FIDELITY ADVISOR SERIES II, N-30D, 1998-08-17

FIDELITY ADVISOR SERIES II
N-30D, 1998-08-17

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(2_FIDELITY_LOGOS)FIDELITY ADVISOR

(REGISTERED TRADEMARK)
STRATEGIC INCOME
FUND - CLASS A, CLASS T, CLASS B
AND CLASS C
SEMIANNUAL REPORT
JUNE 30, 1998
CONTENTS

PRESIDENT'S MESSAGE 3 NED JOHNSON ON INVESTING STRATEGIES.

PERFORMANCE 4 HOW THE FUND HAS DONE OVER TIME.

FUND TALK 19 THE MANAGERS' REVIEW OF FUND
PERFORMANCE, STRATEGY AND OUTLOOK.

INVESTMENT CHANGES 23 A SUMMARY OF MAJOR SHIFTS IN THE FUND'S
INVESTMENTS OVER THE PAST SIX MONTHS.

INVESTMENTS 24 A COMPLETE LIST OF THE FUND'S INVESTMENTS
WITH THEIR MARKET VALUES.

FINANCIAL STATEMENTS 49 STATEMENTS OF ASSETS AND LIABILITIES,
OPERATIONS, AND CHANGES IN NET ASSETS,
AS WELL AS FINANCIAL HIGHLIGHTS.

NOTES 58 NOTES TO THE FINANCIAL STATEMENTS.

PROXY VOTING RESULTS 68

THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE
SUBMITTED FOR THE GENERAL INFORMATION
OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT AUTHORIZED FOR
DISTRIBUTION TO PROSPECTIVE INVESTORS
IN THE FUND UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS.
MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED
BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC,
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT
INVESTED.
NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK.
FOR MORE INFORMATION ON ANY FIDELITY ADVISOR FUND, INCLUDING CHARGES
AND EXPENSES, CONTACT YOUR
INVESTMENT PROFESSIONAL FOR A FREE PROSPECTUS. READ IT CAREFULLY
BEFORE YOU INVEST OR SEND MONEY.
PRESIDENT'S MESSAGE

(PHOTO_OF_EDWARD_C_JOHNSON_3D)DEAR SHAREHOLDER:
As the first half of 1998 drew to a close, benign inflation, low
interest rates and moderate economic growth provided a solid
foundation for strong stock and bond performance. Investors seemed to
put concerns about the financial and economic turmoil in Asia aside
for the most part, responding instead to stronger-than-expected
corporate earnings and a sound domestic economy. The bond markets
tended to benefit from the moderate growth in the economy and a
historically low rate of inflation, as well their traditional status
as a refuge from volatility in the equity markets.
While it's impossible to predict the future direction of the markets
with any degree of certainty, there are certain basic principles that
can help investors plan for their future needs.
The longer your investment time frame, the less likely it is that you
will be affected by short-term market volatility. A 10-year investment
horizon appropriate for saving for a college education, for example,
enables you to weather market cycles in a long-term fund, which may
have a higher risk potential, but also has a higher potential rate of
return.
An intermediate-length fund could make sense if your investment
horizon is two to four years, while a short-term bond fund could be
the right choice if you need your money in one or two years.
If your time horizon is less than a year, you might want to consider
moving some of your bond investment into a money market fund. These
funds seek income and a stable share price by investing in
high-quality, short-term investments. Of course, it's important to
remember that there is no assurance that a money market fund will
achieve its goal of maintaining a stable net asset value of $1.00 per
share, and that these types of funds are neither insured nor
guaranteed by any agency of the U.S. government.
Finally, no matter what your time horizon or portfolio diversity, it
makes good sense to follow a regular investment plan, investing a
certain amount of money in a fund at the same time each month or
quarter and periodically reviewing your overall portfolio. By doing
so, you won't get caught up in the excitement of a rapidly rising
market, nor will you buy all your shares at market highs. While this
strategy - known as dollar cost averaging - won't assure a profit or
protect you from a loss in a declining market, it should help you
lower the average cost of your purchases.
Remember to contact your investment professional if you need help with
your investments.
Best regards,
Edward C. Johnson 3d
ADVISOR STRATEGIC INCOME FUND - CLASS A
PERFORMANCE: THE BOTTOM LINE

There are several ways to evaluate historical performance. You can
look at the total percentage change in value, the average annual
percentage change or the growth of a hypothetical $10,000 investment.
Total return reflects the change in the value of an investment,
assuming reinvestment of the class' dividend income and capital gains
(the profits earned upon the sale of securities that have grown in
value). You can also look at the class' income to measure performance.
The initial offering of Class A shares took place on September 3,
1996. Class A shares bear a 0.15% 12b-1 fee that is reflected in
returns after September 3, 1996. Returns prior to that date are those
of Class T, and reflect Class T shares' 0.25% 12b-1 fee. If Fidelity
had not reimbursed certain class expenses, the total returns and
dividends would have been lower.
CUMULATIVE TOTAL RETURNS
PERIODS ENDED JUNE 30, 1998 PAST 6 PAST 1 LIFE OF
MONTHS YEAR FUND

FIDELITY ADV STRATEGIC INCOME - CL A 3.03% 7.72% 55.29%

FIDELITY ADV STRATEGIC INCOME - CL A -1.86% 2.60% 47.91%
(INCL. MAX. 4.75% SALES CHARGE)

FIDELITY STRATEGIC INC COMP. 3.23% 8.00% 49.47%

JP EMBI PLUS -1.08% 1.39% 84.46%

LB GOVERNMENT BOND 4.18% 11.25% 39.45%

ML HIGH YIELD MASTER 4.51% 11.40% 57.43%

SB NON-U.S. DOLLAR WORLD GOVT. BOND 2.09% 0.88% 19.23%

MULTI-SECTOR INCOME FUNDS AVERAGE 2.71% 7.05% N/A

CUMULATIVE TOTAL RETURNS show Class A's performance in percentage
terms over a set period - in this case, six months, one year or since
the fund started on October 31, 1994. For example, if you had invested
$1,000 in a fund that had a 5% return over the past year, the value of
your investment would be $1,050. You can compare Class A's returns to
those of the Fidelity Strategic Income Composite Index - a
hypothetical combination of unmanaged indices. The composite index
combines the total returns of the JP Morgan Emerging Markets Bond
Index Plus, the Lehman Brothers Government Bond Index, the Merrill
Lynch High Yield Master Index and the Salomon Brothers Non-U.S. Dollar
World Government Bond Index weighted according to the fund's neutral
mix. To measure how Class A's performance stacked up against its
peers, you can compare it to the multi-sector income funds average,
which reflects the performance of mutual funds with similar objectives
tracked by Lipper Analytical Services, Inc. The past six months
average represents a peer group of 95 mutual funds. The benchmarks
listed in the table above include reinvested dividends and capital
gains, if any, and exclude the effect of sales charges.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JUNE 30, 1998 PAST 1 LIFE OF
YEAR FUND

FIDELITY ADV STRATEGIC INCOME - CL A 7.72% 12.75%

FIDELITY ADV STRATEGIC INCOME - CL A 2.60% 11.27%
(INCL. MAX. 4.75% SALES CHARGE)

FIDELITY STRATEGIC INC COMP. 8.00% 11.58%

AVERAGE ANNUAL TOTAL RETURNS take Class A's cumulative return and show
you what would have happened if Class A had performed at a constant
rate each year.
$10,000 OVER LIFE OF FUND
FA Strategic Inc -CL A FID Strategic Inc Comp.
ML High Yield Master 00260 F0086
ML002 1994/10/31 9525.00 10000.00
10000.00
1994/11/30 9572.77 9921.26
9914.94
1994/12/31 9541.61 9887.56
10025.22
1995/01/31 9648.07 9962.57
10166.88
1995/02/28 9875.95 10125.61
10484.10
1995/03/31 10019.24 10301.07
10630.00
1995/04/30 10395.11 10634.09
10878.89
1995/05/31 10786.33 11037.19
11218.77
1995/06/30 10841.49 11135.32
11304.46
1995/07/31 10928.59 11192.91
11433.70
1995/08/31 10945.88 11198.60
11503.09
1995/09/30 11140.78 11390.44
11634.70
1995/10/31 11270.10 11444.44
11717.17
1995/11/30 11395.97 11595.55
11831.55
1995/12/31 11643.10 11847.24
12021.46
1996/01/31 11903.52 12046.81
12211.32
1996/02/29 11807.14 11927.06
12229.71
1996/03/31 11769.08 11944.14
12196.49
1996/04/30 11882.44 12025.48
12202.02
1996/05/31 11965.00 12090.46
12290.02
1996/06/30 12066.53 12234.53
12363.84
1996/07/31 12139.29 12369.42
12447.78
1996/08/31 12280.23 12504.03
12576.33
1996/09/30 12663.01 12784.11
12846.16
1996/10/31 12827.47 12956.74
12986.95
1996/11/30 13077.33 13230.23
13249.51
1996/12/31 13141.42 13261.40
13351.46
1997/01/31 13226.46 13301.40
13454.07
1997/02/28 13339.67 13391.81
13642.80
1997/03/31 13046.74 13220.01
13491.28
1997/04/30 13192.75 13350.18
13644.83
1997/05/31 13535.42 13643.22
13916.32
1997/06/30 13731.04 13839.71
14131.74
1997/07/31 14001.03 14081.77
14470.87
1997/08/31 13990.54 14060.71
14438.31
1997/09/30 14331.31 14317.94
14684.83
1997/10/31 14085.62 14204.77
14782.28
1997/11/30 14206.44 14326.98
14914.67
1997/12/31 14356.16 14478.93
15063.79
1998/01/31 14615.36 14640.74
15284.46
1998/02/28 14724.36 14746.85
15351.23
1998/03/31 14853.96 14828.66
15483.52
1998/04/30 14903.22 14931.13
15557.07
1998/05/31 14832.89 14938.88
15657.71
1998/06/30 14791.03 14946.72
15742.96
IMATRL PRASUN SHR__CHT 19980630 19980722 122102 R00000000000047
$10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was
invested in Fidelity Advisor Strategic Income Fund - Class A on
October 31, 1994, when the fund started, and the current 4.75% sales
charge was paid. As the chart shows, by June 30, 1998, the value of
the investment would have grown to $14,791 - a 47.91% increase on the
initial investment. For comparison, look at how the Merrill Lynch High
Yield Master Index - a market capitalization weighted index of all
domestic and yankee high-yield bonds, did over the same period. Issues
included in the index have maturities of at least one year and have a
credit rating lower than BBB-/Baa3, but are not in default. With
dividends and capital gains, if any, reinvested, the same $10,000
investment would have grown to $15,743 - a 57.43% increase. You can
also look at how the Fidelity Strategic Income Composite Index - a
hypothetical combination of unmanaged indices that is more
representative of the fund's investable universe - did over the same
period. This index combines returns from the J.P. Morgan Emerging
Markets Bond Index Plus (+84.46%), Lehman Brothers Government Bond
Index (+39.45%), Merrill Lynch High Yield Master Index (+57.43%), and
Salomon Brothers Non-U.S. Dollar World Government Bond Index
(+19.23%), according to the fund's neutral mix *, and assumes monthly
rebalancing of the mix. With dividends and capital gains, if any,
reinvested, the same $10,000 investment would have grown to $14,947 -
a 49.47% increase.
UNDERSTANDING
PERFORMANCE
HOW A FUND DID YESTERDAY IS
NO GUARANTEE OF HOW IT WILL DO
TOMORROW. IF YOU SELL YOUR SHARES
DURING A MARKET DOWNTURN, YOU
MIGHT LOSE MONEY. BUT IF YOU CAN
RIDE OUT THE MARKET'S UPS AND
DOWNS, YOU MAY HAVE A GAIN.
(CHECKMARK)
* 40% HIGH YIELD, 30% U.S. GOVERNMENT AND INVESTMENT GRADE, 15%
EMERGING MARKETS, AND 15% FOREIGN DEVELOPED MARKETS.
TOTAL RETURN COMPONENTS
SIX MONTHS YEAR SEPTEMBER 3, 1996
ENDED ENDED (COMMENCEMENT
JUNE 30, DECEMBER 31, OF SALE OF CLASS A
SHARES) TO
DECEMBER 31,

1998 1997 1996

DIVIDEND RETURNS 3.12% 7.20% 2.56%

CAPITAL RETURNS -0.09% 2.04% 4.39%

TOTAL RETURNS 3.03% 9.24% 6.95%

TOTAL RETURN COMPONENTS include both dividend returns and capital
returns. A dividend return reflects the actual dividends paid by the
class. A capital return reflects both the amount paid by the class to
shareholders as capital gain distributions and changes in the class'
share price. Both returns assume the dividends or capital gains, if
any, paid by the class are reinvested, and exclude the effect of sales
charges.
DIVIDENDS AND YIELD
PERIODS ENDED JUNE 30, 1998 PAST 1 PAST 6 PAST 1
MONTH MONTHS YEAR

DIVIDENDS PER SHARE 5.85(CENTS) 34.58(CENTS) 76.37(CENTS)

ANNUALIZED DIVIDEND RATE 6.39% 6.21% 6.73%

30-DAY ANNUALIZED YIELD N/A - -

DIVIDENDS per share show the income paid by the class for a set
period. If you annualize this number, based on an average share price
of $11.13 over the past one month, $11.23 over the past six months and
$11.34 over the past one year, you can compare the class' income over
these three periods. The 30-day annualized YIELD is a standard formula
for all bond funds based on the yields of the bonds in the fund,
averaged over the past 30 days. This figure shows you the yield
characteristics of the fund's investments at the end of the period. It
also helps you to compare funds from different companies on an equal
basis. Yield information will be reported once Class A has a longer,
more stable, operating history.
ADVISOR STRATEGIC INCOME FUND - CLASS T
PERFORMANCE: THE BOTTOM LINE

FIDELITY ADV STRATEGIC INCOME - CL T 3.00% 7.72% 55.38%

FIDELITY ADV STRATEGIC INCOME - CL T -0.61% 3.95% 49.94%
(INCL. MAX. 3.50% SALES CHARGE)

FIDELITY STRATEGIC INC COMP. 3.23% 8.00% 49.47%

JP EMBI PLUS -1.08% 1.39% 84.46%

LB GOVERNMENT BOND 4.18% 11.25% 39.45%

ML HIGH YIELD MASTER 4.51% 11.40% 57.43%

SB NON-U.S. DOLLAR WORLD GOVT. BOND 2.09% 0.88% 19.23%

MULTI-SECTOR INCOME FUNDS AVERAGE 2.71% 7.05% N/A

CUMULATIVE TOTAL RETURNS show Class T's performance in percentage
terms over a set period - in this case, six months, one year or since
the fund started on October 31, 1994. For example, if you had invested
$1,000 in a fund that had a 5% return over the past year, the value of
your investment would be $1,050. You can compare Class T's returns to
those of the Fidelity Strategic Income Composite Index - a
hypothetical combination of unmanaged indices. The composite index
combines the total returns of the J.P. Morgan Emerging Markets Bond
Index Plus, the Lehman Brothers Government Bond Index, the Merrill
Lynch High Yield Master Index and the Salomon Brothers Non-U.S. Dollar
World Government Bond Index weighted according to the fund's neutral
mix. To measure how Class T's performance stacked up against its
peers, you can compare it to the multi-sector income funds average,
which reflects the performance of mutual funds with similar objectives
tracked by Lipper Analytical Services, Inc. The past six months
average represents a peer group of 95 mutual funds. The benchmarks
listed in the table above include reinvested dividends and capital
gains, if any, and exclude the effect of sales charges.AVERAGE ANNUAL
TOTAL RETURNS
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JUNE 30, 1998 PAST 1 LIFE OF
YEAR FUND

FIDELITY ADV STRATEGIC INCOME - CL T 7.72% 12.77%

FIDELITY ADV STRATEGIC INCOME - CL T 3.95% 11.68%
(INCL. MAX. 3.50% SALES CHARGE)

FIDELITY STRATEGIC INC COMP. 8.00% 11.58%

AVERAGE ANNUAL TOTAL RETURNS take Class T's cumulative return and show
you what would have happened if Class T had performed at a constant
rate each year.
$10,000 OVER LIFE OF FUND
FA Strategic Inc -CL T FID Strategic Inc Comp.
ML High Yield Master
00638 F0086
ML002
1994/10/31 9650.00 10000.00
10000.00
1994/11/30 9698.40 9921.26
9914.94
1994/12/31 9666.83 9887.56
10025.22
1995/01/31 9774.68 9962.57
10166.88
1995/02/28 10005.55 10125.61
10484.10
1995/03/31 10150.73 10301.07
10630.00
1995/04/30 10531.53 10634.09
10878.89
1995/05/31 10927.88 11037.19
11218.77
1995/06/30 10983.77 11135.32
11304.46
1995/07/31 11072.01 11192.91
11433.70
1995/08/31 11089.52 11198.60
11503.09
1995/09/30 11286.98 11390.44
11634.70
1995/10/31 11418.00 11444.44
11717.17
1995/11/30 11545.52 11595.55
11831.55
1995/12/31 11795.90 11847.24
12021.46
1996/01/31 12059.74 12046.81
12211.32
1996/02/29 11962.09 11927.06
12229.71
1996/03/31 11923.53 11944.14
12196.49
1996/04/30 12038.38 12025.48
12202.02
1996/05/31 12122.02 12090.46
12290.02
1996/06/30 12224.89 12234.53
12363.84
1996/07/31 12298.60 12369.42
12447.78
1996/08/31 12441.38 12504.03
12576.33
1996/09/30 12830.13 12784.11
12846.16
1996/10/31 12997.13 12956.74
12986.95
1996/11/30 13251.26 13230.23
13249.51
1996/12/31 13315.91 13261.40
13351.46
1997/01/31 13391.70 13301.40
13454.07
1997/02/28 13518.64 13391.81
13642.80
1997/03/31 13222.75 13220.01
13491.28
1997/04/30 13371.63 13350.18
13644.83
1997/05/31 13720.32 13643.22
13916.32
1997/06/30 13919.62 13839.71
14131.74
1997/07/31 14194.54 14081.77
14470.87
1997/08/31 14185.26 14060.71
14438.31
1997/09/30 14518.67 14317.94
14684.83
1997/10/31 14282.39 14204.77
14782.28
1997/11/30 14393.11 14326.98
14914.67
1997/12/31 14558.12 14478.93
15063.79
1998/01/31 14805.33 14640.74
15284.46
1998/02/28 14927.20 14746.85
15351.23
1998/03/31 15058.21 14828.66
15483.52
1998/04/30 15105.82 14931.13
15557.07
1998/05/31 15036.26 14938.88
15657.71
1998/06/30 14994.41 14946.72
15742.96
IMATRL PRASUN SHR__CHT 19980630 19980722 123114 R00000000000047
$10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was
invested in Fidelity Advisor Strategic Income Fund - Class T on
October 31, 1994, when the fund started, and the current 3.50% sales
charge was paid. As the chart shows, by June 30, 1998, the value of
the investment would have grown to $14,994 - a 49.94% increase on the
initial investment. For comparison, look at how the Merrill Lynch High
Yield Master Index - a market capitalization weighted index of all
domestic and yankee high-yield bonds, did over the same period. Issues
included in the index have maturities of at least one year and have a
credit rating lower than BBB-/Baa3, but are not in default. With
dividends and capital gains, if any, reinvested, the same $10,000
investment would have grown to $15,743 - a 57.43% increase. You can
also look at how the Fidelity Strategic Income Composite Index - a
hypothetical combination of unmanaged indices that is more
representative of the fund's investable
universe - did over the same period. This
index combines returns from the J.P. Morgan Emerging Markets Bond
Index Plus (+84.46%), Lehman Brothers Government Bond Index (+39.45%),
Merrill Lynch High Yield Master Index (+57.43%), and Salomon Brothers
Non-U.S. Dollar World Government Bond Index (+19.23%), according to
the fund's neutral mix *, and assumes monthly rebalancing of the mix.
With dividends and capital gains, if any, reinvested, the same $10,000
investment would have grown to $14,947 - a 49.47% increase.

UNDERSTANDING
PERFORMANCE
HOW A FUND DID YESTERDAY IS
NO GUARANTEE OF HOW IT WILL DO
TOMORROW. IF YOU SELL YOUR SHARES
DURING A MARKET DOWNTURN, YOU
MIGHT LOSE MONEY. BUT IF YOU CAN
RIDE OUT THE MARKET'S UPS AND
DOWNS, YOU MAY HAVE A GAIN.
(CHECKMARK)
* 40% HIGH YIELD, 30% U.S. GOVERNMENT AND INVESTMENT GRADE, 15%
EMERGING MARKETS, AND 15% FOREIGN DEVELOPED MARKETS.
TOTAL RETURN COMPONENTS

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
SIX MONTHS YEARS ENDED DECEMBER 31, OCTOBER 31, 1994
ENDED (COMMENCEMENT
JUNE 30, OF OPERATIONS) TO
DECEMBER 31,

1998 1997 1996 1995 1994

DIVIDEND RETURNS 3.09% 7.29% 7.73% 8.65% 0.97%

CAPITAL RETURNS -0.09% 2.04% 5.16% 13.37% -0.80%
TOTAL RETURNS 3.00% 9.33% 12.89% 22.02% 0.17%

</TABLE>

DIVIDENDS PER SHARE 5.89(CENTS) 34.22(CENTS) 76.38(CENTS)

ANNUALIZED DIVIDEND RATE 6.43% 6.14% 6.74%

30-DAY ANNUALIZED YIELD 6.53% - -

DIVIDENDS per share show the income paid by the class for a set
period. If you annualize this number, based on an average share price
of $11.14 over the past one month, $11.23 over the past six months,
and $11.34 over the past one year, you can compare the class' income
over these three periods. The 30-day annualized YIELD is a standard
formula for all bond funds based on the yields of the bonds in the
fund, averaged over the past 30 days. This figure shows you the yield
characteristics of the fund's investments at the end of the period. It
also helps you to compare funds from different companies on an equal
basis. The offering share price used in the calculation of the yield
includes the effect of Class T's 3.50% sales charge.
ADVISOR STRATEGIC INCOME FUND - CLASS B
PERFORMANCE: THE BOTTOM LINE

There are several ways to evaluate historical performance. You can
look at the total percentage change in value, the average annual
percentage change or the growth of a hypothetical $10,000 investment.
Total return reflects the change in the value of an investment,
assuming reinvestment of the class' dividend income and capital gains
(the profits earned upon the sale of securities that have grown in
value). You can also look at the class' income to measure performance.
Class B shares' contingent deferred sales charge included in the past
six months, past one year and life of fund total return figures are
5%, 5% and 3%, respectively. If Fidelity had not reimbursed certain
class expenses, the life of fund total returns would have been lower.
CUMULATIVE TOTAL RETURNS
PERIODS ENDED JUNE 30, 1998 PAST 6 PAST 1 LIFE OF
MONTHS YEAR FUND

FIDELITY ADV STRATEGIC INCOME - CL B 2.75% 7.01% 51.76%

FIDELITY ADV STRATEGIC INCOME - CL B -2.25% 2.11% 48.76%
(INCL. CONTINGENT DEFERRED SALES CHARGE)

FIDELITY STRATEGIC INC COMP. 3.23% 8.00% 49.47%

JP EMBI PLUS -1.08% 1.39% 84.46%

LB GOVERNMENT BOND 4.18% 11.25% 39.45%

ML HIGH YIELD MASTER 4.51% 11.40% 57.43%

SB NON-U.S. DOLLAR WORLD GOVT. BOND 2.09% 0.88% 19.23%

MULTI-SECTOR INCOME FUNDS AVERAGE 2.71% 7.05% N/A

CUMULATIVE TOTAL RETURNS show Class B's performance in percentage
terms over a set period - in this case, six months, one year or since
the fund started on October 31, 1994. For example, if you had invested
$1,000 in a fund that had a 5% return over the past year, the value of
your investment would be $1,050. You can compare Class B's returns to
those of the Fidelity Strategic Income Composite Index - a
hypothetical combination of unmanaged indices. The composite index
combines the total returns of the JP Morgan Emerging Markets Bond
Index Plus, the Lehman Brothers Government Bond Index, the Merrill
Lynch High Yield Master Index and the Salomon Brothers Non-U.S. Dollar
World Government Bond Index weighted according to the fund's neutral
mix. To measure how Class B's performance stacked up against its
peers, you can compare it to the multi-sector income funds average,
which reflects the performance of mutual funds with similar objectives
tracked by Lipper Analytical Services, Inc. The past six months
average represents a peer group of 95 mutual funds. The benchmarks
listed in the table above include reinvested dividends and capital
gains, if any, and exclude the effect of sales charges.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JUNE 30, 1998 PAST 1 LIFE OF
YEAR FUND

FIDELITY ADV STRATEGIC INCOME - CL B 7.01% 12.05%

FIDELITY ADV STRATEGIC INCOME - CL B 2.11% 11.44%
(INCL. CONTINGENT DEFERRED SALES CHARGE)

FIDELITY STRATEGIC INC COMP. 8.00% 11.58%

AVERAGE ANNUAL TOTAL RETURNS take Class B's cumulative return and show
you what would have happened if Class B had performed at a constant
rate each year.
$10,000 OVER LIFE OF FUND
FA Strategic Inc -CL B FID Strategic Inc Comp.
ML High Yield Master
00639 F0086
ML002
1994/10/31 10000.00 10000.00
10000.00
1994/11/30 10045.19 9921.26
9914.94
1994/12/31 9993.77 9887.56
10025.22
1995/01/31 10109.93 9962.57
10166.88
1995/02/28 10342.97 10125.61
10484.10
1995/03/31 10496.27 10301.07
10630.00
1995/04/30 10883.14 10634.09
10878.89
1995/05/31 11285.68 11037.19
11218.77
1995/06/30 11326.35 11135.32
11304.46
1995/07/31 11420.96 11192.91
11433.70
1995/08/31 11431.98 11198.60
11503.09
1995/09/30 11617.60 11390.44
11634.70
1995/10/31 11755.36 11444.44
11717.17
1995/11/30 11878.64 11595.55
11831.55
1995/12/31 12127.76 11847.24
12021.46
1996/01/31 12391.44 12046.81
12211.32
1996/02/29 12283.74 11927.06
12229.71
1996/03/31 12237.32 11944.14
12196.49
1996/04/30 12347.83 12025.48
12202.02
1996/05/31 12426.63 12090.46
12290.02
1996/06/30 12525.39 12234.53
12363.84
1996/07/31 12594.31 12369.42
12447.78
1996/08/31 12733.18 12504.03
12576.33
1996/09/30 13123.27 12784.11
12846.16
1996/10/31 13286.86 12956.74
12986.95
1996/11/30 13539.79 13230.23
13249.51
1996/12/31 13599.52 13261.40
13351.46
1997/01/31 13681.65 13301.40
13454.07
1997/02/28 13803.67 13391.81
13642.80
1997/03/31 13482.16 13220.01
13491.28
1997/04/30 13638.86 13350.18
13644.83
1997/05/31 13973.99 13643.22
13916.32
1997/06/30 14181.74 13839.71
14131.74
1997/07/31 14453.55 14081.77
14470.87
1997/08/31 14423.79 14060.71
14438.31
1997/09/30 14767.17 14317.94
14684.83
1997/10/31 14518.78 14204.77
14782.28
1997/11/30 14623.24 14326.98
14914.67
1997/12/31 14769.60 14478.93
15063.79
1998/01/31 15025.93 14640.74
15284.46
1998/02/28 15128.43 14746.85
15351.23
1998/03/31 15266.11 14828.66
15483.52
1998/04/30 15306.75 14931.13
15557.07
1998/05/31 15227.35 14938.88
15657.71
1998/06/30 14876.00 14946.72
15742.96
IMATRL PRASUN SHR__CHT 19980630 19980727 133515 R00000000000047
$10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was
invested in Fidelity Advisor Strategic Income Fund - Class B on
October 31, 1994, when the fund started. As the chart shows, by June
30, 1998, the value of the investment, including the effect of the
contingent deferred sales charge, would have grown to $14,876 - a
48.76% increase on the initial investment. For comparison, look at how
the Merrill Lynch High Yield Master Index - a market capitalization
weighted index of all domestic and yankee high-yield bonds, did over
the same period. Issues included in the index have maturities of at
least one year and have a credit rating lower than BBB-/Baa3, but are
not in default. With dividends and capital gains, if any, reinvested,
the same $10,000 investment would have grown to $15,743 - a 57.43%
increase. You can also look at how the Fidelity Strategic Income
Composite Index - a hypothetical combination of unmanaged indices that
is more representative of the fund's investable universe - did over
the same period. This index combines returns from the J.P. Morgan
Emerging Markets Bond Index Plus (+84.46%), Lehman Brothers Government
Bond Index (+39.45%), Merrill Lynch High Yield Master Index (+57.43%),
and Salomon Brothers Non-U.S. Dollar World Government Bond Index
(+19.23%), according to the fund's neutral mix *, and assumes monthly
rebalancing of the mix. With dividends and capital gains, if any,
reinvested, the same $10,000 investment would have grown to $14,947 -
a 49.47% increase.
UNDERSTANDING
PERFORMANCE
HOW A FUND DID YESTERDAY IS
NO GUARANTEE OF HOW IT WILL DO
TOMORROW. IF YOU SELL YOUR SHARES
DURING A MARKET DOWNTURN, YOU
MIGHT LOSE MONEY. BUT IF YOU CAN
RIDE OUT THE MARKET'S UPS AND
DOWNS, YOU MAY HAVE A GAIN.
(CHECKMARK)
* 40% HIGH YIELD, 30% U.S. GOVERNMENT AND INVESTMENT GRADE, 15%
EMERGING MARKETS, AND 15% FOREIGN DEVELOPED MARKETS.
TOTAL RETURN COMPONENTS

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
OCTOBER 31, 1994
SIX MONTHS YEARS ENDED DECEMBER 31, (COMMENCEMENT
ENDED OF OPERATIONS) TO
JUNE 30 DECEMBER 31,

1998 1997 1996 1995 1994

DIVIDEND RETURNS 2.75% 6.58% 7.00% 7.78% 0.84%

CAPITAL RETURNS 0.00% 2.02% 5.14% 13.57% -0.90%

TOTAL RETURNS 2.75% 8.60% 12.14% 21.35% -0.06%

</TABLE>

DIVIDENDS PER SHARE 5.22(CENTS) 30.56(CENTS) 68.94(CENTS)

ANNUALIZED DIVIDEND RATE 5.70% 5.48% 6.07%

30-DAY ANNUALIZED YIELD 6.00% - -

DIVIDENDS per share show the income paid by the class for a set
period. If you annualize this number based on an average share price
of $11.15 over the past one month, $11.24 over the past six months,
and $11.36 over the past one year, you can compare the class' income
over these three periods. The 30-day annualized YIELD is a standard
formula for all bond funds based on the yields of the bonds in the
fund, averaged over the past 30 days. This figure shows you the yield
characteristics of the fund's investments at the end of the period. It
also helps you to compare funds from different companies on an equal
basis. The offering share price used in the calculation of the yield
excludes the effect of Class B's contingent deferred sales charge.
ADVISOR STRATEGIC INCOME FUND - CLASS C
PERFORMANCE: THE BOTTOM LINE

There are several ways to evaluate historical performance. You can
look at the total percentage change in value, the average annual
percentage change or the growth of a hypothetical $10,000 investment.
Total return reflects the change in the value of an investment,
assuming reinvestment of the class' dividend income and capital gains
(the profits earned upon the sale of securities that have grown in
value). You can also look at the class' income to measure performance.
The initial offering of Class C shares took place on November 3, 1997.
Class C shares bear a 1.00% 12b-1 fee that is reflected in returns
after November 3, 1997. Returns prior to November 3, 1997 are those of
Class B shares and reflect Class B shares' 0.90% 12b-1 fee (1.00%
prior to January 1, 1996). If Class C shares 12b-1 fee had been
reflected, returns between January 1, 1996 and November 3, 1997 would
have been lower. Class C shares' contingent deferred sales charge
included in the past six months and past one year total return figures
are 1%. If Fidelity had not reimbursed certain class expenses, the
total returns and dividends would have been lower.

<TABLE>
<CAPTION>
<S> <C> <C> <C>
CUMULATIVE TOTAL RETURNS
PERIODS ENDED JUNE 30, 1998 PAST 6 MONTHS PAST 1 YEAR LIFE OF FUND

FIDELITY ADV STRATEGIC INCOME - CL C 2.61% 6.80% 51.46%

FIDELITY ADV STRATEGIC INCOME - CL C 1.61% 5.81% 51.46%
(INCL. CONTINGENT DEFERRED SALES CHARGE)

FIDELITY STRATEGIC INC COMP. 3.23% 8.00% 49.47%

JP EMBI PLUS -1.08% 1.39% 84.46%

LB GOVERNMENT BOND 4.18% 11.25% 39.45%

ML HIGH YIELD MASTER 4.51% 11.40% 57.43%

SB NON-U.S. DOLLAR WORLD GOVT. BOND 2.09% 0.88% 19.23%

MULTI-SECTOR INCOME FUNDS AVERAGE 2.71% 7.05% N/A

</TABLE>

CUMULATIVE TOTAL RETURNS show Class C's performance in percentage
terms over a set period - in this case, six months, one year or since
the fund started on October 31, 1994. For example, if you had invested
$1,000 in a fund that had a 5% return over the past year, the value of
your investment would be $1,050. You can compare Class C's returns to
those of the Fidelity Strategic Income Composite Index - a
hypothetical combination of unmanaged indices. The composite index
combines the total returns of the JP Morgan Emerging Markets Bond
Index Plus, the Lehman Brothers Government Bond Index, the Merrill
Lynch High Yield Master Index and the Salomon Brothers Non-U.S. Dollar
World Government. Bond Index weighted according to the fund's neutral
mix. To measure how Class C's performance stacked up against its
peers, you can compare it to the multi-sector income funds average,
which reflects the performance of mutual funds with similar objectives
tracked by Lipper Analytical Services, Inc. The past six months
average represents a peer group of 95 mutual funds. The benchmarks
listed in the table above include reinvested dividends and capital
gains, if any, and exclude the effect of sales charges.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JUNE 30, 1998 PAST 1 YEAR LIFE OF FUND

FIDELITY ADV STRATEGIC INCOME - CL C 6.80% 11.99%

FIDELITY ADV STRATEGIC INCOME - CL C 5.81% 11.99%
(INCL. CONTINGENT DEFERRED SALES CHARGE)

FIDELITY STRATEGIC INC COMP. 8.00% 11.58%

AVERAGE ANNUAL TOTAL RETURNS take Class C's cumulative return and show
you what would have happened if Class C had performed at a constant
rate each year.
$10,000 OVER LIFE OF FUND
FA Strategic Inc -CL C FID Strategic Inc Comp.
ML High Yield Master
00523 F0086
ML002
1994/10/31 10000.00 10000.00
10000.00
1994/11/30 10040.92 9921.26
9914.94
1994/12/31 9986.63 9887.56
10025.22
1995/01/31 10103.43 9962.57
10166.88
1995/02/28 10336.89 10125.61
10484.10
1995/03/31 10490.99 10301.07
10630.00
1995/04/30 10878.41 10634.09
10878.89
1995/05/31 11281.55 11037.19
11218.77
1995/06/30 11322.34 11135.32
11304.46
1995/07/31 11416.95 11192.91
11433.70
1995/08/31 11428.15 11198.60
11503.09
1995/09/30 11614.14 11390.44
11634.70
1995/10/31 11752.04 11444.44
11717.17
1995/11/30 11875.70 11595.55
11831.55
1995/12/31 12124.43 11847.24
12021.46
1996/01/31 12388.64 12046.81
12211.32
1996/02/29 12280.29 11927.06
12229.71
1996/03/31 12233.85 11944.14
12196.49
1996/04/30 12344.76 12025.48
12202.02
1996/05/31 12423.74 12090.46
12290.02
1996/06/30 12523.05 12234.53
12363.84
1996/07/31 12592.39 12369.42
12447.78
1996/08/31 12731.20 12504.03
12576.33
1996/09/30 13122.19 12784.11
12846.16
1996/10/31 13285.94 12956.74
12986.95
1996/11/30 13539.30 13230.23
13249.51
1996/12/31 13598.34 13261.40
13351.46
1997/01/31 13680.79 13301.40
13454.07
1997/02/28 13802.73 13391.81
13642.80
1997/03/31 13480.38 13220.01
13491.28
1997/04/30 13637.82 13350.18
13644.83
1997/05/31 13973.52 13643.22
13916.32
1997/06/30 14181.32 13839.71
14131.74
1997/07/31 14453.68 14081.77
14470.87
1997/08/31 14423.98 14060.71
14438.31
1997/09/30 14768.14 14317.94
14684.83
1997/10/31 14518.57 14204.77
14782.28
1997/11/30 14605.77 14326.98
14914.67
1997/12/31 14761.32 14478.93
15063.79
1998/01/31 14999.68 14640.74
15284.46
1998/02/28 15112.20 14746.85
15351.23
1998/03/31 15245.53 14828.66
15483.52
1998/04/30 15283.12 14931.13
15557.07
1998/05/31 15199.93 14938.88
15657.71
1998/06/30 15146.23 14946.72
15742.96
IMATRL PRASUN SHR__CHT 19980630 19980722 123907 R00000000000047
$10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was
invested in Fidelity Advisor Strategic Income Fund - Class C on
October 31, 1994, when the fund started. As the chart shows, by June
30, 1998, the value of the investment, would have grown to $15,146 - a
51.46% increase on the initial investment. For comparison, look at how
the Merrill Lynch High Yield Master Index - a market capitalization
weighted index of all domestic and yankee high-yield bonds, did over
the same period. Issues included in the index have maturities of at
least one year and have a credit rating lower than BBB-/Baa3, but are
not in default. With dividends and capital gains, if any, reinvested,
the same $10,000 investment would have grown to $15,743 - a 57.43%
increase. You can also look at how the Fidelity Strategic Income
Composite Index - a hypothetical combination of unmanaged indices that
is more representative of the fund's investable universe - did over
the same period. This index combines returns from the J.P. Morgan
Emerging Markets Bond Index Plus (+84.46%), Lehman Brothers Government
Bond Index (+39.45%), Merrill Lynch High Yield Master Index (+57.43%),
and Salomon Brothers Non-U.S. Dollar World Government Bond Index
(+19.23%), according to the fund's neutral mix *, and assumes monthly
rebalancing of the mix. With dividends and capital gains, if any,
reinvested, the same $10,000 investment would have grown to $14,947 -
a 49.47% increase.
UNDERSTANDING
PERFORMANCE
HOW A FUND DID YESTERDAY IS
NO GUARANTEE OF HOW IT WILL DO
TOMORROW. IF YOU SELL YOUR SHARES
DURING A MARKET DOWNTURN, YOU
MIGHT LOSE MONEY. BUT IF YOU CAN
RIDE OUT THE MARKET'S UPS AND
DOWNS, YOU MAY HAVE A GAIN.
(CHECKMARK)
* 40% HIGH YIELD, 30% U.S. GOVERNMENT AND INVESTMENT GRADE, 15%
EMERGING MARKETS, AND 15% FOREIGN DEVELOPED MARKETS.
TOTAL RETURN COMPONENTS
NOVEMBER 3, 1997
SIX MONTHS (COMMENCEMENT
ENDED OF SALE OF CLASS C
JUNE 30, SHARES) TO
DECEMBER 31,

1998 1997

DIVIDEND RETURNS 2.61% 1.36%

CAPITAL RETURNS 0.00% -0.09%

TOTAL RETURNS 2.61% 1.27%

DIVIDENDS PER SHARE 5.05(CENTS) 28.93(CENTS) 44.16(CENTS)

ANNUALIZED DIVIDEND RATE 5.52% 5.20% 5.96%

30-DAY ANNUALIZED YIELD N/A - -

DIVIDENDS per share show the income paid by the class for a set
period. If you annualize this number based on an average share price
of $11.13 over the past one month, $11.22 over the past six months,
and $11.26 over the life of class, you can compare the class' income
over these two periods. The 30-day annualized YIELD is a standard
formula for all bond funds based on the yields of the bonds in the
fund, averaged over the past 30 days. This figure shows you the yield
characteristics of the fund's investments at the end of the period. It
also helps you to compare funds from different companies on an equal
basis. Yield information will be reported once Class C has a longer,
more stable, operating history.
FUND TALK: THE MANAGERS' OVERVIEW

MARKET RECAP
Globally, investment grade
fixed-income markets generated
positive returns in the first half of
1998. However, debt in the lower
credit tiers, domestically and in
emerging markets, experienced
pronounced volatility and
widening yield spreads. The U.S.
Treasury market generated strong
performance in the first half with
long-term bond yields finishing
June at their lowest level in over
20 years. The yield curve flattened
as long rates fell more than short
rates. Long-term interest rates
declined in response to benign
inflation, an unchanged monetary
policy and Asian instability that
pushed the dollar to an eight-year
high against the Japanese yen.
Foreign developed-market debt
also posted positive results in U.S.
dollar terms. Within the Salomon
Brothers World Government Bond
Index, European currency
strength relative to the dollar
resulted in broad gains. The U.K.
and Sweden led the way with
Japan and Switzerland delivering
the only negative results.
Increased volatility in the domestic
high yield market left yield
spreads wider. Dramatically lower
Asian currencies led many to
speculate about the export
competitiveness of U.S.
companies and the resulting
impact on their corporate
earnings. New issuance of high
yield debt escalated toward the
end of the first half, exacerbating
the upward pressure on yields.
The escalating banking crisis in
Japan, combined with the
brewing fiscal crisis in Russia,
increased spread volatility and
weakness in emerging market
debt issues in the second quarter.
NOTE TO SHAREHOLDERS: The following is an interview with John Carlson
(top), lead Portfolio Manager of Fidelity Advisor Strategic Income
Fund, with additional comments from co-managers Curt Hollingsworth
(top left) on U.S. government securities; Margaret Eagle (top right)
on high-yield securities; Ian Spreadbury (bottom left) on foreign
developed-market securities; and Brian Hogan (bottom right) on
emerging-market investments.
Q. HOW DID THE FUND PERFORM, JOHN?
J.C. For the six months that ended June 30, 1998, the fund's Class A,
Class T, Class B and Class C shares returned 3.03%, 3.00%, 2.75% and
2.61%, respectively. The multi-sector income funds average returned
2.71% during the same period, according to Lipper Analytical Services.
The Fidelity Strategic Income Composite Index - which combines the
performance of four indexes and is described at length on page 4 of
this report - returned 3.23% over the past six months, while the
Merrill Lynch High Yield Master Index returned 4.51%. For the 12
months that ended June 30, 1998, the fund's Class A, T, B and C shares
returned 7.72%, 7.72%, 7.01% and 6.80%, respectively. The Lipper peer
group, the Fidelity Strategic Income Composite Index and Merrill Lynch
index returned 7.05%, 8.00% and 11.40%, respectively, during that
time.
Q. BRIAN, HOW DID THE FUND'S EMERGING-MARKET DEBT INVESTMENTS FARE
DURING THE PAST SIX MONTHS?
B.H. It was a period of pronounced volatility. Yield spreads - which
measure the premium an investor pays for taking on risk - tightened
versus U.S. government bonds in the beginning of the year as sentiment
toward Asia turned favorable due to positive International Monetary
Fund (IMF) negotiations. Global risk premiums, however, took a sharp
turn upward later in the period for four reasons: the weakening
Japanese yen; a renewal of negative sentiment toward Southeast Asian
economies; heightened concerns regarding Russian liquidity; and
declining commodity prices worldwide. In terms of performance, the
fund's positions in both Bulgaria and Kazakhstan traded higher, as did
a small position in Turkish currency. The fund's Bulgarian issues
helped performance as evidence of positive monetary and fiscal
developments became apparent. Turkey, meanwhile, contributed to
performance on the heels of strong economic growth and a favorable IMF
agreement. The fund made an opportunistic investment in Kazakhstan at
attractive yields relative to the country's underlying market and
economic prospects. While the fund's underweighting in Brazil -
relative to the J.P. Morgan Emerging Markets Bond Index Plus -
contributed to returns, security selection within the country negated
the gains. Additionally, an underweighting in Argentina detracted from
performance as the country's debt rallied, spurred on by strong
economic growth and declining unemployment. Lastly, an
outside-the-index investment in a large export-oriented Indonesian
company hindered returns as negative sentiment toward that region
overshadowed the company's favorable business prospects.
Q. TURNING TO YOU, CURT, HOW DID THE FUND'S U.S. GOVERNMENT-RELATED
INVESTMENTS PERFORM DURING THE PERIOD?
C.H. The fund's U.S. government-related securities performed fairly
well. During the course of the period, yields declined on both 3-year
Treasury notes and 30-year Treasury bonds, and that was good news for
bond prices. In terms of the backdrop that contributed to this
climate, one important factor was the Federal Reserve Board's decision
to leave interest rates unchanged. As a result of diminished concern
regarding an interest-rate spike, yields dropped. Another factor was
the overall inflation situation. The U.S. economy has been growing
nicely for quite some time, and inflation has remained in check.
Inflation erodes the value of bonds. Of the three investment baskets
that I concentrate on - Treasuries, U.S. government agencies and
mortgage-backed securities - Treasuries and agencies performed well.
Examples of agency positions in the portfolio were Fannie Mae and
Freddie Mac. I lowered the fund's mortgage weighting during the
period, due mostly to the attractiveness of Treasuries and agencies,
as well as to the fact that mortgage prepayments - which occur when
the homeowner pays off the principal balance on the loan before
maturity - were increasing. Going forward, I may add to the fund's
mortgage positions in search of more attractive returns. I may also
increase the fund's agency bonds.
Q. MARGARET, WHAT FACTORS PLAYED A KEY ROLE IN THE DIRECTION OF THE
HIGH-YIELD MARKET DURING THE PERIOD?
M.E. During the first three months of the period, high-yield bonds
continued to perform well. Two sectors in particular that contributed
to the fund's performance were telecommunications and cable
television. In the second quarter, though, the market gave back some
gains as concerns over Asia crept into the landscape again. Credit
quality - the main driver behind high-yield market performance -
remained favorable throughout the period, and inflation remained
stagnant. We also continued to see a good amount of merger and
acquisition activity, with the AT&T and Tele-Communications, Inc. deal
topping the list. Supply overtook demand slightly toward the end of
May, but as the period came to a close, supply had begun to taper off.
In terms of individual holdings, several of the fund's CLEC positions
- - or competitive local exchange carriers - performed well. These
included both Hyperion and Winstar Communications. Cable TV holdings
that performed well included Adelphia and Time Warner. Pathmark Stores
was also a nice contributor. Pathmark has endured its share of
difficult times, but the company has benefited from strong geographic
locations - mainly in New York and New Jersey - and also has focused
on improving the overall image of its grocery stores. On a negative
note, the fund's position in Evenflow and Spalding detracted from
performance. The recent economic woes in Russia and Asia bear
watching, especially since developments in those regions could have an
indirect impact on the U.S. high-yield market and overall credit
quality.
Q. IAN, WHAT WAS THE STORY WITH THE DEVELOPED, GLOBAL BOND MARKETS?
I.S. The overall backdrop during the period was generally positive
for global bonds. In Europe, for instance, many markets continued to
benefit from progress made on the European Monetary Union (EMU) front.
As countries strived to meet the requirements necessary for joining
the EMU, fiscal and economic policies have converged and this has
resulted in tighter fiscal and economic policies throughout Europe.
One of the better-performing markets during the period was that of the
United Kingdom, where yields were relatively higher than other
countries and inflation was kept at bay. As the EMU has taken hold,
one aspect is that we've seen more corporate bonds issued in Europe.
I've tried to take advantage of this by increasing the fund's exposure
to several asset-backed bonds. Going forward, I may emphasize
corporate bonds as opportunities present themselves. Another move I
made was to emphasize Italian bonds with shorter maturities and German
bonds with longer maturities. This strategy - which was based on
looking forward to a uniform currency - worked out well.
Q. TURNING BACK TO YOU, JOHN, WHAT'S YOUR OUTLOOK FOR EMERGING MARKETS
OVER THE NEXT SIX MONTHS?
J.C. While each portfolio manager is the expert on the key drivers in
their respective markets, the macro variables near term will most
likely be, 1) Japan's progress in strengthening its economy, 2) U.S.
interest rates, 3) corporate earnings, and 4) the U.S. dollar's
strength.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO
MANAGERS ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON
THE COVER. THE MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED
ON MARKET AND OTHER CONDITIONS.

IAN SPREADBURY TALKS ABOUT A
UNIFORM CURRENCY IN EUROPE AND
HOW IT HAS INFLUENCED THE WAY
HE MANAGES HIS SUB-PORTFOLIO:
"As countries have met the
requirements necessary for
joining the EMU, we've seen a
convergence of economic and
fiscal policies throughout Europe.
As a result, the fund's credit and
quantitative team and I began to
look at three of the fund's major
investment areas - France,
Germany and Italy - almost as one.
"In particular, I made some moves
based on the yield curves for each
region. A yield curve is a graph that
shows how yields vary for bonds of
similar quality but different
maturities. Back in May, short-term
interest rates were high in Italy and
we felt they'd come down as the euro
neared. Looking forward nine
months, we determined that the
Italy curve would be only slightly
higher than the German curve.
After doing some work on it, we
concluded that it made sense for
us to move our Italian lira exposure
to the short end of the curve and
balance that by moving our German
Deutsche mark exposure to the long
end. Taking the two currencies
together, we were effectively
duration neutral. But on a
forward-looking basis, we should
be able to pick up some extra
return.
"Of course, these moves are
contingent upon the euro coming to
fruition. At this point, the
consensus seems to be that it
would take a major development
to throw it off course."

FUND FACTS
GOAL: a high level of current
income by investing primarily
in debt securities; as a
secondary objective, the fund
may seek capital appreciation
START DATE: October 31, 1994
SIZE: as of June 30, 1998,
more than $277 million
MANAGER: John Carlson, lead
manager, since 1996; Curt
Hollingsworth, U.S.
government investments, since
1997; Margaret Eagle,
high-yield investments, since
1996; Ian Spreadbury, foreign
developed-market investments,
since February 1998; and
Brian Hogan, emerging-market
investments since 1997
(checkmark)
INVESTMENT CHANGES

TOP FIVE HOLDINGS AS OF JUNE 30, 1998

<TABLE>
<CAPTION>
<S> <C> <C>
(BY ISSUER, EXCLUDING CASH EQUIVALENTS) % OF FUND'S % OF FUND'S INVESTMENTS
INVESTMENTS IN THESE HOLDINGS
6 MONTHS AGO

U.S. TREASURY OBLIGATIONS 14.3 5.3

GERMAN REPUBLIC 3.7 1.1

GOVERNMENT NATIONAL MORTGAGE ASSOCIATION 3.5 5.9

FANNIE MAE 3.3 7.7

FREDDIE MAC 2.6 4.1

</TABLE>

TOP FIVE MARKET SECTORS AS OF JUNE 30, 1998
% OF FUND'S % OF FUND'S INVESTMENTS
INVESTMENTS IN THESE MARKET SECTORS
6 MONTHS AGO

MEDIA & LEISURE 12.1 12.6

UTILITIES 11.1 12.1

TECHNOLOGY 3.0 2.4

RETAIL & WHOLESALE 2.2 2.8

SERVICES 1.7 1.1

QUALITY DIVERSIFICATION AS OF JUNE 30, 1998
(MOODY'S RATINGS) % % OF FUND'S INVESTMENTS
O 6 MONTHS AGO
F
F
U
N
D
'
S
I
N
V
E
S
T
M
E
N
T
S

AAA, AA, A 4 42.3
2
.
0

BAA 0 0.0
.
3

BA 7 8.9
.
4

B 2 27.7
6
.
4

CAA, CA, C 4 3.7
.
6

NOT RATED 6 4.2
.
3

TABLE EXCLUDES SHORT-TERM INVESTMENTS. WHERE MOODY'S RATINGS ARE NOT
AVAILABLE, WE HAVE USED S&P RATINGS. UNRATED DEBT SECURITIES THAT ARE
EQUIVALENT TO BA AND BELOW AT JUNE 30, 1998 AND DECEMBER 31, 1997
ACCOUNT FOR 6.3% AND 4.2%, RESPECTIVELY OF THE FUND'S INVESTMENTS.
ASSET ALLOCATION (% OF FUND'S INVESTMENTS)
AS OF JUNE 30, 1998 * AS OF DECEMBER 31, 1997**

CORPORATE BONDS 32.2%
U.S. GOVERNMENT AND
AGENCY OBLIGATIONS 29.0%
FOREIGN GOVERNMENT
OBLIGATIONS 24.4%
STOCKS 7.6%
OTHER 1.4%
SHORT-TERM
INVESTMENTS 5.4%
CORPORATE BONDS 33.7%
U.S. GOVERNMENT AND
AGENCY OBLIGATIONS 28.7%
FOREIGN GOVERNMENT
OBLIGATIONS 21.6%
STOCKS 9.9%
OTHER 2.8%
SHORT-TERM
INVESTMENTS 3.3%
ROW: 1, COL: 1, VALUE: 5.4
ROW: 1, COL: 2, VALUE: 1.4
ROW: 1, COL: 3, VALUE: 7.6
ROW: 1, COL: 4, VALUE: 24.4
ROW: 1, COL: 5, VALUE: 29.0
ROW: 1, COL: 6, VALUE: 32.2
ROW: 1, COL: 1, VALUE: 3.3
ROW: 1, COL: 2, VALUE: 2.8
ROW: 1, COL: 3, VALUE: 9.9
ROW: 1, COL: 4, VALUE: 21.6
ROW: 1, COL: 5, VALUE: 28.7
ROW: 1, COL: 6, VALUE: 33.7

* FOREIGN
INVESTMENTS 30.0%
** FOREIGN
INVESTMENTS 30.1%
INVESTMENTS JUNE 30, 1998 (UNAUDITED)

SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENT IN SECURITIES

CORPORATE BONDS - 32.2%
MOODY'S PRINCIPAL VALUE
RATINGS (B) AMOUNT (C) (NOTE 1)
CONVERTIBLE BONDS - 0.0%
UTILITIES - 0.0%
TELEPHONE SERVICES - 0.0%
GST Telecommunications, Inc. 0%,
12/15/05 (d)(f) - $ 10,000 $ 10,550
NONCONVERTIBLE BONDS - 32.2%
AEROSPACE & DEFENSE - 0.1%
Compass Aerospace Corp. 10 1/8%,
4/15/05 (f) Caa 110,000 112,200
K & F Industries, Inc. 9 1/4%, 10/15/07 B3 90,000 90,675
202,875
BASIC INDUSTRIES - 1.7%
CHEMICALS & PLASTICS - 0.4%
Huntsman Corp. 9 1/2%, 7/1/07 (f) B2 340,000 341,700
Moll Industries 10 1/2%, 7/1/08 (f) B3 120,000 122,400
Philipp Brothers Chemicals, Inc. 9 7/8%,
6/1/08 (f) B3 500,000 504,375
968,475
IRON & STEEL - 0.3%
CSN Iron SA 9 1/8%, 6/1/07 B1 300,000 240,750
Pohang Iron & Steel Ltd. yankee
6 5/8%, 7/1/03 Ba1 275,000 225,500
Republic Engineered Steels, Inc.
9 7/8%, 12/15/01 Caa 340,000 339,150
805,400
PACKAGING & CONTAINERS - 0.4%
Gaylord Container Corp.:
Series B, 9 3/4%, 6/15/07 B3 250,000 245,000
9 3/8%, 6/15/07 B3 340,000 328,100
9 7/8%, 2/15/08 Caa 630,000 604,800
1,177,900
PAPER & FOREST PRODUCTS - 0.6%
APP Finance II Mauritius Ltd.:
12%, 3/15/04 B3 225,000 154,125
12%, 3/15/04 Caa 500,000 342,500
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (B) AMOUNT (C) (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
BASIC INDUSTRIES - CONTINUED
PAPER & FOREST PRODUCTS - CONTINUED
Advanced Argo Public Company Ltd.
13%, 11/15/07 (f) B2 $ 200,000 $ 199,000
Container Corp. of America:
10 3/4%, 5/1/02 B1 70,000 75,950
gtd.:
9 3/4%, 4/1/03 B1 210,000 224,700
11 1/4%, 5/1/04 B1 50,000 54,000
Florida Coast Paper Co. LLC/Florida Coast
Paper Finance Corp., Series B,
12 3/4%, 6/1/03 Caa 150,000 166,125
Indah Kiat International Finance Co. BV
2 1/2%, 6/15/06 Caa 125,000 100,625
Millar Western Forest 9 7/8%, 5/15/08 (f) B3 215,000 210,700
Stone Container Corp. 11 7/8%, 8/1/16 B2 220,000 245,300
1,773,025
TOTAL BASIC INDUSTRIES 4,724,800
DURABLES - 1.7%
AUTOS, TIRES, & ACCESSORIES - 0.6%
Breed Technologies, Inc. 9 1/4%, 4/15/08 (f) B3 1,070,000 1,045,925
Federal-Mogul Corp. 7 7/8%, 7/1/10 Ba2 290,000 291,088
Morris Material Handling, Inc. 9 1/2%, 4/1/08 (f) B2 109,000
101,370
Safelite Glass Corp. 9 7/8%, 12/15/06 (f) B3 150,000 155,250
1,593,633
CONSUMER DURABLES - 0.3%
Corning Consumer Products Co. 9 5/8%,
5/1/08 (f) B3 750,000 748,125
Simonds Industries 10 1/4%, 7/1/08 (f) B3 90,000 90,000
838,125
HOME FURNISHINGS - 0.5%
Sealy Corp., Inc. 10%, 12/18/08 (g) - 500,000 470,000
Sealy Mattress Co. (f):
9 7/8%, 12/15/07 B3 110,000 112,200
0%, 12/15/07 (d) B3 1,140,000 741,000
1,323,200
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (B) AMOUNT (C) (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
DURABLES - CONTINUED
TEXTILES & APPAREL - 0.3%
Cluett American Corp. 10 1/8%, 5/15/08 (f) B3 $ 240,000 $ 238,200
Polymer Group, Inc.:
9%, 7/1/07 B2 220,000 222,750
8 3/4%, 3/1/08 (f) B2 102,000 102,000
Worldtex, Inc. 9 5/8%, 12/15/07 B1 210,000 210,000
772,950
TOTAL DURABLES 4,527,908
ENERGY - 1.6%
COAL - 0.7%
Level 3 Communications, Inc. 9 1/4%, 5/1/08 (f) B3 1,280,000
1,244,800
P&L Coal Holdings Corp. 9 5/8%, 5/15/08 (f) B2 600,000 616,500
1,861,300
OIL & GAS - 0.9%
Chesapeake Energy Corp. 9 5/8%, 5/1/05 (f) B1 820,000 822,050
Gothic Production Corp. 11 1/4%, 5/1/05 (f) B3 640,000 608,000
Great Lakes Carbon Corp. 10 1/4%, 5/15/08 (f) B3 245,000 247,450
Hurricane Hydrocarbons Ltd. 11 3/4%,
11/1/04 (f) B3 225,000 218,250
Petroleos Mexicanos 9 1/2%, 9/15/27 BB 150,000 140,250
Seven Seas Petroleum, Inc. 12 1/2%,
5/15/05 (f) Caa 160,000 160,000
Vintage Petroleum, Inc. 9%, 12/15/05 B1 320,000 328,400
2,524,400
TOTAL ENERGY 4,385,700
FINANCE - 1.0%
ASSET-BACKED SECURITIES - 0.2%
Airplanes Pass Through Trust Class D
10 7/8%, 3/15/19 Ba2 440,000 482,900
Sears Credit Account Master Trust II
7%, 1/15/04 Aaa 200,000 202,562
685,462
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (B) AMOUNT (C) (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
FINANCE - CONTINUED
BANKS - 0.0%
Korea Development Bank yankee
6 1/2%, 11/15/02 Ba2 $ 50,000 $ 41,655
CREDIT & OTHER FINANCE - 0.8%
Aames Financial Corp. 9 1/8%, 11/1/03 Ba3 60,000 58,800
CEX Holdings, Inc. 9 5/8%, 6/1/08 (f) B2 220,000 222,200
Details Capital Corp. 0%, 11/15/07 (d) Caa 200,000 123,500
Digital Television Services LLC 12 1/2%, 8/1/07 B3 360,000 410,400
Iridium Operating LLC/Iridium Capital Corp.:
11 1/4%, 7/15/05 B3 180,000 180,450
10 7/8%, 7/15/05 B3 405,000 401,963
La Petite Academy, Inc. 10%, 5/15/08 (f) B3 190,000 191,900
Ocwen Capital Trust 10 7/8%, 8/1/27 B2 90,000 98,100
Transwestern Public Co. LP/TWP Capital
9 5/8%, 11/15/07 B2 270,000 275,400
Winstar Equipment II Corp. 12 1/2%, 3/15/04 - 145,000 163,850
2,126,563
TOTAL FINANCE 2,853,680
HEALTH - 1.1%
DRUGS & PHARMACEUTICALS - 0.3%
Global Health Sciences, Inc. 11%, 5/1/08 (f) Caa 810,000 801,900
MEDICAL EQUIPMENT & SUPPLIES - 0.1%
Graham-Field Health Products, Inc.
9 3/4%, 8/15/07 B3 410,000 369,000
MEDICAL FACILITIES MANAGEMENT - 0.7%
Everest Healthcare Services Corp.
9 3/4%, 5/1/08 (f) B3 90,000 92,250
Fountain View, Inc. 11 1/4%, 4/15/08 (f) Caa 220,000 223,850
Integrated Health Services, Inc.:
9 1/2%, 9/15/07 B2 305,000 319,488
Series A, 9 1/4%, 1/15/08 B2 320,000 332,000
Magellan Health Services, Inc. 9%,
2/15/08 (f) B3 200,000 198,000
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (B) AMOUNT (C) (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
HEALTH - CONTINUED
MEDICAL FACILITIES MANAGEMENT - CONTINUED
Oxford Health Plans, Inc. 11%, 5/15/05 (f) Caa $ 310,000 $ 317,750
Tenet Healthcare Corp. 8 5/8%, 1/15/07 Ba3 440,000 454,300
1,937,638
TOTAL HEALTH 3,108,538
INDUSTRIAL MACHINERY & EQUIPMENT - 0.7%
ELECTRICAL EQUIPMENT - 0.4%
Echostar Communications Corp. secured discount
0%, 6/1/04 (d) B2 320,000 311,600
L-3 Communications Corp. 10 3/8%, 5/1/07 B2 80,000 88,000
Motors & Gears, Inc., Series D,
10 3/4%, 11/15/06 B3 410,000 434,600
Omnipoint Corp., Series A 11 5/8%, 8/15/06 B3 280,000 296,800
1,131,000
INDUSTRIAL MACHINERY & EQUIPMENT - 0.3%
Goss Graphic System, Inc. 12%, 10/15/06 B2 350,000 358,750
International Knife & Saw, Inc.
11 3/8%, 11/15/06 B3 30,000 32,475
Specialty Equipment Companies, Inc.
11 3/8%, 12/1/03 B3 500,000 535,000
926,225
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 2,057,225
MEDIA & LEISURE - 8.7%
BROADCASTING - 6.7%
Adelphia Communications Corp.:
Series B, 9 1/4%, 10/1/02 B2 280,000 291,200
9 1/2%, 2/15/04 B2 1,736,328 1,763,901
9 7/8%, 3/1/07 B2 800,000 866,000
8 3/8%, 2/1/08 B2 370,000 369,075
Allbritton Communications Co. 9 3/4%, 11/30/07 B3 1,000,000
1,110,000
Ascent Entertainment Group, Inc.
0%, 12/15/04 (d) B3 230,000 147,200
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (B) AMOUNT (C) (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
MEDIA & LEISURE - CONTINUED
BROADCASTING - CONTINUED
Benedek Communications Corp.
0%, 5/15/06 (d) B3 $ 140,000 $ 111,475
Century Communications Corp.
8 3/8%, 12/15/07 Ba3 20,000 20,500
Charter Communications LP/Charter
Communications Southeast Capital Corp.
11 1/4%, 3/15/06 B3 25,000 27,563
Citadel Broadcasting Co., Series B,
10 1/4%, 7/1/07 B3 380,000 418,000
Diamond Cable Communications PLC yankee (d):
0%, 12/15/05 Caa 320,000 264,000
0%, 2/15/07 Caa 130,000 95,875
Echostar Satellite Broadcasting Corp.
0%, 3/15/04 (d) B3 1,110,000 1,018,425
Echostar DBS Corp. 12 1/2%, 7/1/02 Caa 450,000 500,625
Falcon Holding Group LP/Falcon Funding (f):
8 3/8%, 4/15/10 B2 380,000 382,850
0%, 4/15/10 (d) B2 615,000 398,213
Fox/Liberty Networks LLC/FLN Finance, Inc.
0%, 8/15/07 (d) B1 155,000 107,725
FrontierVision Holdings LP/FrontierVision
Holdings Capital Corp. 0%, 9/15/07 (d) Caa 901,000 696,023
Globo Communicacoes e Participacoes SA
10 5/8%, 12/5/08 (f) B1 200,000 176,500
Granite Broadcasting Corp. 8 7/8%, 5/15/08 (f) B3 615,000 624,225
Grupo Televisa SA de CV yankee 0%,
5/15/08 (d) Ba2 425,000 345,313
HighwayMaster Communications, Inc. Series B,
13 3/4%, 9/15/05 Caa 430,000 309,600
Intermedia Capital Partners IV LP/Intermedia
Partners IV Capital Corp. 11 1/4%, 8/1/06 B2 520,000 587,600
International Cabletel, Inc. 0%, 2/1/06 (d) . B3 450,000 365,625
Lenfest Communications, Inc.:
8 3/8%, 11/1/05 Ba3 90,000 95,625
8 1/4%, 2/15/08 (f) B2 90,000 94,050
LIN Holdings Corp. 0%, 3/1/08 (d)(f) B3 1,450,000 978,750
LIN Television Corp. 8 3/8%, 3/1/08 (f) B2 300,000 306,000
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (B) AMOUNT (C) (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
MEDIA & LEISURE - CONTINUED
BROADCASTING - CONTINUED
NTL, Inc.:
10%, 2/15/07 B3 $ 780,000 $ 832,650
0%, 4/1/08 (d)(f) B3 850,000 552,500
Orbital Imaging Corp. 11 5/8%, 3/1/05 (f) - 860,000 877,200
Orion Network Systems, Inc.:
11 1/4%, 1/15/07 B2 230,000 254,150
0%, 1/15/07 (d) B2 520,000 392,600
Pegasus Communications Corp., Series B,
9 5/8%, 10/15/05 B3 20,000 20,550
Renaissance Media Group 0%, 4/15/08 (d)(f) B3 310,000 192,975
TV Bandeirantes Ltd. 12 7/8%, 5/15/06 (f) B2 200,000 168,000
Telewest PLC 0%, 10/1/07 (d) B1 1,240,000 1,024,550
UIH Australia/Pacific, Inc. (d):
Series B, 0%, 5/15/06 B2 990,000 584,100
0%, 5/15/06 B2 170,000 100,300
United International Holdings, Inc. 0%,
2/15/08 (d) B3 1,010,000 616,100
Young Broadcasting, Inc. Series B:
9%, 1/15/06 B2 90,000 94,725
8 3/4%, 6/15/07 B2 350,000 364,875
18,547,213
ENTERTAINMENT - 1.5%
AMC Entertainment, Inc. 9 1/2%, 3/15/09 B2 130,000 129,350
Cinemark USA, Inc. 8 1/2%, 8/1/08 (Reg. S) B2 310,000 303,025
Hollywood Theaters, Inc. 10 5/8%, 8/1/07 B3 190,000 196,175
Livent, Inc. 9 3/8%, 10/15/04 B1 300,000 300,750
Premier Parks, Inc.:
9 1/4%, 4/1/06 B3 1,020,000 1,051,875
0%, 4/1/08 (d) B3 1,110,000 736,763
SFX Entertainment, Inc. 9 1/8%, 2/1/08 (f) B3 200,000 196,000
Viacom, Inc. 8%, 7/7/06 B1 1,114,000 1,147,420
4,061,358
LODGING & GAMING - 0.2%
Hard Rock Hotel, Inc. 9 1/4%, 4/1/05 (f) B3 90,000 92,475
KSL Recreation Group, Inc. 10 1/4%, 5/1/07 B3 320,000 346,400
Sun International Hotels Ltd./Sun International
North America, Inc. yankee 9%, 3/15/07 Ba3 30,000 31,500
470,375
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (B) AMOUNT (C) (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
MEDIA & LEISURE - CONTINUED
PUBLISHING - 0.1%
Perry Judds, Inc. 10 5/8%, 12/15/07 (f) B3 $ 60,000 $ 62,550
Sun Media Corp. yankee:
9 1/2%, 2/15/07 B2 40,000 42,000
9 1/2%, 5/15/07 B2 28,000 29,400
Transwestern Holdings/TWP Capital Corp.
0%, 11/15/08 (d) B3 50,000 33,250
167,200
RESTAURANTS - 0.2%
AFC Enterprises, Inc. 10 1/4%, 5/15/07 B3 630,000 667,800
TOTAL MEDIA & LEISURE 23,913,946
NONDURABLES - 0.9%
BEVERAGES - 0.1%
Pepsi-Gemex SA de CV GEM
9 3/4%, 3/30/04 Ba3 250,000 254,375
FOODS - 0.6%
Aurora Foods, Inc. 8 3/4%, 7/1/08 (f) B1 130,000 131,788
Del Monte Foods Co. 0%, 12/15/07 (d)(f) Caa 390,000 253,500
Gorges/Quik-To-Fix Foods, Inc.
11 1/2%, 12/1/06 B3 1,300,000 1,280,500
Mastellone Hermanos SA 11 3/4%, 4/1/08 (f) B1 125,000 124,375
1,790,163
HOUSEHOLD PRODUCTS - 0.1%
AKI, Inc. 10 1/2%, 7/1/08 (f) B2 100,000 101,000
Revlon Consumer Products Corp.
8 5/8%, 2/1/08 B3 160,000 160,000
261,000
TOBACCO - 0.1%
North Atlantic Trading, Inc. 11%, 6/15/04 B3 200,000 200,000
TOTAL NONDURABLES 2,505,538
RETAIL & WHOLESALE - 2.0%
GENERAL MERCHANDISE STORES - 0.1%
Controladora Comercial Mexicana SA de CV
Comerci 9 3/8%, 4/14/05 (f) BB- 150,000 144,000
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (B) AMOUNT (C) (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
RETAIL & WHOLESALE - CONTINUED
GROCERY STORES - 1.2%
Disco SA 9 7/8%, 5/15/08 (f) Ba3 $ 210,000 $ 198,450
Fleming Companies, Inc.:
10 1/2%, 12/1/04 B3 110,000 113,575
Series B, 10 5/8%, 7/31/07 B3 160,000 167,000
Jitney-Jungle Stores America, Inc.
10 3/8%, 9/15/07 B3 675,000 720,563
Marsh Supermarkets, Inc. 8 7/8%, 8/1/07 B2 230,000 235,175
Pathmark Stores, Inc.:
11 5/8%, 6/15/02 Caa 890,000 898,900
12 5/8%, 6/15/02 Caa 20,000 20,225
9 5/8%, 5/1/03 Caa 480,000 486,000
Star Markets, Inc. 13%, 11/1/04 B3 320,000 358,000
Supermercados Norte 10 7/8%, 2/9/04 (f) B1 250,000 240,000
3,437,888
RETAIL & WHOLESALE, MISCELLANEOUS - 0.7%
Amazon.com, Inc. 0%, 5/1/08 (d)(f) Caa 1,210,000 738,100
HMV Media Group PLC 10 1/4%, 5/15/08 (f) B3 340,000 345,100
TM Group Holdings 11%, 5/15/08 (f) B2 500,000 512,500
U.S. Office Products Co. 9 3/4%, 6/15/08 (f) B3 290,000 287,100
1,882,800
TOTAL RETAIL & WHOLESALE 5,464,688
SERVICES - 1.5%
ADVERTISING - 0.1%
Tri-State Outdoor Media Group
11%, 5/15/08 (f) - 465,000 472,556
LEASING & RENTAL - 0.4%
Apcoa, Inc. 9 1/4%, 3/15/08 (f) Caa 160,000 158,800
AP Holdings, Inc. 0%, 3/15/08 (d)(f) Caa 900,000 535,500
Hollywood Entertainment Corp.
10 5/8%, 8/15/04 B3 400,000 408,000
1,102,300
PRINTING - 0.3%
Sullivan Graphics, Inc. 12 3/4%, 8/1/05 Caa 720,000 757,800
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (B) AMOUNT (C) (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
SERVICES - CONTINUED
SERVICES - 0.7%
Medaphis Corp. 9 1/2%, 2/15/05 (f) B2 $ 210,000 $ 203,700
Signature Resorts, Inc. 9 3/4%, 10/1/07 B3 780,000 758,550
SITEL Corp. 9 1/4%, 3/15/06 (f) B2 80,000 76,400
Spin Cycle, Inc. unit 0%, 5/1/05 (d)(f) - 260,000 183,300
Teligent, Inc.:
11 1/2%, 12/1/07 Caa 150,000 151,875
0%, 3/1/08 (d)(f) Caa 350,000 193,375
Young American Corp. 11 5/8%, 2/15/06 (f) B3 290,000 288,550
1,855,750
TOTAL SERVICES 4,188,406
TECHNOLOGY - 2.5%
COMMUNICATIONS EQUIPMENT - 0.1%
Intermedia Communications, Inc.
8.60%, 6/1/08 (f) B2 400,000 405,000
COMPUTER SERVICES & SOFTWARE - 1.4%
Concentric Network Corp. 12 3/4%, 12/15/07 - 540,000 575,100
DecisionOne Corp. 9 3/4%, 8/1/07 B3 480,000 460,800
DecisionOne Holdings Corp. unit
0%, 8/1/08 (d) Caa 200,000 120,000
ICG Services, Inc. (d)(f):
0%, 2/15/08 - 2,285,000 1,376,713
0%, 5/1/08 - 50,000 29,250
PSINet, Inc. 10%, 2/15/05 B3 750,000 763,125
Verio, Inc. 10 3/8%, 4/1/05 (f) B- 660,000 678,150
4,003,138
ELECTRONIC INSTRUMENTS - 0.6%
Fisher Scientific International, Inc. 9%, 2/1/08 B3 520,000 517,400
High Voltage Engineering Corp.
10 1/2%, 8/15/04 B3 790,000 811,725
Telecommunications Techniques Co.
9 3/4%, 5/15/08 (f) B3 285,000 289,988
1,619,113
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (B) AMOUNT (C) (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
TECHNOLOGY - CONTINUED
ELECTRONICS - 0.4%
Communications Instruments, Inc. 10%, 9/15/04 B3 $ 130,000 $ 132,600
Details, Inc. 10%, 11/15/05 B3 240,000 239,400
Samsung Electronics America, Inc.
9 3/4%, 5/1/03 (f) Ba1 250,000 230,000
Stellex Industries, Inc. 9 1/2%, 11/1/07 B3 400,000 393,500
995,500
TOTAL TECHNOLOGY 7,022,751
TRANSPORTATION - 0.6%
AIR TRANSPORTATION - 0.3%
Atlas Air, Inc. 9 1/4%, 4/15/08 (f) B3 360,000 359,550
Kitty Hawk, Inc. 9.95%, 11/15/04 B1 370,000 384,800
744,350
RAILROADS - 0.1%
TFM SA de CV 0%, 6/15/09 (d) B2 300,000 186,000
SHIPPING - 0.2%
Amer Reefer Co. Ltd. 10 1/4%, 3/1/08 (f) B1 190,000 190,000
International Shipholding Corp.
7 3/4%, 10/15/07 Ba3 140,000 136,850
Stena Line AB 10 5/8%, 6/1/08 B1 300,000 303,750
630,600
TOTAL TRANSPORTATION 1,560,950
UTILITIES - 8.1%
CELLULAR - 2.0%
CTI Holdings SA 0%, 4/15/08 (d)(f) B3 200,000 111,000
CellNet Data Systems, Inc. 0%, 10/1/07 (d) - 360,000 192,600
Dolphin Telecom PLC 0%, 6/1/08 (d)(f) Caa 280,000 158,200
ESAT Holdings Ltd. 0%, 2/1/07 (d) Caa 360,000 265,500
Fonorola, Inc. 12 1/2%, 8/15/02 B2 1,020,000 1,127,100
Globalstar Capital Corp. 11 1/2%, 6/1/05 (f) B3 330,000 321,338
MGC Communications, Inc. 13%, 10/1/04 Caa 170,000 163,200
McCaw International Ltd. 0%, 4/15/07 (d) Caa 1,263,000 827,265
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (B) AMOUNT (C) (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
UTILITIES - CONTINUED
CELLULAR - CONTINUED
Millicom International Cellular SA 0%, 6/1/06 (d) B3 $ 1,300,000 $
1,007,500
Nextel International, Inc. 12 1/8%, 4/15/08 (f) Caa 320,000 185,600
Nextel Communications, Inc. (d):
0%, 9/15/07 B2 313,000 211,275
0%, 2/15/08 (f) B2 750,000 481,875
Telesystem International Wireless, Inc.
0%, 6/30/07 (d) Caa 710,000 465,050
5,517,503
ELECTRIC UTILITY - 0.1%
Niagara Mohawk Power Corp.:
7 3/4%, 10/1/08 Ba3 70,000 71,663
0%, 7/1/10 (d) Ba3 140,000 95,900
167,563
TELEPHONE SERVICES - 6.0%
Covad Communications Group unit
0%, 3/15/08 (d)(f) - 610,000 311,100
DTI Holdings, Inc. unit 0%, 3/1/08 (d)(f) - 1,390,000 750,600
Dobson Wireline Co. 12 1/4%, 6/15/08 (f) - 490,000 478,975
e.spire Communications, Inc.:
0%, 11/1/05 (d) - 530,000 439,900
0%, 4/1/06 (d) - 500,000 390,000
13 3/4%, 7/15/07 - 280,000 319,200
ESAT Telecom Group PLC 0%, 2/1/07 (d) Caa 180,000 133,121
Facilicom International, Inc.
10 1/2%, 1/15/08 (f) - 190,000 190,000
Firstworld Communications, Inc. unit 0%,
4/15/08 (d)(f) - 410,000 182,450
Flag Ltd. 8 1/4%, 1/30/08 (f) Ba3 320,000 323,200
GST Telecommunications, Inc.
12 3/4%, 11/15/07 - 480,000 555,600
GST USA, Inc. 0%, 12/15/05 (d) - 630,000 510,300
GST Equipment Funding, Inc. 13 1/4%, 5/1/07 - 400,000 461,000
Global Crossing Holding Ltd. 9 5/8%,
5/15/08 (f) - 360,000 374,850
Hermes Europe Railtel BV 11 1/2%, 8/15/07 B3 170,000 191,250
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (B) AMOUNT (C) (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
UTILITIES - CONTINUED
TELEPHONE SERVICES - CONTINUED
Hyperion Telecommunications, Inc.:
Series B, 0%, 4/15/03 (d) B3 $ 360,000 $ 267,300
12 1/4%, 9/1/04 B3 260,000 279,500
IXC Communications, Inc. 9%, 4/15/08 (f) B3 130,000 128,700
Interamericas Communications Corp. unit
14%, 10/27/07 (f) - 230,000 225,400
KMC Telecom Holdings, Inc. unit 0%,
2/15/08 (d)(f) - 890,000 520,650
McLeodUSA, Inc.:
9 1/4%, 7/15/07 B2 310,000 322,013
8 3/8%, 3/15/08 B2 170,000 170,000
MetroNet Communications Corp. 0%,
6/15/08 (d)(f) B3 750,000 464,063
Netia Holdings B.V.:
10 1/4%, 11/1/07 B3 290,000 278,400
0%, 11/1/07 (d) B3 200,000 130,000
Nextlink Communications, Inc.
12 1/2%, 4/15/06 B3 1,210,000 1,364,275
Pathnet, Inc. unit 12 1/2%, 4/15/08 (f) - 560,000 593,600
Qwest Communications, International, Inc.:
10 7/8%, 4/1/07 Ba1 330,000 379,500
0%, 10/15/07 (d) Ba1 620,000 465,000
RSL Communications Ltd. 9 1/8%, 3/1/08 B3 1,000,000 965,000
RSL Communications Ltd./RSL Communications
PLC 12 1/4%, 11/15/06 B3 355,000 399,375
Rhythms NetConnections, Inc. unit
0%, 5/15/08 (d)(f) - 440,000 213,400
Telegroup, Inc. 0%, 11/1/04 (d) - 180,000 141,300
Transtel SA:
12 1/2%, 11/1/07 (f) B2 100,000 91,000
12 1/2%, 11/1/07 (Reg. S) B2 225,000 204,750
Tricom SA 11 3/8%, 9/1/04 B2 200,000 190,500
Versatel Telecom BV unit 13 1/4%, 5/15/08 (f) - 340,000 357,000
Viatel, Inc. unit (f):
0%, 4/15/08 (d) Caa 315,000 192,938
11 1/4%, 4/15/08 Caa 640,000 673,600
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (B) AMOUNT (C) (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
UTILITIES - CONTINUED
TELEPHONE SERVICES - CONTINUED
Winstar Communications, Inc.:
0%, 10/15/05 (d) Caa $ 80,000 $ 67,600
14 1/2%, 10/15/05 Caa 60,000 82,800
10%, 3/15/08 (f) - 350,000 348,250
11%, 3/15/08 (f) - 1,115,000 1,109,425
Winstar Equipment 12 1/2%, 3/15/04 B3 310,000 350,300
16,587,185
TOTAL UTILITIES 22,272,251
TOTAL NONCONVERTIBLE BONDS 88,789,256
TOTAL CORPORATE BONDS
(Cost $88,472,052) 88,799,806
U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - 22.3%
U.S. TREASURY OBLIGATIONS - 14.3%
5 7/8%, 8/31/99 Aaa 5,990,000 6,013,421
10 3/4%, 8/15/05 Aaa 11,580,000 15,066,622
8 7/8%, 8/15/17 Aaa 6,315,000 8,609,113
9%, 11/15/18 Aaa 7,035,000 9,777,524
39,466,680
U.S. GOVERNMENT AGENCY OBLIGATIONS - 8.0%
Fannie Mae 6.74%, 5/13/04 Aaa 780,000 815,950
Freddie Mac:
6 3/4%, 4/5/04 Aaa 870,000 912,004
7.70%, 9/20/04 Aaa 800,000 880,000
5.825%, 2/9/06 Aaa 5,000,000 5,003,100
Federal Farm Credit Bank Medium Term Notes
6.66%, 12/26/06 Aaa 1,000,000 1,053,440
U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (B) AMOUNT (C) (NOTE 1)
U.S. GOVERNMENT AGENCY OBLIGATIONS - CONTINUED
Government Loan Trusts (assets of Trust
guaranteed by U.S. Government through
Agency for International Development)
8 1/2%, 4/1/06 Aaa $ 200,000 $ 220,724
Government Trust Certificates (assets of Trust
guaranteed by U.S. Government through
Defense Security Assistance Agency):
Class 1-C, 9 1/4%, 11/15/01 Aaa 4,437,826 4,701,743
Class 2-E, 9.40%, 5/15/02 Aaa 162,647 171,970
Class T-3, 9 5/8%, 5/15/02 Aaa 68,625 72,560
Guaranteed Export Trust Certificates (assets
of Trust guaranteed by U.S. Government
through Export-Import Bank), Series 1995-A,
6.28%, 6/15/04 Aaa 1,440,000 1,458,043
Guaranteed Trade Trust Certificates (assets of
Trust guaranteed by U.S. Government
through Export-Import Bank) Series 1997-A,
6.104%, 7/15/03 Aaa 1,008,333 1,014,444
Private Export Funding Corp. secured
6.86%, 4/30/04 Aaa 684,000 702,174
State of Israel (guaranteed by U.S. Government
through Agency for International Development)
7 5/8%, 8/15/04 Aaa 4,300,000 4,718,949
U.S. Department of Housing and Urban
Development Government guaranteed
participation certificates Series 1995-A,
8.27%, 8/1/03 Aaa 210,000 232,901
21,958,002
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $60,632,101) 61,424,682
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - 6.7%
FREDDIE MAC - 0.2%
6%, 12/1/07 Aaa 85,491 85,294
8 1/2%, 3/1/20 . Aaa 357,727 376,293
461,587
FANNIE MAE - 3.0%
5 1/2%, 5/1/11 to 8/1/12 Aaa 866,361 842,804
6%, 4/1/01 to 1/1/26 Aaa 3,317,177 3,290,694
6 1/2%, 5/1/08 to 6/1/24 Aaa 2,322,372 2,321,242
U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (B) AMOUNT (C) (NOTE 1)
FANNIE MAE - CONTINUED
7 1/2%, 1/1/28 to 5/1/28 Aaa $ 929,971 $ 953,797
8%, 8/1/27 to 2/1/28 Aaa 48,306 50,002
8%, 8/1/28 (j) Aaa 921,000 953,235
8,411,774
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 3.5%
6%, 1/15/09 to 5/15/09 Aaa 1,107,752 1,106,710
6 1/2%, 4/15/26 to 5/15/26 Aaa 927,384 926,511
7%, 9/15/25 to 11/15/27 Aaa 1,930,524 1,961,300
7 1/2%, 2/15/25 to 3/15/28 Aaa 3,822,643 3,930,218
8%, 12/15/27 Aaa 857,101 888,170
11%, 2/15/16 to 10/15/18 Aaa 703,358 792,011
11 1/2%, 3/15/10 Aaa 61,715 68,884
9,673,804
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $18,145,834) 18,547,165
FOREIGN GOVERNMENT OBLIGATIONS (H) - 24.4%
Argentinian Republic:
Bote 2.218%, 4/3/00 (i) Ba3 2,145 592
BOCON 3.29%, 9/1/02 (i) Ba3 ARS 376,839 310,855
Brady:
floating rate bond 6 5/8%,
3/31/05 (bearer) (i) Ba3 1,472,500 1,299,481
par euro 5 3/4%, 3/31/23 (e) Ba3 2,590,000 1,924,694
discount euro 6 5/8%, 3/31/23 (i) Ba3 800,000 649,500
global bond:
8.726%, 4/10/05 (i) Ba3 210,000 210,000
11 3/8%, 1/30/17 Ba3 1,175,000 1,248,438
11 3/8%, 1/30/17 Ba3 220,000 233,750
11 3/4%, 2/12/07 Ba3 ARS 130,000 122,867
11 3/4%, 2/12/07 (f) Ba3 ARS 250,000 236,283
Austrian Republic euro 4 1/2 %, 9/28/05 (k) Aaa JPY 480,000
4,180,522
Bank for Foreign Economic Affairs of Russia
(Vnesheconombank) interest notes 6 5/8%,
12/15/15 (f)(i) B1 1,360,060 753,980
FOREIGN GOVERNMENT OBLIGATIONS (H) - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (B) AMOUNT (C) (NOTE 1)
Brazilian Federative Republic:
Brady:
debt conversion bond euro 6.69%, 4/15/12 (i) B1 $ 2,675,000 $
1,859,125
capitalization bond 8%, 4/15/14 B1 3,091,959 2,272,589
discount euro 6 5/8%, 4/15/24 (i) B1 1,000,000 770,000
par 5 1/2%, 4/15/24 (e) B1 325,000 228,516
global bond 10 1/8%, 5/15/27 B1 727,000 626,129
IDU euro 6.88%, 1/1/01 (i) B1 1,427,500 1,354,698
Bulgarian Republic (i):
6.562%, 7/28/11 B2 325,000 231,969
Brady:
FLIRB A 2 1/4%, 7/28/12 B2 1,075,000 666,517
discount 6.56%, 7/28/24 B2 1,655,000 1,266,075
Canadian Government 7%, 12/1/06 Aa1 CAD 8,200,000 6,206,357
City of Buenos Aires 11 1/4%, 4/11/07 (f) B1 250,000 253,750
Ecuador Republic Brady:
past due interest euro
6 5/8%, 2/28/15 (bearer) (i) B1 611,969 350,735
par euro 3 1/2%, 2/28/25 (e) B1 1,075,000 578,484
discount euro 6 5/8%, 2/28/25 (i) B1 350,000 243,250
German Republic 6%, 1/4/07 Aaa DEM 17,100,000 10,257,163
Italian Government 12%, 9/1/01 (k) Aa3 ITL 9,000,000 6,122,223
Ivory Coast Brady (f)(i):
FLIRB 2%, 3/30/18 - 703,000 230,233
past due interest 2%, 3/30/18 - 624,000 231,660
Kazakhstan Republic 8 3/8%, 10/2/02 Ba3 400,000 360,000
Korean Republic 8 7/8%, 4/15/08 Ba1 480,000 438,300
Mexico Value recovery rights:
6/30/03 discount A BB+ 729,000 -
6/30/03 discount B BB+ 967,000 -
Moscow City 9 1/2%, 5/31/00 (Reg.) B1 300,000 258,000
Panamanian Republic:
Brady:
interest reduction bond euro
3 3/4%, 7/17/14 (i) Ba1 450,000 334,125
past due interest euro 6.563%, 7/17/19 (i) Ba1 598,845 455,871
par 3 1/2%, 7/17/26 (e) Ba1 550,000 360,250
global bond 8 7/8%, 9/30/27 Baa 300,000 281,250
Peruvian Republic Brady (i):
past due interest 4%, 3/7/17 (f) B2 490,000 302,575
FLIRB:
3 1/4%, 3/7/17 (f) B2 500,000 279,375
3 1/4%, 3/7/17 B2 865,000 483,319
FOREIGN GOVERNMENT OBLIGATIONS (H) - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (B) AMOUNT (C) (NOTE 1)
Poland Government Brady past due interest
4%, 10/27/14 (i) Baa $ 400,000 $ 361,000
Polish Republic Brady par 3%, 10/27/24 (e) Baa 400,000 264,500
Russian Government:
9 1/4%, 11/27/01 B1 310,000 261,950
11 3/4%, 6/10/03 (f) B+ 400,000 353,500
euro 10%, 6/26/07 B1 700,000 534,625
Socialist Republic of Vietnam Brady
3%, 3/12/28 (e) - 500,000 181,250
Treuhandanstalt 6 5/8%, 7/9/03 Aaa DEM 4,000,000 2,424,336
Turkish Government 23%, 5/26/99
(coupon linked to CPI) (i)(k) - TRL 62,500,000 248,112
United Kingdom, Great Britain & Northern Ireland:
9 3/4%, 8/27/02 Aaa GBP 2,000,000 3,722,100
8 3/4%, 8/25/17 Aaa GBP 1,200,000 2,714,964
United Mexican States:
9 3/4%, 2/6/01 Ba2 250,000 260,313
Brady:
discount A, 6.59%, 12/31/19 (i) Ba2 475,000 426,906
discount B, 6.48%, 12/31/19 (i) Ba2 630,000 566,213
par A unit 6 1/4%, 12/31/19 Ba2 1,350,000 1,118,813
par B unit 6 1/4%, 12/31/19 Ba2 1,450,000 1,201,688
global bond 11 1/2%, 5/15/26 Ba2 2,155,000 2,445,925
Venezuelan Republic:
Brady:
debt conversion bond 6 5/8%, 12/18/07 (i) Ba2 952,381 775,000
discount A 6.562%, 3/31/20 (i) Ba2 300,000 245,250
par A euro 6 3/4%, 3/31/20 Ba2 250,000 200,625
Oil recovery rights 3/31/20 B+ 3,685 -
9 1/4%, 9/15/27 Ba2 817,000 631,133
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $69,096,026) 67,411,703
COMMON STOCKS - 0.1%
SHARES
BASIC INDUSTRIES - 0.0%
CHEMICALS & PLASTICS - 0.0%
Foamex-JPS Automotive LP/Foamex JPS Capital Corp.
warrants 7/1/99 (a) 260 6,240
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - 0.0%
BROADCASTING - 0.0%
CS Wireless Systems, Inc. (a)(f) 10 $ -
HighwayMaster Communications, Inc. warrants
9/15/05 (a)(f) 480 960
Loral Orion Networks Systems, Inc. warrants (a):
1/15/07 480 7,200
1/15/17 230 2,760
Orbital Imaging Corp. warrants 3/1/05 (f) 860 38,700
UIH Australia/Pacific, Inc. warrants 5/15/06 (a) 570 2,850
52,470
LEISURE DURABLES & TOYS - 0.0%
IHF Capital, Inc., Series I warrants 11/14/99 (a)(f) 270 8,100
TOTAL MEDIA & LEISURE 60,570
TECHNOLOGY - 0.0%
COMPUTER SERVICES & SOFTWARE - 0.0%
Concentric Network Corp. warrants 12/15/07 (a)(f) 540 72,900
UTILITIES - 0.1%
CELLULAR - 0.1%
MGC Communications, Inc. warrants 10/1/04 (a)(f) 170 10,200
McCaw International Ltd. warrants 4/15/07 (a)(f) 1,753 8,765
Microcell Telecommunications, Inc. warrants 6/1/06 (a)(f) 2,520
48,686
Nextel Communications, Inc. Class A (a) 1,997 49,675
Pagemart Nationwide, Inc. (non-vtg) (a) 2,100 18,900
Powertel, Inc. warrants 2/1/06 (a) 3,328 30,784
167,010
TELEPHONE SERVICES - 0.0%
RSL Communications Ltd./RSL Communications PLC
warrants 11/15/06 (a)(f) 630 63,000
Source Media, Inc. warrants 11/1/07 (a)(f) 1,676 15,671
78,671
TOTAL UTILITIES 245,681
TOTAL COMMON STOCKS
(Cost $191,099) 385,391
PREFERRED STOCKS - 7.5%
SHARES VALUE (NOTE 1)
CONVERTIBLE PREFERRED STOCKS - 0.4%
MEDIA & LEISURE - 0.2%
LODGING & GAMING - 0.2%
Host Marriott Financial Trust $3.375 8,400 $ 441,000
UTILITIES - 0.2%
TELEPHONE SERVICES - 0.2%
IXC Communications, Inc. $3.375 (f) 10,000 475,625
NEXTLINK Communications, Inc. $3.25 (f) 3,000 155,625
631,250
TOTAL CONVERTIBLE PREFERRED STOCKS 1,072,250
NONCONVERTIBLE PREFERRED STOCKS - 7.1%
FINANCE - 0.1%
INSURANCE - 0.1%
American Annuity Group Capital Trust II 8 3/4% 240 250,259
HEALTH - 0.1%
MEDICAL FACILITIES MANAGEMENT - 0.1%
Fresenius Medical Care Capital Trust 9% (a) 251 261,354
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
ELECTRICAL EQUIPMENT - 0.1%
Echostar Communications Corp. 12 1/8%, pay-in-kind 335 368,500
MEDIA & LEISURE - 3.2%
BROADCASTING - 2.9%
Adelphia Communications Corp. $13 5,345 641,400
American Radio Systems Corp. 11 3/8%, pay-in-kind 1,683 194,807
Benedek Communications Corp.
11 1/2%, pay-in-kind (a)(f) 996 986,040
CSC Holdings, Inc. pay-in-kind:
11 1/8% 15,264 1,747,728
Series H, 11 3/4% (a) 4,110 473,678
Citadel Broadcasting Co., Series B, 13 1/4%, pay-in-kind 4,130
487,340
Granite Broadcasting Corp. 12 3/4%, pay-in-kind 434 507,780
PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONCONVERTIBLE PREFERRED STOCKS - CONTINUED
MEDIA & LEISURE - CONTINUED
BROADCASTING - CONTINUED
NTL, Inc. 13%, pay-in-kind 701 $ 828,933
SFX Broadcasting, Inc. 12 5/8% 1,060 118,720
Time Warner, Inc., Series M, 10 1/4%, pay-in-kind 1,806 2,006,918
7,993,344
PUBLISHING - 0.3%
PRIMEDIA, Inc.:
Series D, $10 5,733 601,965
$9.20 1,600 163,200
765,165
TOTAL MEDIA & LEISURE 8,758,509
RETAIL & WHOLESALE - 0.2%
GROCERY STORES - 0.2%
Nebco Evans Holding Co. 11 1/4%, pay-in-kind (a) 79 7,999
Supermarkets General Holdings Corp. $3.52, pay-in-kind (a) 12,725
391,294
399,293
SERVICES - 0.2%
PRINTING - 0.2%
Von Hoffman Corp. 13 1/2%, pay-in-kind (a)(f) 20,000 645,000
TECHNOLOGY - 0.5%
COMMUNICATIONS EQUIPMENT - 0.4%
Intermedia Communications, Inc. 13 1/2%, pay-in-kind 986 1,163,480
COMPUTER SERVICES & SOFTWARE - 0.1%
Concentric Network Corp. 13 1/2% (f) 187 186,533
TOTAL TECHNOLOGY 1,350,013
PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONCONVERTIBLE PREFERRED STOCKS - CONTINUED
UTILITIES - 2.7%
CELLULAR - 0.8%
Nextel Communications, Inc. pay-in-kind:
Series D, 13% 1,044 $ 1,143,180
11 1/8% (f) 1,080 1,112,400
2,255,580
TELEPHONE SERVICES - 1.9%
e.spire Communications, Inc. pay-in-kind:
14 3/4% 211 253,200
$127.50 609 644,018
Hyperion Telecommunications, Inc. 12 7/8%,
pay-in-kind (Reg.) 602 597,485
ICG Holdings, Inc. pay-in-kind:
14% 517 600,880
14 1/4% 696 814,320
IXC Communications, Inc. 12 1/2%, pay-in-kind 967 1,121,720
NEXTLINK Communications, Inc. 14%, pay-in-kind 9,592 563,530
Source Media, Inc. pay-in-kind 3,206 65,723
WinStar Communications, Inc. 14 1/4% 474 564,060
5,224,936
TOTAL UTILITIES 7,480,516
TOTAL NONCONVERTIBLE PREFERRED STOCKS 19,513,444
TOTAL PREFERRED STOCKS
(Cost $19,946,847) 20,585,694
PURCHASED BANK DEBT - 0.1%
MOODY'S PRINCIPAL
RATINGS (B) AMOUNT (C)
Bank for Foreign Economic Affairs of Russia
(Vnesheconombank) loan under 1997
restructuring agreement 6 5/8%, 12/15/20 (i)
(Cost $213,864) B1 $ 490,000 231,525
SOVEREIGN LOAN PARTICIPATIONS - 1.3%
MOODY'S PRINCIPAL VALUE
RATINGS (B) AMOUNT (C) (NOTE 1)
Algerian Republic loan participation -
The Chase Manhattan Bank 7.313%,
3/4/00 (i) - $ 350,000 $ 325,500
Bank for Foreign Economic Affairs of Russia
(Vnesheconombank) loan participation
restructured under 1997 agreement (i):
The Chase Manhattan Bank 6.56%,
12/15/20 - 3,720,000 1,757,700
Lehman Commercial Paper, Inc. 6.72%,
12/15/20 - 750,000 354,375
Bank for Foreign Economic Affairs of Russia
(VnesheconombankBa) loan participation
restructured under 1997 agreement (i):
BankBoston Corp. 6.72%, 12/15/20 - 80,000 37,800
ING Bank NV 6 5/8%, 12/15/20 - 250,000 118,125
Merrill Lynch, Pierce, Fenner & Smith, Inc.
6.72%, 12/15/20 - 200,000 94,500
Morgan (J.P.) Securities, Inc. 6 5/8%,
12/15/20 - 650,000 307,125
Paribus Capital Markets 6.72%, 12/15/20 - 400,000 189,000
Morrocan Kingdom loan participation, Series A (i):
The Chase Manhattan Bank 6.56%, 1/1/09 - 200,000 170,750
ING Bank NV 6.56%, 1/1/09 - 250,000 213,438
Morgan Guaranty Trust Company of New York
6.56%, 1/1/09 - 125,000 106,719
TOTAL SOVEREIGN LOAN PARTICIPATIONS
(Cost $4,176,102) 3,675,032
CASH EQUIVALENTS - 5.4%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations), in a joint
trading account at 5.66%, dated
6/30/98 due 7/1/98 $ 15,021,361 15,019,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $275,892,925) $ 276,079,998
SECURITY TYPE ABBREVIATIONS
FLIRB - Front Loaded Interest Reduction
Bonds
CURRENCY ABBREVIATIONS
ARS - Argentine peso
CAD - Canadian dollar
DEM - German deutsche mark
GBP - British pound
ITL - Italian lira
JPY - Japanese yen
TRL - Turkish lira
LEGEND
(a) Non-income producing
(b) Standard & Poor's credit ratings are used in the absence of a
rating by Moody's Investors Service, Inc.
(c) Principal amount is stated in United States dollars unless
otherwise noted.
(d) Debt obligation initially issued in zero coupon form which
converts to coupon form at a specified rate and date. The rate shown
is the rate at period end.
(e) Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date. The rate shown is the rate at
period end.
(f) Security exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in transactions
exempt from registration, normally to qualified institutional buyers.
At the period end, the value of these securities amounted to
$39,905,703 or 14.4% of net assets.
(g) Restricted securities - Investment in securities not registered
under the Securities Act of 1933 (see Note 2 of Notes to Financial
Statements).
Additional information on each holding is as follows:
ACQUISITION ACQUISITION
SECURITY DATE COST
Sealy Corp., Inc. 10%,
12/18/08 2/23/98 $ 465,752
(h) For foreign government obligations not individually rated by S&P
or Moody's, the ratings listed are assigned to securities by FMR, the
fund's investment adviser, based principally on S&P and Moody's
ratings of the sovereign credit of the issuing government.
(i) The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
(j) Security purchased on a delayed delivery or when-issued basis (see
Note 2 of Notes to Financial Statements).
(k) Principal amount in thousands
OTHER INFORMATION
The composition of long-term debt holdings as a percentage of total
value of investment in securities, is as follows:
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 42.0% AAA, AA, A 41.9%
Baa 0.3% BBB 0.7%
Ba 7.3% BB 11.1%
B 26.0% B 22.0%
Caa 4.6% CCC 2.7%
Ca, C 0.0% CC, C 0.0%
D 0.0%
For some foreign government obligations, FMR has assigned the ratings
of the sovereign credit of the issuing government. The percentage not
rated by Moody's or S&P amounted to 6.3%. FMR has determined that
unrated debt securities that are lower quality account for 6.3% of the
total value of investment in securities.
Distribution of investments by country of issue, as a percentage of
total value of investment in securities, is as follows:
United States 70.0%
Germany 4.6
Canada 3.5
United Kingdom 2.9
Brazil 2.8
Argentina 2.6
Mexico 2.6
Italy 2.2
Russian Republic 1.9
Austria 1.5
Others (individually less than 1%) 5.4
TOTAL 100.0%
INCOME TAX INFORMATION
At June 30, 1998, the aggregate cost of investment securities for
income tax purposes was $276,101,870. Net unrealized depreciation
aggregated $21,872, of which $6,820,133 related to appreciated
investment securities and $6,842,005 related to depreciated investment
securities.
FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998 (UNAUDITED)

ASSETS

INVESTMENT IN SECURITIES, AT VALUE (INCLUDING REPURCHASE $ 276,079,998
AGREEMENTS OF $15,019,000) (COST $275,892,925) -
SEE ACCOMPANYING SCHEDULE

FOREIGN CURRENCY HELD AT VALUE (COST $1,218) 1,205

RECEIVABLE FOR INVESTMENTS SOLD 1,742,569

RECEIVABLE FOR FUND SHARES SOLD 1,151,237

DIVIDENDS RECEIVABLE 231,874

INTEREST RECEIVABLE 4,433,449

OTHER RECEIVABLES 888

PREPAID EXPENSES 3,914

TOTAL ASSETS 283,645,134

LIABILITIES

PAYABLE TO CUSTODIAN BANK $ 2,786

PAYABLE FOR INVESTMENTS PURCHASED 3,806,545
REGULAR DELIVERY

DELAYED DELIVERY 954,540

PAYABLE FOR FUND SHARES REDEEMED 603,512

DISTRIBUTIONS PAYABLE 251,414

ACCRUED MANAGEMENT FEE 135,197

DISTRIBUTION FEES PAYABLE 98,274

OTHER PAYABLES AND ACCRUED EXPENSES 115,987

TOTAL LIABILITIES 5,968,255

NET ASSETS $ 277,676,879

NET ASSETS CONSIST OF:

PAID IN CAPITAL $ 277,174,437

UNDISTRIBUTED NET INVESTMENT INCOME 1,593,223

ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON (1,264,007)
INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS

NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 173,226
AND ASSETS AND LIABILITIES IN FOREIGN CURRENCIES

NET ASSETS $ 277,676,879

</TABLE>

STATEMENT OF ASSETS AND LIABILITIES - CONTINUED
JUNE 30, 1998 (UNAUDITED)

CALCULATION OF MAXIMUM OFFERING PRICE $11.08
CLASS A:
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
($8,002,493 (DIVIDED BY) 722,218 SHARES)

MAXIMUM OFFERING PRICE PER SHARE (100/95.25 OF $11.08) $11.63

CLASS T: $11.08
NET ASSET VALUE AND REDEMPTION PRICE PER SHARE
($180,943,592 (DIVIDED BY) 16,329,605 SHARES)

MAXIMUM OFFERING PRICE PER SHARE (100/96.50 OF $11.08) $11.48

CLASS B: $11.10
NET ASSET VALUE AND OFFERING PRICE PER SHARE
($74,219,023 (DIVIDED BY) 6,687,325 SHARES) A

CLASS C: $11.08
NET ASSET VALUE AND OFFERING PRICE PER SHARE
($7,410,259 (DIVIDED BY) 668,965 SHARES) A

INSTITUTIONAL CLASS: $11.14
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE
PER SHARE ($7,101,512 (DIVIDED BY) 637,407 SHARES)

A REDEMPTION PRICE PER SHARE IS EQUAL TO NET ASSET VALUE LESS ANY
APPLICABLE CONTINGENT DEFERRED SALES CHARGE.

<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)

INVESTMENT INCOME $ 1,003,703
DIVIDENDS

INTEREST 8,118,482

TOTAL INCOME 9,122,185

EXPENSES

MANAGEMENT FEE $ 646,972

TRANSFER AGENT FEES 225,785

DISTRIBUTION FEES 492,694

ACCOUNTING FEES AND EXPENSES 45,400

NON-INTERESTED TRUSTEES' COMPENSATION 379

CUSTODIAN FEES AND EXPENSES 20,509

REGISTRATION FEES 94,345

AUDIT 18,901

LEGAL 6,852

REPORTS TO SHAREHOLDERS 16,026

MISCELLANEOUS 844

TOTAL EXPENSES BEFORE REDUCTIONS 1,568,707

EXPENSE REDUCTIONS (20,704) 1,548,003

NET INVESTMENT INCOME 7,574,182

REALIZED AND UNREALIZED GAIN (LOSS)
NET REALIZED GAIN (LOSS) ON:

INVESTMENT SECURITIES (867,924)

FOREIGN CURRENCY TRANSACTIONS (39,039) (906,963)

CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON:

INVESTMENT SECURITIES (1,676,911)

ASSETS AND LIABILITIES IN FOREIGN CURRENCIES 17,838 (1,659,073)

NET GAIN (LOSS) (2,566,036)

NET INCREASE (DECREASE) IN NET ASSETS RESULTING $ 5,008,146
FROM OPERATIONS

</TABLE>

<TABLE>
<CAPTION>
<S> <C> <C>
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997

INCREASE (DECREASE) IN NET ASSETS

OPERATIONS $ 7,574,182 $ 11,535,543
NET INVESTMENT INCOME

NET REALIZED GAIN (LOSS) (906,963) 5,548,328

CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) (1,659,073) (2,667,312)

NET INCREASE (DECREASE) IN NET ASSETS RESULTING 5,008,146 14,416,559
FROM OPERATIONS

DISTRIBUTIONS TO SHAREHOLDERS (6,551,824) (11,341,743)
FROM NET INVESTMENT INCOME

FROM NET REALIZED GAIN - (5,678,734)

TOTAL DISTRIBUTIONS (6,551,824) (17,020,477)

SHARE TRANSACTIONS - NET INCREASE (DECREASE) 95,126,036 43,274,917

TOTAL INCREASE (DECREASE) IN NET ASSETS 93,582,358 40,670,999

NET ASSETS

BEGINNING OF PERIOD 184,094,521 143,423,522

END OF PERIOD (INCLUDING UNDISTRIBUTED NET INVESTMENT $ 277,676,879 $ 184,094,521
INCOME OF $1,593,223 AND $570,865, RESPECTIVELY)

</TABLE>

<TABLE>
<CAPTION>
<S> <C> <C> <C>
FINANCIAL HIGHLIGHTS - CLASS A
SIX MONTHS ENDED YEARS ENDED
JUNE 30, 1998 DECEMBER 31,

(UNAUDITED) 1997 1996 E
SELECTED PER-SHARE DATA

NET ASSET VALUE, BEGINNING OF PERIOD $ 11.090 $ 11.250 $ 11.010

INCOME FROM INVESTMENT OPERATIONS

NET INVESTMENT INCOME D .389 .802 .267

NET REALIZED AND UNREALIZED GAIN (LOSS) (.053) .198 .493

TOTAL FROM INVESTMENT OPERATIONS .336 1.000 .760

LESS DISTRIBUTIONS

FROM NET INVESTMENT INCOME (.346) (.790) (.280)

FROM NET REALIZED GAIN - (.370) (.240)

TOTAL DISTRIBUTIONS (.346) (1.160) (.520)

NET ASSET VALUE, END OF PERIOD $ 11.080 $ 11.090 $ 11.250

TOTAL RETURN B, C 3.03% 9.24% 6.95%

RATIOS AND SUPPLEMENTAL DATA

NET ASSETS, END OF PERIOD (000 OMITTED) $ 8,002 $ 3,379 $ 587

RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.25% A, F 1.25% F 1.25% A, F

RATIO OF EXPENSES TO AVERAGE NET ASSETS AFTER 1.25% A 1.24% G 1.25% A
EXPENSE REDUCTIONS

RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 7.09% A 7.16% 7.32% A

PORTFOLIO TURNOVER RATE 132% A 140% 119%

</TABLE>

A ANNUALIZED
B THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
C TOTAL RETURNS DO NOT INCLUDE THE ONE TIME SALES CHARGE AND FOR
PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
E FOR THE PERIOD SEPTEMBER 3, 1996 (COMMENCEMENT OF SALE OF CLASS A
SHARES) TO DECEMBER 31, 1996.
F FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD
HAVE BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
G FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE CLASS' EXPENSES.

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
FINANCIAL HIGHLIGHTS - CLASS T
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1998

(UNAUDITED) 1997 1996 1995 1994 E
SELECTED PER-SHARE DATA

NET ASSET VALUE, BEGINNING $ 11.090 $ 11.250 $ 11.000 $ 9.920 $ 10.000
OF PERIOD

INCOME FROM INVESTMENT
OPERATIONS

NET INVESTMENT INCOME .392 D .814 D .813 D .885 .064 D

NET REALIZED AND UNREALIZED (.060) .194 .542 1.231 (.046)
GAIN (LOSS)

TOTAL FROM INVESTMENT .332 1.008 1.355 2.116 .018
OPERATIONS

LESS DISTRIBUTIONS

FROM NET INVESTMENT INCOME (.342) (.798) (.805) (.806) (.098)

FROM NET REALIZED GAIN - (.370) (.300) (.230) -

TOTAL DISTRIBUTIONS (.342) (1.168) (1.105) (1.036) (.098)

NET ASSET VALUE, END OF PERIOD $ 11.080 $ 11.090 $ 11.250 $ 11.000 $ 9.920

TOTAL RETURN B, C 3.00% 9.33% 12.89% 22.02% .17%

RATIOS AND SUPPLEMENTAL DATA

NET ASSETS, END OF PERIOD $ 180,944 $ 119,204 $ 99,327 $ 52,626 $ 10,687
(000 OMITTED)

RATIO OF EXPENSES TO AVERAGE 1.20% A 1.20% 1.23% 1.35% F 1.35% A, F
NET ASSETS

RATIO OF EXPENSES TO AVERAGE 1.20% A 1.19% G 1.22% G 1.35% 1.35% A
NET ASSETS AFTER EXPENSE
REDUCTIONS

RATIO OF NET INVESTMENT INCOME 7.11% A 7.21% 7.34% 7.28% 5.80% A
TO AVERAGE NET ASSETS

PORTFOLIO TURNOVER RATE 132% A 140% 119% 193% 104% A

</TABLE>

A ANNUALIZED
B THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
C TOTAL RETURNS DO NOT INCLUDE THE ONE TIME SALES CHARGE AND FOR
PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
E FOR THE PERIOD OCTOBER 31, 1994 (COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31, 1994.
F FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS' 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 CLASS' EXPENSES.

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
FINANCIAL HIGHLIGHTS - CLASS B
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1998

(UNAUDITED) 1997 1996 1995 1994 E
SELECTED PER-SHARE DATA

NET ASSET VALUE, BEGINNING $ 11.100 $ 11.260 $ 11.010 $ 9.910 $ 10.000
OF PERIOD

INCOME FROM INVESTMENT
OPERATIONS

NET INVESTMENT INCOME .357 D .740 D .743 D .820 .072 D

NET REALIZED AND UNREALIZED (.051) .194 .538 1.237 (.078)
GAIN (LOSS)

TOTAL FROM INVESTMENT .306 .934 1.281 2.057 (.006)
OPERATIONS

LESS DISTRIBUTIONS

FROM NET INVESTMENT INCOME (.306) (.724) (.731) (.727) (.084)

FROM NET REALIZED GAIN - (.370) (.300) (.230) -

TOTAL DISTRIBUTIONS (.306) (1.094) (1.031) (.957) (.084)

NET ASSET VALUE, END OF PERIOD $ 11.100 $ 11.100 $ 11.260 $ 11.010 $ 9.910

TOTAL RETURN B, C 2.75% 8.60% 12.14% 21.35% (.06)%

RATIOS AND SUPPLEMENTAL DATA

NET ASSETS, END OF PERIOD $ 74,219 $ 54,562 $ 37,403 $ 26,654 $ 9,379
(000 OMITTED)

RATIO OF EXPENSES TO AVERAGE 1.86% A 1.86% 1.88% 2.10% F 2.10% A, F
NET ASSETS

RATIO OF EXPENSES TO AVERAGE 1.86% A 1.85% G 1.87% G 2.10% 2.10% A
NET ASSETS AFTER EXPENSE
REDUCTIONS

RATIO OF NET INVESTMENT INCOME 6.44% A 6.55% 6.69% 6.53% 5.06% A
TO AVERAGE NET ASSETS

PORTFOLIO TURNOVER RATE 132% A 140% 119% 193% 104% A

</TABLE>

A ANNUALIZED
B THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
C TOTAL RETURNS DO NOT INCLUDE THE CONTINGENT DEFERRED SALES CHARGE
AND FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
E FOR THE PERIOD OCTOBER 31, 1994 (COMMENCEMENT OF SALE OF OPERATIONS)
TO DECEMBER 31, 1994.
F FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS' 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 CLASS' EXPENSES.

<TABLE>
<CAPTION>
<S> <C> <C>
FINANCIAL HIGHLIGHTS - CLASS C
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,

(UNAUDITED) 1997 E
SELECTED PER-SHARE DATA

NET ASSET VALUE, BEGINNING OF PERIOD $ 11.080 $ 11.400

INCOME FROM INVESTMENT OPERATIONS

NET INVESTMENT INCOME D .335 .105

NET REALIZED AND UNREALIZED GAIN (LOSS) (.046) .037

TOTAL FROM INVESTMENT OPERATIONS .289 .142

LESS DISTRIBUTIONS

FROM NET INVESTMENT INCOME (.289) (.152)

FROM NET REALIZED GAIN - (.310)

TOTAL DISTRIBUTIONS (.289) (.462)

NET ASSET VALUE, END OF PERIOD $ 11.080 $ 11.080

TOTAL RETURN B, C 2.61% 1.27%

RATIOS AND SUPPLEMENTAL DATA

NET ASSETS, END OF PERIOD (000 OMITTED) $ 7,410 $ 659

RATIO OF EXPENSES TO AVERAGE NET ASSETS 2.10% A, F 2.10% A, F

RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS 6.16% A 6.30% A

PORTFOLIO TURNOVER RATE 132% A 140%

</TABLE>

A ANNUALIZED
B THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
C TOTAL RETURNS DO NOT INCLUDE THE CONTINGENT DEFERRED SALES CHARGE
AND FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
E FOR THE PERIOD NOVEMBER 3, 1997 (COMMENCEMENT OF SALE OF CLASS C
SHARES) TO DECEMBER 31, 1997.
F FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD
HAVE BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
FINANCIAL HIGHLIGHTS - INSTITUTIONAL CLASS
SIX MONTHS ENDED YEARS ENDED DECEMBER 31,
JUNE 30, 1998

(UNAUDITED) 1997 1996 1995 E
SELECTED PER-SHARE DATA

NET ASSET VALUE, BEGINNING OF PERIOD $ 11.140 $ 11.300 $ 11.030 $ 10.890

INCOME FROM INVESTMENT OPERATIONS

NET INVESTMENT INCOME .403 D .830 D .826 D .456

NET REALIZED AND UNREALIZED GAIN (LOSS) (.053) .186 .548 .340

TOTAL FROM INVESTMENT OPERATIONS .350 1.016 1.374 .796

LESS DISTRIBUTIONS

FROM NET INVESTMENT INCOME (.350) (.806) (.804) (.426)

FROM NET REALIZED GAIN - (.370) (.300) (.230)

TOTAL DISTRIBUTIONS (.350) (1.176) (1.104) (.656)

NET ASSET VALUE, END OF PERIOD $ 11.140 $ 11.140 $ 11.300 $ 11.030

TOTAL RETURN B, C 3.15% 9.36% 13.04% 7.47%

RATIOS AND SUPPLEMENTAL DATA

NET ASSETS, END OF PERIOD (000 OMITTED) $ 7,102 $ 6,289 $ 6,107 $ 107

RATIO OF EXPENSES TO AVERAGE NET ASSETS 1.10% A, F 1.10% F 1.10% F 1.10% A, F

RATIO OF EXPENSES TO AVERAGE NET ASSETS AFTER 1.10% A 1.09% G 1.10% 1.10% A
EXPENSE REDUCTIONS

RATIO OF NET INVESTMENT INCOME TO AVERAGE 7.22% A 7.31% 7.47% 7.53% A
NET ASSETS

PORTFOLIO TURNOVER RATE 132% A 140% 119% 193%

</TABLE>

A ANNUALIZED
B THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT
BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO
FINANCIAL STATEMENTS).
C TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED.
D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE
SHARES OUTSTANDING DURING THE PERIOD.
E FOR THE PERIOD JULY 3, 1995 (COMMENCEMENT OF SALE OF INSTITUTIONAL
CLASS SHARES) TO DECEMBER 31, 1995.
F FMR AGREED TO REIMBURSE A PORTION OF THE CLASS' EXPENSES DURING THE
PERIOD. WITHOUT THIS REIMBURSEMENT, THE CLASS' EXPENSE RATIO WOULD
HAVE BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS).
G FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD
PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE CLASS' EXPENSES.
NOTES TO FINANCIAL STATEMENTS
For the period ended June 30, 1998 (Unaudited)

1. SIGNIFICANT ACCOUNTING POLICIES.
Fidelity Advisor Strategic Income (the fund) is a fund of Fidelity
Advisor Series II (the trust) and is authorized to issue an unlimited
number of shares. The trust is registered under the Investment Company
Act of 1940, as amended (the 1940 Act), as an open-end management
investment company organized as a Massachusetts business trust.
The fund offers Class A, Class T, Class B, Class C, and Institutional
Class shares, each of which has equal rights as to assets and voting
privileges. Each class has exclusive voting rights with respect to
matters that affect that class. Investment income, realized and
unrealized capital gains and losses, the common expenses of the fund,
and certain fund-level expense reductions, if any, are allocated on a
pro rata basis to each class based on the relative net assets of each
class to the total net assets of the fund. Each class of shares
differs in its respective distribution, transfer agent, and certain
other class-specific fees, expenses, and expense reductions.
The financial statements have been prepared in conformity with
generally accepted accounting principles which require management to
make certain estimates and assumptions at the date of the financial
statements. The following summarizes the significant accounting
policies of the fund:
SECURITY VALUATION. Securities for which quotations are readily
available are valued by a pricing service at their market values as
determined by their most recent bid prices (sales prices if the
principal market is an exchange) in the principal market in which such
securities are normally traded. Securities for which market quotations
are not readily available (and in certain cases debt securities which
trade on an exchange) are valued primarily using dealer-supplied
valuations or at their fair value as determined in good faith under
consistently applied procedures under the general supervision of the
Board of Trustees. Short-term securities with remaining maturities of
sixty days or less for which quotations are not readily available are
valued at amortized cost or original cost plus accrued interest, both
of which approximate current value.
FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are
maintained in U.S. dollars. Investment securities and other assets and
liabilities denominated in a foreign currency are translated into U.S.
dollars at the prevailing rates of exchange at period end. Purchases
and sales of securities, income receipts and expense payments are
translated into U.S. dollars at the prevailing exchange rate on the
respective dates of the transactions.
Net realized gains and losses on foreign currency transactions
represent net gains and losses from sales and maturities of foreign
currency contracts, disposition of foreign currencies, the difference
between the amount of net investment income accrued and the U.S.
dollar amount actually received, and gains and losses between trade
date and settlement on purchases and sales of securities. The effects
of changes in foreign
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
FOREIGN CURRENCY TRANSLATION - CONTINUED
currency exchange rates on investments in securities are included with
the net realized and unrealized gain or loss on investment securities.
INCOME TAXES. As a qualified regulated investment company under
Subchapter M of the Internal Revenue Code, the fund is not subject to
U.S. federal income taxes to the extent that it distributes
substantially all of its taxable income for its fiscal year. The fund
may be subject to foreign taxes on income and gains on investments
which are accrued based upon the fund's understanding of the tax rules
and regulations that exist in the markets in which it invests. The
fund accrues such taxes as applicable. The schedule of investments
includes information regarding income taxes under the caption "Income
Tax Information."
INVESTMENT INCOME. Dividend income is recorded on the ex-dividend
date, except certain dividends from foreign securities where the
ex-dividend date may have passed, are recorded as soon as the fund is
informed of the ex-dividend date. Non-cash dividends included in
dividend income, if any, are recorded at the fair market value of the
securities received. Interest income, which includes accretion of
original issue discount, is accrued as earned. Investment income is
recorded net of foreign taxes withheld where recovery of such taxes is
uncertain.
EXPENSES. Most expenses of the trust can be directly attributed to a
fund. Expenses which cannot be directly attributed are apportioned
among the funds in the trust.
PREPAID EXPENSES. Fidelity Management & Research Company (FMR) bears
all organizational expenses except for registering and qualifying
Class C and shares of Class C for distribution under federal and state
securities law. These expenses are amortized over one year.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are declared daily and
paid monthly from net investment income. Distributions from realized
gains, if any, are recorded on the ex-dividend date. Income dividends
and capital gain distributions are declared separately for each class.
Income and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted
accounting principles. These differences, which may result in
distribution reclassifications, are primarily due to differing
treatments for paydown gains/losses on certain securities, foreign
currency transactions, market discount and losses deferred due to wash
sales. The fund also utilized earnings and profits distributed to
shareholders on redemption of shares as a part of the dividends paid
deduction for income tax purposes.
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
DISTRIBUTIONS TO SHAREHOLDERS - CONTINUED
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital.
Undistributed net investment income and accumulated undistributed net
realized gain (loss) on investments and foreign currency transactions
may include temporary book and tax basis differences which will
reverse in a subsequent period. Any taxable income or gain remaining
at fiscal year end is distributed in the following year.
SECURITY TRANSACTIONS. Security transactions are accounted for as of
trade date. Gains and losses on securities sold are determined on the
basis of identified cost.
2. OPERATING POLICIES.
FOREIGN CURRENCY CONTRACTS. The fund generally uses foreign currency
contracts to facilitate transactions in foreign-denominated
securities. Losses may arise from changes in the value of the foreign
currency or if the counterparties do not perform under the contracts'
terms. The U.S. dollar value of foreign currency contracts is
determined using contractual currency exchange rates established at
the time of each trade.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission (the SEC), the fund, along with
other affiliated entities of FMR, may transfer uninvested cash
balances into one or more joint trading accounts. These balances are
invested in one or more repurchase agreements for U.S. Treasury or
Federal Agency obligations.
REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency
securities are transferred to an account of the fund, or to the Joint
Trading Account, at a bank custodian. The securities are
marked-to-market daily and maintained at a value at least equal to the
principal amount of the repurchase agreement (including accrued
interest). FMR, the fund's investment adviser, is responsible for
determining that the value of the underlying securities remains in
accordance with the market value requirements stated above.
DELAYED DELIVERY TRANSACTIONS. The fund may purchase or sell
securities on a delayed delivery basis. Payment and delivery may take
place a month or more after the date of the transaction. The price of
the underlying securities and the date when the securities will be
delivered and paid for are fixed at the time the transaction is
negotiated. The market values of the securities purchased or sold on a
delayed delivery basis are identified as such in the fund's schedule
of investments. The fund may receive compensation for interest forgone
in the purchase of a delayed delivery security. With respect to
purchase commitments, the fund identifies securities as segregated in
its custodial records with a value at least equal to the amount of the
commitment. Losses
2. OPERATING POLICIES - CONTINUED
DELAYED DELIVERY TRANSACTIONS - CONTINUED
may arise due to changes in the market value of the underlying
securities or if the counterparty does not perform under the contract.
INDEXED SECURITIES. The fund may invest in indexed securities whose
values are linked either directly or inversely to changes in foreign
currencies, interest rates, commodities, indices or other underlying
instruments. The fund uses these securities to increase or decrease
its exposure to different underlying instruments and to gain exposure
to markets that might be difficult to invest in through conventional
securities. Indexed securities may be more volatile than their
underlying instruments, but any loss is limited to the amount of the
original investment. Gains (losses) realized upon the sale of indexed
securities are included in realized gains (losses) on investment
securities.
RESTRICTED SECURITIES. The fund is permitted to invest in securities
that are subject to legal or contractual restrictions on resale. These
securities generally may be resold in transactions exempt from
registration or to the public if the securities are registered.
Disposal of these securities may involve time-consuming negotiations
and expense, and prompt sale at an acceptable price may be difficult.
At the end of the period, restricted securities (excluding 144A
issues) amounted to $470,000 or 0.2% of net assets.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS. The fund is permitted to
invest in loans and loan participations, trade claims or other
receivables. These investments may include standby financing
commitments that obligate the fund to supply additional cash to the
borrower on demand. Loan participations involve a risk of insolvency
of the lending bank or other financial intermediary. At the end of the
period, these investments amounted to $3,675,032 or 1.3% of net
assets.
3. PURCHASES AND SALES OF INVESTMENTS.
Purchases and sales of securities, other than short-term securities,
aggregated $223,807,095 and $134,876,175, respectively, of which U.S.
government and government agency obligations aggregated $69,541,458
and $45,904,507, respectively.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a
monthly fee that is calculated on the basis of a group fee rate plus a
fixed individual fund fee rate applied to the average net assets of
the fund. The group fee rate is the weighted average of a series of
rates and is based on the monthly average net assets of all the mutual
funds advised by FMR. The rates ranged from .1100% to .3700% for the
period. The annual individual fund fee rate is .45%. In the event that
these rates were lower than the contractual rates in effect during the
period, FMR voluntarily implemented the above rates, as they resulted
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
MANAGEMENT FEE - CONTINUED
in the same or a lower management fee. For the period, the management
fee was equivalent to an annualized rate of .59% of average net
assets.
SUB-ADVISER FEE. FMR, on behalf of the fund, entered into sub-advisory
agreements with Fidelity Management & Research (U.K.) Inc., Fidelity
Management & Research (Far East) Inc., and Fidelity International
Investment Advisors (FIIA), and Fidelity Investments Japan Limited
(FIJ). In addition, FIIA entered into a sub-advisory agreement with
its subsidiary, Fidelity International Investment Advisors (U.K.)
Limited (FIIA(U.K.)L). Under the sub-advisory arrangements, FMR may
receive investment advice and research services and may grant the
sub-advisers investment management authority to buy and sell
securities. FMR pays its sub-advisers either a portion of its
management fee or a fee based on costs incurred for these services.
FIIA pays (FIIA(U.K.)L) a fee based on costs incurred for either
service.
DISTRIBUTION AND SERVICE PLAN. In accordance with Rule 12b-1 of the
1940 Act, the Trustees have adopted separate distribution plans with
respect to each class of shares (collectively referred to as "the
Plans"). Under certain of the Plans, the class pays Fidelity
Distributors Corporation (FDC), an affiliate of FMR, a distribution
and service fee. A portion of this fee may be reallowed to securities
dealers, banks and other financial institutions for the distribution
of each class of shares and providing shareholder support services.
For the period, this fee was based on the following annual rates of
the average net assets of each applicable class:
CLASS A .15%

CLASS T .25%

CLASS B .90% *

CLASS C 1.00% **

* .65% REPRESENTS A DISTRIBUTION FEE AND .25% REPRESENTS A SHAREHOLDER
SERVICE FEE.
** .75% REPRESENTS A DISTRIBUTION FEE AND .25% REPRESENTS A
SHAREHOLDER SERVICE FEE.
For the period, each class paid FDC the following amounts, a portion
of which was retained by FDC:
PAID TO RETAINED
FDC BY FDC

CLASS A $ 3,849 $ 70

CLASS T 175,755 1,001

CLASS B 291,517 211,008

CLASS C 21,573 21,573

$ 492,694 $ 233,652

4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
DISTRIBUTION AND SERVICE PLAN - CONTINUED
Under the Plans, FMR may use its resources to pay administrative and
promotional expenses related to the sale of each class' shares. The
Plans also authorize payments to third parties that assist in the sale
of each class' shares or render shareholder support services. For the
period, the following amounts were paid to third parties under the
Plans:
CLASS A $1,407

CLASS T 11,921

CLASS B 11,683

CLASS C 2,537

INSTITUTIONAL CLASS 101

SALES LOAD. FDC receives a front-end sales charge of up to 4.75% for
selling Class A shares, and 3.50% for selling Class T shares of the
fund. FDC receives the proceeds of contingent deferred sales charges
levied on Class B share redemptions occurring within six years of
purchase and Class C share redemptions occurring within one year of
purchase. Contingent deferred sales charges are based on declining
rates ranging from 5% to 1% for Class B and 1% for Class C, of the
lesser of the cost of shares at the initial date of purchase or the
net asset value of the redeemed shares, excluding any reinvested
dividends and capital gains. In addition, purchases of Class A and
Class T shares that were subject to a finder's fee bear a contingent
deferred sales charge on assets that do not remain in the fund for at
least one year. The Class A and Class T contingent deferred sales
charge is based on 0.25% of the lesser of the cost of shares at the
initial date of purchase or the net asset value of the redeemed
shares, excluding any reinvested dividends and capital gains. A
portion of the sales charges paid to FDC are paid to securities
dealers, banks and other financial institutions.
For the period, sales charge amounts paid to and retained by FDC were
as follows:
PAID TO RETAINED
FDC BY FDC

CLASS A $ 48,931 $ 14,514

CLASS T 171,396 62,771

CLASS B 47,575 47,575*

CLASS C 1,494 1,494*

$ 269,396 $ 126,354

* WHEN CLASS B AND CLASS C SHARES ARE INITIALLY SOLD, FDC PAYS
COMMISSIONS FROM ITS OWN RESOURCES TO SECURITIES DEALERS,
BANKS, AND OTHER FINANCIAL INSTITUTIONS THROUGH WHICH THE SALES ARE
MADE.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations
Company, Inc., (FIIOC), an affiliate of FMR, is the transfer, dividend
disbursing and shareholder servicing agent for each class of the fund.
FIIOC receives account fees and asset-based fees that vary according
to the account size and type of account of the shareholders of the
respective classes of the fund. FIIOC pays for typesetting, printing
and mailing of all shareholder reports, except proxy statements. For
the period, the following amounts were paid to FIIOC:
AMOUNT % OF
AVERAGE
NET ASSETS

CLASS A $ 7,007 .27 *

CLASS T 142,470 .20 *

CLASS B 64,604 .20 *

CLASS C 5,703 .27 *

INSTITUTIONAL CLASS 6,001 .19 *

$ 225,785

* ANNUALIZED..
ACCOUNTING FEES. Fidelity Service Company, Inc., an affiliate of FMR,
maintains the fund's accounting records. The fee is based on the level
of average net assets for the month plus out-of-pocket expenses.
5. EXPENSE REDUCTIONS.
FMR voluntarily agreed to reimburse operating expenses (excluding
interest, taxes, brokerage commissions and extraordinary expenses)
above the following annual rates or range of annual rates of average
net assets for each of the following classes:
FMR REIMBURSEMENT
EXPENSE
LIMITATIONS

CLASS A 1.25% $ 4,763

CLASS C 2.10% 10,716

INSTITUTIONAL CLASS 1.10% 4,089

$ 19,568

In addition, the fund has entered into an arrangement with its
custodian whereby credits realized as a result of uninvested cash
balances were used to reduce a portion of expenses. During the period,
the fund's custodian fees were reduced by $1,136 under the custodian
arrangement.
6. BENEFICIAL INTEREST.
At the end of the period, one shareholder was record owner of
approximately 15% of the outstanding shares of the fund.
7. CREDIT RISK.
The fund's relatively large investment in countries with limited or
developing capital markets may involve greater risks than investments
in more developed markets and the prices of such investments may be
volatile. The yields of emerging market debt obligations reflect,
among other things, perceived credit risk. The consequences of
political, social or economic changes in these markets may have
disruptive effects on the market prices of the fund's investments and
the income they generate, as well as the fund's ability to repatriate
such amounts.
8. DISTRIBUTIONS TO SHAREHOLDERS.
Distributions to shareholders of each class were as follows:
SIX MONTHS ENDED YEAR ENDED

JUNE 30, DECEMBER 31,

1998 1997A

FROM NET INVESTMENT INCOME

CLASS A $ 156,006 $ 128,164

CLASS T 4,315,867 7,824,627

CLASS B 1,770,799 2,941,590

CLASS C 109,391 5,711

INSTITUTIONAL CLASS 199,761 441,651

TOTAL $ 6,551,824 $ 11,341,743

FROM NET REALIZED GAIN

CLASS A $ - $ 93,953

CLASS T - 3,695,167

CLASS B - 1,668,813

CLASS C - 16,228

INSTITUTIONAL CLASS - 204,573

TOTAL $ - $ 5,678,734

A DISTRIBUTIONS FOR CLASS C ARE FOR THE PERIOD NOVEMBER 3, 1997
(COMMENCEMENT OF SALE OF SHARES) TO DECEMBER 31, 1997.
9. SHARE TRANSACTIONS.
Share transactions for each class of shares were as follows:

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
SHARES DOLLARS

SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31,

1998 1997 A 1998 1997 A

CLASS A 477,783 265,146 $ 5,361,767 $ 3,006,773
SHARES SOLD

REINVESTMENT OF DISTRIBUTIONS 11,475 17,057 128,529 191,271

SHARES REDEEMED (71,900) (29,534) (806,512) (335,583)

NET INCREASE (DECREASE) 417,358 252,669 $ 4,683,784 $ 2,862,461

CLASS T 7,125,226 4,933,967 $ 80,165,496 $ 55,635,680
SHARES SOLD

REINVESTMENT OF DISTRIBUTIONS 306,755 837,190 3,445,316 9,389,799

SHARES REDEEMED (1,847,056) (3,857,473) (20,743,707) (43,554,684)

NET INCREASE (DECREASE) 5,584,925 1,913,684 $ 62,867,105 $ 21,470,795

CLASS B 2,131,476 1,951,957 $ 23,953,573 $ 22,125,314
SHARES SOLD

REINVESTMENT OF DISTRIBUTIONS 118,021 332,029 1,325,910 3,727,875

SHARES REDEEMED (476,161) (691,264) (5,349,240) (7,851,913)

NET INCREASE (DECREASE) 1,773,336 1,592,722 $ 19,930,243 $ 18,001,276

CLASS C 683,666 75,453 $ 7,667,222 $ 858,758
SHARES SOLD

REINVESTMENT OF DISTRIBUTIONS 7,457 1,548 83,481 17,203

SHARES REDEEMED (81,669) (17,490) (918,012) (199,505)

NET INCREASE (DECREASE) 609,454 59,511 $ 6,832,691 $ 676,456

INSTITUTIONAL CLASS 175,769 146,268 $ 1,978,961 $ 1,658,979
SHARES SOLD

REINVESTMENT OF DISTRIBUTIONS 16,465 53,502 185,615 603,021

SHARES REDEEMED (119,434) (175,667) (1,352,363) (1,998,071)

NET INCREASE (DECREASE) 72,800 24,103 $ 812,213 $ 263,929

</TABLE>

A SHARE TRANSACTIONS FOR CLASS C ARE FOR THE PERIOD NOVEMBER 3, 1997
(COMMENCEMENT OF SALE OF SHARES) TO DECEMBER 31, 1997.
10. REGISTRATION FEES.
For the period, each class paid the following amounts to register its
shares for sale:
REGISTRATION
FEES

CLASS A $ 8,352

CLASS T 42,092

CLASS B 19,076

CLASS C 13,634

INSTITUTIONAL CLASS 11,191

$ 94,345

PROXY VOTING RESULTS

A special meeting of the fund's shareholders was held on May 13, 1998.
The results of votes taken among shareholders on proposals before them
are reported below. Each vote reported represents one dollar of the
fund's net asset value held on the record date for the meeting.
PROPOSAL 1
To elect as Trustees the following twelve nominees.
# OF % OF
VOTES CAST VOTES CAST
RALPH F. COX
AFFIRMATIVE 5,513,057,509.17 98.706

WITHHELD 72,246,260.29 1.294

TOTAL 5,585,303,769.46 100.000

PHYLLIS BURKE DAVIS
AFFIRMATIVE 5,512,454,390.29 98.696

WITHHELD 72,849,379.17 1.304

TOTAL 5,585,303,769.46 100.000

ROBERT M. GATES
AFFIRMATIVE 5,512,847,434.74 98.703

WITHHELD 72,456,334.72 1.297

TOTAL 5,585,303,769.46 100.000

EDWARD C. JOHNSON 3D
AFFIRMATIVE 5,512,807,228.31 98.702

WITHHELD 72,496,541.15 1.298

TOTAL 5,585,303,769.46 100.000

E. BRADLEY JONES
AFFIRMATIVE 5,511,475,475.05 98.678

WITHHELD 73,828,294.41 1.322

TOTAL 5,585,303,769.46 100.000

DONALD J. KIRK
AFFIRMATIVE 5,513,202,285.94 98.709

WITHHELD 72,101,483.52 1.291

TOTAL 5,585,303,769.46 100.000

# OF % OF
VOTES CAST VOTES CAST
PETER S. LYNCH
AFFIRMATIVE 5,514,183,139.14 98.727

WITHHELD 71,120,630.32 1.273

TOTAL 5,585,303,769.46 100.000

WILLIAM O. MCCOY
AFFIRMATIVE 5,513,955,599.52 98.723

WITHHELD 71,348,169.94 1.277

TOTAL 5,585,303,769.46 100.000

GERALD C. MCDONOUGH
AFFIRMATIVE 5,512,597,856.77 98.698

WITHHELD 72,705,912.69 1.302

TOTAL 5,585,303,769.46 100.000

MARVIN L. MANN
AFFIRMATIVE 5,514,046,328.29 98.724

WITHHELD 71,257,441.17 1.276

TOTAL 5,585,303,769.46 100.000

ROBERT C. POZEN
AFFIRMATIVE 5,514,496,636.51 98.732

WITHHELD 70,807,132.95 1.268

TOTAL 5,585,303,769.46 100.000

THOMAS R. WILLIAMS
AFFIRMATIVE 5,512,287,386.41 98.693

WITHHELD 73,016,383.05 1.307

TOTAL 5,585,303,769.46 100.000

PROPOSAL 2
To ratify the selection of Coopers & Lybrand L.L.P. as independent
accountants of the funds.
# OF % OF
VOTES CAST VOTES CAST
AFFIRMATIVE 148,821,510.33 95.016

AGAINST 878,428.46 .561

ABSTAIN 6,927,617.14 4.423

TOTAL 156,627,555.93 100.000

PROPOSAL 3
To authorize the Trustees to adopt an Amended and Restated Declaration
of Trust.
# OF % OF
VOTES CAST VOTES CAST
AFFIRMATIVE 3,423,162,411.38 78.689

AGAINST 66,349,261.56 1.525

ABSTAIN 860,718,039.45 19.786

TOTAL 4,350,229,712.39 100.000

BROKER 1,235,074,057.07
NON-VOTES

INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
INVESTMENT SUB-ADVISERS
Fidelity Management & Research
(U.K.) Inc., London, England
Fidelity Management & Research
(Far East) Inc., Tokyo, Japan
Fidelity International Investment Advisors, Pembroke, Bermuda
Fidelity International Investment Advisors (U.K.) Limited
London, England
Fidelity Investments Japan Limited,
Tokyo, Japan
OFFICERS
Edward C. Johnson 3d, President
Robert C. Pozen, Senior Vice President
Bart A. Grenier, Vice President
John H. Carlson, Vice President
Curt Hollingsworth, Vice President
Margaret L. Eagle, Vice President
Eric D. Roiter, Secretary
Richard A. Silver, Treasurer
John H. Costello, Assistant Treasurer
Leonard M. Rush, Assistant Treasurer
BOARD OF TRUSTEES
Ralph F. Cox *
Phyllis Burke Davis *
Robert M. Gates *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Marvin L. Mann *
William O. McCoy *
Gerald C. McDonough *
Robert C. Pozen
Thomas R. Williams *
ADVISORY BOARD
J. Gary Burkhead
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Investments Institutional Operations Company, Inc.
Boston, MA
CUSTODIAN
Bank of New York
New York, NY
FOCUS FUNDS
Fidelity Advisor Consumer
Industries Fund
Fidelity Advisor Cyclical
Industries Fund
Fidelity Advisor Financial
Services Fund
Fidelity Advisor Health Care Fund
Fidelity Advisor Natural
Resources Fund
Fidelity Advisor Technology Fund
Fidelity Advisor Utilities Growth Fund
GROWTH FUNDS
Fidelity Advisor International Capital Appreciation Fund
Fidelity Advisor Overseas Fund
Fidelity Advisor TechnoQuant
Growth Fund
SM
Fidelity Advisor Mid Cap Fund
Fidelity Advisor Equity Growth Fund
Fidelity Advisor Growth
Opportunities Fund
Fidelity Advisor Strategic
Opportunities Fund
Fidelity Advisor Large Cap Fund
GROWTH AND INCOME FUNDS
Fidelity Advisor Growth & Income Fund
Fidelity Advisor Equity Income Fund
Fidelity Advisor Balanced Fund
TAXABLE INCOME FUNDS
Fidelity Advisor Emerging Markets Income Fund
Fidelity Advisor High Yield Fund
Fidelity Advisor Strategic Income Fund
Fidelity Advisor Mortgage
Securities Fund
Fidelity Advisor Government Investment Fund
Fidelity Advisor Intermediate Bond Fund
Fidelity Advisor Short Fixed-Income Fund
MUNICIPAL FUNDS
Fidelity Advisor Municipal Income Fund
Fidelity Advisor Intermediate Municipal Income Fund
MONEY MARKET FUNDS
Prime Fund
Treasury Fund
Tax-Exempt Fund

(REGISTERED TRADEMARK)

(2_FIDELITY_LOGOS)FIDELITY ADVISOR

(REGISTERED TRADEMARK)
STRATEGIC INCOME
FUND - INSTITUTIONAL CLASS
SEMIANNUAL REPORT
JUNE 30, 1998
CONTENTS

PRESIDENT'S MESSAGE 3 NED JOHNSON ON INVESTING STRATEGIES.

PERFORMANCE 4 HOW THE FUND HAS DONE OVER TIME.

FUND TALK 7 THE MANAGERS' REVIEW OF FUND
PERFORMANCE, STRATEGY AND OUTLOOK.

INVESTMENT CHANGES 11 A SUMMARY OF MAJOR SHIFTS IN THE FUND'S
INVESTMENTS OVER THE PAST SIX MONTHS.

INVESTMENTS 12 A COMPLETE LIST OF THE FUND'S INVESTMENTS
WITH THEIR MARKET VALUES.

FINANCIAL STATEMENTS 37 STATEMENTS OF ASSETS AND LIABILITIES,
OPERATIONS, AND CHANGES IN NET ASSETS,
AS WELL AS FINANCIAL HIGHLIGHTS.

NOTES 46 NOTES TO THE FINANCIAL STATEMENTS.

PROXY VOTING RESULTS 56

There are several ways to evaluate historical performance. You can
look at the total percentage change in value, the average annual
percentage change or the growth of a hypothetical $10,000 investment.
Total return reflects the change in the value of an investment,
assuming reinvestment of the class' dividend income and capital gains
(the profits earned upon the sale of securities that have grown in
value). You can also look at the class' income, as reflected in its
yield, to measure performance. Initial offering of Institutional Class
shares took place on July 3, 1995. Institutional Class shares are sold
to eligible investors without a sales load or 12b-1 fee. Returns prior
to July 3, 1995 are those of Class T, and reflect Class T shares'
0.25% 12b-1 fee. If Fidelity had not reimbursed certain class
expenses, the total returns and dividends would have been lower.
CUMULATIVE TOTAL RETURNS
PERIODS ENDED JUNE 30, 1998 PAST 6 PAST 1 LIFE OF
MONTHS YEAR FUND

FIDELITY ADV STRATEGIC INCOME - INST CL 3.15% 7.90% 56.35%

FIDELITY STRATEGIC INC COMP. 3.23% 8.00% 49.47%

JP EMBI PLUS -1.08% 1.39% 84.46%

LB GOVERNMENT BOND 4.18% 11.25% 39.45%

ML HIGH YIELD MASTER 4.51% 11.40% 57.43%

SB NON-U.S. DOLLAR WORLD GOVT. BOND 2.09% 0.88% 19.23%

MULTI-SECTOR INCOME FUNDS AVERAGE 2.71% 7.05% N/A

CUMULATIVE TOTAL RETURNS show Institutional Class' performance in
percentage terms over a set period - in this case, six months, one
year or since the fund started on October 31, 1994. For example, if
you had invested $1,000 in a fund that had a 5% return over the past
year, the value of your investment would be $1,050. You can compare
the fund's returns to the performance of the Fidelity Strategic Income
Composite Index - a hypothetical combination of unmanaged indices. The
composite index combines the total returns of the JP Morgan Emerging
Markets Bond Index Plus, the Lehman Brothers Government Bond Index,
the Merrill Lynch High Yield Master Index and the Salomon Brothers
Non-U.S. Dollar World Government Bond Index weighted according to the
fund's neutral mix. To measure how Institutional Class' performance
stacked up against its peers, you can compare it to the multi-sector
income funds average, which reflects the performance of mutual funds
with similar objectives tracked by Lipper Analytical Services, Inc.
The past six months average represents a peer group of 95 mutual
funds. The benchmarks listed in the table above include reinvested
dividends and capital gains, if any, and exclude the effect of sales
charges.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JUNE 30, 1998 PAST 1 LIFE OF
YEAR FUND

FIDELITY ADV STRATEGIC INCOME - INST CL 7.90% 12.96%

FIDELITY STRATEGIC INC COMP. 8.00% 11.58%

AVERAGE ANNUAL TOTAL RETURNS take Institutional Class' cumulative
return and show you what would have happened if Institutional Class
had performed at a constant rate each year.
$10,000 OVER LIFE OF FUND
FA Strategic Inc -CL I FID Strategic Inc Comp.
ML High Yield Master
00648 F0086
ML002
1994/10/31 10000.00 10000.00
10000.00
1994/11/30 10050.16 9921.26
9914.94
1994/12/31 10017.44 9887.56
10025.22
1995/01/31 10129.20 9962.57
10166.88
1995/02/28 10368.45 10125.61
10484.10
1995/03/31 10518.89 10301.07
10630.00
1995/04/30 10913.50 10634.09
10878.89
1995/05/31 11324.23 11037.19
11218.77
1995/06/30 11382.14 11135.32
11304.46
1995/07/31 11496.09 11192.91
11433.70
1995/08/31 11515.97 11198.60
11503.09
1995/09/30 11722.27 11390.44
11634.70
1995/10/31 11858.92 11444.44
11717.17
1995/11/30 11991.80 11595.55
11831.55
1995/12/31 12262.15 11847.24
12021.46
1996/01/31 12535.82 12046.81
12211.32
1996/02/29 12434.95 11927.06
12229.71
1996/03/31 12406.66 11944.14
12196.49
1996/04/30 12523.21 12025.48
12202.02
1996/05/31 12607.92 12090.46
12290.02
1996/06/30 12714.41 12234.53
12363.84
1996/07/31 12791.31 12369.42
12447.78
1996/08/31 12938.43 12504.03
12576.33
1996/09/30 13341.77 12784.11
12846.16
1996/10/31 13515.35 12956.74
12986.95
1996/11/30 13779.59 13230.23
13249.51
1996/12/31 13860.66 13261.40
13351.46
1997/01/31 13942.67 13301.40
13454.07
1997/02/28 14076.48 13391.81
13642.80
1997/03/31 13767.86 13220.01
13491.28
1997/04/30 13922.06 13350.18
13644.83
1997/05/31 14282.92 13643.22
13916.32
1997/06/30 14490.10 13839.71
14131.74
1997/07/31 14775.44 14081.77
14470.87
1997/08/31 14766.31 14060.71
14438.31
1997/09/30 15126.16 14317.94
14684.83
1997/10/31 14882.86 14204.77
14782.28
1997/11/30 14998.62 14326.98
14914.67
1997/12/31 15157.95 14478.93
15063.79
1998/01/31 15430.92 14640.74
15284.46
1998/02/28 15560.57 14746.85
15351.23
1998/03/31 15697.07 14828.66
15483.52
1998/04/30 15748.76 14931.13
15557.07
1998/05/31 15676.85 14938.88
15657.71
1998/06/30 15634.85 14946.72
15742.96
IMATRL PRASUN SHR__CHT 19980630 19980722 124244 R00000000000047
$10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was
invested in Fidelity Advisor Strategic Income Fund - Institutional
Class on October 31, 1994, when the fund started. As the chart shows,
by June 30, 1998, the value of the investment would have grown to
$15,635 - a 56.35% increase on the initial investment. For comparison,
look at how the Merrill Lynch High Yield Master Index - a market
capitalization weighted index of all domestic and yankee high-yield
bonds, did over the same period. Issues included in the index have
maturities of at least one year and have a credit rating lower than
BBB-/Baa3, but are not in default. With dividends and capital gains,
if any, reinvested, the same $10,000 investment would have grown to
$15,743 - a 57.43% increase. You can also look at how the Fidelity
Strategic Income Composite Index - a hypothetical combination of
unmanaged indices that is more representative of the fund's investable
universe - did over the same period. This index combines returns from
the J.P. Morgan Emerging Markets Bond Index Plus (+84.46%), Lehman
Brothers Government Bond Index (+39.45%), Merrill Lynch High Yield
Master Index (+57.43%), and Salomon Brothers Non-U.S. Dollar World
Government Bond Index (+19.23%), according to the fund's neutral mix
*, and assumes monthly rebalancing of the mix. With dividends and
capital gains, if any, reinvested, the same $10,000 investment would
have grown to $14,947 - a 49.47% increase.
UNDERSTANDING
PERFORMANCE
HOW A FUND DID YESTERDAY IS
NO GUARANTEE OF HOW IT WILL DO
TOMORROW. IF YOU SELL YOUR SHARES
DURING A MARKET DOWNTURN, YOU
MIGHT LOSE MONEY. BUT IF YOU CAN
RIDE OUT THE MARKET'S UPS AND
DOWNS, YOU MAY HAVE A GAIN.
(CHECKMARK)
* 40% HIGH YIELD, 30% U.S. GOVERNMENT AND INVESTMENT GRADE, 15%
EMERGING MARKETS, AND 15% FOREIGN DEVELOPED MARKETS.
TOTAL RETURN COMPONENTS

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
JULY 3, 1995
SIX MONTHS YEARS ENDED DECEMBER 31, (COMMENCEMENT
ENDED OF SALE OF
JUNE 30, INSTITUTIONAL CLASS
SHARES) TO
DECEMBER 31,

1998 1997 1996 1995

DIVIDEND RETURN 3.15% 7.33% 7.70% 4.00%

CAPITAL RETURN 0.00% 2.03% 5.34% 3.47%

TOTAL RETURN 3.15% 9.36% 13.04% 7.47%

</TABLE>

TOTAL RETURN COMPONENTS include both dividend returns and capital
returns. A dividend return reflects the actual dividends paid by the
class. A capital return reflects both the amount paid by the class to
shareholders as capital gain distributions and changes in the class'
share price. Both returns assume the dividends or capital gains, if
any, paid by the class are reinvested, and exclude the effect of sales
charges.
DIVIDENDS AND YIELD
PERIOD ENDED JUNE 30, 1998 PAST 1 PAST 6 PAST 1
MONTH MONTHS YEAR

DIVIDENDS PER SHARE 5.99(CENTS) 35.03(CENTS) 77.67(CENTS)

ANNUALIZED DIVIDEND RATE 6.51% 6.26% 6.81%

30-DAY ANNUALIZED YIELD 6.84% - -

DIVIDENDS per share show the income paid by the class for a set
period. If you annualize this number based on an average share price
of $11.20 over the past one month, $11.29 over the past six months,
and $11.40 over the past one year, you can compare the class' income
over these three periods. The 30-day annualized YIELD is a standard
formula for all bond funds based on the yields of the bonds in the
fund, averaged over the past 30 days. This figure shows you the yield
characteristics of the fund's investments at the end of the period. It
also helps you to compare funds from different companies on an equal
basis.
FUND TALK: THE MANAGERS' OVERVIEW

MARKET RECAP
Globally, investment grade
fixed-income markets generated
positive returns in the first half of
1998. However, debt in the lower
credit tiers, domestically and in
emerging markets, experienced
pronounced volatility and
widening yield spreads. The U.S.
Treasury market generated strong
performance in the first half with
long-term bond yields finishing
June at their lowest level in over
20 years. The yield curve flattened
as long rates fell more than short
rates. Long-term interest rates
declined in response to benign
inflation, an unchanged monetary
policy and Asian instability that
pushed the dollar to an eight-year
high against the Japanese yen.
Foreign developed-market debt
also posted positive results in U.S.
dollar terms. Within the Salomon
Brothers World Government Bond
Index, European currency
strength relative to the dollar
resulted in broad gains. The U.K.
and Sweden led the way with
Japan and Switzerland delivering
the only negative results.
Increased volatility in the domestic
high yield market left yield
spreads wider. Dramatically lower
Asian currencies led many to
speculate about the export
competitiveness of U.S.
companies and the resulting
impact on their corporate
earnings. New issuance of high
yield debt escalated toward the
end of the first half, exacerbating
the upward pressure on yields.
The escalating banking crisis in
Japan, combined with the
brewing fiscal crisis in Russia,
increased spread volatility and
weakness in emerging market
debt issues in the second quarter.
NOTE TO SHAREHOLDERS: The following is an interview with John Carlson
(top), lead Portfolio Manager of Fidelity Advisor Strategic Income
Fund, with additional comments from co-managers Curt Hollingsworth
(top left) on U.S. government securities; Margaret Eagle (top right)
on high-yield securities; Ian Spreadbury (bottom left) on foreign
developed-market securities; and Brian Hogan (bottom right) on
emerging-market investments.
Q. HOW DID THE FUND PERFORM, JOHN?
J.C. For the six months that ended June 30, 1998, the fund's
Institutional Class shares returned 3.15%. The multi-sector income
funds average returned 2.71% during the same period, according to
Lipper Analytical Services. The Fidelity Strategic Composite Index -
which combines the performance of four indexes and is described at
length on page 4 of this report - returned 3.23% over the past six
months, while the Merrill Lynch High Yield Master Index returned
4.51%. For the 12 months that ended June 30, 1998, the fund's
Institutional Class shares returned 7.90%. The Lipper peer group, the
composite index and the Merrill Lynch index returned 7.05%, 8.00% and
11.40%, respectively, during that time.
Q. BRIAN, HOW DID THE FUND'S EMERGING-MARKET DEBT INVESTMENTS FARE
DURING THE PAST SIX MONTHS?
B.H. It was a period of pronounced volatility. Yield spreads - which
measure the premium an investor pays for taking on risk - tightened
versus U.S. government bonds in the beginning of the year as sentiment
toward Asia turned favorable due to positive International Monetary
Fund (IMF) negotiations. Global risk premiums, however, took a sharp
turn upward later in the period for four reasons: the weakening
Japanese yen; a renewal of negative sentiment toward Southeast Asian
economies; heightened concerns regarding Russian liquidity; and
declining commodity prices worldwide. In terms of performance, the
fund's positions in both Bulgaria and Kazakhstan traded higher, as did
a small position in Turkish currency. The fund's Bulgarian issues
helped performance as evidence of positive monetary and fiscal
developments became apparent. Turkey, meanwhile, contributed to
performance on the heels of strong economic growth and a favorable IMF
agreement. The fund made an opportunistic investment in Kazakhstan at
attractive yields relative to the country's underlying market and
economic prospects. While the fund's underweighting in Brazil -
relative to the J.P. Morgan Emerging Markets Bond Index Plus -
contributed to returns, security selection within the country negated
the gains. Additionally, an underweighting in Argentina detracted from
performance as the country's debt rallied, spurred on by strong
economic growth and declining unemployment. Lastly, an
outside-the-index investment in a large export-oriented Indonesian
company hindered returns as negative sentiment toward that region
overshadowed the company's favorable business prospects.
Q. TURNING TO YOU, CURT, HOW DID THE FUND'S U.S. GOVERNMENT-RELATED
INVESTMENTS PERFORM DURING THE PERIOD?
C.H. The fund's U.S. government-related securities performed fairly
well. During the course of the period, yields declined on both 3-year
Treasury notes and 30-year Treasury bonds, and that was good news for
bond prices. In terms of the backdrop that contributed to this
climate, one important factor was the Federal Reserve Board's decision
to leave interest rates unchanged. As a result of diminished concern
regarding an interest-rate spike, yields dropped. Another factor was
the overall inflation situation. The U.S. economy has been growing
nicely for quite some time, and inflation has remained in check.
Inflation erodes the value of bonds. Of the three investment baskets
that I concentrate on - Treasuries, U.S. government agencies and
mortgage-backed securities - Treasuries and agencies performed well.
Examples of agency positions in the portfolio were Fannie Mae and
Freddie Mac. I lowered the fund's mortgage weighting during the
period, due mostly to the attractiveness of Treasuries and agencies,
as well as to the fact that mortgage prepayments - which occur when
the homeowner pays off the principal balance on the loan before
maturity - were increasing. Going forward, I may add to the fund's
mortgage positions in search of more attractive returns. I may also
increase the fund's agency bonds.
Q. MARGARET, WHAT FACTORS PLAYED A KEY ROLE IN THE DIRECTION OF THE
HIGH-YIELD MARKET DURING THE PERIOD?
M.E. During the first three months of the period, high-yield bonds
continued to perform well. Two sectors in particular that contributed
to the fund's performance were telecommunications and cable
television. In the second quarter, though, the market gave back some
gains as concerns over Asia crept into the landscape again. Credit
quality - the main driver behind high-yield market performance -
remained favorable throughout the period, and inflation remained
stagnant. We also continued to see a good amount of merger and
acquisition activity, with the AT&T and Tele-Communications, Inc. deal
topping the list. Supply overtook demand slightly toward the end of
May, but as the period came to a close, supply had begun to taper off.
In terms of individual holdings, several of the fund's CLEC positions
- - or competitive local exchange carriers - performed well. These
included both Hyperion and Winstar Communications. Cable TV holdings
that performed well included Adelphia and Time Warner. Pathmark Stores
was also a nice contributor. Pathmark has endured its share of
difficult times, but the company has benefited from strong geographic
locations - mainly in New York and New Jersey - and also has focused
on improving the overall image of its grocery stores. On a negative
note, the fund's position in Evenflow and Spalding detracted from
performance. The recent economic woes in Russia and Asia bear
watching, especially since developments in those regions could have an
indirect impact on the U.S. high-yield market and overall credit
quality.
Q. IAN, WHAT WAS THE STORY WITH THE DEVELOPED, GLOBAL BOND MARKETS?
I.S. The overall backdrop during the period was generally positive
for global bonds. In Europe, for instance, many markets continued to
benefit from progress made on the European Monetary Union (EMU) front.
As countries strived to meet the requirements necessary for joining
the EMU, fiscal and economic policies have converged and this has
resulted in tighter fiscal and economic policies throughout Europe.
One of the better-performing markets during the period was that of the
United Kingdom, where yields were relatively higher than other
countries and inflation was kept at bay. As the EMU has taken hold,
one aspect is that we've seen more corporate bonds issued in Europe.
I've tried to take advantage of this by increasing the fund's exposure
to several asset-backed bonds. Going forward, I may emphasize
corporate bonds as opportunities present themselves. Another move I
made was to emphasize Italian bonds with shorter maturities and German
bonds with longer maturities. This strategy - which was based on
looking forward to a uniform currency - worked out well.
Q. TURNING BACK TO YOU, JOHN, WHAT'S YOUR OUTLOOK FOR EMERGING MARKETS
OVER THE NEXT SIX MONTHS?
J.C. While each portfolio manager is the expert on the key drivers in
their respective markets, the macro variables near term will most
likely be, 1) Japan's progress in strengthening its economy, 2) U.S.
interest rates, 3) corporate earnings, and 4) the U.S. dollar's
strength.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO
MANAGERS ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON
THE COVER. THE MANAGERS' VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED
ON MARKET AND OTHER CONDITIONS.