PFL RETIREMENT BUILDER VARIABLE ANNUITY ACCOUNT, 497, 1997-05-02

PFL RETIREMENT BUILDER VARIABLE ANNUITY ACCOUNT
497, 1997-05-02

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VARIABLE INSURANCE PRODUCTS FUND VARIABLE INSURANCE PRODUCTS FUND II VARIABLE
INSURANCE PRODUCTS FUND III: HIGH INCOME, EQUITY-INCOME, OVERSEAS, GROWTH, ASSET
MANAGER, ASSET MANAGER: GROWTH, INDEX 500, CONTRAFUND, BALANCED, GROWTH &
INCOME, GROWTH OPPORTUNITIES, INVESTMENT GRADE BOND PORTFOLIOS

SUPPLEMENT TO THE PROSPECTUS

dated April 30, 1997

The following information supplements the disclosure found under the section
"Investment Principles and Risks" in the Portfolios' Prospectus.

Fidelity Management & Research Company normally invests each fund's assets
according to its investment strategy. High Income, Equity-Income, Growth,
Overseas, Asset Manager, Asset Manager: Growth, Index 500, Contrafund, Balanced,
Growth & Income and Growth Opportunities Portfolios also reserve the right to
invest without limitation in preferred stocks and investment-grade bond debt
instruments for temporary, defensive purposes.

Investment Grade Bond Portfolio reserves the right to invest without limitation
in investment-grade money market instruments or short-term debt instruments for
temporary, defensive purposes.

April 30, 1997
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PROSPECTUS__________________________________________________________MAY 1, 1997

RETIREMENT INCOME BUILDER VARIABLE ANNUITY

Issued Through

PFL RETIREMENT BUILDER VARIABLE ANNUITY ACCOUNT

PFL LIFE INSURANCE COMPANY

The Retirement Income Builder Variable Annuity Policy is a Flexible Premium
Variable Annuity that is offered by PFL Life Insurance Company ("PFL"). You
can use the Policy to accumulate funds for retirement or other long-term
financial planning purposes. You are generally not taxed on any earnings on
amounts you invest until you withdraw them or begin to receive annuity
payments. The Policy is a "variable" annuity because the value of your
investments can go up or down based on the performance of mutual fund
portfolios that you select. It is a flexible premium policy because after you
purchase it you can generally make additional investments of any amount of $50
or more, until the Annuity Commencement Date when PFL begins making annuity
payments to you.

You have fourteen investment options to choose from. They include these
thirteen mutual fund portfolios of the Variable Insurance Products Fund (VIP),
Variable Insurance Products Fund II (VIP II), and the Variable Insurance
Products Fund III (VIP III) which are managed by Fidelity Management &
Research Company (FMR):

VIP VIP II VIP III
Money Market Investment Grade Bond Balanced
High Income Asset Manager Growth & Income
Equity-Income Asset Manager: Growth Growth Opportunities
Growth Index 500
Overseas Contrafund

YOU AS THE OWNER OF THE POLICY, BEAR THE ENTIRE INVESTMENT RISK FOR ALL
AMOUNTS THAT YOU ALLOCATE TO ANY OF THE MUTUAL FUNDS. THIS MEANS THAT YOU
COULD LOSE THE AMOUNT THAT YOU INVEST. But if the mutual fund shares increase
in value, then the value of your Policy will also increase.

The fourteenth investment option is the Fixed Account. If you invest in one
of the alternatives offered in the Fixed Account, then PFL guarantees to
return your investment with interest at rates that PFL will declare from time
to time.

Of course, you can choose any combination of these investment options. You
can also transfer amounts among these options (subject to some restrictions).

LIKE ALL SECURITIES, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

PRIBVAP597
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You should only purchase a Policy as a long-term investment. However, you do
have access to all or some of the current cash value of your investments at
any time before the Annuity Commencement Date. But, if you do withdraw cash
from your Policy, there may be a surrender charge. You may also have to pay
income taxes on some or all of the amount you withdraw, and if you are under
age 59 1/2 there may also be a tax penalty. Finally, there may be an interest
penalty if you make a premature withdrawal from the Fixed Account (this is
called an "Excess Interest Adjustment," and it could also result in your
earning extra interest). PFL has the right to postpone withdrawals from the
Fixed Account.

Prospectuses for the mutual fund portfolios are attached to the back of this
prospectus. This prospectus and the mutual fund prospectuses give you vital
information about the Policies and the mutual funds. Please read them
carefully before you invest. Keep them for future reference.

PLEASE NOTE THAT THE POLICIES AND THE MUTUAL FUNDS: ARE NOT BANK DEPOSITS,
ARE NOT FEDERALLY INSURED, ARE NOT ENDORSED BY ANY BANK OR GOVERNMENT AGENCY
AND ARE NOT GUARANTEED TO ACHIEVE THEIR GOAL.

This Prospectus sets forth the information that a prospective purchaser
should consider before purchasing a Policy. A Statement of Additional
Information about the Policy and the Mutual Fund Account which has the same
date as this Prospectus has been filed with the Securities and Exchange
Commission and is incorporated herein by reference. The Statement of
Additional Information is available at no cost to any person requesting a copy
by writing PFL at the Administrative and Service Office or by calling 1-800-
525-6205. The table of contents of the Statement of Additional Information is
included at the end of this Prospectus.

This Prospectus and the Statement of Additional Information generally
describe only the Policies and the Mutual Fund Account, except when the Fixed
Account is specifically mentioned.

Administrative and Service Office:

Financial Markets Division--Variable Annuity Department

PFL Life Insurance Company

4333 Edgewood Road, N.E.

Cedar Rapids, Iowa 52499-0001

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TABLE OF CONTENTS
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DEFINITIONS................................................................ 5
SUMMARY.................................................................... 8
CONDENSED FINANCIAL INFORMATION............................................ 19
FINANCIAL STATEMENTS....................................................... 19
HISTORICAL PERFORMANCE DATA................................................ 19
Standardized Performance Data............................................ 19
Other Subaccounts........................................................ 20
Non-Standardized Performance Data........................................ 22
PUBLISHED RATINGS.......................................................... 23
PFL LIFE INSURANCE COMPANY................................................. 23
THE RETIREMENT BUILDER ACCOUNTS............................................ 24
The Mutual Fund Account.................................................. 24
The Fixed Account........................................................ 28
Guaranteed Periods..................................................... 29
Dollar Cost Averaging Fixed Account Option............................. 29
Guaranteed Interest Rates.............................................. 30
Transfers................................................................ 31
Reinstatements........................................................... 31
Telephone Transactions................................................... 32
Dollar Cost Averaging.................................................... 32
Asset Rebalancing........................................................ 33
THE POLICY................................................................. 33
Policy Application and Issuance of Policies--Premium Payments............ 33
Additional Premium Payments............................................ 34
Maximum Total Premium Payments......................................... 34
Allocation of Premium Payments......................................... 34
Payment Not Honored by Bank............................................ 35
Policy Value............................................................. 35
The Mutual Fund Policy Value........................................... 36
Adjusted Policy Value.................................................... 36
Amendments............................................................... 36
Non-participating Policy................................................. 36
DISTRIBUTIONS UNDER THE POLICY............................................. 36
Surrenders............................................................... 36
Nursing Care and Terminal Condition Withdrawal Option.................... 38
Unemployment Waiver...................................................... 38
Excess Interest Adjustments (EIA)........................................ 38
Systematic Payout Option................................................. 39
Annuity Payments......................................................... 40
Annuity Commencement Date.............................................. 40
Election of Payment Option............................................. 40
Premium Tax............................................................ 41
Supplementary Contract................................................. 41
Annuity Payment Options.................................................. 41
Death Benefit............................................................ 44
Death of Annuitant Prior to Annuity Commencement Date.................. 44
Death On or After Annuity Commencement Date............................ 46
Beneficiary............................................................ 46
</TABLE>

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Death of Owner........................................................... 47
Restrictions Under the Texas Optional Retirement Program................. 47
Restrictions Under Section 403(b) Plans.................................. 47
Restrictions Under Qualified Policies.................................... 47
CHARGES AND DEDUCTIONS..................................................... 47
Surrender Charge......................................................... 48
Mortality and Expense Risk Fee........................................... 48
Administrative Charges................................................... 49
Premium Taxes............................................................ 50
Federal, State and Local Taxes........................................... 50
Transfer Fee............................................................. 50
Other Expenses Including Investment Advisory Fees........................ 50
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................... 50
Tax Status of Policy..................................................... 51
Taxation of Annuities.................................................... 51
DISTRIBUTOR OF THE POLICIES................................................ 57
Employee and Agent Purchases............................................. 57
VOTING RIGHTS.............................................................. 57
LEGAL PROCEEDINGS.......................................................... 58
STATEMENT OF ADDITIONAL INFORMATION........................................ 59
Appendix A............................................................... A-1
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DEFINITIONS

Accumulation Unit--An accounting unit of measure used in calculating the
Policy Value in the Mutual Fund Account before the Annuity Commencement Date.

Adjusted Policy Value--An amount equal to the Policy Value increased or
decreased by any Excess Interest Adjustments applied at the time of surrender
or on the Annuity Commencement Date.

Administrative and Service Office--Financial Markets Division Variable
Annuity Department, 4333 Edgewood Road, N.E., Cedar Rapids, Iowa 52499-0001.

Annuitant--The person entitled to receive Annuity Payments after the Annuity
Commencement Date and during whose life any Annuity Payments involving life
contingencies will continue.

Annuity Commencement Date--The date upon which Annuity Payments are to
commence. The Annuity Commencement Date may not be later than the last day of
the policy month starting after the Annuitant attains age 85, except as
expressly allowed by PFL, but in no event later than the last day of the
Policy month following the month in which the Annuitant attains age 95. The
Annuity Commencement Date may be required to be earlier for Qualified
Policies.

Annuity Payment Option or Payment Option--A method of receiving a stream of
Annuity Payments selected by the Owner.

Annuity Unit--An accounting unit of measure used in the calculation of the
amount of the second and each subsequent Variable Annuity Payment.

Beneficiary--The person who has the right to the death benefit set forth in
the Policy.

Business Day--A day when the New York Stock Exchange is open for business.

Cash Value--The Adjusted Policy Value, less the Surrender Charge, if any.

Code--The Internal Revenue Code of 1986, as amended.

Cumulative Free Percentage--The percentage (as applied to the Policy Value)
which is available to the Owner free of any Surrender Charge.

Current Interest Rate--The interest rate or rates currently guaranteed to be
credited on amounts allocated to one or more options in the Fixed Account.
This interest rate will always be equal to or greater than 3%.

Dollar Cost Averaging--The process by which the Owner may elect to liquidate
a specified Dollar Cost Averaging Fixed Account Option in order to purchase
Mutual Fund Account Accumulation Units on a systematic basis.

Due Proof of Death--A certified copy of a death certificate, a certified
copy of a decree of a court of competent jurisdiction as to the finding of
death, a written

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statement by the attending physician, or any other proof satisfactory to PFL,
will constitute Due Proof of Death.

Excess Interest Adjustment--A positive or negative adjustment to amounts
withdrawn upon partial or full surrenders by the Owner from the Fixed Account
Guaranteed Period Options, or to amounts applied to Annuity Payment Options.
The adjustment reflects changes in the interest rates declared by PFL since
the date any payment was received by or an amount was transferred to the
Guaranteed Period Option. The Excess Interest Adjustment (EIA) can either
decrease or increase the amount to be received by the Owner upon full
surrender or commencement of Annuity Payments, depending upon whether there
has been an increase or decrease in interest rates, respectively.

Excess Partial Surrender--The portion of a partial withdrawal (surrender)
that can be subject to a Surrender Charge.

Fixed Account--A group of Investment Options under the Policy, other than
the Mutual Fund Account, that are part of the general assets of PFL that are
not in separate accounts.

Fixed Annuity Payments--Payments made pursuant to an Annuity Payment Option
which do not fluctuate in amount.

Guaranteed Period Options--The various guaranteed interest rate periods of
the Fixed Account which may be offered by PFL and into which Premium Payments
may be paid or amounts transferred.

Investment Options--Any of the Guaranteed Period Options of the Fixed
Account, the Dollar Cost Averaging Fixed Account Option, and any of the
Subaccounts of the Mutual Fund Account.

Mutual Fund Account--The PFL Retirement Builder Variable Annuity Account, a
separate account established and registered as a unit investment trust under
the Investment Company Act of 1940 to which Premium Payments under the
Policies may be allocated.

Nonqualified Policy--A Policy other than a Qualified Policy.

Owner or Owners--The person who may exercise all rights and privileges under
the Policy. The Owner during the lifetime of the Annuitant and prior to the
Annuity Commencement Date is the person designated as the Owner or a Successor
Owner in the application.

Policy Anniversary--Each anniversary of the Policy Date.

Policy Date--The Policy Date as shown on the Policy Data Page attached to
the Policy.

Policy Value--On or before the Annuity Commencement Date, the Policy Value
is equal to the Owner's:

(1) Premium Payments; minus

(2) Partial Withdrawals (including any applicable Excess Interest
Adjustments and/or Surrender Charges on such withdrawals); plus

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(3) interest credited in the Fixed Account; plus or minus

(4) accumulated gains or losses in the Mutual Fund Account; minus

(5) Service Charges, premium taxes and transfer fees, if any.

Policy Year--A Policy Year begins on the Policy Date and on each Policy
Anniversary.

Premium Payment--An amount paid to PFL by the Owner or on the Owner's behalf
as consideration for the benefits provided by the Policy.

Qualified Policy--A Policy issued in connection with retirement plans that
qualify for special Federal income tax treatment under the Code.

Service Charge--There is an annual Service Charge on each Policy Anniversary
(and a charge at the time of surrender during any Policy Year) for Policy
maintenance and related administrative expenses. This annual charge is the
lesser of 2% of the Policy Value or $30.

Subaccount--A subdivision within the Mutual Fund Account, the assets of
which are invested in a specified Portfolio of the Underlying Funds.

Successor Owner--A person appointed by the Owner to succeed to ownership of
the Policy in the event of the death of the Owner who is not the Annuitant
before the Annuity Commencement Date.

Surrender Charge--The applicable contingent deferred sales charge, assessed
on certain full surrenders or partial withdrawals of Premium Payments to cover
expenses relating to the sale of the Policies.

Underlying Funds--The portfolios of the Variable Insurance Products Fund
(VIP), the Variable Insurance Products Fund II (VIP II), and the Variable
Insurance Products Fund III (VIP III), managed by Fidelity Management &
Research Company.

Valuation Period--The period of time from one determination of Accumulation
Unit and Annuity Unit values to the next subsequent determination of values.
Such determinations shall be made on each Business Day.

Variable Annuity Payments--Payments made pursuant to an Annuity Payment
Option which fluctuate as to dollar amount or payment term in relation to the
investment performance of the specified Subaccounts within the Mutual Fund
Account.

Written Notice or Written Request--Written notice, signed by the Owner, that
gives PFL the information it requires and is received at the Administrative
and Service Office. For some transactions, PFL may accept an electronic notice
such as telephone instructions. Such electronic notice must meet the
requirements PFL establishes for such notices.

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THE RETIREMENT INCOME BUILDER VARIABLE ANNUITY

SUMMARY

The following summary is intended to provide a brief overview of the Policy.
More detailed information can be found in the sections of this Prospectus that
follow, all of which should be read in their entirety.

THE POLICY

The Retirement Income Builder Variable Annuity is a tax-deferred flexible
premium variable annuity policy which can be purchased on a non-tax qualified
basis or with the proceeds from certain plans qualifying for favorable federal
income tax treatment. The Policy provides the Owner with the ability to
accumulate funds on a tax-deferred basis and to receive periodic annuity
payments on a variable basis, a fixed basis, or a combination of both. The
Owner allocates the Premium Payments among the various options available under
the Mutual Fund Account and the Fixed Account. The Policy is intended for
long-term purposes, such as retirement, and for persons who have maximized
their use of other retirement savings methods, such as 401(k) plans and
individual retirement accounts (IRAs).

THE ACCOUNTS

The Mutual Fund Account. The Mutual Fund Account is a separate account of
PFL, which currently is divided into thirteen Subaccounts that invest
exclusively in shares of the thirteen portfolios of the Variable Insurance
Products Fund ("VIP"), the Variable Insurance Products Fund II ("VIP II"), and
the Variable Insurance Products Fund III ("VIP III") (collectively, the
"Underlying Funds"). Fidelity Management & Research Company ("FMR") provides
investment advice and administrative services to the Underlying Funds. VIP
currently offers five Portfolios: Money Market Portfolio; High Income
Portfolio; Equity-Income Portfolio; Growth Portfolio; and Overseas Portfolio.
VIP II currently offers five portfolios: Investment Grade Bond Portfolio;
Asset Manager Portfolio; Index 500 Portfolio; Asset Manager: Growth Portfolio;
and Contrafund Portfolio. VIP III currently offers three Portfolios: Balanced
Portfolio; Growth Opportunities Portfolio; and Growth & Income Portfolio. Each
of the thirteen Subaccounts of the Mutual Fund Account invests solely in a
corresponding Portfolio of the Underlying Funds. Because the Policy Value may
depend on the investment experience of the selected Subaccounts, the Owner
bears the entire investment risk with respect to Premium Payments allocated
to, and amounts transferred to, the Mutual Fund Account. (See "THE RETIREMENT
BUILDER ACCOUNTS--The Mutual Fund Account," p. 24.)

The Fixed Account. PFL guarantees an annual credited rate of at least 3% on:
Premium Payments and transfers to, less partial withdrawals and transfers from
the Fixed Account. Upon Surrender, PFL guarantees return of at least the
Premium Payments made to, less prior Partial Withdrawals and transfers from,
the Fixed Account. PFL will always offer a Current Interest Rate which will be
guaranteed for at least one year from the date of the Premium Payment or
transfer. PFL may, in its

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sole discretion, declare a higher Current Interest Rate from time-to-time. PFL
may offer optional guaranteed interest rate periods into which Premium
Payments may be made or amounts transferred. PFL may also offer a Dollar Cost
Averaging Fixed Account Option which will have a one-year interest rate
guarantee and which will require automatic periodic transfers to the Mutual
Fund Account. (See "THE RETIREMENT BUILDER ACCOUNTS--The Fixed Account," p.
28.)

PREMIUM PAYMENTS

A Nonqualified or Qualified Policy may be purchased with an initial Premium
Payment of at least $2,000, but there is no minimum initial Premium Payment
required for a Policy purchased and used in connection with a tax deferred
403(b) Annuity. An Owner may make subsequent additional Premium Payments of at
least $50 each at any time before the Annuity Commencement Date. The maximum
total Premium Payments allowed without prior approval of PFL is $1,000,000. At
the time of each Premium Payment no charges or fees are deducted, so the
entire Premium Payment is invested immediately, subject to the restrictions
below regarding the "Right to Cancel" period. (See "CHARGES AND DEDUCTIONS--
Surrender Charge," p. 48 and "CHARGES AND DEDUCTIONS--Premium Taxes," p. 50.)

The Owner must allocate the initial Premium Payment among the Investment
Options (that is, among the options available under the Fixed Account and/or
the Subaccounts of the Mutual Fund Account) according to allocation
percentages in the Policy application or transmittal form. Any allocation must
be in whole percents, and the total allocation must equal 100%. However, any
amounts allocated to Subaccounts of the Mutual Fund Account will be allocated
entirely to the Money Market Subaccount of the Mutual Fund Account for the
first 14 days after the date the Policy is issued or a longer period if the
laws of the state where issued require more than a 10 day "right-to-cancel"
period (See "Right to Cancel Period," below.) At the end of this period, the
amount in the Money Market Subaccount will then be allocated to the
Subaccount(s) of the Mutual Fund Account in accordance with the allocation
percentages specified by the Owner. Allocations specified by the Owner will be
used for Subsequent Additional Premium Payments unless the Owner requests a
change in allocation. Allocations for additional Premium Payments may be
changed by sending Written Notice to PFL's Administrative and Service Office.
(See "THE POLICY--Premium Payments," p. 33.)

RIGHT TO CANCEL PERIOD

When the Owner receives the Policy, it should be reviewed carefully to make
sure it is what the Owner intended to purchase. The Owner may, until the end
of the period of time specified in the Policy (the Right to Cancel period),
examine the Policy and return it for a refund. The applicable period will
depend on the state in which the Policy is issued. In many states the period
is 10 days after the Policy is delivered to the Owner. Some states may allow
for a longer period to return the Policy. The amount of the refund will be the
greater of the Premium Payments made under the Policy or the Policy Value. PFL
will pay the refund within 7 days after it receives written notice of
cancellation and the returned Policy. The Policy will then be deemed void.

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TRANSFERS BEFORE THE ANNUITY COMMENCEMENT DATE

An Owner can transfer values from one Subaccount to another within the
Mutual Fund Account or from the Mutual Fund Account to the Fixed Account, or
from the Fixed Account to the Mutual Fund Account within limits established by
PFL. Transfers of Policy Values from any of the Guaranteed Period Options of
the Fixed Account to any of the Subaccounts of the Mutual Fund Account are
allowed only at the end of the applicable Guaranteed Periods, and will not be
subject to an Excess Interest Adjustment at that time. The Owner may, however,
transfer an amount equal to any or all of the interest credited in any of the
Guaranteed Period Options to any Subaccount(s) of the Mutual Fund Account
prior to the end of a specified Guaranteed Period. (See "THE RETIREMENT
BUILDER ACCOUNTS--Transfers.") Any such "interest transfers" from a Guaranteed
Period Option prior to the end of a Guaranteed Period will not be subject to
any Excess Interest Adjustment. (See "DISTRIBUTIONS UNDER THE POLICY--Excess
Interest Adjustments," p. 38.) Transfers from the Dollar Cost Averaging Fixed
Account Option, except through a Dollar Cost Averaging program, are not
allowed. (See "THE RETIREMENT BUILDER ACCOUNTS--Dollar Cost Averaging Fixed
Account Option," p. 24.) Transfers currently may be made either by telephone
or by sending Written Notice to PFL's Administrative and Service Office. (See
"THE RETIREMENT BUILDER ACCOUNTS--Telephone Transactions," p. 32.)

PFL reserves the right to impose a $10 fee for each transfer in excess of 12
transfers per Policy Year. At the present time, PFL does not charge for
transfers. (See "THE RETIREMENT BUILDER ACCOUNTS--Transfers," p. 31.)

SURRENDERS

The Owner may elect to surrender all or withdraw a portion of the Cash Value
($500 minimum) in exchange for a payment from PFL at any time prior to the
earlier of the Annuitant's death or the Annuity Commencement Date. The Cash
Value equals the Policy Value increased or decreased by any Excess Interest
Adjustment, less any applicable Surrender Charge (described below). A
surrender request must be made by Written Request, and a request for a partial
withdrawal must specify the Subaccounts or Guaranteed Period Options from
which the withdrawal is requested. There is currently no limit on the
frequency or timing of Policy withdrawals, although for Qualified Policies the
retirement plan or applicable law may restrict and/or penalize withdrawals.
(See "DISTRIBUTIONS UNDER THE POLICY--Surrenders," p. 36.) In addition to any
applicable Surrender Charge, Service Charge, Excess Interest Adjustment, and
premium tax, surrenders and partial withdrawals may be subject to income taxes
and a 10% Federal penalty tax.

NURSING CARE AND TERMINAL CONDITION WITHDRAWAL OPTION

In some states, if the Owner or Owner's spouse (Annuitant or Annuitant's
spouse if the Owner is not a natural person): (1) has been confined in a
hospital or nursing facility for 30 consecutive days or (2) has been diagnosed
as having a terminal condition as defined in the Policy or endorsement
(generally, a life expectancy of twelve months or less), then the Surrender
Charge and Excess Interest Adjustment (See "DISTRIBUTIONS UNDER THE POLICY--
Death

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Benefit," p. 44.) are not imposed on surrenders or partial withdrawals. (Since
this benefit may not be available in all states, see the Policy or endorsement
for details.) (See DISTRIBUTIONS UNDER THE POLICY--Nursing Care and Terminal
Condition Withdrawal Option," p. 38.)

UNEMPLOYMENT WAIVER

The Owner may withdraw all or a portion of the Policy Value free of
Surrender Charges and free of Excess Interest Adjustments if the Owner or
Owner's spouse (Annuitant or Annuitant's spouse, if the Owner is not a natural
person) becomes unemployed. In order to qualify, the affected individual 1)
must have been employed full time for at least two years prior to becoming
unemployed, 2) must have been employed full time on the Policy Date, 3) must
have been unemployed for at least 60 consecutive days at the time of
withdrawal, and 4) must have a minimum Cash Value at the time of withdrawal of
$5,000. Proof of unemployment will consist of providing PFL with a
determination letter from the applicable State's Department of Labor which
verifies that the individual qualifies for and is receiving unemployment
benefits at the time of withdrawal. The determination letter must be received
by PFL no later than 15 days after the date of the withdrawal request. This
benefit may not be available in all states, see the Policy or endorsement for
details.

CHARGES AND DEDUCTIONS

Surrender Charge. In order to permit investment of the entire Premium
Payment, PFL does not deduct sales or other charges at the time of investment.
However, a Surrender Charge, which is a contingent deferred sales charge, of
up to 6% of the Premium Payment is imposed on certain full surrenders or
partial withdrawals of Premium Payments in order to cover expenses relating to
the distribution of the Policies. The applicable Surrender Charge is based on
the period of time elapsed since payment of the Premium Payment(s) being
withdrawn. There will be no Surrender Charge imposed five or more years after
a Premium Payment was paid. In any event, Surrender Charges will be waived
after the tenth Policy Year. For purposes of determining the applicable
Surrender Charge, Premium Payments are considered to be withdrawn on a "first-
in, first-out" basis. (See "CHARGES AND DEDUCTIONS--Surrender Charge," p. 48.)

In each Policy Year the Owner may request partial withdrawals ($500 minimum)
of up to 10% of the Policy Value free of Surrender Charges. The percentage
that may be taken free of Surrender Charges each Policy Year is cumulative.
This is referred to as the "Cumulative Free Percentage." That is, Cumulative
Free Percentages which are not taken are carried forward and are available to
be taken in the following Policy Year free of Surrender Charges. Cumulative
Free Percentage withdrawals previously taken reduce the Cumulative Free
Percentage that is available. (See "DISTRIBUTIONS UNDER THE POLICY--
Surrenders," p. 36.) Withdrawals in excess of the available Cumulative Free
Percentage will be subject to a Surrender Charge of up to 6% of the Premium
Payment withdrawn.

Excess Interest Adjustment. Full surrenders, partial withdrawals from the
Guaranteed Period Options of the Fixed Account prior to the end of the

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Guaranteed Period, and amounts applied to an Annuity Payment Option (prior to
the end of the Guaranteed Period) and which are in excess of the cumulative
interest credited at the time of, but prior to, the withdrawal, are subject to
an Excess Interest Adjustment. Depending upon market rates of interest, the
effect of an Excess Interest Adjustment could eliminate all interest in excess
of the minimum guaranteed effective annual interest rate of 3%, or it could
result in the crediting of additional interest. (See "DISTRIBUTIONS UNDER THE
POLICY--Excess Interest Adjustments," p. 38.)

Account Charges. PFL deducts a daily charge equal to a percentage of the net
assets in the Mutual Fund Account for the mortality and expense risks assumed
by PFL. For Guaranteed Minimum Death Benefit Option "A" (Return of Premium
Death Benefit), the effective annual rate of this charge is 1.10% of the value
of the Mutual Fund Account's net assets. For Guaranteed Minimum Death Benefit
Options "B" (5% Annually Compounding Death Benefit) and "C" (Annual Step-Up
Death Benefit), the effective annual rate of this charge is 1.25% of the value
of the Mutual Fund Account's net assets. (See "CHARGES AND DEDUCTIONS--
Mortality and Expense Risk Fee," p. 48, and "DISTRIBUTIONS UNDER THE POLICY--
Death Benefit," p. 44.)

PFL also deducts a daily Administrative Charge from the net assets of the
Mutual Fund Account to partially cover expenses incurred by PFL in connection
with the administration of the Account and the Policies. The effective annual
rate of this charge is .15% of the value of the Mutual Fund Account's net
assets. (See "CHARGES AND DEDUCTIONS--Administrative Charges," p. 49.)

PFL guarantees that the account charges for mortality and expense risks and
administrative expenses will not exceed a total of 1.25% for the Return of
Premium Death Benefit, and 1.40% for the 5% Annually Compounding Death Benefit
or the Annual Step Up Benefit Death Benefit.

Service Charge. There is also an annual Service Charge on each Policy
Anniversary (and a charge at the time of surrender during any Policy Year) for
Policy maintenance and related administrative expenses. This annual charge is
the lesser of 2% of the Policy Value or $30 and is deducted from each
Investment Option in proportion to each Investment Option's percentage of the
Policy Value in the Investment Option just prior to such charge. This charge
is waived if either the Policy Value or the sum of all Premium Payments less
the sum of all partial withdrawals equals or exceeds $50,000 on a Policy
Anniversary (or date of surrender). PFL GUARANTEES THAT THIS CHARGE WILL NOT
BE INCREASED IN THE FUTURE. (See "CHARGES AND DEDUCTIONS--Administrative
Charges," p. 49.)

Taxes. PFL may incur premium taxes relating to the Policies. When permitted
by state law, PFL will not deduct any premium taxes related to particular
Policy from the Policy Value until surrender of the Policy, payment of the
death benefit or until the Annuity Commencement Date. Premium taxes currently
range from 0% to 3.50% of Premium Payments. (See "CHARGES AND DEDUCTIONS--
Premium Taxes," p. 50.)

No charges are currently made against any of the Accounts for federal,
state, or local income taxes. Should PFL determine that any such taxes be
imposed with

- 12 -
<PAGE>

respect to any of the Accounts, PFL may deduct such taxes from amounts held in
the relevant Account. (See "CHARGES AND DEDUCTIONS--Federal, State and Local
Taxes," p. 50.)

Charges Against the Underlying Funds. The value of the net assets of the
Subaccounts of the Mutual Fund Account will reflect the investment advisory
fees and other expenses incurred by the Underlying Funds.

Expense Data. The charges and deductions are summarized in the following
tables. This tabular information regarding expenses assumes that the entire
Policy Value is in the Mutual Fund Account.

<TABLE>
<CAPTION>
VIP VIP VIP VIP II VIP II
MONEY HIGH EQUITY- VIP VIP INVESTMENT ASSET
MARKET INCOME INCOME GROWTH OVERSEAS GRADE BOND MANAGER
------ ------ ------- ------ -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Policy Owner Transaction
Expenses/1/
Sales Load on Purchase
Payments.............. 0 0 0 0 0 0 0
Maximum Surrender
Charge (as a % of
Premium Payment
Surrendered)/2/....... 6% 6% 6% 6% 6% 6% 6%
Surrender Fees......... 0 0 0 0 0 0 0
-----------------------------------------------------------
Service Charge.......... $30 Per Policy
-----------------------------------------------------------
Transfer Fee Currently no fee
Mutual Fund Account
Annual Expenses
(as a percentage of
account value)
Mortality and Expense
Risk Fees/3/.......... 1.25% 1.25% 1.25% 1.25% 1.25% 1.25% 1.25%
Administrative Charge.. 0.15% 0.15% 0.15% 0.15% 0.15% 0.15% 0.15%
Total Mutual Fund
Account Annual
Expenses.............. 1.40% 1.40% 1.40% 1.40% 1.40% 1.40% 1.40%
Underlying Funds Annual
Expenses/4/
(as a percentage of
average net assets,
after waivers and
reimbursements)
Management Fees........ 0.21% 0.59% 0.51% 0.61% 0.76% 0.45% 0.64%
Other Expenses......... 0.09% 0.12% 0.07% 0.08% 0.17% 0.13% 0.10%
Total Underlying Funds
Annual Expenses....... 0.30% 0.71% 0.58%* 0.69%/5/ 0.93%/6/ 0.58% 0.74%/5/
</TABLE>

<TABLE>
<CAPTION>
VIP II
ASSET VIP II VIP III VIP III
VIP II MANAGER: INDEX VIP III GROWTH GROWTH &
CONTRAFUND GROWTH 500 BALANCED OPPORTUNITIES INCOME
---------- -------- ------ -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Policy Owner Transaction
Expenses/1/
Sales Load on Purchase
Payments.............. 0 0 0 0 0 0
Maximum Surrender
Charge (as a % of
Premium Payment
Surrendered)/2/....... 6% 6% 6% 6% 6% 6%
Surrender Fees......... 0 0 0 0 0 0
---------------------------------------------------------------
Service Charge.......... $30 Per Policy
---------------------------------------------------------------
Transfer Fee Currently no fee
Mutual Fund Account
Annual Expenses (as a
percentage of account
value)
Mortality and Expense
Risk Fees/3/.......... 1.25% 1.25% 1.25% 1.25% 1.25% 1.25%
Administrative Charge.. 0.15% 0.15% 0.15% 0.15% 0.15% 0.15%
Total Mutual Fund
Account Annual
Expenses.............. 1.40% 1.40% 1.40% 1.40% 1.40% 1.40%
Underlying Funds Annual
Expenses/4/
(as a percentage of
average net assets,
after waivers and
reimbursements)
Management Fees........ 0.61% 0.65% 0.13% 0.48% 0.61% 0.50%
Other Expenses......... 0.13% 0.22% 0.15% 0.24% 0.16% 0.20%
Total Underlying Funds
Annual Expenses....... 0.74% 0.87%/5/ 0.28%/6/ 0.72%/5/ 0.77%/5/ 0.70%
</TABLE>

- 13 -
<PAGE>

- ----------------------------------
/1/The Surrender Charge and Transfer Fee, if any is imposed, apply to each
Policy, regardless of how Policy Value is allocated among the Mutual Fund
Account and the Fixed Account. The Service Charge applies to both the Fixed
Account and the Mutual Fund Account, and is assessed on a prorata basis
relative to each Account's Policy Value as a percentage of the Policy's total
Policy Value. Mutual Fund Account Annual Expenses do not apply to the Fixed
Account (See "CHARGES AND DEDUCTIONS--Other Expenses Including Investment
Advisory Fees," p. 50.)
/2/The Surrender Charge is decreased based on the number of years since the
Premium Payment was made, from 6% in the year in which the Premium Payment
was made to 0% in the sixth year after the Premium Payment was made.
/3/Mortality and Expense Risk Fees (1.25%) shown are for the 5% Annually
Compounding Death Benefit and the Annual Step Up Death Benefit. The
corresponding Fees for the "Return of Premium Death Benefit" is 1.10% for
each Subaccount. (See "DISTRIBUTIONS UNDER THE POLICY--Death Benefit," p.
44.)
/4/The fee table information relating to the Underlying Funds was provided to
PFL by the Underlying Funds, and PFL has not independently verified such
information.
/5/A portion of the brokerage commissions that the funds pay is used to reduce
fund expenses. In addition, Balanced and Growth Opportunities have entered
into arrangements with their custodians whereby interest earned on uninvested
cash balances is used to reduce custodian expense. Including these
reductions, the total operating expenses presented in the table would have
been .56% for Equity-Income Portfolio, .67% for Growth Portfolio, .92% for
Overseas Portfolio, .73% for Asset Manager Portfolio, .71% for Contrafund
Portfolio, .85% for Asset Manager: Growth Portfolio, .76% for Growth
Opportunities Portfolio, and .71% for Balanced Portfolio.
/6/FMR agreed to reimburse a portion of Index 500 Portfolio's expenses during
the period. Without this reimbursement, the fund's management fee, other
expenses and total expenses would have been .28%, .15% and .43% respectively.

- 14 -
<PAGE>

EXAMPLES

I. An Owner would pay the following expenses on a $1,000 investment,
assuming Death Benefit Option A, (Return of Premium Death Benefit) a
hypothetical 5% annual return on assets and assuming the entire Policy Value
is in the applicable Subaccount:

1. If the Policy is surrendered at the end of the applicable time period:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
VIP Money Market Subaccount..................... $70 $ 91 $ 96 $192
VIP High Income Subaccount...................... $74 $104 $117 $235
VIP Equity-Income Subaccount.................... $73 $100 $111 $222
VIP Growth Subaccount........................... $74 $103 $116 $233
VIP Overseas Subaccount......................... $77 $111 $129 $258
VIP II Investment Grade Bond Subaccount......... $73 $100 $111 $222
VIP II Asset Manager Subaccount................. $75 $105 $119 $238
VIP II Asset Manager: Growth Subaccount......... $76 $109 $126 $252
VIP II Contrafund Subaccount.................... $75 $105 $119 $238
VIP II Index 500 Subaccount..................... $70 $ 90 $ 95 $190
VIP III Balanced................................ $74 $104 $118 $236
VIP III Growth Opportunities.................... $75 $106 $121 $242
VIP III Growth & Income......................... $77 $113 $132 $265
</TABLE>

2. If the Policy is annuitized at the end of the applicable time period:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
VIP Money Market Subaccount..................... $16 $51 $ 88 $192
VIP High Income Subaccount...................... $21 $64 $109 $235
VIP Equity-Income Subaccount.................... $19 $60 $102 $222
VIP Growth Subaccount........................... $20 $63 $108 $233
VIP Overseas Subaccount......................... $23 $70 $120 $258
VIP II Investment Grade Bond Subaccount......... $19 $60 $102 $222
VIP II Asset Manager Subaccount................. $21 $64 $111 $238
VIP II Asset Manager: Growth Subaccount......... $22 $68 $117 $252
VIP II Contrafund Subaccount.................... $21 $64 $111 $238
VIP II Index 500 Subaccount..................... $16 $50 $ 87 $190
VIP III Balanced................................ $21 $64 $110 $236
VIP III Growth Opportunities.................... $21 $65 $112 $242
VIP III Growth & Income......................... $23 $72 $124 $265
</TABLE>

3. If the Policy is not surrendered or annuitized:

- 15 -
<PAGE>

II. An Owner would pay the following expenses on a $1,000 investment,
assuming Death Benefit Option B, (5% Annually Compounding Death Benefit) or
Death Benefit Option C, (Annual Step-Up Death Benefit) a hypothetical 5%
annual return on assets and assuming the entire Policy Value is in the
applicable Subaccount:

1. If the Policy is surrendered at the end of the applicable time period:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
VIP Money Market Subaccount..................... $72 $ 96 $104 $208
VIP High Income Subaccount...................... $76 $108 $125 $251
VIP Equity-Income Subaccount.................... $75 $104 $119 $237
VIP Growth Subaccount........................... $76 $108 $124 $249
VIP Overseas Subaccount......................... $78 $115 $136 $273
VIP II Investment Grade Bond Subaccount......... $75 $104 $119 $237
VIP II Asset Manager Subaccount................. $76 $109 $127 $254
VIP II Asset Manager: Growth Subaccount......... $78 $113 $133 $267
VIP II Contrafund Subaccount.................... $76 $109 $127 $254
VIP II Index 500 Subaccount..................... $72 $ 95 $103 $206
VIP III Balanced................................ $76 $109 $126 $252
VIP III Growth Opportunities.................... $76 $110 $128 $257
VIP III Growth & Income......................... $79 $117 $140 $280
</TABLE>

2. If the Policy is annuitized at the end of the applicable time period:

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
VIP Money Market Subaccount..................... $18 $56 $ 96 $208
VIP High Income Subaccount...................... $22 $68 $117 $251
VIP Equity-Income Subaccount.................... $21 $64 $110 $237
VIP Growth Subaccount........................... $22 $67 $116 $249
VIP Overseas Subaccount......................... $24 $75 $128 $273
VIP II Investment Grade Bond Subaccount......... $21 $64 $110 $237
VIP II Asset Manager Subaccount................. $22 $69 $118 $254
VIP II Asset Manager: Growth Subaccount......... $24 $73 $125 $267
VIP II Contrafund Subaccount.................... $22 $69 $118 $254
VIP II Index 500 Subaccount..................... $18 $55 $ 95 $206
VIP III Balanced................................ $22 $68 $117 $252
VIP III Growth Opportunities.................... $23 $70 $120 $257
VIP III Growth & Income......................... $25 $77 $131 $280
</TABLE>

3. If the Policy is not surrendered or annuitized:

- 16 -
<PAGE>

The above tables are intended to assist the Owner in understanding the costs
and expenses of the Mutual Fund Account and the Underlying Funds that the
Owner will bear, directly or indirectly. These include the 1996 expenses of
the Underlying Funds. (See "CHARGES AND DEDUCTIONS," p. 47, and the Underlying
Funds' prospectuses.) In addition to the expenses listed above, premium taxes,
currently ranging from 0% to 3.50% of Premium Payments may be applicable.

THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN. THE
ASSUMED 5% ANNUAL RETURN IS HYPOTHETICAL AND SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE ANNUAL RETURNS, WHICH MAY BE GREATER OR LESS
THAN THE ASSUMED RATE. THE FIGURES AND DATA FOR UNDERLYING FUND ANNUAL
EXPENSES HAVE BEEN PROVIDED BY FMR FOR 1996 AND PFL HAS NOT INDEPENDENTLY
VERIFIED THEIR ACCURACY.

In these examples, the $30 Service Charge is reflected as a charge of .0644%
based on an anticipated average Policy Value of $46,590.

DEATH BENEFIT

In the event that the Annuitant who is not the Owner dies prior to the
Annuity Commencement Date, the Owner will become the Annuitant unless the
Owner specifically requests on the application or in a Written Request that
the death benefit be paid upon the Annuitant's death and PFL agrees to such an
election. If the Annuitant is also the Owner, upon receipt of proof that the
Annuitant has died before the Annuity Commencement Date, the Death Benefit is
calculated and is payable to the Beneficiary when we receive an election of
the method of settlement and return of the Policy.

The amount of the Death Benefit will depend on the state where the Policy is
purchased and may depend on the death benefit option elected by the Owner.
However, the Death Benefit will always be at least equal to the greater of the
Policy Value or the Cash Value on the date due proof of death and election of
the method of settlement are received by PFL.

The Owner has the "one-time" option of choosing a "Return of Premium Death
Benefit," (Death Benefit Option "A"), a "5% Annually Compounding Death
Benefit," (Death Benefit Option "B"), or an "Annual Step-Up Death Benefit,"
(Death Benefit Option "C"). The Return of Premium Death Benefit is the return
of all Premium Payments less any Partial Withdrawals, as of the date of death.
The 5% Annually Compounding Death Benefit is the total Premium Payments less
any Partial Withdrawals, accumulated at 5% until the earlier of the date of
death or the Owner's 81st birthday. The Annual Step-Up Death Benefit is the
largest Policy Value on the issue date or on any Policy Anniversary prior to
the earlier of the date of death or prior to the Owner's 81st birthday, plus
any premiums paid, less any premium withdrawals taken, subsequent to the date
of the largest anniversary Policy Value. If no election is made by the
Policyholder, the Return of Premium Death Benefit will be used upon death of
the Annuitant.

- 17 -
<PAGE>

The Death Benefit provisions may vary depending on the state where the
Policy is issued. The Death Benefit may be paid as either a lump sum cash
benefit or as an annuity as permitted by federal or state law. (See
"DISTRIBUTIONS UNDER THE POLICY--Death Benefit," p. 44.)

The Death Benefit is not paid on the death of an Owner if the Owner is not
the Annuitant. If an Owner who is not the Annuitant dies before the Annuity
Commencement date, the amount payable under the Policy upon surrender will be
the Policy Value increased or decreased by an Excess Interest Adjustment.

VARIATIONS IN POLICY PROVISIONS

Certain provisions of the Policies may vary from the descriptions in this
Prospectus in order to comply with different state laws. See the Policy itself
for variations. Any such state variations will be included in the Policy
itself or in riders or endorsements attached to the Policy.

New Jersey residents: Annuity payments must begin on or before the Policy
Anniversary that is closest to the Annuitant's 70th birthday or the 10th
Policy Anniversary, whichever occurs last. The Owner may not select a
Guaranteed Period Option that would extend beyond that date. The Owner's
options at the Annuity Commencement Date are to elect a lump sum payment, or
elect to receive annuity payments under one of the Fixed Payment Options. New
Jersey residents cannot elect Variable Payment Options. Consult your agent and
the policy form itself for details regarding these and other terms applicable
to policies sold in New Jersey.

FEDERAL INCOME TAX CONSEQUENCES OF INVESTMENT IN THE POLICY

With respect to Owners who are natural persons, there should be no federal
income tax on increases in the Policy Value until a distribution under the
Policy occurs (e.g., a surrender or Annuity Payment) or is deemed to occur
(e.g., a pledge or assignment of a Policy). Generally, a portion of any
distribution or deemed distribution will be taxable as ordinary income. The
taxable portion of certain distributions will be subject to withholding unless
the recipient elects otherwise. In addition, a penalty tax may apply to
certain distributions or deemed distributions under the Policy. (See "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES," p. 50.)

Note: The foregoing summary is qualified in its entirety by the detailed
information in the remainder of this Prospectus and in the Statement of
Additional Information and in the prospectuses for the Underlying Funds and in
the Policy, all of which should be referred to for more detailed information.
This Prospectus generally describes only the Policy and the Mutual Fund
Account. Separate prospectuses describe the Underlying Funds. (There is no
prospectus for the Fixed Account since interests in the Fixed Account are
deemed not to be securities. See "THE RETIREMENT BUILDER ACCOUNTS--The Fixed
Account," p. 28.)

- 18 -
<PAGE>

REQUESTS FOR INFORMATION

Any telephone requests and inquiriesmay be made to 1-800-525-6205.

Any Written Notices or Written Requestsmust be sent to the following address:

PFL Life Insurance Company
Administrative and Service Office:

Financial Markets Division-Variable Annuity Dept.
4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499-0001

CONDENSED FINANCIAL INFORMATION

The Retirement Income Builder Variable Annuity Account did not commence
operations until January 2, 1997, therefore there are no financial statements
for that account for the year ended December 31, 1996.

FINANCIAL STATEMENTS

The financial statements of PFL and the independent auditors' report thereon
are contained in the Statement of Additional Information which is available
free upon request to PFL's Administrative and Service Office.

HISTORICAL PERFORMANCE DATA

STANDARDIZED PERFORMANCE DATA

From time to time, PFL may advertise historical yields and total returns for
the Subaccounts of the Mutual Fund Account. These figures will be calculated
according to standardized methods prescribed by the Securities and Exchange
Commission ("SEC"). They will be based on historical earnings and are not
intended to indicate future performance.

The yield of a Subaccount of the Mutual Fund Account (other than the Money
Market Subaccount) for a Policy refers to the annualized income generated by
an investment under a Policy in the Subaccount over a specified 30-day period.
The yield is calculated by assuming that the income generated by the
investment during that 30-day period is generated each 30-day period over a
12-month period and is shown as a percentage of the investment.

The total return of a Subaccount of the Mutual Fund Account refers to return
quotations assuming an investment under a Policy has been held in the
Subaccount for various periods of time including, but not limited to, a period
measured from the date the Subaccount commenced operations. When a Subaccount
has been in operation for 1, 5, and 10 years, respectively, the total return
for these periods will be provided. The total return quotations for a
Subaccount will represent the average annual compounded rates of return that
equate an initial investment of $1,000 in the Subaccount to the redemption
value of that investment as of the last day of each of the periods for which
total return quotations are provided.

- 19 -
<PAGE>

The yield and total return calculations for a Subaccount do not reflect the
effect of any premium taxes that may be applicable to a particular Policy. The
yield calculations also do not reflect the effect of any Surrender Charge that
may be applicable to a particular Policy. To the extent that any or all of a
premium tax and/or Surrender Charge is applicable to a particular Policy, the
yield and/or total return of that Policy will be reduced. For additional
information regarding yields and total returns calculated using the standard
formats briefly summarized above, please refer to the Statement of Additional
Information, a copy of which may be obtained from PFL's Administrative and
Service Office upon request.

SUBACCOUNTS

None of the Subaccounts had commenced operations until January 2, 1996,
therefore, the following performance data is for hypothetical subaccounts
which would be subject to the same fees, charges and deductions as the
Subaccounts of the Mutual Fund Account, but which are shown as if the
hypothetical subaccounts actually commenced operations on the same date as the
underlying Portfolio. Accordingly, the following hypothetical performance data
is for periods before the Subaccounts actually commenced operations, and is
based on the performance of the Underlying Funds adjusted to reflect the
Mutual Fund Account charges.

The following information is also based on the method of calculation
described in the Statement of Additional Information. The hypothetical average
annual total returns for periods ended December 31, 1996, were as follows:

HYPOTHETICAL AVERAGE ANNUAL TOTAL RETURNS

Return of Premium Death Benefit (Total Mutual Fund Account Annual Expenses:
1.25%)

<TABLE>
<CAPTION>
HYPOTHETICAL
10 YEAR SUBACCOUNT
OR INCEPTION
1 YEAR 5 YEAR INCEPTION DATE
------ ------ --------- ------------
<S> <C> <C> <C> <C>
Money Market*.............................. -1.33% 3.02% 4.59% 03/31/82
High Income................................ 7.78% 13.45% 9.67% 09/11/85
Equity-Income.............................. 8.12% 16.43% 12.24% 10/08/86
Growth..................................... 8.54% 13.65% 13.65% 10/08/86
Overseas................................... 7.06% 7.70% 6.47% 01/27/87
Investment Grade Bond...................... -2.93% 5.24% 6.78% 06/05/89
Asset Manager.............................. 8.44% 9.80% 11.11% 05/29/90
Asset Manager: Growth...................... 13.76% N/A 18.28% 01/03/95
Contrafund................................. 15.12% N/A 27.17% 01/03/95
Index 500.................................. 16.63% N/A 15.38% 08/27/92
Balanced**................................. 3.20% N/A 8.08% 1/03/95
Growth Opportunities**..................... 11.46% N/A 21.53% 1/03/95
Growth & Income**.......................... N/A N/A N/A N/A
</TABLE>

- 20 -
<PAGE>

5% Annually Compounding Death Benefit or Annual Step-Up Death Benefit (Total
Mutual Fund Account Annual Expenses: 1.40%)

<TABLE>
<CAPTION>
HYPOTHETICAL
10 YEAR SUBACCOUNT
OR INCEPTION
1 YEAR 5 YEAR INCEPTION DATE
------ ------ --------- ------------
<S> <C> <C> <C> <C>
Money Market*.............................. -1.49% 2.87% 4.43% 03/31/82
High Income................................ 7.71% 13.28% 9.51% 09/11/85
Equity-Income.............................. 7.95% 16.26% 12.07% 10/08/86
Growth..................................... 8.37% 13.49% 13.48% 10/08/86
Overseas................................... 6.89% 7.54% 6.31% 01/27/87
Investment Grade Bond...................... -3.09% 5.09% 6.62% 06/05/89
Asset Manager.............................. 8.27% 9.64% 10.95% 05/29/90
Asset Manager: Growth...................... 13.58% N/A 18.09% 01/03/95
Contrafund................................. 14.94% N/A 26.98% 01/03/95
Index 500.................................. 16.45% N/A 15.21% 08/27/92
Balanced**................................. 3.05% N/A 7.91% 1/03/95
Growth Opportunities**..................... 11.30% N/A 21.36% 1/03/95
Growth & Income**.......................... N/A N/A N/A N/A
</TABLE>

This performance data is hypothetical for the Retirement Income Builder
Variable Annuity. For purposes of this calculation, the deductions for the
Mortality and Expense Risk Fee and Administrative Charge are made on a monthly
basis, rather than a daily basis. Accumulation Unit values and yields will
fluctuate and there is no guarantee the Owner will receive back the Owner's
original principal. Average Annual Total Returns and Yield include all
insurance contract charges.
- ----------------------------------
* The underlying Money Market Portfolio seeks to maintain a stable $1.00 share
price, however, there is no assurance that it will be able to do so. An
investment in the Portfolio is not insured by the U.S. government.

** The Retirement Income Builder Subaccounts are expected to commence
operations on or after May 1, 1997.

- 21 -
<PAGE>

NON-STANDARDIZED PERFORMANCE DATA

PFL may from time to time also advertise or disclose average annual total
return or other performance data in non-standard formats for a Subaccount of
the Mutual Fund Account. The non-standard performance data may assume that no
Surrender Charge is applicable, and may also make other assumptions such as
the amount invested in a Subaccount, differences in time periods to be shown,
or the effect of partial withdrawals or annuity payments.

The following hypothetical non-standardized average annual total return
figures are based on the assumption that the Policy is not surrendered, and
therefore the following figures assume that the Surrender Charge is not
imposed.

HYPOTHETICAL AVERAGE ANNUAL TOTAL RETURNS
(ASSUMING NO SURRENDER CHARGE)

Return of Premium Death Benefit (Total Mutual Fund Account Annual Expenses:
1.25%)

<TABLE>
<CAPTION>
HYPOTHETICAL
SUBACCOUNT
10 YEAR INCEPTION
1 YEAR 5 YEAR OR INCEPTION DATE
------ ------ ------------ ------------
<S> <C> <C> <C> <C>
Money Market*........................... 4.03% 3.17% 4.59% 03/31/82
High Income............................. 12.51% 13.45% 9.67% 09/11/85
Equity-Income........................... 12.76% 16.43% 12.24% 10/08/86
Growth.................................. 13.17% 13.65% 13.65% 10/08/86
Overseas................................ 11.71% 7.70% 6.47% 01/27/87
Investment Grade Bond................... 1.83% 5.24% 6.78% 06/05/89
Asset Manager........................... 13.07% 9.80% 11.11% 05/29/90
Asset Manager: Growth................... 18.32% N/A 20.08% 01/03/95
Contrafund.............................. 19.67% N/A 28.75% 01/03/95
Index 500............................... 21.16% N/A 15.40% 08/27/92
Balanced**.............................. 8.55% N/A 10.49% 1/03/95
Growth Opportunities**.................. 16.76% N/A 23.61% 1/03/95
Growth & Income**....................... N/A N/A N/A N/A

5% Annually Compounding Death Benefit or Annual Step-Up Death Benefit (Total
Mutual Fund Account Annual Expenses: 1.40%)

<CAPTION>
HYPOTHETICAL
SUBACCOUNT
10 YEAR INCEPTION
1 YEAR 5 YEAR OR INCEPTION DATE
------ ------ ------------ ------------
<S> <C> <C> <C> <C>
Money Market*........................... 3.87% 3.02% 4.43% 03/31/82
High Income............................. 12.34% 13.28% 9.51% 09/11/85
Equity-Income........................... 12.59% 16.26% 12.07% 10/08/86
Growth.................................. 13.00% 13.49% 13.48% 10/08/86
Overseas................................ 11.51% 7.54% 6.31% 01/27/87
Investment Grade Bond................... 1.68% 5.09% 6.62% 06/05/89
Asset Manager........................... 12.90% 9.64% 10.95% 05/29/90
Asset Manager: Growth................... 18.15% N/A 19.90% 01/03/95
Contrafund.............................. 19.49% N/A 28.56% 01/03/95
Index 500............................... 20.98% N/A 15.23% 08/27/92
Balanced**.............................. 8.40% N/A 10.34% 1/03/95
Growth Opportunities**.................. 16.60% N/A 23.44% 1/03/95
Growth & Income**....................... N/A N/A N/A N/A
</TABLE>

- 22 -
<PAGE>

This performance data is hypothetical for the Retirement Income Builder
Variable Annuity. For purposes of this calculation, the deductions for the
Mortality and Expense Risk Fee and Administrative Charge are made on a monthly
basis, rather than a daily basis. Accumulation Unit values and yields will
fluctuate and there is no guarantee the Owner will receive back the Owner's
original principal. Average Annual Total Returns and Yield include all
insurance contract charges.
- ----------------------------------
* The underlying Money Market Portfolio seeks to maintain a stable $1.00
share price, however, there is no assurance that it will be able to do so.
An investment in the Portfolio is not insured by the U.S. government.
** The Retirement Income Builder Subaccounts are expected to commence
operations on or after May 1, 1997.

All non-standard performance data will be advertised only if the standard
performance data is also disclosed. For additional information regarding the
calculation of other performance data, please refer to the Statement of
Additional Information, a copy of which may be obtained free from PFL's
Administrative and Service office upon request.

PUBLISHED RATINGS

PFL may from time to time publish in advertisements, sales literature and
reports to Owners, the ratings and other information assigned to it by one or
more independent rating organizations such as A.M. Best Company, Standard &
Poor's Insurance Ratings Services, Moody's Investors Service and Duff & Phelps
Credit Rating Co. The purpose of the ratings is to reflect the financial
strength and/or claims-paying ability of PFL and they should not be considered
as bearing on the investment performance of assets held in the Mutual Fund
Account or of the safety or riskiness of an investment in the Mutual Fund
Account. Each year the A.M. Best Company reviews the financial status of
thousands of insurers, culminating in the assignment of Best's ratings. These
ratings reflect their current opinion of the relative financial strength and
operating performance of an insurance company in comparison to the norms of
the life/health insurance industry. In addition, the claims-paying ability of
PFL as measured by Standard & Poor's Insurance Ratings Services, Moody's
Investors Service or Duff & Phelps Credit Rating Co. may be referred to in
advertisements or sales literature or in reports to Owners. These ratings are
opinions of an operating insurance company's financial capacity to meet the
obligations of its insurance policies in accordance with their terms. Claims-
paying ability ratings do not refer to an insurer's ability to meet non-policy
obligations such as debt or commercial paper obligations.

PFL LIFE INSURANCE COMPANY

PFL Life Insurance Company ("PFL"), 4333 Edgewood Road, N.E., Cedar Rapids,
Iowa 52499-0001, is a stock life insurance company. It was incorporated under
the name NN Investors Life Insurance Company, Inc. under the laws of the State
of Iowa on April 19, 1961. It is principally engaged in the sale of life
insurance and annuity policies, and is licensed in the District of Columbia,
Guam, and in all states except New York. As of December 31, 1996, PFL had
assets of approximately

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<PAGE>

$7.9 billion. PFL is a wholly-owned indirect subsidiary of AEGON USA, Inc.
which conducts substantially all of its operations through subsidiary
companies engaged in the insurance business or in providing non-insurance
financial services. All of the stock of AEGON USA, Inc., is indirectly owned
by AEGON n.v. of the Netherlands, the securities of which are publicly traded.
AEGON n.v., a holding company, conducts its business through subsidiary
companies engaged primarily in the insurance business.

THE RETIREMENT BUILDER ACCOUNTS

Premium Payments made under a Policy may be allocated to the Mutual Fund
Account, to the Fixed Account, or to a combination of these Accounts.

THE MUTUAL FUND ACCOUNT

The Mutual Fund Account was established as a separate investment account of
PFL under the laws of the State of Iowa on March 29, 1996. The Mutual Fund
Account receives and currently invests the Premium Payments under the Policies
that are allocated to it for investment only in shares of the Variable
Insurance Products Fund, the Variable Insurance Products Fund II, and the
Variable Insurance Products Fund III, managed by Fidelity Management and
Research Company ("FMR").

The Mutual Fund Account currently is divided into thirteen Subaccounts.
Additional Subaccounts may be established in the future at the discretion of
PFL. Each Subaccount invests exclusively in shares of one of the Portfolios of
the Underlying Funds. Under Iowa law, the assets of the Mutual Fund Account
are owned by PFL but they are held separately from the other assets of PFL. To
the extent that these assets are attributable to the Cash Value of the
Policies, these assets are not chargeable with liabilities incurred in any
other business operation of PFL. Income, gains, and losses incurred on the
assets in the Subaccounts of the Mutual Fund Account, whether or not realized,
are credited to or charged against that Subaccount without regard to other
income, gains or losses of any other Account or Subaccount of PFL. Therefore,
the investment performance of any Subaccount should be entirely independent of
the investment performance of PFL's general account assets or any other
Account or Subaccount maintained by PFL.

The Mutual Fund Account is registered with the SEC under the Investment
Company Act of 1940 (the "1940 Act") as a unit investment trust and meets the
definition of a separate account under federal securities laws. However, the
SEC does not supervise the management or the investment practices or policies
of the Mutual Fund Account or PFL

Underlying Funds. The available Subaccounts of the Mutual Fund Account
currently invest exclusively in shares of the Underlying Funds. The Underlying
Funds are diversified, open-end management investment companies organized as
Massachusetts Business Trusts. They are the type of investment company
commonly known as a series mutual fund. The Variable Insurance Product Fund
was established on November 13, 1981, and was formerly known as Fidelity Cash
Reserves II. The Variable Insurance Products Fund II was established on March
21,

- 24 -
<PAGE>

1988. The Variable Insurance Products Fund III was established on July 14,
1994, and prior to December 30, 1996 was known as the Fidelity Advisor Annuity
Fund.

Certain information concerning the Underlying Funds is set forth below. More
detailed information may be found in the Underlying Funds' current
prospectuses, which accompany or precede this Prospectus, and the Underlying
Funds' current Statements of Additional Information. The following description
is qualified in its entirety by reference to each Underlying Fund's prospectus
and Statement of Additional Information.

FMR provides investment advice and administrative services to the Underlying
Funds pursuant to an agreement under which each Portfolio pays FMR a monthly
fee. VIP currently offers five Portfolios: Money Market; High Income; Equity-
Income; Growth; and Overseas. VIP II currently offers five Portfolios that are
available under the Policies: Investment Grade Bond; Asset Manager; Index 500,
Asset Manager: Growth; and Contrafund. VIP III currently offers three
Portfolios: Balanced; Growth Opportunities, and Growth & Income. The thirteen
Portfolios offered by the Underlying Funds provide a range of investment
alternatives that vary according to the different investment objectives
described in the Underlying Funds' prospectuses and summarized below. The
assets of each Portfolio are separate from the others, and each Portfolio has
separate investment objectives and policies. As a result, each Portfolio
operates as a separate investment fund, and the investment performance of one
Portfolio has no effect on the investment performance of any other Portfolio.
Each of the Portfolios may not be available for investment in every state.

VIP MONEY MARKET PORTFOLIO seeks to obtain as high a level of current income
as is consistent with preserving capital and providing liquidity. The
Portfolio will invest only in high-quality short-term U.S. dollar-denominated
money market instruments of domestic and foreign issuers. The Portfolio seeks
to maintain a constant net asset value of $1.00 per share, although no
assurances can be given that such constant net asset value will be maintained.
The Portfolio's shares are neither insured nor guaranteed by the U.S.
Government.

VIP HIGH INCOME PORTFOLIO seeks to obtain a high level of current income by
investing primarily in high-yielding, lower rated, fixed-income securities. In
choosing these securities, growth of capital also will be considered. The fund
can also invest in common stocks, other equity securities, and debt securities
not currently paying interest but which are expected to do so in the future.
The Portfolio may invest without limitation in lower-quality debt securities,
sometimes called "junk bonds" which carry greater risk than other debt
securities. See the Fund's prospectus for a description of these risks.

VIP EQUITY-INCOME PORTFOLIO seeks reasonable income by investing primarily
in income-producing equity securities. In choosing these securities, the
Portfolio will also consider the potential for capital appreciation. The
Portfolio seeks to achieve a yield which exceeds the composite yield on the
securities comprising the Standard & Poor's Composite Index of 500 Stocks.

VIP GROWTH PORTFOLIO seeks to achieve capital appreciation through the
purchase of common stocks, although the Portfolio's investments are not
restricted

- 25 -
<PAGE>

to any one type of security. Capital appreciation may also be found in other
types of securities, including bonds and preferred stocks.

VIP OVERSEAS PORTFOLIO seeks long-term growth of capital primarily through
investments in foreign securities. The Portfolio seeks to achieve its
investment objective by investing at least 65% of the Portfolio's assets in
securities of companies from at least three different countries outside of
North America. The Overseas Portfolio expects to invest most of its assets in
securities of companies located in developed countries in these general areas:
The Americas (other than the United States), the Far East and Pacific Basin,
Scandinavia and Western Europe. The Overseas Portfolio expects to invest a
majority of its assets in equity securities, but may also invest in debt
securities of any quality. Generally, the investment in securities of foreign
companies will involve greater risks than are present in domestic investments.

VIP II INVESTMENT GRADE BOND PORTFOLIO seeks as high a level of current
income as is consistent with the preservation of capital by investing
primarily in a broad range of fixed-income securities. FMR normally invests at
least 65% of the Portfolio's total assets in investment-grade, fixed income
securities. Its dollar weighted average maturity will be generally five to ten
years.

VIP II ASSET MANAGER PORTFOLIO seeks high total return with reduced risk
over the long-term by allocating its assets among the following classes, or
types of investments: domestic and foreign stocks, bonds, and short-term and
money market instruments. The Portfolio's "neutral" mix is expected to be 50%
stocks, 40% bonds and 10% short-term/money market instruments. FMR may change
the neutral mix from time to time within specified ranges as set forth in the
Fund's prospectus.

VIP II INDEX 500 PORTFOLIO seeks to match the total return of the Standard &
Poor's Composite Index of 500 Stocks, while keeping transaction costs and
other expenses low.

VIP II ASSET MANAGER: GROWTH PORTFOLIO seeks to maximize total return by
allocating its assets among the following classes, or types, of investments:
domestic and foreign stocks, bonds, and short-term and money market
instruments. The Portfolio's "neutral" mix is expected to be 70% stocks, 25%
bonds and 5% short-term/money market instruments. FMR may change the neutral
mix from time to time within specified ranges as set forth in the Fund's
prospectus.

VIP II CONTRAFUND PORTFOLIO seeks capital appreciation by investing
primarily in equity securities of companies that are considered to be
undervalued or out-of-favor by the Portfolio's adviser.

VIP III BALANCED PORTFOLIO seeks both income and growth of capital by
investing in a broad selection of stocks, bonds, and convertible securities.
When FMR's outlook is neutral, it will invest approximately 60% of the fund's
assets in equity securities, and will always invest at least 25% of the fund's
assets in fixed-income securities.

VIP III GROWTH OPPORTUNITIES PORTFOLIO seeks capital growth by investing in
a wide range of common stocks, convertible and foreign securities and bonds
that may offer long-term growth potential.

- 26 -
<PAGE>

VIP III GROWTH & INCOME PORTFOLIO seeks high total return through a
combination of current income and capital appreciation by investing mainly in
equity securities. The fund may also invest in equity securities that are not
paying current dividends, but offer potential for capital appreciation of
future income.

THERE IS NO ASSURANCE THAT ANY OF THE UNDERLYING FUNDS' PORTFOLIOS WILL
ACHIEVE ITS INVESTMENT OBJECTIVE.

PFL may receive expense reimbursements or other revenues from the Underlying
Funds or their investment advisors.

The Underlying Funds' prospectuses should be read carefully before any
decision is made concerning the allocation of Premium Payments to a particular
Subaccount. The Underlying Funds are not limited to selling their shares to
the Mutual Fund Account and are permitted to accept investments from any
separate account of an insurance company. Since the Portfolios of the
Underlying Funds are available to registered separate accounts offering
variable annuity products of the Company, as well as variable annuity and
variable life products of other insurance companies, there is a possibility
that a material conflict may arise between the interests of the Mutual Fund
Account and one or more of the separate accounts of another participating
insurance company. In the event of a material conflict, the affected insurance
companies, including PFL, agree to take any necessary steps, including
removing their separate accounts from the Underlying Funds, to resolve the
matter. See the Underlying Funds' prospectuses for further details.

An investment in the Mutual Fund Account, or in any Portfolio, including the
Money Market Portfolio is not insured or guaranteed by the U.S. government or
any government agency.

Addition, Deletion, or Substitution of Investments. PFL cannot and does not
guarantee that any of the Subaccounts will always be available for Premium
Payments, allocations, or transfers. PFL retains the right, subject to any
applicable law, to make certain changes in the Mutual Fund Account and its
investments. PFL reserves the right to eliminate the shares of any Portfolio
held by a Subaccount and to substitute shares of another Portfolio of the
Underlying Funds, or of another registered open-end management investment
company for the shares of any Portfolio, if the shares of the Portfolio are no
longer available for investment or if, in PFL's judgment, investment in any
Portfolio would be inappropriate in view of the purposes of the Mutual Fund
Account. To the extent required by the 1940 Act, substitutions of shares
attributable to an Owner's interest in a Subaccount will not be made without
prior notice to the Owner and the prior approval of the SEC. Nothing contained
herein shall prevent the Mutual Fund Account from purchasing other securities
for other series or classes of variable annuity policies, or from effecting an
exchange between series or classes of variable annuity policies on the basis
of requests made by Owners.

New Subaccounts may be established when, in the sole discretion of PFL,
marketing, tax, investment or other conditions warrant. Any new Subaccounts
may be made available to existing Owners on a basis to be determined by PFL.
Each additional Subaccount will purchase shares in a mutual fund portfolio or
other investment vehicle. PFL may also eliminate one or more Subaccounts if,
in its sole

- 27 -
<PAGE>

discretion, marketing, tax, investment or other conditions warrant such
change. In the event any Subaccount is eliminated, PFL will notify Owners and
request a reallocation of the amounts invested in the eliminated Subaccount.
If no such reallocation is provided by the Owner, PFL will reinvest the
amounts invested in the eliminated Subaccount in the Subaccount that invests
in the Money Market Portfolio (or in a similar portfolio of money market
instruments) or in another Subaccount, if appropriate.

In the event of any such substitution or change, PFL may, by appropriate
endorsement, make such changes in the Policies as may be necessary or
appropriate to reflect such substitution or change. Furthermore, if deemed to
be in the best interests of persons having voting rights under the Policies,
the Mutual Fund Account may be (i) operated as a management company under the
1940 Act or any other form permitted by law, (ii) deregistered under the 1940
Act in the event such registration is no longer required or (iii) combined
with one or more other separate accounts. To the extent permitted by
applicable law, PFL also may (1) transfer the assets of the Mutual Fund
Account associated with the Policies to another account or accounts, (2)
restrict or eliminate any voting rights of Owners or other persons who have
voting rights as to the Mutual Fund Account, (3) create new mutual fund
accounts, (4) add new Subaccounts to or remove existing Subaccounts from the
Mutual Fund Account, or combine Subaccounts, or (5) add new underlying funds,
or substitute a new fund for an existing fund.

THE FIXED ACCOUNT

This Prospectus is generally intended to serve as a disclosure document only
for the Policy and the Mutual Fund Account. For complete details regarding the
Fixed Account, see the Policy itself.

Premium Payments allocated and amounts transferred to the Fixed Account
become part of the general account of PFL, which supports insurance and
annuity obligations. Interests in the general account have not been registered
under the Securities Act of 1933 (the "1933 Act"), nor is the general account
registered as an investment company under the 1940 Act. Accordingly, neither
the general account nor any interests therein are generally subject to the
provisions of the 1933 or 1940 Acts. PFL has been advised that while the staff
of the SEC has not reviewed the disclosures in this Prospectus which relate to
the fixed portion, the disclosures may be subject to certain generally
applicable provisions of the federal securities laws relating to the accuracy
and completeness of the statements made in the prospectus.

The Fixed Account is made up of all the general assets of PFL, other than
those in the Mutual Fund Account or in any other segregated asset account. The
Policy Owner may allocate Premium Payments to the Fixed Account at the time of
Premium Payment or by subsequent transfers from the Mutual Fund Account.
Rather than the Policy Owner bearing the investment risk, as is the case for
Policy Value allocated to the Mutual Fund Account, PFL bears the full
investment risk for all Policy Value allocated to the Fixed Account. PFL has
sole discretion to invest the assets of its general account, including the
Fixed Account, subject to applicable law.

Premium Payments applied to, and any amounts transferred to, the Fixed
Account will reflect a fixed interest rate. The interest rates PFL sets will
be credited

- 28 -
<PAGE>

for increments of at least one year measured from each Premium Payment or
transfer date. These rates will never be less than an effective annual
interest rate of 3%.

Upon full surrender, the Owner will always receive at least the Premium
Payments applied to, less prior partial withdrawals and transfers from, the
Fixed Account.

Guaranteed Periods. PFL may offer optional guaranteed interest rate periods
("Guaranteed Period Options") into which Premium Payments may be paid or
amounts transferred. For example, PFL may offer Guaranteed Period Options for
1, 3, 5, or 7 years duration from time to time. The Current Interest Rate PFL
sets for funds placed in each Guaranteed Period Option will be guaranteed
until the end of the applicable Guaranteed Period. At the end of the
Guaranteed Period, the Policy Value for the Guaranteed Period Option will be
rolled into a new Guaranteed Period Option(s) or may be transferred to any
Subaccount(s) within the Mutual Fund Account.

The Owner may choose the Guaranteed Period Option(s) in which to place the
Policy Value by giving PFL notice within 30 days before the end of the
expiring Guaranteed Period. In the absence of such election, the new
Guaranteed Period Option will be the same as the expiring Guaranteed Period
Option unless that Guaranteed Period Option is no longer offered, in which
case, the next shorter Guaranteed Period Option offered will be used. PFL
reserves the right, for new Premium Payments, transfers, or rollovers, to
offer or not to offer any Guaranteed Period Option. PFL will, however, always
offer at least a one-year Guaranteed Period Option.

Surrenders or partial withdrawals from a Guaranteed Period Option prior to
the end of the Guaranteed Period and which are in excess of the cumulative
interest credited at the time of, but prior to, the withdrawal are subject to
an Excess Interest Adjustment on the amount withdrawn. An Excess Interest
Adjustment may result in a loss of interest credited, or again of additional
interest, but the Owner's Fixed Account Policy Values will always be credited
with an effective annual interest rate of at least 3%. Surrender charges, if
any, are applied after the Excess Interest Adjustment. However, upon full
surrender the Owner is guaranteed return of Premium Payments to the Fixed
Account, less partial withdrawals and transfers from the Fixed Account. See
"DISTRIBUTIONS UNDER THE POLICY--Excess Interest Adjustment," p. 38.) No
transfers from any Guaranteed Period Option to any other Investment Option
will be allowed prior to the end of the Guaranteed Period. (See "Transfers,"
below.)

For purposes of crediting interest, the oldest Premium Payment or transfer
into a Guaranteed Period Option within the Fixed Account, plus interest
allocable to that Premium Payment or transfer, is considered to be withdrawn
first; the next oldest Premium Payment or transfer plus interest is considered
to be withdrawn next, and so on (this is a "first-in, first-out" procedure).
The Owner bears the risk that PFL will not credit interest in excess of 3% per
year.

Dollar Cost Averaging Fixed Account Option. PFL may offer a Dollar Cost
Averaging Fixed Account Option separate from the Guaranteed Period Option(s).

- 29 -
<PAGE>

This option will have a one-year interest rate guarantee and will only be
available under a Dollar Cost Averaging (DCA) program.

Prior to the Annuity Commencement Date, no transfers, except through a
Dollar Cost Averaging program, will be allowed from the Dollar Cost Averaging
Fixed Account. Dollar Cost Averaging transfers to Subaccounts of the Mutual
Fund Account must begin within 30 days after the Premium Payment or transfer
to the Dollar Cost Averaging Fixed Account. Transfers must be scheduled for at
least six but not more than 24 months, or for at least four, but not more than
eight calendar quarters. No changes to the amount transferred will be allowed,
but changes can be made to the Subaccounts to which these transfers are
allocated. Transfers under a Dollar Cost Averaging program will not be subject
to an Excess Interest Adjustment. (See "THE RETIREMENT BUILDER ACCOUNTS--
Dollar Cost Averaging," p. 32.)

Dollar cost averaging requires regular investment regardless of fluctuating
prices and does not guarantee profits nor prevent losses in a declining
market. Before electing this option, individuals should consider their
financial ability to continue purchases through periods of both high and low
price levels.

Guaranteed Interest Rates. PFL periodically will establish an applicable
Guaranteed Interest Rate for each of the Guaranteed Period Options within the
Fixed Account, and the Dollar Cost Averaging Fixed Account Option. Current
Guaranteed Interest Rates may be changed by PFL frequently or infrequently
depending on interest rates on investments available to PFL and other factors
as described below, but once established, the rate will be guaranteed for the
entire duration of the Guaranteed Period. However, except for limited
situations, any amount withdrawn or transferred will be subject to an Excess
Interest Adjustment, except those at the end of the Guaranteed Period Option.
(See "Excess Interest Adjustment," p. 30.)

The Guaranteed Interest Rate will not be less than 3% per year regardless of
any application of the Excess Interest Adjustment. PFL has no specific formula
for determining the rate of interest that it will declare as a Guaranteed
Interest Rate, as this rate will be reflective of interest rates available on
the types of debt instruments in which PFL intends to invest amounts allocated
to the Fixed Account. In addition, PFL's management may consider other factors
in determining Guaranteed Interest Rates for a particular Guaranteed Period
including but not limited to: regulatory and tax requirements; sales
commissions and administrative expenses borne by the Company; general economic
trends; and competitive factors. There is no obligation to declare a rate in
excess of 3%; the Policy Owner assumes the risk that declared rates will not
exceed 3%. PFL has complete discretion to declare any rate of at least 3%,
regardless of market interest rates, the amounts earned by PFL on its
investments, or any other factors.

PFL'S MANAGEMENT HAS COMPLETE AND SOLE DISCRETION TO DETERMINE THE
GUARANTEED INTEREST RATES. PFL CANNOT PREDICT OR GUARANTEE THE LEVEL OF FUTURE
GUARANTEED INTEREST RATES, EXCEPT THAT PFL GUARANTEES THAT FUTURE GUARANTEED
EFFECTIVE INTEREST RATES WILL NOT BE BELOW 3% PER YEAR.

- 30 -
<PAGE>

TRANSFERS

An Owner can transfer Policy Value from one Investment Option to another
within certain limits.

Subject to the limitations and restrictions described below, transfers from
an Investment Option may be made, up to thirty days prior to the Annuity
Commencement Date, by sending Written Notice, signed by the Owner, to the
Administrative and Service Office. The minimum amount which may be transferred
from a Subaccount of the Mutual Fund Account is the lesser of $500 or the
entire Subaccount value. If the Subaccount value remaining after a transfer is
less than $500, PFL reserves the right, at its discretion, to include that
amount as part of the transfer.

Subject to the limitations and restrictions described below, transfers
currently may be made without charge as often as the Owner wishes, subject to
the minimum dollar amounts specified above. PFL reserves the right to limit
these transfers to no more than 12 per Policy Year in the future or to charge
up to $10 per transfer in excess of 12 per Policy Year.

Transfers of Policy Values from any of the Guaranteed Period Option(s) of
the Fixed Account to any Subaccount(s) of the Mutual Fund Account are allowed
only at the end of the Guaranteed Period(s), and will not be subject to an
Excess Interest Adjustment at that time. The Owner must notify PFL within 30
days prior to the end of any expiring Guaranteed Period Option to instruct PFL
regarding any transfers to be performed at that time. The Owner may, however,
transfer amounts equal to the interest credited in any of the Guaranteed
Period Option(s) to any Subaccount(s) of the Mutual Fund Account prior to the
end of the Guaranteed Period. The maximum "interest transfer" permitted from
any Guaranteed Period Option before the end of the Guaranteed Period will be
the cumulative amount of interest credited for the Guaranteed Period Option at
the time of, but prior to, the transfer. No Excess Interest Adjustment will
apply to such "interest transfers." Interest transfers may affect the interest
crediting rates on amounts remaining in the Guaranteed Period Option, since
for purposes of crediting interest, PFL considers the oldest Premium Payment
or transfer into the Guaranteed Period Option, plus interest allocable to that
particular Premium Payment or transfer, to be withdrawn first.

Transfers out of the Dollar Cost Averaging Fixed Account, except through a
Dollar Cost Averaging program, are not allowed. (See "Dollar Cost Averaging,"
p. 29.)

After the Annuity Commencement Date, transfers out of the Fixed Account are
not permitted. (See "DISTRIBUTIONS UNDER THE POLICY--Annuity Payment Options,"
p. 41.)

Transfers may be made by telephone, subject to the provisions described
below under "Telephone Transactions."

REINSTATEMENTS

Requests are occasionally received by PFL to reinstate funds which had been
transferred to another life insurance company pursuant to a Code Section 1035

- 31 -
<PAGE>

exchange or trustee-to-trustee transfer. In this situation PFL will require
the Owner to replace the same total dollar amount of funds in the applicable
Subaccounts and/or Fixed Accounts as was taken from them to effect the
exchange. The total dollar amount of funds reapplied to the Mutual Fund
Account will be used to purchase a number of Accumulation Units available for
each Subaccount based on the Accumulation Unit values at the date of
reinstatement (within two days of the date the funds are received by PFL). It
should be noted that the number of Accumulation Units available on the
Reinstatement date may be more or less than the number surrendered for the
exchange. Amounts reapplied to the Fixed Account will be entitled to receive
the interest rate they would otherwise have received had they not been
withdrawn. However, an adjustment will be made to the amount reapplied to
compensate PFL for the additional interest credited during the period of time
between the withdrawal and the reapplication of the funds. Owners should
consult a qualified personal tax adviser concerning the tax consequences of
any Code Section 1035 exchanges or reinstatements.

TELEPHONE TRANSACTIONS

Owners (or their designated registered representative) may make transfers
and/or change the allocation of subsequent Premium Payments by telephone if
the "Telephone Transfer/Reallocation Authorization" box in the Policy
application has been initialed or telephone transfers have been subsequently
authorized by the Owner by appropriate Written Request. PFL will not be liable
for following instructions communicated by telephone that it reasonably
believes to be genuine. However, PFL will employ reasonable procedures to
confirm that instructions communicated by telephone are genuine. If PFL fails
to do so, it may be liable for any losses due to unauthorized or fraudulent
instructions. All telephone requests will be recorded on voice recorder
equipment for the protection of the Owner. The Owner, when making telephone
requests, will be required to provide the Owner's social security number,
and/or other information for identification purposes.

Telephone requests must be received at the Administrative and Service Office
no later than 3:00 p.m. Central time in order to assure same-day pricing of
the transaction.

The telephone transaction privilege may be discontinued at any time as to
some or all Owners and PFL may require written confirmation of a telephone
transaction request at its discretion.

DOLLAR COST AVERAGING (DCA)

Under the Dollar Cost Averaging program, prior to the Annuity Commencement
Date, the Owner can instruct PFL to automatically transfer a dollar amount
specified by the Owner from the DCA Fixed Account Option to any other
Subaccount or Subaccounts of the Mutual Fund Account. The automatic transfers
can occur monthly or quarterly and will occur on the 28th day of the month. If
the DCA request is received prior to the 28th day of any month, the first
transfer will occur on the 28th day of that month. If the DCA request is
received on or after the 28th day of any month, the first transfer will occur
on the 28th day of the following month. The amount transferred each time must
be at least $500. A minimum of six monthly or four quarterly transfers are
required and a maximum of 24 monthly or eight quarterly transfers are allowed
from the DCA Fixed Account.

- 32 -
<PAGE>

Dollar Cost Averaging results in the purchase of more Accumulation Units
when the Accumulation Unit value is low, and fewer Accumulation Units when the
Accumulation Unit value is high. However, there is no guarantee that the
Dollar Cost Averaging program will result in higher Policy Values or will
otherwise be successful.

The Policy Owner may request Dollar Cost Averaging when purchasing the
Policy or later. The program will terminate when the amount in the DCA Fixed
Account is insufficient for the next transfer, at which time the entire
remaining balance is transferred.

The Owner may discontinue the program after satisfying the required minimum
number of transfers at any time by sending a Written Notice to the
Administrative and Service Office. The required minimum number of transfers
(six monthly or four quarterly) must be satisfied each time the DCA program is
restarted following termination of the program for any reason. There is no
charge for participation in this program.

ASSET REBALANCING

Prior to the Annuity Commencement Date the Owner may instruct PFL to
automatically transfer amounts among the Subaccounts of the Mutual Fund
Account on a regular basis to maintain a desired allocation of the Policy
Value among the various Subaccounts offered. Rebalancing will occur on a
monthly, quarterly, semi-annual, or annual basis based on the Policy Date, and
beginning on a date selected by the Owner. The Owner must select the
percentage of the Policy Value desired in each of the various Subaccounts
offered (totaling 100%). Any amounts in the Fixed Account are ignored for
purposes of asset rebalancing. Rebalancing may be started, stopped, or changed
at any time, except that rebalancing will not be available when:

(1) a Dollar Cost Averaging program is in effect; or

(2) any other transfer is requested.

There is no charge for participation in this program.

THE POLICY

The Retirement Income Builder Variable Annuity Policy is a flexible premium
variable annuity policy. The rights and benefits under the Policy are
summarized below; however, the description of the Policy contained in this
Prospectus is qualified in its entirety by reference to the Policy itself, a
copy of which is available upon request from PFL. The Policy may be purchased
on a non-tax qualified basis ("Nonqualified Policy"). The Policy may also be
purchased and used in connection with retirement plans or individual
retirement accounts that qualify for favorable federal income tax treatment
("Qualified Policy").

POLICY APPLICATION AND ISSUANCE OF POLICIES--PREMIUM PAYMENTS

Before it will issue a Policy, PFL must receive a completed Policy
application or transmittal form and a minimum initial Premium Payment of
$2,000 for a

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<PAGE>

Nonqualified or Qualified Policy. There is no minimum initial Premium Payment
required for tax deferred 403(b) annuity purchases; any amount selected by the
Owner in such case, up to the maximum total premium payment allowed by PFL,
may be used to start a Policy. The initial Premium Payment for tax deferred
403(b) purchases must be received within 90 days following the Policy Date,
otherwise the Policy will be canceled. PFL reserves the right to increase or
decrease this amount for a class of Policies issued after some future date.
The initial Premium Payment is the only Premium Payment required to be paid
under a Policy. A Policy ordinarily will be issued only in respect of
Annuitants Age 0 through 80. Acceptance or declination of an application shall
be based on PFL's underwriting standards, and PFL reserves the right to reject
any application or Premium Payment based on those underwriting standards.

If the application or transmittal form can be accepted in the form received,
the initial Premium Payment will be credited to the Policy Value within two
Business Days after the later of receipt of the information needed to issue
the Policy or receipt of the initial Premium Payment. If the initial Premium
Payment cannot be credited because the application or other issuing
requirements are incomplete, the applicant will be contacted within five
Business Days and given an explanation for the delay and the initial Premium
Payment will be returned at that time unless the applicant consents to PFL's
retaining the initial Premium Payment and crediting it as soon as the
necessary requirements are fulfilled.

PFL may, if the application or transmittal form can be accepted in the form
received, credit the initial Premium Payment to the Policy Value within one
Business Day after the later of receipt by PFL's agent of the information
needed or the Premium Payment.

The date on which the initial Premium Payment is credited to the Policy
Value is the Policy Date. The Policy Date is the date used to determine Policy
Years and Policy Anniversaries.

All checks or drafts for Premium Payments should be made payable to PFL Life
Insurance Company and sent to the Administrative and Service Office. The Death
Benefit will not take effect until the check or draft for the Premium Payment
is honored.

Additional Premium Payments. While the Annuitant is living and prior to the
Annuity Commencement Date, the Owner may make Additional Premium Payments at
any time, and in any frequency. The minimum Additional Premium Payment under
both a Nonqualified Policy and a Qualified Policy is $50. Additional Premium
Payments will be credited to the Policy and added to the Policy Value as of
the Business Day when the premium and required information are received.

Maximum Total Premium Payments. The maximum total Premium Payments allowed
without prior approval of PFL is $1,000,000.

Allocation of Premium Payments. An Owner must allocate Premium Payments to
one or more of the Investment Options. THE OWNER MUST SPECIFY THE INITIAL
ALLOCATION IN THE POLICY APPLICATION OR TRANSMITTAL FORM. THIS ALLOCATION WILL
BE USED FOR SUBSEQUENT ADDITIONAL PREMIUM PAYMENTS UNLESS THE OWNER REQUESTS A

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<PAGE>

CHANGE OF ALLOCATION. All allocations must be made in whole percentages and
must total 100%. However, the portion of the initial Premium Payment which is
allocated to the Mutual Fund Account will be temporarily allocated entirely to
the Money Market Portfolio of the Mutual Fund Account only for a period of
time equal to the greater of the Policy's Right to Cancel Period, or fourteen
(14) days following the Policy Date. (See "SUMMARY--Right to Cancel Period,"
p. 9.) Based on current state laws, the maximum right to cancel period, and
therefore maximum period of time the funds are expected to be allocated to the
money market account, is 30 days from the date the policy is issued. At the
end of that period, the Policy Value in the Money Market Portfolio will then
be allocated to the Subaccount(s) of the Mutual Fund Account in accordance
with the allocation percentages specified by the Owner. If Premium Payments
are allocated to the Dollar Cost Averaging Fixed Account, directions regarding
the Subaccount(s) to which transfers are to be made must be specified on the
application or other proper Written Request. If the Owner fails to specify how
Premium Payments are to be allocated, the Premium Payment(s) cannot be
accepted.

The Owner may change the allocation instructions for future Subsequent
Additional Premium Payments by sending a Written Notice, signed by the Owner,
to PFL's Administrative and Service Office, or by telephone (subject to the
provisions described under "THE RETIREMENT BUILDER ACCOUNTS--Telephone
Transactions," p. 32). The allocation change will apply to Premium Payments
received after the date the Written Notice or telephone request is received.

Payment Not Honored by Bank. Any payment due under the Policy which is
derived, all or in part, from any amount paid to PFL by check or draft may be
postponed until such time as PFL determines that such instrument has been
honored.

POLICY VALUE

On or before the Annuity Commencement Date, the Policy Value is equal to the
Owner's:

(1) Premium Payments; minus

(2) Partial Withdrawals (including any applicable Excess Interest
Adjustments and/or Surrender Charges on such withdrawals); plus

(3) interest credited in the Fixed Account; plus or minus

(4) accumulated gains or losses in the Mutual Fund Account; minus

(5) Service Charges, premium taxes and transfer fees, if any.

The Policy Value is expected to change from Valuation Period to Valuation
Period, reflecting the investment experience of the selected Subaccount(s), as
well as the deductions for charges. A Valuation Period is the period between
successive Business Days. It begins at the close of business on each Business
Day and ends at the close of business on the next succeeding Business Day. A
Business Day is each day that both the New York Stock Exchange and PFL's
Administrative and Service Office are open for business. Holidays are
generally not Business Days.

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<PAGE>

The Mutual Fund Policy Value. When a Premium Payment is allocated or an
amount is transferred to a Subaccount of the Mutual Fund Account, it is
credited to the Policy Value in the form of Accumulation Units. Each
Subaccount of the Mutual Fund Account has a distinct Accumulation Unit value.
The number of units credited is determined by dividing the Premium Payment or
amount transferred to the Subaccount by the Accumulation Unit value of the
Subaccount as of the end of the Valuation Period during which the allocation
is made. When amounts are transferred out of, or fully surrendered or
partially withdrawn from a Subaccount, Accumulation Units are canceled or
redeemed in a similar manner.

For each Subaccount, the Accumulation Unit Value for a given Business Day is
based on the net asset value of a share of the corresponding Portfolio of the
Underlying Funds less any applicable charges or fees. Therefore, the
Accumulation Unit Values will fluctuate from day to day based on the
investment experience of the corresponding Portfolio. The determination of
Subaccount Accumulation Unit Values is described in detail in the Statement of
Additional Information.

ADJUSTED POLICY VALUE (APV)

The Adjusted Policy Value is the Policy Value increased or decreased by any
Excess Interest Adjustment applied at the time of surrender or on the Annuity
Commencement Date.

The Adjusted Policy Value will be used on the Annuity Commencement Date to
provide the amount of annuity payments under a Policy.

AMENDMENTS

No change in the Policy is valid unless made in writing by PFL and approved
by one of PFL's officers. No registered representative has authority to change
or waive any provision of the Policy.

PFL reserves the right to amend the Policies to meet the requirements of the
Code, regulations or published rulings. An Owner can refuse such a change by
giving Written Notice, but a refusal may result in adverse tax consequences.

NON-PARTICIPATING POLICY

The Policy does not participate or share in the profits or surplus earnings
of PFL. No dividends are payable on the Policy.

DISTRIBUTIONS UNDER THE POLICY

SURRENDERS

Prior to the Annuity Commencement Date, the Owner may surrender all or a
portion of the Cash Value in exchange for a payment from PFL. The Cash Value
is the Adjusted Policy Value, less the Surrender Charge, if any. (See
"DISTRIBUTIONS UNDER THE POLICY--Annuity Payment Options," p. 41.) The Policy
cannot be surrendered after the Annuity Commencement Date. (See "DISTRIBUTIONS
UNDER THE POLICY--Annuity Payments," p. 40.)

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<PAGE>

When requesting a partial surrender ($500 minimum), the Owner must instruct
PFL how the amount withdrawn is to be allocated among various Guaranteed
Period Options of the Fixed Account and/or the Subaccount(s) of the Mutual
Fund Account. If the Owner's request for a partial surrender from a Guaranteed
Period Option of the Fixed Account is greater than the Cash Value of that
Guaranteed Period Option, PFL will pay the Owner the amount of the Cash Value
of that Guaranteed Period Option. If no allocation instructions are given, the
withdrawal will be deducted from each Investment Option in the same proportion
that the Owner's interest in each Investment Option bears to the total Policy
Value. PFL reserves the right to defer payment of the Cash Value from the
Fixed Account for up to six months.

In each Policy Year the Owner may request partial surrenders ($500 minimum)
of up to 10% of the Policy Value free of Surrender Charges. The percentage
that may be taken free of Surrender Charges each Policy Year is cumulative.
This is referred to as the Cumulative Free Percentage. That is, Cumulative
Free Percentages which are not taken are carried forward and are available to
be taken in the following Policy Year free of Surrender Charges. Cumulative
Free percentage withdrawals previously taken reduce the Cumulative Free
Percentage that is available. For example, 10% Cumulative Free Percentage is
available at the beginning of the first policy year. If no partial withdrawals
are taken in the first policy year, the first year unused Cumulative Free
Percentage of 10% is carried forward to the second policy year. The unused 10%
from year one plus 10% additional Cumulative Free Percentage available at the
beginning of policy year two accumulates to a 20% Cumulative Free Percentage
as of the beginning of policy year two. Assume only 5% is used in policy year
two. Thus the Cumulative Free Percentage available as of the beginning of
policy year three would be 25% (that is, 20% -- 5% = 15% unused from policy
year two, plus an additional 10% available at the beginning of policy year
three). Amounts withdrawn in excess of the available Cumulative Free
Percentage will be subject to a Surrender Charge (up to 6%). Neither a
Surrender Charge nor an Excess Interest Adjustment will be assessed if the
withdrawal is necessary to meet the minimum distribution requirements for that
Policy specified by the IRS for tax qualified plans.

Upon full surrender or partial withdrawal, the cumulative interest credited
at the time of, but prior to, the surrender or withdrawal will not be subject
to an Excess Interest Adjustment.

Surrenders or partial withdrawals that are allowed free of Surrender Charges
will reduce the Policy Value by the amount withdrawn. Surrendered or partially
withdrawn amounts in excess of the portion that is free of Surrender Charges
are Excess Partial Withdrawals. Excess Partial Withdrawals will reduce the
Policy Value by an amount equal to (X - Y + Z) where:

X = Excess Partial Withdrawal

Y = Excess Interest Adjustment, which is applicable to the Excess Partial
Withdrawal

Z = Surrender Charge on X minus Y.

For a discussion of the Surrender Charge, see "CHARGES AND DEDUCTIONS--
Surrender Charge," p. 48. For a discussion of the Excess Interest

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<PAGE>

Adjustment, see "DISTRIBUTIONS UNDER THE POLICY--Excess Interest Adjustment,"
p. 38 and Appendix "A".

Since the Owner assumes the investment risk with respect to all Premium
Payments allocated to the Mutual Fund Account, and because withdrawals may be
subject to an Excess Interest Adjustment and to a Surrender Charge, and
possibly premium taxes, the total amount paid upon total surrender of the Cash
Value (taking any prior surrenders into account) may be more or less than the
total Premium Payments made. Following a surrender of the total Cash Value, or
at any time the Policy Value is zero, all rights of the Owner and Annuitant
will terminate.

In addition to any applicable Excess Interest Adjustment, Surrender Charge,
and premium tax, surrenders and partial withdrawals may be subject to income
taxes and, if taken prior to age 59 1/2, a ten percent Federal penalty tax.
(See "CERTAIN FEDERAL INCOME TAX CONSEQUENCES," p. 50.)

NURSING CARE AND TERMINAL CONDITION WITHDRAWAL OPTION

In some states, if the Owner or Owner's spouse (Annuitant or Annuitant's
spouse if the Owner is not a natural person)-(1) has been confined in a
hospital or nursing facility for 30 consecutive days or (2) has been diagnosed
as having a terminal condition as defined in the Policy or endorsement
(generally a life expectancy of 12 months or less), then the Surrender Charge
and Excess Interest Adjustment are not imposed on surrenders or partial
withdrawals. (Since this benefit may not be available in all states, see the
Policy or endorsement for details.) (See DISTRIBUTIONS UNDER THE POLICY--
Nursing Care and Terminal Condition Withdrawal Option," p. 38.)

UNEMPLOYMENT WAIVER

The Owner may withdraw all or a portion of the Policy Value free of
Surrender Charges and free of Excess Interest Adjustments if the Owner or
Owner's spouse (Annuitant or Annuitant's spouse, if the Owner is not a natural
person) becomes unemployed. In order to qualify, the affected individual 1)
must have been employed full time for at least two years prior to becoming
unemployed, 2) must have been employed full time on the Policy Date, 3) must
have been unemployed for at least 60 consecutive days at the time of
withdrawal, and 4) must have a minimum Cash Value at the time of withdrawal of
$5,000. Proof of unemployment will consist of providing PFL with a
determination letter from the applicable State's Department of Labor which
verifies that the individual qualifies for and is receiving unemployment
benefits at the time of withdrawal. The determination letter must be received
by PFL no later than fifteen (15) days following the date PFL receives the
withdrawal request. (This benefit may not be available in all states--see the
Policy or endorsement for details.)

EXCESS INTEREST ADJUSTMENT (EIA)

Full surrenders, partial withdrawals, and amounts applied to an Annuity
Payment Option (prior to the end of any Guaranteed Period) from the Fixed
Account Guaranteed Period Options will be subject to an Excess Interest
Adjustment except as provided for under "Surrenders" or "Nursing Care and
Terminal Condition Withdrawal Option" above or "Systematic Payout Option,"
p. 38.

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<PAGE>

The Excess Interest Adjustment partially compensates PFL for the foregoing
early removal of funds from the Guaranteed Period Options where interest rates
declared by PFL have risen since the date of the guarantee. Conversely, the
Excess Interest Adjustment allows PFL to share the benefit of falling interest
rates with the Owner upon such withdrawals.

Generally, if interest rates declared by PFL have risen since the date of
the guarantee, the application of the Excess Interest Adjustment (a negative
Excess Interest Adjustment in this case) will result in a lower Cash Value
upon surrender. Conversely, if interest rates have fallen since the date of
the guarantee, the application of the Excess Interest Adjustment (a positive
Excess Interest Adjustment in this case) will result in a higher Cash Value
upon surrender.

Excess Interest Adjustments will not reduce the Adjusted Policy Value at the
time of full surrender for a Guaranteed Period Option below the amount paid
into, less any prior partial withdrawals and transfers from that Guaranteed
Period Option, plus interest at the Policy's minimum guaranteed effective
annual interest rate of 3%.

The formula for calculating the Excess Interest Adjustment and examples of
the application of the Excess Interest Adjustments are set forth in Appendix A
to this Prospectus.

SYSTEMATIC PAYOUT OPTION

Under the Systematic Payout Option, Owners can instruct PFL to make
automatic payments to them monthly, quarterly, semi-annually or annually from
specified Investment Options (except the DCA account). Monthly and quarterly
payments can only be accomplished by electronic funds transfer directly to a
checking or savings account. The minimum payment is $50. The maximum payment
is 10% of the Policy Value at the time the Systematic Payout is made divided
by the number of payments made per year (for example, 12 for monthly). If this
requested amount is below the minimum distribution requirements for that
Policy specified by the IRS for tax qualified plans, the maximum payment will
be increased to this minimum required distribution amount. Only partial
withdrawal requests which are in excess of the minimum required distribution
will be subject to any applicable Surrender Charge and/or Excess Interest
Adjustment. The "Request for Systematic Payout" form must specify a date for
the first payment, which must be at least 30 days but not more than one year
after the form is submitted (i.e., Systematic Payouts will start at the end of
the payment mode selected, but not earlier than 30 days from the date of
request).

The Surrender Charge and Excess Interest Adjustment will be waived for
Owners under age 59 1/2 on Qualified Policies if they take Systematic Payouts
using one of the payout methods described in I.R.S. Notice 89-25, Q&A-12 (the
Life Expectancy Recalculation Option, Amortization, or Annuity Factor) which
generally requires payments for life or life expectancy. These payments must
be continued until the later of age 59 1/2 or five years from commencement of
the payments. No additional withdrawals may be taken during the time these
payments are made. For Qualified Policies, Owners age 59 1/2 or older, the
Surrender Charge and Excess Interest Adjustment will be waived if payments are
made using the Life Expectancy Recalculation Option.

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<PAGE>

In addition, for either Qualified or Nonqualified Policies, the Surrender
Charge will not be imposed on Systematic Payouts. Only Systematic Payouts in
excess of the cumulative interest credited at the time of, but prior to, the
payout will be subject to an Excess Interest Adjustment.

Qualified Policies are subject to complex rules with respect to restrictions
on and taxation of distributions, including the applicability of penalty
taxes. In addition, the tax treatment of systematic payouts from Nonqualified
Policies has had an unfavorable ruling regarding the ability to avoid the 10%
penalty tax. Therefore, the Owner should consult a qualified tax adviser
before requesting a Systematic Payout. In certain circumstances withdrawn
amounts may be included in the Owner's gross income. (See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES," p. 50.)

ANNUITY PAYMENTS

Annuity Commencement Date. Unless the Annuity Commencement Date is changed,
Annuity Payments under a Policy will begin on the Annuity Commencement Date
which is selected by the Owner at the time the Policy is applied for. The
Annuity Commencement Date may be changed from time to time by the Owner by
Written Notice to PFL, provided that notice of each change is received by PFL
at its Administrative and Service Office at least thirty (30) days prior to
the then current Annuity Commencement Date. Except as otherwise permitted by
PFL, a new Annuity Commencement Date must be a date which is: (1) at least
thirty (30) days after the date notice of the change is received by PFL and
(2) not later than the last day of the Policy month starting after the
Annuitant attains age 85. In no event will an Annuity Commencement Date be
permitted to be later than the last day of the Policy month following the
month in which the Annuitant attains age 95. The Annuity Commencement Date may
also be changed by the Beneficiary's election of the Annuity Option after the
Annuitant's death.

Election of Payment Option. During the lifetime of the Annuitant and prior
to the Annuity Commencement Date, the Owner may choose a Payment Option or
change the election, but Written Notice of any election or change of election
must be received by PFL at its Administrative and Service Office at least
thirty (30) days prior to the Annuity Commencement Date. If no election is
made prior to the Annuity Commencement Date, Annuity Payments will be made
under (i) Option 3, life income with level payments for 10 years certain,
using the existing Adjusted Policy Value of the Fixed Account, or (ii) under
Option 3-V, life income with variable payments for 10 years certain using the
existing Policy Value of the Mutual Fund Account, or (iii) in a combination of
(i) and (ii). If the Adjusted Policy Value on the Annuity Commencement Date is
less than $2,000, PFL reserves the right to pay it in one lump sum in lieu of
applying it under a Payment Option.

Prior to the Annuity Commencement Date, the Beneficiary may elect to receive
the Death Benefit in a lump sum or under one of the Payment Options, to the
extent allowed by law and subject to the terms of any settlement agreement.
(See "Death Benefit," p. 44.) Annuity Payments will be made on either a fixed
basis or a variable basis as selected by the Owner (or the Beneficiary, after
the Annuitant's death).

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<PAGE>

The person who elects a Payment Option can also name one or more successor
payees to receive any unpaid amount PFL has at the death of a payee. Naming
these payees cancels any prior choice of a successor payee.

A payee who did not elect the Payment Option does not have the right to
advance or assign payments, take the payments in one sum, or make any other
change. However, the payee may be given the right to do one or more of these
things if the person who elects the option tells PFL in writing and PFL
agrees.

Unless the Owner specifies otherwise, the payee shall be the Annuitant, or,
after the Annuitant's death, the Beneficiary. PFL may require written proof of
the age of any person who has an annuity purchased under Option 3, 3-V, 5 or
5-V.

Premium Tax. PFL may be required by state law to pay premium tax on the
amount applied to a payment option or upon withdrawal. If so, PFL will deduct
the premium tax before applying or paying the proceeds.

Supplementary Contract. Once proceeds become payable and a Payment Option
has been selected, the Policy will terminate and PFL will issue a
Supplementary Contract to reflect the terms of the option selected. The
Supplementary Contract will name the payees and will describe the payment
schedule.

ANNUITY PAYMENT OPTIONS

The Policy provides five Payment Options which are described below. Two of
these are offered as either "Fixed Payment Options" or "Variable Payment
Options," and three are only available as Fixed Payment Options. The Owner may
elect a Fixed Payment Option, a Variable Payment Option, or a combination of
both. If the Owner elects a combination, he must specify what part of the
Policy proceeds are to be applied to the Fixed and Variable Payment Options
(and he must also specify which Subaccounts for the Variable Payment Options).

NOTE CAREFULLY: Under Payment Options 3(l) and 5 (including 3-V(l) and 5-V),
it would be possible for only one Annuity Payment to be made if the
Annuitant(s) were to die before the due date of the second Annuity Payment;
only two Annuity Payments if the Annuitant(s) were to die before the due date
of the third Annuity Payment; and so forth.

On the Annuity Commencement Date, the Adjusted Policy Value will be applied
to provide for Annuity Payments under the selected Annuity Option as
specified. The Adjusted Policy Value is the Policy Value for the Valuation
Period which ends immediately preceding the Annuity Commencement Date,
including the effect of any applicable Excess Interest Adjustment.

The effect of choosing a Fixed Payment Option is that the amount of each
payment will be set on the Annuity Commencement Date and will not change. If a
Fixed Payment Option is selected, the Adjusted Policy Value will be
transferred to the general account of PFL, and the Annuity Payments will be
fixed in amount by the fixed annuity provisions selected and the age and sex
(if consideration of sex is allowed) of the Annuitant. For further
information, contact PFL at its Administrative and Service Office.

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<PAGE>

Guaranteed Values. There are five Fixed Payment Options. Options 1, 2 and 4
are based on a guaranteed interest rate of 3%. Options 3 and 5 are based on a
guaranteed interest rate of 3% using the "1983 Table a" (male, female, and
unisex if required by law) mortality table improved to the year 2000 with
projection scale G. ("The 1983 Table a" mortality rates are adjusted based on
improvements in mortality since 1983 to more appropriately reflect increased
longevity. This is accomplished using a set of improvement factors referred to
as projection scale G.)

Option 1--Interest Payments. The Adjusted Policy Value may be left with PFL
for any agreed-upon term. PFL will pay the interest in equal payments or it
may be left to accumulate. Withdrawal rights will be agreed upon by the Owner
and PFL when the option is elected.

Option 2--Income for a Specified Period. Level payments of the proceeds with
interest are made for the fixed period elected, at which time the funds are
exhausted.

Option 3--Life Income. An election may be made between:

1. "No Period Certain"--Level payments will be made during the
lifetime of the Annuitant.

2. "10 Years Certain"--Level Payments will be made for the longer of
the Annuitant's lifetime or ten years.

3. "Guaranteed Return of Policy Proceeds"--Level payments will be
made for the longer of the Annuitant's lifetime or until the total
dollar amount of payments made equals the proceeds applied to the
income option.

Option 4--Income of a Specified Amount. Payments are made for any specified
amount until the proceeds with interest are exhausted.

Option 5--Joint and Survivor Annuity. Payments are made during the joint
lifetime of the payee and a joint payee of the Owner's selection. Payments
will be made as long as either person is living.

For Options 2, 3, and 4, in the event of the death of the person receiving
payments prior to the end of the Guaranteed Period, payments will be continued
to that person's beneficiary or their present value may be paid in a single
sum.

Other options may be arranged by agreement with PFL. Certain options may not
be available in some states.

Current immediate annuity rates for the same class of annuities will be used
if higher than the guaranteed rates (guaranteed rates are based upon the
mortality tables and/or guaranteed interest rates specified in the Policy
under the section entitled "Annuity Payments"). Current amounts may be
obtained from PFL.

Variable Payment Options. The dollar amount of the first Variable Annuity
Payment will be determined in accordance with the annuity payment rates set
forth in the applicable table contained in the Policy. The tables are based on
a 5% effective annual Assumed Investment Return and the "1983 Table a" (male,
female,

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<PAGE>

and unisex if required by law) mortality table improved to the year 2000 with
projection Scale G. ("The 1983 Table a" mortality rates are adjusted based on
improvements in mortality since 1983 to more appropriately reflect increased
longevity. This is accomplished using a set of improvement factors referred to
as projection scale G.) The dollar amount of subsequent Variable Annuity
Payments will vary based on the investment performance of the Subaccount(s) of
the Mutual Fund Account selected by the Annuitant or Beneficiary. If the
actual investment performance exactly matched the Assumed Investment Return of
5% at all times, the amount of each Variable Annuity Payment would remain
equal. If actual investment performance exceeds the Assumed Investment Return,
the amount of the Variable Annuity Payments would increase. Conversely, if
actual investment performance is lower than the Assumed Investment Return, the
amount of the Variable Annuity Payments would decrease.

Determination of the First Variable Payment. The amount of the first
variable payment depends upon the sex (if consideration of sex is allowed
under state law) and adjusted age of the Annuitant. The adjusted age is the
Annuitant's actual age nearest birthday, on the Annuity Commencement Date,
adjusted as follows:

<TABLE>
<CAPTION>
ANNUITY COMMENCEMENT DATE ADJUSTED AGE
------------------------- --------------------
<S> <C>
Before 2001 Actual Age

2001-2010 Actual Age minus 1

2011-2020 Actual Age minus 2

2021-2030 Actual Age minus 3

2031-2040 Actual Age minus 4

After 2040 As determined by PFL
</TABLE>

This adjustment assumes an increase in life expectancy, and therefore it
results in lower payments than without such an adjustment.

The following Variable Payment Options generally are available:

Option 3-V--Life Income. An election may be made between:

l. "No Period Certain"--Payments will be made during the lifetime of
the Annuitant.

2. "10 Years Certain"--Payments will be made for the longer of the
Annuitant's lifetime or ten years.

Option 5-V--Joint and Survivor Annuity. Payments are made as long as either
the Annuitant or the joint Annuitant is living.

Certain options may not be available in some states.

Determination of Subsequent Variable Payments. All Variable Annuity Payments
other than the first are calculated using "Annuity Units" which are credited
to the Policy. The number of Annuity Units to be credited in respect of a
particular Subaccount is determined by dividing that portion of the first
Variable Annuity Payment attributable to that Subaccount by the Annuity Unit
Value of that Subaccount on the Annuity Commencement Date. The number of
Annuity Units of each particular Subaccount credited to the Policy then
remains fixed, assuming no transfers to or from that Subaccount occur. The
dollar value of variable Annuity

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<PAGE>

Units in the chosen Subaccount will increase or decrease reflecting the
investment experience of the chosen Subaccount. The dollar amount of each
Variable Annuity Payment after the first may increase, decrease or remain
constant, and is equal to the sum of the amounts determined by multiplying the
number of Annuity Units of each particular Subaccount credited to the Policy
by the Annuity Unit value for the particular Subaccount on the date the
payment is made.

Transfers. A Policy Owner may transfer the value of the Annuity Units from
one Subaccount to another within the Mutual Fund Account or to the Fixed
Account. However, after the Annuity Commencement Date no transfers may be made
from the Fixed Account to the Mutual Fund Account. The minimum amount which
may be transferred is the lesser of $10 of monthly income or the entire
monthly income of the variable Annuity Units in the Subaccount from which the
transfer is being made. The remaining Annuity Units in the Subaccount must
provide at least $10 of monthly income. If, after a transfer, the monthly
income of the remaining Annuity Units in a Subaccount would be less than $10,
PFL reserves the right to include those Annuity Units as part of the transfer.
PFL reserves the right to limit transfers between Subaccounts or from the
Mutual Fund Account to the Guaranteed Period Options of the Fixed Account
after the Annuity Commencement Date to once per Policy Year.

Tax Withholding. A portion or the entire amount of the Annuity Payments may
be taxable as ordinary income. If, at the time the Annuity Payments begin, the
Owner has not provided PFL with a written election not to have federal income
taxes withheld, PFL must by law withhold such taxes from the taxable portion
of such annuity payments and remit that amount to the federal government.
Withholding is mandatory for certain qualified Policies. (See "CERTAIN FEDERAL
INCOME TAX CONSEQUENCES," p. 50)

Adjustment of Annuity Payments. Payments will be made at 1, 3, 6, or 12
month intervals. If the individual payments provided for would be or become
less than $50, PFL may change, at its discretion, the frequency of payments to
such intervals as will result in payments of at least $50. If the Adjusted
Policy Value on the Annuity Commencement Date is less than $2,000, PFL may pay
such value in one sum in lieu of the payments otherwise provided for.

DEATH BENEFIT

Death of Annuitant Prior to Annuity Commencement Date. A Death Benefit will
be paid to the Beneficiary if the Owner, who is the Annuitant, dies prior to
the Annuity Commencement Date. The amount of the Death Benefit will be the
greatest of a) the Policy Value on the date proof of the Owner's death and an
election of the method of settlement are received by PFL's Administrative and
Service Office, b) the Cash Value on the date PFL receives due proof of death
and an election of a method of settlement, and c) the Guaranteed Minimum Death
Benefit ("GMDB") described below, plus Premium Payments less Partial
Withdrawals, from the date of death to the date the death proceeds are paid.

There are three Guaranteed Minimum Death Benefit options available, (A) the
"Return of Premium Death Benefit", (B) the "5% Annually Compounding Death
Benefit," and (C) the "Annual Step-Up Death Benefit."

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<PAGE>

The "Return of Premium Death Benefit" is the total Premium Payments less any
Adjusted Partial Withdrawals (defined below), as of the date of death.

The "5% Annually Compounding Death Benefit" is the total Premium Payments
less any Adjusted Partial Withdrawals (defined below) plus interest at an
effective annual rate of 5% from the payment or withdrawal date up to the
earlier of the date of death or the Owner's 81st birthday. There is an extra
charge for this Death Benefit (See "CHARGES AND DEDUCTIONS--Mortality and
Expense Risk Fee," p. 48.)

The "Annual Step-Up Death Benefit" is the largest Policy Value on the issue
date or on any Policy Anniversary prior to the earlier of the date of death or
the Owner's 81st birthday, plus any premiums paid, less any partial
withdrawals taken, subsequent to the date of the largest anniversary Policy
Value. There is an extra charge for this Death Benefit. (See CHARGES AND
DEDUCTIONS--Mortality and Expense Risk Fee, p. 48.)

Under all three Death Benefit Options, if the surviving spouse elects to
continue the Policy in lieu of receiving the Death Benefit, an amount equal to
the excess, if any, of the Guaranteed Minimum Death Benefit (i.e., the Return
of Premium Death Benefit, the 5% Annually Compounding Death Benefit, or the
Annual Step-Up Death Benefit) over the Policy Value, will then be added to the
Policy Value. This amount will be added only once, at the time of such
election.

If no choice of Guaranteed Minimum Death Benefit is made in the Policy
application, the "Return of Premium Death Benefit" will apply.

After the Policy Date, an election cannot be made and the Death Benefit
option cannot be changed.

Adjusted Partial Withdrawal. To determine the Guaranteed Minimum Death
Benefit for each partial withdrawal, the Adjusted Partial Withdrawal is the
sum of (1) and (2), where

(1) The Surrender-charge-free withdrawal amount taken and,

(2) The amount that an Excess Partial Withdrawal reduces the Policy
Value. (See "DISTRIBUTIONS UNDER THE POLICY--Surrenders," p. 36.)
times [(a) divided by (b)] where:

(a) is the amount of the Death Benefit less any Cumulative Free
Percentage Withdrawals; and

(b) is the Policy Value less any Cumulative Free Percentage
Withdrawals.

If a partial withdrawal is taken when the Guaranteed Minimum Death Benefit
exceeds the Policy Value, then the partial withdrawal amount used to determine
the Guaranteed Minimum Death Benefit will exceed the amount of the partial
withdrawal. In that case, the total proceeds of a partial withdrawal followed
by a Death Benefit could be less than total Premium Payments.

If the Annuitant who is not the Owner dies, the Owner will become the
Annuitant and no Death Benefits are payable unless the Owner specifically
requests

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<PAGE>

on the Policy application or in writing that the Death Benefit be paid upon
the Annuitant's death and PFL agrees to such election. See your Policy's
provisions.

Due Proof of Death of the Annuitant is proof that the Annuitant who is the
Owner died prior to the commencement of Annuity Payments. Upon receipt of this
proof and an election of a method of settlement and return of the Policy, the
Death Benefit generally will be paid within seven days, or as soon thereafter
as PFL has sufficient information about the Beneficiary to make the payment.
The Beneficiary may receive the amount payable in a lump sum cash benefit, or,
subject to any limitation under any state or federal law, rule, or regulation,
under one of the Payment Options described above, unless a settlement
agreement is effective at the death of the Owner preventing such election.

If the Annuitant was the Owner, and the Beneficiary was not the Annuitant's
spouse, the Death Benefit must (1) be distributed within five years of the
date of the deceased Owner's death, or (2) payments under a Payment Option
must begin no later than one year after the deceased Owner's death and must be
made for the Beneficiary's lifetime or for a period certain (so long as any
certain period does not exceed the Beneficiary's life expectancy). Death
Proceeds which are not paid to or for the benefit of a natural person must be
distributed within five years of the date of the deceased Owner's death. If
the sole Beneficiary is the deceased Owner's surviving spouse, such spouse may
elect to continue the Policy as the new Annuitant and Owner instead of
receiving the Death Benefit. (See "Federal Tax Matters" in the Statement of
Additional Information.)

If the Annuitant is not the Owner, and the Owner dies prior to the Annuity
Commencement Date, a Successor Owner may surrender the Policy at any time for
the amount of the Adjusted Policy Value. If the successor owner is not the
deceased Owner's spouse, however, the Adjusted Policy Value must be
distributed: (1) within five years after the date of the deceased Owner's
death, or (2) payments under a Payment Option must begin no later than one
year after the deceased Owner's death and must be made for the successor
Owner's lifetime or for a period certain (so long as any period certain does
not exceed the successor Owner's life expectancy).

Death On or After Annuity Commencement Date. The Death Benefit payable on or
after the Annuity Commencement Date depends on the Payment Option selected. If
any Owner dies on or after the Annuity Commencement Date, but before the
entire interest in the Policy is distributed, the remaining portion of such
interest in the Policy will be distributed at least as rapidly as under the
method of distribution being used as of the date of that Owner's death.

Beneficiary. The Beneficiary designation in the application will remain in
effect until changed. The Owner may change the designated Beneficiary by
sending Written Notice to PFL. The Beneficiary's consent to such change is not
required unless the Beneficiary was irrevocably designated or consent is
required by law. (If an irrevocable Beneficiary dies, the Owner may then
designate a new Beneficiary.) The change will take effect as of the date the
Owner signs the Written Notice, whether or not the Owner is living when the
Notice is received by PFL. PFL will not be liable for any payment made before
the Written Notice is received. If more

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<PAGE>

than one Beneficiary is designated, and the Owner fails to specify their
interests, they will share equally.

DEATH OF OWNER

Federal tax law requires that if any Owner (including any joint Owner or any
Successor Owner who has become a current Owner) dies before the Annuity
Commencement Date, then the entire value of the Policy must generally be
distributed within five years of the date of death of such Owner. Certain
rules apply where 1) the spouse of the deceased Owner is the sole beneficiary,
2) the Owner is not a natural person and the primary Annuitant dies or is
changed, or 3) any Owner dies after the Annuity Commencement Date. See
"Federal Tax Matters" in the Statement of Additional Information for a
detailed description of these rules. Other rules may apply to Qualified
Policies. (See also "Death Benefit" p. 44.)

RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM

Section 36.105 of the Texas Educational Code permits participants in the
Texas Optional Retirement Program (ORP) to withdraw their interest in a
variable annuity Policy issued under the ORP only upon: (1) termination of
employment in the Texas public institutions of higher education; (2)
retirement; or (3) death. Accordingly, a participant in the ORP (or the
participant's estate if the participant has died) will be required to obtain a
certificate of termination from the employer or a certificate of death before
the account can be redeemed.

RESTRICTIONS UNDER SECTION 403(B) PLANS

Section 403(b) of the Internal Revenue Code provides for tax-deferred
retirement savings plans for employees of certain non-profit and educational
organizations. In accordance with the requirements of Section 403(b), any
Policy used for a 403(b) plan will prohibit distributions of elective
contributions and earnings on elective contributions except upon death of the
employee, attainment of age 59 1/2, separation from service, disability, or
financial hardship. In addition, income attributable to elective contributions
may not be distributed in the case of hardship.

RESTRICTIONS UNDER QUALIFIED POLICIES

Other restrictions with respect to the election, commencement, or
distribution of benefits may apply under Qualified Policies or under the terms
of the plans in respect of which Qualified Policies are issued.

CHARGES AND DEDUCTIONS

No deductions are made from Premium Payments when made, so that the full
amount of each Premium Payment is invested in one or more of the Accounts. PFL
will make certain charges and deductions in connection with the Policy in
order to compensate it for incurring expenses in distributing the Policy,
bearing mortality and expense risks under the Policy, and administering the
Accounts and the Policies. Charges may also be made for premium taxes,
federal, state or local taxes, or for certain transfers or other transactions.
Charges and expenses are also deducted from the Underlying Funds.

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<PAGE>

SURRENDER CHARGE

PFL will incur expenses relating to the sale of Policies, including
commissions to registered representatives and other promotional expenses. PFL
may apply a Surrender Charge, which is a contingent deferred sales charge, to
any amount surrendered (i.e., withdrawn) in connection with a full or partial
Policy surrender in order to cover distribution expenses. A Surrender Charge,
if applicable, will only be applied to withdrawals which exceed the Cumulative
Free Percentage at the time of, but prior to, the withdrawal. (See
"DISTRIBUTIONS UNDER THE POLICY--Surrenders" p. 36.)

The Surrender Charge is not imposed upon exercise of the Nursing Care and
Terminal Condition Withdrawal Option. This feature may not be available in all
states. (See "DISTRIBUTIONS UNDER THE POLICY--Nursing Care and Terminal
Condition Withdrawal Option," p. 38.) The Surrender Charge is also waived upon
certain Systematic Payouts. (See "DISTRIBUTIONS UNDER THE POLICY--Systematic
Payout Option," p. 39.).

The amount of the Surrender Charge is determined by multiplying the amount
of the Premium Payment withdrawn by the applicable Surrender Charge
Percentage. The applicable Surrender Charge Percentage will depend upon the
number of years that have elapsed since the Premium Payment that is being
withdrawn was made. For this purpose, surrenders are allocated to Premium
Payments on a "first-in, first-out" basis, i.e., first to the oldest Premium
Payment, then to the next oldest Premium Payment and so on. Premium Payments
are deemed to be withdrawn before earnings, and after all Premium Payments
have been withdrawn, the remaining Adjusted Policy Value may be withdrawn
without any Surrender Charge. The following is the table of Surrender Charge
Percentages:

<TABLE>
<CAPTION>
APPLICABLE SURRENDER CHARGE
PERCENTAGE
(AS PERCENTAGE OF
NUMBER OF YEARS SINCE PREMIUM PAYMENT PREMIUM PAYMENT WITHDRAWN)
------------------------------------- ---------------------------
<S> <C>
Less than 1................................... 6%
At least 1 and less than 2.................... 6%
At least 2 and less than 3.................... 6%
At least 3 and less than 4.................... 4%
At least 4 and less than 5.................... 2%
5 or more..................................... 0%
</TABLE>

No Surrender Charge will be applied after the tenth Policy Year.

PFL anticipates that the Surrender Charge will not generate sufficient funds
to pay the cost of distributing the Policies. If this charge is insufficient
to cover the distribution expenses, the deficiency will be met from PFL's
general funds, which will include amounts derived from the fee for mortality
and expense risks.

MORTALITY AND EXPENSE RISK FEE

PFL imposes a daily charge as compensation for bearing certain mortality and
expense risks in connection with the Policies. For Guaranteed Minimum Death
Benefit Option A (Return of Premium Death Benefit), this charge is equal to an
effective annual rate of 1.10% of the daily net asset value in the Mutual Fund

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<PAGE>

Account for each Subaccount. For Guaranteed Minimum Death Benefit Options B
(5% Annually Compounding Death Benefit), and C (Annual Step-Up Death Benefit),
the corresponding charge is equal to 1.25% of the net assets in the Mutual
Fund Account. The Mortality and Expense Risk Fee is reflected in the
Accumulation or Annuity Unit Values for the Policy for each Subaccount.

Policy Values and Annuity Payments are not affected by changes in actual
mortality experience nor by actual expenses incurred by PFL. The mortality
risks assumed by PFL arise from its contractual obligations to make Annuity
Payments (determined in accordance with the Annuity tables and other
provisions contained in the Policy) and to pay Death Benefits prior to the
Annuity Commencement Date. Thus, Owners are assured that neither an
Annuitant's own longevity nor an unanticipated improvement in general life
expectancy will adversely affect the periodic Annuity payments that the
Annuitant will receive under the Policy.

PFL also bears substantial risk in connection with the Death Benefit
Guarantee since PFL will pay a Death Benefit equal to the Guaranteed Minimum
Death Benefit (that is, Return of Premium Death Benefit, 5% Annually
Compounding Death Benefit, or Annual Step-Up Death Benefit) if that amount is
higher than the greater of the Policy Value or the Cash Value.

The expense risk assumed by PFL is the risk that PFL's actual expenses in
administering the Policy and the Accounts will exceed the amount recovered
through the Administrative and Service Charges.

If the Mortality and Expense Risk Fee is insufficient to cover PFL's actual
costs, PFL will bear the loss; conversely, if the charge is more than
sufficient to cover costs, the excess will be profit to PFL. PFL expects a
profit from this charge. To the extent that the Surrender Charge is
insufficient to cover the actual cost of Policy distribution, the deficiency
will be met from PFL's general corporate assets, which may include amounts, if
any, derived from the Mortality and Expense Risk Fee. A Mortality and Expense
Risk Fee is assessed during the accumulation phase and during the annuity
phase for all Variable Annuity Options.

ADMINISTRATIVE CHARGES

In order to cover the costs of administering the Policies, PFL deducts a
Service Charge from the Policy Value of each Policy.

The annual Service Charge is deducted from the Policy Value of each Policy
on each Policy Anniversary prior to the Annuity Commencement Date. PFL also
reserves the right to charge up to $30 at the time of surrender during any
Policy Year. After the Annuity Commencement Date, the charge is not deducted.
This annual Service Charge is the lesser of 2% of the Policy Value or $30 and
it will not be increased in the future. This charge is waived if either the
Policy Value or the sum of all Premium Payments less the sum of all partial
surrenders equals or exceeds $50,000 on a Policy Anniversary (or date of
surrender). The Service Charge will be deducted from the Guaranteed Period
Option(s) of the Fixed Account and from the Subaccount(s) in the Mutual Fund
Account, in the same proportion that the Owner's interest in each Guaranteed
Period Option/Subaccount bears to the Owner's total Policy Value.

- 49 -
<PAGE>

PREMIUM TAXES

PFL currently makes no deduction from the Premium Payments for any state
premium taxes PFL pays in connection with Premium Payments under the Policies.
However, PFL will deduct the aggregate premium taxes paid on behalf of a
particular Policy from the Policy Value on (i) the Annuity Commencement Date
(thus reducing the Policy Value), (ii) the total surrender of a Policy, or
(iii) payment of the death proceeds of a Policy. Premium taxes currently range
from 0% to 3.50% of Premium Payments.

FEDERAL, STATE AND LOCAL TAXES

No charges are currently made for federal, state, or local taxes other than
premium taxes. However, PFL reserves the right to deduct charges in the future
for any taxes or other economic burden resulting from the application of any
tax laws that PFL determines to be attributable to the accounts or the
policies.

TRANSFER FEE

There is no charge for the first 12 allowable transfers among Investment
Options in each Policy Year. PFL reserves the right to impose a $10 charge for
the thirteenth and each subsequent transfer request made by the Owner during a
single Policy Year. For the purpose of determining whether a Transfer Fee is
payable, Premium Payment allocations are not considered transfers. All
transfer requests made simultaneously will be treated as a single request. No
Transfer Fee will be imposed for any transfer which is not at the Owner's
request.

OTHER EXPENSES INCLUDING INVESTMENT ADVISORY FEES

Each of the Portfolios of the Underlying Funds is responsible for all of its
expenses. In addition, charges will be made against each of the Portfolios of
the Underlying Funds for investment advisory services provided to the
Portfolio. The net assets of each Portfolio of the Underlying Funds will
reflect deductions in connection with the investment advisory fee and other
expenses.

For more information concerning the investment advisory fee and other
charges against the Portfolios, see the prospectuses for the Underlying Funds,
current copies of which accompany this Prospectus.

CERTAIN FEDERAL INCOME TAX CONSEQUENCES

The following summary does not constitute tax advice. It is a general
discussion of certain of the expected federal income tax consequences of
investment in and distributions with respect to a Policy, based on the
Internal Revenue Code of 1986, as amended (the "Code'), proposed and final
Treasury Regulations thereunder, judicial authority, and current
administrative rulings and practice. This summary discusses only certain
federal income tax consequences to "United States Persons,"

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<PAGE>

and does not discuss state, local, or foreign tax consequences. United States
Persons means citizens or residents of the United States, domestic
corporations, domestic partnerships and trusts or estates that are subject to
United States federal income tax regardless of the source of their income.

At the time the initial Premium Payment is paid, a prospective purchaser
must specify whether he or she is purchasing a Nonqualified Policy or a
Qualified Policy. If the initial Premium Payment is derived from an exchange
or surrender of another annuity policy, PFL may require that the prospective
purchaser provide information with regard to the federal income tax status of
the previous annuity policy. PFL will require that persons purchase separate
Policies if they desire to invest monies qualifying for different annuity tax
treatment under the Code. Each such separate Policy would require the minimum
initial Premium Payment stated above. Subsequent Additional Premium Payments
under a Policy must qualify for the same federal income tax treatment as the
initial Premium Payment under the Policy; PFL will not accept a Subsequent
Additional Premium Payment under a Policy if the federal income tax treatment
of such Premium Payment would be different from that of the initial Premium
Payment.

The Qualified Policies were designed for use by retirement plans and
individual retirement accounts that qualify for special federal income tax
treatment under Sections 401(a), 403(b), or 408(a), or 457 of the Code and
individuals purchasing individual retirement annuities that qualify for
special federal income tax treatment under Section 408(b) of the Code. Certain
requirements must be satisfied in purchasing a Qualified Policy in order for
the plan, account or annuity to retain its special tax treatment. This summary
is not intended to cover such requirements, and assumes that Qualified
Policies are purchased pursuant to retirement plans or individual retirement
accounts, or are individual retirement annuities, that qualify for such
special tax treatment. This summary was prepared by PFL after consultation
with tax counsel, but no opinion of tax counsel has been obtained.

THE DISCUSSION SET FORTH BELOW IS INCLUDED FOR GENERAL PURPOSES ONLY. EACH
POTENTIAL PURCHASER IS URGED TO CONSULT HIS/HER OWN TAX ADVISER AS TO THE
CONSEQUENCES OF INVESTMENT IN A POLICY UNDER FEDERAL AND APPLICABLE STATE,
LOCAL AND FOREIGN TAX LAWS.

TAX STATUS OF THE POLICY

The following discussion is based on the assumption that the Policy
qualifies as an annuity contract for federal income tax purposes. The
Statement of Additional Information discusses the tax requirements for
qualifying as an annuity contract.

TAXATION OF ANNUITIES

The discussion below applies only to those Policies owned by natural
persons, and that qualify as annuity contracts for federal income tax
purposes. With respect to Owners who are natural persons, the Policy should be
treated as an annuity contract for federal income tax purposes.

In General. Except as described below with respect to Owners who are not
natural persons, an Owner who holds a Policy satisfying the diversification
and

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<PAGE>

distribution requirements described in the Statement of Additional Information
should not be taxed on increases in the Policy Value until an amount is
received or deemed received, e.g., upon a partial or full surrender,
assignment, or as Annuity Payments under the Annuity Option selected.
Generally, any amount received or deemed received under a Nonqualified Annuity
Contract prior to the Annuity Commencement Date is deemed to come first from
any "Income on the Contract" and then from the "Investment in the Contract."
The "Investment in the Contract" generally equals total premium payments less
amounts received which were not includable in gross income. To the extent that
the Policy Value (ignoring any surrender charges except on a full surrender)
exceeds the "Investment in the Contract," such excess constitutes the "Income
on the Contract." For these purposes such "Income on the Contract" shall be
computed by reference to the aggregation rules described below, and the amount
includable in gross income will be taxable as ordinary income. If at the time
that any amount is received or deemed received there is no "Income on the
Contract" (e.g., because the gross Policy Value does not exceed the
"Investment in the Contract" and no aggregation rule applies), then such
amount received or deemed received will not be includable in gross income, and
will simply reduce the "Investment in the Contract."

For this purpose, the assignment, pledge or agreement to assign or pledge
any portion of the Policy Value (including assignment of Owner's right to
receive Annuity Payments prior to the Annuity Commencement Date) generally
will be treated as a distribution in the amount of such portion of the Policy
Value. Additionally, if an Owner designates a new Owner prior to the Annuity
Commencement Date without receiving full and adequate consideration, the old
Owner generally will be treated as receiving a distribution under the Policy
in an amount equal to the Policy Value. A transfer of ownership or an
assignment of a Policy, or designation of an Annuitant or Beneficiary who is
not also the Owner, as well as the selection of certain Annuity Commencement
Dates, may result in certain tax consequences to the Owner that are not
discussed herein. An Owner contemplating any such transfer, designation,
selection or assignment of a Policy should contact a competent tax adviser
with respect to the potential tax effects of such a transaction.

Aggregation Rules. Generally all Nonqualified deferred annuity contracts
issued by the same company (or an affiliated company) to the same owner during
any calendar year shall be treated as one annuity contract, and "aggregated"
for purposes of determining the amount includable in gross income. In
addition, for such purposes all individual retirement annuities and accounts
under Section 408 of the Code for an individual are aggregated, and generally
all distributions therefrom during a calendar year are treated as one
distribution made as of the end of such year.

Surrenders or Partial Withdrawals. In the case of a partial withdrawal
(including systematic partial withdrawals) under a Nonqualified Policy, the
amount received generally will be includable in gross income to the extent
that it does not exceed the "Income on the Contract" which is generally equal
to the excess of the Policy Value immediately before the partial withdrawal
over the "Investment in the Contract" at that time. However, for these
purposes the Policy Value immediately before a partial withdrawal may have to
be increased by any positive Excess Interest

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<PAGE>

Adjustment which results from such a partial withdrawal or which could result
from a simultaneous full surrender, and may need further adjustments if the
aggregation rules apply. There is, however, no definitive guidance on the
proper tax treatment of Excess Interest Adjustments, and the Owner should
contact a competent tax adviser with respect to the potential tax consequences
of an Excess Interest Adjustment that may apply in the case of a Non-Qualified
Policy or a Qualified Policy. In the case of a partial surrender (including
systematic payouts) under a Qualified Policy (other than one qualified under
Section 457 of the Code), a ratable portion of the amount received is
generally excludable from gross income, based on the ratio of the "Investment
in the Contract" to the individual's total account balance or accrued benefit
under the retirement plan at the time of each such payment. For a Qualified
Policy, the "Investment in the Contract" can be zero, and generally any
distribution would therefore be fully taxable. Special tax rules may be
available for certain distributions from a Qualified Policy. In the case of a
surrender under a Nonqualified Policy or a Qualified Policy, the amount
received generally will be taxable only to the extent it exceeds the
"Investment in the Contract, unless the aggregation rules apply.

Annuity Payments. Although the tax consequences may vary depending on the
Annuity Payment Option elected under the Policy, in general, for Nonqualified
and certain Qualified Policies, only a portion of the Annuity Payments
received after the Annuity Commencement Date will be includable in the gross
income of the recipient.

For Fixed Annuity Payments, in general the excludable portion of each
payment is determined by dividing the "Investment in the Contract" on the
Annuity Commencement Date by the total expected value of the Annuity Payments
for the term of the payments. The remainder of each Annuity Payment is
includable in gross income. Once the "Investment in the Contract" has been
fully recovered, the full amount of any additional Annuity Payments is
includable in gross income.

For Variable Annuity Payments, the includable portion is generally
determined by an equation that establishes a specific dollar amount of each
payment that is excludable from gross income. This dollar amount is determined
by dividing the "Investment in the Contract" on the Annuity Commencement Date
by the total number of expected periodic payments. The remainder of each
Annuity Payment is includable in gross income. Once the "Investment in the
Contract" has been fully recovered, the full amount of any additional Annuity
Payments is includable in gross income.

Where an Owner allocates a portion of the Adjusted Annuity Purchase Value on
the Annuity Commencement Date to more than one annuity payment option (fixed
or variable), special rules govern the allocation of the Policy's entire
"Investment in the Contract" on such date to each such option, for purposes of
determining the excludable amount of each payment received under that option.
PFL makes no attempt to describe these allocation rules, because they would
prescribe a complex variety of results, depending on how the allocations were
made among the various types of options. Instead, any Owner is advised to
consult a competent tax adviser as to the potential tax effects of allocating
any amount of Adjusted Annuity Purchase Value to any particular annuity
payment option.

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<PAGE>

If, after the Annuity Commencement Date, Annuity Payments cease by reason of
the death of the Annuitant, the excess (if any) of the "Investment in the
Contract" as of the Annuity Commencement Date over the aggregate amount of
Annuity Payments received on or after the Annuity Commencement Date that was
excluded from gross income is allowable as a deduction for the last taxable
year of the Annuitant.

Taxation of Death Benefit Proceeds. Amounts may be distributed from the
Policy because of the death of an Owner or the Annuitant. Generally, such
amounts are includable in the income of the recipient as follows: (1) if
distributed in a lump sum, they are taxed in the same manner as a full
surrender, as described above, or (2) if distributed under an Annuity Payment
Option, they are taxed in the same manner as Annuity Payments, as described
above. For these purposes, the "Investment in the Contract" is not affected by
the Owner's or Annuitant's death. That is, the "Investment in the Contract"
remains generally the total premium payments less amounts received which were
not includable in gross income.

Penalty Taxes. In the case of any amount received or deemed received from
the Policy, e.g., upon a surrender of a Policy (including systematic payouts)
or a deemed distribution under a Policy resulting from a pledge, assignment or
agreement to pledge or assign or an Annuity Payment with respect to a Policy,
there may be imposed on the recipient a federal penalty tax equal to 10% of
the amount includable in gross income. The penalty tax generally will not
apply to any distribution: (i) made on or after the date on which the taxpayer
attains age 59 1/2; (ii) made as a result of the death of the holder
(generally the Owner); (iii) attributable to the disability of the taxpayer,
or (iv) which is part of a series of substantially equal periodic payments
made (not less frequently than annually) for the life (or life expectancy) of
the taxpayer or the joint lives (or joint life expectancies) of such taxpayer
and the taxpayer's beneficiary. Other rules may apply to Qualified Policies.

Withholding. The portion of any distribution under a Policy that is
includable in gross income will be subject to federal income tax withholding
unless the recipient of such distribution elects not to have federal income
tax withheld. Election forms will be provided at the time distributions are
requested or made. For certain Qualified Policies, certain distributions are
subject to mandatory withholding.

Qualified Policies. The Qualified Policy is designed for use with several
types of tax-qualified retirement plans. The tax rules applicable to
participants and beneficiaries in tax-qualified retirement plans vary
according to the type of plan and the terms and conditions of the plan.
Special favorable tax treatment may be available for certain types of
contributions and distributions. Adverse tax consequences may result from
contributions in excess of specified limits; distributions prior to age 59 1/2
(subject to certain exceptions); distributions that do not conform to
specified commencement and minimum distribution rules; aggregate distributions
in excess of a specified annual amount; and in other specified circumstances.
Some retirement plans are subject to distribution and other requirements that
are not incorporated into PFL's Policy administration procedures. Owners,
participants and beneficiaries are responsible for determining that

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<PAGE>

contributions, distributions and other transactions with respect to the
Policies comply with applicable law.

PFL makes no attempt to provide more than general information about use of
the Policy with the various types of retirement plans. Purchasers of Policies
for use with any retirement plan should consult their legal counsel and tax
adviser regarding the suitability of the Policy.

Individual Retirement Annuities. In order to qualify as an individual
retirement annuity under Section 408(b) of the Code, a Policy must contain
certain provisions: (i) the Owner must be the Annuitant; (ii) the Policy
generally is not transferable by the Owner, e.g., the Owner may not designate
a new Owner, designate a Contingent Owner or assign the Policy as collateral
security; (iii) the total Premium Payments for any calendar year on behalf of
any individual may not exceed $2,000, except in the case of a rollover amount
or contribution under Sections 402(c), 403(a)(4), 403(b)(8) or 408(d)(3) of
the Code; (iv) Annuity Payments or partial withdrawals must begin no later
than April 1 of the calendar year following the calendar year in which the
Annuitant attains age 70 1/2; (v) an Annuity Payment Option with a Period
Certain that will guarantee Annuity Payments beyond the life expectancy of the
Annuitant and the Beneficiary may not be selected; (vi) certain payments of
Death Benefits must be made in the event the Annuitant dies prior to the
distribution of the Policy Value; and (vii) the entire interest of the Owner
is non-forfeitable. Policies intended to qualify as individual retirement
annuities under Section 408(b) of the Code contain such provisions.

Section 408 of the Code also indicates that no part of the funds for an
individual retirement account or annuity ("IRA") may be invested in a life
insurance contract, but the regulations thereunder allow such funds to be
invested in an annuity policy that provides a death benefit that equals the
greater of the premiums paid or the Cash Value for the contract. The Policy
provides an enhanced death benefit that could exceed the amount of such a
permissible death benefit, but it is unclear to what extent such an enhanced
death benefit could disqualify the Policy under Section 408 of the Code. The
Internal Revenue Service has not reviewed the Policy for qualification as an
IRA, and has not addressed in a ruling of general applicability whether an
enhanced death benefit provision, such as the provision in the Policy,
comports with IRA qualification requirements.

Section 403(b) Plans. Under Section 403(b) of the Code, payments made by
public school systems and certain tax exempt organizations to purchase
Policies for their employees are excludable from the gross income of the
employee, subject to certain limitations. However, such payments may be
subject to FICA (Social Security) taxes. Additionally, in accordance with the
requirements of the Code, Section 403(b) annuities generally may not permit
distribution of (i) elective contributions made in years beginning after
December 31, 1988, and (ii) earnings on those contributions and (iii) earnings
on amounts attributed to elective contributions held as of the end of the last
year beginning before January 1, 1989. Distributions of such amounts will be
allowed only upon the death of the employee, on or after attainment of age 59
1/2, separation from service, disability, or financial hardship, except that
income attributable to elective contributions may not be distributed in the
case of hardship.

- 55 -
<PAGE>

Corporate Pension and Profit Sharing Plans and H.R 10 Plans. Sections 401(a)
and 403(a) of the Code permit corporate employers to establish various types
of retirement plans for employees and self-employed individuals to establish
qualified plans for themselves and their employees. Such retirement plans may
permit the purchase of the Policies to accumulate retirement savings. Adverse
tax consequences to the plan, the participant or both may result if the Policy
is assigned or transferred to any individual as a means to provide benefit
payments.

Deferred Compensation Plans. Section 457 of the Code, while not actually
providing for a qualified plan (as that term is not used in the Code),
provides for certain deferred compensation plans with respect to service for
state governments, local governments, political sub-divisions, agencies,
instrumentalities and certain affiliates of such entities and tax exempt
organizations which enjoy special treatment. The Policies can be used with
such plans. Under such plans a participant may specify the form of investment
in which his or her participation will be made. All such investments, however,
are owned by, and are subject to, the claims of the general creditors of the
sponsoring employer. Depending on the terms of the particular plan, the
employer may be entitled to draw on deferred amounts for purposes unrelated to
its Section 457 plan obligations. In general, all amounts received under a
Section 457 plan are taxable and are subject to federal income tax withholding
as wages.

Non-natural Persons. Pursuant to Section 72(u) of the Code, an annuity
contract held by a taxpayer other than a natural person generally will not be
treated as an annuity contract under the Code; accordingly, an Owner who is
not a natural person will recognize as ordinary income for a taxable year the
excess of (i) the sum of the Cash Value as of the close of the taxable year
and all previous distributions under the Policy over (ii) the sum of the
Premium Payments paid for the taxable year and any prior taxable year and the
amounts includable in gross income for any prior taxable year with respect to
the Policy. For these purposes, the Policy Value at year end may have to be
increased by any positive Excess Interest Adjustment which could result from a
full surrender at such time. There is, however, no definitive guidance on the
proper tax treatment of Excess Interest Adjustments and the Owner should
contact a competent tax adviser with respect to the potential tax consequences
of an Excess Interest Adjustment. Notwithstanding the preceding sentences in
that paragraph, Section 72(u) of the Code does not apply to (i) a Policy the
nominal Owner of which is not a natural person but the beneficial Owner of
which is a natural person, (ii) a Policy acquired by the estate of a decedent
by reason of such decedent's death, (iii) a Qualified Policy (other than one
qualifying under Section 457) or (iv) a single-payment annuity the
Commencement Date for which is no later than one year from the date of the
single Premium Payment; such Policies are taxed as described above under the
heading "Taxation of Annuities."

Possible Changes in Taxation. In past years, legislation has been proposed
in the U.S. Congress that would have adversely modified federal taxation of
certain annuities. For example, one such proposal would have changed the tax
treatment of Nonqualified annuities that did not have "substantial life
contingencies" by taxing income as it is credited to the annuity. Although as
of the date of this Prospectus Congress was not actively considering any
legislation regarding the taxation of

- 56 -
<PAGE>

annuities, there is always the possibility that the tax treatment of annuities
could change because of legislation or other means (such as IRS regulations,
revenue rulings, judicial decisions, etc.). Moreover, it is also possible that
any change could be retroactive (that is, effective prior to the date of the
change).

DISTRIBUTOR OF THE POLICIES

AEGON USA Securities, Inc., an affiliate of PFL, located at 4333 Edgewood
Road N.E., Cedar Rapids, Iowa, 52499-0001, is the principal underwriter of the
Policies. AEGON USA Securities, Inc. was incorporated under the laws of the
State of Iowa in 1959 and is registered as a broker/dealer under the
Securities Exchange Act of 1934. It is a member of the National Association of
Securities Dealers, Inc. ("NASD").

Policies are sold by registered representatives of AEGON USA Securities,
Inc. or of broker/dealers who have entered into written sales agreements with
the principal underwriter, who are also licensed through various affiliated or
unaffiliated agencies as insurance agents for PFL. PFL has entered into a
distribution agreement with AEGON USA Securities, Inc. and companion sales
agreements with agencies and/or agents through which agreements the Policies
are sold and the registered representatives are compensated by the agencies
and/or AEGON USA Securities, Inc. Broker/dealers will generally receive sales
commissions of up to 5% of Premium Payments. These commissions are not
deducted from Premium Payments, they are paid by PFL. In addition, certain
production, persistency and managerial bonuses may be paid. Subject to
applicable Federal and State laws and regulations, PFL may also pay
compensation to banks and other financial institutions for their services in
connection with the sale and servicing of the Policies. The level of such
compensation will not exceed that paid to broker/dealers for their sale of the
Policies. No amounts will be retained by AEGON USA Securities, Inc. for acting
as principal underwriter for the Policies. The offering of Policies will be
made on a continuing basis.

VOTING RIGHTS

To the extent required by law, PFL will vote the Underlying Fund shares held
by the Mutual Fund Account at regular and special shareholder meetings of the
Underlying Funds in accordance with instructions received from persons having
voting interests in the portfolios, (although the Underlying Funds do not hold
regular annual shareholders meetings). If, however, the 1940 Act or any
regulation thereunder should be amended or if the present interpretation
thereof should change, and as a result PFL determines that it is permitted to
vote the Underlying Funds' shares in its own right, it may elect to do so.

Before the Annuity Commencement Date, the Owner holds voting interest in the
selected Portfolios. The number of votes that an Owner has the right to
instruct will be calculated separately for each Subaccount. The number of
votes that an Owner has the right to instruct for a particular Subaccount will
be determined by dividing the Owner's Policy Value in the Subaccount by the
net asset value per share of the corresponding Portfolio in which the
Subaccount invests. Fractional shares will be counted.

- 57 -
<PAGE>

After the Annuity Commencement Date, the person receiving Annuity Payments
has the voting interest, and the number of votes decreases as Annuity Payments
are made and as the reserves for the Policy decrease. The person's number of
votes will be determined by dividing the reserve for the Policy allocated to
the applicable Subaccount by the net asset value per share of the
corresponding Portfolio. Fractional shares will be counted.

The number of votes that the Owner or person receiving income payments has
the right to instruct will be determined as of the date established by the
Underlying Funds for determining shareholders eligible to vote at the meeting
of the Underlying Funds. PFL will solicit voting instructions by sending
Owners or other persons entitled to vote written requests for instructions
prior to that meeting in accordance with procedures established by the
Underlying Funds. Portfolio shares as to which no timely instructions are
received and shares held by PFL in which Owners or other persons entitled to
vote have no beneficial interest will be voted in proportion to the voting
instructions that are received with respect to all Policies participating in
the same Subaccount.

Each person having a voting interest in a Subaccount will receive proxy
material, reports, and other materials relating to the appropriate Portfolio.

LEGAL PROCEEDINGS

There are no legal proceedings to which the Mutual Fund Account is a party
or to which the assets of the Account are subject. PFL is not involved in any
litigation that is of material importance in relation to its total assets or
that relate to the Mutual Fund Account.

- 58 -
<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

A Statement of Additional Information is available (at no cost) which
contains more details concerning the subjects discussed in this Prospectus.
The following is the Table of Contents for that Statement:

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Policy--General Provisions............................................. 3
Owner.................................................................... 3
Entire Policy............................................................ 3
Delay of Payment and Transfers........................................... 3
Misstatement of Age or Sex............................................... 4
Reallocation of Policy Values After the Annuity Commencement Date........ 4
Assignment............................................................... 4
Evidence of Survival..................................................... 4
Non Participating........................................................ 5
Federal Tax Matters........................................................ 5
Tax Status of the Policy................................................. 5
Taxation of PFL.......................................................... 6
Investment Experience...................................................... 6
State Regulation of PFL.................................................... 10
Administration............................................................. 10
Records and Reports........................................................ 10
Distribution of the Policies............................................... 10
Custody of Assets.......................................................... 11
Historical Performance Data................................................ 11
Money Market Yields...................................................... 11
Other Subaccount Yields.................................................. 12
Total Returns............................................................ 13
Other Performance Data................................................... 13
Legal Matters.............................................................. 14
Independent Auditors....................................................... 14
Other Information.......................................................... 14
Financial Statements....................................................... 14
</TABLE>

- 59 -
<PAGE>

APPENDIX A

EXCESS INTEREST ADJUSTMENT

The formula which will be used to determine the Excess Interest Adjustment
(EIA)/1/ is:

S*(G - C)* (M/12)

S= Gross amount being withdrawn that is subject to the EIA

G= Guaranteed Interest Rate applicable to S.

C= Current Guaranteed Interest Rate then being offered on new Premium
Payments for the next longer Guaranteed Period than "M". If this policy
form or such a Guaranteed period is no longer offered, "C" will be the
U.S. Treasury rate for the next longer maturity (in whole years) than "M"
on the 25th day of the previous calendar month, plus up to 2%.

M= Number of months remaining in the current Guaranteed Period, rounded up to
the next higher whole number of months.

EXAMPLE 1 (FULL SURRENDER, RATES INCREASE BY 3%):

Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Full Surrender: Middle of Contract Year 3

Policy Value ("PV") at middle of
Contract Year 3 = 50,000* (1.055) (caret) 2.5 =
57,161.18

Surrender Charge Free Amount at
middle of Policy Year 3 = 57,161.18* .30 = 17,148.35

EIA Free Amount at middle of
Policy Year 3 = 57,161.18 - 50,000 = 7,161.18

Amount Subject to EIA = 57,161.18 - 7,161.18 = 50,000.00
EIA Floor = 50,000* (1.03) (caret) 2.5 =
53,834.80

Excess Interest Adjustment
G = .055
C = .085
M = 30

Excess Interest Adjustment = S* (G - C)* (M/12)
= 50,000.00* (.055 - .085)* (30/12)
= (-3,750.00), but Excess Interest
Adjustment cannot cause the Adjusted
Policy Value to fall below the
floor, so the adjustment is limited
to 53,834.80 - 57,161.18 = (-
3,326.38)
- ----------------------------------

(1) * represents multiplication;

(caret) represents exponentiation.

A-1

<PAGE>

Adjusted Policy Value = PV + EIA = 57,161.18 + (-3,326.38) =
53,834.80

Surrender Charge = (50,000 - 17,148.35)* .06 = 1,971.10

Cash Value at middle of Policy
Year 3 = PV + EIA - Surrender Charge
= 57,161.18 + (-3,326.38) - 1,971.10
= 51,863.70

EXAMPLE 2 (FULL SURRENDER, RATES DECREASE BY 1%):

Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Full Surrender: Middle of Contract Year 3

Policy Value at middle of Policy
Year 3

Surrender Charge Free Amount at
middle of Policy Year 3 = 50,000* (1.055)(caret) 2.5 =
57,161.18
= 57,161.18* .30 = 17,148.35

EIA Free Amount at middle of
Policy Year 3 = 57,161.18 - 50,000 = 7,161.18

Amount Subject to EIA = 57,161.18 - 7,161.18 = 50,000.00

EIA Floor = 50,000* (1.03) (caret) 2.5 =
53,834.80

Excess Interest Adjustment
G = .055
C = .045
M = 30

Excess Interest Adjustment = S* (G - C)* (M/12)
= 50,000* (.055 - .045)* (30/12)
= 1,250.00

Adjusted Policy Value = PV + EIA
= 57,161.18 + 1,250.00 = 58,411.18

Surrender Charge
= (50,000 - 17,148.35)* .06 = 1,971.10

Cash Value at middle of Policy
Year 3 = PV + EIA - Surrender Charge
= 57,161.18 + (1,250) - 1,971.10
= 56,440. 08

A-2

<PAGE>

On a partial withdrawal, PFL will pay the Owner the full amount of
withdrawal requested (as long as the Policy Value is sufficient). Surrender
Charge--Free withdrawals will reduce the Policy Value by the amount withdrawn.
Amounts withdrawn in excess of the Surrender Charge--Free amount will reduce
the Policy Value by an amount equal to:

X - Y + Z

X= Excess Partial Withdrawal = Requested withdrawal less Surrender Charge--
Free amount
A= Amount of Partial Withdrawal which is subject to Excess Interest
Adjustment = Requested withdrawal - EIA--Free Amount, where EIA--Free
Amount = Cumulative interest credited at time of, but prior to,
withdrawal.
Y= Excess Interest Adjustment = (A)*(G - C)*(M/12) where G, C, and M are
defined above, with "A" substituted for "S" in the definition of G and M.
Z= Surrender Charge on X minus Y.

EXAMPLE 3 (PARTIAL WITHDRAWAL, RATES INCREASE BY 1%):

Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Partial Surrender: $30,000; Middle of Contract Year 3

Policy Value at middle of Policy
Year 3 = 50,000* (1.055)(caret) 2.5 =
57,161.18
Surrender Charge Free Amount at
middle of Policy Year 3 = 57,161.18* .30 = 17,148.35

EIA Free Amount at middle of
Policy Year 3 = 57,161.18 - 50,000 = 7,161.18

Excess Interest Adjustment/Surrender Charge
X =30,000 - 17,148.35 = 12,851.65
A =30,000 - 7,161.18 = 22,838.82
G =.055
C =.065
M =30
Y =22,838.82* (.055 - .065)* (30/12) = -570.97
Z =.06* [12,851.65 - (-570.97)] = 805.36

Reduction to Policy Value due to
Surrender Charge--Free
withdrawal = 17,148.35

Reduction to Policy Value due to
Excess Withdrawal = X -Y + Z
= 12,851.65 - (-570.97) + 805.36
= 14,227.98

A-3

<PAGE>

Policy Value after withdrawal at
middle of Policy Year 3
= 57,161.18 - [17,148.35 + 14,227.98]
= 57,161.18 - [17,148.35 + 12,851.65 -
(-570.97) + 805.36]
= 57,161.18 - [30,000 - (-570.97) +
805.36]
= 57,161.18 - 31,376.33 = 25,784.85

EXAMPLE 4 (PARTIAL WITHDRAWAL, RATES DECREASE BY 1%):

Single Premium: $50,000
Guarantee Period: 5 Years
Guarantee Rate: 5.50% per annum
Partial Surrender: $30,000; Middle of Contract Year 3

Policy Value at middle of Policy
Year 3 = 50,000* (1.055) (caret) .5 =
57,161.18

Surrender Charge Free Amount at
middle of Policy Year 3 = 57,161.18* .30 = 17,148.35

EIA Free Amount at middle of
Policy Year 3 = 57,161.18 - 50,000 = 7,161.18

Excess Interest Adjustment/Surrender Charge
X =30,000 -17,148.35 = 12,851.65
A =30,000 - 7,161.18 = 22,838.82
G =.055
C =.045
M =30
Y =22,838.82* (.055 - .045)* (30/12) = 570.97
Z =.06* [12,851.65 - (570.97)] = 736.84

Reduction to Policy Value due to
Surrender Charge--Free
Withdrawal = 17,148.35

Reduction to Policy Value due to
Excess Withdrawal = X - Y + Z
= 12,851.65 - (570.97) + 736.84
= 13,017.52

Policy Value after withdrawal at
middle of Policy Year 3 = 57,161.18 - [17,148.35 + 13,017.52]
= 57,161.18 - [17,148.35 + 12,851.65 -
(570.97) + 736.84]
= 57,161.18 - [30,000 - (570.97) +
736.84]
= 57,161.18 - 30,165.87 = 26,995.31

A-4

Please read this prospectus before investing, and keep it on file for
future reference. It contains important information to help you decide if
the goal of one or more of the funds matches your own.
To learn more about each fund and its investments, you can obtain a copy of
the funds' most recent financial report and portfolio listing or a copy of
the Statement of Additional Information (SAI) dated April 30, 1997. The SAI
has been filed with the Securities and Exchange Commission (SEC) and is
available along with other related materials on the SEC's Internet Web site
(http://www.sec.gov). The SAI is incorporated herein by reference (legally
forms a part of the prospectus). For a free copy of either document call
Fidelity at 1-800-544-2442.
Shares of each fund may be purchased only by the separate accounts of
insurance companies, for the purpose of funding variable annuity and
variable life insurance contracts. Particular funds may not be available in
your state due to various insurance regulations. Please check with your
insurance company for available funds. Inclusion of a fund in this
Prospectus which is not available in your state is not to be considered a
solicitation. Please read the Prospectus in conjunction with the prospectus
of the separate account of the specific insurance product which accompanies
this Prospectus and keep them on file for future reference.
INVESTMENTS IN THE MONEY MARKET PORTFOLIO ARE NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT, AND THERE CAN BE NO ASSURANCE THAT THE
FUND WILL MAINTAIN A STABLE $1.00 SHARE PRICE.
LIKE ALL MUTUAL FUNDS,
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.
VIP/VIPII/VIPIIIL-pro-049
7
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY,
ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, FEDERAL
RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
HIGH INCOME PORTFOLIO MAY INVEST WITHOUT LIMITATION IN LOWER-QUALITY DEBT
SECURITIES, SOMETIMES CALLED "JUNK BONDS." INVESTORS SHOULD CONSIDER THAT
THESE SECURITIES CARRY GREATER RISKS, SUCH AS THE RISK OF DEFAULT, THAN
OTHER DEBT SECURITIES. REFER TO "INVESTMENT PRINCIPLES AND RISKS" ON PAGE
FOR FURTHER INFORMATION.

VARIABLE
INSURANCE
PRODUCTS
FUNDS
Variable Insurance Products Fund, Variable Insurance Products Fund II and
Variable Insurance Products Fund III (the Trusts) are designed to provide
investment vehicles for variable annuity and variable life insurance
contracts of various insurance companies. The Trusts currently offer the
following funds:
MONEY MARKET FUND
Money Market Portfolio
INCOME FUNDS
Investment Grade Bond Portfolio
High Income Portfolio
ASSET ALLOCATION FUNDS
Asset Manager Portfolio
Asset Manager: Growth Portfolio
GROWTH & INCOME AND GROWTH FUNDS
Balanced Portfolio
Equity-Income Portfolio
Index 500 Portfolio
Growth & Income Portfolio
Growth Opportunities Portfolio
Contrafund Portfolio
Growth Portfolio
Overseas Portfolio
PROSPECTUS
APRIL 30, 1997(FIDELITY_LOGO_GRAPHIC) 82 DEVONSHIRE STREET, BOSTON, MA
02109
CONTENTS

<TABLE>
<CAPTION>
<S> <C> <C>
KEY FACTS THE FUNDS AT A GLANCE

WHO MAY WANT TO INVEST

FINANCIAL HIGHLIGHTS A summary of each fund's
financial data.

THE FUNDS IN DETAIL CHARTER How each fund is organized.

INVESTMENT PRINCIPLES AND RISKS Each fund's
overall approach to investing.

BREAKDOWN OF EXPENSES How operating costs
are calculated and what they include.

PERFORMANCE

ACCOUNT POLICIES DISTRIBUTIONS AND TAXES

TRANSACTION DETAILS Share price calculations and
the timing of purchases and redemptions.

APPENDIX Description of Moody's and S&P's Corporate Bond
Ratings, and additional information about the S&P
500(registered trademark).

</TABLE>

KEY FACTS

THE FUNDS AT A GLANCE
The funds contained in this prospectus are designed to provide investment
vehicles for variable annuity and variable life insurance contracts of
various insurance companies.
MANAGEMENT: Fidelity Management & Research Company (FMR) is the management
arm of Fidelity Investments, which was established in 1946 and is now
America's largest mutual fund manager. Affiliates of FMR may help choose
investments for some of the funds.
MONEY MARKET FUND
MONEY MARKET PORTFOLIO
GOAL: Income while maintaining a stable $1.00 share price.
STRATEGY: Invests in high-quality, short-term, U.S. dollar-denominated
money market securities of all types.
SIZE: As of December 31, 199 6 , the fund had over $ 1.1 b illion
in assets.
INCOME FUNDS
INVESTMENT GRADE BOND PORTFOLIO
GOAL: High current income.
STRATEGY: Invests mainly in investment-grade debt securities.
SIZE: As of December 31, 199 6 , the fund had over $ 228 million
in assets.
HIGH INCOME PORTFOLIO
GOAL: High current income.
STRATEGY: Invests mainly in high-yielding debt securities, with an emphasis
on lower-quality securities.
SIZE: As of December 31, 199 6 , the fund had over $ 1.5 billion
in assets.
ASSET ALLOCATION FUNDS
ASSET MANAGER PORTFOLIO
GOAL: High total return with reduced risk over the long-term.
STRATEGY: The fund diversifies across stocks, bonds, and short-term
instruments, both here and abroad, to pursue its goal. The fund has a
neutral mix which represents the way the fund's investments will generally
be allocated over the long-term. This mix will vary over short-term periods
as fund management gradually adjusts the fund's holdings - within defined
ranges - based on the current outlook for the different markets.
Neutral Mix
Stocks 50%
(can range
from
30-70%)
Row: 1, Col: 1, Value: 20.0
Row: 1, Col: 2, Value: 40.0
Row: 1, Col: 3, Value: 40.0
Bonds 40%
(can range
from
20-60%)
Short-term
10%
(can range
from
0- 50 %)
SIZE: As of December 31, 199 6 , the fund had over $ 3.6 billion
in assets.
ASSET MANAGER: GROWTH PORTFOLIO
GOAL: Maximum total return over the long-term.
STRATEGY: The fund diversifies across stocks, bonds, and short-term
instruments, both here and abroad, to pursue its goal. The fund has a
neutral mix which represents the way the fund's investments will generally
be allocated over the long-term. This mix will vary over short-term periods
as fund management gradually adjusts the fund's holdings - within defined
ranges - based on the current outlook for the different markets.
Neutral Mix
Stocks 70%
(can range
from
50-100%)
Row: 1, Col: 1, Value: 5.0
Row: 1, Col: 2, Value: 65.0
Row: 1, Col: 3, Value: 30.0
Bonds 25%
(can range
from
0-50%)
Short-Term
5%
(can range
from
0-50%)
SIZE: As of December 31, 199 6 , the fund had over $253 million in
assets.
GROWTH & INCOME AND GROWTH FUNDS
BALANCED PORTFOLIO
(formerly known as Fidelity Advisor Annuity Income & Growth Fund)
GOAL: Both income and growth of capital.
STRATEGY: Invests in a diversified portfolio of equity and fixed-income
securities.
SIZE: As of December 31, 1996, the fund had over $103 million in
assets.
EQUITY-INCOME PORTFOLIO
GOAL: Reasonable income. The fund also considers the potential for capital
appreciation (increase in the value of fund's shares).
STRATEGY: Invests mainly in income-producing equity securities.
SIZE: As of December 31, 199 6 , the fund had over $ 6.9 billion
in assets.
INDEX 500 PORTFOLIO
GOAL: Total return that corresponds to that of the Standard & Poor's 500
Index (S&P 500(registered trademark)).
STRATEGY: Invests in equity securities of companies that compose the S&P
500 and in other instruments that are based on the value of the index.
SIZE: As of December 31, 199 6 , the fund had over $ 823 million
in assets.
GROWTH & INCOME PORTFOLIO
GOAL: High total return through a combination of current income and capital
appreciation.
STRATEGY: Invests mainly in equity securities of companies that pay current
dividends and offer potential earnings growth.
SIZE: As of December 31, 1996, the fund had over $989 thousand in
assets.
GROWTH OPPORTUNITIES PORTFOLIO
(formerly known as Fidelity Advisor Annuity Growth Opportunities Fund)
GOAL: Capital Growth (increase in the value of the fund's shares)
STRATEGY: Invests primarily in common stocks and securities convertible
into common stock.
SIZE: As of December 31, 1996, the fund had over $383 million in
assets.
CONTRAFUND PORTFOLIO
GOAL: Capital appreciation (increase in the value of the fund's shares).
STRATEGY: Invests mainly in equity securities of companies that are
undervalued or out-of-favor.
SIZE: As of December 31, 199 6 , the fund had over $ 2.3 b illion
in assets.
GROWTH PORTFOLIO
GOAL: Capital appreciation (increase in the value of the fund's shares).
STRATEGY: Invests mainly in common stocks, although its investments are not
restricted to any one type of security.
SIZE: As of December 31, 199 6 , the fund had over $ 6.0 billion
in assets.
OVERSEAS PORTFOLIO
GOAL: Long-term growth of capital.
STRATEGY: Invests mainly in equity securities outside of the U.S.
SIZE: As of December 31, 1996, the fund had over $ 1.6 billion in
assets.
AS WITH ANY INVESTMENT OPTION, THERE IS NO ASSURANCE THAT THE FUNDS WILL
ACHIEVE THEIR GOALS.
WHO MAY WANT TO INVEST
The value of each fund's (except Money Market's) investments and, as
applicable, the income they generate will vary from day to day, and
generally reflect changes in market conditions, interest rates, and other
company, political, or economic news both here and abroad. In the
short-term, stock prices can fluctuate dramatically in response to these
factors. The securities of smaller, less well-known companies may be more
volatile than those of larger companies. Over time, however, stocks have
shown greater growth potential than other types of securities. Bond prices
generally move in the opposite direction from interest rates. Investments
in foreign securities may involve risks in addition to those of U.S.
investments, including increased political and economic risk, as well as
exposure to currency fluctuations. Except for the money market portfolio,
when fund shares are redeemed, they may be worth more or less than their
original cost. An investment in any one fund is not in itself a balanced
investment plan.
MONEY MARKET PORTFOLIO
The fund may be appropriate for investors who would like to earn income at
current money market rates while preserving the value of their investment.
The fund is managed to keep its share price stable at $1.00. The rate of
income will vary from day to day, generally reflecting short-term interest
rates.
INVESTMENT GRADE BOND PORTFOLIO
The fund may be appropriate for investors who want high current income from
a portfolio of investment-grade debt securities. A fund's level of risk and
potential reward depend on the quality and maturity of its investments.
With its focus on medium- to high-quality investments, the fund has a
moderate risk level and yield potential.
HIGH INCOME PORTFOLIO
The fund is designed for investors who want high current income with some
potential for capital growth from a portfolio of lower-quality debt
securities and income-producing equity securities. The fund may be
appropriate for long-term, aggressive investors who understand the
potential risks and rewards of investing in lower-quality debt, including
defaulted securities. Investors must be willing to accept the fund's
greater price movements and credit risks.
ASSET MANAGER AND ASSET MANAGER: GROWTH PORTFOLIOS
The funds may be appropriate for investors who want to diversify among
domestic and foreign stocks, bonds, short-term instruments and other types
of securities, in one fund. Asset Manager Portfolio spreads its assets
among all three asset classes moderating both its risk and return
potential. On the other hand, Asset Manager: Growth Portfolio, while
spreading its assets among all three asset classes, uses a more aggressive
approach by focusing on stocks for a higher potential return. Because the
funds own different types of investments, their performance is affected by
a variety of factors. The value of each fund's investments and the income
they generate will vary from day to day, and generally reflect interest
rates, market conditions, and other company, political and economic news.
Performance also depends on FMR's skills in allocating assets.
BALANCED PORTFOLIO
The fund may be appropriate for investors who are willing to ride out stock
market fluctuations in pursuit of potentially high long-term returns. The
fund is designed for investors who seek a combination of growth and income
from equity and some bond investments.
EQUITY-INCOME PORTFOLIO
The fund may be appropriate for investors who are willing to ride out stock
market fluctuations in pursuit of potentially high long-term returns. The
fund is designed for those who want some income from equity and bond
investments, but also want to be invested in the stock market for its
long-term growth potential.
INDEX 500 PORTFOLIO
The fund may be appropriate for investors who are willing to ride out stock
market fluctuations in pursuit of potentially high long-term returns. The
fund is designed for those who want to pursue growth of capital and current
income through a portfolio of securities that broadly represents the U.S.
stock market, as measured by the S&P 500. The fund seeks to keep expenses
low as it attempts to match the return of the S&P 500.
Because the fund seeks to track, rather than beat, the performance of the
S&P 500, it is not managed in the same manner as other mutual funds. In
this fund, FMR generally will not judge the merits of any particular stock
as an investment. Therefore, you should not expect to achieve the
potentially greater results that could be obtained by a fund that
aggressively seeks growth.
GROWTH & INCOME PORTFOLIO
The fund may be appropriate for investors who are willing to ride out stock
market fluctuations in pursuit of potentially high long-term returns. The
fund is designed for those who seek a combination of growth and income from
equity and some bond investments.
THE SPECTRUM OF FIDELITY FUNDS
Broad categories of Fidelity funds are
presented here in order of ascending risk.
Generally, investors seeking to maximize
return must assume greater risk. The funds in
this prospectus fall under one of the following
categories.
(solid bullet) MONEY MARKET Seeks income and stability
by investing in high-quality, short-term
investments.
(solid bullet) INCOME Seeks income by investing in
bonds.
(solid bullet) ASSET ALLOCATION Seeks high total return
with reduced risk through a mix of stocks,
bonds, and short-term instruments.
(solid bullet) GROWTH AND INCOME Seeks long-term
growth and income by investing in stocks and
bonds.
(solid bullet) GROWTH Seeks long-term growth by
investing mainly in stocks.
(checkmark)
GROWTH OPPORTUNITIES PORTFOLIO
The fund may be appropriate for investors who are willing to ride out stock
market fluctuations in pursuit of potentially high long-term returns. The
fund is designed for investors who want to be invested in the stock market
for its long-term growth potential. The fund invests for growth and does
not pursue income.
CONTRAFUND PORTFOLIO
The fund may be appropriate for investors who are willing to ride out stock
market fluctuations in pursuit of potentially high long-term returns. The
fund is designed for those who are looking for an investment approach that
follows a contrarian philosophy. This approach focuses on companies that
FMR believes are currently out of public favor but show potential for
capital appreciation.
GROWTH PORTFOLIO
The fund may be appropriate for investors who are willing to ride out stock
market fluctuations in pursuit of potentially high long-term returns. The
fund is designed for those who want to pursue growth wherever it may arise,
and who understand that this strategy often leads to investments in
smaller, less well-known companies. The fund invests for growth and does
not pursue an income strategy.
OVERSEAS PORTFOLIO
The fund may be appropriate for investors who want to pursue their
investment goals in markets outside of the United States. By including
international investments in your portfolio, you can achieve additional
diversification and participate in growth opportunities around the world.
However, it is important to note that investments in foreign securities
involve risks in addition to those of U.S. investments.
In addition to general risks, international investing involves different or
increased risks. The performance of international funds depends upon
currency values, the political and regulatory environment, and overall
economic factors in the countries in which the fund invests. See
"INVESTMENT PRINCIPLES AND RISKS."
FINANCIAL HIGHLIGHTS
The financial highlights tables that follow and each fund's financial
statements are included in each fund's Annual Report and have been audited
by either Coopers & Lybrand L.L.P. (Money Market, High Income,
Equity-Income, Growth and Overseas) or Price Waterhouse LLP (Investment
Grade Bond, Asset Manager, Asset Manager: Growth, Balanced, Index 500,
Growth & Income, Growth Opportunities and Contrafund), independent
accountants. Their reports on the financial statements and financial
highlights are included in the Annual Reports. The financial statements,
the financial highlights, and the reports are incorporated by reference
into the funds' SAI. To learn more about each fund and its investments, you
can obtain a copy of each fund's most recent financial report and portfolio
listing, or a copy of the funds' SAI dated April 30, 1997 free of charge
from your insurance company.

MONEY MARKET PORTFOLIO

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1.Selected Per-Share
Data and Ratios

2.Years
ended 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
December 31

3.Net asset $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
value,
beginning 0 0 0 0 0 0 0 0 0 0
of period

4.Income
from .052 .057 .042 .032 .038 .059 .078 .087 .071 .063
Investment
Operations
Net interest
income

5.Less (.052) (.057) (.042) (.032) (.038) (.059) (.078) (.087) (.071) (.063)
Distributions
From net
interest income

6.Net asset $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
value, end
of 0 0 0 0 0 0 0 0 0 0
period

7.Total
returnA,B 5.41 5.87 4.25 3.23% 3.90 6.09 8.04 9.12 7.39 6.44
% % % % % % % % %

8.Net
assets, $ 1,12 $ 809 $ 749 $ 353 $ 301 $ 271 $ 255 $ 143 $ 106 $ 88
end of period 6
(In millions)

9.Ratio of .30% .33% .27% .22%C .24% .38% .56% .67% .60% .54%
expenses to
average net
assets

10.Ratio of
net 5.28 5.72 4.32 3.16% 3.85 5.93 7.76 8.70 7.16 6.38
interest
income % % % % % % % % %
to average net
assets

</TABLE>

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
11.Selected
Per-Share Data
and Ratios

12.Years ended 1996 1995 1994 1993E 1992 1991 1990 1989 1988D
December 31

13.Net asset $ 12.4 $ 11.02 $ 11.48 $ 10.9 $ 11.08 $ 9.92 $ 10.1 $ 10.0 $ 10.0
value, 80 0 0 70 0 0 40 00 00
beginning of
period

14.Income from .670 .320 .733 .641 .672 .455 .826 .827 .052
Investment
Operations
Net investment
income

15. Net realized (.290) 1.530 (1.163 .559 .058 1.165 (.220) .160 --
and )
unrealized gain
(loss)

16. Total from .380 1.850 (.430) 1.200 .730 1.620 .606 .987 .052
investment
operations

17.Less (.620) (.390) -- (.628) (.680) (.460) (.826) (.827) (.052)
Distributions
From net
investment
income

18. In excess of -- -- -- (.002) -- -- -- -- --
net
investment
income

19. From net -- -- (.010) (.050) (.160) -- -- (.020) --
realized gain

20. In excess of -- -- (.020) (.010) -- -- -- -- --
net realized gain

21. Total (.620) (.390) (.030) (.690) (.840) (.460) (.826) (.847) (.052)
distributions

22.Net asset $ 12.2 $ 12.4 $ 11.02 $ 11.48 $ 10.9 $ 11.08 $ 9.92 $ 10.1 $ 10.0
value, end of 40 80 0 0 70 0 0 40 00
period

23.Total 3.19% 17.32 (3.76) 10.96 6.65% 16.38 6.21% 10.26 .52%
returnB,C % % % % %

24.Net assets, $ 229 $ 182 $ 111 $ 122 $ 74 $ 45 $ 14 $ 6 $ 3
end of period (In
millions)

25.Ratio of .58% .59% .67% .68% .76% .80%F .80%F .80%F .80%A,
expenses F
to average net
assets

26.Ratio of net 6.49% 6.53% 6.53% 6.85% 7.11% 7.73% 8.26% 8.19% 6.99%
investment A
income to
average net
assets

27.Portfolio 81% 182% 143% 70% 119% 128% 122% 67% 0%
turnover rate

</TABLE>

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
28.Selected Per-Share Data and Ratios

29.Years
ended 1996 1995 1994 1993C 1992 1991 1990 1989 1988 1987
December 31

30.Net
asset $ 12.0 $ 10.7 $ 11.9 $ 10.8 $ 9.55 $ 7.07 $ 8.11 $ 9.66 $ 9.68 $ 10.8
value,
beginning 50 50 90 20 0 0 0 0 0 30
of period

31.Income
from .927 .856 .770 .728 .790 .890 .858 1.202 1.110 1.155
Investment
Operations
Net investment
income

32. Net
realized .643 1.224 (.910) 1.332 1.290 1.590 (1.04 (1.55 (.020) (1.00
and 0) 0) 0)
unrealized gain
(loss)

33. Total
from 1.570 2.080 (.140) 2.060 2.080 2.480 (.182) (.348) 1.090 .155
investment
operations

34.Less (.920) (.780) (.730) (.794) (.810) -- (.858) (1.20 (1.110 (1.15
Distributions 2) ) 5)
From net
investment
income

35. In excess
of -- -- -- (.036) -- -- -- -- -- --
net
investment
income

36. From
net (.180) -- (.370) (.060) -- -- -- -- -- (.150)
realized gain

37. Total (1.10 (.780) (1.10 (.890) (.810) -- (.858) (1.20 (1.110 (1.30
distributions 0) 0) 2) ) 5)

38.Net asset $ 12.5 $ 12.0 $ 10.7 $ 11.9 $ 10.8 $ 9.55 $ 7.07 $ 8.11 $ 9.66 $ 9.68
value, 20 50 50 90 20 0 0 0 0 0
end of period

39.Total 14.03 20.72 (1.64) 20.40 23.17 35.08 (2.23) (4.17) 11.64 1.22
returnA,B % % % % % % % % % %

40.Net assets, $ 1,58 $ 1,04 $ 569 $ 464 $ 201 $ 70 $ 30 $ 34 $ 30 $ 19
end of period 9 0
(In millions)

41.Ratio of .71% .71% .71% .64% .67% .97% 1.00 .93% .99% 1.02
expenses to D %D %D
average net
assets

42.Ratio of
net 9.09 9.32 8.75 8.69 10.98 12.94 11.36 12.94 11.41 11.19
investment % % % % % % % % % %
income to
average net
assets

43.Portfolio 123% 132% 122% 155% 160% 154% 156% 124% 139% 189%
turnover rate

44.Average $ .037
commission 0
rateE

</TABLE>

A TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE
TOTAL RETURNS SHOWN.
B THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN.
C EFFECTIVE JANUARY 1, 1993, THE FUND ADOPTED STATEMENT OF POSITION 93-2,
"DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF INCOME,
CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT COMPANIES."
AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT CERTAIN
RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES.
D FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE
BEEN HIGHER.
E FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS
REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY
TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD
TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN
VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE STRUCTURES MAY
DIFFER.
ASSET MANAGER PORTFOLIO

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
45.Selected
Per-Share Data
and Ratios

46.Years ended 1996 1995 1994 1993E 1992 1991 1990 1989D
December 31

47.Net asset $ 15.79 $ 13.79 $ 15.42 $ 13.32 $ 12.55 $ 10.24 $ 9.97 $ 10.00
value, beginning
of period

48.Income from
Investment
Operations

49. Net .63 .30 .45 .33 .32 .35 .41 .09
investment
income

50. Net realized 1.55 1.99 (1.33) 2.39 1.09 1.96 .26 (.01)
and
unrealized gain
(loss)

51. Total from 2.18 2.29 (.88) 2.72 1.41 2.31 .67 .08
investment
operations

52.Less
Distributions

53. From net (.57) (.29) (.29) (.33) (.31) -- (.40) (.09)
investment
income

54. In excess of -- -- -- (.04) -- -- -- --
net investment
income

55. From net (.47) -- (.46) (.25) (.33) -- -- (.02)
realized gain

56. Total (1.04) (.29) (.75) (.62) (.64) -- (.40) (.11)
distributions

57.Net asset $ 16.93 $ 15.79 $ 13.79 $ 15.42 $ 13.32 $ 12.55 $ 10.24 $ 9.97
value, end of
period

58.Total 14.60 16.96 (6.09) 21.23 11.71 22.56 6.72% .81%
returnB.C % % % % % %

59.Net assets, $ 3,641 $ 3,333 $ 3,291 $ 2,423 $ 732 $ 194 $ 36 $ 7
end of period (In
millions)

60.Ratio of .74% .81% .81% .88% .91% 1.08% 1.25% 2.50%
expenses F A,F
to average net
assets

61.Ratio of .73%G .79%G .80%G .88% .91% 1.08% 1.25% 2.50%
expenses to A
average net
assets after
expense
reductions

62.Ratio of net 3.60% 3.54% 4.07% 3.64% 4.89% 5.89% 5.92% 4.77%
investment A
income to
average net
assets

63.Portfolio 168% 256% 85% 113% 92% 110% 117% 158%A
turnover rate

64.Average $ .0163
commission
rateH

</TABLE>

A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED. TOTAL
RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS
SHOWN.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN.
D FOR THE PERIOD SEPTEMBER 6, 1989 (COMMENCEMENT OF OPERATIONS) TO DECEMBER
31, 1989.
E EFFECTIVE JANUARY 1, 1993, THE FUND ADOPTED STATEMENT OF POSITION 93-2,
"DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF INCOME,
CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT COMPANIES."
AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT CERTAIN
RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES.
F FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE
BEEN HIGHER.
G FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES
WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES .
H FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS
REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY
TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD
TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN
VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE STRUCTURES MAY
DIFFER.
ASSET MANAGER: GROWTH PORTFOLIO

65.Selected Per-Share Data and Ratios

66.Years ended 1996 1995C
December 31

67.Net asset $ 11.77 $ 10.00
value, beginning
of period

68.Income from
Investment
Operations

69. Net .21 .10
investment
income

70. Net realized 2.08 2.20
and unrealized
gain (loss)

71. Total from 2.29 2.30
investment
operations

72.Less
Distributions

73. From net (.21) (.11)
investment
income

74. From net (.75) (.42)
realized gain

75. Total (.96) (.53)
distributions

76.Net asset $ 13.10 $ 11.77
value, end of
period

77.Total 20.04% 23.02%
returnA,B

78.Net assets, $ 253 $ 68
end of period (In
millions)

79.Ratio of .87% 1.00%
expenses to D
average net
assets

80.Ratio of .85%E 1.00%
expenses to
average net
assets after
expense
reductions

81.Ratio of net 2.63% 1.69%
investment
income to
average net
assets

82.Portfolio 120% 343%
turnover rate

83.Average $ .0211
commission
rateF
</TABLE>

A TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE
TOTAL RETURNS SHOWN.
B THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN .
C FOR THE PERIOD JANUARY 3, 1995 (COMMENCEMENT OF OPERATIONS) TO DECEMBER
31, 1995.
D FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE
BEEN HIGHER
E FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES
WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES.
F FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS
REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY
TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD
TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN
VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE STRUCTURES MAY
DIFFER.
BALANCED PORTFOLIO
84.Selected
Per-Share Data
and Ratios

85.Years ended 1996 1995C
December 31

86.Net asset $ 11.17 $ 10.00
value, beginning
of period

87.Income from
Investment
Operations

88. Net .33 .14
investment
income

89. Net realized .78 1.25
and unrealized
gain (loss)

90. Total from 1.11 1.39
investment
operations

91.Less
Distributions

92. From net (.01)D (.14)
investment
income

93. From net (.04)D (.08)
realized gain

94. Total (.05) (.22)
distributions

95.Net asset $ 12.23 $ 11.17
value, end of
period

96.Total 9.98% 13.92%
returnA,B

97.Net assets, $ 103 $ 43
end of period (In
millions)

98.Ratio of .72% 1.42%
expenses to E
average net
assets

99.Ratio of .71% 1.42%
expenses to F
average net
assets after
expense
reductions

100.Ratio of net 3.63% 3.56%
investment
income to
average net
assets

101.Portfolio 163% 248%
turnover rate

102.Average $ .0165
commission
rateG

A TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE
TOTAL RETURNS SHOWN.
B THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN.
C FOR THE PERIOD JANUARY 3, 1995 (COMMENCEMENT OF OPERATIONS) TO DECEMBER
31, 1995.
D THE AMOUNTS SHOWN REFLECT CERTAIN RECLASSIFICATIONS RELATED TO BOOK TO
TAX DIFFERENCES.
E FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE
BEEN HIGHER.
F FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES
WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES.
G FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS
REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY
TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD
TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN
VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE STRUCTURES MAY
DIFFER.
EQUITY-INCOME PORTFOLIO

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
103.Selected Per-Share
Data and Ratios

104.Years 1996 1995 1994 1993D 1992 1991 1990 1989 1988 1987
ended
December 31

105.Net asset $ 19.2 $ 15.3 $ 15.4 $ 13.4 $ 11.8 $ 9.51 $ 12.29 $ 11.0 $ 9.42 $ 10.0
value, 7 5 4 0 5 1 2
beginning of
period

106.Income
from
Investment
Operations

107. Net .35 .41 .41 .37 .40 .50 .58 .60 .53 .45
investment
income

108. Net
realized 2.30 4.69 .64 2.06 1.57 2.43 (2.38) 1.29 1.59 (.51)
and
unrealized gain
(loss)

109. Total
from 2.65 5.10 1.05 2.43 1.97 2.93 (1.80) 1.89 2.12 (.06)
investment
operations

110.Less
Distributions

111. From net (.03) (.40) (.37) (.35) (.42) (.59) (.59) (.52) (.53) (.40)
investment
income

112. In excess
of -- -- -- (.04) -- -- -- -- -- --
net
investment
income

113. From net (.86) (.78) (.77) -- -- -- (.39) (.09) -- (.14)
realized gain

114. Total (.89) (1.18) (1.14) (.39) (.42) (.59) (.98) (.61) (.53) (.54)
distributions

115.Net asset $ 21.0 $ 19.2 $ 15.3 $ 15.4 $ 13.4 $ 11.8 $ 9.51 $ 12.2 $ 11.0 $ 9.42
value, end of 3 7 5 4 0 5 9 1
period

116.Total 14.28 35.09 7.07 18.29 16.89 31.44 (15.29) 17.34 22.71 (1.13)
returnA,B % % % % % % % % % %

117.Net assets, $ 6,96 $ 4,87 $ 2,28 $ 1,31 $ 593 $ 282 $ 154 $ 143 $ 52 $ 26
end of period 1 9 4 9
(In millions)

118.Ratio of .58% .61% .60% .62% .65% .74% .78% .85% 1.13 1.33
expenses to % %
average net
assets

119.Ratio of .56% .61% .58% .62% .65% .74% .78% .85% 1.13 1.33
expenses to C C % %
average net
assets after
expense
reductions

120.Ratio of
net 1.97 2.56 2.83 2.87 3.52 4.83 6.01% 5.82 5.36 4.78
investment % % % % % % % % %
income to
average net
assets

121.Portfolio 186% 87% 134% 120% 74% 107% 94% 78% 69% 133%
turnover rate

122.Average $ .042
commission 6
rateE

</TABLE>

A TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE
TOTAL RETURNS SHOWN.
B THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN.
C FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES
WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES.
D EFFECTIVE JANUARY 1 ,1993, THE FUND ADOPTED STATEMENT OF POSITION 93-2,
"DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF INCOME,
CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT COMPANIES."
AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT CERTAIN
RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES.
E FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS
REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY
TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD
TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN
VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE STRUCTURES MAY
DIFFER.
INDEX 500 PORTFOLIO
123.Selected Per-Share Data and Ratios

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
124.Years 1996 1995 1994 1993E 1992D
ended
December 31

125.Net asset $ 75.71 $ 56.22 $ 55.74 $ 52.60 $ 50.00
value, beginning
of period

126.Income
from Investment
Operations

127. Net 1.04 .85 1.14 1.31 .44
investment
income

128. Net realized 15.55 19.72 (.56) 3.80 2.71
and unrealized
gain (loss)

129. Total from 16.59 20.57 .58 5.11 3.15
investment
operations

130.Less
Distributions

131. From net (.91) (.95) -- (1.28) (.47)
investment
income

132. From net (2.34) (.11) (.10) (.60) (.08)
realized gain

133. In excess of -- (.02) -- (.09) --
net realized gain

134. Total (3.25) (1.08) (.10) (1.97) (.55)
distributions

135.Net asset $ 89.05 $ 75.71 $ 56.22 $ 55.74 $ 52.60
value, end of
period

136.Total 22.71% 37.19% 1.04% 9.74% 6.31%
returnB,C

137.Net assets, $ 823 $ 246 $ 51 $ 25 $ 18
end of period (In
millions)

138.Ratio of .28%F .28%F .28%F .28%F .28%A,
expenses to F
average net
assets

139.Ratio of net 2.26% 2.70% 2.81% 2.65% 2.89%A
investment

income to
average net
assets

140.Portfolio 14% 16% 2% 9% 0%
turnover rate

141.Average $ .0315
commission
rateG

</TABLE>

A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED. TOTAL
RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS
SHOWN.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN.
D FOR THE PERIOD AUGUST 27, 1992 (COMMENCEMENT OF OPERATIONS) TO DECEMBER
31, 1992.
E EFFECTIVE JANUARY 1, 1993, THE FUND ADOPTED STATEMENT OF POSITION 93-2,
"DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF INCOME,
CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT COMPANIES."
AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT CERTAIN
RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES.
F FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE
BEEN HIGHER.
G FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS
REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY
TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD
TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN
VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE STRUCTURES MAY
DIFFER.
GROWTH & INCOME PORTFOLIO
142.Selected
Per-Share Data
and Ratios

143.Years 1996D
ended
December 31

144.Net asset $ 10.00
value, beginning
of period

145.Income
from Investment
Operations

146. Net realized (.10)
and unrealized
gain (loss)

147. Total from (.10)
investment
operations

148.Net asset $ 9.90
value, end of
period

149.Total (1.00)%
returnB,C

150.Net assets, $ 0.99
end of period (In
millions)

151.Ratio of 1.00%A,
expenses to E
average net
assets

152.Ratio of net 3.89%A
investment
income to
average net
assets

153.Portfolio 0%
turnover rate

154.Average $ .0120
commission
rateF

156.Years 1996 1995C
ended
December 31

157.Net asset $ 13.07 $ 10.00
value, beginning
of period

158.Income
from Investment
Operations

159. Net .26 .11
investment
income

160. Net realized 2.12 3.14
and unrealized
gain (loss)

161. Total from 2.38 3.25
investment
operations

162.Less
Distributions

163. From net -- (.11)
investment
income

164. From net (.05) (.07)
realized gain

165. Total (.05) (.18)
distributions

166.Net asset $ 15.40 $ 13.07
value, end of
period

167.Total 18.27 32.52
returnA,B % %

168.Net assets, $ 383 $ 164
end of period (In
millions)

169.Ratio of .77 .85%
expenses to % D
average net
assets

170.Ratio of .76% .83%
expenses to E E
average net
assets after
expense
reductions

171.Ratio of net 2.29 2.49
investment % %
income to
average net
assets

172.Portfolio 28 38
turnover rate % %

173.Average $ .0367
commission
rateF

A TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE
TOTAL RETURNS SHOWN.
B THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN.
C FOR THE PERIOD JANUARY 3, 1995 (COMMENCEMENT OF OPERATIONS) TO DECEMBER
31, 1995.
D FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE
BEEN HIGHER.
E FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES
WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES.
F FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS
REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY
TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD
TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN
VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE STRUCTURES MAY
DIFFER.
CONTRAFUND PORTFOLIO
174.Selected Per-Share Data and Ratios

175.Years 1996 1995C
ended
December 31

176.Net asset $ 13.79 $ 10.00
value, beginning
of period

177.Income
from Investment
Operations

178. Net .14 .06
investment
income

179. Net realized 2.76 3.91
and unrealized
gain (loss)

180. Total from 2.90 3.97
investment
operations

181.Less
Distributions

182. From net -- (.06)
investment
income

183. From net (.13) (.12)
realized gain

184. Total (.13) (.18)
distributions

185.Net asset $ 16.56 $ 13.79
value, end of
period

186.Total 21.22 39.72
returnA,B % %

187.Net assets, $ 2,394 $ 877
end of period (In
millions)

188.Ratio of .74 .72
expenses to % %
average net
assets

189.Ratio of .71% .72
expenses to D %
average net
assets after
expense
reductions

190.Ratio of net 1.33 1.07
investment % %
income to
average net
assets

191.Portfolio 178 132
turnover rate % %

192.Average $ .0343
commission
rateE

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
193.Selected Per-Share Data and Ratios

194.Years 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
ended D
December 31

195.Net asset $ 29.2 $ 21.6 $ 23.0 $ 19.7 $ 18.5 $ 12.9 $ 15.18 $ 11.7 $ 10.1 $ 10.0
value, beginning 0 9 8 6 1 1 2 4 3
of period

196.Income
from Investment
Operations

197. Net .22 .08 .12 .12 .09 .09C .24 .24 .19 .10
investment
income

198. Net realized 3.82 7.55 (.12) 3.64 1.64 5.72 (1.98) 3.41 1.39 .27
and
unrealized gain
(loss)

199. Total from 4.04 7.63 -- 3.76 1.73 5.81 (1.74) 3.65 1.58 .37
investment
operations

200.Less
Distributions

201. From net (.08) (.12) (.12) (.11) (.05) (.21) (.21) (.19) -- (.11)
investment
income

202. From net (2.02) -- (1.27) (.21) (.43) -- (.32) -- -- (.15)
realized gain

203. In excess of -- -- -- (.12) -- -- -- -- -- --
net realized gain

204. Total (2.10) (.12) (1.39) (.44) (.48) (.21) (.53) (.19) -- (.26)
distributions

205.Net asset $ 31.1 $ 29.2 $ 21.6 $ 23.0 $ 19.7 $ 18.5 $ 12.91 $ 15.1 $ 11.7 $ 10.1
value, end of 4 0 9 8 6 1 8 2 4
period

206.Total 14.71 35.36 (.02) 19.37 9.32 45.51 (11.73) 31.51 15.58 3.66
returnA,B % % % % % % % % % %

207.Net assets, $ 6,08 $ 4,16 $ 2,14 $ 1,38 $ 750 $ 371 $ 135 $ 77 $ 29 $ 19
end of period 6 3 2 4
(In millions)

208.Ratio of .69% .70% .70% .71% .75% .84% .88% 1.02 1.24 1.50
expenses % % %E
to average net
assets

209.Ratio of .67% .70% .69% .71% .75% .84% .88% 1.02 1.24 1.50
expenses to F F % % %
average net
assets after
expense
reductions

210.Ratio of net .81% .37% .69% .72% .83% .56% 2.69% 2.83 1.91 1.78
investment % % %
income to
average net
assets

211.Portfolio 81% 108% 122% 159% 262% 261% 88% 111% 155% 37%
turnover rate

212.Average $ .041
commission 6
rateG

</TABLE>

A TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE
TOTAL RETURNS SHOWN.
B THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN .
C NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
D EFFECTIVE JANUARY 1, 1993, THE FUND ADOPTED STATEMENT OF POSITION 93-2,
"DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF INCOME,
CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT COMPANIES."
AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT CERTAIN
RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES.
E FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE
BEEN HIGHER.
F FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES
WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES.
G FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS
REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY
TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD
TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN
VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE STRUCTURES MAY
DIFFER.
OVERSEAS PORTFOLIO

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
213.Selected Per-Share Data and Ratios

214.Years
ended 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987F
December 31

215.Net asset $ 17.0 $ 15.6 $ 15.4 $ 11.5 $ 13.0 $ 12.4 $ 12.6 $ 10.1 $ 9.35 $ 10.00
value, beginning 6 7 8 3 9 2 7 1
of period

216.Income from
Investment Operations

217. Net .32D, .17 .19 .06 .16 .24 .18 .07 .09 .05
investment E
income

218. Net realized 1.88 1.34 .08 4.16 (1.54) .74 (.39) 2.57 .67 (.59)
and
unrealized gain
(loss)

219. Total from 2.20 1.51 .27 4.22 (1.38) .98 (.21) 2.64 .76 (.54)
investment
operations

220.Less
Distributions

221. From net (.20) (.06) (.08) (.18) (.18) (.17) (.04) (.08) -- (.11)
investment
income

222. In excess of -- -- -- (.04) -- -- -- -- -- --
net
investment
income

223. From net (.22) (.02) -- -- -- (.14)K -- -- -- --
realized gain

224. In excess of -- (.04) -- (.05) -- -- -- -- -- --
net realized gain

225. Total (.42) (.12) (.08) (.27) (.18) (.31) (.04) (.08) -- (.11)
distributions

226.Net asset $ 18.8 $ 17.0 $ 15.6 $ 15.4 $ 11.53 $ 13.0 $ 12.4 $ 12.6 $ 10.1 $ 9.35
value, end of 4 6 7 8 9 2 7 1
period

227.Total 13.15 9.74 1.72 37.35 (10.72) 8.00 (1.67) 26.28 8.13% (5.38)
returnB, C % % % % % % % % %

228.Net assets, $ 1,66 $ 1,34 $ 1,29 $ 778 $ 181 $ 126 $ 81 $ 26 $ 9 $ 7
end of period 8 3 8
(In millions)

229.Ratio of .93% .91% .92% 1.03 1.14% 1.26 1.41 1.50 1.50% 1.50%
expenses % % % %H H A,H
to average net
assets

230.Ratio of .92%I .91% .92% 1.03 1.14% 1.26 1.41 1.50 1.50% 1.50%
expenses to % % % % A
average net
assets after
expense
reductions

231.Ratio of net 1.84 1.88 1.28 1.21 1.86% 2.33 1.89 .66% .84% .78%A
investment % % % % % %
income to
average net
assets

232.Portfolio 92% 50% 42% 42% 61% 168% 100% 78% 95% 181%A
turnover rate

233.Average $ .013
commission rateJ 7

</TABLE>

A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED. TOTAL
RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS
SHOWN.
C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN.
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
E NET INVESTMENT INCOME PER SHARE REFLECTS A SPECIAL DIVIDEND FROM VOLVO AB
WHICH AMOUNTED TO $.05 PER SHARE.
F FOR THE PERIOD JANUARY 28, 1987 (COMMENCEMENT OF OPERATIONS) TO DECEMBER
31, 1987.
G EFFECTIVE JANUARY 1, 1993, THE FUND ADOPTED STATEMENT OF POSITION 93-2,
"DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF INCOME,
CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT COMPANIES."
AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT CERTAIN
RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES.
H FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE
BEEN HIGHER.
I FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES
WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES.
J FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS
REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY
TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD
TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN
VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE STRUCTURES MAY
DIFFER.
K INCLUDES AMOUNTS DISTRIBUTED FROM NET REALIZED GAIN ON FOREIGN CURRENCY
RELATED TRANSACTIONS TAXABLE AS ORDINARY INCOME.
THE FUNDS IN DETAIL

CHARTER
EACH FUND IS A MUTUAL FUND: an investment that pools shareholders' money
and invests it toward a specified goal. Money Market Portfolio, High Income
Portfolio, Equity-Income Portfolio, Growth Portfolio and Overseas Portfolio
are diversified funds of Variable Insurance Products Fund (VIP), Investment
Grade Bond Portfolio, Asset Manager Portfolio, Index 500 Portfolio, Asset
Manager: Growth Portfolio and Contrafund Portfolio are diversified funds of
Variable Insurance Products Fund II (VIP II) and Growth & Income Portfolio,
Balanced Portfolio and Growth Opportunities are diversified funds of
Variable Insurance Products Fund III (VIP III). VIP, VIP II and VIP III are
open-end management investment companies organized as Massachusetts
business trusts on November 13, 1981, March 21, 1988 and July 14, 1994,
respectively. There is a remote possibility that one fund might become
liable for a misstatement in the prospectus about another fund.
EACH FUND IS GOVERNED BY A BOARD OF TRUSTEES which is responsible for
protecting the interests of shareholders. The trustees are experienced
executives who meet throughout the year to oversee the funds' activities,
review contractual arrangements with companies that provide services to the
funds, and review the funds' performance. The majority of trustees are not
otherwise affiliated with Fidelity.
THE FUNDS MAY HOLD SPECIAL MEETINGS AND MAIL PROXY MATERIALS. These
meetings may be called to elect or remove trustees, change fundamental
policies, approve a management contract, or for other purposes.
Shareholders not attending these meetings are encouraged to vote by proxy.
An insurance company issuing a variable contract that participates in the
funds will vote shares held in its separate account as required by law and
interpretations thereof, as may be amended or changed from time to time. In
accordance with current law and interpretations thereof, a participating
insurance company is required to request voting instructions from
policyowners and must vote shares in the separate account in proportion to
the voting instructions received. Your insurance company is entitled to one
vote for each share it owns. For a further discussion, please refer to your
insurance company's separate account prospectus.
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 02109. It includes a number
of different subsidiaries and divisions which provide a variety of
financial services and products. The funds employ various Fidelity
companies to perform activities required for their operation.
The funds are managed by FMR, which handles each fund's business affairs
and, with the assistance of affiliates for certain funds, chooses the
fund's investments.
(small solid bullet) FMR Texas Inc. (FMR Texas), in Irving, Texas, serves
as a sub-adviser for Money Market Portfolio.
(small solid bullet) Fidelity Management & Research (U.K.) Inc. (FMR
U.K.), in London, England, serves as a sub-adviser for High Income, Asset
Manager, Asset Manager: Growth, Contrafund and Overseas Portfolios.
(small solid bullet) Fidelity Management & Research (Far East) Inc. (FMR
Far East), in Tokyo, Japan, serves as a sub-adviser for High Income, Asset
Manager, Asset Manager: Growth, Contrafund and Overseas Portfolios.
(small solid bullet) Fidelity International Investment Advisors (FIIA), in
Pembroke, Bermuda, serves as a sub-adviser for Overseas Portfolio.
(small solid bullet) Fidelity International Investment Advisors (U.K.)
Limited (FIIAL U.K.), in Kent, England, serves as a sub-adviser for
Overseas Portfolio.

FIDELITY FACTS
Fidelity offers the broadest selection of mutual
funds in the world.
(solid bullet) Number of Fidelity mutual funds: over 225
(solid bullet) Assets in Fidelity mutual funds: over $432
billion
(solid bullet) Number of shareholder accounts: over 29
million
(solid bullet) Number of investment analysts and portfolio
managers: over 270

(checkmark)
Barry Jay Coffman is manager and vice president of VIP: High Income
Portfolio, which he has managed since August 1990. Mr. Coffman also assists
on Fidelity Puritan Fund. Previously, he served as an assistant manager and
analyst for the high yield bond group. Before joining Fidelity in 1986, Mr.
Coffman was an analyst for Equitable Capital Management and was a senior
auditor at Arthur Anderson & Company.
William Danoff is manager and vice president of VIP II: Contrafund
Portfolio, which he has managed since January 1995. Mr. Danoff also manages
Fidelity Contrafund, which he has managed since October 1990. Previously,
he managed Select Retailing Portfolio and assisted on Magellan. Mr. Danoff
joined Fidelity in 1986 as an equity analyst.
Kevin Grant is manager of VIP: Investment Grade Bond Portfolio, which he
has managed since February 1997. He also manages several other Fidelity
funds. Prior to joining Fidelity in 1993, Mr. Grant was a vice president
and chief mortgage strategist at Morgan Stanley for three years.
Stephen Petersen is Vice President and manager of VIP: Equity Income
Portfolio, which he has managed since January 1997. He also manages
Fidelity Balanced Fund, which he has managed since March 1996 and is Vice
President and manager of Fidelity Equity-Income Fund, which he has managed
since July 1993. Since joining Fidelity in 1980, Mr. Petersen has worked as
an analyst and manager.
Jennifer Uhrig is Vice President and manager of VIP: Growth Portfolio,
which she has managed since January 1997. She also manages Advisor Equity
Growth Fund, which she has managed since January 1997. Since joining
Fidelity in 1987, Ms. Uhrig has worked as an analyst and manager.
Richard R. Mace, Jr. is manager and vice president of VIP: Overseas
Portfolio which he has managed since March 1996. He is also manager of
Fidelity Overseas Fund, Fidelity Advisor Overseas Fund, Fidelity Advisor
Annuity Overseas Fund, Fidelity Global Balanced Fund, and Fidelity
International Value Fund. Previously, he managed Fidelity International
Growth & Income Fund, Select Transportation, Select Industrial Materials
and Select Chemical Portfolios. Mr. Mace joined Fidelity in August 1987.
Richard C. Habermann and George Vanderheiden are managers and vice
presidents of VIPII: Asset Manager Portfolio and Asset Manager: Growth
Portfolio. They have managed the funds since March 1996.
Dick Habermann is lead manager of VIPII: Asset Manager Portfolio and Asset
Manager: Growth Portfolio. He also manages Fidelity Asset Manager, Fidelity
Asset Manager: Growth and Fidelity Asset Manager: Income. Mr. Habermann is
a managing director of Fidelity and senior vice president of FMR.
Previously, he was director of research and chief investment officer of
Fidelity International, Limited. Mr. Habermann joined Fidelity in 1968.
George A. Vanderheiden is manager and vice manager of VIP III: Growth
Opportunities Portfolio, which he has managed since January 1995. Mr.
Vanderheiden also manages Advisor Growth Opportunities, Destiny I, Destiny
II, Asset Manger, Asset Manager, Asset Manager: Growth, Asset Manager:
Income Fund. He is a managing director of FMR Corp., and leader of the
growth group. Mr. Vanderheiden joined Fidelity in 1971.
Charles Morrison is manager of VIP II: Asset Manager and Asset Manager:
Growth Portfolios' fixed-income investments, which he has managed since
February 1997. He also manages several other Fidelity funds. Prior to
joining Fidelity in 1987, Mr. Morrison has worked as an analyst and
manager.
Beth Terrana is manager and vice president of VIP III: Growth & Income
Portfolio, which she has managed since the fund commenced operations. She
also manages Fidelity Fund. Since joining Fidelity in 1983, Ms. Terrana has
worked as a portfolio manager.
Bettina Doulton is lead manager and vice president of VIP III: Balanced
Portfolio which she has managed since March 1996. Ms. Doulton also manages
Fidelity Advisor Balanced Fund and co-manages Fidelity Puritan Fund. She
previously managed Fidelity Value Fund, Fidelity Advisor Equity-Income
Fund, VIP: Equity-Income Fund, VIP: Equity-Income Portfolio and Fidelity
select Automotive Portfolio. Ms. Doulton joined Fidelity in 1986.
Kevin E. Grant is also vice president of the Balanced Portfolio and manager
of its fixed-income investments since March 1996. He co-manages Fidelity
Advisor Balanced Fund, Fidelity Balanced Fund, Fidelity Puritan Fund, and
Fidelity Advisor Strategic Income Fund. He also manages Fidelity Ginnie Mae
Fund, Fidelity Mortgage Securities Fund, Fidelity Advisor Limited Term Bond
Fund and Spartan Ginnie Mae Fund. Mr. Grant joined Fidelity in 1993 as
manager of Fidelity Mortgage Securities Fund. He is a former vice president
and chief strategist for mortgage-backed securities at Morgan Stanley.
Previously, Mr. Grant served as an investment director at Aetna Bond
Investors.
John Todd is vice president of each Asset Manager fund and manager of each
fund's short-term and money market investments, which he has managed since
December 1996. He also manages several other Fidelity funds. Mr. Todd
joined Fidelity in 1981.
Each fund has an investment objective similar to that of an existing
Fidelity fund. Money Market Portfolio is most similar to Fidelity Cash
Reserves, High Income Portfolio is most similar to Spartan High Income
Fund, Equity-Income Portfolio is most similar to Fidelity Equity-Income
Fund, Growth Portfolio is most similar to Fidelity Growth Company Fund,
Overseas Portfolio is most similar to Fidelity Overseas Fund, Investment
Grade Bond Portfolio is most similar to Fidelity Investment Grade Bond
Fund, Asset Manager Portfolio is most similar to Fidelity Asset Manager,
Index 500 Portfolio is most similar to Fidelity Market Index Fund,
Contrafund Portfolio is most similar to Fidelity Contrafund, Asset Manager:
Growth Portfolio is most similar to Fidelity Asset Manager: Growth, Growth
& Income Portfolio is most similar to Fidelity Growth & Income Fund,
Balanced Portfolio is most similar to Fidelity Balanced Fund and Growth
Opportunities Portfolio is most similar to Fidelity Advisor Growth
Opportunities Fund. The performance of a separate account investing in
these funds is not expected to be the same as the performance of the
corresponding fund due in part to dissimilarities in their investments.
Various insurance-related costs at the insurance company's separate account
will also affect performance.
Each fund sells its shares to separate accounts of insurance companies
which are both affiliated and unaffiliated with FMR. Each fund currently
does not foresee any disadvantages to policyowners arising out of the fact
that each fund offers its shares to separate accounts of various insurance
companies to serve as the investment medium for their variable products.
Nevertheless, the Board of Trustees intends to monitor events in order to
identify any material irreconcilable conflicts which may possibly arise,
and to determine what action, if any, should be taken in response to such
conflicts. If such a conflict were to occur, one or more insurance
companies' separate accounts might be required to withdraw its investments
in one or more funds and shares of another fund may be substituted. This
might force a fund to sell securities at disadvantageous prices. In
addition, the Board of Trustees may refuse to sell shares of any fund to
any separate account or may suspend or terminate the offering of shares of
any fund if such action is required by law or regulatory authority or is in
the best interests of the shareholders of the fund.
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.
Fidelity Distributors Corporation (FDC) distributes and markets Fidelity's
funds and services. Fidelity Investments Institutional Operations Company,
Inc. (FIIOC), 82 Devonshire Street, Boston, Massachusetts, performs
transfer agent servicing functions for the funds.
FMR Corp. is the ultimate parent company of FMR, FMR Texas, FMR U.K., and
FMR Far East. 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.
Fidelity International Limited (FIL) is the parent company of FIIA and
FIIAL U.K. The Johnson family group also owns, directly or indirectly, more
than 25% of the voting common stock of FIL.
A broker-dealer may use a portion of the commissions paid by High Income
and Asset Manager, respectively, to reduce expenses for those funds. FMR
may use its broker-dealer affiliates and other firms that sell fund shares
to carry out a fund's transactions, provided that the fund receives
brokerage services and commission rates comparable to those of other
broker-dealers.
INVESTMENT PRINCIPLES AND RISKS
The value of each fund's domestic and foreign investments varies in
response to many factors. Stock values fluctuate in response to the
activities of individual companies and general market and economic
conditions. Bond values fluctuate based on changes in interest rates,
market conditions, other economic and political news, and on their quality
and maturity. In general, bond prices rise when interest rates fall, and
fall when interest rates rise. This effect is more pronounced for
longer-term securities. Lower-quality securities offer higher yields, but
also carry more risk.
Funds which invest in foreign securities have increased economic and
political risks as they are exposed to events and factors in the various
world markets. This is especially true for funds that invest in emerging
markets. Also, because many of the funds' investments are denominated in
foreign currencies, changes in the value of foreign currencies can
significantly affect a fund's share price. FMR may use a variety of
investment techniques to either increase or decrease a fund's investment
exposure to any currency.
The total return from a bond includes both income and price gains or
losses. In selecting investments for a bond fund, FMR considers a bond's
expected income together with its potential for price gains or losses.
While income is generally the most important component of bond returns over
time, a bond fund's emphasis on income does not mean the fund invests only
in the highest-yielding bonds available, or that it can avoid losses of
principal.
FMR generally focuses on assembling a portfolio of bonds that it believes
will provide the best balance between risk and return within the range of
eligible investments for the fund. FMR's evaluation of a potential
investment includes an analysis of the credit quality of the issuer, its
structural features, its current price compared to FMR's estimate of its
long-term value, and any short-term trading opportunities resulting from
market inefficiencies.
FMR may use various investment techniques to hedge a portion of the funds'
risks, but there is no guarantee that these strategies will work as FMR
intends. It is important to note that neither the funds nor their yields
are guaranteed by the U.S. Government. When you sell your shares, they may
be worth more or less than what you paid for them.
MONEY MARKET PORTFOLIO
The fund seeks to obtain as high a level of current income as is consistent
with preserving capital and providing liquidity. The fund seeks to obtain
its objective by investing in high-quality, short-term money market
securities while seeking to maintain a stable $1.00 share price.
The fund will invest only in U.S. dollar-denominated securities of domestic
and foreign issuers, including banks and other financial institutions,
governments and their agencies or instrumentalities, and corporations.
When fund shares are redeemed, they should be worth the same amount as when
they were purchased. Of course, there is no guarantee that the fund will
maintain a stable $1.00 share price. The fund follows industry-standard
guidelines on the quality, maturity and diversification of its investments,
which are designed to help maintain a stable $1.00 share price. The fund
will purchase only high-quality securities that FMR believes present
minimal credit risks and will observe maturity restrictions on securities
it buys. In general, securities with longer maturities are more vulnerable
to price changes, although they may provide higher yields. It is possible
that a major change in interest rates or a default on the fund's
investments could cause its share price (and the value of your investment)
to change.
The fund earns income at current money market rates. It stresses
preservation of capital, liquidity, and income and does not seek the higher
yields or capital appreciation that more aggressive investments may
provide. The fund's yield will vary from day to day and generally reflects
current short-term interest rates and other market conditions. The fund
will invest only in instruments that are consistent with its objective.
INVESTMENT GRADE BOND PORTFOLIO
The fund seeks as high a level of current income as is consistent with the
preservation of capital by investing primarily in a broad range of
fixed-income securities. FMR normally invests at least 65% of the fund's
total assets in investment-grade, fixed-income securities such as bonds,
notes and debentures. Although the fund can invest in securities of any
maturity, FMR seeks to manage the fund so that it generally reacts to
changes in interest rates similarly to bonds with maturities between five
and ten years. As of December 31, 1996, the fund's dollar-weighted average
maturity was approximately 8.3 years.
The fund's yield and share price change daily based on changes in interest
rates, market conditions, and other political and economic news, and on the
quality and maturity of its investments.
HIGH INCOME PORTFOLIO
The fund seeks high current income by investing primarily in all types of
income-producing debt securities, preferred stocks, and convertible
securities. FMR normally invests at least 65% of the fund's total assets in
these securities. In choosing investments, the fund also considers growth
of capital.
Although the fund has no limits on the quality and maturity of its
investments, its strategy typically leads to longer-term, lower-quality,
fixed-income securities. These domestic and foreign investments may present
the risk of default or may be in default. If consistent with its investment
objective, however, the fund can also invest in common stocks, other equity
securities, and debt securities not currently paying interest but which are
expected to do so in the future. Performance is also affected by individual
company news. The success of the fund's investment strategy depends on
FMR's analysis of a company's relative values and its potential for success
in light of its current financial situation, its industry position,
economic conditions, and interest rate trends.
ASSET MANAGER AND ASSET MANAGER: GROWTH PORTFOLIOS
Each fund seeks to achieve its investment objective by allocating its
assets among stocks, bonds, short-term and other instruments of U.S. and
foreign issuers. Each fund, however, has a different objective and pursues
its objective by investing within different asset allocation ranges.
ASSET MANAGER seeks high total return with reduced risk over the long-term.
ASSET MANAGER: GROWTH seeks to maximize total return over the long-term.
Each fund allocates its assets among the following classes, or types, of
investments. The STOCK CLASS includes equity securities of all types. The
BOND CLASS includes all varieties of fixed-income instruments with
maturities of more than one year. The SHORT-TERM CLASS/MONEY MARKET CLASS
includes all types of short-term money market instruments. FMR may use its
judgment to place a security in the most appropriate class based on its
investment characteristics. Fixed-income securities may be classified in
the bond or short-term/money market class according to interest rate
sensitivity as well as maturity. The funds may also make other investments
that do not fall within these classes.
FMR has the ability to allocate each fund's assets within specified ranges.
Each fund's NEUTRAL MIX indicates the benchmark for its combination of
investments in each asset class over time. FMR may change the neutral mix
from time to time. The range and approximate neutral mix for each asset
class are shown below.
ASSET MANAGER
Range Neutral mix
STOCK CLASS 30-70% 50%
BOND CLASS 20-60% 40%
SHORT-TERM CLASS 0-50% 10%
Asset Manager's approach spreads the fund's assets among all three classes,
moderating both the risk and return potential of stocks, bonds, and
short-term instruments.
ASSET MANAGER: GROWTH
Range Neutral mix
STOCK CLASS 50-100% 70%
BOND CLASS 0-50% 25%
SHORT-TERM CLASS 0-50% 5%
Asset Manager: Growth's more aggressive approach focuses on stocks for high
potential returns. However, because the fund can invest in bonds and
short-term instruments, its return may not be as high as a fund that
invests only in stocks.
Although the funds seek to reduce their overall risk by diversifying among
different types of investments, the funds aggressively invest in a wide
variety of security types, including stocks and bonds issued in developed
and developing countries and derivative transactions. Because the funds are
subject to the risks of each investment type, the funds and their
performance are affected by many factors.
In pursuit of each fund's objective, FMR will not try to pinpoint the
precise moment when a major reallocation should be made. Instead, FMR
regularly reviews each fund's allocation and makes changes gradually to
favor investments that it believes will provide the most favorable outlook
for achieving each fund's objective.
Each fund diversifies across investment types more than most mutual funds.
No one mutual fund, however, can provide an appropriate balanced investment
plan for all investors.
BALANCED PORTFOLIO
The fund seeks both income and growth of capital by investing in a
diversified portfolio of equity and fixed-income securities with income,
growth of income, and capital appreciation potential.
FMR manages the fund to maintain a balance between stocks and bonds. When
FMR's outlook is neutral, it will invest approximately 60% of the fund's
assets in stocks and other equity securities and the remainder in bonds and
other fixed-income securities. FMR may vary from this target if it believes
stocks or bonds offer more favorable opportunities, but will always invest
at least 25% of the fund's total assets in fixed-income senior securities
(including debt securities and preferred stock).
The fund invests in equity securities, convertible securities, common and
preferred stocks, and fixed-income securities that provide income or
opportunities for capital growth. The fund may buy securities that are not
currently paying income but offer prospects for future income. The fund may
invest in securities of foreign issuers. In selecting investments for the
fund, FMR will consider such factors as the issuer's financial strength,
its outlook for increased dividend or interest payments, and the potential
for capital gains.
EQUITY-INCOME PORTFOLIO
The fund seeks reasonable income by investing primarily in income-producing
equity securities. When choosing the fund's investments, FMR also considers
the potential for capital appreciation. The fund seeks to achieve a yield
that beats that of the S&P 500. FMR normally invests at least 65% of the
fund's total assets in income-producing common or preferred stock. The
remainder of the fund's assets will tend to be invested in debt
obligations, many of which are expected to be convertible into common stock
(if convertible securities present favorable investment opportunities). The
fund has the flexibility, however, to invest the balance in all types of
domestic and foreign securities, including bonds of varying quality. The
fund does not expect to invest in debt securities of companies that do not
have proven earnings or credit.
INDEX 500 PORTFOLIO
The fund seeks to match the total return of the S&P 500 while keeping
expenses low. FMR normally invests at least 80% (65% if fund assets are
below $20 million) of the fund's assets in equity securities of companies
that compose the S&P 500.
The S&P 500 is an index of 500 common stocks, most of which trade on the
New York Stock Exchange. It is generally acknowledged that the S&P 500
broadly represents the performance of publicly traded common stocks in the
U.S.
In seeking a 98% or better long-term correlation of the fund's total return
to that of the S&P 500, the fund utilizes a "passive" or "indexing"
approach and tries to allocate its assets similarly to those of the index.
The fund's composition may not always be identical to that of the S&P 500.
FMR may choose, if extraordinary circumstances warrant, to exclude a stock
held in the S&P 500 and include a similar stock in its place if doing so
will help the fund achieve its objective. FMR monitors the correlation
between the performance of the fund and the S&P 500 on a regular basis. In
the unlikely event that the fund cannot achieve a long-term correlation of
98% or better, the trustees will consider alternative arrangements.
Although the fund focuses on common stocks, it may also invest in other
equity securities and in other types of instruments. The fund purchases
short-term debt securities for cash management purposes and uses various
investment techniques, such as futures contracts, to adjust its exposure to
the S&P 500.
Standard & Poor's Corporation is neither an affiliate nor a sponsor of the
fund, and inclusion of a stock in the index does not imply that it is a
good investment. Please refer to the Appendix for more information on the
S&P 500.
GROWTH & INCOME PORTFOLIO
The fund seeks high total return through a combination of current income
and capital appreciation by investing mainly in equity securities. The fund
expects to invest the majority of its assets in domestic and foreign equity
securities, with a focus on those that pay current dividends and show
potential earnings growth. However, the fund may buy debt securities as
well as equity securities that are not currently paying dividends, but
offer prospects for capital appreciation or future income.
GROWTH OPPORTUNITIES PORTFOLIO
The fund seeks to provide capital growth by investing primarily in common
stocks and securities convertible into common stocks.
The fund, under normal conditions, will invest at least 65% of its total
assets in securities of companies that FMR believes have long-term growth
potential. Although the fund invests primarily in common stock and
securities convertible into common stock, it has the ability to purchase
other securities, such as preferred stock and bonds, that may produce
capital growth. The fund may invest in foreign securities without
limitation.
CONTRAFUND PORTFOLIO
The fund seeks capital appreciation by investing mainly in equity
securities of companies that FMR believes to be undervalued due to an
overly pessimistic appraisal by the public. The fund usually invests
primarily in common stock and securities convertible into common stock, but
it has the flexibility to invest in any type of security that may produce
capital appreciation.
The fund's strategy can lead to investments in small and medium-sized
companies, which carry more risk than larger ones. Generally, these
companies, especially small sized ones, rely on limited product lines and
markets, financial resources, or other factors. This may make them more
susceptible to setbacks or downturns.
In pursuit of the fund's goal, FMR looks for companies with the following
characteristics:
(small solid bullet) unpopular, but improvements seem possible due to
developments such as a change in management, a new product line, or an
improved balance sheet,
(small solid bullet) recently popular, but temporarily out of favor due to
short-term or one-time factors, or
(small solid bullet) undervalued compared to other companies in the same
industry.
GROWTH PORTFOLIO
The fund seeks capital appreciation by investing primarily in common
stocks. The fund however, is not restricted to any one type of security and
may pursue capital appreciation through the purchase of bonds and preferred
stocks. The fund does not place any emphasis on dividend income from its
investments, except when FMR believes this income will have a favorable
influence on the market value of the security.
Growth may be measured by factors such as earnings or gross sales. In
selecting investments for the fund, FMR will tend to focus on smaller,
lesser known companies in new and emerging areas of the economy. However,
FMR may also pursue growth in larger or revitalized companies that hold a
strong position in the market. These may be found in mature or declining
industries.
Companies with strong growth potential often have new products,
technologies, distribution channels, or other opportunities. As a general
rule, these domestic and foreign companies tend to be small and mid-sized
companies that have higher than average price/earnings (P/E) ratios. A high
P/E ratio means that the stock is more expensive than average relative to
the company's earnings. The market prices of these stocks may be
particularly sensitive to economic, market, or company news.
OVERSEAS PORTFOLIO
The fund seeks long-term growth of capital by investing primarily in
securities of issuers whose principal activities are outside of the U.S.
FMR normally invests at least 65% of the fund's total assets in securities
of issuers from at least three different countries outside of North America
(the U.S., Canada, Mexico, and Central America). The fund expects to invest
a majority of its assets in equity securities, but may also invest in debt
securities of any quality. The fund invests in securities of both developed
and emerging markets.
The fund may invest in the securities of any issuer, including companies
and other business organizations as well as governments and government
agencies. The fund, however, will tend to focus on the equity securities of
both large and small companies. The fund may invest in short-term debt
securities and money market instruments for cash management purposes. FMR
may also use various investment techniques to hedge a portion of the fund's
risks, but there is no guarantee that these strategies will work as FMR
intends.
The fund's focus on international investing involves increased or
additional risks compared to funds which invest primarily in domestic
equity securities. International funds have increased economic and
political risks as they are exposed to events and factors in the various
world markets. This is especially true for emerging markets. Also, because
many of the fund's investments are denominated in foreign currencies,
changes in the value of foreign currencies can significantly affect the
fund's share price. FMR may use a variety of techniques to either increase
or decrease the fund's exposure to any currency.
FMR determines where an issuer or its principal business is located by
looking at such factors as its country of organization, the primary trading
market for its securities, and the location of its assets, personnel,
sales, and earnings. When allocating the fund's investments among countries
and regions, FMR considers such factors as the potential for economic
growth, expected levels of inflation, governmental policies, and the
outlook for currency relationships.
SECURITIES AND INVESTMENT PRACTICES
The following pages contain more detailed information about types of
instruments in which a fund may invest, strategies FMR may employ in
pursuit of a fund's investment objective, and a summary of related risks.
Any restrictions listed supplement those discussed earlier in this section.
A complete listing of each fund's limitations and more detailed information
about each fund's investments are contained in the funds' 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
unless it believes that they are consistent with a fund's investment
objective and policies and that doing so will help a fund achieve its goal.
Fund holdings and recent investment strategies are described in each fund's
financial reports, which are sent to shareholders twice a year. For a free
SAI or financial report, contact your insurance company.
EQUITY SECURITIES may include common stocks, preferred stocks, convertible
securities, and warrants. For Asset Manager and Asset Manager: Growth, some
preferred stocks and convertible securities may be included in the bond
class. 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.
RESTRICTIONS: With respect to 75% of its total assets, each fund (excluding
Money Market) may not purchase more than 10% of the outstanding voting
securities of any issuer.
High Income may invest up to 20% of its total assets in common stocks and
other equity securities.
These limitations do not apply to securities of other investment companies.
DEBT SECURITIES. Bonds and other debt instruments are used by issuers to
borrow money from investors. The issuer generally pays the investor a
fixed, variable, or floating rate of interest, and must repay the amount
borrowed at maturity. Other debt securities, such as zero coupon bonds, do
not pay interest, but are sold at a discount from their face values.
Debt securities, loans, and other direct debt have varying levels of
sensitivity to changes in interest rates and varying degrees of quality.
Longer-term bonds and zero coupon bonds are generally more sensitive to
interest rate changes than short-term bonds.
Lower-quality debt securities (sometimes called "junk bonds") are
considered to have speculative characteristics and involve greater risk of
default or price changes due to changes in the issuer's creditworthiness,
or they may already be in default. The market prices of these securities
may fluctuate more than higher-quality securities and may decline
significantly in periods of general economic difficulty.
The table on page provides a summary of ratings assigned to debt
holdings (not including money market instruments) in certain of the funds'
portfolios. These figures are dollar-weighted averages of month-end
portfolio holdings during fiscal 1996, and are presented as a percentage of
total security investments. These percentages are historical and do not
necessarily indicate a fund's current or future debt holdings.
FISCAL 199 6 DEBT HOLDINGS, BY RATING
MOODY'S
INVESTORS SERVICE STANDARD & POOR'S

(as a % of investments) (as a % of investments)
Rating Average Rating Average
INVESTMENT High Asset Asset Mgr: Equity- Growth High Asset Asset Mgr:
Equity- Growth

GRADE Income Manager Growth Balanced Income Opps Overseas Income
Manager Growth Balanced Income Opps Oversea
s
Highest quality Aaa 1.43% 25.46% 12.37% 23.77% 1.28% 15.47% 0.00% AAA 1.43%
25.31% 12.40% 23.33% 1.28% 15.47% 0.00%

High quality Aa 0.00% 0.57% 0.19% 0.52% 0.43% 0.00% 0.22% AA 0.00% 0.34%
0.03% 0.52% 0.43% 0.00% 0.00%

Upper-medium grade A 0.00% 1.87% 0.79% 2.77% 0.63% 0.00% 0.00% A 0.00%
1.71% 0.65% 2.41% 0.21% 0.00% 0.22%

Medium grade Baa 0.00% 2.02% 0.72% 3.28% 1.10% 0.00% 0.00% BBB 0.00% 2.69%
1.13% 4.00% 1.73% 0.00% 0.00%
LOWER QUALITY
Moderately

speculative Ba 4.60% 0.96% 1.01% 0.72% 0.47% 0.00% 0.00% BB 12.03% 1.06%
1.19% 0.59% 0.78% 0.00% 0.05%

Speculative B 49.30% 2.52% 2.97% 1.83% 2.82% 0.00% 0.07% B 47.15% 1.77%
2.57% 1.55% 1.95% 0.00% 0.00%

Highly speculative Caa 9.68% 0.10% 0.17% 0.15% 0.00% 0.00% 0.00% CCC 4.24%
0.18% 0.28% 0.10% 0.02% 0.00% 0.00%

Poor quality Ca CC

Lowest quality, no interest C 0.11% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% C
0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
0.00%

In default, in arrears -- -- -- -- -- -- -- -- D 0.04% 0.00% 0.00% 0.00%
0.00% 0.00% 0.00%

65.12% 33.50% 18.22% 33.04% 6.73% 15.47% 0.29% 64.89% 33.06% 18.25%
32.50% 6.40% 15.47% 0.27%
EACH FUND DOES NOT NECESSARILY RELY ON THE RATINGS OF MOODY'S AND S&P TO
DETERMINE COMPLIANCE WITH ITS DEBT QUALITY POLICY.
REFER TO THE APPENDIX FOR A MORE COMPLETE DISCUSSION OF THESE RATINGS.
SECURITIES NOT RATED BY MOODY'S OR S&P AMOUNTED TO 4.41% FOR HIGH INCOME,
1.23% FOR ASSET MANAGER , 0.70% FOR ASSET
MANAGER: GROWTH, 0.32% FOR BALANCED, 0.35% FOR EQUITY-INCOME, 0.00% FOR
GROWTH OPPORTUNITIES, AND 0.00% FOR
OVERSEAS. THESE PERCENTAGES MAY INCLUDE SECURITIES RATED BY OTHER
NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATIONS, AS
WELL AS UNRATED SECURITIES. FMR HAS DETERMINED THAT UNRATED SECURITIES THAT
ARE LOWER QUALITY ACCOUNT FOR 4.41% FOR HIGH INCOME,
1.16% FOR ASSET MANAGER, 0.69% FOR ASSET MANAGER: GROWTH, 0.32% FOR
BALANCED, 0.35% FOR EQUITY-INCOME, 0.00% FOR GROWTH
OPPORTUNITIES, AND 0.00% FOR OVERSEAS. FOR FOREIGN GOVERNMENT OBLIGATIONS
NOT INDIVIDUALLY RATED BY A NATIONALLY RECOGNIZED
STATISTICAL RATING ORGANIZATION, FMR ASSIGNS A RATING BASED ON THE RATING
OF THE SOVEREIGN CREDIT OF THE ISSUING GOVERNMENT.
RESTRICTIONS: The Investment Grade Bond Portfolio normally invests in
investment-grade securities, but reserves the right to invest up to 5% of
its assets in below investment grade securities. A security is considered
to be investment grade if it is rated investment grade by Moody's Investors
Service, Inc. Standard & Poor's, Duff & Phelps Credit Rating Co., or Fitch
Investors Service, L.P. or is unrated but judged to be of equivalent
quality by FMR. Unless otherwise noted, purchase of a debt security is
consistent with the debt quality policies of Asset Manager, Asset Manager:
Growth, Equity-Income, Contrafund, Growth and Overseas Portfolios if it is
rated at or above the stated level by Moody's or rated in the equivalent
categories by S&P, or is unrated but judged to be of equivalent quality by
FMR. Growth Portfolio and Contrafund Portfolio each currently limits
investment in lower than Baa-quality debt securities to 5% of its assets;
Equity-Income, Asset Manager: Growth, Overseas, Growth & Income, Balanced
and Growth Opportunities Portfolios each currently limits its investment in
lower than Baa-quality debt securities to less than 35% of its assets; and
Asset Manager Portfolio limits its investment in lower than Baa-quality
debt securities to less than 35% of its assets but currently intends to
limit its investment in lower than Baa-quality debt securities, as
determined by FMR, to 20% of its total assets.
MONEY MARKET SECURITIES are high-quality, short-term obligations issued by
the U.S. government, and other entities. These securities may carry fixed,
variable, or floating interest rates.
U.S. GOVERNMENT SECURITIES are high-quality debt instruments 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, U.S. Government
securities such as those issued by the Federal National Mortgage
Association are supported by the instrumentality's right to borrow money
from the U.S. Treasury under certain circumstances. Other U.S. Government
securities such as those issued by the Federal Farm Credit Banks Funding
Corporation are supported only by the credit of the entity that issued
them.
CREDIT AND LIQUIDITY SUPPORT. Issuers may employ various forms of credit
enhancement, including letters of credit, guarantees, puts and other demand
features, and insurance provided by entities such as banks and other
financial institutions. These arrangements expose a fund to the credit risk
of the entity providing the credit or liquidity support. Changes in the
credit quality of the provider could affect the value of the security and a
fund's share price.
EXPOSURE TO FOREIGN MARKETS. Foreign securities, foreign currencies, and
securities issued by U.S. entities with substantial foreign operations may
involve additional risks and considerations. These include risks relating
to political or economic conditions in foreign countries, fluctuations in
foreign currencies, withholding or other taxes, operational risks,
increased regulatory burdens, and the potentially less stringent investor
protection and disclosure standards of foreign markets. Additionally,
governmental issuers of foreign debt securities may be unwilling to repay
principal and interest when due, and may require that the conditions for
payment be renegotiated. All of these factors can make foreign investments,
especially those in developing countries, more volatile than U.S.
investments.
RESTRICTIONS: FMR limits the amount of each of High Income, Equity-Income,
Growth, Investment Grade Bond, Asset Manager and Index 500 Portfolios'
assets that may be invested in foreign securities to 50%. However, pursuant
to certain state insurance regulations, each fund, including Money Market,
Overseas, Asset Manager: Growth and Contrafund Portfolios, may not invest
more than 20% of its assets in any one foreign country. Each fund may have
an additional 15% invested in securities of issuers located in any one (but
only one) of the following countries: Australia, Canada, France, Japan, the
United Kingdom or Germany.
EXPOSURE TO EMERGING MARKETS. Investing in emerging markets involves risks
in addition to those generally associated with foreign investing. The
extent of economic development, political instability, and market depth
varies widely in comparison to more developed markets. Emerging market
economies may be subject to greater social, economic, and political
uncertainties or may be based on only a few industries. All of these
factors can make emerging market securities more volatile and less liquid
than domestic securities.
AMERICAN DEPOSITARY RECEIPTS AND EUROPEAN DEPOSITARY RECEIPTS (ADRS AND
EDRS) 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 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.
ASSET-BACKED SECURITIES include interests in pools of the following:
purchase contracts, financing leases, or sales agreements entered into by
municipalities; lower-rated debt securities; or consumer loans. The value
of these securities may be significantly affected by changes in interest
rates, the market's perception of issuers, and the creditworthiness of the
parties involved. Certain asset-backed securities rely on continued
payments by a municipality, and may also be subject to prepayment risk.
MORTGAGE SECURITIES are interests in pools of commercial or residential
mortgages, and may include complex instruments such as collateralized
mortgage obligations and stripped mortgage-backed securities. Mortgage
securities may be issued by agencies or instrumentalities of the U.S.
government or by private entities.
The price of a mortgage security may be significantly affected by changes
in interest rates. Some mortgage securities may have a structure that makes
their reaction to interest rates and other factors difficult to predict,
making their price highly volatile. Also, mortgage securities, especially
stripped mortgage-backed securities, are subject to prepayment risk.
Securities subject to prepayment risk generally offer less potential for
gains during a declining interest rate environment, and similar or greater
potential for loss in a rising interest rate environment.
VARIABLE AND FLOATING RATE SECURITIES have interest rates that are
periodically adjusted either at specific intervals or whenever a benchmark
rate changes. These interest rate adjustments are designed to help
stabilize the security's price.
STRIPPED SECURITIES are the separate income or principal components of a
debt security. Their risks are similar to those of other debt securities,
although they may be more volatile, and the value of certain types of
stripped securities may move in the same direction as interest rates.
REPURCHASE AGREEMENTS. In a repurchase agreement, a 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.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a fund
temporarily transfers possession of a portfolio instrument to another party
in return for cash. This could increase the risk of fluctuation in the
fund's yield or in the market value of its assets.
PUT FEATURES entitle the holder to put (sell back) a security to the issuer
or another party. In exchange for this benefit, a fund may accept a lower
interest rate. The credit quality of the investment may be affected by the
creditworthiness of the put provider. Demand features and standby
commitments are types of put features.
REAL ESTATE-RELATED INSTRUMENTS include real estate investment trusts,
commercial and residential mortgage-backed securities, and real estate
financings. Real estate-related instruments are sensitive to factors such
as changes in real estate values and property taxes, interest rates, cash
flow of underlying real estate assets, overbuilding, 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 the environment.
ADJUSTING INVESTMENT EXPOSURE. A fund can use various techniques to
increase or decrease its exposure to changing security prices, interest
rates, currency exchange rates, commodity prices, 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 a fund's portfolio of investments and for Index 500, in its effort to
achieve the fund's objective of tracking the S&P 500. If FMR judges market
conditions incorrectly or employs a strategy that does not correlate well
with a 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 a 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 a fund, or there may be a requirement
that the fund supply additional cash to a borrower on demand.
ILLIQUID AND RESTRICTED SECURITIES. Some investments may be determined by
FMR, under the supervision of the Board of Trustees, to be illiquid, which
means that they may be difficult to sell promptly at an acceptable price.
The sale of some illiquid securities and some other securities may be
subject to legal restrictions. Difficulty in selling securities may result
in a loss or may be costly to a fund.
RESTRICTIONS. Money Market, Investment Grade Bond, Asset Manager, Asset
Manager: Growth, Balanced, Equity-Income, Index 500, Growth & Income,
Growth Opportunities, Contrafund, and Growth Portfolios each may not
purchase a security if, as a result, more than 10% of its assets would be
invested in illiquid securities. High Income and Overseas Portfolios each
may not purchase a security if, as a result, more than 15% of its assets
would be invested in illiquid securities.
WARRANTS are instruments which entitle the holder to buy underlying equity
securities at a specific price for a specific period of time. A warrant
tends to be more volatile than its underlying securities and ceases to have
value if it is not exercised prior to its expiration date. In addition,
changes in the value of a warrant do not necessarily correspond to changes
in the value of its underlying securities.
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.
FINANCIAL SERVICES INDUSTRY. Companies in the financial services industry
are subject to various risks related to that industry, such as government
regulation, changes in interest rates, and exposure on loans, including
loans to foreign borrowers. If a fund invests substantially in this
industry, its performance may be affected by conditions affecting the
industry.
RESTRICTIONS. Money Market may invest more than 25% of its total assets in
the financial services industry.
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.
RESTRICTIONS: Money Market may not invest more than 5% of its total assets
in any one issuer, except that the fund may invest up to 10% of its total
assets in the highest quality securities of a single issuer for up to three
business days. These limitations do not apply to U.S. government
securities.
With respect to 75% of its total assets, each of Investment Grade Bond,
High Income, Asset Manager, Asset Manager: Growth, Balanced, Equity-Income,
Index 500, Growth & Income, Growth Opportunities, Contrafund, Growth, and
Overseas, Portfolios may not purchase a security if, as a result, more than
5% would be invested in the securities of any issuer. Each fund (except
Money Market) also may not invest more than 25% of its total assets in any
one industry. These limitations do not apply to U.S. government securities.
BORROWING. Each fund may borrow from banks or from other funds advised by
FMR, or through reverse repurchase agreements. If a fund borrows money, its
share price may be subject to greater fluctuation until the borrowing is
paid off. If a fund makes additional investments while borrowings are
outstanding, this may be considered a form of leverage.
RESTRICTIONS: Each fund, other than Money Market, may borrow only for
temporary or emergency purposes, but not in an amount exceeding 25% of its
assets. Money Market may borrow only for temporary or emergency purposes,
or engage in reverse repurchase agreements, but not in an amount exceeding
25% of its assets for temporary or emergency purposes and 10% of its assets
for general purposes (reverse repurchase agreements).
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 a
fund's securities. A fund may also lend money to other funds advised by
FMR.
RESTRICTIONS: Loans, in the aggregate, may not exceed 331/3% of a fund's
total assets.
OTHER INSTRUMENTS may include depositary receipts, rights, and securities
of closed-end investment companies.
CASH MANAGEMENT. The funds may invest in money market securities, in
repurchase agreements, and in a money market fund available only to funds
and accounts managed by FMR or its affiliates, whose goal is to seek a high
level of current income while maintaining a stable $1.00 share price. A
major change in interest rates or a default on the money market fund's
investment could cause its share price to change.
RESTRICTIONS: Money Market portfolio does not currently intend to invest in
a money market fund.
INTERNAL REVENUE SERVICE (IRS) LIMITATIONS. In addition to the above, each
fund also follows certain limitations imposed by the IRS on separate
accounts of insurance companies relating to the tax-deferred status of
variable contracts. More specific information may be contained in your
insurance company's separate account prospectus.
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 paragraphs restate all those that are fundamental. All policies
stated throughout this prospectus, other than those identified in the
following paragraphs, can be changed without shareholder approval.
MONEY MARKET PORTFOLIO seeks as high a level of current income as is
consistent with preservation of capital and liquidity by investing in money
market instruments.
INVESTMENT GRADE BOND PORTFOLIO seeks as high a level of current income as
is consistent with the preservation of capital.
HIGH INCOME PORTFOLIO seeks a high level of current income by investing
primarily in high yielding, fixed-income securities, while also considering
growth of capital.
ASSET MANAGER PORTFOLIO seeks to obtain high total return with reduced risk
over the long-term by allocating its assets among stocks, bonds, and
short-term instruments.
ASSET MANAGER: GROWTH PORTFOLIO seeks to maximize total return by
allocating its assets among stocks, bonds, short-term instruments, and
other investments.
BALANCED PORTFOLIO seeks high total return through a combination of current
income and capital appreciation.
EQUITY-INCOME PORTFOLIO seeks reasonable income by investing primarily in
income-producing equity securities. In choosing these securities, the fund
will also consider the potential for capital appreciation. The fund's goal
is to achieve a yield which exceeds the composite yield on the securities
comprising the Standard & Poor's Composite Index of 500 Stocks (S&P 500).
INDEX 500 PORTFOLIO seeks investment results that correspond to the total
return of common stocks publicly traded in the United States, as
represented by the S&P 500.
GROWTH & INCOME PORTFOLIO seeks high total return through a combination of
current income and capital appreciation.
GROWTH OPPORTUNITIES PORTFOLIO seeks to provide capital growth through
investing in common stocks and securities convertible into common stocks.
CONTRAFUND PORTFOLIO seeks long-term capital appreciation.
GROWTH PORTFOLIO seeks to achieve capital appreciation.
OVERSEAS PORTFOLIO seeks long-term growth of capital primarily through
investments in foreign securities.
EACH FUND (excluding Money Market), with respect to 75% of total assets,
may not invest more than 5% of its total assets in any one issuer and may
not own more than 10% of the outstanding voting securities of a single
issuer. Each fund may not invest more than 25% of its total assets in any
one industry, except Money Market will invest more than 25% of its total
assets in the financial services industry.
Loans, in the aggregate, may not exceed 33% of a fund's total assets.
BREAKDOWN OF EXPENSES
Like all mutual funds, the funds pay fees related to their daily
operations. Expenses paid out of a fund's assets are reflected in its share
price.
Each fund pays a MANAGEMENT FEE to FMR for managing its investments and
business affairs. FMR in turn, on behalf of Money Market, High Income,
Asset Manager, Asset Manager: Growth, Balanced, Growth Opportunities,
Contrafund and Overseas Portfolios, pays fees to affiliates who provide
assistance with these services. Each fund also pays OTHER EXPENSES, which
are explained on pag e .
FMR may, from time to time, agree to reimburse a fund for management fees
and other expenses above a specified limit. FMR retains the ability to be
repaid by a 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 a fund's expenses and boost its
performance.
MANAGEMENT FEE
EACH FUND'S MANAGEMENT FEE is calculated and paid to FMR every month. The
fee for each fund (excluding Money Market and Index 500 Portfolios) is
calculated by adding a GROUP FEE rate to an INDIVIDUAL FUND FEE rate, and
multiplying the result by the fund's average net assets.
MONEY MARKET'S management fee is calculated by multiplying the sum of two
components by the fund's average net assets and adding an income-based fee.
One component, the group fee rate, is discussed below. The other component,
the individual fund fee rate, is 0.03%. The income-based fee is 6% of the
fund's gross income in excess of a 5% yield and cannot rise above 0.24% of
the fund's average net assets.
INDEX 500'S management fee is calculated and paid to FMR every month. The
fund pays the fee at the annual rate of 0.28% of its average net assets.
THE GROUP FEE RATE is based on the average net assets of all the mutual
funds advised by FMR. This rate cannot rise above 0.5200% for
Equity-Income, Growth, Overseas, Asset Manager, Asset Manager: Growth,
Contrafund, Growth Opportunities, Growth & Income and Balanced Portfolios
and 0.3700% for Money Market, High Income, and Investment Grade Bond
Portfolios, and it drops as total assets under management increase.
For December 31, 1996, the group fee rate was 0.3021% for Asset Manager,
Asset Manager: Growth, Balanced, Equity-Income, Growth & Income, Growth
Opportunities, Contrafund, Growth, and Overseas Portfolio and 0.1425% for
Money Market, Investment Grade Bond, and High Income Portfolios.
The funds' individual fund fee rates and total management fees for fiscal
year 1996 are outlined in the following chart:
Fund Individ Manage
ual ment
Fund Fee
Fee
Rate

Money Market Portfolio 0.03 0.21
% %

Investment Grade Bond Portfolio 0.30 0.45
% %

High Income Portfolio 0.45 0.59
% %

Asset Manager Portfolio 0. 25 0.64
% A %

Asset Manager: Growth Portfolio 0. 3 0 0.65
% B %

Balanced Portfolio 0.15 0.48
%C %

Equity-Income Portfolio 0.20 0.51
% %

Growth & Income Portfolio 0.20 0.50
% % D

Growth Opportunities Portfolio 0.30 0.61
% %

Contrafund Portfolio 0.30 0.61
% %

Growth Portfolio 0.30 0.61
% %

Overseas Portfolio 0.45 0.76
% %

A EFFECTIVE AUGUST 1, 1996, FMR VOLUNTARILY AGREED TO REDUCE THE FUND'S
INDIVIDUAL FUND FEE RATE FROM 0.40% TO 0.25%. IF THIS REDUCTION WERE NOT IN
EFFECT, THE MANAGEMENT FEE WOULD HAVE BEEN 0.70%
B EFFECTIVE AUGUST 1, 1996, FMR VOLUNTARILY AGREED TO REDUCE THE FUND'S
INDIVIDUAL FUND FEE RATE FROM 0.40% TO 0.30%. IF THIS REDUCTION WERE NOT IN
EFFECT, THE MANAGEMENT FEE WOULD HAVE BEEN 0.69%
C EFFECTIVE AUGUST 1, 1996, FMR VOLUNTARILY AGREED TO REDUCE THE FUND'S
INDIVIDUAL FUND FEE RATE FROM 0.20% TO 0.15%. IF THIS REDUCTION WERE NOT IN
EFFECT, THE MANAGEMENT FEE WOULD HAVE BEEN 0.50%
D ESTIMATED.
SUB-ADVISORY AGREEMENTS. On behalf of High Income, Asset Manager, Asset
Manager: Growth, Contrafund, Growth & Income, Balanced and Growth
Opportunities Portfolios, FMR has sub-advisory agreements with two
affiliates, FMR U.K. and FMR Far East. On behalf of Overseas Portfolio, FMR
has sub-advisory agreements with three affiliates: FMR U.K., FMR Far East,
and FIIA. FIIA in turn has a sub-advisory agreement with FIIAL U.K. FMR
U.K. focuses on issuers based in Europe. FMR Far East focuses on issuers
based in Asia and the Pacific Basin. FIIA focuses on issuers based in Hong
Kong, Australia, New Zealand, and Southeast Asia (other than Japan). FIIAL
U.K. focuses on issuers based in the United Kingdom and Europe.
These sub-advisers are compensated for providing FMR with investment
research and advice on issuers based outside the United States. FMR pays
FMR U.K. and FMR Far East fees equal to 110% and 105%, respectively, of the
costs of providing these services. FMR pays FIIA a fee equal to 30%
of its management fee rate associated with investments for which the
sub-adviser provided investment advice. FIIA pays FIIAL U.K. a fee equal to
110% of the cost of providing these services.
On behalf of High Income, Asset Manager: Growth, Balanced, Contrafund and
Overseas Portfolios, the sub-advisers may also provide investment
management services. In return, FMR pays FMR U.K., FMR Far East, and FIIA a
fee equal to 50% of its management fee rate with respect to the
fund's investments that the sub-adviser manages on a discretionary basis.
FIIA pays FIIAL U.K. a fee equal to 110% of the cost of providing these
services.
The following chart details the fees paid by FMR to FMR U.K. and FMR Far
East, on behalf of the funds (as a percentage of a fund's average net
assets) for fiscal 1996:
Fund Fee to Fee to
FMR FMR
U.K. Far
East

Asset Manager Portfolio .009 .009
% %

Asset Manager: Growth Portfolio .007 .007
% %

Balanced Portfolio .006 .006
% %

Growth Opportunities Portfolio .006 .005
% %

Contrafund Portfolio .005 .00 5
% %

Overseas Portfolio .060 .058
% %

FMR Texas is the Money Market Portfolio's sub-adviser and has primary
responsibility for managing investments. FMR is responsible for providing
other management services. FMR pays FMR Texas 50% of its management fee
(before any expense reimbursement) for FMR Texas' service. FMR paid FMR
Texas a fee equal to .10% of Money Market's average net assets for
the fiscal year ended December 31, 1996.
OTHER EXPENSES
While the management fee is a significant component of each fund's annual
operating costs, the funds have other expenses as well.
FIIOC, 82 Devonshire Street, Boston, Massachusetts, performs transfer
agency, dividend disbursing and shareholder servicing functions for each
fund. Fidelity Service Co. (FSC), 82 Devonshire Street, Boston,
Massachusetts, calculates the net asset value (NAV) and dividends, and
maintains the general accounting records for each fund's and administers
the securities lending program for each fund (except for Money Market).
The following chart details the fees paid to FIIOC and FSC and each fund's
total expenses (as a percentage of the fund's average net assets) for
fiscal 1996:
Fund Fee Fee Total
to to Expen
FIIO FS ses
C C

Money Market Portfolio .07 .01 .30
% % %

Investment Grade Bond
.06 .04 .58
Portfolio % % %

High Income Portfolio .05 .05 .71
% % %

Asset Manager Portfolio .06 .02 .74
% % %

Asset Manager: Growth
.07 .06 .87
Portfolio % % %

Balanced Portfolio .06 .08 .72
% % %

Equity-Income Portfolio .06 .01 .58
% % %

Index 500 Portfolio .08 .06 .28
% % %

Growth Opportunities Portfolio .07 .06 .77
% % %

Contrafund Portfolio .07 .04 .74
% % %

Growth Portfolio .06 .02 .69
% % %

Overseas Portfolio .06 .05 .93
% % %

The figures are based on historical expenses, and are calculated as a
percentage of the funds' average net assets. A portion of the brokerage
commissions that certain of the funds pay is used to reduce fund expenses.
In addition, certain funds have entered into arrangements with their
custodian and transfer agent whereby interest earned on, uninvested cash
balances is used to reduce custodian and transfer agent expenses. Including
these reductions, the total operating expenses presented in the chart would
have been:
Fund Total
Expenses

Asset Manager Portfolio 0.73%

Asset Manager: Growth Portfolio 0.85%

Balanced Portfolio 0.71%

Equity-Income Portfolio 0.56%

Growth Opportunities Portfolio 0.76%

Contrafund Portfolio 0.71%

Growth Portfolio 0.67%

Overseas Portfolio 0.92%

FMR has voluntarily agreed to temporarily limit the fund's operating
expenses (as a percentage of each fund's average net assets) to 0.28% for
Index 500, 0.80% for Investment Grade Bond, 1.00% for Asset Manager:
Growth, High Income, Contrafund, and Growth & Income, 1.25% for Asset
Manager, and 1.50% for Equity-Income, Growth, Overseas, Balanced and Growth
Opportunities, respectively. If these agreements were not in effect, total
operating expenses would have been .43% for Index 500. Expenses eligible
for reimbursement do not include interest, taxes, brokerage commissions or
extraordinary expenses.
Each fund also pays other expenses, such as legal, audit, and custodian
fees; proxy solicitation costs; and the compensation of trustees who are
not affiliated with Fidelity.
Each fund's (except Money Market's) portfolio turnover rate for fiscal 1996
is outlined in the following chart. These rates vary from year to year.
High turnover rates increase transaction costs. FMR considers these effects
when evaluating the anticipated benefits of short-term investing.
Fund Portfolio
Turnover
Rate

Investment Grade Bond Portfolio 81%

High Income Portfolio 123%

Asset Manager Portfolio 168%

Asset Manager: Growth Portfolio 120%

Balanced Portfolio 163%

Equity-Income Portfolio 186%

Index 500 Portfolio 14%

Growth & Income <200
%A

Growth Opportunities Portfolio 28%

Contrafund Portfolio 178%

Growth Portfolio 81%

Overseas Portfolio 92%

A ESTIMATED 1997 TURNOVER RATE.
Each fund has adopted a Distribution and Service Plan. Each plan recognizes
that FMR may use its resources, including management fees, to pay expenses
associated with the sale of fund shares. This may include payments to third
parties, such as banks or broker-dealers, that provide shareholder support
services or engage in the sale of a fund's shares.
PERFORMANCE
Each fund's total return and yield may be quoted in advertising in
accordance with current law and interpretations thereof. Performance is
based on historical results and is not intended to indicate future
performance. For additional performance information, contact your insurance
company for a free annual report.
EXPLANATION OF TERMS
TOTAL RETURN is the change in value of an investment in a fund over a given
period, assuming reinvestment of any dividends and capital gains. A
CUMULATIVE TOTAL RETURN reflects actual performance over a stated period of
time. An AVERAGE ANNUAL TOTAL RETURN is a hypothetical rate of return that,
if achieved annually, would have produced the same cumulative total return
if performance had been constant over the entire period. Average annual
total returns smooth out variations in performance; they are not the same
as actual year-by-year results.
YIELD refers to the income generated by an investment in a fund over a
given period of time, expressed as an annual percentage rate. Yields are
calculated according to a standard that is required for all stock and bond
funds. Because this differs from other accounting methods, the quoted yield
may not equal the income actually paid to policyholders. This difference
may be significant for funds whose investments are denominated in foreign
securities. When a yield assumes that income earned is reinvested, it is
called an EFFECTIVE YIELD.
Seven-day yield illustrates the income earned by an investment in a money
market fund over a recent seven-day period. Since money market funds
maintain a stable $1.00 share price, current seven-day yields are the most
common illustration of money market fund performance.
In calculating yield, a fund may from time to time use a security's coupon
rate instead of its yield to maturity in order to reflect the risk premium
on that security. This practice will have the effect of reducing the fund's
yield.
A fund may quote its adjusted NAV, including all distributions paid. This
value may be averaged over specified periods and may be used to calculate a
fund's moving average.
The funds' recent strategies, performance, and holdings are detailed twice
a year in financial reports, which are sent to all shareholders.
TOTAL RETURNS AND YIELDS QUOTED FOR A FUND INCLUDE THE FUND'S EXPENSES, BUT
MAY NOT INCLUDE CHARGES AND EXPENSES ATTRIBUTABLE TO ANY PARTICULAR
INSURANCE PRODUCT. BECAUSE SHARES OF THE FUNDS MAY BE PURCHASED ONLY
THROUGH VARIABLE ANNUITY AND VARIABLE LIFE INSURANCE CONTRACTS, YOU SHOULD
CAREFULLY REVIEW THE PROSPECTUS OF THE INSURANCE PRODUCT YOU HAVE CHOSEN
FOR INFORMATION ON RELEVANT CHARGES AND EXPENSES. Excluding these charges
from quotations of a fund's performance has the effect of increasing the
performance quoted. You should bear in mind the effect of these charges
when comparing a fund's performance to that of other mutual funds.
ACCOUNT POLICIES

DISTRIBUTIONS AND TAXES
For a discussion of the tax status of your variable insurance contract,
refer to the prospectus of your insurance company's separate account. It is
suggested you keep all statements you receive to assist in your personal
recordkeeping.
It is expected that shares of the funds will be held under the terms of
variable annuity and variable life insurance contracts. Under current tax
law, dividends or capital gain distributions from any fund are not
currently taxable when left to accumulate within a variable annuity or
variable life insurance contract. Depending on the variable contract,
withdrawals from the contracts may be subject to ordinary income tax and,
in addition, to a 10% penalty tax on withdrawals before age 59.
Each fund is treated as a separate entity for federal income tax purposes.
Each fund intends to pay out all of its net investment income and net
realized capital gains, if any, for each year. Dividends from Money Market
Portfolio are declared daily and paid monthly. High Income, Equity-Income,
Investment Grade Bond, Growth, Overseas, Asset Manager, Asset Manager:
Growth, Index 500, and Contrafund, Growth & Income, Balanced and Growth
Opportunities Portfolios will distribute any dividends at least annually.
Normally, net realized capital gains, if any, are distributed each year for
a fund. Such income and capital gain distributions from a fund are
automatically reinvested in additional shares of the fund. Each fund
(except Money Market) makes dividend and capital gain distributions on a
per-share basis. After each distribution from a fund, the fund's share
price drops by the amount of the distribution. Because dividends and
capital gain distributions are reinvested, the total value of an account
will not be affected because, although the shares will have a lower price,
there will be correspondingly more of them.
TRANSACTION DETAILS
THE FUNDS ARE OPEN FOR BUSINESS each day the New York Stock Exchange (NYSE)
is open. Each fund's NAV is calculated as of the close of business of the
NYSE, normally 4 p.m. Eastern time.
EACH FUND'S NAV is the value of a single share. 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.
Money Market's portfolio securities and each of the other fund's
investments with remaining maturities of 60 days or less are valued on the
basis of amortized cost. This method minimizes the effect of changes in a
security's market value and helps Money Market Portfolio maintain a stable
$1.00 share price.
Other than Money Market, each fund's assets are valued primarily on the
basis of market quotations. Foreign securities are valued on the basis of
quotations from the primary market in which they are traded, and are
translated from the local currency into U.S. dollars using current exchange
rates. Short-term securities with remaining maturities of sixty days or
less for which quotations are not readily available are valued on the basis
of amortized cost. This method minimizes the effect of changes in a
security's market value. In addition, if quotations are not readily
available or if the values have been materially affected by events
occurring after the closing of a foreign market, assets may be valued by a
method that the Board of Trustees believes accurately reflects fair value.
EACH FUND'S OFFERING PRICE (price to buy one share) and REDEMPTION PRICE
(price to sell one share) are its NAV.
EACH FUND RESERVES THE RIGHT TO SUSPEND THE OFFERING OF SHARES for a period
of time. Each fund also reserves the right to reject any specific purchase
order. Purchase orders may be refused if, in FMR's opinion, they would
disrupt management of a fund.
INVESTMENTS AND REDEMPTIONS. Investments may be made only by separate
accounts established and maintained by insurance companies for the purpose
of funding variable annuity and variable life insurance contracts. Please
refer to the prospectus of your insurance company's separate account for
information on how to invest in and redeem from a fund.
Each participating insurance company receives orders from its variable
contract owners to purchase or redeem shares of the funds each business
day. That night, all orders received by that insurance company on that
business day are aggregated, and the insurance company places a net
purchase or redemption order for shares of one or more funds the morning of
the next business day. These orders are generally executed at the NAV that
was computed at the close of the previous business day in order to provide
a match between the variable contract owners' orders to the insurance
companies and the insurance companies' orders to a fund. In some cases, an
insurance company's order for fund shares may be executed at the NAV next
computed after the order is actually transmitted to a fund.
Redemption proceeds will normally be wired to the insurance company on the
next business day after receipt of the redemption instructions by a fund,
but in no event later than 7 days following receipt of instructions. Each
fund may suspend redemptions or postpone payment dates on days when the
NYSE is closed (other than weekends or holidays), when trading on the NYSE
is restricted, or as permitted by the SEC.
APPENDIX

DESCRIPTION OF MOODY'S INVESTORS SERVICE COMMERCIAL PAPER RATINGS:
Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following
characteristics:
Leading market positions in well established industries.
High rates of return on funds employed.
Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
Broad margins in earning coverage of fixed financial charges and with high
internal cash generation.
Well established access to a range of financial markets and assured sources
of alternate liquidity.
Issuers rated PRIME-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earning trends and coverage ratios, while sound, will be
more subject to variation. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated PRIME-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes
in the level of debt protection measurements and the requirement for
relatively high financial leverage. Adequate alternate liquidity is
maintained.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS:
A - Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated with
the numbers 1, 2, and 3 to indicate the relative degree of safety.
A-1 - This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics will be denoted with a plus (+)
sign designation.
A-2 - Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.
A-3 - This designation indicates that the capacity for timely payment is
satisfactory. These issues are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying the
higher designations.
B - Issues rated B are regarded as having only adequate capacity for timely
payment. However, such capacity may be damaged by changing or short-term
adversities.
C - This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D - Debt rated D is in payment default. The D rating category is used when
interest or principal payments are not made on the date due even if the
applicable period has not expired, unless S&P believes that such payments
will be made during such grace period.
DESCRIPTION OF MOODY'S INVESTORS SERVICE CORPORATE BOND RATINGS:
AAA Bonds which are 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 edged." 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 which are 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 the Aaa securities.
A - Bonds which are 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 which are 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 which are 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 which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
CAA - Bonds which are 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 which are 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 which are rated C are the lowest-rated class of bonds and issues
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 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 higher-rated 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 than debt in higher rated
categories.
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.
The BB rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied BBB- rating.
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 or 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. The
CCC rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied B or B- rating.
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 an 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 B may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
(INDEX 500 PORTFOLIO) S&P does not guarantee the accuracy and/or the
completeness of the S&P 500 Index or any data included therein and S&P
shall have no liability for any errors, omissions, or interruptions
therein. S&P makes no warranty, express or implied, as to results to be
obtained by licensee, owners of the product, or any other person or entity
from the use of the S&P 500 Index or any data included therein. S&P makes
no express or implied warranties, and expressly disclaims all warranties or
merchantability or fitness for a particular purpose or use with respect to
the S&P 500 Index or any data included therein. Without limiting any of the
foregoing, in no event shall S&P have any liability for any special,
punitive, indirect, or consequential damages (including lost profits), even
if notified of the possibility of such damages.
Index 500 Portfolio is not sponsored, endorsed, sold or promoted by
Standard & Poor's ("S&P"). S&P makes no representation or warranty, express
or implied, to participants of the fund or any member of the public
regarding the advisability of investing in securities generally or in the
fund particularly or the ability of the S&P 500 Index to track general
stock market performance. S&P's only relationship to the Licensee is the
licensing of certain trademarks and trade names of S&P and of the S&P 500
Index which is determined, composed and calculated by S&P without regard to
the Licensee or the fund. S&P has no obligation to take the needs of the
Licensee or the participants of the fund into consideration in determining,
composing or calculating the S&P 500 Index. S&P is not responsible for and
has not participated in the determination of the timing of, prices at, or
quantities of the fund to be issued or in the determination or calculation
of the equation by which the fund is to be converted into cash. S&P has no
obligation or liability in connection with the administration, marketing or
trading of the fund.
"Standard & Poor's(registered trademark)," "S&P(registered trademark),"
"S&P 500(registered trademark)," "Standard & Poor's 500," and "500" are
trademarks of McGraw-Hill, Inc. and have been licensed for use by Fidelity
Distributors Corporation.

This prospectus is printed on recycled paper using soy-based inks.

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION

RETIREMENT INCOME BUILDER
VARIABLE ANNUITY
Issued through
PFL RETIREMENT BUILDER VARIABLE
ANNUITY ACCOUNT

Offered by
PFL LIFE INSURANCE COMPANY

4333 Edgewood Road, N.E.
Cedar Rapids, Iowa 52499-0001

This Statement of Additional Information expands upon subjects discussed in
the current Prospectus for the Retirement Income Builder Variable Annuity (the
"Policy") offered by PFL Life Insurance Company. You may obtain a copy of the
Prospectus dated May 1, 1997, by calling 1-800-525-6205, or by writing to the
Administrative and Service Office, Financial Markets Division-Variable Annuity
Dept., 4333 Edgewood Road, N.E., Cedar Rapids, Iowa 52499-0001. The Prospectus
sets forth information that a prospective investor should know before investing
in a Policy. Terms used in the current Prospectus for the Policy are
incorporated in this Statement of Additional Information.

THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND SHOULD BE
READ ONLY IN CONJUNCTION WITH THE PROSPECTUS FOR THE POLICY AND THE PFL
RETIREMENT BUILDER VARIABLE ANNUITY ACCOUNT.

Dated: May 1, 1997
<PAGE>

TABLE OF CONTENTS
<TABLE>
<CAPTION>

Page
<S> <C>
The Policy-- General Provisions.......................................... 3
Owner.................................................................. 3
Entire Policy.......................................................... 3
Delay of Payment and Transfers......................................... 3
Misstatement of Age or Sex............................................. 4
Reallocation of Policy Values After the
Annuity Commencement Date............................................. 4
Assignment............................................................. 4
Evidence of Survival................................................... 4
Non Participating...................................................... 5
Federal Tax Matters (50)................................................. 5
Tax Status of the Policy............................................... 5
Taxation of PFL........................................................ 6
Investment Experience.................................................... 6
State Regulation of PFL.................................................. 10
Administration........................................................... 10
Records and Reports...................................................... 10
Distribution of the Policies (36)........................................ 10
Custody of Assets........................................................ 11
Historical Performance Data (19)........................................ 11
Money Market Yields.................................................... 11
Other Subaccount Yields................................................ 12
Total Returns.......................................................... 13
Other Performance Data................................................. 13
Legal Matters............................................................ 14
Independent Auditors..................................................... 14
Other Information........................................................ 14
Financial Statements (19)................................................ 14
</TABLE>

(Numbers in parenthesis indicate corresponding pages of the Prospectus).

2
<PAGE>

In order to supplement the description in the Prospectus, the following
provides additional information about PFL and the Policy which may be of
interest to a prospective purchaser.

THE POLICY-GENERAL PROVISIONS
Owner

The Policy shall belong to the Owner upon issuance of the Policy after
completion of an application and delivery of the initial Premium Payment. While
the Annuitant is living, the Owner may: (1) assign the Policy; (2) surrender the
Policy; (3) amend or modify the Policy with PFL's consent; (4) receive annuity
payments or name a Payee to receive the payments; and (5) exercise, receive and
enjoy every other right and benefit contained in the Policy. The exercise of
these rights may be subject to the consent of any assignee or irrevocable
Beneficiary; and of the Owner's spouse in a community or marital property state.

A Successor Owner can be named in the Policy application or in a Written
Notice. The Successor Owner will become the new Owner upon the Owner's death,
if the Owner predeceases the Annuitant. If no Successor Owner survives the
Owner and the Owner predeceases the Annuitant, the Owner's estate will become
the Owner.

The Owner may change the ownership of the Policy in a Written Notice. When
this change takes effect, all rights of ownership in the Policy will pass to the
new Owner. A change of ownership may have tax consequences.

When there is a change of Owner or Successor Owner, the change will take
effect as of the date the Owner signs the Written Notice, subject to any payment
PFL has made or action PFL has taken before recording the change. Changing the
Owner or naming a new Successor Owner cancels any prior choice of Successor
Owner, but does not change the designation of the Beneficiary or the Annuitant.

If ownership is transferred (except to the Owner's spouse) because the
Owner dies before the Annuitant, the Adjusted Policy Value generally must be
distributed to the Successor Owner within five years of the Owner's death, or if
the first payment begins within one year of the Owner's death, payments must be
made for a period certain which does not exceed that Successor Owner's life
expectancy.

Entire Policy

The Policy and any endorsements thereon and the Policy application constitute
the entire contract between PFL and the Owner. All statements in the
application are representations and not warranties. No statement will cause the
Policy to be void or to be used in defense of a claim unless contained in the
application.

Delay of Payment and Transfers

Payment of any amount due from the Mutual Fund Account in respect of a
surrender, the Death Benefit or the death of the Owner of a Nonqualified Policy
generally will occur within seven business days from the date the Written Notice
(and any other required documentation or information) is received, except that
PFL may be permitted to defer such payment from the Mutual Fund Account if: (1)
the New York Stock Exchange is closed for other than usual weekends or holidays
or trading on the Exchange is otherwise restricted; or (2) an emergency exists
as defined by the SEC or the SEC requires that trading be restricted; or (3) the
SEC permits a delay for the protection of Owners. In addition, transfers of
amounts from the Subaccounts may be deferred under these circumstances.

3
<PAGE>

Certain delays and restrictions apply to transfers of amounts out of the
---------
Fixed Account. See p. 33 of the Policy Prospectus.

Misstatement of Age or Sex

If the age or sex of the Annuitant has been misstated, PFL will change the
annuity benefit payable to that which the Premium Payments would have purchased
for the correct age or sex. The dollar amount of any underpayment made by PFL
shall be paid in full with the next payment due such person or the Beneficiary.
The dollar amount of any overpayment made by PFL due to any misstatement shall
be deducted from payments subsequently accruing to such person or Beneficiary.
Any underpayment or overpayment will include interest at 5% per year, from the
date of the wrong payment to the date of the adjustment. The age of the
Annuitant may be established at any time by the submission of proof satisfactory
to PFL.

Reallocation of Policy Values After the Annuity Commencement Date

After the Annuity Commencement Date, the Owner may reallocate the value of
a designated number of Annuity Units of a Subaccount of the Mutual Fund Account
then credited to a Policy into an equal value of Annuity Units of one or more
other Subaccounts of the Mutual Fund Account, or the Fixed Account. The
reallocation shall be based on the relative value of the Annuity Units of the
Account(s) or Subaccount(s) at the end of the Business Day on the next payment
date. The minimum amount which may be reallocated is the lesser of (1) $10 of
monthly income or (2) the entire monthly income of the Annuity Units in the
Account or Subaccount from which the transfer is being made. If the monthly
income of the Annuity Units remaining in an Account or Subaccount after a
reallocation is less than $10, PFL reserves the right to include the value of
those Annuity Units as part of the transfer. The request must be in writing to
PFL's Administrative and Service Office. There is no charge assessed in
connection with such reallocation. PFL reserves the right to limit the number
of times a reallocation of Policy Value may be made in any given Policy Year.

After the Annuity Commencement Date, no transfers may be made from the
Fixed Account to the Mutual Fund Account.

Assignment

During the lifetime of the Annuitant the Owner may assign any rights or
benefits provided by a Nonqualified Policy. An assignment will not be binding
on PFL until a copy has been filed at its Administrative and Service Office.
The rights and benefits of the Owner and Beneficiary are subject to the rights
of the assignee. PFL assumes no responsibility for the validity or effect of
any assignment. Any claim made under an assignment shall be subject to proof of
interest and the extent of the assignment. An assignment may have tax
consequences.

Unless the Owner so directs by filing Written Notice with PFL, no
Beneficiary may assign any payments under the Policy before they are due. To
the extent permitted by law, no payments will be subject to the claims of any
Beneficiary's creditors.

Ownership under Qualified Policies is restricted to comply with the
Internal Revenue Code.

Evidence of Survival

PFL reserves the right to require satisfactory evidence that a person is
alive if a payment is based on that person being alive. No payment will be made
until PFL receives such evidence.

4
<PAGE>

Non-Participating

The Policy will not share in PFL's surplus earnings; no dividends will be
paid.

FEDERAL TAX MATTERS

Tax Status of the Policy

Diversification Requirements. Section 817(h) of the Code provides that in
order for a variable contract which is based on a segregated asset account to
qualify as an annuity contract under the Code, the investments made by such
account must be "adequately diversified" in accordance with Treasury
regulations. The Treasury regulations issued under Section 817(h) (Treas. Reg.
(S) 1.817-5) apply a diversification requirement to each of the Subaccounts of
the Mutual Fund Account. The Mutual Fund Account, through the Underlying Funds
and their Portfolios, intends to comply with the diversification requirements of
the Treasury. PFL has entered into agreements regarding participation in the
Retirement Income Builder that require the Underlying Funds and their Portfolios
to be operated in compliance with the Treasury regulations.

Owner Control. In certain circumstances, owners of variable annuity
contracts may be considered the owners, for Federal income tax purposes, of the
assets of the separate account used to support their contracts. In those
circumstances, income and gains from the separate account assets would be
includable in the variable annuity contractowner's gross income. Several years
ago, the IRS state in published rulings that a variable contract owner will be
considered the owner of separate account assets if the contractowner possesses
incidents of ownership in those assets, such as the ability to exercise
investment control over the assets. More recently, the Treasury Department
announced, in connection with the issuance of regulations concerning investment
diversification, that those regulations "do not provide guidance concerning the
circumstances in which investor control of the investments of a segregated asset
account may cause the investor, rather than the insurance company, to be treated
as the owner of the assets in the account." This announcement also stated that
guidance would be issued by way of regulations or rulings on the "extent to
which policyholders may direct their investments to particular subaccounts
without being treated as owners of underlying assets."

The ownership rights under the contract are similar to, but different in
certain respects from those described by the IRS in rulings in which it was
determined that contractowners were not owners of separate account assets. For
example, the Owner of a Policy has the choice of one or more Subaccounts in
which to allocate premiums and Policy Values, and may be able to transfer among
these accounts more frequently than in such rulings. These differences could
result in policyowners being treated as the owners of the assets of the Mutual
Fund Account. In addition, PFL does not know what standards will be set forth,
if any, in the regulations or rulings with the Treasury Department has stated it
expects to issue. PFL therefore reserves the right to modify the Policies as
necessary to attempt to prevent the policyowners from being considered the
owners of a pro rata share of the assets of the Mutual Fund Account.

5
<PAGE>

Distribution Requirements. The Code also requires that Nonqualified
Policies contain specific provisions for distribution of Policy proceeds upon
the death of the Owner. In order to be treated as an annuity contract for
federal income tax purposes, the Code requires that such Policies provide that
if any Owner dies on or after the Annuity Commencement Date and before the
entire interest in the Policy has been distributed, the remaining portion must
be distributed at least as rapidly as under the method in effect on such Owners
death. If any Owner dies before the Annuity Commencement Date, the entire
interest in the Policy must generally be distributed within 5 years after such
Owner's date of death or be applied to provide an immediate annuity under which
payments will begin within one year of such Owner's death and will be made for
the life of the Beneficiary or for a period not extending beyond the life
expectancy of the Beneficiary. However, if such Owner's death occurs prior to
the Annuity Commencement Death, and such Owner's surviving spouse is named
beneficiary, then the Policy may be continued with the surviving spouse as the
new Owner. If any Owner is not a natural person, then for purposes of these
distribution requirements, the primary Annuitant shall be treated as the Owner
and any death or change of such primary Annuitant shall be treated as the Death
of the Owner. The Policy contains provisions intended to comply with these
requirements of the Code. No regulations interpreting these requirements of the
Code have yet been issued and thus no assurance can be given that the provisions
contained in the Policies satisfy all such Code requirements. The provisions
contained in the Policies will be reviewed and modified if necessary to maintain
their compliance with the Code requirements when clarified by regulation or
otherwise.

Taxation of PFL

PFL at present is taxed as a life insurance company under part I of
Subchapter L of the Code. The Mutual Fund Account is treated as part of PFL
and, accordingly, will not be taxed separately as a "regulated investment
company" under Subchapter M of the Code. PFL does not expect to incur any
federal income tax liability with respect to investment income and net capital
gains arising from the activities of the Mutual Fund Account retained as part of
the reserves under the Policy. Based on this expectation, it is anticipated
that no charges will be made against the Mutual Fund Account for federal income
taxes. If, in future years, any federal income taxes are incurred by PFL with
respect to the Mutual Fund Account, PFL may make a charge to the Mutual Fund
Account.

INVESTMENT EXPERIENCE

A "Net Investment Factor" is used to determine the value of Accumulation
Units and Annuity Units, and to determine annuity payment rates.

Accumulation Units

Upon allocation to the selected Subaccount of the Mutual Fund Account,
Premium Payments are converted into Accumulation Units of the Subaccount. The
number of Accumulation Units to be credited is determined by dividing the dollar
amount allocated to each Subaccount by the value of an Accumulation Unit for
that Subaccount as next determined after the Premium Payment is received at the
Administrative and Service Office or, in the case of the initial Premium
Payment, when the Policy application is completed, whichever is later. The
value of an Accumulation Unit was arbitrarily established at $1.000000 at the
inception of each Subaccount. Thereafter, the value of an Accumulation Unit is
determined as of the close of trading on each day the New York Stock Exchange
and PFL's Administrative and Service Office are open for business.

6
<PAGE>

An index (the "Net Investment Factor") which measures the investment
performance of a Subaccount during a Valuation Period, is used to determine the
value of an Accumulation Unit for the next subsequent Valuation Period. The Net
Investment Factor may be greater or less than or equal to one; therefore, the
value of an Accumulation Unit may increase, decrease or remain the same from one
Valuation Period to the next. The Owner bears this investment risk. The net
investment performance of a Subaccount and deduction of certain charges affect
the Accumulation Unit Value.

The Net Investment Factor for any Subaccount for any Valuation Period is
determined by dividing (a) by (b) and subtracting (c) from the result, where:

(a) is the net result of:
(1) the net asset value per share of the shares held in the Subaccount
determined at the end of the current Valuation Period, plus

(2) the per share amount of any dividend or capital gain distribution
made with respect to the shares held in the Subaccount if the ex-
dividend date occurs during the current Valuation Period, plus or
minus

(3) a per share credit or charge for any taxes determined by
PFL to have resulted from the investment operations of the Subaccount;

(b) the net asset value per share of the shares held in the Subaccount
determined as of the end of the immediately preceding Valuation Period;
and

(c) is the charge for mortality and expense risk during the Valuation Period
(equal on an annual basis to 1.10% for the Return of Premium Death Benefit
and 1.25% for both the 5% Annually Compounding Death Benefit or the Annual
Step-Up Death Benefit) of the daily net asset value of the Subaccount, plus
the .15% administrative charge for all three Death Benefit Options.

Illustration of Accumulation Unit Value Calculations

Formula and Illustration for Determining
the Net Investment Factor

Assume Either the 5% Annually Compounding Death Benefit
or the Annual Step-Up Death Benefit is in effect.

Investment Experience Factor = A + B - C - E
---------
D

Where: A = The Net Asset Value of an Underlying Fund share as of the
end of the current Valuation Period.
Assume.............................. A = $11.57

B = The per share amount of any dividend or capital gains
distribution since the end of the immediately preceding
Valuation Period.
Assume.............................. B = 0

C = The per share charge or credit for any taxes reserved for at the
end of the current Valuation Period.
Assume.............................. C = 0

7
<PAGE>

D = The Net Asset Value of an Underlying Fund share at the end of
the immediately preceding Valuation Period.
Assume.............................. D = $11.40

E = The daily deduction for Mortality and Expense Risk Fee and
Administrative Charges, which totals 1.40% on an annual basis.
On a daily basis..................... = .0000380909

Then, the Investment Experience Factor = 11.57 + 0 - 0 - .0000380909 = Z =
-------------
11.40
1.0148741898

Formula and Illustration for Determining Accumulation Unit Value

Accumulation Unit Value = A x B

Where: A = The Accumulation Unit Value for the immediately preceding
Valuation Period.
Assume................................. = $ X

B = The Net Investment Factor for the current Valuation Period.
Assume................................. = Y

Then, the Accumulation Unit Value = $ X x Y = $ Z

Annuity Unit Value And Annuity Payment Rates

The amount of Variable Annuity Payments will vary with Annuity Unit Values.
Annuity Unit Values rise if the net investment performance of the Subaccount
exceeds the assumed interest rate of 5% annually. Conversely, Annuity Unit
Values fall if the net investment performance of the Subaccount is less than the
assumed rate. The value of a variable Annuity Unit in each Subaccount was
established at $1.00 on the date operations began for that Subaccount. The value
of a variable Annuity Unit on any subsequent Business Day is equal to (a)
multiplied by (b) multiplied by (c), where:

(a) is the variable Annuity Unit Value for that Subaccount on the immediately
preceding Business Day;
(b) is the net investment factor for that Subaccount for the valuation period;
and
(c) is the investment result adjustment factor for the valuation period.

The investment result adjustment factor for the valuation period is the
product of discount factors of .99986634 per day to recognize the 5% effective
annual Assumed Investment Return. The valuation period is the period from the
close of the immediately preceding Business Day to the close of the current
Business Day.

The net investment factor for the Policy used to calculate the value of a
variable Annuity Unit in each Subaccount for the valuation period is determined
by dividing (i) by (ii) and subtracting (iii) from the result, where:

(i) is the result of:

8
<PAGE>

(1) the net asset value of a fund share held in that Subaccount determined
at the end of the current valuation period; plus

(2) the per share amount of any dividend or capital gain distributions
made by the fund for shares held in that Subaccount if the ex-dividend
date occurs during the valuation period; plus or minus

(3) a per share charge or credit for any taxes reserved for, which PFL
determines to have resulted from the investment operations of the
Subaccount.

(ii) is the net asset value of a fund share held in that Subaccount determined
as of the end of the immediately preceding valuation period.

(iii) is a factor representing the Mortality and Expense Risk Fee and
Administrative Charge. This factor is equal, on an annual basis, to 1.25%
(for Death Benefit Option A) or 1.40% (for Death Benefit Options B and C)
of the daily net asset value of a fund share held in that Subaccount.

The dollar amount of subsequent Variable Annuity Payments will depend upon
changes in applicable Annuity Unit Values.

The annuity payment rates vary according to the Annuity Option elected and
the sex and adjusted age of the Annuitant at the Annuity Commencement Date. The
Policy also contains a table for determining the adjusted age of the Annuitant.

Illustration of Calculations for Annuity Unit Value
and Variable Annuity Payments

Formula and Illustration for Determining Annuity Unit Value

Annuity Unit Value = A x B x C

Where: A = Annuity Unit Value for the immediately preceding Valuation Period.
Assume.............................. = $ X

B = Investment Experience Factor for the Valuation Period for which the
Annuity Unit Value is being calculated.
Assume.............................. = Y

C = A factor to neutralize the assumed interest rate of 5% built into
the Annuity Tables used.
Assume.............................. = Z

Then, the Annuity Unit Value is:
$ X x Y x Z = $ Q

Formula and Illustration for Determining Amount of First Monthly
Variable Annuity Payment

First Monthly Variable Annuity Payment = A x B
------
$1,000

9
<PAGE>

Where: A = The Policy Value as of the Annuity Commencement Date.
Assume.................................. = $ X

B = The Annuity purchase rate per $1,000 based upon the option
selected, the sex and adjusted age of the Annuitant according to
the tables contained in the Policy.
Assume.................................. = $ Y

Then, the first Monthly Variable Annuity Payment
= $ X x $ Y = $ Z
-----
1,000

Formula and Illustration for Determining the Number of Annuity
Units Represented by Each Monthly Variable Annuity Payment

Number of Annuity Units = A
-
B

Where: A = The dollar amount of the first monthly Variable Annuity Payment.
Assume.................................. = $ X

B = The Annuity Unit Value for the Valuation Date on which the first
monthly payment is due.
Assume.................................. = $ Y

Then, the number of Annuity Units = $ X = Z
---
$ Y

STATE REGULATION OF PFL

PFL is subject to the laws of Iowa governing insurance companies and to
regulation by the Iowa Division of Insurance. An annual statement in a
prescribed form is filed with the Division of Insurance each year covering the
operation of PFL for the preceding year and its financial condition as of the
end of such year. Regulation by the Division of Insurance includes periodic
examination to determine PFL's contract liabilities and reserves so that the
Division may determine the items are correct. PFL's books and accounts are
subject to review by the Division of Insurance at all times and a full
examination of its operations is conducted periodically by the National
Association of Insurance Commissioners. In addition, PFL is subject to
regulation under the insurance laws of other jurisdictions in which it may
operate.

ADMINISTRATION

PFL performs administrative services for the Policies. These services
include issuance of the Policies, maintenance of records concerning the
Policies, and certain valuation services.

RECORDS AND REPORTS

All records and accounts relating to the Mutual Fund Account will be
maintained by PFL. As presently required by the Investment Company Act of 1940
and regulations promulgated thereunder, PFL will mail to all Policy Owners at
their last known address of record, at least annually, reports containing such
information as may be required under that Act or by any other applicable law or
regulation. Policy Owners will also receive confirmation of each financial
transaction and any other reports required by law or regulation.

10
<PAGE>

DISTRIBUTION OF THE POLICIES

The Policies are offered to the public through brokers licensed under the
federal securities laws and state insurance laws. The offering of the Policies
is continuous and PFL does not anticipate discontinuing the offering of the
Policies. However, PFL reserves the right to discontinue the offering of the
Policies.

AEGON USA Securities, Inc., an affiliate of PFL, will be the principal
underwriter of the Policies. AEGON USA Securities, Inc. may enter into
agreements with broker-dealers for the distribution of the Policies.

CUSTODY OF ASSETS

The assets of each of the Subaccounts of the Mutual Fund Account are held
by PFL. The assets of each of the Subaccounts of the Mutual Fund Account are
segregated and held separate and apart from the assets of the other Subaccounts
and from PFL's general account assets. PFL maintains records of all purchases
and redemptions of shares of the Underlying Funds held by each of the
Subaccounts. Additional protection for the assets of the Mutual Fund Account is
afforded by PFL's fidelity bond, presently in the amount of $5,000,000, covering
the acts of officers and employees of PFL.

HISTORICAL PERFORMANCE DATA

Money Market Yields

PFL may from time to time disclose the current annualized yield of the
Money Market Subaccount for a 7-day period in a manner which does not take into
consideration any realized or unrealized gains or losses on shares of the
portfolio securities. This current annualized yield is computed by determining
----------
the net change (exclusive of realized gains and losses on the sale of securities
and unrealized appreciation and depreciation) at the end of the 7-day period in
the value of a hypothetical account having a balance of 1 unit at the beginning
of the 7-day period, dividing such net change in account value by the value of
the account at the beginning of the period to determine the base period return,
and annualizing this quotient on a 365-day basis. The net change in account
value reflects (i) net income from the Portfolio attributable to the
hypothetical account; and (ii) charges and deductions imposed under a Policy
that are attributable to the hypothetical account. The charges and deductions
include the per unit charges for the hypothetical account for (i) the
Administrative Charges; and (ii) the Mortality and Expense Risk Fee. Current
Yield will be calculated according to the following formula:

Current Yield = ((NCS - ES)/UV) x (365/7)
Where:

NCS= The net change in the value of the Portfolio (exclusive of realized gains
and losses on the sale of securities and unrealized appreciation and
depreciation) for the 7-day period attributable to a hypothetical account
having a balance of 1 Subaccount unit.

ES= Per unit expenses of the Subaccount for the 7-day period.

UV= The unit value on the first day of the 7-day period.

11
<PAGE>

Because of the charges and deductions imposed under a Policy, the yield
for the Money Market Subaccount will be lower than the yield for the Money
Market Portfolio. The yield calculations do not reflect the effect of any
premium taxes or Surrender Charges that may be applicable to a particular
Policy. Surrender Charges range from 6% to 0% of the amount of Premium Payments
withdrawn based on the number of years since the Premium Payment was made.
However, Surrender Charges will not be assessed after the tenth Policy Year.

PFL may also disclose the effective yield of the Money Market Subaccount
for the same 7-day period, determined on a compounded basis. The effective
yield is calculated by compounding the base period return according to the
following formula:

Effective Yield = (1 + ((NCS - ES) / UV))/365/7/ - 1

Where:

NCS= The net change in the value of the account (exclusive of realized gains
and losses on the sale of securities and unrealized appreciation and
depreciation) for the 7-day period attributable to a hypothetical
account having a balance of 1 Subaccount unit.

ES= Per unit expenses of the Subaccount for the 7-day period.

UV = The unit value on the first day of the 7-day period.

The yield on amounts held in the Money Market Subaccount normally will
fluctuate on a daily basis. Therefore, the disclosed yield for any given past
period is not an indication or representation of future yields or rates of
return. The Money Market Subaccount actual yield is affected by changes in
interest rates on money market securities, average portfolio maturity of the
Money Market Portfolio, the types and quality of portfolio securities held by
the Money Market Portfolio and its operating expenses.

Other Subaccount Yields

PFL may from time to time advertise or disclose the current annualized
yield of one or more of the Subaccounts of the Mutual Fund Account (except the
Money Market Subaccount) for 30-day periods. The annualized yield of a
Subaccount refers to income generated by the Subaccount over a specific 30-day
period. Because the yield is annualized, the yield generated by a Subaccount
during the 30-day period is assumed to be generated each 30-day period over a
12-month period. The yield is computed by: (i) dividing the net investment
income of the Subaccount less Subaccount expenses for the period, by (ii) the
maximum offering price per unit on the last day of the period times the daily
average number of units outstanding for the period, compounding that yield for a
6-month period, and (iv) multiplying that result by 2. Expenses attributable to
the Subaccount include (i) the Administrative Charge and (ii) the Mortality and
Expense Risk Fee. The 30-day yield is calculated according to the following
formula:

Yield = 2 x ((((NI - ES)/(U x UV)) + 1)/6/ - 1)
Where:

NI= Net investment income of the Subaccount for the 30-day period attributable
to the Subaccount's unit.

ES= Expenses of the Subaccount for the 30-day period.

U= The average number of units outstanding.

UV= The unit value at the close (highest) of the last day in the 30-day
period.

12
<PAGE>

Because of the charges and deductions imposed by the Mutual Fund Account,
the yield for a Subaccount of the Mutual Fund Account will be lower than the
yield for its corresponding Portfolio. The yield calculations do not reflect
the effect of any premium taxes or Surrender Charges that may be applicable to a
particular Policy. Surrender Charges range from 6% to 0% of the amount of
Premium Payments withdrawn based on the number of years since the Premium
Payment was made. However, Surrender Charges will not be assessed after the
tenth Policy Year.

The yield on amounts held in the Subaccounts of the Mutual Fund Account
normally will fluctuate over time. Therefore, the disclosed yield for any given
past period is not an indication or representation of future yields or rates of
return. A Subaccount's actual yield is affected by the types and quality of its
investments and its operating expenses.

Total Returns

PFL may from time to time also advertise or disclose total returns for one
or more of the Subaccounts of the Mutual Fund Account for various periods of
time. One of the periods of time will include the period measured from the date
the Subaccount commenced operations. When a Subaccount has been in operation
for 1, 5 and 10 years, respectively, the total return for these periods will be
provided. Total returns for other periods of time may from time to time also be
disclosed. Total returns represent the average annual compounded rates of
return that would equate an initial investment of $1,000 to the redemption value
of that investment as of the last day of each of the periods. The ending date
for each period for which total return quotations are provided will be for the
most recent month end practicable, considering the type and media of the
communication and will be stated in the communication.

Total returns will be calculated using Subaccount Unit Values which PFL
calculates on each Business Day based on the performance of the Subaccount's
underlying Portfolio, and the deductions for the Mortality and Expense Risk Fee
and the Administrative Charges. Total return calculations will reflect the
effect of Surrender Charges that may be applicable to a particular period. The
total return will then be calculated according to the following formula:

P(1 + T)/N/ = ERV

Where: T= The average annual total return net of Subaccount recurring charges.

ERV= The ending redeemable value of the hypothetical account at
the end of the period.

P= A hypothetical initial payment of $1,000.

N= The number of years in the period.

Other Performance Data

PFL may from time to time also disclose average annual total returns in a
non-standard format in conjunction with the standard format described above.
The non-standard format will be identical to the standard format except that the
Surrender Charge percentage will be assumed to be 0%.

PFL may from time to time also disclose cumulative total returns in
conjunction with the standard format described above. The cumulative returns
will be calculated using the following formula assuming that the Surrender
Charge percentage will be 0%.

CTR = (ERV/P) - 1

13
<PAGE>

Where:
CTR= The cumulative total return net of Subaccount recurring charges for
the period.

ERV= The ending redeemable value of the hypothetical investment at the
end of the period.

P= A hypothetical initial payment of $1,000.

All non-standard performance data will only be advertised if the standard
performance data for the same period, as well as for the required period, is
also disclosed.

Hypothetical Performance Data

From time to time, sales literature or advertisements may quote average
annual total returns for periods prior to the date the Mutual Fund Account
commenced operations. Such performance information for the Subaccounts will be
calculated based on the performance of the various Portfolios and the assumption
that the Subaccounts were in existence for the same periods as those indicated
for the Portfolios, with the level of Policy charges that were in effect at the
inception of the Subaccounts.

LEGAL MATTERS

Legal advice relating to certain matters under the federal securities laws
applicable to the issue and sale of the Policies has been provided to PFL by
Sutherland, Asbill & Brennan L.L.P., of Washington D.C.

INDEPENDENT AUDITORS

The Financial Statements of PFL as of December 31, 1996 and 1995, and for
each of the three years in the period ended December 31, 1996, included in this
Statement of Additional Information have been audited by Ernst & Young LLP,
Independent Auditors, Suite 3400, 801 Grand Avenue, Des Moines, Iowa 50309.

OTHER INFORMATION

A Registration Statement has been filed with the Securities and Exchange
Commission, under the Securities Act of 1933 as amended, with respect to the
Policies discussed in this Statement of Additional Information. Not all of the
information set forth in the Registration Statement, amendments and exhibits
thereto has been included in the Prospectus or this Statement of Additional
Information. Statements contained in the Prospectus and this Statement of
Additional Information concerning the content of the Policies and other legal
instruments are intended to be summaries. For a complete statement of the terms
of these documents, reference should be made to the instruments filed with the
Securities and Exchange Commission.

FINANCIAL STATEMENTS

The values of the interest of Owners in the Mutual Fund Account will be
affected solely by the investment results of the selected Subaccount(s). The
Financial Statements of PFL, which are included in this Statement of Additional
Information, should be considered only as bearing on the ability of PFL to meet
its obligations under the Policies. They should not be considered as bearing on
the investment performance of the assets held in the Mutual Fund Account.

14
<PAGE>

SEPARATE ACCOUNT
FINANCIAL STATEMENTS

RETIREMENT INCOME BUILDER VARIABLE ANNUITY ACCOUNT

The Retirement Income Builder Variable Annuity Account began operations on
January 2, 1997. Therefore, no separate account financial statements were
prepared for the year ending December 31, 1996.
<PAGE>

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
PFL Life Insurance Company

We have audited the accompanying statutory-basis balance sheets of PFL Life
Insurance Company as of December 31, 1996 and 1995, and the related statutory-
basis statements of operations, changes in capital and surplus, and cash flows
for each of the three years in the period ended December 31, 1996. Our audits
also included the accompanying statutory-basis financial statement schedules
required by Article 7 of Regulation S-X. These financial statements and
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

As described in Note 1 to the financial statements, the Company presents its
financial statements in conformity with accounting practices prescribed or
permitted by the Insurance Division, Department of Commerce, of the State of
Iowa, which practices differ from generally accepted accounting principles.
The variances between such practices and generally accepted accounting
principles also are described in Note 1. The effects on the financial
statements of these variances are not reasonably determinable but are presumed
to be material.

In our opinion, because of the effects of the matters described in the
preceding paragraph, the financial statements referred to above do not present
fairly, in conformity with generally accepted accounting principles, the
financial position of PFL Life Insurance Company at December 31, 1996 and
1995, or the results of its operations or its cash flows for each of the three
years in the period ended December 31, 1996.

Also, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of PFL Life Insurance
Company at December 31, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996 in conformity with accounting practices prescribed or permitted by the
Insurance Division, Department of Commerce, of the State of Iowa. Also, in our
opinion, the related financial statement schedules, when considered in
relation to the basic statutory-basis financial statements taken as a whole,
present fairly in all material respects the information set forth therein.

Ernst & Young L.L.P.

Des Moines, Iowa
February 21, 1997

16
<PAGE>

PFL LIFE INSURANCE COMPANY

STATEMENTS OF OPERATIONS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Premiums and other considerations, net
of reinsurance:
Life.................................. $ 204,872 $ 114,704 $ 148,954
Annuity............................... 725,966 921,452 1,067,406
Accident and health................... 227,862 232,738 230,889
Net investment income................... 428,337 392,685 343,880
Amortization of interest maintenance
reserve................................ 2,434 4,341 2,871
Commissions and expense allowances on
reinsurance ceded...................... 73,931 77,071 94,635
---------- ---------- ----------
1,663,402 1,742,991 1,888,635
Benefits and expenses:
Benefits paid or provided for:
Life and accident and health
benefits............................. 147,024 146,346 141,632
Surrender benefits.................... 512,810 498,626 392,064
Other benefits........................ 101,288 88,607 73,306
Increase in aggregate reserves for
policies and contracts:
Life................................ 140,126 50,071 82,062
Annuity............................. 188,002 528,330 569,341
Accident and health................. 26,790 17,694 22,144
Other............................... 19,969 16,017 11,223
---------- ---------- ----------
1,136,009 1,345,691 1,291,772
Insurance expenses:
Commissions........................... 177,466 200,706 215,635
General insurance expenses............ 57,282 57,623 52,166
Taxes, licenses and fees.............. 13,889 15,700 15,368
Transfer to separate account.......... 171,785 42,981 243,806
Other expenses........................ 526 760 1,014
---------- ---------- ----------
420,948 317,770 527,989
---------- ---------- ----------
1,556,957 1,663,461 1,819,761
---------- ---------- ----------
Gain from operations before federal income
taxes and net realized capital losses on
investments.............................. 106,445 79,530 68,874
Federal income tax expense................ 41,177 33,335 23,858
---------- ---------- ----------
Gain from operations before net realized
capital losses on investments............ 65,268 46,195 45,016
Net realized capital losses on investments
(net of related federal income taxes and
amounts transferred to interest
maintenance reserve)..................... (3,503) (18,096) (3,624)
---------- ---------- ----------
Net income................................ $ 61,765 $ 28,099 $ 41,392
========== ========== ==========
</TABLE>

See accompanying notes.

17
<PAGE>

PFL LIFE INSURANCE COMPANY

BALANCE SHEETS--STATUTORY BASIS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1996 1995
---------- ----------
<S> <C> <C>
ADMITTED ASSETS
Cash and invested assets:
Cash and short-term investments........................ $ 50,737 $ 79,852
Bonds.................................................. 4,773,433 4,613,334
Stocks:
Preferred............................................ 3,097 9,336
Common (cost: 1996--$23,212; 1995--$19,061).......... 32,038 24,866
Affiliated entities (cost: 1996--$14,893; 1995--
$14,661)............................................ 6,934 6,794
Mortgage loans on real estate.......................... 911,705 680,414
Real estate, at cost less accumulated depreciation
($11,338 in 1996; $12,493 in 1995):
Home office properties............................... 10,372 20,403
Properties acquired in satisfaction of debt.......... 12,260 2,648
Investment properties................................ 35,922 40,453
Policy loans........................................... 54,214 52,675
Other invested assets.................................. 16,343 13,557
---------- ----------
Total cash and invested assets......................... 5,907,055 5,544,332
Premiums deferred and uncollected........................ 16,345 17,026
Accrued investment income................................ 70,401 68,065
Receivable from affiliates............................... 53,900 79,913
Federal income taxes recoverable......................... 4,018 9,776
Transfers from separate accounts......................... 38,528 --
Other assets............................................. 31,215 32,803
Separate account assets.................................. 1,844,515 1,418,157
---------- ----------
Total admitted assets.................................. $7,965,977 $7,170,072
========== ==========
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Aggregate reserves for policies and contracts:
Life................................................. $ 736,100 $ 596,039
Annuity.............................................. 4,408,419 4,220,274
Accident and health.................................. 139,269 114,884
Policy and contract claim reserves:
Life................................................. 7,369 6,225
Accident and health.................................. 66,988 70,517
Other policyholders' funds............................. 126,672 105,371
Remittances and items not allocated.................... 64,064 123,710
Asset valuation reserve................................ 54,851 43,921
Interest maintenance reserve........................... 23,745 26,376
Other liabilities...................................... 70,663 67,070
Payable to affiliates.................................. 4,975 --
Separate account liabilities........................... 1,844,515 1,418,157
---------- ----------
Total liabilities...................................... 7,547,630 6,792,544
Commitments and contingencies
Capital and surplus:
Common stock, $10 par value, 500 shares authorized, 266
issued and outstanding................................ 2,660 2,660
Paid-in surplus........................................ 154,129 154,129
Unassigned surplus..................................... 261,558 220,739
---------- ----------
Total capital and surplus.............................. 418,347 377,528
---------- ----------
Total liabilities and capital and surplus.............. $7,965,977 $7,170,072
========== ==========
</TABLE>

See accompanying notes.

18
<PAGE>

PFL LIFE INSURANCE COMPANY

STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
TOTAL
COMMON PAID-IN UNASSIGNED CAPITAL AND
STOCK SURPLUS SURPLUS SURPLUS
------ -------- ---------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1994.............. $2,660 $ 99,129 $212,982 $314,771
Capital contribution.................. -- 15,000 -- 15,000
Net income for 1994................... -- -- 41,392 41,392
Net unrealized capital losses......... -- -- (25,350) (25,350)
Increase in non-admitted assets....... -- -- (248) (248)
Decrease in asset valuation reserve... -- -- 6,040 6,040
Dividend to stockholder............... -- -- (20,900) (20,900)
Surplus effect of ceding commissions
associated with the sale of a
division............................. -- -- 184 184
Amendment of reinsurance agreement.... -- -- 391 391
Decrease in liability for reinsurance
in unauthorized companies............ -- -- 505 505
Prior period adjustment............... -- -- (3,444) (3,444)
------ -------- -------- --------
Balance at December 31, 1994............ 2,660 114,129 211,552 328,341
Capital contribution.................. -- 40,000 -- 40,000
Net income for 1995................... -- -- 28,099 28,099
Net unrealized capital losses......... -- -- (7,574) (7,574)
Decrease in non-admitted assets....... -- -- 50 50
Increase in asset valuation reserve... -- -- (5,946) (5,946)
Surplus effect of ceding commissions
associated with the sale of a
division............................. -- -- 35 35
Cancellation of reinsurance
agreement............................ -- -- 585 585
Amendment of reinsurance agreement.... -- -- 419 419
Transfer of subsidiary investment to
stockholder.......................... -- -- (3,250) (3,250)
Change in reserve valuation
methodology.......................... -- -- (501) (501)
Increase in liability for reinsurance
in unauthorized companies............ -- -- (2,730) (2,730)
------ -------- -------- --------
Balance at December 31, 1995............ 2,660 154,129 220,739 377,528
Net income for 1996................... -- -- 61,765 61,765
Net unrealized capital gains.......... -- -- 2,351 2,351
Increase in non-admitted assets....... -- -- (148) (148)
Increase in asset valuation reserve... -- -- (10,930) (10,930)
Dividend to stockholder............... -- -- (20,000) (20,000)
Prior period adjustment............... -- -- 5,025 5,025
Surplus effect of sale of a division.. -- -- (384) (384)
Surplus effect of ceding commissions
associated with the sale of a
division............................. -- -- 29 29
Amendment of reinsurance agreement.... -- -- 421 421
Decrease in liability for reinsurance
in unauthorized companies............ -- -- 2,690 2,690
------ -------- -------- --------
Balance at December 31, 1996............ $2,660 $154,129 $261,558 $418,347
====== ======== ======== ========
</TABLE>

See accompanying notes.

19
<PAGE>

PFL LIFE INSURANCE COMPANY

STATEMENTS OF CASH FLOWS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
SOURCES OF CASH
Premiums and other considerations, net of
reinsurance.............................. $1,240,748 $1,353,407 $1,548,030
Net investment income..................... 431,456 398,051 339,856
---------- ---------- ----------
1,672,204 1,751,458 1,887,886
Life and accident and health claims....... (147,556) (140,798) (137,602)
Surrender benefits and other fund
withdrawals.............................. (512,810) (498,626) (392,064)
Other benefits to policyholders........... (101,254) (88,519) (73,237)
Commissions, other expenses and other
taxes.................................... (248,321) (278,241) (288,384)
Net transfers to separate accounts........ (210,312) (42,981) (243,806)
Dividends to policyholders................ (844) (940) (1,155)
Federal income taxes, excluding tax on
capital gains and IRS settlements........ (35,551) (32,905) (39,864)
---------- ---------- ----------
Net cash provided by operations........... 415,556 668,448 711,774
Proceeds from investments sold, matured or
repaid:
Bonds and preferred stocks.............. 2,112,831 1,757,229 1,430,339
Common stocks........................... 27,214 20,338 12,941
Mortgage loans on real estate........... 74,351 36,550 43,495
Real estate............................. 18,077 23,203 9,536
Other proceeds.......................... 22,567 381 189
---------- ---------- ----------
Total cash from investments............... 2,255,040 1,837,701 1,496,500
Capital contribution...................... -- 40,000 15,000
Dividend from subsidiary.................. -- -- 10,000
Cash received from ceding commissions
associated with the sale of a division... 45 55 284
Increase in remittances and items not
allocated................................ -- 88,295 16,177
Other sources............................. 19,381 12,758 24,855
---------- ---------- ----------
Total sources of cash..................... 2,690,022 2,647,257 2,274,590
APPLICATIONS OF CASH
Cost of investments acquired:
Bonds and preferred stocks.............. $2,270,105 $2,294,195 $2,043,615
Common stocks........................... 29,799 23,284 11,228
Mortgage loans on real estate........... 324,381 192,292 160,068
Net increase in policy loans............ 1,539 877 3,202
Real estate............................. 222 10,188 14,801
Other invested assets................... 5,169 2,670 664
---------- ---------- ----------
Total investments acquired................ 2,631,215 2,523,506 2,233,578
Dividends to stockholder.................. 20,000 -- 20,900
Cash paid associated with the sale of a
division................................. 539 -- --
Repayment of intercompany notes and
receivables, net......................... -- 48,070 365
Cash paid in conjunction with an amendment
of a reinsurance agreement............... 5,812 -- --
Decrease in remittances and items not
allocated................................ 59,646 -- --
Cash paid in conjunction with sales of a
division................................. 123 -- --
Other applications, net................... 1,802 29,887 3,820
---------- ---------- ----------
Total applications of cash................ 2,719,137 2,601,463 2,258,663
---------- ---------- ----------
Net change in cash and short-term
investments.............................. (29,115) 45,790 15,927
Cash and short-term investments at
beginning of year........................ 79,852 34,062 18,135
---------- ---------- ----------
Cash and short-term investments at end of
year..................................... $ 50,737 $ 79,852 $ 34,062
========== ========== ==========
</TABLE>

See accompanying notes.

20
<PAGE>

PFL LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

PFL Life Insurance Company ("the Company") is a stock life insurance company
and is a wholly-owned subsidiary of First AUSA Life Insurance Company ("First
AUSA"), which, in turn, is a wholly-owned subsidiary of AEGON USA, Inc.
("AEGON"). AEGON is a wholly-owned subsidiary of AEGON nv, a holding company
organized under the laws of The Netherlands. Effective June 1, 1995, the
Company transferred the common stock of its wholly-owned subsidiary, Equity
National Life Insurance Company ("Equity National"), to its stockholder, First
AUSA. Equity National was then merged with Life Investors Insurance Company of
America, a subsidiary of First AUSA. The financial statements presented herein
are prepared on the statutory accounting principles basis for the Company
only; as such, the accounts of the Company's subsidiary, Equity National, are
not consolidated with those of the Company.

In connection with the sale of certain affiliated companies, the Company has
assumed various blocks of business from these former affiliates through
mergers. In addition, the Company has canceled or entered into several
coinsurance and reinsurance agreements with affiliates and non-affiliates. The
following is a description of those transactions:

During 1996, the Company sold its North Richland Hills, Texas health
administrative operations known as The Insurance Center. The transaction
resulted in the transfer of substantially all employees and office
facilities to United Insurance Companies, Inc. ("UICI"). All inforce
business will continue to be shared by UICI and the Company and its
affiliates through the existing coinsurance agreements. After a short
transition period, all new business produced by United Group Association,
an independent insurance agency, will be written by the insurance
subsidiaries of UICI and will not be shared with the Company and its
affiliates through coinsurance arrangements. As a result of the sale, the
Company transferred $123 in assets, substantially all of which was cash,
and $70 of liabilities. The difference between the assets and liabilities
of $(53) plus a tax credit of $19 was charged directly to unassigned
surplus.

Effective December 31, 1995, the Company canceled a coinsurance agreement
with its parent, First AUSA. As a result of the cancellation, the Company
transferred $825 of assets and $1,712 of liabilities. The difference
between the assets and liabilities, net of a tax effect of $302 was
credited directly to unassigned surplus.

On January 1, 1994, the Company entered into an agreement with a non-
affiliate reinsurer to increase the reinsurance ceded by 2 1/2% each year
(primarily group health business). As a result, the Company transferred
$3,881 in assets and $4,080 in liabilities during 1994. The difference
between the assets and liabilities of $199, plus a tax credit of $192, was
credited directly to unassigned surplus. During 1995, the Company
transferred $4,303 in assets and liabilities of $4,467. The difference
between the assets and liabilities of $164, plus a tax credit of $255, was
credited directly to unassigned surplus. During 1996, the Company
transferred $5,991 in assets, including $5,812 of cash and short-term
investments and liabilities of $6,146. The difference between the assets
and liabilities of $155, plus a tax credit of $266 was credited directly to
unassigned surplus.

During 1993, the Company sold the Oakbrook Division (primarily group
health business). The initial transfer of risk occurred through an
indemnity reinsurance agreement. The

21
<PAGE>

PFL LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)

policies will then be assumed by the reinsurer by novation as state
regulatory and policyholder approvals are received. In addition, the
Company will receive from the third party administrator a ceding commission
of one percent of the premiums collected between January 1, 1994 and
December 31, 1996. As a result of the sale, in 1994, the Company received
$284 for ceding commissions; the commissions net of the related tax effect
of $100 was credited directly to unassigned surplus. During 1995, the
Company received $55 for ceding commissions; the commissions net of the
related tax effect of $20 was credited directly to unassigned surplus.
During 1996, the Company received $45 for ceding commissions; the
commissions net of the related tax effect of $(16) was charged directly to
unassigned surplus. During 1996, the Company paid $539 in association with
this sale; the proceeds, net of a tax credit of $189, were charged directly
to unassigned surplus.

Nature of Business

The Company sells individual non-participating whole life, endowment and
term contracts, as well as a broad line of single fixed and flexible premium
annuity products. In addition, the Company offers group life, universal life,
and individual and specialty health coverages. The Company is licensed in 49
states and the District of Columbia. Sales of the Company's products are
primarily through an independent insurance agency of The Insurance Center, the
Company's agents, and financial institutions.

Basis of Presentation

The preparation of financial statements of insurance companies requires
management to make estimates and assumptions that affect amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.

Significant estimates and assumptions are utilized in the calculation of
aggregate policy reserves, policy and contract claim reserves, guaranty fund
assessment accruals and valuation allowances on investments. It is reasonably
possible that actual experience could differ from the estimates and
assumptions utilized which could have a material impact on the financial
statements.

The accompanying financial statements have been prepared on the basis of
accounting practices prescribed or permitted by the Insurance Division,
Department of Commerce, of the State of Iowa, which practices differ in some
respects from generally accepted accounting principles. The more significant
of these differences are as follows: (a) bonds are generally reported at
amortized cost rather than segregating the portfolio into held-to-maturity
(reported at amortized cost), available-for-sale (reported at fair value), and
trading (reported at fair value) classifications; (b) acquisition costs of
acquiring new business are charged to current operations as incurred rather
than deferred and amortized over the life of the policies; (c) policy reserves
on traditional life products are based on statutory mortality rates and
interest which may differ from reserves based on reasonable assumptions of
expected mortality, interest, and withdrawals which include a provision for
possible unfavorable deviation from such assumptions; (d) policy reserves on
certain investment products use discounting methodologies utilizing statutory
interest rates rather than full account values; (e) reinsurance amounts are
netted against the corresponding asset or liability rather than shown as gross
amounts on the balance sheet; (f) deferred income taxes are not provided for
the difference between the financial statement and income tax bases of assets
and liabilities; (g) net realized gains or losses attributed to changes in the
level of interest

22
<PAGE>

PFL LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)

rates in the market are deferred and amortized over the remaining life of the
bond or mortgage loan, rather than recognized as gains or losses in the
statement of operations when the sale is completed; (h) declines in the
estimated realizable value of investments are provided for through the
establishment of a formula-determined statutory investment reserve (carried as
a liability) changes to which are charged directly to surplus, rather than
through recognition in the statement of operations for declines in value, when
such declines are judged to be other than temporary; (i) certain assets
designated as "non-admitted assets" have been charged to surplus rather than
being reported as assets; (j) revenues for universal life and investment
products consist of premiums received rather than policy charges for the cost
of insurance, policy administration charges, amortization of policy initiation
fees and surrender charges assessed; (k) pension expense is recorded as
amounts are paid; (l) adjustments to federal income taxes of prior years are
charged or credited directly to unassigned surplus, rather than reported as a
component of expense in the statement of operations; (m) gains or losses on
dispositions of business are charged or credited directly to unassigned
surplus rather than being reported in the statement of operations; and (n) a
liability is established for "unauthorized reinsurers" and changes in this
liability are charged or credited directly to unassigned surplus. The effects
of these variances have not been determined by the Company.

The National Association of Insurance Commissioners (NAIC) currently is in
the process of recodifying statutory accounting practices, the result of which
is expected to constitute the only source of "prescribed" statutory accounting
practices. Accordingly, that project, which is expected to be completed in
1997, will likely change, to some extent, prescribed statutory accounting
practices and may result in changes to the accounting practices that the
Company uses to prepare its statutory-basis financial statements.

Cash and Cash Equivalents

For purposes of the statements of cash flows, the Company considers all
highly liquid investments with remaining maturity of one year or less when
purchased to be cash equivalents.

Investments

Investments in bonds (except those to which the Securities Valuation Office
of the NAIC has ascribed a value), mortgage loans on real estate and short-
term investments are reported at cost adjusted for amortization of premiums
and accrual of discounts. Amortization is computed using methods which result
in a level yield over the expected life of the security. The Company reviews
its prepayment assumptions on mortgage and other asset backed securities at
regular intervals and adjusts amortization rates prospectively when such
assumptions are changed due to experience and/or expected future patterns.
Investments in preferred stocks in good standing are reported at cost.
Investments in preferred stocks not in good standing are reported at the lower
of cost or market. Common stocks of affiliated and unaffiliated companies,
which may include shares of mutual funds (money market and other), are carried
at market. Real estate is reported at cost less allowances for depreciation.
Depreciation is computed principally by the straight-line method. Policy loans
are reported at unpaid principal. Other invested assets consist principally of
investments in various joint ventures and are recorded at equity in underlying
net assets. Other "admitted assets" are valued, principally at cost, as
required or permitted by Iowa Insurance Laws.

23
<PAGE>

PFL LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)

Realized capital gains and losses are determined on the basis of specific
identification and are recorded net of related federal income taxes. The Asset
Valuation Reserve (AVR) is established by the Company to provide for
anticipated losses in the event of default by issuers of certain invested
assets. These amounts are determined using a formula prescribed by the NAIC
and are reported as a liability. The formula for the AVR provides for a
corresponding adjustment for realized gains and losses, net of amounts
attributed to changes in the general level of interest rates. Under a formula
prescribed by the NAIC, the Company defers, in the Interest Maintenance
Reserve (IMR), the portion of realized gains and losses on sales of fixed
income investments, principally bonds and mortgage loans, attributable to
changes in the general level of interest rates and amortizes those deferrals
over the remaining period to maturity of the security.

Interest income is recognized on an accrual basis. The Company does not
accrue income on bonds in default, mortgage loans on real estate in default
and/or foreclosure or which are delinquent more than twelve months, or real
estate where rent is in arrears for more than three months. Further, income is
not accrued when collection is uncertain. At December 31, 1996, 1995 and 1994,
the Company excluded investment income due and accrued of $1,541, $2,272 and
$4,622, respectively, with respect to such practices.

The Company entered into an interest-rate cap agreement on Five Year
Constant Maturities Treasury futures to hedge the exposure of increasing
interest rates. The cash flows from the interest rate cap will help offset
losses that might occur from disintermediation resulting from a rise in
interest rates. The Company paid a one-time premium to receive the difference
between the reference rate and the strike rate after a two-year delay. The
cost is included in interest expense ratably during the life of the agreement.
Income received as a result of the cap agreement will be recognized in
investment income as earned. Unamortized cost of the agreements is included in
other assets.

Aggregate Policy Reserves

Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables using
statutorily specified interest rates and valuation methods that will provide,
in the aggregate, reserves that are greater than or equal to the minimum
required by law.

The aggregate policy reserves for life insurance policies are based
principally upon the 1941, 1958 and 1980 Commissioners' Standard Ordinary
Mortality and American Experience Mortality Tables. The reserves are
calculated using interest rates ranging from 2.00 to 6.00 percent and are
computed principally on the Net Level Premium Valuation and the Commissioners'
Reserve Valuation Methods. Reserves for universal life policies are based on
account balances adjusted for the Commissioners' Reserve Valuation Method.

Deferred annuity reserves are calculated according to the Commissioners'
Annuity Reserve Valuation Method including excess interest reserves to cover
situations where the future interest guarantees plus the decrease in surrender
charges are in excess of the maximum valuation rates of interest. Reserves for
immediate annuities and supplementary contracts with and without life
contingencies are equal to the present value of future payments assuming
interest rates ranging from 2.50 to 11.25 percent and mortality rates, where
appropriate, from a variety of tables.

24
<PAGE>

PFL LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)

Accident and health policy reserves are equal to the greater of the gross
unearned premiums or any required midterminal reserves plus net unearned
premiums and the present value of amounts not yet due on both reported and
unreported claims.

Policy and Contract Claim Reserves

Claim reserves represent the estimated accrued liability for claims reported
to the Company and claims incurred but not yet reported through the statement
date. These reserves are estimated using either individual case-basis
valuations or statistical analysis techniques. These estimates are subject to
the effects of trends in claim severity and frequency. The estimates are
continually reviewed and adjusted as necessary as experience develops or new
information becomes available.

Separate Account

Assets held in trust for purchases of variable annuity contracts and the
Company's corresponding obligation to the contract owners are shown separately
in the balance sheets. The assets in the separate account are valued at
market. Income and gains and losses with respect to the assets in the separate
account accrue to the benefit of the policyholders. The Company received
variable contract premiums of $227,864, $133,386 and $308,305 in 1996, 1995
and 1994, respectively. All variable account contracts are subject to
discretionary withdrawal by the policyholder at the market value of the
underlying assets less the current surrender charge.

Reclassifications

Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform to the 1996 presentation.

2. FAIR VALUES OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the statutory-basis
balance sheet, for which it is practicable to estimate that value. SFAS No.
119, Disclosures about Derivative Financial Instruments and Fair Value of
Financial Instruments, requires additional disclosure about derivatives. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. In that regard, the derived fair
value estimates cannot be substantiated by comparisons to independent markets
and, in many cases, could not be realized in immediate settlement of the
instrument. Statement of Financial Accounting Standards No. 107 and No. 119
exclude certain financial instruments and all nonfinancial instruments from
their disclosure requirements and allow companies to forego the disclosures
when those estimates can only be made at excessive cost. Accordingly, the
aggregate fair value amounts presented do not represent the underlying value
of the Company.

The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:

Cash and short-term investments: The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.

25
<PAGE>

PFL LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)

Investment securities: Fair values for fixed maturity securities
(including redeemable preferred stocks) are based on quoted market prices,
where available. For fixed maturity securities not actively traded, fair
values are estimated using values obtained from independent pricing
services or, in the case of private placements, are estimated by
discounting expected future cash flows using a current market rate
applicable to the yield, credit quality, and maturity of the investments.
The fair values for equity securities other than insurance subsidiaries are
based on quoted market prices. Fair value for the Company's insurance
subsidiary is the statutory net book value of that subsidiary.

Mortgage loans and policy loans: The fair values for mortgage loans are
estimated utilizing discounted cash flow analyses, using interest rates
reflective of current market conditions and the risk characteristics of the
loans. The fair value of policy loans are assumed to equal their carrying
value.

Investment contracts: Fair values for the Company's liabilities under
investment-type insurance contracts are estimated using discounted cash
flow calculations, based on interest rates currently being offered for
similar contracts with maturities consistent with those remaining for the
contracts being valued.

Interest rate cap: Estimated fair value of the interest rate cap is based
upon the latest quoted market price.

Fair values for the Company's insurance contracts other than investment
contracts are not required to be disclosed. However, the fair values of
liabilities under all insurance contracts are taken into consideration in the
Company's overall management of interest rate risk, which minimizes exposure
to changing interest rates through the matching of investment maturities with
amounts due under insurance contracts.

The following sets forth a comparison of the fair values and carrying values
of the Company's financial instruments subject to the provisions of Statement
of Financial Accounting Standards No. 107 and No. 119:

<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------
1996 1995
--------------------- ---------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
ADMITTED ASSETS
Bonds.......................... $4,773,433 $4,867,770 $4,613,334 $4,824,635
Preferred stocks............... 3,097 7,133 9,336 12,275
Common stocks.................. 32,038 32,038 24,866 24,866
Affiliated common and preferred
stock......................... 6,934 6,934 6,794 6,794
Mortgage loans on real estate.. 911,705 922,010 680,414 714,399
Policy loans................... 54,214 54,214 52,675 52,675
Cash and short-term
investments................... 50,737 50,737 79,852 79,852
Interest rate cap.............. 6,797 6,975 7,971 7,250
Separate account assets........ 1,844,515 1,844,515 1,418,157 1,418,157
LIABILITIES
Investment contract
liabilities................... 4,532,568 4,398,630 4,323,188 4,310,505
Separate account annuities..... 1,803,057 1,803,057 1,417,842 1,417,842
</TABLE>

26
<PAGE>

PFL LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)

3. INVESTMENTS

The carrying value and estimated fair value of investments in debt
securities were as follows:

<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
CARRYING UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Bonds:
United States Government and
agencies.................... $ 136,450 $ 3,301 $ 180 $ 139,571
State, municipal and other
government.................. 59,644 1,906 177 61,373
Public utilities............. 147,918 5,616 1,020 152,514
Industrial and
miscellaneous............... 1,958,681 64,710 8,105 2,015,286
Mortgage-backed securities... 2,470,740 43,896 15,610 2,499,026
---------- -------- ------- ----------
4,773,433 119,429 25,092 4,867,770
Preferred stocks............... 3,097 4,036 -- 7,133
---------- -------- ------- ----------
$4,776,530 $123,465 $25,092 $4,874,903
========== ======== ======= ==========
DECEMBER 31, 1995
Bonds:
United States Government and
agencies.................... $ 117,054 $ 5,808 $ 135 $ 122,727
State, municipal and other
government.................. 46,236 3,109 2 49,343
Public utilities............. 156,342 9,578 1,092 164,828
Industrial and
miscellaneous............... 1,781,149 112,074 7,146 1,886,077
Mortgage-backed securities... 2,512,553 93,420 4,313 2,601,660
---------- -------- ------- ----------
4,613,334 223,989 12,688 4,824,635
Preferred stocks............... 9,336 3,348 409 12,275
---------- -------- ------- ----------
$4,622,670 $227,337 $13,097 $4,836,910
========== ======== ======= ==========
</TABLE>

The carrying value and estimated fair value of bonds at December 31, 1996,
by contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
CARRYING ESTIMATED FAIR
VALUE VALUE
---------- --------------
<S> <C> <C>
Due in one year or less............................ $ 202,775 $ 204,980
Due after one year through five years.............. 896,912 921,711
Due after five years through ten years............. 954,555 977,421
Due after ten years................................ 248,451 264,632
---------- ----------
2,302,693 2,368,744
Mortgage and other asset-backed securities......... 2,470,740 2,499,026
---------- ----------
$4,773,433 $4,867,770
========== ==========
</TABLE>

27
<PAGE>

PFL LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)

A detail of net investment income is presented below:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Interest on bonds and notes...................... $364,356 $342,182 $294,145
Dividends on equity investments.................. 1,436 1,822 12,091
Interest on mortgage loans....................... 69,418 52,702 42,385
Rental income on real estate..................... 9,526 10,443 9,360
Interest on policy loans......................... 3,273 3,112 3,182
Other investment income.......................... 1,799 1,803 282
-------- -------- --------
Gross investment income.......................... 449,808 412,064 361,445
Investment expenses.............................. 21,471 19,379 17,565
-------- -------- --------
Net investment income............................ $428,337 $392,685 $343,880
======== ======== ========
</TABLE>

Proceeds from sales and maturities of debt securities and related gross
realized gains and losses were as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Proceeds................................ $2,112,831 $1,757,229 $1,430,339
========== ========== ==========
Gross realized gains.................... $ 19,876 $ 19,721 $ 15,411
Gross realized losses................... (19,634) (34,399) (33,044)
---------- ---------- ----------
Net realized gains (losses)............. $ 242 $ (14,678) $ (17,633)
========== ========== ==========
</TABLE>

At December 31, 1996, investments with an aggregate carrying value of
$5,825,802 were on deposit with regulatory authorities or were restrictively
held in bank custodial accounts for the benefit of such regulatory authorities
as required by statute.

Realized investment gains (losses) and changes in unrealized gains (losses)
for investments are summarized below:

<TABLE>
<CAPTION>
REALIZED
---------------------------
YEAR ENDED DECEMBER 31
---------------------------
1996 1995 1994
------- -------- --------
<S> <C> <C> <C>
Debt securities................................ $ 242 $(14,678) $(17,633)
Short-term investments......................... (197) 24 (309)
Equity securities.............................. 1,798 504 1,322
Mortgage loans on real estate.................. (5,530) (1,053) (2,186)
Real estate.................................... 1,210 (1,908) (2,858)
Other invested assets.......................... 12 (970) 14
------- -------- --------
(2,465) (18,081) (21,650)
Tax effect..................................... (1,235) 7,878 7,236
Transfer to interest maintenance reserve....... 197 (7,891) 10,790
------- -------- --------
Net realized losses............................ $(3,503) $(18,096) $ (3,624)
======= ======== ========
</TABLE>

28
<PAGE>

PFL LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
CHANGE IN UNREALIZED
------------------------------
YEAR ENDED DECEMBER 31
------------------------------
1996 1995 1994
--------- -------- ---------
<S> <C> <C> <C>
Debt securities............................ $(115,867) $355,560 $(322,346)
Equity securities.......................... 2,929 (16,379) (23,202)
--------- -------- ---------
Change in unrealized appreciation
(depreciation)............................ $(112,938) $339,181 $(345,548)
========= ======== =========
</TABLE>

Gross unrealized gains and gross unrealized losses on equity securities were
as follows:

<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Unrealized gains.................................. $ 9,590 $ 6,833 $20,244
Unrealized losses................................. (8,723) (8,895) (5,927)
------- ------- -------
Net unrealized gains (losses)..................... $ 867 $(2,062) $14,317
======= ======= =======
</TABLE>

During 1996, the Company issued mortgage loans with interest rates ranging
from 6.83% to 8.75%. The maximum percentage of any one mortgage loan to the
value of the underlying real estate at origination was 85%. Mortgage loans
with a carrying value of $4,027 were non-income producing for the previous
twelve months. Accrued interest of $852 related to these mortgage loans was
excluded from investment income. The Company requires all mortgage loans to
carry fire insurance equal to the value of the underlying property.

During 1996, 1995 and 1994, mortgage loans of $13,163, $1,644 and $799,
respectively, were foreclosed and transferred to real estate. At December 31,
1996 and 1995, the Company held a mortgage loan loss reserve in the asset
valuation reserve of $5,432 and $6,168, respectively. The mortgage loan
portfolio is diversified by geographic region and specific collateral property
type as follows:

<TABLE>
<CAPTION>
GEOGRAPHIC DISTRIBUTION
- -------------------------------------
DECEMBER 31
------------
1996 1995
----- -----
<S> <C> <C>
South Atlantic.......... 26% 26%
Mountain................ 10 12
W. South Central........ 12 14
Pacific................. 13 17
E. North Central........ 15 13
E. South Central........ 9 5
W. North Central........ 6 6
Middle Atlantic......... 6 3
New England............. 3 4
</TABLE>
<TABLE>
<CAPTION>
PROPERTY TYPE DISTRIBUTION
- -------------------------------------
DECEMBER 31
------------
1996 1995
----- -----
<S> <C> <C>
Retail.................. 37% 31%
Apartment............... 14 20
Office.................. 34 29
Industrial.............. 3 4
Other................... 12 16
</TABLE>

29
<PAGE>

PFL LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)

At December 31, 1996, the Company had the following investments (excluding
U. S. Government guaranteed or insured issues) which individually represented
more than ten percent of capital and surplus and the asset valuation reserve:

<TABLE>
<CAPTION>
DESCRIPTION OF SECURITY OR ISSUER CARRYING VALUE
--------------------------------- --------------
<S> <C>
Bonds:
Citibank.................................................... 70,661
</TABLE>

4. REINSURANCE

The Company reinsures portions of risk on certain insurance policies which
exceed its established limits, thereby providing a greater diversification of
risk and minimizing exposure on larger risks. The Company remains contingently
liable with respect to any insurance ceded, and this would become an actual
liability in the event that the assuming insurance company became unable to
meet its obligation under the reinsurance treaty.

Reinsurance assumption and cession treaties are transacted primarily with
affiliates. Premiums earned reflect the following reinsurance assumed and
ceded amounts:

<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Direct premiums.......................... $1,457,450 $1,591,531 $1,857,446
Reinsurance assumed...................... 1,796 2,356 1,832
Reinsurance ceded........................ (300,546) (324,993) (412,029)
---------- ---------- ----------
Net premiums earned...................... $1,158,700 $1,268,894 $1,447,249
========== ========== ==========
</TABLE>

The Company received reinsurance recoveries in the amount of $168,155,
$167,287 and $148,414 during 1996, 1995 and 1994, respectively. At December
31, 1996 and 1995, estimated amounts recoverable from reinsurers that have
been deducted from policy and contract claim reserves totaled $63,226 and
$65,503, respectively. The aggregate reserves for policies and contracts were
reduced for reserve credits for reinsurance ceded at December 31, 1996 and
1995 of $2,737,441 and $2,920,034, respectively.

At December 31, 1996, amounts recoverable from unauthorized reinsurers of
$73,434 (1995--$70,516) and reserve credits for reinsurance ceded of $55,035
(1995--$48,992) were associated with a single reinsurer and its affiliates.
The Company holds collateral under these reinsurance agreements in the form of
trust agreements totaling $120,477 at December 31, 1996 that can be drawn on
for amounts that remain unpaid for more than 120 days.

5. INCOME TAXES

For federal income tax purposes, the Company joins in a consolidated tax
return filing with certain affiliated companies. Under the terms of a tax-
sharing agreement between the Company and its affiliates, the Company computes
federal income tax expense as if it were filing a separate income tax return,
except that tax credits and net operating loss carryforwards are determined on
the basis of the consolidated group. Additionally, the alternative minimum tax
is computed for the consolidated group and the resulting tax, if any, is
allocated back to the separate companies on the basis of the separate
companies' alternative minimum taxable income.

30
<PAGE>

PFL LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)

Federal income tax expense differs from the amount computed by applying the
statutory federal income tax rate to gain from operations before taxes and
realized capital losses for the following reasons:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Computed tax at federal statutory rate (35%)..... $37,256 $27,835 $24,106
Tax reserve adjustment........................... 2,211 2,405 1,150
Excess tax depreciation.......................... (384) (365) (406)
Deferred acquisition costs--tax basis............ 5,583 4,581 7,378
Prior year over accrual.......................... (499) (306) (644)
Dividend received deduction...................... (454) (56) (3,513)
Charitable contribution.......................... -- -- (3,935)
Other items--net................................. (2,536) (759) (278)
------- ------- -------
Federal income tax expense....................... $41,177 $33,335 $23,858
======= ======= =======
</TABLE>

Prior to 1984, as provided for under the Life Insurance Company Tax Act of
1959, a portion of statutory income was not subject to current taxation but
was accumulated for income tax purposes in a memorandum account referred to as
the policyholders' surplus account. No federal income taxes have been provided
for in the financial statements on income deferred in the policyholders'
surplus account ($20,387 at December 31, 1996). To the extent dividends are
paid from the amount accumulated in the policyholders' surplus account, net
earnings would be reduced by the amount of tax required to be paid. Should the
entire amount in the policyholders' surplus account become taxable, the tax
thereon computed at current rates would amount to approximately $7,135.

The Company's federal income tax returns have been examined and closing
agreements have been executed with the Internal Revenue Service through 1987.
During 1996, there was a $5,025 prior period adjustment to the tax accrual.
This included a $2,100 writeoff of an intangible asset for tax purposes, and a
federal income tax refund of $1,829 for tax years 1984-1986 and related
interest of $1,686, net of a tax effect of $590. An examination is underway
for years 1988 through 1995.

6. POLICY AND CONTRACT ATTRIBUTES

Participating life insurance policies are issued by the Company which
entitle policyholders to a share in the earnings of the participating
policies, provided that a dividend distribution, which is determined annually
based on mortality and persistency experience of the participating policies,
is authorized by the Company. Participating insurance constituted
approximately 1.0% and 1.2% of ordinary life insurance in force at December
31, 1996 and 1995, respectively.

A portion of the Company's policy reserves and other policyholders' funds
(including separate account liabilities) relate to liabilities established on
a variety of the Company's products that are not subject to significant
mortality or morbidity risk; however, there may be certain restrictions placed
upon the amount of funds that can be withdrawn without penalty. The amount of
reserves on these products, by withdrawal characteristics are summarized as
follows:

31
<PAGE>

PFL LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------
1996 1995
------------------- -------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Subject to discretionary withdrawal
with market value adjustment....... $ 20,800 0% $ 699 --%
Subject to discretionary withdrawal
at book value less surrender
charge............................. 794,881 9 733,796 8%
Subject to discretionary withdrawal
at market value.................... 1,803,057 20 1,390,156 16%
Subject to discretionary withdrawal
at book value (minimal or no
charges or adjustments)............ 6,284,876 69 6,395,719 74%
Not subject to discretionary
withdrawal provision............... 174,416 2 139,330 2%
---------- --- ---------- ---
9,078,030 100 8,659,700 100%
Less reinsurance ceded.............. 2,677,432 2,866,160
---------- ----------
Total policy reserves on annuities
and deposit fund liabilities....... $6,400,598 $5,793,540
========== ==========
</TABLE>

A reconciliation of the amounts transferred to and from the separate
accounts is presented below:

<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Transfers as reported in the summary of
operations of the separate accounts statement:
Transfers to separate accounts................. $227,864 $133,386 $308,305
Transfers from separate accounts............... 75,172 104,219 76,133
-------- -------- --------
Net transfers to separate accounts............... 152,692 29,167 232,172
Reconciling adjustments--charges for investment
management, administration fees and contract
guarantees...................................... 19,093 13,814 11,634
-------- -------- --------
Transfers as reported in the summary of
operations of the life, accident and health
annual statement................................ $171,785 $ 42,981 $243,806
======== ======== ========
</TABLE>

32
<PAGE>

PFL LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)

Reserves on the Company's traditional life products are computed using mean
reserving methodologies. These methodologies result in the establishment of
assets for the amount of the net valuation premiums that are anticipated to be
received between the policy's paid-through date to the policy's next
anniversary date. At December 31, 1996 and 1995, these assets (which are
reported as premiums deferred and uncollected) and the amounts of the related
gross premiums and loadings, are as follows:

<TABLE>
<CAPTION>
GROSS LOADING NET
------- ------- -------
<S> <C> <C> <C>
DECEMBER 31, 1996
Life and annuity:
Ordinary direct first year business............. $ 2,657 $ 1,865 $ 792
Ordinary direct renewal business................ 23,307 7,180 16,127
Group life direct business...................... 1,788 1,195 593
Reinsurance ceded............................... (1,706) (438) (1,268)
------- ------- -------
26,046 9,802 16,244
Accident and health:
Direct.......................................... 104 -- 104
Reinsurance ceded............................... (3) -- (3)
------- ------- -------
Total accident and health......................... 101 -- 101
------- ------- -------
$26,147 $ 9,802 $16,345
======= ======= =======
DECEMBER 31, 1995
Life and annuity:
Ordinary direct first year business............. $ 3,151 $ 2,223 $ 928
Ordinary direct renewal business................ 24,250 7,792 16,458
Group life direct business...................... 1,537 779 758
Reinsurance ceded............................... (1,362) (141) (1,221)
------- ------- -------
27,576 10,653 16,923
Accident and health:
Direct.......................................... 1,296 -- 1,296
Reinsurance ceded............................... (1,193) -- (1,193)
------- ------- -------
Total accident and health......................... 103 -- 103
------- ------- -------
$27,679 $10,653 $17,026
======= ======= =======
</TABLE>

At December 31, 1996 and 1995, the Company had insurance in force
aggregating $69,251 and $87,010, respectively, in which the gross premiums are
less than the net premiums required by the standard valuation standards
established by the Insurance Division, Department of Commerce, of the State of
Iowa. The Company established policy reserves of $1,252 and $1,417 to cover
these deficiencies at December 31, 1996 and 1995, respectively.

In 1994, the NAIC enacted a guideline to clarify reserving methodologies for
contracts that require immediate payment of claims upon proof of death of the
insured. Companies were allowed to grade the effects of the change in
reserving methodologies over five years. A direct charge to surplus of $501
was made for the year ended December 31, 1995, related to the change in
reserve methodology.

33
<PAGE>

PFL LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)

7. DIVIDEND RESTRICTIONS

Generally, an insurance company's ability to pay dividends is limited to the
amount that their net assets, as determined in accordance with statutory
accounting practices, exceed minimum statutory capital requirements. However,
payment of such amounts as dividends may be subject to approval by regulatory
authorities.

The Company paid dividends to its parent of $20,000 and $20,900 in 1996 and
1994, respectively. No dividends were paid in 1995.

8. RETIREMENT AND COMPENSATION PLANS

The Company's employees participate in a qualified benefit pension plan
sponsored by AEGON. The Company has no legal obligation for the plan. The
Company recognizes pension expense equal to its allocation from AEGON. The
pension expense is allocated among the participating companies based on the
FASB No. 87 expense as a percent of salaries. The benefits are based on years
of service and the employee's compensation during the highest five consecutive
years of employment. Pension expense aggregated $1,056, $942 and $966 for the
years ended December 31, 1996, 1995 and 1994, respectively. The plan is
subject to the reporting and disclosure requirements of the Employee
Retirement and Income Security Act of 1974.

The Company's employees also participate in a contributory defined
contribution plan sponsored by AEGON which is qualified under Section 401(k)
of the Internal Revenue Service Code. Employees of the Company who customarily
work at least 1,000 hours during each calendar year and meet the other
eligibility requirements, are participants of the plan. Participants may elect
to contribute up to fifteen percent of their salary to the plan. The Company
will match an amount up to three percent of the participant's salary.
Participants may direct all of their contributions and plan balances to be
invested in a variety of investment options. The plan is subject to the
reporting and disclosure requirements of the Employee Retirement and Income
Security Act of 1974. Expense related to this plan was $297, $465 and $411 for
the years ended December 31, 1996, 1995 and 1994, respectively.

AEGON sponsors supplemental retirement plans to provide the Company's senior
management with benefits in excess of normal pension benefits. The plans are
noncontributory and benefits are based on years of service and the employee's
compensation level. The plans are unfunded and nonqualified under the Internal
Revenue Service Code. In addition, AEGON has established incentive deferred
compensation plans for certain key employees of the Company. AEGON also
sponsors an employee stock option plan for individuals employed at least three
years and a stock purchase plan for its producers, with the participating
affiliated companies establishing their own eligibility criteria, producer
contribution limits and company matching formula. These plans have been
accrued or funded as deemed appropriate by management of AEGON and the
Company.

In addition to pension benefits, the Company participates in plans sponsored
by AEGON that provide postretirement medical, dental and life insurance
benefits to employees meeting certain eligibility requirements. Portions of
the medical and dental plans are contributory. The expenses of the
postretirement plans calculated on the pay-as-you-go basis are charged to
affiliates in accordance with an intercompany cost sharing arrangement. The
Company expensed $184, $164 and $169 for the years ended December 31, 1996,
1995 and 1994, respectively.

34
<PAGE>

PFL LIFE INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS--STATUTORY BASIS (CONTINUED)
(DOLLARS IN THOUSANDS)

9. RELATED PARTY TRANSACTIONS

The Company shares certain offices, employees and general expenses with
affiliated companies.

The Company receives data processing, investment advisory and management,
marketing and administration services from certain affiliates. During 1996,
1995 and 1994, the Company paid $17,028, $14,214 and $11,820, respectively,
for these services, which approximates their costs to the affiliates.

Payable to affiliates and intercompany borrowings bear interest at the
thirty-day commercial paper rate of 5.5% at December 31, 1996. During 1996,
1995 and 1994, the Company paid net interest of $174, $71 and $23,
respectively, to affiliates.

During 1995 and 1994, the Company received capital contributions of $40,000
and $15,000, respectively, in cash from its parent and during 1994 received a
dividend of $10,000 from its subsidiary, Equity National, which was included
in net investment income.

During 1995, the Company sold real estate with a book value of approximately
$13,270 to an affiliated entity in exchange for a short-term note receivable.
No gain was recognized on this sale. This note accrued interest at 5.65% and
matured during 1996.

During the year ended December 31, 1995, the Company restructured demand
notes and accrued interest of $13,250 and $745, respectively, related to an
affiliate. The Company received 9,750 shares of preferred stock from the
affiliate for satisfaction of debt. The Company realized a loss of $8,695
related to this transaction. At December 31, 1996 and 1995, the preferred
stock related to this affiliate was deemed to have no value and an unrealized
loss of $4,555 was recognized in 1995.

10. COMMITMENTS AND CONTINGENCIES

The Company is a party to legal proceedings incidental to its business.
Although such litigation sometimes includes substantial demands for
compensatory and punitive damages, in addition to contract liability, it is
management's opinion, after consultation with counsel and a review of
available facts, that damages arising from such demands will not be material
to the Company's financial position.

The Company is subject to insurance guaranty laws in the states in which it
writes business. These laws provide for assessments against insurance
companies for the benefit of policyholders and claimants in the event of
insolvency of other insurance companies. Assessments are charged to operations
when received by the Company except where right of offset against other taxes
paid is allowed by law; amounts available for future offsets are recorded as
an asset on the Company's balance sheet. Potential future obligations for
unknown insolvencies are not determinable by the Company. The future
obligation has been based on the most recent information available from the
National Organization of Life and Health Insurance Guaranty Associations
(NOLHGA). The Company has established a reserve of $21,774 and $21,747 and an
offsetting premium tax benefit of $8,752 and $9,457 at December 31, 1996 and
1995, respectively, for its estimated share of future guaranty fund
assessments related to several major insurer insolvencies. During 1994, $3,444
was charged to surplus as prior period adjustments to provide for this net
reserve plus certain assessments paid that related to several major insurer
insolvencies prior to 1992. The guaranty fund expense was $2,617, $5,859 and
$4,054 for December 31, 1996, 1995 and 1994, respectively.

35
<PAGE>

SCHEDULE I

PFL LIFE INSURANCE COMPANY

SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
AMOUNT AT WHICH
MARKET SHOWN IN THE
TYPE OF INVESTMENT COST (1) VALUE BALANCE SHEET (2)
------------------ ---------- ---------- -----------------
<S> <C> <C> <C>
FIXED MATURITIES
Bonds:
United States Government and
government agencies and
authorities......................... $1,533,581 $1,554,339 $1,533,510
States, municipalities and political
subdivisions........................ 4,918 5,360 4,919
Foreign governments.................. 55,633 56,013 54,725
Public utilities..................... 150,346 152,514 147,918
All other corporate bonds............ 3,046,090 3,099,544 3,032,361
Redeemable preferred stock............. 3,097 7,133 3,097
---------- ---------- ----------
Total fixed maturities................. 4,793,665 4,874,903 4,776,530
EQUITY SECURITIES
Common stocks:
Banks, trust and insurance........... 7,120 9,777 9,777
Industrial, miscellaneous and all
other............................... 16,092 22,261 22,261
---------- ---------- ----------
Total equity securities................ 23,212 32,038 32,038
Mortgage loans on real estate.......... 911,705 911,705
Real estate............................ 46,294 46,294
Real estate acquired in satisfaction of
debt.................................. 12,260 12,260
Policy loans........................... 54,214 54,214
Other long-term investments............ 9,546 9,546
Cash and short-term investments........ 50,737 50,737
---------- ----------
Total investments...................... $5,901,633 $5,893,324
========== ==========
</TABLE>
- --------
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments.
(2) Amount differs from cost as certain bonds have been adjusted to reflect
other than temporary decline in value charged to surplus, as prescribed by
the NAIC.

36
<PAGE>

SCHEDULE III

PFL LIFE INSURANCE COMPANY

SUPPLEMENTARY INSURANCE INFORMATION
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
FUTURE POLICY POLICY AND
BENEFITS AND UNEARNED CONTRACT
EXPENSES PREMIUMS LIABILITIES
------------- -------- -----------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996
Individual life.............................. $ 734,350 $ -- $ 7,240
Individual health............................ 39,219 8,680 13,631
Group life and health........................ 78,418 14,702 53,486
Annuity...................................... 4,408,419 -- --
---------- ------- -------
$5,260,406 $23,382 $74,357
========== ======= =======
YEAR ENDED DECEMBER 31, 1995
Individual life.............................. $ 594,274 $ -- $ 6,066
Individual health............................ 24,225 7,768 11,863
Group life and health........................ 67,994 16,662 58,813
Annuity...................................... 4,220,274 -- --
---------- ------- -------
$4,906,767 $24,430 $76,742
========== ======= =======
YEAR ENDED DECEMBER 31, 1994
Individual life.............................. $ 544,087 $ -- $ 7,298
Individual health............................ 16,649 6,487 8,643
Group life and health........................ 60,207 17,680 57,959
Annuity...................................... 3,693,388 -- --
---------- ------- -------
$4,314,331 $24,167 $73,900
========== ======= =======
</TABLE>

37
<PAGE>

<TABLE>
<CAPTION>
NET INVESTMENT BENEFITS, CLAIMS LOSSES OTHER OPERATING
PREMIUM REVENUE INCOME* AND SETTLEMENT EXPENSES EXPENSES* PREMIUMS WRITTEN
- --------------- -------------- ----------------------- --------------- ----------------
<S> <C> <C> <C> <C>
$ 202,082 $ 66,538 $ 197,526 $ 38,067 --
55,871 5,263 32,903 29,511 $ 55,678
174,781 12,877 105,459 122,953 171,320
725,966 343,659 800,121 230,417 --
- ---------- -------- ---------- --------
$1,158,700 $428,337 $1,136,009 $420,948
========== ======== ========== ========
$111,918 $ 49,929 $ 97,065 $ 37,933 --
47,692 4,091 25,793 26,033 $ 47,690
187,832 11,665 106,065 139,640 184,545
921,452 327,000 1,116,768 114,164 --
- ---------- -------- ---------- --------
$1,268,894 $392,685 $1,345,691 $317,770
========== ======== ========== ========
$146,328 $ 43,025 $ 124,736 $ 42,309 --
38,811 3,983 22,323 22,707 $ 38,797
194,704 10,531 108,400 143,645 192,034
1,067,406 286,341 1,036,313 319,328 --
- ---------- -------- ---------- --------
$1,447,249 $343,880 $1,291,772 $527,989
========== ======== ========== ========
</TABLE>
- --------
* Allocations of net investment income and other operating expenses are based
on a number of assumptions and estimates, and the results would change if
different methods were applied.

38
<PAGE>

SCHEDULE IV

PFL LIFE INSURANCE COMPANY

REINSURANCE
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
ASSUMED PERCENTAGE
CEDED TO FROM OF AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
---------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31,
1996
Life insurance in force.. $4,863,416 $477,112 $ 30,685 $4,416,989 .7%
========== ======== ======== ========== ===
Premiums:
Individual life........ $ 204,144 $ 3,858 $ 1,796 $ 202,082 .9%
Individual health...... 68,699 12,828 -- 55,871 --
Group life and health.. 390,296 215,515 -- 174,781 --
Annuity................ 794,311 68,345 -- 725,966 --
---------- -------- -------- ---------- ---
$1,457,450 $300,546 $ 1,796 $1,158,700 .2%
========== ======== ======== ========== ===
YEAR ENDED DECEMBER 31,
1995
Life insurance in force.. $4,594,434 $468,811 $ 22,936 $4,148,559 .6%
========== ======== ======== ========== ===
Premiums:
Individual life........ $ 113,934 $ 3,841 $ 1,825 $ 111,918 1.6%
Individual health...... 60,309 12,617 -- 47,692 --
Group life and health.. 408,097 220,265 -- 187,832 --
Annuity................ 1,009,191 88,270 531 921,452 .05%
---------- -------- -------- ---------- ---
$1,591,531 $324,993 $ 2,356 $1,268,894 .2%
========== ======== ======== ========== ===
YEAR ENDED DECEMBER 31,
1994
Life insurance in force.. $4,713,817 $468,811 $112,054 $4,357,060 2.6%
========== ======== ======== ========== ===
Premiums:
Individual life........ $ 148,702 $ 3,639 $ 1,265 $ 146,328 .9%
Individual health...... 50,303 11,492 -- 38,811 --
Group life and health.. 412,200 217,496 -- 194,704 --
Annuity................ 1,246,241 179,402 567 1,067,406 .05%
---------- -------- -------- ---------- ---
$1,857,446 $412,029 $ 1,832 $1,447,249 .1%
========== ======== ======== ========== ===
</TABLE>

VARIABLE INSURANCE PRODUCTS FUND:
MONEY MARKET PORTFOLIO, HIGH INCOME PORTFOLIO,
EQUITY-INCOME PORTFOLIO, GROWTH PORTFOLIO, AND OVERSEAS PORTFOLIO
VARIABLE INSURANCE PRODUCTS FUND II:
INVESTMENT GRADE BOND PORTFOLIO, ASSET MANAGER PORTFOLIO,
INDEX 500 PORTFOLIO, CONTRAFUND PORTFOLIO, AND ASSET MANAGER: GROWTH
PORTFOLIO
VARIABLE INSURANCE PRODUCTS FUND III:
BALANCED PORTFOLIO, GROWTH & INCOME PORTFOLIO, GROWTH OPPORTUNITIES
PORTFOLIO
STATEMENT OF ADDITIONAL INFORMATION
APRIL 30, 1997
This Statement of Additional Information (SAI) is not a prospectus but
should be read in conjunction with the funds' current Prospectus (dated
April 30, 1997). Please retain this document for future reference. The
fund's Annual Reports are separate documents supplied with this SAI.
To obtain an additional copy of the Prospectus or an Annual Report, please
call your insurance company or Fidelity Distributors Corporation (FDC) at
1-800-544-2442.
TABLE OF CONTENTS PAGE

Investment Policies and Limitations 3

Portfolio Transactions 17

Valuation of Portfolio Securities 20

Performance 21

Additional Purchase and Redemption Information 33

Distributions and Taxes 34

FMR 34

Trustees and Officers 34

Management Contracts 39

Distribution and Service Plans 47

Contracts with FMR Affiliates 48

Description of the Trusts 19

Financial Statements 50

Appendix 50

VIP/VIPII/VIPIII-ptb-0497
INVESTMENT ADVISER
Fidelity Management & Research Company (FMR)
INVESTMENT SUB-ADVISERS
Money Market Portfolio:
FMR Texas Inc. (FMR Texas)
High Income, Asset Manager, Contrafund, Balanced, Growth
Opportunities, Growth & Income and Asset Manager: Growth Portfolios:
Fidelity Management & Research (U.K.) Inc. (FMR U.K.)
Fidelity Management & Research (Far East) Inc. (FMR Far East)
Overseas Portfolio:
FMR U.K.
FMR Far East
Fidelity International Investment Advisors (FIIA)
Fidelity International Investment Advisors (U.K.) Limited (FIIAL U.K.)
DISTRIBUTOR
Fidelity Distributors Corporation (FDC)
TRANSFER AGENT
Fidelity Investments Institutional Operations Company, Inc. (FIIOC)
CUSTODIANS
Money Market, High Income and Investment Grade Bond Portfolios:
The Bank of New York
Equity-Income, Overseas, Asset Manager: Growth, Asset Manager
Balanced and Growth & Income Portfolios:
The Chase Manhattan Bank, N.A.
Growth, Growth Opportunities, Contrafund and Index 500 Portfolios:
Brown Brothers Harriman & Co.
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 a 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.
Each 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 each
fund. However, except for the fundamental investment limitations listed
below, the investment policies and limitations described in this Statement
of Additional Information are not fundamental and may be changed without
shareholder approval.
MONEY MARKET PORTFOLIO
THE FOLLOWING ARE MONEY MARKET PORTFOLIO'S FUNDAMENTAL INVESTMENT
LIMITATIONS SET FORTH IN THEIR ENTIRETY. THE FUND MAY NOT:
(1) purchase the securities of any issuer (other than obligations issued or
guaranteed as to principal and interest by the United States, its agencies
or instrumentalities) if, as a result, more than 5% of its total assets
would be invested in the securities of such issuer, provided, however, that
with respect to 25% of its total assets, 10% of its assets may be invested
in the securities of any single issuer;
(2) issue senior securities, except as permitted under the Investment
Company Act of 1940;
(3) borrow money, except that the fund may (i) borrow money for temporary
or emergency purposes (not for leveraging or investment) and (ii) engage in
reverse repurchase agreements for any purpose; provided that (i) and (ii)
in combination do not exceed 33% of the fund's 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% limitation;
(4) 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;
(5) 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 the fund will
invest more than 25% of its total assets in the financial services
industry;
(6) 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);
(7) purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments;
(8) lend any security or make any other loan if, as a result, more than 33%
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;
or
(9) invest in companies for the purpose of exercising control or
management.
THE FOLLOWING INVESTMENT LIMITATIONS FOR MONEY MARKET PORTFOLIO ARE NOT
FUNDAMENTAL AND MAY BE CHANGED, AS REGULATORY AGENCIES PERMIT, WITHOUT
SHAREHOLDER APPROVAL.
(i) The fund does not currently intend to purchase a security (other than a
security issued or guaranteed by the U.S. government or any of its agencies
or instrumentalities) if, as a result, more than 5% of its total assets
would be invested in the securities of a single issuer; provided that the
fund may invest up to 10% of its total assets in the first tier securities
of a single issuer for up to three business days.
(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 advisor or (b) by engaging in reverse repurchase agreements with
any party. The fund will not borrow money in excess of 25% of net assets so
long as this limitation is required for certification by certain state
insurance departments. The fund will not borrow for any general purpose in
excess of 10% of net assets. The fund will not purchase any security while
borrowings (excluding reverse repurchase agreements) 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 10% 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 or sell futures
contracts or call options. This limitation does not apply to options
attached to, or acquired or traded together with, their underlying
securities, and does not apply to securities that incorporate features
similar to options or futures contracts.
(vii) The fund does not currently intend to lend assets other than
securities to other parties, except by lending money (up to 10% of the
fund's net assets) to a registered investment company or portfolio for
which FMR or an affiliate serves as investment advisor. (This limit does
not apply to purchases of debt securities 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 broker's 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.
(ix) The fund does not currently intend to invest in oil, gas, or other
mineral exploration or development programs or leases.
QUALITY AND MATURITY. Pursuant to procedures adopted by the Board of
Trustees, the funds may purchase only high-quality securities that FMR
believes present minimal credit risks. To be considered high-quality, a
security must be rated in accordance with applicable rules in one of the
two highest categories for short-term securities by at least two nationally
recognized rating services (or by one, if only one rating service has rated
the security); or, if unrated, judged to be of equivalent quality by FMR.
High-quality securities are divided into "first tier" and "second tier"
securities. First tier securities are those deemed to be in the highest
rating category (e.g., Standard & Poor's A-1), and second tier securities
are those deemed to be in the second highest rating category (e.g.,
Standard & Poor's A-2). Split-rated securities may be determined to be
either first tier or second tier based on applicable regulations.
The fund may not invest more than 5% of its total assets in second tier
securities. In addition, the fund may not invest more than 1% of its total
assets or $1 million (whichever is greater) in the second tier securities
of a single issuer.
The fund currently intends to limit its investments to securities with
remaining maturities of 397 days or less, and to maintain a dollar-weighted
average maturity of 90 days or less. When determining the maturity of a
security, the fund may look to an interest rate reset or demand feature.
DOMESTIC AND FOREIGN ISSUERS. Investments may be made in U.S.
dollar-denominated time deposits, certificates of deposit, and bankers'
acceptances of U.S. banks and their branches located outside of the United
States, U.S. branches and agencies of foreign banks, and foreign branches
of foreign banks. The fund may also invest in U.S. dollar-denominated
securities issued or guaranteed by other U.S. or foreign issuers, including
U.S. and foreign corporations or other business organizations, foreign
governments, foreign government agencies or instrumentalities, and U.S. and
foreign financial institutions, including savings and loan institutions,
insurance companies, mortgage bankers, and real estate investment trusts,
as well as banks.
The obligations of foreign branches of U.S. banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by governmental
regulation. Payment of interest and principal on these obligations may also
be affected by governmental action in the country of domicile of the branch
(generally referred to as sovereign risk). In addition, evidence of
ownership of portfolio securities may be held outside of the United States
and a fund may be subject to the risks associated with the holding of such
property overseas. Various provisions of federal law governing the
establishment and operation of U.S. branches do not apply to foreign
branches of U.S. banks.
Obligations of U.S. branches and agencies of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by federal and state
regulation, as well as by governmental action in the country in which the
foreign bank has its head office.
Obligations of foreign issuers involve certain additional risks. These
risks may include future unfavorable political and economic developments,
withholding taxes, seizures of foreign deposits, currency controls,
interest limitations, or other governmental restrictions that might affect
payment of principal or interest, or the ability to honor a credit
commitment. Additionally, there may be less public information available
about foreign entities. Foreign issuers may be subject to less governmental
regulation and supervision than U.S. issuers. Foreign issuers also
generally are not bound by uniform accounting, auditing, and financial
reporting requirements comparable to those applicable to U.S. issuers.
HIGH INCOME, EQUITY-INCOME, GROWTH, OVERSEAS, GROWTH & INCOME, BALANCED,
GROWTH OPPORTUNITIES, INVESTMENT GRADE BOND, ASSET MANAGER, INDEX 500,
CONTRAFUND, AND ASSET MANAGER: GROWTH PORTFOLIOS
THE FOLLOWING ARE HIGH INCOME, EQUITY-INCOME, GROWTH, OVERSEAS, GROWTH &
INCOME, BALANCED, GROWTH OPPORTUNITIES, INVESTMENT GRADE BOND, ASSET
MANAGER, INDEX 500, CONTRAFUND, AND ASSET MANAGER: GROWTH PORTFOLIOS'
FUNDAMENTAL INVESTMENT LIMITATIONS SET FORTH IN THEIR ENTIRETY. EACH FUND
MAY NOT:
(1) with respect to 75% of the fund's total assets, 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,
(a) more than 5% of the fund's total assets would be invested in the
securities of that issuer, or (b) the fund would hold more than 10% of the
outstanding voting securities of that issuer;
(2) issue senior securities, except as permitted under the Investment
Company Act of 1940;
(3) (for High Income, Equity-Income, Growth , Overseas, Balanced, and
Growth Opportunities Portfolio's) borrow money, except that the fund (i)
may borrow money for temporary or emergency purposes (not for leveraging or
investment) or (ii) engage in reverse repurchase agreements, provided that
(i) and (ii) in combination (borrowings) do not exceed 33% of its total
assets (including the amount borrowed) less liabilities (other than
borrowings). Any borrowings that come to exceed 33% of the value of the
fund's total assets by reason of a decline in net assets will be reduced
within three days (exclusive of Sundays and holidays) to the extent
necessary to comply with the 33% limitation;
(for Investment Grade Bond, Asset Manager, Index 500, Contrafund, Asset
Manager: Growth, and Growth & Income Portfolio's) 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% 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% limitation;
(4) 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;
(5) 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 its total assets would
be invested in the securities of companies whose principal business
activities are in the same industry;
(6) 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);
(7) 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
(8) lend any security or make any other loan if, as a result, more than 33%
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.
(9) (for Balanced and Growth Opportunities Portfolio's) Each fund may,
notwithstanding any other fundamental investment policy or limitation,
invest all of its assets in the securities of a single open-end management
investment company with substantially the same fundamental investment
objective, policies, and limitations as the fund.
THE FOLLOWING INVESTMENT LIMITATIONS FOR HIGH INCOME, EQUITY-INCOME,
GROWTH, OVERSEAS, GROWTH & INCOME, BALANCED, GROWTH OPPORTUNITIES,
INVESTMENT GRADE BOND, ASSET MANAGER, INDEX 500, CONTRAFUND, AND ASSET
MANAGER: GROWTH PORTFOLIOS ARE NOT FUNDAMENTAL AND MAY BE CHANGED, AS
REGULATORY AGENCIES PERMIT, WITHOUT SHAREHOLDER APPROVAL.
(i) Each 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.
(ii) Each 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.
(iii) Each 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 advisor or (b) by engaging in reverse repurchase agreements with
any party (reverse repurchase agreements are treated as borrowings for
purposes of fundamental investment limitation (3)). Each fund will not
borrow money in excess of 25% of net assets so long as this limitation is
required for certification by certain state insurance departments. Any
borrowings that come to exceed this amount will be reduced within seven
days (not including Sundays and holidays) to the extent necessary to comply
with the 25% limitation. Each fund will not purchase any security while
borrowings representing more than 5% of its total assets are outstanding.
Each 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.
(iv) Each fund does not currently intend to purchase any security if, as a
result, more than 10% of Equity-Income, Growth, Investment Grade Bond,
Asset Manager, Index 500, Contrafund, Asset Manager: Growth, Balanced,
Growth Opportunities, and Growth & Income Portfolios' net assets and 15% of
High Income and Overseas Portfolio's 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.
(v) Each fund does not currently intend to lend assets other than
securities to other parties, except by: (a) lending money (up to 5% of net
assets for Equity-Income, Growth, Overseas, Asset Manager, Index 500,
Contrafund and Asset Manager: Growth , Balanced, Growth Opportunities, and
Growth & Income Portfolios and 7.5% of net assets for High Income and
Investment Grade Bond Portfolios) to a registered investment company or
portfolio for which FMR or an affiliate serves as investment advisor 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 to repurchase agreements.)
(vi) Each fund does not currently intend to (a) purchase securities of
other investment companies, except in the open market where no commission
except the ordinary broker's 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.
(vii) Each fund does not currently intend to invest in oil, gas, or other
mineral exploration or development programs or leases.
For each fund's limitations on futures and options transactions, see the
section entitled "Limitations on Futures and Options Transactions." For
limitations on short sales, see the sections entitled "Short Sales" and
"Short Sales Against The Box".
For the funds' policies on foreign investments, see the section entitled
"Exposure to Foreign Markets."
Higher yielding, fixed-income securities of the type in which High Income
Portfolio invests will at times be purchased at a discount from or a
premium over par value. The total return on such securities includes the
potential for a capital gain or loss. High Income Portfolio generally does
not intend to hold securities for the purpose of achieving capital gains,
however, unless current yields on these securities remain attractive.
Capital gain or loss may also be realized upon the sale of portfolio
securities.
The U.S. government has from time to time in the past imposed restrictions,
through taxation and otherwise, on foreign investments by U.S. investors
such as the funds. If such restrictions should be reinstituted, it might
become necessary for Overseas Portfolio to invest all or substantially all
of its assets in U.S. securities. In such event, the Board of Trustees
would reevaluate the fund's investment objective and policies.
In accordance with the funds' fundamental investment policies, there are no
limitations on the percentage of the funds' assets which may be invested in
any one type of instrument. Nor are there limitations (except those imposed
by certain state insurance regulations) on the percentage of the funds'
assets which may be invested in any foreign country. However, in order to
comply with diversification requirements under Section 817(h) of the
Internal Revenue Code of 1986, as amended, in connection with FMR serving
as investment advisor, each fund has agreed to certain non-fundamental
limitations. Please refer to your insurance company's separate account
prospectus for more information.
EACH FUND'S INVESTMENTS MUST BE CONSISTENT WITH ITS INVESTMENT OBJECTIVE
AND POLICIES. ACCORDINGLY, NOT ALL OF THE SECURITY TYPES AND INVESTMENT
TECHNIQUES DISCUSSED BELOW ARE ELIGIBLE INVESTMENTS FOR EACH OF THE FUNDS.
ASSET ALLOCATION (ASSET MANAGER AND ASSET MANAGER: GROWTH). The
short-term/money market class includes all types of domestic and foreign
securities and short-term and money market instruments with remaining
maturities of 12 months or less or comparable interest rate sensitivity.
FMR will seek to maximize total return with respect to Asset Manager and
Asset Manager: Growth. Short-term and money market instruments may include
corporate debt securities, such as commercial paper and notes; government
securities issued by U.S. or foreign governments or their agencies or
instrumentalities; bank deposits and other financial institution
obligations; repurchase agreements involving any type of security; and
other similar short-term instruments. These instruments may be denominated
in U.S. dollars or foreign currency.
The bond class includes all varieties of domestic and foreign fixed-income
securities with maturities greater than 12 months or comparable interest
rate sensitivity. FMR will seek to maximize total return within the bond
class by adjusting a fund's investments in securities with different credit
qualities, maturities, and coupon or dividend rates, and by seeking to take
advantage of yield differentials between securities. Securities in this
class may include bonds, notes, adjustable-rate preferred stocks,
convertible bonds, mortgage-related and asset-backed securities, domestic
and foreign government and government agency securities, zero coupon bonds,
and other intermediate and long-term securities. As with the
short-term/money market class, these securities may be denominated in U.S.
dollars or foreign currency. Asset Manager and Asset Manager: Growth may
also invest in lower quality, high-yielding debt securities (commonly
referred to as "junk bonds"). Asset Manager and Asset Manager: Growth
currently intend to limit their investments in these securities to less
than 35% of their assets.
The stock class includes domestic and foreign equity securities of all
types (other than adjustable rate preferred stocks which are included in
the bond class). FMR seeks to maximize total return within this asset class
by actively allocating assets to industry sectors expected to benefit from
major trends, and to individual stocks that FMR believes to have superior
investment potential. When FMR selects equity securities, it considers both
growth and anticipated dividend income. Securities in the stock class may
include common stocks, fixed-rate preferred stocks (including convertible
preferred stocks), warrants, rights, depositary receipts, securities of
closed-end investment companies, and other equity securities issued by
companies of any size, located anywhere in the world.
In making asset allocation decisions, FMR will evaluate projections of
risk, market conditions, economic conditions, volatility, yields, and
returns. FMR's management will use database systems to help analyze past
situations and trends, research specialists in each of the asset classes to
help in securities selection, portfolio management professionals to
determine asset allocation and to select individual securities, and its own
credit analysis as well as credit analyses provided by rating services.
INVESTMENT DETAILS FOR INDEX 500 PORTFOLIO. Index 500 Portfolio is not
managed according to traditional methods of "active" investment management,
which involve the buying and selling of securities based upon economic,
financial, and market analyses and investment judgment. Instead, the fund,
utilizing a "passive" or "indexing" investment approach, attempts to
duplicate the performance of the S&P 500. The fund may omit or remove an
S&P 500 stock from its portfolio if, following objective criteria, FMR
judges the stock to be insufficiently liquid or believes the merit of the
investment has been substantially impaired by extraordinary events or
financial conditions. FMR may purchase stocks that are not included in the
S&P 500 to compensate for these differences if it believes that their
prices will move together with the prices of S&P 500 stocks omitted from
the portfolio.
The ability of the fund to meet its objective depends in part on its cash
flow because investments and redemptions by shareholders generally will
require the fund to purchase or sell portfolio securities. A low level of
shareholder transactions will keep cash flow manageable and enhance the
fund's ability to track the S&P 500. FMR will make investment changes to
accommodate cash flow in an attempt to maintain the similarity of the
fund's portfolio to the composition of the S&P 500. In addition, the fund
will maintain a reasonable position in high-quality, short-term debt
securities and money market instruments to meet redemption requests.
S&P 500. The S&P 500 is a well-known stock market index that includes
common stocks of companies representing a significant portion of the market
value of all common stocks publicly traded in the United States. Stocks in
the S&P 500 are weighted according to their market capitalization (i.e. the
number of shares outstanding multiplied by the stock's current price), with
the 62 largest stocks currently comprised approximately 50% of the index's
value. The composition of the S&P 500 is determined by Standard & Poor's
Corporation and is based on such factors as the market capitalization and
trading activity of each stock and its adequacy as a representation of
stocks in a particular industry group. Standard and Poor's Corporation may
change the index's composition from time to time.
The performance of the S&P 500 is a hypothetical number which does not take
into account brokerage commissions and other costs of investing, which the
fund bears.
AFFILIATED BANK TRANSACTIONS. A 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
borrowings. In accordance with exemptive orders issued by the Securities
and Exchange Commission (SEC), the Board of Trustees has established and
periodically reviews procedures applicable to transactions involving
affiliated financial institutions.
ASSET-BACKED SECURITIES. Asset-backed securities represent interests in
pools of consumer loans (generally unrelated to mortgage loans) and most
often are structured as pass-through securities. Interest and principal
payments ultimately depend upon payment of the underlying loans by
individuals, although the securities may be supported by letters of credit
or other credit enhancements. The value of asset-backed securities may also
depend on the creditworthiness of the servicing agent for the loan pool,
the originator of the loans, or the financial institution providing the
credit enhancement.
CLOSED-END INVESTMENT COMPANIES. A fund may purchase the shares of
closed-end investment companies to facilitate investment in certain
countries. Shares of closed-end investment companies may trade at a premium
or a discount to their net asset value.
DELAYED-DELIVERY TRANSACTIONS. A fund may buy and sell securities on a
delayed-delivery or when-issued basis. These transactions involve a
commitment by a fund to purchase or sell specific securities at a
predetermined price or yield, with payment and delivery taking place after
the customary settlement period for that type of security. Typically, no
interest accrues to the purchaser until the security is delivered. The
funds (excluding Money Market) may receive fees for entering into
delayed-delivery transactions.
When purchasing securities on a delayed-delivery basis, each fund assumes
the rights and risks of ownership, including the risk of price and yield
fluctuations. Because a 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 a 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 a 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.
Each 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.
EXPOSURE TO FOREIGN MARKETS. Foreign securities, foreign currencies, and
securities issued by U.S. entities with substantial foreign operations 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.
Foreign investments involve a risk of local political, economic, or social
instability, military action or unrest, or adverse diplomatic developments,
and may be affected by actions of foreign governments adverse to the
interests of U.S. investors. Such actions may include 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
is no assurance that FMR will be able to anticipate these potential events
or counter their effects. These risks are magnified for investments in
developing countries, which may have relatively unstable governments,
economies based on only a few industries, and securities markets that trade
a small number of securities.
Economies of particular countries or areas of the world may differ
favorably or unfavorably from the economy of the United States. 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 an exchange 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 result in 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. 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.
Some foreign securities 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.
American Depositary Receipts (ADR's) as well as other "hybrid" forms of
ADRs including European Depositary Receipts (EDRs) and Global Depositary
Receipts (GDRs), are certificates evidencing ownership of shares of a
foreign issuer. These certificates are issued by depository banks and
generally trade on an established market in the United States or elsewhere.
The underlying shares are held in trust by a custodian bank or similar
financial institution in the issuer's home country. The depository bank may
not have physical custody of the underlying securities at all times and may
charge fees for various services, including forwarding dividends and
interest and corporate actions. ADRs are an alternative to directly
purchasing the underlying foreign securities in their national markets and
currencies. However, ADRs continue to be subject to many of the risks
associated with investing directly in foreign securities. These risks
include foreign exchange risk as well as the political and economic risks
of the underlying issuer's country.
FOREIGN CURRENCY TRANSACTIONS. A fund may (excluding Money Market) conduct
foreign currency transactions on a spot (i.e., cash) or forward basis
(i.e., by entering into forward contracts to purchase or sell foreign
currencies). Although foreign exchange dealers generally do not charge a
fee for such conversions, 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 at one rate, while
offering a lesser rate of exchange should the counterparty desire to resell
that currency to the dealer. Forward contracts are customized transactions
that require a specific amount of a currency to be delivered at a specific
exchange rate on a specific date or range of dates in the future. Forward
contracts are generally traded in an interbank market 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. A 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 a fund. A fund
may also use swap agreements, indexed securities, and options and futures
contracts relating to foreign currencies for the same purposes.
A "settlement hedge" or "transaction hedge" is designed to protect a
fund against an adverse change in foreign currency values between the date
a security is purchased or sold and the date on which payment is made or
received. Entering into a forward contract for the purchase or sale of the
amount of foreign currency involved in an underlying security transaction
for a fixed amount of U.S. dollars "locks in" the U.S. dollar price of the
security. Forward contracts to purchase or sell a foreign currency may also
be used by a fund 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.
A fund may also use forward contracts to hedge against a decline in the
value of existing investments denominated in foreign currency. For example,
if a 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. A fund could also hedge the
position by selling another currency expected to perform similarly to the
pound sterling. 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 direct
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.
A 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. 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 a 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 a
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, a fund will
segregate assets to cover currency forward contracts, if any, whose purpose
is essentially speculative. A 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 currency values. Currency management strategies may
substantially change a fund's investment exposure to changes in currency
exchange rates and could result in losses to a fund if currencies do not
perform as FMR anticipates. For example, if a currency's value rose at a
time when FMR had hedged a fund by selling that currency in exchange for
dollars, a fund would not participate in the currency's appreciation. If
FMR hedges currency exposure through proxy hedges, a fund could realize
currency losses from both the hedge and the security position if the two
currencies do not move in tandem. Similarly, if FMR increases a fund's
exposure to a foreign currency and that currency's value declines, a fund
will realize a loss. There is no assurance that FMR's use of currency
management strategies will be advantageous to a fund or that it will hedge
at appropriate times.
FOREIGN REPURCHASE AGREEMENTS. Foreign repurchase agreements may include
agreements to purchase and sell foreign securities in exchange for fixed
U.S. dollar amounts, or in exchange for specified amounts of foreign
currency. Unlike typical U.S. repurchase agreements, foreign repurchase
agreements may not be fully collateralized at all times. However, pursuant
to certain state insurance regulations, any foreign repurchase agreements a
fund enters into will be secured by collateral consisting of liquid assets
having a market value of not less than 102% of the cash or assets
transferred to the other party. The value of a security purchased by a fund
may be more or less than the price at which the counterparty has agreed to
repurchase the security. In the event of default by the counterparty, the
fund may suffer a loss if the value of the security purchased is less than
the agreed-upon repurchase price, or if the fund is unable to successfully
assert a claim to the collateral under foreign laws. As a result, foreign
repurchase agreements may involve higher credit risks than repurchase
agreements in U.S. markets, as well as risks associated with currency
fluctuations. In addition, as with other emerging market investments,
repurchase agreements with counterparties located in emerging markets or
relating to emerging markets may involve issuers or counterparties with
lower credit ratings than typical U.S. repurchase agreements.
FUNDS' RIGHTS AS A SHAREHOLDER. The funds do not intend to direct or
administer the day-to-day operations of any company. Each 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 a 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
a 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 a 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 a fund and the risk of actual liability if a fund is involved in
litigation. No guarantee can be made, however, that litigation against a
fund will not be undertaken or liabilities incurred.
FUTURES AND OPTIONS. The following sections pertain to futures and options:
Asset Coverage for Futures and Options Positions, Combined Positions,
Correlation of Price Changes, Futures Contracts, Futures Margin Payments,
Limitations on Futures and Options Transactions, Liquidity of Options and
Futures Contracts, Options and Futures Relating to Foreign Currencies, OTC
Options, Purchasing Put and Call Options, and Writing Put and Call Options.
ASSET COVERAGE FOR FUTURES AND OPTIONS POSITIONS. The funds 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 option 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 a
fund's assets could impede portfolio management or the fund's ability to
meet redemption requests or other current obligations.
COMBINED POSITIONS. A 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, a 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 a fund's current or
anticipated investments exactly. The funds 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 a fund's other investments.
Options and futures prices can also diverge from the prices of their
underlying instruments, even if the underlying instruments match a 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. A 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 a 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.
FUTURES CONTRACTS. When a fund purchases a futures contract, it agrees to
purchase a specified underlying instrument at a specified future date. When
a fund sells a futures contract, it agrees 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.
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 a fund's exposure to positive and negative
price fluctuations in the underlying instrument, much as if it had
purchased the underlying instrument directly. When a 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 a fund's investment limitations. In the event of the
bankruptcy of an FCM that holds margin on behalf of a 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.
LIMITATIONS ON FUTURES AND OPTIONS TRANSACTIONS. Each fund (excluding Money
Market) has filed 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 funds intend to comply with Rule 4.5
under the Commodity Exchange Act, which limits the extent to which a fund
can commit assets to initial margin deposits and option premiums.
In addition, each fund (excluding Index 500 Portfolio) will not: (a) sell
futures contracts, purchase put options, or write call options if, as a
result, more than 25% 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; or (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. 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.
For Index 500 Portfolio, FMR also intends to follow certain other
limitations on the fund's futures and option activities. The fund will not
purchase any option if, as a result, more than 5% of its total assets would
be invested in option premiums. Under normal conditions, the fund will not
inter into any futures contract or option if, as a result, the sum of (i)
the current value of assets hedged in the case of strategies involving the
sale of securities, and (ii) the current value of the indices or other
instruments underlying the fund's other futures or options positions, would
exceed 35% of the fund's total 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 above limitations on the funds' investments in futures contracts and
options, and the funds' policies regarding futures contracts and options
discussed elsewhere in this SAI, may be changed as regulatory agencies
permit.
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 a 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 a fund to continue to hold a position until
delivery or expiration regardless of changes in its value. As a result, a
fund's access to other assets held to cover its options or futures
positions could also be impaired.
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
funds may purchase and sell currency futures and may purchase and write
currency options to increase or decrease their exposure to different
foreign currencies. A 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
a fund's investments. A currency hedge, for example, should protect a
Yen-denominated security from a decline in the Yen, but will not protect a
fund against a price decline resulting from deterioration in the issuer's
creditworthiness. Because the value of a 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.
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 (OTC) 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 funds greater flexibility to tailor an option to its 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.
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, a 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. A 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 a 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. A 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 a 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.
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 Trustees, FMR determines
the liquidity of a fund's investments and, through reports from FMR, the
Board monitors investments in illiquid instruments. In determining the
liquidity of a 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 a 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,
emerging market securities, and swap agreements to be illiquid. However,
with respect to over-the-counter options a 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. With respect
to Money Market, FMR may also determine some time deposits to be illiquid.
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 Trustees (for Money Market Portfolio, illiquid investments are
valued for purposes of monitoring amortized cost valuation). If through a
change in values, net assets, or other circumstances, a fund were in a
position where more than 10% of Money Market, Equity-Income, Growth,
Investment Grade Bond, Asset Manager, Index 500, Contrafund and Asset
Manager: Growth Portfolios' net assets and more than 15% of High Income and
Overseas Portfolios' net assets were invested in illiquid securities, the
fund would seek to take appropriate steps to protect liquidity.
INDEXED SECURITIES. A fund may purchase securities whose prices are indexed
to the prices of other securities, securities indices, currencies, precious
metals or other commodities, or other financial indicators. Indexed
securities typically, but not always, are debt securities or deposits whose
value at maturity or coupon rate is determined by reference to a specific
instrument or statistic. Gold-indexed securities, for example, typically
provide for a maturity value that depends on the price of gold, resulting
in a security whose price tends to rise and fall together with gold prices.
Currency-indexed securities typically are short-term to intermediate-term
debt securities whose maturity values or interest rates are determined by
reference to the values of one or more specified foreign currencies, and
may offer higher yields than U.S. dollar-denominated securities of
equivalent issuers. Currency-indexed securities may be positively or
negatively indexed; that is, their maturity value may increase when the
specified currency value increases, resulting in a security that performs
similarly to a foreign-denominated instrument, or their maturity value may
decline when foreign currencies increase, resulting in a security whose
price characteristics are similar to a put on the underlying currency.
Currency-indexed securities may also have prices that depend on the values
of a number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, or other instrument to which they
are indexed, and may also be influenced by interest rate changes in the
United States and abroad. At the same time, indexed securities are subject
to the credit risks associated with the issuer of the security, and their
values may decline substantially if the issuer's creditworthiness
deteriorates. Recent issuers of indexed securities have included banks,
corporations, and certain U.S. government agencies. FMR will use its
judgment in determining whether indexed securities should be treated as
short-term instruments, bonds, stocks, or as a separate asset class for
purposes of Asset Manager and Asset Manager: Growth Portfolios' investment
allocations, depending on the individual characteristics of the securities.
Indexed securities may be more volatile than the underlying instruments.
INTERFUND BORROWING AND LENDING PROGRAM. Pursuant to an exemptive order
issued by the SEC, each fund has received permission to lend money to, and
borrow money from, other funds advised by FMR or its affiliates. Interfund
loans and borrowings normally extend overnight, but can have a maximum
duration of seven days. Loans may be called on one day's notice. A fund
will lend through the program only when the returns are higher than those
available from an investment in repurchase agreements, and will borrow
through the program only when the costs are equal to or lower than the cost
of bank loans. A fund may have to borrow from a bank at a higher interest
rate if an interfund loan is called or not renewed. Any delay in repayment
to a lending fund could result in a lost investment opportunity or
additional borrowing costs.
ISSUER LOCATION. FMR determines where an issuer is located by looking at
such factors as its country of organization, the primary trading market for
its securities, and the location of its assets, personnel, sales, and
earnings. The issuer of a security is considered to be located in a
particular country if (1) the security is issued or guaranteed by the
government of the country or any of its agencies, political subdivisions,
or instrumentalities; (2) the security has its primary trading market in
that country; or (3) the issuer is organized under the laws of that
country, derives at least 50% of its revenues or profits from goods sold,
investments made, or services performed in the country, or has at least 50%
of its assets located in the country.
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 each fund's policies
regarding the quality of debt securities.
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 a 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 a 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 a 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 a fund in the event of fraud or misrepresentation. In the
absence of definitive regulatory guidance, each 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, each 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 a 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 each 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.
Each fund will set aside appropriate liquid assets in a segregated
custodial account to cover its potential obligations under standby
financing commitments.
Each fund limits the amount of total assets that it will invest in any one
issuer or in issuers within the same industry (see limitations 1 and 5 ).
For purposes of these limitations, each 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 each 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 a 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.
LOWER-QUALITY DEBT SECURITIES. While the market for high-yield 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
restructurings. Past experience may not provide an accurate indication of
the future performance of the high-yield bond market, especially during
periods of economic recession.
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 Trustees, 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 a fund's ability to dispose of 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 a 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 or
dividend coverage, asset coverage, earnings prospects, and the experience
and managerial strength of the issuer.
Each fund may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise to exercise its rights as a security holder
to seek to protect the interests of security holders if it determines this
to be in the best interest of the fund's shareholders.
MONEY MARKET SECURITIES are high-quality, short-term obligations. Some
money market securities employ a trust or other similar structure to modify
the maturity, price characteristics, or quality of financial assets. For
example, put features can be used to modify the maturity of a security or
interest rate adjustment features can be used to enhance price stability.
If the structure does not perform as intended, adverse tax or investment
consequences may result. Neither the Internal Revenue Service (IRS) nor any
other regulatory authority has ruled definitively on certain legal issues
presented by structured securities. Future tax or other regulatory
determinations could adversely affect the value, liquidity, or tax
treatment of the income received from these securities or the nature and
timing of distributions made by the funds.
MORTGAGE-BACKED SECURITIES. The funds may purchase mortgage-backed
securities issued by government and non-government entities such as banks,
mortgage lenders, or other financial institutions. A mortgage-backed
security is an obligation of the issuer backed by a mortgage or pool of
mortgages or a direct interest in an underlying pool of mortgages. Some
mortgage-backed securities, such as collateralized mortgage obligations or
CMOs, make payments of both principal and interest at a variety of
intervals; others make semiannual interest payments at a predetermined rate
and repay principal at maturity (like a typical bond). Mortgage-backed
securities are based on different types of mortgages including those on
commercial real estate or residential properties. Other types of
mortgage-backed securities will likely be developed in the future, and the
funds may invest in them if FMR determines they are consistent with the
funds' investment objective and policies.
The value of mortgage-backed securities may change due to shifts in the
market's perception of issuers. In addition, regulatory or tax changes may
adversely affect the mortgage securities market as a whole. Non-government
mortgage-backed securities may offer higher yields than those issued by
government entities, but also may be subject to greater price changes than
government issues. Mortgage-backed securities are subject to prepayment
risk. Prepayment, which occurs when unscheduled or early payments are made
on the underlying mortgages, may shorten the effective maturities of these
securities and may lower their total returns.
MUNICIPAL SECURITIES are issued to raise money for a variety of public or
private purposes, including general financing for state and local
governments, or financing for specific projects or public facilities. They
may be issued in anticipation of future revenues and may be backed by the
full taxing power of a municipality, the revenues from a specific project,
or the credit of a private organization. The value of some or all municipal
securities may be affected by uncertainties in the municipal market related
to legislation or litigation involving the taxation of municipal securities
or the rights of municipal securities holders. A fund may own a municipal
security directly or through a participation interest.
PUT FEATURES entitle the holder to sell a security back to the issuer or a
third party at any time or at specified intervals. They are subject to the
risk that the put provider is unable to honor the put feature (purchase the
security). Put providers often support their ability to buy securities on
demand by obtaining letters of credit or other guarantees from other
entities. Demand features, standby commitments, and tender options are
types of put features.
REAL ESTATE-RELATED INSTRUMENTS include real estate investment trusts,
commercial and residential mortgage-backed securities, and real estate
financings. Real estate-related instruments are sensitive to factors such
as real estate values and property taxes, interest rates, cash flow of
underlying real estate assets, overbuilding, 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 the
environment.
REPURCHASE AGREEMENTS. In a repurchase agreement, a fund purchases a
security and simultaneously commits to sell 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. To protect the fund
from the risk that the original seller will not fulfill its obligation, the
securities are held in an account of the fund at a bank, marked-to-market
daily, and maintained at a value at least equal to the sale price plus the
accrued incremental amount. While it does not presently appear possible to
eliminate all risks from these transactions (particularly the possibility
that the value of the underlying security will be less than the resale
price, as well as delays and costs to a fund in connection with bankruptcy
proceedings), it is each fund's current policy to engage in repurchase
agreement transactions with parties whose creditworthiness has been
reviewed and found satisfactory by FMR. Pursuant to certain state insurance
regulations, any repurchase agreements a fund enters into will be secured
by collateral consisting of liquid assets having a market value of not less
than 102% of the cash or assets transferred to the other party.
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, a 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, a fund might obtain a
less favorable price than prevailed when it decided to seek registration of
the security. However, in general, Money Market anticipates holding
restricted securities to maturity or selling them in an exempt transaction.
REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a 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. A
fund will enter into reverse repurchase agreements only with parties whose
creditworthiness has been found 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.
SECURITIES LENDING. A 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 a 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 a 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 Trustees
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 a 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).
SHORT SALES "AGAINST THE BOX." Money Market may sell securities short when
it owns or has the right to obtain securities equivalent in kind or amount
to the securities sold short. Short sales could be used to protect the net
asset value per share of the fund in anticipation of increased interest
rates, without sacrificing the current yield of the securities sold short.
If a fund enters into a short sale against the box, it will be required to
set aside securities equivalent in kind and amount to the securities sold
short (or securities convertible or exchangeable into such securities) and
will be required to hold such securities while the short sale is
outstanding. The fund will incur transaction costs, including interest
expenses, in connection with opening, maintaining, and closing short sales
against the box.
When a fund enters into a short sale, it will be required to set aside
securities equivalent in kind and amount to those sold short (or securities
convertible or exchangeable into such securities) and will be required to
hold them aside while the short sale is outstanding. A fund will incur
transaction costs, including interest expense, in connection with opening,
maintaining, and closing short sales.
SHORT SALES. A fund may enter into short sales with respect to stocks
underlying its convertible security holdings. For example, if FMR
anticipates a decline in the price of the stock underlying a convertible
security a fund holds, it may sell the stock short. If the stock price
subsequently declines, the proceeds of the short sale could be expected to
offset all or a portion of the effect of the stock's decline on the value
of the convertible security. Each fund currently intends to hedge no more
than 15% of its total assets with short sales on equity securities
underlying its convertible security holdings under normal circumstances.
When a fund enters into a short sale, it will be required to set aside
securities equivalent in kind and amount to those sold short (or securities
convertible or exchangeable into such securities) and will be required to
hold them aside while the short sale is outstanding. A fund will incur
transaction costs, including interest expense, in connection with opening,
maintaining, and closing short sales.
SOURCES OF CREDIT OR LIQUIDITY SUPPORT. FMR may rely on its evaluation of
the credit of a bank or other entity in determining whether to purchase a
security supported by a letter of credit guarantee, put or demand feature,
insurance or other source of credit or liquidity. In evaluating the credit
of a foreign bank or other foreign entities, FMR will consider whether
adequate public information about the entity is available and whether the
entity may be subject to unfavorable political or economic developments,
currency controls, or other government restrictions that might affect its
ability to honor its commitment.
SOVEREIGN DEBT OBLIGATIONS. Overseas Portfolio may purchase sovereign debt
instruments issued or guaranteed by foreign governments or their agencies,
including debt of Latin American nations or other developing countries.
Sovereign debt may be in the form of conventional securities or other types
of debt instruments such as loans or loan participations. Sovereign debt of
developing countries may involve a high degree of risk, and may be in
default or present the risk of default. Governmental entities responsible
for repayment of the debt may be unable or unwilling to repay principal and
interest when due, and may require renegotiation or rescheduling of debt
payments. In addition, prospects for repayment of principal and interest
may depend on political as well as economic factors.
STRIPPED GOVERNMENT SECURITIES. Stripped government securities are created
by separating the income and principal components of a U.S. Government
security and selling them separately. STRIPS (Separate Trading of
Registered Interest and Principal of Securities) are created when the
coupon payments and the principal payment are stripped from an outstanding
U.S. Treasury security by a Federal Reserve Bank.
Privately stripped government securities are created when a dealer deposits
a U.S. Treasury security or other U.S. Government security with a custodian
for safekeeping. The custodian issues separate receipts for the coupon
payments and the principal payment, which the dealer then sells.
Proprietary receipts, such as Certificates of Accrual on Treasury
Securities (CATS) and Treasury Investment Growth Receipts (TIGRS), and
generic receipts, such as Treasury Receipts (TRs), are privately stripped
U.S. Treasury securities.
Because the SEC does not consider privately stripped government securities
to be U.S. Government securities for purposes of Rule 2a-7, a fund must
evaluate them as it would non-government securities pursuant to regulatory
guidelines applicable to all money market funds.
STRIPPED MORTGAGE-BACKED SECURITIES are created when a U.S. government
agency or a financial institution separates the interest and principal
components of a mortgage-backed security and sells them as individual
securities. The holder of the "principal-only" security (PO) receives the
principal payments made by the underlying mortgage-backed security, while
the holder of the "interest-only" security (IO) receives interest payments
from the same underlying security.
The prices of stripped mortgage-backed securities may be particularly
affected by changes in interest rates. As interest rates fall, prepayment
rates tend to increase, which tends to reduce prices of IOs and increase
prices of POs. Rising interest rates can have the opposite effect.
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 a fund's exposure to long- or
short-term interest rates (in the United States 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. A 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 a 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 a 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 a 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. A 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.
A fund will maintain appropriate liquid assets in a segregated custodial
account to cover its current obligations under swap agreements. If a 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 a 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.
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.
VARIABLE AND FLOATING RATE SECURITIES provide for periodic adjustments of
the interest rate paid on the security. Variable rate securities provide
for a specified periodic adjustment in the interest rate, while floating
rate securities have interest rates that change whenever there is a change
in a designated benchmark rate. Some variable or floating rate securities
have put features.
WARRANTS. Warrants are securities that give a fund the right to purchase
equity securities from the issuer at a specific price (the strike price)
for a limited period of time. The strike price of warrants typically is
much lower than the current market price of the underlying securities, yet
they are subject to similar price fluctuations. As a result, warrants may
be more volatile investments than the underlying securities and may offer
greater potential for capital appreciation as well as capital loss.
Warrants do not entitle a holder to dividends or voting rights with respect
to the underlying securities and do not represent any rights in the assets
if the issuing company. Also, the value of the warrant does not necessarily
change with the value of the underlying securities and a warrant ceases to
have value if it is not exercised prior to expiration date. These factors
can make warrants more speculative than other types of investments.
ZERO COUPON BONDS. Zero coupon bonds do not make interest payments;
instead, they are sold at a deep discount from their face value and are
redeemed at face value when they mature. Because zero coupon bonds do not
pay current income, their prices can be very volatile when interest rates
change. In calculating its dividends, a fund takes into account as income a
portion of the difference between a zero coupon bond's purchase price and
its face value.
A broker-dealer creates a DERIVATIVE ZERO by separating the interest and
principal components of a U.S. Treasury security and selling them as two
individual securities. CATS (Certificates of Accrual on Treasury
Securities), TIGRs (Treasury Investment Growth Receipts), and TRs (Treasury
Receipts) are examples of derivative zeros.
The Federal Reserve Bank creates STRIPS (Separate Trading of Registered
Interest and Principal of Securities) by separating the interest and
principal components of an outstanding U.S. Treasury bond and selling them
as individual securities. Bonds issued by the Resolution Funding
Corporation (REFCORP) and the Financing Corporation (FICO) can also be
separated in this fashion. ORIGINAL ISSUE ZEROS are zero coupon securities
originally issued by the U.S. government, a government agency, or a
corporation in zero coupon form.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed on
behalf of each fund by FMR pursuant to authority contained in the
management contract. If FMR grants investment management authority to the
sub-advisers (see the section entitled "Management Contracts"), the
sub-advisers are authorized to place orders for the purchase and sale of
portfolio securities, and will do so in accordance with the policies
described below. 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. Securities purchased and sold by
Money Market generally will be traded on a net basis (i.e., without
commission). 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;
and arrangements for payment of fund expenses. Commissions for investments
traded on foreign exchanges will be higher than for investments traded on
U.S. exchanges and may not be subject to negotiation.
The funds may execute portfolio transactions with broker-dealers who
provide research and execution services to the funds 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; and the availability of
securities or the purchasers or sellers of securities. In addition, such
broker-dealers may furnish analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy,
and performance of accounts; effect securities transactions, and perform
functions incidental thereto (such as clearance and settlement). For Money
Market, FMR maintains a listing of broker-dealers who provide such services
on a regular basis. However, as many transactions on behalf of Money Market
are placed with broker-dealers (including broker-dealers on the list)
without regard to the furnishing of such services, it is not possible to
estimate the proportion of such transactions directed to such
broker-dealers solely because such services were provided. The selection of
such broker-dealers generally is made by FMR (to the extent possible
consistent with execution considerations) in accordance with a ranking of
broker-dealers determined periodically by FMR's investment staff based upon
the quality of research and execution services provided.
The receipt of research from broker-dealers that execute transactions on
behalf of the funds may be useful to FMR in rendering investment management
services to the funds or its other clients, and conversely, such research
provided by broker-dealers who have executed transaction orders on behalf
of other FMR clients may be useful to FMR in carrying out its obligations
to the funds. 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
each 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 funds 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 funds or shares of other Fidelity
funds to the extent permitted by law. FMR may use research services
provided by and place agency transactions with Fidelity Brokerage Services,
Inc. (FBSI) and Fidelity Brokerage Services (FBS), subsidiaries of FMR
Corp., if the commissions are fair, reasonable, and comparable to
commissions charged by non-affiliated, qualified brokerage firms for
similar services. From September 1992 through December 1994, FBS operated
under the name Fidelity Brokerage Services Limited, Inc. (FBSL). As of
January 1995, FBSL was converted to an unlimited liability company and
assumed the name FBS. Mr. Johnson 3d, Johnson family members, and various
trusts for the benefit of the Johnson family own, directly or indirectly,
more than 25% of the voting common stock of FIL.
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 Trustees has
authorized FBSI to execute portfolio transactions on national securities
exchanges in accordance with approved procedures and applicable SEC rules.
Each fund's Trustees periodically review FMR's performance of its
responsibilities in connection with the placement of portfolio transactions
on behalf of the funds and review the commissions paid by each fund over
representative periods of time to determine if they are reasonable in
relation to the benefits to the fund.
Because a high turnover rate increases transaction costs and may increase
taxable gains, FMR carefully weighs the anticipated benefits of short-term
investing against these consequences. An increased turnover rate is due to
a greater volume of shareholder purchase orders, short-term interest rate
volatility and other special market conditions. For the fiscal years ended
December 31, 1996 and 1995, the funds had the following portfolio turnover
rates:

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year High Equity- Growth Growth Oversea Investment Asset Asset Balance Contrafun Index
Income Income Opportunitie s Grade Bond Manager Manager: d d 500
s Growth

199 123% 186% 81% 28% 92% 81% 168% 120% 163 178% 14%
6 %

199 132% 87% 108% 38% 50% 182% 256% 343% 248 132% 16%
5 %

</TABLE>

BROKERAGE COMMISSIONS. The following lists the total brokerage commissions
paid; the percentage of the brokerage commissions paid to brokerage firms
that provided research services and the commissions paid to FBSI and FBSL
in dollars and as a percentage of the dollar value of all transactions in
which brokerage commissions were paid for the fiscal periods ended December
31, 1996, 1995 and 1994 for each of the funds. No commissions were paid by
Money Market or Investment Grade Bond Portfolios. The funds pay both
commissions and spreads in connection with the placement of portfolio
transactions. The difference in the percentage of brokerage commissions
paid to and the percentage of the dollar amount of transactions effected
through FBSI and FBS is a result of the low commission rates charged by
FBSI and FBS.
HIGH INCOME PORTFOLIO

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
% % %
Paid to Transactio Transactio
Firms ns ns

Period Providing To To through through

Ended TOTAL Research FBSI FBS % to FBSI % to FBS FBSI FBS
1996 $501,544 69% $10,168 $ 0 2% 0% 2% 0%

1995 $185,561 95% $ 21,896 $ 0 12% 0% 16% 0%

1994 $135,013 98% $ 24,140 $ 0 18% 0% 29% 0%

</TABLE>

EQUITY-INCOME PORTFOLIO

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
% % %
Paid to Transactio Transactio
Firms ns ns

Period Providing To To through through

Ended TOTAL Research FBSI FBS % to FBSI % to FBS FBSI FBS

1996 $13,450,350 66% $3,563,724 $19,906 27% 0% 40% 0%

1995 $5,473,128 94% $2,043,797 $33,242 37% 1% 51% 0%

1994 $4,893,684 95% $ 1,717,630 $116,658 35% 2% 46% 1%

</TABLE>

GROWTH OPPORTUNITIES PORTFOLIO

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
% % %
Paid to Transactio Transactio
Firms ns ns

Period Providing To To through through

Ended TOTAL Research FBSI FBS % to FBSI % to FBS FBSI FBS

1996 $195,409 64% $43,699 $2,978 22% 2% 33% 1%

1995 $105,477 67% $40,358 $100 38% 0% 58% 0%

</TABLE>

GROWTH PORTFOLIO

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
% % %
Paid to Transactio Transactio
Firms ns ns

Period Providing To To through through

Ended TOTAL Research FBSI FBS % to FBSI % to FBS FBSI FBS

1996 $4,689,993 68% $1,167,932 $41,903 25% 1% 37% 1%

1995 $3,835,624 97% $1,237,372 $13,081 32% 0% 43% 0%

1994 $3,120,411 97% $956,332 $0 31% 0% 44% 0%

</TABLE>

OVERSEAS PORTFOLIO

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
% % %
Paid to Transactio Transactio
Firms ns ns

Period Providing To To through through

Ended TOTAL Research FBSI FBS % to FBSI % to FBS FBSI FBS

1996 $4,851,584 86% $23,341 $338,852 1% 7% 2% 9%

1995 $2,495,829 96% $10,057 $240,170 0% 10% 1% 12%

1994 $2,985,961 90% $1,605 $255,413 0% 9% 0% 11%

</TABLE>

BALANCED PORTFOLIO
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
% % %
Paid to Transactio Transactio
Firms ns ns

Period Providing To To through through

Ended TOTAL Research FBSI FBS % to FBSI % to FBS FBSI FBS

1996 $138,649 70% $32,871 $1,221 24% 1% 39% 1%

1995 $65,835 89% $12,056 $195 18% 0% 37% 0%

</TABLE>

ASSET MANAGER PORTFOLIO

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
% % %
Paid to Transactio Transactio
Firms ns ns

Period Providing To To through through

Ended TOTAL Research FBSI FBS % to FBSI % to FBS FBSI FBS

1996 $5,969,816 85% $600,978 $27,964 10% 0% 22% 0%

1995 $12,537,406 96% $1,793,406 $218,281 14% 2% 33% 2%

1994 $3,316,118 92% $583,097 $107,280 18% 3% 32% 3%

</TABLE>

INDEX 500 PORTFOLIO

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
% % %
Paid to Transactio Transactio
Firms ns ns

Period Providing To To through through

Ended TOTAL Research FBSI FBS % to FBSI % to FBS FBSI FBS

1996 $51,591 91% $374 $0 1% 0% 0% 0%

1995 $133,659 31% $20 $ 0 0% 0% 0% 0%

1994 $10,286 1% $17 $ 0 0% 0% 0% 0%

</TABLE>

ASSET MANAGER: GROWTH PORTFOLIO

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
% % %
Paid to Transactio Transactio
Firms ns ns

Period Providing To To through through

Ended TOTAL Research FBSI FBS % to FBSI % to FBS FBSI FBS

1996 $296,932 70% $52,039 $2,173 18% 1% 30% 1%

1995 $335,353 93% $4,540 $14 13% 0% 30% 0%

</TABLE>

CONTRAFUND PORTFOLIO

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
% % %
Paid to Transactio Transactio
Firms ns ns

Period Providing To To through through

Ended TOTAL Research FBSI FBS % to FBSI % to FBS FBSI FBS

1996 $4,846,349 73% $1,020,036 $8,210 21% 0% 32% 0%

1995 $672,767 97% $246,389 $ 0 37% 0% 49% 0%

</TABLE>

From time to time the Trustees will review whether the recapture for the
benefit of the funds of some portion of the brokerage commissions or
similar fees paid by the funds on portfolio transactions is legally
permissible and advisable. Each 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 Trustees 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 each fund to seek such
recapture.
Although the Trustees and officers of each fund are substantially the same
as those of other funds managed by FMR, investment decisions for each 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 each fund. In
some cases this system could have a detrimental effect on the price or
value of the security as far as each fund is concerned. In other cases,
however, the ability of the funds to participate in volume transactions
will produce better executions and prices for the funds. It is the current
opinion of the Trustees that the desirability of retaining FMR as
investment adviser to each fund outweighs any disadvantages that may be
said to exist from exposure to simultaneous transactions.
VALUATION OF PORTFOLIO SECURITIES
FSC normally determines each fund's net asset value per share (NAV) as of
the close of the New York Stock Exchange (NYSE) (normally 4:00 p.m. Eastern
time. The valuation of portfolio securities is determined as of this time
for the purpose of computing the fund's NAV.
MONEY MARKET PORTFOLIO
Portfolio securities and other assets are valued on the basis of amortized
cost. This technique involves initially valuing an instrument at its cost
as adjusted for amortization of premium or accretion of discount rather
than its current market value. The amortized cost value of an instrument
may be higher or lower than the price a fund would receive if it sold the
instrument.
During periods of declining interest rates, the fund's yield based on
amortized cost valuation may be higher than would result if the fund used
market valuations to determine its NAV. The converse would apply during
periods of rising interest rates.
Valuing the fund's investments on the basis of amortized cost and use of
the term "money market fund" are permitted pursuant to Rule 2a-7 under the
1940 Act. The fund's must adhere to certain conditions under Rule 2a-7, as
summarized in the section entitled "Quality and Maturity" on page 4 .
The Board of Trustees oversees FMR's adherence to the provisions of Rule
2a-7 and has established procedures designed to stabilize the fund's NAV at
$1.00. At such intervals as they deem appropriate, the Trustees consider
the extent to which NAV calculated by using market valuations would deviate
from $1.00 per share. If the Trustees believe that a deviation from the
fund's amortized cost per share may result in material dilution or other
unfair results to shareholders, the Trustees have agreed to take such
corrective action, if any, as they deem appropriate to eliminate or reduce,
to the extent reasonably practicable, the dilution or unfair results. Such
corrective action could include selling portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity; withholding dividends; redeeming shares in kind; establishing NAV
by using available market quotations; and such other measures as the
Trustees may deem appropriate.
INVESTMENT GRADE BOND AND HIGH INCOME PORTFOLIOS
Portfolio securities are valued by various methods depending on the primary
market or exchange on which they trade. Fixed-income securities and other
assets for which market quotations are readily available may be valued at
market values determined by such securities' most recent bid prices (sales
prices if the principal market is an exchange) in the principal market in
which they normally are traded, as furnished by recognized dealers in such
securities or assets.
Fixed-income securities and convertible securities may also be valued on
the basis of information furnished by a pricing service that uses a
valuation matrix which incorporates both dealer-supplied valuations and
electronic data processing techniques. Use of pricing services has been
approved by the Board of Trustees. A number of pricing services are
available, and the Trustees, on the basis of an evaluation of these
services, may use various pricing services or discontinue the use of any
pricing service.
Short-term securities are valued either at amortized cost or at original
cost plus accrued interest, both of which approximate current value.
Most equity securities for which the primary market is the United States
are valued at last sale price or, if no sale has occurred, at the closing
bid price. Most equity securities for which the primary market is outside
the United States are valued using the official closing price or the last
sale price in the principal market in which they are traded. If the last
sale price (on the local exchange) is unavailable, the last evaluated quote
or last bid price normally is used.
Futures contracts and options are valued on the basis of market quotations,
if available.
Foreign securities are valued based on prices furnished by independent
brokers or quotation services which express the value of securities in
their local currency. FSC gathers all exchange rates daily at the close of
the NYSE using the last quoted price on the local currency and then
translates the value of foreign securities from their local currencies into
U.S. dollars. Any changes in the value of forward contracts due to exchange
rate fluctuations and days to maturity are included in the calculation of
NAV. If an extraordinary event that is expected to materially affect the
value of a portfolio security occurs after the close of an exchange on
which that security is traded, then that security will be valued as
determined in good faith by a committee appointed by the Board of Trustees.
EQUITY-INCOME, INDEX 500, CONTRAFUND, GROWTH, GROWTH & INCOME, OVERSEAS,
ASSET MANAGER, ASSET MANAGER: GROWTH, BALANCED, AND GROWTH OPPORTUNITIES
PORTFOLIOS
Portfolio securities are valued by various methods depending on the primary
market or exchange on which they trade. Most equity securities for which
the primary market is the United States are valued at last sale price or,
if no sale has occurred, at the closing bid price. Most equity securities
for which the primary market is outside the United States are valued using
the official closing price or the last sale price in the principal market
in which they are traded. If the last sale price (on the local exchange) is
unavailable, the last evaluated quote or last bid price normally is used.
Fixed-income securities and other assets for which market quotations are
readily available may be valued at market values determined by such
securities' most recent bid prices (sales prices if the principal market is
an exchange) in the principal market in which they normally are traded, as
furnished by recognized dealers in such securities or assets. Fixed-income
securities and convertible securities may also be valued on the basis of
information furnished by a pricing service that uses a valuation matrix
which incorporates both dealer-supplied valuations and electronic data
processing techniques. Use of pricing services has been approved by the
Board of Trustees. A number of pricing services are available, and the
Trustees, on the basis of an evaluation of these services, may use various
pricing services or discontinue the use of any pricing service.
Short-term securities are valued either at amortized cost or at original
cost plus accrued interest, both of which approximate current value.
Futures contracts and options are valued on the basis of market quotations,
if available.
Foreign securities are valued based on prices furnished by independent
brokers or quotation services which express the value of securities in
their local currency. FSC gathers all exchange rates daily at the close of
the NYSE using the last quoted price on the local currency and then
translates the value of foreign securities from their local currencies into
U.S. dollars. Any changes in the value of forward contracts due to exchange
rate fluctuations and days to maturity are included in the calculation of
NAV. If an extraordinary event that is expected to materially affect the
value of a portfolio security occurs after the close of an exchange on
which that security is traded, then that security will be valued as
determined in good faith by a committee appointed by the Board of Trustees.
Securities and other assets for which there is no readily available market
value are valued in good faith by a committee appointed by the Board of
Trustees. The procedures set forth above need not be used to determine the
value of the securities owned by a fund if, in the opinion of a committee
appointed by the Board of Trustees, some other method would more accurately
reflect the fair market value of such securities.
PERFORMANCE
The fund may quote performance in various ways. All performance information
supplied by the fund in advertising is historical and is not intended to
indicate future returns. Each non-money market fund's share price, and each
fund's yield and total return fluctuate in response to market conditions
and other factors, and the value of non-money market fund shares when
redeemed may be more or less than their original cost.
YIELD CALCULATIONS (MONEY MARKET PORTFOLIO). To compute the money market
fund's yield for a period, the net change in value of a hypothetical
account containing one share reflects the value of additional shares
purchased with dividends from the one original share and dividends declared
on both the original share and any additional shares. The net change is
then divided by the value of the account at the beginning of the period to
obtain a base period return. This base period return is annualized to
obtain a current annualized yield. The money market fund also may calculate
a compound effective yield by compounding the base period return over a
one-year period. In addition to the current yield, the money market fund
may quote yields in advertising based on any historical seven-day period.
Yields for the money market fund are calculated on the same basis as other
money market funds, as required by regulation.
YIELD CALCULATIONS (EXCLUDING MONEY MARKET PORTFOLIO). Yields for a fund
are computed by dividing the fund's interest and dividend income for a
given 30-day or one-month period, net of expenses, by the average number of
shares entitled to receive distributions during the period, dividing this
figure by the fund's net asset value (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. Dividends from equity investments are treated as if they
were accrued on a daily basis, solely for the purposes of yield
calculations. 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 to daily
income. For a fund's investments denominated in foreign currencies, income
and expenses are calculated first in their respective currencies, and are
then converted to U.S. dollars, either when they are actually converted or
at the end of the 30-day or one month period, whichever is earlier. Capital
gains and losses generally are excluded from the calculation as are gains
and losses from currency exchange rate fluctuations.
Income calculated for the purposes of calculating a 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, a fund's yield may not equal its
distribution rate, the income paid to your account, or the income reported
in the fund's financial statements. In calculating the fund's yield, a
fund may from time to time use a portfolio security's coupon rate instead
of its yield to maturity in order to reflect the risk premium on that
security. This practice will have the effect of reducing the fund's yield.
Yield information may be useful in reviewing a fund's performance and in
providing a basis for comparison with other investment alternatives.
However, each 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 a
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 a 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 quoted in advertising reflect all
aspects of a fund's return, including the effect of reinvesting dividends
and capital gain distributions, and any change in the fund's net asset
value (NAV) over a stated period. Average annual total returns are
calculated by determining the growth or decline in value of a hypothetical
historical investment in a 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 total return of 100% over ten years would
produce an average annual total return of 7.18%, which is the steady annual
rate of return that would equal 100% growth on a compounded basis in ten
years. Average annual total returns covering periods of less than one year
are calculated by determining a fund's total return for the period,
extending that return for a full year (assuming that return remains
constant over the year), and quoting the result as an annual return. While
average annual total returns are a convenient means of comparing investment
alternatives, investors should realize that a fund's performance is not
constant over time, but changes from year to year, and that average annual
total returns represent averaged figures as opposed to the actual
year-to-year performance of the fund.
In addition to average annual total returns, a 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-tax or after-tax basis. Total returns, yields, and other performance
information may be quoted numerically or in a table, graph, or similar
illustration.
NET ASSET VALUE. Charts and graphs using a fund's net asset values,
adjusted net asset values, and benchmark indices may be used to exhibit
performance. An adjusted NAV includes any distributions paid by a fund and
reflects all elements of its return. Unless otherwise indicated, a fund's
adjusted NAVs are not adjusted for sales charges, if any.
MOVING AVERAGES. A fund may illustrate performance using moving averages. A
long-term moving average is the average of each week's adjusted closing NAV
for a specified period. A short-term moving average is the average of each
day's adjusted closing NAV for a specified period. Moving Average Activity
Indicators combine adjusted closing NAVs from the last business day of each
week with moving averages for a specified period to produce indicators
showing when an NAV has crossed, stayed above, or stayed below its moving
average. On December 29, 1996, the 13-week and 39-week long-term moving
averages were $20.66 and $19.74 for Equity-Income; $31.27 and $30.04 for
Growth; $18.32 and $17.85 for Overseas; $16.71 and $15.89 for Asset
Manager; $87.40 and $81.61 for Index 500; $12.89 and $12.15 for Asset
Manager: Growth; $16.15 and $15.17 for Contrafund; $12.05 and $11.42 for
Balanced; N/A and N/A for Growth & Income; and $15.14 and $14.10 for Growth
Opportunities, respectively.

<TABLE>
<CAPTION>
<S> <C> <C>
Historical Fund Results Average Annual Total Returns Cumulative Total Returns

</TABLE>

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
As of 12/31/96 Yields One Five Life of One Five Life of
Year Years Fund* Year Years Fund*

Money Market Portfolio 7-day-5.27% 5.41% 4.53% 5.96% 5.41% 24.78% 78.38%

Investment Grade 30-day-6.03% 3.19% 6.64% 8.19% 3.19% 37.89% 88.91%
Bond Portfolio

High Income Portfolio 30-day-7.31% 14.03% 14.96% 11.12% 14.03% 100.79% 187.13%

Asset Manager N/A 14.60% 11.26% 11.69% 14.60% 70.47% 124.77%
Portfolio

Asset Manager: N/A 20.04% N/A 21.56% 20.04% N/A 47.67%
Growth Portfolio

Equity-Income N/A 14.28% 17.98% 13.74% 14.28% 128.56% 262.28%
Portfolio

Index 500 Portfolio N/A 22.71% N/A 17.06% 22.71% N/A 98.44%

Contrafund Portfolio N/A 21.22% N/A 30.19% 21.22% N/A 69.37%

Growth Portfolio N/A 14.71% 15.16% 15.15% 14.71% 102.58% 310.00%

Overseas Portfolio N/A 13.15% 9.15% 7.88% 13.15% 54.89% 112.54%

Growth & Income N/A
Portfolio

Balanced Portfolio N/A 9.98% N/A 11.95% 9.98% N/A 25.28%

Growth Opportunities N/A 18.27% N/A 25.24% 18.27% N/A 56.73%
Portfolio

</TABLE>

If FMR had not reimbursed certain fund expenses during certain of these
periods, the total returns would have been lower.
* 10-year return for Money Market Portfolio and High Income Portfolio
Commencement of Operations; Equity-Income and Growth Portfolios commenced
operations October 9, 1986; Overseas Portfolio commenced operations January
28, 1987; Investment Grade Bond Portfolio commenced operations December 5,
1988; Asset Manager Portfolio commenced operations September 6, 1989; Index
500 Portfolio commenced operations August 27, 1992; Asset Manager: Growth,
Contrafund; Balanced and Growth Opportunities Portfolios commenced
operations January 3, 1995; and Growth & Income Portfolio commenced
operations December 30, 1996.
The following tables show the income and capital elements of each fund's
cumulative total return. The table compares each fund's return to the
record of the Standard & Poor's 500 Index (S&P 500), the Dow Jones
Industrial Average (DJIA), and the cost of living, as measured by the
Consumer Price Index (CPI), over the same period. The CPI information is as
of the month end closest to the initial investment date for each fund's.
The S&P 500 and DJIA comparisons are provided to show how each fund's total
return compared to the record of a broad unmanaged index of common stocks
and a narrower set of stocks of major industrial companies, respectively,
over the same period. Because the Money Market, High Income, and Investment
Grade Bond Portfolio invests in fixed-income securities, common stocks
represent a different type of investment from the funds. Common stocks
generally offer greater growth potential than the funds, but generally
experience greater price volatility, which means greater potential for
loss. In addition, common stocks generally provide lower income than a
fixed-income investment such as a money market or bond fund. Each fund has
the ability to invest in securities not included in either index, and its
investment portfolio may or may not be similar in composition to the
indexes. The S&P 500 and DJIA returns are based on the prices of unmanaged
groups of stocks and, unlike each fund's returns, do not include the effect
of brokerage commissions or other costs of investing.
MONEY MARKET PORTFOLIO During the ten-year period ended December 31,
1996, a hypothetical $10,000 investment in Money Market Portfolio would
have grown t o $17,838, assuming all distributions were reinvested.
This was a period of fluctuating interest rates and the figures below
should not be considered representative of the dividend income or capital
gain or loss that could be realized from an investment in the fund today.
MONEY MARKET PORTFOLIO INDICES

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Year Value of Value of Value of Total S&P 500 DJIA Cost of
Ended Initial Reinveste Reinveste Value Living
$10,000 d d
Investmen Dividend Capital
t Distribution Gain
s Distribution
s

1996 $10,000 $7,838 $ 0 $ 17,838 $ 41,499 $ 46,181 $ 14,353

1995 $10,000 $6,923 $ 0 $ 16,923 $ 33,750 $ 35,882 $ 13,891

1994 $10,000 $5,985 $ 0 $ 15,985 $ 24,532 $ 26,244 $ 13,548

1993 $10,000 $5,333 $ 0 $ 15,333 $ 24,213 $ 25,001 $ 13,195

1992 $10,000 $4,853 $ 0 $ 14,853 $ 21,996 $ 21,370 $ 12,842

1991 $10,000 $4,296 $ 0 $ 14,296 $ 20,434 $ 19,916 $ 12,480

1990 $10,000 $3,475 $ 0 $ 13,475 $ 15,660 $ 16,018 $ 12,109

1989 $10,000 $2,473 $ 0 $ 12,473 $ 16,164 $ 16,104 $ 11,412

1988 $10,000 $1,430 $ 0 $ 11,430 $ 12,275 $ 12,222 $ 10,905

1987 $10,000 $644 $ 0 $ 10,644 $ 10,526 $ 10,543 $ 10,443

</TABLE>

Explanatory Notes: With an initial investment of $10,000 made on December
31, 1986, the net amount invested in fund shares was $10,000. The cost of
the initial investment ($10,000), together with the aggregate cost of
reinvested dividends for the period covered (their cash value at the time
they were reinvested), amounted t o $17,838. I f distributions had not
been reinvested, the amount of distributions earned from the fund over time
would have been smaller, and cash payments (dividends) for the period would
have amounted to $5,803. The fund did not distribute any capital gains
during the period. Tax consequences of different investments have not been
factored into the above figures.
HIGH INCOME PORTFOLIO During the ten-year period ended December 31, 1996, a
hypothetical $10,000 investment in High Income Portfolio would have grown
to $28,713, assuming all distributions were reinvested. This was a
period of fluctuating interest rates and bond prices and the figures below
should not be considered representative of the dividend income or capital
gain or loss that could be realized from an investment in the fund today.
HIGH INCOME PORTFOLIO INDICES

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Year Value of Value of Value of Total S&P 500 DJIA Cost of
Ended Initial Reinveste Reinveste Value Living
$10,000 d d
Investme Dividend Capital
nt Distribution Gain
s Distribution
s

1996 $11,560 $ 15,734 $ 1,419 $ 28,713 $ 41,499 $ 46,181 $ 14,353

1995 $11,127 $ 13,088 $ 964 $ 25,179 $ 33,750 $ 35,882 $ 13,891

1994 $9,926 $ 10,072 $ 860 $ 20,858 $ 24,532 $ 26,244 $ 13,548

1993 $11,071 $ 9,869 $ 266 $ 21,206 $ 24,213 $ 25,001 $ 13,195

1992 $9,991 $ 7,484 $ 138 $ 17,613 $ 21,996 $ 21,370 $ 12,842

1991 $8,818 $ 5,361 $ 121 $ 14,300 $ 20,434 $ 19,916 $ 12,480

1990 $6,528 $ 3,969 $ 90 $ 10,587 $ 15,660 $ 16,018 $ 12,109

1989 $7,488 $ 3,237 $ 103 $ 10,828 $ 16,164 $ 16,104 $ 11,412

1988 $8,920 $ 2,258 $ 123 $ 11,300 $ 12,275 $ 12,222 $ 10,905

1987 $8,938 $ 1,061 $ 123 $ 10,122 $ 10,526 $ 10,543 $ 10,443

</TABLE>

Explanatory Notes: With an initial investment of $10,000 made on December
31, 1986, the net amount invested in fund shares was $10,000. The cost of
the initial investment ($10,000), together with the aggregate cost of
reinvested dividends and capital gain distributions for the period covered
(their cash value at the time they were reinvested), amounted to
$23,613. If distributions had not been reinvested, the amount of
distributions earned from the fund over time would have been smaller, and
cash payments for the period would have amounted to $7,751 for
dividends an d $702 for capital gains distributions. Tax consequences
of different investments have not been factored into the above figures.
EQUITY-INCOME PORTFOLIO During the ten-year period ended December 31, 1996,
a hypothetical $10,000 investment in Equity-Income Portfolio would have
grown t o $36,228, as suming all distributions were reinvested. This
was a period of fluctuating interest rates, bond prices, and stock prices
and the figures below should not be considered representative of the
dividend income or capital gain or loss that could be realized from an
investment in the fund today.
EQUITY-INCOME PORTFOLIO INDICES

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Year Value of Value of Value of Total S&P 500 DJIA Cost of
Ended Initial Reinvested Reinvested Value Living
$10,000 Dividend Capital Gain
Investment Distributions Distributions

1996 $20,988 $ 9,127 $ 6,113 $ 36,228 $ 41,499 $ 46,181 $ 14,353

1995 $19,232 $ 8,313 $ 4,156 $ 31,701 $ 33,750 $ 35,882 $ 13,891

1994 $15,319 $ 6,048 $ 2,099 $ 23,466 $ 24,532 $ 26,244 $ 13,548

1993 $15,409 $ 5,518 $ 990 $ 21,917 $ 24,213 $ 25,001 $ 13,195

1992 $13,373 $ 4,296 $ 859 $ 18,528 $ 21,996 $ 21,370 $ 12,842

1991 $11,826 $ 3,265 $ 760 $ 15,851 $ 20,434 $ 19,916 $ 12,480

1990 $9,491 $ 1,959 $ 610 $ 12,060 $ 15,660 $ 16,018 $ 12,109

1989 $12,265 $ 1,679 $ 292 $ 14,236 $ 16,164 $ 16,104 $ 11,412

1988 $10,988 $ 977 $ 167 $ 12,132 $ 12,275 $ 12,222 $ 10,905

1987 $9,401 $ 343 $ 143 $ 9,887 $ 10,526 $ 10,543 $ 10,443

</TABLE>

Explanatory Notes: With an initial investment of $10,000 made on October 9,
1986, the net amount invested in fund shares was $10,000. The cost of the
initial investment ($10,000), together with the aggregate cost of
reinvested dividends and capital gain distributions for the period covered
(their cash value at the time they were reinvested), amounted to
$19,805 . If distributions had not been reinvested, the amount of
distributions earned from the fund over time would have been smaller, and
cash payments for the period would have amounted to $4,232 for dividends
and $3,024 f or capital gains distributions. Tax consequences of
different investments have not been factored into the above figures.
GROWTH PORTFOLIO. During the ten-year period ended December 31, 1996, a
hypothetical $10,000 investment in Growth Portfolio would have grown to
$41,000 as suming all distributions were reinvested. This was a period
of fluctuating stock prices and the figures below should not be considered
representative of the dividend income or capital gain or loss that could be
realized from an investment in the fund today.
GROWTH PORTFOLIO INDICES

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Year Value of Value of Value of Total S&P 500 DJIA Cost of
Ende Initial Reinvested Reinvested Value Living
d $10,000 Dividend Capital Gain
Investment Distributions Distributions

1996 $31,047 $ 2,594 $ 7,359 $ 41,000 $ 41,499 $ 46,181 $ 14,353

1995 $29,113 $ 2,330 $ 4,301 $ 35,744 $ 33,750 $ 35,882 $ 13,891

1994 $21,625 $ 1,586 $ 3,195 $ 26,406 $ 24,532 $ 26,244 $ 13,548

1993 $23,011 $ 1,542 $ 1,858 $ 26,411 $ 24,213 $ 25,001 $ 13,195

1992 $19,701 $ 1,198 $ 1,226 $ 22,125 $ 21,996 $ 21,370 $ 12,842

1991 $18,455 $ 1,071 $ 713 $ 20,239 $ 20,434 $ 19,916 $ 12,480

1990 $12,871 $ 541 $ 497 $ 13,909 $ 15,660 $ 16,018 $ 12,109

1989 $15,135 $ 399 $ 224 $ 15,758 $ 16,164 $ 16,104 $ 11,412

1988 $11,685 $ 124 $ 173 $ 11,982 $ 12,275 $ 12,222 $ 10,905

1987 $10,110 $ 106 $ 150 $ 10,366 $ 10,526 $ 10,543 $ 10,443

</TABLE>

Explanatory Notes: With an initial investment of $10,000 made on December
31, 1986, the net amount invested in fund shares was $10,000. The cost of
the initial investment ($10,000), together with the aggregate cost of
reinvested dividends and capital gain distributions for the period covered
(their cash value at the time they were reinvested), amounted to
$16,555. If distributions had not been reinvested, the amount of
distributions earned from the fund over time would have been smaller, and
cash payments for the period would have amounted to $1,196 for dividends
and $4,506 for capital gains distributions. Tax consequences of
different investments have not been factored into the above figures.
OVERSEAS PORTFOLIO. During the period from January 28, 1987 (commencement
of operations) to December 31, 1996, a hypothetical $10,000 investment in
Overseas Portfolio would have grown to $21,254, assuming all
distributions were reinvested. This was a period of fluctuating stock
prices and the figures below should not be considered representative of the
dividend income or capital gain or loss that could be realized from an
investment in the fund today.
OVERSEAS PORTFOLIO INDICES

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Year Value of Value of Value of Total S&P 500 DJIA Cost of
Ended Initial Reinvested Reinvested Value Living**
$10,000 Dividend Capital Gain
Investment Distributions Distributions

1996 $ 18,840 $ 1,979 $ 435 $ 21,254 $ 36,629 $ 40,630 $ 14,263

1995 $ 17,060 $ 1,571 $ 152 $ 18,783 $ 29,789 $ 31,568 $ 13,804

1994 $ 15,670 $ 1,375 $ 71 $ 17,116 $ 21,653 $ 23,089 $ 13,462

1993 $ 15,480 $ 1,276 $ 70 $ 16,826 $ 21,371 $ 21,996 $ 13,112

1992 $ 11,530 $ 720 $ 0 $ 12,250 $ 19,414 $ 18,801 $ 12,761

1991 $ 13,090 $ 631 $ 0 $ 13,721 $ 18,036 $ 17,522 $ 12,401

1990 $ 12,420 $ 285 $ 0 $ 12,705 $ 13,822 $ 14,092 $ 12,032

1989 $ 12,670 $ 250 $ 0 $ 12,920 $ 14,267 $ 14,168 $ 11,340

1988 $ 10,110 $ 121 $ 0 $ 10,231 $ 10,834 $ 10,753 $ 10,836

1987*$ 9,350 $ 112 $ 0 $ 9,462 $ 9,291 $ 9,276 $ 10,378

</TABLE>

* From January 28, 1987 (commencement of operations).
** From month-end closest to initial investment date.
Explanatory Notes: With an initial investment of $10,000 made on January
28, 1987, the net amount invested in fund shares was $10,000. The cost of
the initial investment ($10,000), together with the aggregate cost of
reinvested dividends and capital gain distributions for the period covered
(their cash value at the time they were reinvested), amounted to
$11,705. I f distributions had not been reinvested, the amount of
distributions earned from the fund over time would have been smaller, and
cash payments for the period would have amounted to $1,280 for dividends
and $330 for capital gains distributions. Tax consequences of different
investments (with the exception of foreign tax withholdings) have not been
factored into the above figures.
INVESTMENT GRADE BOND PORTFOLIO. During the period from December 5, 1988
(commencement of operations) to December 31, 1996, a hypothetical $10,000
investment in Investment Grade Bond Portfolio would have grown to $18,891,
assuming all distributions were reinvested. This was a period of
fluctuating interest rates and bond prices and the figures below should not
be considered representative of the dividend income or capital gain or loss
that could be realized from an investment in the fund today.
INVESTMENT GRADE BOND PORTFOLIO INDICES

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Year Value of Value of Value of Total S&P 500 DJIA Cost of
Ende Initial Reinvested Reinvested Value Living**
d $10,000 Dividend Capital Gain
Investment Distributions Distributions

1996 $ 12,240 $ 6,272 $ 379 $ 18,891 $ 34,627 $ 39,266 $13,184

1995 $ 12,480 $ 5,441 $ 386 $ 18,307 $ 28,161 $ 30,509 $12,760

1994 $ 11,020 $ 4,243 $ 341 $ 15,604 $ 20,469 $ 22,314 $12,444

1993 $ 11,480 $ 4,420 $ 313 $ 16,213 $ 20,203 $ 21,257 $12,120

1992 $ 10,970 $ 3,418 $ 223 $ 14,611 $ 18,353 $ 18,170 $11,796

1991 $ 11,080 $ 2,596 $ 24 $ 13,700 $ 17,050 $ 16,934 $11,463

1990 $ 9,920 $ 1,831 $ 21 $ 11,772 $ 13,067 $ 13,619 $11,122

1989 $10,140 $ 921 $ 22 $ 11,083 $ 13,487 $ 13,692 $10,482

1988*$ 10,000 $ 52 $ 0 $ 10,052 $ 10,242 $ 10,392 $10,017

</TABLE>

* From December 5, 1988 (commencement of operations).
** From month-end closest to initial investment date.
Explanatory Notes: With an initial investment of $10,000 made on December
5, 1988, the net amount invested in fund shares was $10,000. The cost of
the initial investment ($10,000), together with the aggregate cost of
reinvested dividends and capital gain distributions for the period covered
(their cash value at the time they were reinvested), amounted to
$15,886. If distributions had not been reinvested, the amount of
distributions earned from the fund over time would have been smaller, and
cash payments for the period would have amounted to $4,484 for dividends
and $270 for capital gains distributions. Tax consequences of different
investments have not been factored into the above figures.
ASSET MANAGER PORTFOLIO. During the period from September 6, 1989
(commencement of operations) to December 31, 1996, a hypothetical $10,000
investment in Asset Manager Portfolio would have grown to $22,477,
assuming all distributions were reinvested. This was a period of
fluctuating interest rates, bond prices, and stock prices and the figures
below should not be considered representative of the dividend income or
capital gain or loss that could be realized from an investment in the fund
today.
ASSET MANAGER PORTFOLIO INDICES

1996 $ 16,930 $ 3,418 $ 2,129 $ 22,477 $ 26,004 $ 29,109 $ 12,729

1995 $ 15,790 $ 2,448 $ 1,375 $ 19,613 $ 21,148 $ 22,617 $ 12,319

1994 $ 13,790 $ 1,779 $ 1,201 $ 16,770 $ 15,372 $ 16,542 $ 12,014

1993 $ 15,420 $ 1,642 $ 795 $ 17,857 $ 15,172 $ 15,758 $ 11,701

1992 $ 13,320 $ 1,004 $ 406 $ 14,730 $ 13,783 $ 13,470 $ 11,388

1991 $ 12,550 $ 610 $ 25 $ 13,185 $ 12,804 $ 12,554 $ 11,067

1990 $ 10,240 $ 497 $ 21 $ 10,758 $ 9,813 $ 10,096 $ 10,738

1989*$ 9,970 $ 91 $ 20 $ 10,081 $ 10,128 $ 10,151 $ 10,120

</TABLE>

* From September 6, 1989 (commencement of operations).
** From month-end closest to initial investment date.
Explanatory Notes: With an initial investment of $116420,000 made on
September 6, 1989, the net amount invested in fund shares was $10,000. The
cost of the initial investment ($10,000), together with the aggregate cost
of reinvested dividends and capital gain distributions for the period
covered (their cash value at the time they were reinvested), amounted to
$14,386. If distributions had not been reinvested, the amount of
distributions earned from the fund over time would have been smaller, and
cash payments for the period would have amounted to $2,320 for dividends
and $1,530 or capital gains distributions. Tax consequences of different
investments have not been factored into the above figures.
INDEX 500 PORTFOLIO. During the period from August 27, 1992 (commencement
of operations) to December 31, 1996, a hypothetical $10,000 investment in
Index 500 Portfolio would have grown to $19,844, assuming all distributions
were reinvested. This was a period of fluctuating stock prices and the
figures below should not be considered representative of the dividend
income or capital gain or loss that could be realized from an investment in
the fund today.
INDEX 500 PORTFOLIO INDICES

1996 $ 17,810 $ 1,115 $ 921 $ 19,844 $ 20,090 $ 22,204 $ 11,256

1995 $ 15,142 $ 750 $ 279 $ 16,171 $ 16,339 $ 17,252 $ 10,894

1994 $ 11,244 $ 363 $ 180 $ 11,787 $ 11,876 $ 12,618 $ 10,625

1993 $ 11,148 $ 360 $ 158 $ 11,666 $ 11,722 $ 12,021 $ 10,348

1992*$ 10,520 $ 95 $ 16 $ 10,631 $ 10,648 $ 10,275 $ 10,071

</TABLE>

* From August 27, 1992 (commencement of operations).
** From month-end closest to initial investment date.
Explanatory Notes: With an initial investment of $10,000 made on August 27,
1992, the net amount invested in fund shares was $10,000. The cost of the
initial investment ($10,000), together with the aggregate cost of
reinvested dividends and capital gain distributions for the period covered
(their cash value at the time they were reinvested), amounted to
$11,451. If distributions had not been reinvested, the amount of
distributions earned from the fund over time would have been smaller, and
cash payments for the period would have amounted to $722 for dividends
and $668 for capital gains distributions. Tax consequences of different
investments have not been factored into the above figures.
CONTRAFUND PORTFOLIO. During the period from January 3, 1995 (commencement
of operations) to December 31, 1996, a hypothetical $10,000 investment in
Contrafund Portfolio would have grown to $16,937, assuming all
distributions were reinvested. This was a period of fluctuating stock
prices and the figures below should not be considered representative of the
dividend income or capital gain or loss that could be realized from an
investment in the fund today.
CONTRAFUND PORTFOLIO INDICES

1996 $ 16,560 $ 73 $ 304 $ 16,937 $ 16,915 $ 17,594 $ 10,595

1995* $ 13,790 $ 61 $ 121 $ 13,972 $ 13,756 $ 13,670 $ 10,254

</TABLE>

1996 $ 13,100 $ 348 $ 1,319 $ 14,767 $ 16,915 $ 17,594 $ 10,595

1995*$ 11,770 $ 110 $ 422 $ 12,302 $ 13,756 $ 13,670 $ 10,254

</TABLE>

1996 $ 12,230 $ 154 $ 144 $ 12,528 $ 16,915 $ 17,594 $ 10,595

1995* $ 11,170 $ 141 $ 81 $ 11,392 $ 13,756 $ 13,670 $ 10,254

</TABLE>

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
GROWTH OPPORTUNITIES PORTFOLIO INDICES

Year Value of Value of Value of Total S&P 500 DJIA Cost of
Ended Initial Reinvested Reinvested Value Living**
$10,000 Dividend Capital Gain
Investment Distributions Distributions

1996 $ 15,400 $ 130 $ 143 $ 15,673 $ 16,915 $ 17,594 $ 10,595

1995* $ 13,070 $ 111 $ 71 $ 13,252 $ 13,756 $ 13,670 $ 10,254

</TABLE>

* From January 3, 1995 (commencement of operations).
** From month-end closest to initial investment date.
Explanatory Notes: With an initial investment of $10,000 made on January 3,
1995, the net amount invested in fund shares was $10,000. The cost of the
initial investment ($10,000), together with the aggregate cost of
reinvested dividends and capital gain distributions for the period covered
(their cash value at the time they were reinvested), amounted to
$10,231 . If distributions had not been reinvested, the amount of
distributions earned from the fund over time would have been smaller, and
cash payments for the period would have amounted to $110 for dividends
and $120 for capital gains distributions. Tax consequences of different
investments have not been factored into the above figures.
PERFORMANCE COMPARISONS. A fund's performance may be compared to the
performance of other mutual funds in general, or to the performance of
particular types of mutual funds. These comparisons may be expressed as
mutual fund rankings prepared by Lipper Analytical Services, Inc. (Lipper),
an independent service located in Summit, New Jersey that monitors the
performance of mutual funds. Generally, Lipper rankings are based on total
return, assume reinvestment of distributions, do not take sales charges or
redemption fees into consideration, and are prepared without regard to tax
consequences. In addition to the mutual fund rankings, a fund's performance
may be compared to stock, bond, and money market mutual fund performance
indices prepared by Lipper or other organizations. When comparing these
indices, it is important to remember the risk and return characteristics of
each type of investment. For example, while stock mutual funds may offer
higher potential returns, they also carry the highest degree of share price
volatility. Likewise, money market funds may offer greater stability of
principal, but generally do not offer the higher potential returns
available from stock mutual funds.
The Asset Allocation Composite (for Asset Manager and Asset Manager:
Growth) Indices are hypothetical representations of the performance of the
funds' three asset classes according to their respective weighting in each
fund's neutral mix. The weightings are rebalanced monthly. Beginning
January 1, 1997, the Asset Allocation Composite Index represents Asset
Manager's three asset classes according to their respective weighting in
the fund's neutral mix (10% - short-term/money market: 40% - bonds; and 50%
stocks), and the Aggressive Asset Allocation Composite Index represents
Asset Manager: Growth's three asset classes according to their respective
weighting in the fund's neutral mix (5% - short-term/money market: 25% -
bonds; and 70% stocks). The following indices are used to calculate the
three asset allocation composite indices: the Salomon Brothers 3-month
T-Bill Total Rate of Return Index, representing the average of T-Bill rates
for each of the prior three months, adjusted to a bond equivalent yield
basis (short-term and money market instruments); the Lehman Brothers
Aggregate Bond Index, a market value weighted performance benchmark for
investment-grade fixed-rate debt issues, including government, corporate,
asset-backed, and mortgaged-backed securities with maturities of at least
one year; and the S&P 500, a widely recognized, unmanaged index of common
stocks. Prior to January 1, 1997 the Asset Allocation Composite Index
represented Asset Manager's three asset classes according to their
respective weighting in the fund's neutral mix (20% - short-term
instruments: 40% - bonds; and 40% stocks) and prior to January 1, 1997, the
Aggressive Asset Allocation Composite Index represented Asset Manager:
Growth's three asset classes according to their respective weighting in the
fund's neutral mix (5% - short-term instruments: 30% - bonds; and 65%
stocks). The following indices were used to calculate the three asset
allocation composite indices: the Salomon Brothers 3-month T-Bill Total
Rate of Return Index; the Lehman Brothers Treasury Bond Index, a widely
utilized benchmark of bond market performance that includes virtually all
long-term public obligations of the U.S. Treasury (bonds): and the S&P 500.
Asset Manager and Asset Manager: Growth have the ability to invest in
securities that are not included in any of the indices, and each fund's
actual investment portfolio may not reflect the composition or the
weighting of the indices used. The S&P 500 and the asset allocation
composite indices include reinvestment of income or dividends and are based
on the prices of unmanaged groups of stocks or U.S. Treasury obligations.
Unlike each fund's returns, the indices do not include the effect of paying
brokerage commissions, spreads, or other costs of investing. Historical
results are used for illustrative purposes only and do not reflect the past
or future performance of the funds.
The following table represents the comparative indices calendar
year-to-year performance of the fund's asset classes:

<TABLE>
<CAPTION>
<S> <C> <C> <C>
SALOMON BROTHERS 3-MONTH LEHMAN BROTHERS TREASURY
S&P 500
T-BILL TOTAL RATE OF BOND INDEX
RETURN INDEX

1996 5.25% 2.70% 22.96%

1995 5.75 18.35 37.58

1994 4.24 -3.38 1.32

1993 3.09 10.68 10.08

1992 3.61 7.21 7.62

1991 5.75 15.29 30.47

1990 7.90 8.54 -3.10

1989 8.64 14.38 31.69

1988 6.76 6.99 16.61

1987 5.91 2.00 5.10

1986 6.23 15.61 18.56

</TABLE>

From time to time, a fund's performance may also be compared to other
mutual funds tracked by financial or business publications and periodicals.
For example, the fund may quote Morningstar, Inc. in its advertising
materials. Morningstar, Inc. is a mutual fund rating service that rates
mutual funds on the basis of risk-adjusted performance. Rankings that
compare the performance of Fidelity funds to one another in appropriate
categories over specific periods of time may also be quoted in advertising.
A fund's performance may also be compared to that of a benchmark index
representing the universe of securities in which the fund may invest. The
total return of a benchmark index reflects reinvestment of all dividends
and capital gains paid by securities included in the index. Unlike a fund's
returns, however, the index returns do not reflect brokerage commissions,
transaction fees, or other costs of investing directly in the securities
included in the index.
A fund may be compared in advertising to Certificates of Deposit (CDs) or
other investments issued by banks or other depository institutions. Mutual
funds differ from bank investments in several respects. For example, a fund
may offer greater liquidity or higher potential returns than CDs, a fund
does not guarantee your principal or your return, and fund shares are not
FDIC insured.
Fidelity may provide information designed to help individuals understand
their investment goals and explore various financial strategies. Such
information may include information about current economic, market, and
political conditions; materials that describe general principles of
investing, such as asset allocation, diversification, risk tolerance, and
goal setting; questionnaires designed to help create a personal financial
profile; worksheets used to project savings needs based on assumed rates of
inflation and hypothetical rates of return; and action plans offering
investment alternatives. Materials may also include discussions of
Fidelity's asset allocation funds and other Fidelity funds, products, and
services.
Ibbotson Associates of Chicago, Illinois (Ibbotson) provides historical
returns of the capital markets in the United States, including common
stocks, small capitalization stocks, long-term corporate bonds,
intermediate-term government bonds, long-term government bonds, Treasury
bills, the U.S. rate of inflation (based on the Consumer Price Index), and
combinations of various capital markets. The performance of these capital
markets is based on the returns of different indices.
Fidelity funds may use the performance of these capital markets in order to
demonstrate general risk-versus-reward investment scenarios. Performance
comparisons may also include the value of a hypothetical investment in any
of these capital markets. The risks associated with the security types in
any capital market may or may not correspond directly to those of the
funds. Ibbotson calculates total returns in the same method as the funds.
The funds may also compare performance to that of other compilations or
indices that may be developed and made available in the future.
A fund may compare its performance or the performance of securities in
which it may invest to averages published by IBC Financial Data, Inc. of
Ashland, Massachusetts. These averages assume reinvestment of
distributions. IBC's MONEY FUND REPORT AVERAGES(trademark)/All Taxable
(Money Market), which is reported in IBC's MONEY FUND REPORT(trademark),
covers over 812 taxable money market funds. When evaluating comparisons to
money market funds, investors should consider the relevant differences in
investment objectives and policies. Specifically, money market funds invest
in short-term, high-quality instruments and seek to maintain a stable $1.00
share price. Bond funds, however, invest in longer-term instruments and
their share prices change daily in response to a variety of factors.
In advertising materials, Fidelity may reference or discuss its products
and services, which may include other Fidelity funds; retirement investing;
brokerage products and services; model portfolios or allocations; saving
for college or other goals; charitable giving; and the Fidelity credit
card. In addition, Fidelity may quote or reprint financial or business
publications and periodicals as they relate to current economic and
political conditions, fund management, portfolio composition, investment
philosophy, investment techniques, the desirability of owning a particular
mutual fund, and Fidelity services and products. Fidelity may also reprint,
and use as advertising and sales literature, articles from Fidelity Focus,
a quarterly magazine provided free of charge to Fidelity fund shareholders.
A fund may be advertised as part of certain asset allocation programs
involving other Fidelity or non-Fidelity mutual funds. These asset
allocation programs may advertise a model portfolio and its performance
results.
A fund may be advertised as part of a no transaction fee (NTF) program in
which Fidelity and non-Fidelity mutual funds are offered. An NTF program
may advertise performance results.
A fund may present its fund number, Quotron(trademark) number, and CUSIP
number, and discuss or quote its current portfolio manager.
VOLATILITY. A fund may quote various measures of volatility and benchmark
correlation in advertising. In addition, the fund may compare these
measures to those of other funds. Measures of volatility seek to compare
the fund's historical share price fluctuations or total returns to those of
a benchmark. Measures of benchmark correlation indicate how valid a
comparative benchmark may be. All measures of volatility and correlation
are calculated using averages of historical data. In advertising, a fund
may also discuss or illustrate examples of interest rate sensitivity.
MOMENTUM INDICATORS indicate a fund's price movements over specific periods
of time. Each point on the momentum indicator represents the fund's
percentage change in price movements over that period.
A fund may advertise examples of the effects of periodic investment plans,
including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a fund at periodic intervals,
thereby purchasing fewer shares when prices are high and more shares when
prices are low. While such a strategy does not assure a profit or guard
against loss in a declining market, the investor's average cost per share
can be lower than if fixed numbers of shares are purchased at the same
intervals. In evaluating such a plan, investors should consider their
ability to continue purchasing shares during periods of low price levels.
A fund may be available for purchase through retirement plans or other
programs offering deferral of, or exemption from, income taxes, which may
produce superior after-tax returns over time. For example, a $1,000
investment earning a taxable return of 10% annually would have an after-tax
value of $1,949 after ten years, assuming tax was deducted from the return
each year at a 31% rate. An equivalent tax-deferred investment would have
an after-tax value of $2,100 after ten years, assuming tax was deducted at
a 31% rate from the tax-deferred earnings at the end of the ten-year
period.
As of December 31, 1996, FMR advised over $28 billion in tax-free fund
assets, $96 billion in money market fund assets, $303 billion in equity
fund assets, $61 billion in international fund assets, and $25 billion in
Spartan fund assets. The funds may reference the growth and variety of
money market mutual funds and the adviser's innovation and participation in
the industry. The equity funds under management figure represents the
largest amount of equity fund assets under management by a mutual fund
investment adviser in the United States, making FMR America's leading
equity (stock) fund manager. FMR, its subsidiaries, and affiliates maintain
a worldwide information and communications network for the purpose of
researching and managing investments abroad.
Each fund is available only through the purchase of variable annuity and
variable life insurance contracts offering deferral of income taxes on
earnings, which may produce superior after-tax returns over time. For
example, a $1,000 investment earning a taxable return of 10% annually would
have an after-tax value of $1,949 after ten years, assuming tax was
deducted from the return each year at a 31% rate. An equivalent
tax-deferred investment would have an after-tax value of $2,100 after ten
years, assuming tax was deducted at a 31% rate from the tax-deferred
earnings at the end of the ten-year period. Individuals holding shares of a
fund through a variable annuity or variable life insurance contract may
receive additional tax benefits from the deferral of income taxes
associated with variable contracts. Individuals should consult their tax
advisors to determine the effect of holding variable contracts on their
individual tax situations.
YIELDS AND TOTAL RETURNS QUOTED FOR A FUND INCLUDE THE FUND'S EXPENSES, BUT
MAY NOT INCLUDE CHARGES AND EXPENSES ATTRIBUTABLE TO ANY PARTICULAR
INSURANCE PRODUCT. BECAUSE YOU CAN PURCHASE SHARES OF EACH FUND ONLY
THROUGH A VARIABLE ANNUITY AND/OR A VARIABLE LIFE INSURANCE CONTRACT, YOU
SHOULD CAREFULLY REVIEW THE PROSPECTUS OF THE INSURANCE PRODUCT YOU HAVE
CHOSEN FOR INFORMATION ON RELEVANT CHARGES AND EXPENSES. Excluding these
charges from quotations of a fund's performance has the effect of
increasing the performance quoted.
INTERNATIONAL INDICES, MARKET CAPITALIZATION, AND NATIONAL
STOCK MARKET RETURN
The following tables show the total market capitalization of certain
countries according to the Morgan Stanley Capital International Indices
database, the total market capitalization of Latin American countries
according to the International Finance Corporation Emerging Markets
database, and the performance of national stock markets as measured in U.S.
dollars by the Morgan Stanley Capital International stock market indices
for the twelve months ended December 31, 1996. Of course, these results are
not indicative of future stock market performance or the funds'
performance. Market conditions during the periods measured fluctuated
widely. Brokerage commissions and other fees are not factored into the
values of the indices.
MARKET CAPITALIZATION. Companies outside the U.S. now make up nearly
two-thirds of the world's stock market capitalization. According to Morgan
Stanley Capital International, the size of the markets as measured in U.S.
dollars grew from $5,080.3 ($8,621.7 including the U.S.) billion in 1995 to
$5,749.4 ($10,078.9 including the U.S.) billion in 1996.
The following table measures the total market capitalization of certain
countries according to the Morgan Stanley Capital International Indices
database. The value of the markets are measured in billions of U.S. dollars
as of December 31, 1996.
TOTAL MARKET CAPITALIZATION
Australia $ 168.3 Japan $ 1,842.4

Austria 23.8 Netherlands 269.8

Belgium 67.9 Norway 31.5

Canada 271.8 Singapore/Malaysia 76.7/148.3

Denmark 50.5 Spain 129.0

France 395.0 Sweden 143.8

Germany 465.9 Switzerland 321.0

Hong Kong 214.6 United Kingdom 1,093.6

Italy 175.6 United States 4,549.1

The following table measures the total market capitalization of Latin
American countries according to the International Finance Corporation
Emerging Markets database. The value of the markets is measured in billions
of U.S. dollars as of December 31, 1996.
TOTAL MARKET CAPITALIZATION - LATIN AMERICA
Argentina $ 30.6

Brazil 109.9

Chile 31.8

Colombia 5.8

Mexico 74.6

Venezuela 9.8

Total Latin America $ 271.0

NATIONAL STOCK MARKET PERFORMANCE. Certain national stock markets have
outperformed the U.S. stock market. The first table below represents the
performance of national stock markets as measured in U.S. dollars by the
Morgan Stanley Capital International stock market indices for the twelve
months ended December 31, 1996. The second table shows the same performance
as measured in local currency. Each table measures total return based on
the period's change in price, dividends paid on stocks in the index, and
the effect of reinvesting dividends net of any applicable foreign taxes.
These are unmanaged indices composed of a sampling of selected companies
representing an approximation of the market structure of the designated
country.
STOCK MARKET PERFORMANCE MEASURED IN U.S. DOLLARS
Australia 17.8% Japan -15.4%

Austria 4.9 Netherlands 28.5

Belgium 13.1 Norway 29.2

Canada 29.3 Singapore/Malaysia -6.9/25.9

Denmark 22.4 Spain 41.3

France 21.8 Sweden 38.0

Germany 14.1 Switzerland 2.8

Hong Kong 33.1 United Kingdom 27.4

Italy 13.4 United States 24.1

STOCK MARKET PERFORMANCE MEASURED IN LOCAL CURRENCY
Australia 10.4% Japan -4.8%

Austria 12.9 Netherlands 38.7

Belgium 22.1 Norway 30.6

Canada 29.9 Singapore/Malaysia -7.9/25.2

Denmark 30.3 Spain 51.5

France 29.5 Sweden 42.2

Germany 22.9 Switzerland 20.0

Hong Kong 33.1 United Kingdom 15.6

Italy 8.7 United States 24.1

The following table shows the average annualized stock market returns
measured in U.S. dollars as of December 31, 1996.
STOCK MARKET PERFORMANCE
Five Years Ended Ten Years Ended
December 31, 1996 December 31, 1996
Germany 10.89% 45.12%

Hong Kong 17.84 38.95

Japan -3.63 5.91

Spain 5.38 19.33

United Kingdom 11.78 46.08

United States 12.70 43.60

PERFORMANCE COMPARISONS. A fund's performance may be compared to the
performance of other mutual funds in general, or to the performance of
particular types of mutual funds. These comparisons may be expressed as
mutual fund rankings prepared by Lipper Analytical Services, Inc. (Lipper),
an independent service located in Summit, New Jersey that monitors the
performance of mutual funds. Generally, Lipper rankings are based on total
return, assume reinvestment of distributions, do not take sales charges or
redemption fees into consideration, and are prepared without regard to tax
consequences. Lipper may also rank funds based on yield. In addition to the
mutual fund rankings, a fund's performance may be compared to stock, bond,
and money market mutual fund performance indices prepared by Lipper or
other organizations. When comparing these indices, it is important to
remember the risk and return characteristics of each type of investment.
For example, while stock mutual funds may offer higher potential returns,
they also carry the highest degree of share price volatility. Likewise,
money market funds may offer greater stability of principal, but generally
do not offer the higher potential returns available from stock mutual
funds.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Each fund is open for business and its net asset value per share (NAV) is
calculated the day the New York Stock Exchange (NYSE) is open for trading.
The NYSE has designated the following holiday closings for 1997: New Year's
Day, Presidents' Day (observed), Good Friday, Memorial Day (observed),
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. Although
FMR expects the same holiday schedule to be observed in the future, the
NYSE may modify its holiday schedule at any time. In addition, the funds
will not process wire purchases and redemptions on days when the Federal
Reserve Wire System is closed.
FSC normally determines the fund's NAV as of the close of the NYSE
(normally 4:00 p.m. Eastern time). However, NAV may be calculated earlier
if trading on the NYSE is restricted or as permitted by the Securities and
Exchange Commission (SEC). To the extent that portfolio securities are
traded in other markets on days when the NYSE is closed, a fund's NAV may
be affected on days when investors do not have access to the fund to
purchase or redeem shares. In addition, trading in some of a fund's
portfolio securities may not occur on days when the fund is open for
business.
If the Trustees determine that existing conditions make cash payments
undesirable, redemption payments may be made in whole or in part in
securities or other property, valued for this purpose as they are valued in
computing a fund's NAV. Shareholders receiving securities or other property
on redemption may realize a gain or loss for tax purposes, and will incur
any costs of sale, as well as the associated inconveniences.
In the Prospectus, each fund has notified shareholders that it reserves the
right at any time, without prior notice, to refuse exchange purchases by
any person or group if, in FMR's judgment, the fund would be unable to
invest effectively in accordance with its investment objective and
policies, or would otherwise potentially be adversely affected.
DISTRIBUTIONS AND TAXES
For a discussion of tax consequences of variable contracts, please refer to
your insurance company's separate account prospectus.
Variable contracts purchased through insurance company separate accounts
provide for the accumulation of all earnings from interest, dividends, and
capital appreciation without current federal income tax liability to the
owner. Depending on the variable contract, distributions from the contract
may be subject to ordinary income tax and a 10% penalty tax on
distributions before age 59. Only the portion of a distribution
attributable to income is subject to federal income tax. Investors should
consult with competent tax advisors for a more complete discussion of
possible tax consequences in a particular situation.
Section 817(h) of the Internal Revenue Code provides that the investments
of a separate account underlying a variable insurance contract (or the
investments of a mutual fund, the shares of which are owned by the variable
separate account) must be "adequately diversified" in order for the
contract to be treated as an annuity or life insurance for tax purposes.
The Treasury Department has issued regulations prescribing these
diversification requirements. Each fund intends to comply with these
requirements.
Each fund intends to qualify each year 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, each fund intends to distribute substantially all its net
taxable income and net realized capital gains within each calendar year as
well as on a fiscal year basis. Each fund also intends to comply with other
tax rules applicable to regulated investment companies including a
requirement that gross capital gains from selling securities held less than
three months must constitute less than 30% of a fund's gross income for
each fiscal year. Gains from some forward currency contracts, futures
contracts, and options are included in this 30% calculation, which may
limit a fund's investments in such instruments. Income and capital gain
distributions are reinvested in additional shares of the fund. This is done
to preserve the tax advantaged status of the variable contracts. Each fund
is treated as a separate entity from the other funds of its respective
trust for tax purposes. Money Market Portfolio may distribute any net
realized short-term gains once each year, or more frequently if necessary,
in order to maintain the fund's NAV at $1.00 per share and to comply with
tax regulations.
If a fund purchases shares in certain foreign investment entities, defined
as passive foreign investment companies (PFICs) in the Internal Revenue
Code, it may be subject to U.S. federal income tax on a portion of any
excess distribution or gain from the disposition of such shares. Interest
charges may also be imposed on the fund with respect to deferred taxes
arising from such distributions or gains. Generally, a fund will elect to
mark-to-market any PFIC shares. Unrealized gains will be recognized as
income for tax purposes and must be distributed to shareholders as
dividends.
MONEY MARKET PORTFOLIO - As of December 31, 1996, the fund had a capital
loss carryforward of approxima tely $29,000 which will expire on
December 31, 2002.
INVESTMENT GRADE BOND PORTFOLIO - As of December 31, 1996, the fund had a
capital loss carryforward of approximatel y $1,514,000, of which $230,000
and $1,284,000 will expire on 2002 and 2004, respectively.
BALANCED PORTFOLIO - As of December 31, 1996, the fund has a capital loss
carryforward of approximatel y $372,000 w hich will expire on December
31, 2004.
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 Investment Company Act of 1940 (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.
At present, the principal operating activities of FMR Corp. are those
conducted by its divisions as follows: FSC, which is the transfer and
shareholder servicing agent for certain of the funds advised by FMR;
Fidelity Investments Institutional Operations Company, which performs
shareholder servicing functions for institutional customers and funds sold
through intermediaries; and Fidelity Investments Retail Marketing Company,
which provides marketing services to various companies within the Fidelity
organization.
Fidelity investment personnel may invest in securities for their own
account pursuant to a code of ethics that sets forth all employees'
fiduciary responsibilities regarding the funds, establishes procedures for
personal investing and restricts certain transactions. For example, all
personal trades in most securities require pre-clearance, and participation
in initial public offerings is prohibited. In addition, restrictions on the
timing of personal investing in relation to trades by Fidelity funds and on
short-term trading have been adopted.
TRUSTEES AND OFFICERS
The Trustees and executive officers of the trust 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 Trustees
also serve in similar capacities for other funds advised by FMR. The
business address of each Trustee and officer who is an "interested person"
(as defined in the Investment Company Act of 1940) is 82 Devonshire Street,
Boston, Massachusetts 02109, which is also the address of FMR. The business
address of all the other Trustees is Fidelity Investments, P.O. Box 9235,
Boston, Massachusetts 02205-9235. Those Trustees who are "interested
persons" by virtue of their affiliation with either the trust or FMR are
indicated by an asterisk (*).
*EDWARD C. JOHNSON 3d (66), Trustee and President, is Chairman,
Chief Executive Officer and a Director of FMR Corp.; a Director and
Chairman of the Board and of the Executive Committee of FMR; Chairman and a
Director of FMR Texas Inc., Fidelity Management & Research (U.K.) Inc., and
Fidelity Management & Research (Far East) Inc.
*J. GARY BURKHEAD (55), Trustee and Senior Vice President, is
President of FMR; and President and a Director of FMR Texas Inc., Fidelity
Management & Research (U.K.) Inc., and Fidelity Management & Research (Far
East) Inc.
RALPH F. CO X (64), Truste e (1991), is a management consultant
(1994). Prior to February 1994, he was President of Greenhill Petroleum
Corporation (petroleum exploration and production). Until March 1990, Mr.
Cox was President and Chief Operating Officer of Union Pacific Resources
Company (exploration and production). He is a Director of Sanifill
Corporation (non-hazardous waste, 1993), CH2M Hill Companies (engineering),
Rio Grande, Inc. (oil and gas production), and Daniel Industries (petroleum
measurement equipment manufacturer). In addition, he is a member of
advisory boards of Texas A&M University and the University of Texas at
Austin.
PHYLLIS BURKE DAVI S (65), Trust ee (1992). Prior to her retirement in
September 1991, Mrs. Davis was the Senior Vice President of Corporate
Affairs of Avon Products, Inc. She is currently a Director of BellSouth
Corporation (telecommunications), Eaton Corporation (manufacturing, 1991),
and the TJX Companies, Inc. (retail stores), and previously served as a
Director of Hallmark Cards, Inc. (1985-1991) and Nabisco Brands, Inc. In
addition, she is a member of the President's Advisory Council of The
University of Vermont School of Business Administration.
E. BRADLEY JONES (69), Truste e. Prior to his retirement in 1984, Mr.
Jones was Chairman and Chief Executive Officer of LTV Steel Company. He is
a Director of TRW Inc. (original equipment and replacement products),
Cleveland-Cliffs Inc (mining), Consolidated Rail Corporation, Birmingham
Steel Corporation, and RPM, Inc. (manufacturer of chemical products), and
he previously served as a Director of NACCO Industries, Inc. (mining and
marketing, 1985-1995) and Hyster-Yale Materials Handling, Inc. (1985-1995).
In addition, he serves as a Trustee of First Union Real Estate Investments,
a Trustee and member of the Executive Committee of the Cleveland Clinic
Foundation, a Trustee and member of the Executive Committee of University
School (Cleveland), and a Trustee of Cleveland Clinic Florida.
DONALD J. KIR K (64), Trustee, is Executive-in-Residence (1995) at
Columbia University Graduate School of Business and a financial consultant.
From 1987 to January 1995, Mr. Kirk was a Professor at Columbia University
Graduate School of Business. Prior to 1987, he was Chairman of the
Financial Accounting Standards Board. Mr. Kirk is a Director of General Re
Corporation (reinsurance), and he previously served as a Director of
Valuation Research Corp. (appraisals and valuations, 1993-1995). In
addition, he serves as Chairman of the Board of Directors of the National
Arts Stabilization Fund, Chairman of the Board of Trustees of the Greenwich
Hospital Association, a Member of the Public Oversight Board of the
American Institute of Certified Public Accountants' SEC Practice Section
(1995), and as a Public Governor of the National Association of Securities
Dealers, Inc. (1996).
*PETER S. LYNC H (53), Trustee, is Vice Chairman and Director of FMR
(1992). Prior to May 31, 1990, he was a Director of FMR and Executive Vice
President of FMR (a position he held until March 31, 1991); Vice President
of Fidelity Magellan Fund and FMR Growth Group Leader; and Managing
Director of FMR Corp. Mr. Lynch was also Vice President of Fidelity
Investments Corporate Services (1991-1992). He is a Director of W.R. Grace
& Co. (chemicals) and Morrison Knudsen Corporation (engineering and
construction). In addition, he serves as a Trustee of Boston College,
Massachusetts Eye & Ear Infirmary, Historic Deerfield (1989) and Society
for the Preservation of New England Antiquities, and as an Overseer of the
Museum of Fine Arts of Boston.
GERALD C. McDONOUGH (67), Trustee and Vice-Chairman of the
non-interested Trustees, is Chairman of G.M. Management Group (strategic
advisory services). Prior to his retirement in July 1988, he was Chairman
and Chief Executive Officer of Leaseway Transportation Corp. (physical
distribution services). Mr. McDonough is a Director of Brush-Wellman Inc.
(metal refining), York International Corp. (air conditioning and
refrigeration), Commercial Intertech Corp. (hydraulic systems, building
systems, and metal products, 1992), CUNO, Inc. (liquid and gas filtration
products, 1996), and Associated Estates Realty Corporation (a real estate
investment trust, 1993). Mr. McDonough served as a Director of
ACME-Cleveland Corp. (metal working, telecommunications, and electronic
products) from 1987-1996.
EDWARD H. MALONE (71), T rustee. Prior to his retirement in 1985, Mr.
Malone was Chairman, General Electric Investment Corporation and a Vice
President of General Electric Company. He is a Director of Allegheny Power
Systems, Inc. (electric utility), General Re Corporation (reinsurance) and
Mattel Inc. (toy manufacturer). In addition, he serves as a Trustee of the
Naples Philharmonic Center for the Arts and Rensselaer Polytechnic
Institute, and he is a member of the Advisory Boards of Butler Capital
Corporation Funds and Warburg, Pincus Partnership Funds.
MARVIN L. MANN (63), Tru stee (1993) is Chairman of the Board,
President, and Chief Executive Officer of Lexmark International, Inc.
(office machines, 1991). Prior to 1991, he held the positions of Vice
President of International Business Machines Corporation ("IBM") and
President and General Manager of various IBM divisions and subsidiaries.
Mr. Mann is a Director of M.A. Hanna Company (chemicals, 1993) and Infomart
(marketing services, 1991), a Trammell Crow Co. In addition, he serves as
the Campaign Vice Chairman of the Tri-State United Way (1993) and is a
member of the University of Alabama President's Cabinet.
WILLIAM O. McCOY (63), T rustee (1997), is the Vice President of
Finance for the University of North Carolina (16-school system, 1995).
Prior to his retirement in December 1994, Mr. McCoy was Vice Chairman of
the Board of BellSouth Corporation (telecommunications) and President of
BellSouth Enterprises. He is currently a Director of Liberty Corporation
(holding company), Weeks Corporation of Atlanta (real estate, 1994), and
Carolina Power and Light Company (electric utility, 1996). Previously, he
was a Director of First American Corporation (bank holding company,
1979-1996). In addition, Mr. McCoy serves as a member of the Board of
Visitors for the University of North Carolina at Chapel Hill (1994) and for
the Kenan Flager Business School (University of North Carolina at Chapel
Hill).
THOMAS R. WILLIAM S (68), Trustee, is President of The Wales Group,
Inc. (management and financial advisory services). Prior to retiring in
1987, Mr. Williams served as Chairman of the Board of First Wachovia
Corporation (bank holding company), and Chairman and Chief Executive
Officer of The First National Bank of Atlanta and First Atlanta Corporation
(bank holding company). He is currently a Director of BellSouth Corporation
(telecommunications), ConAgra, Inc. (agricultural products), Fisher
Business Systems, Inc. (computer software), Georgia Power Company (electric
utility), Gerber Alley & Associates, Inc. (computer software), National
Life Insurance Company of Vermont, American Software, Inc., and AppleSouth,
Inc. (restaurants, 1992).
WILLIAM J. HAYE S (62), Vi ce President (1994), is Vice President of
Fidelity's equity funds; Senior Vice President of FMR; and Managing
Director of FMR Corp.
ROBERT A. LAWRENCE (44) , Vice President (1994), is Vice President of
Fidelity's high income funds and Senior Vice President of FMR (1993). Prior
to joining FMR, Mr. Lawrence was Managing Director of the High Yield
Department for Citicorp (1984-1991).
FRED L. HENNING, JR. (57) , Vice President, is Vice President of
Fidelity's fixed-income funds (1995) and Senior Vice President of FMR
(1995).
SARAH H. ZENOBLE (46), Vice President, is Vice President of
Fidelity's money market funds (1996) and Vice President of FMR Texas Inc.
JOHN TODD (47), is Vice Pr esident of Fidelity Asset Manager: Income,
Fidelity Asset Manager, and Fidelity Asset Manager: Growth and manager of
their short-term and money market investments, which he has managed since
December 1996. He also manages several other Fidelity funds. Mr. Todd
joined Fidelity in 1981.
KEVIN GRANT (36), is Vice President and Manager of Investment Grade
Bond which he has managed since February 1997. He has also been co-manager
of Balanced Portfolio since 1996. He also manages several other Fidelity
funds. Prior to joining Fidelity, Mr. Grant was a vice president and chief
mortgage strategist at Morgan Stanley for three years.
CHARLES MORRISO N (56), is Manager of Asset Manager and Asset
Manager: Growth's fixed-income investments, which he has managed since
February 1997. He also manages several other Fidelity funds. Prior to
joining Fidelity in 1987, Mr. Morrison has worked as an analyst and
manager.
BARRY COFFM AN (37), Vice President of High Income Portfolio (1992),
is an employee of FMR.
JENNIFER G. FARRELLY (33) , Vice President of Index Portfolio (1996),
is an employee of FMR.
RICHARD C. HABERMAN N (56), Vice President of Asset Manager Portfolio
(1996) and Asset Manager: Growth Portfolio (1996), is an employee of FMR.
RICHARD R. MACE, J R. (35), V ice President of Overseas Portfolio
(1996) is an employee of FMR.
GEORGE VANDERHEI DEN (51), Vice President of Asset Manager Portfolio
(1996) and Asset Manager: Growth Portfolio (1996), is an employee of FMR.
STEPHEN PETERSEN (41), V ice President of Equity Income Portfolio
(1997), is an employee of FMR.
JENNIFER UHRI G (36), Vic e President of Growth Portfolio (1997), is
an employee of FMR.
BETH TERRANA (39), Vi ce President of Growth & Income Portfolio
(1996), is an employee of FMR.
BETTINA DOULT ON (32), Vi ce President of Balanced Portfolio (1996),
is an employee of FMR.
ARTHUR S. LO RING (49), Secr etary, 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. RATHGEBE R (49), T reasurer (1995), is Treasurer of the
Fidelity funds and is an employee of FMR (1995). Before joining FMR, Mr.
Rathgeber was a Vice President of Goldman Sachs & Co. (1978-1995), where he
served in various positions, including Vice President of Proprietary
Accounting (1988-1992), Global Co-Controller (1992-1994), and Chief
Operations Officer of Goldman Sachs (Asia) LLC (1994-1995).
ROBERT H. MORRISON (56), M anager of Security Transactions of
Fidelity's equity funds is Vice President of FMR.
JOHN H. COSTELL O (50) , Assistant Treasurer, is an employee of FMR.
LEONARD M. RUS H (50), Assi stant Treasurer (1994), is an employee of
FMR (1994). Prior to becoming Assistant Treasurer of the Fidelity funds,
Mr. Rush was Chief Compliance Officer of FMR Corp. (1993-1994) and Chief
Financial Officer of Fidelity Brokerage Services, Inc. (1990-1993).
The following table sets forth information describing the compensation of
each Trustee and Member of the Advisory Board of each fund for his or her
services for the fiscal year ended December 31, 1996.
COMPENSATION TABLE

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Aggregate J. Gary Ralph F. Phyllis Richard Edward E. Donald Peter S. William Gerald Edward Marvin Thomas
Compensation Burkhea Cox Burke J. C. Bradley J. Kirk Lynch
(double
dagger) O. C. H. L. Mann R.
from a
Fund A d(double
dagger) Davis Flynn
(double
dagger)
(double
dagger) Johnson Jones McCoy McDono Malone Williams
3d(double
dagger) (double
dagger)
(double
dagger)
(double
dagger) ugh (double
dagger)
(double
dagger)

Money
MarketB $ 0 $309 $307 $384 $0 $307 $311 $ 0 $198 $311 $306 $ 302 $ 311

High
IncomeC 0 407 397 498 0 397 402 0 260 402 403 398 402

Equity-
IncomeD,N 0 1960 1908 2,385 0 1,908 1,930 0 1,251 1,932 1,939 1,917 1,929

GrowthEN 0 1719 1682 2,107 0 1,682 1,702 0 1,115 1,705 1,700 1,680 1,702

OverseasFN 0 516 502 626 0 502 488 0 323 508 510 505 508

Investment
Grade 0 68 66 82 0 66 67 0 42 67 67 67 67
BondG

Asset 0 1162 1144 1,423 0 1,144 1,156 0 704 1,155 1,149 1,137 1,156
ManagerH,N

Index 500I 0 143 138 175 0 138 140 0 103 141 143 140 139

ContrafundJ 0 484 468 591 0 468 475 0 344 477 481 474 474

Asset
Manager: 0 42 40 50 0 40 41 0 30 41 41 41 41
GrowthK

BalancedL 0 23 22 28 0 22 23 0 16 23 23 23 23

Growth & 0 50 50 65 0 50 50 0 35 50 50 50 50
Income+

Growth 0 86 82 104 0 82 84 0 60 84 84 84 83
OpportunitiesM

TOTAL 0 137,70 134,70 168,00 134,70 136,20 0 85,333 136,20 136,20 134,70 136,20
COMPEN
SATION 0 0 0 0 0 0 0 0 0
FROM THE FUND
COMPLEX ++, A

</TABLE>

(double dagger) Interested trustees of each fund are compensated by FMR.
(double dagger)(double dagger) Richard J. Flynn and Edward H. Malone served
on the Board of Trustees through December 31, 1996.
(double dagger)(double dagger)(double dagger) During the period from May 1,
1996 through December 31, 1996, William O. McCoy served as a Member of the
Advisory Board of Variable Insurance Products Fund, Variable Insurance
Products Fund II, and Variable Insurance Products Fund III.
+ Estimated
++ Information is as of December 31, 1996 for 235 funds in the complex.
A Compensation figures include cash, a pro rata portion of benefits accrued
under the retirement program for the period ended December 30, 1996 and
required to be deferred, and may include amounts deferred at the election
of Trustees.
B The following amounts are required to be deferred by each non-interested
Trustee, most of which is subject to vesting: Ralph F. Cox, $12, Phyllis
Burke Davis, Richard J. Flynn, $0, $12, E. Bradley Jones, $12, Donald J.
Kirk, $12, Gerald C. McDonough, $12, Edward H. Malone, $12, Marvin L. Mann,
$12, and Thomas R. Williams, $12.
C The following amounts are required to be deferred by each non-interested
Trustee, most of which is subject to vesting: Ralph F. Cox, $15, Phyllis
Burke Davis, Richard J. Flynn, $0, $15, E. Bradley Jones, $15, Donald J.
Kirk, $15, Gerald C. McDonough, $15, Edward H. Malone, $15, Marvin L. Mann,
$15, and Thomas R. Williams, $15.
D The following amounts are required to be deferred by each non-interested
Trustee, most of which is subject to vesting: Ralph F. Cox, $75, Phyllis
Burke Davis, Richard J. Flynn, $0, $75, E. Bradley Jones, $75, Donald J.
Kirk, $75, Gerald C. McDonough, $75, Edward H. Malone, $75, Marvin L. Mann,
$75, and Thomas R. Williams, $75.
E The following amounts are required to be deferred by each non-interested
Trustee, most of which is subject to vesting: Ralph F. Cox, $65, Phyllis
Burke Davis, Richard J. Flynn, $0, $65, E. Bradley Jones, $65, Donald J.
Kirk, $65, Gerald C. McDonough, $65, Edward H. Malone, $65, Marvin L. Mann,
$65, and Thomas R. Williams, $65.
F The following amounts are required to be deferred by each non-interested
Trustee, most of which is subject to vesting: Ralph F. Cox, $20, Phyllis
Burke Davis, Richard J. Flynn, $0, $20, E. Bradley Jones, $20, Donald J.
Kirk, $20, Gerald C. McDonough, $20, Edward H. Malone, $20, Marvin L. Mann,
$20, and Thomas R. Williams, $20.
G The following amounts are required to be deferred by each non-interested
Trustee, most of which is subject to vesting: Ralph F. Cox, $3, Phyllis
Burke Davis, Richard J. Flynn, $0, $3, E. Bradley Jones, $3, Donald J.
Kirk, $3, William O. McCoy, $3, Gerald C. McDonough, $3, Edward H. Malone,
$3, Marvin L. Mann, $3, and Thomas R. Williams, $3.
H The following amounts are required to be deferred by each non-interested
Trustee, most of which is subject to vesting: Ralph F. Cox, $44, Phyllis
Burke Davis, Richard J. Flynn, $0, $44, E. Bradley Jones, $44, Donald J.
Kirk, $44, Gerald C. McDonough, $44, Edward H. Malone, $44, Marvin L. Mann,
$44, and Thomas R. Williams, $44.
I The following amounts are required to be deferred by each non-interested
Trustee, most of which is subject to vesting: Ralph F. Cox, $5, Phyllis
Burke Davis, Richard J. Flynn, $0, $5, E. Bradley Jones, $5, Donald J.
Kirk, $5, Gerald C. McDonough, $5, Edward H. Malone, $5, Marvin L. Mann,
$5, and Thomas R. Williams, $5.
J The following amounts are required to be deferred by each non-interested
Trustee, most of which is subject to vesting: Ralph F. Cox, $19, Phyllis
Burke Davis, Richard J. Flynn, $0, $19, E. Bradley Jones, $19, Donald J.
Kirk, $19, Gerald C. McDonough, $19, Edward H. Malone, $19, Marvin L. Mann,
$19, and Thomas R. Williams, $19.
K The following amounts are required to be deferred by each non-interested
Trustee, most of which is subject to vesting: Ralph F. Cox, $2, Phyllis
Burke Davis, Richard J. Flynn, $0, $2, E. Bradley Jones, $2, Donald J.
Kirk, $2, Gerald C. McDonough, $2, Edward H. Malone, $2, Marvin L. Mann,
$2, and Thomas R. Williams, $2.
L The following amounts are required to be deferred by each non-interested
Trustee, most of which is subject to vesting: Ralph F. Cox, $1, Phyllis
Burke Davis, Richard J. Flynn, $0, $1, E. Bradley Jones, $1, Donald J.
Kirk, $1, Gerald C. McDonough, $1, Edward H. Malone, $1, Marvin L. Mann,
$1, and Thomas R. Williams, $1.
M The following amounts are required to be deferred by each non-interested
Trustee, most of which is subject to vesting: Ralph F. Cox, $3, Phyllis
Burke Davis, Richard J. Flynn, $0, $3, E. Bradley Jones, $3, Donald J.
Kirk, $3, Gerald C. McDonough, $3, Edward H. Malone, $3, Marvin L. Mann,
$3, and Thomas R. Williams, $3.
N For the fiscal year ended in 1996, certain of the non-interested
trustees' aggregate compensation from certain funds includes accrued
voluntary deferred compensation as follows: Equity-Income (Cox, $1,885,
Malone, $1,864, Mann, $1,842); Growth (Cox, $1,654, Malone, $1,635, Mann,
$1,615); Overseas (Cox, $496, Malone, $490, Mann, $485); Asset Manager
(Cox, $1,118, Malone, $1,105, Mann, $1,093).
Under a retirement program adopted in July 1988 and modified in November
1995 and November 1996, each non-interested Trustee who retired before
December 30, 1996 may receive payments from a Fidelity fund during his or
her lifetime based on his or her basic trustee fees and length of service.
The obligation of a fund to make such payments is neither secured nor
funded. A Trustee became eligible to participate in the program at the end
of the calendar year in which he or she reached age 72, provided that, at
the time of retirement, he or she had served as a Fidelity fund Trustee for
at least five years.
The non-interested Trustees may elect to defer receipt of all or a
percentage of their annual fees in accordance with the terms of a Deferred
Compensation Plan (the Plan). Under the Plan, compensation deferred by a
Trustee is periodically adjusted as though an equivalent amount had been
invested and reinvested in shares of one or more funds in the complex
designated by such Trustee (designated securities). The amount paid to the
Trustee under the Plan will be determined based upon the performance of
such investments. Deferral of fees in accordance with the Plan will have a
negligible effect on the funds' assets, liabilities, and net income per
share, and will not obligate the funds to retain the services of any
Trustee or to pay any particular level of compensation to the Trustee. The
funds may invest in such designated securities under the Plan without
shareholder approval.
As of December 30, 1996, the non-interested Trustees terminated the
retirement program for Trustees who retire after such date. In connection
with the termination of the retirement program, each existing
non-interested Trustee received a credit to his or her Plan account equal
to the present value of the estimated benefits that would have been payable
under the retirement program. The amounts credited to the non-interested
Trustees' Plan accounts are subject to vesting. The termination of the
retirement program and related crediting of estimated benefits to the
Trustees' Plan accounts did not result in a material cost to the funds.
As of December 31, 1996, the Trustees, and officers of each fund owned, in
the aggregate, less than 1% of each fund's total outstanding shares.
A shareholder owning of record or beneficially more than 25% of a fund's
outstanding shares may be considered a controlling person. That
shareholder's vote could have a more significant effect on matters
presented at a shareholders' meeting than votes of other shareholders. As
of March 31, 1997, significant shares of the fund were held by the
following companies with the figures beneath each fund representing that
company's holdings as a percentage of that fund's total outstanding shares.

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money High Equity- Growth Oversea Asset Asset Contrafun Index Balance Growth Growth Investmen
Market Incom Incom s Manager Manager d 500 d Opportunitie & t Grade
e e :Growth s Income Bond

Fidelity
Investments
Life 41% -- -- -- -- -- 72% -- 43% -- -- 87% 32%
Insurance
Company
(Boston,
MA)

Nationwide
Life
Insurance -- 46% 28% 29% 37% 26% -- 23% -- 86% 80% -- --
Company
(Columbus, OH)

</TABLE>

MANAGEMENT CONTRACTS
Each fund employs FMR to furnish investment advisory and other services.
Under its management contract with each fund, FMR acts as investment
adviser and, subject to the supervision of the Board of Trustees, directs
the investments of each fund in accordance with its investment objective,
policies, and limitations. FMR also provides each fund with all necessary
office facilities and personnel for servicing each fund's investments,
compensates all officers of each fund and all Trustees who are "interested
persons" of the trusts or of FMR, and all personnel of each 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 Trustees, provide the management and administrative services necessary
for the operation of each fund. These services include providing facilities
for maintaining each fund's organization; supervising relations with
custodians, transfer and pricing agents, accountants, underwriters, and
other persons dealing with each fund; preparing all general shareholder
communications and conducting shareholder relations; maintaining each
fund's records and the registration of each fund's shares under federal and
state laws; developing management and shareholder services for each fund;
and furnishing reports, evaluations, and analyses on a variety of subjects
to the Trustees.
In addition to the management fee payable to FMR and the fees payable to
FSC and FIIOC, each fund pays all of its expenses, without limitation, that
are not assumed by those parties. Each fund pays for typesetting, printing,
and mailing proxy material to shareholders, legal expenses, and the fees of
the custodian, auditor, and non-interested Trustees. Although each fund's
current management contract provides that it will pay for typesetting,
printing, and mailing prospectuses, statements of additional information,
notices, and reports to existing shareholders, each trust on behalf of each
fund has entered into a revised transfer agent agreement with FIIOC,
pursuant to which FIIOC bears the cost of providing these services to
existing shareholders. Other expenses paid by each fund include interest,
taxes, brokerage commissions, each fund's proportionate share of insurance
premiums and Investment Company Institute dues, and the costs of
registering shares under federal and state securities laws. Each fund is
also liable for such non-recurring expenses as may arise, including costs
of any litigation to which each fund may be a party, and any obligation it
may have to indemnify its officers and Trustees with respect to litigation.
FMR is each fund's manager pursuant to management contracts dated as
follows:

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Money High Equity-Inc Growth Overseas Investment Asset Growth & Balanced Index 500 Contrafun Asset Growth
Market Income ome Grade Manager Income d Manager:Opportunitie
Bond Growth s

Contract January January January January January January 1, January Decembe Novembe January Novembe Novembe November
Dated 1, 1994 1, 1994 1, 1993 1, 1993 1, 1993 1993 1, 1993 r 19, r 18, 1, 1993 r 1, 1994 r 1,1994 18, 1994
1996 1994

Date Decembe Decembe Decembe Decembe Decembe December Decembe Decembe Novembe Decembe Novembe Novembe November
Approved by r 15, r 15, r 16, r 16, r 16, 16, 1992 r 16, r 19, r 21, r 16, r 9,1994 r 9,1994 21, 1994
Shareholders 1993 1993 1992 1992 1992 1992 1996 1994 1992

</TABLE>

The management fee paid to FMR by Index 500 Portfolio is reduced by an
amount equal to the fees and expenses of the non-interested Trustees.
MONEY MARKET PORTFOLIO: For the services of FMR under the contract, the
fund pays FMR a monthly management fee composed of a group fee rate and an
individual fund fee rate (.03%), and an income-based component of 6% of the
fund's gross income in excess of a 5% yield. The maximum income-based
component is .24% of average net assets.
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. The schedule below on the right shows the
effective annual group fee rate at various asset levels, which is the
result of cumulatively applying the annualized rates on the left. For
example, the effective annual fee rate at $453 billion of group net assets
- - the approximate level for December 1996 - was .1425%, which is the
weighted average of the respective fee rates for each level of group net
assets up to $453 billion.
GROUP FEE RATE SCHEDULE EFFECTIVE ANNUAL FEE RATES

Average Group Annualized Group Net Effective Annual
Assets Rate Assets Fee 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 .1695

24 - 30 .1800 200 .1658

30 - 36 .1750 225 .1629

36 - 42 .1700 250 .1604

42 - 48 .1650 275 .1583

48 - 66 .1600 300 .1565

66 - 84 .1550 325 .1548

84 - 120 .1500 350 .1533

120 - 174 .1450 400 .1507

174 - 228 .1400

228 - 282 .1375

282 - 336 .1350

Over 336 .1325

On August 1, 1994, FMR voluntarily revised the group fee rate schedule and
added new breakpoints for average group assets in excess of $156 billion
and under $372 billion as shown in the schedule below. The revised group
fee rate schedule was identical to the above schedule for average group
assets under $156 billion.
On January 1, 1996, FMR voluntarily added new breakpoints to the revised
schedule for average group assets in excess of $372 billion, pending
shareholder approval of a new management contract reflecting the revised
schedule and additional breakpoints. The revised group fee rate schedule
and its extensions provide for lower management fee rates as FMR's assets
under management increase. For average group assets in excess of $156
billion, the revised group fee rate schedule with additional breakpoints
voluntarily adopted by FMR is as follows:
GROUP FEE RATE SCHEDULE EFFECTIVE ANNUAL FEE RATES

Average Group Annualized Group Net Effective Annual
Assets Rate Assets Fee Rate

$ 120 - 156 .1450% $150 billion .1736%
billion

156 - 192 .1400 175 .1690

192 - 228 .1350 200 .1652

228 - 264 .1300 225 .1618

264 - 300 .1275 250 .1587

300 - 336 .1250 275 .1560

336 - 372 .1225 300 .1536

372 - 408 .1200 325 .1514

408 - 444 .1175 350 .1494

444 - 480 .1150 375 .1476

480 - 516 .1125 400 .1459

Over .1100 425 .1443
516

450 .1427

475 .1413

500 .1399

525 .1385

550 .1372

The individual fund fee rate for Money Market Portfolio is .03%.
One twelfth of the sum of the group fee rate and the individual fund fee
rate is applied to the fund's average net assets for the current month,
giving a dollar amount, which is the fee for that month.
If the fund's monthly gross yield is 5% or less, the total management fee
is the sum of the group fee and the individual fund fee. If the fund's
monthly gross yield is greater than 5%, the management fee that FMR
receives includes an income-based component. The income-based component
equals 6% of that portion of the fund's gross income that represents a
gross yield of more than 5% per year. The maximum income-based component is
.24% (annualized) of average net assets, at a fund gross yield of 9%. Gross
income for this purpose includes interest accrued and/or discount earned
(including both original issue discount and market discount) on portfolio
obligations, less amortization of premium. Realized and unrealized gains
and losses, if any, are not included in gross income.
For the fiscal years ended December 31, 1996, 1995, and 1994, FMR
received $1,949,039, $1,881,213, and $1,178,543, resp ectively, for
its services as investment adviser to Money Market Portfolio. These fees
were equivalent to .21%, .20%, and .14%, respectively, of the fund's
average net assets for those years.
Prior to January 1, 1994, for the services of FMR under the contract, the
fund paid FMR a monthly management fee computed on the basis of the fund's
gross income. To the extent that the fund's monthly gross income of the
fund was equivalent to an annualized yield of 5% or less, FMR received 4%
of that amount of the fund's gross income. In addition, to the extent that
the fund's monthly gross income exceeded an annualized yield of 5%, FMR
received 6% of that excess. For this purpose, gross income included
interest accrued or discount earned (including both original issue and
market discount), less amortization of premium. The amount of discount or
premium on portfolio instruments was fixed at the time of purchase.
Realized and unrealized gains and losses, if any, were not included in
gross income.
Pursuant to the terms of the contract, limitations were imposed on the
compensation FMR could receive under the above formula. These limitations
were based on the fund's average monthly net assets as follows:
AVERAGE MONTHLY NET ASSETS ANNUALIZED RATE
On the first $1.5 billion. .50%
On the portion in excess of $1.5 to $3.0 billion. .45%
On the portion in excess of $3.0 billion to $4.5 billion. .43%
On the portion in excess of $4.5 billion to $6.0 billion. .41%
On the portion in excess of $6.0 billion. .40%
HIGH INCOME AND INVESTMENT GRADE BOND PORTFOLIOS. For the services of FMR
under the contracts, each fund pays FMR a monthly management fee composed
of the sum 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. The schedule below on the right shows the
effective annual group fee rate at various asset levels, which is the
result of cumulatively applying the annualized rates on the left. For
example, the effective annual fee rate at $453 billion of group net assets
- - the approximate level for December 1996 - was .1425%, which is the
weighted average of the respective fee rates for each level of group net
assets up to $453 billion.
GROUP FEE RATE SCHEDULE EFFECTIVE ANNUAL FEE RATES

Average Group Annualized Group Net Effective Annual
Assets Rate Assets Fee 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 .1695

24 - 30 .1800 200 .1658

30 - 36 .1750 225 .1629

36 - 42 .1700 250 .1604

42 - 48 .1650 275 .1583

48 - 66 .1600 300 .1565

66 - 84 .1550 325 .1548

84 - 120 .1500 350 .1533

120 - 174 .1450 400 .1507

174 - 228 .1400

228 - 282 .1375

282 - 336 .1350

Over 336 .1325

Under Investment Grade Bond's current management contract with FMR, the
group fee rate is based on a schedule with breakpoints ending at .1400% for
average group assets in excess of $174 billion. Prior to January 1, 1993,
the group fee rate breakpoints shown above for average group assets in
excess of $120 billion and under $228 billion were voluntarily adopted by
FMR, on January 1, 1992. The additional breakpoints shown above for average
group assets in excess of $228 billion were voluntarily adopted by FMR on
November 1, 1993.
On August 1, 1994, FMR voluntarily revised (in the case of Investment Grade
Bond the prior extensions to) the group fee rate schedule, and added new
breakpoints for average group assets in excess of $156 billion and under
$372 billion as shown in the schedule below. The revised group fee rate
schedule was identical to the above schedule for average group assets under
$156 billion.
On January 1, 1996, FMR voluntarily added new breakpoints to the revised
schedule for average group assets in excess of $372 billion, pending
shareholder approval of a new management contract reflecting the revised
schedule and additional breakpoints. The revised group fee rate schedule
and its extensions provide for lower management fee rates as FMR's assets
under management increase. For average group assets in excess of $156
billion, the revised group fee rate schedule with additional breakpoints
voluntarily adopted by FMR is as follows:
GROUP FEE RATE SCHEDULE EFFECTIVE ANNUAL FEE RATES

Average Group Annualized Group Net Effective Annual
Assets Rate Assets Fee Rate

$ 120 - 156 .1450% $150 billion .1736%
billion

156 - 192 .1400 175 .1690

192 - 228 .1350 200 .1652

228 - 264 .1300 225 .1618

264 - 300 .1275 250 .1587

300 - 336 .1250 275 .1560

336 - 372 .1225 300 .1536

372 - 408 .1200 325 .1514

408 - 444 .1175 350 .1494

444 - 480 .1150 375 .1476

480 - 516 .1125 400 .1459

Over .1100 425 .1443
516

450 .1427

475 .1413

500 .1399

525 .1385

550 .1372

The individual fund fee rate for Investment Grade Bond Portfolio is .30%,
and the individual fund fee rate for High Income Portfolio is .45%. Based
on the average group net assets of the funds advised by FMR for December
1996, the annual management fee rate for each fund would be calculated as
follows:
INVESTMENT GRADE BOND PORTFOLIO
Group Fee Rate Individual Fund Fee Rate Management Fee Rate

.1425% + .30% = .4425%

HIGH INCOME PORTFOLIO
Group Fee Rate Individual Fund Fee Rate Management Fee Rate

.1425% + .45% = .5925%

One-twelfth of this annual management fee rate is applied to each fund's
net assets averaged for the most recent month, giving a dollar amount,
which is the fee for that month.
During the fiscal years ended December 31, 1996, 1995, and 1994, FMR
received $903,441, $660,058, and $520,469, respectively, for its services
as investment adviser to INVESTMENT GRADE BOND PORTFOLIO. These fees were
equivalent to .45%, .45%, and .46%, respectively, of the average net assets
of the fund for those years.
During the fiscal years ended December 31, 1996, 1995, and 1994, FMR
received $7,422,311, $4,956,133, and $2,999,205, respectively, for its
services as investment adviser to HIGH INCOME PORTFOLIO. These fees were
equivalent to .59%, .60%, and .61%, respectively, of the average net assets
of the fund for those years. On December 15, 1993, shareholders voted to
increase the fund's individual fund fee rate from 0.35% to 0.45%.
EQUITY-INCOME, BALANCED, GROWTH, GROWTH & INCOME, GROWTH OPPORTUNITIES,
OVERSEAS, ASSET MANAGER, CONTRAFUND, AND ASSET MANAGER: GROWTH PORTFOLIOS.
For the services of FMR under the contracts, each fund pays FMR a monthly
management fee composed of the sum 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. The schedule below on the right shows the
effective annual group fee rate at various asset levels, which is the
result of cumulatively applying the annualized rates on the left. For
example, the effective annual fee rate at $453 billion of group net assets
- - the approximate level for December 1996 - was .3021%, which is the
weighted average of the respective fee rates for each level of group net
assets up to $453 billion.
GROUP FEE RATE SCHEDULE EFFECTIVE ANNUAL FEE RATES

Average Group Annualized Group Net Effective Annual
Assets Rate Assets Fee Rate

$ 0 - 3 billion .5200% $ 0.5 billion .5200%

3 - 6 .4900 25 .4238

6 - 9 .4600 50 .3823

9 - 12 .4300 75 .3626

12 - 15 .4000 100 .3512

15 - 18 .3850 125 .3430

18 - 21 .3700 150 .3371

21 - 24 .3600 175 .3325

24 - 30 .3500 200 .3284

30 - 36 .3450 225 .3253

36 - 42 .3400 250 .3223

42 - 48 .3350 275 .3198

48 - 66 .3250 300 .3175

66 - 84 .3200 325 .3153

84 - 102 .3150 350 .3133

102 - 138 .3100

138 - 174 .3050

174 - 228 .3000

228 - 282 .2950

282 - 336 .2900

Over 336 .2850

Under Equity-Income, Growth, Overseas and Asset Manager Portfolios' current
management contracts with FMR, the group fee rate is based on a schedule
with breakpoints ending at .3000% for average group assets in excess of
$174 billion. Prior to January 1, 1993, the group fee rate breakpoints
shown above for average group assets in excess of $138 billion and under
$228 billion were voluntarily adopted by FMR, on January 1, 1992. The
additional breakpoints shown above for average group assets in excess of
$228 billion were voluntarily adopted by FMR on November 1, 1993.
On August 1, 1994, FMR voluntarily revised the prior extensions to the
group fee rate schedule, and added new breakpoints for average group assets
in excess of $210 billion and under $390 billion as shown in the schedule
below. The revised group fee rate schedule was identical to the above
schedule for average group assets under $210 billion. For average group
assets in excess of $210 billion, the group fee rate schedule voluntarily
adopted by FMR is as follows (Asset Manager: Growth and Contrafund
Portfolios' management contracts, dated November 1, 1994, include the
following breakpoints in their fee schedules):
GROUP FEE RATE SCHEDULE EFFECTIVE ANNUAL FEE RATES

Average Group Annualized Group Net Effective Annual
Assets Rate Assets Fee Rate

$ 138 - 174 .3050% $150 billion .3371%
billion

174 - 210 .3000 175 .3325

210 - 246 .2950 200 .3284

246 - 282 .2900 225 .3249

282 - 318 .2850 250 .3219

318 - 354 .2800 275 .3190

354 - 390 .2750 300 .3163

Over .2700 325 .3137
390

350 .3113

375 .3090

400 .3067

On January 1, 1996, FMR voluntarily added new breakpoints to the revised
schedule for average group assets in excess of $390 billion, pending
shareholder approval of a new management contract reflecting the revised
schedule and additional breakpoints. The revised group fee rate schedule
and its extensions provide for lower management fee rates as FMR's assets
under management increase. For average group assets in excess of $210
billion, the revised group fee rate schedule with additional breakpoints
voluntarily adopted by FMR is as follows:
GROUP FEE RATE SCHEDULE EFFECTIVE ANNUAL FEE RATES

Average Group Annualized Group Net Effective Annual
Assets Rate Assets Fee Rate

$ 174 - 210 .3000% $150 billion .3371%
billion

210 - 246 .2950 175 .3325

246 - 282 .2900 200 .3284

282 - 318 .2850 225 .3249

318 - 354 .2800 250 .3219

354 - 390 .2750 275 .3190

390 - 426 .2700 300 .3163

426 - 462 .2650 325 .3137

462 - 498 .2600 350 .3113

498 - 534 .2550 375 .3090

Over .2500 400 .3067
534

425 .3046

450 .3024

475 .3003

500 .2982

525 .2962

550 .2942

The individual fund fee rate for the funds are as follows: .15% for
Balanced; .20% for Equity-Income Portfolio and Growth & Income; .25% for
Asset Manager; .30% for Growth Opportunities, Growth, Asset Manager: Growth
and Contrafund Portfolios; and .45% for Overseas Portfolio. Based on the
average group net assets of the funds advised by FMR for December 1996, the
annual management fee rate for each fund would be calculated as follows:
BALANCED PORTFOLIO
Group Fee Rate Individual Fund Fee Rate Management Fee Rate

.3021% + .15% = .4521%

EQUITY-INCOME, AND GROWTH & INCOME PORTFOLIOS
Group Fee Rate Individual Fund Fee Rate Management Fee Rate

.3021% + .20% = .5021%

ASSET MANAGER
Group Fee Rate Individual Fund Fee Rate Management Fee Rate

.3021% + .25% = .5521%

GROWTH OPPORTUNITIES, GROWTH, CONTRAFUND AND ASSET MANAGER GROWTH
PORTFOLIOS
Group Fee Rate Individual Fund Fee Rate Management Fee Rate

.3021% + .30% = .6021%

OVERSEAS PORTFOLIO
Group Fee Rate Individual Fund Fee Rate Management Fee Rate

.3021% + .45% = .7521%

One-twelfth of the annual management fee rate is applied to each fund's net
assets averaged for the most recent month, giving a dollar amount, which is
the fee for that month.
During the fiscal years ended December 31, 1996, 1995, and 1994, FMR
received $30,150,885 , $17,818,979, and $9,165,293, respectively, for its
services as investment adviser to EQUITY-INCOME PORTFOLIO. These fees were
equivalent to .51% .51%, and .52%, respectively, of the average net assets
of the fund for each of those years.
During the fiscal years ended December 31, 1996, 1995, and 1994, FMR
received $31,760,621 , $19,591,048, and $10,585,482, respectively, for its
services as investment adviser to GROWTH PORTFOLIO. These fees were
equivalent to .61%, .61%, and .62%, respectively, of the average net assets
of the fund for each of those years.
During the fiscal years ended December 31, 1996, and 1995, FMR received
$356,604, and $75,801 for its services as investment adviser to BALANCED
PORTFOLIO. These fees were equivalent to .48%, and .51%, respectively, of
the average net assets of the fund for each of those years. Effective
August 1, 1996, FMR voluntarily agreed to reduce the Balanced Portfolio's
individual fund fee rate from .20% to .15%. If this agreement were not in
effect, the management fee would have been equivalent to .50%.
During the fiscal years ended December 31, 1996, and 1995, FMR received
$1,679,264, and $311,959, respectively, for its services as investment
adviser to GROWTH OPPORTUNITIES PORTFOLIO. These fees were equivalent to
.61%, and .61%, respectively, of the average net assets of the fund for
each of those years.
During the fiscal years ended December 31, 1996, 1995, and 1994, FMR
received $11,667,177, $9,837,952, and $8,646,616, respectively, for its
services as investment adviser to OVERSEAS PORTFOLIO. These fees were
equivalent to .76%, .76%, .77%, respectively, of the average net assets of
the fund for each of those years.
During the fiscal years ended December 31, 1996, 1995, and 1994, FMR
received $22,022,749, $23,174,840, and $22,080,801, respectively, for its
services as investment adviser to ASSET MANAGER PORTFOLIO. These fees were
equivalent to .64%, .71%, and .72%, respectively, of the average net
assets of the fund for each of those years. Effective August 1, 1996, FMR
voluntarily agreed to reduce the Asset Manager Portfolio's individual fund
fee rate from .40% to .25%. If this agreement were not in effect, the
management fee would have been equivalent to .70%.
During the fiscal year ended December 31, 1996, and 1995, FMR received
$906,614 and $261,324 for its services as investment adviser to ASSET
MANAGER: GROWTH PORTFOLIO. These fees were equivalent to .65% and .71%,
respectively, of the average net assets of the fund for each of those
years. Effective August 1, 1996, FMR voluntarily agreed to reduce the Asset
Manager: Growth Portfolio's individual fund fee rate from .40% to .30%. If
this agreement were not in effect, the management fee would have been
equivalent to .69%.
During the fiscal year ended December 31, 1996 and 1995, FRM received
$9,539,179 and$2,316,458 for its service as investment adviser to
CONTRAFUND PORTFOLIO. These fees were equivalent to .61% and .61%,
respectively, of the average net assets of the fund for each of those
years.
INDEX 500 PORTFOLIO. For the services of FMR under the contract,
the fund pays FMR a monthly management fee at the annual rate of .28% of
the average net assets of the fund throughout the month. During the fiscal
years ended December 31, 1996, 1995, and 1994, FMR received $1,346,765,
$351,136, and $103,136, respectively, before any reimbursement of expenses
by FMR.
FMR may, from time to time, voluntarily reimburse all or a portion of a
fund's operating expenses (exclusive of interest, taxes, brokerage
commissions, and extraordinary expenses). 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 a fund's total returns and yield and repayment of the
reimbursement by a fund will lower its total returns and yield.
FMR has voluntarily agreed, subject to revision or termination, to
reimburse a fund if, and to the extent that, its aggregate operating
expenses, including management fees, exceed of a specified annual rate for
the fund. The following provides the expense cap and the date the cap was
imposed: September 19, 1985 (1.00%) for High Income Portfolio, December 30,
1996 (1.00%) fo r Growth & Income Portfolio; October 9, 1986 (1.50%)
for Equity-Income, and Growth Portfolios, January 3, 1995 (1.50%) for
Balanced Portfolio; January 28, 1987 (1.50%) for Overseas Portfolio;
December 5, 1988 (.80%) for Investment Grade Bond Portfolio; January 1,
1990 (1.25%) for Asset Manager Portfolio; August 27, 1992 (.28%) for Index
500 Portfolio; and January 3, 1995 (1.00%) for Asset Manager: Growth and
Contrafund Portfolios; January 3, 1995 (1.50%) for Growth Opportunities
Portfolio. Under this arrangement, FMR reimbursed Index 500
$738,274 , $241,437, and $195,500, respectively for fiscal years
ended December 31, 1996, 1995 and 1994 and Asset Manager: Growth $46,008
for the fiscal year ended December 31, 1995.
SUB-ADVISERS. On behalf of HIGH INCOME, BALANCED, GROWTH & INCOME, GROWTH
OPPORTUNITIES, ASSET MANAGER, CONTRAFUND and ASSET MANAGER: GROWTH
PORTFOLIOS, FMR has entered into sub-advisory agreements with FMR U.K. and
FMR Far East. On behalf of OVERSEAS PORTFOLIO, FMR has entered into
sub-advisory agreements with FMR U.K., FMR Far East, and FIIA. FIIA, in
turn, has entered into a sub-advisory agreement with FIIAL U.K. Pursuant to
the sub-advisory agreements, FMR may receive investment advice and research
services outside the United States from the sub-advisers. On behalf of High
Income, Contrafund, Asset Manager: Growth and Overseas Portfolios, FMR may
also grant the sub-advisers investment management authority, as well as the
authority to buy and sell securities if FMR believes it would be beneficial
to a fund.
Currently, FMR U.K., FMR Far East, FIIA, and FIIAL U.K. each focus on
issuers in countries other than the United States such as those in Europe,
Asia, and the Pacific Basin.
FMR U.K. and FMR Far East, which were organized in 1986, are wholly owned
subsidiaries of FMR. FIIA is a wholly owned subsidiary of Fidelity
International Limited (FIL), a Bermuda company formed in 1968 which
primarily provides investment advisory services to non-U.S. investment
companies and institutional investors investing in securities throughout
the world. Edward C. Johnson 3d, Johnson family members, and various trusts
for the benefit of the Johnson family owns, directly or indirectly, more
than 25% of the voting common stock of FIL. FIIA was organized in Bermuda
in 1983. FIIAL U.K. was organized in the United Kingdom in 1984, and is a
wholly owned subsidiary of Fidelity International Management Holdings
Limited, an indirect wholly owned subsidiary of FIL.
Under the sub-advisory agreements FMR pays the fees of FMR U.K., FMR Far
East, and FIIA. FIIA, in turn, pays the fees of FIIAL U.K. For providing
non-discretionary investment advice and research services the sub-advisers
are compensated as follows:
(small solid bullet) FMR pays FMR U.K. and FMR Far East fees equal to 110%
and 105%, respectively, of FMR U.K.'s and FMR Far East's costs incurred in
connection with providing investment advice and research services.
(small solid bullet) FMR pays FIIA a fee equal to 30% of FMR's monthly
management fee with respect to the average net assets held by the fund for
which FIIA has provided FMR with investment advice and research services.
(small solid bullet) FIIA pays FIIAL U.K. a fee equal to 110% of FIIAL
U.K.'s costs incurred in connection with providing investment advice and
research services.
For providing discretionary investment management and executing portfolio
transactions, the sub-advisers are compensated as follows:
(small solid bullet) FMR pays FMR U.K., FMR Far East, and FIIA a fee equal
to 50% of its monthly management fee with respect to the fund's average net
assets managed by the sub-adviser on a discretionary basis.
(small solid bullet) FIIA pays FIIAL U.K. a fee equal to 110% of FIIAL
U.K.'s costs incurred in connection with providing discretionary investment
management services.
For providing investment advice and research services, the fees paid to the
sub-advisers for fiscal 1995, 1994, and 1993 were as follows:
OVERSEAS PORTFOLIO
Fiscal Year FMR U.K. FMR Far East FIIA FIIAL U.K.

1996 $ 934,318 $ 897,170 -- --

1995 $ 744,061 $ 768,046 -- --

1994 $ 387,086 $ 425,049 -- --

ASSET MANAGER: GROWTH PORTFOLIO
Fiscal Year FMR U.K. FMR Far East

1996 $ 9,362 $ 9,146

1995 $ 4,252 $ 5,046

ASSET MANAGER PORTFOLIO
Fiscal Year FMR U.K. FMR Far East

1996 $ 308,946 $ 305,205

1995. $ 425,265 $ 471,463

1994 $ 147,227 $ 190,254

1993 $ 139,893 $ 227,112

CONTRAFUND PORTFOLIO
Fiscal Year FMR U.K. FMR Far East

1996 $ 79,710 $ 78,354

1995 $ 13,324 $ 15,011

BALANCED PORTFOLIO
Fiscal Year FMR U.K. FMR Far East

1996 $ 4,632 $ 4,355

1995 $ 1,361 $ 1,598

GROWTH OPPORTUNITIES PORTFOLIO
Fiscal Year FMR U.K. FMR Far East

1996 $ 15,833 $ 15,008

1995 $ 2,167 $ 2,421

For providing discretionary investment management and executing portfolio
transactions, FMR, on behalf of Overseas Portfolio paid FMR U.K. fees
totaling $376,357 for fiscal 1992. For providing discretionary investment
management and executing portfolio transactions, no fees were paid by FMR
on behalf of Overseas Portfolio to the sub-advisers during the fiscal years
ended 1995 and 1994.
FMR entered into the sub-advisory agreements described above as follows:
April 1, 1992 for Overseas; January 1, 1994 for High Income; November 1,
1994 for Contrafund and Asset Manager: Growth Portfolios, and November 18,
1994 for Balanced and Growth Opportunities Portfolio. The agreements were
approved by shareholders as follows: March 25, 1992 for Overseas, December
15, 1993 for High Income; November 9, 1994 for Contrafund and Asset
Manager: Growth; and November 21, 1994 for Balanced and Growth
Opportunities Portfolio.
On behalf of MONEY MARKET PORTFOLIO, FMR has entered into a sub-advisory
agreement with FMR Texas pursuant to which FMR Texas has primary
responsibility for providing portfolio investment management services to
the fund.
Under the sub-advisory agreement, dated January 1, 1990, which was approved
by the fund's shareholders December 13, 1989, FMR pays FMR Texas fees equal
to 50% of the management fee payable to FMR under its management contract
with the fund. The fees paid to FMR Texas are not reduced by any voluntary
or mandatory expense reimbursements that may be in effect from time to
time. On behalf of the fund, for the fiscal years ended December 31,
1996, 1995, and 1994, FMR paid FMR Texas fees of $974,519,
$940,607, and $589,272, respectively.
DISTRIBUTION AND SERVICE PLANS
The Trustees have approved Distribution and Service Plans on behalf of the
funds (the Plans) pursuant to Rule 12b-1 under the Investment Company Act
of 1940 (the Rule). The Rule provides in substance that a mutual fund may
not engage directly or indirectly in financing any activity that is
primarily intended to result in the sale of shares of a fund except
pursuant to a plan approved on behalf of the fund under the Rule. The
Plans, as approved by the Trustees, allow the funds and FMR to incur
certain expenses that might be considered to constitute indirect payment by
the funds of distribution expenses.
Under each Plan, if the payment of management fees by the funds to FMR is
deemed to be indirect financing by the funds of the distribution of their
shares, such payment is authorized by the Plans. Each Plan also
specifically recognizes that FMR, either directly or through FDC, may use
its management fee revenue, past profits, or other resources, without
limitation, to pay promotional and administrative expenses in connection
with the offer and sale of shares of each fund. In addition, each Plan
provides that FMR may use its resources, including its management fee
revenues, to make payments to third parties that assist in selling shares
of each fund, or to third parties, including banks, that render shareholder
support services.
Prior to approving each Plan, the Trustees carefully considered all
pertinent factors relating to the implementation of the Plan, and have
determined that there is a reasonable likelihood that the Plan will benefit
the fund and its shareholders. In particular, the Trustees noted that the
Plans do not authorize payments by a fund other than those made to FMR
under its management contract with the fund. To the extent that each Plan
gives FMR and FDC greater flexibility in connection with the distribution
of shares of each fund, additional sales of fund shares may result.
Furthermore, certain shareholder support services may be provided more
effectively under the Plans by local entities with whom shareholders have
other relationships. Money Market, High Income, Equity-Income and Growth
Portfolios' Plans were approved by the fund's respective shareholders on
December 11, 1986. Overseas Portfolio's Plan was approved by the fund's
shareholders on November 18, 1987. The Plans for Investment Grade Bond
Portfolio and Asset Manager Portfolio's Plans were approved by the funds'
respective shareholders on December 13, 1989. Index 500 Portfolio's Plan
was approved by the fund shareholders on December 16, 1992. Contrafund and
Asset Manager: Growth Portfolios' Plans were approved by FMR as the then
sole shareholder on November 9, 1994. Balanced and Growth Opportunities
Portfolios' Plans were approved by FMR as the then sole shareholder on
November 21, 1994. Growth & Income Portfolio's Plan was approved by FMR as
the then sole shareholder on December 19, 1996.
Each fund may execute portfolio transactions with, and purchase securities
issued by, depository institutions that receive payments under the Plans.
No preference for the instruments of such depository institutions will be
shown in the selection of investments.
CONTRACTS WITH FMR AFFILIATES
Each fund has an agreement with FSC, an affiliate of FMR Corp., under
which FSC determines the NAV per share and dividends of each fund and
maintains the portfolio and general accounting records of each fund. The
fee rates in effect as of January 1, 1996, are based on each fund's average
net assets as follows: for Money Market, 0.0175% for the first $500 million
of average net assets and 0.0075% for average net assets in excess of $500
million; for High Income and Overseas, 0.075% for the first $500 million of
average net assets and 0.0375% for average net assets in excess of $500
million; for Investment Grade Bond Portfolio, 0.04% for the first $500
million of average net assets and .02% for average net assets in excess of
$500 million; and for Balanced, Growth & Income, Growth Opportunities,
Equity-Income, Growth, Asset Manager, Contrafund, Asset Manager: Growth and
Index 500 Portfolios, 0.06% for the first $500 million of average net
assets and 0.03% for average net assets in excess of $500 million. The fee
for Money Market Portfolio is limited to a minimum of $40,000 and a maximum
of $800,000 per year. The fee for High Income, Equity Income, Growth,
Overseas, Asset Manager, Investment Grade Bond, Index 500, Contrafund and
Asset Manager: Growth Portfolios is limited to a minimum of $60,000 and a
maximum of $800,000 per year.
The following are the fees paid by each fund to FSC for the last three
fiscal years:

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Money High Equity- Growth Overseas Investment Asset
Market Income Income Grade Bond Manager

1996 $120,582 $662,535 $809,457 $808,115 $ 760,136 $ 82,156 $ 808,547

1995 $ 107,886 $ 266,623 $ 760,752 $ 760,478 $ 551,039 $ 58,943 $ 758,063

1994 $ 92,003 $ 197,109 $ 669,962 $ 664,914 $ 491,242 $ 46,617 $ 751,546

</TABLE>

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Asset Manager: Contrafund Index 500 Balanced Growth
Growth Opportunities

1996 $ 87,337 $ 622,337 $ 271,956 $ 59,115 $ 167,116

1995 $ 44,863 $ 210,939 $ 76,868 $ 46,084 $ 52,050

1994 N/A N/A $ 45,097 N/A N/A

</TABLE>

Each fund utilizes FIIOC, an affiliate of FMR Corp., to maintain the master
accounts of the participating insurance companies. Under the contract, each
fund pays an account fee of $125 and an asset based fee of 0.050% for each
account. The asset-based fees of the growth and growth and income funds are
subject to adjustment if the year-to-date total return of the S&P 500 is
greater than positive or negative 15%. In addition to providing transfer
agent and shareholder servicing functions, FIIOC pays all transfer agent
out-of-pocket expenses and also pays for typesetting, printing and mailing
Prospectuses, Statements of Additional Information, reports, notices and
statements to shareholders allocable to the master account of participating
insurance companies.
The following are the fees paid by each fund to FIIOC (including
reimbursement for out-of-pocket expenses) for the last three fiscal years:

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Money High Equity- Growth Overseas Investment Asset
Market Income Income Grade Bond Manager

1996 $695,000 $642,108 $2,072,078 $2,349,217 $875,218 $131,401 $1,783,138

1995 $ 390,358 $ 417,742 $ 1,660,720 $ 1,536,285 $ 612,828 $ 81,906 $ 957,173

1994 $ 115,837 $ 163,055 N/A $ 7,612 $ 173,157 $ 90,382 $ 50,231

</TABLE>

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Asset Manager: Contrafund Index 500 Balanced Growth
Growth Opportunities

1996 $ 83,612 $ 625,364 $ 371,324 $ 34,808 $ 164,052

1995 $ 17,123 $ 159,152 $ 65,837 $ 7,545 $ 18,071

1994 N/A N/A $ 89,940 N/A N/A

</TABLE>

If a portion of each applicable fund's brokerage commissions had not been
allocated toward payment of these fees, the transfer agent fees for the
last three fiscal years would have been as follows (not applicable for
Money Market, and Investment Grade Bond Portfolios):

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High Equity Growth Asset Asset Contrafund Growth Balanced Overseas Index 500
Income Income Portfolio Manager Manager: Opportunitie
Portfolio Portfolio Portfolio Growth s
Portfolio

1996 $670,254 $3,382,642 $3,029,150 $2,187,494 $103,447 $1,141,270 $184,791 $43,812 $892,751 $ 371,637

1995 $ 427,444 $1,660,720 $1,536,285 $1,545,902 $18,490 $185,309 $25,521 $7,710 $612,828 $ 65,837

1994 $ 163,055 $192,500 $212,064 $181,816 N/A N/A N/A N/A $173,157 $ 89,940

</TABLE>

FSC also receives fees for administering a fund's securities lending
program. Securities lending fees are based on the number and duration of
individual securities loans. For fiscal 1996, 1995, and 1994, no securities
lending fees were incurred by the funds.
Each 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 agreements call
for FDC to use all reasonable efforts, consistent with its other business,
to secure purchasers for shares of each fund, which are continuously
offered at net asset value. Promotional and administrative expenses in
connection with the offer and sale of shares are paid by FMR.
DESCRIPTION OF THE TRUSTS
TRUST ORGANIZATION. Money Market Portfolio, High Income Portfolio,
Equity-Income Portfolio, Growth Portfolio, and Overseas Portfolio are funds
of Variable Insurance Products Fund, an open-end management investment
company organized as a Massachusetts business trust on November 13, 1981.
In July 1985, pursuant to shareholder approval, the Declaration of Trust
was amended to change the name of the Trust from Fidelity Cash Reserves II
to Variable Insurance Products Fund. The Declaration of Trust permits the
Trustees to create additional funds.
Investment Grade Bond Portfolio, Asset Manager Portfolio, Index 500
Portfolio, Contrafund Portfolio, and Asset Manager: Growth Portfolio are
funds of Variable Insurance Products Fund II, an open-end management
investment company organized as a Massachusetts business trust on March 21,
1988. The Declaration of Trust permits the Trustees to create additional
funds.
Balanced Portfolio, Growth & Income Portfolio and Growth Opportunities
Portfolio are funds of Variable Insurance Products Fund III, an open-end
management investment company organized as a Massachusetts business trust
on July 14, 1994. The name of the trust was changed from Fidelity Advisor
Annuity Fund to Variable Insurance Products Fund III on December 30, 1996.
The Advisor Annuity Income & Growth Fund's name was changed to Balanced
Portfolio on December 30, 1996. The Advisor Annuity Growth Opportunities
Fund's name was changed to Growth Opportunities Portfolio on December 30,
1996. The Declaration of Trust permits the Trustees to create additional
funds.
Investments in each trust may be made only by the separate accounts of
insurance companies for the purpose of funding variable annuity and
variable life insurance contracts issued by insurance companies.
The Declarations of trust permit the Trustees to create additional funds.
In the event that FMR ceases to be the investment adviser to a trust or a
fund, the right of the trust or fund to use the identifying name "Fidelity"
may be withdrawn.
The assets of each trust received for the issue or sale of shares of each
of its funds and all income, earnings, profits, and proceeds thereof,
subject only to the rights of creditors, are especially allocated to such
fund, and constitute the underlying assets of such fund. The underlying
assets of each fund are segregated on the books of account, and are to be
charged with the liabilities with respect to such fund and with a share of
the general liabilities of their respective trusts. Expenses with respect
to each trust are to be allocated in proportion to the asset value of their
respective funds, except where allocations of direct expense can otherwise
be fairly made. The officers of each trust, subject to the general
supervision of the Boards of Trustees, have the power to determine which
expenses are allocable to a given fund, or which are general or allocable
to all of the funds of a certain trust. In the event of the dissolution or
liquidation of a trust, shareholders of each fund of that trust are
entitled to receive as a class the underlying assets of such fund available
for distribution.
SHAREHOLDER AND TRUSTEE LIABILITY. Each trust is an entity of the type
commonly known as "Massachusetts business trust." Under Massachusetts law,
shareholders of such a trust may, under certain circumstances, be held
personally liable for the obligations of the trust. Each Declaration of
Trust provides that the trust shall not have any claim against shareholders
except for the payment of the purchase price of shares and requires that
each agreement, obligation, or instrument entered into or executed by the
trust or its Trustees shall include a provision limiting the obligations
created thereby to the trust and its assets. Each Declaration of Trust
provides for indemnification out of each fund's property of any shareholder
held personally liable for the obligations of the fund. Each Declaration of
Trust also provides that its funds shall, upon request, assume the defense
of any claim made against any shareholder for any act or obligation of the
fund and satisfy any judgment thereon. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the fund itself would be unable to meet its
obligations. FMR believes that, in view of the above, the risk of personal
liability to shareholders is remote.
Each Declaration of Trust further provides that the Trustees, if they have
exercised reasonable care, will not be liable for any neglect or
wrongdoing, but nothing in the Declarations of trust protect Trustees
against any liability to which they would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of their office.
VOTING RIGHTS. Each fund's capital consists of shares of beneficial
interest. The shares have no preemptive or conversion rights; the voting
and dividend rights, the right of redemption, and the privilege of exchange
are described in the Prospectus. Shares are fully paid and nonassessable,
except as set forth under the heading "Shareholder and Trustee Liability"
above. Shareholders representing 10% or more of a trust or fund may, as set
forth in the Declarations of trust, call meetings of a trust or fund for
any purpose related to the trust or fund, as the case may be, including, in
the case of a meeting of an entire trust, the purpose of voting on removal
of one or more Trustees. Each trust or fund may be terminated upon the sale
of its assets to another open-end management investment company, or upon
liquidation and distribution of its assets, if approved by vote of the
holders of a majority of the trust or the fund. If not so terminated, each
trust or fund will continue indefinitely.
CUSTODIAN. The Bank of New York, 110 Washington Street, New York New York,
is custodian of Money Market, High Income and Investment Grade Bond
Portfolios' assets; The Chase Manhattan Bank, N.A., 1211 Avenue of the
Americas, New York, New York 10036, is custodian of Equity-Income,
Balanced, Growth & Income, Overseas, Asset Manager: Growth, and Asset
Manager Portfolios' assets; and Brown Brothers Harriman & Co., 40 Water
Street, Boston, Massachusetts, is custodian of Growth, Growth
Opportunities, Contrafund, and Index 500 Portfolios' assets. The custodians
take no part in determining the investment policies of the funds or in
deciding which securities are purchased or sold by the funds. The funds,
however, may invest in obligations of the custodians and may purchase or
sell securities from or to the custodians. The Bank 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. Investors should understand that the expense ratio
for the Overseas Portfolio may be higher than that of investment companies
which invest exclusively in domestic securities since the cost of
maintaining the custody of foreign securities is higher.
FMR, its officers and directors, its affiliated companies, and the Board of
Trustees may, from time to time, conduct transactions with various banks,
including banks serving as custodians for certain funds advised by FMR. The
Boston branch of Brown Brothers Harriman & Co. leases its office space from
an affiliate of FMR at a lease payment which, when entered into, was
consistent with prevailing market rates. 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. Coopers & Lybrand L.L.P., One Post Office Square, Boston,
Massachusetts (1999 Bryan Street, Suite 3000 Dallas, Texas, for Money
Market Portfolio), serves as independent accountant of Variable Insurance
Products Fund and Price Waterhouse LLP, 160 Federal Street, Boston,
Massachusetts, serves as independent accountant of Variable Insurance
Products Fund II and Variable Insurance Products Fund III. Each auditor
examines financial statements for the funds and provides other audit, tax,
and related services.
FINANCIAL STATEMENTS
Each fund's financial statements and financial highlights for the fiscal
year ended December 31, 1996, and the report of the auditors thereon are
included in the fund's Annual Reports, which are separate reports supplied
with this SAI. Each fund's financial statements, including the financial
highlights, and the report of the auditors are incorporated herein by
reference. For an additional copy of the fund's Annual Reports, contact
your insurance company or FDC at 1-800-544-2442.
APPENDIX
DOLLAR-WEIGHTED AVERAGE MATURITY is derived by multiplying the value of
each investment by the time 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, including
collateralized mortgage obligations, and some asset-backed securities 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 timing of principal payments, including
unscheduled prepayments, during the life of the mortgage. The weighted
average life of these securities is likely to be substantially shorter than
their stated final maturity.
The descriptions that follow are examples of eligible ratings for the
funds. A fund may, however, consider the ratings for other types of
investments and the ratings assigned by other rating organizations when
determining the eligibility of a particular investment.
DESCRIPTION OF MOODY'S INVESTORS SERVICE RATINGS OF COMMERCIAL PAPER
Moody's assigns short-term debt ratings to obligations which have an
original maturity not exceeding one year.
Issuers rated PRIME-1 (or related supporting institutions) have a superior
ability for repayment of principal and payment of interest.
Issuers rated PRIME-2 (or related supporting institutions) have a strong
ability for repayment of principal and payment of interest.
DESCRIPTION OF STANDARD & POOR'S RATINGS OF COMMERCIAL PAPER
Debt issues considered short-term in the relevant market may be assigned a
Standard & Poor's commercial paper rating.
A-1 - This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+) designation.
A-2 - Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
DESCRIPTION OF MOODY'S INVESTORS SERVICE RATINGS OF CORPORATE BONDS
Moody's ratings for obligations with an original remaining maturity in
excess of one year fall within nine categories. They range from Aaa
(highest quality) to C (lowest quality). Moody applies numerical modifiers
of 1, 2, or 3 to each generic rating classification from Aa through B. 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 on the lower end of its
generic rating category.
AAA - Bonds that are 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 edged." 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 that are 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 the Aaa securities.
A - Bonds that are 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 that are 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 that are 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 that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
CAA - Bonds that are 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 that are 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 that are rated C are the lowest-rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
DESCRIPTION OF STANDARD & POOR'S RATINGS OF CORPORATE BONDS
Debt issues may be designated by Standard & Poor's as either investment
grade ("AAA" through "BBB") or speculative grade ("BB" through "D"). While
speculative grade debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major
exposures to adverse conditions. Ratings from AA to CCC may be modified by
the addition of a plus sign (+) or minus sign (-) to show relative standing
within the major rating categories.
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 higher-rated 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 than debt in higher rated
categories.
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.
The BB rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied BBB- rating.
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 or 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. The
CCC rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied B or B- rating.
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 an 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 500 STOCKS IN THE S&P 500 INDEX. The following is a list of the 500
stocks comprising the S&P 500 as of February 29, 1996.
Abbott Labs
Advanced Micro Devices Inc.
Aetna Life & Casualty Co.
Ahmanson (H.F.) & Co.
Air Products & Chemicals Inc.
Airtouch Communications
Alberto Culver Co.
Albertson's Inc.
Alcan Aluminum Ltd.
Alco Standard Corp.
Alexander & Alexander
Allergan Inc.
Allied-Signal Inc.
Allstate Corp.
ALL TEL Corp.
Aluminum Co. of America
ALZA Corp.
Amdahl Corp.
Amerada Hess Corp.
American Brands Inc.
American Electric Power Inc.
American Express Co.
American Gen Corp.
American Greetings Corp.
American Home Products Corp.
American Int'l. Group Inc.
American Stores Co.
Ameritech Corp.
Amgen Inc.
Amoco Corp.
AMP Inc.
AMR Corp.
Andrew Corp.
Anheuser-Busch Cos. Inc.
Apple Computer Inc.
Applied Materials Inc.
Archer Daniels Midland Co.
Armco Inc.
Armstrong World Industries Inc.
ASARCO Inc.
Ashland Inc.
AT&T Corp.
Atlantic Richfield Co.
Autodesk Inc.
Automatic Data Processing
Avery Dennison Corp.
Avon Products Inc.
Baker Hughes Inc.
Ball Corp.
Bally Entertainment Corp.
Baltimore Gas & Electric Co.
Banc One Corp.
Bank New York Inc.
Bank of Boston Corp.
BankAmerica Corp.
Bankers Trust N.Y. Corp.
Bard (C.R.) Inc.
Barnett Banks Inc.
Barrick Gold Corp.
Bausch & Lomb Inc.
Baxter International Inc.
Bay Networks Inc.
Becton Dickinson & Co.
Bell Atlantic Corp.
BellSouth Corp.
Bemis Inc.
Beneficial Corp.
Bethlehem Steel Corp.
Beverly Enterprises Inc.
Biomet Inc.
Black & Decker Corp.
Block H&R Inc.
Boatmen's Bancshares Inc.
Boeing Co.
Boise Cascade Corp.
Boston Scientific Corp.
Briggs & Stratton Corp.
Bristol-Myers Squibb Co.
Brown Forman Corp.
Brown Group Inc.
Browning-Ferris Industries Inc.
Brunswick Corp.
Burlington Northern Santa Fe
Burlington Resources Inc.
Cabletron Sys Inc.
Caliber Sys Inc.
Campbell Soup Co.
Carolina Power & Light Co.
Cast Corp.
Caterpillar Inc.
Centex Corp.
Central & South West Corp.
Ceridian Corp.
Champion International Corp.
Charming Shoppes Inc.
Chase Manhattan Corp.
Chemical Banking Corp.
Chevron Corp.
Chrysler Corp.
Chubb Corp.
CIGNA Corp.
Cincinnati Milacron Inc.
Cinergy Corp.
Circuit City Stores Inc.
Cisco Systems Inc.
Citicorp
Clorox Co.
Coastal Corp.
Coca Cola Co.
Colgate-Palmolive Co.
Columbia
Columbia Gas System Inc.
3 Com Corp.
Comcast Corp.
Comerica Inc.
Community Psych Centers
Compaq Computer Corp.
Computer Associates Intl. Inc.
Computer Sciences Corp.
ConAgra Inc.
Conrail Inc.
Consolidated Edison Co. N.Y.
Consolidated Freightways Inc.
Consolidated Natural Gas Co.
Cooper Industries Inc.
Cooper Tire & Rubber Co.
Coors (Adolph) Co.
CoreStates Financial Corp.
Corning Inc.
CPC International Inc.
Crane Co.
Cray Research Inc.
Crown Cork & Seal Inc.
CSX Corp.
CUC Int'l. Inc.
Cummins Engine Inc.
Cyprus Amax Minerals Co.
Dana Corp.
Darden Restaurants Inc.
Data General Corp.
Dayton Hudson Corp.
Dean Witter Discover & Co.
Deere & Co.
Delta Air Lines Inc.
Deluxe Corp.
Dial Corp.
Digital Equipment Corp.
Dillard Department Stores Inc.
Dominion Resources Inc.
Donnelley (R.R.) & Sons Co.
Dover Corp.
Dow Chemical Co.
Dow Jones & Co. Inc.
Dresser Industries Inc.
DSC Communications Corp.
DTE Energy Co.
Du Pont (E.I.) de Nemours &Co
Duke Power
Dun & Bradstreet
EG&G Inc.
Eastern Enterprises
Eastman Chemical Co.
Eastman Kodak Co.
Eaton Corp.
Echlin Inc.
Echo Bay Mines Ltd.
Ecolab Inc.
Edison Int'l.
Emerson Electric Co.
Engelhard Corp.
Enron Corp.
Enserch Corp.
Entergy Corp.
Exxon Corp.
Federal Express Corp.
Federal Home Loan Mtg. Corp.
Federal Natl. Mtge. Assn.
Federal Paper Board Inc.
Federated Dept. Stores Inc.
First Bank System Inc.
First Chicago NBD Corp.
First Data Corp.
First Fidelity Bancorp
First Interstate Bancorp
First Union Corp.
Fleet Financial Group Inc.
Fleetwood Enterprises Inc.
Fleming Cos. Inc.
Fluor Corp.
FMC Corp.
Ford Motor Co.
Foster Wheeler
FPL Group Inc.
Freeport McMoran Copper/Gold
Fruit of the Loom Inc.
Gannett Inc.
Gap Inc.
General Dynamics Corp.
General Electric Co.
General Mills Inc.
General Motors Corp.
General Public Utilities Corp.
General Re Corp.
General Signal Corp.
Genuine Parts Co.
Georgia-Pacific Corp.
Giant Food Inc.
Giddings & Lewis Inc.
Gillette Co.
Golden West Financial Corp.
Goodrich (B.F.) Co.
Goodyear Tire & Rubber Co.
Grace (W.R.) & Co.
Grainger (W.W.) Inc.
Great A&P TEA Inc.
Great Lakes Chemical Corp.
Great Western Financial Corp.
GTE Corp.
Halliburton Co.
Handleman Co.
Harcourt General Inc.
Harland (J.H.) Co.
Harnischfeger Indus. Inc.
Harrahs Entertainment Inc.
Harris Corp.
Hartmarx Corp.
Hasbro Inc.
Heinz (H.J.) Co.
Helmerich & Payne Inc.
Hercules Inc.
Hershey Foods Corp.
Hewlett-Packard Co.
Hilton Hotels Corp.
Home Depot Inc.
Homestake Mining Co.
Honeywell Inc.
Household International Inc.
Houston Industries Inc.
Humana Inc.
Illinois Tool Works Inc.
Inco Ltd.
Ingersoll-Rand Co.
Inland Steel Ind. Inc.
Intel Corp.
Intergraph Corp.
International Bus. Machines
International Flav/Frag
International Paper Co.
Interpublic Group Cos. Inc.
ITT Corp.
ITT Hartford Group Inc.
ITT Industries Inc.
James River Corp.
Jefferson-Pilot Corp.
Johnson Controls Inc.
Johnson & Johnson
Jostens Inc.
K Mart
Kaufman & Broad Home Corp.
Kellogg Co.
Kerr-McGee Corp.
KeyCorp
Kimberly-Clark Corp.
King World Productions Inc.
Knight-Ridder Inc.
Kroger Co.
Laidlaw Inc.
Lilly (Eli) & Co.
Limited Inc.
Lincoln National Corp.
Liz Claiborne Inc.
Lockheed Martin Corp.
Loews Corp.
Longs Drug Stores Corp.
Loral Corp.
Louisiana Land & Exploration
Louisiana Pacific Corp.
Lowe's Cos. Inc.
LSI Logic Corp.
Luby's Cafeterias Inc.
Maillinckrodt Group Inc.
Manor Care Inc.
Marriott Int'l Inc.
Marsh & McLennan Cos. Inc.
Masco Corp.
Mattel Inc.
May Dept. Stores Co.
Maytag Corp.
MBNA Corp.
McDermott International Inc.
McDonald's Corp.
McDonnell Douglas Corp.
McGraw-Hill Companies Inc.
MCI Communications Corp.
Mead Corp.
Medtronic Inc.
Mellon Bank Corp.
Melville Corp.
Mercantile Stores Inc.
Merck & Co. Inc.
Meredith Corp.
Merrill Lynch & Co. Inc.
Micron Technology Inc.
Microsoft Corp.
Millipore Corp.
Minn. Mining & Mfg. Co.
Mobil Corp.
Monsanto Co.
Moore Ltd.
Morgan (J.P.) & Co. Inc.
Morgan Stanley Group Inc.
Morton International Inc.
Motorola Inc.
NACCO Ind. Inc.
Nalco Chemical Co.
National City Corp.
National Semiconductor Corp.
National Service Ind. Inc.
NationsBank Corp.
Navistar International Corp.
New York Times Co.
Newell Co.
Newmont Mining Corp.
Niagara Mohawk Power Corp.
NICOR Inc.
Nike Inc.
NorAm Energy Corp.
Nordstrom Inc.
Norfolk Southern Corp.
Northern States Power Co.
Northern Telecom Ltd.
Northrop Grumman Corp.
Norwest Corp.
Novell Inc.
Nucor Corp.
Nynex Corp.
Occidental Petroleum Corp.
Ogden Corp.
Ohio Edison Co.
ONEOK Inc.
Oracle Corp.
Oryx Energy Co.
Outboard Marine Corp.
Owens Corning
PACCAR Inc.
Pacific Enterprises
Pacific Gas & Electric Co.
Pacific Telesis Group
PacifiCorp
Pall Corp.
Panhandle Eastern Corp.
Parker-Hannifin Corp.
PECO Energy Co.
Penney (J.C.) Inc.
Pennzoil Co.
Peoples Energy Corp.
Pep Boys
PepsiCo Inc.
Perkin-Elmer Corp.
Pfizer Inc.
Phelps Dodge Corp.
Pharmacia & UpJohn Inc.
Philip Morris Cos. Inc.
Phillips Petroleum Co.
Pioneer Hi-Bred Int'l Inc.
Pitney-Bowes Inc.
Placer Dome Inc.
PNC Bank Corp.
Polaroid Corp.
Potlatch Corp.
PPG Industries Inc.
PP&L Resources Inc.
Praxair Inc.
Premark International Inc.
Price
Procter & Gamble Co.
Providian Corp.
Public Service Enterprises
Pulte Corp.
Quaker Oats Co.
Ralston Purina Co.
Raychem Corp.
Raytheon Co.
Reebok International Ltd.
Republic NY Corp.
Reynolds Metals Co.
Rite Aid Corp.
Rockwell International Corp.
Rohm & Haas Co.
Rowan Cos. Inc.
Royal Dutch Petroleum Co.
Rubbermaid Inc.
Russell Corp.
Ryan's Family Steak Houses
Ryder System Inc.
SAFECO Corp.
Safety-Kleen Corp.
Salomon Inc.
Santa Fe Energy Resources Inc.
Santa Fe Pacific Gold Corp.
Sara Lee Corp.
SBC Communications Inc.
Schering-Plough Corp.
Schlumberger Ltd.
Scientific-Atlanta Inc.
Seagram Ltd.
Sears Roebuck & Co.
Service Corp. International
Shared Medical Systems Corp.
Sherwin-Williams Co.
Shoney's Inc.
Sigma Aldrich Corp.
Silicon Graphics Inc.
Snap-On Inc.
Sonat Inc.
Southern Co.
Southwest Airlines Co.
Springs Industries Inc.
Sprint Corp.
Stanley Works
Stone Container Corp.
Stride Rite Corp.
St. Jude Medical Inc.
St. Paul Cos. Inc.
Sun Inc.
Sun Microsystem Inc.
SunTrust Banks Inc.
Supervalu Inc.
Sysco Corp.
Tandem Computers Inc.
Tandy Corp.
Tektronix Inc.
Tele-Communications Inc.
Teledyne Inc.
Tellabs Inc.
Temple-Inland Inc.
Tenet Healthcare Corp.
Tenneco Inc.
Texaco Inc.
Texas Instruments Inc.
Texas Utilities Co.
Textron Inc.
Thomas & Betts Corp.
Time Warner Inc.
Times Mirror Co.
Timken Co.
TJX Companies Inc.
Torchmark Corp.
Toys R Us Inc.
Transamerica Corp.
Travelers Group Inc.
Tribune Co.
Trinova Corp.
TRW Inc.
Tyco Int'l Limited
Unicom Corp.
Unilever N.V.
Union Camp Corp.
Union Carbide Corp.
Union Electric Co.
Union Pacific
Unisys Corp.
United Healthcare Corp.
United Technologies Corp.
Unocal Corp.
UNUM Corp.
U.S. Bancorp
U.S. Healthcare Inc.
U.S. Surgical Corp.
U.S. West Inc.
USAir Group Inc.
USF&G Corp.
USLIFE Corp.
UST Inc.
USX-Marathon Group
USX-U.S. Steel Group
Varity Corp.
V.F. Corp.
Viacom Inc.
Wachovia Corp.
Walgreen Co.
Wal-Mart Stores Inc.
Walt Disney Co.
Warner-Lambert Co.
Wells Fargo & Co.
Wendy's International Inc.
Western Atlas Inc.
Westinghouse Electric Corp.
Westvaco Corp.
Weyerhaeuser Corp.
Whirlpool Corp.
Whitman Corp.
Williamette Industries Inc.
Williams Cos. Inc.
Winn-Dixie Stores Inc.
WMX Technologies Inc.
Woolworth Corp.
Worthington Ind. Inc.
Wrigley (Wm.) Jr. Co.
Xerox Corp.
Yellow Corp.