-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E1MGhLILoTvuPSdAtsmQPwfUocvaT0TsORWANE8OihYhSivupTkAfkKVLisNqgBT yDh0bVpXaLLk/lddqWexug== 0000950131-97-005644.txt : 19970922 0000950131-97-005644.hdr.sgml : 19970922 ACCESSION NUMBER: 0000950131-97-005644 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970918 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROVIDIAN LIFE & HEALTH INSURANCE CO SEPARATE ACCOUNT II CENTRAL INDEX KEY: 0000796535 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 430378030 STATE OF INCORPORATION: MO FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-04734 FILM NUMBER: 97682239 BUSINESS ADDRESS: STREET 1: 20 MOORES RD CITY: FRAZER STATE: PA ZIP: 19355 BUSINESS PHONE: 2156485000 MAIL ADDRESS: STREET 1: 20 MOORES ROAD CITY: FRAZER STATE: PA ZIP: 19355 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL HOME LIFE ASSURANCE CO SEPARATE ACCOUNT II DATE OF NAME CHANGE: 19920703 N-30D 1 SEMI-ANNUAL REPORT - SEPERATE ACCOUNT I [LOGO OF PROVIDIAN] Post Office Box 32830 400 West Market Street Louisville, Kentucky 40232 August 1997 Dear Valued Customer: Enclosed are semi-annual reports for the portfolios available in your Providian Life and Health variable annuity contract. Please take some time to review these reports, and if you have any questions, call one of our customer service representatives at 1-800-866-6007, 9 a.m. to 5 p.m. Eastern time, Monday through Friday. Providian Life and Health is proud to have you as our customer. Sincerely, /s/ William L. Bussler William Bussler President, Financial Markets Division Providian Life and Health Insurance Company provides the variable annuity. Securities are offered through Providian Securities Corporation, 400 West Market Street, Louisville, KY 40202. Both are subsidiaries of Providian Corporation. (2_FIDELITY_LOGOS) VARIABLE INSURANCE PRODUCTS FUND VARIABLE INSURANCE PRODUCTS FUND II VARIABLE INSURANCE PRODUCTS FUND III MONEY MARKET PORTFOLIO INVESTMENT GRADE BOND PORTFOLIO HIGH INCOME PORTFOLIO ASSET MANAGER PORTFOLIO BALANCED PORTFOLIO ASSET MANAGER: GROWTH PORTFOLIO EQUITY-INCOME PORTFOLIO GROWTH & INCOME PORTFOLIO INDEX 500 PORTFOLIO GROWTH OPPORTUNITIES PORTFOLIO CONTRAFUND PORTFOLIO GROWTH PORTFOLIO OVERSEAS PORTFOLIO SEMIANNUAL REPORT JUNE 30, 1997 CONTENTS MONEY MARKET PORTFOLIO 4 PERFORMANCE 5 FUND TALK: THE MANAGER'S OVERVIEW 6 INVESTMENTS 9 FINANCIAL STATEMENTS INVESTMENT GRADE BOND PORTFOLIO 11 PERFORMANCE AND INVESTMENT SUMMARY 12 FUND TALK: THE MANAGER'S OVERVIEW 13 INVESTMENTS 18 FINANCIAL STATEMENTS HIGH INCOME PORTFOLIO 20 PERFORMANCE AND INVESTMENT SUMMARY 21 FUND TALK: THE MANAGER'S OVERVIEW 22 INVESTMENTS 30 FINANCIAL STATEMENTS ASSET MANAGER PORTFOLIO 32 PERFORMANCE AND INVESTMENT SUMMARY 33 FUND TALK: THE MANAGERS' OVERVIEW 35 INVESTMENTS 48 FINANCIAL STATEMENTS BALANCED PORTFOLIO 50 PERFORMANCE AND INVESTMENT SUMMARY 51 FUND TALK: THE MANAGER'S OVERVIEW 52 INVESTMENTS 61 FINANCIAL STATEMENTS ASSET MANAGER: GROWTH PORTFOLIO 63 PERFORMANCE AND INVESTMENT SUMMARY 64 FUND TALK: THE MANAGERS' OVERVIEW 66 INVESTMENTS 78 FINANCIAL STATEMENTS EQUITY-INCOME PORTFOLIO 80 PERFORMANCE AND INVESTMENT SUMMARY 81 FUND TALK: THE MANAGER'S OVERVIEW 82 INVESTMENTS 87 FINANCIAL STATEMENTS GROWTH & INCOME PORTFOLIO 89 PERFORMANCE AND INVESTMENT SUMMARY 90 FUND TALK: THE MANAGER'S OVERVIEW 91 INVESTMENTS 95 FINANCIAL STATEMENTS INDEX 500 PORTFOLIO 97 PERFORMANCE AND INVESTMENT SUMMARY 98 FUND TALK: THE MANAGER'S OVERVIEW 99 INVESTMENTS 105 FINANCIAL STATEMENTS GROWTH OPPORTUNITIES PORTFOLIO 107 PERFORMANCE AND INVESTMENT SUMMARY 108 FUND TALK: THE MANAGER'S OVERVIEW 109 INVESTMENTS 113 FINANCIAL STATEMENTS CONTRAFUND PORTFOLIO 115 PERFORMANCE AND INVESTMENT SUMMARY 116 FUND TALK: THE MANAGER'S OVERVIEW 117 INVESTMENTS 126 FINANCIAL STATEMENTS GROWTH PORTFOLIO 128 PERFORMANCE AND INVESTMENT SUMMARY 129 FUND TALK: THE MANAGER'S OVERVIEW 130 INVESTMENTS 134 FINANCIAL STATEMENTS OVERSEAS PORTFOLIO 136 PERFORMANCE AND INVESTMENT SUMMARY 137 FUND TALK: THE MANAGER'S OVERVIEW 138 INVESTMENTS 143 FINANCIAL STATEMENTS NOTES TO FINANCIAL STATEMENTS 145 NOTES TO THE FINANCIAL STATEMENTS THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUNDS. THIS REPORT IS NOT AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUNDS UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS. MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED. NEITHER THE FUNDS NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK. VARIABLE INSURANCE PRODUCTS FUND: MONEY MARKET PORTFOLIO PERFORMANCE To measure a money market fund's performance, you can look at either total return or yield. Total return reflects the change in value of an investment, assuming reinvestment of the fund's dividend income and capital gains (the profits earned upon the sale of securities that have grown in value). Yield measures the income paid by a fund. Since a money market fund tries to maintain a $1 share price, yield is an important measure of performance. AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED PAST 1 PAST 5 PAST 10 JUNE 30, 1997 YEAR YEARS YEARS MONEY MARKET 5.42% 4.64% 5.93% AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and show you what would have happened if the fund had achieved that return by performing at a constant rate each year. PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER. If Fidelity had not reimbursed certain fund expenses, the past five and 10 year total returns would have been lower. Yield will vary. YIELD Row: 1, Col: 1, Value: 5.37 Row: 1, Col: 2, Value: 2.65 Row: 2, Col: 1, Value: 5.19 Row: 2, Col: 2, Value: 2.63 Row: 3, Col: 1, Value: 5.28 Row: 3, Col: 2, Value: 2.64 Row: 4, Col: 1, Value: 5.3 Row: 4, Col: 2, Value: 2.67 Row: 5, Col: 1, Value: 5.159999999999999 Row: 5, Col: 2, Value: 2.66 Money Market MMDA 6% - 5% - 4% - 3% - 2% - 1% - 0% 7/2/97 4/2/97 12/30/96 10/2/96 6/26/96 MONEY MARKET 5.37% 5.19% 5.28% 5.30% 5.16% MMDA 2.65% 2.63% 2.64% 2.67% 2.66% YIELD refers to the income paid by the fund over a given period. Yields for money market funds are usually for seven-day periods, expressed as annual percentage rates. A yield that assumes income earned is reinvested or compounded is called an effective yield. The chart above shows the fund's current seven-day yield at quarterly intervals over the past year. You can compare these yields to the all taxable money market funds average and the bank money market deposit account (MMDA) average. The MMDA average is supplied by BANK RATE MONITOR. TM COMPARING PERFORMANCE There are some important differences between a bank money market deposit account (MMDA) and a money market fund. First, the U.S. Government neither insures nor guarantees a money market fund. In fact, there is no assurance that a money fund will maintain a $1 share price. Second, a money market fund returns to its shareholders income earned by the fund's investments after expenses. This is in contrast to banks, which set their MMDA rates periodically based on current interest rates, competitors' rates, and internal criteria. (checkmark) VARIABLE INSURANCE PRODUCTS FUND: MONEY MARKET PORTFOLIO FUND TALK: THE MANAGER'S OVERVIEW NOTE TO SHAREHOLDERS: Robert Duby became Portfolio Manager of Money Market Portfolio on April 1, 1997. Q. WHAT WAS THE INVESTING ENVIRONMENT LIKE OVER THE PAST SIX MONTHS, BOB? A. Most market observers have been surprised at the strength of the economy over the past six months. While economic growth slowed unexpectedly in the second quarter of 1997 from the rapid pace of the first quarter, the economy remains quite healthy. Earlier in 1997, the Federal Reserve Board felt that we would see this economic growth translate into inflationary pressure. Speaking before Congress in February, Fed Chairman Alan Greenspan indicated the Fed's tendency to strike pre-emptively against inflation. That is, he said the Fed might raise the rates banks charge each other for overnight loans - known as the fed funds rate - even before inflation appeared, to slow the economy down and head off potential inflation. The Fed followed through by raising the fed funds rate by 0.25% to 5.50% at its March meeting. Most market participants felt the Fed would raise rates again in May, but it did not. Economic growth tailed off and there were very few signs of inflation. That backdrop, coupled with political pressure from many who were unhappy with the Fed's pre-emptive stance, convinced the Fed to stand pat through the end of the period. At this point, it appears that the Fed has shifted its stance from one that is pre-emptive to one that is more reactive. Q. HOW WAS THE FUND MANAGED DURING THIS PERIOD? A. The fund was positioned more aggressively in the first quarter than in the second. As the first quarter unfolded and interest rates rose in anticipation of the Fed's March move to raise the fed funds rate, the fund employed what is known as a barbell strategy - concentrating investments on either end of the maturity spectrum - purchasing overnight to two-month securities on the one hand and one-year bank investments on the other. Both areas were offering attractive rates, with one-year securities at about a 6.20% annual rate and overnight securities offering a 5.25% rate. The fund's approach became more cautious in the second quarter as the Fed's May meeting approached and it appeared rates would rise again. As the one-year rate fell toward 5.85% and the overnight rate stood at 5.50%, there were less appealing yield opportunities on the longer end of the maturity spectrum. At the end of the period, the fund's average maturity stood at 44 days, a range that reflects a more neutral interest rate outlook. Q. WHAT'S YOUR OUTLOOK? A. While it softened in the second quarter, overall economic growth remains fairly strong. Consumer spending is robust and confidence is quite high. As a result, I expect some inflationary pressures to arise as we head into the fall. At that point, I would expect the Fed to raise interest rates slightly if growth proves to be stronger and if some inflationary pressure builds up. In addition, I believe that any program of rate increases by the Fed will be gradual, where the Fed raises interest rates, then waits a month or two to gauge the effect. FUND FACTS GOAL: income and share price stability by investing in high-quality, short-term investments START DATE: April 1, 1982 SIZE: as of June 30, 1997, more than $1.0 billion MANAGER: Robert Duby, since April 1997; joined Fidelity in 1982 (checkmark) VARIABLE INSURANCE PRODUCTS FUND: MONEY MARKET PORTFOLIO INVESTMENTS JUNE 30, 1997 (UNAUDITED) Showing Percentage of Total Value of Investment in Securities BANKERS' ACCEPTANCES - 1.0% DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT (NOTE 1) Chase Manhattan Bank 8/22/97 5.82% $ 7,000,000 $ 6,942,569 Royal Bank of Canada 7/7/97 5.58 4,000,000 3,996,300 TOTAL BANKERS' ACCEPTANCES 10,938,869 CERTIFICATES OF DEPOSIT - 41.2% DOMESTIC CERTIFICATES OF DEPOSIT - 2.3% Chase Manhattan Bank (USA) 7/28/97 5.55 5,000,000 5,000,000 CoreStates Capital Corp. 7/10/97 5.66 (a) 10,000,000 9,998,668 Morgan Guaranty Trust, NY 8/12/97 5.78 4,000,000 3,999,739 8/12/97 5.80 5,000,000 4,999,599 23,998,006 CHICAGO BRANCH, YANKEE DOLLAR, FOREIGN BANKS - 0.9% ABN-AMRO Bank 12/23/97 5.70 5,000,000 4,998,849 Bank of Montreal 7/1/97 5.55 5,000,000 5,000,000 9,998,849 NEW YORK BRANCH, YANKEE DOLLAR, FOREIGN BANKS - 31.3% Bank of Nova Scotia 4/1/98 6.20 6,000,000 5,997,422 Bank of Tokyo - Mitsubishi Ltd. 7/10/97 5.83 4,000,000 4,000,000 8/6/97 5.85 4,000,000 4,000,000 8/13/97 5.82 2,000,000 2,000,000 8/27/97 5.75 5,000,000 5,000,000 8/29/97 5.79 2,000,000 2,000,000 9/30/97 5.76 6,000,000 6,000,000 Banque Nationale de Paris 7/21/97 5.63 2,000,000 2,000,000 9/30/97 5.85 5,000,000 5,000,000 Barclays U.S. Funding Corp. 7/7/97 5.56 15,000,000 15,000,000 Bayerische Hypotheken-und Weschel 7/23/97 5.56 3,000,000 3,000,000 8/11/97 5.68 10,000,000 10,000,000 Bayerische Vereinsbank A.G. 7/14/97 5.56 5,000,000 5,000,000 Caisse Nationale de Credit Agricole 7/21/97 5.60 30,000,000 30,000,000 11/13/97 5.86 2,000,000 2,000,000 Canadian Imperial Bank of Commerce 7/21/97 5.61 5,000,000 5,000,000 Commerzbank, Germany 7/7/97 5.56 8,000,000 8,000,000 Deutsche Bank, Germany A.G. 7/9/97 5.56 20,000,000 20,000,000 Landesbank Hessen - Thuringen 9/5/97 6.20 15,000,000 15,000,259 9/11/97 6.11 14,000,000 13,999,473 National Westminster Bank, PLC 7/9/97 5.56 25,000,000 25,000,000 8/5/97 5.50 5,000,000 5,000,000 DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT (NOTE 1) Royal Bank of Canada 8/13/97 5.80% $ 5,000,000 $ 4,999,589 Sanwa Bank Ltd. Japan 7/10/97 5.81 4,000,000 4,000,000 7/21/97 5.82 11,000,000 11,000,000 8/1/97 5.85 3,000,000 3,000,000 8/27/97 5.75 2,000,000 2,000,000 Societe Generale, France 7/11/97 5.70 5,000,000 5,000,000 7/28/97 5.55 17,000,000 17,000,000 8/7/97 5.52 10,000,000 10,000,000 11/12/97 5.90 5,000,000 5,000,000 Sumitomo Bank, Ltd. 7/21/97 5.79 4,000,000 4,000,000 7/29/97 5.75 2,000,000 2,000,000 8/4/97 5.75 2,000,000 2,000,000 8/4/97 5.75 2,000,000 2,000,000 8/19/97 5.75 2,000,000 2,000,000 8/25/97 5.75 3,000,000 3,000,000 Swiss Bank Corp. 7/22/97 5.53 12,000,000 12,000,000 8/4/97 5.50 12,000,000 12,000,000 12/22/97 5.99 8,000,000 8,000,000 2/23/98 5.80 20,000,000 20,000,000 Westdeutsche Landesbank 7/14/97 5.56 15,000,000 15,000,000 336,996,743 LONDON BRANCH, EURODOLLAR, FOREIGN BANKS - 6.7% ABN-AMRO Bank 7/24/97 5.45 5,000,000 5,000,055 9/22/97 5.65 1,000,000 1,000,023 Abbey National, Treasury Services 7/22/97 5.60 10,000,000 10,000,000 7/28/97 5.72 10,000,000 10,000,000 9/24/97 5.65 18,000,000 18,000,000 3/4/98 5.87 5,000,000 5,000,000 Bank of Nova Scotia 7/23/97 5.60 4,000,000 4,000,000 11/12/97 5.86 4,000,000 4,000,000 Bayerische Landesbank Girozentrale 7/7/97 5.56 4,000,000 3,999,966 12/31/97 5.75 2,000,000 2,000,090 Bayerische Vereinsbank A.G. 9/17/97 5.65 2,000,000 1,999,946 12/29/97 5.75 5,000,000 5,000,122 National Australia Bank 9/23/97 5.65 2,000,000 2,000,000 72,000,202 TOTAL CERTIFICATES OF DEPOSIT 442,993,800 COMMERCIAL PAPER - 32.7% Abbey National, North America 7/18/97 5.70 6,000,000 5,984,077 AC Acquisition Holding Company 7/7/97 5.60 3,000,000 2,997,220 7/11/97 5.63 4,100,000 4,093,622 8/27/97 5.62 2,000,000 1,982,393 COMMERCIAL PAPER - CONTINUED DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT (NOTE 1) American Home Products 7/16/97 5.58% $ 5,000,000 $ 4,988,438 Asset Securitization Coop. Corp. 8/21/97 5.61 6,000,000 5,952,740 Associates Corp. of North America 7/1/97 5.69 5,000,000 5,000,000 Bear Stearns Cos., Inc. 7/9/97 5.60 3,000,000 2,996,293 7/10/97 5.61 2,000,000 1,997,215 Berliner Handels-und Frankfurter Bank 7/7/97 5.57 2,000,000 1,998,153 BHF Finance (Delaware), Inc. 7/11/97 5.62 1,000,000 998,444 BMW US Capital Corp. 7/9/97 5.60 2,188,000 2,185,297 7/7/97 5.63 1,000,000 999,067 7/15/97 5.60 3,000,000 2,993,502 8/5/97 5.64 2,600,000 2,585,844 8/12/97 5.61 2,000,000 1,987,003 8/25/97 5.62 1,100,000 1,090,639 Chrysler Financial Corporation 8/4/97 5.66 2,000,000 1,989,384 8/5/97 5.66 1,000,000 994,536 Citibank Credit Card Master Trust I (Dakota Certificate Program) 7/7/97 5.61 6,000,000 5,994,420 CIT Group Holdings, Inc. 7/1/97 6.30 10,000,000 10,000,000 Cregem North America, Inc. 7/11/97 5.72 2,300,000 2,296,397 9/18/97 5.65 2,000,000 1,975,554 9/23/97 5.66 1,000,000 986,980 9/24/97 5.66 1,000,000 986,825 Enterprise Funding Corp. 7/7/97 5.57 5,000,000 4,995,375 7/7/97 5.63 2,672,000 2,669,506 7/21/97 5.61 1,687,000 1,681,780 7/22/97 5.76 3,000,000 2,990,060 8/19/97 5.67 1,000,000 992,351 Fina Oil and Chemical Company 8/28/97 5.64 10,000,000 9,910,100 Ford Motor Credit Corp. 7/14/97 5.70 10,000,000 9,979,669 7/21/97 5.62 11,000,000 10,965,961 7/23/97 5.61 6,000,000 5,979,613 Generale Bank 7/30/97 5.53 5,000,000 4,978,331 General Electric Capital Corp. 7/7/97 5.50 10,000,000 9,991,000 7/28/97 5.52 10,000,000 9,959,725 9/17/97 5.64 10,000,000 9,879,533 9/22/97 5.80 6,000,000 5,921,980 9/23/97 5.80 15,000,000 14,802,600 General Electric Capital Services, Inc. 7/9/97 5.59 10,000,000 9,987,644 General Motors Acceptance Corp. 8/7/97 5.61 3,000,000 2,982,826 8/27/97 5.50 4,000,000 3,966,117 10/14/97 6.00 12,000,000 11,796,300 10/16/97 6.01 1,000,000 982,687 10/20/97 6.03 4,000,000 3,927,912 10/29/97 6.02 2,000,000 1,961,033 DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT (NOTE 1) 11/3/97 6.02% $ 4,000,000 $ 3,918,958 11/10/97 6.02 6,000,000 5,871,520 11/12/97 6.02 2,000,000 1,956,562 Goldman Sachs Group, L.P. (The) 11/12/97 5.87 15,000,000 14,681,750 GTE Corp. 7/21/97 5.63 2,000,000 1,993,778 Halifax PLC 7/21/97 5.60 5,000,000 4,984,583 IBM Credit Corp. 7/21/97 5.60 10,000,000 9,969,111 8/19/97 5.61 4,000,000 3,969,729 Matterhorn Capital Corp. (LOC Union Bank of Switzerland) 7/8/97 5.57 5,005,000 4,999,599 Merrill Lynch & Co., Inc. 7/9/97 5.61 1,000,000 998,760 7/28/97 5.54 15,000,000 14,939,363 7/28/97 5.61 5,000,000 4,979,113 8/18/97 5.79 3,000,000 2,977,200 Morgan Stanley Dean Witter Discover & Company 8/20/97 5.61 9,000,000 8,930,500 Morgan Stanley Group, Inc. 7/23/97 5.64 6,000,000 5,979,540 Nationwide Building Society 7/21/97 5.64 5,500,000 5,482,889 Norfolk Southern Corp. 7/8/97 5.80 2,000,000 1,997,756 7/14/97 5.78 2,000,000 1,995,847 7/16/97 5.80 1,000,000 997,596 PHH Corp. 7/8/97 5.68 5,000,000 4,994,526 7/14/97 5.63 1,000,000 997,981 Preferred Receivables Funding Corp. 7/16/97 5.58 5,000,000 4,988,438 7/30/97 5.60 2,000,000 1,991,026 8/19/97 5.67 3,000,000 2,977,052 REXAM PLC 7/16/97 5.58 5,000,000 4,988,438 Sears Roebuck Acceptance Corp. 7/11/97 5.63 2,000,000 1,996,894 7/15/97 5.64 2,000,000 1,995,644 8/25/97 5.62 3,000,000 2,974,471 Toronto Dominion Holdings USA, Inc. 7/21/97 5.60 3,000,000 2,990,750 12/23/97 5.75 2,000,000 1,945,653 TOTAL COMMERCIAL PAPER 351,821,173 FEDERAL AGENCIES - 7.4% FEDERAL HOME LOAN BANK - AGENCY COUPONS - 0.5% 9/4/97 5.71 (a) 5,000,000 4,998,140 FEDERAL NATIONAL MORTGAGE ASSOC. - AGENCY COUPONS - 4.6% 7/1/97 5.67 (a) 15,000,000 14,997,517 9/9/97 5.71 (a) 25,000,000 24,990,406 9/13/97 5.71 (a) 10,000,000 9,995,420 49,983,343 FEDERAL NATIONAL MORTGAGE ASSOC. - DISCOUNT NOTES - 2.3% 7/3/97 5.61 25,000,000 24,992,319 TOTAL FEDERAL AGENCIES 79,973,802 BANK NOTES - 2.1% DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT (NOTE 1) Comerica Bank 3/27/98 6.20% $ 5,000,000 $ 4,992,970 First Bank NA 7/16/97 5.65 (a) 5,000,000 4,995,975 Huntington National Bank 9/30/97 5.50 2,000,000 2,001,053 Key Bank of New York 7/1/97 5.66 (a) 5,000,000 4,999,713 7/1/97 5.69 (a) 1,000,000 999,913 PNC Bank, Inc. 7/11/97 5.65 (a) 5,000,000 4,998,597 TOTAL BANK NOTES 22,988,221 MASTER NOTES (A) - 3.6% Goldman Sachs Group, L.P. (The) 8/5/97 5.82 5,000,000 5,000,000 9/16/97 5.81 (c) 10,000,000 10,000,000 J.P. Morgan Securities 7/1/97 6.38 18,000,000 18,000,000 Norwest Corp. 7/1/97 5.69 6,000,000 6,000,000 TOTAL MASTER NOTES 39,000,000 MEDIUM-TERM NOTES - 4.5% Associates Corp. of North America 7/15/97 5.95 2,250,000 2,250,557 Capital One Funding Corp. (1994-B) 7/8/97 5.63 (a) 3,289,000 3,289,000 Capital One Funding Corp. (1995-E) 7/8/97 5.63 (a) 5,700,000 5,700,000 General Motors Acceptance Corp. 7/1/97 5.69 (a) 2,000,000 1,999,751 8/1/97 5.82 (a) 5,000,000 5,000,000 Liquid Asset Backed Securities Trust (1996-1) (b) 7/15/97 5.72 (a) 5,000,000 5,000,000 Liquid Asset Backed Securities Trust (1996-2) (b) 7/1/97 5.72 (a) 7,000,000 7,000,000 Merrill Lynch & Co., Inc. 7/7/97 5.67 (a) 2,000,000 1,999,669 7/18/97 5.69 (a) 5,000,000 4,999,867 Morgan Stanley Group, Inc. 7/1/97 5.68 (a) 5,000,000 5,000,000 Norwest Corp. 7/22/97 5.86 (a) 6,000,000 6,000,000 TOTAL MEDIUM-TERM NOTES 48,238,844 SHORT-TERM NOTES (A) - 2.8% SMM Trust (1996-B) (b) 7/7/97 5.74 5,500,000 5,500,000 SMM Trust (1996-P) (b) 7/16/97 5.72 7,000,000 7,000,000 SMM Trust (1997-V) (b) 7/28/97 5.69 8,000,000 8,000,000 DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT (NOTE 1) SMM Trust (1997-W) (b) 7/16/97 5.69% $ 7,000,000 $ 7,000,000 Transamerica Life Insurance and Annuity Co. 9/16/97 5.81 3,000,000 3,000,000 TOTAL SHORT-TERM NOTES 30,500,000 TIME DEPOSITS - 4.6% Bank of Tokyo - Mitsubishi Ltd. 7/3/97 5.69 4,000,000 4,000,000 Canadian Imperial Bank of Commerce 7/1/97 6.25 42,000,000 42,000,000 Sumitomo Bank, Ltd. 7/9/97 5.75 3,000,000 3,000,000 TOTAL TIME DEPOSITS 49,000,000 REPURCHASE AGREEMENTS - 0.1% MATURITY AMOUNT In a joint trading account (U.S. Government Obligations) dated 6/30/97 due 7/1/97 At 5.99% $ 1,381,230 1,381,000 TOTAL INVESTMENTS - 100% $1,076,835,709 Total Cost for Income Tax Purposes - $ 1,076,835,709 LEGEND 1. The coupon rate shown on floating or adjustable rate securities represents the rate at period end. The due dates on these types of securities reflects the next interest rate reset date or, when applicable, the final maturity date. 2. Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $39,500,000 or 3.7% of net assets. 3. Restricted securities - Investment in securities not registered under the Securities Act of 1933 (see Note 2 of Notes to Financial Statements). Additional information on each holding is as follows: ACQUISITION ACQUISITION SECURITY DATE COST Goldman Sachs Group, L.P. (The) 5.81%, 9/16/97 6/16/97 $ 10,000,000 INCOME TAX INFORMATION At December 31, 1996, the fund had a capital loss carryforward of approximately $29,000 which will expire on December 31, 2002. VARIABLE INSURANCE PRODUCTS FUND: MONEY MARKET PORTFOLIO FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 1997 (UNAUDITED) ASSETS Investment in securities, at value (including repurchase agreements of $1,381,000) - $1,076,835,709 See accompanying schedule Receivable for investments sold 188,000 Interest receivable 7,287,661 TOTAL ASSETS 1,084,311,370 LIABILITIES Payable to custodian bank $ 1,591 Payable for investments purchased 2,000,410 Share transactions in process 1,474,015 Accrued management fee 189,680 Other payables and 101,660 accrued expenses TOTAL LIABILITIES 3,767,356 NET ASSETS $1,080,544,014 Net Assets consist of: Paid in capital $1,080,585,466 Accumulated net realized gain (41,452) (loss) on investments NET ASSETS, for 1,080,585,466 shares outstanding $1,080,544,014 NET ASSET VALUE, offering price $1.00 and redemption price per share ($1,080,544,014 (divided by) 1,080,585,466 shares)
STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) INTEREST INCOME $ 31,913,288 EXPENSES Management fee $ 1,183,256
Transfer agent fees 418,988 Accounting fees and expenses 68,373 Non-interested trustees' compensation 262 Custodian fees and expenses 19,215 Audit 8,680 Legal 1,590 Miscellaneous 37,731 Total expenses before reductions 1,738,095 Expense reductions (4,815) 1,733,280 NET INTEREST INCOME 30,180,008 NET REALIZED GAIN (LOSS) ON INVESTMENTS (27,802) NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 30,152,206 OTHER INFORMATION Expense reductions Custodian interest credits $ 4,815
STATEMENT OF CHANGES IN NET ASSETS INCREASE (DECREASE) IN NET ASSETS SIX MONTHS ENDED YEAR ENDED JUNE 30, 1997 DECEMBER 31, (UNAUDITED) 1996 Operations $ 30,180,008 $ 49,421,275 Net interest income Net realized gain (loss) (27,802) 49,076 NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 30,152,206 49,470,351 Distributions to shareholders from net interest income (30,180,008) (49,421,275) Share transactions at net asset value of $1.00 per share 1,049,791,223 1,994,407,823 Proceeds from sales of shares Reinvestment of distributions from net interest income 30,180,006 49,421,275 Cost of shares redeemed (1,125,554,506) (1,726,597,066) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS (45,583,277) 317,232,032 TOTAL INCREASE (DECREASE) IN NET ASSETS (45,611,079) 317,281,108 NET ASSETS Beginning of period 1,126,155,093 808,873,985 End of period $ 1,080,544,014 $ 1,126,155,093
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, 1997 SELECTED PER-SHARE DATA (UNAUDITED) 1996 1995 1994 1993 1992
Net asset value, beginning of period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 Income from Investment Operations .026 .052 .057 .042 .032 .038 Net interest income Less Distributions From net interest income (.026) (.052) (.057) (.042) (.032) (.038) Net asset value, end of period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 TOTAL RETURN B, C 2.65% 5.41% 5.87% 4.25% 3.23% 3.90% RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (000 omitted) $ 1,080,544 $1,126,155 $ 808,874 $ 748,606 $ 353,104 $ 301,002 Ratio of expenses to average net assets after expense .30% A .30% .33% .27% .22% .24% reductions D Ratio of net interest income to average net assets 5.29% A 5.28% 5.72% 4.32% 3.16% 3.85%
A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED AND DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN. C THE TOTAL RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED DURING THE PERIOD SHOWN. D FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE BEEN HIGHER. VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO PERFORMANCE AND INVESTMENT SUMMARY PERFORMANCE There are several ways to evaluate a fund's historical performance. You can look at the total percentage change in value, the average annual percentage change or the growth of a hypothetical $10,000 investment. Total return reflects the change in the value of an investment, assuming reinvestment of the fund's dividend income and capital gains (the profits earned upon the sale of securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED PAST 1 PAST 5 LIFE OF JUNE 30, 1997 YEAR YEARS FUND INVESTMENT GRADE BOND 7.74% 6.64% 8.05% Lehman Brothers Aggregate Bond Index 8.15% 7.12% n/a
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what would have happened if the fund had performed at a constant rate each year. You can compare these figures to the Lehman Brothers Aggregate Bond Index -a market value weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year. This benchmark includes reinvested dividends and capital gains, if any. UNDERSTANDING PERFORMANCE How a fund did yesterday is no guarantee of how it will do tomorrow. Bond prices, for example, generally move in the opposite direction of interest rates. In turn, the share price, return and yield of a fund that invests in bonds will vary. That means if you sell your shares during a market downturn, you might lose money. But if you can ride out the market's ups and downs, you may have a gain. (checkmark) Figures for more than one year assume a steady compounded rate of return and are not the fund's year-by-year results, which fluctuated over the periods shown. The life of fund figures are from commencement of operations, December 5, 1988. If Fidelity had not reimbursed certain fund expenses, the life of fund total return figures would have been lower. PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER. Past performance is no guarantee of future results. Principal and investment return will vary and you may have a gain or loss when you withdraw your money. $10,000 OVER LIFE OF FUND 1988/12/31 10000.00 10000.00 1989/01/31 10086.92 10143.88 1989/02/28 10109.25 10070.36 1989/03/31 10172.02 10113.90 1989/04/30 10285.31 10325.54 1989/05/31 10399.91 10596.87 1989/06/30 10600.00 10919.52 1989/07/31 10765.35 11151.64 1989/08/31 10679.56 10986.42 1989/09/30 10721.69 11042.65 1989/10/31 10887.69 11314.55 1989/11/30 10981.36 11422.39 1989/12/31 11026.21 11452.96 1990/01/31 11001.11 11316.86 1990/02/28 11063.52 11353.48 1990/03/31 11097.11 11361.84 1990/04/30 11101.82 11257.75 1990/05/31 11276.11 11591.07 1990/06/30 11364.07 11777.05 1990/07/31 11476.89 11939.97 1990/08/31 11475.79 11780.51 1990/09/30 11520.66 11877.97 1990/10/31 11521.38 12028.78 1990/11/30 11590.77 12287.71 1990/12/31 11711.43 12479.17 1991/01/31 11735.04 12633.43 1991/02/28 11853.10 12741.27 1991/03/31 12053.80 12828.93 1991/04/30 12230.89 12967.91 1991/05/31 12325.33 13043.74 1991/06/30 12348.94 13037.11 1991/07/31 12455.20 13217.90 1991/08/31 12714.93 13503.94 1991/09/30 12951.04 13777.57 1991/10/31 13092.71 13930.97 1991/11/30 13234.39 14058.71 1991/12/31 13629.42 14476.23 1992/01/31 13494.11 14279.29 1992/02/29 13567.97 14372.13 1992/03/31 13543.27 14291.11 1992/04/30 13642.04 14394.34 1992/05/31 13851.92 14665.96 1992/06/30 14012.41 14867.80 1992/07/31 14296.36 15171.13 1992/08/31 14382.78 15324.82 1992/09/30 14555.62 15506.47 1992/10/31 14370.44 15300.89 1992/11/30 14333.40 15304.35 1992/12/31 14536.36 15547.71 1993/01/31 14841.14 15845.85 1993/02/28 15093.07 16123.24 1993/03/31 15159.39 16190.42 1993/04/30 15252.23 16303.16 1993/05/31 15278.75 16323.92 1993/06/30 15570.53 16619.76 1993/07/31 15676.64 16713.76 1993/08/31 15955.15 17006.72 1993/09/30 16034.73 17053.43 1993/10/31 16114.31 17117.15 1993/11/30 16034.73 16971.54 1993/12/31 16129.93 17063.52 1994/01/31 16312.59 17293.91 1994/02/28 16045.19 16993.45 1994/03/31 15678.93 16574.49 1994/04/30 15538.06 16442.14 1994/05/31 15495.80 16439.84 1994/06/30 15453.53 16403.51 1994/07/31 15707.10 16729.33 1994/08/31 15721.19 16750.09 1994/09/30 15552.14 16503.56 1994/10/31 15566.23 16488.86 1994/11/30 15594.40 16452.24 1994/12/31 15523.97 16565.84 1995/01/31 15749.36 16893.69 1995/02/28 16053.30 17295.35 1995/03/31 16155.46 17401.46 1995/04/30 16374.37 17644.53 1995/05/31 17031.09 18327.33 1995/06/30 17162.44 18461.69 1995/07/31 17104.06 18420.46 1995/08/31 17308.38 18642.77 1995/09/30 17468.91 18824.14 1995/10/31 17702.41 19068.94 1995/11/30 17965.10 19354.69 1995/12/31 18213.20 19626.31 1996/01/31 18329.95 19756.64 1996/02/29 17995.20 19413.22 1996/03/31 17857.01 19278.28 1996/04/30 17749.53 19169.86 1996/05/31 17718.82 19130.94 1996/06/30 17933.78 19387.85 1996/07/31 17979.84 19440.90 1996/08/31 17964.49 19408.32 1996/09/30 18256.22 19746.55 1996/10/31 18655.43 20183.96 1996/11/30 18962.52 20529.68 1996/12/31 18793.62 20338.80 1997/01/31 18839.68 20401.08 1997/02/28 18864.60 20451.83 1997/03/31 18668.78 20225.20 1997/04/30 18946.20 20527.95 1997/05/31 19093.07 20722.01 1997/06/30 19321.53 20967.97 Let's say hypothetically that $10,000 was invested in Investment Grade Bond Portfolio on December 31, 1988, shortly after the fund started. By June 30, 1997, the value of the investment would have grown to $19,322 - a 93.22% increase on the initial investment. For comparison, look at how the Lehman Brothers Aggregate Bond Index did over the same period. With dividends and capital gains, if any, reinvested, the same $10,000 investment would have grown to $20,968 - a 109.68% increase. INVESTMENT SUMMARY QUALITY DIVERSIFICATION AS OF JUNE 30, 1997 (MOODY'S RATINGS) % OF FUND'S INVESTMENTS Aaa 55.7 Aa 4.4 A 15.0 Baa 13.7 Ba 6.0 B 0 Not rated 0.5 TABLE EXCLUDES SHORT-TERM INVESTMENTS. WHERE MOODY'S RATINGS ARE NOT AVAILABLE, WE HAVE USED S&P RATINGS. UNRATED DEBT SECURITIES THAT ARE EQUIVALENT TO BA AND BELOW AT JUNE 30, 1997, ACCOUNT FOR 0.5% OF THE FUND'S INVESTMENTS. AVERAGE YEARS TO MATURITY AS OF JUNE 30, 1997 Years 8.4 AVERAGE YEARS TO MATURITY IS BASED ON THE AVERAGE TIME UNTIL PRINCIPAL PAYMENTS ARE EXPECTED FROM EACH OF THE FUND'S BONDS, WEIGHTED BY DOLLAR AMOUNT. TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997 % OF FUND'S INVESTMENTS Finance 20.7 Utilities 5.4 Retail & Wholesale 2.8 Media & Leisure 2.3 Technology 1.9 VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO FUND TALK: THE MANAGER'S OVERVIEW NOTE TO SHAREHOLDERS: Kevin Grant became Portfolio Manager of Investment Grade Bond Portfolio on February 3, 1997. Q. HOW DID THE FUND PERFORM, KEVIN? A. For the six- and 12-month periods that ended June 30, 1997, the fund slightly underperformed the Lehman Brothers Aggregate Bond Index, a broad measure of U.S. taxable bonds, which returned 3.09% for the six-month period and 8.15% for the 12-month period. Q. WHAT WAS THE INVESTMENT ENVIRONMENT LIKE DURING THE FIRST HALF OF 1997? A. It's been a good environment for investors, both in the stock and bond markets. We've had virtually no inflation and we've seen solid growth in the economy and in corporate earnings. Companies have paid down debt; even the airlines are paying down debt. The average corporate balance sheet is in the best shape we've seen in probably 30 years. This has been a good investing environment, particularly for corporate bonds and mortgage-backed securities. Q. WHAT WAS YOUR STRATEGY FOR CORPORATE BONDS IN THIS MARKET? A. We haven't seen companies take on a lot of new debt to do such things as acquisitions, which makes it a very good environment for corporate bonds. In particular, we focused on three areas of the corporate bond market. First, we used short-maturity corporate bonds - which have two-, three- and four-year maturities - to replace Treasuries. They have marginally more risk than Treasuries, but offer a yield advantage over them. Second, we invested in puttable corporate bonds, which can offer attractive yields as well as favorable price action because they can be redeemed by the fund prior to maturity in the event interest rates rise. Third, we invested in bank capital securities, which are long corporate bonds issued by banks. We were overweighted in those three areas of the corporate market during the period and that helped us. Q. HOW HAVE MORTGAGE-BACKED SECURITIES FARED IN THIS ENVIRONMENT? A. It's been a good environment for the mortgage market. Interest rates haven't been particularly volatile, and rates are high enough that prepayment risk was not an issue during the period. In 1993, when interest rates dropped so low, many mortgage holders refinanced into lower rate mortgages. Interest rates are now quite a bit higher. During the first half of 1997, the mortgage market was a discount market, which means there was very little prepayment risk. We would probably need a drop in interest rates of about 50 basis points for prepayment risk to become a real problem. Q. AT THE END OF 1996, THE FUND OWNED A FAIR AMOUNT OF YANKEE BONDS. DID THE FUND CONTINUE TO INVEST IN THIS TYPE OF SECURITY DURING THE FIRST HALF OF THE YEAR? A. Yes. We've continued to own yankee bonds, which are issued by foreign entities and denominated in U.S. dollars. They often trade more cheaply than domestic corporates and frequently carry better credit quality characteristics. The nice thing about yankee bonds is that you can get the same or better yield spread than you get in corporate bonds, but you have much less event risk. By that I mean, you don't really have the possibility of the issuer being bought by a junk-bond company, for example, so you don't have the possibility of the bonds going from a single-A rating to a double-B in a week. We've focused mainly on sovereign names, such as the Canadian provinces of Ontario and Alberta. We also owned some Korean notes. Korea carries a single-A rating, so it's a very high- grade country. The tension between North and South Korea has not really affected the bonds. Q. VALUATIONS OF CORPORATE BONDS WERE VERY EXPENSIVE AT THE END OF LAST YEAR. DID THAT CONTINUE DURING THIS SIX-MONTH PERIOD? A. Yes, that's still the case. This is an environment we're probably going to have to live with for a while, with optimism built into the prices of most bonds. The fund continues to hold corporate bonds. We're not going to own just Treasuries. That would not make sense, because even though corporate bonds are expensive, they still have a yield advantage over Treasuries. So, we're in a defensive posture, but we're not betting on a blow-up in corporate America. I think that would be foolhardy. Q. WHAT'S YOUR OUTLOOK GOING INTO THE SECOND HALF OF 1997? A. I think it's really going to be more of the same. We'll continue to focus on the three areas of the corporate bond market that I mentioned earlier. The mortgage market is very expensive right now, so we're probably going to continue to be defensive in mortgage securities. The overall market was about 30% invested in mortgage securities, and we were modestly underweighted in that sector at the end of the period. Unless conditions change, I think we'll stay underweighted in these securities. FUND FACTS GOAL: income and share price stability by investing in high-quality, short-term investments START DATE: April 1, 1982 SIZE: as of June 30, 1997, more than $1.0 billion MANAGER: Robert Duby, since April 1997; joined Fidelity in 1982 (checkmark) VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO INVESTMENTS JUNE 30, 1997 (UNAUDITED) Showing Percentage of Total Value of Investment in Securities NONCONVERTIBLE BONDS - 40.4% MOODY'S PRINCIPAL VALUE RATINGS (A) AMOUNT (NOTE 1) BASIC INDUSTRIES - 0.4% CHEMICALS & PLASTICS - 0.4% Praxair, Inc., 6.90% 11/1/06 A3 $ 1,000,000 $ 987,300 DURABLES - 1.0% AUTOS, TIRES, & ACCESSORIES - 0.2% Tennessee Gas Pipeline Co. 7%, 3/15/27 Baa3 540,000 539,671 TEXTILES & APPAREL - 0.8% Levi Strauss & Co. 7%, 11/1/06 (c) Baa2 2,000,000 1,978,400 TOTAL DURABLES 2,518,071 ENERGY - 0.9% ENERGY SERVICES - 0.4% Petroliam Nasional BHD yankee 6 7/8%, 7/1/03 (c) A1 1,040,000 1,036,402 OIL & GAS - 0.5% Husky Oil Ltd. yankee 6 7/8%, 11/15/03 Baa3 340,000 335,192 Pennzoil Co. 9 5/8%, 11/15/99 Baa3 460,000 490,089 Ras Laffan Liquid Natural Gas Co. Ltd. yankee 7.628%, 9/15/06 (c) A3 500,000 506,405 1,331,686 TOTAL ENERGY 2,368,088 FINANCE - 20.7% ASSET-BACKED SECURITIES - 3.4% Discover Card Master Trust I 6.90%, 2/16/00 A2 260,000 260,242 Ford Credit Grantor Trust 5.90%, 10/15/00 Aaa 480,649 480,048 Green Tree Financial Corp. 6.10%, 4/15/27 Aaa 862,654 861,032 KeyCorp Auto Grantor Trust 5.80%, 7/15/00 A3 39,886 39,758 PNC Student Loan Trust I 6.314%, 1/25/01 Aaa 3,100,000 3,100,000 Premier Auto Trust: 4.90%, 12/15/98 Aaa 141,429 140,898 8.05%, 4/4/00 Aaa 1,430,000 1,453,238 6%, 5/6/00 Aaa 500,000 499,530 Railcar Trust 7 3/4%, 6/1/04 Aaa 761,410 789,963 Sears Credit Account Master Trust II 7%, 1/15/04 Aaa 1,000,000 1,012,500 Standard Credit Card Master Trust I 7.65%, 2/15/00 A2 150,000 151,359 Union Federal Savings Bank Grantor Trust 8.20%, 1/10/01 Baa2 47,629 48,313 8,836,881 MOODY'S PRINCIPAL VALUE RATINGS (A) AMOUNT (NOTE 1) BANKS - 8.4% ABN Amro Bank NV 6 5/8%, 10/31/01 Aa3 $ 1,000,000 $ 995,870 Banc One Corp. 6.70%, 3/24/00 Aa3 1,450,000 1,456,757 BankBoston Capital Trust II 7 3/4%, 12/15/26 Baa1 1,080,000 1,036,282 BanPonce Corp.: 5 3/4%, 3/1/99 A3 370,000 364,975 6.378%, 4/8/99 A3 430,000 427,725 BanPonce Trust I 8.327%, 2/1/27 (c) Baa1 1,230,000 1,243,013 Capital One Bank 6.42%, 11/12/99 Baa3 2,000,000 1,989,500 Corporacion Andina de Fomento yankee 7.10%, 2/1/03 A3 1,000,000 1,004,820 Export-Import Bank of Korea 6 3/8%, 2/15/06 A1 1,500,000 1,405,680 First Fidelity Bancorp 8 1/2%, 4/1/98 A2 250,000 254,048 First Maryland Bancorp 10 3/8%, 8/1/99 Baa1 500,000 536,415 Firstar Corp. 7.15%, 9/1/00 A3 640,000 643,782 Hartford National Corp. 9.85%, 6/1/99 A3 1,150,000 1,219,943 Kansallis-Osake-Pankki 10%, 5/1/02 A3 260,000 291,577 KeyCorp 8.40%, 4/1/99 A2 310,000 319,883 Korea Development Bank yankee 6 3/4%, 12/1/05 A1 2,350,000 2,276,962 Midland Bank PLC yankee 7 5/8%, 6/15/06 A1 700,000 720,895 NB Capital Trust IV 8 1/4%, 4/15/27 A1 3,000,000 3,074,220 Signet Bank 7.80%, 9/15/06 Baa1 500,000 516,240 Sovran Financial Corp. 9 3/4%, 6/15/99 A2 770,000 816,647 Union Planters Corp. 6 3/4%, 11/1/05 Baa2 400,000 387,448 Union Planters National Bank 6.81%, 8/20/01 A3 500,000 500,625 21,483,307 CREDIT & OTHER FINANCE - 5.6% AT&T Capital Corp.: 6.02%, 12/1/98 Baa3 1,000,000 997,060 6.16%, 12/3/99 Baa3 500,000 494,605 Associates Corp. of North America 6 7/8%, 2/15/00 Aa3 3,000,000 3,028,260 BCH Cayman Islands Ltd. yankee 7.70%, 7/15/06 A3 500,000 510,840 Chase Capital I 7.67%, 12/1/26 A1 2,650,000 2,565,757 Chrysler Financial Corp. 6 3/8%, 1/28/00 A3 1,240,000 1,236,280 Finova Capital Corp. 6.14%, 11/2/98 Baa1 400,000 399,892 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (A) AMOUNT (NOTE 1) FINANCE - CONTINUED CREDIT & OTHER FINANCE - CONTINUED First Security Capital I 8.41%, 12/15/26 A3 $ 210,000 $ 214,087 General Electric Capital Corp. 6.94%, 4/13/09 (b) Aaa 1,000,000 1,009,410 General Motors Acceptance Corp.: 6.40%, 5/17/99 A3 1,000,000 1,000,680 6.65%, 5/24/00 A3 1,650,000 1,651,568 KeyCorp Institutional Capital A 7.826%, 12/1/26 A1 800,000 776,968 Secured Finance, Inc. gtd. secured 9.05%, 12/15/04 Aaa 500,000 555,295 14,440,702 INSURANCE - 1.1% Executive Risk Capital Trust 8 5/8%, 2/1/27 Baa3 1,750,000 1,739,150 Nationwide Mutual Insurance Co. 6 1/2%, 2/15/04 (c) A1 130,000 125,562 SunAmerica, Inc. 6.20%, 10/31/99 Baa1 1,000,000 992,910 2,857,622 SAVINGS & LOANS - 2.2% Ahmanson (H.F.) & Co. 9 7/8%, 11/15/99 Baa2 3,000,000 3,220,560 Great West Financial Trust II 8.206%, 2/1/27 Baa2 2,500,000 2,493,050 5,713,610 TOTAL FINANCE 53,332,122 HEALTH - 0.7% MEDICAL FACILITIES MANAGEMENT - 0.7% Columbia/HCA Healthcare Corp.: 6 1/2%, 3/15/99 A2 1,000,000 1,003,470 6 7/8%, 7/15/01 A2 750,000 753,900 1,757,370 HOLDING COMPANIES - 0.7% Norfolk Southern Corp. 7.05%, 5/1/37 Baa1 1,700,000 1,725,398 INDUSTRIAL MACHINERY & EQUIPMENT - 1.6% POLLUTION CONTROL - 1.6% WMX Technologies, Inc.: 6 1/4%, 4/1/99 A3 1,200,000 1,197,300 7.10%, 8/1/26 A3 3,000,000 3,056,910 4,254,210 MEDIA & LEISURE - 2.3% BROADCASTING - 2.2% TCI Communication, Inc.: 7 1/4%, 6/15/99 Ba1 3,680,000 3,708,115 7 3/8%, 2/15/00 Ba1 750,000 755,700 Time Warner, Inc. 7.95%, 2/1/00 Ba1 1,170,000 1,202,865 5,666,680 MOODY'S PRINCIPAL VALUE RATINGS (A) AMOUNT (NOTE 1) RESTAURANTS - 0.1% Darden Restaurants, Inc. 6 3/8%, 2/1/06 Baa1 $ 310,000 $ 286,793 TOTAL MEDIA & LEISURE 5,953,473 NONDURABLES - 1.7% FOODS - 0.5% ConAgra, Inc. 7 1/8%, 10/1/26 Baa1 1,270,000 1,275,639 TOBACCO - 1.2% Philip Morris Companies, Inc. 6.95%, 6/1/06 A2 3,000,000 3,009,990 TOTAL NONDURABLES 4,285,629 RETAIL & WHOLESALE - 2.8% GENERAL MERCHANDISE STORES - 2.0% Dayton Hudson Corp. 6.40%, 2/15/03 Baa1 500,000 487,065 Federated Department Stores, Inc. 8 1/2%, 6/15/03 Baa2 3,000,000 3,190,050 Penney (J.C.) Co., Inc. 6.95%, 4/1/00 A2 1,000,000 1,008,420 Sears, Roebuck & Co. 9.23% 8/6/98 A2 450,000 465,120 5,150,655 GROCERY STORES - 0.8% American Stores Co. 7 1/2%, 5/1/37 Baa2 1,400,000 1,426,558 Kroger Co. 8.15%, 7/15/06 Baa3 500,000 527,180 1,953,738 TOTAL RETAIL & WHOLESALE 7,104,393 TECHNOLOGY - 1.9% COMPUTERS & OFFICE EQUIPMENT - 1.2% Comdisco, Inc. 6 3/8%, 11/30/01 Baa1 3,200,000 3,132,448 ELECTRONICS - 0.7% Texas Instruments, Inc. 6 7/8%, 7/15/00 A3 1,692,000 1,705,604 TOTAL TECHNOLOGY 4,838,052 TRANSPORTATION - 0.3% AIR TRANSPORTATION - 0.3% AMR Corp. 9.55%, 3/6/98 Baa3 400,000 408,564 Delta Air Lines, Inc. equipment trust certificate 8.54%, 1/2/07 Baa1 416,138 442,646 851,210 UTILITIES - 5.4% CELLULAR - 0.9% 360 Degrees Communications Co.: 7 1/8%, 3/1/03 Ba1 1,420,000 1,412,176 7 1/2%, 3/1/06 Ba1 850,000 847,926 2,260,102 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (A) AMOUNT (NOTE 1) UTILITIES - CONTINUED ELECTRIC UTILITY - 1.1% British Columbia Hydro & Power Authority yankee 12 1/2%, 1/15/14 Aa2 $ 360,000 $ 405,558 DR Investment yankee 7.10%, 5/15/02 (c) Baa1 1,500,000 1,510,860 Israel Electric Corp. Ltd. yankee 7 1/4%, 12/15/06 (c) A3 1,000,000 991,970 2,908,388 GAS - 1.2% Florida Gas Transmission Co. 7 3/4%, 11/1/97 (c) Baa2 220,000 221,250 Mitchell Energy & Development Corp. 8%, 7/15/99 Ba1 1,730,000 1,770,188 Southwest Gas Corp. 9 3/4%, 6/15/02 Baa2 1,000,000 1,111,370 3,102,808 TELEPHONE SERVICES - 2.2% LCI International, Inc. 7 1/4%, 6/15/07 Ba1 950,000 940,975 MFS Communications, Inc. 0%, 1/15/04 (f) Ba3 2,000,000 1,861,600 WorldCom, Inc. 7 3/4%, 4/1/07 Ba1 2,700,000 2,761,236 5,563,811 TOTAL UTILITIES 13,835,109 TOTAL NONCONVERTIBLE BONDS (Cost $103,327,484) 103,810,425 U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - 35.3% U.S. TREASURY OBLIGATIONS - 23.9% 6 5/8%, 6/30/01 Aaa 11,960,000 12,072,065 7 7/8%, 8/15/01 Aaa 510,000 537,494 10 3/4%, 5/15/03 Aaa 138,000 166,657 11 7/8%, 11/15/03 Aaa 3,000,000 3,835,770 12 3/8%, 5/15/04 Aaa 1,914,000 2,528,566 7%, 7/15/06 Aaa 21,000,000 21,603,750 12 3/4%, 11/15/10 (callable) Aaa 1,747,000 2,424,242 13 7/8%, 5/15/11 (callable) Aaa 30,000 44,367 12%, 8/15/13 (callable) Aaa 3,772,000 5,309,694 9%, 11/15/18 Aaa 7,679,000 9,499,153 8 7/8%, 2/15/19 Aaa 1,400,000 1,713,250 7 1/4%, 2/15/23 Aaa 1,680,000 1,730,400 61,465,408 U.S. GOVERNMENT AGENCY OBLIGATIONS - 11.4% Federal Agricultural Mortgage Corporation 7.01%, 2/10/05 Aaa 10,000 10,125 Federal Home Loan Bank: 6 3/4%, 4/5/04 Aaa 375,000 376,114 7.31%, 6/16/04 Aaa 4,155,000 4,295,231 7.36%, 7/1/04 Aaa 3,100,000 3,221,582 MOODY'S PRINCIPAL VALUE RATINGS (A) AMOUNT (NOTE 1) 7.38%, 8/5/04 Aaa $ 110,000 $ 114,193 7.56%, 9/01/04 Aaa 310,000 324,725 7.46%, 9/9/04 Aaa 50,000 52,102 7.70%, 9/20/04 Aaa 40,000 42,225 6.46%, 12/15/04 Aaa 1,745,000 1,713,922 8.09%, 12/28/04 Aaa 10,000 10,794 7.59%, 3/10/05 Aaa 10,000 10,513 Federal Home Loan Mortgage Corporation 6.77%, 9/15/02 Aaa 150,000 150,678 8%, 1/26/05 Aaa 520,000 556,561 8.115%, 1/31/05 Aaa 1,140,000 1,229,593 6.783%, 8/18/05 Aaa 1,000,000 999,220 planned amortization class Series 1727 Class D, 6 1/2%, 8/15/14 Aaa 190,000 190,475 Federal National Mortgage Association: 6.72%, 8/1/05 Aaa 1,180,000 1,174,100 sequential pay Series 1996-M5 Class A1, 7.141%, 6/25/08 Aaa 224,488 227,408 Series 1994-M3 Class A, 7.71%, 4/1/06 Aaa 14,523 14,686 Financing Corp. stripped principal 0%, 3/26/00 - 512,000 430,249 Government Loan Trusts (assets of Trust guaranteed by U.S. Government through Agency for International Development) 8 1/2%, 4/1/06 Aaa 1,760,000 1,898,002 Government Trust Certificates (assets of Trust guaranteed by U.S. Government through Defense Security Assistance Agency): Class T-3, 9 5/8%, 5/15/02 Aaa 67,365 71,570 Class 1-C, 9 1/4%, 11/15/01 Aaa 1,119,342 1,188,484 Class 2-E, 9.40%, 5/15/02 Aaa 955,284 1,013,662 Guaranteed Export Trust Certificates (assets of Trust guaranteed by U.S. Government through Export-Import Bank): Series 1993-C, 5.20%, 10/15/04 Aaa 6,667 6,383 Series 1993-D, 5.23%, 5/15/05 Aaa 13,617 12,991 Series 1994-A, 7.12%, 4/15/06 Aaa 8,230 8,379 Series 1994-C, 6.61%, 9/15/99 Aaa 57,747 57,987 U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (A) AMOUNT (NOTE 1) Guaranteed Trade Trust Certificates (assets of Trust guaranteed by U.S. Government through Export-Import Bank) Series 1994-B, 7 1/2%, 1/26/06 Aaa $ 8,330 $ 8,605 Israel Export Trust Certificates (assets of Trust guaranteed by U.S. Government through Export-Import Bank) Series 1994-1, 6.88%, 1/26/03 Aaa 14,118 14,228 Overseas Private Investment Corp. U.S. Government guaranteed participation certificate Series 1994-1995, 6.08%, 8/15/04 (callable) Aaa 140,000 136,898 Private Export Funding Corp.: secured 5.65%, 3/15/03 Aaa 243,000 238,169 secured 6.86%, 4/30/04 Aaa 1,604,283 1,615,160 State of Israel (guaranteed by U.S. Government through Agency for International Development): 6 1/8%, 8/15/99 Aaa 770,000 768,429 7 1/8%, 8/15/99 Aaa 435,000 442,527 7 3/4%, 11/15/99 Aaa 144,000 148,349 0%, 11/15/01 Aaa 2,875,000 2,176,174 6 1/4%, 8/15/02 Aaa 352,000 347,725 6 1/8%, 3/15/03 Aaa 70,000 68,178 6 5/8%, 2/15/04 Aaa 180,000 179,890 6 3/4%, 8/15/04 Aaa 1,000,000 1,004,330 7 5/8%, 8/15/04 Aaa 330,000 347,612 5.89%, 8/15/05 Aaa 1,175,000 1,113,332 U.S. Department of Housing and Urban Development Government guaranteed participation certificates: Series 1995-A: 8.27%, 8/1/03 Aaa 415,000 448,208 8.24%, 8/1/04 Aaa 500,000 540,065 Series 1996-A, 6.98%, 8/1/05 Aaa 180,000 181,903 29,181,736 TOTAL U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS (Cost $89,688,627) 90,647,144 U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES - 14.2% FEDERAL HOME LOAN MORTGAGE CORPORATION - 0.7% 7%, 5/01/01 Aaa 172,509 173,501 8 1/2%, 3/01/20 Aaa 1,570,252 1,649,487 1,822,988 MOODY'S PRINCIPAL VALUE RATINGS (A) AMOUNT (NOTE 1) FEDERAL NATIONAL MORTGAGE ASSOCIATION - 10.5% 6.345%, 3/01/99 Aaa $ 77,838 $ 77,546 5 1/2%, 5/01/00 to 7/01/01 Aaa 2,647,237 2,565,126 6%, 3/01/01 to 6/01/11 Aaa 14,466,801 14,074,564 6 1/2%, 2/01/10 to 5/01/26 Aaa 8,192,990 7,842,304 8%, 12/01/24 to 7/01/27 Aaa 2,362,595 2,417,036 26,976,576 GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 3.0% 6%, 8/15/08 to 4/15/11 Aaa 5,433,429 5,284,630 10%, 7/15/13 to 11/15/24 Aaa 1,891,746 2,081,200 8%, 2/15/17 Aaa 346,667 359,429 7,725,259 TOTAL U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES (Cost $36,012,975) 36,524,823 COMMERCIAL MORTGAGE SECURITIES - 3.3% BKB Commercial Mortgage Trust Series 1997-C1 Class A-1, 6 7/8%, 2/25/43 (c) Aaa 3,072,923 3,084,446 CS First Boston Mortgage Securities Corp.: Series 1995-AEWI Class A-1, 6.665%, 11/25/27 Aaa 79,465 79,365 floater Series 1994-CFB1 Class A-1, 6.2375%, 1/25/28 (d) Aaa 77,890 77,914 Equitable Life Assurance Society of the United States (The): Series 1996-1 (c): Class B1, 7.33%, 5/15/06 Aa2 500,000 508,640 Class C1, 7.52%, 5/15/06 A2 500,000 512,065 Meritor Mortgage Security Corp. Series 1987-1 Class A-3, 9.40%, 6/1/99 Baa3 26,987 26,954 Nomura Asset Securities Corp. floater Series 1994-MD-II Class A-6, 6.9564% 7/4/03 (d) - 179,477 180,907 Oregon Commercial Mortgage, Inc. Series 1995-1 Class A, 7.15%, 6/25/23 (c)(d) Aaa 204,328 204,967 Resolution Trust Corp.: floater Series 1993-C2 Class A-2, 6.62%, 3/25/25 (d) Aaa 264,647 265,061 COMMERCIAL MORTGAGE SECURITIES - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (A) AMOUNT (NOTE 1) Resolution Trust Corp.: - continued commercial Series 1995-C1 Class A-4B, 6.65%, 2/25/27 Aaa $ 740,000 $ 738,844 floater Series 1994-C1 Class A-3, 6.30%, 6/25/26 (d) Aaa 228,240 228,240 SC Finance Corp. floater 7.2375%, 8/1/04 (c)(d) - 600,000 601,875 Structured Asset Securities Corp. sequential pay: Series 1993-C1 Class A-1A, 6.60%, 10/25/24 AA+ 39,274 39,139 Series 1996 Class A-2A, 7 3/4%, 2/25/28 Aaa 1,020,086 1,034,431 Wells Fargo Capital Markets Apartment Financing Trust 6.56%, 12/29/05 (c) Aaa 750,000 739,770 TOTAL COMMERCIAL MORTGAGE SECURITIES (Cost $8,267,612) 8,322,618 FOREIGN GOVERNMENT OBLIGATIONS (E) - 1.8% Alberta Province yankee 9 1/4%, 4/1/00 Aa2 2,500,000 2,673,000 British Columbia Province 7%, 1/1/03 Aa2 500,000 507,230 Manitoba Province 6 3/4%, 3/1/03 A1 500,000 499,265 Ontario Province yankee 7 3/4%, 6/4/02 Aa3 1,000,000 1,044,870 TOTAL FOREIGN GOVERNMENT OBLIGATIONS (Cost $4,824,375) 4,724,365 SUPRANATIONAL OBLIGATIONS - 0.3% African Development Bank 7 3/4%, 12/15/01 (Cost $691,799) Aa1 660,000 687,166 CASH EQUIVALENTS - 4.7% MATURITY AMOUNT Investments in repurchase agreements (U.S. Treasury obligations) in a joint trading account at 5.93%, dated 6/30/97 due 7/1/97 $ 12,192,008 12,190,000 TOTAL INVESTMENT IN SECURITIES - 100% (Cost $255,002,872) $ 256,906,541 LEGEND 4. Standard & Poor's credit ratings are used in the absence of a rating by Moody's Investors Service, Inc. 5. Debt obligation initially issued at one coupon which converts to a higher coupon at a specified date. 6. Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $13,265,625 or 5.1% of net assets. 7. The coupon rate shown on floating or adjustable rate securities represents the rate at period end. 8. For foreign government obligations not individually rated by S&P or Moody's, the ratings listed are assigned to securities by FMR, the fund's investment adviser, based principally on S&P and Moody's ratings of the sovereign credit of the issuing government. 9. Debt obligation initially issued in zero coupon form which converts to coupon form at a specified rate and date. OTHER INFORMATION Purchases and sales of securities, other than short-term securities, aggregated $195,928,403 and $170,908,345, respectively, of which U.S. government and government agency obligations aggregated $120,223,036 and $137,847,077, respectively. The composition of long-term debt holdings as a percentage of total value of investment in securities, is as follows: MOODY'S RATINGS S&P RATINGS Aaa, Aa, A 73.2% AAA, AA, A 70.2% Baa 13.7% BBB 21.3% Ba 6.0% BB 1.2% B 0.0% B 0.0% Caa 0.0% CCC 0.0% Ca, C 0.0% CC, C 0.0% D 0.0% For some foreign government obligations, FMR has assigned the ratings of the sovereign credit of the issuing government. The percentage not rated by both S&P and Moody's amounted to 0.5%. INCOME TAX INFORMATION At June 30, 1997, the aggregate cost of investment securities for income tax purposes was $255,006,227. Net unrealized appreciation aggregated $1,900,314, of which $2,956,441 related to appreciated investment securities and $1,056,127 related to depreciated investment securities. At December 31, 1996, the fund had a capital loss carryforward of approximately $1,523,000 of which $230,000, and $1,293,000 will expire on December 31, 2003 and 2004, respectively. VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED) ASSETS Investment in securities, at $ 256,906,541 value (including repurchase agreements of $12,190,000) (cost $255,002,872) - See accompanying schedule Cash 299 Receivable for fund shares sold 441,929 Interest receivable 3,489,812 TOTAL ASSETS 260,838,581 LIABILITIES Payable for investments purchased $ 2,048,469 Accrued management fee 93,494 Other payables and accrued expenses 49,401 TOTAL LIABILITIES 2,191,364
NET ASSETS $ 258,647,217 Net Assets consist of: Paid in capital $ 251,000,862 Undistributed net investment income 7,603,855 Accumulated undistributed net realized gain (loss) on investments and foreign currency transactions (1,861,169) Net unrealized appreciation (depreciation) on investments 1,903,669 NET ASSETS, for 21,842,464 $ 258,647,217 shares outstanding NET ASSET VALUE, offering price $ 11.84 and redemption price per share ($258,647,217 (divided by) 21,842,464 shares)
STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) INVESTMENT INCOME $ 8,376,565 Interest EXPENSES Management fee $ 527,568 Transfer agent fees 95,695 Accounting fees and expenses 48,849 Non-interested trustees' compensation 552 Custodian fees and expenses 8,018 Registration fees 25 Audit 18,627 Legal 326 Miscellaneous 7,852 Total expenses before reductions 707,512 Expense reductions (971 706,541 ) NET INVESTMENT INCOME 7,670,024 REALIZED AND UNREALIZED GAIN (LOSS) (333,170 Net realized gain (loss) on ) investment securities Change in net unrealized appreciation (depreciation) on investment securities (432,325 ) NET GAIN (LOSS) (765,495 ) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 6,904,529 OTHER INFORMATION $ 971 Expense reduction Custodian credits
STATEMENT OF CHANGES IN NET ASSETS INCREASE (DECREASE) IN NET ASSETS SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, 1997 1996 (UNAUDITED) Operations Net investment income $ 7,670,024 $ 13,175,925 Net realized gain (loss) (333,170) (1,136,463) Change in net unrealized appreciation (depreciation) (432,325) (5,278,792) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 6,904,529 6,760,670 Distributions to shareholders from net investment income (13,381,760) (9,612,980) Share transactions 61,651,406 108,335,706 Net proceeds from sales of shares Reinvestment of distributions 13,381,760 9,612,980 Cost of shares redeemed (38,502,521) (68,048,460) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 36,530,645 49,900,226 TOTAL INCREASE (DECREASE) IN NET ASSETS 30,053,414 47,047,916 NET ASSETS Beginning of period 228,593,803 181,545,887 End of period (including undistributed net investment income of $7,603,855 and $13,165,742, respectively) $ 258,647,217 $ 228,593,803 OTHER INFORMATION Shares Sold 5,288,011 9,066,652 Issued in reinvestment of distributions 1,151,614 807,813 Redeemed (3,271,497) (5,752,069) Net increase (decrease) 3,168,128 4,122,396
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, 1997 1996 1995 1994 1993 E 1992 SELECTED PER-SHARE DATA (UNAUDITED) Net asset value, beginning of period $12.240 $12.480 $11.020 $11.480 $10.970 $11.080 Income from Investment Operations .376 D .670 .320 .733 .641 .672 Net investment income Net realized and unrealized gain (loss) (.046) (.290) 1.530 (1.163) .559 .058 Total from investment operations .330 .380 1.850 (.430) 1.200 .730
Less Distributions From net investment income (.730) (.620) (.390) - (.628) (.680) In excess of net investment income - - - - (.002) - From net realized gain - - - (.010) (.050) (.160) In excess of net realized gain - - - (.020) (.010) - Total distributions (.730) (.620) (.390) (.030) (.690) (.840) Net asset value, end of period $ 11.840 $ 12.240 $ 12.480 $ 11.020 $ 11.480 $10.970 TOTAL RETURN B, C 2.81% 3.19% 17.32% (3.76)% 10.96% 6.65% RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (000 omitted) $258,647 $228,594 $181,546 $111,381 $122,376 $73,598 Ratio of expenses to average net assets .60% A .58% .59% .67% .68% .76% Ratio of net investment income to average net assets 6.46% A 6.49% 6.53% 6.53% 6.85% 7.11% Portfolio turnover rate 151% A 81% 182% 143% 70% 119%
A ANNUALIZED B TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN. C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED DURING THE PERIODS SHOWN. D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. E EFFECTIVE JANUARY 1, 1993, THE FUND ADOPTED STATEMENT OF POSITION 93-2, "DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF INCOME, CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT COMPANIES." AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT CERTAIN RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES. VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO PERFORMANCE AND INVESTMENT SUMMARY PERFORMANCE There are several ways to evaluate a fund's historical performance. You can look at the total percentage change in value, the average annual percentage change or the growth of a hypothetical $10,000 investment. Total return reflects the change in the value of an investment, assuming reinvestment of the fund's dividend income and capital gains (the profits earned upon the sale of securities that have grown in value). AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10 JUNE 30, 1997 YEAR YEARS YEARS HIGH INCOME 14.47% 13.24% 11.48% Merrill Lynch High Yield Master Index 14.30% 11.60% 11.41%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what would have happened if the fund had performed at a constant rate each year. You can compare the fund's returns to those of the Merrill Lynch High Yield Master Index - a market capitalization weighted index of all domestic and yankee high- yield bonds. Issues included in the index have maturities of at least one year and have a credit rating lower than BBB-/Baa3, but are not in default. This benchmark reflects the reinvestment of dividends and capital gains, if any. UNDERSTANDING PERFORMANCE How a fund did yesterday is no guarantee of how it will do tomorrow. Bond prices, for example, generally move in the opposite direction of interest rates. In turn, the share price, return and yield of a fund that invests in bonds will vary. That means if you sell your shares during a market downturn, you might lose money. But if you can ride out the market's ups and downs, you may have a gain. (checkmark) Figures for more than one year assume a steady compounded rate of return and are not the fund's year-by-year results, which fluctuated over the periods shown. If Fidelity had not reimbursed certain fund expenses, the past five year and past 10 year total returns would have been lower. PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER. Past performance is no guarantee of future results. Principal and investment return will vary and you may have a gain or loss when you withdraw your money. The fund includes high yielding, lower-rated securities which are subject to greater price volatility and may involve greater risk of default. The market for these securities may be less liquid. $10,000 OVER 10 YEARS 1987/06/30 10000.00 10000.00 1987/07/31 10010.70 10054.41 1987/08/31 10093.62 10155.16 1987/09/30 9742.14 9921.51 1987/10/31 9276.27 9656.42 1987/11/30 9549.48 9900.62 1987/12/31 9702.32 10032.09 1988/01/31 10021.30 10306.61 1988/02/29 10321.34 10586.28 1988/03/31 10247.18 10568.77 1988/04/30 10327.05 10599.29 1988/05/31 10311.70 10654.61 1988/06/30 10527.82 10858.33 1988/07/31 10637.41 10973.07 1988/08/31 10586.60 11009.12 1988/09/30 10671.47 11120.09 1988/10/31 10787.64 11293.35 1988/11/30 10746.45 11335.65 1988/12/31 10831.84 11383.62 1989/01/31 11092.14 11554.33 1989/02/28 11146.70 11631.98 1989/03/31 11003.47 11621.63 1989/04/30 10881.61 11655.93 1989/05/31 11082.67 11870.51 1989/06/30 11400.09 12038.69 1989/07/31 11325.04 12095.70 1989/08/31 11259.35 12155.45 1989/09/30 10865.39 12039.73 1989/10/31 10399.58 11849.29 1989/11/30 10408.34 11875.85 1989/12/31 10379.81 11865.11 1990/01/31 10150.37 11633.21 1990/02/28 9994.07 11463.80 1990/03/31 9888.62 11618.76 1990/04/30 9917.92 11677.80 1990/05/31 10121.70 11888.73 1990/06/30 10281.14 12119.06 1990/07/31 10439.95 12375.17 1990/08/31 10265.30 11901.42 1990/09/30 10021.90 11383.81 1990/10/31 9778.71 11094.12 1990/11/30 10008.07 11188.11 1990/12/31 10148.02 11349.32 1991/01/31 10363.32 11509.75 1991/02/28 10937.47 12364.04 1991/03/31 11325.02 12895.64 1991/04/30 11726.92 13354.88 1991/05/31 11899.16 13420.09 1991/06/30 12157.53 13690.06 1991/07/31 12616.84 14018.08 1991/08/31 12789.09 14312.71 1991/09/30 13076.16 14495.01 1991/10/31 13521.12 14925.74 1991/11/30 13635.95 15098.15 1991/12/31 13707.72 15273.55 1992/01/31 14439.75 15807.56 1992/02/29 14964.03 16200.15 1992/03/31 15447.75 16426.18 1992/04/30 15556.98 16545.74 1992/05/31 15744.22 16809.66 1992/06/30 15915.86 17018.51 1992/07/31 16227.94 17363.32 1992/08/31 16571.22 17593.20 1992/09/30 16742.86 17793.66 1992/10/31 16493.20 17568.92 1992/11/30 16696.05 17817.74 1992/12/31 16883.30 18047.16 1993/01/31 17335.81 18491.55 1993/02/28 17631.52 18841.57 1993/03/31 18038.40 19168.23 1993/04/30 18157.08 19305.82 1993/05/31 18428.33 19565.70 1993/06/30 18903.02 19933.29 1993/07/31 19089.51 20147.55 1993/08/31 19292.95 20339.61 1993/09/30 19360.77 20439.97 1993/10/31 19818.51 20825.00 1993/11/30 20004.99 20938.90 1993/12/31 20327.11 21148.27 1994/01/31 21005.24 21611.74 1994/02/28 20980.06 21456.32 1994/03/31 20273.29 20757.12 1994/04/30 20068.69 20514.55 1994/05/31 20105.89 20441.46 1994/06/30 20031.49 20516.70 1994/07/31 20105.89 20660.93 1994/08/31 20105.89 20804.44 1994/09/30 20254.69 20796.56 1994/10/31 20068.69 20849.41
1994/11/30 19901.30 20672.06 1994/12/31 19994.30 20902.00 1995/01/31 20217.49 21197.35 1995/02/28 20911.39 21858.73 1995/03/31 21171.78 22162.93 1995/04/30 21792.71 22681.84 1995/05/31 22353.55 23390.48 1995/06/30 22413.64 23569.13 1995/07/31 22954.45 23838.58 1995/08/31 23134.72 23983.26 1995/09/30 23515.29 24257.65 1995/10/31 23735.63 24429.61 1995/11/30 23855.81 24668.07 1995/12/31 24136.23 25064.04 1996/01/31 24697.07 25459.88 1996/02/29 25104.99 25498.22 1996/03/31 25039.04 25428.97 1996/04/30 25412.75 25440.49 1996/05/31 25764.49 25623.96 1996/06/30 25896.39 25777.88 1996/07/31 25808.45 25952.89 1996/08/31 26182.17 26220.91 1996/09/30 26951.59 26783.49 1996/10/31 26863.65 27077.02 1996/11/30 27149.44 27624.44 1996/12/31 27523.15 27837.00 1997/01/31 27896.87 28050.93 1997/02/28 28402.88 28444.43 1997/03/31 27520.51 28128.51 1997/04/30 27949.77 28448.66 1997/05/31 29118.32 29021.99 1997/06/30 29642.97 29463.84 Let's say hypothetically that $10,000 was invested in High Income Portfolio on June 30, 1987. As the chart shows, by June 30, 1997, the value of the investment would have grown to $29,643 - a 196.43% increase on the initial investment. For comparison, look at how the Merrill Lynch High Yield Master Index did over the same period. With dividends and capital gains, if any, reinvested, the same $10,000 investment would have grown to $29,464 - a 194.64% increase. INVESTMENT SUMMARY TOP FIVE HOLDINGS AS OF JUNE 30, 1997
(BY ISSUER, EXCLUDING CASH EQUIVALENTS) % OF FUND'S INVESTMENTS PanAmSat Corp. 3.3 Time Warner, Inc. 2.8 NextLink Communications, Inc. 1.9 Millicom International Cellular SA 1.8 Intermedia Communications, Inc. 1.8
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997
% OF FUND'S INVESTMENTS Media & Leisure 31.8 Utilities 12.1 Basic Industries 11.3 Finance 5.1 Services 5.0
QUALITY DIVERSIFICATION AS OF JUNE 30, 1997
(MOODY'S RATINGS) % OF FUND'S INVESTMENTS Aaa, Aa, A 0.0 Baa 0.0 Ba 5.5 B 51.5 Caa, Ca, C 8.0 Nonrated 5.2
TABLE EXCLUDES SHORT-TERM INVESTMENTS. WHERE MOODY'S RATINGS ARE NOT AVAILABLE, WE HAVE USED S&P RATINGS. UNRATED DEBT SECURITIES THAT ARE EQUIVALENT TO BA AND BELOW AT JUNE 30, 1997, ACCOUNT FOR 5.2% OF THE FUND'S INVESTMENTS. VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO FUND TALK: THE MANAGER'S OVERVIEW An interview with Barry Coffman, Portfolio Manager of High Income Portfolio Q. BARRY, HOW DID THE FUND PERFORM OVER THE PAST SIX MONTHS AND THE PAST YEAR? A. It did well, outperforming its benchmark, the Merrill Lynch High Yield Master Index, which had a total return of 5.84% for the six months that ended June 30, 1997, and 14.30% for the 12-month period. Q. WHY DID THE FUND BEAT ITS BENCHMARK? A. The fund had a lighter weighting in higher-quality BB-rated securities and a heavier weighting in lower-quality B-rated securities than its benchmark. During the period, credit spreads narrowed, meaning there was an ever smaller gap in yield between the B- and BB-rated securities. As spreads narrowed, B-rated securities performed better than the higher-rated BB securities and helped the fund outpace its benchmark. There were both fundamental and technical reasons for the performance of B-rated securities. From a fundamental standpoint, there was continued economic strength and the stock market's impressive rise. And from a technical standpoint, demand for the lower-quality tiers of the high-yield market was solid. Q. WHICH OF THE FUND'S HOLDINGS PERFORMED PARTICULARLY WELL? A. Many of the fund's larger media and telecommunications holdings - including PanAmSat and Millicom International Cellular - were some of its best performers. PanAmSat was upgraded upon the completion of its merger with GM Hughes. Millicom not only benefited from its quickly growing cellular businesses in emerging countries, but it also rose on the news that it is planning to undertake a significant restructuring by selling off its Latin American business and spinning off its Asian operations. Other strong performers included stocks issued by high-yield companies - those with below-investment-grade credit ratings. For example, the stock price of Allied Waste performed well over the past six months. That rise was due, in part, to Allied's successful integration of a recent acquisition. Q. WERE THERE ANY DISAPPOINTMENTS? A. Some of our paging holdings proved to be disappointing, but the industry as a whole was plagued by a number of developments during the past six months. First, investors became concerned that pager sales would decline in light of new competitive products. Second, there was the bankruptcy of a high-profile paging company and the failure of another company to successfully introduce a new product. While the fund did not own either of those troubled pagers, it did hold others that appeared to fall in price in sympathy, including Arch Communications. While I reduced the fund's stake in Arch, I continued to hold onto Pagemart because it continued to be one of the fastest-growing paging companies and one with a strategy that I believe should distinguish it from its competitors. Q. IN ADDITION TO PAGING COMPANIES, THE FUND ALSO HAD SIGNIFICANT HOLDINGS IN OTHER TELECOMMUNICATIONS-RELATED COMPANIES. WHAT IS THE ATTRACTION TO THESE COMPANIES? A. The growth potential for many telecommunications companies is significant and, in my view, will be independent of the economic environment. The companies I emphasized have fast-growing businesses in fast-growing industries. For example, the competitive local exchange companies - including Intermedia Communications, Nextlink, GST USA, Brooks Fiber and McLeodUSA - gained market share in the $100 billion local telephone market at the expense of regional Bell operating companies. Another large telecommunications holding is McCaw International, which is a subsidiary of Nextel and owns enhanced specialized mobile radio licenses in Latin America and Asia used for dispatch, messaging and voice purposes. Q. WHAT'S YOUR OUTLOOK? A. The market is at risk to a slowing economy that likely would hurt the weakest companies in the high-yield market. I will probably focus on improving the overall credit quality of the fund, while concentrating the fund's aggressive holdings in situations I believe have strong fundamental momentum and an attractive risk/reward tradeoff. FUND FACTS GOAL: income and share price stability by investing in high-quality, short-term investments START DATE: April 1, 1982 SIZE: as of June 30, 1997, more than $1.0 billion MANAGER: Robert Duby, since April 1997; joined Fidelity in 1982 (checkmark) VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO INVESTMENTS JUNE 30, 1997 (UNAUDITED) Showing Percentage of Total Value of Investment in Securities CORPORATE BONDS - 70.2% MOODY'S PRINCIPAL VALUE RATINGS (A) AMOUNT (NOTE 1) CONVERTIBLE BONDS - 0.7% MEDIA & LEISURE - 0.6% RESTAURANTS - 0.6% Boston Chicken, Inc. 4 1/2%, 2/1/04 B2 $ 14,000,000 $ 10,640,000 RETAIL & WHOLESALE - 0.1% RETAIL & WHOLESALE, MISCELLANEOUS - 0.1% Corporate Express, Inc. 4 1/2%, 7/1/00 B3 1,500,000 1,335,000 UTILITIES - 0.0% TELEPHONE SERVICES - 0.0% GST Telecommunications, Inc. 0%, 12/15/05 (d)(g) - 630,000 409,500 TOTAL CONVERTIBLE BONDS 12,384,500 NONCONVERTIBLE BONDS - 69.5% AEROSPACE & DEFENSE - 1.3% AEROSPACE & DEFENSE - 0.5% Alliant Techsystems, Inc. 11 3/4%, 3/1/03 B2 40,000 44,100 Fairchild Corp. 12%, 10/15/01 Caa 1,945,000 1,964,450 RHI Holdings, Inc. 11 7/8%, 3/1/99 B2 3,160,000 3,160,000 Wyman-Gordon Co. 10 3/4%, 3/15/03 Ba3 4,740,000 5,071,800 10,240,350 DEFENSE ELECTRONICS - 0.5% Tracor, Inc. 8 1/2%, 3/1/07 B1 9,430,000 9,524,300 SHIP BUILDING & REPAIR - 0.3% Newport News Shipbuilding, Inc.: 8 5/8%, 12/1/06 Ba2 670,000 691,775 9 1/4%, 12/1/06 B1 4,650,000 4,847,625 5,539,400 TOTAL AEROSPACE & DEFENSE 25,304,050 BASIC INDUSTRIES - 10.7% CHEMICALS & PLASTICS - 2.6% Atlantis Group, Inc. 11%, 2/15/03 B2 7,785,000 8,038,013 BPC Holdings Corp. 12 1/2%, 6/15/06 Caa 350,000 381,500 Foamex LP/Foamex Capital Corp. 9 7/8%, 6/15/07 (g) B3 5,840,000 5,913,000 Freedom Chemical Co. 10 5/8%, 10/15/06 B3 6,260,000 6,385,200 Pioneer Americas Acquisition Corp. 9 1/4%, 6/15/07 (g) B1 5,780,000 5,693,300 Plastic Specialties & Technologies, Inc. 11 1/4%, 12/1/03 B3 5,990,000 6,409,300 Sterling Chemicals Holdings, Inc. 11 3/4%, 8/15/06 B3 15,560,000 16,765,900 49,586,213 MOODY'S PRINCIPAL VALUE RATINGS (A) AMOUNT (NOTE 1) IRON & STEEL - 1.0% GS Technologies Operating, Inc. 12 1/4%, 10/1/05 B2 $ 3,410,000 $ 3,733,950 Republic Engineered Steels, Inc. 9 7/8%, 12/15/01 Caa 7,810,000 7,282,825 WCI Steel, Inc. 10%, 12/1/04 B2 8,070,000 8,392,800 19,409,575 METALS & MINING - 0.6% Commonwealth Aluminum Corp. 10 3/4%, 10/1/06 B2 10,110,000 10,615,500 PAPER & FOREST PRODUCTS - 6.5% Asia Pulp & Paper Finance II Mauritius Ltd. 12%, 3/15/04 (g) B3 11,785,000 12,079,625 American Pad & Paper Co., Inc. 13%, 11/15/05 B3 2,290,000 2,679,300 Container Corp. of America: 10 3/4%, 5/1/02 B1 50,000 54,688 gtd. 9 3/4%, 4/1/03 B1 490,000 518,175 gtd. 11 1/4%, 5/1/04 B1 150,000 164,250 Crown Paper Co. 11%, 9/1/05 B3 3,780,000 3,789,450 Doman Industries Ltd. yankee 8 3/4%, 3/15/04 B1 11,660,000 11,251,900 Florida Coast Paper Co. LLC\Florida Coast Paper Finance Corp., Series B, 12 3/4%, 6/1/03 Caa 3,110,000 3,211,075 Gaylord Container Corp. 11 1/2%, 5/15/01 B3 1,160,000 1,219,450 Indah Kiat International Finance Co. BV 12 1/2%, 6/15/06 Ba2 2,680,000 3,041,800 Mail-Well Corp. 10 1/2%, 2/15/04 B 1,640,000 1,705,600 Malette, Inc. yankee 12 1/4%, 7/15/04 Ba3 1,340,000 1,500,800 Repap Wisconsin, Inc.: 9 1/4%, 2/1/02 B2 11,170,000 11,225,850 9 7/8%, 5/1/06 Caa 12,510,000 12,603,825 Repap New Brunswick, Inc. yankee 10 5/8%, 4/15/05 Caa 5,110,000 4,816,175 Riverwood International 10 7/8%, 4/1/08 Caa 8,750,000 7,940,625 SD Warren Co., Series B, 12%, 12/15/04 B1 7,330,000 8,209,600 Specialty Paperboard, Inc. 9 3/8%, 10/15/06 B1 5,000,000 5,062,500 Stone Container Corp.: 12 5/8%, 7/15/98 B2 10,000,000 10,512,500 10 3/4%, 10/1/02 B1 10,510,000 11,088,050 11 7/8%, 8/1/16 B2 8,400,000 9,072,000 Tembec Finance Corp. yankee 9 7/8%, 9/30/05 B1 1,365,000 1,405,950 123,153,188 TOTAL BASIC INDUSTRIES 202,764,476 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (A) AMOUNT (NOTE 1) NONCONVERTIBLE BONDS - CONTINUED DURABLES - 2.4% AUTOS, TIRES, & ACCESSORIES - 0.6% Jordan Industries, Inc. 10 3/8%, 8/1/03 B3 $ 11,895,000 $ 12,311,325 HOME FURNISHINGS - 0.9% Guitar Center Management Co., Inc. 11%, 7/1/06 B2 2,527,000 2,767,065 Interlake Corp. 12 1/8%, 3/1/02 B3 10,275,000 10,763,063 Knoll, Inc. 10 7/8%, 3/15/06 B1 3,426,000 3,790,013 17,320,141 TEXTILES & APPAREL - 0.9% Dan River, Inc. 10 1/8%, 12/15/03 B3 4,700,000 4,982,000 GFSI, Inc. 9 5/8%, 3/1/07 (g) B3 1,410,000 1,424,100 Synthetic Industries, Inc. 9 1/4%, 2/15/07 (g) B2 9,610,000 9,730,125 16,136,225 TOTAL DURABLES 45,767,691 ENERGY - 3.8% ENERGY SERVICES - 0.8% DI Industries, Inc. 8 7/8%, 7/1/07 B1 3,875,000 3,816,875 McDermott International, Inc. 9 3/8%, 3/15/02 Ba3 11,680,000 12,246,363 16,063,238 OIL & GAS - 3.0% Belden & Blake Corp. 9 7/8%, 6/15/07 (g) B3 5,805,000 5,746,950 Chesapeake Energy Corp. 10 1/2%, 6/1/02 Ba2 690,000 727,950 Cross Timbers Oil Co. 9 1/4%, 4/1/07 B2 8,000,000 8,260,000 Flores & Rucks, Inc.: 13 1/2%, 12/1/04 B1 390,000 468,975 9 3/4%, 10/1/06 B3 9,860,000 10,303,700 Harcor Energy, Inc. 14 7/8%, 7/15/02 B3 13,060,000 15,410,800 Ocean Energy, Inc. 8 7/8%, 7/15/07 (g) B3 10,850,000 10,850,000 United Meridian Corp. 10 3/8%, 10/15/05 B2 190,000 206,150 United Refining Co. 10 3/4%, 6/15/07 (g) B2 4,050,000 4,009,500 55,984,025 TOTAL ENERGY 72,047,263 FINANCE - 4.1% ASSET-BACKED SECURITIES - 0.4% Airplanes Pass Through Trust 10 7/8%, 3/15/19 Ba2 6,710,000 7,750,050 MOODY'S PRINCIPAL VALUE RATINGS (A) AMOUNT (NOTE 1) CREDIT & OTHER FINANCE - 1.8% APP International Finance Co. BV yankee 11 3/4%, 10/1/05 Ba3 $ 2,165,000 $ 2,392,325 GST Equipment Funding, Inc. 13 1/4%, 5/1/07 (g) - 10,360,000 11,085,200 Imperial Credit Capital Trust I 10 1/4%, 6/14/02 (g) B2 4,870,000 4,882,175 Imperial Credit Industries, Inc. 9 7/8%, 1/15/07 B2 11,200,000 11,088,000 PTC International Finance BV 0%, 7/1/07 (d)(g) B3 3,440,000 2,085,500 Polytama International Finance BV 11 1/4%, 6/15/07 B2 2,750,000 2,839,375 34,372,575 INSURANCE - 0.4% Integon Corp.: 8%, 8/15/99 B1 1,500,000 1,526,250 9 1/2%, 10/15/01 B1 5,200,000 5,603,000 7,129,250 SAVINGS & LOANS - 1.5% First Nationwide Holdings, Inc. 10 5/8%, 10/1/03 Ba3 7,240,000 7,855,400 First Nationwide Parent Holdings Ltd. 12 1/2%, 4/15/03 B3 18,180,000 20,270,700 28,126,100 SECURITIES INDUSTRY - 0.0% ECM Corp. extendible 14%, 6/1/02 (g) - 235,942 259,537 TOTAL FINANCE 77,637,512 HEALTH - 2.8% DRUGS & PHARMACEUTICALS - 0.1% Leiner Health Products, Inc. 9 5/8%, 7/1/07 (g) B3 1,150,000 1,164,375 MEDICAL EQUIPMENT & SUPPLIES - 1.1% Wright Medical Technology, Inc. 10 3/4%, 7/1/00 B3 20,920,000 21,286,089 MEDICAL FACILITIES MANAGEMENT - 1.6% Integrated Health Services, Inc. (g): 11%, 4/30/06 (e) B1 4,890,000 5,256,750 9 1/2%, 9/15/07 B1 3,460,000 3,537,850 Mariner Health Group, Inc. 9 1/2%, 4/1/06 B2 1,180,000 1,215,400 Tenet Healthcare Corp. 8 5/8%, 1/15/07 Ba3 20,370,000 20,675,550 30,685,550 TOTAL HEALTH 53,136,014 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (A) AMOUNT (NOTE 1) NONCONVERTIBLE BONDS - CONTINUED INDUSTRIAL MACHINERY & EQUIPMENT - 3.1% ELECTRICAL EQUIPMENT - 1.1% Amphenol Corp. 9 7/8%, 5/15/07 B2 $ 1,680,000 $ 1,730,400 Motors & Gears, Inc. 10 3/4%, 11/15/06 B3 19,030,000 19,600,900 21,331,300 INDUSTRIAL MACHINERY & EQUIPMENT - 1.7% Calmar, Inc. 11 1/2%, 8/15/05 B3 1,570,000 1,664,200 Continental Global Group, Inc. 11%, 4/1/07 (g) B2 4,000,000 4,200,000 Goss Graphic System, Inc. 12%, 10/15/06 B2 9,630,000 10,593,000 International Knife & Saw, Inc. 11 3/8%, 11/15/06 B3 2,460,000 2,626,050 MVE, Inc. 12 1/2%, 2/15/02 B3 5,735,000 5,878,375 Thermadyne Holdings Corp.: 10 1/4%, 5/1/02 B1 1,484,000 1,537,795 10 3/4%, 11/1/03 B3 5,226,000 5,421,975 31,921,395 POLLUTION CONTROL - 0.3% Allied Waste of North America, Inc. 10 1/4%, 12/1/06 (g) B3 4,750,000 5,082,500 TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 58,335,195 MEDIA & LEISURE - 17.4% BROADCASTING - 7.1% Adelphia Communications Corp.: 9 1/2%, 2/15/04 B3 990,000 940,500 9 7/8%, 3/1/07 (g) B3 20,610,000 19,888,650 Benedek Communications Corp. 0%, 5/15/06 (d) - 11,830,000 7,127,575 Capstar Broadcasting Partners, Inc. 0%, 2/1/09 (d)(g) CCC 12,830,000 8,243,275 Capstar Radio Broadcasting Partners, Inc. 9 1/4%, 7/1/07 (g) - 9,710,000 9,394,425 Chancellor Radio Broadcasting Co. 8 3/4%, 6/15/07 (g) B3 8,640,000 8,532,000 Citadel Broadcasting Co. 10 1/4%, 7/1/07 (g) B3 5,550,000 5,550,000 CS Wireless Systems, Inc. 0%, 3/1/06 (d) Caa 12,770,000 3,064,800 Diamond Cable Communications PLC yankee 0%, 9/30/04 (d) B3 2,030,000 1,639,225 Echostar DBS Corp. 12 1/2%, 7/1/02 (g) Caa 7,250,000 7,186,563 Echostar Satellite Broadcasting Corp. 0%, 3/15/04 (d) Caa 5,410,000 3,841,100 Echostar Communications Corp. 0%, 6/1/04 (d) B2 17,750,000 14,910,000 MOODY'S PRINCIPAL VALUE RATINGS (A) AMOUNT (NOTE 1) Intermedia Capital Partners IV L P/Intermedia Partners IV Capital Corp. 11 1/4%, 8/1/06 B2 $ 590,000 $ 634,988 Jacor Communications Co.: 9 3/4%, 12/15/06 B2 3,190,000 3,317,600 8 3/4%, 6/15/07 (g) B2 5,260,000 5,194,250 Lenfest Communications, Inc.: 8 3/8%, 11/1/05 Ba3 2,710,000 2,669,350 10 1/2%, 6/15/06 B2 1,660,000 1,809,400 Olympus Communications LP/ Olympus Capital Corp 10 5/8%, 11/15/06 B1 5,550,000 5,799,750 SFX Broadcasting, Inc. 10 3/4%, 5/15/06 B3 3,845,000 4,142,988 Telewest PLC 0%, 10/1/07 (d) B1 16,990,000 12,275,275 UIH Australia/PAC, Inc., Series B, 0%, 5/15/06 (d) B2 13,875,000 8,394,375 134,556,089 ENTERTAINMENT - 2.6% AMC Entertainment, Inc. 9 1/2%, 3/15/09 (g) B2 10,940,000 11,104,100 AMF Group, Inc. 0%, 3/15/06 (d) B2 12,280,000 8,749,500 Cinemark USA, Inc. 9 5/8%, 8/1/08 B2 8,240,000 8,363,600 Viacom, Inc. 8%, 7/7/06 B1 21,700,000 21,049,000 49,266,200 LEISURE DURABLES & TOYS - 1.7% Coleman Escrow Corp. secured (g): 1st priority 0%, 5/15/01 B3 20,350,000 12,820,500 2nd priority 0%, 5/15/01 Caa 3,700,000 2,136,750 Icon Health And Fitness, Inc. 13%, 7/15/02 B3 12,750,000 14,311,875 Icon Fitness Corp. 0%, 11/15/06 (d) CCC+ 5,650,000 3,079,250 32,348,375 LODGING & GAMING - 4.1% American Skiing Co. 12%, 7/15/06 B3 7,480,000 7,854,000 Casino Magic Financial Corp. 11 1/2%, 10/15/01 B1 3,760,000 3,290,000 HMH Properties, Inc. 9 1/2%, 5/15/05 Ba3 14,610,000 15,230,925 Hollywood Casino Corp. 12 3/4%, 11/1/03 B2 6,050,000 6,413,000 Horseshoe Gaming LLC 12 3/4%, 9/30/00 B1 15,220,000 17,008,350 KSL Recreation Group, Inc. 10 1/4%, 5/1/07 (g) B3 5,570,000 5,792,800 Prime Hospitality Corp. 9 3/4%, 4/1/07 - 5,190,000 5,462,475 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (A) AMOUNT (NOTE 1) NONCONVERTIBLE BONDS - CONTINUED MEDIA & LEISURE - CONTINUED LODGING & GAMING - CONTINUED Sun International Hotels Ltd./ Sun International North America, Inc. yankee 9%, 3/15/07 Ba3 $ 15,030,000 $ 15,255,450 Wyndham Hotel Corp. 10 1/2%, 5/15/06 B2 1,920,000 2,145,600 78,452,600 PUBLISHING - 0.8% Big Flower Press Holdings, Inc. 8 7/8%, 7/1/07 (g) - 16,300,000 16,014,750 RESTAURANTS - 1.1% AFC Enterprises, Inc. 10 1/4%, 5/15/07 (g) B3 11,420,000 11,362,900 Host Marriott Travel Plazas, Inc. 9 1/2%, 5/15/05 B1 8,790,000 9,141,600 20,504,500 TOTAL MEDIA & LEISURE 331,142,514 NONDURABLES - 1.4% FOODS - 0.1% International Home Foods, Inc. 10 3/8%, 11/1/06 B2 2,830,000 2,914,900 HOUSEHOLD PRODUCTS - 1.2% Renaissance Cosmetic, Inc. 11 3/4%, 2/15/04 B3 10,000,000 10,350,000 Revlon Consumer Products Corp. 10 1/2%, 2/15/03 B3 11,470,000 12,215,550 22,565,550 TOBACCO - 0.1% North Atlantic Trading, Inc. 11%, 6/15/04 (g) B3 1,810,000 1,837,150 TOTAL NONDURABLES 27,317,600 RETAIL & WHOLESALE - 4.5% APPAREL STORES - 1.5% Lamonts Apparel, Inc. 10 1/4%, 11/1/99 pay-in-kind (b)(g) - 2,201,000 88,040 Mothers Work, Inc. 12 5/8%, 8/1/05 B3 21,970,000 22,684,025 Specialty Retailers, Inc. (g): 8 1/2%, 7/15/05 Ba3 4,480,000 4,468,800 9%, 7/15/07 B2 1,990,000 1,980,050 29,220,915 GENERAL MERCHANDISE STORES - 0.0% K mart Corp. 8.70%, 8/1/97 Ba2 250,000 250,625 GROCERY STORES - 3.0% Food 4 Less Holdings, Inc. 13 5/8%, 6/15/07 - 1,826,493 2,135,207 Grand Union Co. 12%, 9/1/04 Caa 7,270,000 5,379,800 MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) Pantry, Inc. 12%, 11/15/00 B2 $ 660,000 $ 676,500 Pathmark Stores, Inc.: 11 5/8%, 6/15/02 Caa 10,760,000 10,894,500 9 5/8%, 5/1/03 B3 1,960,000 1,891,400 Penn Traffic Co.: 10 1/4%, 2/15/02 B3 7,850,000 6,751,000 8 5/8%, 12/15/03 B3 3,780,000 3,052,350 10 3/8%, 10/1/04 B3 3,860,000 3,281,000 11 1/2%, 4/15/06 B3 3,180,000 2,814,300 Pueblo Xtra International, Inc.: 9 1/2%, 8/1/03 B3 11,340,000 10,858,050 9 1/2%, 8/1/03 (g) B3 3,540,000 3,416,100 Randalls Food Markets, Inc. 9 3/8%, 7/1/07 (g) B2 5,080,000 5,060,950 56,211,157 RETAIL & WHOLESALE, MISCELLANEOUS - 0.0% Corporate Expess, Inc., Series B, 9 1/8%, 3/15/04 B2 1,070,000 1,070,000 TOTAL RETAIL & WHOLESALE 86,752,697 SERVICES - 4.1% LEASING & RENTAL - 0.0% GPA Holland 8.94%, 2/16/99 - 500,000 513,750 PRINTING - 1.2% Sullivan Graphics, Inc. 12 3/4%, 8/1/05 Caa 21,300,000 21,885,750 SERVICES - 2.9% Orion Network Systems, Inc. unit: 11 1/4%, 1/15/07 B2 5,585,000 5,710,663 0%, 1/15/07 (d) B2 45,930,000 26,180,100 Outsourcing Solutions, Inc. 11%, 11/1/06 B3 3,960,000 4,296,600 Protection One Alarm Monitoring, Inc. 13 5/8%, 6/30/05 Caa 18,300,000 18,757,500 54,944,863 TOTAL SERVICES 77,344,363 TECHNOLOGY - 2.9% COMMUNICATIONS EQUIPMENT - 0.3% Intermedia Communications, Inc. 0%, 5/15/06 (d) B2 6,430,000 4,420,625 COMPUTER SERVICES & SOFTWARE - 0.5% Verio, Inc. 13 1/2%, 6/15/04 unit (g) - 10,050,000 10,100,250 COMPUTERS & OFFICE EQUIPMENT - 1.6% Dictaphone Corp. 11 3/4%, 8/1/05 B3 14,530,000 13,367,600 Exide Electronics Group, Inc. 11 1/2%, 5/15/06 B3 6,950,000 7,453,875 Unisys Corp.: 10 5/8%, 10/1/99 B1 4,080,000 4,212,600 12%, 4/15/03 B1 4,400,000 4,763,000 11 3/4%, 10/15/04 B1 1,020,000 1,101,600 30,898,675 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (A) AMOUNT (NOTE 1) NONCONVERTIBLE BONDS - CONTINUED TECHNOLOGY - CONTINUED ELECTRONIC INSTRUMENTS - 0.3% Wavetek Corp. 10 1/8%, 6/15/07 (g) B3 $ 5,270,000 $ 5,375,400 ELECTRONICS - 0.2% Fairchild Semiconductor Corp. 10 1/8%, 3/15/07 (g) B2 470,000 495,850 Viasystems, Inc. 9 3/4%, 6/1/07 (g) B3 3,150,000 3,205,125 3,700,975 TOTAL TECHNOLOGY 54,495,925 TRANSPORTATION - 1.8% AIR TRANSPORTATION - 0.2% US Air Inc., pass through trust 8 5/8%, 9/1/98 B1 5,000,000 5,075,000 RAILROADS - 1.2% TFM SA de CV (g): 10 1/4%, 6/15/07 B2 2,520,000 2,564,100 0%, 6/15/09 (d) B2 8,660,000 5,001,150 Transtar Holdings LP/Transtar Capital Corp. 0%, 12/15/03 (d) B- 17,941,000 15,249,850 22,815,100 TRUCKING & FREIGHT - 0.4% Greyhound Lines, Inc. 11 1/2%, 4/15/07 (g) B3 6,860,000 7,305,900 TOTAL TRANSPORTATION 35,196,000 UTILITIES - 9.2% CELLULAR - 6.0% Arch Communications Group, Inc. 0%, 3/15/08 (d) B3 12,070,000 6,366,925 Clearnet Communications, Inc. yankee 0%, 12/15/05 (d) B3 11,420,000 7,508,650 Fonorola, Inc. 12 1/2%, 8/15/02 B2 1,020,000 1,122,000 McCaw International Ltd. unit 0%, 4/15/07 (d)(g) CCC 27,110,000 13,012,800 Microcell Telecommunications, Inc. 0%, 6/1/06 (d) B3 28,060,000 15,713,600 Millicom International Cellular SA 0%, 6/1/06 (d) B3 49,000,000 35,035,000 Mobile Telecommunications Technologies Corp. 13 1/2%, 12/15/02 B3 10,825,000 11,420,375 Omnipoint Corp.: 11 5/8%, 8/15/06 B2 2,150,000 2,031,750 Series A, 11 5/8%, 8/15/06 B3 5,980,000 5,651,100 Pagemart, Inc. 0%, 11/1/03 (d) - 3,250,000 2,811,250 Pagemart Nationwide, Inc. 0%, 2/1/05 (d) - 7,070,000 5,267,150 Telesystem International Wireless, Inc. 0%, 6/30/07 (d)(g) B- 7,670,000 4,084,275 MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) USA Mobile Communications, Inc. II 9 1/2%, 2/1/04 B2 $ 3,970,000 $ 3,692,100 113,716,975 ELECTRIC UTILITY - 0.3% CMS Energy Corp. 8 1/8%, 5/15/02 Ba3 5,680,000 5,722,600 TELEPHONE SERVICES - 2.9% Brooks Fiber Properties, Inc. 11 7/8%, 11/1/06 - 5,730,000 3,695,850 GST USA, Inc. 0%, 12/15/05 (d) - 11,110,000 6,888,200 Hyperion Telecommunications, Inc., Series B, 0%, 4/15/03 (d) - 12,560,000 6,311,400 McLeodUSA, Inc. 0%, 3/1/07 (d)(g) B3 11,000,000 7,012,500 Nextlink Communications, Inc. 12 1/2%, 4/15/06 - 700,000 743,750 RSL Communications Ltd./ RSL Communications PLC 12 1/4%, 11/15/06 - 9,140,000 9,299,950 Shared Technologies Fairchild Communications Corp. 0%, 3/1/06 (d) Caa 18,290,000 16,323,825 Teleport Communications Group, Inc.: 8%, 8/1/05 B1 5,550,000 4,002,938 9 7/8%, 7/1/06 B1 310,000 330,925 54,609,338 TOTAL UTILITIES 174,048,913 TOTAL NONCONVERTIBLE BONDS 1,321,290,213 TOTAL CORPORATE BONDS (Cost $1,309,051,600) 1,333,674,713 COMMERCIAL MORTGAGE SECURITIES - 0.0% Lennar Central Partners LP Series 1995-1 Class F, 11.70%, 5/15/05 (g) - 63,357 63,951 Meritor Mortgage Security Corp. Series 1987-1 Class B, 9.40%, 2/1/00 (b)(g) - 1,350,000 267,165 TOTAL COMMERCIAL MORTGAGE SECURITIES (Cost $220,926) 331,116 COMMON STOCKS - 7.9% SHARES AEROSPACE & DEFENSE - 0.3% Fairchild Corp. Class A 289,000 5,202,000 BASIC INDUSTRIES - 0.5% CHEMICALS & PLASTICS - 0.1% Foamex International, Inc. (a) 182,800 2,399,250 Foamex-JPS Automotive LP/Foamex JPS Capital Corp. warrants 7/1/99 (a) 530 14,840 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) BASIC INDUSTRIES - CONTINUED CHEMICALS & PLASTICS - CONTINUED Sterling Chemical Holdings warrants 8/15/08 (a) 340 $ 11,900 2,425,990 PAPER & FOREST PRODUCTS - 0.4% Gaylord Container Corp. Class A (a) 860,600 6,723,438 SDW Holdings Corp. (a): warrants 12/15/06 7,609 38,045 Series B warrants 12/16/06 4,450 75,650 6,837,133 TOTAL BASIC INDUSTRIES 9,263,123 DURABLES - 0.1% TEXTILES & APPAREL - 0.1% Arena Brands Holdings Corp. Class B 48,889 1,974,630 HM/Hat Brands Trust Class I unit (a)(f) 340,000 - 1,974,630 ENERGY - 1.0% OIL & GAS - 1.0% Harcor Energy, Inc. (a) 469,000 2,814,000 Harcor Energy, Inc. warrants 7/24/00 (a) 330,000 742,500 Ocean Energy, Inc. (a) 304,200 14,069,250 Snyder Oil Corp. 50,000 918,750 18,544,500 FINANCE - 0.0% SECURITIES INDUSTRY - 0.0% ECM Corp. LP (g) 3,000 300,000 HEALTH - 0.0% MEDICAL EQUIPMENT & SUPPLIES - 0.0% Wright Medical Technology, Inc. warrants 6/30/03 (a) 3,212 321,200 INDUSTRIAL MACHINERY & EQUIPMENT - 0.7% POLLUTION CONTROL - 0.7% Allied Waste Industries, Inc. (a) 717,300 12,463,088 MEDIA & LEISURE - 3.3% BROADCASTING - 1.9% American Radio Systems Corp. Class A (a) 216,900 8,648,888 Benedek Communications Corp. warrants 7/1/00 (a) 57,600 115,200 CS Wireless Systems, Inc. (a)(g) 3,514 - Jacor Communications, Inc. Class A (a) 310,600 11,880,450 PanAmSat Corp. (a) 342,400 9,929,600 United International Holdings, Inc. Class A (a) 441,100 4,576,413 35,150,551 ENTERTAINMENT - 0.0% Live Entertainment, Inc. (a)(f): $2.00 warrants 3/28/98 232,000 11,600 $2.72 warrants 3/28/98 221,765 11,088 22,688 LEISURE DURABLES & TOYS - 0.1% IHF Capital, Inc. (a)(g): Series H warrants 11/15/04 10,250 1,691,250 Series I warrants 11/14/99 5,890 323,950 2,015,200 SHARES VALUE (NOTE 1) LODGING & GAMING - 1.0% Bally Gaming International, Inc. warrants 7/29/98 (a) 90,000 $ 112,500 Host Marriott Corp. (a) 651,300 11,601,281 Motels of America, Inc. (a) 3,000 93,000 Showboat, Inc. 437,300 7,625,419 19,432,200 PUBLISHING - 0.3% Big Flower Press Holdings, Inc. (a) 304,200 6,312,150 TOTAL MEDIA & LEISURE 62,932,789 NONDURABLES - 0.3% HOUSEHOLD PRODUCTS - 0.0% Renaissance Cosmetics, Inc. warrants 8/31/06 (a)(g) 12,750 1,402,500 TOBACCO - 0.3% North Atlantic Trading, Inc. unit (a)(g) 210,000 5,302,500 TOTAL NONDURABLES 6,705,000 RETAIL & WHOLESALE - 0.2% APPAREL STORES - 0.1% Lamonts Apparel, Inc. (a) 35,870 3,364 Lamonts Apparel, Inc. warrants 6/10/99 (a) 66,214 - Mothers Work (a)(h) 209,100 1,515,975 1,519,339 GROCERY STORES - 0.1% Food 4 Less Holdings, Inc. warrants 12/31/02 (a)(f) 155,047 2,248,182 RETAIL & WHOLESALE, MISCELLANEOUS - 0.0% Town & Country Jewelry Manufacturing Corp. Class A (a) 8,374 2,094 TOTAL RETAIL & WHOLESALE 3,769,615 SERVICES - 0.6% Orion Network Systems, Inc. (a) 358,700 3,945,700 Protection One, Inc. (a) 469,200 6,334,200 Protection One, Inc. warrants 6/30/05 (a) 74,560 708,320 Vestar/LPA Investment Corp. (a) 5,177 103,540 11,091,760 TECHNOLOGY - 0.1% COMPUTERS & OFFICE EQUIPMENT - 0.1% Exide Electronics Group, Inc. (a) 117,600 1,389,150 Exide Electronics Group, Inc. warrants 3/15/06 (a)(g) 6,770 169,250 1,558,400 UTILITIES - 0.8% CELLULAR - 0.8% Intercel, Inc. warrants 2/1/06 (a) 56,448 282,240 Microcell Telecommunications, Inc. (a): warrants 6/1/06 112,240 1,403,000 conditional warrants 6/1/06 112,240 70,150 Pagemart Wireless, Inc. Class A (a) 1,446,000 12,291,000 14,046,390 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) UTILITIES - CONTINUED TELEPHONE SERVICES - 0.0% Hyperion Telecommunications, Inc. warrants 4/15/01 (a)(g) 12,560 $ 376,800 NextLink Communications, Inc. warrants 2/1/09 (a) 663,204 6,632 RSL Communications Ltd./RSL Communications PLC warrants 11/15/06 (a) 9,140 274,200 657,632 TOTAL UTILITIES 14,704,022 TOTAL COMMON STOCKS (Cost $121,699,279) 148,830,127 PREFERRED STOCKS - 16.2% CONVERTIBLE PREFERRED STOCKS - 0.9% MEDIA & LEISURE - 0.9% BROADCASTING - 0.2% Benedek Communications Corp. 15% (a) 33,600 3,679,200 LODGING & GAMING - 0.7% Host Marriott Financial Trust $3.375 (g) 251,200 14,538,200 TOTAL MEDIA & LEISURE 18,217,400 RETAIL & WHOLESALE - 0.0% RETAIL & WHOLESALE, MISCELLANEOUS - 0.0% Town & Country Corp. pay-in-kind 128 64 TOTAL CONVERTIBLE PREFERRED STOCKS 18,217,464 NONCONVERTIBLE PREFERRED STOCKS - 15.3% BASIC INDUSTRIES - 0.1% PAPER & FOREST PRODUCTS - 0.1% SDW Holdings Corp. 15% (g) 44,500 1,596,438 FINANCE - 1.0% CREDIT & OTHER FINANCE - 0.5% American Annuity Group Capital Trust II 8 3/4% 8,910 8,865,450 SAVINGS & LOANS - 0.5% California Federal Bank FSB: Series B, 10 5/8% 15,610 1,713,198 11 1/2% 1,778 199,136 California Federal Preferred Capital Corp. 9 1/8% 308,750 7,873,125 9,785,459 TOTAL FINANCE 18,650,909 INDUSTRIAL MACHINERY & EQUIPMENT - 0.1% ELECTRICAL EQUIPMENT - 0.1% Ampex Corp. 8% (a)(f) 1,589 1,235,114 MEDIA & LEISURE - 9.6% BROADCASTING - 9.4% American Radio Systems Corp. 11 3/8% pay-in-kind 133,856 14,255,664 Cablevision System Corp.: 11 1/8% depositary shares pay-in-kind 140,667 14,137,034 Series H, $11.75 pay-in-kind 157,433 16,294,316 SHARES VALUE (NOTE 1) Capstar Broadcasting Partners, Inc. 12% (g) 35,630 $ 3,607,538 Chancellor Radio Broadcasting Co.: 12% pay-in-kind (g) 10,317 1,114,236 Series A, 12 1/4% 64,300 8,198,250 Citadel Broadcasting Co. 13 1/4% pay-in-kind (g) 84,000 8,400,000 PanAmSat Corp. 12 3/4% pay-in-kind 43,047 52,517,340 Sinclair Capital 11 5/8%, (g) 75,000 7,912,500 Time Warner, Inc., Series M, 10 1/4% pay-in-kind 47,834 52,856,570 179,293,448 PUBLISHING - 0.2% K-III Communications Corp.: Series B, $11.625 pay-in-kind 29,748 3,246,251 Series D, $10 5,400 544,050 3,790,301 TOTAL MEDIA & LEISURE 183,083,749 NONDURABLES - 0.6% HOUSEHOLD PRODUCTS - 0.6% Renaissance Cosmetics, Inc. pay-in-kind 14% 14,156 12,457,280 SERVICES - 0.3% Loewen Group Capital LP, Series A, $2.36 200,000 5,300,000 TECHNOLOGY - 1.5% COMMUNICATIONS EQUIPMENT - 1.5% Intermedia Communications, Inc. pay-in-kind 13 1/2% 27,596 28,492,870 UTILITIES - 2.1% TELEPHONE SERVICES - 2.1% ICG Holdings, Inc. 14 1/4% pay-in-kind 3,713 3,954,345 NextLink Communications, Inc. pay-in-kind 14% 684,175 35,406,056 39,360,401 TOTAL NONCONVERTIBLE PREFERRED STOCKS 290,176,761 TOTAL PREFERRED STOCKS (Cost $289,883,326) 308,394,225 CASH EQUIVALENTS - 5.7% MATURITY AMOUNT Investments in repurchase agreements (U.S. Treasury obligations) in a joint trading account dated 6/30/97 due 7/1/97: at 5 7/8% $ 11,175,824 11,174,000 at 5.93% 97,367,036 97,351,000 TOTAL CASH EQUIVALENTS 108,525,000 TOTAL INVESTMENT IN SECURITIES - 100% (Cost $1,829,380,131) $ 1,899,755,181 LEGEND 1. Non-income producing 2. Non-income producing - issuer filed for protection under the Federal Bankruptcy Code or is in default of interest payment. 3. Standard & Poor's credit ratings are used in the absence of a rating by Moody's Investors Service, Inc. 4. Debt obligation initially issued in zero coupon form which converts to coupon form at a specified rate and date. 5. Debt obligation initially issued at one coupon which converts to a higher coupon at a specified date. 6. Restricted securities - Investment in securities not registered under the Securities Act of 1933 (see Note 2 of Notes to Financial Statements). Additional information on each holding is as follows: ACQUISITION ACQUISITION COST SECURITY DATE (000S) Ampex Corp. 8% 2/16/95 $ 834,225 Food 4 Less Holdings, 12/30/92 $ 229,281 Inc. warrants 12/31/02 to 5/17/93 HM/Hat Brands Trust Class I unit 2/22/94 $ 340,000 Live Entertainment, Inc.: $2.00 warrants 3/28/98 3/23/93 $ 220,717 $2.72 warrants 3/28/98 3/23/93 $ 131,863 7. Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $338,705,668 or 17.7% of net assets. 8. An affiliated company is a company in which the fund has ownership of at least 5% of the voting securities. Transactions during the period with companies which are or were affiliates are as follows: PURCHASE SALES DIVIDEND VALUE AFFILIATE COST COST INCOME Mothers Work $ - $ - $ - $1,515,975 OTHER INFORMATION Purchases and sales of securities, other than short-term securities, aggregated $1,303,270,433 and $1,021,325,332, respectively, of which U.S. government and government agency obligations aggregated $49,578,125 and $97,601,563, respectively. The fund placed a portion of its portfolio transactions with brokerage firms which are affiliates of Fidelity Management & Research Company. The commissions paid to these affiliated firms were $2,362 for the period (see Note 4 of Notes to Financial Statements). The composition of long-term debt holdings as a percentage of total value of investment in securities, is as follows: MOODY'S RATINGS S&P RATINGS Aaa, Aa, A 0.0% AAA, AA, A 0.0% Baa 0.0% BBB 0.0% Ba 5.5% BB 5.9% B 50.4% B 49.6% Caa 6.7% CCC 5.2% Ca, C 0.0% CC, C 0.9% D 0.0% The percentage not rated by both S&P and Moody's amounted to 5.2%. FMR has determined that unrated debt securities that are lower quality account for 5.2% of the total value of investment in securities. INCOME TAX INFORMATION At June 30, 1997, the aggregate cost of investment securities for income tax purposes was $1,829,386,624. Net unrealized appreciation aggregated $70,368,557, of which $95,952,177 related to appreciated investment securities and $25,583,620 related to depreciated investment securities. VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997 (UNAUDITED) ASSETS Investment in securities, at value (including repurchase agreements of $108,525,000) (cost $1,829,380,131) - $ 1,899,755,181 See accompanying schedule Cash 12,332,427 Receivable for investments sold 17,307,645 Dividends receivable 3,882,207 Interest receivable 26,709,841 Other receivables 13,035
TOTAL ASSETS 1,960,000,336 LIABILITIES Payable for investments purchased $ 45,858,116 Payable for fund shares redeemed 1,878,115 Accrued management fee 935,372 Other payables and 206,898 accrued expenses TOTAL LIABILITIES 48,878,501 NET ASSETS $1,911,121,835 Net Assets consist of: Paid in capital $1,732,723,161 Undistributed net investment income 73,506,048 Accumulated undistributed net realized gain (loss) on investments and foreign currency transactions 34,517,576 Net unrealized appreciation (depreciation) on investments 70,375,050 NET ASSETS, for 153,746,684 $1,911,121,835 shares outstanding NET ASSET VALUE, offering price $ 12.43 and redemption price per share ($1,911,121,835 (divided by) 153,746,684 shares)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) INVESTMENT INCOME $13,388,030 Dividends Interest 67,053,640 TOTAL INCOME 80,441,670 EXPENSES Management fee 5,086,045 Transfer agent fees 632,302 Accounting fees and expenses 405,554 Non-interested trustees' compensation 3,770 Custodian fees and expenses 27,408 Registration fees 2,989 Audit 20,017 Legal 5,001 Miscellaneous 49,506 Total expenses before reductions 6,232,592 Expense reductions (10,217) 6,222,375 NET INVESTMENT INCOME 74,219,295 REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on: Investment securities 36,015,078 Foreign currency transactions 355 36,015,433 Change in net unrealized appreciation (depreciation) on: Investment securities 19,411,450 Assets and liabilities in 16 19,411,466 foreign currencies NET GAIN (LOSS) 55,426,899
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $129,646,194 OTHER INFORMATION $ 7,004 Expense reductions Directed brokerage arrangements Custodian credits 3,213 $ 10,217
STATEMENT OF CHANGES IN NET ASSETS INCREASE (DECREASE) IN NET ASSETS SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, 1997 1996 (UNAUDITED)
Operations $ 74,219,295 $ 113,508,707 Net investment income Net realized gain (loss) 36,015,433 15,837,127 Change in net unrealized appreciation (depreciation) 19,411,466 35,065,622 NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 129,646,194 164,411,456 Distributions to shareholders (116,014,735) (81,893,762) From net investment income From net realized gain (14,338,900) (16,022,693) TOTAL DISTRIBUTIONS (130,353,635) (97,916,455) Share transactions 645,716,095 1,058,212,273 Net proceeds from sales of shares Reinvestment of distributions 130,353,635 97,916,455 Cost of shares redeemed (453,062,260) (673,801,481) NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 323,007,470 482,327,247 TOTAL INCREASE (DECREASE) IN NET ASSETS 322,300,029 548,822,248 NET ASSETS Beginning of period 1,588,821,806 1,039,999,558 End of period (including undistributed net investment income of $73,506,048 and $113,174,121, $ 1,911,121,835 $ 1,588,821,806 respectively) OTHER INFORMATION Shares Sold 53,868,295 89,104,560 Issued in reinvestment of distributions 11,056,288 8,680,536
Redeemed (38,063,304) (57,202,172) Net increase (decrease) 26,861,279 40,582,924
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, 1997
SELECTED PER-SHARE DATA (UNAUDITED) 1996 1995 1994 1993 E 1992 Net asset value, beginning of period $12.520 $12.050 $10.750 $11.990 $10.820 $ 9.550 Income from Investment Operations .519 D .927 .856 .770 .728 .790 Net investment income Net realized and unrealized gain (loss) (.391) .643 1.224 (.910) 1.332 1.290 Total from investment operations .910 1.570 2.080 (.140) 2.060 2.080 Less Distributions From net investment income (.890) (.920) (.780) (.730) (.794) (.810) In excess of net investment income - - - - (.036) - From net realized gain (.110) (.180) - (.370) (.060) - Total distributions (1.000) (1.100) (.780) (1.100) (.890) (.810) Net asset value, end of period $12.430 $12.520 $12.050 $10.750 $11.990 $10.820 TOTAL RETURN B, C 7.70% 14.03% 20.72% (1.64)% 20.40% 23.17% RATIOS AND SUPPLEMENTAL DATA Net assets, end of period (000 omitted) $1,911,122 $1,588,822 $1,040,000 $569,417 $463,931 $200,591 Ratio of expenses to average net assets .73% A .71% .71% .71% .64% F .67% Ratio of net investment income to average net assets 8.70% A 9.09% 9.32% 8.75% 8.69% 10.98% Portfolio turnover rate 130% A 123% 132% 122% 155% 160% Average commission rate G $ .0379 $ .370
A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED AND DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN. C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED DURING THE PERIODS SHOWN. D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. E EFFECTIVE JANUARY 1, 1993, THE FUND ADOPTED STATEMENT OF POSITION 93-2, "DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF INCOME, CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT COMPANIES." AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT CERTAIN RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES. F FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE BEEN HIGHER. G FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE STRUCTURES MAY DIFFER. VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO PERFORMANCE AND INVESTMENT SUMMARY PERFORMANCE There are several ways to evaluate a fund's historical performance. You can look at the total percentage change in value, the average annual percentage change or the growth of a hypothetical $10,000 investment. Total return reflects the change in the value of an investment, assuming reinvestment of the fund's dividend income and capital gains (the profits earned upon the sale of securities that have grown in value). AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED PAST 1 PAST 5 LIFE OF JUNE 30, 1997 YEAR YEARS FUND ASSET MANAGER 20.45% 12.43% 12.43% S&P 500(registered trademark) 34.70% 19.78% 15.73% AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what would have happened if the fund had performed at a constant rate each year. You can compare the fund's returns to those of the Standard & Poor's 500 Index - a widely recognized, unmanaged index of common stocks. This benchmark reflects the reinvestment of dividends and capital gains, if any. UNDERSTANDING PERFORMANCE How a fund did yesterday is no guarantee of how it will do tomorrow. The stock market, for example, has a history of long-term growth and short-term volatility. In turn, the share price and return of a fund that invests in stocks will vary. That means if you sell your shares during a market downturn, you might lose money. But if you can ride out the market's ups and downs, you may have a gain. (checkmark) Figures for more than one year assume a steady compounded rate of return and are not the fund's year-by-year results, which fluctuated over the periods shown. The life of fund figures are from commencement of operations, September 6, 1989. If Fidelity had not reimbursed certain fund expenses, the life of fund total return figure would have been lower. PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER. Past performance is no guarantee of future results. Principal and investment return will vary and you may have a gain or loss when you withdraw your money. $10,000 OVER LIFE OF FUND 1989/09/30 10000.00 10000.00 10000.00 1989/10/31 10020.02 9768.00 10056.80 1989/11/30 10060.06 9967.27 10176.58 1989/12/31 10091.09 10206.48 10276.51 1990/01/31 9868.42 9521.63 10028.74 1990/02/28 9969.64 9644.46 10092.83 1990/03/31 10050.61 9900.03 10192.14 1990/04/30 9919.03 9652.53 10098.07 1990/05/31 10425.10 10593.65 10527.54 1990/06/30 10506.07 10521.62 10593.12 1990/07/31 10485.83 10487.95 10657.74 1990/08/31 10141.70 9539.84 10328.10 1990/09/30 9929.15 9075.25 10235.77 1990/10/31 9979.76 9036.22 10309.16 1990/11/30 10465.59 9619.96 10618.33 1990/12/31 10769.23 9888.36 10792.26 1991/01/31 11284.56 10319.49 10998.06 1991/02/28 11726.26 11057.34 11273.46 1991/03/31 11915.56 11324.93 11395.89 1991/04/30 12094.35 11352.11 11470.64 1991/05/31 12367.79 11842.52 11652.80 1991/06/30 12146.94 11300.13 11501.78 1991/07/31 12451.92 11826.72 11732.96 1991/08/31 12704.33 12107.01 11941.81 1991/09/30 12777.94 11904.82 11998.53 1991/10/31 12862.08 12064.35 12105.32 1991/11/30 12651.74 11578.15 12021.91 1991/12/31 13198.62 12902.69 12614.23 1992/01/31 13366.89 12662.70 12476.36 1992/02/29 13626.47 12827.32 12556.08 1992/03/31 13593.27 12577.19 12465.30 1992/04/30 13792.52 12946.96 12618.63 1992/05/31 13936.42 13010.40 12742.54 1992/06/30 13925.35 12816.54 12748.15 1992/07/31 14157.81 13340.74 13094.39 1992/08/31 14113.53 13067.25 13044.11 1992/09/30 14202.09 13221.45 13188.37 1992/10/31 14224.22 13267.72 13135.88 1992/11/30 14534.17 13720.15 13311.12 1992/12/31 14744.49 13888.91 13474.31 1993/01/31 15010.15 14005.57 13642.74 1993/02/28 15150.92 14196.05 13832.92 1993/03/31 15579.83 14495.59 13974.84 1993/04/30 15672.57 14144.79 13889.88 1993/05/31 15939.19 14523.87 14039.05 1993/06/30 16066.70 14565.99 14188.15 1993/07/31 16263.77 14507.73 14206.31 1993/08/31 16739.04 15057.57 14555.79 1993/09/30 16750.64 14941.63 14540.94 1993/10/31 17202.73 15250.92 14690.42 1993/11/30 17179.54 15106.04 14577.30 1993/12/31 17875.07 15288.82 14678.18 1994/01/31 18443.09 15808.64 14966.46 1994/02/28 17857.33 15380.23 14682.69 1994/03/31 17017.99 14709.65 14303.29 1994/04/30 17030.15 14897.93 14340.48 1994/05/31 17176.13 15142.26 14437.14 1994/06/30 16847.69 14771.27 14292.76 1994/07/31 17139.63 15255.77 14594.63 1994/08/31 17541.06 15881.26 14845.95 1994/09/30 17334.15 15492.17 14628.31 1994/10/31 17419.36 15840.74 14768.45 1994/11/30 17163.73 15263.82 14553.89 1994/12/31 16786.37 15490.18 14689.12 1995/01/31 16676.82 15891.84 14963.69 1995/02/28 16946.97 16511.15 15337.61 1995/03/31 17170.77 16998.39 15572.33 1995/04/30 17444.31 17498.99 15852.32 1995/05/31 17668.12 18198.43 16377.48 1995/06/30 17817.32 18621.18 16596.81 1995/07/31 18451.43 19238.66 16808.32 1995/08/31 18675.24 19286.95 16918.98 1995/09/30 18911.47 20100.85 17284.77 1995/10/31 18662.80 20029.09 17383.15 1995/11/30 19147.71 20908.37 17811.48 1995/12/31 19632.62 21311.07 18066.96 1996/01/31 20055.36 22036.50 18374.75 1996/02/29 20001.35 22240.77 18307.28 1996/03/31 20213.99 22454.95 18329.47 1996/04/30 20426.62 22785.94 18405.65 1996/05/31 20586.10 23373.59 18599.57 1996/06/30 20772.16 23462.64 18738.02 1996/07/31 20426.62 22426.06 18440.99 1996/08/31 20466.49 22899.03 18597.29 1996/09/30 21210.73 24187.79 19153.95 1996/10/31 21755.62 24854.88 19550.66 1996/11/30 22832.10 26733.66 20293.51 1996/12/31 22499.85 26204.07 20066.55 1997/01/31 23177.64 27841.30 20726.94 1997/02/28 23377.96 28059.58 20837.00 1997/03/31 22488.67 26906.61 20325.55 1997/04/30 23257.38 28512.93 21062.97 1997/05/31 24372.77 30248.80 21793.43 1997/06/30 25020.90 31603.95 22394.49 Let's say hypothetically that $10,000 was invested in Asset Manager Portfolio on September 30, 1989, shortly after the fund started. By June 30, 1997, the value of the investment would have grown to $25,021 - a 150.21% increase. With reinvested dividends and capital gains, if any, a $10,000 investment in the S&P 500, would have grown to $31,604 over the same period - a 216.04% increase on the initial investment. You can also look at how the Fidelity Composite Index did over the same period. The composite index combines the cumulative total returns of three unmanaged indexes - the S&P 500 (216.04%), Lehman Brothers Aggregate Bond Index (89.88%), and the Salomon Brothers 3-month T-Bill Total Rate of Return Index (47.88%) - according to the fund's neutral mix,* assuming monthly rebalancing. With reinvested dividends and capital gains, if any, a $10,000 investment in the index would have grown to $22,394 - a 123.94% increase. * 50% STOCKS, 40% BONDS AND 10% SHORT-TERM INSTRUMENTS EFFECTIVE JANUARY 1, 1997; 40%, 40% AND 20%, RESPECTIVELY, BETWEEN JUNE 1, 1992 AND DECEMBER 31, 1996; 30%, 40% AND 30%, RESPECTIVELY, PRIOR TO JUNE 1, 1992. INVESTMENT SUMMARY TOP FIVE STOCKS AS OF JUNE 30, 1997 % OF FUND'S INVESTMENTS Philip Morris Companies, Inc. 5.2 Federal National Mortgage Association 4.5 Federal Home Loan Mortgage Corporation 2.1 General Motors Corp. 1.9 International Business Machines Corp. 1.8 TOP FIVE BOND ISSUERS AS OF JUNE 30, 1997 (WITH MATURITIES MORE THAN ONE YEAR) % OF FUND'S INVESTMENTS U.S. Treasury Obligations 5.8 Federal National Mortgage Association 4.0 Government National Mortgage Association 1.1 Ford Motor Credit Co. 0.8 AT&T Capital Corp. 0.5 ASSET ALLOCATION AS OF JUNE 30, 1997* Row: 1, Col: 1, Value: 5.9 Row: 1, Col: 2, Value: 31.7 Row: 1, Col: 3, Value: 62.2 Stock class 62.0% Bond class 31.9% Short-term class 6.1% FOREIGN INVESTMENTS 11.4% * ASSET ALLOCATION IN THE PIE CHART REFLECTS THE CATEGORIZATION OF ASSETS AS DEFINED IN THE FUND'S PROSPECTUS. FINANCIAL STATEMENT CATEGORIZATIONS CONFORM TO ACCOUNTING STANDARDS AND WILL DIFFER FROM THE PIE CHART. % OF FUND'S INVESTMENTS VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO FUND TALK: THE MANAGER'S OVERVIEW An interview with Richard Habermann (top left), Portfolio Manager of Asset Manager Portfolio, George Vanderheiden (top right), sub-manager for stocks, Charles Morrison (bottom left), sub-manager for bonds, and John Todd (bottom right), sub-manager for short-term/money market instruments. Charles Morrison became sub-manager for bonds on February 3, 1997, and John Todd became sub- manager for short-term/money market instruments on December 1, 1996. Q. HOW DID THE FUND PERFORM, DICK? D.H. The fund's performance historically has been compared to that of the Standard & Poor's 500 Index. However, there are some significant differences between the make-up of the fund and the composition of the index. While the S&P 500 is made up exclusively of stocks, the fund invests in stocks, bonds and short-term/money market instruments. The fund allocates assets among these three categories in order to help control both volatility and risk relative to funds or indexes that invest only in stocks. That being said, the S&P 500 posted a strong 20.61% return during the six months that ended June 30, 1997, and 34.70% over the 12 months ended June 30, 1997. Since the fund is diversified into other asset classes that didn't perform as well as stocks, the fund's performance lagged that of the S&P 500. However, the fund did benefit from the performance of its equity investments and its small stake in high-yield bonds, while the bond and short-term money market portions of the fund performed in line with their respective markets. Q. WHAT WAS THE FUND'S ASSET MIX AT THE END OF THE PERIOD? D.H. At the end of June 1997, the fund's equity position stood at about 62%, 12% above the new neutral mix the fund instituted on January 1, 1997. That neutral mix comprises 50% stocks, 40% bonds and 10% short-term/money market instruments. In order to add to the equity portion, we reduced both the fund's bond and short-term/money market positions. At the end of the period, the fund held about 32% in bonds and approximately 6% in short-term/money market instruments. Q. WHY DID YOU INCREASE THE FUND'S STOCK INVESTMENTS? D.H. Because the investing environment was very favorable not only for all financial assets, but especially for stocks. We've had limited inflation and corporate earnings continued to be strong. Another key factor was the strength of the dollar, although that can act as a double-edged sword. On the negative side, a rising dollar acts as a drag on the economy by slowing exports and suppressing corporate earnings. This especially affects large, multinational corporations. These companies, however, generally were able to post earnings surprises through cost cutting and to sustain their stock prices by buying back shares. The positive side of the strong dollar is that it helps to control inflation by keeping import prices down. In addition, investors, especially those abroad, tend to feel more comfortable investing in U.S. markets when the dollar is strong, helping to sustain prices for both stocks and bonds. Q. WHAT WAS THE ENVIRONMENT LIKE FOR THE BOND MARKET? D.H. During the latter stages of the first quarter and the beginning of the second quarter, the bond market struggled because of concerns that continued economic growth might lead to inflation. Employment had reached a level where historically there should have been increased upward pressure on wages. The Federal Reserve Board tried to anticipate and head off incipient inflation by raising the fed funds rate - the rate banks charge each other for overnight loans - by 0.25% to 5.50% at the end of March. This move was well-telegraphed, so the rate increase was already priced into the market when the Fed acted. The Fed chose to keep rates steady in May, a stance that surprised many in the market who were anticipating another rate increase. The Fed stood pat mainly because economic growth slowed and there were few if any signs of inflationary pressure. From that point on, the bond market responded favorably. Q. TURNING TO YOU, GEORGE, HOW DID YOU MANAGE THE STOCK PORTION OF THE FUND IN A VIRTUALLY NO-INFLATION ENVIRONMENT? G.V. I concentrated on four areas during the period. First, I looked at innovators and unit growers because these companies use unit growth to increase earnings and don't have to rely on price increases. Technology, health care and telecommunications fall within these areas. Second were the interest- sensitive sectors that benefited from low interest rates, including mortgage companies, insurance, finance and construction. Third, I looked at global growers - companies with proprietary advantages, such as low costs or unique distribution channels and strong brands - which are seizing market share on a global basis. Fourth were the acquisitive companies in consolidating industries. Certain industries have stopped growing, but certain companies have been able to show great earnings growth by acquiring market share and paring costs. Q. PHILIP MORRIS IS THE FUND'S LARGEST STOCK HOLDING. WHAT IS YOUR POSITION ON TOBACCO STOCKS? G.V. I own tobacco stocks because they operate a profitable business that historically has offered above-average returns to shareholders over the long term. In the past, the stocks have provided better-than-average earnings growth, lower-than-average price-to-earnings ratios and high yields. Nothing this year has changed that. We have determined that the tobacco stocks are selling at a "litigation discount" in excess of any reasonable estimate of potential liabilities. The cost of the proposed settlement is high, but should be passed completely along to consumers. Q. STOCK VALUATIONS WERE QUITE HIGH. WHY WAS THAT, AND WILL THEY STAY INFLATED? G.V. We had a nearly perfect investing environment during the period - experiencing growth without inflation. Accelerating inflation is usually the killer of all bond and equity bull markets, but inflation just kept receding as the economic expansion continued. During the worst bear market I ever encountered - the 1973-1974 bear that took prices down about 50% -everything that could go wrong did go wrong. Today is an environment where everything that could go right has gone right - from a declining budget deficit, to falling inflation, to surging earnings, to big flows into mutual funds and rising consumer confidence. If any of these factors change for the worse, valuations should deflate. My biggest concern going forward is that the low level of inflation and pricing power in a strong economy will deteriorate to deflation in a slowing or contracting economy, thereby leading to sizable earnings declines. Q. CHARLIE, WHAT CHANGES HAVE YOU MADE SINCE TAKING OVER THE FUND'S BOND INVESTMENTS? C.M. For most of the period, I focused on positioning the bond portion of the portfolio more aggressively by increasing its weighting in corporate and mortgage-backed securities, while decreasing the percentage held in Treasuries. Part of that move was accomplished with Dick's reallocation of assets away from bonds. In reducing the fund's stake in bonds, I sold Treasuries. At the same time, I tended to focus any new purchases on investments that offered a yield advantage over Treasuries. Specific areas of focus included BBB-rated corporate bonds and commercial mortgage-backed securities. Q. WHAT KINDS OF BONDS DID YOU FOCUS ON IN THE CORPORATE MARKET? C.M. One area of interest over the period was in the bank market. I continued to add long-term bank paper in the form of capital securities. Last fall, the Federal Reserve Board ruled that domestic banking companies could issue capital securities, which offered the banks significant tax advantages, as well as the opportunity to strengthen their balance sheets. Numerous banks took advantage of this opportunity and inundated the market with these securities. The large amount of supply in a relatively concentrated period of time allowed us to purchase many capital securities at cheap levels. This market has performed well following the initial supply. Q. JOHN, WHAT HAS THE BACKDROP FOR THE SHORT-TERM AND MONEY MARKETS BEEN LIKE SINCE YOU CAME ON BOARD? J.T. As Dick pointed out, the Fed raised the fed funds rate at its March meeting, but then chose not to continue to raise rates at its late May meeting. For now, the Fed appears to be in a holding pattern. Some believe that the Fed has abandoned the notion of being pre-emptive - seeking to head off inflation before it actually appears - and instead will respond only to actual evidence of inflation rather than trying to respond to underlying inflationary pressures. Q. WHAT SORT OF STRATEGY DID YOU PURSUE? J.T. Because Fed Chairman Alan Greenspan warned that the Fed might raise rates, I reduced the short-term/money market portion's average maturity to about 50 days in the first quarter. Once the market adjusted to the new, higher rate level and expectations of further Fed interest rate increases were built into the yield curve, the maturity was extended. That's because many longer-maturity instruments were attractively valued because their prices and yields reflected a more aggressive Fed interest rate posture than I felt was likely. Q. TURNING BACK TO YOU, DICK, WHAT'S YOUR OUTLOOK? D.H. I believe that a lack of pricing power, among other things, makes it clear that corporations are not operating with a very strong wind at their backs. At the same time, U.S. companies - helped by advances in technology that help cut costs - are operating very efficiently, leading to many positive earnings surprises. I don't see much that would change that over the near future. Still, the economic pattern over the past year has been like a seesaw. That is, the economy has grown in spurts, picking up for one quarter then tailing off into weakness during the next. If the economy shows sustained strength, interest rates could rise and put some pressure on the markets. On the other hand, one could argue that rates might fall because inflation is at such a low level. As always, we'll have to wait and see what the future holds. FUND FACTS GOAL: maximum total return over the long term by allocating assets among stocks, bonds and short-term instruments anywhere in the world START DATE: September 6, 1989 SIZE: as of June 30, 1997, more than $4 billion MANAGER: Richard Habermann, since March 1996; joined Fidelity in 1968 (checkmark) VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO INVESTMENTS JUNE 30, 1997 (UNAUDITED) Showing Percentage of Total Value of Investment in Securities COMMON STOCKS - 61.1% SHARES VALUE (NOTE 1) AEROSPACE & DEFENSE - 1.2% AEROSPACE & DEFENSE - 0.9% Boeing Co. 625,500 $ 33,190,594 Gulfstream Aerospace Corp. (a) 44,000 1,298,000 34,488,594 DEFENSE ELECTRONICS - 0.3% Raytheon Co. 258,800 13,198,800 SHIP BUILDING & REPAIR - 0.0% Avondale Industries, Inc. (a) 21,600 453,600 Newport News Shipbuilding, Inc. 62,300 1,210,956 1,664,556 TOTAL AEROSPACE & DEFENSE 49,351,950 BASIC INDUSTRIES - 3.0% CHEMICALS & PLASTICS - 2.2% Air Products & Chemicals, Inc. 74,500 6,053,125 du Pont (E.I.) de Nemours & Co. 848,100 53,324,288 Raychem Corp. 242,300 18,021,063 Union Carbide Corp. 227,800 10,720,838 88,119,314 PACKAGING & CONTAINERS - 0.2% Owens-Illinois, Inc. (a) 227,500 7,052,500 PAPER & FOREST PRODUCTS - 0.6% Boise Cascade Corp. 145,100 5,123,844 Champion International Corp. 216,900 11,983,725 International Paper Co. 86,200 4,186,088 Willamette Industries, Inc. 29,400 2,058,000 23,351,657 TOTAL BASIC INDUSTRIES 118,523,471 CONSTRUCTION & REAL ESTATE - 0.7% CONSTRUCTION - 0.5% Centex Corp. 89,800 3,648,125 D.R. Horton, Inc. 192,224 1,994,324 Fleetwood Enterprises, Inc. 364,581 10,869,071 Kaufman & Broad Home Corp. 183,700 3,226,231 U.S. Home Corp. (a) 19,700 523,281 20,261,032 ENGINEERING - 0.2% Fluor Corp. 143,600 7,924,925 TOTAL CONSTRUCTION & REAL ESTATE 28,185,957 DURABLES - 3.4% AUTOS, TIRES, & ACCESSORIES - 2.9% Cummins Engine Co., Inc. 148,500 10,478,531 Dana Corp. 56,900 2,162,200 Discount Auto Parts, Inc. (a) 111,000 2,164,500 Federal-Mogul Corp. 59,500 2,082,500 General Motors Corp. 1,355,090 75,461,574 Gentex Corp. (a) 53,400 1,054,650 Goodyear Tire & Rubber Co. 62,000 3,925,375 Honda Motor Co. Ltd. 99,000 2,979,197 Magna International, Inc. Class A 165,200 9,931,264 Superior Industries International, Inc. 250,300 6,632,950 116,872,741 CONSUMER ELECTRONICS - 0.1% Newell Co. 120,600 4,778,775 SHARES VALUE (NOTE 1) TEXTILES & APPAREL - 0.4% Arena Brands Holdings Corp. Class B 8,445 $ 341,094 Burlington Industries, Inc. (a) 307,100 3,685,200 Liz Claiborne, Inc. 84,700 3,949,138 NIKE, Inc. Class B 116,300 6,789,013 Reebok International Ltd. 18,600 869,550 15,633,995 TOTAL DURABLES 137,285,511 ENERGY - 5.0% ENERGY SERVICES - 0.2% McDermott International, Inc. 275,800 8,049,913 OIL & GAS - 4.8% Amerada Hess Corp. 119,600 6,645,275 Anadarko Petroleum Corp. 13,100 786,000 Atlantic Richfield Co. 223,500 15,756,750 British Petroleum PLC ADR 396,568 29,693,029 Burlington Resources, Inc. 304,400 13,431,650 Canada Occidental Petroleum Ltd. 5,800 130,229 Chevron Corp. 17,600 1,301,300 Elf Aquitaine SA sponsored ADR 61,800 3,364,238 Enron Oil & Gas Co. 38,400 696,000 Kerr-McGee Corp. 58,100 3,682,088 Louisiana Land & Exploration Co. 239,200 13,664,300 Mobil Corp. 35,200 2,459,600 Noble Affiliates, Inc. 22,800 882,075 Occidental Petroleum Corp. 515,100 12,909,694 Royal Dutch Petroleum Co. Ord. 119,200 6,196,385 Royal Dutch Petroleum Co. 911,600 49,568,250 Santa Fe Energy Resources, Inc. (a) 178,000 2,614,375 Sun Co., Inc. 74,400 2,306,400 Tosco Corp. 545,700 16,336,894 Total SA: Class B 30,733 3,104,555 sponsored ADR 89,837 4,547,998 Union Pacific Resources Group, Inc. 40,600 1,009,925 191,087,010 TOTAL ENERGY 199,136,923 FINANCE - 13.0% BANKS - 0.4% Canadian Imperial Bank of Commerce 5,000 126,028 Credit Suisse Group (Reg.) 63,600 8,159,425 NationsBank Corp. 87,500 5,643,750 13,929,203 CLOSED END INVESTMENT COMPANY - 0.1% First NIS Regional Fund (a) 200,000 3,700,000 CREDIT & OTHER FINANCE - 1.1% Fleet Financial Group, Inc. 710,900 44,964,425 FEDERAL SPONSORED CREDIT - 6.6% Federal Home Loan Mortgage Corporation 2,427,100 83,431,563 Federal National Mortgage Association 4,189,890 182,783,951 266,215,514 INSURANCE - 4.4% AFLAC, Inc. 96,600 4,564,350 Aegon NV (Reg.) 97,743 6,848,119 Allmerica Financial Corp. 126,900 5,060,138 Allstate Corp. 704,300 51,413,900 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) FINANCE - CONTINUED INSURANCE - CONTINUED American International Group, Inc. 265,000 $ 39,584,375 CIGNA Corp. 40,500 7,188,750 Equitable of Iowa Companies 15,100 845,600 General Re Corp. 66,000 12,012,000 Loews Corp. 43,400 4,345,425 MGIC Investment Corp. 306,700 14,702,431 Nationwide Financial Services, Inc. Class A 14,400 382,500 PMI Group, Inc. 112,500 7,017,188 Provident Companies, Inc. 9,600 513,600 Providian Financial Corp. (a) 242,500 7,790,313 Reliastar Financial Corp. 42,081 3,077,173 Torchmark Corp. 142,300 10,138,875 Travelers Property Casualty Corp. Class A 34,500 1,375,688 UNUM Corp. 25,200 1,058,400 177,918,825 SAVINGS & LOANS - 0.2% Golden West Financial Corp. 131,400 9,198,000 SECURITIES INDUSTRY - 0.2% United Asset Management Corp. 219,800 6,223,088 TOTAL FINANCE 522,149,055 HEALTH - 4.8% DRUGS & PHARMACEUTICALS - 1.7% American Home Products Corp. 10,700 818,550 Amgen, Inc. 211,800 12,310,875 Astra AB Class A Free shares 1,038,801 19,374,080 Merck & Co., Inc. 51,900 5,371,650 Novartis AG (Reg.) 9,900 15,810,195 Schering-Plough Corp. 339,100 16,234,413 69,919,763 MEDICAL EQUIPMENT & SUPPLIES - 0.6% Allegiance Corp. 20,180 549,905 Bard (C.R.), Inc. 99,000 3,594,938 Baxter International, Inc. 42,100 2,199,725 Biomet, Inc. 235,100 4,378,738 Boston Scientific Corp. (a) 12,000 737,250 Johnson & Johnson 26,900 1,731,688 St. Jude Medical, Inc. (a) 272,000 10,608,000 23,800,244 MEDICAL FACILITIES MANAGEMENT - 2.5% Columbia/HCA Healthcare Corp. 1,730,050 68,012,591 Health Management Associates, Inc. Class A (a) 12,900 367,650 Humana, Inc. (a) 465,400 10,762,375 Tenet Healthcare Corp. (a) 317,600 9,389,050 United HealthCare Corp. 198,300 10,311,600 98,843,266 TOTAL HEALTH 192,563,273 HOLDING COMPANIES - 0.1% U.S. Industries, Inc. (a) 158,900 5,660,813 INDUSTRIAL MACHINERY & EQUIPMENT - 1.2% ELECTRICAL EQUIPMENT - 0.7% Emerson Electric Co. 59,200 3,259,700 General Electric Co. 268,400 17,546,650 SHARES VALUE (NOTE 1) Scientific-Atlanta, Inc. 135,300 $ 2,959,688 Sensormatic Electronics Corp. 46,200 594,825 Westinghouse Electric Corp. 205,600 4,754,500 29,115,363 INDUSTRIAL MACHINERY & EQUIPMENT - 0.4% Caterpillar, Inc. 118,700 12,745,413 JLK Direct Distribution, Inc. Class A 1,000 25,625 Ultratech Stepper, Inc. (a) 150,000 3,431,250 16,202,288 POLLUTION CONTROL - 0.1% Browning-Ferris Industries, Inc. 143,400 4,768,050 TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 50,085,701 MEDIA & LEISURE - 1.9% BROADCASTING - 0.1% Cox Communications, Inc. Class A (a) 35,500 852,000 HSN, Inc. (a) 27,045 845,156 TCI Group Class A 118,900 1,768,638 3,465,794 ENTERTAINMENT - 0.1% Cedar Fair LP (depositary unit) 10,200 446,250 Royal Caribbean Cruises Ltd. 64,200 2,242,988 2,689,238 LEISURE DURABLES & TOYS - 0.4% Nintendo Co. Ltd. Ord. 208,400 17,450,738 LODGING & GAMING - 0.7% Bally Gaming International, Inc. warrants 7/29/98 (a) 38,400 48,000 Circus Circus Enterprises, Inc. (a) 319,300 7,862,763 Fitzgeralds South, Inc. warrants 3/15/99 (a)(d) 420 - HFS, Inc. (a) 56,100 3,253,800 Harrah's Entertainment, Inc. (a) 148,600 2,711,950 Mirage Resorts, Inc. (a) 317,000 8,004,250 Sun International Hotels Ltd. Ord. (a) 152,600 5,636,663 27,517,426 PUBLISHING - 0.1% Cognizant Corp. 89,200 3,612,600 RESTAURANTS - 0.5% Brinker International, Inc. (a) 107,000 1,524,750 Lone Star Steakhouse Saloon (a) 79,100 2,056,600 McDonald's Corp. 334,700 16,170,194 Papa John's International, Inc. (a) 29,300 1,076,775 20,828,319 TOTAL MEDIA & LEISURE 75,564,115 NONDURABLES - 6.0% HOUSEHOLD PRODUCTS - 0.0% Premark International, Inc. 36,300 971,025 TOBACCO - 6.0% Philip Morris Companies, Inc. 4,715,400 209,245,875 RJR Nabisco Holdings Corp. 925,330 30,535,890 UST, Inc. 42,400 1,176,600 240,958,365 TOTAL NONDURABLES 241,929,390 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) PRECIOUS METALS - 0.1% Barrick Gold Corp. 34,800 $ 757,426 Newmont Mining Corp. 29,905 1,166,295 1,923,721 RETAIL & WHOLESALE - 4.8% APPAREL STORES - 0.3% Gap, Inc. 80,600 3,133,325 TJX Companies, Inc. 273,400 7,210,925 10,344,250 DRUG STORES - 0.0% CVS Corp. 37,500 1,921,875 GENERAL MERCHANDISE STORES - 1.6% Federated Department Stores, Inc. (a) 229,900 7,989,025 Proffitts, Inc. (a) 7,800 342,225 Wal-Mart Stores, Inc. 1,719,300 58,133,831 66,465,081 GROCERY STORES - 0.2% Safeway, Inc. (a) 186,900 8,620,763 RETAIL & WHOLESALE, MISCELLANEOUS - 2.7% Circuit City Stores, Inc. - CarMax Group 21,900 313,444 Corporate Express, Inc. 149,600 2,159,850 Home Depot, Inc. (The) 732,000 50,462,250 Lowe's Companies, Inc. 623,600 23,151,150 Officemax, Inc. (a) 425,600 6,144,600 Office Depot, Inc. (a) 66,200 1,286,763 Rex Stores Corp. (a) 51,900 525,488 Staples, Inc. (a) 177,800 4,133,850 Toys "R" Us, Inc. (a) 356,300 12,470,500 U.S. Office Products Co. (a) 122,000 3,728,625 Viking Office Products, Inc. (a) 169,300 3,216,700 107,593,220 TOTAL RETAIL & WHOLESALE 194,945,189 SERVICES - 0.0% ADVERTISING - 0.0% Interpublic Group of Companies, Inc. 19,100 1,171,069 LEASING & RENTAL - 0.0% Hanover Compressor Co. 2,600 50,700 PRINTING - 0.0% Donnelley (R.R.) & Sons Co. 4,800 175,800 SERVICES - 0.0% PEAPOD, Inc. 8,400 94,500 TOTAL SERVICES 1,492,069 TECHNOLOGY - 9.7% COMMUNICATIONS EQUIPMENT - 0.6% Alcatel Alsthom Compagnie Generale d'Electricite SA sponsored ADR 15,900 401,475 Alcatel Alsthom Compagnie Generale d'Electricite SA 130,100 16,284,072 Andrew Corp. 48,300 1,358,438 Cisco Systems, Inc. (a) 64,600 4,336,275 Nokia Corp. AB sponsored ADR 28,200 2,079,750 24,460,010 COMPUTER SERVICES & SOFTWARE - 1.8% American Management Systems, Inc. (a) 21,000 561,750 Automatic Data Processing, Inc. 195,300 9,179,100 SHARES VALUE (NOTE 1) CUC International, Inc. 140,500 $ 3,626,656 Ceridian Corp. (a) 125,300 5,293,925 CompUSA, Inc. (a) 82,400 1,771,600 Electronic Data Systems Corp. 341,600 14,005,600 First Data Corp. 254,300 11,173,306 Microsoft Corp. (a) 91,500 11,563,313 Netscape Communications Corp. (a) 22,100 708,581 Oracle Systems Corp. (a) 158,500 7,984,438 Paychex, Inc. 127,200 4,833,600 Policy Management Systems Corp. (a) 94,400 4,436,800 75,138,669 COMPUTERS & OFFICE EQUIPMENT - 3.3% Bay Networks, Inc. (a) 199,300 5,293,906 Compaq Computer Corp. (a) 298,100 29,586,425 Hewlett-Packard Co. 133,900 7,498,400 Ingram Micro, Inc. Class A (a) 26,900 648,963 International Business Machines Corp. 809,700 73,024,819 SCI Systems, Inc. (a) 189,700 12,093,375 Tech Data Corp. (a) 155,200 4,879,100 133,024,988 ELECTRONIC INSTRUMENTS - 1.0% Applied Materials, Inc. (a) 115,600 8,185,925 Cognex Corp. (a) 67,300 1,783,450 KLA Instruments Corp. (a) 24,200 1,179,750 Lam Research Corp. (a) 158,700 5,881,819 Novellus Systems, Inc. (a) 91,400 7,906,100 Teradyne, Inc. (a) 125,700 4,933,725 Thermo Electron Corp. (a) 141,300 4,804,200 Varian Associates, Inc. 80,800 4,383,400 39,058,369 ELECTRONICS - 3.0% AMP, Inc. 458,700 19,150,725 Atmel Corp. (a) 28,700 803,600 Intel Corp. 216,500 30,702,406 Methode Electronics, Inc. Class A 129,500 2,573,813 Microchip Technology, Inc. (a) 25,350 754,163 Micron Technology, Inc. 527,300 21,059,044 Molex, Inc. 83,000 2,894,625 Motorola, Inc. 17,200 1,307,200 Solectron Corp. (a) 393,700 27,559,000 Storage Technology Corp. (a) 67,400 2,999,300 Texas Instruments, Inc. 105,100 8,834,969 Thomas & Betts Corp. 5,000 262,813 118,901,658 TOTAL TECHNOLOGY 390,583,694 TRANSPORTATION - 0.7% AIR TRANSPORTATION - 0.1% Continental Airlines, Inc. Class B (a) 31,300 1,093,544 Delta Air Lines, Inc. 21,200 1,738,400 Northwest Airlines Corp. Class A (a) 50,600 1,840,575 4,672,519 RAILROADS - 0.4% Bombardier, Inc. Class B 119,200 2,702,321 Burlington Northern Santa Fe Corp. 52,600 4,727,425 CSX Corp. 164,860 9,149,730 16,579,476 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) TRANSPORTATION - CONTINUED SHIPPING - 0.1% Stolt-Nielsen SA Class B sponsored ADR 105,500 $ 2,044,063 Stolt-Nielsen SA 31,300 590,788 2,634,851 TRUCKING & FREIGHT - 0.1% Roadway Express, Inc. 25,200 589,050 Yellow Corp. (a) 107,300 2,400,838 2,989,888 TOTAL TRANSPORTATION 26,876,734 UTILITIES - 5.5% CELLULAR - 1.8% AirTouch Communications, Inc. (a) 734,100 20,095,988 360 Degrees Communications Co. (a) 35,900 614,788 Vodafone Group PLC sponsored ADR 620,800 30,070,000 Vodafone Group PLC 4,810,755 23,464,799 74,245,575 ELECTRIC UTILITY - 0.2% American Electric Power Co., Inc. 59,700 2,507,400 Entergy Corp. 181,000 4,954,875 7,462,275 GAS - 0.1% Enron Corp. 81,200 3,313,975 TELEPHONE SERVICES - 3.4% AT&T Corp. 215,200 7,545,450 Ameritech Corp. 196,400 13,342,925 Bell Atlantic Corp. 141,700 10,751,488 BellSouth Corp. 332,000 15,396,500 Deutsche Telekom AG 82,400 1,978,450 MCI Communications Corp. 668,600 25,594,844 NextLink Communications, Inc. warrants 2/1/09 (a) 43,900 439 NYNEX Corp. 274,500 15,818,063 Qwest Communications International, Inc. 5,100 138,975 SBC Communications, Inc. 267,900 16,576,313 Sprint Corp. 531,200 27,954,400 WorldCom, Inc. (a) 72,600 2,323,200 137,421,047 TOTAL UTILITIES 222,442,872 TOTAL COMMON STOCKS (Cost $1,979,750,356) 2,458,700,438 PREFERRED STOCKS - 1.0% CONVERTIBLE PREFERRED STOCKS - 0.0% RETAIL & WHOLESALE - 0.0% GROCERY STORES - 0.0% Supermarkets General Holdings Corp. $3.52 pay-in-kind (a) 20,000 405,000 NONCONVERTIBLE PREFERRED STOCKS - 1.0% CONSTRUCTION & REAL ESTATE - 0.0% REAL ESTATE INVESTMENT TRUSTS - 0.0% Walden Residential Properties, Inc. 9.20% 49,000 1,237,250 SHARES VALUE (NOTE 1) FINANCE - 0.1% CREDIT & OTHER FINANCE - 0.0% American Annuity Group Capital Trust II 8 3/4% 1,490 $ 1,482,550 SAVINGS & LOANS - 0.1% California Federal Preferred Capital Corp. 9 1/8% 156,890 4,000,695 TOTAL FINANCE 5,483,245 HEALTH - 0.1% MEDICAL FACILITIES MANAGEMENT - 0.1% Fresenius Medical Care Capital Trust 9% 1,381 1,415,180 MEDIA & LEISURE - 0.7% BROADCASTING - 0.6% American Radio Systems Corp. 11.375% pay-in-kind 27,126 2,888,919 Cablevision System Corp. 11 1/8% depositary shares pay-in-kind 49,472 4,971,936 PanAmSat Corp. 12 3/4% pay-in-kind 202 246,440 SFX Broadcasting, Inc. 12 5/8% 29,474 3,175,824 Sinclair Capital 11 5/8% (d) 28,380 2,994,090 Time Warner, Inc., Series M, 10 1/4% pay-in-kind 8,770 9,690,850 23,968,059 PUBLISHING - 0.1% K-III Communications Corp.: Series B, $11.625 pay-in-kind 1,750 190,969 Series D, $10 31,050 3,128,288 3,319,257 TOTAL MEDIA & LEISURE 27,287,316 NONDURABLES - 0.0% HOUSEHOLD PRODUCTS - 0.0% Revlon Group, Inc., Series B, 14 7/8% 5,100 510,000 UTILITIES - 0.1% TELEPHONE SERVICES - 0.1% NextLink Communications, Inc. 14% pay-in-kind 45,453 2,352,193 TOTAL NONCONVERTIBLE PREFERRED STOCKS 38,285,184 TOTAL PREFERRED STOCKS (Cost $37,307,667) 38,690,184 NONCONVERTIBLE CORPORATE BONDS - 17.1% MOODY'S PRINCIPAL RATINGS (C) AMOUNT AEROSPACE & DEFENSE - 0.2% AEROSPACE & DEFENSE - 0.0% Be Aerospace, Inc. 9 7/8%, 2/1/06 B2 $ 270,000 284,175 Rohr, Inc. 11 5/8%, 5/15/03 Ba3 340,000 378,250 662,425 DEFENSE ELECTRONICS - 0.1% Tracor, Inc. 8 1/2%, 3/1/07 B1 1,170,000 1,181,700 NONCONVERTIBLE CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) AEROSPACE & DEFENSE - CONTINUED SHIP BUILDING & REPAIR - 0.1% Newport News Shipbuilding, Inc.: 8 5/8%, 12/1/06 Ba2 $ 920,000 $ 949,900 9 1/4%, 12/1/06 B1 3,830,000 3,992,775 4,942,675 TOTAL AEROSPACE & DEFENSE 6,786,800 BASIC INDUSTRIES - 0.7% CHEMICALS & PLASTICS - 0.2% Acetex Corp. yankee 9 3/4%, 10/1/03 B1 1,270,000 1,289,050 Foamex LP/Foamex Capital Corp. 9 7/8%, 6/15/07 (d) B3 320,000 324,000 General Chemical Corp. 9 1/4%, 8/15/03 B2 1,320,000 1,349,700 Pioneer Americas Acquisition Corp. 9 1/4%, 6/15/07 (d) B1 200,000 197,000 Praxair, Inc. 6.90%, 11/1/06 A3 4,000,000 3,949,200 Sterling Chemicals Holdings, Inc. 11 1/4%, 4/1/07 B3 1,870,000 1,982,200 9,091,150 IRON & STEEL - 0.1% Neenah Corp. 11 1/8%, 5/1/07 (d) B3 1,690,000 1,791,400 METALS & MINING - 0.0% Well Aluminum Corp. 10 1/8%, 6/1/05 (d) B2 80,000 82,400 PACKAGING & CONTAINERS - 0.2% BWAY Corp. 10 1/4%, 4/15/07 (d) B2 1,490,000 1,601,750 Owens-Illinois, Inc.: 7.85%, 5/15/04 Ba1 1,180,000 1,196,225 9.95%, 10/15/04 Ba3 3,030,000 3,211,800 8.10%, 5/15/07 Ba1 940,000 952,925 Silgan Holdings, Inc. 9%, 6/1/09 (d) B1 2,060,000 2,075,450 9,038,150 PAPER & FOREST PRODUCTS - 0.2% Asia Pulp & Paper Finance II Mauritius Ltd. 12%, 3/15/04 (d) B3 860,000 881,500 Florida Coast Paper Co. LLC/ Florida Coast Paper Finance Corp., Series B, 12 3/4%, 6/1/03 Caa 900,000 929,250 Gaylord Container Corp. 11 1/2%, 5/15/01 B3 220,000 231,275 Repap Wisconsin, Inc.: 9 1/4%, 2/1/02 B2 1,780,000 1,788,900 9 7/8%, 5/1/06 Caa 190,000 191,425 Repap New Brunswick, Inc. yankee 10 5/8%, 4/15/05 Caa 690,000 650,325 Riverwood International Corp. 10 1/4%, 4/1/06 B3 1,730,000 1,704,050 MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) Stone Container Corp. 10 3/4%, 10/1/02 B1 $2,540,000 $2,679,700 9,056,425 TOTAL BASIC INDUSTRIES 29,059,525 CONSTRUCTION & REAL ESTATE - 0.2% BUILDING MATERIALS - 0.1% Building Materials Corp. of America 0%, 7/1/04 (b) B1 3,790,000 3,448,900 Falcon Building Products, Inc. 9 1/2%, 6/15/07 (d) B3 90,000 89,325 Nortek, Inc. 9 1/4%, 3/15/07 Ba3 790,000 805,800 4,344,025 CONSTRUCTION - 0.1% Greystone Homes, Inc. 10 3/4%, 3/1/04 Ba3 1,950,000 2,130,375 REAL ESTATE - 0.0% Iron Mountain, Inc. 10 1/8%, 10/1/06 B3 1,050,000 1,115,625 TOTAL CONSTRUCTION & REAL ESTATE 7,590,025 DURABLES - 0.5% AUTOS, TIRES, & ACCESSORIES - 0.1% Aftermarket Technology Corp. 12%, 8/1/04 B3 1,313,000 1,463,995 Blue Bird Body Co. 10 3/4%, 11/15/06 B2 1,545,000 1,637,700 Delco Remy International, Inc. 10 5/8%, 8/1/06 (d) B2 390,000 413,400 Tennessee Gas Pipeline Co. 7%, 3/15/27 Baa3 2,630,000 2,628,422 6,143,517 HOME FURNISHINGS - 0.1% Interlake Corp. 12 1/8%, 3/1/02 B3 2,470,000 2,587,325 Knoll, Inc. 10 7/8%, 3/15/06 B1 623,000 689,194 3,276,519 TEXTILES & APPAREL - 0.3% GFSI, Inc. 9 5/8%, 3/1/07 (d) B3 2,480,000 2,504,800 Levi Strauss & Co. 7%, 11/1/06 (d) Baa2 7,700,000 7,616,840 10,121,640 TOTAL DURABLES 19,541,676 ENERGY - 0.9% ENERGY SERVICES - 0.3% Falcon Drilling, Inc. 9 3/4%, 1/15/01 Ba3 930,000 953,250 Parker Drilling Co. 9 3/4%, 11/15/06 B1 310,000 323,950 Petroliam Nasional BHD yankee 7 1/8%, 10/18/06 (d) A1 7,000,000 7,023,870 Pride Petroleum Services, Inc. 9 3/8%, 5/1/07 Ba3 1,690,000 1,749,150 10,050,220 NONCONVERTIBLE CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) ENERGY - CONTINUED OIL & GAS - 0.6% Energy Corp. America 9 1/2%, 5/15/07 (d) B2 $ 2,800,000 $ 2,758,000 Flores & Rucks, Inc. 9 3/4%, 10/1/06 B3 1,780,000 1,860,100 Forcenergy, Inc. 8 1/2%, 2/15/07 B2 1,300,000 1,270,750 Gulf Canada Resources Ltd. yankee 9 5/8%, 7/1/05 Ba2 990,000 1,060,538 Husky Oil Ltd. yankee 6 7/8%, 11/15/03 Baa3 2,680,000 2,642,105 Occidental Petroleum Corp.: 10.94%, 5/17/00 Baa3 2,700,000 2,989,575 6.39%, 11/9/00 Baa3 1,000,000 987,290 8 1/2%, 11/9/01 Baa2 1,251,000 1,325,022 Ocean Energy, Inc. 8 7/8%, 7/15/07 (d) B3 1,860,000 1,860,000 Pennzoil Co. 9 5/8%, 11/15/99 Baa3 2,260,000 2,407,827 Petsec Energy, Inc. 9 1/2%, 6/15/07 (d) B3 190,000 190,000 Ras Laffan Liquid Natural Gas Co. Ltd. yankee 7.628%, 9/15/06 (d) A3 4,880,000 4,942,513 United Refining Co. 10 3/4%, 6/15/07 (d) B2 760,000 752,400 25,046,120 TOTAL ENERGY 35,096,340 FINANCE - 6.4% ASSET-BACKED SECURITIES - 1.1% Airplanes Pass Through Trust 10 7/8%, 3/15/19 Ba2 8,550,000 9,875,250 Caterpillar Financial Asset Trust 6.55%, 5/22/02 A3 880,000 881,925 CPS Auto Grantor Trust 6.55%, 12/15/02 Aaa 3,269,748 3,276,900 Green Tree Financial Corp.: 6 1/2%, 6/15/27 Aaa 1,800,000 1,803,924 6.80%, 6/15/27 Aaa 1,900,000 1,909,500 6.45%, 9/15/28 Aaa 3,640,000 3,629,763 Olympic Automobile Receivables Trust: 6.40%, 9/15/01 Aaa 4,550,000 4,561,577 6.70%, 3/15/02 Aaa 2,150,000 2,159,407 Premier Auto Trust: 8.05%, 4/4/00 Aaa 6,804,000 6,914,565 6%, 5/6/00 Aaa 2,320,000 2,317,819 WFS Financial Owner Trust 6.55%, 10/20/04 Aaa 4,430,000 4,417,984 41,748,614 BANKS - 1.7% ABN Amro Bank NV 6 5/8%, 10/31/01 Aa3 7,000,000 6,971,090 Banc One Corp. 6.70%, 3/24/00 Aa3 4,500,000 4,520,970 MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) BanPonce Financial Corp. 7.72%, 4/13/00 A3 $ 2,000,000 $ 2,042,740 BanPonce Corp. 6.665%, 3/5/01 A3 4,450,000 4,428,952 BanPonce Trust I 8.327%, 2/1/27 (d) Baa1 6,450,000 6,518,241 Capital One Bank: 6.74%, 5/31/99 Baa3 4,000,000 4,005,080 7.20%, 7/19/99 Baa3 8,000,000 8,093,760 6.42%, 11/12/99 Baa3 4,900,000 4,874,275 8 1/8%, 3/1/00 Baa3 1,500,000 1,550,250 Den Danske Bank AS 7.40%, 6/15/10 (d)(g) A1 4,580,000 4,576,611 Korea Development Bank yankee 7 1/4%, 5/15/06 A1 5,660,000 5,614,890 Midland Bank PLC yankee 7 5/8%, 6/15/06 A1 3,000,000 3,089,550 NB Capital Trust IV 8 1/4%, 4/15/27 A1 4,000,000 4,098,960 Signet Bank 7.80%, 9/15/06 Baa1 3,000,000 3,097,440 Signet Banking Corp. 9 5/8%, 6/1/99 Baa2 790,000 831,981 Summit Bancorp. 8 5/8%, 12/10/02 BBB 1,730,000 1,855,269 Union Planters National Bank 6.81%, 8/20/01 A3 3,500,000 3,504,375 69,674,434 CREDIT & OTHER FINANCE - 3.0% AT&T Capital Corp.: 6.02%, 12/1/98 Baa3 7,500,000 7,477,950 6.39%, 1/22/99 Baa3 1,520,000 1,522,918 6.26%, 2/18/99 Baa3 8,000,000 7,983,120 6.16%, 12/3/99 Baa3 2,750,000 2,720,328 Ahmanson Capital Trust I 8.36%, 12/1/26 (d) Baa3 4,250,000 4,285,488 BCH Cayman Islands Ltd. yankee 7.70%, 7/15/06 A3 2,600,000 2,656,368 CIT Group Holdings, Inc. 6 1/4%, 10/4/99 Aa3 6,500,000 6,483,750 Chrysler Financial Corp. 6 3/8%, 1/28/00 A3 7,600,000 7,577,200 Finova Capital Corp.: 6.44%, 11/6/01 Baa1 5,500,000 5,422,780 6.12%, 5/28/02 Baa1 2,000,000 1,936,840 First Security Capital I 8.41%, 12/15/26 A3 1,690,000 1,722,887 Ford Motor Credit Co.: 5.73%, 2/23/00 A1 3,250,000 3,185,423 6.65%, 5/22/00 A1 9,000,000 9,008,910 5.68%, 2/15/01 A1 5,000,000 4,835,000 6.57%, 3/19/01 A1 700,000 696,220 7%, 9/25/01 A1 12,500,000 12,605,500 General Electric Capital Corp. 6.94%, 4/13/09 (f) Aaa 7,000,000 7,065,870 General Motors Acceptance Corp. 5 5/8%, 2/1/99 A3 5,000,000 4,947,250 GreenPoint Capital Trust I 9.10%, 6/1/27 (d) Ba1 1,200,000 1,207,200 NONCONVERTIBLE CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) FINANCE - CONTINUED CREDIT & OTHER FINANCE - CONTINUED Heller Financial, Inc. 7 7/8%, 11/1/99 A2 $ 5,050,000 $ 5,187,461 Household Finance Corp. 5.7825%, 6/4/98 (g) A2 12,500,000 12,500,000 KeyCorp Institutional Capital Series A, 7.826%, 12/1/26 A1 3,600,000 3,496,356 Nordstrom Credit, Inc. 7 1/4%, 4/30/02 A2 3,500,000 3,558,450 TransAmerican Energy Corp. 11 1/2%, 6/15/02 (d) B3 230,000 224,250 Triton Energy Ltd./Triton Energy Corp. 9 1/4%, 4/15/05 Ba2 930,000 984,638 119,292,157 INSURANCE - 0.2% Reliance Group: 9%, 11/15/00 Ba3 180,000 185,400 9 3/4%, 11/15/03 B1 3,390,000 3,534,075 SunAmerica, Inc. 6.20%, 10/31/99 Baa1 5,500,000 5,461,005 9,180,480 SAVINGS & LOANS - 0.4% Bank UTD Corp. 8 7/8%, 5/1/07 Ba3 3,760,000 3,886,900 Chevy Chase Savings Bank FSB 9 1/4%, 12/1/08 B1 2,410,000 2,416,025 First Nationwide Holdings, Inc. 10 5/8%, 10/1/03 Ba3 1,050,000 1,139,250 First Nationwide Parent Holdings Ltd. 12 1/2%, 4/15/03 B3 3,530,000 3,935,950 Great Western Financial Corp. 8.60%, 2/1/02 Baa1 2,000,000 2,131,500 Long Island Savings Bank FSB 7%, 6/13/02 Baa3 2,500,000 2,503,125 16,012,750 TOTAL FINANCE 255,908,435 HEALTH - 0.5% MEDICAL EQUIPMENT & SUPPLIES - 0.1% McKesson Corp. 6.60%, 3/1/00 (d) A3 4,570,000 4,574,570 MEDICAL FACILITIES MANAGEMENT - 0.4% Columbia/HCA Healthcare Corp.: 6 1/2%, 3/15/99 A2 4,500,000 4,515,615 6 7/8%, 7/15/01 A2 2,000,000 2,010,400 Integrated Health Services, Inc. 9 1/2%, 9/15/07 (d) B1 1,300,000 1,329,250 Tenet Healthcare Corp.: 8%, 1/15/05 Ba1 280,000 280,000 10 1/8%, 3/1/05 Ba3 3,760,000 4,098,400 8 5/8%, 1/15/07 Ba3 5,120,000 5,196,800 17,430,465 TOTAL HEALTH 22,005,035 MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) HOLDING COMPANIES - 0.2% Norfolk Southern Corp. 7.05%, 5/1/37 Baa1 $ 6,610,000 $ 6,708,753 INDUSTRIAL MACHINERY & EQUIPMENT - 0.2% INDUSTRIAL MACHINERY & EQUIPMENT - 0.1% Continental Global Group, Inc. 11%, 4/1/07 (d) B2 730,000 766,500 Exide Corp. 10%, 4/15/05 B1 825,000 853,875 Goss Graphic System, Inc. 12%, 10/15/06 B2 1,890,000 2,079,000 3,699,375 POLLUTION CONTROL - 0.1% Allied Waste of North America, Inc. 10 1/4%, 12/1/06 (d) B3 1,990,000 2,129,300 WMX Technologies, Inc. 7.10%, 8/1/26 A3 2,700,000 2,751,219 4,880,519 TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 8,579,894 MEDIA & LEISURE - 2.8% BROADCASTING - 1.8% Adelphia Communications Corp.: 9 1/2%, 2/15/04 B3 4,130,000 3,923,500 9 7/8%, 3/1/07 (d) - 1,020,000 984,300 Cablevision System Corp.: 9 1/4%, 11/1/05 B2 1,370,000 1,407,675 9 7/8%, 5/15/06 B2 1,330,000 1,413,125 sr. sub. deb. 9 7/8%, 2/15/13 B2 340,000 357,850 Capstar Radio Broadcasting Partners, Inc. (d): 9 1/4%, 7/1/07 - 2,930,000 2,834,775 0%, 2/1/09 (b) CCC 600,000 385,500 Diamond Cable Communications PLC yankee (b): 0%, 9/30/04 B3 2,320,000 1,873,400 0%, 2/15/07 (d) - 1,930,000 1,083,213 Echostar Communications Corp. secured discount 0%, 6/1/04 (b) B2 2,320,000 1,948,800 Echostar Satellite Broadcasting Corp. 0%, 3/15/04 (b) Caa 1,600,000 1,136,000 Echostar DBS Corp. 12 1/2%, 7/1/02 (d) Caa 930,000 921,863 Granite Broadcasting Corp.: 10 3/8%, 5/15/05 B3 710,000 718,875 9 3/8%, 12/1/05 B3 265,000 255,063 Intermedia Capital Partners IV LP/ Intermedia Partners IV Capital Corp. 11 1/4%, 8/1/06 B2 890,000 957,863 International Cabletel, Inc.: 0%, 2/1/06 (b) B3 1,480,000 1,021,200 10%, 2/15/07 (d) - 2,480,000 2,504,800 Jacor Communications Co. 8 3/4%, 6/15/07 (d) B2 250,000 246,875 NONCONVERTIBLE CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) MEDIA & LEISURE - CONTINUED BROADCASTING - CONTINUED Lenfest Communications, Inc. 8 3/8%, 11/1/05 Ba3 $ 2,500,000 $ 2,462,500 Olympus Communications LP/ Olympus Capital Corp. 10 5/8%, 11/15/06 B1 1,070,000 1,118,150 Rogers Cablesystems Ltd. yankee 11%, 12/1/15 B2 1,800,000 1,971,000 SCI Television, Inc. secured 11%, 6/30/05 Ba1 1,480,000 1,561,400 SFX Broadcasting, Inc. 10 3/4%, 5/15/06 B3 1,870,000 2,014,925 TCI Communication, Inc.: 7 1/4%, 6/15/99 Ba1 8,590,000 8,655,628 6.46%, 3/6/00 Ba1 6,570,000 6,462,186 TCI Communications Financing III 9.65%, 3/31/27 Ba3 3,480,000 3,644,743 Tele Communications, Inc. 9 1/4%, 4/15/02 Ba1 3,000,000 3,219,060 Telemundo Group, Inc. 7%, 2/15/06 (f) B1 4,170,000 3,992,775 Telewest PLC 0%, 10/1/07 (b) B1 4,860,000 3,511,350 Time Warner, Inc.: 7.95%, 2/1/00 Ba1 7,810,000 8,029,383 7 3/4%, 6/15/05 Ba1 2,150,000 2,184,938 9.15%, 2/1/23 Ba1 1,020,000 1,126,580 73,929,295 ENTERTAINMENT - 0.1% AMC Entertainment, Inc. 9 1/2%, 3/15/09 (d) B2 1,560,000 1,583,400 Cinemark USA, Inc. 9 5/8%, 8/1/08 B2 340,000 345,100 Viacom, Inc. 8%, 7/7/06 B1 3,470,000 3,365,900 5,294,400 LEISURE DURABLES & TOYS - 0.1% Coleman Escrow Corp. secured 1st priority 0%, 5/15/01 (d) B3 3,000,000 1,890,000 LODGING & GAMING - 0.4% American Skiing Co. 12%, 7/15/06 B3 2,600,000 2,730,000 Circus Circus Enterprises, Inc. 7%, 11/15/36 Baa2 2,125,000 2,063,906 Courtyard by Marriott II LP/ Courtyard II Finance Co., Series B, 10 3/4%, 2/1/08 B- 1,190,000 1,288,175 HMC Acquisition Properties, Inc. 9%, 12/15/07 Ba3 4,730,000 4,777,300 HMH Properties, Inc. 9 1/2%, 5/15/05 Ba3 1,620,000 1,688,850 Hollywood Casino Corp. 12 3/4%, 11/1/03 B2 330,000 349,800 Horseshoe Gaming LLC 9 3/8%, 6/15/07 (d) B3 480,000 483,000 MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) Prime Hospitality Corp. 9 3/4%, 4/1/07 - $ 1,880,000 $ 1,978,700 Sun International Hotels Ltd./Sun International North America, Inc. yankee 9%, 3/15/07 Ba3 1,810,000 1,837,150 Wyndham Hotel Corp. 10 1/2%, 5/15/06 B2 580,000 648,150 17,845,031 PUBLISHING - 0.2% Golden Books Publishing, Inc. 7.65%, 9/15/02 B1 490,000 453,250 News America Holdings, Inc. 7.70%, 10/30/25 Baa3 5,310,000 5,028,145 Sun Media Corp. (d): yankee 9 1/2%, 2/15/07 B3 1,200,000 1,212,000 9 1/2%, 5/15/07 B3 370,000 373,700 7,067,095 RESTAURANTS - 0.2% Foodmaker, Inc. 9 3/4%, 6/1/02 B3 2,630,000 2,695,750 Host Marriott Travel Plazas, Inc. 9 1/2%, 5/15/05 B1 5,500,000 5,720,000 8,415,750 TOTAL MEDIA & LEISURE 114,441,571 NONDURABLES - 0.5% FOODS - 0.2% Chiquita Brands International, Inc.: 9 5/8%, 1/15/04 B1 1,980,000 2,041,875 10 1/4%, 11/1/06 B1 220,000 233,200 ConAgra, Inc. 7 1/8%, 10/1/26 Baa1 4,250,000 4,268,870 Specialty Foods Corp. 11 1/8%, 10/1/02 B3 2,760,000 2,732,400 9,276,345 HOUSEHOLD PRODUCTS - 0.1% Revlon Consumer Products Corp. 10 1/2%, 2/15/03 B3 4,120,000 4,387,800 TOBACCO - 0.2% Philip Morris Companies, Inc.: 7 1/4%, 9/15/01 A2 4,600,000 4,635,052 6.95%, 6/1/06 A2 4,420,000 4,434,719 9,069,771 TOTAL NONDURABLES 22,733,916 RETAIL & WHOLESALE - 1.1% APPAREL STORES - 0.1% AnnTaylor, Inc. 8 3/4%, 6/15/00 B3 2,810,000 2,824,050 Lamonts Apparel, Inc. 10 1/4%, 11/1/99 pay-in-kind (d)(h) - 2,816,000 112,640 Specialty Retailers, Inc. (d): 8 1/2%, 7/15/05 Ba3 810,000 807,975 9%, 7/15/07 B2 80,000 79,600 3,824,265 NONCONVERTIBLE CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) RETAIL & WHOLESALE - CONTINUED GENERAL MERCHANDISE STORES - 0.7% Dayton Hudson Corp.: 6.80%, 10/1/01 Baa1 $ 4,000,000 $ 3,993,160 7 1/2%, 7/15/06 Baa1 3,500,000 3,569,545 Federated Department Stores, Inc.: 10%, 2/15/01 Baa2 8,830,000 9,659,755 8 1/8%, 10/15/02 Baa2 1,510,000 1,573,148 K Mart Corp.: 12 1/2%, 3/1/05 Ba3 2,020,000 2,434,100 7 3/4%, 10/1/12 Ba3 240,000 219,600 8 1/4%, 1/1/22 Ba3 1,790,000 1,628,900 Michaels Stores, Inc. 10 7/8%, 6/18/06 Ba2 1,090,000 1,171,750 Parisian, Inc. 9 7/8%, 7/15/03 B1 2,120,000 2,204,800 Penney (J.C.) Co., Inc. 6.95%, 4/1/00 A2 4,300,000 4,336,206 30,790,964 GROCERY STORES - 0.3% Kroger Co. 8.15%, 7/15/06 Baa3 2,250,000 2,372,310 Pathmark Stores, Inc.: 12 5/8%, 6/15/02 Caa 1,720,000 1,763,000 9 5/8%, 5/1/03 B3 3,760,000 3,628,400 0%, 11/1/03 (b) Caa 1,670,000 1,139,775 Penn Traffic Co.: 10 1/4%, 2/15/02 B3 1,060,000 911,600 8 5/8%, 12/15/03 B3 460,000 371,450 Pueblo Xtra International, Inc. 9 1/2%, 8/1/03 (d) B3 480,000 463,200 Randalls Food Markets, Inc. 9 3/8%, 7/1/07 (d) B2 140,000 139,475 10,789,210 TOTAL RETAIL & WHOLESALE 45,404,439 SERVICES - 0.5% LEASING & RENTAL - 0.3% PHH Corp. 5.6775%, 6/11/98 (g) A2 12,500,000 12,498,620 PRINTING - 0.0% Sullivan Graphics, Inc. 12 3/4%, 8/1/05 Caa 1,410,000 1,448,775 SERVICES - 0.2% Borg-Warner Security Corp. 9 5/8%, 3/15/07 (d) B3 960,000 964,800 Orion Network System, Inc. unit: 0%, 1/15/07 (b) B2 4,060,000 2,314,200 11 1/4%, 1/15/07 B2 2,710,000 2,770,975 6,049,975 TOTAL SERVICES 19,997,370 MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) TECHNOLOGY - 0.4% COMPUTERS & OFFICE EQUIPMENT - 0.3% Comdisco, Inc. 6 3/8%, 11/30/01 Baa1 $ 8,300,000 $ 8,124,787 Unisys Corp.: 12%, 4/15/03 B1 2,310,000 2,500,575 11 3/4%, 10/15/04 B1 970,000 1,047,600 11,672,962 ELECTRONICS - 0.1% Advanced Micro Devices, Inc. 11%, 8/1/03 Ba1 2,040,000 2,264,400 Fairchild Semiconductor Corp.: 10 1/8%, 3/15/07 (d) B2 1,340,000 1,413,700 11.74%, 3/15/08 pay-in-kind (e) - 1,760,000 1,696,288 Viasystems, Inc. 9 3/4%, 6/1/07 (d) B3 190,000 193,325 5,567,713 TOTAL TECHNOLOGY 17,240,675 TRANSPORTATION - 0.3% AIR TRANSPORTATION - 0.2% Delta Air Lines, Inc. 9 7/8%, 5/15/00 Baa3 1,500,000 1,616,640 US Air, Inc.: 9 5/8%, 2/1/01 B3 1,810,000 1,864,300 10%, 7/1/03 B3 2,200,000 2,266,000 10 3/8%, 3/1/13 B1 1,240,000 1,357,800 7,104,740 RAILROADS - 0.1% Burlington Northern Santa Fe Corp. 7.29%, 6/1/36 Baa2 3,000,000 3,075,360 TOTAL TRANSPORTATION 10,180,100 UTILITIES - 1.7% CELLULAR - 0.3% Globalstar LP/Globalstar Capital Corp. (d): unit 11 3/8%, 2/15/04 B3 1,410,000 1,410,000 11 1/4%, 6/15/04 B3 1,240,000 1,159,400 McCaw International Ltd. unit 0%, 4/15/07 (b)(d) CCC 3,200,000 1,536,000 Millicom International Cellular SA 0%, 6/1/06 (b) B3 1,550,000 1,108,250 Paging Network, Inc. 8 7/8%, 2/1/06 B2 670,000 609,700 NONCONVERTIBLE CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) UTILITIES - CONTINUED CELLULAR - CONTINUED Telesystem International Wireless, Inc. 0%, 6/30/07 (b)(d) B- $ 290,000 $ 154,425 360 Degrees Communications Co.: 7 1/8%, 3/1/03 Ba1 4,310,000 4,286,252 7 1/2%, 3/1/06 Ba1 3,150,000 3,142,314 13,406,341 ELECTRIC UTILITY - 0.6% CMS Energy Corp. 8 1/8%, 5/15/02 Ba3 2,230,000 2,246,725 CalEnergy, Inc. 9 1/2%, 9/15/06 Ba2 900,000 963,000 Commonwealth Edison Co. 7 3/8%, 9/15/02 Baa2 5,170,000 5,246,568 Hydro-Quebec yankee 7.40%, 3/28/25 A2 2,620,000 2,839,687 Israel Electric Corp. yankee 7 7/8%, 12/15/26 (d) A3 2,940,000 2,960,786 Long Island Lighting Co. 8 5/8%, 4/15/04 Ba1 6,130,000 6,385,498 NIPSCO Capital Markets, Inc. 7.39%, 4/1/04 Baa1 3,500,000 3,531,710 24,173,974 TELEPHONE SERVICES - 0.8% LCI International, Inc. 7 1/4%, 6/15/07 Ba1 3,650,000 3,615,325 MFS Communications, Inc. (b): 0%, 1/15/04 Ba3 4,255,000 3,960,554 0%, 1/15/06 Ba3 5,945,000 4,689,119 McleodUSA, Inc. 0%, 3/1/07 (b)(d) B3 1,240,000 790,500 Shared Technologies Fairchild Communications Corp. 0%, 3/1/06 (b) Caa 1,020,000 910,350 Teleport Communications Group, Inc. 0%, 7/1/07 (b) B1 1,940,000 1,399,225 Winstar Equipment Corp. 12 1/2%, 3/15/04 (d) CCC 1,140,000 1,114,350 WorldCom, Inc. 7 3/4%, 4/1/07 Ba1 12,750,000 13,039,170 29,518,593 TOTAL UTILITIES 67,098,908 TOTAL NONCONVERTIBLE CORPORATE BONDS (Cost $681,642,417) 688,373,462 U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - 7.8% MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) U.S. TREASURY OBLIGATIONS - 5.8% 9 1/4%, 8/15/98 Aaa $ 37,055,000 $ 38,380,828 7 3/4%, 12/31/99 Aaa 1,560,000 1,615,817 7 7/8%, 8/15/01 Aaa 315,000 331,982 11 7/8%, 11/15/03 Aaa 38,040,000 48,637,564 7%, 7/15/06 Aaa 10,507,000 10,809,076 11 3/4%, 2/15/10 (callable) Aaa 26,045,000 33,952,002 12 3/4%, 11/15/10 (callable) Aaa 12,000,000 16,651,920 13 7/8%, 5/15/11 (callable) Aaa 25,650,000 37,934,042 9%, 11/15/18 Aaa 10,240,000 12,667,187 7 1/4%, 2/ 15/23 Aaa 14,126,000 14,549,780 6 1/2%, 11/15/26 Aaa 19,365,000 18,572,197 234,102,395 U.S. GOVERNMENT AGENCY OBLIGATIONS - 2.0% Farm Credit Systems Financial Assistance Corp. 8.80%, 6/10/05 Aaa 2,000,000 2,244,060 Federal Agricultural Mortgage Corp. 7.63%, 1/16/01 Aaa 3,321,000 3,442,947 Federal Farm Credit Bank: 8.16%, 12/7/04 Aaa 5,000,000 5,401,550 9.55%, 5/9/05 Aaa 2,500,000 2,914,050 Federal Home Loan Bank: 7.31%, 6/16/04 Aaa 2,500,000 2,584,375 8.22%, 11/17/04 Aaa 4,000,000 4,315,040 7.59%, 3/10/05 Aaa 3,850,000 4,047,313 Federal Home Loan Mortgage Corporation 6 3/4%, 8/1/05 Aaa 2,500,000 2,492,975 Federal National Mortgage Association 6.97%, 4/8/04 Aaa 6,010,000 6,103,876 Guaranteed Export Trust Certificates (assets of Trust guaranteed by U.S. Government through Export-Import Bank) Series 1994-A, 7.12%, 4/15/06 Aaa 7,596,471 7,734,157 State of Israel (guaranteed by U.S. Government through Agency for International Development): 6 5/8%, 8/15/03 Aaa 7,810,000 7,829,369 5 5/8%, 9/15/03 Aaa 8,540,000 8,130,849 6 3/4%, 8/15/04 Aaa 2,144,000 2,153,284 U.S. Trade Trust Certificates (assets of Trust guaranteed by U.S. Government through Export-Import Bank) 6.69%, 1/15/09 (d) Aaa 5,760,000 5,725,555 U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) U.S. GOVERNMENT AGENCY OBLIGATIONS - CONTINUED U.S. Department of Housing and Urban Development Government guaranteed participation certificates: Series 1995-A, 8.24%, 8/1/04 Aaa $ 3,260,000 $ 3,521,224 Series 1996-A, 6.67%, 8/1/01 Aaa 9,400,000 9,436,942 Series 1996-A, 7.63%, 8/1/14 (callable) Aaa 2,825,000 2,888,421 80,965,987 TOTAL U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS (Cost $320,604,811) 315,068,382 U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - 5.4% FEDERAL HOME LOAN MORTGAGE CORPORATION - 0.4% 5 1/2%, 1/1/03 to 6/1/03 Aaa 4,030,042 3,846,916 7%, 4/1/01 to 8/1/01 Aaa 2,876,294 2,891,588 7 1/2%, 7/1/27 (j) Aaa 8,760,000 8,801,063 8 1/2%, 7/1/21 to 6/1/23 Aaa 268,153 280,424 15,819,991 FEDERAL NATIONAL MORTGAGE ASSOCIATION - 3.9% 5 1/2%, 2/1/03 to 5/1/03 Aaa 4,018,328 3,834,971 6%, 10/1/02 to 5/1/26 Aaa 65,927,205 63,068,623 6 1/2%, 12/1/25 to 7/1/26 Aaa 73,328,857 70,194,335 7%, 5/1/26 Aaa 14,281,900 14,014,114 7 1/2%, 5/1/26 to 8/1/26 Aaa 5,646,930 5,665,761 156,777,804 GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 1.1% 6%, 12/15/08 to 5/15/26 Aaa 10,839,939 10,530,343 6 1/2%, 6/15/08 to 7/15/09 Aaa 20,093,334 19,870,622 8%, 5/15/25 Aaa 226,289 231,661 8 1/2%, 12/15/16 to 10/15/26 Aaa 13,809,620 14,349,525 44,982,151 TOTAL U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES (Cost $214,280,261) 217,579,946 COMMERCIAL MORTGAGE SECURITIES - 1.2% American Southwest Financial Securities Series 1994-C2 Class B2, 12.79%, 12/25/01 (d)(g) - 750,000 738,750 BKB Commercial Mortgage Trust Series 1997-C1 Class D, 7.83%, 2/25/43 (d)(g) BBB 1,800,000 1,818,000 MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) Berkeley Federal Bank & Trust FSB Series 1994 Class 1-B, 7.78%, 8/1/24 (d)(g) - $ 1,900,000 $ 1,371,563 Blackrock Capital Funding LLC Series 1996 Class C2, 7.60%, 11/16/26 (d) Aaa 1,215,001 1,226,771 CBA Mortgage Corp. Series 1993-C1 Class E, 7.76%, 12/25/03 (d)(g) Ba2 500,000 480,625 CS First Boston Mortgage Securities Corp. Series 1995-AEWI Class E, 9.80%, 11/25/97 (d)(g) - 1,100,000 1,106,875 DLJ Mortgage Acceptance Corp. Series 1993-MF12 Class B-2, 10.10%, 9/18/03 (d) - 600,000 601,500 Equitable Life Assurance Society of the United States (The) (d): Series 174 Class B1, 7.33%, 5/15/06 Aa2 3,500,000 3,560,480 Series 174, Class D1, 7.77%, 5/15/06 Baa2 2,200,000 2,260,896 Series 1996-1 Class C1, 7.52%, 5/15/06 A2 2,300,000 2,355,499 First Chicago/Lennar Trust I Series 1997-CHL1 (g): Class D, 8.11%, 5/29/08 - 1,100,000 1,050,156 Class E, 8.11%, 4/1/39 - 1,600,000 1,223,000 General Motors Acceptance Corp. Commercial Mortgage Securities, Inc. Series 1996-C1 Class F, 7.86%, 11/15/06 (d) Ba3 750,000 702,758 Kidder Peabody Acceptance Corp. sequential pay, Series 1993-M1 Class A-2, 7.15%, 4/25/25 Aa2 2,325,889 2,338,245 Merrill Lynch Mortgage Investments, Inc. Series 1994 Class M1-E, 8.13%, 6/25/22 (d)(g) Ba2 5,670,000 5,549,513 Morgan Stanley Capital One, Inc.: Series 1996-MBL1 Class E, 8.661%, 5/25/21 (d) - 1,870,310 1,717,178 sequential pay Series 1997-C1 Class A-1C, 7.63%, 2/15/20 Aaa 4,560,000 4,718,175 Mortgage Capital Funding, Inc. Series 1996-MC1 Class G, 7.15%, 7/15/28 (d) BB 1,000,000 878,050 NB Commercial Mortgage sequential pay, Series FSI Class A, 7.187%, 10/20/23 (d) - 1,752,227 1,755,239 Penn Mutual Life Insurance Co. (The) Series 1996-PML (d): Class K, 7.90%, 11/15/26 - 1,473,000 911,419 Class L, 7.90%, 11/15/26 - 1,133,000 483,678 COMMERCIAL MORTGAGE SECURITIES - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) Structured Asset Securities Corp.: Series 1995-C1 Class E, 7 3/8%, 9/25/24 (d) BB $ 1,200,000 $ 1,068,750 Series 1993-C1 Class E, 6.60%, 10/25/24 (d) B 1,250,000 437,500 sequential pay Series 1996 Class A-2A, 7 3/4%, 2/25/28 Aaa 1,624,291 1,647,133 Series 1996-CFL Class G, 7 3/4%, 2/25/28 (d) - 1,000,000 855,781 Series 1996-C3 Class E, 8.46%, 6/25/30 (d) - 500,000 472,422 Wells Fargo Capital Markets Apartment Financing Trust 6.56%, 12/29/05 (d) Aaa 4,650,000 4,586,574 TOTAL COMMERCIAL MORTGAGE SECURITIES (Cost $44,396,294) 45,916,530 FOREIGN GOVERNMENT OBLIGATIONS (I) - 0.5% Export Development Corp. yankee 8 1/8%, 8/10/99 Aa2 1,640,000 1,697,531 Israeli State euro 6 3/8%, 12/19/01 A3 5,750,000 5,642,188 Manitoba Province yankee 6 3/8%, 10/15/99 A1 7,000,000 6,999,400 Mexico Value recovery rights 6/30/03 discount A - 2,000 - Newfoundland Province yankee 11 5/8%, 10/15/07 Baa1 2,000,000 2,652,000 Quebec Province yankee 7.22%, 7/22/36 (f) A2 3,500,000 3,644,060 TOTAL FOREIGN GOVERNMENT OBLIGATIONS (Cost $20,474,119) 20,635,179 CERTIFICATES OF DEPOSIT - 3.0% ABN-Amro Bank NV yankee 5.65%, 12/23/97 8,000,000 7,990,202 Banque Nationale de Paris yankee 5.85%, 9/30/97 4,800,000 4,801,296 Bayerische Vereinsbank AG yankee 5.56%, 7/14/97 12,500,000 12,499,668 Caisse Nationale de Credit Agricole yankee 5.60%, 7/21/97 12,500,000 12,499,673 Deutsche Bank AG yankee 6.20%, 4/10/98 6,000,000 6,004,704 Landesbank Hessen-Thuringen yankee: 5.78%, 1/27/98 6,200,000 6,195,567 5.67%, 2/11/98 3,000,000 2,994,737 National Westminster Bank PLC yankee 5 1/2%, 8/5/97 12,000,000 11,996,960 Rabobank Nederlan, Coop Central yankee: 5.97%, 3/20/98 3,500,000 3,502,013 6.20%, 4/10/98 5,000,000 5,003,920 PRINCIPAL VALUE AMOUNT (NOTE 1) Sanwa Bank Ltd. yankee 5 3/4%, 8/27/97 $ 12,500,000 $ 12,500,631 Societe Generale yankee 5.55%, 7/28/97 12,000,000 11,998,172 Swiss Bank Corp. yankee 5 1/2%, 8/4/97 12,000,000 11,997,162 SunTrust Bank 5.85%, 11/25/97 11,000,000 11,003,412 TOTAL CERTIFICATES OF DEPOSIT (Cost $120,986,009) 120,988,117 COMMERCIAL PAPER - 1.5% ABN-Amro North America, Inc. yankee 5.82%, 12/5/97 1,000,000 975,466 AC Acquisition Holding Co. 5.56%, 7/9/97 4,500,000 4,493,700 BMW US Capital Corp. yankee 5.57%, 8/19/97 6,600,000 6,548,850 Caisse des Depots et Consignations yankee 5.58%, 9/18/97 250,000 246,917 Citibank Credit Card Master Trust I (Dakota Certificate Program): 5.58%, 7/7/97 2,600,000 2,597,138 5.60%, 8/22/97 1,900,000 1,884,168 Delaware Funding Corp. 5.58%, 9/16/97 2,050,000 2,025,349 Fina Oil & Chemical Co. 5.61%, 8/14/97 3,400,000 3,375,945 General Electric Capital Corp. 5.75%, 7/1/97 6,400,000 6,399,016 Goldman Sachs Group LP 5.83%, 1/26/98 5,000,000 4,836,958 Nationwide Building Society yankee 5.32%, 8/11/97 7,000,000 6,954,593 New Center Asset Trust 5.60%, 8/15/97 1,100,000 1,092,185 Norfolk Southern Corp. 5.77%, 7/16/97 2,500,000 2,493,622 Pacific Gas & Electric Co. 5.60%, 8/28/97 1,500,000 1,486,332 Triple A One Funding Corp. 5.58%, 7/16/97 3,600,000 3,591,152 Unifunding, Inc. yankee: 5.58%, 9/15/97 4,800,000 4,742,712 5.67%, 11/12/97 8,000,000 7,832,000 TOTAL COMMERCIAL PAPER (Cost $61,568,752) 61,576,103 BANK NOTES - 1.2% Bank of Tokyo-Mitsubishi Ltd. 5.70%, 7/14/97 12,500,000 12,500,000 Corestates Bank NA 5.65%, 1/30/98 (g) 6,000,000 5,999,939 First Bank National Association 5.60%, 5/15/98 (g) 5,800,000 5,796,346 BANK NOTES - CONTINUED PRINCIPAL VALUE AMOUNT (NOTE 1) Morgan Guaranty Trust Co. 5.375%, 3/30/98 (g) $ 11,000,000 $ 10,994,720 Sumitomo Bank Ltd. 5.74%, 7/11/97 12,500,000 12,500,000 TOTAL BANK NOTES (Cost $47,790,819) 47,791,005 CASH EQUIVALENTS - 0.2% MATURITY AMOUNT Investments in repurchase agreements (U.S. Treasury obligations) in a joint trading account dated 6/30/97 due 7/1/97: at 5 7/8% $ 3,661,597 3,661,000 at 5.99% 250,042 250,000 at 5.93% 3,748,617 3,748,000 7,659,000 TOTAL INVESTMENT IN SECURITIES - 100% (Cost $3,536,460,505) $ 4,022,978,346 LEGEND 1. Non-income producing 2. Debt obligation initially issued in zero coupon form which converts to coupon form at a specified rate and date. 3. Standard & Poor's credit ratings are used in the absence of a rating by Moody's Investors Service, Inc. 4. Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $132,179,126 or 3.3% of net assets. 5. Restricted securities - Investment in securities not registered under the Securities Act of 1933 (see Note 2 of Notes to Financial Statements). Additional information on each holding is as follows: ACQUISITION ACQUISITION SECURITY DATE COST Fairchild Semiconductor Corp. 11.74%, 3/15/08 pay-in-kind 4/3/97 $1,541,077 6. Debt obligation initially issued at one coupon which converts to a higher coupon at a specified date. 7. The coupon rate shown on floating or adjustable rate securities represents the rate at period end. 8. Non-income producing - issuer filed for protection under the Federal Bankruptcy Code or is in default of interest payment. 9. For foreign government obligations not individually rated by S&P or Moody's, the ratings listed are assigned to securities by FMR, the fund's investment adviser, based principally on S&P and Moody's ratings of the sovereign credit of the issuing government. 10. Security purchased on a delayed delivery or when-issued basis (see Note 2 of Notes to Financial Statements). OTHER INFORMATION Purchases and sales of securities, other than short-term securities, aggregated $1,654,154,486 and $1,477,645,288, respectively, of which U.S. government and government agency obligations aggregated $412,461,203 and $889,699,347, respectively. The fund placed a portion of its portfolio transactions with brokerage firms which are affiliates of FMR. The commissions paid to these affiliated firms were $174,322 for the period. The composition of long-term debt holdings as a percentage of total value of investment in securities, is as follows: MOODY'S RATINGS S&P RATINGS Aaa, Aa, A 19.5% AAA, AA, A 18.8% Baa 3.9% BBB 5.7% Ba 3.6% BB 2.0% B 3.9% B 3.8% Caa 0.2% CCC 0.4% Ca, C 0.0% CC, C 0.0% D 0.0% For some foreign government obligations, FMR has assigned the ratings of the sovereign credit of the issuing government. The percentage not rated by both S&P and Moody's amounted to 0.6%. FMR has determined that unrated debt securities that are lower quality account for 0.2% of the total value of investment in securities. Distribution of investments by country of issue, as a percentage of total value of investment in securities, is as follows: United States 88.6% United Kingdom 2.9 Netherlands 2.1 France 1.4 Canada 1.0 Others (individually less than 1%) 4.0 TOTAL 100.0% INCOME TAX INFORMATION At June 30, 1997, the aggregate cost of investment securities for income tax purposes was $3,538,260,955. Net unrealized appreciation aggregated $484,717,391, of which $515,085,273 related to appreciated investment securities and $30,367,882 related to depreciated investment securities. VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 1997 (UNAUDITED) ASSETS Investment in $4,022,978,346 securities, at value (including repurchase agreements of $7,659,000) (cost $3,536,460,505) - See accompanying schedule Cash 317,016 Receivable for 3,697,569 investments sold Receivable for fund 1,283,409 shares sold Dividends receivable 5,653,220 Interest receivable 21,592,771 Other receivables 59,936 TOTAL ASSETS 4,055,582,267 LIABILITIES Payable for $ 13,833,520 investments purchased Regular delivery Delayed delivery 8,800,150 Payable for fund 4,879,599 shares redeemed Accrued management 1,828,948 fee Other payables and 396,197 accrued expenses TOTAL LIABILITIES 29,738,414 NET ASSETS $ 4,025,843,853 Net Assets consist of: Paid in capital $ 3,392,224,145 Undistributed net 69,229,933 investment income Accumulated 77,872,297 undistributed net realized gain
(loss) on investments and foreign currency transactions
Net unrealized 486,517,478 appreciation (depreciation) on investments and assets and liabilities in foreign currencies NET ASSETS, for $ 4,025,843,853 242,519,191 shares outstanding NET ASSET VALUE, $16.60 offering price and redemption price per share ($4,025,843,853 (divided by) 242,519,191 shares) STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) INVESTMENT INCOME $ 20,936,069 Dividends Interest 60,402,478 TOTAL INCOME 81,338,547 EXPENSES Management fee $ 10,415,204 Transfer agent fees 1,341,983 Accounting fees and 402,957 expenses Non-interested 8,207 trustees' compensation Custodian fees and 105,052 expenses Registration fees 8,446 Audit 71,538 Legal 5,834 Miscellaneous 142,608 Total expenses 12,501,829 before reductions Expense reductions (82,260 12,419,569 ) NET INVESTMENT 68,918,978 INCOME REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on: Investment 82,598,838 securities Foreign currency (10,176 82,588,662 transactions ) Change in net unrealized appreciation (depreciation) on: Investment 255,138,426 securities Assets and 519 255,138,945 liabilities in foreign currencies NET GAIN (LOSS) 337,727,607
NET INCREASE $ 406,646,585 (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS OTHER INFORMATION $ 71,772 Expense reductions Directed brokerage arrangements Custodian credits 10,488 $ 82,260
STATEMENT OF CHANGES IN NET ASSETS INCREASE (DECREASE) SIX MONTHS YEAR ENDED IN NET ASSETS ENDED DECEMBER 31, JUNE 30, 1997 1996 (UNAUDITED) Operations $ 68,918,978 $ 123,680,897 Net investment income Net realized gain 82,588,662 331,183,089 (loss) Change in net 255,138,945 15,746,586 unrealized appreciation (depreciation) NET INCREASE 406,646,585 470,610,572 (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS Distributions to (126,645,359) (119,397,539) shareholders From net investment income From net realized (317,686,664) (98,450,602) gain TOTAL DISTRIBUTIONS (444,332,023) (217,848,141) Share transactions 160,759,463 270,086,820 Net proceeds from sales of shares Reinvestment of 444,332,023 217,848,141 distributions Cost of shares (182,756,372) (432,347,524) redeemed NET INCREASE 422,335,114 55,587,437 (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS TOTAL INCREASE 384,649,676 308,349,868 (DECREASE) IN NET ASSETS NET ASSETS Beginning of period 3,641,194,177 3,332,844,309 End of period $4,025,843,853 $3,641,194,177 (including undistributed net investment income of $69,229,933 and $120,488,851, respectively) OTHER INFORMATION Shares Sold 10,083,606 17,138,645 Issued in 28,796,632 14,427,029 reinvestment of distributions Redeemed (11,428,361) (27,544,207) Net increase 27,451,877 4,021,467
(decrease) SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, 1997 SELECTED PER-SHARE (UNAUDITED) 1996 1995 1994 1993 E 1992 DATA Net asset value, $ 16.93 $ 15.79 $ 13.79 $ 15.42 $ 13.32 $ 12.55 beginning of period Income from Investment Operations Net investment .29 D .63 .30 .45 .33 .32 income Net realized and 1.45 1.55 1.99 (1.33) 2.39 1.09 unrealized gain (loss) Total from 1.74 2.18 2.29 (.88) 2.72 1.41 investment operations Less Distributions From net (.59) (.57) (.29) (.29) (.33) (.31) investment income In excess of net - - - - (.04) - investment income From net realized (1.48) (.47) - (.46) (.25) (.33) gain Total distributions (2.07) (1.04) (.29) (.75) (.62) (.64) Net asset value, end $ 16.60 $ 16.93 $ 15.79 $ 13.79 $ 15.42 $ 13.32 of period TOTAL RETURN B, C 11.20% 14.60% 16.96% (6.09)% 21.23% 11.71% RATIOS AND SUPPLEMENTAL DATA Net assets, end of $ 4,025,844 $ 3,641,194 $ 3,332,844 $ 3,290,527 $ 2,422,692 $ 731,724 period (000 omitted) Ratio of expenses to .67% A .74% .81% .81% .88% .91% average net assets Ratio of expenses to .66% A, .73% F .79% F .80% F .88% .91% average net assets F after expense reductions Ratio of net 3.69% A 3.60% 3.54% 4.07% 3.64% 4.89% investment income to average net assets Portfolio turnover rate 86% A 168% 256% 85% 113% 92% Average commission $ .0464 $ .0163 rate G
A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED AND DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN. C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. E EFFECTIVE JANUARY 1, 1993, THE FUND ADOPTED STATEMENT OF POSITION 93-2, "DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF INCOME, CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT COMPANIES." AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT CERTAIN RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES. F FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). G FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE STRUCTURES MAY DIFFER. VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO PERFORMANCE AND INVESTMENT SUMMARY PERFORMANCE There are several ways to evaluate a fund's historical performance. You can look at the total percentage change in value, the average annual percentage change or the growth of a hypothetical $10,000 investment. Total return reflects the change in the value of an investment, assuming reinvestment of the fund's dividend income and capital gains (the profits earned upon the sale of securities that have grown in value). If Fidelity had not reimbursed certain fund expenses, the life of fund total return would have been lower. AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED PAST 1 LIFE OF JUNE 30, 1997 YEAR FUND BALANCED 24.77% 15.39% S&P 500(registered trademark) 34.70% 33.11% Lehman Brothers Aggregate Bond Index 8.15% 9.91% AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and show what would have happened if the fund had achieved that return by performing at a constant rate each year. You can compare the fund's returns to the performance of the Standard & Poor's 500 Index - a widely recognized, unmanaged index of common stocks - and the performance of the Lehman Brothers Aggregate Bond Index - a market value weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of at least one year. Figures for more than one year assume a steady compounded rate of return and are not the fund's year-by-year results, which fluctuated over the periods shown. The life of fund figures are from commencement of operations January 3, 1995. PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER. Past performance is no guarantee of future results. Principal and investment return will vary and you may have a gain or loss when you withdraw your money. UNDERSTANDING PERFORMANCE How a fund did yesterday is no guarantee of how it will do tomorrow. The stock market, for example, has a history of long-term growth and short-term volatility. In turn, the share price and return of a fund that invests in stocks will vary. That means if you sell your shares during a market downturn, you might lose money. But if you can ride out the market's ups and downs, you may have a gain. (checkmark) $10,000 OVER LIFE OF FUND 1995/01/03 10000.00 10000.00 10000.00 1995/01/31 9990.00 10258.23 10197.90 1995/02/28 10190.00 10658.00 10440.37 1995/03/31 10260.00 10972.51 10504.42 1995/04/30 10390.00 11295.66 10651.15 1995/05/31 10610.00 11747.14 11063.32 1995/06/30 10740.00 12020.03 11144.43 1995/07/31 10880.00 12418.61 11119.54 1995/08/31 10920.00 12449.78 11253.74 1995/09/30 11020.00 12975.16 11363.22 1995/10/31 10890.00 12928.84 11511.00 1995/11/30 11210.00 13496.42 11683.49 1995/12/31 11391.59 13756.36 11847.46 1996/01/31 11473.17 14224.63 11926.13 1996/02/29 11319.47 14356.49 11718.83 1996/03/31 11227.28 14494.74 11637.37 1996/04/30 11258.01 14708.39 11571.92 1996/05/31 11380.93 15087.72 11548.42 1996/06/30 11452.64 15145.21 11703.51 1996/07/31 11227.28 14476.09 11735.54 1996/08/31 11298.98 14781.39 11715.87 1996/09/30 11780.44 15613.29 11920.04 1996/10/31 12098.00 16043.91 12184.08 1996/11/30 12733.12 17256.66 12392.78 1996/12/31 12528.25 16914.81 12277.55 1997/01/31 12927.76 17971.65 12315.15 1997/02/28 13144.66 18112.54 12345.78 1997/03/31 12777.20 17368.30 12208.97 1997/04/30 13260.15 18405.19 12391.74 1997/05/31 13785.10 19525.70 12508.88 1997/06/30 14289.05 20400.45 12657.35 Let's say hypothetically that $10,000 was invested in Balanced Portfolio on January 3, 1995, when the fund started. As the chart shows, by June 30, 1997, the value of the investment would have grown to $14,289 - a 42.89% increase on the initial investment. For comparison, look at how both the S&P 500 and Lehman Brothers Aggregate Bond Index did over the same period. With dividends and capital gains, if any, reinvested, the same $10,000 investment in the S&P 500 would have grown to $20,400 - a 104.00% increase. If $10,000 was put in the bond index, it would have grown to $12,657 - a 26.57% increase. INVESTMENT SUMMARY TOP FIVE STOCKS AS OF JUNE 30, 1997 % OF FUND'S INVESTMENTS General Electric Co. 2.5 Bristol-Myers Squibb Co. 2.1 Philip Morris Companies, Inc. 2.1 Citicorp 2.1 Procter & Gamble Co. 2.0 TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997 % OF FUND'S INVESTMENTS Finance 17.2 Health 10.5 Nondurables 9.8 Aerospace & Defense 6.9 Energy 6.6 ASSET ALLOCATION AS OF JUNE 30, 1997* Row: 1, Col: 1, Value: 7.5 Row: 1, Col: 2, Value: 26.8 Row: 1, Col: 3, Value: 65.7 Row: 1, Col: 1, Value: 45.0 Row: 1, Col: 2, Value: 39.0 Row: 1, Col: 3, Value: 28.0 Row: 2, Col: 1, Value: 31.0 Row: 2, Col: 2, Value: 40.0 Row: 2, Col: 3, Value: 67.0 Row: 3, Col: 1, Value: 90.0 Row: 3, Col: 2, Value: 60.0 Row: 3, Col: 3, Value: 46.0 Stocks 65.7% Bonds 26.8% Short-term investments 7.5% FOREIGN INVESTMENTS 8.4% * % OF FUND'S INVESTMENTS VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO FUND TALK: THE MANAGER'S OVERVIEW An interview with Bettina Doulton, Portfolio Manager of Balanced Portfolio Q. HOW DID THE FUND PERFORM, BETTINA? G.V. Given the structure of the fund - a blend of equities and fixed-income investments - the fund's performance tends to fall between its two benchmark indices, the Standard & Poor's 500 Index and the Lehman Brothers Aggregate Bond Index. That's exactly what happened over the six months that ended June 30, 1997. The fund performed better than the Lehman Brothers index, which returned 3.09% over that period, but underperformed the S&P 500, which returned a very strong 20.61%. For the 12 months that ended June 30, 1997, the Lehman Brothers index returned 8.15% and the S&P 500 returned 34.70%. Again, the fund's performance fell between that of the two indices. Q. WHAT KEY STRATEGIES DID YOU PURSUE OVER THE PAST SIX MONTHS? G.V. Because the asset allocation of the fund generally will approximate 60% equities and 40% fixed-income, the strategy is to add value through security selection within each asset class. In the stock sub-portfolio, a notable decision was my concentration on selected finance, nondurables and pharmaceutical stocks - stocks that turned out to be among the better performers during the period. Within these industries, diversified financial-services company American Express and pharmaceuticals firm Bristol-Myers Squibb were particularly strong contributors. Q. WHAT TYPES OF EQUITY INVESTMENTS WERE MOST ATTRACTIVE TO YOU OVER THE PERIOD? G.V. Overall, stock selection remained company-specific, focused on firms with competitive advantages or catalysts for positive change - including dominant market positions, cost-structure reductions or new products - and shareholder-friendly managements. The combination of some or all of these attributes typically translates into solid earnings and generous free cash flow. Of course, my decision to invest in a particular stock also is contingent on an attractive valuation. Over the past six months, a significant proportion of companies meeting these criteria have been large-capitalization diversified financials and "consumer growth companies," mainly pharmaceuticals and nondurables firms. One stock that I found to be particularly attractive over the period was BankAmerica. This bank is in the process of aggressively reducing its cost structure, achieving improving returns on capital and using excess capital to repurchase its shares. In addition, the firm has been the beneficiary of an improving California economy. Q. HOW DID SOME OF THE OTHER LARGER STOCK HOLDINGS PERFORM? G.V. The fund's top five stocks performed well, including Citicorp. Its solid business prospects shone through in the face of a rather volatile environment for financials brought on by concerns over rising interest rates. General Electric and Philip Morris also were positive contributors. The upward revaluation of GE continued as investors were attracted to its global business franchise, consistent growth prospects and stable free cash flow. Philip Morris' underlying business prospects remained good, and the market viewed progress on negotiations for a tobacco settlement positively. On the negative side, the fund's aerospace and defense investments were disappointing as they weakened early in 1997 after outperforming for most of 1996. Q. HOW WAS THE BOND PORTION OF THE FUND STRUCTURED? G.V. The manager of the fund's fixed-income subportfolio, Kevin Grant, maintained an interest rate posture in line with the overall bond market as measured by the Lehman Brothers Aggregate Bond Index. Kevin was attracted to corporate bonds issued by companies he felt wouldn't be affected by shifts in the economy, including bonds issued by banks. Historically, bank earnings were quite sensitive to interest rates. However, over the past several years, banks have increased the fee-based portions of their business, making them less sensitive to interest rates and loans. In the corporate area, the fund's bonds were focused on maturities in the two- to six-year range. These bonds offered a yield advantage over Treasuries, but were short enough in maturity that they shouldn't markedly underperform Treasuries if the market became nervous about credit risk. Q. WHAT'S YOUR OUTLOOK FOR THE NEXT SIX MONTHS? G.V. In terms of the overall U.S. economy, I believe it's likely there will be more of the same - moderate growth and low inflation - although the duration of the current economic expansion already has exceeded all but two post-war expansions. Against this backdrop, corporate America is generally performing well. Earnings growth prospects remain favorable, driven by globalization, market share gains, continuing productivity improvements and capital redeployment. In addition, I believe merger and acquisition activity is likely to remain robust as companies seek to bolster their market position and exploit revenue and cost synergies. Given this scenario, I think it's quite probable that the same stocks that have been market leaders recently - larger-capitalization financials, pharmaceuticals and consumer nondurables - will continue to perform well. FUND FACTS GOAL: maximum total return over the long term by allocating assets among stocks, bonds and short-term instruments anywhere in the world START DATE: September 6, 1989 SIZE: as of June 30, 1997, more than $4 billion MANAGER: Richard Habermann, since March 1996; joined Fidelity in 1968 (checkmark) VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO INVESTMENTS JUNE 30, 1997 (UNAUDITED) Showing Percentage of Total Value of Investment in Securities COMMON STOCKS - 64.6% SHARES VALUE (NOTE 1) AEROSPACE & DEFENSE - 6.7% AEROSPACE & DEFENSE - 5.7% AlliedSignal, Inc. 24,000 $ 2,016,000 Boeing Co. 50,628 2,686,448 Lockheed Martin Corp. 15,800 1,636,288 Rockwell International Corp. 2,600 153,400 Sundstrand Corp. 17,000 948,813 Textron, Inc. 3,400 225,675 United Technologies Corp. 22,000 1,826,000 9,492,624 DEFENSE ELECTRONICS - 0.7% Raytheon Co. 23,900 1,218,900 SHIP BUILDING & REPAIR - 0.3% General Dynamics Corp. 7,300 547,500 Newport News Shipbuilding, Inc. 780 15,161 562,661 TOTAL AEROSPACE & DEFENSE 11,274,185 BASIC INDUSTRIES - 4.2% CHEMICALS & PLASTICS - 3.0% Air Products & Chemicals, Inc. 10,600 861,250 du Pont (E.I.) de Nemours & Co. 10,000 628,750 Goodrich (B.F.) Co. 20,200 874,913 Monsanto Co. 35,000 1,507,188 Nalco Chemical Co. 3,000 115,875 Olin Corp. 3,400 132,813 Praxair, Inc. 15,900 890,400 5,011,189 PAPER & FOREST PRODUCTS - 1.2% Fort Howard Corp. (a) 16,100 815,063 Kimberly-Clark Corp. 25,400 1,263,650 2,078,713 TOTAL BASIC INDUSTRIES 7,089,902 CONSTRUCTION & REAL ESTATE - 0.2% BUILDING MATERIALS - 0.2% Masco Corp. 6,800 283,900 DURABLES - 1.7% AUTOS, TIRES, & ACCESSORIES - 0.0% Johnson Controls, Inc. 100 4,106 Scania AB Class B 100 3,057 7,163 CONSUMER DURABLES - 1.7% Corning, Inc. 4,700 261,438 Minnesota Mining & Manufacturing Co. 24,500 2,499,000 2,760,438 TOTAL DURABLES 2,767,601 ENERGY - 6.1% ENERGY SERVICES - 0.2% Halliburton Co. 5,000 396,250 OIL & GAS - 5.9% Amoco Corp. 8,000 695,500 British Petroleum PLC: ADR 14,986 1,122,077 Ord. 89,067 1,106,834 Exxon Corp. 13,000 799,500 Mobil Corp. 10,600 740,675 SHARES VALUE (NOTE 1) Royal Dutch Petroleum Co. 56,000 $ 3,045,000 Royal Dutch Petroleum Co. Ord. 2,000 103,966 Texaco, Inc. 15,700 1,707,375 Total SA: Class B 1,300 131,322 sponsored ADR 2,200 111,375 USX-Marathon Group 8,200 236,775 Unocal Corp. 1,800 69,863 9,870,262 TOTAL ENERGY 10,266,512 FINANCE - 12.1% BANKS - 6.1% BankAmerica Corp. 47,400 3,060,263 Citicorp 28,500 3,436,031 NationsBank Corp. 35,200 2,270,400 Wells Fargo & Co. 5,500 1,482,250 10,248,944 CREDIT & OTHER FINANCE - 1.7% American Express Co. 29,700 2,212,650 Associates First Capital Corp. 1,000 55,500 Beneficial Corp. 3,900 277,144 Household International, Inc. 2,300 270,106 2,815,400 FEDERAL SPONSORED CREDIT - 1.7% Federal Home Loan Mortgage Corporation 48,200 1,656,875 Federal National Mortgage Association 27,800 1,212,775 2,869,650 INSURANCE - 2.3% Allstate Corp. 23,000 1,679,000 Hartford Financial Services Group, Inc. 4,900 405,475 St. Paul Companies, Inc. (The) 3,300 251,625 Travelers Group, Inc. (The) 24,000 1,513,500 3,849,600 SAVINGS & LOANS - 0.3% Great Western Financial Corp. 8,200 440,750 TOTAL FINANCE 20,224,344 HEALTH - 10.3% DRUGS & PHARMACEUTICALS - 7.7% American Home Products Corp. 42,500 3,251,250 Bristol-Myers Squibb Co. 44,200 3,580,200 Merck & Co., Inc. 13,800 1,428,300 Pfizer, Inc. 10,800 645,300 Schering-Plough Corp. 47,200 2,259,700 SmithKline Beecham PLC ADR 19,400 1,777,525 12,942,275 MEDICAL EQUIPMENT & SUPPLIES - 2.6% Allegiance Corp. 30,000 817,500 Baxter International, Inc. 35,200 1,839,200 Johnson & Johnson 27,400 1,763,875 4,420,575 TOTAL HEALTH 17,362,850 HOLDING COMPANIES - 0.1% CINergy Corp. 2,900 100,932 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) INDUSTRIAL MACHINERY & EQUIPMENT - 5.9% ELECTRICAL EQUIPMENT - 3.8% Emerson Electric Co. 17,600 $ 969,100 General Electric Co. 64,600 4,223,225 Grainger (W.W.), Inc. 7,400 578,588 Honeywell, Inc. 7,900 599,413 6,370,326 INDUSTRIAL MACHINERY & EQUIPMENT - 1.4% Cooper Industries, Inc. 18,098 900,376 Harnischfeger Industries, Inc. 6,200 257,300 Tyco International Ltd. 17,200 1,196,475 2,354,151 POLLUTION CONTROL - 0.7% Browning-Ferris Industries, Inc. 24,800 824,600 Waste Management, Inc. 10,800 346,950 1,171,550 TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 9,896,027 MEDIA & LEISURE - 0.3% BROADCASTING - 0.0% CS Wireless Systems, Inc. (a)(c) 8 - Time Warner, Inc. 1,200 57,900 57,900 ENTERTAINMENT - 0.1% Cedar Fair LP (depositary unit) 5,000 218,750 PUBLISHING - 0.2% McGraw-Hill, Inc. 5,500 323,469 TOTAL MEDIA & LEISURE 600,119 NONDURABLES - 9.6% BEVERAGES - 1.6% Anheuser-Busch Companies, Inc. 5,300 222,269 PepsiCo, Inc. 65,000 2,441,563 2,663,832 FOODS - 1.0% Campbell Soup Co. 1,600 80,000 Flowers Industries, Inc. 5,850 98,353 Heinz (H.J.) Co. 16,200 747,225 Hershey Foods Corp. 500 27,656 Nabisco Holdings Corp. Class A 18,100 721,738 1,674,972 HOUSEHOLD PRODUCTS - 4.8% Avon Products, Inc. 8,900 628,006 Clorox Co. 3,600 475,200 Procter & Gamble Co. 23,800 3,361,750 Rubbermaid, Inc. 8,800 261,800 Unilever PLC Ord. 13,400 384,015 Unilever NV: ADR 11,400 2,440,313 Ord. 2,000 420,753 7,971,837 TOBACCO - 2.2% Philip Morris Companies, Inc. 80,100 3,554,438 RJR Nabisco Holdings Corp. 5,300 174,900 3,729,338 TOTAL NONDURABLES 16,039,979 SHARES VALUE (NOTE 1) RETAIL & WHOLESALE - 3.1% APPAREL STORES - 0.1% Footstar, Inc. (a) 3,022 $ 78,950 DRUG STORES - 1.0% CVS Corp. 10,500 538,125 Rite Aid Corp. 22,920 1,143,135 1,681,260 GENERAL MERCHANDISE STORES - 1.6% Dayton Hudson Corp. 2,000 106,375 Sears, Roebuck & Co. 18,600 999,750 Wal-Mart Stores, Inc. 47,200 1,595,950 2,702,075 GROCERY STORES - 0.4% American Stores Co. 14,500 715,938 TOTAL RETAIL & WHOLESALE 5,178,223 SERVICES - 0.7% LEASING & RENTAL - 0.0% Hanover Compressor Co. 100 1,950 Ryder Systems, Inc. 400 13,200 15,150 PRINTING - 0.4% Deluxe Corp. 11,600 395,850 Donnelley (R.R.) & Sons Co. 5,500 201,438 597,288 SERVICES - 0.3% ADT Ltd. (a) 5,000 165,000 National Service Industries, Inc. 8,800 428,450 593,450 TOTAL SERVICES 1,205,888 TECHNOLOGY - 2.4% COMPUTERS & OFFICE EQUIPMENT - 2.0% Exide Electronics Group, Inc. warrants 3/15/06 (a)(c) 10 250 Pitney Bowes, Inc. 26,400 1,834,800 Xerox Corp. 18,000 1,419,750 3,254,800 ELECTRONICS - 0.4% Thomas & Betts Corp. 14,050 738,503 TOTAL TECHNOLOGY 3,993,303 UTILITIES - 1.2% CELLULAR - 0.0% Microcell Telecommunications, Inc. 6/1/06 (a): conditional warrants 560 350 warrants 560 7,000 7,350 ELECTRIC UTILITY - 0.1% Allegheny Power System, Inc. 1,400 37,363 Edison International 5,000 124,375 GPU, Inc. 1,000 35,875 197,613 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) UTILITIES - CONTINUED GAS - 0.5% Consolidated Natural Gas Co. 300 $ 16,144 El Paso Natural Gas Co. 362 19,910 Williams Companies, Inc. 19,000 831,250 867,304 TELEPHONE SERVICES - 0.6% ALLTEL Corp. 2,200 73,563 Ameritech Corp. 5,800 394,038 BCE, Inc. 6,000 166,878 Hyperion Telecommunications, Inc. warrants 4/15/01 (a)(c) 60 1,800 MCI Communications Corp. 7,000 267,969 NextLink Communications, Inc. warrants 2/1/09 (a) 3,229 32 RSL Communications Ltd./RSL Communications PLC warrants 11/15/06 (a) 40 1,200 905,480 TOTAL UTILITIES 1,977,747 TOTAL COMMON STOCKS (Cost $87,743,324) 108,261,512 PREFERRED STOCKS - 1.1% CONVERTIBLE PREFERRED STOCKS - 0.5% DURABLES - 0.1% AUTOS, TIRES, & ACCESSORIES - 0.1% Republic Industries, Inc. $1.55 4,000 98,000 ENERGY - 0.0% OIL & GAS - 0.0% Tosco Financing Trust $2.875 (c) 1,700 95,838 INDUSTRIAL MACHINERY & EQUIPMENT - 0.1% ELECTRICAL EQUIPMENT - 0.1% Loral Space & Communications Ltd. Series C, $3.00 (c) 4,000 199,000 MEDIA & LEISURE - 0.1% LODGING & GAMING - 0.1% Host Marriott Financial Trust $3.375 (c) 3,000 173,625 RETAIL & WHOLESALE - 0.2% APPAREL STORES - 0.2% TJX Companies, Inc., Series E, $7.00 1,000 285,000 TOTAL CONVERTIBLE PREFERRED STOCKS 851,463 NONCONVERTIBLE PREFERRED STOCKS - 0.6% FINANCE - 0.1% CREDIT & OTHER FINANCE - 0.0% American Annuity Group Capital Trust II 8 3/4% 50 49,750 SAVINGS & LOANS - 0.1% California Federal Preferred Capital Corp. 9 1/8% 2,800 71,400 TOTAL FINANCE 121,150 SHARES VALUE (NOTE 1) MEDIA & LEISURE - 0.4% BROADCASTING - 0.3% American Radio Systems Corp. 11 3/8% pay-in-kind 855 $ 91,058 Citadel Broadcasting Co. 13 1/4% pay-in-kind (c) 600 60,000 Cablevision System Corp. pay-in-kind: 11 1/8% depositary shares 1,244 125,022 Series H, $11.75 267 27,635 Capstar Broadcasting Partners, Inc. 12% (c) 100 10,125 Sinclair Capital 11 5/8% (c) 800 84,400 Time Warner, Inc., Series M, 10 1/4% pay-in-kind 145 160,225 558,465 PUBLISHING - 0.1% K-III Communications Corp., Series D, $10 600 60,450 TOTAL MEDIA & LEISURE 618,915 UTILITIES - 0.1% TELEPHONE SERVICES - 0.1% NextLink Communications, Inc. 14% pay-in-kind 3,334 172,535 TOTAL NONCONVERTIBLE PREFERRED STOCKS 912,600 TOTAL PREFERRED STOCKS (Cost $1,598,971) 1,764,063 CORPORATE BONDS - 12.3% MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) CONVERTIBLE BONDS - 0.2% INDUSTRIAL MACHINERY & EQUIPMENT - 0.1% POLLUTION CONTROL - 0.1% WMX Technologies, Inc. 2%, 1/24/05 Baa1 $ 80,000 73,800 MEDIA & LEISURE - 0.0% LEISURE DURABLES & TOYS - 0.0% Hasbro Corp. 6%, 11/15/98 A3 24,000 35,040 RETAIL & WHOLESALE - 0.1% GENERAL MERCHANDISE STORES - 0.1% Federated Department Stores, Inc. 5%, 10/1/03 Baa3 150,000 178,875 TOTAL CONVERTIBLE BONDS 287,715 NONCONVERTIBLE BONDS - 12.1% AEROSPACE & DEFENSE - 0.2% AEROSPACE & DEFENSE - 0.2% Alliant Techsystems, Inc. 11 3/4%, 3/1/03 B2 13,000 14,333 Fairchild Corp. 12%, 10/15/01 Caa 10,000 10,100 Lockheed Martin Corp. 7.20%, 5/1/36 A3 300,000 307,746 332,179 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) NONCONVERTIBLE BONDS - CONTINUED AEROSPACE & DEFENSE - CONTINUED DEFENSE ELECTRONICS - 0.0% Tracor, Inc. 8 1/2%, 3/1/07 B1 $ 20,000 $ 20,200 SHIP BUILDING & REPAIR - 0.0% Newport News Shipbuilding, Inc. 9 1/4%, 12/1/06 B1 10,000 10,425 TOTAL AEROSPACE & DEFENSE 362,804 BASIC INDUSTRIES - 0.7% CHEMICALS & PLASTICS - 0.1% Atlantis Group, Inc. 11%, 2/15/03 B2 10,000 10,325 Foamex LP/Foamex Capital Corp. 9 7/8%, 6/15/07 (c) B3 10,000 10,125 Freedom Chemical Co. 10 5/8%, 10/15/06 B3 60,000 61,200 Pioneer Americas Acquisition Corp. 9 1/4%, 6/15/07 (c) B1 10,000 9,850 Sterling Chemicals Holdings, Inc.: 11 3/4%, 8/15/06 B3 70,000 75,425 11 1/4%, 4/1/07 B3 40,000 42,400 209,325 IRON & STEEL - 0.1% GS Technologies Operating, Inc. 12 1/4%, 10/1/05 B2 20,000 21,900 Republic Engineered Steels, Inc. 9 7/8%, 12/15/01 Caa 50,000 46,625 WCI Steel, Inc. 10%, 12/1/04 B2 40,000 41,600 110,125 METALS & MINING - 0.0% Commonwealth Aluminum Corp. 10 3/4%, 10/1/06 B2 40,000 42,000 PAPER & FOREST PRODUCTS - 0.5% Asia Pulp & Paper Finance II Mauritius Ltd. 12%, 3/15/04 (c) B3 85,000 87,125 American Pad & Paper Co., Inc. 13%, 11/15/05 B3 40,000 46,800 Crown Paper Co. 11%, 9/1/05 B3 30,000 30,075 Doman Industries Ltd. yankee 8 3/4%, 3/15/04 B1 50,000 48,250 Florida Coast Paper Co. LLC/ Florida Coast Paper Finance Corp., Series B, 12 3/4%, 6/1/03 Caa 20,000 20,650 Gaylord Container Corp. 11 1/2%, 5/15/01 B3 10,000 10,513 Indah Kiat International Finance Co. BV 12 1/2%, 6/15/06 Ba2 20,000 22,700 Mail-Well Corp. 10 1/2%, 2/15/04 B 10,000 10,400 Malette, Inc. yankee 12 1/4%, 7/15/04 Ba3 10,000 11,200 Repap Wisconsin, Inc.: 9 1/4%, 2/1/02 B2 40,000 40,200 9 7/8%, 5/1/06 Caa 50,000 50,375 MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) Repap New Brunswick, Inc. yankee 10 5/8%, 4/15/05 Caa $ 20,000 $ 18,850 Riverwood International 10 7/8%, 4/1/08 Caa 50,000 45,375 SD Warren Co., Series B, 12%, 12/15/04 B1 15,000 16,800 Stone Container Corp.: 12 5/8%, 7/15/98 B2 100,000 105,125 11 7/8%, 12/1/98 B2 30,000 31,575 10 3/4%, 10/1/02 B1 80,000 84,400 11 7/8%, 8/1/16 B2 40,000 43,200 Tembec Finance Corp. yankee 9 7/8%, 9/30/05 B1 10,000 10,300 733,913 TOTAL BASIC INDUSTRIES 1,095,363 DURABLES - 0.5% AUTOS, TIRES, & ACCESSORIES - 0.0% Jordan Industries, Inc. 10 3/8%, 8/1/03 B3 20,000 20,700 HOME FURNISHINGS - 0.1% Guitar Center Management Co., Inc. 11%, 7/1/06 B2 6,000 6,570 Interlake Corp. 12 1/8%, 3/1/02 B3 40,000 41,900 Knoll, Inc. 10 7/8%, 3/15/06 B1 38,000 42,038 90,508 TEXTILES & APPAREL - 0.4% Dan River, Inc. 10 1/8%, 12/15/03 B3 10,000 10,600 Levi Strauss & Co. 6.80%, 11/1/03 (c) Baa2 570,000 565,138 Polymer Group, Inc. 9%, 7/1/07 (c) - 40,000 39,356 Synthetic Industries, Inc. 9 1/4%, 2/15/07 (c) B2 40,000 40,500 655,594 TOTAL DURABLES 766,802 ENERGY - 0.5% ENERGY SERVICES - 0.1% DI Industries, Inc. 8 7/8%, 7/1/07 B1 25,000 24,625 McDermott International, Inc. 9 3/8%, 3/15/02 Ba3 60,000 62,909 Petroliam Nasional BHD yankee 6 7/8%, 7/1/03 (c) A1 130,000 129,550 217,084 OIL & GAS - 0.4% Belden & Blake Corp. 9 7/8%, 6/15/07 (c) B3 40,000 39,600 Cross Timbers Oil Co. 9 1/4%, 4/1/07 B2 60,000 61,950 Flores & Rucks, Inc. 9 3/4%, 10/1/06 B3 40,000 41,800 Ocean Energy, Inc. 8 7/8%, 7/15/07 (c) B3 60,000 60,000 Pennzoil Co. 9 5/8%, 11/15/99 Baa3 60,000 63,925 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) NONCONVERTIBLE BONDS - CONTINUED ENERGY - CONTINUED OIL & GAS - CONTINUED Ras Laffan Liquid Natural Gas Co. Ltd. yankee 8.29%, 3/15/14 (c) A3 $ 300,000 $ 312,468 United Refining Co. 10 3/4%, 6/15/07 (c) B2 30,000 29,700 609,443 TOTAL ENERGY 826,527 FINANCE - 5.0% ASSET-BACKED SECURITIES - 1.3% Airplanes Pass Through Trust 10 7/8%, 3/15/19 Ba2 100,000 115,500 Capital Equipment Receivables Trust 6.11%, 7/15/99 Aaa 1,410,000 1,411,763 Green Tree Financial Corp. 6.10%, 4/15/27 Aaa 71,888 71,753 Sears Credit Account Master Trust II 6 1/2%, 10/15/03 Aaa 630,000 632,558 2,231,574 BANKS - 1.5% ABN Amro Bank NV 6 5/8%, 10/31/01 Aa3 500,000 497,935 Banc One Corp. 6.70%, 3/24/00 Aa3 350,000 351,631 Banco Latinoamer Exportaciones Euro 6.90%, 12/6/99 (c) Baa2 100,000 100,813 Capital One Bank 6.74%, 5/31/99 Baa3 260,000 260,330 Export-Import Bank of Korea 6 3/8%, 2/15/06 A1 600,000 562,272 First USA Bank 6 1/2%, 12/23/99 Baa3 250,000 248,785 Midland Bank PLC yankee 7 5/8%, 6/15/06 A1 250,000 257,463 Signet Bank 7.80%, 9/15/06 Baa1 250,000 258,120 Summit Bancorp. 8 5/8%, 12/10/02 BBB 100,000 107,241 2,644,590 CREDIT & OTHER FINANCE - 2.0% APP International Finance Co. BV yankee 11 3/4%, 10/1/05 Ba3 10,000 11,050 Ahmanson Capital Trust I 8.36%, 12/1/26 (c) Baa3 250,000 252,088 Associates Corp. of North America 6 1/2%, 9/9/98 Aa3 250,000 250,993 CIT Group Holdings, Inc. 6 1/4%, 9/30/99 Aa3 860,000 857,859 Chrysler Financial Corp. 6 3/8%, 1/28/00 A3 180,000 179,460 First Security Capital I 8.41%, 12/15/26 A3 110,000 112,141 GST Equipment Funding, Inc. 13 1/4%, 5/1/07 (c) - 60,000 64,200 General Electric Capital Corp. 6.94%, 4/13/09 (e) Aaa 480,000 484,517 MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) Imperial Credit Capital Trust I 10 1/4%, 6/14/02 (c) B2 $ 20,000 $ 20,050 Imperial Credit Industries, Inc. 9 7/8%, 1/15/07 B2 50,000 49,500 MCN Investment Corp. 6.03%, 2/1/01 Baa2 180,000 175,819 Nordstrom Credit, Inc. 7 1/4%, 4/30/02 A2 200,000 203,340 PNC Institutional Capital Trust 8.315%, 5/15/27 (c) A2 600,000 606,714 Polytama International Finance BV 11 1/4%, 6/15/07 B2 20,000 20,650 PTC International Finance BV 0%, 7/1/07 (c) B3 10,000 6,063 3,294,444 INSURANCE - 0.1% Integon Capital I 10 3/4%, 2/15/07 (c) Ba3 100,000 121,500 SAVINGS & LOANS - 0.1% First Nationwide Holdings, Inc. 10 5/8%, 10/1/03 Ba3 40,000 43,400 First Nationwide Parent Holdings Ltd. 12 1/2%, 4/15/03 B3 80,000 89,200 132,600 TOTAL FINANCE 8,424,708 HEALTH - 0.2% MEDICAL EQUIPMENT & SUPPLIES - 0.0% Wright Medical Technology, Inc. 10 3/4%, 7/1/00 B3 40,000 40,700 MEDICAL FACILITIES MANAGEMENT - 0.2% Columbia/HCA Healthcare Corp. 6 1/2%, 3/15/99 A2 240,000 240,833 Integrated Health Services, Inc. 9 1/2%, 9/15/07 (c) B1 10,000 10,225 Tenet Healthcare Corp.: 8%, 1/15/05 Ba1 20,000 20,000 8 5/8%, 1/15/07 Ba3 10,000 10,150 281,208 TOTAL HEALTH 321,908 HOLDING COMPANIES - 0.2% Gray Communications System, Inc. 10 5/8%, 10/1/06 B3 20,000 21,075 Norfolk Southern Corp. 7.05%, 5/1/37 Baa1 340,000 345,080 TOTAL HOLDING COMPANIES 366,155 INDUSTRIAL MACHINERY & EQUIPMENT - 0.5% ELECTRICAL EQUIPMENT - 0.0% Amphenol Corp. 9 7/8%, 5/15/07 B2 10,000 10,300 Motors & Gears, Inc. 10 3/4%, 11/15/06 B3 60,000 61,800 72,100 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) NONCONVERTIBLE BONDS - CONTINUED INDUSTRIAL MACHINERY & EQUIPMENT - CONTINUED INDUSTRIAL MACHINERY & EQUIPMENT - 0.2% Continental Global Group, Inc. 11%, 4/1/07 (c) B2 $ 20,000 $ 21,000 Goss Graphic System, Inc. 12%, 10/15/06 B2 50,000 55,000 International Knife & Saw, Inc. 11 3/8%, 11/15/06 B3 10,000 10,675 Tenneco, Inc. 8.075%, 10/1/02 Baa1 300,000 314,838 401,513 POLLUTION CONTROL - 0.3% WMX Technologies, Inc. 7.10%, 8/1/26 A3 400,000 407,588 TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 881,201 MEDIA & LEISURE - 1.2% BROADCASTING - 0.6% Adelphia Communications Corp.: 9 1/2%, 2/15/04 B3 10,000 9,500 9 7/8%, 3/1/07 (c) - 130,000 125,450 Benedek Communications Corp. 0%, 5/15/06 (b) - 50,000 30,125 Capstar Radio Broadcasting Partners, Inc. (c): 9 1/4%, 7/1/07 - 60,000 58,050 0%, 2/1/09 (b) CCC 70,000 44,975 Chancellor Radio Broadcasting Co. 8 3/4%, 6/15/07 (c) B3 60,000 59,250 Citadel Broadcasting Co. 10 1/4%, 7/1/07 (c) B3 40,000 40,000 CS Wireless Systems, Inc. 0%, 3/1/06 (b) Caa 30,000 7,200 Diamond Cable Communications PLC yankee 0%, 9/30/04 (b) B3 10,000 8,075 Echostar DBS Corp. 12 1/2%, 7/1/02 (c) Caa 50,000 49,563 Echostar Satellite Broadcasting Corp. 0%, 3/15/04 (b) Caa 40,000 28,400 Echostar Communications Corp. secured discount 0%, 6/1/04 (b) B2 190,000 159,600 Jacor Communications Co. 8 3/4%, 6/15/07 (c) B2 10,000 9,875 Lenfest Communications, Inc.: 8 3/8%, 11/1/05 Ba3 10,000 9,850 10 1/2%, 6/15/06 B2 10,000 10,900 Olympus Communications LP/ Olympus Capital Corp. 10 5/8%, 11/15/06 B1 50,000 52,250 SFX Broadcasting, Inc. 10 3/4%, 5/15/06 B3 10,000 10,775 TCI Communication, Inc. 6.82%, 9/15/10 Ba1 250,000 249,878 Telewest PLC 0%, 10/1/07 (b) B1 60,000 43,350 UIH Australia/PAC, Inc., Series B, 0%, 5/15/06 (b) B2 90,000 54,450 1,061,516 MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) ENTERTAINMENT - 0.1% AMC Entertainment, Inc. 9 1/2%, 3/15/09 (c) B2 $ 70,000 $ 71,050 AMF Group, Inc., Series B: 10 7/8%, 3/15/06 B2 20,000 21,550 0%, 3/15/06 (b) B2 10,000 7,125 Cinemark USA, Inc. 9 5/8%, 8/1/08 B2 30,000 30,450 Viacom, Inc. 8%, 7/7/06 B1 100,000 97,000 227,175 LEISURE DURABLES & TOYS - 0.1% Coleman Escrow Corp. (c): secured 1st priority 0%, 5/15/01 B3 140,000 88,200 secured 2nd priority 0%, 5/15/01 Caa 20,000 11,550 Icon Health and Fitness, Inc. 13%, 7/15/02 B3 50,000 56,125 Icon Fitness Corp. 0%, 11/15/06 (b) CCC+ 10,000 5,450 161,325 LODGING & GAMING - 0.3% American Skiing Co. 12%, 7/15/06 B3 30,000 31,500 Casino Magic Financial Corp. 11 1/2%, 10/15/01 B1 20,000 17,500 Circus Circus Enterprises, Inc. 7%, 11/15/36 Baa2 150,000 145,688 HMC Acquisition Properties, Inc. 9%, 12/15/07 Ba3 60,000 60,600 Hollywood Casino Corp. 12 3/4%, 11/1/03 B2 60,000 63,600 Horseshoe Gaming LLC 12 3/4%, 9/30/00 B1 40,000 44,700 Prime Hospitality Corp. 9 3/4%, 4/1/07 - 20,000 21,050 Sun International Hotels Ltd./Sun International North America, Inc. yankee 9%, 3/15/07 Ba3 70,000 71,050 455,688 PUBLISHING - 0.1% Big Flower Press Holdings, Inc. 8 7/8%, 7/1/07 (c) - 90,000 88,425 RESTAURANTS - 0.0% AFC Enterprises, Inc. 10 1/4%, 5/15/07 (c) B3 40,000 39,800 TOTAL MEDIA & LEISURE 2,033,929 NONDURABLES - 0.2% FOODS - 0.0% International Home Foods, Inc. 10 3/8%, 11/1/06 B2 10,000 10,300 HOUSEHOLD PRODUCTS - 0.0% Renaissance Cosmetic, Inc. 11 3/4%, 2/15/04 B3 50,000 51,750 Revlon Consumer Products Corp. 10 1/2%, 2/15/03 B3 65,000 69,225 120,975 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) NONCONVERTIBLE BONDS - CONTINUED NONDURABLES - CONTINUED TOBACCO - 0.2% North Atlantic Trading, Inc. 11%, 6/15/04 (c) B3 $ 10,000 $ 10,150 Philip Morris Companies, Inc. 6.95%, 6/1/06 A2 250,000 250,833 260,983 TOTAL NONDURABLES 392,258 RETAIL & WHOLESALE - 0.9% APPAREL STORES - 0.1% Mothers Work, Inc. 12 5/8%, 8/1/05 B3 10,000 10,325 Specialty Retailers, Inc. 8 1/2%, 7/15/05 (c) Ba3 30,000 29,925 40,250 GENERAL MERCHANDISE STORES - 0.5% Dayton Hudson Corp.: 6.80%, 10/1/01 Baa1 300,000 299,487 6.40%, 2/15/03 Baa1 400,000 389,652 Penney (J.C.) Co., Inc. 6.95%, 4/1/00 A2 160,000 161,347 850,486 GROCERY STORES - 0.3% American Stores Co. 7 1/2%, 5/1/37 Baa2 250,000 254,743 Food 4 Less Holdings, Inc. 13 5/8%, 6/15/07 - 10,681 12,486 Grand Union Co. 12%, 9/1/04 Caa 50,000 37,000 Pantry, Inc. 12%, 11/15/00 B2 10,000 10,250 Pathmark Stores, Inc.: 11 5/8%, 6/15/02 Caa 40,000 40,500 9 5/8%, 5/1/03 B3 10,000 9,650 Penn Traffic Co.: 10 1/4%, 2/15/02 B3 40,000 34,400 8 5/8%, 12/15/03 B3 30,000 24,225 10 3/8%, 10/1/04 B3 20,000 17,000 11 1/2%, 4/15/06 B3 20,000 17,700 Pueblo Xtra International, Inc.: 9 1/2%, 8/1/03 B3 60,000 57,450 9 1/2%, 8/1/03 (c) B3 10,000 9,650 Randalls Food Markets, Inc. 9 3/8%, 7/1/07 (c) B2 10,000 9,963 535,017 RETAIL & WHOLESALE, MISCELLANEOUS - 0.0% Corporate Express, Inc., Series B, 9 1/8%, 3/15/04 B2 10,000 10,000 TOTAL RETAIL & WHOLESALE 1,435,753 SERVICES - 0.2% PRINTING - 0.0% Sullivan Graphics, Inc. 12 3/4%, 8/1/05 Caa 40,000 41,100 MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) SERVICES - 0.2% Orion Network System, Inc. unit: 11 1/4%, 1/15/07 B2 $ 50,000 $ 51,125 0%, 1/15/07 (b) B2 290,000 165,300 Outsourcing Solutions, Inc. 11%, 11/1/06 B3 10,000 10,850 227,275 TOTAL SERVICES 268,375 TECHNOLOGY - 0.2% COMMUNICATIONS EQUIPMENT - 0.0% Intermedia Communications, Inc. 0%, 5/15/06 (b) B2 80,000 55,000 COMPUTER SERVICES & SOFTWARE - 0.0% Verio, Inc. unit 13 1/2%, 6/15/04 (c) - 50,000 50,250 COMPUTERS & OFFICE EQUIPMENT - 0.2% Comdisco, Inc. 6.70%, 8/6/99 Baa1 250,000 250,948 Dictaphone Corp. 11 3/4%, 8/1/05 B3 10,000 9,200 Exide Electronics Group, Inc. 11 1/2%, 5/15/06 B3 10,000 10,725 Unisys Corp. 12%, 4/15/03 B1 10,000 10,825 281,698 ELECTRONIC INSTRUMENTS - 0.0% Wavetek Corp. 10 1/8%, 6/15/07 (c) B3 10,000 10,200 ELECTRONICS - 0.0% Fairchild Semiconductor Corp. 10 1/8%, 3/15/07 (c) B2 30,000 31,650 Viasystems, Inc. 9 3/4%, 6/1/07 (c) B3 10,000 10,175 41,825 TOTAL TECHNOLOGY 438,973 TRANSPORTATION - 0.1% AIR TRANSPORTATION - 0.0% Atlas Air, Inc. pass through trust 12 1/4%, 12/1/02 Ba3 30,000 33,450 RAILROADS - 0.1% Burlington Northern Santa Fe Corp. 7.29%, 6/1/36 Baa2 150,000 153,768 TFM SA de CV (c): 10 1/4%, 6/15/07 B2 10,000 10,175 0%, 6/15/09 (b) B2 20,000 11,550 175,493 TOTAL TRANSPORTATION 208,943 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) NONCONVERTIBLE BONDS - CONTINUED UTILITIES - 1.5% CELLULAR - 0.7% Arch Communications Group, Inc. 0%, 3/15/08 (b) B3 $ 90,000 $ 47,475 Clearnet Communications, Inc. yankee 0%, 12/15/05 (b) B3 50,000 32,875 McCaw International Ltd. unit 0%, 4/15/07 (b)(c) CCC 200,000 96,000 Microcell Telecommunications, Inc. 0%, 6/1/06 (b) B3 140,000 78,400 Millicom International Cellular SA 0%, 6/1/06 (b) B3 260,000 185,900 Mobile Telecommunications Technologies Corp. 13 1/2%, 12/15/02 B3 20,000 21,100 Omnipoint Corp.: 11 5/8%, 8/15/06 B2 10,000 9,450 Series A, 11 5/8%, 8/15/06 B3 30,000 28,350 Pagemart, Inc. 0%, 11/1/03 (b) - 70,000 60,550 Pagemart Nationwide, Inc. 0%, 2/1/05 (b) - 40,000 29,800 RSL Communications Ltd./RSL Communications PLC 12 1/4%, 11/15/06 - 40,000 40,700 Telesystem International Wireless, Inc. 0%, 6/30/07 (b)(c) B- 30,000 15,975 360 Degrees Communications Co. 7 1/8%, 3/1/03 Ba1 400,000 397,796 USA Mobile Communications, Inc. II 9 1/2%, 2/1/04 B2 10,000 9,300 1,053,671 ELECTRIC UTILITY - 0.0% CMS Energy Corp. 8 1/8%, 5/15/02 Ba3 10,000 10,075 GAS - 0.2% Columbia Gas System, Inc. 6.61%, 11/28/02 Baa1 379,000 374,717 TELEPHONE SERVICES - 0.6% Brooks Fiber Properties, Inc.: 0%, 3/1/06 (b) - 10,000 6,750 11 7/8%, 11/1/06 - 20,000 12,900 GST USA, Inc. 0%, 12/15/05 (b) - 34,000 21,080 Hyperion Telecommunications, Inc., Series B, 0%, 4/15/03 (b) - 60,000 30,150 LCI International, Inc. 7 1/4%, 6/15/07 Ba1 200,000 198,100 McleodUSA, Inc. 0%, 3/1/07 (b)(c) B3 40,000 25,500 MFS Communications, Inc. 0%, 1/15/06 (b) Ba3 250,000 197,188 Shared Technologies Fairchild Communications Corp. 0%, 3/1/06 (b) Caa 87,000 77,648 MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) Teleport Communications Group, Inc. 0%, 7/1/07 (b) B1 $ 20,000 $ 14,425 WorldCom, Inc. 7 3/4%, 4/1/07 Ba1 400,000 409,072 992,813 TOTAL UTILITIES 2,431,276 TOTAL NONCONVERTIBLE BONDS 20,254,975 TOTAL CORPORATE BONDS (Cost $20,329,264) 20,542,690 U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - 10.7% U.S. TREASURY OBLIGATIONS - 9.6% 5 7/8%, 8/15/98 Aaa 1,000,000 999,690 6 5/8%, 6/30/01 Aaa 6,540,000 6,601,280 7%, 7/15/06 Aaa 5,286,000 5,437,973 12%, 8/15/13 (callable) Aaa 1,100,000 1,548,426 8 1/8%, 8/15/19 Aaa 825,000 941,144 7 1/4%, 2/15/23 Aaa 490,000 504,700 TOTAL U.S. TREASURY OBLIGATIONS 16,033,213 U.S. GOVERNMENT AGENCY OBLIGATIONS - 1.1% Federal Home Loan Bank: 7.56%, 9/1/04 Aaa 310,000 324,725 7.59%, 3/10/05 Aaa 190,000 199,738 Federal National Mortgage Association 6.72%, 8/1/05 Aaa 720,000 716,400 Government Trust Certificates (assets of Trust guaranteed by U.S. Government through Defense Security Assistance Agency) Class 2-E, 9.40%, 5/15/02 Aaa 127,981 135,802 State of Israel (guaranteed by U.S. Government through Agency for International Development): 8%, 11/15/01 Aaa 220,000 231,917 5.89%, 8/15/05 Aaa 310,000 293,730 TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS 1,902,312 TOTAL U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS (Cost $17,972,172) 17,935,525 U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - 2.4% Federal Home Loan Mortgage Corporation: 7%, 6/1/99 to 7/1/01 Aaa 466,372 469,127 7 1/2%, 7/1/27 (g) Aaa 970,000 974,547 Federal National Mortgage Association: 5 1/2%, 2/1/03 to 2/1/26 Aaa 1,170,119 1,115,067 6%, 4/1/11 Aaa 461,556 446,556 Government National Mortgage Association 7%, 10/15/23 to 8/15/27 (g) Aaa 1,111,502 1,094,199 TOTAL U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES (Cost $4,111,968) 4,099,496 U.S. GOVERNMENT AGENCY - 0.7% MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) Federal Home Loan Mortgage Corporation planned amortization class Series 1645 Class ZA, 5 1/2%, 4/15/05 Aaa $ 622,356 $ 606,797 Federal National Mortgage Association planned amortization class Series 1993-129 Class D, 6.10%, 6/25/05 Aaa 500,000 496,250 TOTAL U.S. GOVERNMENT AGENCY (Cost $1,097,458) 1,103,047 COMMERCIAL MORTGAGE SECURITIES - 0.3% BKB Commercial Mortgage Trust Series 1997-C1 Class A-1, 6 7/8%, 2/25/43 (c) Aaa 307,292 308,445 Wells Fargo Capital Markets Apartment Financing Trust 6.56%, 12/29/05 (c) Aaa 250,000 246,590 TOTAL COMMERCIAL MORTGAGE SECURITIES (Cost $548,447) 555,035 FOREIGN GOVERNMENT OBLIGATIONS (F) - 0.4% Manitoba Province yankee 6 3/8%, 10/15/99 A1 470,000 469,962 Quebec Province yankee 6.86%, 4/15/26 (e) A2 250,000 246,125 TOTAL FOREIGN GOVERNMENT OBLIGATIONS (Cost $709,904) 716,087 CASH EQUIVALENTS - 7.5% MATURITY AMOUNT Investments in repurchase agreements (U.S. Treasury obligations) in a joint trading account at 5.93%, dated 6/30/97 due 7/1/97 $ 12,490,057 12,488,000 TOTAL INVESTMENT IN SECURITIES - 100% (Cost $146,599,508) $ 167,465,455 LEGEND 1. Non-income producing 2. Debt obligation initially issued in zero coupon form which converts to coupon form at a specified rate and date. 3. Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $4,713,489 or 2.8% of net assets. 4. Standard & Poor's credit ratings are used in the absence of a rating by Moody's Investors Service, Inc. 5. Debt obligation initially issued at one coupon which converts to a higher coupon at a specified rate and date. 6. For foreign government obligations not individually rated by S&P or Moody's, the ratings listed are assigned to securities by FMR, the fund's investment adviser, based principally on S&P and Moody's ratings of the sovereign credit of the issuing government. 7. Security purchased on a delayed delivery or when-issued basis (see Note 2 of Notes to Financial Statements). OTHER INFORMATION Purchases and sales of securities, other than short-term securities, aggregated $89,201,982 and $47,453,749, respectively, of which U.S. government and government agency obligations aggregated $28,333,982 and $ 22,737,773, respectively. The fund placed a portion of its portfolio transactions with brokerage firms which are affiliates of FMR. The commissions paid to these affiliated firms were $9,631 for the period. The composition of long-term debt holdings as a percentage of total value of investment in securities, is as follows: MOODY'S RATINGS S&P RATINGS Aaa, Aa, A 19.4% AAA, AA, A 18.5% Baa 2.8% BBB 4.4% Ba 1.3% BB 0.4% B 2.4% B 2.5% Caa 0.3% CCC 0.2% Ca, C 0.0% CC, C 0.0% D 0.0% For some foreign government obligations, FMR has assigned the ratings of the sovereign credit of the issuing government. The percentage not rated by both S&P and Moody's amounted to 0.3%. FMR has determined that unrated debt securities that are lower quality account for 0.3% of the total value of investment in securities. INCOME TAX INFORMATION At June 30, 1997, the aggregate cost of investment securities for income tax purposes was $146,608,960. Net unrealized appreciation aggregated $20,856,495, of which $21,494,643 related to appreciated investment securities and $638,148 related to depreciated investment securities. At December 31, 1996, the fund had a capital loss carryforward of approximately $372,000 which will expire on December 31, 2004. VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 1997 (UNAUDITED) ASSETS Investment in $ 167,465,455 securities, at value (including repurchase agreements of $12,488,000) (cost $146,599,508) - - - See accompanying schedule Cash 1,115,612 Receivable for 670,618 investments sold Receivable for fund 297,225 shares sold Dividends receivable 160,685 Interest receivable 652,510 TOTAL ASSETS 170,362,105 LIABILITIES Payable for $ 1,451,436 investments purchased Regular delivery Delayed delivery 2,094,009 Accrued management 60,531 fee Other payables and 29,741 accrued expenses TOTAL LIABILITIES 3,635,717 NET ASSETS $166,726,388 Net Assets consist of: Paid in capital $141,786,400 Undistributed net 2,231,662 investment income Accumulated 1,842,367 undistributed net realized gain (loss) on investments and foreign currency transactions Net unrealized 20,865,959 appreciation (depreciation) on investments and assets and liabilities in foreign currencies NET ASSETS, for $166,726,388 12,251,612 shares outstanding NET ASSET VALUE, $ 13.61 offering price and redemption price per share ($166,726,388 (divided by) 12,251,612 shares) STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) INVESTMENT INCOME $ 854,788 Dividends Interest 1,790,207 TOTAL INCOME 2,644,995 EXPENSES Management fee $ 294,816 Transfer agent fees 48,191 Accounting fees and 39,379 expenses Non-interested 272 trustees' compensation Custodian fees and 8,008 expenses Registration fees 21 Audit 10,725 Legal 1,119 Miscellaneous 145 Total expenses 402,676 before reductions Expense reductions (5,162 397,514 ) NET INVESTMENT 2,247,481 INCOME REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on: Investment 2,241,895 securities Foreign currency (19 2,241,876 transactions ) Change in net unrealized appreciation (depreciation) on: Investment 13,357,453 securities Assets and (322 13,357,131 liabilities in ) foreign currencies NET GAIN (LOSS) 15,599,007 NET INCREASE $ 17,846,488 (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS OTHER INFORMATION $ 5,087 Expense reductions Directed brokerage arrangements Custodian interest 75 credits $ 5,162 STATEMENT OF CHANGES IN NET ASSETS INCREASE (DECREASE) SIX MONTHS YEAR ENDED IN NET ASSETS ENDED DECEMBER 31, JUNE 30, 1997 1996 (UNAUDITED) Operations $ 2,247,481 $ 2,701,775 Net investment income Net realized gain 2,241,876 (391,485) (loss) Change in net 13,357,131 6,443,286 unrealized appreciation (depreciation) NET INCREASE 17,846,488 8,753,576 (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS Distributions to (2,678,656) (26,804) shareholders From net investment income From net realized - (192,158) gain TOTAL DISTRIBUTIONS (2,678,656) (218,962) Share transactions 50,743,701 51,928,218 Net proceeds from sales of shares Reinvestment of 2,678,656 218,962 distributions Cost of shares (4,973,433) (727,396) redeemed NET INCREASE 48,448,924 51,419,784 (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS TOTAL INCREASE 63,616,756 59,954,398 (DECREASE) IN NET ASSETS NET ASSETS Beginning of period 103,109,632 43,155,234 End of period $ 166,726,388 $ 103,109,632 (including undistributed net investment income of $2,231,662 and $2,677,878, respectively) OTHER INFORMATION Shares Sold 3,992,425 4,616,047 Issued in 215,153 19,533 reinvestment of distributions Redeemed (390,109) (64,658) Net increase 3,817,469 4,570,922 (decrease) SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, 1997 SELECTED PER-SHARE (UNAUDITED) 1996 1995 DATA Net asset value, $ 12.23 $ 11.17 $ 10.00 beginning of period Income from Investment Operations Net investment .22 D .33 .14 income Net realized and 1.47 .78 1.25 unrealized gain (loss) Total from 1.69 1.11 1.39 investment operations Less Distributions From net (.31) (.01) H (.14) investment income From net realized - (.04) H (.08) gain Total distributions (.31) (.05) (.22) Net asset value, end $ 13.61 $ 12.23 $ 11.17 of period TOTAL RETURN B, C 14.05% 9.98% 13.92% RATIOS AND SUPPLEMENTAL DATA Net assets, end of $166,726 $103,110 $43,155 period (000 omitted) Ratio of expenses to .62% A .72% 1.42% average net assets E Ratio of expenses to .61% A, F .71% F 1.42% average net assets after expense reductions Ratio of net 3.47% A 3.63% 3.56% investment income to average net assets Portfolio turnover 81% A 163% 248% rate Average commission $ .0417 $ .0165 rate G A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED AND DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN. C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. E FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE BEEN HIGHER. F FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). G FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE STRUCTURES MAY DIFFER. H THE AMOUNTS SHOWN REFLECT CERTAIN RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES (SEE NOTE 1 OF NOTES TO FINANCIAL STATEMENTS). VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO PERFORMANCE AND INVESTMENT SUMMARY PERFORMANCE There are several ways to evaluate a fund's historical performance. You can look at the total percentage change in value, the average annual percentage change or the growth of a hypothetical $10,000 investment. Total return reflects the change in the value of an investment, assuming reinvestment of the fund's dividend income and capital gains (the profits earned upon the sale of securities that have grown in value). AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED PAST 1 LIFE OF JUNE 30,1997 YEAR FUND ASSET MANAGER: GROWTH 25.51% 23.29% S&P 500(registered trademark) 34.70% 33.11% AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what would have happened if the fund had performed at a constant rate each year. You can compare the fund's return to those of the Standard & Poor's 500 Index - a widely recognized, unmanaged index of common stocks. This benchmark reflects the reinvestment of dividends and capital gains, if any. UNDERSTANDING PERFORMANCE How a fund did yesterday is no guarantee of how it will do tomorrow. The stock market, for example, has a history of long-term growth and short-term volatility. In turn, the share price and return of a fund that invests in stocks will vary. That means if you sell your shares during a market downturn, you might lose money. But if you can ride out the market's ups and downs, you may have a gain. (checkmark) Figures for more than one year assume a steady compounded rate of return and are not the fund's year-by-year results, which fluctuated over the periods shown. The life of fund figures are from commencement of operations, January 3, 1995. If Fidelity had not reimbursed certain fund expenses, the life of fund total return figure would have been lower. PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, THE TOTAL RETURN WOULD HAVE BEEN LOWER. Past performance is no guarantee of future results. Principal and investment return will vary and you may have a gain or loss when you withdraw your money. $10,000 OVER LIFE OF FUND 1995/01/31 10000.00 10000.00 10000.00 1995/02/28 10149.70 10389.70 10319.41 1995/03/31 10289.42 10696.30 10539.38 1995/04/30 10558.88 11011.31 10785.08 1995/05/31 10708.58 11451.43 11198.64 1995/06/30 11137.72 11717.44 11396.90 1995/07/31 11546.91 12106.00 11632.64 1995/08/31 12065.87 12136.38 11694.83 1995/09/30 12245.51 12648.54 12051.93 1995/10/31 11776.45 12603.38 12082.78 1995/11/30 11986.03 13156.67 12486.40 1995/12/31 12277.71 13410.07 12699.16 1996/01/31 12569.78 13866.55 13007.00 1996/02/29 12613.39 13995.09 13008.05 1996/03/31 12840.37 14129.86 13058.25 1996/04/30 13143.01 14338.14 13160.97 1996/05/31 13348.36 14707.92 13378.10 1996/06/30 13402.41 14763.95 13465.02 1996/07/31 13067.35 14111.68 13090.93 1996/08/31 13164.62 14409.30 13265.02 1996/09/30 13705.04 15220.25 13818.40 1996/10/31 14104.95 15640.03 14160.36 1996/11/30 15023.67 16822.26 14932.58 1996/12/31 14737.79 16489.01 14697.36 1997/01/31 15367.80 17519.24 15354.72 1997/02/28 15514.22 17656.59 15451.58 1997/03/31 14781.88 16931.08 14967.66 1997/04/30 15401.55 17941.87 15652.51 1997/05/31 16336.68 19034.17 16360.18 1997/06/30 16821.15 19886.90 16925.34 Let's say hypothetically that $10,000 was invested in Asset Manager: Growth Portfolio on January 31, 1995, shortly after the fund began. As the chart shows, by June 30, 1997, the value of the investment would have grown to $16,821 - a 68.21% increase. With reinvested dividends and capital gains, if any, a $10,000 investment in the S&P 500 would have grown to $19,887 over the same period - a 98.87% increase. You can also look at how the Fidelity Aggressive Asset Allocation Composite Index, a hypothetical combination of unmanaged indices, did over the same period. The Aggressive Asset Allocation Composite index combines the cumulative total returns of three unmanaged indexes - the S&P 500 (98.87%), Lehman Brothers Aggregate Bond Index (24.12%), and the Salomon Brothers 3-month T-Bill Total Rate of Return Index (13.63%) - according to the fund's neutral mix*, assuming monthly rebalancing. With reinvested dividends and capital gains, if any, a $10,000 investment in the index would have grown to $16,925 - a 69.25% increase. * 70% STOCKS, 25% BONDS AND 5% SHORT-TERM INSTRUMENTS EFFECTIVE JANUARY 1, 1997; 65%, 30% AND 5%, RESPECTIVELY, PRIOR TO DECEMBER 31, 1996. INVESTMENT SUMMARY TOP FIVE STOCKS AS OF JUNE 30, 1997 % OF FUND'S INVESTMENTS Philip Morris Companies, Inc. 6.4 Federal National Mortgage Association 4.7 Federal Home Loan Mortgage Corporation 2.7 International Business Machines Corp. 2.3 General Motors Corp. 2.3 TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997 (STOCKS ONLY) % OF FUND'S INVESTMENTS Finance 15.1 Technology 12.9 Nondurables 7.5 Retail & Wholesale 7.0 Utilities 6.8 ASSET ALLOCATION AS OF JUNE 30, 1997* Row: 1, Col: 1, Value: 4.2 Row: 1, Col: 2, Value: 16.5 Row: 1, Col: 3, Value: 79.3 Stock class 79.3% Bond class 16.5% Short-term class 4.2% FOREIGN INVESTMENTS 10.4% * ASSET ALLOCATION IN THE PIE CHART REFLECTS THE CATEGORIZATION OF ASSETS AS DEFINED IN THE FUND'S PROSPECTUS. FINANCIAL STATEMENT CATEGORIZATIONS CONFORM TO ACCOUNTING STANDARDS AND WILL DIFFER FROM THE PIE CHART. % OF FUND'S INVESTMENTS VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO FUND TALK: THE MANAGER'S OVERVIEW An interview with Richard Habermann (top left), Portfolio Manager of Asset Manager: Growth Portfolio, George Vanderheiden (top right), sub-manager for stocks, Charles Morrison (bottom left), sub-manager for bonds, and John Todd (bottom right), sub-manager for short-term/money market instruments. Charles Morrison became sub-manager for bonds on February 3, 1997, and John Todd became sub-manager for short-term/money market instruments on December 1, 1996. Q. HOW DID THE FUND PERFORM, DICK? D.H. The fund's performance historically has been compared to that of the Standard & Poor's 500 Index. However, there are some significant differences between the make-up of the fund and the composition of the index. While the S&P 500 is made up exclusively of stocks, the fund invests in stocks, bonds and short-term/money market instruments. The fund allocates assets among these three categories in order to help control both volatility and risk relative to funds or indexes that invest only in stocks. That being said, the S&P 500 posted a strong 20.61% return during the six months that ended June 30, 1997, and 34.70% over the 12 months ended June 30, 1997. Since the fund is diversified into other asset classes that didn't perform as well as stocks, the fund's performance lagged that of the S&P 500. However, the fund did benefit from the performance of its equity investments and its small stake in high-yield bonds, while the bond and short-term money market portions of the fund performed in line with their respective markets. Q. WHAT WAS THE FUND'S ASSET MIX AT THE END OF THE PERIOD? D.H. At the end of June 1997, the fund's equity position stood at about 79%, 9% above the new neutral mix the fund instituted on January 1, 1997. That neutral mix comprises 70% stocks, 25% bonds and 5% short-term/money market instruments. In order to add to the equity portion, we reduced both the fund's bond and short-term/money market positions. At the end of the period, the fund held about 17% in bonds and approximately 4% in short-term/money market instruments. Q. WHY DID YOU INCREASE THE FUND'S STOCK INVESTMENTS? D.H. Because the investing environment was very favorable not only for all financial assets, but especially for stocks. We've had limited inflation and corporate earnings continued to be strong. Another key factor was the strength of the dollar, although that can act as a double-edged sword. On the negative side, a rising dollar acts as a drag on the economy by slowing exports and suppressing corporate earnings. This especially affects large, multinational corporations. These companies, however, generally were able to post earnings surprises through cost cutting and sustain their stock prices by buying back shares. The positive side of the strong dollar is that it helps to control inflation by keeping import prices down. In addition, investors, especially those abroad, tend to feel more comfortable investing in U.S. markets when the dollar is strong, helping to sustain prices for both stocks and bonds. Q. WHAT WAS THE ENVIRONMENT LIKE FOR THE BOND MARKET? D.H. During the latter stages of the first quarter and the beginning of the second quarter, the bond market struggled because of concerns that continued economic growth might lead to inflation. Employment had reached a level where historically there should have been increased upward pressure on wages. The Federal Reserve Board tried to anticipate and head off incipient inflation by raising the fed funds rate - the rate banks charge each other for overnight loans - by 0.25% to 5.50% at the end of March. This move was well-telegraphed, so the rate increase was already priced into the market when the Fed acted. The Fed chose to keep rates steady in May, a stance that surprised many in the market who were anticipating another rate increase. The Fed stood pat mainly because economic growth slowed and there were few if any signs of inflationary pressure. From that point on, the bond market responded favorably. Q. TURNING TO YOU, GEORGE, HOW DID YOU MANAGE THE STOCK PORTION OF THE FUND IN A VIRTUALLY NO-INFLATION ENVIRONMENT? G.V. I concentrated on four areas during the period. First, I looked at innovators and unit growers because these companies use unit growth to increase earnings and don't have to rely on price increases. Technology, health care and telecommunications fall within these areas. Second were the interest sensitive sectors that benefited from low interest rates, including mortgage companies, insurance, finance and construction. Third, I looked at global growers - companies with proprietary advantages, such as low costs, unique distribution channels or strong brands - which are seizing market share on a global basis. Fourth were the acquisitive companies in consolidating industries. Certain industries have stopped growing, but certain companies have been able to show earnings growth by acquiring market share and paring costs. Q. PHILIP MORRIS IS THE FUND'S LARGEST STOCK HOLDING. WHAT IS YOUR POSITION ON TOBACCO STOCKS? G.V. I own tobacco stocks because they operate a profitable business that historically has offered above-average returns to shareholders over the long term. In the past, the stocks have provided better-than-average earnings growth, lower-than-average price-to-earnings ratios and high yields. Nothing this year has changed that. We have determined that the tobacco stocks are selling at a "litigation discount" in excess of any reasonable estimate of potential liabilities. The cost of the proposed settlement is high, but should be passed completely along to consumers. Q. STOCK VALUATIONS WERE QUITE HIGH. WHY WAS THAT, AND WILL THEY STAY INFLATED? G.V. We had a nearly perfect investing environment during the period - experiencing growth without inflation. Accelerating inflation is usually the killer of all bond and equity bull markets, but inflation just kept receding as the economic expansion continued. During the worst bear market I ever encountered - the 1973-1974 bear that took prices down about 50% - everything that could go wrong did go wrong. Today is an environment where everything that could go right has gone right - from a declining budget deficit, to falling inflation, to surging earnings, to big flows into mutual funds and rising consumer confidence. If any of these factors change for the worse, valuations should deflate. My biggest concern going forward is that the low level of inflation and pricing power in a strong economy will deteriorate to deflation in a slowing or contracting economy, thereby leading to sizable earnings declines. Q. CHARLIE, WHAT CHANGES HAVE YOU MADE SINCE TAKING OVER THE FUND'S BOND INVESTMENTS? C.M. For most of the period, I focused on positioning the bond portion of the portfolio more aggressively by increasing its weighting in securities that offer a yield advantage over Treasuries, such as corporate securities, while decreasing the percentage held in Treasuries. Part of that move was accomplished with Dick's reallocation of assets away from bonds. In reducing the fund's stake in bonds, I sold Treasuries. At the same time, I tended to focus any new purchases on investments that offered a yield advantage over Treasuries. Specific areas of focus included BBB-rated corporate bonds and commercial mortgage-backed securities. Q. WHAT KINDS OF BONDS DID YOU FOCUS ON IN THE CORPORATE MARKET? C.M. One area of interest over the period was in the bank market. I continued to add long-term bank paper in the form of capital securities. Last fall, the Federal Reserve Board ruled that domestic banking companies could issue capital securities, which offered the banks significant tax advantages, as well as the opportunity to strengthen their balance sheets. Numerous banks took advantage of this opportunity and inundated the market with these securities. The large amount of supply in a relatively concentrated period of time allowed us to purchase many capital securities at cheap levels. This market has performed well following the initial supply. Q. JOHN, WHAT HAS THE BACKDROP FOR THE SHORT-TERM AND MONEY MARKETS BEEN LIKE SINCE YOU CAME ON BOARD? J.T. As Dick pointed out, the Fed raised the fed funds rate at its March meeting, but then chose not to continue to raise rates at its late May meeting. For now, the Fed appears to be in a holding pattern. Some believe that the Fed has abandoned the notion of being pre-emptive - seeking to head off inflation before it actually appears - and instead will respond only to actual evidence of inflation rather than trying to respond to underlying inflationary pressures. Q. WHAT SORT OF STRATEGY DID YOU PURSUE? J.T. Because Fed Chairman Alan Greenspan warned that the Fed might raise rates, I reduced the short-term/money market portion's average maturity to about 50 days in the first quarter. Once the market adjusted to the new, higher rate level and expectations of further Fed interest rate increases were built into the yield curve, the maturity was extended. That's because many longer-maturity instruments were attractively valued because their prices and yields reflected a more aggressive Fed interest rate posture than I felt was likely. Q. TURNING BACK TO YOU, DICK, WHAT'S YOUR OUTLOOK? D.H. I believe that a lack of pricing power, among other things, makes it clear that corporations are not operating with a very strong wind at their backs. At the same time, U.S. companies - helped by advances in technology that help cut costs - are operating very efficiently, leading to many positive earnings surprises. I don't see much that would change that over the near future. Still, the economic pattern over the past year has been like a seesaw. That is, the economy has grown in spurts, picking up for one quarter then tailing off into weakness during the next. If the economy shows sustained strength, interest rates could rise and put some pressure on the markets. On the other hand, one could argue that rates might fall because inflation is at such a low level. As always, we'll have to wait and see what the future holds. FUND FACTS GOAL: maximum total return over the long term by allocating assets among stocks, bonds and short-term instruments anywhere in the world START DATE: September 6, 1989 SIZE: as of June 30, 1997, more than $4 billion MANAGER: Richard Habermann, since March 1996; joined Fidelity in 1968 (checkmark) VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO INVESTMENTS JUNE 30, 1997 (UNAUDITED) Showing Percentage of Total Value of Investment in Securities COMMON STOCKS - 78.2% SHARES VALUE (NOTE 1) AEROSPACE & DEFENSE - 1.6% AEROSPACE & DEFENSE - 1.1% Boeing Co. 80,600 $ 4,276,838 Gulfstream Aerospace Corp. (a) 5,800 171,100 4,447,938 DEFENSE ELECTRONICS - 0.4% Raytheon Co. 34,000 1,734,000 SHIP BUILDING & REPAIR - 0.1% Avondale Industries, Inc. (a) 2,800 58,800 Newport News Shipbuilding, Inc. 8,200 159,388 218,188 TOTAL AEROSPACE & DEFENSE 6,400,126 BASIC INDUSTRIES - 4.4% CHEMICALS & PLASTICS - 2.8% Air Products & Chemicals, Inc. 9,800 796,250 du Pont (E.I.) de Nemours & Co. 108,100 6,796,788 Raychem Corp. 31,900 2,372,563 Union Carbide Corp. 30,000 1,411,875 11,377,476 PACKAGING & CONTAINERS - 0.8% Owens-Illinois, Inc. (a) 95,100 2,948,100 PAPER & FOREST PRODUCTS - 0.8% Boise Cascade Corp. 19,400 685,063 Champion International Corp. 29,000 1,602,250 International Paper Co. 11,500 558,469 Willamette Industries, Inc. 3,900 273,000 3,118,782 TOTAL BASIC INDUSTRIES 17,444,358 CONSTRUCTION & REAL ESTATE - 0.9% CONSTRUCTION - 0.7% Centex Corp. 11,800 479,375 D.R. Horton, Inc. 32,900 341,338 Fleetwood Enterprises, Inc. 48,733 1,452,853 Kaufman & Broad Home Corp. 24,200 425,013 U.S. Home Corp. (a) 2,600 69,063 2,767,642 ENGINEERING - 0.2% Fluor Corp. 18,900 1,043,044 TOTAL CONSTRUCTION & REAL ESTATE 3,810,686 DURABLES - 4.3% AUTOS, TIRES, & ACCESSORIES - 3.6% Circuit City Stores, Inc. - CarMax Group 2,500 35,781 Cummins Engine Co., Inc. 19,500 1,375,969 Dana Corp. 7,500 285,000 Discount Auto Parts, Inc. (a) 12,500 243,750 Federal-Mogul Corp. 8,300 290,500 General Motors Corp. 163,100 9,081,631 Gentex Corp. (a) 7,000 138,250 Goodyear Tire & Rubber Co. 8,100 512,831 Honda Motor Co. Ltd. 13,000 391,208 Magna International, Inc. Class A 21,200 1,274,472 Superior Industries International, Inc. 32,900 871,850 14,501,242 CONSUMER ELECTRONICS - 0.2% Newell Co. 15,900 630,038 SHARES VALUE (NOTE 1) TEXTILES & APPAREL - 0.5% Burlington Industries, Inc. (a) 40,400 $ 484,800 Liz Claiborne, Inc. 10,900 508,213 NIKE, Inc. Class B 15,000 875,625 Reebok International Ltd. 2,400 112,200 1,980,838 TOTAL DURABLES 17,112,118 ENERGY - 6.5% ENERGY SERVICES - 0.3% McDermott International, Inc. 37,600 1,097,450 OIL & GAS - 6.2% Amerada Hess Corp. 15,700 872,331 Anadarko Petroleum Corp. 1,700 102,000 Atlantic Richfield Co. 28,700 2,023,350 British Petroleum PLC ADR 52,146 3,904,432 Burlington Resources, Inc. 40,100 1,769,413 Canada Occidental Petroleum Ltd. 700 15,717 Chevron Corp. 2,300 170,056 Elf Aquitaine SA sponsored ADR 8,100 440,944 Enron Oil & Gas Co. 5,100 92,438 Fortune Petroleum Corp. warrants 9/28/98 (a) 100,000 75,000 Kerr-McGee Corp. 7,600 481,650 Louisiana Land & Exploration Co. 31,500 1,799,438 Mobil Corp. 4,600 321,425 Noble Affiliates, Inc. 3,000 116,063 Occidental Petroleum Corp. 67,800 1,699,238 Royal Dutch Petroleum Co. Ord. 3,200 166,346 Royal Dutch Petroleum Co. 129,600 7,047,000 Santa Fe Energy Resources, Inc. (a) 23,400 343,688 Sun Co., Inc. 9,500 294,500 Tosco Corp. 68,100 2,038,744 Total SA: Class B 2,420 244,461 sponsored ADR 15,065 762,666 Union Pacific Resources Group, Inc. 5,300 131,838 24,912,738 TOTAL ENERGY 26,010,188 FINANCE - 14.9% BANKS - 0.4% Canadian Imperial Bank of Commerce 200 5,041 Credit Suisse Group (Reg.) 8,400 1,077,660 NationsBank Corp. 11,500 741,750 1,824,451 CLOSED END INVESTMENT COMPANY - 0.1% First NIS Regional Fund (a) 25,000 462,500 CREDIT & OTHER FINANCE - 0.9% Fleet Financial Group, Inc. 55,200 3,491,400 FEDERAL SPONSORED CREDIT - 7.4% Federal Home Loan Mortgage Corporation 319,400 10,979,375 Federal National Mortgage Association 428,200 18,680,225 29,659,600 INSURANCE - 5.6% AFLAC, Inc. 12,700 600,075 Aegon NV (Reg.) 12,898 903,666 Allmerica Financial Corp. 14,100 562,238 Allstate Corp. 83,100 6,066,300 American International Group, Inc. 33,900 5,063,813 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) FINANCE - CONTINUED INSURANCE - CONTINUED CIGNA Corp. 5,300 $ 940,750 Equitable of Iowa Companies 2,000 112,000 General Re Corp. 8,700 1,583,400 Loews Corp. 5,700 570,713 MGIC Investment Corp. 40,400 1,936,675 PMI Group, Inc. 14,700 916,913 Provident Companies, Inc. 1,200 64,200 Providian Financial Corp. (a) 31,200 1,002,300 Reliastar Financial Corp. 5,700 416,813 Torchmark Corp. 18,700 1,332,375 Travelers Property Casualty Corp. Class A 4,500 179,438 UNUM Corp. 3,300 138,600 22,390,269 SAVINGS & LOANS - 0.3% Golden West Financial Corp. 17,300 1,211,000 SECURITIES INDUSTRY - 0.2% United Asset Management Corp. 28,300 801,244 TOTAL FINANCE 59,840,464 HEALTH - 6.3% DRUGS & PHARMACEUTICALS - 2.3% American Home Products Corp. 1,400 107,100 Amgen, Inc. 27,300 1,586,813 Astra AB Class A Free shares 136,700 2,549,515 Merck & Co., Inc. 6,800 703,800 Novartis AG (Reg.) 1,296 2,069,698 Schering-Plough Corp. 44,600 2,135,225 9,152,151 MEDICAL EQUIPMENT & SUPPLIES - 0.8% Allegiance Corp. 2,660 72,485 Bard (C.R.), Inc. 13,000 472,063 Baxter International, Inc. 5,400 282,150 Biomet, Inc. 30,900 575,513 Boston Scientific Corp. (a) 1,600 98,300 Johnson & Johnson 3,500 225,313 St. Jude Medical, Inc. (a) 35,800 1,396,200 3,122,024 MEDICAL FACILITIES MANAGEMENT - 3.2% Columbia/HCA Healthcare Corp. 222,750 8,756,859 Health Management Associates, Inc. Class A (a) 1,500 42,750 Humana, Inc. (a) 59,700 1,380,563 Tenet Healthcare Corp. (a) 41,800 1,235,713 United HealthCare Corp. 26,100 1,357,200 12,773,085 TOTAL HEALTH 25,047,260 HOLDING COMPANIES - 0.2% U.S. Industries, Inc. (a) 20,900 744,563 INDUSTRIAL MACHINERY & EQUIPMENT - 1.6% ELECTRICAL EQUIPMENT - 0.9% Emerson Electric Co. 7,800 429,488 General Electric Co. 35,300 2,307,738 Scientific-Atlanta, Inc. 17,800 389,375 Sensormatic Electronics Corp. 6,200 79,825 Westinghouse Electric Corp. 26,500 612,813 3,819,239 SHARES VALUE (NOTE 1) INDUSTRIAL MACHINERY & EQUIPMENT - 0.5% Caterpillar, Inc. 15,600 $ 1,675,050 JLK Direct Distribution, Inc. Class A 100 2,563 Ultratech Stepper, Inc. (a) 19,000 434,625 2,112,238 POLLUTION CONTROL - 0.2% Browning-Ferris Industries, Inc. 18,800 625,100 TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 6,556,577 MEDIA & LEISURE - 2.4% BROADCASTING - 0.1% Cox Communications, Inc. Class A (a) 4,600 110,400 HSN, Inc. (a) 3,350 104,688 TCI Group Class A (a) 15,600 232,050 447,138 ENTERTAINMENT - 0.0% Cedar Fair LP (depositary unit) 1,300 56,875 Royal Caribbean Cruises Ltd. 3,100 108,306 165,181 LEISURE DURABLES & TOYS - 0.6% Nintendo Co. Ltd. Ord. 27,300 2,286,013 LODGING & GAMING - 0.9% Circus Circus Enterprises, Inc. (a) 42,000 1,034,250 HFS, Inc. (a) 7,200 417,600 Harrah's Entertainment, Inc. (a) 19,500 355,875 Mirage Resorts, Inc. (a) 42,200 1,065,550 Sun International Hotels Ltd. Ord. (a) 19,400 716,588 3,589,863 PUBLISHING - 0.1% Cognizant Corp. 11,500 465,750 RESTAURANTS - 0.7% Brinker International, Inc. (a) 14,100 200,925 Lone Star Steakhouse Saloon (a) 10,300 267,800 McDonald's Corp. 43,100 2,082,269 Papa John's International, Inc. (a) 3,800 139,650 2,690,644 TOTAL MEDIA & LEISURE 9,644,589 NONDURABLES - 7.5% HOUSEHOLD PRODUCTS - 0.1% Premark International, Inc. 4,800 128,400 TOBACCO - 7.4% Philip Morris Companies, Inc. 576,300 25,573,313 RJR Nabisco Holdings Corp. 121,820 4,020,060 UST, Inc. 5,400 149,850 29,743,223 TOTAL NONDURABLES 29,871,623 PRECIOUS METALS - 0.1% Barrick Gold Corp. 4,600 100,120 Newmont Mining Corp. 3,886 151,554 251,674 RETAIL & WHOLESALE - 7.0% APPAREL STORES - 0.3% Gap, Inc. 10,600 412,075 TJX Companies, Inc. 35,200 928,400 1,340,475 DRUG STORES - 0.0% CVS Corp. 3,900 199,875 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) RETAIL & WHOLESALE - CONTINUED GENERAL MERCHANDISE STORES - 2.2% Federated Department Stores, Inc. (a) 30,300 $ 1,052,925 Proffitts, Inc. (a) 1,100 48,263 Wal-Mart Stores, Inc. 226,300 7,651,769 8,752,957 GROCERY STORES - 0.3% Safeway, Inc. (a) 24,500 1,130,063 RETAIL & WHOLESALE, MISCELLANEOUS - 4.2% Circuit City Stores, Inc. - Circuit City Group 77,500 2,756,094 Corporate Express, Inc. 20,400 294,525 Home Depot, Inc. (The) 96,100 6,624,894 Lowe's Companies, Inc. 80,400 2,984,850 Officemax, Inc. (a) 56,000 808,500 Office Depot, Inc. (a) 8,700 169,106 Rex Stores Corp. (a) 6,800 68,850 Staples, Inc. (a) 23,400 544,050 Toys "R" Us, Inc. (a) 46,900 1,641,500 U.S. Office Products Co. (a) 15,900 485,944 Viking Office Products, Inc. (a) 21,200 402,800 16,781,113 TOTAL RETAIL & WHOLESALE 28,204,483 SERVICES - 0.0% ADVERTISING - 0.0% Interpublic Group of Companies, Inc. 2,500 153,281 LEASING & RENTAL - 0.0% Hanover Compressor Co. 300 5,850 PRINTING - 0.0% Donnelley (R.R.) & Sons Co. 600 22,058 SERVICES - 0.0% PEAPOD, Inc. 1,100 12,375 TOTAL SERVICES 193,564 TECHNOLOGY - 12.9% COMMUNICATIONS EQUIPMENT - 0.8% Alcatel Alsthom Compagnie Generale d'Electricite SA sponsored ADR 2,100 53,025 Alcatel Alsthom Compagnie Generale d'Electricite SA 17,100 2,140,335 Andrew Corp. (a) 6,300 177,188 Cisco Systems, Inc. (a) 8,500 570,563 Nokia Corp. AB sponsored ADR 3,700 272,875 3,213,986 COMPUTER SERVICES & SOFTWARE - 2.4% American Management Systems, Inc. (a) 2,800 74,900 Automatic Data Processing, Inc. 25,700 1,207,900 CUC International, Inc. (a) 18,200 469,788 Ceridian Corp. (a) 16,500 697,125 CompUSA, Inc. (a) 10,400 223,600 Electronic Data Systems Corp. 44,100 1,808,100 First Data Corp. 33,500 1,471,906 Microsoft Corp. (a) 12,000 1,516,500 Netscape Communications Corp. (a) 2,900 92,981 Oracle Systems Corp. (a) 20,900 1,052,838 Paychex, Inc. 16,350 621,300 Policy Management Systems Corp. (a) 10,000 470,000 9,706,938 SHARES VALUE (NOTE 1) COMPUTERS & OFFICE EQUIPMENT - 4.6% Bay Networks, Inc. (a) 25,300 $ 672,031 Compaq Computer Corp. (a) 40,300 3,999,775 Hewlett-Packard Co. 17,600 985,600 Ingram Micro, Inc. Class A (a) 3,500 84,438 International Business Machines Corp. 103,500 9,334,406 SCI Systems, Inc. (a) 42,200 2,690,250 Tech Data Corp. (a) 21,200 666,475 18,432,975 ELECTRONIC INSTRUMENTS - 1.3% Applied Materials, Inc. (a) 14,500 1,026,781 Cognex Corp. (a) 8,900 235,850 KLA Instruments Corp. (a) 3,200 156,000 Lam Research Corp. (a) 20,400 756,075 Novellus Systems, Inc. (a) 12,200 1,055,300 Teradyne, Inc. (a) 16,500 647,625 Thermo Electron Corp. (a) 18,600 632,400 Varian Associates, Inc. 10,600 575,050 5,085,081 ELECTRONICS - 3.8% AMP, Inc. 59,000 2,463,250 Atmel Corp. (a) 3,900 109,200 Intel Corp. 28,900 4,098,381 Methode Electronics, Inc. Class A 10,200 202,725 Microchip Technology, Inc. (a) 3,350 99,663 Micron Technology, Inc. 67,900 2,711,756 Molex, Inc. 10,875 379,266 Motorola, Inc. 2,300 174,800 Solectron Corp. (a) 49,100 3,437,000 Storage Technology Corp. (a) 8,600 382,700 Texas Instruments, Inc. 13,800 1,160,063 Thomas & Betts Corp. 700 36,794 15,255,598 TOTAL TECHNOLOGY 51,694,578 TRANSPORTATION - 0.9% AIR TRANSPORTATION - 0.2% Continental Airlines, Inc. Class B (a) 4,100 143,244 Delta Air Lines, Inc. 2,800 229,600 Northwest Airlines Corp. Class A (a) 6,800 247,350 620,194 RAILROADS - 0.5% Bombardier, Inc. Class B 15,700 355,927 Burlington Northern Santa Fe Corp. 7,000 629,125 CSX Corp. 21,700 1,204,350 2,189,402 SHIPPING - 0.1% Stolt-Nielsen SA Class B sponsored ADR 16,500 319,688 Stolt-Nielsen SA 1,700 32,088 351,776 TRUCKING & FREIGHT - 0.1% Roadway Express, Inc. 3,300 77,138 Yellow Corp. (a) 13,800 308,775 385,913 TOTAL TRANSPORTATION 3,547,285 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) UTILITIES - 6.7% CELLULAR - 1.9% AirTouch Communications, Inc. (a) 94,700 $ 2,592,413 360 Degrees Communications Co. (a) 4,700 80,488 Vodafone Group PLC sponsored ADR 83,700 4,054,219 Vodafone Group PLC 172,641 842,069 7,569,189 ELECTRIC UTILITY - 0.2% American Electric Power Co., Inc. 7,900 331,800 Entergy Corp. 23,800 651,525 983,325 GAS - 0.1% Enron Corp. 10,300 420,369 TELEPHONE SERVICES - 4.5% AT&T Corp. 28,300 992,269 Ameritech Corp. 25,900 1,759,581 Bell Atlantic Corp. 18,700 1,418,863 BellSouth Corp. 43,700 2,026,588 Deutsche Telekom AG 10,800 259,311 MCI Communications Corp. 88,000 3,368,750 NextLink Communications, Inc. warrants 2/1/09 (a) 5,940 59 NYNEX Corp. 36,700 2,114,838 Qwest Communications International, Inc. 700 19,075 SBC Communications, Inc. 35,800 2,215,125 Sprint Corp. 67,700 3,562,713 WorldCom, Inc. (a) 9,600 307,200 18,044,372 TOTAL UTILITIES 27,017,255 TOTAL COMMON STOCKS (Cost $264,403,573) 313,391,391 NONCONVERTIBLE PREFERRED STOCKS - 1.1% CONSTRUCTION & REAL ESTATE - 0.0% REAL ESTATE INVESTMENT TRUSTS - 0.0% Walden Residential Properties, Inc. 9.20% 5,800 146,450 FINANCE - 0.2% CREDIT & OTHER FINANCE - 0.1% American Annuity Group Capital Trust II 8 3/4% 160 159,200 SAVINGS & LOANS - 0.1% California Federal Preferred Capital Corp. 9 1/8% 20,560 524,280 TOTAL FINANCE 683,480 HEALTH - 0.1% MEDICAL FACILITIES MANAGEMENT - 0.1% Fresenius Medical Care Capital Trust 9% 166 170,109 MEDIA & LEISURE - 0.7% BROADCASTING - 0.6% American Radio Systems Corp. 11 3/8% pay-in-kind 3,025 322,163 Cablevision System Corp. 11 1/8% depositary shares pay-in-kind 4,910 493,455 SHARES VALUE (NOTE 1) PanAmSat Corp. 12 3/4% pay-in-kind 24 $ 29,280 SFX Broadcasting, Inc. 12 5/8% 3,143 338,658 Sinclair Capital 11 5/8% (e) 3,100 327,050 Time Warner, Inc., Series M, 10 1/4% pay-in-kind 964 1,065,220 2,575,826 PUBLISHING - 0.1% K-III Communications Corp.: Series B, $11.625 pay-in-kind 206 22,480 Series D, $10 3,386 341,140 363,620 TOTAL MEDIA & LEISURE 2,939,446 UTILITIES - 0.1% TELEPHONE SERVICES - 0.1% NextLink Communications, Inc. 14% pay-in-kind 6,150 318,263 TOTAL NONCONVERTIBLE PREFERRED STOCKS (Cost $4,110,913) 4,257,748 NONCONVERTIBLE CORPORATE BONDS - 11.1% MOODY'S PRINCIPAL RATINGS (D) AMOUNT AEROSPACE & DEFENSE - 0.3% AEROSPACE & DEFENSE - 0.1% BE Aerospace, Inc.: 9 3/4%, 3/1/03 Ba3 $ 400,000 417,000 9 7/8%, 2/1/06 B2 10,000 10,525 Rohr, Inc. 11 5/8%, 5/15/03 Ba3 50,000 55,625 483,150 DEFENSE ELECTRONICS - 0.0% Tracor, Inc. 8 1/2%, 3/1/07 B1 130,000 131,300 SHIP BUILDING & REPAIR - 0.2% Newport News Shipbuilding, Inc.: 8 5/8%, 12/1/06 Ba2 155,000 160,038 9 1/4%, 12/1/06 B1 540,000 562,950 722,988 TOTAL AEROSPACE & DEFENSE 1,337,438 BASIC INDUSTRIES - 0.8% CHEMICALS & PLASTICS - 0.1% Acetex Corp. yankee 9 3/4%, 10/1/03 B1 120,000 121,800 Foamex LP/Foamex Capital Corp. 9 7/8%, 6/15/07 (e) B3 60,000 60,750 General Chemical Corp. 9 1/4%, 8/15/03 B2 150,000 153,375 Pioneer Americas Acquisition Corp. 9 1/4%, 6/15/07 (e) B1 40,000 39,400 Sterling Chemicals Holdings, Inc. 11 1/4%, 4/1/07 B3 240,000 254,400 629,725 IRON & STEEL - 0.1% Neenah Corp. 11 1/8%, 5/1/07 (e) B3 210,000 222,600 NONCONVERTIBLE CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) BASIC INDUSTRIES - CONTINUED METALS & MINING - 0.0% Well Aluminum Corp. 10 1/8%, 6/1/05 (e) B2 $ 20,000 $ 20,600 PACKAGING & CONTAINERS - 0.3% BWAY Corp. 10 1/4%, 4/15/07 (e) B2 190,000 204,250 Owens Illinois, Inc.: 7.85%, 5/15/04 Ba1 150,000 152,063 9.95%, 10/15/04 Ba3 210,000 222,600 8.10%, 5/15/07 Ba1 210,000 212,888 Silgan Holdings, Inc. 9%, 6/1/09 (e) B1 260,000 261,950 1,053,751 PAPER & FOREST PRODUCTS - 0.3% Asia Pulp & Paper Finance II Mauritius Ltd. 12%, 3/15/04 (e) B3 110,000 112,750 Florida Coast Paper Co. LLC/Florida Coast Paper Finance Corp., Series B, 12 3/4%, 6/1/03 Caa 100,000 103,250 Gaylord Container Corp. 11 1/2%, 5/15/01 B3 40,000 42,050 Repap Wisconsin, Inc.: 9 1/4%, 2/1/02 B2 230,000 231,150 9 7/8%, 5/1/06 Caa 30,000 30,225 Repap New Brunswick, Inc. yankee 10 5/8%, 4/15/05 Caa 90,000 84,825 Riverwood International Corp. 10 1/4%, 4/1/06 B3 220,000 216,700 Stone Container Corp. 10 3/4%, 10/1/02 B1 300,000 316,500 1,137,450 TOTAL BASIC INDUSTRIES 3,064,126 CONSTRUCTION & REAL ESTATE - 0.2% BUILDING MATERIALS - 0.1% Building Materials Corp. of America 0%, 7/1/04 (b) B1 420,000 382,200 Falcon Building Products, Inc. 9 1/2%, 6/15/07 (e) B3 20,000 19,850 Nortek, Inc. 9 1/4%, 3/15/07 Ba3 90,000 91,800 493,850 CONSTRUCTION - 0.1% Greystone Homes, Inc. 10 3/4%, 3/1/04 Ba3 200,000 218,500 REAL ESTATE - 0.0% Iron Mountain, Inc. 10 1/8%, 10/1/06 B3 100,000 106,250 TOTAL CONSTRUCTION & REAL ESTATE 818,600 MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) DURABLES - 0.4% AUTOS, TIRES, & ACCESSORIES - 0.1% Aftermarket Technology Corp. 12%, 8/1/04 B3 $ 135,000 $ 150,525 Blue Bird Body Co. 10 3/4%, 11/15/06 B2 230,000 243,800 Delco Remy International, Inc. 10 5/8%, 8/1/06 (e) B2 50,000 53,000 Tennessee Gas Pipeline Co. 7%, 3/15/27 Baa3 90,000 89,946 537,271 HOME FURNISHINGS - 0.1% Interlake Corp. 12 1/8%, 3/1/02 B3 240,000 251,400 Knoll, Inc. 10 7/8%, 3/15/06 B1 26,000 28,763 280,163 TEXTILES & APPAREL - 0.2% GFSI, Inc. 9 5/8%, 3/1/07 (e) B3 290,000 292,900 Levi Strauss & Co. 7%, 11/1/06 (e) Baa2 310,000 306,652 599,552 TOTAL DURABLES 1,416,986 ENERGY - 0.5% ENERGY SERVICES - 0.1% Falcon Drilling, Inc. 9 3/4%, 1/15/01 Ba3 120,000 123,000 Parker Drilling Co. 9 3/4%, 11/15/06 B1 30,000 31,350 Pride Petroleum Services, Inc. 9 3/8%, 5/1/07 Ba3 210,000 217,350 371,700 OIL & GAS - 0.4% Energy Corp. America 9 1/2%, 5/15/07 (e) B2 350,000 344,750 Flores & Rucks, Inc. 9 3/4%, 10/1/06 B3 220,000 229,900 Forcenergy, Inc. 8 1/2%, 2/15/07 B2 150,000 146,625 Gulf Canada Resources Ltd. yankee 9 5/8%, 7/1/05 Ba2 130,000 139,263 Husky Oil Ltd. yankee 6 7/8%, 11/15/03 Baa3 85,000 83,798 Occidental Petroleum Corp. 9 3/4%, 6/15/01 Baa3 100,000 109,823 Ocean Energy, Inc. 8 7/8%, 7/15/07 (e) B3 240,000 240,000 Pennzoil Co. 9 5/8%, 11/15/99 Baa3 70,000 74,579 Petsec Energy, Inc. 9 1/2%, 6/15/07 (e) B3 30,000 30,000 NONCONVERTIBLE CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) ENERGY - CONTINUED OIL & GAS - CONTINUED Ras Laffan Liquid Natural Gas Co. Ltd. yankee 7.628%, 9/15/06 (e) A3 $ 70,000 $ 70,897 United Refining Co. 10 3/4%, 6/15/07 (e) B2 100,000 99,000 1,568,635 TOTAL ENERGY 1,940,335 FINANCE - 2.5% ASSET-BACKED SECURITIES - 0.5% Airplanes Pass Through Trust 10 7/8%, 3/15/19 Ba2 1,100,000 1,271,065 CPS Auto Grantor Trust 6.55%, 12/15/02 Aaa 105,786 106,017 Green Tree Financial Corp.: 6 1/2%, 6/15/27 Aaa 100,000 100,218 6.80%, 6/15/27 Aaa 100,000 100,500 6.45%, 9/15/28 Aaa 110,000 109,691 Olympic Automobile Receivables Trust: 6.40%, 9/15/01 Aaa 150,000 150,382 6.70%, 3/15/02 Aaa 70,000 70,306 WFS Financial Owner Trust 6.55%, 10/20/04 Aaa 140,000 139,620 2,047,799 BANKS - 0.5% ABN Amro Bank NV 6 5/8%, 10/31/01 Aa3 250,000 248,968 Banc One Corp. 6.70%, 3/24/00 Aa3 150,000 150,699 BanPonce Corp. 6.665%, 3/5/01 A3 150,000 149,291 BanPonce Trust I 8.327%, 2/1/27 (e) Baa1 230,000 232,433 Capital One Bank 6.42%, 11/12/99 Baa3 500,000 497,375 Den Danske Bank AS 7.40%, 6/15/10 (e)(g) A1 140,000 139,896 Korea Development Bank yankee 7 1/4%, 5/15/06 A1 180,000 178,565 Midland Bank PLC yankee 7 5/8%, 6/15/06 A1 125,000 128,731 NB Capital Trust IV 8 1/4%, 4/15/27 A1 150,000 153,711 Nationsbank Corp. 5.67%, 2/9/01 A1 250,000 241,323 2,120,992 CREDIT & OTHER FINANCE - 0.9% AT&T Capital Corp.: 6.39%, 1/22/99 Baa3 50,000 50,096 6.26%, 2/18/99 Baa3 350,000 349,262 6.65%, 4/30/99 Baa3 250,000 250,700 Ahmanson Capital Trust I 8.36%, 12/1/26 (e) Baa3 250,000 252,088 MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) CIT Group Holdings, Inc. 6 1/4%, 10/4/99 Aa3 $ 250,000 $ 249,375 Chrysler Financial Corp. 6 3/8%, 1/28/00 A3 230,000 229,310 First Security Capital I 8.41%, 12/15/26 A3 110,000 112,141 Ford Motor Credit Co.: 6.65%, 5/22/00 A1 400,000 400,396 7%, 9/25/01 A1 325,000 327,743 General Electric Capital Corp. 6.94%, 4/13/09 (c) Aaa 250,000 252,353 GreenPoint Capital Trust I 9.10%, 6/1/27 (e) Ba1 170,000 171,020 Heller Financial, Inc. 7 7/8%, 11/1/99 A2 180,000 184,900 Household Finance Corp. 5.7825%, 6/4/98 (g) A2 500,000 500,000 KeyCorp Institutional Capital Series A, 7.826%, 12/1/26 A1 130,000 126,257 Nordstrom Credit, Inc. 7 1/4%, 4/30/02 A2 100,000 101,670 TransAmerican Energy Corp. 11 1/2%, 6/15/02 (e) B3 40,000 39,000 Triton Energy Ltd./Triton Energy Corp. 9 1/4%, 4/15/05 Ba2 110,000 116,463 3,712,774 INSURANCE - 0.2% Reliance Group: 9%, 11/15/00 Ba3 360,000 370,800 9 3/4%, 11/15/03 B1 270,000 281,475 SunAmerica, Inc. 6.20%, 10/31/99 Baa1 250,000 248,228 900,503 SAVINGS & LOANS - 0.4% Bank UTD Corp. 8 7/8%, 5/1/07 Ba3 450,000 465,188 Chevy Chase Savings Bank FSB 9 1/4%, 12/1/08 B1 260,000 260,650 First Nationwide Holdings, Inc. 10 5/8%, 10/1/03 Ba3 160,000 173,600 First Nationwide Parent Holdings Ltd. 12 1/2%, 4/15/03 B3 250,000 278,750 Long Island Savings Bank FSB 7%, 6/13/02 Baa3 250,000 250,313 1,428,501 TOTAL FINANCE 10,210,569 HEALTH - 0.4% MEDICAL EQUIPMENT & SUPPLIES - 0.0% McKesson Corp. 6.60%, 3/1/00 (e) A3 150,000 150,150 MEDICAL FACILITIES MANAGEMENT - 0.4% Columbia/HCA Healthcare Corp.: 6 1/2%, 3/15/99 A2 125,000 125,434 6 7/8%, 7/15/01 A2 125,000 125,650 NONCONVERTIBLE CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) HEALTH - CONTINUED MEDICAL FACILITIES MANAGEMENT - CONTINUED Integrated Health Services, Inc. 9 1/2%, 9/15/07 (e) B1 $ 210,000 $ 214,725 Tenet Healthcare Corp.: 8%, 1/15/05 Ba1 30,000 30,000 10 1/8%, 3/1/05 Ba3 240,000 261,600 8 5/8%, 1/15/07 Ba3 760,000 771,400 1,528,809 TOTAL HEALTH 1,678,959 HOLDING COMPANIES - 0.1% Norfolk Southern Corp. 7.05%, 5/1/37 Baa1 220,000 223,287 INDUSTRIAL MACHINERY & EQUIPMENT - 0.2% INDUSTRIAL MACHINERY & EQUIPMENT - 0.1% Continental Global Group, Inc. 11%, 4/1/07 (e) B2 100,000 105,000 Exide Corp. 10%, 4/15/05 B1 165,000 170,775 Goss Graphic System, Inc. 12%, 10/15/06 B2 250,000 275,000 550,775 POLLUTION CONTROL - 0.1% Allied Waste of North America, Inc. 10 1/4%, 12/1/06 (e) B3 290,000 310,300 WMX Technologies, Inc. 7.10%, 8/1/26 A3 80,000 81,518 391,818 TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 942,593 MEDIA & LEISURE - 2.6% BROADCASTING - 1.6% Adelphia Communications Corp.: 9 1/2%, 2/15/04 B3 520,000 494,000 9 7/8%, 3/1/07 (e) - 120,000 115,800 Cablevision System Corp.: 9 1/4%, 11/1/05 B2 260,000 267,150 9 7/8%, 5/15/06 B2 180,000 191,250 9 7/8%, 2/15/13 B2 120,000 126,300 Capstar Broadcasting Partners, Inc. 0%, 2/1/09 (b)(e) CCC 80,000 51,400 Capstar Radio Broadcasting Partners, Inc. 9 1/4%, 7/1/07 (e) - 410,000 396,675 Diamond Cable Communications PLC yankee (b): 0%, 9/30/04 B3 270,000 218,025 0%, 2/15/07 (e) - 190,000 106,638 Echostar DBS Corp. 12 1/2%, 7/1/02 (e) Caa 120,000 118,950 Echostar Satellite Broadcasting Corp. 0%, 3/15/04 (b) Caa 220,000 156,200 Echostar Communications Corp. secured discount 0%, 6/1/04 (b) B2 322,000 270,480 Granite Broadcasting Corp.: 10 3/8%, 5/15/05 B3 30,000 30,375 9 3/8%, 12/1/05 B3 40,000 38,800 MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) Intermedia Capital Partners IV LP/Intermedia Partners IV Capital Corp. 11 1/4%, 8/1/06 B2 $ 100,000 $ 107,625 International Cabletel, Inc. 0%, 2/1/06 (b) B3 130,000 89,700 Jacor Communications Co. 8 3/4%, 6/15/07 (e) B2 50,000 49,375 Lenfest Communications, Inc. 8 3/8%, 11/1/05 Ba3 550,000 541,750 NTL, Inc. 10%, 2/15/07 - 270,000 270,625 Olympus Communications LP/ Olympus Capital Corp. 10 5/8%, 11/15/06 B1 140,000 146,300 Rogers Cablesystems Ltd. yankee 11%, 12/1/15 B2 190,000 208,050 SCI Television, Inc. secured 11%, 6/30/05 Ba1 150,000 158,250 SFX Broadcasting, Inc. 10 3/4%, 5/15/06 B3 320,000 344,800 TCI Communication, Inc.: 7 1/4%, 6/15/99 Ba1 330,000 332,521 6.46%, 3/6/00 Ba1 200,000 196,718 TCI Communications Financing III 9.65%, 3/31/27 Ba3 440,000 460,830 Tele Communications, Inc. 9 1/4%, 4/15/02 Ba1 100,000 107,302 Telemundo Group, Inc. 7%, 2/15/06 (c) B1 200,000 191,500 Telewest PLC 0%, 10/1/07 (b) B1 680,000 491,300 Time Warner, Inc. 7.95%, 2/1/00 Ba1 190,000 195,337 6,474,026 ENTERTAINMENT - 0.2% AMC Entertainment, Inc. 9 1/2%, 3/15/09 (e) B2 180,000 182,700 Cinemark USA, Inc. 9 5/8%, 8/1/08 B2 140,000 142,100 Viacom, Inc. 8%, 7/7/06 B1 470,000 455,900 780,700 LEISURE DURABLES & TOYS - 0.1% Coleman Escrow Corp. secured 1st priority 0%, 5/15/01 (e) B3 380,000 239,400 LODGING & GAMING - 0.5% American Skiing Co. 12%, 7/15/06 B3 370,000 388,500 Courtyard by Marriott II LP/ Courtyard II Finance Co., Series B, 10 3/4%, 2/1/08 B- 150,000 162,375 HMC Acquisition Properties, Inc. 9%, 12/15/07 Ba3 250,000 252,500 HMH Properties, Inc. 9 1/2%, 5/15/05 Ba3 550,000 573,375 Hollywood Casino Corp. 12 3/4%, 11/1/03 B2 50,000 53,000 Horseshoe Gaming LLC 9 3/8%, 6/15/07 (e) B3 70,000 70,438 Prime Hospitality Corp. 9 3/4%, 4/1/07 - 220,000 231,550 NONCONVERTIBLE CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) MEDIA & LEISURE - CONTINUED LODGING & GAMING - CONTINUED Sun International Hotels Ltd./ Sun International North America, Inc. yankee 9%, 3/15/07 Ba3 $ 260,000 $ 263,900 Wyndham Hotel Corp. 10 1/2%, 5/15/06 B2 50,000 55,875 2,051,513 PUBLISHING - 0.1% Golden Books Publishing, Inc. 7.65%, 9/15/02 B1 40,000 37,000 News America Holdings, Inc. 7.70%, 10/30/25 Baa3 200,000 189,384 Sun Media Corp. (e): yankee 9 1/2%, 2/15/07 B3 150,000 151,500 9 1/2%, 5/15/07 B3 60,000 60,600 438,484 RESTAURANTS - 0.1% Foodmaker, Inc. 9 3/4%, 6/1/02 B3 170,000 174,250 Host Marriott Travel Plazas, Inc. 9 1/2%, 5/15/05 B1 450,000 468,000 642,250 TOTAL MEDIA & LEISURE 10,626,373 NONDURABLES - 0.4% FOODS - 0.2% Chiquita Brands International, Inc.: 9 5/8%, 1/15/04 B1 140,000 144,375 10 1/4%, 11/1/06 B1 220,000 233,200 ConAgra, Inc. 7 1/8%, 10/1/26 Baa1 150,000 150,666 Specialty Foods Corp. 11 1/8%, 10/1/02 B3 180,000 178,200 706,441 HOUSEHOLD PRODUCTS - 0.1% Revlon Consumer Products Corp. 10 1/2%, 2/15/03 B3 440,000 468,600 TOBACCO - 0.1% Philip Morris Companies, Inc.: 7 1/4%, 9/15/01 A2 150,000 151,143 6.95%, 6/1/06 A2 140,000 140,466 291,609 TOTAL NONDURABLES 1,466,650 RETAIL & WHOLESALE - 0.9% APPAREL STORES - 0.1% AnnTaylor, Inc. 8 3/4%, 6/15/00 B3 370,000 371,850 Specialty Retailers, Inc. (e): 8 1/2%, 7/15/05 Ba3 110,000 109,725 9%, 7/15/07 B2 20,000 19,900 501,475 MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) GENERAL MERCHANDISE STORES - 0.5% Dayton Hudson Corp.: 6.80%, 10/1/01 Baa1 $ 150,000 $ 149,744 7 1/2%, 7/15/06 Baa1 250,000 254,968 Federated Department Stores, Inc.: 10%, 2/15/01 Baa2 250,000 273,493 8 1/8%, 10/15/02 Baa2 50,000 52,091 K mart Corp.: 12 1/2%, 3/1/05 Ba3 440,000 530,200 7 3/4%, 10/1/12 Ba3 40,000 36,600 8 1/4%, 1/1/22 Ba3 200,000 182,000 Michaels Stores, Inc. 10 7/8%, 6/18/06 Ba2 70,000 75,250 Parisian, Inc. 9 7/8%, 7/15/03 B1 240,000 249,600 Penney (J.C.) Co., Inc. 6.95%, 4/1/00 A2 150,000 151,263 1,955,209 GROCERY STORES - 0.3% Kroger Co. 8.15%, 7/15/06 Baa3 125,000 131,795 Pathmark Stores, Inc.: 12 5/8%, 6/15/02 Caa 40,000 41,000 9 5/8%, 5/1/03 B3 620,000 598,300 0%, 11/1/03 (b) Caa 110,000 75,075 Penn Traffic Co.: 10 1/4%, 2/15/02 B3 180,000 154,800 8 5/8%, 12/15/03 B3 70,000 56,525 Pueblo Xtra International, Inc. 9 1/2%, 8/1/03 (e) B3 90,000 86,850 Randalls Food Markets, Inc. 9 3/8%, 7/1/07 (e) B2 30,000 29,888 1,174,233 TOTAL RETAIL & WHOLESALE 3,630,917 SERVICES - 0.4% LEASING & RENTAL - 0.1% PHH Corp. 5.6775%, 6/11/98 (g) A2 500,000 499,945 PRINTING - 0.1% Sullivan Graphics, Inc. 12 3/4%, 8/1/05 Caa 200,000 205,500 SERVICES - 0.2% Borg-Warner Security Corp. 9 5/8%, 3/15/07 (e) B3 110,000 110,550 Orion Network Systems, Inc. unit: 11 1/4%, 1/15/07 B2 310,000 316,975 0%, 1/15/07 (b) B2 490,000 279,300 706,825 TOTAL SERVICES 1,412,270 TECHNOLOGY - 0.4% COMPUTERS & OFFICE EQUIPMENT - 0.2% Comdisco, Inc.: 7.21%, 7/2/01 Baa1 125,000 126,895 6 3/8%, 11/30/01 Baa1 300,000 293,667 NONCONVERTIBLE CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) TECHNOLOGY - CONTINUED COMPUTERS & OFFICE EQUIPMENT - CONTINUED Unisys Corp.: 12%, 4/15/03 B1 $ 260,000 $ 281,450 11 3/4%, 10/15/04 B1 70,000 75,600 777,612 ELECTRONICS - 0.2% Advanced Micro Devices, Inc. 11%, 8/1/03 Ba1 330,000 366,300 Fairchild Semiconductor Corp.: 10 1/8%, 3/15/07 (e) B2 220,000 232,100 11.74%, 3/15/08 pay-in- kind (f) - 210,000 202,398 Viasystems, Inc. 9 3/4%, 6/1/07 (e) B3 30,000 30,525 831,323 TOTAL TECHNOLOGY 1,608,935 TRANSPORTATION - 0.1% AIR TRANSPORTATION - 0.1% US Air, Inc.: 10 3/8%, 3/1/13 B1 170,000 186,150 pass through trust: 9 5/8%, 2/1/01 B3 80,000 82,400 10%, 7/1/03 B3 250,000 257,500 526,050 UTILITIES - 0.9% CELLULAR - 0.2% Globalstar LP/Globalstar Capital Corp. (e): unit 11 3/8%, 2/15/04 B3 180,000 180,000 11 1/4%, 6/15/04 B3 160,000 149,600 McCaw International Ltd. unit 0%, 4/15/07 (b)(e) CCC 380,000 182,400 Millicom International Cellular SA 0%, 6/1/06 (b) B3 160,000 114,400 Paging Network, Inc. 8 7/8%, 2/1/06 B2 90,000 81,900 Telesystem International Wireless, Inc. 0%, 6/30/07 (b)(e) B- 50,000 26,625 360 Degrees Communications Co. 7 1/8%, 3/1/03 Ba1 180,000 179,008 913,933 ELECTRIC UTILITY - 0.3% CMS Energy Corp. 8 1/8%, 5/15/02 Ba3 290,000 292,175 CalEnergy, Inc. 9 1/2%, 9/15/06 Ba2 100,000 107,000 Cleveland Electric Illuminating Co./Toledo Edison Co. 7.67%, 7/1/04 (e) Ba2 90,000 90,563 Commonwealth Edison Co. 7 3/8%, 9/15/02 Baa2 170,000 172,518 MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) Hydro-Quebec yankee 7.40%, 3/28/25 A2 $ 90,000 $ 97,547 Israel Electric Corp. yankee 7 7/8%, 12/15/26 (e) A3 120,000 120,848 Long Island Lighting Co. 8 5/8%, 4/15/04 Ba1 210,000 218,753 NIPSCO Capital Markets, Inc. 7.39%, 4/1/04 Baa1 100,000 100,906 1,200,310 TELEPHONE SERVICES - 0.4% LCI International, Inc. 7 1/4%, 6/15/07 Ba1 150,000 148,575 MFS Communications, Inc. (b): 0%, 1/15/04 Ba3 140,000 130,312 0%, 1/15/06 Ba3 330,000 260,288 McLeodUSA, Inc. 0%, 3/1/07 (b)(e) B3 160,000 102,000 Shared Technologies Fairchild Communications Corp. 0%, 3/1/06 (b) Caa 90,000 80,325 Teleport Communications Group, Inc. 0%, 7/1/07 (b) B1 290,000 209,163 Winstar Equipment Corp. 12 1/2%, 3/15/04 (e) CCC+ 130,000 127,075 WorldCom, Inc. 7 3/4%, 4/1/07 Ba1 400,000 409,072 1,466,810 TOTAL UTILITIES 3,581,053 TOTAL NONCONVERTIBLE CORPORATE BONDS (Cost $43,790,129) 44,485,141 U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - 2.7% U.S. TREASURY OBLIGATIONS - 2.3% 9 1/4%, 8/15/98 Aaa 50,000 51,789 8%, 8/15/99 Aaa 50,000 51,844 7 3/4%, 12/31/99 Aaa 450,000 466,101 6 5/8%, 6/30/01 Aaa 1,350,000 1,362,650 7 7/8%, 8/15/01 Aaa 2,102,000 2,215,319 10 3/4%, 5/15/03 Aaa 125,000 150,958 7 7/8%, 11/15/04 Aaa 2,550,000 2,752,011 7%, 7/15/06 Aaa 473,000 486,599 12 3/4%, 11/15/10 (callable) Aaa 500,000 693,830 8 7/8%, 2/15/19 Aaa 489,000 598,414 7 1/4%, 2/ 15/23 Aaa 395,000 406,850 6 1/2%, 11/15/26 Aaa 155,000 148,654 9,385,019 U.S. GOVERNMENT AGENCY OBLIGATIONS - 0.4% Federal Home Loan Bank: 7.31%, 6/16/04 Aaa 125,000 129,219 7.56%, 9/1/04 Aaa 50,000 52,375 Federal Home Loan Mortgage Corporation 6.783%, 8/18/05 Aaa 440,000 439,657 U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) U.S. GOVERNMENT AGENCY OBLIGATIONS - CONTINUED Federal National Mortgage Association: 6.97%, 4/8/04 Aaa $ 190,000 $ 192,968 6.44%, 6/21/05 Aaa 250,000 244,960 Guaranteed Export Trust Certificates (assets of Trust guaranteed by U.S. Government through Export-Import Bank) Series 1994-A, 7.12%, 4/15/06 Aaa 131,683 134,070 U.S. Department of Housing and Urban Development Government guaranteed participation certificates Series 1995-A, 8.24%, 8/1/04 Aaa 20,000 21,603 U.S. Trade Trust Certificates (assets of Trust guaranteed by U.S. government through Export-Import Bank) 6.69%, 1/15/09 (e) Aaa 200,000 198,804 1,413,656 TOTAL U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS (Cost $10,787,191) 10,798,675 U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - 1.6% FEDERAL HOME LOAN MORTGAGE CORPORATION - 0.1% 7 1/2%, 7/1/27 Aaa 500,000 502,344 FEDERAL NATIONAL MORTGAGE ASSOCIATION - 1.2% 6%, 3/1/11 to 5/1/11 Aaa 1,962,585 1,898,801 6 1/2%, 2/1/26 to 7/1/26 Aaa 2,421,240 2,319,686 7%, 4/1/26 to 5/1/26 Aaa 494,067 484,804 4,703,291 GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 0.3% 6%, 5/15/11 to 7/15/11 Aaa 904,957 887,509 8 1/2%, 10/15/26 Aaa 490,919 510,094 1,397,603 TOTAL U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES (Cost $6,527,820) 6,603,238 COMMERCIAL MORTGAGE SECURITIES - 0.9% American Southwest Financial Securities Series 1994-C2 Class B2, 12.79%, 12/25/01 (e)(g) - 250,000 246,250 Blackrock Capital Funding LLC Series 1996 Class C2, 7.6035%, 11/16/26 (e)(g) Aaa 104,143 105,152 MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) BKB Commercial Mortgage Trust Series 1997-C1 Class D, 7.83%, 2/25/43 (e)(g) BBB $ 60,000 $ 60,600 CBA Mortgage Corp. Series 1993-C1 Class E, 7.76%, 12/25/03 (e)(g) Ba2 250,000 240,313 CS First Boston Mortgage Securities Corp. Series 1995- AEWI Class E, 9.7975%, 11/25/97 (e)(g) - 250,000 251,563 DLJ Mortgage Acceptance Corp. Series 1993-MF12 Class B-2, 10.10%, 9/18/03 (e) - 250,000 250,625 First Chicago/Lennar Trust I, Series 1997-CHL1 (g): Class D, 8.106%, 5/29/08 - 350,000 334,141 Class E, 8.106%, 4/1/39 - 320,000 244,600 General Motors Acceptance Corp. Commercial Mortgage Securities, Inc. Series 1996-C1 Class F, 7.86%, 11/15/06 (e) Ba3 250,000 234,253 Kidder Peabody Acceptance Corp. sequential pay, Series 1993-M1 Class A-2, 7.15%, 4/25/25 Aa2 72,233 72,616 Morgan Stanley Capital One, Inc.: sequential pay Series 1997-C1 Class A-1C, 7.63%, 2/15/20 Aaa 150,000 155,203 Series 1996-MBL1 Class E, 8.661%, 5/25/21 (e)(g) - 94,940 87,166 Mortgage Capital Funding, Inc. Series 1996-MC1 Class G, 7.15%, 7/15/28 (e) BB 100,000 87,805 Structured Asset Securities Corp.: Series 1993-C1 Class E, 6.60%, 10/25/24 (e) B 250,000 87,500 Series 1995-C1 Class E, 7 3/8%, 9/25/24 (e) BB 1,000,000 890,625 sequential pay Series 1996 Class A-2A, 7 3/4%, 2/25/28 AAA 78,468 79,572 TOTAL COMMERCIAL MORTGAGE SECURITIES (Cost $3,340,993) 3,427,984 FOREIGN GOVERNMENT OBLIGATIONS (H) - 0.2% Export Development Corp. yankee 8 1/8%, 8/10/99 Aa2 50,000 51,754 Israeli State euro 6 3/8%, 12/19/01 A3 210,000 206,063 Manitoba Province yankee 6 3/8%, 10/15/99 A1 125,000 124,990 FOREIGN GOVERNMENT OBLIGATIONS (H) - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) Newfoundland Province yankee 11 5/8%, 10/15/07 Baa1 $ 250,000 $ 331,500 Quebec Province yankee 7.22%, 7/22/36 (c) A2 150,000 156,174 TOTAL FOREIGN GOVERNMENT OBLIGATIONS (Cost $865,051) 870,481 CERTIFICATES OF DEPOSIT - 1.2% Banque Nationale de Paris yankee 5.85%, 9/30/97 200,000 200,054 Bayerische Vereinsbank AG yankee 5.56%, 7/14/97 500,000 499,987 Caisse Nationale de Credit Agricole yankee 5.60%, 7/21/97 500,000 499,987 Deutsche Bank AG yankee 6.20%, 4/10/98 500,000 500,392 Landesbank Hessen-Thuringen yankee 5.78%, 1/27/98 300,000 299,786 National Westminster Bank PLC yankee 5 1/2%, 8/5/97 400,000 399,899 Rabobank Nederlan Coop Central yankee: 5.97%, 3/20/98 200,000 200,115 6.20%, 4/10/98 200,000 200,157 Royal Bank of Canada yankee 5.58%, 12/11/97 400,000 399,432 Sanwa Bank Ltd. yankee 5 3/4%, 8/27/97 500,000 500,025 Societe Generale yankee 5.55%, 7/28/97 500,000 499,924 SunTrust Bank 5.85%, 11/25/97 500,000 500,155 TOTAL CERTIFICATES OF DEPOSIT (Cost $4,699,379) 4,699,913 COMMERCIAL PAPER - 0.8% AC Acquisition Holding Co. 5.56%, 7/9/97 275,000 274,615 American General Finance Corp. 5.60%, 8/5/97 100,000 99,447 BMW US Capital Corp. yankee: 5.57%, 7/7/97 100,000 99,892 5.57%, 8/19/97 300,000 297,675 Citibank Credit Card Master Trust I (Dakota Certificate Program) 5.60%, 7/21/97 275,000 274,092 Fina Oil & Chemical Co. 5.61%, 8/14/97 100,000 99,293 Goldman Sachs Group LP 5.83%, 1/26/98 200,000 193,478 Merrill Lynch & Co., Inc. 5.62%, 7/8/97 435,000 434,465 Nationwide Building Society yankee 5.32%, 8/11/97 500,000 496,757 New Center Asset Trust 5.65%, 7/21/97 100,000 99,676 PRINCIPAL VALUE AMOUNT (NOTE 1) Unifunding, Inc. yankee: 5.58%, 9/15/97 $200,000 $ 197,613 5.67%, 11/12/97 300,000 293,700 Westpac Capital Corp. yankee 5.30%, 8/29/97 165,000 163,479 TOTAL COMMERCIAL PAPER (Cost $3,024,500) 3,024,182 BANK NOTES - 0.3% Bank of Tokyo-Mitsubishi Ltd. 5.70%, 7/14/97 500,000 500,000 Corestates Bank NA 5.6475%, 1/30/98 (g) 200,000 199,998 First Bank National Association 5.5975%, 5/15/98 (g) 200,000 199,874 Sumitomo Bank Ltd. 5.74%, 7/11/97 500,000 500,000 TOTAL BANK NOTES (Cost $1,399,873) 1,399,872 CASH EQUIVALENTS - 1.9% MATURITY AMOUNT Investments in repurchase agreements (U.S. Treasury obligations) in a joint trading account dated 6/30/97 due 7/1/97: at 5.99% $ 13,002 13,000 at 5.93% 7,727,273 7,726,000 TOTAL CASH EQUIVALENTS 7,739,000 TOTAL INVESTMENT IN SECURITIES - 100% (Cost $350,688,422) $ 400,697,625 LEGEND 1. Non-income producing 2. Debt obligation initially issued in zero coupon form which converts to coupon form at a specified rate and date. 3. Debt obligation initially issued at one coupon which converts to a higher coupon at a specified date. 4. Standard & Poor's credit ratings are used in the absence of a rating by Moody's Investors Service, Inc. 5. Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $10,203,792 or 2.5% of net assets. 6. Restricted securities - Investment in securities not registered under the Securities Act of 1933 (see Note 2 of Notes to Financial Statements). Additional information on each holding is as follows: ACQUISITION ACQUISITION SECURITY DATE COST Fairchild Semiconductor Corp. 11.74%, 3/15/08 pay-in-kind 4/3/97 $ 183,878 7. The coupon rate shown on floating or adjustable rate securities represents the rate at period end. 8. For foreign government obligations not individually rated by S&P or Moody's, the ratings listed are assigned to securities by FMR, the fund's investment adviser, based principally on S&P and Moody's ratings of the sovereign credit of the issuing government. OTHER INFORMATION Purchases and sales of securities, other than short-term securities, aggregated $194,622,823 and $ 86,184,600, respectively, of which U.S. government and government agency obligations aggregated $16,194,987 and $31,811,662, respectively. The fund placed a portion of its portfolio transactions with brokerage firms which are affiliates of FMR. The commissions paid to these affiliated firms were $22,480 for the period. The composition of long-term debt holdings as a percentage of total value of investment in securities, is as follows: MOODY'S RATINGS S&P RATINGS Aaa, Aa, A 6.1% AAA, AA, A 6.1% Baa 1.3% BBB 1.9% Ba 3.1% BB 2.6% B 4.7% B 4.7% Caa 0.2% CCC 0.4% Ca, C 0.0% CC, C 0.0% D 0.0% For some foreign government obligations, FMR has assigned the ratings of the sovereign credit of the issuing government. The percentage not rated by both S&P and Moody's amounted to 0.7%. FMR has determined that unrated debt securities that are lower quality account for 0.7% of the total value of investment in securities. Distribution of investments by country of issue, as a percentage of total value of investment in securities, is as follows: United States 89.6% United Kingdom 2.7 Netherlands 2.2 France 1.2 Others (individually less than 1%) 4.3 TOTAL 100.0% INCOME TAX INFORMATION At June 30, 1997, the aggregate cost of investment securities for income tax purposes was $350,712,855. Net unrealized appreciation aggregated $49,984,770, of which $53,389,318 related to appreciated investment securities and $3,404,548 related to depreciated investment securities. VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 1997 (UNAUDITED) ASSETS Investment in $ 400,697,625 securities, at value (including repurchase agreements of $7,739,000) (cost $350,688,422) - - - See accompanying schedule Cash 50,675 Receivable for 265,717 investments sold Receivable for fund 912,902 shares sold Dividends receivable 650,045 Interest receivable 1,124,108 TOTAL ASSETS 403,701,072 LIABILITIES Payable for $ 2,277,300 investments purchased Payable for fund 2,636 shares redeemed Accrued management 195,789 fee Other payables and 94,137 accrued expenses TOTAL LIABILITIES 2,569,862 NET ASSETS $401,131,210 Net Assets consist of: Paid in capital $338,818,399 Undistributed net 4,197,523 investment income Accumulated 8,105,402 undistributed net realized gain (loss) on investments and foreign currency transactions Net unrealized 50,009,886 appreciation (depreciation) on investments and assets and liabilities in foreign currencies NET ASSETS, for $401,131,210 26,873,048 shares outstanding NET ASSET VALUE, $14.93 offering price and redemption price per share ($401,131,210 (divided by) 26,873,048 shares) STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) INVESTMENT INCOME $ 2,430,378 Dividends Interest 3,085,128 TOTAL INCOME 5,515,506 EXPENSES Management fee $ 996,258 Transfer agent fees 125,480 Accounting fees and 99,808 expenses Non-interested 844 trustees' compensation Custodian fees and 39,036 expenses Audit 20,860 Legal 295 Miscellaneous 3,741 Total expenses 1,286,322 before reductions Expense reductions (18,339) 1,267,983 NET INVESTMENT 4,247,523 INCOME REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on: Investment 8,243,632 securities Foreign currency (1,344) 8,242,288 transactions Change in net unrealized appreciation (depreciation) on: Investment 31,836,736 securities Assets and 575 31,837,311 liabilities in foreign currencies NET GAIN (LOSS) 40,079,599 NET INCREASE $ 44,327,122 (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS OTHER INFORMATION $ 15,565 Expense reductions Directed brokerage arrangements Custodian credits 2,774 $ 18,339 STATEMENT OF CHANGES IN NET ASSETS INCREASE (DECREASE) IN NET ASSETS SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, 1997 1996 (UNAUDITED) Operations $ 4,247,523 $ 3,681,563 Net investment income Net realized gain 8,242,288 6,740,985 (loss) Change in net 31,837,311 16,385,266 unrealized appreciation (depreciation) NET INCREASE 44,327,122 26,807,814 (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS Distributions to - (3,802,638) shareholders From net investment income From net realized (447,876) (8,710,844 gain ) TOTAL DISTRIBUTIONS (447,876) (12,513,482 ) Share transactions 127,046,008 180,656,312 Net proceeds from sales of shares Reinvestment of 447,876 12,513,482 distributions Cost of shares (23,265,472) (22,687,189 redeemed ) NET INCREASE 104,228,412 170,482,605 (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS TOTAL INCREASE 148,107,658 184,776,937 (DECREASE) IN NET ASSETS NET ASSETS Beginning of period 253,023,552 68,246,615 End of period $401,131,210 $253,023,552 (including under (over) distribution of net investment income of $4,197,523 and $(50,000), respectively) OTHER INFORMATION Shares Sold 9,228,522 14,392,956 Issued in 32,763 975,606 reinvestment of distributions Redeemed (1,701,939) (1,851,290) Net increase 7,559,346 13,517,272 (decrease) SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS SIX MONTHS ENDED YEAR ENDED JANUARY 3, 1995 JUNE 30, 1997 DECEMBER 31, (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, SELECTED PER-SHARE (UNAUDITED) 1996 1995 DATA Net asset value, $ 13.10 $ 11.77 $ 10.00 beginning of period Income from Investment Operations Net investment .18 D .21 .10 income Net realized and 1.67 2.08 2.20 unrealized gain (loss) Total from 1.85 2.29 2.30 investment operations Less Distributions From net - (.21) (.11) investment income From net realized (.02) (.75) (.42) gain Total distributions (.02) (.96) (.53) Net asset value, end $ 14.93 $ 13.10 $ 11.77 of period TOTAL RETURN B, C 14.14% 20.04% 23.02% RATIOS AND SUPPLEMENTAL DATA Net assets, end of $401,131 $253,024 $68,247 period (000 omitted) Ratio of expenses to .78% A .87% 1.00% average net assets Ratio of expenses to .77% A, F .85% F 1.00% average net assets after expense reductions Ratio of net 2.59% A 2.63% 1.69% investment income to average net assets Portfolio turnover rate 56% A 120% 343% Average commission $ .0402 $ .0211 rate G A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED AND DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN. C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. E FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE BEEN HIGHER. F FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). G FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE STRUCTURES MAY DIFFER. VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO PERFORMANCE AND INVESTMENT SUMMARY PERFORMANCE There are several ways to evaluate a fund's historical performance. You can look at the total percentage change in value, the average annual percentage change or the growth of a hypothetical $10,000 investment. Total return reflects the change in the value of an investment, assuming reinvestment of the fund's dividend income and capital gains (the profits earned upon the sale of securities that have grown in value). AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED PAST 1 PAST 5 PAST 10 JUNE 30, 1997 YEAR YEARS YEARS EQUITY-INCOME 25.66% 20.09% 13.66% S&P 500(registered trademark) 34.70% 19.78% 14.64% AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what would have happened if the fund had performed at a constant rate each year. You can compare these figures to the performance of the Standard & Poor's 500 Index - a widely recognized, unmanaged index of common stocks. This benchmark reflects the reinvestment of dividends and capital gains, if any. UNDERSTANDING PERFORMANCE How a fund did yesterday is no guarantee of how it will do tomorrow. The stock market, for example, has a history of long-term growth and short-term volatility. In turn, the share price and return of a fund that invests in stocks will vary. That means if you sell your shares during a market downturn, you might lose money. But if you can ride out the market's ups and downs, you may have a gain.(checkmark) Figures for more than one year assume a steady compounded rate of return and are not the fund's year-by-year results, which fluctuated over the periods shown. PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER. Past performance is no guarantee of future results. Principal and investment return will vary and you may have a gain or loss when you withdraw your money. $10,000 OVER THE PAST 10 YEARS 1987/06/30 10000.00 10000.00 1987/07/31 10380.95 10507.00 1987/08/31 10666.67 10898.91 1987/09/30 10442.79 10660.22 1987/10/31 8404.96 8364.01 1987/11/30 8028.88 7674.82 1987/12/31 8439.31 8258.87 1988/01/31 9039.55 8606.57 1988/02/29 9487.50 9007.64 1988/03/31 9322.33 8729.30 1988/04/30 9476.65 8826.20 1988/05/31 9603.73 8902.98 1988/06/30 10150.11 9311.63 1988/07/31 10131.73 9276.25 1988/08/31 9957.04 8960.85 1988/09/30 10252.91 9342.59 1988/10/31 10429.84 9602.31 1988/11/30 10262.22 9465.00 1988/12/31 10355.90 9630.63 1989/01/31 10995.50 10335.60 1989/02/28 10939.07 10078.24 1989/03/31 11176.01 10313.06 1989/04/30 11607.33 10848.31 1989/05/31 11952.38 11287.67 1989/06/30 11960.57 11223.33 1989/07/31 12657.87 12236.79 1989/08/31 12861.25 12476.64 1989/09/30 12716.66 12425.48 1989/10/31 11983.01 12137.21 1989/11/30 12051.48 12384.81 1989/12/31 12152.05 12682.05 1990/01/31 11331.37 11831.08 1990/02/28 11398.51 11983.70 1990/03/31 11417.31 12301.27 1990/04/30 11021.46 11993.74 1990/05/31 11750.66 13163.13 1990/06/30 11633.66 13073.62 1990/07/31 11349.14 13031.78 1990/08/31 10442.90 11853.71 1990/09/30 9632.82 11276.43 1990/10/31 9387.20 11227.94 1990/11/30 10060.00 11953.27 1990/12/31 10294.08 12286.77 1991/01/31 10846.12 12822.47 1991/02/28 11593.01 13739.28 1991/03/31 11833.50 14071.77 1991/04/30 11888.80 14105.54 1991/05/31 12541.30 14714.90 1991/06/30 12028.50 14040.96 1991/07/31 12710.42 14695.26 1991/08/31 12978.71 15043.54 1991/09/30 12889.63 14792.31 1991/10/31 13104.27 14990.53 1991/11/30 12539.43 14386.41 1991/12/31 13530.38 16032.22 1992/01/31 13713.06 15734.02 1992/02/29 14158.37 15938.56 1992/03/31 13984.88 15627.76 1992/04/30 14422.98 16087.22 1992/05/31 14538.27 16166.04 1992/06/30 14410.99 15925.17 1992/07/31 14852.62 16576.51 1992/08/31 14527.21 16236.69 1992/09/30 14678.01 16428.28 1992/10/31 14853.73 16485.78 1992/11/30 15392.59 17047.95 1992/12/31 15815.27 17257.64 1993/01/31 16287.37 17402.60 1993/02/28 16653.24 17639.28 1993/03/31 17149.52 18011.46 1993/04/30 17078.21 17575.59 1993/05/31 17387.21 18046.61 1993/06/30 17591.73 18098.95 1993/07/31 17831.07 18026.55 1993/08/31 18513.20 18709.76 1993/09/30 18442.42 18565.69 1993/10/31 18611.07 18950.00 1993/11/30 18285.82 18769.98 1993/12/31 18708.50 18997.10 1994/01/31 19532.45 19643.00 1994/02/28 19029.45 19110.67 1994/03/31 18233.36 18277.45 1994/04/30 18861.65 18511.40 1994/05/31 19041.17 18814.98 1994/06/30 18923.53 18354.02 1994/07/31 19555.60 18956.03 1994/08/31 20561.76 19733.23 1994/09/30 20224.91 19249.76 1994/10/31 20640.04 19682.88 1994/11/30 19965.45 18966.03 1994/12/31 20030.39 19247.30 1995/01/31 20343.57 19746.38 1995/02/28 21119.27 20515.90 1995/03/31 21848.51 21121.32 1995/04/30 22456.18 21743.34 1995/05/31 23132.91 22612.42 1995/06/30 23465.27 23137.71 1995/07/31 24368.32 23904.96 1995/08/31 24673.96 23964.96 1995/09/30 25493.12 24976.28 1995/10/31 25199.77 24887.12 1995/11/30 26289.34 25979.66 1995/12/31 27059.54 26480.03 1996/01/31 27845.91 27381.41 1996/02/29 27939.44 27635.23 1996/03/31 28233.54 27901.36 1996/04/30 28601.16 28312.63 1996/05/31 28909.97 29042.81 1996/06/30 28645.28 29153.46 1996/07/31 27248.30 27865.46 1996/08/31 27807.09 28453.15 1996/09/30 28998.20 30054.49 1996/10/31 29468.75 30883.39 1996/11/30 31439.22 33217.87 1996/12/31 30924.55 32559.82 1997/01/31 32130.35 34594.16 1997/02/28 32486.30 34865.38 1997/03/31 31278.87 33432.76 1997/04/30 32388.40 35428.69 1997/05/31 34395.33 37585.59 1997/06/30 35994.36 39269.43
Let's say hypothetically $10,000 was invested in Equity-Income Portfolio on June 30, 1987. As the chart shows, by June 30, 1997, the value of the investment would have grown to $35,994 - a 259.94% increase on the initial investment. For comparison, look at how the S&P 500 did over the same period. With dividends and capital gains, if any, reinvested, the same $10,000 investment would have grown to $39,269 - a 292.69% increase. INVESTMENT SUMMARY TOP FIVE STOCKS AS OF JUNE 30, 1997
% OF FUND'S INVESTMENTS General Electric Co. 3.2 Philip Morris Companies, Inc. 2.7 British Petroleum PLC ADR 1.9 Federal National Mortgage Association 1.6 Royal Dutch Petroleum Co. 1.6
TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997
% OF FUND'S INVESTMENTS Finance 19.9 Energy 12.9 Nondurables 7.4 Health 7.1 Aerospace & Defense 6.8
ASSET ALLOCATION AS OF JUNE 30, 1997 * Row: 1, Col: 1, Value: 5.8 Row: 1, Col: 2, Value: 1.2 Row: 1, Col: 3, Value: 93.0 Stocks 93.0% Bonds 1.2% Short-term investments 5.8% FOREIGN INVESTMENTS 10.2% * (% OF FUND'S INVESTMENTS) VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO FUND TALK: THE MANAGER'S OVERVIEW An interview with Stephen Petersen, Portfolio Manager of Equity-Income Portfolio Q. STEVE, HOW DID THE FUND PERFORM? A. For the six- and 12-month periods ending June 30, 1997, the fund underperformed the Standard & Poor's 500 index, which returned 20.61% for the six-month period and 34.70% for the 12-month period. Q. WHY DID THE FUND UNDERPERFORM THE S&P 500 INDEX, ESPECIALLY OVER THE PAST SIX MONTHS? A. In general, when you compare the performance of most actively managed diversified funds, like this one, against the S&P 500 index's performance over the period, very few beat the index. In fact, in the first quarter of 1997, less than 9% of all fund managers did so. That's because the index was heavily weighted in a small number of very large-capitalization stocks, and those stocks were the top performers over the period. Diversified funds, by definition, own stocks of several different cap sizes, not just large-cap stocks. In addition, many of the top stocks that contributed to the S&P 500 index's performance, such as technology giant Microsoft, don't pay dividends, and are therefore not the kind of stocks this fund tends to own. Q. SINCE YOU TOOK OVER THE FUND IN EARLY JANUARY, HAVE YOU CHANGED ITS POSITIONING? A. Somewhat. In general, I looked for stocks with good dividend yields and attractive valuation characteristics, such as the price-to-earnings ratio. Over the period, I restructured the portfolio so it owned more of those kinds of stocks. Going forward, my universe will be large-capitalization, income-producing common stocks, as well as stocks that are down and out but have great upside potential. Q. WHAT WERE SOME OF THE FUND'S POSITIVE PERFORMERS DURING THE PERIOD? A. General Electric, the fund's largest holding, showed consistently strong earnings growth and performed better than initial expectations. Philip Morris, another top five holding, continued to look strong. Over the period, much of its earnings came from its food business and its tobacco business outside the U.S. So, Philip Morris' major growth was outside of the areas of the company affected by the litigation against the tobacco industry. Q. FINANCIAL STOCKS - WHICH MADE UP ABOUT 20% OF THE FUND AT THE END OF THE PERIOD - GENERALLY DID WELL OVER THE PERIOD. WHY IS THAT AND HOW DID YOU TAKE ADVANTAGE OF THIS TREND? A. Basically, financial stocks, which tend to do well when interest rates are low, benefited from the interest rate environment over the period. Over the past six months, many banks generated more capital than they needed to run their businesses, and they invested it by buying back their own stock. In addition, both acquiring and acquired financial companies benefited from recent mergers. Q. WHAT WAS YOUR TOP-WEIGHTED FINANCIAL STOCK? A. Financial service company Fannie Mae - the Federal National Mortgage Association - which buys mortgages, packages them, creates securities and then sells them back to the marketplace, was the fund's top financial stock. It did well during the period. Q. DID YOU EXPERIENCE ANY DISAPPOINTMENTS OVER THE PERIOD? A. Sure. I expected to see a significant lift in the performance of cyclical stocks and positioned the fund accordingly. Unfortunately, cyclicals - those stocks whose performance is closely associated with the strength of the economy - didn't perform well relative to growth-oriented stocks over the period. Q. STEVE, HOW DOES THE FUND LOOK GOING FORWARD? A. Generally, I will be sticking with what I call the winners in the portfolio - large-cap, steady earnings-growth companies with attractive fundamentals and valuations. In addition, I will continue to look for attractive, overlooked or oversold types of companies, which I believe show some interesting possibilities going forward. FUND FACTS GOAL: seeks reasonable income by investing primarily in income producing equity securities to provide current income and increase the value of the fund's shares START DATE: October 9,1986 SIZE: as of June 30, 1997, more than $8.5 billion MANAGER: Stephen Petersen, since January 1997; joined Fidelity in 1980 (checkmark) VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO INVESTMENTS JUNE 30, 1997 (UNAUDITED) Showing Percentage of Total Value of Investment in Securities COMMON STOCKS - 91.3% SHARES VALUE (NOTE 1) AEROSPACE & DEFENSE - 6.8% AEROSPACE & DEFENSE - 3.8% AlliedSignal, Inc. 1,055,100 $ 88,628,379 Boeing Co. 1,668,000 88,508,250 GenCorp, Inc. 200,000 4,625,000 Gulfstream Aerospace Corp. (a) 246,200 7,262,900 Lockheed Martin Corp. 850,603 88,090,573 Textron, Inc. 60,000 3,982,500 Thiokol Corp. 376,700 26,369,000 United Technologies Corp. 258,800 21,480,400 328,947,002 DEFENSE ELECTRONICS - 2.1% Litton Industries, Inc. (a) 842,500 40,703,281 Northrop Grumman Corp. 874,500 76,792,031 Raytheon Co. 1,276,000 65,076,000 182,571,312 SHIP BUILDING & REPAIR - 0.9% General Dynamics Corp. 991,500 74,362,500 Newport News Shipbuilding, Inc. 60,000 1,166,250 75,528,750 TOTAL AEROSPACE & DEFENSE 587,047,064 BASIC INDUSTRIES - 6.7% CHEMICALS & PLASTICS - 2.6% Air Products & Chemicals, Inc. 184,600 14,998,750 du Pont (E.I.) de Nemours & Co. 330,000 20,748,750 Goodrich (B.F.) Co. 91,300 3,954,431 Great Lakes Chemical Corp. 336,400 17,618,950 Hercules, Inc. 228,600 10,944,225 Millennium Chemicals, Inc. 500,000 11,375,000 Monsanto Co. 1,644,000 70,794,750 Olin Corp. 243,300 9,503,906 Union Carbide Corp. 960,000 45,180,000 Witco Corp. 403,700 15,315,369 220,434,131 IRON & STEEL - 0.4% Aeroquip Vickers, Inc. 48,700 2,301,075 Allegheny Teledyne, Inc. 300,700 8,118,900 Inland Steel Industries, Inc. 631,300 16,492,713 Quanex Corp. 61,000 1,871,938 USX-U.S. Steel Group 124,100 4,351,256 33,135,882 METALS & MINING - 2.0% Alcan Aluminium Ltd. 1,400,000 47,760,113 Alumax, Inc. (a) 835,000 31,677,813 Aluminum Co. of America 740,900 55,845,338 Harsco Corp. 264,700 10,720,350 Inco Ltd. 551,093 16,465,133 Kaiser Aluminum Corp. (a) 250,000 3,062,500 Metallgesellschaft AG Ord. (a) 222,500 4,629,734 Noranda, Inc. 200,000 4,309,564 174,470,545 PACKAGING & CONTAINERS - 0.0% Owens-Illinois, Inc. (a) 108,600 3,366,600 PAPER & FOREST PRODUCTS - 1.7% Boise Cascade Corp. 385,400 13,609,438 Champion International Corp. 485,000 26,796,250 Domtar, Inc. 627,300 5,543,085 SHARES VALUE (NOTE 1) Georgia-Pacific Corp. 191,800 $ 16,374,925 Kimberly-Clark Corp. 656,300 32,650,925 Weyerhaeuser Co. 933,500 48,542,000 143,516,623 TOTAL BASIC INDUSTRIES 574,923,781 CONSTRUCTION & REAL ESTATE - 1.2% BUILDING MATERIALS - 0.8% American Standard Companies, Inc. 45,100 2,018,225 Coltec Industries, Inc. (a) 1,371,600 26,746,200 Masco Corp. 1,045,400 43,645,450 72,409,875 ENGINEERING - 0.2% EG & G, Inc. 389,900 8,772,750 Fluor Corp. 120,500 6,650,094 15,422,844 REAL ESTATE - 0.0% Boston Properties, Inc. 78,500 2,158,750 REAL ESTATE INVESTMENT TRUSTS - 0.2% Equity Residential Properties Trust (SBI) 300,000 14,250,000 Weeks Corp. 170,500 5,328,125 19,578,125 TOTAL CONSTRUCTION & REAL ESTATE 109,569,594 DURABLES - 3.0% AUTOS, TIRES, & ACCESSORIES - 1.0% Chrysler Corp. 142,000 4,659,375 Cummins Engine Co., Inc. 138,000 9,737,625 Eaton Corp. 347,400 30,332,363 General Motors Corp. 300,000 16,706,250 Johnson Controls, Inc. 55,000 2,258,438 Modine Manufacturing Co. 98,100 2,918,475 Snap-on Tools Corp. 455,150 17,921,531 Standard Products Co. 76,700 1,936,675 TRW, Inc. 34,700 1,971,394 88,442,126 CONSUMER DURABLES - 0.6% Minnesota Mining & Manufacturing Co. 504,000 51,408,000 CONSUMER ELECTRONICS - 0.9% Maytag Co. 688,900 17,997,513 Sunbeam-Oster, Inc. 1,168,400 44,107,100 Whirlpool Corp. 225,000 12,276,563 74,381,176 TEXTILES & APPAREL - 0.5% Dexter Corp. 353,700 11,318,400 Reebok International Ltd. 687,700 32,149,975 Stride Rite Corp. 191,700 2,468,138 45,936,513 TOTAL DURABLES 260,167,815 ENERGY - 12.6% ENERGY SERVICES - 1.2% Halliburton Co. 25,000 1,981,250 Dresser Industries, Inc. 271,700 10,120,825 Schlumberger Ltd. 696,100 87,012,500 99,114,575 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) ENERGY - CONTINUED OIL & GAS - 11.4% Amerada Hess Corp. 464,500 $ 25,808,781 Amoco Corp. 365,000 31,732,188 Atlantic Richfield Co. 630,000 44,415,000 British Petroleum PLC ADR 2,181,180 163,315,853 Burlington Resources, Inc. 566,700 25,005,638 Chevron Corp. 929,600 68,732,300 Exxon Corp. 1,500,000 92,250,000 Mobil Corp. 302,600 21,144,175 Occidental Petroleum Corp. 1,665,200 41,734,075 Pennzoil Co. 850,400 65,268,200 Phillips Petroleum Co. 412,500 18,046,875 Royal Dutch Petroleum Co. 2,498,000 135,828,750 Texaco, Inc. 580,000 63,075,000 Tosco Corp. 649,800 19,453,388 Total SA: Class B 831,600 84,005,714 sponsored ADR 200,800 10,165,500 USX-Marathon Group 1,178,600 34,032,075 Unocal Corp. 1,116,517 43,334,816 987,348,328 TOTAL ENERGY 1,086,462,903 FINANCE - 18.8% BANKS - 9.1% Bank of New York Co., Inc. 1,715,700 74,632,950 Bank of Nova Scotia Halifax 195,400 8,562,416 BankBoston Corp. 801,100 57,729,269 BankAmerica Corp. 1,562,000 100,846,625 Chase Manhattan Corp. 385,700 37,437,006 Citicorp 974,400 117,476,100 Comerica, Inc. 505,000 34,340,000 Credit Suisse Group (Reg.) 150,400 19,295,245 First Bank System, Inc. 592,530 50,587,249 National Bank of Canada 500,000 6,265,165 National City Corp. 976,335 51,257,588 NationsBank Corp. 1,426,800 92,028,600 Norwest Corp. 579,000 32,568,750 Royal Bank of Canada 400,000 18,121,899 U.S. Bancorp 728,700 46,727,888 Wells Fargo & Co. 144,900 39,050,550 786,927,300 CREDIT & OTHER FINANCE - 2.8% American Express Co. 955,172 71,160,314 Beneficial Corp. 304,700 21,652,744 Edper Group Ltd. (The) Class A (ltd. vtg.) 400,000 6,678,014 First Chicago NBD Corp. 1,384,100 83,738,050 Household International, Inc. 345,000 40,515,938 Transamerica Corp. 169,100 15,821,419 239,566,479 FEDERAL SPONSORED CREDIT - 1.7% Federal Home Loan Mortgage Corporation 403,600 13,873,750 Federal National Mortgage Association 3,115,300 135,904,963 149,778,713 INSURANCE - 4.0% Aetna, Inc. 282,700 28,941,413 Allstate Corp. 1,154,999 84,314,927 Brascan Ltd. Class A 1,000,000 24,734,726 CIGNA Corp. 20,000 3,550,000 SHARES VALUE (NOTE 1) Fremont General Corp. 423,924 $ 17,062,941 General Re Corp. 110,000 20,020,000 Hartford Financial Services Group, Inc. 663,300 54,888,075 Marsh & McLennan Companies, Inc. 150,600 10,749,075 Norwich Union PLC (a) 844,900 4,493,784 Provident Companies, Inc. 241,600 12,925,600 Providian Financial Corp. (a) 150,000 4,818,750 Reliastar Financial Corp. 509,621 37,266,036 Travelers Group, Inc. (The) 711,667 44,879,479 348,644,806 SAVINGS & LOANS - 0.9% Ahmanson (H.F.) & Co. 109,900 4,725,700 Great Western Financial Corp. 934,100 50,207,875 TCF Financial Corp. 25,600 1,264,000 Washington Mutual, Inc. 273,800 16,359,550 72,557,125 SECURITIES INDUSTRY - 0.3% Bear Stearns Companies, Inc. 210,000 7,179,375 First Marathon Inc. Class A (non-vtg.) 299,400 4,228,660 Lehman Brothers Holdings, Inc. 440,200 17,828,100 29,236,135 TOTAL FINANCE 1,626,710,558 HEALTH - 7.1% DRUGS & PHARMACEUTICALS - 4.3% American Home Products Corp. 1,473,000 112,684,500 Barr Laboratories, Inc. (a)(d) 1,391,650 61,232,600 Bristol-Myers Squibb Co. 1,350,800 109,414,800 Merck & Co., Inc. 37,000 3,829,500 Novartis AG (Reg.) 13,300 21,239,959 Pharmacia & Upjohn, Inc. 427,100 14,841,725 Schering-Plough Corp. 1,020,000 48,832,500 372,075,584 MEDICAL EQUIPMENT & SUPPLIES - 1.1% Allegiance Corp. 393,500 10,722,875 Bausch & Lomb, Inc. 250,000 11,781,250 Cardiac Control Systems, Inc. (a) 79,800 64,838 Cardinal Health, Inc. 618,500 35,409,125 Johnson & Johnson 40,000 2,575,000 U.S. Surgical Corp. 909,608 33,882,879 94,435,967 MEDICAL FACILITIES MANAGEMENT - 1.7% Beverly Enterprises, Inc. (a)(d) 5,222,000 84,857,500 Columbia/HCA Healthcare Corp. 1,522,350 59,847,384 144,704,884 TOTAL HEALTH 611,216,435 HOLDING COMPANIES - 0.5% CINergy Corp. 415,000 14,447,188 Norfolk Southern Corp. 283,400 28,552,550 42,999,738 INDUSTRIAL MACHINERY & EQUIPMENT - 6.7% ELECTRICAL EQUIPMENT - 3.6% General Electric Co. 4,191,100 273,993,163 Westinghouse Electric Corp. 1,489,900 34,453,938 308,447,101 INDUSTRIAL MACHINERY & EQUIPMENT - 1.8% Cooper Industries, Inc. 60,000 2,985,000 Caterpillar, Inc. 309,500 33,232,563 Harnischfeger Industries, Inc. 279,600 11,603,400 Ingersoll-Rand Co. 430,000 26,552,500 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) INDUSTRIAL MACHINERY & EQUIPMENT - CONTINUED INDUSTRIAL MACHINERY & EQUIPMENT - CONTINUED Parker-Hannifin Corp. 50,000 $ 3,034,375 Stewart & Stevenson Services, Inc. 283,500 7,371,000 Tyco International Ltd. 962,742 66,970,740 151,749,578 POLLUTION CONTROL - 1.3% Browning-Ferris Industries, Inc. 958,700 31,876,775 Safety Kleen Corp. 313,200 5,285,250 Waste Management, Inc. 2,405,200 77,267,050 114,429,075 TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 574,625,754 MEDIA & LEISURE - 3.3% BROADCASTING - 0.0% Ascent Entertainment Group, Inc. 119,365 1,089,205 ENTERTAINMENT - 1.3% All American Communications, Inc. (a) 260,534 3,940,577 MGM Grand, Inc. (a) 266,400 9,856,800 Viacom, Inc. Class B (non-vtg.) (a) 3,148,500 94,455,000 108,252,377 LEISURE DURABLES & TOYS - 0.6% Brunswick Corp. 375,400 11,731,250 Hasbro, Inc. 1,559,450 44,249,394 55,980,644 LODGING & GAMING - 0.4% ITT Corp. (a) 520,000 31,752,500 Mirage Resorts, Inc. (a) 157,400 3,974,350 35,726,850 PUBLISHING - 1.0% ACNielsen Corp. (a) 336,000 6,594,000 Cognizant Corp. 353,700 14,324,850 Harcourt General, Inc. 449,500 21,407,438 Hollinger International, Inc. Class A 1,894,400 21,193,600 Houghton Mifflin Co. 1,600 106,800 McGraw-Hill, Inc. 324,800 19,102,300 82,728,988 TOTAL MEDIA & LEISURE 283,778,064 NONDURABLES - 7.4% BEVERAGES - 0.5% Anheuser-Busch Companies, Inc. 902,400 37,844,400 PepsiCo, Inc. 150,000 5,634,375 43,478,775 FOODS - 0.9% General Mills, Inc. 819,450 53,366,681 Heinz (H.J.) Co. 176,100 8,122,613 Kellogg Co. 124,800 10,686,000 Ralston Purina Co. 110,000 9,040,625 81,215,919 HOUSEHOLD PRODUCTS - 2.5% Avon Products, Inc. 86,100 6,075,431 Dial Corp. 517,300 8,082,813 Gillette Co. 200,700 19,016,325 Premark International, Inc. 25,000 668,750 Procter & Gamble Co. 410,800 58,025,500 Rubbermaid, Inc. 1,010,400 30,059,400 SHARES VALUE (NOTE 1) Tambrands, Inc. 100,000 $ 4,987,500 Unilever PLC Ord. 1,705,400 48,873,030 Unilever NV: Ord. 3,100 652,166 ADR 200,000 42,812,500 219,253,415 TOBACCO - 3.5% BAT Industries PLC Ord. 1,349,500 12,075,005 Gallaher Group PLC sponsored ADR (a) 365,700 6,742,594 Philip Morris Companies, Inc. 5,220,100 231,641,938 RJR Nabisco Holdings Corp. 1,333,400 44,002,200 Universal Corp. 182,600 5,797,550 300,259,287 TOTAL NONDURABLES 644,207,396 PRECIOUS METALS - 0.3% Newmont Mining Corp. 567,200 22,120,800 RETAIL & WHOLESALE - 5.2% APPAREL STORES - 0.3% Charming Shoppes, Inc. (a) 290,100 1,513,959 Footstar, Inc. (a) 362,600 9,472,925 Limited, Inc. (The) 909,900 18,425,475 29,412,359 DRUG STORES - 0.2% Rite Aid Corp. 337,100 16,812,863 GENERAL MERCHANDISE STORES - 2.9% Coles Myer Ltd. 1,252,000 6,502,059 Consolidated Stores Corp. (a) 2,270,156 78,887,930 Dayton Hudson Corp. 140,000 7,446,250 Federated Department Stores, Inc. (a) 656,400 22,809,900 Sears, Roebuck & Co. 390,000 20,962,500 Wal-Mart Stores, Inc. 1,929,000 65,224,313 Woolworth Corp. (a) 2,061,200 49,468,800 251,301,752 GROCERY STORES - 0.1% American Stores Co. 147,200 7,268,000 RETAIL & WHOLESALE, MISCELLANEOUS - 1.7% Staples, Inc. (a) 1,845,700 42,912,525 Tandy Corp. 852,500 47,740,000 Toys "R" Us, Inc. (a) 1,180,000 41,300,000 U.S. Office Products Co. (a) 513,300 15,687,731 147,640,256 TOTAL RETAIL & WHOLESALE 452,435,230 SERVICES - 0.8% LEASING & RENTAL - 0.0% Hanover Compressor Co. 6,300 122,850 PRINTING - 0.7% Deluxe Corp. 486,600 16,605,225 Donnelley (R.R.) & Sons Co. 568,400 20,817,650 Ennis Business Forms, Inc. 196,700 1,893,238 Harland (John H.) Co. 1,051,300 23,982,781 63,298,894 SERVICES - 0.1% Dun & Bradstreet Corp. 368,800 9,681,000 TOTAL SERVICES 73,102,744 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) TECHNOLOGY - 3.8% COMMUNICATIONS EQUIPMENT - 0.4% Alcatel Alsthom Compagnie Generale d'Electricite SA 263,200 $ 32,943,641 COMPUTER SERVICES & SOFTWARE - 0.2% Electronic Data Systems Corp. 262,800 10,774,800 Sabre Group Holdings, Inc. Class A (a) 178,800 4,849,950 15,624,750 COMPUTERS & OFFICE EQUIPMENT - 1.5% International Business Machines Corp. 700,000 63,131,250 Pitney Bowes, Inc. 791,000 54,974,500 Silicon Graphics, Inc. (a) 344,200 5,163,000 Xerox Corp. 100,000 7,887,500 131,156,250 ELECTRONICS - 1.0% AMP, Inc. 499,400 20,849,950 Intel Corp. 359,000 50,910,688 Thomas & Betts Corp. 214,800 11,290,425 83,051,063 PHOTOGRAPHIC EQUIPMENT - 0.7% Eastman Kodak Co. 708,500 54,377,375 Polaroid Corp. 200,000 11,100,000 65,477,375 TOTAL TECHNOLOGY 328,253,079 TRANSPORTATION - 1.1% AIR TRANSPORTATION - 0.7% Northwest Airlines Corp. Class A (a) 1,523,500 55,417,313 Viad Corp. 275,800 5,309,150 60,726,463 RAILROADS - 0.4% CSX Corp. 635,200 35,253,600 TOTAL TRANSPORTATION 95,980,063 UTILITIES - 6.0% ELECTRIC UTILITY - 2.2% Allegheny Power System, Inc. 975,000 26,020,313 American Electric Power Co., Inc. 967,700 40,643,400 Central Maine Power Co. 602,500 7,455,938 CILCORP, Inc. 76,300 3,142,606 Consolidated Edison Co. of New York, Inc. 279,100 8,216,006 DPL, Inc. 637,300 15,693,513 Duke Power Co. 50,000 2,396,875 Entergy Corp. 1,439,500 39,406,313 Illinova Corp. 250,000 5,500,000 Niagara Mohawk Power Corp. (a) 1,006,700 8,619,869 PG&E Corp. 648,400 15,723,700 PacifiCorp. 200,000 4,400,000 Pinnacle West Capital Corp. 338,600 10,179,163 187,397,696 GAS - 0.6% MCN Corp. 400,000 12,250,000 Nova Corp. 650,000 5,555,354 Pacific Enterprises 285,400 9,596,575 Questar Corp. 713,700 28,815,638 56,217,567 SHARES VALUE (NOTE 1) TELEPHONE SERVICES - 3.2% Ameritech Corp. 643,700 $ 43,731,369 AT&T Corp. 113,500 3,979,594 ALLTEL Corp. 508,900 17,016,344 BCE, Inc. 700,000 19,469,091 Bell Atlantic Corp. 365,000 27,694,375 BellSouth Corp. 525,000 24,346,875 Comsat Corp., Series 1 244,200 5,815,013 Frontier Corp. 200,000 3,987,500 MCI Communications Corp. 270,100 10,339,766 Manitoba Telecom Services, Inc. 250,000 2,661,790 NYNEX Corp. 740,000 42,642,500 SBC Communications, Inc. 195,000 12,065,625 Sprint Corp. 312,500 16,445,313 Telus Corp. 450,000 8,262,413 WorldCom, Inc. (a) 1,103,800 35,321,600 273,779,168 TOTAL UTILITIES 517,394,431 TOTAL COMMON STOCKS (Cost $6,217,569,762) 7,890,995,449 CONVERTIBLE PREFERRED STOCKS - 1.7% CONSTRUCTION & REAL ESTATE - 0.1% REAL ESTATE INVESTMENT TRUSTS - 0.1% Vornado Realty Trust $3.25, Series A 127,600 6,906,350 DURABLES - 0.1% AUTOS, TIRES, & ACCESSORIES - 0.1% Republic Industries, Inc. $1.55 219,200 5,370,400 ENERGY - 0.1% OIL & GAS - 0.1% Unocal Capital Trust $3.125 100,000 5,637,500 FINANCE - 1.1% INSURANCE - 0.8% Aetna, Inc. Class C 6 1/4% 760,000 71,250,000 SECURITIES INDUSTRY - 0.3% Salomon, Inc. $2.03 840,700 28,899,063 TOTAL FINANCE 100,149,063 INDUSTRIAL MACHINERY & EQUIPMENT - 0.1% ELECTRICAL EQUIPMENT - 0.1% Loral Space & Communications Ltd. $3.00, Series C (b) 183,200 9,114,200 MEDIA & LEISURE - 0.1% BROADCASTING - 0.1% Evergreen Media Corp. $3.00 (b) 187,200 10,202,400 TECHNOLOGY - 0.1% COMPUTERS & OFFICE EQUIPMENT - 0.1% Wang Labs, Inc. $3.25 (b) 80,000 4,040,000 Wang Labs, Inc. $3.25 157,600 7,958,800 11,998,800 UTILITIES - 0.0% GAS - 0.0% MCN Corp. $4.00 25,100 1,364,813 TOTAL CONVERTIBLE PREFERRED STOCKS (Cost $122,619,633) 150,743,526 CONVERTIBLE BONDS - 1.2% MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) CONSTRUCTION & REAL ESTATE - 0.4% REAL ESTATE INVESTMENT TRUSTS - 0.4% Liberty Property 8%, 7/1/01 Ba2 $ 27,985,000 $ 34,701,400 DURABLES - 0.1% CONSUMER ELECTRONICS - 0.1% Matsushita Electric Industrial Co. Ltd.: 1.30%, 3/29/02 Aa2 JPY 410,000,000 5,114,048 1.40%, 3/31/04 Aa2 JPY 190,000,000 2,369,925 7,483,973 ENERGY - 0.2% OIL & GAS - 0.2% Pennzoil Co. 4 3/4%, 10/1/03 Baa3 9,820,000 12,532,775 MEDIA & LEISURE - 0.0% LODGING & GAMING - 0.0% Hilton Hotels Corp. 5%, 5/15/06 Baa2 3,670,000 3,899,375 RETAIL & WHOLESALE - 0.2% RETAIL & WHOLESALE, MISCELLANEOUS - 0.2% Home Depot, Inc. 3 1/4%, 10/1/01 A1 5,000,000 5,687,500 U.S. Office Products Co. 5 1/2%, 2/1/01 B3 10,000,000 12,250,000 17,937,500 TECHNOLOGY - 0.3% COMPUTERS & OFFICE EQUIPMENT - 0.3% Unisys Corp. 8 1/4%, 3/15/06 B3 17,981,000 23,734,920 TOTAL CONVERTIBLE BONDS (Cost $93,124,832) 100,289,943 CASH EQUIVALENTS - 5.8% MATURITY AMOUNT Investments in repurchase agreements (U.S. Treasury obligations) in a joint trading account at 5.93%, dated 6/30/97 due 7/1/97 $ 498,485,098 498,403,000 TOTAL INVESTMENT IN SECURITIES - 100% (Cost $6,931,717,227) $ 8,640,431,918 CURRENCY ABBREVIATIONS JPY - Japanese yen LEGEND (a) Non-income producing (b) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $23,356,600 or 0.3% of net assets. (c) Standard & Poor's credit ratings are used in the absence of a rating by Moody's Investors Service, Inc. (d) An affiliated company is a company in which the fund has ownership of companies which are or were affiliates are as follows: PURCHASE SALES DIVIDEND VALUE AFFILIATE COST COST INCOME Barr Laboratories, Inc. $ - $ 5,029,783 $ - $ 61,232,600 Beverly Enterprises, Inc. - 3,388,955 - 84,857,500 Integramed America, Inc. - 166,375 - - Synetic, Inc. - 40,768,344 - - TOTALS $- $ 49,353,457 $ - $146,090,100 OTHER INFORMATION Purchases and sales of securities, other than short-term securities, aggregated $2,976,701,733 and $2,433,124,647, respectively. The fund placed a portion of its portfolio transactions with brokerage firms which are affiliates of FMR. The commissions paid to these affiliated firms were $623,898 for the period (see Note 4 of Notes to Financial Statements). The composition of long-term debt holdings as a percentage of total value of investment in securities, is as follows: MOODY'S RATINGS S&P RATINGS Aaa, Aa, A 0.2% AAA, AA, A 0.1% Baa 0.2% BBB 0.2% Ba 0.4% BB 0.0% B 0.4% B 0.4% Caa 0.0% CCC 0.0% Ca, C 0.0% CC, C 0.0% D 0.0% Distribution of investments by country of issue, as a percentage of total value of investment in securities, is as follows: United States 89.8% United Kingdom 2.7 Netherlands 2.1 Canada 2.1 France 1.5 Netherland Antilles 1.0 Others (individually less than 1%) 0.8 TOTAL 100.0% INCOME TAX INFORMATION At June 30, 1997, the aggregate cost of investment securities for income tax purposes was $6,939,210,994. Net unrealized appreciation aggregated $1,701,220,924, of which $1,768,591,981 related to appreciated investment securities and $67,371,057 related to depreciated investment securities. VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 1997 (UNAUDITED) ASSETS Investment in $8,640,431,918 securities, at value (including repurchase agreements of $498,403,000) (cost $6,931,717,227) - See accompanying schedule Cash 63,975 Receivable for 59,449,914 investments sold Receivable for fund 7,030,723 shares sold Dividends receivable 12,137,083 Interest receivable 1,916,557 Other receivables 115,759 TOTAL ASSETS 8,721,145,929 LIABILITIES Payable for $ 126,839,504 investments purchased Payable for fund 1,307,053 shares redeemed Accrued management 3,492,405 fee Other payables and 559,932 accrued expenses TOTAL LIABILITIES 132,198,894 NET ASSETS $8,588,947,035 Net Assets consist of: Paid in capital $6,566,052,739 Undistributed net 64,214,928 investment income Accumulated 249,987,580 undistributed net realized gain (loss) on investments and foreign currency transactions Net unrealized 1,708,691,788 appreciation (depreciation) on investments and assets and liabilities in foreign currencies NET ASSETS, for $8,588,947,035 389,282,331 shares outstanding NET ASSET VALUE, $22.06 offering price and redemption price per share ($8,588,947,035 (divided by) 389,282,331 shares) STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) INVESTMENT INCOME $74,933,797 Dividends Interest 11,519,913 TOTAL INCOME 86,453,710 EXPENSES Management fee $ 18,948,541 Transfer agent fees 2,670,034 Accounting fees and 405,779 expenses Non-interested 18,445 trustees' compensation Custodian fees and 92,149 expenses Registration fees 48,392 Audit 35,310 Legal 10,069 Miscellaneous 238,137 Total expenses 22,466,856 before reductions Expense reductions (557,661 21,909,195 ) NET INVESTMENT 64,544,515 INCOME REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on: Investment 265,331,361 securities (including realized gain of $12,689,716 on sales of investments in affiliated issuers) Foreign currency (16,911 265,314,450 transactions ) Change in net unrealized appreciation (depreciation) on: Investment 847,590,904 securities Assets and (17,469 847,573,435 liabilities in ) foreign currencies NET GAIN (LOSS) 1,112,887,885 NET INCREASE $1,177,432,400 (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS OTHER INFORMATION $ 553,138 Expense reductions Directed brokerage arrangements Custodian credits 4,523 $ 557,661 STATEMENT OF CHANGES IN NET ASSETS INCREASE (DECREASE) IN NET ASSETS SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, 1997 1996 (UNAUDITED) Operations $ 64,544,515 $ 117,458,579 Net investment income Net realized gain 265,314,450 597,117,485 (loss) Change in net 847,573,435 90,992,918 unrealized appreciation (depreciation) NET INCREASE 1,177,432,400 805,568,982 (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS Distributions to (119,852,890) (7,876,787) shareholders From net investment income From net realized (602,593,699) (225,801,230) gain TOTAL DISTRIBUTIONS (722,446,589) (233,678,017) Share transactions 822,950,455 1,829,128,598 Net proceeds from sales of shares Reinvestment of 722,446,589 233,678,017 distributions Cost of shares (372,525,843) (553,042,238) redeemed NET INCREASE 1,172,871,201 1,509,764,377 (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS TOTAL INCREASE 1,627,857,012 2,081,655,342 (DECREASE) IN NET ASSETS NET ASSETS Beginning of period 6,961,090,023 4,879,434,681 End of period $ 8,588,947,035 $ 6,961,090,023 (including undistributed net investment income of $64,214,928 and $117,454,549, respectively) OTHER INFORMATION Shares Sold 40,075,873 93,794,843 Issued in 36,487,203 12,390,139 reinvestment of distributions Redeemed (18,261,978) (28,467,146) Net increase 58,301,098 77,717,836 (decrease) SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, 1997 SELECTED PER-SHARE (UNAUDITED) 1996 1995 1994 1993 E 1992 DATA Net asset value, $ 21.03 $ 19.27 $ 15.35 $ 15.44 $ 13.40 $ 11.85 beginning of period Income from Investment Operations Net investment .18 D .35 .41 .41 .37 .40 income Net realized and 3.02 2.30 4.69 .64 2.06 1.57
unrealized gain (loss) Total from 3.20 2.65 5.10 1.05 2.43 1.97 investment operations Less Distributions From net (.36) (.03) (.40) (.37) (.35) (.42) investment income In excess of net - - - - (.04) - investment income From net realized (1.81) (.86) (.78) (.77) - - gain Total distributions (2.17) (.89) (1.18) (1.14) (.39) (.42) Net asset value, end $ 22.06 $ 21.03 $ 19.27 $ 15.35 $ 15.44 $ 13.40 of period TOTAL RETURN B, C 16.39% 14.28% 35.09% 7.07% 18.29% 16.89% RATIOS AND SUPPLEMENTAL DATA Net assets, end of $8,588,947 $6,961,090 $4,879,435 $2,284,412 $1,318,500 $592,880 period (000 omitted) Ratio of expenses to .60% A .58% .61% .60% .62% .65% average net assets Ratio of expenses to .59% A, .56% .61% .58% .62% .65% average net assets F F F after expense reductions Ratio of net 1.72% A 1.97% 2.56% 2.83% 2.87% 3.52% investment income to average net assets Portfolio turnover rate 68% A 186% 87% 134% 120% 74% Average commission $ .0438 $ .0426 rate G
A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED AND DO NOT REFLECT CHARGES ATTRIBUTED TO YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN. C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. E EFFECTIVE JANUARY 1, 1993, THE FUND ADOPTED STATEMENT OF POSITION 93-2, "DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF INCOME, CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT COMPANIES." AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT CERTAIN RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES. F FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). G FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE STRUCTURES MAY DIFFER. VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO PERFORMANCE AND INVESTMENT SUMMARY PERFORMANCE There are several ways to evaluate a fund's historical performance. You can look at the total percentage change in value, the average annual percentage change or the growth of a hypothetical $10,000 investment. Total return reflects the change in the value of an investment, assuming reinvestment of the fund's dividend income and capital gains (the profits earned upon the sale of securities that have grown in value). AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and show you what would have happened if the fund had performed at a constant rate each year. Average annual total returns will appear once the fund is a year old, and the growth of a hypothetical $10,000 investment in the fund will appear in the fund's next report six months from now. You can compare the fund's returns to the performance of the Standard & Poor's 500 Index - a widely recognized, unmanaged index of common stocks. This benchmark reflects the reinvestment of dividends and capital gains, if any. UNDERSTANDING PERFORMANCE How a fund did yesterday is no guarantee of how it will do tomorrow. The stock market, for example, has a history of long-term growth and short-term volatility. In turn, the share price and return of a fund that invests in stocks will vary. That means if you sell your shares during a market downturn, you might lose money. But if you can ride out the market's ups and downs, you may have a gain. (checkmark) PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER. Past performance is no guarantee of future results. Principal and investment return will vary and you may have a gain or loss when you withdraw your money. INVESTMENT SUMMARY TOP FIVE STOCKS AS OF JUNE 30, 1997 % OF FUND'S INVESTMENTS General Electric Co. 3.5 Philip Morris Companies, Inc. 2.4 BankAmerica Corp. 2.4 Tyco International Ltd. 2.2 Citicorp 1.9 TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997 % OF FUND'S INVESTMENTS Finance 14.7 Health 12.2 Retail & Wholesale 9.6 Industrial Machinery & Equipment 9.1 Nondurables 9.0 ASSET ALLOCATION AS OF JUNE 30, 1997* Row: 1, Col: 1, Value: 4.8 Row: 1, Col: 2, Value: 1.8 Row: 1, Col: 3, Value: 93.40000000000001 Stocks 94.4% Bonds 0.8% Short-term investments 4.8% FOREIGN INVESTMENTS 7.5% * % OF FUND'S INVESTMENTS VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO FUND TALK: THE MANAGER'S OVERVIEW An interview with Beth Terrana, Portfolio Manager of Growth & Income Portfolio Q. HOW DID THE FUND PERFORM, BETH? A. For the six months that ended June 30, 1997, the fund trailed the Standard & Poor's 500 Index, which returned 20.61%. Going forward, the fund's semiannual report will also quote 12-month performance. Q. LOOKING AT THE FUND'S PERFORMANCE VERSUS THAT OF ITS INDEX, WHICH STRATEGIES PLAYED KEY ROLES? A. Broadly, my decision to emphasize selected stocks in the strong finance, health and diversified industrials sectors was particularly helpful. Within the finance and health areas, I focused on money-center banks and pharmaceuticals, including BankAmerica and Bristol-Myers Squibb - two of the largest contributors to fund performance for the period. General Electric - the fund's top holding - was another notable contributor based on its strong performance as well as its overweighting in the fund. Additionally, a substantial underweighting of generally weak electric and telecommunications utilities stocks proved very helpful. The largest detractor relative to the index was the fund's underexposure to a number of large-capitalization technology and nondurables stocks, which accounted for a disproportionate amount of the index's return. Microsoft and Coca-Cola -two of the largest index constituents - illustrate this point particularly well. Together, these TWO stocks alone accounted for approximately 1.5% of the index's 20.61% return. While in hindsight I clearly wish I'd owned more of these stocks, fundamentals for these companies didn't appear to support their valuations, which were at steep premiums to the overall market as well as comparable firms. Q. HOW DID SOME OF THE FUND'S TOP POSITIONS FARE RELATIVE TO THE INDEX? A. Many of the fund's larger exposures did well, performing in line with my expectations. Individual security selection will always be a main driver of performance and the fund's top positions obviously play a key role. Over the course of the period, six of the fund's top ten positions outperformed the index. Q. FOR THOSE INVESTORS WHO MAY BE UNFAMILIAR WITH YOUR MANAGEMENT STYLE, HOW WOULD YOU CHARACTERIZE YOUR INVESTMENT PROCESS? A. Fundamentally, I am a bottom-up investor who believes that superior investment performance results from owning companies with improving financial returns. Improvements in financial returns drive both sustainable improvements in a company's secular growth rate and its earnings power. The most important elements I look for in an investment include restructuring potential, rising returns on invested capital, good balance sheet management, strong free cash flow and shareholder-friendly management. Increasingly, global franchises and strong brands have also become important factors. I've generally found that companies exhibiting some or all of these attributes tend to generate improving financial returns -including expanding profit margins and accelerating earnings growth rates -through time. Further, as a firm's financial returns improve, its stock is likely to be rewarded with a higher valuation once the market finally catches on. Q. WHAT'S YOUR OUTLOOK FOR THE NEXT SIX MONTHS? A. As a backdrop to the stock market, I believe it's very likely that the supportive environment - moderate economic growth and low inflation - will continue. Also, given that there are few signs of incipient inflation, I don't foresee any significant action by the Federal Reserve to raise interest rates - an event that would likely be a negative for the market, at least over the short term. Assuming this favorable economic environment continues, the critical factor going forward will be corporate earnings, which at this time appear relatively sustainable overall. However, I remain focused on those companies with the potential to deliver exceptional numbers, particularly given the recent propensity of the market to dramatically reduce stock prices upon earnings disappointments. Recently, even earnings numbers that come in as expected have resulted in large stock price declines, partly because analysts' "real" expectations were even higher. FUND FACTS GOAL: seeks reasonable income by investing primarily in income producing equity securities to provide current income and increase the value of the fund's shares START DATE: October 9,1986 SIZE: as of June 30, 1997, more than $8.5 billion MANAGER: Stephen Petersen, since January 1997; joined Fidelity in 1980 (checkmark) VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO INVESTMENTS JUNE 30, 1997 (UNAUDITED) Showing Percentage of Total Value of Investment in Securities COMMON STOCKS - 93.4% SHARES VALUE (NOTE 1) AEROSPACE & DEFENSE - 4.5% AEROSPACE & DEFENSE - 4.1% AlliedSignal, Inc. 26,700 $ 2,242,800 Boeing Co. 17,200 912,661 Lockheed Martin Corp. 11,600 1,201,325 Textron, Inc. 20,800 1,380,600 United Technologies Corp. 18,500 1,535,500 7,272,886 DEFENSE ELECTRONICS - 0.4% Raytheon Co. 14,800 754,800 TOTAL AEROSPACE & DEFENSE 8,027,686 BASIC INDUSTRIES - 5.1% CHEMICALS & PLASTICS - 3.9% Air Products & Chemicals, Inc. 9,900 804,375 Avery Dennison Corp. 6,000 240,750 Cytec Industries, Inc. (a) 4,300 160,713 Goodrich (B.F.) Co. 12,600 545,738 Hercules, Inc. 2,300 110,113 Monsanto Co. 35,900 1,545,944 Praxair, Inc. 45,800 2,564,800 Raychem Corp. 5,700 423,938 Sealed Air Corp. (a) 14,200 674,500 7,070,871 PAPER & FOREST PRODUCTS - 1.2% Fort Howard Corp. (a) 7,500 379,688 International Paper Co. 3,900 189,394 James River Corp. of Virginia 10,900 403,300 Kimberly-Clark Corp. 22,300 1,109,425 2,081,807 TOTAL BASIC INDUSTRIES 9,152,678 CONSTRUCTION & REAL ESTATE - 3.0% BUILDING MATERIALS - 1.8% American Standard Companies, Inc. (a) 19,900 890,525 Masco Corp. 39,400 1,644,950 Sherwin-Williams Co. 21,300 657,638 3,193,113 REAL ESTATE INVESTMENT TRUSTS - 1.2% Beacon Properties Corp. 13,600 453,900 Duke Realty Investors, Inc. 9,300 376,650 Equity Residential Properties Trust (SBI) 12,400 589,000 Public Storage, Inc. 18,400 538,200 Storage USA, Inc. 5,500 210,375 2,168,125 TOTAL CONSTRUCTION & REAL ESTATE 5,361,238 DURABLES - 3.2% AUTOS, TIRES, & ACCESSORIES - 0.4% Eaton Corp. 5,200 454,025 Navistar International Corp. (a) 18,200 313,950 767,975 CONSUMER DURABLES - 1.7% Corning, Inc. 13,200 734,250 Minnesota Mining & Manufacturing Co. 23,400 2,386,800 3,121,050 CONSUMER ELECTRONICS - 0.3% Newell Co. 14,100 558,713 SHARES VALUE (NOTE 1) TEXTILES & APPAREL - 0.8% Liz Claiborne, Inc. 20,100 $ 937,163 VF Corp. 5,200 442,650 1,379,813 TOTAL DURABLES 5,827,551 ENERGY - 7.5% ENERGY SERVICES - 0.9% Halliburton Co. 5,900 467,575 McDermott International, Inc. 7,400 215,988 Schlumberger Ltd. 7,800 975,000 1,658,563 OIL & GAS - 6.6% Amoco Corp. 13,500 1,173,656 British Petroleum PLC ADR 30,064 2,251,042 Exxon Corp. 22,300 1,371,450 Mobil Corp. 14,800 1,034,150 Royal Dutch Petroleum Co. 33,200 1,805,250 Texaco, Inc. 15,300 1,663,875 Tosco Corp. 21,000 628,688 Total SA sponsored ADR 14,000 708,750 USX-Marathon Group 32,500 938,438 Unocal Corp. 5,900 228,994 11,804,293 TOTAL ENERGY 13,462,856 FINANCE - 14.7% BANKS - 7.9% Bank of New York Co., Inc. 35,700 1,552,950 BankBoston Corp. 7,600 547,675 BankAmerica Corp. 65,500 4,228,844 Citicorp 27,800 3,351,638 First Bank System, Inc. 18,400 1,570,900 First Union Corp. 8,200 758,500 Mellon Bank Corp. 19,800 893,475 NationsBank Corp. 15,100 973,950 Wells Fargo & Co. 1,200 323,400 14,201,332 CREDIT & OTHER FINANCE - 1.8% American Express Co. 16,600 1,236,700 Associates First Capital Corp. 8,400 466,200 Household International, Inc. 12,800 1,503,200 3,206,100 FEDERAL SPONSORED CREDIT - 1.9% Federal Home Loan Mortgage Corporation 50,200 1,725,625 Federal National Mortgage Association 37,400 1,631,575 3,357,200 INSURANCE - 2.4% AFLAC, Inc. 7,400 349,650 Allstate Corp. 23,800 1,737,400 MGIC Investment Corp. 3,400 162,988 PMI Group, Inc. 1,600 99,800 Progressive Corp. 300 26,100 Travelers Group, Inc. (The) 29,100 1,835,119 4,211,057 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) FINANCE - CONTINUED SAVINGS & LOANS - 0.7% Ahmanson (H.F.) & Co. 4,900 $ 210,700 Charter One Financial Corp. 5,100 274,763 Great Western Financial Corp. 14,600 784,750 1,270,213 TOTAL FINANCE 26,245,902 HEALTH - 11.9% DRUGS & PHARMACEUTICALS - 7.9% American Home Products Corp. 27,300 2,088,450 Bristol-Myers Squibb Co. 38,300 3,102,300 Cytyc Corp. (a) 4,300 116,638 Merck & Co., Inc. 17,100 1,769,850 Pfizer, Inc. 32,400 1,935,900 Schering-Plough Corp. 37,000 1,771,375 SmithKline Beecham PLC ADR 25,500 2,336,438 Warner-Lambert Co. 8,400 1,043,700 14,164,651 MEDICAL EQUIPMENT & SUPPLIES - 3.7% Bard (C.R.), Inc. 12,500 453,906 Baxter International, Inc. 26,900 1,405,525 Boston Scientific Corp. (a) 14,300 878,556 Johnson & Johnson 35,200 2,266,000 McKesson Corp. 10,500 813,750 Medtronic, Inc. 9,500 769,500 6,587,237 MEDICAL FACILITIES MANAGEMENT - 0.3% Columbia/HCA Healthcare Corp. 3,000 117,938 Humana, Inc. (a) 20,900 483,313 601,251 TOTAL HEALTH 21,353,139 HOLDING COMPANIES - 0.1% CINergy Corp. 6,300 219,319 INDUSTRIAL MACHINERY & EQUIPMENT - 8.5% ELECTRICAL EQUIPMENT - 4.6% Emerson Electric Co. 21,600 1,189,350 General Electric Co. 96,400 6,302,150 Harris Corp. 3,200 268,800 Westinghouse Electric Corp. 20,500 474,063 8,234,363 INDUSTRIAL MACHINERY & EQUIPMENT - 3.7% Illinois Tool Works, Inc. 21,600 1,078,650 Ingersoll-Rand Co. 10,000 617,500 Stanley Works 22,700 908,000 Tyco International Ltd. 57,400 3,992,888 6,597,038 POLLUTION CONTROL - 0.2% Waste Management, Inc. 12,000 385,500 TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 15,216,901 MEDIA & LEISURE - 4.6% BROADCASTING - 1.1% Evergreen Media Corp. Class A (a) 20,400 910,350 Time Warner, Inc. 20,800 1,003,600 1,913,950 ENTERTAINMENT - 0.6% Disney (Walt) Co. 12,600 1,011,150 SHARES VALUE (NOTE 1) LEISURE DURABLES & TOYS - 0.5% Mattel, Inc. 27,100 $ 918,013 LODGING & GAMING - 0.3% Host Marriott Corp. (a) 31,200 555,750 PUBLISHING - 2.1% Cognizant Corp. 15,400 623,700 Harcourt General, Inc. 9,200 438,150 McGraw-Hill, Inc. 12,500 735,156 Scholastic Corp. (a) 6,900 241,500 Times Mirror Co. Class A 27,900 1,541,475 World Color Press, Inc. (a) 7,500 178,125 3,758,106 TOTAL MEDIA & LEISURE 8,156,969 NONDURABLES - 9.0% BEVERAGES - 0.7% PepsiCo, Inc. 31,600 1,186,975 FOODS - 1.6% Campbell Soup Co. 42,500 2,125,000 Heinz (H.J.) Co. 8,700 401,288 Hershey Foods Corp. 6,800 376,125 2,902,413 HOUSEHOLD PRODUCTS - 4.2% Avon Products, Inc. 19,400 1,368,913 Clorox Co. 6,800 897,600 Colgate-Palmolive Co. 1,300 84,825 Procter & Gamble Co. 12,200 1,723,250 Rubbermaid, Inc. 9,800 291,550 Unilever PLC Ord. 30,900 885,526 Unilever NV ADR 10,900 2,333,281 7,584,945 TOBACCO - 2.5% Philip Morris Companies, Inc. 98,500 4,370,938 TOTAL NONDURABLES 16,045,271 PRECIOUS METALS - 0.2% Getchell Gold Corp. (a) 12,100 426,525 RETAIL & WHOLESALE - 9.4% APPAREL STORES - 1.4% Gap, Inc. 29,900 1,162,363 Payless ShoeSource, Inc. (a) 24,200 1,323,438 2,485,801 DRUG STORES - 1.5% CVS Corp. 37,977 1,946,321 Walgreen Co. 14,500 777,563 2,723,884 GENERAL MERCHANDISE STORES - 5.2% Coles Myer Ltd. 71,500 371,324 Consolidated Stores Corp. (a) 89,975 3,126,631 Dayton Hudson Corp. 20,100 1,069,069 Federated Department Stores, Inc. (a) 71,400 2,481,150 Sears, Roebuck & Co. 21,100 1,134,125 Wal-Mart Stores, Inc. 30,900 1,044,806 9,227,105 GROCERY STORES - 0.7% American Stores Co. 10,500 518,438 Asda Group PLC 177,400 366,194 Ahold NV 3,600 303,528 1,188,160 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) RETAIL & WHOLESALE - CONTINUED RETAIL & WHOLESALE, MISCELLANEOUS - 0.6% Home Depot, Inc. (The) 16,300 $ 1,123,681 TOTAL RETAIL & WHOLESALE 16,748,631 SERVICES - 3.6% ADVERTISING - 1.8% Interpublic Group of Companies, Inc. 12,500 766,406 Omnicom Group, Inc. 28,600 1,762,475 Outdoor Systems, Inc. (a) 4,800 183,600 WPP Group PLC 127,000 519,028 3,231,509 LEASING & RENTAL - 0.3% Hanover Compressor Co. 100 1,950 Republic Industries, Inc. (a) 5,600 139,300 Ryder Systems, Inc. 12,200 402,600 543,850 PRINTING - 0.3% Donnelley (R.R.) & Sons Co. 15,900 582,338 SERVICES - 1.2% ADT Ltd. (a) 19,800 653,400 Ecolab, Inc. 14,300 682,825 National Service Industries, Inc. 6,300 306,731 Service Corp. International 14,818 487,142 2,130,098 TOTAL SERVICES 6,487,795 TECHNOLOGY - 7.4% COMMUNICATIONS EQUIPMENT - 0.6% Alcatel Alsthom Compagnie Generale d'Electricite SA sponsored ADR 2,400 60,600 Alcatel Alsthom Compagnie Generale d'Electricite SA 6,600 826,094 Andrew Corp. (a) 5,100 143,438 1,030,132 COMPUTER SERVICES & SOFTWARE - 1.7% Adobe Systems, Inc. 2,500 87,656 Automatic Data Processing, Inc. 8,500 399,500 CUC International, Inc. (a) 15,600 402,675 CompUSA, Inc. (a) 22,300 479,450 Microsoft Corp. (a) 9,600 1,213,200 Oracle Systems Corp. (a) 9,700 488,638 3,071,119 COMPUTERS & OFFICE EQUIPMENT - 3.8% Compaq Computer Corp. (a) 14,600 1,449,050 Diebold, Inc. 12,550 489,450 International Business Machines Corp. 28,100 2,534,269 Pitney Bowes, Inc. 18,700 1,299,650 Xerox Corp. 13,600 1,072,700 6,845,119 ELECTRONICS - 1.3% Intel Corp. 11,500 1,630,844 Texas Instruments, Inc. 8,500 714,531 2,345,375 TOTAL TECHNOLOGY 13,291,745 UTILITIES - 0.7% ELECTRIC UTILITY - 0.3% Edison International 22,000 547,250 SHARES VALUE (NOTE 1) TELEPHONE SERVICES - 0.4% WorldCom, Inc. (a) 20,200 $ 646,400 TOTAL UTILITIES 1,193,650 TOTAL COMMON STOCKS (Cost $151,597,143) 167,217,856 CONVERTIBLE PREFERRED STOCKS - 1.0% CONSTRUCTION & REAL ESTATE - 0.2% REAL ESTATE INVESTMENT TRUSTS - 0.2% Vornado Realty Trust $3.25 Series A 5,300 286,863 DURABLES - 0.1% AUTOS, TIRES, & ACCESSORIES - 0.1% Republic Industries, Inc. $1.55 8,600 210,700 ENERGY - 0.3% OIL & GAS - 0.3% Tosco Financing Trust $2.875 (b) 8,200 462,275 HEALTH - 0.3% MEDICAL EQUIPMENT & SUPPLIES - 0.3% McKesson Financing Trust $2.50 (b) 9,400 571,050 MEDIA & LEISURE - 0.1% LODGING & GAMING - 0.1% Host Marriott Financial Trust $3.375 (b) 4,800 277,800 TOTAL CONVERTIBLE PREFERRED STOCKS (Cost $1,729,992) 1,808,688 CONVERTIBLE BONDS - 0.8% MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) INDUSTRIAL MACHINERY & EQUIPMENT - 0.6% POLLUTION CONTROL - 0.6% USA Waste Services, Inc. 4%, 2/1/02 Ba2 $ 642,000 683,730 United Waste Systems, Inc. 4 1/2%, 6/1/01 B1 198,000 271,755 955,485 RETAIL & WHOLESALE - 0.2% GENERAL MERCHANDISE STORES - 0.1% Federated Department Stores, Inc. 5%, 10/1/03 Baa3 220,000 262,350 RETAIL & WHOLESALE, MISCELLANEOUS - 0.1% Staples, Inc. 4 1/2%, 10/1/00 (b) Ba2 93,000 112,995 TOTAL RETAIL & WHOLESALE 375,345 TOTAL CONVERTIBLE BONDS (Cost $1,289,817) 1,330,830 CASH EQUIVALENTS - 4.8% MATURITY VALUE AMOUNT (NOTE 1) Investments in repurchase agreements (U.S. Treasury obligations) in a joint trading account at 5.93%, dated 6/30/97 due 7/1/97 $ 8,616,419 $ 8,615,000 TOTAL INVESTMENT IN SECURITIES - 100% (Cost $163,231,952) $ 178,972,374 LEGEND (a) Non-income producing (b) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $1,424,120 or 0.8% of net assets. (c) Standard & Poor's credit ratings are used in the absence of a rating by Moody's Investors Service, Inc. OTHER INFORMATION Purchases and sales of securities, other than short-term securities, aggregated $189,250,835 and $35,258,709, respectively. The fund placed a portion of its portfolio transactions with brokerage firms which are affiliates of Fidelity Management & Research Company. The commissions paid to these affiliated firms were $22,730 for the period (see Note 4 of Notes to Financial Statements). INCOME TAX INFORMATION At June 30, 1997, the aggregate cost of investment securities for income tax purposes was $163,231,952. Net unrealized appreciation aggregated $15,740,422, of which $16,585,242 related to appreciated investment securities and $844,820 related to depreciated investment securities. VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 1997 (UNAUDITED) ASSETS Investment in $178,972,374 securities, at value (including repurchase agreements of $8,615,000) (cost $163,231,952) - See accompanying schedule Cash 21,799 Receivable for 505,400 investments sold Receivable for fund 841,663 shares sold Dividends receivable 160,697 Interest receivable 14,678 TOTAL ASSETS 180,516,611 LIABILITIES Payable for $ 1,047,870 investments purchased Payable for fund 80 shares redeemed Accrued management 68,520 fee Other payables and 36,258 accrued expenses TOTAL LIABILITIES 1,152,728 NET ASSETS $179,363,883 Net Assets consist of: Paid in capital $163,362,211 Undistributed net 592,329 investment income Accumulated (331,075 undistributed net ) realized gain (loss) on investments and foreign currency transactions Net unrealized 15,740,418 appreciation (depreciation) on investments and assets and liabilities in foreign currencies NET ASSETS, for $ 179,363,883 15,613,501 shares outstanding NET ASSET VALUE, $11.49 offering price and redemption price per share ($179,363,883 (divided by) 15,613,501 shares) STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) INVESTMENT INCOME $ 692,052 Dividends Interest 220,743 TOTAL INCOME 912,795 EXPENSES Management fee $ 216,567 Transfer agent fees 35,283 Accounting fees and 34,705 expenses Non-interested 131 trustees' compensation Custodian fees and 22,607 expenses Audit 11,519 Legal 16 Total expenses 320,828 before reductions Expense reductions (209 320,619 ) NET INVESTMENT 592,176 INCOME REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on: Investment (330,979 ) securities Foreign currency (96 (331,075 ) ) transactions Change in net unrealized appreciation (depreciation) on: Investment 15,750,754 securities Assets and (4) 15,750,750 liabilities in foreign currencies NET GAIN (LOSS) 15,419,675 NET INCREASE $ 16,011,851 (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS OTHER INFORMATION $ 209 Expense reductions Custodian credits STATEMENT OF CHANGES IN NET ASSETS INCREASE (DECREASE) SIX MONTHS DECEMBER 31, IN NET ASSETS ENDED 1996 JUNE 30, 1997 (COMMENCEMENT (UNAUDITED) OF OPERATIONS) Operations $ 592,176 $ 153 Net investment income Net realized gain (331,075) - (loss) Change in net 15,750,750 (10,332) unrealized appreciation (depreciation) NET INCREASE 16,011,851 (10,179) (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS Share transactions 176,559,612 1,000,010 Net proceeds from sales of shares Cost of shares (14,197,411) - redeemed NET INCREASE 162,362,201 1,000,010 (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS TOTAL INCREASE 178,374,052 989,831 (DECREASE) IN NET ASSETS NET ASSETS Beginning of period 989,831 - End of period $179,363,883 $ 989,831 (including undistributed net investment income of $592,329 and $153, respectively) OTHER INFORMATION Shares Sold 16,857,064 100,001 Redeemed (1,343,564) - Net increase 15,513,500 100,001 (decrease) SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS SIX MONTHS ENDED DECEMBER 31, JUNE 30, 1997 1996 (UNAUDITED) (COMMENCEMENT OF OPERATIONS) SELECTED PER-SHARE DATA Net asset value, $ 9.90 $ 10.00 beginning of period Income from Investment Operations Net investment .07 D .00 income Net realized and 1.52 (.10) unrealized gain (loss) Total from 1.59 (.10) investment operations Net asset value, end $ 11.49 $ 9.90 of period TOTAL RETURN B, C 16.06% (1.00)% RATIOS AND SUPPLEMENTAL DATA Net assets, end of $179,364 $ 990 period (000 omitted) Ratio of expenses to .75% A 1.00% A, average net assets E Ratio of net 1.38% A 3.89% A investment income to average net assets Portfolio turnover rate 86% A 0% A Average commission $ .0280 $ .0120 rate F
ANNUALIZED TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED AND DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN. THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE BEEN HIGHER. A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE STRUCTURES MAY DIFFER. VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO PERFORMANCE AND INVESTMENT SUMMARY PERFORMANCE There are several ways to evaluate a fund's historical performance. You can look at the total percentage change in value, the average annual percentage change or the growth of a hypothetical $10,000 investment. Total return reflects the change in the value of an investment, assuming reinvestment of the fund's dividend income and capital gains (the profits earned upon the sale of securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED PAST 1 LIFE OF JUNE 30, 1997 YEAR FUND INDEX 500 34.06% 19.67% S&P 500(registered trademark) 34.70% 20.03%
AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what would have happened if the fund had performed at a constant rate each year. You can compare the fund's returns to the performance of the Standard & Poor's 500 Index - a widely recognized, unmanaged index of common stocks. This benchmark includes reinvested dividends and capital gains, if any. UNDERSTANDING PERFORMANCE How a fund did yesterday is no guarantee of how it will do tomorrow. The stock market, for example, has a history of long-term growth and short-term volatility. In turn, the share price and return of a fund that invests in stocks will vary. That means if you sell your shares during a market downturn, you might lose money. But if you can ride out the market's ups and downs, you may have a gain. (checkmark) Figures for more than one year assume a steady compounded rate of return and are not the fund's year-by-year results, which fluctuated over the periods shown. The life of fund figures are from commencement of operations, August 27, 1992. If Fidelity had not reimbursed certain fund expenses, the past one year and life of fund return figures would have been lower. PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD BE LOWER. Past performance is no guarantee of future results. Principal and investment return will vary and you may have a gain or loss when you withdraw your money.
$10,000 OVER LIFE OF FUND 1992/08/27 10000.00 10000.00 1992/08/31 10014.00 10018.36 1992/09/30 10130.00 10136.58 1992/10/31 10152.00 10172.06 1992/11/30 10498.00 10518.92 1992/12/31 10630.67 10648.31 1993/01/31 10707.47 10737.75 1993/02/28 10856.70 10883.79 1993/03/31 11095.84 11113.43 1993/04/30 10822.25 10844.49 1993/05/31 11103.95 11135.12 1993/06/30 11132.32 11167.41 1993/07/31 11081.66 11122.74 1993/08/31 11501.17 11544.30 1993/09/30 11407.95 11455.40 1993/10/31 11641.01 11692.53 1993/11/30 11527.52 11581.45 1993/12/31 11666.06 11721.59 1994/01/31 12059.53 12120.12 1994/02/28 11732.95 11791.67 1994/03/31 11223.46 11277.55 1994/04/30 11357.65 11421.90 1994/05/31 11533.77 11609.22 1994/06/30 11252.82 11324.80 1994/07/31 11623.93 11696.25 1994/08/31 12087.29 12175.80 1994/09/30 11793.76 11877.49 1994/10/31 12055.84 12144.73 1994/11/30 11617.64 11702.42 1994/12/31 11787.47 11875.97 1995/01/31 12099.87 12183.91 1995/02/28 12563.64 12658.72 1995/03/31 12931.02 13032.28 1995/04/30 13311.22 13416.08 1995/05/31 13834.52 13952.32 1995/06/30 14148.51 14276.43 1995/07/31 14620.55 14749.84 1995/08/31 14656.86 14786.86 1995/09/30 15269.88 15410.86 1995/10/31 15218.62 15355.85 1995/11/30 15880.76 16029.97 1995/12/31 16171.25 16338.71 1996/01/31 16724.46 16894.88 1996/02/29 16880.36 17051.49 1996/03/31 17054.17 17215.70 1996/04/30 17292.62 17469.46 1996/05/31 17733.85 17919.99
1996/06/30 17809.61 17988.27 1996/07/31 17020.75 17193.55 1996/08/31 17370.61 17556.16 1996/09/30 18342.21 18544.22 1996/10/31 18848.06 19055.67 1996/11/30 20260.89 20496.09 1996/12/31 19844.17 20090.06 1997/01/31 21074.26 21345.29 1997/02/28 21231.99 21512.63 1997/03/31 20349.53 20628.68 1997/04/30 21559.17 21860.21 1997/05/31 22870.18 23191.06 1997/06/30 23874.76 24230.02
Let's say hypothetically that $10,000 was invested in Index 500 Portfolio on August 27, 1992, when the fund started. As the chart shows, by June 30, 1997, the value of the investment would have grown to $23,875 - a 138.75% increase on the initial investment. For comparison, look at how the S&P 500 did over the same period. With dividends and capital gains, if any, reinvested, the same $10,000 investment would have grown to $24,230 - a 142.30% increase.
INVESTMENT SUMMARY TOP TEN STOCKS AS OF JUNE 30, 1997 % OF FUND'S INVESTMENTS General Electric Co. 2.9 Coca-Cola Co. (The) 2.3 Exxon Corp. 2.1 Microsoft Corp. 2.1 Merck & Co., Inc. 1.7 Royal Dutch Petroleum Co. 1.6 Intel Corp. 1.6 Philip Morris Companies, Inc. 1.5 Procter & Gamble Co. 1.3 International Business Machines Corp. 1.3
TOP TEN MARKET SECTORS AS OF JUNE 30, 1997 % OF FUND'S INVESTMENTS Finance 14.3 Technology 13.3 Nondurables 10.8 Health 10.7 Utilities 8.5 Energy 8.3 Industrial Machinery & Equipment 5.6 Basic Industries 5.0 Retail & Wholesale 4.4 Durables 3.8
VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO FUND TALK: THE MANAGER'S OVERVIEW An interview with Jennifer Farrelly, Portfolio Manager of Index 500 Portfolio Q. HOW DID THE FUND PERFORM, JEN? A. For the six months that ended June 30, 1997, the fund performed in line with the 20.61% return of the Standard & Poor's 500 Index. Of course, the fund's total return is slightly lower than the index due to management expenses. The S&P 500 returned 34.70% for the 12 months ended June 30, 1997. Q. HOW WOULD YOU CHARACTERIZE THE MARKET OVER THE PAST SIX MONTHS? A. The U.S. stock market continued to be strong, led by large-capitalization companies. There were a number of factors that contributed to the positive investing environment. Most importantly, corporate earnings were healthy, helped by a steadily growing economy that has shown no signs of emerging inflation. Interest rates remained relatively low, helping to sustain economic growth, keep corporate borrowing costs under control and make investment alternatives to stocks less attractive. Economic growth remained moderate enough to discourage the Federal Reserve Board from aggressively raising interest rates to cool an overheated economy and head off potential inflation. Q. AT THE SAME TIME, THE FED DID RAISE RATES BACK IN MARCH . . . A. That's right. In February, Fed Chairman Alan Greenspan indicated in his semiannual Congressional testimony that the Fed was inclined to raise short-term rates in the first half of 1997, as a pre-emptive strike against possible inflation caused by a tight labor market. As the Fed's March 25 Open Market Committee meeting approached and data emerged showing the economy picking up speed, the market experienced a sharp sell-off. Investors became convinced that the Fed would raise rates. The Fed did so, increasing a key short-term rate by 0.25% at its March meeting. However, when statistics emerged in the second quarter showing the economy slowing and no significant increase in inflation, the market recovered from its late March and early April correction and continued its steady upward climb through the end of the period. Q. WHY DID THE STOCKS OF THE LARGEST COMPANIES CONTINUE TO PERFORM WELL? A. Because they tended to provide reliable earnings, and earnings are one of the main drivers of stock prices. With the economy showing strength, the stock market broadened somewhat with the prices of small- and mid-capitalization stocks also starting to show improvement. At the same time, cost cutting and sustained international sales helped large-cap stocks maintain their status as market leaders. Q. WERE THERE ANY PARTICULAR SECTORS OF THE MARKET THAT PROVED TO BE MARKET LEADERS? A. Not really. No one sector stood out above the rest, although many financial services stocks did well. In the past, the uncertain interest-rate environment probably would have adversely affected these stocks. However, interest rates remain at a relatively low level and many financial services companies have emphasized steadier fee-based businesses that tend to insulate them from the negative influence that monetary policy might exert. In addition, many financial services firms benefited from the strong stock market and the positive impact of significant inflows of capital, especially through mutual funds. Positive merger and acquisition activity also bolstered stocks in the sector. Q. WHAT SECTORS LAGGED DURING THE PERIOD? A. Precious metals was one area that lagged the market. Although we continue to use more gold than we mine, its price continues to plummet. That's because many central banks have sold their gold reserves off recently because the metal has been such a poor performing asset. For example, Australia recently sold off a fair amount of its reserves to buy U.S. government bonds, among other investments. In addition, gold often is seen as a hedge against inflation, and with such positive news on that front recently, the precious metal has lost its luster. Q. WHAT'S YOUR OUTLOOK FOR THE REST OF 1997? A. Even though investors have seen valuations well above historical levels, earnings growth and earnings surprises have supported stock prices and driven them higher. Nevertheless, investors should understand that this situation leads to a great deal of uncertainty looking forward. While the large-cap stocks that make up the S&P 500 have rallied to post annual returns in the 20% to 30% range for more than two years, the index's historical average annual return is approximately 11%. Investors should set their expectations accordingly. FUND FACTS GOAL: seeks reasonable income by investing primarily in income producing equity securities to provide current income and increase the value of the fund's shares START DATE: October 9,1986 SIZE: as of June 30, 1997, more than $8.5 billion MANAGER: Stephen Petersen, since January 1997; joined Fidelity in 1980 (checkmark) VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO INVESTMENTS JUNE 30, 1997 (UNAUDITED) Showing Percentage of Total Value of Investment in Securities COMMON STOCKS - 93.0% SHARES VALUE (NOTE 1) AEROSPACE & DEFENSE - 2.2% AEROSPACE & DEFENSE - 1.9% AlliedSignal, Inc. 59,100 $ 4,964,223 Boeing Co. 149,918 7,955,024 Lockheed Martin Corp. 40,393 4,183,200 McDonnell Douglas Corp. 44,500 3,048,250 Rockwell International Corp. 45,900 2,708,100 Textron, Inc. 34,700 2,303,213 United Technologies Corp. 49,600 4,116,800 29,278,810 DEFENSE ELECTRONICS - 0.2% Northrop Grumman Corp. 12,000 1,053,750 Raytheon Co. 49,300 2,514,300 3,568,050 SHIP BUILDING & REPAIR - 0.1% General Dynamics Corp. 13,200 990,000 TOTAL AEROSPACE & DEFENSE 33,836,860 BASIC INDUSTRIES - 5.0% CHEMICALS & PLASTICS - 2.7% Air Products & Chemicals, Inc. 23,300 1,893,125 Avery Dennison Corp. 21,900 878,738 Dow Chemical Co. 50,800 4,425,950 du Pont (E.I.) de Nemours & Co. 235,800 14,825,925 Eastman Chemical Co. 16,175 1,027,113 Engelhard Corp. 30,200 632,313 FMC Corp. (a) 7,700 611,669 Goodrich (B.F.) Co. 11,300 489,431 Great Lakes Chemical Corp. 12,500 654,688 Hercules, Inc. 21,500 1,029,313 Monsanto Co. 123,000 5,296,688 Morton International, Inc. 29,700 896,569 Nalco Chemical Co. 14,000 540,750 PPG Industries, Inc. 38,300 2,226,188 Praxair, Inc. 32,800 1,836,800 Raychem Corp. 9,400 699,125 Rohm & Haas Co. 13,300 1,197,831 Union Carbide Corp. 26,600 1,251,863 W.R. Grace & Co. 15,100 832,388 41,246,467 IRON & STEEL - 0.2% Aeroquip Vickers, Inc. 5,800 274,050 Allegheny Teledyne, Inc. 36,384 982,368 Armco, Inc. (a) 22,400 86,800 Bethlehem Steel Corp. (a) 23,300 243,194 Inland Steel Industries, Inc. 10,200 266,475 Nucor Corp. 18,300 1,033,950 USX-U.S. Steel Group 17,800 624,113 Worthington Industries, Inc. 20,150 368,997 3,879,947 METALS & MINING - 0.6% ASARCO, Inc. 9,000 275,625 Alcan Aluminium Ltd. 47,257 1,612,143 Aluminum Co. of America 36,200 2,728,575 Cyprus Amax Minerals Co. 19,450 476,525 Freeport-McMoRan Copper & Gold, Inc. Class B 40,500 1,260,563 Inco Ltd. 35,136 1,049,766 Phelps Dodge Corp. 13,500 1,150,031 Reynolds Metals Co. 15,300 1,090,125 9,643,353 SHARES VALUE (NOTE 1) PACKAGING & CONTAINERS - 0.2% Ball Corp. 6,498 $ 195,346 Bemis Co., Inc. 10,900 471,425 Crown Cork & Seal Co., Inc. 26,800 1,432,125 Tupperware Corp. 13,100 478,150 2,577,046 PAPER & FOREST PRODUCTS - 1.3% Boise Cascade Corp. 10,200 360,188 Champion International Corp. 19,900 1,099,475 Georgia-Pacific Corp. 19,200 1,639,200 International Paper Co. 62,900 3,054,581 James River Corp. of Virginia 18,100 669,700 Kimberly-Clark Corp. 118,332 5,887,017 Louisiana-Pacific Corp. 22,700 479,538 Mead Corp. 11,000 684,750 Potlatch Corp. 6,100 276,025 Stone Container Corp. 20,800 297,700 Temple-Inland, Inc. 11,500 621,000 Union Camp Corp. 14,500 725,000 Westvaco Corp. 21,250 668,047 Weyerhaeuser Co. 41,600 2,163,200 Willamette Industries, Inc. 11,500 805,000 19,430,421 TOTAL BASIC INDUSTRIES 76,777,234 CONSTRUCTION & REAL ESTATE - 0.4% BUILDING MATERIALS - 0.3% Armstrong World Industries, Inc. 8,700 638,363 Crane Co. 9,700 405,581 Masco Corp. 33,500 1,398,625 Owens-Corning 10,800 465,750 Sherwin-Williams Co. 36,000 1,111,500 4,019,819 CONSTRUCTION - 0.0% Centex Corp. 6,100 247,813 Fleetwood Enterprises, Inc. 7,500 223,594 Kaufman & Broad Home Corp. 8,200 144,013 Pulte Corp. 4,300 148,619 764,039 ENGINEERING - 0.1% EG & G, Inc. 10,000 225,000 Fluor Corp. 17,500 965,781 Foster Wheeler Corp. 8,600 348,300 1,539,081 TOTAL CONSTRUCTION & REAL ESTATE 6,322,939 DURABLES - 3.8% AUTOS, TIRES, & ACCESSORIES - 2.3% AutoZone, Inc. (a) 31,550 743,397 Chrysler Corp. 147,100 4,826,719 Cooper Tire & Rubber Co. 16,500 363,000 Cummins Engine Co., Inc. 8,200 578,613 Dana Corp. 21,400 813,200 Eaton Corp. 16,200 1,414,463 Echlin, Inc. 13,000 468,000 Ford Motor Co. 248,000 9,362,000 General Motors Corp. 158,278 8,814,106 Genuine Parts Co. 37,850 1,282,169 Goodyear Tire & Rubber Co. 32,600 2,063,988 ITT Industries, Inc. 24,800 638,600 Johnson Controls, Inc. 17,500 718,594 NACCO Industries, Inc. Class A 1,800 101,588 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) DURABLES - CONTINUED AUTOS, TIRES, & ACCESSORIES - CONTINUED Navistar International Corp. (a) 15,270 $ 263,408 PACCAR, Inc. 16,190 751,823 Pep Boys-Manny, Moe & Jack 12,600 429,188 Snap-On Tools Corp. 12,800 504,000 TRW, Inc. 26,500 1,505,531 35,642,387 CONSUMER DURABLES - 0.8% Corning, Inc. 47,900 2,664,438 Minnesota Mining & Manufacturing Co. 87,400 8,914,800 11,579,238 CONSUMER ELECTRONICS - 0.2% Black & Decker Corp. 19,800 736,313 Maytag Co. 20,900 546,013 Newell Co. 33,300 1,319,513 Whirlpool Corp. 15,500 845,719 3,447,558 TEXTILES & APPAREL - 0.5% Fruit of the Loom, Inc. Class A (a) 16,000 496,000 Liz Claiborne, Inc. 14,900 694,713 NIKE, Inc. Class B 60,300 3,520,013 Reebok International Ltd. 11,600 542,300 Russell Corp. 8,100 239,963 Springs Industries, Inc. Class A 4,300 226,825 Stride Rite Corp. 10,300 132,613 VF Corp. 13,400 1,140,675 6,993,102 TOTAL DURABLES 57,662,285 ENERGY - 8.3% ENERGY SERVICES - 0.8% Baker Hughes, Inc. 30,500 1,179,969 Dresser Industries, Inc. 36,700 1,367,075 Halliburton Co. 26,300 2,084,275 Helmerich & Payne, Inc. 5,300 305,413 McDermott International, Inc. 11,400 332,738 Rowan Companies, Inc. (a) 18,000 507,375 Schlumberger Ltd. 51,600 6,450,000 Western Atlas, Inc. (a) 11,300 827,725 13,054,570 OIL & GAS - 7.5% Amerada Hess Corp. 19,400 1,077,913 Amoco Corp. 104,000 9,041,500 Ashland, Inc. 15,600 723,450 Atlantic Richfield Co. 67,600 4,765,800 Burlington Resources, Inc. 26,200 1,156,075 Chevron Corp. 136,600 10,099,863 Coastal Corp. (The) 22,100 1,175,444 Exxon Corp. 519,700 31,961,550 Kerr-McGee Corp. 10,200 646,425 Louisiana Land & Exploration Co. 7,200 411,300 Mobil Corp. 165,000 11,529,375 Occidental Petroleum Corp. 68,900 1,726,806 Oryx Energy Co. (a) 22,000 464,750 Pennzoil Co. 9,800 752,150 Phillips Petroleum Co. 55,000 2,406,250 Royal Dutch Petroleum Co. 448,400 24,381,750 Santa Fe Energy Resources, Inc. (a) 20,800 305,500 Sun Co., Inc. 15,200 471,200 Texaco, Inc. 55,400 6,024,750 SHARES VALUE (NOTE 1) USX-Marathon Group 60,100 $ 1,735,388 Union Pacific Resources Group, Inc. 52,212 1,298,774 Unocal Corp. 52,488 2,037,191 114,193,204 TOTAL ENERGY 127,247,774 FINANCE - 14.3% BANKS - 6.6% Banc One Corp. 114,726 5,557,041 Bank of New York Co., Inc. 82,000 3,567,000 BankBoston Corp. 32,091 2,312,558 BankAmerica Corp. 150,000 9,684,375 Bankers Trust New York Corp. 17,200 1,496,400 Barnett Banks, Inc. 43,600 2,289,000 Chase Manhattan Corp. 91,773 8,907,717 Citicorp 96,862 11,677,925 Comerica, Inc. 22,400 1,523,200 CoreStates Financial Corp. 46,700 2,510,125 Fifth Third Bancorp 22,100 1,813,581 First Bank System, Inc. 28,200 2,407,575 First Union Corp. 59,781 5,529,743 KeyCorp 47,107 2,632,104 Mellon Bank Corp. 54,100 2,441,263 Morgan (J.P.) & Co., Inc. 38,700 4,039,313 National City Corp. 46,780 2,455,950 NationsBank Corp. 152,946 9,865,017 Norwest Corp. 77,600 4,365,000 PNC Financial Corp. 70,300 2,926,238 Republic New York Corp. 11,500 1,236,250 SunTrust Banks, Inc. 46,600 2,565,913 U.S. Bancorp 31,700 2,032,763 Wachovia Corp. 34,500 2,011,781 Wells Fargo & Co. 19,300 5,201,350 101,049,182 CREDIT & OTHER FINANCE - 1.5% American Express Co. 99,079 7,381,386 Beneficial Corp. 11,400 810,113 Countrywide Credit Industries, Inc. 20,400 636,225 First Chicago NBD Corp. 66,659 4,032,870 Fleet Financial Group, Inc. 50,874 3,217,781 Green Tree Financial Corp. 28,700 1,022,438 Household International, Inc. 20,210 2,373,412 MBNA Corp. 70,000 2,563,750 Transamerica Corp. 13,929 1,303,232 23,341,207 FEDERAL SPONSORED CREDIT - 1.0% Federal Home Loan Mortgage Corporation 149,600 5,142,500 Federal National Mortgage Association 228,600 9,972,675 15,115,175 INSURANCE - 4.2% Aegon NV (Reg.) 7,906 553,914 Aetna, Inc. 31,500 3,224,813 Allstate Corp. 93,121 6,797,833 American General Corp. 50,552 2,413,858 American International Group, Inc. 98,175 14,664,891 Aon Corp. 34,050 1,762,088 CIGNA Corp. 15,800 2,804,500 Chubb Corp. (The) 36,500 2,440,938 Conseco, Inc. 40,000 1,480,000 General Re Corp. 17,300 3,148,600 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) FINANCE - CONTINUED INSURANCE - CONTINUED Hartford Financial Services Group, Inc. 24,500 $ 2,027,375 Jefferson Pilot Corp. 14,900 1,041,138 Lincoln National Corp. 21,900 1,409,813 Loews Corp. 24,000 2,403,000 MBIA, Inc. 2,800 315,875 MGIC Investment Corp. 24,600 1,179,263 Marsh & McLennan Companies, Inc. 30,200 2,155,525 Providian Financial Corp. (a) 19,700 632,863 SAFECO Corp. 26,300 1,227,881 St. Paul Companies, Inc. (The) 17,300 1,319,125 Torchmark Corp. 14,800 1,054,500 Travelers Group, Inc. (The) 133,800 8,437,763 UNUM Corp. 30,700 1,289,400 USF&G Corp. 24,300 583,200 64,368,156 SAVINGS & LOANS - 0.2% Ahmanson (H.F.) & Co. 22,000 946,000 Golden West Financial Corp. 11,900 833,000 Great Western Financial Corp. 28,750 1,545,313 3,324,313 SECURITIES INDUSTRY - 0.8% Merrill Lynch & Co., Inc. 69,000 4,114,125 Morgan Stanley Dean Witter Discover and Co. 119,856 5,161,299 Salomon, Inc. 22,900 1,273,813 Schwab (Charles) Corp. 36,600 1,489,163 12,038,400 TOTAL FINANCE 219,236,433 HEALTH - 10.7% DRUGS & PHARMACEUTICALS - 6.9% ALZA Corp. Class A (a) 17,600 510,400 Allergan, Inc. 13,700 435,831 American Home Products Corp. 133,700 10,228,050 Amgen, Inc. 55,400 3,220,125 Bristol-Myers Squibb Co. 209,700 16,985,700 Lilly (Eli) & Co. 115,396 12,614,225 Merck & Co., Inc. 252,200 26,102,700 Pfizer, Inc. 135,000 16,132,500 Pharmacia & Upjohn, Inc. 106,260 3,692,535 Schering-Plough Corp. 154,700 7,406,263 Sigma Aldrich Corp. 21,000 736,313 Warner-Lambert Co. 56,700 7,044,975 105,109,617 MEDICAL EQUIPMENT & SUPPLIES - 3.0% Abbott Laboratories 162,500 10,846,875 Bard (C.R.), Inc. 12,000 435,750 Bausch & Lomb, Inc. 11,700 551,363 Baxter International, Inc. 57,200 2,988,700 Becton, Dickinson & Co. 25,800 1,306,125 Biomet, Inc. 24,000 447,000 Boston Scientific Corp. (a) 40,500 2,488,219 Cardinal Health, Inc. 22,700 1,299,575 Guidant Corp. 15,600 1,326,000 Johnson & Johnson 278,800 17,947,750 Mallinckrodt, Inc. 15,400 585,200 Medtronic, Inc. 50,300 4,074,300 Millipore Corp. 9,000 396,000 SHARES VALUE (NOTE 1) Pall Corp. 26,400 $ 613,800 St. Jude Medical, Inc. (a) 19,050 742,950 U.S. Surgical Corp. 14,600 543,850 46,593,457 MEDICAL FACILITIES MANAGEMENT - 0.8% Beverly Enterprises, Inc. (a) 20,700 336,375 Columbia/HCA Healthcare Corp. 140,412 5,519,947 HEALTHSOUTH Rehabilitation Corp. (a) 66,000 1,645,875 Humana, Inc. (a) 34,100 788,563 Manor Care, Inc. 13,200 430,650 Tenet Healthcare Corp. (a) 63,100 1,865,394 United HealthCare Corp. 38,600 2,007,200 12,594,004 TOTAL HEALTH 164,297,078 HOLDING COMPANIES - 0.2% CINergy Corp. 32,913 1,145,784 Norfolk Southern Corp. 26,100 2,629,575 3,775,359 INDUSTRIAL MACHINERY & EQUIPMENT - 5.6% ELECTRICAL EQUIPMENT - 3.8% Emerson Electric Co. 93,500 5,148,344 General Electric Co. 689,200 45,056,450 General Instrument Corp. (a) 28,600 715,000 General Signal Corp. 10,500 458,063 Grainger (W.W.), Inc. 11,200 875,700 Harris Corp. 8,100 680,400 Honeywell, Inc. 26,600 2,018,275 Scientific-Atlanta, Inc. 16,100 352,188 Westinghouse Electric Corp. 132,950 3,074,469 58,378,889 INDUSTRIAL MACHINERY & EQUIPMENT - 1.5% Briggs & Stratton Corp. 5,400 270,000 Case Corp. 15,300 1,053,788 Caterpillar, Inc. 40,000 4,295,000 Cincinnati Milacron, Inc. 8,400 217,875 Cooper Industries, Inc. 24,646 1,226,139 Deere & Co. 53,500 2,935,813 Dover Corp. 23,600 1,451,400 Giddings & Lewis, Inc. 7,000 146,125 Harnischfeger Industries, Inc. 10,200 423,300 Illinois Tool Works, Inc. 51,900 2,591,756 Ingersoll-Rand Co. 23,000 1,420,250 Parker-Hannifin Corp. 15,650 949,759 Stanley Works 15,600 624,000 Tenneco, Inc. 35,800 1,617,713 Timken Co. 13,222 470,207 Tyco International Ltd. 34,800 2,420,775 22,113,900 POLLUTION CONTROL - 0.3% Browning-Ferris Industries, Inc. 44,500 1,479,625 Safety Kleen Corp. 12,100 204,188 Waste Management, Inc. 94,900 3,048,663 4,732,476 TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 85,225,265 MEDIA & LEISURE - 3.6% BROADCASTING - 0.5% TCI Group Class A (a) 138,900 2,066,138 Time Warner, Inc. 119,102 5,746,672 7,812,810 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) MEDIA & LEISURE - CONTINUED ENTERTAINMENT - 0.9% Disney (Walt) Co. 141,200 $ 11,331,300 King World Productions, Inc. 7,900 276,500 Viacom, Inc. Class B (non-vtg.) (a) 74,100 2,223,000 13,830,800 LEISURE DURABLES & TOYS - 0.2% Brunswick Corp. 20,500 640,625 Hasbro, Inc. 27,150 770,381 Mattel, Inc. 60,376 2,045,237 3,456,243 LODGING & GAMING - 0.5% HFS, Inc. (a) 32,900 1,908,200 Harrah's Entertainment, Inc. (a) 21,600 394,200 Hilton Hotels Corp. 51,800 1,375,938 ITT Corp. (a) 24,300 1,483,819 Marriott International, Inc. 26,700 1,638,713 6,800,870 PUBLISHING - 1.0% American Greetings Corp. Class A 15,600 579,150 Cognizant Corp. 35,700 1,445,850 Dow Jones & Co., Inc. 20,300 815,806 Gannett Co., Inc. 29,400 2,903,250 Harcourt General, Inc. 14,800 704,850 Knight-Ridder, Inc. 19,700 966,531 McGraw-Hill, Inc. 20,900 1,229,181 Meredith Corp. 11,300 327,700 New York Times Co. (The) Class A 20,300 1,004,850 Times Mirror Co. Class A 19,500 1,077,375 Tribune Co. 25,700 1,235,206 U.S. West Media Group (a) 130,800 2,648,700 14,938,449 RESTAURANTS - 0.5% Darden Restaurants, Inc. 33,400 302,688 McDonald's Corp. 146,100 7,058,456 Wendy's International, Inc. 27,000 700,313 8,061,457 TOTAL MEDIA & LEISURE 54,900,629 NONDURABLES - 10.8% AGRICULTURE - 0.1% Pioneer Hi-Bred International, Inc. 17,300 1,384,000 BEVERAGES - 3.7% Anheuser-Busch Companies, Inc. 104,400 4,378,275 Brown-Forman Corp. Class B 14,500 707,781 Coca-Cola Co. (The) 520,800 35,154,000 Coors (Adolph) Co. Class B 8,000 213,000 PepsiCo, Inc. 325,200 12,215,325 Seagram Co. Ltd. 77,500 3,115,380 Whitman Corp. 21,800 551,813 56,335,574 FOODS - 2.3% Archer-Daniels-Midland Co. 113,754 2,673,219 CPC International, Inc. 30,000 2,769,375 Campbell Soup Co. 97,700 4,885,000 ConAgra, Inc. 50,300 3,225,488 General Mills, Inc. 33,700 2,194,713 Heinz (H.J.) Co. 77,150 3,558,544 Hershey Foods Corp. 32,200 1,781,063 Kellogg Co. 44,200 3,784,625 Quaker Oats Co. 28,500 1,278,938 SHARES VALUE (NOTE 1) Ralston Purina Co. 22,200 $ 1,824,563 Sara Lee Corp. 100,600 4,187,475 Sysco Corp. 36,900 1,346,850 Wrigley (Wm.) Jr. Co. 24,400 1,634,800 35,144,653 HOUSEHOLD PRODUCTS - 3.1% Alberto Culver Co. Class B 11,600 324,800 Avon Products, Inc. 27,900 1,968,694 Clorox Co. 10,900 1,438,800 Colgate-Palmolive Co. 61,400 4,006,350 Gillette Co. 116,200 11,009,950 International Flavors & Fragrances, Inc. 23,000 1,161,500 Procter & Gamble Co. 142,100 20,071,625 Rubbermaid, Inc. 31,400 934,150 Unilever NV ADR 33,400 7,149,688 48,065,557 TOBACCO - 1.6% Fortune Brands, Inc. 35,700 1,332,056 Philip Morris Companies, Inc. 511,400 22,693,375 UST, Inc. 38,900 1,079,475 25,104,906 TOTAL NONDURABLES 166,034,690 PRECIOUS METALS - 0.3% Barrick Gold Corp. 74,800 1,628,030 Battle Mountain Gold Co. 47,100 267,881 Echo Bay Mines Ltd. 29,200 162,851 Homestake Mining Co. 30,600 399,713 Newmont Mining Corp. 32,565 1,270,035 Placer Dome, Inc. 50,200 814,457 4,542,967 RETAIL & WHOLESALE - 4.4% APPAREL STORES - 0.3% Charming Shoppes, Inc. (a) 22,000 114,813 Gap, Inc. 58,500 2,274,188 Limited, Inc. (The) 56,819 1,150,585 TJX Companies, Inc. 32,400 854,550 4,394,136 DRUG STORES - 0.4% CVS Corp. 34,800 1,783,500 Long Drug Stores, Inc. 8,100 212,119 Rite Aid Corp. 25,700 1,281,788 Walgreen Co. 51,600 2,767,050 6,044,457 GENERAL MERCHANDISE STORES - 2.3% Costco Companies, Inc. (a) 43,839 1,441,207 Dayton Hudson Corp. 45,300 2,409,394 Dillards, Inc. Class A 23,700 820,613 Federated Department Stores, Inc. (a) 43,600 1,515,100 K mart Corp. (a) 101,300 1,240,925 May Department Stores Co. (The) 51,200 2,419,200 Mercantile Stores Co., Inc. 7,800 490,913 Nordstrom, Inc. 16,700 819,344 Penney J C Co., Inc. 51,600 2,692,875 Sears, Roebuck & Co. 82,000 4,407,500 Wal-Mart Stores, Inc. 480,000 16,230,000 Woolworth Corp. (a) 28,100 674,400 35,161,471 GROCERY STORES - 0.5% Albertson's, Inc. 52,600 1,919,900 American Stores Co. 30,600 1,510,875 Fleming Companies, Inc. 7,988 143,784 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) RETAIL & WHOLESALE - CONTINUED GROCERY STORES - CONTINUED Giant Food, Inc. Class A 12,600 $ 407,925 Great Atlantic & Pacific Tea Co., Inc. 7,900 214,781 Kroger Co. (The) (a) 52,700 1,528,300 Supervalu, Inc. 14,100 486,450 Winn-Dixie Stores, Inc. 31,500 1,173,375 7,385,390 RETAIL & WHOLESALE, MISCELLANEOUS - 0.9% Circuit City Stores, Inc. - Circuit City Group 16,600 590,338 Comcast Corp. Class A special 68,250 1,458,844 Home Depot, Inc. (The) 100,600 6,935,113 IKON Office Solutions, Inc. 28,100 700,744 Lowe's Companies, Inc. 36,300 1,347,638 Tandy Corp. 12,100 677,600 Toys "R" Us, Inc. (a) 60,700 2,124,500 13,834,777 TOTAL RETAIL & WHOLESALE 66,820,231 SERVICES - 0.5% ADVERTISING - 0.1% Interpublic Group of Companies, Inc. 16,900 1,036,181 LEASING & RENTAL - 0.0% Ryder Systems, Inc. 15,800 521,400 PRINTING - 0.1% Deluxe Corp. 17,300 590,363 Donnelley (R.R.) & Sons Co. 31,500 1,153,688 Harland (John H.) Co. 6,400 146,000 Moore Corporation Ltd. 18,400 362,496 2,252,547 SERVICES - 0.3% Block (H&R), Inc. 21,700 699,825 Dun & Bradstreet Corp. 35,700 937,125 Ecolab, Inc. 13,600 649,400 Jostens, Inc. 8,000 211,000 National Service Industries, Inc. 9,400 457,663 Service Corp. International 49,400 1,624,025 4,579,038 TOTAL SERVICES 8,389,166 TECHNOLOGY - 13.3% COMMUNICATIONS EQUIPMENT - 2.0% Andrew Corp. (a) 19,112 537,525 Cabletron Systems, Inc. (a) 32,700 925,819 Cisco Systems, Inc. (a) 137,500 9,229,688 DSC Communications Corp. (a) 24,600 547,350 Lucent Technologies, Inc. 133,484 9,619,191 Northern Telecom Ltd. 54,000 4,867,490 Tellabs, Inc. (a) 37,600 2,100,900 3Com Corp. (a) 66,800 3,006,000 30,833,963 COMPUTER SERVICES & SOFTWARE - 3.8% Adobe Systems, Inc. 15,100 529,444 Autodesk, Inc. 9,900 379,294 Automatic Data Processing, Inc. 61,200 2,876,400 CUC International, Inc. (a) 83,075 2,144,373 Ceridian Corp. (a) 16,900 714,025 Computer Associates International, Inc. 76,075 4,236,427 Computer Sciences Corp. (a) 16,100 1,161,213 Equifax, Inc. 31,600 1,175,125 First Data Corp. 93,600 4,112,550 SHARES VALUE (NOTE 1) Microsoft Corp. (a) 251,700 $ 31,808,588 Novell, Inc. (a) 72,500 502,969 Oracle Systems Corp. (a) 141,400 7,123,025 Parametric Technology Corp. (a) 26,600 1,132,163 Shared Medical Systems Corp. 5,000 270,000 58,165,596 COMPUTERS & OFFICE EQUIPMENT - 3.9% Amdahl Corp. (a) 25,300 221,375 Apple Computer, Inc. (a) 26,000 370,500 Bay Networks, Inc. (a) 41,200 1,094,375 Compaq Computer Corp. (a) 56,600 5,617,550 Data General Corp. (a) 8,300 215,800 Dell Computer Corp. (a) 36,700 4,309,956 Digital Equipment Corp. (a) 33,000 1,169,438 EMC Corp. (a) 51,500 2,008,500 Hewlett-Packard Co. 212,300 11,888,800 Intergraph Corp. (a) 10,000 85,000 International Business Machines Corp. 216,700 19,543,631 Pitney Bowes, Inc. 31,000 2,154,500 Seagate Technology (a) 51,800 1,822,713 Silicon Graphics, Inc. (a) 37,000 555,000 Sun Microsystems, Inc. (a) 77,100 2,869,566 Tandem Computers, Inc. (a) 24,800 502,200 Unisys Corp. (a) 36,500 278,313 Xerox Corp. 68,000 5,363,500 60,070,717 ELECTRONIC INSTRUMENTS - 0.3% Applied Materials, Inc. (a) 37,800 2,676,713 Perkin-Elmer Corp. 9,200 731,975 Tektronix, Inc. 7,000 420,000 Thermo Electron Corp. (a) 31,300 1,064,200 4,892,888 ELECTRONICS - 2.9% AMP, Inc. 45,896 1,916,158 Advanced Micro Devices, Inc. (a) 28,500 1,026,000 Intel Corp. 171,800 24,363,388 LSI Logic Corp. (a) 29,300 937,600 Micron Technology, Inc. 43,900 1,753,256 Motorola, Inc. 124,000 9,424,000 National Semiconductor Corp. (a) 29,300 897,313 Texas Instruments, Inc. 39,900 3,354,094 Thomas & Betts Corp. 11,200 588,700 44,260,509 PHOTOGRAPHIC EQUIPMENT - 0.4% Eastman Kodak Co. 69,800 5,357,150 Polaroid Corp. 9,600 532,800 5,889,950 TOTAL TECHNOLOGY 204,113,623 TRANSPORTATION - 1.1% AIR TRANSPORTATION - 0.3% AMR Corp. (a) 19,100 1,766,750 Delta Air Lines, Inc. 15,400 1,262,800 Southwest Airlines Co. 30,300 784,013 US Airways Group, Inc. (a) 16,400 574,000 4,387,563 RAILROADS - 0.6% Burlington Northern Santa Fe Corp. 31,918 2,868,630 CSX Corp. 45,338 2,516,259 Union Pacific Corp. 51,300 3,616,650 9,001,539 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) TRANSPORTATION - CONTINUED TRUCKING & FREIGHT - 0.2% Caliber System, Inc. 8,100 $ 301,725 Federal Express Corp. (a) 23,800 1,374,450 Laidlaw, Inc. Class B 65,800 907,898 2,584,073 TOTAL TRANSPORTATION 15,973,175 UTILITIES - 8.5% CELLULAR - 0.2% AirTouch Communications, Inc. (a) 105,000 2,874,375 ELECTRIC UTILITY - 2.2% American Electric Power Co., Inc. 39,300 1,650,600 Baltimore Gas & Electric Co. 30,800 821,975 Carolina Power & Light Co. 31,600 1,133,650 Central & South West Corp. 44,200 939,250 Consolidated Edison Co. of New York, Inc. 49,100 1,445,381 DTE Energy Co. 30,300 837,038 Dominion Resources, Inc. 37,800 1,384,425 Duke Power Co. 75,207 3,605,236 Edison International 90,600 2,253,675 Entergy Corp. 48,400 1,324,950 FPL Group, Inc. 38,200 1,759,588 GPU, Inc. 25,300 907,638 Houston Industries, Inc. 49,000 1,050,438 Niagara Mohawk Power Corp. (a) 30,300 259,444 Northern States Power Co. 14,400 745,200 Ohio Edison Co. 32,000 698,000 PECO Energy Co. 46,500 976,500 PG&E Corp. 86,200 2,090,350 PP&L Resources, Inc. 33,900 675,881 PacifiCorp. 61,600 1,355,200 Public Service Enterprise Group, Inc. 50,000 1,250,000 Southern Co. 140,900 3,082,188 Texas Utilities Co. 47,100 1,622,006 Unicom Corp. 45,200 1,005,700 Union Electric Co. 21,300 802,744 33,677,057 GAS - 0.6% Columbia Gas System, Inc. (The) 11,500 750,375 Consolidated Natural Gas Co. 19,900 1,070,869 ENSERCH Corp. 14,500 322,625 Eastern Enterprises Co. 4,200 145,688 Enron Corp. 53,200 2,171,225 NICOR, Inc. 10,500 376,688 Noram Energy Corp. 28,679 437,355 ONEOK, Inc. 5,789 186,333 Pacific Enterprises 17,700 595,163 Peoples Energy Corp. 7,400 277,038 Sonat, Inc. 18,100 927,625 Williams Companies, Inc. 32,950 1,441,563 8,702,547 TELEPHONE SERVICES - 5.5% ALLTEL Corp. 39,100 1,307,406 AT&T Corp. 339,000 11,886,188 Ameritech Corp. 114,900 7,806,019 Bell Atlantic Corp. 91,700 6,957,738 BellSouth Corp. 207,500 9,622,813 Frontier Corp. 34,300 683,856 GTE Corp. 201,200 8,827,650 MCI Communications Corp. 143,400 5,489,531 NYNEX Corp. 92,000 5,301,500 SHARES VALUE (NOTE 1) SBC Communications, Inc. 191,824 $ 11,869,110 Sprint Corp. 90,000 4,736,250 U.S. West Communications Group 100,400 3,783,825 WorldCom, Inc. (a) 181,100 5,795,200 84,067,086 TOTAL UTILITIES 129,321,065 TOTAL COMMON STOCKS (Cost $1,138,887,654) 1,424,476,773 U.S. TREASURY OBLIGATIONS - 0.3% MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) U.S. Treasury Bills, yields at dates of purchase 5.11% to 5.28%, 8/07/97 to 1/08/98 (b) (Cost $3,973,818) $ 4,050,000 3,973,818 CASH EQUIVALENTS - 6.7% MATURITY VALUE AMOUNT (NOTE 1) Investments in repurchase agreements (U.S. Treasury obligations) in a joint trading account at 5.93%, dated 6/30/97 due 7/1/97 $ 103,083,977 103,067,000 TOTAL INVESTMENT IN SECURITIES - 100% (Cost $1,245,928,472) $ 1,531,517,591 FUTURES CONTRACTS EXPIRATION UNDERLYING FACE UNREALIZED DATE AMOUNT AT VALUE GAIN/(LOSS) PURCHASED 239 S&P 500 Index Contracts Sept. 1997 $106,384,623 $(54,809) THE FACE VALUE OF FUTURES PURCHASED AS A PERCENTAGE OF TOTAL INVESTMENTS - 6.9% LEGEND (a) Non-income producing (b) Security was pledged to cover margin requirements for futures contracts. At the period end, the value of securities pledged amounted to $3,973,818. OTHER INFORMATION Purchases and sales of securities, other than short-term securities, aggregated $494,675,041 and $5,220,911, respectively. The market value of futures contracts opened and closed during the period amounted to $543,582,086 and $529,220,148 respectively. The fund placed a portion of its portfolio transactions with brokerage firms which are affiliates of Fidelity Management & Research Company. The commissions paid to these affiliated firms were $63 for the period (see Note 4 of Notes to Financial Statements). INCOME TAX INFORMATION At June 30, 1997 the aggregate cost of investment securities for income tax purposes was $1,245,928,472. Net unrealized appreciation aggregated $285,589,119, of which $300,312,750 related to appreciated investment securities and $14,723,631 related to depreciated investment securities. VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 1997 (UNAUDITED) ASSETS Investment in $ 1,531,517,591 securities, at value (including repurchase agreements of $103,067,000) (cost $1,245,928,472) - See accompanying schedule Cash 105 Receivable for fund 5,931,316 shares sold Dividends receivable 1,629,782 Other receivables 3,346 TOTAL ASSETS 1,539,082,140 LIABILITIES Payable for $ 1,257,374 investments purchased Payable for fund 979,674 shares redeemed Accrued management 188,667 fee Payable for daily 792,556 variation on futures contracts Other payables and 172,255 accrued expenses TOTAL LIABILITIES 3,390,526 NET ASSETS $1,535,691,614 Net Assets consist of: Paid in capital $1,226,167,647 Undistributed net 10,647,945 investment income Accumulated 13,341,727 undistributed net realized gain (loss) on investments and foreign currency transactions Net unrealized 285,534,295 appreciation (depreciation) on investments and assets and liabilities in foreign currencies NET ASSETS, for $1,535,691,614 14,820,532 shares outstanding NET ASSET VALUE, $ 103.62 offering price and redemption price per share ($1,535,691,614 (divided by) 14,820,532 shares) STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) INVESTMENT INCOME $ 9,963,719 Dividends Interest 2,280,379 TOTAL INCOME 12,244,098 EXPENSES Management fee $ 1,607,543 Transfer agent fees 426,756 Accounting fees and 247,982 expenses Non-interested 2,305 trustees' compensation Custodian fees and 25,316 expenses Registration fees 8,223 Audit 26,892 Legal 1,004 Miscellaneous 13,097 Total expenses 2,359,118 before reductions Expense reductions (771,246) 1,587,872 NET INVESTMENT 10,656,226 INCOME REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on: Investment 1,026,442 securities Foreign currency (17) transactions Futures contracts 11,550,416 12,576,841 Change in net unrealized appreciation (depreciation) on: Investment 190,817,156 securities Assets and 25 liabilities in foreign currencies Futures contracts 810,769 191,627,950 NET GAIN (LOSS) 204,204,791 NET INCREASE $214,861,017 (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS OTHER INFORMATION $ 23,179 Expense reductions Directed brokerage arrangements Custodian credits 629 FMR 747,438 reimbursement $ 771,246 STATEMENT OF CHANGES IN NET ASSETS INCREASE (DECREASE) SIX MONTHS YEAR ENDED IN NET ASSETS ENDED DECEMBER 31, JUNE 30, 1997 1996 (UNAUDITED) Operations $ 10,656,226 $ 10,838,949 Net investment income Net realized gain 12,576,841 22,654,377 (loss) Change in net 191,627,950 68,025,688 unrealized appreciation (depreciation) NET INCREASE 214,861,017 101,519,014 (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS Distributions to (10,847,444) (3,387,922) shareholders From net investment income From net realized (22,010,833) (8,711,800) gain TOTAL DISTRIBUTIONS (32,858,277) (12,099,722) Share transactions 621,256,178 568,794,744 Net proceeds from sales of shares Reinvestment of 32,858,277 12,099,722 distributions Cost of shares (123,668,266) (92,770,768) redeemed NET INCREASE 530,446,189 488,123,698 (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS TOTAL INCREASE 712,448,929 577,542,990 (DECREASE) IN NET ASSETS NET ASSETS Beginning of period 823,242,685 245,699,695 End of period $1,535,691,614 $823,242,685 (including undistributed net investment income of $10,647,945 and $10,839,163, respectively) OTHER INFORMATION Shares Sold 6,545,398 6,984,700 Issued in 357,466 161,200 reinvestment of distributions Redeemed (1,326,621) (1,146,896) Net increase 5,576,243 5,999,004 (decrease)
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, AUGUST 27, 1992 JUNE 30, 1997 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, SELECTED PER-SHARE (UNAUDITED) 1996 1995 1994 1993 E 1992 DATA
Net asset value, $ 89.05 $ 75.71 $ 56.22 $ 55.74 $ 52.60 $ 50.00 beginning of period Income from Investment Operations Net investment .87 D 1.04 .85 1.14 1.31 .44 income Net realized and 16.82 15.55 19.72 (.56) 3.80 2.71 unrealized gain (loss) Total from 17.69 16.59 20.57 .58 5.11 3.15 investment operations Less Distributions From net (1.03) (.91) (.95) - (1.28) (.47) investment income From net realized (2.09) (2.34) (.11) (.10) (.60) (.08) gain In excess of net - - (.02) - (.09) - realized gain Total distributions (3.12) (3.25) (1.08) (.10) (1.97) (.55) Net asset value, end $103.62 $ 89.05 $ 75.71 $ 56.22 $ 55.74 $ 52.60 of period
TOTAL RETURN B, C 20.31% 22.71% 37.19% 1.04% 9.74% 6.31% RATIOS AND SUPPLEMENTAL DATA Net assets, end of $1,535,692 $823,243 $245,700 $51,301 $25,153 $17,961 period (000 omitted) Ratio of expenses to .28% A, .28% F .28% F .28% F .28% F .28% A, average net assets F F Ratio of net 1.88% A 2.26% 2.70% 2.81% 2.65% 2.89% A investment income to average net assets Portfolio turnover rate 1% A 14% 16% 2% 9% 0% Average commission $ .0322 $ .0315 rate G
A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED AND DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN. C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. E EFFECTIVE JANUARY 1, 1993, THE FUND ADOPTED STATEMENT OF POSITION 93-2, "DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF INCOME, CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT COMPANIES." AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT CERTAIN RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES. F FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). G FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE STRUCTURES MAY DIFFER. VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO PERFORMANCE AND INVESTMENT SUMMARY PERFORMANCE There are several ways to evaluate a fund's historical performance. You can look at the total percentage change in value, the average annual percentage change or the growth of a hypothetical $10,000 investment. Total return reflects the change in the value of an investment, assuming reinvestment of the fund's dividend income and capital gains (the profits earned upon the sale of securities that have grown in value). AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED JUNE 30, 1997 PAST 1 LIFE OF YEAR FUND GROWTH OPPORTUNITIES 29.02% 26.86% S&P 500(registered trademark) 34.70% 33.11% AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and show you what would have happened if the fund had achieved that return by performing at a constant rate each year. You can compare the fund's returns to the performance of the Standard & Poor's 500 Index - a widely recognized, unmanaged index of common stocks. UNDERSTANDING PERFORMANCE How a fund did yesterday is no guarantee of how it will do tomorrow. The stock market, for example, has a history of long-term growth and short-term volatility. In turn, the share price and return of a fund that invests in stocks will vary. That means if you sell your shares during a market downturn, you might lose money. But if you can ride out the market's ups and downs, you may have a gain. (checkmark) Figures for more than one year assume a steady compounded rate of return and are not the fund's year-by-year results, which fluctuated over the periods shown. The life of fund figures are from commencement of operations January 3, 1995. If Fidelity had not reimbursed certain fund expenses, the life of fund total return would have been lower. PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER. Past performance is no guarantee of future results. Principal and investment return will vary and you may have a gain or loss when you withdraw your money. $10,000 OVER LIFE OF FUND 1987/06/30 10000.00 10000.00 1987/07/31 10400.00 10507.00 1987/08/31 10710.20 10898.91 1987/09/30 10587.76 10660.22 1987/10/31 8261.22 8364.01 1987/11/30 7681.63 7674.82 1987/12/31 8473.47 8258.87 1988/01/31 8657.31 8606.57 1988/02/29 9359.26 9007.64 1988/03/31 9275.69 8729.30 1988/04/30 9392.68 8826.20 1988/05/31 9309.12 8902.98 1988/06/30 9777.08 9311.63 1988/07/31 9726.94 9276.25 1988/08/31 9492.96 8960.85 1988/09/30 9760.37 9342.59 1988/10/31 9785.44 9602.31 1988/11/30 9693.52 9465.00 1988/12/31 9793.79 9630.63 1989/01/31 10495.74 10335.60 1989/02/28 10278.47 10078.24 1989/03/31 10589.20 10313.06 1989/04/30 11149.21 10848.31 1989/05/31 11548.00 11287.67 1989/06/30 11395.27 11223.33 1989/07/31 12413.46 12236.79 1989/08/31 12625.58 12476.64 1989/09/30 12735.89 12425.48 1989/10/31 12379.52 12137.21 1989/11/30 12583.16 12384.81 1989/12/31 12880.13 12682.05 1990/01/31 12133.46 11831.08 1990/02/28 12249.36 11983.70 1990/03/31 12399.06 12301.27 1990/04/30 12038.01 11993.74 1990/05/31 13103.55 13163.13 1990/06/30 13376.54 13073.62 1990/07/31 13165.20 13031.78 1990/08/31 11809.05 11853.71 1990/09/30 10593.80 11276.43 1990/10/31 10215.14 11227.94 1990/11/30 11042.91 11953.27 1990/12/31 11368.74 12286.77 1991/01/31 12126.07 12822.47 1991/02/28 13030.73 13739.28 1991/03/31 13423.97 14071.77 1991/04/30 13298.85 14105.54 1991/05/31 14085.34 14714.90 1991/06/30 13039.67 14040.96 1991/07/31 14281.96 14695.26 1991/08/31 14916.52 15043.54 1991/09/30 15032.71 14792.31 1991/10/31 15497.45 14990.53 1991/11/30 14612.65 14386.41 1991/12/31 16543.13 16032.22 1992/01/31 17553.05 15734.02 1992/02/29 17920.26 15938.56 1992/03/31 16821.98 15627.76 1992/04/30 16163.01 16087.22 1992/05/31 16025.73 16166.04 1992/06/30 15403.37 15925.17 1992/07/31 15998.27 16576.51 1992/08/31 15558.96 16236.69 1992/09/30 15833.53 16428.28 1992/10/31 16446.73 16485.78 1992/11/30 17545.01 17047.95 1992/12/31 18085.00 17257.64 1993/01/31 18441.94 17402.60 1993/02/28 18061.76 17639.28 1993/03/31 18781.98 18011.46 1993/04/30 18585.56 17575.59 1993/05/31 19969.89 18046.61 1993/06/30 20175.67 18098.95 1993/07/31 20119.55 18026.55 1993/08/31 21129.73 18709.76 1993/09/30 21522.58 18565.69 1993/10/31 21728.36 18950.00 1993/11/30 20849.13 18769.98 1993/12/31 21588.06 18997.10 1994/01/31 22130.57 19643.00 1994/02/28 21902.31 19110.67 1994/03/31 20907.20 18277.45 1994/04/30 21036.57 18511.40 1994/05/31 20548.96 18814.98 1994/06/30 19504.10 18354.02 1994/07/31 20180.77 18956.03 1994/08/31 21325.15 19733.23 1994/09/30 21066.42 19249.76 1994/10/31 21922.21 19682.88 1994/11/30 21046.52 18966.03 1994/12/31 21583.88 19247.30 1995/01/31 21175.88 19746.38 1995/02/28 22052.83 20515.90 1995/03/31 22853.30 21121.32 1995/04/30 23623.75 21743.34 1995/05/31 24544.28 22612.42 1995/06/30 26715.55 23137.71 1995/07/31 29357.09 23904.96 1995/08/31 29717.30 23964.96 1995/09/30 30487.74 24976.28 1995/10/31 30177.56 24887.12 1995/11/30 30157.55 25979.66 1995/12/31 29217.00 26480.03 1996/01/31 29677.27 27381.41 1996/02/29 30672.28 27635.23 1996/03/31 30790.66 27901.36 1996/04/30 31996.03 28312.63 1996/05/31 32996.92 29042.81 1996/06/30 32351.18 29153.46 1996/07/31 29875.88 27865.46 1996/08/31 30769.14 28453.15 1996/09/30 32835.48 30054.49 1996/10/31 32760.15 30883.39 1996/11/30 34578.96 33217.87 1996/12/31 33513.50 32559.82 1997/01/31 35439.94 34594.16 1997/02/28 34634.29 34865.38 1997/03/31 32693.44 33432.76 1997/04/30 34266.20 35428.69 1997/05/31 36642.08 37585.59 1997/06/30 38147.92 39269.43 Let's say hypothetically that $10,000 was invested in Growth Opportunities Portfolio on January 3, 1995, when the fund started. As the chart shows, by June 30, 1997, the value of the investment would have grown to $18,095 - a 80.95% increase on the initial investment. For comparison, look at how the S&P 500 did over the same period. With dividends and capital gains, if any, reinvested, the same $10,000 investment would have grown to $20,400 - a 104.00% increase. INVESTMENT SUMMARY TOP FIVE STOCKS AS OF JUNE 30, 1997 % OF FUND'S INVESTMENTS Philip Morris Companies, Inc. 5.9 Federal National Mortgage Association 4.6 Federal Home Loan Mortgage Corporation 2.9 International Business Machines Corp. 2.4 General Motors Corp. 2.4 TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997 % OF FUND'S INVESTMENTS Finance 16.5 Technology 13.8 Retail & Wholesale 7.1 Nondurables 7.0 Energy 6.8 ASSET ALLOCATION AS OF JUNE 30, 1997* Row: 1, Col: 1, Value: 6.0 Row: 1, Col: 2, Value: 12.0 Row: 1, Col: 3, Value: 82.0 Stocks 82.0% Bonds 12.0% Short-term investments 6.0% FOREIGN INVESTMENTS 8.0% * % OF FUND'S INVESTMENTS VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO FUND TALK: THE MANAGER'S OVERVIEW An interview with George Vanderheiden, Portfolio Manager of Growth Opportunities Portfolio Q. HOW DID THE FUND PERFORM, GEORGE? A. For the six- and 12-month periods that ended June 30, 1997, the fund underperformed the Standard & Poor's 500 Index, which rose 20.61% for the six- month period and 34.70% for the 12-month period. Q. WHY DID THE FUND'S RETURN TRAIL THE S&P 500 DURING THE PERIOD? A. Much of the fund's underperformance relative to the S&P 500 can be traced to asset allocation. Over the six-month period, the fund had an average of 13% of assets in Treasury bonds and 4% of assets in cash. This total of 17% of assets appreciated only about 1% during the period. Conversely, the other 83% in stocks was up about 18%, close to the S&P 500 gain. Q. THE ECONOMY STRENGTHENED IN THE FIRST HALF OF 1997 AND YOU STILL OWNED BONDS. WHY? A. Bonds were purchased originally as a short-term tactical move to hedge against slowing corporate earnings growth in 1996. Earnings growth did slow as I expected in 1996, but the stock market did not correct as it has done in the past. However, with Treasury bond yields at 3.5-times the yield on the S&P 500, I considered bonds a good safety cushion in an expensive market. Q. WHAT IS YOUR POSITION ON TOBACCO STOCKS? A. I own the tobacco stocks because they operate a profitable business that historically has offered above-average returns to shareholders over the long term. In the past, the stocks have provided better-than-average earnings growth, lower-than-average price-to-earnings ratios and high yields. Nothing this year has changed that. We have determined that the tobacco stocks are selling at a "litigation discount" far in excess of any reasonable estimate of potential liabilities. The cost of the proposed settlement is high, but should be completely passed along to consumers. Q. WHY ARE STOCK VALUATIONS SO HIGH AND DO YOU THINK THEY WILL STAY INFLATED? A. We had a near perfect investing environment during the period -experiencing growth without inflation. Accelerating inflation is usually a killer of all bond and equity bull markets, but inflation just keeps receding as the economic expansion continues. During the worst bear market I ever encountered - the 1973- 1974 bear that took prices down about 50% -everything that could go wrong did go wrong. Today is an environment where everything that could go right has gone right - from a declining budget deficit, to falling inflation, to surging earnings, to big flows into mutual funds and rising consumer confidence. If any of these factors change for the worse, valuations will deflate. My biggest concern going forward is that the low level of inflation and pricing power in a strong economy will deteriorate to deflation in a slowing or contracting economy, thereby leading to sizable earnings declines. Q. HOW DID YOU MANAGE IN A LOW-INFLATION ENVIRONMENT? A. I concentrated on four areas during the period. First, I looked at innovators and unit growers because these companies use unit growth to grow earnings and don't need price increases. Technology, health care and telecommunications companies fall within these areas. Second were the interest-sensitive sectors that benefited from low interest rates, including mortgage companies, insurance, finance and construction. Third were global growers - companies with proprietary advantages such as low costs or unique distribution channels and strong brands - which are seizing market share on a global basis. Fourth were the acquisitive companies in consolidating industries. Certain industries have stopped growing, but certain companies have been able to show great earnings growth by acquiring market share and paring costs. Q. WHAT'S YOUR OUTLOOK? A. With the market continuing to advance sharply over the past six months and Fed policy becoming restrictive in the spring, the investing climate has become more precarious. Investors with short-term orientations should be prepared for some downside risk. Risks to the market include rising inflation and/or falling earnings. However, whatever the shorter term holds, remember that since 1945 the stock market has risen 70% of the time, so chances are if one year is down, the next two could very well be up. FUND FACTS GOAL: to provide capital growth by investing primarily in common stocks and securities convertible into common stocks START DATE: January 3, 1995 SIZE: as of June 30, 1997, more than $706 million MANAGER: George Vanderheiden, since inception; joined Fidelity in 1971 (checkmark) VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO INVESTMENTS JUNE 30, 1997 (UNAUDITED) Showing Percentage of Total Value of Investment in Securities COMMON STOCKS - 82.0% SHARES VALUE (NOTE 1) AEROSPACE & DEFENSE - 1.7% AEROSPACE & DEFENSE - 1.2% Boeing Co. 151,700 $ 8,049,408 Gulfstream Aerospace Corp. (a) 10,700 315,650 8,365,058 DEFENSE ELECTRONICS - 0.4% Raytheon Co. 62,800 3,202,800 SHIP BUILDING & REPAIR - 0.1% Avondale Industries, Inc. (a) 5,300 111,300 Newport News Shipbuilding, Inc. 15,200 295,450 406,750 TOTAL AEROSPACE & DEFENSE 11,974,608 BASIC INDUSTRIES - 4.6% CHEMICALS & PLASTICS - 3.0% Air Products & Chemicals, Inc. 18,200 1,478,750 du Pont (E.I.) de Nemours & Co. 201,700 12,681,888 Raychem Corp. 59,200 4,403,000 Union Carbide Corp. 55,700 2,621,381 21,185,019 PACKAGING & CONTAINERS - 0.8% Owens-Illinois, Inc. (a) 176,700 5,477,700 PAPER & FOREST PRODUCTS - 0.8% Boise Cascade Corp. 36,000 1,271,250 Champion International Corp. 53,800 2,972,450 International Paper Co. 21,400 1,039,238 Willamette Industries, Inc. 7,200 504,000 5,786,938 TOTAL BASIC INDUSTRIES 32,449,657 CONSTRUCTION & REAL ESTATE - 1.0% CONSTRUCTION - 0.7% Centex Corp. 22,000 893,750 D.R. Horton, Inc. 48,636 504,599 Fleetwood Enterprises, Inc. 90,562 2,699,880 Kaufman & Broad Home Corp. 44,900 788,556 U.S. Home Corp. (a) 4,800 127,500 5,014,285 ENGINEERING - 0.3% Fluor Corp. 35,100 1,937,081 TOTAL CONSTRUCTION & REAL ESTATE 6,951,366 DURABLES - 4.5% AUTOS, TIRES, & ACCESSORIES - 3.8% Circuit City Stores, Inc. - CarMax Group 4,200 60,113 Cummins Engine Co., Inc. 36,300 2,561,419 Dana Corp. 13,600 516,800 Discount Auto Parts, Inc. (a) 29,400 573,300 Federal-Mogul Corp. 13,300 465,500 General Motors Corp. 309,600 17,240,850 Gentex Corp. (a) 13,100 258,725 Goodyear Tire & Rubber Co. 14,700 930,694 Honda Motor Co. Ltd. 24,000 722,229 Magna International, Inc. Class A 39,300 2,362,583 Superior Industries International, Inc. 59,600 1,579,400 27,271,613 CONSUMER ELECTRONICS - 0.2% Newell Co. 29,500 1,168,938 SHARES VALUE (NOTE 1) TEXTILES & APPAREL - 0.5% Burlington Industries, Inc. (a) 75,100 $ 901,200 Liz Claiborne, Inc. 19,800 923,175 NIKE, Inc. Class B 28,300 1,652,013 Reebok International Ltd. 4,400 205,700 3,682,088 TOTAL DURABLES 32,122,639 ENERGY - 6.8% ENERGY SERVICES - 0.3% McDermott International, Inc. 69,800 2,037,288 OIL & GAS - 6.5% Amerada Hess Corp. 29,200 1,622,425 Anadarko Petroleum Corp. 3,200 192,000 Atlantic Richfield Co. 54,600 3,849,300 British Petroleum PLC ADR 94,528 7,077,784 Burlington Resources, Inc. 74,400 3,282,900 Canada Occidental Petroleum Ltd. 1,300 29,189 Chevron Corp. 4,300 317,931 Elf Aquitaine SA sponsored ADR 14,700 800,231 Enron Oil & Gas Co. 9,400 170,375 Kerr-McGee Corp. 14,200 899,925 Louisiana Land & Exploration Co. 58,500 3,341,813 Mobil Corp. 8,600 600,925 Noble Affiliates, Inc. 5,600 216,650 Occidental Petroleum Corp. 125,900 3,155,369 Royal Dutch Petroleum Co. 239,600 13,028,250 Santa Fe Energy Resources, Inc. (a) 43,500 638,906 Sun Co., Inc. 18,800 582,800 Tosco Corp. 137,700 4,122,394 Total SA: Class B 3,853 389,218 sponsored ADR 28,368 1,436,130 Union Pacific Resources Group, Inc. 9,700 241,288 45,995,803 TOTAL ENERGY 48,033,091 FINANCE - 16.5% BANKS - 0.5% Credit Suisse Group (Reg.) 15,100 1,937,222 NationsBank Corp. 21,400 1,380,300 3,317,522 CREDIT & OTHER FINANCE - 2.1% Fleet Financial Group, Inc. 235,282 14,881,587 FEDERAL SPONSORED CREDIT - 7.4% Federal Home Loan Mortgage Corporation 593,300 20,394,688 Federal National Mortgage Association 741,700 32,356,663 52,751,351 INSURANCE - 6.0% AFLAC, Inc. 23,650 1,117,463 Aegon NV (Reg.) 23,341 1,635,329 Allmerica Financial Corp. 23,400 933,075 Allstate Corp. 167,859 12,253,707 American International Group, Inc. 64,800 9,679,500 CIGNA Corp. 9,900 1,757,250 Equitable of Iowa Companies 3,700 207,200 General Re Corp. 16,100 2,930,200 Loews Corp. 10,600 1,061,325 MGIC Investment Corp. 75,000 3,595,313 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) FINANCE - CONTINUED INSURANCE - CONTINUED Nationwide Financial Services, Inc. Class A 3,500 $ 92,969 PMI Group, Inc. 26,700 1,665,413 Provident Companies, Inc. 2,400 128,400 Providian Financial Corp. (a) 57,700 1,853,613 Reliastar Financial Corp. 10,700 782,438 Torchmark Corp. 34,800 2,479,500 Travelers Property Casualty Corp. Class A 8,400 334,950 UNUM Corp. 6,200 260,400 42,768,045 SAVINGS & LOANS - 0.3% Golden West Financial Corp. 32,100 2,247,000 SECURITIES INDUSTRY - 0.2% United Asset Management Corp. 51,800 1,466,588 TOTAL FINANCE 117,432,093 HEALTH - 6.5% DRUGS & PHARMACEUTICALS - 2.4% American Home Products Corp. 2,600 198,900 Amgen, Inc. 50,400 2,929,500 Astra AB Class A Free shares 247,566 4,617,213 Merck & Co., Inc. 12,600 1,304,100 Novartis AG (Reg.) 2,300 3,673,076 Schering-Plough Corp. 82,900 3,968,838 16,691,627 MEDICAL EQUIPMENT & SUPPLIES - 0.8% Allegiance Corp. 4,880 132,980 Bard (C.R.), Inc. 24,200 878,763 Baxter International, Inc. 10,300 538,175 Biomet, Inc. 57,500 1,070,938 Boston Scientific Corp. (a) 2,900 178,169 Johnson & Johnson 6,600 424,875 St. Jude Medical, Inc. (a) 66,500 2,593,500 5,817,400 MEDICAL FACILITIES MANAGEMENT - 3.3% Columbia/HCA Healthcare Corp. 411,550 16,179,059 Health Management Associates, Inc. Class A (a) 2,900 82,650 Humana, Inc. (a) 113,700 2,629,313 Tenet Healthcare Corp. (a) 77,600 2,294,050 United HealthCare Corp. 48,400 2,516,800 23,701,872 TOTAL HEALTH 46,210,899 HOLDING COMPANIES - 0.2% U.S. Industries, Inc. (a) 38,800 1,382,250 INDUSTRIAL MACHINERY & EQUIPMENT - 1.7% ELECTRICAL EQUIPMENT - 1.0% Emerson Electric Co. 14,500 798,406 General Electric Co. 65,600 4,288,600 Scientific-Atlanta, Inc. 33,100 724,063 Sensormatic Electronics Corp. 11,000 141,625 Westinghouse Electric Corp. 50,300 1,163,188 7,115,882 INDUSTRIAL MACHINERY & EQUIPMENT - 0.5% Caterpillar, Inc. 29,000 3,113,875 JLK Direct Distribution, Inc. Class A 200 5,125 Ultratech Stepper, Inc. (a) 34,400 786,900 3,905,900 SHARES VALUE (NOTE 1) POLLUTION CONTROL - 0.2% Browning-Ferris Industries, Inc. 35,700 $ 1,187,025 TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 12,208,807 MEDIA & LEISURE - 2.7% BROADCASTING - 0.1% Cox Communications, Inc. Class A (a) 8,600 206,400 HSN, Inc. (a) 6,440 201,250 TCI Group Class A (a) 29,100 432,863 840,513 ENTERTAINMENT - 0.3% Cedar Fair LP (depositary unit) 2,500 109,375 Royal Carribean Cruises Ltd. 50,100 1,750,369 1,859,744 LEISURE DURABLES & TOYS - 0.6% Nintendo Co. Ltd. Ord. 49,100 4,111,474 LODGING & GAMING - 0.9% Circus Circus Enterprises, Inc. (a) 78,100 1,923,213 HFS, Inc. (a) 13,700 794,600 Harrah's Entertainment, Inc. (a) 36,300 662,475 Mirage Resorts, Inc. (a) 80,300 2,027,575 Sun International Hotels Ltd. Ord. (a) 33,200 1,226,325 6,634,188 PUBLISHING - 0.1% Cognizant Corp. 21,600 874,800 RESTAURANTS - 0.7% Brinker International, Inc. (a) 26,200 373,350 Lone Star Steakhouse Saloon (a) 19,300 501,800 McDonald's Corp. 81,800 3,951,963 Papa John's International, Inc. (a) 7,200 264,600 5,091,713 TOTAL MEDIA & LEISURE 19,412,432 NONDURABLES - 7.0% HOUSEHOLD PRODUCTS - 0.0% Premark International, Inc. 8,900 238,075 TOBACCO - 7.0% Philip Morris Companies, Inc. 939,000 41,668,125 RJR Nabisco Holdings Corp. 226,260 7,466,580 UST, Inc. 10,100 280,275 49,414,980 TOTAL NONDURABLES 49,653,055 PRECIOUS METALS - 0.1% Barrick Gold Corp. 8,300 180,650 Newmont Mining Corp. 7,269 283,491 464,141 RETAIL & WHOLESALE - 7.1% APPAREL STORES - 0.4% Gap, Inc. 19,700 765,838 TJX Companies, Inc. 66,800 1,761,850 2,527,688 DRUG STORES - 0.0% CVS Corp. 6,800 348,500 GENERAL MERCHANDISE STORES - 2.3% Federated Department Stores, Inc. (a) 56,200 1,952,950 Proffitts, Inc. (a) 1,900 83,363 Wal-Mart Stores, Inc. 420,300 14,211,394 16,247,707 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) RETAIL & WHOLESALE - CONTINUED GROCERY STORES - 0.3% Safeway, Inc. (a) 45,500 $ 2,098,688 RETAIL & WHOLESALE, MISCELLANEOUS - 4.1% Circuit City Stores, Inc. - Circuit City Group 91,900 3,268,194 Corporate Express, Inc. 37,900 547,181 Home Depot, Inc. (The) 178,600 12,312,238 Lowe's Companies, Inc. 147,400 5,472,225 Officemax, Inc. (a) 104,075 1,502,583 Office Depot, Inc. (a) 16,200 314,888 Rex Stores Corp. (a) 12,700 128,588 Staples, Inc. (a) 43,500 1,011,375 Toys "R" Us, Inc. (a) 87,100 3,048,500 U.S. Office Products Co. (a) 28,800 880,200 Viking Office Products, Inc. (a) 43,400 824,600 29,310,572 TOTAL RETAIL & WHOLESALE 50,533,155 SERVICES - 0.1% ADVERTISING - 0.1% Interpublic Group of Companies, Inc. 4,700 288,169 LEASING & RENTAL - 0.0% Hanover Compressor Co. 600 11,700 PRINTING - 0.0% Donnelley (R.R.) & Sons Co. 1,100 40,439 SERVICES - 0.0% PEAPOD, Inc. 2,000 22,500 TOTAL SERVICES 362,808 TECHNOLOGY - 13.8% COMMUNICATIONS EQUIPMENT - 0.8% Alcatel Alsthom Compagnie Generale d'Electricite SA sponsored ADR 3,800 95,950 Alcatel Alsthom Compagnie Generale d'Electricite SA 31,000 3,880,140 Andrew Corp. (a) 11,300 317,813 Cisco Systems, Inc. (a) 15,800 1,060,575 Nokia Corp. AB sponsored ADR 6,700 494,125 5,848,603 COMPUTER SERVICES & SOFTWARE - 2.7% American Management Systems, Inc. (a) 5,100 136,425 Automatic Data Processing, Inc. 47,700 2,241,900 CUC International, Inc. (a) 33,200 856,975 Ceridian Corp. (a) 30,600 1,292,850 CompUSA, Inc. (a) 20,300 436,450 Electronic Data Systems Corp. 83,400 3,419,400 First Data Corp. 62,200 2,732,913 Microsoft Corp. (a) 22,400 2,830,800 Netscape Communications Corp. (a) 5,500 176,344 Oracle Systems Corp. (a) 38,750 1,952,031 Paychex, Inc. 30,200 1,147,600 Policy Management Systems Corp. (a) 40,200 1,889,400 19,113,088 COMPUTERS & OFFICE EQUIPMENT - 4.5% Bay Networks, Inc. (a) 48,000 1,275,000 Compaq Computer Corp. (a) 74,600 7,404,050 Hewlett-Packard Co. 32,700 1,831,200 Ingram Micro, Inc. Class A (a) 6,600 159,225 International Business Machines Corp. 191,700 17,288,944 SCI Systems, Inc. (a) 44,000 2,805,000 Tech Data Corp. (a) 39,300 1,235,494 31,998,913 SHARES VALUE (NOTE 1) ELECTRONIC INSTRUMENTS - 1.3% Applied Materials, Inc. (a) 27,000 $ 1,911,938 Cognex Corp. (a) 16,500 437,250 KLA Instruments Corp. (a) 5,900 287,625 Lam Research Corp. (a) 35,000 1,297,188 Novellus Systems, Inc. (a) 22,100 1,911,650 Teradyne, Inc. (a) 30,700 1,204,975 Thermo Electron Corp. (a) 34,500 1,173,000 Varian Associates, Inc. 19,800 1,074,150 9,297,776 ELECTRONICS - 4.5% AMP, Inc. 109,100 4,554,925 Atmel Corp. (a) 7,000 196,000 Intel Corp. 57,900 8,210,944 Methode Electronics, Inc. Class A 114,100 2,267,738 Microchip Technology, Inc. (a) 6,250 185,938 Micron Technology, Inc. 128,600 5,135,963 Molex, Inc. 20,243 705,975 Motorola, Inc. 4,200 319,200 Solectron Corp. (a) 103,500 7,245,000 Storage Technology Corp. (a) 16,000 712,000 Texas Instruments, Inc. 25,700 2,160,406 Thomas & Betts Corp. 1,200 63,075 31,757,164 TOTAL TECHNOLOGY 98,015,544 TRANSPORTATION - 0.9% AIR TRANSPORTATION - 0.1% Continental Airlines, Inc. Class B (a) 7,400 258,538 Delta Air Lines, Inc. 5,200 426,400 Northwest Airlines Corp. Class A (a) 12,600 458,325 1,143,263 RAILROADS - 0.6% Bombardier, Inc. Class B 28,400 643,842 Burlington Northern Santa Fe Corp. 13,000 1,168,375 CSX Corp. 40,300 2,236,650 4,048,867 SHIPPING - 0.1% Stolt-Nielsen SA Class B sponsored ADR 29,400 569,625 Stolt-Nielsen SA 4,300 81,163 650,788 TRUCKING & FREIGHT - 0.1% Roadway Express, Inc. 6,200 144,925 Yellow Corp. (a) 26,200 586,225 731,150 TOTAL TRANSPORTATION 6,574,068 UTILITIES - 6.8% CELLULAR - 1.7% AirTouch Communications, Inc. (a) 174,200 4,768,725 360 Degrees Communications Co. (a) 8,706 149,090 Vodafone Group PLC sponsored ADR 142,380 6,896,531 Vodafone Group PLC 24,023 117,174 11,931,520 ELECTRIC UTILITY - 0.3% American Electric Power Co., Inc. 14,600 613,200 Entergy Corp. 44,200 1,209,975 1,823,175 GAS - 0.1% Enron Corp. 19,600 799,925 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) UTILITIES - CONTINUED TELEPHONE SERVICES - 4.7% AT&T Corp. 52,600 $ 1,844,288 Ameritech Corp. 46,700 3,172,681 Bell Atlantic Corp. 34,600 2,625,275 BellSouth Corp. 81,200 3,765,650 Deutsche Telekom AG 19,600 470,602 MCI Communications Corp. 163,500 6,258,984 NYNEX Corp. 68,100 3,924,263 Qwest Communications International, Inc. 1,200 32,700 SBC Communications, Inc. 66,500 4,114,688 Sprint Corp. 125,700 6,614,963 WorldCom, Inc. (a) 17,700 566,400 33,390,494 TOTAL UTILITIES 47,945,114 TOTAL COMMON STOCKS (Cost $476,697,141) 581,725,727 U.S. TREASURY OBLIGATIONS - 12.0% PRINCIPAL AMOUNT 8 1/8%, 8/15/19 $ 21,640,000 24,686,479 7 5/8%, 11/15/22 2,000,000 2,178,440 6 1/4%, 8/15/23 45,953,000 42,542,368 stripped principal: 0%, 2/15/19 43,750,000 9,819,688 0%, 8/15/19 10,000,000 2,170,600 0%, 8/15/20 20,000,000 4,047,200 TOTAL U.S. TREASURY OBLIGATIONS (Cost $85,961,758) 85,444,775 CASH EQUIVALENTS - 6.0% MATURITY AMOUNT Investments in repurchase agreements (U.S. Treasury obligations) in a joint trading account at 5.93%, dated 6/30/97 due 7/1/97 $ 42,594,015 42,587,000 TOTAL INVESTMENT IN SECURITIES - 100% (Cost $605,245,899) $ 709,757,502 LEGEND 1. Non-income producing OTHER INFORMATION Purchases and sales of securities, other than short-term securities, aggregated $298,528,669 and $68,291,517, respectively, of which U.S. government and government agency obligations aggregated $33,871,823 and $6,563,299, respectively. The market value of futures contracts opened and closed during the period amounted to $9,619,242 and $9,579,433, respectively. The fund placed a portion of its portfolio transactions with brokerage firms which are affiliates of Fidelity Management & Research. The commissions paid to these affiliated firms were $45,612 for the period. (see Note 4 of Notes to Financial Statements) INCOME TAX INFORMATION At June 30, 1997, the aggregate cost of investment securities for income tax purposes was $605,271,604. Net unrealized appreciation aggregated $104,485,898, of which $110,709,066 related to appreciated investment securities and $6,223,168 related to depreciated investment securities. VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 1997 (UNAUDITED) Investment in $ 709,757,502 securities, at value (including repurchase agreements of $42,587,000) (cost $605,245,899) - - - See accompanying schedule Cash 808 Receivable for 491,197 investments sold Receivable for fund 2,101,658 shares sold Dividends receivable 1,086,338 Interest receivable 1,745,837 TOTAL ASSETS 715,183,340 LIABILITIES Payable for $ 8,490,520 investments purchased Payable for fund 152 shares redeemed Accrued management 337,600 fee Other payables and 106,664 accrued expenses TOTAL LIABILITIES 8,934,936 NET ASSETS $706,248,404 Net Assets consist of: Paid in capital $582,572,383 Undistributed net 4,997,998 investment income Accumulated 14,166,109 undistributed net realized gain (loss) on investments and foreign currency transactions Net unrealized 104,511,914 appreciation (depreciation) on investments and assets and liabilities in foreign currencies NET ASSETS, for $706,248,404 41,242,299 shares outstanding NET ASSET VALUE, $17.12 offering price and redemption price per share ($706,248,404 (divided by) 41,242,299 shares) STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) INVESTMENT INCOME $ 3,981,833 Dividends Interest 3,195,610 TOTAL INCOME 7,177,443 EXPENSES Management fee $ 1,583,318 Transfer agent fees 191,171 Accounting fees and 150,696 expenses Non-interested 1,358 trustees' compensation Custodian fees and 50,475 expenses Registration fees 21 Audit 14,906 Legal 4,232 Miscellaneous 356 Total expenses 1,996,533 before reductions Expense reductions (20,025 1,976,508 ) NET INVESTMENT 5,200,935 INCOME REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on: Investment 14,399,104 securities Foreign currency (2,166 transactions ) Futures contracts (39,809 14,357,129 ) Change in net unrealized appreciation (depreciation) on: Investment 58,370,392 securities Assets and 347 58,370,739 liabilities in foreign currencies NET GAIN (LOSS) 72,727,868 NET INCREASE $77,928,803 (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS OTHER INFORMATION $ 19,204 Expense reductions Directed brokerage arrangements Custodian credits 821 $ 20,025 STATEMENT OF CHANGES IN NET ASSETS INCREASE (DECREASE) IN NET ASSETS SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, 1997 1996 (UNAUDITED) Operations $ 5,200,935 $ 6,366,110 Net investment income Net realized gain 14,357,129 9,088,610 (loss) Change in net 58,370,739 35,812,890 unrealized appreciation (depreciation) NET INCREASE 77,928,803 51,267,610 (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS Distributions to (6,567,693) - shareholders From net investment income From net realized (9,194,770) (705,098 gain ) TOTAL DISTRIBUTIONS (15,762,463) (705,098 ) Share transactions 253,984,326 170,852,927 Net proceeds from sales of shares Reinvestment of 15,762,463 705,098 distributions Cost of shares (8,750,145) (3,337,769 redeemed ) NET INCREASE 260,996,644 168,220,256 (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS TOTAL INCREASE 323,162,984 218,782,768 (DECREASE) IN NET ASSETS NET ASSETS Beginning of period 383,085,420 164,302,652 End of period $706,248,404 $383,085,420 (including undistributed net investment income of $4,997,998 and $6,366,110, respectively) OTHER INFORMATION Shares Sold 15,911,548 12,499,499 Issued in 1,011,711 53,538 reinvestment of distributions Redeemed (556,728) (246,129 ) Net increase 16,366,531 12,306,908 (decrease) SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, 1997 SELECTED PER-SHARE DATA (UNAUDITED) 1996 1995 Net asset value, $ 15.40 $ 13.07 $ 10.00 beginning of period Income from Investment Operations Net investment .16 D .26 .11 income Net realized and 2.16 2.12 3.14 unrealized gain (loss) Total from 2.32 2.38 3.25 investment operations Less Distributions From net (.25) - (.11) investment income From net realized (.35) (.05) (.07) gain Total distributions (.60) (.05) (.18) Net asset value, end $ 17.12 $ 15.40 $ 13.07 of period TOTAL RETURN B, C 15.45% 18.27% 32.52% RATIOS AND SUPPLEMENTAL DATA Net assets, end of $706,248 $383,085 $164,303 period (000 omitted) Ratio of expenses to .77% A .77% .85% average net assets E Ratio of expenses to .76% A, F .76% .83% average net assets F F after expense reductions Ratio of net 1.99% A 2.29% 2.49% investment income to average net assets Portfolio turnover rate 27% A 28% 38% Average commission $ .0364 $ .0367 rate G A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED AND DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN. C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. E FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE BEEN HIGHER. F FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). G FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE STRUCTURES MAY DIFFER. VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO PERFORMANCE AND INVESTMENT SUMMARY PERFORMANCE There are several ways to evaluate a fund's historical performance. You can look at the total percentage change in value, the average annual percentage change or the growth of a hypothetical $10,000 investment. Total return reflects the change in the value of an investment, assuming reinvestment of the fund's dividend income and capital gains (the profits earned upon the sale of securities that have grown in value). AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED PAST 1 LIFE OF JUNE 30, 1997 YEAR FUND CONTRAFUND 25.07% 29.11% S&P 500(registered trademark) 34.70% 33.11% AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what would have happened if the fund had performed at a constant rate each year. You can compare the fund's return to the performance of the Standard & Poor's 500 Index -a widely recognized, unmanaged index of common stocks. This benchmark reflects the reinvestment of dividends and capital gains, if any. UNDERSTANDING PERFORMANCE How a fund did yesterday is no guarantee of how it will do tomorrow. The stock market, for example, has a history of long-term growth and short-term volatility. In turn, the share price and return of a fund that invests in stocks will vary. That means if you sell your shares during a market downturn, you might lose money. But if you can ride out the market's ups and downs, you may have a gain. (checkmark) Figures for more than one year assume a steady compounded rate of return and are not the fund's year-by-year results, which fluctuated over the periods shown. The life of the fund figures are from commencement of operations January 3, 1995. PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, THE TOTAL RETURN WOULD BE LOWER. Past performance is no guarantee of future results. Principal and investment return will vary and you may have a gain or loss when you withdraw your money. $10,000 OVER LIFE OF FUND 1995/01/03 10000.00 10000.00 1995/01/31 9870.00 10258.23 1995/02/28 10370.00 10658.00 1995/03/31 10890.00 10972.51 1995/04/30 11480.00 11295.66 1995/05/31 11730.00 11747.14 1995/06/30 12490.00 12020.03 1995/07/31 13470.00 12418.61 1995/08/31 13640.00 12449.78 1995/09/30 13940.00 12975.16 1995/10/31 13650.00 12928.84 1995/11/30 13900.00 13496.42 1995/12/31 13971.98 13756.36 1996/01/31 14073.30 14224.63 1996/02/29 14124.25 14356.49 1996/03/31 14584.49 14494.74 1996/04/30 15065.18 14708.39 1996/05/31 15239.05 15087.72 1996/06/30 15116.32 15145.21 1996/07/31 14410.62 14476.09 1996/08/31 14962.90 14781.39 1996/09/30 15597.01 15613.29 1996/10/31 16077.71 16043.91 1996/11/30 17039.10 17256.66 1996/12/31 16936.82 16914.81 1997/01/31 17591.38 17971.65 1997/02/28 17103.08 18112.54 1997/03/31 16660.22 17368.30 1997/04/30 17060.91 18405.19 1997/05/31 18115.35 19525.70 1997/06/30 18906.18 20400.45 Let's say hypothetically that $10,000 was invested in Contrafund Portfolio on January 3, 1995, when the fund started. As the chart shows, by June 30, 1997, the value of the investment would have grown to $18,906 - a 89.06% increase on the initial investment. For comparison, look at how the S&P 500 did over the same period. With dividends and capital gains, if any, reinvested, the same $10,000 investment would have grown to $20,400 - a 104.00% increase. INVESTMENT SUMMARY TOP TEN STOCKS AS OF JUNE 30, 1997 % OF FUND'S INVESTMENTS Schlumberger Ltd. 1.6 Microsoft Corp. 1.2 Lucent Technologies, Inc. 1.1 Home Depot, Inc. (The) 1.1 American International Group, Inc. 1.1 Royal Dutch Petroleum Co. 1.0 Alcatel Alsthom Compagnie Generale d'Electricite SA 1.0 Texas Instruments, Inc. 1.0 Tyco International Ltd. 1.0 Westinghouse Electric Corp. 1.0 TOP TEN MARKET SECTORS AS OF JUNE 30, 1997 % OF FUND'S INVESTMENTS Technology 14.8 Finance 13.5 Energy 12.8 Retail & Wholesale 7.5 Industrial Machinery & Equipment 6.2 Media & Leisure 6.2 Durables 4.8 Basic Industries 4.8 Health 4.7 Nondurables 3.8 VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO FUND TALK: THE MANAGER'S OVERVIEW An interview with Will Danoff, Portfolio Manager of Contrafund Portfolio Q. HOW DID THE FUND PERFORM, WILL? A. Results were disappointing. For the six months that ended June 30, 1997, the fund trailed the 20.61% return of the Standard & Poor's 500 Index. From a 12- month perspective, the fund also lagged the S&P 500, which had a return of 34.70%. I consider this performance to be unsatisfactory and I'm working as hard as ever with Fidelity's research staff to find stocks that can help boost second-half performance. Q. WHAT FACTORS WERE BEHIND THE FUND'S UNDERPERFORMANCE RELATIVE TO THE S&P 500? A. A primary reason was the narrowness of the market. By that I mean that the market's advance was concentrated chiefly among stocks of the largest companies in the index. To illustrate, shares of the 100 largest S&P 500 stocks appreciated approximately 25% over the past six months, while the 100 smallest stocks in the index rose only around 15%. This phenomenon hurt the fund, which tends to emphasize small- and mid-sized companies. Q. WERE THERE ANY OTHER SPECIFIC FACTORS THAT HAD A NEGATIVE IMPACT ON THE FUND'S RETURN? A. The fund's underweighting in health care stocks relative to the index -health care stocks make up around 11% of the index, while they comprised almost 5% of the fund - hurt performance. With governments throughout the world attempting to limit health care expenditure growth and U.S. health maintenance organizations (HMOs) trying to contain industry costs, I thought the industry would suffer a slowdown. Unfortunately, many health care stocks - particularly pharmaceuticals -continued to perform well, rising about 23% during the period. Thus, my strategy of underweighting these stocks hurt the fund's return. Q. ASIDE FROM HEALTH STOCKS, HOW DID OTHER SECTORS PERFORM DURING THE PERIOD? A. The finance sector, which accounted for around 14% of the fund's investments at the end of the period, rose approximately 23%. This strong showing was due largely to falling interest rates, good expense control and continuing industry consolidation. Some financial stocks held by the fund included American International Group, a leading insurer with operations in Asia; Washington Mutual, a rapidly growing West Coast thrift; and First Bank Systems, a Minneapolis bank with one of the lowest expense ratios in the industry and a recent acquirer of another stock in Contrafund's portfolio, U.S. Bancorp. On the other hand, the fund's energy exploration and production positions were hurt by falling oil and natural gas prices. As of period end, the fund's exposure to these stocks had fallen from about 23% six months ago to approximately 13%. Low capital investment in the energy sector has resulted in a tight supply of oil service equipment. Examples of fund positions that benefited from this positive trend included Schlumberger, Halliburton, ENSCO International and Smith International, all top 25 positions within the portfolio. Q. DID YOU PLAY ANY OTHER PARTICULAR THEMES DURING THE PERIOD? A. One area of optimism is the Internet and certain stocks that could benefit from the Internet's popularity. The cable television industry is an example. These stocks have had a tough four-year stretch, as government regulation limited companies' ability to raise prices, and subscriber growth slowed. As a result, the market still holds a pessimistic view on cable TV stocks. However, with the Internet's popularity, these companies have a huge opportunity to reaccelerate their earnings growth. Many cable TV companies are offering access to the Internet at dramatically faster speeds than is currently available over telephone wires. This could help turn the cable TV industry's fortunes around. Along the same lines, the technology and telecommunications industries could also benefit from the Internet demand. Two of the fund's top positions - Lucent Technologies and Alcatel - are leading providers of the equipment being used to improve the Internet's operating efficiency. Q. WHAT'S YOUR OUTLOOK? A. As I mentioned, the biggest stocks in the S&P 500 are quite expensive, a trend that could continue for several years. If it does, I'll continue my contrarian approach of looking for undervalued companies that are growing their earnings rapidly and therefore have the capability to produce good share price appreciation. FUND FACTS GOAL: to provide capital growth by investing primarily in common stocks and securities convertible into common stocks START DATE: January 3, 1995 SIZE: as of June 30, 1997, more than $706 million MANAGER: George Vanderheiden, since inception; joined Fidelity in 1971 (checkmark) VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO INVESTMENTS JUNE 30, 1997 (UNAUDITED) Showing Percentage of Total Value of Investment in Securities COMMON STOCKS - 93.0% SHARES VALUE (NOTE 1) AEROSPACE & DEFENSE - 2.3% AEROSPACE & DEFENSE - 2.2% AlliedSignal, Inc. 115,900 $ 9,736,589 Boeing Co. 178,500 9,471,656 GenCorp, Inc. 96,700 2,236,188 General Motors Corp. Class H 10,600 612,150 Gulfstream Aerospace Corp. (a) 125,000 3,687,500 Kellstrom Industries, Inc. (a) 189,100 2,978,325 Lockheed Martin Corp. 116,000 12,013,250 Sundstrand Corp. 99,300 5,542,181 Textron, Inc. 104,700 6,949,463 United Technologies Corp. 205,400 17,048,200 70,275,502 DEFENSE ELECTRONICS - 0.0% Datum, Inc. (a) 8,000 248,000 Raytheon Co. 11,900 606,900 854,900 SHIP BUILDING & REPAIR - 0.1% General Dynamics Corp. 23,600 1,770,000 TOTAL AEROSPACE & DEFENSE 72,900,402 BASIC INDUSTRIES - 4.8% CHEMICALS & PLASTICS - 2.5% Air Products & Chemicals, Inc. 27,100 2,201,875 Avery Dennison Corp. 6,200 248,775 Cambrex Corp. 90,800 3,609,300 Crompton & Knowles Corp. 332,292 7,393,497 Cytec Industries, Inc. (a) 170,100 6,357,488 du Pont (E.I.) de Nemours & Co. 65,400 4,112,025 Engelhard Corp. 1,000 20,938 FMC Corp. (a) 1,800 142,988 Ferro Corp. 24,000 889,500 Fuller (H.B.) Co. 53,900 2,964,500 Goodrich (B.F.) Co. 47,600 2,061,675 International Specialty Products, Inc. (a) 75,500 1,061,719 Monsanto Co. 337,500 14,533,594 Morton International, Inc. 150,900 4,555,294 Nalco Chemical Co. 46,100 1,780,613 Praxair, Inc. 138,500 7,756,000 Raychem Corp. 22,600 1,680,875 Sealed Air Corp. (a) 242,100 11,499,750 Union Carbide Corp. 42,600 2,004,863 W.R. Grace & Co. 62,900 3,467,363 Witco Corp. 53,000 2,010,688 80,353,320 IRON & STEEL - 0.1% Aeroquip Vickers, Inc. 9,700 458,325 Nucor Corp. 51,000 2,881,500 Steel Dynamics, Inc. (a) 42,100 1,052,500 4,392,325 METALS & MINING - 0.7% Alcan Aluminium Ltd. 44,300 1,511,266 Aluminum Co. of America 103,600 7,808,850 Falconbridge Ltd. 79,200 1,554,572 Reynolds Metals Co. 62,600 4,460,250 Rio Tinto PLC (Reg.) 309,900 5,398,794 20,733,732 PACKAGING & CONTAINERS - 0.5% Crown Cork & Seal Co., Inc. 48,800 2,607,750 Owens-Illinois, Inc. (a) 397,900 12,334,900 SHARES VALUE (NOTE 1) Peak International, Ltd. 38,900 $ 466,800 Silgan Holdings, Inc. 37,100 1,437,625 16,847,075 PAPER & FOREST PRODUCTS - 1.0% Abitibi-Consolidated, Inc. 28,300 505,266 American Pad & Paper Co. (a) 90,100 1,520,438 Bowater, Inc. 23,900 1,105,375 Champion International Corp. 39,900 2,204,475 Deltic Timber Corp. 16,557 485,327 Fort Howard Corp. (a) 12,400 627,750 Georgia-Pacific Corp. 12,500 1,067,188 International Paper Co. 29,300 1,422,881 James River Corp. of Virginia 271,600 10,049,200 Kimberly-Clark Corp. 181,100 9,009,725 Mail-Well, Inc. (a) 83,500 2,379,750 Temple-Inland, Inc. 33,000 1,782,000 32,159,375 TOTAL BASIC INDUSTRIES 154,485,827 CONSTRUCTION & REAL ESTATE - 3.3% BUILDING MATERIALS - 0.9% American Residential Services, Inc. (a) 42,100 978,825 American Standard Companies, Inc. (a) 9,400 420,650 Coltec Industries, Inc. (a) 166,900 3,254,550 Lilly Industrial Coatings, Inc. Class A 66,400 1,336,300 Mark IV Industries, Inc. 25,000 600,000 Masco Corp. 168,600 7,039,050 Medusa Corp. 20,200 775,175 Nortek, Inc. (a) 29,200 704,450 Sherwin-Williams Co. 140,500 4,337,938 Southdown, Inc. 73,600 3,210,800 USG Corp. (a) 155,400 5,672,100 York International Corp. 2,100 96,600 28,426,438 CONSTRUCTION - 0.1% Centex Corp. 31,500 1,279,688 Lennar Corp. 33,300 1,063,519 Morrison Knudsen Corp. (a) 56,700 772,538 Walter Industries, Inc. (a) 3,600 60,300 3,176,045 ENGINEERING - 0.0% DSP Group, Inc. (a) 13,900 208,283 Stone & Webster, Inc. 1,300 55,494 263,777 REAL ESTATE - 0.2% Boston Properties, Inc. 67,200 1,848,000 Catellus Development Corp. (a) 18,700 338,938 Crescent Operating, Inc. 27,790 333,480 Rouse Co. (The) 185,723 5,478,829 Stewart Enterprises, Inc. Class A 2,100 88,200 8,087,447 REAL ESTATE INVESTMENT TRUSTS - 2.1% Arden Realty Group, Inc. 74,300 1,931,800 BRE Properties, Inc. Class A 3,600 90,450 Bay Apartment Communities, Inc. 40,200 1,487,400 Bedford Property Investors, Inc. 72,900 1,467,113 Bradley Real Estate Trust (SBI) 33,200 639,100 Cali Realty Corp. 49,300 1,676,200 Crescent Real Estate Equities, Inc. 277,900 8,823,325 Duke Realty Investors, Inc. 22,400 907,200 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) CONSTRUCTION & REAL ESTATE - CONTINUED REAL ESTATE INVESTMENT TRUSTS - CONTINUED Equity Residential Properties Trust (SBI) 121,000 $ 5,747,500 Essex Property Trust, Inc. 13,300 427,263 Felcor Suite Hotels, Inc. 132,700 4,943,075 First Industrial Realty Trust, Inc. 80,200 2,345,850 Glenborough Realty Trust, Inc. 53,000 1,338,250 Golf Trust of America, Inc. 89,600 2,492,000 Home Properties of NY, Inc. 8,900 200,250 Irvine Apartment Communities, Inc. 3,600 106,200 Kilroy Realty Corp. 11,800 297,950 Kimco Realty Corp. 70,100 2,225,675 LTC Properties, Inc. 51,700 937,063 Macerich Co. 60,400 1,676,100 Pacific Gulf Properties, Inc. 2,600 57,200 Patriot American Hospitality, Inc. 147,800 3,768,900 Public Storage, Inc. 40,700 1,190,475 Reckson Associates Realty Corp. 124,500 2,863,500 Speiker Properties, Inc. 72,200 2,540,538 Starwood Lodging Trust combined certificate (SBI) 270,000 11,525,625 Sunstone Hotel Investors, Inc. 32,600 472,700 Urban Shopping Centers, Inc. 5,100 162,563 Vornado Realty Trust 32,900 2,372,913 Weeks Corp. 31,300 978,125 65,692,303 TOTAL CONSTRUCTION & REAL ESTATE 105,646,010 DURABLES - 4.8% AUTOS, TIRES, & ACCESSORIES - 2.1% Chrysler Corp. 212,200 6,962,813 Circuit City Stores, Inc. - CarMax Group 88,400 1,265,225 Cross-Continent Auto Retailers, Inc. (a) 43,900 463,694 Danaher Corp. 227,100 11,539,519 Eaton Corp. 28,400 2,479,675 Echlin, Inc. 49,400 1,778,400 Federal-Mogul Corp. 40,700 1,424,500 Ford Motor Co. 293,000 11,060,750 General Motors Corp. 103,200 5,746,950 Lear Corp. (a) 131,000 5,813,125 Navistar International Corp. (a) 203,600 3,512,100 O'Gara Co. (a) 297,400 3,048,350 OmniQuip International, Inc. 24,400 564,250 SPX Corp. 102,400 6,636,800 Superior Industries International, Inc. 1,700 45,050 TRW, Inc. 9,600 545,400 Tower Automotive, Inc. (a) 41,500 1,784,500 Toyota Motor Corp. 66,000 1,945,833 United Auto Group, Inc. (a) 50,300 996,569 67,613,503 CONSUMER DURABLES - 1.2% Blyth Industries, Inc. (a) 14,100 475,875 Corning, Inc. 249,700 13,889,563 Minnesota Mining & Manufacturing Co. 203,200 20,726,400 Samsonite Corp. (a) 50,300 2,219,488 37,311,326 CONSUMER ELECTRONICS - 0.5% Electrolux AB 7,100 513,120 Gemstar International Group Ltd. (a) 46,900 861,788 Maytag Co. 48,400 1,264,450 Philips Electronics NV 165,000 11,859,375 SHARES VALUE (NOTE 1) Philips Electronics NV (Bearer) 36,350 $ 2,602,113 Sunbeam-Oster, Inc. 12,500 471,875 17,572,721 HOME FURNISHINGS - 0.3% Carpetright PLC 347,500 2,903,986 Furniture Brands International, Inc. 12,500 242,188 Leggett & Platt, Inc. 61,500 2,644,500 Linens'n Things, Inc. 91,800 2,719,575 Miller (Herman), Inc. 4,000 144,000 8,654,249 TEXTILES & APPAREL - 0.7% Cutter & Buck, Inc. (a) 144,200 2,343,250 Dexter Corp. 50,200 1,606,400 House of Fraser PLC Class L 673,400 1,788,009 Intimate Brands, Inc. Class A 41,500 871,500 Kellwood Co. 6,400 177,600 Liz Claiborne, Inc. 117,900 5,497,088 Mohawk Industries, Inc. (a) 2,100 47,775 Oxford Industries, Inc. 33,100 939,213 Polo Ralph Lauren Corp. Class A 9,100 249,113 Reebok International Ltd. 154,000 7,199,500 Stride Rite Corp. 41,100 529,163 Unifi, Inc. 22,300 833,463 Warnaco Group, Inc. Class A 45,000 1,434,375 23,516,449 TOTAL DURABLES 154,668,248 ENERGY - 12.8% ENERGY SERVICES - 6.3% BJ Services Co. (a) 172,700 9,261,038 Baker Hughes, Inc. 120,300 4,654,106 Diamond Offshore Drilling, Inc. (a) 208,500 16,236,938 Dresser Industries, Inc. 190,300 7,088,675 ENSCO International, Inc. (a) 475,387 25,076,664 Falcon Drilling, Inc. (a) 75,800 4,367,975 Global Marine, Inc. (a) 217,000 5,045,250 Halliburton Co. 305,900 24,242,575 Marine Drilling Companies, Inc. (a) 287,300 5,638,263 McDermott International, Inc. 195,700 5,711,994 Nabors Industries, Inc. (a) 311,300 7,782,500 Noble Drilling Corp. (a) 260,100 5,868,506 Reading & Bates Corp. (a) 29,300 783,775 Smedvig AS, Series B 55,200 1,356,136 Santa Fe International Corp. 7,200 244,800 Schlumberger Ltd. 402,200 50,275,000 Smith International, Inc. (a) 361,600 21,967,200 Varco International, Inc. (a) 63,300 2,041,425 Weatherford Enterra, Inc. (a) 81,100 3,122,350 Western Atlas, Inc. (a) 8,800 644,600 201,409,770 OIL & GAS - 6.5% Amoco Corp. 120,500 10,475,969 Anadarko Petroleum Corp. 5,000 300,000 Atlantic Richfield Co. 12,400 874,200 Barrett Resources Corp. (a) 600 17,963 British Petroleum PLC ADR 292,284 21,884,765 Burlington Resources, Inc. 220,000 9,707,500 Camco International, Inc. 168,600 9,230,850 Canadian Natural Resources Ltd. (a) 186,400 4,840,068 Chesapeake Energy Corp. (a) 10,700 104,994 Coastal Corp. (The) 109,900 5,845,306 Cooper Cameron Corp. (a) 167,140 7,813,795 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) ENERGY - CONTINUED OIL & GAS - CONTINUED Enron Oil & Gas Co. 7,000 $ 126,875 Forcenergy Gas Exploration, Inc. (a) 107,900 3,277,463 Mesa, Inc. (a) 160,600 923,450 Mobil Corp. 130,700 9,132,663 Murphy Oil Corp. 153,900 7,502,625 Newfield Exploration Co. (a) 214,300 4,286,000 Norcen Energy Resources Ltd. 17,800 424,163 Ocean Energy, Inc. (a) 9,800 453,250 Oryx Energy Co. (a) 46,400 980,200 Parker & Parsley Petroleum Co. 53,100 1,878,413 Penn West Petroleum Ltd. (a) 38,600 493,456 Penn West Petroleum Ltd. (a)(b) 68,600 876,971 Petsec Energy Ltd. sponsored ADR 73,000 1,660,750 Phillips Petroleum Co. 85,900 3,758,125 Pogo Producing Co. 133,000 5,145,438 Renaissance Energy Ltd. (a) 238,800 6,641,741 Rio Alto Exploration Ltd. (a) 32,200 269,373 Royal Dutch Petroleum Co. 598,000 32,516,250 Santa Fe Energy Resources, Inc. (a) 217,700 3,197,469 Swift Energy Co. (a) 127,300 3,039,288 Texaco, Inc. 102,500 11,146,875 Tosco Corp. 379,900 11,373,256 Total SA Class B 123,633 12,489,031 United Meridian Corp. (a) 138,300 4,149,000 Unocal Corp. 287,400 11,154,713 Vastar Resources, Inc. 4,000 140,250 Vintage Petroleum, Inc. 11,000 338,250 YPF Sociedad Anonima sponsored ADR 2,600 79,950 YPF Sociedad Anonima D shares 4,200 129,379 208,680,077 TOTAL ENERGY 410,089,847 FINANCE - 13.5% BANKS - 3.9% Bank of New York Co., Inc. 229,300 9,974,550 Bank of Nova Scotia Halifax 2,600 114,314 BankBoston Corp. 500 36,031 BankAmerica Corp. 331,900 21,428,294 Citicorp 24,200 2,917,613 Comerica, Inc. 71,300 4,848,400 Credit Suisse Group (Reg.) 87,200 11,187,137 Credito Italiano Ord. 1,584,000 2,897,378 Fifth Third Bancorp 23,200 1,903,850 First Bank System, Inc. 224,500 19,166,688 First Union Corp. 29,400 2,719,500 HSBC Holdings PLC 226,655 6,716,164 Imperial Bancorp 6,200 179,025 Lloyds TSB Group PLC 198,900 2,039,630 Mellon Bank Corp. 28,500 1,286,063 National City Corp. 98,100 5,150,250 North Fork Bancorp., Inc. 186,500 3,986,438 Norwest Corp. 43,000 2,418,750 Royal Bank of Canada 6,200 280,889 Standard Chartered Bank PLC 278,000 4,239,125 Star Banc Corp. 1,900 80,275 Texas Regional Bancshares, Inc. Class A (vtg.) 116,300 4,884,600 U.S. Bancorp 168,700 10,817,888 SHARES VALUE (NOTE 1) Wells Fargo & Co. 11,500 $ 3,099,250 Zions Bancorp 83,200 3,130,400 125,502,502 CLOSED-END INVESTMENT COMPANIES - 0.1% Morgan Stanley Emerging Markets Fund, Inc. 23,900 427,213 Morgan Stanley Asia-Pacific Fund, Inc. 82,100 862,050 Templeton Dragon Fund, Inc. 43,400 705,250 1,994,513 CREDIT & OTHER FINANCE - 1.9% American Express Co. 263,900 19,660,550 Associates First Capital Corp. 23,200 1,287,600 Finova Group, Inc. 32,800 2,509,200 Fleet Financial Group, Inc. 240,300 15,198,975 Greenpoint Financial Corp. 159,200 10,596,750 Homeside, Inc. 2,100 45,319 Household International, Inc. 83,900 9,853,006 59,151,400 FEDERAL SPONSORED CREDIT - 1.3% Federal Home Loan Mortgage Corporation 487,400 16,754,375 Federal National Mortgage Association 582,400 25,407,200 42,161,575 INSURANCE - 4.6% AFLAC, Inc. 39,400 1,861,650 ARM Financial Group, Inc. Class A 2,300 46,000 ACE Ltd. 31,700 2,341,838 Aetna, Inc. 68,800 7,043,400 Allmerica Financial Corp. 79,400 3,166,075 Allstate Corp. 296,700 21,659,100 AMBAC, Inc. 12,000 916,500 American General Corp. 28,400 1,356,100 American International Group, Inc. 225,800 33,728,875 Aon Corp. 61,350 3,174,863 Berkshire Hathaway, Inc. (a) 60 2,832,000 Brascan Ltd. Class A 13,600 336,392 CIGNA Corp. 38,900 6,904,750 Chubb Corp. (The) 8,800 588,500 Exel Ltd. 6,200 327,050 Hartford Financial Services Group, Inc. 78,100 6,462,775 MGIC Investment Corp. 31,500 1,510,031 Mid Ocean Ltd. 4,900 256,944 Old Republic International Corp. 9,500 287,969 Progressive Corp. 51,400 4,471,800 Provident Companies, Inc. 19,100 1,021,850 Providian Financial Corp. (a) 13,000 417,625 Reinsurance Group of America, Inc. 4,000 230,000 Reliastar Financial Corp. 24,600 1,798,875 St. Paul Companies, Inc. (The) 24,000 1,830,000 Security-Connecticut Corp. 70,800 3,898,425 SunAmerica, Inc. 77,900 3,797,625 Torchmark Corp. 65,200 4,645,500 Travelers Property Casualty Corp. Class A 90,800 3,620,650 Travelers Group, Inc. (The) 305,766 19,282,368 UNUM Corp. 124,200 5,216,400 USF&G Corp. 152,200 3,652,800 148,684,730 SAVINGS & LOANS - 1.6% Ahmanson (H.F.) & Co. 90,400 3,887,200 Charter One Financial Corp. 25,185 1,356,842 Dime Bancorp., Inc. 117,400 2,054,500 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) FINANCE - CONTINUED SAVINGS & LOANS - CONTINUED Glendale Federal Bank FSB (a) 247,900 $ 6,476,388 Golden West Financial Corp. 71,080 4,975,600 Great Western Financial Corp. 182,200 9,793,250 Ocwen Financial Corp. 10,000 326,250 TCF Financial Corp. 50,300 2,483,563 Washington Mutual, Inc. 323,900 19,353,025 50,706,618 SECURITIES INDUSTRY - 0.1% Guoco Group Ltd. 450,000 2,369,950 Morgan Stanley Dean Witter Discover and Co. 18,900 813,881 3,183,831 TOTAL FINANCE 431,385,169 HEALTH - 4.6% DRUGS & PHARMACEUTICALS - 2.1% Andrx Corp. 78,600 3,006,450 Barr Laboratories, Inc. (a) 207,700 9,138,800 Bristol-Myers Squibb Co. 118,400 9,590,400 Elan Corp. PLC ADR (a) 55,400 2,506,850 Glaxo PLC sponsored ADR 12,500 522,656 Immunex Corp. 1,000 36,250 Interneuron Pharmaceuticals, Inc. 3,600 72,450 Merck & Co., Inc. 11,400 1,179,900 Novartis AG (Reg.) 15,111 24,132,107 Pfizer, Inc. 58,400 3,489,400 Schering-Plough Corp. 156,000 7,468,500 Sepracor, Inc. (a) 23,400 604,013 Warner-Lambert Co. 55,800 6,933,150 68,680,926 MEDICAL EQUIPMENT & SUPPLIES - 0.6% Bausch & Lomb, Inc. 56,700 2,671,988 Baxter International, Inc. 38,700 2,022,075 Boston Scientific Corp. (a) 2,300 141,306 Cardinal Health, Inc. 22,500 1,288,125 McKesson Corp. 12,500 968,750 Medtronic, Inc. 51,200 4,147,200 Nitinol Medical Technologies, Inc. 1,000 15,125 St. Jude Medical, Inc. (a) 102,400 3,993,600 Sybron International Corp. (a) 36,800 1,467,400 Ventana Medical Systems, Inc. 65,000 804,375 17,519,944 MEDICAL FACILITIES MANAGEMENT - 1.9% Beverly Enterprises, Inc. (a) 75,400 1,225,250 Carematrix Corp. (a) 53,200 1,313,375 Columbia/HCA Healthcare Corp. 7,800 306,638 Coventry Corp. (a) 102,600 1,551,825 FPA Medical Management, Inc. 11,500 272,406 HEALTHSOUTH Rehabilitation Corp. (a) 617,500 15,398,906 Health Management Associates, Inc. Class A (a) 316,200 9,011,700 Humana, Inc. (a) 46,900 1,084,563 Integrated Health Services, Inc. 194,100 7,472,850 NovaCare, Inc. (a) 48,600 674,325 Oxford Health Plans, Inc. (a) 64,600 4,635,050 Quorum Health Group, Inc. (a) 9,300 332,475 Safeguard Health Enterprises, Inc. (a) 63,700 676,813 Sunrise Assisted Living, Inc. (a) 119,300 4,175,500 Tenet Healthcare Corp. (a) 196,400 5,806,075 SHARES VALUE (NOTE 1) Trigon Healthcare, Inc. 131,000 $ 3,176,750 United HealthCare Corp. 36,500 1,898,000 Vencor, Inc. (a) 31,500 1,330,875 60,343,376 TOTAL HEALTH 146,544,246 HOLDING COMPANIES - 0.5% Norfolk Southern Corp. 161,500 16,271,125 PartnerRe Ltd. 16,000 610,000 Triarc Companies, Inc. Class A (a) 24,000 489,000 17,370,125 INDUSTRIAL MACHINERY & EQUIPMENT - 6.2% ELECTRICAL EQUIPMENT - 1.9% AMETEK, Inc. 67,000 1,574,500 Common Development International Ltd. (a)(b) 41,200 753,486 Computer Products, Inc. (a) 2,100 52,500 General Electric Co. 85,400 5,583,025 General Instrument Corp. (a) 86,800 2,170,000 Honeywell, Inc. 43,000 3,262,625 Kuhlman Corp. 9,900 319,275 Loral Space & Communications Ltd. (a) 864,600 12,969,000 Roper Industries, Inc. 8,700 451,313 Scientific-Atlanta, Inc. 166,900 3,650,938 Spectrain Corp. 3,100 114,313 Viasat, Inc. 6,800 98,600 Westinghouse Electric Corp. 1,348,615 31,186,722 62,186,297 INDUSTRIAL MACHINERY & EQUIPMENT - 3.2% AGCO Corp. 10,200 366,563 Case Corp. 204,100 14,057,388 Caterpillar, Inc. 84,000 9,019,500 Cooper Industries, Inc. 26,800 1,333,300 Dover Corp. 34,600 2,127,900 Harnischfeger Industries, Inc. 80,200 3,328,300 Illinois Tool Works, Inc. 209,900 10,481,881 Ingersoll-Rand Co. 121,000 7,471,750 Kaydon Corp. 117,800 5,845,825 Keystone International, Inc. 98,700 3,423,656 New Holland NV 324,100 8,872,238 Parker-Hannifin Corp. 16,000 971,000 Stanley Works 63,300 2,532,000 Tyco International Ltd. 453,714 31,560,506 Thermo Fibergen, Inc. rights 12/31/01 (a) 13,700 36,819 101,428,626 POLLUTION CONTROL - 1.1% Allied Waste Industries, Inc. (a) 17,300 300,588 Browning-Ferris Industries, Inc. 32,800 1,090,600 Thermo Instrument Systems, Inc. (a) 68,800 2,107,000 USA Waste Services, Inc. (a) 573,780 22,162,253 United Waste Systems, Inc. (a) 186,200 7,634,200 Waste Management, Inc. 2,800 89,950 33,384,591 TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 196,999,514 MEDIA & LEISURE - 6.2% BROADCASTING - 1.6% APT Satellite Holdings Ltd. sponsored ADR 263,500 3,326,688 American Radio Systems Corp. Class A (a) 32,700 1,303,913 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) MEDIA & LEISURE - CONTINUED BROADCASTING - CONTINUED Asia Satellite Telecommunications Holdings Ltd. 255,000 $ 781,754 Canal Plus SA 2,200 428,013 Clear Channel Communications, Inc. (a) 41,400 2,548,688 Cox Communications, Inc. Class A (a) 56,300 1,351,200 Evergreen Media Corp. Class A (a) 5,600 249,900 HSN, Inc. (a) 8,300 259,375 Jacor Communications, Inc. Class A (a) 110,100 4,211,325 Metro Networks, Inc. (a) 40,500 982,125 Smartalk Teleservices, Inc. (a) 46,900 726,950 TCA Cable TV, Inc. 9,300 349,913 TCI Group Class A (a) 269,100 4,002,863 Telemundo Group, Inc. Class A (a) 136,400 3,273,600 Time Warner, Inc. 488,100 23,550,825 Univision Communications, Inc. Class A (a) 9,900 387,338 Westwood One, Inc. (a) 50,000 1,612,500 49,346,970 ENTERTAINMENT - 0.8% Airtours PLC 29,600 572,577 Disney (Walt) Co. 237,800 19,083,450 Family Golf Centers, Inc. (a) 12,200 280,600 Premier Parks, Inc. (a) 93,300 3,440,438 Regal Cinemas, Inc. (a) 19,600 646,800 Viacom, Inc. (a): Class A 39,900 1,184,531 Class B (non-vtg.) 49,800 1,494,000 26,702,396 LEISURE DURABLES & TOYS - 1.0% Brunswick Corp. 200,500 6,265,625 Callaway Golf Co. 67,700 2,403,350 Champion Enterprises, Inc. (a) 36,600 549,000 Harley-Davidson, Inc. 35,200 1,687,400 Hasbro, Inc. 466,025 13,223,459 Mattel, Inc. 142,550 4,828,881 Nintendo Co. Ltd. Ord. 33,300 2,788,434 31,746,149 LODGING & GAMING - 1.0% Bristol Hotel Co. (a) 7,200 277,200 Doubletree Corp. (a) 39,000 1,603,875 Four Seasons Hotels, Inc. 125,800 3,735,777 HFS, Inc. (a) 260,600 15,114,800 Hilton Hotels Corp. 3,600 95,625 Host Marriott Corp. (a) 102,900 1,832,906 ITT Corp. 6,300 384,117 La Quinta Motor Inns, Inc. 132,700 2,902,813 Marriott International, Inc. 3,000 184,125 Patriot American Hospitality, Inc. 76,700 3,458,217 WMS Industries, Inc. 105,300 2,639,081 32,228,536 PUBLISHING - 0.8% Big Flower Press Holdings, Inc. (a) 194,600 4,037,950 Dow Jones & Co., Inc. 32,500 1,306,094 Harte Hanks Communications, Inc. 7,700 227,150 Meredith Corp. 51,500 1,493,500 New York Times Co. (The) Class A 99,900 4,945,050 Pearson, PLC 215,600 2,498,009 Playboy Enterprises, Inc. Class B (a) 30,400 351,500 SHARES VALUE (NOTE 1) Times Mirror Co. Class A 158,900 $ 8,779,225 Tribune Co. 61,500 2,955,844 26,594,322 RESTAURANTS - 1.0% Boston Chicken, Inc. (a) 88,100 1,233,400 Chart House Enterprises, Inc. 4,800 35,976 Compass Group PLC Ord. 46,600 522,468 Cracker Barrel Old Country Store, Inc. 10,800 286,200 Fine Host Corp. (a) 31,500 992,250 Foodmaker, Inc. (a) 58,600 959,575 Landry's Seafood Restaurants, Inc. (a) 96,000 2,208,000 Logan's Roadhouse, Inc. (a) 24,900 591,375 Lone Star Steakhouse Saloon 2,600 67,600 McDonald's Corp. 246,700 11,918,694 Morton's Restaurant Group, Inc. (a) 316,900 6,298,388 Papa John's International, Inc. (a) 14,400 529,200 Rainforest Cafe, Inc. (a) 11,100 281,663 ShowBiz Pizza Time, Inc. (a) 77,700 2,049,338 Starbucks Corp. (a) 17,600 685,300 30,124,896 TOTAL MEDIA & LEISURE 196,743,269 NONDURABLES - 3.8% AGRICULTURE - 0.1% Pioneer Hi-Bred International, Inc. 17,900 1,432,000 BEVERAGES - 0.7% Cadbury-Schweppes PLC Ord. 1,103,597 9,847,166 Coors (Adolph) Co. Class B 25,000 665,625 COTT Corp. 6,200 66,012 PepsiCo, Inc. 343,600 12,906,475 23,485,278 FOODS - 1.5% CPC International, Inc. 2,100 193,856 Campbell Soup Co. 133,400 6,670,000 Dean Foods Co. 103,100 4,162,663 Dole Food, Inc. 30,000 1,282,500 Earthgrains Co. 6,200 406,488 Flowers Industries, Inc. 30,000 504,375 Hershey Foods Corp. 83,500 4,618,594 Interstate Bakeries Corp. 7,800 462,638 Nabisco Holdings Corp. Class A 182,500 7,277,188 Nestle SA (Reg.) 6,735 8,875,546 Ralston Purina Co. 83,600 6,870,875 Sara Lee Corp. 87,100 3,625,538 Tasty Baking Co. 500 8,750 Tootsie Roll Industries, Inc. 23,455 1,043,748 Tyson Foods, Inc. 88,400 1,690,650 47,693,409 HOUSEHOLD PRODUCTS - 1.3% Church & Dwight Co., Inc. 24,200 647,350 Dial Corp. 249,800 3,903,125 Estee Lauder Companies, Inc. 12,100 608,025 Gillette Co. 163,100 15,453,725 Premark International, Inc. 69,500 1,859,125 Stanhome, Inc. 5,500 180,813 Unilever NV: Ord. 74,810 15,738,248 ADR 21,430 4,587,359 42,977,770 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) NONDURABLES - CONTINUED TOBACCO - 0.2% Consolidated Cigar Holdings, Inc. Class A (a) 93,000 $ 2,580,750 Culbro Corp. (a) 2,200 306,213 Dimon, Inc. 7,200 190,800 Gallaher Group PLC sponsored ADR (a) 79,700 1,469,469 General Cigar Holdings, Inc. Class A 10,700 314,981 Swisher International Group, Inc. Class A 60,100 1,036,725 Universal Corp. 8,200 260,350 6,159,288 TOTAL NONDURABLES 121,747,745 PRECIOUS METALS - 0.7% Euro-Nevada Mining Ltd. 177,700 5,470,068 Franco-Nevada Mining Corp. 228,900 11,481,060 Getchell Gold Corp. (a) 43,300 1,526,325 Indochina Goldfields Ltd. (a) 133,900 630,391 Indochina Goldfields Ltd. (a)(b) 75,600 355,919 Newmont Mining Corp. 48,000 1,872,000 21,335,763 RETAIL & WHOLESALE - 7.4% APPAREL STORES - 0.8% AnnTaylor Stores Corp. (a) 53,600 1,045,200 Charming Shoppes, Inc. (a) 1,202,800 6,277,113 Footstar, Inc. (a) 17,500 457,188 Gap, Inc. 113,000 4,392,875 Goody's Family Clothing (a) 161,900 4,432,013 Payless ShoeSource, Inc. (a) 34,488 1,886,063 Ross Stores, Inc. 9,800 320,338 TJX Companies, Inc. 219,000 5,776,125 24,586,915 DRUG STORES - 0.9% CVS Corp. 524,061 26,858,126 General Nutrition Companies, Inc. (a) 12,400 347,200 27,205,326 GENERAL MERCHANDISE STORES - 2.2% Coles Myer Ltd. 261,700 1,359,096 Costco Companies, Inc. (a) 227,400 7,475,775 Dayton Hudson Corp. 176,400 9,382,275 Dollar Tree Stores (a) 20,000 1,007,500 Federated Department Stores, Inc. (a) 41,800 1,452,550 Hudson's Bay Co. Ord. 7,000 157,172 K mart Corp. (a) 319,200 3,910,200 Kohls Corp. (a) 54,600 2,890,388 Meyer (Fred), Inc. (a) 38,900 2,010,644 Michaels Stores, Inc. (a) 3,600 76,275 99 Cents Only Stores (a) 50,000 1,506,250 Nordstrom, Inc. 72,500 3,557,031 Stein Mart, Inc. (a) 99,200 2,976,000 Wal-Mart Stores, Inc. 685,200 23,168,325 Woolworth Corp. (a) 347,200 8,332,800 Woolworths Ltd. 440,700 1,444,973 70,707,254 GROCERY STORES - 1.1% Ahold NV 23,645 1,993,591 American Stores Co. 9,600 474,000 Asda Group PLC 866,100 1,787,828 Dominick's Supermarkets, Inc. (a) 161,000 4,286,625 SHARES VALUE (NOTE 1) Fleming Companies, Inc. 28,500 $ 513,000 Loblaw Companies Ltd. 37,600 517,437 Quality Food Centers, Inc. (a) 142,200 5,403,600 Richfood Holdings, Inc. Class A 313,100 8,140,600 Safeway, Inc. (a) 289,600 13,357,800 36,474,481 RETAIL & WHOLESALE, MISCELLANEOUS - 2.4% Barnes & Noble, Inc. (a) 2,200 94,600 Bed Bath & Beyond, Inc. 1,000 30,375 Circuit City Stores, Inc. - Circuit City Group 223,900 7,962,444 Comcast Corp.: Class A 109,000 2,282,188 Class A special 123,800 2,646,225 Fabri-Centers of America, Inc. Class A (a) 3,500 95,375 Fingerhut Companies, Inc. 23,100 402,806 Hancock Fabrics, Inc. 79,400 1,091,750 Home Depot, Inc. (The) 493,800 34,041,338 Pier 1 Imports, Inc. 7,200 190,800 Staples, Inc. (a) 307,100 7,140,075 Tiffany & Co., Inc. 39,700 1,833,644 Toys "R" Us, Inc. (a) 253,507 8,872,745 U.S. Office Products Co. (a) 291,600 8,912,025 Viking Office Products, Inc. (a) 16,300 309,700 Williams-Sonoma, Inc. 1,000 42,750 75,948,840 TOTAL RETAIL & WHOLESALE 234,922,816 SERVICES - 3.4% ADVERTISING - 0.4% Interpublic Group of Companies, Inc. 75,400 4,622,963 Lycos, Inc. (a) 5,200 66,300 Omnicom Group, Inc. 64,400 3,968,650 Outdoor Systems, Inc. (a) 88,200 3,373,650 12,031,563 EDUCATIONAL SERVICES - 0.0% Apollo Group, Inc. Class A (a) 700 24,675 LEASING & RENTAL - 0.6% Alrenco, Inc. (a) 150,000 1,987,500 Budget Group, Inc. Class A (a) 106,600 3,677,700 Danka Business Systems PLC sponsored ADR 21,300 870,638 Hanover Compressor Co. 2,400 46,800 Hertz Corp. Class A 185,700 6,685,200 Rent-Way, Inc. (a) 37,800 557,550 Republic Industries, Inc. (a) 162,400 4,039,700 Ryder Systems, Inc. 48,300 1,593,900 19,458,988 PRINTING - 0.2% ASM Lithography Holding NV (a) 56,800 3,322,800 Standard Register Co. 72,300 2,214,188 Valassis Communications, Inc. (a) 35,400 849,600 6,386,588 SERVICES - 2.2% ADT Ltd. (a) 465,900 15,374,700 APAC Teleservices, Inc. (a) 695,000 13,509,063 AccuStaff, Inc. (a) 186,400 4,415,350 Assisted Living Concepts, Inc. (a) 8,100 223,763 Borg Warner Security Corp. (a) 37,400 668,525 Corestaff, Inc. 3,100 83,700 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) SERVICES - CONTINUED SERVICES - CONTINUED Corrections Corp. of America (a) 29,700 $ 1,180,575 Dun & Bradstreet Corp. 48,300 1,267,875 Ecolab, Inc. 237,400 11,335,850 Hays PLC 271,800 2,579,053 International Service Systems AS, Series B (a) 22,100 791,948 Learning Tree International, Inc. (a) 12,200 541,375 National Service Industries, Inc. 48,300 2,351,606 Norrell Corp. GA 7,100 234,300 Personnel Group of America, Inc. (a) 6,900 198,806 Pierce Leahy Corp. 8,600 154,800 Pittston Co. (Brinks Group) 7,600 228,000 Premier Technologies, Inc. (a) 11,700 304,200 Registry, Inc. 1,200 55,200 Rentokil Group PLC 741,244 2,598,696 Robert Half International, Inc. (a) 64,600 3,040,238 Securicor Group PLC 528,800 2,508,836 Securitas AB Class B 83,800 2,366,067 Service Corp. International 8,300 272,863 Snyder Communications, Inc. (a) 15,200 409,450 Staffmark, Inc. (a) 17,300 387,088 SGS Societe Generale de Surveillance Holdings SA: (Bearer) 900 1,921,314 (Reg.) 1,340 527,198 Telespectrum Worldwide, Inc. (a) 135,700 954,141 Wackenhut Corp. 2,600 62,400 Wackenhut Corrections Corp. (a) 27,900 812,588 71,359,568 TOTAL SERVICES 109,261,382 TECHNOLOGY - 14.7% COMMUNICATIONS EQUIPMENT - 4.2% Alcatel Alsthom Compagnie Generale d'Electricite SA 258,660 32,375,388 ADC Telecommunications, Inc. 11,300 377,138 Advanced Fibre Communication, Inc. 93,900 5,669,213 Boston Technology, Inc. (a) 27,600 815,925 Ciena Corp. 84,800 3,996,200 Cisco Systems, Inc. (a) 49,900 3,349,538 DSC Communications Corp. (a) 66,700 1,484,075 Davox Corp. (a) 23,650 845,488 Dynatech Corp. (a) 31,300 1,118,975 Ericsson (L.M.) Telephone Co.: Class B 5,800 228,740 Class B ADR 116,800 4,599,000 Lucent Technologies, Inc. 482,600 34,777,363 Newbridge Networks Corp. (a) 212,000 9,222,000 Nokia Corp. AB sponsored ADR 111,900 8,252,625 Northern Telecom Ltd. 184,200 16,603,549 Tekelec (a) 9,800 346,675 Tellabs, Inc. (a) 156,300 8,733,263 132,795,155 COMPUTER SERVICES & SOFTWARE - 3.6% Acxiom Corp. (a) 2,100 43,050 Advanced Communication Systems, Inc. 275,100 2,097,638 Alphanet Solutions, Inc. (a) 29,900 441,025 Aspen Technology, Inc. (a) 2,500 94,063 Automatic Data Processing, Inc. 280,300 13,174,100 Broderbund Software, Inc. (a) 49,300 1,217,094 Baan Co. NV (a) 23,100 1,591,013 SHARES VALUE (NOTE 1) CBT Group PLC sponsored ADR (a) 20,000 $ 1,262,500 CUC International, Inc. (a) 321,300 8,293,556 Ceridian Corp. (a) 252,216 10,656,126 Citrix Systems, Inc. (a) 61,300 2,689,538 Computer Learning Centers, Inc. 2,000 84,000 Computer Sciences Corp. (a) 17,600 1,269,400 DST Systems, Inc. 94,000 3,131,375 ECI Telecom Ltd. 51,600 1,535,100 Electronic Arts, Inc. (a) 11,700 393,413 Electronics for Imaging, Inc. 4,000 189,000 Engineering Animation, Inc. (a) 36,900 1,245,375 Equifax, Inc. 145,300 5,403,344 First Data Corp. 172,000 7,557,250 GT Interactive Software, Inc. (a) 94,000 1,116,250 HBO & Co. 11,900 819,613 Intersolv, Inc. (a) 22,600 211,875 Keane, Inc. (a) 67,400 3,504,800 Maxis, Inc. (a) 32,000 384,000 McAfee Associates, Inc. (a) 37,900 2,392,438 Metro Information Services, Inc. 3,100 61,225 Microsoft Corp. (a) 302,300 38,203,163 Netscape Communications Corp. (a) 12,400 397,575 New Era of Networks, Inc. 27,800 458,700 Ontrack Data International, Inc. 3,600 82,800 Open Market, Inc. (a) 48,000 636,000 Oracle Systems Corp. (a) 4,400 221,650 Paychex, Inc. 11,250 427,500 RWD Technologies, Inc. 500 8,625 Radiant Systems, Inc. 4,400 91,850 Saville Systems Ireland PLC sponsored ADR (a) 19,000 988,000 Scopus Technology, Inc. (a) 46,500 1,040,438 Simulation Sciences, Inc. 7,700 117,425 Symantec Corp. (a) 6,300 122,850 USCS International, Inc. (a) 23,000 753,250 Visio Corp. (a) 8,600 606,300 115,014,287 COMPUTERS & OFFICE EQUIPMENT - 2.3% Apex PC Solutions, Inc. 2,600 51,350 Bay Networks, Inc. (a) 5,200 138,125 Bell & Howell Co. (a) 13,700 422,131 Compaq Computer Corp. (a) 147,000 14,589,750 Comverse Technology, Inc. (a) 14,700 764,400 Creative Technology Corp. Ltd. (a) 36,700 623,900 Data General Corp. (a) 53,900 1,401,400 Dell Computer Corp. (a) 117,100 13,751,931 Diebold, Inc. 10,575 412,425 EMC Corp. (a) 455,600 17,768,400 International Business Machines Corp. 48,000 4,329,000 Kronos, Inc. (a) 58,800 1,617,000 Overland Data, Inc. 6,300 33,863 Pitney Bowes, Inc. 97,600 6,783,200 Procom Technology, Inc. 44,900 482,675 Quantum Corp. (a) 136,200 2,766,563 Seagate Technology (a) 500 17,594 Stratus Computer, Inc. (a) 27,900 1,395,000 Sun Microsystems, Inc. (a) 38,500 1,432,922 Symbol Technologies, Inc. 132,300 4,448,588 73,230,217 ELECTRONIC INSTRUMENTS - 1.1% Applied Materials, Inc. (a) 104,200 7,378,663 KLA Instruments Corp. (a) 31,400 1,530,750 Laser Power Corp. 100,000 587,500 Perkin-Elmer Corp. 142,100 11,305,831 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) TECHNOLOGY - CONTINUED ELECTRONIC INSTRUMENTS - CONTINUED Tektronix, Inc. 28,000 $ 1,680,000 Teradyne, Inc. (a) 51,100 2,005,675 Thermo Electron Corp. (a) 219,800 7,473,200 Thermoquest Corp. (a) 5,100 79,050 Waters Corp. (a) 113,100 4,057,463 36,098,132 ELECTRONICS - 3.3% Altera Corp. (a) 92,300 4,661,150 Analog Devices, Inc. (a) 15,200 403,750 DII Group, Inc. 9,300 409,200 Etec Systems, Inc. (a) 4,900 210,088 Griffon Corp. (a) 118,300 1,619,231 Intel Corp. 111,700 14,167,069 KEMET Corp. (a) 15,700 390,538 Kent Electronics Corp. (a) 7,400 271,488 Lattice Semiconductor Corp. (a) 49,100 2,774,150 Linear Technology Corp. 35,400 1,831,950 MRV Communications, Inc. (a) 12,400 365,800 Maxim Integrated Products, Inc. (a) 53,700 3,054,188 Micro Linear Corp. (a) 17,000 178,500 Microchip Technology, Inc. (a) 29,300 871,675 Micron Technology, Inc. 259,700 10,371,769 Motorola, Inc. 120,900 9,188,400 National Semiconductor Corp. (a) 206,000 6,308,750 PMC-Sierra, Inc. (a) 34,700 910,875 Photronics, Inc. (a) 8,100 386,775 SGS Thomson Microelectronics NV (a) 7,400 592,000 Sanmina Corp. (a) 5,950 377,825 Semtech Corp. (a) 52,400 1,912,600 Solectron Corp. (a) 25,500 1,785,000 Sterling Commerce, Inc. 9,400 309,025 Storage Technology Corp. (a) 75,500 3,359,750 Texas Instruments, Inc. 381,900 32,103,469 Unitrode Corp. (a) 102,600 5,168,475 Vishay Intertechnology, Inc. 115 3,328 Vitesse Semiconductor Corp. (a) 33,000 1,078,688 Zero Corp. 74,400 1,953,000 107,018,506 PHOTOGRAPHIC EQUIPMENT - 0.2% Polaroid Corp. 125,500 6,965,250 TOTAL TECHNOLOGY 471,121,547 TRANSPORTATION - 1.1% AIR TRANSPORTATION - 0.3% Comair Holdings, Inc. 13,600 376,550 Continental Airlines, Inc. Class B (a) 169,400 5,918,413 Delta Air Lines, Inc. 33,900 2,779,800 Ryanair Holdings PLC sponsored ADR 13,100 355,338 Viad Corp. 43,700 841,225 10,271,326 RAILROADS - 0.3% Bombardier, Inc. Class B 73,600 1,668,547 CSX Corp. 25,100 1,393,050 Canadian Pacific Ltd. 2,300 65,469 Canadian National Railway Co. 17,600 767,407 Wisconsin Central Transportation Corp. (a) 158,200 5,892,950 9,787,423 SHARES VALUE (NOTE 1) TRUCKING & FREIGHT - 0.5% Air Express International Corp. 7,700 $ 306,075 Airborne Freight Corp. 1,500 62,813 CNF Transportation, Inc. 168,700 5,440,575 Expeditors International of Washington, Inc. 84,800 2,406,200 Roadway Express, Inc. 21,300 497,888 Swift Transportation Co., Inc. (a) 43,400 1,280,300 USFreightways Corp. 98,200 2,540,925 Werner Enterprises, Inc. 3,400 65,875 XTRA Corp. 4,600 202,113 Yellow Corp. (a) 124,100 2,776,738 15,579,502 TOTAL TRANSPORTATION 35,638,251 UTILITIES - 2.9% CELLULAR - 0.3% Mobile Telecommunications Technologies, Inc. (a) 138,900 1,988,006 Vodafone Group PLC sponsored ADR 128,100 6,204,844 8,192,850 ELECTRIC UTILITY - 0.5% Edison International 333,200 8,288,350 National Grid Co. PLC 1,637,600 5,983,817 Ogden Corp. 9,300 202,275 14,474,442 GAS - 0.2% El Paso Natural Gas Co. 81,400 4,477,000 Enron Corp. 39,300 1,603,931 Sonat, Inc. 28,800 1,476,000 7,556,931 TELEPHONE SERVICES - 1.9% Brooks Fiber Properties, Inc. (a) 122,500 4,134,375 Cable & Wireless PLC Ord. 666,900 6,106,036 Cincinnati Bell, Inc. 27,000 850,500 Excel Communication, Inc. 20,300 583,625 MCI Communications Corp. 192,000 7,350,000 McLeodUSA, Inc. 132,600 4,475,250 Qwest Communications International, Inc. 45,000 1,226,250 Sprint Corp. 5,600 294,700 STAR Telecommunications, Inc. 49,400 654,550 Tel-Save Holdings, Inc. (a) 2,600 39,650 Telco Communications Group, Inc. 40,000 1,300,000 Teleport Communications Group, Inc. Class A (a) 101,000 3,446,625 US WEST Media Group (a) 108,400 2,195,100 WorldCom, Inc. (a) 909,390 29,100,480 61,757,141 TOTAL UTILITIES 91,981,364 TOTAL COMMON STOCKS (Cost $2,418,784,303) 2,972,841,525 PREFERRED STOCKS - 0.8% CONVERTIBLE PREFERRED STOCKS - 0.3% CONSTRUCTION & REAL ESTATE - 0.2% REAL ESTATE INVESTMENT TRUSTS - 0.2% Vornado Realty Trust $3.25, Series A 120,800 6,538,300 PREFERRED STOCKS - CONTINUED SHARES VALUE (NOTE 1) CONVERTIBLE PREFERRED STOCKS - CONTINUED RETAIL & WHOLESALE - 0.1% APPAREL STORES - 0.1% TJX Companies, Inc., Series E, $7.00 8,400 $ 2,394,000 TOTAL CONVERTIBLE PREFERRED STOCKS 8,932,300 NONCONVERTIBLE PREFERRED STOCKS - 0.5% TECHNOLOGY - 0.1% COMPUTER SERVICES & SOFTWARE - 0.1% SAP AG 27,900 5,754,225 UTILITIES - 0.4% TELEPHONE SERVICES - 0.4% Stet (Societa Finanziaria Telefonica) Spa 1,396,200 4,838,120 Telecom Italia Mobile Spa de Risp 4,234,800 7,516,731 12,354,851 TOTAL NONCONVERTIBLE PREFERRED STOCKS 18,109,076 TOTAL PREFERRED STOCKS (Cost $25,279,293) 27,041,376 CONVERTIBLE BONDS - 0.1% MOODY'S PRINCIPAL RATINGS (C) AMOUNT HEALTH - 0.1% MEDICAL FACILITIES MANAGEMENT - 0.1% NovaCare, Inc. 5 1/2%, 1/15/00 B1 $ 1,624,000 1,526,560 MEDIA & LEISURE - 0.0% BROADCASTING - 0.0% Home Shopping Network, Inc. 5 7/8%, 3/1/06 (b) B- 445,000 570,713 Home Shopping Network, Inc. 5 7/8%, 3/1/06 B3 29,000 37,193 Jacor Communications, Inc. liquid yield option notes 0%, 6/12/11 B3 302,000 169,498 777,404 TECHNOLOGY - 0.0% ELECTRONICS - 0.0% National Semiconductor Corp. 6 1/2%, 10/1/02 (b) Ba2 1,355,000 1,397,344 TOTAL CONVERTIBLE BONDS (Cost $3,298,523) 3,701,308 U.S. TREASURY OBLIGATIONS - 1.2% 7 5/8%, 2/15/25 Aaa $ 30,000,000 32,850,000 6 3/4%, 8/15/26 Aaa 5,000,000 4,948,450 TOTAL U.S. TREASURY OBLIGATIONS (Cost $38,564,727) 37,798,450 CASH EQUIVALENTS - 4.9% MATURITY AMOUNT Investments in repurchase agreements (U.S. Treasury obligations) in a joint trading account at 5.93%, dated 6/30/97 due 7/1/97 $ 157,004,858 $ 156,979,000 TOTAL INVESTMENT IN SECURITIES - 100% (Cost $2,642,905,846) $ 3,198,361,659 LEGEND 1. Non-income producing 2. Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $3,954,433 or 0.1% of net assets. 3. Standard & Poor's credit ratings are used in the absence of a rating by Moody's Investors Service, Inc. 4. Transactions during the period with companies which are or were affiliates are as follows: PURCHASE SALES DIVIDEND VALUE AFFILIATE COST COST INCOME Cutter & Buck, Inc. $ - $ 130,000 $ - $ - OTHER INFORMATION Purchases and sales of securities, other than short-term securities, aggregated $2,581,519,143 and $2,067,054,575, respectively, of which U.S. government and government agency obligations aggregated $12,330,855 and $83,163,081, respectively. The market value of futures contracts opened and closed during the period amounted to $191,296,108 and $192,542,878, respectively. The fund placed a portion of its portfolio transactions with brokerage firms which are affiliates of FMR. The commissions paid to these affiliated firms were $736,024 for the period. Distribution of investments by country of issue, as a percentage of total value of investment in securities, is as follows: United States 85.1% Netherlands 2.6 United Kingdom 2.6 Canada 2.2 Netherland Antilles 1.6 Switzerland 1.4 France 1.4 Bermuda 1.1 Others (individually less than 1%) 2.0 TOTAL 100.0% INCOME TAX INFORMATION At June 30, 1997, the aggregate cost of investment securities for income tax purposes was $2,644,690,371. Net unrealized appreciation aggregated $553,671,288, of which $586,693,869 related to appreciated investment securities and $33,022,581 related to depreciated investment securities. VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 1997 (UNAUDITED) ASSETS Investment in $ 3,198,361,659 securities, at value (including repurchase agreements of $156,979,000) (cost $2,642,905,846) - See accompanying schedule Receivable for 59,459,081 investments sold Receivable for fund 6,523,051 shares sold Dividends receivable 2,975,377 Interest receivable 1,050,854 TOTAL ASSETS 3,268,370,022 LIABILITIES Payable to custodian $ 9,448 bank Payable for 42,551,506 investments purchased Payable for fund 751,649 shares redeemed Accrued management 1,562,871 fee Other payables and 294,808 accrued expenses TOTAL LIABILITIES 45,170,282 NET ASSETS $ 3,223,199,740 Net Assets consist of: Paid in capital $ 2,591,680,584 Undistributed net 14,872,629 investment income Accumulated 61,194,489 undistributed net realized gain (loss) on investments and foreign currency transactions Net unrealized 555,452,038
appreciation (depreciation) on investments and assets and liabilities in foreign currencies NET ASSETS, for $3,223,199,740 179,793,883 shares outstanding NET ASSET VALUE, $17.93 offering price and redemption price per share ($3,223,199,740 (divided by) 179,793,883 shares)
STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) INVESTMENT INCOME $ 16,173,638 Dividends Interest 9,201,324 TOTAL INCOME 25,374,962 EXPENSES Management fee $ 8,331,378 Transfer agent fees 997,003 Accounting fees and 401,998 expenses Non-interested 5,810 trustees' compensation Custodian fees and 207,894 expenses Registration fees 13,357 Audit 20,419 Legal 2,911 Miscellaneous 46,997 Total expenses 10,027,767 before reductions Expense reductions (513,563 9,514,204 ) NET INVESTMENT 15,860,758 INCOME REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on: Investment 69,106,380 securities (including realized gain of $2,496 on sales of investments in affiliated issuers) Foreign currency (13,416 transactions ) Futures contracts 1,246,770 70,339,734 Change in net unrealized appreciation (depreciation) on: Investment 232,852,484 securities Assets and (4,098 232,848,386 liabilities in ) foreign currencies NET GAIN (LOSS) 303,188,120
NET INCREASE $319,048,878 (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS OTHER INFORMATION $ 506,300 Expense reductions Directed brokerage arrangements Custodian interest 7,263 credits $ 513,563
STATEMENT OF CHANGES IN NET ASSETS INCREASE (DECREASE) IN NET ASSETS SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, 1997 1996 (UNAUDITED) Operations $ 15,860,758 $ 20,976,837 Net investment income Net realized gain 70,339,734 49,001,422 (loss) Change in net 232,848,386 254,150,553 unrealized appreciation (depreciation) NET INCREASE 319,048,878 324,128,812 (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS Distributions to (21,846,321) - shareholders From net investment income From net realized (57,736,705) (9,296,351) gain TOTAL DISTRIBUTIONS (79,583,026) (9,296,351) Share transactions 704,874,447 1,380,209,873 Net proceeds from sales of shares Reinvestment of 79,583,026 9,296,351 distributions Cost of shares (194,826,644) (187,235,370) redeemed NET INCREASE 589,630,829 1,202,270,854 (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS TOTAL INCREASE 829,096,681 1,517,103,315 (DECREASE) IN NET ASSETS NET ASSETS Beginning of period 2,394,103,059 876,999,744 End of period $ 3,223,199,740 $ 2,394,103,059 (including undistributed net investment income of $14,872,629 and $20,976,837, respectively) OTHER INFORMATION Shares Sold 42,121,561 92,660,951 Issued in 4,834,935 674,626 reinvestment of distributions Redeemed (11,722,580) (12,369,121)
Net increase 35,233,916 80,966,456 (decrease) SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
FINANCIAL HIGHLIGHTS SIX MONTHS YEARS ENDED JANUARY 3, 1995 ENDED DECEMBER 31, (COMMENCEMENT JUNE 30, 1997 OF OPERATIONS) TO DECEMBER 31, SELECTED PER-SHARE DATA (UNAUDITED) 1996 1995 Net asset value, $ 16.56 $ 13.79 $ 10.00 beginning of period Income from Investment Operations Net investment .10 D .14 .06 income Net realized and 1.78 2.76 3.91 unrealized gain (loss) Total from 1.88 2.90 3.97 investment operations Less Distributions From net (.14) - (.06) investment income From net realized (.37) (.13) (.12) gain Total distributions (.51) (.13) (.18) Net asset value, end $ 17.93 $ 16.56 $ 13.79 of period TOTAL RETURN B, C 11.63% 21.22% 39.72% RATIOS AND SUPPLEMENTAL DATA Net assets, end of $3,223,200 $2,394,103 $ 877,000 period (000 omitted) Ratio of expenses to .73% A .74% .72% average net assets Ratio of expenses to .69% A, E .71% E .72% average net assets after expense reductions Ratio of net 1.16% A 1.33% 1.07% investment income to average net assets Portfolio turnover rate 163% A 178% 132% Average commission $ .0365 $ .0343 rate F
A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED AND DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN. C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. E FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). F FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE STRUCTURES MAY DIFFER. VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO PERFORMANCE AND INVESTMENT SUMMARY PERFORMANCE There are several ways to evaluate a fund's historical performance. You can look at the total percentage change in value, the average annual percentage change or the growth of a hypothetical $10,000 investment. Total return reflects the change in the value of an investment, assuming reinvestment of the fund's dividend income and capital gains (the profits earned upon the sale of securities that have grown in value). AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED PAST 1 PAST 5 PAST 10 JUNE 30, 1997 YEAR YEARS YEARS GROWTH 17.92% 19.89% 14.33% S&P 500 (registered trademark) 34.70% 19.78% 14.64% AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what would have happened if the fund had performed at a constant rate each year. You can compare these figures to the performance of the Standard & Poor's 500 Index - a widely recognized, unmanaged index of common stocks. This benchmark reflects the reinvestment of dividends and capital gains, if any. UNDERSTANDING PERFORMANCE How a fund did yesterday is no guarantee of how it will do tomorrow. The stock market, for example, has a history of long-term growth and short-term volatility. In turn, the share price and return of a fund that invests in stocks will vary. That means if you sell your shares during a market downturn, you might lose money. But if you can ride out the market's ups and downs, you may have a gain. (checkmark) Figures for more than one year assume a steady compounded rate of return and are not the fund's year-by-year results, which fluctuated over the periods shown. If Fidelity had not reimbursed certain fund expenses, the past 10 years total return would have been lower. PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER. Past performance is no guarantee of future results. Principal and investment return will vary and you may have a gain or loss when you withdraw your money. $10,000 OVER THE PAST 10 YEARS 1995/01/03 10000.00 10000.00 1995/01/31 10060.00 10258.23 1995/02/28 10370.00 10658.00 1995/03/31 10560.00 10972.51 1995/04/30 10930.00 11295.66 1995/05/31 11440.00 11747.14 1995/06/30 11790.00 12020.03 1995/07/31 12180.00 12418.61 1995/08/31 12260.00 12449.78 1995/09/30 12470.00 12975.16 1995/10/31 12560.00 12928.84 1995/11/30 12920.00 13496.42 1995/12/31 13251.81 13756.36 1996/01/31 13444.45 14224.63 1996/02/29 13434.43 14356.49 1996/03/31 13393.72 14494.74 1996/04/30 13607.45 14708.39 1996/05/31 13912.77 15087.72 1996/06/30 14024.73 15145.21 1996/07/31 13617.62 14476.09 1996/08/31 13699.05 14781.39 1996/09/30 14360.59 15613.29 1996/10/31 14950.89 16043.91 1996/11/30 16080.60 17256.66 1996/12/31 15673.50 16914.81 1997/01/31 16416.46 17971.65 1997/02/28 16573.05 18112.54 1997/03/31 15727.48 17368.30 1997/04/30 16446.21 18405.19 1997/05/31 17513.74 19525.70 1997/06/30 18095.06 20400.45 Let's say hypothetically that $10,000 was invested in Growth Portfolio on June 30, 1987. As the chart shows, by June 30, 1997, the value of the investment would have grown to $38,148 - a 281.48% increase on the initial investment. For comparison, look at how the S&P 500 did over the same period. With dividends and capital gains, if any, reinvested, the same $10,000 investment would have grown to $39,269 - a 292.69% increase. INVESTMENT SUMMARY TOP FIVE STOCKS AS OF JUNE 30, 1997 % OF FUND'S INVESTMENTS Philip Morris Companies, Inc. 4.3 Microsoft Corp. 3.3 Merck & Co., Inc. 3.1 Wal-Mart Stores, Inc. 2.3 Boeing Co. 2.2 TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997 % OF FUND'S INVESTMENTS Technology 20.1 Health 16.7 Nondurables 9.2 Retail & Wholesale 8.5 Finance 7.8 ASSET ALLOCATION AS OF JUNE 30, 1997 * Row: 1, Col: 1, Value: 8.4 Row: 1, Col: 2, Value: 91.59999999999999 Stocks 91.6% Short-term investments 8.4% FOREIGN INVESTMENTS 6.8% * (% OF FUND'S INVESTMENTS) VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO FUND TALK: THE MANAGER'S OVERVIEW An interview with Jennifer Uhrig, Portfolio Manager of Growth Portfolio Q. HOW DID THE FUND PERFORM, JENNIFER? A. The performance was disappointing. For the six months that ended June 30, 1997, the fund underperformed the Standard & Poor's 500 Index, which had a six-month return of 20.61%. For the 12-month period that ended June 30, 1997, the fund trailed the S&P 500's return of 34.70%. Q. WHAT FACTORS INFLUENCED THE FUND'S PERFORMANCE? A. A distinct lack of market breadth during the period affected the performance of many diversified stock funds, as much of the market's gain throughout the period was concentrated among a select group of household-name, large-cap stocks. Many of these "mega-cap" stocks comprised the top tier of the S&P 500. The fund participated in this rally to some extent - I increased the fund's weightings in the market's 50 largest stocks to around 35% of total investments - but I wasn't overweighted in enough of them to fully capitalize on the large-cap rally. Additionally, a technology stock correction in early 1997 had a negative impact on performance. Q. WHAT SORTS OF CHANGES HAVE YOU MADE SINCE TAKING OVER THE FUND IN JANUARY? A. First off, I've reduced the number of individual positions within the portfolio. Rather than having an abundance of smaller positions, none of which are particularly meaningful to performance, I've concentrated on the stocks in which I'm most confident. A by-product of this strategy is that the concentration among the fund's top positions has increased. At the beginning of the period, the fund's top 10 positions comprised approximately 18% of the fund's investments; at the end of the period, that percentage had jumped to approximately 25%. In addition, I also raised the fund's average market capitalization weighting. At the beginning of the period, the fund's weighted market cap was around $13 billion. This figure rose to around $23 billion by period's end, but still was well below the S&P 500's average market cap of $33 billion. Q. WHICH STOCKS PERFORMED WELL? WHERE DID THE DISAPPOINTMENTS LIE? A. Health care stocks did well, with some of the larger pharmaceutical companies leading the way. The fund owned large-cap health care names such as Bristol-Myers Squibb and Schering-Plough, both of which performed well. Other stocks that contributed positively included WorldCom, a telecommunications services company, CompUSA and Philip Morris. Retail stocks, on the other hand, turned in a subpar performance as the fund's positions in PETsMART, Viking Office Products and Just for Feet had negative effects on performance. Q. PHILIP MORRIS IS THE FUND'S LARGEST SINGLE POSITION AT AROUND 4.3%. CAN YOU EXPLAIN HOW THIS STOCK WILL BE AFFECTED BY THE RECENT TOBACCO LITIGATION SETTLEMENT? A. I think the settlement will eventually benefit everyone involved. Cigarette prices will likely rise, as tobacco companies search for ways to fund their liabilities. From a public health perspective, a price increase would almost certainly reduce the number of smokers. So that's positive. From a shareholder perspective, Philip Morris' earnings may be affected by lower sales volumes, but any decline may be offset by the potential for the stock's price-to-earnings ratio to rise. This is because the valuation of the stock was penalized during litigation due to certain risks. As a final note, I would add that the settlement still needs to go to Congress to become law. So while the settlement appears logical from all sides, it still may get bogged down in the political arena. Q. WHAT'S YOUR OUTLOOK? A. Over the past year or so, stocks in general have benefited from favorable investment conditions. Economic growth has remained strong and, with no signs of inflation, interest rate levels have remained low. I don't know how long this backdrop can continue, but I'm optimistic about the outlook for growth stocks. High interest rates, even more so than weak earnings, have a negative influence on growth stocks. I think higher rates, as a result of an acceleration in the economy and higher inflation, are unlikely given the Federal Reserve Board's recent action to reign in the economy before it overheats. FUND FACTS GOAL: to provide capital growth by investing primarily in common stocks and securities convertible into common stocks START DATE: January 3, 1995 SIZE: as of June 30, 1997, more than $706 million MANAGER: George Vanderheiden, since inception; joined Fidelity in 1971 (checkmark) VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO INVESTMENTS JUNE 30, 1997 (UNAUDITED) Showing Percentage of Total Value of Investment in Securities COMMON STOCKS - 91.6% SHARES VALUE (NOTE 1) AEROSPACE & DEFENSE - 3.8% AEROSPACE & DEFENSE - 3.3% Boeing Co. 2,843,000 $ 150,856,688 Gulfstream Aerospace Corp. (a) 514,300 15,171,850 Lockheed Martin Corp. 323,800 33,533,538 United Technologies Corp. 301,000 24,983,000 Wyman-Gordon Co. (a) 184,200 4,973,400 229,518,476 DEFENSE ELECTRONICS - 0.5% Raytheon Co. 619,000 31,569,000 TOTAL AEROSPACE & DEFENSE 261,087,476 BASIC INDUSTRIES - 3.1% CHEMICALS & PLASTICS - 1.0% Air Products & Chemicals, Inc. 158,300 12,861,875 Cytec Industries, Inc. (a) 443,300 16,568,338 Monsanto Co. 782,700 33,705,019 Praxair, Inc. 178,300 9,984,800 73,120,032 IRON & STEEL - 0.7% Inland Steel Industries, Inc. 557,000 14,551,625 Nucor Corp. 555,500 31,385,750 45,937,375 PACKAGING & CONTAINERS - 0.5% Owens-Illinois, Inc. 1,050,100 32,553,100 PAPER & FOREST PRODUCTS - 0.9% Kimberly-Clark Corp. 1,024,700 50,978,825 Stone Container Corp. 595,000 8,515,938 59,494,763 TOTAL BASIC INDUSTRIES 211,105,270 DURABLES - 1.9% AUTOS, TIRES, & ACCESSORIES - 0.2% AutoZone, Inc. (a) 357,900 8,433,019 Circuit City Stores, Inc. - CarMax Group 324,500 4,644,406 13,077,425 CONSUMER DURABLES - 0.8% Corning, Inc. 491,300 27,328,563 Minnesota Mining & Manufacturing Co. 255,400 26,050,800 53,379,363 TEXTILES & APPAREL - 0.9% Liz Claiborne, Inc. 322,500 15,036,563 Reebok International Ltd. 399,900 18,695,325 Timberland Co. Class A (a)(b) 481,700 31,310,500 65,042,388 TOTAL DURABLES 131,499,176 ENERGY - 6.1% ENERGY SERVICES - 3.7% Dresser Industries, Inc. 657,100 24,476,975 Falcon Drilling, Inc. (a) 445,000 25,643,125 Halliburton Co. 800,200 63,415,850 Schlumberger Ltd. 769,600 96,200,000 Transocean Offshore, Inc. 132,400 9,615,550 Varco International, Inc. (a) 292,000 9,417,000 Western Atlas, Inc. (a) 337,500 24,721,875 253,490,375 SHARES VALUE (NOTE 1) OIL & GAS - 2.4% British Petroleum PLC ADR 376,326 $ 28,177,409 Burlington Resources, Inc. 168,300 7,426,238 Chesapeake Energy Corp. (a) 372,000 3,650,250 EVI, Inc. (a) 154,000 6,468,000 Royal Dutch Petroleum Co. 706,800 38,432,250 Tosco Corp. 1,099,600 32,919,275 Total SA: Class B 310,400 31,355,668 sponsored ADR 179,800 9,102,375 Union Pacific Resources Group, Inc. 247,441 6,155,095 Vintage Petroleum, Inc. 209,200 6,432,900 170,119,460 TOTAL ENERGY 423,609,835 FINANCE - 7.8% BANKS - 0.9% Bank of New York Co., Inc. 533,900 23,224,650 NationsBank Corp. 642,500 41,441,250 64,665,900 CREDIT & OTHER FINANCE - 1.7% American Express Co. 645,600 48,097,200 Associates First Capital Corp. 271,600 15,073,800 Beneficial Corp. 266,900 18,966,581 Household International, Inc. 268,108 31,485,933 113,623,514 FEDERAL SPONSORED CREDIT - 2.5% Federal Home Loan Mortgage Corporation 1,883,600 64,748,750 Federal National Mortgage Association 1,760,500 76,801,813 Student Loan Marketing Association 262,300 33,312,100 174,862,663 INSURANCE - 2.7% Allmerica Financial Corp. 313,100 12,484,863 Allstate Corp. 503,600 36,762,800 AMBAC, Inc. 424,200 32,398,275 American International Group, Inc. 300,000 44,812,500 MBIA, Inc. 92,000 10,378,750 UNUM Corp. 1,165,600 48,955,200 185,792,388 TOTAL FINANCE 538,944,465 HEALTH - 16.7% DRUGS & PHARMACEUTICALS - 9.0% American Home Products Corp. 1,048,500 80,210,250 Barr Laboratories, Inc. (a) 52,400 2,305,600 Bristol-Myers Squibb Co. 1,834,600 148,602,600 Elan Corp. PLC ADR (a) 456,900 20,674,725 Genentech, Inc. (a) 356,900 21,034,794 Merck & Co., Inc. 2,084,900 215,787,150 Novartis sponsored ADR 485,400 38,832,000 Schering-Plough Corp. 1,198,000 57,354,250 SmithKline Beecham PLC ADR 429,400 39,343,775 624,145,144 MEDICAL EQUIPMENT & SUPPLIES - 4.9% Abbott Laboratories 1,103,400 73,651,950 Boston Scientific Corp. (a) 569,000 34,957,938 Cardinal Health, Inc. 210,100 12,028,225 Johnson & Johnson 2,193,300 141,193,688 Medtronic, Inc. 275,600 22,323,600 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) HEALTH - CONTINUED MEDICAL EQUIPMENT & SUPPLIES - CONTINUED St. Jude Medical, Inc. (a) 777,700 $ 30,330,300 Sofamor/Danek Group, Inc. (a) 346,300 15,843,225 Sybron International Corp. (a) 259,100 10,331,613 340,660,539 MEDICAL FACILITIES MANAGEMENT - 2.8% Carematrix Corp. (a) 205,300 5,068,344 Columbia/HCA Healthcare Corp. 621,837 24,445,967 HEALTHSOUTH Rehabilitation Corp. (a) 1,907,800 47,575,763 Health Management Associates, Inc. Class A (a) 672,800 19,174,800 Humana, Inc. (a) 518,900 11,999,563 Oxford Health Plans, Inc. (a) 448,700 32,194,225 Tenet Healthcare Corp. (a) 741,800 21,929,463 United HealthCare Corp. 632,500 32,890,000 195,278,125 TOTAL HEALTH 1,160,083,808 HOLDING COMPANIES - 0.4% Norfolk Southern Corp. 289,500 29,167,125 INDUSTRIAL MACHINERY & EQUIPMENT - 2.3% ELECTRICAL EQUIPMENT - 1.5% General Electric Co. 876,300 57,288,113 Harris Corp. 277,900 23,343,600 Westinghouse Electric Corp. 1,159,700 26,818,063 107,449,776 INDUSTRIAL MACHINERY & EQUIPMENT - 0.2% Tyco International Ltd. 169,500 11,790,844 POLLUTION CONTROL - 0.6% USA Waste Services, Inc. (a) 918,700 35,484,788 Zurn Industries, Inc. 146,500 4,211,875 39,696,663 TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 158,937,283 MEDIA & LEISURE - 5.3% BROADCASTING - 0.2% Clear Channel Communications, Inc. (a) 168,800 10,391,750 ENTERTAINMENT - 1.6% Disney (Walt) Co. 1,398,200 112,205,550 LEISURE DURABLES & TOYS - 0.2% Harley-Davidson, Inc. 240,000 11,505,000 Nintendo Co. Ltd. Ord. 64,000 5,359,152 16,864,152 LODGING & GAMING - 1.7% Circus Circus Enterprises, Inc. (a) 635,100 15,639,338 HFS, Inc. (a) 891,500 51,707,000 Mirage Resorts, Inc. (a) 1,314,800 33,198,700 Sun International Hotels Ltd. Ord. (a) 487,900 18,021,806 118,566,844 PUBLISHING - 0.5% New York Times Co. (The) Class A 72,000 3,564,000 Times Mirror Co. Class A 534,700 29,542,175 33,106,175 SHARES VALUE (NOTE 1) RESTAURANTS - 1.1% Landry's Seafood Restaurants, Inc. (a) 324,100 $ 7,454,300 McDonald's Corp. 475,500 22,972,594 Starbucks Corp. (a) 1,093,300 42,570,369 72,997,263 TOTAL MEDIA & LEISURE 364,131,734 NONDURABLES - 9.2% BEVERAGES - 2.2% Coca-Cola Enterprises, Inc. 805,400 18,524,200 PepsiCo, Inc. 3,600,600 135,247,538 153,771,738 FOODS - 0.7% Campbell Soup Co. 499,900 24,995,000 Hershey Foods Corp. 391,600 21,660,375 46,655,375 HOUSEHOLD PRODUCTS - 1.4% Clorox Co. 301,300 39,771,600 Procter & Gamble Co. 416,100 58,774,125 98,545,725 TOBACCO - 4.9% Philip Morris Companies, Inc. 6,685,600 296,673,500 RJR Nabisco Holdings Corp. 1,286,100 42,441,300 339,114,800 TOTAL NONDURABLES 638,087,638 PRECIOUS METALS - 0.4% Barrick Gold Corp. 415,000 9,032,521 Getchell Gold Corp. (a) 270,753 9,544,043 Newmont Mining Corp. 295,000 11,505,000 30,081,564 RETAIL & WHOLESALE - 8.5% APPAREL STORES - 1.1% Just for Feet, Inc. (a) 1,110,500 19,364,344 Ross Stores, Inc. 550,100 17,981,394 TJX Companies, Inc. 1,065,200 28,094,650 Talbots, Inc. 264,700 8,999,800 74,440,188 DRUG STORES - 1.0% CVS Corp. 917,805 47,037,506 Rite Aid Corp. 497,600 24,817,800 71,855,306 GENERAL MERCHANDISE STORES - 3.0% Consolidated Stores Corp. (a) 667,812 23,206,467 Costco Companies, Inc. (a) 694,900 22,844,838 Wal-Mart Stores, Inc. 4,798,800 162,259,425 208,310,730 GROCERY STORES - 0.1% Safeway, Inc. (a) 200,500 9,248,063 RETAIL & WHOLESALE, MISCELLANEOUS - 3.3% Bed Bath & Beyond, Inc. (a) 461,400 14,015,025 Corporate Express, Inc. 1,244,900 17,973,244 Home Depot, Inc. (The) 1,117,500 77,037,656 Lowe's Companies, Inc. 992,300 36,839,138 Officemax, Inc. (a) 490,600 7,083,038 Staples, Inc. (a) 386,400 8,983,800 Toys "R" Us, Inc. (a) 1,266,900 44,341,500 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) RETAIL & WHOLESALE - CONTINUED RETAIL & WHOLESALE, MISCELLANEOUS - CONTINUED U.S. Office Products Co. (a) 243,300 $ 7,435,856 Viking Office Products, Inc. (a) 621,600 11,810,400 225,519,657 TOTAL RETAIL & WHOLESALE 589,373,944 SERVICES - 1.7% ADVERTISING - 0.1% Omnicom Group, Inc. 82,900 5,108,713 EDUCATIONAL SERVICES - 0.2% Apollo Group, Inc. Class A (a) 334,300 11,784,075 LEASING & RENTAL - 0.2% Hanover Compressor Co. 5,100 99,450 Hertz Corp. Class A 328,100 11,811,600 11,911,050 SERVICES - 1.2% ADT Ltd. (a) 706,800 23,324,400 AccuStaff, Inc. (a) 1,002,500 23,746,719 Gartner Group, Inc. Class A (a) 837,000 30,079,688 Sitel Corp. (a) 497,900 10,269,188 87,419,995 TOTAL SERVICES 116,223,833 TECHNOLOGY - 20.1% COMMUNICATIONS EQUIPMENT - 3.6% ADC Telecommunications, Inc. (a) 754,400 25,178,100 Alcatel Alsthom Compagnie Generale d'Electricite SA sponsored ADR 16,000 404,000 Alcatel Alsthom Compagnie Generale d'Electricite SA 599,900 75,086,970 Aspect Telecommunications Corp. (a) 822,000 18,289,500 Cisco Systems, Inc. (a) 94,900 6,370,163 Lucent Technologies, Inc. 835,900 60,237,044 Nokia Corp. AB sponsored ADR 458,300 33,799,625 Tellabs, Inc. (a) 583,700 32,614,238 251,979,640 COMPUTER SERVICES & SOFTWARE - 7.8% Broderbund Software, Inc. (a) 659,900 16,291,281 CUC International, Inc. (a) 1,482,600 38,269,613 Cadence Design Systems, Inc. (a) 573,300 19,205,550 CompUSA, Inc. (a) 2,059,700 44,283,550 Electronics for Imaging, Inc. (a) 345,900 16,343,775 Equifax, Inc. 420,500 15,637,344 Henry (Jack) & Associates, Inc. 165,600 4,015,800 Keane, Inc. (a) 344,100 17,893,200 Microsoft Corp. (a) 1,799,700 227,437,088 Oracle Systems Corp. (a) 810,800 40,844,050 Parametric Technology Corp. (a) 437,700 18,629,606 PeopleSoft, Inc. (a) 699,100 36,877,525 Policy Management Systems Corp. (a) 206,500 9,705,500 Sabre Group Holdings, Inc. Class A (a) 376,600 10,215,275 SunGard Data Systems, Inc. (a) 393,600 18,302,400 Yahoo, Inc. (a) 204,800 7,219,200 541,170,757 COMPUTERS & OFFICE EQUIPMENT - 2.5% Adaptec, Inc. (a) 692,400 24,060,900 Compaq Computer Corp. (a) 677,100 67,202,175 Fore Systems, Inc. (a) 1,457,200 19,854,350 SHARES VALUE (NOTE 1) Ingram Micro, Inc. Class A (a) 162,200 $ 3,913,075 Pitney Bowes, Inc. 379,500 26,375,250 Quantum Corp. (a) 560,400 11,383,125 SCI Systems, Inc. (a) 100,200 6,387,750 Tech Data Corp. (a) 539,400 16,957,388 176,134,013 ELECTRONIC INSTRUMENTS - 0.4% Applied Materials, Inc. (a) 210,600 14,913,113 Novellus Systems, Inc. (a) 33,600 2,906,400 Waters Corp. (a) 217,800 7,813,575 25,633,088 ELECTRONICS - 5.8% Altera Corp. (a) 393,100 19,851,550 Intel Corp. 359,900 51,038,319 Linear Technology Corp. 375,400 19,426,950 Maxim Integrated Products, Inc. (a) 273,700 15,566,688 Micron Technology, Inc. 950,600 37,964,588 Motorola, Inc. 716,600 54,461,600 Sanmina Corp. (a) 501,600 31,851,600 Solectron Corp. (a) 204,500 14,315,000 Texas Instruments, Inc. 1,315,400 110,575,813 Uniphase Corp. (a) 380,800 22,181,600 Xilinx, Inc. (a) 429,000 21,047,813 398,281,521 TOTAL TECHNOLOGY 1,393,199,019 TRANSPORTATION - 0.5% RAILROADS - 0.5% Wisconsin Central Transportation Corp. (a) 919,800 34,262,550 UTILITIES - 3.8% CELLULAR - 0.9% AirTouch Communications, Inc. (a) 1,227,800 33,611,025 Nextel Communications, Inc. Class A (a) 659,800 12,494,963 Vanguard Cellular Systems, Inc. Class A (a) 1,146,700 15,623,788 61,729,776 TELEPHONE SERVICES - 2.9% Cincinnati Bell, Inc. 657,800 20,720,700 MCI Communications Corp. 260,300 9,964,609 Sprint Corp. 893,300 47,009,913 WorldCom, Inc. (a) 3,860,170 123,525,420 201,220,642 TOTAL UTILITIES 262,950,418 TOTAL COMMON STOCKS (Cost $4,948,655,239) 6,342,745,138 CASH EQUIVALENTS - 8.4% MATURITY AMOUNT Investments in repurchase agreements (U.S. Treasury obligations) in a joint trading account at 5.93%, dated 6/30/97 due 7/1/97 $ 584,241,222 584,145,000 TOTAL INVESTMENT IN SECURITIES - 100% (Cost $5,532,800,239) $ 6,926,890,138 LEGEND 1. Non-income producing 2. An affiliated company is a company in which the fund has ownership of at least 5% of the voting securities. Transactions during the period with companies which are or were affiliates are as follows: PURCHASE SALES DIVIDEND VALUE AFFILIATE COST COST INCOME Timberland Co. Class A $ 3,474,754 $ 1,222,255 $ - $ 31,310,500 OTHER INFORMATION Purchases and sales of securities, other than short-term securities, aggregated $4,244,176,604 and $4,238,684,327, respectively. The fund placed a portion of its portfolio transactions with brokerage firms which are affiliates of Fidelity Management & Research Company. The commissions paid to these affiliated firms were $1,377,437 for the period (see Note 4 of Notes to Financial Statements). INCOME TAX INFORMATION At June 30, 1996, the aggregate cost of investment securities for income tax purposes was $5,537,054,914. Net unrealized appreciation aggregated $1,389,835,224, of which $1,460,271,254 related to appreciated investment securities and $70,436,030 related to depreciated investment securities. VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 1997 (UNAUDITED) ASSETS Investment in $ 6,926,890,138 securities, at value (including repurchase agreements of $584,145,000) (cost $5,532,800,239) - See accompanying schedule Cash 251 Receivable for 18,347,400 investments sold Receivable for fund 3,541,061 shares sold Dividends receivable 7,495,963 Other receivables 728,658 TOTAL ASSETS 6,957,003,471 LIABILITIES Payable for $ 15,738,603 investments purchased Payable for fund 1,935,837 shares redeemed Accrued management 3,400,703 fee Other payables and 509,241 accrued expenses TOTAL LIABILITIES 21,584,384 NET ASSETS $6,935,419,087 Net Assets consist of: Paid in capital $4,909,839,898 Undistributed net 20,298,488 investment income Accumulated 611,204,466 undistributed net realized gain (loss) on investments and foreign currency transactions Net unrealized 1,394,076,235 appreciation (depreciation) on investments and assets and liabilities in foreign currencies NET ASSETS, for $6,935,419,087 202,783,458 shares outstanding NET ASSET VALUE, $34.20 offering price and redemption price per share ($6,935,419,087 (divided by) 202,783,458 shares) STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) INVESTMENT INCOME $ 31,247,401 Dividends Interest 10,168,233 TOTAL INCOME 41,415,634 EXPENSES Management fee $ 19,103,779 Transfer agent fees 2,231,258 Accounting fees and 404,942 expenses Non-interested 13,729 trustees' compensation Custodian fees and 106,069 expenses Registration fees 60,637 Audit 25,840 Legal 10,909 Miscellaneous 211,034 Total expenses 22,168,197 before reductions Expense reductions (787,052) 21,381,145 NET INVESTMENT 20,034,489 INCOME REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on: Investment 626,563,617 securities (including realized gain of $281,124 on sales of investments in affiliated issuers) Foreign currency 288 626,563,905 transactions Change in net unrealized appreciation (depreciation) on: Investment 189,156,287 securities Assets and (13,643) 189,142,644 liabilities in foreign currencies NET GAIN (LOSS) 815,706,549 NET INCREASE $835,741,038 (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS OTHER INFORMATION $ 781,353 Expense reductions Directed brokerage arrangements Custodian interest 5,699 credits $ 787,052
STATEMENT OF CHANGES IN NET ASSETS INCREASE (DECREASE) IN NET ASSETS SIX MONTHS ENDED YEAR ENDED JUNE 30, 1997 DECEMBER 31, (UNAUDITED) 1996 Operations $ 20,034,489 $ 42,344,647 Net investment income Net realized gain 626,563,905 186,713,569 (loss) Change in net 189,142,644 451,420,339 unrealized appreciation (depreciation) NET INCREASE 835,741,038 680,478,555 (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS Distributions to (41,142,087) (11,769,237) shareholders From net investment income From net realized (184,159,819) (297,173,230) gain TOTAL DISTRIBUTIONS (225,301,906) (308,942,467) Share transactions 805,853,592 2,599,782,601 Net proceeds from sales of shares Reinvestment of 225,301,906 308,942,467 distributions Cost of shares (792,599,197) (1,356,539,313) redeemed NET INCREASE 238,556,301 1,552,185,755 (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS TOTAL INCREASE 848,995,433 1,923,721,843 (DECREASE) IN NET ASSETS NET ASSETS Beginning of period 6,086,423,654 4,162,701,811 End of period $6,935,419,087 $ 6,086,423,654 (including undistributed net investment income of $20,298,488 and $41,404,557, respectively) OTHER INFORMATION Shares Sold 25,455,810 87,784,118 Issued in 7,138,844 11,121,040 reinvestment of distributions Redeemed (25,234,555) (46,058,296) Net increase 7,360,099 52,846,862 (decrease)
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, 1997 SELECTED PER-SHARE DATA (UNAUDITED) 1996 1995 1994 1993 D 1992 Net asset value, $ 31.14 $ 29.20 $ 21.69 $ 23.08 $ 19.76 $ 18.51 beginning of period Income from Investment Operations Net investment .10 G .22 .08 .12 .12 .09 income Net realized and 4.11 3.82 7.55 (.12) 3.64 1.64 unrealized gain (loss) Total from 4.21 4.04 7.63 - 3.76 1.73 investment operations Less Distributions From net (.21) (.08) (.12) (.12) (.11) (.05) investment income From net realized (.94) (2.02) - (1.27) (.21) (.43) gain In excess of net - - - - (.12) - realized gain Total distributions (1.15) (2.10) (.12) (1.39) (.44) (.48) Net asset value, end $ 34.20 $ 31.14 $ 29.20 $ 21.69 $ 23.08 $ 19.76 of period TOTAL RETURN B, C 13.83% 14.71% 35.36% (.02)% 19.37% 9.32% RATIOS AND SUPPLEMENTAL DATA Net assets, end of $6,935,419 $6,086,424 $4,162,702 $2,141,869 $1,383,849 $749,837 period (000 omitted) Ratio of expenses to .71% A .69% .70% .70% .71% .75% average net assets Ratio of expenses to .68% A, .67% .70% .69% .71% .75% average net assets E E E after expense reductions Ratio of net .64% A .81% .37% .69% .72% .83% investment income to average net assets Portfolio turnover rate 144% A 81% 108% 122% 159% 262% Average commission $ .0428 $ .0416 rate F
A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED AND DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN. C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). D EFFECTIVE JANUARY 1, 1993, THE FUND ADOPTED STATEMENT OF POSITION 93-2, "DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF INCOME, CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT COMPANIES." AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT CERTAIN RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES. E FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). F FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE STRUCTURES MAY DIFFER. G NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO PERFORMANCE AND INVESTMENT SUMMARY PERFORMANCE There are several ways to evaluate a fund's historical performance. You can look at the total percentage change in value, the average annual percentage change or the growth of a hypothetical $10,000 investment. Total return reflects the change in the value of an investment, assuming reinvestment of the fund's dividend income and capital gains (the profits earned upon the sale of securities that have grown in value). AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED PAST 1 PAST 5 PAST 10 JUNE 30, 1997 YEAR YEARS YEARS OVERSEAS 22.69% 11.30% 8.93% Morgan Stanley EAFE Index 12.88% 12.84% 6.58% AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what would have happened if the fund had performed at a constant rate each year. You can compare the fund's figures to the performance of the Morgan Stanley Capital International Europe, Australasia, Far East (EAFE) Index - a market capitalization weighted, unmanaged index of over 1,000 foreign stocks. UNDERSTANDING PERFORMANCE Many markets around the globe offer the potential for significant growth over time; however, investing in foreign markets means assuming greater risks than investing in the United States. Factors like changes in a country's financial markets, its local political and economic climate, and the fluctuating value of its currency create these risks. For these reasons an international fund's performance may be more volatile than a fund that invests exclusively in the United States. (checkmark) Figures for more than one year assume a steady compounded rate of return and are not the fund's year-by-year results, which fluctuated over the periods shown. If Fidelity had not reimbursed certain fund expenses, the fund's life of fund total return would have been lower. PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER. Past performance is no guarantee of future results. Principal and investment return will vary and you may have a gain or loss when you withdraw your money. Foreign investments involve greater risks and potential rewards than U.S. investments. These risks include political and economic uncertainties of foreign countries, as well as the risk of currency fluctuations. $10,000 OVER LIFE OF FUND 1987/06/30 10000.00 10000.00 1987/07/31 9885.93 9982.53 1987/08/31 10760.46 10731.04 1987/09/30 10522.81 10562.10 1987/10/31 8327.00 9082.16 1987/11/30 8403.04 9171.60 1987/12/31 8994.45 9443.94 1988/01/31 8686.62 9612.55 1988/02/29 8917.49 10253.29 1988/03/31 9321.52 10883.72 1988/04/30 9475.43 11041.88 1988/05/31 9302.28 10687.92 1988/06/30 9138.74 10406.21 1988/07/31 9071.41 10732.69 1988/08/31 8753.95 10034.87 1988/09/30 9129.12 10473.34 1988/10/31 9533.15 11369.46 1988/11/30 9706.31 12046.70 1988/12/31 9725.55 12113.86 1989/01/31 10014.14 12327.00 1989/02/28 10187.29 12390.36 1989/03/31 10178.12 12147.18 1989/04/30 10478.61 12259.84 1989/05/31 10090.88 11592.87 1989/06/30 10052.10 11397.72 1989/07/31 10992.37 12828.97 1989/08/31 10914.82 12252.00 1989/09/30 11593.36 12810.10 1989/10/31 10963.29 12295.42 1989/11/30 11554.59 12913.51 1989/12/31 12281.59 13389.98 1990/01/31 12116.81 12891.76 1990/02/28 11833.99 11991.98 1990/03/31 12281.29 10742.71 1990/04/30 12349.36 10657.45 1990/05/31 13156.44 11873.48 1990/06/30 13448.16 11768.90 1990/07/31 14128.83 11934.67 1990/08/31 12689.69 10775.72 1990/09/30 11483.93 9273.97 1990/10/31 12553.56 10719.02 1990/11/30 12164.60 10086.73 1990/12/31 12077.09 10250.13 1991/01/31 12193.77 10581.67 1991/02/28 12604.58 11716.01 1991/03/31 12235.91 11012.68 1991/04/30 12504.94 11120.82 1991/05/31 12534.83 11236.86 1991/06/30 11847.31 10411.17 1991/07/31 12435.19 10922.69 1991/08/31 12475.05 10700.87 1991/09/30 12983.22 11303.96 1991/10/31 13072.89 11464.20 1991/11/30 12604.58 10929.00 1991/12/31 13043.00 11493.41 1992/01/31 13202.43 11247.91 1992/02/29 12927.30 10845.33 1992/03/31 12664.72 10129.36 1992/04/30 13452.48 10177.51 1992/05/31 14038.24 10858.75 1992/06/30 13775.66 10343.69 1992/07/31 12897.01 10078.96 1992/08/31 12785.91 10711.12 1992/09/30 12270.84 10499.61 1992/10/31 11432.59 9948.86 1992/11/30 11371.99 10042.48 1992/12/31 11644.67 10094.42 1993/01/31 11977.96 10093.18 1993/02/28 12212.57 10398.06 1993/03/31 13059.80 11304.42 1993/04/30 13927.70 12377.23 1993/05/31 14227.33 12638.64 1993/06/30 13876.04 12441.45 1993/07/31 14423.64 12876.96 1993/08/31 15198.55 13572.10 1993/09/30 15115.90 13266.60 1993/10/31 15663.50 13675.44 1993/11/30 15002.24 12480.07 1993/12/31 15994.13 13381.22 1994/01/31 17037.67 14512.54 1994/02/28 16737.18 14472.34 1994/03/31 16321.86 13849.00 1994/04/30 16861.77 14436.60 1994/05/31 16654.11 14353.71 1994/06/30 16477.61 14556.56 1994/07/31 16913.69 14696.55 1994/08/31 17110.96 15044.49 1994/09/30 16664.50 14570.66 1994/10/31 17007.13 15055.86 1994/11/30 16363.39 14332.27 1994/12/31 16269.95 14422.02 1995/01/31 15595.06 13867.99 1995/02/28 15636.10 13828.19 1995/03/31 16117.53 14690.67 1995/04/30 16578.03 15243.17 1995/05/31 16808.28 15061.46 1995/06/30 16965.27 14797.33 1995/07/31 17718.81 15718.56 1995/08/31 17226.92 15118.95 1995/09/30 17478.10 15414.22 1995/10/31 17132.72 14999.89 1995/11/30 17331.58 15417.24 1995/12/31 17854.87 16038.41 1996/01/31 18189.78 16104.25 1996/02/29 18229.84 16158.69 1996/03/31 18508.65 16501.84 1996/04/30 19023.38 16981.60 1996/05/31 19034.10 16669.11 1996/06/30 19173.51 16762.92 1996/07/31 18605.16 16272.99 1996/08/31 18744.57 16308.64 1996/09/30 19291.46 16741.89 1996/10/31 19098.44 16570.58 1996/11/30 20095.72 17229.89 1996/12/31 20202.96 17008.25 1997/01/31 20202.96 16413.00 1997/02/28 20671.03 16681.45 1997/03/31 20858.84 16741.86 1997/04/30 21034.92 16830.69 1997/05/31 22349.60 17929.23 1997/06/30 23523.42 18921.25 Let's say hypothetically that $10,000 was invested in Overseas Portfolio on June 30, 1987. As the chart shows, by June 30, 1997, the value of the investment would have grown to $23,523 - a 135.23% increase on the initial investment. For comparison, look at how the Morgan Stanley EAFE Index did over the same period. With dividends and capital gains, if any, reinvested, the same $10,000 investment would have grown to $18,921 over the same period - a 89.21% increase. INVESTMENT SUMMARY TOP FIVE STOCKS AS OF JUNE 30, 1997 % OF FUND'S INVESTMENTS Alcatel Alsthom Compagnie Generale d'Electricite SA 2.1 Novartis AG (Reg.) 1.9 Total SA Class B 1.8 Philips Electronics NV (Bearer) 1.8 Takeda Chemical Industries Ltd. 1.5 TOP FIVE MARKET SECTORS AS OF JUNE 30, 1997 % OF FUND'S INVESTMENTS Finance 15.1 Technology 10.1 Durables 9.8 Basic Industries 9.7 Health 8.8 TOP FIVE COUNTRIES AS OF JUNE 30, 1997 (EXCLUDING CASH EQUIVALENTS) % OF FUND'S INVESTMENTS Japan 25.4 United Kingdom 13.5 France 9.5 Netherlands 7.9 Sweden 5.3 TOP COUNTRIES ARE BASED ON THE LOCATION OF THE ISSUER OF EACH SECURITY, INDICATING WHERE THE FUND IS EXPOSED TO POLITICAL AND CREDIT RISKS. PERCENTAGES ARE ADJUSTED FOR THE EFFECT OF OPEN FUTURES CONTRACTS, IF APPLICABLE. VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO FUND TALK: THE MANAGER'S OVERVIEW An interview with Richard Mace, Portfolio Manager of Overseas Portfolio Q. HOW HAS THE FUND PERFORMED, RICK? A. Pretty well. For the six months that ended June 30, 1997, the fund topped the 11.25% return registered by the Morgan Stanley Capital International EAFE Index. For the 12-month period that ended June 30, 1997, the fund again topped the EAFE index, which returned 12.88%. Q. WHAT FACTORS CONTRIBUTED TO THE FUND'S STRONG SHOWING? A. Individual stock selection had the biggest influence on the fund's return, as several of the fund's larger positions posted positive results. Market selection -specifically, the fund's underweighting in Japan relative to the index - also played a key role. While the EAFE index had an approximate Japanese weighting of 30% during the period, I kept the fund at around 23% on average. As Japan's well-documented economic woes continued to hamper the overall performance of Japanese securities, my strategy of underweighting Japanese securities worked in the fund's favor. I would add, however, that while market selection is important, I place more emphasis on analyzing the specific pluses and minuses of a stock than I do on the country where a stock is issued. Q. HOW DID THE EUROPEAN PORTION OF THE PORTFOLIO PERFORM? A. The across-the-board decline in European interest rates had favorable implications for Europe's stock markets. This rate environment, which may have been related to continuing optimism on proposed economic unity throughout Europe, led to strong performances in countries such as Spain, Italy and Sweden. In Europe, I basically continued my strategy of looking for companies based on three themes: those that would benefit from a rising dollar, those that would gain from the overall improvement of world economies and those companies that were engaging in restructurings designed to improve the return on capital employed in their businesses. Q. DID YOUR STRATEGIES LEAD YOU TO ANY OTHER REGIONS OF THE WORLD? A. One area that came into play was Canada. I've previously mentioned my strategy of looking for stocks than can benefit from improving economies, and Canada's many natural resource-related stocks fit that bill. Stocks such as Inco, a nickel producer; Alcan, an aluminum producer; and Noranda, a paper and forest products company, reflected this strategy. Q. FOLLOWING THE LEAD OF MANY AMERICAN COMPANIES, SOME INTERNATIONAL FIRMS HAVE BEEN IMPLEMENTING VARIOUS COST-CUTTING AND RESTRUCTURING STRATEGIES. WHY IS THIS A POSITIVE TREND? HOW HAS IT AFFECTED THE FUND? A. Worldwide, I think company managements have gotten smarter about how they run their businesses. In order to earn returns above their cost of capital, companies have had to reduce expenses, either by cutting personnel, restructuring their balance sheets or upgrading their technology. As they strive to become more shareholder-friendly, international companies also are coming up with new ways to utilize their existing assets. In terms of the fund, several individual holdings are good illustrations of this trend. For example, Volvo, one of the fund's larger stakes and a strong performer during the period, divested many of its non-core businesses and announced plans to implement a share redemption program in which the company will buy back one of every 20 outstanding shares. Q. WHICH INDIVIDUAL STOCK POSITIONS BENEFITED THE FUND? WERE THERE ANY DISAPPOINTMENTS? A. As I mentioned earlier, individual stock selection was a real key to performance. Aside from the strong performances of Volvo and Telebras, a Brazilian telecommunications company, the fund's stake in Total, a French-based oil company, and Alcatel, which specializes in telecommunications and electrical equipment, turned in favorable results. Disappointments included the poor performance of several Japanese brokerage companies, including Nomura Securities and Nikko Securities. Q. WHAT'S YOUR OUTLOOK? A. More and more, individual stock selection is outdistancing country selection in terms of performance influence. I think this trend will most likely continue and will place even more emphasis on thorough research and analysis of individual stocks. With this in mind, I'll continue to use my three-pronged approach of looking for stocks that can benefit from a rising dollar, stronger economies and increased corporate efficiencies. FUND FACTS GOAL: to increase the value of the fund's shares by investing mainly in stocks in Europe, the Far East and the Pacific Basin START DATE: January 28, 1987 SIZE: as of June 30, 1997, more than $2.0 billion MANAGER: Richard Mace, since 1996; joined Fidelity in 1987 (checkmark) VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO INVESTMENTS JUNE 30, 1997 (UNAUDITED) Showing Percentage of Total Value of Investment in Securities COMMON STOCKS - 88.0% SHARES VALUE (NOTE 1) ARGENTINA - 0.2% Perez Companc Class B 481,414 $ 3,866,315 AUSTRALIA - 1.8% Aberfoyle Ltd. 22,800 63,586 Australia & New Zealand Banking Group Ltd. 376,800 2,811,729 Brambles Industries Ltd. 200,200 3,952,242 Broken Hill Proprietary Co. Ltd. (The) 226,800 3,330,629 CSR Ltd. 882,500 3,412,396 Coles Myer Ltd. 877,000 4,554,557 Colonial Ltd. (a) 682,200 1,738,024 National Australia Bank Ltd. 182,300 2,606,642 Pasminco Ltd. 476,800 966,754 QNI Ltd. 871,880 1,570,659 Tabcorp Holdings Ltd. 162,800 883,516 Western Mining Holdings Ltd. 953,939 6,003,913 Westpac Banking Corp. 143,800 863,862 Woolworths Ltd. 1,211,500 3,972,281 36,730,790 AUSTRIA - 0.1% Voest-Alpine Stahl AG 21,900 992,005 BELGIUM - 0.2% BBL (Banque Bruxelles Lambert) 6,700 1,693,329 Credit Communal Holding/Dexia (b) 13,500 1,449,133 3,142,462 BERMUDA - 0.1% Fuji International Trust unit sponsored ADR (b) 100 2,698,015 BRAZIL - 1.0% Centrais Electricas Brasileiras SA 2,080,000 1,240,464 Compania Energertica Minas Gerais 87,262,000 4,498,880 Multicanal Participacoes SA sponsored ADR 92,800 1,264,400 Telebras sponsored ADR 95,000 14,416,250 21,419,994 CANADA - 2.8% Alcan Aluminium Ltd. 269,700 9,200,645 Alliance Forest Products (a)(b) 83,700 2,043,016 BCE, Inc. 233,000 6,480,426 Bro-X Minerals Ltd. 42,700 - Canadian Imperial Bank of Commerce 34,800 877,152 Canadian Natural Resources Ltd. (a) 159,900 4,151,968 Cominco Ltd. (a) 245,900 6,545,341 Domtar, Inc. 312,700 2,763,148 Greenstone Resources Ltd. (a) 141,300 1,238,352 Inco Ltd. 310,100 9,264,930 National Bank of Canada 361,200 4,525,955 Noranda, Inc. 373,200 8,041,647 Renaissance Energy Ltd. (a) 66,900 1,860,689 St Laurent Paperboard, Inc. (a)(b) 155,900 2,427,733 59,421,002 CHINA (PEOPLES REPUBLIC) - 0.0% First Tractor Co. Ltd. Class H (a) 416,000 273,861 DENMARK - 0.8% Den Danske Bank Group AS 55,900 5,437,154 International Service Systems AS, Series B (a) 128,800 4,615,514 Novo-Nordisk AS Class B 30,900 3,368,405 Sophus Berendsen AS, Series B 6,300 910,624 Unidanmark AS Class A 34,500 1,937,560 16,269,257 SHARES VALUE (NOTE 1) EMERGING MARKETS - 0.3% GT Global Developing Markets Fund 249,700 $ 3,511,406 TCW/DW Emerging Markets Opportunities Trust (SBI) 82,500 1,227,188 Templeton Dragon Fund, Inc. 52,300 849,875 5,588,469 FINLAND - 1.9% Cultor OY, Series 1 57,600 3,046,271 Huhtamaki Ord. 190,700 8,196,748 Metsa-Serla Ltd. Class B 575,100 4,678,397 Nokia Corp. AB, Series A 130,300 9,720,253 Outokumpu OY Class A 135,300 2,680,084 Pohjola Class B 124,900 3,699,104 Rauma OY 2,317 53,026 UPM-Kymmene Corp. 83,200 1,920,074 Valmet OY 344,400 5,947,752 39,941,709 FRANCE - 9.5% Alcatel Alsthom Compagnie Generale d'Electricite SA 356,650 44,640,386 Axa SA 114,726 7,131,110 Axime SA Ex Segin (a) 2,100 248,206 Canal Plus SA 5,189 1,009,526 Cap Gemini Sogeti SA 28,700 1,513,044 Carrefour Supermarche SA 2,400 1,741,982 Compagnie de Saint Gobain 15,900 2,317,319 Credit Commercial de France Ord. 56,700 2,400,990 Eramet SA 98,162 4,523,979 Generale des Eaux, Cie 18,950 2,426,678 Generale des Eaux warrants 5/2/01 (a) 18,950 11,344 Groupe Danone 30,800 5,086,017 Lafarge Coppee SA 62,520 3,886,103 Lagardere S.C.A. (Reg.) 77,700 2,255,602 Michelin SA (Compagnie Generale des Etablissements) Class B 163,000 9,782,439 Nationale Elf Aquitaine 127,700 13,768,545 Pechiney SA Class A 384,164 15,124,310 Paribas SA (Cie Financiere) Class A 46,200 3,189,892 Rhone Poulenc SA Class A 653,400 26,668,480 Societe Generale Class A 65,500 7,307,234 Total SA Class B 378,614 38,246,440 Unibail 8,100 757,627 Usinor Sacilor 242,100 4,364,239 Valeo SA 15,900 986,956 199,388,448 GERMANY - 3.8% Allianz Aktiengesellschaft Holdings (Reg.) 12,500 2,604,555 Altana AG 7,000 739,903 Beta Systems Software AG 3,000 171,999 BASF AG 136,400 4,962,131 Bayer AG 269,300 10,414,065 Buderus AG 8,300 4,564,881 Continental Gummi-Werke AG 134,300 3,335,380 Daimler-Benz AG Ord. 77,900 6,274,844 Dresdner Bank AG Ord. 30,000 1,034,145 Emerging Germany Fund, Inc. 70,600 732,475 Hoechst AG Ord. 84,000 3,556,345 Lufthansa 117,300 2,210,925 Mannesmann AG Ord. 11,300 4,999,708 Metallgesellschaft AG Ord. 276,300 5,749,193 New Germany Fund, Inc. (The) 231,800 3,650,850 Thyssen AG Ord. 4,300 1,022,343 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) GERMANY - CONTINUED Veba AG Ord. 113,500 $ 6,320,367 Volkswagen AG 23,965 18,150,518 80,494,627 HONG KONG - 1.6% Great Eagle Holdings Ltd. 546,000 1,800,736 HSBC Holdings PLC 745,100 22,078,550 Hong Kong & China Gas Co. Ltd. 1,708,800 3,418,923 Hutchison Whampoa Ltd. Ord. 240,000 2,075,642 Peregrine Investments Holdings Ltd. 1,200,000 2,470,634 Wharf Holdings Ltd. 206,000 893,456 32,737,941 INDONESIA - 0.4% Matahari Putra Prima PT (For. Reg.) 2,301,000 4,636,058 PT Multipolar (For. Reg.) 2,383,000 808,377 PT Multipolar Corp. rights 12/31/97 (For. Reg.) 13,106,500 1,751,485 Putra Surya Multidana PT (For. Reg.) (a) 880,000 1,402,137 8,598,057 IRELAND - 0.8% Bank of Ireland, Inc. 968,400 10,639,830 CRH PLC 145,000 1,511,364 Independent Newspapers PLC 889,749 5,035,962 17,187,156 ITALY - 1.2% Credito Italiano Ord. 3,572,700 6,535,015 Eni Spa 2,128,800 12,042,644 Mondadori Arnoldo Editore Spa 1,700 9,925 Telecom Italia: Mobile Spa 1,942,000 6,250,390 Spa 380,000 1,220,358 26,058,332 JAPAN - 23.6% Acom Co. Ltd. 100,900 4,858,197 Amway Japan Ltd. 171,200 5,794,025 Aoyama Trading Co. Ord. 3,300 105,927 Asahi Chemical Industry Co. Ltd. 271,000 1,619,216 Asahi Breweries Ltd. 50,000 745,780 Bank of Tokyo-Mitsubishi Ltd. 327,000 6,560,251 Canon, Inc. 355,000 9,661,127 Circle K Japan Co. Ltd. 13,000 746,129 Citizen Watch Co. Ltd. Ord. 472,000 3,639,478 Dai-Ichi Kangyo Bank 124,000 1,687,295 DDI Corp. Ord. 913 6,737,302 Dai-Tokyo Fire & Marine Insurance Ord. 354,000 2,050,294 Daiichi Pharmaceutical Co. Ltd. 99,000 1,744,341 Daiwa House Industry Co. Ltd. 227,000 2,772,035 Daiwa Securities Co. Ltd. 774,000 6,103,153 Denso Corp. 212,000 5,066,771 Denny's Japan Co. Ltd. 79,000 2,377,339 Daito Trust Construction Co. 340,700 4,011,906 Fuji Bank Ltd. 498,000 7,471,411 Fuji Photo Film Co. Ltd. 719,000 28,911,770 Fujitsu Ltd. 1,086,000 15,061,624 Hitachi Ltd. 2,232,000 24,920,056 Hitachi Maxell Ltd. 385,000 9,537,267 Honda Motor Co. Ltd. 425,000 12,789,480 Hoya Corp. 22,000 978,673 Ibiden Co. Ltd. 200,000 2,878,451 Ito-Yokado Co. Ltd. 152,000 8,816,782 Japan Associated Finance Co. 46,000 3,611,147 Jusco Co. Ltd. 111,000 3,746,958 SHARES VALUE (NOTE 1) Kao Corp. 301,000 $ 4,174,539 Kobe Steel Ltd. Ord. (a) 847,000 1,617,977 Komatsu Ltd. Ord. 1,001,000 8,120,109 Kyocera Corp. 58,000 4,603,777 Long Term Credit Bank of Japan Ltd. (The) 413,000 1,783,200 Matsushita Electric Industrial Co. Ltd. 1,300,000 26,193,902 Matsushita Communication Industrial Co. Ltd. 185,000 6,244,930 Matsushita Electric Works Co. Ltd. 293,000 3,322,430 Minebea Co. Ltd. 273,000 2,905,142 Minolta Camera Co. Ltd. 711,000 4,452,859 Mitsubishi Estate Co. Ltd. 282,000 4,083,213 Mitsubishi Heavy Industries Ltd. 625,000 4,791,966 Mitsubishi Trust & Banking Corp. 100,000 1,578,787 Mitsui Fudosan (Re Devel) Co. 60,000 826,900 Murata Manufacturing Co. Ltd. 31,000 1,233,024 NKK Corp. 775,000 1,662,960 NEC Corp. 313,000 4,368,267 Nikko Securities Co. Ltd. 570,000 3,505,168 Nintendo Co. Ltd. Ord. 182,000 15,240,088 Nippon Telegraph & Telephone Corp. Ord. 1,744 16,733,394 Nitto Denko Corp. 27,000 525,186 Nomura Securities Co. Ltd. 805,000 11,094,247 Nichiei Co. Ltd. 31,400 3,642,723 Onward Kashiyama & Co. Ltd. 233,000 3,861,485 Omron Corp. 176,000 3,730,472 Orix Corp. 198,100 14,670,234 Ricoh Co. Ltd. Ord. 493,000 6,450,346 Rohm Co. Ltd. 93,000 9,572,157 Sakura Bank Ltd. 2,191,000 16,779,606 Sankyo Co. Ltd. 345,000 11,585,764 Sekisui Chemical Co. Ltd. 6,000 60,709 Shin-Etsu Chemical Co. Ltd. 113,000 2,996,380 Sony Corp. 214,200 18,665,078 Sumitomo Sitix Corp. 39,000 833,442Sony Music Entertainment Japan, Inc. 32,500 1,522,308Shohkoh Fund & Co. Ltd. 3,600 1,089,624 Shinko Electric Industries Co. Ltd. 44,600 1,630,023 TDK Corp. 102,000 7,482,402 Takeda Chemical Industries Ltd. 1,128,000 31,681,799 Takefuji Corp. 16,000 873,653 Terumo Corp. 125,000 2,387,806 THK Co. Ltd. 184,600 3,155,968 Toyota Motor Corp. 665,000 19,605,739 Toyo Trust & Banking Co. Ltd. 33,000 277,770 Tokyo Electron Ltd. 107,800 5,152,811 Uni Charm Corp. Ord. 80,000 2,847,049 Uny Co. Ltd. 310,000 6,056,958 World Co. Ltd. 35,300 1,548,772 Xebio Co. Ltd. 37,200 915,033 Yamanouchi Pharmaceutical Co. Ltd. 79,000 2,122,378 Yasuda Trust & Banking 212,000 809,944 496,074,683 KOREA (SOUTH) - 0.3% Korea Electric Power Corp. 204,960 6,116,486 MALAYSIA - 0.3% Arab Malaysian Corp. BHD 668,000 2,487,304 Magnum Corp. BHD 397,000 597,584 Oriental Holdings BHD 178,000 1,339,671 Rothmans of Pall Mall Malaysia BHD 79,000 776,074 5,200,633 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) MEXICO - 0.4% Cifra SA de CV: Series A 227,993 $ 421,927 Series C 1,864,100 2,984,440 Gruma SA Class B sponsored ADR (a)(b) 91,596 1,671,627 Grupo Financiero Bancomer Class B (a) 2,228,000 1,072,923 Grupo Financiero Inbursa SA Class B 237,000 1,009,846 Tubos De Acero De Mexico ADR (a) 78,200 1,441,813 8,602,576 MULTI-NATIONAL - 0.0% Morgan Stanley Asia-Pacific Fund, Inc. 82,900 870,450 NETHERLANDS - 7.9% AKZO Nobel NV 145,500 19,927,448 Ahold NV 36,600 3,085,871 Chicago Bridge & Iron Co. NV 94,000 2,079,750 DSM NV 71,700 7,129,479 ING Groep NV 377,422 17,390,505 KBB NV Ord. 37,200 2,600,458 KLM Royal Dutch Air Lines NV 39,506 1,216,900 Koninklijke Hoogovens NV 121,600 6,773,097 Koninklijke KNP BT NV 288,800 6,572,659 Koninklijke Pakhoed NV 24,600 866,718 New Holland NV 248,000 6,789,000 Philips Electronics NV (Bearer) 521,700 37,345,868 Royal Dutch Petroleum Co. Ord. 456,160 23,712,609 Unilever NV Ord. 101,900 21,437,340 VNU Ord. 33,300 735,818 Vendex International NV (b) 121,600 6,655,466 Vedior NV BDR (a)(b) 66,800 1,765,144 166,084,130 NETHERLANDS ANTILLES - 0.2% Schlumberger Ltd. 32,700 4,087,500 NEW ZEALAND - 0.2% Air New Zealand Ltd. Class B 552,200 1,689,359 Lion Nathan Ltd. 572,000 1,450,501 Lion Nathan Ltd. (Australia) (a) 59,200 151,715 3,291,575 NORWAY - 0.6% Den Norske Bank AS Class A Free shares 682,500 2,673,475 Elkem ASA 275,400 5,393,956 NCL Holdings AS (a) 460,300 1,451,258 Orkla AS Class B (non-vtg.) 15,600 1,058,212 Saga Petroleum AS Class B 126,300 2,206,505 12,783,406 PERU - 0.1% Compania de Minas Buenaventura SA Class B sponsored ADR 80,200 1,578,938 PORTUGAL - 0.2% Electricidade de Portugal SA (a) 234,300 4,295,057 RUSSIA - 0.0% Vimpel Communications sponsored ADR 12,800 486,400 SINGAPORE - 0.2% Creative Technology Corp. Ltd. (a) 109,000 1,853,000 Kim Engineering Holdings Ltd. 2,683,000 2,251,941 4,104,941 SOUTH AFRICA - 0.3% Gencor Ltd. (Reg.) 820,800 3,782,739 JCI Ltd. 187,500 1,442,944 5,225,683 SHARES VALUE (NOTE 1) SPAIN - 2.1% Acerinox SA (Reg.) 29,750 $ 5,567,853 Asturiana del Zinc SA (a)(b) 259,900 5,496,614 Banco Bilbao Vizcaya SA Ord. (Reg.) 74,600 6,052,954 Banco de Santander SA Ord. (Reg.) 127,800 3,932,974 Banco Intercontinental Espanol 10,500 1,850,534 Tabacalera SA, Series A 126,300 6,771,957 Telefonica de Espana SA Ord. 511,500 14,770,310 44,443,196 SWEDEN - 5.3% ABB AB: Series A 297,900 4,186,265 Series B 153,000 2,140,137 Astra AB Class A Free shares 1,216,000 22,678,928 Assi Doman AB Free shares 63,600 1,812,200 Electrolux AB 87,200 6,301,982 Ericsson (L.M.) Telephone Co.: Class B 154,400 6,089,211 Class B ADR 49,400 1,945,125 Esselte AB Class B Free shares 90,900 2,142,702 Graenges AB (Reg.) (a) 48,600 645,188 Investor AB Class B Free shares 82,000 4,327,807 Nordbanken AB 156,900 5,303,834 SKF AB Ord. 34,100 883,305 Scania AB Class B 211,700 6,470,820 Skandia Foersaekrings AB 249,800 9,220,697 Svenska Cellulosa AB (SCA) Class B Ord. 101,900 2,138,039 Svenska Handelsbanken 160,200 5,104,157 Swedish Match Co. 4,500,200 15,154,151 Volvo AB Class B 582,600 15,619,505 112,164,053 SWITZERLAND - 4.8% ABB AG (Bearer) 650 982,894 Credit Suisse Group (Reg.) 190,477 24,436,837 Danzas Holdings AG (Reg.) 1,160 226,206 Julius Baer Holding AG 5,313 8,124,909 Nestle SA (Reg.) 9,030 11,899,952 Novartis AG (Reg.) 25,000 39,924,735 Roche Holding AG participation certificates 1,250 11,294,047 Sulzer AG (Reg.) 2,500 2,138,214 SGS Societe Generale de Surveillance Holding SA (Bearer) 800 1,707,834 100,735,628 UNITED KINGDOM - 13.5% Allied Domecq PLC 6,200 44,587 Asda Group PLC 2,705,400 5,584,562 BAT Industries PLC Ord. 1,709,800 15,298,884 BOC Group PLC 49,900 868,066 Barclays PLC Ord. 227,500 4,514,333 Barratt Developments PLC 847,125 3,469,114 Bass PLC Ord. 242,300 2,956,605 Blue Circle Industries PLC 430,400 3,073,729 Boots Co. PLC Class L (The) 323,900 3,793,246 British Aerospace PLC 257,400 5,726,819 British Petroleum PLC: ADR 47,800 3,579,025 Ord. 998,909 12,413,428 British Land Co. PLC, (The) Ord. 176,200 1,663,125 British Steel PLC Ord. 1,230,000 3,061,134 British Telecommunications PLC Ord. 850,300 6,313,105 Cable & Wireless PLC Ord. 348,900 3,194,476 Caradon PLC 2,419,380 8,095,359 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) UNITED KINGDOM - CONTINUED Cookson Group PLC 4,377,200 $ 15,411,423 Dixons Group PLC 333,400 2,625,202 DR Solomons Group PLC sponsored ADR 13,400 340,025 English China Clay PLC 352,200 1,196,067 Glaxo Holdings PLC 538,800 11,122,060 Granada Group PLC 811,000 10,665,566 Grand Metropolitan PLC 1,492,491 14,360,698 Guinness PLC Ord. 221,100 2,164,223 HSBC Holdings PLC Ord. 57,600 1,772,465 Hays PLC 94,200 893,844 ICI (Imperial Chemical Industries) PLC Class L 133,900 1,859,014 Inchcape PLC Ord. 739,600 3,484,330 Ladbroke Group PLC Ord. 1,328,800 5,220,446 Lloyds TSB Group PLC 1,896,498 19,447,737 LucasVarity PLC 2,165,700 7,498,901 Mercury Asset Management Group PLC 77,400 1,591,270 National Grid Co. PLC 1,566,100 5,722,555 Norwich Union PLC (a) 194,300 1,033,427 Pearson, PLC 68,300 791,345 Perpetual PLC 19,600 874,434 Prudential Corp. PLC 428,318 4,146,217 Reckitt & Colman Ltd. Ord. 91,800 1,370,791 Redland PLC Ord. 458,900 2,597,365 Rentokil Group PLC 5,403,900 18,945,307 Rio Tinto PLC (Reg.) 53,900 938,997 Rolls Royce PLC Ord. 765,355 2,917,658 Rugby Group PLC 795,600 1,589,322Somerfield PLC 866,000 2,609,351 Shell Transport & Trading Co. PLC (Reg.) 2,313,300 15,769,642 SmithKline Beecham PLC Ord. 947,218 17,431,898 Tarmac 128,200 264,634 Thames Water PLC Ord. 144,800 1,663,235 Tomkins PLC Ord. 179,800 778,214 Unigate PLC 333,200 2,679,095 Unilever PLC Ord. 276,800 7,932,482 Vodafone Group PLC 1,865,929 9,101,201 WPP Group PLC 252,900 1,033,561 283,493,599 UNITED STATES OF AMERICA - 1.5% Alumax, Inc. (a) 222,700 8,448,681 Aluminum Co. of America 139,600 10,522,350 D.R. Horton, Inc. 161,600 1,676,600 Hanover Compressor Co. 1,500 29,250 Jefferson Smurfit Corp. 34,400 550,400 Kaiser Aluminum Corp. (a) 8,200 100,450 MCI Communications Corp. 213,800 8,184,531 Newmont Mining Corp. 46,000 1,794,000 Silgan Holdings, Inc. 2,600 100,750 31,407,012 TOTAL COMMON STOCKS (Cost $1,450,354,067) 1,845,854,386 PREFERRED STOCKS - 1.0% SHARES VALUE (NOTE 1) CONVERTIBLE PREFERRED STOCKS - 0.1% JAPAN - 0.1% AJL participating trust 73,000 $ 1,272,938 NONCONVERTIBLE PREFERRED STOCKS - 0.9% ITALY - 0.9% Stet (Societa Finanziaria Telefonica) Spa 3,435,100 11,903,329 Telecom Italia: Mobile Spa de Risp 3,961,100 7,030,916 Ord. 435,400 871,518 TOTAL NONCONVERTIBLE PREFERRED STOCKS 19,805,763 TOTAL PREFERRED STOCKS (Cost $12,443,054) 21,078,701 CORPORATE BONDS - 0.8% MOODY'S PRINCIPAL RATINGS (D) AMOUNT BERMUDA - 0.2% MBL International Finance of Bermuda 3%, 11/30/02 Aa2 $ 4,472,000 4,896,840 JAPAN - 0.6% Asahi Breweries Ltd 6.40%, 10/16/98 - JPY 501,000,000 6,817,218 Matsushita Electric Industrial Co. Ltd.: 1.30%, 3/29/02 Aa2 JPY 186,000,000 2,320,031 1.40%, 3/31/04 Aa2 JPY 174,000,000 2,170,352 11,307,601 TOTAL CORPORATE BONDS (Cost $15,280,034) 16,204,441 GOVERNMENT OBLIGATIONS - 0.0% U.S. Treasury Bills, yields at dates of purchase 4.85%, to 5.28%, 8/7/97 to 1/8/98 (c) (Cost $886,510) $900,000 886,492 CASH EQUIVALENTS - 10.2% MATURITY AMOUNT Investments in repurchase agreements (U.S. Treasury obligations) in a joint trading account at 5.93%, dated 6/30/97 due 7/1/97 $ 214,820,380 214,785,000 TOTAL INVESTMENT IN SECURITIES - 100% (Cost $1,693,748,665) $ 2,098,809,020 FUTURES CONTRACTS EXPIRATION UNDERLYING FACE UNREALIZED DATE AMOUNT AT VALUE GAIN/(LOSS) PURCHASED 232 Nikkei 225 Stock Index Contracts Sept. 1997 $ 23,890,200 $ 40,693 THE FACE VALUE OF FUTURES PURCHASED AS A PERCENTAGE OF TOTAL INVESTMENT IN SECURITIES - 1.1% CURRENCY ABBREVIATIONS JPY - Japanese yen LEGEND (a) Non-income producing (b) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $24,206,748 or 1.2% of net assets. (c) A portion of the security was pledged to cover margin requirements for futures contracts. At the period end, the value of securities pledged amounted to $788,676. (d) Standard & Poor's credit ratings are used in the absence of a rating by Moody's Investors Service, Inc. OTHER INFORMATION Purchases and sales of securities, other than short-term securities, aggregated $712,738,103 and $575,228,156, respectively. The market value of futures contracts opened and closed during the period amounted to $49,056,147 and $39,254,194, respectively. The fund placed a portion of its portfolio transactions with brokerage firms which are affiliates of Fidelity Management & Research Company. The commissions paid to these affiliated firms were $127,548 for the period (see Note 4 of Notes to Financial Statements). MARKET SECTOR DIVERSIFICATION As a Percentage of Total Value of Investments Aerospace & Defense 0.4% Basic Industries 9.7 Cash Equivalents 10.2 Construction & Real Estate 2.9 Durables 9.8 Energy 6.5 Finance 15.1 Government Obligations 0.0 Health 8.8 Holding Companies 1.3 Industrial Machinery & Equipment 2.5 Media & Leisure 2.2 Nondurables 6.6 Precious Metals 0.5 Retail & Wholesale 3.7 Services 2.1 Technology 10.1 Transportation 0.5 Utilities 7.1 100.0% INCOME TAX INFORMATION At June 30, 1997, the aggregate cost of investment securities for income tax purposes was $1,694,697,195. Net unrealized appreciation aggregated $404,111,825, of which $447,629,963 related to appreciated investment securities and $43,518,138 related to depreciated investment securities. VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES JUNE 30, 1997 (UNAUDITED) ASSETS Investment in $2,098,809,020 securities, at value (including repurchase agreements of $214,785,000) (cost $1,693,748,665) - See accompanying schedule Cash 2,443 Receivable for 3,065,615 investments sold Receivable for fund 1,404,647 shares sold Dividends receivable 7,012,340 Interest receivable 149,101 Other receivables 27,542 TOTAL ASSETS 2,110,470,708 LIABILITIES Payable for $ 16,404,484 investments purchased Payable for fund 2,602,874 shares redeemed Accrued management 1,275,223 fee Payable for daily 34,800 variation on futures contracts Other payables and 342,806 accrued expenses accrued expenses TOTAL LIABILITIES 20,660,187 NET ASSETS $2,089,810,521 Net Assets consist of: Paid in capital $1,603,802,130 Undistributed net 14,431,091 investment income Accumulated 66,527,361 undistributed net realized gain (loss) on investments and foreign currency transactions Net unrealized 405,049,939 appreciation (depreciation) on investments and assets and liabilities in foreign currencies NET ASSETS, for $2,089,810,521 104,279,605 shares outstanding NET ASSET VALUE, $20.04 offering price and redemption price per share ($2,089,810,521 (divided by) 104,279,605 shares) STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) INVESTMENT INCOME 26,148,620 Dividends Interest $ 5,052,251 31,200,871 Less foreign taxes (3,188,198) withheld TOTAL INCOME 28,012,673 EXPENSES Management fee $ 6,739,466 Transfer agent fees 648,554 Accounting fees and 400,724 expenses Non-interested 3,852 trustees' compensation Custodian fees and 422,619 expenses Registration fees 4,483 Audit 14,836 Legal 2,287 Miscellaneous 71,824 Total expenses 8,308,645 before reductions Expense reductions (71,550) 8,237,095 NET INVESTMENT 19,775,578 INCOME REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on: Investment 69,225,765 securities Foreign currency (83,526) transactions Futures contracts (182,586) 68,959,653 Change in net unrealized appreciation (depreciation) on: Investment 199,312,047 securities Assets and (61,369) liabilities in foreign currencies Futures contracts 511,033 199,761,711 NET GAIN (LOSS) 268,721,364 NET INCREASE $288,496,942 (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS OTHER INFORMATION $ 70,664 Expense reductions Directed brokerage arrangements Custodian credits 886 $ 71,550 STATEMENT OF CHANGES IN NET ASSETS INCREASE (DECREASE) IN NET ASSETS SIX MONTHS YEAR ENDED ENDED DECEMBER 31, JUNE 30, 1997 1996 (UNAUDITED) Operations $ 19,775,578 $ 28,360,200 Net investment income Net realized gain 68,959,653 114,395,097 (loss) Change in net 199,761,711 46,672,077 unrealized appreciation (depreciation) NET INCREASE 288,496,942 189,427,374 (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS Distributions to (29,012,812) (16,689,141) shareholders From net investment income From net realized (115,172,073) (18,358,055) gain TOTAL DISTRIBUTIONS (144,184,885) (35,047,196) Share transactions 478,306,941 649,592,564 Net proceeds from sales of shares Reinvestment of 144,184,885 35,047,196 distributions Cost of shares (344,594,600) (514,552,645) redeemed NET INCREASE 277,897,226 170,087,115 (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS TOTAL INCREASE 422,209,283 324,467,293 (DECREASE) IN NET ASSETS NET ASSETS Beginning of period 1,667,601,238 1,343,133,945 End of period $2,089,810,521 $1,667,601,238 (including undistributed net investment income of $14,431,091 and $22,748,929, respectively) OTHER INFORMATION Shares Sold 26,141,924 37,069,614 Issued in 8,319,959 2,053,145 reinvestment of distributions Redeemed (18,706,716) (29,349,715) Net increase 15,755,167 9,773,044 (decrease) SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED YEARS ENDED DECEMBER 31, JUNE 30, 1997 SELECTED PER-SHARE DATA (UNAUDITED) 1996 1995 1994 1993 F 1992
Net asset value, $ 18.84 $ 17.06 $ 15.67 $ 15.48 $ 11.53 $ 13.09 beginning of period Income from Investment Operations Net investment .20 D .32 D, .17 .19 .06 .16 income E Net realized and 2.64 1.88 1.34 .08 4.16 (1.54) unrealized gain (loss) Total from 2.84 2.20 1.51 .27 4.22 (1.38) investment operations Less Distributions From net (.33) (.20) (.06) (.08) (.18) (.18) investment income In excess of net - - - - (.04) - investment income From net realized (1.31) (.22) (.02) - - - gain In excess of net - - (.04) - (.05) - realized gain Total distributions (1.64) (.42) (.12) (.08) (.27) (.18) Net asset value, end $ 20.04 $ 18.84 $ 17.06 $ 15.67 $ 15.48 $ 11.53 of period TOTAL RETURN B, C 16.44% 13.15% 9.74% 1.72% 37.35% (10.72)% RATIOS AND SUPPLEMENTAL DATA Net assets, end of $ 2,089,811 $ 1,667,601 $ 1,343,134 $ 1,297,701 $ 777,961 $ 180,837 period (000
omitted) Ratio of expenses to .94% A .93% .91% .92% 1.03% 1.14% average net assets Ratio of expenses to .93% A, G .92% .91% .92% 1.03% 1.14% average net assets G after expense reductions Ratio of net 2.23% A 1.84% 1.88% 1.28% 1.21% 1.86% investment income to average net assets Portfolio turnover rate 72% A 92% 50% 42% 42% 61% Average commission $ .0115 $ .0137 rate H
A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED AND DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN. C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. E INVESTMENT INCOME PER SHARE REFLECTS A SPECIAL DIVIDEND WHICH AMOUNTED TO $.05 PER SHARE. F EFFECTIVE JANUARY 1, 1993, THE FUND ADOPTED STATEMENT OF POSITION 93-2, "DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF INCOME, CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT COMPANIES." AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT CERTAIN RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES. G FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). H FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE STRUCTURES MAY DIFFER. NOTES TO FINANCIAL STATEMENTS For the period ended June 30, 1997 (Unaudited) 1. SIGNIFICANT ACCOUNTING POLICIES. The Money Market Portfolio, High Income Portfolio, Equity-Income Portfolio, Growth Portfolio and Overseas Portfolio (the funds) are funds of Variable Insurance Products Fund. Investment Grade Bond Portfolio, Asset Manager Portfolio, Asset Manager: Growth Portfolio, Index 500 Portfolio and Contrafund Portfolio (the funds) are funds of Variable Insurance Products Fund II. Balanced Portfolio, Growth & Income Portfolio and Growth Opportunities Portfolio (the funds) are funds of Variable Insurance Products Fund III. The Variable Insurance Products Fund, Variable Insurance Products Fund II and Variable Insurance Products Fund III (the trusts) are registered under the Investment Company Act of 1940, as amended (the 1940 Act), as open-end management investment companies organized as Massachusetts business trusts. Each fund is authorized to issue an unlimited number of shares. Shares of each fund may only be purchased by insurance companies for the purpose of funding variable annuity or variable life insurance contracts. On July 17, 1997, the Board of Trustees approved the creation of Service Class, a new class of shares of each fund. The Service Class shares of High Income Portfolio, Equity-Income Portfolio, Growth Portfolio, Overseas Portfolio, Asset Manager Portfolio, Asset Manager: Growth Portfolio, Contrafund Portfolio, Balanced Portfolio, Growth & Income Portfolio and Growth Opportunities Portfolio will be subject to an annual distribution and service fee of .10% of each class' average net assets. Service Class shares of the Money Market Portfolio, Index 500 Portfolio and Investment Grade Portfolio will be available without a 12b-1 fee. Service Class shares of each fund are expected to be available on or about October 31, 1997. The financial statements have been prepared in conformity with generally accepted accounting principles which permit management to make certain estimates and assumptions at the date of the financial statements. The following summarizes the significant accounting policies of the funds: SECURITY VALUATION: MONEY MARKET PORTFOLIO. As permitted under Rule 2a-7 of the 1940 Act, and certain conditions therein, securities are valued initially at cost and thereafter assume a constant amortization to maturity of any discount or premium. INVESTMENT GRADE BOND PORTFOLIO. Securities are valued based upon a computerized matrix system and/or appraisals by a pricing service, both of which consider market transactions and dealer-supplied valuations. Securities (including restricted securities) for which market quotations are not readily available are valued at their fair value as determined in good faith under consistently applied procedures under the general supervision of the Board of Trustees. Short-term securities with remaining maturities of sixty days or less for which quotations are not readily available are valued at amortized cost or original cost plus accrued interest, both of which approximate current value. HIGH INCOME PORTFOLIO. Securities for which quotations are readily available are valued by a pricing service at their market values as determined by their most recent bid prices in the principal market (sales prices if the principal market is an exchange) in which such securities are normally traded. Securities (including restricted securities) for which market quotations are not readily available are valued at their fair value as determined in good faith under consistently applied procedures under the general supervision of the Board of Trustees. Short-term securities with remaining maturities of sixty days or less for which quotations are not readily available are valued at amortized cost or original cost plus accrued interest, both of which approximate current value. ASSET MANAGER, BALANCED AND ASSET MANAGER: GROWTH PORTFOLIOS. Equity securities for which quotations are readily available are valued at the last sale price, or if no sale price, at the closing bid price. Debt securities for which quotations are readily available are valued by a pricing service at their market values as determined by their most recent bid prices in the principal market (sales prices if the principal market is an exchange) in which such securities are normally traded. Securities (including restricted securities) for which market quotations are not readily available are valued at their fair value as determined in good faith under consistently applied procedures under the general supervision of the Board of Trustees. Short-term securities with remaining maturities of sixty days or less for which quotations are not readily available are valued at amortized cost or original cost plus accrued interest, both of which approximate current value. EQUITY-INCOME, GROWTH & INCOME, INDEX 500, GROWTH OPPORTUNITIES, CONTRAFUND AND GROWTH PORTFOLIOS. Securities for which exchange quotations are readily available are valued at the last sale price, or if no sale price, at the closing bid price. Securities (including restricted securities) for which exchange quotations are not readily available (and in certain cases debt securities which trade on an exchange) are valued primarily using dealer-supplied valuations or at their fair value as determined in good faith under consistently applied procedures under the general supervision of the Board of Trustees. Short-term securities with remaining maturities of sixty days or less for which quotations are not readily available are valued at amortized cost or original cost plus accrued interest, both of which approximate current value. OVERSEAS PORTFOLIO. Securities for which quotations are readily available are valued at the last sale price, or if no sale price, at the closing bid price in the principal market in which such securities are normally traded. Securities (including restricted securities) for which quotations are not readily available are valued primarily using dealer-supplied valuations 1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED OVERSEAS PORTFOLIO - CONTINUED or at their fair value as determined in good faith under consistently applied procedures under the general supervision of the Board of Trustees. Short-term securities with remaining maturities of sixty days or less for which quotations are not readily available are valued at amortized cost or original cost plus accrued interest, both of which approximate current value. FOREIGN CURRENCY TRANSLATION. The accounting records of the funds are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing rates of exchange at period end. Income receipts and expense payments are translated into U.S. dollars at the prevailing exchange rate on the respective dates of the transactions. Purchases and sales of securities are translated into U.S. dollars at the contractual currency exchange rates established at the time of each trade. Net realized gains and losses on foreign currency transactions represent net gains and losses from sales and maturities of forward currency contracts, disposition of foreign currencies, and the difference between the amount of net investment income accrued and the U.S. dollar amount actually received. The effects of changes in foreign currency exchange rates on investments in securities are included with the net realized and unrealized gain or loss on investment securities. INCOME TAXES. Growth & Income intends to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code. As qualified regulated investment companies under Subchapter M of the Internal Revenue Code, each fund is not subject to U.S. federal income taxes to the extent that it distributes substantially all of its taxable income for the fiscal year. Each fund may be subject to foreign taxes on income and gains on investments which are accrued based upon each fund's understanding of the tax rules and regulations that exist in the markets in which they invest. Each fund accrues such taxes as applicable. The schedules of investments include information regarding income taxes under the caption "Income Tax Information." INVESTMENT INCOME: MONEY MARKET PORTFOLIO. Interest income, which includes amortization of premium and accretion of discount, is accrued as earned. INVESTMENT GRADE BOND, HIGH INCOME, ASSET MANAGER, BALANCED, ASSET MANAGER: GROWTH, EQUITY-INCOME, INDEX 500, GROWTH OPPORTUNITIES, GROWTH & INCOME, CONTRAFUND, GROWTH AND OVERSEAS PORTFOLIOS. Dividend income is recorded on the ex-dividend date, except certain dividends from foreign securities where the ex- dividend date may have passed, are recorded as soon as the funds are informed of the ex-dividend date. Non-cash dividends included in dividend income, if any, are recorded at the fair market value of the securities received. Interest income, which includes accretion of original issue discount, is accrued as earned. Investment income is recorded net of foreign taxes withheld where recovery of such taxes is uncertain. EXPENSES. Most expenses of each trust can be directly attributed to a fund. Expenses which cannot be directly attributed are apportioned between the funds in the trust. DISTRIBUTIONS TO SHAREHOLDERS. Dividends are declared daily and paid monthly from net interest income for the Money Market Portfolio. Distributions are recorded on the ex-dividend date for all other funds. Certain foreign currency gains (losses), if applicable, are taxable as ordinary income and, therefore, increase (decrease) taxable ordinary income available for distributions. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences, which may result in distribution reclassifications, are primarily due to differing treatments for litigation proceeds, paydown gains/losses on certain securities, futures and options transactions, defaulted bonds, foreign currency transactions, passive foreign investment companies (PFIC), market discount, partnerships, non-taxable dividends, capital loss carryforwards, losses deferred due to wash sales and excise tax regulations. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to paid in capital. Undistributed net investment income and accumulated undistributed net realized gain (loss) on investments and foreign currency transactions may include temporary book and tax basis differences which will reverse in a subsequent period. Any taxable income or gain remaining at fiscal year end is distributed in the following year. SECURITY TRANSACTIONS. Security transactions are accounted for as of trade date. Gains and losses on securities sold are determined on the basis of identified cost. 2. OPERATING POLICIES. FOREIGN CURRENCY CONTRACTS. Certain funds generally use foreign currency contracts to facilitate transactions in foreign-denominated securities. Losses may arise from changes in the value of the foreign currency or if the counterparties do not perform under the contracts' terms. The U.S. dollar value of foreign currency contracts is determined using contractual currency exchange rates established at the time of each trade. The cost of the foreign currency contracts is included in the cost basis of the associated investment. 2. OPERATING POLICIES - CONTINUED JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the Securities and Exchange Commission (the SEC), the funds, along with other affiliated entities of Fidelity Management & Research Company (FMR), may transfer uninvested cash balances into one or more joint trading accounts. These balances are invested in one or more repurchase agreements for U.S. Treasury or Federal Agency obligations. REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency Securities are transferred to an account of the funds, or to the Joint Trading Account, at a bank custodian. The securities are marked-to-market daily and maintained at a value at least equal to the principal amount of the repurchase agreement (including accrued interest). FMR, the funds' investment adviser, is responsible for determining that the value of the underlying securities remains in accordance with the market value requirements stated above. DELAYED DELIVERY TRANSACTIONS. Each fund may purchase or sell securities on a delayed delivery basis. Payment and delivery may take place a month or more after the date of the transaction. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. The market values of the securities purchased or sold on a delayed delivery basis are identified as such in each applicable fund's schedule of investments. Each fund may receive compensation for interest forgone in the purchase of a delayed delivery security. With respect to purchase commitments, the fund identifies securities as segregated in its custodial records with a value at least equal to the amount of the commitment. Losses may arise due to changes in the market value of the underlying securities or if the counterparty does not perform under the contract. INTERFUND LENDING PROGRAM. Pursuant to an Exemptive Order issued by the SEC, the funds, along with other registered investment companies having management contracts with FMR, may participate in an interfund lending program. This program provides an alternative credit facility allowing the funds to borrow from, or lend money to, other participating funds. FUTURES CONTRACTS. Certain funds may use futures contracts to manage their exposure to the stock and bond markets and to fluctuations in interest rates and currency values. Buying futures tends to increase a fund's exposure to the underlying instrument, while selling futures tends to decrease a fund's exposure to the underlying instrument or hedge other fund investments. Futures contracts involve, to varying degrees, risk of loss in excess of the futures variation margin reflected in each applicable fund's Statement of Assets and Liabilities. The underlying face amount at value of any open futures contracts at period end is shown in each applicable fund's schedule of investments under the caption "Futures Contracts." This amount reflects each contract's exposure to the underlying instrument at period end. Losses may arise from changes in the value of the underlying instruments, if there is an illiquid secondary market for the contracts, or if the counterparties do not perform under the contracts' terms. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. RESTRICTED SECURITIES. Each fund is permitted to invest in securities that are subject to legal or contractual restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are registered. Disposal of these securities may involve time-consuming negotiations and expense, and prompt sale at an acceptable price may be difficult. At the end of the period, restricted securities (excluding 144A issues) amounted to $10,000,000, $3,505,987, $1,696,288 and $202,398 or 0.9%, 0.2%, 0.0% and 0.1% of net assets of the Money Market, High Income, Asset Manager and Asset Manager: Growth Portfolios, respectively. 3. PURCHASES AND SALES OF INVESTMENTS. Information regarding purchases and sales of securities (other than short-term securities) and the market value of future contracts opened and closed is included under the caption "Other Information" at the end of each applicable fund's schedule of investments. 4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES. MANAGEMENT FEE. As each fund's investment adviser, FMR receives a monthly fee. For the Money Market Portfolio, FMR receives a monthly fee that is calculated on the basis of a basic fund fee rate of .03% of the fund's average net assets, plus a fixed income group fee rate and an income-based fee. The group fee rate is the weighted average of a series of rates ranging from .1100% to .3700% and is based on the monthly average net assets of all the mutual funds advised by FMR. In the event that these rates were lower than the contractual rates in effect during the period, FMR voluntarily implemented the above rates, as they resulted in the same or a lower management fee. The income-based fee is added only when the fund's gross yield exceeds 5%. At that time the income-based fee would equal 6% of that portion of the fund's gross income that represents a gross yield of more than 5% per year. The maximum income-based component is 0.24% of average net assets. For the Index 500 Portfolio, FMR receives a fee that is computed at an annual rate of .28% of the fund's average net assets. For all other funds, FMR receives a monthly fee that is calculated on the basis of a group fee rate plus a fixed individual fund fee rate applied to the average net assets of the fund. The group fee rate is the weighted average of a series of rates and is based on the monthly average net assets of all the mutual funds advised by FMR. The rates ranged from .1100% to .3700% for the Investment Grade Bond and High Income Portfolios and .2500% to .5200% for 4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED MANAGEMENT FEE - CONTINUED the Asset Manager, Balanced, Asset Manager: Growth, Equity-Income, Growth & Income, Growth Opportunities, Contrafund, Growth and Overseas Portfolios for the period. In the event that these rates were lower than the contractual rates in effect during the period, FMR voluntarily implemented the above rates, as they resulted in the same or a lower management fee. The annual individual fund fee rates are .30% for Investment Grade Bond, Asset Manager: Growth, Growth Opportunities, Contrafund and Growth and, .45% for High Income and Overseas, .25% for Asset Manager, .15% for Balanced, and .20% for Equity-Income and Growth & Income Portfolios. For the period, each funds' management fee was equivalent to the following annualized rates expressed as a percentage of average net assets: Money Market .21% Investment Grade Bond .44% High Income .60% Asset Manager .56% Balanced .46% Asset Manager: Growth, Growth Opportunities, Contrafund, Growth .61% Equity-Income .51% Growth & Income .50% Index 500 .28% Overseas .76% SUB-ADVISER FEE. As the Money Market Portfolio's investment sub-adviser, FMR Texas Inc., a wholly owned subsidiary of FMR, receives a fee from FMR of 50% of the management fee payable to FMR. The fee is paid prior to any voluntary expense reimbursements which may be in effect. FMR, on behalf of the High Income, Asset Manager, Balanced, Asset Manager: Growth, Growth & Income, Growth Opportunities, Contrafund and Overseas Portfolios, entered into sub-advisory agreements with Fidelity Management & Research (U.K.) Inc., Fidelity Management & Research (Far East) Inc., and with respect only to Overseas Portfolio, Fidelity International Investment Advisors (FIIA). In addition, FIIA entered into a sub-advisory agreement with its subsidiary, Fidelity International Investment Advisors (U.K.) Limited (FIIAL U.K.). Under the sub-advisory arrangements, FMR may receive investment advice and research services and may grant the sub-advisers investment management authority to buy and sell securities. FMR pays its sub-advisers either a portion of its management fee or a fee based on costs incurred for these services. FIIA pays FIIAL U.K. a fee based on costs incurred for either service. TRANSFER AGENT FEES. Fidelity Investments Institutional Operations Company (FIIOC), an affiliate of FMR, is the funds' transfer, dividend disbursing and shareholder servicing agent. FIIOC receives account fees and asset-based fees that vary according to account size and type of account. FIIOC pays a portion of the expenses related to the typesetting, printing and mailing of shareholder reports, except proxy statements. For the period, each funds' transfer agent fees was equivalent to the following annualized rates expressed as a percentage of average net assets: Money Market, High Income, .07 Asset Manager, Balanced, Equity-Income, % Growth Opportunities, Contrafund, Growth and Overseas Investment Grade Bond, Asset Manager: .08 Growth, Growth & Income and Index 500 % ACCOUNTING FEES. Fidelity Service Company Inc., an affiliate of FMR, maintains the funds' accounting records. The fee is based on the level of average net assets for the month plus out-of-pocket expenses. BROKERAGE COMMISSIONS. Certain funds placed a portion of their portfolio transactions with brokerage firms which are affiliates of FMR. The commissions paid to these affiliated firms are shown under the caption "Other Information" at the end of each applicable fund's schedule of investments. 5. EXPENSE REDUCTIONS. FMR voluntarily agreed to reimburse the Index 500 fund's operating expenses (excluding interest, taxes, brokerage commissions and extraordinary expenses) above an annual rate of .28% of average net assets. FMR has directed certain portfolio trades to brokers who paid a portion of certain funds' expenses. In addition, certain funds have entered into arrangements with their custodian and transfer agent whereby credits realized on uninvested cash balances were used to offset a portion of certain funds' expenses. For the period, the reductions under these arrangements are shown under the caption "Other Information" on each applicable fund's Statement of Operations. 6. INTERFUND LENDING PROGRAM. Contrafund Portfolio participated in the interfund lending program as a lender. The maximum loan and the average daily loan balances during the period for which loans were outstanding amounted to $36,999,000 and $17,934,833, respectively. The weighted average interest rate was 5.42%. Interest earned from the interfund lending program amounted to $16,203 and is included in interest income on the Statement of Operations. 7. BENEFICIAL INTEREST. At the end of the period, Fidelity Investments Life Insurance Company and its subsidiaries, affiliates of FMR, were the record owners of more than 5% of the outstanding shares and certain unaffiliated insurance companies were record owners of 10% or more of the total outstanding shares of the following funds: FILI UNAFFILIATED INSURANCE COMPANIES FUND % OF OWNERSHIP # OF % OF OWNERSHIP Money Market 50 1 11 Investment Grade Bond 35 1 11 High Income 14 2 57 Asset Manager 20 3 49 Balanced 23 1 76 Asset Manager: Growth 76 - - Equity-Income 20 1 29 Growth & Income 90 - - Index 500 44 1 10 Growth Opportunities 28 1 71 Contrafund 37 2 35 Growth 15 1 28 Overseas 15 1 36 8. TRANSACTIONS WITH AFFILIATED COMPANIES. An affiliated company is a company in which the fund has ownership of at least 5% of the voting securities. Information regarding transactions with affiliated companies is included in the "Legend" at the end of each applicable fund's schedule of investments. 9. ASSET TRANSFER INFORMATION. In September 1996, the Board of Trustees approved a proposal to liquidate Money Market Fund, Government Investment Fund, High Yield Fund, and Overseas Fund of the Fidelity Advisor Annuity Fund trust, and to transfer the assets of those funds to Money Market Portfolio, Investment Grade Bond Portfolio, High Income Portfolio, and Overseas Portfolio, respectively. The liquidation and transfer of assets was completed on March 14, 1997. VALUE OF FUND ASSETS TRANSFERRED SHARES EACH SHARE Money Market Fund $27,320,971 27,320,971 $ 1.00 Investment Grade Portfolio $19,784,453 1,717,566 $ 11.52 High Income Portfolio $91,391,383 7,733,642 $ 11.82 Overseas Portfolio $46,754,098 2,644,463 $ 17.68 INVESTMENT ADVISER Fidelity Management & Research Company Boston, MA INVESTMENT SUB-ADVISERS FMR Texas Inc., Irving, TX MONEY MARKET PORTFOLIO Fidelity Management & Research (U.K.) Inc., London, England HIGH INCOME, ASSET MANAGER, ASSET MANAGER: GROWTH, CONTRAFUND, BALANCED, GROWTH OPPORTUNITIES, GROWTH & INCOME AND OVERSEAS PORTFOLIOS Fidelity Management & Research (Far East) Inc., Tokyo, Japan HIGH INCOME, ASSET MANAGER, ASSET MANAGER: GROWTH, CONTRAFUND, BALANCED, GROWTH OPPORTUNITIES, GROWTH & INCOME AND OVERSEAS PORTFOLIOS Fidelity International Investment Advisors Pembroke, Bermuda OVERSEAS PORTFOLIO Fidelity International Investment Advisors (U.K.) Limited Kent, England OVERSEAS PORTFOLIO OFFICERS Edward C. Johnson 3d, PRESIDENT Robert C. Pozen, SENIOR VICE PRESIDENT Abigail Johnson, VICE PRESIDENT - GROWTH, CONTRAFUND AND GROWTH OPPORTUNITIES PORTFOLIOS Richard A. Spillane, Jr., VICE PRESIDENT - EQUITY INCOME, OVERSEAS, BALANCED AND GROWTH & INCOME PORTFOLIOS William J. Hayes, VICE PRESIDENT Fred L. Henning, Jr., VICE PRESIDENT - HIGH INCOME, INVESTMENT GRADE BOND, ASSET MANAGER AND ASSET MANAGER: GROWTH PORTFOLIOS Robert A. Lawrence, VICE PRESIDENT - INVESTMENT GRADE BOND, INDEX 500, ASSET MANAGER, ASSET MANAGER: GROWTH AND HIGH INCOME PORTFOLIOS Barry J. Coffman, VICE PRESIDENT - HIGH INCOME PORTFOLIO William Danoff, VICE PRESIDENT - CONTRAFUND PORTFOLIO Bettina Doulton, VICE PRESIDENT - BALANCED PORTFOLIO Jennifer Farrelly, VICE PRESIDENT - INDEX 500 PORTFOLIO Kevin E. Grant, VICE PRESIDENT - INVESTMENT GRADE BOND AND BALANCED PORTFOLIOS Richard C. Habermann, VICE PRESIDENT - ASSET MANAGER AND ASSET MANAGER: GROWTH PORTFOLIOS Robert K. Duby, VICE PRESIDENT - MONEY MARKET PORTFOLIO Richard M. Mace, Jr., VICE PRESIDENT - OVERSEAS PORTFOLIO Charles S. Morrison, VICE PRESIDENT - ASSET MANAGER AND ASSET MANAGER: GROWTH PORTFOLIOS Stephen Petersen, VICE PRESIDENT - EQUITY INCOME Beth Terrana, VICE PRESIDENT - GROWTH & INCOME PORTFOLIO John Todd, VICE PRESIDENT - ASSET MANAGER AND ASSET MANAGER: GROWTH PORTFOLIOS Jennifer Uhrig, VICE PRESIDENT - GROWTH OPPORTUNITIES PORTFOLIO George Vanderheiden, VICE PRESIDENT - ASSET MANAGER, ASSET MANAGER: GROWTH AND GROWTH OPPORTUNITIES PORTFOLIOS Sarah H. Zenoble, VICE PRESIDENT - MONEY MARKET PORTFOLIOS Thomas D. Maher, ASSISTANT VICE PRESIDENT - MONEY MARKET PORTFOLIO Arthur S. Loring, SECRETARY Richard A. Silver, TREASURER Boyce Greer, VICE PRESIDENT - MONEY MARKET PORTFOLIO Robert H. Morrison, MANAGER, SECURITY TRANSACTIONS John H. Costello, ASSISTANT TREASURER Leonard M. Rush, ASSISTANT TREASURER Thomas J. Simpson, ASSISTANT TREASURER - MONEY MARKET PORTFOLIO BOARD OF TRUSTEES Robert C. Pozen ** Ralph F. Cox * Phyllis Burke Davis * Robert M. Gates ** Edward C. Johnson 3d E. Bradley Jones * Donald J. Kirk * Peter S. Lynch Marvin L. Mann * William O. McCoy * Gerald C. McDonough * Thomas R. Williams * GENERAL DISTRIBUTOR Fidelity Distributors Corporation Boston, MA TRANSFER AND SHAREHOLDER SERVICING AGENT Fidelity Investments Institutional Operations Co., Inc. Boston, MA CUSTODIAN The Bank of New York, New York, NY MONEY MARKET, INVESTMENT GRADE BOND AND HIGH INCOME PORTFOLIOS The Chase Manhattan Bank, New York, NY EQUITY-INCOME, ASSET MANAGER, ASSET MANAGER: GROWTH, GROWTH & INCOME, BALANCED AND OVERSEAS PORTFOLIOS Brown Brothers Harriman & Co., Boston, MA GROWTH, GROWTH OPPORTUNITIES, CONTRAFUND AND INDEX 500 PORTFOLIOS * INDEPENDENT TRUSTEES ** BALANCED, GROWTH & INCOME AND GROWTH OPPORTUNITIES PORTFOLIOS ONLY -----END PRIVACY-ENHANCED MESSAGE-----