VARIABLE INSURANCE PRODUCTS FUND II, N-30D, 1997-02-27

VARIABLE INSURANCE PRODUCTS FUND II
N-30D, 1997-02-27

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(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS
FUND II: INVESTMENT GRADE BOND PORTFOLIO

ANNUAL REPORT
DECEMBER 31, 1996
CONTENTS

<TABLE>
<CAPTION>
<S> <C> <C>
MARKET ENVIRONMENT 3 A review of what happened in world markets
during the last year.

PERFORMANCE 4 How the fund has done over time.

FUND TALK 5 The manager's review of fund performance, strategy
and outlook.

INVESTMENTS 6 A complete list of the fund's investments with their
market values.

FINANCIAL STATEMENTS 10 Statements of assets and liabilities, operations, and
changes in net assets, as well as financial highlights.

NOTES 12 Notes to the financial statements.

REPORT OF INDEPENDENT ACCOUNTANTS 14 The auditors' opinion.

DISTRIBUTIONS 15

</TABLE>

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.
MARKET ENVIRONMENT

Most stock and bond markets posted positive returns in 1996, aided by
moderate growth and low inflation. Sustained corporate earnings growth and
a favorable interest rate environment also proved beneficial. Japan,
however, was the major exception as an underperforming stock market and a
weak yen undermined returns for U.S.-based investors. The strongest gains
came from the often-volatile emerging bond markets in 1996, while
performance of the bond markets of developed countries was mixed.
U.S. STOCK MARKETS
The Standard & Poor's 500 Index - a broad measure of U.S. stock market
performance - rose 22.96% for the 12 months that ended December 31, 1996,
well above the index's long-term average annual return of about 12%. The
Russell 2000 Index - a measure of small stock performance - rose 16.49%.
The Dow Jones Industrial Average - an index of 30 blue-chip stocks - posted
a return of 28.70%, closing above 6500 for the first time in November.
The U.S. stock market spent much of the past year breaking price and
trading volume records. Solid corporate earnings reports, large cash
inflows into mutual funds, widespread optimism and a generally favorable
interest rate environment propelled share prices higher.
Large-capitalization stocks thrived as investors sought their lower
volatility and higher degree of liquidity over smaller-cap stocks in an
environment where it was sometimes difficult to discern the health of the
economy.
Most industry sectors experienced positive, if not strong performance. At
mid-year, technology stocks suffered from a sell-off sparked by fears that
company earnings were weakening. Nevertheless, this sector proved to be the
strongest in the U.S. market in 1996. Earnings surprises and positive
earnings projections were the main drivers of solid performance, especially
among semiconductor manufacturers, companies that make disk drives and
monitors, and software firms. Even though consensus estimates pointed
toward increases in short-term interest rates by the Fed, financial stocks
- - usually sensitive to changes in interest rates - shrugged off this
concern and posted solid performance based on low interest rates and
positive business prospects. Energy stocks reaped the benefits of
higher-than-expected energy prices, which resulted in part from the delayed
re-entry of Iraq into the world market. Uncertainty over the direction of
the economy benefited consumer nondurables - such as food, beverage and
tobacco companies - health care and traditional big-name growth stocks, as
these companies tend to post steady earnings growth in many economic
environments.
Utilities stocks struggled in 1996 for two reasons. First, and most
important, uncertainty over the direction and form of deregulation in the
sector tended to diminish investor interest. Second, stocks in the sector
tend to move in concert with bonds, which lagged due to periodic inflation
fears and confusing economic signals. Stocks in the telecommunications
field especially were affected by uncertainty over legislation signed into
law in February 1996. Biotechnology issues had a hard time recovering from
a correction in stock prices from overvalued levels that they experienced
earlier in 1996. Cyclical stocks - those that usually rise and fall with
the economy - posted mixed results that largely depended on the outlook for
companies in the specific sector rather than the direction of the economy.
FOREIGN STOCK MARKETS
Foreign stock markets posted mixed results in 1996. The Morgan Stanley
Capital International (MSCI) EAFE Index - which measures stock performance
in Europe, Australia and the Far East - returned 6.05% in 1996. Europe
posted the most consistently strong equity markets due to stronger economic
growth, lower interest rates, higher corporate earnings, the relative
weakness of the continent's major currencies and a new emphasis on
shareholder friendliness by many of the region's corporations. The MSCI
Europe Index was up 21.09% in 1996. The Japanese stock market
underperformed on the weakness of the economic recovery and the uncertainty
for any substantial economic reform. The Tokyo Stock Exchange TOPIX Total
Return Index was off 16.26%. Emerging market equity performance ran the
gamut from negative to positive, with the MSCI Emerging Markets Free Index
returning 6.03% for 1996. While Hong Kong was a top performer - benefiting
from the rising value of the property sector, solid economic growth and
stable interest rates - other Asian markets posted mixed returns as
concerns rose over declining export growth in the region. Latin America
enjoyed a strong first half, but faded toward the end of 1996 due to low
domestic savings rates and inefficient governments, among other factors.
U.S. BOND MARKETS
Uncertainty over the direction of the economy led to mixed performance in
U.S. bond markets in 1996. For the year, the Lehman Brothers Aggregate Bond
Index - a broad measure of the performance of the U.S. taxable bond market
- - posted a total return of 3.63%. Stronger-than-expected economic signals
rattled the bond market in the early spring. Investors spent most of the
summer anticipating a short-term interest rate increase by the Federal
Reserve Board. However, the Fed neither raised nor lowered rates through
the end of 1996. Interest rates responded to the Fed's inaction by falling
during much of October and November. In December, though, bond prices
dropped due to inflation concerns, stronger-than-expected economic data and
comments by Fed Chairman Alan Greenspan that the stock markets may be
overvalued.
FOREIGN BOND MARKETS
While low inflation and moderate growth helped provide a positive backdrop
for most bond markets in 1996, performance in overseas bond markets was
mixed. The Salomon Brothers World Government Bond Index - a measure of
government bond market performance in developed nations - returned 3.62%
for the 12 months that ended December 31, 1996. In Europe, focus centered
on the continuing progress toward the European Monetary Union (EMU).
Attractive opportunities arose as countries worked to meet the requirements
for joining the EMU. However, Germany and Japan - two of the larger
components of the Salomon Brothers World Government Bond Index -
experienced currency problems that hurt returns. In stark contrast to the
developed world, the often-volatile emerging debt markets enjoyed a
particularly strong year, helped by inflows of foreign capital, low
interest rates and the implementation of country-specific reforms -
especially in Latin America. The J.P. Morgan Emerging Markets Bond Index -
of which Latin America is a large component - posted a return of 34.16%
during the period.
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY

PERFORMANCE
There are several ways to evaluate a fund's historical performance. You can
look at the total percentage change in value, the average annual percentage
change, or the growth of a hypothetical $10,000 investment. Total return
reflects the change in the value of an investment, assuming reinvestment of
the fund's dividend income and capital gains (the profits earned upon the
sale of securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1996 PAST 1 PAST 5 LIFE OF
YEAR YEARS FUND

INVESTMENT GRADE BOND 3.19% 6.64% 8.19%

Lehman Brothers Aggregate Bond Index 3.63% 7.04% n/a

AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what
would have happened if the fund had performed at a constant rate each year.
You can compare these figures to the Lehman Brothers Aggregate Bond Index -
a market value weighted performance benchmark for investment-grade
fixed-rate debt issues, including government, corporate, asset-backed, and
mortgage-backed securities, with maturities of at least one year. This
benchmark includes reinvested dividends and capital gains, if any.

UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of
how it will do tomorrow. Bond prices, for
example, generally move in the opposite
direction of interest rates. In turn, the share price,
return, and yield of a fund that invests in bonds
will vary. That means if you sell your shares
during a market downturn, you might lose
money. But if you can ride out the market's ups
and downs, you may have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of return
and are not the fund's year-by-year results, which fluctuated over the
periods shown. The life of fund figures are from commencement of
operations, December 5, 1988.
If Fidelity had not reimbursed certain fund expenses, the life of fund
total return figures would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL
CHARGES, THE TOTAL RETURNS WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
IMAHDR PRASUN SHR__CHT 19960930 19961009 151627 S00000000000001
Invest. Grade Bond LB Aggregate Bond
00227 LB001
1988/12/31 10000.00 10000.00
1989/01/31 10086.92 10143.88
1989/02/28 10109.25 10070.36
1989/03/31 10172.02 10113.90
1989/04/30 10285.31 10325.54
1989/05/31 10399.91 10596.87
1989/06/30 10600.00 10919.52
1989/07/31 10765.35 11151.64
1989/08/31 10679.56 10986.42
1989/09/30 10721.69 11042.65
1989/10/31 10887.69 11314.55
1989/11/30 10981.36 11422.39
1989/12/31 11026.21 11452.96
1990/01/31 11001.11 11316.86
1990/02/28 11063.52 11353.48
1990/03/31 11097.11 11361.84
1990/04/30 11101.82 11257.75
1990/05/31 11276.11 11591.07
1990/06/30 11364.07 11777.05
1990/07/31 11476.89 11939.97
1990/08/31 11475.79 11780.51
1990/09/30 11520.66 11877.97
1990/10/31 11521.38 12028.78
1990/11/30 11590.77 12287.71
1990/12/31 11711.43 12479.17
1991/01/31 11735.04 12633.43
1991/02/28 11853.10 12741.27
1991/03/31 12053.80 12828.93
1991/04/30 12230.89 12967.91
1991/05/31 12325.33 13043.74
1991/06/30 12348.94 13037.11
1991/07/31 12455.20 13217.90
1991/08/31 12714.93 13503.94
1991/09/30 12951.04 13777.57
1991/10/31 13092.71 13930.97
1991/11/30 13234.39 14058.71
1991/12/31 13629.42 14476.23
1992/01/31 13494.11 14279.29
1992/02/29 13567.97 14372.13
1992/03/31 13543.27 14291.11
1992/04/30 13642.04 14394.34
1992/05/31 13851.92 14665.96
1992/06/30 14012.41 14867.80
1992/07/31 14296.36 15171.13
1992/08/31 14382.78 15324.82
1992/09/30 14555.62 15506.47
1992/10/31 14370.44 15300.89
1992/11/30 14333.40 15304.35
1992/12/31 14536.36 15547.71
1993/01/31 14841.14 15845.85
1993/02/28 15093.07 16123.24
1993/03/31 15159.39 16190.42
1993/04/30 15252.23 16303.16
1993/05/31 15278.75 16323.92
1993/06/30 15570.53 16619.76
1993/07/31 15676.64 16713.76
1993/08/31 15955.15 17006.72
1993/09/30 16034.73 17053.43
1993/10/31 16114.31 17117.15
1993/11/30 16034.73 16971.54
1993/12/31 16129.93 17063.52
1994/01/31 16312.59 17293.91
1994/02/28 16045.19 16993.45
1994/03/31 15678.93 16574.49
1994/04/30 15538.06 16442.14
1994/05/31 15495.80 16439.84
1994/06/30 15453.53 16403.51
1994/07/31 15707.10 16729.33
1994/08/31 15721.19 16750.09
1994/09/30 15552.14 16503.56
1994/10/31 15566.23 16488.86
1994/11/30 15594.40 16452.24
1994/12/31 15523.97 16565.84
1995/01/31 15749.36 16893.69
1995/02/28 16053.30 17295.35
1995/03/31 16155.46 17401.46
1995/04/30 16374.37 17644.53
1995/05/31 17031.09 18327.33
1995/06/30 17162.44 18461.69
1995/07/31 17104.06 18420.46
1995/08/31 17308.38 18642.77
1995/09/30 17468.91 18824.14
1995/10/31 17702.41 19068.94
1995/11/30 17965.10 19354.69
1995/12/31 18213.20 19626.31
1996/01/31 18329.95 19756.64
1996/02/29 17995.20 19413.22
1996/03/31 17857.01 19278.28
1996/04/30 17749.53 19169.86
1996/05/31 17718.82 19130.94
1996/06/30 17933.78 19387.85
1996/07/31 17979.84 19440.90
1996/08/31 17964.49 19408.32
1996/09/30 18256.22 19746.55
1996/10/31 18655.43 20183.96
1996/11/30 18962.52 20529.68
1996/12/31 18793.62 20338.80
IMATRL PRASUN SHR__CHT 19960930 19961009 151629 R00000000000123

Let's say hypothetically that $10,000 was invested in Investment Grade Bond
Portfolio on December 31, 1988, shortly after the fund started. By December
31, 1996, the value of the investment would have grown to $18,794 - an
87.94% increase on the initial investment. With reinvested dividends and
capital gains, if any, a $10,000 investment in the Lehman Brothers
Aggregate Bond Index would have grown to $20,339 over the same period - a
103.39% increase.
INVESTMENT SUMMARY
QUALITY DIVERSIFICATION AS OF DECEMBER 31, 1996
(MOODY'S RATINGS) % OF FUND'S
INVESTMENTS

Aaa 62.7

Aa 2.8

A 12.6

Baa 9.7

Ba 1.9

B 0.0

Not rated 0.5

TABLE EXCLUDES SHORT-TERM INVESTMENTS. WHERE MOODY'S RATINGS ARE
UNAVAILABLE, WE HAVE USED S&P RATINGS. UNRATED DEBT SECURITIES THAT ARE
EQUIVALENT TO BA AND BELOW AS OF DECEMBER 31, 1996, ACCOUNT FOR 0.5% OF THE
FUND'S INVESTMENTS.
AVERAGE YEARS TO MATURITY AS OF DECEMBER 31, 1996
Years 8.3

AVERAGE YEARS TO MATURITY IS BASED ON THE AVERAGE TIME UNTIL PRINCIPAL
PAYMENTS ARE EXPECTED FROM EACH OF THE FUND'S BONDS, WEIGHTED BY DOLLAR
AMOUNT.
TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1996
% OF FUND'S
INVESTMENTS

Finance 13.5

Energy 1.9

Utilities 1.9

Technology 1.8

Media & Leisure 1.3

VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW

An interview with Michael Gray, Portfolio Manager of Investment Grade Bond
Portfolio
Q. HOW DID THE FUND PERFORM, MICHAEL?
A. For the 12-month period that ended December 31, 1996, the fund trailed
the Lehman Brothers Aggregate Bond Index, which returned 3.63% for the
period.
Q. CAN YOU CHARACTERIZE THE ATMOSPHERE IN WHICH YOU
WERE INVESTING?
A. It was really a tale of two periods. During the first six months of
1996, a stronger-than-expected economy caught many investors off guard. We
went from anticipating an easing of interest rates by the Federal Reserve
Board to expecting an increase in rates. Investors also showed concerns
over inflation creeping into the picture. The second half of 1996 was a
different story. The economy weakened some, and inflation fears subsided.
Optimism was further buoyed when the Fed announced in the fall that an
interest rate increase was unnecessary. Other factors contributing to the
more favorable second half included an improved budget deficit situation
and the strong showing by the stock market.
Q. THERE SEEMED TO BE INTENSE SCRUTINY OF FED POLICY DURING THE PERIOD. DID
THIS AFFECT YOUR STRATEGY AT ALL?
A. While there is always concern over what the Fed will do in terms of
monetary policy, it may have been a bit more intensified in 1996. This type
of attention doesn't affect how I manage the fund. I do watch economic
indicators closely, but I'm not trying to time the daily hiccups of the
market. While my duration-neutral focus may not allow me to reap all the
rewards of a big market rally, the fund will most likely benefit from not
being on the wrong side in a downturn.
Q. YOU'VE INCREASED YOUR CORPORATE BOND EXPOSURE SLIGHTLY. HOW DID
CORPORATES PERFORM DURING THE PERIOD?
A. The prolonged stability of the economy, coupled with very low inflation,
translated into bright results for corporates. While the demand for spread
products - instruments offering advantageous yields relative to Treasuries
- - was high, there was somewhat of a dichotomy in that spreads weren't all
that attractive. Corporate valuations were rich and got richer as the
period progressed. I sought the issues that I thought would most benefit
the fund, but the valuation situation will be something worth monitoring in
the months ahead. While some feel corporates may have reached their
ceiling, I'll continue to invest in them until I see a reason not to.
Q. HOW DID MORTGAGE-BACKED ISSUES FARE DURING THE PERIOD? DID YOU FOLLOW
ANY PARTICULAR STRATEGY IN TERMS OF MORTGAGES?
A. The mortgage market kept pace with the corporate market, due largely to
the demand for the spread products I just mentioned. I had a slightly
underweighted position compared to my index in mortgages throughout most of
the period, but did try to buy more discounted mortgage-backed issues.
Discounted mortgages are less susceptible to prepayment risk than those
with current coupons. If we're at a certain rate level and rates drop or
rise slightly, this will have a big impact on a current coupon mortgage.
When a mortgage bond is already at a discount, however, a slight variation
in rates won't have as much of an effect.
Q. WERE THERE ANY OTHER INVESTMENTS THAT CAUGHT YOUR EYE?
A. I owned a fair amount of yankee bonds, which are issued by foreign
entities and denominated in U.S. dollars. The benefits of yankees are that
they often trade cheaper relative to domestic corporates, and they
frequently carry better credit quality characteristics. The fund's Canadian
yankee issues contributed positively to performance.
Q. WHAT'S YOUR OUTLOOK GOING FORWARD?
A. It's been a favorable environment overall, and I think we could see a
continuation of the trends that we saw in 1996. The economy is progressing
along with moderate growth, and inflation should remain low, both of which
could result in continued strength in the corporate sector. Regarding
valuations, however, I'm somewhat cautious. Valuations were expensive in
1996, and I'll be monitoring any developments there.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER
ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER.
THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED ON MARKET AND
OTHER CONDITIONS.

FUND FACTS
GOAL: seeks to provide a high rate of income
consistent with reasonable risk, by investing in a
broad range of investment-grade, fixed-income
securities; in addition, the fund seeks to protect
capital
START DATE: December 5, 1988
SIZE: as of December 31, 1996, more than
$228 million
MANAGER: Michael Gray, since 1995; joined
Fidelity in 1982
(checkmark)
NOTE TO SHAREHOLDERS: Kevin Grant became portfolio manager of the fund on
February 3, 1997, after the period ended.
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO
INVESTMENTS DECEMBER 31, 1996

Showing Percentage of Total Value of Investment in Securities

NONCONVERTIBLE BONDS - 27.0%
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (A) AMOUNT (NOTE 1)
AEROSPACE & DEFENSE - 0.7%
Lockheed Martin Corp.:
7.70%, 6/15/08 A3 $ 500,000 $ 523,115
7 3/4%, 5/1/26 A3 1,000,000 1,038,680
1,561,795
BASIC INDUSTRIES - 0.4%
CHEMICALS & PLASTICS - 0.4%
Praxair, Inc., 6.90%, 11/1/06 A3 1,000,000 996,900
DURABLES - 0.9%
TEXTILES & APPAREL - 0.9%
Levi Strauss & Co.
7%, 11/1/06 (c) Baa2 2,000,000 1,988,240
ENERGY - 1.9%
ENERGY SERVICES - 0.9%
Petroliam Nasional BHD yankee (c):
6 7/8%, 7/1/03 A1 1,040,000 1,041,487
7 1/8%, 10/18/06 A+ 1,000,000 1,009,150
2,050,637
OIL & GAS - 1.0%
Husky Oil Ltd. yankee
6 7/8%, 11/15/03 Baa3 500,000 496,380
Petro-Canada
8.60%, 10/15/01 A3 750,000 803,528
Petro-Canada, Inc. yankee
7 7/8%, 6/15/26 Baa1 500,000 526,095
Ras Laffan Liquid Natural
Gas Co. Ltd. 7.628%,
9/15/06 (c) A3 500,000 501,900
2,327,903
TOTAL ENERGY 4,378,540
FINANCE - 13.5%
ASSET-BACKED SECURITIES - 3.1%
Discover Card Master Trust I
6.90%, 2/16/00 A2 260,000 260,975
Ford Credit Auto Loan Master
Trust 7 3/8%, 4/15/99 Aaa 500,000 502,030
Ford Credit Grantor Trust
5.90%, 10/15/00 Aaa 627,750 627,652
Green Tree Financial Corp.
6.10%, 4/15/27 Aaa 1,019,401 1,010,004
KeyCorp Auto Grantor Trust
5.80%, 7/15/00 A3 59,888 59,852
Premier Auto Trust:
4.90%, 12/15/98 Aaa 262,209 260,939
8.05%, 4/4/00 Aaa 1,430,000 1,464,856
6%, 5/6/00 Aaa 500,000 500,000
Railcar Trust 7 3/4%, 6/1/04 Aaa 797,610 831,259
Sears Credit Account
Master Trust II 7%, 1/15/04 Aaa 1,000,000 1,018,750
Standard Credit Card Master
Trust I 7.65%, 2/15/00 A2 150,000 152,438
Union Federal Savings
Bank Grantor Trust
8.20%, 1/10/01 Baa2 62,803 63,651
6,752,406

MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (A) AMOUNT (NOTE 1)
BANKS - 5.8%
ABN Amro Bank NV
6 5/8%, 10/31/01 Aa3 $ 1,000,000 $ 1,000,350
BankBoston Captial Trust I
7 3/4%, 12/15/26 (c) Baa1 1,080,000 1,037,171
Banponce Corp.:
5 3/4%, 3/1/99 A3 370,000 364,361
6.378%, 4/8/99 A3 430,000 428,198
Citicorp euro 5%, 1/30/98 (d) A2 500,000 500,000
Corporacion Andina de Fomento
yankee 7.10%, 2/1/03 Baa2 1,000,000 1,001,380
First Fidelity Bancorp
8 1/2%, 4/1/98 A2 250,000 256,885
First Maryland Bancorp
10 3/8%, 8/1/99 Baa1 500,000 544,885
Firstar Corp. 7.15%, 9/1/00 A3 640,000 645,990
Kansallis-Osake-Pankki
10%, 5/1/02 A3 260,000 295,074
KeyCorp 8.40%, 4/1/99 A2 310,000 323,395
HSBC Americas, Inc.
8 5/8%, 3/1/97 Baa1 250,000 250,915
Mellon Financial Co.
6 1/2%, 12/1/97 A2 200,000 200,758
Merita Bank Ltd. yankee
6 1/2%, 1/15/06 A3 1,000,000 952,690
Midland Bank PLC yankee
7 5/8%, 6/15/06 A1 700,000 724,822
National City Corp.
5.67%, 1/31/97 (d) A2 850,000 850,094
Signet Banking Corp. 5.63%,
5/15/97 (d) Baa2 350,000 349,146
Signet Bank 7.80%, 9/15/06 Baa1 500,000 518,755
Sovran Financial Corp.
9 3/4%, 6/15/99 A2 770,000 828,289
Union Planters Corp.
6 3/4%, 11/1/05 Baa2 400,000 387,784
Union Planters National Bank
6.81%, 8/20/01 A3 500,000 501,875
Wells Fargo Capital B 7.95%,
12/1/26 (c) A1 1,080,000 1,070,928
13,033,745
CREDIT & OTHER FINANCE - 4.1%
AT&T Capital Corp.:
6.02%, 12/1/98 Baa3 1,000,000 996,270
6.16%, 12/3/99 Baa3 500,000 496,165
BCH Cayman Islands Ltd.
yankee 7.70%, 7/15/06 A3 500,000 516,585
Chase Capital I
7.67%, 12/1/26 A1 1,300,000 1,271,101
Finova Capital Corp.
6.14%, 11/2/98 Baa1 400,000 399,516
First Securities Capital I
8.41%, 12/15/26 (c) A3 500,000 504,975
General Electric Capital Corp.
6.94%, 4/13/09 (b) Aaa 1,000,000 1,013,970
General Motors Acceptance Corp.:
5.65%, 12/15/97 A3 1,000,000 998,580
5 3/8%, 3/9/98 A3 1,400,000 1,392,244
NONCONVERTIBLE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (A) AMOUNT (NOTE 1)
FINANCE - CONTINUED
CREDIT & OTHER FINANCE - CONTINUED
Keycorp Institutional Capital A
7.826%, 12/1/26 (c) Aa $ 1,080,000 $ 1,059,480
Secured Finance, Inc. gtd.
secured 9.05%, 12/15/04 Aaa 500,000 563,545
9,212,431
INSURANCE - 0.5%
Nationwide Mutual Insurance Co.
6 1/2%, 2/15/04 (c) A1 130,000 126,152
SunAmerica, Inc.
6.20%, 10/31/99 Baa1 1,000,000 995,530
1,121,682
TOTAL FINANCE 30,120,264
HEALTH - 0.8%
MEDICAL FACILITIES MANAGEMENT - 0.8%
Columbia/HCA Healthcare Corp.:
6 1/2%, 3/15/99 A2 1,000,000 1,004,770
6 7/8%, 7/15/01 A3 750,000 758,903
1,763,673
INDUSTRIAL MACHINERY & EQUIPMENT - 0.5%
POLLUTION CONTROL - 0.5%
WMX Technologies, Inc.
6 1/4%, 4/1/99 A1 1,200,000 1,199,292
MEDIA & LEISURE - 1.3%
LODGING & GAMING - 1.2%
Circus Circus Enterprises, Inc.:
6.45%, 2/1/06 Baa2 1,000,000 946,660
7%, 11/15/36 Baa2 750,000 732,713
Mirage Resorts, Inc.
7 1/4%, 10/15/06 Baa2 1,000,000 1,006,700
2,686,073
RESTAURANTS - 0.1%
Darden Restaurants, Inc.
6 3/8%, 2/1/06 Baa1 310,000 287,479
TOTAL MEDIA & LEISURE 2,973,552
NONDURABLES - 0.7%
FOODS - 0.7%
Ralcorp Holdings, Inc.
8 3/4%, 9/15/04 Ba1 1,335,000 1,458,821
RETAIL & WHOLESALE - 0.8%
GENERAL MERCHANDISE STORES - 0.6%
Dayton Hudson Corp.
6.40%, 2/15/03 Baa1 500,000 486,935
J C Penney, Inc.
6.90%, 8/15/26 A1 250,000 252,785
Sears, Roebuck & Co.
9.23%, 8/6/98 A2 450,000 471,438
1,211,158
GROCERY STORES - 0.2%
Kroger Co. 8.15%, 7/15/06 Ba1 500,000 517,630
TOTAL RETAIL & WHOLESALE 1,728,788

MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (A) AMOUNT (NOTE 1)
SERVICES - 0.6%
LEASING & RENTAL - 0.6%
Ryder System, Inc.
9 1/4%, 5/15/01 A3 $ 1,190,000 $ 1,304,169
TECHNOLOGY - 1.8%
COMPUTERS & OFFICE EQUIPMENT - 1.8%
Comdisco, Inc.:
9 3/4%, 1/15/97 Baa1 200,000 200,172
7 3/4%, 1/29/97 Baa2 700,000 700,945
6 3/8%, 11/30/01 Baa1 3,200,000 3,148,480
4,049,597
TRANSPORTATION - 1.2%
AIR TRANSPORTATION - 1.2%
AMR Corp.
9.55%, 3/6/98 Baa3 400,000 415,040
Delta Air Lines, Inc.:
equipment trust certificate
8.54%, 1/2/07 Baa1 434,123 461,330
10 1/2%, 4/30/16 Baa1 1,000,000 1,221,640
United Airlines Pass Through
Trust 7.27%, 1/30/13 Baa1 610,000 590,669
2,688,679
UTILITIES - 1.9%
CELLULAR - 0.9%
360 Degrees Communications Co.:
7 1/8%, 3/1/03 Ba2 1,120,000 1,106,459
7 1/2%, 3/1/06 Ba2 1,000,000 991,910
2,098,369
ELECTRIC UTILITY - 0.4%
British Columbia Hydro &
Power Authority yankee
12 1/2%, 1/15/14 Aa2 360,000 415,796
Israel Electric Corp. Ltd. yankee
7 1/4%, 12/15/06 (c) A3 500,000 497,110
912,906
GAS - 0.6%
Florida Gas Transmission Co.
7 3/4%, 11/1/97 (c) Baa2 220,000 223,071
Southwest Gas Corp.
9 3/4%, 6/15/02 Baa2 1,000,000 1,127,840
1,350,911
TOTAL UTILITIES 4,362,186
TOTAL NONCONVERTIBLE BONDS
(Cost $60,371,493) 60,574,496
U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS - 40.0%
U.S. TREASURY OBLIGATIONS - 29.5%
6 1/8%, 3/31/98 Aaa 6,710,000 6,742,476
9 1/4%, 8/15/98 Aaa 9,950,000 10,467,699
8 7/8%, 11/15/98 Aaa 1,332,000 1,401,517
8 7/8%, 2/15/99 Aaa 130,000 137,536
6 3/4%, 6/30/99 Aaa 500,000 508,830
7 3/4%, 12/31/99 Aaa 7,332,000 7,668,832
11 7/8%, 11/15/03 Aaa 3,000,000 3,913,590
U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (A) AMOUNT (NOTE 1)
U.S. TREASURY OBLIGATIONS - CONTINUED
7%, 7/15/06 Aaa $ 500,000 $ 519,455
12 3/4%, 11/15/10
(callable) Aaa 1,367,000 1,934,947
13 7/8%, 5/15/11 Aaa 30,000 45,291
12%, 8/15/13 (callable) Aaa 3,140,000 4,491,676
9%, 11/15/18 Aaa 11,400,000 14,305,176
8 7/8%, 2/15/19 Aaa 8,455,000 10,496,122
8 1/8%, 8/15/19 Aaa 2,200,000 2,544,784
6%, 2/15/26 Aaa 790,000 719,026
65,896,957
U.S. GOVERNMENT AGENCY OBLIGATIONS - 10.5%
Farm Credit System Financial
Assistance Corp. 9 3/8%,
7/21/03 Aaa 305,000 351,037
Federal Home Loan Bank:
6.365%, 4/9/01 Aaa 1,565,000 1,569,883
6.225%, 10/17/02 Aaa 1,000,000 990,160
7.31%, 6/16/04 Aaa 4,155,000 4,327,682
7.36%, 7/1/04 Aaa 1,000,000 1,043,120
7.66%, 7/20/04 Aaa 1,940,000 2,056,710
7.56%, 9/1/04 Aaa 310,000 325,829
6.46%, 12/15/04 Aaa 1,745,000 1,724,008
Federal Home Loan
Mortgage Corp.:
8.115%, 1/31/05 Aaa 640,000 696,602
6.783%, 8/18/05 Aaa 1,000,000 1,006,870
Federal National Mortgage
Association 6.85%, 8/22/05 Aaa 1,000,000 1,012,500
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 189,691 203,042
Class 2-E, 9.40%,
5/15/02 Aaa 988,328 1,059,892
Class T-2, 9 5/8%,
5/15/02 Ba3 76,093 81,529
Guaranteed Export Trust Certificates
(assets of Trust guaranteed by
U.S. Government through
Export-Import Bank) Series
1994-C 6.61%, 9/15/99 Aaa 68,797 69,358
Guaranteed Trade Trust Certificates
(assets of Trust guaranteed
by U.S. Government through
Export-Import Bank) Series
1994-A 7.39%, 6/26/06 Aaa 513,000 530,429
Private Export Funding Corp.
secured 6.24%, 5/15/02 Aaa 220,000 217,703

MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (A) AMOUNT (NOTE 1)
State of Israel (guaranteed by
U.S. Government through
Agency for International
Development):
7 3/4%, 4/1/98 Aaa $ 60,069 $ 60,939
4 7/8%, 9/15/98 Aaa 190,000 186,637
7 1/8%, 8/15/99 Aaa 435,000 445,221
7 3/4%, 11/15/99 Aaa 144,000 149,763
6.86%, 4/30/04 Aaa 718,875 729,378
6 3/4%, 8/15/04 Aaa 1,000,000 1,012,490
5.89%, 8/15/05 Aaa 690,000 654,945
8 1/2%, 4/1/06 Aaa 1,750,000 1,911,000
U.S. Housing & Urban Development:
8.27%, 8/1/03 Aaa 415,000 453,350
8.24%, 8/1/04 participation
certificate Aaa 500,000 547,960
23,418,037
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $87,788,352) 89,314,994
U.S. GOVERNMENT AGENCY
MORTGAGE-BACKED SECURITIES - 16.9%
FEDERAL HOME LOAN MORTGAGE CORPORATION - 0.9%
7%, 5/1/01 Aaa 183,028 184,285
8 1/2%, 3/1/20 Aaa 1,693,352 1,774,091
1,958,376
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 11.4%
5 1/2%, 5/1/00 to 7/1/01 Aaa 2,846,983 2,724,194
6%, 3/1/01 to 4/1/11 Aaa 13,067,954 12,717,779
6 1/2%, 1/1/26 to 5/1/26 Aaa 8,383,107 8,000,874
8 1/2%, 12/1/24 to 9/1/26 Aaa 1,902,682 1,940,758
25,383,605
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 4.6%
6%, 8/15/08 to 4/15/11 Aaa 5,749,836 5,578,300
8%, 2/15/17 to 7/15/26 Aaa 2,387,651 2,441,045
10%, 7/15/13 to 11/15/24 Aaa 2,069,137 2,277,020
10,296,365
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $37,180,266) 37,638,346
COMMERCIAL MORTGAGE SECURITIES - 3.5%
CS First Boston Mortgage
Securities Corp. Series:
1994-CFB1 Class A-1,
5.93%, 1/25/28 (d) Aaa 280,531 280,356
1995-AEWI Class A1,
6.665%, 11/25/27 AAA 222,014 222,499
COMMERCIAL MORTGAGE SECURITIES - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (A) AMOUNT (NOTE 1)
Equitable Life Assurance Society
of the United States (c):
Series 1996-1:
Class B1, 7.33%, 5/15/06 Aa2 $ 500,000 $ 514,531
Class C1, 7.52%, 5/15/06 A2 500,000 516,875
sequential pay Series 174
Class A1, 7.24%, 5/15/06 Aaa 1,000,000 1,033,750
Lennar Central Partner LP
floater Series 1994-1 Class B,
6.38%, 9/15/01 (c)(d) - 338,128 338,128
Meritor Mortgage Security Corp.
Series 1987-1 Class A3,
9.40%, 6/1/99 Baa3 90,128 90,016
Nomura Asset Securities Corp.
floater Series 1994-MD-II
Class A-6, 6.66%, 7/4/03 (d) - 179,477 180,879
Oregon Commercial Mortgage,
Inc. Series 1995-1 Class A,
7.15%, 6/25/23 (c) AAA 298,181 298,740
Resolution Trust Corp. commercial Series :
1995-C1 Class A-2B,
6.55%, 2/25/27 Aaa 270,641 269,965
1995-C1 Class A-4B,
6.65%, 2/25/27 Aaa 740,000 737,919
Resolution Trust Corp. floater Series (d):
1993-C2 Class A-2,
6.62%, 3/25/25 AAA 410,984 410,984
1994-C1 Class A-3,
6.30%, 6/25/26 AAA 277,992 278,513
SC Finance Corp. floater
6.93%, 8/1/04 (c)(d) - 600,000 602,625
Structured Asset Securities
Corp. Series:
1993-C1, Class A-1,
6.60%, 10/25/24 AA+ 80,787 80,661
1996 Class A-2A,
7 3/4%, 2/25/28 AAA 1,146,122 1,161,523
Wells Fargo Capital Markets
Apartment Financing Trust
6.56%, 12/29/05 (c) Aaa 750,000 750,000
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $7,668,518) 7,767,964
FOREIGN GOVERNMENT OBLIGATIONS (E) - 2.8%
Alberta Province
9 1/4%, 4/1/00 Aa2 1,400,000 1,519,686
British Columbia Province
7%, 1/1/03 Aa2 500,000 510,540
Manitoba Province
6 3/4%, 3/1/03 A1 500,000 503,180
Ontario Province yankee
7 3/4%, 6/4/02 Aa3 1,000,000 1,056,020
Quebec Province yankee:
7 1/2%, 7/15/02 A2 500,000 515,200
7.22%, 7/22/36 (b) A2 2,000,000 2,096,480
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $6,152,283) 6,201,106
CASH EQUIVALENTS - 9.8%
MATURITY VALUE
AMOUNT (NOTE 1)
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 6.75%, dated
12/31/96 due 1/2/97 $ 21,853,192 $ 21,845,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $221,005,912) $ 223,341,906
LEGEND
1. Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
2. Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date.
3. Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of these securities amounted to $13,114,313 or 5.7% of net
assets.
4. The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
5. Some foreign government obligations have not been individually rated by
S&P or Moody's. The ratings listed are assigned to securities by FMR, the
fund's investment adviser, based principally on S&P and Moody's ratings of
the sovereign credit of the issuing government.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $193,393,952 and $153,217,879, respectively, of which U.S.
government and government agency obligations aggregated $132,314,642 and
$119,719,497, respectively.
The composition of long-term debt holdings as a percentage of total value
of investment in securities, is as follows (ratings are unaudited):
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 77.0% AAA, AA, A 70.8%
Baa 9.7% BBB 15.2%
Ba 1.9% BB 0.8%
B 0.0% B 0.0%
Caa 0.0% CCC 0.0%
Ca, C 0.0% CC, C 0.0%
D 0.0%
For some foreign government obligations, FMR has assigned the ratings of
the sovereign credit of the issuing government. The percentage not rated by
both S&P and Moody's amounted to 0.5%.
INCOME TAX INFORMATION
At December 31, 1996, the aggregate cost of investment securities for
income tax purposes was $221,009,785. Net unrealized appreciation
aggregated $2,332,121, of which $3,805,870 related to appreciated
investment securities and $1,473,749 related to depreciated investment
securities.
At December 31, 1996, the fund had a capital loss carryforward of
approximately $1,514,000 of which $230,000 and $1,284,000 will expire on
December 31, 2002 and 2004, respectively.
VARIABLE INSURANCE PRODUCTS FUND II: INVESTMENT GRADE BOND PORTFOLIO
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES

<TABLE>
<CAPTION>
<S> <C> <C>
DECEMBER 31, 1996

ASSETS

Investment in securities, at value (including repurchase agreements of $21,845,000) (cost $221,005,912) - $ 223,341,906
See accompanying schedule

Cash 499

Receivable for investments sold 942,178

Receivable for fund shares sold 1,591,439

Interest receivable 2,835,556

Other receivables 1,563

TOTAL ASSETS 228,713,141

LIABILITIES

Accrued management fee $ 82,668

Other payables and accrued expenses 36,670

TOTAL LIABILITIES 119,338

NET ASSETS $ 228,593,803

Net Assets consist of:

Paid in capital $ 214,473,804

Undistributed net investment income 13,165,742

Accumulated undistributed net realized gain (loss) on investments (1,381,737
)

Net unrealized appreciation (depreciation) on investments 2,335,994

NET ASSETS, for 18,674,336 $ 228,593,803
shares outstanding

NET ASSET VALUE, offering price $12.24
and redemption price per
share ($228,593,803 (divided by) 18,674,336 shares)

</TABLE>

STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996

INVESTMENT INCOME $ 14,356,561
Interest

EXPENSES

Management fee $ 903,441

Transfer agent fees 131,401

Accounting fees and expenses 82,156

Non-interested trustees' compensation 1,978

Custodian fees and expenses 24,328

Audit 36,944

Legal 1,207

Miscellaneous 1,661

Total expenses before reductions 1,183,116

Expense reductions (2,480 1,180,636
)

NET INVESTMENT INCOME 13,175,925

REALIZED AND UNREALIZED GAIN (LOSS) (1,136,463
Net realized gain (loss) on )
investment securities

Change in net unrealized appreciation (depreciation) (5,278,792
on investment securities )

NET GAIN (LOSS) (6,415,255
)

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 6,760,670

OTHER INFORMATION
Expense reductions

Custodian interest credits $ 2,480

</TABLE>

STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1995

<TABLE>
<CAPTION>
<S> <C> <C>
Operations $ 13,175,925 $ 9,555,423
Net investment income

Net realized gain (loss) (1,136,463) 2,634,445

Change in net unrealized appreciation (depreciation) (5,278,792) 10,799,845

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 6,760,670 22,989,713

Distributions to shareholders from net investment income (9,612,980) (4,480,858)

Share transactions 108,335,706 116,054,959
Net proceeds from sales of shares

Reinvestment of distributions 9,612,980 4,480,858

Cost of shares redeemed (68,048,460) (68,879,418)

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 49,900,226 51,656,399

TOTAL INCREASE (DECREASE) IN NET ASSETS 47,047,916 70,165,254

NET ASSETS

Beginning of period 181,545,887 111,380,633

End of period (including undistributed net investment income of $13,165,742 and $9,528,238,
respectively) $ 228,593,803 $ 181,545,887

OTHER INFORMATION
Shares

Sold 9,066,652 9,944,966

Issued in reinvestment of distributions 807,813 413,363

Redeemed (5,752,069) (5,910,491)

Net increase (decrease) 4,122,396 4,447,838

</TABLE>

<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.

</TABLE>

FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31,

SELECTED PER-SHARE DATA 1996 1995 1994 1993 C 1992

</TABLE>

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 12.480 $ 11.020 $ 11.480 $ 10.970 $ 11.080

Income from Investment Operations .670 .320 .733 .641 .672
Net investment income

Net realized and unrealized gain (loss) (.290) 1.530 (1.163) .559 .058

Total from investment operations .380 1.850 (.430) 1.200 .730

Less Distributions

From net investment income (.620) (.390) - (.628) (.680)

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

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

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

Total distributions (.620) (.390) (.030) (.690) (.840)

Net asset value, end of period $ 12.240 $ 12.480 $ 11.020 $ 11.480 $ 10.970

TOTAL RETURN A, B 3.19% 17.32% (3.76)% 10.96% 6.65%

RATIOS AND SUPPLEMENTAL DATA

Net assets, end of period (000 omitted) $ 228,594 $ 181,546 $ 111,381 $ 122,376 $ 73,598

Ratio of expenses to average net assets .58% .59% .67% .68% .76%

Ratio of net investment income to average net assets 6.49% 6.53% 6.53% 6.85% 7.11%

Portfolio turnover rate 81% 182% 143% 70% 119%

</TABLE>

AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT CERTAIN
RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES.
NOTES TO FINANCIAL STATEMENTS
For the period ended December 31, 1996

1. SIGNIFICANT ACCOUNTING POLICIES.
Investment Grade Bond Portfolio (the fund) is a fund of Variable Insurance
Products Fund 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. Shares of the fund may
only be purchased by insurance companies for the purpose of funding
variable annuity or variable life insurance contracts. The financial
statements have been prepared in conformity with generally accepted
accounting principles which permit management to make certain estimates and
assumptions at the date of the financial statements. The following
summarizes the significant accounting policies of the fund:
SECURITY VALUATION. Securities are valued based upon a computerized matrix
system and/or appraisals by a pricing service, both of which consider
market transactions and dealer-supplied valuations. Securities (including
restricted securities) for which market quotations are not readily
available are valued at their fair value as determined in good faith under
consistently applied procedures under the general supervision of the Board
of Trustees. Short-term securities with remaining maturities of sixty days
or less for which quotations are not readily available are valued at
amortized cost or original cost plus accrued interest, both of which
approximate current value.
INCOME TAXES. As a qualified regulated investment company under Subchapter
M of the Internal Revenue Code, the fund is not subject to income taxes to
the extent that it distributes substantially all of its taxable income for
its fiscal year. 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 between the
funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are recorded on the
ex-dividend date.
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, market discount, capital
loss carryforwards and losses deferred due to wash sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital and may
affect the per-share allocation between net investment income and realized
and unrealized gain (loss). Undistributed net investment income and
accumulated undistributed net realized gain (loss) on investments 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. The cost of
the foreign currency contracts is included in the cost basis of the
associated investment.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the fund, along with other affiliated
entities of Fidelity Management & Research Company (FMR), may transfer
uninvested cash balances into one or more joint trading accounts. These
balances are invested in one or more repurchase agreements that mature in
60 days or less from the date of purchase 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.
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, the
fund had no investments in restricted securities (excluding 144A issues).
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities), is included under the caption "Other Information"
at the end of the fund's schedule of investments.
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. In the event that these rates were lower
than the contractual rates in effect during the period, FMR voluntarily
implemented the above rates, as they resulted in the same or a lower
management fee. The annual individual fund fee rate is .30%. For the
period, the management fee was equivalent to an annual rate of .45% of
average net assets.
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations Company
(FIIOC), an affiliate of FMR, is the fund's transfer, dividend disbursing
and shareholder servicing agent. FIIOC receives account fees and
asset-based fees that vary according to account size and type of account.
FIIOC pays for typesetting, printing and mailing of all shareholder
reports, except proxy statements. For the period, the transfer agent fees
were equivalent to an annual rate of .06% of average net assets.
ACCOUNTING FEES. Fidelity Service Co. (FSC), 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 the fund's operating expenses
(excluding interest, taxes, brokerage commissions and extraordinary
expenses) above an annual rate of .80% of average net assets.
The fund has entered into an arrangement with its custodian whereby
interest earned on uninvested cash balances was used to offset a portion of
the fund's expenses.
For the period, the reduction under these arrangements are shown under the
caption "Other Information" on the fund's Statement of Operations.
6. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investment Life Insurance Company (FILI)
and its subsidiaries, affiliates of FMR, were the record owners of
approximately 37% of the outstanding shares of the fund. In addition, one
unaffiliated insurance company was record owner of 10% or more of the total
outstanding shares of the fund, totaling 13%.
7. ASSET TRANSFER INFORMATION.
In September 1996, the Board of Trustees approved a proposal to liquidate
Fidelity Advisor Annuity Government Investment Fund and transfer the assets
of Fidelity Advisor Annuity Government Investment Fund to the fund. The
liquidation and transfer of assets are expected to occur in the first
quarter of 1997.
REPORT OF INDEPENDENT ACCOUNTANTS

To the Trustees of Variable Insurance Products Fund II and the Shareholders
of Investment Grade Bond Portfolio:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments (except for Moody's and Standard &
Poor's ratings), and the related statements of operations and of changes in
net assets and the financial highlights present fairly, in all material
respects, the financial position of Investment Grade Bond Portfolio (a fund
of Variable Insurance Products Fund II) at December 31, 1996, the results
of its operations for the year then ended, and the changes in its net
assets and the financial highlights for the periods indicated in conformity
with generally accepted accounting principles. These financial statements
and financial highlights (hereafter referred to as "financial statements")
are the responsibility of the Investment Grade Bond Portfolio's management;
our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these financial statements
in accordance with generally accepted auditing standards which require that
we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at December 31, 1996
by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 10, 1997
DISTRIBUTIONS

The Board of Trustees of Investment Grade Bond Portfolio voted to pay on
February 7, 1997, to shareholders of record at the opening of business on
February 7, 1997, a distribution of $.00 per share derived from capital
gains realized from sales of portfolio securities and a dividend of $.73
per share from net investment income.
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
OFFICERS
Edward C. Johnson 3d, PRESIDENT
J. Gary Burkhead, SENIOR VICE PRESIDENT
Fred L. Henning, Jr., VICE PRESIDENT
Robert A. Lawrence, VICE PRESIDENT
Michael S. Gray, VICE PRESIDENT
Arthur S. Loring, SECRETARY
Kenneth A. Rathgeber, TREASURER
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
BOARD OF TRUSTEES
J. Gary Burkhead
Ralph F. Cox *
Phyllis Burke Davis *
Richard J. Flynn *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Edward H. Malone *
Marvin L. Mann *
Gerald C. McDonough *
Thomas R. Williams *
ADVISORY BOARD
William O. McCoy
* INDEPENDENT TRUSTEES
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Investments Institutional Operations Co.
Boston, MA
CUSTODIAN
The Bank of New York, New York, NY

(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS
FUND II: INDEX 500 PORTFOLIO
ANNUAL REPORT
DECEMBER 31, 1996
CONTENTS

<TABLE>
<CAPTION>
<S> <C> <C>
MARKET ENVIRONMENT 3 A review of what happened in world markets
during the last year.

PERFORMANCE 4 How the fund has done over time.

FUND TALK 5 The manager's review of fund performance, strategy
and outlook.

INVESTMENTS 6 A complete list of the fund's investments with their
market values.

FINANCIAL STATEMENTS 13 Statements of assets and liabilities, operations, and
changes in net assets, as well as financial highlights.

NOTES 15 Notes to the financial statements.

REPORT OF INDEPENDENT ACCOUNTANTS 17 The auditors' opinion.

DISTRIBUTIONS 18

</TABLE>

Most stock and bond markets posted positive returns in 1996, aided by
moderate growth and low inflation. Sustained corporate earnings growth and
a favorable interest rate environment also proved beneficial. Japan,
however, was the major exception as an underperforming stock market and a
weak yen undermined returns for U.S.-based investors. The strongest gains
came from the often-volatile emerging bond markets in 1996, while
performance of the bond markets of developed countries was mixed.
U.S. STOCK MARKETS
The Standard & Poor's 500 Index - a broad measure of U.S. stock market
performance - rose 22.96% for the 12 months that ended December 31, 1996,
well above the index's long-term average annual return of about 12%. The
Russell 2000 Index - a measure of small stock performance - rose 16.49%.
The Dow Jones Industrial Average - an index of 30 blue-chip stocks - posted
a return of 28.70%, closing above 6500 for the first time in November.
The U.S. stock market spent much of the past year breaking price and
trading volume records. Solid corporate earnings reports, large cash
inflows into mutual funds, widespread optimism and a generally favorable
interest rate environment propelled share prices higher.
Large-capitalization stocks thrived as investors sought their lower
volatility and higher degree of liquidity over smaller-cap stocks in an
environment where it was sometimes difficult to discern the health of the
economy.
Most industry sectors experienced positive, if not strong performance. At
mid-year, technology stocks suffered from a sell-off sparked by fears that
company earnings were weakening. Nevertheless, this sector proved to be the
strongest in the U.S. market in 1996. Earnings surprises and positive
earnings projections were the main drivers of solid performance, especially
among semiconductor manufacturers, companies that make disk drives and
monitors, and software firms. Even though consensus estimates pointed
toward increases in short-term interest rates by the Fed, financial stocks
- - usually sensitive to changes in interest rates - shrugged off this
concern and posted solid performance based on low interest rates and
positive business prospects. Energy stocks reaped the benefits of
higher-than-expected energy prices, which resulted in part from the delayed
re-entry of Iraq into the world market. Uncertainty over the direction of
the economy benefited consumer nondurables - such as food, beverage and
tobacco companies - health care and traditional big-name growth stocks, as
these companies tend to post steady earnings growth in many economic
environments.
Utilities stocks struggled in 1996 for two reasons. First, and most
important, uncertainty over the direction and form of deregulation in the
sector tended to diminish investor interest. Second, stocks in the sector
tend to move in concert with bonds, which lagged due to periodic inflation
fears and confusing economic signals. Stocks in the telecommunications
field especially were affected by uncertainty over legislation signed into
law in February 1996. Biotechnology issues had a hard time recovering from
a correction in stock prices from overvalued levels that they experienced
earlier in 1996. Cyclical stocks - those that usually rise and fall with
the economy - posted mixed results that largely depended on the outlook for
companies in the specific sector rather than the direction of the economy.
FOREIGN STOCK MARKETS
Foreign stock markets posted mixed results in 1996. The Morgan Stanley
Capital International (MSCI) EAFE Index - which measures stock performance
in Europe, Australia and the Far East - returned 6.05% in 1996. Europe
posted the most consistently strong equity markets due to stronger economic
growth, lower interest rates, higher corporate earnings, the relative
weakness of the continent's major currencies and a new emphasis on
shareholder friendliness by many of the region's corporations. The MSCI
Europe Index was up 21.09% in 1996. The Japanese stock market
underperformed on the weakness of the economic recovery and the uncertainty
for any substantial economic reform. The Tokyo Stock Exchange TOPIX Total
Return Index was off 16.26%. Emerging market equity performance ran the
gamut from negative to positive, with the MSCI Emerging Markets Free Index
returning 6.03% for 1996. While Hong Kong was a top performer - benefiting
from the rising value of the property sector, solid economic growth and
stable interest rates - other Asian markets posted mixed returns as
concerns rose over declining export growth in the region. Latin America
enjoyed a strong first half, but faded toward the end of 1996 due to low
domestic savings rates and inefficient governments, among other factors.
U.S. BOND MARKETS
Uncertainty over the direction of the economy led to mixed performance in
U.S. bond markets in 1996. For the year, the Lehman Brothers Aggregate Bond
Index - a broad measure of the performance of the U.S. taxable bond market
- - posted a total return of 3.63%. Stronger-than-expected economic signals
rattled the bond market in the early spring. Investors spent most of the
summer anticipating a short-term interest rate increase by the Federal
Reserve Board. However, the Fed neither raised nor lowered rates through
the end of 1996. Interest rates responded to the Fed's inaction by falling
during much of October and November. In December, though, bond prices
dropped due to inflation concerns, stronger-than-expected economic data and
comments by Fed Chairman Alan Greenspan that the stock markets may be
overvalued.
FOREIGN BOND MARKETS
While low inflation and moderate growth helped provide a positive backdrop
for most bond markets in 1996, performance in overseas bond markets was
mixed. The Salomon Brothers World Government Bond Index - a measure of
government bond market performance in developed nations - returned 3.62%
for the 12 months that ended December 31, 1996. In Europe, focus centered
on the continuing progress toward the European Monetary Union (EMU).
Attractive opportunities arose as countries worked to meet the requirements
for joining the EMU. However, Germany and Japan - two of the larger
components of the Salomon Brothers World Government Bond Index -
experienced currency problems that hurt returns. In stark contrast to the
developed world, the often-volatile emerging debt markets enjoyed a
particularly strong year, helped by inflows of foreign capital, low
interest rates and the implementation of country-specific reforms -
especially in Latin America. The J.P. Morgan Emerging Markets Bond Index -
of which Latin America is a large component - posted a return of 34.16%
during the period.
VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY

INDEX 500 22.71% 17.06%

S&P 500 (registered trademark) 22.96% 17.39%

AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what
would have happened if the fund had performed at a constant rate each year.
You can compare the fund's returns to the performance of the Standard &
Poor's 500 Index - a widely recognized, unmanaged index of common stocks.
This benchmark includes reinvested dividends and capital gains, if any.

UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of growth in the long run and volatility
in the short run. In turn, the share price and return
of a fund that invests in stocks will vary. That
means if you sell your shares during a market
downturn, you might lose money. But if you can
ride out the market's ups and downs, you may
have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of return
and are not the fund's year-by-year results, which fluctuated over the
periods shown. The life of fund figures are from commencement of
operations, August 27, 1992.
If Fidelity had not reimbursed certain fund expenses, the past one year and
life of fund return figures would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL
CHARGES, THE TOTAL RETURNS WOULD BE LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
IMAHDR PRASUN SHR__CHT 19961231 19970109 133236 S00000000000001
VIP II: Index 500 SP Standard & Poor 500
00157 SP001
1992/08/27 10000.00 10000.00
1992/08/31 10014.00 10018.36
1992/09/30 10130.00 10136.58
1992/10/31 10152.00 10172.06
1992/11/30 10498.00 10518.92
1992/12/31 10630.67 10648.31
1993/01/31 10707.47 10737.75
1993/02/28 10856.70 10883.79
1993/03/31 11095.84 11113.43
1993/04/30 10822.25 10844.49
1993/05/31 11103.95 11135.12
1993/06/30 11132.32 11167.41
1993/07/31 11081.66 11122.74
1993/08/31 11501.17 11544.30
1993/09/30 11407.95 11455.40
1993/10/31 11641.01 11692.53
1993/11/30 11527.52 11581.45
1993/12/31 11666.06 11721.59
1994/01/31 12059.53 12120.12
1994/02/28 11732.95 11791.67
1994/03/31 11223.46 11277.55
1994/04/30 11357.65 11421.90
1994/05/31 11533.77 11609.22
1994/06/30 11252.82 11324.80
1994/07/31 11623.93 11696.25
1994/08/31 12087.29 12175.80
1994/09/30 11793.76 11877.49
1994/10/31 12055.84 12144.73
1994/11/30 11617.64 11702.42
1994/12/31 11787.47 11875.97
1995/01/31 12099.87 12183.91
1995/02/28 12563.64 12658.72
1995/03/31 12931.02 13032.28
1995/04/30 13311.22 13416.08
1995/05/31 13834.52 13952.32
1995/06/30 14148.51 14276.43
1995/07/31 14620.55 14749.84
1995/08/31 14656.86 14786.86
1995/09/30 15269.88 15410.86
1995/10/31 15218.62 15355.85
1995/11/30 15880.76 16029.97
1995/12/31 16171.25 16338.71
1996/01/31 16724.46 16894.88
1996/02/29 16880.36 17051.49
1996/03/31 17054.17 17215.70
1996/04/30 17292.62 17469.46
1996/05/31 17733.85 17919.99
1996/06/30 17809.61 17988.27
1996/07/31 17020.75 17193.55
1996/08/31 17370.61 17556.16
1996/09/30 18342.21 18544.22
1996/10/31 18848.06 19055.67
1996/11/30 20260.89 20496.09
1996/12/31 19844.17 20090.06
IMATRL PRASUN SHR__CHT 19961231 19970109 133238 R00000000000056

Let's say hypothetically that $10,000 was invested in Index 500 Portfolio
on August 27, 1992, when the fund started. As the chart shows, by December
31, 1996, the value of the investment would have grown to $19,844 - a
98.44% increase on the initial investment. With reinvested dividends and
capital gains, if any, a $10,000 investment in the S&P 500 would have grown
to $20,090 over the same period - a 100.90% increase.
INVESTMENT SUMMARY
TOP TEN STOCKS AS OF DECEMBER 31, 1996
% OF FUND'S
INVESTMENTS

General Electric Co. 2.6

Coca-Cola Co. (The) 2.1

Exxon Corp. 1.9

Intel Corp. 1.7

Microsoft Corp. 1.6

Merck & Co., Inc. 1.5

Philip Morris Companies, Inc. 1.5

Royal Dutch Petroleum Co. ADR 1.5

International Business Machines Corp. 1.3

Procter & Gamble Co. 1.2

TOP TEN MARKET SECTORS AS OF DECEMBER 31, 1996
% OF FUND'S
INVESTMENTS

Finance 13.1

Technology 12.3

Nondurables 10.3

Utilities 9.6

Health 9.3

Energy 8.2

Basic Industries 5.3

Industrial Machinery & Equipment 5.0

Retail & Wholesale 3.9

Durables 3.7

VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW

An interview with Jennifer Farrelly, Portfolio Manager of Index 500
Portfolio
Q. HOW DID THE FUND PERFORM, JEN?
A. For the year ended December 31, 1996, the fund performed in line with
the 22.96% return of the Standard & Poor's 500 Index. Of course, the fund's
total return is slightly lower than the index due to management expenses.
Q. WHAT HAVE BEEN SOME OF THE MAJOR DEVELOPMENTS IN THE MARKET RECENTLY?
A. As was the case throughout 1996, the market was able to shake off brief
downturns and rebound strongly. In one such event in early December,
Federal Reserve Chairman Alan Greenspan caused markets to tumble worldwide
when he mused in a speech about the "irrational exuberance" of the stock
market. The faith that has held investors all year in a slow but steadily
growing economy with relatively low inflation helped the market rebound.
Investors took heart in the fact that a slower economy would not spawn a
rise in interest rates and, thus, crimp corporate profits.
Q. WERE INVESTORS CONCERNED ABOUT CORPORATE EARNINGS?
A. Absolutely. The strong dollar, combined with a tight labor market, the
potential for rising wages, a slower economy and pricing pressure, had
investors concerned throughout the period that earnings were going to be
lower. A strong dollar is significant because it raises the costs of
American goods sold abroad. Additionally, if companies are not able to pass
on higher employment costs in the form of price increases, then their
profits will suffer. As it turned out, third quarter earnings came in
stronger than expected.
Q. WHY HAVE LARGE-CAPITALIZATION STOCKS OUTPERFORMED SMALL-COMPANY STOCKS?
A. What we've witnessed this year is what investors call a "flight to
quality," where large-capitalization companies are sought because of their
liquidity, meaning they are easier to buy and sell. As the market climbs
higher and higher, it becomes more difficult for portfolio managers to pick
stocks that will outperform. Many managers therefore have moved to larger
companies with established track records as a way of keeping up with the
market. Some large-cap stocks are also considered "defensive" because they
are not influenced by the vagaries of the economy. In the past few months,
investors sought defensive stocks - such as food or personal care companies
- - as signs of a slowing economy emerged.
Q. LET'S LOOK AT SOME OF THE MAJOR SECTORS OF THE MARKET. WHAT HAPPENED IN
TECHNOLOGY?
A. Memory chip demand recovered after dynamic random access memory chip
prices plunged 80%. In addition, personal computer sales came in stronger
than expected - up 20% in 1996 from 1995 - which buoyed many companies with
products related to PCs. As an example, chip-maker Intel reported a 41%
year-over-year earnings gain for the third quarter. Microsoft also
continued its dominance of the software business, and IBM had better
earnings than the Street anticipated.
Q. WE HEAR FINANCIAL COMPANIES WERE ALSO A BIG PART OF THE STOCK MARKET'S
PERFORMANCE THIS YEAR . . .
A. That's right. Bank stocks turned in their second big year in a row
helped by steadily improving earnings, strong balance sheets and a greater
emphasis on fee-based businesses. Additionally, while interest rates did
not fall significantly from 1995, banks enjoyed a relatively benign
interest rate environment for much of 1996. Brokerage firms also remained
the beneficiaries of the booming stock market.
Q. WAS THERE ANY DOWNSIDE TO THE CONTINUALLY STRONG PERFORMANCE OF THE
STOCK MARKET?
A. With investors so fearful about future earnings, companies reporting
earnings below Street expectations or those that don't beat expectations by
enough are seeing their stock prices punished by the market. One prime
example was AT&T, which lost 10% of its value when it announced its
earnings would be adversely affected by a slowdown in the consumer
long-distance market. As for sectors, some basic industries such as paper
and commodity chemicals were hurt by falling prices and increased costs.
Q. WHAT DO YOU SEE GOING FORWARD?
A. The current evidence of a slowing economy has increased investors'
confidence in the stock market. Despite this development, I think that
investors should understand there is still a great amount of uncertainty
given the stock market's high valuations and the questionable strength of
future corporate earnings.
THE VIEWS EXPRESSED IN THIS REPORT REFLECT THOSE OF THE PORTFOLIO MANAGER
ONLY THROUGH THE END OF THE PERIOD OF THE REPORT AS STATED ON THE COVER.
THE MANAGER'S VIEWS ARE SUBJECT TO CHANGE AT ANY TIME BASED ON MARKET AND
OTHER CONDITIONS.

FUND FACTS
GOAL: to provide returns that correspond to
those of the S&P 500 Index
START DATE: August 27, 1992
SIZE: as of December 31,1996, more than
$823 million
MANAGER: Jennifer Farrelly, since 1994; joined
Fidelity in 1988
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO
INVESTMENTS DECEMBER 31, 1996

Showing Percentage of Total Value of Investment in Securities

COMMON STOCKS - 89.7%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 1.7%
AEROSPACE & DEFENSE - 1.4%
Boeing Co. 47,109 $ 5,011,220
Lockheed Martin Corp. 26,393 2,414,960
McDonnell Douglas Corp. 28,400 1,817,600
Northrop Grumman Corp. 7,500 620,625
Rockwell International Corp. 28,800 1,753,200
11,617,605
DEFENSE ELECTRONICS - 0.2%
Raytheon Co. 31,000 1,491,875
SHIP BUILDING & REPAIR - 0.1%
General Dynamics Corp. 8,200 578,100
Newport News Shipbuilding, Inc. (a) 4,480 67,200
645,300
TOTAL AEROSPACE & DEFENSE 13,754,780
BASIC INDUSTRIES - 5.3%
CHEMICALS & PLASTICS - 2.7%
Air Products & Chemicals, Inc. 14,600 1,009,225
Avery Dennison Corp. 13,600 481,100
Dow Chemical Co. 32,200 2,523,675
du Pont (E.I.) de Nemours & Co. 73,700 6,955,438
Eastman Chemical Co. 10,375 573,219
Engelhard Corp. 19,000 363,375
FMC Corp. (a) 4,800 336,600
Goodrich (B.F.) Co. 7,100 287,550
Grace (WR) & Co. 11,500 595,125
Great Lakes Chemical Corp. 8,300 388,025
Hercules, Inc. 14,000 605,500
Monsanto Co. 77,000 2,993,375
Morton International, Inc. 18,800 766,100
Nalco Chemical Co. 8,900 321,513
PPG Industries, Inc. 24,600 1,380,675
Praxair, Inc. 20,400 940,950
Raychem Corp. 5,800 464,725
Rohm & Haas Co. 8,500 693,813
Union Carbide Corp. 17,100 698,963
22,378,946
IRON & STEEL - 0.2%
Allegheny Teledyne, Inc. 22,784 524,032
Armco, Inc. (a) 14,100 58,163
Bethlehem Steel Corp. (a) 14,500 130,500
Inland Steel Industries, Inc. 6,300 126,000
Nucor Corp. 11,600 591,600
USX-U.S. Steel Group 11,000 345,125
Worthington Industries, Inc. 11,850 214,781
1,990,201
METALS & MINING - 0.7%
ASARCO, Inc. 5,700 141,788
Alcan Aluminium Ltd. 29,657 1,000,574
Aluminum Co. of America 22,800 1,453,500
Cyprus Amax Minerals Co. 12,350 288,681
Freeport-McMoRan Copper &
Gold, Inc. Class B 25,600 764,800
Inco Ltd. 22,036 703,268
Phelps Dodge Corp. 8,700 587,250
Reynolds Metals Co. 8,300 467,913
5,407,774
PACKAGING & CONTAINERS - 0.4%
Ball Corp. 4,039 105,011
Bemis Co., Inc. 7,000 258,125
Corning, Inc. 30,200 1,396,750

SHARES VALUE (NOTE 1)
Crown Cork & Seal Co., Inc. 16,900 $ 918,938
Tupperware Corp. 8,100 434,363
3,113,187
PAPER & FOREST PRODUCTS - 1.3%
Boise Cascade Corp. 6,300 200,025
Champion International Corp. 12,600 544,950
Georgia-Pacific Corp. 12,100 871,200
International Paper Co. 39,500 1,594,813
James River Corp. 11,100 367,688
Kimberly-Clark Corp. 37,116 3,535,299
Louisiana-Pacific Corp. 14,200 299,975
Mead Corp. 6,800 395,250
Potlatch Corp. 3,700 159,100
Stone Container Corp. 13,100 194,863
Temple-Inland, Inc. 7,200 389,700
Union Camp Corp. 9,100 434,525
Westvaco Corp. 13,450 386,688
Weyerhaeuser Co. 26,000 1,231,750
Willamette Industries, Inc. 7,200 501,300
11,107,126
TOTAL BASIC INDUSTRIES 43,997,234
CONGLOMERATES - 1.0%
AlliedSignal, Inc. 37,100 2,485,700
Crane Co. 6,000 174,000
Harris Corp. 5,200 356,850
ITT Industries, Inc. 15,400 377,300
Textron, Inc. 10,700 1,008,475
Tyco International Ltd. 20,000 1,057,500
United Technologies Corp. 32,200 2,125,200
Whitman Corp. 13,900 317,963
7,902,988
CONSTRUCTION & REAL ESTATE - 0.4%
BUILDING MATERIALS - 0.2%
Armstrong World Industries, Inc. 4,700 326,650
Masco Corp. 21,200 763,200
Owens-Corning 6,700 285,588
Sherwin-Williams Co. 11,200 627,200
2,002,638
CONSTRUCTION - 0.1%
Centex Corp. 3,800 142,975
Fleetwood Enterprises, Inc. 4,600 126,500
Kaufman & Broad Home Corp. 5,200 66,950
Pulte Corp. 3,200 98,400
434,825
ENGINEERING - 0.1%
EG&G, Inc. 6,300 126,788
Fluor Corp. 10,900 683,975
Foster Wheeler Corp. 5,400 200,475
1,011,238
TOTAL CONSTRUCTION & REAL ESTATE 3,448,701
DURABLES - 3.7%
AUTOS, TIRES, & ACCESSORIES - 2.4%
AutoZone, Inc. 20,250 556,875
Chrysler Corp. 95,700 3,158,100
Cooper Tire & Rubber Co. 11,100 219,225
Cummins Engine Co., Inc. 5,300 243,800
Dana Corp. 13,300 433,913
Eaton Corp. 10,300 718,425
Echlin, Inc. 8,000 253,000
Ford Motor Co. 155,400 4,953,375
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
DURABLES - CONTINUED
AUTOS, TIRES, & ACCESSORIES - CONTINUED
General Motors Corp. 99,478 $ 5,545,899
Genuine Parts Co. 16,000 712,000
Goodyear Tire & Rubber Co. 20,500 1,053,188
Johnson Controls, Inc. 5,500 455,813
NACCO Industries, Inc. Class A 1,100 58,850
Navistar International Corp. (a) 9,970 90,976
PACCAR, Inc. 5,045 343,060
Pep Boys-Manny, Moe & Jack 8,100 249,075
Snap-on Tools Corp. 8,100 288,563
TRW, Inc. 16,800 831,600
20,165,737
CONSUMER DURABLES - 0.6%
Minnesota Mining & Manufacturing Co. 55,200 4,574,700
CONSUMER ELECTRONICS - 0.2%
Black & Decker Corp. 11,600 349,450
Maytag Co. 13,400 264,650
Newell Co. 20,800 655,200
Whirlpool Corp. 9,700 452,263
1,721,563
TEXTILES & APPAREL - 0.5%
Fruit of the Loom, Inc. Class A (a) 10,100 382,538
Liz Claiborne, Inc. 9,700 374,663
NIKE, Inc. Class B 37,800 2,258,550
Reebok International Ltd. 7,300 306,600
Russell Corp. 5,000 148,750
Springs Industries, Inc. Class A 2,700 116,100
Stride Rite Corp. 6,600 66,000
VF Corp. 8,300 560,250
4,213,451
TOTAL DURABLES 30,675,451
ENERGY - 8.2%
ENERGY SERVICES - 0.8%
Baker Hughes, Inc. 19,100 658,950
Dresser Industries, Inc. 23,600 731,600
Halliburton Co. 16,500 994,125
Helmerich & Payne, Inc. 3,200 166,800
McDermott International, Inc. 7,100 118,038
Rowan Companies, Inc. (a) 11,100 251,138
Schlumberger Ltd. 32,300 3,225,963
Western Atlas, Inc. (a) 7,100 503,213
6,649,827
OIL & GAS - 7.4%
Amerada Hess Corp. 12,300 711,863
Amoco Corp. 65,300 5,256,650
Ashland, Inc. 8,400 368,550
Atlantic Richfield Co. 21,200 2,809,000
Burlington Resources, Inc. 16,400 826,150
Chevron Corp. 85,900 5,583,500
Coastal Corp. (The) 13,800 674,475
Exxon Corp. 163,200 15,993,600
Kerr-McGee Corp. 6,400 460,800
Louisiana Land & Exploration Co. 4,400 235,950
Mobil Corp. 51,700 6,320,325
Occidental Petroleum Corp. 42,400 991,100
Oryx Energy Co. (a) 13,700 339,075
Pennzoil Co. 6,200 350,300
Phillips Petroleum Co. 34,600 1,531,050
Royal Dutch Petroleum Co. ADR 70,400 12,020,800

SHARES VALUE (NOTE 1)
Santa Fe Energy Resources, Inc. (a) 12,000 $ 166,500
Sun Co., Inc. 9,800 238,875
Texaco, Inc. 34,800 3,414,750
USX-Marathon Group 37,700 900,088
Union Pacific Resources Group, Inc. 32,712 956,826
Unocal Corp. 32,722 1,329,331
61,479,558
TOTAL ENERGY 68,129,385
FINANCE - 13.1%
BANKS - 6.7%
Banc One Corp. 57,326 2,465,018
Bank of Boston Corp. 20,091 1,290,847
Bank of New York Co., Inc. 45,000 1,518,750
BankAmerica Corp. 47,400 4,728,150
Bankers Trust New York Corp. 10,600 914,250
Barnett Banks, Inc. 25,300 1,040,463
Boatmen's Bancshares, Inc. 20,700 1,335,150
Chase Manhattan Corp. 57,273 5,111,615
Citicorp 63,262 6,515,986
Comerica, Inc. 15,200 796,100
CoreStates Financial Corp. 29,200 1,514,750
Fifth Third Bancorp 14,000 879,375
First Bank System, Inc. 18,600 1,269,450
First Union Corp. 36,442 2,696,550
Fleet Financial Group, Inc. 34,574 1,724,378
KeyCorp. 30,207 1,525,454
Mellon Bank Corp. 17,200 1,221,200
Morgan (J.P.) & Co., Inc. 24,600 2,401,575
National City Corp. 29,255 1,312,818
NationsBank Corp. 38,217 3,735,712
Norwest Corp. 48,800 2,122,800
PNC Financial Corp. 44,900 1,689,363
Republic New York Corp. 7,200 587,700
SunTrust Banks, Inc. 29,400 1,447,950
U.S. Bancorp 20,400 916,725
Wachovia Corp. 22,000 1,243,000
Wells Fargo & Co. 12,300 3,317,925
55,323,054
CREDIT & OTHER FINANCE - 1.2%
American Express Co. 32,979 1,863,314
Beneficial Corp. 7,100 449,963
Dean Witter, Discover & Co. 21,658 1,434,843
First Chicago NBD Corp. 41,559 2,233,796
Green Tree Financial Corp. 18,100 699,113
Household International, Inc. 12,810 1,181,723
MBNA Corp. 29,200 1,211,800
Transamerica Corp. 8,629 681,691
9,756,243
FEDERAL SPONSORED CREDIT - 0.9%
Federal Home Loan Mortgage Corporation 23,600 2,598,950
Federal National Mortgage Association 143,500 5,345,375
7,944,325
INSURANCE - 3.7%
Aetna, Inc. 19,900 1,592,000
Alexander & Alexander Services, Inc. 6,000 104,250
Allstate Corp. 58,421 3,381,115
American General Corp. 26,800 1,095,450
American International Group, Inc. 61,675 6,676,319
Aon Corp. 14,100 875,963
CIGNA Corp. 9,900 1,352,588
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
INSURANCE - CONTINUED
Chubb Corp. (The) 23,000 $ 1,236,250
General Re Corp. 10,800 1,703,700
ITT Hartford Group, Inc. 15,500 1,046,250
Jefferson Pilot Corp. 9,300 526,613
Lincoln National Corp. 13,800 724,500
Loews Corp. 15,200 1,432,600
MGIC Investment Corp. 7,800 592,800
Marsh & McLennan Companies, Inc. 9,400 977,600
Providian Corp. 12,200 626,775
SAFECO Corp. 16,500 650,719
St. Paul Companies, Inc. (The) 11,100 650,738
Torchmark Corp. 9,500 479,750
Travelers Group, Inc. (The) 84,300 3,825,113
UNUM Corp. 9,700 700,825
USF&G Corp. 15,400 321,475
USLIFE Corp. 4,575 152,119
30,725,512
SAVINGS & LOANS - 0.2%
Ahmanson (H.F.) & Co. 14,000 455,000
Golden West Financial Corp. 7,500 473,438
Great Western Financial Corp. 17,950 520,550
1,448,988
SECURITIES INDUSTRY - 0.4%
Merrill Lynch & Co., Inc. 22,100 1,801,150
Morgan Stanley Group, Inc. 19,900 1,136,788
Salomon, Inc. 13,900 655,038
3,592,976
TOTAL FINANCE 108,791,098
HEALTH - 9.3%
DRUGS & PHARMACEUTICALS - 5.8%
ALZA Corp. Class A (a) 11,000 284,625
Allergan, Inc. 8,500 302,813
American Home Products Corp. 83,700 4,906,913
Amgen, Inc. (a) 34,700 1,886,813
Bristol-Myers Squibb Co. 66,000 7,177,500
Lilly (Eli) & Co. 71,996 5,255,708
Merck & Co., Inc. 160,000 12,680,000
Pfizer, Inc. 84,400 6,994,650
Pharmacia & Upjohn, Inc. 66,760 2,645,365
Schering-Plough Corp. 48,700 3,153,325
Sigma Aldrich Corp. 6,500 405,844
Warner-Lambert Co. 35,600 2,670,000
48,363,556
MEDICAL EQUIPMENT & SUPPLIES - 2.8%
Abbott Laboratories 102,700 5,212,025
Bard (C.R.), Inc. 7,400 207,200
Bausch & Lomb, Inc. 7,500 262,500
Baxter International, Inc. 35,900 1,471,900
Becton, Dickinson & Co. 16,300 707,013
Biomet, Inc. 15,200 229,900
Boston Scientific Corp. (a) 23,200 1,392,000
Guidant Corp. 9,700 552,900
Johnson & Johnson 175,300 8,721,175
Mallinckrodt, Inc. 9,800 432,425
Medtronic, Inc. 31,400 2,135,200
Millipore Corp. 5,600 231,700

SHARES VALUE (NOTE 1)
Pall Corp. 15,100 $ 385,050
St. Jude Medical, Inc. (a) 10,550 449,694
U.S. Surgical Corp. 8,200 322,875
22,713,557
MEDICAL FACILITIES MANAGEMENT - 0.7%
Beverly Enterprises, Inc. (a) 13,100 167,025
Columbia/HCA Healthcare Corp. 88,112 3,590,564
Humana, Inc. (a) 21,300 407,363
Manor Care, Inc. 8,200 221,400
Tenet Healthcare Corp. (a) 28,500 623,438
United HealthCare Corp. 24,100 1,084,500
6,094,290
TOTAL HEALTH 77,171,403
HOLDING COMPANIES - 0.3%
CINergy Corp. 20,813 694,634
Norfolk Southern Corp. 16,500 1,443,750
2,138,384
INDUSTRIAL MACHINERY & EQUIPMENT - 5.0%
ELECTRICAL EQUIPMENT - 3.4%
Emerson Electric Co. 29,400 2,844,450
General Electric Co. 217,200 21,475,650
General Instrument Corp. (a) 18,100 391,413
General Signal Corp. 6,600 282,150
Grainger (W.W.), Inc. 6,800 545,700
Honeywell, Inc. 16,700 1,098,025
Scientific-Atlanta, Inc. 10,000 150,000
Westinghouse Electric Corp. 81,650 1,622,794
28,410,182
INDUSTRIAL MACHINERY & EQUIPMENT - 1.2%
Briggs & Stratton Corp. 3,900 171,600
Case Corp. 5,900 321,550
Caterpillar, Inc. 25,300 1,903,825
Cincinnati Milacron, Inc. 5,300 115,938
Cooper Industries, Inc. 14,246 600,113
Deere & Co. 33,900 1,377,188
Dover Corp. 14,900 748,725
Giddings & Lewis, Inc. 4,600 59,225
Harnischfeger Industries, Inc. 6,100 293,563
Illinois Tool Works, Inc. 16,000 1,278,000
Ingersoll-Rand Co. 14,300 636,350
Parker-Hannifin Corp. 9,850 381,688
Stanley Works (The) 11,600 313,200
TRINOVA Corp. 3,800 138,225
Tenneco, Inc. 22,400 1,010,800
Timken Co. 4,246 194,785
9,544,775
POLLUTION CONTROL - 0.4%
Browning-Ferris Industries, Inc. 28,000 735,000
Laidlaw, Inc. Class B 41,200 479,367
Safety Kleen Corp. 7,700 126,088
WMX Technologies, Inc. 64,500 2,104,313
3,444,768
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 41,399,725
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - 3.5%
BROADCASTING - 0.5%
TCI Group Class A 85,900 $ 1,122,069
TCI Satellite Entertainment, Inc.
Class A (a) 8,590 84,826
Time Warner, Inc. 74,992 2,812,180
4,019,075
ENTERTAINMENT - 1.0%
Disney (Walt) Co. 89,100 6,203,588
King World Productions, Inc. (a) 5,000 184,375
Viacom, Inc. Class B (non-vtg.) (a) 46,800 1,632,150
8,020,113
LEISURE DURABLES & TOYS - 0.2%
Brunswick Corp. 13,000 312,000
Hasbro, Inc. 11,400 443,175
Mattel, Inc. 35,876 995,559
1,750,734
LODGING & GAMING - 0.4%
HFS, Inc. (a) 16,300 973,925
Harrah's Entertainment, Inc. (a) 13,600 270,300
Hilton Hotels Corp. 32,400 846,450
ITT Corp. 15,300 663,638
Marriott International, Inc. 16,900 933,725
3,688,038
PUBLISHING - 0.8%
American Greetings Corp. Class A 9,900 280,913
Cognizant Corp. (a) 22,300 735,900
Dow Jones & Co., Inc. 12,700 430,213
Dun & Bradstreet Corp. 22,400 532,000
Gannett Co., Inc. 18,600 1,392,675
Harcourt General, Inc. 9,500 438,188
Knight-Ridder, Inc. 12,700 485,775
McGraw-Hill, Inc. 13,000 599,625
Meredith Corp. 3,600 189,900
New York Times Co. (The) Class A 12,900 490,200
Times Mirror Co. Class A 13,600 676,600
Tribune Co. 8,100 638,888
6,890,877
RESTAURANTS - 0.6%
Darden Restaurants, Inc. 20,800 182,000
McDonald's Corp. 92,000 4,163,000
Wendy's International, Inc. 17,000 348,500
4,693,500
TOTAL MEDIA & LEISURE 29,062,337
NONDURABLES - 10.3%
AGRICULTURE - 0.1%
Pioneer Hi-Bred International, Inc. 10,900 763,000
BEVERAGES - 3.4%
Anheuser-Busch Companies, Inc. 65,100 2,604,000
Brown-Forman Corp. Class B 9,000 411,750
Coca-Cola Co. (The) 327,700 17,245,213
Coors (Adolph) Co. Class B 5,100 96,900
PepsiCo, Inc. 205,900 6,022,575
Seagram Co. Ltd. 49,300 1,950,998
28,331,436

SHARES VALUE (NOTE 1)
FOODS - 2.2%
Archer-Daniels-Midland Co. 71,854 $ 1,580,788
CPC International, Inc. 19,100 1,480,250
Campbell Soup Co. 30,800 2,471,700
ConAgra, Inc. 31,900 1,587,025
General Mills, Inc. 21,000 1,330,875
Heinz (H.J.) Co. 48,550 1,735,663
Hershey Foods Corp. 20,300 888,125
Kellogg Co. 27,900 1,830,938
Quaker Oats Co. 17,900 682,438
Ralston Purina Group 14,000 1,027,250
Sara Lee Corp. 63,900 2,380,275
Sysco Corp. 23,900 779,738
Wrigley (Wm.) Jr. Company 15,200 855,000
18,630,065
HOUSEHOLD PRODUCTS - 2.9%
Alberto Culver Co. Class B 3,600 172,800
Avon Products, Inc. 17,400 993,975
Clorox Co. 6,700 672,513
Colgate-Palmolive Co. 19,400 1,789,650
Gillette Co. 72,400 5,629,100
International Flavors & Fragrances, Inc. 14,600 657,000
Procter & Gamble Co. 90,200 9,696,500
Rubbermaid, Inc. 19,600 445,900
Unilever NV ADR 21,100 3,697,775
23,755,213
TOBACCO - 1.7%
American Brands, Inc. 22,500 1,116,563
Philip Morris Companies, Inc. 107,700 12,129,713
UST, Inc. 24,800 802,900
14,049,176
TOTAL NONDURABLES 85,528,890
PRECIOUS METALS - 0.4%
Barrick Gold Corp. 46,900 1,342,835
Battle Mountain Gold Co. 29,600 203,500
Echo Bay Mines Ltd. 18,400 122,143
Homestake Mining Co. 19,200 273,600
Newmont Mining Corp. 13,024 582,824
Placer Dome, Inc. 31,400 688,310
Santa Fe Pacific Gold Corp. 17,220 264,758
3,477,970
RETAIL & WHOLESALE - 3.9%
APPAREL STORES - 0.3%
Charming Shoppes, Inc. (a) 13,700 69,356
Gap, Inc. 37,800 1,138,725
Limited, Inc. (The) 35,519 652,662
TJX Companies, Inc. 9,500 450,063
2,310,806
DRUG STORES - 0.3%
CVS Corp. 13,800 570,975
Long Drug Stores, Inc. 2,700 132,638
Rite Aid Corp. 11,100 441,225
Walgreen Co. 32,300 1,292,000
2,436,838
GENERAL MERCHANDISE STORES - 2.0%
Dayton Hudson Corp. 28,500 1,118,625
Dillard Department Stores, Inc. Class A 15,000 463,125
Federated Department Stores, Inc. (a) 27,400 935,025
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
GENERAL MERCHANDISE STORES - CONTINUED
K mart Corp. 64,000 $ 664,000
May Department Stores Co. (The) 32,900 1,538,075
Mercantile Stores Co., Inc. 4,900 241,938
Nordstrom, Inc. 10,600 375,638
Penney (J.C.) Co., Inc. 29,500 1,438,125
Price/Costco, Inc. (a) 25,839 649,205
Sears, Roebuck & Co. 51,400 2,370,825
Wal-Mart Stores, Inc. 301,600 6,899,100
Woolworth Corp. (a) 17,400 380,625
17,074,306
GROCERY STORES - 0.5%
Albertson's, Inc. 33,200 1,182,750
American Stores Co. 19,100 780,713
Fleming Companies, Inc. 4,973 85,784
Giant Food, Inc. Class A 7,900 272,550
Great Atlantic & Pacific Tea Co., Inc. 5,100 162,563
Kroger Co. (The) (a) 16,600 771,900
Supervalu, Inc. 8,800 249,700
Winn-Dixie Stores, Inc. 20,000 632,500
4,138,460
RETAIL & WHOLESALE, MISCELLANEOUS - 0.8%
Circuit City Stores, Inc. 12,800 385,600
Comcast Corp. Class A special 43,050 766,828
Home Depot, Inc. (The) 62,900 3,152,863
Lowe's Companies, Inc. 22,700 805,850
Tandy Corp. 7,900 347,600
Toys "R" Us, Inc. (a) 35,900 1,077,000
6,535,741
TOTAL RETAIL & WHOLESALE 32,496,151
SERVICES - 0.6%
ADVERTISING - 0.1%
Interpublic Group of Companies, Inc. 10,800 513,000
LEASING & RENTAL - 0.0%
Ryder Systems, Inc. 10,600 298,125
PRINTING - 0.3%
Alco Standard Corp. 17,200 887,950
Deluxe Corp. 10,900 356,975
Donnelley (R.R.) & Sons Co. 20,200 633,775
Harland (John H.) Co. 4,100 135,300
Moore Corporation Ltd. 13,200 273,465
2,287,465
SERVICES - 0.2%
Block (H&R), Inc. 13,500 391,500
Ecolab, Inc. 8,400 316,050
Jostens, Inc. 5,000 105,625
National Service Industries, Inc. 6,300 235,463
Service Corp. International 30,900 865,200
1,913,838
TOTAL SERVICES 5,012,428
TECHNOLOGY - 12.3%
COMMUNICATIONS EQUIPMENT - 1.8%
Andrew Corp. (a) 7,875 417,867
Cabletron Systems, Inc. (a) 19,800 658,350
Cisco Systems, Inc. (a) 85,200 5,420,850
DSC Communications Corp. (a) 15,400 275,275
Lucent Technologies, Inc. 83,784 3,875,010

SHARES VALUE (NOTE 1)
Northern Telecom Ltd. 33,900 $ 2,106,926
Tellabs, Inc. (a) 23,500 884,188
3Com Corp. (a) 22,100 1,621,588
15,260,054
COMPUTER SERVICES & SOFTWARE - 3.1%
Autodesk, Inc. 6,100 170,800
Automatic Data Processing, Inc. 38,000 1,629,250
CUC International, Inc. (a) 51,675 1,227,281
Ceridian Corp. (a) 8,900 360,450
Computer Associates International, Inc. 47,975 2,386,756
Computer Sciences Corp. (a) 9,800 804,825
First Data Corp. 58,800 2,146,200
Microsoft Corp. (a) 157,200 12,988,650
Novell, Inc. (a) 46,500 440,297
Oracle Corp. (a) 86,100 3,594,675
Shared Medical Systems Corp. 3,000 147,750
25,896,934
COMPUTERS & OFFICE EQUIPMENT - 3.7%
Amdahl Corp. (a) 15,800 191,575
Apple Computer, Inc. 16,300 340,263
Bay Networks, Inc. (a) 24,800 517,700
Compaq Computer Corp. (a) 35,500 2,635,875
Data General Corp. (a) 5,200 75,400
Dell Computer Corp. (a) 23,800 1,264,375
Digital Equipment Corp. (a) 20,500 745,688
EMC Corp. (a) 30,500 1,010,313
Hewlett-Packard Co. 134,500 6,758,625
Intergraph Corp. (a) 6,100 62,525
International Business Machines Corp. 69,300 10,464,300
Pitney Bowes, Inc. 19,700 1,073,650
Seagate Technology (a) 32,200 1,271,900
Silicon Graphics, Inc. (a) 22,700 578,850
Sun Microsystems, Inc. (a) 48,600 1,248,413
Tandem Computers, Inc. (a) 15,400 211,750
Unisys Corp. (a) 22,700 153,225
Xerox Corp. 42,800 2,252,350
30,856,777
ELECTRONIC INSTRUMENTS - 0.3%
Applied Materials, Inc. (a) 23,500 844,531
Perkin-Elmer Corp. 5,800 341,475
Tektronix, Inc. 4,400 225,500
Thermo Electron Corp. 20,100 829,068
2,240,574
ELECTRONICS - 2.9%
AMP, Inc. 28,796 1,105,047
Advanced Micro Devices, Inc. (a) 17,700 455,775
Intel Corp. 108,200 14,167,438
LSI Logic Corp. (a) 16,900 452,075
Micron Technology, Inc. 27,500 800,938
Motorola, Inc. 78,000 4,787,250
National Semiconductor Corp. (a) 18,100 441,188
Texas Instruments, Inc. 25,000 1,593,750
Thomas & Betts Corp. 5,300 235,188
24,038,649
PHOTOGRAPHIC EQUIPMENT - 0.5%
Eastman Kodak Co. 44,200 3,547,050
Polaroid Corp. 5,900 256,650
3,803,700
TOTAL TECHNOLOGY 102,096,688
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TRANSPORTATION - 1.1%
AIR TRANSPORTATION - 0.3%
AMR Corp. (a) 11,900 $ 1,048,688
Delta Air Lines, Inc. 10,300 730,013
Southwest Airlines Co. 19,100 422,588
USAir Group, Inc. (a) 8,300 194,013
2,395,302
RAILROADS - 0.7%
Burlington Northern Santa Fe Corp. 20,218 1,746,330
CSX Corp. 27,738 1,171,931
Conrail, Inc. 10,600 1,056,025
Union Pacific Corp. 32,100 1,930,013
5,904,299
TRUCKING & FREIGHT - 0.1%
Caliber System, Inc. 5,200 100,100
Consolidated Freightways Corp. (a) 2,850 25,294
Consolidated Freightways, Inc. 5,700 126,825
Federal Express Corp. (a) 14,900 663,050
915,269
TOTAL TRANSPORTATION 9,214,870
UTILITIES - 9.6%
CELLULAR - 0.2%
AirTouch Communications, Inc. (a) 65,700 1,658,925
ELECTRIC UTILITY - 2.5%
American Electric Power Co., Inc. 24,700 1,015,788
Baltimore Gas & Electric Co. 19,500 521,625
Carolina Power & Light Co. 19,900 726,350
Central & South West Corp. 27,700 709,813
Consolidated Edison Co. of New York, Inc. 30,800 900,900
DTE Energy Co. 19,000 615,125
Dominion Resources, Inc. 23,300 897,050
Duke Power Co. 26,600 1,230,250
Edison International 57,700 1,146,788
Entergy Corp. 29,900 829,725
FPL Group, Inc. 24,200 1,113,200
GPU, Inc. 15,900 534,638
Houston Industries, Inc. 32,800 742,100
Niagara Mohawk Power Corp. 19,000 187,625
Northern States Power Co. 9,100 417,463
Ohio Edison Co. 20,000 455,000
PECO Energy Co. 29,200 737,300
PP&L Resources, Inc. 21,300 489,900
Pacific Gas & Electric Co. 54,700 1,148,700
PacifiCorp. 38,600 791,300
Public Service Enterprise Group, Inc. 32,200 877,450
Southern Co. 88,500 2,002,313
Texas Utilities Co. 29,600 1,206,200
Unicom Corp. 28,400 770,350
Union Electric Co. 13,500 519,750
20,586,703
GAS - 0.8%
Columbia Gas System, Inc. (The) 7,300 464,463
Consolidated Natural Gas Co. 12,500 690,625
ENSERCH Corp. 9,000 207,000
Eastern Enterprises Co. 2,600 91,975
El Paso Natural Gas Co. 2,083 105,192
Enron Corp. 33,300 1,436,063
NICOR, Inc. 6,500 232,375
Noram Energy Corp. 18,157 279,441
ONEOK, Inc. 3,500 105,000
Pacific Enterprises 11,100 337,163
PanEnergy Corp. 19,900 895,500

SHARES VALUE (NOTE 1)
Peoples Energy Corp. 4,500 $ 152,438
Sonat, Inc. 11,400 587,100
Williams Companies, Inc. 20,550 770,625
6,354,960
TELEPHONE SERVICES - 6.1%
ALLTEL Corp. 25,000 784,375
AT&T Corp. 211,900 9,217,650
Ameritech Corp. 72,200 4,377,125
Bell Atlantic Corp. 57,500 3,723,125
BellSouth Corp. 130,600 5,272,975
Frontier Corp. 21,800 493,225
GTE Corp. 127,300 5,792,150
MCI Communications Corp. 90,500 2,958,219
NYNEX Corp. 57,700 2,776,813
Pacific Telesis Group 56,400 2,072,700
SBC Communications, Inc. 80,200 4,150,350
Sprint Corp. 56,700 2,260,913
U.S. West, Inc. (a) 62,700 2,022,075
U.S. West, Inc. (Media Group) (a) 82,200 1,520,700
WorldCom, Inc. (a) 111,100 2,895,544
50,317,939
TOTAL UTILITIES 78,918,527
TOTAL COMMON STOCKS
(Cost $648,485,937) 743,217,010
U.S. TREASURY OBLIGATIONS - 0.5%
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (A) AMOUNT (NOTE 1)
U.S. Treasury Bills, yields at date
of purchase 5.06% to 5.40%,
3/6/97 (b)
(Cost $4,122,570) $ 4,200,000 4,163,460
CASH EQUIVALENTS - 9.8%
MATURITY VALUE
AMOUNT (NOTE 1)
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 6.75%, dated
12/31/96 due 1/2/97 $ 81,298,476 81,268,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $733,876,507) $ 828,648,470
FUTURES CONTRACTS
EXPIRATION UNDERLYING FACE UNREALIZED
DATE AMOUNT AT VALUE GAIN/(LOSS)
PURCHASED
214 S&P 500 Index Contracts Mar. 1997 $ 79,661,500 $ (865,578)
THE FACE VALUE OF FUTURES PURCHASED AS A PERCENTAGE OF TOTAL INVESTMENT IN
SECURITIES - 9.6%
LEGEND
1. Non-income producing
2. Security pledged to cover margin requirements for futures contracts. At
the period end, the value of securities pledged amounted to $4,163,460.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $498,627,105 and $60,621,879, respectively.
The market value of futures contracts opened and closed during the period
amounted to $629,542,879 and $580,149,403, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company. The
commissions paid to these affiliated firms were $374 for the period (see
Note 4 of Notes to Financial Statements).
The fund participated in the interfund lending program as a lender. The
maximum loan and average daily balances during the period for which loans
were outstanding amounted to $15,966,000 and $10,572,000, respectively. The
weighted average interest rate was 5.42% (see Note 2 of Notes to Financial
Statements).
INCOME TAX INFORMATION
At December 31, 1996, the aggregate cost of investment securities for
income tax purposes was $733,876,507. Net unrealized appreciation
aggregated $94,771,963, of which $108,388,822 related to appreciated
investment securities and $13,616,859 related to depreciated investment
securities.
The fund hereby designates approximately $13,962,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND II: INDEX 500 PORTFOLIO
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES

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DECEMBER 31, 1996

ASSETS

Investment in securities, at value (including repurchase agreements of $81,268,000) (cost $733,876,507) - $ 828,648,470
See accompanying schedule

Cash 359

Receivable for investments sold 28,659,261

Receivable for fund shares sold 3,319,301

Dividends receivable 1,274,804

Other receivables 146

TOTAL ASSETS 861,902,341

LIABILITIES

Payable for investments purchased $ 33,566,854

Payable for fund shares redeemed 3,271,797

Accrued management fee 87,009

Payable for daily variation on 1,635,565
futures contracts

Other payables and 98,431
accrued expenses

TOTAL LIABILITIES 38,659,656

NET ASSETS $ 823,242,685

Net Assets consist of:

Paid in capital $ 695,721,458

Undistributed net investment income 10,839,163

Accumulated undistributed net realized gain (loss) on investments and foreign currency transactions 22,775,719

Net unrealized appreciation (depreciation) on investments 93,906,345
and assets and liabilities in
foreign currencies

NET ASSETS, for 9,244,289 $ 823,242,685
shares outstanding

NET ASSET VALUE, offering price $89.05
and redemption price per share ($823,242,685 (divided by) 9,244,289 shares)

</TABLE>

STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996

INVESTMENT INCOME $ 9,687,701
Dividends

Interest 2,483,300

TOTAL INCOME 12,171,001

EXPENSES

Management fee $ 1,346,765

Transfer agent fees 371,637

Accounting fees and expenses 271,956

Non-interested trustees' compensation 2,347

Custodian fees and expenses 43,234

Registration fees 319

Audit 44,006

Legal 2,309

Miscellaneous 1,443

Total expenses before reductions 2,084,016

Expense reductions (751,964 1,332,052
)

NET INVESTMENT INCOME 10,838,949

REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:

Investment securities 16,384,201

Foreign currency transactions 124

Futures contracts 6,270,052 22,654,377

Change in net unrealized appreciation (depreciation) on:

Investment securities 68,765,773

Assets and liabilities in (57
foreign currencies )

Futures contracts (740,028 68,025,688
)

NET GAIN (LOSS) 90,680,065

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 101,519,014

OTHER INFORMATION $ 313
Expense reductions
Directed brokerage arrangements

Custodian interest credits 1,380

Transfer agent interest credits 11,997

FMR reimbursement 738,274

$ 751,964

</TABLE>

STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1995

<TABLE>
<CAPTION>
<S> <C> <C>
Operations $ 10,838,949 $ 3,388,217
Net investment income

Net realized gain (loss) 22,654,377 8,859,319

Change in net unrealized appreciation (depreciation) 68,025,688 24,840,544

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 101,519,014 37,088,080

Distributions to shareholders (3,387,922) (1,038,071)
From net investment income

From net realized gain (8,711,800) (125,271)

In excess of net realized gain - (16,781)

TOTAL DISTRIBUTIONS (12,099,722) (1,180,123)

Share transactions 568,794,744 176,225,141
Net proceeds from sales of shares

Reinvestment of distributions 12,099,722 1,180,123

Cost of shares redeemed (92,770,768) (18,914,447)

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 488,123,698 158,490,817

TOTAL INCREASE (DECREASE) IN NET ASSETS 577,542,990 194,398,774

NET ASSETS

Beginning of period 245,699,695 51,300,921

End of period (including undistributed net investment income of $10,839,163 and $3,389,130,
respectively) $ 823,242,685 $ 245,699,695

OTHER INFORMATION
Shares

Sold 6,984,700 2,593,616

Issued in reinvestment of distributions 161,200 20,470

Redeemed (1,146,896) (281,351)

Net increase (decrease) 5,999,004 2,332,735

</TABLE>

<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.

</TABLE>

FINANCIAL HIGHLIGHTS

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<S> <C> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31, AUGUST 27, 1992
(COMMENCEMENT
OF
OPERATIONS) TO
DECEMBER 31,

SELECTED PER-SHARE DATA 1996 1995 1994 1993 D 1992

</TABLE>

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 75.71 $ 56.22 $ 55.74 $ 52.60 $ 50.00

Income from Investment Operations

Net investment income 1.04 .85 1.14 1.31 .44

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

Total from investment operations 16.59 20.57 .58 5.11 3.15

Less Distributions

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

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

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

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

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

TOTAL RETURN B, C 22.71% 37.19% 1.04% 9.74% 6.31%

RATIOS AND SUPPLEMENTAL DATA

Net assets, end of period (000 omitted) $ 823,243 $ 245,700 $ 51,301 $ 25,153 $ 17,961

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

Ratio of net investment income to average net assets 2.26% 2.70% 2.81% 2.65% 2.89% A

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

Average commission rate F $ .0315

A ANNUALIZED B TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT
ANNUALIZED. TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR
INSURANCE COMPANY'S
SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL
RETURNS SHOWN. C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN
EXPENSES NOT BEEN
REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS). D EFFECTIVE JANUARY 1, 1993, THE FUND ADOPTED STATEMENT
OF POSITION 93-2,
"DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF
INCOME, CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT
COMPANIES." AS A
RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT CERTAIN
RECLASSIFICATIONS RELATED TO BOOK TO TAX DIFFERENCES. E FMR AGREED TO
REIMBURSE A PORTION OF THE FUND'S
EXPENSES DURING THE PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S
EXPENSE RATIO WOULD HAVE BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL
STATEMENTS). F FOR
FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS
REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR
SECURITY TRADES ON WHICH COMMISSIONS
ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND
TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS MARKETS
WHERE TRADING PRACTICES AND
COMMISSION RATE STRUCTURES MAY DIFFER.

</TABLE>

NOTES TO FINANCIAL STATEMENTS
For the period ended December 31, 1996

1. SIGNIFICANT ACCOUNTING POLICIES.
Index 500 Portfolio (the fund) is a fund of Variable Insurance Products
Fund 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. Shares of the fund may only be
purchased by insurance companies for the purpose of funding variable
annuity or variable life insurance contracts. The financial statements have
been prepared in conformity with generally accepted accounting principles
which permit management to make certain estimates and assumptions at the
date of the financial statements. The following summarizes the significant
accounting policies of the fund:
SECURITY VALUATION. Securities for which exchange quotations are readily
available are valued at the last sale price, or if no sale price, at the
closing bid price. Securities (including restricted securities) for which
exchange quotations are not readily available (and in certain cases debt
securities which trade on an exchange) are valued primarily using
dealer-supplied valuations or at their fair value as determined in good
faith under consistently applied procedures under the general supervision
of the Board of Trustees. Short-term securities with remaining maturities
of sixty days or less for which quotations are not readily available are
valued at amortized cost or original cost plus accrued interest, both of
which approximate current value.
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. Income receipts
and expense payments are translated into U.S. dollars at the prevailing
exchange rate on the respective dates of the transactions. Purchases and
sales of securities are translated into U.S. dollars at the contractual
currency exchange rates established at the time of each trade.
Net realized gains and losses on foreign currency transactions represent
net gains and losses from sales and maturities of forward currency
contracts, disposition of foreign currencies, and the difference between
the amount of net investment income accrued and the U.S. dollar amount
actually received. The effects of changes in foreign currency exchange
rates on investments in securities are included with the net realized and
unrealized gain or loss on investment securities.
INCOME TAXES. As a qualified regulated investment company under Subchapter
M of the Internal Revenue Code, the fund is not subject to income taxes to
the extent that it distributes substantially all of its taxable income for
its fiscal year. 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 between the
funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are recorded on the
ex-dividend date.
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 futures
and options transactions.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital and may
affect the per-share allocation between net investment income and realized
and unrealized gain (loss). 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. The cost of
the foreign currency contracts is included in the cost basis of the
associated investment.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the fund, along with other affiliated
entities of Fidelity Management & Research Company (FMR), may transfer
uninvested cash balances into one or more joint trading accounts. These
balances are invested in one or more repurchase agreements that mature in
60 days or less from the date of purchase 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
2. OPERATING POLICIES - CONTINUED
REPURCHASE AGREEMENTS - CONTINUED
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.
INTERFUND LENDING PROGRAM. Pursuant to an Exemptive Order issued by the
SEC, the fund, along with other registered investment companies having
management contracts with FMR, may participate in an interfund lending
program. This program provides an alternative credit facility allowing the
fund to borrow from, or lend money to, other participating funds.
Information regarding the fund's participation in the program is included
under the caption "Other Information" at the end of the fund's schedule of
investments.
FUTURES CONTRACTS. The fund may use futures contracts to manage its
exposure to the stock market and to fluctuations in interest rates and
currency values. Buying futures tends to increase the fund's exposure to
the underlying instrument, while selling futures tends to decrease the
fund's exposure to the underlying instrument or hedge other fund
investments. Futures contracts involve, to varying degrees, risk of loss in
excess of the futures variation margin reflected in the Statement of Assets
and Liabilities. The underlying face amount at value of any open futures
contracts at period end, is shown in the schedule of investments under the
caption "Futures Contracts." This amount reflects each contract's exposure
to the underlying instrument at period end. Losses may arise from changes
in the value of the underlying instruments, if there is an illiquid
secondary market for the contracts, or if the counterparties do not perform
under the contracts' terms. Futures contracts are valued at the settlement
price established each day by the board of trade or exchange on which they
are traded.
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities) and the market value of futures contracts opened and
closed, is included under the caption "Other Information" at the end of the
fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As the fund's investment adviser, FMR receives a fee that
is computed daily at an annual rate of .28% of the fund's average net
assets.
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations Company
(FIIOC), an affiliate of FMR, is the fund's transfer, dividend disbursing
and shareholder servicing agent. FIIOC receives account fees and
asset-based fees that vary according to account size and type of account.
FIIOC pays for typesetting, printing and mailing of all shareholder
reports, except proxy statements. For the period, the transfer agent fees
were equivalent to an annual rate of .08% of average net assets.
ACCOUNTING FEES. Fidelity Service Co. (FSC), 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.
BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms are shown under the caption
"Other Information" at the end of the fund's schedule of investments.
5. EXPENSE REDUCTIONS.
FMR voluntarily agreed to reimburse the fund's operating expenses
(excluding interest, taxes, brokerage commissions and extraordinary
expenses) above an annual rate of .28% of average net assets.
FMR has directed certain portfolio trades to brokers who paid a portion of
the fund's expenses. In addition, the fund has entered into arrangements
with its custodian and transfer agent whereby interest earned on uninvested
cash balances was used to offset a portion of the fund's expenses.
For the period, the reduction under these arrangements are shown under the
caption "Other Information" on the fund's Statement of Operations.
6. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investment Life Insurance Company (FILI)
and its subsidiaries, affiliates of FMR, were the record owners of
approximately 43% of the outstanding shares of the fund. In addition, one
unaffiliated insurance company was record owner of 10% or more of the total
outstanding shares of the fund, totaling 10%.
REPORT OF INDEPENDENT ACCOUNTANTS

To the Trustees of Variable Insurance Products Fund II and the Shareholders
of Index 500 Portfolio:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments, and the related statements of
operations and of changes in net assets and the financial highlights
present fairly, in all material respects, the financial position of Index
500 Portfolio (a fund of Variable Insurance Products Fund II) at December
31, 1996, the results of its operations for the year then ended, and the
changes in its net assets and the financial highlights for the periods
indicated in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to
as "financial statements") are the responsibility of the Index 500
Portfolio's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of
these financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1996 by correspondence with the
custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 10, 1997
DISTRIBUTIONS

The Board of Trustees of Index 500 Portfolio voted to pay on February 7,
1997, to shareholders of record at the opening of business on February 7,
1997, a distribution of $2.09 per share derived from capital gains realized
from sales of portfolio securities and a dividend of $1.03 per share from
net investment income.

INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
OFFICERS
Edward C. Johnson 3d, PRESIDENT
J. Gary Burkhead, SENIOR VICE PRESIDENT
Jennifer G. Farrelly, VICE PRESIDENT
William J. Hayes, VICE PRESIDENT
Arthur S. Loring, SECRETARY
Kenneth A. Rathgeber, TREASURER
Robert H. Morrison, MANAGER, SECURITY TRANSACTIONS
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
BOARD OF TRUSTEES
J. Gary Burkhead
Ralph F. Cox *
Phyllis Burke Davis *
Richard J. Flynn *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Edward H. Malone *
Marvin L. Mann *
Gerald C. McDonough *
Thomas R. Williams *
ADVISORY BOARD
William O. McCoy
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Investments Institutional Operations Co.
Boston, MA
CUSTODIAN
Brown Brothers Harriman & Co., Boston, MA
* INDEPENDENT TRUSTEES

(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS
FUND II: ASSET MANAGER PORTFOLIO

ANNUAL REPORT
DECEMBER 31, 1996
CONTENTS

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MARKET ENVIRONMENT 3 A review of what happened in world markets
during the last year.

PERFORMANCE 4 How the fund has done over time.

FUND TALK 5 The managers' review of fund performance, strategy
and outlook.

ADDITIONAL INTERVIEW ON POLICY CHANGES 7 A discussion of recent changes to
VIP II: Asset Manager

INVESTMENTS 8 A complete list of the fund's investments with their
market values.

FINANCIAL STATEMENTS 19 Statements of assets and liabilities, operations, and
changes in net assets, as well as financial highlights.

NOTES 21 Notes to the financial statements.

REPORT OF INDEPENDENT ACCOUNTANTS 24 The auditors' opinion.

DISTRIBUTIONS 25

</TABLE>

Most stock and bond markets posted positive returns in 1996, aided by
moderate growth and low inflation. Sustained corporate earnings growth and
a favorable interest rate environment also proved beneficial. Japan,
however, was the major exception as an underperforming stock market and a
weak yen undermined returns for U.S.-based investors. The strongest gains
came from the often-volatile emerging bond markets in 1996, while
performance of the bond markets of developed countries was mixed.
U.S. STOCK MARKETS
The Standard & Poor's 500 Index - a broad measure of U.S. stock market
performance - rose 22.96% for the 12 months that ended December 31, 1996,
well above the index's long-term average annual return of about 12%. The
Russell 2000 Index - a measure of small stock performance - rose 16.49%.
The Dow Jones Industrial Average - an index of 30 blue-chip stocks - posted
a return of 28.70%, closing above 6500 for the first time in November.
The U.S. stock market spent much of the past year breaking price and
trading volume records. Solid corporate earnings reports, large cash
inflows into mutual funds, widespread optimism and a generally favorable
interest rate environment propelled share prices higher.
Large-capitalization stocks thrived as investors sought their lower
volatility and higher degree of liquidity over smaller-cap stocks in an
environment where it was sometimes difficult to discern the health of the
economy.
Most industry sectors experienced positive, if not strong performance. At
mid-year, technology stocks suffered from a sell-off sparked by fears that
company earnings were weakening. Nevertheless, this sector proved to be the
strongest in the U.S. market in 1996. Earnings surprises and positive
earnings projections were the main drivers of solid performance, especially
among semiconductor manufacturers, companies that make disk drives and
monitors, and software firms. Even though consensus estimates pointed
toward increases in short-term interest rates by the Fed, financial stocks
- - usually sensitive to changes in interest rates - shrugged off this
concern and posted solid performance based on low interest rates and
positive business prospects. Energy stocks reaped the benefits of
higher-than-expected energy prices, which resulted in part from the delayed
re-entry of Iraq into the world market. Uncertainty over the direction of
the economy benefited consumer nondurables - such as food, beverage and
tobacco companies - health care and traditional big-name growth stocks, as
these companies tend to post steady earnings growth in many economic
environments.
Utilities stocks struggled in 1996 for two reasons. First, and most
important, uncertainty over the direction and form of deregulation in the
sector tended to diminish investor interest. Second, stocks in the sector
tend to move in concert with bonds, which lagged due to periodic inflation
fears and confusing economic signals. Stocks in the telecommunications
field especially were affected by uncertainty over legislation signed into
law in February 1996. Biotechnology issues had a hard time recovering from
a correction in stock prices from overvalued levels that they experienced
earlier in 1996. Cyclical stocks - those that usually rise and fall with
the economy - posted mixed results that largely depended on the outlook for
companies in the specific sector rather than the direction of the economy.
FOREIGN STOCK MARKETS
Foreign stock markets posted mixed results in 1996. The Morgan Stanley
Capital International (MSCI) EAFE Index - which measures stock performance
in Europe, Australia and the Far East - returned 6.05% in 1996. Europe
posted the most consistently strong equity markets due to stronger economic
growth, lower interest rates, higher corporate earnings, the relative
weakness of the continent's major currencies and a new emphasis on
shareholder friendliness by many of the region's corporations. The MSCI
Europe Index was up 21.09% in 1996. The Japanese stock market
underperformed on the weakness of the economic recovery and the uncertainty
for any substantial economic reform. The Tokyo Stock Exchange TOPIX Total
Return Index was off 16.26%. Emerging market equity performance ran the
gamut from negative to positive, with the MSCI Emerging Markets Free Index
returning 6.03% for 1996. While Hong Kong was a top performer - benefiting
from the rising value of the property sector, solid economic growth and
stable interest rates - other Asian markets posted mixed returns as
concerns rose over declining export growth in the region. Latin America
enjoyed a strong first half, but faded toward the end of 1996 due to low
domestic savings rates and inefficient governments, among other factors.
U.S. BOND MARKETS
Uncertainty over the direction of the economy led to mixed performance in
U.S. bond markets in 1996. For the year, the Lehman Brothers Aggregate Bond
Index - a broad measure of the performance of the U.S. taxable bond market
- - posted a total return of 3.63%. Stronger-than-expected economic signals
rattled the bond market in the early spring. Investors spent most of the
summer anticipating a short-term interest rate increase by the Federal
Reserve Board. However, the Fed neither raised nor lowered rates through
the end of 1996. Interest rates responded to the Fed's inaction by falling
during much of October and November. In December, though, bond prices
dropped due to inflation concerns, stronger-than-expected economic data and
comments by Fed Chairman Alan Greenspan that the stock markets may be
overvalued.
FOREIGN BOND MARKETS
While low inflation and moderate growth helped provide a positive backdrop
for most bond markets in 1996, performance in overseas bond markets was
mixed. The Salomon Brothers World Government Bond Index - a measure of
government bond market performance in developed nations - returned 3.62%
for the 12 months that ended December 31, 1996. In Europe, focus centered
on the continuing progress toward the European Monetary Union (EMU).
Attractive opportunities arose as countries worked to meet the requirements
for joining the EMU. However, Germany and Japan - two of the larger
components of the Salomon Brothers World Government Bond Index -
experienced currency problems that hurt returns. In stark contrast to the
developed world, the often-volatile emerging debt markets enjoyed a
particularly strong year, helped by inflows of foreign capital, low
interest rates and the implementation of country-specific reforms -
especially in Latin America. The J.P. Morgan Emerging Markets Bond Index -
of which Latin America is a large component - posted a return of 34.16%
during the period.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY

Asset Manager 14.60% 11.26% 11.69%

S&P 500 (registered trademark) 22.96% 15.22% 13.93%

AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what
would have happened if the fund had performed at a constant rate each year.
You can compare the fund's returns to those of the Standard & Poor's 500
Index - a widely recognized, unmanaged index of common stocks. This
benchmark reflects the reinvestment of dividends and capital gains, if any.

1989/09/30 10000.00 10000.00
10000.00
1989/10/31 10020.02 9768.00
10057.20
1989/11/30 10060.06 9967.27
10176.98
1989/12/31 10091.09 10206.48
10276.92
1990/01/31 9868.42 9521.63
10029.14
1990/02/28 9969.64 9644.46
10093.23
1990/03/31 10050.61 9900.03
10192.55
1990/04/30 9919.03 9652.53
10098.47
1990/05/31 10425.10 10593.65
10527.96
1990/06/30 10506.07 10521.62
10593.55
1990/07/31 10485.83 10487.95
10658.17
1990/08/31 10141.70 9539.84
10328.51
1990/09/30 9929.15 9075.25
10236.17
1990/10/31 9979.76 9036.22
10309.57
1990/11/30 10465.59 9619.96
10618.75
1990/12/31 10769.23 9888.36
10792.69
1991/01/31 11284.56 10319.49
10998.50
1991/02/28 11726.26 11057.34
11273.90
1991/03/31 11915.56 11324.93
11396.34
1991/04/30 12094.35 11352.11
11471.10
1991/05/31 12367.79 11842.52
11653.26
1991/06/30 12146.94 11300.13
11502.23
1991/07/31 12451.92 11826.72
11733.43
1991/08/31 12704.33 12107.01
11942.28
1991/09/30 12777.94 11904.82
11999.01
1991/10/31 12862.08 12064.35
12105.80
1991/11/30 12651.74 11578.15
12022.39
1991/12/31 13198.62 12902.69
12614.73
1992/01/31 13366.89 12662.70
12476.86
1992/02/29 13626.47 12827.32
12556.58
1992/03/31 13593.27 12577.19
12465.80
1992/04/30 13792.52 12946.96
12619.13
1992/05/31 13936.42 13010.40
12743.05
1992/06/30 13925.35 12816.54
12748.65
1992/07/31 14157.81 13340.74
13094.91
1992/08/31 14113.53 13067.25
13044.62
1992/09/30 14202.09 13221.45
13188.90
1992/10/31 14224.22 13267.72
13136.41
1992/11/30 14534.17 13720.15
13311.65
1992/12/31 14744.49 13888.91
13474.85
1993/01/31 15010.15 14005.57
13643.28
1993/02/28 15150.92 14196.05
13833.47
1993/03/31 15579.83 14495.59
13975.40
1993/04/30 15672.57 14144.79
13890.43
1993/05/31 15939.19 14523.87
14039.61
1993/06/30 16066.70 14565.99
14188.71
1993/07/31 16263.77 14507.73
14206.88
1993/08/31 16739.04 15057.57
14556.36
1993/09/30 16750.64 14941.63
14541.52
1993/10/31 17202.73 15250.92
14691.00
1993/11/30 17179.54 15106.04
14577.88
1993/12/31 17875.07 15288.82
14678.76
1994/01/31 18443.09 15808.64
14967.05
1994/02/28 17857.33 15380.23
14683.28
1994/03/31 17017.99 14709.65
14303.86
1994/04/30 17030.15 14897.93
14341.05
1994/05/31 17176.13 15142.26
14437.71
1994/06/30 16847.69 14771.27
14293.33
1994/07/31 17139.63 15255.77
14595.21
1994/08/31 17541.06 15881.26
14846.54
1994/09/30 17334.15 15492.17
14628.89
1994/10/31 17419.36 15840.74
14769.03
1994/11/30 17163.73 15263.82
14554.47
1994/12/31 16786.37 15490.18
14689.71
1995/01/31 16676.82 15891.84
14964.29
1995/02/28 16946.97 16511.15
15338.22
1995/03/31 17170.77 16998.39
15572.95
1995/04/30 17444.31 17498.99
15852.95
1995/05/31 17668.12 18198.43
16378.13
1995/06/30 17817.32 18621.18
16597.47
1995/07/31 18451.43 19238.66
16808.98
1995/08/31 18675.24 19286.95
16919.65
1995/09/30 18911.47 20100.85
17285.46
1995/10/31 18662.80 20029.09
17383.85
1995/11/30 19147.71 20908.37
17812.18
1995/12/31 19632.62 21311.07
18067.68
1996/01/31 20055.36 22036.50
18375.48
1996/02/29 20001.35 22240.77
18308.01
1996/03/31 20213.99 22454.95
18330.20
1996/04/30 20426.62 22785.94
18406.38
1996/05/31 20586.10 23373.59
18600.31
1996/06/30 20772.16 23462.64
18738.77
1996/07/31 20426.62 22426.06
18441.72
1996/08/31 20466.49 22899.03
18598.03
1996/09/30 21210.73 24187.79
19154.71
1996/10/31 21755.62 24854.88
19551.44
1996/11/30 22832.10 26733.66
20294.32
1996/12/31 22499.85 26204.07
20067.35
IMATRL PRASUN SHR__CHT 19960930 19961009 151629 R00000000000123

Let's say hypothetically that $10,000 was invested in Asset Manager
Portfolio on September 30, 1989, shortly after the fund started. By
December 31, 1996, the value of the investment would have grown to $22,500
- - a 125.00% increase. With reinvested dividends and capital gains, if any,
a $10,000 investment in the S&P 500, which would have grown to $26,204 over
the same period - a 162.04% increase on the initial investment.
You can also look at how the Fidelity Composite Index did over the same
period. The composite index combines the cumulative total returns of three
unmanaged indexes - the S&P 500 (162.04%), Lehman Brothers Aggregate Bond
Index (84.18%), and the Salomon Brothers 3-month T-Bill Total Rate of
Return Index (44.16%) - according to the fund's neutral mix,* assuming
monthly rebalancing. With reinvested dividends and capital gains, if any, a
$10,000 investment in the index would have grown to $20,067 - a 100.67%
increase.
* 50% STOCKS, 40% BONDS AND 10% SHORT-TERM INSTRUMENTS EFFECTIVE JANUARY 1,
1997; 40%, 40% AND 20%, RESPECTIVELY, BETWEEN JUNE 1, 1992 AND DECEMBER 31,
1996; 30%, 40% AND 30%, RESPECTIVELY, PRIOR TO JUNE 1, 1992.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1996
% OF FUND'S
INVESTMENT
S

Philip Morris Companies, Inc. 4.6

Federal National Mortgage Association 4.3

General Motors Corp. 2.5

Compaq Computer Corp. 1.9

International Business Machines Corp. 1.9

TOP FIVE BOND ISSUERS AS OF DECEMBER 31, 1996
(WITH MATURITIES MORE THAN ONE YEAR) % OF FUND'S
INVESTMENT
S

U.S. Treasury Obligations 19.0

Federal National Mortgage Association 4.5

Government National Mortgage Association 2.3

Federal Home Loan Mortgage Corporation 1.6

Federal Home Loan Bank 0.5

ASSET ALLOCATION AS OF DECEMBER 31, 1996*
Row: 1, Col: 1, Value: 7.7
Row: 1, Col: 2, Value: 44.9
Row: 1, Col: 3, Value: 47.4
Stocks 47.4%
Bonds 44.9%
Short-term investments 7.7%
FOREIGN INVESTMENTS 11.6%
*

% OF FUND'S INVESTMENTS

VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
FUND TALK: THE MANAGERS' OVERVIEW

An interview with Richard Habermann (center), Portfolio Manager of Asset
Manager Portfolio, as well as George Vanderheiden (left) and Michael Gray,
sub-managers for stocks and bonds, respectively
Q. HOW DID THE FUND PERFORM, DICK?
D.H. The fund continued to lag the stock market somewhat during the period.
That's not altogether surprising, however, since the fund invests in both
stocks and bonds, and stocks markedly outperformed bonds over the past
year. The Standard & Poor's 500 Index had a total return of 22.96% for the
12 months that ended December 31, 1996. The fund benefited most from the
performance of its equity investments, and performed in line with other
flexible portfolios and with our expectations following a repositioning of
the fund that we executed earlier in the year.
Q. CAN YOU ELABORATE ON THIS REPOSITIONING?
D.H. On the bond side, we focused on investment-grade, dollar-denominated
securities, bringing the bond portfolio's duration - its sensitivity to
changes in interest rates - in line with the bond market average as
represented by the Lehman Brothers Aggregate Index. Our stock selection
emphasized large-capitalization stocks whose dividend yields were slightly
higher than that of the market. Fortunately, these kinds of stocks provided
very strong performance in 1996.
Q. WHAT WAS THE FUND'S ASSET MIX AT THE END OF THE PERIOD?
D.H. We aimed to bring the fund in line with the new neutral mix we have
developed for the fund. As a result, the fund had about 47% in stocks, 45%
in bonds and 8% in short-term money market securities. For more information
on this policy change, please refer to the additional interview that
follows.
Q. WHAT HAS YOUR ASSET ALLOCATION STRATEGY BEEN OVER THE PAST SIX MONTHS?
D.H. We've kept the stock weighting fairly steady over that period. As I
said, stocks performed very well. Stock prices rebounded starting in July,
after it became evident that some negative corporate earnings reports were
not indicative of the state of the overall market. A benign economic and
interest rate environment helped stocks maintain their momentum through the
last three months of the year. Federal Reserve Board Chairman Alan
Greenspan's comments about the market's exuberance caused some short-term
volatility in December, but the stock market rebounded fairly quickly.
There were times when we added to the fixed-income component, buying bonds
when they became undervalued during periods of market duress. Periodically,
economic data that some feared signaled impending inflation shook the
market. Inflation is a negative influence on bond investing because it
erodes the value of a bond's fixed payments. We added to the fund's
position in investment-grade bonds when their prices fell and their yields
rose in response to the economic data, enabling us to lock in higher yields
on our new fixed-income investments. When yields subsequently fell, the
value of the fixed-income investments we purchased earlier increased.
Q. TURNING TO YOU, GEORGE, WHAT STOCK-PICKING STRATEGIES HAVE YOU PURSUED?
G.V. I've sought to minimize the risk in the stock holdings because I
considered stock market valuations to be high on a historical basis. As a
result, I've pursued two strategies - growth at a reasonable price and
vulture investing. I have always felt the most prudent way to buy growth
stocks is to get as much total return, meaning stock appreciation plus
dividend yield, for as small a price as possible. The price you pay for a
growth stock is reflected in its price-to-earnings ratio, or how much times
earnings the market thinks that stock is worth. To give an example, both
Philip Morris and Coca-Cola are growth stocks with each having grown its
earnings per share at an 18% growth rate over the past 10 years. Assuming
they can sustain similar growth rates in the future, Philip Morris would
have a higher total return because its dividend yield is 5%, whereas Coke's
is 1%. But look at what the market was paying for each stock's total return
at the beginning of October. Coke was at around $51 and the consensus
estimate for its earnings per share was $1.40 for 1996, thereby producing a
price-to-earnings ratio of 36 times. Philip Morris, on the other hand, was
at $93 with a consensus earnings-per-share estimate of $7.70 for 1996,
thereby producing a price-to-earnings ratio of 12 times. Litigation
concerns have been dragging down Philip Morris' ratio, but these worries
have been around for 15 years and this was the biggest gap between the two
companies' price-to-earnings ratios. That's why I invested in Philip Morris
and not Coca-Cola.
Q. WHAT DO YOU MEAN BY VULTURE INVESTING?
G.V. Occasionally bad things happen to good stocks. Quality growth stocks
may stumble temporarily due to new product introductions, too much
inventory or manufacturing problems that cause a disappointment in
quarterly earnings. If these are truly temporary occurrences, they can be
wonderful opportunities to buy a stock or sector when prices are down. For
example, in January 1996, Intel's price had dropped to $50 from $75 months
before as concerns developed over its receivables with Packard Bell. Nine
months later the stock had increased substantially. Buying a sector with
good long-term fundamentals after it has suffered a big decline can
mitigate risk and enhance the ultimate upside gain. However, it does
require patience.
Q. MICHAEL, WHERE HAVE YOU FOUND OPPORTUNITIES IN THE BOND PORTFOLIO?
M.G. I've increased the fund's investments in bonds that offered a yield
advantage over Treasuries - agency issues, mortgage-backed securities and
corporate bonds.
Q. WHAT MADE CORPORATE BONDS MORE ATTRACTIVE?
M.G. As Dick said, they became more attractive earlier in the period. In
addition, for most of the period, the fundamental outlook for corporations
was favorable. That is, business prospects appeared to improve. The best
indicator of a favorable corporate environment has been a strong stock
market. This strength showed that corporations were doing well and that
investors were comfortable with prospects as they drove up stock prices.
Part of that optimism was a function of the economic environment, which has
been fairly positive. Despite the bond market's inflation fears in the
spring, the economy looked as if it was growing, while inflation remained
under control. Moderate growth with low inflation is a good recipe for
corporations. In addition, there was a limited supply of new corporate
issues, along with fairly strong demand. Many investors were looking for
added yield, and there wasn't much to buy in the way of corporate bonds.
This backdrop helped corporate bonds post strong price gains on a relative
basis.
Q. WERE THERE OTHER TYPES OF BONDS THAT WERE ATTRACTIVE TO YOU?
M.G. I was attracted to Yankee bonds. These are dollar-denominated bonds
issued in the U.S. by foreign banks, governments and corporations. They
tend to trade more cheaply than other bonds with similar credit ratings and
often don't drop in price as quickly as corporate bonds when bad news
affects the issuer.
Q. WHAT KINDS OF MORTGAGE-BACKED SECURITIES DID YOU FAVOR?
M.G. When rates rose earlier in the period, I bought mortgage-backed
securities that were selling at a discount. In general, I sought securities
that I thought would be less susceptible to changes in interest rates than
other choices in the mortgage-backed sector. Mortgage-backed securities
tend not to perform well if rates go up or down sharply, so I looked for
those bonds that by the nature of their structure would be less sensitive
to interest rate changes. Those securities tended to be in 15-year and
30-year mortgages that were selling at a discount.
Q. TURNING BACK TO YOU, DICK, WHAT'S YOUR OUTLOOK?
D.H. Twice this year, there has been real excitement in the stock market,
in July and December. Both occasions were related to concerns about
earnings. Going forward, I think we'll find more risk in the markets.
Sometimes people tend to forget that stocks, most importantly, are stocks
of COMPANIES. So what we've been trying to do is to spend a lot of time
listening to companies and trying to get a sense of what's going on. There
might be a pick-up in the economy to sustain earnings, but in the short
term, earnings disappointments will hit a stock hard. The stocks and
markets that have done poorly are those that haven't met expectations. If
the low-interest, low-inflation environment continues, earnings will be
more crucial. That is, because of lower interest rates, there will be more
of a reaction when earnings don't meet expectations. In addition, stock
prices will be more sensitive to any changes in interest rates. As for
fixed-income, we'll continue to keep an eye on the strength of the economy
and to look for value in the various sectors of the market.
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.
NOTE TO SHAREHOLDERS: Charles Morrison became sub-manager for bonds on
February 3, 1997, after the period ended.

FUND FACTS
GOAL: maximum total return over the long term
by allocating assets among stocks, bonds and
short-term instruments anywhere in the world
START DATE: September 6, 1989
SIZE: as of December 31, 1996, more than
$3.6 billion
MANAGER: Richard Habermann, since March
1996; joined Fidelity in 1968
(checkmark)
ADDITIONAL INTERVIEW ON POLICY CHANGES

NOTE TO SHAREHOLDERS: Beginning on December 1, 1996, Asset Manager
Portfolio's neutral mix of investments changed, and there was a change in
how bonds and short-term instruments are classified. In the following
additional interview segment, Portfolio Manager Dick Habermann discusses
these changes.
Q. WE UNDERSTAND THAT THE FUND'S NEUTRAL ALLOCATION PERCENTAGES CHANGED.
CAN YOU EXPLAIN?
A. Yes. Asset Manager's neutral mix - which represents how the fund's
investments are allocated, on average, over the long term - was 40% stocks,
40% bonds and 20% short-term instruments. Under a new policy approved by
the fund's Board of Trustees, the neutral mix is now 50% stocks, 40% bonds
and 10% short-term/money market instruments. As always, this allocation
will vary over short-term periods as fund management makes gradual
adjustments to the portfolio's holdings - within defined ranges - based on
the current outlook for the different markets. The neutral mix is designed
to establish a general direction for the fund and communicate the expected
posture of the fund going forward.
Q. WHAT DO THESE CHANGES MEAN?
A. The most significant impact of the changes is a 10% increase in the
fund's equity allocation and a reduction in the fixed-income classes. The
other changes to the bond and short-term positions are mainly a
redefinition of the dividing line of short-term securities and longer-term
bonds.
Q. SO YOU ALSO CHANGED THE DEFINITION OF "SHORT-TERM" FOR THE PURPOSES OF
HOW THE FUND LOOKS AT ITS ALLOCATIONS . . .
A. The short-term asset class in the fund included all bonds and short-term
instruments with maturities of three years or less. Under our new
definition, we now move most securities with one to three years remaining
maturity into the bond class, leaving shorter-term instruments in a newly
named "short-term/money market" class. This class, in general, will include
securities with remaining maturities of 12 months or less and securities
with comparable interest rate sensitivity. In addition to redefining the
bond and short-term class, we also assigned a manager to the
short-term/money market part of the fund: John Todd, a veteran manager in
our money market fund group who has been with Fidelity since 1981.
Q. WHY DID YOU MAKE THESE CHANGES?
A. With the changes in the management structure, we thought it was a good
time to reassess the neutral mix based on what we learned since we launched
the first Asset Manager fund in 1988.
One thing we found is that stocks have continued to provide superior
returns relative to both intermediate and long term bonds. At the same
time, the volatility of stocks and bonds by some measures has been
converging. Based on this comparison and other factors we evaluated, we
believe the fund can modestly increase its allocation to equities and thus
its potential return without unduly affecting its volatility.
Shareholders should remember that these allocations simply represent a
neutral mix. Because the fund is actively managed, allocations will change
based on the market environment. The allocation ranges for each asset class
have been modified to accommodate the change in the neutral mix.
Q. AND WHY DID YOU REDEFINE THE SHORT-TERM CLASS AND ADD A SUB-MANAGER?
A. We believe that actively managing the short-term part of the portfolio
more like a money market fund will help to make this category more stable.
Additionally, this redefinition is in line with the way Fidelity looks at
fixed-income asset classes across our funds.
Q. WILL THESE CHANGES HAVE ANY IMPACT ON THE LEVEL OF FOREIGN SECURITIES
HELD IN THE FUND?
A. Because part of the fund's goal is to produce high total return over the
long-term through diversification, foreign investments will continue to
play a role in the fund. However, we are more likely to seek investment
opportunities first in domestic markets. For example, foreign holdings were
down to about 12% at the end of the period, compared with 19% six months
before that. That said, we have removed the limit on foreign investment in
order to standardize policy with other funds.
Q. HOW HAVE YOU BROUGHT THE FUND IN LINE WITH THE NEW POLICIES?
A. We have been making gradual changes so that at the start of 1997, the
fund's neutral allocation mix and holdings are where we want them.
Shareholders should keep in mind that we're continually fine-tuning the
fund within its prospectus parameters to achieve the best risk-reward
ratio, so making changes over the next month won't be unusual.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
INVESTMENTS DECEMBER 31, 1996

Showing Percentage of Total Value of Investment in Securities

COMMON STOCKS - 47.1%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 0.6%
AEROSPACE & DEFENSE - 0.3%
Boeing Co. 92,800 $ 9,871,600
Gulfstream Aerospace Corp. (a) 46,700 1,132,475
11,004,075
DEFENSE ELECTRONICS - 0.3%
Raytheon Co. 256,800 12,358,500
TOTAL AEROSPACE & DEFENSE 23,362,575
BASIC INDUSTRIES - 2.4%
CHEMICALS & PLASTICS - 1.6%
Air Products & Chemicals, Inc. 61,200 4,230,450
du Pont (E.I.) de Nemours & Co. 423,900 40,005,563
Raychem Corp. 95,800 7,675,975
Union Carbide Corp. 190,000 7,766,250
59,678,238
METALS & MINING - 0.1%
Reynolds Metals Co. 33,300 1,877,288
PACKAGING & CONTAINERS - 0.1%
Owens-Illinois, Inc. (a) 59,500 1,353,625
Tupperware Corp. 45,300 2,429,213
3,782,838
PAPER & FOREST PRODUCTS - 0.6%
Boise Cascade Corp. 126,700 4,022,725
Champion International Corp. 204,300 8,835,975
International Paper Co. 108,500 4,380,688
Temple-Inland, Inc. 36,900 1,997,213
Willamette Industries, Inc. 23,800 1,657,075
20,893,676
TOTAL BASIC INDUSTRIES 86,232,040
CONSTRUCTION & REAL ESTATE - 0.5%
CONSTRUCTION - 0.4%
Centex Corp. 102,200 3,845,275
DR Horton, Inc. 123,224 1,340,061
Fleetwood Enterprises, Inc. 296,181 8,144,978
Kaufman & Broad Home Corp. 150,700 1,940,263
Lennar Corp. 4,600 125,350
U.S. Home Corp. (a) 18,000 468,000
15,863,927
ENGINEERING - 0.1%
Fluor Corp. 63,400 3,978,350
TOTAL CONSTRUCTION & REAL ESTATE 19,842,277
DURABLES - 4.0%
AUTOS, TIRES, & ACCESSORIES - 3.8%
Cummins Engine Co., Inc. 82,400 3,790,400
Dana Corp. 82,300 2,685,038
Discount Auto Parts, Inc. (a) 47,800 1,117,325
Federal-Mogul Corp. 108,800 2,393,600
General Motors Corp. 1,604,990 89,478,193
Goodyear Tire & Rubber Co. 48,400 2,486,550
Honda Motor Co. Ltd. 397,000 11,333,075
Magna International, Inc. Class A 247,000 13,738,739
Superior Industries International, Inc. 116,900 2,703,313
Volvo AB Class B 336,300 7,389,159
137,115,392
CONSUMER ELECTRONICS - 0.1%
Newell Co. 100,000 3,150,000
Whirlpool Corp. 22,100 1,030,413
4,180,413

SHARES VALUE (NOTE 1)
TEXTILES & APPAREL - 0.1%
Burlington Industries, Inc. (a) 315,900 $ 3,474,900
TOTAL DURABLES 144,770,705
ENERGY - 4.3%
ENERGY SERVICES - 0.1%
McDermott International, Inc. 208,900 3,472,963
OIL & GAS - 4.2%
Amerada Hess Corp. 98,200 5,683,325
Anadarko Petroleum Corp. 13,900 900,025
Atlantic Richfield Co. 145,900 19,331,750
British Petroleum PLC ADR 178,178 25,189,915
Burlington Resources, Inc. 216,400 10,901,150
Canada Occidental Petroleum Ltd. 227,700 3,662,534
Elf Aquitaine SA sponsored ADR 50,700 2,294,175
Enron Oil & Gas Co. 15,000 378,750
Kerr-McGee Corp. 47,600 3,427,200
Noble Affiliates, Inc. 23,600 1,129,850
Occidental Petroleum Corp. 145,600 3,403,400
Royal Dutch Petroleum Co.:
ADR 275,700 47,075,775
Ord. 29,800 5,222,716
Santa Fe Energy Resources, Inc. (a) 149,100 2,068,763
Sun Co., Inc. 142,800 3,480,750
Tosco Corp. 154,500 12,224,813
Total SA:
Class B 19,733 1,604,494
sponsored ADR 56,437 2,271,589
Ultramar Diamond Shamrock Corp. 5,500 173,938
Union Pacific Resources Group, Inc. 39,500 1,155,375
151,580,287
TOTAL ENERGY 155,053,250
FINANCE - 10.1%
BANKS - 1.2%
Canadian Imperial Bank of Commerce 18,700 824,609
Fleet Financial Group, Inc. 700,000 34,912,500
Nations Bank Corp. 39,800 3,890,450
State Street Boston Corp. 42,900 2,767,050
42,394,609
CLOSED END INVESTMENT COMPANY - 0.1%
First NIS Regional Fund (a) 200,000 2,200,000
CREDIT & OTHER FINANCE - 0.0%
Transamerica Corp. 15,700 1,240,300
FEDERAL SPONSORED CREDIT - 5.8%
Federal Home Loan Mortgage
Corporation 497,200 54,754,150
Federal National Mortgage
Association 4,176,290 155,566,803
210,320,953
INSURANCE - 2.7%
AFLAC, Inc. 81,300 3,475,575
Allmerica Financial Corp. 110,700 3,708,450
Allstate Corp. 543,100 31,431,913
American International Group, Inc. 193,700 20,968,025
CIGNA Corp. 10,200 1,393,575
Equitable of Iowa Companies 12,400 568,850
General Re Corp. 91,200 14,386,800
Loews Corp. 19,400 1,828,450
MGIC Investment Corp. 25,200 1,915,200
Provident Companies, Inc. 8,800 425,700
Providian Corp. 184,700 9,488,963
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
INSURANCE - CONTINUED
Reliastar Financial Corp. 14,500 $ 837,375
Torchmark Corp. 112,700 5,691,350
Travelers/Aetna Property Casualty Corp.
Class A 28,300 1,001,113
UNUM Corp. 10,400 751,400
97,872,739
SAVINGS & LOANS - 0.2%
Golden West Financial Corp. 113,900 7,189,938
SECURITIES INDUSTRY - 0.1%
United Asset Management Corp. 219,500 5,844,188
TOTAL FINANCE 367,062,727
HEALTH - 2.6%
DRUGS & PHARMACEUTICALS - 0.6%
Astra AB Class A Free shares 175,400 8,629,609
Novartis AG (Reg.) 3,300 3,771,077
Pharmacia & Upjohn, Inc. 15,900 630,038
Schering-Plough Corp. 130,400 8,443,400
21,474,124
MEDICAL EQUIPMENT & SUPPLIES - 0.1%
Allegiance Corp. 16,580 458,023
Baxter International, Inc. 32,400 1,328,400
Biomet, Inc. 193,000 2,919,125
4,705,548
MEDICAL FACILITIES MANAGEMENT - 1.9%
Columbia/HCA Healthcare Corp. 1,390,150 56,648,613
Humana, Inc. (a) 194,000 3,710,250
Tenet Healthcare Corp. (a) 211,100 4,617,813
United HealthCare Corp. 49,000 2,205,000
67,181,676
TOTAL HEALTH 93,361,348
HOLDING COMPANIES - 0.1%
U.S. Industries, Inc. (a) 62,800 2,158,750
INDUSTRIAL MACHINERY & EQUIPMENT - 1.0%
ELECTRICAL EQUIPMENT - 0.5%
Emerson Electric Co. 24,200 2,341,350
General Electric Co. 91,800 9,076,725
Scientific-Atlanta, Inc. 61,000 915,000
Sensormatic Electronics Corp. 59,900 1,003,325
Westinghouse Electric Corp. 153,900 3,058,763
16,395,163
INDUSTRIAL MACHINERY & EQUIPMENT - 0.3%
Caterpillar, Inc. 141,600 10,655,400
Dover Corp. 12,000 603,000
Illinois Tool Works, Inc. 3,600 287,550
Kaydon Corp. 900 42,413
Kennametal, Inc. 1,517 58,973
11,647,336
POLLUTION CONTROL - 0.2%
Browning-Ferris Industries, Inc. 258,200 6,777,750
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 34,820,249
MEDIA & LEISURE - 0.9%
BROADCASTING - 0.0%
CS Wireless Systems, Inc. (a)(c) 47 -
HSN, Inc. (a) 29,745 706,444
706,444

SHARES VALUE (NOTE 1)
ENTERTAINMENT - 0.1%
Cedar Fair LP (depositary unit) 8,400 $ 310,800
Royal Carribean Cruises Ltd. 53,800 1,257,575
1,568,375
LEISURE DURABLES & TOYS - 0.4%
Nintendo Co. Ltd. Ord. 200,400 14,327,865
LODGING & GAMING - 0.3%
Bally Gaming International, Inc.
(warrants) (a) 38,400 67,200
Circus Circus Enterprises, Inc. (a) 269,100 9,250,313
Fitzgeralds South, Inc.
(warrants) (a)(c) 420 -
Mirage Resorts, Inc. (a) 34,400 743,900
Sun International Hotels Ltd. Ord. (a) 51,800 1,890,700
11,952,113
RESTAURANTS - 0.1%
Brinker International, Inc. (a) 86,000 1,376,000
Darden Restaurants, Inc. 48,800 427,000
McDonald's Corp. 42,000 1,900,500
3,703,500
TOTAL MEDIA & LEISURE 32,258,297
NONDURABLES - 5.3%
HOUSEHOLD PRODUCTS - 0.0%
Premark International, Inc. 50,000 1,112,500
TOBACCO - 5.3%
Philip Morris Companies, Inc. 1,466,100 165,119,513
RJR Nabisco Holdings Corp. 647,430 22,012,620
UST, Inc. 140,400 4,545,450
191,677,583
TOTAL NONDURABLES 192,790,083
PRECIOUS METALS - 0.1%
Barrick Gold Corp. 34,900 999,252
Santa Fe Pacific Gold Corp. 143,000 2,198,625
3,197,877
RETAIL & WHOLESALE - 2.6%
APPAREL STORES - 0.2%
TJX Companies, Inc. 124,200 5,883,975
DRUG STORES - 0.0%
CVS Corp. 33,400 1,381,925
GENERAL MERCHANDISE STORES - 1.1%
Federated Department Stores, Inc. (a) 364,200 12,428,325
Wal-Mart Stores, Inc. 1,230,600 28,149,975
40,578,300
GROCERY STORES - 0.0%
Safeway, Inc. 11,300 483,075
RETAIL & WHOLESALE, MISCELLANEOUS - 1.3%
Home Depot, Inc. (The) 391,300 19,613,913
Lowe's Companies, Inc. 316,200 11,225,100
Officemax, Inc. (a) 262,800 2,792,250
Office Depot, Inc. (a) 119,200 2,115,800
Rex Stores Corp. (a) 62,100 504,563
Tandy Corp. 46,100 2,028,400
Toys "R" Us, Inc. (a) 292,400 8,772,000
47,052,026
TOTAL RETAIL & WHOLESALE 95,379,301
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SERVICES - 0.0%
ADVERTISING - 0.0%
Interpublic Group of Companies, Inc. 15,700 $ 745,750
SERVICES - 0.0%
HCIA, Inc. (a) 19,900 686,550
TOTAL SERVICES 1,432,300
TECHNOLOGY - 8.3%
COMMUNICATIONS EQUIPMENT - 0.1%
Cisco Systems, Inc. (a) 70,600 4,491,925
Nokia Corp. AB sponsored ADR 12,900 743,363
5,235,288
COMPUTER SERVICES & SOFTWARE - 0.8%
America Online, Inc. (a) 75,200 2,500,400
Automatic Data Processing, Inc. 150,700 6,461,263
Electronic Data Systems Corp. 140,300 6,067,975
Microsoft Corp. (a) 45,900 3,792,488
Oracle Corp. (a) 112,500 4,696,875
Policy Management Systems Corp. (a) 94,400 4,354,200
Sabre Group Holdings, Inc. Class A (a) 7,400 206,275
28,079,476
COMPUTERS & OFFICE EQUIPMENT - 4.8%
Adaptec, Inc. (a) 21,600 864,000
Bay Networks, Inc. (a) 396,000 8,266,500
Compaq Computer Corp. (a) 919,700 68,287,725
Hewlett-Packard Co. 184,800 9,286,200
Ingram Micro, Inc. Class A (a) 7,200 165,600
International Business Machines Corp. 447,600 67,587,600
SCI Systems, Inc. (a) 188,500 8,411,813
Seagate Technology (a) 208,300 8,227,850
Silicon Graphics, Inc. (a) 38,400 979,200
Tech Data Corp. (a) 10,600 290,175
172,366,663
ELECTRONIC INSTRUMENTS - 0.6%
Applied Materials, Inc. (a) 157,800 5,670,938
KLA Instruments Corp. (a) 33,800 1,199,900
Lam Research Corp. (a) 81,400 2,289,375
Novellus System, Inc. (a) 69,500 3,766,031
Teradyne, Inc. (a) 196,700 4,794,563
Varian Associates, Inc. 74,900 3,810,538
21,531,345
ELECTRONICS - 2.0%
AMP, Inc. 370,400 14,214,100
Atmel Corp. (a) 77,000 2,550,625
Intel Corp. 106,700 13,971,031
Methode Electronics, Inc. Class A 5,400 109,350
Microchip Technology, Inc. (a) 12,500 635,938
Micron Technology, Inc. 86,200 2,510,575
Molex, Inc. 54,500 1,941,563
Motorola, Inc. 41,700 2,559,338
National Semiconductor Corp. (a) 88,800 2,164,500
Solectron Corp. (a) 376,100 20,074,338
Storage Technology Corp. (a) 62,400 2,971,800
Texas Instruments, Inc. 118,900 7,579,875
Xilinx, Inc. (a) 48,600 1,789,088
73,072,121
TOTAL TECHNOLOGY 300,284,893

SHARES VALUE (NOTE 1)
TRANSPORTATION - 0.3%
RAILROADS - 0.2%
Bombardier, Inc. Class B 94,600 $ 1,745,909
Burlington Northern Santa Fe Corp. 45,600 3,938,700
CSX Corp. 53,460 2,258,685
7,943,294
SHIPPING - 0.1%
Stolt-Nielsen SA Class B
sponsored ADR 84,900 1,591,875
Stolt-Nielsen SA 33,000 622,875
2,214,750
TOTAL TRANSPORTATION 10,158,044
UTILITIES - 4.0%
CELLULAR - 1.6%
AirTouch Communications, Inc. (a) 352,000 8,888,000
Microcell Telecommunications, Inc. (a):
(warrants) 680 8,500
(conditional warrants) 680 425
360 Degrees Communications Co. (a) 37,200 860,250
Vodafone Group PLC sponsored ADR 676,200 27,977,775
Vodafone Group PLC 4,766,050 20,165,682
57,900,632
GAS - 0.1%
Enron Corp. 107,900 4,653,188
TELEPHONE SERVICES - 2.3%
Ameritech Corp. 170,400 10,330,500
Bell Atlantic Corp. 130,000 8,417,500
BellSouth Corp. 277,900 11,220,213
Deutsche Telekom AG (a) 83,300 1,734,629
MCI Communications Corp. 548,700 17,935,631
NYNEX Corp. 247,800 11,925,375
SBC Communications, Inc. 293,800 15,204,150
Sprint Corp. 143,400 5,718,075
82,486,073
TOTAL UTILITIES 145,039,893
TOTAL COMMON STOCKS
(Cost $1,488,768,510) 1,707,204,609
PREFERRED STOCKS - 0.3%
CONVERTIBLE PREFERRED STOCKS - 0.0%
RETAIL & WHOLESALE - 0.0%
GROCERY STORES - 0.0%
Supermarkets General Holdings Corp.
pay-in-kind $3.52 (a) 20,000 540,000
NONCONVERTIBLE PREFERRED STOCKS - 0.3%
ENERGY - 0.0%
OIL & GAS - 0.0%
Gulf Canada Resources Ltd., Series 1,
adj. rate 114,600 372,010
FINANCE - 0.0%
SAVINGS & LOANS - 0.0%
Chevy Chase Capital Corp., Series A,
$5.1875 6,000 310,500
PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONCONVERTIBLE PREFERRED STOCKS - CONTINUED
MEDIA & LEISURE - 0.3%
BROADCASTING - 0.3%
Cablevision System Corp.
(depositary shares) 30,120 $ 2,710,800
Time Warner, Inc., 10 1/4% Series M,
pay-in-kind 6,027 6,539,295
TOTAL MEDIA & LEISURE 9,250,095
NONDURABLES - 0.0%
HOUSEHOLD PRODUCTS - 0.0%
Revlon Group, Inc., Series B,
14 7/8% 5,100 510,000
TECHNOLOGY - 0.0%
COMPUTER SERVICES & SOFTWARE - 0.0%
ICG Holdings, Inc.
14 1/4% pay-in-kind 1,039 1,148,095
TOTAL NONCONVERTIBLE PREFERRED STOCKS 11,590,700
TOTAL PREFERRED STOCKS
(Cost $11,707,866) 12,130,700
CORPORATE BONDS - 13.6%
MOODY'S RATINGS PRINCIPAL
(UNAUDITED) (B) AMOUNT
CONVERTIBLE BONDS - 0.5%
RETAIL & WHOLESALE - 0.5%
DRUG STORES - 0.5%
Rite Aid Corp. liquid yield
option notes 0%, 7/24/06 Baa1 $ 30,020,000 19,062,700
NONCONVERTIBLE BONDS - 13.1%
AEROSPACE & DEFENSE - 0.3%
AEROSPACE & DEFENSE - 0.2%
Be Aerospace, Inc.
9 7/8%, 2/1/06 B2 270,000 283,500
Lockheed Martin Corp.:
7.70%, 6/15/08 A3 2,750,000 2,877,133
7 3/4%, 5/1/26 A3 3,000,000 3,116,040
6,276,673
SHIP BUILDING & REPAIR - 0.1%
Newport News Shipbuilding,
Inc. (c):
8 5/8%, 12/1/06 Ba2 1,310,000 1,339,475
9 1/4%, 12/1/06 B1 1,200,000 1,239,000
2,578,475
TOTAL AEROSPACE & DEFENSE 8,855,148
BASIC INDUSTRIES - 0.4%
CHEMICALS & PLASTICS - 0.3%
Acetex Corp. yankee
9 3/4%, 10/1/03 B1 2,140,000 2,118,600
Freedom Chemical Co.
10 5/8%, 10/15/06 (c) B3 310,000 325,500
Ivex Holdings Corp. 0%,
3/15/05 (e) Caa 680,000 516,800

MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (B) AMOUNT (NOTE 1)
NL Industries, Inc.
11 3/4%, 10/15/03 B1 $ 900,000 $ 954,000
Praxair, Inc.
6.90%, 11/1/06 A3 4,000,000 3,987,600
Sterling Chemicals Holdings,
Inc. 11 3/4%, 8/15/06 B3 870,000 917,850
8,820,350
IRON & STEEL - 0.0%
AK Steel Corp. 9 1/8%,
12/15/06 (c) Ba2 1,480,000 1,518,850
PACKAGING & CONTAINERS - 0.1%
Owens-Illinois, Inc.
9.95%, 10/15/04 B2 2,280,000 2,425,350
TOTAL BASIC INDUSTRIES 12,764,550
CONSTRUCTION & REAL ESTATE - 0.4%
BUILDING MATERIALS - 0.2%
Building Materials Corp. of
America 0%, 7/1/04 (e) B1 2,770,000 2,399,513
Usinor Sacilor yankee
7 1/4%, 8/1/06 Baa2 5,000,000 4,992,100
7,391,613
CONSTRUCTION - 0.0%
Greystone Homes, Inc.
10 3/4%, 3/1/04 B1 1,800,000 1,840,500
REAL ESTATE - 0.2%
Henderson Capital International
Ltd. euro 4%, 3/28/97 - 7,220,000 6,245,300
TOTAL CONSTRUCTION & REAL ESTATE 15,477,413
DURABLES - 0.5%
AUTOS, TIRES, & ACCESSORIES - 0.2%
APS, Inc. 11 7/8%, 1/15/06 B2 330,000 357,225
Aetna Industries, Inc.
11 7/8%, 10/1/06 B3 1,780,000 1,913,500
Aftermarket Technology Corp.
12%, 8/1/04 B3 1,750,000 1,955,625
Blue Bird Body Co. 10 3/4%,
11/15/06 (c) B2 1,240,000 1,295,800
Delco Remy International, Inc.
10 5/8%, 8/1/06 (c) B2 1,620,000 1,717,200
7,239,350
CONSUMER ELECTRONICS - 0.0%
Tag Heuer International SA
yankee 12%, 12/15/05 B3 790,000 908,500
HOME FURNISHINGS - 0.1%
Interlake Corp.
12 1/8%, 3/1/02 B3 2,470,000 2,556,450
Knoll, Inc. 10 7/8%, 3/15/06 B3 960,000 1,060,800
3,617,250
TEXTILES & APPAREL - 0.2%
Hat Brands, Inc., Series B,
12 5/8%, 9/15/02 (g) - 380,000 209,000
Levi Strauss & Co.
7%, 11/1/06 (c) Baa2 6,000,000 5,964,720
Pillowtex Corp. 10%,
11/15/06 (c) B2 1,450,000 1,511,625
7,685,345
TOTAL DURABLES 19,450,445
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (B) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
ENERGY - 1.1%
ENERGY SERVICES - 0.4%
Parker Drilling Co. 9 3/4%,
11/15/06 (c) B1 $ 310,000 $ 325,500
Petroliam Nasional BHD yankee (c):
7 1/8%, 10/18/06 A+ 7,000,000 7,064,050
7 5/8%, 10/15/26 A1 6,000,000 6,048,420
13,437,970
OIL & GAS - 0.7%
Diamond Shamrock, Inc.
7.65%, 7/1/26 Baa3 2,000,000 2,073,280
Flores & Rucks, Inc.
9 3/4%, 10/1/06 B3 590,000 625,400
HS Resource, Inc.
9 1/4%, 11/15/06 (c) B2 170,000 174,675
Husky Oil Ltd. yankee
6 7/8%, 11/15/03 Baa3 4,000,000 3,971,040
Norcen Energy Resources Ltd.
yankee 7 3/8%, 5/15/06 Baa3 2,200,000 2,234,100
Occidental Petroleum Corp.:
10.94%, 5/17/00 Baa3 2,700,000 3,047,355
6.39%, 11/9/00 Baa3 1,000,000 991,130
8 1/2%, 11/9/01 Baa2 1,251,000 1,340,096
Petro-Canada, Inc. yankee
7 7/8%, 6/15/26 Baa1 3,000,000 3,156,570
Ras Laffan Liquid Natural Gas
Co. Ltd. 7.628%, 9/15/06 (c) A3 2,800,000 2,810,640
Tosco Corp. 7 5/8%, 5/15/06 Baa2 3,500,000 3,613,470
24,037,756
TOTAL ENERGY 37,475,726
FINANCE - 5.8%
ASSET-BACKED SECURITIES - 0.6%
Airplanes Pass Through Trust
Class D 10 7/8%, 3/15/19 Ba2 6,250,000 6,953,125
Caterpillar Financial Asset Trust
6.55%, 5/22/02 A3 880,000 885,500
Green Tree Financial Corp.:
6 1/2%, 6/15/27 Aaa 1,800,000 1,807,308
6.80%, 6/15/27 Aaa 1,900,000 1,915,428
Premier Auto Trust:
8.05%, 4/4/00 Aaa 6,804,000 6,969,848
6%, 5/6/00 Aaa 2,320,000 2,320,000
20,851,209
BANKS - 1.6%
ABN Amro Bank NV
6 5/8%, 10/31/01 Aa3 7,000,000 7,002,450
Bank of America National Trust
& Savings 5 1/2%, 6/19/97 - 5,000,000 4,998,550
Banponce Financial Corp.
7.72%, 4/13/00 A3 2,000,000 2,057,160
Capital One Bank:
8 1/8%, 2/27/98 Baa3 1,035,000 1,056,663
6.74%, 5/31/99 Baa3 4,000,000 4,012,000
7.20%, 7/19/99 Baa3 8,000,000 8,089,680
Central Fidelity Banks, Inc.
8.15%, 11/15/02 Baa2 100,000 105,880

MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (B) AMOUNT (NOTE 1)
HSBC Americas, Inc.
7%, 11/1/06 Baa1 $ 7,000,000 $ 6,910,400
KeyCorp 7 1/2%, 6/15/06 A2 6,300,000 6,461,217
Midland Bank PLC yankee
7 5/8%, 6/15/06 A1 3,000,000 3,106,380
Signet Bank
7.80%, 9/15/06 Baa1 3,000,000 3,112,530
Signet Banking Corp.
9 5/8%, 6/1/99 Baa2 790,000 842,654
Southern National Corp.
7.05%, 5/23/03 A3 5,000,000 5,045,300
Summit Bancorp
8 5/8%, 12/10/02 BBB- 1,730,000 1,875,683
Union Planters National Bank
6.81%, 8/20/01 A3 3,500,000 3,513,125
58,189,672
CREDIT & OTHER FINANCE - 3.1%
AT&T Capital Corp.:
6.02%, 12/1/98 Baa3 7,500,000 7,472,025
6.16%, 12/3/99 Baa3 2,750,000 2,728,908
Aames Financial Corp.
9 1/8%, 11/1/03 Ba3 100,000 101,750
Ahmanson Capital Trust I
8.36%, 12/1/26 (c) Baa3 4,250,000 4,294,838
BCH Cayman Islands Ltd.
yankee 7.70%, 7/15/06 A3 2,600,000 2,686,242
CIT Group Holdings, Inc.
6 1/4%, 10/4/99 Aa3 6,500,000 6,493,890
Chase Capital I
7.67%, 12/1/26 A1 10,000,000 9,777,700
ContiFinancial Corp.
8 3/8%, 8/15/03 Ba 1,110,000 1,141,191
Finova Capital Corp.:
6.44%, 11/6/01 Baa1 5,500,000 5,443,955
6.12%, 5/28/02 Baa1 2,000,000 1,941,900
First Securities Capital I
8.41%, 12/15/26 (c) A3 4,000,000 4,039,800
Ford Motor Credit:
5.73%, 2/23/00 A1 3,250,000 3,185,975
6.65%, 5/22/00 A1 9,000,000 9,048,150
5.68%, 2/15/01 A1 5,000,000 4,838,950
6.57%, 3/19/01 A1 700,000 699,146
7%, 9/25/01 A1 12,500,000 12,686,375
General Electric Capital Corp.
6.94%, 4/13/09 (d) Aaa 7,000,000 7,097,790
General Motors Acceptance
Corp. 5 5/8%, 2/1/99 A3 5,000,000 4,936,350
HMC Acquisition Properties, Inc.
9%, 12/15/07 Ba3 4,730,000 4,800,950
Keycorp Institutional Capital A
7.826%, 12/1/26 (c) Aa 5,000,000 4,905,000
North American Mortgage Co.
7.29%, 8/19/03 Baa2 1,000,000 1,016,510
Repsol International Finance BV
yankee 7%, 8/1/05 Aa3 3,000,000 3,016,620
Wells Fargo Capital C
7.73%, 12/1/26 (c) A1 10,350,000 10,040,742
112,394,757
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (B) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
FINANCE - CONTINUED
INSURANCE - 0.2%
Reliance Group
9 3/4%, 11/15/03 B1 $ 2,440,000 $ 2,537,600
SunAmerica, Inc.
6.20%, 10/31/99 Baa1 5,500,000 5,475,415
8,013,015
SAVINGS & LOANS - 0.3%
Chevy Chase Savings Bank FSB
9 1/4%, 12/1/08 B1 1,920,000 1,958,400
First Nationwide Escrow Corp.
10 5/8%, 10/1/03 (c) Ba3 1,050,000 1,134,000
First Nationwide Parent Holdings
Ltd. 12 1/2%, 4/15/03 B2 3,960,000 4,385,700
Great Western Financial Corp.
8.60%, 2/1/02 Baa1 2,000,000 2,148,420
9,626,520
TOTAL FINANCE 209,075,173
HEALTH - 0.3%
MEDICAL EQUIPMENT & SUPPLIES - 0.0%
IMED Corp. 9 3/4%,
12/1/06 (c) B3 250,000 254,375
MEDICAL FACILITIES MANAGEMENT - 0.3%
Columbia/HCA Healthcare
Corp.:
6 1/2%, 3/15/99 A2 4,500,000 4,521,465
6 7/8%, 7/15/01 A3 2,000,000 2,023,740
Quest Diagnostics, Inc.
10 3/4%, 12/15/06 B2 90,000 94,725
Tenet Healthcare Corp.
10 1/8%, 3/1/05 Ba3 3,760,000 4,154,800
10,794,730
TOTAL HEALTH 11,049,105
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
Exide Corp. 10%, 4/15/05 B1 825,000 849,750
Goss Graphic System, Inc.
12%, 10/15/06 B2 1,650,000 1,699,500
2,549,250
POLLUTION CONTROL - 0.0%
Allied Waste of North America,
Inc. 10 1/4%, 12/1/06 (c) B3 180,000 189,000
Envirosource, Inc.
9 3/4%, 6/15/03 B3 550,000 512,875
701,875
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 3,251,125
MEDIA & LEISURE - 1.4%
BROADCASTING - 0.7%
Bell Cablemedia PLC yankee
0%, 9/15/05 (e) B2 960,000 777,600
Granite Broadcasting Corp.
10 3/8%, 5/15/05 B3 710,000 727,750

MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (B) AMOUNT (NOTE 1)
Intermedia Capital Partners IV
LP/Intermedia Partners
Capital Corp. 11 1/4%,
8/1/06 (c) B2 $ 890,000 $ 923,375
International Cabletel, Inc.
0%, 2/1/06 (e) B3 320,000 216,800
Jacor Communications Co.
9 3/4%, 12/15/06 B2 120,000 122,400
NWCG Holdings Corp.
0%, 6/15/99 Caa 520,000 431,600
SCI Television, Inc. secured
11%, 6/30/05 B2 4,850,000 5,189,500
SFX Broadcasting, Inc.
10 3/4%, 5/15/06 B3 3,200,000 3,360,000
Telemundo Group, Inc. 7%,
2/15/06 (d) B1 4,170,000 4,024,050
Telewest PLC 0%,
10/1/07 (e) B1 3,390,000 2,356,050
Time Warner, Inc.:
7.95%, 2/1/00 Ba1 2,000,000 2,065,380
7 3/4%, 6/15/05 Ba1 5,300,000 5,331,429
9.15%, 2/1/23 Ba1 1,020,000 1,105,670
26,631,604
ENTERTAINMENT - 0.1%
Viacom, Inc. 8%, 7/7/06 B1 2,500,000 2,425,000
LODGING & GAMING - 0.4%
American Skiing Co.
12%, 7/15/06 (c) B3 2,240,000 2,357,600
Circus Circus Enterprises, Inc.
7%, 11/15/36 Baa2 4,250,000 4,152,038
Courtyard by Marriott II LP/
Courtyard II Finance Co.,
Series B, 10 3/4%, 2/1/08 B- 1,190,000 1,255,450
HMH Properties, Inc.
9 1/2%, 5/15/05 Ba3 1,020,000 1,063,350
Mirage Resorts, Inc.
7 1/4%, 10/15/06 Baa2 6,000,000 6,040,200
Wyndham Hotel Corp.
10 1/2%, 5/15/06 B2 580,000 614,800
15,483,438
PUBLISHING - 0.0%
Golden Books Publishing, Inc.
7.65%, 9/15/02 B1 490,000 436,100
RESTAURANTS - 0.2%
Foodmaker, Inc.
9 3/4%, 6/1/02 B3 2,180,000 2,212,700
Host Marriott Travel Plazas, Inc.
9 1/2%, 5/15/05 B1 4,960,000 5,170,800
7,383,500
TOTAL MEDIA & LEISURE 52,359,642
NONDURABLES - 0.6%
FOODS - 0.4%
Chiquita Brands International,
Inc. 9 5/8%, 1/15/04 B1 4,350,000 4,447,875
ConAgra, Inc.
7 1/8%, 10/1/26 Baa1 3,250,000 3,321,045
Foodbrands of America, Inc.
10 3/4%, 5/15/06 B3 1,150,000 1,207,500
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (B) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
NONDURABLES - CONTINUED
FOODS - CONTINUED
Ralcorp Holdings, Inc.
8 3/4%, 9/15/04 Ba1 $ 2,500,000 $ 2,731,875
Specialty Foods Corp.:
11 1/8%, 10/1/02 B3 3,200,000 3,040,000
11 1/4%, 8/15/03 Caa 805,000 611,800
15,360,095
HOUSEHOLD PRODUCTS - 0.2%
Revlon Consumer Products
Corp. 10 1/2%, 2/15/03 B3 1,800,000 1,887,750
Revlon Worldwide Corp.
secured 0%, 3/15/98 B3 4,940,000 4,279,275
6,167,025
TOTAL NONDURABLES 21,527,120
RETAIL & WHOLESALE - 0.7%
APPAREL STORES - 0.0%
Lamonts Apparel, Inc.
pay-in-kind 10 1/4%,
11/1/99 (c)(g) - 2,816,000 119,680
Loehmann's, Inc.
11 7/8%, 5/15/03 B2 1,030,000 1,112,400
1,232,080
GENERAL MERCHANDISE STORES - 0.5%
Dayton Hudson Corp.:
6.80%, 10/1/01 Baa1 7,500,000 7,503,300
7 1/2%, 7/15/06 Baa1 3,500,000 3,578,120
J.C. Penney, Inc.
6.90%, 8/15/26 A1 1,000,000 1,011,140
K Mart Corp.:
12 1/2%, 3/1/05 Ba3 1,000,000 1,152,500
8 1/4%, 1/1/22 Ba3 1,430,000 1,201,200
Michaels Stores, Inc.
10 7/8%, 6/18/06 Ba2 1,810,000 1,755,700
16,201,960
GROCERY STORES - 0.2%
Kroger Co. 8.15%, 7/15/06 Ba1 2,250,000 2,329,335
Pathmark Stores, Inc.:
12 5/8%, 6/15/02 Caa 1,720,000 1,763,000
9 5/8%, 5/1/03 B3 2,030,000 1,943,725
0%, 11/1/03 (e) Caa 2,510,000 1,625,225
7,661,285
TOTAL RETAIL & WHOLESALE 25,095,325
SERVICES - 0.1%
PRINTING - 0.0%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa 1,410,000 1,360,650
SERVICES - 0.1%
Iron Mountain, Inc.
10 1/8%, 10/1/06 B3 1,050,000 1,107,750
Prime Succession Acquisition
Corp. 10 3/4%, 8/15/04 (c) B 80,000 86,800

MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (B) AMOUNT (NOTE 1)
Speedy Muffler King, Inc./
Speedy USA, Inc. yankee
10 7/8%, 10/1/06 B1 $ 1,190,000 $ 1,276,275
2,470,825
TOTAL SERVICES 3,831,475
TECHNOLOGY - 0.5%
COMMUNICATIONS EQUIPMENT - 0.1%
Echostar Satellite Broadcasting
Corp. 0%, 3/15/04 (e) Caa 1,790,000 1,355,925
Echostar Communications Corp.
0%, 6/1/04 (e) B2 2,430,000 1,998,675
3,354,600
COMPUTERS & OFFICE EQUIPMENT - 0.3%
Comdisco, Inc.
6 3/8%, 11/30/01 Baa1 8,300,000 8,166,370
Unisys Corp.:
12%, 4/15/03 B1 2,310,000 2,471,700
11 3/4%, 10/15/04 B1 1,330,000 1,418,113
12,056,183
ELECTRONICS - 0.1%
Advanced Micro Devices, Inc.
11%, 8/1/03 Ba1 2,580,000 2,792,850
TOTAL TECHNOLOGY 18,203,633
TRANSPORTATION - 0.3%
AIR TRANSPORTATION - 0.2%
Delta Air Lines, Inc.:
9 7/8%, 5/15/00 Baa3 1,500,000 1,624,830
10 1/2%, 4/30/16 Baa1 2,500,000 3,054,100
US Air, Inc.:
9 5/8%, 2/1/01 B3 2,180,000 2,169,100
10%, 7/1/03 B3 2,200,000 2,189,000
9,037,030
RAILROADS - 0.1%
Burlington Northern Santa Fe
Corp. 7.29%, 6/1/36 Baa2 3,000,000 3,095,310
TOTAL TRANSPORTATION 12,132,340
UTILITIES - 0.6%
CELLULAR - 0.3%
Arch Communications Group,
Inc. 0%, 3/15/08 (e) B3 1,820,000 1,039,675
Microcell Telecommunications,
Inc. 0%, 6/1/06 (e) B3 170,000 94,775
Millicom International Cellular
SA 0%, 6/1/06 (e) B3 600,000 372,000
Mobile Telecommunications
Technologies Corp.
13 1/2%, 12/15/02 B3 1,050,000 1,050,000
Paging Network, Inc.
10%, 10/15/08 B2 620,000 630,075
Rogers Cantel, Inc.
9 3/8%, 6/1/08 Ba3 1,540,000 1,617,000
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (B) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
UTILITIES - CONTINUED
CELLULAR - CONTINUED
360 Degrees Communications
Co.:
7 1/8%, 3/1/03 Ba2 $ 3,500,000 $ 3,457,685
7 1/2%, 3/1/06 Ba2 2,750,000 2,727,753
Western Wireless Corp.
10 1/2%, 6/1/06 B3 1,000,000 1,048,750
12,037,713
ELECTRIC UTILITY - 0.0%
El Paso Electric Co. 1st Mtg.
9.40%, 5/1/11 Ba3 1,030,000 1,102,100
TELEPHONE SERVICES - 0.3%
Brooks Fiber Properties, Inc.
0%, 11/1/06 (c)(e) - 1,040,000 663,000
Call-Net Enterprises, Inc. yankee
0%, 12/1/04 (e) B2 3,360,000 2,755,200
MFS Communications, Inc.
0%, 1/15/06 (e) B1 4,510,000 3,292,300
Shared Technologies Fairchild
Communications Corp.
0%, 3/1/06 (e) Caa 2,730,000 2,279,550
8,990,050
TOTAL UTILITIES 22,129,863
TOTAL NONCONVERTIBLE BONDS 472,678,083
TOTAL CORPORATE BONDS
(Cost $482,786,798) 491,740,783
U.S. GOVERNMENT AND GOVERNMENT
AGENCY OBLIGATIONS - 22.9%
U.S. TREASURY OBLIGATIONS - 19.0%
6 1/8%, 3/31/98 Aaa 226,665,000 227,762,059
8 7/8%, 11/15/98 Aaa 23,075,000 24,279,284
8 7/8%, 2/15/99 Aaa 7,540,000 7,977,094
6 3/4%, 6/30/99 Aaa 2,700,000 2,747,682
8%, 8/15/99 Aaa 7,420,000 7,772,450
7 3/4%, 12/31/99 Aaa 21,945,000 22,953,153
5 1/2%, 12/31/00 Aaa 47,000,000 45,912,890
7 7/8%, 8/15/01 Aaa 72,260,000 77,024,824
10 3/4%, 5/15/03 Aaa 12,725,000 15,655,695
11 7/8%, 11/15/03 Aaa 41,040,000 53,537,911
7%, 7/15/06 Aaa 2,700,000 2,805,057
11 3/4%, 2/15/10 Aaa 51,045,000 67,786,229
12 3/4%, 11/15/10
(callable) Aaa 12,000,000 16,985,640
13 7/8%, 5/15/11 Aaa 25,650,000 38,723,549
9%, 11/15/18 Aaa 59,690,000 74,901,400
8 7/8%, 2/15/19 Aaa 1,340,000 1,663,489
688,488,406
U.S. GOVERNMENT AGENCY OBLIGATIONS - 3.9%
Federal Agricultural Mortgage
Corp. 7.63%, 1/16/01 Aaa 3,321,000 3,476,157
Farm Credit Systems Financial
Assistance Corp.
8.80%, 6/10/05 - 2,000,000 2,270,320

MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (B) AMOUNT (NOTE 1)
Federal Farm Credit Bank:
8.16%, 12/7/04 Aaa $ 5,000,000 $ 5,448,450
9.55%, 5/9/05 Aaa 2,500,000 2,949,600
Federal Home Loan Bank:
5.695%, 12/19/00 Aaa 4,000,000 3,916,880
5.95%, 3/6/03 Aaa 4,000,000 3,895,640
7.31%, 6/16/04 Aaa 2,500,000 2,603,900
8.22%, 11/17/04 Aaa 4,000,000 4,365,160
7.59%, 3/10/05 Aaa 3,850,000 4,073,762
Federal Home Loan Mortgage
Corporation:
0%, 1/23/97 - 24,000,000 23,921,760
0%, 1/31/97 - 24,390,000 24,278,686
6 3/4%, 8/1/05 Aaa 2,500,000 2,509,375
Federal National Mortgage
Association
5 1/2%, 2/2/01 Aaa 9,030,000 8,763,344
Guaranteed Export Trust
Certificates (assets of Trust
Guaranteed by U.S.
Government through
Export-Import Bank):
Series 1994-A,
7.12%, 4/15/06 Aaa 7,893,296 8,085,695
Series 1996-A,
6.55%, 6/15/04 Aaa 4,279,407 4,314,327
Guaranteed Trade Trust
Certificates (asset Guaranteed
Trust guaranteed by U.S.
Government through Export-
Import Bank) Series 1994-A,
7.39%, 6/26/06 Aaa 2,922,042 3,021,318
State of Israel (guaranteed by
U.S. Government through
Agency for International
Development):
6 5/8%, 8/15/03 Aaa 7,810,000 7,858,344
5 5/8%, 9/15/03 Aaa 8,540,000 8,144,598
6 3/4%, 8/15/04 Aaa 2,144,000 2,170,779
U.S. Housing & Urban
Development:
6.67%, 8/1/01 Aaa 9,400,000 9,490,898
8.24%, 8/1/04
participate certificate Aaa 2,450,000 2,685,004
7.63%, 8/1/14 Aaa 2,825,000 2,868,675
141,112,672
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $830,856,827) 829,601,078
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES - 6.8%
FEDERAL HOME LOAN MORTGAGE CORPORATION - 0.2%
5 1/2%, 1/1/03 to 6/1/03 Aaa 4,197,497 4,016,459
7%, 4/1/01 to 8/1/01 Aaa 2,942,091 2,962,303
8 1/2%, 7/1/21 to 6/1/23 Aaa 270,843 282,857
7,261,619
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES - CONTINUED
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (B) AMOUNT (NOTE 1)
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 4.3%
5 1/2%, 2/1/03 to 5/1/03 Aaa $ 4,187,180 $ 4,006,587
6%, 10/1/02 to 6/1/26 Aaa 43,567,905 41,310,311
6 1/2%, 6/1/00 to 7/1/26 Aaa 82,478,168 78,696,439
7%, 5/1/26 to 11/1/26 Aaa 29,630,381 29,293,601
153,306,938
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 2.3%
6%, 12/15/08 to 5/15/26 Aaa $ 11,334,802 10,972,223
6 1/2%, 6/15/08 to 7/15/09 Aaa 21,491,247 21,285,023
8%, 5/15/25 to 10/15/26. Aaa 24,776,159 25,273,598
8 1/2%, 12/15/16 to
10/15/26 Aaa 25,557,003 26,484,667
84,015,511
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $241,223,453) 244,584,068
COMMERCIAL MORTGAGE SECURITIES - 1.0%
American Southwest Financial
Securities Series 1994-C2
Class B2, 12.79%,
12/25/01 (c) - 750,000 731,250
Berkeley Federal Bank & Trust
FSB Series 1994 Class 1-B,
7.9038%, 8/1/24 (c)(f) - 2,900,000 1,958,406
Blackrock Capital Funding
LLC Series 1996 Class C2,
7.6414%, 11/16/26 (c)(f) AAA 1,573,448 1,593,608
CBA Mortgage Corp.
Series 1993-C1 Class E,
7.7732%, 12/25/03 (c)(f) Ba2 500,000 449,688
CS First Boston Mortgage
Securities Corp.
Series 1994-M1 Class E,
12.60%, 2/15/02 (c) - 500,000 498,750
DLJ Mortgage Acceptance
Corp. Series 1993-MF12
Class B-2, 10.10%,
9/18/03 (c) - 600,000 562,500
Equitable Life Assurance Society
of the United States (c):
Series 174 Class A1,
7.24%, 5/15/06 Aaa 5,000,000 5,168,750
Series 174 Class B1,
7.33%, 5/15/06 Aa2 3,500,000 3,601,719
Series 1996-1 Class C1,
7.52%, 5/15/06 A2 2,300,000 2,377,625
General Motors Acceptance
Corp. Commercial
Mortgage Securities, Inc.
Series 1996-C1 Class F,
7.86%, 11/15/06 (c) Ba3 750,000 645,469
Lehman Structured Securities
Corp. Series 1996-1 Class E-2,
7.995%, 6/25/26 BB 1,710,704 1,591,490

MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (B) AMOUNT (NOTE 1)
Merrill Lynch Mortgage
Investments, Inc.:
Series 1994 Class M1-E,
8.137%, 6/25/22 (c)(f) Ba2 $ 5,670,000 $ 5,104,772
Series 1995 Class C2-E,
7.9886%, 6/15/21 (c)(f) Ba3 464,135 431,936
Mortgage Capital Funding, Inc.
Series 1996-MC1 Class G,
7.15%, 7/15/28 (c) BB 1,000,000 800,625
Morgan Stanley Capital One,
Inc. Series 1996-MBL1
Class E, 8.5191%,
5/25/21 (c)(f) - 1,910,136 1,719,719
NB Commercial Mortgage
sequential pay, Series FSI
Class A, 7.187%,
10/20/23 (c) - 2,402,428 2,412,939
Penn Mutual Life Insurance Co.
(The) (c):
Series 1996-PML Class K,
7.90%, 11/15/26 - 1,473,000 861,705
Series 1996-PML Class L,
7.90%, 11/15/26 - 1,133,000 495,348
Structured Asset Securities Corp. (c):
Series 1993-C1 Class E,
6.60%, 10/25/24 B 1,250,033 487,122
Series 1996-C3 Class E,
8.458%, 6/25/30 (f) - 500,000 441,094
Wells Fargo Capital Markets
Apartment Financing Trust
6.56%, 12/29/05 (c) Aaa 3,250,000 3,250,000
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $34,126,408) 35,184,515
FOREIGN GOVERNMENT OBLIGATIONS - 0.6%
Newfoundland Province yankee
11 5/8%, 10/15/07 Baa1 2,000,000 2,678,160
Manitoba Province yankee
6 3/8%, 10/15/99 A1 7,000,000 7,025,410
Mexico Value recovery rights - 2,000 -
Quebec Province yankee
7.22%, 7/22/36 (d) A2 10,000,000 10,482,400
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $19,660,950) 20,185,970
CERTIFICATES OF DEPOSIT - 3.3%
Abbey National Treasury
Services PLC yankee
5.43%, 3/17/97 14,000,000 13,997,469
Bank of Scotland yankee
5.39%, 3/5/97 12,000,000 11,996,995
Bank of Tokyo-Mitsubishi Ltd.
yankee 5.51%, 3/6/97 14,500,000 14,494,248
Bayerische Hypotheken und
Wechsel Bank AG
yankee 5.40%, 4/7/97 14,500,000 14,494,132
Bayerische Vereinsbank AG
yankee 5.40%, 4/2/97 14,500,000 14,500,000
CERTIFICATES OF DEPOSIT - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
National Westminster Bank PLC
yankee 5.41%, 2/10/97 $ 14,500,000 $ 14,498,553
Sanwa Bank Ltd. yankee
5.49%, 1/15/97 11,000,000 10,999,938
Sumitomo Bank Ltd. yankee
5.54%, 1/31/97 12,000,000 12,000,373
Westdeutsche Landesbank Giron
yankee 5.40%, 2/5/97 14,500,000 14,498,524
TOTAL CERTIFICATES OF DEPOSIT
(Cost $121,498,614) 121,480,232
COMMERCIAL PAPER - 3.2%
Commonwealth Bank of Australia
yankee 5.325%, 3/11/97 12,000,000 11,867,700
Dakota 5.40%, 3/12/97 14,750,000 14,584,185
Enterprise Funding Corp.
5.47%, 1/24/97 13,461,000 13,406,887
Ford Motor Credit Co.
5.30%, 3/11/97 14,500,000 14,339,291
General Electric Capital Corp.
5.29%, 6/4/97 14,500,000 14,159,128
General Motors Acceptance Corp.
5.465%, 6/23/97 12,000,000 11,678,680
PHH Corp. 5 1/2%, 1/17/97 13,000,000 12,962,983
Sherwood Medical Co.
5.32%, 3/10/97 12,000,000 11,867,749
Unifunding, Inc.
5.37%, 2/24/97 10,000,000 9,910,777
TOTAL COMMERCIAL PAPER
(Cost $114,880,494) 114,777,380
CASH EQUIVALENTS - 1.2%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations), in a joint
trading account dated 12/31/96
due 1/2/97:
at 6.82% $ 25,830,783 25,821,000
at 6 3/4% 18,067,773 18,061,000
43,882,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $3,389,391,920) $ 3,620,771,335
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) 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 $93,936,690 or 2.6% of net
assets.
(d) Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date.
(e) Debt obligation initially issued in zero coupon form which converts to
coupon form at a specified rate and date.
(f) The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
(g) Non-income producing - issuer filed for protection under the Federal
Bankruptcy Code or is in default of interest payment.
(h) An affiliated company is a company in which the fund has ownership of
at least 5% of the voting securities. Transactions during the period with
companies which are or were affiliates are as follows:
PURCHASE SALES DIVIDEND VALUE
AFFILIATE COST COST INCOME
Barr Laboratories, Inc. $ - $ 16,365,800 $ - $ -
Synetic, Inc. - 25,400,727 - -
WMS Industries, Inc. 344,890 2,617,463 - -
Totals $ 344,890 $ 44,383,990 $ - $ -
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $5,236,434,286 and $5,033,786,308, respectively, of which U.S.
government and government agency obligations aggregated $1,026,406,839 and
$814,153,575, respectively.
The market value of futures contracts opened and closed during the period
amounted to $16,398,668 and $180,511,750, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company. The
commissions paid to these affiliated firms were $628,942 for the period
(see Note 4 of Notes to Financial Statements).
The fund participated in the bank borrowing program. The maximum loan and
average daily balance during the period for which the loan was outstanding
amounted to $6,956,000. The weighted average interest rate was 5.6%. (see
Note 5 of Notes to Financial Statements).

The composition of long-term debt holdings as a percentage of total value
of investment in securities, is as follows (ratings are unaudited):
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 33.5% AAA, AA, A 32.1%
Baa 4.1% BBB 5.7%
Ba 1.6% BB 1.4%
B 3.1% B 2.7%
Caa 0.3% CCC 0.3%
Ca, C 0.0% CC, C 0.0%
D 0.0%
The percentage not rated by both S&P and Moody's amounted to 0.5%.
Distribution of investments by country of issue, as a percentage of total
value of investment in securities, is as follows:
United States 88.4%
United Kingdom 3.3
Japan 1.7
Netherlands 1.6
Canada 1.6
Germany 1.2
Others (individually less than 1%) 2.2
TOTAL 100.0%
INCOME TAX INFORMATION
At December 31, 1996, the aggregate cost of investment securities for
income tax purposes was $3,393,524,538. Net unrealized appreciation
aggregated $227,246,797, of which $259,014,716 related to appreciated
investment securities and $31,767,919 related to depreciated investment
securities.
The fund hereby designates approximately $77,081,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES

<TABLE>
<CAPTION>
<S> <C> <C>
DECEMBER 31, 1996

ASSETS

Investment in securities, at value (including repurchase agreements of $43,882,000) (cost $3,389,391,920) $ 3,620,771,335
- -
See accompanying schedule

Cash 368

Receivable for investments sold 12,629,838

Receivable for fund shares sold 1,477,468

Dividends receivable 4,091,627

Interest receivable 21,130,140

Other receivables 84,928

TOTAL ASSETS 3,660,185,704

LIABILITIES

Payable for investments purchased $ 15,938,580

Payable for fund 1,089,638
shares redeemed

Accrued management fee 1,688,073

Other payables and 275,236
accrued expenses

TOTAL LIABILITIES 18,991,527

NET ASSETS $ 3,641,194,177

Net Assets consist of:

Paid in capital $ 2,969,889,033

Undistributed net investment income 120,488,851

Accumulated undistributed 319,437,760
net realized gain (loss) on investments and foreign currency transactions

Net unrealized appreciation (depreciation) on investments 231,378,533
and assets and liabilities in
foreign currencies

NET ASSETS, for 215,067,314 shares outstanding $ 3,641,194,177

NET ASSET VALUE, offering price $16.93
and redemption price per share ($3,641,194,177 (divided by) 215,067,314 shares)

</TABLE>

STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996

INVESTMENT INCOME $ 34,783,182
Dividends

Interest 113,908,635

TOTAL INCOME 148,691,817

EXPENSES

Management fee $ 22,022,749

Transfer agent fees 2,187,494

Accounting fees and expenses 808,547

Non-interested trustees' compensation 28,265

Custodian fees and expenses 393,000

Registration fees 8,154

Audit 30,576

Legal 22,462

Interest 1,087

Miscellaneous 4,586

Total expenses before reductions 25,506,920

Expense reductions (496,000 25,010,920
)

NET INVESTMENT INCOME 123,680,897

REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:

Investment securities (including 305,682,042
realized gain of $23,048,578
on sales of investments in
affiliated issuers)

Foreign currency transactions 12,006,469

Futures contracts 13,494,578 331,183,089

Change in net unrealized
appreciation (depreciation) on:

Investment securities 31,145,689

Assets and liabilities in (6,941,808
foreign currencies )

Futures contracts (8,457,295 15,746,586
)

NET GAIN (LOSS) 346,929,675

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 470,610,572

OTHER INFORMATION $ 472,893
Expense reductions
Directed brokerage arrangements

Custodian interest credits 23,107

$ 496,000

</TABLE>

STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1995

Operations $ 123,680,897 $ 114,776,593

Net investment income

Net realized gain (loss) 331,183,089 108,752,522

Change in net unrealized appreciation (depreciation) 15,746,586 284,744,744

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 470,610,572 508,273,859

Distributions to shareholders (119,397,539) (67,894,650)

From net investment income

From net realized gain (98,450,602) -

TOTAL DISTRIBUTIONS (217,848,141) (67,894,650)

Share transactions 270,086,820 239,926,948

Net proceeds from sales of shares

Reinvestment of distributions 217,848,141 67,894,650

Cost of shares redeemed (432,347,524) (705,883,879)

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 55,587,437 (398,062,281)

TOTAL INCREASE (DECREASE) IN NET ASSETS 308,349,868 42,316,928

NET ASSETS

Beginning of period 3,332,844,309 3,290,527,381

End of period (including undistributed net investment income of $120,488,851 and $105,158,635, $ 3,641,194,177 $ 3,332,844,309

respectively)

OTHER INFORMATION

Sold 17,138,645 16,731,500

Issued in reinvestment of distributions 14,427,029 5,014,376

Redeemed (27,544,207) (49,259,550)

Net increase (decrease) 4,021,467 (27,513,674)

</TABLE>

<TABLE>
<CAPTION>
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SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.

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FINANCIAL HIGHLIGHTS

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YEARS ENDED DECEMBER 31,

SELECTED PER-SHARE DATA 1996 1995 1994 1993 D 1992

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Net asset value, beginning of period $ 15.79 $ 13.79 $ 15.42 $ 13.32 $ 12.55

Income from Investment Operations

Net investment income .63 .30 .45 .33 .32

Net realized and unrealized gain (loss) 1.55 1.99 (1.33) 2.39 1.09

Total from investment operations 2.18 2.29 (.88) 2.72 1.41

Less Distributions

From net investment income (.57) (.29) (.29) (.33) (.31)

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

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

Total distributions (1.04) (.29) (.75) (.62) (.64)

Net asset value, end of period $ 16.93 $ 15.79 $ 13.79 $ 15.42 $ 13.32

TOTAL RETURN A, B 14.60% 16.96% (6.09)% 21.23% 11.71%

RATIOS AND SUPPLEMENTAL DATA

Net assets, end of period (000 omitted) $ 3,641,194 $ 3,332,844 $ 3,290,527 $ 2,422,692 $ 731,724

Ratio of expenses to average net assets .74% .81% .81% .88% .91%

Ratio of expenses to average net assets after expense reductions .73% .79% .80% .88% .91%
C C C

Ratio of net investment income to average net assets 3.60% 3.54% 4.07% 3.64% 4.89%

Portfolio turnover rate 168% 256% 85% 113% 92%

Average commission rate E $ .0163

A TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE
TOTAL RETURNS
SHOWN. B THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES
NOT BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 6 OF NOTES TO
FINANCIAL
STATEMENTS). C FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS
WITH THIRD PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S
EXPENSES (SEE NOTE
6 OF NOTES TO FINANCIAL STATEMENTS). D EFFECTIVE JANUARY 1, 1993, THE
FUND ADOPTED STATEMENT OF POSITION 93-2, "DETERMINATION, DISCLOSURE,
AND FINANCIAL
STATEMENT PRESENTATION OF INCOME, CAPITAL GAIN, AND RETURN OF CAPITAL
DISTRIBUTIONS BY INVESTMENT COMPANIES." AS A RESULT, NET INVESTMENT
INCOME PER SHARE
MAY REFLECT CERTAIN RECLASSIFICATIONS RELATED TO BOOK TO TAX
DIFFERENCES.. E FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1,
1995, A FUND IS REQUIRED TO
DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY TRADES
ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD
TO PERIOD AND FUND TO FUND
DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS MARKETS WHERE
TRADING PRACTICES AND COMMISSION RATE STRUCTURES MAY DIFFER.

</TABLE>

NOTES TO FINANCIAL STATEMENTS
For the period ended December 31, 1996

1. SIGNIFICANT ACCOUNTING POLICIES.
Asset Manager Portfolio (the fund) is a fund of Variable Insurance Products
Fund 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. Shares of the fund may only be
purchased by insurance companies for the purpose of funding variable
annuity or variable life insurance contracts. The financial statements have
been prepared in conformity with generally accepted accounting principles
which permit management to make certain estimates and assumptions at the
date of the financial statements. The following summarizes the significant
accounting policies of the fund:
SECURITY VALUATION. Equity securities for which quotations are readily
available are valued at the last sale price, or if no sale price, at the
closing bid price. Debt securities for which quotations are readily
available are valued by a pricing service at their market values as
determined by their most recent bid prices in the principal market (sales
prices if the principal market is an exchange) in which such securities are
normally traded. Securities (including restricted securities) for which
market quotations are not readily available are valued at their fair value
as determined in good faith under consistently applied procedures under the
general supervision of the Board of Trustees. Short-term securities with
remaining maturities of sixty days or less for which quotations are not
readily available are valued at amortized cost or original cost plus
accrued interest, both of which approximate current value.
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. Income receipts
and expense payments are translated into U.S. dollars at the prevailing
exchange rate on the respective dates of the transactions. Purchases and
sales of securities are translated into U.S. dollars at the contractual
currency exchange rates established at the time of each trade.
Net realized gains and losses on foreign currency transactions represent
net gains and losses from sales and maturities of forward currency
contracts, disposition of foreign currencies, and the difference between
the amount of net investment income accrued and the U.S. dollar amount
actually received. The effects of changes in foreign currency exchange
rates on investments in securities are included with the net realized and
unrealized gain or loss on investment securities.
INCOME TAXES. 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, gains on investments or currency repatriation. 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 between the
funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are recorded on the
ex-dividend date.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences, which may result in distribution
reclassifications, are primarily due to differing treatments for litigation
proceeds, paydown gains/losses on certain securities, futures and options
transactions, foreign currency transactions, passive foreign investment
companies (PFIC), market discount, partnerships, non-taxable dividends and
losses deferred due to wash sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital and may
affect the per-share allocation between net investment income and realized
and unrealized gain (loss). 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. The cost of
the foreign currency contracts is included in the cost basis of the
associated investment.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the fund, along with other affiliated
entities of Fidelity Management & Research Company (FMR), may transfer
uninvested cash balances into one or more joint trading accounts. These
balances are invested in one or more repurchase agreements that mature in
60 days or less from the date of purchase for U.S. Treasury or Federal
Agency obligations.
2. OPERATING POLICIES - CONTINUED
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.
FUTURES CONTRACTS. The fund may use futures contracts to manage its
exposure to the stock market and to fluctuations in interest rates and
currency values. Buying futures tends to increase the fund's exposure to
the underlying instrument, while selling futures tends to decrease the
fund's exposure to the underlying instrument or hedge other fund
investments. Losses may arise from changes in the value of the underlying
instruments, if there is an illiquid secondary market for the contracts, or
if the counterparties do not perform under the contracts' terms. Futures
contracts are valued at the settlement price established each day by the
board of trade or exchange on which they are traded.
RESTRICTED SECURITIES. 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, the
fund had no investments in restricted securities (excluding 144A issues).
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities), the market value of futures contracts opened and
closed, is included under the caption "Other Information" at the end of the
fund's schedule of investments.
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 .2500% to .5200% for
the period. In the event that these rates were lower than the contractual
rates in effect during the period, FMR voluntarily implemented the above
rates, as they resulted in the same or a lower management fee. The annual
individual fund fee rate is .25%. For the period, the management fee was
equivalent to an annual rate of .64% of average net assets. Effective
August 1, 1996, FMR voluntarily agreed to reduce the individual fund fee
rate from .40% to .25%.
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations Company
(FIIOC), an affiliate of FMR, is the fund's transfer, dividend disbursing
and shareholder servicing agent. FIIOC receives account fees and
asset-based fees that vary according to account size and type of account.
FIIOC pays for typesetting, printing and mailing of all shareholder
reports, except proxy statements. For the period, the transfer agent fees
were equivalent to an annual rate of .06% of average net assets.
ACCOUNTING FEES. Fidelity Service Co. (FSC), 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.
BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms are shown under the caption
"Other Information" at the end of the fund's schedule of investments.
5. BANK BORROWINGS.
The fund is permitted to have bank borrowings for temporary or emergency
purposes to fund shareholder redemptions. The fund has established
borrowing arrangements with certain banks. Under the most restrictive
arrangement, the fund must pledge to the bank securities having a market
value in excess of 220% of the total bank borrowings. The interest rate on
the borrowings is the bank's base rate, as revised from time to time.
Information regarding the fund's participation in the program is included
under the caption "Other Information" at the end of the fund's schedule of
investments.
6. EXPENSE REDUCTIONS.
FMR voluntarily agreed to reimburse the fund's operating expenses
(excluding interest, taxes, brokerage commissions and extraordinary
expenses) above an annual rate of 1.25% of average net assets.
FMR has directed certain portfolio trades to brokers who paid a portion of
the fund's expenses. In addition, the fund has entered into an arrangement
with its custodian whereby interest earned on uninvested cash balances was
used to offset a portion of the fund's expenses.
For the period, the reduction under these arrangements are shown under the
caption "Other Information" on the fund's Statement of Operations.
7. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investment Life Insurance Company (FILI)
and its subsidiaries, affiliates of FMR, were the record owners of
approximately 19% of the outstanding shares of the fund. In addition, three
unaffiliated insurance companies were each record owner of 10% or more of
the total outstanding shares of the fund, totaling 49%.
8. TRANSACTIONS WITH AFFILIATED COMPANIES.
An affiliated company is a company in which the fund has ownership of at
least 5% of the voting securities. Information regarding transactions with
affiliated companies is included under the caption "Legend" at the end of
the fund's schedule of investments.
REPORT OF INDEPENDENT ACCOUNTANTS

To the Trustees of Variable Insurance Products Fund II and the Shareholders
of Asset Manager Portfolio:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments (except for Moody's and Standard &
Poor's ratings), and the related statements of operations and of changes in
net assets and the financial highlights present fairly, in all material
respects, the financial position of Asset Manager Portfolio (a fund of
Variable Insurance Products Fund II) at December 31, 1996, the results of
its operations for the year then ended, and the changes in its net assets
and the financial highlights for the periods indicated in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Asset Manager Portfolio's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of securities at December 31, 1996 by correspondence
with the custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 10, 1997
DISTRIBUTIONS

The Board of Trustees of Asset Manager Portfolio voted to pay on February
7, 1997, to shareholders of record at the opening of business on February
7, 1997, a distribution of $1.48 per share derived from capital gains
realized from sales of portfolio securities and a dividend of $.59 per
share from net investment income.

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
OFFICERS
Edward C. Johnson 3d, PRESIDENT
J. Gary Burkhead, SENIOR VICE PRESIDENT
William J. Hayes, VICE PRESIDENT
Fred L. Henning, Jr., VICE PRESIDENT
Robert A. Lawrence, VICE PRESIDENT
Richard C. Habermann, VICE PRESIDENT
John Todd, VICE PRESIDENT
George Vanderheiden, VICE PRESIDENT
Arthur S. Loring, SECRETARY
Kenneth A. Rathgeber, TREASURER
Robert H. Morrison, MANAGER, SECURITY TRANSACTIONS
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
BOARD OF TRUSTEES
J. Gary Burkhead
Ralph F. Cox *
Phyllis Burke Davis *
Richard J. Flynn *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Edward H. Malone *
Marvin L. Mann *
Gerald C. McDonough *
Thomas R. Williams *
ADVISORY BOARD
William O. McCoy
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Investments Institutional Operations Co.
Boston, MA
CUSTODIAN
The Chase Manhattan Bank, N.A., New York, NY
* INDEPENDENT TRUSTEES

(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS
FUND II: CONTRAFUND PORTFOLIO

ANNUAL REPORT
DECEMBER 31, 1996
CONTENTS

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MARKET ENVIRONMENT 3 A review of what happened in world markets
during the last year.

PERFORMANCE 4 How the fund has done over time.

FUND TALK 5 The manager's review of fund performance, strategy
and outlook.

INVESTMENTS 6 A complete list of the fund's investments with their
market values.

FINANCIAL STATEMENTS 15 Statements of assets and liabilities, operations, and
changes in net assets, as well as financial highlights.

NOTES 17 Notes to the financial statements.

REPORT OF INDEPENDENT ACCOUNTANTS 19 The auditors' opinion.

DISTRIBUTIONS 20

</TABLE>

Most stock and bond markets posted positive returns in 1996, aided by
moderate growth and low inflation. Sustained corporate earnings growth and
a favorable interest rate environment also proved beneficial. Japan,
however, was the major exception as an underperforming stock market and a
weak yen undermined returns for U.S.-based investors. The strongest gains
came from the often-volatile emerging bond markets in 1996, while
performance of the bond markets of developed countries was mixed.
U.S. STOCK MARKETS
The Standard & Poor's 500 Index - a broad measure of U.S. stock market
performance - rose 22.96% for the 12 months that ended December 31, 1996,
well above the index's long-term average annual return of about 12%. The
Russell 2000 Index - a measure of small stock performance - rose 16.49%.
The Dow Jones Industrial Average - an index of 30 blue-chip stocks - posted
a return of 28.70%, closing above 6500 for the first time in November.
The U.S. stock market spent much of the past year breaking price and
trading volume records. Solid corporate earnings reports, large cash
inflows into mutual funds, widespread optimism and a generally favorable
interest rate environment propelled share prices higher.
Large-capitalization stocks thrived as investors sought their lower
volatility and higher degree of liquidity over smaller-cap stocks in an
environment where it was sometimes difficult to discern the health of the
economy.
Most industry sectors experienced positive, if not strong performance. At
mid-year, technology stocks suffered from a sell-off sparked by fears that
company earnings were weakening. Nevertheless, this sector proved to be the
strongest in the U.S. market in 1996. Earnings surprises and positive
earnings projections were the main drivers of solid performance, especially
among semiconductor manufacturers, companies that make disk drives and
monitors, and software firms. Even though consensus estimates pointed
toward increases in short-term interest rates by the Fed, financial stocks
- - usually sensitive to changes in interest rates - shrugged off this
concern and posted solid performance based on low interest rates and
positive business prospects. Energy stocks reaped the benefits of
higher-than-expected energy prices, which resulted in part from the delayed
re-entry of Iraq into the world market. Uncertainty over the direction of
the economy benefited consumer nondurables - such as food, beverage and
tobacco companies - health care and traditional big-name growth stocks, as
these companies tend to post steady earnings growth in many economic
environments.
Utilities stocks struggled in 1996 for two reasons. First, and most
important, uncertainty over the direction and form of deregulation in the
sector tended to diminish investor interest. Second, stocks in the sector
tend to move in concert with bonds, which lagged due to periodic inflation
fears and confusing economic signals. Stocks in the telecommunications
field especially were affected by uncertainty over legislation signed into
law in February 1996. Biotechnology issues had a hard time recovering from
a correction in stock prices from overvalued levels that they experienced
earlier in 1996. Cyclical stocks - those that usually rise and fall with
the economy - posted mixed results that largely depended on the outlook for
companies in the specific sector rather than the direction of the economy.
FOREIGN STOCK MARKETS
Foreign stock markets posted mixed results in 1996. The Morgan Stanley
Capital International (MSCI) EAFE Index - which measures stock performance
in Europe, Australia and the Far East - returned 6.05% in 1996. Europe
posted the most consistently strong equity markets due to stronger economic
growth, lower interest rates, higher corporate earnings, the relative
weakness of the continent's major currencies and a new emphasis on
shareholder friendliness by many of the region's corporations. The MSCI
Europe Index was up 21.09% in 1996. The Japanese stock market
underperformed on the weakness of the economic recovery and the uncertainty
for any substantial economic reform. The Tokyo Stock Exchange TOPIX Total
Return Index was off 16.26%. Emerging market equity performance ran the
gamut from negative to positive, with the MSCI Emerging Markets Free Index
returning 6.03% for 1996. While Hong Kong was a top performer - benefiting
from the rising value of the property sector, solid economic growth and
stable interest rates - other Asian markets posted mixed returns as
concerns rose over declining export growth in the region. Latin America
enjoyed a strong first half, but faded toward the end of 1996 due to low
domestic savings rates and inefficient governments, among other factors.
U.S. BOND MARKETS
Uncertainty over the direction of the economy led to mixed performance in
U.S. bond markets in 1996. For the year, the Lehman Brothers Aggregate Bond
Index - a broad measure of the performance of the U.S. taxable bond market
- - posted a total return of 3.63%. Stronger-than-expected economic signals
rattled the bond market in the early spring. Investors spent most of the
summer anticipating a short-term interest rate increase by the Federal
Reserve Board. However, the Fed neither raised nor lowered rates through
the end of 1996. Interest rates responded to the Fed's inaction by falling
during much of October and November. In December, though, bond prices
dropped due to inflation concerns, stronger-than-expected economic data and
comments by Fed Chairman Alan Greenspan that the stock markets may be
overvalued.
FOREIGN BOND MARKETS
While low inflation and moderate growth helped provide a positive backdrop
for most bond markets in 1996, performance in overseas bond markets was
mixed. The Salomon Brothers World Government Bond Index - a measure of
government bond market performance in developed nations - returned 3.62%
for the 12 months that ended December 31, 1996. In Europe, focus centered
on the continuing progress toward the European Monetary Union (EMU).
Attractive opportunities arose as countries worked to meet the requirements
for joining the EMU. However, Germany and Japan - two of the larger
components of the Salomon Brothers World Government Bond Index -
experienced currency problems that hurt returns. In stark contrast to the
developed world, the often-volatile emerging debt markets enjoyed a
particularly strong year, helped by inflows of foreign capital, low
interest rates and the implementation of country-specific reforms -
especially in Latin America. The J.P. Morgan Emerging Markets Bond Index -
of which Latin America is a large component - posted a return of 34.16%
during the period.
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY

Contrafund 21.22% 30.19%

S&P 500 (registered trademark) 22.96% 30.11%

AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what
would have happened if the fund had performed at a constant rate each year.
You can compare the fund's return to the performance of the Standard &
Poor's 500 Index - a widely recognized, unmanaged index of common stocks.
This benchmark reflects the reinvestment of dividends and capital gains, if
any.

Fidelity VIP II: Contrafund Standard & Poor's 500
$16,937
$16,915
$
Let's say hypothetically that $10,000 was invested in Contrafund Portfolio
on January 3, 1995, when the fund started. As the chart shows, by December
31, 1996, the value of the investment would have grown to $16,937 - a
69.37% increase on the initial investment. With reinvested dividends and
capital gains, if any, a $10,000 investment in the S&P 500 would have grown
to $16,915 over the same period - a 69.15% increase.
INVESTMENT SUMMARY
TOP TEN STOCKS AS OF DECEMBER 31, 1996
% OF FUND'S
INVESTMENTS

Schlumberger Ltd. 2.1

Intel Corp. 1.8

International Business Machines Corp. 1.5

Royal Dutch Petroleum Co. ADR 1.3

Halliburton Co. 1.2

British Petroleum PLC ADR 1.1

ENSCO International, Inc. 1.0

EMC Corp. 0.9

Federal National Mortgage Association 0.8

Unocal Corp. 0.8

TOP TEN MARKET SECTORS AS OF DECEMBER 31, 1996
% OF FUND'S
INVESTMENTS

Energy 24.2

Technology 15.3

Finance 10.3

Retail & Wholesale 6.3

Industrial Machinery & Equipment 4.0

Health 4.0

Basic Industries 3.8

Media & Leisure 3.8

Durables 3.7

Utilities 2.9

VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW

An interview with
William Danoff, Portfolio Manager of Contrafund Portfolio
Q. HOW DID THE FUND PERFORM OVER THE PAST YEAR, WILL?
A. The fund slightly trailed the Standard & Poor's 500 Index, which rose
22.96% during the 12-month period that ended December 31, 1996.
Q. WHAT WAS THE INVESTING ENVIRONMENT LIKE IN 1996?
A. The market environment was more difficult than the Dow Jones Industrial
Index's 28.7% performance would indicate. Market breadth, measured by the
number of stocks participating in a rally, was only fair.
Larger-capitalization companies led the market's advance, and broader
measures of market performance lagged. Specifically, the Russell 2000
Index, which measures the performance of smaller-cap companies, and the
Standard & Poor's MidCap 400 Index rose 16.4% and 19.2%, respectively, both
below the S&P 500 Index's advance in 1996. In addition, the sectors leading
the market changed frequently during the year, a phenomenon called market
rotation. For example, the technology sector - and particularly the
semiconductor stocks - was borderline schizophrenic. Semiconductor stocks
plunged by a third or more in July's correction after performing poorly
during the first six months of the year, then rose sharply in the second
half of the year. This volatility made for a more challenging year than
usual for stock fund portfolio managers.
Q. WHAT FACTORS CONTRIBUTED TO THE FUND'S PERFORMANCE SINCE YOUR REPORT TO
SHAREHOLDERS EARLY IN THE SUMMER?
A. The fund's investments in the energy and energy services sectors, which
accounted for approximately 24% of the fund's holdings on December 31,
helped its performance. I started adding to our holdings in these sectors
because I felt the market was too pessimistic about the prospectus for
energy-related companies, and was undervaluing them as a result. As it
turned out, the sector rose about 45% during the year, and the fund's
holdings in Schlumberger, Halliburton, British Petroleum, ENSCO and Unocal,
among others, appreciated nicely since the last report to you. Production
capacity in the energy industry has been shrinking for the past decade, and
capacity utilization exceeded 90 percent in 1996. With conditions so tight
in the sector, earnings exploded when oil and natural gas prices rose
throughout the year.
Q. YOU SIGNIFICANTLY INCREASED THE FUND'S HOLDINGS IN TECHNOLOGY FROM SIX
MONTHS AGO. HOW DID IT WORK OUT?
A. Since many technology stocks were temporarily out-of-favor after the
summer correction I mentioned earlier, I boosted the fund's technology
holdings to over 15% of the fund's investments on December 31 from just
over 6% at the end of June. Computing and electronics continue to play a
growing part in the global economy, and earnings in both sectors rebounded
significantly after the industry's excessive inventory position returned to
normal levels during the second quarter. The fund's holdings in Intel, IBM
and EMC did particularly well during the period.
Q. THE FUND MUST HAVE SUFFERED SOME DISAPPOINTMENTS. WHAT DECISIONS DO YOU
REGRET?
A. The biggest disappointment to me was carrying too much cash during the
year. While I reduced the fund's cash position from 15% six months ago to
under 10% at the end of December, not being more fully invested in the
stock market undeniably hurt the fund's performance. Given the market's
strong performance, I estimate the fund's cash position detracted 2% from
the fund's showing in 1996. I was correct to hold cash during the
technology rout in the spring, but I regret not moving faster to build the
fund's technology positions after fundamentals began to improve in the late
summer.
Q. WHAT'S YOUR OUTLOOK FOR THE FIRST HALF OF 1997, WILL?
A. While the stock market outlook appears bright, expectations are high.
Inflation remains low, and corporate profit growth remains good, fueled by
excellent productivity gains. I have attempted to position the fund to
participate if the market continues its ascent in 1997. But, as I did last
year, I have tried to dampen some of the downside risk should unforeseen
events cloud the otherwise clear economic skies. Stocks could fall
meaningfully if interest rates continue their recent rise, or if a slowing
economy or the strong U.S. dollar hurt corporate earnings growth. With the
help of Fidelity's large research staff, I'll continue to look for those
investment ideas that will perform well regardless of the market
environment.

Showing Percentage of Total Value of Investment in Securities

COMMON STOCKS - 89.0%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 1.2%
AEROSPACE & DEFENSE - 1.0%
BE Aerospace, Inc. (a) 6,800 $ 184,450
Boeing Co. 53,500 5,691,063
Gulfstream Aerospace Corp. (a) 109,400 2,652,950
Lockheed Martin Corp. 73,400 6,716,100
McDonnell Douglas Corp. 91,600 5,862,400
Orbital Sciences Corp. (a) 66,500 1,147,125
Sundstrand Corp. 32,500 1,381,250
23,635,338
SHIP BUILDING & REPAIR - 0.2%
Avondale Industries, Inc. (a) 22,000 473,000
General Dynamics Corp. 76,100 5,365,050
5,838,050
TOTAL AEROSPACE & DEFENSE 29,473,388
BASIC INDUSTRIES - 3.8%
CHEMICALS & PLASTICS - 2.5%
Air Products & Chemicals, Inc. 68,200 4,714,325
Avery Dennison Corp. 69,800 2,469,175
Betz Dearborn, Inc. 25,300 1,480,050
Cambrex Corp. 67,200 2,200,800
Crompton & Knowles Corp. 335,392 6,456,296
Cytec Industries, Inc. (a) 33,500 1,360,938
du Pont (E.I.) de Nemours & Co. 105,900 9,994,313
FMC Corp. (a) 5,100 357,638
International Specialty Products, Inc. (a) 20,600 252,350
Monsanto Co. 276,200 10,737,275
Nalco Chemical Co. 32,600 1,177,675
Olin Corp. 11,200 421,400
Potash Corp. 5,800 493,752
Praxair, Inc. 144,700 6,674,288
Raychem Corp. 1,000 80,125
Sealed Air Corp. (a) 224,100 9,328,163
Union Carbide Corp. 20,500 837,938
Witco Corp. 35,800 1,091,900
60,128,401
IRON & STEEL - 0.0%
Steel Dynamics, Inc. (a) 46,400 887,400
METALS & MINING - 0.3%
Alcan Aluminium Ltd. 20,900 705,128
Aluminum Co. of America 19,800 1,262,250
Falconbridge Ltd. 21,800 464,354
Falconbridge Ltd.
Final Installment Receipt (d) 81,700 1,168,122
Freeport-McMoRan Copper
& Gold, Inc. Class B 66,800 1,995,650
Inco Ltd. 5,000 159,573
QNI Ltd. 244,146 490,970
6,246,047
PACKAGING & CONTAINERS - 0.5%
Corning, Inc. 49,800 2,303,250
Crown Cork & Seal Co., Inc. 38,800 2,109,750
Owens-Illinois, Inc. (a) 295,600 6,724,900
11,137,900
PAPER & FOREST PRODUCTS - 0.5%
American Pad & Paper Co. (a) 67,500 1,527,188
James River Corp. 55,900 1,851,688
Kimberly-Clark Corp. 82,600 7,867,650
11,246,526
TOTAL BASIC INDUSTRIES 89,646,274

SHARES VALUE (NOTE 1)
CONGLOMERATES - 1.1%
AlliedSignal, Inc. 89,400 $ 5,989,800
American Standard Companies, Inc. (a) 60,400 2,310,300
Brascan Ltd. Class A 40,200 894,409
Coltec Industries, Inc. (a) 22,500 424,688
GenCorp, Inc. 39,700 719,563
Lancaster Colony Corp. 13,100 602,600
Textron, Inc. 3,500 329,875
Tyco International Ltd. 271,900 14,376,713
United Technologies Corp. 19,400 1,280,400
26,928,348
CONSTRUCTION & REAL ESTATE - 2.9%
BUILDING MATERIALS - 0.6%
Armstrong World Industries, Inc. 4,100 284,950
Dexter Corp. 98,200 3,130,125
Lilly Industrial Coatings, Inc. Class A 40,100 731,825
Masco Corp. 62,200 2,239,200
Nortek, Inc. (a) 1,200 24,000
Sherwin-Williams Co. 60,800 3,404,800
Southdown, Inc. 50,400 1,568,700
USG Corp. (a) 90,100 3,052,138
14,435,738
CONSTRUCTION - 0.1%
Bouygues Offshore SA
sponsored ADR (a) 97,300 1,252,738
Fairfield Communities, Inc. (a) 11,300 279,675
Oakwood Homes Corp. 55,900 1,278,713
2,811,126
ENGINEERING - 0.1%
Fluor Corp. 41,700 2,616,675
REAL ESTATE - 0.3%
New World Development Co. Ltd. 16,000 108,087
Rouse Co. (The) 218,123 6,925,405
7,033,492
REAL ESTATE INVESTMENT TRUSTS - 1.8%
Arden Realty Group, Inc. 83,000 2,303,250
Bay Apartment Communities, Inc. 3,400 122,400
Beacon Properties Corp. 116,400 4,263,150
Bradley Real Estate Trust (SBI) 26,900 484,200
Cali Realty Corp. 62,700 1,935,863
Capstead Mortgage Corp. 16,800 403,200
CenterPoint Properties Corp. 43,300 1,418,075
Crescent Real Estate Equities, Inc. 137,700 7,263,675
Duke Realty Investors, Inc. 43,100 1,659,350
Equity Residential Properties Trust (SBI) 18,700 771,375
Essex Property Trust, Inc. 43,100 1,266,063
Felcor Suite Hotels, Inc. 21,200 749,950
First Industrial Realty Trust, Inc. 103,200 3,134,700
Kimco Realty Corp. 500 17,438
LTC Properties, Inc. 60,800 1,124,800
Macerich Co. 64,700 1,690,288
Patriot American Hospitality, Inc. 71,100 3,066,188
Public Storage, Inc. 26,200 812,200
Reckson Associates Realty Corp. 22,500 950,625
Regency Realty Group 8,400 220,500
Sovran Self Storage, Inc. 900 28,125
Speiker Properties, Inc. 71,300 2,566,800
Starwood Lodging Trust combined
certificate (SBI) 63,300 3,489,413
Vornado Realty Trust 1,400 73,500
Weeks Corp. 29,400 977,550
40,792,678
TOTAL CONSTRUCTION & REAL ESTATE 67,689,709
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
DURABLES - 3.7%
AUTOS, TIRES, & ACCESSORIES - 2.2%
Chrysler Corp. 310,400 $ 10,243,200
Cross-Continent Auto Retailers, Inc. (a) 46,400 968,600
Danaher Corp. 168,300 7,846,988
Federal-Mogul Corp. 5,000 110,000
Federal Signal Co. 8,300 214,763
General Motors Corp. 310,700 17,321,525
Johnson Controls, Inc. 19,700 1,632,638
Lear Corp. (a) 80,900 2,760,713
Lucas Varity PLC sponsored ADR (a) 14,452 549,176
O'Gara Co. (a) 17,000 165,750
PACCAR, Inc. 7,700 523,600
Pep Boys-Manny, Moe & Jack 12,300 378,225
SPX Corp. 117,600 4,557,000
Smith (A.O.) Corp. Class B 3,500 104,563
Snap-on Tools Corp. 33,000 1,175,625
Toyota Motor Corp. 43,000 1,234,929
United Auto Group, Inc. (a) 53,500 1,377,625
51,164,920
CONSUMER DURABLES - 0.2%
Minnesota Mining & Manufacturing Co. 72,900 6,041,588
CONSUMER ELECTRONICS - 0.1%
Harman International Industries, Inc. 12,800 712,000
Sunbeam-Oster, Inc. 42,000 1,081,500
1,793,500
HOME FURNISHINGS - 0.4%
Carpetright PLC 347,500 3,440,646
Furniture Brands International, Inc. (a) 99,700 1,395,800
Leggett & Platt, Inc. 48,500 1,679,313
Miller (Herman), Inc. 37,200 2,106,450
8,622,209
TEXTILES & APPAREL - 0.8%
Cutter & Buck, Inc. (a)(e) 280,000 3,255,000
Fruit of the Loom, Inc. Class A (a) 59,600 2,257,350
Jones Apparel Group, Inc. (a) 19,800 740,025
Liz Claiborne, Inc. 123,800 4,781,775
NIKE, Inc. Class B 39,700 2,372,075
Nine West Group, Inc. (a) 100 4,638
Reebok International Ltd. 101,400 4,258,800
Russell Corp. 19,900 592,025
Stride Rite Corp. 34,000 340,000
Timberland Co. Class A (a) 19,400 737,200
Unifi, Inc. 19,200 616,800
Warnaco Group, Inc. Class A 9,100 269,588
Westpoint Stevens, Inc. Class A (a) 6,400 191,200
20,416,476
TOTAL DURABLES 88,038,693
ENERGY - 24.0%
COAL - 0.0%
MAPCO, Inc. 6,300 214,200
ENERGY SERVICES - 10.2%
Atwood Oceanics, Inc. (a) 800 50,800
BJ Services Co. (a) 196,100 10,001,100
Baker Hughes, Inc. 429,900 14,831,550
Carbo Ceramics, Inc. 33,100 695,100
Diamond Offshore Drilling, Inc. (a) 255,000 14,535,000
Dresser Industries, Inc. 420,900 13,047,900
ENSCO International, Inc. (a) 485,787 23,560,670
Eni Spa 483,800 2,486,887
Falcon Drilling, Inc. (a) 117,000 4,592,250

SHARES VALUE (NOTE 1)
Global Marine, Inc. (a) 323,600 $ 6,674,250
Halliburton Co. 460,900 27,769,225
Helmerich & Payne, Inc. 52,700 2,746,988
Marine Drilling Companies, Inc. (a) 287,300 5,656,219
Nabors Industries, Inc. (a) 536,400 10,325,700
Newpark Resources, Inc. (a) 24,400 908,900
Noble Drilling Corp. (a) 311,700 6,195,038
Oceaneering International, Inc. (a) 11,700 185,738
Reading & Bates Corp. (a) 192,500 5,101,250
Schlumberger Ltd. 502,400 50,177,200
Smedvig AS, Series B (a) 55,200 1,151,082
Smith International, Inc. (a) 397,900 17,855,763
Tidewater, Inc. 151,159 6,839,945
Transocean Offshore, Inc. 149,174 9,342,022
Varco International, Inc. (a) 185,300 4,285,063
Western Atlas, Inc. (a) 16,900 1,197,788
240,213,428
OIL & GAS - 13.8%
Amerada Hess Corp. 13,800 798,675
American Exploration Co. (a) 77,800 1,244,800
Amoco Corp. 13,400 1,078,700
Anadarko Petroleum Corp. 117,200 7,588,700
Ashland, Inc. 49,700 2,180,588
Atlantic Richfield Co. 15,800 2,093,500
Barrett Resources Corp. (a) 140,100 5,971,763
British Petroleum PLC ADR 176,800 24,995,100
Burlington Resources, Inc. 264,500 13,324,188
Camco International, Inc. 280,900 12,956,513
Canada Occidental Petroleum Ltd. 103,600 1,666,397
Canadian Natural Resources Ltd. (a) 273,300 7,496,137
Chesapeake Energy Corp. (a) 96,400 5,362,250
Chieftain International, Inc. (a) 65,700 1,725,353
Coastal Corp. (The) 160,500 7,844,438
Cooper Cameron Corp. (a) 214,620 16,418,430
Dorset Exploration Ltd. (a) 3,500 15,447
Enron Oil & Gas Co. 246,100 6,214,025
Enterprise Oil PLC 174,700 1,933,227
Exxon Corp. 36,300 3,557,400
Flores & Rucks, Inc. (a) 64,200 3,418,650
Forcenergy Gas Exploration, Inc. (a) 119,400 4,328,250
Imperial Oil Ltd. 4,300 202,320
Kerr-McGee Corp. 41,600 2,995,200
Louisiana Land & Exploration Co. 79,400 4,257,825
Monterey Resources, Inc. (a) 31,600 509,550
Murphy Oil Corp. 71,600 3,982,750
Nationale Elf Aquitaine 4,700 427,709
National-Oilwell, Inc. (a) 33,600 1,033,200
Newfield Exploration Co. (a) 264,200 6,869,200
Noble Affiliates, Inc. 118,600 5,677,975
Norcen Energy Resources Ltd. 17,900 396,951
Northstar Energy Corp. (a) 150,300 1,748,758
Occidental Petroleum Corp. 126,600 2,959,275
Oryx Energy Co. (a) 90,200 2,232,450
Parker & Parsley Petroleum Co. 64,200 2,359,350
Penn West Petroleum Ltd. (a) 33,600 343,145
Penn West Petroleum Ltd. (a)(c) 82,100 838,458
Pennzoil Co. 6,000 339,000
Petro-Canada 109,500 1,545,629
Petro-Canada
Final Installment Receipt (d) 151,100 1,658,865
Petroleum Securities Australia Ltd.
sponsored ADR (a) 84,500 1,922,375
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
ENERGY - CONTINUED
OIL & GAS - CONTINUED
Phillips Petroleum Co. 317,000 $ 14,027,250
Poco Petroleums Ltd. (a) 20,800 198,767
Pogo Producing Co. 173,000 8,174,250
Renaissance Energy Ltd. (a) 358,200 12,189,539
Rio Alto Exploration Ltd. (a) 3,100 22,501
Rio Alto Exploration Ltd. (a)(c) 39,300 285,250
Royal Dutch Petroleum Co. ADR 177,800 30,359,350
Saga Petroleum AS Class B 44,100 691,439
Santa Fe Energy Resources, Inc. (a) 387,800 5,380,725
Stone Energy Corp. (a) 4,800 143,400
Suncor, Inc. 34,200 1,414,553
Swift Energy Co. (a) 211,200 6,309,600
Texaco, Inc. 76,100 7,467,313
Tosco Corp. 110,000 8,703,750
Total SA:
Class B 66,686 5,422,253
sponsored ADR 16,600 668,150
USX-Marathon Group 99,700 2,380,338
Ultramar Diamond Shamrock Corp. 153,100 4,841,788
Union Pacific Resources Group, Inc. 114,600 3,352,050
United Meridian Corp. (a) 284,800 14,738,400
Unocal Corp. 449,600 18,265,000
Valero Energy Corp. 3,700 105,913
Vastar Resources, Inc. 76,200 2,895,600
Vintage Petroleum, Inc. 120,700 4,164,150
326,713,845
TOTAL ENERGY 567,141,473
FINANCE - 10.3%
BANKS - 3.3%
Bank of New York Co., Inc. 222,100 7,495,875
BankAmerica Corp. 164,700 16,428,825
Citicorp 32,500 3,347,500
Comerica, Inc. 2,000 104,750
Cullen Frost Bankers, Inc. 26,600 884,450
Fifth Third Bancorp 5,900 370,594
First Bank System, Inc. 148,400 10,128,300
First Empire State Corp. 800 230,400
Fleet Financial Group, Inc. 143,800 7,172,025
HSBC Holdings PLC 476,655 10,369,677
Hang Seng Bank Ltd. 332,000 4,034,909
North Fork Bancorporation, Inc. 88,000 3,135,000
Norwest Corp. 80,100 3,484,350
Regions Financial Corp. 3,300 170,569
Texas Regional Bancshares, Inc.
Class A (vtg.) 9,500 323,000
U.S. Bancorp 147,600 6,632,775
Westpac Banking Corp. 354,800 2,019,212
Zions Bancorp 22,900 2,381,600
78,713,811
CLOSED END INVESTMENT COMPANY - 0.1%
Morgan Stanley Emerging Markets
Fund, Inc. 23,900 331,613
Morgan Stanley Asia-Pacific Fund, Inc. 82,100 800,475
Templeton Dragon Fund, Inc. 43,400 699,825
1,831,913
CREDIT & OTHER FINANCE - 1.4%
American Express Co. 105,800 5,977,700
Associates First Capital Corp. 51,200 2,259,200

SHARES VALUE (NOTE 1)
Beneficial Corp. 29,400 $ 1,863,225
Finova Group, Inc. 13,500 867,375
First Chicago NBD Corp. 24,300 1,306,125
Green Tree Financial Corp. 10,000 386,250
Greenpoint Financial Corp. 169,300 8,020,588
Household International, Inc. 106,100 9,787,725
Transamerica Corp. 37,300 2,946,700
33,414,888
FEDERAL SPONSORED CREDIT - 1.3%
Federal Home Loan Mortgage
Corporation 107,900 11,882,488
Federal National Mortgage Association 519,200 19,340,200
Student Loan Marketing Association 400 37,250
31,259,938
INSURANCE - 2.8%
ACE Ltd. 9,600 577,200
Aetna, Inc. 129,000 10,320,000
Allmerica Financial Corp. 72,100 2,415,350
Allstate Corp. 249,900 14,462,963
American International Group, Inc. 113,500 12,286,375
Chubb Corp. (The) 8,100 435,375
Conseco, Inc. 33,800 2,154,750
General Re Corp. 5,500 867,625
ITT Hartford Group, Inc. 51,200 3,456,000
MMI Companies, Inc. 37,100 1,196,475
Marsh & McLennan Companies, Inc. 20,300 2,111,200
Mercury General Corp. 5,600 294,000
Mid Ocean Ltd. 26,200 1,375,500
Penncorp. Financial Group, Inc. 3,800 136,800
Progressive Corp. 12,500 842,188
Provident Companies, Inc. 4,600 222,525
Providian Corp. 19,000 976,125
Reinsurance Group of America, Inc. 1,900 89,538
Reliastar Financial Corp. 7,800 450,450
SunAmerica, Inc. 68,700 3,048,563
Travelers/Aetna Property Casualty
Corp. Class A 8,700 307,763
Travelers Group, Inc. (The) 142,366 6,459,857
UNUM Corp. 8,000 578,000
USF&G Corp. 50,200 1,047,925
66,112,547
SAVINGS & LOANS - 1.2%
Ahmanson (H.F.) & Co. 28,000 910,000
Charter One Financial Corp. 19,085 801,570
Dime Bancorp., Inc. (a) 58,800 867,300
Glendale Federal Bank FSB (a) 197,900 4,601,175
Golden West Financial Corp. 118,080 7,453,800
Great Western Financial Corp. 102,200 2,963,800
Long Island Bancorp., Inc. 7,800 273,000
Sovereign Bancorp., Inc. 400 5,250
TCF Financial Corporation 27,800 1,209,300
Washington Mutual, Inc. 184,400 7,986,825
27,072,020
SECURITIES INDUSTRY - 0.2%
Guoco Group Ltd. 188,000 1,052,479
Peregrine Investments Holdings Ltd. 882,000 1,510,957
Salomon, Inc. 23,300 1,098,013
Schwab (Charles) Corp. 26,800 857,600
4,519,049
TOTAL FINANCE 242,924,166
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
HEALTH - 3.9%
DRUGS & PHARMACEUTICALS - 1.4%
Alkermes, Inc. (a) 7,100 $ 165,075
Alliance Pharmaceutical Corp. (a) 3,600 49,050
Andrx Corp. 1,600 25,800
Biogen, Inc. 12,000 465,000
Bristol-Myers Squibb Co. 60,600 6,590,250
Human Genome Sciences, Inc. (a) 10,000 407,500
Lilly (Eli) & Co. 18,600 1,357,800
Merck & Co., Inc. 14,900 1,180,825
Millennium Pharmaceuticals, Inc. (a) 13,200 229,350
Novartis AG (Reg.) 4,653 5,317,219
Pfizer, Inc. 23,800 1,972,425
Schering-Plough Corp. 28,000 1,813,000
Sepracor, Inc. (a) 93,600 1,556,100
Sequus Pharmaceuticals, Inc. (a) 5,000 80,000
Warner-Lambert Co. 145,000 10,875,000
32,084,394
MEDICAL EQUIPMENT & SUPPLIES - 0.9%
Acuson Corp. (a) 20,600 502,125
Boston Scientific Corp. (a) 58,200 3,492,000
Cardinal Health, Inc. 24,400 1,421,300
Datascope Corp. (a) 4,900 98,000
Guidant Corp. 2,700 153,900
InControl, Inc. (a) 29,100 232,800
Mallinckrodt, Inc. 127,100 5,608,288
Medtronic, Inc. 72,300 4,916,400
St. Jude Medical, Inc. (a) 57,600 2,455,200
U.S. Surgical Corp. 84,400 3,323,250
22,203,263
MEDICAL FACILITIES MANAGEMENT - 1.6%
Beverly Enterprises, Inc. (a) 69,100 881,025
Carematrix Corp. (a) 17,200 225,750
Columbia/HCA Healthcare Corp. 205,300 8,365,975
HEALTHSOUTH Rehabilitation Corp. (a) 315,200 12,174,600
Health Management Associates, Inc.
Class A (a) 218,700 4,920,750
Integrated Health Services, Inc. 31,800 775,125
National Surgery Centers, Inc. (a) 8,400 319,200
NovaCare, Inc. (a) 36,600 402,600
Oxford Health Plans, Inc. (a) 56,000 3,279,500
PacifiCare Health Systems, Inc.
Class B (a) 6,800 579,700
Quorum Health Group, Inc. (a) 6,700 199,325
Safeguard Health Enterprises, Inc. (a) 63,700 1,114,750
Sunrise Assisted Living, Inc. (a) 52,300 1,457,863
Tenet Healthcare Corp. (a) 115,200 2,520,000
37,216,163
TOTAL HEALTH 91,503,820
HOLDING COMPANIES - 0.3%
CINergy Corp. 31,500 1,051,313
Citic Pacific Ltd. Ord. 228,000 1,323,576
Norfolk Southern Corp. 41,100 3,596,250
PartnerRe Ltd. 20,700 703,800
6,674,939
INDUSTRIAL MACHINERY & EQUIPMENT - 4.0%
ELECTRICAL EQUIPMENT - 1.4%
AMETEK, Inc. 52,900 1,177,025
Alcatel Alsthom Compagnie Generale
d'Electricite SA 40,900 3,284,609

SHARES VALUE (NOTE 1)
American Power Conversion Corp. (a) 70,100 $ 1,910,225
Common Development International
Ltd. (a)(c) 58,100 519,185
Computer Products, Inc. (a) 2,100 40,950
Emerson Electric Co. 3,200 309,600
Hutchison Whampoa Ltd. Ord. 468,000 3,675,868
Loral Space & Communications Ltd. (a) 395,900 7,274,663
Roper Industries, Inc. 43,300 1,694,113
Westinghouse Electric Corp. 636,800 12,656,400
32,542,638
INDUSTRIAL MACHINERY & EQUIPMENT - 2.0%
Case Corp. 187,500 10,218,750
Caterpillar, Inc. 151,700 11,415,425
Deere & Co. 5,000 203,125
Detroit Diesel Corp. (a) 40,600 933,800
Dover Corp. 5,400 271,350
Harnischfeger Industries, Inc. 76,000 3,657,500
Illinois Tool Works, Inc. 41,600 3,322,800
Ingersoll-Rand Co. 79,000 3,515,500
Kaydon Corp. 118,300 5,574,888
Manitowoc Co., Inc. 26,500 1,073,250
New Holland NV (a) 261,100 5,450,463
Parker-Hannifin Corp. 4,500 174,375
Thermo Fibergen, Inc. (a) 13,700 143,850
Thermo Fibergen, Inc. (rights)(a) 13,700 34,250
Thermo Fibertek, Inc. (a) 2,100 19,556
UCAR International, Inc. (a) 5,200 195,650
46,204,532
POLLUTION CONTROL - 0.6%
Republic Industries, Inc. (a) 24,000 748,500
Sevenson Environmental Services, Inc. 13,200 240,900
USA Waste Services, Inc. (a) 287,880 9,176,175
United Waste Systems, Inc. (a) 154,600 5,314,375
15,479,950
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 94,227,120
MEDIA & LEISURE - 3.8%
BROADCASTING - 1.0%
American Radio Systems Corp.
Class A (a) 36,900 1,005,525
Asia Satellite Telecommunications
Holdings Ltd. (a) 94,200 218,617
Canal Plus SA 2,200 485,780
Carlton Communications PLC 19,900 174,398
HSN, Inc. (a) 56,790 1,348,763
Infinity Broadcasting Corp. Class A 303,050 10,190,056
Jacor Communications, Inc. Class A (a) 44,800 1,226,400
Metro Networks, Inc. (a) 25,500 643,875
Renaissance Communications Corp. (a) 68,900 2,463,175
Telemundo Group, Inc. Class A (a) 136,400 3,955,600
Young Broadcasting, Inc. Class A (a) 37,300 1,091,025
22,803,214
ENTERTAINMENT - 0.1%
Disney (Walt) Co. 13,300 926,013
Regal Cinemas, Inc. (a) 4,400 135,300
Viacom, Inc. (a):
Class A 18,300 631,350
Class B (non-vtg.) 4,600 160,425
1,853,088
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - CONTINUED
LEISURE DURABLES & TOYS - 0.8%
Brunswick Corp. 5,700 $ 136,800
Champion Enterprises, Inc. (a) 211,800 4,130,100
Golden Bear Golf, Inc. (a) 10,100 113,625
Hasbro, Inc. 278,550 10,828,631
Mattel, Inc. 70,150 1,946,663
Nintendo Co. Ltd. Ord. 28,300 2,023,346
19,179,165
LODGING & GAMING - 0.4%
Circus Circus Enterprises, Inc. (a) 58,600 2,014,375
HFS, Inc. (a) 67,600 4,039,100
Hilton Hotels Corp. 41,300 1,078,963
Host Marriott Corp. (a) 166,400 2,662,400
US Franchise Services, Inc. Class A (a) 3,900 39,488
9,834,326
PUBLISHING - 1.1%
Acnielsen Corp. (a) 25,000 378,125
Cognizant Corp. (a) 83,400 2,752,200
Gannett Co., Inc. 53,300 3,990,838
Gibson Greetings, Inc. (a) 800 15,700
Harcourt General, Inc. 29,600 1,365,300
Knight-Ridder, Inc. 39,100 1,495,575
Meredith Corp. 51,700 2,727,175
New York Times Co. (The) Class A 155,100 5,893,800
Playboy Enterprises, Inc. Class B (a) 25,600 249,600
Times Mirror Co. Class A 118,200 5,880,450
Tribune Co. 25,300 1,995,538
26,744,301
RESTAURANTS - 0.4%
Landry's Seafood Restaurants, Inc. (a) 92,600 1,979,325
Morton's Restaurant Group, Inc. (a) 316,900 5,347,688
Papa John's International, Inc. (a) 10,800 364,500
Shoney's, Inc. (a) 4,800 33,600
Starbucks Corp. (a) 23,800 681,275
8,406,388
TOTAL MEDIA & LEISURE 88,820,482
NONDURABLES - 1.5%
AGRICULTURE - 0.1%
Pioneer Hi-Bred International, Inc. 38,600 2,702,000
BEVERAGES - 0.0%
Pete's Brewing Co. (a) 42,400 339,200
FOODS - 0.7%
Campbell Soup Co. 161,100 12,928,275
Ralston Purina Group 41,800 3,067,075
Tyson Foods, Inc. 4,100 140,425
16,135,775
HOUSEHOLD PRODUCTS - 0.6%
Dial Corp. 271,900 4,010,525
Gillette Co. 119,700 9,306,675
Premark International, Inc. 34,700 772,075
14,089,275
TOBACCO - 0.1%
Consolidated Cigar Holdings, Inc.
Class A (a) 19,600 485,100
Dimon, Inc. 3,800 87,875
Philip Morris Companies, Inc. 5,000 563,125
RJR Nabisco Holdings Corp. 9,800 333,200
Swisher International Group, Inc. Class A 54,500 865,188
Universal Corp. 11,800 379,075
2,713,563
TOTAL NONDURABLES 35,979,813

SHARES VALUE (NOTE 1)
PRECIOUS METALS - 1.5%
Agnico Eagle Mines Ltd. 31,900 $ 447,952
Barrick Gold Corp. 32,700 936,262
Bre-X Minerals Ltd. (a) 412,700 6,532,874
Euro-Nevada Mining Ltd. 146,400 4,367,918
Franco Nevada Mining Corp. 191,400 8,761,243
Getchell Gold Corp. (a) 90,900 3,488,288
Greenstone Resources Ltd. (a) 89,300 1,039,016
Indochina Goldfields Ltd. (a) 111,400 1,308,342
Indochina Goldfields Ltd. (a)(c) 75,600 887,887
Kinross Gold Corp. (a) 84,100 595,083
Newmont Mining Corp. 167,400 7,491,150
TVI Pacific, Inc. (a)(c) 123,300 114,229
35,970,244
RETAIL & WHOLESALE - 6.2%
APPAREL STORES - 1.0%
Abercrombie & Fitch Co. (a) 3,500 57,750
Baby Superstore, Inc. (a) 57,300 1,375,200
Cato Corp. Class A 85,000 425,000
Charming Shoppes, Inc. (a) 864,800 4,378,050
Footstar, Inc. (a) 96,132 2,391,284
Gap, Inc. 35,100 1,057,388
Goody's Family Clothing (a) 77,200 1,379,950
Limited, Inc. (The) 27,512 505,533
Payless ShoeSource, Inc. (a) 85,188 3,194,550
Ross Stores, Inc. 400 20,000
Saks Holdings, Inc. (a) 8,700 234,900
TJX Companies, Inc. 187,700 8,892,288
23,911,893
DRUG STORES - 0.8%
Arbor Drugs, Inc. 46,800 813,150
CVS Corp. 298,600 12,354,575
Revco (D.S.), Inc. (a) 182,500 6,752,500
Rite Aid Corp. 2,200 87,450
20,007,675
GENERAL MERCHANDISE STORES - 1.4%
Dayton Hudson Corp. 101,000 3,964,250
Family Dollar Stores, Inc. 8,300 169,113
Federated Department Stores, Inc. (a) 96,800 3,303,300
Kohls Corp. (a) 60,100 2,358,925
MacFrugals Bargains Closeouts, Inc. (a) 12,300 321,338
Mazel Stores, Inc. (a) 11,200 252,000
Price/Costco, Inc. (a) 227,900 5,725,988
Stein Mart, Inc. (a) 102,900 2,083,725
Woolworth Corp. (a) 636,300 13,919,063
32,097,702
GROCERY STORES - 1.5%
Ahold NV 14,552 909,342
American Stores Co. 27,300 1,115,888
Asda Group PLC 741,500 1,562,333
Dominick's Supermarkets, Inc. (a) 91,700 1,994,475
Food Lion, Inc.:
Class A 846,000 8,274,938
Class B 134,400 1,360,800
Giant Food, Inc. Class A 51,700 1,783,650
Loblaw Companies Ltd. 56,500 583,197
Performance Food Group Co. (a) 1,150 17,825
Provigo, Inc. (a) 11,400 46,154
Quality Food Centers, Inc. (a) 12,600 425,250
Richfood Holdings, Inc. Class A 282,000 6,838,500
Safeway, Inc. (a) 218,100 9,323,775
Weis Markets, Inc. 21,900 698,063
34,934,190
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
RETAIL & WHOLESALE - CONTINUED
RETAIL & WHOLESALE, MISCELLANEOUS - 1.5%
Bulgari Spa 4,200 $ 85,217
Circuit City Stores, Inc. 139,400 4,199,425
Home Depot, Inc. (The) 270,500 13,558,813
Lowe's Companies, Inc. 74,200 2,634,100
Staples, Inc. (a) 178,100 3,216,931
Toys "R" Us, Inc. (a) 283,600 8,508,000
U.S. Office Products Co. (a) 65,700 2,242,013
34,444,499
TOTAL RETAIL & WHOLESALE 145,395,959
SERVICES - 1.5%
ADVERTISING - 0.3%
Interpublic Group of Companies, Inc. 8,300 394,250
Omnicom Group, Inc. 61,100 2,795,325
Snyder Communications, Inc. (a) 91,600 2,473,200
5,662,775
EDUCATIONAL SERVICES - 0.0%
Education Management Corp. (a) 32,400 680,400
LEASING & RENTAL - 0.0%
Ryder Systems, Inc. 10,600 298,125
Team Rental Group, Inc. Class A (a) 3,300 53,213
351,338
PRINTING - 0.3%
ASM Lithography Holding NV (a) 45,200 2,251,525
Deluxe Corp. 21,800 713,950
Harland (John H.) Co. 96,400 3,181,200
Reynolds & Reynolds Co. Class A 2,600 67,600
Standard Register Co. 1,300 42,250
Valassis Communications, Inc. (a) 6,800 143,650
6,400,175
SERVICES - 0.9%
APAC Teleservices, Inc. (a) 213,200 8,181,480
CDI Corp. (a) 400 11,350
Ecolab, Inc. 255,700 9,620,713
Orion Network Systems, Inc. (a) 1,700 21,888
Registry, Inc. 2,300 106,088
Robert Half International, Inc. (a) 64,500 2,217,188
Signature Resorts, Inc. (a) 12,800 451,200
Telespectrum Worldwide, Inc. (a) 77,900 1,236,663
Teletech Holdings, Inc. (a) 800 20,800
Zebra Technologies Corp. Class A (a) 6,000 140,250
22,007,620
TOTAL SERVICES 35,102,308
TECHNOLOGY - 15.2%
COMMUNICATIONS EQUIPMENT - 1.3%
ADC Telecommunications, Inc. (a) 28,100 874,613
Ascend Communications, Inc. (a) 20,800 1,292,200
Aspect Telecommunications Corp. (a) 12,500 793,750
Cisco Systems, Inc. (a) 76,600 4,873,675
Dynatech Corp. (a) 71,700 3,172,725
Ericsson (L.M.) Telephone Co.
Class B ADR 40,800 1,231,650
Lucent Technologies, Inc. 160,700 7,432,375
Nokia Corp. AB sponsored ADR 27,100 1,561,638
Northern Telecom Ltd. 42,300 2,628,997
Tellabs, Inc. (a) 50,400 1,896,300
3Com Corp. (a) 78,800 5,781,950
U.S. Robotics Corp. (a) 2,900 208,800
31,748,673

SHARES VALUE (NOTE 1)
COMPUTER SERVICES & SOFTWARE - 2.3%
America Online, Inc. (a) 25,200 $ 837,900
Autodesk, Inc. 5,000 140,000
Automatic Data Processing, Inc. 138,000 5,916,750
BMC Software, Inc. (a) 3,400 140,675
Borland International, Inc. (a) 4,800 26,100
CACI International, Inc. Class A (a) 32,800 688,800
CBT Group PLC sponsored ADR 1,800 97,650
CUC International, Inc. (a) 64,200 1,524,750
Ceridian Corp. (a) 82,616 3,345,948
Computer Sciences Corp. (a) 42,700 3,506,738
DST Systems, Inc. 19,500 611,813
Electronic Arts, Inc. (a) 14,800 443,075
Equifax, Inc. 163,500 5,007,188
First Data Corp. 34,700 1,266,550
Intuit (a) 46,000 1,449,000
Keane, Inc. (a) 101,400 3,219,450
McAfee Associates, Inc. (a) 15,400 677,600
Microsoft Corp. (a) 167,200 13,814,900
Midway Games, Inc. (a) 51,400 1,040,850
Ontrack Data International, Inc. (a) 37,300 559,500
Open Market, Inc. (a) 27,500 371,250
Oracle Corp. (a) 82,400 3,440,200
Parametric Technology Corp. (a) 45,100 2,317,013
Paychex, Inc. 10,400 534,950
Scopus Technology, Inc. (a) 7,600 353,400
SunGard Data Systems, Inc. (a) 49,700 1,963,150
Viisage Technology, Inc. (a) 5,000 72,500
53,367,700
COMPUTERS & OFFICE EQUIPMENT - 5.8%
Adaptec, Inc. (a) 74,600 2,984,000
Amdahl Corp. (a) 126,300 1,531,388
Applied Magnetics Corp. (a) 123,900 3,701,513
Bay Networks, Inc. (a) 429,700 8,969,988
Bell & Howell Co. (a) 47,300 1,123,375
Comdisco, Inc. 19,300 612,775
Compaq Computer Corp. (a) 129,100 9,585,675
Dell Computer Corp. (a) 13,500 717,188
Diebold, Inc. 79,350 4,989,131
Digital Equipment Corp. (a) 75,700 2,753,588
EMC Corp. (a) 614,100 20,342,063
Gateway 2000, Inc. (a) 4,000 214,250
Hewlett-Packard Co. 36,500 1,834,125
Ingram Micro, Inc. Class A (a) 12,900 296,700
International Business Machines Corp. 237,000 35,787,000
Kronos, Inc. (a) 76,600 2,451,200
Lexmark International Group, Inc. (a) 169,600 4,685,200
Pitney Bowes, Inc. 112,500 6,131,250
Procom Technology, Inc. 49,100 466,450
Quantum Corp. (a) 40,000 1,145,000
Seagate Technology (a) 422,500 16,688,750
Sequent Computer Systems, Inc. (a) 14,500 257,375
Silicon Graphics, Inc. (a) 166,500 4,245,750
Symbol Technologies, Inc. (a) 10,200 451,350
Tech Data Corp. (a) 6,300 172,463
Trident Microsystems, Inc. (a) 12,100 204,188
Western Digital Corp. (a) 84,800 4,823,000
137,164,735
ELECTRONIC INSTRUMENTS - 0.5%
Applied Materials, Inc. (a) 21,600 776,250
Perkin-Elmer Corp. 134,800 7,936,350
Silicon Valley Group, Inc. (a) 2,700 54,338
Teradyne, Inc. (a) 39,000 950,625
Thermo Electron Corp. 1,600 66,000
Waters Corp. (a) 89,500 2,718,563
12,502,126
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TECHNOLOGY - CONTINUED
ELECTRONICS - 4.8%
AVX Corp. 9,400 $ 202,100
Altera Corp. (a) 55,700 4,048,694
Arrow Electronics, Inc. (a) 14,400 770,400
Atmel Corp. (a) 61,700 2,043,813
Avnet, Inc. 34,500 2,009,625
Chips & Technologies, Inc. (a) 127,000 2,317,750
Cirrus Logic, Inc. (a) 45,400 703,700
Griffon Corp. (a) 38,900 476,525
Integrated Device Technology, Inc. (a) 325,700 4,437,663
Intel Corp. 323,400 42,345,188
KEMET Corp. (a) 34,900 811,425
Kent Electronics Corp. (a) 98,900 2,546,675
Lattice Semiconductor Corp. (a) 73,500 3,381,000
Linear Technology Corp. 30,100 1,320,638
Maxim Integrated Products, Inc. (a) 25,600 1,107,200
Microchip Technology, Inc. (a) 54,400 2,767,600
Micron Technology, Inc. 69,700 2,030,013
Motorola, Inc. 55,600 3,412,450
National Semiconductor Corp. (a) 225,900 5,506,313
SGS Thomson Microelectronics NV (a) 14,600 1,022,000
S3, Inc. (a) 7,000 113,750
Sanmina Corp. (a) 32,800 1,853,200
Solectron Corp. (a) 34,500 1,841,438
Storage Technology Corp. (a) 315,100 15,006,638
Texas Instruments, Inc. 88,700 5,654,625
Thomas & Betts Corp. 46,400 2,059,000
Unitrode Corp. (a) 32,900 966,438
VLSI Technology, Inc. (a) 19,900 475,113
Xilinx, Inc. (a) 36,200 1,332,613
Zero Corp. 65,300 1,306,000
Zilog, Inc. (a) 10,700 279,538
114,149,125
PHOTOGRAPHIC EQUIPMENT - 0.5%
Eastman Kodak Co. 77,300 6,203,325
Imation Corp. (a) 159,300 4,480,313
10,683,638
TOTAL TECHNOLOGY 359,615,997
TRANSPORTATION - 1.2%
AIR TRANSPORTATION - 0.1%
AMR Corp. (a) 13,300 1,172,063
Continental Airlines, Inc. Class B (a) 39,200 1,107,400
Delta Air Lines, Inc. 1,500 106,313
Northwest Airlines Corp. Class A (a) 12,100 473,413
UAL Corp. (a) 2,700 168,750
3,027,939
RAILROADS - 0.9%
Bombardier, Inc. Class B 72,400 1,336,193
Burlington Northern Santa Fe Corp. 46,800 4,042,350
CSX Corp. 6,500 274,625
Canadian Pacific Ltd. 241,900 6,361,378
Conrail, Inc. 21,540 2,145,923
Tranz Rail Holdings Ltd.
sponsored ADR (a) 28,500 504,094
Trinity Industries, Inc. 4,900 183,750
Wisconsin Central Transportation
Corp. (a) 158,700 6,288,488
21,136,801
SHIPPING - 0.0%
Kirby Corp. (a) 10,000 197,500

SHARES VALUE (NOTE 1)
TRUCKING & FREIGHT - 0.2%
Air Express International Corp. 20,000 $ 645,000
Consolidated Freightways, Inc. 25,200 560,700
Expeditors International of
Washington, Inc. 86,200 1,982,600
USFreightways Corp. 10,900 299,069
Werner Enterprises, Inc. 3,300 59,813
Yellow Corp. (a) 103,900 1,493,563
5,040,745
TOTAL TRANSPORTATION 29,402,985
UTILITIES - 2.9%
CELLULAR - 0.1%
McLeod, Inc. (a) 38,200 974,100
Palmer Wireless, Inc. (a) 28,500 299,250
1,273,350
ELECTRIC UTILITY - 0.6%
Allegheny Power System, Inc. 17,000 516,375
American Electric Power Co., Inc. 90,000 3,701,250
Consolidated Edison Co. of
New York, Inc. 7,100 207,675
DPL, Inc. 16,800 411,600
DQE, Inc. 4,900 142,100
Entergy Corp. 39,300 1,090,575
FPL Group, Inc. 35,300 1,623,800
GPU, Inc. 1,600 53,800
KU Energy Corp. 18,500 555,000
National Grid Co. PLC 1,132,000 3,781,276
Pinnacle West Capital Corp. 22,200 704,850
Public Service Co. of Colorado 5,300 206,038
Sevillana de Electricidad 18,296 207,765
Tucson Electric Power Co. (a) 15,000 249,375
13,451,479
GAS - 0.7%
Consolidated Natural Gas Co. 5,300 292,825
Enron Corp. 199,600 8,607,750
Italgas Spa 259,100 1,084,193
Noram Energy Corp. 17,100 262,913
ONEOK, Inc. 9,000 270,000
Sonat, Inc. 121,000 6,231,500
Tejas Gas Corp. (a) 1,600 76,200
16,825,381
TELEPHONE SERVICES - 1.5%
BCE, Inc. 154,500 7,359,558
British Telecommunications PLC Ord. 140,100 947,966
Cincinnati Bell, Inc. 32,200 1,984,325
MCI Communications Corp. 181,100 5,919,706
MFS Communications, Inc. 68,900 3,755,050
Smartalk Teleservices, Inc. (a) 71,300 1,212,100
Teleport Communications Group, Inc.
Class A (a) 31,100 948,550
WorldCom, Inc. (a) 537,000 13,995,563
36,122,818
WATER - 0.0%
Yorkshire Water PLC Ord. 17,400 210,134
TOTAL UTILITIES 67,883,162
TOTAL COMMON STOCKS
(Cost $1,780,742,211) 2,102,418,880
CONVERTIBLE PREFERRED STOCKS - 0.2%
SHARES VALUE (NOTE 1)
ENERGY - 0.1%
OIL & GAS - 0.1%
Tosco Financing Trust $2.875 (c) 11,100 $ 570,263
Ultramar Diamond Shamrock
Corp. $2.50 (c) 17,200 1,062,100
TOTAL ENERGY 1,632,363
RETAIL & WHOLESALE - 0.1%
APPAREL STORES - 0.1%
TJX Companies, Inc., Series E, $7.00 5,900 1,545,063
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $2,631,081) 3,177,426
CONVERTIBLE BONDS - 0.3%
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (B) AMOUNT (NOTE 1)
ENERGY - 0.1%
ENERGY SERVICES - 0.0%
Nabors Industries, Inc. 5%,
5/1/06 Ba2 $ 1,016,000 1,249,680
OIL & GAS - 0.1%
Pogo Producing Co. 5 1/2%,
6/15/06 (c) B2 1,100,000 1,388,750
TOTAL ENERGY 2,638,430
HEALTH - 0.1%
MEDICAL FACILITIES MANAGEMENT - 0.1%
NovaCare, Inc. 5 1/2%,
1/15/00 B1 2,130,000 1,911,675
MEDIA & LEISURE - 0.0%
BROADCASTING - 0.0%
Home Shopping Network, Inc.
5 7/8%, 3/1/06 (c) B- 445,000 478,375
Jacor Communications, Inc.
liquid yield option notes
0%, 6/12/11 B3 302,000 135,523
TOTAL MEDIA & LEISURE 613,898
RETAIL & WHOLESALE - 0.0%
APPAREL STORES - 0.0%
Charming Shoppes, Inc.
7 1/2%, 7/15/06 B2 395,000 383,150
TECHNOLOGY - 0.1%
ELECTRONICS - 0.1%
National Semiconductor Corp.
6 1/2%, 10/1/02 (c) Ba2 1,655,000 1,630,175
TOTAL CONVERTIBLE BONDS
(Cost $6,587,222) 7,177,328
U.S. TREASURY OBLIGATIONS - 4.7%
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (B) AMOUNT (NOTE 1)
U.S. Treasury Bill, yields at date
of purchase 5.34%, 3/6/97 - $ 250,000 $ 247,825
7 1/4%, 2/15/23 Aaa 6,300,000 6,577,578
6 1/4%, 8/15/23 Aaa 22,100,000 20,718,750
7 1/2%, 11/15/24 Aaa 5,690,000 6,223,438
7 5/8%, 2/15/25 Aaa 39,000,000 43,320,420
6 7/8%, 8/15/25 Aaa 7,000,000 7,137,830
6%, 2/15/26 Aaa 13,000,000 11,832,080
6 3/4%, 8/15/26 Aaa 16,000,000 16,120,000
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $112,387,712) 112,177,921
CASH EQUIVALENTS - 5.8%
MATURITY
AMOUNT
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account at 6.75%, dated
12/31/96 due 1/2/97 $ 137,218,438 137,167,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $2,039,515,226) $ 2,362,118,555
CURRENCY ABBREVIATIONS
CAD - Canadian dollar
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) 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 $7,774,672 or 0.3% of net
assets.
(d) Purchased on an installment basis. Market value reflects only those
payments made through December 31, 1996. The remaining installment for
Falconbridge Ltd., aggregating CAD 776,150 is due January 31, 1997. The
remaining installment for Petro-Canada, aggregating CAD 642,175 is due
March 24, 1997.
(e) An affiliated company is a company in which the fund has ownership of
at least 5% of the voting securities. Transactions during the period with
companies which are or were affiliates are as follows:
PURCHASE SALES DIVIDEND VALUE
AFFILIATE COST COST INCOME
Cutter & Buck, Inc. $ 39,000 $ - $ - $ 3,255,000
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $3,728,210,661 and $2,494,655,085, respectively, of which U.S.
government and government agency obligations aggregated $139,603,569 and
$109,833,563, respectively.
The market value of futures contracts opened and closed during the period
amounted to $83,367,121 and $82,962,684, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of Fidelity Management & Research Company. The
commissions paid to these affiliated firms were $1,028,246 for the period
(see Note 4 of Notes to Financial Statements).
INCOME TAX INFORMATION
At December 31, 1996, the aggregate cost of investment securities for
income tax purposes was $2,046,267,190. Net unrealized appreciation
aggregated $315,851,365, of which $341,028,736 related to appreciated
investment securities and $25,177,371 related to depreciated investment
securities.
The fund hereby designates approximately $13,087,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND II: CONTRAFUND PORTFOLIO
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES

<TABLE>
<CAPTION>
<S> <C> <C>
DECEMBER 31, 1996

ASSETS

Investment in securities, at value (including repurchase agreements of $137,167,000) (cost $2,039,515,226) $ 2,362,118,555
- -
See accompanying schedule

Cash 266,665

Receivable for investments sold 17,594,993

Receivable for fund shares sold 17,326,528

Dividends receivable 1,963,857

Interest receivable 2,844,453

TOTAL ASSETS 2,402,115,051

LIABILITIES

Payable for investments purchased $ 5,325,350

Payable for fund shares redeemed 1,294,444

Accrued management fee 1,164,508

Other payables and 227,690
accrued expenses

TOTAL LIABILITIES 8,011,992

NET ASSETS $ 2,394,103,059

Net Assets consist of:

Paid in capital $ 2,002,049,755

Undistributed net investment income 20,976,837

Accumulated undistributed net realized gain (loss) on investments and foreign 48,472,815
currency transactions

Net unrealized appreciation (depreciation) on investments 322,603,652
and assets and liabilities in foreign currencies

NET ASSETS, for 144,559,967 shares outstanding $ 2,394,103,059

NET ASSET VALUE, offering price $16.56
and redemption price per
share ($2,394,103,059 (divided by) 144,559,967 shares)

</TABLE>

STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996

INVESTMENT INCOME $ 18,426,701
Dividends

Interest 13,714,953

TOTAL INCOME 32,141,654

EXPENSES

Management fee $ 9,539,179

Transfer agent fees 1,141,270

Accounting fees and expenses 622,337

Non-interested trustees' compensation 7,709

Custodian fees and expenses 324,660

Registration fees 3,486

Audit 42,110

Legal 7,818

Miscellaneous 3,876

Total expenses before reductions 11,692,445

Expense reductions (527,628 11,164,817
)

NET INVESTMENT INCOME 20,976,837

REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:

Investment securities 49,545,658

Foreign currency transactions (139,799
)

Futures contracts (404,437 49,001,422
)

Change in net unrealized appreciation (depreciation) on:

Investment securities 254,150,260

Assets and liabilities in 293 254,150,553
foreign currencies

NET GAIN (LOSS) 303,151,975

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 324,128,812

OTHER INFORMATION $ 516,935
Expense reductions
Directed brokerage arrangements

Custodian interest credits 10,693

$ 527,628

</TABLE>

STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED JANUARY 3, 1995
DECEMBER 31, (COMMENCEMENT
1996 OF OPERATIONS) TO
DECEMBER 31,
1995

<TABLE>
<CAPTION>
<S> <C> <C>
Operations $ 20,976,837 $ 4,056,021
Net investment income

Net realized gain (loss) 49,001,422 16,037,745

Change in net unrealized appreciation (depreciation) 254,150,553 68,453,099

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 324,128,812 88,546,865

Distributions to shareholders - (3,710,433)
From net investment income

From net realized gain (9,296,351) (7,420,866)

TOTAL DISTRIBUTIONS (9,296,351) (11,131,299)

Share transactions 1,380,209,873 806,897,529
Net proceeds from sales of shares

Reinvestment of distributions 9,296,351 11,131,299

Cost of shares redeemed (187,235,370) (18,444,650)

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 1,202,270,854 799,584,178

TOTAL INCREASE (DECREASE) IN NET ASSETS 1,517,103,315 876,999,744

NET ASSETS

Beginning of period 876,999,744 -

End of period (including undistributed net investment income of $20,976,837 and $275,151,
respectively) $ 2,394,103,059 $ 876,999,744

OTHER INFORMATION
Shares

Sold 92,660,951 64,153,925

Issued in reinvestment of distributions 674,626 816,078

Redeemed (12,369,121) (1,376,492)

Net increase (decrease) 80,966,456 63,593,511

</TABLE>

<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.

</TABLE>

FINANCIAL HIGHLIGHTS
YEAR ENDED JANUARY 3, 1995
DECEMBER 31, (COMMENCEMENT
1996 OF OPERATIONS) TO
DECEMBER 31,
1995

SELECTED PER-SHARE DATA

<TABLE>
<CAPTION>
<S> <C> <C>
Net asset value, beginning of period $ 13.79 $ 10.00

Income from Investment Operations

Net investment income .14 .06

Net realized and unrealized gain (loss) 2.76 3.91

Total from investment operations 2.90 3.97

Less Distributions

From net investment income - (.06)

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

Total distributions (.13) (.18)

Net asset value, end of period $ 16.56 $ 13.79

TOTAL RETURN A 21.22% 39.72%

RATIOS AND SUPPLEMENTAL DATA

Net assets, end of period (000 omitted) $ 2,394,103 $ 877,000

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

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

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

Portfolio turnover rate 178% 132%

Average commission rate C $ .0343

A TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE
TOTAL RETURNS
SHOWN. B FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH
THIRD PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S
EXPENSES (SEE NOTE 5 OF
NOTES TO FINANCIAL STATEMENTS). C FOR FISCAL YEARS BEGINNING ON OR
AFTER SEPTEMBER 1, 1995, A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE
COMMISSION RATE PER
SHARE FOR SECURITY TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS
AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND TO FUND DEPENDING ON
THE MIX OF TRADES EXECUTED
IN VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE
STRUCTURES MAY DIFFER.

</TABLE>

NOTES TO FINANCIAL STATEMENTS
For the period ended December 31, 1996

1. SIGNIFICANT ACCOUNTING POLICIES.
Contrafund Portfolio (the fund) is a fund of Variable Insurance Products
Fund 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. Shares of the fund may only be
purchased by insurance companies for the purpose of funding variable
annuity or variable life insurance contracts. The financial statements have
been prepared in conformity with generally accepted accounting principles
which permit management to make certain estimates and assumptions at the
date of the financial statements. The following summarizes the significant
accounting policies of the fund:
SECURITY VALUATION. Securities for which exchange quotations are readily
available are valued at the last sale price, or if no sale price, at the
closing bid price. Securities (including restricted securities) for which
exchange quotations are not readily available (and in certain cases debt
securities which trade on an exchange) are valued primarily using
dealer-supplied valuations or at their fair value as determined in good
faith under consistently applied procedures under the general supervision
of the Board of Trustees. Short-term securities with remaining maturities
of sixty days or less for which quotations are not readily available are
valued at amortized cost or original cost plus accrued interest, both of
which approximate current value.
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. Income receipts
and expense payments are translated into U.S. dollars at the prevailing
exchange rate on the respective dates of the transactions. Purchases and
sales of securities are translated into U.S. dollars at the contractual
currency exchange rates established at the time of each trade.
Net realized gains and losses on foreign currency transactions represent
net gains and losses from sales and maturities of forward currency
contracts, disposition of foreign currencies, and the difference between
the amount of net investment income accrued and the U.S. dollar amount
actually received. The effects of changes in foreign currency exchange
rates on investments in securities are included with the net realized and
unrealized gain or loss on investment securities.
INCOME TAXES. As a qualified regulated investment company under Subchapter
M of the Internal Revenue Code, the fund is not subject to income taxes to
the extent that it distributes substantially all of its taxable income for
its fiscal year. 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 between the
funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are recorded on the
ex-dividend date.
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 futures
and options transactions, foreign currency transactions, passive foreign
investment companies (PFIC), partnerships, non-taxable dividends and losses
deferred due to wash sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital and may
affect the per-share allocation between net investment income and realized
and unrealized gain (loss). 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. The cost of
the foreign currency contracts is included in the cost basis of the
associated investment.
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the fund, along with other affiliated
entities of Fidelity Management & Research Company (FMR), may transfer
uninvested cash balances into one or more joint trading accounts. These
balances are invested in one or more repurchase agreements that mature in
60 days or less from the date of purchase for U.S. Treasury or Federal
Agency obligations.
2. OPERATING POLICIES - CONTINUED
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.
FUTURES CONTRACTS. The fund may use futures contracts to manage its
exposure to the stock market and to fluctuations in interest rates and
currency values. Buying futures tends to increase the fund's exposure to
the underlying instrument, while selling futures tends to decrease the
fund's exposure to the underlying instrument or hedge other fund
investments. Losses may arise from changes in the value of the underlying
instruments, if there is an illiquid secondary market for the contracts, or
if the counterparties do not perform under the contracts' terms. Futures
contracts are valued at the settlement price established each day by the
board of trade or exchange on which they are traded.
RESTRICTED SECURITIES. 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, the
fund had no investments in restricted securities (excluding 144A issues).
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities) and the market value of futures contracts opened and
closed, is included under the caption "Other Information" at the end of the
fund's schedule of investments.
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 .2500% to .5200% for the period. In the event that these
rates were lower than the contractual rates in effect during the period,
FMR voluntarily implemented the above rates, as they resulted in the same
or a lower management fee. The annual individual fund fee rate is .30%. For
the period, the management fee was equivalent to an annual rate of .61% of
average net assets.
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations Company
(FIIOC), an affiliate of FMR, is the fund's transfer, dividend disbursing
and shareholder servicing agent. FIIOC receives account fees and
asset-based fees that vary according to account size and type of account.
FIIOC pays for typesetting, printing and mailing of all shareholder
reports, except proxy statements. For the period, the transfer agent fees
were equivalent to an annual rate of .07% of average net assets.
ACCOUNTING FEES. Fidelity Service Co. (FSC), 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.
BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms are shown under the caption
"Other Information" at the end of the fund's schedule of investments.
5. EXPENSE REDUCTIONS.
FMR voluntarily agreed to reimburse the fund's operating expenses
(excluding interest, taxes, brokerage commissions and extraordinary
expenses) above an annual rate of 1.00% of average net assets.
FMR has directed certain portfolio trades to brokers who paid a portion of
the fund's expenses. In addition, the fund has entered into an arrangement
with its custodian whereby interest earned on uninvested cash balances was
used to offset a portion of the fund's expenses.
For the period, the reduction under these arrangements are shown under the
caption "Other Information" on the fund's Statement of Operations.
6. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investment Life Insurance Company (FILI)
and its subsidiaries, affiliates of FMR, were the record owners of
approximately 38% of the outstanding shares of the fund. In addition, one
unaffiliated insurance company was record owner of 10% or more of the total
outstanding shares of the fund, totaling 23%.
7. TRANSACTIONS WITH AFFILIATED COMPANIES.
An affiliated company is a company in which the fund has ownership of at
least 5% of the voting securities. Information regarding transactions with
affiliated companies is included under the caption "Legend" at the end of
the fund's schedule of investments.
REPORT OF INDEPENDENT ACCOUNTANTS

To the Trustees of Variable Insurance Products Fund II and the Shareholders
of Contrafund Portfolio:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments (except for Moody's and Standard &
Poor's ratings), and the related statements of operations and of changes in
net assets and the financial highlights present fairly, in all material
respects, the financial position of Contrafund Portfolio (a fund of
Variable Insurance Products Fund II) at December 31, 1996, the results of
its operations for the year then ended, and the changes in its net assets
and the financial highlights for the periods indicated in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Contrafund Portfolio's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of securities at December 31, 1996 by correspondence
with the custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 10, 1997
DISTRIBUTIONS

The Board of Trustees of Contrafund Portfolio voted to pay on February 7,
1997, to shareholders of record at the opening of business on February 7,
1997, a distribution of $.37 per share derived from capital gains realized
from sales of portfolio securities and a dividend of $.14 per share from
net investment income.

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
OFFICERS
Edward C. Johnson 3d, PRESIDENT
J. Gary Burkhead, SENIOR VICE PRESIDENT
William J. Hayes, VICE PRESIDENT
Robert A. Lawrence, VICE PRESIDENT
William Danoff, VICE PRESIDENT
Arthur S. Loring, SECRETARY
Kenneth A. Rathgeber, TREASURER
Robert H. Morrison, MANAGER, SECURITY TRANSACTIONS
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
BOARD OF TRUSTEES
J. Gary Burkhead
Ralph F. Cox *
Phyllis Burke Davis *
Richard J. Flynn *
Edward C. Johnson 3d
E. Bradley Jones *
Donald J. Kirk *
Peter S. Lynch
Edward H. Malone *
Marvin L. Mann *
Gerald C. McDonough *
Thomas R. Williams *
ADVISORY BOARD
William O. McCoy
* INDEPENDENT TRUSTEES
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Investments Institutional Operations Co.
Boston, MA
CUSTODIAN
Brown Brothers Harriman & Co., Boston, MA

(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS
FUND II: ASSET MANAGER: GROWTH PORTFOLIO
ANNUAL REPORT
DECEMBER 31, 1996
CONTENTS

<TABLE>
<CAPTION>
<S> <C> <C>
MARKET ENVIRONMENT 3 A review of what happened in world markets
during the last year.

PERFORMANCE 4 How the fund has done over time.

FUND TALK 5 The managers' review of fund performance, strategy
and outlook.

ADDITIONAL INTERVIEW ON POLICY CHANGES 7 A discussion of recent changes to
VIP II: Asset Manager: Growth

INVESTMENTS 8 A complete list of the fund's investments with their
market values.

FINANCIAL STATEMENTS 17 Statements of assets and liabilities, operations, and
changes in net assets, as well as financial highlights.

NOTES 19 Notes to the financial statements.

REPORT OF INDEPENDENT ACCOUNTANTS 21 The auditors' opinion.

DISTRIBUTIONS 22

</TABLE>

Most stock and bond markets posted positive returns in 1996, aided by
moderate growth and low inflation. Sustained corporate earnings growth and
a favorable interest rate environment also proved beneficial. Japan,
however, was the major exception as an underperforming stock market and a
weak yen undermined returns for U.S.-based investors. The strongest gains
came from the often-volatile emerging bond markets in 1996, while
performance of the bond markets of developed countries was mixed.
U.S. STOCK MARKETS
The Standard & Poor's 500 Index - a broad measure of U.S. stock market
performance - rose 22.96% for the 12 months that ended December 31, 1996,
well above the index's long-term average annual return of about 12%. The
Russell 2000 Index - a measure of small stock performance - rose 16.49%.
The Dow Jones Industrial Average - an index of 30 blue-chip stocks - posted
a return of 28.70%, closing above 6500 for the first time in November.
The U.S. stock market spent much of the past year breaking price and
trading volume records. Solid corporate earnings reports, large cash
inflows into mutual funds, widespread optimism and a generally favorable
interest rate environment propelled share prices higher.
Large-capitalization stocks thrived as investors sought their lower
volatility and higher degree of liquidity over smaller-cap stocks in an
environment where it was sometimes difficult to discern the health of the
economy.
Most industry sectors experienced positive, if not strong performance. At
mid-year, technology stocks suffered from a sell-off sparked by fears that
company earnings were weakening. Nevertheless, this sector proved to be the
strongest in the U.S. market in 1996. Earnings surprises and positive
earnings projections were the main drivers of solid performance, especially
among semiconductor manufacturers, companies that make disk drives and
monitors, and software firms. Even though consensus estimates pointed
toward increases in short-term interest rates by the Fed, financial stocks
- - usually sensitive to changes in interest rates - shrugged off this
concern and posted solid performance based on low interest rates and
positive business prospects. Energy stocks reaped the benefits of
higher-than-expected energy prices, which resulted in part from the delayed
re-entry of Iraq into the world market. Uncertainty over the direction of
the economy benefited consumer nondurables - such as food, beverage and
tobacco companies - health care and traditional big-name growth stocks, as
these companies tend to post steady earnings growth in many economic
environments.
Utilities stocks struggled in 1996 for two reasons. First, and most
important, uncertainty over the direction and form of deregulation in the
sector tended to diminish investor interest. Second, stocks in the sector
tend to move in concert with bonds, which lagged due to periodic inflation
fears and confusing economic signals. Stocks in the telecommunications
field especially were affected by uncertainty over legislation signed into
law in February 1996. Biotechnology issues had a hard time recovering from
a correction in stock prices from overvalued levels that they experienced
earlier in 1996. Cyclical stocks - those that usually rise and fall with
the economy - posted mixed results that largely depended on the outlook for
companies in the specific sector rather than the direction of the economy.
FOREIGN STOCK MARKETS
Foreign stock markets posted mixed results in 1996. The Morgan Stanley
Capital International (MSCI) EAFE Index - which measures stock performance
in Europe, Australia and the Far East - returned 6.05% in 1996. Europe
posted the most consistently strong equity markets due to stronger economic
growth, lower interest rates, higher corporate earnings, the relative
weakness of the continent's major currencies and a new emphasis on
shareholder friendliness by many of the region's corporations. The MSCI
Europe Index was up 21.09% in 1996. The Japanese stock market
underperformed on the weakness of the economic recovery and the uncertainty
for any substantial economic reform. The Tokyo Stock Exchange TOPIX Total
Return Index was off 16.26%. Emerging market equity performance ran the
gamut from negative to positive, with the MSCI Emerging Markets Free Index
returning 6.03% for 1996. While Hong Kong was a top performer - benefiting
from the rising value of the property sector, solid economic growth and
stable interest rates - other Asian markets posted mixed returns as
concerns rose over declining export growth in the region. Latin America
enjoyed a strong first half, but faded toward the end of 1996 due to low
domestic savings rates and inefficient governments, among other factors.
U.S. BOND MARKETS
Uncertainty over the direction of the economy led to mixed performance in
U.S. bond markets in 1996. For the year, the Lehman Brothers Aggregate Bond
Index - a broad measure of the performance of the U.S. taxable bond market
- - posted a total return of 3.63%. Stronger-than-expected economic signals
rattled the bond market in the early spring. Investors spent most of the
summer anticipating a short-term interest rate increase by the Federal
Reserve Board. However, the Fed neither raised nor lowered rates through
the end of 1996. Interest rates responded to the Fed's inaction by falling
during much of October and November. In December, though, bond prices
dropped due to inflation concerns, stronger-than-expected economic data and
comments by Fed Chairman Alan Greenspan that the stock markets may be
overvalued.
FOREIGN BOND MARKETS
While low inflation and moderate growth helped provide a positive backdrop
for most bond markets in 1996, performance in overseas bond markets was
mixed. The Salomon Brothers World Government Bond Index - a measure of
government bond market performance in developed nations - returned 3.62%
for the 12 months that ended December 31, 1996. In Europe, focus centered
on the continuing progress toward the European Monetary Union (EMU).
Attractive opportunities arose as countries worked to meet the requirements
for joining the EMU. However, Germany and Japan - two of the larger
components of the Salomon Brothers World Government Bond Index -
experienced currency problems that hurt returns. In stark contrast to the
developed world, the often-volatile emerging debt markets enjoyed a
particularly strong year, helped by inflows of foreign capital, low
interest rates and the implementation of country-specific reforms -
especially in Latin America. The J.P. Morgan Emerging Markets Bond Index -
of which Latin America is a large component - posted a return of 34.16%
during the period.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY

Asset Manager: Growth 20.04% 21.56%

S&P 500 (registered trademark) 22.96% 30.11%

AVERAGE ANNUAL RETURNS take the fund's cumulative return and show you what
would have happened if the fund had performed at a constant rate each year.
You can compare the fund's return to those of the Standard & Poor's 500
Index - a widely recognized, unmanaged index of common stocks. This
benchmark reflects the reinvestment of dividends and capital gains, if any.

UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of growth in the long run and volatility
in the short run. In turn, the share price and return
of a fund that invests in stocks will vary. That
means if you sell your shares during a market
downturn, you might lose money. But if you can
ride out the market's ups and downs, you may
have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of return
and are not the fund's year-by-year results, which fluctuated over the
periods shown. The life of fund figures are from commencement of
operations, January 3, 1995.
If Fidelity had not reimbursed certain fund expenses, the life of fund
total return figure would have been lower.
PERFORMANCE NUMBERS ARE NET OF ALL FUND OPERATING EXPENSES, BUT DO NOT
INCLUDE ANY INSURANCE CHARGES IMPOSED BY YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. IF PERFORMANCE INFORMATION INCLUDED THE EFFECT OF THESE ADDITIONAL
CHARGES, THE TOTAL RETURN WOULD HAVE BEEN LOWER.
Past performance is no guarantee of future results. Principal and
investment return will vary and you may have a gain or loss when you
withdraw your money.
$10,000 OVER LIFE OF FUND
IMAHDR PRASUN SHR__CHT 19960930 19961009 151627 S00000000000001
Asset Manager:Growt S&P500 Fid. Aggr.Asset. Alloc.
00159 SP001 F0022
1995/01/31 10000.00 10000.00
10000.00
1995/02/28 10149.70 10389.70
10319.41
1995/03/31 10289.42 10696.30
10539.38
1995/04/30 10558.88 11011.31
10785.08
1995/05/31 10708.58 11451.43
11198.64
1995/06/30 11137.72 11717.44
11396.90
1995/07/31 11546.91 12106.00
11632.64
1995/08/31 12065.87 12136.38
11694.83
1995/09/30 12245.51 12648.54
12051.93
1995/10/31 11776.45 12603.38
12082.78
1995/11/30 11986.03 13156.67
12486.40
1995/12/31 12277.71 13410.07
12699.16
1996/01/31 12569.78 13866.55
13007.00
1996/02/29 12613.39 13995.09
13008.05
1996/03/31 12840.37 14129.86
13058.25
1996/04/30 13143.01 14338.14
13160.97
1996/05/31 13348.36 14707.92
13378.10
1996/06/30 13402.41 14763.95
13465.02
1996/07/31 13067.35 14111.68
13090.93
1996/08/31 13164.62 14409.30
13265.02
1996/09/30 13705.04 15220.25
13818.40
1996/10/31 14104.95 15640.03
14160.36
1996/11/30 15023.67 16822.26
14932.58
1996/12/31 14737.79 16489.01
14697.36
IMATRL PRASUN SHR__CHT 19960930 19961009 151629 R00000000000123

Let's say hypothetically that $10,000 was invested in Asset Manager: Growth
Portfolio on January 31, 1995, shortly after the fund began. As the chart
shows, by December 31, 1996, the value of the investment would have grown
to $14,738 - a 47.38% increase. With reinvested dividends and capital
gains, if any, a $10,000 investment in the S&P 500 would have grown to
$16,489 over the same period - a 64.89% increase.
You can also look at how the Fidelity Aggressive Asset Allocation Composite
Index, a hypothetical combination of unmanaged indices, did over the same
period. The Aggressive Asset Allocation Composite index combines the
cumulative total returns of three unmanaged indexes - the S&P 500 (64.89%),
Lehman Brothers Aggregate Bond Index (20.39%), and the Salomon Brothers
3-month T-Bill Total Rate of Return Index (10.78%) - according to the
fund's neutral mix*, assuming monthly rebalancing. With reinvested
dividends and capital gains, if any, a $10,000 investment in the index
would have grown to $14,697 - a 46.97% increase.
* 70% STOCKS, 25% BONDS AND 5% SHORT-TERM INSTRUMENTS EFFECTIVE JANUARY 1,
1997; 65%, 30% AND 5%, RESPECTIVELY, PRIOR TO DECEMBER 31, 1996.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1996
% OF FUND'S
INVESTMENTS

Philip Morris Companies, Inc. 6.6

Federal National Mortgage Association 6.2

General Motors Corp. 3.5

International Business Machines Corp. 2.8

Compaq Computer Corp. 2.4

TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 1996
(STOCKS ONLY) % OF FUND'S
INVESTMENTS

Finance 14.3

Technology 12.0

Nondurables 7.7

Utilities 5.8

Durables 5.7

ASSET ALLOCATION AS OF DECEMBER 31, 1996*
Row: 1, Col: 1, Value: 8.9
Row: 1, Col: 2, Value: 22.5
Row: 1, Col: 3, Value: 68.59999999999999
Stocks 68.6%
Bonds 22.5%
Short-term investments 8.9%
FOREIGN INVESTMENTS 9.2%
*
% OF FUND'S INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
FUND TALK: THE MANAGERS' OVERVIEW

An interview with Richard Habermann (center), Portfolio Manager of VIP II:
Asset Manager: Growth, as well as George Vanderheiden (left) and Michael
Gray, sub-managers for stocks and bonds, respectively
Q. HOW DID THE FUND PERFORM, DICK?
D.H. Pretty well. For most of the past year - when the stock market was
quite strong and bonds posted mixed results - the fund nearly performed in
line with the broad stock market. For the 12 months that ended December 31,
1996, the Standard & Poor's 500 Index posted a return of 22.96%. The fund
benefited most from the performance of its equity investments, a result of
restructuring of the portfolio after a management change in March.
Q. WHAT WAS THE NATURE OF THIS REPOSITIONING?
D.H. On the equity side, we emphasized large-capitalization stocks whose
dividend yields were slightly higher than that of the market. This approach
helped the fund, as stocks in this area were among the best performing
asset classes in 1996. We focused the fund's bond investments on
investment-grade, dollar-denominated securities, and brought the bond
portfolio's duration - its sensitivity to changes in interest rates - in
line with the bond market average as represented by the Lehman Brothers
Aggregate Index.
Q. WHAT WAS THE FUND'S ASSET MIX AT THE END OF THE PERIOD?
D.H. The fund had about 69% in stocks, 22% in bonds and 9% in short-term
money-market securities. This asset allocation is fairly close to the new
neutral mix we have developed for the fund. For more information on that
policy change, shareholders should refer to the additional interview that
follows in this report.
Q. CAN YOU GIVE US SOME DETAILS ON YOUR ASSET ALLOCATION STRATEGY OVER THE
PAST SIX MONTHS?
D.H. We've maintained a fairly consistent weighting in stocks over that
period, a position that has helped the fund because stocks performed so
well. Investors bid up stock prices in July after finding that some
negative corporate earnings reports were not indicative of the state of the
overall market. Through the last three months of the year, stocks continued
to do well, spurred by a benign economic and interest rate environment.
Federal Reserve Board Chairman Alan Greenspan's comments about the market's
exuberance caused some short-term volatility in December, but the stock
market rebounded fairly quickly. The fixed-income component was increased
at times, as we bought bonds when they became undervalued during periods of
market duress. At those times, the market was spooked by
stronger-than-expected economic data that was considered to be a signal of
inflation. Bond investors fear inflation because it erodes the value of a
bond's fixed payments. We bought more investment-grade bonds when their
prices fell and their yields rose in response to the economic data.
Therefore, we were able to lock in higher yields on our new fixed-income
investments. When yields subsequently fell, the value of the fixed-income
investments we purchased earlier increased.
Q. TURNING TO YOU, GEORGE, WHAT STOCK-PICKING STRATEGIES HAVE YOU PURSUED?
G.V. I've sought to minimize the risk in the stock holdings because I
considered stock market valuations to be high on a historical basis. As a
result, I've pursued two strategies - growth at a reasonable price and
vulture investing. I have always felt the most prudent way to buy growth
stocks is to get as much total return, meaning stock appreciation plus
dividend yield, for as small a price as possible. The price you pay for a
growth stock is reflected in its price-to-earnings ratio, or how much times
earnings the market thinks that stock is worth. To give an example, both
Philip Morris and Coca-Cola are growth stocks with each having grown its
earnings per share at an 18% growth rate over the past 10 years. Assuming
they can sustain similar growth rates in the future, Philip Morris would
have a higher total return because its dividend yield is 5%, whereas Coke's
is 1%. But look at what the market was paying for each stock's total return
at the beginning of October. Coke was at around $51 and the consensus
estimate for its earnings per share was $1.40 for 1996, thereby producing a
price-to-earnings ratio of 36 times. Philip Morris, on the other hand, was
at $93 with a consensus earnings-per-share estimate of $7.70 for 1996,
thereby producing a price-to-earnings ratio of 12 times. Litigation
concerns have been dragging down Philip Morris' ratio, but these worries
have been around for 15 years and this was the biggest gap between the two
companies' price-to-earnings ratios. That's why I invested in Philip Morris
and not Coca-Cola.
Q. WHAT DO YOU MEAN BY VULTURE INVESTING?
G.V. Occasionally bad things happen to good stocks. Quality growth stocks
may stumble temporarily due to new product introductions, too much
inventory or manufacturing problems that cause a disappointment in
quarterly earnings. If these are truly temporary occurrences, they can be
wonderful opportunities to buy a stock or sector when prices are down. For
example, in January 1996, Intel's price had dropped to $50 from $75 months
before as concerns developed over its receivables with Packard Bell. Nine
months later the stock had increased substantially. Buying a sector with
good long-term fundamentals after it has suffered a big decline can
mitigate risk and enhance the ultimate upside gain. However, it does
require patience.
Q. MICHAEL, WHERE HAVE YOU FOUND OPPORTUNITIES IN THE BOND PORTFOLIO?
M.G. I've increased the fund's investments in bonds that offered a yield
advantage over Treasuries - agency issues, mortgage-backed securities and
corporate bonds.
Q. WHAT MADE CORPORATE BONDS MORE ATTRACTIVE?
M.G. As Dick said, they became more attractive earlier in the period. In
addition, for most of the period, the fundamental outlook for corporations
was favorable. That is, business prospects appeared to improve. The best
indicator of a favorable corporate environment has been a strong stock
market. This strength showed that corporations were doing well and that
investors were comfortable with prospects as they drove up stock prices.
Part of that optimism was a function of the economic environment, which has
been fairly positive. Despite the bond market's inflation fears in the
spring, the economy looked as if it was growing, while inflation remained
under control. Moderate growth with low inflation is a good recipe for
corporations. In addition, there was a limited supply of new corporate
issues, along with fairly strong demand. Many investors were looking for
added yield, and there wasn't much to buy in the way of corporate bonds.
This backdrop helped corporate bonds post strong price gains on a relative
basis.
Q. WERE THERE OTHER TYPES OF BONDS THAT WERE ATTRACTIVE TO YOU?
M.G. I was attracted to Yankee bonds. These are dollar-denominated bonds
issued in the U.S. by foreign banks, governments and corporations. They
tend to trade more cheaply than other bonds with similar credit ratings and
often don't drop in price as quickly as corporate bonds when bad news
affects the issuer.
Q. WHAT KINDS OF MORTGAGE-BACKED SECURITIES DID YOU FAVOR?
M.G. When rates rose earlier in the period, I bought mortgage-backed
securities that were selling at a discount. In general I sought securities
that I thought would be less susceptible to changes in interest rates than
other choices in the mortgage-backed sector. Mortgage-backed securities
tend not to perform well if rates go up or down sharply, so I looked for
those bonds that by the nature of their structure would be less sensitive
to interest rate changes. Those securities tended to be in 15-year and
30-year mortgages that were selling at a discount.
Q. TURNING BACK TO YOU, DICK, WHAT'S YOUR OUTLOOK?
D.H. Twice this year, there has been real excitement in the stock market,
in July and December. Both occasions were related to concerns about
earnings. Going forward, I think we'll find more risk in the markets.
Sometimes people tend to forget that stocks, most importantly, are stocks
of COMPANIES. So what we've been trying to do is to spend a lot of time
listening to companies and trying to get a sense of what's going on. There
might be a pick-up in the economy to sustain earnings, but in the short
term, earnings disappointments will hit a stock hard. The stocks and
markets that have done poorly are those that haven't met expectations. If
the low-interest, low-inflation environment continues, earnings will be
more crucial. That is, because of lower interest rates, there will be more
of a reaction when earnings don't meet expectations. In addition, stock
prices will be more sensitive to any changes in interest rates. As for
fixed-income, we'll continue to keep an eye on the strength of the economy
and to look for value in the various sectors of the market.

NOTE TO SHAREHOLDERS: Charles Morrison became sub-manager for bonds on
February 3,1997, after the period ended.

FUND FACTS
GOAL: maximum total return over the long term
by allocating assets among stocks, bonds and
short-term instruments anywhere in the world
START DATE: January 3, 1995
SIZE: as of December 31, 1996, more than
$253 million
MANAGER: Richard Habermann, since March
1996; joined Fidelity in 1968
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
ADDITIONAL INTERVIEW ON POLICY CHANGES

NOTE TO SHAREHOLDERS: Beginning on December 1, 1996, Asset Manager: Growth
Portfolio's neutral mix of investments changed, and there was a change in
how bonds and short-term instruments are classified. In the following
additional interview segment, Portfolio Manager Dick Habermann discusses
these changes.
Q. WE UNDERSTAND THAT THE FUND'S NEUTRAL ALLOCATION PERCENTAGES CHANGED.
CAN YOU EXPLAIN?
A. Yes. Asset Manager: Growth's neutral mix - which represents how the
fund's investments are allocated, on average, over the long term - was 65%
stocks, 30% bonds and 5% short-term instruments. Under a new policy
approved by the fund's Board of Trustees, the neutral mix is now 70%
stocks, 25% bonds and 5% short-term/money market. As always, this mix will
vary over short-term periods as fund management makes gradual adjustments
to the portfolio's holdings - within defined ranges - based on the current
outlook for the different markets. The neutral mix is designed to establish
a general direction for the fund and communicate the expected posture of
the fund going forward.
Q. WHAT DO THESE CHANGES MEAN?
A. The most significant impact of the changes is a 5% increase in the
fund's equity allocation at the expense of the bond component. The other
changes to the bond and short-term classes are mainly a redefinition of the
dividing line of short-term securities and longer-term bonds.
Q. SO YOU ALSO CHANGED THE DEFINITION OF "SHORT-TERM" FOR THE PURPOSES OF
HOW THE FUND LOOKS AT ITS ALLOCATIONS . . .
A. The short-term asset class in the fund included all bonds and short-term
instruments with maturities of three years or less. Under our new
definition, we now generally move securities with one to three years
remaining maturity into the bond class, leaving shorter-term instruments in
a newly named "short-term/money market" class. In addition to redefining
the bond and short-term classes, we also assigned a manager to the
short-term/money market part of the fund: John Todd, a veteran manager in
our money market fund group who has been with Fidelity since 1981.
Q. WHY DID YOU MAKE THESE CHANGES?
A. With the changes in the management structure, we thought it was a good
time to reassess the neutral mix based on what we learned since we launched
the first Asset Manager fund in 1988. One thing we found is that stocks
have continued to provide superior returns relative to both intermediate
and long term bonds. At the same time, the volatility of stocks and bonds
by some measures has been converging. Based on this comparison and other
factors we evaluated, we believe the fund can modestly increase its
allocation to equities and thus its potential return without unduly
affecting its volatility.
Shareholders should remember that these allocations simply represent a
neutral mix. Because the fund is actively managed, allocations will change
based on the market environment. The allocation ranges for each asset class
have been modified to accommodate the change in the neutral mix.
Q. AND WHY DID YOU REDEFINE THE SHORT-TERM CLASS AND ASSIGN A SUB-PORTFOLIO
MANAGER?
A. We believe that actively managing the short-term part of the portfolio
more like a money market fund will help to make this category more stable.
Additionally, this redefinition is in line with the way Fidelity looks at
fixed-income asset classes across our funds.
Q. WILL THESE CHANGES HAVE ANY IMPACT ON THE LEVEL OF FOREIGN SECURITIES
HELD IN THE FUND?
A. Because part of the fund's goal is to produce high total return over the
long-term through diversification, foreign investments will continue to
play a role in the fund. However, we are more likely to seek investment
opportunities first in domestic markets.
Q. HOW HAVE YOU BROUGHT THE FUND IN LINE WITH THE NEW POLICIES?
A. We have been making gradual changes, so that at the start of 1997, the
fund's neutral allocation mix and holdings are where we want them.
Shareholders should keep in mind that we're continually fine-tuning the
fund within its prospectus parameters to achieve the best risk-reward
ratio, so making changes over the next month won't be unusual.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
INVESTMENTS DECEMBER 31, 1996

Showing Percentage of Total Value of Investment in Securities

COMMON STOCKS - 68.3%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 1.0%
AEROSPACE & DEFENSE - 0.5%
Boeing Co. 9,800 $ 1,042,475
Gulfstream Aerospace Corp. (a) 5,000 121,250
1,163,725
DEFENSE ELECTRONICS - 0.5%
Raytheon Co. 26,900 1,294,563
TOTAL AEROSPACE & DEFENSE 2,458,288
BASIC INDUSTRIES - 3.2%
CHEMICALS & PLASTICS - 2.2%
Air Products & Chemicals, Inc. 6,500 449,313
du Pont (E.I.) de Nemours & Co. 36,100 3,406,938
Raychem Corp. 10,100 809,263
Union Carbide Corp. 19,800 809,325
5,474,839
METALS & MINING - 0.1%
Reynolds Metals Co. 3,400 191,675
PACKAGING & CONTAINERS - 0.1%
Owens-Illinois, Inc. (a) 2,200 50,050
Tupperware Corp. 4,400 235,950
286,000
PAPER & FOREST PRODUCTS - 0.8%
Boise Cascade Corp. 13,500 428,625
Champion International Corp. 21,700 938,525
International Paper Co. 11,400 460,275
Temple-Inland, Inc. 2,700 146,138
Willamette Industries, Inc. 2,500 174,063
2,147,626
TOTAL BASIC INDUSTRIES 8,100,140
CONSTRUCTION & REAL ESTATE - 0.9%
CONSTRUCTION - 0.7%
Centex Corp. 10,900 410,113
DR Horton, Inc. 32,900 357,788
Fleetwood Enterprises, Inc. 29,933 823,158
Kaufman & Broad Home Corp. 15,700 202,138
Lennar Corp. 500 13,625
U.S. Home Corp. (a) 1,700 44,200
1,851,022
ENGINEERING - 0.2%
Fluor Corp. 7,000 439,250
TOTAL CONSTRUCTION & REAL ESTATE 2,290,272
DURABLES - 5.7%
AUTOS, TIRES, & ACCESSORIES - 5.4%
Cummins Engine Co., Inc. 7,600 349,600
Dana Corp. 8,300 270,788
Discount Auto Parts, Inc. (a) 5,100 119,213
Federal-Mogul Corp. 11,600 255,200
General Motors Corp. 161,200 8,986,900
Goodyear Tire & Rubber Co. 5,100 262,013
Honda Motor Co. Ltd. 21,000 599,483
Magna International, Inc. Class A 28,700 1,596,364
Superior Industries International, Inc. 22,500 520,313
Volvo AB Class B 35,900 788,792
13,748,666
CONSUMER ELECTRONICS - 0.2%
Newell Co. 10,600 333,900
Whirlpool Corp. 2,200 102,575
436,475

SHARES VALUE (NOTE 1)
TEXTILES & APPAREL - 0.1%
Burlington Industries, Inc. (a) 31,000 $ 341,000
TOTAL DURABLES 14,526,141
ENERGY - 5.6%
ENERGY SERVICES - 0.1%
McDermott International, Inc. 22,200 369,075
OIL & GAS - 5.5%
Amerada Hess Corp. 10,400 601,900
Anadarko Petroleum Corp. 1,500 97,125
Atlantic Richfield Co. 14,300 1,894,750
British Petroleum PLC ADR 13,702 1,937,120
Burlington Resources, Inc. 23,100 1,163,663
Canada Occidental Petroleum Ltd. 20,100 323,307
Elf Aquitaine SA sponsored ADR 5,400 244,350
Enron Oil & Gas Co. 1,600 40,400
Fortune Petroleum Corp. (warrants)(a) 100,000 175,000
Kerr-McGee Corp. 5,000 360,000
Louisiana Land & Exploration Co. 17,700 949,163
Noble Affiliates, Inc. 2,300 110,113
Occidental Petroleum Corp. 15,500 362,313
Royal Dutch Petroleum Co.:
Ord. 800 140,207
ADR 19,100 3,261,325
Santa Fe Energy Resources, Inc. (a) 15,800 219,225
Sun Co., Inc. 15,100 368,063
Tosco Corp. 16,500 1,305,563
Total SA:
Class B 920 74,805
sponsored ADR 8,065 324,616
Ultramar Diamond Shamrock Corp. 600 18,975
Union Pacific Resources Group, Inc. 4,200 122,850
14,094,833
TOTAL ENERGY 14,463,908
FINANCE - 14.3%
BANKS - 1.4%
Canadian Imperial Bank of Commerce 2,000 88,193
Fleet Financial Group, Inc. 53,900 2,688,263
NationsBank Corp. 4,200 410,550
State Street Boston Corp. 4,600 296,700
3,483,706
CLOSED END INVESTMENT COMPANY - 0.1%
First NIS Regional Fund (a) 25,000 275,000
CREDIT & OTHER FINANCE - 0.1%
Transamerica Corp. 1,700 134,300
FEDERAL SPONSORED CREDIT - 8.4%
Federal Home Loan Mortgage
Corporation 52,100 5,737,513
Federal National Mortgage Association 426,500 15,887,125
21,624,638
INSURANCE - 3.8%
AFLAC, Inc. 8,500 363,375
Allmerica Financial Corp. 11,800 395,300
Allstate Corp. 47,200 2,731,700
American International Group, Inc. 20,300 2,197,475
CIGNA Corp. 1,100 150,288
Equitable of Iowa Companies 1,300 59,638
General Re Corp. 9,600 1,514,400
Loews Corp. 2,100 197,925
MGIC Investment Corp. 2,500 190,000
Provident Companies, Inc. 900 43,538
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
INSURANCE - CONTINUED
Providian Corp. 19,600 $ 1,006,950
Reliastar Financial Corp. 1,600 92,400
Torchmark Corp. 12,000 606,000
Travelers/Aetna Property Casualty Corp.
Class A 3,000 106,125
UNUM Corp. 1,100 79,475
9,734,589
SAVINGS & LOANS - 0.3%
Golden West Financial Corp. 12,400 782,750
SECURITIES INDUSTRY - 0.2%
United Asset Management Corp. 22,500 599,063
TOTAL FINANCE 36,634,046
HEALTH - 3.8%
DRUGS & PHARMACEUTICALS - 0.9%
Astra AB Class A Free shares 18,600 915,112
Novartis AG (Reg.) 400 457,100
Pharmacia & Upjohn, Inc. 1,400 55,475
Schering-Plough Corp. 13,700 887,075
2,314,762
MEDICAL EQUIPMENT & SUPPLIES - 0.2%
Allegiance Corp. 1,760 48,620
Baxter International, Inc. 3,200 131,200
Biomet, Inc. 20,500 310,063
489,883
MEDICAL FACILITIES MANAGEMENT - 2.7%
Columbia/HCA Healthcare Corp. 145,050 5,910,788
Humana, Inc. (a) 20,600 393,975
Tenet Healthcare Corp. (a) 22,300 487,813
United HealthCare Corp. 5,200 234,000
7,026,576
TOTAL HEALTH 9,831,221
HOLDING COMPANIES - 0.1%
U.S. Industries, Inc. 6,900 236,700
INDUSTRIAL MACHINERY & EQUIPMENT - 1.5%
ELECTRICAL EQUIPMENT - 0.7%
Emerson Electric Co. 2,500 241,875
General Electric Co. 9,800 968,975
Scientific-Atlanta, Inc. 11,500 172,500
Sensormatic Electronics Corp. 5,800 97,150
Westinghouse Electric Corp. 16,300 323,963
1,804,463
INDUSTRIAL MACHINERY & EQUIPMENT - 0.5%
Caterpillar, Inc. 15,200 1,143,800
Dover Corp. 1,300 65,325
Illinois Tool Works, Inc. 400 31,950
Kaydon Corp. 100 4,713
Kennametal, Inc. 200 7,775
1,253,563
POLLUTION CONTROL - 0.3%
Browning-Ferris Industries, Inc. 25,100 658,875
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 3,716,901

SHARES VALUE (NOTE 1)
MEDIA & LEISURE - 1.1%
BROADCASTING - 0.0%
CS Wireless Systems, Inc. (a)(f) 9 $ -
HSN, Inc. (a) 3,150 74,813
74,813
ENTERTAINMENT - 0.0%
Cedar Fair LP (depositary unit) 900 33,300
Royal Carribean Cruises Ltd. 1,800 42,075
75,375
LEISURE DURABLES & TOYS - 0.5%
Nintendo Co. Ltd. Ord. 18,300 1,308,383
LODGING & GAMING - 0.4%
Circus Circus Enterprises, Inc. (a) 22,200 763,125
Mirage Resorts, Inc. (a) 3,600 77,850
Sun International Hotels Ltd. Ord. (a) 5,400 197,100
1,038,075
RESTAURANTS - 0.2%
Brinker International, Inc. (a) 8,100 129,600
Darden Restaurants, Inc. 4,800 42,000
McDonald's Corp. 4,500 203,625
375,225
TOTAL MEDIA & LEISURE 2,871,871
NONDURABLES - 7.7%
HOUSEHOLD PRODUCTS - 0.0%
Premark International, Inc. 5,300 117,925
TOBACCO - 7.7%
Philip Morris Companies, Inc. 149,700 16,859,963
RJR Nabisco Holdings Corp. 68,720 2,336,480
UST, Inc. 14,900 482,388
19,678,831
TOTAL NONDURABLES 19,796,756
PRECIOUS METALS - 0.1%
Barrick Gold Corp. 3,800 108,801
Santa Fe Pacific Gold Corp. 15,300 235,238
344,039
RETAIL & WHOLESALE - 4.9%
APPAREL STORES - 0.2%
TJX Companies, Inc. 12,400 587,450
DRUG STORES - 0.1%
CVS Corp. 3,500 144,813
GENERAL MERCHANDISE STORES - 1.7%
Federated Department Stores, Inc. (a) 39,200 1,337,700
Wal-Mart Stores, Inc. 130,700 2,989,763
4,327,463
GROCERY STORES - 0.0%
Safeway, Inc. 1,200 51,300
RETAIL & WHOLESALE, MISCELLANEOUS - 2.9%
Circuit City Stores, Inc. 77,500 2,334,688
Home Depot, Inc. (The) 41,600 2,085,200
Lowe's Companies, Inc. 33,800 1,199,900
Officemax, Inc. (a) 27,900 296,438
Office Depot, Inc. (a) 12,700 225,425
Rex Stores Corp. (a) 5,800 47,125
Tandy Corp. 4,600 202,400
Toys "R" Us, Inc. (a) 31,000 930,000
7,321,176
TOTAL RETAIL & WHOLESALE 12,432,202
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SERVICES - 0.0%
ADVERTISING - 0.0%
Interpublic Group of Companies, Inc. 1,700 $ 80,750
SERVICES - 0.0%
HCIA, Inc. (a) 2,200 75,900
TOTAL SERVICES 156,650
TECHNOLOGY - 12.0%
COMMUNICATIONS EQUIPMENT - 0.2%
Cisco Systems, Inc. (a) 7,500 477,188
Nokia Corp. AB sponsored ADR 1,400 80,675
557,863
COMPUTER SERVICES & SOFTWARE - 1.1%
America Online, Inc. (a) 7,800 259,350
Automatic Data Processing, Inc. 15,900 681,713
Electronic Data Systems Corp. 14,700 635,775
Microsoft Corp. (a) 4,800 396,600
Oracle Systems Corp. (a) 11,900 496,825
Policy Management Systems Corp. (a) 6,000 276,750
Sabre Group Holdings, Inc. Class A (a) 800 22,300
2,769,313
COMPUTERS & OFFICE EQUIPMENT - 6.7%
Adaptec, Inc. (a) 2,000 80,000
Bay Networks, Inc. (a) 41,900 874,663
Compaq Computer Corp. (a) 82,100 6,095,925
Hewlett-Packard Co. 19,200 964,800
Ingram Micro, Inc. Class A (a) 800 18,400
International Business Machines Corp. 47,000 7,097,000
SCI Systems, Inc. (a) 20,400 910,350
Seagate Technology (a) 22,100 872,950
Silicon Graphics, Inc. (a) 4,100 104,550
Tech Data Corp. (a) 7,100 194,363
17,213,001
ELECTRONIC INSTRUMENTS - 0.9%
Applied Materials, Inc. (a) 16,800 603,750
KLA Instruments Corp. (a) 3,500 124,250
Lam Research Corp. (a) 8,800 247,500
Novellus System, Inc. (a) 7,400 400,988
Teradyne, Inc. (a) 20,900 509,438
Varian Associates, Inc. 8,000 407,000
2,292,926
ELECTRONICS - 3.1%
AMP, Inc. 41,900 1,607,913
Atmel Corp. (a) 8,200 271,625
Intel Corp. 11,100 1,453,406
Methode Electronics, Inc. Class A 300 6,075
Microchip Technology, Inc. (a) 1,300 66,138
Micron Technology, Inc. 9,400 273,775
Molex, Inc. 5,800 206,625
Motorola, Inc. 4,400 270,050
National Semiconductor Corp. (a) 9,500 231,563
Solectron Corp. (a) 40,300 2,151,013
Storage Technology Corp. (a) 6,600 314,325
Texas Instruments, Inc. 12,600 803,250
Xilinx, Inc. (a) 5,200 191,425
7,847,183
TOTAL TECHNOLOGY 30,680,286

SHARES VALUE (NOTE 1)
TRANSPORTATION - 0.6%
RAILROADS - 0.5%
Bombardier, Inc. Class B 10,000 $ 184,557
Burlington Northern Santa Fe Corp. 4,700 405,963
CSX Corp. 17,300 730,925
1,321,445
SHIPPING - 0.1%
Stolt-Nielsen SA 1,800 33,975
Stolt-Nielsen SA Class B sponsored ADR 10,700 200,625
234,600
TOTAL TRANSPORTATION 1,556,045
UTILITIES - 5.8%
CELLULAR - 2.2%
AirTouch Communications, Inc. (a) 37,400 944,350
Microcell Telecommunications, Inc.:
(warrants) (a) 40 500
(conditional warrants) (a) 40 25
360 Degrees Communications Co. (a) 4,000 92,500
Vodafone Group PLC 171,037 723,676
Vodafone Group PLC sponsored ADR 91,400 3,781,675
5,542,726
GAS - 0.2%
Enron Corp. 11,300 487,313
TELEPHONE SERVICES - 3.4%
Ameritech Corp. 18,100 1,097,313
Bell Atlantic Corp. 13,800 893,550
BellSouth Corp. 29,500 1,191,063
Deutsche Telekom AG (a) 8,700 181,168
MCI Communications Corp. 58,300 1,905,681
NYNEX Corp. 26,300 1,265,688
SBC Communications, Inc. 31,200 1,614,600
Sprint Corp. 15,100 602,113
8,751,176
TOTAL UTILITIES 14,781,215
TOTAL COMMON STOCKS
(Cost $157,378,764) 174,876,681
PREFERRED STOCKS - 0.3%
CONVERTIBLE PREFERRED STOCKS - 0.0%
MEDIA & LEISURE - 0.0%
BROADCASTING - 0.0%
Triathalon Broadcasting Co. $0.945
depositary share representing
1/10 pfd 2,000 17,000
NONCONVERTIBLE PREFERRED STOCKS - 0.3%
FINANCE - 0.0%
SAVINGS & LOANS - 0.0%
Chevy Chase Capital Corp.,
Series A, $5.1875 2,000 103,500
MEDIA & LEISURE - 0.3%
BROADCASTING - 0.3%
Cablevision System Corp. depositary
shares representing 1/100 pfd.,
Series M pay-in-kind 1,989 179,010
Time Warner, Inc., Series M,
10 1/4% pay-in-kind 550 596,750
TOTAL MEDIA & LEISURE 775,760
PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TECHNOLOGY - 0.0%
COMPUTER SERVICES & SOFTWARE - 0.0%
ICG Holdings, Inc. 14 1/4% pay-in-kind 42 $ 46,410
TOTAL NONCONVERTIBLE PREFERRED STOCKS 925,670
TOTAL PREFERRED STOCKS
(Cost $929,984) 942,670
CORPORATE BONDS - 8.8%
MOODY'S RATINGS (B) PRINCIPAL
(UNAUDITED) AMOUNT
NONCONVERTIBLE BONDS - 8.8%
AEROSPACE & DEFENSE - 0.2%
AEROSPACE & DEFENSE - 0.1%
Be Aerospace, Inc. 9 7/8%,
2/1/06 B2 $ 10,000 10,500
Lockheed Martin Corp. 7.70%,
6/15/08 A3 150,000 156,935
167,435
SHIP BUILDING & REPAIR - 0.1%
Newport News Shipbuilding, Inc. (f):
8 5/8%, 12/1/06 Ba2 130,000 132,925
9 1/4%, 12/1/06 B1 120,000 123,900
256,825
TOTAL AEROSPACE & DEFENSE 424,260
BASIC INDUSTRIES - 0.3%
CHEMICALS & PLASTICS - 0.2%
Acetex Corp. yankee 9 3/4%,
10/1/03 B1 200,000 198,000
Freedom Chemical Co.
10 5/8%, 10/15/06 (f) B3 150,000 157,500
Ivex Holdings Corp. 0%,
3/15/05 (c) Caa 50,000 38,000
NL Industries, Inc. 11 3/4%,
10/15/03 B1 80,000 84,800
Sterling Chemicals Holdings, Inc.
11 3/4%, 8/15/06 B3 80,000 84,400
562,700
IRON & STEEL - 0.1%
AK Steel Corp. 9 1/8%,
12/15/06 (f) Ba2 150,000 153,938
PACKAGING & CONTAINERS - 0.0%
Owens-Illinois, Inc. 9.95%,
10/15/04 B2 110,000 117,013
TOTAL BASIC INDUSTRIES 833,651
CONSTRUCTION & REAL ESTATE - 0.2%
BUILDING MATERIALS - 0.1%
Building Materials Corp. of
America 0%, 7/1/04 (c) B1 290,000 251,213
Usinor Sacilor yankee 7 1/4%,
8/1/06 Baa2 125,000 124,803
376,016

MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
CONSTRUCTION - 0.1%
Greystone Homes, Inc.
10 3/4%, 3/1/04 B1 $ 180,000 $ 184,050
TOTAL CONSTRUCTION & REAL ESTATE 560,066
DURABLES - 0.6%
AUTOS, TIRES, & ACCESSORIES - 0.3%
APS, Inc. 11 7/8%, 1/15/06 B2 30,000 32,475
Aetna Industries, Inc.
11 7/8%, 10/1/06 (f) B3 200,000 215,000
Aftermarket Technology Corp.
12%, 8/1/04 B3 180,000 201,150
Blue Bird Body Co. 10 3/4%,
11/15/06 (f) B2 120,000 125,400
Delco Remy International, Inc.
10 5/8%, 8/1/06 (f) B2 220,000 233,200
807,225
CONSUMER ELECTRONICS - 0.0%
Tag Heuer International SA
yankee 12%, 12/15/05 B3 55,000 63,250
HOME FURNISHINGS - 0.1%
Interlake Corp. 12 1/8%,
3/1/02 B3 240,000 248,400
Knoll, Inc. 10 7/8%,
3/15/06 B3 40,000 44,200
292,600
TEXTILES & APPAREL - 0.2%
Levi Strauss & Co. 7%,
11/1/06 (f) Baa2 250,000 248,530
Pillowtex Corp. 10%,
11/15/06 (f) B2 160,000 166,800
415,330
TOTAL DURABLES 1,578,405
ENERGY - 0.4%
ENERGY SERVICES - 0.1%
Parker Drilling Co. 9 3/4%,
11/15/06 (f) B1 30,000 31,500
Petroliam Nasional BHD yankee
7 5/8%, 10/15/26 (f) A1 250,000 252,018
283,518
OIL & GAS - 0.3%
Flores & Rucks, Inc. 9 3/4%,
10/1/06 B3 60,000 63,600
HS Resource, Inc. 9 1/4%,
11/15/06 (f) B2 20,000 20,550
Husky Oil Ltd. yankee 6 7/8%,
11/15/03 Baa3 125,000 124,095
Occidental Petroleum Corp.
9 3/4%, 6/15/01 Baa3 100,000 111,505
Petro-Canada 8.60%,
10/15/01 A3 250,000 267,843
Petro-Canada, Inc. yankee
7 7/8%, 6/15/26 Baa1 125,000 131,524
Tosco Corp. 7 5/8%, 5/15/06 Baa2 100,000 103,242
822,359
TOTAL ENERGY 1,105,877
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
FINANCE - 2.4%
BANKS - 0.4%
ABN Amro Bank NV
6 5/8%, 10/31/01 Aa3 $ 250,000 $ 250,088
Capital One Bank 6.74%,
5/31/99 Baa3 125,000 125,375
HSBC Americas, Inc. 7%,
11/1/06 Baa1 150,000 148,080
KeyCorp 7 1/2%, 6/15/06 A2 100,000 102,559
Midland Bank PLC yankee
7 5/8%, 6/15/06 A1 125,000 129,433
Nationsbank Corp. 5.67%,
2/9/01 A1 250,000 241,548
Southern National Corp.
7.05%, 5/23/03 A3 100,000 100,906
1,097,989
ASSET-BACKED SECURITIES - 0.3%
Airplanes Pass Through Trust
Class D 10 7/8%, 3/15/19 Ba2 510,000 567,375
Green Tree Financial Corp.
6 1/2%, 6/15/27 Aaa 100,000 100,406
6.80%, 6/15/27 Aaa 100,000 100,812
768,593
CREDIT & OTHER FINANCE - 1.2%
AT&T Capital Corp. 6.02%,
12/4/98 Baa3 250,000 249,018
Aames Financial Corp.
9 1/8%, 11/1/03 Ba3 10,000 10,175
Ahmanson Capital Trust I
8.36%, 12/1/26 (f) Baa3 250,000 252,638
CIT Group Holdings, Inc.
6 1/4%, 10/4/99 Aa3 250,000 249,765
Chase Capital I
7.67%, 12/1/26 A1 300,000 293,331
ContiFinancial Corp. 8 3/8%,
8/15/03 Ba 110,000 113,091
First Securities Capital 8.41%,
12/15/26 (f) A3 250,000 252,488
Ford Motor Credit:
6.65%, 5/22/00 A1 100,000 100,535
7%, 9/25/01 A1 325,000 329,846
General Electric Capital Corp.
6.94%, 4/13/09 (d) Aaa 250,000 253,493
HMC Acquisition Properties, Inc.
9%, 12/15/07 Ba3 250,000 253,750
Keycorp Institutional Capital A
7.826%, 12/1/26 (f) Aa 250,000 245,250
PNC Funding Corp. 9 7/8%,
3/1/01 A3 250,000 278,733
Wells Fargo Capital C 7.73%,
12/1/26 (f) A1 300,000 291,036
3,173,149
INSURANCE - 0.2%
Reliance Group:
9%, 11/15/00 Ba3 80,000 82,000
9 3/4%, 11/15/03 B1 150,000 156,000
SunAmerica, Inc. 6.20%,
10/31/99 Baa1 250,000 248,883
486,883

MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
SAVINGS & LOANS - 0.3%
Chevy Chase Savings Bank
FSB 9 1/4%, 12/1/08 B1 $ 190,000 $ 193,800
First Nationwide Parent Holdings
Ltd. 12 1/2%, 4/15/03 B2 280,000 310,100
First Nationwide Escrow Corp.
10 5/8%, 10/1/03 (f) Ba3 160,000 172,800
676,700
TOTAL FINANCE 6,203,314
HEALTH - 0.2%
MEDICAL EQUIPMENT & SUPPLIES - 0.0%
IMED Corp. 9 3/4%,
12/1/06 (f) B3 20,000 20,350
MEDICAL FACILITIES MANAGEMENT - 0.2%
Columbia/HCA Healthcare Corp.:
6 1/2%, 3/15/99 A2 125,000 125,596
6 7/8%, 7/15/01 A3 125,000 126,484
Quest Diagnostics, Inc.
10 3/4%, 12/15/06 B2 10,000 10,525
Tenet Healthcare Corp.
10 1/8%, 3/1/05 Ba3 240,000 265,200
527,805
TOTAL HEALTH 548,155
INDUSTRIAL MACHINERY & EQUIPMENT - 0.2%
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
Exide Corp. 10%, 4/15/05 B1 65,000 66,950
Goss Graphic System, Inc.
12%, 10/15/06 B2 170,000 175,100
242,050
POLLUTION CONTROL - 0.1%
Allied Waste of North America, Inc.
10 1/4%, 12/1/06 (f) B3 120,000 126,000
Envirosource, Inc. 9 3/4%,
6/15/03 B3 50,000 46,625
172,625
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 414,675
MEDIA & LEISURE - 1.3%
BROADCASTING - 0.5%
Bell Cablemedia PLC yankee
0%, 9/15/05 (c) B2 60,000 48,600
Granite Broadcasting Corp.
10 3/8%, 5/15/05 B3 30,000 30,750
Intermedia Capital Partners IV
LP/ Intermedia Partners IV
Capital Corp. 11 1/4%,
8/1/06 (f) B2 100,000 103,750
Jacor Communications Co.
9 3/4%, 12/15/06 B2 20,000 20,400
NWCG Holdings Corp. 0%,
6/15/99 Caa 60,000 49,800
SCI Television, Inc. secured
11%, 6/30/05 B2 250,000 267,500
SFX Broadcasting, Inc.
10 3/4%, 5/15/06 B3 260,000 273,000
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
MEDIA & LEISURE - CONTINUED
BROADCASTING - CONTINUED
Telemundo Group, Inc.
7%, 2/15/06 (d) B1 $ 200,000 $ 193,000
Telewest PLC 0%, 10/1/07 (c) B1 270,000 187,650
1,174,450
ENTERTAINMENT - 0.1%
Viacom, Inc. 8%, 7/7/06 B1 260,000 252,200
LODGING & GAMING - 0.5%
American Skiing Co. 12%,
7/15/06 (f) B3 230,000 242,075
Circus Circus Enterprises, Inc.
7%, 11/15/36 Baa2 250,000 244,238
Courtyard by Marriott II
LP/Courtyard II Finance Co.
Series B, 10 3/4%, 2/1/08 B- 150,000 158,250
HMH Properties, Inc. 9 1/2%,
5/15/05 Ba3 360,000 375,300
Mirage Resorts, Inc. 7 1/4%,
10/15/06 Baa2 250,000 251,675
Wyndham Hotel Corp.
10 1/2%, 5/15/06 B2 50,000 53,000
1,324,538
PUBLISHING - 0.0%
Golden Books Publishing, Inc.
7.65%, 9/15/02 B1 40,000 35,600
RESTAURANTS - 0.2%
Foodmaker, Inc. 9 3/4%,
6/1/02 B3 120,000 121,800
Host Marriott Travel Plazas, Inc.
9 1/2, 5/15/05 B1 380,000 396,150
517,950
TOTAL MEDIA & LEISURE 3,304,738
NONDURABLES - 0.5%
FOODS - 0.2%
Chiquita Brands International, Inc.:
9 5/8%, 1/15/04 B1 200,000 204,500
10 1/4%, 11/1/06 B1 100,000 106,500
Foodbrands of America, Inc.
10 3/4%, 5/15/06 B3 50,000 52,500
Specialty Foods Corp.:
11 1/8%, 10/1/02 B3 110,000 104,500
11 1/4%, 8/15/03 Caa 80,000 60,800
528,800
HOUSEHOLD PRODUCTS - 0.3%
Revlon Consumer Products Corp.:
9 3/8%, 4/1/01 B2 150,000 152,250
10 1/2%, 2/15/03 B3 100,000 104,875
Revlon Worldwide Corp.
secured 0%, 3/15/98 B3 510,000 441,788
698,913
TOTAL NONDURABLES 1,227,713

MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
RETAIL & WHOLESALE - 0.8%
APPAREL STORES - 0.1%
Limited, Inc. 7.80%, 5/15/02 Baa2 $ 250,000 $ 254,420
Loehmann's, Inc.
11 7/8%, 5/15/03 B2 50,000 54,000
308,420
GENERAL MERCHANDISE STORES - 0.4%
Dayton Hudson Corp.:
6.80%, 10/1/01 Baa1 250,000 250,110
7 1/2%, 7/15/06 Baa1 250,000 255,580
K Mart Corp.:
12 1/2%, 3/1/05 Ba3 170,000 195,925
8 1/4%, 1/1/22 Ba3 150,000 126,000
Michaels Stores, Inc. 10 7/8%,
6/18/06 Ba2 130,000 126,100
953,715
GROCERY STORES - 0.3%
Kroger Co. 8.15%, 7/15/06 Ba1 125,000 129,408
Pathmark Stores, Inc.:
12 5/8%, 6/15/02 Caa 40,000 41,000
9 5/8%, 5/1/03 B3 350,000 335,125
0%, 11/1/03 (c) Caa 210,000 135,975
641,508
TOTAL RETAIL & WHOLESALE 1,903,643
SERVICES - 0.2%
PRINTING - 0.0%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa 100,000 96,500
SERVICES - 0.2%
Iron Mountain, Inc.
10 1/8%, 10/1/06 B3 100,000 105,500
Prime Succession Acquisition
Corp. 10 3/4%,
8/15/04 (f) B 210,000 227,850
Speedy Muffler King, Inc./
Speedy USA, Inc. yankee
10 7/8%, 10/1/06 B1 230,000 246,675
580,025
TOTAL SERVICES 676,525
TECHNOLOGY - 0.6%
COMMUNICATIONS EQUIPMENT - 0.2%
Echostar Satellite Broadcasting
Corp. 0%, 3/15/04 (c) Caa 260,000 197,405
Echostar Communications Corp.
0%, 6/1/04 (c) B2 150,000 123,375
320,780
COMPUTERS & OFFICE EQUIPMENT - 0.3%
Comdisco, Inc.:
7.21%, 7/2/01 Baa1 125,000 127,731
6 3/8%, 11/30/01 Baa1 300,000 295,170
Unisys Corp.:
12%, 4/15/03 B1 260,000 278,200
11 3/4%, 10/15/04 B1 100,000 106,625
807,726
CORPORATE BONDS - CONTINUED
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
TECHNOLOGY - CONTINUED
ELECTRONICS - 0.1%
Advanced Micro Devices, Inc.
11%, 8/1/03 Ba1 $ 290,000 $ 313,925
TOTAL TECHNOLOGY 1,442,431
TRANSPORTATION - 0.1%
AIR TRANSPORTATION - 0.1%
US Air, Inc.:
9 5/8%, 2/1/01 B3 100,000 99,500
10%, 7/1/03 B3 250,000 248,750
348,250
UTILITIES - 0.8%
CELLULAR - 0.4%
Arch Communications Group,
Inc. 0%, 3/15/08 (c) B3 120,000 68,550
Microcell Telecommunications,
Inc. 0%, 6/1/06 (c) B3 10,000 5,575
Millicom International Cellular
SA 0%, 6/1/06 (c) B3 50,000 31,000
Mobile Telecommunications
Technologies Corp. 13 1/2%,
12/15/02 B3 140,000 140,000
Paging Network, Inc. 10%,
10/15/08 (f) B2 50,000 50,813
Rogers Cantel, Inc. 9 3/8%,
6/1/08 Ba3 180,000 189,000
360 Degrees Communications
Co. 7 1/8%, 3/1/03 Ba2 350,000 345,769
Western Wireless Corp.
10 1/2%, 6/1/06 B3 75,000 78,656
909,363
ELECTRIC UTILITY - 0.1%
El Paso Electric Co. 1st Mtg.
9.40%, 5/1/11 Ba3 50,000 53,500
Israel Electric Corp. Ltd. yankee
7 1/4%, 12/15/06 (f) A3 250,000 248,555
302,055
TELEPHONE SERVICES - 0.3%
Brooks Fiber Properties, Inc.
0%, 11/1/06 (c)(f) - 90,000 57,375
Call-Net Enterprises, Inc.
yankee 0%, 12/1/04 (c) B2 150,000 123,000
MFS Communications, Inc.
0%, 1/15/06 (c) B1 420,000 306,600
Shared Technologies Fairchild
Communications Corp.
0%, 3/1/06 (c) Caa 270,000 225,450
712,425
TOTAL UTILITIES 1,923,843
TOTAL NONCONVERTIBLE BONDS 22,495,546
TOTAL CORPORATE BONDS
(Cost $21,990,918) 22,495,546
U.S. GOVERNMENT AND GOVERNMENT
AGENCY OBLIGATIONS - 9.4%
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
U.S. TREASURY OBLIGATIONS - 8.0%
7 3/8%, 11/15/97 Aaa $ 900,000 $ 912,933
9%, 5/15/98 Aaa 2,000,000 2,084,380
8 7/8%, 2/15/99 Aaa 2,460,000 2,602,606
8%, 8/15/99 Aaa 290,000 303,775
7 3/4%, 12/31/99 Aaa 4,895,000 5,119,876
7 7/8%, 8/15/01 Aaa 2,372,000 2,528,410
10 3/4%, 5/15/03 Aaa 315,000 387,548
7 7/8, 11/15/04 Aaa 2,710,000 2,957,288
12 3/4%, 11/15/10 (callable) Aaa 500,000 707,735
8 7/8%, 2/15/19 Aaa 2,313,000 2,871,381
20,475,932
U.S. GOVERNMENT AGENCY OBLIGATIONS - 1.4%
Federal Home Loan Bank
7.31%, 6/16/04 Aaa 125,000 130,195
7.56%, 9/1/04 Aaa 50,000 52,553
Federal Home Loan Mortgage
Corporation:
0%, 1/14/97 P-1 270,000 269,506
0%, 1/23/97 P-1 1,000,000 996,740
0%, 1/31/97 P-1 1,000,000 995,436
6.783%, 8/18/05 Aaa 440,000 443,023
Federal National Mortgage
Association 6.44%, 6/21/05 Aaa 250,000 246,485
Guaranteed Export Trust
Certificates (assets of Trust
guaranteed by U.S.
Government through
Export-Import Bank)
Series 1994-A, 7.12%,
4/15/06 Aaa 139,334 142,730
Guaranteed Trade Trust Certificates
Series 1994-A (assets of Trust
guaranteed by U.S. Government
through Export-Import Bank)
7.39%, 6/26/06 Aaa 36,667 37,912
State of Israel (guaranteed by
U.S. Government through
Agency for International
Development) 5 5/8%,
9/15/03 Aaa 210,000 200,277
U.S. Housing & Urban
Development 8.24%, 8/1/04
participation certificate Aaa 20,000 21,918
3,536,775
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $23,906,278) 24,012,707
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES - 4.3%
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
FEDERAL NATIONAL MORTGAGE ASSOCIATION - 3.1%
6%, 3/1/11 Aaa $ 1,868,504 $ 1,796,099
6 1/2%, 2/1/26 to 7/1/26 Aaa 2,460,745 2,349,349
7%, 4/1/26 to 9/1/26 Aaa 1,975,620 1,931,780
7 1/2%, 8/1/26 to 11/1/26 Aaa 1,980,996 1,979,749
8,056,977
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 1.2%
6%, 5/15/11 to 7/15/11 Aaa 964,382 930,927
8%, 6/15/26 to10/15/26 Aaa 1,472,586 1,502,037
8 1/2%, 10/15/26 Aaa 494,407 512,329
2,945,293
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $10,975,853) 11,002,270
COMMERCIAL MORTGAGE SECURITIES - 0.6%
American Southwest Financial
Securities Series 1994-C2
Class B2, 12.79%,
12/25/01 (f)(g) - 250,000 243,750
Blackrock Capital Funding LLC
Series 1996 Class C2, 7.6414%,
11/16/26 (f) AAA 134,867 136,595
CBA Mortgage Corp.
Series 1993-C1 Class E,
7.7732%, 12/25/03 (f)(g) Ba2 250,000 224,844
CS First Boston Mortgage
Securities Corp. Series
1994-M1 Class E,
12.60%, 2/15/02 (f) - 100,000 99,750
DLJ Mortgage Acceptance Corp.
Series 1993-MF12 Class B-2,
10.10%, 9/18/03 (f) - 250,000 234,375
General Motors Acceptance
Corp. Commercial Mortgage
Securities, Inc. Series 1996-C1
Class F, 7.86%, 11/15/06 (f) Ba3 250,000 215,156
Merrill Lynch Mortgage
Investments, Inc. Series 1995
Class C2-E, 8.15%,
6/15/21 (f) Ba3 92,207 85,810
Morgan Stanley Capital One,
Inc. Series 1996-MBL1
Class E, 8.661%, 5/25/21 (f) - 96,961 87,295
Mortgage Capital Funding, Inc.
Series 1996-MC1 Class G,
7.15%, 7/15/28 (f) BB 100,000 80,063
Structured Asset Securities
Corp. Series 1993-C1
Class E, 6.60%,
10/25/24 (f) B 250,000 97,422
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $1,491,001) 1,505,060
FOREIGN GOVERNMENT OBLIGATIONS - 0.3%
MOODY'S RATINGS (B) PRINCIPAL VALUE
(UNAUDITED) AMOUNT (NOTE 1)
Manitoba Province yankee
6 3/8%, 10/15/99 A1 $ 125,000 $ 125,454
Newfoundland Province yankee
11 5/8%, 10/15/07 Baa1 250,000 334,770
Quebec Province yankee 7.22%,
7/22/36 (d) A2 250,000 262,060
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $708,121) 722,284
CERTIFICATES OF DEPOSIT - 0.8%
Bank of Tokyo-Mitsubishi Ltd. yankee
5.51%, 3/6/97 400,000 399,841
Bayerische Hypotheken und Wechsel
Bank AG yankee 5.40%, 4/7/97 400,000 399,838
Bayerische Vereinsbank AG yankee
5.40%, 4/2/97 400,000 400,000
National Westminster Bank PLC yankee
5.41%, 2/10/97 400,000 399,960
Westdeutsche Landesbank Giron yankee
5.40%, 2/5/97 400,000 399,959
TOTAL CERTIFICATES OF DEPOSIT
(Cost $2,000,000) 1,999,598
COMMERCIAL PAPER - 1.5%
Commonwealth Bank of
Australia yankee 5.325%,
3/11/97 400,000 395,590
Dakota 5.40%, 3/12/97 450,000 444,941
Enterprise Funding Corp.
5.47%, 1/24/97 400,000 398,392
Ford Motor Credit Co.
5.30%, 3/11/97 475,000 469,735
General Electric Capital Corp.
5.29%, 6/4/97 450,000 439,421
General Motors Acceptance
Corp. 5.465%, 6/23/97 400,000 389,289
MCI Communications Corp.
5.65%, 2/20/97 200,000 198,399
PHH Corp. 5 1/2%, 1/17/97 450,000 448,719
Sherwood Medical Co.
5.32%, 3/10/97 400,000 395,592
Unifunding, Inc. 5.37%,
2/24/97 364,000 360,752
TOTAL COMMERCIAL PAPER
(Cost $3,944,260) 3,940,830
CASH EQUIVALENTS - 5.7%
MATURITY VALUE
AMOUNT (NOTE 1)
Investments in repurchase agreements
(U.S. Treasury obligations) in a joint
trading account dated 12/31/96
due 1/2/97:
at 6.82% $ 2,232,846 $ 2,232,000
at 6 3/4% 12,267,599 12,263,000
TOTAL CASH EQUIVALENTS
(Cost $14,495,000) 14,495,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $237,820,179) $ 255,992,646
LEGEND
1. Non-income producing
2. Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
3. Debt obligation initially issued in zero coupon form which converts to
coupon form at a specified rate and date.
4. Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date.
5. A company in which the fund has ownership of at least 5% of the voting
securities is an affiliated company. A summary of the transactions during
the period in which the issuers were affiliates is as follows:
PURCHASE SALES DIVIDEND MARKET
AFFILIATE COST COST INCOME VALUE
Cardiac Control Systems, Inc. $ 50,600 $ 358,569 $ - $ -
IVF America, Inc. - 1,364,593 - -
Totals $ 50,600 $ 1,723,162 $ - $ -
6. Security exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At the period
end, the value of these securities amounted to $5,657,301 or 2.2% of net
assets.
7. The coupon rate shown on floating or adjustable rate securities
represents the rate at period end.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $307,230,436 and $153,774,137, respectively, of which U.S.
government and government agency obligations aggregated $65,004,481 and
$28,178,731, respectively.
The market value of futures contracts opened and closed during the period
amounted to $1,122,861 and $4,735,264, respectively.
The fund placed a portion of its portfolio transactions with brokerage
firms which are affiliates of FMR. The commissions paid to these affiliated
firms were $54,212 for the period. (See Note 4 of Notes to Financial
Statements).
The composition of long-term debt holdings as a percentage of total value
of investment in securities, is as follows (ratings are unaudited):
MOODY'S RATINGS S&P RATINGS
Aaa, Aa, A 14.7% AAA, AA, A 14.1%
Baa 1.5% BBB 2.3%
Ba 1.6% BB 1.8%
B 3.7% B 3.5%
Caa 0.3% CCC 0.3%
Ca, C 0.0% CC, C 0.0%
D 0.0%
The percentage not rated by both S&P and Moody's amounted to 0.3%.
INCOME TAX INFORMATION
At December 31, 1996, the aggregate cost of investment securities for
income tax purposes was $237,896,311. Net unrealized appreciation
aggregated $18,096,335, of which $21,181,377 related to appreciated
investment securities and $3,085,042 related to depreciated investment
securities.
The fund hereby designates approximately $316,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER: GROWTH PORTFOLIO
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES

<TABLE>
<CAPTION>
<S> <C> <C>
DECEMBER 31, 1996

ASSETS

Investment in securities, at value (including repurchase agreements of $14,495,000) (cost $237,820,179) - $ 255,992,646
See accompanying schedule

Receivable for investments sold 524,815

Receivable for fund shares sold 1,091,669

Dividends receivable 386,979

Interest receivable 816,088

TOTAL ASSETS 258,812,197

LIABILITIES

Payable to custodian bank $ 184

Payable for investments purchased 5,081,562

Payable for fund shares redeemed 521,618

Accrued management fee 122,881

Other payables and 62,400
accrued expenses

TOTAL LIABILITIES 5,788,645

NET ASSETS $ 253,023,552

Net Assets consist of:

Paid in capital $ 234,589,987

Distributions in excess of net investment income (50,000
)

Accumulated undistributed net realized gain (loss) on investments and foreign currency transactions 310,990

Net unrealized appreciation (depreciation) on investments 18,172,575
and assets and liabilities in
foreign currencies

NET ASSETS, for 19,313,702 $ 253,023,552
shares outstanding

NET ASSET VALUE, offering price $13.10
and redemption price per share ($253,023,552 (divided by) 19,313,702 shares)

</TABLE>

STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996

INVESTMENT INCOME $ 1,970,962
Dividends

Interest 2,897,055

TOTAL INCOME 4,868,017

EXPENSES

Management fee $ 906,614

Transfer agent fees 103,447

Accounting fees and expenses 87,337

Non-interested trustees' compensation 495

Custodian fees and expenses 86,353

Audit 32,529

Legal 644

Miscellaneous 391

Total expenses before reductions 1,217,810

Expense reductions (31,356 1,186,454
)

NET INVESTMENT INCOME 3,681,563

REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on:

Investment securities (including 6,261,398
realized gain of $267,451
on sales of investments in
affiliated issuers)

Foreign currency transactions 216,929

Futures contracts 262,658 6,740,985

Change in net unrealized appreciation (depreciation) on:

Investment securities 16,678,547

Assets and liabilities in (132,526
foreign currencies )

Futures contracts (160,755 16,385,266
)

NET GAIN (LOSS) 23,126,251

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 26,807,814

OTHER INFORMATION $ 30,590
Expense reductions
Directed brokerage arrangements

Custodian interest credits 766

$ 31,356

</TABLE>

STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED JANUARY 3, 1995
DECEMBER 31, (COMMENCEMENT
1996 OF OPERATIONS) TO
DECEMBER 31,
1995

Operations $ 3,681,563 $ 621,277

Net investment income

Net realized gain (loss) 6,740,985 4,773,781

Change in net unrealized appreciation (depreciation) 16,385,266 1,787,309

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 26,807,814 7,182,367

Distributions to shareholders (3,802,638) (591,903)

From net investment income

From net realized gain (8,710,844) (2,259,995)

TOTAL DISTRIBUTIONS (12,513,482) (2,851,898)

Share transactions 180,656,312 68,544,838

Net proceeds from sales of shares

Reinvestment of distributions 12,513,482 2,851,898

Cost of shares redeemed (22,687,189) (7,480,590)

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 170,482,605 63,916,146

TOTAL INCREASE (DECREASE) IN NET ASSETS 184,776,937 68,246,615

NET ASSETS

Beginning of period 68,246,615 -

End of period (including distributions in excess of net investment income of $50,000 and $31,082, $ 253,023,552 $ 68,246,615

respectively)

OTHER INFORMATION

Sold 14,392,956 6,215,852

Issued in reinvestment of distributions 975,606 243,336

Redeemed (1,851,290) (662,758)

Net increase (decrease) 13,517,272 5,796,430

</TABLE>

<TABLE>
<CAPTION>
<S> <C> <C>
SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.

</TABLE>

FINANCIAL HIGHLIGHTS
YEAR ENDED JANUARY 3, 1995
DECEMBER 31, (COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31,

SELECTED PER-SHARE DATA 1996 1995

<TABLE>
<CAPTION>
<S> <C> <C>
Net asset value, beginning of period $ 11.77 $ 10.00

Income from Investment Operations

Net investment income .21 .10

Net realized and unrealized gain (loss) 2.08 2.20

Total from investment operations 2.29 2.30

Less Distributions

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

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

Total distributions (.96) (.53)

Net asset value, end of period $ 13.10 $ 11.77

TOTAL RETURN A, B 20.04% 23.02%

RATIOS AND SUPPLEMENTAL DATA

Net assets, end of period (000 omitted) $ 253,024 $ 68,247

Ratio of expenses to average net assets .87% 1.00% C

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

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

Portfolio turnover rate 120% 343%

Average commission rate E $ .0211 -

A TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE
TOTAL RETURNS
SHOWN. B THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES
NOT BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO
FINANCIAL
STATEMENTS). C FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES
DURING THE PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO
WOULD HAVE
BEEN HIGHER. D FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS
WITH THIRD PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S
EXPENSES (SEE NOTE 5 OF
NOTES TO FINANCIAL STATEMENTS). E FOR FISCAL YEARS BEGINNING ON OR
AFTER SEPTEMBER 1, 1995, A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE
COMMISSION RATE PER SHARE
FOR SECURITY TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY
VARY FROM PERIOD TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN
VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE STRUCTURES
MAY DIFFER.

</TABLE>

NOTES TO FINANCIAL STATEMENTS
For the period ended December 31, 1996

1. SIGNIFICANT ACCOUNTING POLICIES.
Asset Manager: Growth Portfolio (the fund) is a fund of Variable Insurance
Products Fund 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. Shares of the fund may
only be purchased by insurance companies for the purpose of funding
variable annuity or variable life insurance contracts. The financial
statements have been prepared in conformity with generally accepted
accounting principles which permit management to make certain estimates and
assumptions at the date of the financial statements. The following
summarizes the significant accounting policies of the fund:
SECURITY VALUATION. Equity securities for which quotations are readily
available are valued at the last sale price, or if no sale price, at the
closing bid price. Debt securities for which quotations are readily
available are valued by a pricing service at their market values as
determined by their most recent bid prices in the principal market (sales
prices if the principal market is an exchange) in which such securities are
normally traded. Securities (including restricted securities) for which
market quotations are not readily available are valued at their fair value
as determined in good faith under consistently applied procedures under the
general supervision of the Board of Trustees. Short-term securities with
remaining maturities of sixty days or less for which quotations are not
readily available are valued at amortized cost or original cost plus
accrued interest, both of which approximate current value.
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. Income receipts
and expense payments are translated into U.S. dollars at the prevailing
exchange rate on the respective dates of the transactions. Purchases and
sales of securities are translated into U.S. dollars at the contractual
currency exchange rates established at the time of each trade.
Net realized gains and losses on foreign currency transactions represent
net gains and losses from sales and maturities of forward currency
contracts, disposition of foreign currencies, and the difference between
the amount of net investment income accrued and the U.S. dollar amount
actually received. The effects of changes in foreign currency exchange
rates on investments in securities are included with the net realized and
unrealized gain or loss on investment securities.
INCOME TAXES. 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, gains on
investments or currency repatriation. 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 between the
funds in the trust.
DISTRIBUTIONS TO SHAREHOLDERS. Distributions are recorded on the
ex-dividend date.
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, futures and options transactions,
foreign currency transactions, passive foreign investment companies (PFIC),
market discount and losses deferred due to wash sales.
Permanent book and tax basis differences relating to shareholder
distributions will result in reclassifications to paid in capital and may
affect the per-share allocation between net investment income and realized
and unrealized gain (loss). Distributions in excess of 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. The cost of
the foreign currency contracts is included in the cost basis of the
associated investment.
2. OPERATING POLICIES - CONTINUED
JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the fund, along with other affiliated
entities of Fidelity Management & Research Company (FMR), may transfer
uninvested cash balances into one or more joint trading accounts. These
balances are invested in one or more repurchase agreements that mature in
60 days or less from the date of purchase 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.
FUTURES CONTRACTS. The fund may use futures contracts to manage its
exposure to the stock market. Buying futures tends to increase the fund's
exposure to the underlying instrument, while selling futures tends to
decrease the fund's exposure to the underlying instrument or hedge other
fund investments. Losses may arise from changes in the value of the
underlying instruments, if there is an illiquid secondary market for the
contracts, or if the counterparties do not perform under the contracts'
terms. Futures contracts are valued at the settlement price established
each day by the board of trade or exchange on which they are traded.
RESTRICTED SECURITIES. 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, the
fund had no investments in restricted securities (excluding 144A issues).
3. PURCHASES AND SALES OF INVESTMENTS.
Information regarding purchases and sales of securities (other than
short-term securities), the market value of future contracts opened and
closed is included under the caption "Other Information" at the end of each
applicable fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As 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 .2500% to .5200% for the period. In the event that these
rates were lower than the contractual rates in effect during the period,
FMR voluntarily implemented the above rates, as they resulted in the same
or a lower management fee. The annual individual fund fee rate is .30%. For
the period, the management fee was equivalent to an annual rate of .65% of
average net assets. Effective August 1, 1996, FMR voluntarily agreed to
reduce the individual fund fee rate from .40% to .30%.
TRANSFER AGENT FEES. Fidelity Investments Institutional Operations Company
(FIIOC), an affiliate of FMR, is the fund's transfer, dividend disbursing
and shareholder servicing agent. FIIOC receives account fees and
asset-based fees that vary according to account size and type of account.
FIIOC pays for typesetting, printing and mailing of all shareholder
reports, except proxy statements. For the period, the transfer agent fees
were equivalent to an annual rate of .07% of average net assets.
ACCOUNTING FEES. Fidelity Service Co. (FSC), 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.
BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio
transactions with brokerage firms which are affiliates of FMR. The
commissions paid to these affiliated firms are shown under the caption
"Other Information" at the end of the fund's schedule of investments.
5. EXPENSE REDUCTIONS.
FMR voluntarily agreed to reimburse the fund's operating expenses
(excluding interest, taxes, brokerage commissions and extraordinary
expenses) above an annual rate of 1.00% of average net assets.
FMR has directed certain portfolio trades to brokers who paid a portion of
the fund's expenses. In addition, the fund has entered into an arrangement
with its custodian whereby interest earned on uninvested cash balances was
used to offset a portion of the fund's expenses.
For the period, the reductions under these arrangements are shown under the
caption "Other Information" on the fund's Statement of Operations.
6. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investments Life Insurance Company
(FILI) and its subsidiaries, affiliates of FMR, were the record owners of
approximately 80% of the outstanding shares of the fund.
7. TRANSACTIONS WITH AFFILIATED COMPANIES.
An affiliated company is a company in which the fund has ownership of at
least 5% of the voting securities. Information regarding affiliated
companies is included under the caption "Other Information" at the end of
the fund's schedule of investments.
REPORT OF INDEPENDENT ACCOUNTANTS

To the Trustees of Variable Insurance Products II and the Shareholders of
Asset Manager: Growth Portfolio:
In our opinion, the accompanying statement of assets and liabilities,
including the schedule of investments (except for Moody's and Standard &
Poor's ratings), and the related statements of operations and of changes in
net assets and the financial highlights present fairly, in all material
respects, the financial position of Asset Manager: Growth Portfolio (a fund
of Variable Insurance Products II) at December 31, 1996, the results of its
operations for the year then ended, and the changes in its net assets and
the financial highlights for the periods indicated in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are
the responsibility of the Asset Manager: Growth Portfolio's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which
included confirmation of securities at December 31, 1996 by correspondence
with the custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 10, 1997
DISTRIBUTIONS

The Board of Trustees of Asset Manager: Growth Portfolio voted to pay on
February 7, 1997, to shareholders of record at the opening of business on
February 7, 1997, a distribution of $.02 per share derived from capital
gains realized from sales of portfolio securities.