FIDELITY REAL ESTATE HIGH INCOME FUND III INC, N-2/A, 1996-01-03

FIDELITY REAL ESTATE HIGH INCOME FUND III INC
N-2/A, 1996-01-03

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As filed with the Securities and Exchange Commission on January 3, 1996
1933 Act File No. 33-64113
1940 Act File No. 811-07419
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. 2
Post-Effective Amendment No. __
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 1
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>
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<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 OR 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 JANUARY 3, 1996
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 ___________ ___, 1996 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 _______, 1996.

TABLE OF CONTENTS
FUND EXPENSES 1
THE FUND 1
USE OF PROCEEDS 2
MANAGEMENT OF THE FUND 2
Board of Directors 2
FMR and Its Affiliates 2
Management Fee 3
INVESTMENT PRINCIPLES AND RISKS 3
Securities and Investment Practices 4
Mortgage-Backed Securities 4
Commercial Mortgage-Backed Securities 5
Residential Mortgage-Backed Securities 6
Mortgage-Related Securities Issued by U.S. Government Agencies and
Instrumentalities 6
Collateralized Mortgage Obligations and Multi-Class Pass-Through
Securities 6
Stripped Mortgage-Backed Securities 6
Equity Securities 7
Debt Securities 7
Lower Rated and Non-Rated Lower Quality Debt Securities 7
Real Estate Investment Trusts 8
U.S. Government Securities 8
Money Market Instruments 8
Adjusting Investment Exposure 8
Direct Debt 8
When-Issued and Delayed-Delivery Transactions 8
Repurchase Agreements 9
Illiquid and Restricted Securities 9
Other Instruments 9
Diversification 9
Borrowing 9
Lending 9
Fundamental Investment Policies and Restrictions 9
HOW TO PURCHASE SHARES OF THE FUND 10
LIQUIDATION OF THE FUND 10
TAXATION 10
DESCRIPTION OF CAPITAL STOCK 11
DETERMINATION OF NET ASSET VALUE 11
DIVIDENDS AND DISTRIBUTIONS 11
REPORTS TO SHAREHOLDERS 11
CERTAIN LEGAL MATTERS 12
INVESTMENT POLICIES AND LIMITATIONS B-2
UNTIL , 1996, 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 Estate 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 commercial 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
possibility 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 exchange
for the shareholder's stock. See "Taxation, Disposition 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.
TREATMENT OF FEES AND EXPENSES BY CERTAIN TAXABLE SHAREHOLDERS. Certain
shareholders of the Fund that are not tax-exempt organizations may be
required to include in taxable income, in addition to actual distributions
by the Fund, a deemed dividend equal to their pro rata shares of certain
Fund expenses. Although these shareholders also will be entitled to claim
a corresponding deduction of an equal dollar amount, this deduction will be
treated as a "miscellaneous itemized deduction." Miscellaneous itemized
deductions are deductible only to the extent that all such deductions
(including those unrelated to owning shares of the Fund) exceed two percent
of a shareholder's adjusted gross income. In addition, in the case of
individuals, otherwise allowable itemized deductions will be reduced, but
not by more than eighty percent, by an amount equal to three percent of the
individual's adjusted gross income over a statutorily defined threshold.
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

____________________, 1996

This Statement of Additional Information ("SAI") is not a prospectus but
should be read in conjunction with the current Prospectus (dated
___________, 1996) 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-15
PERFORMANCE B-17
DISTRIBUTIONS AND TAXES B-18
FMR B-18
DIRECTORS AND OFFICERS B-18
MANAGEMENT CONTRACT B-19
CONTRACTS WITH COMPANIES AFFILIATED WITH FMR B-21
DESCRIPTION OF THE FUND B-21
QUESTIONS AND ANSWERS B-23
THE CMBS MARKET (OVERVIEW) B-28
PERFORMANCE OF REHI I B-29
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.
FOREIGN 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.
ASSET 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.
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
Compensation Benefits Accrued Estimated Annual the 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.
QUESTIONS AND ANSWERS
The Fund anticipates the following questions to be asked by potential
investors about the Fund during the offering period and, accordingly,
supplies the following answers in response.
Q: INDICATE WHEN YOUR FIRM BEGAN MANAGING MORTGAGE ACCOUNTS (WHOLE LOANS
AND/OR COMMERCIAL MORTGAGE-BACKED SECURITIES) FOR U.S. TAX-EXEMPT INVESTORS
AND NON TAX-EXEMPT INVESTORS. ALSO DESCRIBE TO WHAT EXTENT, IF ANY, YOUR
FIRM HAS INVESTED IN WHOLE LOANS AND/OR COMMERCIAL MORTGAGE-BACKED
SECURITIES FOR ITS OWN ACCOUNT.
A: Fidelity Management & Research Company (FMR), on behalf of mutual funds
it advises, began investing in commercial mortgage-backed securities (CMBS)
for non tax-exempt investors in June of 1994 and began investing in CMBS
for U.S. tax-exempt investors in January of 1995. In addition to its CMBS
portfolios, on behalf of mutual funds it advises, FMR has been investing in
Mortgage-Backed Securities (MBS) for over 20 years. The Fidelity
Investments complex of mutual funds and its affiliated companies do not
offer a whole loan investment product for tax-exempt or non tax-exempt
investors. FMR does not invest in CMBS or whole loans for its own account.
Q: PROVIDE BACKGROUND SUMMARIES HIGHLIGHTING COMMERCIAL MORTGAGE EXPERIENCE
OF INVESTMENT AND PORTFOLIO MANAGEMENT PROFESSIONALS WHO WOULD BE INVOLVED
WITH A COMMERCIAL MORTGAGE-BACKED SECURITIES INVESTMENT EFFORT.
A: Biographies of FMR's CMBS professionals follow.
FMR'S CMBS TEAM
MARK P. SNYDERMAN
Portfolio Manager
CMBS
Mr. Snyderman is Portfolio Manager with responsibility for investing in
CMBS.
Prior to joining FMR in 1994, Mr. Snyderman was with Aldrich, Eastman &
Waltch from 1988 to 1994, where he was responsible for the management of an
$800 million portfolio composed of commercial mortgage whole loans and
commercial mortgage-backed securities. His last position was that of
Director. Prior to Aldrich, Eastman & Waltch, Mr. Snyderman was a founder
and employee of Commercial Mortgage Corporation, a commercial mortgage
conduit company sponsored by First Boston and Bain & Co.
Mr. Snyderman earned an M.B.A. from Stanford University and an A.B from
Dartmouth College. He is a Chartered Financial Analyst. He has completed
research and published articles on commercial mortgage risk and mortgage
investing.
DAVID A. BAGNANI
CMBS Analyst
Mr. Bagnani is a research analyst in the FMR Real Estate Group and is
responsible for real estate collateral and bond analysis of commercial
mortgage-backed securities. Mr. Bagnani's nine years of real estate
experience include the financial management of commercial properties, due
diligence for acquisitions and sales, property management, and real estate
consulting. Before joining FMR in 1994, Mr. Bagnani was a senior real
estate consultant with Coopers & Lybrand from 1989 to 1994, where he
coordinated the real estate valuation analysis on several securitizations.
In addition, he assisted lenders in the management and disposition of
non-performing and Real Estate Owned (REO) assets.
Mr. Bagnani earned an M.B.A. from Boston College and a B.S.C. from the
University of Santa Clara.
STEPHEN B. ROSEN
CMBS Analyst
Mr. Rosen is a research analyst in the FMR Real Estate Group and is
responsible for real estate collateral and bond analysis of commercial
mortgage-backed securities. Prior to joining FMR in 1995, Mr. Rosen was an
Investment Officer and Assistant Vice President with Heller Financial from
1990 to 1995. At Heller, he was responsible for identifying, structuring
and underwriting commercial real estate investments in the mid-Atlantic and
Northeast markets. His role was to manage the investment process from
sourcing and negotiating transactions to presenting them to Heller
Financial's investment committees. Mr. Rosen originated debt and
gap-equity financings including immediate fundings, forward commitments,
and taxable and tax-exempt credit enhancements.
Mr. Rosen earned an M.B.A. in Finance from Columbia University and a B.S.
in Systems Engineering from the University of Pennsylvania.
DEBORAH L. SADOWSKI
CMBS Research Associate
Ms. Sadowski is a research associate in the FMR Real Estate Group and is
responsible for collateral analysis and security tracking of commercial
mortgage-backed securities. Ms. Sadowski joined FMR in 1995.
Ms. Sadowski earned a B.S. from Tufts University in 1995.
Q: ARE YOU CURRENTLY A REGISTERED INVESTMENT ADVISOR? ARE YOU CURRENTLY A
FIDUCIARY FOR ANY PENSION PLANS? ARE YOU CURRENTLY A QPAM?
A: FMR is a registered investment adviser. FMR manages registered
investment companies, as well as mutual funds organized in foreign
jurisdictions. FMR's affiliate, Fidelity Management Trust Company (FMTC)
is a pension plan fiduciary and a QPAM.
Q: PROVIDE (QUANTIFY) TOTAL ASSETS UNDER MANAGEMENT SINCE 1990. ALSO
DESCRIBE ANY SIGNIFICANT INCREASES AND/OR DECREASES, AND HIRINGS AND/OR
TERMINATIONS.
A:
(IN $ MILLIONS) 1990 1991 1992 1993 1994 19951

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
TOTAL NET VALUE OF ASSETS 110,000 144,000 172,000 237,000 275,000 335,000
MANAGEMENT (ALL PRODUCTS)2

</TABLE>

TOTAL MARKET VALUE OF -- -- -- -- $600 $900
COMMERCIAL MORTGAGES
(WHOLE LOANS & CMBS)
UNDER MANAGEMENT

TOTAL MARKET VALUE OF -- -- -- -- $400 $600
INVESTMENT GRADE CMBS
UNDER MANAGEMENT

TOTAL MARKET VALUE OF -- -- -- -- $140 $300
SUB-INVESTMENT GRADE
CMBS UNDER MANAGEMENT

TOTAL VOLUME CMBS TRADED -- -- -- -- $700 $800

1 As of 9/30/95.
2 Total assets managed by FMR as of December 31 were greater than or equal
to the amounts shown.
Q: LIST YOUR FIRM'S MAJOR TAX-EXEMPT PENSION ACCOUNTS, FOR ALL PUBLIC AND
ERISA CLIENTS CURRENTLY INVESTED IN WHOLE LOANS AND COMMERCIAL
MORTGAGE-BACKED SECURITIES. IF CONFIDENTIALITY REQUIREMENTS PRECLUDE
REVEALING CLIENT NAMES, PROVIDE A GENERIC DESCRIPTION.
A:
INVESTOR INCEPTION DATE $ INVESTED IN WHOLE LOANS $ INVESTED IN CMBS

GTE3 12/15/94 N/A $65 million4

3 A separate account managed by FMTC on behalf of GTE designed to invest in
public and private market real estate. A component of this account is an
FMR-managed mutual fund formed to invest primarily in non-investment grade
CMBS.
4 As of 9/30/95.
Q: DESCRIBE YOUR FIRM'S DISTINGUISHING AREA(S) OF EXPERTISE WITH RESPECT TO
WHOLE LOANS AND CMBS AND HOW THAT EXPERTISE BENEFITS YOUR CLIENTS.
A: FMR's Real Estate Group represents a collection of experienced
investment professionals and reflects the commitment of resources by FMR to
real estate investment management. The Real Estate Group consists of 15
investment professionals, with both public and private market expertise,
including 4 investment professionals specializing in CMBS.
FMR has dedicated significant resources to capitalize on the investment
opportunities available in the non-investment grade CMBS market. Within
FMR's Real Estate Group is a specialized investment team with CMBS
expertise, consisting of a Portfolio Manager, Mark Snyderman, two
dedicated CMBS analysts, David Bagnani and Stephen Rosen, and a CMBS
research associate Deborah Sadowski. In addition to their own
CMBS-specific research, these four investment professionals rely upon the
broader market research generated by other members of the Real Estate
Group.
While the CMBS market is still developing, FMR has already pursued an
active investment program across the credit quality spectrum. Additional
information on FMR's investment process and the dedication of resources to
the CMBS discipline is provided in the next answer.
Q: DESCRIBE YOUR COMMERCIAL MORTGAGE INVESTMENT PROCESS. WHICH
PROFESSIONALS PARTICIPATE? WHAT INTERNAL RESOURCES ARE USED? WHAT
EXTERNAL RESOURCES ARE REQUIRED? HOW ARE BUY/SELL DECISIONS IMPLEMENTED?
A: FMR's investment approach to non-investment grade CMBS follows the same
fundamental, bottom-up approach as is applied by FMR to high yield
corporate bond research, except the analysis focuses on real estate cash
flow and operations and loan fundamentals rather than corporate management
and earnings prospects. FMR's four CMBS investment professionals analyze
the real estate markets, the properties and the ability of underlying
mortgage loans to support the cash flows of the various tranches of the
CMBS issue.
This collateral analysis is primarily done on a mark-the-leases-to-market
basis. FMR believes that a borrower's ability to re-finance debt is
influenced more by recent and future (often lower rate) leases than
historical leases. FMR gathers this information primarily by site visits
and market analyses performed by FMR staff and a group of external
contractors.
After determining the ability of properties to support debt service under
different scenarios, the analysis focuses on cash flow timing issues, which
can affect the life and credit-worthiness of the issue. This analysis
integrates specific details such as mortgage loan pre-payment terms,
borrower incentives, amortization and loan transferability. Finally, prior
to making the final investment decision, the team examines pricing
comparisons with other CMBS issues as well as with corporate bonds to
determine whether risk-adjusted yields are deemed reasonable in light of
liquidity and other current market trends.
Once a security has been purchased, the analysts and portfolio manager
review property market changes and security performance on an ongoing
basis. For example, if FMR's projections change to show certain real
estate markets will perform better than previously expected, FMR might
shift the weight of assets under management toward the more attractive
markets and away from those less attractive. Once the risk/return ratio
has shifted and the premium over corporate bonds reaches a level of
unattractiveness, the manager may sell the particular security and buy
others with better risk/return characteristics.
These buy and sell decisions are implemented through two dedicated mortgage
securities traders. The capital markets expertise of these traders is an
important resource to FMR's CMBS investment team because it allows the
portfolio manager and analysts to focus exclusively on CMBS research and
portfolio management while receiving timely and comprehensive market
information.
Another important resource to the CMBS team are the other eleven
professionals of FMR's Real Estate Group, who focus on private-market real
estate investments (E.G., non-publicly traded real estate-related
securities and real estate ownership interests) and real estate research.
The Real Estate Group's Director of Real Estate Research oversees a
research system which directly benefits the CMBS effort.
One component of this system conducts econometric analyses on the eighty
largest metropolitan areas in the U.S. and focuses on the supply and demand
characteristics for the space markets in each of these areas. Another
component consists of a field network of appraisers in the top eighty
metropolitan areas who are able to inspect property sites on short notice.
This is especially important when CMBS issues are backed by many properties
in different markets. FMR's Director of Asset Management also assists in
making on-site property assessments as well as evaluating property site
inspection reports from the field network. The remaining investment
professionals of the Real Estate Group are an important source of
fundamental real estate information.
Q: DESCRIBE YOUR ABILITY TO ACCESS THE WHOLE LOAN AND CMBS MARKETS. ALSO
DESCRIBE YOUR STRATEGY FOR PRICING INVESTMENTS IN THESE AREAS.
A: FMR believes it has significant access to the CMBS market. FMR-advised
entities are important prospective investors for issuers of CMBS because
FMR purchases across the spectrum of credit quality.
FMR's CMBS discipline analyzes CMBS pricing by comparing relative values to
other bonds. FMR's size can be effective in connection with pricing these
investments. While FMR generally prefers not to buy the entire portion of
any tranche, which can serve to reduce liquidity, FMR, from time-to-time,
manages the size of an order to maximize the attractiveness of the offering
price.
Q: THOROUGHLY DESCRIBE ANY MODEL(S) YOUR FIRM HAS DEVELOPED FOR USE IN THE
ACQUISITION OF COMMERCIAL MORTGAGES. INDICATE WHO DEVELOPED THE MODEL, WHO
OWNS THE MODEL, WHO MAINTAINS THE MODEL AND HOW THE MODEL IS USED IN YOUR
INVESTMENT PROCESS.
A: FMR's CMBS professionals primarily utilize the following models to
complement their fundamental research in conducting analysis on different
CMBS issues. While these models do not make investment decisions or
execute trades, they complement the experience, research and judgment of
the investment professionals to provide a necessary composite of
information with which to invest successfully in the CMBS market.
The most important CMBS model to FMR is FMR's Credit Roll-up Model. It was
developed by FMR employees, including Mr. Snyderman. This model combines
site-visit information (such as market rents, market occupancy, property
competitiveness, location quality, etc.) with loan data to determine FMR's
view of the marked-to-market loan-to-value ratio and cash flow coverage.
The Model uses loan-to-value and debt-service coverage to analyze future
collateral credit losses. Finally, the Model extrapolates its analysis to
the entire collateral pool. This projected collateral loss output is
important to FMR's analysis of the credit-worthiness of a particular
tranche of CMBS.
FMR also uses various commercially available property lease roll-up models
from time to time. FMR believes that these models are most appropriate for
transactions with few, but complicated assets. FMR also occasionally uses
a third-party proprietary lease roll-up model to test sensitivity analyses
on multiple loans, simultaneously.
Q: ASSEMBLE A HYPOTHETICAL $100 MILLION CMBS PORTFOLIO. WHAT ASSETS DO YOU
ANTICIPATE WILL BRING GREATEST VALUE AND WHY? HOW LONG WOULD IT TAKE TO
BECOME INVESTED IN THIS PORTFOLIO?
A: Under current market conditions, a hypothetical $100 million CMBS
portfolio would be invested primarily in CMBS issues rated below BBB as a
result of FMR's perception of the substantial yield premiums relative to
comparably rated corporate bonds. FMR believes these issues offer the
potential for price appreciation as comfort with credit quality increases.
Today, FMR would allocate approximately $50-$75 million to BB issues
because FMR, at present, sees the greatest relative value in this tranche
for the following reasons: (i) the yield difference between BBB and BB is
now roughly 300 basis points, the largest in the entire CMBS credit quality
spectrum; (ii) the 200 basis point gap between BB CMBS and BB corporate
bonds also is now the largest; and (iii) BB issues generally provide the
greatest liquidity within the non-investment grade sector.
FMR would allocate approximately $20-$30 million to B issues. These
investments are more likely to be single-borrower securities and RTC
issued CMBS. Lastly, FMR probably would invest roughly $15-$20 million in
illiquid investments, including unrated pieces, first loss pieces,
distressed loans and other special situations.
The portfolio, which would consist of approximately 20-30 positions and
would reflect U.S. property markets with respect to geographic and property
type composition, likely would take roughly nine months to become invested.
The hypothetical portfolio described above is based on FMR's present
perception of the market for CMBS. Based on new information and/or
analysis, FMR's hypothetical $100 million portfolio could change at any
time. Because of the foregoing, a potential investor should not assume
that the portfolio mix of Fidelity Real Estate High Income Fund III, Inc.
will necessarily coincide with the hypothetical portfolio described above.
See "Investment Policies and Limitations" in the Statement of Additional
Information of Fidelity Real Estate High Income Fund III, Inc. for a
description of that Fund's investment policies and limitations.
Q: DESCRIBE THE IDEAL CMBS INVESTMENT MANDATE FOR YOUR FIRM UNDER A FULLY
DISCRETIONARY ARRANGEMENT, INCLUDING PROPOSED INVESTMENT STRUCTURE,
SUGGESTED INVESTMENT GUIDELINES AND BENCHMARKS.
A: As a result of certain regulations pertaining to ERISA qualified plans
investing in non-investment grade CMBS, FMR has developed a closed-end
investment company to facilitate qualified-plan CMBS investing. The Fund
is Fidelity Real Estate High Income Fund III, Inc. (REHI III). FMR chose a
closed-end format (rather than open-end) to ease liquidity requirements and
capitalize on opportunities in unrated and other illiquid securities.
REHI III has a four-year term and will distribute current income monthly to
shareholders and net capital gains at least once annually. Certain key
investment guidelines currently anticipated for this fund under current
market condition include: no more than 10% of total assets invested in one
issuer (except during the first nine months); no more than 50% of total
assets exposure to a single property type; no more than 20% of total
assets exposure to a single metropolitan area; no more than 10% of total
assets invested in interest-only pieces; no more than 10% of total assets
invested in principal-only pieces; no more than 15% of total assets
invested in zero coupon instruments; and no more than 15% of total assets
invested in equity securities. These guidelines are non-fundamental
guidelines and may be changed by FMR at any time without prior notice.
These guidelines are based on FMR's present perception of the market for
CMBS. Based on new information and/or analysis and subject to "Investment
Policies and Limitations" in the Statement of Additional Information of
Fidelity Real Estate High Income Fund III, Inc., FMR's allocation of REHI
III's portfolio can change at any time. Because of the foregoing, a
potential investor in REHI III should not assume that the portfolio
guidelines of REHI III will necessarily coincide with the guidelines
described above. See "Investment Policies and Limitations" in the
Statement of Additional Information of Fidelity Real Estate High Income
Fund III, Inc. for a description of that Fund's investment policies and
limitations.
The benchmark proposed for REHI III is the Lehman Brothers Baa Corporate
Intermediate Bond Index plus 275 basis points. Investment grade
indices generally are less volatile than high yield indices because the
latter are affected by significant cash flows into and out of high yield
mutual funds. This benchmark is not for advisory-fee calculation purposes.
Q: DESCRIBE YOUR PROCEDURES FOR MONITORING, EVALUATING AND REPORTING
PERFORMANCE. WHAT BENCHMARKS ARE CURRENTLY IN USE FOR YOUR WHOLE LOANS?
FOR CMBS?
A: Once the decision is made to purchase securities, the analysts and
portfolio manager review property market changes and security performance
on an ongoing basis. This includes monitoring remittance reports monthly
and conducting research updates on each security at least semi-annually.
Shareholders in REHI III generally will receive net asset value and
dividend information monthly from the fund's transfer agent. Additionally,
REHI III normally will report more detailed information on fund
performance, key holdings and investment strategy on a quarterly basis.
There is no benchmark currently in use for non-investment grade CMBS. The
existing Fidelity mutual fund designed to invest primarily in
non-investment grade CMBS is a component of a separate account which
invests in both public and private market real estate.
Q: PROVIDE AN INDICATIVE FEE SCHEDULE FOR WHOLE LOANS, INVESTMENT-GRADE
CMBS, AND BELOW-INVESTMENT GRADE CMBS.
A: The management fee for REHI III is described in the section entitled
"Management Contract" of REHI III's Statement of Additional Information.
THE CMBS MARKET (OVERVIEW)
According to the Board of Governors of the Federal Reserve System's FLOW OF
FUNDS ACCOUNTS, SECOND QUARTER 1995, there were approximately $1 trillion
of commercial and multi-family mortgages outstanding as of June 30, 1995.
According to CS First Boston's CMBS/COMMERCIAL REAL ESTATE QUARTERLY
SURVEILLANCE REPORT: THIRD QUARTER 1995, approximately $77 billion of
outstanding commercial and multi-family mortgages outstanding were
securitized as of June 30, 1995.
According to COMMERCIAL MORTGAGE ALERT, January 9, 1995, $6.0 billion of
commercial mortgage-backed securities ("CMBS") were issued in 1990, $8.2
billion of CMBS were issued in 1991, $13.9 billion of CMBS were issued in
1992, $17.6 billion were issued in 1993 and $20.0 billion were issued in
1994. According to COMMERCIAL MORTGAGE ALERT, December 25, 1995, $17.1
billion of CMBS were issued in 1995 through December 21, 1995.
According to CS First Boston's CMBS/COMMERCIAL REAL ESTATE QUARTERLY
SURVEILLANCE REPORT: THIRD QUARTER 1995, in the third quarter of 1995,
56.0% of the CMBS issued were rated AAA, 14.4% were rated AA, 11.0% were
rated A, 8.0% were rated BBB and 10.6% were rated below investment grade,
respectively.
According to Lehman Brothers' MBS AND ABS STRATEGIES, December 15, 1995,
then-current indicative yield spreads (relative to comparable Treasury
securities), for existing collateral callable CMBS with a seven-to-ten-year
average life, were averaging 100 basis points for CMBS rated AAA, 125 basis
points for CMBS rated AA, 175 basis points for CMBS rated A, 225 basis
points for CMBS rated BBB and 555 basis points for CMBS rated BB.
According to the same source, then-current indicative yield spreads
(relative to comparable Treasury securities), for new-origination
collateral call-protected CMBS with a seven-to-ten-year average life, were
averaging 80 basis points for CMBS rated AAA, 110 basis points for CMBS
rated AA, 130 basis points for CMBS rated A, 175 basis points for CMBS
rated BBB and 450 basis points for CMBS rated BB.
Fidelity believes that investment-grade CMBS contain a large fixed-income
component and, as such, represent a substitute to corporate bonds and an
alternative to whole-loan lending. Non-investment grade CMBS, on the other
hand, have a large real estate equity component and represent an investment
alternative to making equity investments in real estate. Fidelity believes
that non-investment-grade CMBS behave similarly to real estate equity as
non-investment-grade corporate bonds do to corporate equity. Thus, the
value of an investment in investment-grade CMBS is primarily sensitive to
interest-rate movements, while the value of an investment in
non-investment-grade CMBS is primarily sensitive to the creditworthiness of
the underlying mortgages. Of course, movements in interest rates and in the
value of real estate investments (or other factors) may, at any time,
adversely or positively affect the values of CMBS investments.
PERFORMANCE OF REHI I
The Fund is a new, non-diversified, closed-end management investment
company. Because the Fund has not commenced operations, it has no
historical performance record. For the benefit of investors, the
performance record of Fidelity Real Estate High Income Fund ("REHI I"), a
separate non-diversified, open-end management investment company with
similar investment objectives and policies as the Fund, is presented below.
REHI I returned 5.43% from January 5, 1995 (commencement of operations)
through March 31, 1995; 7.04% from April 1, 1995 through June 30, 1995;
4.36% from July 31, 1995 through September 30, 1995; and 20.44% from
January 5, 1995 through November 30, 1995. The Merrill Lynch High Yield
Master Index returned 6.03% for the first quarter of 1995, 6.35% for the
second quarter of 1995, 2.92% for the third quarter of 1995 and 18.02% for
January 1, 1995 through November 30, 1995. The Lehman Brothers Baa
Intermediate Corporate Bond Index returned 5.60% for the first quarter of
1995, 6.44% for the second quarter of 1995, 2.22% for the third quarter of
1995 and 17.96% for January 1, 1995 through November 30, 1995.
Total returns for REHI I are historical and include the change in share
price and reinvestment of dividends and capital gains distributions, if
any. The total returns reported above are for the periods stated over the
most recent 11-month period ending November 30, 1995 (except for REHI I,
which commenced operations January 5, 1995). Average total returns for all
reported periods assume a steady compounded rate of return and are not REHI
I's or a composite's steady period-by-period return, which fluctuated over
the periods reported.
The Fund is not the same as REHI I, the performance of which is presented
above for the period of that fund's inception on January 5, 1995 through
November 30, 1995. Although REHI I's investment objectives and policies are
comparable to those of the Fund, the assets of the two funds and other
factors affecting performance may vary. Past performance of REHI I is no
guarantee of future results of the Fund. Share price, yield and return of
shares of the Fund and the share price, yield and return of shares of REHI
I may vary between the two funds. Investors may have a gain or a loss of
principal when they sell their shares of the Fund.
During the period from commencement of operations on January 5, 1995
through November 30, 1995, shares of REHI I were offered with an expense
ratio (annualized ratio of expenses to average net assets) of 1.09%.
Shares of the Fund are expected to have an expense ratio that is less than
or equal to that of REHI I.
The Merrill Lynch High Yield Master Index, a registered trademark of
Merrill Lynch, is an unmanaged index of 849 issues of U.S. domestic
high-yield, below-investment-grade corporate debt and includes reinvestment
of income and capital appreciation. The Lehman Brothers Baa Intermediate
Corporate Bond Index, a registered trademark of The Lehman Brothers
companies, is an unmanaged index of 911 issues of U.S. domestic
intermediate-term corporate debt rated Baa and includes reinvestment of
income and capital appreciation.

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, as amended,
and the Investment Company Act of 1940, as amended, the Registrant has duly
caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Boston
and the Commonwealth of Massachusetts, on the 3rd day of January, 1996.
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 January
3, 1996
Executive Officer) and Director
/s/Kenneth A. Rathgeber Treasurer (Principal Financial and January
3, 1996
Accounting Officer) and Director
/s/John H. Costello Assistant Treasurer and Director January 3,
1996

1933 Act File No. 33-64113
1940 Act File No. 811-07419
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