FIDELITY REAL ESTATE HIGH INCOME FUND III INC, N-2, 1995-11-09

FIDELITY REAL ESTATE HIGH INCOME FUND III INC
N-2, 1995-11-09

Previous: FIDELITY REAL ESTATE HIGH INCOME FUND III INC, N-8A, 1995-11-09

Next: OLD MUTUAL SOUTH AFRICA EQUITY TRUST, N-8A, 1995-11-09

As filed with the Securities and Exchange Commission on November 9, 1995
1933 Act File No. 33-_____
1940 Act File No. 811-____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM N-2
(CHECK APPROPRIATE BOX OR BOXES)
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. __
Post-Effective Amendment No. __
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. __
FIDELITY REAL ESTATE HIGH INCOME FUND III, INC.
Exact Name of Registrant as Specified in Charter
82 DEVONSHIRE STREET, BOSTON, MASSACHUSETTS 02109
Address of Principal Executive Offices (Number, Street, City, State, Zip
Code)
1-800-________
Registrant's Telephone Number, including Area Code
____________________
ARTHUR S. LORING, ESQUIRE
FIDELITY REAL ESTATE HIGH INCOME FUND III, INC.
82 DEVONSHIRE STREET (F5C)
BOSTON, MASSACHUSETTS 02109
Name and Address (Number, Street, City, State, Zip Code) of Agent for
Service
WITH A COPY TO:
STUART E. FROSS, ESQUIRE
FIDELITY MANAGEMENT & RESEARCH COMPANY
82 DEVONSHIRE STREET (F5H)
BOSTON, MASSACHUSETTS 02109
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this Registration Statement.
____________________
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis in reliance on Rule 415 under the Securities
Act of 1933, other than securities offered in connection with a dividend
reinvestment plan, check the following box.
____________________
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Title of Securities Being Amount Being Proposed Maximum Proposed Maximum Amount of
Registered Registered Offering Price Aggregate Offering Price Registration Fee (2)
Per Share (1) (1)

Shares: $.001 par value 200,000 shares $10.00 $2,000,000 $1,690

</TABLE>

(1) Estimated solely for purposes of calculating the registration fee.
(2) Includes $1,000 registration fee under the Investment Company Act of
1940.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.

FIDELITY REAL ESTATE HIGH INCOME FUND III, INC.
CROSS REFERENCE SHEET
PURSUANT TO RULE 495(A)
ITEM NUMBER OF FORM N-2
PART A LOCATION OR HEADING IN PROSPECTUS
1. Outside Front Cover Outside Front Cover Page
2. Inside Front and Outside
Back Cover Page Inside Front Cover Page; Outside Back Cover Page
3. Fee Table and Synopsis Fund Expenses
4. Financial Highlights Not applicable
5. Plan of Distribution How to Purchase Shares of the Fund
6. Selling Shareholders Not applicable
7. Use of Proceeds Use of Proceeds; Investment Principles and Risks
8. General Description of the Registrant Cover Page; The Fund; Investment
Principles and Risks; Description of Capital Stock
9. Management The Fund; Management of the Fund
10. Capital Stock, Long-Term Debt
and Other Securities Description of Capital Stock; Dividends and
Distributions; Liquidation of the Fund
11. Defaults and Arrears on Senior
Securities Not applicable
12. Legal Proceedings Not applicable
13. Table of Contents of the Statement
of Additional Information Table of Contents of the Statement of
Additional Information

PART B LOCATION OF HEADING IN SAI
14. Cover Page Cover Page
15. Table of Contents Cover Page
16. General Information and History Not Applicable
17. Investment Objective and Policies Investment Policies and
Limitations; Fund Maturity and Turnover
18. Management Directors and Officers
19. Control Persons and Principal Holders
of Securities Directors and Officers
20. Investment Advisory and Other Services FMR; Management Contract;
Description of the Fund
21. Brokerage Allocation and Other Practices Contracts with Companies
Affiliated with FMR; Fund Transactions
22. Tax Status Taxation
23. Financial Statements Financial Statements

Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell
nor the solicitation of an offer to buy nor shall there be any sale of
these securities in any State in which such offer, solicitation or sale
would be unlawful prior to registration or qualification under the
securities laws of any such State.
PROSPECTUS
SUBJECT TO COMPLETION, DATED NOVEMBER 9, 1995
FIDELITY REAL ESTATE HIGH INCOME FUND III, INC.
200,000 SHARES OF COMMON STOCK
________________
The Fidelity Real Estate High Income Fund III, Inc. (the "Fund") is a
non-diversified, closed-end management investment company. The Fund's
investment objective is to seek high current income by investing primarily
in commercial mortgage-backed securities. The Fund's investment adviser is
Fidelity Management & Research Company ("FMR"). Shares of the Fund's
common stock, $.001 par value per share ("Shares"), are offered to banks
and trust institutions that invest for their own accounts or for accounts
of their customers, retirement plan sponsors and similar institutional
investors. The Fund may invest without limitation in lower-quality debt
securities, sometimes referred to as "junk bonds." These securities are
regarded as predominantly speculative with respect to capacity to pay
interest and repay principal. INVESTMENT IN THE FUND ENTAILS SUBSTANTIAL
RISKS AND NO ASSURANCE CAN BE GIVEN THAT THE FUND WILL ACHIEVE ITS
INVESTMENT OBJECTIVE.
The Fund is offering its Shares through Fidelity Distributors Corporation
("FDC"). There is no initial sales charge on purchases of Shares. The
minimum initial investment is $5,000,000. See "How to Purchase Shares of
the Fund." The Fund has registered 200,000 Shares for sale under the
Registration Statement to which this Prospectus relates. The Fund expects
to incur approximately $45,000 in expenses in connection with the offering
of the Shares. A portion of such expenses will be charged as operating
expenses during the first fiscal period and the remainder will be amortized
over a period of not more than 48 months.
The Fund does not intend to list the Shares on any national securities
exchange, and neither the Fund, FMR nor FDC intends to make a secondary
market in the Shares at any time. Accordingly, there is not expected to be
any secondary trading market in the Shares. An investment in the Shares
should be considered illiquid. The Fund expects to liquidate on the fourth
anniversary following the commencement of operations, and the Board of
Directors of the Fund may authorize the Fund to make liquidating
distributions after three years of operations.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
<S> <C> <C> <C>
PRICE TO PUBLIC SALES LOAD ESTIMATED
PROCEEDS
TO FUND (1)

Per Share ................................. $---- None $----

Total........................................ $---- None $----

</TABLE>

(1) Before deduction of offering expenses incurred by the Fund,
estimated at $45,000. Assumes all shares are sold at the Offering Price.
This Prospectus sets forth concisely information about the Fund that a
prospective investor ought to know before investing. Prospective investors
should carefully review the information set forth in this Prospectus and
should retain this Prospectus for future reference. A Statement of
Additional Information ("SAI") dated ___________ ___, 1995 has been filed
with the Securities and Exchange Commission ("SEC") and can be obtained
without charge by calling 1-617-563-6414. A table of contents to the
Statement of Additional Information is located at page __ of this
Prospectus. This Prospectus incorporates by reference the entire Statement
of Additional Information.
_______________________________
THE DATE OF THIS PROSPECTUS IS _______, 1995.

TABLE OF CONTENTS
FUND EXPENSES 3
THE FUND 4
USE OF PROCEEDS 4
MANAGEMENT OF THE FUND 4
Board of Directors 4
FMR and Its Affiliates 4
Management Fee 5
Mortgage-Backed Securities Generally 6
Commercial Mortgage-Backed Securities 7
Residential Mortgage-Backed Securities 8
Mortgage-Related Securities Issued by U.S. Government Agencies and
Instrumentalities 8
Private Mortgage Pass-Through Securities 9
Adjustable Rate Mortgage Securities 9
Collateralized Mortgage Obligations and Multi-Class Pass-Through
Securities 9
Stripped Mortgage-Backed Securities 9
Lower Rated and Non-Rated Lower Quality Debt Securities 9
Other Securities 10
Fundamental Investment Policies and Restrictions 11
HOW TO PURCHASE SHARES OF THE FUND 11
LIQUIDATION OF THE FUND 12
PERFORMANCE 13
TAXATION 13
DESCRIPTION OF CAPITAL STOCK 14
DETERMINATION OF NET ASSET VALUE 14
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN 14
REPORTS TO SHAREHOLDERS 15
CERTAIN LEGAL MATTERS 15
INVESTMENT POLICIES AND LIMITATIONS B-2
UNTIL , 1995, ALL DEALERS EFFECTING
TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION
TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
FUND EXPENSES
The following tables are intended to assist investors in understanding the
various costs and expenses directly or indirectly associated with investing
in the Fund.
Shareholder Transaction Expenses
Sales Load (as a percentage of offering price) None
Dividend Reinvestment Plan Fees None
Annual OPERATING Expenses (as a percentage of net assets
attributable to Common Shares)
Management Fees ___%
Other Expenses ___%
Total Annual Fund Operating Expenses ___%
EXAMPLE:
An investor would pay the following expenses on a $1,000 investment in the
Fund, assuming a 5% annual return:
One Year Three Years Five Years Ten Years
This "Example" assumes that all dividends and other distributions are
reinvested at net asset value and that the percentage amounts listed under
Total Annual Expenses remain the same in the years shown except, as to the
Three, Five and Ten Year periods, for the completion of organization
expense amortization. The above tables and the assumptions in the
Example of a 5% annual return and reinvestment at net asset value are
required by regulation of the Securities and Exchange Commission ("SEC");
the assumed 5% annual return is not a prediction of, and does not
represent, the projected or actual performance of the Fund's Shares.
This Example should not be considered a representation of future
expenses, and the Fund's actual expenses may be more or less than those
shown.
THE FUND
Fidelity Real Estate High Income Fund III, Inc. (the "Fund") is a
non-diversified, closed-end management investment company which was
organized as a Maryland corporation on August , 1995. The
Fund is offering its Shares through Fidelity Distributors Corporation
("FDC"). The Fund's principal office is located at 82 Devonshire
Street, Boston, Massachusetts 02109, and its telephone number is
1-800-___-____.
The Fund does not intend to list the Shares for trading on any national
securities exchange, and neither the Fund, FMR nor FDC intends to make a
secondary trading market in the Shares. An investment in the Shares
should be considered illiquid. On the fourth anniversary of the
Fund's commencement of operations, the Fund will be liquidated and all
Shares will be cancelled and redeemed at the current net asset value per
share, unless the Board of Directors deems it advisable to commence the
liquidation of the Fund by making liquidating distributions after the third
anniversary following the Fund's commencement of operations. See
"Liquidation of the Fund."
The Fund is designed for those who seek high current income, with
some potential for capital growth, from a portfolio of lower-quality,
high-yielding commercial mortgage-backed securities and other mortgage and
real estate-related securities.
Shares of the Fund are offered to banks and trust institutions
investing for their own accounts or for accounts of their customers;
retirement plan sponsors; and similar institutional customers. The
Fund's level of risk and potential reward depend on the quality and
maturity of its investments and is closely tied to economic
developments in the real estate industry. Since the Fund
invests in commercial mortgage-backed securities and other mortgage and
real estate-related securities, including lower-quality securities, the
Fund has the potential for higher yields, and also carries a higher
degree of risk than funds that invest in higher-quality portfolios.
The Fund may be appropriate for aggressive institutional investors
who understand the potential risks and rewards of investing in commercial
mortgage-backed securities and other mortgage and real
estate-related securities, including lower-quality securities and
who are willing to accept the greater price movements and credit
risks of these securities.
The value of the Fund's investments and the income it generates vary
from day to day, and generally reflect interest rates, market conditions,
and other economic and political news. Some of the Fund's
investments may also be subject to maturity extensions or
prepayments, which can lower or raise the Fund's returns,
particularly in periods of declining interest rates. When you sell your
shares, they may be worth more or less than what you paid for them. By
itself, the Fund does not constitute a balanced investment plan.
USE OF PROCEEDS
The proceeds of the offering of Shares, net of organizational and offering
expenses estimated to be $45,000, will be invested by the Fund in
accordance with the Fund's investment objective and policies. It is
anticipated that it may take up to eight months from the receipt of
offering proceeds for the Fund to be fully invested in accordance with its
objective and policies. During the interim period, the proceeds
will be invested in U.S. Government securities (which include obligations
of the United States Government and its agencies and instrumentalities) and
high-quality, short-term money market instruments.
MANAGEMENT OF THE FUND

REAL ESTATE HIGH INCOME FUND III IS A FUND: an investment that pools
shareholders' money and invests it toward a specified goal. The Fund
is currently a non-diversified fund, a closed-end management
investment company organized as a Maryland business
corporation on August , 1995.
BOARD OF DIRECTORS
Management of the Fund, including general supervision of the duties
performed by FMR, is the responsibility of the Fund's Board of Directors.
THE FUND MAY HOLD SPECIAL MEETINGS AND MAIL PROXY MATERIALS.
These meetings may be called to elect or remove Directors, change
fundamental policies, approve a management contract, or for other purposes.
Shareholders not attending these meetings are encouraged to vote by proxy.
The Fund will mail proxy materials in advance, including a voting
card and information about the proposals to be voted on. You are entitled
to one vote for each share you own.
FMR AND ITS AFFILIATES
Fidelity Investments is one of the largest investment management
organizations in the United States and has its principal business address
at 82 Devonshire Street, Boston, Massachusetts. It includes a number of
different subsidiaries and divisions which provide a variety of financial
services and products. The Fund employs various Fidelity companies
to perform activities required for its operation.
The Fund is managed by FMR, which chooses the Fund's
investments and handles its business affairs.
As of ________, 1995, FMR advised funds having approximately ___ million
shareholder accounts with a total value of more than $___ billion.
Mark P. Snyderman is manager of Fidelity Real Estate High
Income Fund III, Inc. He also manages Fidelity Real Estate High
Income Fund and Fidelity Real Estat High Income Fund II.
He joined Fidelity in May of 1994 as an investment officer for commercial
mortgage-backed securities. Previously, he was director and business head
for Aldrich, Eastman & Waltch, a real estate investment advisory firm
located in Boston, MA.
Fidelity investment personnel may invest in securities for their own
account pursuant to a code of ethics that establishes procedures for
personal investing and restricts certain transactions.
FDC distributes and markets the Fund. Fidelity Investments
Institutional Operations Company ("FIIOC") performs transfer
agency servicing functions for the Fund.
FMR Corp. is the ultimate parent company of FMR. Members of the
Edward C. Johnson 3d family are the predominant owners of a class of shares
of common stock representing approximately 49% of the voting power of FMR
Corp. Under the Investment Company Act of 1940 (the "1940 Act"),
control of a company is presumed where one individual or group of
individuals owns more than 25% of the voting stock of that company;
therefore, the Johnson family may be deemed under the 1940 Act to form a
controlling group with respect to FMR Corp.
To carry out the Fund's transactions, FMR may use its broker-dealer
affiliates, provided that the Fund receives services and
commission rates comparable to those of other broker-dealers.
MANAGEMENT FEE
The Fund pays a management fee to FMR for managing its investments and
business affairs; FMR in turn may pay fees to affiliates who provide
assistance with these services.
The management fee is calculated and paid to FMR every month. The
fee is calculated by adding a group fee rate to an individual fund fee
rate, and multiplying the result by the Fund's monthly average net assets.
The group fee rate is base on the combined average net assets of the Fund
and all the mutual funds advised by FMR. This rate cannot rise
above .52%, and drops as total assets under management increase.
For __________, 1995, the group fee rate was .1507%. The individual
fund fee rate is .60%. The total management fee rate will be
approximately .75%.
FIIOC performs transfer agency, dividend disbursing and shareholder
servicing functions for the Fund. Fidelity Service Co. calculates
the Fund's net asset value ("NAV") and dividends for the Fund, maintains
the Fund's general accounting records and administers the Fund's securities
lending program. The Fund pays FIIOC a fee for these services.
The Fund pays fees related to its daily operation. Expenses paid
out of the Fund's assets are reflected in its per share net asset value or
dividends; they are neither billed directly to shareholders nor deducted
from shareholder accounts.
FMR may, from time to time, agree to reimburse the Fund for management
fees and other expenses above a specified limit. FMR retains the
ability to be repaid by the Fund if expenses fall below the specified limit
prior to the end of the fiscal year. Reimbursement arrangements,
which may be terminated at any time without notice, can decrease the Fund's
expenses and enhance its performance.
INVESTMENT PRINCIPLES AND RISKS
The Fund seeks a high level of current income. The Fund will normally
invest so that at least 65% of its total assets will be invested in
lower-quality real estate debt securities, including commercial
mortgage-backed securities and other mortgage and real estate-related
securities. When consistent with its goal, the Fund may also
consider the potential for capital gain.
The Fund's investments in real estate-related instruments generally
are sensitive to factors such as changes in real estate values and property
taxes, interest rates, cash flow of underlying real estate assets,
overbuilding, extended vacancies of properties and the management skill and
creditworthiness of the issuer. Real estate-related instruments may also be
affected by tax and regulatory requirements, such as those relating to
zoning and the environment. In addition, commercial mortgage-backed
securities are subject to risks affecting the ability of mortgagors to meet
their payment obligations, as well as the unique interest rate and payment
priority characteristics of a particular investment. The market for
commercial mortgage-backed securities is relatively new.
The Fund's yield and share price will change based on changes in
interest rates, market conditions, and other political and economic news
and on the quality and maturity of its investments. In general, bond prices
rise when interest rates fall, and vice versa. FMR may use various
investment techniques to hedge the Fund's risks, but there is no
guarantee that these strategies will work as intended. It is important to
note that the Fund is not guaranteed. When you sell your shares,
they may be worth more or less than what you paid for them.
FMR normally invests the Fund's assets according to its investment
strategy. The Fund also reserves the right to invest without
limitation in investment-grade debt or investment-grade money market
instruments for temporary, defensive purposes.
SECURITIES AND INVESTMENT PRACTICES
The following pages contain more detailed information about types of
instruments in which the Fund may invest, and strategies FMR may
employ in pursuit of the Fund's investment objective. A summary of
risks and restrictions associated with these instrument types and
investment practices is included as well. A complete listing of the
Fund's policies and limitations and more detailed information about
the Fund's investments are contained in the Fund's
SAI. Policies and limitations are considered at the time of purchase; the
sale of instruments is not required in the event of a subsequent change in
circumstances.
FMR may not buy all of these instruments or use all of these techniques to
the full extent permitted unless it believes that doing so will help the
Fund achieve its goal. As a shareholder, you will receive financial
reports at least every six months detailing Fund holdings and
describing recent investment activities.
Under normal market conditions, the Fund will be substantially
fully invested in a portfolio of lower-quality, high yielding
commercial mortgage-backed securities. The Fund may also invest
in other real estate related securities, including residential
mortgage-backed securities, collateralized mortgage obligations,
regular interests in real estate mortgage investment conduits ("REMICs"),
adjustable rate mortgages, bank debt, real estate investment trusts,
equity securities, corporate debt securities, U.S. Treasury and agency
securities and a variety of money market instruments. The Fund may
invest without limitation in lower-rated securities and non-rated
securities of lower quality. Such securities are commonly referred to as
"junk bonds" and have a greater risk of default of principal and interest.
In determining which commercial mortgage-backed securities the
Fund will purchase, FMR will consider, among other factors, the
following: characteristics of the underlying mortgage loans, including
loan-to-value and debt service coverage ratios, loan seasoning and
refinancing risk; characteristics of the underlying property, including
diversity of the loan pool, tenant occupancy and leasing, and
competitiveness in the pertinent market; economic, environmental and local
considerations; deal structure, including historical performance of the
originator, subordination percentages and other credit enhancement
features; and structural participants such as administrators and servicers.
In addition to examining the relative value of the investments, FMR may
interact with rating agencies, review due diligence by underwriters and
rating agencies, and confirm debt service coverage ratios and security cash
flows. FMR will select investments that vary by underlying property types,
geographic regions and industry exposure.
MORTGAGE-BACKED SECURITIES are a form of asset-backed security that
are interests in pools of commercial or residential mortgages, and may
include complex instruments such as collateralized mortgage obligations and
stripped mortgage-backed securities. These interests may also include
mortgage pass-through securities, regular interests in REMICs or other
kinds of mortgage-backed securities. Mortgage-backed securities may be
issued by the government or by private entities. These securities are
subject to credit risks associated with the performance of the underlying
mortgage properties. Factors such as changes in consumer spending habits,
local economic and competitive conditions, tenant occupancy rates and
regulatory or zoning restrictions, or the loss of a major tenant may
adversely affect the economic viability of a mortgaged property. In
addition, these securities are subject to prepayment risk, although
commercial mortgages tend to have shorter maturities than residential
mortgages as well as prepayment protection features. Some securities may
have a structure that makes their reaction to interest rates and other
factors difficult to predict, making their value highly volatile.
COMMERCIAL MORTGAGE-BACKED SECURITIES, which are expected to constitute
all or substantially all of the Fund's assets, are generally multi-class
debt or pass-through securities backed by a mortgage loan or pool of
mortgage loans secured by commercial property, such as industrial and
warehouse properties, office buildings, retail space and shopping malls,
multifamily properties and cooperative apartments, hotels and motels,
nursing homes, hospitals, senior living centers and agricultural property.
The commercial mortgage loans that underlie commercial mortgage-backed
securities often have certain distinct characteristics. Commercial mortgage
loans are generally not fully amortizing. At their maturity date, repayment
of the remaining principal balance or "balloon" is due and the owners of
the underlying real estate must generally obtain a new loan or sell the
real estate to pay the remaining balance. Unlike most one to four family
residential mortgages, commercial real property loans often contain
provisions that substantially reduce the likelihood that such securities
will be prepaid. The provisions generally impose significant prepayment
penalties on loans and, in some cases there may be prohibitions on
principal prepayments for several years following origination. Assets
underlying commercial mortgage-backed securities may relate to only a few
properties or to a single property.
Commercial mortgage-backed securities have been issued in public and
private transactions by a variety of public and private issuers.
Non-governmental entities that have issued or sponsored commercial
mortgage-backed securities offerings include owners of commercial
properties, originators of and investors in mortgage loans, savings and
loan associations, mortgage banks, commercial banks, insurance companies,
investment banks and special purpose subsidiaries of the foregoing. The
Fund may from time to time purchase commercial mortgage-backed
securities directly from issuers in privately negotiated transactions or
from a holder of such commercial mortgage-backed securities in the
secondary market.
Commercial mortgage-backed securities generally are structured to provide
protection to the senior class investors against potential losses on the
underlying mortgage loans. This protection is generally provided by having
the holders of the subordinated class of securities, which may include the
Fund, take the first loss if there are defaults on the underlying
commercial mortgage loans. Other protection, which may benefit all of the
classes or particular classes, may include issuer guarantees,
reserve funds, additional subordinated securities, cross-collateralization,
and over-collateralization.
By adjusting the priority of interest and principal payments on each class
of a given commercial mortgage-backed security, issuers are able to issue
senior-investment grade securities and lower-rated or non-rated
subordinated securities tailored to meet the needs of sophisticated
institutional investors. In general, subordinated classes of commercial
mortgage-backed securities are entitled to receive repayment of principal
only after all required principal payments have been made to more senior
classes and have subordinate rights as to receipt of interest
distributions. Such subordinated classes are subject to a substantially
greater risk of nonpayment than are senior classes of commercial
mortgage-backed securities. Even within a class of subordinate securities,
most commercial mortgage-backed securities are structured with a hierarchy
of levels (or "loss positions"). Loss positions are the order in which
nonrecoverable losses of principal are applied to the securities within a
given structure. For instance, a first loss subordinate security will
absorb any principal losses before any higher loss position subordinate
security. This type of structure allows a number of classes of securities
to be created with varying degrees of credit exposure, prepayment exposure
and different levels of potential total return.
Subordinated classes of commercial mortgage-backed securities are
structured to absorb any credit-related losses prior to the senior class.
There are no limitations on the classes of commercial mortgage-backed
securities in which the Fund may invest. Accordingly, in certain
circumstances, because the Fund intends to invest in subordinated
classes of securities, if the underlying mortgage loan is not paid in full,
the Fund will recover proportionally less of its investment in a
commercial mortgage-backed security than the holders of more senior classes
of the same commercial mortgage-backed security.
The rating assigned to a given issue and class of commercial
mortgage-backed securities is a product of many factors, including the
structure of the security, the level of subordination, the quality and
adequacy of the collateral, and the past performance of the originators and
servicing companies. The rating of any commercial mortgage-backed security
is determined to a substantial degree by the debt service coverage ratio
(i.e., the ratio of current net operating income from the commercial
properties, in the aggregate, to the current debt service obligations on
the properties) and the loan-to-value ratio of the pooled properties. The
amount of the securities issued in any one rating category is determined by
the rating agencies after a credit rating process which includes analysis
of the issuer, servicer and property manager, as well as verification of
the loan-to-value and debt service coverage ratios. Loan-to-value ratios
may be particularly important in the case of commercial mortgages because
most commercial mortgage loans provide that the lender's sole remedy in the
event of a default is against the mortgaged property, and the lender is not
permitted to pursue remedies with respect to other assets of the borrower.
Accordingly, loan-to-value ratios may, in certain circumstances, determine
the amount realized by the holder of the commercial mortgage-backed
security in the event of default.
RESIDENTIAL MORTGAGE-BACKED SECURITIES are mortgage-backed
securities representing participation interests in pools of one to four
family residential mortgage loans originated by private mortgage
originators. Traditionally, residential mortgage-backed securities were
issued by governmental agencies such as the Federal National Mortgage
Association ("FNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC")
and the Government National Mortgage Association ("GNMA"). The Fund
may invest in mortgage securities issued by non-governmental
agencies as well as governmental agencies. Non-governmental entities that
have issued or sponsored residential mortgage-backed securities offerings
include savings and loan associations, mortgage banks, insurance companies,
investment banks and special purpose subsidiaries of the foregoing. Similar
to commercial mortgage-backed securities, residential mortgage-backed
securities have been issued using a variety of structures, including
multi-class structures featuring senior and subordinated classes. The
Fund does not currently intend to invest in residential
mortgage-backed securities, but may do so if suitable commmercial
mortgage-backed securities are not available. If purchased, these
residential mortgage-backed are expected to have similar credit and
cash flow characteristics as those of the commercial mortgage-backed
securities that the Fund expects to purchase.
Although one to four family residential loans do not typically have
prepayment penalties or restrictions, as commercial mortgage loans often
do, residential mortgage-backed securities are often structured so that
subordinated classes may be locked out of prepayments for a period of time.
However, in a period of extremely rapid prepayments, during which senior
classes may be retired faster than expected, the subordinated classes may
receive unscheduled payments of principal and would have average lives
that, while longer than the average lives of the senior classes, would be
shorter than originally expected.
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES include securities issued by GNMA, FNMA and FHLMC. The
U.S. Government or the issuing agency guarantees the payment of interest
and principal on these securities. However, the guarantees do not extend to
the securities' yield or value.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS PASS-THROUGH
SECURITIES. Collateralized mortgage obligations or "CMOs" are debt
obligations collateralized by mortgage loans or mortgage pass-through
securities. Typically, CMOs are collateralized by GNMA, FNMA or FHLMC
certificates, but also may be collateralized by whole loans or private
mortgage pass-through securities (collectively, "mortgage assets").
Multi-class pass-through securities are equity interests in a trust
composed of mortgage assets. Unless the context indicates otherwise, all
references herein to CMOs include multi-class pass-through certificates.
Payments of principal of and interest on the mortgage assets, and any
reinvestment income thereon, provide the Funds to pay debt service
on the CMOs or make scheduled distributions on the multi-class pass-through
securities. CMOs may be issued by agencies or instrumentalities of the U.S.
Government, or by private originators of, or investors in, mortgage loans,
including depository institutions, mortgage banks, investment banks and
special purpose subsidiaries of the foregoing. The issuer of CMOs or
multi-class pass-through securities may elect to be treated as a REMIC. The
Fund will not invest in residual interests in REMICs.
STRIPPED MORTGAGE-BACKED SECURITIES. The Fund may invest in
mortgage pass-through securities where all or a substantial portion of the
interest payments go to one class of holders ("interest-only securities" or
"IOs") and all or a substantial portion of the principal payments go to a
second class of holders ("principal-only securities" or "POs"). These
securities are commonly referred to as stripped mortgage-backed securities
or SMBS. The yields to maturity on IOs and POs are very sensitive to the
rate of principal payments (including prepayments) on the related
underlying mortgage assets, and such rate may have a material effect on
yield to maturity. If the underlying mortgage assets experience greater
than anticipated prepayments of principal, the Fund may not fully
recoup its initial investment in IOs. Conversely, if the underlying
mortgage assets experience less than anticipated prepayments of principal,
the yield on POs could be materially adversely affected. In addition to
SMBS issued by agencies or instrumentalities of the U.S. Government,
the Fund may purchase SMBS issued by private originators of, or
investors in, mortgage loans, including depository institutions, mortgage
banks, investment banks and special purpose subsidiaries of the foregoing.
EQUITY SECURITIES. Equity Securities may include common stocks,
preferred stocks, convertible securities, and warrants. Common
stocks, the most familiar type, represent an equity (ownership) interest in
a corporation. Although equity securities have a history of
long-term growth in value, their prices fluctuate based on changes in a
company's financial condition and on overall market and economic
conditions. Smaller companies are especially sensitive to these
factors.
DEBT SECURITIES. Bonds and other debt instruments are used by issuers to
borrow money from investors. The issuer pays the investor a fixed or
variable rate of interest, and must repay the amount borrowed at maturity.
Some debt securities, such as zero coupon bonds, do not pay current
interest, but are purchased at a discount from their face values. Debt
securities, loans, and other direct debt have varying degrees of quality
and varying levels of sensitivity to changes in interest rates. Longer-term
bonds are generally more sensitive to interest rate changes than short-term
bonds.
LOWER-RATED AND NON-RATED LOWER-QUALITY DEBT SECURITIES. The
mortgage-backed securities in which the Fund will invest are
expected to be lower-rated (i.e., have a credit quality below investment
grade) or non-rated subordinated classes of equivalent quality.
Investments in such lower-rated securities or non-rated securities of lower
credit quality are subject to special risks, including a greater risk of
loss of principal and non-payment of interest.
Generally, lower-rated or non-rated securities of lower credit quality
offer a higher return potential than higher-rated securities but involve
greater volatility of price and greater risk of loss of income and
principal, including the possibility of default or bankruptcy of the
issuers of such securities. Lower-rated securities and non-rated securities
of lower quality will likely have large uncertainties or major risk
exposure to adverse conditions and are predominantly speculative. The
occurrence of adverse conditions and uncertainties would likely reduce the
value of securities held by the Fund, with a commensurate effect on
the value of the Fund's shares. While the market values of
lower-rated securities and non-rated securities of lower quality tend to
react less to fluctuations in interest rate levels than do those of
higher-rated securities, the market values of certain of these securities
also tend to be more sensitive to changes in economic conditions than
higher-rated securities. In addition, lower-rated securities and non-rated
securities of lower quality generally present a higher degree of credit
risk. The Fund may incur additional expenses to the extent that it
is required to seek recovery upon a default in the payment of principal or
interest on its Fund holdings.
Securities which are rated BB by Standard & Poor's Corporation (S&P), and
Ba by Moody's Investors Service, Inc. (Moody's) have speculative
characteristics with respect to capacity to pay interest and repay
principal. Securities which are rated B generally lack characteristics of a
desirable investment and assurance of interest and principal payments over
any long period of time may be small. Securities which are rated Caa or CCC
or below are of poor standing. Those issues may be in default or
present elements of danger with respect to principal or interest
payments. Securities rated C by Moody's, D by S&P, or the equivalent by
another nationally recognized statistical rating organization are the
lowest rating class. Such ratings indicate that payments are in default, or
that a bankruptcy petition has been filed with respect to the issuer or
that the issuer is regarded as having extremely poor prospects. See the
Appendix for a general description of bond ratings.
In general, the ratings of nationally recognized statistical rating
organizations represent the opinions of these agencies as to the quality of
securities that they rate. Such ratings, however, are relative and
subjective, and are not absolute standards of quality and do not evaluate
the market value risk of the securities. It is possible that an agency
might not change its rating of a particular issue to reflect subsequent
events. These ratings will be used by the Fund as initial criteria
for the selection of securities, but the Fund also will rely upon
the independent advice of FMR to evaluate potential investments.
The lower-rated securities in which the Fund will invest typically
will be subject to restrictions against transfer to the general public.
Accordingly, these securities are ordinarily traded only among
institutions.
At times a major portion of an issue of lower-rated securities or non-rated
securities of lower quality may be held by relatively few institutional
purchasers. These securities may be less liquid than higher-quality debt
securities, or in fact may be illiquid. Under adverse market or economic
conditions or in the event of adverse changes in the financial condition of
the issuer, the Fund may find it more difficult to sell such
securities when FMR believes it advisable to do so or may be able to sell
such securities only at prices lower than if the securities were more
widely held. In such circumstances, the Fund may also find it more
difficult to determine the fair value of such securities for purposes of
computing the Fund's NAV.
REAL ESTATE INVESTMENT TRUSTS are entities which either own
properties or make construction or mortgage loans. Equity trusts own real
estate directly and the value of, and income earned, by the trust
depends upon the income of the underlying properties and the rental income
they earn. Equity trusts may also include operating or finance companies.
Equity trusts can also realize capital gains by selling properties that
have appreciated in value. A mortgage trust can make construction,
development, or long-term mortgage loans, and are sensitive to the credit
quality of the borrower. Mortgage trusts derive their income from interest
payments. Hybrid trusts combine the characteristics of both equity and
mortgage trusts, generally by holding both ownership interests and mortgage
interests in real estate. The value of securities issued by real
estate investment trusts are affected by tax and regulatory requirements
and by perceptions of management skill. They are also
subject to heavy cash flow dependency, defaults by borrowers or
tenants, self-liquidation, and the possiblility of failing to
qualify for tax-free status under the Internal Revenue Code and
failing to maintain exemption from the 1940 Act.
U.S. GOVERNMENT SECURITIES are high-quality debt securities issued or
guaranteed by the U.S. Treasury or by an agency or instrumentality of the
U.S. Government. Not all U.S. Government securities are
backed by the full faith and credit of the United States. For example,
securities issued by FNMA are supported by the instrumentality's right to
borrow money from the U.S. Treasury under certain circumstances. However,
securities issued by the Financing Corporation are supported only by the
credit of the entity that issued them.
MONEY MARKET INSTRUMENTS are high-quality instruments that present
minimal credit risk. They may include U.S. Government obligations,
commercial paper and other short-term corporate obligations, and
certificates of deposit, bankers' acceptances, bank deposits, and other
financial institution obligations. These instruments may carry fixed or
variable interest rates.
ADJUSTING INVESTMENT EXPOSURE. The Fund can use various
techniques to increase or decrease its exposure to changing security
prices, interest rates, or other factors that affect security values. These
techniques may involve derivative transactions such as buying and selling
options and futures contracts, entering into currency exchange contracts or
swap agreements, purchasing indexed securities, and selling securities
short.
FMR can use these practices to adjust the risk and return characteristics
of the Fund's portfolio of investments. If FMR judges market
conditions incorrectly or employs a strategy that does not correlate well
with the Fund's investments, these techniques could result in a
loss, regardless of whether the intent was to reduce risk or increase
return. These techniques may increase the volatility of the Fund and
may involve a small investment of cash relative to the magnitude of the
risk assumed. In addition, these techniques could result in a loss if the
counterparty to the transaction does not perform as promised.
DIRECT DEBT. Loans and other direct debt instruments are interests
in amounts owed to another party by a company, government, or other
borrower. They have additional risks beyond conventional debt securities
because they may entail less legal protection for the Fund, or there
may be a requirement that the Fund supply additional cash to a
borrower on demand.
WHEN-ISSUED AND DELAYED-DELIVERY TRANSACTIONS are trading practices
in which payment and delivery for the securities take place at a future
date. The market value of a security could change during this period, which
could affect the Fund's yield.
REPURCHASE AGREEMENTS. In a repurchase agreement, the Fund
buys a security at one price and simultaneously agrees to sell it back at a
higher price. Delays or losses could result if the other party to the
agreement defaults or becomes insolvent.
ILLIQUID AND RESTRICTED SECURITIES. Some investments may be
determined by FMR, under the supervision of the Board of Directors,
to be illiquid, which means that they may be difficult to sell promptly at
an acceptable price. The sale of some securities, including illiquid
securities, may be subject to legal restrictions. Difficulty in selling
securities may result in a loss or may be costly to the Fund.
RESTRICTIONS: The Fund may not purchase a security if, as a
result, more than 45% of its net assets would be invested in
illiquid securities.
OTHER INSTRUMENTS may include convertible securities and preferred
stocks.
DIVERSIFICATION. Diversifying a Fund's investment portfolio
can reduce the risks of investing. This may include limiting the amount of
money invested in any one issuer or, on a broader scale, in any one
industry. Since the Fund is not diversified, it may be more
sensitive to changes in the market value of a single issuer or industry.
RESTRICTIONS: The Fund is considered non-diversified.
Generally, to meet federal tax requirements at the close of each quarter,
the Fund does not invest more than 25% of its total assets in any
one issuer and, with respect to 50% of total assets, does not invest more
than 5% of its total assets in any one issuer. The Fund may not
invest more than 25% of its total assets in any one industry, except for,
under normal market conditions, securities and instruments backed by real
estate and real estate mortgages, including interests in real estate
investment trusts and securities of companies engaged in the real-estate
business. These limitations do not apply to U.S. Government
securities.
BORROWING. The Fund may borrow from banks or through reverse
repurchase agreements. If the Fund borrows money, its share price
may be subject to greater fluctuation until the borrowing is paid off. If
the Fund makes additional investments while borrowings are
outstanding, this may be considered a form of leverage.
RESTRICTIONS: The Fund may borrow only for temporary or
emergency purposes, but not in an amount exceeding 33% of its total
assets.
LENDING. Lending securities to broker-dealers and institutions,
including Fidelity Brokerage Services, Inc. (FBSI), an affiliate of FMR, is
a means of earning income. This practice could result in a loss or a delay
in recovering the Fund's securities. The Fund may also lend
money to issuers in connection with certain direct debt transactions.
RESTRICTIONS: Loans, in the aggregate, may not exceed 33% of
the Fund's total assets.
FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS
Some of the policies and restrictions discussed on the preceding pages are
fundamental, that is, subject to change only by shareholder approval. The
following paragraph restates all those that are fundamental. All policies
stated throughout this Prospectus, other than those identified in
the following paragraph, can be changed without shareholder approval.
The Fund seeks a high level of current income by investing primarily
in commercial mortgage-backed securities. The Fund may not
invest more than 25% of its total assets in any one industry, except that
it will, under normal market conditions, invest more than 25% of its total
assets in securities and instruments backed by real estate and real estate
mortgages and securities of companies engaged in the real-estate business,
including interests in real estate investment trusts. The Fund may
borrow only for temporary or emergency purposes, but not in an amount
exceeding 33% of the Fund's total assets. Loans, in the
aggregate, may not exceed 33% of the Fund's total assets.
HOW TO PURCHASE SHARES OF THE FUND
The Fund is offering 200,000 Shares for sale. Pursuant to a
Distribution Agreement, the Fund is offering its Shares through its agent
FDC, 82 Devonshire Street, Boston, MA 02109, without a sales charge.
FDC is not obligated to sell any particular number of Shares and is
offering the Shares on a best efforts basis.
The Fund does not intend to list its Shares on any national securities
exchange and there is not expected to be a secondary market in Shares.

There is no initial sales charge on purchases of Shares. The
minimum initial investment is $5,000,000. However, current or
former Directors or officers of the Fund or current or retired officers,
directors, or regular employees of FMR Corp. or its subsidiaries (a
Fidelity director or employee), the spouse of a Fidelity director or
employee, a Fidelity director or employee acting as custodian for a minor
child, or a person acting as trustee of a trust for the sole benefit of the
minor child of a Fidelity director or employee will be permitted to make an
investment in the Fund of $5,000 or more.

LIQUIDATION OF THE FUND
Recognizing the likelihood that a secondary market for the Shares will not
exist, it is presently contemplated that the Fund will sell all of its
assets and, prior to the fourth anniversary following the commencement of
operations (the "Anticipated Liquidation Date"), distribute the proceeds
thereof to Shareholders. The Board of Directors in its sole discretion may
adopt a plan providing for one or more liquidating distributions of the
Fund's assets at any time after the third anniversary of the Fund's
commencement of operations, and, if the Board of Directors determines that
it is in the best interest of shareholders to do so, it may extend the
period of time required to complete the liquidation of the Fund for a
period of up to 90 days following the Anticipated Liquidation Date.
Amounts received by a shareholder in a distribution pursuant to a plan of
complete liquidation of the Fund will be treated as if received in exhange
for the shareholder's stock. See "Taxation, Dsiposition of Shares."
The Fund will pay all costs and expenses associated with its complete
liquidation.
TAXATION
QUALIFICATIONS AS A "RIC." The Fund intends to qualify as a
"regulated investment company" for federal tax purposes, and as such, will
not be subject to federal taxation. There are tax requirements that
all funds must follow in order to qualify as a "RIC." In its effort
to adhere to these requirements, the Fund may have to limit its investment
activity in some types of instruments.
TAXES ON DISTRIBUTIONS. Distributions are subject to federal
income tax, and may also be subject to state or local taxes.
Distributions are taxable whether or not reinvested.
Distributions declared in December and paid in January are taxable as if
they were paid on December 31.
For federal income tax purposes, the Fund's income and
short-term capital gain distributions are taxed as dividends; long-term
capital gain distributions are taxed as long-term capital gains.
Every January, FIIOC will send to each shareholder a
statement showing the taxable distributions paid to the shareholder
in the previous year.
DISPOSITION OF SHARES. In general, for federal income tax
purposes, any gain or loss realized upon a taxable disposition of Shares of
the Fund held by a shareholder as a capital asset will be treated as
long-term capital gain or loss if the Shares have been held for more than
one year and otherwise as short-term capital gain or loss. However,
any loss realized upon a taxable disposition of Shares within six months
from the date of their purchase will be treated as a long-term capital loss
to the extent of any amounts treated by shareholders as long-term capital
gains with respect to such Shares. All or a portion of any loss
realized upon a taxable disposition of Shares will be disallowed if other
Shares of the Fund are purchased within 30 days before or after such
disposition.
TAX EXEMPT ORGANIZATIONS. Investors that are exempt from federal
income taxation, such as pension plans and endowments, will generally not
be subject to federal income taxation, including unrelated business income
tax, with respect to investments in the Fund. However, a tax-exempt
investor could become subject to unrelated business income tax under the
debt-financed income rules if the investor were to incur any indebtedness
with respect to an investment in the Fund.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Fund consists of 100,000,000 shares of
Common Stock, par value $.001 per share. Shares have no preemptive,
conversion or redemption rights and are freely transferable. The
description herein of the Fund's capital structure relates to its capital
structure at the date hereof.
The Fund is not required to hold annual meetings of shareholders. The Fund
may hold special meetings and mail proxy materials. These meetings may be
called to elect or remove Directors, change fundamental policies, approve a
management contract, or for other purposes. Shareholders not attending
these meetings are encouraged to vote by proxy. The Fund will mail proxy
materials in advance, including a voting card and information about the
proposals to be voted on. You are entitled to one vote for each share you
own. In addition to formal business meetings, the Fund may
periodically invite shareholders to participate in periodic informational
meetings.
DETERMINATION OF NET ASSET VALUE
The Fund's NAV is determined as of the close of business
of the New York Stock Exchange, normally 4:00 p.m. Eastern time on the
last business day of each week. The NAV is computed by adding the
value of the Fund's investments, cash, and other assets, subtracting
its liabilities, and then dividing the result by the number of shares
outstanding.
Securities and other assets for which market quotations are readily
available are valued at market values determined by their most recent bid
prices (sales prices if the principal market is an exchange) in the
principal market in which such securities normally are traded.
Securities and other assets for which market quotations are not readily
available (including restricted securities, if any) are appraised at their
fair market value as determined in good faith under consistently applied
procedures under the general supervision of the Board of Directors.
Securities may also be valued on the basis of valuations furnished by a
pricing service that uses both dealer-supplied valuations and evaluations
based on expert analysis of market data and other factors if such
valuations are believed to reflect more accurately the fair value of such
securities. There are a number of pricing services available, and
the Directors, or officers acting on behalf of the Directors, on the basis
of ongoing evaluation of these pricing services, may use other pricing
services or may discontinue the use of any pricing service in whole or in
part.
DIVIDENDS AND DISTRIBUTIONS
The Fund distributes to shareholders substantially all of its net
investment income in cash monthly and will periodically make cash
distributions of its net capital gains. A shareholder will realize
capital gains and income for tax purposes on all dividends and
distributions.
The Fund will not offer a dividend reinvestment program.
REPORTS TO SHAREHOLDERS
The Fund will send unaudited semi-annual and audited annual reports to
shareholders, including a list of the portfolio investments held by the
Fund.
CERTAIN LEGAL MATTERS
Certain legal matters with respect to the Offer will be passed upon for
the Fund by Kirkpatrick & Lockhart, LLP, Washington, DC.
Kirkpatrick & Lockhart, LLP, will rely as to matters of Maryland law
upon the legal opinion of Piper & Marbury, Baltimore, Maryland.

STATEMENT OF ADDITIONAL INFORMATION

____________________, 1995

This Statement of Additional Information ("SAI") is not a
prospectus but should be read in conjunction with the current Prospectus
(dated ___________, 1995) of the Fidelity Real Estate High Income Fund
III, Inc. (the "Fund"). Please retain this document for future
reference. To obtain additional copies of the Prospectus or this SAI
without charge, please call Fidelity Distributors Corporation ("FDC") at
1-617-563-6414.
TABLE OF CONTENTS PAGE
INVESTMENT POLICIES AND LIMITATIONS B-2
FUND TRANSACTIONS B-2
PERFORMANCE B-13
DISTRIBUTIONS AND TAXES B-14
FMR B-14
DIRECTORS AND OFFICERS B-15
MANAGEMENT CONTRACT B-17
CONTRACTS WITH COMPANIES AFFILIATED WITH FMR B-18
DESCRIPTION OF THE FUND B-18
APPENDIX A B-A-1
INVESTMENT ADVISER
Fidelity Management & Research Company ("FMR")
DISTRIBUTOR
Fidelity Distributors Corporation ("FDC")
TRANSFER AGENT
Fidelity Investment Institutional Operations Company
("FIIOC")
CUSTODIAN
The Bank of New York

INVESTMENT POLICIES AND LIMITATIONS
The following policies and limitations supplement those set forth in the
Prospectus. Unless otherwise noted, whenever an investment policy or
limitation states a maximum percentage of the Fund's assets that may
be invested in any security or other asset, or sets forth a policy
regarding quality standards, such standard or percentage limitation will be
determined immediately after and as a result of the Fund's
acquisition of such security or other asset. Accordingly, any subsequent
change in values, net assets, or other circumstances will not be considered
when determining whether the investment complies with the Fund's
investment policies and limitations.
The Fund's fundamental investment policies and limitations cannot be
changed without approval by a "majority of the outstanding voting
securities" (as defined in the Investment Company Act of 1940) of the
Fund. However, except for the fundamental investment limitations set
forth below, the investment policies and limitations described in this
SAI are not fundamental and may be changed without shareholder
approval.
THE FOLLOWING ARE THE FUND'S FUNDAMENTAL INVESTMENT LIMITATIONS SET
FORTH IN THEIR ENTIRETY. THE FUND MAY NOT:
(1) issue senior securities, except as permitted under the Investment
Company Act of 1940;
(2) borrow money, except that the Fund may borrow money for
temporary or emergency purposes (not for leveraging or investment) in an
amount not exceeding 33 1/3% of its total assets (including the amount
borrowed) less liabilities (other than borrowings). Any borrowings that
come to exceed this amount will be reduced within three days (not including
Sundays and holidays) to the extent necessary to comply with the 33 1/3%
limitation;
(3) underwrite securities issued by others, except to the extent that the
Fund may be considered an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted securities;
(4) purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. Government or any of its agencies or
instrumentalities) if, as a result, more than 25% of the Fund's
total assets would be invested in the securities of companies whose
principal business activities are in the same industry, except that, under
normal market conditions, the Fund will invest more than 25% of its
total assets in securities and instruments backed by real estate and real
estate mortgages and securities of companies engaged in the real estate
business, including interests in real estate investment trusts;
(5) purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments (but this shall not prevent the
Fund from investing in securities or other instruments backed by
real estate or securities of companies engaged in the real estate
business);
(6) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments (but this shall not prevent
the Fund from purchasing or selling options and futures contracts or
from investing in securities or other instruments backed by physical
commodities); or
(7) lend any security or make any other loan if, as a result, more than 33
1/3% of its total assets would be lent to other parties, but this
limitation does not apply to purchases of debt securities or to repurchase
agreements.
THE FOLLOWING INVESTMENT LIMITATIONS ARE NOT FUNDAMENTAL AND MAY BE
CHANGED WITHOUT SHAREHOLDER APPROVAL.
(i) To meet federal tax requirements for qualification as a "regulated
investment company" the Fund limits its investments so that
at the close of each quarter of its taxable year: (a) with regard to at
least 50% of total assets, no more than 5% of total assets are invested in
the securities of a single issuer, and (b) no more than 25% of total assets
are invested in the securities of a single issuer. Limitations (a) and (b)
do not apply to "Government securities" as defined for federal tax
purposes. With respect to 75% of its total assets, the fund does not
currently intend to purchase more than 10% of the outstanding voting
securities of any issuer.
(ii) The Fund does not currently intend to sell securities short,
unless it owns or has the right to obtain securities equivalent in kind and
amount to the securities sold short, and provided that transactions in
futures contracts and options are not deemed to constitute selling
securities short.
(iii) The Fund does not currently intend to purchase securities on
margin, except that the Fund may obtain such short-term credits as
are necessary for the clearance of transactions, and provided that margin
payments in connection with futures contracts and options on futures
contracts shall not constitute purchasing securities on margin.
(iv) The Fund may borrow money only (a) from a bank or from a
registered investment company or portfolio for which FMR or an affiliate
serves as investment adviser or (b) by engaging in reverse repurchase
agreements with any party (reverse repurchase agreements are treated as
borrowings for purposes of fundamental investment limitation (2)).
The Fund will not purchase any security while borrowings
representing more than 5% of its total assets are outstanding. The
Fund will not borrow from other funds advised by FMR or its
affiliates if total outstanding borrowings immediately after such borrowing
would exceed 15% of the Fund's total assets.
(v) The Fund does not currently intend to purchase any security if,
as a result, more than 45% of its net assets would be invested in
securities that are deemed to be illiquid because they are subject to legal
or contractual restrictions on resale or because they cannot be sold or
disposed of in the ordinary course of business at approximately the prices
at which they are valued.
(vi) The Fund does not currently intend to purchase interests in
real estate investment trusts that are not readily marketable or interests
in real estate limited partnerships that are not listed on an exchange or
traded on the NASDAQ National Market System if, as a result, the sum of
such interests and other investments considered illiquid under limitation
(v) would exceed 45% of the Fund's assets.
(vii) The Fund does not currently intend to lend assets other than
securities to other parties, except by (a) lending money (up to 7.5% of the
Fund's net assets) to a registered investment company or portfolio
for which FMR or an affiliate serves as investment adviser or (b) acquiring
loans, loan participations, or other forms of direct debt instruments and,
in connection therewith, assuming any associated unfunded commitments of
the sellers. (This limitation does not apply to purchases of debt
securities or mortgage-related securities or direct mortgage investments;
or to repurchase agreements.)
(viii) The Fund does not currently intend to (a) purchase securities
of other investment companies, except in the open market where no
commission except the ordinary brokers commission is paid, or (b) purchase
or retain securities issued by other open-end investment companies.
Limitations (a) and (b) do not apply to securities received as dividends,
through offers of exchange, or as a result of a reorganization,
consolidation, or merger.
For the Fund's limitations on futures and options transactions, see
the section entitled "Limitations on Futures and Options Transactions" on
page __.
MORTGAGE-BACKED SECURITIES
As discussed in the Prospectus, the mortgage-backed securities purchased by
the Fund evidence an interest in a specific pool of mortgages. Such
securities are issued by GNMA, FNMA and FHLMC and by private issuers, such
as depository institutions, mortgage banks, investment banks and special
purpose subsidiaries of the foregoing.
GNMA CERTIFICATES. The Government National Mortgage Association
("GNMA") is a wholly-owned corporate instrumentality of the United States
within the Department of Housing and Urban Development. The
National Housing Act of 1934, as amended (the "Housing Act"), authorized
GNMA to guarantee the timely payment of the principal of and interest on
certificates that are based on and backed by a pool of mortgage loans
insured by the Federal Housing Administration under the Housing Act, or
Title V of the Housing Act of 1949 ("FHA Loans"), or guaranteed by the
Veterans" Administration under the Servicemen"s Readjustment Act of 1944,
as amended ("VA Loans"), or by pools of other eligible mortgage loans.
The Housing Act provides that the full faith and credit of the U.S.
Government is pledged to the payment of all amounts that may be required to
be paid under the guarantee. In order to meet its obligations under
such guarantee, GNMA is authorized to borrow from the U.S. Treasury with no
limitations as to amount.
The GNMA certificates will represent a pro rata interest in one or more
pools of the following types of mortgage loans: (i) fixed rate
level payment mortgage loans; (ii) fixed rate graduated payment mortgage
loans; (iii) fixed rate growing equity mortgage loans; (iv) fixed rate
mortgage loans secured by manufactured (mobile) homes; (v) mortgage loans
on multifamily residential properties under construction; (vi) mortgage
loans on completed multifamily protects; (vii) fixed rate mortgage loans as
to which escrowed Funds are used to reduce the borrower"s monthly payments
during the early years of the mortgage loans ("buydown" mortgage loans);
(viii) mortgage loans that provide for adjustments in payments based on
periodic changes in interest rates or in other payment terms of the
mortgage loans; and (ix) mortgage-backed serial notes. All of these
mortgage loans will be FHA Loans or VA Loans and, except as otherwise
specified above, will be fully-amortizing loans secured by first liens on
one-to-four-family housing units.
FNMA CERTIFICATES. The Federal National Mortgage Association
("FNMA") is a federally chartered and privately owned corporation organized
and existing under the Federal National Mortgage Association Charter
Act. FNMA was originally established in 1938 as a U.S. Government
agency to provide supplemental liquidity to the mortgage market and was
transformed into a shareholder owned and privately managed corporation by
legislation enacted in 1968. FNMA provides funds to the mortgage
market primarily by purchasing home mortgage loans from local lenders,
thereby replenishing their funds for additional lending. FNMA
acquires funds to purchase home mortgage loans form many capital market
investors that may not ordinarily invest in mortgage loans directly,
thereby expanding the total amount of funds available for housing.
Each FNMA certificate will entitle the registered holder thereof to
receive amounts representing such holder's pro rata interest in scheduled
principal payments and interest payments (at such FNMA certificate's
pass-through rates, which is net of any servicing and guarantee fees on the
underlying mortgage loans), and any principal prepayments on the mortgage
loans in the pool represented by such FNMA certificate and such holder's
proportionate interest in the full principal amount of any foreclosed or
otherwise finally liquidated mortgage loan. The full and timely
payment of principal of and interest on each FNMA certificate will be
guaranteed by FNMA, which guarantee is not backed by the full faith and
credit of the U.S. Government.
Each FNMA certificate will represent a pro rata interest in one or more
pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed rate level payment mortgage loans; (ii)
fixed rate graduated payment mortgage loans; and (iii) adjustable rate
mortgage loans.

FHLMC CERTIFICATES. The Federal Home Loan Mortgage Corporation
("FHLMC") is a corporate instrumentality of the United States created
pursuant to the Emergency Home Finance Act of 1970, as amended (the "FHLMC
Act"). FHLMC was established primarily for the purpose of
increasing the availability of mortgage credit for the financing of needed
housing. The principal activity of FHLMC currently consists of the
purchase of first lien, conventional, residential mortgage loans and
participation interests in such mortgage securities, primarily FHLMC
certificates.
FHLMC guarantees to each registered holder of a FHLMC certificate the
timely payment of interest at the rate provided for by such FHLMC
certificate, whether or not received. FHLMC also guarantees to each
registered holder of a FHLMC certificate ultimate collection of all
principal of the related mortgage loans, without any offset or deduction,
but does not, generally, guarantee the timely payment of scheduled
principal. FHLMC may remit the amount due on account of its
guarantee of collection of principal at any time after default on an
underlying mortgage loan, but not later than 30 days following (i)
foreclosure sale, (ii) payment of a claim by any mortgage insurer or (iii)
the expiration of any right of redemption, whichever occurs later, but in
any event no later than one year after demand has been made upon the
mortgagor for accelerated payment of principal. The obligations of
FHLMC under its guarantee are obligations solely of FHLMC and are not
backed by the full faith and credit of the U.S. Government.
FHLMC certificates represent a pro rata interest in a group of mortgage
loans (a "FHLMC certificate group") purchased by FHLMC. The
mortgage loans underlying the FHLMC certificate will consist of fixed rate
or adjustable rate mortgage loans with original terms to maturity of
between ten and thirty years, substantially all of which are secured by
first liens on one-to four- family residential properties or multifamily
projects. Each mortgage loan must meet the applicable standard set
forth in the FHLMC Act. A FHLMC certificate group may
include whole loans, participation interests in whole loans, participation
interests in whole loans and undivided interests in whole loans and
participations comprising another FHLMC certificate group.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS PASS-THROUGH
SECURITIES. Collateralized mortgage obligations or "CMOs" are debt
obligations collateralized by mortgage loans or mortgage pass-through
securities. Typically, CMOs are collateralized by GNMA, FNMA or
FHLMC certificates, but also may be collateralized by whole loans or
private mortgage pass-through securities (collectively, "Mortgage
Assets"). Multi-class pass-through securities are equity interests
in a trust composed of Mortgage Assets. Unless the context
indicates otherwise, all references herein to CMOs include multi-class
pass-through certificates. Payments of principal of and interest on
the Mortgage Assets, and any reinvestment income thereon, provide the funds
to pay debt service on the CMOs or make scheduled distributions on the
multi-class pass-through securities. CMOs may be issued by agencies
or instrumentalities of the U.S. Government, or by private originators of,
or investors in, mortgage loans, including depository institutions,
mortgage banks, investment banks and special purpose subsidiaries of the
foregoing. The issuer of CMOs or multi-class pass-through
securities may elect to be treated as a Real Estate Mortgage Investment
Conduit ("REMIC").
In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is
issued at a specific fixed or floating coupon rate and has a stated
maturity or final distribution date. Principal prepayments on the
Mortgage Assets may cause the CMOs to be retired substantially earlier than
their stated maturities or final distribution dates. Interest is
paid or accrues on all classes of the CMOs on a monthly, quarterly or
semi-annual basis. The principal of and interest on the Mortgage
Assets may be allocated among the several classes of a CMO series in a
number of different ways. Generally, the purpose of the allocation
of the cash flow of a CMO to the various classes is to obtain a more
predictable cash flow to the individual tranches than exists with the
underlying collateral of the CMO. As a general rule, the more
predictable the cash flow is on a CMO tranche, the lower the anticipated
yield will be on that tranche at the time of issuance relative to
prevailing market yields on mortgage-backed securities.
The Fund also may invest in, among other things, parallel-pay CMOs and
Planned Amortization Class CMOs ("PAC Bonds"). Parallel-pay CMOs
are structured to provide payments of principal on each payment date to
more than one class. These simultaneous payments are taken into
account in calculating the stated maturity date or final distribution date
of each class, which, as with other CMO structures, must be retired by its
stated maturity date or final distribution date but may be retired
earlier. PAC Bonds generally require payments of a specified amount
of principal on each payment date. PAC Bonds are parallel-pay CMOs
with the required principal payment on such securities having the highest
priority after interest has been paid to all classes.
The Fund may invest in CMO residuals. The residual in a CMO
structure generally represents the interest in any excess cash flow
remaining after making required payments of principal of and interest on
the CMOs and related administrative expenses of the issuer.
TYPES OF CREDIT ENHANCEMENT
Mortgage-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties. To
lessen the effect of failures by obligors on underlying assets to make
payments, those securities may contain elements of credit support, which
fall into two categories: (i) liquidity protection and (ii)
protection against losses resulting from ultimate default by an obligor on
the underlying assets. Liquidity protection refers to the provision
of advances, generally by the entity administering the pool of assets, to
ensure that the receipt of payments on the underlying pool occurs in a
timely fashion. Protection against losses resulting from default
insures ultimate payment of the obligations on at least a portion of the
assets in the pool. This protection may be provided through
guarantees, insurance policies or letters of credit obtained by the issuer
or sponsor from third parties, through various means of structuring the
transaction or through a combination of such approaches. The Fund
will not pay any additional fees for credit support, although the existence
of credit support may increase the price of a security.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinate securities" (multiple class securities with one
or more classes subordinate to other classes as to the payment of principal
thereof and interest thereon, with the result that defaults on the
underlying assets are borne first by the holders of the subordinated
class); creation of "reserve Funds" (where cash or investments, sometimes
funded from a portion of the payments on the underlying assets, are held in
reserve against future losses); and "overcollateralization" (where the
scheduled payments on, or the principal amount of the underlying assets
exceeds that requiem to make payment of the securities and pay any
servicing or other fees). The degree of credit support provided for
each issue is generally based on historical information respecting the
level of credit risk associated with the underlying assets.
Delinquencies or losses in excess of those anticipated could adversely
affect the return on an investment in such issue.
U.S. GOVERNMENT SECURITIES.
U.S. Government securities include:
(1) U.S. Treasury bills (maturities of one year or less), U.S. Treasury
notes (maturities of one to ten years) and U.S. Treasury bonds (generally
maturities of greater than ten years), all of which are direct obligations
of the U.S. Government and, as such, are backed by the "full faith and
credit" of the United States.
(2) Securities issued by agencies and instrumentalities of the U.S.
Government which are backed by the full faith and credit of the United
States. Among the agencies and instrumentalities issuing such
obligations are the Federal Housing Administration, GNMA, the Department of
Housing and Urban Development, the Export-Import Bank, the Farmers Home
Administration ("FHA"), the General Services Administration, the Maritime
Administration and the Small Business Administration. The
maturities of such obligations range from three months to 30 years.
(3) Securities issued by agencies and instrumentalities which are not
backed by the full faith and credit of the United States, but whose issuing
agency or instrumentality may borrow from the U.S. Treasury to meet its
obligations. Among the agencies and instrumentalities issuing such
obligations are the Tennessee Valley Authority, the FNMA, FHLMC and the
U.S. Postal Service.
(4) Securities issued by agencies and instrumentalities which are not
backed by the full faith and credit of the United States, but which are
backed by the credit of the issuing agency or instrumentality.
Among the agencies and instrumentalities issuing such obligations are
the Federal Farm Credit System and the Federal Home Loan Bank.
Neither the value nor the yield of the shares of the Fund or of the U.S.
Government securities which may be invested in by the Fund are guaranteed
by the U.S. Government. Such values and yield will fluctuate with
changes in prevailing interest rates and other factors. Generally,
as prevailing interest rates rise, the value of any U.S. Government
securities held by the Fund will fall. Such securities with longer
maturities generally tend to produce higher yields and are subject to
greater market fluctuation, as a result of changes in interest rates, than
debt securities with shorter maturities.
OTHER INVESTMENT POLICIES
AFFILIATED BANK TRANSACTIONS. The Fund may engage in
transactions with financial institutions that are, or may be considered to
be, "affiliated persons" of the Fund under the Investment Company
Act of 1940. These transactions may include repurchase agreements with
custodian banks; short-term obligations of, and repurchase agreements with,
the 50 largest U.S. banks (measured by deposits); municipal securities;
U.S. Government securities with affiliated financial institutions
that are primary dealers in these securities; short-term currency
transactions; and short-term secured borrowings. In accordance with
exemptive orders issued by the Securities and Exchange Commission
("SEC"), the Board of Directors has established and periodically
reviews procedures applicable to transactions involving affiliated
financial institutions.
DELAYED-DELIVERY TRANSACTIONS. The Fund may buy and sell
securities on a delayed-delivery or when-issued basis. These transactions
involve a commitment by the Fund to purchase or sell specific
securities at a predetermined price and/or yield, with payment and delivery
taking place after the customary settlement period for that type of
security (and more than seven days in the future). Typically, no interest
accrues to the purchaser until the security is delivered. The Fund
may receive fees for entering into delayed-delivery transactions.
When purchasing securities on a delayed-delivery basis, the Fund
assumes the rights and risks of ownership, including the risk of price and
yield fluctuations. Because the Fund is not required to pay for
securities until the delivery date, these risks are in addition to the
risks associated with the Fund's other investments. If the
Fund remains substantially fully invested at a time when
delayed-delivery purchases are outstanding, the delayed-delivery purchases
may result in a form of leverage. When delayed-delivery purchases are
outstanding, the Fund will set aside appropriate liquid assets in a
segregated custodial account to cover its purchase obligations. When the
Fund has sold a security on a delayed-delivery basis, the
Fund does not participate in further gains or losses with respect to
the security. If the other party to a delayed-delivery transaction fails to
deliver or pay for the securities, the Fund could miss a favorable
price or yield opportunity, or could suffer a loss.
The Fund may renegotiate delayed-delivery transactions after they
are entered into, and may sell underlying securities before they are
delivered, which may result in capital gains or losses.
REPURCHASE AGREEMENTS. In a repurchase agreement, the Fund
purchases a security and simultaneously commits to resell that security
back to the original seller at an agreed-upon price. The resale
price reflects the purchase price plus an agreed-upon incremental amount
which is unrelated to the coupon rate or maturity of the purchased
security. A repurchase agreement involves the obligation of the seller to
pay the agreed-upon resale price, which obligation is in effect secured by
the value (at least equal to the amount of the agreed-upon resale price and
marked to market daily) of the underlying security. The Fund may
engage in repurchase agreements with respect to any type of security in
which it is authorized to invest. While it does not presently appear
possible to eliminate all risks from these transactions (particularly the
possibility of a decline in the market value of the underlying securities,
as well as delays and costs to the Fund in connection with
bankruptcy proceedings), it is the Fund's current policy to limit
repurchase agreements to those parties whose creditworthiness has been
reviewed and found satisfactory by FMR.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement,
the Fund sells a portfolio instrument to another party, such as a
bank or broker-dealer, in return for cash and agrees to repurchase the
instrument at a particular price and time. While a reverse repurchase
agreement is outstanding, the Fund will maintain appropriate liquid
assets in a segregated custodial account to cover its obligation under the
agreement. The Fund will enter into reverse repurchase agreements
only with parties whose creditworthiness is deemed satisfactory by FMR.
Such transactions may increase fluctuations in the market value of the
Fund's assets and may be viewed as a form of leverage.
LENDING. The Fund may lend securities to parties such as
broker-dealers or institutional investors, including Fidelity Brokerage
Services, Inc. (FBSI). FBSI is a member of the New York Stock Exchange and
a subsidiary of FMR Corp.
Securities lending allows the Fund to retain ownership of the
securities loaned and, at the same time, to earn additional income. Since
there may be delays in the recovery of loaned securities, or even a loss of
rights in collateral supplied should the borrower fail financially, loans
will be made only to parties deemed by FMR to be of good standing.
Furthermore, they will only be made if, in FMR's judgment, the
consideration to be earned from such loans would justify the risk.
FMR understands that it is the current view of the SEC Staff that the
Fund may engage in loan transactions only under the following
conditions: (1) the Fund must receive 100% collateral in the form of
cash or cash equivalents (e.g., U.S. Treasury bills or notes) from the
borrower; (2) the borrower must increase the collateral whenever the market
value of the securities loaned (determined on a daily basis) rises above
the value of the collateral; (3) after giving notice, the Fund must
be able to terminate the loan at any time; (4) the Fund must receive
reasonable interest on the loan or a flat fee from the borrower, as well as
amounts equivalent to any dividends, interest, or other distributions on
the securities loaned and to any increase in market value; (5) the
Fund may pay only reasonable custodian fees in connection with the
loan; and (6) the Board of Directors must be able to vote proxies on
the securities loaned, either by terminating the loan or by entering into
an alternative arrangement with the borrower.
Cash received through loan transactions may be invested in any security in
which the Fund is authorized to invest. Investing this cash subjects
that investment, as well as the security loaned, to market forces (i.e.,
capital appreciation or depreciation).
VARIABLE OR FLOATING RATE OBLIGATIONS bear variable or floating
interest rates and carry rights that permit holders to demand payment of
the unpaid principal balance plus accrued interest from the issuers or
certain financial intermediaries. Floating rate instruments have interest
rates that change whenever there is a change in a designated base rate
while variable rate instruments provide for a specified periodic adjustment
in the interest rate. These formulas are designed to result in a market
value for the instrument that approximates its par value.
ILLIQUID INVESTMENTS are investments that cannot be sold or disposed
of in the ordinary course of business at approximately the prices at which
they are valued. Under the supervision of the Board of Directors,
FMR determines the liquidity of the Fund's investments and, through
reports from FMR, the Board monitors investments in illiquid instruments.
In determining the liquidity of the Fund's investments, FMR may
consider various factors including (1) the frequency of trades and
quotations, (2) the number of dealers and prospective purchasers in the
marketplace, (3) dealer undertakings to make a market, (4) the nature of
the security (including any demand or tender features), and (5) the nature
of the marketplace for trades (including the ability to assign or offset
the Fund's rights and obligations relating to the investment).
Investments currently considered by the Fund to be illiquid include
repurchase agreements not entitling the holder to payment of principal and
interest within seven days, non-government stripped fixed-rate
mortgage-backed securities, and over-the-counter options. Also, FMR may
determine some restricted securities, government-stripped fixed-rate
mortgage-backed securities, loans and other direct debt instruments, and
swap agreements to be illiquid. However, with respect to over-the-counter
options the Fund writes, all or a portion of the value of the
underlying instrument may be illiquid depending on the assets held to cover
the option and the nature and terms of any agreement the Fund may
have to close out the option before expiration.
In the absence of market quotations, illiquid investments are priced at
fair value as determined in good faith by a committee appointed by the
Board of Directors. If through a change in values, net assets or
other circumstances, the Fund were in a position where more than
45% of its net assets were invested in illiquid securities, it would
seek to take appropriate steps to protect liquidity.
RESTRICTED SECURITIES generally can be sold in privately negotiated
transactions, pursuant to an exemption from registration under the
Securities Act of 1933, or in a registered public offering. Where
registration is required, the Fund may be obligated to pay all or
part of the registration expense and a considerable period may elapse
between the time it decides to seek registration and the time it may be
permitted to sell a security under an effective registration statement. If,
during such a period, adverse market conditions were to develop, the
Fund might obtain a less favorable price than prevailed when it
decided to seek registration of the security.
SWAP AGREEMENTS. Swap agreements can be individually negotiated and
structured to include exposure to a variety of different types of
investments or market factors. Depending on their structure, swap
agreements may increase or decrease the Fund's exposure to long- or
short-term interest rates (in the U.S. or abroad), foreign currency values,
mortgage securities, corporate borrowing rates, or other factors such as
security prices or inflation rates. Swap agreements can take many different
forms and are known by a variety of names. The Fund is not limited
to any particular form of swap agreement if FMR determines it is consistent
with the Fund's investment objective and policies.
In a typical cap or floor agreement, one party agrees to make payments only
under specified circumstances, usually in return for payment of a fee by
the other party. For example, the buyer of an interest rate cap obtains the
right to receive payments to the extent that a specified interest rate
exceeds an agreed-upon level, while the seller of an interest rate floor is
obligated to make payments to the extent that a specified interest rate
falls below an agreed-upon level. An interest rate collar combines elements
of buying a cap and selling a floor.
Swap agreements will tend to shift the Fund's investment exposure
from one type of investment to another. For example, if the Fund
agreed to exchange payments in dollars for payments in foreign currency,
the swap agreement would tend to decrease the Fund's exposure to
U.S. interest rates and increase its exposure to foreign currency and
interest rates. Caps and floors have an effect similar to buying or writing
options. Depending on how they are used, swap agreements may increase or
decrease the overall volatility of the Fund's investments and its
share price and yield.
The most significant factor in the performance of swap agreements is the
change in the specific interest rate, currency, or other factors that
determine the amounts of payments due to and from the Fund. If a
swap agreement calls for payments by the Fund, the Fund must
be prepared to make such payments when due. In addition, if the
counterparty's creditworthiness declined, the value of a swap agreement
would be likely to decline, potentially resulting in losses. The
Fund expects to be able to eliminate its exposure under swap
agreements either by assignment or other disposition, or by entering into
an offsetting swap agreement with the same party or a similarly
creditworthy party.
The Fund will maintain appropriate liquid assets in a segregated
custodial account to cover its current obligations under swap agreements.
If the Fund enters into a swap agreement on a net basis, it will
segregate assets with a daily value at least equal to the excess, if any,
of the Fund's accrued obligations under the swap agreement over the
accrued amount the Fund is entitled to receive under the agreement.
If the Fund enters into a swap agreement on other than a net basis,
it will segregate assets with a value equal to the full amount of the
Fund's accrued obligations under the agreement.
LOWER-QUALITY DEBT SECURITIES. While the market for high-yield,
lower-quality corporate debt securities has been in existence for many
years and has weathered previous economic downturns, the 1980s brought a
dramatic increase in the use of such securities to fund highly leveraged
corporate acquisitions and restructuring. Past experience may not provide
an accurate indication of the future performance of the high-yield bond
market, especially during periods of economic recession. In fact, from 1989
to 1991, the percentage of lower-quality securities that defaulted rose
significantly above prior levels, although the default rate decreased in
1992,1993 and 1994.
The market for lower-quality debt securities may be thinner and less active
than that for higher-quality debt securities, which can adversely affect
the prices at which the former are sold. If market quotations are not
available, lower-quality debt securities will be valued in accordance with
procedures established by the Board of Directors, including the use
of outside pricing services. Judgment plays a greater role in valuing
high-yield corporate debt securities than is the case for securities for
which more external sources for quotations and last-sale information are
available. Adverse publicity and changing investor perceptions may affect
the ability of outside pricing services to value lower-quality debt
securities and the Fund's ability to sell these securities.
Since the risk of default is higher for lower-quality debt securities,
FMR's research and credit analysis are an especially important part of
managing securities of this type held by the Fund. In considering
investments for the Fund, FMR will attempt to identify those issuers
of high-yielding securities whose financial condition is adequate to meet
future obligations, has improved, or is expected to improve in the future.
FMR's analysis focuses on relative values based on such factors as
interest, dividend or debt service coverage, asset coverage, earnings
prospects, and the experience and managerial strength of the issuer.
OREIGN INVESTMENTS. Investing in securities issued by companies or other
issuers whose principal activities are outside the United States may
involve significant risks in addition to the risks inherent in U.S.
investments. The value of securities denominated in foreign currencies and
of dividends and interest paid with respect to such securities will
fluctuate based on the relative strength of the U.S. dollar. In addition,
there is generally less publicly available information about foreign
issuers' financial condition and operations, particularly those not subject
to the disclosure and reporting requirements of the U.S. securities laws.
Foreign issuers are generally not bound by uniform accounting, auditing,
and financial reporting requirements and standards of practice comparable
to those applicable to U.S. issuers. Further, economies of particular
countries or areas of the world may differ favorably or unfavorably from
the economy of the United States.
Investing abroad also involves different political and economic risks.
Foreign investments may be affected by actions of foreign governments
adverse to the interests of U.S. investors, including the possibility of
expropriation or nationalization of assets, confiscatory taxation,
restrictions on U.S. investment or on the ability to repatriate assets or
convert currency into U.S. dollars, or other government intervention. There
may be a greater possibility of default by foreign governments or foreign
government-sponsored enterprises. Investments in foreign countries also
involve a risk of local political, economic, or social instability,
military action or unrest, or adverse diplomatic developments. There is no
assurance that FMR will be able to anticipate these potential events or
counter their effects. The considerations noted above generally are
intensified for investments in developing countries. Developing countries
may have relatively unstable governments, economies based on only a few
industries, and securities markets that trade a small number of securities.
Foreign markets may offer less protection to investors than U.S. markets.
It is anticipated that in most cases the best available market for foreign
securities will be on exchanges or in over-the-counter markets located
outside of the United States. Foreign stock markets, while growing in
volume and sophistication, are generally not as developed as those in the
United States, and securities of some foreign issuers (particularly those
located in developing countries) may be less liquid and more volatile than
securities of comparable U.S. issuers. Foreign security trading practices,
including those involving securities settlement where Fund assets
may be released prior to receipt of payment, may expose the Fund to
increased risk in the event of a failed trade or the insolvency of a
foreign broker-dealer, and may involve substantial delays. In addition, the
costs of foreign investing, including withholding taxes, brokerage
commissions and custodial costs, are generally higher than for U.S.
investors. In general, there is less overall governmental supervision and
regulation of securities exchanges, brokers, and listed companies than in
the United States. It may also be difficult to enforce legal rights in
foreign countries.
The Fund may invest in foreign securities that impose restrictions
on transfer within the United States or to U.S. persons. Although
securities subject to such transfer restrictions may be marketable abroad,
they may be less liquid than foreign securities of the same class that are
not subject to such restrictions.
The Fund may invest in American Depository Receipts and European
Depository Receipts (ADRs and EDRs), which are certificates evidencing
ownership of shares of a foreign-based issuer held in trust by a bank or
similar financial institution. Designed for use in the U.S. and European
securities markets, respectively, ADRs and EDRs are alternatives to the
purchase of the underlying securities in their national markets and
currencies.
FOREIGN CURRENCY TRANSACTIONS. The Fund may conduct foreign
currency transactions on a spot (i.e., cash) basis or by entering into
forward contracts to purchase or sell foreign currencies at a future date
and price. The Fund will convert currency on a spot basis from time
to time, and investors should be aware of the costs of currency conversion.
Although foreign exchange dealers generally do not charge a fee for
conversion, they do realize a profit based on the difference between the
prices at which they are buying and selling various currencies. Thus, a
dealer may offer to sell a foreign currency to the Fund at one rate,
while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer. Forward contracts are generally traded
in an interbank market conducted directly between currency traders (usually
large commercial banks) and their customers. The parties to a forward
contract may agree to offset or terminate the contract before its maturity,
or may hold the contract to maturity and complete the contemplated currency
exchange.
The Fund may use currency forward contracts for any purpose
consistent with its investment objective. The following discussion
summarizes the principal currency management strategies involving forward
contracts that could be used by the Fund. The Fund may also
use swap agreements, indexed securities, and options and futures contracts
relating to foreign currencies for the same purposes.
When the Fund agrees to buy or sell a security denominated in a
foreign currency, it may desire to "lock in" the U.S. dollar price of the
security. By entering into a forward contract for the purchase or sale, for
a fixed amount of U.S. dollars, of the amount of foreign currency involved
in the underlying security transaction, the Fund will be able to
protect itself against an adverse change in foreign currency values between
the date the security is purchased or sold and the date on which payment is
made or received. This technique is sometimes referred to as a "settlement
hedge" or "transaction hedge." The Fund may also enter into forward
contracts to purchase or sell a foreign currency in anticipation of future
purchases or sales of securities denominated in foreign currency, even if
the specific investments have not yet been selected by FMR.
The Fund may also use forward contracts to hedge against a decline
in the value of existing investments denominated in foreign currency. For
example, if the Fund owned securities denominated in pounds
sterling, it could enter into a forward contract to sell pounds sterling in
return for U.S. dollars to hedge against possible declines in the pound's
value. Such a hedge, sometimes referred to as a "position hedge," would
tend to offset both positive and negative currency fluctuations, but would
not offset changes in security values caused by other factors. The
Fund could also hedge the position by selling another currency
expected to perform similarly to the pound sterling - for example,
by entering into a forward contract to sell Deutschemarks or European
Currency Units in return for U.S. dollars. This type of hedge, sometimes
referred to as a "proxy hedge," could offer advantages in terms of cost,
yield, or efficiency, but generally would not hedge currency exposure as
effectively as a simple hedge into U.S. dollars. Proxy hedges may result in
losses if the currency used to hedge does not perform similarly to the
currency in which the hedged securities are denominated.
The Fund may enter into forward contracts to shift its investment
exposure from one currency into another. This may include shifting exposure
from U.S. dollars to a foreign currency, or from one foreign currency to
another foreign currency. For example, if the Fund held investments
denominated in Deutschemarks, the Fund could enter into forward
contracts to sell Deutschemarks and purchase Swiss Francs. This type of
strategy, sometimes known as a "cross-hedge," will tend to reduce or
eliminate exposure to the currency that is sold, and increase exposure to
the currency that is purchased, much as if the Fund had sold a
security denominated in one currency and purchased an equivalent security
denominated in another. Cross-hedges protect against losses resulting from
a decline in the hedged currency, but will cause the Fund to assume
the risk of fluctuations in the value of the currency it purchases.
Under certain conditions, SEC guidelines require mutual funds to set aside
appropriate liquid assets in a segregated custodial account to cover
currency forward contracts. As required by SEC guidelines, the Fund
will segregate assets to cover currency forward contracts, if any, whose
purpose is essentially speculative. The Fund will not segregate
assets to cover forward contracts entered into for hedging purposes,
including settlement hedges, position hedges, and proxy hedges.
Successful use of currency management strategies will depend on FMR's skill
in analyzing and predicting currency values. Currency management strategies
may substantially change the Fund's investment exposure to changes
in currency exchange rates, and could result in losses to the Fund
if currencies do not perform as FMR anticipates. For example, if a
currency's value rose at a time when FMR had hedged the Fund by
selling that currency in exchange for dollars, the Fund would be
unable to participate in the currency's appreciation. If FMR hedges
currency exposure through proxy hedges, the Fund could realize
currency losses from the hedge and the security position at the same time
if the two currencies do not move in tandem. Similarly, if FMR increases
the Fund's exposure to a foreign currency, and that currency's value
declines, the Fund will realize a loss. There is no assurance that
FMR's use of currency management strategies will be advantageous to the
Fund or that it will hedge at an appropriate time.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS. Direct debt instruments are
interests in amounts owed by a corporate, governmental, or other borrower
to lenders or lending syndicates (loans and loan participations), to
suppliers of goods or services (trade claims or other receivables), or to
other parties. Direct debt instruments are subject to the Fund's
policies regarding the quality of debt securities it may purchase.
Purchasers of loans and other forms of direct indebtedness depend primarily
upon the creditworthiness of the borrower for payment of principal and
interest. Direct debt instruments may not be rated by any nationally
recognized rating service. If the Fund does not receive scheduled
interest or principal payments on such indebtedness, the Fund's
share price and yield could be adversely affected. Loans that are fully
secured offer the Fund more protections than an unsecured loan in
the event of non-payment of scheduled interest or principal. However, there
is no assurance that the liquidation of collateral from a secured loan
would satisfy the borrower's obligation, or that the collateral could be
liquidated. Indebtedness of borrowers whose creditworthiness is poor
involves substantially greater risks and may be highly speculative.
Borrowers that are in bankruptcy or restructuring may never pay off their
indebtedness, or may pay only a small fraction of the amount owed. Direct
indebtedness of developing countries also involves a risk that the
governmental entities responsible for the repayment of the debt may be
unable, or unwilling, to pay interest and repay principal when due.
Investments in loans through direct assignment of a financial institution's
interests with respect to a loan may involve additional risks to the
Fund. For example, if a loan is foreclosed, the Fund could
become part owner of any collateral, and would bear the costs and
liabilities associated with owning and disposing of the collateral. In
addition, it is conceivable that under emerging legal theories of lender
liability, the Fund could be held liable as a co-lender. Direct debt
instruments may also involve a risk of insolvency of the lending bank or
other intermediary. Direct debt instruments that are not in the form of
securities may offer less legal protection to the Fund in the event
of fraud or misrepresentation. In the absence of definitive regulatory
guidance, the Fund relies on FMR's research in an attempt to avoid
situations where fraud or misrepresentation could adversely affect the
Fund.
A loan is often administered by a bank or other financial institution that
acts as agent for all holders. The agent administers the terms of the loan,
as specified in the loan agreement. Unless, under the terms of the loan or
other indebtedness, the Fund has direct recourse against the
borrower, it may have to rely on the agent to apply appropriate credit
remedies against a borrower. If assets held by the agent for the benefit of
the Fund were determined to be subject to the claims of the agent's
general creditors, the Fund might incur certain costs and delays in
realizing payment on the loan or loan participation and could suffer a loss
of principal or interest.
Direct indebtedness purchased by the Fund may include letters of
credit, revolving credit facilities, or other standby financing commitments
obligating the Fund to pay additional cash on demand. These
commitments may have the effect of requiring the Fund to increase
its investment in a borrower at a time when it would not otherwise have
done so, even if the borrower's condition makes it unlikely that the amount
will ever be repaid. The Fund will set aside appropriate liquid
assets in a segregated custodial account to cover its potential obligations
under standby financing commitments.
The Fund limits the amount of total assets that it will invest in
any one issuer or in issuers within the same industry (see fundamental
limitation 4). For purposes of these limitations, the Fund
generally will treat the borrower as the "issuer" of indebtedness held by
the Fund. In the case of loan participations where a bank or other
lending institution serves as financial intermediary between the
Fund and the borrower, if the participation does not shift to the
Fund the direct debtor-creditor relationship with the borrower, SEC
interpretations require the Fund, in appropriate circumstances, to
treat both the lending bank or other lending institution and the borrower
as "issuers" for these purposes. Treating a financial intermediary as an
issuer of indebtedness may restrict the Fund's ability to invest in
indebtedness related to a single financial intermediary, or a group of
intermediaries engaged in the same industry, even if the underlying
borrowers represent many different companies and industries.
FUND'S RIGHTS AS A SHAREHOLDER. The fund does not intend to
direct or administer the day-to-day operations of any company. The
fund, however, may exercise its rights as a shareholder and may communicate
its views on important matters of policy to management, the Board of
Directors, and shareholders of a company when FMR determines that such
matters could have a significant effect on the value of the fund's
investment in the company. The activities that the fund may engage
in, either individually or in conjunction with others, may include, among
others, supporting or opposing proposed changes in a company's corporate
structure or business activities; seeking changes in a company's directors
or management; seeking changes in company's direction or policies; seeking
the sale or reorganization of the company or a portion of its assets; or
supporting or opposing third party takeover efforts. This area of
corporate activity is increasingly prone to litigation, and it is possible
that the fund could be involved in lawsuits related to such activities.
FMR will monitor such activities with a view to mitigating, to the
extent possible, the risk of litigation against the fund and the risk of
actual liability, if the fund is involved in litigation. No
guarantee can be made, however, that litigation against the fund will not
be undertaken or liabilities incurred.
LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS. The Fund will
file a notice of eligibility for exclusion from the definition of the term
"commodity pool operator" with the Commodity Futures Trading Commission
(CFTC) and the National Futures Association, which regulate trading in the
futures markets. The Fund intends to comply with Rule 4.5 under the
Commodity Exchange Act, which limits the extent to which the Fund
can commit assets to initial margin deposits and options premiums.
In addition, the Fund will not: (a) sell futures contracts, purchase
put options, or write call options if, as a result, more than 50% of the
Fund's total assets would be hedged with futures and options under
normal conditions; (b) purchase futures contracts or write put options if,
as a result, the Fund's total obligations upon settlement or
exercise of purchased futures contracts and written put options would
exceed 25% of its total assets; (c) purchase call options if, as a result,
the current value of option premiums for call options purchased by the
Fund would exceed 5% of the Fund's total assets; or (d) write
call options on securities if, as a result, the aggregate value of the
securities underlying the calls would exceed 25% of the Fund's net
assets. These limitations do not apply to options attached to or acquired
or traded together with their underlying securities, and do not apply to
securities that incorporate features similar to options.
The Fund's limitations on investments in futures contracts and
options, and the Fund's policies regarding futures contracts and
options discussed elsewhere in this SAI may be changed as regulatory
agencies permit.
FUTURES CONTRACTS. When the Fund purchases a futures
contract, it agrees to purchase a specified underlying instrument at a
specified future date. When the Fund sells a futures contract, they
agree to sell the underlying instrument at a specified future date. The
price at which the purchase and sale will take place is fixed when the
Fund enters into the contract. Some currently available futures
contracts are based on specific securities, such as U.S. Treasury bonds or
notes, and some are based on indices of securities prices, such as the
Standard & Poor's Composite Index of 500 Stocks (S&P 500). Futures can be
held until their delivery dates, or can be closed out before then if a
liquid secondary market is available.
The value of a futures contract tends to increase and decrease in tandem
with the value of its underlying instrument. Therefore, purchasing futures
contracts will tend to increase the Fund's exposure to positive and
negative price fluctuations in the underlying instrument, much as if it had
purchased the underlying instrument directly. When the Fund sells a
futures contract, by contrast, the value of its futures position will tend
to move in a direction contrary to the market. Selling futures contracts,
therefore, will tend to offset both positive and negative market price
changes, much as if the underlying instrument had been sold.
FUTURES MARGIN PAYMENTS. The purchaser or seller of a futures
contract is not required to deliver or pay for the underlying instrument
unless the contract is held until the delivery date. However, both the
purchaser and seller are required to deposit "initial margin" with a
futures broker, known as a futures commission merchant (FCM), when the
contract is entered into. Initial margin deposits are typically equal to a
percentage of the contract's value. If the value of either party's position
declines, that party will be required to make additional "variation margin"
payments to settle the change in value on a daily basis. The party that has
a gain may be entitled to receive all or a portion of this amount. Initial
and variation margin payments do not constitute purchasing securities on
margin for purposes of the Fund's investment limitations. In the
event of the bankruptcy of an FCM that holds margin on behalf of the
Fund, the Fund may be entitled to return of margin owed to it
only in proportion to the amount received by the FCM's other customers,
potentially resulting in losses to the Fund.
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, the
Fund obtains the right (but not the obligation) to sell the option's
underlying instrument at a fixed strike price. In return for this right,
the Fund pays the current market price for the option (known as the
option premium). Options have various types of underlying instruments,
including specific securities, indices of securities prices, and futures
contracts. The Fund may terminate its position in a put option it
has purchased by allowing it to expire or by exercising the option. If the
option is allowed to expire, the Fund will lose the entire premium
it paid. If the Fund exercises the option, it completes the sale of
the underlying instrument at the strike price. The Fund may also
terminate a put option position by closing it out in the secondary market
at its current price, if a liquid secondary market exists.
The buyer of a typical put option can expect to realize a gain if security
prices fall substantially. However, if the underlying instrument's price
does not fall enough to offset the cost of purchasing the option, a put
buyer can expect to suffer a loss (limited to the amount of the premium
paid, plus related transaction costs).
The features of call options are essentially the same as those of put
options, except that the purchaser of a call option obtains the right to
purchase, rather than sell, the underlying instrument at the option's
strike price. A call buyer typically attempts to participate in potential
price increases of the underlying instrument with risk limited to the cost
of the option if security prices fall. At the same time, the buyer can
expect to suffer a loss if security prices do not rise sufficiently to
offset the cost of the option.
WRITING PUT AND CALL OPTIONS. When the Fund writes a put
option, it takes the opposite side of the transaction from the option's
purchaser. In return for receipt of the premium, the Fund assumes
the obligation to pay the strike price for the option's underlying
instrument if the other party to the option chooses to exercise it. When
writing an option on a futures contract, the Fund will be required
to make margin payments to an FCM as described above for futures contracts.
The Fund may seek to terminate its position in a put option it
writes before exercise by closing out the option in the secondary market at
its current price. If the secondary market is not liquid for a put option
the Fund has written, however, the Fund must continue to be
prepared to pay the strike price while the option is outstanding,
regardless of price changes, and must continue to set aside assets to cover
its position.
If security prices rise, a put writer would generally expect to profit,
although its gain would be limited to the amount of the premium it
received. If security prices remain the same over time, it is likely that
the writer will also profit, because it should be able to close out the
option at a lower price. If security prices fall, the put writer would
expect to suffer a loss. This loss should be less than the loss from
purchasing the underlying instrument directly, however, because the premium
received for writing the option should mitigate the effects of the decline.
Writing a call option obligates the Fund to sell or deliver the
option's underlying instrument, in return for the strike price, upon
exercise of the option. The characteristics of writing call options are
similar to those of writing put options, except that writing calls
generally is a profitable strategy if prices remain the same or fall.
Through receipt of the option premium, a call writer mitigates the effects
of a price decline. At the same time, because a call writer must be
prepared to deliver the underlying instrument in return for the strike
price, even if its current value is greater, a call writer gives up some
ability to participate in security price increases.
COMBINED POSITIONS. The Fund may purchase and write options
in combination with each other, or in combination with futures or forward
contracts, to adjust the risk and return characteristics of the overall
position. For example, the Fund may purchase a put option and write
a call option on the same underlying instrument, in order to construct a
combined position whose risk and return characteristics are similar to
selling a futures contract. Another possible combined position would
involve writing a call option at one strike price and buying a call option
at a lower price, in order to reduce the risk of the written call option in
the event of a substantial price increase. Because combined options
positions involve multiple trades, they result in higher transaction costs
and may be more difficult to open and close out.
CORRELATION OF PRICE CHANGES. Because there are a limited number of
types of exchange-traded options and futures contracts, it is likely that
the standardized contracts available will not match the Fund's
current or anticipated investments exactly. The Fund may invest in
options and futures contracts based on securities with different issuers,
maturities, or other characteristics from the securities in which they
typically invest, which involves a risk that the options or futures
position will not track the performance of the Fund's other
investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match the
Fund's investments well. Options and futures prices are affected by
such factors as current and anticipated short-term interest rates, changes
in volatility of the underlying instrument, and the time remaining until
expiration of the contract, which may not affect security prices the same
way. Imperfect correlation may also result from differing levels of demand
in the options and futures markets and the securities markets, from
structural differences in how options and futures and securities are
traded, or from imposition of daily price fluctuation limits or trading
halts. The Fund may purchase or sell options and futures contracts
with a greater or lesser value than the securities it wishes to hedge or
intends to purchase in order to attempt to compensate for differences in
volatility between the contract and the securities, although this may not
be successful in all cases. If price changes in the Fund's options
or futures positions are poorly correlated with its other investments, the
positions may fail to produce anticipated gains or result in losses that
are not offset by gains in other investments.
LIQUIDITY OF OPTIONS AND FUTURES CONTRACTS. There is no assurance a
liquid secondary market will exist for any particular options or futures
contract at any particular time. Options may have relatively low trading
volume and liquidity if their strike prices are not close to the underlying
instrument's current price. In addition, exchanges may establish daily
price fluctuation limits for options and futures contracts, and may halt
trading if a contract's price moves upward or downward more than the limit
in a given day. On volatile trading days when the price fluctuation limit
is reached or a trading halt is imposed, it may be impossible for the
Fund to enter into new positions or close out existing positions. If
the secondary market for a contract is not liquid because of price
fluctuation limits or otherwise, it could prevent prompt liquidation of
unfavorable positions, and potentially could require the Fund to
continue to hold a position until delivery or expiration regardless of
changes in its value. As a result, the Fund's access to other assets
held to cover its options or futures positions could also be impaired.
OTC OPTIONS. Unlike exchange-traded options, which are standardized
with respect to the underlying instrument, expiration date, contract size,
and strike price, the terms of over-the-counter options (options not traded
on exchanges) generally are established through negotiation with the other
party to the option contract. While this type of arrangement allows the
Fund greater flexibility to tailor an option to their needs, OTC
options generally involve greater credit risk than exchange-traded options,
which are guaranteed by the clearing organization of the exchanges where
they are traded.
OPTIONS AND FUTURES RELATING TO FOREIGN CURRENCIES. Currency futures
contracts are similar to forward currency exchange contracts, except that
they are traded on exchanges (and have margin requirements) and are
standardized as to contract size and delivery date. Most currency futures
contracts call for payment or delivery in U.S. dollars. The underlying
instrument of a currency option may be a foreign currency, which generally
is purchased or delivered in exchange for U.S. dollars, or may be a futures
contract. The purchaser of a currency call obtains the right to purchase
the underlying currency, and the purchaser of a currency put obtains the
right to sell the underlying currency.
The uses and risks of currency options and futures are similar to options
and futures relating to securities or indices, as discussed above. The
Fund may purchase and sell currency futures and may purchase and
write currency options to increase or decrease their exposure to different
foreign currencies. The Fund may also purchase and write currency
options in conjunction with each other or with currency futures or forward
contracts. Currency futures and options values can be expected to correlate
with exchange rates, but may not reflect other factors that affect the
value of the Fund's investments. A currency hedge, for example,
should protect a Yen-denominated security from a decline in the Yen, but
will not protect the Fund against a price decline resulting from
deterioration in the issuer's creditworthiness. Because the value of the
Fund's foreign-denominated investments changes in response to many
factors other than exchange rates, it may not be possible to match the
amount of currency options and futures to the value of the Fund's
investments exactly over time.
SSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. The Fund will
comply with guidelines established by the Securities and Exchange
Commission with respect to coverage of options and futures strategies by
mutual Funds, and if the guidelines so require will set aside
appropriate liquid assets in a segregated custodial account in the amount
prescribed. Securities held in a segregated account cannot be sold while
the futures or options strategy is outstanding, unless they are replaced
with other suitable assets. As a result, there is a possibility that
segregation of a large percentage of the Fund's assets could impede
portfolio management or the Fund's ability to meet redemption
requests or other current obligations.
FUND TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed on
behalf of the Fund by FMR pursuant to authority contained in the
Fund's management contract. FMR is also responsible for the
placement of transaction orders for other investment companies and accounts
for which it or its affiliates act as investment adviser. In selecting
broker-dealers, subject to applicable limitations of the federal securities
laws, FMR considers various relevant factors, including, but not limited
to, the size and type of the transaction; the nature and character of the
markets for the security to be purchased or sold; the execution efficiency,
settlement capability, and financial condition of the broker-dealer firm;
the broker-dealer's execution services rendered on a continuing basis; and
the reasonableness of any commissions. Generally, commissions for foreign
investments traded will be higher than for U.S. investments and may not be
subject to negotiation.
The Fund may execute portfolio transactions with broker-dealers who
provide research and execution services to the Fund or other
accounts over which FMR or its affiliates exercise investment discretion.
Such services may include advice concerning the value of securities; the
advisability of investing in, purchasing, or selling securities; the
availability of securities or the purchasers or sellers of securities;
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and performance of
accounts; and effecting securities transactions and performing functions
incidental thereto (such as clearance and settlement). The selection of
such broker-dealers generally is made by FMR (to the extent possible
consistent with execution considerations) based upon the quality of
research and execution services provided.
The receipt of research from broker-dealers that execute transactions on
behalf of the Fund may be useful to FMR in rendering investment
management services to the Fund or its other clients, and,
conversely, such research provided by brokers-dealers who have executed
transaction orders on behalf of other FMR clients may be useful to FMR in
carrying out its obligations to the Fund. The receipt of such
research has not reduced FMR's normal independent research activities;
however, it enables FMR to avoid the additional expenses that could be
incurred if FMR tried to develop comparable information through its own
efforts.
Subject to applicable limitations of the federal securities laws,
broker-dealers may receive commissions for agency transactions that are in
excess of the amount of commissions charged by other broker-dealers in
recognition of their research and execution services. In order to cause the
Fund to pay such higher commissions, FMR must determine in good
faith that such commissions are reasonable in relation to the value of the
brokerage and research services provided by such executing broker-dealers,
viewed in terms of a particular transaction or FMR's overall
responsibilities to the Fund and its other clients. In reaching this
determination, FMR will not attempt to place a specific dollar value on the
brokerage and research services provided, or to determine what portion of
the compensation should be related to those services.
FMR is authorized to use research services provided by and to place
portfolio transactions with brokerage firms that have provided assistance
in the distribution of shares of the Fund or shares of other
Fidelity funds to the extent permitted by law. FMR may use research
services provided by and place agency transactions with FBSI and
Fidelity Brokerage Services, Ltd. (FBSL), subsidiaries of FMR Corp., if the
commissions are fair, reasonable, and comparable to commissions charged by
non-affiliated, qualified brokerage firms for similar services.
FMR may allocate brokerage transactions to broker-dealers who have entered
into arrangements with FMR under which the broker-dealer allocates a
portion of the commissions paid by each fund toward payment of the fund's
expenses, such as transfer agent fees or custodian fees. The transaction
quality must, however, be comparable to those of other qualified
broker-dealers.
Section 11(a) of the Securities Exchange Act of 1934 prohibits members of
national securities exchanges from executing exchange transactions for
accounts which they or their affiliates manage, unless certain requirements
are satisfied. Pursuant to such requirements, the Board of Directors
has authorized FBSI to execute portfolio transactions on national
securities exchanges in accordance with approved procedures and applicable
SEC rules.
The Fund's Directors periodically review FMR's performance of its
responsibilities in connection with the placement of portfolio transactions
on behalf of the Fund and review the commissions paid by the
Fund over representative periods of time to determine if they are
reasonable in relation to the benefits to the Fund.
The Fund's portfolio turnover rate is expected to be 50%
(annualized) in the first fiscal period ending December 31, 1995.
From time to time the Directors will review whether the recapture
for the benefit of the Fund of some portion of the brokerage
commissions or similar fees paid by the Fund on portfolio
transactions is legally permissible and advisable. The Fund seeks to
recapture soliciting broker-dealer fees on the tender of portfolio
securities, but at present no other recapture arrangements are in effect.
The Directors intend to continue to review whether recapture
opportunities are available and are legally permissible and, if so, to
determine in the exercise of their business judgment whether it would be
advisable for the Fund to seek such recapture.
Although the Directors and officers of the Fund are
substantially the same as those of other funds managed by FMR, investment
decisions for the Fund are made independently from those of other
funds managed by FMR or accounts managed by FMR affiliates. It sometimes
happens that the same security is held in the portfolio of more than one of
these funds or accounts. Simultaneous transactions are inevitable when
several funds and accounts are managed by the same investment adviser,
particularly when the same security is suitable for the investment
objective of more than one fund or account.
When two or more funds are simultaneously engaged in the purchase or sale
of the same security, the prices and amounts are allocated in accordance
with procedures believed to be appropriate and equitable for the
Fund. In some cases this system could have a detrimental effect on
the price or value of the security as far as the Fund is concerned.
In other cases, however, the ability of the Fund to participate in
volume transactions will produce better executions and prices for the
Fund. It is the current opinion of the Directors that the
desirability of retaining FMR as investment adviser to the Fund
outweighs any disadvantages that may be said to exist from exposure to
simultaneous transactions.
PERFORMANCE
The Fund may quote its performance in various ways. All
performance information supplied by the Fund's advertising is
historical and is not intended to indicate future returns. The
Fund's share price, yield, and total return fluctuate in response to
market conditions and other factors.
YIELD CALCULATIONS. Yield for the Fund is computed by
dividing the Fund's interest income for a given 30-day or one month
period, net of expenses, by the average number of Shares entitled to
receive dividends during the period, dividing this figure by the
Fund's net asset value per share ("NAV") at the end of the
period, and annualizing the result (assuming compounding of income) in
order to arrive at an annual percentage rate. Income is calculated for
purposes of yield quotations in accordance with standardized methods
applicable to all stock and bond funds. In general, interest income is
reduced with respect to bonds trading at a premium over their par value by
subtracting a portion of the premium from income on a daily basis, and is
increased with respect to bonds trading at a discount by adding a portion
of the discount of the daily income. Income is adjusted to
reflect gains and losses from principal repayments received by the
Fund with respect to mortgage-related securities and other
asset-backed securities. Other capital gains and losses generally are
excluded from the calculation as are gains and losses currently from
exchange rate fluctuations.
Income calculated for the purposes of calculating the Fund's yield
differs from income as determined for other accounting purposes. Because
of the different accounting methods used, and because of the compounding of
income assumed in yield calculations, the Fund's yield may not equal
its distribution rate, the income paid, or the income reported in
the Fund's financial statements.
Yield information may be useful in reviewing the Fund's performance
and in providing a basis for comparison with other investment alternatives.
However, the Fund's yield fluctuates, unlike investments that pay a
fixed interest rate over a stated period of time. When comparing investment
alternatives, investors should also note the quality and maturity of the
portfolio securities of respective investment companies they have chosen to
consider.
Investors should recognize that in periods of declining interest rates the
Fund's yield will tend to be somewhat higher than prevailing market
rates, and in periods of rising interest rates the Fund's yield will
tend to be somewhat lower. Also, when interest rates are falling, the
inflow of net new money to the Fund from the continuous sale of its
Shares will likely be invested in instruments producing lower yields
than the balance of the Fund's holdings, thereby reducing the
Fund's current yield. In periods of rising interest rates, the
opposite can be expected to occur.
TOTAL RETURN CALCULATIONS. Total returns reflect all aspects of
the Fund's returns, including the effect of reinvesting dividends
and capital gain distributions, and any change in the Fund's NAV
over a stated period. Average annual returns are calculated by determining
the growth or decline in value of a hypothetical historical investment in
the Fund over a stated period, and then calculating the annually
compounded percentage rate that would have produced the same result if the
rate of growth or decline in value had been constant over the period. For
example, a cumulative return of 100% over ten years would produce an
average annual return of 7.18%, which is the steady annual rate that would
equal 100% growth on a compounded basis in ten years. While average
annual returns are a convenient means of comparing investment alternatives,
investors should realize that the Fund's performance is not constant
over time, but changes from year to year, and that average annual returns
represent averaged figures as opposed to the actual year-to-year
performance of the Fund.
In addition to average annual returns, the Fund may quote
unaveraged or cumulative total returns reflecting the simple change in
value of an investment over a stated period. Average annual and cumulative
total returns may be quoted as a percentage or as a dollar amount, and may
be calculated for a single investment, a series of investments, or a series
of redemptions, over any time period. Total returns may be broken down into
their components of income and capital (including capital gains and changes
in share price) in order to illustrate the relationship of these factors
and their contributions to total return. Total returns may be quoted on a
before or after tax basis. Total returns, yields, and other performance
information may be quoted numerically or in a table, graph, or similar
illustration.
DISTRIBUTIONS AND TAXES
TAX STATUS OF THE FUND. The Fund intends to qualify as a
"regulated investment company" for tax purposes so that it will not be
liable for federal tax on income and capital gains distributed to
shareholders. In order to qualify as a regulated investment company
and avoid being subject to federal income or excise taxes at the Fund
level, the Fund intends to distribute substantially all of its net
investment income and net realized capital gains within each calendar year
as well as on a fiscal year basis.
DIVIDENDS. Because the Fund's income is primarily derived
from interest, dividends from the Fund generally will not qualify
for the dividends-received deduction available to corporate shareholders.
Short-term capital gains are distributed as dividend income, but do not
qualify for the dividends received deduction. A portion of the
Fund's dividends derived from certain U.S. Government
obligations may be exempt from state and local taxation. The Fund
will send each shareholder a notice in January describing the tax status of
dividend and capital gain distributions for the prior year.
CAPITAL GAIN DISTRIBUTIONS. Long-term capital gains earned by the
Fund on the sale of securities and distributed to shareholders are
federally taxable as long-term capital gains, regardless of the length of
time shareholders have held their shares. If a shareholder receives a
long-term capital gain distribution on shares of the Fund, and such
shares are held for six months or less and are sold at a loss, the portion
of the loss equal to the amount of the long-term capital gain distribution
will be considered a long-term loss for tax purposes. Short-term capital
gains distributed by the Fund are taxable to shareholders as
dividends, not as capital gains.
OTHER TAX INFORMATION. The information above is only a summary of
the tax consequences generally affecting the Fund and its
shareholders, and no attempt has been made to discuss individual tax
consequences. In addition to federal income taxes, shareholders may be
subject to state and local taxes on distributions received from the
Fund. Investors should consult their tax advisers to determine
whether the Fund is suitable to their particular tax situation.
FMR
All of the stock of FMR is owned by FMR Corp., its parent organized in
1972. The voting common stock of FMR Corp. is divided into two
classes. Class B is held predominantly by members of the Edward C.
Johnson 3d family and is entitled to 49% of the vote on any matter acted
upon by the voting common stock. Class A is held predominantly by
non-Johnson family member employees of FMR Corp. and its affiliates and is
entitled to 51% of the vote on any such matter. The Johnson family
group and all other Class B shareholders have entered into a shareholders'
voting agreement under which all Class B shares will be voted in accordance
with the majority vote of Class B shares. Under the 1940 Act,
control of a company is presumed where one individual or group of
individuals owns more than 25% of the voting stock of that company.
Therefore, through their ownership of voting common stock and the
execution of the shareholders' voting agreement, members of the Johnson
family may be deemed, under the 1940 Act, to form a controlling group with
respect to FMR Corp.
TRUSTEES DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund are listed
below. Except as indicated, each individual has held the office shown or
other offices in the same company for the last five years. All persons
named as Directors also serve in similar capacities for other funds
advised by FMR. Unless otherwise noted, the business address of each
Director and officer is 82 Devonshire Street, Boston, Massachusetts
02109, which is also the address of FMR. Those Directors who are
"interested persons" (as defined in the Investment Company Act of 1940) by
virtue of their affiliation with either the Fund or FMR, are
indicated by an asterisk (*).
ARTHUR S. LORING (47), President and Secretary, is Senior Vice
President (1993) and General Counsel of FMR, Vice President-Legal of FMR
Corp., and Vice President and Clerk of FDC.
Kenneth A. Rathgeber ( ), Treasurer (1995), is Treasurer of the
Fidelity funds and an employee of FMR (1995). Before joining FMR,
Mr. Rathgeber was aVice President of Goldman Sachs & Co. (1978-1995), where
he served in various positions, including Vice President of Proprietary
Accounting (1998-1992), Global Co-Controller (1992-1994), and Chief
Operations Officer of Goldman Sachs (Asia) LLC (1994-1995).
JOHN H. COSTELLO (48), Assistant Treasurer, is an employee of FMR.
The following table sets forth information describing the compensation of
each current Director of the Fund for his or her services as
Director for the fiscal year ended December 31, 1995.
COMPENSATION TABLE

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Total
Pension or Compensation
Aggregate Retirement from Fund and the
Compensation Benefits Accrued Estimated Annual Fund
from as Part of Fund Benefits Upon Complex Paid
Directors the Fund(dagger) Expenses * Retirement*

to Directors*

Arthur S. Loring

Kenneth A. Rathgeber

John H. Costello

</TABLE>

* Information is as of December 31, 1994 for 206 funds in the complex.
** Interested Directors of the Fund are compensated by FMR.
(dagger) Estimated.
Under a retirement program that became effective on November 1, 1989,
Directors, upon reaching age 72, become eligible to participate in a
defined benefit retirement program under which they receive payments during
their lifetime from the Fund based on their basic Director
fees and length of service.
MANAGEMENT CONTRACT
The Fund employs FMR to furnish investment advisory and other
services. Under its management contract with the Fund, FMR acts as
investment adviser and, subject to the supervision of the Board of
Directors, directs the investments of the Fund in accordance
with its investment objective, policies and limitations. FMR also provides
the Fund with all necessary office facilities and personnel for
servicing the Fund's investments, compensates all officers of the
Fund and all Directors who are "interested persons" of the
Fund or of FMR, and all personnel of the Fund or FMR
performing services relating to research, statistical, and investment
activities.
In addition, FMR or its affiliates, subject to the supervision of the Board
of Directors, provide the management and administrative services
necessary for the operation of the Fund. These services include
providing facilities for maintaining the Fund's organization;
supervising relations with custodians, transfer and pricing agents,
accountants, underwriters and other persons dealing with the Fund;
preparing all general shareholder communications and conducting shareholder
relations; maintaining the Fund's records and the registration of
the Fund's shares under federal and state laws; developing
management and shareholder services for the Fund; and furnishing
reports, evaluations, and analyses on a variety of subjects to the
Directors.
In addition to the management fee payable to FMR and the fees payable to
FIIOC, the Fund pays all of its expenses, without limitation, that
are not assumed by those parties. The Fund pays for the typesetting,
printing, and mailing of its proxy materials to shareholders, legal
expenses, and the fees of the custodian, auditor and non-interested
Directors. Although the Fund's current management contract
provides that the Fund will pay for typesetting, printing, and
mailing prospectuses, statements of additional information, notices and
reports to shareholders, the Fund has entered into a transfer agent
agreement with FIIOC, pursuant to which FIIOC bears the costs of providing
these services to existing shareholders. Other expenses paid by the
Fund include interest, taxes, brokerage commissions, the
Fund's proportionate share of insurance premiums and Investment
Company Institute dues, and the costs of registering shares under federal
and state securities laws. The Fund is also liable for such
non-recurring expenses as may arise, including costs of any litigation to
which the Fund may be a party, and any obligation it may have to
indemnify its officers and Directors with respect to litigation.
FMR is the Fund's manager pursuant to a management contract dated
_______, 1995, which was approved by shareholders on ____________, 1995.
The management fee paid to FMR is reduced by an amount equal to the fees
and expenses of the non-interested Directors.
For the services of FMR under the contract, the Fund pays FMR a
monthly management fee composed of a basic fee.
COMPUTING THE BASIC FEE. The Fund's basic fee rate is composed of
two elements: a group fee rate and an individual fund fee rate. The group
fee rate is based on the monthly average net assets of all of the
registered investment companies with which FMR has management contracts and
is calculated on a cumulative basis pursuant to the graduated fee rate
schedule shown below on the left. Also shown below on the right is the
effective annual group fee rate schedule which is the result of
cumulatively applying the annualized rates at varying asset levels. For
example, the effective annual fee rate at $___ billion of group net assets
- - the approximate level for ________, 1995 - was _____%, which is the
weighted average of the respective fee rates for each level of group net
assets up to that level.
GROUP FEE RATE SCHEDULE EFFECTIVE ANNUAL FEE RATES
Average Group Annualized Group Net Effective Annual Fee
Assets Rate Assets Rate

0 - $ 3 billion .3700% $ 0.5 billion .3700%

3 - 6 .3400 25 .2664

6 - 9 .3100 50 .2188

9 - 12 .2800 75 .1986

12 - 15 .2500 100 .1869

15 - 18 .2200 125 .1793

18 - 21 .2000 150 .1736

21 - 24 .1900 175 .1690

24 - 30 .1800 200 .1652

30 - 36 .1750 225 .1618

36 - 42 .1700 250 .1587

42 - 48 .1650 275 .1560

48 - 66 .1600 300 .1536

66 - 84 .1550 325 .1514

84 - 120 .1500 350 .1494

120 - 156 .1450 375 .1476

156 - 192 .1400 400 .1459

192 - 228 .1350

228 - 264 .1300

264 - 300 .1275

300 - 336 .1250

336 - 372 .1225

Over 372 .1200

The individual fund fee rate is 0.60%. Based on the average group net
assets of the funds advised by FMR for __________, 1995, the annual basic
fee rate would be calculated as follows:
Group Fee Rate Individual Fund Fee Rate Management Fee Rate

_____% + .60% = _____%

One-twelfth of this annual basic fee rate is applied to the Fund's
net assets averaged for the most recent month, giving a dollar amount,
which is the fee for that month.
FMR may, from time to time, voluntarily reimburse all or a portion of the
Fund's operation expenses (exclusive of interest, taxes, brokerage
commissions, and extraordinary expenses) above a specified percentage of
average net assets. FMR retains the ability to be repaid for these expense
reimbursements in the amount that expenses fall below the limit prior to
the end of the fiscal year. Expense reimbursements by FMR will increase the
Fund's total returns and reimbursement by the Fund will lower
its total returns.
CONTRACTS WITH COMPANIES AFFILIATED WITH FMR
FIIOC is transfer, dividend disbursing, and shareholders' servicing agent
for the Fund. Under the Fund's contract with FIIOC, the
Fund pays a per account fee of $___ and a monetary
transaction fee of $___ or $___ depending on the nature of
services provided. Fees for certain institutional retirement plan accounts
are based on the net assets of all such accounts in the Fund. Under
the contract, FIIOC pays out-of-pocket expenses associated with providing
transfer agent services. In addition, FIIOC bears the expense of
typesetting, printing, and mailing prospectuses, statements of additional
information, and all other reports, notices, and statements to
shareholders, with the exception of proxy statements.
The Fund has a contract with FSC which provides that
FSC will perform the calculations necessary to determine the
Fund's net asset per share and dividends, maintains the
Fund's accounting records, and administers the Fund's
securities lending program. The fee rates are based on the Fund's
average net assets, specifically, _______. The fee is limited to a
minimum of $_______ and a maximum of $750,000 per year.
The Fund has a distribution agreement with FDC, a Massachusetts
corporation organized on July 18, 1960. FDC is a broker-dealer
registered under the Securities Exchange Act of 1934 and is a member of the
National Association of Securities Dealers, Inc. The distribution
agreement calls for FDC to use all reasonable efforts, consistent with its
other business, to secure purchasers for Shares of the Fund.
Promotional and administrative expenses in connection with the offer and
sale of Shares are paid by FMR.
DESCRIPTION OF THE FUND
COMMON STOCK . The authorized capital stock of the Fund is
100,000,000 shares of Common Stock ($.001 par value). The Common
Stock, when issued, will be fully paid and nonassessable. All
shares of Common Stock are equal as to dividends, distributions and voting
privileges. There are no conversion, preemptive or other
subscription rights. In the event of liquidation, each share of
Common Stock is entitled to its proportion of the Fund's assets after debts
and expenses. There are no cumulative voting rights for the
election of directors. Prior to the offering, FMR will own 100% of
the outstanding shares of Common stock of the Fund and, consequently, will
be a controlling person of the Fund until the shares offered hereby are
issued or sold.
The Fund's Board of Directors has the authority to classify and reclassify
any authorized but unissued shares of capital stock and to establish the
rights and preferences of such unclassified shares. The Fund has no
present intention of offering additional shares of its Common Stocks.
Other offerings of its Common Stock, if made, will require approval of
the Fund's Board of Directors. Any additional offering will be
subject to the requirements of the 1940 Act that shares of Common Stock may
not be sold at a price below the then current net asset value (exclusive of
underwriting discounts and commissions) except in connection with an
offering to existing shareholders or with the consent of a majority of the
Fund's outstanding Common Stock.
SPECIAL VOTING PROVISIONS. The Fund presently has provisions in
its Articles of Incorporation, as amended, and By-Laws which may have the
effect of limiting the ability of other entities or persons to acquire
control of the Fund, to cause it to engage in certain transactions, or to
modify its structure.
Under these provisions, a director may be removed from office only for
cause by vote of at least 75% of the shares of capital stock entitled to be
voted on the matter. Also conversion of the Fund from a closed-end
to an open-end investment company requires approval of 75% of the entire
Board of Directors and the affirmative vote of holders of at least 75% of
the Common Stock outstanding unless it is approved by a vote of 75% of the
Continuing Directors (as defined below), in which event such conversion
requires the approval of the holders of a majority of the outstanding
Common Stock. A "Continuing Director" is any member of the Board of
Directors of the Fund who is not a person or affiliate of a person who
enters or proposes to enter into a Business Combination (as defined below)
with the Fund (an "Interested Party") and who has been a member of the
Board of Directors for a period of at least 12 months, or has been a member
of the Board of Directors since April 1, 1994, or is a successor of a
Continuing Director who is unaffiliated with an Interested Party and is
recommended to succeed a Continuing Director by a majority of the
Continuing Directors then on the Board of Directors of the Fund.
Additionally, the affirmative vote of 75% of the entire Board of Directors
and the holders of at least (i) 75% of the Common Stock and (ii) in the
case of a Business Combination (as defined below), 66 2/3% of the Common
Stock other than Common Stock held by an Interested Party who is (or whose
affiliate is) a party to a Business Combination (as defined below) or an
affiliate or associate of the Interested Party, are required to authorize
any of the following transactions:
(i) merger, consolidation or statutory share exchange of the Fund with or
into any other person;
(ii) issuance or transfer by the Fund (in one or a series of transactions
in any 12 month period) of any securities of the Fund to any person or
entity for cash, securities or other property (or combination thereof)
having an aggregate fair market value of $1,000,000 or more, excluding
issuances or transfers of debt securities of the Fund, sales of securities
of the Fund in connection with a public offering, issuances of securities
of the Fund pursuant to a dividend reinvestment plan adopted by the Fund
and issuances of securities of the Fund upon the exercise of any stock
subscription rights distributed by the Fund and portfolio transactions
effected by the Fund in the ordinary course of its business;
(iii) sale, lease, exchange, mortgage, pledge, transfer or other
disposition by the Fund (in one or a series of transactions in any 12 month
period) to or with any person or entity of any assets of the Fund having an
aggregate fair market value of $1,000,000 or more, except for portfolio
transactions (including pledges of portfolio securities in connection with
borrowings) effected by the Fund in the ordinary course of its business
(transactions within clauses (i), (ii) and (iii) above being known
individually as a "Business Combination");
(iv) the voluntary liquidation or dissolution of the Fund, or an amendment
to the Fund's Articles of Incorporation, as amended, to terminate the
Fund's existence; or
(v) unless the 1940 Act or federal law requires a lesser vote, any
stockholder proposal as to specific investment decisions made or to be made
with respect to the Fund's assets as to which stockholder approval is
required under federal or Maryland law.
However, the stockholder vote described above will not be required with
respect to the foregoing transactions (other than those set forth in (v)
above) if they are approved by a vote of 75% of the Continuing
Directors. In that case, if Maryland law requires stockholder
approval, the affirmative vote of a majority of the votes entitled to be
cast thereon shall be required.
Reference is made to the Articles of Incorporation as amended, and By-Laws
of the Fund, on file with the Commission, for the full text of these
provisions.
CUSTODIAN. Bank of New York, 48 Wall Street, New York, New York
10286, is custodian of the assets of the Fund. The custodian is
responsible for the safekeeping of the Fund's assets and the
appointment of subcustodian banks and clearing agencies. The custodian
takes no part in determining the investment policies of the Fund or
in deciding which securities are purchased or sold by the Fund. The
Fund may, however, invest in obligations of the custodian and may
purchase securities from or sell securities to the custodian. Morgan
Guaranty Trust Company of New York and Chemical Bank, each headquartered in
New York, also may serve as a special purpose custodian of certain assets
in connection with pooled repurchase agreement transactions.
FMR, its officers and directors, its affiliated companies, and the
Fund's Directors may from time to time have transactions with
various banks, including banks serving as custodians for certain
Funds advised by FMR. Transactions that have occurred to
date include mortgages and personal and general business loans. In
the judgment of FMR, the terms and conditions of those transactions were
not influenced by existing or potential custodial or other Fund
relationships.
AUDITOR. _________________________ serves as the
Fund's independent accountant. The auditor examines financial
statements for the Fund and provides other audit, tax, and related
services.
APPENDIX A
DOLLAR-WEIGHTED AVERAGE MATURITY is derived by multiplying the value of
each investment by the number of days remaining to its maturity, adding
these calculations, and then dividing the total by the value of the
Fund's portfolio. An obligation's maturity is typically determined
on a stated final maturity basis, although there are some exceptions to
this rule.
For example, if it is probable that the issuer of an instrument will take
advantage of a maturity-shortening device, such as a call, refunding, or
redemption provision, the date on which the instrument will probably be
called, refunded, or redeemed may be considered to be its maturity date.
Also, the maturities of mortgage-backed securities and some asset-backed
securities, such as collateralized mortgage obligations, are determined on
a weighted average life basis, which is the average time for principal to
be repaid. For a mortgage security, this average time is calculated by
estimating the expected principal payments during the life of the mortgage.
The weighted average life of these securities is likely to be substantially
shorter than their stated final maturity.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S CORPORATE BOND RATINGS:
AAA - Bonds rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
AA - Bonds rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long-term risks appear somewhat
larger than in Aaa securities.
A - Bonds rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
BAA - Bonds rated Baa are considered as medium-grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
BA - Bonds rated Ba are judged to have speculative elements. Their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payment of or maintenance
of other terms of the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
CA - Bonds rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
short-comings.
C - Bonds rated C are the lowest rated class of bonds and issued so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S CORPORATE BOND RATINGS:
AAA - Debt rated AAA has the highest rating assigned by Standard &
Poor's to a debt obligation. Capacity to pay interest and repay principal
is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and
repay principal and differs from the highest-rated debt issues only in
small degree.
A - Debt rated A has a strong capacity to pay interest and repay
principal, although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions.
BBB - Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories.
BB - Debt rated BB has less near-term vulnerability to
default than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or economic
conditions which could lead to inadequate capacity to meet timely interest
and principal payments.
B - Debt rated B has a greater vulnerability to default but
currently has the capacity to meet interest payments and principal
repayments. Adverse business, financial, or economic conditions will likely
impair capacity or willingness to pay interest and repay principal. The B
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BB- rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal.
In the event of adverse business, financial, or economic conditions, it is
not likely to have the capacity to pay interest and repay principal.
CC - Debt rated CC is typically applied to debt subordinated to
senior debt which is assigned an actual or implied CCC debt rating.
C - The rating C is typically applied to debt subordinated to senior
debt which is assigned on actual or implied CCC- debt rating. The C rating
may be used to cover a situation where a bankruptcy petition has been filed
but debt service payments are continued.
CI - The rating CI is reserved for income bonds on which no interest
is being paid.
D - Debt rated D is in payment default. The D rating category is
used when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period. The D
rating will also be used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
The ratings from AA to CCC may be modified by the addition of a plus or
minus to show relative standing within the major rating categories.

FINANCIAL STATEMENTS

[INSERT TO FOLLOW]

FIDELITY REAL ESTATE HIGH INCOME FUND III, INC.
PART C - OTHER INFORMATION
ITEM 24: FINANCIAL STATEMENTS AND EXHIBITS
1. Financial Statements
Financial Statements included in PART A (Prospectus) of this Registration
Statement:
None.
Financial Statements included in PART B (SAI) of this Registration
Statement:
(a) [Balance sheet of the Registrant.]
(b) [Report of ___________________.]
2. Exhibits
(a) Articles of Incorporation of Fidelity Real Estate High Income
Fund III, Inc. dated as of
August 25, 1995.
(b) By-Laws, as amended, of the Registrant dated August 25, 1995.
(c) Not applicable.
(d) Not applicable.
(e) Not applicable.
(f) Not applicable.
(g) Form of Management Contract between Fidelity Real Estate High
Income Fund III, Inc.
and Fidelity Management & Research Company to be filed by subsequent
amendment.
(h) Form of Distribution Agreement between Fidelity Real Estate
High Income Fund III, Inc.
and Fidelity Distributors Corporation to be filed by subsequent
amendment.

(i) Not applicable.
(j) Custodian Contract dated as of ______________ between
Fidelity Real Estate High Income
Fund III, Inc. and Bank of New York to be filed by subsequent
amendment.
(k) Transfer Agency and Service Agreement dated as of
_____________ between Fidelity
Real Estate High Income Fund III, Inc. and Fidelity Investments
Institutional Operations
Company to be filed by subsequent amendment.
(l)(1) Opinion and consent of Kirkpatrick & Lockhart to be filed by
subsequent amendment.

(m) Not applicable.
(n) Opinion and consent of Piper & Marbury to be filed by subsequent
amendment.
(o) Not applicable.
(p) Not applicable.
(q) Not applicable.
(r) [Not applicable.]
ITEM 25: MARKETING ARRANGEMENTS
Not Applicable.
ITEM 26: OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Registration fees $________
Printing expenses ________
Legal fees and expenses ________
Accounting fees and expenses ________
Miscellaneous expenses ________
Total $________
ITEM 27: PERSONS CONTROLLED BY OR UNDER COMMON CONTROL
[INSERT TO FOLLOW]
ITEM 28: NUMBER OF HOLDERS OF SECURITIES
At _________, 1995 the numbers of recordholders of Shares of the
Registrant were as follows:
NUMBER OF
TITLE OF CLASS RECORD HOLDERS
Common Stock, $.001 par value per share
ITEM 29: INDEMNIFICATION
[INSERT TO FOLLOW]
ITEM 30: BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(1) FIDELITY MANAGEMENT & RESEARCH COMPANY

FMR serves as investment adviser to a number of other investment
companies. The directors and officers of the Adviser have held, during the
past two fiscal years, the following positions of a substantial nature.

<TABLE>
<CAPTION>
<S> <C>
Edward C. Johnson 3d Chairman of the Executive Committee of FMR; President
and Chief Executive Officer of FMR Corp.; Chairman of
the Board and a Director of FMR, FMR Corp., FMR Texas
Inc., Fidelity Management & Research (U.K.) Inc., and
Fidelity Management & Research (Far East) Inc.; President
and Trustee of funds advised by FMR.

J. Gary Burkhead President of FMR; Managing Director of FMR Corp.;
President and a Director of FMR Texas Inc., Fidelity
Management & Research (U.K.) Inc., and Fidelity
Management & Research (Far East) Inc.; Senior Vice
President and Trustee of funds advised by FMR.

Peter S. Lynch Vice Chairman and Director of FMR.

Robert Beckwitt Vice President of FMR and of funds advised by FMR.

David Breazzano Vice President of FMR (1993) and of a fund advised by
FMR.

Stephan Campbell Vice President of FMR (1993).

Dwight Churchill Vice President of FMR (1993).

William Danoff Vice President of FMR (1993) and of a fund advised by
FMR.

Scott DeSano Vice President of FMR (1993).

Penelope Dobkin Vice President of FMR and of a fund advised by FMR.

Larry Domash Vice President of FMR (1993).

George Domolky Vice President of FMR (1993) and of a fund advised by
FMR.

Robert K. Duby Vice President of FMR.

Margaret L. Eagle Vice President of FMR and of a fund advised by FMR.

Kathryn L. Eklund Vice President of FMR.

Richard B. Fentin Senior Vice President of FMR (1993) and of a fund advised
by FMR.

Daniel R. Frank Vice President of FMR and of funds advised by FMR.

Michael S. Gray Vice President of FMR and of funds advised by FMR.

Lawrence Greenberg Vice President of FMR (1993).

Barry A. Greenfield Vice President of FMR and of a fund advised by FMR.

William J. Hayes Senior Vice President of FMR; Equity Division Leader.

Robert Haber Vice President of FMR and of funds advised by FMR.

Richard Haberman Senior Vice President of FMR (1993).

Daniel Harmetz Vice President of FMR and of a fund advised by FMR.

Ellen S. Heller Vice President of FMR.

</TABLE>

John Hickling Vice President of FMR (1993) and of funds advised by
FMR.

Robert F. Hill Vice President of FMR; and Director of Technical
Research.

Stephen P. Jonas Treasurer and Vice President of FMR (1993); Treasurer of
FMR Texas Inc. (1993), Fidelity Management & Research
(U.K.) Inc. (1993), and Fidelity Management & Research
(Far East) Inc. (1993).

David B. Jones Vice President of FMR (1993).

Steven Kaye Vice President of FMR (1993) and of a fund advised by
FMR.

Frank Knox Vice President of FMR (1993).

Robert A. Lawrence Senior Vice President of FMR (1993); and High Income
Division Leader.

Alan Leifer Vice President of FMR and of a fund advised by FMR.

Harris Leviton Vice President of FMR (1993) and of a fund advised by
FMR.

Bradford E. Lewis Vice President of FMR and of funds advised by FMR.

Malcolm W. MacNaught III Vice President of FMR (1993).

Robert H. Morrison Vice President of FMR and Director of Equity Trading.

David Murphy Vice President of FMR and of funds advised by FMR.

Andrew Offit Vice President of FMR (1993).

Judy Pagliuca Vice President of FMR (1993).

Jacques Perold Vice President of FMR.

Anne Punzak Vice President of FMR and of funds advised by FMR.

Lee Sandwen Vice President of FMR (1993).

Patricia A. Satterthwaite Vice President of FMR (1993) and of a fund advised by
FMR.

Thomas T. Soviero Vice President of FMR (1993).

Robert E. Stansky Senior Vice President of FMR (1993) and of funds advised
by FMR.

Gary L. Swayze Vice President of FMR and of funds advised by FMR; and
Tax-Free Fixed-Income Group Leader.

Thomas Sweeney Vice President of FMR (1993).

Donald Taylor Vice President of FMR (1993) and of funds advised by
FMR.

Beth F. Terrana Senior Vice President of FMR (1993) and of funds advised
by FMR.

Joel Tillinghast Vice President of FMR (1993) and of a fund advised by
FMR.

Robert Tucket Vice President of FMR (1993).

George A. Vanderheiden Senior Vice President of FMR; Vice President of funds
advised by FMR; and Growth Group Leader.

Jeffrey Vinik Senior Vice President of FMR (1993) and of a fund advised
by FMR.

Guy E. Wickwire Vice President of FMR and of a fund advised by FMR.

Arthur S. Loring Senior Vice President (1993), Clerk and General Counsel of
FMR; Vice President, Legal of FMR Corp.; and Secretary
of funds advised by FMR.

</TABLE>

ITEM 31: LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, and the
Rules (17 CFR 270.31a-1 to 31a-3) promulgated thereunder are maintained at
the offices of the custodian of the Registrant at
__________________________, except that the corporate records of the
Registrant (including its Articles of Incorporation and By-Laws) are
maintained at the offices of the Registrant at ________________.
ITEM 32: MANAGEMENT SERVICES
Not applicable.
ITEM 33: UNDERTAKINGS
1. The Registrant undertakes to suspend the offering of its Shares until
it amends its prospectus if (1) subsequent to the effective date of its
Registration Statement, its net asset value declines more than 10 percent
from its net asset value as of the effective date of the Registration
Statement, or (2) the net asset value increases to an amount greater than
its net proceeds as stated in the prospectus.
2. Not applicable.
3. Not applicable.
4. The Registrant undertakes:
a. to file, during any period in which offers or sales are being made, a
post-effective amendment to the registration statement:
(1) to include any prospectus required by Section 10(a)(3) of the 1933 Act
[15 U.S.C. 77J(A)(3)];
(2) to reflect in the prospectus any facts or events after the effective
date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration
statement; and
(3) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
b. that, for the purpose of determining any liability under the 1933 Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
those securities at that time shall be deemed to be the initial bona fide
offering thereof; and
c. to remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
5. The Registrant undertakes that:
a. For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
a registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant under Rule 497(h) under the
Securities Act of 1933 shall be deemed to be part of the Registration
Statement as of the time it was declared effective.

b. For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering thereof.
6. Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused its
Registration Statement to be signed on its behalf by the undersigned,
thereto duly authorized, in the City of Boston and the Commonwealth of
Massachusetts, on the 9th day of November, 1995.
FIDELITY REAL ESTATE HIGH INCOME
FUND III, INC.
By: /s/ Arthur S. Loring
Arthur S. Loring
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form N-2 has been signed below by the following
persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/Arthur S. Loring President, Secretary (Principal November 9, 1995
Executive Officer) and Director
/s/Kenneth A. Rathgeber Treasurer (Principal Financial and November 9,
1995
Accounting Officer) and Director
/s/John H. Costello Assistant Treasurer and Director November 9, 1995

1933 Act File No. 33-_____
1940 Act File No. 811-____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM N-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. __
Post-Effective Amendment No. __
and/or
REGISTRATION STATEMENT
UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. __
____________________
FIDELITY REAL ESTATE HIGH INCOME FUND III, INC.
(Exact Name of Registrant as Specified in Charter)
____________________
EXHIBITS
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBER EXHIBIT NUMBERED PAGE