PROVIDIAN LIFE & HEALTH INSURANCE CO SEPARATE ACCOUNT V, N-30D, 1997-03-25

PROVIDIAN LIFE & HEALTH INSURANCE CO SEPARATE ACCOUNT V
N-30D, 1997-03-25

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<PAGE>

ACACIA
CAPITAL
CORPORATION
CALVERT
RESPONSIBLY
INVESTED
PORTFOLIOS

ANNUAL REPORT
DECEMBER 31, 1996
<PAGE>

CALVERT RESPONSIBLY INVESTED MONEY MARKET PORTFOLIO

Dear Investor:

Interest rates remained low and the economy continued to expand modestly
during 1996. Longer-term bonds exhibited a great deal of volatility, but yields
on money market securities hardly moved from their position at the beginning of
the year.

It was widely expected that the Federal Reserve would intervene to tighten
monetary policy when the economy appeared to gather momentum in the second
quarter, but the Fed took no action after cutting the federal funds rate by 25
basis points in late January.

PERFORMANCE

The CRI Money Market Portfolio's yield was in line with an average of
similar funds. This is lower than the dividend yield earned over the course of
1995, reflecting the current low interest rate environment.

OUTLOOK

The economy looks to be expanding at a moderate pace, but any sign of a
strengthening could prompt the Federal Reserve to raise their targets for key
short-term rates in order to temper the pace of economic growth. Of course,
money market investors' primary objective is stability of principal, and this
Portfolio continues to provide a safe harbor. We appreciate your investment.

Sincerely,

/s/ Clifton S. Sorrell
Clifton S. Sorrell
President

January 17, 1997

- --------------------------------------------------------------------------------
ANNUAL REPORT CRI MONEY MARKET PORTFOLIO - 1
- --------------------------------------------------------------------------------
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of Acacia Capital Corporation and Shareholders of
Calvert Responsibly Invested Money Market Portfolio:

We have audited the accompanying statement of assets and liabilities of
Calvert Responsibly Invested Money Market Portfolio (one of the portfolios
comprising the Acacia Capital Corporation), including the portfolio of
investments, as of December 31, 1996, and the related statement of operations
for the year then ended, statement of changes in net assets for each of the two
years in the period then ended and financial highlights for each of the three
years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund;s management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits. The financial highlights for each of the preceding years
were audited by other auditors whose report dated January 31, 1994 expressed an
unqualified opinion thereon.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
December 31, 1996, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Calvert Responsibly Invested Money Market Portfolio as of December 31, 1996, the
results of its operations, the changes in its net assets and financial
highlights for the respective periods stated in the first paragraph in
conformity with generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.

Baltimore, Maryland
January 31, 1997

- --------------------------------------------------------------------------------
2 - CRI MONEY MARKET PORTFOLIO ANNUAL REPORT
- --------------------------------------------------------------------------------
<PAGE>

MONEY MARKET PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996

<TABLE>
<CAPTION>
U.S. GOVERNMENT AGENCIES AND PRINCIPAL
INSTRUMENTALITIES - 45.3% AMOUNT VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Federal Farm Credit Bank, 5.22%, 1/3/97................................. $155,000 $154,955
Federal Farm Credit Bank, 5.21%, 2/6/97................................. 200,000 198,958
Federal Farm Credit Bank, 5.27%, 3/19/97................................ 250,000 247,182
Federal Home Loan Bank Board, 5.21%, 2/13/97............................ 200,000 198,755
Federal Home Loan Mortgage Corp., 5.22%, 1/16/97........................ 300,000 299,348
Federal Home Loan Mortgage Corp., 5.40%, 1/23/97........................ 75,000 74,753
Federal Home Loan Mortgage Corp., 5.21%, 2/11/97........................ 198,000 196,825
Federal National Mortgage Assn., 5.22%, 1/28/97......................... 615,000 612,592
----------
Total U.S. Government Agencies and Instrumentalities
(Cost $1,983,368).................................................. 1,983,368
----------

CORPORATE OBLIGATIONS - 40.3%
- --------------------------------------------------------------------------------

Alabama State Industrial Development Authority VRDN,
5.80%, 5/1/10, LOC: Regions Bank *................................... 100,000 100,000
Alabama State Industrial Development Authority VRDN,
5.90%, 12/1/19, LOC: Chemical Bank *................................. 140,000 140,000
Arbor Properties, Inc. VRDN, 6.20%, 11/1/21, LOC: Amsouth Bank *........ 100,000 100,000
Aspen Institute, Inc. VRDN, 5.74%, 12/1/04, LOC:
First National Bank of Maryland *.................................... 140,000 140,000
Barton Healthcare, LLC. VRDN, 5.70%, 2/15/25, LOC:
American National Bank & Trust *..................................... 150,000 150,000
Chapel Oaks, Inc. VRDN, 6.05%, 10/1/26, LOC: Allied Irish Bank *........ 100,000 100,000
Fed One Dayton VRDN, 6.83%, 8/1/09, LOC: Bank One Ohio *................ 140,000 140,000
Iowa Financial Authority Economic Development Authority Revenue
VRDN, 5.90%, 3/1/11, LOC: Rabobank Nederland *....................... 150,000 150,000
Mahoning County, Ohio VRDN, 6.10%, 11/1/98, LOC: PNC Bank *............. 155,000 155,000
Mississippi Business Financial Corp. VRDN, 5.90%,
6/1/10, LOC: National Bank of Detroit *.............................. 140,000 140,000
Montgomery County, Pennsylvania Industrial Development Revenue
VRDN, 5.75%, 3/1/10, LOC: Corestates *............................... 150,000 150,000
TLC Holdings, LLC. VRDN, 5.90%, 6/1/26, LOC:
Columbus Bank & Trust *.............................................. 150,000 150,000
W.L. Petrey Wholesale, Inc. Industrial Development Bond VRDN,
5.90%, 3/1/11, LOC: Southtrust Bank *................................ 150,000 150,000
----------
Total Corporate Obligations (Cost $1,765,000)....................... 1,765,000
----------
</TABLE>

- --------------------------------------------------------------------------------
ANNUAL REPORT CRI MONEY MARKET PORTFOLIO - 3
- --------------------------------------------------------------------------------
<PAGE>

<TABLE>
<CAPTION>
PRINCIPAL
MUNICIPAL OBLIGATIONS - 14.6% AMOUNT VALUE
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Chicago, Illinois General Obligation VRDN, Series A, 5.65%,
1/1/02, LOC: Canadian Imperial *..................................... $100,000 $100,000
Gardena, California Certificates of Participation VRDN,
5.95%, 7/1/25, LOC: Dai-Ichi Kangyo Bank *........................... 140,000 140,000
City of Mt. Vernon Industrial Solid Waste
Disposal VRDN, 6.00%, 11/1/11, LOC: Suntrust Bank *.................. 150,000 150,000
Village of Schaumberg, Illinois VRDN, 5.80%,
12/1/20, Bond Purchase Agreement: Credit Suisse *.................... 150,000 150,000
Virginia State Housing Development Authority VRDN, 5.60%, 3/1/02 *...... 100,000 100,000
------------
Total Municipal Obligations (Cost $640,000)........................ 640,000
------------

TOTAL INVESTMENTS (Cost $4,388,368) - 100.2%................. 4,388,368
Other assets and liabilities, net - (0.2)%..................... (10,139)
------------
NET ASSETS - 100%.............................................. $4,378,229
============
</TABLE>

* Optional tender features give these securities a shorter effective maturity
date.
Explanation of Guarantees:
LOC: Letter of Credit
Abbreviations:
VRDN: Variable Rate Demand Notes

See notes to financial statements.

- --------------------------------------------------------------------------------
4 - CRI MONEY MARKET PORTFOLIO ANNUAL REPORT
- --------------------------------------------------------------------------------
<PAGE>

MONEY MARKET PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996

<TABLE>
<S> <C>
ASSETS
- --------------------------------------------------------------------------------
Investments in securities, at value............................. $4,388,368
Interest receivable............................................. 11,217
Other assets.................................................... 738
------------
Total assets........................................... 4,400,323
------------

LIABILITIES
- --------------------------------------------------------------------------------
Payable to Bank................................................. 17,437
Payable to Calvert Asset Management Company, Inc. .............. 1,877
Accrued expenses and other liabilities.......................... 2,780
------------
Total liabilities...................................... 22,094
------------
Net assets.................................... $4,378,229
============

NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------
Par value and paid-in capital applicable to 4,382,463
shares of common stock outstanding $1 par value,
5,000,000 shares authorized............................ $4,377,887
============
Undisturbed net investment income (loss)........................ 7
Accumulated net realized gains (losses) on investments.......... 355
------------
NET ASSETS.................................... $4,378,229
============

NET ASSETS VALUE PER SHARE.................... $1.00
============
</TABLE>

See notes to financial statements.

- --------------------------------------------------------------------------------
ANNUAL REPORT CRI MONEY MARKET PORTFOLIO - 5
- --------------------------------------------------------------------------------
<PAGE>

MONEY MARKET PORTFOLIO
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996

<TABLE>
<S> <C>
NET INVESTMENT INCOME
- --------------------------------------------------------------------------------
Investment Income
Interest income................................................. $264,827
-----------
Total investment income....................................... 264,827
-----------

Expenses
Investment advisory fee......................................... 24,348
Directors' fees and expenses.................................... 435
Custodian fees.................................................. 6,165
Reports to shareholders......................................... 4,192
Professional fees............................................... 578
Miscellaneous................................................... 633
-----------
Total expenses................................................ 36,351
Fees paid indirectly.......................................... (6,165)
-----------
Net expenses................................................ 30,186
-----------
NET INVESTMENT INCOME..................................... 234,641
-----------
REALIZED GAIN (LOSS) ON INVESTMENTS
- --------------------------------------------------------------------------------
Net realized gain (loss)........................................... 205
-----------

INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS.................................................... $234,846
===========
</TABLE>

See notes to financial statements.

- --------------------------------------------------------------------------------
6 - CRI MONEY MARKET PORTFOLIO ANNUAL REPORT
- --------------------------------------------------------------------------------
<PAGE>

MONEY MARKET PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Operations
Net investment income..................................... $234,641 $288,653
Net realized gain (loss).................................. 205 150
---------- -----------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS............................... 234,846 288,803
---------- -----------
Distributions to shareholders from
Net investment income..................................... (235,033) (288,254)
---------- -----------
Capital share transactions
Shares sold............................................... 13,882,018 10,858,696
Reinvestment of distributions............................. 235,032 266,798

Shares redeemed........................................... (14,867,168) (12,476,524)
---------- -----------
Total capital share transactions........................ (750,118) (1,351,030)
---------- -----------
TOTAL INCREASE (DECREASE)
IN NET ASSETS................................................ (750,305) (1,350,481)

NET ASSETS
- -----------------------------------------------------------------------------------------------
Beginning of year............................................ 5,128,534 6,479,015
---------- -----------
End of year (including undistributed net investment
income of $7 and $399, respectively)...................... $4,378,229 $5,128,534
---------- -----------
CAPITAL SHARE ACTIVITY
- -----------------------------------------------------------------------------------------------
Reinvestment of distributions................................ 235,032 266,798
Shares redeemed.............................................. (14,867,168) (12,476,524)
---------- -----------
Total capital share activity............................ (750,118) (1,351,030)
========== ===========
</TABLE>

See notes to financial statements.

- --------------------------------------------------------------------------------
ANNUAL REPORT CRI MONEY MARKET PORTFOLIO - 7
- --------------------------------------------------------------------------------
<PAGE>

NOTES TO FINANCIAL STATEMENTS

NOTE A-SIGNIFICANT ACCOUNTING POLICIES

GENERAL: The Money Market Portfolio (the "Portfolio"), a series of Acacia
Capital Corporation's Calvert Responsibly Invested (CRI) Portfolios, is
registered under the Investment Company Act of 1940 as a diversified, open-end
management investment company. The operations of each series are accounted for
separately. The shares of the Portfolio are sold to affiliated and unaffiliated
insurance companies for allocation to certain of their variable separate
accounts.

SECURITY VALUATION: All securities are valued at amortized cost, which
approximates market.

SECURITY TRANSACTIONS AND INVESTMENT INCOME: Security transactions are
accounted for on trade date. Realized gains and losses are recorded on an
identified cost basis. Interest income, accretion of discount and amortization
of premium are recorded on an accrual basis.

DISTRIBUTIONS TO SHAREHOLDERS: Distributions to shareholders are recorded
by the Portfolio on ex-dividend date. Dividends are accrued daily and paid
monthly. Distributions from net realized capital gains, if any, are paid at
least annually. Distributions are determined in accordance with income tax
regulations which may differ from generally accepted accounting principles,
accordingly, periodic reclassifications are made within the Portfolio's capital
accounts to reflect income and gains available for distribution under income tax
regulations.

ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.

EXPENSE OFFSET ARRANGEMENTS: The Portfolio has an arrangement with its
custodian bank whereby the custodian's fees are paid indirectly by credits
earned on the Portfolio's cash on deposit with the bank. Such deposit
arrangement is an alternative to overnight investments.

FEDERAL INCOME TAXES: No provision for federal income or excise tax is
required since the Portfolio intends to continue to qualify as a regulated
investment company under the Internal Revenue Code and to distribute
substantially all of its earnings.

- --------------------------------------------------------------------------------
8 - CRI MONEY MARKET PORTFOLIO ANNUAL REPORT
- --------------------------------------------------------------------------------
<PAGE>

NOTE B-RELATED PARTY TRANSACTIONS

Calvert Shareholder Services, Inc., an affiliate of the Advisor, acts as
transfer, dividend disbursing and shareholder servicing agent for the Portfolio.

Each Director who is not affiliated with the Advisor received a fee of $500 for
each Board meeting attended plus an annual fee of $2,000 for Directors not
serving on other Calvert Fund Boards. Director's fees are allocated to each of
the portfolios served. Effective August 1, 1996, annual fees and meeting fees
were increased to $3,000 and $750, respectively.

NOTE C-INVESTMENT ACTIVITY
The cost of investments owned at December 31, 1996 was substantially the
same for federal income tax and financial reporting purposes.

As a cash management practice, the Portfolio may sell or purchase short-
term variable rate notes from other Portfolios managed by the Advisor. All
transactions are executed at independently derived prices.

- --------------------------------------------------------------------------------
ANNUAL REPORT CRI MONEY MARKET PORTFOLIO - 9
- --------------------------------------------------------------------------------
<PAGE>

MONEY MARKET PORTFOLIO
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
<S>
NET ASSET VALUE, BEGINNING............................ $1.00 $1.00 $1.00
========= =========== ==========
Income from investment operations
- ---------------------------------
Net investment income.............................. .048 .055 .039
Net realized gain (loss)........................... -- -- --
--------- ----------- ----------
Total from investment operations................. .048 .055 .039
--------- ----------- ----------
Distributions from
- ------------------
Net investment income.............................. (.048) (.055) (.039)
--------- ----------- ----------
Total increase (decrease) in net asset value.......... -- -- --
--------- ----------- ----------
NET ASSET VALUE, ENDING............................... $1.00 $1.00 $1.00
========= =========== ==========

Total return.......................................... 4.95% 5.37% 3.96%
========= =========== ==========
Ratios to average net assets:
Net investment income.............................. 4.82% 5.23% 3.91%
========= =========== ==========
Total expenses +................................... .75% .66% --
========= =========== ==========
Net expenses....................................... .62% .59% .45%
========= =========== ==========
Expenses reimbursed................................ -- -- .36%
========= =========== ==========
NET ASSETS, ENDING (IN THOUSANDS)..................... $4,378 $5,129 $6,479
========= =========== ==========
Number of shares outstanding, ending (in thousands)... 4,382 5,133 6,484

========= =========== ==========
<CAPTION>
PERIODS ENDED DECEMBER 31,
----------------------------
1993 1993**
- -------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING.................................... $1.00 $1.00
=========== ==========
Income from investment operations
- ---------------------------------
Net investment income...................................... .031 .009
----------- ----------
Net realized gain (loss)................................... -- --
----------- ----------
Total from investment operations......................... .031 .009
----------- ----------
Distributions from
- ------------------
Net investment income...................................... (.031) (.009)
----------- ----------
Total increase (decrease) in net asset value.................. -- --
----------- ----------
NET ASSET VALUE, ENDING....................................... $1.00 $1.00
=========== ==========
Total return.................................................. 3.09% 2.11%
=========== ==========
Ratios to average net assets:
Net investment income...................................... 3.07% 3.02%(a)
=========== ==========
Total expenses............................................. -- --
=========== ==========
Net expenses............................................... -- --
=========== ==========
Expenses reimbursed........................................ .11% .85%(a)
=========== ==========
NET ASSETS, ENDING (IN THOUSANDS)............................. $4,032 $1,795
=========== ==========
Number of shares outstanding, ending (in thousands)........... 4,032 1,795
=========== ==========
</TABLE>

(a) Annualized
+ Effective December 31, 1995, this ratio reflects total expenses before
reduction for fees paid indirectly:
such reductions are included in the ratio of net expenses.
** From june 30, 1992, inception

- --------------------------------------------------------------------------------
10 - CRI MONEY MARKET PORTFOLIO ANNUAL REPORT
- --------------------------------------------------------------------------------
<PAGE>

CALVERT RESPONSIBLY INVESTED STRATEGIC GROWTH PORTFOLIO

Dear Investor:

The Calvert Responsibly Invested Strategic Growth Portfolio reported
outstanding performance results for 1996 and significantly outperformed its
benchmarks.

CALVERT RESPONSIBLY INVESTED
STRATEGIC GROWTH PORTFOLIO
-------------------------------------------------------------------------
Comparison of change in value of a
hypothetical $10,000 investment.

(GRAPH APPEARS HERE)

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
12/31/96 12/31/95 9/30/95 6/30/95 3/15/95

CRI Strategic Growth $14,729 $10,954 $10,190 $9,900 $10,000

S & P 500 Reinv $15,415 $12,538 $11,836 $10,955 $10,000

Russell 2000 $14,306 $12,279 $12,019 $10,938 $10,000
</TABLE>

Average Annual Total Return
(period ending 12/31/96)

1 Year 34.33% Life of Fund 24.04% (3/95)
-------------------------------------------------------------------------
Performance information is for the Portfolio only and does not
reflect charges and expenses of the variable annuity.
Past performance does not indicate future results.
-------------------------------------------------------------------------

MARKET SUMMARY

Nineteen ninety-six was a great year for the stock market, but investors
needed nerves of steel to withstand the high degree of volatility. Small-cap
stocks accomplished most of their gains in the first half. A mid-year market
correction caused prices to decline about 20% on average, before the market
started to recover in August. In general, large-cap stocks outperformed small-
caps, as investors sought out companies that typically provide more predictable
earnings and less volatile prices.

Investor sentiment was positive, judging by mutual fund cash inflows. The
average monthly inflow to stock funds was over $24 billion during the first five
months and slowed to just over $14 billion during the last seven months.

PERFORMANCE AND STRATEGY

Even though we focus on small- and mid-cap stocks, the return on the
Strategic Growth Portfolio was well-above measures of the large-cap universe due
to good stock selection. During the year, we continued to seek out stocks of
companies with solid underlying fundamentals and strong earnings growth rates
that are trading at a discount. Strict sell guidelines kept the Portfolio
concentrated in those stocks we are most confident about.

- --------------------------------------------------------------------------------
ANNUAL REPORT CRI STRATEGIC GROWTH PORTFOLIO - 11
- --------------------------------------------------------------------------------
<PAGE>

One of our top-performers for the year, and a good example of our stock
selection process, is the software company, Clarify. We identified the stock's
tremendous growth potential, made our first investment in May at a split-
adjusted share price of $22.25 and, by year-end, the share price had
approximately doubled to $48.00 per share.

Throughout the year, we maintained sizable commitments to the technology,
medical/pharmaceutical, oil and gas services, retail and telecommunications
equipment industries.

OUTLOOK

While we are optimistic about opportunities in the small- and mid-cap
sector, investors should be prepared for above-average volatility in 1997.
Studies point to a pattern of market corrections typically following two back-
to-back years when the Dow Jones Industrial Average gains more than 20%. The Dow
gained 33.5% in 1995 and 26% in 1996. In addition, years following Presidential
elections have tended to be more volatile.

While we continue to identify promising investment opportunities, we
believe continued strong stock selection will be the key to performance in 1997.
We appreciate your investment in the CRI Strategic Growth Portfolio.

Sincerely,

/s/ Clifton S. Sorrell /s/ Cedd Moses
Clifton S. Sorrell Cedd Moses
President Portfolio Manager, Portfolio Advisory Services

January 17, 1997

- --------------------------------------------------------------------------------
12 - CRI STRATEGIC GROWTH PORTFOLIO ANNUAL REPORT
- --------------------------------------------------------------------------------
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of Acacia Capital Corporation, and Shareholders of
Calvert Responsibly Invested Strategic Growth Portfolio:

We have audited the accompanying statement of assets and liabilities of
Calvert Responsibly Invested Strategic Growth Portfolio (one of the portfolios
comprising Acacia Capital Corporation), including the portfolio of investments,
as of December 31, 1996, and the related statement of operations for the year
then ended, and statement of changes in net assets and financial highlights for
the year then ended and the period from March 1, 1995 (commencement of
operations) through December 31, 1995. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audit.

In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Calvert Responsibly Invested Strategic Growth Portfolio as of December 31, 1996,
the results of its operations, the changes in its net assets and financial
highlights for the respective periods stated in the first paragraph in
conformity with generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.

Baltimore, Maryland
January 31, 1997

- --------------------------------------------------------------------------------
ANNUAL REPORT CRI STRATEGIC GROWTH PORTFOLIO - 13
- --------------------------------------------------------------------------------
<PAGE>

STRATEGIC GROWTH PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996

<TABLE>
<CAPTION>
EQUITY SECURITIES - 88.7% SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
COMPUTER - SERVICES - 9.7%
Harbinger Corp. *..................................... 3,500 $91,875
Sapient Corp. *....................................... 3,350 141,119
Technology Solutions Co. *............................ 1,500 62,250
----------
295,244
----------

ELECTRONIC PRODUCTS - MISCELLANEOUS - 3.5%
Uniphase Corp. *...................................... 2,000 105,000
----------
105,000
----------

ELECTRONICS - SEMICONDUCTOR EQUIPMENT - 1.8%
PRI Automation, Inc. *................................ 1,200 54,600
----------
54,600
----------

ELECTRONICS - SEMICONDUCTOR MANUFACTURING - 10.8%
DSP Communications, Inc. *............................ 2,800 54,250
Sanmina Corp. *....................................... 2,600 146,900
Vitesse Semiconductor Corp. *......................... 2,800 127,400
----------
328,550
----------
FINANCE - MORTGAGE - 5.1%
Cityscape Financial Corp. *........................... 5,900 154,875
----------
154,875
----------
MEDICAL - ETHICAL DRUGS - 6.5%
Dura Pharmaceuticals, Inc. *.......................... 2,000 95,500
Jones Medical Industries, Inc......................... 2,775 101,634
----------
197,134
----------

MEDICAL - INFORMATION TECHNOLOGY - 1.0%
Enterprise Systems, Inc. *............................ 1,300 30,550
----------
30,550
----------

MEDICAL - SERVICES - 4.6%
Access Health, Inc. *................................. 3,100 138,725
----------
138,725
----------

OIL AND GAS - FIELD SERVICES - 0.9%
Trico Marine Services, Inc. *......................... 600 28,800
----------
28,800
----------

RETAIL - APPAREL AND SHOE - 1.5%
Gadzooks, Inc. *...................................... 2,450 44,712
----------
44,712
----------
</TABLE>

- --------------------------------------------------------------------------------
14 - CRI STRATEGIC GROWTH PORTFOLIO ANNUAL REPORT
- --------------------------------------------------------------------------------
<PAGE>

<TABLE>
<CAPTION>
EQUITY SECURITIES (CONT'D) SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
RETAIL - DISCOUNT AND VARIETY - 4.5%
Dollar Tree Stores, Inc. * 3,600 $137,700
----------
137,700
----------
SOFTWARE - APPLICATIONS - 22.5%
Clarify, Inc.* 3,200 153,600
Documentum, Inc. * 2,260 76,275
Objective Systems Integrators, Inc. * 1,400 33,425
Pegasystems, Inc. * 3,100 93,388
Remedy Corp. * 900 48,375
Siebel Systems, Inc. * 5,400 145,800
Vantive Corp. * 4,200 131,250
----------
682,113
----------

SOFTWARE - DATABASE AND DEVELOPMENT TOOLS - 7.2%
Cognos, Inc. * 1,500 42,188
Pure Atrai Corp. * 1,800 44,550
Rational Software Corp. * 3,300 130,556
----------
217,294
----------

SOFTWARE - EDUCATION AND ENTERTAINMENT - 2.9%
CBT Group Publishing Ltd., ADR * 1,600 86,800
----------
86,800
----------

SOFTWARE - SYSTEMS - 3.0%
Citrix Systems, Inc. * 2,300 89,844
----------
89,844
----------

TELECOMMUNICATIONS - EQUIPMENT - 3.2%
SeaChange International, Inc. * 900 22,950
Sourcecom Corp., Series B, Preferred * 1,500 6,450
Verilink Corp. * 2,000 66,500
----------
95,900
----------
Total Equity Securities (Cost $2,094,488) 2,687,841
----------

TOTAL INVESTMENTS (Cost $2,094,488) - 88.7% 2,687,841
Other assets and liabilities, net - 11.3% 342,801
----------
NET ASSETS - 100% $3,030,642
==========
</TABLE>

*Non-income producing.
+ Restricted securities.
See notes to financial statements.

- --------------------------------------------------------------------------------
ANNUAL REPORT CRI STRATEGIC GROWTH PORTFOLIO - 15
- --------------------------------------------------------------------------------
<PAGE>

STRATEGIC GROWTH PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996

<TABLE>
<S>
ASSETS <C>
- --------------------------------------------------------------------------------------
Investments in securities, at value...................................... $2,687,841
Cash..................................................................... 466,958
Dividends receivable..................................................... 56
Other assets............................................................. 146
----------
Total assets.................................................... 3,155,001
----------

LIABILITIES
- --------------------------------------------------------------------------------------
Payable for securities purchased......................................... 118,498
Payable to Calvert Asset Management Company, Inc......................... 3,730
Accrued expenses and other liabilities................................... 2,131
----------
Total liabilities............................................... 124,359
----------
Net assets.................................................... $3,030,642
==========

NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------------
Par value and paid-in capital applicable to 206,840 shares of common
stock outstanding; $1 par value, 1,000,000 shares authorized........... $2,444,199
Accumulated net realized gain (loss) on investments...................... (6,910)
Net unrealized appreciation (depreciation) on investments................ 593,353
----------
NET ASSETS.................................................... $3,030,642
==========
NET ASSET VALUE PER SHARE..................................... $14.65
==========
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

- --------------------------------------------------------------------------------
16 - CRI STRATEGIC GROWTH PORTFOLIO ANNUAL REPORT
- --------------------------------------------------------------------------------
<PAGE>

STRATEGIC GROWTH PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996

<TABLE>
<S> <C>
NET INVESTMENT INCOME
- --------------------------------------------------------------------------------
Investment Income
Interest income.................................................. $3,783
Dividend income................................................ 149
----------
Total investment income...................................... 3,932
----------

EXPENSES
Investment advisory fee........................................ 28,564
Directors' fees and expenses................................... 150
Administrative fees............................................ 3,794
Custodian fees................................................. 8,821
Reports to shareholders........................................ 4,325
Professional fees.............................................. 487
Miscellaneous.................................................. 780
Reimbursement from Advisor..................................... (3,794)
----------
Total expenses............................................... 43,127
Fees paid indirectly......................................... (8,821)
----------
Net expenses............................................ 34,306
NET INVESTMENT INCOME (LOSS).......................... ----------
(30,374)
----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
- --------------------------------------------------------------------------------
Net realized gain (loss) on:
Securities..................................................... 39,089
Options written................................................ 1,369
Securities sold short.......................................... 3,170
----------
43,628
Change in unrealized appreciation or depreciation................. 486,428
----------

NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS............................................... 530,056
----------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS.................................... $499,682
==========
</TABLE>

See notes to financial statements.

- --------------------------------------------------------------------------------
ANNUAL REPORT CRI STRATEGIC GROWTH PORTFOLIO - 17
- --------------------------------------------------------------------------------
<PAGE>

STRATEGIC GROWTH PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
MARCH 1, 1995
YEAR ENDED INCEPTION TO
DECEMBER 31, DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS 1996 1995
- --------------------------------------------------------------------------------------------
<S>....................................................... <C> <C>
Operations
Net investment income (loss)........................... $(30,374) $3,237
Net realized gain (loss)............................... 43,628 (11,166)
Change in unrealized appreciation or depreciation...... 486,428 106,925
------------ -------------

INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS.......................... 499,682 98,996
------------ -------------

Distributions to shareholders from
Net investment income.................................. (533) (2,702)
Net realized gain on investments....................... (9,000) --
------------ -------------
Total distributions.................................. (9,533) (2,702)
------------ -------------

Capital share transactions
Shares sold............................................ 1,765,749 1,272,662
Reinvestment of distributions.......................... 9,532 2,702
Shares redeemed........................................ (444,228) (162,218)
------------ -------------
Total capital share transactions..................... 1,331,053 1,113,146
------------ -------------

TOTAL INCREASE (DECREASE)
IN NET ASSETS............................................. 1,821,202 1,209,440

NET ASSETS
- --------------------------------------------------------------------------------------------
Beginning of period....................................... 1,209,440 --
------------ -------------
End of period (including undistributed net investment
income of $0 and $535, respectively)................. $3,030,642 $1,209,440
============ =============

CAPITAL SHARE ACTIVITY
- --------------------------------------------------------------------------------------------
Shares sold............................................... 128,377 126,452
Reinvestment of distributions............................. 651 247
Shares redeemed........................................... (32,774) (16,113)
------------ -------------
Total capital share activity......................... 96,254 110,586
============ =============
</TABLE>

See notes to Financial Statements

- --------------------------------------------------------------------------------
18 - CRI STRATEGIC GROWTH PORTFOLIO ANNUAL REPORT
- --------------------------------------------------------------------------------
<PAGE>

NOTES TO FINANCIAL STATEMENTS

NOTE A--SIGNIFICANT ACCOUNTING POLICIES

GENERAL: The Strategic Growth Portfolio (the "Portfolio"), a series of Acacia
Capital Corporation's Calvert Responsibly Invested (CRI) Portfolios, is
registered under the Investment Company Act of 1940 as a nondiversified, open-
end management investment company. The operations of each series are accounted
for separately. The shares of the Portfolio, which were first offered on March
1, 1995, are sold to affiliated and unaffiliated insurance companies for
allocation to certain of their variable separate accounts.

SECURITY VALUATION: Securities listed or traded on a national securities
exchange are valued at the last reported sales price. Unlisted securities and
listed securities for which the last sale price is not available are valued at
the most recent bid price or based on a yield equivalent obtained from the
securities' market maker. Other securities and assets for which market
quotations are not available or deemed inappropriate are valued in good faith
under the direction of the Board of Directors.

OPTIONS: The Portfolio may write or purchase option securities. The option
premium is the basis for recognition of unrealized or realized gain or loss on
the option. The cost of securities acquired or the proceeds from securities sold
through the exercise of the option is adjusted by the amount of the premium.

SECURITIES SOLD SHORT: The Portfolio may sell securities that it does not own
in anticipation of a decline in their market price. Gains or losses represent
the difference between the sale proceeds and the current market value of the
security .

DEPOSITS WITH BROKERS: The Portfolio maintains liquid assets (such as cash, U.S.
government securities or other high-grade debt obligations) sufficient to cover,
on a daily basis, the current values of written options and securities sold
short.

SECURITY TRANSACTIONS AND INVESTMENT INCOME: Security transactions are
accounted for on trade date. Realized gains and losses are recorded on an
identified cost basis. Dividend income is recorded on the ex-dividend date.
Interest income, accretion of discount and amortization of premium are recorded
on an accrual basis. Dividends declared on securities sold short are reported as
an expense.

DISTRIBUTIONS TO SHAREHOLDERS: Distributions to shareholders are recorded by
the Portfolio on ex-dividend date. Dividends from net investment income and
distributions from net realized capital gains, if any, are paid at least
annually. Distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles, accordingly,
periodic reclassifications are made within the Portfolio's capital accounts to
reflect income and gains available for distribution under income tax
regulations.

ESTIMATES: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.

- --------------------------------------------------------------------------------
ANNUAL REPORT CRI STRATEGIC GROWTH PORTFOLIO - 19
- --------------------------------------------------------------------------------
<PAGE>

FEDERAL INCOME TAXES: No provision for federal income or excise tax is required
since the Portfolio intends to continue to qualify as a regulated investment
company under the Internal Revenue Code and to distribute substantially all of
its earnings.

NOTE B-RELATED PARTY TRANSACTIONS

Calvert Asset Management Company, Inc. (the "Advisor") is wholly-owned by
Calvert Group, Ltd. ("Calvert"), which is indirectly wholly-owned by Acacia
Mutual Life Insurance Company. The Advisor provides investment advisory services
and pays the salaries and fees of officers and affiliated Directors of the
Portfolio. For its services, the Advisor receives a monthly fee based on an
annual rate of 1.5% of the Portfolio's average daily net assets. Effective
April, 1996, the Portfolio began paying a monthly performance fee of plus or
minus up to .15%, on an annual basis, of average daily net assets of the
performance period depending on the Portfolio's performance compared to the
Russell 2000 Index.

Calvert Administrative Services Company, an affiliate of the Advisor, provides
administrative services to the Portfolio for an annual fee, payable monthly, of
.20% of the Portfolio's annual average daily net assets. The Advisor voluntarily
reimbursed the Portfolio for administrative fees.

NOTE C-INVESTMENT ACTIVITY

During the year, purchases and sales of investments, other than short-term
securities, were $3,436,098 and $1,973,142, respectively

The cost of investments owned at December 31, 1996 was substantially the same
for federal income tax and financial reporting purposes. Net unrealized
appreciation aggregated $593,353, of which $673,907 related to appreciated
securities and $80,554 related to depreciated securities.

The Portfolio's only transaction in written call options was the expiration of 2
contracts, premium value of $1,369, which had been open at December 31, 1995.

- --------------------------------------------------------------------------------
20 - CRI STRATEGIC GROWTH PORTFOLIO ANNUAL REPORT
- --------------------------------------------------------------------------------
<PAGE>

STRATEGIC GROWTH PORTFOLIO
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
PERIODS ENDED DECEMBER 31,
------------------------------
1996 1995**
- -------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING.................................. $10.94 $10.00
========== ============
Income from investment operations
- ---------------------------------
Net investment income.................................... (.15) .25
Net realized and unrealized gain (loss).................. 3.90 .93
---------- ------------
Total from investment operations..................... 3.75 1.18
---------- ------------
Distributions from
- ------------------
Net investment income.................................... (.00) (.24)
Net realized gains....................................... (.04) --
---------- ------------
Total distributions.................................. (.04) (.24)
---------- ------------
Total increase (decrease) in net asset value................ 3.71 .94
---------- ------------
NET ASSET VALUE, ENDING..................................... $14.65 $10.94
========== ============

Total return................................................ 34.33% 9.65%
========== ============
Ratios to average net assets:
Net investment income.................................... (1.60%) .43%(a)
========== ============
Total expenses +......................................... 2.27% 2.17%(a)
========== ============
Net expenses............................................. 1.81% 1.64%(a)
========== ============
Expenses reimbursed...................................... .20% .20%(a)
========== ============
Portfolio turnover.......................................... 120% 223%
========== ============
Average commission rate paid................................ $.0499 --
========== ============
NET ASSETS, ENDING (IN THOUSANDS)........................... $3,031 $1,209
========== ============
Number of shares outstanding, ending (in thousands)......... 207 111
========== ============
</TABLE>

(a) Annualized
+ This ration reflects total expenses before reduction for fees paid
indirectly such reductions are included in the ration of net expenses.
** From March 1, 1995, inception.

- --------------------------------------------------------------------------------
ANNUAL REPORT CRI STRATEGIC GROWTH PORTFOLIO - 21
- --------------------------------------------------------------------------------
<PAGE>

CALVERT RESPONSIBLY INVESTED CAPITAL ACCUMULATION PORTFOLIO

Dear Investor:

The economy continued to expand at a moderate pace in 1996, which paved the
way for strong stock market performance. Gross Domestic Product spiked at mid-
year, but fell back to modest levels for the last two quarters. While many
investors believed the Federal Reserve would intervene to tighten monetary
policy, the Fed took no action after cutting the federal funds rate by 25 basis
points in late January. Short-term rates fell in response to the January cut and
remained low throughout the year.

Calvert Responsibly Invested
Capital Accumulation Portfolio
- --------------------------------------------------------------------------------
Comparison of a change in value of a hypothetical $10,000 investment.

(Graph appears here)

<TABLE>
12/31/96 12/31/95 12/31/94 12/31/93
<S> <C> <C> <C> <C>
CRI Capital Accumulation $17,758 $16,498 $11,818 $13,120

S & P 500 Rein $22,240 $18,089 $13,153 $12,919

Russell 2000 $22,454 $19,274 $15,271 $15,554

S & P 400 Midcap Reinv $28,808 $24,168 $18,456 $19,141

12/31/92 12/31/91 7/16/91

CRI Capital Accumulation $12,198 $10,725 $10,000

S & P 500 Rein $11,738 $10,908 $10,000

Russell 2000 $13,082 $11,048 $10,000

S & P 400 Midcap Reinv $16,798 $15,010 $10,000
</TABLE>

Average Annual Total Return
(period ending 12/31/96)

1 Year 7.44% 5 Year 10.55%
Life of Fund 11.10% (7/91)
- --------------------------------------------------------------------------------
*New sub-advisors assumed management of the
Portfolio effective December 1994.

Performance information is for the Portfolio only and does not
reflect charges and expenses of the variable annuity.
Past performance does not indicate future results.
- --------------------------------------------------------------------------------

FUND PERFORMANCE

The stock market continued to reward investors with big gains for the
second year in a row. In general, small- and mid-capitalization stocks turned in
good 12-month gains; however these stocks experienced a high degree of
volatility and did not move in-step with the broad market averages.

For the first half of the year, the Standard & Poor's 500 Stock Index,
which is comprised mainly of larger companies, lagged measures of small- and
mid-cap stock performance. This situation reversed in the second half of the
year, when the S&P 500 soared almost 12%, and small- and mid-cap stocks did not
keep pace.

The Capital Accumulation Portfolio lagged its benchmarks for the six-month
period because we had a higher commitment to companies with very small market
capitalizations. Prices of these stocks tend to fluctuate the most of all of the
companies within the small- and mid-cap universe, and in this case their
volatility affected performance relative to our benchmarks.

- --------------------------------------------------------------------------------
22 - CRI CAPITAL ACCUMULATION PORTFOLIO ANNUAL REPORT
- --------------------------------------------------------------------------------
<PAGE>

FUND MANAGERS' APPROACH

The CRI Capital Accumulation Portfolio uses a multi-manager strategy to
invest primarily in stocks of small-and mid-capitalization companies. In
October, one management company, Apodaca Investment Management, notified Calvert
Group that one of its primary money managers was resigning. We are evaluating
how this will affect our allocation of assets among investment managers.

APODACA INVESTMENT MANAGEMENT

Throughout 1996, Apodaca maintained sizable positions in the client/server
software, networking and telecommunications equipment industries. They also held
a large position in the healthcare sector but dramatically reduced exposure to
this group at mid-year, when valuations appeared stretched and performance began
to lag the market. Assets were redeployed into the energy service, energy
exploration and production, semiconductor manufacturing and semiconductor
equipment industries.

The manager is now closely monitoring the client/server software group.
Analysts are forecasting very aggressive earnings growth of over 100% for the
next two years for several of these companies. Apodaca will be looking to take
profits as expectations for this degree of earnings growth become more
widespread and as companies reach their price/valuation targets. Assets will
likely be reinvested in healthcare stocks.

BROWN CAPITAL MANAGEMENT, INC.

Brown Capital continued to focus on two key investment themes: "The Graying
of America" and "The Information Age." They maintained sizable positions in
stocks of companies that help businesses operate more efficiently, including
computer software and other technology stocks, and companies that play a role in
peoples' lives as they age, such as financial services and select health care
stocks.

This approach served investors well, as technology and financial services
stocks were the biggest contributors to this portion of the Portfolio's return.
Top performers in the technology arena were EMC, Compuware and Microsoft. In
financial services, T. Rowe Price and Green Tree Financial Services turned in
strong gains.

FORTALEZA ASSET MANAGEMENT

Fortaleza remained focused on companies in the technology, health care and
retail industries. Technology holdings generated good gains for the year, with
software company, Hyperion, and systems integration consultant, Vanstar helping
to boost returns. Although strong performers in the first half of the year,
health care stocks came under pressure during the third quarter and did not
contribute positively to the Portfolio's one-year performance. Retail stocks
held up well until year-end, when investors worried that Christmas sales would
be weak. Most retailers reported good holiday sales, and stock prices began to
come back in the first quarter of 1997.

During the fourth quarter, the manager built a position in ESS Technology,
a chip manufacturer for multimedia applications. This is a fairly new company
that is experiencing stronger overseas demand for its product and getting

- --------------------------------------------------------------------------------
ANNUAL REPORT CRI CAPITAL ACCUMULATION PORTFOLIO - 23
- --------------------------------------------------------------------------------
<PAGE>

increased analyst attention. Fortaleza also took advantage of a decline in the
stock price of Physician Support Systems, a company that provides systems and
software for health care professionals, and significantly increased their
holdings.

OUTLOOK

After two back-to-back years of very strong stock market performance,
investors' nervousness about the direction of the market in the coming year is
understandable. Still, the economic climate remains favorable and each of the
Capital Accumulation Portfolio managers continue to spot promising investment
opportunities among small- and mid-cap stocks.

Apodaca notes that, on a year-to-year basis, small-cap stocks have lagged
large-cap issues for three years. This trend began to reverse late in 1996, and
they believe small-cap stocks will maintain this performance edge. However, the
markets will likely continue to exhibit a high degree of volatility, and, in
their opinion, their ability to identify the most promising stocks and
industries will be the crucial factor.

While acknowledging that the stock market is not cheap, Brown Capital's
outlook for the coming year is also positive. They expect continued modest
economic growth, modest inflation, stable or slightly declining interest rates
and moderately increasing corporate profits. Under this scenario, stocks should
generate positive returns, but probably not the double-digit gains of 1995 and
1996. Importantly, their strategy of selecting superior companies in terms of
management and potential for earnings growth and buying at attractive valuations
offer an additional comfort.

Fortaleza is optimistic based on small-cap stocks' lower prices relative to
large-cap issues and the favorable earnings outlook for small-cap companies.
However, any earnings disappointments in the large-cap universe could jolt the
market, and the correction would likely trickle down to the small-cap universe.
Thus, strong fundamental analysis will be essential in capturing market
opportunities.

Managers continue to employ the same rigorous stock selection criteria that
have worked well for investors since the Portfolio's inception. In evaluating
your investment decisions, we encourage you to focus on your long-term
objectives. Thank you for your continued confidence.

Sincerely,

/s/ Clifton S. Sorrell
Clifton S. Sorrell
President

January 17, 1997

- --------------------------------------------------------------------------------
24 - CRI CAPITAL ACCUMULATION PORTFOLIO ANNUAL REPORT
- --------------------------------------------------------------------------------
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS
============

To the Board of Directors of Acacia Capital Corporation and Shareholders of
Calvert Responsibly Invested Capital Accumulation Portfolio:

We have audited the accompanying statement of assets and liabilities of
Calvert Responsibly Invested Capital Accumulation Portfolio (one of the
portfolios comprising the Acacia Capital Corporation), including the portfolio
of investments, as of December 31, 1996, and the related statement of operations
for the year then ended, statement of changes in net assets for each of the two
years in the period then ended and financial highlights for each of the three
years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits. The financial highlights for each of the preceding years
were audited by other auditors whose report dated January 31, 1994 expressed an
unqualified opinion thereon.

In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Calvert Responsibly Invested Capital Accumulation Portfolio as of December 31,
1996, the results of its operations, the changes in its net assets and financial
highlights for the respective periods stated in the first paragraph in
conformity with generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.

Baltimore, Maryland
January 31, 1997

- --------------------------------------------------------------------------------
ANNUAL REPORT CRI CAPITAL ACCUMULATION PORTFOLIO - 25
- --------------------------------------------------------------------------------
<PAGE>

CAPITAL ACCUMULATION PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996

<TABLE>
<CAPTION>
EQUITY SECURITIES - 95.6% SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
AGRICULTURE - 0.9%
Northland Cranberries, Inc., Class A................. 8,000 $184,000
-----------
184,000
-----------

AIRLINES - 0.3%
Atlantic Coast Airlines, Inc. *...................... 5,000 61,250
-----------
61,250
-----------

BIOTECHNOLOGY - 1.3%
Amgen, Inc. *........................................ 2,200 119,625
Ibah, Inc. *......................................... 8,200 55,350
Neurex Corp. *....................................... 4,700 79,900
-----------
254,875
-----------

BUSINESS EQUIPMENT AND SERVICES - 5.8%
Employee Solutions, Inc. *........................... 3,000 61,500
Equifax, Inc......................................... 8,600 263,375
Hewlett Packard Co................................... 2,500 125,625
May & Speh, Inc. *................................... 10,000 125,000
MDSI Mobile Data Solutions, Inc. *................... 30,000 476,250
Staffmark, Inc. *.................................... 7,500 93,750
-----------
1,145,500
-----------

COMMUNICATIONS - 3.8%
Amati Communications Corp. *......................... 4,300 56,437
Cisco Systems, Inc. *................................ 3,950 251,319
LCC International, Inc. *............................ 4,200 77,700
Periphonics Corp. *.................................. 5,300 155,025
Tekelec, Inc. *...................................... 6,300 99,225
Videoserver, Inc. *.................................. 2,400 102,000
Voxware, Inc. *...................................... 2,500 18,750
-----------
760,456
-----------

COMPUTER - EQUIPMENT AND SERVICES - 1.3%
BRC Holdings, Inc. *................................. 2,300 102,925
Digital Link Corp. *................................. 2,700 65,475
Raster Graphics, Inc. *.............................. 7,800 92,625
-----------
261,025
-----------

COMPUTER - NETWORKS - 4.7%
Act Networks, Inc. *................................. 5,800 211,700
Bay Networks, Inc. *................................. 6,600 137,775
Larscom, Inc., Class A *............................. 10,000 113,750
Netvantage, Inc., Class A *.......................... 6,200 55,800
Network Appliance, Inc. *............................ 3,200 162,800
</TABLE>

- --------------------------------------------------------------------------------
26 - CRI CAPITAL ACCUMULATION PORTFOLIO ANNUAL REPORT
- --------------------------------------------------------------------------------
<PAGE>

<TABLE>
<CAPTION>
EQUITY SECURITIES (CONT'D)........................... SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
COMPUTER - NETWORKS (CONT'D)
Network General Corp. *.............................. 6,000 $181,500
Proxim, Inc. *....................................... 2,900 66,700
-----------
930,025
-----------

COMPUTER - SOFTWARE - 9.3%
Aspen Technology, Inc. *............................. 3,000 240,750
Axent Technologies, Inc. *........................... 4,800 72,000
Concentra Corp. *.................................... 9,600 86,400
Hyperion Software Corp. *............................ 8,600 182,750
IDX Systems Corp. *.................................. 4,300 123,087
Legato Systems, Inc. *............................... 5,200 169,650
Metatools, Inc. *.................................... 6,500 76,375
Microsoft Corp. *.................................... 1,000 82,625
Open Text Corp. *.................................... 5,000 34,375
Pegasystems, Inc. *.................................. 3,500 105,437
Segue Software, Inc. *............................... 4,600 83,950
Siebel Systems, Inc. *............................... 3,600 97,200
Sterling Software, Inc............................... 4,800 151,800
Vantive Corp. *...................................... 2,800 87,500
Veritas Software Co. *............................... 2,750 136,812
Viasoft, Inc. *...................................... 1,400 66,150
Xionics Document Technologies *...................... 4,700 58,750
-----------
1,855,611
-----------

COMPUTER - SYSTEMS - 7.0%
Advanced Health Corp. *.............................. 4,200 52,500
Amisys Managed Care Systems, Inc. *.................. 5,000 85,000
BTG, Inc. *.......................................... 3,500 92,750
Cellular Technical Services, Inc. *.................. 5,000 100,000
Dataworks Corp. *.................................... 2,700 68,175
Imnet Systems, Inc. *................................ 4,000 97,000
Nuko Information Systems, Inc. *..................... 6,700 74,537
Object Design, Inc. *................................ 5,200 61,100
Oracle Corp. *....................................... 3,937 164,370
Physician Support Systems, Inc. *.................... 13,300 256,025
S3, Inc. *........................................... 5,300 86,125
Vanstar Corp. *...................................... 8,600 210,700
Versant Object Technology Corp. *.................... 2,900 54,013
-----------
1,402,295
-----------

CONSUMER PRODUCTS AND SERVICES - 1.1%
Newell Co............................................ 6,800 214,200
-----------
214,200
-----------

DENTAL - 0.4%
United Dental Care, Inc. *........................... 2,500 75,937
-----------
75,937
-----------
</TABLE>

- --------------------------------------------------------------------------------
ANNUAL REPORT CRI - CAPITAL.ACCUMULATION PORTFOLIO - 27
- --------------------------------------------------------------------------------
<PAGE>

<TABLE>
<CAPTION>
EQUITY SECURITIES (CONT'D) SHARES VALUE
- --------------------------------------------------------------------------------
<S>.................................................. <C> <C>
EDUCATION - 0.7%
Devry, Inc. *........................................ 6,000 $141,120
-----------
141,120
-----------

ELECTRICAL EQUIPMENT - 3.4%
Belden, Inc.......................................... 4,500 166,500
Checkpoint Systems, Inc. *........................... 5,300 131,175
Fluke Corp........................................... 1,500 66,321
Sterling Commerce, Inc. *............................ 4,700 165,675
Ultrak, Inc. *....................................... 4,700 143,350
-----------
673,021
-----------

ELECTRONICS - DEFENSE - 0.4%
Jacobs Engineering Group, Inc. *..................... 3,000 70,875
-----------
70,875
-----------

ELECTRONICS - INSTRUMENTS - 0.7%
Checkfree Corp. *.................................... 8,000 137,000
-----------
137,000
-----------

ELECTRONICS - SEMICONDUCTORS - 10.5%
ADE Corp. *.......................................... 6,000 102,000
Ariel Corp. *........................................ 7,500 77,813
Benchmarq Microelectronics, Inc. *................... 3,900 83,363
CFM Technologies, Inc. *............................. 7,100 147,325
EMC Corp. *.......................................... 7,700 255,063
ESS Technology, Inc. *............................... 8,900 250,313
Micrion Corp. *...................................... 4,300 93,525
Novellus Systems, Inc. *............................. 1,500 81,281
Sanmina Corp. *...................................... 2,800 158,200
Solectron Corp. *.................................... 4,400 234,850
Tencor Instruments *................................. 4,100 108,137
Uniphase Corp. *..................................... 3,900 204,750
Vishay Intertechnology, Inc. *....................... 9,586 224,073
Zoran Corp. *........................................ 4,000 72,000
-----------
2,092,693
-----------

FINANCIAL SERVICES - 4.3%
Chase Manhattan Corp................................. 2,652 236,691
Glendale Federal Bank Federal Savings Bank *........ 3,100 72,075
Green Tree Financial Corp............................ 6,550 252,994
T. Rowe Price Associates, Inc........................ 6,900 300,150
-----------
861,910
-----------

FURNITURE - 1.5%
Ethan Allen Interiors, Inc........................... 3,500 134,750
Miller Herman, Inc................................... 2,900 164,213
-----------
298,963
-----------
</TABLE>

- --------------------------------------------------------------------------------
28 - CRI CAPITAL ACCUMULATION PORTFOLIO ANNUAL REPORT
- --------------------------------------------------------------------------------
<PAGE>

<TABLE>
<CAPTION>
EQUITY SECURITIES (CONT'D) SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
HEALTH CARE - 3.5%
American Homepatient, Inc. *......................... 4,500 $122,625
American Oncology Research, Inc. *................... 10,000 102,500
Health Care & Retirement Corp. *..................... 4,950 141,694
NCS Healthcare, Inc., Class A *..................... 3,700 107,763
Pall Corp. (rights).................................. 5,900 150,450
Renal Care Group, Inc. *............................. 2,300 72,737
-----------
697,769
-----------

INDUSTRIAL PRODUCTS - 1.1%
Alyn Corp. *......................................... 1,600 17,400
Amcast Industrial Corp............................... 3,800 94,050
BE Aerospace, Inc. *................................. 3,800 103,075
-----------
214,525
-----------

INSURANCE - 1.6%
AFLAC, Inc........................................... 3,850 164,587
American Bankers Insurance Group, Inc................ 3,000 153,375
-----------
317,962
-----------

LEISURE - 1.2%
Carnival Corp., Class A.............................. 7,400 244,200
-----------
244,200
-----------

LUMBER - 0.2%
T.J. International, Inc.............................. 2,000 45,250
-----------
45,250
-----------

MANUFACTURING - 0.3%
Act Manufacturing, Inc. *............................ 2,200 58,025
-----------
58,025
-----------

MEDICAL - 6.1%
Acuson, (rights) *................................... 4,000 97,500
ALZA Corp. *......................................... 2,600 67,275
Cardinal Health, Inc................................. 4,500 262,125
Cytyc Corp. *........................................ 6,000 162,000
Inhale Therapeutic Systems *......................... 7,500 113,437
Medquist, Inc. *..................................... 6,900 170,775
Pediatrix Medical Group *............................ 1,500 55,313
QLT Phototherapeutics *.............................. 5,200 104,650
Scherer (R.P.) Corp. *............................... 3,700 185,925
-----------
1,219,000
-----------

OIL AND GAS - 5.1%
3DX Technologies, Inc. *............................. 2,800 30,800
American Oilfield Divers, Inc. *..................... 4,800 57,000
Belden & Blake Corp. *............................... 4,500 114,750
Dawson Production Services, Inc. *................... 5,300 82,150
HS Resources, Inc. *................................. 4,500 74,250
</TABLE>

- --------------------------------------------------------------------------------
ANNUAL REPORT CRI CAPITAL.ACCUMULATION PORTFOLIO - 29
- --------------------------------------------------------------------------------
<PAGE>

<TABLE>
<CAPTION>
EQUITY SECURITIES (CONTD) SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
OIL AND GAS (CONT'D)
Marine Drilling Cos., Inc. *......................... 1,100 $21,656
MCN Corp............................................. 6,600 190,575
Patterson Energy, Inc. *............................. 2,300 59,225
Varco International, Inc. *.......................... 11,700 270,563
Veritas DGC, Inc. *.................................. 3,600 66,600
Wiser Oil Co. *...................................... 2,600 51,350
-----------
1,018,919
-----------

PHARMACEUTICAL - 2.9%
Agouron Pharmaceuticals, Inc. *...................... 2,500 169,375
Dura Pharmaceuticals, Inc. *......................... 4,000 191,000
Immulogic Pharmaceutical Corp. *..................... 9,500 60,563
Incyte Pharmaceuticals, Inc. *....................... 1,700 87,550
Medicis Pharmaceutical Corp., Class A *.............. 1,350 59,400
-----------
567,888
-----------

PROPERTY MANAGEMENT - 0.8%
Rouse Co............................................. 5,000 158,750
-----------
158,750
-----------

REAL ESTATE - 1.0%
Post Properties, Inc................................. 4,700 189,175
-----------
189,175
-----------

RESEARCH - 0.9%
Clintrials Research, Inc. *.......................... 3,500 79,625
Quintiles Transnational Corp. *...................... 1,500 99,375
-----------
179,000
-----------

RESTAURANTS - 2.9%
Applebees International, Inc......................... 4,300 118,250
Cheesecake Factory, Inc. *........................... 8,000 145,000
Longhorn Steaks, Inc. *.............................. 5,000 94,375
Papa Johns International, Inc. *..................... 3,150 106,313
Rainforest Cafe, Inc. *.............................. 4,900 116,416
-----------
580,354
-----------

RETAIL - APPAREL AND SHOE - 3.0%
Buckle, Inc. *....................................... 4,000 100,000
Cutter & Buck, Inc. *................................ 9,500 112,312
Gadzooks, Inc. *..................................... 2,650 48,362
Pacific Sunwear of California *...................... 3,500 90,125
St. John Knits, Inc.................................. 3,000 130,500
Wet Seal, Inc., Class A.............................. 5,000 106,875
-----------
588,174
-----------

RETAIL - DEPARTMENT STORES - 0.6%
Nordstrom, Inc....................................... 3,400 120,487
-----------
120,487
-----------
</TABLE>

- --------------------------------------------------------------------------------
30 - CRI CAPITAL ACCUMULATION PORTFOLIO ANNUAL REPORT
- --------------------------------------------------------------------------------
<PAGE>

<TABLE>
<CAPTION>
EQUITY SECURITIES (CONT'D) SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
Retail - Discount and Variety - 1.1%
Caseys General Stores, Inc........................... 3,800 $71,250
Dollar General Corp.................................. 4,725 151,200
-----------
222,450
-----------

RETAIL - SPECIAL LINE - 3.9%
Autozone, Inc. *..................................... 7,900 217,250
Eagle Hardware & Garden, Inc. *...................... 3,600 74,700
Home Depot, Inc...................................... 3,100 155,387
Revco D.S., Inc. *................................... 5,300 196,100
West Marine, Inc. *.................................. 5,000 139,750
-----------
783,187
-----------

SPECIALIZED SERVICES - 0.6%
Inacom Corp. *....................................... 2,800 112,000
-----------
112,000
-----------

TELECOMMUNICATIONS - 1.1%
Brightpoint, Inc. *.................................. 4,400 130,900
Verilink Corp. *..................................... 2,700 89,775
-----------
220,675
-----------

TRANSPORTATION - 0.3%
Hvide Marine, Inc., Class A *........................ 2,900 63,075
-----------
63,075
-----------

Total Equity Securities (Cost $16,109,112)........ 19,021,621
-----------

TOTAL INVESTMENTS (Cost $16,109,112) - 95.6%.. 19,021,621
Other assets and liabilities, net - 4.4%...... 882,702
-----------
NET ASSETS - 100%.................. $19,904,323
-----------
</TABLE>

*Non-income producing.
See notes to financial statements.

- --------------------------------------------------------------------------------
ANNUAL REPORT CRI CAPITAL.ACCUMULATION PORTFOLIO - 31
- --------------------------------------------------------------------------------
<PAGE>

CAPITAL ACCUMULATION PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996

<TABLE>
<CAPTION>
ASSETS
- --------------------------------------------------------------------------------
<S> <C>
Investments in securities, at value.............................. $19,021,621
Cash............................................................. 1,187,165
Receivable for securities sold................................... 113,400
Interest and dividends receivable................................ 4,750
Other assets..................................................... 1,575
------------
Total assets............................................ 20,328,511
------------

LIABILITIES
- --------------------------------------------------------------------------------

Payable for securities purchased................................. 404,509
Payable to Calvert Asset Management Company, Inc................. 16,316
Payable to Calvert Administrative Services Company............... 1,636
Accrued expenses and other liabilities........................... 1,727
------------
Total liabilities....................................... 424,188
------------
Net assets..................................... $19,904,323
============

NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------

Par value and paid-in capital applicable to 827,683 shares of common
stock outstanding; $1 par value, 1,000,000 shares authorized $16,996,460
Accumulated net realized gains (losses) on investments (4,646)
Net unrealized appreciation (depreciation) on investments 2,912,509
------------
NET ASSETS.................................................. $19,904,323
============

NET ASSET VALUE PER SHARE....................... $24.05
============
</TABLE>

See notes to financial statements.

- --------------------------------------------------------------------------------
32 - CRI CAPITAL ACCUMULATION PORTFOLIO ANNUAL REPORT
- --------------------------------------------------------------------------------
<PAGE>

CAPITAL ACCUMULATION PORTFOLIO
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
NET INVESTMENT INCOME
- --------------------------------------------------------------------------------
<S> <C>
Investment Income
Interest income............................................... $6,535
Dividend income............................................... 55,973
-----------
Total investment income.................................... 62,508
-----------

Expenses
Investment advisory fee....................................... 126,374
Directors' fees and expenses.................................. 1,259
Administrative fees........................................... 15,797
Custodian fees................................................ 52,152
Reports to shareholders....................................... 2,221
Professional fees............................................. 11,217
Miscellaneous................................................. 1,173
-----------
Total expenses............................................. 210,193
Fees paid indirectly....................................... (52,152)
-----------
Net expenses............................................ 158,041
-----------
NET INVESTMENT INCOME (LOSS) (95,533)
-----------

REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
- --------------------------------------------------------------------------------
Net realized gain (loss)........................................ 7,603
Change in unrealized appreciation or depreciation............... 1,182,679
-----------

NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS............................................. 1,190,282
-----------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS.................................. $1,094,749
===========
</TABLE>

See notes to financial statements.

- --------------------------------------------------------------------------------
ANNUAL REPORT CRI CAPITAL ACCUMLATION PORTFOLIO - 33
- --------------------------------------------------------------------------------
<PAGE>

CAPITAL ACCUMULATION PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS

YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
INCREASE (DECREASE) IN NET ASSETS 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Operations
Net investment income (loss)............................... $ (95,533) $(58,120)
Net realized gain (loss)................................... 7,603 805,204
Change in unrealized appreciation or depreciation.......... 1,182,679 1,398,962
----------- -----------

INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS................................ 1,094,749 2,146,046
----------- -----------

Distributions to shareholders from
Net investment income...................................... -- (3,628)
Net realized gain on investments........................... (32,307) (466,861)
----------- -----------
Total distributions...................................... (32,307) (470,489)
----------- -----------
Capital share transactions
Shares sold................................................ 14,697,452 2,445,856
Shares issued from merger (Note A)......................... 4,728,068
Reinvestment of distributions.............................. 32,310 470,489
Shares redeemed............................................ (9,551,228) (1,345,444)
----------- -----------
Total capital share transactions......................... 9,906,602 1,570,901
----------- -----------

TOTAL INCREASE (DECREASE)
IN NET ASSETS................................................ 10,969,044 3,246,458

NET ASSETS
- --------------------------------------------------------------------------------------------
Beginning of year............................................. 8,935,279 5,688,821
----------- -----------
End of year $19,904,323 $8,935,279
=========== ===========

CAPITAL SHARE ACTIVITY
- --------------------------------------------------------------------------------------------
Shares sold.......................................... 618,839 112,840

Shares issued from merger (Note A)................... 207,827
Reinvestment of distributions........................ 1,343 20,976
Shares redeemed...................................... (398,789) (70,579)
----------- -----------
Total capital share activity...................... 429,220 63,237
=========== ===========
</TABLE>

See notes to financial statements.

- --------------------------------------------------------------------------------
34 - CRI CAPITAL ACCUMULATION PORTFOLIO ANNUAL REPORT
- --------------------------------------------------------------------------------
<PAGE>

NOTES TO FINANCIAL STATEMENTS

NOTE A-SIGNIFICANT ACCOUNTING POLICIES

GENERAL: The Capital Accumulation Portfolio (the "Portfolio"), a series of
Acacia Capital Corporation's Calvert Responsibly Invested (CRI) Portfolios, is
registered under the Investment Company Act of 1940 as a non-diversified, open-
end management investment company. The operations of each series are accounted
for separately. The shares of the Portfolio are sold to affiliated and
unaffiliated insurance companies for allocation to certain of their variable
separate accounts.

On February 23, 1996, the net assets of CRI Equity Portfolio were merged into
the Portfolio. The acquisition was accomplished by a tax free exchange of
207,827 shares of the Portfolio (valued at $4,728,068) for the 259,797 shares of
CRI Equity Portfolio outstanding at February 23, 1996. CRI Equity Portfolio's
net assets at that date, including $249,296 of unrealized appreciation, were
combined with those of the Portfolio. The aggregate net assets of the Portfolio
and CRI Equity Portfolio immediately before the acquisition were $9,742,153 and
$4,727,159, respectively.

SECURITY VALUATION: Securities listed or traded on a national securities
exchange are valued at the last reported sale price. Unlisted securities and
listed securities for which the last sale price is not available are valued at
the most recent bid price or based on a yield equivalent obtained from the
securities' market maker. Other securities and assets for which market
quotations are not available or deemed inappropriate are valued in good faith
under the direction of the Board of Directors.

The Fund designates $6,891 as capital gain dividends for taxable year ended
December 31, 1996.

ESTIMATES: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.

- --------------------------------------------------------------------------------
ANNUAL REPORT CRI CAPITAL ACCUMULATION PORTFOLIO - 35
- --------------------------------------------------------------------------------
<PAGE>

FEDERAL INCOME TAXES: No provision for federal income or excise tax is required
since the Portfolio intends to continue to qualify as a regulated investment
company under the Internal Revenue Code and to distribute substantially all of
its earnings.

NOTE B-RELATED PARTY TRANSACTIONS

Calvert Administrative Services Company, an affiliate of the Advisor, provides
administrative services to the Portfolio for an annual fee, payable monthly, of
.10% of the Portfolio's annual average daily net assets.

Calvert Shareholder Services, Inc., an affiliate of the Advisor, acts as
transfer, dividend disbursing and shareholder servicing agent for the Portfolio.

NOTE C-INVESTMENT ACTIVITY

During the year, purchases and sales of investments, other than short-term
securities, were $27,029,176 and $17,513,139, respectively. Such transactions
are exclusive of the effects of the merger of CRI Equity

The cost of investments owned at December 31, 1996 was substantially the same
for federal income tax and financial reporting purposes. Net unrealized
appreciation aggregated $2,912,509, of which $3,638,769 related to appreciated
securities and $726,260 related to depreciated securities.

Net realized capital loss carryforward, for federal income tax purposes, of
$1,598 at December 31, 1996 may be utilized to offset future capital gains until
expiration in 2004.

- --------------------------------------------------------------------------------
36 - CRI ACCUMULATION CAPITAL PORTFOLIO ANNUAL REPORT
- --------------------------------------------------------------------------------
<PAGE>

CAPITAL ACCUMULATION PORTFOLIO
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING................................ $22.42 $16.97 $18.95
======== ======== ========
Income from investment operations
- ---------------------------------
Net investment income.................................. (.12) (.15) .10
Net realized and unrealized gain (loss)................ 1.79 6.85 (1.98)
-------- -------- --------
Total from investment operations..................... 1.67 6.70 (1.88)
-------- -------- --------
Distributions from
- ------------------
Net investment income.................................. -- (.01) (.10)
Net realized gains..................................... (.04) (1.24) --
-------- -------- --------
Total distributions.................................. (.04) (1.25) (.10)
-------- -------- --------
Total increase (decrease) in net asset value.............. 1.63 5.45 (1.98)
-------- -------- --------
NET ASSET VALUE, ENDING................................... $24.05 $22.42 $16.97
======== ======== ========

Total return.............................................. 7.44% 39.46% (9.92%)
======== ======== ========
Ratios to average net assets:
Net investment income.................................. (.60%) (.84%) .68%
======== ======== ========
Total expenses+ ...................................... 1.33% 1.56% --
======== ======== ========
Net expenses........................................... 1.00% 1.25% .79%
======== ======== ========
Expenses reimbursed.................................... -- .10% --
======== ======== ========
Portfolio turnover**...................................... 124% 135% 79%
======== ======== ========
Average commission rate paid.............................. $.0563 -- --
======== ======== ========
NET ASSETS, ENDING (IN THOUSANDS)......................... $19,904 $8,935 $5,689
======== ======== ========
Number of shares outstanding,
ending (in thousands).................................. 828 398 335
======== ======== ========
</TABLE>

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------
1993 1992
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING............................................ $17.87 $15.82
======== ========
Income from investment operations
- ---------------------------------
Net investment income.............................................. .08 .09
Net realized and unrealized gain (loss)............................ 1.27 2.09
-------- --------
Total from investment operations................................. 1.35 2.18
-------- --------
Distributions from
- ------------------
Net investment income.............................................. (.08) (.09)
Net realized gains................................................. (.19) (.04)
-------- --------
Total distributions.............................................. (.27) (.13)
-------- --------
Total increase (decrease) in net asset value.......................... 1.08 2.05
-------- --------
NET ASSET VALUE, ENDING............................................... $18.95 $17.87
======== ========
Total return.......................................................... 7.56% 13.73%
======== ========
Ratios to average net assets:
Net investment income.............................................. .66% 1.19%
======== ========
Total expenses+ .................................................. -- --
======== ========
Net expenses....................................................... .80% .39%
======== ========
Expenses reimbursed................................................ -- .87%
======== ========
Portfolio turnover.................................................... 26% 2%
======== ========
NET ASSETS, ENDING (IN THOUSANDS)..................................... $4,986 $870
======== ========
Number of shares outstanding,
ending (in thousands).............................................. 263 49
======== ========
</TABLE>

+ Effective December 31, 1995, this ratio reflects total expenses before
reduction for fees paid indirectly: such reductions are included in the
ratio of net expenses.
** Portfolio turnover excludes transactions in connection with the February
1996 merger of CRI Equity Portfolio.

- --------------------------------------------------------------------------------
ANNUAL REPORT CRI CAPITAL ACCUMULATION PORTFOLIO - 37
- --------------------------------------------------------------------------------
<PAGE>

CALVERT RESPONSIBLY INVESTED GLOBAL EQUITY PORTFOLIO

Dear Investor:
Nineteen ninety-six was a good year for the world's stock markets. The U.S.
put in a solid performance, but importantly, other global markets also
contributed strong gains. Top performers included Spain, which benefited from a
rising currency as well as a strong equity market, Hong Kong, which managed to
shrug off the uncertainties of the reversion to Chinese rule in 1997, the U.K.,
the Netherlands and Ireland. The weakest performer was Japan, where the
economy's recovery continued to be dogged by the weakness of the financial
system. In dollar terms, the market ended down 15.4% for the year, which put a
severe drag on performance measures of the global stock market.

CALVERT RESPONSIBLY INVESTED
GLOBAL EQUITY PORTFOLIO
- --------------------------------------------------------------------------------
Comparison of change in value of a hypothetical $10,000 investment.

(Graph appears here)

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
12/31/96 12/31/95 12/31/94 12/31/93 12/31/92 6/30/92

CRI GLOBAL EQUITY $15,800 $13,797 $12,281 $12,548 $9,673 $10,000

MSCI WORLD INDEX $17,492 $15,344 $12,548 $11,979 $9,729 $10,000

</TABLE>

Average Annual Total Return
(period ending 12/31/96)

1 Year 14.99% Life of Fund 10.71% (6/92)
- --------------------------------------------------------------------------------
Performance information is for the Portfolio only and does not
reflect charges and expenses of the variable annuity.
Past performance does not indicate future results.
- --------------------------------------------------------------------------------

PERFORMANCE
The CRI Global Equity Portfolio generated a strongly positive return for
the 12-month period. The Fund's return was in-line with the Morgan Stanley
Capital International World Index (an unmanaged Index of the world's stock
markets).

INVESTMENT STRATEGY
Our strategy for the year was to underweight the U.S. market on the basis
of the maturity of the economic cycle and the potential for a deterioration in
earnings and valuations and to overweight the markets of the Far East,
particularly Hong Kong, where we were optimistic on both valuations and the
colony's ability to steer a steady course through the changeover of sovereignty.
We maintained a market weighting in Europe as a whole, but focused on the
peripheral countries.

- --------------------------------------------------------------------------------
38 - CRI GLOBAL EQUITY PORTFOLIO ANNUAL REPORT
- --------------------------------------------------------------------------------
<PAGE>

During the first quarter, we added to our position in Japan to take
advantage of seasonal market weakness. After the market's 7.2% rise in April, we
began to steadily reduce exposure through the year, switching assets to the core
European markets of Germany and Switzerland. Late in the year, we began to
lessen our commitment to the U.K. We think we experienced the bulk of this
market's advance in 1996, and the U.K. now poses greater political risk, due to
the coming general election.

OUTLOOK
As we enter 1997, we look forward to a period of synchronized growth
through many economies. While the U.S. and the U.K. lead the business cycle and
should be the first to see interest rates raised and growth slow, elsewhere the
expansion is still proceeding and at a moderate and sustainable pace. We
therefore anticipate some switching of assets from the U.S. to the international
markets which have lagged in this cycle.

Sincerely,

/s/ Clifton Sorrell
- ----------------------
Clifton S. Sorrell
President

January 17, 1997

- --------------------------------------------------------------------------------
ANNUAL REPORT CRI GLOBAL EQUITY PORTFOLIO - 39
- --------------------------------------------------------------------------------
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS
==========

To the Board of Directors of Acacia Capital Corporation and Shareholders of
Calvert Responsibly Invested Global Equity Portfolio:

We have audited the accompanying statement of assets and liabilities of
Calvert Responsibly Invested Global Equity Portfolio (one of the portfolios
comprising the Acacia Capital Corporation), including the portfolio of
investments, as of December 31, 1996, and the related statement of operations
for the year then ended, statement of changes in net assets for each of the two
years in the period then ended and financial highlights for each of the three
years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits. The financial highlights for each of the preceding years
were audited by other auditors whose report dated January 31, 1994 expressed an
unqualified opinion thereon.

In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Calvert Responsibly Invested Global Equity Portfolio as of December 31, 1996,
the results of its operations, the changes in its net assets and financial
highlights for the respective periods stated in the first paragraph in
conformity with generally accepted accounting principles.

COOPERS & LYBRAND L.L.P
Baltimore, Maryland
January 31, 1997

- --------------------------------------------------------------------------------
40 - CRI GLOBAL EQUITY PORTFOLIO ANNUAL REPORT
- --------------------------------------------------------------------------------
<PAGE>

GLOBAL EQUITY PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996

<TABLE>
<CAPTION>
Equity Securities - 95.1% Shares Value
- --------------------------------------------------------------------------------
<S> <C> <C>
AUSTRALIA - 4.4%
Australian & New Zealand Bank Group............... 25,000 $157,579
Brambles Industries, Ltd.......................... 10,000 195,136
National Australia Bank........................... 23,000 270,567
---------
623,282
---------

FRANCE - 6.2%
Assur Gen de France............................... 3,105 100,239
Canal Plus........................................ 650 143,568
Pinault Printemps Redoute, S.A.................... 800 317,317
SGS Thomas Micro *................................ 4,300 304,153
---------
865,277
---------
GERMANY - 5.0%
Douglas Holdings.................................. 6,790 266,958
Linde............................................. 350 213,803
Volkswagen........................................ 520 216,272
---------
697,033
---------

HONG KONG - 8.0%
Amoy Properties................................... 100,000 144,159
Cheung Kong Holdings.............................. 20,000 177,775
Hong Kong Land Holdings........................... 100,000 278,000
Hysan Development................................. 55,000 219,019
Hysan Development (warrants)*..................... 2,750 2,489
Sun Hung Kai Properties........................... 25,000 306,258
---------
1,127,700
---------

ITALY - 2.5%
Parmalat Finanz................................... 84,000 128,464
STET.............................................. 19,500 88,695
Telecom Italia Mobile............................. 53,600 135,502
---------
352,661
---------

JAPAN - 15.7%
Canon Sales Co., Inc.............................. 8,800 194,526
Eisai Co.......................................... 11,000 216,562
Fuji Machine Manufacturing........................ 7,000 185,563
Hitachi Zosen Corp................................ 20,000 77,714
Itochu Corp....................................... 28,000 150,384
Keyence Corp...................................... 1,000 123,478
Nikko Securities.................................. 12,000 89,526
Nippon Sanso Corp................................. 40,000 141,266
Nitto Denko Corp.................................. 5,000 73,396
Sanwa Bank........................................ 12,000 163,716
</TABLE>

- --------------------------------------------------------------------------------
ANNUAL REPORT CRI GLOBAL EQUITY PORTFOLIO - 41
- --------------------------------------------------------------------------------
<PAGE>

<TABLE>
<CAPTION>
Equity Securities (Cont'd) Shares Value
- --------------------------------------------------------------------------------
<S> <C> <C>
JAPAN (CONT'D)
Shinmaywa Industries.............................. 18,000 $132,579
Shiseido Co....................................... 17,000 196,702
Sumitomo Electric Industries...................... 13,000 181,850
Takasago Thermal Engineering...................... 12,000 152,318
Tokyo Style Co.................................... 9,000 125,896
---------
2,205,476
---------

MALAYSIA - 3.7%
AMMB Holdings Berhad.............................. 30,000 251,831
Malayan Bank Berhad............................... 24,000 266,086
---------
517,917
---------

MEXICO - 6.3%
Banco Frances Del Rio La Plata, ADR............... 4,600 126,500
Banpais, S.A., ADR *.............................. 10,000 0
Cifra, S.A. de C.V., ADR *........................ 159,000 194,298
Grupo Industrial Durango, S.A., ADR *............. 11,000 116,875
Telefonos de Mexico, S.A., ADR.................... 5,800 191,400
Transportadora de Gas, ADR........................ 21,000 257,250
---------
886,323
---------

NETHERLANDS - 5.7%
Elsevier, N.V.................................... 11,600 196,189
ING Groep, N.V.................................... 8,200 295,418
Vendex International.............................. 1,960 83,895
Ver Ned Uitgevers................................. 10,550 220,594
---------
796,096
---------

NEW ZEALAND - 2.7%
Independent News.................................. 35,000 175,680
Wilson & Horton................................... 25,000 203,252
---------
378,932
---------

SINGAPORE - 3.4%
Keppel Corp....................................... 17,000 132,423
City Developments................................. 20,000 180,090
Straits Steamship Land............................ 50,000 160,080
---------
472,593
---------

SPAIN - 4.9%
Aguas de Barcelona................................ 4,937 205,352
Prosegur Seguridad................................ 15,325 141,652
Telefonica de Esp................................. 8,810 204,600
Vallehermoso, S.A................................. 6,340 137,470
---------
689,074
---------

SWEDEN - 0.3%
Scania AB, Series A............................... 930 23,182
Scania AB, Series B............................... 930 23,250
---------
46,432
---------
</TABLE>

- --------------------------------------------------------------------------------
42 - CRI GLOBAL EQUITY PORTFOLIO ANNUAL REPORT
- --------------------------------------------------------------------------------
<PAGE>

<TABLE>
<CAPTION>
Equity Securities (Cont'd) Shares Value
- --------------------------------------------------------------------------------
<S> <C> <C>
SWITZERLAND - 3.8%
Winterthur........................................ 440 $254,434
Zurich Versicherun................................ 1,000 277,923
---------
532,357
---------

THAILAND - 0.1%
Bangkok Bank...................................... 1,000 9,670
---------
9,670
---------

UNITED KINGDOM - 13.2%
Allied Irish Banks................................ 32,334 217,148
Anglian Water..................................... 10,100 101,744
Argyll Group...................................... 10,000 36,834
Azlan Group....................................... 4,000 38,976
Bellway........................................... 9,300 48,277
Cadbury Schweppes................................. 11,200 94,596
Carlton Communications............................ 11,200 98,165
Commercial Union.................................. 6,700 78,628
Firstbus.......................................... 11,900 41,998
Glynwed International............................. 6,600 37,992
Johnson Matthey................................... 8,400 79,438
Kingfisher........................................ 9,100 98,218
Lloyds TSB Group.................................. 15,700 115,928
Low & Bonar....................................... 7,000 48,809
Marks & Spencer................................... 10,700 90,190
National Westminster.............................. 9,000 105,773
Powerscreen International......................... 4,000 38,718
Safeway........................................... 11,700 80,779
SIG............................................... 9,100 37,572
Smith & Nephew.................................... 32,200 100,125
Smurfit Jefferson................................. 28,810 83,167
Somerfield *...................................... 14,700 41,554
Vitec Group....................................... 3,200 38,924
Wolseley.......................................... 12,800 100,983
---------
1,854,536
---------
UNITED STATES - 9.2%
Brady, (W.H.) Co., Class A........................ 4,900 120,662
Cardinal Health, Inc.............................. 2,250 131,063
Fort Howard Corp. *............................... 4,300 119,056
Great Western Financial Corp...................... 4,000 116,000
Household International, Inc...................... 1,300 119,925
Interim Services, Inc. *.......................... 2,600 92,300
La Quinta Inns, Inc............................... 5,500 105,188
Lear Corp. *...................................... 3,400 116,025
Molex, Inc., Class A.............................. 3,200 114,000
</TABLE>

- --------------------------------------------------------------------------------
ANNUAL REPORT CRI GLOBAL EQUITY PORTFOLIO - 43
- --------------------------------------------------------------------------------
<PAGE>

<TABLE>
<CAPTION>
EQUITY SECURITIES (CONT'D) Shares Value
- --------------------------------------------------------------------------------
<S> <C> <C>
UNITED STATES (CONT'D)
Quorum Health Group, Inc. *......................... 4,000 $119,000
Worldcom, Inc. *.................................... 5,000 130,313
----------
1,283,532
----------

Total Equity Securities (Cost $12,194,881)..... 13,338,891
----------
</TABLE>

<TABLE>
<CAPTION>
PRINICIPAL
TIME DEPOSIT - 4.7% AMOUNT
- --------------------------------------------------------------------------------
<S> <C> <C>
State Street Bank, London, 5.40%, 1/3/97............ $656,470 656,470
-----------

Total Time Deposit (Cost $656,470)............. 656,470
-----------
TOTAL INVESTMENTS (Cost $12,851,351) - 99.8% 13,995,361
Other assets and liabilities, net - 0.2%..... 31,456
-----------
NET ASSETS - 100%............................ $14,026,817
===========
</TABLE>

* Non-income producing.
See notes to financial statements.

- --------------------------------------------------------------------------------
44 - CRI GLOBAL EQUITY PORTFOLIO ANNUAL REPORT
- --------------------------------------------------------------------------------
<PAGE>

GLOBAL EQUITY PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996

<TABLE>
<CAPTION>
ASSETS
- --------------------------------------------------------------------------------
<S> <C>
Investments in securities, at value............................. $13,995,361
Cash............................................................ 19,919
Interest and dividends receivable............................... 28,348
Other assets.................................................... 1,493
-----------
Total assets........................................... 14,045,121
===========
</TABLE>

<TABLE>
<CAPTION>
LIABILITIES
- --------------------------------------------------------------------------------
<S> <C>
Payable to Calvert Asset Management Company, Inc................ 11,683
Payable to Calvert Administrative Services Company.............. 1,167
Accrued expenses and other liabilities.......................... 5,454
-----------
Total liabilities...................................... 18,304
-----------
Net assets.................................... $14,026,817
===========
</TABLE>

<TABLE>
<CAPTION>
NET ASSETS CONSIST OF:
- -------------------------------------------------------------------------------------------------------
<S> <C>
Par value and paid-in capital applicable to 748,445 shares of common................
stock outstanding; $1 par value, 1,000,000 shares authorized...................... $12,775,344
Undistributed net investment income (loss).......................................... 14,340
Accumulated net realized gain (loss) on investments and foreign currencies.......... 92,805
Net unrealized appreciation (depreciation) on investments and assets................ -----------
and liabilities in foreign currencies............................................. 1,144,328
NET ASSETS..................................................................... $14,026,817
===========

NET ASSET VALUE PER SHARE...................................................... $18.74
===========
</TABLE>

- --------------------------------------------------------------------------------
ANNUAL REPORT CRI GLOBAL EQUITY PORTFOLIO - 45
- --------------------------------------------------------------------------------
<PAGE>

GLOBAL EQUITY PORTFOLIO
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
NET INVESTMENT INCOME
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Interest income............................................. $53,884
Dividend income (net of foreign taxes of $20,785)........... 215,762
---------
Total investment income................................ 269,646
=========
Expenses
Investment advisory fee..................................... 122,600
Directors' fees and expenses................................ 1,002
Administrative fees......................................... 40,000
Custodian fees.............................................. 50,124
Reports to shareholders..................................... 4,791
Professional fees........................................... 3,324
Miscellaneous............................................... 638
Reimbursement from Advisor.................................. (27,740)
---------
Total expenses............................................ 194,739
Fees paid indirectly...................................... (50,124)
---------
Net expenses............................................ 144,615
---------
NET INVESTMENT INCOME (LOSS)............................ 125,031
---------
</TABLE>

<TABLE>
<CAPTION>
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
- --------------------------------------------------------------------------------
<S> <C>
Net realized gain (loss) on:
Securities.................................................. 666,540
Foreign currencies.......................................... (23,160)
----------
643,380
----------
Change in unrealized appreciation or depreciation on:
Securities.................................................. 899,012
----------
Assets and liabilities in foreign currencies................ (2,422)
==========
896,590
----------

NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS.............................................. 1,539,970
----------
INCREASE (DECREASE) IN NET ASSETS
RESULTING fROM oPERATIONS................................... $1,665,001
==========
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.

- --------------------------------------------------------------------------------
46 - CRI GLOBAL EQUITY PORTFOLIO ANNUAL REPORT
- --------------------------------------------------------------------------------
<PAGE>

GLOBAL EQUITY PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS

INCREASE (DECREASE) IN NET ASSETS
RESULTING fROM OPERATIONS...................... 1,665,001 1,146,101
------------ ------------
Distributions to shareholders from
Net investment income............................ (100,000) (137,673)
Net realized gain on investments................. (597,000) (249,074)
------------ ------------
Total distributions............................ (697,000) (386,747)
------------ ------------
Capital share transactions
Shares sold................................ 4,709,791 3,017,493
Reinvestment of distributions.............. 697,005 386,745
Shares redeemed............................ (2,178,927) (2,097,365)
------------ ------------
Total capital share transactions............ 3,227,869 1,306,873
------------ ------------

TOTAL INCREASE (DECREASE)
IN NET ASSETS...................................... 4,195,870 2,066,227
</TABLE>

<TABLE>
<CAPTION>
NET ASSETS
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Beginning of year................................... 9,830,947 7,764,720
------------ ------------
End of year (including undistributed
net investment income of $14,340 and
$12,469, respectively)............................ $14,026,817 $9,830,947
============ ============
</TABLE>

<TABLE>
<CAPTION>
CAPITAL SHARE ACTIVITY
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Shares sold......................................... 258,532 186,095
Reinvestment of distributions....................... 37,193 22,551
Shares redeemed..................................... (120,463) (123,999)
------------ ------------
Total capital share activity................ 175,262 84,647
============ ============
</TABLE>

- --------------------------------------------------------------------------------
ANNUAL REPORT CRI GLOBAL EQUITY PORTFOLIO - 47
- --------------------------------------------------------------------------------
<PAGE>

NOTES TO FINANCIAL STATEMENT

NOTE A-SIGNIFICANT ACCOUNTING POLICIES
GENERAL: The Global Equity Portfolio (the "Portfolio"), a series of Acacia
Capital Corporation's Calvert Responsibly Invested (CRI) Portfolios, is
registered under the Investment Company Act of 1940 as a diversified, open-end
management investment company. The operations of each series are accounted for
separately. The shares of the Portfolio are sold to affiliated and unaffiliated
insurance companies for allocation to certain of their variable separate
accounts.

SECURITY VALUATION: Securities listed or traded on a national securities
exchange are valued at the last reported sales price. Foreign security prices,
furnished by quotation services in the security's local currency, are translated
using the current U. S. dollar exchange rate. Unlisted securities and listed
securities for which the last sale price is not available are valued at the most
recent bid price or based on a yield equivalent obtained from the securities'
market maker. Other securities and assets for which market quotations are not
available or deemed inappropriate are valued in good faith under the direction
of the Board of Directors.

SECURITY TRANSACTIONS AND INVESTMENT INCOME: Security transactions are
accounted for on trade date. Realized gains and losses are recorded on an
identified cost basis. Dividend income is recorded on the ex-dividend date or,
in the case of dividends on certain foreign securities, as soon as the Portfolio
is informed of the ex-dividend date. Interest income, accretion of discount and
amortization of premium are recorded on an accrual basis.

FOREIGN CURRENCY TRANSACTIONS: The Portfolio's accounting records are
maintained in U. S. dollars. For valuation of assets and liabilities on each
date of net asset value determination, foreign denominations are translated into
U. S. dollars using the current exchange rate. Security transactions, income and
expenses are converted at the prevailing rate of exchange on the date of the
event. The effect of changes in foreign exchange rates on foreign denominated
securities is included with the net realized and unrealized gain or loss on
securities. Other foreign currency gains or losses are reported separately.

The Fund designates $400,000 as capital gain dividends for taxable year ended
December 31, 1996.

ESTIMATES: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.

- --------------------------------------------------------------------------------
48 - CRI GLOBAL EQUITY PORTFOLIO ANNUAL REPORT
- --------------------------------------------------------------------------------
<PAGE>

FEDERAL INCOME TAXES: No provision for federal income or excise tax is required
since the Portfolio intends to continue to qualify as a regulated investment
company under the Internal Revenue Code and to distribute substantially all of
its earnings.

NOTE B-RELATED PARTY TRANSACTIONS

Calvert Administrative Services Company, an affiliate of the Advisor, provides
administrative services to the Portfolio for an annual fee, payable monthly, of
the greater of $40,000 or .10% of the Portfolio's annual average daily net
assets.

Calvert Shareholder Services, Inc., an affiliate of the Advisor, acts as
transfer, dividend disbursing and shareholder servicing agent for the Portfolio.

NOTE C-INVESTMENT ACTIVITY

During the year, purchases and sales of investments, other than short-term
securities, were $11,960,074 and $9,391,388, respectively.

The cost of investments owned at December 31, 1996 was substantially the same
for federal income tax and financial reporting purposes. Net unrealized
appreciation aggregated $1,144,010, of which $1,978,991 related to appreciated
securities and $834,981 related to depreciated securities.

- --------------------------------------------------------------------------------
ANNUAL REPORT CRI GLOBAL EQUITY PORTFOLIO - 49
- --------------------------------------------------------------------------------
<PAGE>

GLOBAL EQUITY PORTFOLIO
FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING........................ $17.15 $15.89 $17.72
----------- ----------- -----------
Income from investment operations
- ---------------------------------
Net investment income..................... .17 .27 .11
Net realized and unrealized
gain (loss)....................... 2.40 1.69 (.49)
----------- ----------- -----------
Total from investment operations....... 2.57 1.96 (.38)
----------- ----------- -----------
Distributions from
- ------------------
Net investment income........................ (.14) (.25) (.13)
Net realized gains........................... (.84) (.45) (1.32)
----------- ----------- -----------
Total distributions............. (.98) (.70) (1.45)
----------- ----------- -----------
Total increase (decrease) in net asset value...... 1.59 1.26 (1.83)
=========== =========== ===========
NET ASSET VALUE, ENDING........................... $18.74 $17.15 $15.89
=========== =========== ===========

Total return...................................... 14.99% 12.35% (2.13%)
=========== =========== ===========
Ratios to average net assets:
Net investment income........................ 1.02% 1.48% .59%
=========== =========== ===========
Total expenses+ ............................. 1.59% 1.51% --
=========== =========== ===========
Net expenses................................. 1.18% 1.12% 1.24%
=========== =========== ===========
Expenses reimbursed.......................... .23% .39% .29%
=========== =========== ===========
Portfolio turnover................................ 85% 90% 84%
=========== =========== ===========
Average commission rate paid...................... $.0352 -- --
=========== =========== ===========
NET ASSETS, ENDING (IN THOUSANDS)................. $14,027 $9,831 $7,765
=========== =========== ===========
Number of shares outstanding,
ending (in thousands)........................ 748 573 489
----------- ----------- -----------
</TABLE>

<TABLE>
<CAPTION>
PERIODS ENDING DECEMBER 31,
-------------------------------
1993 1992**
- ------------------------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING.................................. $14.57 $15.00
=========== ===========
Income from investment operations
- ---------------------------------
Net investment income.................................... .11 (.02)
Net realized and unrealized gain (loss).................. 6.07 (.41)
----------- -----------
Total from investment operations....................... 4.18 (.43)
----------- -----------
Distributions from
- ------------------
Net investment income.................................... (.08) --
Net realized gains....................................... (.95) --
----------- -----------
Total distributions.................................... (1.03) --
----------- -----------
Total increase (decrease) in net asset value................ 3.15 (.43)
----------- -----------
NET ASSET VALUE, ENDING..................................... $17.72 $14.57
=========== ===========

Total return................................................ 29.72% (3.27%)
Ratios to average net assets:............................... ----------- ----------

Net investment income.................................... 1.00% (.98%)(a)
=========== ===========
Total expenses+ ......................................... -- --
=========== ===========
Net expenses............................................. .94% .98%(a)
=========== ===========
Expenses reimbursed...................................... .10% 1.07%(a)
=========== ===========
Portfolio turnover.......................................... 64% --
=========== ===========
NET ASSETS, ENDING (IN THOUSANDS)........................... $4,529 $236
=========== ===========
Number of shares outstanding,
ending (in thousands).................................... 256 16
=========== ===========
</TABLE>

(a) Annualized
+ Effective December 31, 1995, this ratio reflects total expenses before
reduction for fees paid indirectly;
such reductions are included in the ratio of net expenses:
** From June 30, 1992, inception.

- --------------------------------------------------------------------------------
50 - CRI GLOBAL EQUITY PORTFOLIO ANNUAL REPORT
- --------------------------------------------------------------------------------
<PAGE>

CALVERT RESPONSIBLY INVESTED
BALANCED PORTFOLIO

Dear Investor:

Changing expectations for the strength of the economy and direction of
interest rates made for very volatile financial markets during 1996. Stock
market investors emerged with strong gains; the Standard & Poor's 500 Stock
Index gained almost 23% for the year. The bond market see-sawed, with the yield
on the benchmark 30-year Treasury bond closing the year just three-quarters of a
percent above where it began. While many investors believed the Federal Reserve
would intervene to tighten monetary policy, the Fed took no action after cutting
the federal funds rate by 25 basis points in late January.

CALVERT RESPONSIBLY INVESTED
BALANCED PORTFOLIO
-------------------------------------------------------------------------
Comparison of change in value of a
hypothetical $10,000 investment.

(GRAPH APPEARS HERE)

<TABLE>
<CAPTION>
<S> <C>
$35,000
$30,000
$31,748
$28,672
$25,000
$20,000
$19,456
$17,223

$15,000
$10,000
1/1/87 12/88 12/90 12/92 12/94 12/96
12/87 12/89 12/91 12/93 12/95
</TABLE>

_____ CRI Balanced
_____ S & P 500 Reinv
----- Lehman Aggregate Bd
----- 90-Day T-Bill

Average Annual Total Return
(period ending 12/31/96)

1 Year 12.62% 5 Year 10.45%
10 Year 11.11% Life of Fund 10.41% (9/86)*
-------------------------------------------------------------------------

New sub-advisors assumed management of the
Portfolio effective February 1995.

Performance information is for the Portfolio only and does not
reflect charges and expenses of the variable annuity.
Past performance does not indicate future results.
-------------------------------------------------------------------------

FUND PERFORMANCE AND STRATEGY

We maintained the Portfolio's target asset allocation of roughly 60%
equities and 40% fixed-income securities throughout 1996. Equity holdings were
the strongest contributors to the Fund's return, which is not surprising given
the strength of the stock market.

EQUITY INVESTMENTS--NCM CAPITAL MANAGEMENT

We continued to focus on companies in the technology and financial services
industries. The financial services group turned in good gains as profits were
strong due to continued low interest rates. Some of our technology holdings--
semiconductors, chips and equipment--were hurt by unfavorable supply and demand
conditions, but our technology position as a whole was positive for performance
for the year due to strong gains from EMC Corp and BMC Software.

- --------------------------------------------------------------------------------
ANNUAL REPORT CRI BALANCED PORTFOLIO - 51
- --------------------------------------------------------------------------------

<PAGE>

Consumer staples companies (food, drugs and personal care items) also did
well as investors moved to these more defensive stocks. While we did not have a
large commitment to the consumer staples group, our holdings of Gillette and
Hershey contributed good gains. Energy services companies also advanced as
improved supply and demand conditions boosted profit potential. In this group,
Smith International was a strong performer.

The Portfolio invests a small portion of assets (slightly less than 3% at
year-end) in foreign securities. For this period, our holdings of Umbono
Investment Corp., a South African company, were hurt by the continued
devaluation of the currency. We are optimistic that bulk of the currency decline
has passed, and we maintain a favourable opinion of this stock's investment
potential. We are also pleased to have an opportunity to participate in Africa's
economic growth.

FIXED-INCOME INVESTMENTS--CALVERT ASSET MANAGEMENT COMPANY

We kept the Portfolio's interest rate sensitivity in line with our
benchmark. The bond market was very volatile throughout 1996, and we did not
believe it was prudent to take a decidedly conservative or aggressive stance
until a clearer picture emerged regarding the strength of the economy. The
Portfolio's weighted average maturity was 13 years at the end of 1996, compared
to 14 years at the end of 1995.

OUTLOOK

The markets will likely continue to exhibit a high degree of volatility.
Stocks' extended valuations and uncertainty about whether companies can meet
earnings estimates could dampen investors "exuberance." We expect the return on
stocks for 1997 will come closer to historical averages than the exceptional
returns of 1995 and 1996. The bond market is likely to remain skittish, at least
for the first half of the year, as investors still struggle to reconcile low
inflation numbers with strong labor reports. The Portfolio's blend of stocks and
bonds should help to smooth the ups and downs of specific markets, sectors and
securities.

We appreciate your investment.

Sincerely,

/s/ Clifton S. Sorrell
Clifton S. Sorrel
president

January 17, 1997

- --------------------------------------------------------------------------------
52 - CRI BALANCED PORTFOLIO ANNUAL REPORT
- --------------------------------------------------------------------------------
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS
==========

To the Board of Directors of Acacia Capital Corporation and Shareholders of
Calvert Responsibly Invested Balanced Portfolio:

We have audited the accompanying statement of assets and liabilities of
Calvert Responsibly Invested Balanced Portfolio (one of the portfolios
comprising the Acacia Capital Corporation), including the portfolio of
investments, as of December 31, 1996, and the related statement of operations
for the year then ended, statement of changes in net assets for each of the two
years in the period then ended and financial highlights for each of the three
years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits. The financial highlights for each of the preceding years
were audited by other auditors whose report dated January 31, 1994 expressed an
unqualified opinion thereon.

In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Calvert Responsibly Invested Balanced Portfolio as of December 31, 1996, the
results of its operations, the changes in its net assets and financial
highlights for the respective periods stated in the first paragraph in
conformity with generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.

Baltimore, Maryland
January 31, 1997

- --------------------------------------------------------------------------------
ANNUAL REPORT CRI BALANCED PORTFOLIO - 53
- --------------------------------------------------------------------------------
<PAGE>

<TABLE>
<CAPTION>
BALANCED PORTFOLIO
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996

EQUITY SECURITIES -57.1% SHARES VALUE
- ---------------------------------------------------------------------------
<S> <C> <C>
AIRLINES - 0.6%
Comair Holdings, Inc. ............................ 41,000 $ 993,600
----------
993,600
----------

BIOTECHNOLOGY - 1.0%
Amgen, Inc. * .................................... 29,560 1,607,325
-----------
1,607,325
-----------

BUILDING MATERIALS AND CONSTRUCTION - 0.6%
Oakwood Homes Corp. .............................. 43,700 999,637
-----------
999,637
-----------

BUSINESS EQUIPMENT AND SERVICES - 1.2%
Hewlett Packard Co. .............................. 22,300 1,120,575
Sun Microsystems, Inc. * ......................... 29,640 76,377
-----------
1,881,952
-----------

COMMUNICATIONS - 2.0%
Ameritech Corp. .................................. 30,595 1,854,822
U.S. Robotics Corp. * ............................ 20,200 1,454,400
-----------
3,309,222
-----------

COMPUTER - HARDWARE * 1.9%
Compaq Computer Corp. * .......................... 23,400 1,737,450
International Business Machines .................. 9,300 1,404,400
-----------
3,141,750
-----------

COMPUTER - NETWORKS - 2.4%
3Com Corp. * ..................................... 24,400 1,790,350
Cisco Systems, Inc. * ............................ 31,800 2,023,275
-----------
3,813,625
-----------

COMPUTER - SOFTWARE - 4.0%
BMC Software, Inc. * ............................. 17,500 724,063
Computer Associates International Inc. ........... 38,577 1,919,206
Microsoft Corp. * ................................ 20,820 1,720,253
Oracle Corp. * ................................... 48,757 2,035,605
-----------
6,399,127
-----------

CONSUMER PRODUCTS AND SERVICES - 4.9%
Avon Products, Inc. .............................. 28,400 1,622,350
Colgate Palmolive Co. ............................ 27,400 2,527,650
CUC International, Inc. * ........................ 55,450 1,316,937
Gillette Co. ..................................... 32,100 2,495,775
-----------
7,962,712
-----------
</TABLE>

- --------------------------------------------------------------------------------
54 - CRI BALANCED PORTFOLIO ANNUAL REPORT
- --------------------------------------------------------------------------------

<PAGE>

<TABLE>
<CAPTION>
EQUITY SECURITIES (CONT'D) SHARES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
DELIVERY - 0.7%
Federal Express Corp. * .................... 23,800 $ 1,059,100
------------
1,059,100

ELECTRONICS - 2.8%
Arrow Electronics, Inc. * .................. 14,200 759,700
Atmel Corp. * .............................. 26,800 887,750
EMC Corp. * ................................ 38,450 1,273,656
Intel Corp. ................................ 11,700 1,531,969
------------
4,453,075
------------

ENTERTAINMENT - 1.3%
Regal Cinemas, Inc. * ...................... 34,200 1,051,650
Walt Disney Co. ............................ 15,005 1,044,723
------------
2,096,373
------------

FINANCIAL SERVICES - 9.4%
Banc One Corp. ............................. 21,700 933,100
Bank New York, Inc. ........................ 29,000 978,750
Bank of Boston Corp. ....................... 19,315 1,240,989
BankAmerica Corp. .......................... 23,200 2,314,200
Chase Manhattan Corp. ...................... 20,300 1,811,775
Federal National Mortgage Assn. ............ 42,700 1,590,575
Green Tree Financial Corp. ................. 48,530 1,874,471
SunAmerica, Inc. ........................... 39,300 1,743,937
Umbono Investment Corp., Ltd. * ............ 1,156,540 2,719,235
------------
15,207,032
------------

FOOD PRODUCTS - 3.0%
CPC International, Inc. .................... 32,300 2,503,250
Hershey Foods Corp. ........................ 31,200 1,365,000
McCormick & Co., Inc. ...................... 41,900 987,269
------------
4,855,519
------------

HEALTH CARE - 2.4%
Cardinal Health, Inc. ...................... 25,000 1,485,375
Johnson & Johnson .......................... 46,500 2,313,375
------------
3,798,750
------------

INDUSTRIAL PRODUCTS - 0.9%
Praxair, Inc. .............................. 31,200 1,439,100
------------
1,439,100
------------

INSURANCE - 3.1%
AFLAC, Inc. ................................ 39,050 1,669,387
American International Group, Inc. ......... 20,350 2,202,887
MGIC Investment Corp. ...................... 15,500 1,178,800
------------
5,050,274
------------
</TABLE>

- --------------------------------------------------------------------------------
ANNAUL REPORT CRI BALANCED PORTFOLIO - 55
- --------------------------------------------------------------------------------
<PAGE>

<TABLE>
<CAPTION>
EQUITY SECURITIES (CONT'D) SHARES VALUE
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
MANUFACTURING - 0.9%
Dover Corp. .................................................. 29,945 $ 1,504,736
-----------
1,504,736
-----------

MEDICAL - 2.6%
Boston Scientific Corp. * ..................................... 17,185 1,031,100
Guidant Corp. ................................................ 26,900 1,533,300
Medrronic, Inc. .............................................. 23,900 1,625,200
-----------
4,189,600
-----------

OFFICE EQUIPMENT AND SUPPLIES - 1.6%
Officemax, Inc. * ............................................ 104,800 1,113,500
Viking Office Products, Inc. * ............................... 55,000 1,467,813
-----------
2,581,313
-----------

OIL AND GAS - 0.6%
Seitel, Inc. * ............................................... 24,100 964,000
-----------
964,000
-----------

PAPER AND PACKAGING - 1.6%
Avery Dennison Corp. ......................................... 43,100 1,524,663
Sealed Air Corp. * ........................................... 24,800 1,032,300
-----------
2,556,963
-----------

PHARMACEUTICAL - 1.4%
Merck & Co., Inc. ............................................ 28,800 2,282,400
-----------
2,282,400
-----------

RETAIL - 2.6%
Barnes & Noble, Inc. * ....................................... 41,600 1,123,200
Consolidated Stores Corp. * .................................. 32,313 1,038,039
Jones Apparel Group, Inc. * .................................. 30,600 1,143,675
Penney (J.C.). Inc. .......................................... 18,000 877,500
-----------
4,182,414
-----------

TELECOMMUNICATIONS - 3.6%
360 Communications Co. * ..................................... 58,500 1,352,813
Century Telephone Enterprises, Inc. .......................... 47,465 1,465,482
Ericsson (L.M.) Telephone, Co., Class B, ADR ................. 51,405 1,551,788
SBC Communications, Inc. ..................................... 27,400 1,417,950
-----------
5,788,033
-----------

Total Equity Securities (Costs $77,958,662) .............. 92,117,632
-----------
</TABLE>

<TABLE>
<CAPTION>
PRINCIPAL
MORTGAGE BACKED SECURITIES - 10.8% AMOUNT
- -----------------------------------------------------------------------------------------------
<S> <C>
Advanta Corp., 5.50%, 3/25/10 ................................ $1,729,639 1,646,941
Federal Home Loan Mortgage Corp., 5.125%, 8/15/06 ............ 1,790,349 1,752,035
Federal Home Loan Mortgage Corp., 5.50%, 5/1/11 .............. 3,656,123 3,440,883
Federal Home Loan Mortgage Corp., 6.00%, 12/15/19 ............ 1,000,000 971,310
Federal Home Loan Mortgage Corp., 6.50%, 8/15/21 ............. 1,000,000 991,730
</TABLE>

- --------------------------------------------------------------------------------
56 - CRI BALANCED PORTFOLIO ANNUAL REPORT
- --------------------------------------------------------------------------------

<PAGE>

<TABLE>
<CAPTION>
PRINCIPAL
MORTGAGE BACKED SECURITIES (CONT'D) AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Federal National Mortgage Assn., 6.00%, 3/1/06 .................. $ 2,498,439 $ 2,430,878
Federal National Mortgage Assn., 6.30%, 12/25/23 ................ 1,000,000 960,480
Federal National Mortgage Assn., 7.00%, 8/1/25 .................. 943,971 923,789
Government National Mortgage Assn., 6.50%, 12/15/23 ............. 1,511,000 1,258,560
Vendee Mortgage Trust, 6.75%, 9/13/09 ........................... 1,163,000 1,164,772
Vendee Mortgage Trust, 8.00%, 7/15/18 ........................... 1,000,000 1,043,220
Vendee Mortgage Trust, 6.75%, 4/15/22 ........................... 1,000,000 916,160
-----------

Total Mortgage Backed Securities (Cost $17,448,342) ........ 17,500,758
-----------

MUNICIPAL OBLIGATIONS - 9.0%
- --------------------------------------------------------------------------------------------------------
Illinois Housing Development Authority, 8.35%, 8/1/26 ........... 1,130,000 1,163,222
La Miranda, California Industrial Development Authority VRDN,
5.70%, 12/1/26, LOC: First National Bank of Chicago** ......... 7,500,000 7,500,000
Maryland State Economic Development Corp., 8.00%, 10/1/05 ....... 1,000,000 1,004,790
Maryland State Economic Development Corp., 8.625%, 10/1/19 ...... 750,000 767,468
Miami Beach, Florida Redevelopment Agency, 8.80%, 12/1/15 ....... 2,585,000 2,750,182
Texas State, College Student Loan, 7.35%, 12/1/21 ............... 600,000 588,534
Virginia State Housing Development Authority, 7.55% 7/1/11 ...... 740,000 753,313
-----------

Total Municipal Obligations (Cost, $14,306,777) ............ 14,527,509
-----------

CORPORATE OBLIGATIONS - 8.4%
- --------------------------------------------------------------------------------------------------------
Albersons, Inc. 6.18%, 3/22/00 .................................. 25,000 24,925
AMR Corp., 9.82%, 3/7/01 ........................................ 25,000 27,525
BellSouth Savings, 9.19%, 7/1/03 ................................ 366,807 401,537
Continental Valorem Corp. VRDN, 6.45%, 6/1/13,
LOC: Tokai Bank Ltd.** ........................................ 700,000 700,000
Dayton Hudson Corp., 9.00%, 10/1/21 ............................. 60,000 67,762
Dean Wirrer Discover & Co., 6.30%, 1/15/06 ...................... 1,000,000 946,040
Discover Card Master Trust, 6.03%, 8/18/08 ...................... 1,500,000 1,420,395
First Union Corp., 6.55%, 10/15/35 .............................. 1,000,000 972,620
International Business Machines, 7.00%, 10/30/25 ................ 2,000,000 1,907,420
MedPartners, Inc., 7.375%, 10/1/06 .............................. 2,000,000 2,007,260
Puger Power Consv., 6.45%, 4/11/05 .............................. 1,596,737 1,594,834
SunAmerica, Inc., 8.125%, 4/28/23 ............................... 2,000,000 2,102,140
United Dominion Realty Trust, Inc., 8.50%, 9/15/24 .............. 1,200,000 1,318,056
-----------

Total Corporate Obligations (Cost $13,439,121) ............. 13,490,514
-----------

U.S. GOVERNMENT AND
INSTRUMENTALITIES - 7.5%
- --------------------------------------------------------------------------------------------------------
Federal Farm Credit Bank, 6.75%, 5/14/99 ........................ 3,000,000 3,014,340
Federal Home Loan Mortgage Corp., 6.80%, 5/14/99 ................ 2,000,000 2,009,920
Federal National Mortgage Assn., 5.49%, 10/2/03 ................. 1,075,000 1,015,950
Financing Corp., 9.80%, 11/30/17 ................................ 50,000 64,808
</TABLE>

- --------------------------------------------------------------------------------
ANNUAL REPORT CRI BALANCED PORTFOLIO - 57
- --------------------------------------------------------------------------------
<PAGE>

<TABLE>
<CAPTION>
U.S. GOVERNMENT AND PRINCIPAL
INSTRUMENTALITIES (CONT'D) AMOUNT VALUE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Financing Corp., 9.80%, 4/6/18................................... $50,000 $64,964
Resolution Funding Corp., 8.625%, 1/15/21........................ 1,000,000 1,202,720
Silver Spring Metro Center, 6.875%, 5/15/13...................... 50,000 46,993
Small Business Administration, 8.05%, 6/1/12..................... 786,268 808,473
Small Business Administration, 7.70%, 7/1/16..................... 3,000,000 3,099,450
WNH Ltd. Partnership, 9.40%, 10/1/99............................. 705,000 747,258
---------------

Total U.S. Government Agencies and Instrumentalities
(Cost $11,950,760).......................................... 12,074,876
---------------

U.S. TREASURY - 6.0%
- -----------------------------------------------------------------------------------------------------
U.S. Treasury Bonds, 6.875%, 8/15/25............................. 1,500,000 1,528,785
U.S. Treasury Notes, 5.875%, 11/15/05............................ 1,000,000 964,090
U.S. Treasury Notes, 5.625%, 2/15/06............................. 1,000,000 945,770
U.S. Treasury Notes, 7.00%, 7/15/06.............................. 6,000,000 6,232,860
----------------

Total U.S. Treasury (Cost $9,701,626)....................... 9,671,505
----------------
OTHER DEBT - 0.6%
- -----------------------------------------------------------------------------------------------------
Chicksaw Nation, Oklahoma, 10.00%, 8/1/03........................ 1,000,000 1,033,240
South Africa Rep., 9.625%, 12/15/99.............................. 15,000 15,956
----------------

Total Other Debt (Cost $1,014,785).......................... 1,049,196
----------------

TOTAL INVESTMENTS (Cost $145,820,073) - 99,4%.......... 160,431,990
Other assets and liabilities, net - 0.6%............... 1,041,004
----------------
NET ASSETS - 100%...................................... $161,472,994
================
</TABLE>

* Non-income producing.
** Optional tender features give these securities a shorter effective maturity
date.
Explanation of Guarantees:
LOC: Letter of Credit
Abbreviations:
VRDN: Variable Rate Demand Notes
See notes to financial statements.

- --------------------------------------------------------------------------------
S8 - CRI BALANCED PORTFOLIO ANNUAL REPORT
- --------------------------------------------------------------------------------
<PAGE>

BALANCED PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996

<TABLE>
<S> <C>
ASSETS
- --------------------------------------------------------------------------------------
Investments in securities, at value................................ $160,431,990
Cash............................................................... 447,742
Receivable for securities sold..................................... 373,591
Interest and dividends receivable.................................. 1,098,455
Other assets....................................................... 14,446
------------
Total assets.................................................. 162,366,224
------------

LIABILITIES
- -------------------------------------------------------------------------------------
Payable for securities purchased................................... 764,856
Payable to Calvert Asset Management Company, Inc................... 101,314
Accrued expenses and other liabilities............................. 27,060
------------
Total liabilities............................................. 893,230
------------
Net assets............................................... $161,472,994
============

NET ASSETS CONSIST OF:
- --------------------------------------------------------------------------------------
Par value and paid-in capital applicable to 91,045,481
shares of common stock outstanding: $1 par value,
92,000,000 shares authorized.................................. $145,095,219
Undistributed net investment income (loss)......................... 380,193
Accumulated net realized gains (losses) on investments
and foreign currencies........................................ 1,385,665
Net unrealized appreciation (depreciation) on investments
and assets and liabilities in foreign currencies.............. 14,611,917
------------
NET ASSETS............................................... $161,472,994
============

NET ASSET VALUE PER SHARE................................ $1,774
============
</TABLE>

See notes to financial statements.

- --------------------------------------------------------------------------------
ANNUAL REPORT CRI BALANCED PORTFOLIO - 59
- --------------------------------------------------------------------------------
<PAGE>

BALANCED PORTFOLIO
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
NET INVESTMENT INCOME
- ---------------------------------------------------------------------------------
<S> <C>
Investment Income
Interest income.................................................... $3,929,028
Dividend income (net of foreign taxes of $11,929)................... 767,242
Total investment income.......................................... ----------
4,696,270
----------

Expenses
Investment advisory fee............................................ 963,829
Directors' fees and expenses....................................... 11,108
Custodian fees..................................................... 47,112
Reports to shareholders............................................ 6,172
Professional fees.................................................. 57,536
Miscellaneous...................................................... 7,972
----------
Total expenses.................................................. 1,093,729
Fees paid indirectly............................................ (47,112)
Net expenses................................................. ----------
1,046,617
----------
NET INVESTMENT INCOME..................................... 3,649,653
----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
- ---------------------------------------------------------------------------------
Net realized gain (loss) on:
Securities......................................................... 9,074,404
Foreign currencies................................................. (16,554)
----------
9,057,850
----------

Change in unrealized appreciation or depreciaiton on:
Securities......................................................... 3,628,653
Assets and liabilities in foreign currencies....................... 24
----------
3,628,677
----------

NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS................................................... 12,686,527
----------

INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS........................................ $16,336,180
===========
</TABLE>

See notes to financial statements.

- --------------------------------------------------------------------------------
60 - CRI BALANCED PORTFOLIO ANNUAL REPORT
- --------------------------------------------------------------------------------

<PAGE>

BALANCED PORTFOLIO
STATEMENTS OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER
INCREASE (DECREASE) IN NET ASSETS 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S>
Operations............................................................ <C> <C>
Net investment income............................................... $3,649,653 $2,688,213
Net realized gain (loss)............................................ 9,057,850 9,131,406
Change in unrealized appreciation or depreciation................... 3,628,677 10,212,473
------------- -------------

INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS........................................ 16,336,180 22,032,092
------------- -------------

Distributions to shareholders from
Net investment income............................................... (3,502,338) (2,379,651)
Net realized gain on investments.................................... (8,620,000) (7,467,802)
------------- -------------
Total distributions.............................................. (12,122,338) (9,847,453)
------------- -------------

Capital share transactions
Shares sold......................................................... 38,725,037 27,827,854
Shares issued from merger (Note A).................................. 3,670,827 --
Reinvestment of distributions....................................... 12,122,338 9,847,453
Shares redeemed..................................................... (7,496,263) (6,215,413)
------------- -------------
Total capital share transactions................................. 47,021,939 31,459,894
------------- -------------

TOTAL INCREASE (DECREASE)
IN NET ASSETS......................................................... 51,235,781 43,644,533

NET ASSETS
- ---------------------------------------------------------------------------------------------------------------
Beginning of year..................................................... 110,237,213 66,592,680
------------- -------------
End of year (including undistributed net investment
income of $380,193 and $270,941, respectively)................... $161,472,994 $110,237,213
============= =============

CAPITAL SHARE ACTIVITY
- ---------------------------------------------------------------------------------------------------------------
Shares sold........................................................... 21,664,978 16,449,557
Shares issued from merger (Note A).................................... 2,061,104 --
Reinvestment of distributions......................................... 6,833,336 5,782,412
Shares redeemed....................................................... (4,241,957) (3,747,516)
------------ ------------
Total capital share activity..................................... 26,317,461 18,484,453
============ ============
</TABLE>

See notes to financial statements.

- --------------------------------------------------------------------------------
ANNUAL REPORT CRI BALANCED PORTFOLIO - 61
- --------------------------------------------------------------------------------
<PAGE>

NOTES TO FINANCIAL STATEMENTS

NOTE A--SIGNIFICANT ACCOUNTING POLICIES

GENERAL: The Balanced Portfolio (the "Portfolio"), a series of Acacia Capital
Corporation's Calverr Responsibly Invested (CRI) Portofolios, is registered
under the Investment Company Act of 1940 as a non-diversified, open-end
management investment company. The operations of each series are accounted for
separately. The shares of the Portfolio are sold to affiliated and
unaffiliated insurance companies for allocation to certain of their variable
separate accounts.

On February 23, 1996, the net assets of CRI Bond Portfolio were merged into the
Portfolio. The acquisition was accomplished by a tax free exchange of 2,061,104
shares of the Portfolio (valued at $3,670,827) for the 230,738 shares of CRI
Bond Portfolio outstanding at February 23, 1996. CRI Bond Portfolio's net
assets at that date, including $1,419 of unrealized appreciation, were combined
with those of the Portfolio. The aggregate net assets of the Portfolio and CRI
Bond Portfolio immediately before the acquisition were $121,161,865 and
$3,670,445, respectively.

SECURITY VALUATION: Securities listed or traded on a national securities
exchange are valued at the last reported sale price. Foreign security prices,
furnished by quotation services in the security's local currency, are translated
using the current U.S. dollar exchange rate. Unlisted securities and listed
securities for which the last sale price is not available are valued at the most
recent bid price or based on a yield equivalent obtained from the securities'
market maker. Municipal securities are valued utilizing the average of bid
prices or at bid prices based on a matrix system (which considers such factors
as security prices, yields, maturities and ratings) furnished by dealers through
an independent pricing service. Other securities and assets for which market
quotations are not available or deemed inappropriate are valued in good faith
under the direction of the Board of Directors.

REPURCHASE AGREEMENTS: The Portfolio may enter into repurchase agreements with
recognized financial institutions or registered broker/dealers and, in all
instances, holds underlying securities with a value exceeding the total
repurchase price, including accrued interest.

SECURITY TRANSACTIONS AND INVESTMENT INCOME: Security transactions are accounted
for on trade date. Realized gains and losses are recorded on an identified cost
basis. Dividend income is recorded on the ex-dividend date or, in the case of
dividends on certain foreign securities, as soon as the Portfolio is informed of
the ex-dividend date. Interest income, accretion of discount and amortization of
premium are recorded on an accrual basis.

FOREIGN CURRENCY TRANSACTIONS: The Portfolio's accounting records are maintained
in U.S. dollars. For valuation of assets and liabilities on each date of net
asset value determination, foreign denominations are translated into U.S.
dollars using the current exchange rate. Security transactions, income and
expenses are converted at the prevailing rate of exchange on the date of the
event. The effect of changes in foreign exchanges rates on foreign denominated
securities is included with the net realized and unrealized gain or loss on
securities. Other foreign currency gains or losses are reported separately.

DISTRIBUTIONS TO SHAREHOLDERS: Distributions to shareholders are recorded by the
Portfolio on ex-dividend date. Dividends from net investment income and
distributions from net realized capital gains, if any, are paid at least
annually. Distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles, accordingly,
periodic

- --------------------------------------------------------------------------------
62 - CRI BALANCED PORTFOLIO ANNUAL REPORT
- --------------------------------------------------------------------------------
<PAGE>

reclassifications are made within the Portfolio's capital accounts to reflect
income and gains available for distribution under income tax regulations.

The Fund designates $6,500,000 as capital gain dividends for taxable year ended
December 31, 1996.

ESTIMATES: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.

EXPENSE OFFSET ARRANGEMENTS: The Portfolio has an arrangement with its custodian
bank whereby the custodian's fees are paid indirectly by credits earned on the
Portfolio's cash on deposit with the bank. Such deposit arrangement is an
alternative to overnight investments.

FEDERAL INCOME TAXES: No provision for federal income or excise tax is required
since the Portfolio intends to continue to qualify as a regulated investment
company under the Internal Revenue Code and to distribute substantially all of
its earnings.

NOTE B--RELATED PARTY TRANSACTIONS

Calvert Asset Management Company, Inc. (the "Advisor") is wholly-owned by
Calvert Group, Ltd. ("Calvert"), which is indirectly wholly-owned by Acacia
Mutual Life Insurance Company. The Advisor provides investment advisory services
and pays the salaries and fees of officers and affiliated Directors of the
Portfolio. For its services, the Advisor receives a monthly fee based on an
annual rate of .70% of the Portfolio's average daily net assets. Effective July,
1996, the Portfolio began paying a monthly performance fee of plus or minus up
to .15%, on an annual basis, of average daily net assets of the performance
period depending on the Portfolio's performance compared to the Lipper Balanced
Funds Index.

Calvert Shareholder Services, Inc. an affiliate of the Advisor, acts as
transfer, dividend disbursing and shareholder servicing agent for the Portfolio.

NOTE C--INVESTMENT ACTIVITY

During the year, purchases and sales of investments, other than short-term
securities, were $161,454,850 and $121,803,926, respectively. U.S. government
security purchases were $56,865,794 and sales were $37,342,926. Such
transactions are exclusive of the effects of the merger of CRI Bond.

The cost of investments owned at December 31, 1996 was substantially the same
for federal income tax purposes and financial reporting purposes. Net unrealized
appreciation aggregated $14,611,917, of which $16,800,589 related to appreciated
securities and $2,188,672 related to depreciated securities.

As a cash management practice, the Portfolio may sell or purchase short-term
variable rate notes from other Portfolios managed by the Advisor. All
transactions are executed at independently derived prices.

- --------------------------------------------------------------------------------
ANNUAL REPORT CRI BALANCED PORTFOLIO - 63
- --------------------------------------------------------------------------------
<PAGE>

DREYFUS VARIABLE INVESTMENT FUND, QUALITY BOND PORTFOLIO
- ----------------------------------------------------------------------
LETTER TO SHAREHOLDERS

Dear Shareholder:

We are pleased to provide you with this report on Dreyfus Variable Investment
Fund--Quality Bond Portfolio. For its annual reporting period ended December 31,
1996, your Portfolio produced a total return of 3.13% per share, based upon net
asset value,* compared to 3.58% for the Merrill Lynch Domestic Master Index
(Subindex D010).** Income dividends of $.657 per share were declared during the
period, which is equivalent to an annualized distribution rate per share of
5.70%.***

THE ECONOMY

Over the reporting period, the economy has grown moderately, showing little
evidence of accelerating inflation despite the robust pace of new job creation
and the low unemployment rate. It was fear of accelerating inflation that
prompted a sharp rise in long-term interest rates earlier in the year: however,
by year-end, long-term rates had fallen by one half of one percent (50 basis
points) from last summer's peak. Contributing to the drop in rates was the
decision of the Open Market Committee of the Federal Reserve Board (the "Fed")
to leave short-term interest rates unchanged.

Inflation at the consumer level of the economy remains in the 3% range, which
has been accompanied by a comparably benign inflation picture at the production
level of the economy as well. The so-called "core" Producer Price Index (it
excludes the energy and food components because of their volatility) rose just
0.1% in November and a mere 0.6% for the previous 12 months. Producers appeared
to have little ability to pass on price increases to their customers, a reason
cited by the Fed as evidence of the lack of rising price inflation.

Despite the sanguine price environment, consumers remained wary spenders and
modest borrowers, and retail sales growth has been moderate. Nevertheless, the
renewed decline in mortgage rates spurred the housing market: existing home
sales in November increased for the first time in six months. New housing starts
also rose sharply, with the November increase the largest monthly rise since
July 1995. Job growth still appears to have underlying strength: monthly
increases in workers added to payrolls could also move higher. The recent
unemployment rate rose slightly, but still remained near a seven-year low.

Lending optimism to the prospect for continued economic growth was the report
from The Conference Board--a private research group--that its Index of Leading
Economic Indicators rose for the tenth consecutive month in November. An
increase in this index generally correlates with economic expansion over the
next three to twelve months. Manufacturing remained firm all year: both factory
orders and industrial production rose moderately. Despite this overall strength
in production, there were some signs of moderation at year-end. Inventories have
built up and orders for durable goods--those items intended to last three or
more years--declined.

Last year, high employment, low inflation and moderate economic growth
stayed the Fed's hand from raising interest rates. The economy is now in
the sixth year of this business cycle and we remain alert to signs of the
potential rekindling of inflationary pressures.

MARKET ENVIRONMENT

The interest rate environment over the past year was quite volatile.
Alternating signs of economic strength and weakness have caused interest rates
to rise and fall throughout the year. We began 1996 with ten-year Treasury
yields at 5.60%. As fears of economic growth and inflation gripped the market,
yields rose to over 7.00% during the summer

<PAGE>

months. Slowing economic growth and continued benign inflation helped ten-year
rates to later dip below 6.10% and finish the year at 6.40%. Despite this
interest rate volatility, yield spreads over Treasuries of both corporate and
mortgage backed securities narrowed throughout the year through October. In
November and December, spreads widened as a large supply of long term bank and
insurance debt and commercial mortgage backed debt was underwritten in a short
period of time.

THE PORTFOLIO

The Portfolio has generally been well positioned for this market environment
as a more defensive, shorter duration posture was adopted during the rising rate
environment early in the year. Additionally, the Portfolio was overweighted in
corporates and mortgages up until the end of October. In October and November we
sold a large portion of the corporate and agency mortgage positions to prepare
for the anticipated large supply of new issues. The Portfolio subsequently
benefited from corporate and mortgage backed purchases in November and December
as spreads on these securities narrowed late in the year. We have added numerous
names in the Bank sector including First Union, Barnett Banks, PNC, Bank of
Boston and Bank of New York. Additionally, we have added exposure to commercial
mortgage backed securities in the Portfolio . These securities generally offer
better prepayment protection than residential mortgage backed securities and
wider spreads than comparably rated corporate bonds. The steadily improving
commercial real estate market should help benefit these securities.

Included in this report is a series of detailed statements about your
Portfolio's holdings and its financial condition. We hope they are informative.
Please know that we greatly appreciate your continued confidence in the
Portfolio and The Dreyfus Corporation.

Very truly yours,

/s/ Garitt A. Kono

Garitt A. Kono
Portfolio Manager

/s/ Kevin McClintock

Kevin McClintock
Portfolio Manager

January 15, 1997
New York, N.Y.

* Total return includes reinvestment of dividends and any capital gains paid.
The Portfolio's performance does not reflect the deduction of additional
charges imposed in connection with investing in variable annuity contracts
and variable life insurance policies.
** The Merrill Lynch Domestic Master Index is an unmanaged performance
benchmark for portfolios that include U.S. Government, mortgage and
BBB or higher-rated corporate securities with maturities greater than or
equal to one year.
*** Distribution rate per share is based upon dividends per share declared
from net investment income during the period, divided by the net asset
value per share at the end of the period.
<PAGE>

DREYFUS VARIABLE INVESTMENT FUND, QUALITY BOND PORTFOLIO DECEMBER 31, 1996
- --------------------------------------------------------------------------------

[GRAPH APPEARS HERE]

*Source: Merrill Lynch, Pierce, Fenner and Smith Inc.

AVERAGE ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
One Year Ended Five Years Ended From Inception (8/31/90)
December 31, 1996 December 31, 1996 to December 31, 1996
- ----------------- ----------------- -----------------------
<S> <C> <C>
3.13% 8.90% 9.63%
</TABLE>

______________________
Past performance is not predictive of future performance.

THE PORTFOLIO'S PERFORMANCE DOES NOT REFLECT THE DEDUCTION OF ADDITIONAL CHARGES
IMPOSED IN CONNECTION WITH INVESTING IN VARIABLE ANNUITY CONTRACTS AND VARIABLE
LIFE INSURANCE POLICIES.

The above graph compares a $10,000 investment made in Dreyfus Variable
Investment Fund, Quality Bond Portfolio on 8/31/90 (Inception Date) to a $10,000
investment made in the Merrill Lynch Domestic Master Index (Subindex D010) on
that date. All dividends and capital gain distributions are reinvested.

The Portfolio's performance shown in the line graph takes into account all
applicable fees and expenses of the Portfolio. The Merrill Lynch Domestic Master
Index (Subindex D010) is an unmanaged performance benchmark for portfolios that
include U.S. Government, mortgage and investment-grade corporate securities
rated A and better. The Index does not take into account charges, fees and other
expenses. Further information relating to Portfolio performance, including
expense reimbursements, if applicable, is contained in the Financial Highlights
section of the Prospectus and elsewhere in this report.

<PAGE>

DREYFUS VARIABLE INVESTMENT FUND, QUALITY BOND PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS DECEMBER 31, 1996

<TABLE>
<CAPTION>
PRINCIPAL
BONDS AND NOTES--114.5% AMOUNT VALUE
- ------------------------------------------------------------------------------------- ------------- ------------
<S> <C> <C>
BANKING--16.8% BNY Capital I,
Gtd. Capital Securities, Ser.B, 7.97%, 2026 $ 1,000,000 $ 986,520
BankBoston Capital Trust II,
Gtd. Capital Securities, 73/4%, 2026....... 1,000,000(a) 964,045
Barnett Capital II,
Gtd. Capital Securities, 7.95%, 2026....... 1,500,000(a) 1,489,523
First Chicago, Sub. Notes:
81/4%, 2002................................ 15,000 16,000
67/8%, 2003................................ 100,000 100,226
First Tennessee Capital Trust I,
Gtd. Capital Securities, 8.07%, 2027....... 2,000,000 1,978,340
First Union Institutional Capital I,
Gtd. Capital Securities, 8.04%, 2026....... 1,000,000(a) 992,045
NationsBank,
Sub. Notes, 61/2%, 2003.................... 175,000 171,860
PNC Institutional Capital Trust A,
Gtd. Capital Securities, Ser.A, 7.95%, 2026 1,000,000(a) 1,000,000
Union Planters Capital Trust A,
Gtd. Capital Trust Pass-through Securities,
8.20%,2026................................. 1,000,000(a) 991,225
Zions Institutional Capital Trust A,
Gtd. Capital Securities, Ser.A, 8.536%, 2026 1,500,000(a) 1,538,790
------------
10,228,574
------------

COMMERCIAL MORTGAGES--23.0% Asset Securitization,
Commercial Mortgage Pass-Through Ctfs.,
Ser. 1996-MD VI, Cl. A7, 7.488%, 2026.. 2,500,000 2,494,531
Chase Commercial Mortgage Securities,
Mortgage Pass-Through Ctfs.,
Ser. 1996-2, Cl. D, 6.90%, 2006........ 2,000,000 1,923,125
DLJ Mortgage Acceptance,
Mortgage Pass-Through Ctfs.,
Ser. 1996-CF2, Cl.A-3, 7.38%, 2021..... 2,000,000(a) 2,006,250
FDIC REMIC Trust,
Mortgage Pass-Through Ctfs.,
Ser. 1996-C1, Cl. I-D, 71/4%, 2026..... 2,500,000 2,441,016
GMAC Commercial Mortgage Securities,
Mortgage Pass-Through Ctfs.,
Ser. 1996-C1, Cl. C, 7.43%, 2006....... 2,000,000 2,030,000
Merrill Lynch Mortgage Investors,
Mortgage Pass-Through Ctfs.,
Ser. 1995-C3, Cl. C, 7.369%, 2025...... 2,200,000(b) 2,212,375
Resolution Trust,
Commercial Mortgage Pass-Through Ctfs.,
Ser. 1995-C2, Cl. C, 7%, 2027.......... 939,810 926,594
------------
14,033,891
------------
</TABLE>
<PAGE>

DREYFUS VARIABLE INVESTMENT FUND, QUALITY BOND PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS (CONTINUED) DECEMBER 31, 1996

<TABLE>
<CAPTION>
PRINCIPAL
BONDS AND NOTES (CONTINUED) AMOUNT VALUE
- -------------------------------------------------------------------------------- ------------- ------------
<S> <C> <C>
FINANCE--6.5% Avco Financial Services,
Sr. Notes, 6.35%, 2000................. $ 1,000,000 $ 995,531
Commercial Credit,
Notes, 73/4%, 2005..................... 1,000,000 1,050,948
GMAC,
Notes, 55/8%, 2001..................... 2,000,000 1,928,728
-------------
3,975,207
-------------

FOREIGN--1.8% Kingdom of Sweden,
Bonds, Ser. A, Zero Coupon, 1997....... 60,000 59,207
United Mexican States,
Floating Rate Notes, 7 9/16%, 2001..... 1,000,000(a,b) 1,003,750
-------------
1,062,957
-------------

INDUSTRIAL--2.3% American Brands,
Deb., 85/8%, 2021...................... 400,000 452,301
Eastman Kodak,
Deb., 9.95%, 2018...................... 400,000 511,068
Ford Motor,
Deb., 87/8%, 2022...................... 400,000 462,305
-------------
1,425,674
-------------
INSURANCE--.2% SunAmerica:
Deb., 9.95%, 2012...................... 13,000 15,630
Notes, 9%, 1999........................ 130,000 136,039
-------------
151,669
-------------

OTHER--.1% City of New York,
General Obligation Bonds, Ser. D, 10%, 2007 25,000 28,750
-------------
PAPER--3.3% Champion International,
Deb., 7.20%, 2011...................... 2,000,000(c) 1,987,130
-------------
RESIDENTIAL MORTGAGES--3.3% The Money Store Trust,
Asset-Backed Ctfs.,
Ser.1996-D, Cl.A-16, 7.11%, 2028....... 2,000,000 2,000,265
-------------
TELEPHONE--4.9% BellSouth Capital Funding,
Deb., 6.04%, 2001...................... 2,000,000(d) 1,990,696
Wisconsin Bell,
Deb., 6.35%, 2006...................... 1,000,000(e) 984,801
-------------
2,975,497
-------------
</TABLE>
<PAGE>

DREYFUS VARIABLE INVESTMENT FUND, QUALITY BOND PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS (CONTINUED) DECEMBER 31, 1996

<TABLE>
<CAPTION>
PRINCIPAL
BONDS AND NOTES (CONTINUED) AMOUNT VALUE
- ------------------------------------------------------------------------------------ ------------- ------------
<S> <C> <C>
U.S. GOVERNMENT AND AGENCIES--23.5% FICO Coupon Strips,
Ser. 1, Zero Coupon, 5/11/2000......... $ 95,000 $ 77,352
Federal National Mortgage Association,
7.13%, 1/1/2012........................ 2,500,000(b) 2,500,000
Government National Mortgage Association I:
61/2%, 4/15/2026-5/15/2026............. 3,001,130 2,863,258
Government National Mortgage Association II:
5%, 2/20/2027.......................... 1,500,000(f) 1,461,555
51/2%, 10/20/2026...................... 7,500,000(f) 7,425,930
-------------
14,328,095
-------------

U.S. GOVERNMENT--28.8% U.S. Treasury Notes:
61/4%, 10/31/2001...................... 150,000 150,188
61/8%, 12/31/2001...................... 13,000,000 12,953,282
57/8%, 11/15/2005...................... 3,000,000 2,894,531
7%, 7/15/2006.......................... 1,500,000 1,558,828
-------------
17,556,829
-------------
TOTAL BONDS AND NOTES
(cost $69,786,938)..................... $ 69,754,538
=============

SHORT-TERM INVESTMENTS--2.8%
- -----------------------------------------------------------------------------
AGENCY DISCOUNT NOTE; Federal Home Loan Mortgage Corp.,
61/2%, 1/2/1997
(cost $1,735,687)...................... $ 1,736,000 $ 1,735,687
=============

TOTAL INVESTMENTS (cost $71,522,625)............................................ 117.3% $ 71,490,225
======= =============

LIABILITIES, LESS CASH AND RECEIVABLES.......................................... (17.3%) $(10,554,203)
======= =============

NET ASSETS...................................................................... 100.0% $ 60,936,022
======= =============
</TABLE>

NOTES TO STATEMENT OF INVESTMENTS:
- --------------------------------------------------------------------------------
(a) Securities 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 December
31, 1996, these securities amounted to $9,985,628 or 16.4% of net assets.
(b) Variable rate security - interest rate subject to periodic change.
(c) Reflects date security can be redeemed at holders' option; the stated
maturity is 11/1/2026.
(d) Reflects date security can be redeemed at holders' option; the stated
maturity is 11/15/2026.
(e) Reflects date security can be redeemed at holders' option; the stated
maturity is 12/1/2026.
(f) Purchased on a forward commitment basis.

See notes to financial statements.
<PAGE>

DREYFUS VARIABLE INVESTMENT FUND, QUALITY BOND PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1996

<TABLE>
<CAPTION>
COST VALUE
----------- -----------
<S> <C> <C> <C>
ASSETS: Investments in securities--See Statement of Investments $71,522,625 $71,490,225
Cash............................................. 2,023,023
Interest receivable.............................. 460,012
Receivable for investment securities sold........ 20,447,184
Prepaid expenses and other assets................ 5,637
------------
94,426,081
------------

LIABILITIES: Due to The Dreyfus Corporation and affiliates.... 35,578
Payable for investment securities purchased...... 33,366,477
Payable for shares of Beneficial Interest redeemed 59,514
Accrued expenses................................. 28,490
------------
33,490,059
------------

NET ASSETS..................................................................... $60,936,022
============

REPRESENTED BY: Paid-in capital.................................. $60,532,072
Accumulated net realized gain (loss) on investments 436,350
Accumulated net unrealized appreciation (depreciation)
on investments--Note 5.......................... (32,400)
------------

NET ASSETS..................................................................... $60,936,022
============

SHARES OUTSTANDING
(unlimited number of $.001 par value shares of Beneficial Interest authorized). 5,299,446

NET ASSET VALUE, offering and redemption price per share....................... $11.50
=======
</TABLE>

See notes to financial statements.
<PAGE>

DREYFUS VARIABLE INVESTMENT FUND, QUALITY BOND PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996

INVESTMENT INCOME

<TABLE>
<S> <C> <C> <C>
INCOME Interest Income................................... $3,374,276

EXPENSES: Investment advisory fee--Note 4(a)................ $ 330,181
Auditing fees..................................... 27,880
Prospectus and shareholders' reports.............. 12,646
Custodian fees--Note 4(a)......................... 10,533
Registration fees................................. 7,418
Legal fees........................................ 3,657
Trustees' fees and expenses--Note 4(b)............ 1,840
Shareholder servicing costs....................... 278
Miscellaneous..................................... 5,356
-----------
TOTAL EXPENSES............................... 399,789
----------

INVESTMENT INCOME--NET.......................................................... 2,974,487

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS--Note 5:

Net realized gain (loss) on investments .......... $ 296,597
Net unrealized appreciation (depreciation)
on investments.................................. (1,282,927)
-----------

NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS.......................... (986,330)
----------

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................ $1,988,157
==========
</TABLE>

See notes to financial statements.
<PAGE>

DREYFUS VARIABLE INVESTMENT FUND, QUALITY BOND PORTFOLIO
- -------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
OPERATIONS:
Investment income--net....................................................... $ 2,974,487 $ 1,394,941
Net realized gain (loss) on investments...................................... 296,597 628,024
Net unrealized appreciation (depreciation) on investments.................... (1,282,927) 2,002,134
-------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS.......... 1,988,157 4,025,099
-------------- -------------
DIVIDENDS TO SHAREHOLDERS FROM:
Investment income--net....................................................... (2,977,385) (1,396,840)
Net realized gain on investments............................................. -- (387,055)
-------------- -------------
TOTAL DIVIDENDS.......................................................... (2,977,385) (1,783,895)
-------------- -------------
BENEFICIAL INTEREST TRANSACTIONS:
Net proceeds from shares sold................................................ 31,824,343 25,461,134
Dividends reinvested......................................................... 2,977,385 1,783,895
Cost of shares redeemed...................................................... (10,323,319) (5,283,531)
-------------- -------------
INCREASE (DECREASE) IN NET ASSETS FROM BENEFICIAL INTEREST TRANSACTIONS.. 24,478,409 21,961,498
-------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS................................ 23,489,181 24,202,702

NET ASSETS:
Beginning of Period.......................................................... 37,446,841 13,244,139
-------------- -------------
End of Period................................................................ $ 60,936,022 $ 37,446,841
============== =============
Undistributed investment income--net........................................... -- $ 2,898
-------------- -------------

SHARES SHARES
-------------- -------------
CAPITAL SHARE TRANSACTIONS:
Shares sold.................................................................. 2,770,727 2,224,658
Shares issued for dividends reinvested....................................... 260,715 155,421
Shares redeemed.............................................................. (902,643) (466,867)
-------------- -------------
NET INCREASE (DECREASE) IN SHARES OUTSTANDING............................ 2,128,799 1,913,212
============== =============
</TABLE>

See notes to financial statements.
<PAGE>

DREYFUS VARIABLE INVESTMENT FUND, QUALITY BOND PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996

INVESTMENT INCOME

<TABLE>
<S> <C> <C> <C>
INCOME Interest Income.................................... $3,374,276

EXPENSES: Investment advisory fee--Note 4(a)................. $ 330,181
Auditing fees...................................... 27,880
Prospectus and shareholders' reports............... 12,646
Custodian fees--Note 4(a).......................... 10,533
Registration fees.................................. 7,418
Legal fees......................................... 3,657
Trustees' fees and expenses--Note 4(b)............. 1,840
Shareholder servicing costs........................ 278
Miscellaneous...................................... 5,356
-----------
TOTAL EXPENSES................................ 399,789
----------

INVESTMENT INCOME--NET........................................................... 2,974,487

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS--Note 5:

Net realized gain (loss) on investments ........... $ 296,597
Net unrealized appreciation (depreciation)
on investments................................... (1,282,927)
-----------

NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS........................... (986,330)
----------

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................. $1,988,157
==========
</TABLE>

See notes to financial statements.
<PAGE>

DREYFUS VARIABLE INVESTMENT FUND, QUALITY BOND PORTFOLIO
- -------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS

See notes to financial statements.
<PAGE>

DREYFUS VARIABLE INVESTMENT FUND, QUALITY BOND PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Contained below is per share operating performance data for a share of
Beneficial Interest outstanding, total investment return, ratios to average net
assets and other supplemental data for each period indicated. This information
has been derived from the Series' financial statements.

<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
PER SHARE DATA: 1996 1995 1994 1993 1992
------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period............... $11.81 $10.53 $11.81 $10.94 $10.67
------- ------ ------ ------ ------
INVESTMENT OPERATIONS:
Investment income--net............................. .66 .68 .73 .76 .92
Net realized and unrealized gain (loss)
on investments.................................. (.31) 1.42 (1.27) .88 .30
------- ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS................... .35 2.10 (.54) 1.64 1.22
------- ------ ------ ------ ------
DISTRIBUTIONS:
Dividends from investment income--net.............. (.66) (.69) (.73) (.76) (.92)
Dividends from net realized gain on investments.... -- (.13) (.01) (.01) (.03)
------- ------ ------ ------ ------
TOTAL DISTRIBUTIONS................................ (.66) (.82) (.74) (.77) (.95)
------- ------ ------ ------ ------
Net asset value, end of period..................... $11.50 $11.81 $10.53 $11.81 $10.94
======= ====== ====== ====== ======
TOTAL INVESTMENT RETURN............................... 3.13% 20.42% (4.59%) 15.33% 12.09%

RATIOS/SUPPLEMENTAL DATA:
Ratio of expenses to average net assets............ .79% .81% -- -- --
Ratio of net investment income
to average net assets........................... 5.86% 6.13% 7.03% 6.51% 8.54%
Decrease reflected in above expense ratios
due to undertakings by The Dreyfus Corporation.. -- .04% 1.20% 3.51% 5.33%
Portfolio Turnover Rate............................ 258.36% 263.53% 64.80% 110.62% 9.39%
Net Assets, end of period (000's Omitted).......... $60,936 $37,447 $13,244 $4,706 $405
</TABLE>

See notes to financial statments.
<PAGE>

DREYFUS VARIABLE INVESTMENT FUND, QUALITY BOND PORTFOLIO
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS

NOTE 1--GENERAL:

Dreyfus Variable Investment Fund (the "Fund") is registered under the
Investment Company Act of 1940 ("Act") as an open-end management investment
company, operating as a series company currently offering eleven series,
including the Quality Bond Portfolio (the "Series") and is intended to be a
funding vehicle for variable annuity contracts and variable life insurance
policies to be offered by the separate accounts of life insurance companies. The
Series is a diversified portfolio. The Series' investment objective is to
provide the maximum amount of current income to the extent consistent with the
preservation of capital and the maintenance of liquidity. The Dreyfus
Corporation ("Dreyfus") serves as the Series' investment adviser. Dreyfus is a
direct subsidiary of Mellon Bank, N.A. ("Mellon"). Premier Mutual Fund Services,
Inc. acts as the distributor of the Series' shares, which are sold without a
sales charge.

The Fund currently functions as the funding vehicle for the Dreyfus Series
2000 Variable Annuity Contract (the "Account") issued by Mutual Benefit Life
Insurance Company ("Mutual Benefit Life"). On July 16, 1991, the Superior Court
of New Jersey entered an Order (the "Order") appointing the New Jersey Insurance
Commissioner as Rehabilitator of Mutual Benefit Life. The Commissioner was
granted immediate exclusive possession and control of, and title to, the
business and assets of Mutual Benefit Life, including the assets and liabilities
of the Account.

The Commissioner was empowered by the Order to take such steps as he deemed
appropriate toward removing the cause and conditions that made rehabilitation
necessary. On January 15, 1993, the Commissioner filed the First Amended Plan of
Rehabilitation ("Plan") with the Court. The Plan stipulated that the assets and
liabilities of the Account would be transferred to a separate account of MBL
Life Assurance Corporation ("MBLLAC"), a wholly-owned subsidiary of Mutual
Benefit Life. The Plan also provided for the transfer of the ownership of the
stock of MBLLAC to a Trust. The Commissioner was designated as the sole Trustee
of the Trust. On August 12, 1993, the Court rendered an opinion approving the
Plan with certain modifications. Two subsequent amendments to the Plan were
filed and approved by the Court. None of the modifications or amendments
affected the status of the Account. On November 10, 1993, the Court issued an
Order of Confirmation permitting the implementation of the Plan.

An order was also issued by the Court on January 28, 1994, approving the form
of the Third Amended Plan of Rehabilitation, the Election Materials and related
documents. On April 29, 1994, the Plan was implemented. Substantially all of the
assets of Mutual Benefit Life were transferred to MBLLAC which assumed and
reinsured Mutual Benefit Life's restructured insurance liabilities. The stock of
MBLLAC was assigned to the Stock Trust and the Commissioner was designated as
Trustee.

In view of the terms and conditions of both the Order and the Plan,
applications for new contracts and additional purchase payments under existing
contracts are currently not being accepted by the Account. The terms of the
Order and the Plan permit redemptions from the Account to continue as requested.

The proceedings of the New Jersey Insurance Commissioner with respect to
Mutual Benefit Life or the Account do not apply to the separate accounts of
other life insurance companies that may use the Fund as a funding vehicle for
contracts or policies issued by them.

The Fund accounts separately for the assets, liabilities and operations of
each series. Expenses directly attributable to each series are charged to that
series' operations; expenses which are applicable to all series are allocated
among them on a pro rata basis.
<PAGE>

DREYFUS VARIABLE INVESTMENT FUND, QUALITY BOND PORTFOLIO
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)

The Series' financial statements are prepared in accordance with generally
accepted accounting principles which may require the use of management estimates
and assumptions. Actual results could differ from those estimates.

NOTE 2--SIGNIFICANT ACCOUNTING POLICIES:

(a) PORTFOLIO VALUATION: Investments (excluding short-term investments and
U.S. Government obligations) are valued each business day by an independent
pricing service ("Service") approved by the Board of Trustees. Investments for
which quoted bid prices are readily available and are representative of the bid
side of the market in the judgment of the Service are valued at the mean between
the quoted bid prices (as obtained by the Service from dealers in such
securities) and asked prices (as calculated by the Service based upon its
evaluation of the market for such securities). Other investments (which
constitute a majority of the portfolios' securities) are carried at fair value
as determined by the Service, based on methods which include consideration of:
yields or prices of securities of comparable quality, coupon, maturity and type;
indications as to values from dealers; and general market conditions.
Investments in U.S. Government obligations are valued at the mean between quoted
bid and asked prices. Short-term investments are carried at amortized cost,
which approximates value.

(b) SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions
are recorded on a trade date basis. Realized gain and loss from securities
transactions are recorded on the identified cost basis. Interest income,
including, where applicable, amortization of discount on investments, is
recognized on the accrual basis.

(c) DIVIDENDS TO SHAREHOLDERS: Dividends are recorded on the ex-dividend
date. Dividends from investment income-net are declared and paid monthly.
Dividends from net realized capital gain are normally declared and paid
annually, but the Series may make distributions on a more frequent basis to
comply with the distribution requirements of the Internal Revenue Code. To the
extent that net realized capital gain can be offset by capital loss carryovers,
if any, it is the policy of the Series not to distribute such gain.

(d) FEDERAL INCOME TAXES: It is the policy of the Series to continue to
qualify as a regulated investment company, if such qualification is in the best
interests of its shareholders, by complying with the applicable provisions of
the Internal Revenue Code, and to make distributions of taxable income
sufficient to relieve it from substantially all Federal income and excise taxes.

NOTE 3--BANK LINE OF CREDIT:

The Series participates with other Dreyfus-managed funds in a $100 million
unsecured line of credit primarily to be utilized for temporary or emergency
purposes, including the financing of redemptions. Interest is charged to the
Series at rates which are related to the Federal Funds rate in effect at the
time of borrowings. For the period ended December 31, 1996, the Series did not
borrow under the line of credit.

NOTE 4--INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES:

(a) Pursuant to an Investment Advisory Agreement ("Agreement") with Dreyfus,
the investment advisory fee is computed at the annual rate of .65 of 1% of the
value of the Series' average daily net assets and is payable monthly.

The Series compensates Dreyfus Transfer, Inc. a wholly-owned subsidiary of
Dreyfus, under a transfer agency agreement for providing personnel and
facilities to perform transfer agency services for the Series.
<PAGE>

DREYFUS VARIABLE INVESTMENT FUND, QUALITY BOND PORTFOLIO
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)

Effective May 10, 1996, the Fund entered into a custody agreement with Mellon
to provide custodial services for the Series. During the period ended December
31, 1996, $7,153 was charged by Mellon pursuant to the custody agreement.

(b) Each trustee who is not an "affiliated person" as defined in the Act
receives from the Fund an annual fee of $2,500 and an attendance fee of $250 per
meeting. The Chairman of the Board receives an additional 25% of such
compensation.

NOTE 5--SECURITIES TRANSACTIONS:

The aggregate amount of purchases and sales (including paydowns) of
investment securities, excluding short-term securities, during the period ended
December 31, 1996, amounted to $154,250,397 and $112,057,929, respectively.

At December 31, 1996, accumulated net unrealized depreciation on investments
was $32,400, consisting of $418,384 gross unrealized appreciation and $450,784
gross unrealized depreciation.

At December 31, 1996, the cost of investments for Federal income tax purposes
was substantially the same as the cost for financial reporting purposes (see the
Statement of Investments).
<PAGE>

DREYFUS VARIABLE INVESTMENT FUND, QUALITY BOND PORTFOLIO
- --------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

SHAREHOLDERS AND BOARD OF TRUSTEES
DREYFUS VARIABLE INVESTMENT FUND, QUALITY BOND PORTFOLIO

We have audited the accompanying statement of assets and liabilities,
including the statement of investments, of Dreyfus Variable Investment Fund,
Quality Bond Portfolio (one of the series constituting the Dreyfus Variable
Investment Fund) as of December 31, 1996, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended, and financial highlights for
each of the years indicated therein. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included verification by examination of securities
held by the custodian as of December 31, 1996 and confirmation of securities not
held by the custodian by correspondence with others. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Dreyfus Variable Investment Fund, Quality Bond Portfolio at December 31, 1996,
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the indicated years, in conformity with generally
accepted accounting principles.

/s/Ernst & Young LLP

New York, New York
January 29, 1997
<PAGE>

[Dreyfus lion "d" logo]

DREYFUS VARIABLE INVESTMENT FUND,
QUALITY BOND PORTFOLIO
200 Park Avenue
New York, NY 10166

INVESTMENT ADVISER
The Dreyfus Corporation
200 Park Avenue
New York, NY 10166

CUSTODIAN
Mellon Bank, N.A.
One Mellon Bank Center
Pittsburgh, PA 15258

TRANSFER AGENT & DIVIDEND DISBURSING AGENT
Dreyfus Transfer, Inc.
P.O. Box 9671
Providence, RI 02940

[Dreyfus logo]

DREYFUS VARIABLE
INVESTMENT FUND,
QUALITY BOND
PORTFOLIO
ANNUAL REPORT

December 31, 1996

[Photo of Dreyfus]
<PAGE>

DREYFUS VARIABLE INVESTMENT FUND, GROWTH AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS

Dear Shareholder:

We are pleased to provide you with this report on Dreyfus Variable
Investment Fund - Growth and Income Portfolio. For the year ended December
31, 1996, the total return for your Portfolio was 20.75%, based on net asset
value.* This compares with a total return of 22.95% for the Standard and
Poor's 500 Composite Stock Price Index (the S&P 500).** From inception on May
2, 1994 to December 31, 1996, the total return for the Portfolio was 93.11%,
and the average annual total return was 27.97%.*** Such a rise in the
slightly more than two and a half years of the existence of the Portfolio is
well above the historical average of returns in the equity market and we
believe that it is unlikely to be repeated.

Since inception on May 2, 1994, the assets of the Portfolio have grown to
$225.9 million as of December 31, 1996. With a mix of different sized
companies included in the Portfolio, the average market capitalization of
companies held in the Portfolio is less than the average of companies in the
Standard and Poor's 500 Composite Stock Price Index.

During the fiscal year, our approach was to mix together some securities
for growth and others for income. We have also included a mix of large
capitalization stocks, mid-capitalization stocks and small capitalization
stocks.

This mix of investments is illustrated by the largest common stock
holdings in the Portfolio. Gannett is a major newspaper company, owning such
properties as the newspaper "USA Today." UGI is a gas utility which also has
an important investment in a propane company. Columbia/HCA Healthcare is the
largest hospital company in the U.S. Merry Land & Investment is an apartment
real estate investment trust. Nabisco Holdings, Cl. A is a major consumer
products company. Viacom, Cl. B and Time Warner are large media companies
whose stocks have been laggards in the market. International Game Technology
provides equipment to the gaming industry worldwide. Computer Sciences
provides computer management and outsourcing to many of the largest
corporations in the U.S. and overseas. OfficeMax is a nationwide office
supplies superstore company.

We believe that many of the securities currently held in the Portfolio
have not yet fully participated in the powerful gains which have been
realized in the stock market in the last few years. These positions
contributed to the Portfolio's slight underperformance of its benchmark
index. Some of them fit into the category of valuable business franchises
which, we believe, are somewhat out of favor because of near-term
disappointments.

We use a mixture of convertible securities, real estate investment trusts
and utilities as a means of satisfying the income portion of the Portfolio's
joint objectives of growth and income. Both the utility indexes and the
convertible securities indexes lagged the return on the Standard and Poor's
Composite 500 Stock Price Index in 1996, a year in which bond prices lagged
behind stock prices, and therefore also contributed to the Portfolio's slight
underperformance of that index. The Portfolio includes investments in the
convertible securities of Thermo Electron, Airtouch Communications and Home
Depot, among others.

Several long-term positive forces have provided a supportive background
for the financial markets over the last several years. First, the trend of
inflation has remained generally favorable in the last several years. Second,
we are in the early stages of a key demographic shift as the baby boom
generation begins to focus on the need for a permanent program of saving to
provide for future retirement income. Third, U.S. productivity growth in
manufacturing has been favorable and many U.S. companies are quite
competitive with their foreign competitors.

We continue to believe that the period of strongest earnings growth in
the U.S. economy is behind us. Corporate cost cutting is very far advanced in
many companies as are the benefits of refinancing high cost debt. We believe
that strong profit growth may become increasingly scarce over the next year.

We appreciate the willingness of our shareholders to invest in the Growth
and Income Portfolio of Dreyfus Variable Investment Fund. We will endeavor to
realize a favorable return for the shareholders commensurate with a
reasonable level
<PAGE>

of risk. There is likely to be an alternation of periods where the net asset
value of the Portfolio declines and periods when the net asset value rises.
Our focus is on achieving a satisfactory return for the shareholders over a
period of time.
Very truly yours,

/s/ Richard B. Hoey

Richard B. Hoey
Portfolio Manager
January 20, 1997
New York, N.Y.

** SOURCE: LIPPER ANALYTICAL SERVICES, INC. - Reflects the reinvestment of
income dividends and, where applicable, capital gain distributions. The
Standard & Poor's 500 Composite Stock Price Index is a widely accepted
unmanaged index of stock market performance.

*** Fund's share price and investment return fluctuate so you may receive more
or less than your original cost upon redemption. Past performance is no
guarantee of future results.
<PAGE>

DREYFUS VARIABLE INVESTMENT FUND, GROWTH AND INCOME PORTFOLIO DECEMBER 31, 1996
- -------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN DREYFUS VARIABLE
INVESTMENT FUND, GROWTH AND INCOME PORTFOLIO AND THE STANDARD & POOR'S 500
COMPOSITE STOCK PRICE INDEX

$19,311
Dreyfus Variable
Investment Fund, Growth
and Income Portfolio
Dollars [GRAPH APPEARS HERE] $17,580
Standard & Poor's 500
Composite Stock Price
Index*

*Source: Lipper Analytical Services, Inc.

AVERAGE ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
One Year Ended From Inception (5/2/94)
December 31, 1996 to December 31, 1996
----------------- --------------------
<S> <C>
20.75% 27.97%
</TABLE>

___________
Past performance is not predictive of future performance.

The Portfolio's performance does not reflect the deduction of additional
charges imposed in connection with investing in variable annuity contracts
and variable life insurance policies.

The above graph compares a $10,000 investment made in Dreyfus Variable
Investment Fund, Growth and Income Portfolio on 5/2/94 (Inception Date) to a
$10,000 investment made in the Standard & Poor's 500 Composite Stock Price
Index on that date. For comparative purposes, the value of the Index on
4/30/94 is used as the beginning value on 5/2/94. All dividends and capital
gain distributions are reinvested.

The Portfolio's performance shown in the line graph takes into account all
applicable fees and expenses of the Portfolio. The Standard & Poor's 500
Composite Stock Price Index is a widely accepted, unmanaged index of overall
stock market performance, which does not take into account charges, fees and
other expenses. Further information relating to Portfolio performance,
including expense reimbursements, if applicable, is contained in the
Financial Highlights section of the Prospectus and elsewhere in this report.

<PAGE>

DREYFUS VARIABLE INVESTMENT FUND, GROWTH AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS DECEMBER 31, 1996

<TABLE>
<CAPTION>
COMMON STOCKS-71.4% SHARES VALUE
- ------------------------------------------------------------------------------------ ---------------- ----------------
<S> <C> <C>
BASIC AND PROCESS
INDUSTRIES-1.3% duPont (El) deNemours........................ 30,000 $ 2,831,250
----------------
CAPITAL GOODS-5.4% Boeing....................................... 20,000 2,127,500
Deere & Co................................... 75,000 3,046,875
Thermo Instrument Systems.................... 100,000 (a) 3,312,500
Thiokol...................................... 80,000 3,580,000
----------------
12,066,875
----------------
CONSUMER-10.0% ADT Limited.................................. 75,000 (a) 1,715,625
Dal-Tile..................................... 71,000 (a) 1,446,625
Ford Motor................................... 100,000 3,187,500
Nabisco Holdings, Cl. A...................... 150,000 5,831,250
OfficeMax.................................... 500,000 (a) 5,312,500
Sunglass Hut................................. 685,000 (a) 4,966,250
----------------
22,459,750
----------------
ENERGY-7.8% Amerada Hess................................. 50,000 2,893,750
Louisiana Land & Exploration................. 90,000 4,826,250
Occidental Petroleum......................... 100,000 2,337,500
UGI.......................................... 300,000 6,712,500
Western Gas Resources........................ 44,400 854,700
----------------
17,624,700
----------------
FINANCIAL-2.5% ADVANTA, Cl. B............................... 40,000 1,635,000
Federal National Mortgage Association........ 50,000 1,862,500
Great Western Financial...................... 75,000 2,175,000
----------------
5,672,500
----------------
HEALTH CARE-5.7% ALPHARMA, Cl. A.............................. 210,000 2,992,500
Algos Pharmaceutical......................... 185,000 (a) 2,081,250
Columbia/HCA Healthcare...................... 160,000 6,520,000
Fuisz Technologies........................... 30,000 (a) 236,250
ONCOR........................................ 250,000 (a) 984,375
----------------
12,814,375
----------------
INSURANCE-.5% CapMAC Holdings.............................. 35,500 1,175,938
----------------
MEDIA/ENTERTAINMENT-14.3% Comcast, Cl. A............................... 250,000 4,453,125
Gannett...................................... 100,000 7,487,500
Groupe AB, A.D.S............................. 250,000 (a) 3,593,750
International Game Technology................ 300,000 5,475,000
Time Warner.................................. 150,000 5,625,000
Viacom, Cl. B................................ 165,000 (a) 5,754,375
----------------
32,388,750
----------------
MINING AND METALS-2.7% Barrick Gold................................. 100,000 2,875,000
Brascan...................................... 150,000 3,318,750
----------------
6,193,750
----------------
REAL ESTATE-6.2% Arden Realty................................. 100,000 2,775,000
Franchise Finance Corporation of America 175,000 4,834,375
</TABLE>
<PAGE>

DREYFUS VARIABLE INVESTMENT FUND, GROWTH AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS (CONTINUED) DECEMBER 31, 1996

<TABLE>
<CAPTION>
COMMON STOCKS (CONTINUED) SHARES VALUE
- --------------------------------------------------------------------------- ---------------- ----------------
<S> <C> <C>
REAL ESTATE (CONTINUED) Merry Land & Investment....................... 300,000 $ 6,450,000
----------------
14,059,375
----------------
TECHNOLOGY-8.8% Atmel......................................... 75,000 (a) 2,484,375
Computer Sciences............................. 65,000 (a) 5,338,125
Electronic Data Systems....................... 100,000 4,325,000
First Data.................................... 60,000 2,190,000
Informix...................................... 150,000 (a) 3,056,250
LSI Logic..................................... 50,000 (a) 1,337,500
Vanstar....................................... 50,000 (a) 1,225,000
----------------
19,956,250
----------------
TELECOMMUNICATIONS-4.4% GTE........................................... 75,000 3,412,500
SBC Communications............................ 75,000 3,881,250
Viatel........................................ 300,000 (a) 2,700,000
----------------
9,993,750
----------------
UTILITIES-1.8% Texas Utilities............................... 100,000 4,075,000
----------------
TOTAL COMMON STOCKS
(cost $159,081,757).......................... $ 161,312,263
================
CONVERTIBLE PREFERRED STOCKS-4.7%
- --------------------------------------------------------------------------
MEDIA/ENTERTAINMENT-1.1% Station Casinos, 7%........................... 50,000 $ 2,393,750
----------------
TELECOMMUNICATIONS-3.6% AirTouch Communications, Ser. C, 4.25%........ 110,000 4,977,500
MFS Communications, 8%........................ 35,000 3,193,750
----------------
8,171,250
----------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(cost $9,889,281)............................ $ 10,565,000
================
PREFERRED STOCKS-1.2%
- --------------------------------------------------------------------------
MEDIA/ENTERTAINMENT; News Corp, A.D.S., Cum., $.40
(cost $3,025,373)............................ 150,000 $ 2,643,750
================
PRINCIPAL
CONVERTIBLE CORPORATE NOTES & BONDS-9.4% AMOUNT
- -------------------------------------------------------------------------- ----------------
CONSUMER-5.3% Home Depot, Sub. Notes,
3.25%, 10/1/2001............................. $ 5,000,000 $ 4,893,750
Omnicom Group, Sub. Deb.,
4.25%, 1/3/2007.............................. 1,800,000 (b) 1,836,000
Pep Boys, Sub. Notes,
Zero Coupon, 9/20/2011....................... 4,000,000 2,090,000
Staples, Sub. Deb.,
4.50%, 10/1/2000............................. 3,000,000 (b) 3,105,000
----------------
11,924,750
----------------
HEALTH CARE-.6% Complete Management, Sub. Deb.,
8%, 8/15/2003................................ 1,300,000 1,369,875
----------------
</TABLE>
<PAGE>

DREYFUS VARIABLE INVESTMENT FUND, GROWTH AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS (CONTINUED) DECEMBER 31, 1996

<TABLE>
<CAPTION>
PRINCIPAL
CONVERTIBLE CORPORATE NOTES & BONDS (CONTINUED) AMOUNT VALUE
- -------------------------------------------------------------------------- ---------------- ----------------
<S> <C> <C>
INSURANCE-.9% Penn Treaty American, Sub. Notes,
6.25%, 12/3/2003............................. $ 2,000,000 (b) $ 2,140,000
----------------
TECHNOLOGY-2.6% Thermo Electron, Euro Sub. Deb.,
4.25%, 1/1/2003.............................. 5,000,000 (b) 5,900,000
----------------
TOTAL CONVERTIBLE CORPORATE NOTES & BONDS
(cost $21,441,811)........................... $ 21,334,625
================
U.S. TREASURY NOTES-3.1%
5.625%, 11/30/1998
(cost $6,977,162)............................ $ 7,000,000 $ 6,969,922
================
SHORT-TERM INVESTMENTS-10.4%
U.S. TREASURY BILLS: 5.36%, 1/16/1997.............................. $ 213,000 $ 212,561
5.13%, 2/20/1997.............................. 738,000 732,923
5.03%, 2/27/1997.............................. 245,000 243,079
4.98%, 3/6/1997............................... 19,530,000 19,357,745
5.30%, 3/13/1997.............................. 3,038,000 3,008,258
----------------
TOTAL SHORT -TERM INVESTMENTS
(cost $23,557,186)........................... $ 23,554,566
================
TOTAL INVESTMENTS (cost $223,972,570)..................................... 100.2% $ 226,380,126
======== ================
LIABILITIES, LESS CASH AND RECEIVABLES.................................... (.2%) $ (445,156)
======== ================
NET ASSETS................................................................ 100.0% $ 225,934,970
======== ================
</TABLE>

NOTES TO STATEMENT OF INVESTMENTS:

(a) Non-income producing.
(b) Securities 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 December 31,
1996, these securities amounted to $12,981,000 or approximately 5.7% of net
assets.

See notes to financial statements.
<PAGE>

DREYFUS VARIABLE INVESTMENT FUND, GROWTH AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1996

<TABLE>
<CAPTION>
COST VALUE
-------------- --------------
<S> <C> <C> <C>
ASSETS: Investments in securities-See Statement of Investments..... $ 223,972,570 $ 226,380,126
Receivable for investment securities sold.................. 9,953,436
Dividends and interest receivable.......................... 686,771
Prepaid expenses........................................... 163
--------------
237,020,496
--------------
LIABILITIES: Due to The Dreyfus Corporation and affiliates.............. 147,717
Cash overdraft due to Custodian............................ 1,050,880
Payable for investment securities purchased................ 9,824,406
Accrued expenses........................................... 62,523
--------------
11,085,526
--------------
NET ASSETS....................................................................... $ 225,934,970
==============
REPRESENTED BY: Paid-in capital............................................ $ 221,552,145
Accumulated undistributed investment income-net............ 181,456
Accumulated net realized gain (loss) on investments........ 1,793,813
Accumulated net unrealized appreciation (depreciation)
on investments-Note 5.................................... 2,407,556
--------------
NET ASSETS....................................................................... $ 225,934,970
==============
SHARES OUTSTANDING
(UNLIMITED NUMBER OF $.001 PAR VALUE SHARES OF BENEFICIAL INTEREST AUTHORIZED)... 11,556,263

NET ASSET VALUE, offering and redemption price per share......................... $19.55
======
</TABLE>

See notes to financial statements.
<PAGE>

DREYFUS VARIABLE INVESTMENT FUND, GROWTH AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996

INVESTMENT INCOME

<TABLE>
<S> <C> <C> <C>
INCOME: Cash dividends (net of $11,596 foreign taxes
withheld at source).................................... $ 2,438,905
Interest................................................... 1,796,050
------------
Total Income........................................... $ 4,234,955
EXPENSES: Investment advisory fee-Note 4(a).......................... 1,135,998
Registration fees.......................................... 47,541
Professional fees.......................................... 40,562
Custodian fees-Note 4(a)................................... 21,875
Prospectus and shareholders' reports....................... 5,741
Trustees' fees and expenses-Note 4(b)...................... 5,433
Shareholder servicing costs................................ 1,730
Miscellaneous.............................................. 2,019
------------
Total Expenses......................................... 1,260,899
------------

INVESTMENT INCOME-NET............................................................ 2,974,056
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS-Note 5:
Net realized gain (loss) on investments.................... $ 22,639,509
Net unrealized appreciation (depreciation) on investments.. (2,605,907)
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS........................... 20,033,602
------------

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................. $ 23,007,658
============
</TABLE>

See notes to financial statements.
<PAGE>

DREYFUS VARIABLE INVESTMENT FUND, GROWTH AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1996 December 31, 1995
----------------- -----------------
<S> <C> <C>
OPERATIONS:
Investment income-net........................................................... $ 2,974,056 $ 572,821
Net realized gain (loss) on investments......................................... 22,639,509 4,082,523
Net unrealized appreciation (depreciation) on investments....................... (2,605,907) 5,056,480
--------------- --------------
Net Increase (Decrease) in Net Assets Resulting from Operations............... 23,007,658 9,711,824
--------------- --------------
DIVIDENDS TO SHAREHOLDERS FROM:
Investment income-net........................................................... (2,817,457) (548,022)
Net realized gain on investments................................................ (22,301,456) (2,627,285)
--------------- --------------
Total Dividends............................................................... (25,118,913) (3,175,307)
--------------- --------------
BENEFICIAL INTEREST TRANSACTIONS:
Net proceeds from shares sold................................................... 142,396,273 71,235,254
Dividends reinvested............................................................ 25,118,913 3,175,307
Cost of shares redeemed......................................................... (10,630,121) (10,825,812)
--------------- --------------
Increase (Decrease) in Net Assets from Beneficial Interest Transactions....... 156,885,065 63,584,749
Total Increase (Decrease) in Net Assets..................................... 154,773,810 70,121,266
NET ASSETS:
Beginning of Period............................................................. 71,161,160 1,039,894
--------------- --------------
End of Period................................................................... $ 225,934,970 $ 71,161,160
=============== ==============
UNDISTRIBUTED INVESTMENT INCOME-NET............................................... $ 181,456 $ 24,857
--------------- --------------
<CAPTION>
Shares Shares
--------------- --------------
<S> <C> <C>
CAPITAL SHARE TRANSACTIONS:
Shares sold..................................................................... 6,920,188 4,269,435
Shares issued for dividends reinvested.......................................... 1,271,395 179,268
Shares redeemed................................................................. (518,058) (652,787)
--------------- --------------
Net Increase (Decrease) in Shares Outstanding................................. 7,673,525 3,795,916
=============== ==============
</TABLE>

See notes to financial statements.
<PAGE>

DREYFUS VARIABLE INVESTMENT FUND, GROWTH AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

Contained below is per share operating performance data for a share of
Beneficial Interest outstanding, total investment return, ratios to average
net assets and other supplemental data for each period indicated. This
information has been derived from the Series' financial statements.

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
PER SHARE DATA: 1996 1995 1994(1)
------ ------ -------
<S> <C> <C> <C>
Net asset value, beginning of period.................................. $18.33 $11.98 $12.50
------ ------ ------
INVESTMENT OPERATIONS:
Investment income-net................................................. .36 .28 .28
Net realized and unrealized gain (loss)
on investments...................................................... 3.43 7.07 (.43)
------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS...................................... 3.79 7.35 (.15)
------ ------ ------
DISTRIBUTIONS:
Dividends from investment income-net.................................. (.35) (.27) (.28)
Dividends from net realized gain on investments....................... (2.22) (.73) (.09)
------ ------ ------
TOTAL DISTRIBUTIONS................................................... (2.57) (1.00) (.37)
------ ------ ------
Net asset value, end of period........................................ $19.55 $18.33 $11.98
====== ====== ======
TOTAL INVESTMENT RETURN................................................... 20.75% 61.89% (1.22%)(2)
RATIOS/SUPPLEMENTAL DATA:
Ratio of expenses to average net assets............................... .83% .92% .22%(2)
Ratio of net investment income
to average net assets............................................... 1.96% 2.21% 2.25%(2)
Decrease reflected in above expense ratios
due to undertakings by The Dreyfus Corporation...................... -- .03% 1.28%(2)
Portfolio Turnover Rate............................................... 237.44% 255.42% 237.09%(2)
Average commission rate paid (3)...................................... $.1904 -- --
Net Assets, end of period (000's Omitted)............................. $225,935 $71,161 $1,040
</TABLE>

______________
(1) From May 2, 1994 (commencement of operations) to December 31, 1994.
(2) Not annualized.
(3) For fiscal years beginning January 1, 1996, the Series is required to
disclose its average commission rate paid per share for purchases and sales
of investment securities.

See notes to financial statements.
<PAGE>

DREYFUS VARIABLE INVESTMENT FUND, GROWTH AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS

NOTE 1-GENERAL:

Dreyfus Variable Investment Fund (the "Fund") is registered under the
Investment Company Act of 1940 ("Act") as an open-end management investment
company, operating as a series company, currently offering eleven series,
including the Growth and Income Portfolio (the "Series") and is intended to
be a funding vehicle for variable annuity contracts and variable life
insurance policies to be offered by the separate accounts of life insurance
companies. The Series is a non-diversified portfolio. The Series' investment
objective is to provide long-term capital growth, current income and growth
of income, consistent with reasonable investment risk. The Dreyfus
Corporation ("Dreyfus") serves as the Series' investment adviser. Dreyfus is
a direct subsidiary of Mellon Bank, N.A. ("Mellon"). Premier Mutual Fund
Services, Inc. acts as the distributor of the Series' shares, which are sold
without a sales charge.

The Fund accounts separately for the assets, liabilities and operations
of each series. Expenses directly attributable to each series are charged to
that series' operations; expenses which are applicable to all series are
allocated among them on a pro rata basis.

The Series' financial statements are prepared in accordance with
generally accepted accounting principles which may require the use of
management estimates and assumptions. Actual results could differ from those
estimates.

NOTE 2-SIGNIFICANT ACCOUNTING POLICIES:

(A) PORTFOLIO VALUATION: Investments in securities (including options and
financial futures) are valued at the last sales price on the securities
exchange on which such securities are primarily traded or at the last sales
price on the national securities market. Securities not listed on an exchange
or the national securities market, or securities for which there were no
transactions, are valued at the average of the most recent bid and asked
prices, except for open short positions, where the asked price is used for
valuation purposes. Bid price is used when no asked price is available.
Securities for which there are no such valuations are valued at fair value as
determined in good faith under the direction of the Board of Trustees.
Investments denominated in foreign currencies are translated to U.S. dollars
at the prevailing rates of exchange. Forward currency exchange contracts are
valued at the forward rate.

(B) SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities
transactions are recorded on a trade date basis. Realized gain and loss from
securities transactions are recorded on the identified cost basis. Dividend
income is recognized on the ex-dividend date and interest income, including,
where applicable, amortization of discount on investments, is recognized on
the accrual basis.

(C) DIVIDENDS TO SHAREHOLDERS: Dividends are recorded on the ex-dividend
date. The Series declares and pays dividends from investment income-net on a
quarterly basis. Dividends from net realized capital gain are normally
declared and paid annually, but the Series may make distributions on a more
frequent basis to comply with the distribution requirements of the Internal
Revenue Code. To the extent that net realized capital gain can be offset by
capital loss carryovers, if any, it is the policy of the Series not to
distribute such gain.

(D) FEDERAL INCOME TAXES: It is the policy of the Series to continue to
qualify as a regulated investment company, if such qualification is in the
best interests of its shareholders, by complying with the applicable
provisions of the Internal Revenue Code, and to make distributions of taxable
income sufficient to relieve it from substantially all Federal income and
excise taxes.
<PAGE>

DREYFUS VARIABLE INVESTMENT FUND, GROWTH AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

NOTE 3-BANK LINE OF CREDIT:

The Series participates with other Dreyfus-managed funds in a $100
million unsecured line of credit primarily to be utilized for temporary or
emergency purposes, including the financing of redemptions. Interest is
charged to the Series at rates which are related to the Federal Funds rate in
effect at the time of borrowings. For the period ended December 31, 1996, the
Series did not borrow under the line of credit.

NOTE 4-INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES:

(A) Pursuant to an Investment Advisory Agreement ("Agreement") with
Dreyfus, the investment advisory fee is computed at the annual rate of .75 of
1% of the value of the Series' average daily net assets and is payable
monthly.

The Series compensates Dreyfus Transfer, Inc., a wholly-owned subsidiary
of Dreyfus, under a transfer agency agreement for providing personnel and
facilities to perform transfer agency services for the Series.

Effective May 10, 1996, the Series entered into a custody agreement with
Mellon to provide custodial services for the Series. During the period ended
December 31, 1996, $14,193 was charged by Mellon pursuant to the custody
agreement.

(B) Each trustee who is not an "affiliated person" as defined in the Act
receives from the Fund an annual fee of $2,500 and an attendance fee of $250
per meeting. The Chairman of the Board receives an additional 25% of such
compensation.

NOTE 5-SECURITIES TRANSACTIONS:

The aggregate amount of purchases and sales of investment securities,
excluding short-term securities, during the period ended December 31, 1996,
amounted to $424,524,602 and $307,781,021, respectively.

At December 31, 1996, accumulated net unrealized appreciation on
investments was $2,407,556, consisting of $10,461,470 gross unrealized
appreciation and $8,053,914 gross unrealized depreciation.

At December 31, 1996, the cost of investments for Federal income tax
purposes was substantially the same as the cost for financial reporting
purposes (see the Statement of Investments).
<PAGE>

DREYFUS VARIABLE INVESTMENT FUND, GROWTH AND INCOME PORTFOLIO
- --------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

SHAREHOLDERS AND BOARD OF TRUSTEES
DREYFUS VARIABLE INVESTMENT FUND, GROWTH AND INCOME PORTFOLIO

We have audited the accompanying statement of assets and liabilities,
including the statement of investments, of Dreyfus Variable Investment Fund,
Growth and Income Portfolio (one of the series constituting the Dreyfus
Variable Investment Fund) as of December 31, 1996, and the related statement
of operations for the year then ended, the statement of changes in net assets
for each of the two years in the period then ended, and financial highlights
for each of the years indicated therein. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included verification by
examination of securities held by the custodian as of December 31, 1996 and
confirmation of securities not held by the custodian by correspondence with
others. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Dreyfus Variable Investment Fund, Growth and Income Portfolio at
December 31, 1996, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended,
and the financial highlights for each of the indicated years, in conformity
with generally accepted accounting principles.

/s/ Ernst & Young LLP
New York, New York
January 29, 1997
<PAGE>

(Dreyfus lion "d" logo)

DREYFUS VARIABLE INVESTMENT FUND,
GROWTH AND INCOME PORTFOLIO
200 Park Avenue
New York, NY 10166

INVESTMENT ADVISER
The Dreyfus Corporation
200 Park Avenue
New York, NY 10166

CUSTODIAN
Mellon Bank, N.A.
One Mellon Bank Center
Pittsburgh, PA 15258

TRANSFER AGENT &
DIVIDEND DISBURSING AGENT
Dreyfus Transfer, Inc.
P.O. Box 9671
Providence, RI 02940

[Dreyfus Logo]

VARIABLE
INVESTMENT FUND,
GROWTH AND INCOME
PORTFOLIO
ANNUAL REPORT

DECEMBER 31, 1996

[Photo of Dreyfus]

DECEMBER 31, 1996
<PAGE>

THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
- --------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS

Dear Shareholder:

We are pleased to report that the Dreyfus Socially Responsible Growth
Fund, Inc. achieved a total return of 21.23%, based on net asset value, for
the fiscal year ended December 31, 1996* compared to an increase of 22.95%
for the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500"),**
indicating competitive performance relative to the market. The positive
results can be attributed to three basic factors: 1) stock selection, 2)
focus on several strong sectors: technology, consumer staples and financials
and 3) avoidance of lower quality companies with potential earnings
disappointments.

ECONOMIC REVIEW

The much-heralded "Goldilocks" phase of the U.S. economy - not too hot
and not too cold - may be ending. First, the slowdown to 2% GDP growth seems
to have been confined to the summer and recent data depict faster growth for
the fourth quarter of 1996. Second, inflation has begun a cyclical climb,
although there is yet little linkage to the tight labor market. The economy
is operating with very little slack near the close of its sixth year of
expansion. Hence, the resumption of faster growth quickly restored a rising
trend to bond yields and pulled short-term rates above their December lows.
As yet there is little expectation of tighter Federal Reserve policy,
although sustained above-trend growth would probably justify higher rates
during 1997. Modest tightening in 1997 would in our opinion help allay
inflation fears and sustain another year of economic growth.

Although the economy grew near its 2.4% long-term trend rate in 1996, it was
nonetheless quite volatile during the year. After a strong first half, and then
the summer slowdown, the return to faster growth late in the year is not broad
based. Strong sectors are in manufacturing, exports, services and construction.
By contrast, some retailers found Christmas sales disappointing and capital
goods orders are mixed. However, inventories are quite lean and this tilts the
odds towards yet another year of growth in 1997. While corporate profit growth
slowed in 1996, profits still generally tended to surprise on the upside and, we
believe, should maintain steady growth in 1997.

Accelerating wage growth in 1996 did not fuel higher prices. And surging
energy prices have failed to lift inflation elsewhere. Indeed, core inflation
(excluding food and energy) decelerated last year. But with oil prices rising
now for a year, their ability to raise the overall price level may become
worrisome at some point, especially if the Fed finds them significant.

We believe the economy has reverted to a period of modest growth above
the long-term average. Key issues are whether faster growth will fuel higher
inflation and at what point rising oil prices would disturb price stability.
The economy will shortly begin a seventh expansion year and continued
volatility in growth and in sentiment is likely.

MARKET OVERVIEW

The stock market in 1996 was a mixture of agony and ecstasy, with the
accent for most of the year on the more desirable of those two alternatives.
By the end of the year, the S&P had registered a gain of 22.95%, while the
blue chip Dow Jones Industrial Average ("DJIA") gained 28.91%.*** The road
leading to those impressive year-end gains was not a smooth one, however.

The market year began haltingly, in the wake of shaky business conditions
at the end of the previous year. As 1996 unfolded, however, the market picked
up steam. The economy took on characteristics that continued for much of the
year - low inflation, moderate growth and relatively low interest rates. This
was a combination that investors liked, perhaps too much. By midyear,
satisfaction with the economy turned into fear that economic growth might be
overdone.

The prevailing nervousness about potential inflation served to boost
interest rates temporarily, without the need for Federal Reserve
intervention. This was a temporary setback for large capitalization stocks,
but more damaging to Nasdaq issues and particularly to the smaller
capitalization stocks measured by the Russell 2000 Index.
<PAGE>

As Summer turned into Fall, interest rates eased and inflation remained
at bay. The benign economic environment allowed many stocks to resume their
upward course, causing a string of record-breaking performances by the DJIA
and other broad market indexes. In mid-Fall the prospect that government
would continue divided in Washington, with a Democratic President and a
Republican-controlled Congress, appeared to be another plus factor for the
market. Stocks continued to surge, hardly pausing for breath when Chairman
Alan Greenspan raised a caution signal in early December by referring to
"irrational exuberance" in the equity markets.

Stock market veterans issued a stream of warnings that what goes up so
strongly and consistently must, at some point, come down. Nonetheless, a
fairly steady flow of new money coming into stocks from people putting money
aside for retirement seemed to be fueling the boom. While, at the very end of
the year, caution caused a softening of stock prices, which backed away from
the year's record of 6560.91 on the DJIA, that record was surpassed in early
1997, when the average surpassed 6700.

Among the best performing groups for 1996 were oil drillers,
semi-conductors, computers, financial enterprises and consumer non-durables.
Corporate earnings were very strong for much of the year, but showed signs of
flagging as the year wore on. This raised questions in the minds of many
market observers whether the scorching pace of the past year could be
maintained.

PORTFOLIO FOCUS

The Fund's rewarding stock selection can be seen from a brief overview of
several of the names that led the way for the year including BMC Software,
3Com, Computer Associates, EMC, Colgate Palmolive, Gillette, CPC
International, Citicorp, Greentree Acceptance Corp. Financial, SunAmercia,
Bank of Boston and Allstate. Each of these names exhibited superior earnings
revisions during the previous six months and because of their earnings
stability were rewarded by investors who remained skittish about the strength
of the economy.

The sector overweighting decisions contributed nicely to performance as
the Fund was weighted heavily in three strong areas. Technology regained
investor attention after a dismal performance in the second quarter as many
came to the conclusion that a slowdown in the capital goods cycle would have
a minimal adverse effect on these companies. We currently intend to continue
to take some profits in this area on strength but will remain overweighted as
we continue to like the long-term picture for Technology. Consumer Staple
stocks continued to attract interest because of the stability of their
earnings although many are beginning to look pricey. The Financial or
Interest-Sensitive stocks benefited from a rebound in the bond market as the
Fed decided to leave rates unchanged and reduce investor anxiety over the
prevalence of inflation in this economy. We currently remain overweighted in
this group as we believe that company-specific fundamentals remain intact and
that the long-term direction of interest rates is lower.

SOCIAL RESPONSIBILITY

The Dreyfus Socially Responsible Growth Fund continues to see positive
results in its effort to invest in a way that enhances the quality of life in
America. We believe that our commitment to social investment is slowly but
surely reaping social dividends. For example, the nation is witnessing a
broad-based attack on the tobacco industry, especially its targeting of
youthful customers. In the fight against tobacco, The Dreyfus Socially
Responsible Growth Fund, along with a growing chorus of forces, including
lawmakers in state and local governments and the American Medical
Association, is calling for the general divestment of tobacco stocks, which,
it should be noted, continue to seriously underperform the S&P 500.

There is also positive news to report on a number of the Fund's core
holdings. BankAmerica was recently named a winner of Business Ethics magazine's
Award for Corporate Social Responsibility and Ethics for general ethics,
environment and community banking. The company has just announced that it has
granted stock options to all employees. Interestingly, the above-mentioned
awards were sponsored by another leader in corporate social responsibility,
<PAGE>

Sears, Roebuck and Co., which the Fund has held for some time. On the
diversity front, two of the Fund's companies, Johnson & Johnson and Disney,
have announced that they will now be extending employee benefits to same-sex
partners, a move which complements the Fund's objectives of ensuring equal
employment opportunity for all Americans.

OUTLOOK

The current outlook for the stock market appears mixed to positive. Low
interest rates, modest economic growth, and continued money flows into mutual
funds bode well for the market. However, somewhat extended valuations, the
possibility of slowing economic growth and slow earnings for individual
companies compared to the prior year give us some concern. We look for 1997 to
be a year for much more modest returns from the equity markets than 1996 or 1995
as a result of overall slowing economic conditions. The focus will continue to
be on the ability of investment managers to outperform through superior stock
selection.

We thank you for your confidence in us and look forward to serving you well
in the future.

Sincerely,

signature logo] signature logo] signature logo]

Stephon A. Jackson, CFA Maceo K. Sloan, CFA Eric Steedman
Portfolio Manager Portfolio Manager Portfolio Manager
NCM Capital NCM Capital The Dreyfus Corporation
Management Group, Inc. Management Group, Inc.
January 15, 1997
New York, N. Y.

* Total return includes reinvestment of dividends and any capital gains paid.
Figures do not reflect the deduction of any additional charges applicable to
separate accounts of participating insurance companies which use the Fund as
an underlying investment.

*** SOURCE: LIPPER ANALYTICAL SERVICES, INC. - Reflects the reinvestment of
income dividends and, where applicable, capital gain distributions. The Dow
Jones Industrial Average (DJIA) is a price-weighted average of 30 actively
traded blue chip stocks.
<PAGE>

THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC. DECEMBER 31, 1996
- --------------------------------------------------------------------------------
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE DREYFUS SOCIALLY
RESPONSIBLE GROWTH FUND, INC. AND THE STANDARD & POOR'S 500 COMPOSITE STOCK
PRICE INDEX

EXHIBIT A:

STANDARD DREYFUS
& POOR'S 500 SOCIALLY
PERIOD COMPOSITE STOCK RESPONSIBLE
PRICE INDEX* GROWTH FUND

10/7/93 10,000 10,000
12/31/93 10,232 10,735
12/31/94 10,366 10,895
12/31/95 14,257 14,661
12/31/96 17,528 17,774

*Source: Lipper Analytical Services, Inc.

[Exhibit A:
$17,774
Dreyfus Socially
Responsible
Growth Fund
Dollars

$17,528
Standard & Poor's 500
Composite Stock
Price Index*

AVERAGE ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
One Year Ended From Inception (10/7/93)
December 31, 1996 to December 31, 1996
-------------------- ----------------------
<S> <C>
21.23% 19.45%
</TABLE>

_____________________
Past performance is not predictive of future performance.

THE FUND'S PERFORMANCE DOES NOT REFLECT THE DEDUCTION OF ADDITIONAL CHARGES
IMPOSED IN CONNECTION WITH INVESTING IN VARIABLE ANNUITY CONTRACTS AND
VARIABLE LIFE INSURANCE POLICIES.

The above graph compares a $10,000 investment made in The Dreyfus Socially
Responsible Growth Fund, Inc. on 10/7/93 (Inception Date) to a $10,000
investment made in the Standard & Poor's 500 Composite Stock Price Index on
that date. For comparative purposes, the value of the Index on 9/30/93 is
used as the beginning value on 10/7/93. All dividends and capital gain
distributions are reinvested.

The Fund's performance shown in the line graph takes into account all applicable
fees and expenses of the Fund. The Standard & Poor's 500 Composite Stock Price
Index is a widely accepted, unmanaged index of overall stock market performance,
which does not take into account charges, fees and other expenses. Further
information relating to Fund performance, including expense reimbursements, if
applicable, is contained in the Financial Highlights section of the Prospectus
and elsewhere in this report.
<PAGE>

THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS DECEMBER 31, 1996

<TABLE>
<CAPTION>
Common Stocks-92.6% Shares Value
- ---------------------------------------------------------------------- ---------- ------------
<S> <C> <C>
Consumer Durables-.7% Oakwood Homes........................... 34,600 $ 791,475
------------
Consumer Non-Durables-12.2% Clorox.................................. 23,000 2,308,625
Coca-Cola............................... 44,800 *********
Colgate-Palmolive....................... 26,600 2,453,850
Gillette................................ 26,900 2,091,475
Jones Apparel Group..................(a) 31,200 1,166,100
McCormick & Co.......................... 22,600 532,513
NIKE, Cl. B............................. 52,000 3,107,000
------------
14,017,163
------------

Consumer Services-6.0% BET Holdings, Cl. A..................(a) 12,300 353,625
CUC International....................(a) 70,050 1,663,688
Disney (Walt)........................... 39,900 2,778,037
Regal Cinemas........................(a) 10,400 319,800
Service Corp. International............. 60,800 1,702,400
------------
6,817,550
------------

Electronic Technology-13.3% Cisco Systems........................(a) 41,200 2,621,350
Coherent.............................(a) 9,300 392,925
EMC..................................(a) 42,200 1,397,875
Intel................................... 19,000 2,487,813
Linear Technology....................... 24,900 1,092,488
Seagate Technology...................(a) 60,000 2,370,000
Sun Microsystems.....................(a) 39,000 1,001,812
3COM.................................(a) 23,900 1,753,662
U.S. Robotics........................(a) 29,100 2,095,200
------------
15,213,125
------------

Finance-20.3% AFLAC................................... 34,900 1,491,975
Allstate................................ 26,700 1,545,263
American International Group............ 18,000 1,948,500
BankAmerica............................. 26,500 2,643,375
Bank of Boston.......................... 52,300 3,360,275
Chase Manhattan......................... 13,000 1,160,250
Citicorp................................ 22,900 2,358,700
Federal National Mortgage Association... 51,400 1,914,650
Green Tree Financial.................... 58,300 2,251,837
PNC Bank................................ 48,300 1,817,287
Summit Bancorp.......................... 31,600 1,382,500
SunAmerica.............................. 31,000 1,375,625
------------
23,250,237
------------

Health Technology-10.9% Amgen................................(a) 39,600 2,153,250
Bristol-Myers Squibb.................... 20,700 2,251,125
Guidant................................. 21,800 1,242,600
Johnson & Johnson....................... 38,300 1,905,425
Medtronic............................... 33,100 2,250,800
Merck & Co.............................. 34,000 2,694,500
------------
12,497,700
------------
</TABLE>
<PAGE>

THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF INVESTMENTS (CONTINUED) DECEMBER 31, 1996

<TABLE>
<CAPTION>
COMMON STOCKS (CONTINUED) Shares Value
- ---------------------------------------------------------------------- ---------- ------------
<S> <C> <C>
Industrial Services-1.4% Schlumberger............................ 7,000 $ 699,125
Seitel...............................(a) 23,300 932,000
------------
1,631,125
------------

Process Industries-2.9% Avery Dennison.......................... 37,600 1,330,100
Bemis................................... 55,000 2,028,125
------------
3,358,225
------------
Producer Manufacturing-1.9% Dover................................... 44,100 2,216,025
------------
Retail Trade-6.9% Consolidated Stores..................(a) 50,625 1,626,328
OfficeMax............................(a) 102,800 1,092,250
Safeway..............................(a) 45,000 1,923,750
Sears, Roebuck & Co..................... 53,100 2,449,238
Viking Office Products...............(a) 31,600 843,325
------------
7,934,891
------------

Technology Services-10.6% Arrow Electronics....................(a) 28,500 1,524,750
BMC Software.........................(a) 54,000 2,234,250
Computer Associates International....... 37,300 1,855,675
Microsoft............................(a) 48,000 3,966,000
Oracle...............................(a) 60,800 2,538,400
------------
12,119,075
------------
Transportation-2.0% Comair Holdings......................... 48,900 1,173,600
Federal Express......................(a) 24,200 1,076,900
------------
2,250,500
------------
Utilities-3.5% CMS Energy.............................. 21,900 736,388
Century Telephone Enterprises........... 43,400 1,339,976
360 Communications...................... 32,900 760,812
WorldCom.............................(a) 42,600 1,110,262
------------
3,947,437
------------
TOTAL COMMON STOCKS
(cost $94,601,003).................... $106,044,528
============
</TABLE>

<TABLE>
<CAPTION>
Principal
SHORT-TERM INVESTMENT-7.9% Amount
- ---------------------------------------------------------------------- -----------
<S> <C> <C>
U.S. Treasury Bill; 4.95%, 3/6/1997
(cost $9,045,634)..................... $ 9,126,000 $ 9,045,509
============
TOTAL INVESTMENTS (cost $103,646,637)................................. 100.5% $115.090,037
------------ ============
LIABILITIES, LESS CASH AND RECEIVABLES................................ (.5%) $ (520,044)
------------ ============
NET ASSETS............................................................ 100.0% $114,569,993
------------ ============
Notes to Statement of Investments:
- -------------------------------------------------------------------------------------------------------
</TABLE>

(a) Non-income producing.

See notes to financial statements.
<PAGE>

THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1996

<TABLE>
<CAPTION>
Cost Value
---------- ------------
<S> <C> <C> <C>
ASSETS: Investments in securities-See Statement of Investments..... $ 103,646,637 $115,090,037
Cash....................................................... 159,239
Dividends receivable....................................... 60,919
Prepaid expenses........................................... 24,922
------------
115,335,117
------------

LIABILITIES: Due to The Dreyfus Corporation and affiliates.............. 78,604
Payable for Common Stock redeemed.......................... 608,667
Accrued expenses........................................... 77,853
------------
765,124
------------

NET ASSETS.................................................................. $114,569,993
============

REPRESENTED BY: Paid-in capital............................................ $102,861,347
Accumulated undistributed investment income-net............ 42,432
Accumulated net realized gain (loss) on investments........ 222,814
Accumulated net unrealized appreciation (depreciation)
on investments-Note 4...................................... 11,443,400
------------

NET ASSETS.................................................................. $114,569,993
============
SHARES OUTSTANDING
(150 million shares of $.001 par value Common Stock authorized)............. 5,704,191

NET ASSET VALUE, offering and redemption price per share.................... $20.09
======
</TABLE>

See notes to financial statements.
<PAGE>

THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1996

<TABLE>
INVESTMENT INCOME
<S> <C> <C> <C>
INCOME: Cash dividends (net of $3,103 foreign taxes
withheld at source)........................... $ 719,847
Interest......................................... 240,728
----------
Total Income.............................. $ 960,575

EXPENSES: Investment advisory fee-Note 3(a)................ 522,795
Legal fees....................................... 40,421
Auditing fees.................................... 31,587
Registration fees................................ 22,928
Directors' fees and expenses-Note 3(c)........... 13,678
Custodian fees-Note 3(b)......................... 13,069
Prospectus and shareholders' reports............. 12,366
Shareholder servicing costs-Note 3(b)............ 9,215
Interest-Note 2.................................. 5,962
Miscellaneous.................................... 15,459
----------
Total Expenses............................ 687,480
Less-reduction in investment advisory fee due to
undertaking-Note 3(a)......................... (19,166)
----------
Net Expenses.............................. 668,314
-----------
INVESTMENT INCOME-NET................................................... 292,261
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS-Note 4:
Net realized gain (loss) on investments.......... $4,325,349
Net unrealized appreciation (depreciation) on
investments................................... 7,720,782
----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS.................. 12,046,131
-----------

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................... $12,338,392
===========
</TABLE>

See notes to financial statements.
<PAGE>

THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS

Net Increase (Decrease) in Net Assets Resulting from Operations 12,338,392 5,156,499
---------- -----------

DIVIDENDS TO SHAREHOLDERS FROM:
Investment income-net............................................... (251,529) (140,970)
Net realized gain on investments.................................... (4,505,355) (722,469)
---------- -----------

Total Dividends.................................................... (4,756,884) (863,439)
---------- -----------

CAPITAL STOCK TRANSACTIONS:
Net proceeds from shares sold....................................... 136,594,495 19,961,838
Dividends reinvested................................................ 4,756,884 863,439
Cost of shares redeemed............................................. (66,020,126) (3,867,386)
---------- -----------

Increase (Decrease) in Net Assets from Capital Stock Transactions 75,331,253 16,957,891

Total Increase (Decrease) in Net Assets........................... 82,912,761 21,250,951

NET ASSETS:
Beginning of Period................................................. 31,657,232 10,406,281

End of Period....................................................... $114,569,993 $31,657,232

UNDISTRIBUTED INVESTMENT INCOME-NET.................................. $ 42,432 $ 1,700

Shares Shares
---------- -----------
CAPITAL SHARE TRANSACTIONS:
Shares sold......................................................... 7,039,912 1,237,706
Shares issued for dividends reinvested.............................. 233,664 50,113
Shares redeemed..................................................... (3,398,612) (245,303)
---------- -----------
Net Increase (Decrease) in Shares Outstanding...................... 3,874,964 1,042,516
========== ===========
</TABLE>

See notes to financial statements.
<PAGE>

THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

Contained below is per share operating performance data for a share of
information has been derived from the Fund's financial statements.

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
PER SHARE DATA: 1996 1995 1994 1993(1)
------- ------- -------- ---------
<S> <C> <C> <C> <C>
Net asset value, beginning of period.................................... $17.31 $ 13.23 $ 13.38 $12.50
------- ------- -------- ---------
INVESTMENT OPERATIONS:
Investment income-net................................................... .05 .08 .35 .04
Net realized and unrealized gain (loss)
on investments......................................................... 3.63 4.49 (.15) .88
------- ------- -------- ---------

TOTAL FROM INVESTMENT OPERATIONS........................................ 3.68 4.57 .20 .92

DISTRIBUTIONS:

Dividends from investment income-net.................................... (.05) (.08) (.35) (.04)
Dividends from net realized gain on investments......................... (.85) (.41) -- --
------- ------- -------- ---------
Total Distributions..................................................... (.90) (.49) (.35) (.04)

Net asset value, end of period.......................................... $20.09 $ 17.31 $ 13.23 $13.38
======= ======= ======== =========

TOTAL INVESTMENT RETURN.................................................. 21.23% 34.56% 1.49% 7.35%(2)

RATIOS/SUPPLEMENTAL DATA:

Ratio of operating expenses to average net assets....................... .95% 1.27% .25% .06%(2)
Ratio of interest expense to average net assets......................... .01% -- -- --
Ratio of net investment income
to average net assets.................................................. .42% .70% 4.58% 6.19%(2)
Decrease reflected in above expense ratios
due to undertakings by Dreyfus and sub-investment adviser .03% .06% 2.60% 6.19%(2)
Portfolio Turnover Rate................................................. 126.41% 88.52% 373.68% --
Average commission rate paid (3)........................................ $.0578 -- -- --
Net Assets, end of period (000's Omitted)............................... $114,570 $31,657 $10,406 $1,372
</TABLE>

_______________________________
(1) From October 7, 1993 (commencement of operations) to December 31, 1993.

(2) Not annualized.

(3) For fiscal years beginning January 1, 1996, the Fund is required to
disclose its average commission rate paid per share for purchases and sales
of investment securities.

See notes to financial statements.
<PAGE>

THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS

NOTE 1-SIGNIFICANT ACCOUNTING POLICIES:

The Dreyfus Socially Responsible Growth Fund, Inc. (the "Fund") is
registered under the Investment Company Act of 1940 ("Act") as a diversified
open-end management investment company. The Fund's investment objective is to
provide capital growth through equity investments in companies that not only
meet traditional investment standards but which also show evidence that they
conduct their business in a manner that contributes to the enhancement of the
quality of life in America. The Fund is intended to be a funding vehicle for
variable annuity contracts and variable life insurance policies to be offered
by the separate accounts of life insurance companies. The Dreyfus Corporation
("Dreyfus") serves as the Fund's investment adviser. Dreyfus is a direct
subsidiary of Mellon Bank, N.A. ("Mellon"). NCM Capital Management Group, Inc.
("NCM") serves as the Fund's sub-investment adviser. Premier Mutual Fund
Services, Inc. acts as the distributor of the Fund's shares, which are sold
without a sales charge.

The Fund's financial statements are prepared in accordance with generally
accepted accounting principles which may require the use of management
estimates and assumptions. Actual results could differ from those estimates.

(a) PORTFOLIO VALUATION: Investments in securities are valued at the last
sales price on the securities exchange on which such securities are primarily
traded or at the last sales price on the national securities market.
Securities not listed on an exchange or the national securities market, or
securities for which there were no transactions, are valued at the average of
the most recent bid and asked prices. Bid price is used when no asked price
is available.

(b) SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities
transactions are recorded on a trade date basis. Realized gain and loss from
securities transactions are recorded on the identified cost basis. Dividend
income is recognized on the ex-dividend date and interest income, including,
where applicable, amortization of discount on investments, is recognized on
the accrual basis.

(c) DIVIDENDS TO SHAREHOLDERS: Dividends are recorded on the ex-dividend
date. Dividends from investment income-net and dividends from net realized
capital gain are normally declared and paid annually, but the Fund may make
distributions on a more frequent basis to comply with the distribution
requirements of the Internal Revenue Code. To the extent that net realized
capital gain can be offset by capital loss carryovers, if any, it is the
policy of the Fund not to distribute such gain.

(d) FEDERAL INCOME TAXES: It is the policy of the Fund to continue to
qualify as a regulated investment company, if such qualification is in the
best interests of its shareholders, by complying with the applicable
provisions of the Internal Revenue Code, and to make distributions of taxable
income sufficient to relieve it from substantially all Federal income and
excise taxes.

NOTE 2-BANK LINE OF CREDIT:

The Fund participates with other Dreyfus-managed funds in a $100 million
unsecured line of credit primarily to be utilized for temporary or emergency
purposes, including the financing of redemptions. Interest is charged to the
Fund at rates which are related to the Federal Funds rate in effect at the
time of borrowings. At December 31, 1996, there were no outstanding
borrowings.

The average daily amount of borrowings outstanding during the period
ended December 31, 1996 was approximately $99,000, with related a weighted
average annualized interest rate of 5.99%. The maximum amount borrowed at any
time during the period ended December 31, 1996 was $3,800,000.
<PAGE>

THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (continued)

NOTE 3-INVESTMENT ADVISORY FEE, SUB-INVESTMENT ADVISORY FEE AND OTHER
TRANSACTIONS WITH AFFILIATES:

(a) Pursuant to an Investment Advisory Agreement ("Agreement") with
Dreyfus, the investment advisory fee is computed at the annual rate of .75 of
1% of the value of the Fund's average daily net assets and is payable
monthly. Dreyfus has undertaken from January 1, 1996 through December 31,
1996 to reduce the investment advisory fee paid by the Fund, to the extent
that the Fund's aggregate expenses (exclusive of taxes, brokerage, interest
on borrowings and extraordinary expenses) exceed an annual rate of 1% of the
value of the Fund's average daily net assets. The reduction in investment
advisory fee, pursuant to the undertaking, amounted to $19,166 during the
period ended December 31, 1996.

Pursuant to a Sub-Investment Advisory Agreement with NCM, the
sub-investment advisory fees are payable monthly by Dreyfus, and are based
upon the value of the Fund's average daily net assets, computed at the
following annual rates:

<TABLE>
<CAPTION>
Average Net Assets
------------------
<S> <C>
0 to $32 million.......................................... .10 of 1%
In excess of $32 million to $150 million.................. .15 of 1%
In excess of $150 million to $300 million................. .20 of 1%
In excess of $300 million................................. .25 of 1%
</TABLE>

Prior to April 22, 1996, the sub-investment advisory fee was computed at an
annual rate of .10 of 1% on the first $500
million and .20 of 1% on the excess over $500 million of the value of the
Fund's average daily net assets and was payable by Dreyfus.

(b) Pursuant to the Fund's Shareholder Services Plan, the Fund reimburses
Dreyfus Service Corporation, a wholly-owned subsidiary of Dreyfus, an amount
not to exceed an annual rate of .25 of 1% of the value of the Fund's average
daily net assets for certain allocated expenses with respect to servicing
and/or maintaining shareholder accounts. During the period ended December 31,
1996, the Fund was charged an aggregate of $5,531 pursuant to the Shareholder
Services Plan.

The Fund compensates Dreyfus Transfer, Inc., a wholly-owned subsidiary of
Dreyfus, under a transfer agency agreement for providing personnel and
facilities to perform transfer agency services for the Fund. Such
compensation amounted to $160 during the period ended December 31, 1996.

Effective May 10, 1996, the Fund entered into a custody agreement with
Mellon to provide custodial services for the Fund. During the period ended
December 31, 1996, $9,190 was paid to Mellon pursuant to the custody
agreement.

(c) Each director who is not an "affiliated person" as defined in the Act
receives from the Fund an annual fee of $2,500. The Chairman of the Board
receives an additional 25% of such compensation.

NOTE 4-SECURITIES TRANSACTIONS:

The aggregate amount of purchases and sales of investment securities,
excluding short-term securities, during the period ended December 31, 1996,
amounted to $146,562,928 and $82,272,518, respectively.

At December 31, 1996, accumulated net unrealized appreciation on
investments was 11,443,400, consisting of $12,269,295 gross unrealized
appreciation and $825,895 gross unrealized depreciation.

At December 31, 1996, the cost of investments for Federal income tax
purposes was substantially the same as the cost for financial reporting
purposes (see the Statement of Investments).
<PAGE>

THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
- --------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

Shareholders and Board of Directors
The Dreyfus Socially Responsible Growth Fund, Inc.

We have audited the accompanying statement of assets and liabilities of
The Dreyfus Socially Responsible Growth Fund, Inc., including the statement
of investments, as of December 31, 1996, and the related statement of
operations for the year then ended, the statement of changes in net assets
for each of the two years in the period then ended, and financial highlights
for each of the years indicated therein. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included verification by
examination of securities held by the custodian as of December 31, 1996 and
confirmation of securities not held by the custodian by correspondence with
others. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of The Dreyfus Socially Responsible Growth Fund, Inc. at December
31, 1996, the results of its operations for the year then ended, the changes
in its net assets for each of the two years in the period then ended, and the
financial highlights for each of the indicated years, in conformity with
generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

New York, New York
January 29, 1997
<PAGE>

THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC.
- --------------------------------------------------------------------------------
IMPORTANT TAX INFORMATION (UNAUDITED)

For Federal tax purposes the Fund hereby designates $.1996 per share as a
long-term capital gain distribution of the $.791 per share paid on December
26, 1996. The Fund also designates $.010 per share as a long-term capital
gain distribution of the $.110 per share paid on September 16, 1996.
<PAGE>

[Dreyfus lion "d" logo]
THE DREYFUS SOCIALLY RESPONSIBLE
GROWTH FUND, INC.
200 Park Avenue
New York, NY 10166

INVESTMENT ADVISER

The Dreyfus Corporation
200 Park Avenue
New York, NY 10166

SUB-INVESTMENT ADVISER

NCM Capital Management Group, Inc.
103 West Main Street
Durham, NC 27705

CUSTODIAN

Mellon Bank, N.A.
One Mellon Bank Center
Pittsburgh, PA 15258

TRANSFER AGENT &

DIVIDEND DISBURSING AGENT

Dreyfus Transfer, Inc.
P.O. Box 9671
Providence, RI 02940

Printed in U.S.A. 111AR9612

[Dreyfus logo]
SOCIALLY RESPONSIBLE
GROWTH FUND, INC.
ANNUAL REPORT

December 31, 1996

[Photo of Dreyfus]
<PAGE>

PRESIDENT'S MESSAGE
- --------------------------------------------------------------------------------

Dear Shareholder:

I am pleased to present the Annual Report to Shareholders for Federated Utility
Fund II, a portfolio of Federated Insurance Series.

This report covers the 12-month period from January 1, 1996 through December 31,
1996. It begins with a commentary by the fund's portfolio manager, which is
followed by a complete listing of the fund's utility holdings and the financial
statements.

The fund is an attractive way to help your money earn dividend income, with some
opportunities for growth, from an investment sector that supplies critical
services to society. At the end of the reporting period, the fund's 60 common
and preferred stock holdings were spread across the electric, telecommunication,
natural gas and international utilities.

Despite a relatively weak environment for utility stocks during 1996 (the total
return for the Standard & Poor's Utility Index* was 3.08%) Federated Utility
Fund II produced a strong total return of 11.56%.** Contributing to this
performance was $0.41 per share in income, $0.05 per share in capital gains, and
a 7% increase in net asset value. On December 31, 1996, net assets reached $63.6
million -- a significant increase over the $30 million in net assets at the
beginning of the period.

Thank you for participating in the income and growth opportunities of utility
stocks through Federated Utility Fund II. We hope you are pleased with the
fund's strong relative performance. As always, we welcome your comments and
suggestions.

Sincerely,

/s/ J. Christopher Donahue

J. Christopher Donahue
President
February 15, 1997

* Standard & Poor's Utility Index is an unmanaged index of common stocks
from forty different electric and natural gas utilities indicating daily
changes in the price of the stocks. Investments cannot be made in an index.

** Performance quoted represents past performance and is not indicative of
future results. Investment return and principal value will fluctuate, so that
an investor's shares, when redeemed, may be worth more or less than their
original cost. Performance information does not reflect the charges and
expenses of a variable annuity or variable life insurance contract.

1
<PAGE>

FEDERATED UTILITY FUND II
- --------------------------------------------------------------------------------

MANAGEMENT DISCUSSION AND ANALYSIS

1996 was an exciting year for the utility industry, complete with mergers and
acquisitions, spin-offs and landmark legislation. We witnessed proposed
combinations of huge companies at handsome premiums to pre-announcement stock
prices. In telecommunications, British Telecommunications agreed to buy MCI
Communications at a 43% premium to create the fourth largest long distance
company in the world. A number of electric utilities proposed mergers with other
electric utilities, some on a friendly basis and others on a hostile basis. A
new buzzword developed for the industry as well. The concept of "convergence,"
in which an electric utility merges with a natural gas utility to become a total
energy provider brought some innovative merger announcements. Enron Corporation,
the largest marketer of natural gas in North America agreed to buy Portland
General, a low cost electric utility in the western United States at a 48%
premium. More recently, Duke Power agreed to merge with PanEnergy at a 19%
premium. With a combined market capitalization of $23 billion, this represents
the largest merger to date in the industry, creating a powerhouse total energy
provider.

Some electric companies made acquisitions outside the United States, with
numerous transactions in the United Kingdom and Australia power industries. And
Southern Company, the largest domestic electric utility bought 80% of
Consolidated Electric Power Asia, the largest independent power producer in
Asia, continuing its strategy to derive an increasing percentage of its income
internationally. On the opposing side of the spectrum, AT&T Corporation has
completed the spin-off of its Lucent Technology and NCR Corporation
subsidiaries. Clearly, many utility managements are positioning their companies
to thrive in the more competitive environment of the future. The portfolio has
benefited from its ownership in a number of these takeover candidates.

On the legislative front, deregulation continues to move forward. The President
signed the landmark telecommunications bill in February 1996, beginning the
lengthy process of bringing competition to the local and long distance markets.
Electric deregulation is progressing on a state-by-state basis, with 42 states
currently studying legislation. Our observation is that efforts to bring
competition to the utility industry are progressing very slowly, allowing the
companies time to improve their balance sheets and cost structures, to work with
their commissions and legislatures, and increasingly to find synergistic merger
partners. Furthermore, key states such as California and Pennsylvania have
proposed electric utility reform which is quite positive for the utility
companies in those states and which is being studied as a model by other states.

The fund posted a total return of 11.56% for the period ended December 31,
1996,* far surpassing the 3.08% return of the Standard & Poor's ("S&P") Utility
Index. It should be noted that Standard & Poor's removed telephone utilities
from its utility index and placed them in a separate S&P Communications Index**
on July 10, 1996. In the future we will compare the fund's performance with both
the S&P Utility Index, representing electric and natural gas sectors, and the
S&P Communications Index.

* Performance quoted represents past performance. Investment return and
principal value will fluctuate, so that an investor's shares, when redeemed,
may be worth more or less than their original cost. Performance information
does not reflect the charges and expenses of a variable annuity or variable
life insurance contract.

** Standard & Poor's Communications Index is an unmanaged index of common stocks
from telephone utilities indicating daily changes in the price of the stocks.
Investments cannot be made in an index.

2
<PAGE>

- --------------------------------------------------------------------------------

The portfolio's performance was bolstered by an 11% allocation to natural gas, a
sector which enjoyed a total return of nearly 33% in 1996. This performance
dwarfed that of the S&P electrics sector, down 0.33% for the year and the S&P
telephones sector, which was up only 1.01% in 1996. While natural gas stocks
benefited from strong natural gas prices and merger speculation, the interest-
sensitive electrics were held back by a poorly performing bond market.
Telephones suffered from a combination of rising interest rates, entering the
year in an overbought position and investor concerns regarding telecom
deregulation.

An allocation of 8% to international utilities contributed to the portfolio's
return, as international utilities significantly outperformed domestic utilities
in 1996. Finally, the portfolio holds 23% in non-utility common stocks and
convertible securities which diversify away some of the interest rate risk
inherent in utilities and which have contributed significantly to the defensive
characteristics of the portfolio.

OUTLOOK

We expect to see more electric utility company mergers in 1997 and a
continuation of the convergence theme. The Federal Energy Regulatory Commission
has recently issued guidelines which should quicken the pace of completing
proposed electric utility mergers. This is welcome news. The premiums being paid
and the synergistic savings resulting from these combinations should benefit the
stocks. Additionally, we should see further competitive rulings from state
utility commissions and legislatures, reducing uncertainty in the group. On the
telephone front, recent deregulation guidelines proposed by the Federal
Communications Commission exhibit a slow and less harsh approach to the process,
resulting in positive performances by these stocks. Lastly, utilities retain
their defensive investment qualities as the general stock market becomes
increasingly volatile. In fact, the fund has outperformed the S&P 500 Stock
Index*** in 17 of the 20 periods in which the Index corrected by 2% or more
since 1990. As well, the fund has outperformed the 30-year Treasury Bond return
in 17 of the 18 periods in which the Treasury Bond corrected by 3% or more since
1990. We will strive to maintain the defensive qualities of the fund while
seeking a competitive return.

THEMES

1) High quality domestic utilities with superior dividend growth prospects.

2) Defensive non-utility holdings, mostly in the form of convertible bonds
and preferred stocks.

3) Diversified international utility holdings.

*** Standard & Poor's 500 Stock Index is an unmanaged composite index of common
stocks in industrial, transportation, and financial and public utility
companies, and can be used to compare the total returns of funds whose
portfolios are invested primarily in common stocks. Investments cannot be
made in an index.

3
<PAGE>

- --------------------------------------------------------------------------------

COMMENTS REGARDING SELECTED PURCHASES

SPRINT CORP. -- Sprint enjoys the highest revenue and volume growth of the
long distance telephone companies. We purchased the stock at an attractive
price compared to its peers and compared to its historical price/earnings
multiple relative to the market.

SALOMON BROTHERS DECS, SERIES CINCINNATI BELL, 7.625% -- This Salomon Brothers
preferred stock is convertible into the common stock of Cincinnati Bell, a
midwest local and long distance telephone service provider whose expected long-
term earnings growth rate is 23%. We believe that its other businesses,
including telemarketing services, information management and billing services,
and yellow pages publication are undervalued.

TOSCO CORP. 5.75% CONVERTIBLE PREFERRED STOCK -- Tosco is a highly successful
oil refiner, wholesaler, gas retailer and operator of convenience stores. We
purchased the convertible preferred stock issued as part of the company's
financing for its proposed acquisition of Unocal Corp.

SUNAMERICA PERCS 8.5% -- SunAmerica is one of the best positioned companies in
the growing annuity and retirement savings market. We purchased this high
yielding convertible preferred to complement our holding of the SunAmerica 7.25%
STRYPES.

4
<PAGE>

FEDERATED UTILITY FUND II
- --------------------------------------------------------------------------------

GROWTH OF $10,000 INVESTED IN THE FEDERATED UTILITY FUND II

The graph below illustrates the hypothetical investment of $10,000 in the
Federated Utility Fund II (the "Fund") from February 10, 1994 (start of
performance) to December 31, 1996, compared to the Standard & Poor's 500 Index
(S&P 500)+ and the Standard & Poor's Utility Index (SPXU).+

GRAPHIC REPRESENTATION OMITTED. SEE APPENDIX A

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED DECEMBER 31, 1996
<S> <C>
1 Year.......................................................11.56%
Start of Performance (2/10/94)...............................10.63%
</TABLE>

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY
MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT
OBLIGATIONS OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.

* The Fund's performance assumes the reinvestment of all dividends and
distributions. The S&P 500 and SPXU have been adjusted to reflect reinvestment
of dividends on securities in the indices.

+ The S&P 500 and the SPXU are not adjusted to reflect sales charges, expenses,
or other fees that the SEC requires to be reflected in the Fund's performance.
The indices are unmanaged.

5
<PAGE>

FEDERATED UTILITY FUND II
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
- -------- ------------------------------------------------------- -----------
<S> <C>
COMMON STOCKS--79.4%
- -----------------------------------------------------------------
CONSUMER DURABLES--1.2%
------------------------------------------------------
24,300 Ford Motor Co. $ 774,563
------------------------------------------------------ ----------
CONSUMER NON-DURABLES--1.9%
------------------------------------------------------
10,800 Philip Morris Cos., Inc. 1,216,350
------------------------------------------------------ ----------
ELECTRIC UTILITIES: CENTRAL--12.0%
------------------------------------------------------
58,700 CMS Energy Corp. 1,973,787
------------------------------------------------------
23,300 Cinergy Corp. 777,637
------------------------------------------------------
75,000 DPL, Inc. 1,837,500
------------------------------------------------------
54,600 Illinova Corp. 1,501,500
------------------------------------------------------
38,900 NIPSCO Industries, Inc. 1,541,412
------------------------------------------------------ ----------
Total 7,631,836
------------------------------------------------------ ----------
ELECTRIC UTILITIES: EAST--5.6%
------------------------------------------------------
50,000 DQE, Inc. 1,450,000
------------------------------------------------------
28,200 GPU, Inc. 948,225
------------------------------------------------------
45,000 Peco Energy Co. 1,136,250
------------------------------------------------------ ----------
Total 3,534,475
------------------------------------------------------ ----------
ELECTRIC UTILITIES: SOUTH--14.8%
------------------------------------------------------
55,700 Duke Power Co. 2,576,125
------------------------------------------------------
57,100 FPL Group, Inc. 2,626,600
------------------------------------------------------
69,600 Southern Co. 1,574,700
------------------------------------------------------
54,300 TECO Energy, Inc. 1,309,988
------------------------------------------------------
33,000 Texas Utilities Co. 1,344,750
------------------------------------------------------ ----------
Total 9,432,163
------------------------------------------------------ ----------
ELECTRIC UTILITIES: WEST--7.3%
------------------------------------------------------
50,400 Pacificorp 1,033,200
------------------------------------------------------
66,200 Pinnacle West Capital Corp. 2,101,850
------------------------------------------------------
35,300 Portland General Corp. 1,482,600
------------------------------------------------------ ----------
Total 4,617,650
------------------------------------------------------ ----------
</TABLE>

6
<PAGE>

FEDERATED UTILITY FUND II
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
- -------- ------------------------------------------------------- -----------
<S> <C>
COMMON STOCKS--CONTINUED
- -----------------------------------------------------------------
ENERGY MINERALS--0.5%
------------------------------------------------------
3,100 Exxon Corp. $ 303,800
------------------------------------------------------ -----------
FINANCE--4.0%
------------------------------------------------------
48,500 Meditrust, REIT 1,940,000
------------------------------------------------------
8,500 Mellon Bank Corp. 603,500
------------------------------------------------------ -----------
Total 2,543,500
------------------------------------------------------ -----------
MAJOR U.S. TELECOMMUNICATIONS--17.8%
------------------------------------------------------
12,600 AT&T Corp. 548,100
------------------------------------------------------
29,800 Ameritech Corp. 1,806,625
------------------------------------------------------
50,000 BellSouth Corp. 2,018,750
------------------------------------------------------
39,700 GTE Corp. 1,806,350
------------------------------------------------------
63,900 MCI Communications Corp. 2,088,731
------------------------------------------------------
38,700 Pacific Telesis Group 1,422,225
------------------------------------------------------
6,700 SBC Communications, Inc. 346,725
------------------------------------------------------
32,500 Sprint Corp. 1,295,938
------------------------------------------------------ -----------
Total 11,333,444
------------------------------------------------------ -----------
NATURAL GAS DISTRIBUTION--4.9%
------------------------------------------------------
52,400 MCN Corp. 1,513,050
------------------------------------------------------
3,400 New Jersey Resources Corp. 99,450
------------------------------------------------------
48,900 Pacific Enterprises 1,485,338
------------------------------------------------------ -----------
Total 3,097,838
------------------------------------------------------ -----------
NON-U.S. UTILITIES--6.2%
------------------------------------------------------
13,500 CPT Telefonica del Peru S.A., 254,813
------------------------------------------------------
Class B, ADR
------------------------------------------------------
30,000 Iberdrola S.A. 425,188
------------------------------------------------------
15,400 Korea Electric Power Corp., ADR 315,700
------------------------------------------------------
43,300 National Power Co. PLC, ADR 1,466,787
------------------------------------------------------
241,800 STET-Societa Finanziaria Telefonica S.P.A. 816,892
------------------------------------------------------
9,000 Telecomunicacoes Brasileras, ADR 688,500
------------------------------------------------------ -----------
Total 3,967,880
------------------------------------------------------
</TABLE>

7
<PAGE>

FEDERATED UTILITY FUND II
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
VALUE
IN U.S.
SHARES DOLLARS
- -------- ------------------------------------------------------------- ------------
<S> <C>
COMMON STOCKS--CONTINUED
- -----------------------------------------------------------------------
OIL/GAS TRANSMISSION--2.3%
------------------------------------------------------------
15,100 Panenergy Corp. $ 679,500
------------------------------------------------------------
21,000 Williams Cos., Inc. (The) 787,500
------------------------------------------------------------ -----------
Total 1,467,000
------------------------------------------------------------ -----------
OTHER TELEPHONE/COMMUNICATIONS--0.5%
------------------------------------------------------------
13,500 Frontier Corp. 305,437
------------------------------------------------------------ -----------
WATER SUPPLY--0.4%
------------------------------------------------------------
12,800 American Water Works Co., Inc. 264,000
------------------------------------------------------------ -----------
TOTAL COMMON STOCKS (IDENTIFIED COST $46,114,384) 50,489,936
------------------------------------------------------------ -----------
CONVERTIBLE PREFERRED STOCKS--15.0%
- -----------------------------------------------------------------------
BASIC INDUSTRY--1.6%
------------------------------------------------------------
32,900 Coeur d'Alene Mines Corp., Conv. Pfd., 7.00% 575,750
------------------------------------------------------------
2,800 International Paper Co., Cumulative Conv. Pfd., $2.63 129,755
------------------------------------------------------------
7,700 Merrill Lynch & Co., Inc., STRYPES, Series IML 6.25% 308,962
------------------------------------------------------------ -----------
Total 1,014,467
------------------------------------------------------------ -----------
CABLE-0.7%
------------------------------------------------------------
20,500 Merrill Lynch & Co., Inc., STRYPES, Series Cox, 6.00% 456,125
------------------------------------------------------------ -----------
CELLULAR TELEPHONE--0.9%
------------------------------------------------------------
20,200 Airtouch Communications, Inc., DECS, Series B, 6.00% 550,450
------------------------------------------------------------ -----------
CONSUMER NON-DURABLES--0.5%
------------------------------------------------------------
6,200 Amcor Ltd., PRIDES 316,200
------------------------------------------------------------ -----------
ENERGY MINERALS--1.0%
------------------------------------------------------------
12,100(a)Tosco Corp., Conv. Pfd., 5.75% 630,713
------------------------------------------------------------ -----------
FINANCE--5.2%
------------------------------------------------------------
7,500 Aetna Services Inc., Conv. Pfd., 6.25% 595,312
------------------------------------------------------------
4,500 Merrill Lynch & Co., Inc., STRYPES, Series Sun America 7.25% 299,250
------------------------------------------------------------
16,000 Merrill Lynch & Co., Inc., STRYPES, Series MGIC, $3.12 1,076,000
------------------------------------------------------------
9,500 Salomon, Inc., DECS, Series FSA, 7.625% 289,750
------------------------------------------------------------
</TABLE>

8
<PAGE>

FEDERATED UTILITY FUND II
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL OR VALUE
FOREIGN PAR IN U.S.
AMOUNT DOLLARS
- ---------- ----------------------------------------------------------------- -----------
<S> <C>
CONVERTIBLE PREFERRED STOCKS--CONTINUED
- ----------------------------------------------------------------------------
FINANCE--continued
-----------------------------------------------------------------
10,900 Salomon, Inc., DECS, Series $ 656,725
-----------------------------------------------------------------
Cincinnati Bell, $3.48
-----------------------------------------------------------------
10,000 SunAmerica, Inc., PERCS, 8.5% 422,500
----------------------------------------------------------------- -----------
Total 3,339,537
----------------------------------------------------------------- -----------
OIL/GAS TRANSMISSION--1.4%
-----------------------------------------------------------------
10,000 Williams Cos., Inc. (The), Conv. Pfd., $3.50 885,000
----------------------------------------------------------------- -----------
SERVICES--2.0%
-----------------------------------------------------------------
2,800 Alco Standard Corp., ACES, $5.04 267,400
-----------------------------------------------------------------
25,000 Browning-Ferris Industries, Inc., ACES, $2.58 712,500
-----------------------------------------------------------------
24,900 Hollinger International Publishing, Inc., Conv. Pfd., $.95 286,350
----------------------------------------------------------------- -----------
Total 1,266,250
----------------------------------------------------------------- -----------
TECHNOLOGY--1.7%
-----------------------------------------------------------------
13,500 Microsoft Corp., Conv. Pfd., 2.75% 1,081,687
----------------------------------------------------------------- -----------
TOTAL CONVERTIBLE PREFERRED STOCKS (IDENTIFIED COST $8,995,460) 9,540,429
----------------------------------------------------------------- -----------
CONVERTIBLE CORPORATE BONDS--3.6%
- ----------------------------------------------------------------------------
HEALTH CARE--1.2%
-----------------------------------------------------------------
$470,000 Alza Corp., Conv. Bond, 5.00%, 5/1/2006 453,550
-----------------------------------------------------------------
270,000 Tenet Healthcare Corp., Conv. Bond, 6.00%, 12/1/2005 280,800
----------------------------------------------------------------- -----------
Total 734,350
----------------------------------------------------------------- -----------
NON-U.S. UTILITIES--1.2%
-----------------------------------------------------------------
245,000 Korea Electric Power Corp., Conv. Bond, 5.00%, 8/1/2001 245,612
-----------------------------------------------------------------
450,000(a)New World Infrastructure, Conv. Bond, 5.00%, 7/15/2001 532,688
----------------------------------------------------------------- -----------
Total 778,300
----------------------------------------------------------------- -----------
RETAIL TRADE--0.4%
-----------------------------------------------------------------
240,000 Saks Holdings, Inc., Conv. Bond, 5.50%, 9/15/2006 221,549
----------------------------------------------------------------- -----------
TECHNOLOGY--0.9%
-----------------------------------------------------------------
525,000(a)Solectron Corp., Conv. Bond, 6.00%, 3/1/2006 572,156
----------------------------------------------------------------- -----------
TOTAL CONVERTIBLE CORPORATE BONDS (IDENTIFIED COST $2,194,809) 2,306,355
----------------------------------------------------------------- -----------
</TABLE>

9
<PAGE>

FEDERATED UTILITY FUND II
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
VALUE
PRINCIPAL IN U.S.
AMOUNT DOLLARS
- --------- -------------------------------------------------------------------- ------------
<S> <C>
(b)REPURCHASE AGREEMENT--3.9%
- --------------------------------------------------------------------------------
$ 2,450,000 BT Securities Corporation, 6.90%, dated 12/31/1996, due 1/2/1997
(AT AMORTIZED COST) $ 2,450,000
-------------------------------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST $59,754,653)(c) $64,786,720
-------------------------------------------------------------------- ===========
</TABLE>

(a) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities laws. At December 31, 1996, these securities
amounted to $1,735,557 which represents 2.73% of net assets.

(b) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated funds.

(c) The cost of investments for federal tax purposes amounts to $59,773,122.
The net unrealized appreciation of investments on a federal tax basis
amounts to $5,013,598 which is comprised of $5,441,092 appreciation and
$427,494 depreciation at December 31, 1996.

Note: The categories of investments are shown as a percentage of net assets
($63,557,536) at December 31, 1996.

The following acronyms are used throughout this portfolio:

ACES -- Adjustable Convertible Extendable Securities
ADR -- American Depositary Receipt
DECS -- Dividend Enhanced Convertible Stock
PERCS -- Preferred Equity Redemption Cumulative Stock
PLC -- Public Limited Company
PRIDES -- Preferred Redeemable Increased Dividend Equity Securities
REIT -- Real Estate Investment Trust
STRYPES -- Structured Yield Product Exchangeable for Stock

(See Notes which are an integral part of the Financial Statements)

10
<PAGE>

FEDERATED UTILITY FUND II
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<S> <C> <C>
ASSETS:
- -----------------------------------------------------------------------
Total investments in securities, at value (identified cost $59,754,653,
and tax cost $59,773,122) $ 64,786,720
- -----------------------------------------------------------------------
Cash 789
- -----------------------------------------------------------------------
Income receivable 197,174
- -----------------------------------------------------------------------
Receivable for investments sold 355,942
- -----------------------------------------------------------------------
Receivable for shares sold 64,887
- ----------------------------------------------------------------------- ------------
Total assets 65,405,512
- -----------------------------------------------------------------------
LIABILITIES:
- --------------------------------------------------------
Payable for investments purchased $ 1,708,514
- --------------------------------------------------------
Payable for shares redeemed 114,911
- --------------------------------------------------------
Net payable for foreign currency exchange contracts 1,152
- --------------------------------------------------------
Payable for taxes withheld 4,022
- --------------------------------------------------------
Accrued expenses 19,377
- -------------------------------------------------------- -----------
Total liabilities 1,847,976
- ----------------------------------------------------------------------- ------------
Net Assets for 5,382,230 shares outstanding $ 63,557,536
- ----------------------------------------------------------------------- ------------
NET ASSETS CONSIST OF:
- -----------------------------------------------------------------------
Paid in capital $ 56,986,551
- -----------------------------------------------------------------------
Net unrealized appreciation of investments and translation of
in foreign currency assets and liabilities 5,032,196
- -----------------------------------------------------------------------
Accumulated net realized gain on investments and 1,447,599
foreign currency transactions
- -----------------------------------------------------------------------
Undistributed net investment income 91,190
- ----------------------------------------------------------------------- ------------
Total Net Assets $ 63,557,536
- ----------------------------------------------------------------------- ============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- -----------------------------------------------------------------------
$63,557,536 / 5,382,230 shares outstanding $11.81
- ----------------------------------------------------------------------- ============
</TABLE>

(See Notes which are an integral part of the Financial Statements)

11
<PAGE>

FEDERATED UTILITY FUND II
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<S> <C>
INVESTMENT INCOME:
- -------------------------------------------------------------------------------
Dividends (net of foreign taxes withheld of $53,469) $ 2,052,676
- -------------------------------------------------------------------------------
Interest 250,263
- ------------------------------------------------------------------------------- ------------
Total income 2,302,939
- -------------------------------------------------------------------------------
EXPENSES:
- -------------------------------------------------------------------
Investment advisory fee $ 361,797
- -------------------------------------------------------------------
Administrative personnel and services fee 125,000
- -------------------------------------------------------------------
Custodian fees 29,963
- -------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 17,870
- -------------------------------------------------------------------
Directors'/Trustees' fees 2,005
- -------------------------------------------------------------------
Auditing fees 10,000
- -------------------------------------------------------------------
Legal fees 3,060
- -------------------------------------------------------------------
Portfolio accounting fees 47,784
- -------------------------------------------------------------------
Share registration costs 9,743
- -------------------------------------------------------------------
Printing and postage 36,476
- -------------------------------------------------------------------
Insurance premiums 4,138
- -------------------------------------------------------------------
Miscellaneous 12,382
- ------------------------------------------------------------------- ---------
Total expenses 660,218
- -------------------------------------------------------------------
Waiver of investment advisory fee (248,058)
- ------------------------------------------------------------------- ---------
Net expenses 412,160
- ------------------------------------------------------------------------------- --------------
Net investment income 1,890,779
- ------------------------------------------------------------------------------- --------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
AND FOREIGN CURRENCY:
- -------------------------------------------------------------------------------
Net realized gain on investments and foreign currency transactions 1,471,710
- -------------------------------------------------------------------------------
Net change in unrealized appreciation of investments and translation
of assets and liabilities in foreign currency 2,758,768
- ------------------------------------------------------------------------------- --------------
Net realized and unrealized gain on investments and foreign currency 4,230,478
- ------------------------------------------------------------------------------- --------------
Change in net assets resulting from operations $ 6,121,257
- ------------------------------------------------------------------------------- ==============
</TABLE>

(See Notes which are an integral part of the Financial Statements)

12
<PAGE>

FEDERATED UTILITY FUND II
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------
1996 1995
--------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- --------------------------------------------------------------------------
OPERATIONS --
- --------------------------------------------------------------------------
Net investment income $ 1,890,779 $ 552,993
- --------------------------------------------------------------------------
Net realized gain (loss) on
investments and foreign currency transactions ($1,464,419 and
$202,587, respectively, as computed for federal tax purposes) 1,471,710 192,681
- --------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) of investments
and translation of assets and liabilities in foreign currency 2,758,768 2,281,446
- -------------------------------------------------------------------------- ----------- -----------
Change in net assets resulting from operations 6,121,257 3,027,120
- -------------------------------------------------------------------------- ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS --
- --------------------------------------------------------------------------
Distributions from net investment income (1,821,526) (545,930)
- --------------------------------------------------------------------------
Distributions from net realized gains on investments and foreign
currency transactions (192,047) --
- -------------------------------------------------------------------------- ----------- -----------
Change in net assets resulting from distributions to shareholders (2,013,573) (545,930)
- -------------------------------------------------------------------------- ----------- -----------
SHARE TRANSACTIONS --
- --------------------------------------------------------------------------
Proceeds from sale of shares 36,577,954 27,140,255
- --------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
distributions declared 2,013,573 542,617
- --------------------------------------------------------------------------
Cost of shares redeemed (8,821,081) (1,458,826)
- -------------------------------------------------------------------------- ----------- -----------
Change in net assets resulting from share transactions 29,770,446 26,224,046
- -------------------------------------------------------------------------- ----------- -----------
Change in net assets 33,878,130 28,705,236
- --------------------------------------------------------------------------
NET ASSETS:
- --------------------------------------------------------------------------
Beginning of period 29,679,406 974,170
- -------------------------------------------------------------------------- ----------- -----------
End of period (including undistributed net investment income
of $91,190 and $5,636, respectively) $63,557,536 $29,679,406
- -------------------------------------------------------------------------- =========== ===========
</TABLE>

(See Notes which are an integral part of the Financial Statements)

13
<PAGE>

FEDERATED UTILITY FUND II
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994(a)
-------- --------- ---------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.03 $ 9.29 $ 9.48
- ---------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------------------------------------
Net investment income 0.42 0.45 0.34
- ---------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments
and foreign currency 0.82 1.74 (0.19)
- --------------------------------------------------------------------- ------- ------- --------
Total from investment operations 1.24 2.19 0.15
- --------------------------------------------------------------------- ------- ------- --------
LESS DISTRIBUTIONS
- ---------------------------------------------------------------------
Distributions from net investment income (0.41) (0.45) (0.34)
- ---------------------------------------------------------------------
Distributions from net realized gain on investments and foreign
currency transactions (0.05) -- --
- --------------------------------------------------------------------- ------- ------- --------
Total distributions (0.46) (0.45) (0.34)
- --------------------------------------------------------------------- ------- ------- --------
NET ASSET VALUE, END OF PERIOD $ 11.81 $ 11.03 $ 9.29
- --------------------------------------------------------------------- ======= ======= ========
TOTAL RETURN(b) 11.56% 24.18% 1.12%
- ---------------------------------------------------------------------
Ratios to average net assets
- ---------------------------------------------------------------------
Expenses 0.85% 0.85% 0.60%*
- ---------------------------------------------------------------------
Net investment income 3.92% 4.62% 4.77%*
- ---------------------------------------------------------------------
Expense waiver/reimbursement(c) 0.51% 2.24% 54.83%*
- ---------------------------------------------------------------------
SUPPLEMENTAL DATA
- ---------------------------------------------------------------------
Net assets, end of period (000 omitted) $63,558 $29,679 $ 974
- ---------------------------------------------------------------------
Average commission rate paid(d) $ .0402 -- --
- ---------------------------------------------------------------------
Portfolio turnover 63% 62% 73%
- ---------------------------------------------------------------------
</TABLE>

* Computed on an annualized basis.

(a) Reflects operations for the period from April 14, 1994 (date of initial
public investment) to December 31, 1994. For the period from December 9,
1993 (the start of business) to April 13, 1994, the net investment income
was distributed to the Fund's adviser.

(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.

(d) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged.

(See Notes which are an integral part of the Financial Statements)

14
<PAGE>

FEDERATED UTILITY FUND II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------

1. ORGANIZATION

Federated Insurance Series (the "Trust") is registered under the Investment
Company Act of 1940, as amended (the "Act") as an open-end, management
investment company. The Fund consists of eight portfolios. The financial
statements included herein are only those of Federated Utility Fund II (the
"Fund"), a diversified portfolio. The financial statements of the other
portfolios are presented separately. The assets of each portfolio are segregated
and a shareholder's interest is limited to the portfolio in which shares are
held. The investment objective of the Fund is to achieve high current income and
moderate capital appreciation.

Effective April 15, 1996, the Board of Trustees ("Trustees") changed the name of
the Trust from Insurance Management Series to Federated Insurance Series and the
name of the Fund from Utility Fund to Federated Utility Fund II.

2. SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.

INVESTMENT VALUATIONS -- Listed foreign and domestic corporate bonds, other
fixed income and asset-backed securities, and unlisted securities and
private placement securities are generally valued at the mean of the latest
bid and asked price as furnished by an independent pricing service. Listed
foreign and domestic equity securities are valued at the last sale price
reported on a national securities exchange. Short-term securities are
valued at the prices provided by an independent pricing service. However,
short-term securities with remaining maturities of sixty days or less at
the time of purchase may be valued at amortized cost, which approximates
fair market value.

REPURCHASE AGREEMENTS -- It is the policy of the Fund to require the
custodian bank to take possession, to have legally segregated in the
Federal Reserve Book Entry System, or to have segregated within the
custodian bank's vault, all securities held as collateral under repurchase
agreement transactions. Additionally, procedures have been established by
the Fund to monitor, on a daily basis, the market value of each repurchase
agreement's collateral to ensure that the value of collateral at least
equals the repurchase price to be paid under the repurchase agreement
transaction.

The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Trustees. Risks may arise from the
potential inability of counterparties to honor the terms of the repurchase
agreement. Accordingly, the Fund could receive less than the repurchase
price on the sale of collateral securities.

15
<PAGE>

FEDERATED UTILITY FUND II
- --------------------------------------------------------------------------------

INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS -- Interest income and
expenses are accrued daily. Bond premium and discount, if applicable, are
amortized as required by the Internal Revenue Code, as amended (the
"Code"). Distributions to shareholders 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 are primarily due to differing treatments for
foreign currency transactions. The following reclassifications have been
made to the financial statements.

<TABLE>
<CAPTION>
INCREASE/(DECREASE)
-----------------------------------
ACCUMULATED
NET REALIZED UNDISTRIBUTED NET
GAIN/LOSS INVESTMENT INCOME
------------- -----------------
<S> <C>
($16,301) $16,301
</TABLE>

Net investment income, net realized gains/losses, and net assets were not
affected by this reclassification.

FEDERAL TAXES -- It is the Fund's policy to comply with the provisions of
the Code applicable to regulated investment companies and to distribute to
shareholders each year substantially all of its income. Accordingly, no
provisions for federal tax are necessary.

Withholding taxes on foreign interest and dividends have been provided for
in accordance with the Fund's understanding of the applicable country's tax
rules and rates.

WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS -- The Fund may engage in
when-issued or delayed delivery transactions. The Fund records when-issued
securities on the trade date and maintains security positions such that
sufficient liquid assets will be available to make payment for the
securities purchased. Securities purchased on a when-issued or delayed
delivery basis are marked to market daily and begin earning interest on the
settlement date.

FOREIGN EXCHANGE CONTRACTS -- The Fund may enter into foreign currency
commitments for the delayed delivery of securities or foreign currency
exchange transactions. Purchased contracts are used to acquire exposure to
foreign currencies; whereas, contracts to sell are used to hedge the Fund's
securities against currency fluctuations. Risks may arise upon entering
into these transactions from the potential inability of counter-parts to
meet the terms of their commitments and from unanticipated movements in
security prices or foreign exchange rates. The foreign currency
transactions are adjusted by the daily exchange rate of the underlying
currency and any gains or losses are recorded for financial statement
purpose as unrealized until the settlement date.

16
<PAGE>

FEDERATED UTILITY FUND II
- --------------------------------------------------------------------------------

At December 31, 1996, the Fund had an outstanding foreign currency
commitment as set forth below:

<TABLE>
<CAPTION>
CONTRACTS SETTLEMENT CONTRACTS TO IN EXCHANGE CONTRACTS APPRECIATION
SOLD DATE DELIVER/RECEIVE FOR AT VALUE (DEPRECIATION)
-------------- --------------- --------------- ----------- --------- --------------
<S> <C> <C> <C> <C> <C>
Spanish Peseta January 9, 1997 17,403,229 $132,899 $134,051 ($1,152)
</TABLE>

FOREIGN CURRENCY TRANSLATION -- The accounting records of the Fund are
maintained in U.S. dollars. All assets and liabilities denominated in
foreign currencies ("FC") are translated into U.S. dollars based on the
rate of exchange of such currencies against U.S. dollars on the date of
valuation. Purchases and sales of securities, income and expenses are
translated at the rate of exchange quoted on the respective date that such
transactions are recorded. Differences between income and expense amounts
recorded and collected or paid are adjusted when reported by the custodian
bank. The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss
from investments.

Reported net realized foreign exchange gains or losses arise from sales of
portfolio securities, sales and maturities of short-term securities, sales
of FCs, currency gains or losses realized between the trade and settlement
dates on securities transactions, the difference between the amounts of
dividends, interest, and foreign withholding taxes recorded on the Fund's
books, and the U.S. dollar equivalent of the amounts actually received or
paid. Net unrealized foreign exchange gains and losses arise from changes
in the value of assets and liabilities other than investments in securities
at fiscal year end, resulting from changes in the exchange rate.

RESTRICTED SECURITIES -- Restricted securities are securities that may only
be resold upon registration under federal securities laws or in
transactions exempt from such registration. In some cases, the issuer of
restricted securities has agreed to register such securities for resale, at
the issuer's expense either upon demand by the Fund or in connection with
another registered offering of the securities. Many restricted securities
may be resold in the secondary market in transactions exempt from
registration. Such restricted securities may be determined to be liquid
under criteria established by the Trustees. The Fund will not incur any
registration costs upon such resales. The Fund's restricted securities are
valued at the price provided by dealers in the secondary market or, if no
market prices are available, at the fair value as determined by the Fund's
pricing committee.

Additional information on each restricted security held at December 31,
1996 is as follows:

<TABLE>
<CAPTION>
SECURITY ACQUISITION DATE ACQUISITION COST
----------------------------- ---------------- ----------------
<S> <C> <C>
New World Infrastructure, LTD 05/15/96 $450,000
Solectron Corp. 02/15/96-08/14/96 508,097
Tosco Corp. 12/10/96-12/20/96 607,669
</TABLE>

17
<PAGE>

FEDERATED UTILITY FUND II
- --------------------------------------------------------------------------------

USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual results
could differ from those estimated.

OTHER -- Investment transactions are accounted for on the trade date.

3. SHARES OF BENEFICIAL INTEREST

The Declaration of Fund permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).

Transactions in shares were as follows:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1996 1995
--------- ---------
<S> <C> <C>
Shares sold 3,296,405 2,677,407
- ---------------------------------------------------------------
Shares issued to shareholders in payment of 180,323 52,774
- ---------------------------------------------------------------
Shares redeemed distributions declared (785,968) (143,617)
- --------------------------------------------------------------- --------- ---------
Net change resulting from share transactions 2,690,760 2,586,564
- --------------------------------------------------------------- ========= =========
</TABLE>

4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES

INVESTMENT ADVISORY FEE -- Federated Advisers, the Fund's investment
adviser (the "Adviser"), receives for its services an annual investment
advisory fee equal to 0.75% of the Fund's average daily net assets. The
Adviser may voluntarily choose to waive any portion of its fee. The Adviser
can modify or terminate this voluntary waiver at any time at its sole
discretion.

ADMINISTRATIVE FEE -- Federated Services Company ("FServ"), under the
Administrative Services Agreement, provides the Fund with administrative
personnel and services. The fee paid to FServ is based on the level of
average aggregate daily net assets of all funds advised by subsidiaries of
Federated Investors for the period. The administrative fee received during
the period of the Administrative Services Agreement shall be at least
$125,000 per portfolio and $30,000 per each additional class of shares.

TRANSFER AND DIVIDEND DISBURSING AGENT FEES AND EXPENSES -- FServ, through
its subsidiary, Federated Shareholder Services Company ("FSSC") serves as
transfer and dividend disbursing agent for the Fund. The fee paid to FSSC
is based on the size, type, and number of accounts and transactions made by
shareholders.

18
<PAGE>

FEDERATED UTILITY FUND II
- --------------------------------------------------------------------------------

ORGANIZATIONAL EXPENSES -- Organizational and start-up administrative
service expenses of $49,266 were borne initially by the Adviser. The Fund
has agreed to reimburse the Adviser for the organizational and start-up
administrative expenses during the five-year period following effective
date. For the period ended December 31, 1996, the Fund paid $9,853 pursuant
to this agreement.

GENERAL -- Certain of the Officers and Trustees of the Trust are Officers
and Directors or Trustees of the above companies.

5. INVESTMENT TRANSACTIONS

Purchases and sales of investments, excluding short-term securities, for the
period ended December 31, 1996, were as follows:

<TABLE>
<S> <C>
PURCHASES $59,634,640
- ------------------------------------------------------------------- ===========
SALES $29,860,077
- ------------------------------------------------------------------- ===========
</TABLE>

6. CONCENTRATION OF CREDIT RISK

The Fund invests in securities of non-U.S. issuers. Although the Fund maintains
a diversified investment portfolio, the political or economic developments
within a particular country or region may have an adverse effect on the ability
of domiciled issuers to meet their obligations. Additionally, political or
economic developments may have an effect on the liquidity and volatility of
portfolio securities and currency holdings.

At December 31, 1996, the diversification of countries was as follows:

<TABLE>
<CAPTION>
PERCENTAGE OF
COUNTRY NET ASSETS
- ------------------ -------------
<S> <C>
Brazil 1.1%
China 0.8%
Italy 1.3%
Korea 0.9%
Peru 0.4%
Spain 0.7%
United Kingdom 2.3%
</TABLE>

19
<PAGE>

INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------

To the Board of Trustees of the Federated Insurance Series
and Shareholders of FEDERATED UTILITY FUND II:

We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Federated Utility Fund II, (a portfolio of the
Federated Insurance Series) as of December 31, 1996, and the related statement
of operations for the year then ended, the statement of changes in net assets
for the years ended December 31, 1996 and 1995, and the financial highlights for
the periods presented. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements and financial highlights present
fairly, in all material respects, the financial position of Federated Utility
Fund II as of December 31, 1996, the results of its operations, the changes in
its net assets, and its financial highlights for the respective stated periods
in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP

Pittsburgh, Pennsylvania
February 7, 1997

20
<PAGE>

TRUSTEES OFFICERS
- --------------------------------------------------------------------------------

John F. Donahue John F. Donahue
Chairman
Thomas G. Bigley
J. Christopher Donahue
John T. Conroy, Jr. President

William J. Copeland Edward C. Gonzales
Executive Vice President
J. Christopher Donahue
John W. McGonigle
James E. Dowd Executive Vice President, Treasurer,
and Secretary

Lawrence D. Ellis, M.D. Richard B. Fisher
Vice President
Edward L. Flaherty, Jr.
S. Elliott Cohan
Peter E. Madden Assistant Secretary

Gregor F. Meyer

John E. Murray, Jr.

Wesley W. Posvar

Marjorie P. Smuts

Variable funds are not bank deposits or obligations, are not guaranteed by any
bank, and are not insured or guaranteed by the U.S. government, the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other
government agency. Investment in variable funds involves investment risk,
including possible loss of principal.

This report is authorized for distribution to prospective investors only when
preceded or accompanied by the fund's prospectus which contains facts concerning
its objective and policies, management fees, expenses, and other information.

21
<PAGE>

[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>

[LETTERHEAD OF FEDERATED UTILITY FUND II APPEARS HERE]

Federated Insurance Series

[LOGO OF FEDERATED INVESTORS] ___________________________________

___________________________________

___________________________________
<PAGE>

PRESIDENT'S MESSAGE
- -------------------------------------------------------------------------------

Dear Fellow Shareholder:

I am pleased to present the Annual Report to Shareholders for Federated High
Income Bond Fund II, a portfolio of Federated Insurance Series.

This report covers the 12-month period from January 1, 1996 through December
31, 1996. It begins with a commentary by the fund's portfolio manager, which
is followed by a complete listing of the fund's high-yield bond holdings and
the financial statements.

Federated High Income Bond Fund II not only withstood a difficult
environment for bonds during the period, it performed well, as high-yield
bonds outperformed other types of bonds.* The rising economy tended to
improve the earnings and cash flow of companies that issue high-yield bonds.

The fund also benefited from expert security selection and broad
diversification across more than 200 high-yield bonds representing the
entire business and industrial spectrum.

Contributing to the fund's strong 12-month total return of 14.31% were
income distributions of $0.88 per share and a 5% increase in net asset value
for the period ended December 31, 1996.** Over the period, fund assets more
than tripled to reach $66 million.

Thank you for participating in the income opportunities of high-yield
corporate bonds through Federated High Income Bond Fund II. We trust you
were pleased with the income and total performance generated by your
investment. As always, we welcome your comments and suggestions.

Sincerely,

/s/ J. Christopher Donahue

J. Christopher Donahue
President
February 15, 1997

* Lower rated bonds involve a higher degree of risk than investment grade
bonds in return for higher yield potential.

** Performance quoted reflects past performance and is not indicative of
future results. Investment return and principal value will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than
their original cost. Performance information does not reflect the charges
and expenses of a variable annuity or variable life insurance contract.

1
<PAGE>

FEDERATED HIGH INCOME BOND FUND II
- --------------------------------------------------------------------------------

MANAGEMENT DISCUSSION AND ANALYSIS

During 1996, the high yield bond market delivered very attractive returns to
investors. The recession that many economic forecasters expected to begin in
1996 failed to materialize. Instead, the domestic economy continued its
pattern of moderate economic growth coupled with low inflation. In this
environment, stock prices rose while high quality bond prices fell as
interest rates, in response to the stronger economic growth, moved higher.
However, high-yield bond prices actually increased as the better than
expected economic environment, which reduced investors' fears of negative
credit outcomes, offset the general rise in interest rates. For example, the
yield spread between the First Boston High Yield Index* and Treasuries
narrowed from 484 basis points to 355 basis points during the year, more
than offsetting the approximately 85 basis point rise in the rate for
10-year Treasury securities. The technical environment for high-yield bonds
was also very strong during the year. Over $70 billion worth of new issues
were easily absorbed by strong demand. Moderate economic growth, low default
rates, and strong demand resulted in superior performance for high-yield
bonds relative to high quality bonds. For example, the Lehman Brothers High
Yield Bond Index** returned 11.35% while the Lehman Brothers Aggregate Bond
Index***, a measure of high quality bond performance, returned 3.63%.

Federated High Income Bond Fund II outperformed the Lehman Brothers High
Yield Bond Index** during 1996 returning 14.31% versus 11.35% for the Index.
Several factors were responsible for the fund's strong performance. First,
the fund had a greater portion of its assets allocated to the single B
sector than the Index. Given the general rise in interest rates, the more
credit sensitive single B sector outperformed the more interest rate
sensitive double B sector by over 450 basis points. The fund also benefited
by substantial merger and acquisition activity involving high-yield issuers.
For example, Continental Cablevision, Pace Industries, Motor Wheel, Park
Communications and TransOcean Container were all acquired by stronger
entities during the year. In most cases the securities held by the fund were
subsequently retired at very attractive prices. The fund also benefited from
its underweight position in the restaurant sector which performed poorly
during the year. Finally, the fund benefited from good security selection
during the period as deteriorating credit situations were minimal. On the
negative side, the fund's underweight in specialty retail and gaming hurt
performance as these sectors outperformed the overall market. Also, the
fund's overweight in the broadcasting sector negatively impacted
performance.

As we look out into 1997 we remain optimistic on the outlook for high-yield
securities. We believe that economic growth will continue to be moderate,
inflation will remain under control and interest rates should remain in a
trading range. From a macro-economic standpoint this is a very attractive
scenario for high-yield securities as issuer creditworthiness should remain
at acceptable levels. The technical environment is also attractive. Demand
for high-yield securities should continue to be strong. We believe these two
factors will result in a narrowing of the yield spread or risk premium
between high-yield bonds and Treasuries. However, the yield spread between
high-yield bonds and Treasuries ended 1996 at its low point for this
economic cycle. This has two implications. First, the relative total return
advantage of highyield bonds over high quality bonds will probably not
approach the roughly 775 basis points advantage experienced in 1996. Second,
individual companies which do not meet expectations will be dealt with
harshly by the market as current spread levels leave little room for
disappointment.

* First Boston High Yield Index is an unmanaged trader priced portfolio
constructed to mirror the public high-yield debt market. Investments cannot
be made in an index.

** Lehman Brothers High Yield Bond Index is an unmanaged index which includes
fixed rate, public nonconvertible, non-investment grade issues that are
rated Ba1 or lower by Moody's Investor Service. Investments cannot be made
in an index.

*** Lehman Brothers Aggregate Bond Index is an unmanaged total return index
measuring both the capital price changes and income provided by the
underlying universe of securities, weighted by market value outstanding.
Investments cannot be made in an index.

2
<PAGE>

FEDERATED HIGH INCOME BOND FUND II
- --------------------------------------------------------------------------------

GROWTH OF $10,000 INVESTED IN THE FEDERATED HIGH INCOME BOND FUND II

The graph below illustrates the hypothetical investment of $10,000 in the
Federated High Income Bond Fund II (the "Fund") from March 1, 1994 (start of
performance) to December 31, 1996, compared to the Lehman Brothers Single B
Rated Index (LBSBRI),+ and the Lipper High Current Yield Funds Average
(LHCYFA).++

GRAPHIC REPRESENTATION OMITTED SEE APPENDIX A

AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED DECEMBER 31, 1996
1 Year 14.31%
Start of Performance (3/1/94) 10.48%

* The Fund's performance assumes the reinvestment of all dividends and
distributions. The LBSBRI and the LHCYFA have been adjusted to reflect
reinvestment of dividends on securities in the index and average.

+ The LBSBRI is not adjusted to reflect sales charges, expenses, or other
fees that the SEC requires to be reflected in the Fund's performance. The
index is unmanaged.

++ The LHCYFA represents the average of the total returns reported by all of
the mutual funds designated by Lipper Analytical Services, Inc. as falling
into the category, and is not adjusted to reflect any sales charges.
However, these total returns are reported net of expenses or other fees
that the SEC requires to be reflected in a fund's performance.

3
<PAGE>

FEDERATED HIGH INCOME BOND FUND II
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ---------------------------------------------------------------------- ------------
CORPORATE BONDS -- 95.4%
- -----------------------------------------------------------------------------------------
<S> <C> <C>
AEROSPACE & DEFENSE -- 0.2%
-----------------------------------------------------------------------
$ 150,000 Tracor, Inc., Sr. Sub. Note, 10.875%, 8/15/2001 $ 160,125
----------------------------------------------------------------------- ------------
AUTOMOTIVE -- 3.1%
-----------------------------------------------------------------------
300,000 Aftermarket Technology Co., Sr. Sub. Note, 12.00%, 8/1/2004 336,750
-----------------------------------------------------------------------
75,000 (a) Blue Bird Body Co., Sr. Sub. Note, 10.75%, 11/15/2006 78,562
-----------------------------------------------------------------------
550,000 Collins & Aikman Products Co., Sr. Sub. Note, 11.50%, 4/15/2006 605,000
-----------------------------------------------------------------------
350,000 Exide Corp., Sr. Note, 10.00%, 4/15/2005 365,750
-----------------------------------------------------------------------
75,000 JPS Automotive Products Corp., Sr. Note, 11.125%, 6/15/2001 80,812
-----------------------------------------------------------------------
350,000 Lear Corp., Sub. Note, 9.50%, 7/15/2006 376,250
-----------------------------------------------------------------------
100,000 Lear Seating Corp., Sr. Sub. Note, 11.25%, 7/15/2000 102,500
-----------------------------------------------------------------------
100,000 Lear Seating Corp., Sub. Note, 8.25%, 2/1/2002 101,250
-----------------------------------------------------------------------
50,000 (a)Safelite Glass Corp., Sr. Sub. Note, 9.875%, 12/15/2006 51,625
----------------------------------------------------------------------- ------------
Total 2,098,499
----------------------------------------------------------------------- ------------
BANKING -- 1.5%
700,000 (a)First Nationwide Escrow Corp., Sr. Sub. Note, 10.625%, 10/1/2003 756,000
-----------------------------------------------------------------------
200,000 First Nationwide Holdings, Inc., Sr. Note, 12.25%, 5/15/2001 226,500
----------------------------------------------------------------------- ------------
Total 982,500
----------------------------------------------------------------------- ------------
BEVERAGE & TOBACCO -- 1.1%
-----------------------------------------------------------------------
100,000 (a)Delta Beverage Group Inc., Sr. Note, 9.75%, 12/15/2003 103,000
-----------------------------------------------------------------------
250,000 Dimon, Inc., Sr. Note, 8.875%, 6/1/2006 261,250
-----------------------------------------------------------------------
400,000 Dr. Pepper Bottling Holdings Co., Sr. Disc. Note, 0/11.625%, 2/15/2003 379,000
----------------------------------------------------------------------- ------------
Total 743,250
----------------------------------------------------------------------- ------------
BROADCAST RADIO & TV -- 7.3%
-----------------------------------------------------------------------
90,000 Chancellor Broadcasting Co., Sr. Sub. Note, 12.50%, 10/1/2004 101,700
-----------------------------------------------------------------------
250,000 Chancellor Broadcasting Co., Sr. Sub. Note, 9.375%, 10/1/2004 253,125
-----------------------------------------------------------------------
250,000 Granite Broadcasting Corp., Sr. Sub. Note, 10.375%, 5/15/2005 257,500
-----------------------------------------------------------------------
675,000 Heritage Media Corp., Sr. Sub. Note, 8.75%, 2/15/2006 652,219
-----------------------------------------------------------------------
</TABLE>

4
<PAGE>

FEDERATED HIGH INCOME BOND FUND II
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ------------ ------------------------------------------------------------------------ ---------
CORPORATE BONDS -- CONTINUED
- ---------------------------------------------------------------------------------------
<S> <C> <C>
BROADCAST RADIO & TV -- CONTINUED
------------------------------------------------------------------------
$ 250,000 Jacor Communications, Inc., Sr. Sub. Note, 9.75%, 12/15/2006 $ 256,875
------------------------------------------------------------------------
300,000 Lamar Advertising Co., Sr. Sub. Note, 9.625%, 12/1/2006 309,750
------------------------------------------------------------------------
200,000 NWCG Holding Corp., Sr. Disc. Note, 13.50% accrual, 6/15/1999 167,500
------------------------------------------------------------------------
125,000 Park Communications, Inc., Sr. Note, 13.75%, 5/15/2004 141,875
------------------------------------------------------------------------
300,000 Pegasus Media, Note, 12.50%, 7/1/2005 325,500
------------------------------------------------------------------------
400,000 SCI Television, Inc., Sr. Secd. Note, 11.00%, 6/30/2005 431,000
------------------------------------------------------------------------
525,000 SFX Broadcasting, Inc., Sr. Sub. Note, 10.75%, 5/15/2006 555,188
------------------------------------------------------------------------
150,000 Sinclair Broadcast Group, Sr. Sub. Note, 10.00%, 12/15/2003 153,750
------------------------------------------------------------------------
425,000 Sinclair Broadcast Group, Sr. Sub. Note, 10.00%, 9/30/2005 435,625
------------------------------------------------------------------------
50,000 Sullivan Broadcast Holdings Inc., Deb., 13.25%, 12/15/2006 46,250
------------------------------------------------------------------------
400,000 Sullivan Broadcast Holdings Inc., Sr. Sub. Note, 10.25%, 12/15/2005 406,000
------------------------------------------------------------------------
375,000 Young Broadcasting, Inc., Sr. Sub. Note, 10.125%, 2/15/2005 390,000
------------------------------------------------------------------------ ---------
Total 4,883,857
------------------------------------------------------------------------ ---------
BUILDING & DEVELOPMENT -- 0.2%
------------------------------------------------------------------------
150,000 (a)Building Materials Corporation of America, Sr. Note, 8.625%,
------------------------------------------------------------------------
12/15/2006 150,000
------------------------------------------------------------------------ ---------
BUSINESS EQUIPMENT & SERVICES -- 3.0%
------------------------------------------------------------------------
500,000 Knoll Inc., Sr. Sub. Note, 10.875%, 3/15/2006 553,750
------------------------------------------------------------------------
400,000 Monarch Acquisition Corp., Sr. Note, 12.50%, 7/1/2003 470,000
------------------------------------------------------------------------
500,000 (a)Outsourcing Solutions, Inc., Sr. Sub. Note, 11.00%, 11/1/2006 525,000
------------------------------------------------------------------------
400,000 United Stationers Supply Co., Sr. Sub. Note, 12.75%, 5/1/2005 446,000
------------------------------------------------------------------------ ---------
Total 1,994,750
------------------------------------------------------------------------ ---------
CABLE TELEVISION -- 10.4%
------------------------------------------------------------------------
200,000 (a)Australis Holdings Pty Limited, Unit, 0/15.00%, 11/1/2002 116,000
------------------------------------------------------------------------
275,000 Australis Media Limited, Unit, 0/15.75%, 5/15/2003 162,250
------------------------------------------------------------------------
550,000 Bell Cablemedia PLC, Sr. Disc. Note, 0/11.95%, 7/15/2004 484,000
------------------------------------------------------------------------
200,000 CF Cable TV, Inc., Sr. Secd. 2nd Priority Note, 11.625%, 2/15/2005 233,500
------------------------------------------------------------------------
300,000 CS Wireless Systems, Inc., Sr. Disc. Note, 0/11.375%, 3/1/2006 109,500
</TABLE>

5
<PAGE>

FEDERATED HIGH INCOME BOND FUND II
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ------------ ------------------------------------------------------------------------ ---------
CORPORATE BONDS -- CONTINUED
- ---------------------------------------------------------------------------------------
<S> <C> <C>
CABLE TELEVISION -- CONTINUED
$ 150,000 Cablevision Systems Corp., Sr. Sub. Deb., 9.875%, 2/15/2013 $ 148,125
------------------------------------------------------------------------
100,000 Cablevision Systems Corp., Sr. Sub. Note, 10.50%, 5/15/2016 103,375
------------------------------------------------------------------------
100,000 Cablevision Systems Corp., Sr. Sub. Note, 9.25%, 11/1/2005 99,000
------------------------------------------------------------------------
400,000 Cablevision Systems Corp., Sr. Sub. Note, 9.875%, 5/15/2006 412,000
------------------------------------------------------------------------
275,000 Charter Communications Southeast, L.P., Sr. Note, 11.25%, 3/15/2006 286,344
------------------------------------------------------------------------
475,000 Comcast UK Cable, Deb., 0/11.20%, 11/15/2007 337,250
------------------------------------------------------------------------
250,000 Diamond Cable Co., Sr. Disc. Note, 0/11.75%, 12/15/2005 178,125
------------------------------------------------------------------------
500,000 EchoStar Satellite Broadcasting Corp., Sr. Disc. Note, 0/13.125%,
3/15/2004 380,000
------------------------------------------------------------------------
475,000 International Cabletel, Inc., Sr. Disc. Note, 0/12.75%, 4/15/2005 356,250
------------------------------------------------------------------------
675,000 International Cabletel, Inc., Sr. Disc. Note, 0/11.50%, 2/1/2006 460,687
------------------------------------------------------------------------
400,000 Le Groupe Videotron Ltee, Sr. Note, 10.625%, 2/15/2005 441,000
------------------------------------------------------------------------
200,000 Lenfest Communications Inc., Sr. Sub. Note, 10.50%, 6/15/2006 211,000
------------------------------------------------------------------------
350,000 Peoples Choice TV Corp., Unit, 0/13.125%, 6/1/2004 150,500
------------------------------------------------------------------------
250,000 Rogers Cablesystems Ltd., Sr. Secd. 2nd Priority Note, 10.00%,
12/1/2007 266,875
------------------------------------------------------------------------
200,000 Rogers Cablesystems Ltd., Sr. Secd. 2nd Priority Note, 10.00%,
3/15/2005 214,500
------------------------------------------------------------------------
150,000 Rogers Cablesystems Ltd., Sr. Sub. Gtd. Note, 11.00%, 12/1/2015 162,000
------------------------------------------------------------------------
1,450,000 TeleWest PLC, Sr. Disc. Deb., 0/11.00%, 10/1/2007 1,009,563
------------------------------------------------------------------------
650,000 UIH Australia/Pacific, Sr. Disc. Note, 0/14.00%, 5/15/2006 341,250
------------------------------------------------------------------------
150,000 Wireless One, Inc., Sr. Note, 13.00%, 10/15/2003 147,000
------------------------------------------------------------------------
100,000 Wireless One, Inc., Unit, 0/13.50%, 8/1/2006 49,000
------------------------------------------------------------------------ ----------
Total 6,859,094
------------------------------------------------------------------------ ----------
CHEMICALS & PLASTICS -- 5.7%
------------------------------------------------------------------------
175,000 Arcadian Partners L.P., Sr. Note, Series B, 10.75%, 5/1/2005 194,250
------------------------------------------------------------------------
350,000 (a)Astor Corp., Sr. Sub. Note, 10.50%, 10/15/2006 362,687
------------------------------------------------------------------------
300,000 Buckeye Cellulose Corp., Sr. Sub. Note, 9.25%, 9/15/2008 311,250
------------------------------------------------------------------------
250,000 Crain Industries, Inc., Sr. Sub. Note, 13.50%, 8/15/2005 283,125
</TABLE>

6
<PAGE>

FEDERATED HIGH INCOME BOND FUND II
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ------------ ------------------------------------------------------------------------ ----------
CORPORATE BONDS -- CONTINUED
- ---------------------------------------------------------------------------------------
<S> <C> <C>
CHEMICALS & PLASTICS -- CONTINUED
------------------------------------------------------------------------
$ 50,000 Foamex L.P., Sr. Note, 11.25%, 10/1/2002 $ 53,500
------------------------------------------------------------------------
250,000 Foamex L.P., Sr. Sub. Deb., 11.875%, 10/1/2004 270,312
------------------------------------------------------------------------
500,000 Harris Chemical North America, Inc., Sr. Note, 10.25% 7/15/2001 525,000
------------------------------------------------------------------------
500,000 (a)ISP Holding, Inc., Sr. Note, 9.00%, 10/15/2003 510,000
------------------------------------------------------------------------
383,000 Polymer Group, Inc., Sr. Note, 12.25%, 7/15/2002 417,470
------------------------------------------------------------------------
450,000 RBX Corp., Sr. Sub. Note, Series B, 11.25%, 10/15/2005 383,063
------------------------------------------------------------------------
425,000 Sterling Chemicals Holdings, Inc., Sr. Disc. Note, 0/13.50%, 8/15/2008 246,500
------------------------------------------------------------------------
75,000 Sterling Chemicals, Inc., Sr. Sub. Note, 11.75%, 8/15/2006 79,500
------------------------------------------------------------------------
150,000 Uniroyal Technology Corp., Sr. Secd. Note, 11.75%, 6/1/2003 150,375
------------------------------------------------------------------------ ----------
Total 3,787,032
------------------------------------------------------------------------ ----------
CLOTHING & TEXTILES -- 2.0%
------------------------------------------------------------------------
250,000 (a)Pillowtex Corp., Sr. Sub. Note, 10.00%, 11/15/2006 261,563
------------------------------------------------------------------------
1,000,000 WestPoint Stevens, Inc., Sr. Sub. Deb., 9.375%, 12/15/2005 1,037,500
------------------------------------------------------------------------ ----------
Total 1,299,063
------------------------------------------------------------------------ ----------
CONSUMER PRODUCTS -- 3.3%
------------------------------------------------------------------------
400,000 American Safety Razor Co., Sr. Note, 9.875%, 8/1/2005 424,500
------------------------------------------------------------------------
150,000 Herff Jones, Inc., Sr. Sub. Note, 11.00%, 8/15/2005 162,187
------------------------------------------------------------------------
150,000 Hosiery Corp. of America, Inc., Sr. Sub. Note, 13.75%, 8/1/2002 165,750
------------------------------------------------------------------------
450,000 (a)ICON Fitness Corp., Sr. Disc. Note, 0/13.00%, 11/15/2006 242,437
------------------------------------------------------------------------
150,000 ICON Health & Fitness, Inc., Sr. Sub. Note, 13.00%, 7/15/2002 170,437
------------------------------------------------------------------------
525,000 Playtex Family Products Corp., Sr. Sub. Note, 9.00%, 12/15/2003 523,688
------------------------------------------------------------------------
100,000 (a)Rayovac Corp., Sr. Sub. Note, 10.25%, 11/1/2006 103,875
------------------------------------------------------------------------
450,000 Simmons Co., Sr. Sub. Note, 10.75%, 4/15/2006 475,875
------------------------------------------------------------------------ ----------
Total 2,268,749
------------------------------------------------------------------------ ----------
CONTAINER & GLASS PRODUCTS -- 2.8%
------------------------------------------------------------------------
575,000 Owens-Illinois, Inc., Sr. Sub. Note, 9.75%, 8/15/2004 603,750
------------------------------------------------------------------------
450,000 Owens-Illinois, Inc., Sr. Sub. Note, 9.95%, 10/15/2004 478,125
------------------------------------------------------------------------
300,000 Packaging Resources Inc., Sr. Note, 11.625%, 5/1/2003 318,000
</TABLE>

7
<PAGE>

FEDERATED HIGH INCOME BOND FUND II
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ------------ ------------------------------------------------------------------------ ---------
CORPORATE BONDS -- CONTINUED
- ---------------------------------------------------------------------------------------
<S> <C> <C>
CONTAINER & GLASS PRODUCTS -- CONTINUED
------------------------------------------------------------------------
$ 300,000 (a)Plastic Containers, Inc., Sr. Secd. Note, 10.00%, 12/15/2006 $ 311,250
------------------------------------------------------------------------
100,000 (a)U.S. Can Corp., Sr. Sub. Note, 10.125%, 10/15/2006 105,250
------------------------------------------------------------------------ ----------
Total 1,816,375
------------------------------------------------------------------------ ----------
COSMETICS & TOILETRIES -- 1.1%
------------------------------------------------------------------------
50,000 Revlon Consumer Products Corp., Note, 9.375%, 4/1/2001 51,313
------------------------------------------------------------------------
625,000 Revlon Consumer Products Corp., Sr. Sub. Note, 10.50%, 2/15/2003 657,813
------------------------------------------------------------------------ ----------
Total 709,126
------------------------------------------------------------------------ ----------
ECOLOGICAL SERVICES & EQUIPMENT -- 1.1%
------------------------------------------------------------------------
450,000 (a)Allied Waste North America, Inc., Sr. Sub. Note, 10.25%, 12/1/2006 473,625
------------------------------------------------------------------------
200,000 ICF Kaiser International, Inc., Sr. Sub. Note, 13.00%, 12/31/2003 189,000
------------------------------------------------------------------------
225,000 (b)Mid-American Waste Systems, Inc., Sr. Sub. Note, 12.25%, 2/15/2003 90,000
------------------------------------------------------------------------ ----------
Total 752,625
------------------------------------------------------------------------ ----------
ELECTRONICS -- 0.5%
------------------------------------------------------------------------
275,000 Advanced Micro Devices, Inc., Sr. Secd. Note, 11.00%, 8/1/2003 299,750
------------------------------------------------------------------------ ----------
FINANCIAL INTERMEDIARIES -- 0.5%
------------------------------------------------------------------------ ----------
300,000 ContiFinancial Corp., Sr. Note, 8.375%, 8/15/2003 310,125
------------------------------------------------------------------------ ----------
FOOD & DRUG RETAILERS -- 2.7%
------------------------------------------------------------------------
375,000 Carr-Gottstein Foods Co., Sr. Sub. Note, 12.00%, 11/15/2005 399,844
------------------------------------------------------------------------
550,000 Ralph's Grocery Co., Sr. Note, 10.45%, 6/15/2004 585,750
------------------------------------------------------------------------
175,000 Ralph's Grocery Co., Sr. Sub. Note, 11.00%, 6/15/2005 184,625
------------------------------------------------------------------------
525,000 Smith's Food & Drug Centers, Inc., Sr. Sub. Note, 11.25%, 5/15/2007 581,438
------------------------------------------------------------------------ ----------
Total 1,751,657
------------------------------------------------------------------------ ----------
FOOD PRODUCTS -- 2.6%
------------------------------------------------------------------------
250,000 Curtice-Burns Foods, Inc., Sr. Sub. Note, 12.25%, 2/1/2005 260,000
------------------------------------------------------------------------
650,000 (a)International Home Foods, Inc., Sr. Sub. Note, 10.375%, 11/1/2006 679,250
------------------------------------------------------------------------
100,000 PMI Acquisition Corp., Sr. Sub. Note, 10.25%, 9/1/2003 103,750
------------------------------------------------------------------------
200,000 Specialty Foods Corp., Sr. Note, 11.125%, 10/1/2002 189,000
------------------------------------------------------------------------
100,000 Specialty Foods Corp., Sr. Sub. Note, 11.25%, 8/15/2003 76,500
------------------------------------------------------------------------
</TABLE>

8
<PAGE>

FEDERATED HIGH INCOME BOND FUND II
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ------------ ------------------------------------------------------------------------ ----------
CORPORATE BONDS -- CONTINUED
- ---------------------------------------------------------------------------------------
<S> <C> <C>
FOOD PRODUCTS -- CONTINUED
------------------------------------------------------------------------
$ 350,000 Van de Kamp's, Inc., Sr. Sub. Note, 12.00%, 9/15/2005 $ 387,625
------------------------------------------------------------------------ ----------
Total 1,696,125
------------------------------------------------------------------------ ----------
FOOD SERVICES -- 0.2%
------------------------------------------------------------------------
100,000 Americold Corp., Sr. Sub. Note, 12.875%, 5/1/2008 103,500
------------------------------------------------------------------------ ----------
FOREST PRODUCTS -- 3.5%
------------------------------------------------------------------------
50,000 Container Corp. of America, Sr. Note, 11.25%, 5/1/2004 54,562
------------------------------------------------------------------------
100,000 Container Corp. of America, Sr. Note, 9.75%, 4/1/2003 105,500
------------------------------------------------------------------------
300,000 Four M Corp., Sr. Note, 12.00%, 6/1/2006 315,000
------------------------------------------------------------------------
200,000 Repap New Brunswick, 2nd Priority Sr. Secd. Note, 10.625%,
4/15/2005 210,000
------------------------------------------------------------------------
550,000 Riverwood International Corp., Sr. Sub. Note, 10.875%, 4/1/2008 511,500
------------------------------------------------------------------------
500,000 S. D. Warren Co., Sr. Sub. Note, 12.00%, 12/15/2004 540,625
------------------------------------------------------------------------
100,000 Stone Container Corp., Sr. Note, 11.50%, 10/1/2004 105,750
------------------------------------------------------------------------
150,000 Stone Container Corp., Sr. Note, 11.875%, 8/1/2016 159,000
------------------------------------------------------------------------
300,000 (a)Uniforet Inc., Sr. Note, 11.125%, 10/15/2006 280,500
------------------------------------------------------------------------ -----------
Total 2,282,437
------------------------------------------------------------------------ -----------
HEALTHCARE -- 3.3%
------------------------------------------------------------------------
675,000 Dade International, Inc., Sr. Sub. Note, 11.125%, 5/1/2006 734,062
------------------------------------------------------------------------
250,000 (a)Genesis Health Ventures, Inc., Sr. Sub. Note, 9.25%, 10/1/2006 258,125
------------------------------------------------------------------------
200,000 Genesis Health Ventures, Inc., Sr. Sub. Note, 9.75%, 6/15/2005 211,500
------------------------------------------------------------------------
150,000 (a)Prime Succession Acquisition Corp., Sr. Sub. Note, 10.75%, 8/15/2004 163,125
------------------------------------------------------------------------
100,000 (a)Rose Hills Acquisition Corp., Sr. Sub. Note, 9.50%, 11/15/2004 102,500
------------------------------------------------------------------------
650,000 Tenet Healthcare Corp., Sr. Sub. Note, 10.125%, 3/1/2005 721,500
------------------------------------------------------------------------ ----------
Total 2,190,812
------------------------------------------------------------------------ ----------
HOTELS, MOTELS, INNS & CASINOS -- 0.6%
------------------------------------------------------------------------
350,000 Courtyard by Marriott II LP, Sr. Note, 10.75%, 2/1/2008 371,875
------------------------------------------------------------------------ ----------
INDUSTRIAL PRODUCTS & EQUIPMENT -- 4.0%
------------------------------------------------------------------------
400,000 Cabot Safety Acquisition Corp., Sr. Sub. Note, 12.50%, 7/15/2005 448,000
------------------------------------------------------------------------
</TABLE>

9
<PAGE>

FEDERATED HIGH INCOME BOND FUND II
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ------------- ------------------------------------------------------------------------ ----------
CORPORATE BONDS -- CONTINUED
- ---------------------------------------------------------------------------------------
<S> <C> <C>
INDUSTRIAL PRODUCTS & EQUIPMENT -- CONTINUED
------------------------------------------------------------------------
$ 400,000 (a)Euramax International PLC, Sr. Sub. Note, 11.25%, 10/1/2006 $ 416,000
------------------------------------------------------------------------
150,000 Fairfield Manufacturing Co., Inc., Sr. Sub. Note, 11.375%, 7/1/2001 157,500
------------------------------------------------------------------------
250,000 (a)Hawk Corp., Sr. Note, 10.25%, 12/1/2003 256,250
------------------------------------------------------------------------
250,000 IMO Industries, Inc., Sr. Sub. Note, 11.75%, 5/1/2006 235,000
------------------------------------------------------------------------
300,000 (a)International Knife & Saw, Inc., Sr. Sub. Note, 11.375%, 11/15/2006 310,500
------------------------------------------------------------------------
100,000 Johnstown America Industries, Inc., Sr. Sub. Note, 11.75%, 8/15/2005 96,500
------------------------------------------------------------------------
250,000 Mettler-Toledo, Inc., Sr. Sub. Note, 9.75%, 10/1/2006 264,375
------------------------------------------------------------------------
500,000 Unifrax Investment Corp., Sr. Note, 10.50%, 11/1/2003 511,250
------------------------------------------------------------------------ ----------
Total 2,695,375
------------------------------------------------------------------------ ----------
LEISURE & ENTERTAINMENT -- 4.2%
------------------------------------------------------------------------
650,000 AMF Group, Inc., Sr. Sub. Disc. Note, 0/12.25%, 3/15/2006 430,625
------------------------------------------------------------------------
100,000 AMF Group, Inc., Sr. Sub. Note, 10.875%, 3/15/2006 105,750
------------------------------------------------------------------------
300,000 Cobblestone Golf Group, Inc., Sr. Note, 11.50%, 6/1/2003 313,875
------------------------------------------------------------------------
150,000 Premier Parks, Inc., Sr. Note, 12.00%, 8/15/2003 164,625
------------------------------------------------------------------------
875,000 Six Flags Theme Parks, Sr. Sub. Disc. Note, 0/12.25%, 6/15/2005 831,250
------------------------------------------------------------------------
925,000 Viacom, Inc., Sub. Deb., 8.00%, 7/7/2006 898,406
------------------------------------------------------------------------ ----------
Total 2,744,531
------------------------------------------------------------------------ ----------
MACHINERY & EQUIPMENT -- 2.3%
------------------------------------------------------------------------
500,000 Alvey Systems, Inc., Sr. Sub. Note, 11.375%, 1/31/2003 528,750
------------------------------------------------------------------------
350,000 (a)Clark Material Handling Corp., Sr. Note, 10.75%, 11/15/2006 364,875
------------------------------------------------------------------------
233,000 Primeco Inc., Sr. Sub. Note, 12.75%, 3/1/2005 266,785
------------------------------------------------------------------------
350,000 (a)Tokheim Corp., Sr. Sub. Note, 11.50%, 8/1/2006 373,625
------------------------------------------------------------------------ ----------
Total 1,534,035
------------------------------------------------------------------------ ----------
METALS & MINING -- 0.8%
------------------------------------------------------------------------
500,000 Royal Oak Mines, Sr. Sub. Note, 11.00%, 8/15/2006 510,000
------------------------------------------------------------------------ ----------
OIL & GAS -- 3.9%
------------------------------------------------------------------------
500,000 (a)Abraxas Petroleum Corp., Sr. Note, 11.50%, 11/1/2004 536,250
------------------------------------------------------------------------
100,000 Falcon Drilling Co., Inc., Sr. Note, 8.875%, 3/15/2003 101,625
------------------------------------------------------------------------
</TABLE>

10
<PAGE>

FEDERATED HIGH INCOME BOND FUND II
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ------------------------------------------------------------------------ ----------
CORPORATE BONDS -- CONTINUED
- --------------------------------------------------------------------------------------
<S> <C> <C>
OIL & GAS -- CONTINUED
------------------------------------------------------------------------
$ 150,000 Falcon Drilling Co., Inc., Sr. Note, 9.75%, 1/15/2001 $ 157,875
------------------------------------------------------------------------
50,000 Falcon Drilling Co., Inc., Sr. Sub. Note, 12.50%, 3/15/2005 56,062
------------------------------------------------------------------------
450,000 Forcenergy Gas Exploration, Inc., Sr. Sub. Note, 9.50%, 11/1/2006 470,250
------------------------------------------------------------------------
100,000 Giant Industries, Inc., Sr. Sub. Note, 9.75%, 11/15/2003 104,500
------------------------------------------------------------------------
275,000 (a)HS Resources, Inc., Sr. Sub. Note, 9.25%, 11/15/2006 283,937
------------------------------------------------------------------------
50,000 HS Resources, Inc., Sr. Sub. Note, 9.875%, 12/1/2003 52,500
------------------------------------------------------------------------
250,000 Mesa Operating Company, Sr. Sub. Disc. Note, 0/11.625%, 7/1/2006 173,750
------------------------------------------------------------------------
100,000 Mesa Operating Company, Sr. Sub. Note, 10.625%, 7/1/2006 109,000
------------------------------------------------------------------------
475,000 United Meridian Corp., Sr. Sub. Note, 10.375%, 10/15/2005 523,688
------------------------------------------------------------------------ ----------
Total 2,569,437
------------------------------------------------------------------------ ----------
PRINTING & PUBLISHING -- 2.7%
------------------------------------------------------------------------
750,000 Affiliated Newspaper Investments, Inc., Sr. Disc. Note, 0/13.25%,
7/1/2006 618,750
------------------------------------------------------------------------
150,000 Garden State Newspapers, Inc., Sr. Sub. Note, 12.00%, 7/1/2004 164,250
------------------------------------------------------------------------
300,000 Hollinger International Publishing, Inc., Sr. Sub. Note, 9.25%, 2/1/2006 298,125
------------------------------------------------------------------------
250,000 K-III Communications Corp., Company Guarantee, Series B, 8.50%,
2/1/2006 246,563
------------------------------------------------------------------------
450,000 (a)Petersen Publishing Co., L.L.C., Sr. Sub. Note, 11.125%, 11/15/2006 471,375
------------------------------------------------------------------------ ----------
Total 1,799,063
------------------------------------------------------------------------ ----------
REAL ESTATE -- 0.8%
------------------------------------------------------------------------
500,000 Trizec Finance Ltd., Sr. Note, 10.875%, 10/15/2005 553,125
------------------------------------------------------------------------ ----------
RETAILERS -- 0.7%
------------------------------------------------------------------------
425,000 Brylane Capital Corp., Sr. Sub. Note, 10.00%, 9/1/2003 437,750
------------------------------------------------------------------------ ----------
SERVICES -- 1.4%
------------------------------------------------------------------------
300,000 Coinmach Corp., Sr. Note, 11.75%, 11/15/2005 324,750
------------------------------------------------------------------------
400,000 (a)Intertek Finance PLC, Sr. Sub. Note, 10.25%, 11/1/2006 418,000
------------------------------------------------------------------------
200,000 (a)Ryder TRS, Inc., Sr. Sub. Note, 10.00%, 12/1/2006 208,500
------------------------------------------------------------------------ ----------
Total 951,250
------------------------------------------------------------------------ ----------
</TABLE>

11
<PAGE>

FEDERATED HIGH INCOME BOND FUND II
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ------------- ------------------------------------------------------------------------ ----------
CORPORATE BONDS -- CONTINUED
- ---------------------------------------------------------------------------------------
<S> <C> <C>
STEEL -- 2.8%
------------------------------------------------------------------------
$ 275,000 Acme Metals, Inc., Sr. Secd. Disc. Note, 0/13.50%, 8/1/2004 $ 284,625
------------------------------------------------------------------------
50,000 Armco, Inc., Sr. Note, 9.375%, 11/1/2000 50,875
------------------------------------------------------------------------
100,000 Bar Technologies, Inc., Company Guarantee, 13.50%, 4/1/2001 102,750
------------------------------------------------------------------------
300,000 Bayou Steel Corp., 1st Mtg. Note, 10.25%, 3/1/2001 277,500
------------------------------------------------------------------------
400,000 EnviroSource, Inc., Sr. Note, 9.75%, 6/15/2003 376,000
------------------------------------------------------------------------
300,000 GS Technologies Operating Co., Inc., Sr. Note, 12.00%, 9/1/2004 313,125
------------------------------------------------------------------------
225,000 GS Technologies Operating Co., Inc., Sr. Note, 12.25%, 10/1/2005 236,812
------------------------------------------------------------------------
200,000 Republic Engineered Steel, Inc., 1st Mtg. Note, 9.875%, 12/15/2001 188,250
------------------------------------------------------------------------ -----------
Total 1,829,937
------------------------------------------------------------------------ -----------
SURFACE TRANSPORTATION -- 3.3%
------------------------------------------------------------------------
425,000 AmeriTruck Distribution Corp., Sr. Sub. Note, 12.25%, 11/15/2005 429,250
------------------------------------------------------------------------
250,000 Gearbulk Holding Limited, Sr. Note, 11.25%, 12/1/2004 276,250
------------------------------------------------------------------------
300,000 Great Dane Holdings, Inc., Sr. Sub. Deb., 12.75%, 8/1/2001 302,250
------------------------------------------------------------------------
400,000 (a)Statia Terminals, 1st Mtg. Note, 11.75%, 11/15/2003 412,000
------------------------------------------------------------------------
500,000 Stena AB, Sr. Note, 10.50%, 12/15/2005 542,500
------------------------------------------------------------------------
200,000 Trism, Inc., Sr. Sub. Note, 10.75%, 12/15/2000 193,000
------------------------------------------------------------------------ ----------
Total 2,155,250
------------------------------------------------------------------------ ----------
TELECOMMUNICATIONS & CELLULAR -- 9.7%
------------------------------------------------------------------------
350,000 American Communications Services Inc., Sr. Disc. Note, 0/12.75%,
4/1/2006 197,750
------------------------------------------------------------------------
250,000 Arch Communications Group, Inc., Sr. Disc. Note, 0/10.875%,
3/15/2008 144,375
------------------------------------------------------------------------
500,000 Brooks Fiber Properties, Inc., Sr. Disc. Note, 0/10.875%, 3/1/2006 335,000
------------------------------------------------------------------------
550,000 (a)Brooks Fiber Properties, Inc., Sr. Disc. Note, 0/11.875%, 11/1/2006 352,000
------------------------------------------------------------------------
375,000 Cellular Communications International, Inc., Sr. Disc. Note, 13.25%
accrual, 8/15/2000 261,562
------------------------------------------------------------------------
100,000 Fonorola, Inc., Sr. Secd. Note, 12.50%, 8/15/2002 109,375
------------------------------------------------------------------------
850,000 Intermedia Communications of Florida, Inc., Sr. Disc. Note, 0/12.50%,
5/15/2006 563,125
------------------------------------------------------------------------
</TABLE>

12
<PAGE>

FEDERATED HIGH INCOME BOND FUND II
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ------------ ----------------------------------------------------------------------- -----------
CORPORATE BONDS -- CONTINUED
- --------------------------------------------------------------------------------------
<S> <C> <C>
TELECOMMUNICATIONS & CELLULAR -- CONTINUED
-----------------------------------------------------------------------
$ 750,000 Millicom International Cellular S. A., Sr. Disc. Note, 0/13.50%,
6/1/2006 $ 466,875
-----------------------------------------------------------------------
175,000 NEXTEL Communications, Inc., Sr. Disc. Note, 0/11.50%, 9/1/2003 136,938
-----------------------------------------------------------------------
450,000 NEXTEL Communications, Inc., Sr. Disc. Note, 0/9.75%, 8/15/2004 308,813
-----------------------------------------------------------------------
250,000 Nextlink Communications, L.L.C., Sr. Note, Series AI, 12.50%,
4/15/2006 269,375
-----------------------------------------------------------------------
250,000 Paging Network, Inc., Sr. Sub. Note, 10.00%, 10/15/2008 254,063
-----------------------------------------------------------------------
375,000 Paging Network, Inc., Sr. Sub. Note, 10.125%, 8/1/2007 383,906
-----------------------------------------------------------------------
400,000 PanAmSat, L.P., Sr. Sub. Disc. Note, 0/11.375%, 8/1/2003 373,000
-----------------------------------------------------------------------
100,000 PhoneTel Technologies, In, Sr. Note, 12.00%, 12/15/2006 103,750
-----------------------------------------------------------------------
450,000 Sygnet Wireless, Inc., Sr. Note, 11.50%, 10/1/2006 466,875
-----------------------------------------------------------------------
775,000 Teleport Communications Group, Inc., Sr. Disc. Note, 0/11.125%,
7/1/2007 536,688
-----------------------------------------------------------------------
75,000 Teleport Communications Group, Inc., Sr. Note, 9.875%, 7/1/2006 80,438
-----------------------------------------------------------------------
350,000 USA Mobile Communications, Inc., Sr. Note, 9.50%, 2/1/2004 332,500
-----------------------------------------------------------------------
700,000 Vanguard Cellular Systems, Inc., Deb., 9.375%, 4/15/2006 708,750
----------------------------------------------------------------------- ------------
Total 6,385,158
----------------------------------------------------------------------- ------------
UTILITIES -- 2.0%
-----------------------------------------------------------------------
75,000 CalEnergy Co., Inc., Sr. Note, 9.50%, 9/15/2006 77,437
-----------------------------------------------------------------------
800,000 California Energy Co., Inc., Sr. Disc. Note, 0/10.25%, 1/15/2004 848,000
-----------------------------------------------------------------------
350,000 El Paso Electric Co., 1st Mtg. Note, 9.40%, 5/1/2011 372,393
----------------------------------------------------------------------- ------------
Total 1,297,830
----------------------------------------------------------------------- ------------
TOTAL CORPORATE BONDS (IDENTIFIED COST $60,744,333) 62,974,067
----------------------------------------------------------------------- ------------
</TABLE>

13
<PAGE>

FEDERATED HIGH INCOME BOND FUND II
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ----------------------------------------------------------------------- -----------
PREFERRED STOCKS -- 2.2%
- --------------------------------------------------------------------------------------
<S> <C> <C>
BROADCAST RADIO & TV -- 0.4%
-----------------------------------------------------------------------
2,500 Chancellor Broadcasting Co., PIK Pfd., 12.25% $ 280,000
----------------------------------------------------------------------- -----------
PRINTING & PUBLISHING -- 1.1%
-----------------------------------------------------------------------
3,450 K-III Communications Corp., Cumulative PIK Pfd., Series B, 11.625% 351,124
-----------------------------------------------------------------------
3,500 K-III Communications Corp., Pfd., Series D, $10.00 343,875
----------------------------------------------------------------------- -----------
Total 694,999
----------------------------------------------------------------------- -----------
TELECOMMUNICATIONS & CELLULAR -- 0.3%
-----------------------------------------------------------------------
165 PanAmSat Corp., PIK Pfd., 12.75% 201,887
----------------------------------------------------------------------- -----------
UTILITIES -- 0.5%
-----------------------------------------------------------------------
2,710 El Paso Electric Co., PIK Pfd., Series A, 11.40% 301,903
----------------------------------------------------------------------- -----------
TOTAL PREFERRED STOCKS (IDENTIFIED COST $1,334,325) 1,478,789
----------------------------------------------------------------------- -----------
COMMON STOCKS -- 0.1%
- --------------------------------------------------------------------------------------
BROADCAST RADIO & TV -- 0.1%
-----------------------------------------------------------------------
1,250 Park Communications, Inc., Warrants 5/6/2004 25,000
-----------------------------------------------------------------------
15 (a)Pegasus Media, Class B 4,500
-----------------------------------------------------------------------
800 Sullivan Broadcast Holdings Inc., Class B 8,000
----------------------------------------------------------------------- -----------
Total 37,500
----------------------------------------------------------------------- -----------
CABLE TELEVISION -- 0.0%
-----------------------------------------------------------------------
82 (a)CS Wireless Systems, Inc. 0
-----------------------------------------------------------------------
450 Wireless One, Inc., Warrants 10/19/2000 450
----------------------------------------------------------------------- -----------
Total 450
----------------------------------------------------------------------- -----------
CHEMICALS & PLASTICS -- 0.0%
-----------------------------------------------------------------------
425 Sterling Chemicals Holdings, Inc., Warrants 1/1/2008 14,875
----------------------------------------------------------------------- -----------
CONSUMER PRODUCTS -- 0.0%
-----------------------------------------------------------------------
50 Hosiery Corp. of America, Inc. 275
----------------------------------------------------------------------- -----------
ECOLOGICAL SERVICES & EQUIPMENT -- 0.0%
-----------------------------------------------------------------------
960 ICF Kaiser International, Inc., Warrants 12/31/1998 480
----------------------------------------------------------------------- -----------
FOOD & DRUG RETAILERS -- 0.0%
-----------------------------------------------------------------------
884 Grand Union Co. 4,420
----------------------------------------------------------------------- -----------
</TABLE>

14
<PAGE>

FEDERATED HIGH INCOME BOND FUND II
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OR
SHARES VALUE
- ----------- ----------------------------------------------------------------------- -----------
COMMON STOCKS -- CONTINUED
- --------------------------------------------------------------------------------------
<S> <C> <C>
PRINTING & PUBLISHING -- 0.0%
-----------------------------------------------------------------------
50 Affiliated Newspaper $ 3,000
----------------------------------------------------------------------- -----------
STEEL -- 0.0%
-----------------------------------------------------------------------
100 (a)Bar Technologies, Inc., Warrants 4/1/2001 6,000
----------------------------------------------------------------------- -----------
TELECOMMUNICATIONS & CELLULAR -- 0.0%
-----------------------------------------------------------------------
375 Cellular Communications International, Inc., Warrants 1/1/2001 7,500
----------------------------------------------------------------------- -----------
TOTAL COMMON STOCKS (IDENTIFIED COST $68,983) 74,500
----------------------------------------------------------------------- -----------
(c)REPURCHASE AGREEMENT -- 0.4%
- --------------------------------------------------------------------------------------
295,000 BT Securities Corporation, 6.90%, dated 12/31/1996, due 1/2/1997
(AT AMORTIZED COST) 295,000
----------------------------------------------------------------------- -----------
TOTAL INVESTMENTS (IDENTIFIED COST $62,442,641)(d) $64,822,356
----------------------------------------------------------------------- ===========
</TABLE>

(a) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities laws. At December 31, 1996, these securities
amounted to $10,048,186 which represents 15% of net assets.

(b) Non-income producing security.

Mid-American Waste Systems, Inc.: On January 22, 1997, Mid-American filed
for protection under Chapter 11 of the Bankruptcy Code. The company has
agreed to be acquired by USA Waste Services, Inc. The timing and outcome of
this potential transaction is uncertain.

(c) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other Federated funds.

(d) The cost of investments for federal tax purposes amounts to $62,464,490.
The net unrealized appreciation of investments on a federal tax basis
amounts to $2,357,866 which is comprised of $2,882,306 appreciation and
$524,440 depreciation at December 31, 1996.

Note: The categories of investments are shown as a percentage of net assets
($66,043,310) at December 31, 1996.

The following acronym(s) are used throughout this portfolio:

GTD -- Guaranty
LLC -- Limited Liability Corporation
LP -- Limited Partnership
PIK -- Payment in Kind
PLC -- Public Limited Company

(See Notes which are an integral part of the Financial Statements)

15
<PAGE>

FEDERATED HIGH INCOME BOND FUND II
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
ASSETS:
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Total investments in securities, at value (identified cost $62,442,641 and
tax cost $62,464,490) $ 64,822,356
- ---------------------------------------------------------------------------------------
Cash 42,730
- ---------------------------------------------------------------------------------------
Income receivable 1,237,150
- ---------------------------------------------------------------------------------------
Receivable for shares sold 219,158
- --------------------------------------------------------------------------------------- --------------
Total assets 66,321,394
- ---------------------------------------------------------------------------------------
LIABILITIES:
- ----------------------------------------------------------------------
Payable for investments purchased $ 236,309
- ----------------------------------------------------------------------
Payable for shares redeemed 25,303
- ----------------------------------------------------------------------
Accrued expenses 16,472
- --------------------------------------------------------------------- -----------
Total liabilities 278,084
- --------------------------------------------------------------------------------------- --------------
Net Assets for 6,450,008 shares outstanding $ 66,043,310
- --------------------------------------------------------------------------------------- ==============
NET ASSETS CONSIST OF:
- ---------------------------------------------------------------------------------------
Paid in capital $63,269,852
- ---------------------------------------------------------------------------------------
Net unrealized appreciation of investments 2,379,715
- ---------------------------------------------------------------------------------------
Accumulated net realized gain on investments 283,948
- ---------------------------------------------------------------------------------------
Undistributed net investment income 109,795
- --------------------------------------------------------------------------------------- --------------
Total Net Assets $ 66,043,310
- --------------------------------------------------------------------------------------- ==============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- ---------------------------------------------------------------------------------------
$66,043,310 divide by 6,450,008 shares outstanding $10.24
- --------------------------------------------------------------------------------------- ==============
</TABLE>

(See Notes which are an integral part of the Financial Statements)

16
<PAGE>

FEDERATED HIGH INCOME BOND FUND II
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ----------------------------------------------------------------------
Dividends $ 19,194
- ----------------------------------------------------------------------
Interest 3,998,585
- ---------------------------------------------------------------------- ===========
Total income 4,017,779
- ----------------------------------------------------------------------
EXPENSES:
- -----------------------------------------------------------
Investment advisory fee $ 240,233
- -----------------------------------------------------------
Administrative personnel and services fee 125,000
- -----------------------------------------------------------
Custodian fees 26,616
- -----------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 13,777
- -----------------------------------------------------------
Directors'/Trustees' fees 1,456
- -----------------------------------------------------------
Auditing fees 10,000
- -----------------------------------------------------------
Legal fees 2,831
- -----------------------------------------------------------
Portfolio accounting fees 66,789
- -----------------------------------------------------------
Share registration costs 12,095
- -----------------------------------------------------------
Printing and postage 41,932
- -----------------------------------------------------------
Insurance premiums 2,877
- -----------------------------------------------------------
Miscellaneous 13,884
- ----------------------------------------------------------- ---------
Total expenses 557,490
- -----------------------------------------------------------
Waivers and reimbursements --
- ---------------------------------------------
Waiver of investment advisory fee $ (203,132)
- ---------------------------------------------
Reimbursement of other operating expenses (32,285)
- --------------------------------------------- ----------
Total waivers and reimbursements (235,417)
- ----------------------------------------------------------- ---------
Net expenses 322,073
- ---------------------------------------------------------------------- ---------
Net investment income 3,695,706
- ---------------------------------------------------------------------- ---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ----------------------------------------------------------------------
Net realized gain on investments 290,512
- ---------------------------------------------------------------------- -----------
Net change in unrealized appreciation of investments 2,051,764
- ---------------------------------------------------------------------- -----------
Net realized and unrealized gain on investments 2,342,276
- ---------------------------------------------------------------------- -----------
Change in net assets resulting from operations $ 6,037,982
- ---------------------------------------------------------------------- ===========
</TABLE>

(See Notes which are an integral part of the Financial Statements)

17
<PAGE>

FEDERATED HIGH INCOME BOND FUND II
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1996 1995
------- --------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ---------------------------------------------------------------------------
OPERATIONS --
- ---------------------------------------------------------------------------
Net investment income $ 3,695,706 $ 717,145
- ---------------------------------------------------------------------------
Net realized gain (loss) on investments ($290,512 and $8,035, net
gain, respectively, as computed for federal tax purposes) 290,512 5,784
- ---------------------------------------------------------------------------
Net change in unrealized appreciation 2,051,764 493,099
- --------------------------------------------------------------------------- ------------ -----------
Change in net assets resulting from operations 6,037,982 1,216,028
- --------------------------------------------------------------------------- ------------ -----------
DISTRIBUTIONS TO SHAREHOLDERS --
- ---------------------------------------------------------------------------
Distributions from net investment income (3,613,374) (687,618)
- --------------------------------------------------------------------------- ------------ -----------
SHARE TRANSACTIONS --
- ---------------------------------------------------------------------------
Proceeds from sale of shares 55,826,183 21,185,904
- ---------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
distributions declared 3,612,247 686,601
- ---------------------------------------------------------------------------
Cost of shares redeemed (15,984,743) (3,692,843)
- --------------------------------------------------------------------------- ------------ -----------
Change in net assets resulting from share transactions 43,453,687 18,179,662
- --------------------------------------------------------------------------- ------------ -----------
Change in net assets 45,878,295 18,708,072
- ---------------------------------------------------------------------------
NET ASSETS:
- ---------------------------------------------------------------------------
Beginning of period 20,165,015 1,456,943
- --------------------------------------------------------------------------- ------------ -----------
End of period (including undistributed net investment income
of $109,795 and $27,463, respectively) $ 66,043,310 $20,165,015
- --------------------------------------------------------------------------- ============ ===========
</TABLE>

(See Notes which are an integral part of the Financial Statements)

18
<PAGE>

FEDERATED HIGH INCOME BOND FUND II
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994(a)
------ ------ --------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.79 $ 8.87 $ 10.00
- ----------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------
Net investment income 0.88 0.85 0.75
- ----------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.45 0.89 (1.12)
- ---------------------------------------------------------------- ------- -------- ---------
Total from investment operations 1.33 1.74 (0.37)
- ---------------------------------------------------------------- ------- -------- ---------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------
Distributions from net investment income (0.88) (0.82) (0.75)
- ----------------------------------------------------------------
Distributions in excess of net investment income(d) -- -- (0.01)
- ---------------------------------------------------------------- ------- -------- ---------
Total distributions (0.88) (0.82) (0.76)
- ---------------------------------------------------------------- ------- -------- ---------
NET ASSET VALUE, END OF PERIOD $ 10.24 $ 9.79 $ 8.87
- ---------------------------------------------------------------- ======= ======== =========
TOTAL RETURN(b) 14.31% 20.38% (3.73%)
- ----------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------
Expenses 0.80% 0.80% 0.41%*
- ----------------------------------------------------------------
Net investment income 9.23% 9.27% 9.11%*
- ----------------------------------------------------------------
Expense waiver/reimbursement(c) 0.59% 3.40% 10.01%*
- ----------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------
Net assets, end of period (000 omitted) $ 66,043 $20,165 $ 1,457
- ----------------------------------------------------------------
Portfolio turnover 51% 48% 18%
- ----------------------------------------------------------------
</TABLE>

* Computed on an annualized basis.

(a) Reflects operations for the period from February 2, 1994 (date of initial
public investment) to December 31, 1994. For the period from December 9,
1993 (the start of business) to February 1, 1994, the Fund had no public
investment.

(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.

(d) Distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.

(See Notes which are an integral part of the Financial Statements)

19
<PAGE>

FEDERATED HIGH INCOME BOND FUND II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------

1. ORGANIZATION

Federated Insurance Series (the "Trust") is registered under the Investment
Company Act of 1940, as amended (the "Act") as an open-end, management
investment company. The Trust consists of eight portfolios. The financial
statements included herein are only those of Federated High Income Bond Fund II
(the "Fund"), a diversified portfolio. The financial statements of the other
portfolios are presented separately. The assets of each portfolio are segregated
and a shareholder's interest is limited to the portfolio in which shares are
held. The investment objective of the Fund is to seek high current income.

Effective April 15, 1996, the Board of Trustees (the "Trustees") changed the
name of the Trust from Insurance Management Series to Federated Insurance Series
and the name of the Fund from Corporate Bond Fund to Federated High Income Bond
Fund II.

2. SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.

INVESTMENT VALUATIONS -- Listed Corporate bonds are generally valued at the
mean of the latest bid and asked price as furnished by an independent
pricing service. Listed equity securities are valued at the last sale price
reported on a national securities exchange. Short-term securities are
valued at the prices provided by an independent pricing service. However,
short-term securities with remaining maturities of sixty days or less at
the time of purchase may be valued at amortized cost, which approximates
fair market value.

20
<PAGE>

FEDERATED HIGH INCOME BOND FUND II
- --------------------------------------------------------------------------------

RESTRICTED SECURITIES -- Restricted securities are securities that may only
be resold upon registration under federal securities laws or in
transactions exempt from such registration. Many restricted securities may
be resold in the secondary market in transactions exempt from registration.
In some cases, the restricted securities may be resold without registration
upon exercise of a demand feature. Such restricted securities may be
determined to be liquid under criteria established by the Board of
Trustees. The Fund will not incur any registration costs upon such resales.
The Fund's restricted securities are valued at the price provided by
dealers in the secondary market or, if no market prices are available, at
the fair value as determined by the Fund's pricing committee.

21
<PAGE>

FEDERATED HIGH INCOME BOND FUND II
- --------------------------------------------------------------------------------

Additional information on each restricted security held at December 31,
1996 is as follows:

<TABLE>
<CAPTION>
SECURITY FUND
ACQUISITION ACQUISITION
DATE COST
----------------- ---------------
<S> <C> <C>
Abraxas Petroleum Corp. 11/5/96 $501,750
Allied Waste North America, Inc. 11/25/96 452,250
Astor Corp. 10/2/96 351,625
Australias Holdings Pty Limited 10/29/96 115,009
Bar Technologies, Inc. 8/28/96 5,588
Blue Bird Body Co. 11/13/96 74,771
Brooks Fiber Properties Inc. 11/1/96 315,064
Building Materials Corporation of America 12/4/96 149,253
Clark Material Handling Corp. 11/22/96-12/19/96 352,500
CS Wireless System, Inc. 2/16/96 0
Delta Beverage Group Inc. 12/12/96 100,000
Euramax International Plc. 9/18/96 404,063
First Nationwide Escrow Corp. 9/13/96 705,000
Genesis Health Ventures Inc. 10/1/96 250,000
Hawk Corporation 11/22/96 250,000
HS Resources, Inc. 11/22/96 273,576
ICON Fitness Corp. 11/15/96 232,883
International Home Foods Inc. 10/29/96-11/4/96 653,125
International Knife & Saw, Inc. 10/31/96 300,000
Intertek Finance Plc. 10/21/96 400,000
ISP Holdings, Inc. 10/15/96 498,605
Outsourcing Solutions, Inc. 10/31/96 503,750
Pegasus Media 6/30/95-01/2/96 1,250
Petersen Publishing Co. 11/20/96-5/12/96 454,500
Pillowtex Corporation 11/6/96 250,000
Plastic Containers, Inc. 12/11/96 304,500
Prime Succession Acquisition Corp. 7/13/96 150,000
Rayovac Corp. 10/17/96 100,000
Rose Hills Acquisition Corp. 11/14/96 100,000
Ryder TRS, Inc. 11/20/96 200,000
Safelite Glass Corp. 12/13/96 50,000
Statia Terminals 11/22/96 400,000
Tokheim Corporation 8/16/96-9/4/96 357,969
Uniforet Inc. 10/7/96 300,000
U.S. Can Corp. 10/10/96 100,000
</TABLE>

22
<PAGE>

FEDERATED HIGH INCOME BOND FUND II
- --------------------------------------------------------------------------------

INVESTMENT RISKS -- Although the Fund has a diversified portfolio, the Fund
has 95.4% of its portfolio invested in lower rated and comparable quality
unrated high yield securities. Investments in higher yield securities are
accomplished by a greater degree of credit risk and the risk tends to be
more sensitive to economic conditions than higher rated securities. The
risk of loss due to default by the issuer may be significantly great for
the holders of high yielding securities because such securities are
generally unsecured and are often subordinated to other creditors of the
issuer. The Fund held a defaulted security with a value of $90,000,
representing 0.14% of the Fund's net assets at December 31, 1996.

OTHER -- Investment transactions are accounted for on the trade date.

3. SHARES OF BENEFICIAL INTEREST

The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest (without par value).

Transactions in shares were as follows:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1996 1995
------- ------
<S> <C> <C>
Shares sold 5,638,009 2,211,100
- ----------------------------------------------------------------
Shares issued to shareholders in payment of
distributions declared 365,049 71,640
- ----------------------------------------------------------------
Shares redeemed (1,611,816) (388,244)
- ---------------------------------------------------------------- ---------- ---------
Net change resulting from share transactions 4,391,242 1,894,496
- ---------------------------------------------------------------- ========== =========
</TABLE>

4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES

INVESTMENT ADVISORY FEE -- Federated Advisers, the Fund's investment
adviser (the "Adviser"), receives for its services an annual investment
advisory fee equal to 0.60% of the Fund's average daily net assets. The
Adviser may voluntarily choose to waive any portion of its fee and
reimburse certain operating expenses of the Fund. The Adviser can modify or
terminate this voluntary waiver and reimbursement at any time at its sole
discretion.

23
<PAGE>

FEDERATED HIGH INCOME BOND FUND II
- --------------------------------------------------------------------------------

PORTFOLIO ACCOUNTING FEES -- FServ maintains the Trust's accounting records
for which it receives a fee. The fee is based on the level of the Trust's
average daily net assets for the period, plus out-of-pocket expenses.

ORGANIZATIONAL EXPENSES -- Organizational expenses of $16,313 and start-up
administrative service expenses of $31,507 were borne initially by the
Adviser. The Fund has agreed to reimburse the Adviser for the
organizational and start-up administrative expenses during the five year
period following effective date. For the period ended December 31, 1996,
the Fund paid $3,263 and $6,301, respectively, pursuant to this agreement.

GENERAL -- Certain of the Officers and Trustees of the Trust are Officers
and Directors or Trustees of the above companies.

5. INVESTMENT TRANSACTIONS

Purchases and sales of investments, excluding short-term securities, for the
year ended December 31, 1996, were as follows:

PURCHASES $ 63,184,177
- --------------------------------------------------------------- ============
SALES $ 19,547,998
- --------------------------------------------------------------- ============

24
<PAGE>

INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------

To the Board of Trustees of the Federated Insurance Series and Shareholders of
FEDERATED HIGH INCOME BOND FUND II:

We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Federated High Income Bond Fund II (a portfolio
of the Federated Insurance Series) as of December 31, 1996, and the related
statement of operations for the year then ended, the statement of changes in net
assets for the years ended December 31, 1996 and 1995, and the financial
highlights for the periods presented. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
December 31, 1996, by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Federated High
Income Bond Fund II as of December 31, 1996, the results of its operations, the
changes in its net assets and its financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP

Pittsburgh, Pennsylvania
February 7, 1997

25
<PAGE>

TRUSTEES OFFICERS
- --------------------------------------------------------------------------------
John F. Donahue John F. Donahue
Thomas G. Bigley Chairman
John T. Conroy, Jr. J. Christopher Donahue
William J. Copeland President
J. Christopher Donahue Edward C. Gonzales
James E. Dowd Executive Vice President
Lawrence D. Ellis, M.D. John W. McGonigle
Edward J. Flaherty, Jr. Executive Vice President,
Treasurer, and Secretary
Peter E. Madden Richard B. Fisher
Gregor F. Meyer Vice President
John E. Murray, Jr. S. Elliott Cohan
Wesley W. Posvar Assistant Secretary
Marjorie P. Smuts

Variable funds are not bank deposits or obligations, are not guaranteed by
any bank, and are not insured or guaranteed by the U.S. government, the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other government agency. Investment in variable funds involves investment
risk, including the possible loss of principal.

This report is authorized for distribution to prospective investors only
when preceded or accompanied by the fund's prospectus which contains facts
concerning its objective and policies, management fees, expenses and other
information.

26
<PAGE>

TOMORROW FUNDS
--------------
RETIREMENT TRUST

A Lifecycle Retirement Program

Annual Report

DECEMBER 31, 1996

TOMORROW LONG-TERM RETIREMENT FUND

TOMORROW MEDIUM-TERM RETIREMENT FUND

TOMORROW SHORT-TERM RETIREMENT FUND

CORE LARGE-CAP STOCK FUND

CORE SMALL-CAP STOCK FUND

<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

TABLE OF CONTENTS

<TABLE>
<CAPTION>
<S> <C>
Chairman's Letter.................................................... 1
Average Annual Total Return.......................................... 2
Ten Largest Holdings................................................. 5
Schedules of Investments
Core Large Cap Stock Fund....................................... 6
Core Small Cap Stock Fund....................................... 9
Tomorrow Long-Term Retirement Fund.............................. 14
Tomorrow Medium-Term Retirement Fund............................ 23
Tomorrow Short-Term Retirement Fund............................. 31
Statements of Assets and Liabilities................................. 38
Statements of Operations............................................. 39
Statements of Changes in Net Assets.................................. 40
Notes to Financial Statements........................................ 41
Financial Highlights................................................. 47
Independent Auditor's Report......................................... 48
</TABLE>
<PAGE>

DEAR SHAREHOLDER:

Continued low inflation, a cooling economy (3rd quarter growth of 2.0%),
declining interest rates, and healthy profit margins set the stage for yet
another strong increase in the market in the 4th quarter of 1996.

Record cash flows into equity mutual funds helped November's 7.6% rise in the
S&P 500 replace September's 5.6% gain as the strongest monthly performance since
December 1991. The market's fourth quarter return of 8.4% was the eighth
straight 3% or greater quarterly gain. Since January 1995, the S&P 500 has
returned an astonishing 68.9%.

In December cautionary comments on the current bull market by Fed Chairman
Greenspan tempered to some degree the prevailing market optimism, and resulted
in an increase in market volatility similar to what we saw in July.

Since their inception in March 1996 the Tomorrow Short Term, Medium Term and
Long Term Retirement Funds have performed slightly below their benchmark
allocations of fixed income, domestic and international equities. The Core Small
Cap Fund had a very strong 1996, outperforming its benchmark, the Russell 2000,
by over four percentage points. Since its inception in February 1996, the Core
Large Cap Fund slightly underperformed the S&P 500.

The Tomorrow Funds utilize a highly structured quantitative process in the
domestic equity allocations. The objective of the process is to maximize return
while minimizing investment risk as well as style and capitalization drift.
Historically, this risk-averse strategy has fared well relative to the markets
over a market cycle, and has underperformed when stock prices rise sharply.
Given the powerful up market of 1995-96, the slight underperformance of the
Funds is consistent with our long term goal of reducing risk.

Weiss, Peck & Greer is committed to helping you invest wisely prior to and
during your retirement. The Tomorrow Retirement Funds were created to simplify
investment decision making and help you enjoy today. We wish you and your family
a happy, healthy and prosperous 1997.

Sincerely,

/s/ Roger J. Weiss
Roger J. Weiss
Chairman of the Board
January 15, 1997

Page 1
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

AVERAGE ANNUAL TOTAL RETURN

CORE LARGE-CAP

The Tomorrow Fund Large-Cap portfolio underperformed the S&P 500 in 1996 with a
return of 15.4% as compared to the index's return of 16.9% over the same period.

This year's extended and unusually powerful run in the market, coming at the end
of a long economic cycle, was an inhospitable environment for the Fund's risk
control strategy. The strongly defensive character of the strategy caused the
risk controlled portfolio to lag its benchmark during this extended run.

[Graph appears here]

- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
(for the period February 6, 1996 (commencement of
operations) through December 31, 1996)

<TABLE>
<S> <C>
CORE LARGE-CAP....................................................... 15.35%
S&P 500.............................................................. 16.39%
</TABLE>
- --------------------------------------------------------------------------------

CORE SMALL-CAP

The Tomorrow Fund Small-Cap portfolio outperformed the Russell 2000 in 1996 with
a 17.7% return vs. the benchmark's 13.6% return.

The Fund uses a highly quantitative strategy that focuses on minimizing the
total risk of the investment portfolio. In 1996 this focus resulted in a value
tilt to the portfolio as well as concentrations in the real property and
mortgage industries. The strong performance of the financial sector in
conjunction with small cap value stocks outperforming growth in 1996, were the
primary contributors to the Fund's strong performance relative to the Russell
2000.

[Graph appears here]

- --------------------------------------------------------------------------------
Average Annual Total Return
(for the period February 6, 1996 (commencement of
operations) through December 31, 1996)

<TABLE>
<S> <C>
CORE SMALL-CAP....................................................... 17.70%
S&P 500.............................................................. 13.63%
</TABLE>
- --------------------------------------------------------------------------------

Page 2
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

AVERAGE ANNUAL TOTAL RETURN

LONG, MEDIUM & SHORT TERM
TOMORROW FUNDS

In 1996 the Adviser class of each Tomorrow Life Cycle Fund, which consist of a
blended allocation of domestic and international equities and fixed income
instruments, underperformed their respective benchmarks by an average of 1.8%.
Performance for the Institutional class will vary from the Adviser class due to
differences in expenses charged to their class.

The domestic equity portfolios comprise the largest allocation in the Life
Cycle Tomorrow Funds. These portfolios utilize the same risk control strategy
employed in the Large and Small Cap Tomorrow Funds. This risk-averse strategy
has historically performed well relative to the markets over a market cycle and
have underperformed in sharply rising markets. Given the powerful up market of
1995-1996 the underperformance in the Funds is consistent with our long term
goal of reducing volatility.

[Graph appears here]

- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
(Inception through December 31, 1996)

<TABLE>
<CAPTION>
TOMORROW LONG-TERM
<S> <C>
(Adviser Class)................................................... 9.08+
(Institutional Class)............................................. 9.03%++
Tomorrow Long-Term Benchmark......................................... 11.00%
</TABLE>
- --------------------------------------------------------------------------------

[Graph appears here]

- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
(Inception through December 31, 1996)

<TABLE>
<CAPTION>
TOMORROW MEDIUM-TERM
<S> <C>
(Adviser Class)................................................... 8.89+
(Institutional Class)............................................. 8.54%++
Tomorrow Long-Term Benchmark......................................... 10.53%
</TABLE>
- --------------------------------------------------------------------------------

[Graph appears here]

- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
(Inception through December 31, 1996)

<TABLE>
<CAPTION>
TOMORROW SHORT-TERM
<S> <C>
(Adviser Class)................................................... 8.54+
(Institutional Class)............................................. 8.23%++
Tomorrow Long-Term Benchmark......................................... 10.39%
</TABLE>
- --------------------------------------------------------------------------------

NOTE:
+ Inception March 7, 1996. ++ Inception April 2, 1996.

Page 3
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

AVERAGE ANNUAL TOTAL RETURN

Performance represents historical data. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost. Each Fund's
results and their indices assume the reinvestment of all capital gain
distributions and income dividends. Each Fund's past performance is not
indicative of future performance and should be considered in light of each
Fund's investment policy and objectives, the characteristics and quality of its
portfolio securities and the periods selected. The S&P 500 Stock Index and the
S&P 400 MidCap Stock Index are each broad based measurement of changes in stock
market conditions based on the average performance of 500 and 400, respectively,
widely held common stocks. The Russell 2000 Growth Index is a measurement of
changes in stock market conditions based on the average performance of small
U.S. growth oriented securities with a median market capitalization of
approximately $200 million. The Lehman Government Corporate Index is a market
weighted blend of all U.S. Government securities and all U.S. Corporate
securities. The Morgan Stanley Capital International Europe, Australia, Far East
("EAFE") is an index of more than 800 companies in Europe, Australia and the Far
East.

The benchmarks used by the Long-Term Retirement Fund, Medium-Term Retirement
Fund and Short-Term Retirement Fund are each comprised of an allocated portion
of several of the above mentioned indices. The allocated portions are as
follows:

<TABLE>
- --------------------------------------------------------------------------------
Long- Medium- Short
Term Term Term
---- ---- ----
<S> <C> <C> <C>
S&P 500 30% 35% 40%
S&P 400 MidCap 20% 15% 10%
Russell 2000 Growth 25% 15% 10%
Lehman Government Corporate 20% 30% 40%
EAFE 5% 5% 0%
- --------------------------------------------------------------------------------
</TABLE>

Page 4
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

TEN LARGEST HOLDINGS AT DECEMBER 31, 1996*

<TABLE>
<CAPTION>
Market Percent
Core Large-Cap Value of Fund
- ----------------------------------------------------------------------
<S> <C> <C>
Exxon Corp................................... $64,680 4.1%
Royal Dutch Petroleum Co ADR................. 47,298 3.0%
Standard & Poor's Depositary
Receipt.................................. 44,362 2.8%
Lilly Eli & Co.............................. 29,492 1.9%
Mobil Corp................................... 28,362 1.8%
GTE Corp..................................... 26,481 1.7%
Bristol-Myers Squibb Co...................... 26,426 1.7%
Eastman Kodak Co............................. 25,038 1.6%
International Business Machines
Corp.................................... 23,707 1.5%
Amoco Corp................................... 23,579 1.5%
-------- -------
$339,425 21.6%
======== =======
<CAPTION>
Market Percent
Core Small-Cap Value of Fund
- -----------------------------------------------------------------------
<S> <C> <C>
BRE Properties Inc........................... $10,568 0.5%
Home Beneficial Corp......................... 6,780 0.4%
Financial Trust Corp......................... 6,699 0.4%
IWC Resources Corp........................... 6,567 0.3%
Citizens Bancorp Maryland.................. 6,200 0.3%
Boole & Babbage Inc.......................... 6,025 0.3%
Ekco Group Inc............................... 5,998 0.3%
Liberty Bancorp Inc.......................... 5,920 0.3%
SPX Corp..................................... 5,890 0.3%
Interstate Bakeries Corp..................... 5,846 0.3%
-------- -------
$66,493 3.4%
======== =======
<CAPTION>
Long-Term Retirement
- -----------------------------------------------------------------------
<S> <C> <C>
US Treasury Note
5.500%, Due 11/15/98..................... $120,187 9.5%
US Treasury Note
6.500%, Due 8/15/05...................... 98,628 7.8%
Exxon Corp .................................. 91,140 7.2%
Standard & Poor's Depositary
Receipt................................... 57,302 4.6%
BT EAFE Equity Index Fund.................... 53,861 4.3%
US Treasury Bond
6.875%, Due 8/15/25...................... 35,689 2.8%
U.S. Robotics Corp .......................... 23,040 1.8%
Amgen Inc ................................... 18,542 1.5%
State Auto Financial Corp ................... 18,486 1.5%
Sprint Corp.................................. 18,343 1.5%
-------- -------
$535,218 42.5%
======== =======
<CAPTION>
Medium-Term Retirement
- -----------------------------------------------------------------------
<S> <C> <C>
US Treasury Note
5.500%, Due 11/15/98..................... $501,606 13.6%
US Treasury Note
6.500%, Due 8/15/05...................... 425,711 11.6%
Standard & Poor's Depositary
Receipt.................................. 177,450 4.8%
US Treasury Bond
6.875%, Due 8/15/25...................... 161,111 4.4%
BT EAFE Equity Index Fund.................... 144,849 3.9%
Exxon Corp................................... 53,214 1.4%
May Department Stores Co..................... 39,083 1.1%
Kimberly-Clark Corp ......................... 37,243 1.0%
Royal Dutch Petroleum Co ADR ................ 36,882 1.0%
Viacom Inc Cl B ............................. 35,433 1.0%
---------- -------
$1,612,582 43.8%
========== =======
<CAPTION>
Short-Term Retirement
- ----------------------------------------------------------------------
<S> <C> <C>
US Treasury Note
5.500%, Due 11/15/98..................... $880,046 18.5%
US Treasury Note
6.500%, Due 8/15/05...................... 743,737 15.6%
US Treasury Bond
6.875%, Due 8/15/25...................... 275,316 5.8%
Standard & Poor's Depositary
Receipt.................................. 221,813 4.7%
Royal Dutch Petroleum Co ADR ................ 126,013 2.6%
Exxon Corp................................... 91,140 1.9%
GTE Corp .................................... 84,766 1.8%
Pharmacia & Upjohn Inc ...................... 75,169 1.6%
Mobil Corp .................................. 73,350 1.5%
Chevron Corp ................................ 71,825 1.5%
---------- -------
$2,643,175 55.5%
========== =======
</TABLE>

* The composition of the largest securities in each porfolio is subject to
change.

Page 5
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

SCHEDULES OF INVESTMENTS AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
Number
of Shares Security Value
- ---------- -------- -----
<S> <C> <C>
CORE LARGE-CAP STOCK FUND

COMMON STOCKS (96.6%)
Basic Materials (9.3%)
185 Dow Chemical Co ............................. $14,499
360 Barrick Gold Corp ........................... 10,305
235 Monsanto Co ................................. 9,136
117 PPG Industries Inc. ......................... 6,567
274 Placer Dome Inc ADR ......................... 5,960
88 Phelps Dodge Corp ........................... 5,940
82 Pioneer Hi Bred International ............... 5,740
117 Great Lakes Chemical Corp. .................. 5,470
105 W.R. Grace & Co.............................. 5,434
105 International Flavors &
Fragrances Inc ........................... 4,725
144 Inco Ltd .................................... 4,590
99 Newmont Mining Corp ......................... 4,430
48 Rohm & Haas Co .............................. 3,918
66 Reynolds Metals Co .......................... 3,720
194 Engelhard Corp .............................. 3,710
110 James River Corp of Virginia ................ 3,644
114 USX US Steel Group .......................... 3,577
61 Temple Inland Inc ........................... 3,302
64 Nucor Corp .................................. 3,264
79 International Paper Co. ..................... 3,190
133 Cyprus Amax Minerals Co. .................... 3,109
47 Sigma Aldrich Corp .......................... 2,935
188 Homestake Mining Co ......................... 2,679
80 Boise Cascade Corp .......................... 2,540
46 Union Camp Corp ............................. 2,197
224 +Bethlehem Steel Corp. ....................... 2,016
70 Westvaco Corp................................ 2,013
86 Allegheny Teledyne Inc ...................... 1,978
51 Bemis Inc ................................... 1,881
103 Worthington Industries....................... 1,867
92 Inland Steel Industries Inc ................. 1,840
25 +FMC Corp .................................... 1,753
231 Echo Bay Mines Ltd .......................... 1,530
37 BF Goodrich Co............................... 1,499
100 Stone Container Corp ........................ 1,487
36 Ecolab Inc .................................. 1,354
35 Nalco Chemical Co ........................... 1,264
159 +Armco Inc ................................... 656
13 Potlach Corp ................................ 559
--------
146,278
--------
CAPITAL GOODS (12.2%)
216 Boeing Co ................................... 22,977
222 Minnesota Mining &
Manufacturing Co ......................... 18,398
222 McDonnell Douglas Corp ...................... 14,208
204 +Rockwell International....................... 12,418
124 Emerson Electric Co. ........................ 11,997

204 Corning Inc ................................. $9,435
405 Westinghouse Electric Corp .................. 8,049
107 Honeywell Inc. .............................. 7,035
110 Fluor Corp .................................. 6,902
89 Eaton Corp .................................. 6,208
105 Crown Cork & Seal Inc ....................... 5,709
114 Cooper Industries ........................... 4,802
89 Tyco International Ltd ...................... 4,706
47 Textron Inc ................................. 4,430
76 Alco Standard Corp .......................... 3,924
91 Parker Hannifin Corp ........................ 3,526
42 Northrop Grumman Corp ....................... 3,476
62 Dover Corp .................................. 3,115
118 Pall Corp ................................... 3,009
120 PP & L Resources Inc ........................ 2,760
34 Raychem Corp................................. 2,724
55 Harnischfeger Industries Inc. ............... 2,647
36 General Dynamics ............................ 2,538
30 Grainger WW Inc ............................. 2,408
58 Millipore Corp .............................. 2,400
205 Laidlaw Inc Cl B............................. 2,358
46 Cummins Engine Inc .......................... 2,116
80 Moore Corp Ltd .............................. 1,630
44 Avery Dennison Corp ......................... 1,556
35 General Signal Corp ......................... 1,496
78 McDermott International Inc ................. 1,297
57 Cincinnati Milacron Inc ..................... 1,247
47 Ball Corp ................................... 1,222
27 Briggs & Stratton Corp ...................... 1,188
40 Crane Co .................................... 1,160
29 Trinova Corp ................................ 1,055
28 National Services Industries Inc ............ 1,046
23 Thomas & Betts Corp ......................... 1,021
43 Premark International........................ 957
98 +Navistar International Corp ................. 894
14 Timken Co. .................................. 642
42 Giddings & Lewis Inc. ....................... 541
6 NACCO Industries Inc Cl A ................... 321
--------
191,548
--------
COMMUNICATION SERVICES (3.1%)
582 GTE Corp..................................... 26,481
326 US West Inc ................................. 10,513
171 Sprint Corp ................................. 6,818
163 ALLTEL Corp ................................. 5,114
--------
48,926
--------
CONSUMER CYCLICAL (12.4%)
312 Eastman Kodak Co ............................ 25,038
237 May Department Stores Co .................... 11,080
378 Dun & Bradstreet Corp ....................... 8,978

</TABLE>
See notes to financial statements

Page 6
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

SCHEDULES OF INVESTMENTS AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
Number
of Shares Security Value
- ---------- -------- -----
<S> <C> <C>
CORE LARGE-CAP STOCK FUND (CONTINUED)

382 The Limited Inc ............................... $7,019
225 Gap Inc. ...................................... 6,778
89 Gannet Inc .................................... 6,664
240 Mattel Inc..................................... 6,660
156 Dayton Hudson Corp ............................ 6,123
170 Masco Corp .................................... 6,120
153 Service Corp International .................... 4,284
96 Tandy Corp..................................... 4,224
136 Dillard Department Stores ..................... 4,199
106 New York Times Co Cl A ........................ 4,028
90 Genuine Parts Co .............................. 4,016
83 Interpublic Group of Cos Inc .................. 3,942
375 +K mart Stores ................................. 3,891
81 Harcourt General Inc........................... 3,736
109 Dow Jones & Co Inc ............................ 3,692
113 Black & Decker Corp............................ 3,404
98 Cognizant Corp ................................ 3,234
70 McGraw-Hill Cos Inc ........................... 3,229
64 TRW Inc. ...................................... 3,168
71 Owens Corning ................................. 3,026
94 Echlin Inc. ................................... 2,973
67 Polaroid Corp ................................. 2,914
42 VF Corp ....................................... 2,835
40 Armstrong World Industries Inc................. 2,780
139 Cooper Tire & Rubber .......................... 2,745
65 Reebok International Ltd ...................... 2,730
135 Maytag Corp ................................... 2,666
69 Liz Claiborne Inc. ............................ 2,665
63 Hasbro Inc .................................... 2,449
31 Tribune Co. ................................... 2,445
80 Circuit City Store Inc ........................ 2,410
43 Sherwin-Williams Co. .......................... 2,408
61 Knight- Ridder Inc ............................ 2,333
106 +Woolworth Corp ................................ 2,319
77 American Greetings-Cl A ....................... 2,185
52 +Fruit of the Loom Inc ......................... 1,969
71 Stanley Works ................................. 1,917
37 Mercantile Stores ............................. 1,827
102 Viad Corp ..................................... 1,683
35 TJX Cos Inc.................................... 1,658
71 Ogden Corp .................................... 1,331
60 Jostens Inc ................................... 1,268
34 Snap-On Inc ................................... 1,211
40 Russell Corp .................................. 1,190
28 +Payless ShoeSource Inc ........................ 1,050
20 Springs Industries Inc ........................ 860
16 Meredith Corp ................................. 844
54 Stride Rite Corp .............................. 540
32 +ACNielsen Corp ................................ 484
22 Outboard Marine Inc. .......................... 363
9 +Footstar Inc .................................. 224
--------
193,809
--------
CONSUMER STAPLES (13.1%)
101 Unilever NV ADR ............................... $17,700
212 Walt Disney Co ................................ 14,761
398 +Viacom Inc Cl B .............................. 13,880
205 Kellogg Co .................................... 13,453
309 Heinz H J Co .................................. 11,124
483 Archer Daniels Midland Co...................... 10,626
254 Anheuser- Busch Cos Inc. ...................... 10,160
118 Ralston Purina Co ............................. 8,658
165 Conagra Inc ................................... 8,209
87 Colgate-Palmolive Co .......................... 8,026
102 CPC International Inc. ........................ 7,905
234 UST Inc. ...................................... 7,576
109 General Mills Inc ............................. 6,908
158 Quaker Oats Co................................. 6,024
129 +Kroger Co ..................................... 5,999
69 Avon Products Inc ............................. 3,942
96 American Stores Co............................. 3,924
115 Winn Dixie Stores ............................. 3,637
76 Hershey Foods Corp ............................ 3,325
79 Rite Aid Corp. ................................ 3,140
127 Whitman Corp .................................. 2,905
87 Sysco Corp .................................... 2,838
67 +CVS Corp ...................................... 2,764
51 Tupperware Corp................................ 2,735
26 Clorox Co. .................................... 2,610
74 Giant Food Inc Cl A ........................... 2,553
122 Wendy's International ......................... 2,501
57 +Ceridian Corp ................................. 2,308
67 Deluxe Corp ................................... 2,194
50 +King World Productions Inc .................... 1,844
123 Dial Corp ..................................... 1,814
60 Supervalu Inc. ................................ 1,703
29 Brown-Forman Corp Class B .................... 1,327
74 Fleming Cos Inc ............................... 1,277
70 Safety Kleen Corp ............................. 1,146
28 Great Atlantic & Pacific Tea .................. 892
25 Hilton Hotels Corp ............................ 653
32 Coors (Adolph) Co Cl B ........................ 608
29 Luby's Cafeterias Inc. ........................ 576
77 +Shoney's Inc .................................. 539
8 Alberto Culver Co.............................. 384
43 +Ryan's Family Steak Houses Inc ................ 296
6 Longs Drug Stores Corp......................... 295
7 Harland Co. ................................... 231
--------
205,970
--------

ENERGY (18.0%)
660 Exxon Corp .................................... 64,680
277 Royal Dutch Petroleum Co ADR................... 47,298
232 Mobil Corp. ................................... 28,362
</TABLE>

See notes to financial statements

Page 7
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

SCHEDULES OF INVESTMENTS AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
Number
of Shares Security Value
- --------- -------- -----
<S> <C> <C>
CORE LARGE-CAP STOCK FUND (CONTINUED)

292 Amoco Corp ......................................... $23,579
317 Chevron Corp........................................ 20,605
137 Texaco Inc ......................................... 13,443
134 Schlumberger Ltd ................................... 13,383
93 Atlantic Richfield ................................. 12,334
240 Phillips Petroleum Co. ............................. 10,620
331 Occidental Petroleum Corp .......................... 7,737
117 Halliburton Co...................................... 7,049
127 Burlington Resources Inc ........................... 6,398
170 Dresser Industries Inc ............................. 5,270
78 Amerada Hess Corp. ................................. 4,514
105 Baker Hughes Inc ................................... 3,623
98 Sun Co ............................................. 2,389
30 Kerr McGee Corp .................................... 2,160
83 +Oryx Energy Co ..................................... 2,054
28 Louisiana Land & Exploration Co .................... 1,502
33 Ashland Inc ........................................ 1,448
21 Pennzoil Co. ....................................... 1,187
71 +Santa Fe Energy Resources .......................... 985
38 +Rowan Cos .......................................... 860
11 Helmerich & Payne Inc............................... 573
--------
282,053
--------

FINANCIAL (3.8%)
79 Loews Corp ......................................... 7,446
127 Lincoln National Corp Ltd. ......................... 6,667
74 UNUM Corp .......................................... 5,347
76 First Bank System Inc .............................. 5,254
43 Marsh & McLennan Cos ............................... 4,472
99 U.S. Bancorp ....................................... 4,449
64 St Paul Cos. Inc Corp .............................. 3,752
55 Boatmen's Bancshares Inc ........................... 3,548
44 Transamerica Corp .................................. 3,481
76 National City Corp ................................. 3,411
80 Safeco Corp ........................................ 3,155
44 Jefferson- Pilot Corp .............................. 2,492
117 USF&G Corp ......................................... 2,442
25 Republic NY Corp ................................... 2,041
18 Aetna Inc .......................................... 1,440
21 USLife Corp ........................................ 698
--------
60,095
--------
HEALTH CARE (11.9%)
404 Lilly Eli & Co ..................................... 29,492
243 Bristol-myers Squibb Co. ........................... 26,426
341 Schering-Plough Corp. .............................. 22,080
543 Pharmacia & Upjohn Inc.............................. 21,516
316 American Home Products Corp......................... 18,526
257 +Amgen Inc. ......................................... 13,974
140 Warner Lambert Co .................................. 10,500
148 +Boston Scientific Corp ............................. 8,180
262 +Humana Inc ......................................... 5,011
188 +Tenet Healthcare Corp .............................. 4,113
96 +St. Jude Medical Inc. .............................. 4,092
91 Becton Dickinson & Co. ............................. 3,947
84 Allergan Inc. ...................................... 2,992
83 Bausch & Lomb Inc .................................. 2,946
63 Mallinckrodt Inc. .................................. 2,780
169 Biomet ............................................. 2,556
92 +ALZA Corp .......................................... 2,381
83 +Fresenius Medical Care ADR ......................... 2,334
43 United States Surgical Corp ........................ 1,693
78 +Transitional Hospitals Corp ........................ 751
--------
186,990
--------
TECHNOLOGY (4.6%)
157 International Business Machines
Corp............................................ 23,707
415 First Data Corp .................................... 15,147
143 Raytheon Co ........................................ 6,882
593 +Novell Inc ......................................... 5,615
233 +Apple Computer Inc ................................. 4,864
105 +Advanced Micro Devices Inc ......................... 2,704
90 Autodesk Inc ....................................... 2,520
33 Perkin Elmer Corp................................... 1,943
26 Harris Corp......................................... 1,784
126 +Amdahl Corp ........................................ 1,528
75 EG&G Inc ........................................... 1,509
190 +Unisys Corp ........................................ 1,282
25 Shared Medical Systems Corp ........................ 1,231
71 +Intergraph Corp .................................... 728
40 +Data General Corp .................................. 580
--------
72,024
--------
TRANSPORTATION (0.7%)
136 +Federal Express Corp. .............................. 6,052
123 Caliber Systems Inc ................................ 2,368
60 Consolidated Freightways Inc ....................... 1,335
43 +USAir Group Inc .................................... 1,005
23 +Yellow Corp ........................................ 331
30 +Consolidated Freightways Corp ...................... 266
--------
11,357
--------

UTILITIES (7.5%)
465 Southern Co ........................................ 10,521
239 Enron Corp ......................................... 10,307
139 FPL Group Inc. ..................................... 6,394
137 Duke Power Co ...................................... 6,371
153 Williams Cos Inc ................................... 5,738
142 Dominion Resources Inc.............................. 5,467
251 Pacific Gas & Electric Co. ......................... 5,271
107 Coastal Corp ....................................... 5,230
</TABLE>

Page 8 See notes to financial statements
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

SCHEDULES OF INVESTMENTS AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
Number
of Shares Security Value
- --------- -------- -----
<S> <C> <C>
CORE LARGE-CAP STOCK FUND (CONTINUED)

117 American Electric Power Co ..................................... $4,812
117 Texas Utilities Co ............................................. 4,768
164 Entergy Corp.................................................... 4,551
226 Edison International ........................................... 4,492
185 Houston Industries ............................................. 4,186
153 Central & South West Corp ...................................... 3,921
110 Cinergy Corp. .................................................. 3,671
71 Sonat Inc. ..................................................... 3,656
59 Consolidated National Gas Co ................................... 3,260
101 Pacific Enterprises ............................................ 3,068
90 GPU Inc ........................................................ 3,026
46 Columbia Gas System Inc ........................................ 2,927
76 Union Electric Co............................................... 2,925
95 Public Service Enterprise ...................................... 2,588
111 Ohio Edison Co ................................................. 2,525
210 +Niagara Mohawk Power Corp....................................... 2,074
42 Northern States Power........................................... 1,927
67 ENSERCH Corp ................................................... 1,541
82 Noram Energy Corp. ............................................. 1,261
26 Nicor Inc. ..................................................... 929
26 Oneok Inc. ..................................................... 780
6 Eastern Enterprises ............................................ 212
----------
118,399
----------

TOTAL COMMON STOCKS
(Cost $1,408,895)............................................ 1,517,449
----------
UNIT INVESTMENT TRUST (2.8%)
(Cost $44,815)
600 Standard & Poor's
Depositary Receipt ........................................... 44,362
----------
CONVERTIBLE PREFERRED
STOCK (0.0%)
(Cost $327)
FINANCIAL (0.0%)
5 Aetna Inc Class C 6.250% ....................................... 397
----------
TOTAL INVESTMENTS (99.4%)
(Cost $1,454,037)............................................. 1,562,208

OTHER ASSETS IN EXCESS
OF LIABILITIES (0.6%)......................................... 8,924
----------
TOTAL NET ASSETS (100.0%).......................................$1,571,132
==========
+Non-income producing security.

CORE SMALL-CAP STOCK FUND

COMMON STOCKS (97.0%)
BASIC MATERIALS (4.8%)
213 Tuscarora Inc .................................................. $5,831
112 Ameron International Inc ....................................... 5,782
114 Cleveland Cliffs Inc............................................ 5,173
807 +Amax Gold Inc .................................................. 5,145
157 Florida Rock Industries Inc..................................... 5,142
136 Carpenter Technology Corp ...................................... 4,981
222 Lawter International Inc ....................................... 4,962
139 Mosinee Paper Corp ............................................. 4,934
179 Fab Industries Inc ............................................. 4,922
150 Cambrex Corp ................................................... 4,913
149 Liqui-Box Corp ................................................. 4,842
318 Coeur D'Alene Mines Corp........................................ 4,810
291 Quaker Chemical Corp ........................................... 4,765
145 Dexter Corp .................................................... 4,622
244 Wausau Paper Mills Co .......................................... 4,514
765 +Hecla Mining Co ................................................ 4,207
109 +Getchell Gold Corp ............................................. 4,183
302 Calgon Carbon Corp ............................................. 3,699
61 Fuller H B Co .................................................. 2,867
151 Lilly Industries Inc Cl A ...................................... 2,775
57 Penwest Ltd .................................................... 998
--------
94,067
--------

CAPITAL GOODS (12.8%)
109 NACCO Industries Inc Cl A ...................................... 5,831
66 McClatchy Newspapers Inc Cl A .................................. 5,810
139 Butler Manufacturing Co ........................................ 5,630
274 Penn Engineering &
Manufacturing Corp.......................................... 5,617
133 Kimball International Inc Cl B.................................. 5,503
372 Daniel Industries Inc........................................... 5,487
87 +SEACOR Holdings Inc ............................................ 5,481
133 Manitowoc Inc .................................................. 5,387
132 Tredegar Industries Inc ........................................ 5,297
352 Oil-Dri Corp America ........................................... 5,280
161 Kysor Industrial Corp .......................................... 5,253
212 Amcast Industrial Corp ......................................... 5,247
210 Brady W H Co ................................................... 5,171
127 IDEX Corp ...................................................... 5,064
107 Fisher Scientific International Inc............................. 5,042
84 Barnes Group Inc ............................................... 5,040
94 Mine Safety Appliances Co ...................................... 5,006
227 +Osmonics Inc ................................................... 4,994
202 Baldor Electric Co ............................................. 4,974
111 Thiokol Corp ................................................... 4,967
117 American Filtrona Corp ......................................... 4,958
214 Albany International Corp Cl A ................................. 4,949
177 +Bearings Inc.................................................... 4,934
81 Carlisle Cos Inc ............................................... 4,900
</TABLE>

See notes to financial statements Page 9
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

SCHEDULES OF INVESTMENTS AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
Number
of Shares Security Value
- --------- -------- -----
<S> <C> <C>
CORE LARGE-CAP STOCK FUND (CONTINUED)
76 +SPS Technologies Inc.......................................... $4,883
237 Varlen Corp .................................................. 4,873
145 Donaldson Co.................................................. 4,858
100 +Littelfuse Inc. .............................................. 4,850
149 +Avatar Holdings Inc .......................................... 4,768
91 Teleflex Inc ................................................. 4,743
185 International Aluminum Corp .................................. 4,718
205 Learonal Inc ................................................. 4,715
211 +Ladd Furniture Inc ........................................... 4,680
155 Commercial Metals Co.......................................... 4,669
151 Standex International Corp ................................... 4,662
631 +Insituform Technologies Inc Cl A ............................. 4,654
145 +USA Waste Services Inc ....................................... 4,622
188 Graco Inc .................................................... 4,606
145 Stone & Webster Inc .......................................... 4,604
204 +Lydall Inc ................................................... 4,590
492 +Thermo Fibertek Inc .......................................... 4,582
262 Raymond Corp ................................................. 4,552
316 Woodhead Industries Inc ...................................... 4,345
679 UNR Industries Inc ........................................... 4,074
101 +Sequa Corp Cl A .............................................. 3,964
109 +Dionex Corp .................................................. 3,815
302 +Nashua Corp. ................................................. 3,624
114 +Syratech Corp ................................................ 3,591
326 Sealright Co ................................................. 3,423
156 Granite Construction Inc ..................................... 2,964
100 Grief Bros Corp Cl A ......................................... 2,850
167 +Cuno Inc ..................................................... 2,484
63 AAR Corp ..................................................... 1,905
19 Miller (Herman) Inc .......................................... 1,076
35 Harmon Industries ............................................ 652
22 +Devon Group Inc .............................................. 605
42 +Durakon Industries Inc. ...................................... 536
15 Gleason Corp ................................................. 497
34 +Intermagnetics General Corp .................................. 408
--------
251,264
--------

CONSUMER CYCLICAL (14.3%)
1,371 Ekco Group Inc ............................................... 5,998
152 SPX Corp ..................................................... 5,890
124 Pultizer Publishing Co........................................ 5,750
88 +Culbro Corp .................................................. 5,709
417 +Johnson Worldwide
Association Inc Cl A......................................... 5,525
284 Sturm Ruger & Co Inc ......................................... 5,502
222 Donnelly Corp ................................................ 5,439
96 Houghton Mifflin Co .......................................... 5,436
386 ADVO Inc ..................................................... 5,404
214 American Business Products.................................... 5,377
195 K2 Inc ....................................................... 5,362
210 Standard Products Co ......................................... 5,355
527 Graphic Industries ........................................... $5,336
449 +Lifetime Hoan Corp ........................................... 5,276
120 Hughes Supply Inc ............................................ 5,175
157 Wiley (John) & Sons Inc Cl A ................................. 5,063
160 Wynns International Inc ...................................... 5,060
505 Crown Crafts Inc ............................................. 5,050
154 +Gelman Sciences Inc .......................................... 5,005
202 Bassett Furniture Industries Inc.............................. 4,949
82 NCH Corp ..................................................... 4,940
172 Starrett LS Co Cl A .......................................... 4,881
830 +American Media Inc............................................ 4,876
164 Lawson Products Inc .......................................... 4,856
177 Unitog Co..................................................... 4,823
181 Guilford Mills Inc ........................................... 4,819
315 +National Education Corp ...................................... 4,804
565 +Handleman Co ................................................. 4,803
253 Caseys General Stores Inc .................................... 4,744
274 Wackenhut Corp Cl A .......................................... 4,726
262 Russ Berrie & Co Inc ......................................... 4,716
308 Osh Kosh B'Gosh Inc Cl A ..................................... 4,697
50 Dart Group Corp Cl A ......................................... 4,650
697 +Uno Restaurant Corp .......................................... 4,618
116 Apogee Enterprises Inc ....................................... 4,611
297 Genovese Drugs Stores ........................................ 4,603
87 Meredith Corp ................................................ 4,589
318 Falcon Products Inc .......................................... 4,532
169 Stanhome Inc ................................................. 4,479
231 Delechamps Inc ............................................... 4,476
243 Brown Group Inc .............................................. 4,465
393 La-Z-Boy Chair Co ............................................ 4,454
127 Plenum Publishing Corp ....................................... 4,445
205 Smart & Final Inc ............................................ 4,433
277 Strawbridge & Clothier ....................................... 4,397
86 WD-40 Co ..................................................... 4,387
227 +Lands' End Inc ............................................... 4,346
198 True North Communications Inc ................................ 4,331
425 Stride Rite Corp ............................................. 4,250
274 Cadmus Communications Corp ................................... 4,247
49 United Television Inc ........................................ 4,220
175 Waverly Inc .................................................. 4,156
227 Walbro Corp. ................................................. 4,143
211 Alico Inc .................................................... 3,956
385 +Playboy Enterprises Inc Cl B ................................. 3,754
207 Commercial Intertech Corp .................................... 2,820
320 +GRC International Inc ........................................ 2,600
127 +Pre-Paid Legal Services Inc .................................. 2,318
530 +Topps Co Inc ................................................. 2,120
84 Shopko Stores Inc ............................................ 1,260
70 +AnnTaylor Stores Corp ........................................ 1,225
70 +American Classic Voyages Co................................... 919
28 Thomas Nelson Inc............................................. 417
</TABLE>

Page 10 See notes to financial statements
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

SCHEDULES OF INVESTMENTS AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
Number
of Shares Security Value
- --------- -------- -----
<S> <C> <C>
CORE SMALL-CAP STOCK FUND (CONTINUED)

20 +Galey & Lord Inc ............................................. $297
15 Outboard Marine Inc. ......................................... 247
--------
280,111
--------
Consumer Staples (6.7%)
119 Interstate Bakeries Corp ..................................... 5,846
172 Harland Co. .................................................. 5,676
244 Nash Finch Corp .............................................. 5,185
326 Rykoff-Sexton Inc ............................................ 5,175
351 Dames & Moore Inc ............................................ 5,133
224 Church & Dwight Co............................................ 5,124
129 Tootsie Roll Industries....................................... 5,112
365 Ruddick Corp ................................................. 5,110
104 Longs Drug Stores ............................................ 5,109
281 International Multifoods Corp ................................ 5,093
261 Blair Corp ................................................... 5,024
286 Arbor Drugs Inc .............................................. 4,969
267 ABM Industries Inc ........................................... 4,940
350 +Foodbrands America Inc ....................................... 4,813
127 National Presto Industries ................................... 4,747
181 +Carmike Cinemas Inc. Cl A .................................... 4,593
278 Goodmark Foods Inc ........................................... 4,587
241 Coors (Adolph) Co Cl B ....................................... 4,579
30 Farmer Brothers Co ........................................... 4,560
212 Flowers Industries Inc ....................................... 4,558
227 +International Dairy Queen Inc
Cl A...................................................... 4,540
348 WLR Foods Inc ................................................ 4,307
216 Luby's Cafeterias Inc. ....................................... 4,293
359 A.T. Cross Co Cl A ........................................... 4,173
217 Angelica Corp ................................................ 4,150
591 +Shoney's Inc ................................................. 4,137
255 +AMC Entertainment Inc ........................................ 3,666
76 Rival Co...................................................... 1,891
37 +Valassis Communications Inc. ................................. 782
30 +Bone Care International Inc................................... 218
--------
132,090
--------
Energy (4.1%)
320 Landauer Inc ................................................. 5,562
265 Wiser Oil Co ................................................. 5,234
188 Ashland Coal Inc ............................................. 5,217
100 Helmerich & Payne Inc......................................... 5,213
143 Vintage Petroleum Inc ........................................ 4,933
343 Berry Petroleum Cl A ......................................... 4,931
137 Apache Corp .................................................. 4,846
519 +Allied Waste Industries Inc .................................. 4,801
290 Getty Petroleum Corp ......................................... 4,712
296 +Tuboscope Vetco International
Corp...................................................... 4,588
275 +HS Resources Inc ............................................. 4,537

105 +Barrett Resources Corp ....................................... $4,476
293 Quaker State Corp ............................................ 4,139
152 Holly Corp ................................................... 4,066
212 +Plains Resources Inc ......................................... 3,313
129 +Belden & Blake Corp .......................................... 3,290
200 +Pool Energy Services Co ...................................... 3,075
58 +Newpark Resources Inc ........................................ 2,161
140 +Hondo Oil & Gas Co ........................................... 1,523
69 +Box Energy Corp Cl B.......................................... 630
--------
81,247
--------
Financial Services (31.0%)
427 BRE Properties Inc ........................................... 10,568
179 Home Beneficial Corp ......................................... 6,780
168 Financial Trust Corp ......................................... 6,699
100 Citizens Bancorp Maryland .................................... 6,200
119 Liberty Bancorp Inc........................................... 5,920
95 Forest City Enterprises Inc Cl A ............................. 5,748
319 State Auto Financial Corp .................................... 5,742
385 Burham Pacific Properties Inc ................................ 5,727
175 Wesbanco Inc ................................................. 5,688
215 American Heritage Life Inc.................................... 5,644
139 Horace Mann Educator Corp..................................... 5,612
198 Brenton Banks Inc ............................................ 5,470
254 F & M National Corp .......................................... 5,429
130 CNB Bancshares Inc ........................................... 5,427
183 First Michigan Bank Corp ..................................... 5,421
146 One Valley Bancorp Inc ....................................... 5,420
166 First Midwest Bancorp Inc .................................... 5,416
155 Susquehanna Bancshares Inc.................................... 5,367
164 +UICI ......................................................... 5,330
242 MGI Properties ............................................... 5,324
430 First Union Real Estate Corp.................................. 5,321
335 Commercial Net Lease Realty
Inc....................................................... 5,318
128 Banknorth Group Inc .......................................... 5,312
142 Student Loan Corp ............................................ 5,289
170 Deposit Guaranty Corp ........................................ 5,270
132 Protective Life Corp ......................................... 5,264
91 Westamerica Bancorp........................................... 5,255
212 Irwin Financial Corp ......................................... 5,247
193 Federal Realty Investment Trust............................... 5,235
135 New York Bancorp Inc ......................................... 5,231
309 South West Property Trust .................................... 5,214
137 Fort Wayne National Corp ..................................... 5,206
153 Provident Bancorp ............................................ 5,202
109 Pennsylvania Real Estate
Investment................................................ 5,192
135 Suffolk Bancorp .............................................. 5,164
136 National Health Investors Inc. ............................... 5,151
65 +Alexander's Inc .............................................. 5,143
</TABLE>

See notes to financial statements Page 11
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

SCHEDULES OF INVESTMENTS AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
Number
of Shares Security Value
- --------- -------- -----
<S> <C> <C>
CORE SMALL-CAP STOCK FUND (CONTINUED)

154 RLI Corp ........................................... 5,140
293 Washington Real Estate
Investment Trust................................ 5,127
155 United Bankshares Inc .............................. 5,115
405 ALFA Corp .......................................... 5,113
239 Trustco Bank Corp .................................. 5,109
276 LTC Properties Inc ................................. 5,106
302 Kranzco Realty Trust................................ 5,096
152 Omega Healthcare Investors Inc ..................... 5,054
439 IRT Property Co .................................... 5,049
246 Universal Health Realty Income ..................... 5,043
155 First Financial Bancorp ............................ 5,037
207 Nationwide Health Properties
Inc............................................. 5,020
207 Wellsford Residential Property
Trust........................................... 5,020
210 American Health Properties ......................... 5,014
135 First Commercial Corp .............................. 5,012
142 United Fire & Casualty Co........................... 5,005
118 US Bancorp Inc...................................... 5,000
180 Bancorp South Inc .................................. 4,995
141 Whitney Holding Corp ............................... 4,988
505 Berkshire Realty Co ................................ 4,987
94 Park National Corp ................................. 4,982
147 +MAIC Holdings Inc .................................. 4,980
223 SEI Corp ........................................... 4,962
181 Zenith National Insurance Corp...................... 4,955
125 BT Financial Corp .................................. 4,953
157 Citizens Banking Corp............................... 4,945
384 CRIIMI MAE Inc. .................................... 4,944
216 Crawford & Co ...................................... 4,941
129 National Communications
Bancorp......................................... 4,934
511 Gainsco Inc ........................................ 4,918
168 National City Bancshares Inc ....................... 4,914
125 Liberty Corp ....................................... 4,906
381 Taubman Centers Inc ................................ 4,905
185 First Merchants Corp ............................... 4,903
272 NYMagic Inc ........................................ 4,896
100 Mark Twain Bancshares Inc .......................... 4,875
134 Capitol American Financial Corp .................... 4,874
177 Community First Bankshares ......................... 4,868
140 Firstbank Co ....................................... 4,865
119 American General Corp .............................. 4,864
128 Selective Insurance Group .......................... 4,864
123 United Carolina Bancshares ......................... 4,859
114 Associated BancCorp ................................ 4,845
119 UMB Financial Corp ................................. 4,805
196 Hubco Inc .......................................... 4,802
46 Zions Bancorp....................................... 4,784
196 Health Care Real Estate
Investment Trust................................ 4,778

154 Gallagher (Arthur J.) & Co ......................... 4,774
180 Poe & Brown Inc .................................... 4,770
155 Argonaut Group Inc ................................. 4,766
125 JSB Financial Inc .................................. 4,750
151 Albank Financial Corp .............................. 4,738
163 Acordia Inc ........................................ 4,727
203 Allied Capital Commercial Corp ..................... 4,720
93 Berkley W R Corp ................................... 4,720
250 American Federal Bank .............................. 4,719
356 Hilb, Rogal & Hamilton Co .......................... 4,717
52 +Markel Corp ........................................ 4,680
63 First Union Corp ................................... 4,662
358 Western Investment Real Estate
Trust........................................... 4,654
177 First Western Bancorp Inc .......................... 4,646
216 Fulton Financial Corp .............................. 4,644
181 Valley National Bancorp ............................ 4,638
189 First Source Corp .................................. 4,630
248 First Commonwealth Financial
Corp............................................ 4,619
113 Farmers Capital Bank Corp .......................... 4,605
178 McGrath Rent Corp .................................. 4,584
183 Keystone Financial Inc ............................. 4,575
269 Ramco-Gershenson Properties
Trust........................................... 4,539
290 Avemco Corp ........................................ 4,531
172 National Penn Bancshares Inc ....................... 4,494
145 S&T Bancorp Inc .................................... 4,459
137 Corus Bankshares Inc ............................... 4,418
257 Mid Am Inc ......................................... 4,401
150 Bank of Granite Corp ............................... 4,350
92 Trenwick Group Inc ................................. 4,255
473 Cash America International Inc. .................... 4,021
112 MAF Bancorp ........................................ 3,892
76 U.S. Bancorp ....................................... 3,415
189 Bradley Real Estate Inc ............................ 3,402
89 Anchor Bancorp Inc ................................. 3,182
71 Value Line Inc ..................................... 3,142
88 Southtrust Corp .................................... 3,069
93 Fremont General Corp ............................... 2,883
55 Homeland Bankshares Corp ........................... 2,282
78 HCC Insurance Holdings Inc ......................... 1,872
78 FNB Corp............................................ 1,794
113 Trust Company of New Jersey ........................ 1,582
40 UST Corp ........................................... 825
-------
610,243
-------
Health Care (2.9%)
349 +Tecnol Medical Products Inc. ....................... 5,279
130 Seafield Capital Corp .............................. 5,037
102 +Synetic Inc ........................................ 4,947
175 West Inc ........................................... 4,944
</TABLE>

Page 12 See notes to financial statements
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

SCHEDULES OF INVESTMENTS AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
Number
of Shares Security Value
- --------- -------- -----
<S> <C> <C>
CORE SMALL-CAP STOCK fUND (CONTINUED)

466 +Medco Research Inc ............................... $4,893
305 +Advanced Magnetics Inc ........................... 4,728
134 +Lunar Corp ....................................... 4,690
119 Chemed Corp ...................................... 4,343
369 +Epitope Inc ...................................... 4,243
130 Diagnostic Products Corp.......................... 3,364
274 Kinetic Concepts Inc ............................. 3,356
1,710 +Foxmeyer Health Corp ............................. 2,993
71 +Vivra Inc ........................................ 1,961
64 +Barr Laboratories Inc ............................ 1,624
25 +American Homepatient Inc ......................... 681
100 + Faulding Inc .................................... 612
--------
57,695
--------
Technology (4.3%)
241 +Boole & Babbage Inc .............................. 6,025
123 +BRC Holdings Inc ................................. 5,504
233 Cubic Corp ....................................... 5,388
164 +Keane Inc ........................................ 5,207
119 CTS Corp ......................................... 5,087
114 Fluke Corp ....................................... 5,087
381 Kaman Corp Cl A................................... 4,953
171 Analysts International Corp ...................... 4,831
225 +Bell Industries Inc .............................. 4,809
183 +Esterline Technologies Corp ...................... 4,781
227 MTS Systems Corp ................................. 4,540
247 X-Rite Inc ....................................... 4,075
234 +Trident Microsystems Inc ......................... 3,949
162 +DH Technology Inc ................................ 3,888
135 +Kent Electronics Corp ............................ 3,476
71 +Dynatech Corp .................................... 3,142
81 Logicon Inc ...................................... 2,957
163 +Tekelec .......................................... 2,567
53 +Kronos Inc. ...................................... 1,696
88 +Integrated Process Equipment
Corp.......................................... 1,584
22 +Silicon Graphics Inc.............................. 561
--------
84,107
--------
Transportation (1.9%)
276 International Shipholding Corp ................... 5,106
402 Rollins Truck Leasing Corp ....................... 5,075
346 +Yellow Corp....................................... 4,974
192 +Swift Transportation Co Inc ...................... 4,512
51 Florida East Coast Industries .................... 4,456
493 Frozen Foods Express
Industries Inc................................ 4,437
174 Expeditors International of
Washington Inc................................ 4,002
199 Hunt J B Transportation
Services Inc.................................. 2,786
109 Harper Group Inc ................................. 2,589
--------
37,937
--------

Utilities (14.2%)
211 IWC Resources Corp ............................... 6,567
188 Oneok Inc. ....................................... 5,640
132 California Water Services Co ..................... 5,544
116 +Tejas Gas Corp.................................... 5,525
116 SJW Corp ......................................... 5,438
193 Black Hills Corp ................................. 5,428
173 Energen Corp ..................................... 5,233
185 Aquarion Co ...................................... 5,157
302 Cascade Natural Gas Corp ......................... 5,134
151 Laclede Gas Co ................................... 5,090
129 KN Energy Inc .................................... 5,063
197 Connecticut Natural Gas Corp ..................... 5,023
210 Atmos Energy Corp ................................ 5,014
243 Washington Energy Co ............................. 5,012
183 TNP Enterprise Inc ............................... 5,010
447 +Citizens Utilities Co Cl B ....................... 4,976
249 Philadelphia Suburban Corp ....................... 4,949
203 South Jersey Industries Inc....................... 4,948
156 E'Town Corp ...................................... 4,933
214 MDU Resources Group Inc .......................... 4,922
320 St Joseph Light & Power Co........................ 4,920
137 Wicor Inc ........................................ 4,915
282 Eastern Utilities Association..................... 4,900
249 Public Service Co of New
Mexico........................................ 4,867
540 +TPC Corp ......................................... 4,860
199 Indiana Energy Inc ............................... 4,851
228 Connecticut Energy Corp .......................... 4,845
258 Empire District Electric Co....................... 4,838
202 Green Mountain Power Corp......................... 4,823
307 United Water Resources Inc ....................... 4,797
213 Pennsylvania Enterprises Inc ..................... 4,782
152 Central Hudson Gas & Electric
Corp.......................................... 4,769
163 New Jersey Resources Corp ........................ 4,768
168 Bay State Gas Co ................................. 4,746
246 Western Gas Resources Inc ........................ 4,735
137 Northwestern Public Service Co.................... 4,692
402 Central Maine Power Co. .......................... 4,673
218 Yankee Energy System Inc.......................... 4,660
127 Cilcorp Inc ...................................... 4,651
134 Sigcorp Inc ...................................... 4,640
207 UGI Corp ......................................... 4,632
155 IES Industries Inc ............................... 4,631
129 Orange & Rockland Utilities Inc................... 4,628
198 Piedmont Natural Gas Inc ......................... 4,628
204 United Cities Gas Co.............................. 4,590
161 WPS Resources Corp ............................... 4,589
248 Public Service Co of North
Carolina...................................... 4,544
</TABLE>
See notes to financial statements Page 13
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

SCHEDULES OF INVESTMENTS AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
Number
of Shares Security Value
- --------- -------- -----
<S> <C> <C>
CORE SMALL-CAP STOCK fUND (CONTINUED)

194 Commonwealth Energy System ................................ $4,535
157 North Carolina Natural Gas Corp ........................... 4,533
222 Madison Gas & Electric Co.................................. 4,495
185 Northwest Natural Gas Co .................................. 4,440
203 Southern California Water Co .............................. 4,415
137 Otter Tail Power Co ....................................... 4,401
203 Colonial Gas Co ........................................... 4,314
121 Eastern Enterprises Inc.................................... 4,280
132 United Illuminating Co..................................... 4,141
299 Central Vermont Public Services
Corp................................................... 3,588
137 Consumers Water Co ........................................ 2,466
74 +Southern Union Co.......................................... 1,628
--------
279,816
--------
Total Investments (97.0%)
(Cost $1,707,952)...................................... 1,908,577

Other Assets in Excess
of Liabilities (3.0%).................................. 58,814
--------
Total Net Assets (100.0%)................................. $1,967,391
==========
</TABLE>

+ Non-income producing security.

<TABLE>
<CAPTION>
TOMORROW LONG-TERM RETIREMENT FUND
<S> <C> <C>
COMMON STOCKS (75.2%)
Basic Materials (3.3%)
59 IMC Global Inc ............................................ $2,308
34 Vulcan Materials Co ....................................... 2,070
24 Dow Chemical Co ........................................... 1,881
37 Consolidated Papers Inc ................................... 1,818
57 Barrick Gold Corp ......................................... 1,632
130 Ethyl Corp ................................................ 1,251
48 Allegheny Teledyne Inc .................................... 1,104
59 Wausau Paper Mills Co ..................................... 1,092
27 Bowater Inc ............................................... 1,016
42 Placer Dome Inc ADR ....................................... 914
70 Lawter International Inc .................................. 884
35 Schulman Inc .............................................. 858
22 Olin Corp ................................................ 828
11 Pioneer Hi Bred International ............................. 770
11 Phelps Dodge Corp ......................................... 742
11 Aluminum Co. of America ................................... 701
101 Battle Mountain Gold Co ................................... 694

54 Calgon Carbon Corp ........................................ $661
12 Ameron International Inc ................................. 619
12 Nucor Corp ................................................ 612
19 Dexter Corp ............................................... 606
10 Betzdearborn Inc. ......................................... 585
30 Crompton & Knowles Corp ................................... 577
10 Reynolds Metals Co ........................................ 564
17 Florida Rock Industries Inc................................ 557
12 Newmont Mining Corp ....................................... 537
17 Chesapeake Corp ........................................... 533
12 Champion International Corp. .............................. 519
25 Stepan Chemical Co ........................................ 509
14 +Tremont Corp .............................................. 506
16 USX-U.S. Steel Group ...................................... 502
18 Fab Industries Inc ........................................ 495
11 International Flavors &
Fragrances Inc ......................................... 495
29 RPM Inc .................................................. 493
12 Minerals Technologies Inc.................................. 492
17 Ferro Corp ................................................ 482
10 Petrolite Corp ............................................ 480
13 Carpenter Technologies Corp ............................... 476
14 Cambrex Corp .............................................. 458
10 Cleveland-Cliffs Inc....................................... 454
25 Glatefelter (PH) Co ....................................... 450
80 +Hecla Mining Co ........................................... 440
16 Tuscarora Inc ............................................. 438
14 Puerto Rican Chemical Inc ................................. 437
13 Liqui-Box Corp ............................................ 422
27 Coeur D'Alene Mines Corp ................................. 408
64 +Amax Gold Inc ............................................. 408
21 Engelhard Corp ............................................ 402
12 James River Corp of Virginia............................... 398
11 Mosinee Paper Corp ........................................ 390
12 South Down Inc ............................................ 374
15 Cyprus Amax Minerals Co. .................................. 351
11 Inco Ltd .................................................. 351
12 Westvaco Corp ............................................. 345
24 Homestake Mining Co ....................................... 342
12 MacDermid Inc ............................................. 330
12 Sonoco Products Co ........................................ 311
15 Worthington Industries Inc................................. 272
37 Echo Bay Mines Ltd ........................................ 245
10 +ChemFirst Inc ............................................. 231
25 +Bethlehem Steel Corp. ..................................... 225
229 +Sunshine Mining & Refining ................................ 215
12 Oregon Steel Mills ........................................ 201
10 Inland Steel Industries Inc ............................... 200
10 Lilly Industries Inc Cl A ................................. 184
24 +Armco Inc ................................................. 99
3 Mississippi Chemical Corp ................................. 80
--------
41,324
--------
</TABLE>

Page 14 See notes to financial statements
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

SCHEDULES OF INVESTMENTS AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
Number
of Shares Security Value
---------- -------- -----
<S> <C> <C>
TOMORROW LONG-TERM RETIREMENT FUND (CONTINUED)

CAPITAL GOODS (7.8%)
320 U.S. Robotics Corp .......................... $23,040
525 Raymond Corp ................................ 9,122
326 +Vallen Corp ................................. 5,420
327 Tejon Ranch Co. ............................. 4,701
40 Boeing Co.................................... 4,255
28 Minnesota Mining &
Manufacturing Co ......................... 2,320
33 McDonnell Douglas Corp ...................... 2,112
42 Hubbell Inc Cl B ............................ 1,816
46 WMX Technologies Inc. ....................... 1,501
70 Westinghouse Electric Corp .................. 1,391
83 Sensormatic Electronics Corp ................ 1,390
12 Emerson Electric Co. ........................ 1,161
32 Wallace Computer Services Inc. .............. 1,104
19 Miller (Herman) Inc ......................... 1,076
22 Corning Inc ................................. 1,017
30 +Analog Devices Inc. ......................... 1,016
30 +Atmel Corp .................................. 994
30 +ADC Telecommunications Inc .................. 934
20 Molex Inc ................................... 782
12 Fluor Corp .................................. 753
20 Trinity Industries Inc ...................... 750
11 Honeywell Inc. .............................. 723
14 Alco Standard Corp .......................... 723
13 Crown Cork & Seal Inc ....................... 707
10 Eaton Corp .................................. 697
26 Amcast Industrial Corp ...................... 643
27 +Jacobs Engineering Group Inc ................ 638
10 Nordson Corp ................................ 637
19 Standard Register Co ........................ 617
19 Pentair Inc ................................. 613
15 Deere & Co .................................. 609
10 Carlisle Cos Inc ............................ 605
18 Donaldson Co Inc ............................ 603
27 Premark International Inc.................... 601
13 Thiokol Corp ................................ 582
11 Teleflex Inc ................................ 573
14 Tredegar Industrials Inc .................... 562
17 HON Industries .............................. 561
16 McClatchy Newspapers Inc Cl A ............... 560
27 Penn Engineering &
Manufacturing Corp ....................... 553
10 NACCO Industries Inc Cl A ................... 535
24 Ametek Inc .................................. 534
10 Tyco International Ltd ...................... 529
11 Fisher Scientific International ............. 518
13 IDEX Corp ................................... 518
21 Baldor Electric Co .......................... 517
23 +Osmonics Inc ................................ 506
10 Dover Corp .................................. 503
12 Butler Manufacturing Co ..................... 486
10 +Littelfuse Inc. ............................. 485
10 Kaydon Corp ................................. 471
19 Brady W H Co ................................ 468
14 Gleason Corp ................................ 464
17 Duriron Co Inc .............................. 461
20 Learonal Inc ................................ 460
18 International Aluminum Corp ................. 459
16 +Bearings Inc ................................ 446
14 Stone & Webster Inc ......................... 445
46 +Thermo Fibertek Inc ......................... 428
29 Daniel Industries Inc........................ 428
11 Parker Hannifin Corp ........................ 426
14 Commercial Metals Co......................... 422
28 Oil-Dri Corp America ........................ 420
22 Armor All Products Corp ..................... 418
23 Gencorp Inc ................................. 417
13 +Avatar Holdings Inc ......................... 416
56 +Insituform Technologies Cl A ................ 413
34 +Nashua Corp. ................................ 408
18 +Lydall Inc .................................. 405
14 Grief Brothers Corp Cl A .................... 399
10 +Sequa Corp Cl A ............................. 393
20 Granite Construction Inc .................... 380
33 Laidlaw Inc Cl B ........................... 380
18 Varlen Corp ................................. 370
16 Goulds Pumps Inc ............................ 367
18 Keystone International Inc .................. 362
11 Kysor Industrial Corp ....................... 359
14 Graco Inc ................................... 343
14 +Rohr Inc .................................... 317
13 Watts Industries Inc Cl A ................... 310
10 Standex International Corp .................. 309
11 Pall Corp ................................... 281
12 Albany International Corp Cl A .............. 278
11 Robbins & Myers Inc. ........................ 275
45 UNR Industries Inc .......................... 270
18 +Cuno Inc .................................... 268
17 +Ladd Furniture Inc .......................... 249
15 Brush Wellman Inc. .......................... 246
10 McDermott International Inc ................. 166
28 +Air & Water Technology Corp.................. 161
11 +MagneTek Inc ................................ 142
235 +Radius Inc .................................. 125
63 +Rollins Environmental Services
Inc...................................... 110
10 Sealright Co ................................ 105
11 +Navistar International Corp ................. 100
--------
98,933
--------
</TABLE>

See notes to financial statements

Page 15
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

SCHEDULES OF INVESTMENTS AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
Number
of Shares Security Value
---------- -------- -----
<S> <C> <C>
TOMORROW LONG-TERM RETIREMENT FUND (CONTINUED)

COMMUNICATION SERVICES (2.7%)
460 Sprint Corp ................................. $18,343
216 GTE Corp .................................... 9,828
44 US West Inc ................................. 1,419
39 Century Telephone Enterprises
Inc...................................... 1,204
35 ALLTEL Corp ................................. 1,098
14 SBC Communications .......................... 724
31 Aliant Communications Co..................... 527
17 Frontier Corp ............................... 385
--------
33,528
--------

CONSUMER CYCLICAL (10.6%)
821 Wackenhut Corp .............................. 14,162
725 Caseys General Stores Inc ................... 13,594
124 Eastman Kodak Co ............................ 9,951
527 Russ Berrie & Co ............................ 9,486
224 True North Communications Inc................ 4,900
668 +Uno Restaurant Corp ......................... 4,425
318 Commercial Intertech Corp ................... 4,333
222 Walbro Corp. ................................ 4,051
349 Stride Rite Corp ............................ 3,490
54 Omnicom Group Inc ........................... 2,470
37 May Department Stores Co .................... 1,730
40 PHH Corp .................................... 1,720
47 +Fred Meyer Inc .............................. 1,668
33 Penney (J.C.) Co Inc. ....................... 1,609
28 +Nine West Group Inc ......................... 1,298
40 Gap Inc. .................................... 1,205
30 +Fruit of the Loom Inc ....................... 1,136
30 +Jones Apparel Group ......................... 1,121
40 Mattel Inc .................................. 1,110
40 +Lands' End Inc .............................. 1,060
27 Dayton Hudson Corp .......................... 1,060
56 The Limited Inc ............................. 1,029
22 Lancaster Colony Corp ....................... 1,012
40 Dun & Bradstreet Corp ....................... 950
20 TJX Cos Inc ................................. 947
33 Service Corp International .................. 924
36 +HSN Inc ..................................... 855
11 Gannet Inc .................................. 824
95 +Handleman Co ................................ 807
21 Tiffany & Co ................................ 769
20 Masco Corp .................................. 720
39 Wellman Inc ................................. 668
43 Genovese Drugs Stores ....................... 665
60 +Burlington Industries Inc ................... 660
17 SPX Corp .................................... 659
19 Hannaford Brothers Co ....................... 646
24 Stanhome Inc ................................ 636
11 Houghton Mifflin Co ......................... 623
10 NCH Corp .................................... 602
11 Meredith Corp ............................... 580
13 Hughes Supply Inc ........................... 561
16 Belo (AH) Corp .............................. 558
21 +CSS Industries Inc .......................... 546
123 Ekco Group Inc .............................. 538
35 +National Education Corp ..................... 534
12 +Volt Information Sciences Inc ............... 525
16 Wiley (John) & Sons ......................... 516
21 Donnelly Corp ............................... 514
48 +Best Buy Co Inc ............................. 510
19 Modine Manufacturing ........................ 508
29 +AnnTaylor Stores Corp ....................... 507
26 Sturm Ruger & Co Inc ........................ 504
54 Blessings Corp .............................. 503
50 Crown Crafts Inc ............................ 500
35 Falcon Products Inc ......................... 499
48 +K mart Stores ............................... 498
10 TRW Inc. .................................... 495
11 Genuine Parts Co ............................ 491
37 +Johnson Worldwide Association
Inc Cl A ................................. 490
35 ADVO Inc .................................... 490
16 American List Corp. ......................... 486
26 Sotheby's Holdings Inc Cl A ................. 481
47 Graphic Industries Inc....................... 476
16 La-Z Boy Inc ................................ 472
10 Whirlpool Corp .............................. 466
38 Fingerhut Cos Inc. .......................... 465
10 Harcourt General Corp. ...................... 461
10 McGraw-Hill Cos Inc ......................... 461
39 +Lifetime Hoan Corp .......................... 458
29 Osh Kosh B'Gosh Cl A ........................ 442
18 Bassett Furniture Industries Inc............. 441
24 Brown Group Inc ............................. 441
10 Tandy Co .................................... 440
16 Tennant Co .................................. 440
17 +Christiana Cos............................... 438
20 Lawson Products Inc ......................... 437
16 Unitog Co ................................... 436
74 +American Media Inc........................... 435
31 +Information Resources Inc ................... 434
11 Hasbro Inc .................................. 428
18 Waverly Inc ................................. 427
14 Circuit City Store Inc ...................... 422
12 Plenum Publishing Corp ...................... 420
67 PT Tri Polyta Indonesia ADR ................. 419
11 New York Times Co Cl A ...................... 418
49 +Syms Corp ................................... 416
21 Delechamps Inc .............................. 407
10 Apogee Enterprises Inc ...................... 398
</TABLE>

See notes to financial statements
Page 16
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

SCHEDULES OF INVESTMENTS AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
Number
of Shares Security Value
---------- -------- -----
<S> <C> <C>
TOMORROW LONG-TERM RETIREMENT FUND (CONTINUED)

15 +MacFrugals Bargains Closeouts ............... $392
20 Alico Inc ................................... 375
11 Dow Jones & Co Inc .......................... 373
23 Strawbridge & Clothier ...................... 365
91 +Topps Co Inc ................................ 364
11 +Gelman Sciences Inc ......................... 358
18 Cooper Tire & Rubber ........................ 356
18 Maytag Corp ................................. 356
36 +Playboy Enterprises Inc Cl B ................ 351
11 Echlin Inc. ................................. 348
13 Guilford Mills Inc .......................... 346
12 Starrett (L.S) Co Cl A ...................... 341
10 Cognizant Corp .............................. 330
13 American Business Products .................. 327
14 Lee Enterprises Inc.......................... 326
22 Duty Free International Inc ................ 319
75 +Service Merchandise Inc ..................... 319
10 Dillard Department Stores ................... 309
12 Standard Products Co ........................ 306
10 Black & Decker Corp ......................... 301
12 Arvin Industries Inc ........................ 297
11 Stanley Works ............................... 297
10 American Greetings Cl A ..................... 284
13 Smart & Final Inc ........................... 281
31 +GRC International Inc ....................... 252
11 +Woolworth Corp .............................. 241
11 +Gibson Greetings Inc ........................ 216
13 Cadmus Communications Corp .................. 202
24 +Intelligent Electronics Inc. ................ 192
18 Hancock Fabrics Inc ......................... 187
10 CPI Corp .................................... 168
10 Viad Corp ................................... 165
13 Ennis Business Forms ........................ 146
38 CML Group Inc ............................... 128
3 +Payless Shoesource Inc ...................... 113
3 +ACNielsen Corp .............................. 45
--------
132,883
--------

CONSUMER STAPLES (4.9%)
334 WLR Foods Inc ............................... 4,133
96 +Revco D.S. Inc .............................. 3,552
40 Cardinal Health Inc ......................... 2,330
93 IBP Inc ..................................... 2,255
11 Unilever NV ADR ............................. 1,928
86 Archer Daniels Midland Co ................... 1,892
27 Kellogg Co .................................. 1,772
44 Anheuser- Busch Cos Inc. .................... 1,760
51 Tyson Foods Inc Cl A ........................ 1,747
50 +Viacom Inc Cl B ............................. 1,744
45 Albertsons Inc .............................. 1,603
16 Kimberly-Clark Corp ......................... 1,524
28 Conagra Inc ................................ 1,393
37 Heinz H J Co ................................ 1,332
35 UST Inc. .................................... 1,133
12 Colgate- Palmolive Co ....................... 1,107
32 Sysco Corp .................................. 1,044
33 Bergen Brunswig Corp ........................ 941
103 +Perrigo Co .................................. 940
34 Kelly Services Inc Cl A ..................... 918
42 Flowers Industries Inc ...................... 903
64 Ruddick Corp ................................ 896
23 Quaker Oats Co .............................. 877
11 CPC International Inc. ...................... 852
13 General Mills Inc ........................... 824
11 Ralston Purina Co ........................... 807
43 International Multifoods Corp ............... 779
19 Tambrands Inc. .............................. 777
33 Church & Dwight Co Inc ...................... 755
13 Paychex Inc ................................. 669
21 TCA Cable TV Inc ............................ 633
11 Avon Products Inc ........................... 628
39 Carter Wallace Inc .......................... 609
18 Dean Foods Co................................ 580
29 +International Dairy Queen Inc
Cl A..................................... 580
12 +Kroger Co ................................... 558
12 McDonald's Corp. ............................ 543
15 Universal Foods Corp ........................ 529
12 Hershey Foods Corp .......................... 525
13 Rite Aid Corp. .............................. 517
13 Tootsie Roll Industries ..................... 515
27 Coors (Adolph) Co Cl B....................... 513
22 Banta Corp. ................................. 503
27 +Ruby Tuesday Inc ............................ 499
10 Longs Drug Stores Inc........................ 491
13 National Presto Industries .................. 486
26 ABM Industries Inc .......................... 481
56 Bridgford Foods Corp ........................ 476
14 +Canandaigua Wine Co Cl B .................... 469
14 Harland Co. ................................. 462
11 +Chris Craft Industries Inc .................. 461
23 Luby's Cafeterias Inc. ...................... 457
11 American Stores Co .......................... 450
21 Nash Finch Corp ............................. 446
62 +Shoney's Inc ................................ 434
10 +CVS Corp .................................... 412
30 +Foodbrands America Inc ...................... 412
25 Goodmark Foods Inc .......................... 412
14 Dreyers Grand Ice Cream Inc ................. 406
10 +Ceridian Corp ............................... 405
14 First Brands Corp ........................... 397
17 Whitman Corp ................................ 389
</TABLE>

See notes to financial statements

Page 17
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

SCHEDULES OF INVESTMENTS AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
Number
of Shares Security Value
- ---------- -------- -----
<S> <C> <C>
TOMORROW LONG-TERM RETIREMENT FUND (CONTINUED)

20 Blair Corp .................................. $385
26 Dames & Moore Inc ........................... 380
21 Lance Inc ................................... 378
10 Giant Food Inc Cl A ......................... 345
10 Deluxe Corp ................................. 327
22 +AMC Entertainment Inc ....................... 316
32 +Buffets Inc ................................. 292
11 +Carmike Cinemas Inc. Cl A ................... 279
16 Arbor Drugs Inc ............................. 278
17 Savannah Foods & Industries ................. 230
14 Michael Foods Inc ........................... 179
10 Rykoff-Sexton Inc ........................... 159
10 Dial Corp ................................... 148
12 A.T. Cross Co Cl A .......................... 140
--------
62,701
--------

ENERGY (14.1%)
930 Exxon Corp .................................. 91,140
105 Royal Dutch Petroleum Co ADR ................ 17,929
79 Mobil Corp. ................................. 9,658
128 Chevron Corp ................................ 8,320
323 +Tuboscope Vetco International
Corp ..................................... 5,006
46 Amoco Corp .................................. 3,714
50 Anadarko Petroleum Co ....................... 3,237
141 +Global Marine Inc ........................... 2,908
43 +ENSCO International Inc ..................... 2,085
25 Tosco Corp .................................. 1,978
17 Schlumberger Ltd ............................ 1,698
52 +Weatherford Enterra Inc ..................... 1,560
35 Phillips Petroleum Co. ...................... 1,549
11 Atlantic Richfield .......................... 1,459
13 Texaco Inc .................................. 1,276
49 Occidental Petroleum Corp ................... 1,145
58 +Nabors Industries Inc ....................... 1,116
40 Georgia Gulf Corp ........................... 1,075
23 +Smith International Inc ..................... 1,032
20 +Triton Energy Ltd ........................... 970
18 +BJ Services Co............................... 918
24 Parker & Parsley Petroleum Co ............... 882
28 Dresser Industries Inc ...................... 868
36 USX-Marathon Group .......................... 859
24 Mapco Inc ................................... 816
53 Quaker State Corp ........................... 749
14 Helmerich & Payne Inc ....................... 730
23 Valero Energy Corp .......................... 658
11 Amerada Hess Corp. .......................... 637
64 Ranger Oil Ltd............................... 632
31 Wiser Oil Co ................................ 612
11 Murphy Oil Corp ............................. 612
10 Halliburton Co .............................. 602
17 Apache Corp ................................. $601
23 Landauer Inc ................................ 564
34 +HS Resources Inc ............................ 561
39 Berry Petroleum Cl A ........................ 561
11 Burlington Resources Inc .................... 554
17 Ultra Diamond Shamrock Corp.................. 538
32 Getty Petroleum Corp ........................ 520
14 Vintage Petroleum Inc ....................... 483
25 Sevenson Environmental
Services Inc.............................. 456
148 +Harken Energy Corp .......................... 444
47 +Allied Waste Industrials Inc ................ 435
16 Holly Corp .................................. 428
10 +Barrett Resources Corp ...................... 426
12 Baker Hughes Inc ............................ 414
16 Sun Co ...................................... 390
30 +Crown Central Petroleum Cl A ................ 371
12 Ashland Coal Inc ............................ 333
12 +Varco International Inc ..................... 278
27 +Parker Drilling Co .......................... 260
10 +Oryx Energy Co .............................. 248
15 +Pool Energy Services Co ..................... 231
13 +Plains Resources Inc ........................ 203
10 +Santa Fe Energy Resources ................... 139
11 +Hondo Oil & Gas Co .......................... 120
--------
177,988
--------
FINANCIAL (11.1%)
1,027 State Auto Financial Corp ................... 18,486
1,021 South West Property Trust ................... 17,229
220 Progressive Corp ............................ 14,823
230 Commerce Bancshares Inc ..................... 10,638
221 Universal Health Real Estate
Investment Trust......................... 4,530
336 Western Investment Real Estate
Investment Trust......................... 4,368
30 Summit Bancorp .............................. 1,312
40 Equifax Inc. ................................ 1,225
86 Hibernia Corp Cl A .......................... 1,139
40 Paine Webber Group Inc ...................... 1,125
21 Lincoln National Corp Ltd. .................. 1,102
20 Comerica Inc ................................ 1,047
30 Southtrust Corp ............................. 1,046
22 +Policy Management Systems
Corp Technologies......................... 1,015
30 Mercantile Bankshares Corp .................. 960
10 Loews Corp .................................. 942
11 Transatlantic Holdings Inc .................. 885
20 AFLAC Inc ................................... 855
67 First Union Real Estate Equity .............. 829
18 U.S. Bancorp ................................ 809
</TABLE>

See notes to financial statements

Page 18
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

SCHEDULES OF INVESTMENTS AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
Number
of Shares Security Value
- ---------- -------- -----
<S> <C> <C>
TOMORROW LONG-TERM RETIREMENT FUND (CONTINUED)

14 Chubb Corp .................................. $752
10 UNUM Corp ................................... 722
17 Bancorp Hawaii Inc. ......................... 714
33 City National Corp .......................... 714
18 Wilmington Trust Co ......................... 711
18 Capitol American Financial Corp ............. 655
16 Home Beneficial Corp ........................ 606
10 Forest City Enterprises Inc Cl A ............ 605
23 American Heritage Life Investors ............ 604
18 RLI Corp .................................... 601
15 Financial Trust Corp ........................ 598
26 F & M National Corp ......................... 556
22 BRE Properties Inc .......................... 544
14 New York Bancorp Inc ........................ 542
47 IRT Property Co ............................. 540
12 National City Corp .......................... 538
22 Pennsylvania Real Estate
Investment Trust......................... 536
16 Dauphin Deposit Corp ........................ 528
24 MGI Properties .............................. 528
41 CRIIMI MAE Inc. ............................. 528
28 LTC Properties Inc .......................... 518
19 Federal Realty Investment Trust.............. 515
27 Mid America Bancorp ......................... 513
13 Liberty Corp ................................ 510
21 Wellsford Residential Property
Trust .................................... 509
15 +MAIC Holdings Inc ........................... 508
22 Crawford & Co ............................... 503
12 CNB Bancshares Inc .......................... 501
15 Omega Healthcare Investors Inc .............. 499
10 Liberty Bancorp Inc ........................ 497
18 Zenith National Insurance ................... 493
13 National Health Investors Inc. .............. 492
31 Commercial Net Lease Realty ................. 492
33 Burham Pacific Properties Inc ............... 491
29 Kranzco Realty Trust ........................ 489
20 Health Care Real Estate
Investment Trust Inc ..................... 487
15 +UICI ........................................ 487
20 Nationwide Health Properties Inc............. 485
13 Student Loan Corp ........................... 484
12 Protective Life Corp ........................ 478
20 American Health Properties Inc............... 477
17 CBT Corp .................................... 467
10 Trenwick Group Inc .......................... 463
14 United Bankshares Inc ....................... 462
12 JSB Financial Inc ........................... 456
14 First Financial Bancorp ..................... 455
14 Wesbanco Inc ................................ 455
13 Firstbank Illinois Co ....................... 452
34 Hilb, Rogal & Hamilton Co ................... 451
13 Susquehanna Bancshares Inc .................. 450
11 Farmers Capital Bank Corp ................... 448
11 UMB Financial Corp .......................... 446
15 First Michigan Bank Corp .................... 444
12 First Financial Corp ........................ 444
24 Baldwin & Lyons Inc ......................... 441
18 Hubco Inc ................................... 441
17 McGrath Rent Corp ........................... 438
11 BT Financial Corp ........................... 436
11 United Carolina Bancshares .................. 435
14 Deposit Guaranty Corp ....................... 434
14 Gallagher (Arthur J.) & Co .................. 434
36 EMC Insurance Group Inc ..................... 432
18 F & M Bancorp ............................... 432
14 Argonaut Group Inc .......................... 431
14 S&T Bancorp Inc ............................. 431
23 First Commonwealth Financial
Corp ..................................... 428
16 BSB Bancorp Inc ............................. 428
10 Associated Banc Corp ........................ 425
20 Heritage Financial Service Inc .............. 425
12 Whitney Holding Corp ........................ 425
13 First Midwest Bancorp Inc ................... 424
16 First Merchants Corp ........................ 424
10 US Bancorp Inc............................... 424
11 Midland Co .................................. 424
19 SEI Corp .................................... 423
13 Merchants New York Bancorp .................. 423
27 Avemco Corp ................................. 422
11 Frontier Insurance Group Inc ................ 421
11 National Communications
Bancorp.................................. 421
15 American Financial Enterprise
Inc...................................... 420
13 Corus Bankshares Inc ........................ 419
13 First United Bancshares Inc ................. 419
18 Allied Capital Commerical Corp .............. 419
11 Fort Wayne National Corp .................... 418
11 Selective Insurance Group ................... 418
17 First Source Corp ........................... 417
22 American Federal Bank ....................... 415
10 Banknorth Group Inc ......................... 415
42 Berkshire Realty Co ......................... 415
15 Brenton Banks Inc ........................... 414
15 Community First Bankshares .................. 413
24 Mid Am Inc .................................. 411
13 Citizens Banking Corp ...................... 410
14 National City Bancshares Inc ................ 410
11 First Commercial Corp ....................... 408
11 One Valley Bancorp Inc ...................... 408
</TABLE>
See notes to financial statements

Page 19
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

Schedules of Investments at December 31, 1996

<TABLE>
<CAPTION>
Number
of Share Security Value
------- -------- -----
<S> <C> <C>
TOMORROW LONG-TERM RETIREMENT FUND (CONTINUED)

13 Albank Financial Corp ....................... $408
233 CRI Liquidating Real Estate
Investment Trust Inc ..................... 408
14 Acordia Inc ................................. 406
14 Bank of Granite Corp ........................ 406
10 Hancock Holding Co........................... 405
10 Horace Mann Educator Corp.................... 404
23 Magna Bancorp Inc ........................... 403
22 NYMagic Inc ................................. 396
10 Safeco Corp ................................. 394
15 First Western Bancorp Inc ................... 394
18 Fulton Financial Corp ....................... 387
40 Gainsco Inc ................................. 385
18 Trustco Bank Corp ........................... 385
45 Cash America International Inc. ............. 383
10 Suffolk Bancorp ............................. 383
15 Keystone Financial Inc ...................... 375
14 Poe & Brown Inc ............................. 371
14 National Penn Bancshares Inc ................ 366
13 Bancorp South Inc ........................... 361
10 Tompkins County Trustco Inc ................. 334
13 HCC Insurance Holdings Inc .................. 312
11 Valley National Bancorp ..................... 282
13 USF&G Corp .................................. 271
10 First Commerce Bancshares ................... 265
20 Citizens Inc Cl A ........................... 170
12 Taubman Centers Inc ......................... 155
12 ALFA Corp ................................... 152
3 +Echelon International Corp .................. 47
-------
139,987
-------
HEALTH CARE (7.0%)
341 +Amgen Inc. .................................. 18,542
242 Columbia Healthcare Corp .................... 9,862
86 Bristol-Myers Squibb Co. .................... 9,353
226 Pharmacia & Upjohn Inc ...................... 8,955
331 +Tecnol Medical Products Inc. ................ 5,006
42 American Home Products Corp.................. 2,462
33 Schering-Plough Corp. ....................... 2,137
125 Mylan Laboratories Inc ...................... 2,094
53 +Centocor Inc ................................ 1,895
57 +Forest Laboratories Inc ..................... 1,867
24 Warner Lambert Co ........................... 1,800
81 +Nellcor Puritan Bennett Inc ................. 1,772
36 +HealthCare COMPARE Corp ..................... 1,525
72 +Value Health Inc. ........................... 1,404
15 +Pacificare Health Systems Inc ............... 1,279
30 Beckman Instruments Inc ..................... 1,151
30 +HEALTHSOUTH Corp ............................ 1,144
19 +Boston Scientific Corp ...................... 1,140
25 +Watson Pharmaceuticals Inc................... 1,123
77 +Horizon/CMS Healthcare Corp ................. 972
30 +Vencor Inc .................................. 949
18 DENTSPLY International Inc................... 855
38 +Tenet Healthcare Corp ....................... 831
24 +Foundation Health Corp ...................... 762
28 Diagnostic Products Corp..................... 724
37 +Humana Inc .................................. 708
47 +NovaCare Inc ................................ 517
18 West Inc .................................... 508
11 Mallinckrodt Inc. ........................... 485
12 Seafield Capital Corp ....................... 465
17 +ALZA Corp ................................... 440
12 Chemed Corp ................................. 438
12 Allergan Inc. ............................... 427
10 +St. Jude Medical Inc. ....................... 426
17 +Acuson Corp.................................. 414
11 Bausch & Lomb Inc ........................... 390
37 +Medco Research Inc .......................... 388
33 +Epitope Inc ................................. 380
11 +Advanced Technology
Laboratories............................. 341
12 Bard (CR) Inc ............................... 336
22 Biomet Inc. ................................. 333
16 +Datascope Corp .............................. 320
21 Kinetic Concepts Inc ........................ 257
15 +Advanced Magnetics Inc ...................... 233
14 +Beverly Enterprises Inc...................... 179
10 +Systemix Inc ................................ 153
------
87,742
------
TECHNOLOGY (2.8%)
823 X-Rite Inc .................................. 3,580
239 +Trident Microsystems Inc .................... 4,033
42 First Data Corp ............................. 1,533
24 Raytheon Co ................................. 1,155
31 +Fiserv Inc .................................. 1,139
21 +Compuware Corp .............................. 1,053
22 +Litton Industries Inc ....................... 1,048
18 +Dell Computer Corp .......................... 956
42 +Structural Dynamics Research
Corp..................................... 840
72 +Novell Inc .................................. 682
27 +Bell Industries Inc ......................... 577
21 +Esterline Technologies Corp ................. 549
20 +Stratus Computer Inc. ....................... 545
12 Fluke Corp .................................. 535
23 Cubic Corp .................................. 532
21 +Boole & Babbage Inc ......................... 525
11 +Storage Technology Corp ..................... 524
11 +BRC Holdings Inc ............................ 492
23 +Apple Computer Inc .......................... 480
</TABLE>

See notes to financial statements

Page 20
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

SCHEDULES OF INVESTMENTS AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
Number
of Shares Security Value
- --------- -------- -----
<S> <C> <C>
TOMORROW LONG-TERM RETIREMENT FUND (CONTINUED)

10 Interpublic Group of Cos Inc ................ $475
11 CTS Corp .................................... 470
36 Kaman Corp Cl A.............................. 468
84 +Borland International Inc.................... 457
14 Analysts International Corp ................. 395
162 +Executone Information Systems
Inc...................................... 385
14 +Advanced Micro Devices Inc .................. 361
11 +Keane Inc ................................... 349
17 MTS Systems Corp ............................ 340
13 +Tekelec ..................................... 205
10 EG&G Inc .................................... 201
41 +AST Research Inc ............................ 172
12 +Amdahl Corp ................................. 146
21 +Unisys Corp ................................. 142
12 +Intergraph Corp ............................. 123
--------
35,467
--------
TRANSPORTATION (1.7%)
524 International Shipholding Corp .............. 9,694
326 +Yellow Corp.................................. 4,686
24 Burlington Northern Santa Fe
Corp..................................... 2,073
26 Alexander & Baldwin Inc...................... 650
29 Atlantic Southeast Airlines Inc. ............ 634
41 Hunt (JB) Transport Services Inc ............ 574
12 +Federal Express Corp. ....................... 534
42 Rollins Truck Leasing Corp .................. 530
50 +USA Truck Inc ............................... 400
44 Frozen Foods Express
Industries............................... 396
21 Arnold Industries Inc ....................... 333
10 +Swift Transportation Co...................... 235
12 Caliber Systems Inc ......................... 231
--------
20,970
--------
UTILITIES (9.2%)
727 Eastern Utilities Association................ 12,632
352 GPU Inc ..................................... 11,836
525 Public Service Co of North
Carolina.................................. 9,581
327 +Tucson Electric Power Co .................... 5,436
329 United Water Resources Inc .................. 5,141
222 Washington Energy Co ........................ 4,579
153 Northeast Utilities ......................... 2,027
53 Florida Progress Corp ....................... 1,709
73 Southern Co ................................. 1,652
32 El Paso Natural Gas ......................... 1,616
46 CMS Energy Corp ............................. 1,547
57 Scana Corp .................................. 1,525
67 Ohio Edison Co .............................. 1,524

35 Enron Corp .................................. $1,509
58 Potomac Electric Power Co.................... 1,493
45 Central Hudson Gas & Electric
Corp ..................................... 1,412
63 Montana Power Co ............................ 1,347
50 Boston Edison Co. ........................... 1,344
31 Nipsco Industries Inc........................ 1,228
30 Public Service Co of Colorado................ 1,166
32 +CalEnergy Inc ............................... 1,076
30 New England Electric ........................ 1,046
22 Duke Power Co ............................... 1,023
47 Pacific Gas & Electric Co. .................. 987
61 Midamerican Energy Holdings ................. 968
38 Puget Sound Power & Light ................... 912
34 Indiana Energy Inc .......................... 829
29 IPALCO Enterprises Inc....................... 790
40 Public Service Co of New
Mexico................................... 785
38 Edison International ........................ 755
20 Williams Cos Inc ............................ 731
25 MCN Corp Holding Co ......................... 722
29 LG & E Energy Corp .......................... 711
25 Black Hills Corp ............................ 703
32 New York State Electric & Gas
Corp...................................... 692
59 Central Maine Power Co. ..................... 686
13 Coastal Corp ................................ 635
21 Brooklyn Union Gas Co........................ 633
13 +Tejas Gas Corp............................... 619
30 American Water Works Inc..................... 619
27 Houston Industries Inc....................... 611
17 Southwestern Public Service ................. 601
14 National Fuel Gas Co ........................ 577
28 Pacificorp .................................. 574
18 IWC Resources Corp .......................... 560
13 California Water Services Co ................ 546
18 Energen Corp ................................ 544
21 Central & South West Corp ................... 538
27 Philadelphia Suburban Corp .................. 537
26 Nevada Power Co.............................. 533
19 TNP Entreprise Inc .......................... 520
10 Sonat Inc. .................................. 515
15 Northwestern Public Service Co............... 514
16 Idaho Power Co .............................. 498
12 Texas Utilities Co .......................... 489
20 South Jersey Industries Inc.................. 487
23 AGL Resources Inc ........................... 486
19 Connecticut Natural Gas Corp ................ 484
16 IES Industries Inc .......................... 478
20 Atmos Energy Corp ........................... 477
28 Cascade Natural Gas Corp .................... 476
</TABLE>

See notes to financial statements

Page 21
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

SCHEDULES OF INVESTMENTS AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
Number
of Shares Security Value
- ---------- -------- -----
<S> <C> <C>
TOMORROW LONG-TERM RETIREMENT FUND (CONTINUED)

15 E Town Corp ................................. $474
17 Aquarion Co ................................. 474
13 Hawaiian Electric Industries Inc............. 470
10 SJW Corp .................................... 469
16 New Jersey Resources Corp ................... 468
14 Cinergy Corp. ............................... 467
10 FPL Group Inc. .............................. 460
20 MDU Resources Group Inc ..................... 460
13 Eastern Enterprises Inc...................... 460
19 Laclede Gas Co .............................. 458
11 American Electric Power Co .................. 452
16 Bay State Gas Co............................. 452
13 Sig Corp Inc ................................ 450
24 Empire District Electric Co.................. 450
19 Commonwealth Energy System .................. 444
12 Cilcorp Inc ................................. 439
10 Pennsylvania Enterprises Inc ................ 439
20 Southern California Water Co ................ 435
39 +Citizens Utilities Co Cl B .................. 434
15 North Carolina Natural Gas Corp ............. 433
12 Orange & Rockland Utilities Inc.............. 430
12 Wicor Inc ................................... 430
18 Green Mountain Power Corp.................... 430
19 United Cities Gas Co......................... 428
15 WPS Resources Corp .......................... 428
19 UGI Corp .................................... 425
11 Dominion Resources Inc ...................... 424
18 Piedmont Natural Gas Inc .................... 421
13 Otter Tail Power Co ......................... 418
27 St Joseph Light & Power Co................... 415
17 Northwest Natural Gas Co .................... 408
20 Madison Gas & Electric Co.................... 405
17 PP & L Resources Inc ........................ 391
13 Oneok Inc. .................................. 390
10 Union Electric Co............................ 385
17 Washington Gas Light Co ..................... 385
18 Colonial Gas Co ............................. 383
12 United Illuminating Co....................... 377
12 Pacific Enterprises ......................... 365
13 Entergy Corp ................................ 361
40 +TPC Corp .................................... 360
104 +PhoneTel Technologies Inc ................... 332
15 Western Gas Resources Inc ................... 289
13 Yankee Energy System Inc..................... 278
11 Connecticut Energy Corp ..................... 234
11 Noram Energy Corp. .......................... 169
16 +Niagara Mohawk Power Corp.................... 158
----------
116,278
----------
TOTAL COMMON STOCKS
(Cost $914,983)........................... 947,801
----------
Unit Investment Trust (4.5%)
(Cost $58,506)
775 Standard & Poor's
Depositary Receipts ................... $57,302
----------
Open End Investment Company (4.3%)
(Cost $53,052)
5,072 Bankers Trust EAFE Equity
Index Fund............................... 53,861
----------
Principal
Amount
U.S. Government
Obligations (20.2%)
U.S. Treasury Bond (2.8%)
$35,000 6.875% Due 8/15/25 .......................... 35,689
----------
U.S. Treasury Notes (17.4%)
121,000 5.500% Due 11/15/98 ......................... 120,187
98,000 6.500% Due 8/15/05 .......................... 98,628
----------
218,815
----------
Total U.S. Treasury Obligations
(Cost $254,302)........................... 254,504
----------
Total Investments (104.2%)
(Cost $1,280,843)......................... 1,313,468

Liabilities in Excess of
Other Assets (-4.2%)...................... (53,577)
----------
Total Net Assets (100.0%).................... $1,259,891
==========
</TABLE>

+ Non-income producing security.

Page 22
See notes to financial statements
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

SCHEDULES OF INVESTMENTS AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
Number
of Shares Security Value
--------- -------- -----
<S> <C> <C>
TOMORROW MEDIUM-TERM RETIREMENT FUND

COMMON STOCKS (59.8%)
BASIC MATERIALS (4.2%)
1,037 Barrick Gold Corp ........................... $29,684
306 Dow Chemical Co ............................. 23,983
500 Quaker Chemical Corp ........................ 8,188
382 Lawter International Inc .................... 4,823
229 Stepan Chemical Co .......................... 4,666
178 Placer Dome Inc ADR ......................... 3,872
235 Coeur D'Alene Mines Corp .................... 3,554
55 Aluminum Co of America ...................... 3,506
78 Newmont Mining Corp ......................... 3,490
63 Consolidated Papers Inc ..................... 3,095
69 Bowater Inc ................................. 2,596
35 Pioneer Hi Bred International ............... 2,450
251 Ethyl Corp .................................. 2,416
76 Georgia Gulf Corp ........................... 2,042
30 Phelps Dodge Corp ........................... 2,025
23 Rohm & Haas Co .............................. 1,877
44 Olin Corp ................................... 1,655
38 Champion International Corp. ................ 1,643
27 Reynolds Metals Co .......................... 1,522
26 BetzDearborn Inc. ........................... 1,521
78 Crompton & Knowles Corp ..................... 1,501
28 Nucor Corp .................................. 1,428
31 International Flavors &
Fragrances Inc............................ 1,395
44 Chesapeake Corp ............................. 1,380
44 USX-U.S. Steel Group ........................ 1,380
73 Wausau Paper Mills Co ....................... 1,350
41 Inco Ltd .................................... 1,307
20 Sigma Aldrich Corp .......................... 1,249
44 Ferro Corp .................................. 1,248
30 Minerals Technologies Inc ................... 1,230
69 RPM Inc ..................................... 1,173
63 Glatefelter (PH) Co ......................... 1,134
58 Engelhard Corp .............................. 1,109
47 Cyprus Amax Minerals Co. .................... 1,099
34 Dexter Corp ................................. 1,084
20 Temple Inland Inc ........................... 1,082
23 Cleveland Cliffs Inc ....................... 1,044
42 Schulman Inc ................................ 1,029
76 Calgon Carbon Corp .......................... 931
65 Homestake Mining Co ......................... 926
15 Mead Corp ................................... 872
126 Battle Mountain Gold Co ..................... 866
18 Petrolite Corp .............................. 864
18 Great Lakes Chemical Corp. .................. 841
24 James River Corp of Virginia ................ 795
16 Union Camp Corp ............................. 764
20 Mosinee Paper Corp .......................... 710
15 Fuller H B Co ............................... 705

24 Westvaco Corp ............................... $690
13 Ameron Inc .................................. 671
18 Bemis Inc ................................... 664
24 Tuscarora Inc ............................... 657
36 Worthington Industries ...................... 652
97 Echo Bay Mines Ltd .......................... 643
31 Inland Steel Industries Inc ................. 620
19 Liqui-Box Corp .............................. 618
17 +Tremont Corp ................................ 614
24 International Aluminum Corp ................. 612
22 FAB Industries Inc .......................... 605
16 Ecolab Inc .................................. 602
18 Florida Rock Industries Inc ................. 590
21 MacDermid Inc ............................... 578
17 South Down Inc .............................. 529
16 Cambrex Corp ................................ 524
20 Sonoco Products Co .......................... 518
36 Tejon Ranch Co. ............................. 518
89 +Hecla Mining Co ............................. 490
13 Nalco Chemical Co ........................... 470
15 Puerto Rican Cement Inc ..................... 469
71 +Amax Gold Inc ............................... 453
12 Carpenter Technology Corp ................... 440
9 +MAXXAM Inc .................................. 429
23 Oregon Steel Mills .......................... 385
40 +Bethlehem Steel Corp. ....................... 360
--------
153,505
--------
CAPITAL GOODS (6.1%)
532 McDonnell Douglas Corp ...................... 34,048
321 Minnesota Mining &
Manufacturing Co ......................... 26,603
1,033 Raymond Corp ................................ 17,948
122 Boeing Co ................................... 12,978
200 +Analog Devices Inc. ......................... 6,775
200 +ADC Telecommunications Inc .................. 6,225
62 Emerson Electric Co. ........................ 5,999
291 Westinghouse Electric Corp .................. 5,784
100 York International Corp ..................... 5,588
159 WMX Technologies Inc. ....................... 5,187
337 Oil-Dri Corp America ........................ 5,055
109 Corning Inc ................................. 5,041
228 Penn Engineering &
Manufacturing Corp ....................... 4,674
66 Honeywell Inc. .............................. 4,340
76 Crown Cork & Seal Inc ....................... 4,133
338 +Nashua Corp. ................................ 4,056
236 +Vallen Corp ................................. 3,924
51 Fluor Corp .................................. 3,200
52 Sundstrand Corp ............................. 2,210
40 Tyco International Ltd ...................... 2,115
</TABLE>

See notes to financial statements Page 23

<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

SCHEDULES OF INVESTMENTS AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
Number
of Shares Security Value
--------- -------- -----
<S> <C> <C>
TOMORROW MEDIUM-TERM RETIREMENT FUND (CONTINUED)
20 Textron Inc ................................. $1,885
27 Eaton Corp .................................. 1,883
50 Trinity Industries Inc ...................... 1,875
80 Allegheny Teledyne Inc ...................... 1,840
30 Miller (Herman) Inc ......................... 1,699
74 Premark International Inc ................... 1,647
19 Raychem Corp ............................... 1,522
34 Hubbell Inc Cl B ............................ 1,471
29 Dover Corp .................................. 1,457
44 HON Industries .............................. 1,452
27 Alco Standard Corp .......................... 1,394
62 Ametek Inc .................................. 1,380
53 Pall Corp ................................... 1,352
27 Kaydon Corp ................................. 1,272
02 Laidlaw Inc Cl B ............................ 1,173 1
35 Donaldson Co Inc ............................ 1,173
30 Parker Hannifin Corp ........................ 1,162
23 Precision Castparts Corp .................... 1,141
32 Pentair Inc ................................. 1,032
12 Northrop Gruman Corp ........................ 993
30 Standard Register Co ........................ 975
41 +Jacobs Engineering Group Inc ................ 969
15 Nordson Corp ................................ 956
23 Millipore Corp .............................. 952
13 General Dynamics ............................ 916
45 Keystone International Inc .................. 906
11 Grainger WW Inc ............................. 883
17 Harnischfeger Industries Inc. ............... 818
18 General Signal Corp ......................... 769
28 Duriron Co Inc .............................. 759
16 Cummins Engine Inc .......................... 736
18 Butler Manufacturing Co ..................... 729
20 Avery Dennison Corp ......................... 707
38 Gencorp Inc ................................. 689
17 +Sequa Corp Cl A ............................. 667
11 Barnes Group Inc ............................ 660
51 +Magnetek Inc ................................ 657
44 Daniel Industries ........................... 649
16 IDEX Corp ................................... 638
85 +Insituform Technologies Cl A ................ 627
27 Learonal Inc ................................ 621
19 Kysor Industrial Corp ....................... 620
20 Standex International Corp .................. 617
25 Baldor Electric Co .......................... 616
25 Brady W H Co ................................ 616
10 Carlisle Cos Inc ............................ 605
19 Stone & Webster Inc ......................... 603
26 Goulds Pumps Inc ............................ 596
18 Gleason Corp ................................ 596
11 NACCO Industries Inc Cl A ................... 588
24 Watts Industries Inc Cl A ................... 573
19 Commercial Metals ........................... 572
26 +Osmonics Inc ................................ 572
22 Graco Inc ................................... 539
10 Mine Safety Appliances Co ................... 532
28 Armor All Products Corp ..................... 532
57 +Thermo Fibertek Inc ......................... 531
23 +Lydall Inc .................................. 517
24 Moore Corp Ltd .............................. 489
17 +Bearings Inc ................................ 474
21 Cincinnati Milacron Inc ..................... 459
22 Varlen Corp ................................. 452
25 McDermott International Inc ................. 416
21 Granite Construction Inc .................... 399
17 +Rohr Inc .................................... 385
60 UNR Industries Inc .......................... 360
7 Briggs & Stratton Corp ...................... 308
18 Brush Wellman Inc. .......................... 295
51 +Air and Water Technologies
Corp..................................... 293
10 Ball Corp ................................... 260
29 +Rollins Environmental Inc ................... 226 1
--------
225,610
--------
COMMUNICATIONS SERVICES (1.1%)
37 GTE Corp .................................... 10,784 2
56 Sprint Corp ................................. 10,208 2
89 US West Inc ................................. 6,095 1
35 ALLTEL Corp ................................. 4,236 1
77 NYNEX Corp .................................. 3,706
72 Century Telephone Enterprises
Inc...................................... 2,223
44 Frontier Corp ............................... 995
42 Aliant Communications ....................... 714
--------
38,961
--------
CONSUMER CYCLICAL (8.5%)
36 May Department Stores Co .................... 39,083 8
41 Penney (J.C.) Co Inc. ....................... 31,249 6
34 Eastman Kodak Co ............................ 26,804 3
33 Russ Berrie & Co Inc ........................ 18,594 1,0
25 Wackenhut Corp Ser A ........................ 12,506 7
43 +Fred Meyer Inc .............................. 8,627 2
00 +Atmel Corp .................................. 6,625 2
15 Ruddick Corp ................................ 5,810 4
42 +National Education Corp ..................... 5,216 3
63 Gap Inc. .................................... 4,910 1
20 +Fruit of the Loom Inc ....................... 4,545 1
33 Sturm Ruger & Co Inc ........................ 4,514 2
50 +Playboy Enterprises Inc Cl B ................ 4,388 4
57 Mattel Inc .................................. 4,357 1
21 Caseys General Stores Inc ................... 4,144 2
</TABLE>

Page 24 See notes to financial statements

<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

SCHEDULES OF INVESTMENTS AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
Number
of Shares Security Value
--------- -------- -----

TOMORROW MEDIUM-TERM RETIREMENT FUND (CONTINUED)
<S> <C> <C>
351 +Lifetime Hoan Corp .......................... $4,124
105 Dayton Hudson Corp .......................... 4,121
224 The Limited Inc ............................. 4,116
161 Dun & Bradstreet Corp ....................... 3,824
48 Gannet Inc .................................. 3,594
10 Washington Post Co .......................... 3,351
118 Service Corp International .................. 3,304
49 +Vons Cos Inc ................................ 2,934
74 +Jones Apparel Group ......................... 2,766
60 Omnicom Group Inc ........................... 2,745
67 Masco Corp .................................. 2,412
36 Vulcan Materials Co ......................... 2,192
39 +Nine West Group Inc ......................... 1,809
49 Hannaford Brothers Co ....................... 1,666
63 +HSN Inc ..................................... 1,496
30 TRW Inc. .................................... 1,485
143 +K mart Stores ............................... 1,484
38 New York Times Co Cl A ...................... 1,444
31 Lancaster Colony Corp ....................... 1,426
30 Interpublic Group of Cos Inc ................ 1,425
129 +Burlington Industries Inc ................... 1,419
53 +Lands' End Inc .............................. 1,405
40 Belo (AH) Corp - Ser A ...................... 1,395
45 Dillard Department Stores ................... 1,389
35 Hasbro Inc .................................. 1,361
24 Houghton Mifflin Co ......................... 1,359
36 Tiffany & Co ................................ 1,319
29 Genuine Parts Co ............................ 1,294
19 +Scholastic Corp ............................. 1,278
24 Meredith Corp ............................... 1,266
47 Modine Manufacturing ........................ 1,257
27 Harcourt General ............................ 1,245
67 Sotheby's Holdings Cl A ..................... 1,240
18 VF Corp ..................................... 1,215
26 McGraw-Hill Cos Inc ......................... 1,199
27 Tandy ....................................... 1,188
25 Whirlpool Corp .............................. 1,166
24 TJX Cos Inc ................................. 1,137
34 Cognizant Corp .............................. 1,122
29 Liz Claiborne Inc. .......................... 1,120
14 Tribune Co. ................................. 1,104
26 Reebok International Ltd .................... 1,092
26 +CVS Corp .................................... 1,073
61 Wellman Inc ................................. 1,045
36 First Brands Corp ........................... 1,022
33 Circuit City Store Inc ...................... 994
17 Sherwin-Williams Co. ........................ 952
89 +Best Buy Co Inc ............................. 946
93 Stride Rite Corp ............................ 930
34 Stanhome Inc ................................ 901
22 +Ceridian Corp ............................... 891
45 Cooper Tire & Rubber ........................ 889
26 Dow Jones & Co Inc .......................... 881
20 Polaroid Corp ............................... 870
14 NCH Corp .................................... 843
17 Mercantile Stores ........................... 839
12 Armstrong World Industries Inc .............. 834
192 +Service Merchandise Inc ..................... 816
27 Black & Decker Corp ......................... 813
41 Maytag Corp ................................. 810
62 Fingerhut Cos Inc. .......................... 759
24 Echlin Inc. ................................. 759
41 Brown Group Inc ............................. 753
26 American Greetings Cl A ..................... 738
30 Donnelly Corp ............................... 735
21 McClatchy Newspapers Cl A ................... 735
11 + Culbro Corp ................................ 714
163 Ekco Group Inc .............................. 713
22 Wiley John & Sons ........................... 709
70 Graphic Industries Inc ...................... 709
27 +MacFrugals Bargains Closeouts ............... 705
50 ADVO Inc .................................... 700
113 +American Media Inc .......................... 664
15 +Volt Information Sciences Inc ............... 656
48 +Johnson Worldwide Associates
Inc Cl A................................. 636
22 Starrett LS Co Cl A ......................... 624
23 Stanley Works ............................... 621
24 +Christiana Cos .............................. 618
12 WD-40 Co .................................... 612
24 Standard Products Co ........................ 612
87 +Shoney's Inc ................................ 609
46 Kaman Corp Cl A ............................ 598
15 Apogee Enterprises Inc ...................... 596
30 Luby's Cafeterias Inc. ...................... 596
17 Plenum Publishing Corp ...................... 595
58 Crown Crafts Inc ............................ 580
21 Tennant Co .................................. 577
67 +Handleman Co ................................ 569
26 True North Communications ................... 569
26 +Woolworth Corp .............................. 569
37 Osh Kosh B'Gosh Cl A ....................... 564
23 Bassett Furniture Industries Inc ............ 563
21 Guilford Mills Inc .......................... 559
22 American Business Products .................. 553
12 OEA Systems Inc ............................. 549
21 +CSS Industries Inc .......................... 546
20 Unitog Co ................................... 545
25 Smart and Final Inc ......................... 541
86 PT Tri Polyta Indonesia ADR ................. 537
23 Lee Enterprises Inc ......................... 535
132 +Topps Co Inc ................................ 528
62 +Syms Corp ................................... 527
</TABLE>

See notes to financial statements Page 25
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

SCHEDULES OF INVESTMENTS AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
Number
of Shares Security Value
- --------- -------- -----
<S> <C> <C>
TOMOROW MEDIUM-TERM RETIREMENT FUND (CONTINUED)

19 K2 Inc ................................... $522
28 Walbro Corp. ............................. 511
26 Delechamps Inc ........................... 504
21 Waverly Inc .............................. 499
26 Alico Inc ................................ 487
16 American List Corp. ...................... 486
30 Strawbridge & Clothier ................... 476
12 Knight- Ridder Inc ....................... 459
31 Duty Free International Inc .............. 449
15 Russell Corp ............................. 446
47 Blessings Corp ........................... 438
39 Hancock Fabrics Inc ...................... 405
8 Home Depot Inc ........................... 401
49 +Intelligent Electronics Inc. ............. 392
15 Arvin Industries Inc ..................... 371
22 CPI Corp ................................. 368
26 +Information Resources Inc ................ 364
32 Ennis Business Forms ..................... 360
19 Ogden Corp ............................... 356
18 +Gibson Greetings Inc ..................... 353
95 CML Group Inc ............................ 321
39 +GRC International Inc .................... 317
18 +AnnTaylor Stores Corp .................... 315
14 Lawson Products Inc ...................... 306
21 Falcon Products Inc ...................... 299
25 A.T. Cross Co Cl A ....................... 291
11 +ACNielsen Corp ........................... 166
6 +Echelon International Corp ............... 93
--------
313,941
--------
CONSUMER STAPLES (9.5%)
391 Kimberly-Clark Corp ..................... 37,243
1,016 +Viacom Inc. Cl B ........................ 35,433
517 Kellogg Co .............................. 33,928
1,453 Archer Daniels Midland Co................ 31,966
762 Anheuser-Busch Cos Inc. ................. 30,480
152 Unilever NV ADR ........................ 26,638
416 +Revco D.S. Inc .......................... 15,392
731 Goodmark Foods Inc ...................... 12,062
734 Genovese Drugs Stores ................... 11,379
543 Dames & Moore Inc ....................... 7,941
174 Albertsons Inc .......................... 6,199
105 Cardinal Health Inc ..................... 6,116
201 IBP Inc ................................. 4,874
51 Colgate-Palmolive Co. ................... 4,705
129 Heinz H J Co ............................ 4,644
93 Conagra Inc ............................. 4,627
62 Ralston Purina Co........................ 4,549
230 ABM Industries Inc ...................... 4,255
105 IMC Global Inc .......................... 4,108

123 UST Inc. ................................ $3,982
50 CPC International Inc. .................. 3,875
106 Sysco Corp .............................. 3,458
51 General Mills Inc ....................... 3,232
82 Tyson Foods Inc Cl A .................... 2,809
49 Tambrands Inc. .......................... 2,003
42 +Kroger Co ............................... 1,953
48 Quaker Oats Co .......................... 1,830
82 Flowers Industries Inc .................. 1,763
59 Bergen Brunswig Corp .................... 1,682
26 Avon Products Inc ....................... 1,485
46 Dean Foods Co ........................... 1,484
32 McDonald's Corp. ........................ 1,448
36 Rite Aid Corp. .......................... 1,431
52 Kelly Services Inc Cl A ................. 1,404
32 Hershey Foods Corp ...................... 1,400
45 TCA Cable TV Inc ........................ 1,356
143 +Perrigo Co .............................. 1,305
31 American Stores Co ...................... 1,267
24 Paychex Inc ............................. 1,235
12 Clorox Co. .............................. 1,205
74 Dial Corp ............................... 1,091
59 International Multifoods Corp ........... 1,069
49 +International Dairy Queen Inc
Cl A................................. 980
18 Longs Drug Stores Inc ................... 884
24 Universal Foods Corp .................... 846
44 +Ruby Tuesday Inc ........................ 814
35 Whitman Corp ............................ 801
42 Coors (Adolph) Co Cl B................... 798
24 Harland Co. ............................. 792
24 Deluxe Corp ............................. 786
22 Giant Food Inc Cl A ..................... 759
28 Amcast Industrial Corp .................. 693
18 +King World Productions Inc .............. 664
36 Lance Inc ............................... 648
28 Banta Corp. ............................. 640
17 National Presto Industries .............. 635
72 Bridgford Foods Corp .................... 612
28 Nash Finch Corp ......................... 595
13 Brown-Forman Corp Cl B .................. 595
21 West Co ................................. 593
14 +Chris Craft Industries Inc .............. 586
18 Winn Dixie Stores ....................... 569
43 WLR Foods Inc ........................... 532
80 +Uno Restaurant Corp ..................... 530
18 Supervalu Inc. .......................... 511
36 Savannah Foods & Industries ............. 486
14 Dreyers Grand Ice Cream Inc ............. 406
17 +Carmike Cinemas Inc. Cl A ............... 431
</TABLE>

Page 26 See notes to financial statements
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

SCHEDULES OF INVESTMENTS AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
Number
of Shares Security Value
- --------- -------- -----
<S> <C> <C>
TOMORROW MEDIUM-TERM RETIREMENT fUND (CONTINUED)

29 +Foodbrands America Inc ..................... $399
42 +Buffets Inc ................................ 383
19 Blair Corp ................................. 366
6 Tecumseh Products Co Cl B .................. 341
9 National Services Industries Inc ........... 336
20 +AMC Entertainment Inc ...................... 287
7 +Footstar Inc ............................... 174
--------
349,778
--------
Energy (9.9%)
543 Exxon Corp ................................. 53,214
216 Royal Dutch Petroleum Co ADR .............. 36,882
249 Atlantic Richfield ......................... 33,024
194 Mobil Corp. ................................ 23,716
1,236 Sevenson Environmental
Services Inc ............................ 22,557
195 Schlumberger Ltd ........................... 19,476
225 Amoco Corp ................................. 18,169
181 Texaco Inc ................................. 17,761
1,066 Quaker State Corp .......................... 15,057
732 +HS Resources Inc ........................... 12,078
730 +Tuboscope Vetco International
Corp .................................... 11,315
160 Chevron Corp .............................. 10,400
534 Getty Petroleum Corp ....................... 8,677
101 Anadarko Petroleum Co ...................... 6,540
130 Phillips Petroleum Co. ..................... 5,752
259 Global Marine Inc .......................... 5,342
216 Occidental Petroleum Corp .................. 5,049
60 Halliburton Co ............................. 3,615
79 Tidewater Inc .............................. 3,575
135 USX-Marathon Group ......................... 3,223
103 +Dresser Industries Inc ..................... 3,193
39 Tosco Co ................................... 3,086
58 +Ensco International Inc .................... 2,813
58 +Smith International Inc .................... 2,603
45 +BJ Services Co ............................. 2,295
76 +Weatherford Enterra Inc .................... 2,280
62 Parker & Parsley Petroleum Co .............. 2,278
115 +Nabors Industries Inc ...................... 2,214
43 Burlington Resources Inc ................... 2,166
60 Mapco Inc .................................. 2,040
60 Valero Energy Corp ......................... 1,717
164 Ranger Oil Ltd ............................. 1,619
43 Apache Corp ................................ 1,521
44 Baker Hughes Inc ........................... 1,518
27 Murphy Oil Corp ............................ 1,502
27 Helmerich & Payne Inc ...................... 1,407
44 Ultramar Diamond Shamrock
Corp.................................... 1,391
22 Amerada Hess Corp. ......................... 1,273
39 Sun Co Inc ................................. 951
31 Black Hills Corp ........................... 872
33 +Oryx Energy Co ............................. 817
11 Kerr Mcgee Corp ............................ 792
37 Wiser Oil Co ............................... 731
29 +Varco International Inc .................... 671
19 Vintage Petroleum Inc ...................... 655
45 Berry Petroleum Cl A ....................... 647
26 Landauer Inc ............................... 637
14 +Barrett Resources Corp ..................... 597
11 Louisiana Land & Exploration Co ............ 590
21 Ashland Coal Inc ........................... 583
187 +Harken Energy Corp ......................... 561
60 +Allied Waste Industries Inc ................ 555
57 +Parker Drilling Co ......................... 549
20 Holly Corp ................................. 535
12 Ashland Inc ................................ 526
42 +Crown Central Petroleum Cl A ............... 520
--------
364,127
--------
Financial (6.0%)
1,029 Mid Am Inc ................................. 17,622
1,039 Kranzco Realty Trust ...................... 17,533
1,037 Commercial Net Lease Realty ................ 16,462
533 Avemco Corp ................................ 8,328
200 Southtrust Corp ............................ 6,975
100 Progressive Corp ........................... 6,738
181 First Data Corp ............................ 6,607
132 PHH Corp ................................... 5,676
100 Comerica Inc ............................... 5,238
227 Universal Health Realty Income ............. 4,654
100 Commerce Bancshares Inc .................... 4,625
230 Mid America Bancorp ........................ 4,370
230 LTC Properties Inc ......................... 4,255
234 State Auto Financial Corp .................. 4,212
232 Magna Bancorp Inc .......................... 4,060
225 NYMAGIC Inc ................................ 4,050
233 South West Property Trust .................. 3,932
73 Lincoln National Corp Ltd. ................. 3,833
69 Chubb Corp ................................. 3,709
36 Loews Corp ................................. 3,393
100 Paine Webber Group Inc ..................... 2,813
49 U.S. Bancorp ............................... 2,202
19 Marsh & McLennan Cos ....................... 1,976
45 Bancorp Hawaii Inc. ........................ 1,890
142 Hibernia Corp Cl A ......................... 1,882
26 UNUM Corp .................................. 1,879
23 Transatlantic Holdings Inc ................. 1,852
84 City National Corp ......................... 1,817
46 Northern Trust Corp ........................ 1,668
18 TransAmerica Corp .......................... 1,424
</TABLE>

See notes to financial statements Page 27
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

SCHEDULES OF INVESTMENTS AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
Number
of Shares Security Value
- --------- -------- -----
<S> <C> <C>
TOMORROW MEDIUM-TERM RETIREMENT fUND (CONTINUED)

22 St Paul Cos. Inc. Corp ....................... $1,290
28 National City Corp ........................... 1,257
29 Wilmington Trust Co .......................... 1,146
31 Dauphin Deposit Corp ......................... 1,023
18 Jefferson- Pilot Corp ........................ 1,019
16 Citizens Bancorp ............................. 992
24 Safeco Corp .................................. 947
41 Church & Dwight Co Inc ....................... 938
24 Home Beneficial Corp ......................... 909
21 Financial Trust Corp ......................... 837
10 Republic NY Corp ............................. 816
21 New York Bancorp Inc ......................... 814
20 Capitol American Financial Corp .............. 727
17 CNB Bancshares Inc ........................... 710
28 BRE Properties Inc ........................... 693
18 Midland Co ................................... 693
33 USF&G Corp ................................... 689
30 Crawford & Co ................................ 686
31 MGI Properties ............................... 682
17 BT Financial Corp ............................ 674
45 Burham Pacific Properties Inc ................ 669
17 Liberty Corp ................................. 667
20 United Bankshares Inc ........................ 660
20 First Midwest Bancorp Inc .................... 652
22 First Michigan Bank Corp ..................... 652
17 JSB Financial Inc ............................ 646
17 Selective Insurance Group .................... 646
21 Argonaut Group Inc ........................... 646
25 McGrath Rent Corp ............................ 644
16 Tredegar Industries Inc ...................... 642
16 UMB Financial Corp ........................... 638
18 Whitney Holding Corp ......................... 637
12 Park National Corp ........................... 636
15 USBancorp Inc ................................ 636
26 Penn Real Estate Investment
Trust.................................... 634
16 United Carolina Bancshares .................. 632
17 First Commercial Corp ....................... 631
17 First Financial Corp ........................ 629
18 Firstbank Illinois Co ....................... 625
19 First Financial Bancorp ..................... 617
45 Commercial Intertech Corp ................... 613
19 Corus Bankshares Inc ........................ 613
19 First United Bancshares Inc ................. 613
15 Farmers Capital Bank Corp ................... 611
21 Bank of Granite Corp ........................ 609
12 Berkley W R Corp ............................ 609
33 Baldwin & Lyons Inc ......................... 606
22 CBT Corp .................................... 605
22 Community First Bankshares .................. 605
23 American Heritage Life Investors ............ 604
22 Zenith National Insurance ................... 602
28 Fulton Financial Corp ....................... 602
13 Trenwick Group Inc .......................... 601
25 F & M Bancorp Frederick ..................... 600
28 Heritage Financial Service Inc .............. 595
48 First Union Real Estate ..................... 594
19 S&T Bancorp Inc ............................. 584
21 Bancorp South Inc ........................... 583
24 Nationwide Health ........................... 582
331 CRI Liquidating REIT Inc..................... 579
68 Cash America International Inc. ............. 578
22 First Western Bancorp Inc ................... 577
27 F & M National Corp ......................... 577
50 IRT Property Co ............................. 575
15 Frontier Insurance Group Inc ................ 574
44 Western Investment Real Estate .............. 572
15 National Health Investors, Inc. ............. 568
17 Tompkins County Trustco Inc ................. 567
17 Omega Healthcare Investors Inc .............. 565
23 Hubco Inc ................................... 563
20 American Financial Enterprise
Inc...................................... 560
21 First Merchants Corp ........................ 556
21 Poe & Brown Inc ............................. 556
25 SEI Corp .................................... 556
26 Trustco Bank Corp ........................... 556
7 +Alexander's Inc ............................. 554
20 Brenton Banks Inc ........................... 552
20 Federal Realty Investment Trust ............. 542
29 First Commonwealth Financial
Corp ..................................... 540
45 EMC Insurance Group Inc ..................... 540
6 +Markel Corp ................................. 540
22 First Source Corp ........................... 539
21 Valley National Bancorp ..................... 538
22 Health Care REIT Inc ........................ 536
11 Mark Twain Bancshares Inc ................... 536
20 BSB Bancorp Inc ............................. 535
23 Allied Capital Commercial Corp .............. 535
22 Wellsford Residential Property
Trust..................................... 533
17 Albank Financial Corp ....................... 533
40 Hilb, Rogal & Hamilton Co ................... 530
28 American Federal Bank ....................... 528
41 CRIIMI MAE Inc. ............................. 528
22 American Health Properties .................. 525
20 National Pennsylvania
Bancshares Inc ........................... 522
16 Merchants New York Bancorp .................. 520
15 +MAIC Holdings Inc ........................... 508
16 Citizens Banking Corp ...................... 504
</TABLE>

Page 28 See notes to financial statements
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

SCHEDULES OF INVESTMENTS AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
Number
of Shares Security Value
- --------- -------- -----
<S> <C> <C>
TOMORROW MEDIUM-tERM RETIREMENT fUND (CONTINUED)

20 Keystone Financial Inc ..................................... $500
50 Berkshire Realty Co ........................................ 494
51 Gainsco Inc ................................................ 491
21 Albany International Corp Cl A ............................ 486
16 Acordia Inc ................................................ 464
14 Gallagher (Arthur J.) & Co ................................. 434
16 HCC Insurance Holdings Inc ................................. 384
--------
221,537
--------
Health Care (4.4%)
373 Schering-Plough Corp. ...................................... 24,152
591 Columbia Healthcare Corp ................................... 24,083
118 Bristol-Myers Squibb Co. ................................... 12,833
199 American Home Products Corp. ............................... 11,666
187 +Amgen Inc. ................................................. 10,168
232 Pharmacia & Upjohn Inc ..................................... 9,193
94 Warner Lambert Co .......................................... 7,050
89 +Boston Scientific Corp ..................................... 5,340
100 +HEALTHSOUTH Corp ........................................... 3,813
300 Kinetic Concepts Inc ....................................... 3,675
347 +Medco Research Inc ......................................... 3,644
204 Mylan Laboratories Inc ..................................... 3,417
96 +Forest Laboratories Inc .................................... 3,144
142 +Nellcor Inc ................................................ 3,106
84 +Centocor Inc ............................................... 3,003
35 +Pacificare Health Systems Inc .............................. 2,984
65 +Watson Pharmaceuticals ..................................... 2,921
70 +Biogen Inc. ................................................ 2,713
52 +HealthCare COMPARE Corp .................................... 2,203
98 +Tenet Healthcare Corp ...................................... 2,144
101 +Value Health Inc. .......................................... 1,969
61 +Foundation Health Corp ..................................... 1,937
100 +Humana Inc ................................................. 1,912
135 +Horizon/CMS Healthcare Corp ................................ 1,704
33 Mallinckrodt Inc. .......................................... 1,456
29 DENTSPLY International Inc. ................................ 1,377
25 +St. Jude Medical Inc. ...................................... 1,066
34 Diagnostic Products Corp ................................... 880
31 +ALZA Corp .................................................. 802
22 Allergan Inc. .............................................. 784
50 Biomet Inc ................................................. 756
21 Bausch & Lomb Inc .......................................... 745
18 United States Surgical Corp ................................ 709
62 +Novacare Inc ............................................... 682
45 +Tecnol Medical Products Inc. ............................... 681
24 +Acuson ..................................................... 585
12 +Synetic Inc ................................................ 582
20 Bard (CR) Inc .............................................. 560
31 Carter Wallace Inc ......................................... 484
37 +Beverly Enterprises Inc .................................... 472
41 +Epitope Inc ................................................ 471
20 +Datascope Corp ............................................. 400
--------
162,266
--------
Technology (2.0%)
729 X-Rite Inc ................................................. $12,029
309 Beckman Instruments Inc .................................... 11,858
282 +Loral Space Communications ................................. 5,182
100 +Parametric Technology ...................................... 5,138
91 Raytheon Co ................................................ 4,379
82 Wallace Computer Services Inc. ............................. 2,829
56 +Litton Industries Inc ...................................... 2,667
44 +Compuware Corp ............................................. 2,205
119 Sensormatic Electronics Corp ............................... 1,993
47 +Fiserv Inc ................................................. 1,727
181 Novell Inc ................................................. 1,714
37 Thiokol Corp ............................................... 1,656
30 +Dell Computer Corp ......................................... 1,594
31 +Policy Management Systems
Corp.................................................... 1,430
19 +3Com Corp .................................................. 1,394
51 +Stratus Computer Inc. ...................................... 1,390
25 Teleflex Inc ............................................... 1,303
49 +Advanced Micro Devices Inc ................................. 1,262
53 +Structural Dynamics Research
Corp .................................................... 1,060
46 +Apple Computer Inc ......................................... 960
18 +Storage Technology Corp .................................... 857
11 Harris Corp ................................................ 755
29 +Boole & Babbage Inc ........................................ 725
16 +BRC Holdings Inc ........................................... 716
24 Analysts International Corp ................................ 678
27 Cubic Corp ................................................. 624
19 +Gelman Sciences Inc ........................................ 617
14 CTS Corp ................................................... 598
28 EG&G Inc ................................................... 563
101 +Borland International Inc ................................. 549
21 +Esterline Technologies Corp ................................ 549
24 +Bell Industries Inc ........................................ 513
42 +Amdahl Corp ................................................ 509
213 +Executone Information Systems
Inc ..................................................... 506
68 +Unisys Corp ................................................ 459
27 +Trident Microsystems Inc ................................... 456
12 +Advanced Technology
Laboratories ............................................ 372
18 MTS Systems Corp ........................................... 360
84 +AST Research Inc ........................................... 352
--------
74,528
--------
Transportation (1.9%)
389 Burlington Northern Santa Fe
Corp.................................................... 33,600
1,033 International Shipholding Corp ............................. 19,111
345 Rollins Truck Leasing Corp ................................. 4,356
</TABLE>

See notes to financial statements Page 29
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

SCHEDULES OF INVESTMENTS AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
Number
of Shares Security Value
--------- -------- -----
<S> <C> <C>
TOMORROW MEDIUM-tERM RETIREMENT fUND (CONTINUED)

36 +Federal Express Corp. ....................... $1,602
52 Alexander & Baldwin Inc ..................... 1,300
47 Atlantic Southeast Airlines Inc. ............ 1,028
67 Hunt J B Transport Services Inc ............. 938
41 Caliber Systems Inc ......................... 789
11 Union Pacific Corp .......................... 661
69 Frozen Foods Express
Industries............................... 621
25 +USAir Group Inc ............................. 584
34 Arnold Industries Inc ....................... 540
37 +Yellow Corp ................................. 532
65 +USA Truck Inc ............................... 520
19 Consolidated Freightways Inc ................ 423
19 Overseas Shipholding Group .................. 323
3 Florida East Coast Industries ............... 262
9 +Consolidated Freightways Corp ............... 80
--------
67,270
--------
UTILITIES (6.2%)
1,029 Public Service Co ........................... 18,779
838 St Joseph Light & Power ..................... 12,884
737 Cascade Natural Gas Corp .................... 12,529
735 United Water Resources Inc .................. 11,484
400 Illinova Corp ............................... 11,000
200 New England Electric ........................ 6,975
276 Southern Co ................................. 6,245
133 Enron Corp .................................. 5,736
200 Boston Edison Co. ........................... 5,375
231 Ohio Edison Co .............................. 5,255
255 Public Service Co of New
Mexico................................... 5,004
228 Philadelphia Suburban Corp .................. 4,532
130 GPU Inc ..................................... 4,371
231 Eastern Utilities Association ............... 4,014
231 +Tucson Electric Power Co .................... 3,840
119 Allegheny Power System Inc .................. 3,615
72 Duke Power Co ............................... 3,348
246 Northeast Utilities ......................... 3,260
154 Pacific Gas & Electric Co. .................. 3,234
98 Florida Progress Corp ....................... 3,161
76 Texas Utilities Co .......................... 3,097
119 Potomac Electric Power Co ................... 3,064
80 Williams Cos Inc ............................ 2,981
108 Scana Corp .................................. 2,889
85 CMS Energy Corp ............................. 2,858
81 +CalEnergy Inc ............................... 2,724
118 Edison International ........................ 2,345
42 Coastal Corp ................................ 2,053
64 MCN Corp Holding Co ......................... 1,848
47 Public Service Co of Colorado ............... 1,827
39 FPL Group Inc. .............................. 1,794
82 New York State Electric &
Gas Corp ................................. 1,773
43 Nipsco Industries ........................... 1,704
44 Dominion Resources Inc ...................... 1,694
54 Brooklyn Union Gas Co ....................... 1,627
32 El Paso Natural Gas ......................... 1,616
58 Entergy Corp ................................ 1,610
97 MidAmerican Energy Holdings ................. 1,540
37 National Fuel Gas Co ........................ 1,526
37 American Electric Power Co .................. 1,522
42 Southwestern Public Service ................. 1,486
28 Sonat Inc. .................................. 1,442
60 Puget Sound Power & Light ................... 1,440
63 Houston Industries Inc ...................... 1,425
67 Pacificorp .................................. 1,374
30 Pennsylvania Enterprises Inc ................ 1,316
50 Central & South West Corp ................... 1,281
47 IPALCO Enterprises .......................... 1,281
38 Cinergy Corp. ............................... 1,268
51 LG & E Energy Corp .......................... 1,250
40 Idaho Power Co .............................. 1,245
58 Montana Power Co ............................ 1,240
58 AGL Resources Inc ........................... 1,225
32 Hawaiian Electric Industries ................ 1,156
19 Consolidated National Gas Co ................ 1,050
27 Union Electric .............................. 1,040
42 Indiana Energy Inc .......................... 1,024
43 Washington Gas Light Co ..................... 973
42 PP & L Resources Inc ........................ 966
15 Columbia Gas System Inc ..................... 954
82 Central Maine Power Co. ..................... 953
46 American Water Works Inc .................... 949
30 Pacific Enterprises ......................... 911
29 Oneok Inc. .................................. 870
23 Eastern Enterprises Inc ..................... 814
24 IWC Resources Corp .......................... 747
15 +Tejas Gas Corp .............................. 714
16 California Water Services Co ................ 672
32 Nevada Power ................................ 656
14 Northern States Power........................ 642
26 Laclede Gas Co .............................. 627
17 Cilcorp Inc ................................. 623
40 Noram Energy Corp. .......................... 615
25 South Jersey Industries Inc ................. 609
26 Commonwealth Energy System .................. 608
19 United Illuminating Co ...................... 596
53 +Citizens Utilities Co Cl B .................. 590
17 Northwestern Public Service ................. 582
18 Otter Tail Power Co ......................... 578
20 North Carolina Natural Gas Corp ............. 577
24 Northwest Natural Gas Co .................... 576
</TABLE>

Page 30 See notes to financial statements
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

SCHEDULES OF INVESTMENTS AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
Number
of Shares Security Value
--------- -------- -----
<S> <C> <C>
TOMORROW MEDIUM-TERM RETIREMENT FUND (CONTINUED)

21 TNP Enterprise Inc .......................... $575
25 United Cities Gas Co ........................ 562
22 Connecticut Natural Gas Corp ................ 561
24 Piedmont Natural Gas Inc .................... 561
26 Yankee Energy System ........................ 556
24 MDU Resources Group Inc ..................... 552
61 +TPC Corp .................................... 549
29 Empire District Electric Co ................. 544
55 +Niagara Mohawk Power Corp ................... 543
15 Wicor Inc ................................... 538
24 UGI Corp .................................... 537
19 Aquarion Co ................................. 530
22 Atmos Energy Corp ........................... 525
22 Green Mountain Power Corp ................... 525
18 Bay State Gas Co ............................ 509
14 Orange & Rockland Utilities Inc ............. 502
23 Southern California Water Co ................ 500
17 New Jersey Resources Corp ................... 497
24 Washington Energy Co ........................ 495
24 Western Gas Resources Inc ................... 462
20 Enserch Corp ................................ 460
21 Colonial Gas Co ............................. 446
15 WPS Resources Corp .......................... 428
133 +PhoneTel Technologies Inc ................... 424
19 Madison Gas & Electric ...................... 385
--------
228,444

TOTAL COMMON STOCKS
(Cost $2,127,837)......................... 2,199,967
---------
OPEN END INVESTMENT
COMPANY (3.9%)
(Cost $141,920)
13,639 Bankers Trust EAFE Equity
Index Fund .............................. 144,849
--------
UNIT INVESTMENT
TRUST (4.8%)
(Cost $180,814)
Standard & Poor's
2,400 Depositary Receipt ...................... 177,450
--------
Principal
Amount
- ------ U.S. GOVERNMENT
OBLIGATIONS (40.9%)
$425,000 U.S. TREASURY BILL (11.4%)
Due 4/17/97 ................................. 418,868
--------
158,000 U.S. TREASURY BOND (4.4%)
6.875% Due 8/15/25 .......................... 161,111
--------
U.S. TREASURY NOTES (25.1%)
$505,000 5.500% Due 11/15/98 ......................... $501,606
423,000 6.500% Due 8/15/05 .......................... 425,711
--------
927,317
--------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $1,507,528)......................... 1,507,296
--------
TOTAL INVESTMENTS (109.4%)
(Cost $3,958,099)......................... 4,029,562

LIABILITIES IN EXCESS OF OTHER
ASSETS (-9.4%)............................ (348,377)
---------
TOTAL NET ASSETS (100.0%).................... $3,681,185
=========
</TABLE>

+ Non-income producing security.

<TABLE>
<CAPTION>
Number
of Shares Security Value
- --------- -------- -----
<S> <C> <C>
TOMORROW SHORT-TERM RETIREMENT FUND

COMMON STOCKS (55.3%)
BASIC MATERIALS (3.0%)
377 Dow Chemical Co ............................. $29,547
1,500 Coeur D'Alene Mines Corp..................... 22,687
700 Quaker Chemical Corp ........................ 11,463
385 Barrick Gold Corp ........................... 11,021
60 Pioneer Hi Bred International ............... 4,200
335 Calgon Carbon Corp .......................... 4,104
700 +Hecla Mining Co ............................. 3,850
600 +Amax Gold Inc ............................... 3,825
68 Nucor Corp .................................. 3,468
46 Phelps Dodge Corp ........................... 3,105
137 Placer Dome Inc ADR ......................... 2,980
67 IMC Global Inc .............................. 2,621
36 Aluminum Co of America ...................... 2,295
51 Newmont Mining Corp ......................... 2,282
27 Rohm & Haas Co .............................. 2,204
40 Consolidated Papers Inc ..................... 1,965
60 Inco Ltd .................................... 1,913
41 International Flavors &
Fragrances Inc............................. 1,845
31 Reynolds Metals Co .......................... 1,748
44 Bowater Inc ................................. 1,655
160 Ethyl Corp .................................. 1,540
40 Olin Corp .................................. 1,505
30 Champion International Corp. ................ 1,298
</TABLE>

See notes to financial statements Page 31
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

SCHEDULES OF INVESTMENTS AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
Number
of Shares Security Value
--------- -------- -----
<S> <C> <C>
TOMORROW SHORT-TERM RETIREMENT FUND (CONTINUED)

40 Ferro Corp .................................. $1,135
21 Great Lakes Chemical Corp. .................. 982
35 Georgia Gulf Corp ........................... 941
30 Lubrizol Corp ............................... 930
22 Tambrands Inc. .............................. 899
44 Engelhard Corp .............................. 841
22 Ecolab Inc .................................. 828
20 BF Goodrich Co............................... 810
30 Schulman Inc ................................ 735
12 BetzDearborn Inc. ........................... 702
36 Crompton & Knowles Corp ..................... 693
22 Chesapeake Corp ............................. 690
10 Harso Corp .................................. 685
18 Bemis Inc ................................... 664
28 Cyprus Amax Minerals Co. .................... 655
20 Westvaco Corp ............................... 575
11 Precision Castparts Corp .................... 546
29 Glatefelter (PH) Co ......................... 522
28 Wausau Paper Mills Co ....................... 518
11 Fuller H B Co ............................... 517
37 Lawter International Inc .................... 467
9 +MAXXAM Inc .................................. 429
10 +Sealed Air Corp ............................. 416
60 Battle Mountain Gold Co ..................... 413
23 Oregon Steel Mills .......................... 385
12 Dexter Corp ................................. 383
41 +Bethlehem Steel Corp. ....................... 369
14 Sonoco Products Co .......................... 362
10 James River Corp of Virginia ................ 331
9 Carpenter Technology Corp ................... 330
7 Cleveland-Cliffs Inc ........................ 318
45 Echo Bay Mines Ltd .......................... 298
--------
142,490
--------

CAPITAL GOODS (5.7%)
605 Boeing Co.................................... 64,357
402 Minnesota Mining &
Manufacturing Co........................... 33,316
1,200 +Vallen Corp ................................. 19,950
319 York International Corp ..................... 17,824
320 +Parametric Technology Corp .................. 16,440
205 McDonnell Douglas Corp ...................... 13,120
268 Deere & Co .................................. 10,888
100 U.S. Robotics Corp .......................... 7,200
300 Daniel Industries Inc ....................... 4,425
44 Emerson Electric Co. ........................ 4,257
87 Corning Inc ................................. 4,024
117 WMX Technologies Inc. ....................... 3,817
192 Westinghouse Electric Corp .................. 3,816
58 Honeywell Inc. .............................. 3,813
200 Armor All Products Corp ..................... 3,800

66 Crown Cork & Seal Inc ....................... $3,589
200 Raymond Corp ................................ 3,475
100 +Analog Devices Inc. ......................... 3,387
100 +Atmel Corp .................................. 3,311
100 +ADC Telecommunications Inc .................. 3,113
47 Tyco International Ltd ...................... 2,485
48 Alco Standard Corp .......................... 2,478
23 Textron Inc ................................. 2,168
88 Premark International Inc.................... 1,958
29 Fluor Corp .................................. 1,820
78 Allegheny Teledyne Inc ...................... 1,794
21 Raychem Corp ............................... 1,683
62 Pall Corp ................................... 1,581
76 Sensormatic Electronics Corp ................ 1,273
22 Miller (Herman) Inc ......................... 1,246
23 Dover Corp .................................. 1,156
24 Hubbell Inc Cl B ............................ 1,038
22 Kaydon Corp ................................. 1,037
57 Gencorp Inc ................................. 1,033
31 HON Industries .............................. 1,023
24 Sundstrand Corp ............................. 1,020
100 +Novell Inc .................................. 947
23 Trinity Industries Inc ...................... 862
49 RPM Inc ..................................... 833
20 +BMC Software Inc ............................ 827
20 Thermo Electron Corp ........................ 825
20 +Cadence Design Systems Inc .................. 795
20 Kennametal Inc .............................. 778
20 Avery Dennison Corp ......................... 707
11 Nordson Corp ................................ 701
21 Standard Register Co ........................ 683
20 +USA Waste Services Inc ...................... 638
28 Ametek Inc .................................. 623
13 Cummins Engine Inc .......................... 598
10 Avnet Inc ................................... 582
20 Duriron Co Inc .............................. 542
10 +Gateway 2000 Inc ............................ 536
10 +Solectron Corp .............................. 534
20 Reynolds & Reynolds Cl A .................... 520
23 Cincinnati Milacron Inc ..................... 503
7 +FMC Corp .................................... 491
10 Harnischfeger Industries Inc. ............... 481
20 +360 Communications Co........................ 462
18 +Jacobs Engineering Group Inc ................ 425
7 Carlisle Cos Inc ............................ 424
21 Keystone International Inc .................. 423
8 Teleflex Inc ................................ 417
17 Watts Industries Inc Cl A ................... 406
9 Thiokol Corp ................................ 403
17 +Rohr Inc .................................... 385
11 Donaldson Co Inc ............................ 369
</TABLE>

Page 32 See notes to financial statements
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

SCHEDULES OF INVESTMENTS AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
Number
of Shares Security Value
--------- -------- -----
<S> <C> <C>
TOMORROW SHORT-TERM RETIREMENT FUND (CONTINUED)

15 Albany International Corp Cl 'A' ............ $347
10 Leggett & Platt Inc ......................... 346
18 Brush Wellman Inc. .......................... 295
14 +Datascope Corp .............................. 280
--------
271,703
--------

COMMUNICATION SERVICES (3.3%)
1,863 GTE Corp .................................... 84,766
894 Sprint Corp ................................. 35,648
198 AT&T Corp ................................... 8,613
169 Bellsouth Corp. ............................. 6,823
91 Bell Atlantic Corp .......................... 5,892
99 NYNEX Corp .................................. 4,764
123 US West Inc ................................. 3,967
70 ALLTEL Corp ................................. 2,196
46 Century Telephone Enterprises
Inc...................................... 1,420
39 Frontier Corp ............................... 882
20 Southern New England
Telecommunications......................... 777
30 Aliant Communications Co .................... 510
--------
156,258
--------

CONSUMER CYCLICAL (5.6%)
853 Eastman Kodak Co ............................ 68,453
417 Vulcan Materials Co ......................... 25,385
800 Caseys General Stores Inc ................... 15,000
1,000 Dames & Moore Inc ........................... 14,625
300 +Fruit of the Loom Inc ....................... 11,362
229 May Department Stores Co .................... 10,706
194 Penney (J.C.) Co. Inc. ...................... 9,457
155 General Motors Corp ......................... 8,641
139 Albertsons Inc .............................. 4,952
300 +AMC Entertainment Inc ....................... 4,313
120 +Fred Meyer Inc .............................. 4,260
700 +American Media Inc .......................... 4,112
110 Masco Corp .................................. 3,960
200 Delechamps Inc .............................. 3,875
200 Blair Corp .................................. 3,850
200 Alico Inc ................................... 3,750
200 Russ Berrie & Co Inc ........................ 3,600
200 Wackenhut Corp Ser A ........................ 3,450
121 Mattel Inc................................... 3,358
46 Eaton Corp .................................. 3,208
104 Gap Inc. .................................... 3,133
40 Gannet Inc .................................. 2,995
60 Whirlpool Corp .............................. 2,798
69 Dayton Hudson Corp .......................... 2,708
83 Sysco Corp .................................. 2,708
94 Service Corp International .................. 2,632
141 The Limited Inc ............................. 2,591
6 Washington Post Co .......................... 2,011
42 Lancaster Colony Corp ....................... 1,932
168 +K mart Stores ............................... 1,743
35 Interpublic Group of Cos Inc ................ 1,662
41 Hasbro Inc .................................. 1,594
32 Harcourt General Inc......................... 1,476
38 Wallace Computer Services Inc. .............. 1,311
32 American Stores Co .......................... 1,308
28 Omnicom Group Inc ........................... 1,281
34 +Jones Apparel Group ......................... 1,271
15 Tribune Co. ................................. 1,183
35 Cognizant Corp .............................. 1,155
35 Dillard Department Stores Inc
Cl A..................................... 1,081
34 Circuit City Store Inc ...................... 1,024
40 +HSN Inc ..................................... 950
20 Harley Davidson Inc ......................... 940
83 Burlington Industries Inc ................... 913
33 Modine Manufacturing Co ..................... 883
13 +Scholastic Corp ............................. 874
27 South Down Inc .............................. 840
12 Armstrong World Industries Inc............... 834
35 Dun & Bradstreet Corp ....................... 831
27 Black & Decker Corp ......................... 813
20 Dow Jones & Co Inc .......................... 678
24 +Lands' End Inc .............................. 636
20 Echlin Inc. ................................. 633
18 Belo (AH) Corp............................... 628
57 +Best Buy Co ................................. 606
35 Viad Corp ................................... 578
30 Sotheby's Holdings Cl A ..................... 555
26 Cooper Tire & Rubber Co...................... 514
19 +MacFrugals Bargains Closeout ................ 496
10 Mercantile Stores Co ........................ 494
8 Houghton Mifflin Co ......................... 453
25 Lance Inc ................................... 450
10 +Chris Craft Industries Inc .................. 419
16 Lee Enterprises Inc ......................... 372
15 Arvin Industries Inc ........................ 371
22 CPI Corp .................................... 369
13 Stanley Works ............................... 351
81 +Service Merchandise Inc ..................... 344
100 CML Group Inc ............................... 338
22 Duty Free International Inc ................ 319
18 +AnnTaylor Stores Corp ....................... 315
6 Home Depot Inc .............................. 301
13 Caliber Systems Inc ......................... 250
11 +ACNielsen Corp .............................. 166
--------
268,428
--------
</TABLE>

See notes to financial statements Page 33
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

SCHEDULES OF INVESTMENTS AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
Number
of Shares Security Value
--------- -------- -----
<S> <C> <C>
TOMORROW SHORT-TERM RETIREMENT FUND (CONTINUED)

CONSUMER STAPLES (5.3%)
1,500 ABM Industries Inc .......................... $27,750
141 Unilever NV ADR ............................. 24,710
177 Kimberly-Clark Corp ......................... 16,859
1,030 Genovese Drugs Stores ....................... 15,965
177 Gillette Co. ................................ 13,762
173 Kellogg Co .................................. 11,353
324 +Viacom Inc. Cl 'B' .......................... 11,300
486 Archer Daniels Midland Co.................... 10,692
500 Goodmark Foods Inc .......................... 8,250
204 Anheuser- Busch Cos Inc. .................... 8,160
150 Coca Cola Co ................................ 7,894
57 Philip Morris Cos Inc. ...................... 6,469
174 +Revco D.S. Inc .............................. 6,438
178 Pepsico Inc. ................................ 5,207
223 Flowers Industries Inc ...................... 4,794
300 ADVO Inc .................................... 4,200
52 Ralston Purina Co ........................... 3,816
100 Quaker Oats Co............................... 3,813
200 Brown Group Inc ............................. 3,675
78 +Kroger Co ................................... 3,627
200 International Multifoods Corp ............... 3,625
99 Heinz H J Co ................................ 3,564
64 Conagra Inc ................................. 3,184
128 IBP Inc ..................................... 3,104
47 General Mills Inc ........................... 2,979
89 UST Inc. .................................... 2,881
31 Colgate- Palmolive Co ....................... 2,860
35 Avon Products Inc ........................... 1,999
38 Hershey Foods Corp .......................... 1,663
51 Dean Foods Co................................ 1,645
48 Tyson Foods Inc Cl A ........................ 1,644
23 +Vons Cos Inc ................................ 1,377
29 McDonald's Corp. ............................ 1,312
46 Bergen Brunswig Corp ........................ 1,311
30 +CVS Corp..................................... 1,237
31 Universal Foods Corp ........................ 1,093
10 Clorox Co. .................................. 1,004
23 +Ceridian Corp ............................... 931
20 +Symbol Technologies Inc. .................... 885
30 Supervalu Inc. .............................. 851
23 Hannaford Brothers Co ....................... 782
20 +King World Productions Inc .................. 738
26 Kelly Services Inc Cl A ..................... 702
21 Deluxe Corp ................................. 688
50 +NEXTEL Communications Inc Cl A .............. 653
30 +Mirage Resorts Inc. ......................... 649
13 Brown-Forman Corp Cl 'B' .................... 595
31 Coors (Adolph) Cl B ......................... 588
20 Callaway Golf Co ............................ 575
62 +Perrigo Co .................................. 566
50 +OfficeMax Inc. .............................. 531
35 Dial Corp.................................... $516
17 TCA Cable TV Inc ............................ 512
20 Sbarro Inc .................................. 510
10 Longs Drug Stores Inc ....................... 491
10 Coca Cola Entrerprises Inc .................. 485
35 Savannah Foods & Industries ................. 472
33 Ruddick Corp ................................ 462
20 Banta Corp. ................................. 457
16 First Brands Corp ........................... 454
20 International Game Technology ............... 365
22 Carter Wallace Inc .......................... 344
14 Church & Dwight Co .......................... 320
44 +Shoney's Inc ................................ 308
10 Dreyers Grand Ice Cream Inc ................. 290
30 +Buffets Inc ................................. 274
8 +Footstar Inc ................................ 199
--------
251,409
--------
ENERGY (12.8%)
738 Royal Dutch Petroleum Co ADR ................ 126,013
930 Exxon Corp .................................. 91,140
600 Mobil Corp. ................................. 73,350
1,105 Chevron Corp ................................ 71,825
374 Schlumberger Ltd ............................ 37,353
459 Amoco Corp .................................. 37,064
368 Texaco Inc .................................. 36,110
1,000 +HS Resources Inc ............................ 16,500
1,000 Getty Petroleum Corp ........................ 16,250
144 duPont (EI) de Nemours & Co ................. 13,590
700 +Tuboscope Vetco International
Corp..................................... 10,850
724 Quaker State Corp ........................... 10,227
500 Sevenson Environmental
Services Inc............................... 9,125
42 Atlantic Richfield .......................... 5,570
74 Anadarko Petroleum Co........................ 4,792
101 Phillips Petroleum Co. ...................... 4,469
300 Berry Petroleum Class A ..................... 4,313
300 +Crown Central Petroleum Cl A ................ 3,712
166 +Global Marine Inc ........................... 3,424
64 Burlington Resources Inc .................... 3,224
51 Halliburton Co............................... 3,073
128 Occidental Petroleum Corp ................... 2,992
124 USX-Marathon Group........................... 2,961
61 Baker Hughes Inc ............................ 2,105
59 Dresser Industries Inc ...................... 1,829
36 +ENSCO International Inc ..................... 1,746
36 Tidewater Inc ............................... 1,629
49 +Weatherford Enterra Inc ..................... 1,470
18 Tosco Corp................................... 1,424
73 +Nabors Industries Inc ....................... 1,405
</TABLE>

Page 34 See notes to financial statements

<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

SCHEDULES OF INVESTMENTS AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
Number
of Shares Security Value
--------- -------- -----
<S> <C> <C>
TOMORROW SHORT-TERM RETIREMENT FUND (CONTINUED)

39 Apache Corp ................................. $1,380
22 Amerada Hess Corp. .......................... 1,273
26 +Smith International Inc ..................... 1,167
21 +BJ Services Co .............................. 1,071
28 Parker & Parsley Petroleum Co ............... 1,029
28 Mapco Inc ................................... 952
28 Valero Energy Corp .......................... 802
75 Ranger Oil Ltd .............................. 741
13 Murphy Oil Corp ............................. 723
31 +Varco International Inc ..................... 717
20 Ultra Diamond Shamrock Corp ................. 632
58 +Parker Drilling Co .......................... 558
10 Helmerich & Payne Inc........................ 521
--------
611,101
--------

FINANCIAL (4.9%)
400 Summit Bankcorp ............................. 17,500
300 Comerica Inc ................................ 15,712
1,000 Avemco Corp ................................. 15,625
900 Kranzco Realty Trust ........................ 15,188
246 American Express Co. ........................ 13,899
314 PHH Corp .................................... 13,502
700 Mid Am Inc .................................. 11,987
400 Paine Webber Group Inc ...................... 11,250
700 Commercial Net Lease Realty ................. 11,113
93 Bankamerica Corp ............................ 9,277
500 State Auto Financial Corp ................... 9,000
500 South West Property Trust ................... 8,437
100 Progressive Corp ............................ 6,738
100 Commerce Bancshares Inc ..................... 4,625
300 Burham Pacific Properties Inc ............... 4,462
200 F & M National Corp ......................... 4,275
300 Hilb, Rogal & Hamilton Co ................... 3,975
300 CRIIMI Mae Inc. ............................. 3,863
200 American Federal Bank ....................... 3,775
200 First Commonwealth Financial
Corp..................................... 3,725
300 First Union Real Estate Trust ............... 3,712
2,100 CRI Liquidating REIT Inc .................... 3,675
300 EMC Insurance Group Inc ..................... 3,600
100 Southtrust Corp ............................. 3,488
300 IRT Property Co ............................. 3,450
65 Lincoln National Corp Ltd. .................. 3,413
45 UNUM Corp ................................... 3,251
32 Loews Corp .................................. 3,016
25 Marsh & McLennan Cos ........................ 2,600
36 Chubb Corp .................................. 1,935
40 National City Corp .......................... 1,795
33 +HealthCare COMPARE Corp ..................... 1,398
29 Bancorp Hawaii Inc. ......................... 1,218
32 Northern Trust Corp ......................... 1,160
20 +Policy Management Systems
Corp..................................... $922
20 U.S. Bancorp ................................ 899
11 Transatlantic Holdings Inc .................. 885
21 Wilmington Trust Co.......................... 830
38 City National Corp .......................... 822
38 USF&G Corp .................................. 793
10 American National Insurance Co. ............. 737
22 Dauphin Deposit Corp ........................ 726
10 Franklin Resource Inc ....................... 684
20 USLife Corp ................................. 665
10 State Street Boston Corp .................... 645
20 Charles Schwab Corp ......................... 640
4 +Echelon International Corp .................. 62
--------
234,949
--------
HEALTH CARE (8.7%)
1,897 Pharmacia & Upjohn Inc....................... 75,169
626 Bristol-Myers Squibb Co. .................... 68,077
1,658 Columbia Healthcare Corp .................... 67,564
1,050 American Home Products Corp. ................ 61,556
740 +Amgen Inc. .................................. 40,237
558 Schering-Plough Corp. ....................... 36,131
300 +HEALTHSOUTH Corp ............................ 11,437
101 Pfizer Inc .................................. 8,370
79 Warner Lambert Co ........................... 5,925
77 Cardinal Health Inc ......................... 4,485
100 Beckman Instruments Inc ..................... 3,837
165 +Tenet Healthcare Corp ....................... 3,609
60 +Boston Scientific Corp ...................... 3,600
300 +Epitope Inc ................................. 3,450
167 +Humana Inc .................................. 3,194
70 +Biogen Inc. ................................. 2,713
29 CPC International Inc. ...................... 2,247
131 Mylan Laboratories Inc ...................... 2,194
39 Mallinckrodt Inc. ........................... 1,721
65 +Value Health Inc. ........................... 1,268
31 +Forest Laboratories Inc ..................... 1,015
28 +Foundation Health Corp ...................... 889
31 +ALZA Corp ................................... 802
22 Allergan Inc. ............................... 784
21 Bausch & Lomb Inc ........................... 746
40 +Chiron Corp.................................. 745
19 +Centocor Inc ................................ 679
30 +Genzyme Corp ................................ 652
24 +Acuson Corp ................................. 585
20 Bard (CR) Inc ............................... 560
44 +Novacare Inc ................................ 484
11 Diagnostic Products Corp .................... 285
--------
415,010
--------
</TABLE>

See notes to financial statements Page 35

<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

SCHEDULES OF INVESTMENTS AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
Number
of Shares Security Value
--------- -------- -----
<S> <C> <C>
TOMORROW SHORT-TERM RETIREMENT FUND (CONTINUED)

TECHNOLOGY (1.5%)
500 Equifax Inc. ................................ $15,312
192 +Dell Computer Corp .......................... 10,200
134 +Cisco Systems Inc ........................... 8,526
64 Intel Corp .................................. 8,380
200 +Bell Industries Inc ......................... 4,275
225 +Loral Space Communications .................. 4,134
106 First Data Corp ............................. 3,869
64 Lucent Technologies Inc ..................... 2,960
60 Raytheon Co ................................. 2,888
41 +Compuware Corp .............................. 2,055
35 +Litton Industries Inc ....................... 1,667
50 +Advanced Micro Devices Inc .................. 1,288
33 +Fiserv Inc .................................. 1,213
47 +Apple Computer Inc .......................... 981
23 +Stratus Computer Inc. ....................... 627
12 +Storage Technology Corp ..................... 571
16 +Structural Dynamics Research
Corp..................................... 320
60 +AST Research Inc ............................ 251
24 +Borland International Inc.................... 130
---------
69,647
---------
TRANSPORTATION (0.5%)
169 Burlington Northern Santa Fe
Corp..................................... 14,597
200 International Shipholding Corp .............. 3,700
34 +Federal Express Corp. ....................... 1,513
37 Alexander & Baldwin Inc ..................... 925
20 Illinois Central Corp ....................... 640
20 +Consolidated Freightways Inc ................ 445
24 Arnold Industries Inc ....................... 381
26 Hunt J B Transportation
Services Inc............................. 364
19 Overseas Shipholding Group .................. 323
10 Consolidated Freightways Corp ............... 89
---------
22,977
---------
UTILITIES (4.0%)
1,200 +Tucson Electric Power Co .................... 19,950
1,000 Cascade Natural Gas Corp .................... 17,000
600 Boston Edison Co. ........................... 16,125
800 Eastern Utilities Association................ 13,900
600 Ohio Edison Co .............................. 13,650
700 United Water Resources Inc .................. 10,938
700 St Joseph Light & Power Co .................. 10,762
177 Southern Co ................................. 4,005
327 Central Maine Power Co. ..................... 3,801
88 Enron Corp .................................. 3,795
200 Empire District Electric .................... 3,750
200 Public Service Co of North
Carolina................................. 3,650
100 New England Electric ........................ $3,487
100 GPU Inc ..................................... 3,362
300 Citizens Utilities Co Cl B .................. 3,338
66 FPL Group Inc. .............................. 3,036
77 Williams Cos Inc ............................ 2,869
68 American Electric Power Co .................. 2,796
140 Edison International ........................ 2,783
100 Illinova Corp ............................... 2,750
119 +Pacific Gas & Electric Co. .................. 2,499
57 Texas Utilities Co .......................... 2,323
76 Allegheny Power System Inc .................. 2,308
63 Florida Progress Corp ....................... 2,032
76 Potomac Electric Power ...................... 1,957
40 Duke Power Co ............................... 1,860
69 Scana Corp .................................. 1,846
54 CMS Energy Corp ............................. 1,816
135 Northeast Utilities ......................... 1,789
52 +CalEnergy Inc ............................... 1,748
84 Pacificorp .................................. 1,722
34 Coastal Corp ................................ 1,662
73 Houston Industries Inc ...................... 1,652
37 Public Service Co of Colorado ............... 1,438
35 Dominion Resources Inc....................... 1,347
45 Entergy Corp................................. 1,249
52 New York State Electric &
Gas Corp................................... 1,124
32 Cinergy Corp. ............................... 1,068
19 Consolidated National Gas Co ................ 1,050
16 Columbia Gas System Inc ..................... 1,018
62 Midamerican Energy Holdings ................. 984
38 Central & South West Corp ................... 975
29 MCN Corp Holdings Co ........................ 837
15 El Paso Natural Gas Co ...................... 758
18 National Fuel Gas Co ........................ 742
24 Brooklyn Union Gas Co ....................... 723
20 Southwestern Public Service ................. 707
27 Puget Sound Power & Light ................... 648
14 Pennsylvania Enterprises Inc ................ 614
27 Montana Power Co ............................ 577
27 AGL Resources Inc ........................... 570
18 Idaho Power Co .............................. 560
15 Hawaiian Electric Industries Inc ............ 542
25 Public Service Co of New
Mexico................................... 491
20 Washington Gas Light Co ..................... 453
13 Indiana Energy Inc .......................... 317
---------
189,753
---------
TOTAL COMMON STOCKS
(Cost $2,551,213).......................... 2,633,725
---------
</TABLE>

Page 36 See notes to financial statements

<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

SCHEDULES OF INVESTMENTS AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
Number
of Shares Security Value
--------- -------- -----
<S> <C> <C>
TOMORROW SHORT-TERM RETIREMENT FUND (CONTINUED)

UNIT INVESTMENT
TRUST (4.7%)
(Cost $223,347)
3,000 Standard & Poor's Depositary
Receipts................................... $221,813
----------
Principal
Amount
------
U.S. GOVERNMENT
OBLIGATIONS (56.4%)
U.S. TREASURY BILL (16.5%)
$800,000 5.148% Due 4/17/97 .......................... 788,458
----------
U.S. TREASURY BOND (5.8%)
270,000 6.875% Due 8/15/25 ......................... 275,316
----------
U.S. TREASURY NOTES (34.1%)
886,000 5.500% Due 11/15/98 ......................... 880,046
739,000 6.500% Due 8/15/05 .......................... 743,737
----------
1,623,783
----------

TOTAL U.S. GOVERNMENT
OBLIGATIONS ($2,688,637).................. 2,687,557
----------
TOTAL INVESTMENTS (116.4%)
(Cost $5,463,197).......................... 5,543,095

LIABILITIES IN EXCESS OF
OTHER ASSETS (-16.4%)...................... (780,425)
----------

TOTAL NET ASSETS (100.0%).................... $4,762,670
==========
</TABLE>

+ Non-incoming producing security.

See notes to financial statements Page 37

<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

STATEMENTS OF ASSETS AND LIABILITIES AT DECEMBER 31, 1996

<TABLE>
<CAPTION>
Core Core Long- Medium- Short-
Large- Small- Term Term Term
Cap Cap Retirement Retirement Retirement
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments at value (+)..................................... $1,562,208 $1,908,577 $1,313,468 $4,029,562 $5,543,095
Cash......................................................... 29,185 82,628 98,368 0 10,204
Receivable for Fund shares sold.............................. 0 0 89,094 438,193 962,406
Receivable for securities sold............................... 0 0 600 1,500 700
Receivable from Adviser...................................... 14,152 11,516 7,490 8,321 4,543
Dividends and interest receivable............................ 2,519 4,150 5,835 21,104 33,446
Deferred organizational expenses and
prepaid expenses......................................... 41,717 41,762 38,625 38,632 38,635
--------- --------- --------- --------- ----------
1,649,781 2,048,633 1,553,480 4,537,312 6,593,029
--------- --------- --------- --------- ----------
LIABILITIES
Payable for investment securities purchased.................. 0 0 217,952 745,197 1,756,290
Payable for Fund shares redeemed............................ 549 5,230 9 137 11
Payable to custodian bank.................................... 0 0 0 32,392 0
Accrued distribution fees payable
(Adviser Shares)......................................... 0 0 210 676 710
Accrued service fees payable
(Institutional Shares)................................... 0 0 184 347 209
Organization costs payable................................... 51,083 51,083 47,200 47,110 47,110
Other accrued expenses....................................... 27,017 24,929 28,034 30,268 26,029
--------- --------- --------- --------- ----------
78,649 81,242 293,589 856,127 1,830,359
--------- --------- --------- --------- ----------
NET ASSETS................................ $1,571,132 $1,967,391 $1,259,891 $3,681,185 $4,762,670
========= ========= ========= ========= =========
NET ASSETS REPRESENTED BY:
Shares of beneficial interest (par $0.001)................... $140 $264 $180 $457 $520
Paid-in surplus.............................................. 1,464,282 1,762,989 1,229,337 3,612,663 4,686,086
Accumulated undistributed/(overdistributed)
net investment income.................................... (1,618) 1,401 (2,127) (1,936) (1,788)
Undistributed/(overdistributed) realized
gains on investments..................................... 157 2,112 (124) (1,462) (2,046)
Net unrealized appreciation on investments................... 108,171 200,625 32,625 71,463 79,898
--------- --------- --------- --------- ----------
NET ASSETS .................................................. $1,571,132 $1,967,391 $1,259,891 $3,681,185 $4,762,670
========= ========= ========= ========= =========
NET ASSET VALUE AND REDEMPTION PRICE
PER SHARE:
ADVISER SHARES:
Net Assets................................................... - - $977,702 $3,416,022 $4,458,598
Shares of beneficial interest issued and
outstanding.............................................. - - 140,044 423,387 486,601
Net asset value per share.................................... - - $6.98 $8.07 $9.16
========= ========= ========= ========= =========
INSTITUTIONAL SHARES:
Net Assets................................................... $1,571,132 $1,967,391 $282,189 $265,163 $304,072
Shares of beneficial interest issued and
outstanding.............................................. 140,123 263,461 40,014 33,733 33,016
Net asset value per share.................................... $11.21 $7.47 $7.05 $7.86 $9.21
========= ========= ========= ========= =========
(+) Investments at cost...................................... 1,454,037 1,707,952 1,280,843 3,958,099 5,463,197

UNREALIZED APPRECIATION/(DEPRECIATION): *
Gross appreciation....................................... 127,114 251,739 49,958 115,060 113,965
Gross depreciation....................................... (18,943) (51,114) (17,333) (43,597) (34,067)
--------- --------- --------- --------- ----------
NET UNREALIZED APPRECIATION.................................. 108,171 200,625 32,625 71,463 79,898
========= ========= ========= ========= =========
* Based on cost of securities for Federal Income tax purposes which does not differ from book cost.
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Page 38 See notes to financial statements
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

STATEMENTS OF OPERATIONS FOR THE PERIOD ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
Core Core Long Medium Short
Large Small Term Term Term
Cap* Cap* Retirement** Retirement** Retirement**
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends.................................................... $20,123 $37,946 $6,931 $15,543 $14,285
Interest..................................................... 182 0 4,085 17,971 23,969
Other........................................................ 2,725 1,622 479 1,272 0
------- ------- ------ ------ ------
23,030 39,568 11,495 34,786 38,254
------- ------- ------ ------ ------
EXPENSES:
Investment advisory fees - Note 5............................ 5,907 9,076 2,533 7,501 7,488
Transfer agent fees and expenses
(Advisor Class)............................................. 0 0 10,042 10,042 10,042
Transfer agent fees and expenses
(Institutional Shares)...................................... 11,000 11,000 9,042 9,042 9,042
Custodian fees and expenses - Note 7......................... 11,028 13,201 8,958 10,132 6,187
Professional fees............................................ 29,000 30,000 28,420 31,576 31,050
Administration fees - Note 5................................. 709 1,089 304 900 899
Shareholders' reports........................................ 4,000 4,500 3,249 4,198 3,600
Fund accounting fees......................................... 25,000 25,000 24,750 24,750 24,750
Registration fees and expenses............................... 46,688 47,466 46,322 48,330 47,215
Trustees' fees and expenses.................................. 6,000 6,000 6,000 6,000 6,000
Amortization of organization costs........................... 9,453 9,453 8,612 8,597 8,597
Distribution fees (Adviser Shares) - Note 5.................. 0 0 1,320 4,325 4,574
Service fees (Institutional Shares) - Note 5................. 0 0 184 338 209
Other expenses............................................... 40 73 18 58 63
------- ------- ------ ------ ------
TOTAL EXPENSES............................................... 148,825 156,858 149,754 165,789 159,716
Less fees waived by Adviser and
Administrator - Note 5...................................... (6,616) (10,165) (2,837) (8,401) (8,387)
Less expenses reimbursed
by Adviser - Note 5......................................... (130,419) (131,089) (140,534) (138,948) (132,675)
Less expenses paid indirectly - Note 7....................... (1,941) (468) (658) (1,269) (1,390)
------- ------- ------ ------ ------
NET EXPENSES................................................. 9,849 15,136 5,725 17,171 17,264
------- ------- ------ ------ ------
NET INVESTMENT INCOME........................................ 13,181 24,432 5,770 17,615 20,990
------- ------- ------ ------ ------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS
Net realized gain on investments............................ 29,755 25,143 7,802 24,377 232
Change in unrealized appreciation on
Investments.............................................. 108,171 200,625 32,625 71,463 79,898
------- ------- ------ ------ ------
NET GAIN ON INVESTMENTS...................................... 137,926 225,768 40,427 95,840 80,130
------- ------- ------ ------ ------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS............................................. $151,107 $250,200 $46,197 $113,455 $101,120
======= ======= ====== ======= =======

* Commencement of operations February 6, 1996.
** Commencement of operations March 7, 1996.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

See notes to financial statements Page 39
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

STATEMENTS OF CHANGES IN NET ASSETS FOR THE PERIOD ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
Core Core Long- Medium- Short-
Large- Small- Term Term Term
Cap* Cap* Retirement** Retirement** Retirement**
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Net investment income................................... $13,181 $24,432 $5,770 $17,615 $20,990
Net realized gain
on investments........................................ 29,755 25,143 7,802 24,377 232
Change in unrealized
appreciation on investments........................... 108,171 200,625 32,625 71,463 79,898
---------- ---------- ---------- --------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS............................. 151,107 250,200 46,197 113,455 101,120
---------- ---------- ---------- --------- ----------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME:
ADVISER SHARES 0 0 (7,897) (11,718) (22,778)
INSTITUTIONAL SHARES (14,799) (23,031) 0 (7,833) 0
---------- ---------- ---------- --------- ----------
TOTAL DIVIDENDS TO
SHAREHOLDERS FROM NET
INVESTMENT INCOME (14,799) (23,031) (7,897) (19,551) (22,778)
---------- ---------- ---------- --------- ----------
DISTRIBUTIONS TO SHAREHOLDERS FROM NET REALIZED GAINS:
ADVISER SHARES 0 0 (6,017) (23,803) (2,278)
INSTITUTIONAL SHARES (29,598) (23,031) (1,909) (2,036) 0
---------- ---------- ---------- --------- ----------
TOTAL DISTRIBUTIONS FROM NET
REALIZED GAINS (29,598) (23,031) (7,926) (25,839) (2,278)
---------- ---------- ---------- --------- ----------
TRANSACTIONS IN SHARES OF
BENEFICIAL INTEREST:
Received on issuance:
Shares sold........................................... 1,720,086 1,801,897 1,256,481 3,739,365 4,786,563
Shares issued in reinvestment
of dividends and distributions 44,396 46,062 15,823 45,391 25,055
Shares redeemed....................................... (400,060) (84,706) (42,787) (171,636) (125,012)
---------- ---------- ---------- --------- ----------
NET INCREASE FROM
CAPITAL SHARE TRANSACTIONS............................ 1,364,422 1,763,253 1,229,517 3,613,120 4,686,606
---------- ---------- ---------- --------- ----------
TOTAL INCREASE
IN NET ASSETS......................................... 1,471,132 1,967,391 1,259,891 3,681,185 4,762,670

NET ASSETS:
Beginning of period..................................... 100,000 0 0 0 0
---------- ---------- ---------- --------- ----------
End of period+.......................................... $1,571,132 $1,967,391 $1,259,891 $3,681,185 $4,762,670
========== ========== ========== ========== ==========
+ Includes undistributed/
(overdistributed) net
investment income................................... ($1,618) $1,401 ($2,127) ($1,936) ($1,788)
========== ========== ========== ========== ==========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

* Commencement of operations February 6, 1996.
** Commencement of operations March 7, 1996.

Page 40 See notes to financial statements
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

NOTES TO FINANCIAL STATEMENTS

1. GENERAL

The Tomorrow Long-Term Retirement Fund ("Long-Term Fund"), Tomorrow Medium-
Term Retirement Fund ("Medium-Term Fund"), Tomorrow Short-Term Retirement Fund
("Short-Term Fund"), Core Large-Cap Fund (Large-Cap Fund") and Core Small-Cap
Fund ("Small -Cap Fund") are separate funds (collectively the "Funds") of the
Tomorrow Funds Retirement Trust (the "Trust"). The Trust is a Delaware business
trust registered under the Investment Company Act of 1940, as amended (the
"Act"), as an open-end investment company. All of the funds are diversified.

The Trust offers two classes of shares: Adviser Class Shares and
Institutional Class Shares. Adviser Shares and Institutional Shares are
substantially the same except that Adviser Shares bear the fees payable under a
plan adopted by the Trust's Board of Trustees pursuant to Rule 12b-1 under the
Act (the "Distribution Plan") at an annual rate of up to 0.50% of the average
daily net assets attributable to the Adviser Shares; Institutional Shares bear
the fees that are payable under a Service Plan (the "Service Plan") at an annual
rate of up to 0.25% of the average daily net assets attributable to the
Institutional Shares. In addition to fees paid pursuant to the Distribution Plan
and Service Plan, each class also bears the expense associated with transfer
agent fees.

Investment income, expenses (other than expenses incurred under the
Distribution Plan, the Service Plan and transfer agent fees and expenses), and
realized and unrealized gains and losses on investments of a Fund are allocated
to the separate classes of shares based upon their relative net asset value on
the date income is earned or expenses and realized and unrealized gains and
losses are incurred.

The Long-Term Fund, Medium-Term Fund and Short-Term Fund first
commenced offering Adviser Shares on March 7, 1996 and Institutional Shares on
April 2, 1996. The Large-Cap Fund and Small-Cap Fund first commenced offering
Institutional shares on February 6, 1996. There are currently no shares
outstanding for the Adviser Class of the Large-Cap Fund and Small-Cap Fund.

2. SIGNIFICANT ACCOUNTING POLICIES

Portfolio Valuation
- -------------------
Common Stock - Securities listed or admitted to trading on a national
securities exchange, including options, are valued at the last sale price on
such exchange as of the close of regular trading on the New York Stock Exchange
("NYSE") on each day that the Funds calculate their net asset values.
Unlisted securities and listed securities for which there are no sales reported
on the valuation date are valued at the mean between the most recent bid and
ask prices.

Bonds - Bonds and other fixed income securities (other than short-term
obligations but including listed issues) in the Funds' portfolios are valued by
a pricing service which utilizes both dealer-supplied valuations and electronic
data processing techniques which take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data, without exclusive reliance upon quoted prices, exchange or
over-the-counter prices, when such valuations are believed to reflect the market
value of such securities.

Money Market Securities - Investments in money market and other short-term
(60 days or less) securities are valued at amortized cost, which has been
determined by the Trust's Board of Trustees to represent the fair market value
of such securities.

Page 41
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

Foreign Securities - Securities listed or admitted to trading
on an international securities exchange, including options, are valued
at the last sale price, at the close of the primary international exchange
on the day that the Fund's calculate their net asset values. Unlisted foreign
securities and listed foreign securities for which there are no sales reported
on the valuation date are valued at the mean between the most recent bid and
asked prices.

Certain risks result from investing in foreign securities in addition to
the usual risk inherent in domestic investments. Such risks include
future political, economical and currency exchange developments
including restrictions and changes in foreign law.

Security Transactions and Investment Income
- -------------------------------------------
Security transactions are recorded on a trade date basis. Realized gains and
losses from security transactions are recorded utilizing the identification
method. Interest income is recognized on an accrual basis and dividend income is
recognized on ex-dividend date. Discounts on fixed income securities are
accreted to interest income over the life of the security or until an applicable
call date if sooner, with a corresponding increase in cost basis.

During the period from inception through December 31, 1996, none of the
Funds in the Trust entered into the following transactions: futures, options,
forward currency contracts or foreign currency transactions.

Federal Income Taxes
- --------------------
Each Fund's policy is to comply with the requirements of the Internal Revenue
Code that are applicable to regulated investment companies and to distribute all
of its taxable income to its shareholders. Accordingly, no federal tax or excise
tax provisions are required.
The federal income tax basis of investments approximates cost.

Distributions to Shareholders
- -----------------------------
Dividends from Net Investment Income - Dividends from net investment income
are declared and paid annually when available for each Fund and are recorded on
ex-dividend date.

Distributions from Capital Gains - Distributions from capital gains are
declared by December 31 of the year in which they are earned and are paid by
January 31 of the following year. However, to the extent that the net realized
gains of a Fund can be offset by capital loss carryovers of that Fund, such
gains will not be distributed.

The amounts of dividends from net investment income and distributions from
net realized gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the composition of net assets based on their federal
tax-basis treatment; temporary differences do not require reclassification.
Dividends and distributions to shareholders which exceed net investment income
and net realized capital gains for financial reporting purposes but not for tax
purposes are reported as dividends in excess of net investment income or net
distributions in excess of net realized gains. To the extent they exceed net
investment income and net realized gains for tax purposes, they are reported as
distributions of capital.

Page 42
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

Use of Estimates
- ----------------
Estimates and assumptions are required to be made regarding assets,
liabilities and changes in net assets resulting from operations when financial
statements are prepared. Changes in the economic environment, financial markets
and any other parameters used in determining these estimates could cause actual
results to differ from these amounts.

3. ORGANIZATIONAL EXPENSES

Weiss, Peck & Greer. L.L.C. ("WPG"), the Funds' investment Adviser, paid the
organizational expenses of the Funds in the amount of approximately $243,000
($51,000 each for the Large-Cap and Small-Cap Funds and $47,000 each for the
Long-Term, Medium-Term and Short-Term Funds). The Funds will reimburse WPG for
these expenses which have been deferred and are being amortized by the Funds on
a straight line method over a period of five years from the commencement of
operations.

4. EXPENSES

The Trust accounts separately for the assets, liabilities and operations of
each Fund. Direct expenses of a Fund are charged to that Fund while general
Trust expenses are allocated among the Trust's respective Funds.

5. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES

The Trust, with respect to each Fund, has entered into an Investment Advisory
Agreement with WPG which entitles WPG to receive a fee, which is accrued daily
and paid monthly, at an annual rate of 0.75% of each Fund's average daily net
assets. WPG voluntarily agreed not to impose its advisory fee applicable to the
Funds for the period ended December 31, 1996.

WPG has agreed to voluntarily limit each Fund's total operating expenses,
(excluding taxes, brokerage commissions, interest, dividends paid on securities
sold short and extraordinary legal fees and expenses) to 1.75% of the average
daily net assets for the Adviser Class Shares and 1.50% of the average daily net
assets for the Institutional class shares. WPG will reduce its advisory fee (but
not below $0) when the total operating expenses exceed these limits.

The Trust has entered into an Administration Agreement with WPG. For its
administrative services, WPG is entitled to receive a fee, which is accrued
daily and paid monthly, at an annual rate of 0.09% of each Fund's average
daily net assets. WPG voluntarily agreed not to impose its administration
services fee applicable to the funds for the period ended December 31, 1996.

The Trust with respect to the Adviser Class of each Fund has adopted a
Distribution Plan pursuant to Rule 12b-1 under the Act. Under the Distribution
Plan, each Fund pays distribution and service fees at an aggregate annual rate
of up to 0.50% of the daily average net assets attributable to the Adviser Class
Shares. Up to 0.25% of this fee is for service fees and is intended to be
compensation for personnel services and/or account maintenance services. The
remaining amount is for distribution fees and is intended to compensate WPG for
its services and expenses associated with serving as principal underwriter of
the Adviser Class. These payments are borne solely by the Adviser Class Shares.
For the period April 2, 1996 through December 31, 1996 payments pursuant to the
Distribution Plan from the Long-Term Fund, Medium-Term Fund and Short-Term Fund
amounted to $1,320, $4,325 and $4,574, respectively. Of these amounts, WPG
earned $670, $2,203 and $2,307, respectively.

Page 43
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

The Trust with respect to the Institutional Class of each Fund has
also adopted a Service Plan (the "Institutional Service Plan") pursuant to which
each Fund has agreed to pay fiduciaries of retirement plans investing in the
Funds a fee for various services and/or account maintenance services relating to
the Institutional Class Shares. The Institutional Service Plan fee is accrued
daily and paid quarterly at an annual rate of up to 0.25% of the average daily
net asset value attributable to the Institutional Class Shares of each Fund, and
is borne solely by the Institutional Class Shares. For the period through
December 31, 1996 payments made pursuant to the Institutional Service Plan from
the Long-Term Fund, Medium-Term Fund and Short-Term Fund amounted to $184, $338
and $209, respectively. No such payments were made for the Large-Cap Fund and
Small-Cap Fund.

6. SECURITIES TRANSACTIONS

Sale proceeds, cost of securities purchased, (excluding short term
investments), total commissions and commissions received by WPG on such
transactions were as follows:

<TABLE>
<CAPTION>
PROCEEDS COST OF COMMISSIONS
OF SECURITIES SECURITIES TOTAL RECEIVED
SOLD PURCHASED COMMISSIONS BY WPG
---- --------- ----------- ------
<S> <C> <C> <C> <C>
Large-Cap* $427,821 $1,854,942 $1,651 $1,645
Small-Cap* 154,436 1,837,244 2,387 2,387
Long-Term** 115,061 1,388,034 846 821
Medium-Term** 296,128 3,810,468 2,094 2,070
Short-Term** 200,718 4,874,544 2,056 2,004
</TABLE>

* For the period February 6, 1996 (commencement of operations ) through
December 31, 1996.
** For the period March 7, 1996 (commencement of operations) through December
31, 1996.

7. CUSTODIAN FEES

Each Fund has entered into an expense offset arrangement with its custodian
wherein it receives credit toward the reduction of custodian fees whenever there
are uninvested cash balances. The Funds' custodian fee and related offset were
as follows:

<TABLE>
<CAPTION>
CUSTODIAN FEE OFFSET CREDIT
------------- -------------
<S> <C> <C>
Large-Cap* $11,028 $1,941
Small-Cap* 13,201 468
Long-Term** 8,958 658
Medium-Term** 10,132 1,269
Short-Term** 6,187 1,390
</TABLE>

The Funds could have invested its cash balances elsewhere if it had not
agreed to a reduction in fees under the expense offset agreement with its
custodian.

* For the period February 6, 1996 (commencement of operations) through December
31, 1996.
** For the period March 7, 1996 (commencement of operations) through
December 31, 1996.

Page 44
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

8. CAPITAL SHARE TRANSACTIONS

Transactions in shares of the Funds were as follows:

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CORE LARGE-CAP
SHARES AMOUNT
------ ------
<S> <C> <C>
INSTITUTIONAL CLASS SHARES*
Sold 161,419 $1,720,086
Reinvested from dividends
and distributions 3,905 44,396
Redeemed (35,201) (400,060)
------- ----------
Net increase 130,123 $1,364,422
------- ----------
</TABLE>

* For the period February 6, 1996 (commencement of operations) through December
31, 1996.
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
CORE SMALL-CAP
SHARES AMOUNT
------ ------
<S> <C> <C>
INSTITUTIONAL CLASS SHARES*
Sold 268,942 $1,801,897
Reinvested from dividends
and distributions 6,191 46,062
Redeemed (11,672) (84,706)
--------- -----------
Net increase 263,461 $1,763,253
--------- -----------
</TABLE>

* For the period February 6, 1996 (commencement of operations) through December
31, 1996.
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
LONG-TERM RETIREMENT
SHARES AMOUNT
------ ------
<S> <C> <C>
ADVISER CLASS SHARES*
Sold 143,309 $977,964
Reinvested from dividends
and distributions 1,985 13,914
Redeemed (5,250) (35,184)
-------- ----------
Net increase - Adviser Class 140,044 956,694
-------- ----------

INSTITUTIONAL CLASS SHARES**
SHARES AMOUNT
------ ------
Sold 40,904 278,517
Reinvested from dividends
and distributions 270 1,909
Redeemed (1,160) (7,603)
-------- ----------
Net increase - Institutional Class 40,014 272,823
-------- ----------
Net increase in Fund 180,058 $1,229,517
-------- ----------
</TABLE>

* For the period March 7, 1996 (commencement of operations) through December
31, 1996.
** For the period April 2, 1996 (commencement of operations) through December
31, 1996.
- --------------------------------------------------------------------------------

Page 45
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

NOTES TO FINANCIAL STATEMENTS - (CONTINUED)

- --------------------------------------------------------------------------------
MEDIUM-TERM RETIREMENT

<TABLE>
<CAPTION>
Shares Amount
------ ------
<S> <C> <C>
ADVISER CLASS SHARES*
Sold 434,251 $3,434,858
Reinvested from dividends
and distributions 4,374 35,521
Redeemed (15,238) (118,433)
-------- ----------
Net increase - Adviser Class 423,387 3,351,946
-------- ----------

INSTITUTIONAL CLASS SHARES**
Sold 39,564 304,507
Reinvested from dividends
and distributions 1,248 9,870
Redeemed (7,079) (53,203)
-------- ----------
Net increase - Institutional Class 33,733 261,174
-------- ----------
Net increase in Fund 457,120 $3,613,120
-------- ----------
</TABLE>

* For the period March 7, 1996 (commencement of operations) through
December 31, 1996.
** For the period April 2, 1996 (commencement of operations) through
December 31, 1996.
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
SHORT-TERM RETIREMENT

<TABLE>
<CAPTION>
Shares Amount
------ ------
<S> <C> <C>
ADVISER CLASS SHARES*
Sold 498,279 $4,497,333
Reinvested from dividends
and distributions 2,714 25,055
Redeemed (14,392) (123,915)
-------- ----------
Net increase - Adviser Class 486,601 4,398,473
-------- ----------

INSTITUTIONAL CLASS SHARES**
Sold 33,138 289,230
Redeemed (122) (1,097)
-------- ----------
Net increase - Institutional Class 33,016 288,133
-------- ----------
Net increase in Fund 519,617 $4,686,606
-------- ----------
</TABLE>

* For the period March 7, 1996 (commencement of operations) through
December 31, 1996.
** For the period April 2, 1996 (commencement of operations) through
December 31, 1996.
- --------------------------------------------------------------------------------

Page 46
<PAGE>

TOMORROW FUNDS RETIREMENT TRUST

FINANCIAL HIGHLIGHTS

$ per share ratios

<TABLE>
<CAPTION>
Net Net Total Dividends Distri- Net
Asset Realized Income From butions Asset
Value at Net and From Net from Total Value at
Beginning Investment Unrealized Investment Investment Capital Distri- End of
of Period Income Gains Operations Income Gains butions Period
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Large-Cap - Institutional Shares
For the period February 6, 1996*
through December 31, 1996 10.00 0.10 1.24 1.34 (0.11) (0.02) (0.13) $11.21

Small-Cap - Institutional Shares
For the period February 6, 1996*
through December 31, 1996 6.50 0.10 1.05 1.15 (0.09) (0.09) (0.18) 7.47

Long-Term Retirement
Adviser Shares
For the period March 7, 1996*
through December 31, 1996 6.50 0.04 0.55 0.59 (0.06) (0.05) (0.11) 6.98

Institutional Shares
For the period April 2, 1996*
through December 31, 1996 6.51 0.04 0.55 0.59 0.00 (0.05) (0.05) 7.05

Medium-Term Retirement
Adviser Shares
For the period March 7, 1996*
through December 31, 1996 7.50 0.04 0.63 0.67 (0.03) (0.07) (0.10) 8.07

Institutional Shares
For the period April 2, 1996*
through December 31, 1996 7.53 0.10 0.55 0.65 (0.25) (0.07) (0.32) 7.86

Short-Term Retirement
Adviser Shares
For the period March 7, 1996*
through December 31, 1996 8.50 0.06 0.72 0.78 (0.06) (0.06) (0.12) 9.16

Institutional Shares
For the period March 7, 1996*
through December 31, 1996 8.51 0.00 0.70 0.70 0.00 0.00 0.00 9.21

Ratio information
assuming no fee waivers,
reimbursements or
Ratio of custody fee
Ratio of Net earnings credit receive
-------------------------
Expenses Income to Ratio of Ratio of
Net To Average Average Portfolio Average Expenses Net Income
Total Assets Net Net Turnover Commissions To Average To Average
Return++ (000's) Assets+ Assets+ Rate Per Share Net Assets+ Net Assets+
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Large-Cap - Institutional Shares
For the period February 6, 1996*
through December 31, 1996 15.35% $1,571 1.25% 1.67% 48.62% $0.035 18.89% -15.97%

Small-Cap - Institutional Shares
For the period February 6, 1996*
through December 31, 1996 17.70% 1,967 1.25% 2.02% 11.46% 0.035 12.96% -9.69%

Long-Term Retirement
Adviser Shares
For the period March 7, 1996*
through December 31, 1996 9.08% 978 1.75% 1.63% 25.09% 0.035 45.36% -41.98%

Institutional Shares
For the period April 2, 1996*
through December 31, 1996 9.03% 282 1.50% 1.97% 25.09% 0.035 40.49% -37.02%

Medium-Term Retirement
Adviser Shares
For the period March 7, 1996*
through December 31, 1996 8.89% 3,416 1.75% 1.73% 22.56% 0.035 15.88% -12.40%

Institutional Shares
For the period April 2, 1996*
through December 31, 1996 8.54% 265 1.50% 1.96% 22.56% 0.035 20.86% -17.40%

Short-Term Retirement
Adviser Shares
For the period March 7, 1996*
through December 31, 1996 8.54% 4,459 1.75% 2.08% 14.16% 0.035 15.68% -11.85%

Institutional Shares
For the period March 7, 1996*
through December 31, 1996 8.23% 304 1.50% 2.31% 14.16% 0.035 19.10% -15.29%
</TABLE>

+ Annualized.
++ Not annualized.
* Commencement of operations.

See notes to financial statements.

Page 47
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Shareholders and Board of Trustees of:

CORE LARGE-CAP STOCK FUND
CORE SMALL-CAP STOCK FUND
TOMORROW LONG-TERM RETIREMENT FUND
TOMORROW MEDIUM-TERM RETIREMENT FUND
TOMORROW SHORT-TERM RETIREMENT FUND

We have audited the accompanying statements of assets and liabilities, including
the schedules of investments of Core Large-Cap Stock Fund, Core Small-Cap Stock
Fund, Tomorrow Long-Term Retirement Fund, Tomorrow Medium-Term Retirement Fund
and Tomorrow Short-Term Retirement Fund as of December 31, 1996, and the related
statements of operations, changes in net assets and financial highlights for the
period February 6, 1996 (commencement of operations) to December 31, 1996 for
the Core Large-Cap Stock Fund and Core Small-Cap Stock Fund and for the period
March 7, 1996 (commencement of operations) to December 31, 1996 for the Tomorrow
Long-Term Retirement Fund, Tomorrow Medium-Term Retirement Fund and Tomorrow
Short-Term Retirement Fund. These financial statements and financial highlights
are the responsibility of the Funds' management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodian and other appropriate
audit procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Core
Large-Cap Stock Fund, Core Small-Cap Stock Fund, Tomorrow Long-Term Retirement
Fund, Tomorrow Medium-Term Retirement Fund and Tomorrow Short-Term Retirement
Fund as of December 31, 1996, the results of their operations, changes in net
assets and financial highlights for the period February 6, 1996 (commencement of
operations) to December 31, 1996 for the Core Large-Cap Stock Fund and Core
Small-Cap Stock Fund and for the period March 7, 1996 (commencement of
operations) to December 31, 1996 for the Tomorrow Long-Term Retirement Fund,
Tomorrow Medium-Term Retirement Fund and Tomorrow Short-Term Retirement Fund, in
conformity with generally accepted accounting principles.

KPMG Peat Marwick LLP

New York, New York
January 15, 1997
<PAGE>

TOMORROW FUNDS
--------------

RETIREMENT TRUST

A Lifecycle Retirement Program
------------------------------------------
ONE NEW YORK PLAZA, NEW YORK, NY 1004
(800) 223-3332

INDEPENDENT TRUSTEES AND MEMBERS INVESTMENT ADVISER
OF AUDIT COMMITTEE Weiss, Peck & Greer, L.L.C.
Raymond R. Herrmann, Jr. One New York Plaza
Lawrence J. Israel New York, NY 10004

CUSTODIAN
OFFICERS Boston Safe Deposit and Trust Company
ROGER J. WEISS One Exchange Place
Chairman of the Board, President Boston, MA 02109
and Trustee

JAY C. NADEL DIVIDEND DISBURSING AND
Executive Vice President TRANSFER AGENT
and Treasurer First Data Investor Services Group, Inc.
440 Computer Drive
FRANCIS H. POWERS Westboro, MA 01581-5120
Executive Vice President
and Treasurer
LEGAL COUNSEL
DANIEL CARDELL Hale and Dorr
Vice President 60 State Street
Boston, MA 02109
STEPHEN GRESHAM
Vice President INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
ARLEN S. ORANSKY 345 Park Avenue
Vice President New York, NY 10154

JOSEPH J. REARDON
Vice President

DANIEL S. VANDIVORT
Vice President

JOSEPH PARASCONDOLA
Assistant Vice President

This report is submitted for general information of shareholders and is not
authorized for distribution to prospective investors unless preceded or
accompanied by an effective prospectus. Nothing herein is to be considered an
offer of sale or solicitation of an offer to buy shares of the Tomorrow Funds
Retirement Trust. Such offering is made only by prospectus, which includes
details as to offering and other material information.
<PAGE>

PRESIDENT'S MESSAGE
- --------------------------------------------------------------------------------

Dear Fellow Shareholder:

I am pleased to present the Annual Report to Shareholders for Federated
American Leaders Fund II, a portfolio of Federated Insurance Series.

This report covers the 12-month period from January 1, 1996 through December
31, 1996. It begins with a commentary by the fund's portfolio manager, which
is followed by a complete listing of the fund's holdings and its financial
statements.

As a shareholder, your money has been at work in a portfolio of
approximately 75 leading American corporations across 12 key business and
industrial sectors.

In the continued favorable stock market, the fund's portfolio performed very
well. Contributing to the strong total return of 21.58% were income
distributions of $0.18 per share, capital gains distributions of $0.09 per
share, and a significant 19% increase in net asset value.* Over the
reporting period, fund net assets nearly tripled to reach $142.2 million.

Thank you for participating in the long-term growth opportunities of
American companies through Federated American Leaders Fund II. We trust you
were pleased with the positive performance of your investment. As always, we
welcome your comments and suggestions.

Sincerely,

/s/ J. Christopher Donahue

J. Christopher Donahue
President
February 15, 1997

* Performance quoted represents past performance and is not indicative of
future performance. Investment return and principal value will fluctuate, so
that an investor's shares, when redeemed, may be worth more or less than
their original cost. Performance information does not reflect the charges and
expenses of a variable annuity or variable life insurance contract.

1
<PAGE>

FEDERATED AMERICAN LEADERS FUND II
- --------------------------------------------------------------------------------

MANAGEMENT DISCUSSION AND ANALYSIS

The Standard & Poor's 500 Stock Index ("S&P 500")* registered a total return
of 8.34% for the fourth quarter of 1996, and 22.96% for the full year 1996.
For the two-year period ended December 31, 1996, the total return for the
S&P 500 was 69.17%, making 1995-1996 one of the strongest two-year periods
in the past 50 years. Major indices continued to reach new all time highs in
the fourth quarter as investors reacted positively to election results and
the favorable economic environment including moderate growth, subdued
inflation, stable interest rates and rising corporate profits.

Our forecast for the economy for 1997 is for this environment to continue
with real Gross Domestic Product growth of roughly 2.5% and corporate profit
increases of 5% to 7%. Net inflows into the U.S. stock market should remain
strong, especially into mutual funds. With the market strength of the past
two years, many traditional measures of value suggest the market may have
reached levels of over-valuation. We share some of these concerns. However,
a multiple of 17 times estimated 1997 earnings for the S&P 500 does not seem
unreasonable in the current economic environment, and we see many factors
which are very positive for U.S. equities. The U.S. is the world leader in
information technology, which has helped us to become an export powerhouse
as world markets are expanding more rapidly.

While we do not attempt to time the market, we recognize we are in a higher
risk market environment despite the positives which we can identify.
Therefore, our current strategy is more defensive than that of six months
ago. The current portfolio is well diversified among the 12 market sectors
with modest overweights in energy and utilities. The technology sector is
slightly underweighted. The current structure is consistent with our value
and momentum disciplines which reflect few areas of compelling mis-valuation.

For 1996, the Federated American Leaders Fund II portfolio had a total
return of 21.58%.** While falling short of the S&P 500, the fund's
performance was competitive with other growth and income funds. Market
strength in 1996 was more concentrated in large capitalization stocks that
dominate the S&P 500, particularly in the latter half of the year. While we
want to own stocks of America's leading companies, we pay close attention to
valuation, which causes us to sell or avoid some large well-known stocks
with high price to earnings ratios, in favor of more attractively valued
companies.

Although we have become more selective, we believe the market still offers
good investment values in certain types of stocks. We particularly favor
companies which are restructuring and/or will be beneficiaries of industry
consolidation as is occurring in aerospace and banking. Lockheed Martin and
Chase Manhattan are good examples of these themes. We also favor dominant
companies which are both domestic and global leaders such as General
Electric and General Motors.

* The Standard & Poor's 500 Stock Index, a composite index of common stocks in
industry, transportation, and financial and public utility companies, can be
used to compare to the total returns of funds whose portfolios are invested
primarily in common stocks. This index is unmanaged and actual investments
cannot be made in an index.

** Performance quoted represents past performance and is not indicative of
future performance. Investment return and principal value will fluctuate so
that an investor's shares, when redeemed, may be worth more or less than
their original cost. Performance information does not reflect the charges and
expenses of a variable annuity or variable life insurance contract.

2
<PAGE>

FEDERATED AMERICAN LEADERS FUND II
- --------------------------------------------------------------------------------

GROWTH OF $10,000 INVESTED IN THE FEDERATED AMERICAN LEADERS FUND II

The graph below illustrates the hypothetical investment of $10,000 in the
Federated American Leaders Fund II (the "Fund") from February 10, 1994
(start of performance) to December 31, 1996, compared to the Standard and
Poor's 500 Index (S&P 500)+ and the Lipper Growth and Income Funds Average
(LGIFA).++

Graphic representation omitted; see Appendix A.

AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED DECEMBER 31, 1996

<TABLE>
<S> <C>
1 Year.............................................21.58%
Start of Performance (2/10/94).....................18.03%
</TABLE>

* The Fund's performance assumes the reinvestment of all dividends and
distributions. The S&P 500 and the LGIFA have been adjusted to reflect
reinvestment of dividends on securities in the index and average.

+ The S&P 500 is not adjusted to reflect sales charges, expenses, or other fees
that the SEC requires to be reflected in the Fund's performance. The index is
unmanaged.

++ The LGIFA represents the average of the total returns reported by all of the
mutual funds designated by Lipper Analytical Services, Inc. as falling into
the category, and is not adjusted to reflect any sales charges. However,
these total returns are reported net of expenses or other fees that the SEC
requires to be reflected in a fund's performance.

3
<PAGE>

FEDERATED AMERICAN LEADERS FUND II
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
SHARES VALUE
- ---------- ------------------------------------------------------- ---------------
COMMON STOCKS -- 94.3%
- --------------------------------------------------------------------
<S> <C>
BASIC INDUSTRY -- 6.6%
-----------------------------------------------------
20,400 Betzdearborn, Inc. $ 1,193,400
-----------------------------------------------------
28,000 Consolidated Papers, Inc. 1,375,500
-----------------------------------------------------
27,500 Great Lakes Chemical Corp. 1,285,625
-----------------------------------------------------
35,000 International Paper Co. 1,413,125
-----------------------------------------------------
37,500 Monsanto Co. 1,457,812
-----------------------------------------------------
65,000 Morton International, Inc. 2,648,750
----------------------------------------------------- ---------------
Total 9,374,212
----------------------------------------------------- ---------------
CONSUMER DURABLES -- 3.1%
-----------------------------------------------------
37,500 General Motors Corp. 2,090,624
-----------------------------------------------------
101,500 Rubbermaid, Inc. 2,309,125
----------------------------------------------------- ---------------
Total 4,399,749
----------------------------------------------------- ---------------
CONSUMER NON-DURABLES -- 12.9%
-----------------------------------------------------
24,800 Avon Products, Inc. 1,416,700
-----------------------------------------------------
32,000 CPC International, Inc. 2,480,000
-----------------------------------------------------
52,500 Heinz (H.J.) Co. 1,876,875
-----------------------------------------------------
73,000 IBP, Inc. 1,770,250
-----------------------------------------------------
37,000 Kimberly-Clark Corp. 3,524,250
-----------------------------------------------------
23,000 Philip Morris Cos., Inc. 2,590,375
-----------------------------------------------------
35,000 Tambrands, Inc. 1,430,624
-----------------------------------------------------
18,400 Unilever N.V., ADR 3,224,600
----------------------------------------------------- ---------------
Total 18,313,674
----------------------------------------------------- ---------------
ENERGY MINERALS -- 9.0%
-----------------------------------------------------
18,900 Chevron Corp. 1,228,500
-----------------------------------------------------
16,000 Exxon Corp. 1,568,000
-----------------------------------------------------
10,000 Mobil Corp. 1,222,500
-----------------------------------------------------
50,000 Occidental Petroleum Corp. 1,168,750
-----------------------------------------------------
10,000 Royal Dutch Petroleum Co., ADR 1,707,500
-----------------------------------------------------
</TABLE>

4
<PAGE>

FEDERATED AMERICAN LEADERS FUND II
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
SHARES VALUE
- --------- ----------------------------------------------------- ---------------
COMMON STOCKS -- CONTINUED
- --------------------------------------------------------------------
<S> <C>
ENERGY MINERALS -- CONTINUED
-----------------------------------------------------
13,000 Texaco, Inc. $ 1,275,625
-----------------------------------------------------
65,000 USX Marathon Group 1,551,875
-----------------------------------------------------
62,662 Union Pacific Resources Group, Inc. 1,832,864
-----------------------------------------------------
28,600 Unocal Corp. 1,161,874
----------------------------------------------------- --------------
Total 12,717,488
----------------------------------------------------- --------------
FINANCE -- 13.0%
-----------------------------------------------------
45,000 Aflac, Inc. 1,923,750
-----------------------------------------------------
25,508 Allstate Corp. 1,476,276
-----------------------------------------------------
12,500 CIGNA Corp. 1,707,813
-----------------------------------------------------
17,000 Chase Manhattan Corp. 1,517,250
-----------------------------------------------------
13,000 Citicorp 1,339,000
-----------------------------------------------------
19,600 Dean Witter, Discover & Co. 1,298,500
-----------------------------------------------------
56,500 Federal National Mortgage Association 2,104,625
-----------------------------------------------------
23,000 Marsh & McLennan Cos., Inc. 2,392,000
-----------------------------------------------------
26,000 National City Corp. 1,166,750
-----------------------------------------------------
25,000 Republic New York Corp. 2,040,625
-----------------------------------------------------
33,533 Travelers Group, Inc. 1,521,560
----------------------------------------------------- --------------
Total 18,488,149
----------------------------------------------------- --------------
HEALTH CARE -- 10.0%
-----------------------------------------------------
42,500 Abbott Laboratories 2,156,875
-----------------------------------------------------
26,500 American Home Products Corp. 1,553,563
-----------------------------------------------------
30,000 Bausch & Lomb, Inc. 1,050,000
-----------------------------------------------------
90,000 (a)Biomet, Inc. 1,361,250
-----------------------------------------------------
22,000 Bristol-Myers Squibb Co. 2,392,500
-----------------------------------------------------
47,700 Columbia/HCA Healthcare Corp. 1,943,775
-----------------------------------------------------
70,800 (a)Healthsource, Inc. 929,250
-----------------------------------------------------
19,000 Merck & Co., Inc. 1,505,750
-----------------------------------------------------
30,000 United Healthcare Corp. 1,350,000
----------------------------------------------------- --------------
Total 14,242,963
----------------------------------------------------- --------------
</TABLE>

5
<PAGE>

FEDERATED AMERICAN LEADERS FUND II
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
SHARES VALUE
- ----------- ------------------------------------------------------ -------------
COMMON STOCKS -- CONTINUED
- --------------------------------------------------------------------
<S> <C>
PRODUCER MANUFACTURING -- 5.4%
-----------------------------------------------------
17,800 General Electric Co. $ 1,759,975
-----------------------------------------------------
41,500 Ingersoll-Rand Co. 1,846,750
-----------------------------------------------------
14,200 Loews Corp. 1,338,350
-----------------------------------------------------
28,500 Textron, Inc. 2,686,125
----------------------------------------------------- -----------
Total 7,631,200
----------------------------------------------------- -----------
RETAIL TRADE -- 4.7%
-----------------------------------------------------
43,900 Dayton-Hudson Corp. 1,723,075
-----------------------------------------------------
52,000 Dillard Department Stores, Inc., Class A 1,605,500
-----------------------------------------------------
30,000 Sears, Roebuck & Co. 1,383,750
-----------------------------------------------------
85,000 Wal-Mart Stores, Inc. 1,944,375
----------------------------------------------------- -----------
Total 6,656,700
----------------------------------------------------- -----------
SERVICES -- 4.9%
-----------------------------------------------------
71,500 Block (H&R), Inc. 2,073,500
-----------------------------------------------------
96,500 Browning-Ferris Industries, Inc. 2,533,125
-----------------------------------------------------
14,000 Disney (Walt) Co. 974,750
-----------------------------------------------------
19,000 Gannett Co., Inc. 1,422,625
----------------------------------------------------- -----------
Total 7,004,000
----------------------------------------------------- -----------
TECHNOLOGY -- 10.9%
-----------------------------------------------------
38,500 AMP, Inc. 1,477,438
-----------------------------------------------------
6,900 Automatic Data Processing, Inc. 295,838
-----------------------------------------------------
1,050 Boeing Co. 111,694
-----------------------------------------------------
45,500 Electronic Data Systems Corp. 1,967,875
-----------------------------------------------------
40,000 General Motors Corp., Class H 2,250,000
-----------------------------------------------------
26,400 Hewlett-Packard Co. 1,326,600
-----------------------------------------------------
14,000 Intel Corp. 1,833,125
-----------------------------------------------------
13,900 International Business Machines Corp. 2,098,900
-----------------------------------------------------
9,270 Lockheed Martin Corp. 848,205
-----------------------------------------------------
28,560 Lucent Technologies, Inc. 1,320,900
-----------------------------------------------------
25,000 Rockwell International Corp. 1,521,875
-----------------------------------------------------
9,000 (a)Solectron Corp. 480,375
----------------------------------------------------- -----------
Total 15,532,825
----------------------------------------------------- -----------
</TABLE>

6
<PAGE>

FEDERATED AMERICAN LEADERS FUND III
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
SHARES VALUE
- ------------ ---------------------------------------------------------- --------------
<S> <C>
COMMON STOCKS -- CONTINUED
- -------------------------------------------------------------------------
TRANSPORTATION -- 0.9%
----------------------------------------------------------
15,000 (a)AMR Corp. $ 1,321,874
---------------------------------------------------------- ------------
UTILITIES -- 12.9%
----------------------------------------------------------
34,500 AT&T Corp. 1,500,750
----------------------------------------------------------
30,000 (a)Columbia Gas System, Inc. 1,908,750
----------------------------------------------------------
44,100 Enron Corp. 1,901,813
----------------------------------------------------------
28,000 FPL Group, Inc. 1,288,000
----------------------------------------------------------
47,000 GTE Corp. 2,138,500
----------------------------------------------------------
101,000 MCI Communications Corp. 3,301,438
----------------------------------------------------------
109,100 Pacific Gas & Electric Co. 2,291,100
----------------------------------------------------------
76,000 Pacific Telesis Group 2,793,000
----------------------------------------------------------
55,600 Southern Co. 1,257,950
---------------------------------------------------------- ------------
Total 18,381,301
---------------------------------------------------------- ------------
TOTAL COMMON STOCKS (IDENTIFIED COST $117,159,609) 134,064,135
---------------------------------------------------------- ------------
PREFERRED STOCKS -- 1.7%
- -------------------------------------------------------------------------
TECHNOLOGY -- 1.7%
----------------------------------------------------------
30,600 Microsoft Corp., Conv. Pfd. (IDENTIFIED COST $2,444,175) 2,451,825
---------------------------------------------------------- ------------
(B)REPURCHASE AGREEMENTS -- 3.6%
- -------------------------------------------------------------------------
$ 5,130,000 BT Securities Corporation, 6.90%, dated 12/31/1996,
due 1/2/1997 (AT AMORTIZED COST) 5,130,000
---------------------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST $124,733,784)(C) $141,645,960
---------------------------------------------------------- ============
</TABLE>

(a) Non-income producing security.

(c) The cost of investments for federal tax purposes amounts to $124,736,051.
The net unrealized appreciation of investments on a federal tax basis
amounts to $16,909,909 which is comprised of $18,525,108 appreciation and
$1,615,199 depreciation at December 31, 1996.

Note: The categories of investments are shown as a percentage of net assets
($142,216,464) at December 31, 1996.

The following acronyms are used throughout this portfolio:

ADR -- American Depositary Receipt

(See Notes which are an integral part of the Financial Statements)

7
<PAGE>

FEDERATED AMERICAN LEADERS FUND II
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
- ------------------------------------------------------------------------------------
Total investments in securities, at value (identified cost, $124,733,784
and tax cost, $124,736,051) $ 141,645,960
- ------------------------------------------------------------------------------------
Cash 15,361
- ------------------------------------------------------------------------------------
Income receivable 320,777
- ------------------------------------------------------------------------------------
Receivable for investments sold 521,723
- ------------------------------------------------------------------------------------
Receivable for shares sold 516,775
- ------------------------------------------------------------------------------------ ===============
Total assets $143,020,596
- ------------------------------------------------------------------------------------
LIABILITIES:
- -----------------------------------------------------------------------
Payable for investments purchased $ 544,984
- -----------------------------------------------------------------------
Payable for shares redeemed 249,683
- -----------------------------------------------------------------------
Accrued expenses 9,465
- ------------------------------------------------------------------------ ----------
Total liabilities 804,132
- ------------------------------------------------------------------------------------ ===============
Net Assets for 9,322,235 shares outstanding $ 142,216,464
- ------------------------------------------------------------------------------------ ===============
NET ASSETS CONSIST OF:
- ------------------------------------------------------------------------------------
Paid in capital $ 121,468,683
- ------------------------------------------------------------------------------------
Net unrealized appreciation of investments 16,912,176
- ------------------------------------------------------------------------------------
Accumulated net realized gain on investments 3,724,287
- ------------------------------------------------------------------------------------
Undistributed net investment income 111,318
- ------------------------------------------------------------------------------------ ===============
Total Net Assets $ 142,216,464
- ------------------------------------------------------------------------------------ ===============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
$142,216,464 / 9,322,235 shares outstanding $15.26
- ------------------------------------------------------------------------------------ ===============
</TABLE>

(See Notes which are an integral part of the Financial Statements)

8
<PAGE>

FEDERATED AMERICAN LEADERS FUND II
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
- ------------------------------------------------------------------------------------
Dividends $ 1,888,201
- ------------------------------------------------------------------------------------
Interest 323,745
- ------------------------------------------------------------------------------------ ============
Total income 2,211,946
- ------------------------------------------------------------------------------------
EXPENSES:
- -----------------------------------------------------------------------
Investment advisory fee $ 693,045
- -----------------------------------------------------------------------
Administrative personnel and services fee 125,000
- -----------------------------------------------------------------------
Custodian fees 26,802
- -----------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 18,072
- -----------------------------------------------------------------------
Directors'/Trustees' fees 1,936
- -----------------------------------------------------------------------
Auditing fees 10,000
- -----------------------------------------------------------------------
Legal fees 2,920
- -----------------------------------------------------------------------
Portfolio accounting fees 44,751
- -----------------------------------------------------------------------
Share registration costs 24,823
- -----------------------------------------------------------------------
Printing and postage 30,939
- -----------------------------------------------------------------------
Insurance premiums 3,303
- -----------------------------------------------------------------------
Miscellaneous 11,527
- ----------------------------------------------------------------------- ==========
Total expenses 993,118
- -----------------------------------------------------------------------
Waivers --
- -----------------------------------------------------------------------
Waiver of investment advisory fee (203,603)
- ----------------------------------------------------------------------- ==========
Net expenses 789,515
- ----------------------------------------------------------------------------------- ============
Net investment income 1,422,431
- ----------------------------------------------------------------------------------- ============
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- -----------------------------------------------------------------------------------
Net realized gain on investments 3,780,324
- -----------------------------------------------------------------------------------
Net change in unrealized appreciation of investments 12,783,766
- ----------------------------------------------------------------------------------- ============
Net realized and unrealized gain on investments 16,564,090
- ----------------------------------------------------------------------------------- ============
Change in net assets resulting from operations $ 17,986,521
- ----------------------------------------------------------------------------------- ============
</TABLE>

(See Notes which are an integral part of the Financial Statements)

9
<PAGE>

FEDERATED AMERICAN LEADERS FUND II
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995
------------- ---------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ----------------------------------------------------------------------------------------------
OPERATIONS --
- ----------------------------------------------------------------------------------------------
Net investment income $ 1,422,431 $ 385,529
- ----------------------------------------------------------------------------------------------
Net realized gain (loss) on investments ($3,738,194 and
$460,510 net gains, respectively, as computed for federal tax purposes) 3,780,324 418,832
- ----------------------------------------------------------------------------------------------
Net change in unrealized appreciation of investments 12,783,766 4,129,761
- ---------------------------------------------------------------------------------------------- ------------ -----------
Change in net assets resulting from operations 17,986,521 4,934,122
- ---------------------------------------------------------------------------------------------- ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS --
- ----------------------------------------------------------------------------------------------
Distributions from net investment income (1,311,113) (386,024)
- ----------------------------------------------------------------------------------------------
Distributions in excess of net investment income -- (10,010)
- ----------------------------------------------------------------------------------------------
Distributions from net realized gains (450,672) --
- ---------------------------------------------------------------------------------------------- ------------ -----------
Change in net assets resulting from distributions to shareholders (1,761,785 (396,034)
- ---------------------------------------------------------------------------------------------- ------------ -----------
SHARE TRANSACTIONS --
- ----------------------------------------------------------------------------------------------
Proceeds from sale of shares 89,014,893 45,176,314
- ----------------------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment
of distributions declared 1,761,418 396,398
- ----------------------------------------------------------------------------------------------
Cost of shares redeemed (13,298,117) (3,997,296)
- ---------------------------------------------------------------------------------------------- ------------ -----------
Change in net assets resulting from share transactions 77,478,194 41,575,416
- ---------------------------------------------------------------------------------------------- ------------ -----------
Change in net assets 93,702,930 46,113,504
- ----------------------------------------------------------------------------------------------
NET ASSETS:
- ----------------------------------------------------------------------------------------------
Beginning of period 48,513,534 2,400,030
- ---------------------------------------------------------------------------------------------- ------------ -----------
End of period (including undistributed net investment
income of $111,318 and $0, respectively) $142,216,464 $48,513,534
- ---------------------------------------------------------------------------------------------- ============ ===========
</TABLE>

(See Notes which are an integral part of the Financial Statements)

10
<PAGE>

FEDERATED AMERICAN LEADERS FUND II
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------

1996 1995 1994(A)
--------- ---------- -----------

<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 12.80 $ 9.74 $ 10.00
- -------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------------------------------
Net investment income 0.19 0.20 0.19
- -------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 2.54 3.06 (0.26)
- ------------------------------------------------------------------------------------------- -------- ------- ---------
Total from investment operations 2.73 3.26 (0.07)
- ------------------------------------------------------------------------------------------- -------- ------- ---------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------------------------------
Distributions from net investment income (0.18) (0.19) (0.19)
- -------------------------------------------------------------------------------------------
Distributions in excess of net investment income(b) -- (0.01) --
- -------------------------------------------------------------------------------------------
Distributions from net realized gain on investments (0.09) -- --
- ------------------------------------------------------------------------------------------- -------- ------- --------
Total distributions (0.27) (0.20) (0.19)
- ------------------------------------------------------------------------------------------- -------- ------- --------
NET ASSET VALUE, END OF PERIOD $ 15.26 $ 12.80 $ 9.74
- ------------------------------------------------------------------------------------------- ======== ======= ========
TOTAL RETURN(C) 21.58% 33.71% (0.70)%
- -------------------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -------------------------------------------------------------------------------------------
Expenses 0.85% 0.85% 0.54%*
- -------------------------------------------------------------------------------------------
Net investment income 1.54% 2.03% 2.58%*
- -------------------------------------------------------------------------------------------
Expense waiver/reimbursement(d) 0.22% 1.36% 25.42%*
- -------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $142,216 $48,514 $ 2,400
- -------------------------------------------------------------------------------------------
Average commission rate paid(e) $ 0.0012 -- --
- -------------------------------------------------------------------------------------------
Portfolio turnover 90% 43% 32%
- -------------------------------------------------------------------------------------------
</TABLE>

* Computed on an annualized basis.

(a) Reflects operations for the period from February 10, 1994 (date of initial
public investment) to December 31, 1994. For the period from December 9,
1993 (start of business) to January 31, 1994, the Fund had no investment
activity.

(b) Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principals. These
distributions do not represent a return of capital for federal income tax
purposes.

(c) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.

(d) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.

(e) Represents total commissions paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.

(See Notes which are an integral part of the Financial Statements)

11
<PAGE>

FEDERATED AMERICAN LEADERS FUND II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------

1. ORGANIZATION

Federated Insurance Series (the "Trust") is registered under the Investment
Company Act of 1940, as amended (the "Act") as an open-end, management
investment company. The Trust consists of eight portfolios. The financial
statements included herein are only those of Federated American Leaders Fund
II (the "Fund"), a diversified portfolio. The financial statements of the
other portfolios are presented separately. The assets of each portfolio are
segregated and a shareholder's interest is limited to the portfolio in which
shares are held. The primary investment objective of the Fund is to achieve
long-term growth of capital. The Fund's secondary objective is to provide
income.

Effective April 15, 1996, the Board of Trustees ("Trustees") changed the
name of the Trust from Insurance Management Series to Federated Insurance
Series and the name of the Fund from Equity Growth and Income Fund to
Federated American Leaders Fund II.

2. SIGNIFICANT ACCOUNTING POLICIES

INVESTMENT VALUATIONS -- Listed equity securities are valued at the last
sale price reported on a national securities exchange. Short-term
securities are valued at the prices provided by an independent pricing
service. However, short-term securities with remaining maturities of sixty
days or less at the time of purchase may be valued at amortized cost, which
approximates fair market value.

INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS -- Interest income and
expenses are accrued daily. Bond premium and discount, if applicable, are
amortized as required by the Internal Revenue Code, as amended (the
"Code"). Dividend income and distributions to shareholders are recorded on
the ex-dividend date.

12
<PAGE>

FEDERATED AMERICAN LEADERS FUND II
- --------------------------------------------------------------------------------
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These differences are primarily due to differing treatments for
short term capital gain distributions. The following reclassifications have
been made to the financial statements.

INCREASE (DECREASE)
-----------------------------------------
ACCUMULATED NET UNDISTRIBUTED NET
REALIZED GAIN/LOSS INVESTMENT INCOME
-----------------------------------------
($10,010) $10,010

Net investment income, net realized gains/losses, and net assets were not
affected by this reclassification.

OTHER -- Investment transactions are accounted for on the trade date.

3. SHARES OF BENEFICIAL INTEREST

The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest (without par value).

Transactions in shares were as follows:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1996 1995
--------- ----------
<S> <C> <C>
Shares sold 6,346,064 3,870,639
- ----------------------------------------------------------
Shares issued to shareholders in payment of
distributions declared 124,400 32,670
- ----------------------------------------------------------
Shares redeemed (938,427) (359,502)
- ---------------------------------------------------------- ----------- ----------
Net change resulting from share transactions 5,532,037 3,543,807
- ---------------------------------------------------------- =========== ==========
</TABLE>

13
<PAGE>

FEDERATED AMERICAN LEADERS FUND II
- --------------------------------------------------------------------------------

4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES

ORGANIZATIONAL EXPENSES -- Organizational and start-up administrative
service expenses of $47,855 were borne initially by the Adviser. The Fund
has agreed to reimburse the Adviser for the organizational and start-up
administrative expenses during the five-year period following the effective
date. For the period ended December 31, 1996, the Fund paid $9,571 pursuant
to this agreement.

GENERAL -- Certain of the Officers and Trustees of the Trust are Officers
and Directors or Trustees of the above companies.

5. INVESTMENT TRANSACTIONS

Purchases and sales of investments, excluding short-term securities, for the
period ended December 31, 1996, were as follows:

<TABLE>
<S> <C>
PURCHASES $ 153,455,140
- ------------------------------------------------------------ ===============
SALES $ 78,730,697
- ------------------------------------------------------------ ===============
</TABLE>

14
<PAGE>

INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------

To the Board of Trustees of the Federated Insurance Series
and Shareholders of FEDERATED AMERICAN LEADERS FUND II:

We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of Federated American Leaders Fund
II (a portfolio of the Federated Insurance Series) as of December 31, 1996,
and the related statement of operations for the year then ended, the
statement of changes in net assets for the years ended December 31, 1996 and
1995, and the financial highlights for the periods presented. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of the
securities owned as of December 31, 1996 by correspondence with the
custodian and brokers; where replies were not received from brokers, we
performed other auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Federated
American Leaders Fund II as of December 31, 1996, the results of its
operations, the changes in its net assets and its financial highlights for
the respective stated periods in conformity with generally accepted
accounting principles.

DELOITTE & TOUCHE LLP

Pittsburgh, Pennsylvania
February 7, 1997

15
<PAGE>

<TABLE>
<CAPTION>
TRUSTEES OFFICERS
- --------------------------------------------------------------------------------------------------
<S> <C>
John F. Donahue John F. Donahue
Thomas G. Bigley Chairman
John T. Conroy, Jr. J. Christopher Donahue
William J. Copeland President
J. Christopher Donahue Edward C. Gonzales
James E. Dowd Executive Vice President
Lawrence D. Ellis, M.D. John W. McGonigle
Edward J. Flaherty, Jr. Executive Vice President, Treasurer, and Secretary
Peter E. Madden Richard B. Fisher
Gregor F. Meyer Vice President
John E. Murray, Jr. S. Elliott Cohan
Wesley W. Posvar Assistant Secretary
Marjorie P. Smuts
</TABLE>

Variable funds are not bank deposits or obligations, are not guaranteed by
any bank, and are not insured or guaranteed by the U.S. government, the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other government agency. Investment in variable funds involves investment
risk, including the possible loss of principal.

This report is authorized for distribution to prospective investors only
when preceded or accompanied by the fund's prospectus which contains facts
concerning its objective and policies, management fees, expenses and other
information.

16
<PAGE>

[THIS PAGE INTENTIONALLY LEFT BLANK]

<PAGE>

[LETTERHEAD OF FEDERATED UTILITY FUND II APPEARS HERE]

Federated Insurance Series

[LOGO OF FEDERATED INVESTORS] ___________________________________

___________________________________

<PAGE>

PRESIDENT'S MESSAGE
- -------------------------------------------------------------------------------

Dear Shareholder:

I am pleased to present the Annual Report to Shareholders for Federated Prime
Money Fund II, a portfolio of Federated Insurance Series.

During the reporting period, the fund kept shareholders' ready cash working
every day while maintaining a stable share price of $1.00.*

To pursue a competitive daily yield, the fund invests in a portfolio of high-
quality money market securities. Over the 12-month reporting period, the fund
paid a total of $0.05 per share in dividends to shareholders. On December 31,
1996, total net assets reached $45.7 million -- a significant increase over the
$17.8 million in total net assets at the beginning of the reporting period.

Thank you for keeping your ready cash working and accessible through Federated
Prime Money Fund II. We will continue to keep you up to date on your investment,
and welcome your comments and suggestions.

Sincerely,

/s/ J. Christopher Donahue

J. Christopher Donahue
President
February 15, 1997

* Although money market funds seek to maintain a share value of $1.00, there
is no guarantee that they will do so. An investment in the fund is neither
insured nor guaranteed by the U.S. government.

1
<PAGE>

FEDERATED PRIME MONEY FUND II
- -------------------------------------------------------------------------------

MANAGEMENT DISCUSSION AND ANALYSIS

Federated Prime Money Fund II invests in money market instruments maturing in
thirteen months or less. The average maturity of these securities, computed on a
dollar weighted basis, is restricted to 90 days or less. Portfolio securities
must be rated in one of the two highest short-term rating categories by one or
more of the nationally recognized statistical rating organizations or be of
comparable quality to securities having such ratings. Typical security types
include, but are not limited to: commercial paper, certificates of deposit, time
deposits, variable rate instruments and repurchase agreements.

U.S. economic growth has slowed in a nearly ideal fashion. Labor markets are
still tight, but monthly payroll gains have downshifted from 233,000 per month
in the first half of the year to 171,000 over the second half. Home building has
slowed as well. Offsetting this consumer slowdown, however, manufacturing is
strengthening. The National Association of Purchasing Managers Index* has
increased to 54.00% for December while industrial production and capacity
utilization have also been high. So while the economy remains mixed, overall it
appears to be advancing at a moderate and sustainable pace.

The lingering concern is that tight labor markets and gently rising wage
pressures will prove inflationary. To date, however, price pressures have been
evident only in the food and energy sectors. Elsewhere in the economy,
systematic price pressures are largely absent. The consumer price index rose at
a rate of just 3.30% over the past 12 months while the producer price index
increased by 2.90% for the same period.

Thirty day commercial paper started the reporting period at 5.27% on February 1,
1996, and rose very modestly to 5.35%. This lack of movement reflects the 5.25%
federal funds target maintained by the Federal Reserve Board for the entire 12-
month time period. The money market yield curve steepened substantially
throughout the reporting period. One month commercial paper rates rose 8 basis
points while the six-month rates rose 42 basis points.

The target average maturity range for Federated Prime Money Fund II began the
reporting period at 40-50 days and was shortened to the 35-45 day range in July,
reflecting the changing economic and monetary sentiment. Given the concentrated
nature of much of the fund's current asset base, however, the actual average
maturity has been much lower. In structuring the fund, there is continued
emphasis placed on positioning 30-35% of the fund's core assets in variable rate
demand notes and accomplishing a modest barbell structure.

During the 12 months ended December 31, 1996, the net assets of Federated Prime
Money Fund II increased from $17.8 million to $45.7 million while the 7-day net
yield increased from 4.61% to 4.77%.** The effective average maturity of the
fund on December 31, 1996, was 28 days.

* The National Association of Purchasing Manager's Index is a diffusion index
that measures the economic activity of the largest manufacturers in the
United States.

** Performance quoted represents past performance and is not indicative of
future results. Yield will vary. Performance information does not reflect
the charges and expenses of a variable annuity or variable life insurance
contract.

2
<PAGE>

FEDERATED PRIME MONEY FUND II
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ------------ -------------------------------------------------------------------- ----------
<S> <C>
BANK NOTES -- 2.2%
- ----------------------------------------------------------------------------------
BANKING -- 2.2%
-------------------------------------------------------------------
$1,000,000 Harris Trust & Savings Bank, Chicago, 5.500%, 3/26/1997 $ 999,867
------------------------------------------------------------------- ----------
COMMERCIAL PAPER -- 20.6%
- ----------------------------------------------------------------------------------
BANKING -- 5.4%
-------------------------------------------------------------------
500,000 ABN AMRO Bank N.V., Amsterdam, 5.794%, 3/6/1997 494,996
-------------------------------------------------------------------
1,000,000 Bank of Nova Scotia, Toronto, 5.510%, 1/6/1997 999,246
-------------------------------------------------------------------
500,000 Commerzbank U.S. Finance, Inc., (Guaranteed by Commerzbank AG,
Frankfurt), 5.709%, 3/18/1997 494,142
-------------------------------------------------------------------
500,000 Svenska Handelsbanken, Inc., (Guaranteed by Svenska Handelsbanken,
Stockholm), 5.531%, 2/12/1997 496,862
------------------------------------------------------------------- ---------
Total 2,485,246
-------------------------------------------------------------------
FINANCE - AUTOMOTIVE -- 6.5%
-------------------------------------------------------------------
2,000,000 Ford Motor Credit Corp., 5.427%, 3/13/1997 1,979,016
-------------------------------------------------------------------
1,000,000 General Motors Acceptance Corp., 5.456%, 6/9/1997 976,548
------------------------------------------------------------------- ---------
Total 2,955,564
-------------------------------------------------------------------
FINANCE - COMMERCIAL -- 4.3%
-------------------------------------------------------------------
1,000,000 Beta Finance, Inc., 5.775% - 5.783%, 1/13/1997 - 3/13/1997 993,531
-------------------------------------------------------------------
1,000,000 General Electric Capital Corp., 5.764%, 1/29/1997 995,644
------------------------------------------------------------------- ---------
Total 1,989,175
-------------------------------------------------------------------
FINANCE - RETAIL -- 4.4%
-------------------------------------------------------------------
2,000,000 New Center Asset Trust, A1+/P1 Series, 5.402%, 1/27/1997 1,992,301
------------------------------------------------------------------- ---------
TOTAL COMMERCIAL PAPER 9,422,286
------------------------------------------------------------------- ---------
SHORT-TERM NOTES -- 6.0%
- --------------------------------------------------------------------------------
FINANCE - AUTOMOTIVE -- 1.5%
-------------------------------------------------------------------
672,273 Nationsbank Auto Owner Trust 1996-A, 5.776%, 8/15/1997 672,629
------------------------------------------------------------------- ---------
</TABLE>

3
<PAGE>

FEDERATED PRIME MONEY FUND II
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------- ------------------------------------------------------------------ ----------
<S> <C>
FINANCE - EQUIPMENT -- 3.4%
------------------------------------------------------------------
$ 772,306 Capita Equipment Receivables Trust 1996-1, 5.600%, 10/15/1997 $ 772,306
-------------------------------------------------------------------
773,412 Navistar Financial 1996-B Owner Trust, 5.490%, 11/20/1997 773,412
------------------------------------------------------------------- ----------
Total 1,545,718
-------------------------------------------------------------------
FINANCE - CONSUMER -- 1.1%
-------------------------------------------------------------------
500,000 Silver REMIC Trust I 1996-1, 5.700%, 1/15/1998 500,000
------------------------------------------------------------------- ----------
TOTAL SHORT-TERM NOTES 2,718,347
------------------------------------------------------------------- ----------
(A)NOTES - VARIABLE -- 17.9%
- --------------------------------------------------------------------------------
BANKING -- 11.3%
-------------------------------------------------------------------
180,000 Alabama State IDA, (Wellborn Cabinet, Inc.), Tax Revenue Bonds,
(Amsouth Bank N.A., Birmingham LOC), 5.800%, 1/1/1997 180,000
-------------------------------------------------------------------
200,000 Capital One Funding Corp., (Series 1995-A), (Bank One, Indianapolis,
IN LOC), 5.95%, 1/2/1997 200,000
-------------------------------------------------------------------
190,000 Denver Urban Renewal Authority, (Series 1992-B), (Banque Paribas,
Paris LOC), 5.900%, 1/2/1997 190,000
-------------------------------------------------------------------
200,000 Franklin County, OH, (Edison Wielding), (Series 1995), (Huntington
National Bank, Columbus, OH LOC), 6.050%, 1/2/1997 200,000
-------------------------------------------------------------------
1,000,000 Kenny, Donald R. and Cheryl A., (Series 1996-C), (Star Bank, NA,
Cincinnati LOC), 5.980%, 1/2/1997 1,000,000
-------------------------------------------------------------------
278,000 Maryland State IDFA, (Human Genome), (Series 1994), (First National
Bank of Maryland, Baltimore LOC), 5.938%, 1/6/1997 278,000
-------------------------------------------------------------------
375,000 Mississippi Business Finance Corp., Metalloy Project, (Comerica Bank,
Detroit, MI LOC), 5.900%, 1/1/1997 375,000
-------------------------------------------------------------------
385,000 Pelham City, IDB, (Columbus Bank and Trust Co., GA LOC), 6.130%,
1/2/1997 385,000
-------------------------------------------------------------------
550,000 REAL I Funding Corp., Casto Realty Investments Series 1996,
(Huntington National Bank, Columbus, OH LOC), 5.930%, 1/2/1997 550,000
-------------------------------------------------------------------
380,000 Roby Company Ltd. Partnership, (Huntington National Bank,
Columbus, OH LOC), 5.930%, 1/2/1997 380,000
-------------------------------------------------------------------
1,000,000 SMM Trust, (Series 1996-V), (Morgan Guaranty Trust Co., New York
Swap Agreement), 5.581%, 2/24/1997 1,000,000
-------------------------------------------------------------------
</TABLE>

4
<PAGE>

FEDERATED PRIME MONEY FUND II
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------- --------------------------------------------------------------------------- ---------
<S> <C>
(A)NOTES - VARIABLE -- CONTINUED
- -----------------------------------------------------------------------------------------
BANKING -- CONTINUED
----------------------------------------------------------------------------
$ 185,000 Southeast Regional Holdings, LLC, (Series 1995-A), (Columbus Bank and
Trust Co., GA LOC), 6.130%, 1/2/1997 $ 185,000
----------------------------------------------------------------------------
253,000 Vista Funding Corp., (Series 1994-A), (Fifth Third Bank of
Northwestern OH LOC), 5.98%, 1/2/1997 253,000
---------------------------------------------------------------------------- ---------
Total 5,176,000
----------------------------------------------------------------------------
INSURANCE -- 4.4%
----------------------------------------------------------------------------
1,000,000 General American Life Insurance Co., 5.806%, 1/23/1997 1,000,000
----------------------------------------------------------------------------
1,000,000 Transamerica Occidental Life Insurance Company, 5.304%, 1/30/1997 1,000,000
---------------------------------------------------------------------------- ---------
Total 2,000,000
----------------------------------------------------------------------------
SOVEREIGN GOVERNMENT -- 2.2%
----------------------------------------------------------------------------
1,000,000 (b)Short Term Asset Corp., Secured Class F-1 Bonds, (European Bank
for Reconstruction and Development LIQ), 5.626%, 1/13/1997 1,000,000
----------------------------------------------------------------------------- ---------
TOTAL NOTES - VARIABLE 8,176,000
---------------------------------------------------------------------------- ---------
GOVERNMENT AGENCIES -- 17.5%
- -----------------------------------------------------------------------------------------
8,000,000 Federal National Mortgage Association, 6.500%, 1/2/1997 7,998,556
---------------------------------------------------------------------------- ---------
GOVERNMENT AGENCY OBLIGATIONS -- 1.8%
- -----------------------------------------------------------------------------------------
U.S. TREASURY NOTES -- 1.8%
----------------------------------------------------------------------------
800,000 6.875%, 2/28/1997-3/31/1997 802,407
---------------------------------------------------------------------------- ---------
(C)REPURCHASE AGREEMENTS -- 16.4%
- -----------------------------------------------------------------------------------------
2,090,000 CIBC Wood Gundy Securities Corp., 6.900%, dated 12/31/1996, due 1/2/1997 2,090,000
----------------------------------------------------------------------------
2,200,000 Fuji Government Securities, Inc., 6.900%, dated 12/31/1996, due
1/2/1997 2,200,000
----------------------------------------------------------------------------
</TABLE>

5
<PAGE>

FEDERATED PRIME MONEY FUND II
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- --------- ------------------------------------------------------------------ ---------
<S> <C>
(C)REPURCHASE AGREEMENTS -- CONTINUED
- --------------------------------------------------------------------------------
$2,200,000 PaineWebber Group, Inc., 6.850%, dated 12/31/1996, due
1/2/1997 $2,200,000
------------------------------------------------------------------
1,000,000 Swiss Bank Capital Markets, 6.800%, dated 12/31/1996, due
1/2/1997 1,000,000
------------------------------------------------------------------ -----------
TOTAL REPURCHASE AGREEMENTS 7,490,000
------------------------------------------------------------------ -----------
TOTAL INVESTMENTS (AT AMORTIZED COST)(D) $37,607,463
------------------------------------------------------------------ ===========
</TABLE>

(a) Current rate and next reset date shown.

(b) Denotes a restricted security which is subject to restrictions on resale
under Federal Securities laws. At December 31, 1996 these securities
amounted to $1,000,000 which represents 2.2% of net assets.

(c) The repurchase agreements are fully collateralized by U.S. government
and/or agency obligations based on market prices at the date of the
portfolio. The investments in the repurchase agreements are through
participation in joint accounts with other Federated funds.

(d) Also represents cost for federal tax purposes.

Note: The categories of investments are shown as a percentage of net assets
($45,655,332) at December 31, 1996.

The following acronyms are used throughout this portfolio:

IDA -- Industrial Development Authority
IDB -- Industrial Development Bond
IDFA -- Industrial Development Finance Authority
LIQ -- Liquidity Agreement
LLC -- Limited Liability Corporation
LOC -- Letter of Credit
REMIC -- Real Estate Mortgage Investment Conduit

(See Notes which are an integral part of the Financial Statements)

6
<PAGE>

FEDERATED PRIME MONEY FUND II
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
- -------------------------------------------------------------------------------

<TABLE>
ASSETS:
- ------------------------------------------------------------------
<S> <C> <C>
Investments in repurchase agreements $ 7,490,000
- ------------------------------------------------------------------
Investments in securities 30,117,463
- ------------------------------------------------------------------ -----------
Total investments in securities, at amortized cost and value $37,607,463
- ---------------------------------------------------------------------------------
Cash 8,062,347
- ---------------------------------------------------------------------------------
Income receivable 99,159
- ---------------------------------------------------------------------------------
Receivable for shares sold 427,135
- --------------------------------------------------------------------------------- ----------
Total assets 46,196,104
- ---------------------------------------------------------------------------------
LIABILITIES:
- ------------------------------------------------------------------
Payable for shares redeemed 518,160
- ------------------------------------------------------------------
Accrued expenses 22,612
- ------------------------------------------------------------------ -----------
Total liabilities 540,772
- --------------------------------------------------------------------------------- -----------
Net Assets for 45,655,332 shares outstanding $45,655,332
- --------------------------------------------------------------------------------- ===========
NET ASSETS VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- ---------------------------------------------------------------------------------
$45,655,332 / 45,655,332 shares outstanding $1.00
- --------------------------------------------------------------------------------- ==========
</TABLE>

(See Notes which are an integral part of the Financial Statements)

7
<PAGE>

FEDERATED PRIME MONEY FUND II
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
- -------------------------------------------------------------------------------

<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ------------------------------------------------------------------------------------
Interest $1,694,866
- ------------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------------------------
Investment advisory fee $ 154,455
- ---------------------------------------------------------------------
Administrative personnel and services fee 125,000
- ---------------------------------------------------------------------
Custodian fees 28,125
- ---------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 24,203
- ---------------------------------------------------------------------
Directors'/Trustees' fees 1,916
- ---------------------------------------------------------------------
Auditing fees 8,500
- ---------------------------------------------------------------------
Legal fees 3,631
- ---------------------------------------------------------------------
Portfolio accounting fees 40,451
- ---------------------------------------------------------------------
Share registration costs 8,075
- ---------------------------------------------------------------------
Printing and postage 21,717
- ---------------------------------------------------------------------
Insurance premiums 2,795
- ---------------------------------------------------------------------
Miscellaneous 5,310
- --------------------------------------------------------------------- ----------
Total expenses 424,178
- --------------------------------------------------------------------- ----------
Waivers and reimbursements --
- --------------------------------------------------------
Waiver of investment advisory fee $ (154,455)
- --------------------------------------------------------
Reimbursement of other operating expenses (21,235)
- -------------------------------------------------------- ----------
Total waivers and reimbursements (175,690)
- --------------------------------------------------------------------- ----------
Net expenses 248,488
- ------------------------------------------------------------------------------------- ==========
Net investment income $1,446,378
- ------------------------------------------------------------------------------------- ==========
</TABLE>

(See Notes which are an integral part of the Financial Statements)

8
<PAGE>

FEDERATED PRIME MONEY FUND II
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------------
1996 1995
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------
OPERATIONS --
- ------------------------------------------------------------
Net investment income $ 1,446,378 $ 415,530
- ------------------------------------------------------------ ------------- ------------
DISTRIBUTIONS TO SHAREHOLDERS --
- ------------------------------------------------------------
Distributions from net investment income (1,446,378) (415,530)
- ------------------------------------------------------------ ------------- ------------
SHARE TRANSACTIONS --
- ------------------------------------------------------------
Proceeds from sale of shares 214,683,781 39,232,023
- ------------------------------------------------------------
Net asset value of shares issued to shareholders in payment
of distributions declared 1,446,378 414,549
- ------------------------------------------------------------
Cost of shares redeemed (188,312,731) (22,360,936)
- ------------------------------------------------------------ ------------- ------------
Change in net assets resulting from share transactions 27,817,428 17,285,636
- ------------------------------------------------------------ ------------- ------------
Change in net assets 27,817,428 17,285,636
- ------------------------------------------------------------
NET ASSETS:
- ------------------------------------------------------------
Beginning of period 17,837,904 552,268
- ------------------------------------------------------------ ------------- ------------
End of period $ 45,655,332 $ 17,837,904
- ------------------------------------------------------------ ============= ============
</TABLE>

(See Notes which are an integral part of the Financial Statements)

9
<PAGE>

FEDERATED PRIME MONEY FUND II
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994(A)
------- ------- --------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00 $ 1.00 $ 1.00
- ------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------
Net investment income 0.05 0.05 0.01
- ------------------------------------------------------------
LESS DISTRIBUTIONS
- ------------------------------------------------------------
Distributions from net investment income (0.05) (0.05) (0.01)
- ------------------------------------------------------------ ------- ------- --------
NET ASSET VALUE, END OF PERIOD $ 1.00 $ 1.00 $ 1.00
- ------------------------------------------------------------ ======= ======= ========
TOTAL RETURN(B) 4.75% 5.20% 0.50%
- ------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------
Expenses 0.80% 0.80% 0.80%*
- ------------------------------------------------------------
Net investment income 4.68% 5.12% 4.26%*
- ------------------------------------------------------------
Expense waiver/reimbursement(c) 0.57% 2.69% 71.84%*
- ------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------
Net assets, end of period (000 omitted) $45,655 $17,838 $ 552
- ------------------------------------------------------------
</TABLE>

* Computed on an annualized basis.

(a) Reflects operations for the period from November 18, 1994 (date of initial
public investment) to December 31, 1994. For the period from December 10,
1993 (start of business) to November 17, 1994, the Fund had no public
investment.

(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.

(See Notes which are an integral part of the Financial Statements)

10
<PAGE>

FEDERATED PRIME MONEY FUND II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- -------------------------------------------------------------------------------

1. ORGANIZATION

Federated Insurance Series (the "Trust") is registered under the Investment
Company Act of 1940, as amended (the "Act") as an open-end, management
investment company. The Trust consists of eight portfolios. The financial
statements included herein are only those of Federated Prime Money Fund II (the
"Fund"), a diversified portfolio. The financial statements of the other
portfolios are presented separately. The assets of each portfolio are segregated
and a shareholder's interest is limited to the portfolio in which shares are
held. The investment objective of the Fund is to provide current income
consistent with stability of principal and liquidity.

2. SIGNIFICANT ACCOUNTING POLICIES

INVESTMENT VALUATIONS -- The Fund's use of the amortized cost method to
value its portfolio securities is in accordance with Rule 2a-7 under the
Act.

The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Trustees (the
"Trustees"). Risks may arise from the potential inability of counterparties
to honor the terms of the repurchase agreement. Accordingly, the Fund could
receive less than the repurchase price on the sale of collateral
securities.

11
<PAGE>

FEDERATED PRIME MONEY FUND II
- --------------------------------------------------------------------------------

At December 31, 1996, the Fund, for federal tax purposes, had a capital
loss carryforward of $134, which will reduce the Fund's taxable income
arising from future net realized gain on investments, if any, to the extent
permitted by the Code, and thus will reduce the amount of the distributions
to shareholders which would otherwise be necessary to relieve the Fund of
any liability for federal tax. Pursuant to the Code, such capital loss
carryforward will expire as follows:

EXPIRATION YEAR EXPIRATION AMOUNT
--------------- -----------------
2004 $134

RESTRICTED SECURITIES -- Restricted securities are securities that may only
be resold upon registration under federal securities laws or in
transactions exempt from such registration. Many restricted securities may
be resold in the secondary market in transactions exempt from registration.
In some cases, the restricted securities may be resold without registration
upon exercise of a demand feature. Such restricted securities may be
determined to be liquid under criteria established by the Board of
Trustees. The Trust will not incur any registration costs upon such
resales. Restricted securities are valued at amortized cost in accordance
with Rule 2a-7 under the Investment Company Act of 1940.

Additional information on each restricted security held at December 31,
1996 is as follows:

SECURITY ACQUSITION DATE ACQUISITION COST
----------------------- --------------- ----------------
Short Term Asset Corp. 5/7/1996 $1,000,000

OTHER -- Investment transactions are accounted for on the trade date.

12
<PAGE>

FEDERATED PRIME MONEY FUND II
- --------------------------------------------------------------------------------

3. SHARES OF BENEFICIAL INTEREST

The Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest (without par value). At
December 31, 1996, capital paid in aggregated $45,655,332. Transactions in
capital stock were as follows:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------
1996 1995
------------ -----------
<S> <C> <C>
Shares sold 214,683,781 39,232,023
- --------------------------------------------------
Shares issued to shareholders in payment of
distributions declared 1,446,378 414,549
- --------------------------------------------------
Shares redeemed (188,312,731) (22,360,936)
- -------------------------------------------------- ------------ -----------
Net change resulting from share transactions 27,817,428 17,285,636
- -------------------------------------------------- ============ ===========
</TABLE>

4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES

INVESTMENT ADVISORY FEE -- Federated Advisers, the Fund's investment
adviser (the "Adviser"), receives for its services an annual investment
advisory fee equal to 0.50% of the Fund's average daily net assets. The
Adviser may voluntarily choose to waive any portion of its fee and/or
reimburse certain operating expenses of the Fund. The Adviser can modify or
terminate this voluntary waiver and/or reimbursement at any time at its
sole discretion.

ORGANIZATIONAL EXPENSES -- Organizational expenses of $22,431 were borne
initially by the Adviser. The Fund has agreed to reimburse the Adviser for
the organizational expenses during the five-year period following the
Fund's effective date. For the period ended December 31, 1996, the Fund
paid $4,486 pursuant to this agreement.

GENERAL -- Certain of the Officers and Trustees of the Trust are Officers
and Directors or Trustees of the above companies.

13
<PAGE>

INDEPENDENT AUDITORS' REPORT
- -------------------------------------------------------------------------------

To the Board of Trustees of the Federated Insurance Series
and Shareholders of FEDERATED PRIME MONEY FUND II:

We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the Federated Prime Money Fund II (a portfolio
of the Federated Insurance Series) as of December 31, 1996, and the related
statement of operations for the year then ended, the statement of changes in net
assets for the years ended December 31, 1996 and 1995, and the financial
highlights for the periods presented. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
December 31, 1996, by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Federated Prime
Money Fund II as of December 31, 1996, the results of its operations, the
changes in its net assets and its financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP

Pittsburgh, Pennsylvania
February 7, 1997

14
<PAGE>

<TABLE>
<CAPTION>
TRUSTEES OFFICERS
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
John F. Donahue John F. Donahue
Thomas G. Bigley Chairman
John T. Conroy, Jr. J. Christopher Donahue
William J. Copeland President
J. Christopher Donahue Edward C. Gonzales
James E. Dowd Executive Vice President
Lawrence D. Ellis, M.D. John W. McGonigle
Edward L. Flaherty, Jr. Executive Vice President, Treasurer, and Secretary
Peter E. Madden Richard B. Fisher
Gregor F. Meyer Vice President
John E. Murray, Jr. S. Elliott Cohan
Wesley W. Posvar Assistant Secretary
Marjorie P. Smuts
</TABLE>

<PAGE>

[LETTERHEAD OF FEDERATED UTILITY FUND II APPEARS HERE]

Federated Insurance Series

[LOGO OF FEDERATED INVESTORS] ___________________________________

___________________________________

<PAGE>

PRESIDENT'S MESSAGE
- --------------------------------------------------------------------------------

Dear Shareholder:

I am pleased to present the Annual Report to Shareholders for Federated Fund for
U.S. Government Securities II, a portfolio of Federated Insurance Series.

This report covers the 12-month period from January 1, 1996, through December
31, 1996. It begins with a commentary by the fund's portfolio manager, which is
followed by a complete listing of the fund's holdings and its financial
statements.

To help your money pursue an attractive level of income, the fund invests
primarily in short-to-intermediate-term U.S. government mortgage-backed
securities and U.S. Treasury notes and U.S. agency debentures.

During the reporting period, stronger economic growth forced interest rates to
rise, which combined with mixed economic signals to cause a high degree of
volatility in the bond market. In this environment, Federated Fund for U.S.
Government Securities II produced a net total return of 4.20% versus a 5-year
U.S. Treasury return of 2.32%.* Consistent with its objective of providing
current income, the fund paid a strong dividend stream that totaled $0.57 per
share, in addition to capital gains of $0.04 per share. On December 31, 1996,
total net assets reached $34.9 million -- a significant increase over the $12.3
million in total net assets at the beginning of the reporting period.

Thank you for pursuing income opportunities through Federated Fund for U.S.
Government Securities II. We will continue to keep you up to date on your
progress. Your comments and suggestions are always welcome.

Sincerely,

/S/ J. Christopher Donahue
J. Christopher Donahue
President
February 15, 1997

* Performance quoted represents past performance and is not indicative of
future performance. Investment return and principal value will fluctuate,
so that an investor's shares, when redeemed, may be worth more or less than
their original cost. Performance information does not reflect the charges
and expenses of a variable annuity or variable life insurance contract.

1
<PAGE>

FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II
- --------------------------------------------------------------------------------

MANAGEMENT DISCUSSION AND ANALYSIS

Federated Fund for U.S. Government Securities II, a portfolio of Federated
Insurance Series, provides shareholders a professionally managed portfolio of
U.S. government securities. The fund is managed for specific maturity levels
according to management's assumptions on market risk and volatility. Current
investment strategy emphasizes a diversified range of mortgage securities with
coupons averaging 7.53% and a weighted average effective duration of 4.1 years.

The U.S. Treasury market in 1996 offered lackluster returns to investors versus
1995's awesome returns and played second fiddle to the stellar gains in the
equity market. Shorter duration U.S. Treasuries posted slightly positive
returns, while the longer end of the curve produced negative returns. The theme
throughout 1996 was a trading range environment, amidst swift and sharp market
movements based on shifting Federal Reserve Board expectations. Given this
environment, the mortgage-backed securities sector was the best performing fixed
income sector during 1996. On a total rate of return basis for the year,
mortgages outperformed their Treasury counterparts by over 200 basis points. The
fundamentals and technicals in the mortgage market were attractive for most of
1996 with relatively benign prepayment rates.

During this time period, the fund focused on purchases of discount and current
15- and 30-year mortgage securities. The fund also continued to hold a core
position in U.S. Treasuries and agency debentures. These securities have been
added for call protection as well as capital gain potential. This strategy
provided the fund, for the fiscal year ended December 31, 1996, a net total rate
of return of 4.20% versus a blend of the Lehman Government and Mortgage Indices*
return of 4.50%.

Overall, our view on the mortgage market is one of fair value when viewed from
an historical perspective. However, the tight spreads in other fixed income
markets combined with the general desire for higher yields portrays a favorable
outlook for the mortgage market moving into 1997.

As of December 31, 1996, total net assets were $34.9 million and the average 30-
day SEC net yield was 5.96%** based upon the net asset value per share of
$10.09.

* The Lehman Brothers Government/Corporate (Total) Index is comprised of
approximately 5,000 issues which include non-convertible bonds publicly
issued by the U.S. government or its agencies; corporate bonds guaranteed
by the U.S. government and quasi-federal corporations; and publicly issued,
fixed-rate, non-convertible domestic bonds of companies in industry, public
utilities, and finance. The average maturity of these bonds approximates
nine years. Tracked by Lehman Brothers, the index calculates total returns
for 1 month, 3-month and 12-month, and 10-year periods, and year-to-date.
The Lehman Brothers Government/Corporate (Long-Term) Index is composed of
the same types of issues as defined above. However, the average maturity of
the bonds included in this index approximates 22 years. The Lehman Brothers
Mortgage-Backed Securities Index includes 15- and 30-year fixed-rate
securities backed by mortgage pools of the Government National Mortgage
Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and
Federal National Mortgage Corporation (FNMA). Graduated payment mortgages
(GPMs) and balloons are included in the index. These indices are unmanaged.
Investments cannot be made in an index.

** Performance quoted represents past performance and is not indicative of
future performance. Investment return and principal value will fluctuate,
so that an investor's shares, when redeemed, may be worth more or less than
their original cost. Performance information does not reflect the charges
and expenses of a variable annuity or variable life insurance contract.

2
<PAGE>

FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II
- -------------------------------------------------------------------------------

GROWTH OF $10,000 INVESTED IN THE FEDERATED FUND FOR U.S. GOVERNMENT
SECURITIES II

The graph below illustrates the hypothetical investment of $10,000 in the
Federated Fund for U.S. Securities II (the "Fund") from March 28, 1994 (start of
performance) to December 31, 1996 compared to the Lehman Brothers 5-Year
Treasury Bellwether Index (LB5TB)+ and the Lipper U.S. Mortgage Funds Average
(LUSMFA).++

Graphic representation omitted; see Appendix C

AVERAGE ANNUAL TOTAL RETURN FOR THE PERIOD ENDED DECEMBER 31, 1996
1 Year....................................................4.20%
Start of Performance (3/28/94)............................5.62%

PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT RETURN
AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY MAY BE
WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS OF OR
GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.

* The Fund's performance assumes the reinvestment of all dividends and
distributions. The LB5TB and LUSMFA have been adjusted to reflect
reinvestment of dividends on securities in the index and average.

+ The LB5TB is not adjusted to reflect sales charges, expenses, or other
fees that the SEC requires to be reflected in the Fund's performance. The
index is unmanaged.

++ The LUSMFA represents the average of the total returns reported by all of
the mutual funds designated by Lipper Analytical Services, Inc. as falling
into the category, and is not adjusted to reflect any sales charges.
However, these total returns are reported net of expenses or other fees
that the SEC requires to be reflected in a fund's performance.

3
<PAGE>

FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II PORTFOLIO OF INVESTMENTS
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- -------------------------------------------------------------------------------- ------------
<S> <C>
INTERMEDIATE-TERM U.S. GOVERNMENT OBLIGATIONS--15.9%
- ----------------------------------------------------------------------------------------------- ------------
$ 900,000 Federal Farm Credit Bank, 9.00%, 3/7/2000 $ 973,863
--------------------------------------------------------------------------------
1,000,000 Federal Farm Credit Bank, 8.65%, 10/1/1999 1,064,800
--------------------------------------------------------------------------------
1,000,000 Federal Home Loan Bank, 6.83%, 7/17/2001 1,021,530
--------------------------------------------------------------------------------
2,500,000 Federal Home Loan Bank, 5.94%, 4/30/1998 2,508,400
-------------------------------------------------------------------------------- ------------
TOTAL INTERMEDIATE-TERM U.S. GOVERNMENT
OBLIGATIONS (IDENTIFIED COST $5,521,084) 5,568,593
-------------------------------------------------------------------------------- ------------
LONG-TERM U.S. GOVERNMENT OBLIGATIONS--62.1%
- -----------------------------------------------------------------------------------------------
8,606,915 Federal Home Loan Mortgage Corp., 6.00%-9.00%, 9/1/2010-7/1/2026 8,604,005
--------------------------------------------------------------------------------
5,726,305 Federal National Mortgage Association, 6.50%-8.00%, 8/1/2011-8/1/2026 5,644,353
--------------------------------------------------------------------------------
7,277,516 Government National Mortgage Association, 6.50%-11.00%,
9/15/2015-8/15/2026 7,466,900
-------------------------------------------------------------------------------- ------------
TOTAL LONG-TERM U.S. GOVERNMENT OBLIGATIONS
(IDENTIFIED COST $21,643,589) 21,715,258
-------------------------------------------------------------------------------- ------------
U.S. TREASURY OBLIGATIONS--19.0%
- -----------------------------------------------------------------------------------------------
690,000 U.S. Treasury Bonds, 11.25%, 2/15/2015 1,019,247
--------------------------------------------------------------------------------
1,320,000 U.S. Treasury Bonds, 9.25%, 2/15/2016 1,675,766
--------------------------------------------------------------------------------
900,000 U.S. Treasury Notes, 7.50%, 5/15/2002 951,903
--------------------------------------------------------------------------------
1,000,000 U.S. Treasury Notes, 7.25%, 8/15/2004 1,051,690
--------------------------------------------------------------------------------
1,000,000 U.S. Treasury Notes, 5.75%, 8/15/2003 969,360
--------------------------------------------------------------------------------
1,000,000 U.S. Treasury Notes, 5.00%, 2/15/1999 982,330
-------------------------------------------------------------------------------- ------------
TOTAL U.S. TREASURY OBLIGATIONS (IDENTIFIED COST $6,571,330) 6,650,296
-------------------------------------------------------------------------------- ------------
(A)REPURCHASE AGREEMENT--2.0%
- -----------------------------------------------------------------------------------------------
715,000 BT Securities Corp., 6.90%, dated 12/31/1996, due 1/2/1997
(AT AMORTIZED COST) 715,000
-------------------------------------------------------------------------------- ------------
TOTAL INVESTMENTS (IDENTIFIED COST $34,451,003)(B) $ 34,649,147
-------------------------------------------------------------------------------- ============
</TABLE>

(a) The repurchase agreement is fully collateralized by U.S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreements is through participation in a joint
account with other Federated funds.

(b) The cost of investments for federal tax purposes amounts to $34,451,003.
The net unrealized appreciation of investments on a federal tax basis
amounts to $198,144 which is comprised of $311,993 appreciation and
$113,849 depreciation at December 31, 1996.

Note: The categories of investments are shown as a percentage of net assets
($34,964,547) at December 31, 1996.

(See Notes which are an integral part of the Financial Statements)

4
<PAGE>

FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II
STATEMENT OF ASSETS AND LIABILITIES

DECEMBER 31, 1996
- -------------------------------------------------------------------------------

<TABLE>
<S> <C> <C>
ASSETS:
- ------------------------------------------------------------------------------------------------
Total investments in securities, at value (identified and tax cost $34,451,003) $ 34,649,147
- ------------------------------------------------------------------------------------------------
Income receivable 401,755
- ------------------------------------------------------------------------------------------------
Receivable for shares sold 208,424
- ------------------------------------------------------------------------------------------------ ------------
Total assets 35,259,326
- ------------------------------------------------------------------------------------------------
LIABILITIES:
- ----------------------------------------------------------------------------------
Payable for shares redeemed $ 265,901
- ----------------------------------------------------------------------------------
Capital gain distribution payable 403
- ----------------------------------------------------------------------------------
Payable to Bank 13,124
- ----------------------------------------------------------------------------------
Accrued expenses 15,351
- ---------------------------------------------------------------------------------- ---------
Total liabilities 294,779
- ------------------------------------------------------------------------------------------------ ------------
Net Assets for 3,466,312 shares outstanding $ 34,964,547
- ------------------------------------------------------------------------------------------------ ============
NET ASSETS CONSIST OF:
- ------------------------------------------------------------------------------------------------
Paid in capital $ 34,827,248
- ------------------------------------------------------------------------------------------------
Net unrealized appreciation of investments 198,144
- ------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (129,895)
- ------------------------------------------------------------------------------------------------
Undistributed net investment income 69,050
- ------------------------------------------------------------------------------------------------ ------------
Total Net Assets $ 34,964,547
- ------------------------------------------------------------------------------------------------ ============
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PROCEEDS PER SHARE:
- ------------------------------------------------------------------------------------------------
$34,964,547 / 3,466,312 shares outstanding $10.09
- ------------------------------------------------------------------------------------------------ ============
</TABLE>

(See Notes which are an integral part of the Financial Statements)

5
<PAGE>

FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<S> <C> <C> <C>
INVESTMENT INCOME:
- ---------------------------------------------------------------------------------------------------------------
Interest (net of dollar roll expense of $28,615) $1,599,538
- ------------------------------------------------------------------------------------------------
EXPENSES:
- ---------------------------------------------------------------------------------
Investment advisory fee $ 141,092
- ---------------------------------------------------------------------------------
Administrative personnel and services fee 125,000
- ---------------------------------------------------------------------------------
Custodian fees 22,574
- ---------------------------------------------------------------------------------
Transfer and dividend disbursing agent fees and expenses 17,199
- ---------------------------------------------------------------------------------
Directors'/Trustees' fees 2,234
- ---------------------------------------------------------------------------------
Auditing fees 7,000
- ---------------------------------------------------------------------------------
Legal fees 2,805
- ---------------------------------------------------------------------------------
Portfolio accounting fees 49,022
- ---------------------------------------------------------------------------------
Share registration costs 7,068
- ---------------------------------------------------------------------------------
Printing and postage 35,599
- ---------------------------------------------------------------------------------
Insurance premiums 2,766
- ---------------------------------------------------------------------------------
Miscellaneous 14,741
- --------------------------------------------------------------------------------- ----------
Total expenses 427,100
- ---------------------------------------------------------------------------------
Waivers and reimbursements --
- -------------------------------------------------------------------
Waiver of investment advisory fee $ (141,092)
- -------------------------------------------------------------------
Reimbursement of other operating expenses (96,851)
- ------------------------------------------------------------------- ----------
Total waivers and reimbursements (237,943)
- ------------------------------------------------------------------------------- ---------
Net expenses 189,157
- ------------------------------------------------------------------------------------------------ ----------
Net investment income 1,410,381
- ------------------------------------------------------------------------------------------------ ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
- ------------------------------------------------------------------------------------------------
Net realized loss on investments (129,895)
- ------------------------------------------------------------------------------------------------ ----------
Net change in unrealized appreciation of investments 21,469
- ------------------------------------------------------------------------------------------------ ----------
Net realized and unrealized loss on investments (108,426)
- ------------------------------------------------------------------------------------------------ ----------
Change in net assets resulting from operations $1,301,955
==========
</TABLE>

(See Notes which are an integral part of the Financial Statements)

6
<PAGE>

FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------
1996 1995
---------- ----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
- ------------------------------------------------------------------------------------------------
OPERATIONS --
- ------------------------------------------------------------------------------------------------
Net investment income $ 1,410,381 $ 304,371
- ------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments ($129,895 net loss and
$68,245 net gain respectively, as computed for federal tax purposes) (129,895) 68,245
- ------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) 21,469 176,675
- ------------------------------------------------------------------------------------------------ ------------ ------------
Change in net assets resulting from operations 1,301,955 549,291
- ------------------------------------------------------------------------------------------------ ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS --
- ------------------------------------------------------------------------------------------------
Distributions from net investment income (1,344,598) (301,104)
- ------------------------------------------------------------------------------------------------
Distributions from net realized gains (68,239) --
- ------------------------------------------------------------------------------------------------ ------------ ------------
Change in net assets resulting from distributions to shareholders (1,412,837) (301,104)
- ------------------------------------------------------------------------------------------------ ------------ ------------
SHARE TRANSACTIONS --
- ------------------------------------------------------------------------------------------------
Proceeds from sale of shares 36,293,161 13,444,158
- ------------------------------------------------------------------------------------------------
Net asset value of shares issued to shareholders in payment of
distributions declared 1,406,120 292,129
- ------------------------------------------------------------------------------------------------
Cost of shares redeemed (14,888,081) (2,964,009)
- ------------------------------------------------------------------------------------------------ ------------ ------------
Change in net assets resulting from share transactions 22,811,200 10,772,278
- ------------------------------------------------------------------------------------------------
Change in net assets 22,700,318 11,020,465
- ------------------------------------------------------------------------------------------------
NET ASSETS:
- ------------------------------------------------------------------------------------------------
Beginning of period 12,264,229 1,243,764
- ------------------------------------------------------------------------------------------------ ------------ ------------
End of period (including undistributed net investment income of
$69,050 and $3,267, respectively) $ 34,964,547 $ 12,264,229
================================================================================================ ============ ============
</TABLE>

(See Notes which are an integral part of the Financial Statements)

7
<PAGE>

FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------

(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994(A)
-------- -------- --------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.29 $ 9.99 $ 9.99
- -----------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------
Net investment income 0.59 0.54 0.27
- -----------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.18) 0.30 --
- ----------------------------------------------------------------------------------- ------- ------- --------
Total from investment operations 0.41 0.84 0.27
- ----------------------------------------------------------------------------------- ------- ------- --------
LESS DISTRIBUTIONS
- -----------------------------------------------------------------------------------
Distributions from net investment income (0.57) (0.54) (0.27)
- -----------------------------------------------------------------------------------
Distributions from net realized gain on investments (0.04) -- --
- ----------------------------------------------------------------------------------- ------- ------- --------
Total distributions (0.61) (0.54) (0.27)
- ----------------------------------------------------------------------------------- ------- ------- --------
NET ASSET VALUE, END OF PERIOD $ 10.09 $ 10.29 $ 9.99
- ----------------------------------------------------------------------------------- ======= ======= ========
TOTAL RETURN(B) 4.20% 8.77% 2.62%
- -----------------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------------------------------------
Expenses 0.80% 0.80% 0.48%*
- -----------------------------------------------------------------------------------
Net investment income 6.00% 6.00% 3.99%*
- -----------------------------------------------------------------------------------
Expense waiver/reimbursement(c) 1.01% 4.81% 32.83%*
- -----------------------------------------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $34,965 $12,264 $ 1,244
- -----------------------------------------------------------------------------------
Portfolio turnover 97% 65% 0%
- -----------------------------------------------------------------------------------
</TABLE>

* Computed on an annualized basis.

(a) Reflects operations for the period from March 29, 1994 (date of initial
public investment) to December 31, 1994. For the period from December 8,
1993 (start of business), to March 28, 1994, net investment income was
distributed to the Fund's adviser.

(b) Based on net asset value, which does not reflect the sales charge or
contingent deferred sales charge, if applicable.

(See Notes which are an integral part of the Financial Statements)

8
<PAGE>

FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------

1. ORGANIZATION

Federated Insurance Series (the "Trust") is registered under the Investment
Company Act of 1940, as amended (the "Act") as an open-end, management
investment company. The Trust consists of eight portfolios. The financial
statements included herein are only those of Federated Fund for U.S. Government
Securities II (the "Fund"), a diversified portfolio. The financial statements of
the other portfolios are presented separately. The assets of each portfolio are
segregated and a shareholder's interest is limited to the portfolio in which
shares are held. The investment objective of the Fund is to provide current
income.

Effective April 15, 1996, the Board of Trustees ("Trustees") changed the
name of the Trust from Insurance Management Series to Federated Insurance Series
and the name of the Fund from U.S. Government Bond Fund to Federated Fund for
U.S. Government Securities II.

2. SIGNIFICANT ACCOUNTING POLICIES

INVESTMENT VALUATIONS -- U.S. government securities are generally valued at
the mean of the latest bid and asked price as furnished by an independent
pricing service. Short-term securities are valued at the prices provided by
an independent pricing service. However, short-term securities with
remaining maturities of sixty days or less at the time of purchase may be
valued at amortized cost, which approximates fair market value.

The Fund will only enter into repurchase agreements with banks and other
recognized financial institutions, such as broker/dealers, which are deemed
by the Fund's adviser to be creditworthy pursuant to the guidelines and/or
standards reviewed or established by the Board of Trustees (the
"Trustees"). Risks may arise from the potential inability of counterparties
to honor the terms of the repurchase agreement. Accordingly, the Fund could
receive less than the repurchase price on the sale of collateral
securities.

9
<PAGE>

FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II
- --------------------------------------------------------------------------------

At December 31, 1996, the Fund, for federal tax purposes, had a capital
loss carryforward of $129,895, which will reduce the Fund's taxable income
arising from future net realized gain on investments, if any, to the extent
permitted by the Code, and thus will reduce the amount of the distributions
to shareholders which would otherwise be necessary to relieve the Fund of
any liability for federal tax. Pursuant to the Code, such capital loss
carryforward will expire as follows:

EXPIRATION YEAR EXPIRATION AMOUNT
--------------- -----------------
2004 $129,895

DOLLAR ROLL TRANSACTIONS -- The Fund enters into dollar roll transactions,
with respect to mortgage securities issued by GNMA, FNMA and FHLMC, in
which the Fund sells mortgage securities to financial institutions and
simultaneously agrees to accept substantially similar (same type, coupon
and maturity) securities at a later date at an agreed upon price. Dollar
roll transactions are short-term financing arrangements which will not
exceed twelve months. The Fund will use the proceeds generated from the
transactions to invest in short-term investments, which may enhance the
Fund's current yield and total return.

OTHER -- Investment transactions are accounted for on the trade date.

3. SHARES OF BENEFICIAL INTEREST

The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).

Transactions in shares were as follows:

YEAR ENDED
DECEMBER 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Shares sold 3,618,961 1,332,658
- ---------------------------------------------------------------------------

Shares issued to shareholders in payment of distributions declared 140,342 28,952
- ---------------------------------------------------------------------------
Shares redeemed (1,484,884) (294,269)
- --------------------------------------------------------------------------- ---------- ---------
Net change resulting from share transactions 2,274,419 1,067,341
- --------------------------------------------------------------------------- ========== =========
</TABLE>

10
<PAGE>

FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II
- --------------------------------------------------------------------------------

4. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES

The Adviser may voluntarily choose to waive any portion of its fee and/or
reimburse certain operating expenses of the Fund. The Adviser can modify or
terminate this voluntary waiver and/or reimbursement at any time at its
sole discretion.

PORTFOLIO ACCOUNTING FEES -- FServ maintains the Fund's accounting records
for which it receives a fee. The fee is based on the level of the Fund's
average daily net assets for the period, plus out-of-pocket expenses.

ORGANIZATIONAL EXPENSES -- Organizational expenses of $51,572 were borne
initially by the Adviser. The Fund has agreed to reimburse the Adviser for
the organizational expenses during the five-year period following effective
date. For the period ended December 31, 1996, the Fund paid $10,314
pursuant to this agreement.

GENERAL -- Certain of the Officers and Trustees of the Trust are Officers
and Directors or Trustees of the above companies.

5. INVESTMENT TRANSACTIONS

Purchases and sales of investments, excluding short-term securities, for the
period ended December 31, 1996, were as follows:

<TABLE>
<S> <C>
PURCHASES $47,059,314
- ------------------------------------------------------------------- ===========
SALES $21,895,093
- ------------------------------------------------------------------- ===========
</TABLE>

11
<PAGE>

INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------

To the Board of Trustees of the Federated Insurance Series and Shareholders
of FEDERATED FUND FOR U.S. GOVERNMENT SECURITIES II:

We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of the Federated Fund for U.S.
Government Securities II, (a portfolio of the Federated Insurance Series)
as of December 31, 1996, and the related statement of operations for the
year then ended, the statement of changes in net assets for the years ended
December 31, 1996 and 1995, and the financial highlights for the periods
presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of the
securities owned as of December 31, 1996, by correspondence with the
custodian and brokers; where replies were not received from brokers, we
performed other auditing procedures. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights present
fairly, in all material respects, the financial position of Federated Fund
for U.S. Government Securities II as of December 31, 1996, the results of
its operations, the changes in its net assets, and its financial highlights
for the respective stated periods in conformity with generally accepted
accounting principles.

DELOITTE & TOUCHE LLP

Pittsburgh, Pennsylvania
February 7, 1997

12
<PAGE>

TRUSTEES OFFICERS
- --------------------------------------------------------------------------------
John F. Donahue John F. Donahue
Thomas G. Bigley Chairman

John T. Conroy, Jr. J. Christopher Donahue
William J. Copeland President

J. Christopher Donahue Edward C. Gonzales
James E. Dowd . Executive Vice President

Lawrence D. Ellis, M.D . John W. McGonigle
Edward L. Flaherty, Jr Executive Vice President, Treasurer, and Secretary

Peter E. Madden Richard B. Fisher
Gregor F. Meyer Vice President

John E. Murray, Jr. S. Elliott Cohan
Wesley W. Posvar Assistant Secretary
Marjorie P. Smuts

Variable funds are not bank deposits or obligations, are not guaranteed by
any bank, and are not insured or guaranteed by the U.S. government, the
Federal Deposit Insurance Corporation, the Federal Reserve Board, or any
other government agency. Investment in variable funds involves investment
risk, including possible loss of principal.

This report is authorized for distribution to prospective investors only
when preceded or accompanied by the fund's prospectus which contains facts
concerning its objective and policies, management fees, expenses, and other
information.

13
<PAGE>

[This Page Intentionally Left Blank]
<PAGE>

[LETTERHEAD OF FEDERATED UTILITY FUND II APPEARS HERE]

Federated Insurance Series

[LOGO OF FEDERATED INVESTORS] ___________________________________

___________________________________

<PAGE>

Wanger Advisors Trust 1996 Annual Report

WANGER

96
<PAGE>

Wanger Advisors Trust
1996 Annual Report
Contents

1 Squirrel Chatter

3 Funds at a Glance

4 Performance Review
Wanger U.S. Small Cap

6 Performance Review
Wanger International
Small Cap

8 Statement of Investments
Wanger U.S. Small Cap

12 Statement of Investments
Wanger International
Small Cap

16 Portfolio Diversification
Wanger International
Small Cap

17 Statements of Assets
and Liabilities

18 Statements of Operations

19 Statements of Changes in
Net Assets

20 Financial Highlights
Wanger U.S. Small Cap

21 Financial Highlights
Wanger International
Small Cap

22 Notes to Financial Statements

Wanger Asset Management, L.P., ("WAM") is one of the leading global small-cap
equity managers in the U.S. with 26 years of small-cap investment experience.
WAM manages over $5.4 billion in equities and is the investment adviser to
Wanger U.S. Small Cap, Wanger International Small Cap, Acorn Fund, Acorn
International and Acorn USA.

WAM uses a unique style of catching trends with small, attractively-priced
niche companies. For more complete information about our funds including the
Acorn Funds, fees and expenses, call WAM Brokerage Services, L.L.C.,
distributor, at 1-800-5WANGER for a prospectus. Read it carefully before you
invest or send money.

Wanger
[LOGO] [9]6
<PAGE>

Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
[LOGO] SQUIRREL CHATTER

Ralph Wanger is the President of Wanger Asset Management, L.P., and the
portfolio manager of Wanger Advisors Trust and Acorn Investment Trust. Mr.
Wanger has been featured in Forbes, Money, The Wall Street Journal, Newsweek and
Barron's. Mr. Wanger was also featured in Bill Griffeth's 1994 book, The Mutual
Fund Masters. In a USA Today national survey, professional money managers were
asked to name their favorite investment professional. Wanger was voted #1.

A Zebra in Lion Country, by Ralph Wanger, is due out in bookstores in
March. Published by Simon & Schuster, this book is a witty survival guide to
investing. It also features some of Wanger's letters to Acorn Fund shareholders
which investors have enjoyed reading over the years. An excerpt from this new
book follows.

Every bad idea starts from a good idea. We all know this from our own
experience. We go to a party and have a glass of champagne. Good idea. We feel
better, more relaxed. The party is now more interesting, the toasts more lively,
the girls prettier, the dancing more fun. So we have a second glass of
champagne. Another good idea.

The jokes now have gone from humorous to hilarious, the people you're meeting
are the most interesting and glamorous you've ever known, and the dancing is
wild and you've never been better at it. But after the third glass, and the
fourth... well, what started as a good idea turns into a very bad idea, with
your head already beginning to pound from a headache you know will terminate in
a humdinger of a hangover.

It happens all the time in the stock market. Technology stocks have been
the rage for a long time, albeit with some periods of "consolidation." The boom
started with a very good idea. American technology leads the world. Personal
computers and the software to run them, and other electronic and communications
devices, have become inexpensive and relatively easy to use, and we all buy
them. Companies like Microsoft, Motorola, Intel are well-run--indeed fabulous--
companies. All this is correct, a great investment idea. The people who were
in early have made a lot of money.

But as the party lengthens, the stocks get taken over by people who don't
particularly understand what's happening; they are just playing a trend.

(continued)

1
<PAGE>

Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
[LOGO] SQUIRREL CHATTER (continued)

New companies are invented to meet their demands. The securities industry, you
know, is not a service industry. It is a manufacturing industry. If you want a
stock, Wall Street will make it for you. Any business, any kind you want.
Recently, the Internet being the rage, the investment bankers have worked
overtime creating a stream of IPOs to meet the demand. And people love them, to
judge by their P/Es, some of which have soared into the triple-digit
stratosphere.

Remember back in the early '80's when the hard disk drive for computers was
invented? It was an important, crucial invention, and investors were eager to
be part of this technology. More than 70 disk drive companies were formed and
their stocks were sold to the public. Each company had to get 20 percent of the
market share to survive. For some reason, they didn't all do it.

Anything can get overdone. In the financial world, things get taken to extremes
all the time, like the tulip scandal of 1637. That started with a good idea. The
tulip was a terrific invention. The flower had not previously been seen in
Europe, and it was a great hit, and new varieties and colors increased its
popularity. There was nothing wrong with the idea. But after a few years people
started selling tulip bulbs for hundreds of thousands of dollars a piece, if
they were of a rare variety, and a good idea went to speculative madness.

The tulip was a good idea, disk drives were a good idea, the Internet is a
good idea. They have to be good ideas or they would not become widely popular.
Come up with a concept that's patently silly or harmful and people won't want
it. So, only a good idea can become so popular that it becomes a bad idea.

[PHOTO OF RALPH WANGER APPEARS HERE]

Ralph Wanger, President

2
<PAGE>

Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
FUNDS AT A GLANCE

- --------------------------------------------------------------------------------
WANGER U.S. SMALL CAP
RESULTS TO DECEMBER 31, 1996

<TABLE>
<CAPTION>
4th Quarter Last 12 months
<S> <C> <C>
Wanger U.S. Small Cap 7.7% 46.6%
Russell 2000 5.2% 16.5%
S&P MidCap 400 6.1% 19.2%
S&P 500 8.3% 23.0%
Dow-Jones 10.2% 28.9%
966 Variable Insurance
Funds Average 13.4%
</TABLE>

NET ASSET VALUE PER SHARE AS OF 12/31/96: $16.97

The Russell 2000 is formed by taking 3,000 companies and then eliminating the
largest 1,000 leaving a good small company index. The S&P MidCap 400 is a market
value-weighted index of 400 stocks that are in the next tier down from the S&P
500. The S&P 500 is a broad market-weighted average, still blue chip dominated.
The Dow Jones Industrial Average includes 30 large companies. The Lipper
Variable Funds average includes both funds. All indices are unmanaged and
include reinvested dividends.

- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
WANGER INTERNATIONAL SMALL CAP
RESULTS TO DECEMBER 31, 1996

4th Quarter Last 12 months
<S> <C> <C>
Wanger Int'l Small Cap 4.3% 32.0%
EAFE 1.6% 6.1%
Lipper International Small Co. 2.8% 13.3%
Funds Average
Lipper International Fund Index 5.2% 14.4%
966 Variable Insurance
Funds Average 13.4%
71 International Variable Insurance
Funds Average 14.9%
</TABLE>

NET ASSET VALUE PER SHARE AS OF 12/31/96: $17.71

EAFE is Morgan Stanley's Europe, Australia and Far East Index, an index of
companies throughout the world in proportion to world market capitalization,
excluding the U.S. and Canada. The Lipper International Small Company Funds
Average is comprised of 12 small company international funds. The Lipper
International Fund Index is an equal-weighted index of the 30 largest
international funds. The Lipper Variable Funds average include both funds; the
International Average includes Wanger Int'l Small Cap. All indices are unmanaged
and include reinvested dividends.

- --------------------------------------------------------------------------------
WANGER U.S. SMALL CAP TOP 5 INDUSTRIES
As a % of net assets, as of 12/31/96

<TABLE>
<S> <C>
Energy/Minerals 23.9%
Information 17.9%
Industrial Goods/Services 14.4%
Finance 14.0%
Health Care 13.2%
</TABLE>

- --------------------------------------------------------------------------------
WANGER INTERNATIONAL SMALL CAP TOP 5 COUNTRIES
As a % of net assets, as of 12/31/96

<TABLE>
<S> <C>
United Kingdom 16.1%
Japan 14.6%
Sweden 7.6%
Singapore 5.8%
Australia 5.5%
</TABLE>
- --------------------------------------------------------------------------------
WANGER U.S. SMALL CAP TOP 10 HOLDINGS

<TABLE>
<S> <C> <C> <C>
CalEnergy 4.9 % Respironics 2.8 %
Power Plants Sleep Apnea Products

Tesoro Petroleum 3.8 % Wackenhut 2.7%
Oil Refinery/Gas Reserves Prison Management

NGC 3.8% Atwood Oceanics 2.6%
Gas Processing/Marketing Offshore Drilling

Lincare Holdings 3.6 % Coast Savings 2.4%
Home Health Care Services California Savings/Loan

Seagull Energy 3.6 % Kronos 2.4 %
Oil/Gas Producer Time Accounting
Software & Clocks
</TABLE>

- --------------------------------------------------------------------------------
WANGER INTERNATIONAL SMALL CAP TOP 10 HOLDINGS

<TABLE>
<S> <C> <C> <C>
TT Tieto 3.4% Oriflame International 2.0%
Computer Services/ Natural Cosmetics
Consulting--Finland United Kingdom

Tyndall 2.9% Kempen 2.0%
Money Management/ Stock Brokerage/Investment
Insurance--Australia Management--Netherlands

Genting International 2.8% Grupo Radio Centro 1.9%
Cruise Line--Singapore Radio Broadcasting/
Networks Mexico
Getinge Industrier 2.3%
Sterilization & Disinfection International Container 1.9%
Equipment--Sweden Terminal Services
Container Handling Terminals
Medeva 2.1% & Port Management--Philippines
Pharmaceuticals
United Kingdom Premier Oil 1.8%
Oil/Gas Producer
United Kingdom
</TABLE>

- --------------------------------------------------------------------------------
The funds' top 10 holdings and portfolio diversification vary with changes in
portfolio investments. See the Statements of Investments for complete lists of
the funds's holdings, including those described under "Performance Review."

3
<PAGE>

Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
WANGER U.S. SMALL CAP PERFORMANCE REVIEW

Wanger U.S. Small Cap had a career year in 1996. One number says it all: +46.6%.
Your Fund's 46.6% return was the third best of all 966 variable insurance funds
in the U.S. tracked by Lipper Analytical Services, Inc. This ranking is based on
the one year total return ending 12/31/96. In other words, we ranked in the top
0.3% of our class. That's summa summa cum laude material.

At the head of our own class were our oil and gas stocks. We accumulated an
outsized energy position in the first half of the year, buying up bustling
companies like NGC Corp. (natural gas brokerage), Atwood Oceanics (deep-sea
drilling rigs), Seagull Energy and United Meridian (oil & gas explorers) on the
cheap. Ten-gallon hats off to Jason Selch, our resident oilman, for tapping into
those gusher stocks.

Small-cap investing was at a handicap last year. Small-cap indices like the
Russell 2000 (+ 16.5%) lagged behind the S&P 500's 23% return as mutual fund
managers poured their record cash inflows into the most liquid large-cap stocks.

The popularity of index investing and the revival of the Nifty Fifty were both
signs of the market's big-cap fetish. We produced our own nifty returns without
the benefit of bigness. We jumped into energy stocks early in the year when the
stocks were slow to follow the price of oil's lead. And we stayed clear of the
fancy-multiple high-tech stocks that soared in the first quarter, but littered
the new lows list soon after.

Our other big winners were a multi-industrial group. Technology was represented
by ACT Manufacturing, an electronics assembler with a bulging backlog of new
customers. Health care winner was Steris, a sterilization equipment company
recovering from acquisition indigestion. Our growth utility (no oxymoron)
CalEnergy was buoyed by its recent acquisition of a UK electric company. And our
best banker was Texas Regional, the grandest bank in the Rio Grande Valley.

Small-cap investing can be volatile and 1996 will be a hard act to follow. Our
team of analysts will continue to work hard to reward the confidence you've
shown in us.

- --------------------------------------------------------------------------------
FUND FACTS

THE U.S. STOCK MARKET WAS RED HOT AND THE LARGE COMPANY INDEXES, LIKE THE S&P
500 AND THE DOW JONES INDUSTRIAL AVERAGE, ENJOYED ANOTHER BANNER YEAR. REMEMBER,
THE S&P 500 IS A BROAD MARKET-WEIGHTED, BLUE-CHIP DOMINATED INDEX AND THE DOW
JONES IS MADE UP OF THE 30 LARGEST U.S. COMPANIES' RETURNS. MOST WANGER U.S.
SMALL CAP COMPANIES ARE NOT FOUND IN THE S&P 500 OR THE DOW; RATHER, THE FUND
PRIMARILY INVESTS IN SMALL AND MID-SIZE COMPANIES IN THE U.S.

4
<PAGE>

Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
[LOGO] WANGER U.S. SMALL CAP RESULTS TO DECEMBER 31, 1996

- --------------------------------------------------------------------------------
THE VALUE OF A $10,000 INVESTMENT IN TOTAL RETURN FOR EACH PERIOD
WANGER U.S. SMALL CAP MAY 3, 1995 THROUGH DECEMBER 31, 1996

Wanger U.S. Small Cap
$17,004

Russell 2000
$13,756

[GRAPH APPEARS HERE]

- --------------------------------------------------------------------------------
This graph compares the results of $10,000 invested in Wanger U.S. Small Cap on
May 3, 1995 (the date the Fund began operations) with the Russell 2000 with
dividends reinvested. Past performances does not guarantee future results. The
investment return and principal value of an investment in the Fund will
fluctuate so that Fund shares, when redeemed, may be worth more or less than
their original cost.

AVERAGE ANNUAL TOTAL RETURN
1 year: 46.6% Life: 37.4%

5
<PAGE>

Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
WANGER INTERNATIONAL SMALL CAP PERFORMANCE REVIEW

Wanger International Small Cap had a spectacular year in 1996. Our total return
for the year was 32%. Lipper Analytical Services, Inc. tracks 966 variable
insurance mutual funds; our total return for 1996 ranked us #16, in the top 2%.
We are one of 71 international variable insurance mutual funds; we were #2 in
the international arena. Our return was more than double that of the average of
our competitors.

How did we do it? Market conditions were mixed with the most commonly used
international stock index, EAFE, up only 6% for the year. That we were able to
produce a return over five times as large was in part achieved by underweighting
Japanese stocks (the Jasdaq index of smaller Japanese companies was down almost
14% in 1996, on top of which the Japanese Yen declined about 11%) and
overweighting European stocks (a number of European stock markets were up over
20% and most of their currencies declined less than the Yen).

A second important factor which helped us to outperform was our exposure to
energy and technology stocks. The former sector took off along with the price of
oil, and the latter benefited from the current profit growth wave in the
industry, along with newfound interest by U.S. institutions tired of paying sky
high prices for domestic technology stocks.

Finally, our bottom up, research driven approach to stock picking paid off with
our analysts by and large outperforming their respective countries and sectors
in 1996.

For example, our aforementioned energy portfolio benefited from the skill and
enthusiasm brought to bear by our intrepid Jason Selch, whose stocks in the fund
rose an incredible 176% in 1996.

How much risk did we take? Recall that in the investing world, risk is usually
measured by the degree to which prices bounce up and down. We all know that by
this measure cash is the best behaved (least volatile) asset, followed by short-
term bonds, then long-term bonds, blue chip stocks, and finally smaller company
stocks. Where does your Fund fit in in 1996? This might surprise you, but our
weekly volatility during 1996 was somewhere between long-term bonds and blue
chip stocks, even though the Fund invests in smaller company stocks and even
though individual foreign markets can be quite volatile (1).

Your Fund enjoyed lower volatility in 1996 than the blue chips because of its
high level of diversification across countries (over 25) and industries (more
than 20). To illustrate, our top five performers in 1996 included the Finnish
computer consultant TT Tieto, Canadian oil service company Shaw, Dutch mutual
fund manager Kempen, Argentine steel producer Siderca, and Australian life
insurer Tyndall.

We like these stocks because they have high management ownership, low or no
research coverage by brokerage analysts, and above average returns on equity.
Our globe trotting team of security analysts is already at work trying to
uncover more niche companies to add to your portfolio in 1997!!

- --------------------------------------------------------------------------------

(1) We calculated the weekly volatility (technically the standard deviation of
the weekly returns) in 1996 for each of these asset classes and observed the
following:

<TABLE>
<S> <C>
Cash 0%
Bonds (Lipper U.S. Government Bond Index) 0.8%
Wanger International Small Cap 1.1%
Blue chip stocks (S&P 500 Index) 1.7%
Small company stocks (NASDAQ Composite Index) 2.0%
</TABLE>

Volatility or variability in expected return is one measure of risk. Higher
numbers indicate greater volatility. The information shown represents relative
volatility over past periods and does not necessarily indicate relative future
volatility.

6
<PAGE>

Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
[LOGO] WANGER INTERNATIONAL SMALL CAP RESULTS TO DECEMBER 31, 1996

- --------------------------------------------------------------------------------
THE VALUE OF A $10,000 INVESTMENT IN TOTAL RETURN FOR EACH PERIOD
WANGER INTERNATIONAL SMALL CAP MAY 3, 1995 THROUGH DECEMBER 31, 1996

[WANGER INTERNATIONAL SMALL CAP GRAPH APPEARS HERE]

________________________________________________________________________________
This graph compares the results of $10,000 invested in Wanger International
Small Cap on May 3, 1995 (the date the Fund began operations) with Morgan
Stanley's Europe, Australia and Far East Index (EAFE). Past performances does
not guarantee future results. The investment return and principal value of an
investment in the Fund will fluctuate so that Fund shares, when redeemed, may be
worth more or less than their original cost.

AVERAGE ANNUAL TOTAL RETURN
1 year: 32.0% Life: 41.0%

7
<PAGE>

Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
WANGER U.S. SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31, 1996

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number Value
of Shares
<S> <C> <C>
COMMON STOCKS AND OTHER EQUITY-LIKE
SECURITIES--90.3%

INFORMATION--17.9%
- --------------------------------------------------------------------------------
BROADCASTING/CATV--1.9%

100,000 C-Tec(b) $ 2,425,000
Cable TV/Local Telephone

- --------------------------------------------------------------------------------
PROGRAMMING FOR CATV/TV/SATELLITES--6.4%

113,400 Data Transmission (b) 2,523,150
Data Services for Farmers

88,000 Tele-Communications,
Liberty Media Group (b) 2,513,500
Cable TV Programming

70,000 Gaylord Entertainment 1,601,250
Cable TV Programming

58,000 International Family Entertainment (b) 899,000
Cable TV Programming

42,000 United Video Satellite (b) 735,000
Cable TV Programming
- --------------------------------------------------------------------------------
TOTAL 8,271,900

- --------------------------------------------------------------------------------
MOBILE COMMUNICATIONS--1.9%

112,500 COMARCO (b) 2,053,125
Wireless Network Testing

40,000 Palmer Wireless (b) 420,000
Cellular Phone Services
- --------------------------------------------------------------------------------
TOTAL 2,473,125
- --------------------------------------------------------------------------------
COMPUTER SOFTWARE/SERVICES--4.2%

103,600 CACI International, CI.A (b) 2,175,600
Computer Software Systems

46,600 Analysts International 1,316,450
Contract Programming

80,000 Simulation Sciences (b) 1,190,000
Process Control Software

14,000 Compuware (b) 701,750
Computer Services & Software
- --------------------------------------------------------------------------------
TOTAL 5,383,800

- --------------------------------------------------------------------------------
<CAPTION>
STATEMENT OF INVESTMENTS DECEMBER 31, 1996

Number Value
of Shares
<S> <C> <C>
COMPUTER SYSTEMS--1.1%

55,400 ACT Manufacturing (b) $ 1,461,175
Contract Manufacturing

- --------------------------------------------------------------------------------
COMPONENTS/PERIPHERALS--2.4%

96,000 Kronos (b) 3,072,000
Time Accounting Software & Clocks

- --------------------------------------------------------------------------------
INFORMATION TOTAL 23,087,000

HEALTHCARE--13.2%
- --------------------------------------------------------------------------------
BIOTECHNOLOGY/DRUG DELIVERY--1.4%

40,000 Watson Pharmaceuticals (b) 1,797,500
Generic Pharmaceuticals

- --------------------------------------------------------------------------------
MEDICAL EQUIPMENT--7.1%

210,000 Respironics (b) 3,648,750
Sleep Apnea Products

59,100 Steris (b) 2,570,850
Sterilization Equipment

76,000 Invacare 2,090,000
Wheelchairs, Patient Aids & Beds

70,000 Kinetic Concepts 857,500
Hospital Beds
- --------------------------------------------------------------------------------
TOTAL 9,167,100

- --------------------------------------------------------------------------------
SERVICES--4.7%

114,000 Lincare Holdings (b) 4,674,000
Home Health Care Services

100,800 United Payors & Providers (b) 1,386,000
Medical Claims Repricing
- --------------------------------------------------------------------------------
TOTAL 6,060,000

- --------------------------------------------------------------------------------
Health Care Total 17,024,600
</TABLE>

See accompanying notes to financial statements.

8
<PAGE>

Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
WANGER U.S. SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31, 1996

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number Value
of Shares
<S> <C>

CONSUMER GOODS/SERVICES--6.9%
- --------------------------------------------------------------------------------

RETAIL--3.1%

322,900 Host Mariott Services (b) $ 2,946,463
Runs Airport Restaurants

30,000 Borders Group (b) 1,076,250
Bookstores
- --------------------------------------------------------------------------------
Total 4,022,713

- --------------------------------------------------------------------------------
ENTERTAINMENT/LEISURE--1.4%
63,000 Showboat 1,086,750
Casino/Hotels

42,000 Rio Hotel & Casino (b) 614,250
Casino/Hotel

60,000 Monarch Casino & Resort (b) 120,000
Casino/Hotel
- --------------------------------------------------------------------------------
TOTAL 1,821,000

- --------------------------------------------------------------------------------
FOOD--0.4%
70,000 Shoney's (b) 490,000
Restaurants

- --------------------------------------------------------------------------------
MANUFACTURERS--2.0%
163,500 Rawlings (b) 1,635,000
Baseball Equipment

28,000 Newell 882,000
Household Goods
- --------------------------------------------------------------------------------
TOTAL 2,517,000

- --------------------------------------------------------------------------------
CONSUMER GOODS/SERVICES TOTAL 8,850,713

- --------------------------------------------------------------------------------
Number Value
of Shares

Finance--14.0%
- --------------------------------------------------------------------------------
BANKS/SAVINGS & LOANS--7.4%
<S> <C> <C>
84,000 Coast Savings (b) 3,076,500
California Savings & Loan

60,000 Texas Regional Bancshares 2,040,000
TexMex Bank

56,000 Peoples Bank Bridgeport 1,617,000
Consumer Finance

106,000 Imperial Thrift & Loan (b) 1,590,000
California Thrift

80,000 Commonwealth Bancorp 1,200,000
Pennsylvania Savings & Loan
- --------------------------------------------------------------------------------
TOTAL 9,523,500

- --------------------------------------------------------------------------------
INSURANCE--1.6%
64,000 Penn Treaty American (b) 1,664,000
Nursing Home Equipment

17,000 Leucadia National 454,750
Insurance Holding Company
- --------------------------------------------------------------------------------
TOTAL 2,118,750

- --------------------------------------------------------------------------------
MONEY MANAGEMENT--2.7%
125,000 Baker Fentress 2,109,375
Closed-End Investment Company

63,000 SEI 1,401,750
Mutual Fund Distributor
- --------------------------------------------------------------------------------
TOTAL 3,511,125

- --------------------------------------------------------------------------------
CREDIT CARDS--1.1%
31,000 National Data 1,348,500
Credit Card & Medical Claims Processor

- --------------------------------------------------------------------------------
OTHER--1.2%
86,500 Jayhawk (b) 973,125
Used Auto Finance

28,000 Americredit (b) 574,000
Used Auto Finance
- --------------------------------------------------------------------------------
TOTAL 1,547,125

- --------------------------------------------------------------------------------
FINANCE TOTAL 18,049,000
</TABLE>

See accompanying notes to financial statements

<PAGE>

Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
WANGER U.S. SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31, 1996

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Number Value
of Shares
<S> <C> <C>
INDUSTRIAL GOODS/SERVICES--14.4%
- ----------------------------------------------------------------------------------
MACHINERY--0.4%

30,500 Farr (b) $507,062
Filters

- ----------------------------------------------------------------------------------
STEEL--5.5%

135,900 Atchison Casting (b) 2,446,200
Steel Foundries

91,000 Worthington Industries 1,649,375
Steel Processing

56,000 Gibraltar Steel (b) 1,470,000
Steel Processing

105,000 Universal Stainless (b) 918,750
Semi-finished Stainless Steel Producer

35,300 Steel Dynamics (b) 675,113
Steel Mini-Mill
- ----------------------------------------------------------------------------------
TOTAL 7,159,438

- ----------------------------------------------------------------------------------
INDUSTRIAL SUPPLIERS--3.2%

92,000 Applied Industrial Technologies 2,564,500
Distribution of Industrial Components

75,000 Lilly Industries, Cl. A 1,368,750
Industrial Coatings

10,500 Aftermarket Technology (b) 181,125
Auto Transmission Remanufacturer
- ----------------------------------------------------------------------------------
TOTAL 4,114,375

- ----------------------------------------------------------------------------------
SERVICES--5.3%

230,600 Wackenhut, Cl. B 3,516,650
Prison Management

100,000 World Color Press (b) 1,925,000
Printing

50,000 Hub Group (b) 1,337,500
Freight Forwarder
- ----------------------------------------------------------------------------------
TOTAL 6,779,150

- ----------------------------------------------------------------------------------
INDUSTRIAL GOODS/SERVICES TOTAL 18,560,025
<CAPTION>
- ----------------------------------------------------------------------------------
Number Value
of Shares
<S> <C> <C>
ENERGY/MINERALS--23.9%
- ----------------------------------------------------------------------------------
INDEPENDENT POWER--6.1%

189,000 CalEnergy (b) $6,355,125
Power Plants

19,000 AES Corporation (b) 883,500
Power Plants

38,500 Thermo Ecotek (b) 587,125
Biomass Operator
- ----------------------------------------------------------------------------------
TOTAL 7,825,750

- ----------------------------------------------------------------------------------
OIL/GAS PRODUCERS--8.6%

352,000 Tesoro Petroleum (b) 4,928,000
Oil Refinery/Gas Reserves

209,000 Seagull Energy (b) 4,598,000
Oil & Gas Producer

22,000 United Meridian (b) 1,138,500
Oil & Gas Producer

100,000 Tipperary (b) 462,500
Oil & Gas Producer
- ----------------------------------------------------------------------------------
TOTAL 11,127,000

- ----------------------------------------------------------------------------------
DISTRIBUTION/MARKETING/REFINING--4.2%

210,000 NGC 4,882,500
Gas Processing/Marketing

23,000 United Cities Natural Gas 517,500
Natural Gas Utility
- ----------------------------------------------------------------------------------
TOTAL 5,400,000

- ----------------------------------------------------------------------------------
OIL SERVICES--5.0%

53,700 Atwood Oceanics (b) 3,409,950
Offshore Drilling

145,000 GeoScience (b) 1,885,000
Offshore Seismic Equipment

53,000 J Ray McDermott (b) 1,166,000
Offshore Construction
- ----------------------------------------------------------------------------------
TOTAL 6,460,950

- ----------------------------------------------------------------------------------
ENERGY/MINERALS TOTAL 30,813,700
</TABLE>

See accompanying notes to financial statements.

10
<PAGE>

Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
WANGER U.S. SMALL CAP

<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Principal Amount Value
<S> <C>

TOTAL COMMON STOCKS AND OTHER
EQUITY-LIKE SECURITIES--90.3% $116,385,038
- -----------------------------------------------------------------
(COST: $96,923,306)

SHORT-TERM OBLIGATION--7.5% 9,690,000
$9,690,000 State Street Bank Repurchase
Agreement 4.75% 01/02/97;
12/31/96 Agreement Collateralized by U.S. Treasury Bonds
- -----------------------------------------------------------------
(COST: $9,690,000)

TOTAL INVESTMENTS--97.8% 126,075,038
- -----------------------------------------------------------------
(COST: $106,613,306)

CASH AND OTHER ASSETS LESS LIABILITIES--2.2% 2,882,873
- - ---------------------------------------------------------------

TOTAL NET ASSETS--100% $128,957,911
</TABLE>

- -----------------------------------------------------------------
NOTES TO STATEMENT OF INVESTMENTS:

(a) At December 31, 1996, for federal income tax purposes cost of investments
was $106,613,306 and net unrealized appreciation was $19,461,732,
consisting of gross unrealized appreciation of $21,927,316 and gross
unrealized depreciation of $2,465,584.

(b) Non-income producing security.

See accompanying notes to financial statements.

11
<PAGE>

Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
WANGER INTERNATIONAL SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31, 1996

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Number Value
of Shares
<S> <C> <C>
COMMON STOCKS AND OTHER EQUITY-LIKE
SECURITIES-93.3%

EUROPE-42.3%
- -----------------------------------------------------------------------------
GERMANY/AUSTRIA-2.0%

10,000 Rhoen Klinikum Ord. $1,044,708

1,200 Rhoen Klinikum Pfd. 119,136
Hospital Management

2,500 Cewe Color Holdings 567,776
Photographic Developing/Printing
- -----------------------------------------------------------------------------
TOTAL 1,731,620
- -----------------------------------------------------------------------------
DENMARK-0.8%

5,000 Kompan International (b) 703,521
Playground Equipment
- -----------------------------------------------------------------------------
NETHERLANDS-2.0%

86,000 Kempen (b) 1,690,369
Stock Brokerage/Investment Management
- -----------------------------------------------------------------------------
FINLAND-3.4%

34,000 TT Tieto, Cl. B 2,868,865
Computer Services/Consulting
- -----------------------------------------------------------------------------
NORWAY-0.9%

62,500 P4 Radio Helo Norge (b) 567,701
Commercial Radio Station

55,000 Sysdeco Group (b) 220,503
Software "Tool" Sets & Systems

- -----------------------------------------------------------------------------
TOTAL 788,204
- -----------------------------------------------------------------------------
SWEDEN-7.6%

100,000 Getinge Industrier 1,969,830
Sterilization & Disinfection Equipment

50,000 Esselte, Series A 1,135,032
Office Supplies & Related Equipment

60,000 Mandator (b) 984,183
Computer Services/Consulting

8,000 Scala International (b) 726,421
Accounting Software

40,000 Frontec, Series B. (b) 691,271
Computer Services & Software
<CAPTION>
- -----------------------------------------------------------------------------
Number
of Shares Value
<S> <C> <C>

- ----------------------------------------------------------------------------
SWEDEN-7.6% (CONT.)
20,000 Tryckindustri $ 600,469
Printer

13,714 Pricer, Cl. B (b) 337,427
Electronic Shelf Labels for Supermarkets
- -----------------------------------------------------------------------------
TOTAL 6,444,633

- -----------------------------------------------------------------------------
FRANCE-2.6%
12,000 Axime Ex Segin (b) 1,384,935
Computer Services/Consulting

7,250 Fininfo 767,004
Financial Data Feeds
- -----------------------------------------------------------------------------
TOTAL 2,151,939
- -----------------------------------------------------------------------------
UNITED KINGDOM/IRELAND-16.1%

402,361 Medeva 1,759,272
Drugs for Hyperactive Children

185,000 Oriflame International 1,693,759
Natural Cosmetics Sold Door-to-Door

2,500,000 Premier Oil (b) 1,518,779
Oil & Gas Producer

799,700 St James Place 1,347,999
Life Insurance

40,000 Euro Money Publications 960,039
Financial Publications & Databases

117,000 Seton Healthcare Group 910,010
Pharmaceuticals

170,000 Tunstall 781,123
Monitoring Equipment

80,000 Edinburgh Fund Managers 772,139
Investment Management

223,500 Bluebird Toys 751,564
"Polly Pocket" Toy Manufacturer

2,000,000 Electronics Boutique (b) 701,633
Videogame/Computer Software Stores

58,500 Serco Group 674,749
Facilities Management

80,000 N. Brown Group 614,014
Mail Order Clothing in Large Sizes
</TABLE>

See accompanying notes to financial statements.

12
<PAGE>

Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
Wanger International Small Cap Statement of Investments December 31, 1996

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Number Value
of Shares
<S> <C>

- ----------------------------------------------------------------------------------
UNITED KINGDOM/IRELAND-16.1% (CONT.)
65,000 Dorling Kindersley $457,730
Reference Books & CD-ROMs
35,000 Planning Sciences (b) 420,000
Database & Business Intelligence Software
13,000 International Cabletel (b) 328,250
Cable TV & Telephone System
- ----------------------------------------------------------------------------------
TOTAL 13,691,060

- ----------------------------------------------------------------------------------
PORTUGAL-0.6%
45,400 Filmes Lusomundo (b) 522,283
Newspapers, Radio, Video, Film Distribution

- ----------------------------------------------------------------------------------
SWITZERLAND-1.9%
2,000 Societe Generale d'Affichage 893,655
Billboard Advertising
1,400 Phoenix Mecano 731,903
Electrical Components
- ----------------------------------------------------------------------------------
TOTAL 1,625,558

- ----------------------------------------------------------------------------------
HUNGARY-0.2%
5,000 Cofinec (b) 151,250
Consumer Goods Packaging

- ----------------------------------------------------------------------------------
ITALY/GREECE-4.2%
399,000 Banca Fideuram 874,362
Life Insurance & Mutual Funds
120,000 Athens Medical Center 841,474
Hospitals (Greece)
300,000 Costa Crociere 726,077
Mediterranean Cruise Line
30,000 Intracom (b) 674,881
Telecommunications Equipment (Greece)
15,000 Cellular Communications International (b) 435,000
Mobile Communications
- ----------------------------------------------------------------------------------
TOTAL 3,551,794

- ----------------------------------------------------------------------------------
EUROPE TOTAL 35,921,096
<CAPTION>
- ----------------------------------------------------------------------------------
Number Value
of Shares
<S> <C>

ASIA-30.7%
- ----------------------------------------------------------------------------------
HONG KONG/CHINA-2.7%
3,500,000 Golden Harvest Entertainment 1,176,471
Movie Distribution & Exhibition
1,300,000 Li and Fung 1,151,260
Sourcing of Consumer Goods
- ----------------------------------------------------------------------------------
TOTAL 2,327,731

- ----------------------------------------------------------------------------------
JAPAN-14.6%
30,000 Hokuto 1,315,585
Mushroom Grower
51,600 Central Uni 1,178,082
Health Care/Medical Equipment
30,000 Konami 1,020,936
Entertainment Software/Hardware
20,300 HIS 979,409
Travel Agent
15,000 Tiemco (b) 958,904
Fishing Equipment
40,000 Arrk 923,581
Industrial Modeling
30,000 People 904,627
Sports Clubs
25,000 Nihon Jumbo 870,165
Photo Processing Lab
27,000 NuSkin Asia Pacific (b) 833,625
Personal Care Products
10,000 Ryohin Keikaku 740,932
Specialty Consumer Goods Retailer
11,400 Paramount Bed 726,803
Hospital Bed Manufacturer
30,000 Shinki 692,685
Corporate & Consumer Lending
10,500 Noritsu Koki 493,021
Photo Processing Lab Manufacturer
32,000 Belluna 479,711
Catalog Sales
10,000 Mars Engineering 254,157
150 Mars Engineering Warrants 1/25/00 18,750
GAMING SYSTEMS & MACHINERY
- ----------------------------------------------------------------------------------
TOTAL 12,390,973
</TABLE>

See accompanying notes to financial statements.

13
<PAGE>

Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
Wanger International Small Cap Statement of Investments December 31, 1996

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Number Value
of Shares
<S> <C>

- ----------------------------------------------------------------------------------
MALAYSIA-1.7%
300,000 Malaysian Assurance Alliance $1,461,097
Insurance

- ----------------------------------------------------------------------------------
INDONESIA/PHILIPPINES-2.6%
3,000,000 Int'l Container Terminal Services (b) 1,568,441
Container Handling Terminals
& Port Management (Philippines)
600,000 PILTEL (b) 507,605
Mobile Communications (Philippines)
214,800 Suba Indah 131,835
Beverage and Food
- ----------------------------------------------------------------------------------
TOTAL 2,207,881

- ----------------------------------------------------------------------------------
INDIA-0.5%
30,000 IS Himalaya Fund (b) 387,000
Closed-End Fund

- ----------------------------------------------------------------------------------
KOREA-1.8%
35,000 Dongbu Fire & Marine Insurance (b) 1,168,267
Non-Life Insurance
1,500 S-1 Corporation New (b) 246,600
500 S-1 Corporation 91,662
Alarm Monitoring
- ----------------------------------------------------------------------------------
TOTAL 1,506,529

- ----------------------------------------------------------------------------------
SINGAPORE-5.8%
1,000,000 Genting International 2,400,000
Cruise Line
599,956 Venture Manufacturing 1,492,599
411,134 Venture Manufacturing Warrants 7/26/99 (b) 661,318
Contract Electronics Manufacturer
200,000 Datacraft Asia 334,000
Computer Consulting
- ----------------------------------------------------------------------------------
TOTAL 4,887,917

- ----------------------------------------------------------------------------------
THAILAND-1.0%
769,000 Shinawatra Satellite 869,774
Satellite Leasing

- ----------------------------------------------------------------------------------
ASIA TOTAL 26,038,902
<CAPTION>
- ----------------------------------------------------------------------------------
Number Value
of Shares
<S> <C>

LATIN AMERICA-9.2%
- ----------------------------------------------------------------------------------
MEXICO-3.4%
235,000 Grupo Radio Centro (b) 1,615,625
Radio Broadcasting/Networks
417,000 Nadro, Series L 1,244,855
Pharmaceutical Distribution
- ----------------------------------------------------------------------------------
TOTAL 2,860,480

- ----------------------------------------------------------------------------------
ARGENTINA-3.8%
700,000 Siderca 1,277,755
Seamless Pipe for Oil Wells
120,000 Patagonia 1,128,226
Supermarkets
412,000 Cresud (b) 729,386
Agriculture
28,000 Siderar (b) 80,656
Flat Rolled Steel
- ----------------------------------------------------------------------------------
TOTAL 3,216,023

- ----------------------------------------------------------------------------------
OTHER LATIN AMERICA-2.0%
15,000 Genesis Chile Fund 551,250
Closed-End Fund (Chile)
50,000 Elevadores Atlas 490,809
Elevator Services (Brazil)
8,000 Ceteco Holdings 460,169
Appliances Retailer (Central America)
550,000 Brazilian Smaller Companies Warrants 261,250
Closed-End Fund
- ----------------------------------------------------------------------------------
TOTAL 1,763,478

- ----------------------------------------------------------------------------------
LATIN AMERICA TOTAL 7,839,981
</TABLE>

See accompanying notes to financial statements.

14
<PAGE>

Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
WANGER INTERNATIONAL SMALL CAP STATEMENT OF INVESTMENTS DECEMBER 31, 1996

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number Value
of Shares
<S> <C> <C>
OTHER COUNTRIES--11.1%
- --------------------------------------------------------------------------------
AUSTRALIA--5.5%

1,417,976 Tyndall $ 2,421,542
Money Management & Insurance

800,000 Austereo 1,270,880
Radio Broadcasting

500,000 Australian Hospital Care (b) 992,875
Hospital Management
- --------------------------------------------------------------------------------
TOTAL 4,685,297

- --------------------------------------------------------------------------------
ISRAEL--1.2%

70,100 Blue Square Israel (b) 998,925
Supermarkets & Department Stores

- --------------------------------------------------------------------------------
CANADA--4.4%

70,000 Shaw Industries 1,414,606
Oil Field Services

140,000 Ranger Oil 1,382,500
Oil & Gas Producer

250,000 Pan East Petroleum (b) 893,704
Oil & Gas Producer
- --------------------------------------------------------------------------------
TOTAL 3,690,810

- --------------------------------------------------------------------------------
OTHER COUNTRIES TOTAL 9,375,032
<CAPTION>
- --------------------------------------------------------------------------------
Principal Amount Value
<S> <C>
TOTAL COMMON STOCKS AND OTHER
EQUITY-LIKE SECURITIES--93.3% $79,175,011
- --------------------------------------------------------------------------------
(COST: $71,170,835)

SHORT-TERM OBLIGATION--6.1% 5,185,000
$5,185,000 State Street Bank Repurchase
Agreement 4.75% 01/02/97;
12/31/96 Agreement Collateralized by U.S. Treasury Bonds
- --------------------------------------------------------------------------------
(COST: $5,185,000)

TOTAL INVESTMENTS--99.4% 84,360,011
- --------------------------------------------------------------------------------
(COST: $76,355,835)

CASH AND OTHER ASSETS LESS LIABILITIES--0.6% 495,071
- --------------------------------------------------------------------------------

TOTAL NET ASSETS--100% $84,855,082
- --------------------------------------------------------------------------------
</TABLE>

- --------------------------------------------------------------------------------
NOTES TO STATEMENT OF INVESTMENTS:

(a) At December 31, 1996, for federal income tax purposes cost of investments
was $76,543,791 and net unrealized appreciation was $7,816,220 consisting
of gross unrealized appreciation of $13,081,776 and gross unrealized
depreciation of $5,265,556.

(b) Non-income producing security.

See accompanying notes to financial statements.

15
<PAGE>

Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
WANGER INTERNATIONAL SMALL CAP PORTFOLIO DIVERSIFICATION DECEMBER 31, 1996

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Percent Value
<S> <C> <C>

AT DECEMBER 31, 1996, THE FUND'S PORTFOLIO OF INVESTMENTS AS A PERCENTAGE
OF NET ASSETS WAS DIVERSIFIED AS FOLLOWS
- ---------------------------------------------------------------------------------
INFORMATION

10.3% Software/Services $ 8,734,816
4.4 Broadcasting/CATV 3,782,456
2.1 Mobile Communications 1,812,379
1.7 Distribution 1,417,769
0.9 Consumer Electronics 731,903
0.8 Equipment 674,881
- ---------------------------------------------------------------------------------
20.2 TOTAL 17,154,204

- ---------------------------------------------------------------------------------
HEALTH CARE

5.3 Biotechnology/Drug Delivery 4,436,420
3.7 Equipment 3,147,912
3.2 Services 2,746,250
2.0 Hospital/Laboratory Supplies 1,719,678
- ---------------------------------------------------------------------------------
14.2 TOTAL 12,050,260

- ---------------------------------------------------------------------------------
CONSUMER GOODS/SERVICES

11.7 Retail 9,974,101
7.9 Entertainment/Leisure 6,738,105
6.2 Manufacturers 5,229,551
2.6 Food 2,176,806
- ---------------------------------------------------------------------------------
28.4 TOTAL 24,118,563

- ---------------------------------------------------------------------------------
FINANCE
9.8% Money Management $ 8,305,911
3.2 Other 2,752,369
3.1 Insurance 2,629,364
- ---------------------------------------------------------------------------------
16.1 TOTAL 13,687,644

- ---------------------------------------------------------------------------------
INDUSTRIAL GOODS/SERVICES

8.3 Services 7,010,946
0.1 Steel 80,656
- ---------------------------------------------------------------------------------
8.4 TOTAL 7,091,602

- ---------------------------------------------------------------------------------
ENERGY/MINERALS

4.5 Oil/Gas Producers 3,794,983
1.5 Oil Services 1,277,755
- ---------------------------------------------------------------------------------
6.0 TOTAL 5,072,738

- ---------------------------------------------------------------------------------
93.3 TOTAL COMMON STOCKS AND 79,175,011
OTHER EQUITY-LIKE SECURITIES

- ---------------------------------------------------------------------------------
6.1 SHORT-TERM OBLIGATIONS 5,185,000

- ---------------------------------------------------------------------------------
0.6 CASH AND OTHER ASSETS LESS LIABILITIES 495,071

- ---------------------------------------------------------------------------------
100.0 NET ASSETS $84,855,082
</TABLE>

See accompanying notes to financial statements.

16
<PAGE>

Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 1996

<TABLE>
<CAPTION>
Wanger U.S. Wanger International
Small Cap Small Cap

- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS

Investments, at value (cost: Wanger U.S. Small Cap $106,613,306;
Wanger International Small Cap $76,355,835) $126,075,038 $84,360,011
Cash 5,875 360,529
Organization costs 66,641 66,641
Receivable for:
Securities sold 1,454,509 102,948
Fund shares sold 2,802,009 674,765
Dividends and interest 35,315 60,965
- -------------------------------------------------------------------------------------------------------------
Total assets 130,439,387 85,625,859

- -------------------------------------------------------------------------------------------------------------
Liabilities and Net Assets
Payable for:
Securities purchased 1,373,760 651,443
Amount owed to advisor 66,812 66,693
Other 40,904 52,641
- -------------------------------------------------------------------------------------------------------------
Total liabilities 1,481,476 770,777
- -------------------------------------------------------------------------------------------------------------
Net assets applicable to Fund shares outstanding $128,957,911 $84,855,082
- -------------------------------------------------------------------------------------------------------------
Fund shares outstanding 7,598,121 4,791,121
- -------------------------------------------------------------------------------------------------------------
PRICING OF SHARES
Net asset value, offering price and redemption price per share $16.97 $17.71
- -------------------------------------------------------------------------------------------------------------
ANALYSIS OF NET ASSETS
Paid-in capital $105,966,024 $74,585,481
Undistributed net realized gain on sales of investments and foreign
currency transactions 3,530,155 2,453,188
Unrealized appreciation of investments and foreign currency transactions 19,461,732 7,816,413
(net of unrealized PFIC gains of $187,956 for Wanger
International Small Cap)
Net investment loss -- --
- -------------------------------------------------------------------------------------------------------------
Net assets applicable to Fund shares outstanding $128,957,911 $84,855,082
- -------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to financial statements.

17
<PAGE>

Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
Wanger U.S. Wanger International
Small Cap Small Cap
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of foreign taxes of $51,646 for Wanger International Small Cap) $ 338,661 $ 474,929
Interest 217,556 106,849
- -----------------------------------------------------------------------------------------------------------------------
Total investment income 556,217 581,778
- -----------------------------------------------------------------------------------------------------------------------
EXPENSES:
Investment advisory 704,115 631,977
Legal and audit fees 56,103 56,023
Amortization of organization costs 20,031 20,031
Transfer agent 18,440 18,174
Reports to shareholders 16,857 17,483
Trustees' 15,524 15,400
Insurance 7,017 7,037
Custodian 17,508 102,609
Other 5,055 6,375
- -----------------------------------------------------------------------------------------------------------------------
Total expenses 860,650 875,109
Less custodian fees paid indirectly (17,508) (20,862)
- -----------------------------------------------------------------------------------------------------------------------
Net expenses 843,142 854,247
- -----------------------------------------------------------------------------------------------------------------------
Net investment loss (286,925) (272,469)
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on sales of investments 3,926,442 2,570,609
Net change in unrealized appreciation 19,022,289 6,894,415
- -----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 22,948,731 9,465,024
- -----------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations $22,661,806 $9,192,555
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes to financial statements.

18
<PAGE>

Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
--------------------------------------- ---------------------------------------
WANGER U.S. SMALL CAP WANGER INTERNATIONAL SMALL CAP

Year ended May 3, 1995 through Year ended May 3, 1995 through
December 31, 1996 December 31, 1995 December 31, 1996 December 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C>
FROM OPERATIONS:
Net investment loss $(286,925) $(102,659) $(272,469) $(27,334)
Net realized gain on sales of investments 3,926,442 59,816 2,570,609 53,290
Net change in unrealized appreciation 19,022,289 439,443 6,894,415 1,109,954
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting
from operations 22,661,806 396,600 9,192,555 1,135,910

DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income -- -- (6,530) --
Net realized gain (66,519) -- (52,334) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total distribution to shareholders (66,519) -- (58,864) --

FROM FUND SHARE TRANSACTIONS:
Reinvestment of dividends and capital gain
distributions 66,519 -- 58,864 --

Proceeds from shares sold 91,019,446 24,819,962 67,872,674 11,951,601
- ------------------------------------------------------------------------------------------------------------------------------------
91,085,965 24,819,962 67,931,538 11,951,601
Payments for shares redeemed (6,626,877) (3,438,708) (3,579,071) (1,844,269)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets from Fund share
transactions 84,459,088 21,381,254 64,352,467 10,107,332
- ------------------------------------------------------------------------------------------------------------------------------------
Total increase in net assets 107,054,375 21,777,854 73,486,158 11,243,242
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of Period 21,903,536 125,682 11,368,924 125,682
- ------------------------------------------------------------------------------------------------------------------------------------
End of Period (a) $128,957,911 $21,903,536 $84,855,082 $11,368,924
===================================================================================================================================
</TABLE>

(a) Includes accumulated net investment loss of $102,659 for Wanger U.S. Small
Cap and $27,401 for Wanger International Small Cap in 1995.

See accompanying notes to financial statements.

19
<PAGE>

Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
WANGER U.S. SMALL CAP FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
Year ended May 3, 1995 through
December 31, 1996 December 31, 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.60 $ 10.00

INCOME FROM INVESTMENT OPERATIONS
Net investment loss (c) (.06) (.05)
Net realized and unrealized gain on investments 5.46 1.65
- ----------------------------------------------------------------------------------------------------
Total from investment operations 5.40 1.60

LESS DISTRIBUTIONS
Dividends from net investment income -- --
Distributions from net realized gain (0.03) --
- ---------------------------------------------------------------------------------------------------
Total distributions (0.03) --

NET ASSET VALUE, END OF PERIOD $ 16.97 $ 11.60
- ---------------------------------------------------------------------------------------------------
TOTAL RETURN 46.59% 16.00%

RATIOS/SUPPLEMENTAL DATA:
Ratio of expenses to average net assets (a)(b) 1.21% 2.08% *
Ratio of net investment loss to average net assets (b) (.41%) (1.44%)*
Portfolio turnover rate 46% 59% *
Net assets at end of period $128,957,911 $21,903,536

The average commissions paid per share on stock transactions for the
year ended December 31, 1996 was $.0581.
- ----------------------------------------------------------------------------------------------------
</TABLE>

*Annualized

(a) In accordance with a requirement of the Securities and Exchange Commission,
this ratio reflects gross custodian fees. This ratio net of custodian fees
paid indirectly would have been 1.19% for the year ended December 31, 1996
and 2.00% for the period ended December 31, 1995.

(b) The Fund was reimbursed by the Advisor for certain net expenses from May 3,
1995 through December 31, 1995. Without the reimbursement, the ratio of
expenses to average net assets and the ratio of net investment loss to
average net assets for the period ended December 31, 1995 would have been
2.35% and (1.71%), respectively.

(c) Net investment loss per share for the year ended December 31, 1996 was
based upon the average shares outstanding during the year.

See accompanying notes to financial statements.

20
<PAGE>

Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
WANGER INTERNATIONAL SMALL CAP FINANCIAL HIGHLIGHTS

<TABLE>
<CAPTION>
Year ended May 3, 1995 through
December 31, 1996 December 31, 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $13.45 $10.00

INCOME FROM INVESTMENT OPERATIONS
Net investment loss (c) (.09) (.03)
Net realized and unrealized gain on investments 4.38 3.48
- -------------------------------------------------------------------------------------------------------------------------
Total from investment operations 4.29 3.45

LESS DISTRIBUTIONS
Dividends from net investment income -- --
Distributions from net realized gain (.03) --
- -------------------------------------------------------------------------------------------------------------------------
Total distributions (.03) --

NET ASSET VALUE, END OF PERIOD $17.71 $13.45
- -------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 32.01% 34.50%

RATIOS/SUPPLEMENTAL DATA
Ratio of expenses to average net assets (a) (b) 1.79% 2.32% *
Ratio of net investment loss to average net assets (b) (0.56%) (0.81%)*
Portfolio turnover rate 50% 14% *
Net assets at end of period 84,855,082 11,368,924

The average commissions paid per share on stock transactions
for the year ended December 31, 1996 was $.0130.
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>

*Annualized

(a) In accordance with a requirement of the Securities and Exchange Commission,
this ratio reflects gross custodian fees. This ratio net of custodian fees
paid indirectly would have been 1.75% for the year ended December 31, 1996
and 2.00% for the period ended December 31, 1995.

(b) The Fund was reimbursed by the Advisor for certain expenses from May 3,
1995 through December 31, 1995. Without the reimbursement, the ratio of
expenses to average net assets and the ratio of net investment income to
average net assets for the period ended December 31, 1995 would have been
4.20% and (2.69)%, respectively.

(c) Net investment loss per share for the year ended December 31, 1996 was
based upon the average shares outstanding during the year.

See accompanying notes to financial statements.

21
<PAGE>

Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS

1. NATURE OF OPERATIONS
Wanger U.S. Small Cap and Wanger International Small Cap ("the Funds") are
series of Wanger Advisors Trust ("the Trust"), an open-end management investment
company organized as a Massachusetts business trust. The investment objective of
each Fund is to seek long-term growth of capital. The Funds are available only
for allocation to certain life insurance company separate accounts established
for the purpose of funding qualified and non-qualified variable annuity
contracts, and may also be offered directly to certain types of pension plans
and retirement arrangements.

2. SIGNIFICANT ACCOUNTING POLICIES
SECURITY VALUATION
Investments are stated at current value. Securities traded on securities
exchanges or in over-the-counter markets in which transaction prices are
reported are valued at the last sales price at the time of valuation. Securities
for which there are no reported sales on the valuation date are valued at the
mean of the latest bid and ask quotation or, if there is no ask quotation, at
the most recent bid quotation. Money market instruments having a maturity of 60
days or less from the valuation date are valued on an amortized cost basis.
Securities for which quotations are not readily available and any other assets
are valued at a fair value as determined in good faith by the Board of Trustees.

FOREIGN CURRENCY TRANSLATIONS
Values of investments denominated in foreign currencies are converted into
U.S. dollars using the spot market rate of exchange at the time of valuation.
Purchases and sales of investments and dividend and interest income are
translated into U.S. dollars using the spot market rate of exchange prevailing
on the respective dates of such transactions. The gain or loss resulting from
changes in foreign exchange rates is included with net realized and unrealized
gain or loss from investments as appropriate.

SECURITY TRANSACTIONS AND INVESTMENT INCOME
Security transactions are accounted for on the trade date (date the order to buy
or sell is executed) and dividend income is recorded on the ex-dividend date,
except that certain dividends from foreign securities are recorded as soon as
the information is available to the Fund. Interest income is recorded on the
accrual basis and includes amortization of discounts on money market instruments
and on long-term debt instruments when required for federal income tax purposes.
Realized gains and losses from security transactions are reported on an
identified cost basis. Net realized gains for Wanger U.S. Small Cap include
distributions of realized gains from other investment companies of $202,920 in
1996.

FUND SHARE VALUATION
Fund shares are sold and redeemed on a continuing basis at net asset value. Net
asset value per share is determined daily as of the close of trading on the New
York Stock Exchange on each day the Exchange is open for trading by dividing the
total value of the Fund's investments and other assets, less liabilities, by the
number of Fund shares outstanding.

CUSTODIAN FEES
Custodian fees are reduced based on each Fund's cash balances maintained with
the custodian. This presentation does not affect the determination of net
investment income.

FEDERAL INCOME TAXES, DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
The Funds have complied with the special provisions of the Internal Revenue Code
available to regulated investment companies and, in the manner provided therein,
distribute all of their taxable income, as well as any net realized gain on
sales of investments and foreign currency transactions reportable for federal
income tax purposes.

Wanger International Small Cap has elected to mark-to-market its investment
in Passive Foreign Investment Companies ("PFICS") for income tax purposes. In
accordance with this election, the Fund recognized cumulative net unrealized
appreciation on PFICS of $210,309 for the year ended December 31, 1996. The
amount for 1996 is treated as ordinary income for federal income tax purposes,
and as such, is used to offset the net investment loss incurred by the Fund.
Cumulative net unrealized appreciation recognized in prior years on PFICs sold
in 1996 amounted to $22,353.

Dividends and distributions payable to its shareholders are recorded by the
Fund on the ex-dividend date.

Reclassifications have been made in 1996 for Wanger U.S. Small Cap and
Wanger International Small Cap in the accompanying analysis of net assets from
accumulated net investment loss to undistributed net realized gains on sales of
investments of $389,584 and $96,091, respectively, to reflect differences
between financial reporting and income tax bases.

22
<PAGE>

Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS

3. TRANSACTIONS WITH AFFILIATES

The Fund's investment advisor, Wanger Asset Management, L.P. ("WAM"), furnishes
continuing investment supervision to the Funds and is responsible for overall
management of the Funds' business affairs. Each Fund pays WAM a monthly advisory
fee based upon average daily net assets at the following rates:

<TABLE>
<CAPTION>
Wanger U.S. Wanger International
Small Cap Small Cap
- --------------------------------------------------------------------------------
<S> <C> <C>
Average Daily Net Assets:
For the first $100 million 1.00% 1.30%
Next $150 million .95% 1.20%
In excess of $250 million .90% 1.10%
- --------------------------------------------------------------------------------
</TABLE>

The investment advisory agreements also provide that WAM will reimburse the
Funds to the extent that ordinary operating expenses (computed based on net
custodian fees) exceed 1.50% (2.00% in 1995) for Wanger U.S. Small Cap and 1.90%
(2.00% in 1995) for Wanger International Small Cap, of average net assets. WAM
was not required to reimburse the Funds under these agreements for the year
ended December 31, 1996.

Certain officers and trustees of the Trust are also principals of WAM. The
Trust makes no direct payments to its officers and trustees who are affiliated
with WAM. Wanger U.S. Small Cap and Wanger International Small Cap incurred
trustees' fees and expenses of $15,524 and $15,400 respectively, for the year
ended December 31, 1996 to trustees not affiliated with WAM.

WAM advanced $100,000 to each Fund in connection with their organization
and initial registration. These costs are being amortized and reimbursed to WAM
over the period May, 1995 through April, 2000.

WAM Brokerage Services, L.L.C., a wholly-owned subsidiary of WAM, is the
distributor of each Fund's shares and receives no compensation for its services.

- --------------------------------------------------------------------------------
4. FUND SHARE TRANSACTIONS

Proceeds and payments on Fund shares as shown in the statements of changes in
net assets are in respect of the following numbers of shares:

<TABLE>
<CAPTION>
--------------------------------------- ---------------------------------------
Wanger U.S. Small Cap Wanger International Small Cap

Year ended Period ended Year ended Period ended
December 31, 1996 December 31, 1995 December 31, 1996 December 31, 1995
- ------------------------------------------------------------------------------------------------------------------------------------

<S> <C> <C> <C> <C>
Shares sold 6,137,385 2,170,461 4,154,432 986,106
Shares issued in reinvestment of dividend and
capital gain distributions 5,157 - 3,911 -
- ------------------------------------------------------------------------------------------------------------------------------------

6,142,542 2,170,461 4,158,343 986,106
Less shares redeemed 432,817 294,633 212,404 153,492
- ------------------------------------------------------------------------------------------------------------------------------------

Net increase in shares outstanding 5,709,725 1,875,828 3,945,939 832,614
===================================================================================================================================
</TABLE>

5. INVESTMENT TRANSACTIONS

The aggregate cost of purchases and proceeds from sales other than short-term
obligations for the year ended December 31, 1996 were:

<TABLE>
<CAPTION>
Purchases Sales
<S> <C> <C>
Wanger U.S. Small Cap $103,202,082 $30,342,586
Wanger International Small Cap 82,019,311 23,145,432
- --------------------------------------------------------------------------------
</TABLE>

23
<PAGE>

Wanger Advisors Trust 1996 Annual Report
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS

TO THE SHAREHOLDERS AND THE BOARD OF TRUSTEES OF WANGER ADVISORS TRUST

We have audited the accompanying statements of assets and liabilities, including
the statements of investments, of the Wanger Advisors Trust, comprising the U.S.
Small Cap and Wanger International Small Cap portfolios, as of December 31,
1996, the related statements of operations for the year then ended and changes
in net assets and the financial highlights for the periods indicated thereon.
These financial statements and financial highlights are the responsibility of
the Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
December 31, 1996, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
each of the respective portfolios of the Wanger Advisors Trust as of December
31, 1996, the results of their operations for the year then ended and changes in
net assets and financial highlights for the periods indicated thereon, in
conformity with generally accepted accounting principles.

ERNST & YOUNG LLP

Chicago, Illinois
January 31, 1997

24
<PAGE>

WANGER ADVISORS TRUST

TRUSTEES TRANSFER AGENT,
Fred D. Hasselbring DIVIDEND DISBURSING AGENT
Charles P. McQuaid AND CUSTODIAN
P. Michael Phelps
James A. Star State Street Bank
Ralph Wanger and Trust Company
Attention:
OFFICERS Wanger Advisors Trust
P.O. Box 8502
Ralph Wanger Boston, Massachusetts
President 02266-8502

Charles P. McQuaid DISTRIBUTOR
Senior Vice President WAM Brokerage
Services, L.L.C.
Terence M. Hogan 227 West Monroe Street
Vice President Suite 3000
Chicago, Illinois 60606
Leah J. Zell 1-800-5-WANGER
Vice President (1-800-592-6437)

Merrillyn J. Kosier INVESTMENT ADVISOR
Vice President and Wanger Asset
Secretary Management, L.P.
227 West Monroe Street
Bruce H. Lauer Suite 3000
Vice President and Chicago, Illinois 60606
Treasurer 1-800-5-WANGER
(1-800-592-6437)
Kenneth A. Kalina
Assistant Treasurer LEGAL COUNSEL
Bell, Boyd & Lloyd
Chicago, Illinois

INDEPENDENT AUDITORS
Ernst & Young LLP
Chicago, Illinois

This report, including the audited schedules of investments and financial
statements, is submitted for the general information of the shareholders of the
Wanger Advisors Trust. This report is not authorized for distribution unless
preceded or accompanied by a prospectus.
<PAGE>

Wanger Advisors Trust
<PAGE>

- --------------------------------------------------------------------------------
Annual Report
- --------------------------------------------------------------------------------

December 31, 1996

- --------------------------------------------------------------------------------
Equity Income Portfolio
<PAGE>

DEAR INVESTOR

The equity market and your fund were strong in the second half of 1996,
reflecting continued good corporate earnings, a generally favorable economic and
interest rate environment, and heavy investor demand. The post-election rally
was particularly notable in light of how little the political scene actually
changed. For the year as a whole, equity returns were impressive, coming as they
did on the heels of considerable strength in 1995. Stocks have now provided six
consecutive years of positive returns with no interim corrections of 10% or
more.

PERFORMANCE REVIEW

As shown in the table, your fund performed well over the last six months,
with a return approximating that of the unmanaged Standard & Poor's 500
Stock Index and comfortably ahead of the Lipper Equity Income Funds
Average. For the year as a whole, the fund exceeded the Lipper average but
trailed the broad market, a not uncommon pattern for a conservative fund in
robust years like 1996.

-------------------------------------------------------------
Performance Comparison
-------------------------------------------------------------

<TABLE>
<CAPTION>
Periods Ended 12/31/96 6 Months 12 Months
-------------------------------------------------------------
<S> <C> <C>
Equity Income Portfolio 11.12% 19.56%
-------------------------------------------------------------
S&P 500 11.68 22.96
-------------------------------------------------------------
Lipper Equity Income
Funds Average 10.33 18.85
-------------------------------------------------------------
</TABLE>

DIVIDEND DISTRIBUTIONS

Your Board of Directors declared a fourth quarter income dividend of $0.11
per share. At the same time, a $0.07 per share capital gain distribution
was declared, of which $0.02 was short-term and $0.05 long-term. These
distributions were paid on December 30 to shareholders of record on
December 26.

PORTFOLIO STRATEGY

While the last 12 months were a strong period for the broad equity market,
it was challenging for income-oriented investors. Bond and money market
returns were generally in the mid-single-digit range in 1996, with shorter-
maturity securities returning more than those with longer maturities. Two
traditional high-yield sectors of the equity market, electric utilities and
telephone companies, were about flat on average for the year. These sectors
suffered due to their interest rate sensitivity and to concern about the
impact of a newly deregulated environment.

Despite poor returns from many traditional yield vehicles, your fund
performed reasonably well due to the continued strength of companies in the
financial (Chase Manhattan, American Express), health care (Warner-
Lambert), and energy (Exxon, Texaco) sectors. We purchased many of these
holdings in recent years when they were out of favor and inexpensive on a
relative valuation basis for various reasons. We often make investment
decisions based on the tendency of a company's fundamentals and stock price
to regress to the mean within historical ranges and the likelihood that
investor perceptions about the relative values of these stocks will improve
over the intermediate term. This was clearly the case in 1996 with respect
to some of the companies just mentioned.

During the second half of the year, despite a market that had advanced
sharply, we were able to find opportunities in companies with higher-than-
average dividend yields, limited risk, and attractive return potential. In
many cases, investments that interest us often involve stocks that have
suffered relative to the broad market for various reasons. Controversy and
underperformance often create opportunities that we hope to exploit
profitably on your behalf. We recently initiated new positions in AT&T,
Amoco, International Flavors & Fragrances, ITT, and Whirlpool, all fine
companies that have been struggling recently because of negative
fundamental trends affecting their businesses, negative investor views of
their prospects, or some combination of these factors.

---------------------------------------------------------------------------
Security Diversification
---------------------------------------------------------------------------

[CHART APPEARS HERE]

_____
1
<PAGE>

The Security Diversification chart on page 1 shows that we had 86% of total
fund assets invested in common stocks on December 31, the same percentage
as at the end of our June reporting period.

SUMMARY AND OUTLOOK

The last two years were exceptionally profitable for equity investors, who
enjoyed attractive returns in a nearly perfect environment for stocks. It
is difficult to see how things can get much better; at the same time, it is
also difficult to see anything on the horizon that would cause this
environment to change for the worse. Nonetheless, we are sensitive to the
lessons of history, particularly the tendency of the equity market to pause
for breath after consecutive powerful years like the past two.

Over the last few years, stock prices have appreciated at a much faster
rate than the earnings and dividends of the underlying companies. Because
of this "delinkage," we expect more subdued equity performance in 1997. We
do not have a bearish outlook for the year ahead but simply want to raise
the possibility that it may not live up to many investors' high
expectations for a continuation of recent trends. Notwithstanding this
cautionary tone, we continue to believe we will find interesting investment
opportunities during the year. As always, we appreciate your continued
confidence and support.

Respectfully submitted,

/s/ Brian C. Rogers
Brian C. Rogers
President and
Chairman of the Investment Advisory Committee

January 24, 1997

PORTFOLIO HIGHLIGHTS

- --------------------------------------------------------------------------------
Twenty-Five Largest Holdings
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Percent of
Net Assets
12/31/96
- --------------------------------------------------------
<S> <C>
GE 1.7%
- --------------------------------------------------------
Atlantic Richfield 1.5
- --------------------------------------------------------
Chase Manhattan 1.5
- --------------------------------------------------------
Exxon 1.4
- --------------------------------------------------------
Mellon Bank 1.4
- --------------------------------------------------------
AT&T 1.3
- --------------------------------------------------------
DuPont 1.3
- --------------------------------------------------------
Simon DeBartolo Group 1.2
- --------------------------------------------------------
Texaco 1.2
- --------------------------------------------------------
Chevron 1.2
- --------------------------------------------------------
Warner-Lambert 1.2
- --------------------------------------------------------
General Mills 1.1
- --------------------------------------------------------
J. P. Morgan 1.0
- --------------------------------------------------------
International Flavors & Fragrances 1.0
- --------------------------------------------------------
Georgia-Pacific 1.0
- --------------------------------------------------------
Wells Fargo 1.0
- --------------------------------------------------------
Pharmacia & Upjohn 1.0
- --------------------------------------------------------
Union Camp 1.0
- --------------------------------------------------------
American Brands 1.0
- --------------------------------------------------------
Quaker Oats 1.0
- --------------------------------------------------------
American General 1.0
- --------------------------------------------------------
American Home Products 0.9
- --------------------------------------------------------
Royal Dutch Petroleum 0.9
- --------------------------------------------------------
3M 0.9
- --------------------------------------------------------
J. C. Penney 0.9
- --------------------------------------------------------
Total 28.6%
========================================================
</TABLE>

_____
2
<PAGE>

PORTFOLIO HIGHLIGHTS

- --------------------------------------------------------------------------------
Major Portfolio Changes
- --------------------------------------------------------------------------------

Six Months Ended December 31, 1996
Listed in descending order of size

LARGEST PURCHASES (10)
- --------------------------------------------------------------------------------
International Flavors & Fragrances*

AT&T *

Amoco *

Dow Chemical

Chevron

ITT *

H&R Block

Whirpool *

Atlantic Richfield

LARGEST SALES (10)
- --------------------------------------------------------------------------------
Eli Lilly **

PHH **

Salomon **

SmithKline Beecham

Conrail

Kimberly-Clark

Honeywell

Eastman Kodak

Vodafone **

TRW **
================================================================================
*Position added.
**Position eliminated.

T. Rowe Price Equity Income Portfolio
December 31, 1996

- --------------------------------------------------------------------------------
Performance Comparison
- --------------------------------------------------------------------------------

This chart shows the value of a hypothetical $10,000 investment in the fund over
the past 10 fiscal year periods or since inception (for funds lacking 10-year
records). The result is compared with a broad-based average or index. The index
return does not reflect expenses, which have been deducted from the fund's
return.

- --------------------------------------------------------------------------------
Equity Income Portfolio
- --------------------------------------------------------------------------------

[CHART APPEARS HERE]

- --------------------------------------------------------------------------------
Average Annual Compound Total Return
- --------------------------------------------------------------------------------

This table shows how the fund would have performed each year if its actual (or
cumulative) returns for the periods shown had been earned at a constant rate.

Since Inception
Periods Ended 12/31/96 1 Year Inception Date
- ------------------------------------------------------------
Equity Income Portfolio 19.56% 21.93% 3/31/94
- ------------------------------------------------------------

Investment return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.

Total returns do not include charges imposed by your insurance company's
separate account. If these were included, performance would have been lower.

_____
3
<PAGE>

FINANCIAL HIGHLIGHTS

T. Rowe Price Equity Income Portfolio

<TABLE>
<CAPTION>
For a share outstanding
throughout each period
-----------------------------------
Year 3/31/94
Ended to
12/31/96 12/31/95 12/31/94
<S> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 13.21 $ 10.42 $ 10.00
-----------------------------------
Investment activities
Net investment income 0.42 0.44 0.30
Net realized and
unrealized gain (loss) 2.13 3.05 0.41
-----------------------------------
Total from
investment activities 2.55 3.49 0.71
-----------------------------------
Distributions
Net investment income (0.42) (0.44) (0.29)
Net realized gain (0.08) (0.26) -
-----------------------------------
Total distributions (0.50) (0.70) (0.29)
-----------------------------------
NET ASSET VALUE

End of period $ 15.26 $ 13.21 $ 10.42
===================================

RATIOS/SUPPLEMENTAL DATA

TOTAL RETURN 19.56% 34.76% 7.15%
- -------------------------------------------------------------
Ratio of expenses to
average net assets 0.85% 0.85% 0.85%+
- -------------------------------------------------------------
Ratio of net investment
income to average
net assets 2.94% 3.61% 3.88%+
- -------------------------------------------------------------
Portfolio turnover rate 17.4% 10.1% 21.3%+
- -------------------------------------------------------------
Average commission rate
paid $ 0.0388 - -
- -------------------------------------------------------------
Net assets, end of period
(in thousands) $ 103,751 $ 14,658 $ 2,191
- -------------------------------------------------------------
</TABLE>

+ Annualized.

The accompanying notes are an integral part of these financial statements.

_____
4
<PAGE>

STATEMENT OF NET ASSETS

T. Rowe Price Equity Income Portfolio
December 31, 1996

<TABLE>
<CAPTION>
SHARES/PAR VALUE
- -------------------------------------------------------------
In thousands
<S> <C> <C>
COMMON STOCKS AND WARRANTS 86.3%

FINANCIAL 17.3%

BANK AND TRUST 9.4%

BANC ONE 9,470 $ 407

Bank of Boston 10,100 649

Bankers Trust New York 7,000 604

Chase Manhattan 17,004 1,518

Fleet Financial Group 14,700 733

J. P. Morgan 11,100 1,084

Mellon Bank 20,400 1,448

Mercantile Bankshares 8,800 280

National City 12,500 561

PNC Bank 16,200 610

Signet Banking 11,800 363

U. S. Bancorp 11,600 521

Wells Fargo 3,866 1,043

9,821
----------

INSURANCE 3.8%

Alexander & Alexander 18,800 327

American General 24,200 989

Hilb, Rogal and Hamilton 4,400 58

Lincoln National 9,700 509

Provident 4,800 232

SAFECO 10,300 406

St. Paul Companies 13,500 792

USF&G 17,100 357

Willis-Corroon ADR 24,900 287

3,957
----------

FINANCIAL SERVICES 4.1%

American Express 16,200 915

Fannie Mae 19,200 715

H&R Block 28,700 832

Sallie Mae 9,700 904

Travelers Group 19,333 877

4,243
----------

Total Financial 18,021

UTILITIES 13.7%

TELEPHONE SERVICES 7.2%

ALLTEL 27,600 866

AT&T 30,500 1,327

BCE 16,050 766

Bell Atlantic 9,900 641

BellSouth 19,900 $ 803

Frontier 19,000 430

GTE 17,800 810

Pacific Telesis 12,500 459

SBC Communications 11,100 574

Southern New England
Telecommunications 9,300 362

U S WEST Communications 12,050 389

7,427
----------

ELECTRIC UTILITIES 6.5%

BGE 11,100 297

Centerior Energy 34,000 365

Dominion Resources 13,350 514

DQE 8,212 238

Duke Power 6,200 287

Echelon International * 573 9

Edison International 12,400 246

Entergy 19,300 536

Florida Progress 8,600 277

GPU 5,300 178

Ohio Edison 21,700 494

Pacific Gas and Electric 16,700 351

PacifiCorp 24,500 502

PECO Energy 24,300 614

Public Service Enterprise 15,700 428

Southern Company 13,200 299

Unicom 27,800 754

Western Resources 12,500 386

6,775
----------
TOTAL UTILITIES 14,202
----------

CONSUMER NONDURABLES 18.3%

COSMETICS 1.0%

International Flavors &
Fragrances 23,800 1,071

1,071
----------

BEVERAGES 1.5%

Anheuser-Busch 17,900 716

Brown-Forman (Class B) 17,500 801

1,517
----------

FOOD PROCESSING 4.5%

General Mills 18,600 1,179

Heinz 23,400 836

Kellogg 5,800 381

</TABLE>

___
5
<PAGE>

T. Rowe Price Equity Income Portfolio
December 31, 1996

<TABLE>
<CAPTION>
SHARES/PAR VALUE
- -------------------------------------------------------------
In thousands
<S> <C> <C>
McCormick 31,000 $ 730

Quaker Oats 26,200 999

Sara Lee 15,400 574
4,699
----------

HOSPITAL SUPPLIES/
HOSPITAL MANAGEMENT 1.9%

Abbott Laboratories 17,900 908

Bausch & Lomb 16,100 563

Baxter International 12,700 521

1,992
----------

PHARMACEUTICALS 4.7%

American Home Products 16,500 967

Novartis (CHF) 697 798

Pharmacia & Upjohn 25,792 1,022

SmithKline Beecham ADR 11,700 796

Warner-Lambert 16,400 1,230

4,813
----------

MISCELLANEOUS CONSUMER PRODUCTS 4.7%

American Brands 20,400 1,012

Armstrong World 4,400 306

Grand Metropolitan ADR 13,900 440

Philip Morris 5,700 642

RJR Nabisco 7,800 265

Tambrands 18,100 740

Unilever N.V. ADR 5,100 894

UST 17,500 566

4,865
----------
TOTAL CONSUMER NONDURABLES 18,957
----------

CONSUMER SERVICES 4.9%

GENERAL MERCHANDISERS 1.2%

J.C. Penney 18,800 916

May Department Stores 7,500 351

1,267
----------

SPECIALTY MERCHANDISERS 0.1%

Fleming Companies 4,800 83

Hancock Fabrics 1,900 20

103
----------

ENTERTAINMENT AND LEISURE 1.3%

Homestead Village, warrants,

10/29/97 * 168 1

ITT * 15,600 677

Reader's Digest (Class A) 14,400 580

Reader's Digest (Class B) 1,200 43

1,301
----------

MEDIA AND COMMUNICATIONS 2.3%

Cognizant 3,200 $ 105

Dow Jones 10,600 359

Dun & Bradstreet 17,900 425

Gannett 6,300 472

McGraw-Hill 11,900 549

R. R. Donnelly 16,000 502

2,412
----------
TOTAL CONSUMER SERVICES 5,083
----------

CONSUMER CYCLICALS 4.8%

AUTOMOBILES AND RELATED 1.2%

Eaton 6,900 481

Ford Motor 4,600 147

Genuine Parts 6,300 280

GM 5,900 329

1,237
----------

BUILDING AND REAL ESTATE 1.9%

Rouse 6,300 200

SECURITY CAPITAL
PACIFIC TRUST
REIT 4,000 92

Simon DeBartolo Group
REIT 41,236 1,278

Weingarten Realty Investors
REIT 9,100 370

1,940
----------

MISCELLANEOUS CONSUMER DURABLES 1.7%

Corning 18,300 846

Eastman Kodak 4,100 329

Whirlpool 13,400 625

1,800
----------
TOTAL CONSUMER CYCLICALS 4,977
----------

TECHNOLOGY 1.0%

ELECTRONIC COMPONENTS 0.5%

AMP 12,400 476

476
----------

ELECTRONIC SYSTEMS 0.3%

Honeywell 5,300 349

349
----------

OFFICE AUTOMATION 0.2%

Pitney Bowes 4,300 234

234
----------
TOTAL TECHNOLOGY 1,059
----------
</TABLE>

_
6
<PAGE>

T. Rowe Price Equity Income Portfolio
December 31, 1996

<TABLE>
<CAPTION>
SHARES/PAR VALUE
- -------------------------------------------------------------
In thousands
<S> <C> <C>
CAPITAL EQUIPMENT 3.2%

ELECTRICAL EQUIPMENT 2.3%

GE 17,800 $ 1,760

Hubbell (Class B) 15,400 666

2,426
----------

MACHINERY 0.9%

Cooper Industries 14,567 614

FMC * 3,800 266

880
----------
TOTAL CAPITAL EQUIPMENT 3,306
----------

BUSINESS SERVICES AND TRANSPORTATION 1.3%

TRANSPORTATION SERVICES 0.2%

Alexander & Baldwin 8,550 212

212
----------

MISCELLANEOUS BUSINESS SERVICES 0.4%

Deluxe Corp. 7,300 239

GATX 2,800 136

375
----------

RAILROADS 0.7%

Conrail 2,296 229

Union Pacific 8,500 511

740
----------

TOTAL BUSINESS SERVICES AND TRANSPORTATION 1,327
----------

ENERGY 10.7%

ENERGY SERVICES 0.6%

McDermott International 5,500 91

Witco 18,900 577

668
----------

GAS TRANSMISSION 0.1%

TransCanada PipeLines 8,400 147

147
----------

INTEGRATED PETROLEUM - DOMESTIC 4.0%

Amoco 11,300 910

Atlantic Richfield 12,100 1,603

British Petroleum ADR 6,000 848

Sun Company 3,910 95

USX-Marathon 26,700 638

4,094
----------

INTEGRATED PETROLEUM - INTERNATIONAL 6.0%

Chevron 19,250 1,251

Exxon 15,000 1,470

Mobil 6,200 758

Repsol ADR 14,300 $ 545

Royal Dutch Petroleum ADR 5,500 939

Texaco 12,900 1,266

6,229
----------
TOTAL ENERGY 11,138
----------

PROCESS INDUSTRIES 9.4%

DIVERSIFIED CHEMICALS 2.1%

Dow Chemical 11,300 885

DuPont 13,900 1,312

2,197
----------

SPECIALTY CHEMICALS 3.3%

3M 11,200 928

Betz Laboratories 11,900 696

Great Lakes Chemical 15,700 734

Lubrizol 17,900 555

Nalco Chemical 14,600 528

3,441
----------

PAPER AND PAPER PRODUCTS 3.0%

Consolidated Papers 10,300 506

International Paper 21,200 856

James River 8,400 278

Kimberly-Clark 4,050 386

Union Camp 21,400 1,022

3,048
----------

FOREST PRODUCTS 1.0%

Georgia-Pacific 14,700 1,058

1,058
----------
TOTAL PROCESS INDUSTRIES 9,744
----------

BASIC MATERIALS 1.5%

METALS 0.7%

Reynolds Metals 12,900 727

727
----------

MINING 0.8%

LONRHO (GBP) 111,800 239

Newmont Mining 12,949 580

819
----------
TOTAL BASIC MATERIALS 1,546
----------
MISCELLANEOUS COMMON STOCKS 0.2% 221
----------

TOTAL COMMON STOCKS AND
WARRANTS (COST $81,387) 89,581
----------
</TABLE>

_
7
<PAGE>

T. Rowe Price Equity Income Portfolio
December 31, 1996

<TABLE>
<CAPTION>
SHARES/PAR VALUE
- -------------------------------------------------------------
In thousands
<S> <C> <C>
CORPORATE BONDS 0.4%

B.F. Saul REIT, Sr. Secured
Notes, 11.625%
4/1/02 $ 150,000 $ 162

Coca-Cola Bottling Group
Sr. Sub. Notes
9.00%, 11/15/03 25,000 25

El Paso Electric, 1st Mtg.
Notes, 8.90%
2/1/06 200,000 209

TOTAL CORPORATE BONDS
(COST $380) 396

U.S. GOVERNMENT OBLIGATIONS 2.2%

U.S. Treasury Bonds
6.00%, 2/15/26 500,000 455

6.25%, 8/15/23 20,000 19

U.S. Treasury Notes
5.625%, 2/15/06 250,000 237

5.75%, 8/15/03 400,000 388

5.875%, 2/15/04 20,000 19

6.50%, 5/31/01 700,000 708

7.00%, 7/15/06 400,000 416

7.375%, 11/15/97 20,000 20

TOTAL U.S. GOVERNMENT
OBLIGATIONS (COST $2,227) 2,262
----------

SHORT-TERM INVESTMENTS 10.4%

COMMERCIAL PAPER 10.4%

BHF Finance (Delaware)
5.30%, 4/11/97 1,000,000 985

Investments in Commercial
Paper through a joint
account 6.75 - 7.10%
1/2/97 2,832,729 2,832

Island Finance Puerto Rico
5.47%, 1/9/97 $2,000,000 $ 1,998

Preferred Receivables Funding
5.35%, 2/3/97 1,000,000 995

Tasmanian Public Finance
5.43%, 2/18/97 2,000,000 1,986

Unifunding, 5.44%, 1/6/97 2,000,000 1,998

TOTAL SHORT-TERM INVESTMENTS
(COST $10,794) 10,794
----------

TOTAL INVESTMENTS IN SECURITIES

99.3% of Net Assets
(Cost $94,788) $ 103,033

Other Assets Less Liabilities 718
----------

NET ASSETS $ 103,751
----------

NET ASSETS CONSIST OF:

Accumulated net realized
gain/loss - net of distributions $ 934

Net unrealized gain (loss) 8,245

Paid-in-capital applicable to 6,800,066
shares of $0.0001 par value capital stock
outstanding; 1,000,000,000 shares of the
corporation authorized 94,572

NET ASSETS $ 103,751
----------

NET ASSET VALUE PER SHARE $ 15.26
----------
</TABLE>

* Non-income producing
REIT Real Estate Investment Trust
CHF Swiss franc
GBP British sterling
The accompanying notes are an integral part of these financial statements.

_
8
<PAGE>

STATEMENT OF OPERATIONS

T. Rowe Price Equity Income Portfolio
In thousands

<TABLE>
<CAPTION>
Year
Ended
12/31/96
<S> <C>
INVESTMENT INCOME
Income
Dividend $ 1,457
Interest 480
------------
Total income 1,937
------------

Expenses
Investment management and administrative 435
------------
Net investment income 1,502
------------

REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on securities 1,676
------------

Change in net unrealized gain or loss on
Securities 6,822
Other assets and liabilities
denominated in foreign currencies (1)
------------
Change in net unrealized gain or loss 6,821
------------
Net realized and unrealized gain (loss) 8,497
------------

INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 9,999
============
</TABLE>

The accompanying notes are an integral part of these financial statements.

_
9
<PAGE>

STATEMENT OF CHANGES IN NET ASSETS

T. Rowe Price Equity Income Portfolio
In thousands

<TABLE>
<CAPTION>
Year
Ended
12/31/96 12/31/95
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS

Operations
Net investment income $ 1,502 $ 195
Net realized gain (loss) 1,676 59
Change in net unrealized gain
or loss 6,821 1,398
--------------------------
Increase (decrease) in net
assets from operations 9,999 1,652
--------------------------

Distributions to shareholders
Net investment income (1,787) (243)
Net realized gain (470) (55)
--------------------------
Decrease in net assets from
distributions (2,257) (298)
--------------------------

Capital share transactions*
Shares sold 89,085 12,026
Distributions reinvested 2,256 297
Shares redeemed (10,297) (1,266)
--------------------------

Increase (decrease) in net assets
from capital share transactions 81,044 11,057
--------------------------
Net equalization 307 55
--------------------------

NET ASSETS

Increase (decrease) during period 89,093 12,466
Beginning of period 14,658 2,192
--------------------------

END OF PERIOD $ 103,751 $ 14,658
==========================

*Share information
Shares sold 6,273 978
Distributions reinvested 153 25
Shares redeemed (736) (103)
--------------------------
Increase (decrease) in shares
outstanding 5,690 900
</TABLE>

The accompanying notes are an integral part of these financial statements.

__
10
<PAGE>

NOTES TO FINANCIAL STATEMENTS

T. Rowe Price Equity Income Portfolio
December 31, 1996

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

T. Rowe Price Equity Series, Inc., (the corporation) is registered under
the Investment Company Act of 1940. The Equity Income Portfolio (the fund),
a diversified, open-end management investment company, is one of the
portfolios established by the corporation and commenced operations on March
31, 1994. The shares of the fund are currently being offered only to
separate accounts of certain insurance companies as an investment medium
for both variable annuity contracts and variable life insurance policies.

VALUATION Equity securities listed or regularly traded on a securities
exchange are valued at the last quoted sales price at the time the
valuations are made. A security which is listed or traded on more than one
exchange is valued at the quotation on the exchange determined to be the
primary market for such security. Listed securities not traded on a
particular day and securities regularly traded in the over-the-counter
market are valued at the mean of the latest bid and asked prices. Other
equity securities are valued at a price within the limits of the latest bid
and asked prices deemed by the Board of Directors, or by persons delegated
by the Board, best to reflect fair value.

Debt securities are generally traded in the over-the-counter market and are
valued at a price deemed best to reflect fair value as quoted by dealers
who make markets in these securities or by an independent pricing service.
Short-term debt securities are valued at their amortized cost which, when
combined with accrued interest, approximates fair value.

For purposes of determining the fund's net asset value per share, the U.S.
dollar value of all assets and liabilities initially expressed in foreign
currencies is determined by using the mean of the bid and offer prices of
such currencies against U.S. dollars quoted by a major bank.

Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair
value as determined in good faith by or under the supervision of the
officers of the fund, as authorized by the Board of Directors.

CURRENCY TRANSLATION Assets and liabilities are translated into U.S.
dollars at the prevailing exchange rate at the end of the reporting period.
Purchases and sales of securities and income and expenses are translated
into U.S. dollars at the prevailing exchange rate on the dates of such
transactions. The effect of changes in foreign exchange rates on realized
and unrealized security gains and losses is reflected as a component of
such gains and losses.

PREMIUMS AND DISCOUNTS Premiums and discounts on debt securities are
amortized for both financial reporting and tax purposes.

OTHER Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses
are reported on the identified cost basis. Dividend income and
distributions to shareholders are recorded by the fund on the ex-dividend
date. Income and capital gain distributions are determined in accordance
with federal income tax regulations and may differ from those determined in
accordance with generally accepted accounting principles. The fund follows
the practice of equalization under which undistributed net investment
income per share is unaffected by fund shares sold or redeemed.

NOTE 2 - INVESTMENT TRANSACTIONS

COMMERCIAL PAPER JOINT ACCOUNT The fund, and other affiliated funds, may
transfer uninvested cash into a commercial paper joint account, the daily
aggregate balance of which is invested in high-grade commercial paper. All
securities purchased by the joint account satisfy the fund's criteria as to
quality, yield, and liquidity.

OTHER Purchases and sales of portfolio securities, other than short-term
securities, aggregated $79,590,000 and $7,988,000, respectively, for the
year ended December 31, 1996.

NOTE 3 - FEDERAL INCOME TAXES

No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company and distribute all of
its taxable income.

In order for the fund's capital accounts and distributions to shareholders
to reflect the tax character of certain transactions, the following
reclassifications were made during the year ended December 31, 1996. The
results of operations and net assets were not affected by the
reclassifications.

__
11
<PAGE>

T. Rowe Price Equity Income Portfolio

___________________________________________________________________________

Undistributed net investment income $ (22,000)
Undistributed net realized gain (286,000)
Paid-in-capital 308,000

At December 31, 1996, the aggregate cost of investments for federal income
tax and financial reporting purposes was $94,788,000, and net unrealized
gain aggregated $8,245,000, of which $8,971,000 related to appreciated
investments and $726,000 to depreciated investments.

NOTE 4 - RELATED PARTY TRANSACTIONS

The investment management and administrative agreement between the fund and
T. Rowe Price Associates, Inc. (the manager) provides for an all-inclusive
annual fee, of which $54,000 was payable at December 31, 1996. The fee,
computed daily and paid monthly, is equal to 0.85% of the fund's average
daily net assets. Pursuant to the agreement, investment management,
shareholder servicing, transfer agency, accounting, and custody services
are provided to the fund, and interest, taxes, brokerage commissions, and
extraordinary expenses are paid directly by the fund.

__
12
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS OF T. ROWE PRICE EQUITY SERIES, INC. AND SHAREHOLDERS
OF THE EQUITY INCOME PORTFOLIO

In our opinion, the accompanying statement of net assets 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 the Equity Income Portfolio (one of the portfolios constituting T. Rowe
Price Equity Series, Inc., hereafter referred to as the "Fund") at December
31, 1996, and the results of its operations, the changes in its net assets
and the financial highlights for each of the fiscal periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund'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 custodians and, where appropriate, the application of alternative
auditing procedures for unsettled security transactions, provide a
reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP
Baltimore, Maryland
January 20, 1997

__
13
<PAGE>

ANNUAL REPORT

December 31, 1996

_______________________________________________________________________
NEW AMERICAN GROWTH PORTFOLIO

Invest With Confidence [LOGO APPEARS HERE]
T. Rowe Price
<PAGE>

DEAR INVESTOR

Stock prices continued their record-breaking advance in the second half of 1996
with all the major market indices setting new highs near year-end. A brief but
sharp correction around midyear, caused by an increase in long-term bond yields
of over one percentage point, was followed by a surprising surge back into
record territory over the last five months of the year.

The 1996 return of 23% for the unmanaged Standard & Poor's 500 Stock Index
was particularly impressive coming in the aftermath of 1995's nearly 38%
advance. The 1995-96 market was the first period of back-to-back gains
exceeding 20% since 1982-83, the beginning of this record 15-year bull
market. The cumulative gain of 69% for the past two years was the best for
the S&P 500 since 1975-76.

The New America Growth Portfolio had a strong first half, outperforming
both the S&P 500 and the average growth fund as measured by the Lipper
Growth Funds Average. The second half, however, proved to be tougher
sledding, as the fund trailed both the market and its peer average. For the
full year, the fund also lagged the S&P 500 but outperformed the average
growth fund.

<TABLE>
<CAPTION>
Performance Comparison

Periods Ended 12/31/96 6 Months 12 Months
----------------------------------------------------------------------
<S> <C> <C>
New America
Growth Portfolio 5.77% 20.09%
S&P 500 11.68 22.96
Lipper Growth
Funds Average 8.23 19.24
</TABLE>

YEAR-END DISTRIBUTIONS

The fund's Board of Directors declared an income distribution of $0.02 and
a long-term capital gain distribution of $0.12 per share. Both were paid on
December 30 to shareholders of record on December 26. You should have
received your statement reflecting these distributions in early January.

MARKET ENVIRONMENT

The surprising feature of 1996's record-breaking market is that it occurred
while interest rates rose. The primary impetus for this long bull market
was a secular decline in interest rates that took long rates from a high of
14% in early 1982 to less than 6% in late 1995. Long-term rates rose
approximately 75 basis points overall in 1996 (100 basis points equal one
percentage point), and yet the market cruised to new highs after a brief
skittish period around midyear.

The stock market was able to buck the backup in long-term interest rates
for several reasons. First, underlying inflation in the economy showed
little change and remained close to 3% with very few signs of a pickup.
Rising inflation is anathema to a strong stock market. Also, the market
responded favorably to steady economic growth at a moderate, sustainable
overall rate of 2.3% for 1996. Just as important, corporate profits
remained surprisingly strong for this stage of the economic cycle. We have
now had six consecutive years of economic growth without any signs of a
recession, and for 1996 the average company in the S&P 500 should report
profit gains in excess of 10%.

Investors also viewed 1996's election results favorably. Both parties seem
to have become more moderate over the past four years. Furthermore, the
split control of the Executive and Legislative branches of government
between the two parties assured investors that no radical changes to the
status quo on tax, business, and social issues would upset the economy's
underlying strength and growth.

Lastly, record mutual fund inflows and merger and acquisition activity
created strong demand for stocks in 1996 that was only partially offset by
a record amount of new stock issuance by corporations. Domestic equity
mutual fund inflows tailed off somewhat late in the year, but initial
reports in January suggest a sharp pickup in early 1997.

Overall, the positive economic, inflation, profit, supply and demand, and
psychological environment helped drive the market to record levels. Your
fund outperformed in the first half while interest rates were rising and
investors feared this increase would choke off the economy's growth. Growth
stocks led the way in the first half, while cyclicals lagged. Your fund's
focus on noncyclical growth companies in service businesses led us to many
of the best-performing sectors of the market. In the second half, as
investors realized that moderately higher interest rates would not choke
off the economy,

______
1
<PAGE>

cyclicals regained market favor while growth stocks and your fund lagged.

PORTFOLIO REVIEW

In the first half, the fund's strong performance was concentrated in the
business services sector with top holdings such as HFS, ADT, and Alco
Standard leading the way. Overall, business services positions
underperformed in the second half, giving back some of the first half's
strong gains. Financial services companies were the fund's best performers
in the second half, as interest rates stabilized and fears of further rises
subsided. Insurers MGIC Investment and ACE Limited and consumer lender
Norwest were among our best holdings in this area. The two largest
contributors to fund performance in the last six months were two drug
retailers, Revco and Eckerd. Revco rose over 50% in the second half as it
rebounded following a failed takeover attempt by Rite Aid, and Eckerd
climbed just under 50% in response to the continued takeover activity in
the group as well as to strong underlying fundamentals.

For the full year, business services holdings were our best performers. In
fact, the top five contributors to fund performance all were in this
category. Coincidentally, our best performer for the year was home security
company, ADT, which was the object of a failed takeover attempt during the
year by Republic Industries, our second-largest contributor. Republic is a
rapidly growing solid waste disposal and auto retailing company, headed up
by well-known entrepreneur Wayne Huizenga. Another solid waste disposal
company, USA Waste Services, was our third-best performer. During the year,
USA Waste acquired another portfolio holding, Sanifill.

The worst performers for the year were health care service companies
including former top holding United HealthCare, a leading HMO, and Apria
Healthcare, a top home health care provider. Earnings were moderately
disappointing at both companies, and investors became increasingly wary
about managed care companies in general. Several retail holdings, including
vitamin marketer General Nutrition and personal computer direct marketer
Micro Warehouse, hurt fund performance due to disappointing sales results.

The major sector diversification of the portfolio has evolved substantially
over the course of 1996, as indicated in the accompanying table.

Sector Diversification

<TABLE>
<CAPTION>
12/31/95 6/30/96 12/31/96
----------------------------------------------------
<S> <C> <C> <C>
Financial Services 10% 17% 20%

Consumer Services 40 32 30

Business Services 41 42 41

Reserves 9 9 9
----------------------------------------------------
Total 100% 100% 100%
</TABLE>

The most significant change was a doubling of our financial services
weighting during 1996 from 10% to 20% of the portfolio. New additions in
early 1996 included Norwest, Green Tree Financial, and PMI Group. We added
to financial services names in the second half by boosting our holdings in
existing companies. As noted earlier, this sector was our best performer in
the second half. Consumer holdings were trimmed from 40% to 30% of the
portfolio as we anticipated an increasingly competitive environment for
retailers, restaurant companies, entertainment companies, and
communications providers. Business services, our largest sector, was little
changed over the year and remains our most fertile area for sustainable,
high-growth service companies.

Portfolio characteristics remain strong. Our analysts forecast 18% annual
earnings growth for the portfolio companies over the next five years, 50%
higher than the forecasted growth for the S&P 500. Our portfolio sells at a
valuation premium of less than 20%, based on its average P/E ratio, which
seems a very reasonable trade-off for the much higher expected growth.

Portfolio Characteristics

<TABLE>
<CAPTION>
New America
As of 12/31/96 Growth Portfolio S&P 500
-------------------------------------------------------------
<S> <C> <C>
Earnings Growth Rate
Estimated Next 5 Years * 18.0% 12.2%

Profitability - Return on
Equity Latest 12 Months 15.6 19.4

Dividend Yield on Stocks 0.4 2.0

P/E Ratio (Based on Next 12
Months' Estimated Earnings) 19.4X 16.5X
-------------------------------------------------------------
</TABLE>

* Earnings forecasts are based on T. Rowe Price research and are
in no way indicative of future investment returns.

OUTLOOK

While the better-than-20% annual stock market returns of the past two years
are clearly not replicable going forward, the favorable environment that
drove the market in 1996 remains largely in place as we begin 1997.
Economic growth is solid, profit momentum is strong, inflation remains low,
and investor appetite for stocks continues at record levels.

Our portfolio companies remain vibrant and should continue to show strong
earnings growth even if overall economic growth falls off. Having cooled
down a bit over the past six months, the valuation characteristics of the
portfolio look more attractive. We believe that the fund's focus on less
cyclical, consistent high-growth companies,

____
2
<PAGE>

operating primarily in service businesses, will continue to provide
shareholders with above-average long-term returns.

Respectfully submitted,

/s/ John H. Laporte

John H. Laporte
President

/s/ Brian W. H. Berghuis

Brian W. H. Berghuis
Executive Vice President

January 20, 1997

PORTFOLIO HIGHLIGHTS

Twenty-Five Largest Holdings

Percent of
Net Assets
12/31/96
- --------------------------------------------------
<S> <C>
ADT 2.7%
- --------------------------------------------------
HFS 2.5
- --------------------------------------------------
PriceCostco 2.3
- --------------------------------------------------
Franklin Resources 2.3
- --------------------------------------------------
ACE Limited 2.2
- --------------------------------------------------
CUC International 2.2
- --------------------------------------------------
Alco Standard 2.1
- --------------------------------------------------
USA Waste Services 2.1
- --------------------------------------------------
Quorum Health Group 2.1
- --------------------------------------------------
Comcast 2.1
- --------------------------------------------------
Western Atlas 2.0
- --------------------------------------------------
General Nutrition 2.0
- --------------------------------------------------
Columbia/HCA Healthcare 1.9
- --------------------------------------------------
UNUM 1.9
- --------------------------------------------------
Corporate Express 1.9
- --------------------------------------------------
La Quinta Inns 1.9
- --------------------------------------------------
Revco 1.9
- --------------------------------------------------
PMI Group 1.8
- --------------------------------------------------
Cardinal Health 1.8
- --------------------------------------------------
Norwest 1.8
- --------------------------------------------------
SunGard Data Systems 1.8
- --------------------------------------------------
Outback Steakhouse 1.7
- --------------------------------------------------
Freddie Mac 1.6
- --------------------------------------------------
Green Tree Financial 1.6
- --------------------------------------------------
MGIC Investment 1.6
- --------------------------------------------------
Total 49.8%
==================================================
</TABLE>

T. Rowe Price New America Growth Portfolio

December 31, 1996

Performance Comparison

This chart shows the value of a hypothetical $10,000 investment in
the fund over the past 10 fiscal year periods or since inception
(for funds lacking 10-year records). The result is compared with a
broad-based average or index. The index return does not reflect
expenses, which have been deducted from the fund's return.

New America Growth Portfolio

[CHART APPEARS HERE]

Average Annual Compound Total Return

This table shows how the fund would have performed each year if its actual (or
cumulative) returns for the periods shown had been earned at a constant rate.

<TABLE>
<CAPTION>
Since Inception
Periods Ended 12/31/96 1 Year Inception Date
- -----------------------------------------------------------------
<S> <C> <C> <C>
New America Growth Portfolio 20.09% 24.60% 3/31/94
- -----------------------------------------------------------------
</TABLE>

Investment return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.

Total returns do not include charges imposed by your insurance company's
separate account. If these were included, performance would have been lower.

____
3
<PAGE>

FINANCIAL HIGHLIGHTS

T. Rowe Price New America Growth Portfolio

<TABLE>
<CAPTION>
For a share outstanding throughout each period
-----------------------------------------------
Year 3/31/94
Ended to
12/31/96 12/31/95 12/31/94
<S> <C> <C> <C>
NET ASSET VALUE

Beginning of period $ 15.23 $ 10.10 $ 10.00

Investment activities
Net investment income 0.04 0.03 0.01
Net realized and
unrealized gain (loss) 2.94 5.12 0.09

Total from
investment activities 2.98 5.15 0.10

Distributions
Net investment income (0.04) (0.02) -
Net realized gain (0.50) - -

Total distributions (0.54) (0.02) -

NET ASSET VALUE

End of period $ 17.67 $ 15.23 $ 10.10
----------------------------------------------
Ratios/Supplemental Data

Total return 20.09% 51.10% 1.00%

Ratio of expenses to
average net assets 0.85% 0.85% 0.85%+

Ratio of net investment
income to average
net assets 0.18% 0.23% 0.15%+

Portfolio turnover rate 27.2% 54.5% 81.0%+

Average commission rate
paid $ 0.0996 - -

Net assets, end of period
(in thousands) $ 60,241 $ 12,304 $ 2,028

</TABLE>

+ Annualized.

The accompanying notes are an integral part of these financial statements.

_____
4
<PAGE>

STATEMENT OF NET ASSETS
T. Rowe Price New America Growth Portfolio
December 31, 1996

<TABLE>
<CAPTION>
Shares/Par Value
- -------------------------------------------------------------------
In thousands
<S> <C> <C>
COMMON STOCKS 90.6%

FINANCIAL SERVICES 19.7%

BANK AND TRUST 1.8%
Norwest 25,000 $ 1,088

1,088
-----------------
INSURANCE 7.6%

ACE Limited 22,500 1,353

MGIC Investment 12,500 950

PMI Group 20,000 1,107

UNUM 16,000 1,156

4,566
-----------------

INVESTMENT SERVICES 2.3%

Franklin Resources 20,000 1,367

1,367
-----------------
OTHER FINANCIAL SERVICES 8.0%

Associates First Capital 7,500 331

Fannie Mae 17,000 633

Freddie Mac 9,000 991

Green Tree Financial 25,000 966

Household International 8,000 738

Mercury Finance 62,600 767

Money Store 15,000 416

4,842
-----------------
TOTAL FINANCIAL SERVICES 11,863
-----------------
CONSUMER SERVICES 30.1%

RETAILING/GENERAL MERCHANDISERS 2.3%

PriceCostco * 55,000 1,385

1,385
-----------------
RETAILING/SPECIALTY MERCHANDISERS 10.2%

AutoZone * 20,000 550

Circuit City Stores 20,000 603

Cole National (Class A) * 25,000 656

Eckerd * 6,445 206

General Nutrition * 70,000 1,190

Home Depot 12,500 627

Kohl's * 19,500 765

Revco * 30,900 1,143

Tommy Hilfiger * 8,000 384

6,124
------------------

ENTERTAINMENT AND LEISURE 3.9%

Carnival (Class A) 18,700 617

Disney 8,500 592

La Quinta Inns 60,000 $ 1,148

2,357
------------------

MEDIA/COMMUNICATION SERVICES 6.1%

AirTouch Communications * 25,000 631

Comcast (Class A Special) 70,000 1,247

Cox Communications
(Class A) * 10,000 231

Gaylord Entertainment 35,000 801

Paging Network * 20,900 320

PanAmSat * 16,000 450

3,680
------------------

RESTAURANTS/FOOD DISTRIBUTION 4.0%

Boston Chicken * 24,000 861

Lone Star Steakhouse
& Saloon * 20,000 536

Outback Steakhouse * 38,000 1,012

2,409
------------------

PERSONAL SERVICES 3.6%

CUC International * 56,250 1,336

Service Corp. 30,000 840

2,176
------------------
TOTAL CONSUMER SERVICES 18,131
------------------

BUSINESS SERVICES 39.9%

HEALTH CARE SERVICES 7.6%

Apria Healthcare * 30,500 572

Columbia/HCA Healthcare 28,500 1,162

PacifiCare Health Systems
(Class B) * 11,000 936

Quorum Health Group * 42,500 1,259

Vencor * 21,000 664

4,593
------------------

DISTRIBUTION SERVICES 4.9%

Alco Standard 25,000 1,291

Cardinal Health 18,750 1,092

Patterson Dental * 19,100 537

2,920
------------------

COMPUTER SERVICES 6.0%

BISYS Group * 22,500 834

Ceridian * 8,000 324

Electronic Data Systems 13,500 584

First Data 22,000 803

SunGard Data Systems * 27,000 1,076

3,621
------------------
</TABLE>
<PAGE>

T. Rowe Price New America Growth Portfolio
December 31, 1996
<TABLE>
<CAPTION>
Shares/Par Value
- -------------------------------------------------------------------
In thousands
<S> <C> <C>
ENVIRONMENTAL SERVICES 3.2%

Republic Industries * 21,000 $ 655

USA Waste Services * 40,000 1,275

1,930
-----------------

ENERGY SERVICES 6.3%

BJ Services * 16,000 816

Camco International 15,000 692

Schlumberger 3,500 349

Smith International * 16,000 718

Western Atlas * 17,000 1,205

3,780
-----------------

OTHER BUSINESS SERVICES 11.9%

ADT * 70,000 1,601

ADVO 27,500 385

Catalina Marketing * 14,000 772

Corporate Express * 39,000 1,148

HFS * 25,000 1,494

Interim Services * 24,800 880

Micro Warehouse * 9,000 105

Paychex 2,700 139

Scholastic * 9,800 655

7,179
-----------------
TOTAL BUSINESS SERVICES 24,023
-----------------
MISCELLANEOUS COMMON STOCKS 0.9% 551
-----------------
TOTAL COMMON STOCKS (COST $47,931) 54,568
-----------------

SHORT-TERM INVESTMENTS 9.0%

COMMERCIAL PAPER 9.0%

Asset Securitization

Cooperative, 4(2)
5.30%,
2/6-2/20/97 $ 2,000,000 1,988

Delaware Funding, 4(2),
5.45%, 1/10/97 1,000,000 999

Investments in Commercial

Paper through a
joint account
6.75 - 7.10%
1/2/97 $ 1,460,606 $ 1,460
Preferred Receivables Funding

5.35%, 1/13/97 1,000,000 998

TOTAL SHORT-TERM INVESTMENTS
(COST $5,445) 5,445
-----------
TOTAL INVESTMENTS IN SECURITIES
99.6% of Net Assets (Cost $53,376) $ 60,013

Other Assets Less Liabilities 228
-----------
NET ASSETS $ 60,241
-----------

NET ASSETS CONSIST OF:

Accumulated net realized gain/loss -
net of distributions $ 198
Net unrealized gain (loss) 6,637
Paid-in-capital applicable to 3,409,303
shares of $0.0001 par value capital stock
outstanding; 1,000,000,000 shares
authorized 53,406
-----------
NET ASSETS $ 60,241
-----------

NET ASSET VALUE PER SHARE $ 17.67
-----------
</TABLE>

The accompanying notes are an integral part of these financial statements.

____
6
<PAGE>

STATEMENT OF OPERATIONS
T. Rowe Price New America Growth Portfolio
In thousands

<TABLE>
<CAPTION>
Year
Ended
12/31/96
<S> <C>
INVESTMENT INCOME

Income
Interest $ 222
Dividend 154
------------
Total income 376
------------

Expenses
Investment management and administrative 311
------------
Net investment income 65
------------

REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on securities 637
Change in net unrealized gain or loss
on securities 5,130
------------
Net realized and unrealized gain (loss) 5,767
------------
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 5,832
============
</TABLE>

The accompanying notes are an integral part of these financial statements.

____
7
<PAGE>

STATEMENT OF CHANGES IN NET ASSETS
T. Rowe Price New America Growth Portfolio
In thousands

<TABLE>
<CAPTION>
Year
Ended
12/31/96 12/31/95
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income $ 65 $ 11
Net realized gain (loss) 637 385
Change in net unrealized gain or loss 5,130 1,472
-----------------------
Increase (decrease) in net assets
from operations 5,832 1,868
-----------------------
Distributions to shareholders
Net investment income (92) (4)
Net realized gain (765) -
-----------------------
Decrease in net assets from distributions (857) (4)
-----------------------
Capital share transactions*
Shares sold 51,507 9,399
Distributions reinvested 857 4
Shares redeemed (9,492) (998)
-----------------------
Increase (decrease) in net assets from capital
share transactions 42,872 8,405
-----------------------
Net equalization 90 7
-----------------------
NET ASSETS

Increase (decrease) during period 47,937 10,276
Beginning of period 12,304 2,028
-----------------------
END OF PERIOD $60,241 $12,304
=======================

*Share information
Shares sold 3,117 680
Distributions reinvested 52 -
Shares redeemed (568) (73)

Increase (decrease) in shares outstanding 2,601 607
-----------------------
</TABLE>

The accompanying notes are an integral part of these financial statements.

____
8
<PAGE>

NOTES TO FINANCIAL STATEMENTS
T. Rowe Price New America Growth Portfolio
December 31, 1996

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

T. Rowe Price Equity Series, Inc., (the corporation) is registered under
the Investment Company Act of 1940. The New America Growth Portfolio (the
fund), a diversified, open-end management investment company, is one of the
portfolios established by the corporation and commenced operations on March
31, 1994. The shares of the fund are currently being offered only to
separate accounts of certain insurance companies as an investment medium
for both variable annuity contracts and variable life insurance policies.

Short-term debt securities are valued at their amortized cost which, when
combined with accrued interest, approximates fair value.

PREMIUMS AND DISCOUNTS Premiums and discounts on debt securities are
amortized for both financial reporting and tax purposes.

NOTE 2 - INVESTMENT TRANSACTIONS

OTHER Purchases and sales of portfolio securities, other than short-term
securities, aggregated $47,326,000 and $8,935,000, respectively, for the
year ended December 31, 1996.

NOTE 3 - FEDERAL INCOME TAXES

No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company and distribute all of
its taxable income.

__________________________________________________________________________

Undistributed net investment income $ (72,000)
Undistributed net realized gain (43,000)
Paid-in-capital 115,000

At December 31, 1996, the aggregate cost of investments for federal income
tax and financial reporting purposes was $53,376,000, and net unrealized
gain aggregated $6,637,000, of which $8,119,000 related to appreciated
investments and $1,482,000 to depreciated investments.

NOTE 4 - RELATED PARTY TRANSACTIONS

The investment management and administrative agreement between the fund and
T. Rowe Price Associates, Inc. (the manager) provides for an all-inclusive
annual fee, of which $30,000 was payable at December 31, 1996. The fee,
computed daily and paid monthly, is equal to 0.85% of the fund's average
daily net assets. Pursuant to the agreement, investment management,
shareholder servicing, transfer agency, accounting, and custody services
are provided to the fund, and interest, taxes, brokerage commissions, and
extraordinary expenses are paid directly by the fund.

____
9
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS OF T. ROWE PRICE EQUITY SERIES, INC.
AND SHAREHOLDERS OF THE NEW AMERICA GROWTH PORTFOLIO

In our opinion, the accompanying statement of net assets 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 the New America Growth Portfolio (one of the portfolios constituting T.
Rowe Price Equity Series, Inc., hereafter referred to as the "Fund") at
December 31, 1996, and the results of its operations, the changes in its
net assets and the financial highlights for each of the fiscal periods
presented, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to
as "financial statements") are the responsibility of the Fund'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 custodians and, where appropriate, the application
of alternative auditing procedures for unsettled security transactions,
provide a reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP
Baltimore, Maryland
January 20, 1997

____
10
<PAGE>

Montgomery Variable Series:
Emerging Markets Fund

ANNUAL REPORT
December 31, 1996

[LOGO]

THE MONTGOMERY FUNDS
Invest wisely.
<PAGE>

Montgomery Variable Series: Emerging Markets Fund
Portfolio Highlights
December 31, 1996

In Latin America, we expect 1997 to be the year when Brazil will deliver
the "big ticket" reforms the world has been waiting for. Should these
reforms go through as planned, we also expect real interest rates to fall
from their current level of 15%. That, in turn, should stimulate further
growth in the economy and the stock market.

In Europe, stronger economic growth in the region (led by Germany) augers
well for the emerging economies there. In the Middle East, Israel's recent
decision to withdraw from the Hebron in cause for some optimism about the
peace process.

Q. WHY SHOULD AN INVESTOR CONSIDER THE MONTGOMERY VARIABLE SERIES: EMERGING
MARKETS FUND?

A. The emerging market economies continue to grow at a rate of nearly 6% a
year. Inflation and real interest rates in many of these nations are also
headed downward, and we expect companies in them to post average real
earnings growth of 20 to 25%. We are convinced that 1997 could prove to be
the year of the emerging markets bull run, and we believe that excellent
long-term opportunities are opening up for investors who have the
wherewithal to wait out the inevitable ups and downs of these markets.

Top Five Countries
(as a percentage of total net assets)

<TABLE>
-----------------------------------------------------
<S> <C>
Brazil........................................ 15.1%
Malaysia...................................... 12.6
China/Hong Kong............................... 7.8
South Africa.................................. 6.5
Portugal...................................... 5.2
-----------------------------------------------------
</TABLE>

Top Ten Holdings
(as a percentage of total net assets)

<TABLE>
-----------------------------------------------------
<S> <C>
Uniao de Bancos Brasileiros................... 2.7%
Telebras, ADR................................. 2.7
Banco Bradesco................................ 2.5
Sonae Investmentos............................ 2.4
Lonrho........................................ 2.3
IOI Corporation Oxygen, Inc................... 2.1
IJM Corporation Berhad........................ 2.0
Telefonos de Venezuela, ADR................... 1.9
Capital Portugal Fund......................... 1.8
Compania de Telefonos de Chile, ADR........... 1.8
-----------------------------------------------------
</TABLE>

2
<PAGE>

MONTGOMERY VARIABLE SERIES: EMERGING MARKETS FUND
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Portfolio Investments
December 31, 1996

COMMON STOCKS--78.7%
SHARES VALUE (NOTE 1)
<S> <C>
ARGENTINA--4.5%
150,300 Astra Cia Argentina de Petroleo (Oil) $ 287,126
11,524 Banco Frances del Rio de La Plata, ADR (Banks) 316,910
48,000 Cresud S.A.+ (Real Estate) 84,976
16,200 Inversiones y Representaciones (Real Estate) 52,012
42,500 Siderar S.A. (Steel) 122,423
13,600 Telefonica de Argentina, Sponsored ADR
(Telephone/Networks) 351,900
----------
1,215,347
----------
BRAZIL--6.2%
11,900 Cemig, ADS (Electric Utilities) 404,243
580 Centrais Electrobas Sta Cat, GDS+*** (Electric Utilities) 54,123
7,200 Multicanal, ADR+ (Cable Television) 92,250
9,600 Telebras, ADR (Telephone/Networks) 734,400
3,670,000 Telec Brasileiras-Telebras ON (Telephone/Networks) 263,127
12,000 Usiminas, ADR*** (Steel) 122,700
----------
1,670,843
----------
CHILE--2.0%
4,760 Compania de Telefonos de Chile, ADR
(Telecommunications/Wireless) 481,355
1,000 Sociedad Quimica y Minera de Chile (Chemicals) 54,125
----------
535,480
----------
CHINA/HONG KONG--7.8%
21,000 Cheung Kong Holdings (Real Estate) 186,664
24,000 China Light and Power Company (Electric Utilities) 106,742
34,000 China Resources Enterprises Ltd. (Holding) 76,488
111,000 Concord Land Development Company Ltd.+ (Real Estate) 48,077
32,000 Guoco Group, Ltd., ORD (Diversified Financial Services) 179,145
8,000 Henderson Land Development Company (Real Estate) 80,677
12,200 HSBC Holdings (Banks) 261,051
41,000 Hutchison Whampoa Ltd. (Conglomerates) 322,031
48,000 New World Development Company Ltd. (Holding) 324,261
20,000 Shanghai Industrial Holdings Ltd.+ (Conglomerates) 72,920
44,000 Shangri-La Asia (Lodging) 65,137
15,000 Sun Hung Kai Properties Ltd. (Real Estate) 183,755
10,000 Swire Pacific Company, Ltd., Class A (Holding) 95,352
38,000 Wheelock and Company, Ltd. (Holding) 108,333
----------
2,110,633
----------
CZECH REPUBLIC--2.5%
3,050 SPT Telecom A.S.+ (Telephone/Networks) 379,708
33,800 The Czech Value Fund+ (Mutual Funds) 287,300
----------
667,008
----------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

3
<PAGE>

Montgomery Variable Series: Emerging Markets Fund
Portfolio Investments (continued)
December 31, 1996

COMMON STOCKS (CONTINUED)
SHARES VALUE (NOTE 1)
<S> <C>
EGYPT--0.3%
4,000 Tora Cement+ (Cement) $ 80,757
--------
GREECE--0.2%
15,000 Aegek (Heavy Construction) 55,328
--------
HUNGARY--0.3%
3,000 Borsodchem, GDR*** (Chemicals) 75,450
--------
INDIA--2.1%
3,300 Bajaj Auto, Ltd., GDR*** (Auto/Auto Parts) 109,939
3,700 Bajaj Auto, Ltd., GDS (Auto/Auto Parts) 123,266
10,000 Gujarat Ambuja Cement Ltd., GDR*** (Cement) 86,000
5,800 Indian Petrochemicals Corporation Ltd., GDR*** (Chemicals) 66,990
16,700 Tata Engineering and Locomotive Company, Ltd., GDR*** (Auto/Auto Parts) 178,523
--------
564,718
--------
INDONESIA--3.3%
66,000 Ciputra Development (F)** (Auto/Auto Parts) 68,459
16,000 Hanjaya Mandala Sampoerna (F)** (Tobacco) 85,351
90,000 Semen Gresik (F) (Building Materials) 289,585
1,900 Tambang Timah, GDR (Euro) (Metals and Mining) 34,152
17,600 Tambang Timah, GDR*** (Metals and Mining) 316,360
2,700 Telekomunikas Indonesia, ADR (Telephone/Regional - Local) 93,150
--------
887,057
--------
ISRAEL--0.7%
4,000 Teva Pharmaceuticals, ADR (Pharmacy/Drugs) 200,250
--------
KOREA--2.9%
18,700 Korea Electric Power Corporation, ADR (Electric Utilities) 383,350
2,060 Korea Mobile Telecommunications, ADR (Telephone/Wireless) 26,523
1,854 Korea Mobile Telecommunications, ADS (Telephone/Wireless) 23,870
14,000 Pohang Iron and Steel Company, Ltd., ADS (Steel) 283,500
2,100 Samsung Electronics, Ltd., GDS*** (Electronics) 38,745
1,600 Samsung Electronics, Ltd., GDS, Non-voting*** (Electronics) 29,520
--------
785,508
--------
MALAYSIA--12.5%
41,000 Arab Malaysian Corporation (Diversified Financial Services) 204,554
15,000 Development and Commercial Bank Holdings Corporation (Banks) 51,376
14,000 Genting Berhad (Leisure Time) 96,456
67,000 Guinness Anchor Berhad (Food and Beverage) 164,482
16,000 Hong Leong Bank Berhad** (Banks) 55,751
228,000 IJM Corporation Berhad (Heavy Construction) 537,161
29,000 Innovest Berhad+ (Real Estate) 103,346
373,000 IOI Corporation Oxygen, Inc. (Chemicals) 573,051
23,000 Leader Universal Holdings Berhad (Telecommunications Equipment) 48,268
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

4
<PAGE>

Montgomery Variable Series: Emerging Markets Fund
Portfolio Investments (continued)
December 31, 1996

<TABLE>
<CAPTION>
COMMON STOCKS (CONTINUED)
SHARES VALUE (NOTE 1)
<S> <C>
MALAYSIA (CONTINUED)
37,000 Lingkaran Trans Kota Holdings Berhad+ (Real Estate) $ 76,183
10,000 Metacorp Berhad (Chemicals) 25,539
29,000 New Straits Times** (Newspaper/Publishing) 167,650
36,000 Oriental Holdings Berhad (Auto/Auto Parts) 245,179
169,000 Public Bank Berhad (F)** (Banks) 358,008
29,000 Resorts World Berhad (Leisure Time) 132,053
28,000 Tanjong PLC (Leisure Time) 111,978
15,000 Telekom Malaysia Berhad** (Telecommunications/Other) 133,637
31,000 United Engineers Berhad (Heavy Construction) 279,865
----------
3,364,537
----------
MEXICO--2.3%
14,400 Bufete Industrial S.A.+ (Heavy Construction) 306,000
16,000 Cementos Mexicanos S.A. CPO (Building Materials) 57,317
14,000 Grupo Modelo S.A. de C.V., Series C (Food and Beverage) 81,275
49,000 Industrias Penoles CPO (Metals and Mining) 173,666
----------
618,258
----------
MOROCCO--0.2%
3,500 Banque Marocaine du Commerce Exterieur, GDR+*** (Banks) 54,679
----------
PERU--0.6%
4,092 Credicorp, Ltd. (Banks) 75,702
5,600 Minas Buenaventura, ADR (Metals and Mining) 40,743
2,200 Telefonica del Peru S.A., ADR, Series B (Telephone/Networks) 41,525
----------
157,970
----------
PHILIPPINES--2.9%
581,100 Aboitiz Equity Ventures (Conglomerates) 58,552
6,300 Manila Electric Company, Class B (Electric Utilities) 51,502
766,000 Metro Pacific Inc., Class B (Conglomerates) 189,316
100,000 Music Semiconductors Corporation+ (Semiconductor) 49,430
189,000 PCI Leasing and Financing, Inc.+** (Diversified Financial Services) 49,945
2,800 Philippine Long Distance Telephone, (Telephone/Long Distance) 153,840
2,700 Philippine Long Distance Telephone, ADR (Telephone/Long Distance) 137,700
514,000 Republic Glass (Glass) 99,673
----------
789,958
----------
PORTUGAL--5.2%
4,600 Banco Totta E Acores, SA (Banks) 86,749
4,200 Capital Portugal Fund+ (Mutual Funds) 484,876
17,000 Portucel Industries Empresa (Pulp and Paper) 98,678
20,300 Sonae InvestImentos (Conglomerates) 642,844
1,500 Telecel-Comunicacaoes Pessoai, SA+ (Telecommunications/Wireless) 95,776
----------
1,408,923
----------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

5
<PAGE>

Montgomery Variable Series: Emerging Markets Fund
Portfolio Investments (continued)
December 31, 1996

<TABLE>
<CAPTION>
COMMON STOCKS (CONTINUED)
SHARES VALUE (NOTE 1)
<S> <C>
RUSSIA--3.2%
2,300 AO Mosenergo, ADS*** (Electric Utilities) $ 70,926
9 Irkutskenegro, RDC+*** (Oilfield Equipment) 251,100
3,300 LukOil Company, ADR (Oil) 153,862
1,200 Tatneft, ADS+ (Oil) 55,500
6,950 Tatneft, Sponsored ADR***+ (Oil) 333,600
----------
864,988
----------
SINGAPORE--1.7%
363,000 CDL Hotels International, Ltd. (Real Estate) 207,677
27,000 Far East Levingston (Heavy Construction) 140,856
13,000 Keppel Corporation, ORD (Shipping) 101,265
----------
449,798
----------
SLOVAKIA--0.1%
1,200 VUB Kupon Fund+ (Mutual Funds) 22,508
----------
SOUTH AFRICA--6.5%
4,800 Anglo American Gold Investment Company (Metals and Mining) 365,502
36,300 Barlow, Ltd. (Building Materials) 321,994
290,256 Lonrho (Conglomerates) 616,682
38,600 Sasol, Ltd. (Metals and Mining) 457,903
----------
1,762,081
----------

TAIWAN--3.6%
192,000 Bank Sinopac** (Banks) 208,058
28,000 Cathay Life Insurance** (Insurance) 178,182
56,000 China Development Corporation** (Diversified Financial Services) 171,054
73,000 China Steel Corporation** (Steel) 68,487
111,000 Pacific Construction** (Heavy Construction) 94,855
54,000 Taiwan Semiconductor Company** (Semiconductor) 110,945
12,200 Yageo Corporation, GDR+*** (Electronics) 122,031
----------
953,612
----------

THAILAND--3.9%
6,200 Ban Pu Coal Public Company, Ltd. (F) (Coal) 115,074
48,000 Bangkok Bank Public Company, Ltd., Series 2 (F) (Banks) 357,600
26,000 Electricity Generation Power Company (F) (Electric Utilities) 70,966
76,000 IFCT Finance and Securities Plc (F) (Securities Brokerage) 205,958
10,000 PTT Exploration and Production Public Company, Ltd. (F) (Oil) 144,272
1,300 Siam Cement Public Company, Ltd., Local Series 2 (Building Materials) 40,963
3,800 Siam Cement Public Company, Ltd. (F) (Building Materials) 119,722
----------
1,054,555
----------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

6
<PAGE>

Montgomery Variable Series: Emerging Markets Fund
Portfolio Investments (continued)
December 31, 1996

<TABLE>
<CAPTION>
COMMON STOCKS--(CONTINUED)
SHARES VALUE (NOTE 1)
<S> <C>
TURKEY--1.3%
1,088,333 Koc Holdings (Holding) $ 190,672
882,000 Trakya Cam Sanayil (Glass) 44,730
1,083,000 Turk Sise ve Cam (Glass) 114,841
-----------
350,243
-----------

VENEZUELA--1.9%
18,100 Telefonos de Venezuela, ADR+ (Telephone/Networks) 509,063
-----------

TOTAL COMMON STOCKS (COST $20,684,538) 21,209,552
-----------
PREFERRED STOCKS--8.9%

BRAZIL--8.9%
92,940,000 Banco Bradesco (Banks) 673,504
5,200,000 CESP-Cia Ener Sao Paulo (Electric Utilities) 202,725
396,000 Electropaulo, "B" (Electric Utilities) 58,499
15,500,000 Lojas Americanas (Retail Trade) 204,360
800,000 Petroleo Brasileiro (Oil) 127,418
22,570,000 Uniao de Bancos Brasileiros (Banks) 736,332
394,600,000 Usiminas (Steel) 402,537
-----------
TOTAL PREFERRED STOCKS (COST $2,313,255) 2,405,375
-----------
CONVERTIBLE BONDS--1.8%
PRINCIPAL AMOUNT

MEXICO--1.2%
$300,000 Alfa S.A. de C.V.,
8.000% due 09/15/00*** (Steel) 331,125
-----------
THAILAND--0.6%
150,000 Central Pattana Public Company, Ltd.,
2.750% due 04/10/01 (Real Estate) 156,938
-----------
TOTAL CONVERTIBLE BONDS
(COST $485,902) 488,063
-----------
WARRANTS--0.1%
(COST $28,571)
SHARES

MALAYSIA--0.1%
24,000 Development and Commercial Bank Holdings Corporation, Warrants,
Expire 12/27/99+ (Banks) 36,112
-----------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

7
<PAGE>

Montgomery Variable Series: Emerging Markets Fund
Portfolio Investments (continued)
December 31, 1996

<TABLE>
<CAPTION>
RIGHTS - 0.0%#
(COST $0)
SHARES VALUE (NOTE 1)
<S> <C>
ARGENTINA--0.0%#
150,300 Astra Cia Argentina de Petroleo, Rights,
Expire 01/10/97+ (Oil) $ 0
-----------
TOTAL SECURITIES (COST $23,512,266) 24,139,102
-----------
REPURCHASE AGREEMENTS--13.3%
PRINCIPAL AMOUNT

$1,789,000 Agreement with Bear Stearns Companies Inc. Tri-Party, 7.500% dated
12/31/96, to be repurchased at $1,789,745, on 01/02/97,
collateralized by $1,838,660 market value of U.S. Government
securities, having various maturities and various interest rates 1,789,000

1,789,000 Agreement with Chase Manhattan Corporation Tri-Party, 7.500%
dated 12/31/96, to be repurchased at $1,789,745, on 01/02/97,
collateralized by $1,824,832 market value of U.S. Government
securities, having various maturities and various interest rates 1,789,000
-----------

TOTAL REPURCHASE AGREEMENTS (COST $3,578,000) 3,578,000
-----------

TOTAL INVESTMENTS (COST $27,090,266*) 102.8% 27,717,102
OTHER ASSETS AND LIABILITIES (NET) (2.8) (751,359)
----- -----------
NET ASSETS 100.0% $26,965,743
===== ===========
</TABLE>

___________________________
* Aggregate cost for Federal tax purposes is $27,149,843.
** Illiquid Security or Special Situation Security (See Note 6 to
Statements).
*** 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.
# Amount represents less than 0.1%.
+ Non-income producing security.

Descriptions of securities have not been audited by Deloitte & Touche LLP.

ABBREVIATIONS:
ADR American Depositary Receipt
ADS American Depositary Share
(F) Foreign or alien share.
GDR Global Depositary Receipt
GDS Global Depositary Share
ORD Ordinary
RDC Russian Depositary Certificate

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

8
<PAGE>

Montgomery Variable Series: Emerging Markets Fund
Statement of Assets and Liabilities
December 31, 1996

<TABLE>

<S> <C> <C>
ASSETS:

Investments in securities, at value (Identified cost $27,090,266) (Note 1)
Securities................................................................ $24,139,102
Repurchase agreements..................................................... 3,578,000
-----------
Total investments................................................................. 27,717,102
Cash.............................................................................. 100,461
Foreign currency (Cost $502,449).................................................. 502,644
Forward foreign currency exchange contracts:
Forward foreign currency exchange contracts to buy, at value
(Contract cost $961,133) (Note 3)......................................... 962,903
Receivables:
Shares of beneficial interest sold........................................ 261,771
Dividends................................................................. 28,071
Interest.................................................................. 10,869
Other Assets:
Organization costs (Note 1)............................................... 50,776
-----------
Total Assets...................................................................... 29,634,597

LIABILITIES:
Forward foreign currency exchange contracts:
Payable for forward foreign currency exchange contracts
to buy (Note 3)........................................................... $ 961,133
Payables:
Investment securities purchased........................................... 1,602,655
Organization cost......................................................... 61,485
Management fee............................................................ 23,906
Custodian fees............................................................ 10,263
Trustees' fees and expenses............................................... 1,000
Shares of beneficial interest redeemed.................................... 782
Other accrued liabilities and expenses.................................... 7,630
----------
Total Liabilities................................................................. 2,668,854
-----------
NET ASSETS........................................................................ $26,965,743
===========
NET ASSETS consist of:
Accumulated net investment loss................................................... $ (15,221)
Accumulated net realized loss on securities sold, forward foreign
currency exchange contracts and foreign currency transactions.................... (101,401)
Net unrealized appreciation of investments, forward foreign currency
exchange contracts, foreign currency transactions and other net assets........... 626,197
Shares of beneficial interest..................................................... 25,320
Additional paid-in capital........................................................ 26,430,848
-----------
NET ASSETS........................................................................ $26,965,743
===========
Net Asset Value, offering and redemption price per share
($26,965,743 - 2,531,992 shares of beneficial interest outstanding).............. $ 10.65
===========
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

9
<PAGE>

Montgomery Variable Series: Emerging Markets Fund
Statement of Operations
For the Period Ended December 31, 1996*

<TABLE>

<S> <C> <C>
NET INVESTMENT INCOME:

Dividends (Net of foreign withholding taxes of $5,564)............................ $ 101,935
Interest.......................................................................... 89,692
--------
Total Investment Income........................................................... 191,627
--------
EXPENSES:
Management fee (Note 2)........................................................... $105,768
Legal and audit fees.............................................................. 36,031
Custodian fees.................................................................... 31,516
Amortization of organization expenses (Note 1).................................... 11,384
Trustees' fees and expenses (Note 2).............................................. 9,295
Other............................................................................. 15,341
Total Expenses.................................................................... 209,335
Fees deferred by Manager (Note 2)................................................. (86,264)
--------
NET EXPENSES...................................................................... 123,071
--------
NET INVESTMENT INCOME............................................................. 68,556
--------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
(NOTES 1 AND 3)

Net realized gain/(loss) on:
Security transactions........................................................ (101,401)
Forward foreign currency exchange contracts.................................. (28,943)
Foreign currency transactions................................................ 11,084
--------
Net realized loss on investments during the period................................ (119,260)
--------
Change in unrealized appreciation/(depreciation) of:
Securities................................................................... 626,836
Forward foreign currency exchange contracts.................................. 1,770
Foreign currency transactions and net other assets........................... (2,409)
--------
Net unrealized appreciation of investments
during the period............................................................ 626,197
--------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS................................... 506,937
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.............................. $ 575,493
--------
</TABLE>

___________________
* Montgomery Variable Series: Emerging Markets Fund commenced operations on
February 2, 1996.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

10
<PAGE>

Montgomery Variable Series: Emerging Markets Fund
Statement of Changes in Net Assets
For the Period Ended December 31, 1996*

<TABLE>
<S> <C>
NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS:
Net investment income............................................................... $ 68,556
Net realized loss on securities, forward foreign currency
exchange contracts and foreign currency transactions during the period............. (119,260)
Net unrealized appreciation of securities, forward foreign currency
exchange contracts, foreign currency transactions and net other
assets during the period........................................................... 626,197
-----------
Net increase in net assets resulting from operations................................ 575,493

DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income............................................ (65,918)

BENEFICIAL INTEREST TRANSACTIONS:
Net increase from beneficial interest transactions (Note 4)......................... 25,956,168
-----------
Net increase in net assets.......................................................... 26,465,743

NET ASSETS:
Beginning of period................................................................. 500,000
-----------
End of period....................................................................... $26,965,743
===========
Accumulated net investment loss..................................................... $ (15,221)
===========
Financial Highlights
Selected Per Share Data for the Period Ended:
12/31/96*
Net asset value - beginning of period............................................... $ 10.00
-----------
Net investment income............................................................... 0.03
Net realized and unrealized gain on investments..................................... 0.65
-----------
Net increase in net assets resulting from investment operations..................... 0.68
Distributions to shareholders:
Distributions from net investment income........................................ (0.03)
-----------
Net asset value - end of period..................................................... $ 10.65
===========
Total return **..................................................................... 6.79%
===========
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)................................................ $ 26,966
Ratio of net investment income to average net assets................................ 0.81%+
Ratio of operating expenses to average net assets................................... 1.45%+
Portfolio turnover rate............................................................. 43%
Average commission rate paid (a).................................................... $ 0.0002
Net investment loss before deferral of fees and absorption
of expenses by Manager............................................................. $ (0.01)
Operating expense ratio before deferral of fees and absorption
of expenses by Manager............................................................. 2.47%+
</TABLE>

______________________
* Montgomery Variable Series: Emerging Markets Fund commenced operations on
February 2, 1996.
** Total return represents aggregate total return for the period indicated.
+ Annualized.
(a) Average commission rate paid per share of securities purchased and sold
by the Fund.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

11
<PAGE>

The Montgomery Funds III
Notes to Financial Statements

1. SIGNIFICANT ACCOUNTING POLICIES:

The Montgomery Funds III (the "Trust") is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as a diversified, open-
end management investment company. As of December 31, 1996, the Trust had
three series, the Montgomery Variable Series: Growth Fund, the Montgomery
Variable Series: Emerging Markets Fund and the Montgomery Variable Series:
International Small Cap Fund.

The Trust was organized as a Delaware business trust on August 24, 1994.
Prior to the public offerings of shares of the Funds, a limited number of
shares were sold to Montgomery Asset Management, L.P. and/or affiliated
persons of Montgomery Asset Management in private placement offerings.
Otherwise, the Funds had no significant operations prior to February 2,
1996, the date on which the Montgomery Variable Series: Emerging Markets
Fund commenced operations (i.e., commenced selling shares to the public).

The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
Information presented in these financial statements pertains to the
Montgomery Variable Series: Emerging Markets Fund (the "Fund"). The
Montgomery Variable Series: Growth Fund and the Montgomery Variable Series:
International Small Cap Fund are presented under separate covers.

The following is a summary of significant accounting policies.

A. PORTFOLIO VALUATION

The Fund's securities are valued using current market valuations:
either the last reported sales price or, lacking any reported sales,
and in the case of fixed income securities, the mean between the
closing bid and asked prices. The value of securities denominated in
foreign currencies and traded on foreign exchanges or in foreign
markets will be translated into U.S. dollars at the last price of
their respective currency denomination against U.S. dollars quoted by
a major bank or, if no such quotation is available, at the rate of
exchange determined in accordance with policies established in good
faith by the Board of Trustees. Securities for which market
quotations are not readily available (including restricted securities
which are subject to limitations as to their sale) are valued at fair
value as determined in good faith by or under the supervision of the
Trust in accordance with methods which are authorized by the Trust's
Board of Trustees.

Short term debt obligations with remaining maturities in excess of 60
days are valued at current market prices, as discussed above. Short-
term securities with maturities of 60 days or less are carried at
amortized cost, which approximates market value.

B. DIVIDENDS AND DISTRIBUTIONS

Dividends, if any, from net investment income of the Fund are declared
and paid at least annually.

Distributions of any short-term capital gains earned by the Fund are
distributed no less frequently than annually. Additional
distributions of net investment income and capital gains for the Fund
may be made in order to avoid the application of a 4% non-deductible
excise tax on certain undistributed amounts of ordinary income and
capital gains. Income distributions and capital gain distributions
are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. These
differences are primarily due to differing treatments of income and
gains on various investment securities held by the Fund, timing
differences and differing characterizations of distributions made by
the Fund.

Permanent differences incurred during the year ended December 31,
1996, resulting from differences in book and tax accounting have been
reclassified at year end to reflect a decrease to undistributed net
investment income of $17,859 and an increase to accumulated realized
loss of $17,859.

C. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS

The Fund may engage in forward foreign currency exchange contracts
with off balance sheet risk in the normal course of investing
activities in order to manage exposure to market risks. Forward
foreign currency exchange contracts are valued at the forward rate and
are marked-to-market daily. The change in market value is recorded by
the Fund as an unrealized gain or loss.

When the contract is closed, the Fund records a realized gain or loss
equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed. Forward
foreign currency exchange contracts have been used solely to establish
a rate of exchange for settlement of transactions. Although forward
foreign currency exchange contracts limit the risk of loss due to a
decline in the value of the hedged currency, they also limit any
potential gain that might result should the value of the currency
increase. In addition, the Fund could be exposed to risks if the
counterparties to the contracts are unable to meet the terms of their
contracts.

12
<PAGE>

The Montgomery Funds III
Notes to Financial Statements
(continued)

D. FOREIGN CURRENCY

Foreign currencies, investments and other assets and liabilities are
translated into U.S. dollars at the exchange rates prevailing at the
end of the period, and purchases and sales of investment securities
and income and expenses are translated on the respective dates of such
transactions. Unrealized gains and losses which result from changes
in foreign currency exchange rates on investments have been included
in the unrealized appreciation/(depreciation) of securities. Net
realized foreign currency gains and losses resulting from movement in
exchange rates include foreign currency gains and losses between trade
date and settlement date on investment securities, transactions,
foreign currency transactions and the difference between the amounts
of interest and dividends recorded on the books of the Fund and the
amount actually received and the portion of foreign currency gains and
losses related to fluctuations in exchange rates between the initial
purchase trade date and subsequent sale trade date.

E. REPURCHASE AGREEMENTS

The Fund may engage in repurchase agreement transactions individually
or jointly through a joint repurchase account with other series of the
Trust pursuant to a joint repurchase agreement. Under the terms of a
typical repurchase agreement, the Fund writes a financial contract
with a counterparty and takes possession of a government debt
obligation as collateral. The Fund also agrees with the counterparty
to allow the counterparty to repurchase the financial contract at a
specified date and price, thereby determining the yield during the
Fund's holding period. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the Fund's
holding period. The value of the collateral is at least equal at all
times to the total amount of the repurchase obligations, including
interest. In the event of counterparty default, the Fund has the
right to use the collateral to offset losses incurred. There could be
potential loss to the Fund in the event the Fund is delayed or
prevented from exercising its rights to dispose of the collateral
securities, including the risk of a possible decline in the value of
the underlying securities, while the Fund seeks to assert its rights.
The Fund's investment manager, acting under the supervision of the
Board of Trustees, reviews the value of the collateral and the
creditworthiness of those banks and dealers with which the Fund enters
into repurchase agreements to evaluate potential risks. The Fund may
also participate on an individual or joint basis in tri-party
repurchase agreements which involve a counterparty and a custodian
bank.

F. SECURITIES TRANSACTIONS AND INVESTMENT INCOME

Securities transactions are recorded on a trade-date basis. Realized
gain and loss from securities transactions is recorded on the specific
identified cost basis. Dividend income is recognized on the ex-
dividend date and interest income, including, where applicable,
amortization of discount on short-term investments, is recognized on
an accrual basis. Dividend income on foreign securities is recognized
as soon as the Fund is informed of the ex-dividend date.

G. FEDERAL INCOME TAXES

It is the intention of the Fund to qualify and elect treatment as a
regulated investment company under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"), by complying with the
provisions available to certain investment companies, as defined in
applicable sections of the Code, and to make distributions of taxable
income to shareholders sufficient to relieve the Fund from all or
substantially all Federal income taxes.

H. ORGANIZATION COSTS

Expenses incurred in connection with the organization of the Fund are
amortized on a straight-line basis over a period of five years from
commencement of operations.

2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES:

a. Montgomery Asset Management, L.P. is the Fund's Manager (the
"Manager"). The Manager, a California limited partnership, is an
investment adviser registered with the Securities and Exchange
Commission under the Investment Advisers Act of 1940, as amended (the
"Advisers Act"). The general partner of the Manager is Montgomery
Asset Management, Inc. The sole limited partner of the Manager is
Montgomery Securities. Under the Advisers Act, both Montgomery Asset
Management, Inc. and Montgomery Securities may be deemed controlling
persons of the Manager. Although the operations and management of the
Manager are independent from those of Montgomery Securities, it is
expected that the Manager may draw upon the research and
administrative resources of Montgomery Securities at its discretion in
a manner consistent with applicable regulations.

13
<PAGE>

The Montgomery Funds III
Notes to Financial Statements
(continued)

transactions, furnishes the Fund with office space and certain
administrative services, and provides the personnel needed by the
Trust with respect to the Manager's responsibilities under such
Agreement. As compensation, the Fund pays the Manager a monthly
management fee (accrued daily) at the following annual rates based
upon the average daily net assets of the Fund:

First $250 Million Over $250 Million
------------------ -----------------
1.25% 1.00%

The Manager has agreed to reduce some or all of its management fee or
absorb the Fund expenses if necessary to keep the Fund's annual
operating expenses, exclusive of interest or taxes, at or below 1.75%
of the average daily net assets of the Fund or the maximum allowed by
applicable state expense limitations for the Fund.

Any reductions or absorptions made for the Fund by the Manager of its
fees are subject to recovery within the following three years provided
the Fund is able to affect such reimbursement and remain in compliance
with applicable expense limitations. Any of the Manager's voluntary
absorptions are also subject to recovery.

For the period ended December 31, 1996, the Manager has deferred fees
of $86,264.

As of December 31, 1996, the deferred management fees subject to
recoupment are $86,264.

b. Certain officers and Trustees of the Trust are, with respect to the
Trust's Manager and/or Montgomery Securities, "affiliated persons" as
defined in the 1940 Act. Each Trustee who is not an "affiliated
person" receives an annual retainer and quarterly meeting fees
totalling $35,000 per annum, as well as reimbursement for expenses,
for services as Trustee of all three Trusts advised by the Manager
($5,000 of which will be allocated to the Montgomery Funds III).

c. The Fund has no sales load and does not pay distribution (Rule 12b-1)
fees.

3. SECURITIES TRANSACTIONS:

a. The aggregate amount of purchases and sales of investment securities,
other than short-term securities, for the period ended December 31,
1996, were $27,059,237 and $3,456,120, respectively.

b. At December 31, 1996, aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost and
aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value for federal income tax
purposes were $1,532,059 and $964,800, respectively.

c. The schedule of forward foreign currency exchange contracts at
December 31, 1996 was as follows:

<TABLE>
<CAPTION>
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS TO BUY: CONTRACT VALUE DATE VALUE (NOTE 1)
<S> <C> <C>
413,581 Brazilian Real 01/02/97 $398,019
1,276,582 Hong Kong Dollar 01/03/97 165,051
45,413,241 Portuguese Escudo 01/03/97 292,890
500,849 South African Commercial Rand 01/07/97 106,943
--------
TOTAL FORWARD FOREIGN CURRENCY EXCHANGE
CONTRACTS TO BUY (CONTRACT COST $961,133) $962,903
--------
</TABLE>

d. Under an unsecured Revolving Credit Agreement with Deutsche Bank (New
York), the Montgomery Variable Series: Emerging Markets Fund, along
with other funds of Montgomery Funds I, Montgomery Funds II,and
Montgomery Funds III, may for one year starting August 6, 1996, borrow
(consistent with applicable law and its investment policies) up to 10%
of its net asset value, provided that the aggregate principal amount
of outstanding loans under the agreement to all Funds does not exceed
$300,000,000. For the period ended December 31, 1996, there were no
borrowings under this agreement.

14
<PAGE>

The Montgomery Funds III
Notes to Financial Statements
(continued)

4. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST:

The Trust has authorized an unlimited number of shares of beneficial
interest which have a par value of $0.01. Transactions in shares of
beneficial interest for the period indicated below were:

<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1996*
SHARES AMOUNT
<S> <C> <C>
Shares Sold 2,724,011 $28,483,626
Issued as Reinvestment
of Dividends 6,363 65,918
Shares Redeemed (248,382) (2,593,376)
--------- -----------
Net Increase 2,481,992 $25,956,168
========= ===========
</TABLE>

____________________

* Montgomery Variable Series: Emerging Markets Fund commenced operations on
February 2, 1996.

5. FOREIGN SECURITIES:

The Fund purchases securities in emerging market countries. Securities of
foreign companies and foreign governments involve special risks and
considerations not typically associated with investing in U.S. companies
and the U.S. government. These risks include re-evaluation of currencies,
less reliable information about issuers, differences in the clearance and
settlement of securities transactions practices, and future adverse
political and economic developments. These risks are heightened for
investments in emerging market countries. Moreover, securities of many
foreign companies and foreign governments and their markets may be less
liquid and their prices more volatile than those securities of comparable
U.S. companies and the U.S. government.

6. SPECIAL SITUATION SECURITIES:

The Fund may not invest more than 15% of its net assets in illiquid
securities. The securities shown in the table below have been determined by
the Manager to be illiquid because they are restricted or because there is
an exceptionally low trading volume in the primary trading market for these
securities at December 31, 1996. These securities are valued at market
price:

<TABLE>
<CAPTION>
12/31/96
ACQUISITION MARKET VALUE % OF TOTAL
SECURITY DATE SHARES VALUE PER SHARE COST NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
Bank Sinopac 07/17/96 192,000 $208,058 $ 1.08 $179,949 0.77%
Cathay Life Insurance 09/12/96 28,000 178,182 6.36 177,506 0.66
China Development Corporation 09/12/96 56,000 171,054 3.05 154,621 0.63
China Steel Corporation 09/12/96 73,000 68,487 0.94 70,710 0.25
Pacific Construction 09/12/96 111,000 94,855 0.85 106,648 0.35
PCI Leasing and Financing, Inc. 12/26/96 189,000 49,945 0.26 50,916 0.19
Taiwan Semiconductor Company 07/17/96 54,000 110,945 2.05 98,957 0.41
-------- ----
$881,526 3.26%
======== ====
</TABLE>

The following securities held by the Fund on December 31, 1996, are
generally unrestricted securities for which reliable market prices can be
established. These securities are valued at their market prices. However,
because the process of re-registering foreign securities in the Fund's name
can take more than seven days, the following shares of each of these
securities were deemed temporarily restricted or illiquid in the hands of
the Fund at December 31, 1996. The Fund bears the cost of re-registering
these securities:

15
<PAGE>

The Montgomery Funds III
Notes to Financial Statements
(continued)

<TABLE>
<CAPTION>
12/31/96
ACQUISITION MARKET VALUE % OF TOTAL
SECURITY DATE SHARES VALUE PER SHARE COST NET ASSETS
<S> <C> <C> <C> <C> <C> <C>
Ciputra Development (F) 10/16/96 22,000 $ 22,820 $ 1.04 $ 59,084 0.08%
Hanjaya Mandala Sampoerna (F) 07/11/96 3,700 19,737 5.33 89,211 0.07
Hong Leong Bank Berhad 11/15/96 16,000 55,751 3.48 53,358 0.21
New Straits Times 09/04/96 29,000 167,650 5.78 158,862 0.62
Public Bank Berhad (F) 12/13/96 169,000 358,008 2.12 336,981 1.33
Telekom Malaysia Berhad 08/20/96 15,000 133,637 8.90 136,263 0.50
-------- ----
$757,603 2.81%
======== ====
</TABLE>

7. CAPITAL LOSS CARRYFORWARD

At December 31, 1996, the Fund had available for Federal income tax
purposes unused capital losses of $84,636 expiring in 2004.

Under current tax law, net short-term capital losses realized after October
31 may be deferred and treated as occurring on the first day of the
following fiscal year. For the fiscal year ended December 31, 1996, the
Fund elected to defer net short-term capital losses of $14,382 occurring
between November 1, 1995, and December 31, 1996.

Such deferred losses will be treated as arising on the first day of the
fiscal year ended December 31, 1997.

16
<PAGE>

To the Board of Trustees and the Shareholders of The Montgomery Funds III:

We have audited the accompanying statement of assets and liabilities,
including the portfolio investments, of the Montgomery Variable Series:
Emerging Markets Fund (the "Fund") as of December 31, 1996, and the related
statement of operations, statement of changes in net assets and the
financial highlights for the period February 2, 1996 (commencement of
operations) to December 31, 1996. These financial statements and financial
highlights are the responsibility of the Fund's management, Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards, Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement, An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned at December 31, 1996, by correspondence with the custodian
and brokers; where replies were not received from brokers, we performed
other auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Fund as of
December 31, 1996, the results of its operations, the changes in its net
assets and its financial highlights for the period February 2, 1996
(commencement of operations) to December 31, 1996, in conformity with
generally accepted accounting principles.

Deloitte & Touche, LLP.

San Francisco, California
January 31, 1997
<PAGE>

Montgomery Variable Series:
Growth Fund

ANNUAL REPORT
December 31, 1996

[LOGO OF MONTGOMERY FUNDS APPEARS HERE]

THE MONTGOMERY FUNDS
Invest wisely.
<PAGE>

MONTGOMERY VARIABLE SERIES: GROWTH FUND
PORTFOLIO HIGHLIGHTS
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
Investment Review

Q. HOW DID THE MONTGOMERY VARIABLE SERIES: GROWTH FUND PERFORM SINCE ITS
INCEPTION ON FEBRUARY 9, 1996?

A. The Montgomery Variable Series: Growth Fund kept pace with the market
during the year and continues to lead the index by a wide margin.

Q. WHERE WAS THE FUND OVERWEIGHT DURING THIS PERIOD? DO YOU STILL HAVE A
FAVORABLE OUTLOOK FOR THESE AREAS?

A. The Montgomery Variable Series: Growth Fund was overweight in three
sectors in the second half of 1996: basic materials, such as paper and
forest products; consumer cyclicals like retail, lodging and building
materials; and technology. Each of these sectors is sensitive to the
economic cycle. Although the economy is entering its sixth year of
expansion, we are optimistic about continued growth in the U.S. economy
and about the relative values offered by the stocks we own in these
sectors.

A recent survey of U.S. paper and forest products companies, for instance,
revealed that over the next three years they plan to increase capacity only
marginally; many observers, in fact, expect the rate of expansion to near
an all-time low. Industry investors have also declined significantly in all
product areas over the past six months. At the same time, demand has risen
considerably, resulting in significantly higher industry operating rates.
We believe these conditions should lead to an upturn in prices for paper
and forest products fairly soon. On top of these improving fundamentals,
relative stock prices in the group recently hit a 3-year low.

These trends represent the sort of important fundamental change that we
look for and we believe they should help drive these stocks up in the near
future.

Q. ISN'T IT UNUSUAL TO FIND SECTORS SUCH AS BASIC INDUSTRIES AND BUILDING
MATERIALS IN A GROWTH FUND?

A. True, but we believe "growth is where you find it." A key element of our
process and our discipline is that we're willing to look at companies and
industries other portfolios might overlook because these areas are not
considered traditional growth. This can create a meaningful advantage for
our shareholders. Remember, we are trying to find companies combining the
best future growth prospects at the most reasonable prices .

Q. AT THE END OF 1996, FOUR STOCKS IN THE MONTGOMERY VARIABLE SERIES:
GROWTH FUND EACH MADE UP MORE THAT 3% OF ASSETS. TWO OF THEM ARE DAYTON
HUDSON AND L.M. ERICSSON. HOW DID THEY PERFORM DURING THE SECOND HALF OF
1996?

A. Both companies' stocks outperformed the overall market and our outlook
for them remains favorable. Dayton Hudson rose about 14% in the last
half of 1996, after it reported earnings that surpassed analyst
expectations and

Portfolio Manager
- -------------------------------------------------
Roger W. Honour..........Senior Portfolio Manager

Andrew Pratt....................Portfolio Manager

Kathryn M. Peters...............Portfolio Manager
- -------------------------------------------------
Fund Performance
- -------------------------------------------------
Aggregate total returns for the period
ended 12/31/96
- -------------------------------------------------
MONTGOMERY VARIABLE SERIES:
GROWTH FUND

Since inception (2/9/96)...................27.22%

S&P 500 INDEX

Since (1/31/96)............................18.91%
- -------------------------------------------------

Past performance is not guaranteed of future
results. Net asset value, investment return and
principal value will fluctuate so that shares,
when redeemed, may be worth more or less than
their orginal cost.
- -------------------------------------------------

Growth of a $10,000 Investment

[GRAPH APPEARS HERE]

* The Standard & Poor's 500 Index is composed of 500 widely held common stocks
listed on the NySE, AMEX, and OTC market.
<PAGE>

Montgomery Variable Series: Growth Fund
Portfolio Highlights
December 31, 1996

its earnings estimates were revised upward. Ericsson's performance was
even more exceptional, registering 40% gain in the last half of the
year.

It's important to note that both stocks became large positions in the
Montgomery Variable Series: Growth Fund through capital appreciation.

Q. HOW WILL YOU MANAGE THE MONTGOMERY VARIABLE SERIES: GROWTH FUND GOING
FORWARD?

A. As in the past, we will follow our multidisciplined methodology and seek
to creatively provide shareholders with the best available returns,
while at the same time taking the least number of necessary risks. Our
investment decisions are guided by companies' business fundamentals, not
by trying to guess the next hot trend or sector of the market. We invest
as we find opportunities that meet our disciplines, and we believe this
approach will serve our shareholders over the long term.

TOP FIVE INDUSTRIES
(AS A PERCENTAGE OF NET ASSETS)

<TABLE>
--------------------------------------------------------------------
<S> <C>
Software Systems......................................... 10.1%
Telecommunications Equipment............................. 9.1
Retail Trade............................................. 7.9
Pulp and Paper........................................... 7.8
Banks/Savings and Loan................................... 5.7
--------------------------------------------------------------------
</TABLE>

TOP TEN HOLDINGS
(AS A PERCENTAGE OF NET ASSETS)

<TABLE>
--------------------------------------------------------------------
<S> <C>
Simulation Sciences, Inc................................. 7.0%
Canadian National Railway Company........................ 3.6
Dayton Hudson Corporation................................ 3.3
Ericsson (L.M.) Telephone Company, Class B, ADR.......... 3.2
International Paper Company.............................. 3.0
Octel Communications Corporation......................... 3.0
Golden West Financial Corporation........................ 3.0
Willamette Industries, Inc............................... 3.0
Masco Corporation........................................ 2.3
Sybase, Inc.............................................. 2.3
--------------------------------------------------------------------
</TABLE>

2
<PAGE>

MONTGOMERY VARIABLE SERIES: GROWTH FUND
- --------------------------------------------------------------------------------
Portfolio Investments
December 31, 1996

<TABLE>
<CAPTION>
COMMON STOCKS--83.2%
SHARES VALUE (NOTE 1)
<S> <C> <C>
AEROSPACE/DEFENSE--1.0%
900 Gulfstream Aerospace Corporation+ $ 21,825
----------
AIRLINES--2.1%
1,000 Federal Express Corporation+ 44,500
----------
APPAREL AND TEXTILES--1.2%
375 VF Corporation 25,312
----------
AUTO/AUTO PARTS--1.6%
600 General Motors Corporation 33,450
----------
BANKS/SAVINGS AND LOAN--5.7%
400 BankAmerica Corporation 39,900
175 Citicorp 18,025
1,000 Golden West Financial Corporation 63,125
----------
121,050
BUILDING MATERIALS--2.3%
1,375 Masco Corporation 49,500
----------
BUSINESS SERVICES--5.4%
1,575 AccuStaff Inc.+ 33,272
250 Computer Sciences Corporation + 20,531
700 Forrester Research, Inc.+ 18,112
750 Netscape Communications Corporation+ 42,656
----------
114,571
----------
CONGLOMERATES--1.1%
450 Tyco International Ltd. 23,794
----------
DIVERSIFIED FINANCIAL SERVICES--0.4%
200 Norwest Corporation 8,700
----------
ELECTRONICS--1.1%
300 Raychem Corporation 24,038
----------
FOOD AND BEVERAGE--2.7%
1,300 Fleming Companies, Inc. 22,425
200 Unilever N.V., ADR 35,050
----------
57,475
----------
HEALTH CARE--0.6%
200 Oxford Health Plans, Inc.+ 11,713
----------
LEISURE TIME--1.4%
900 GTECH Holdings Corporation+ 28,800
----------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

3
<PAGE>

Montomgery Variable Series: Growth Fund
Portfolio Investments (continued)
December 31, 1996

<TABLE>
<CAPTION>
COMMON STOCKS--(continued)
SHARES VALUE (NOTE 1)
<S> <C>
LODGING--2.6%
325 HFS Inc.+ $ 19,419
1,300 Interstate Hotels Company+ 36,725
-----------
56,144
-----------
MACHINERY AND TOOLS--1.1%
1,000 Measurex Corporation 24,000
-----------
METALS AND MINING--1.5%
1,050 Freeport-McMoRan Copper and Gold, Inc., Series B 31,369
-----------
NEWSPAPERS/PUBLISHING--0.9%
1,000 World Color Press, Inc.+ 19,250
-----------
OIL--3.7%
600 Amerada Hess Corporation 34,725
525 Belco Oil & Gas Corporation+ 14,372
1,000 Union Pacific Resources Group, Inc. 29,250
-----------
78,347
-----------
OILFIELD EQUIPMENT--3.2%
350 Schlumberger Ltd. 34,956
725 Tidewater Inc. 32,806
-----------
67,762
-----------
PIPELINES--0.6%
300 Enron Corporation 12,937
-----------
PULP AND PaPER--7.8%
1,200 Boise Cascade Corporation 38,100
1,600 International Paper Company 64,600
900 Willamette Industries, Inc. 62,888
-----------
165,588
-----------
RAILROAD--3.6%
2,000 Canadian National Railway Company 76,000
-----------
REAL ESTATE--0.5%
200 Starwood Lodging Trust 11,025
-----------
RETAIL TRADE--7.9%
1,800 Dayton Hudson Corporation 70,650
300 Gucci Group 19,163
1,050 Nordstrom, Inc. 37,209
400 Saks Holdings, Inc.+ 10,800
600 Staples, Inc.+ 10,837
400 TJX Companies, Inc. 18,950
-----------
167,609
-----------
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

4
<PAGE>

Montomgery Variable Series: Growth Fund
Portfolio Investments (continued)
December 31, 1996

COMMON STOCKS--(continued)

<TABLE>
<CAPTION>
SHARES VALUE (NOTE 1)
<S> <C>
SEMICONDUCTORS--2.2%
650 Analog Devices Inc.+ $ 22,019
400 Texas Instruments, Inc. 25,500
-----------
47,519
-----------
SOFTWARE SYSTEMS - 10.1%
1,000 Macromedia Inc.+ 18,125
10,000 Simulation Sciences, Inc.+ 148,125
2,875 Sybase, Inc.+ 47,977
-----------
214,227
-----------
TECHNOLOGY--MISCELLANEOUS - 1.8%
3,700 Avid Technology Inc.+ 38,619
-----------
TELECOMMUNICATIONS EQUIPMENT--9.1%
2,250 Ericsson (L.M.) Telephone Company, Class B, ADR 67,922
250 General Instrument Corporation New+ 5,406
550 Northern Telecom Ltd. 34,031
3,700 Octel Communications Corporation+ 64,288
850 PictureTel Corporation+ 21,994
-----------
193,641
-----------
TOTAL COMMON StOCKS (COST $1,629,615) 1,768,765
-----------
REPURCHASE AGREEMENTS--34.9%
PRINCIPAL AMOUNT

$371,500 Agreement with Bear Stearns Companies Inc. Tri-Party 7.500% dated
12/31/96, to be repurchased at $371,655, on 01/02/97, collateralized
by $381,812 market value of U.S. Government securities, having
various maturities and various interest rates 371,500
-----------
371,500 Agreement with Chase Manhattan Corporation Tri-Party, 7.500% dated
12/31/96, to be repurchased at $371,655, on 01/02/97, collateralized by
$378,941 market value of U.S. Government securities, having various
maturities and various interest rates 371,500
-----------
TOTAL REPURCHASE AGREEMENTS (COST $743,000) 743,000
-----------
TOTAL INVESTMENTS (cOST $2,372,615*) 118.1 % 2,511,765
OTHER ASSETS AND LIABILITIES (NET) ( 18.1) (385,070)
-------- ------------
NET ASSETS 100.0 % $2,126,695
======== ============
</TABLE>

______________________
* Aggregate cost for Federal tax purposes is $2,379,803.
+ Non-income producing security.
Descriptions of securities have not been audited by Deloitte & Touche LLP.

ABBREVIATION:
ADR American Depositary Receipt

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

<PAGE>

Montgomery Variable Series: Growth Fund
Statement of Assets and Liabilities
December 31, 1996

<TABLE>
<S> <C> <C>
ASSETS:
Investments in securities, at value (Identified cost $2,372,615)(Note 1)
Securities.......................................................... $ 1,768,765
Repurchase agreements............................................... 743,000
-------------
Total investments................................................... 2,511,765
Cash........................................................................ 194
Receivables:
Investment securities sold.......................................... 11,748
Expenses absorbed by Manager (Note 2)............................... 4,067
Shares of beneficial interest sold.................................. 2,915
Dividends........................................................... 875
Interest............................................................ 154
Other Assets:
Organization costs (Note 1)......................................... 50,870
-------------
Total Assets................................................................ 2,582,588

LIABILITIES:
Payables:
Investment securities purchased..................................... $ 345,816
Organization cost................................................... 60,235
Shares of beneficial interest redeemed.............................. 36,949
Trustees' fees and expenses......................................... 1,500
Custody fees........................................................ 772
Other accrued liabilities and expenses.............................. 10,621
-----------
Total Liabilities........................................................... 455,893
-------------
NET ASSETS.................................................................. $ 2,126,695
=============
NET ASSETS CONSIST OF:
Accumulated net realized gain on securities sold............................ $ 13,765
Net unrealized appreciation of investments.................................. 139,150
Shares of beneficial interest............................................... 1,725
Additional paid-in capital.................................................. 1,972,055
-------------
NET ASSETS.................................................................. $ 2,126,695
=============
Net Asset Value, offering and redemption price per share
($2,126,695 divided by 172,459 shares of beneficial interest
outstanding)................................................................ $ 12.33
=============
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

6
<PAGE>

Montgomery Variable Series: Growth Fund
Statement of Operations
For the Period Ended December 31, 1996*

<TABLE>
NET INVESTMENT INCOME:
<S> <C> <C>
Interest........................................................ $ 20,333
Dividends (Net of foreign withholding taxes of $75)............. 6,327
----------
Total Investment Income......................................... 26,660

EXPENSES:
Legal and audit fees............................................ $ 29,179
Amortization of organization expenses (Note 1).................. 11,197
Management fee (Note 2)......................................... 10,449
Trustees' fees and expenses (Note 2)............................ 9,795
Custodian fees.................................................. 3,758
Transfer agency fees............................................ 1,021
Other........................................................... 7,481
----------
Total Expenses.................................................. 72,880
Fees deferred and expenses absorbed by Manager (Note 2)......... (72,827)
----------
Net Expenses.................................................... 53
----------
Net Investment Income........................................... 26,607
----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTES 1 AND 3):
Net realized gain on investments during the period.............. 74,537
Net unrealized appreciation of investments during the period.... 139,150
----------
Net Realized and Unrealized Gain on Investments................. 213,687
----------
Net Increase in Net Assets Resulting from Operations............ $ 240,294
==========
Statement of Changes in Net Assets
For the Period Ended December 31, 1996*

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS:
Net investment income........................................... $ 26,607
Net realized gain on investments during the period.............. 74,537
Net unrealized appreciation of investments during the period.... 139,150
----------
Net increase in net assets resulting from operations............ 240,294

DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income........................ (26,562)
Distributions from net realized gains on investments............ (60,772)

BENEFICIAL INTEREST TRANSACTIONS:
Net increase from beneficial interest transactions (Note 4)..... 1,854,346
----------
Net increase in net assets...................................... 2,007,306

NET ASSETS:
Beginning of period............................................. 119,389
----------
End of period................................................... $2,126,695
----------
</TABLE>

________________________
* Montgomery Variable Series: Growth Fund commenced operations on
February 9, 1996.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

7
<PAGE>

Montgomery Variable Series: Growth Fund
Financial Highlights
Selected Per Share Data for the Period Ended:

<TABLE>
<CAPTION>
12/31/96*
<S> <C>
Net asset value--beginning of period........................................... $ 10.08
------------
Net investment income.......................................................... 0.15
Net realized and unrealized gain on investments................................ 2.59
------------
Net increase in net assets resulting from investment operations................ 2.74
Distributions to Shareholders:
Distributions from net investment income............................... (0.15)
Distributions from net realized gains on investments................... (0.34)
------------
Total Distributions.................................................... (0.49)
------------
Net asset value - end of period................................................ $ 12.33
============
Total return **................................................................ 27.22 %
============
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)........................................... $ 2,127
Ratio of net investment income to average net assets........................... 2.55 %+
Ratio of operating expenses to average net assets.............................. 0.01 %+
Portfolio turnover rate........................................................ 78 %
Average commission rate paid (a)............................................... $ 0.0520
Net investment loss before deferral of fees and absorption
of expenses by Manager................................................. $ (0.27)
Operating expense ratio before deferral of fees and absorption
of expenses by Manager................................................. 6.98 %+
</TABLE>

_____________________________
* Montgomery Variable Series: Growth Fund commenced operations on
February 9, 1996.
** Total return represents aggregate total return for the period indicated.
+ Annualized.
(a) Average commission rate paid per share of securities purchased and sold
by the Fund.

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.

8
<PAGE>

The Montgomery Funds III
Notes to Financial Statements

1. SIGNIFICANT ACCOUNTING POLICIES:

The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
Information presented in these financial statements pertains to the
Montgomery Variable Series: Growth Fund (the "Fund"). The Montgomery
Variable Series: Emerging Markets Fund and the Montgomery Variable Series:
International Small Cap Fund are presented under separate covers.

The following is a summary of significant accounting policies.

A. PORTFOLIO VALUATIONS

The Fund's securities are valued using current market valuations:
either the last reported sales price or, lacking any reported sales,
and in the case of fixed income securities, the mean between the
closing bid and asked prices. Securities for which market quotations
are not readily available (including restricted securities which are
subject to limitations as to their sale) are valued at fair value as
determined in good faith by or under the supervision of the Trust in
accordance with methods which are authorized by the Trust's Board of
Trustees.

B. DIVIDENDS AND DISTRIBUTIONS

Dividends, if any, from net investment income of the Fund are declared
and paid at least annually.

Distributions of any short-term capital gains earned by the Fund are
distributed no less frequently than annually. Additional distributions
of net investment income and capital gains for the Fund may be made in
order to avoid the application of a 4% non-deductible excise tax on
certain undistributed amounts of ordinary income and capital gains.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments of income and gains on various investment
securities held by the Fund, timing differences and differing
characterizations of distributions made by the Fund.

C. REPURCHASE AGREEMENTS

The Fund may engage in repurchase agreement transactions individually
or jointly through a joint repurchase account with other series of the
Trust pursuant to a joint repurchase agreement. Under the terms of a
typical repurchase agreement, the Fund writes a financial contract
with a counterparty and takes possession of a government debt
obligation as collateral. The Fund also agrees with the counterparty
to allow the counterparty to repurchase the financial contract at a
specified date and price, thereby determining the yield during the
Fund's holding period. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the Fund's
holding period. The value of the collateral is at least equal at all
times to the total amount of the repurchase obligations, including
interest. In the event of counterparty default, the Fund has the right
to use the collateral to offset losses incurred. There could be
potential loss to the Fund in the event the Fund is delayed or
prevented from exercising its rights to dispose of the collateral
securities, including the risk of a possible decline in the value of
the underlying securities, during the period while the Fund seeks to
assert its rights. The Fund's investment manager, acting under the
supervision of the Board of Trustees, reviews the value of the
collateral and the creditworthiness of those banks and dealers with
which the Fund enters into repurchase agreements to evaluate potential
risks. The Fund may also participate on an individual or joint basis
in tri-party repurchase agreements which involve a counterparty and a
custodian bank.

9
<PAGE>

The Montgomery Funds III
Notes to Financial Statements
(continued)

D. SECURITIES TRANSACTIONS AND INVESTMENT INCOME

Securities transactions are recorded on a trade-date basis. Realized
gain and loss from securities transactions are recorded on the
specific identified cost basis. Dividend income is recognized on the
ex-dividend date and interest income, including, where applicable,
amortization of discount on short-term investments, is recognized on
an accrual basis.

E. FEDERAL INCOME TAXES

F. ORGANIZATION COSTS

Expenses incurred in connection with the organization of the Fund are
amortized on a straight-line basis over a period of five years from
commencement of operations.

2. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES:

a. Montgomery Asset Management, L.P. is the Fund's Manager
(the "Manager"). The Manager, a California limited partnership, is an
investment adviser registered with the Securities and Exchange
Commission under the Investment Advisers Act of 1940, as amended (the
"Advisers Act"). The general partner of the Manager is Montgomery
Asset Management, Inc. Montgomery Securities and certain of its
principals are affiliates of the Manager. Under the Advisers Act, both
Montgomery Asset Management, Inc. and Montgomery Securities may be
deemed controlling persons of the Manager. Although the operations and
management of the Manager are independent from those of Montgomery
Securities, it is expected that the Manager may draw upon the research
and administrative resources of Montgomery Securities at its
discretion in a manner consistent with applicable regulations.

Pursuant to the investment management agreement ("Investment
Management Agreement"), the Manager provides the Fund with advice on
buying and selling securities, manages the investments of the Fund
including the placement of orders for portfolio transactions,
furnishes the Fund with office space and certain administrative
services, and provides the personnel needed by the Trust with respect
to the Manager's responsibilities under such Agreement. As
compensation, the Fund pays the Manager a monthly management fee
(accrued daily) at the following annual rates based upon the average
daily net assets of the Fund:

<TABLE>
<CAPTION>
First $500 Million Next $500 Million Over $1 Billion
------------------ ----------------- ---------------
<S> <C> <C>
1.00% 0.90% 0.80%
</TABLE>

The Manager has agreed to reduce some or all of its management fee or
absorb the Fund expenses if necessary to keep the Fund's annual
operating expenses, exclusive of interest or taxes, at or below 1.25%
of the average daily net assets of the Fund or the maximum allowed by
applicable state expense limitations for the Fund.

For the period ended December 31, 1996, the Manager has deferred fees
of $10,449 and absorbed expenses of $62,378.

As of December 31, 1996, the deferred management fees and absorbed
expenses subject to recoupment are $72,827.

b. Certain officers and Trustees of the Trust are, with respect to the
Trust's Manager and/or Montgomery Securities, "affiliated persons" as
defined in the 1940 Act. Each Trustee who is not an "affiliated
person" receives an annual retainer and quarterly meeting fees
totalling $35,000 per annum, as well as reimbursement for expenses,
for services as a Trustee of all three Trusts advised by the Manager
($5,000 of which will be allocated to the Montgomery Funds III).

c. The Fund has no sales load and does not pay distribution (Rule 12b-1)
fees.

d. For the period ended December 31, 1996, the Fund incurred total
brokerage commissions of $2,368 of which $9 was paid to its
affiliates.

10
<PAGE>

The Montgomery Funds III
Notes to Financial Statements
(continued)

3. SECURITIES TRANSACTIONS:

a. The aggregate amounts of purchases and sales of investment securities,
other than short-term securities, for the period ended December 31,
1996, were $2,142,641 and $593,575, respectively.

c, Under an unsecured Revolving Credit Agreement with Deutsche Bank (New
York), the Montgomery Variable Series: Growth Fund, along with other
funds of the Montgomery Funds I, Montgomery Funds II and Montgomery
Funds III, may for one year starting August 6, 1996, borrow
(consistent with applicable law and its investment policies) up to 10%
of its net asset value, provided that the aggregate principal amount
of outstanding loans under the agreement to all Funds does not exceed
$300,000,000. For the period ended December 31, 1996, there were no
borrowings under this agreement.

4. TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST:

The Trust has authorized an unlimited number of shares of beneficial
interest which have a par value of $0.01. Transactions in shares of
beneficial interest for the period indicated below were:

PERIOD ENDED
DECEMBER 31, 1996*
SHARES AMOUNT
<S> <C> <C>
Shares Sold 333,351 $3,946,116
Issued as Reinvestment
of Dividends 7,141 87,335
Shares Redeemed (179,876) (2,179,105)
--------- -----------
Net Increase 160,616 $1,854,346
========= ===========
</TABLE>

_____________________________
* Montgomery Variable Series: Growth Fund commenced operations on
February 9, 1996.

11
<PAGE>

To the Board of Trustees and the Shareholders of The Montgomery Funds III:

We have audited the accompanying statement of assets and liabilities,
including the portfolio investments, of the Montgomery Variable Series:
Growth Fund (the "Fund") as of December 31, 1996, and the related statement
of operations, statement of changes in net assets and the financial
highlights for the period February 9, 1996 (commencement of operations) to
December 31, 1996. These financial statements and financial highlights are
the responsibility of the Fund's management, Our responsibility is to express
an opinion on these financial statements and financial highlights based on
our audit.

We conducted our audit in accordance with generally accepted auditing
standards, Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement, An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned at December 31, 1996, by correspondence with the custodian
and brokers; where replies were not received from brokers, we performed other
auditing procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the Fund as of
December 31, 1996, the results of its operations, the changes in its net
assets and its financial highlights for the period February 9, 1996
(commencement of operations) to December 31, 1996, in conformity with
generally accepted accounting principles.

Deloitte & Touche, LLP.

San Francisco, California
January 31, 1997

12
<PAGE>

The Montgomer Funds III
Tax Information (Unaudited)
Fiscal Year Ended December 31, 1996

Of the distributions made by the Fund, the corresponding percentage
represents the amount of the distribution which will qualify for the
dividends received deduction available to corporate shareholders:
Montgomery Variable Series: Growth Fund................................... 5.66%

13
<PAGE>

===============================================================================

DFA INVESTMENT DIMENSIONS GROUP INC.

VA SMALL VALUE PORTFOLIO

VA LARGE VALUE PORTFOLIO

VA INTERNATIONAL VALUE PORTFOLIO

VA INTERNATIONAL SMALL PORTFOLIO

VA SHORT-TERM FIXED PORTFOLIO

VA GLOBAL BOND PORTFOLIO

ANNUAL REPORT

YEAR ENDED NOVEMBER 30, 1996

===============================================================================
<PAGE>

DFA INVESTMENT DIMENSIONS GROUP INC.

ANNUAL REPORT

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Performance Charts................................................................. 1-2
Statements of Net Assets
VA Small Value Portfolio...................................................... 3-10
VA Large Value Portfolio...................................................... 11-12
VA International Value Portfolio.............................................. 13-16
VA International Small Portfolio.............................................. 17-21
VA Short-Term Fixed Portfolio................................................. 22-23
Schedule of Investments - VA Global Bond Portfolio................................. 24
Statement of Assets and Liabilities - VA Global Bond Portfolio..................... 25
Statements of Operations........................................................... 26-27
Statements of Changes in Net Assets................................................ 28-30
Financial Highlights............................................................... 31-33
Notes to Financial Statements...................................................... 34-38
Report of Independent Accountants.................................................. 39
</TABLE>

This report is submitted for the information of the Fund's stockholders. It is
not authorized for distribution to prospective investors unless preceded or
accompanied by an effective prospectus.

i
<PAGE>

DFA INVESTMENT DIMENSIONS GROUP INC.

PERFORMANCE CHARTS

================================================================================
VA Small Value Portfolio vs.
Fama-French Small Cap Value Index
October 1995-November 1996

The following reflects the growth of a $10,000 investment.

[GRAPH APPEARS HERE]

Fama-French Small
VA Small Value Portfolio Cap Value Index

9/30/95 10000 10000
10/31/95 9490 9554
11/30/95 9695.933 9822.4674
12/31/95 9853.007115 9976.680138
1/31/96 9773.197757 10117.35133
2/29/96 9994.072026 10275.18201
3/31/96 10334.86988 10621.45564
4/30/96 10825.7762 10987.89586
5/31/96 11306.44067 11419.72017
6/30/96 11046.39253 11238.14662
7/31/96 10354.88836 10639.1534
8/31/96 10765.97743 11079.61436
9/30/96 11096.49293 11362.14452
10/31/96 11196.36137 11329.1943
11/30/96 11777.45252 11848.0714

Annualized One From
Total Return(%) Year October 1995
- ------------------------------------------------------------------------
21.47 15.05

* The portfolio seeks to capture return premiums associated with high
book-to-market ratios by investing on a market cap-weighted basis in
companies that have market caps of approximately $600 million or less and
book-to-market ratios in the upper 30% of publicly traded U.S. companies.

* This portfolio's returns in fiscal 1996 reflected the performance of small
U.S. companies with high book-to-market ratios.

Past performance is not predictive of future performance.

Bama-French Small Cap Value Index courtesy of Fama-French and CRSP,
University of Chicago.
- --------------------------------------------------------------------------------

================================================================================

VA Large Value Portfolio vs.
Fama-French Large Cap Value Index
February 1995-November 1996

The following reflects the growth of a $10,000 investment.

[GRAPH APPEARS HERE]

Fama-French Large
VA Large Value Portfolio Cap Value Index

1/31/95 10000 10000
2/28/95 10313 10465
3/31/95 10666.7359 10504.767
4/30/95 10989.938 10840.91954
5/31/95 11242.70657 11421.99283
6/30/95 11313.53562 11610.45571
7/31/95 11870.16158 11958.76938
8/31/95 11798.94061 12177.61486
9/30/95 12021.94058 12669.5905
10/31/95 11607.18363 12392.12647
11/30/95 12174.77491 12846.91751
12/31/95 12266.08573 13168.09045
1/31/96 12567.83143 13480.1742
2/29/96 12687.22583 13477.47816
3/31/96 13154.11574 13698.5088
4/30/96 13348.79666 13713.57716
5/31/96 13586.40524 13920.65218
6/30/96 13191.04084 13917.86805
7/31/96 12626.4643 13148.20994
8/31/96 13092.38083 13576.84159
9/30/96 13321.49749 13841.59
10/31/96 13746.45326 14259.60602
11/30/96 14661.96705 15062.42184

Annualized One From
Total Return(%) Year February 1995
- -------------------------------------------------------------------------
20.43 23.21

* The portfolio seeks to capture return premiums associated with high
book-to-market ratios by investing on a market cap-weighted basis in
companies that have market caps of approximately $600 million or more and
book-to-market ratios in the upper 30% of publicly traded companies.

* This portfolio's returns in fiscal 1996 reflected the performance of large
U.S. companies with high book-to-market ratios.

Past performance is not predictive of future performance.

Fama-French Large Cap Value Index courtesy of Fama-French and CRSP,
University of Chicago.
- --------------------------------------------------------------------------------

================================================================================

VA International Value Portfolio vs.
EAFE Index
October 1995-November 1996

The following reflects the growth of a $10,000 investment.

[GRAPH APPEARS HERE]

VA International
Value Portfolio EAFE Index
---------------- -----------

9/30/95 10000 10000
10/31/95 9800 9730
11/30/95 10030.3 10002.44
12/31/95 10554.88469 10412.54004
1/31/96 10615.04753 10454.1902
2/29/96 10624.60108 10496.00696
3/31/96 10825.40604 10716.42311
4/30/96 11246.51433 11027.19938
5/31/96 11186.9078 10828.70979
6/30/96 11196.97602 10893.68205
7/31/96 10856.58795 10577.76527
8/31/96 10916.29918 10598.9208
9/30/96 11096.41812 10885.09166
10/31/96 10926.64292 10776.24074
11/30/96 11427.08317 11207.29037

Annualized One From
Total Return(%) Year October 1995
- -------------------------------------------------------------
13.93 12.11

* The portfolio's objective is to capture premium returns and diversification
benefits by investing in a broad cross-section of small companies on a market
cap-weighted basis. The VA International Value Portfolio provides access to
publicly traded large companies listed on the major exchanges of countries
outside the U.S.

* This portfolio's returns in fiscal 1996 reflected the performance of its
strategy.

Past performance is not predictive of future performance.

EAFE Index courtesy of Morgan Stanley Capital International.
- --------------------------------------------------------------------------------

1
<PAGE>

DFA INVESTMENT DIMENSIONS GROUP INC.

PERFORMANCE CHARTS
================================================================================

VA International Small Portfolio vs.
EAFE Index
October 1995-November 1996

The following reflects the growth of a $10,000 investment.

VA International
Small Portfolio EAFE Index
---------------- ----------

9/30/95 10000 10000
10/31/95 9640 9730
11/30/95 9710.372 10002.44
12/31/95 10110.43933 10412.54004
1/31/96 10430.94025 10454.1902
2/29/96 10561.32701 10496.00696
3/31/96 10841.20217 10716.42311
4/30/96 11601.17044 11027.19938
5/31/96 11430.63324 10828.70979
6/30/96 11230.59716 10893.68205
7/31/96 10640.99081 10577.76527
8/31/96 10640.99081 10598.9208
9/30/96 10640.99081 10885.09166
10/31/96 10461.15806 10776.24074
11/30/96 10481.03426 11207.29037

Annualized One From
Total Return(%) Year October 1995
- ------------------------------------------------------------------
7.94 4.11

* The portfolio invests in companies with market capitalization greater than
$500 million and book-to-market ratios in the upper 30% of small publicly
traded international companies. Country weightings reflect the EAFE Index
market capitalization weight, with Japan limited to 38%.

* This portfolio's returns in fiscal 1996 reflected the performance of its
strategy.

Past performance is not predictive of future performance.

EAFE Index courtesy of Morgan Stanley Capital International.
- --------------------------------------------------------------------------------

================================================================================

VA Short-Term Fixed Portfolio vs.
One-Month CD's
October 1995-November 1996

The following reflects the growth of a $10,000 investment.

[GRAPH APPEARS HERE]

VA Short-Term
Fixed Portfolio One Month CD's
--------------- --------------

9/30/95 10000 10000
10/31/95 10039 10046
11/30/95 10081.1638 10089.1978
12/31/95 10127.53715 10130.56351
1/31/96 10173.11107 10177.1641
2/29/96 10213.80351 10216.85504
3/31/96 10241.38078 10255.67909
4/30/96 10269.03251 10297.72738
5/31/96 10285.46296 10337.88851
6/30/96 10342.03301 10375.10491
7/31/96 10384.43535 10420.75537
8/31/96 10425.97309 10462.4384
9/30/96 10491.65672 10504.28815
10/31/96 10566.14748 10547.35573
11/30/96 10620.03483 10587.43568

Annualized One From
Total Return(%) Year October 1995
- -------------------------------------------------------------
5.35 5.29

* The portfolio maximizes expected returns by using a strategy of shifting
maturities based on changes in the yield curve. Using current prices, the
strategy creates a matrix of expected returns from different buy and sell
strategies and identifies the optimal maturity range for the highest expected
returns. Issues which meet maturity and quality level are further evaluated
for business risk. Maturities are shifted if sufficient premiums can be
documented.

* This portfolio's returns in fiscal 1996 reflected the performance of its
strategy.

Past performance is not predictive of future performance.
- --------------------------------------------------------------------------------

================================================================================

VA Global Bond Portfolio vs.
Salomon World Fixed Income Index
February 1995-November 1996

The following reflects the growth of a $10,000 investment.

[GRAPH APPEARS HERE]

Salomon World Fixed
VA Global Bond Portfolio Income Index
------------------------ -------------------

1/31/95 10000 10000
2/28/95 10155 10156
3/31/95 10338.8055 10321.5428
4/30/95 10483.54878 10475.33379
5/31/95 10712.09014 10840.92294
6/30/95 10718.51739 10857.18432
7/31/95 10816.0559 10931.01317
8/31/95 10852.83049 11022.83369
9/30/95 10991.74672 11174.94879
10/31/95 11079.6807 11311.28317
11/30/95 11268.03527 11526.19755
12/31/95 11314.23421 11644.91738
1/31/96 11404.74809 11755.5441
2/29/96 11242.80066 11588.61537
3/31/96 11296.76611 11628.01666
4/30/96 11350.99058 11673.36593
5/31/96 11415.69123 11731.73276
6/30/96 11453.36301 11844.35739
7/31/96 11540.40857 11905.94805
8/31/96 11715.82278 12009.5298
9/30/96 11934.90867 12237.71086
10/31/96 12144.96306 12462.88474
11/30/96 12299.20409 12687.21667

Annualized One From
Total Return(%) Year February 1995
- --------------------------------------------------------------------------------
9.15 11.95

* The portfolio invests in U.S. and international government bonds, debt
guaranteed by foreign governments, high quality corporate debt and debt of
supranational issuers with maturities of 10 years or less. Eligible
countries: United States, Canada, United Kingdom, Germany, Japan, France and
Australia. The portfolio is diversified across countries. Using current
prices, the strategy creates a matrix of expected horizon returns from
different buy and sell strategies and identifies the maturity range with the
highest expected returns. Maturities are shifted only if sufficient premiums
warrant it. Country weighting is increased or reduced based on expected
returns. The portfolio may be concentrated in the U.S. if international
curves are inverted.

* This portfolio's returns in fiscal 1996 reflected the performance of its
strategy.

Past performance is not predictive of future performance.

Salomon World Fixed Income Index courtesy of Salomon Brothers.
- --------------------------------------------------------------------------------

2
<PAGE>

DFA INVESTMENT DIMENSIONS GROUP INC.

STATEMENT OF NET ASSETS

VA SMALL VALUE PORTFOLIO

NOVEMBER 30, 1996

<TABLE>
<CAPTION>
Shares Value+
------ ------
<S> <C> <C>
COMMON STOCKS - (99.0%)
AAR Corp............................................... 1,400 $41,825
*ACX Technologies, Inc.................................. 1,300 23,725
APL, Ltd............................................... 1,100 26,400
*AST Research, Inc...................................... 800 3,525
*Accell International Corp.............................. 400 1,175
*Acceptance Insurance Companies, Inc.................... 1,300 26,650
*Acclaim Entertainment, Inc............................. 1,400 7,263
Aceto Corp............................................. 440 6,050
*Acme Metals, Inc....................................... 1,000 20,750
*Adage, Inc............................................. 400 1,513
*Adflex Solutions, Inc.................................. 200 2,125
*Advanced Logic Research, Inc........................... 1,000 12,125
*Advanced Marketing Services, Inc....................... 500 5,125
*Advanced Technology Labs, Inc.......................... 1,100 31,625
Advantage Bancorp, Inc................................. 250 8,031
*Advest Group, Inc...................................... 700 7,350
*Aeroflex, Inc.......................................... 1,000 4,500
*Aerovox, Inc........................................... 400 2,250
Airborne Freight Corp.................................. 1,800 38,700
*Alamco, Inc............................................ 400 4,600
*Alaska Air Group, Inc.................................. 1,100 26,538
Albank Financial Corp.................................. 1,200 39,300
*Aldila, Inc............................................ 500 2,250
*Alliance Entertainment Corp............................ 1,300 3,088
*Alliance Semiconductor Corp............................ 1,800 14,400
Allied Healthcare Products, Inc........................ 200 1,375
*Allied Holdings, Inc................................... 100 813
*Allwaste, Inc.......................................... 600 2,625
*Alpha Industries, Inc.................................. 500 3,938
Alpharma, Inc. Class A................................. 500 6,375
Amcast Industrial Corp................................. 700 16,538
Amcore Financial, Inc.................................. 300 6,750
*America West Airlines, Inc. Class B..................... 1,800 26,325
*American Banknote Corp................................. 1,600 7,800
*American Ecology Corp.................................. 700 722
*American Freightways Corp.............................. 900 9,225
American Heritage Life Investment Corp................. 1,200 27,075
*American Mobile Satellite Corp......................... 600 7,388
*American Pacific Corp.................................. 700 4,813
American Recreation Centers, Inc....................... 400 2,025
*American Software, Inc. Class A........................ 300 1,781
*American Travellers Corp............................... 1,350 47,588
*American Waste Services, Inc.
Class A............................................... 2,100 4,463
*American White Cross, Inc.............................. 600 141
*Ameriwood Industries International Corp................ 400 3,725
Ameron, Inc............................................ 300 14,475
*Ames Department Stores, Inc............................ 800 3,900
Ampco-Pittsburgh Corp.................................. 400 5,550
*Amrep Corp............................................. 600 2,925
*Amtech Corp............................................ 800 6,050
*Amtran, Inc............................................ 300 2,175
Amvestors Financial Corp............................... 691 9,933
Analogic Corp.......................................... 100 2,750
Andover Bancorp, Inc. DE............................... 480 12,870
Angelica Corp.......................................... 800 15,400
*Ann Taylor Stores Corp................................. 2,000 $40,500
*Antec Corp............................................. 1,000 9,625
*Apertus Technologies, Inc.............................. 300 928
*Apogee, Inc............................................ 200 1,138
*Applied Extrusion Technologies, Inc.................... 500 4,688
*Arch Communications Group, Inc......................... 1,000 10,875
Arkansas Best Corp..................................... 1,700 8,606
*Artistic Greetings, Inc................................ 500 2,344
Arvin Industries, Inc.................................. 1,900 45,125
Ashland Coal, Inc...................................... 1,200 30,900
*Astec Industries, Inc.................................. 900 7,988
*Astrosystems, Inc...................................... 400 2,225
*Astrotech International Corp........................... 800 4,150
*Atkinson (Guy F.) of California........................ 500 5,094
*Atlantic Gulf Communities Corp......................... 500 2,188
*Atlantic Tele-Network, Inc............................. 1,000 19,188
*Au Bon Pain, Inc. Class A.............................. 100 769
*Audiovox Corp. Class A................................. 800 4,200
Augat, Inc............................................. 1,700 48,025
*Autoinfo, Inc.......................................... 600 1,688
Aviall, Inc............................................ 800 7,900
*Avid Technology, Inc................................... 900 11,475
*Aydin Corp............................................. 400 3,600
*Aztar Corp............................................. 3,300 23,925
Aztec Manufacturing Co................................. 500 3,563
BEI Electronics, Inc................................... 600 6,563
*BMC West Corp.......................................... 500 6,000
*BPI Packaging Technologies, Inc........................ 300 703
BSB Bancorp, Inc....................................... 600 16,050
Badger Meter, Inc...................................... 100 3,913
Bairnco Corp........................................... 900 5,625
Baker (J.), Inc........................................ 1,200 7,425
*Baker (Michael) Corp................................... 700 4,463
*Baldwin Piano & Organ Co............................... 300 3,863
*Baldwin Technology, Inc. Class A....................... 1,400 3,675
*Bally Total Fitness Holding Corp....................... 1,000 5,625
*Bank United Financial Corp. Class A.................... 200 1,813
Bankers Corp........................................... 1,100 21,313
*Banner Aerospace, Inc.................................. 1,000 8,375
*Banyan System, Inc..................................... 600 2,475
*Basin Exploration, Inc................................. 900 5,569
Bassett Furniture Industries, Inc...................... 1,200 27,225
Bay View Capital Corp.................................. 600 24,900
*Bayou Steel Corp. Class A.............................. 900 2,531
*Be Aerospace, Inc...................................... 1,400 32,288
*Beazer Homes USA, Inc.................................. 700 11,288
*Bel Fuse, Inc.......................................... 400 5,050
*Bell Microproducts, Inc................................ 500 3,938
*Bell Sports Corp....................................... 300 1,894
*Bellwethwer Exporation Co.............................. 500 3,875
*Ben & Jerry's Homemade, Inc. Class A................... 200 2,563
*Ben Franklin Retail Stores, Inc........................ 500 50
*Berlitz International, Inc............................. 900 17,325
*Bertuccis, Inc......................................... 700 3,806
Bindley Western Industries, Inc........................ 300 5,325
Binks Manufacturing Co................................. 300 8,400
*Bird Corp.............................................. 400 2,150
Birmingham Steel Corp.................................. 1,500 26,438
Blair Corp............................................. 500 9,813
</TABLE>

3
<PAGE>

VA SMALL VALUE PORTFOLIO CONTINUED

<TABLE>
<CAPTION>
Shares Value+
------ ------
<S> <C> <C>
*Blowout Entertainment, Inc............................. 12 $ 46
*Bluegreen Corp......................................... 700 2,013
*Bombay Co., Inc........................................ 2,100 9,975
*Bon-Ton Stores, Inc.................................... 900 5,175
*Boomtown, Inc.......................................... 800 5,250
*Borland International, Inc............................. 1,400 11,331
*Borror Corp............................................ 300 1,350
Bowne & Co., Inc....................................... 300 7,350
*Brothers Gourmet Coffees, Inc.......................... 300 788
*Brown & Sharpe Manufacturing Co. Class A............... 700 10,063
Brown Group, Inc....................................... 600 11,400
Brush Wellman, Inc..................................... 900 15,075
*Builders Transport, Inc................................ 400 1,200
*Burlington Coat Factory Warehouse Corp................. 1,200 14,400
*Buttrey Food & Drug Stores Co.......................... 700 5,775
CPB, Inc............................................... 200 5,925
*CSP, Inc............................................... 200 1,625
CTS Corp............................................... 400 15,850
*Calcomp Technology, Inc................................ 400 1,138
California Financial Holding Corp...................... 400 11,650
*California Microwave, Inc.............................. 700 10,500
Calmat Co.............................................. 1,300 23,725
*Canandaigua Wine Co., Inc. Class A .................... 800 21,500
Capital Re Corp........................................ 1,200 46,050
Capsure Holdings Corp.................................. 1,300 12,350
Cardinal Health, Inc................................... 168 14,049
*Cardinal Realty Services, Inc.......................... 200 4,175
*Care Group, Inc........................................ 700 1,225
Carpenter Technology Corp.............................. 800 28,400
*Carson Pirie Scott & Co................................ 800 20,700
Carter-Wallace, Inc.................................... 2,900 45,313
Cash America International, Inc........................ 2,400 18,900
*Casino America, Inc.................................... 800 2,800
*Casino Magic Corp...................................... 1,900 5,403
*Catalina Lighting, Inc................................. 600 3,000
*Catherines Stores Corp................................. 500 2,875
Cato Corp. Class A .................................... 1,500 7,406
*Cell Genesys, Inc...................................... 500 3,406
*Cellstar Corp.......................................... 300 3,544
Cenfed Financial Corp.................................. 440 13,310
Cenit Bancorp, Inc..................................... 100 3,950
*Centennial Cellular Corp. Class A ..................... 600 7,013
*Central Sprinkler Corp................................. 200 3,725
*Central Tractor Farm & Country, Inc.................... 300 4,200
Chaparral Steel Co..................................... 1,500 19,313
*Charming Shoppes, Inc.................................. 8,800 44,550
*Chart House Enterprises, Inc........................... 700 3,763
*Cherry Corp. Class A .................................. 600 6,675
*Cherry Corp. Class B .................................. 400 4,250
*Chic by His, Inc....................................... 1,000 4,750
*Chock Full O' Nuts Corp................................ 500 2,313
Citfed Bancorp, Inc.................................... 400 18,550
Citizens Bancorp MD ................................... 300 17,288
Citizens Banking Corp.................................. 500 15,313
*Civic Bancorp ......................................... 400 4,175
*Clean Harbors, Inc..................................... 800 1,800
Cleveland Cliffs, Inc.................................. 600 26,550
*Cliffs Drilling Co..................................... 300 15,525
*Clothestime, Inc....................................... 1,200 338
*Coast Savings Financial, Inc........................... 1,600 56,747
*Coastal Physician Group, Inc........................... 1,000 3,750
Coeur d'Alene Mines Corp. ID .......................... 1,000 14,625
*Coho Energy, Inc....................................... 1,400 10,675
Collagen Corp.......................................... 200 $ 4,013
Commercial Intertech Corp.............................. 500 5,188
Commercial Metals Co................................... 1,300 41,438
*Community Psychiatric Centers ......................... 3,700 33,300
Computer Data Systems, Inc............................. 500 16,125
*Concord Fabrics, Inc. Class A ......................... 200 1,200
*Cone Mills Corp. NC ................................... 1,000 8,375
Continental Homes Holding Corp......................... 600 12,300
Cooker Restaurant Corp................................. 500 5,563
Core Industries, Inc................................... 800 11,600
*Cortech, Inc........................................... 1,500 2,578
*Criticare Systems, Inc................................. 600 1,481
Cross (A.T.) Co. Class A .............................. 500 5,500
*Crosscomm Corp......................................... 500 2,938
*Crown Central Petroleum Corp. Class A ................. 400 5,700
Crown Crafts, Inc...................................... 700 6,475
*Crown-Andersen, Inc.................................... 100 600
Cubic Corp............................................. 750 15,844
*Cybex International, Inc............................... 400 3,850
*Cygne Designs, Inc..................................... 1,100 1,031
*Cyrk, Inc.............................................. 300 3,769
*Cytrx Corp............................................. 200 694
*D&N Financial Corp..................................... 600 9,263
*DBA Systems, Inc....................................... 400 2,400
*DII Group, Inc......................................... 200 4,925
*DIY Home Warehouse, Inc................................ 500 2,250
DS Bancor, Inc......................................... 210 8,925
*Daka International, Inc................................ 500 4,688
*Damark International, Inc. Class A .................... 800 7,200
Daniel Industries, Inc................................. 300 4,200
*Data General Corp...................................... 600 8,775
*Data Race, Inc......................................... 400 6,775
*Dataflex Corp.......................................... 400 1,100
*Datakey, Inc........................................... 200 863
*Datascope Corp......................................... 500 9,250
*Datron Systems, Inc.................................... 200 1,913
*Datum, Inc............................................. 300 3,938
*Daxor Corp............................................. 400 5,400
Deb Shops, Inc......................................... 1,100 5,019
*Deckers Outdoor Corp................................... 500 4,375
Defiance, Inc.......................................... 600 3,900
Delchamps, Inc......................................... 200 4,175
Delta Woodside Industries, Inc......................... 2,100 12,600
*Designs, Inc........................................... 1,300 8,734
*Detection Systems, Inc................................. 200 3,663
*Detroit Diesel Corp.................................... 500 9,875
*Devcon International Corp.............................. 400 2,625
*Dianon Systems, Inc.................................... 500 4,000
*Digi International, Inc................................ 500 6,500
Dime Financial Corp.................................... 400 7,150
*Discovery Zone, Inc.................................... 1,000 375
*Dixie Yarns, Inc....................................... 1,000 6,625
*Dominion Bridge Corp................................... 600 1,556
Downey Financial Corp.................................. 800 23,000
*Dress Barn, Inc........................................ 1,900 27,194
*Drug Emporium, Inc..................................... 1,100 4,469
Dyersburg Corp......................................... 1,100 6,600
Dynamics Corp. of America ............................. 300 8,550
*E-Z-Em, Inc. Class A .................................. 300 3,319
*E-Z-Em, Inc. Class B .................................. 9 97
*EIS International, Inc................................. 500 4,375
*ESCO Electronics Corp. Trust Receipts ................. 900 8,775
Eastern Bancorp, Inc................................... 300 6,713
</TABLE>

4
<PAGE>

VA SMALL VALUE PORTFOLIO
CONTINUED

<TABLE>
<CAPTION>
Shares Value+
------ ------
<S> <C> <C>
Eastern Co............................................. 200 $ 2,700
Eaton Vance Corp....................................... 800 34,400
Ecology & Environment, Inc. Class A ................... 200 1,888
*Edison Brothers Stores, Inc............................ 1,900 2,613
*Edisto Resources Corp.................................. 1,100 10,038
*Egghead, Inc........................................... 1,500 9,281
Ekco Group, Inc........................................ 1,600 5,400
*Electroglas, Inc....................................... 1,000 17,500
*Electromagnetic Sciences, Inc.......................... 600 12,375
*Emcon ................................................. 700 2,713
*Empire of Carolina, Inc................................ 200 1,300
Energen Corp........................................... 900 24,413
Enhance Financial Services Group, Inc.................. 800 27,400
*Environmental Elements Corp............................ 600 1,500
*Envirotest Systems Corp. Class A ...................... 1,000 2,281
*Equitrac Corp.......................................... 300 3,150
*Equity Oil Co.......................................... 300 984
*Evans & Sutherland Computer Corp....................... 700 17,763
Evergreen Bancorp, Inc. DE ............................ 800 12,850
*Evergreen Resources, Inc............................... 500 3,281
*Exar Corp.............................................. 500 7,906
Excel Industries, Inc.................................. 900 13,500
Exide Corp............................................. 800 20,400
*Exide Electronics Group, Inc........................... 300 3,263
*Ezcorp, Inc. Class A Non-Voting ....................... 600 4,613
*FM Properties, Inc..................................... 500 1,438
*FSI International, Inc................................. 800 11,650
*FTP Software, Inc...................................... 1,000 7,875
Fab Industries, Inc.................................... 500 13,375
*Failure Group, Inc..................................... 600 3,525
*Fairchild Corp. Class A ............................... 300 4,988
*Fairfield Communities, Inc............................. 300 7,350
Family Bancorp ........................................ 300 10,538
*Fansteel, Inc.......................................... 700 4,638
*Farah, Inc............................................. 900 5,963
Farrel Corp............................................ 200 575
*Fibreboard Corp........................................ 200 6,925
*Fieldcrest Cannon, Inc................................. 500 7,188
*Filenes Basement Corp.................................. 1,700 8,341
*First Alert, Inc....................................... 1,100 4,331
First American Financial Corp.......................... 1,000 36,625
*First Cash, Inc........................................ 300 1,594
First Central Financial Corp........................... 1,000 3,813
*First Citizens Financial Corp.......................... 220 4,098
First Defiance Financial Corp.......................... 200 2,450
First Essex Bancorp ................................... 500 6,938
First Financial Corp. of Western Maryland ............. 200 6,375
First Northern Capital Corp............................ 400 6,800
*First Republic Bancorp, Inc............................ 600 10,725
First Union Corp....................................... 474 36,199
*FirstFed Financial Corp. DE ........................... 900 21,488
Flexsteel Industries, Inc.............................. 600 7,725
Florida Rock Industries, Inc........................... 800 24,600
Fluke Corp............................................. 200 8,625
*Fluor Daniel/GTI, Inc.................................. 316 2,726
*Foster (L.B.) Co. Class A ............................. 800 3,275
*Foxmeyer Health Corp................................... 1,400 3,150
*Franklin Electronic Publishers, Inc.................... 500 6,250
Freds, Inc. Class A ................................... 800 7,250
Fremont General Corp................................... 2,100 65,363
Friedman Industries, Inc............................... 525 3,150
Frisch's Restaurants, Inc.............................. 649 8,761
*G-III Apparel Group, Ltd............................... 600 1,706
*GTI Corp............................................... 500 $ 2,688
*GZA Geoenvironmental Technologies, Inc................. 300 938
*Galey & Lord, Inc...................................... 300 3,900
*Galileo Electro-Optics Corp............................ 600 14,475
*Gantos, Inc............................................ 500 1,859
Garan, Inc............................................. 400 7,150
*Garnet Resources Corp.................................. 1,000 391
*Gasonics International, Inc............................ 300 3,263
*Gehl Co................................................ 500 4,188
*General Host Corp...................................... 1,995 6,983
General Housewares Corp................................ 300 3,000
*Genicom Corp........................................... 500 1,984
*Genlyte Group, Inc..................................... 1,100 9,900
*Genus, Inc............................................. 800 5,500
Gerber Scientific, Inc................................. 900 13,950
*Giant Group, Ltd....................................... 400 3,350
Giant Industries, Inc.................................. 1,000 15,250
*Gibraltar Packaging Group, Inc......................... 400 1,450
*Gibson Greetings, Inc.................................. 1,400 26,600
Giddings & Lewis, Inc.................................. 1,700 19,763
Golden Poultry Co., Inc................................ 1,200 12,300
*Good Guys, Inc......................................... 1,200 9,675
*Gottschalks, Inc....................................... 300 2,025
*Government Technology Services, Inc.................... 600 3,713
*Gradco Systems, Inc.................................... 700 2,494
Graham-Field Health Products, Inc...................... 1,100 8,938
*Grand Casinos, Inc..................................... 1,500 19,125
Grand Premier Financial, Inc........................... 669 7,108
Granite State Bankshares, Inc.......................... 200 4,425
Graphic Industries, Inc................................ 900 8,156
*Greater New York Savings Bank NY ...................... 1,100 14,575
Green (A.P.) Industries, Inc........................... 600 5,925
Greenbrier Companies, Inc.............................. 1,300 12,513
*Ground Round Restaurants, Inc.......................... 1,000 2,516
Grovebank for Savings ................................. 100 4,913
Guilford Mills, Inc.................................... 1,200 30,750
*Gundle/SLT Environmental, Inc.......................... 800 5,100
HF Financial Corp...................................... 200 3,325
*HMG Worldwide Corp..................................... 600 844
*HS Resources, Inc...................................... 900 15,300
*Hamburger Hamlet Restaurants, Inc...................... 400 8
*Hampton Industries, Inc................................ 400 2,100
*Handex Environmental Recovery, Inc..................... 600 7,125
Handleman Co........................................... 2,900 23,925
*Hanger Orthopedic Group, Inc........................... 700 4,200
*Harding Lawson Associates Group, Inc................... 400 2,650
Harleysville Group, Inc................................ 1,200 36,900
*Hartmarx Corp.......................................... 500 2,625
Harvey's Casino Resorts ............................... 500 8,313
*Hathaway Corp.......................................... 400 1,575
*Hauser Chemical Research, Inc.......................... 900 5,288
Haverty Furniture Co., Inc............................. 700 9,188
Health Images, Inc..................................... 1,000 15,625
*Health O Meter Products, Inc........................... 800 4,850
*Healthcare Services Group, Inc......................... 500 4,875
Hechinger Co. Class A ................................. 2,600 6,988
Hechinger Co. Class B ................................. 200 863
*Hein-Werner Corp....................................... 210 1,326
*Hi-Lo Automotive, Inc.................................. 500 1,313
Hoenig Group, Inc...................................... 500 2,188
Home Port Bancorp, Inc................................. 200 3,413
</TABLE>

5
<PAGE>

VA SMALL VALUE PORTFOLIO
CONTINUED

<TABLE>
<CAPTION>
Shares Value+
------ ------
<S> <C> <C>
*Home State Holdings, Inc............................... 500 $ 3,844
Horizon Financial Corp................................. 200 2,725
*Horizon/CMS Healthcare Corp............................ 1,500 16,125
*Hovnanian Enterprises, Inc. Class A ................... 1,300 7,638
Hudson Foods, Inc. Class A ............................ 500 9,125
Huffy Corp............................................. 800 11,000
Hughes Supply, Inc..................................... 500 21,500
*Hugoton Energy Corp.................................... 600 6,563
Hunt (J.B.) Transportation Services, Inc............... 1,100 15,400
Hunt Manufacturing Co.................................. 300 5,288
*Hycor Biomedical, Inc.................................. 100 356
*Hyde Athletic Industries, Inc. Class B ................ 300 1,425
ICO, Inc............................................... 800 5,250
*ICU Medical, Inc....................................... 500 4,031
*Imperial Holly Corp.................................... 200 3,100
*Inacom Corp............................................ 800 24,850
Indiana Federal Corp................................... 400 8,800
*Information Resources, Inc............................. 800 9,150
Ingles Market, Inc. Class A ........................... 400 5,800
*Innodata Corp.......................................... 200 288
Insteel Industries, Inc................................ 700 5,600
*Insurance Auto Auctions, Inc........................... 1,000 9,375
Integrated Health Services, Inc........................ 900 19,800
*Integrated Process Equipment Corp...................... 500 8,531
Intelligent Electronics, Inc........................... 500 3,750
*Interface Systems, Inc................................. 400 2,250
Interface, Inc. Class A ............................... 1,300 25,838
*Intergraph Corp........................................ 1,400 12,688
International Multifoods Corp.......................... 1,500 23,625
*International Technology Corp.......................... 150 1,519
*International Thoroughbred Breeders, Inc............... 800 2,750
Interpool, Inc......................................... 100 2,400
Interstate Johnson Lane, Inc........................... 200 2,625
*Intertan, Inc.......................................... 900 5,175
Investors Financial Services Corp...................... 223 6,105
Investors Financial Services Corp. Class A ............ 43 1,177
Isco, Inc.............................................. 200 1,975
*Isolyser Co., Inc...................................... 1,400 11,375
*Iwerks Entertainment, Inc.............................. 900 5,794
*J & J Snack Foods Corp................................. 800 8,750
J & L Specialty Steel, Inc............................. 1,600 19,400
*JPE, Inc............................................... 200 1,525
JSB Financial, Inc..................................... 900 32,738
*Jaclyn, Inc............................................ 200 1,063
Jacobson Stores, Inc................................... 500 4,813
*Jan Bell Marketing, Inc................................ 2,200 5,088
*Jean Philippe Fragrances, Inc.......................... 500 3,500
John Alden Financial Corp.............................. 1,200 21,150
Johnston Industries, Inc............................... 300 2,363
*Johnstown American Industries, Inc..................... 300 1,238
*Jones Intercable, Inc. Class A ........................ 900 9,619
Justin Industries, Inc................................. 2,300 24,294
K Swiss, Inc. Class A ................................. 300 3,319
Kaman Corp. Class A ................................... 200 2,500
Katy Industries, Inc................................... 800 11,100
Kellwood Co............................................ 1,800 32,400
*Kerr Group, Inc........................................ 300 825
*Key Production Co., Inc................................ 800 10,100
*Key Tronic Corp........................................ 500 4,344
*Keystone Consolidated Industries, Inc.................. 298 2,198
*Kinder-Care Learning Centers, Inc...................... 1,700 $33,788
Knape & Vogt Manufacturing Co.......................... 500 8,000
*Kulicke & Soffa Industries, Inc........................ 800 16,300
*LTX Corp............................................... 1,900 11,163
Ladd Furniture, Inc.................................... 700 9,406
*Laserscope ............................................ 600 3,300
Lawyers Title Corp..................................... 800 15,200
*Lechters, Inc.......................................... 1,500 7,125
Lennar Corp............................................ 500 13,000
*Life USA Holdings, Inc................................. 1,000 10,000
Lillian Vernon Corp.................................... 300 3,600
Lindberg Corp.......................................... 400 3,950
*Liuski International, Inc.............................. 400 975
*Living Centers of America, Inc......................... 900 22,838
*Logic Devices, Inc..................................... 200 644
*Loronix Information Systems, Inc....................... 200 913
*Louis Dreyfus Natural Gas Corp......................... 350 5,994
Lufkin Industries, Inc................................. 600 12,675
Lukens, Inc. DE ....................................... 1,300 23,888
MAF Bancorp, Inc....................................... 826 28,291
MDC Holdings, Inc...................................... 500 3,750
*MI Schottenstein Homes, Inc............................ 800 7,900
*MK Gold Corp........................................... 1,700 2,550
*MRS Technology, Inc.................................... 200 475
*MS Carriers, Inc....................................... 1,100 20,625
MTS Systems Corp....................................... 800 16,300
Marcus Corp............................................ 500 11,563
*Mariner Health Group, Inc.............................. 1,600 11,800
Maritrans, Inc......................................... 1,000 6,125
Marsh Supermarkets, Inc. Class A ...................... 300 3,600
Marsh Supermarkets, Inc. Class B ...................... 400 4,500
Maryland Federal Bancorp .............................. 315 10,415
*Matrix Pharmaceutical, Inc............................. 900 7,763
*Matrix Service Co...................................... 800 4,600
*Maverick Tube Corp..................................... 600 9,450
*Maxwell Technologies, Inc.............................. 200 8,975
*Maxxam, Inc............................................ 500 23,063
*Maxxim Medical, Inc.................................... 700 8,925
*McFarland Energy, Inc.................................. 400 4,475
Medex, Inc............................................. 500 11,656
*Medical Graphics Corp.................................. 200 1,000
*Melamine Chemicals, Inc................................ 500 3,813
*Mercer International, Inc.............................. 800 9,550
Merchants Bancorp, Inc................................. 200 6,150
Meridian Insurance Group, Inc.......................... 600 8,625
*Merisel, Inc........................................... 2,500 4,688
*Mesa Air Group, Inc.................................... 2,800 27,825
*Mesaba Holdings, Inc................................... 700 9,275
*Metrocall, Inc......................................... 500 2,719
*Meyerson (M.H.) & Co., Inc............................. 200 563
Michael Foods, Inc..................................... 1,700 19,550
*Michaels Stores, Inc................................... 900 9,028
*Microage, Inc.......................................... 1,200 27,000
*Microcom, Inc.......................................... 800 9,100
*Micronics Computers, Inc............................... 1,100 3,059
Mid America Banccorp .................................. 849 15,914
*MidAmerican Waste System, Inc.......................... 1,000 563
*Midisoft Corp.......................................... 300 975
*Midwest Grain Products, Inc............................ 200 3,250
*Mikasa, Inc............................................ 100 1,050
*Mikohn Gaming Corp..................................... 800 5,500
*Miltope Group, Inc..................................... 500 1,438
Mine Safety Appliances Co.............................. 500 25,594
*Mobilemedia Corp. Class A ............................. 700 809
*Monarch Casino and Resort, Inc......................... 500 1,469
</TABLE>

6
<PAGE>

VA SMALL VALUE PORTFOLIO
CONTINUED

<TABLE>
<CAPTION>
Shares Value+
------ ------
<S> <C> <C>
Monarch Machine Tool Co................................ 300 $ 2,513
*Moog, Inc. Class A .................................... 500 12,000
*Morgan Products, Ltd................................... 700 4,900
*Mountasia Entertainment International, Inc............. 500 1,594
Movado Group, Inc...................................... 500 12,750
*Movie Gallery, Inc..................................... 500 6,875
*Musicland Stores Corp.................................. 2,900 4,350
NBT Bancorp ........................................... 772 14,567
NCH Corp............................................... 200 11,400
*NS Group, Inc.......................................... 1,200 4,125
*NSA International, Inc................................. 200 338
NYMAGIC, Inc........................................... 1,000 18,000
Nacco Industries, Inc. Class A ........................ 600 28,650
Nash Finch Co.......................................... 900 17,213
*Nashua Corp............................................ 500 7,938
*Nathans Famous, Inc.................................... 400 1,525
*National Auto Credit, Inc.............................. 1,630 16,708
*National City Bancorp ................................. 660 13,448
*National Home Centers, Inc............................. 500 1,063
*National Patent Development Corp....................... 500 4,250
National Presto Industries, Inc........................ 500 18,438
*National Steel Corp. Class B .......................... 1,100 10,313
*Natural Wonders, Inc................................... 700 3,806
*Neostar Retail Group, Inc.............................. 100 8
*Netframe Systems, Inc.................................. 500 1,531
*Netrix Corp............................................ 800 4,100
*Network Computing Devices, Inc......................... 300 2,513
*New Brunswick Scientific Co., Inc...................... 315 2,166
New Jersey Resources Corp.............................. 1,500 44,438
Newmil Bancorp, Inc.................................... 200 1,825
Newport Corp........................................... 500 4,375
*Nexthealth, Inc........................................ 700 2,078
*Noodle Kidoodle, Inc................................... 200 1,138
*Nord Resources Corp.................................... 1,400 5,950
*Nortek, Inc............................................ 1,100 16,913
North American Mortgage Co............................. 300 6,900
North Side Savings Bank NY ............................ 400 20,950
*Norton McNaughton, Inc................................. 200 1,675
Norwich Financial Corp................................. 400 7,825
*Novacare, Inc.......................................... 5,600 47,600
*Nview Corp............................................. 400 1,525
O'Sullivan Corp........................................ 600 6,450
*O'Sullivan Industries Holdings, Inc.................... 1,100 12,238
*O.I. Corp.............................................. 400 1,350
*OHM Corp............................................... 400 3,400
*OMI Corp............................................... 2,600 19,825
*Oak Technology, Inc.................................... 1,500 14,906
*Offshore Logistics, Inc................................ 700 14,088
*Old America Stores, Inc................................ 400 1,900
*Olympic Financial, Ltd................................. 1,200 16,650
*Olympic Steel, Inc..................................... 700 17,019
OnbanCorp, Inc......................................... 1,200 46,200
*One Price Clothing Stores, Inc......................... 900 2,503
Oneida, Ltd............................................ 900 15,300
*Oneita Industries, Inc................................. 600 2,250
*Onyx Acceptance Corp................................... 100 813
*Opal, Inc.............................................. 400 7,325
*Opinion Research Corp.................................. 200 838
*Opti, Inc.............................................. 700 3,697
*Option Care, Inc....................................... 800 3,950
Orange Co., Inc........................................ 700 5,338
Oregon Steel Mills, Inc................................ 1,700 29,113
Oshkosh Truck Corp. Class B ........................... 700 8,225
*Ostex International, Inc............................... 400 2,400
Outboard Marine Corp................................... 1,700 $27,625
*Outlook Group Corp..................................... 400 1,875
Overseas Shipholding Group, Inc........................ 1,300 20,800
Oxford Industries, Inc................................. 700 12,775
*PLM International, Inc................................. 1,000 3,250
*Pacific Rim Holding Corp............................... 800 2,363
Pacific Scientific Co.................................. 300 3,450
Palfed, Inc............................................ 400 5,750
Pancho's Mexican Buffet, Inc........................... 400 813
*Paragon Trade Brands, Inc.............................. 500 13,875
Park Electrochemical Corp.............................. 300 6,825
*Park-Ohio Industries, Inc.............................. 300 4,369
*Patterson Energy, Inc.................................. 148 4,070
*Payless Cashways, Inc.................................. 3,400 5,950
*Penn Traffic Co........................................ 200 1,025
*Penn Treaty American Corp.............................. 600 14,700
Penn Virginia Corp..................................... 200 8,075
Peoples Heritage Financial Group, Inc.................. 1,400 39,288
*Peoples Telephone Co., Inc............................. 1,400 5,163
*Perfumania, Inc........................................ 600 1,913
*Perini Corp............................................ 400 3,600
*Petrocorp, Inc......................................... 700 6,869
*Pharmaceutical Resources, Inc.......................... 1,000 5,750
*Pharmchem Laboratories, Inc............................ 500 1,977
Phillips-Van Heusen Corp............................... 1,500 19,313
Piccadilly Cafeterias, Inc............................. 900 8,100
*Pico Holdings, Inc..................................... 500 1,891
Pilgrim Pride Corp..................................... 1,300 11,375
Pillowtex Corp......................................... 300 5,213
Pinnacle Bank Jasper, AL .............................. 100 1,763
*Pinnacle Systems, Inc.................................. 200 2,075
Pioneer Financial Services, Inc........................ 500 9,250
Piper Jaffray Companies, Inc........................... 800 11,700
*Pittencrieff Communications, Inc....................... 600 2,456
Pittston Burlington Group ............................. 500 9,813
*Plasti-Line, Inc....................................... 100 1,025
*Players International, Inc............................. 1,400 8,925
Ply-Gem Industries, Inc. DE ........................... 800 10,500
*Polymedica Industries, Inc............................. 500 2,156
*Pool Energy Services Co................................ 1,200 17,775
Pope & Talbot, Inc..................................... 1,100 17,463
Portsmouth Bank Shares, Inc............................ 510 7,491
Poughkeepsie Savings Bank FSB NY ...................... 1,100 5,844
*President Casinos, Inc................................. 100 81
Presidential Life Corp................................. 2,900 34,619
*Price Communications Corp.............................. 500 4,063
Price Enterprises, Inc................................. 300 5,194
Prime Bancorp, Inc..................................... 330 6,600
*Procyte Corp........................................... 1,100 2,406
*Proffitts, Inc......................................... 900 36,338
*Progress Software Corp................................. 500 10,031
Progressive Bank, Inc.................................. 200 6,900
Proler International Corp.............................. 400 3,600
*Proteon, Inc........................................... 700 2,691
Provident Bankshares Corp.............................. 630 24,294
*Proxima Corp........................................... 200 2,763
Pulte Corp............................................. 400 12,250
*QMS, Inc............................................... 900 5,288
Quaker Chemical Corp................................... 500 8,438
*Quaker Fabric Corp..................................... 700 7,263
Quaker State Corp...................................... 500 8,563
RCSB Financial, Inc.................................... 1,300 39,081
RLI Corp............................................... 600 19,050
</TABLE>

7
<PAGE>

VA SMALL VALUE PORTFOLIO
CONTINUED

<TABLE>
<CAPTION>
Shares Value+
------ ------
<S> <C> <C>
*RPC Energy Services, Inc............................... 1,200 $18,600
*Rag Shops, Inc......................................... 200 413
*Rally's Hamburgers, Inc................................ 1,300 5,484
*Ramsay Health Care, Inc................................ 700 1,881
Raymond Corp........................................... 200 3,550
*Read-Rite Corp......................................... 700 15,531
*Reading Entertainment, Inc............................. 400 3,925
*Recoton Corp........................................... 300 4,463
*Redwood Empire Bancorp ................................ 200 2,150
Refac Technology Development Corp...................... 300 1,969
*Rentrak Corp........................................... 100 381
*Republic Automotive Parts, Inc......................... 300 4,800
*Republic Engineered Steels, Inc........................ 100 225
*Rex Stores Corp........................................ 500 4,875
Rexene Corp............................................ 300 3,975
*Rhodes, Inc............................................ 500 3,500
*Riddell Sports, Inc.................................... 700 3,216
Riggs National Corp.................................... 1,400 24,238
Roanoke Electric Steel Corp............................ 200 2,775
*Rodman & Renshaw Capital Group, Inc.................... 600 900
*Rollins Environmental Services, Inc.................... 5,200 10,400
Rollins Truck Leasing Corp............................. 3,900 46,800
Rouge Steel Co. Class A ............................... 600 12,975
*Ruby Tuesday, Inc...................................... 1,000 16,125
*Ryans Family Steak Houses, Inc......................... 2,900 20,028
Rykoff-Sexton, Inc..................................... 100 1,450
Ryland Group, Inc...................................... 500 6,938
*S&K Famous Brands, Inc................................. 400 3,675
SPX Corp............................................... 1,100 34,925
*STM Wireless, Inc. Class A ............................ 200 1,438
Saint Paul Bancorp, Inc................................ 1,600 45,100
*Salant Corp. DE ....................................... 600 2,100
*San Filippo (John B.) & Son, Inc....................... 800 4,150
Sanderson Farms, Inc................................... 100 1,594
Sands Regent Casino Hotel ............................. 400 1,225
*Schuler Homes, Inc..................................... 800 4,700
*Scios-Nova, Inc........................................ 3,100 17,631
*Seacor Holdings, Inc................................... 500 31,625
Seafield Capital Corp.................................. 300 10,425
*Secom General Corp..................................... 400 1,100
Security Capital Corp. W.I ............................ 200 14,275
Security Connecticut Corp.............................. 500 17,250
Selective Insurance Group, Inc......................... 500 17,063
*Sequent Computer Systems, Inc.......................... 2,100 35,569
*Sequoia Systems, Inc................................... 500 1,102
*Serv-Tech, Inc......................................... 600 1,763
*Service Merchandise Co., Inc........................... 3,400 18,700
*Sharper Image Corp..................................... 500 1,719
*Shiloh Industries, Inc................................. 1,100 18,425
*Shoe Carnival, Inc..................................... 300 1,613
*Shoney's, Inc.......................................... 558 4,604
Shopko Stores, Inc..................................... 2,700 41,850
Showboat, Inc.......................................... 100 1,863
Sifco Industries, Inc.................................. 400 4,300
*Signal Technology Corp................................. 600 4,425
*Silicon Valley Group, Inc.............................. 1,300 27,463
*Sizzler International, Inc............................. 2,400 6,900
Skyline Corp........................................... 900 23,400
Skywest, Inc........................................... 600 8,513
Smith (A.O.) Corp...................................... 800 23,700
Smith (A.O.) Corp. Convertible Class A ................ 200 5,800
Snyder Oil Corp........................................ 1,600 27,600
*Softech, Inc........................................... 300 $ 825
South Jersey Industries, Inc........................... 300 7,238
Southdown, Inc......................................... 1,500 48,888
*Southwall Technologies, Inc............................ 500 3,344
Southwest Bancshares, Inc. DE ......................... 300 5,513
Southwest Securities Group, Inc ....................... 200 2,563
Southwestern Energy Co................................. 2,200 35,200
*Spacelabs Medical, Inc................................. 500 10,063
*Spaghetti Warehouse, Inc............................... 500 2,500
Spartan Motors, Inc.................................... 500 3,188
*Sparton Corp........................................... 500 4,000
*Spec's Music, Inc...................................... 400 450
*Specialty Chemical Resources, Inc...................... 300 525
*Spectran Corp.......................................... 500 8,781
*Speizman Industries, Inc............................... 300 1,659
*Sport Chalet, Inc...................................... 600 2,025
*Sportmart, Inc. Class A ............................... 250 758
*Sports & Recreation, Inc............................... 1,700 14,663
*Sports Club Co., Inc................................... 600 1,575
*Staff Builders, Inc. Class A .......................... 400 975
*Standard Commercial Corp............................... 840 11,344
*Standard Management Corp............................... 200 938
*Standard Microsystems Corp............................. 1,100 12,100
Standard Motor Products, Inc. Class A ................. 1,100 15,125
Standard Pacific Corp. DE ............................. 2,600 15,275
Standard Products Co................................... 1,400 32,025
Stant Corp............................................. 1,000 12,500
*Staodyn, Inc........................................... 500 672
*Starcraft Corp......................................... 200 763
Starrett (L.S.) Co. Class A ........................... 200 5,550
Steel Technologies, Inc................................ 500 6,313
*Steel of West Virginia, Inc............................ 600 3,375
Sterling Bancorp ...................................... 500 7,438
*Sterling Financial Corp. WA ........................... 600 8,138
Stewart Information Services Corp...................... 500 10,531
*Stokely USA, Inc....................................... 1,000 1,875
Stone & Webster, Inc................................... 800 26,100
*Stratus Computer, Inc.................................. 1,200 30,900
Strawbridge & Clothier Class A ........................ 900 14,963
*Strouds, Inc........................................... 100 400
*Stuart Entertainment, Inc.............................. 600 3,375
*Sulcus Computer Corp................................... 500 1,063
Sumitomo Bank of California ........................... 300 7,688
*Summit Care Corp....................................... 200 3,000
*Summit Technology, Inc................................. 500 2,609
*Sun Coast Plastics, Inc................................ 200 700
*Sun Healthcare Group, Inc.............................. 2,000 25,000
*Sun Sportswear, Inc.................................... 500 1,031
Sun Television and Appliances, Inc..................... 1,500 3,938
*Sunrise Medical, Inc................................... 700 10,063
*Sunrise Resources, Inc................................. 400 1,725
Susquehanna Bancshares, Inc............................ 500 17,688
*Swiss Army Brands, Inc................................. 700 9,800
*Syms Corp.............................................. 1,500 13,125
*Syncor International Corp. DE ......................... 900 9,056
*Syntellect, Inc........................................ 700 3,456
*Syquest Technology, Inc................................ 900 4,444
*Syratech Corp.......................................... 200 6,200
*TBC Corp............................................... 400 2,925
TCBY Enterprises, Inc.................................. 2,200 9,350
TJ International, Inc.................................. 1,400 30,450
TR Financial Corp...................................... 500 14,656
Tab Products Co. DE ................................... 400 3,100
*Taco Cabana Inc........................................ 1,300 8,694
</TABLE>

8
<PAGE>

VA SMALL VALUE PORTFOLIO
CONTINUED

<TABLE>
<CAPTION>
Shares Value+
------ ------
<S> <C> <C>
*Tandy Crafts, Inc...................................... 1,000 $ 6,625
*Tanknology Environmental, Inc.......................... 1,200 2,475
Telxon Corp............................................ 500 6,031
*Tesoro Petroleum Corp.................................. 1,100 15,950
*Theratx, Inc........................................... 500 5,250
Thomas Industries, Inc................................. 300 6,075
Thomaston Mills, Inc................................... 400 4,550
*Thorn Apple Valley, Inc................................ 500 6,375
*Tipperary Corp......................................... 500 2,500
*Titan Corp............................................. 1,000 3,000
Titan Wheel International, Inc......................... 1,200 15,900
Toastmaster, Inc....................................... 600 1,800
*Todd Shipyards Corp.................................... 800 5,500
Tower Air, Inc......................................... 600 1,819
*Trans World Airlines, Inc.............................. 1,700 13,175
*Trans World Entertainment Corp......................... 800 6,400
Transnational RE Corp. Class A ........................ 200 5,013
*Travel Ports of America, Inc........................... 200 525
*Tremont Corp. DE ...................................... 600 21,825
*Trend-Lines, Inc. Class A ............................. 200 975
*Trism, Inc............................................. 500 1,906
*Truevision, Inc........................................ 1,300 3,331
*Tuboscope Vetco International, Inc..................... 1,600 24,800
*Tuesday Morning Corp................................... 700 15,225
*Tultex Corp............................................ 2,500 17,813
Twin Disc, Inc......................................... 200 4,325
*Tyco Toys, Inc......................................... 3,000 35,250
*Tyler Corp............................................. 1,700 2,763
U.S. Bancorp, Inc...................................... 500 20,250
*UNC, Inc............................................... 1,500 13,875
*URS Corp............................................... 719 6,022
USX-Delhi Group ....................................... 800 11,800
*Ultimate Electronics, Inc.............................. 300 900
*Ultradate Corp......................................... 100 488
*Ultratech Stepper, Inc................................. 300 6,844
Uni-Marts, Inc......................................... 500 3,188
Unico American Corp.................................... 500 4,656
*Union Switch & Signal, Inc............................. 250 1,859
*Uniroyal Technology Corp............................... 1,100 3,163
*United American Healthcare Corp........................ 200 1,275
United Industrial Corp................................. 400 2,350
*United Retail Group, Inc............................... 500 1,500
*United States Home Corp................................ 1,000 24,750
*Universal Hospital Services, Inc....................... 300 2,813
*Universal International, Inc........................... 400 925
*Universal Standard Medical Labs, Inc................... 500 1,969
*Uno Restaurant Corp.................................... 300 2,063
*Utilx Corp............................................. 600 2,194
*V Band Systems, Inc.................................... 500 1,000
*VLSI Technology, Inc................................... 800 18,400
*Value City Department Stores, Inc...................... 1,800 22,950
*Valuevision International, Inc. Class A ............... 1,400 7,744
*Variflex, Inc.......................................... 200 1,025
Varlen Corp............................................ 110 2,214
*Ventura County National Bancorp ....................... 000 $ 1,463
*Venture Stores, Inc.................................... 1,500 4,875
*Veritas DGC, Inc....................................... 900 19,238
*Vertex Communications Corp............................. 200 3,450
*Vicorp Restaurants, Inc................................ 800 11,200
*Video Display Corp..................................... 300 1,144
*Video Lottery Technologies, Inc........................ 900 3,994
*Vie de France Corp..................................... 700 1,444
Virginia Beach Federal Financial Corp.................. 400 3,675
*WHX Corp............................................... 2,200 20,625
WLR Foods, Inc......................................... 300 3,825
Walden Bancorp, Inc.................................... 300 10,369
*Wall Data, Inc......................................... 600 9,075
Warren Bancorp, Inc.................................... 300 4,500
*Washington Homes, Inc.................................. 700 3,150
Washington National Corp............................... 300 8,363
Washington Savings Bank FSB Waldorf, MD ............... 400 1,900
Watkins-Johnson Co..................................... 500 13,000
Watts Industries, Inc. Class A ........................ 1,600 35,000
Webb (Del) Corp........................................ 800 13,500
Webster Financial Corp................................. 500 18,750
*Weirton Steel Corp..................................... 3,600 9,450
*Welcome Home, Inc...................................... 200 175
Wellman, Inc........................................... 1,000 16,125
*Wells-Gardner Electronics Corp......................... 200 800
Wesbanco, Inc.......................................... 200 6,025
Westco Bancorp, Inc.................................... 300 6,525
*Western Beef, Inc...................................... 500 5,250
*Weston (Roy F.), Inc. Class A ......................... 600 2,250
*Whittaker Corp......................................... 700 9,800
*Wickes Lumber Co....................................... 200 713
Wilshire Oil Co. of Texas ............................. 500 2,688
Windmere Corp.......................................... 1,400 20,125
Wiser Oil Co........................................... 800 13,900
Wolohan Lumber Co...................................... 600 7,613
*Wonderware Corp........................................ 500 4,719
*Worldtex, Inc.......................................... 1,200 9,900
Yankee Energy Systems, Inc............................. 900 19,800
*Yellow Corp............................................ 2,400 36,300
York Financial Corp.................................... 605 10,134
*Zale Corp.............................................. 3,000 59,625
*Zemex Corp............................................. 728 6,279
Zenith National Insurance Corp......................... 1,500 41,250
*Zilog, Inc............................................. 1,000 22,375
Zurn Industries, Inc................................... 300 8,588
---------
TOTAL COMMON STOCKS
(Cost $7,059,369) .................................... 7,977,024
---------
PREFERRED STOCKS - (0.0%)
Fedders Corp. Convertible
(Cost $1,251) ........................................ 500 2,938
---------
RIGHTS/WARRANTS - (0.0%)
*Amvestors Financial Corp. Warrants Class A 04/02/02
(Cost $0) ............................................. 46 230
---------
</TABLE>

9
<PAGE>

VA SMALL VALUE PORTFOLIO
CONTINUED

<TABLE>
<CAPTION>
Face
Amount Value+
------ ------
(000)
<S> <C> <C>
TEMPORARY CASH INVESTMENTS - (2.8%)
Repurchase Agreement, PNC Securities Corp. 5.45%, 12/02/96 (Collateralized
by U.S. Treasury Bills 4.93%, 01/16/97) (Cost $227,000) ..................... $ 227 $ 227,000
-----------
TOTAL INVESTMENTS - (101.8%) (Cost $7,287,620) ................................ 8,207,192
-----------
OTHER ASSETS AND LIABILITIES - (-1.8%)
Other Assets ................................................................. 11,659
Payable for Investment Securities Purchased .................................. (153,513)
Other Liabilities ............................................................ (6,850)
-----------
(148,704)
-----------
NET ASSETS - (100.0%) Applicable to 685,658 Outstanding $.01 Par Value Shares
(100,000,000 Shares Authorized) .............................................. $ 8,058,488
===========
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE....................... $ 11.75
===========
</TABLE>

_________________
+See Note B to Financial Statements.
*Non-Income Producing Securities

See accompanying Notes to Financial Statements.

10
<PAGE>

STATEMENT OF NET ASSETS

VA LARGE VALUE PORTFOLIO

NOVEMBER 30, 1996

<TABLE>
<CAPTION>
Shares Value+
------ ------
<S> <C> <C>
UNITED STATES - (98.3%)
COMMON STOCKS - (98.3%)
*AK Steel Holding Corp.................................. 1,100 $ 41,938
*AMR Corp............................................... 2,200 200,750
*Advanced Micro Devices, Inc............................ 2,800 67,900
Aetna, Inc............................................. 3,600 259,650
Ahmanson (H.F.) & Co................................... 2,400 79,200
Albemarle Corp......................................... 1,100 19,938
Alexander & Baldwin, Inc............................... 600 15,975
Alleghany Corp......................................... 100 21,150
*Alumax, Inc............................................ 900 29,138
Ambac, Inc............................................. 700 47,950
*Amdahl Corp............................................ 2,600 30,875
Amerada Hess Corp...................................... 2,200 129,525
*America West Airlines, Inc. Class B ................... 1,100 16,088
American General Corp.................................. 4,300 176,838
American National Insurance Co......................... 600 45,075
Apple Computer, Inc.................................... 2,900 70,325
Argonaut Group, Inc.................................... 300 8,888
Asarco, Inc............................................ 900 24,525
Astoria Financial Corp................................. 600 22,575
Avnet, Inc............................................. 800 46,800
*BHC Communications, Inc. Class A ...................... 100 10,213
Ball Corp.............................................. 600 14,700
Bancorp Hawaii, Inc.................................... 600 26,175
Bankers Trust New York Corp............................ 1,200 104,400
Bear Stearns Companies, Inc............................ 2,711 74,553
Berkley (W.R.) Corp.................................... 300 15,825
*Bethlehem Steel Corp................................... 2,500 22,500
*Beverly Enterprises ................................... 2,800 37,100
Boise Cascade Corp..................................... 1,000 31,000
Borg Warner Automotive, Inc............................ 400 16,000
Bowater, Inc........................................... 1,200 45,150
*Burlington Industries, Inc............................. 1,100 11,963
Burlington Northern Santa Fe Corp...................... 3,700 332,538
CIGNA Corp............................................. 1,600 226,200
*CNA Financial Corp..................................... 1,500 161,250
CSX Corp............................................... 4,900 229,075
*Cal Fed Bancorp, Inc................................... 700 16,975
*Caliber Systems, Inc................................... 1,200 23,250
Centex Corp............................................ 500 18,000
Champion International Corp............................ 2,300 98,900
Chiquita Brands International, Inc..................... 300 3,975
*Chris-Craft Industries, Inc............................ 412 16,841
Chrysler Corp.......................................... 15,000 532,500
Cincinnati Financial Corp.............................. 1,130 67,800
Citizens Corp.......................................... 200 4,375
Coca-Cola Enterprises, Inc............................. 2,600 117,325
Comdicso, Inc.......................................... 300 9,750
Commerce Bancshares, Inc............................... 746 33,454
Commerce Group, Inc.................................... 600 14,400
Comsat Corp. Series 1 ................................. 1,000 26,250
Conrail, Inc........................................... 1,600 155,600
Consolidated Freightways, Inc.......................... 900 21,713
Coors (Adolph) Co. Class B ............................ 700 13,825
Countrywide Credit Industries, Inc..................... 2,100 60,638
Cummins Engine Co., Inc................................ 800 36,200
Cyprus Amax Minerals Co., Inc.......................... 2,100 51,975
*DSC Communications Corp................................ 3,200 57,800
Diamond Shamrock, Inc.................................. 600 19,500
*Digital Equipment Corp................................. 3,700 $ 135,975
Dillard Department Stores, Inc. Class A ............... 2,700 82,688
*Dime Bancorp, Inc...................................... 1,800 28,575
Donaldson, Lufkin & Jenrette, Inc...................... 1,500 53,438
Enserch Corp........................................... 1,000 23,375
*Enserch Exploration, Inc............................... 3,600 40,950
Equitable Companies, Inc............................... 3,200 79,200
Equitable of Iowa Companies ........................... 600 26,850
*FHP International Corp................................. 300 10,781
*Federated Department Stores, Inc....................... 5,000 170,625
Financial Security Assurance Holdings, Ltd............. 600 19,050
Fina, Inc. Class A .................................... 700 33,075
Finova Group, Inc...................................... 400 26,400
First Colony Corp...................................... 700 25,200
First Hawaiian, Inc.................................... 200 6,488
First of America Bank Corp............................. 300 18,225
Florida East Coast Industries, Inc..................... 300 26,400
Ford Motor Co.......................................... 28,000 917,000
*Fruit of The Loom, Inc. Class A ....................... 800 28,500
GATX Corp.............................................. 300 14,963
General Motors Corp.................................... 17,900 1,031,467
General Motors Corp. Class H .......................... 2,400 130,800
Georgia-Pacific Corp................................... 2,300 167,325
Golden West Financial Corp............................. 1,100 74,250
Great Atlantic & Pacific Tea Co., Inc.................. 800 26,200
Great Western Financial Corp........................... 2,900 90,263
Greenpoint Financial Corp.............................. 1,500 72,375
Heilig-Meyers Co....................................... 1,000 13,875
Helmerich & Payne, Inc................................. 400 21,500
Hollinger International, Inc. Class A ................. 1,700 18,700
Inland Steel Industries, Inc........................... 1,200 22,350
International Paper Co................................. 7,200 306,000
*International Speciality Products, Inc................. 2,200 26,675
James River Corp. of Virginia ......................... 2,100 67,200
K Mart Corp............................................ 11,700 130,163
*Kaiser Aluminum Corp................................... 1,700 18,063
LTV Corp............................................... 2,900 31,175
Lafarge Corp........................................... 5,900 113,575
Lehman Brothers Holdings, Inc.......................... 2,400 69,900
Lennar Corp............................................ 500 13,000
Liberty Financial Companies, Inc....................... 800 28,400
Lincoln National Corp.................................. 2,300 123,913
Loews Corp............................................. 2,800 259,700
Longs Drug Stores Corp................................. 100 5,013
Longview Fibre Co...................................... 1,100 20,075
Louisiana-Pacific Corp................................. 2,700 61,088
MBIA, Inc.............................................. 900 91,013
MCI Communications Corp................................ 3,200 97,800
Mead Corp.............................................. 1,100 65,175
Mercantile Stores Co., Inc............................. 700 35,175
*Meyer (Fred), Inc. DE ................................. 800 26,800
Mitchell Energy & Development Corp. Class A............ 300 6,469
Mitchell Energy & Development Corp. Class B............ 600 12,675
Morgan (J.P.) & Co., Inc............................... 1,000 94,375
Murphy Oil Corp........................................ 200 10,200
</TABLE>

11
<PAGE>

VA LARGE VALUE PORTFOLIO
CONTINUED

<TABLE>
<CAPTION>
Shares Value+
------ ------
<S> <C> <C>
*National Semiconductor Corp............................ 2,600 $ 63,700
*Navistar International Corp............................ 2,200 20,900
*Nextel Communications Corp. Class A.................... 5,100 76,819
Norfolk Southern Corp.................................. 3,700 333,000
Occidental Petroleum Corp.............................. 7,800 187,200
Ogden Corp............................................. 1,100 21,313
Ohio Casualty Corp..................................... 700 24,063
Old Republic International Corp........................ 2,100 56,963
Overseas Shipholding Group, Inc........................ 500 8,000
PHH Corp............................................... 700 31,413
Paccar, Inc............................................ 300 20,025
Paine Webber Group, Inc................................ 1,300 35,263
Paul Revere Corp....................................... 1,000 31,625
Phelps Dodge Corp...................................... 1,400 101,675
Potlatch Corp.......................................... 700 30,975
Pulte Corp............................................. 400 12,250
*Quantum Corp........................................... 900 24,188
RJR Nabisco Holdings Corp.............................. 6,540 209,280
Rayonier, Inc.......................................... 700 27,125
Reliance Group Holdings, Inc........................... 2,700 24,300
Reliastar Financial Corp............................... 200 11,150
Republic New York Corp................................. 300 26,475
Reynolds Metals Co..................................... 1,600 95,200
Ryder System, Inc...................................... 2,000 60,750
Safeco Corp............................................ 3,100 129,425
Saint Paul Companies, Inc.............................. 1,900 111,863
Salomon, Inc........................................... 2,600 118,625
Sensormatic Electronics Corp........................... 1,300 26,000
Signet Banking Corp.................................... 1,000 30,250
Smiths Food & Drug Centers, Inc. Class B............... 49 1,482
Southern New England Telecommunications Corp........... 300 11,925
*Spiegel, Inc. Class A Non-Voting....................... 200 1,713
Springs Industries, Inc. Class A....................... 300 13,950
Standard Federal Bancorporation, ...................... 200 11,275
Stone Container Corp................................... 2,400 36,900
Sun Company, Inc....................................... 1,100 27,500
TIG Holdings, Inc...................................... 900 27,450
*Tandem Computers, Inc.................................. 2,600 35,425
Tecumseh Products Co. Class A.......................... 200 11,775
Telephone & Data Systems, Inc.......................... 1,100 41,113
Temple-Inland, Inc..................................... 1,400 75,250
*Teradyne, Inc.......................................... 1,600 37,800
Timken Co.............................................. 800 36,500
Transamerica Corp...................................... 1,400 111,125
Tyson Foods, Inc. Class A.............................. 1,800 59,063
UMB Financial Corp..................................... 300 11,850
USF&G Corp............................................. 3,600 72,000
USLIFE Corp............................................ 650 20,069
USX-Marathon Group, Inc................................ 7,100 162,413
USX-US Steel Group .................................... 2,100 63,263
Union Camp Corp........................................ 1,700 83,513
Union Pacific Corp..................................... 3,400 198,050
*Union Pacific Resources Group, Inc..................... 2,879 86,010
Unionbancal Corp....................................... 700 38,325
*Unisys Corp............................................ 2,500 19,063
*United States Cellular Corp............................ 1,400 39,200
Unitrin, Inc........................................... 700 37,363
Valero Energy Corp..................................... 900 27,000
Valhi, Inc............................................. 1,200 7,350
*Value Health, Inc...................................... 900 $ 16,313
*Viacom, Inc. Class B................................... 7,000 264,250
*Vishay Intertechnology, Inc............................ 1,600 33,600
*Waban, Inc............................................. 600 15,825
Washington Mutual, Inc................................. 1,200 52,275
Wellman, Inc........................................... 1,000 16,125
Wesco Financial Corp................................... 100 18,500
Westvaco Corp.......................................... 2,300 64,975
Weyerhaeuser Co........................................ 2,000 92,000
*Wheelabrator Technologies, Inc......................... 3,600 58,950
Whirlpool Corp......................................... 300 15,000
*Woolworth Corp......................................... 2,000 48,000
*Zurich Reinsurance Centre Holdings, Inc................ 500 15,313
-----------
TOTAL UNITED STATES
(Cost $11,525,241) ................................... 13,331,932
-----------
FRANCE - (0.0%)
INVESTMENT IN CURRENCY - (0.0%)
*French Francs (Cost $1,902) .......................... 1,886
-----------
GERMANY - (0.0%)
INVESTMENT IN CURRENCY - (0.0%)
*German Marks (Cost $850) ............................. 842
-----------
SPAIN - (0.0%)
INVESTMENT IN CURRENCY - (0.0%)
*Spanish Peseta (Cost $130) ........................... 126
-----------
UNITED KINGDOM - (0.0%)
INVESTMENT IN CURRENCY - (0.0%)
*British Pound Sterling (Cost $10) .................... 11
-----------
Face
Amount
------
(000)
TEMPORARY CASH INVESTMENTS - (1.3%)
Repurchase Agreement, PNC
Securities Corp. 5.45%, 12/02/96 (Collateralized by U.S.
Treasury Bills 4.93%, 01/16/97)
(Cost $177,000) ...................................... $ 177 177,000
-----------
TOTAL INVESTMENTS - (99.6%) (Cost $11,705,133) ........ 13,511,797
-----------
OTHER ASSETS AND LIABILITIES - (0.4%)
Other Assets .......................................... 66,398
Liabilities ........................................... (8,081)
-----------
58,317
-----------
NET ASSETS - (100.0%) Applicable to 1,008,543
Outstanding $.01 Par Value Shares (100,000,000 Shares
Authorized)............................................ $13,570,114
===========
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER
SHARE.................................................. $ 13.46
===========
</TABLE>

_______________
+See Note B to Financial Statements.
*Non-Income Producing Securities

See accompanying Notes to Financial Statements.

12
<PAGE>

STATEMENT OF NET ASSETS

VA INTERNATIONAL VALUE PORTFOLIO

NOVEMBER 30, 1996

<TABLE>
<CAPTION>
Shares Value+
------- ------
<S> <C> <C>
JAPAN -- (38.5%)
COMMON STOCKS -- (36.0%)
Aichi Steel Works, Ltd...................... 4,000 $ 19,332
Aisin Seiki Co., Ltd........................ 2,000 31,986
#Amada Co., Ltd............................. 3,000 25,097
*Aoki Corp.................................. 6,000 15,501
Aoyama Trading Co., Ltd..................... 1,100 31,318
#Asahi Breweries, Ltd....................... 4,000 42,882
*Ashikaga Bank, Ltd......................... 3,000 16,397
Atsugi Nylon Industrial Co., Ltd............ 5,000 19,464
Calpis Food Industry Co., Ltd............... 2,000 13,040
Casio Computer Co., Ltd..................... 3,000 24,359
Chugoku Bank, Ltd........................... 2,000 32,865
#Chuo Trust and Banking Co., Ltd............ 2,000 20,035
Citizen Watch Co., Ltd...................... 3,000 23,409
Dai Tokyo Fire & Marine Insurance
Co., Ltd.................................... 4,000 24,253
Daicel Chemical Industries, Ltd............. 4,000 19,016
Daikyo, Inc................................. 3,000 16,239
Daito Trust Construction Co.,
Ltd......................................... 1,500 19,640
#Daiwa Bank, Ltd............................ 15,000 86,995
Daiwa House Industry Co., Ltd............... 5,000 69,420
Ezaki Glico Co., Ltd........................ 2,000 18,102
Fuji Photo Film Co., Ltd.................... 5,000 156,854
Fujisawa Pharmaceutical Co., Ltd............ 2,000 17,750
Fujita Corp................................. 9,000 28,471
Fujitsu, Ltd................................ 15,000 143,673
Fukuoka City Bank, Ltd...................... 4,000 28,647
Gunze, Ltd.................................. 4,000 22,425
*Hanwa Co., Ltd............................. 5,000 15,246
*Haseko Corp................................ 8,000 24,605
Hiroshima Bank, Ltd......................... 2,000 11,037
Hitachi Koki Co., Ltd....................... 2,000 16,661
#Hitachi Maxell, Ltd........................ 1,000 20,650
#Hitachi Transport System, Ltd.............. 2,000 19,332
Hitachi, Ltd................................ 36,000 335,327
Hokkaido Bank, Ltd.......................... 7,000 17,715
*Hokkaido Takushoku Bank, Ltd.,
Takugin.................................... 16,000 35,149
Hokuriku Bank, Ltd......................... 7,000 36,661
Hyakujushi Bank, Ltd....................... 3,000 19,429
Inax Corp.................................. 2,000 16,854
Katokichi Co., Ltd......................... 1,000 20,387
Keiyo Bank, Ltd............................ 5,000 24,605
Kinden Corp................................ 2,000 27,768
Kiyo Bank, Ltd............................. 5,000 21,090
Kokusai Securities Co., Ltd................ 2,000 23,726
Komatsu, Ltd............................... 9,000 75,844
*Kumagai Gumi Co., Ltd..................... 6,000 16,977
Kureha Chemical Industry Co.,
Ltd........................................ 4,000 18,629
Kyudenko Corp.............................. 2,000 21,441
#Long Term Credit Bank of Japan,
Ltd........................................ 20,000 126,538
Maeda Corp................................. 2,000 15,571
Marubeni Corp.............................. 16,000 72,408
Maruetsu, Inc.............................. 3,000 21,907
Matsushita Electric Industrial
Co., Ltd................................... 22,000 380,844
#Matsushita Electric Works, Ltd............ 4,000 37,258
Mitsubishi Gas Chemical Co., Inc........... 5,000 18,981

Shares Value+
------ ------
Mitsubishi Oil Co., Ltd.................... 4,000 $ 26,538
Mitsui Fudosan Co., Ltd.................... 4,000 47,452
Mitsui Trust & Banking Co., Ltd............ 2,000 19,156
#Mizuno Corp............................... 2,000 15,606
Nagase & Co., Ltd.......................... 2,000 17,012
#Nihon Cement Co., Ltd..................... 3,000 18,585
#Nippon Credit Bank, Ltd................... 12,000 30,580
Nippon Meat Packers, Inc., Osaka........... 2,000 26,186
Nippon Oil Co., Ltd........................ 12,000 67,803
Nippon Sheet Glass Co., Ltd................ 4,000 16,485
Nippon Shinpan Co., Ltd., Tokyo............ 6,000 37,592
#Nisshin Steel Co., Ltd.................... 5,000 15,334
Nisshinbo Industries, Inc.................. 3,000 26,362
Nittetsu Mining Co., Ltd................... 2,000 17,223
*Nitto Boseki Co., Ltd..................... 7,000 21,283
Noritz Corp................................ 1,000 13,620
Pioneer Electronic Corp.................... 2,000 43,058
San-In Godo Bank, Ltd...................... 3,000 22,671
Sankyo Aluminum Industry Co.,
Ltd........................................ 3,000 13,629
Sanyo Electric Co., Ltd.................... 21,000 98,357
Sekisui House, Ltd......................... 6,000 64,323
Shiga Bank, Ltd............................ 4,000 21,722
Shinmaywa Industries, Ltd.................. 2,000 16,696
Shionogi & Co., Ltd........................ 3,000 23,515
#Shiseido Co., Ltd......................... 4,000 48,155
Sumitomo Corp.............................. 10,000 84,798
Sumitomo Realty & Development
Co., Ltd................................... 7,000 48,594
Teijin, Ltd................................ 4,000 19,086
#Tokyo Sowa Bank, Ltd...................... 4,000 20,035
Tokyo Steel Manufacturing Co.,
Ltd........................................ 1,500 22,144
Tokyo Style Co., Ltd....................... 1,000 14,763
*Tokyo Tatemono Co., Ltd................... 4,000 18,348
Toyo Engineering Corp...................... 3,000 16,081
Toyo Trust & Banking Co., Ltd.............. 7,000 60,466
Toyota Motor Corp.......................... 2,000 54,657
Toyota Tsusho Corp......................... 4,000 24,077
Victor Co. of Japan, Ltd................... 2,000 20,914
Yamaguchi Bank, Ltd........................ 2,000 29,877
Yamaichi Securities Co., Ltd............... 12,000 63,374
Yamato Kogyo Co., Ltd...................... 2,000 19,859
Yasuda Trust & Banking Co., Ltd............ 8,000 37,750
----------
TOTAL COMMON STOCKS
(Cost $3,958,866).......................... 3,783,576
----------
INVESTMENT IN CURRENCY -- (2.5%)
*Japanese Yen (Cost $269,968).............. 267,211
----------
TOTAL -- JAPAN (Cost $4,228,834)........... 4,050,787
----------
UNITED KINGDOM -- (19.8%)
COMMON STOCKS -- (19.1%)
ASDA Group P.L.C........................... 18,900 37,649
Abbey National P.L.C....................... 4,000 46,934
Anglian Water P.L.C........................ 2,100 20,598
Argyll Group P.L.C......................... 5,000 32,695
Arjo Wiggins Appleton P.L.C................ 5,400 14,569
Associated British Foods P.L.C............. 4,000 29,686
BAA P.L.C.................................. 3,045 25,209
</TABLE>

13
<PAGE>

THE VA INTERNATIONAL VALUE PORTFOLIO CONTINUED

<TABLE>
<CAPTION>
Shares Value+
------ ------
<S> <C> <C>
Barclays P.L.C.................... 4,500 $ 77,650
Bass P.L.C........................ 5,800 76,438
British Gas P.L.C................. 22,000 80,991
British Land Co. P.L.C............ 3,500 28,447
British Steel P.L.C............... 16,300 45,553
British Telecommunications P.L.C.. 42,000 267,229
Burton Group P.L.C................ 18,700 46,759
Commercial Union P.L.C............ 3,071 34,072
General Accident P.L.C............ 2,500 30,783
Great Universal Stores P.L.C...... 6,100 70,343
Guardian Royal Exchange P.L.C..... 7,266 32,734
Guinness P.L.C.................... 7,000 52,598
ICI (Imperial Chemical Industries
P.L.C.).......................... 4,300 55,839
Ladbroke Group P.L.C.............. 7,698 26,528
Lasmo P.L.C....................... 8,700 32,174
Lonrho P.L.C...................... 6,237 14,102
National Power P.L.C.............. 6,000 46,597
National Westminster Bank P.L.C... 8,430 97,991
North West Water Group P.L.C...... 2,419 24,032
Pilkington P.L.C.................. 7,830 19,546
Powergen P.L.C.................... 3,000 29,275
Redland P.L.C..................... 4,110 25,563
Royal & Sun Alliance Insurance
Group, Inc. P.L.C................ 9,948 75,001
Sainsbury (J.) P.L.C.............. 9,000 56,809
Scottish & Newcastle P.L.C........ 2,000 21,483
Sears P.L.C....................... 12,100 18,916
Severn Trent P.L.C................ 2,999 33,021
Shell Transport & Trading Co.
P.L.C............................ 7,500 124,688
Tesco P.L.C....................... 14,200 81,159
Thames Water P.L.C................ 2,784 27,026
Unilever P.L.C.................... 2,300 54,206
Welsh Water P.L.C................. 1,583 19,718
Whitbread P.L.C................... 4,200 54,116
Yorkshire Water P.L.C............. 1,652 18,981
----------
TOTAL COMMON STOCKS
(Cost $1,698,058)................. 2,007,708
----------
INVESTMENT IN CURRENCY -- (0.7%)
*British Pound Sterling
(Cost $75,472).................... 76,075
----------
TOTAL -- UNITED KINGDOM
(Cost $1,773,530)................. 2,083,783
----------
GERMANY -- (7.8%)
COMMON STOCKS -- (7.6%)
BASF AG........................... 4,000 148,103
#BHF Bank.......................... 1,000 24,243
Bankgesellschaft Berlin AG........ 1,000 16,433
#Bayer AG.......................... 2,000 80,560
#Bayerische Hypotheken und
Wechselbank AG................... 1,700 53,384
Bayerische Vereinsbank AG......... 1,120 46,979
#Commerzbank AG.................... 2,000 49,203
Deutsche Bank AG.................. 3,300 157,429
Deutsche Lufthansa AG............. 2,000 25,773
Dresdner Bank AG, Frankfurt....... 2,900 86,160
#Man AG, Muenchen.................. 100 23,593
#Siemens AG........................ 500 24,113
Vereins & Westbank AG............. 112 26,096
Volkswagen AG..................... 100 $ 40,124
----------
TOTAL COMMON STOCKS
(Cost $697,350)................... 802,193
----------
INVESTMENT IN CURRENCY -- (0.2%)
*German Marks (Cost $21,874)....... 21,684
----------
TOTAL -- GERMANY
(Cost $719,224)................... 823,877
----------
FRANCE -- (7.5%)
COMMON STOCKS -- (7.1%)
Alcatel Alsthom Cie Generale
d'Electricite SA................. 567 51,498
Axa SA............................ 700 42,126
Banque Nationale de Paris......... 700 27,861
Elf Aquitaine SA.................. 1,609 140,529
Eridania Beghin-Say SA............ 200 31,297
Financiere de Paribas SA Series A 446 30,642
Groupe Danone..................... 300 44,359
LaFarge Coppee SA................. 308 19,609
Peugeot SA........................ 200 24,593
Rhone-Poulenc SA Series A......... 1,125 36,372
Saint Louis (SLB)................. 100 25,455
Saint-Gobain...................... 307 43,983
*Societe Centrale des Assurances
Generales de France SA........... 700 23,262
Societe Generale Paris............ 510 55,679
Suez SA........................... 624 26,915
Total SA Series B................. 825 66,809
UAP SA............................ 1,930 51,420
----------
TOTAL COMMON STOCKS
(Cost $659,603)................... 742,409
----------
INVESTMENT IN CURRENCY -- (0.4%)
*French Francs (Cost $44,695)...... 44,140
----------
TOTAL -- FRANCE (Cost $704,298)..... 786,549
----------
SWITZERLAND -- (5.5%)
COMMON STOCKS -- (5.5%)
Baloise-Holding, Basel............ 25 55,833
Banque Cantonale Vaudois.......... 110 29,463
CS Holding, Zuerich (Namen)....... 800 85,188
*Julius Baer Holding AG, Zuerich... 20 21,489
*Oerlikon-Buehrle Holding AG,
Zuerich.......................... 500 51,612
Pargesa Holding SA, Geneve........ 50 56,216
*SBG (Schweizerische
Bankgesellschaft)................ 110 103,668
*SBV (Schweizerischer Bankverein)
(Namen).......................... 300 59,286
SIG (Schweizerische Industrie
Gesellschaft Holding AG),
Neuhausen am Rheinfall............ 10 24,098
Schindler Holding AG, Hergiswil... 25 24,962
Sulzer AG, Winterthur............. 50 28,780
*Swissair Schweizerische
Luftverkehr AG, Zuerich........... 50 37,989
---------
TOTAL COMMON STOCKS
(Cost $559,447)................... 578,584
---------
</TABLE>

14
<PAGE>

THE VA INTERNATIONAL VALUE PORTFOLIO CONTINUED

<TABLE>
<CAPTION>
Shares Value+
-------- ----------
<S> <C> <C>
INVESTMENT IN CURRENCY -- (0.0%)
*Swiss Francs (Cost $1,548)........ $ 1,508
-----------
TOTAL -- SWITZERLAND
(Cost $560,995)................... 580,092
-----------
HONG KONG -- (4.4%)
COMMON STOCKS -- (4.4%)
#Amoy Properties, Ltd.............. 40,000 55,883
Chinese Estates Holdings, Ltd..... 24,645 28,533
*Evergo China Holdings, Ltd........ 3,838 725
#Great Eagle Holdings, Ltd......... 7,177 29,802
Hang Lung Development Co., Ltd.... 12,000 26,777
#Hong Kong & Shanghai Hotels, Ltd.. 18,416 36,687
Hopewell Holdings, Ltd............ 70,000 46,180
Hysan Development Co., Ltd........ 10,000 38,225
Paliburg Holdings, Ltd............ 36,000 30,503
#Sino Land Co., Ltd................ 20,000 25,483
Wharf Holdings, Ltd............... 17,000 87,963
Wheelock and Co., Ltd............. 19,000 55,792
-----------
TOTAL COMMON STOCKS
(Cost $324,805)................... 462,553
-----------
INVESTMENT IN CURRENCY -- (0.0%)
*Hong Kong Dollars (Cost $2,415)... 2,415
-----------
RIGHTS/WARRANTS -- (0.0%)
*Hong Kong & Shanghai Hotels, Ltd.
Warrants 12/10/98................. 1,416 82
-----------
TOTAL -- HONG KONG
(Cost $327,220)................... 465,050
-----------
NETHERLANDS -- (3.6%)
COMMON STOCKS -- (3.6%)
ABN Amro Holding NV............... 1,353 87,662
DSM NV............................ 500 48,434
Fortis Amev NV.................... 2,321 77,412
Ing Groep NV...................... 2,914 102,092
KLM Royal Dutch Airlines NV....... 828 21,372
Philips Electronics NV............ 1,000 40,429
-----------
TOTAL COMMON STOCKS
(Cost $281,002)................... 377,401
-----------
INVESTMENT IN CURRENCY -- (0.0%)
*Netherlands Guilder (Cost $62).... 62
-----------
TOTAL -- NETHERLANDS
(Cost $281,064)................... 377,463
-----------
ITALY -- (3.2%)
COMMON STOCKS -- (3.2%)
Banca Commerciale Italiana SpA.... 26,000 47,788
*Banca di Roma..................... 30,000 27,570
#Credito Italiano.................. 20,000 21,950
Fiat SpA.......................... 49,000 144,425
Istituto Bancario San Paolo
Torino SpA....................... 9,000 56,529
Italcementi Fabbriche Riunite
Cemento SpA, Bergamo............. 5,000 29,273
*Olivetti (Ing C & C) SpA, Ivrea... 25,000 8,810
-----------
TOTAL COMMON STOCKS
(Cost $355,723)................... 336,345
-----------
INVESTMENT IN CURRENCY -- (0.0%)
*Italian Lira (Cost $6)............ $ 6
-----------
TOTAL -- ITALY (Cost $355,729)...... 336,351
-----------
AUSTRALIA -- (3.0%)
COMMON STOCKS -- (3.0%)
Australia and New Zealand Banking
Group, Ltd........................ 5,863 38,552
CSR, Ltd.......................... 8,813 28,867
Commonwealth Bank of Australia.... 3,426 33,442
MIM Holdings, Ltd................. 11,281 16,086
National Australia Bank, Ltd...... 5,528 68,915
News Corp., Ltd................... 11,685 62,267
#Westpac Banking Corp.............. 11,200 67,075
-----------
TOTAL COMMON STOCKS
(Cost $262,250)................... 315,204
-----------
INVESTMENT IN CURRENCY -- (0.0%)
*Australian Dollar (Cost $14) 14
-----------
TOTAL -- AUSTRALIA
(Cost $262,264)................... 315,218
-----------
SWEDEN -- (2.9%)
COMMON STOCKS -- (2.9%)
*Diligentia AB........... 560 8,967
*Naeckebro AB............ 110 1,983
Skandinaviska Enskilda Banken
Series A.................... 5,600 52,134
Stadshypotek AB Series A 1,000 29,791
Stora Kopparbergs Bergslags AB
Series A.................... 2,900 39,741
Svenka Cellulosa AB Series B 1,300 27,884
Svenska Handelsbanken Series A .. 2,400 65,777
*Swedish Match AB (Frueher Svenska
Taendsticks AB)............. 900 2,949
Volvo AB Series A....... 2,400 52,551
Volvo AB Series B....... 900 19,774
-----------
TOTAL COMMON STOCKS
(Cost $242,185).............. 301,551
-----------
INVESTMENT IN CURRENCY -- (0.0%)
*Swedish Krona (Cost $21) 21
-----------
TOTAL -- SWEDEN (Cost $242,206) ... 301,572
-----------
SPAIN -- (2.2%)
COMMON STOCKS -- (2.2%)
Banco Central Hispanoamericano SA 1,200 29,873
Fuerzas Electricas de Cataluna SA
Series A.................... 2,900 23,169
Iberdrola SA............ 9,200 106,167
Sevillana de Electricidad ... 4,300 40,328
Union Electrica Fenosa SA ... 4,000 30,135
-----------
TOTAL COMMON STOCKS
(Cost $173,289).............. 229,672
-----------
INVESTMENT IN CURRENCY -- (0.0%)
*Spanish Peseta (Cost $471) .. 461
-----------
TOTAL -- SPAIN (Cost $173,760) 230,133
-----------
</TABLE>

15
<PAGE>

THE VA INTERNATIONAL VALUE PORTFOLIO CONTINUED

<TABLE>
<CAPTION>
Shares Value+
------- ------
<S> <C> <C>
BELGIUM -- (1.8%)
COMMON STOCKS -- (1.4%)
Banque Bruxelles Lambert.......................................... 100 $ 21,099
CMB (Cie Maritime Belge).......................................... 300 22,789
Cofinimmo SA...................................................... 200 22,489
Electrafina SA.................................................... 200 18,509
Groupe Bruxelles Lambert SA....................................... 200 25,395
Societe Generale de Belgique SA................................... 500 37,982
-----------
TOTAL COMMON STOCKS (Cost $147,459)................................. 148,263
-----------
INVESTMENT IN CURRENCY -- (0.4%)
*Belgian Francs (Cost $45,464)..................................... 44,918
-----------
TOTAL -- BELGIUM (Cost $192,923).................................... 193,181
-----------
SINGAPORE -- (1.3%)
COMMON STOCKS -- (1.3%).............................................
Singapore Land, Ltd............................................... 9,000 51,639
Straits Steamship Land, Ltd....................................... 17,000 54,283
United Industrial Corp., Ltd...................................... 18,000 15,396
United Overseas Land, Ltd......................................... 12,000 18,988
-----------
TOTAL COMMON STOCKS (Cost $143,397)................................. 140,306
-----------
INVESTMENT IN CURRENCY -- (0.0%)
*Singapore Dollars (Cost $76)...................................... 77
-----------
TOTAL -- SINGAPORE (Cost $143,473).................................. 140,383
-----------
Face
Amount
--------
(000)
TEMPORARY CASH INVESTMENTS -- (2.2%)
Repurchase Agreement, PNC Securities Corp.
5.45%, 12/02/96 (Collateralized by U.S.
Treasury Bills 4.93%, 01/16/97)
(Cost $223,000).................................................. $ 223 223,000
----------
TOTAL INVESTMENTS -- (103.7%)
(Cost $10,188,520)................................................. 10,907,439
----------
OTHER ASSETS AND LIABILITIES -- (-3.7%)
Other Assets........................................................ 554,178
Payable for Investment Securities Purchased ........................ (939,860)
Other Liabilities................................................... (5,215)
----------
(390,897)
----------
NET ASSETS -- (100.0%) Applicable to 921,300 Outstanding
$.01 Par Value Shares (100,000,000 Shares Authorized)............. $10,516,542
============
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE ........... $ 11.41
============
</TABLE>

__________
+See Note B to Financial Statements.
*Non-Income Producing Securities
#Securities on Loan

See accompanying Notes to Financial Statements

16
<PAGE>

STATEMENT OF NET ASSETS

VA INTERNATIONAL SMALL PORTFOLIO

NOVEMBER 30, 1996

<TABLE>
<CAPTION>
Shares Value+
------ ------
<S> <C> <C>
JAPAN -- (33.9%)
COMMON STOCKS -- (32.2%)
Achilles Corp............................... 6,000 $20,562
Aica Kogyo Co., Ltd......................... 3,000 17,373
Aichi Tokei Denki Co., Ltd.................. 3,000 15,290
Aida Engineering, Ltd....................... 3,000 21,169
Asahi Kogyosha Co., Ltd..................... 3,000 17,004
Asahi Organic Chemicals Industry
Co., Ltd................................. 3,000 19,640
Ashimori Industry Co., Ltd.................. 3,000 14,183
*Asics Corp.................................. 7,000 17,592
*#Bank of Osaka, Ltd.......................... 9,000 23,726
#CKD Corp.................................... 2,000 13,866
*Central Finance Co., Ltd.................... 4,000 13,638
*#Chori Co., Ltd.............................. 5,000 16,696
Daisan Bank, Ltd............................ 4,000 19,227
*Daiwabo Co., Ltd............................ 8,000 28,822
Ehime Bank, Ltd............................. 5,000 23,682
*#Fuji Kosan Co., Ltd......................... 6,000 19,086
Fuji Oil Co., Ltd........................... 3,000 22,803
Fuji Spinning Co., Ltd., Tokyo.............. 4,000 19,578
Fujiko Co., Ltd............................. 4,000 12,830
*Furukawa Battery Co., Ltd................... 3,000 18,084
Gakken Co., Ltd............................. 3,000 19,772
*#Hitachi Seiki Co., Ltd...................... 4,000 13,779
#Hokkaido Gas Co., Ltd....................... 4,000 16,696
Hokuriku Electric Industry Co., Ltd......... 4,000 19,895
Howa Machinery, Ltd......................... 5,000 17,267
Ichikoh Industries, Ltd..................... 4,000 16,169
#Iwasaki Electric Co., Ltd................... 4,000 17,293
Iwatsu Electric Co., Ltd.................... 3,000 14,025
JDC Corp.................................... 6,000 19,139
*Japan Aviation Electronics Industry,
Ltd. .................................... 3,000 20,824
*Japan Coated Paper Manufacturing
Co., Ltd.................................. 3,000 10,677
Japan Paper Industry Co., Ltd............... 3,000 13,313
Japan Transcity Corp........................ 3,000 15,685
Japan Vilene Co., Ltd....................... 3,000 15,633
*Kansai Kisen Kaisha......................... 9,000 16,134
Kanto Auto Works, Ltd., Yokosuka............ 3,000 22,777
#Kanto Denka Kogyo Co., Ltd.................. 4,000 19,859
Kawada Industries, Inc...................... 2,000 14,763
#Kawai Musical Instruments
Manufacturing Co., Ltd..................... 5,000 19,728
Keiyo Co., Ltd.............................. 2,000 21,968
Kokusai Kogyo Co., Ltd...................... 2,000 22,671
#Komatsu Forklift Co., Ltd., Tochigi......... 3,000 19,007
Kosei Securities Co., Ltd................... 4,000 16,169
Kyodo Shiryo Co., Ltd....................... 5,000 17,399
*Kyotaru Co., Ltd............................ 3,000 17,135
#Kyushu Bank, Ltd............................ 4,000 15,501
Life Corp................................... 2,000 17,575
Maruyama Manufacturing Co., Inc............. 3,000 10,677
#Matsuo Bridge Co., Ltd...................... 3,000 16,213
*Mitsubishi Shindoh Co., Ltd................. 3,000 11,757
Mitsui Construction Co., Ltd................ 6,000 19,772
*Mitsui Mining Co., Ltd...................... 5,000 19,859
Mitsuuroko Co., Ltd......................... 3,000 21,063
Nakamuraya Co., Ltd......................... 3,000 16,661
#Nichias Corp................................ 4,000 $18,032
Nichiei Construction Co., Ltd............... 2,000 14,534
*Nichimo Co., Ltd............................ 5,000 19,069
Nichireki Co., Ltd.......................... 2,000 16,344
Nichiro Corp................................ 5,000 18,234
Nifco, Inc.................................. 2,000 21,968
Nippon Beet Sugar Manufacturing
Co., Ltd.................................. 5,000 22,012
*Nippon Carbon Co., Ltd...................... 5,000 18,805
Nippon Chemical Industrial Co., Ltd........ 2,000 21,615
*#Nippon Columbia Co., Ltd.................... 3,000 16,793
Nippon Concrete Industries Co., Ltd........ 3,000 12,522
Nippon Densetsu Kogyo Co., Ltd.............. 2,000 19,684
*#Nippon Kasei Chemical Co., Ltd.............. 5,000 14,763
*Nippon Steel Chemical Co., Ltd.............. 6,000 22,144
Nippon Synthetic Chemical Industry
Co., Ltd. ............................... 3,000 14,446
*Nitto Boseki Co., Ltd....................... 8,000 24,323
OSG Manufacturing Co., Ltd.................. 3,000 18,401
*Odakyu Real Estate Co., Ltd................. 4,000 17,926
#Parco Co., Ltd.............................. 2,000 18,453
Prima Meat Packers, Ltd..................... 5,000 15,158
#Rasa Industries, Ltd........................ 3,000 19,218
Rheon Automatic Machinery Co., Ltd......... 2,000 15,817
Sagami Co., Ltd............................. 3,000 20,088
Sakai Chemical Industry Co., Ltd............ 3,000 15,316
Sakata Inx Corp............................. 3,000 17,689
Sasebo Heavy Industries Co., Ltd.,
Tokyo .................................... 7,000 16,854
Shikoku Chemicals Corp...................... 3,000 13,234
Shinagawa Fuel Co., Ltd..................... 3,000 21,617
*#Showa Line, Ltd............................. 10,000 14,938
#Sumitomo Precision Products Co., Ltd.,
Amagasaki City.............................. 2,000 15,905
#TOC Co., Ltd................................ 2,000 19,332
Taisei Rotec Corp........................... 3,000 16,424
Takaoka Electric Manufacturing Co.,
Ltd., Tokyo............................... 4,000 16,344
Takasago International Corp................. 3,000 18,981
#Takashima & Co., Ltd........................ 4,000 20,457
Takiron Co., Ltd............................ 3,000 16,292
#Tasaki Shinju Co., Ltd...................... 2,000 16,046
Toa Doro Kogyo Co., Ltd..................... 3,000 15,026
*Toa Wool Spinning & Weaving Co., Ltd....... 6,000 17,821
*Tokai Kogyo Co., Ltd........................ 7,000 30,448
Tokico, Ltd................................. 4,000 15,677
#Tokyo Kikai Seisakusho Ltd.................. 3,000 23,278
Tokyo Rope Manufacturing Co., Ltd.......... 4,000 17,856
*Tokyo Securities Co., Ltd................... 4,000 15,220
*Tokyo Tekko Co., Ltd........................ 3,000 13,761
#Tokyo Theatres Co., Inc., Tokyo............. 6,000 16,661
#Tonami Transportation Co., Ltd.............. 3,000 17,109
Totoku Electric Co., Ltd., Tokyo............ 3,000 17,399
Toyo Chemical Co., Ltd...................... 3,000 19,666
*Toyo Electric Co., Ltd...................... 5,000 17,135
</TABLE>

17
<PAGE>

VA INTERNATIONAL SMALL PORTFOLIO CONTINUED

<TABLE>
<CAPTION>
Shares Value+
------ ------
<S> <C> <C>
#Toyo Umpanki Co., Ltd................. 5,000 $ 22,891
Wakachiku Construction Co., Ltd....... 4,000 18,594
Yondenko Corp......................... 2,000 17,926
#Zenchiku Co., Ltd..................... 4,000 13,533
----------
TOTAL COMMON STOCKS
(Cost $2,011,580)..................... 1,931,485
----------
INVESTMENT IN CURRENCY -- (1.7%)
*Japanese Yen (Cost $100,809).......... 100,083
----------
TOTAL -- JAPAN (Cost $2,112,389) 2,031,568
----------
UNITED KINGDOM -- (14.0%)
COMMON STOCKS -- (13.9%)
APV P.L.C............................. 15,000 18,533
Ash & Lacy P.L.C...................... 7,000 20,592
Bluebird Toys P.L.C................... 5,000 15,927
Bodycote International P.L.C.......... 3,000 35,679
*Bodycote International P.L.C. Issue
96 ... 1,000 1,807
Bradstock Group P.L.C................. 21,000 20,828
British Polythene Industries P.L.C.... 2,000 24,593
CRT Group P.L.C....................... 5,750 26,727
Canadian Pizza P.L.C.................. 12,000 16,440
Carpetright P.L.C..................... 4,000 43,101
Cattle's Holdings P.L.C............... 5,400 23,238
Davis Service Group P.L.C............. 6,666 25,100
Dawson Group P.L.C.................... 4,000 10,590
Dawson International P.L.C............ 10,000 9,582
Dewhirst Group P.L.C.................. 6,000 19,063
Diploma P.L.C......................... 3,000 18,659
Etam P.L.C............................ 7,000 15,709
Greene King P.L.C..................... 2,000 22,643
Henderson Administration Group P.L.C. 1,000 19,668
Heywood Williams Group P.L.C.......... 5,000 18,785
Higgs & Hill P.L.C.................... 13,000 16,499
How Group P.L.C....................... 29,000 18,525
Johnston Press P.L.C.................. 7,010 21,211
MacFarlane Group Clansman P.L.C...... 6,000 17,852
Mersey Docks & Harbour Co. P.L.C..... 3,580 23,470
Molins P.L.C.......................... 1,360 20,575
*Oxford Molecular Group P.L.C.......... 5,714 34,483
Photo-Me International P.L.C.......... 6,000 12,103
Polypipe P.L.C........................ 8,000 28,980
Quick Group P.L.C..................... 8,000 19,836
Redrow Group P.L.C.................... 11,000 25,055
Renishaw P.L.C........................ 2,420 14,197
Senior Engineering Group P.L.C........ 12,000 22,391
Serco Group P.L.C..................... 2,400 26,830
St. Modwen Properties P.L.C........... 23,000 24,358
Staveley Industries P.L.C............. 6,000 19,163
T & S Stores P.L.C.................... 7,690 22,428
Triplex Lloyd P.L.C................... 7,317 25,645
Vardon P.L.C.......................... 9,000 12,028
Vinten Group P.L.C.................... 2,000 23,685
----------
TOTAL COMMON STOCKS
(Cost $768,424)....................... 836,578
----------
INVESTMENT IN CURRENCY -- (0.1%)
*British Pound Sterling (Cost $1,375).. 1,440
----------
TOTAL -- UNITED KINGDOM
(Cost $769,799)....................... $838,018
----------
FRANCE -- (10.2%)
COMMON STOCKS -- (9.0%)
Bis SA................................ 200 20,188
Bollore Technologies SA............... 200 21,490
Canal Plus SA......................... 50 11,492
DMC (Dollfus Mieg et Cie)............. 300 6,637
Degremont............................. 300 23,271
EBF SA................................ 714 26,871
France SA............................. 80 18,541
*GTM Entrepose......................... 500 25,043
Gaumont............................... 401 33,256
Groupe Andre SA....................... 304 22,301
Groupe du Louvre SA................... 700 19,038
Groupement pour le Financement de la
Construction SA...................... 300 25,984
Guyenne et Gascogne SA................ 60 21,835
Havas Advertising SA.................. 203 22,357
Legris Industries SA.................. 400 17,468
Lille-Bonnieres & Colombes............ 330 28,759
*Metaleurop SA......................... 1,500 13,216
*Moulinex SA........................... 1,200 29,190
*SAGA (Societe Anonyme de
Gerance et d'Armement).............. 300 4,654
SAT SA (SA des
Telecommunications)................. 57 17,468
SFIM (Societe de Fabrication
d'Instruments de Mesure)............ 102 20,494
*SGE (Societe Generale d'Enterprise SA) 1,000 22,352
Skis Rossignol SA..................... 648 17,376
Strafor Facom SA...................... 283 20,771
Union Immobiliere de France........... 300 24,013
*Union Industrielle de Credit SA,
Paris............................... 1,364 5,643
Vallourec (Usines a Tubes de
Lorraine Escaut et Vallourec
Reunies)............................ 400 21,766
----------
TOTAL COMMON STOCKS
(Cost $524,015)....................... 541,474
----------
INVESTMENT IN CURRENCY -- (1.2%)
*French Francs (Cost $72,872).......... 72,292
----------
RIGHTS/WARRANTS -- (0.0%)
*Union Industrielle de Credit SA,
Paris Rights 12/12/96
(Cost $2,992)......................... 1,364 105
----------
TOTAL -- FRANCE (Cost $599,879) 613,871
----------
GERMANY -- (7.6%)
COMMON STOCKS -- (7.6%)
Aachener und Muenchener
Versicherungs AG.................... 100 27,984
*Concordia Bau und Boden AG............ 496 5,811
*DLW AG................................ 100 6,508
DSL Holding AG........................ 150 16,694
*Didier-Werke AG....................... 200 15,321
Dyckerhoff & Widmann AG............... 100 12,691
Fag Kugelfischer Georg Schaeffer AG... 1,250 15,620
Felten & Guilleaume Energietechnik AG. 100 11,064
Gerresheimer Glas AG.................. 1,000 21,996
Goldschmidt AG........................ 50 20,989
</TABLE>

18
<PAGE>

VA INTERNATIONAL SMALL PORTFOLIO CONTINUED

<TABLE>
<CAPTION>
Shares Value+
------ ------
<S> <C> <C>
Harpener AG................................ 100 $ 16,922
Holsten-Brauerei AG, Hamburg............... 100 22,454
Iwka AG.................................... 100 22,096
*Kali und Salz Beteiligungs AG.............. 200 20,957
*Kaufhalle AG............................... 200 21,868
*Linotype-Hell AG........................... 100 8,331
Phoenix AG, Hamburg........................ 1,000 11,975
Plettac AG................................. 70 13,513
Rheinboden Hypothekenbank AG............... 100 16,271
Salamander AG, Kornwesteim................. 100 10,088
*Schmalbach-Lubeca AG....................... 140 30,843
*Strabag AG................................. 100 7,813
Tarkett AG................................. 1,200 25,851
Verseidag AG............................... 200 15,295
WCM Beteiligungs und Grundbesitz AG ...... 3,000 28,331
*Walter AG.................................. 100 27,205
--------
TOTAL COMMON STOCKS
(Cost $540,916)............................ 454,491
--------
INVESTMENT IN CURRENCY -- (0.0%)
*German Marks (Cost $9)..................... 9
--------
TOTAL -- GERMANY
(Cost $540,925)............................ 454,500
--------
MALAYSIA -- (6.0%)
COMMON STOCKS -- (5.3%)
Ban Hin Lee Bank Berhad.................... 6,000 28,735
Bandar Raya Developments Berhad............ 11,000 22,422
Batu Kawan Berhad.......................... 10,500 22,027
Berjaya Group Berhad....................... 29,000 21,350
Berjaya Leisure Berhad..................... 17,000 21,397
*Gadek Capital Berhad....................... 2,000 5,304
Guinness Anchor Berhad..................... 11,000 26,994
Hap Seng Consolidated Berhad............... 11,000 21,987
Ho Hup Construction Co. Berhad............. 5,000 13,754
Kelang Container Terminal Berhad........... 7,000 17,039
Kemayan Corp. Berhad....................... 11,000 14,803
Landmarks Berhad........................... 15,000 22,205
MCB Holdings Berhad........................ 25,000 19,098
Phileo Allied Berhad....................... 12,000 22,133
*Sri Hartamas Corp. Berhad.................. 30,000 20,661
Westmont Land (Asia) Berhad................ 12,600 18,752
--------
TOTAL COMMON STOCKS
(Cost $290,230)............................ 318,661
--------
INVESTMENT IN CURRENCY -- (0.7%)
*Malaysian Ringetts (Cost $43,651).......... 43,605
--------
TOTAL -- MALAYSIA
(Cost $333,881)............................ 362,266
--------
NETHERLANDS -- (4.9%)
COMMON STOCKS -- (4.9%)
ACF Holding NV (Certificate)............... 800 12,947
Ahrend NV.................................. 618 31,904
Capital Gemini NV.......................... 2,100 61,879
Grolsche NV................................ 800 30,858
Internatio-Mueller NV...................... 1,200 30,000
Koninklijke Frans Maas Groep NV............ 715 28,948
Otra NV.................................... 1,000 17,285
Schuttersveld Holding...................... 617 24,837
Twentsche Kabel Holding NV................. 606 30,757
Wegener NV................................. 305 27,510
--------
TOTAL COMMON STOCKS
(Cost $225,208)............................ $296,925
--------
INVESTMENT IN CURRENCY -- (0.0%)
*Netherlands Guilder (Cost $7).............. 7
--------
TOTAL -- NETHERLANDS
(Cost $225,215)............................ 296,932
--------
ITALY -- (3.5%)
COMMON STOCKS -- (3.5%)
*#Ansaldo Trasporti SpA...................... 7,000 8,169
Banca Toscana.............................. 11,000 20,291
#Cartiere Burgo SpA......................... 4,000 19,174
*Cogefar-Impresit Costruzioni Generali SpA.. 19,000 15,213
*Dalmine SpA................................ 82,000 18,433
Gewiss SpA................................. 2,000 25,388
Milano Assicurazioni SpA................... 5,000 14,050
*Premafin Finanziaria SpA................... 37,000 12,280
Previdente Cia Italiana
Assicurazione SpA......................... 3,000 14,876
Sorin Biomedica SpA........................ 7,500 27,521
#Tecnost SpA................................ 8,000 19,306
Vianini Lavori SpA......................... 10,000 17,190
--------
TOTAL COMMON STOCKS
(Cost $234,436)............................ 211,891
--------
INVESTMENT IN CURRENCY -- (0.0%)
*Italian Lira (Cost $11).................... 11
--------
TOTAL -- ITALY (Cost $234,447)............... 211,902
--------
SWITZERLAND -- (3.4%)
COMMON STOCKS -- (3.4%)
Attisholz Holding AG, Attisholz............ 24 9,504
EGL (Elektrizitaets-Gesellschaft
Laufenberg) AG, Laufenberg............... 100 21,949
Forbo Holding AG, Eglisau.................. 51 20,744
*Helvetia Patria Holding, St. Gallen........ 50 20,721
Kraftwerk Laufenburg, Laufenburg........... 100 21,566
Phoenix Mecano AG, Stein am Rhein.......... 50 25,326
Porst Holding AG, Jegenstorf............... 94 13,563
*Saurer AG, Arbon........................... 56 24,325
Schweizerische National
Versicherungs Gesellschaft, Basel......... 10 19,417
*Von Roll AG, Gerlafingen................... 759 13,223
Zuercher Ziegeleien Holding, Zuerich....... 27 14,919

--------
TOTAL COMMON STOCKS
(Cost $224,676)............................ 205,257
--------
INVESTMENT IN CURRENCY -- (0.0%)
*Swiss Francs (Cost $80).................... 76
--------
TOTAL -- SWITZERLAND
(Cost $224,756)............................ 205,333
--------
HONG KONG -- (3.2%)
COMMON STOCKS -- (3.2%)
Dynamic Holdings, Ltd...................... 92,000 20,232
Four Seas Mercantile Holdings, Ltd........ 60,000 29,686
Grande Holdings, Ltd....................... 28,000 11,138
</TABLE>

19
<PAGE>

VA INTERNATIONAL SMALL PORTFOLIO CONTINUED

<TABLE>
<CAPTION>
Shares Value+
------ ------
<S> <C> <C>
#Great Wall Electronic International, Ltd. ... 101,886 $ 14,498
Liu Chong Hing Bank, Ltd...................... 16,000 26,699
Semi-Tech (Global) Co., Ltd................... 14,039 24,426
Shell Electric Manufacturing
(Holdings) Co., Ltd.......................... 38,000 23,718
Tai Cheung Holdings, Ltd...................... 25,000 24,093
Varitronix International, Ltd................. 10,000 18,563

TOTAL COMMON STOCKS
(Cost $159,384)............................... 193,053
---------
INVESTMENT IN CURRENCY -- (0.0%)
*Hong Kong Dollars (Cost $201)................. 201
---------
RIGHTS/WARRANTS -- (0.0%)
*Four Seas Mercantile Holdings, Ltd.
Warrants 09/30/98
(Cost $0)..................................... 12,000 1,382
---------
TOTAL -- HONG KONG
(Cost $159,585)............................... 194,636
---------
SWEDEN -- (2.9%)
COMMON STOCKS -- (2.8%)
*Celsius Industrier AB Series B................ 1,400 18,455
*#Enator AB..................................... 1,400 34,201
Foereningsbanken AB Series A.................. 10,400 48,797
Garphyttan Industrier AB...................... 1,400 17,517
Marieberg Tidnings AB Series A................ 1,400 36,285
Rottneros Bruk AB............................. 11,700 14,116
---------
TOTAL COMMON STOCKS
(Cost $119,233)............................... 169,371
---------
INVESTMENT IN CURRENCY -- (0.1%)
*Swedish Krona (Cost $2,853)................... 2,871
---------
RIGHTS/WARRANTS -- (0.1%)
*Enator AB Rights 12/11/96
(Cost $0)................................... 1,400 3,024
---------
TOTAL -- SWEDEN (Cost $122,086)................. 175,266
---------
AUSTRALIA -- (2.9%)
COMMON STOCKS -- (2.9%)
*Aurora Gold, Ltd.............................. 15,600 31,014
Bank of Queensland, Ltd....................... 5,717 26,319
Caltex Australia, Ltd......................... 5,760 20,838
Capral Aluminium, Ltd......................... 7,483 22,560
Iama, Ltd..................................... 12,717 29,324
#Metal Manufactures, Ltd....................... 7,600 18,578
#Pacific Magazines and Printing, Ltd.......... 8,900 24,656
---------
TOTAL COMMON STOCKS
(Cost $132,003)............................... 173,289
---------
INVESTMENT IN CURRENCY -- (0.0%)
*Australian Dollar (Cost $1,722)............... 1,785
---------
TOTAL -- AUSTRALIA
(Cost $133,725)............................... 175,074
---------
SPAIN -- (2.7%)
COMMON STOCKS -- (2.7%)
Banco Zaragozano SA........................... 1,200 24,593
Cementos Portland SA.......................... 500 17,464
Ebro Agricolas Compania de Alimentacion SA.... 1,700 23,620
Europistas Concesionaria Espanola SA......... 2,300 20,594
Fabricacion de Automoviles Renault
de Espana SA................................ 800 $ 15,747
GESA (Gas y Electricidad SA).................. 400 22,540
*Huarte SA..................................... 2,000 2,794
Uralita SA.................................... 1,900 14,080
Viscofan Industria Navarra de
Envolturas Celulosicas SA................... 1,300 20,069
--------
TOTAL COMMON STOCKS
(Cost $174,943)............................... 161,501
--------
INVESTMENT IN CURRENCY -- (0.0%)
*Spanish Peseta (Cost $939).................... 918
--------
TOTAL -- SPAIN (Cost $175,882).................. 162,419
--------
KOREA -- (2.1%)
COMMON STOCKS -- (2.1%)
Daelim Industrial Co., Ltd.................... 1,030 11,993
Hankuk Paper Manufacturing Co., Ltd. ........ 500 11,342
Hanmi Pharmaceutical Co., Ltd................. 714 29,291
Kumho Electric Co., Ltd....................... 330 12,940
Pang Rim Spinning............................. 300 18,098
*Se Poong Corp................................. 1,200 17,519
*Ssangyong Investment Securities Co., Ltd. .. 1,020 12,430
Union Steel Manufacturing Co., Ltd........... 200 13,996
--------
TOTAL COMMON STOCKS
(Cost $160,384)............................... 127,609
--------
INVESTMENT IN CURRENCY -- (0.0%)
*Korean Won (Cost $1).......................... 1
--------
TOTAL -- KOREA (Cost $160,385).................. 127,610
--------
SINGAPORE -- (1.9%)
COMMON STOCKS -- (1.9%)
Amtek Engineering, Ltd........................ 15,000 29,401
Hitachi Zosen (Singapore), Ltd................ 22,000 13,015
Hotel Plaza, Ltd.............................. 25,000 16,215
Scotts Holdings, Ltd.......................... 25,000 22,274
Tuan Sing Holdings, Ltd....................... 44,000 16,465
Van Der Horst, Ltd............................ 4,000 17,819
--------
TOTAL COMMON STOCKS
(Cost $109,472)............................... 115,189
--------
INVESTMENT IN CURRENCY -- (0.0%)
*Singapore Dollars (Cost $1,180)............... 1,188
--------
TOTAL -- SINGAPORE
(Cost $110,652)............................... 116,377
--------
BELGIUM -- (1.1%)
COMMON STOCKS -- (1.0%)
Ackermans & Van Haaren SA..................... 120 21,112
CMB (Cie Maritime Belge)...................... 300 22,789
*Immobel (Cie Immobiliere de Belgique SA)...... 200 13,392
--------
TOTAL COMMON STOCKS
(Cost $59,083)................................ 57,293
--------
INVESTMENT IN CURRENCY -- (0.1%)
*Belgian Francs (Cost $3,125).................. 3,098
--------
TOTAL -- BELGIUM (Cost $62,208)................. 60,391
--------
</TABLE>

20
<PAGE>

VA INTERNATIONAL SMALL PORTFOLIO CONTINUED

<TABLE>
<CAPTION>
Face
Amount Value+
------ ------
(000)
<S> <C> <C>
TEMPORARY CASH INVESTMENTS -- (5.0%)
Repurchase Agreement, PNC Securities
Corp. 5.45%, 12/02/96
(Collateralized by U.S. Treasury
Notes 5.01%, 01/16/97)
(Cost $299,000)...................... $ 299 $ 299,000
----------
TOTAL INVESTMENTS -- (105.3%)
(Cost $6,264,814)........................ 6,325,163
----------
OTHER ASSETS AND LIABILITIES -- (-5.3%)
Other Assets............................... 76,083
Payable for Investment
Securities Purchased..................... (388,762)
Other Liabilities.......................... (5,301)
----------
(317,980)
----------
NET ASSETS -- (100.0%) Applicable
to 573,172 Outstanding
$.01 Par Value Shares
(100,000,000 Shares Authorized)........... $6,007,183
==========
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE.......................... $ 10.48
==========

___________
+See Note B to Financial Statements.
*Non-Income Producing Securities
#Securities on Loan
</TABLE>

See accompanying Notes to Financial Statements.

21
<PAGE>

STATEMENT OF NET ASSETS

VA SHORT-TERM FIXED PORTFOLIO

NOVEMBER 30, 1996

<TABLE>
<CAPTION>
Face
Amount Value+
------ ------
(000)
<S> <C> <C>
BONDS -- (42.8%)
Albertson's, Inc. Medium Term Notes
5.650%, 03/26/98............................. $170 $ 169,864
Bayerische Landesbank U.S. Finance,
Inc. Medium Term Notes
6.250%, 07/01/98............................. 150 151,305
Canada (Government of) Bonds
6.400%, 09/10/98............................. 160 161,880
Chevron Canada Financial, Ltd.
Corporate Bonds
5.600%, 04/01/98............................. 150 149,796
Colgate-Palmolive Co. Medium Term Notes
6.630%, 02/16/98............................. 160 161,570
DuPont (E.I.) de Nemours & Co.
Corporate Bonds
8.650%, 12/01/97............................. 150 154,309
FCC National Bank Medium Term Notes
6.000%, 04/02/98............................. 150 150,543
Ford Motor Credit Co. Corporate Bonds
6.250%, 02/26/98............................. 150 150,906
General Electric Capital Corp.
Medium Term Notes
7.950%, 02/02/98............................. 150 153,662
Interamerican Development Bank
Corporate Bonds
9.450%, 09/15/98............................. 150 159,285
KFW International Finance, Inc.
Medium Term Notes
8.250%, 03/18/98............................. 150 154,737
Morgan Guaranty Trust Corporate Bonds
6.000%, 10/01/98............................. 150 150,557
National Rural Utilities Cooperative
Finance Corp. Medium Term Notes
8.500%, 02/15/98............................. 150 154,827
Ontario Hydro Medium Term Notes
5.800%, 03/31/98............................. 150 150,120
Paccar Financial Corp. Medium Term Bonds
7.350%, 02/02/98............................. 180 183,323
Pepsico, Inc. Corporate Bonds
6.125%, 01/15/98............................. 150 150,707
Pitney Bowes Credit Medium Term Bonds
6.305%, 09/23/98............................. 170 171,382
Rockwell International Corp.
Corporate Bonds
7.625%, 02/17/98............................. 150 153,399
WMX Technologies, Inc. Medium Term Bonds
8.125%, 02/01/98............................. 150 153,930
Wachovia Bank Medium Term Notes
5.375%, 04/15/98............................. 150 149,249
Wal-Mart Stores, Inc. Corporate
Bonds
5.500%, 03/01/98............................. 200 199,599
----------

TOTAL BONDS (Cost $3,315,994)................. $3,334,950
----------
COMMERCIAL PAPER -- (37.7%)
Barclays U.S. C.P. 5.300%, 01/10/97.......... $180 178,862
Barton Capital Corp. C.P.
5.310%, 01/10/97............................. 200 198,735
Beta Finance, Inc. C.P.
5.480%, 12/06/96............................. 160 159,830
Caisse des Depots et Consignments C.P.
5.250%, 12/06/96............................. 170 169,819
Ciesco Corp. C.P.
5.400%, 12/05/96............................. 160 159,854
Commerzbank U.S. Finance C.P.
5.310%, 01/03/97............................. 200 198,946
Corporate Asset Funding Corp. C.P.
5.400%, 12/17/96............................. 170 169,535
Glaxo Wellcome P.L.C. C.P.
5.300%, 01/27/97............................. 210 208,124
McKenna Triangle C.P.
5.420%, 12/13/96............................. 160 159,660
Michelin Tire Corp. C.P.
5.300%, 12/20/96............................. 200 199,362
Sheffield Receivables Corp. C.P.
5.320%, 01/17/97............................. 200 198,527
Siemens Corp. C.P.
5.300%, 01/07/97............................. 180 178,943
St. Michael Finance, Ltd. C.P.
5.320%, 01/07/97............................. 180 178,943
Stanley Works C.P.
5.260%, 12/16/96............................. 170 169,558
Triple-A-One Plus Funding C.P.
5.350%, 01/10/97............................. 200 198,735
USAA Capital Corp. C.P.
5.320%, 01/16/97............................. 210 208,482
----------
TOTAL COMMERCIAL PAPER
(Cost $2,937,084)........................... 2,935,915
----------
U.S. TREASURY OBLIGATIONS -- (7.1%)
U.S. Treasury Notes
6.125%, 03/31/98............................. 150 151,148
5.875%, 10/31/98............................. 200 200,969
5.500%, 11/15/98............................. 200 199,594
----------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $549,542)............................. 551,711
----------
AGENCY OBLIGATIONS -- (5.8%)
Federal Home Loan Bank
5.715%, 03/20/98............................. 150 150,283
Student Loan Marketing Association
7.000%, 03/03/98............................. 150 152,583
6.250%, 06/30/98............................. 150 151,338
----------
TOTAL AGENCY OBLIGATIONS
(Cost $451,623)............................. 454,204
----------
</TABLE>

22
<PAGE>

VA SHORT-TERM FIXED PORTFOLIO CONTINUED

<TABLE>
<CAPTION>
Face
Amount Value+
------ ------
(000)
<S> <C> <C>
SUPRANATIONAL OBLIGATIONS -- (2.0%)
African Development Bank
(Cost $155,293)
10.000%, 11/01/97......................... $150 $ 155,784
----------
TEMPORARY CASH INVESTMENTS -- (3.7%)
Repurchase Agreement, PNC
Securities Corp. 5.45%, 12/02/96
(Collateralized by U.S.
Treasury Bills 4.93%, 01/16/97)
(Cost $286,000)..................... 286 286,000
----------
TOTAL INVESTMENTS -- (99.1%) (Cost $7,695,536) . 7,718,564
----------
OTHER ASSETS AND LIABILITIES -- (0.9%)
Other Assets............................... 78,812
Payable for Fund Shares Redeemed........... (3,752)
Other Liabilities.......................... (4,893)
----------
70,167
----------
NET ASSETS -- (100.0%) Applicable to
772,580 Outstanding $.01 Par Value Shares
(100,000,000 Shares Authorized)..... $7,788,731
==========
NET ASSET VALUE, OFFERING AND REDEMPTION
PRICE PER SHARE.......................... $ 10.08
==========
</TABLE>

____________
+See Note B to Financial Statements.

See accompanying Notes to Financial Statements

<PAGE>

SCHEDULE OF INVESTMENTS

VA GLOBAL BOND PORTFOLIO

NOVEMBER 30, 1996

<TABLE>
<CAPTION>
Face
Amount Value+
------ ------
(000)
<S> <C> <C>
JAPAN -- (24.3%)
BONDS -- (24.3%)
Asian Development Bank
5.000%, 02/05/03................................ 14,000 $142,645
Austria (Republic of)
6.250%, 10/16/03................................ 13,000 143,925
Credit Local de France SA
6.000%, 10/31/01................................ 9,000 94,848
European Investment Bank
4.625%, 02/26/03................................ 16,000 160,070
Export-Import Bank of Japan
4.375%, 10/01/03................................ 15,000 150,040
World Bank (International Bank for
Reconstruction and Development)
4.500%, 03/20/03................................ 16,000 161,589
--------
TOTAL -- JAPAN (Cost $890,643)................... 853,117
--------
FRANCE -- (18.3%)
BONDS -- (18.3%)
Abbey National Treasury Services
P.L.C
6.000%, 02/17/04................................ 500 98,228
Credit Local de France SA
7.000%, 05/12/03................................ 700 147,656
France (Republic of)
8.500%, 04/25/03................................ 600 135,330
6.750%, 10/25/03................................ 500 103,572
Regie Autonome des Transports
Parisiens SA
6.000%, 09/24/03................................ 800 158,744
--------
TOTAL BONDS (Cost $622,255)...................... 643,530
--------
INVESTMENT IN CURRENCY -- (0.0%)
*French Francs (Cost $24)....................... 24
--------
TOTAL -- FRANCE (Cost $622,279).................. 643,554
--------
CANADA -- (17.8%)
BONDS -- (17.8%)
Canada (Government of)
8.500%, 04/01/02................................ 400 340,586
Kansai International Airport Co., Ltd
8.000%, 07/02/03................................ 200 165,191
Victoria (Treasury Corp.)
7.250%, 11/24/03................................ 150 119,989
--------
TOTAL -- CANADA (Cost $580,523).................. 625,766
--------
GERMANY -- (17.5%)
BONDS -- (17.5%)
Germany (Republic of)
8.000%, 01/21/02................................ 550 409,753

World Bank (International Bank for
Reconstruction and Development)
6.125%, 09/27/02................................ 300 $204,621
--------
TOTAL BONDS (Cost $620,096)...................... 614,374
--------
INVESTMENT IN CURRENCY -- (0.0%)
*German Marks (Cost $3)......................... 3
--------
TOTAL -- GERMANY (Cost $620,099)................. 614,377
--------
NETHERLANDS -- (8.9%)
BONDS -- (8.9%)
Bank Nederlandse Gemeenten
7.625%, 12/16/02................................ 250 161,035
Netherlands (Kingdom of)
6.500%, 04/15/03................................ 250 154,220
--------
TOTAL BONDS (Cost $314,578)...................... 315,255
--------
INVESTMENT IN CURRENCY -- (0.0%)
*Netherlands Guilder (Cost $4).................. 3
--------
TOTAL -- NETHERLANDS
(Cost $314,582)................................ 315,258
--------
UNITED KINGDOM -- (7.9%)
BONDS -- (7.9%)
Nippon Telegraph & Telephone Corp
10.875%, 05/10/01............................... 75 141,708
Oesterreichische Kontrollbank AG
9.250%, 07/15/02................................ 75 135,972
--------
TOTAL BONDS (Cost $251,908)...................... 277,680
--------
INVESTMENT IN CURRENCY -- (0.0%)
*British Pound Sterling (Cost $3)............... 3
--------
TOTAL -- UNITED KINGDOM
(Cost $251,911)................................ 277,683
--------
UNITED STATES -- (5.3%)
U.S. TREASURY OBLIGATIONS -- (5.3%)
U.S. Treasury Notes (Cost $183,394)
6.875%, 03/31/00................................ 180 186,131
--------
AUSTRALIA -- (0.0%)
INVESTMENT IN CURRENCY -- (0.0%)
*Australian Dollar (Cost $9).................... 9
--------
TOTAL INVESTMENTS -- (100%)
(Cost $3,463,440).............................. $3,515,895
==========
</TABLE>

___________

+See Note B to Financial Statements.
*Non-Income Producing Securities
@denominated in Local Currency

See accompanying Notes to Financial Statements

24
<PAGE>

STATEMENT OF ASSETS AND LIABILITIES

VA GLOBAL BOND PORTFOLIO

NOVEMBER 30, 1996
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<S>
ASSETS: <C>
Investments at Value...................................... $ 3,516
Cash...................................................... 53
Interest Receivable....................................... 99
Unrealized Gain on Foreign Forward Currency Contracts..... 18
Prepaid Expenses and Other Assets......................... 22
--------
Total Assets............................... 3,708
--------
LIABILITIES:
Payable for Fund Shares Redeemed.......................... 5
--------
NET ASSETS................................................ $ 3,703
========
SHARES OUTSTANDING $.01 PAR VALUE
(100,000,000 Shares Authorized)........................ 332,470
========
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
$ 11.14
========
Investments at Cost....................................... $ 3,463
========
</TABLE>

See accompanying Notes to Financial Statements

25
<PAGE>

DFA INVESTMENT DIMENSIONS GROUP INC.

STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED NOVEMBER 30, 1996
(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
VA Small VA Large VA International
Value Value Value
Portfolio Portfolio Portfolio
--------- --------- -------------
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends (Net of Foreign Taxes withheld of $0, $0 and
$14, respectively).................................. $ 73 $ 208 $153
Interest............................................... 5 17 16
Income from Securities Lending......................... - - 2
------- -------- -----
Total Investment Income........................... 78 225 171
------- -------- -----
EXPENSES
Investment Advisory Services........................... 28 20 28
Accounting & Transfer Agent Fees....................... 19 33 21
Custodians' Fees....................................... 1 7 16
Legal Fees............................................. 2 4 2
Audit Fees............................................. 1 2 1
Filing Fees............................................ 2 2 2
Shareholders' Report................................... 3 7 3
Directors' Fees and Expenses........................... 1 2 1
Organization Costs..................................... 1 7 3
Other.................................................. 1 4 4
------- -------- -----
Total Expenses.................................... 59 88 81
------- -------- -----
NET INVESTMENT INCOME.................................. 19 137 90
------- -------- -----
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY
Net Realized Gain on Investment Securities 76 479 58
Net Realized Gain (Loss) on Foreign Currency Transactions -- (1) 2
Change in Unrealized Appreciation (Depreciation) of:
Investment Securities and Foreign Currency 1,079 1,191 694
Translation of Foreign Currency Denominated Amounts -- -- 3
------ -------- -----
NET GAIN ON INVESTMENT SECURITIES AND FOREIGN CURRENCY 1,155 1,669 757
------ -------- -----
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,174 $1,806 $847
====== ======== =====
</TABLE>

See accompanying Notes to Financial Statements

<PAGE>

DFA INVESTMENT DIMENSIONS GROUP INC.

STATEMENTS OF OPERATIONS

FOR THE YEAR ENDED NOVEMBER 30, 1996
(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
VA VA
International Short-Term VA Global
Small Fixed Bond
Portfolio Portfolio Portfolio
--------- --------- ---------
<S> <C> <C> <C>
INVESTMENT INCOME
Dividends (Net of Foreign Taxes withheld of $8, $0 and
$0, respectively)......................................... $ 91 -- --
Interest..................................................... 9 $310 $180
Income from Securities Lending............................... 3 -- --
---- ---- ----
Total Investment Income................................. 103 310 180
---- ---- ----
EXPENSES
Investment Advisory Services................................. 27 14 9
Accounting & Transfer Agent Fees............................. 19 13 30
Custodians' Fees............................................. 10 1 2
Legal Fees................................................... 2 2 2
Audit Fees................................................... 1 1 2
Filing Fees.................................................. 2 2 1
Shareholders' Report......................................... 3 2 4
Directors' Fees and Expenses................................. 1 1 2
Organization Costs........................................... 1 1 6
Other........................................................ 3 2 3
---- ---- ----
Total Expenses ......................................... 69 39 61
---- ---- ----
NET INVESTMENT INCOME........................................ 34 271 119
---- ---- ----
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND
FOREIGN CURRENCY
Net Realized Gain (Loss) on Investment Securities ........... 136 (1) 93
Net Realized Gain on Foreign Currency Transactions........... 1 -- 206
Change in Unrealized Appreciation (Depreciation) of:
Investment Securities and Foreign Currency 204 24 (86)
Translation of Foreign Currency Denominated Amounts 2 -- (22)
---- ---- ----
NET GAIN ON INVESTMENT SECURITIES AND FOREIGN CURRENCY. 343 23 191
---- ---- ----
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.............. $377 $294 $310
==== ==== ====
</TABLE>

See accompanying Notes to Financial Statements

27
<PAGE>

DFA INVESTMENT DIMENSIONS GROUP INC.

STATEMENTS OF CHANGES IN NET ASSETS
(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
VA SMALL VA LARGE
VALUE PORTFOLIO VALUE PORTFOLIO
---------------------------- ----------------------------
YEAR OCT. 3, YEAR JAN. 13,
ENDED TO ENDED TO
NOV. 30, NOV. 30, NOV. 30, NOV. 30,
1996 1995 1996 1995
------------ ----------- -------------- -----------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income ....................... $ 19 $ 7 $ 137 $ 102
Net Realized Gain on Investment Securities .. 76 -- 479 324
Net Realized Loss on Foreign Currency
Transactions ............................. -- -- (1) (12)
Change in Unrealized Appreciation
(Depreciation) of:
Investment Securities and Foreign Currency. 1,079 (159) 1,191 616
-------- ------- ------- --------
Net Increase (Decrease) in Net Assets
Resulting from Operations .............. 1,174 (152) 1,806 1,030
-------- ------- ------- --------
Distributions From:
Net Investment Income ....................... (9) (3) (86) (87)
Net Realized Gains .......................... -- -- (2) (322)
-------- ------- ------- --------
Total Distributions .................... (9) (3) (88) (409)
-------- ------- ------- --------
Capital Share Transactions (1):
Shares Issued ............................... 2,156 5,000 5,754 8,833
Shares Issued in Lieu of Cash Distributions.. 9 3 88 409
Shares Redeemed ............................. (120) -- (552) (3,301)
-------- ------- ------- --------
Net Increase From Capital Share
Transactions ........................... 2,045 5,003 5,290 5,941
-------- ------- ------- --------
Total Increase ......................... 3,210 4,848 7,008 6,562
NET ASSETS
Beginning of Period ......................... 4,848 -- 6,562 --
-------- ------- ------- --------
End of Period ................................. $8,058 $4,848 13,570 $ 6,562
======== ======= ======= ========
(1) SHARES ISSUED AND REDEEMED:
Shares Issued ............................. 195 500 465 808
Shares Issued in Lieu of Cash Distributions 1 -- 7 36
Shares Redeemed ........................... (11) -- (45) (263)
-------- ------- ------- --------
185 500 427 581
======== ======= ======= ========
</TABLE>

See accompanying Notes to Financial Statements

28
<PAGE>

DFA INVESTMENT DIMENSIONS GROUP INC.

STATEMENTS OF CHANGES IN NET ASSETS
(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
VA INTERNATIONAL VA INTERNATIONAL
VALUE PORTFOLIO SMALL PORTFOLIO
---------------------------- ----------------------------
YEAR OCT. 3, YEAR OCT. 3,
ENDED TO ENDED TO
NOV. 30, NOV. 30, NOV. 30, NOV. 30,
1996 1995 1996 1995
------------ ----------- -------------- -----------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income (Loss) ................. $ 90 $ (2) $ 34 $ (3)
Net Realized Gain on Investment Securities ... 58 -- 136 --
Net Realized Gain (Loss) on Foreign Currency
Transactions .............................. 2 (10) 1 2
Change in Unrealized Appreciation
(Depreciation) of:
Investment Securities and Foreign Currency.. 694 25 204 (144)
Translation of Foreign Currency
Denominated Amounts ..................... 3 1 2 1
-------- ------- ------- -------
Net Increase (Decrease) in Net Assets
Resulting from Operations ............... 847 14 377 (144)
-------- ------- ------- -------
Distributions From:
Net Realized Gains ........................... (8) -- -- --
-------- ------- ------- -------
Capital Share Transactions (1):
Shares Issued ................................ 5,279 5,000 802 5,000
Shares Issued in Lieu of Cash Distributions .. 8 -- -- --
Shares Redeemed .............................. (623) -- (28) --
-------- ------- ------- -------
Net Increase From Capital Share
Transactions ............................ 4,664 5,000 774 5,000
-------- ------- ------- -------
Total Increase .......................... 5,503 5,014 1,151 4,856
NET ASSETS
Beginning of Period .......................... 5,014 -- 4,856 --
-------- ------- ------- -------
End of Period .................................. $10,517 $5,014 $6,007 $4,856
======== ======= ======= =======
(1) SHARES ISSUED AND REDEEMED:
Shares Issued .............................. 477 500 75 500
Shares Issued in Lieu of Cash Distributions.. 1 -- -- --
Shares Redeemed ............................ (57) -- (3) --
-------- ------- ------- -------
421 500 72 500
======== ======= ======= =======
</TABLE>

See accompanying Notes to Financial Statements

29
<PAGE>

DFA INVESTMENT DIMENSIONS GROUP INC.

STATEMENTS OF CHANGES IN NET ASSETS
(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
VA SHORT-TERM VA GLOBAL
FIXED PORTFOLIO BOND PORTFOLIO
---------------------------- ----------------------------
YEAR OCT. 3, YEAR JAN. 13,
ENDED TO ENDED TO
NOV. 30, NOV. 30, NOV. 30, NOV. 30,
1996 1995 1996 1995
-------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net Investment Income ............................ $ 271 $ 42 $ 119 144
Net Realized Gain (Loss) on Investment Securities. (1) -- 93 34
Net Realized Gain on Foreign Currency
Transactions .................................. -- -- 206 35
Change in Unrealized Appreciation
(Depreciation) of:
Investment Securities and Foreign Currency .... 24 (1) (86) 139
Translation of Foreign Currency
Denominated Amounts ......................... -- -- (22) 41
------- ------- ------- -------
Net Increase in Net Assets
Resulting from Operations ................... 294 41 310 393
------- ------- ------- -------
Distributions From:
Net Investment Income ............................ (262) (20) (132) (175)
Net Realized Gains ............................... -- -- -- (34)
------- ------- ------- -------
Total Distributions ......................... (262) (20) (132) (209)
------- ------- ------- -------
Capital Share Transactions (1):
Shares Issued .................................... 3,072 5,000 -- 3,235
Shares Issued in Lieu of Cash Distributions ...... 262 20 132 209
Shares Redeemed .................................. (618) -- -- (235)
------- ------- ------- -------
Net Increase From Capital Share
Transactions ................................ 2,716 5,020 132 3,209
------- ------- ------- -------
Total Increase .............................. 2,748 5,041 310 3,393
NET ASSETS
Beginning of Period .............................. 5,041 -- 3,393 --
------- ------- ------- -------
End of Period ...................................... $7,789 $5,041 $3,703 $3,393
======= ======= ======= =======
(1) SHARES ISSUED AND REDEEMED:
Shares Issued .................................. 306 502 -- 320
Shares Issued in Lieu of Cash Distributions .... 26 -- 12 20
Shares Redeemed ................................ (61) -- -- (20)
------- ------- ------- -------
271 502 12 320
======= ======= ======= =======
</TABLE>

See accompanying Notes to Financial Statements

30
<PAGE>

DFA INVESTMENT DIMENSIONS GROUP INC.

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

<TABLE>
<CAPTION>
VA SMALL VA LARGE
VALUE PORTFOLIO VALUE PORTFOLIO
------------------------------- -----------------------------
YEAR OCT. 3, YEAR JAN. 13,
ENDED TO ENDED TO
NOV. 30, NOV. 30, NOV. 30, NOV. 30,
1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ......... $ 9.69 $10.00 $ 11.29 $10.00
------------ ------------ ------------ ------------
Income from Investment Operations ............
- ---------------------------------
Net Investment Income ..................... 0.03 0.01 0.17 0.19
Net Gains (Losses) on Securities (Realized
and Unrealized) ......................... 2.05 (0.31) 2.12 1.85
------------ ------------ ------------ ------------
Total from Investment Operations ....... 2.08 (0.30) 2.29 2.04
- ----------------------------------------------------------------------------------------------------------------
Less Distributions ...........................
- ------------------
Net Investment Income ..................... (0.02) (0.01) (0.12) (0.16)
Net Realized Gains ........................ -- -- -- (0.59)
------------ ------------ ------------ ------------
Total Distributions ....................... (0.02) (0.01) (0.12) (0.75)
- ----------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period ............... $ 11.75 $ 9.69 $ 13.46 $11.29
================================================================ ============ ==============================
Total Return ................................. 21.47% (3.04)%# 20.45% 20.41%#
- ----------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (thousands) ........ $ 8,058 $4,848 $13,570 $6,562
Ratio of Expenses to Average Net Assets ...... 1.05% 0.99%* 1.03% 1.20%*
Ratio of Net Investment Income to Average Net
Assets .................................... 0.34% 0.91%* 1.59% 2.03%*
Portfolio Turnover Rate ...................... 5.19% 0.00%* 18.54% 65.38%*
Average Commission Rate (1) .................. $0.0678 N/A $0.0484 N/A
- ----------------------------------------------------------------------------------------------------------------
</TABLE>

*Annualized

#Non-Annualized

(1) Computed by dividing the total amount of brokerage commissions paid by
the total shares of investment securities purchased and sold during the
period for which commissions were charged, as required by the SEC for
fiscal years beginning after September 1, 1995.

See accompanying Notes to Financial Statements

31
<PAGE>

DFA INVESTMENT DIMENSIONS GROUP INC.

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

<TABLE>
<CAPTION>
VA INTERNATIONAL VA INTERNATIONAL
VALUE PORTFOLIO SMALL PORTFOLIO
------------------------------- ----------------------------
YEAR OCT. 3, YEAR OCT. 3,
ENDED TO ENDED TO
NOV. 30, NOV. 30, NOV. 30, NOV. 30,
1996 1995 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ........ $ 10.03 $ 10.00 $ 9.71 $ 10.00
-------------- -------------- -------------- -----------
Income from Investment Operations ............
- ---------------------------------
Net Investment Income (Loss) .............. 0.11 -- 0.06 (0.01)
Net Gains (Losses) on Securities (Realized
and Unrealized) ........................ 1.29 0.03 0.71 (0.28)
-------------- -------------- -------------- -----------
Total from Investment Operations ....... 1.40 0.03 0.77 (0.29)
- ---------------------------------------------------------------------------------------------------------------
Less Distributions ...........................
- ------------------
Net Realized Gains ........................ (0.02) -- -- --
-------------- -------------- -------------- -----------
Net Asset Value, End of Period .............. $ 11.41 $ 10.03 $ 10.48 $ 9.71
===============================================================================================================
Total Return ................................ 13.92% 0.30%# 7.93% (2.90)%#
- ---------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (thousands) ....... $ 10,517 $5,014 $ 6,007 $ 4,856
Ratio of Expenses to Average Net Assets ..... 1.17% 1.32%* 1.27% 2.52%*
Ratio of Net Investment Income to Average Net
Assets .................................... 1.29% (0.20)%* 0.63% (0.39)%*
Portfolio Turnover Rate ..................... 4.14% 0.00%* 6.40% 0.00%*
Average Commission Rate (1) ................. $ 0.0080 N/A $ 0.0200 N/A
- ---------------------------------------------------------------------------------------------------------------
</TABLE>

*Annualized

#Non-Annualized

See accompanying Notes to Financial Statements

32
<PAGE>

DFA INVESTMENT DIMENSIONS GROUP INC.

FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)

<TABLE>
<CAPTION>
VA SHORT-TERM VA GLOBAL
FIXED PORTFOLIO BOND PORTFOLIO
------------------------------- -----------------------------
YEAR OCT. 3, YEAR JAN. 13,
ENDED TO ENDED TO
NOV. 30, NOV. 30, NOV. 30, NOV. 30,
1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ......... $ 10.04 $ 10.00 $ 10.61 $ 10.00
-------------- -------------- -------------- ------------
Income from Investment Operations ............
- ---------------------------------
Net Investment Income ..................... 0.48 0.08 0.37 0.48
Net Gains (Losses) on Securities (Realized
and Unrealized) ......................... 0.04 -- 0.57 0.81
-------------- -------------- -------------- ------------
Total from Investment Operations ........ 0.52 0.08 0.94 1.29
- ----------------------------------------------------------------------------------------------------------------
Less Distributions ...........................
- ------------------
Net Investment Income ..................... (0.48) (0.04) (0.41) (0.57)
Net Realized Gains ........................ -- -- -- (0.11)
-------------- -------------- -------------- ------------
Total Distributions ..................... (0.48) (0.04) (0.41) (0.68)
- ----------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period ............... $ 10.08 $ 10.04 $ 11.14 $ 10.61
================================================================================================================
Total Return ................................. 5.34% 0.81%# 9.16% 13.09%#
- ----------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (thousands) ........ $ 7,789 $ 5,041 $ 3,703 $ 3,393
Ratio of Expenses to Average Net Assets ...... 0.70% 0.63%* 1.73% 1.31%*
Ratio of Net Investment Income to Average Net
Assets .................................... 4.93% 5.11%* 3.43% 5.08%*
Portfolio Turnover Rate ...................... 29.27% 0.00%* 88.93% 60.09%*
- ----------------------------------------------------------------------------------------------------------------
</TABLE>

(Restated to reflect a 900% stock dividend as of January 2, 1996.)

*Annualized

#Non-Annualized

See accompanying Notes to Financial Statements

33
<PAGE>

DFA INVESTMENT DIMENSIONS GROUP INC.

NOTES TO FINANCIAL STATEMENTS

A. ORGANIZATION:

At November 30, 1996, DFA Investment Dimensions Group Inc. (the "Fund")
consisted of twenty nine portfolios: The U.S. 9-10 Small Company Portfolio, The
U.S. 6-10 Small Company Portfolio, The U.S. Large Company Portfolio, The
Enhanced U.S. Large Company Portfolio, The U.S. Small Cap Value Portfolio, The
U.S. Large Cap Value Portfolio, The DFA/AEW Real Estate Securities Portfolio,
The Japanese Small Company Portfolio, The Pacific Rim Small Company Portfolio,
The United Kingdom Small Company Portfolio, The Continental Small Company
Portfolio, The Emerging Markets Portfolio, The RWB/DFA International High Book
to Market Portfolio, The International Small Company Portfolio, The Large Cap
International Portfolio, The DFA International Small Cap Value Portfolio, The
DFA Intermediate Government Fixed Income Portfolio, The DFA One-Year Fixed
Income Portfolio, The DFA Two-Year Corporate Fixed Income Portfolio, The DFA
Two-Year Government Portfolio, The DFA Five-Year Government Portfolio, The DFA
Two-Year Global Fixed Income Portfolio, The DFA Global Fixed Income Portfolio
(the "Portfolios") VA Small Value Portfolio, VA Large Value Portfolio, VA
International Value Portfolio, VA International Small Portfolio, VA Short-Term
Fixed Portfolio and VA Global Bond Portfolio (the "VA Portfolios"). At November
30, 1996, The DFA Two Year Corporate Fixed Income Portfolio and The DFA Two-Year
Government Portfolio had not yet commenced operations. These financial
statements related solely to the VA Portfolios.

On December 20, 1995, the Board of Directors of DFA Investment Group Inc.
approved a 900% stock dividend under Maryland Corporate Law which is treated as
a 10 for 1 stock split for financial reporting purposes for VA Short-Term Fixed
Portfolio and VA Global Bond Portfolio. The record date of the stock dividend
was January 1, 1996, and the ex-date and payable dates were January 2, 1996.
This was a tax-free event to the shareholders of these portfolios. All share and
per share data as of and for the period ended November 30, 1995 have been
restated to reflect the stock dividend.

B. SIGNIFICANT ACCOUNTING POLICIES:

The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such policies
are consistently followed by the Fund in preparation of its financial
statements. The preparation of financial statements in accordance with generally
accepted accounting principles may require management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates.

1. Security Valuation: Securities held by VA Small Value Portfolio and
VA Large Value Portfolio (the "Domestic Equity Portfolios") which are listed
on a securities exchange and for which market quotations are readily
available are valued at the last quoted sale price of the day, or if there is
no such reported sale, at the mean between the most recent bid and asked
prices. Securities held by VA International Value Portfolio and VA
International Small Portfolio (the "International Equity Portfolios") which
are listed on a securities exchange are valued at the last quoted sale price.
Price information on listed securities is taken from the exchange where the
security is primarily traded.

Unlisted securities for which market quotations are readily available are
valued at the mean between the most recent bid and asked prices. Securities
for which quotations are not readily available are valued in good faith at
fair value using methods determined by the Board of Directors.

Securities held by VA Short-Term Fixed Portfolio and VA Global Bond
Portfolio are valued on the basis of prices provided by a pricing service
when such prices are believed to reflect the fair market value of such
securities. Securities for which quotations are not readily available are
valued in good faith at fair value using methods determined by the Board of
Directors.

2. Foreign Currency: Securities, other assets and liabilities of the
International Equity Portfolios and VA Global Bond Portfolio whose values are
initially expressed in foreign currencies are translated to U.S. dollars at
the bid price of such currency against U.S. dollars last quoted by a major
bank. Dividend and interest income and

34
<PAGE>

certain expenses are translated to U.S. dollars at the rate of exchange on
their respective accrual dates. Receivables and payables denominated in
foreign currencies are marked to market daily based on daily exchange rates
and exchange gains or losses are realized upon ultimate receipt or
disbursement. VA Global Bond Portfolio also enters into forward foreign
currency contracts solely for the purpose of hedging against fluctuations in
currency exchange rates. These contracts are also market to market daily
based on daily exchange rates.

The International Equity Portfolios do not generally isolate the effect of
fluctuations in foreign exchange rates from the effect of fluctuations in the
market prices of securities whether realized or unrealized. However, VA
Global Bond Portfolio does isolate the effect of fluctuations in foreign
currency rates when determining the gain or loss upon the sale or maturity of
foreign currency denominated debt obligations pursuant to U.S. Federal income
tax regulations; such amounts are categorized as foreign exchange gains or
loss for both financial reporting and income tax reporting purposes.

Realized gains or losses on foreign currency transactions represent net
foreign exchange gains or losses from the disposition of foreign currencies,
currency gains or losses realized between the trade and settlement dates on
securities transactions, and the difference between amount of interest,
dividends and foreign withholding taxes recorded on the books of the
International Equity Portfolios and VA Global Bond Portfolio and the U.S.
dollar equivalent amounts actually received or paid.

3. Federal Income Taxes: It is the VA Portfolios' intention to continue
to qualify as a regulated investment company and distribute all of their
taxable income. Accordingly, no provision for Federal taxes is required in
the financial statements.

4. Other: Security transactions are accounted for on the date the
securities are purchased or sold. Costs used in determining realized gains
and losses on the sale of investment securities are those of specific
securities sold. Dividend income and distributions to shareholders are
recorded on the ex-dividend date. Interest income is recorded on the accrual
basis. Discount and premium on debt securities purchased are amortized over
the lives of the respective securities. Expenses directly attributable to a
VA Portfolio are directly charged. Common expenses are allocated using
methods determined by the Board of Directors.

C. INVESTMENT ADVISOR:

Dimensional Fund Advisors Inc. ("the Advisor") provides investment
advisory services to the VA Portfolios. For the year ended November 30, 1996,
the VA Portfolios' advisory fees were computed daily and paid monthly to the
Advisor based on the following effective annual rates of:

<TABLE>
<S> <C>
VA Small Value Portfolio ..................... .50 of 1%
VA Large Value Portfolio ..................... .25 of 1%
VA International Value Portfolio ............. .40 of 1%
VA International Small Portfolio ............. .50 of 1%
VA Short-Term Fixed Portfolio ................ .25 of 1%
VA Global Bond Portfolio ..................... .25 of 1%
</TABLE>

Certain officers of the VA Portfolios are also officers, directors and
shareholders of the Advisor.

35
<PAGE>

D. PURCHASES AND SALES OF SECURITIES:

For the year ended November 30, 1996, the VA Portfolios made the following
purchases and sales of investment securities (amounts in thousands):

<TABLE>
<CAPTION>
OTHER
U.S. GOVERNMENT INVESTMENT
SECURITIES SECURITIES
---------------------- ----------------------
Purchases Sales Purchases Sales
<S> <C> <C> <C> <C>
VA Small Value Portfolio ........ -- -- $2,326 $ 290
VA Large Value Portfolio ........ -- -- 6,818 1,480
VA International Value Portfolio -- -- 4,904 279
VA International Small Portfolio -- -- 1,147 335
VA Short-Term Fixed Portfolio ... $1,455 $609 3,783 298
VA Global Bond Portfolio ........ 184 282 3,182 2,591
</TABLE>

E. INVESTMENT TRANSACTIONS:

At November 30, 1996, gross unrealized appreciation and depreciation for
financial reporting and federal income tax purposes of investment securities
and foreign currencies was as follows (amounts in thousands):

<TABLE>
<CAPTION>
GROSS UNREALIZED GROSS UNREALIZED
APPRECIATION DEPRECIATION NET
---------------- ---------------- -------
<S> <C> <C> <C>
VA Small Value Portfolio ....................... $1,417 $(497) $ 920
VA Large Value Portfolio ....................... 1,929 (122) 1,807
VA International Value Portfolio................. 1,085 (366) 719
VA International Small Portfolio................. 609 (549) 60
VA Short-Term Fixed Portfolio .................. 24 (1) 23
VA Global Bond Portfolio ....................... 53 -- 53
</TABLE>

At November 30, 1996, VA Short-Term Fixed Portfolio had a capital loss
carryover for federal income tax purposes of approximately $1,500 which
expires on November 30, 2004.

F. FINANCIAL INSTRUMENTS:

In accordance with the VA Portfolios' Investment Objectives and Policies,
the VA Portfolios may invest in certain financial instruments which have
off-balance sheet risk and concentrations of credit risk. These instruments
and their significant corresponding risks are described below:

1. Repurchase Agreements. The VA Portfolios may purchase money market
instruments subject to the seller's agreement to repurchase them at an agreed
upon date and price. The seller will be required on a daily basis to maintain
the value of the collateral subject to the agreement at not less than the
repurchase price (including accrued interest). The agreements are conditioned
upon the collateral being deposited under the Federal Reserve book-entry system
or with the Fund's custodian or a third party sub-custodian. All open repurchase
agreements were entered into on November 29, 1996.

36
<PAGE>

2. Forward Foreign Currency Contracts: VA Global Bond Portfolio may
enter into forward foreign currency contracts to hedge against adverse
changes in the relationship of the U.S. dollar to foreign currencies. At
November 30, 1996, VA Global Bond Portfolio had entered into the following
contracts and the related net unrealized foreign exchange gain is reflected
in the accompanying financial statements:

<TABLE>
<CAPTION>
UNREALIZED
VALUE AT FOREIGN
EXPIRATION CONTRACT NOVEMBER 30, EXCHANGE GAIN
DATE CURRENCY SOLD AMOUNT 1996 (LOSS)
---------- ------------- ------ -------------- ---------------
<S> <C> <C> <C> <C>
12/09/96 835,500 French Francs $ 162,929 $ 159,856 $ 3,073
12/09/96 2,614,944 French Francs 504,815 500,468 4,347
12/30/96 98,484,845 Japanese Yen 869,623 865,046 4,577
12/30/96 985,018 German Marks 645,279 640,936 4,343
12/31/96 557,075 Netherlands Guilder 325,015 323,015 2,000
12/31/96 858,728 Canadian Dollar 637,748 636,632 1,116
12/31/96 173,500 British Pound Sterling 290,526 291,605 (1,079)
------------ -------------- ---------------
$3,435,935 $3,417,558 $18,377
============ ============== ===============
</TABLE>

Risks may arise upon entering into these contracts from the potential
inability of counter parties to meet the terms of their contracts and from
unanticipated movements in the value of foreign currency relative to the U.S.
dollar. VA Global Bond Portfolio will enter into forward contracts only for
hedging purposes.

3. Foreign Market Risks: Investments in foreign markets may involve
certain considerations and risks not typically associated with investments in
the United States, including the possibility of future political and economic
developments and the level of foreign governmental supervision and regulation
of foreign securities markets. These markets are generally smaller, less
liquid and more volatile than the major securities markets in the United
States. Consequently, acquisition and disposition of securities by the Fund
may be inhibited.

G. LINE OF CREDIT

In July, 1996, the VA Portfolios, together with other DFA-advised
portfolios, entered into a $50 million unsecured line of credit with its
domestic custodian bank. Each portfolio is permitted to borrow between 25%
and 33 1/3 % of its net assets as determined by its investment policies, up
to a maximum of $50 million per portfolio. Borrowings under the line are
charged interest at the current overnight federal funds rate plus a variable
rate determined at the date of borrowing. Each portfolio is individually, and
not jointly liable for its particular advances under the line. There is no
commitment fee on the unused portion of the line of credit. There were no
borrowings under the line of credit during the year ended November 30, 1996.

H. COMPONENTS OF NET ASSETS:

<TABLE>
<CAPTION>
AT NOVEMBER 30, 1996 NET ASSETS CONSIST OF:
---------------------------------------------------
(AMOUNTS IN THOUSANDS)
VA SMALL VA LARGE VA INTERNATIONAL
VALUE VALUE VALUE
PORTFOLIO PORTFOLIO PORTFOLIO
-------------- ----------- -----------------
<S> <C> <C> <C>
Paid-In Capital ........................................... $7,048 $11,231 $ 9,652
Undistributed Net Investment Income ....................... 14 54 90
Undistributed Net Realized Gain ........................... 76 479 50
Accumulated Net Realized Foreign Exchange Gain (Loss) ..... -- (1) 2
Unrealized Appreciation of Investment Securities and
Foreign Currency ......................................... 920 1,807 719
Unrealized Net Foreign Exchange Gain ...................... -- -- 4
-------- -------- ----------
8,058 $13,570 $10,517
======== ======== ==========
</TABLE>

37
<PAGE>

<TABLE>
<CAPTION>
VA INTERNATIONAL VA SHORT-TERM VA GLOBAL
SMALL FIXED BOND
PORTFOLIO PORTFOLIO PORTFOLIO
---------------- --------------- -----------
<S> <C> <C> <C>
Paid-In Capital ........................................... $5,773 $7,736 $3,341
Undistributed Net Investment Income (Loss) ................ 34 31 (9)
Undistributed Net Realized Gain (Loss) .................... 136 (1) 93
Undistributed Net Realized Foreign Exchange Gain .......... 1 -- 206
Unrealized Appreciation of Investment Securities and
Foreign Currency ........................................ 60 23 53
Unrealized Net Foreign Exchange Gain ...................... 3 -- 19
---------------- --------------- -----------
$6,007 $7,789 $3,703
================ =============== ===========
</TABLE>

I. SECURITIES LENDING

Loans of international securities are required at all times to be secured
by collateral at least equal to 105% of the market value of the securities on
loan. However, in the event of default or bankruptcy by the other party to
the agreement, realization and/or retention of the collateral may be subject
to legal proceedings. In the event that the borrower fails to return loaned
securities, and cash collateral being maintained by the borrower is
insufficient to cover the value of loaned securities, and provided such
collateral insufficiency is not the result of investment losses, the lending
agent has agreed to pay the amount of the shortfall to the VA Portfolios or,
at the option of the lending agent, replace the loaned securities. The market
value of securities on loan to brokers and the related collateral cash
received at November 30, 1996 is as follows:

<TABLE>
<CAPTION>
VALUE OF VALUE OF
SECURITIES ON LOAN COLLATERAL
------------------ ------------------
<S> <C> <C>
VA International Value Portfolio.......................................... $887,197 $947,042
VA International Small Portfolio.......................................... 577,843 630,526
</TABLE>

38
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
DFA INVESTMENT DIMENSIONS GROUP INC.:

We have audited the accompanying statements of net assets of The DFA Investment
Dimensions Group Inc. (comprising, respectively, VA Small Value, VA Large Value,
VA International Value, VA International Small and VA Short-Term Fixed
Portfolios) and the statement of assets and liabilities including the schedule
of investments of the DFA Investment Dimensions Group Inc., VA Global Bond
Portfolio as of November 30, 1996, and the related statements of operations for
the year then ended, and the statements of changes in net assets and financial
highlights for each of the periods presented. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments owned as of
November 30, 1996, by correspondence with the custodians and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements and
financial highlights referred to above present fairly, in all material respects,
the financial position of each of the aforementioned portfolios constituting the
DFA Investment Dimensions Group Inc. as of November 30, 1996, and the results of
their operations for the year then ended and the changes in their net assets and
their financial highlights for each of the periods presented, in conformity with
generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.

2400 Eleven Penn Center
Philadelphia, Pennsylvania
January 17, 1997

39
<PAGE>

THE STRONG

DISCOVERY FUND II

ANNUAL REPORT . DECEMBER 31, 1996

[PIE CHART]
[PHOTO OF FAMILY]
[BAR GRAPH]

DESIGNED TO SEEK CAPITAL GROWTH BY
EMPHASIZING INVESTMENTS IN COMPANIES
WITH ATTRACTIVE GROWTH OPPORTUNITIES

[STRONG LOGO]
STRONG FUNDS
<PAGE>

THE STRONG

DISCOVERY FUND II

ANNUAL REPORT . DECEMBER 31, 1996

TABLE OF CONTENTS

<TABLE>
<S> <C>
INVESTMENT REVIEW
The Strong Discovery Fund II .........................................2

FINANCIAL INFORMATION
Schedule of Investments in Securities ................................4

Statement of Operations ..............................................7

Statement of Assets and Liabilities ..................................8

Statement of Changes in Net Assets ...................................8

Notes to Financial Statements ........................................9

FINANCIAL HIGHLIGHTS .....................................................11

REPORT OF INDEPENDENT ACCOUNTANTS ........................................12
</TABLE>
<PAGE>

THE STRONG DISCOVERY FUND II

THROUGH FREQUENT DISCUSSIONS WITH MANAGEMENT, SUPPLIERS, CUSTOMERS AND
COMPETITORS, WE BELIEVE WE CAN IDENTIFY VITAL ASPECTS OF COMPANIES THAT AREN'T
REFLECTED ON HISTORICAL FINANCIAL STATEMENTS.

The Strong Discovery Fund II seeks to provide investors with capital growth by
investing in a diversified portfolio of small-, mid-, and larger-cap stocks.

Our investment approach combines number-crunching research with on-site visits
to the companies in which we invest. Through frequent discussions with
management, suppliers, customers and competitors, we believe we can identify
vital aspects of companies that aren't reflected on historical financial
statements.

A DIFFICULT FIRST HALF OF 1996 FOR THE FUND...
The Fund's charter gives us the flexibility to allocate assets away from stocks
when we believe it is appropriate. Historically, when it appears the market has
gotten ahead of itself, we've taken defensive positions to help protect capital.
Early 1996 was one of those times.

ASSET ALLOCATION

Based on net assets as of 12-31-96
[PIE CHART]

Short-Term Investments 7.0%
Stocks 93.0%

The year began with investors having enjoyed one of the better markets on
record. However, signs of economic weakness led us to anticipate a downturn in
economic activity that would put corporate profits and the stock market at risk.
Therefore, we decided to reduce the portfolio's commitment to stocks and invest
the proceeds in U.S. Treasury bonds.

But as the first half of the year unfolded, a sharp rebound in economic growth
fueled higher stock prices. Our decision to conservatively position the Fund
prevented it from fully participating in the market's strong advances early in
the year. In addition, interest rates rose as the economy recovered, which
negatively impacted the Fund's bond holdings.

By March, we realized that our cautious stance was incorrect, and we began to
reallocate the bond investments back into stocks. While the decision to return
the portfolio to a normal position emphasizing stocks was sound, the timing was
poor. In June and July, the market corrected sharply, impacting small and mid-
cap growth stocks most significantly. This sequence of events caused the Fund to
under perform the stock market and its peer group during the first half of 1996.

...A RETURN TO FORM IN LATTER PART OF THE YEAR
During the last five months of the year, the major stock indexes moved higher as
corporate profits continued growing and inflation remained low, enabling the
stock market to anticipate lower interest rates. However, the market's advance
later in the year was concentrated mainly in the stocks of large companies:

<TABLE>
<CAPTION>
TOTAL RETURNS FOR 1996(1)*
- --------------------------------------------------
<S> <C>
S&P 500 (large companies) 22.96%

Russell 2000(R) (smaller companies) 16.49%

Lipper Capital Appreciation Funds Index
(our growth peer group) 14.95%
- --------------------------------------------------
</TABLE>

Despite bias toward larger firms, the portfolio performed well from August
through the end of the year, gaining 13.09% topping our Lipper peer group's
12.59% gain and enabling us to end the year in positive territory.(1)

FOCUSING ON WHAT WE DO BEST
To a large extent, the Fund's improved performance later in the year was due to
our focusing on what we do best. Our strength is identifying companies that are
just starting to blossom, and it's typically been our adeptness at identifying
good growers that has generated our greatest success over the years. To that
end, we re-evaluated the portfolio to emphasize these strengths.

. Brick-by-brick recovery program. We avoided the temptation to make big bets in
an effort to quickly catch up with the market. Rather, we chose to rely on our
time-tested stock picking abilities to gradually close the gap.

. Face-to-face evaluation. We spent 2-3 days a week visiting companies,
appraising management and generally "kicking the tires." Just since August, we
have met with the management of over 150 companies.

. Diversify, but stay focused on small- and medium-size growth companies. Small
companies are where we usually find the attributes we prize. To help ensure
that we invest in these companies in a disciplined way, we generally divide
the portfolio into three tiers: one third in companies with a market
capitalization less than $1 billion, one third committed to companies between
$1-3 billion, and the final third invested in larger firms. (By comparison,
the S&P 500's weighted average market-cap is over $20 billion.)

2
<PAGE>

. Welcomed Charles "Chip" Paquelet. In August, Chip Paquelet was named portfolio
co-manager of the Fund. Chip, whom I've worked with for more than eight years,
managed the Strong Small Cap Fund from its inception on December 29, 1995
through August of 1996. His proven ability to identify attractive growth
companies should be a great asset.

Having thoroughly reviewed the Fund's holdings, we believe it is well-positioned
to pursue its growth goal.

WE SEE MANY OPPORTUNITIES AHEAD
Currently, we like the environment for U.S. stocks. The economy appears strong
enough to support attractive growth in corporate profits, but not so strong as
to trigger inflation and higher interest rates. In addition, valuations should
benefit as baby boomers ratchet up their savings for retirement.

Large cap stock prices largely reflect this positive environment. But we believe
the stocks of small and mid-size companies still have room for strong gains. In
fact, we've not had a problem finding attractively priced stocks with exciting
growth prospects.

For instance, we estimate the average annual growth rate of the companies in the
portfolio at 24% - more than twice that of the companies in the S&P 500 Index.
By concentrating on companies with superior growth potential, our goal over time
is to return the Fund's performance to the strong relative and absolute level
that existed prior to 1996. Your continued confidence is appreciated as we work
to accomplish this.

Sincerely,

/s/Richard S. Strong
Richard S. Strong
Portfolio Manager

/s/Charles A. Paquelet
Charles A. Paquelet
Portfolio Manager
[PHOTO OF RICHARD S. STRONG AND CHARLES A. PAQUELET]

---------------------------------------------------
GROWTH OF AN ASSUMED $10,000 INVESTMENT
---------------------------------------------------

From 5-8-92 to 12-31-96
---------------------------
[GRAPH] AVERAGE ANNUAL
TOTAL RETURNS
---------------------------
As of 12-31-96

1-year 0.81%

3-year 8.86%

Since Inception 12.29%

<TABLE>
<CAPTION>
The Strong S & P 500 Appreciation
Discovery II Fund Stock Index Funds Index
----------------- ----------- -----------
<S> <C> <C> <C>
4-92 10,000 10,000 10,000
12-92 10,887 10,680 11,024
12-93 13,285 11,756 12,760
12-94 12,569 11,912 12,447
12-95 17,001 16,388 16,379
12-96 17,138 20,151 18,828
</TABLE>

This graph, provided in accordance with SEC regulations, compares a $10,000
investment in the Fund, made at its inception, with a similar investment in the
Standard & Poor's 500 Stock Index ("S&P 500") and the Lipper Capital
Appreciation Funds Index. Results include the reinvestment of all dividends and
capital gains distributions. Performance is historical and does not represent
future results. Investment returns and principal value vary, and you may have a
gain or loss when you sell shares. To equalize time periods, the indexes'
performance was prorated for the month of May 1992.
- --------------------------------------------------------------------------------

.The S&P 500 is an unmanaged index generally representative of the U.S. stock
market, without regard to company size. The Russell 2000(R) Index is an
unmanaged index generally representative of the U.S. market for small cap
stocks. The Lipper Capital Appreciation Funds Index is an equally-weighted
performance index of the largest qualifying funds in this Lipper category.
Source of the S&P 500 and Russell index data is Micropal. Source of the Lipper
index data is Lipper Analytical Services, Inc.

/1/Average annual total return and total return measure change in the value of
an investment, assuming reinvestment of all dividends and capital gains.
Average annual total return reflects annualized change, while total return
reflects aggregate change. The Fund's returns include the effect of deducting
the Fund's expenses, but do not include charges and expenses attributable to
any particular insurance product. Including such insurance fees and expenses
from the Fund's return quotations has the effect of decreasing the performance
quoted.

3
<PAGE>

SCHEDULE OF INVESTMENTS IN SECURITIES December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
SHARES OR VALUE
PRINCIPAL (NOTE 2)
AMOUNT (In Thousands)
- ---------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS 92.7%
AEROSPACE & DEFENSE 0.7%
Boeing Company 5,600 $ 596
Hexcel Corporation (b) 63,800 1,037
-------
1,633
AIRLINE 0.2%
Atlas Air, Inc. (b) 8,750 418

AUTOMOBILE 0.3%
General Motors Corporation 13,200 736

BANK - MONEY CENTER 2.3%
BankAmerica Corporation 12,600 1,257
Chase Manhattan Corporation 22,668 2,023
Citicorp 19,425 2,001
-------
5,281
BANK - REGIONAL 0.2%
First Bank System, Inc. 6,200 423

BROKERAGE & INVESTMENT MANAGEMENT 0.1%
The Quick & Reilly Group, Inc. 9,312 278

CHEMICAL - SPECIALTY 0.0%
Great Lakes Chemical Corporation 600 28

COMMERCIAL SERVICE 7.4%
Accustaff, Inc. (b) 255,800 5,404
Bacou U.S.A., Inc. (b) 77,250 1,284
Consolidated Graphics, Inc. (b) 81,100 4,542
Getty Communications PLC Sponsored ADR (b) 80,800 1,212
Interim Services, Inc. (b) 40,000 1,420
Manpower, Inc. 11,000 357
PIA Merchandising Services, Inc. (b) 122,100 1,282
Pittston Company Brinks Group 22,600 610
Sensormatic Electronics Corporation 7,925 133
Universal Outdoor Holdings, Inc. (b) 24,200 569
Vallen Corporation (b) 15,200 253
-------
17,066
COMPUTER - MAINFRAME 1.7%
International Business Machines Corporation 25,900 3,911

COMPUTER - PERIPHERAL EQUIPMENT 0.7%
Creative Technology, Ltd. (b) 95,900 1,127
Micros Systems, Inc. (b) 2,800 86
U.S. Robotics, Inc. (b) 6,600 475
-------
1,688
COMPUTER SERVICE 1.3%
National Techteam, Inc. (b) 44,100 882
Sykes Enterprises, Inc. (b) 53,500 2,006
-------
2,888
COMPUTER SOFTWARE 2.6%
Ascend Communications, Inc. (b) 900 56
BroadVision, Inc. (b) 31,300 247
Cisco Systems, Inc. (b) 13,800 878
Computer Associates International, Inc. 22,200 1,105
FileNet Corporation (b) 13,000 416
IA Corporation (b) 40,700 239
McAfee Associates, Inc. (b) 34,600 1,522
OneWave, Inc. (b) 28,900 226
Phoenix International, Inc. (b) 11,500 198
Select Software Tools, Ltd. Sponsored ADR (b) 12,900 235
Sterling Commerce, Inc. (b) 17,000 599
TriTeal Corporation (b) 15,900 338
-------
6,059
<CAPTION>
SHARES OR VALUE
PRINCIPAL (NOTE 2)
AMOUNT (In Thousands)
- ---------------------------------------------------------------------------
<S> <C> <C>
DIVERSIFIED OPERATIONS 0.1%
Minnesota Mining & Manufacturing Company 2,100 $ 174

ELECTRONIC PRODUCTS - MISCELLANEOUS 0.2%
Harmonic Lightwaves, Inc. (b) 10,800 166
Universal Electronics, Inc. (b) 47,725 263
-------
429
ELECTRONICS - SEMICONDUCTOR/COMPONENT 2.7%
Cypress Semiconductor, Inc. (b) 7,600 108
Intel Corporation 31,650 4,144
Motorola, Inc. 11,150 684
SDL, Inc. (b) 3,700 97
Texas Instruments, Inc. 8,800 561
Uniphase Corporation (b) 11,125 584
-------
6,178
FINANCE - MISCELLANEOUS 1.0%
American Express Company 31,400 1,774
Checkfree Corporation (b) 11,400 195
MoneyGram Payment Systems, Inc. (b) 21,950 291
-------
2,260
HEALTHCARE - DRUG/DIVERSIFIED 2.8%
Halsey Drug Company, Inc. (b) 354,400 2,171
Eli Lilly & Company 6,700 489
Pharmacia & Upjohn, Inc. 96,970 3,842
-------
6,502

HEALTHCARE - INSTRUMENTATION 0.2%
FemRx, Inc. (b) 112,550 506

HEALTHCARE - MEDICAL SUPPLY 9.5%
Bergen Brunswig Corporation Class A 35,850 1,022
Cohr, Inc. (b) 50,300 1,358
Dentsply International, Inc. 41,200 1,957
Foxmeyer Health Corporation (b) 635,400 1,033
Laboratory Corporation of America Holdings
Warrants, Expire 4/28/00 (b) 9,801 1
McKesson Corporation 149,950 8,397
NCS Healthcare, Inc. Class A (b) 42,900 1,249
Omnicare, Inc. 17,500 562
Steris Corporation (b) 8,900 387
Suburban Ostomy Supply Company, Inc. (b) 195,900 2,694
Sybron International Corporation (b) 97,575 3,220
-------
21,880
HEALTHCARE - PATIENT CARE 3.0%
American Healthcorp, Inc. (b) 7,400 86
Humana, Inc. (b) 39,400 753
Renal Treatment Centers, Inc. (b) 13,600 347
United Dental Care, Inc. (b) 186,500 5,665
-------
6,851
HEALTHCARE - PRODUCT 0.3%
Sabratek Corporation (b) 40,400 641

HOUSEHOLD APPLIANCES & FURNISHINGS 1.2%
Fedders Corporation Class A 197,400 987
Harman International Industries, Inc. 27,700 1,541
Newell Companies, Inc. 6,700 211
-------
2,739
HOUSING RELATED 1.0%
Diamond Home Services, Inc. (b) 66,900 1,840
Royal Plastics Group, Ltd. (b) 18,900 352
-------
2,192
INSURANCE - LIFE 0.2%
Conseco, Inc. 6,600 421

INSURANCE - MULTI-LINE 0.5%
MGIC Investment Corporation 13,550 1,030
</TABLE>

See notes to financial statements.

4
<PAGE>

- ---------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES OR VALUE
PRINCIPAL (NOTE 2)
AMOUNT (In Thousands)
- ---------------------------------------------------------------------------
<S> <C> <C>
LEISURE PRODUCT 1.3%
Custom Chrome, Inc. (b) 67,500 $ 1,359
Harley-Davidson, Inc. 14,475 680
Mattel, Inc. 14,750 409
SCP Pool Corporation (b) 27,950 580
--------
3,028

LEISURE SERVICE 3.3%
Candlewood Hotel Company, Inc. (b) 65,200 628
Circus Circus Enterprises, Inc. (b) 85,500 2,939
The Walt Disney Company 10,750 748
Hilton Hotels Corporation 11,100 290
La Quinta Inns, Inc. 44,500 851
Red Roof Inns, Inc. (b) 114,300 1,772
Sholodge, Inc. (b) 31,000 418
--------
7,646
MACHINE TOOL 0.5%
Applied Power, Inc. 28,700 1,137

MACHINERY - MISCELLANEOUS 1.0%
Greenwich Air Services, Inc. (b) 106,350 2,366

MEDIA - RADIO/TV 1.1%
American Radio Systems Corporation Class A (b) 13,500 368
Clear Channel Communications, Inc. (b) 13,000 469
Comcast Corporation Class A 11,800 210
Tele Communications, Inc. Class A (b) 25,700 336
Young Broadcasting, Inc. Class A (b) 36,650 1,072
--------
2,455
NATURAL GAS DISTRIBUTION 0.3%
Enron Corporation 4,500 194
WICOR, Inc. 13,425 482
--------
676
OFFICE AUTOMATION 4.0%
Danka Business Systems PLC Sponsored ADR 252,475 8,931
Xerox Corporation 2,850 150
--------
9,081
OIL - NORTH AMERICAN EXPLORATION
& PRODUCTION 11.0%
Barrett Resources Corporation (b) 6,400 273
Chesapeake Energy Corporation (b) 25,100 1,396
Flores & Rucks, Inc. (b) 224,225 11,940
Nuevo Energy Company (b) 9,050 471
Triton Energy, Ltd. (b) 34,525 1,674
Union Pacific Resources Group, Inc. 327,600 9,582
--------
25,336
OIL WELL EQUIPMENT & SERVICE 4.7%
Cooper Cameron Corporation (b) 32,700 2,501
Global Marine, Inc. (b) 39,400 813
Marine Drilling Companies, Inc. (b) 10,800 213
Nabors Industries, Inc. (b) 82,100 1,580
National-Oilwell, Inc. (b) 11,700 360
Noble Drilling Corporation (b) 156,300 3,106
Oceaneering International, Inc. (b) 40,800 648
Rowan Companies, Inc. (b) 24,600 557
Schlumberger, Ltd. 6,700 669
3DX Technologies, Inc. (b) 36,000 396
--------
10,843
PAPER & FOREST PRODUCTS 0.1%
Buckeye Cellulose Corporation (b) 4,700 125

PERSONAL & COMMERCIAL LENDING 2.1%
Associates First Capital Corporation 49,300 2,176
Household International, Inc. 22,300 2,057
Mercury Finance Company 45,000 551
--------
4,784
<CAPTION>
SHARES OR VALUE
PRINCIPAL (NOTE 2)
AMOUNT (In Thousands)
- ---------------------------------------------------------------------------
<S> <C> <C>
RAILROAD 0.8%
Burlington Northern Santa Fe Corporation 22,500 $ 1,944

REAL ESTATE 0.1%
Signature Resorts, Inc. (b) 5,100 180

RETAIL - DEPARTMENT STORE 0.8%
Federated Department Stores, Inc. (b) 55,375 1,890

RETAIL - DISCOUNT & VARIETY 1.5%
Consolidated Stores Corporation (b) 70,000 2,249
Stein Mart, Inc. (b) 57,300 1,160
--------
3,409
RETAIL - DRUG STORE 1.4%
Revco D.S., Inc. (b) 40,300 1,491
Rite Aid Corporation 42,800 1,701
--------
3,192
RETAIL - RESTAURANT 4.2%
Casa Ole Restaurants, Inc. (b) 52,900 489
Longhorn Steaks, Inc. (b) 58,250 1,100
McDonald's Corporation 37,700 1,706
Quality Dining, Inc. (b) 235,475 4,209
Rainforest Cafe, Inc. (b) 89,125 2,094
--------
9,598
RETAIL - SPECIALTY 9.6%
CUC International, Inc. (b) 254,150 6,036
Central Garden & Pet Company (b) 155,700 3,279
Corporate Express, Inc. (b) 75,800 2,231
Goody's Family Clothing, Inc. (b) 600 11
The Home Depot, Inc. 38,500 1,930
MSC Industrial Direct Company, Inc. Class A (b) 23,100 855
Movie Gallery, Inc. (b) 320,100 4,161
OfficeMax, Inc. (b) 179,900 1,912
Wilmar Industries, Inc. (b) 27,000 749
Zale Corporation (b) 45,500 870
--------
22,034
SAVINGS & LOAN 1.0%
TCF Financial Corporation 52,500 2,284

TELECOMMUNICATION EQUIPMENT 1.3%
Aware, Inc. (b) 12,800 130
Belden, Inc. 35,100 1,299
Cascade Communications Corporation (b) 11,000 606
Loral Space & Communications (b) 49,250 905
Scientific-Atlanta, Inc. 6,800 102
--------
3,042
TELECOMMUNICATION SERVICE 0.2%
U.S. West, Inc. Media Group (b) 23,400 433

TELEPHONE 0.5%
Cincinnati Bell, Inc. 17,000 1,048

TOBACCO 0.5%
Philip Morris Companies, Inc. 11,100 1,250

TRANSPORTATION SERVICE 1.2%
Coach USA, Inc. (b) 53,400 1,549
Hub Group, Inc. Class A (b) 43,000 1,150
--------
2,699
--------
TOTAL COMMON STOCKS (COST $200,686) 212,692

CONVERTIBLE PREFERRED STOCKS 0.3%
Nuevo Financing 5.75% (Cost $555) 11,100 595
</TABLE>

See notes to financial statements.

5
<PAGE>

SCHEDULE OF INVESTMENTS IN SECURITIES (continued) December 31, 1996
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
SHARES OR VALUE
PRINCIPAL (NOTE 2)
AMOUNT (In Thousands)
- ---------------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS (a) 7.1%
COMMERCIAL PAPER
DISCOUNTED 6.7%
RJR Nabisco, Inc., Due 1/02/97 $ 5,500 $ 5,500
Tupperware Corporation, Due 1/02/97 10,000 10,000
--------
15,500

INTEREST BEARING, DUE UPON DEMAND 0.4%
American Family Financial Services, Inc., 5.51% 588 588
Johnson Controls, Inc., 5.53% 126 126
Warner Lambert Company, 5.48% 226 226
--------
940
--------
TOTAL SHORT-TERM INVESTMENTS (COST $16,440) 16,440
--------
TOTAL INVESTMENTS IN SECURITIES
(COST $217,681) 100.1% 229,727
Other Assets and Liabilities, Net (0.1%) (315)
--------
NET ASSETS 100.0% $229,412
========
</TABLE>

<TABLE>
<CAPTION>
PERCENTAGE OF
COUNTRY DIVERSIFICATION NET ASSETS
- -----------------------------------------------------------------
<S> <C>
United States ..................................... 94.9%
United Kingdom. ................................... 4.5
Singapore ......................................... 0.5
Canada ............................................ 0.2
Other Assets and Liabilities, Net ................. (0.1)
-----
Total 100.0%
=====
</TABLE>

LEGEND
- ------
(a) Short-term investments include any security which has a maturity of less
than one year.
(b) Non-income producing security.

All principal amounts and costs are stated in thousands.
Percentages are stated as a percent of net assets.

See notes to financial statements.

6
<PAGE>

STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
For the Year Ended December 31, 1996

<TABLE>
<CAPTION>
(In Thousands)
<S> <C>
INCOME:
Dividends $ 966
Interest 1,167
------
Total Income 2,133

EXPENSES:
Investment Advisory Fees 2,296
Custodian Fees 123
Shareholder Servicing Costs 253
Other 107
------
Total Expenses 2,779
------
NET INVESTMENT LOSS (646)

REALIZED AND UNREALIZED GAIN (LOSS):
Net Realized Gain (Loss) on:
Investments 6,862
Futures Contracts, Options and Forward Foreign Currency Contracts (4,885)
Change in Unrealized Appreciation/Depreciation on:
Investments 869
Futures Contracts and Forward Foreign Currency Contracts (1,323)
Foreign Currencies (2)
------
NET GAIN 1,521
------

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 875
======
</TABLE>

See notes to financial statements.

7
<PAGE>

STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
December 31, 1996
(In Thousands, Except Per Share Amounts)
<S> <C>
ASSETS:
Investments in Securities, at Value (Cost of $217,681) $229,727
Receivable from Brokers for Securities Sold 992
Dividends and Interest Receivable 152
Other Assets 11
--------
Total Assets 230,882

LIABILITIES:
Payable to Brokers for Securities Purchased 1,182
Accrued Operating Expenses and Other Liabilities 288
--------
Total Liabilities 1,470
--------
NET ASSETS $229,412
========

Capital Shares Outstanding (Unlimited Number Authorized) 21,237

Net Asset Value Per Share $10.80
======
</TABLE>

STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
(In Thousands)
YEAR ENDED YEAR ENDED
DEC. 31, 1996 DEC. 31, 1995
------------- -------------
<S> <C> <C>
OPERATIONS:
Net Investment Loss ($ 646) ($ 587)
Net Realized Gain 1,977 33,875
Change in Unrealized Appreciation/Depreciation (456) 15,183
-------- --------
Increase in Net Assets Resulting from Operations 875 48,471

CAPITAL SHARE TRANSACTIONS 31,171 80,827

DISTRIBUTIONS:
In Excess of Net Investment Income (20,605) (3,178)
From Net Realized Gains (27,076) --
-------- --------
TOTAL INCREASE (DECREASE) IN NET ASSETS (15,635) 126,120

NET ASSETS:
Beginning of Period 245,047 118,927
-------- --------
End of Period $229,412 $245,047
======== ========
</TABLE>

See notes to financial statements.

8
<PAGE>

NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
December 31, 1996

1. ORGANIZATION
The Strong Discovery Fund II is a diversified series of the Strong Variable
Insurance Funds, Inc., an open-end management investment company registered
under the Investment Company Act of 1940.

2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements.

(A) Security Valuation -- Portfolio securities traded primarily on a
principal securities exchange are valued at the last reported sales
price or the mean between the latest bid and asked prices where no
last sales price is available. Securities traded over-the-counter are
valued at the mean of the latest bid and asked prices or the last
reported sales price. Debt securities not traded on a principal
securities exchange are valued through valuation obtained from a
commercial pricing service, otherwise sale or bid prices are used.
Securities for which market quotations are not readily available when
held by the Fund are valued at fair value as determined in good faith
under consistently applied procedures established by and under the
general supervision of the Board of Directors. Securities which are
purchased within 60 days of their stated maturity are valued at
amortized cost, which approximates current value.

The Fund may own certain investment securities which are restricted as
to resale. These securities are valued after giving due consideration
to pertinent factors, including recent private sales, market
conditions and the issuer's financial performance. The Fund generally
bears the costs, if any, associated with the disposition of restricted
securities.

(B) Federal Income and Excise Taxes and Distributions to Shareholders --It
is the Fund's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders
in a manner which results in no tax cost to the Fund. Therefore, no
Federal income or excise tax provision is required.

The character of distributions made during the year from net
investment income or net realized gains may differ from the
characterization for Federal income tax purposes due to differences in
the recognition of income and expense items for financial statement
and tax purposes. Where appropriate, reclassifications between net
asset accounts are made for such differences that are permanent in
nature.

(C) Realized Gains and Losses on Investment Transactions -- Gains or
losses realized on investment transactions are determined by comparing
the identified cost of the security lot sold with the net sales
proceeds.

(D) Futures -- Upon entering into a futures contract, the Fund pledges to
the broker cash or other investments equal to the minimum "initial
margin" requirements of the exchange. The Fund also receives from or
pays to the broker an amount of cash equal to the daily fluctuation in
the value of the contract. Such receipts or payments are known as
"variation margin," and are recorded as unrealized gains or losses.
When the futures contract is closed, a realized gain or loss is
recorded equal to the difference between the value of the contract at
the time it was opened and the value at the time it was closed.

(E) Options -- Premiums received by the Fund upon writing put or call
options are recorded as an asset with a corresponding liability which
is subsequently adjusted to the current market value of the option.
When an option expires, is exercised, or is closed, the Fund realizes
a gain or loss, and the liability is eliminated. The Fund continues to
bear the risk of adverse movements in the price of the underlying
asset during the period of the option, although any potential loss
during the period would be reduced by the amount of the option premium
received.

(F) Foreign Currency Translation -- Investment securities and other assets
and liabilities initially expressed in foreign currencies are
converted to U.S. dollars based upon current exchange rates. Purchases
and sales of foreign investment securities and income are converted to
U.S. dollars based upon currency exchange rates prevailing on the
respective dates of such transactions. The effect of changes in
foreign exchange rates on realized and unrealized security gains or
losses is reflected as a component of such gains or losses.

(G) Forward Foreign Currency Exchange Contracts -- Forward foreign
currency exchange contracts are valued at the forward rate and are
marked-to-market daily. The change in market value is recorded as an
unrealized gain or loss. When the contract is closed, the Fund records
an exchange gain or loss equal to the difference between the value of
the contract at the time it was opened and the value at the time it
was closed.

(H) Additional Investment Risk -- The use of futures contracts, options,
foreign denominated assets, forward foreign currency exchange
contracts and other similar instruments for purposes of hedging the
Fund's investment portfolio involves, to varying degrees, elements of
market risk in excess of the amount recognized in the statement of
assets and liabilities. The predominant risk with futures contracts is
an imperfect correlation between the value of the contracts and the
underlying securities. Foreign denominated assets and forward foreign
currency exchange contracts may involve greater risks than domestic
transactions, including currency, political and economic, regulatory
and market risks.

9
<PAGE>

NOTES TO FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
December 31, 1996

(I) Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, and the
reported amounts of increases and decreases in net assets from
operations during the reporting period. Actual results could differ
from those estimates.

(J) Other -- Investment security transactions are recorded as of the trade
date. Dividend income and distributions to shareholders are recorded
on the ex-dividend date. Interest income is recorded on the accrual
basis and includes amortization of premium and discounts.

3. NET ASSETS

Net assets as of December 31, 1996 were as follows (in thousands):

<TABLE>
<S> <C>
Capital Stock $233,956
Undistributed Net Realized Loss (16,588)
Net Unrealized Appreciation 12,044
--------
$229,412
========
</TABLE>

4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund for the years ended December 31, 1996
and 1995 were as follows (in thousands):

<TABLE>
<CAPTION>
1996 1995
------------------ -----------------
Shares Dollars Shares Dollars
------ ------- ------ -------
<S> <C> <C> <C> <C>
Shares Sold 8,623 $ 99,577 11,517 $141,163
Dividends Reinvested 4,416 47,655 240 3,176
Shares Redeemed (10,035) (116,061) (5,338) (63,512)
------ -------- ------ --------
3,004 $ 31,171 6,419 $ 80,827
====== ======== ====== ========
</TABLE>

5. RELATED PARTY TRANSACTIONS
Strong Capital Management, Inc. (the "Advisor"), with whom certain officers
and directors of the Fund are affiliated, provides investment advisory
services to the Fund. Investment advisory fees, which are established by
terms of the Advisory Agreement, are based on an annualized rate of 1.00%
of the average daily net assets of the Fund. Advisory fees are subject to
reimbursement by the Advisor if the Fund's operating expenses exceed
certain levels.

The amount payable to the Advisor at December 31, 1996 and unaffiliated
directors' fees for 1996 were (in thousands) $190 and $5, respectively.

6. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of long-term securities for the year
ended December 31, 1996 were as follows (in thousands):

<TABLE>
<S> <C>
Purchases:
U.S. Government and Agency $ 298,315
Other 1,776,779

Sales:
U.S. Government and Agency 322,466
Other 1,763,523
</TABLE>

7. INCOME TAX INFORMATION
At December 31, 1996, the investment cost, gross unrealized appreciation
and depreciation on investments and capital loss carryovers (expiring in
varying amounts through 2004) for Federal income tax purposes were as
follows (in thousands):

<TABLE>
<S> <C>
Aggregate Investment Cost $218,614
========
Aggregate Unrealized:
Appreciation $ 24,030
Depreciation (12,917)
--------
$ 11,113
========
Capital Loss Carryovers $ 15,590
========
</TABLE>

For corporate shareholders in the Fund, the percentage of dividend income
distributed for the year ended December 31, 1996 which is designated as
qualifying for the dividends-received deduction is 1.6%.

10
<PAGE>

FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
12-31-96 12-31-95 12-31-94 12-31-93 12-31-92(b)
-------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA(a)
- -----------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 13.44 $ 10.07 $ 11.54 $ 10.15 $ 10.00
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income (Loss) (0.05) (0.03) 0.10 0.05 0.04
Net Realized and Unrealized Gains (Losses)
on Investments 0.04 3.58 (0.71) 2.09 0.78
------- ------- -------- -------- --------
Total from Investment Operations (0.01) 3.55 (0.61) 2.14 0.82
LESS DISTRIBUTIONS:
From Net Investment Income -- -- (0.10) (0.05) (0.04)
In Excess of Net Investment Income (1.05) (0.18) (0.43) (0.70) --
From Net Realized Gains (1.58) -- (0.33) -- (0.63)(d)
-------- -------- -------- -------- --------
Total Distributions (2.63) (0.18) (0.86) (0.75) (0.67)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 10.80 $ 13.44 $ 10.07 $ 11.54 $ 10.15
======== ======== ======== ======== ========

TOTAL RETURN +0.8% +35.3% -5.4% +22.0% +8.9%

RATIOS AND SUPPLEMENTAL DATA
- ----------------------------
Net Assets, End of Period (In Thousands) $229,412 $245,047 $118,927 $ 71,938 $ 26,739
Ratio of Expenses to Average Net Assets 1.2% 1.3% 1.2% 1.3% 1.7%*
Ratio of Net Investment Income to Average Net Assets (0.3%) (0.3%) 1.1% 0.5% 0.5%*
Portfolio Turnover Rate 970.0% 542.1% 662.5% 976.5% 1,149.6%
Average Commission Rate Paid(c) $ 0.0292
</TABLE>

* Calculated on an annualized basis.
(a) Information presented relates to a share of capital stock of the fund
outstanding for the entire period.
(b) Inception date is May 8, 1992. Total return and portfolio turnover rate are
not annualized.
(c) Disclosure required, effective for reporting periods beginning after
September 1, 1995.
(d) Ordinary income distribution for tax purposes.

11
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------

To the Shareholders and Board of Directors of the
Strong Discovery Fund II

We have audited the accompanying statement of assets and liabilities of Strong
Discovery Fund II (one of the portfolios constituting the Strong Variable
Insurance Funds, Inc.), including the schedule of investments in securities, as
of December 31, 1996, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the periods
indicated. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996 by correspondence with the custodians and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Strong
Discovery Fund II as of December 31, 1996, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the periods
indicated, in conformity with generally accepted accounting principles.

COOPERS & LYBRAND L.L.P.

Milwaukee, Wisconsin
February 3, 1997

12
<PAGE>

- --------------------------------------------------------------------------------
Annual Report
- --------------------------------------------------------------------------------

December 31, 1996

________________________________________________________________________________
INTERNATIONAL STOCK PORTFOLIO
<PAGE>

DEAR INVESTOR

Despite a patch of volatility in December, most world stock markets
and your fund ended the year the way they began - on a positive
note. U.S. equities led the charge, which was followed to varying
degrees by international markets. European bourses generally kept
pace with the U.S. juggernaut. The markets of Asia and Latin
America turned in mixed performances but did produce winners,
notably Hong Kong and Brazil, while Japan's protracted slide ended
in another disappointing year.

PERFORMANCE REVIEW

As shown in the table, the returns from the T. Rowe Price
International Stock Portfolio over the 6- and 12-month periods
ended December 31, 1996, surpassed those of the unmanaged Morgan
Stanley Capital International Europe, Australia and Far East (EAFE)
Index. This was primarily due to stock selection and the fund's
underweighting in Japan, which plays a dominant role in the
benchmark. The fund also outperformed the average returns for
similar funds over both periods.

- -------------------------------------------------------------
Performance Comparison
- -------------------------------------------------------------

Periods Ended 12/31/96 6 Months 12 Months
- -------------------------------------------------------------
International
Stock Portfolio 5.19% 14.70%

MSCI EAFE* 1.46 6.05

Lipper International
Funds Average 3.39 11.78

*Net of withholding taxes.

Much of the fund's strength in the past six months came from
country allocation relative to the EAFE index and the Lipper
benchmark, and the rest resulted from stock selection within
individual markets. Exposure to the markets of the Netherlands,
France, and Brazil helped performance, but our relatively small
Japanese holdings hampered overall results. The concepts of return
on equity and shareholder value, common in the U.S., are beginning
to take hold in Europe, notably in Germany. While these ideas have
yet to make much headway in the Far East, Asian markets are
beginning to reward well-run companies, which helped fund
performance.

INVESTMENT REVIEW

EUROPE

European markets generally performed well, although there was some
divergence. In U.S. dollar terms, Germany and France rose 8.91% and
9.35%, respectively, for the six-month period; the Netherlands was
up 14.82%, while the U.K. - the best of the major markets - rose
24.13%.

There was dissimilarity in the performance of currencies. Goals for
the European Monetary Union (EMU) crystallized somewhat, and the
program will now include the weaker currencies of Italy and Spain
by the year 2002. Italian bonds and the lira firmed on the news,
with long-term yields moving below those in the U.K. to just under
8%. However, the German mark and the French franc weakened slightly
against the U.S. dollar. The new agreement has caused us to revise
our overall currency assumptions going forward. Previously, we
expected the U.S. dollar to resume its longer-term downtrend
against the mark and its hard currency bloc after a short period of
reversal. We now believe there will be relatively little movement
between the U.S. and European currencies over the longer term.

- -------------------------------------------------------------
Market Performance
- -------------------------------------------------------------

Six Months Local Local Currency U.S.
Ended 12/31/96 Currency vs. U.S. Dollars Dollars
- -------------------------------------------------------------
France 10.42% -0.97% 9.35%

Germany 10.26 -1.23 8.91

Hong Kong 18.01 0.07 18.10

Italy -0.60 0.82 0.21

Japan -11.52 -5.50 -16.38

Mexico 6.00 -3.73 2.04

Netherlands 16.35 -1.32 14.82

Singapore -4.63 0.91 -3.76

Sweden 23.42 -2.82 19.94

Switzerland 5.75 -6.78 -1.43

United Kingdom 12.70 10.14 24.13

Source: Fame Information Services, Inc., using MSCI Indices.

Great Britain continued to enjoy a mini-economic boom outside of
the EMU straitjacket. Consumer confidence was at an all-time high,
unemployment continued to fall, and retail sales showed signs of
improvement. In contrast to much of the rest of the world, the
Chancellor of the Exchequer found it necessary to raise interest
rates in an attempt to stay ahead of the inflationary curve.

-
1
<PAGE>

The major economic theme across Continental markets was the
advancing debate over shareholder value. Hardly a day passed
without someone comparing the more shareholder-friendly models seen
in the U.S. and the U.K. to the bureaucratic models of many
Continental countries. This is likely to become a lasting theme,
with companies focusing on free cash flow, return on equity, and
improved shareholder relations. We hope this trend spreads to other
parts of the investment world.

On balance, our European stock selections contributed positively to
fund performance over the year. Major holdings include Royal Dutch
Petroleum, Wolters Kluwer, and Elsevier in the Netherlands,
SmithKline Beecham and National Westminster Bank in the U.K., and
Eaux Cie Generale in France.

FAR EAST

Japan was again the major constraint on overall international
performance. During the past six months, Japanese stocks fell
11.52% in local currency terms, but the decline increased to 16.38%
for U.S. investors because of the weakness of the yen. Results were
even worse for smaller Japanese companies.

The key factors were disappointing earnings and a sluggish economy.
There were some pleasant earnings surprises from blue chips such as
Honda Motor, TDK, and Sony, but results were disappointing for most
companies. Japanese multinationals with internationally recognized
products performed well, while heavily regulated domestic firms did
poorly.

The backdrop to this earnings picture was a fragile economy that
showed signs of weakening further. While capital expenditure grew,
consumer restraint resulted in overall household spending falling
3% year-over-year in October and another 1% in November. Corporate
restructuring, the growing acceptance of early retirement packages,
and a lack of consumer confidence were just a few of the many
factors dampening demand, which is not likely to improve anytime
soon since the consumption tax will rise from 3% to 5% next April.
Widespread deregulation is required in Japan, which remains
dominated by a mountain of bureaucratic restrictions. The
government is likely to push for needed reforms during the next few
years. In the interim, the broader Japanese market could remain a
lackluster performer, so we are focusing on globally competitive
companies and a select number of domestic firms that appear well
positioned in this market.

Other Asian markets featuring companies with high returns on equity
and clean balance sheets performed best in what was a decidedly
mixed picture. On top of the list was Hong Kong, which rose 18%
over the last six months. An accelerating economy, subdued interest
rates, and a booming property market provided the catalyst. Long
lines to buy residential properties were again in evidence, a level
of enthusiasm not seen since 1993. It looks as though the economy
could continue to boom throughout 1997, even though Hong Kong
reverts to Chinese rule in July. China's economy is also improving
rapidly, with further easing of credit and improving financial
positions at state-owned enterprises.

- -------------------------------------------------------------
Chart 1 - Geographic Diversification
- -------------------------------------------------------------

Singapore was disappointing, falling 4.63% in local currency and
3.76% in dollar terms during the last six months. The economies of
both Singapore and Malaysia should improve through 1997 as the
global electronics cycle picks up again. The markets in Korea and
Thailand fell heavily. Korea is being squeezed by increased
competition from Japan because of the weak yen and Japan's broadly
similar industrial structure. Thailand suffered from falling
exports in its over-leveraged economy, which has led to concern
about the health of the banking system. Nevertheless, we believe
the prospects for the region should improve throughout the year.

LATIN AMERICA

Latin American markets turned in mixed results. Brazil returned
10.97% in dollar terms during the last six months. In contrast,
Mexico rose just 2% and the Chilean market was worse, down 15%.

As ever, it is impossible to view Latin America as a homogeneous
bloc. Inflation continued to edge down in Brazil to an annualized
rate of about 11% from more than 20% at the start of the year. Part
of this improvement was a result of higher interest rates, which
were put in place to slow the rapid expansion of credit-driven
sales and a deterioration in the trade balance exacerbated by
rising imports. However, despite the modest trade worries, there
was further progress in needed fiscal and Social Security reforms.
The longer-term potential of Brazil finally seems closer to being
realized. Our largest holding in this market is Telecomunicacoes
Brasileiras.

In Mexico, although the inflation picture also improved, all eyes
are fixed on the fragility of the banking system.

-
2
<PAGE>

- -------------------------------------------------------------
Sector Diversification
- -------------------------------------------------------------
<TABLE>
<CAPTION>
Percent of Percent of
Net Assets Net Assets
6/30/96 12/31/96
- -------------------------------------------------------------
<S> <C> <C>
Services 25.6% 26.0%

Finance 16.7 16.3

Consumer Goods 15.9 15.5

Capital Equipment 14.0 12.7

Energy 10.5 10.1

Materials 7.9 7.8

Multi-Industry 3.7 3.8

Miscellaneous 0.1 0.1

Reserves 5.6 7.7
- -------------------------------------------------------------
Total 100.0% 100.0%
</TABLE>

While its longer-term survival is not in doubt, its continuing
weakness will likely curtail the pace of real loan growth and,
therefore, longer-term economic growth. Nevertheless, we remain
confident that the longer-term story remains intact following
recapitalization, tighter regulation, and enhanced capital
requirements. Mexican stocks look cheap by international standards.

Chile's long-term picture is still superior to most other markets
in the region, given its high savings rate and a history of good
economic management. However, the shorter-term picture is clouded
by overheating. A sharp rise in imports in October, coupled with a
weak copper price and sluggish exports, led to a negative trade
balance. As a result, the upward bias on interest rates is likely
to persist for a while.

INVESTMENT POLICY AND OUTLOOK

International stock valuations remain cheaper than those in the
U.S. Europe and Japan are both at earlier stages of their economic
cycles, and growth in the developing world is still superior to
most established economies. We believe international investors
could be rewarded as foreign companies start to approach the
superior returns on equity of U.S. firms. Moreover, we see few
signs of inflation anywhere and, therefore, expect interest rates
to remain relatively low.

International stocks produced respectable returns overall in 1996,
and we remain optimistic about their prospects in 1997. Low
interest rates, accelerating earnings growth, reasonable
valuations, and a greater awareness of shareholder value could
produce favorable results. Your fund will attempt to capture
returns in a broadly diversified fashion, focusing on companies and
markets that offer superior growth prospects at reasonable
valuations. The emphasis in the portfolio will continue to be a
fairly low weighting in Japan and higher concentrations in the
faster-growing regions. Many world economies are expanding faster
than the U.S., and we expect international markets to provide solid
opportunities for investors.

Respectfully submitted,

/s/ MARTIN G. WADE

Martin G Wade
President

January 17, 1997

_
3
<PAGE>

PORTFOLIO HIGHLIGHTS

<TABLE>
<CAPTION>
- -------------------------------------------------------------
Twenty-Five Largest Holdings
- -------------------------------------------------------------
Percent of
Net Assets
12/31/96
- -------------------------------------------------------------
<S> <C>
Royal Dutch Petroleum, Netherlands 2.0%

Wolters Kluwer, Netherlands 2.0

Elsevier, Netherlands 1.9

SmithKline Beecham, United Kingdom 1.5

National Westminster Bank, United Kingdom 1.5

Eaux Cie Generale, France 1.2

Telecomunicacoes Brasileiras, Brazil 1.2

Reed International, United Kingdom 1.2

Astra, Sweden 1.1

Novartis, Switzerland 1.1

Shell Transport & Trading, United Kingdom 1.0

Abbey National, United Kingdom 1.0

Roche Holdings, Switzerland 1.0

Carrefour, France 0.9

Mitsubishi Heavy Industries, Japan 0.9

Canon, Japan 0.9

Denso, Japan 0.9

NEC, Japan 0.9

ABB, Switzerland 0.9

Pinault Printemps, France 0.9

Norsk Hydro, Norway 0.8

ING Groep, Netherlands 0.8

Kyocera, Japan 0.8

Kingfisher, United Kingdom 0.8

Nestle, Switzerland 0.7
- -------------------------------------------------------------
Total 27.9%
- -------------------------------------------------------------
</TABLE>

T. Rowe Price International Stock Portfolio
December 31, 1996

- -------------------------------------------------------------
Performance Comparison
- -------------------------------------------------------------

This chart shows the value of a hypothetical $10,000 investment in
the fund over the past 10 fiscal year periods or since inception
(for funds lacking 10-year records). The result is compared with a
broad-based average or index. The index return does not reflect
expenses, which have been deducted from the fund's return.

- -------------------------------------------------------------
Chart 2 - International Stock Portfolio
- -------------------------------------------------------------

- -------------------------------------------------------------
Average Annual Compound Total Return
- -------------------------------------------------------------

This table shows how the fund would have performed each year if its
actual (or cumulative) returns for the periods shown had been
earned at a constant rate.
<TABLE>
<CAPTION>

Since Inception
Periods Ended 12/31/96 1 Year Inception Date
- -------------------------------------------------------------
<S> <C> <C>
International Stock Portfolio 14.70% 9.94% 3/31/94
</TABLE>

Investment return and principal value represent past performance
and will vary. Shares may be worth more or less at redemption than
at original purchase.

Total returns do not include charges imposed by your insurance
company's separate account. If these were included, performance
would have been lower.

_
4
<PAGE>

FINANCIAL HIGHLIGHTS
T. Rowe Price International Stock Portfolio

<TABLE>
<CAPTION>
For a share outstanding
throughout each period
------------------------------
Year From 3/31/94
Ended to
12/31/96 12/31/95 12/31/94
<S> <C> <C> <C>
NET ASSET VALUE

Beginning of period $ 11.26 $ 10.18 $ 10.00

Investment activities
Net investment income 0.09 0.07 0.06
Net realized and
unrealized gain (loss) 1.55 1.06 0.12

Total from
investment activities 1.64 1.13 0.18

Distributions
Net investment income (0.17) (0.05) -

Net realized gain (0.09) - -

Total distributions (0.26) (0.05) -

NET ASSET VALUE

End of period $ 12.64 $ 11.26 $ 10.18
------------------------------

RATIOS/SUPPLEMENTAL DATA

Total return 14.70% 11.18% 1.80%

Ratio of expenses to
average net assets 1.05% 1.05% 1.05%!

Ratio of net investment
income to average
net assets 1.22% 1.47% 1.50%!

Portfolio turnover rate 9.7% 17.4% 4.6%!

Average commission rate paid $ 0.0014 $ - $ -

Net assets, end of period
(in thousands) $ 210,746 $ 51,661 $ 9,095
</TABLE>

+ Annualized.
The accompanying notes are an integral part of these financial
statements.

___
5
<PAGE>

STATEMENT OF NET ASSETS
T. Rowe Price International Stock Portfolio
December 31, 1996

<TABLE>
<CAPTION>
Shares/Par Value
- ------------------------------------------------------------
In thousands
<S> <C> <C>
ARGENTINA 0.6%

COMMON STOCKS 0.6%

Banco de Galicia Buenos Aires
(Class B)
ADR (USD) 6,040 $ 147

Banco Frances del Rio
ADR (USD) 5,458 150

Enron Global Power &
Pipeline (USD) 520 14

Naviera Perez (Class B) 53,386 375

Sociedad Comercial del Plata * 5,630 14

Sociedad Comercial del Plata
ADR (144a) (USD) * 690 18

Telecom Argentina Stet
(Class B) 3,260 14

Telecom Argentina Stet
(Class B) ADR (USD) 620 25

Telefonica de Argentina
(Class B) ADR (USD) 14,370 372

Transportadora de Gas del Sur
ADR (USD) 1,200 15

YPF Sociedad Anonima
(Class D)
ADR (USD) 6,789 171

Total Argentina (Cost $1,158) 1,315
---------

AUSTRALIA 1.6%

COMMON STOCKS 1.5%

Australia & New Zealand Bank
Group 28,000 176

Australia Gas & Light 64,251 366

Broken Hill Proprietary 27,352 390

Commonwealth Bank of
Australia,installment receipts 30,300 189

Howard Smith 14,316 118

Lend Lease 8,073 156

National Australia Bank 19,454 229

National Mutual Holdings* 64,000 96

News Corporation 68,399 361

Publishing and Broadcasting 30,000 146

Tabcorp Holdings 49,000 234

WMC 21,500 135

Westpac Bank 44,000 $ 250

Woodside Petroleum 43,000 314

3,160
---------

PREFERRED STOCKS 0.1%

Sydney Harbour Casino
Holdings * 117,000 180

180

Total Australia (Cost $2,905) 3,340
---------

AUSTRIA 0.1%

COMMON STOCKS 0.1%

Energie Versorgung Nieder 336 51

Flughafen Wien 870 44

Total Austria (Cost $97) 95
---------

BELGIUM 0.9%

COMMON STOCKS 0.9%

Dexia* 995 91

Generale de Banque 1,243 446

Generale de Banque, VVPR
Strip 113 0

Kredietbank 3,470 1,137

UCB 93 242

Total Belgium (Cost $1,661) 1,916
---------

BRAZIL 3.1%

COMMON STOCKS 0.4%

Brazil Fund (USD) 1,700 38

Companhia Siderurgica
Nacional 1,982,750 56

Eletrobras 851,220 305

Eletrobras ADR (USD) 3,390 60

Telecomunicacoes Brasileiras 4,904,150 352

Telecomunicacoes de
Sao Paulo* 58,539 13

White Martins 46,580,000 67

891
---------

PREFERRED STOCKS 2.7%

Banco Bradesco 47,298,985 343

Banco Itau 200,070 87

Brahma 560,158 306

Brasmotor 320,560 89

Cia Cimento Portland Itau 269,150 95
</TABLE>
___
6
<PAGE>

T. Rowe Price International Stock Portfolio
December 31, 1996

<TABLE>
<CAPTION>
Shares/Par Value
- ------------------------------------------------------------
In thousands
<S> <C> <C>
Cia Energetica de Sao Paulo
ADR, sponsored (USD) * 830 $ 10

Cia Energetica de Sao Paulo
ADS (USD) * 440 5

Cia Energetica Minas Gerais 7,050,428 240

Cia Energetica Minas Gerais
ADR, sponsored,non voting (USD) 7,656 259

Cia Tecidos Norte de Minas 209,450 67

Lojas Americanas 2,292,180 30

Pao de Acucar GDR (USD) 7,015 122

Petrol Brasileiros 1,276,245 203

Telecomunicacoes Brasileiras 4,796,499 369

Telecomunicacoes Brasileiras
ADR (USD) 24,346 1,863

Telecomunicacoes Brasileiras
ADR (144a) (USD) 17 1

Telecomunicacoes de Minas
Gerais 648,000 80

Telecomunicacoes de
Sao Paulo 2,076,950 450

Telecomunicacoes do Rio
de Janeiro* 610,000 77

Unibanco 8,968,560 293

Usiminas 267,977,460 273

Usiminas ADS (USD) 28,716 294
-----
5,556
-----
TOTAL BRAZIL (Cost $5,377) 6,447
-----
CANADA 0.3%

COMMON STOCKS 0.3%

Alcan Aluminum 12,140 410

Royal Bank of Canada 4,030 142

Total Canada (Cost $471) 552

CHILE 0.4%

COMMON STOCKS 0.4%

AFP Providia ADR (USD) 141 3

Chile Fund (USD) 2,440 51

Chilectra ADR (144a) (USD) 1,980 106

Chilgener ADS (USD) 2,580 54

Compania Cervecerias Unidas
ADS (USD) 2,070 33

Compania de Telecomunicaciones
de Chile ADR (USD) 1,248 $ 126

Empresa Nacional de
Electricidad ADS (USD) 7,842 122

Enersis ADS (USD) 4,826 134

Five Arrows Chile Investment
Trust (USD) 18,990 53

Genesis Chile Fund (USD) 2,120 78
-----
TOTAL CHILE (Cost $821) 760
-----
CHINA 0.4%

COMMON STOCKS 0.4%

Huaneng Power International
(Class N) ADR (USD) * 20,500 471

Shanghai Petrochemical
(Class H) (HKD) 921,000 280

Yizheng Chemical Fibre
(Class H) (HKD) 592,000 144
-----
TOTAL CHINA (Cost $800) 895
-----
CZECH REPUBLIC 0.0%

COMMON STOCKS 0.0%

SPT Telecom * 630 78
-----
TOTAL CZECH REPUBLIC (Cost $71) 78
-----
DENMARK 0.2%

COMMON STOCKS 0.2%

Den Danske Bank 3,330 268

Tele Danmark (Class B) 520 29

Unidanmark (Class A) 2,200 114
-----
TOTAL DENMARK (Cost $357) 411
-----

FINLAND 0.2%

COMMON STOCKS 0.2%

Nokia (Class A) 7,200 418
-----
TOTAL FINLAND (Cost $319) 418
-----

FRANCE 8.5%

COMMON STOCKS AND WARRANTS 8.5%

AXA 3,421 218
</TABLE>

7
<PAGE>

T. Rowe Price International Stock Portfolio
December 31, 1996

<TABLE>
<CAPTION>
Shares/Par Value
- ------------------------------------------------------------
In thousands
<S> <C> <C>
Accor 2,375 $ 301

Alcatel Alsthom 4,430 356

Assurances Generales
de France 5,475 177

Canal Plus 2,110 466

Carrefour 2,947 1,917

Castorama Dubois 638 110

Chargeurs International* 987 49

Cie de St. Gobain 5,650 799

Credit Local de France,
bearer 2,820 246

Credit Local de France,
registered 409 36

Eaux Cie Generale 20,920 2,592

Elf Aquitaine 6,940 632

GTM Entrepose 2,040 94

Guilbert 2,368 463

Havas 1,410 99

L'Oreal 844 318

LVMH 5,335 1,490

Lapeyre 5,100 293

Legrand 1,910 325

Pathe* 1,147 276

Pinault Printemps 4,540 1,801

Primagaz 2,992 352

Primagaz, warrants, 6/30/98 * 37 1

Rexel 1,120 340

Sanofi 6,231 620

Schneider 7,290 337

Societe Generale 940 102

Sodexho 2,100 1,170

Television Francaise 6,720 642

Total (Class B) 15,308 1,245
------
TOTAL FRANCE (Cost $15,298) 17,867
------
GERMANY 3.6%

COMMON STOCKS AND WARRANTS 3.4%

Allianz Holdings 407 740

Altana 122 95

Bayer 41,355 1,693

Bilfinger and Berger 5,910 217

Buderus 256 126

Deutsche Bank 3,808 179

Gehe 20,551 1,316

Hoechst 6,470 $ 303

Hornbach Baumarkt 690 22

Mannesmann 930 403

Praktiker 1,493 30

Rhoen Klinikum 3,430 367

SAP 1,060 144

Schering 1,767 148

Veba 21,490 1,243

Veba, warrants, 4/6/98 * 160 51

Volkswagen 356 148

Volkswagen International
Finance, warrants 10/27/98 * 80 12

7,237
PREFERRED STOCKS 0.2%

Fielmann 1,562 49

Hornbach 2,130 152

Krones 107 39

SAP 1,058 148

388
------
Total Germany (Cost $6,920) 7,625
------
HONG KONG 4.6%

COMMON STOCKS 4.6%

Cathay Pacific Airways 248,000 391

Dao Heng Bank Group 115,000 552

First Pacific 455,876 592

Guangdong Investment 402,000 387

Guangzhou Investment 819,000 392

Guoco Group 133,000 745
Hong Kong Land
Holdings (USD) 456,127 1,268

Hopewell Holdings 1,051,000 679

Hutchison Whampoa 164,000 1,288

New World Development 212,796 1,438

Swire Pacific (Class A) 88,000 839

Wharf Holdings 223,000 1,113
------
TOTAL HONG KONG (Cost $8,053) 9,684
------
INDIA 0.2%

COMMON STOCKS 0.2%

State Bank of India
GDR (USD) * 22,800 410
------
TOTAL INDIA (Cost $323) 410
------
</TABLE>

8
<PAGE>

T. Rowe Price International Stock Portfolio
December 31, 1996

<TABLE>
<CAPTION>
SHARE/PAR VALUE
- -----------------------------------------------------------
In thousands
<S> <C> <C>
INDONESIA 0.0%

COMMON STOCKS 0.0%

Telekom Indonesia (Class B) 44,000 $ 76

Total Indonesia (Cost $70) 76

ITALY 1.8%

COMMON STOCKS AND WARRANTS 1.8%

Banca Fideuram 88,920 195

ENI 102,244 526

Finanziaria Autogrill * 7,031 7

Gucci Group (USD) 1,390 88

IMI 30,710 262

Industrie Natuzzi ADR (USD) 10,060 234

Istituto Nazionale delle
Assicurazioni 33,500 44

Italgas 41,000 172

Mediolanum * 12,030 114

Rinascente 14,000 80

Rinascente, warrants, 11/30/99 * 450 0

Stet 157,900 718

Stet, savings shares 57,000 192

Telecom Italia 132,378 344

Telecom Italia Mobile 281,784 714

Telecom Italia Mobile,
savings shares 52,846 77

Unicem * 4,740 31

TOTAL ITALY (COST $3,120) 3,798

JAPAN 20.1%

COMMON STOCKS 20.1%

Advantest 3,200 150

Alps Electric 23,000 250

Amada 55,000 427

Canon 84,000 1,857

Citizen Watch 29,000 208

DDI 89 589

Daifuku 8,000 101

Daiichi Pharmaceutical 56,000 899

DaiNippon Screen
Manufacturing 51,000 377

Daiwa House 71,000 914

Denso 76,000 1,831

East Japan Railway 187 841

Fanuc 14,600 468

Hitachi 96,000 $ 895

Hitachi Zosen 92,000 358

Honda Motor 5,000 143

Inax 21,000 156

Ishihara Sangyo Kaisha * 23,000 56

Ito-Yokado 22,000 957

Kao 24,000 280

Kawada Industries 6,000 37

Kokuyo 27,000 667

Komatsu 72,000 591

Komori 24,000 510

Kumagai Gumi 40,000 99

Kuraray 64,000 591

Kyocera 27,000 1,683

Makita 37,000 518

Marui 48,000 866

Matsushita Electric
Industrial 76,000 1,240

Mitsubishi 34,000 352

Mitsubishi Heavy
Industries 237,000 1,883

Mitsubishi Paper Mills 25,000 98

Mitsui Fudosan 121,000 1,212

Mitsui Petrochemical
Industries 20,000 104

Murata Manufacturing 27,000 898

NEC 150,000 1,813

National House Industrial 12,000 160

Nippon Hodo 11,000 127

Nippon Steel 334,000 986

Nippon Telephone
& Telecom 73 553

Nomura Securities 74,000 1,112

Pioneer Electronic 33,000 630

Sangetsu 4,000 84

Sankyo 54,000 1,529

Sega Enterprises 9,100 306

Sekisui Chemical 82,000 828

Sekisui House 53,000 540

Seven Eleven Japan 8,000 468

Sharp 70,000 997

Shin-Etsu Chemical 47,150 859

Shiseido 15,000 174

Sony 18,700 1,226

Sumitomo 109,000 859
</TABLE>

___
9
<PAGE>

T. Rowe Price International Stock Portfolio
December 31, 1996

<TABLE>
<CAPTION>
SHARES/PAR VALUE
- -----------------------------------------------------------
In thousands
<S> <C> <C>
Sumitomo Electric 110,000 $ 1,539

Sumitomo Forestry 33,000 402

TDK 19,000 1,239

Teijin 139,000 607
Tokio Marine & Fire

Insurance 24,000 226

Tokyo Electronics 11,000 337

Tokyo Steel Manufacturing 29,500 420

Toppan Printing 47,000 588

Uny 29,000 531

Yurtec 10,500 142

TOTAL JAPAN (COST $45,611) 42,388

MALAYSIA 3.0%

COMMON STOCKS AND RIGHTS 3.0%

Affin Holdings 290,000 798

Berjaya Sports Toto 135,000 674

Commerce Asset Holdings 60,000 451

MBF Capital 211,000 343

Multi-Purpose Holdings 360,000 699

Multi-Purpose Holdings,
rights * 360,000 1

Renong 405,000 718

Resorts World 67,000 305

Tanjong 145,000 580

Technology Resources
Industries * 121,000 239

Time Engineering 94,000 174

United Engineers 152,000 1,372

6,354

PREFERRED STOCKS 0.0%

Renong, cv. loan stock,
4.00%, 5/21/01 * 27,400 11

TOTAL MALAYSIA (COST $5,504) 6,365

MEXICO 1.6%

COMMON STOCKS 1.6%

Cemex (Class B) 82,767 323

Cemex ADS (USD) 47,530 339

Cemex ADS (144a) (USD) * 11,494 82

Cifra ADR (USD) * 272,674 320

Fomentos Economico
Mexicano (Class B) 19,149 66

Gruma (Class B) * 43,316 $ 264

Gruma ADR (USD) * 4,375 107

Grupo Financiero Banamex
(Class B) * 61,455 130

Grupo Financiero Banamex
(Class L) * 1,486 3

Grupo Financiero Bancomer
(Class L) * 607 0

Grupo Financiero Bancomer
GDS (USD) * 820 6

Grupo Industrial Maseca
(Class B) 153,010 194

Grupo Modelo (Class C) 33,014 192

Grupo Televisa GDR (USD) * 3,145 81

Kimberly-Clark Mexico
(Class A) 8,582 169

Panamerican Beverages
(Class A)
ADR (USD) 7,990 374

Telefonos de Mexico (Class L)
ADS (USD) 22,246 734

TOTAL MEXICO (COST $3,258) 3,384

NETHERLANDS 9.9%

COMMON STOCKS 9.9%

ABN Amro Holdings 16,026 1,043

Ahold 14,306 895

Akzo Nobel 356 49

CSM 14,811 824

Elsevier 233,388 3,947

Fortis Amev 20,220 709

Hagemeyer 3,300 264

ING Groep 47,745 1,720

Koninklijke PTT
Nederland 5,394 206

Nutricia 2,820 429

Otra 2,750 47

Polygram 23,471 1,196

Royal Dutch Petroleum 23,910 4,195

Unilever 7,200 1,274

Wolters Kluwer 30,930 4,111

TOTAL NETHERLANDS (COST $17,660) 20,909
</TABLE>

____
10
<PAGE>

T. Rowe Price International Stock Portfolio
December 31, 1996

<TABLE>
<CAPTION>
Shares/Par Value
- -------------------------------------------------------------------
In thousands
<S> <C> <C>
NEW ZEALAND 0.5%

COMMON STOCKS 0.5%

Air New Zealand (Class B) 16,545 $ 45

Carter Holt Harvey 39,500 89

Fernz 22,000 75

Fletcher Challenge Building 38,750 119

Fletcher Challenge Energy 5,750 17

Fletcher Challenge Forests
Division 134,886 226

Fletcher Challenge Paper 11,500 24

Telecom Corporation of
New Zealand 95,000 485

Total New Zealand (Cost $957) 1,080
-------

NORWAY 1.5%

COMMON STOCKS 1.5%

Bergesen (Class A) 2,310 56

Norsk Hydro 32,337 1,736

Orkla (Class A) 18,980 1,317

Saga Petroleum (Class B) 5,930 92

Total Norway (Cost $2,533) 3,201
-------

PANAMA 0.1%

COMMON STOCKS 0.1%

Banco Latinoamericano de
Exportaciones
(Class E) (USD) 1,998 101

Total Panama (Cost $98) 101
-------

PERU 0.0%

COMMON STOCKS 0.0%

Telefonica del Peru (Class B) 7,030 13

Telefonica del Peru (Class B)
ADR (USD) 2,430 46

Total Peru (Cost $62) 59
-------

PHILIPPINES 0.1%

COMMON STOCKS 0.1%

Philippine National Bank 19,700 234

TOTAL PHILIPPINES (COST $306) 234
-------

PORTUGAL 0.4%

COMMON STOCKS AND RIGHTS 0.4%

Jeronimo Martins 8,420 $ 434

Jeronimo Martins,
baby shares * 5,612 270

Jeronimo Martins,
bonus rights * 8,420 142

Jeronimo Martins,
rights to units * 1,403 79

TOTAL PORTUGAL (COST $661) 925
-------

RUSSIA 0.0%

COMMON STOCKS 0.0%

Gazprom ADR (USD) * 2,760 49

Total Russia (Cost $43) 49
-------

SINGAPORE 2.2%

COMMON STOCKS AND WARRANTS 2.2%

City Developments 17,000 153

DBS Land 74,000 272

Development Bank of
Singapore 24,000 324

Far East Levingston
Shipbuilding 24,000 125

Fraser & Neave 32,200 331

Keppel 12,000 94

Overseas Union Bank 110,000 849

Singapore Airlines 5,000 46

Singapore Land 93,000 515

Singapore Press 38,600 761

United Industrial 97,000 82

United Overseas Bank 83,480 931

United Overseas Bank,
warrants, 6/17/97 * 10,400 37

TOTAL SINGAPORE (COST $4,341) 4,520
-------

SOUTH KOREA 0.5%

COMMON STOCKS 0.5%

Cho Hung Bank 19,400 161

Hanil Bank 11,800 82

Hanil Securities* 7,000 51

Korea Electric Power 12,400 361

Samsung Electronic 3,770 225
</TABLE>

____
11
<PAGE>

T. Rowe Price International Stock Portfolio
December 31, 1996

<TABLE>
<CAPTION>
SHARES/PAR VALUE
- ----------------------------------------------------------------
In thousands
<S> <C> <C>
Samsung Electronic, new 301 $ 16

Samsung Electronic
GDR (USD) * 360 4

Samsung Electronic
GDS (USD) * 315 8

Samsung Fire & Marine
Insurance 75 30

Seoul Bank * 5,000 25

Shinhan Bank 4,630 73

Yukong 5,608 107

TOTAL SOUTH KOREA (COST $1,637) 1,143

SPAIN 2.4%

COMMON STOCKS 2.4%

Aguas de Barcelona 1,667 69

Aguas de Barcelona, new* 23 1

Argentaria Banca de Espana 4,665 209

Banco Popular Espanol 3,010 591

Banco Santander 10,148 650

Centros Comerciales Pryca 6,417 136

Continente Central 2,470 51

Empresa Nacional de
Electricidad 15,027 1,070

Fomento de Construcciones
y Contra 333 31

Gas Natural 3,131 728

Iberdrola 41,640 590

Repsol 20,971 804

Repsol ADR (USD) 90 3

Telefonica de Espana 8,730 203

TOTAL SPAIN (COST $4,142) 5,136

SWEDEN 2.6%

COMMON STOCKS 2.6%

ABB (Class A) 3,310 374

Astra (Class B) 47,590 2,296

Atlas Copco (Class B) 20,000 487

Electrolux (Class B) 12,180 707

Esselte (Class B) 2,500 55

Hennes & Mauritz (Class B) 5,460 756

Sandvik (Class A) 6,010 162

Sandvik (Class B) 19,090 518

Scribona (Class B) 2,670 30

Stora Kopparbergs (Class B) 10,560 144

TOTAL SWEDEN (COST $4,414) 5,529

SWITZERLAND 4.2%

COMMON STOCKS 4.2%

ABB 1,152 $ 1,433

Adecco 3,177 797

CS Holding 3,270 336

Nestle 1,437 1,543

Novartis * 1,937 2,218

Roche Holdings 266 2,070

Schweizerischer Bankverein 2,780 529

TOTAL SWITZERLAND (COST $8,376) 8,926

THAILAND 0.4%

COMMON STOCKS 0.4%

Advanced Information Service 9,600 81

Bangkok Bank 33,900 328

Siam Cement 2,000 63

Siam Commercial Bank 17,600 128

Thai Farmers Bank 17,500 109

Total Access
Communications (USD) 5,500 38

TOTAL THAILAND (COST $1,217) 747

UNITED KINGDOM 16.2%

COMMON STOCKS 16.2%

Abbey National 159,000 2,084

Argos 84,466 1,112

Asda Group 339,000 714

British Gas 79,000 305

British Petroleum 62,000 744

Cable & Wireless 142,000 1,181

Cadbury Schweppes 93,860 792

Caradon 184,000 753

Coats Viyella 51,000 116

Compass Group 53,000 563

David S. Smith 93,000 497

East Midlands Electricity* 12,100 137

Electrocomponents 59,000 469

GKN 8,000 137

Glaxo Wellcome 94,000 1,527

Grand Metropolitan 168,000 1,324

Guinness 136,000 1,070

Heywood Williams Group 11,000 45

Hillsdown Holdings 37,000 127

John Laing (Class A) 30,000 144
</TABLE>

____
12
<PAGE>

T. Rowe Price Stock Portfolio
December 31, 1996

<TABLE>
<CAPTION>
SHARES/PAR VALUE
- -----------------------------------------------------------------
<S> <C> <C>
In thousands

Kingfisher 148,000 $ 1,608

Ladbroke Group 90,000 356

London Electricity 48,571 566

National Westminster Bank 271,000 3,185

RTZ 63,000 1,012

Rank Group 100,000 750

Reed International 135,000 2,556

Rolls Royce 30,480 135

Safeway 124,500 864

Sears 39,000 64

Shell Transport & Trading 124,500 2,152

SmithKline Beecham 235,000 3,259

T & N 123,000 366

Tesco 113,000 687

Tomkins 291,500 1,348

United Newspapers 121,000 1,445

TOTAL UNITED KINGDOM (COST $28,631) 34,194
--------

VENEZUELA 0.1%

COMMON STOCKS 0.1%

Compania Anonima Nacional
Telefonos de
Venezuela
ADR (USD) * 3,970 112

TOTAL VENEZUELA (COST $91) 112
--------

SHORT-TERM INVESTMENTS 5.8%

COMMERCIAL PAPER 5.8%

Countrywide Funding,
6.20%, 1/17/97 $1,000,000 997

Dover, 4(2) 5.45%, 1/23/97 1,000,000 997

Ford Motor Credit,
6.10%, 1/17/97 3,000,000 2,992

Indosuez North America,
5.37%, 3/6/97 $2,000,000 $ 1,981

Kingdom of Sweden,
5.40%, 2/3/97 1,000,000 995

Korea Development Bank,
5.34%, 2/27/97 2,000,000 1,983

Tasmanian Public Finance,
5.40%, 6/20/97 2,000,000 1,949

Investments in Commercial
Paper through a
joint account,
6.75-7.10%, 1/2/97 215,989 216

TOTAL SHORT-TERM INVESTMENTS
(COST $12,110) 12,110
--------

Total Investments in Securities

98.1% of Net Assets (Cost $189,473) $206,799

Other Assets Less Liabilities 3,947

NET ASSETS $210,746
---------
NET ASSETS CONSIST OF:

Accumulated net realized gain/loss -
net of distributions $ 107
Net unrealized gain (loss) 17,326
Paid-in-capital applicable to 16,676,941
shares of $0.0001 par value capital stock
outstanding; 1,000,000,000 shares
authorized 193,313

NET ASSETS $210,746
---------

NET ASSET VALUE PER SHARE $ 12.64
---------
</TABLE>

* Non-income producing
4(2) Commercial paper sold within terms of a private placement memorandum,
exempt from registration under section 4.2 of the Securities Act of 1933,
as amended, and may be sold only to dealers in that program or other
"accredited investors."
144a Security was purchased pursuant to Rule 144a under the Securities Act of
1933 and may not be resold subject to that rule except to qualified
institutional buyers -- total of such securities at year-end amounts to
0.1% of net assets.
HKD Hong Kong dollar
USD U.S. dollar

The accompanying notes are an integral part of these financial statements.

____
13
<PAGE>

STATEMENT OF OPERATIONS
T. Rowe Price International Stock Portfolio
In thousands

<TABLE>
<CAPTION>
Year
Ended
12/31/96
<S> <C>
INVESTMENT INCOME
Income
Dividend (net of foreign taxes of $ 343) $ 2,355
Interest 627
-----------
Total income 2,982
-----------
Expenses
Investment management and administrative 1,378
-----------
Net investment income 1,604
-----------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on
Securities 1,225
Foreign currency transactions (136)
-----------
Net realized gain (loss) 1,089
-----------
Change in net unrealized gain or loss on
Securities 15,121
Other assets and liabilities
denominated in foreign currencies 1
-----------
Change in net unrealized gain or loss 15,122
-----------
Net realized and unrealized gain (loss) 16,211
-----------
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 17,815
===========
</TABLE>

The accompanying notes are an integral part of these financial
statements.

____
14
<PAGE>

STATEMENT OF CHANGES IN NET ASSETS
T. Rowe Price International Stock Portfolio
In thousands

<TABLE>
<CAPTION>
Year
Ended
12/31/96 12/31/95
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income $ 1,604 $ 353
Net realized gain (loss) 1,089 138
Change in net unrealized gain or loss 15,122 2,413
----------------------------
Increase (decrease) in net assets
from operations 17,815 2,904
----------------------------
Distributions to shareholders
Net investment income (1,993) (52)
Net realized gain (1,133) -
----------------------------
Decrease in net assets from distributions (3,126) (52)
----------------------------
Capital share transactions*
Shares sold 153,908 41,948
Distributions reinvested 3,126 52
Shares redeemed (12,638) (2,286)
----------------------------
Increase (decrease) in net assets from
capital share transactions 144,396 39,714
----------------------------
NET ASSETS
Increase (decrease) during period 159,085 42,566
Beginning of period 51,661 9,095
----------------------------
END OF PERIOD $210,746 $ 51,661
============================
*Share information
Shares sold 12,891 3,906
Distributions reinvested 255 5
Shares redeemed (1,059) (214)
----------------------------
Increase (decrease) in shares outstanding 12,087 3,697
</TABLE>

The accompanying notes are an integral part of these financial statements.

____
15
<PAGE>

NOTES TO FINANCIAL STATEMENTS
T. Rowe Price International Stock Portfolio
December 31, 1996

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

T. Rowe Price International Series, Inc. (the corporation) is registered
under the Investment Company Act of 1940. The International Stock Portfolio
(the fund), a diversified, open-end management investment company, is the
sole portfolio established by the corporation and commenced operations on
March 31, 1994. The shares of the fund are currently being offered only to
separate accounts of certain insurance companies as an investment medium
for both variable annuity contracts and variable life insurance policies.

VALUATION Equity securities listed or regularly traded on a securities
exchange (including Nasdaq) are valued at the last quoted sales price at
the time the valuations are made. A security which is listed or traded on
more than one exchange is valued at the quotation on the exchange
determined to be the primary market for such security. Other equity
securities and those listed securities that are not traded on a particular
day are valued at a price within the limits of the latest bid and asked
prices deemed by the Board of Directors, or by persons delegated by the
Board, best to reflect fair value.

Short-term debt securities are valued at amortized cost which approximates
fair value.

NOTE 2 - INVESTMENT TRANSACTIONS

Consistent with its investment objective, the fund engages in the following
practices to manage exposure to certain risks or enhance performance. The
investment objective, policies, program, and risk factors of the fund are
described more fully in the fund's prospectus and Statement of Additional
Information.

EMERGING MARKETS At December 31, 1996, the fund held investments in
securities of companies located in emerging markets. Future economic or
political developments could adversely affect the liquidity or value, or
both, of such securities.

SECURITIES LENDING To earn additional income, the fund lends its
securities to approved brokers. At December 31, 1996, the market value of
securities on loan was $5,216,000, which was fully collateralized with
cash. Although the risk is mitigated by the collateral, the fund could
experience a delay in recovering its securities and a possible loss of
income or value if the borrower fails to return them.

OTHER Purchases and sales of portfolio securities, other than short-term
securities, aggregated $144,941,000 and $11,807,000, respectively, for the
year ended December 31, 1996.

NOTE 3 - FEDERAL INCOME TAXES

No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company and distribute all of
its taxable income.

____
16
<PAGE>

T.Rowe Price International Stock Portfolio

_________________________________________________

Undistributed net investment income $ 37,000
Undistributed net realized gain 31,000
Paid-in-capital (68,000)

At December 31, 1996, the aggregate cost of investments for federal income
tax and financial reporting purposes was $189,473,000, and net unrealized gain
aggregated $17,326,000, of which $24,439,000 related to appreciated investments
and $7,113,000 to depreciated investments.

NOTE 4 - RELATED PARTY TRANSACTIONS

The fund is managed by Rowe Price-Fleming International, Inc. (the
manager), which is owned by T. Rowe Price Associates, Inc., Robert Fleming
Holdings Limited, and Jardine Fleming Holdings Limited under a joint venture
agreement.

The investment management agreement between the fund and the manager
provides for an all-inclusive annual fee, computed daily and paid monthly, equal
to 1.05% of the fund's average daily net assets. Pursuant to the agreement,
investment management, shareholder servicing, transfer agency, accounting, and
custody services are provided to the fund, and interest, taxes, brokerage
commissions, and extraordinary expenses are paid directly by the fund.

During the year ended December 31, 1996, the fund, in the ordinary course
of business, paid commissions of $14,000 to, and placed security purchase and
sale orders aggregating $5,108,000 with, certain affiliates of the manager in
connection with the execution of various portfolio transactions.

____
17
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

TO THE BOARD OF DIRECTORS OF T. ROWE PRICE INTERNATIONAL SERIES, INC. AND
SHAREHOLDERS OF THE INTERNATIONAL STOCK PORTFOLIO

In our opinion, the accompanying statement of net assets 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 the International Stock Portfolio (constituting T. Rowe Price
International Series, Inc., hereafter referred to as the "Fund") at
December 31, 1996, and the results of its operations, the changes in its
net assets and the financial highlights for each of the fiscal periods
presented, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to
as "financial statements") are the responsibility of the Fund'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 custodians and, where appropriate, the application
of alternative auditing procedures for unsettled security transactions,
provide a reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP
Baltimore, Maryland
January 20, 1997

____
18
<PAGE>

OCC ACCUMULATION TRUST

. SMALL CAP PORTFOLIO
. MANAGED PORTFOLIO
. U.S. GOVERNMENT INCOME PORTFOLIO

ANNUAL REPORT
1996
<PAGE>

OCC ACCUMULATION TRUST

MANAGED BY

[LOGO OF OPCAP APPEARS HERE]

We are pleased to report on the 1996 investment activities and results of
the portfolios in the OCC Accumulation Trust. The objective of the portfolios is
to provide above-average returns with below-average risk by adhering to a
disciplined value approach in buying securities. The portfolios are intended for
the long-term investor seeking to preserve capital and make it grow.

The year was an excellent one for investors in stocks, as the market
continued to rise in a favorable environment of low inflation, slow economic
growth and generally low interest rates. The equity portfolios in the Trust
performed well, delivering returns that generally matched or exceeded their
benchmarks. In managing these portfolios, we invest for the long term in what we
perceive to be superior, undervalued businesses. We do not attempt to forecast
the stock market. Instead, we focus on individual companies and where their
businesses are going over the next several years, not on where the stock market
is heading in the next quarter.

The bond market, by contrast, provided only modest returns in 1996. There
were recurrent investor concerns throughout the year that the economy might
overheat and, if so, that inflation might increase and bond prices might fall.
Economic growth was, in fact, moderate and inflation remained in check.
Nonetheless, these concerns led to relatively weak bond prices. We weathered
these difficult market conditions reasonably well, maintaining a defensive
posture by keeping average maturities short. Prices of shorter maturities tend
to fall less than those of longer maturities in a declining bond market.

1
<PAGE>

SMALL CAP PORTFOLIO

The Small Cap Portfolio delivered a total return of 18.7% in 1996,
exceeding the total return of 16.5% for the Russell 2000 Index with dividends
included (Russell 2000), a widely followed benchmark which includes smaller
capitalization stocks. The Portfolio invests in undervalued smaller companies
with strong competitive positions, high returns on capital and
shareholder-oriented managements. Its favorable relative performance in 1996 was
achieved despite having a relatively high cash position during the year.

The Portfolio's performance for the year was slightly behind the 19.9%
average total return for the small company growth funds in Lipper's Variable
Insurance Products Performance Analysis Service Report. It ranked 23rd among the
40 funds in this Lipper universe. As the small cap market became less
speculative in the second half of the year, the Portfolio significantly
outperformed the market and its peers. It provided a total return of 9.4% in the
1996 second half compared with 5.6% for the Russell 2000, and its return of 6.5%
in the fourth quarter compared with an average of 1.8% for the funds in the
Lipper small company growth funds category.

For the five years ended December 31, 1996, the Portfolio provided an
average annual total return of 14.5%*, compared with the 15.6% average annual
total return for the Russell 2000. The Portfolio's five-year performance was
third among eight funds in the Lipper small company growth funds category. From
its inception on August 1, 1988 through December 31, 1996, the Portfolio
generated an average annual total return of 14.7%*, exceeding the 13.0% average
annual total return for the Russell 2000. Returns for the Portfolio take into
account expenses incurred by the Portfolio, but not separate account charges
imposed by the insurance company.

We invest in smaller companies for long-term growth. Even when the small
cap market reached a high speculative pitch in the first half of 1996, we did
not stray from our value style. By being disciplined, patient investors, we seek
to outperform the Russell 2000 and provide excellent returns for investors with
below-market risk.

We continue to find excellent smaller companies available at reasonable
valuations. Vital Signs, Inc., one of the Portfolio's newer investments, is an
example. The company manufactures consumable medical products, such as face
masks and breathing circuits, used in anesthesia, respiratory and critical care
applications. Even at a time of cost pressures in the health care market, we own
the stock because of its high returns (28% cash flow on operating assets),
strong new product program and long-term contracts with hospital supply groups.
Like many of our portfolio companies, it holds leading market shares in its
products, and this provides competitive advantages. Also like many, it is
increasing shareholder value by using cash to repurchase stock. Moreover, in a
consolidating industry, Vital Signs is acquiring products which it can sell
through its distribution channels at only modest additional distribution cost.
All in all, this is an outstanding company with high insider ownership, which we
believe results in the interests of management being aligned with those of
shareholders, strong new product flow and a reasonable valuation (about 15 times
estimated fiscal 1997 earnings).

In addition to our investment in Vital Signs, we established new positions
during the second half in such stocks as American Radio Systems Corp., Dal-Tile
International, Inc., Jason, Inc., Tracor, Inc. and Wang Laboratories, Inc. We
reduced or eliminated the Portfolio's holdings of Capitol American Financial
Corp., Martin Marietta Materials, Inc., Noble Drilling Co., Omnicom Group, Inc.
and Singer Co. N.V.

As of December 31, 1996, the Portfolio's net assets were allocated 83% to
common stocks and securities convertible into common stocks and 17% to cash and
cash equivalents. The five largest equity positions as of December 31, 1996 were
Magellan Health Services, Inc., the largest behavioral health care company in
the U.S., representing 4.3% of the Portfolio's net assets; BancTec, Inc., which
provides automated processing systems to the banking industry, 3.8% of net
assets; SpaceLabs, Inc., a medical devices company, 3.8% of net assets; EG&G,
Inc., a supplier of technology products and services to manufacturers and end
users in industry and government, 3.3% of net assets; and Wang Laboratories,
Inc., a software developer, 3.0% of net assets. Major industry positions were in
the insurance sector, 14.4% of net assets; electrical equipment, 10.6% of net

2
<PAGE>

assets; manufacturing, 8.0% of net assets; drugs and medical products, 5.9% of
net assets; and energy, 5.1% of net assets.
________________

* Based on results of the OCC Accumulation Trust and its predecessor. On
September 16, 1994, an investment company which had commenced operations on
August 1, 1988, called Quest for Value Accumulation Trust (the "Old Trust"), was
effectively divided into two investment funds -- the Old Trust and the present
OCC Accumulation Trust (the "Present Trust") -- at which time the Present Trust
commenced operations. The total net assets of the Small Cap Portfolio
immediately after the transaction were $139,812,573 in the Old Trust and
$8,129,274 in the Present Trust. For the period prior to September 16, 1994, the
performance figures for the Small Cap Portfolio of the Present Trust reflect the
performance of the Small Cap Portfolio of the Old Trust.

[GRAPH APPEARS HERE]

Past performance is not predictive of future performance.
Assumes reinvestment of all dividends and distributions.
+with dividends.

The performance graph does not reflect charges imposed by the Variable Accounts.

3
<PAGE>

OCC ACCUMULATION TRUST
SMALL CAP PORTFOLIO
SCHEDULE OF INVESTMENTS

DECEMBER 31, 1996

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- -----------
<S> <C>
U.S. GOVERNMENT AGENCY NOTE - .7%
$ 230,000 Federal Home Loan Mortgage Corp., 5.23%, 1/2/97 (cost - $229,967).... $ 229,967
-----------

SHORT-TERM CORPORATE NOTES - 16.8%
AUTOMOTIVE - 2.5%
Ford Motor Credit Co.,
$ 345,000 5.40%, 1/28/97..................................................... $ 343,603
500,000 5.62%, 1/2/97...................................................... 499,922
-----------
843,525
-----------
BANKING - 1.9%
670,000 Norwest Financial, Inc., 5.51%, 1/22/97.............................. 667,846
-----------
CONGLOMERATES - 3.7%
1,275,000 General Electric Capital Corp., 5.35%, 1/30/97....................... 1,269,505
-----------
MACHINERY/ENGINEERING - 3.5%
1,210,000 Deere (John) Capital Corp., 5.38%, 1/22/97........................... 1,206,203
-----------
MISCELLANEOUS FINANCIAL SERVICES - 1.5%
500,000 Beneficial Corp., 5.52%, 1/28/97..................................... 497,930
-----------
TECHNOLOGY - 3.7%
IBM Credit Corp.,
370,000 5.31%, 1/6/97...................................................... 369,727
900,000 5.32%, 1/6/97...................................................... 899,335
-----------
1,269,062
-----------
Total Short-Term Corporate Notes (cost - $5,754,071)................. $ 5,754,071
-----------

CORPORATE NOTE - .1%
AUTOMOTIVE - .1%
$ 2,148 Collins Industries, Inc., 8.75%, 1/11/00 (cost - $2,148)............. $ 1,995
-----------

CONVERTIBLE CORPORATE BOND - .1%
REAL ESTATE - .1%
$ 49,995 Security Capital Group, Inc., 12.00%, 6/30/14 (A)
(cost - $45,364)..................................................... $ 60,481
-----------

<CAPTION>
SHARES
------
<S> <C>
CONVERTIBLE PREFERRED STOCK - .2%
TRANSPORTATION - .2%
825 Interpool, Inc., 5.75%, Conv. Pfd. (cost - $62,700).................. $ 84,150
-----------
COMMON STOCKS - 82.2%
ADVERTISING - 2.4%
71,900 Katz Media Group, Inc.*.............................................. $ 808,875
-----------
AEROSPACE/DEFENSE - 1.2%
19,000 Tracor, Inc.*........................................................ 403,750
-----------
</TABLE>

4
<PAGE>

OCC ACCUMULATION TRUST
SMALL CAP PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)

DECEMBER 31, 1996

<TABLE>
<CAPTION>
SHARES VALUE
- ---------- -----------
<S> <C>
COMMON STOCKS (CONTINUED)
AUTOMOTIVE - 2.5%
14,400 Borg-Warner Automotive, Inc.......................................... $ 554,400
45,000 Jason, Inc.*......................................................... 292,500
-----------
846,900
-----------
BANKING - .5%
6,800 First Financial Caribbean Corp. ..................................... 188,700
-----------
BUILDING & CONSTRUCTION - 1.0%
16,400 Dal-Tile International, Inc.*........................................ 334,150
-----------
CHEMICALS - 1.1%
10,500 McWhorter Technologies, Inc.*........................................ 240,187
9,800 Sybron Chemicals, Inc.*.............................................. 156,800
-----------
396,987
-----------
COMPUTER SERVICES - 3.8%
63,867 BancTec, Inc.*....................................................... 1,317,257
-----------
DRUGS & MEDICAL PRODUCTS - 5.9%
5,000 Dentsply International, Inc. ........................................ 237,500
62,800 SpaceLabs Medical, Inc.*............................................. 1,287,400
19,700 Vital Signs, Inc. ................................................... 512,200
-----------
2,037,100
-----------
ELECTRICAL EQUIPMENT - 10.6%
9,200 Arrow Electronics, Inc.*............................................. 492,200
5,300 AVX Corp. ........................................................... 113,950
56,800 EG & G, Inc. ........................................................ 1,143,100
43,000 Exar Corp.*.......................................................... 666,500
19,100 Marshall Industries*................................................. 584,937
27,720 Oak Industries, Inc.*................................................ 637,560
-----------
3,638,247
-----------
ENERGY - 5.1%
17,948 Aquila Gas Pipeline Corp. ........................................... 284,924
3,300 Belden & Blake Corp.*................................................ 84,150
10,000 Nuevo Energy Co.*.................................................... 520,000
21,300 Petroleum Heat & Power Company, Inc. (Class A)....................... 135,788
9,640 Seagull Energy Corp.*................................................ 212,080
12,500 St. Mary Land & Exploration Co. ..................................... 310,938
4,000 Triton Energy Ltd.*.................................................. 194,000
-----------
1,741,880
-----------
</TABLE>

5
<PAGE>

OCC ACCUMULATION TRUST
SMALL CAP PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)

DECEMBER 31, 1996

<TABLE>
<CAPTION>
SHARES VALUE
------ -----------
<S> <C>
COMMON STOCKS (CONTINUED)
HEALTH & HOSPITALS - 5.0%
65,200 Magellan Health Services, Inc*....................................... $ 1,458,850
14,800 Summit Care Corp.*................................................... 242,350
-----------
1,701,200
-----------
INSURANCE - 14.4%
9,400 ACE Ltd. ............................................................ 565,175
38,100 Capsure Holdings Corp.*.............................................. 433,388
20,600 Delphi Financial Group, Inc. ........................................ 607,700
10,900 Everest Reinsurance Holdings, Inc. .................................. 313,375
50,300 E.W. Blanch Holdings, Inc. .......................................... 1,012,287
17,200 Gryphon Holdings, Inc. .............................................. 242,950
17,000 Horace Mann Educators Corp. ......................................... 686,375
7,100 Protective Life Corp. ............................................... 283,112
18,200 United Wisconsin Services, Inc. ..................................... 477,750
6,000 W.R. Berkley Corp. .................................................. 304,500
-----------
4,926,612
-----------
MACHINERY/ENGINEERING - 2.1%
30,200 United Dominion Industries, Ltd. .................................... 709,700
-----------
MANUFACTURING - 8.0%
13,600 Alltrista Corp.*..................................................... 350,200
139,200 Baldwin Technology Co. (Class A)*.................................... 348,000
6,500 Briggs & Stratton Corp. ............................................. 286,000
4,500 Carlisle Companies, Inc. ............................................ 272,250
15,750 Crane Co. ........................................................... 456,750
59,500 Easco, Inc. ......................................................... 453,687
31,200 Exabyte Corp.*....................................................... 417,300
5,200 Greenfield Industries, Inc. ......................................... 159,250
-----------
2,743,437
-----------
MEDIA/BROADCASTING - .6%
7,500 American Radio Systems Corp.*........................................ 204,375
-----------
PAPER PRODUCTS - 2.4%
143,800 Repap Enterprises, Inc.*............................................. 399,944
21,000 Shorewood Packaging Corp.*........................................... 409,500
-----------
809,444
-----------
PRINTING & PUBLISHING - 2.9%
15,300 International Imaging Materials, Inc.*............................... 348,075
63,400 Nu-Kote Holdings, Inc. (Class A)*.................................... 649,850
-----------
997,925
-----------
</TABLE>

6
<PAGE>

OCC ACCUMULATION TRUST
SMALL CAP PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)

DECEMBER 31, 1996

<TABLE>
<CAPTION>
SHARES VALUE
- ----------- -----------
<S> <C>
COMMON STOCKS (CONTINUED)
REAL ESTATE - 3.6%
15,291 Cousins Properties, Inc. ............................................ $ 430,059
66 Security Capital Group, Inc. (A)..................................... 82,156
20,200 Security Capital Industrial Trust, Inc. ............................. 431,775
12,752 Security Capital Pacific Trust....................................... 291,702
-----------
1,235,692
-----------
RETAIL - .4%
8,500 Maxim Group, Inc.*................................................... 148,750
-----------
TECHNOLOGY - 4.1%
11,000 Channell Commercial Corp.*........................................... 136,125
8,000 Unitrode Corp.*...................................................... 235,000
51,400 Wang Laboratories, Inc.*............................................. 1,040,850
-----------
1,411,975
-----------
TELECOMMUNICATIONS - .6%
10,100 ECI Telecom Ltd. .................................................... 214,625
-----------
TEXTILES/APPAREL - 1.7%
19,000 Westpoint Stevens, Inc. (Class A)*................................... 567,625
-----------
TOBACCO/BEVERAGES/FOOD PRODUCTS - .2%
6,000 Sylvan Foods Holdings, Inc.*......................................... 78,000
-----------
TRANSPORTATION - 1.6%
12,200 Interpool, Inc....................................................... 285,175
13,100 MTL, Inc.*........................................................... 265,275
-----------
550,450
-----------
OTHER - .5%
6,150 McGrath RentCorp..................................................... 158,363
-----------

Total Common Stocks (cost - $24,953,214).......................... $28,172,019
-----------
Total Investments (cost - $31,047,464).......................100.1% $34,302,683
Other Liabilities in Excess of other assets.................. (0.1) (46,012)
----- -----------
Total Net Assets.............................................100.0% $34,256,671
===== ===========
</TABLE>
________________
* Non-income producing security.

(A) Restricted securities (the Portfolio will not bear any costs, including
those involved in registration under the securities act of 1933, in
connection with the disposition of these securities):

<TABLE>
<CAPTION>
DATE OF PAR AVERAGE FAIR VALUE AS OF
DESCRIPTION ACQUISITION AMOUNT SHARES COST DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Security Capital Group, Inc. 12.00%, 6/30/14....... 9/16/94 $49,995 -- $ 91 $ 120
Security Capital Group, Inc. Common Stock.......... 9/16/94 -- 66 949 1,245
</TABLE>

See accompanying notes to financial statements.

7
<PAGE>

OCC ACCUMULATION TRUST
SMALL CAP PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES

DECEMBER 31, 1996

<TABLE>
<S> <C>
ASSETS
Investments, at value (cost - $31,047,464)............................ $34,302,683
Cash.................................................................. 8,758
Dividends receivable.................................................. 8,504
Interest receivable................................................... 6,304
Receivable from fund shares sold...................................... 1,397
Other assets.......................................................... 1,207
-----------
Total Assets........................................................ 34,328,853
-----------

LIABILITIES
Payable for fund shares redeemed...................................... 27,274
Investment advisory fee payable....................................... 23,648
Other payables and accrued expenses................................... 21,260
-----------
Total Liabilities................................................... 72,182
-----------
Total Net Assets.................................................... $34,256,671
===========

NET ASSETS
Par value ($.01 per share)............................................ $ 15,153
Paid-in-capital in excess of par...................................... 29,167,853
Accumulated undistributed net investment income....................... 226,925
Accumulated undistributed net realized gain on investments............ 1,591,521
Net unrealized appreciation on investments............................ 3,255,219
-----------
Total Net Assets.................................................... $34,256,671
===========
Fund shares outstanding............................................... 1,515,250
-----------
Net asset value per share............................................. $ 22.61
===========
</TABLE>

See accompanying notes to financial statements.

8
<PAGE>

OCC ACCUMULATION TRUST
SMALL CAP PORTFOLIO
STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1996

<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends...................................................................... $ 227,354
Interest....................................................................... 199,837
----------
Total investment income..................................................... 427,191
----------

OPERATING EXPENSES
Investment advisory fees (note 2A)............................................. 165,735
Custodian fees (note 1G)....................................................... 22,883
Auditing, consulting and tax return preparation fees........................... 10,309
Transfer and dividend disbursing agent fees.................................... 9,357
Trustees' fees and expenses.................................................... 5,702
Reports and notices to shareholders............................................ 3,914
Legal fees..................................................................... 3,048
Miscellaneous.................................................................. 1,770
----------
Total operating expenses.................................................... 222,718

Less: Investment advisory fees waived (note 2A)............................. (17,823)

Less: Expense offset arrangement (note 1G).................................. (4,629)
----------

Net operating expenses................................................. 200,266
----------

Net investment income.................................................. 226,925
----------

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS -- NET

Net realized gain on investments............................................... 1,679,412

Net change in unrealized appreciation (depreciation) on investments............ 2,142,715
----------
Net realized gain and change in unrealized appreciation (depreciation) on
investments................................................................ 3,822,127
----------

Net increase in net assets resulting from operations............................. $4,049,052
==========
</TABLE>

See accompanying notes to financial statements.

9
<PAGE>

OCC ACCUMULATION TRUST
SMALL CAP PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
OPERATIONS
Net investment income..................................................... $ 226,925 $ 211,870
Net realized gain on investments.......................................... 1,679,412 456,809
Net change in unrealized appreciation (depreciation) on
investments............................................................. 2,142,715 1,189,804
----------- -----------
Net increase in net assets resulting from operations................. 4,049,052 1,858,483
----------- -----------

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Net investment income..................................................... (211,870) (29,623)
Net realized gains........................................................ (544,700) (26,352)
----------- -----------
Total dividends and distributions to shareholders.................... (756,570) (55,975)
----------- -----------

FUND SHARE TRANSACTIONS
Net proceeds from sales................................................... 17,604,938 7,801,061
Reinvestment of dividends and distributions............................... 756,533 55,975
Cost of shares redeemed................................................... (3,401,674) (2,865,595)
----------- -----------
Net increase in net assets from fund share transactions.............. 14,959,797 4,991,441
----------- -----------

Total increase in net assets.................................... 18,252,279 6,793,949

NET ASSETS
Beginning of year......................................................... 16,004,392 9,210,443
----------- -----------
End of year (including undistributed net investment income of
$226,925 and $211,870, respectively).................................... $34,256,671 $16,004,392
=========== ===========

SHARES ISSUED AND REDEEMED
Issued.................................................................... 837,586 427,444
Issued in reinvestment of dividends and distributions..................... 38,520 3,289
Redeemed.................................................................. (164,530) (156,903)
----------- -----------
Net increase......................................................... 711,576 273,830
=========== ===========
</TABLE>

See accompanying notes to financial statements.

10
<PAGE>

OCC ACCUMULATION TRUST
SMALL CAP PORTFOLIO
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1996

(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

OCC Accumulation Trust (the "Trust") (formerly Quest for Value Accumulation
Trust) was organized on May 12, 1994 as a Massachusetts business trust and is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The Trust is authorized to
issue an unlimited number of seven classes of shares of beneficial interest at
$.01 par value. The Trust is comprised of seven portfolios: the Equity
Portfolio, the Small Cap Portfolio (the "Portfolio"), the Global Equity
Portfolio, the Managed Portfolio, the Bond Portfolio, the U.S. Government
Income Portfolio and the Money Market Portfolio. OpCap Advisors (the "Adviser"),
a majority-owned (99%) subsidiary of Oppenheimer Capital, serves as the Trust's
investment adviser. The Trust is an investment vehicle for variable annuity and
variable life insurance contracts of various life insurance companies, and
qualified pension and retirement plans. The following is a summary of
significant accounting policies consistently followed by the Portfolio in the
preparation of its financial statements:

(A) VALUATION OF INVESTMENTS

Investment securities, other than debt securities, listed on a national
exchange or traded in the over-the-counter National Market System are valued
each business day at the last reported sale price; if there are no such reported
sales, the securities are valued at their last quoted bid price. Other
securities traded over-the-counter and not part of the National Market System
are valued at the last quoted bid price. Investment debt securities (other than
short-term obligations) are valued each business day by an independent pricing
service (approved by the Board of Trustees) using methods which include current
market quotations from a major market maker in the securities and
trader-reviewed "matrix" prices. Short-term debt securities having a remaining
maturity of sixty days or less are valued at amortized cost or amortized value,
which approximates market value. Any securities or other assets for which market
quotations are not readily available are valued at their fair value as
determined in good faith by the Board of Trustees. The ability of issuers of
debt instruments to meet their obligations may be affected by economic
developments in a specific industry or region.

(B) FEDERAL INCOME TAXES

It is the Portfolio's policy to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to shareholders; accordingly,
no Federal income tax provision is required.

Investment transactions are accounted for on the trade date. In determining
the gain or loss from the sale of investments, the cost of investments sold has
been determined on the basis of identified cost. Dividend income is recorded on
the ex-dividend date and interest income is accrued as earned. Discounts or
premiums on debt securities purchased are accreted or amortized to interest
income over the lives of the respective securities.

(D) DIVIDENDS AND DISTRIBUTIONS

Dividends and distributions to shareholders from net investment income and
net realized capital gains, if any, are declared and paid at least annually.

11
<PAGE>

OCC ACCUMULATION TRUST
SMALL CAP PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(D) DIVIDENDS AND DISTRIBUTIONS (CONTINUED)

principles. These "book-tax" differences are either considered temporary or
permanent in nature. To the extent these differences are permanent in nature,
such amounts are reclassified within the capital accounts based on their Federal
tax-basis treatment; temporary differences do not require reclassification.
Dividends and distributions which exceed net investment income and net realized
capital gains for financial reporting purposes but not for tax purposes are
reported as dividends in excess of net investment income or distributions in
excess of net realized capital gains, respectively. To the extent distributions
exceed current and accumulated earnings and profits for Federal income tax
purposes, they are reported as distributions of paid-in-capital or tax return of
capital. At December 31, 1996, the Portfolio did not have any permanent book-tax
differences.

(E) ALLOCATION OF EXPENSES

Expenses specifically identifiable to a particular portfolio are borne by
that portfolio. Other expenses are allocated to each portfolio based on its net
assets in relation to the total net assets of all applicable portfolios of the
Trust or another reasonable basis.

(F) USE OF ESTIMATES

(G) CUSTODY OFFSETS

The Portfolio benefits from an expense offset arrangement with its
custodian bank where uninvested cash balances earn credits that reduce monthly
fees. Had these cash balances been invested in income producing securities, they
would have generated income for the Portfolio.

(2) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES

(A) The investment advisory fee is accrued daily and payable monthly to the
Adviser, and is computed as a percentage of the Portfolio's net assets as of the
close of business each day at the annual rate of .80% on the first $400 million,
.75% on the next $400 million and .70% thereafter.

The Adviser has voluntarily agreed to waive that portion of the advisory
fee necessary to limit total operating expenses of the Portfolio to 1.00% (net
of expense offsets) of average daily net assets on an annual basis.

(B) Total brokerage commissions paid by the Portfolio for the year ended
December 31, 1996 amounted to $52,990, of which Oppenheimer & Co., Inc., an
affiliate of the Adviser, received $23,565.

(3) PURCHASES AND SALES OF SECURITIES

For the year ended December 31, 1996, purchases and sales of investment
securities, other than short-term securities, were $20,565,700 and $9,055,696,
respectively.

12
<PAGE>

OCC ACCUMULATION TRUST
SMALL CAP PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

(4) UNREALIZED APPRECIATION (DEPRECIATION) AND COST OF INVESTMENTS FOR FEDERAL
INCOME TAX PURPOSES

Aggregate gross unrealized appreciation for securities in which there is an
excess of value over tax cost is $3,909,842, aggregate gross unrealized
depreciation for securities in which there is an excess of tax cost over value
is $663,423, and net unrealized appreciation for Federal income tax purposes is
$3,246,419. Federal income tax cost basis of portfolio securities is $31,056,264
at December 31, 1996.

(5) SUBSEQUENT EVENT

Oppenheimer Financial Corp., a holding company, holds a one-third interest
in Oppenheimer Capital and Oppenheimer Capital, L.P., a Delaware limited
partnership whose units are traded on the New York Stock Exchange and of which
Oppenheimer Financial Corp. is the sole general partner, owns the remaining two-
thirds interest. On February 13, 1997, PIMCO Advisors L.P., a registered
investment adviser, signed a definitive agreement with Oppenheimer Group, Inc.
and its subsidiary Oppenheimer Financial Corp. for PIMCO Advisors L.P. and its
affiliate, Thomson Advisory Group, Inc., to acquire the one-third managing
general partner interest in Oppenheimer Capital and the 1.0% general partner
interest in Oppenheimer Capital L.P. The completion of the transaction is
subject to certain client, lender, IRS and other approvals.

13
<PAGE>

OCC ACCUMULATION TRUST
SMALL CAP PORTFOLIO
FINANCIAL HIGHLIGHTS

FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:

Income from investment operations:
Net investment income................... 0.14 0.26 0.06
Net realized and unrealized gain (loss)
on investments........................ 3.45 2.37 (0.17)
----------- ----------- -----------
Total from investment operations...... 3.59 2.63 (0.11)
----------- ----------- -----------

Dividends and distributions to
shareholders:
Dividends to shareholders from net
investment income..................... (0.25) (0.05) --
Distributions to shareholders from net
realized capital gains................ (0.64) (0.05) --
----------- ----------- -----------
Total dividends and distributions to
shareholders....................... (0.89) (0.10) --
----------- ----------- -----------

Net asset value, end of period.......... $ 22.61 $ 19.91 $ 17.38
=========== =========== ===========

Total return(2)......................... 18.7% 15.2% (0.6%)
=========== =========== ===========

Net assets, end of period............... $34,256,671 $16,004,392 $ 9,210,443
----------- ----------- -----------

Ratio of net operating expenses to
average net assets(6)................. 0.93% (4,5) 0.74% 0.74%(3)
----------- ----------- -----------

Ratio of net investment income to
average net assets(6)................. 1.03% (4) 1.75% 1.22%(3)
----------- ----------- -----------

Portfolio turnover rate................. 50% 69% 32%
----------- ----------- -----------

Average commission rate................. $ 0.0493 -- --
----------- ----------- -----------
</TABLE>

________________

(1) Commencement of operations.

(2) Assumes reinvestment of all dividends and distributions. Aggregate (not
annualized) total return is shown for any period shorter than one year.

(3) Annualized.

(4) Average net assets for the year ended December 31, 1996 were $22,131,648.

(5) Gross of expense offsets. (See note 1G in Notes to Financial Statements)

(6) During the periods presented above, the Adviser waived a portion or all of
its fees and assumed a portion of the Portfolio's operating expenses.
Additionally, for the year ended December 31, 1996, the Portfolio benefited
from an expense offset arrangement with its custodian bank. If such waivers,
assumptions and expense offsets had not been in effect, the ratios of net
operating expenses to average daily net assets and the ratios of net
investment income to average daily net assets would have been 1.01% and
0.92%, respectively, for the year ended December 31, 1996, 0.99% and 1.50%,
respectively, for the year ended December 31, 1995 and 1.64% and 0.32%,
annualized, respectively, for the period September 16, 1994 (commencement of
operations) to December 31, 1994.

14
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Trustees of
OCC Accumulation Trust -- Small Cap 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 the Small Cap Portfolio (one of the
seven portfolios constituting OCC Accumulation Trust, hereafter referred to as
the "Portfolio") at December 31, 1996, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for the periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the 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, provide a reasonable
basis for the opinion expressed above.

RICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 17, 1997

15
<PAGE>

MANAGED PORTFOLIO

Continuing its superior long-term performance, the Managed Portfolio
provided a total return of 22.8% in 1996. This return was slightly below the
total return of 23.0% for the Standard & Poor's 500 Index with dividends
included (S&P 500), an unmanaged index of 500 of the largest corporations
weighted by market capitalization, and substantially above the 13.9% average
total return of the funds in Lipper's Variable Insurance Products Performance
Analysis Service Report flexible portfolio funds category. The Portfolio ranked
fifth among the 76 funds in this Lipper universe.

The Portfolio invests in stocks, bonds and cash equivalents, with a bias
toward stocks, which have outperformed other classes of investments for nearly
every five-year period since the Depression.

The Portfolio has delivered consistently excellent returns over time. For
the five years ended December 31, 1996, the Portfolio's average annual total
return of 19.1%* exceeded the 15.2% average annual total return of the S&P 500.
This five-year performance was second best among the 54 flexible portfolio funds
in the Lipper universe. From inception on August 1, 1988 through December 31,
1996, the Portfolio delivered an average annual total return of 20.1%*,
surpassing the 16.1% average annual total return for the S&P 500. Returns for
the Portfolio take into account expenses incurred by the Portfolio, but not
separate account charges imposed by the insurance company.

Our investment philosophy is based on the concept that the single most
important determinant of whether a stock will increase in value is the rate of
return on invested capital within the company. We believe companies with high
returns can increase their value for extended periods. We therefore look for
companies with above-average returns where those returns are protected by strong
competitive positions, and we want to buy those companies at what we consider to
be reasonable prices.

The Portfolio has been a long-term investor in McDonnell Douglas Corp., its
second largest position at the end of the year. In December 1996, Boeing Co.
reached agreement to acquire McDonnell Douglas in a friendly transaction. We
believe the deal is good for both companies. Boeing will acquire the production
capacity, technical skills and products of McDonnell Douglas, while McDonnell
Douglas shareholders will receive a significant premium over market. The
transaction is expected to close late in the 1997 first quarter or early in the
second.

The Portfolio has substantial holdings of high-quality financial services
stocks, including banks and insurance companies. These companies, including
Wells Fargo & Co., Federal Home Loan Mortgage Corp. (Freddie Mac) and Citicorp,
are positioned for higher earnings in 1997 and 1998 and, on top of that, are
increasing value by repurchasing shares.

Because we tend to hold stocks for the long term, rather than trading in
and out of the market, there was relatively little portfolio activity in the
1996 second half. We established new positions in ACE, Ltd., Caterpillar, Inc.,
R.R. Donnelley & Sons Co., McDonald's Corp. and Tele-Communications, Inc. (Class
A). We sold the Portfolio's investments in Mellon Bank Corp. and Reebok
International Ltd. and reduced its position in Intel Corp., among others.

At year end, the Portfolio's net assets were allocated 86% to common stocks
and securities convertible into common stocks, 1% to Treasury notes and bonds,
and 13% to cash and equivalents. The five largest equity positions were: Wells
Fargo & Co., a leading bank in the Western United States, representing 6.1% of
the Portfolio's net assets; McDonnell Douglas Corp., the nation's largest
manufacturer of military aircraft and an important competitor in commercial
aircraft, 5.3% of net assets; Federal Home Loan Mortgage Corp. (Freddie Mac),
the second largest insurer of home mortgages in the United States, 4.7% of net
assets; Citicorp, a leading bank and financial services company, 4.6% of net
assets; and du Pont (E. I.) de Nemours & Company, a major industrial company
operating in chemicals, fibers, polymers, petroleum and diversified businesses,
4.3% of net assets.

16
<PAGE>

Major industry positions were in the banking sector, 12.3% of the
Portfolio's net assets; miscellaneous financial services, 12.1% of net assets;
chemicals, 8.4% of net assets; aerospace and defense, 7.5% of net assets; and
insurance, 6.6% of net assets.
________________

* Based on results of the OCC Accumulation Trust and its predecessor. On
September 16, 1994, an investment company which had commenced operations on
August 1, 1988, called Quest for Value Accumulation Trust (the "Old Trust"), was
effectively divided into two investment funds -- the Old Trust and the present
OCC Accumulation Trust (the "Present Trust") -- at which time the Present Trust
commenced operations. The total net assets of the Managed Portfolio immediately
after the transaction were $682,601,380 in the Old Trust and $51,345,102 in the
Present Trust. For the period prior to September 16, 1994, the performance
figures for the Managed Portfolio of the Present Trust reflect the performance
of the Managed Portfolio of the Old Trust.

COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
OCC ACCUMULATION TRUST MANAGED PORTFOLIO FROM INCEPTION (8/1/88)*
THROUGH 12/31/96 AND TOTAL RETURN ON S&P 500 INDEX+

<TABLE>
<CAPTION>
Measurement Period
(Fiscal Year Covered) Managed Portfolio S&P 500 Index
<S> <C> <C>
8/1/88 10000 10000
12/31/88 10440 10383
12/31/89 13839 13673
12/31/90 13336 13249
12/31/91 19458 17285
12/31/92 23098 18602
12/31/93 25498 20475
12/31/94 26165 20746
12/31/95 38083 28542
12/31/96 46755 35095
</TABLE>

Past performance is not predictive of future performance. Assumes reinvestment
of all dividends and distributions. +with dividends.

The performance graph does not reflect charges imposed by the Variable Accounts.

17
<PAGE>

OCC ACCUMULATION TRUST
MANAGED PORTFOLIO
SCHEDULE OF INVESTMENTS

DECEMBER 31, 1996

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ------------
<S> <C> <C>
SHORT-TERM CORPORATE NOTES - 13.6%
AUTOMOTIVE - 3.8%
$6,870,000 Ford Motor Credit Co., 5.42%, 1/6/97................................ $ 6,864,828
------------
CONGLOMERATES - 4.3%
7,680,000 General Electric Capital Corp., 5.39%, 1/7/97....................... 7,673,101
------------
INSURANCE - .3%
555,000 Marsh & McLennan Co., Inc., 6.55%, 1/2/97........................... 554,899
------------
MISCELLANEOUS FINANCIAL SERVICES - 5.2%
Household Finance Corp.,
130,000 5.34%, 1/7/97..................................................... 129,884
3,300,000 5.45%, 1/7/97..................................................... 3,297,003
6,000,000 Merrill Lynch & Co., Inc., 5.70%, 1/6/97............................ 5,995,250
------------
9,422,137
------------
Total Short-Term Corporate Notes (cost - $24,514,965)............. $ 24,514,965
------------

U.S. TREASURY NOTES AND BONDS - .9%
$ 700,000 6.25%, 8/15/23...................................................... $ 656,250
630,000 7.875%, 4/15/98..................................................... 646,437
297,500 7.875%, 8/15/01..................................................... 317,117
------------
Total U.S. Treasury Notes and Bonds (cost - $1,514,907)........... $ 1,619,804
------------

CONVERTIBLE CORPORATE BOND - .4%
REAL ESTATE - .4%
$ 614,371 Security Capital Group, Inc., 12.00%, 6/30/14 (A) (cost - $557,508). $ 743,231
------------

<CAPTION>
SHARES
- -----------
<S> <C> <C>
CONVERTIBLE PREFERRED STOCK - .0%
RETAIL - .0%
2,478 Venture Stores, Inc., $3.25 Conv. Pfd. (cost - $102,527)............ $ 45,533
------------

COMMON STOCKS - 85.4%
AEROSPACE/DEFENSE - 7.5%
43,200 Lockheed Martin Corp. .............................................. $ 3,952,800
150,000 McDonnell Douglas Corp. ............................................ 9,600,000
------------
13,552,800
------------
BANKING - 12.3%
80,000 Citicorp............................................................ 8,240,000
10,000 First Empire State Corp. ........................................... 2,880,000
41,200 Wells Fargo & Co. .................................................. 11,113,700
------------
22,233,700
------------
</TABLE>

18
<PAGE>

OCC ACCUMULATION TRUST
MANAGED PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)

DECEMBER 31, 1996

<TABLE>
<CAPTION>
SHARES VALUE
- ----------- ------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
BUILDING & CONSTRUCTION - .3%
31,680 Newport News Shipbuilding Inc.*..................................... $ 475,200
------------
CHEMICALS - 8.4%
83,000 du Pont (E.I.) de Nemours & Co. .................................... 7,833,125
100,000 Hercules, Inc. ..................................................... 4,325,000
80,000 Monsanto Co. ....................................................... 3,110,000
------------
15,268,125
------------
CONGLOMERATES - 4.1%
164,200 Tenneco, Inc. ...................................................... 7,409,525
------------
CONSUMER PRODUCTS - 3.6%
236,200 Mattel, Inc. ....................................................... 6,554,550
------------
DRUGS & MEDICAL PRODUCTS - 3.1%
130,000 Becton, Dickinson & Co. ............................................ 5,638,750
------------
ENERGY - 2.7%
55,300 Triton Energy Ltd.*................................................. 2,682,050
73,091 Union Pacific Resources Group, Inc. ................................ 2,137,912
------------
4,819,962
------------
FOOD SERVICES - 3.2%
127,700 McDonald's Corp. ................................................... 5,778,425
------------
INSURANCE - 6.6%
60,000 ACE Ltd. ........................................................... 3,607,500
138,600 EXEL Ltd. .......................................................... 5,249,475
15,400 Transamerica Corp. ................................................. 1,216,600
41,200 Travelers Group, Inc. .............................................. 1,869,450
------------
11,943,025
------------
MANUFACTURING - 2.3%
54,700 Catepillar, Inc..................................................... 4,116,175
------------
METALS & MINING - 3.2%
196,100 Freeport McMoRan Copper & Gold (Class B)............................ 5,858,487
------------
MISCELLANEOUS FINANCIAL SERVICES - 12.1%
57,200 American Express Co. ............................................... 3,231,800
161,000 Countrywide Credit Industries, Inc. ................................ 4,608,625
77,500 Federal Home Loan Mortgage Corp. ................................... 8,534,687
145,900 Federal National Mortgage Assoc. ................................... 5,434,775
------------
21,809,887
------------
PAPER PRODUCTS - 1.9%
80,000 Champion International Corp. ....................................... 3,460,000
------------
PRINTING/PUBLISHING - .8%
45,600 Donnelly (R.R.) & Sons Co. ......................................... 1,430,700
------------
</TABLE>

19
<PAGE>

OCC ACCUMULATION TRUST
MANAGED PORTFOLIO
SCHEDULE OF INVESTMENTS (CONTINUED)

DECEMBER 31, 1996

<TABLE>
<CAPTION>
SHARES VALUE
- ----------- ------------
<S> <C> <C>
COMMON STOCKS (CONTINUED)
RAILROADS - 2.9%
86,300 Union Pacific Corp. ................................................ $ 5,188,788
------------
REAL ESTATE - .6%
811 Security Capital Group, Inc. (A).................................... 1,009,517
------------
TECHNOLOGY - 5.9%
29,300 Intel Corp. ........................................................ 3,836,469
190,600 National Semiconductor Corp.*....................................... 4,645,875
75,000 Unitrode Corp.*..................................................... 2,203,125
------------
10,685,469
------------
TELECOMMUNICATIONS - 3.9%
30,000 Sprint Corp. ....................................................... 1,196,250
456,000 Tele-Communications, Inc. (Class A) *............................... 5,956,500
------------
7,152,750
------------
Total Common Stocks (cost - $115,007,880)........................... $154,385,835
------------

Total Investments (cost - $141,697,788).................... 100.3% $181,309,368
Other Liabilities in Excess of Other Assets................ (0.3) (581,274)
----- -----------
Total Net Assets........................................ 100.0% $180,728,094
===== ===========
</TABLE>

________________

* Non-income producing security.

(A) Restricted Securities (the Portfolio will not bear any costs, including
those involved in registration under the Securities Act of 1933, in
connection with the disposition of these securities):

<TABLE>
<CAPTION>
DATE OF PAR AVERAGE FAIR VALUE AS OF
DESCRIPTION ACQUISITION AMOUNT SHARES COST DECEMBER 31, 1996
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Security Capital Group, Inc. 12.00%, 6/30/14 9/16/94 $614,371 -- $ 91 $ 120
Security Capital Group, Inc. Common Stock 9/16/94 -- 811 949 1,245
</TABLE>

20
<PAGE>

OCC ACCUMULATION TRUST
MANAGED PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES

DECEMBER 31, 1996

<TABLE>
<S> <C>
ASSETS
Investments, at value (cost - $141,697,788).................................... $181,309,368
Cash........................................................................... 6,937
Receivable from investments sold............................................... 1,047,817
Receivable from fund shares sold............................................... 329,292
Dividends receivable........................................................... 123,034
Interest receivable............................................................ 110,591
Other assets................................................................... 7,932
------------
Total Assets................................................................. 182,934,971
------------

LIABILITIES
Payable for investments purchased.............................................. 1,897,083
Investment advisory fee payable................................................ 137,907
Payable for fund shares redeemed............................................... 132,215
Other payables and accrued expenses............................................ 39,672
------------
Total Liabilities............................................................ 2,206,877
------------
Total Net Assets............................................................. $180,728,094
============

NET ASSETS
Par value ($.01 per share)..................................................... $ 49,914
Paid-in-capital in excess of par............................................... 132,265,145
Accumulated undistributed net investment income................................ 2,161,818
Accumulated undistributed net realized gain on investments..................... 6,639,637
Net unrealized appreciation on investments..................................... 39,611,580
------------
Total Net Assets............................................................. $180,728,094
============

Fund shares outstanding........................................................ 4,991,370
------------
Net asset value per share...................................................... $ 36.21
============
</TABLE>

See accompanying notes to financial statements.

21
<PAGE>

OCC ACCUMULATION TRUST
MANAGED PORTFOLIO
STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1996

<TABLE>
<S> <C>
INVESTMENT INCOME
Dividends..................................................................... $ 1,924,873
Interest...................................................................... 1,333,194
-----------
Total investment income.................................................... 3,258,067
-----------

OPERATING EXPENSES
Investment advisory fees (note 2A)............................................ 972,381
Custodian fees (note 1G)...................................................... 31,020
Trustees' fees and expenses................................................... 25,790
Reports and notices to shareholders........................................... 21,135
Auditing, consulting and tax return preparation fees.......................... 13,434
Transfer and dividend disbursing agent fees................................... 11,151
Legal fees.................................................................... 9,476
Miscellaneous................................................................. 23,141
-----------
Total operating expenses................................................... 1,107,528

Less: Investment advisory fees waived (note 2A)............................ (8,220)

Less: Expense offset arrangement (note 1G)................................. (3,060)
-----------
Net operating expenses................................................ 1,096,248
-----------
Net investment income................................................. 2,161,819
-----------

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS - NET

Net realized gain on investments.............................................. 6,639,637

Net change in unrealized appreciation (depreciation) on investments........... 18,285,659
-----------
Net realized gain and change in unrealized appreciation (depreciation) on
investments............................................................... 24,925,296
-----------
Net increase in net assets resulting from operations............................ $27,087,115
===========
</TABLE>

See accompanying notes to financial statements.

22
<PAGE>

OCC ACCUMULATION TRUST
MANAGED PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
<S> <C> <C>
OPERATIONS
Net investment income...................................... $ 2,161,819 $ 1,378,069
Net realized gain on investments........................... 6,639,637 1,023,914
Net change in unrealized appreciation (depreciation) on
investments.............................................. 18,285,659 23,901,028
------------ -----------
Net increase in net assets resulting from
operations.......................................... 27,087,115 26,303,011
------------ -----------

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Net investment income...................................... (1,378,070) (360,801)
Net realized gains......................................... (878,874) --
------------ -----------
Total dividends and distributions to shareholders..... (2,256,944) (360,801)
------------ -----------

FUND SHARE TRANSACTIONS
Net proceeds from sales.................................... 79,297,599 27,913,098
Reinvestment of dividends and distributions................ 2,256,944 360,801
Cost of shares redeemed.................................... (24,844,767) (9,971,333)
------------ -----------
Net increase in net assets from fund share
transactions........................................ 56,709,776 18,302,566
------------ -----------

Total increase in net assets..................... 81,539,947 44,244,776

NET ASSETS
Beginning of year.......................................... 99,188,147 54,943,371
------------ -----------

End of year (including undistributed net investment income
of $2,161,818 and $1,378,069, respectively).............. $ 180,728,094 $99,188,147
============ ===========

SHARES ISSUED AND REDEEMED
Issued..................................................... 2,403,077 1,016,970
Issued in reinvestment of dividends and distributions...... 73,016 15,866
Redeemed................................................... (775,472) (379,452)
------------ -----------
Net increase.......................................... 1,700,621 653,384
============ ===========
</TABLE>

See accompanying notes to financial statements.

<PAGE>

OCC ACCUMULATION TRUST
MANAGED PORTFOLIO
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1996

(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

OCC Accumulation Trust (the "Trust") (formerly Quest for Value Accumulation
Trust) was organized on May 12, 1994, as a Massachusetts business trust and is
registered under the Investment Company Act of 1940, as amended, as a
diversified, open-end management investment company. The Trust is authorized to
issue an unlimited number of seven classes of shares of beneficial interest at
$.01 par value. The Trust is comprised of seven portfolios: the Equity
Portfolio, the Small Cap Portfolio, the Global Equity Portfolio, the Managed
Portfolio (the "Portfolio"), the Bond Portfolio, the U. S. Government Income
Portfolio and the Money Market Portfolio. OpCap Advisors (the "Adviser"), a
majority-owned (99%) subsidiary of Oppenheimer Capital, serves as the Trust's
investment adviser. The Trust is an investment vehicle for variable annuity and
variable life insurance contracts of various life insurance companies, and
qualified pension and retirement plans. The following is a summary of
significant accounting policies consistently followed by the Portfolio in the
preparation of its financial statements:

(A) VALUATION OF INVESTMENTS

(B) FEDERAL INCOME TAXES

(D) DIVIDENDS AND DISTRIBUTIONS

Dividends and distributions to shareholders from net investment income and
net realized capital gains, if any, are declared and paid at least annually.

24
<PAGE>

OCC ACCUMULATION TRUST
MANAGED PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(D) DIVIDENDS AND DISTRIBUTIONS (CONTINUED)

based on their Federal tax-basis treatment; temporary differences do not require
reclassification. Dividends and distributions which exceed net investment income
and net realized capital gains for financial reporting purposes but not for tax
purposes are reported as dividends in excess of net investment income or
distributions in excess of net realized capital gains, respectively. To the
extent distributions exceed current and accumulated earnings and profits for
Federal income tax purposes, they are reported as distributions of paid-
in-capital or tax return of capital. At December 31, 1996, the Portfolio did not
have any permanent book-tax differences.

(E) ALLOCATION OF EXPENSES

(F) USE OF ESTIMATES

(G) CUSTODY OFFSETS

(2) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES

(B) Total brokerage commissions paid by the Portfolio for the year ended
December 31, 1996 amounted to $107,123, of which Oppenheimer & Co., Inc., an
affiliate of the Adviser, received $61,183.

(3) PURCHASES AND SALES OF SECURITIES

For the year ended December 31, 1996, purchases and sales of investment
securities, other than short-term securities, were $84,349,690 and $30,263,820,
respectively.

(4) UNREALIZED APPRECIATION (DEPRECIATION) AND COST OF INVESTMENTS FOR FEDERAL
INCOME TAX PURPOSES

Aggregate gross unrealized appreciation for securities in which there is an
excess of value over tax cost is $40,341,986, aggregate gross unrealized
depreciation for securities in which there is an excess of tax cost over value
is $730,406 and net unrealized appreciation for Federal income tax purposes is
$39,611,580. Federal income tax cost basis of portfolio securities is
$141,697,788 at December 31, 1996.

25
<PAGE>

OCC ACCUMULATION TRUST
MANAGED PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

(5) SUBSEQUENT EVENT

26
<PAGE>

OCC ACCUMULATION TRUST
MANAGED PORTFOLIO
FINANCIAL HIGHLIGHTS

FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:

<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED SEPTEMBER 16, 1994(1)
DECEMBER 31, 1996 DECEMBER 31, 1995 TO DECEMBER 31, 1994
----------------- ----------------- ---------------------
<S> <C> <C> <C>
Net asset value, beginning of period........... $ 30.14 $ 20.83 $ 21.80
----------- ---------- ---------
Income from investment operations:
Net investment income.......................... 0.43 0.42 0.14
Net realized and unrealized gain (loss) on
investments.................................. 6.31 9.02 (1.11)
----------- ---------- ---------
Total from investment operations............. 6.74 9.44 (0.97)
----------- ---------- ---------
Dividends and distributions to shareholders:
Dividends to shareholders from net
investment income............................ (0.41) (0.13) --
Distributions to shareholders from net
realized capital gains....................... (0.26) -- --
----------- ---------- ---------
Total dividends and distributions to
shareholders.............................. (0.67) (0.13) 0.00
----------- ---------- ---------
Net asset value, end of period................. $ 36.21 $ 30.14 $ 20.83
=========== ========== =========
Total return(2)................................ 22.8% 45.6% (4.4%)
=========== ========== =========
Net assets, end of period...................... $ 180,728,094 $99,188,147 $54,943,371
----------- ---------- ---------
Ratio of net operating expenses to average
net assets(6)................................ 0.84%(4,5) 0.66% 0.66%(3)
----------- ---------- ---------
Ratio of net investment income to average
net assets(6)................................ 1.66%(4) 1.85% 2.34%(3)
----------- ---------- ---------
Portfolio turnover rate........................ 27% 22% 8%
----------- ---------- ---------
Average commission rate........................ $ 0.0592 -- --
----------- ---------- ---------
</TABLE>

_________________

(1) Commencement of operations.

(2) Assumes reinvestment of all dividends and distributions. Aggregate (not
annualized) total return is shown for any period shorter than one year.

(3) Annualized.

(4) Average net assets for the year ended December 31, 1996 were $130,347,107.

(5) Gross of expense offsets. (See note 1G in Notes to Financial Statements)

(6) During the periods presented above, the Adviser waived a portion or all of
its fees and assumed a portion of the Portfolio's operating expenses.
Additionally, for the year ended December 31, 1996, the Portfolio benefited
from an expense offset arrangement with its custodian bank. If such waivers,
assumptions and expense offsets had not been in effect, the ratios of net
operating expenses to average daily net assets and the ratios of net
investment income to average daily net assets would have been 0.85% and
1.65%, respectively, for the year ended December 31, 1996, 0.74% and 1.77%,
respectively, for the year ended December 31, 1995 and 0.96% and 2.04%,
annualized, respectively, for the period September 16, 1994 (commencement of
operations) to December 31, 1994.

27
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Trustees of
OCC Accumulation Trust -- Managed 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 the Managed Portfolio (one of the
seven portfolios constituting OCC Accumulation Trust, hereafter referred to as
the "Portfolio") at December 31, 1996, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for the periods presented, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the 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
1177 Avenue of the Americas
New York, New York 10036
February 17, 1997

28
<PAGE>

U.S. GOVERNMENT INCOME PORTFOLIO

The U.S. Government Income Portfolio is intended for investors seeking high
cash returns from investments in government securities. In 1996, a challenging
year for bond investors, the Portfolio performed well versus its peers. The
Portfolio had a total return (dividends paid and change in net asset value
assuming the reinvestment of dividends) of 3.0%, compared with a total return of
4.1% for the Lehman Brothers Intermediate Government Bond Index (Lehman Index)
and an average total return of 2.6% for the U.S. Government funds in Lipper's
Variable Insurance Products Performance Analysis Service Report. The Portfolio's
performance was 11th among the 34 funds in this Lipper universe.

The Portfolio provided an average annual total return of 8.0% from its
inception on January 3, 1995 through December 31, 1996, versus an average annual
total return of 9.1% for the Lehman Index. Returns take into account expenses
incurred by the Portfolio, but not separate account charges imposed by the
insurance company.

The Portfolio invests in debt obligations issued or guaranteed by the U.S.
Government and its agencies or intermediaries. These issues are considered to
carry the least credit risk. The Portfolio invests primarily in
intermediate-term securities and places a priority on maintaining a relatively
stable net asset value (NAV) per share.

At the end of December 1996, the Portfolio's assets were allocated 62% to
U.S. Government agency securities, 36% to U.S. Treasury securities and 2% to
cash and cash equivalents. We increased the Portfolio's holdings of agency
securities in the second half because of their attractive yields relative to
Treasuries.

Early in the year, when the bond market was weak, we kept the Portfolio's
average maturity relatively short to preserve capital. Prices of shorter
maturities tend to fall less than those of longer maturities in a declining
market. By year end, we had lengthened maturities somewhat to capitalize on
higher yields for intermediate term securities. The average maturity of the
Portfolio's investments was approximately 3.8 years as of December 31, 1996.

COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN
OCC ACCUMULATION TRUST U.S. GOVERNMENT INCOME PORTFOLIO FROM INCEPTION (1/3/95)
THROUGH 12/31/96 AND TOTAL RETURN ON LEHMAN INTERMEDIATE GOV'T BOND INDEX*

[GRAPH APPEARS HERE]

Past performance is not predictive of future performance.
Assumes reinvestment of all dividends and distributions.
* with dividends.

The performance graph does not reflect charges imposed by the Variable Accounts.

29
<PAGE>

OCC ACCUMULATION TRUST
U.S. GOVERNMENT INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS

DECEMBER 31, 1996

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT VALUE
- ----------- ----------
<S> <C> <C>
U.S. TREASURY NOTES - 36.3%
$ 100,000 5.75%, 10/31/00.................................................... $ 98,672
475,000 6.50%, 8/15/97..................................................... 477,822
390,000 6.50%, 10/15/06.................................................... 392,133
125,000 7.25%, 5/15/04..................................................... 131,523
140,000 7.375%, 11/15/97................................................... 142,012
----------
Total U.S. Treasury Notes (cost - $1,242,934)...................... $1,242,162
----------
U.S. GOVERNMENT AGENCY NOTES - 62.0%
$ 75,000 Federal Farm Credit Bank, 8.65%, 10/1/99............................. $ 79,629
Federal Home Loan Bank,
60,000 6.94%, 3/14/97..................................................... 60,169
100,000 8.09%, 12/28/04.................................................... 108,781
155,000 8.60%, 8/25/99..................................................... 164,325
Federal Home Loan Mortgage Corp.,
175,000 6.22%, 3/24/03..................................................... 172,758
125,000 7.75%, 11/7/01..................................................... 131,973
150,000 8.115%, 1/31/05.................................................... 163,266
Federal National Mortgage Assoc.,
60,000 5.375%, 6/10/98.................................................... 59,597
20,000 5.46%, 1/3/97...................................................... 19,994
20,000 5.46%, 1/7/97...................................................... 19,982
125,000 8.50%, 2/1/05...................................................... 131,426
230,000 8.80%, 7/25/97..................................................... 234,133
55,000 9.20%, 6/10/97..................................................... 55,798
150,000 9.20%, 9/11/00..................................................... 164,274
150,000 Private Export Funding Corp., 9.10%, 10/30/98........................ 157,868
Student Loan Marketing Assoc.
75,000 7.00%, 3/3/98...................................................... 76,008
100,000 7.20%, 11/9/00..................................................... 103,047
Tennessee Valley Authority,
150,000 6.00%, 11/1/00..................................................... 148,430
65,000 8.375%, 10/1/99.................................................... 68,554
----------
Total U.S. Government Agency Notes (cost - $2,103,674)............. $2,120,012
----------

Total Investments (cost - $3,346,608)....................... 98.3% $3,362,174
Other Assets in Excess of Other Liabilities................. 1.7 59,824
----- ----------
Total Net Assets............................................ 100.0% $3,421,998
===== ==========
</TABLE>

See accompanying notes to financial statements.

30
<PAGE>

OCC ACCUMULATION TRUST
U.S. GOVERNMENT INCOME PORTFOLIO
STATEMENT OF ASSETS AND LIABILITIES

DECEMBER 31, 1996

<TABLE>
<S> <C>
ASSETS
Investments, at value (cost - $3,346,608)....................................... $3,362,174
Cash............................................................................ 11,662
Interest receivable............................................................. 63,513
Receivable from fund shares sold................................................ 6,026
Other assets.................................................................... 203
----------
Total Assets.................................................................. 3,443,578
----------

LIABILITIES
Investment advisory fee payable................................................. 4,337
Payable for fund shares redeemed................................................ 1,988
Other payables and accrued expenses............................................. 15,255
----------
Total Liabilities............................................................. 21,580
----------
Total Net Assets.............................................................. $3,421,998
==========

NET ASSETS
Par value ($.01 per share)...................................................... $ 3,297
Paid-in-capital in excess of par................................................ 3,411,026
Accumulated net realized loss on investments.................................... (7,891)
Net unrealized appreciation on investments...................................... 15,566
----------
Total Net Assets.............................................................. $3,421,998
==========
Fund shares outstanding......................................................... 329,735
----------
Net asset value per share....................................................... $ 10.38
==========
</TABLE>

See accompanying notes to financial statements.

<PAGE>

OCC ACCUMULATION TRUST
U.S. GOVERNMENT INCOME PORTFOLIO
STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 1996

<TABLE>
<S> <C>
INVESTMENT INCOME
Interest........................................................................ $153,307
--------

OPERATING EXPENSES
Custodian fees (note 1G)........................................................ 17,308
Investment advisory fees (note 2)............................................... 14,797
Auditing, consulting and tax return preparation fees............................ 10,309
Transfer and dividend disbursing agent fees..................................... 9,044
Legal fees...................................................................... 1,753
Reports and notices to shareholders............................................. 737
Miscellaneous................................................................... 3,802
--------
Total operating expenses..................................................... 57,750
Less: Investment advisory fees waived and expenses assumed (note 2).......... (34,102)
Less: Expense offset arrangement (note 1G)................................... (394)
--------
Net operating expenses.................................................. 23,254
--------
Net investment income................................................... 130,053
--------

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS - NET

Net realized loss on investments................................................ (7,891)

Net change in unrealized appreciation (depreciation) on investments............. (26,424)
--------

Net realized loss and change in unrealized appreciation (depreciation) on
investments................................................................. (34,315)
--------

Net increase in net assets resulting from operations.............................. $ 95,738
========
</TABLE>

See accompanying notes to financial statements.

32
<PAGE>

OCC ACCUMULATION TRUST
U.S. GOVERNMENT INCOME PORTFOLIO
STATEMENT OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
YEAR ENDED JANUARY 3, 1995(1)
DECEMBER 31, 1996 TO DECEMBER 31, 1995
----------------- --------------------
<S> <C> <C>
OPERATIONS
Net investment income..................................... $ 130,053 $ 46,710
Net realized gain (loss) on investments................... (7,891) 7,795
Net change in unrealized appreciation (depreciation) on
investments............................................. (26,424) 41,990
----------- ----------
Net increase in net assets resulting from
operations......................................... 95,738 96,495
----------- ----------

DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Net investment income..................................... (130,053) (46,710)
Net realized gains........................................ -- (7,795)
----------- ----------
Total dividends and distributions to shareholders.... (130,053) (54,505)
----------- ----------

FUND SHARE TRANSACTIONS
Net proceeds from sales................................... 2,180,216 1,442,074
Reinvestment of dividends and distributions............... 130,663 53,894
Cost of shares redeemed................................... (297,024) (95,500)
----------- ----------
Net increase in net assets from fund share
transactions....................................... 2,013,855 1,400,468
----------- ----------

Total increase in net assets.................... 1,979,540 1,442,458

NET ASSETS
Beginning of period....................................... 1,442,458 0
----------- ----------
End of period (including undistributed net investment
income of $0 and $0, respectively)...................... $ 3,421,998 $1,442,458
=========== ==========

SHARES ISSUED AND REDEEMED
Issued.................................................... 209,939 139,749
Issued in reinvestment of dividends and distributions..... 12,589 5,140
Redeemed.................................................. (28,592) (9,090)
----------- ----------
Net increase......................................... 193,936 135,799
=========== ==========
</TABLE>

_______________

(1) Commencement of operations.

See accompanying notes to financial statements.

33
<PAGE>

OCC ACCUMULATION TRUST
U.S GOVERNMENT INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1996

(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

OCC Accumulation Trust (the "Trust") (formerly Quest for Value Accumulation
Trust) was organized on May 12, 1994 as a Massachusetts business trust and is
registered under the Investment Company Act of 1940 as amended, as a
diversified, open-ended management investment company. The Trust is authorized
to issue an unlimited number of seven classes of shares of beneficial interest
at $.01 par value. The Trust is comprised of seven portfolios: the Equity
Portfolio, the Small Cap Portfolio, the Global Equity Portfolio, the Managed
Portfolio, the Bond Portfolio, the U.S. Government Income Portfolio (the
"Portfolio") and the Money Market Portfolio. OpCap Advisors (the "Adviser"), a
majority-owned (99%) subsidiary of Oppenheimer Capital, serves as the Trust's
investment adviser. The U.S. Government Income Portfolio one of the Trust's
seven portfolios, commenced operations on January 3, 1995. The Trust is an
investment vehicle for variable annuity and variable life insurance contracts of
various life insurance companies, and qualified pension and retirement plans.
The following is a summary of significant accounting policies consistently
followed by the Portfolio in the preparation of its financial statements:

(A) VALUATION OF INVESTMENTS

Investment debt securities (other than short-term obligations) are valued
each business day by an independent pricing service (approved by the Board of
Trustees) using methods which include current market quotations from a major
market maker in the securities and trader-reviewed "matrix" prices. Short-term
debt securities having a remaining maturity of sixty days or less are valued at
amortized cost or amortized value which approximates market value. Any
securities or other assets for which market quotations are not readily available
are valued at their fair value as determined in good faith by the Board of
Trustees. The ability of issuers of debt instruments to meet their obligations
may be affected by economic developments in a specific industry or region.

(B) FEDERAL INCOME TAXES

Investment transactions are accounted for on the trade date. In determining
the gain or loss from the sale of investments, the cost of investments sold has
been determined on the basis of identified cost. Interest income is accrued as
earned. Discounts or premiums on debt securities purchased are accreted or
amortized to interest income over the lives of the respective securities.

(D) DIVIDENDS AND DISTRIBUTIONS

Dividends from net investment income are declared daily and paid monthly.
Distributions from net realized capital gains, if any, are declared and paid at
least annually.

The Portfolio records dividends and distributions to its shareholders on
the ex-dividend date. The amount of dividends and distributions from net
investment income and net realized capital gains are determined in accordance
with Federal income tax regulations, which may differ from generally accepted
accounting principles. These "book-tax" differences are either considered
temporary or permanent in nature. To the extent these differences are permanent
in nature, such amounts are reclassified within the capital accounts based on
their Federal tax-basis treatment; temporary differences do not require
reclassification. Dividends and distributions which exceed net investment income
and net realized capital gains for financial reporting purposes but not for tax
purposes are reported as dividends in excess of net investment income or
distributions in excess of net realized capital gains, respectively. To the
extent distributions exceed current and

34
<PAGE>

OCC ACCUMULATION TRUST
U.S. GOVERNMENT INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

(D) DIVIDENDS AND DISTRIBUTIONS (CONTINUED)

accumulated earnings and profits for Federal income tax purposes, they are
reported as distributions of paid-in-capital or tax return of capital. At
December 31, 1996, the Portfolio did not have any permanent book-tax
differences.

(E) ALLOCATION OF EXPENSES

(F) USE OF ESTIMATES

(G) CUSTODY OFFSETS

(2) INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES

The investment advisory fee is accrued daily and payable monthly to the
Adviser, and is computed as a percentage of the Portfolio's net assets as of the
close of business each day at the annual rate of .60%.

The Adviser has voluntarily agreed to waive that portion of the advisory
fee and to assume any necessary expenses to limit total operating expenses of
the Portfolio to 1.00% (net of expense offsets) of average daily net assets on
an annual basis.

(3) PURCHASES AND SALES OF SECURITIES

For the year ended December 31, 1996, purchases and sales of investment
securities, other than short-term securities, were $2,669,452 and $705,798,
respectively.

(4) UNREALIZED APPRECIATION (DEPRECIATION) AND COST OF INVESTMENTS FOR FEDERAL
INCOME TAX PURPOSES

Aggregate gross unrealized appreciation for securities in which there is an
excess of value over tax cost is $22,879, aggregate gross unrealized
depreciation for securities in which there is an excess of tax cost over value
is $9,001 and net unrealized appreciation for Federal income tax purposes is
$13,878. Federal income tax cost basis of portfolio securities is $3,348,296 at
December 31, 1996.

(5) CAPITAL LOSS CARRY-FORWARD

For the year ended December 31, 1996, the Portfolio incurred net realized
capital losses of $6,203 which are available as a reduction against future net
capital gains realized before the end of fiscal year 2004 to the extent provided
by regulations. To the extent that this capital loss carry-forward is used to
offset future net capital gains, it is possible that gains so offset will not be
distributed to shareholders.

(6) SUBSEQUENT EVENT

35
<PAGE>

OCC ACCUMULATION TRUST
U.S. GOVERNMENT INCOME PORTFOLIO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 1996

(6) SUBSEQUENT EVENT (CONTINUED)

Exchange and of which Oppenheimer Financial Corp. is the sole general partner,
owns the remaining two-thirds interest. On February 13, 1997, PIMCO Advisors
L.P., a registered investment adviser, signed a definitive agreement with
Oppenheimer Group, Inc. and its subsidiary Oppenheimer Financial Corp. for PIMCO
Advisors L.P. and its affiliate, Thomson Advisory Group, Inc., to acquire the
one-third managing general partner interest in Oppenheimer Capital and the 1.0%
general partner interest in Oppenheimer Capital L.P. The completion of the
transaction is subject to certain client, lender, IRS and other approvals.

36
<PAGE>

OCC ACCUMULATION TRUST
U.S. GOVERNMENT INCOME PORTFOLIO
FINANCIAL HIGHLIGHTS

FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD:

<TABLE>
<CAPTION>
YEAR ENDED JANUARY 3, 1995(1)
DECEMBER 31, 1996 TO DECEMBER 31, 1995
----------------- --------------------
<S> <C> <C>
Net asset value, beginning of period.............................. $ 10.62 $ 10.00
---------- ----------

Income from investment operations:
Net investment income............................................. 0.55 0.60
Net realized and unrealized gain (loss) on investments............ (0.24) 0.68
---------- ----------
Total from investment operations................................ 0.31 1.28
---------- ----------

Dividends and distributions to shareholders:
Dividends to shareholders from net investment income.............. (0.55) (0.60)
Distributions to shareholders from net realized capital gains..... -- (0.06)
---------- ----------
Total dividends and distributions to shareholders............... (0.55) (0.66)
---------- ----------

Net asset value, end of period.................................... $ 10.38 $ 10.62
========== ==========

Total return(2)................................................... 3.0% 13.1%
========== ==========

Net assets, end of period......................................... $ 3,421,998 $1,442,458
---------- ----------

Ratio of net operating expenses to average net assets(6).......... 0.96%(4,5) 0.75%(3)
---------- ----------
Ratio of net investment income to average net assets(6)........... 5.27%(4) 5.75%(3)
---------- ----------
Portfolio turnover rate........................................... 31% 65%
---------- ----------
</TABLE>

(1) Commencement of operations.

(2) Assumes reinvestment of all dividends and distributions. Aggregate (not
annualized) total return is shown for any period shorter than one year.

(3) Annualized.

(4) Average net assets for the year ended December 31, 1996 were $2,466,244.

(5) Gross of expense offsets. (See note 1G in Notes to Financial Statements)

(6) During the periods presented above, the Adviser waived all of its fees and
assumed a portion of the Portfolio's operating expenses. Additionally, for
the year ended December 31, 1996, the Portfolio benefited from an expense
offset arrangement with its custodian bank. If such waivers, assumptions
and expense offsets had not been in effect, the ratios of net operating
expenses to average daily net assets and the ratios of net investment
income to average daily net assets would have been 2.34% and 3.87%,
respectively, for the year ended December 31, 1996, and 4.73% and 1.77%,
annualized, respectively for the period January 3, 1995 (commencement of
operations) to December 31, 1995.

37
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Trustees of
OCC Accumulation Trust -- U.S. Government Income 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 the U.S. Government Income
Portfolio (one of the seven portfolios constituting OCC Accumulation Trust,
hereafter referred to as the "Portfolio") 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 year then ended and for the period January 3,
1995 (commencement of operations) through December 31, 1995, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the 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, provide a reasonable basis for the opinion
expressed above.

PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 17, 1997

38
<PAGE>

OCC ACCUMULATION TRUST
ONE WORLD FINANCIAL CENTER
NEW YORK, NY 10281

<TABLE>
<S> <C>
TRUSTEES AND PRINCIPAL OFFICERS

Joseph M. La Motta Trustee, President
Paul Y. Clinton Trustee
Thomas W. Courtney Trustee
Lacy B. Herrmann Trustee
George Loft Trustee
Bernard H. Garil Vice President
Robert J. Bluestone Vice President
Pierre Daviron Vice President
John C. Giusio, Jr. Vice President
Richard J. Glasebrook, II Vice President
Louis Goldstein Vice President
Benjamin D. Gutstein Vice President
Vikki Hanges Vice President
Timothy McCormick Vice President
Eileen P. Rominger Vice President
Sheldon M. Siegel Treasurer
Deborah Kaback Secretary
Richard L. Peteka Assistant Treasurer

INVESTMENT ADVISER

OpCap Advisors
One World Financial Center
New York, NY 10281

CUSTODIAN AND TRANSFER AGENT

State Street Bank and Trust Company
P.O. Box 1713
Boston, MA 02105

INDEPENDENT ACCOUNTANTS

Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036

This report is authorized for
distribution only
to shareholders and to others who have
received a copy of this Trust's
prospectus.
</TABLE>

39
<PAGE>

Annuity Administrative Offices [LOGO OF PROVIDIAN]
Post Office Box 32700
400 West Market Street
Louisville, Kentucky 40232
800-866-6007

February 1997

Dear Valued Customer:

Enclosed are annual reports for the portfolios available in your Providian Life
and Health variable annuity contract.

Please take some time to review these reports, and if you have any questions,
call one of our customer service representatives at 800-866-6007, 8 a.m. to 6
p.m. Eastern time, Monday through Friday.

Providian Life and Health is proud to have you as our customer.

Sincerely,

/s/ Jeffrey P. Lammers
Jeffrey P. Lammers
Senior Vice President
National Sales Director

Providian Life and Health Insurance Company provides the variable annuity.
Securities are offered through Providian Securities Corporation, 400 West Market
Street, Louisville, KY 40202. Both are subsidiaries of Providian Corporation.

(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS
FUND: 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 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 11 Statements of assets and liabilities, operations, and
changes in net assets, as well as financial highlights.

NOTES 13 Notes to the financial statements.

REPORT OF INDEPENDENT ACCOUNTANTS 15 The auditors' opinion.

DISTRIBUTIONS 16

</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: GROWTH 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 PAST 1 PAST 5 PAST 10
DECEMBER 31, 1996 YEAR YEARS YEARS

Growth 14.71% 15.16% 15.15%

S&P 500(registered trademark) 22.96% 15.22% 15.27%

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 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.

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.
If Fidelity had not reimbursed certain fund expenses, the fund's past 10
years total return 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 THE PAST 10 YEARS
IMAHDR PRASUN SHR__CHT 19961231 19970108 094950 S00000000000001
VIP: Growth SP Standard & Poor 500
00151 SP001
1986/12/31 10000.00 10000.00
1987/01/31 11066.80 11347.00
1987/02/28 11615.15 11795.21
1987/03/31 11804.55 12136.09
1987/04/30 11804.55 12028.08
1987/05/31 11884.45 12132.72
1987/06/30 12233.99 12745.42
1987/07/31 12723.35 13391.62
1987/08/31 13102.85 13891.12
1987/09/30 12953.05 13586.91
1987/10/31 10106.77 10660.29
1987/11/30 9397.70 9781.88
1987/12/31 10366.43 10526.28
1988/01/31 10591.35 10969.44
1988/02/29 11450.11 11480.61
1988/03/31 11347.87 11125.86
1988/04/30 11491.00 11249.36
1988/05/31 11388.77 11347.23
1988/06/30 11961.27 11868.07
1988/07/31 11899.93 11822.97
1988/08/31 11613.68 11420.99
1988/09/30 11940.82 11907.52
1988/10/31 11971.49 12238.55
1988/11/30 11859.04 12063.54
1988/12/31 11981.72 12274.65
1989/01/31 12840.48 13173.16
1989/02/28 12574.67 12845.14
1989/03/31 12954.82 13144.44
1989/04/30 13639.93 13826.63
1989/05/31 14127.81 14386.61
1989/06/30 13940.96 14304.61
1989/07/31 15186.62 15596.31
1989/08/31 15446.13 15902.00
1989/09/30 15581.07 15836.80
1989/10/31 15145.09 15469.39
1989/11/30 15394.23 15784.96
1989/12/31 15757.54 16163.80
1990/01/31 14844.06 15079.21
1990/02/28 14985.85 15273.73
1990/03/31 15169.00 15678.49
1990/04/30 14727.29 15286.53
1990/05/31 16030.87 16776.96
1990/06/30 16364.85 16662.88
1990/07/31 16106.29 16609.56
1990/08/31 14447.18 15108.05
1990/09/30 12960.44 14372.29
1990/10/31 12497.19 14310.49
1990/11/30 13509.89 15234.95
1990/12/31 13908.51 15660.00
1991/01/31 14835.02 16342.78
1991/02/28 15941.78 17511.29
1991/03/31 16422.88 17935.06
1991/04/30 16269.80 17978.11
1991/05/31 17231.99 18754.76
1991/06/30 15952.72 17895.79
1991/07/31 17472.54 18729.74
1991/08/31 18248.86 19173.63
1991/09/30 18391.00 18853.43
1991/10/31 18959.57 19106.07
1991/11/30 17877.10 18336.09
1991/12/31 20238.85 20433.74
1992/01/31 21474.39 20053.67
1992/02/29 21923.63 20314.37
1992/03/31 20579.99 19918.24
1992/04/30 19773.81 20503.84
1992/05/31 19605.86 20604.31
1992/06/30 18844.46 20297.30
1992/07/31 19572.27 21127.46
1992/08/31 19034.81 20694.35
1992/09/30 19370.72 20938.54
1992/10/31 20120.92 21011.83
1992/11/30 21464.55 21728.33
1992/12/31 22125.17 21995.59
1993/01/31 22561.85 22180.35
1993/02/28 22096.74 22482.00
1993/03/31 22977.86 22956.37
1993/04/30 22737.56 22400.83
1993/05/31 24431.14 23001.17
1993/06/30 24682.89 23067.88
1993/07/31 24614.23 22975.60
1993/08/31 25850.09 23846.38
1993/09/30 26330.71 23662.76
1993/10/31 26582.46 24152.58
1993/11/30 25506.80 23923.13
1993/12/31 26410.81 24212.60
1994/01/31 27074.51 25035.83
1994/02/28 26795.26 24357.36
1994/03/31 25577.85 23295.38
1994/04/30 25736.12 23593.56
1994/05/31 25139.58 23980.49
1994/06/30 23861.30 23392.97
1994/07/31 24689.14 24160.26
1994/08/31 26089.17 25150.83
1994/09/30 25772.64 24534.64
1994/10/31 26819.61 25086.67
1994/11/30 25748.29 24173.01
1994/12/31 26405.69 24531.50
1995/01/31 25906.55 25167.60
1995/02/28 26979.42 26148.38
1995/03/31 27958.71 26920.02
1995/04/30 28901.27 27712.81
1995/05/31 30027.46 28820.49
1995/06/30 32683.78 29489.99
1995/07/31 35915.43 30467.88
1995/08/31 36356.11 30544.36
1995/09/30 37298.68 31833.33
1995/10/31 36919.20 31719.68
1995/11/30 36894.72 33112.18
1995/12/31 35744.06 33749.92
1996/01/31 36307.15 34898.76
1996/02/29 37524.44 35222.28
1996/03/31 37669.27 35561.47
1996/04/30 39143.91 36085.64
1996/05/31 40368.39 37016.29
1996/06/30 39578.41 37157.32
1996/07/31 36550.12 35515.71
1996/08/31 37642.94 36264.74
1996/09/30 40170.90 38305.72
1996/10/31 40078.73 39362.19
1996/11/30 42303.87 42337.58
1996/12/31 41000.39 41498.87
IMATRL PRASUN SHR__CHT 19961231 19970108 094953 R00000000000123

Let's say hypothetically that $10,000 was invested in Growth Portfolio on
December 31, 1986. As the chart shows, by December 31, 1996, the value of
the investment would have grown to $41,000 - a 310.00% 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 $41,499 over the same
period - a 314.99% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1996
% OF FUND'S
INVESTMENTS

Intel Corp. 2.5

General Electric Co. 2.4

Cisco Systems, Inc. 2.4

HFS, Inc. 1.9

Oracle Systems Corp. 1.8

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

Technology 25.6

Health 11.0

Retail & Wholesale 9.0

Finance 8.2

Media & Leisure 6.3

ASSET ALLOCATION AS OF DECEMBER 31, 1996 *
Row: 1, Col: 1, Value: 9.199999999999999
Row: 1, Col: 2, Value: 45.0
Row: 1, Col: 3, Value: 45.8
Stocks 90.8%
Short-term investments 9.2%
FOREIGN INVESTMENTS 3.6%
*
(% OF FUND'S INVESTMENTS)
VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW

NOTE TO SHAREHOLDERS: Jennifer Uhrig became Portfolio Manager of Growth
Portfolio on January 7, 1997, after the period ended.
Q. WHAT CAN YOU TELL US ABOUT THE FUND'S PERFORMANCE, JENNIFER?
A. During the 12 months that ended December 31, 1996, the fund
significantly underperformed the Standard & Poor's 500 Index, which
returned 22.96% during the past one year.
Q. WHAT WERE THE CAUSES OF THE FUND'S RELATIVELY POOR PERFORMANCE?
A. There were three reasons for the fund's underperformance, and most of
them affected the fourth quarter. First, the fund was significantly
underweighted compared to the S&P 500 in financial services and energy
stocks. Financial services was one of the best-performing groups in the
stock market in 1996. In fact, it was one of only a few sectors that
outperformed the general market. However, financial services is not what
one would typically consider to be a growth area, and the fund
traditionally has not had a strong weighting in this sector. Second, the
fund's cash position was high - over 9% both six months ago and when the
period ended - while the market was very strong throughout. Third and
perhaps most important, the fund had twice the market's weighting in
retail. This sector as a whole performed poorly, and some of the fund's
retail holdings blew up, including Sunglass Hut. So those are three key
reasons why the fund lagged its index.
Q. WHAT TYPE OF IMPACT DID THE FUND'S TECHNOLOGY INVESTMENTS HAVE ON
PERFORMANCE?
A. As it turned out, the technology investments did not help, relatively
speaking. With about 26% of its holdings in technology at year-end, the
fund had about twice the weighting of its index in this market sector.
While technology generally performed well, the sector's strength came from
just a few very large capitalization stocks - including Microsoft and IBM.
The fund did own these stocks, but was not overweighted in them. In
retrospect, larger investments in these stocks would have helped the fund.
Q. WHAT WAS THE STORY WITH THE FUND'S HEALTH CARE POSITION?
A. Health care was a strong sector, with the drug stocks doing quite well,
particularly in the second half of the year. Unit growth has been better
than expected, and pricing has stabilized. So the earnings momentum across
this sector has been strong. Drug therapy is a lot cheaper than other types
of therapy, such as hospitalization. Therefore, it is being preferred over
hospital stays - hence the unit growth in prescription medicine. Drug
stocks were also helped by the stock market's concern about the economy.
Drug stocks such as Merck, Pfizer and Bristol-Myers Squibb are what I
consider strong non-cyclical or economically defensive investments, meaning
that they are not as influenced by the strength of the economy. If your
health is at risk, you'll spend money on medicine, whether the economy is
strong, weak or in-between.
Q. HOW ABOUT RETAIL?
A. Retailers are early cyclicals - what I call the "front end of the
economy." They typically lead economic cycles up and lead economic cycles
down. In this respect, they're the other side of the coin from health care.
People who are worried about the economy typically are not spending as much
money on retail goods. I believe investors' concern about the health of the
economy was justified by the relatively lackluster Christmas season for
retail. The fund's overweighting in this sector hurt, and investments in
PETsMART, Staples and Lowe's - as well as Sunglass Hut that I mentioned
earlier - dragged performance down.
Q. WHAT'S YOUR OUTLOOK FOR THE FIRST HALF OF THE YEAR, JENNIFER?
A. A lot depends on how well the economy does, and chances are it will be
slower in 1997 than it was in 1996. I believe consumers are somewhat
over-extended on their borrowing, and that's an environment that typically
doesn't bode well for economic growth. Another argument for a slowdown in
the economy is that we're five years into a recovery, which is a long time
without a breather. I don't know if there will be a recession, but I can't
really see the economy taking off a whole lot from the level it's at today.
The good news is that growth stocks - because they tend to be less
influenced by general economic cycles - can still do well if things slow
down.

FUND FACTS
GOAL: to increase the value of the fund's
shares over the long term by investing in stocks
with above-average growth potential
START DATE: October 9, 1986
SIZE: as of December 31, 1996, more than
$6.0 billion
MANAGER: Jennifer Uhrig, since January 1997;
joined Fidelity in 1987
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO
INVESTMENTS DECEMBER 31, 1996

Showing Percentage of Total Value of Investment in Securities

COMMON STOCKS - 90.8%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 1.4%
AEROSPACE & DEFENSE - 1.2%
Boeing Co. 467,200 $ 49,698,363
Gulfstream Aerospace Corp. (a) 185,300 4,493,525
Lockheed Martin Corp. 165,000 15,097,500
Wyman-Gordon Co. (a) 132,000 2,937,000
72,226,388
DEFENSE ELECTRONICS - 0.2%
Raytheon Co. 259,100 12,469,188
TOTAL AEROSPACE & DEFENSE 84,695,576
BASIC INDUSTRIES - 1.8%
CHEMICALS & PLASTICS - 1.0%
Air Products & Chemicals, Inc. 71,100 4,914,788
Airgas, Inc. (a) 177,600 3,907,200
du Pont (E.I.) de Nemours & Co. 250,000 23,593,750
Monsanto Co. 600,000 23,325,000
Praxair, Inc. 150,000 6,918,750
62,659,488
IRON & STEEL - 0.1%
Nucor Corp. 133,500 6,808,500
METALS & MINING - 0.3%
Aluminum Co. of America 155,500 9,913,125
Freeport McMoRan Copper & Gold, Inc.
Class A 125,000 3,515,625
Inco Ltd. 151,800 4,844,622
Titanium Metals Corp. (a) 30,100 989,538
19,262,910
PACKAGING & CONTAINERS - 0.3%
Crown Cork & Seal Co., Inc. 175,100 9,521,063
Tupperware Corp. 100,000 5,362,500
14,883,563
PAPER & FOREST PRODUCTS - 0.1%
Kimberly-Clark Corp. 85,400 8,134,350
TOTAL BASIC INDUSTRIES 111,748,811
CONGLOMERATES - 1.0%
AlliedSignal, Inc. 300,000 20,100,000
Tyco International Ltd. 369,500 19,537,313
United Technologies Corp. 273,400 18,044,400
57,681,713
CONSTRUCTION & REAL ESTATE - 0.7%
CONSTRUCTION - 0.3%
Oakwood Homes Corp. 875,000 20,015,625
ENGINEERING - 0.2%
MasTec, Inc. (a) 250,000 13,250,000
REAL ESTATE INVESTMENT TRUSTS - 0.2%
First Industrial Realty Trust, Inc. 178,800 5,431,050
RFS Hotel Investors, Inc. 343,300 6,780,175
12,211,225
TOTAL CONSTRUCTION & REAL ESTATE 45,476,850
DURABLES - 4.1%
AUTOS, TIRES, & ACCESSORIES - 2.3%
AutoZone, Inc. (a) 775,000 21,312,500
Chrysler Corp. 1,285,700 42,428,100
Danaher Corp. 140,000 6,527,500
Eaton Corp. 150,000 10,462,500
General Motors Corp. 834,846 46,542,665

SHARES VALUE (NOTE 1)
Honda Motor Co. Ltd. 165,000 $ 4,710,220
PACCAR, Inc. 60,400 4,107,200
TRW, Inc. 100,000 4,950,000
141,040,685
CONSUMER DURABLES - 0.4%
Minnesota Mining & Manufacturing Co. 302,900 25,102,838
CONSUMER ELECTRONICS - 0.3%
Harman International Industries, Inc. 150,100 8,349,313
Newell Co. 218,000 6,867,000
15,216,313
HOME FURNISHINGS - 0.0%
Furniture Brands International, Inc. (a) 85,700 1,199,800
TEXTILES & APPAREL - 1.1%
Adidas AG 63,300 5,461,499
Adidas AG (b) 45,600 3,934,350
Gucci Group NV 100,000 6,387,500
Liz Claiborne, Inc. 107,400 4,148,325
Mohawk Industries, Inc. (a) 216,700 4,767,400
NIKE, Inc. Class B 625,800 37,391,550
Tommy Hilfiger (a) 100,000 4,800,000
66,890,624
TOTAL DURABLES 249,450,260
ENERGY - 6.0%
ENERGY SERVICES - 1.6%
Baker Hughes, Inc. 204,600 7,058,700
Diamond Offshore Drilling, Inc. (a) 145,100 8,270,700
Dresser Industries, Inc. 197,100 6,110,100
Halliburton Co. 269,800 16,255,450
Schlumberger Ltd. 350,000 34,956,250
Tidewater, Inc. 113,800 5,149,450
Transocean Offshore, Inc. 101,300 6,343,913
Varco International, Inc. (a) 239,500 5,538,438
Western Atlas, Inc. (a) 100,000 7,087,500
96,770,501
OIL & GAS - 4.4%
Abacan Resource Corp. (a) 274,600 2,385,588
Amerada Hess Corp. 315,800 18,276,925
Anadarko Petroleum Corp. 103,300 6,688,675
Apache Corp. 263,900 9,335,463
Atlantic Richfield Co. 250,700 33,217,750
Barrett Resources Corp. (a) 300,000 12,787,500
Belco Oil & Gas Corp. (a) 69,000 1,888,875
Benton Oil & Gas Co. (a) 240,000 5,430,000
British Petroleum PLC ADR 209,871 29,670,513
Burlington Resources, Inc. 104,600 5,269,225
Chesapeake Energy Corp. (a) 209,400 11,647,875
Kerr-McGee Corp. 98,000 7,056,000
Louisiana Land & Exploration Co. 177,000 9,491,625
Nationale Elf Aquitaine 67,800 6,169,931
Noble Affiliates, Inc. 200,000 9,575,000
Occidental Petroleum Corp. 315,200 7,367,800
Parker & Parsley Petroleum Co. 137,200 5,042,100
Pennzoil Co. 89,500 5,056,750
Royal Dutch Petroleum Co. ADR 333,300 56,910,975
Texaco, Inc. 60,500 5,936,563
Titan Exploration, Inc. 141,700 1,700,400
Union Pacific Resources Group, Inc. 247,441 7,237,649
Unocal Corp. 254,601 10,343,166
268,486,348
TOTAL ENERGY 365,256,849
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - 8.2%
BANKS - 2.3%
Bank of New York Co., Inc. 150,000 $ 5,062,500
BankAmerica Corp. 365,000 36,408,750
Chase Manhattan Corp. 60,400 5,390,700
Citicorp 467,300 48,131,900
First Bank System, Inc. 144,000 9,828,000
NationsBank Corp. 300,200 29,344,550
Norwest Corp. 130,200 5,663,700
139,830,100
CREDIT & OTHER FINANCE - 1.1%
American Express Co. 625,000 35,312,500
Beneficial Corp. 136,100 8,625,338
Concord EFS, Inc. (a) 12,100 341,825
Green Tree Financial Corp. 230,000 8,883,750
Household International, Inc. 150,008 13,838,238
67,001,651
FEDERAL SPONSORED CREDIT - 2.4%
Federal Home Loan Mortgage
Corporation 400,000 44,050,000
Federal National Mortgage Association 2,650,000 98,712,500
Student Loan Marketing Association 15,000 1,396,875
144,159,375
INSURANCE - 2.2%
Allstate Corp. 275,000 15,915,625
American General Corp. 75,400 3,081,975
American International Group, Inc. 300,000 32,475,000
CIGNA Corp. 80,000 10,930,000
Capital Re Corp. 94,400 4,401,400
General Re Corp. 75,200 11,862,800
ITT Hartford Group, Inc. 125,000 8,437,500
MBIA, Inc. 90,100 9,122,625
MGIC Investment Corp. 129,800 9,864,800
Marsh & McLennan Companies, Inc. 52,900 5,501,600
SunAmerica, Inc. 150,000 6,656,250
Travelers Group, Inc. (The) 220,000 9,982,500
UNUM Corp. 75,000 5,418,750
133,650,825
SECURITIES INDUSTRY - 0.2%
Schwab (Charles) Corp. 311,300 9,961,600
United Asset Management Corp. 75,300 2,004,863
11,966,463
TOTAL FINANCE 496,608,414
HEALTH - 11.0%
DRUGS & PHARMACEUTICALS - 5.9%
ALZA Corp. Class A (a) 176,500 4,566,938
American Home Products Corp. 550,000 32,243,750
Amgen, Inc. (a) 221,900 12,065,813
Biochem Pharmaceuticals, Inc. (a) 134,500 6,755,170
Biogen, Inc. (a) 579,400 22,451,750
Bristol-Myers Squibb Co. 422,800 45,979,500
Dura Pharmaceuticals, Inc. (a) 50,000 2,387,500
Elan Corp. PLC ADR (a) 200,000 6,650,000
Genentech, Inc. special (a) 385,000 20,645,625
Lilly (Eli) & Co. 275,000 20,075,000
Merck & Co., Inc. 895,500 70,968,375
Perseptive Biosystem, Inc. Class G
(warrants) (a) 1,390 0
Pfizer, Inc. 645,300 53,479,238
Protein Design Labs, Inc. (a) 225,000 8,212,500
Schering-Plough Corp. 398,100 25,776,975

SHARES VALUE (NOTE 1)
SmithKline Beecham PLC ADR 352,300 $ 23,956,400
Thermotrex Corp. (a) 2,800 76,650
356,291,184
MEDICAL EQUIPMENT & SUPPLIES - 2.6%
Bergen Brunswig Corp. Class A 375,000 10,687,500
Boston Scientific Corp. (a) 215,700 12,942,000
Cardinal Health, Inc. 270,900 15,779,925
Johnson & Johnson 1,030,400 51,262,400
Medtronic, Inc. 552,500 37,570,000
Pall Corp. 200,000 5,100,000
St. Jude Medical, Inc. (a) 375,000 15,984,375
Sofamor/Danek Group, Inc. (a) 137,000 4,178,500
Sybron International, Inc. (a) 235,000 7,755,000
161,259,700
MEDICAL FACILITIES MANAGEMENT - 2.5%
American Medical Response, Inc. (a) 185,000 6,012,500
Carematrix Corp. (a) 205,300 2,694,563
Columbia/HCA Healthcare Corp. 815,037 33,212,758
HEALTHSOUTH Rehabilitation Corp. (a) 1,320,300 50,996,588
Lincare Holdings, Inc. (a) 276,900 11,352,900
Oxford Health Plans, Inc. (a) 363,000 21,258,188
PacifiCare Health Systems, Inc. Class B (a) 168,300 14,347,575
United HealthCare Corp. 215,900 9,715,500
Vencor, Inc. (a) 76,925 2,432,753
152,023,325
TOTAL HEALTH 669,574,209
HOLDING COMPANIES - 0.1%
Norfolk Southern Corp. 45,300 3,963,750
INDUSTRIAL MACHINERY & EQUIPMENT - 3.9%
ELECTRICAL EQUIPMENT - 3.0%
Alcatel Alsthom Compagnie Generale
d'Electricite SA 67,900 5,452,933
American Power Conversion Corp. (a) 150,400 4,098,400
Duracell International, Inc. 25,500 1,781,813
Emerson Electric Co. 214,800 20,781,900
General Electric Co. 1,505,200 148,826,650
United Communication Industry PCL
(For. Reg.) 154,000 1,656,947
182,598,643
INDUSTRIAL MACHINERY & EQUIPMENT - 0.7%
Case Corp. 175,000 9,537,500
Caterpillar, Inc. 176,100 13,251,525
Illinois Tool Works, Inc. 67,600 5,399,550
Ingersoll-Rand Co. 200,000 8,900,000
MSC Industrial Direct, Inc. (a) 72,000 2,664,000
Stanley Works (The) 205,600 5,551,200
45,303,775
POLLUTION CONTROL - 0.2%
USA Waste Services, Inc. (a) 160,000 5,100,000
WMX Technologies, Inc. 75,400 2,459,925
Zurn Industries, Inc. 146,500 3,827,313
11,387,238
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 239,289,656
MEDIA & LEISURE - 6.3%
BROADCASTING - 0.4%
Clear Channel Communications, Inc. (a) 82,800 2,991,150
Evergreen Media Corp. Class A (a) 275,000 6,875,000
Lin Television Corp. (a) 105,800 4,470,050
PanAmSat Corp. (a) 320,000 8,960,000
Time Warner, Inc. 252 9,450
23,305,650
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
MEDIA & LEISURE - CONTINUED
ENTERTAINMENT - 0.5%
Disney (Walt) Co. 157,600 $ 10,972,900
MGM Grand, Inc. (a) 184,900 6,448,388
Regal Cinemas, Inc. (a) 150,000 4,612,500
Viacom, Inc. Class B (non-vtg.) (a) 175,000 6,103,125
28,136,913
LEISURE DURABLES & TOYS - 0.3%
Harley-Davidson, Inc. 240,000 11,280,000
Nintendo Co. Ltd. Ord. 64,000 4,575,765
15,855,765
LODGING & GAMING - 3.6%
Anchor Gaming (a) 100,000 4,025,000
Circus Circus Enterprises, Inc. (a) 640,700 22,024,063
Doubletree Corp. (a) 100,000 4,500,000
Extended Stay America, Inc. (a) 234,400 4,717,300
HFS, Inc. (a) 1,900,900 113,578,775
Hilton Hotels Corp. 500,000 13,062,500
Host Marriott Corp. (a) 350,000 5,600,000
ITT Corp. (a) 100,000 4,337,500
Mirage Resorts, Inc. (a) 1,281,100 27,703,788
Prime Hospitality Corp. (a) 76,500 1,233,563
Studio Plus Hotels, Inc. (a) 375,000 5,906,250
Sun International Hotels Ltd. Ord. (a) 198,600 7,248,900
Wyndham Hotel Corp. (a) 189,700 4,671,363
218,609,002
PUBLISHING - 0.4%
Gannett Co., Inc. 75,000 5,615,625
Knight-Ridder, Inc. 100,000 3,825,000
New York Times Co. (The) Class A 131,100 4,981,800
Scholastic Corp. (a) 74,000 4,976,500
Times Mirror Co. Class A 167,900 8,353,025
27,751,950
RESTAURANTS - 1.1%
Apple South, Inc. 505,600 6,825,600
Applebee's International, Inc. 235,000 6,462,500
Landry's Seafood Restaurants, Inc. (a) 518,100 11,074,388
Lone Star Steakhouse Saloon (a) 543,400 14,535,950
Outback Steakhouse, Inc. (a) 137,700 3,683,475
Planet Hollywood International, Inc.
Class A (a) 275,000 5,431,250
Rainforest Cafe, Inc. (a) 45,100 1,059,850
Starbucks Corp. (a) 678,200 19,413,475
68,486,488
TOTAL MEDIA & LEISURE 382,145,768
NONDURABLES - 4.1%
BEVERAGES - 1.3%
Anheuser-Busch Companies, Inc. 451,700 18,068,000
Coca-Cola Co. (The) 623,700 32,822,213
PepsiCo, Inc. 1,004,600 29,384,550
80,274,763
FOODS - 0.2%
General Mills, Inc. 105,500 6,686,063
Smithfield Foods, Inc. (a) 28,100 1,067,800
7,753,863
HOUSEHOLD PRODUCTS - 1.5%
Avon Products, Inc. 97,700 5,581,113
Clorox Co. 75,600 7,588,350
Gillette Co. 495,600 38,532,900
Premark International, Inc. 100,000 2,225,000

SHARES VALUE (NOTE 1)
Procter & Gamble Co. 340,300 $ 36,582,250
USA Detergents, Inc. (a) 48,900 2,035,463
92,545,076
TOBACCO - 1.1%
Philip Morris Companies, Inc. 538,500 60,648,563
RJR Nabisco Holdings Corp. 150,900 5,130,600
65,779,163
TOTAL NONDURABLES 246,352,865
PRECIOUS METALS - 0.6%
Barrick Gold Corp. 415,000 11,882,226
Bre-X Minerals Ltd. (a) 259,800 4,112,529
Getchell Gold Corp. (a) 191,853 7,362,359
Newmont Mining Corp. 295,000 13,201,250
36,558,364
RETAIL & WHOLESALE - 9.0%
APPAREL STORES - 1.0%
Footstar, Inc. (a) 79,172 1,969,404
Gap, Inc. 515,000 15,514,375
Just for Feet, Inc. (a) 1,313,800 34,487,250
Loehmanns, Inc. (a) 145,600 3,348,800
Saks Holdings, Inc. (a) 194,200 5,243,400
60,563,229
DRUG STORES - 0.3%
CVS Corp. 275,000 11,378,125
General Nutrition Companies, Inc. (a) 63,700 1,074,938
Revco (D.S.), Inc. (a) 120,600 4,462,200
16,915,263
GENERAL MERCHANDISE STORES - 2.2%
Consolidated Stores Corp. (a) 385,250 12,376,156
Dayton Hudson Corp. 195,900 7,689,075
Dollar General Corp. 135,312 4,329,984
Family Dollar Stores, Inc. 500,100 10,189,538
Federated Department Stores, Inc. (a) 300,000 10,237,500
Meyer (Fred), Inc. (a) 107,200 3,805,600
Price/Costco, Inc. (a) 131,700 3,308,963
Sears, Roebuck & Co. 275,000 12,684,375
Stein Mart, Inc. (a) 107,800 2,182,950
Wal-Mart Stores, Inc. 2,828,500 64,701,938
Woolworth Corp. (a) 218,700 4,784,063
136,290,142
GROCERY STORES - 0.1%
Safeway, Inc. (a) 200,500 8,571,375
RETAIL & WHOLESALE, MISCELLANEOUS - 5.4%
Barnes & Noble, Inc. (a) 128,000 3,456,000
Bed Bath & Beyond, Inc. (a) 401,100 9,726,675
Circuit City Stores, Inc. 140,300 4,226,538
Corporate Express, Inc. (a) 496,200 14,606,888
Home Depot, Inc. (The) 1,018,500 51,052,313
Lowe's Companies, Inc. 1,700,000 60,350,000
Officemax, Inc. (a) 1,335,400 14,188,625
Office Depot, Inc. (a) 1,130,200 20,061,050
Petco Animal Supplies, Inc. (a) 88,100 1,828,075
PETsMART, Inc. (a) 2,937,900 64,266,563
Sports Authority, Inc. (a) 200,550 4,361,963
Staples, Inc. (a) 1,361,700 24,595,706
Sunglass Hut International, Inc. (a) 1,793,200 13,000,700
Toys "R" Us, Inc. (a) 829,400 24,882,000
U.S. Office Products Co. (a) 130,000 4,436,250
Viking Office Products, Inc. (a) 451,500 12,049,406
327,088,752
TOTAL RETAIL & WHOLESALE 549,428,761
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SERVICES - 1.4%
ADVERTISING - 0.1%
Omnicom Group, Inc. 75,700 $ 3,463,275
Universal Outdoor Holdings, Inc. (a) 112,100 2,634,350
6,097,625
EDUCATIONAL SERVICES - 0.1%
Sylvan Learning Systems (a) 101,000 2,878,500
LEASING & RENTAL - 0.4%
Hollywood Entertainment Corp. (a) 1,250,000 23,125,000
Movie Gallery, Inc. (a) 309,000 4,017,000
27,142,000
SERVICES - 0.8%
ADT Ltd. (a) 271,600 6,212,850
APAC Teleservices, Inc. (a) 223,700 8,584,488
AccuStaff, Inc. (a) 435,000 9,189,375
Employee Solutions, Inc. (a) 30,000 615,000
Medpartners, Inc. (a) 205,500 4,315,500
Service Corp. International 585,700 16,399,600
Sitel Corp. (a) 150,100 2,120,163
Teletech Holdings, Inc. (a) 90,300 2,347,800
Zebra Technologies Corp. Class A (a) 32,300 755,013
50,539,789
TOTAL SERVICES 86,657,914
TECHNOLOGY - 25.6%
COMMUNICATIONS EQUIPMENT - 4.1%
ADC Telecommunications, Inc. (a) 120,000 3,735,000
Ascend Communications, Inc. (a) 476,700 29,614,988
Aspect Telecommunications Corp. (a) 197,000 12,509,500
Checkpoint Systems, Inc. (a) 130,000 3,217,500
Cisco Systems, Inc. (a) 2,255,500 143,506,188
Lucent Technologies, Inc. 470,200 21,746,750
Nokia Corp. AB sponsored ADR 115,900 6,678,738
P-COM, Inc. (a) 22,500 666,563
Tellabs, Inc. (a) 188,900 7,107,363
3Com Corp. (a) 249,300 18,292,388
U.S. Robotics Corp. (a) 57,500 4,140,000
251,214,978
COMPUTER SERVICES & SOFTWARE - 10.8%
Affiliated Computer Services, Inc.
Class A (a) 300,000 8,925,000
America Online, Inc. (a) 224,500 7,464,625
American Management Systems, Inc. (a) 250,000 6,125,000
Automatic Data Processing, Inc. 547,700 23,482,638
BBN Corp. (a) 100,000 2,250,000
BMC Software, Inc. (a) 300,000 12,412,500
CUC International, Inc. (a) 3,977,600 94,468,000
Cadence Design Systems, Inc. (a) 450,000 17,887,500
Ceridian Corp. (a) 120,000 4,860,000
Citrix Systems, Inc. (a) 42,300 1,652,344
Computer Associates International, Inc. 354,600 17,641,350
Computer Horizons Corp. (a) 15,000 577,500
Computer Sciences Corp. (a) 294,800 24,210,450
CompUSA, Inc. (a) 1,479,000 30,504,375
DST Systems, Inc. (a) 100,000 3,137,500
Electronic Data Systems Corp. 244,300 10,565,975
Electronics for Imaging, Inc. (a) 160,000 13,160,000
Equifax, Inc. 225,300 6,899,813
First Data Corp. 322,380 11,766,870
HBO & Co. 435,800 25,875,625
Henry (Jack) & Associates, Inc. 53,900 1,926,925

SHARES VALUE (NOTE 1)
Inso Corp. (a) 132,300 $ 5,258,925
McAfee Associates, Inc. (a) 466,500 20,526,000
Microsoft Corp. (a) 725,000 59,903,125
Netscape Communications Corp. (a) 412,100 23,438,188
Oracle Systems Corp. (a) 2,636,700 110,082,225
Parametric Technology Corp. 531,000 27,280,125
Paychex, Inc. 287,500 14,788,281
PeopleSoft, Inc. (a) 540,000 25,886,250
Physician Computer Network, Inc. (a) 351,200 2,985,200
Policy Management Systems Corp. (a) 150,000 6,918,750
Remedy Corp. (a) 120,400 6,471,500
Sabre Group Holdings, Inc. Class A (a) 76,200 2,124,075
SunGard Data Systems, Inc. (a) 275,000 10,862,500
Sybase, Inc. (a) 136,400 2,276,175
Technology Solutions, Inc. (a) 175,000 7,262,500
Viasoft, Inc. (a) 125,000 5,906,250
657,764,059
COMPUTERS & OFFICE EQUIPMENT - 5.5%
Adaptec, Inc. (a) 1,040,800 41,632,000
Bay Networks, Inc. (a) 270,000 5,636,250
Compaq Computer Corp. (a) 701,400 52,078,950
Dell Computer Corp. (a) 454,700 24,155,938
Diebold, Inc. 28,600 1,798,225
EMC Corp. (a) 563,000 18,649,375
FileNet Corp. (a) 236,600 7,571,200
Gateway 2000, Inc. (a) 89,300 4,783,131
Hewlett-Packard Co. 356,500 17,914,125
Ingram Micro, Inc. Class A (a) 162,200 3,730,600
International Business Machines Corp. 615,000 92,865,000
Lexmark International Group, Inc. (a) 142,700 3,942,088
Micron Electronics, Inc. (a) 322,600 6,270,538
Pitney Bowes, Inc. 200,000 10,900,000
Quantum Corp. (a) 231,600 6,629,550
Seagate Technology (a) 668,200 26,393,900
Tech Data Corp. (a) 275,500 7,541,813
332,492,683
ELECTRONIC INSTRUMENTS - 0.4%
Applied Materials, Inc. (a) 184,000 6,612,500
Perkin-Elmer Corp. 79,700 4,692,338
Thermo Electron Corp. 275,000 11,343,750
22,648,588
ELECTRONICS - 4.6%
Analog Devices, Inc. (a) 300,000 10,162,500
Atmel Corp. (a) 398,500 13,200,313
Cirrus Logic, Inc. (a) 225,900 3,501,450
Etec Systems, Inc. (a) 151,000 5,775,750
Intel Corp. 1,150,000 150,578,125
KEMET Corp. (a) 199,700 4,643,025
Linear Technology Corp. 515,000 22,595,625
Maxim Integrated Products, Inc. (a) 530,400 22,939,800
Micron Technology, Inc. 256,500 7,470,563
Motorola, Inc. 135,400 8,310,175
Solectron Corp. (a) 95,100 5,075,963
Storage Technology Corp. (a) 162,300 7,729,538
Texas Instruments, Inc. 152,300 9,709,125
Xilinx, Inc. (a) 159,300 5,864,231
277,556,183
PHOTOGRAPHIC EQUIPMENT - 0.2%
Eastman Kodak Co. 185,100 14,854,275
TOTAL TECHNOLOGY 1,556,530,766
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TRANSPORTATION - 1.0%
AIR TRANSPORTATION - 0.8%
AMR Corp. (a) 185,000 $ 16,303,125
America West Airlines, Inc. Class B (a) 529,600 8,407,400
Atlantic Southeast Airlines, Inc. 269,700 5,899,688
Comair Holdings, Inc. 150,000 3,600,000
Delta Air Lines, Inc. 37,600 2,664,900
Midwest Express Holdings, Inc. (a) 200,000 7,200,000
UAL Corp. (a) 125,000 7,812,500
51,887,613
RAILROADS - 0.2%
CSX Corp. 244,000 10,309,000
TOTAL TRANSPORTATION 62,196,613
UTILITIES - 4.6%
CELLULAR - 1.6%
AirTouch Communications, Inc. (a) 1,851,800 46,757,950
Arch Communications Group, Inc. (a) 325,043 3,047,278
Palmer Wireless, Inc. (a) 947,200 9,945,600
360 Degrees Communications Co. (a) 675,800 15,627,875
Vanguard Cellular Systems, Inc.
Class A (a) 1,146,700 18,060,525
93,439,228
GAS - 0.2%
Enron Corp. 304,900 13,148,813
TELEPHONE SERVICES - 2.8%
Ameritech Corp. 190,500 11,549,063
Bell Atlantic Corp. 183,700 11,894,575
BellSouth Corp. 374,700 15,128,513
Cincinnati Bell, Inc. 65,400 4,030,275
Comsat Corp., Series 1 125,000 3,078,125
GTE Corp. 75,500 3,435,250
LCI International, Inc. (a) 771,200 16,580,800
MCI Communications Corp. 806,200 26,352,663
MFS Communications, Inc. 641,700 34,972,650
Mastech Corp. 56,400 1,071,600
SBC Communications, Inc. 162,500 8,409,375
Sprint Corp. 258,500 10,307,688
Telebras sponsored ADR 75,000 5,737,500
Telefonos de Mexico SA sponsored
ADR representing Ord. Class L shares 75,000 2,475,000
WorldCom, Inc. (a) 625,600 16,304,700
171,327,777
TOTAL UTILITIES 277,915,818
TOTAL COMMON STOCKS
(Cost $4,316,599,345) 5,521,532,957
CASH EQUIVALENTS - 9.2%
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 $ 556,529,620 556,321,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $4,872,920,345) $ 6,077,853,957
LEGEND
1. Non-income producing
2. 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 $3,934,350 or 0.1% of net
assets.
3. 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
Hollywood
Entertainment Corp. $ 172,425 $ 546,875 $ - $ -
Lycos, Inc. - - - -
Microwave Power
Devices, Inc. - 1,172,000 - -
Sunglass Hut
International, Inc. 17,079,408 19,336,265 - -
Vanguard Cellular
Systems, Inc. Class A 1,032,413 15,999,485 - -
Wyndham Hotel Corp. 324,910 - - -
TOTALS $ 18,609,156 $ 37,054,625 $ - $ -
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $5,184,860,168 and $3,798,902,641, respectively, of which U.S.
government and government agency obligations aggregated $109,306,406 and
$168,455,938, 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 $1,209,835 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 $4,886,896,501. Net unrealized appreciation
aggregated $1,190,957,456, of which $1,309,441,776 related to appreciated
investment securities and $118,484,320 related to depreciated investment
securities.
The fund hereby designates approximately $182,971,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND: GROWTH PORTFOLIO
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES

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DECEMBER 31, 1996

ASSETS

Investment in securities, at $ 6,077,853,957
value (including repurchase agreements of $556,321,000) (cost $4,872,920,345) -
See accompanying schedule

Cash 832

Receivable for investments sold 6,982,553

Receivable for fund shares sold 8,213,411

Dividends receivable 4,888,033

Other receivables 435,798

TOTAL ASSETS 6,098,374,584

LIABILITIES

Payable for fund shares redeemed $ 8,403,261

Accrued management fee 3,074,604

Other payables and 473,065
accrued expenses

TOTAL LIABILITIES 11,950,930

NET ASSETS $ 6,086,423,654

Net Assets consist of:

Paid in capital $ 4,671,288,904

Undistributed net investment income 41,404,557

Accumulated undistributed 168,796,602
net realized gain (loss) on
investments and foreign
currency transactions

Net unrealized appreciation (depreciation) on investments 1,204,933,591
and assets and liabilities in
foreign currencies

NET ASSETS, for 195,423,359 shares outstanding $ 6,086,423,654

NET ASSET VALUE, offering price $31.14
and redemption price per
share ($6,086,423,654 (divided by) 195,423,359 shares)

</TABLE>

STATEMENT OF OPERATIONS

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YEAR ENDED DECEMBER 31, 1996

INVESTMENT INCOME $ 44,216,166
Dividends

Interest 33,387,635

TOTAL INCOME 77,603,801

EXPENSES

Management fee $ 31,760,621

Transfer agent fees 3,029,150

Accounting fees and expenses 808,115

Non-interested trustees' compensation 29,313

Custodian fees and expenses 156,863

Registration fees 47,360

Audit 66,493

Legal 33,943

Miscellaneous 28,325

Total expenses before reductions 35,960,183

Expense reductions (701,029 35,259,154
)

NET INVESTMENT INCOME 42,344,647

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

Investment securities (including 186,716,014
realized loss of $15,650,936
on sales of investments in
affiliated issuers)

Foreign currency transactions (2,445 186,713,569
)

Change in net unrealized appreciation (depreciation) on:

Investment securities 451,420,485

Assets and liabilities in (146 451,420,339
foreign currencies )

NET GAIN (LOSS) 638,133,908

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 680,478,555

OTHER INFORMATION

Expense reductions $ 694,383
Directed brokerage arrangements

Custodian interest credits 6,646

$ 701,029

</TABLE>

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

Operations $ 42,344,647 $ 11,674,225

Net investment income

Net realized gain (loss) 186,713,569 361,319,825

Change in net unrealized appreciation (depreciation) 451,420,339 474,991,263

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 680,478,555 847,985,313

Distributions to shareholders (11,769,237) (12,404,421)

From net investment income

From net realized gain (297,173,230) -

TOTAL DISTRIBUTIONS (308,942,467) (12,404,421)

Share transactions 2,599,782,601 2,059,928,760

Net proceeds from sales of shares

Reinvestment of distributions 308,942,467 12,404,421

Cost of shares redeemed (1,356,539,313) (887,081,596)

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 1,552,185,755 1,185,251,585

TOTAL INCREASE (DECREASE) IN NET ASSETS 1,923,721,843 2,020,832,477

NET ASSETS

Beginning of period 4,162,701,811 2,141,869,334

End of period (including undistributed net investment income of $41,404,557 and $10,790,283, $ 6,086,423,654 $ 4,162,701,811

respectively)

OTHER INFORMATION

Sold 87,784,118 76,302,442

Issued in reinvestment of distributions 11,121,040 568,749

Redeemed (46,058,296) (33,037,870)

Net increase (decrease) 52,846,862 43,833,321

</TABLE>

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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 C 1992

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Net asset value, beginning of period $ 29.20 $ 21.69 $ 23.08 $ 19.76 $ 18.51

Income from Investment Operations

Net investment income .22 .08 .12 .12 .09

Net realized and unrealized gain (loss) 3.82 7.55 (.12) 3.64 1.64

Total from investment operations 4.04 7.63 - 3.76 1.73

Less Distributions

From net investment income (.08) (.12) (.12) (.11) (.05)

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

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

Total distributions (2.10) (.12) (1.39) (.44) (.48)

Net asset value, end of period $ 31.14 $ 29.20 $ 21.69 $ 23.08 $ 19.76

TOTAL RETURN A, B 14.71% 35.36% (.02)% 19.37% 9.32%

RATIOS AND SUPPLEMENTAL DATA

Net assets, end of period (000 omitted) $ 6,086,424 $ 4,162,702 $ 2,141,869 $ 1,383,849 $ 749,837

Ratio of expenses to average net assets .69% .70% .70% .71% .75%

Ratio of expenses to average net assets
after expense reductions .67% D .70% .69% .71% .75%
D

Ratio of net investment income to average
net assets .81% .37% .69% .72% .83%

Portfolio turnover rate 81% 108% 122% 159% 262%

Average commission rate E $ .0416

A 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). B 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 EFFECTIVE JANUARY 1, 1993, THE FUND ADOPTED STATEMENT OF
POSITION 93-2, "DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT
PRESENTATION OF INCOME,
CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT
COMPANIES." AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY REFLECT
CERTAIN RECLASSIFICATIONS
RELATED TO BOOK TO TAX DIFFERENCES. D FMR 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.
Growth Portfolio (the fund) is a fund of Variable Insurance Products Fund
(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 litigation
proceeds, foreign currency transactions 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 SEC), 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.
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 .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 .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 months 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 1.50% 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 Investments Life Insurance Company
(FILI) and its subsidiaries, affiliates of FMR, were the record owners of
approximately 16% 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 28%.
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 and the Shareholders of
Growth Portfolio:
We have audited the accompanying statement of assets and liabilities of
Variable Insurance Products Fund: Growth Portfolio, including the schedule
of portfolio investments, as of December 31, 1996, and the related
statement of operations for the year then ended, the statement of changes
in net assets for each of the two years in the period then ended and the
financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility
of the fund's management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 1996 by correspondence with the
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position
of Variable Insurance Products Fund: Growth Portfolio as of December 31,
1996, the results of its operations for the year then ended, the changes in
its net assets for each of the two years in the period then ended, and the
financial highlights for each of the five years in the period then ended,
in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 10, 1997
DISTRIBUTIONS

The Board of Trustees of 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 $.94 per share derived from capital gains realized from
sales of portfolio securities and a dividend of $.21 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
William J. Hayes, VICE PRESIDENT
Jennifer Uhrig, 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: EQUITY-INCOME 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 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>

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: EQUITY-INCOME PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY

EQUITY-INCOME 14.28% 17.98% 13.74%

S&P 500 (registered trademark) 22.96% 15.22% 15.27%

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.
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 THE PAST 10 YEARS
IMAHDR PRASUN SHR__CHT 19961231 19970120 075109 S00000000000001
VIP: Equity-Income SP Standard & Poor 500
00150 SP001
1986/12/31 10000.00 10000.00
1987/01/31 11147.70 11347.00
1987/02/28 11407.19 11795.21
1987/03/31 11696.79 12136.09
1987/04/30 11405.62 12028.08
1987/05/31 11475.90 12132.72
1987/06/30 11715.12 12745.42
1987/07/31 12161.41 13391.62
1987/08/31 12496.13 13891.12
1987/09/30 12233.85 13586.91
1987/10/31 9846.51 10660.29
1987/11/30 9405.93 9781.88
1987/12/31 9886.75 10526.28
1988/01/31 10589.95 10969.44
1988/02/29 11114.72 11480.61
1988/03/31 10921.23 11125.86
1988/04/30 11102.01 11249.36
1988/05/31 11250.88 11347.23
1988/06/30 11890.98 11868.07
1988/07/31 11869.44 11822.97
1988/08/31 11664.79 11420.99
1988/09/30 12011.40 11907.52
1988/10/31 12218.68 12238.55
1988/11/30 12022.31 12063.54
1988/12/31 12132.06 12274.65
1989/01/31 12881.37 13173.16
1989/02/28 12815.25 12845.14
1989/03/31 13092.83 13144.44
1989/04/30 13598.12 13826.63
1989/05/31 14002.36 14386.61
1989/06/30 14011.95 14304.61
1989/07/31 14828.85 15596.31
1989/08/31 15067.11 15902.00
1989/09/30 14897.72 15836.80
1989/10/31 14038.23 15469.39
1989/11/30 14118.45 15784.96
1989/12/31 14236.27 16163.80
1990/01/31 13274.83 15079.21
1990/02/28 13353.50 15273.73
1990/03/31 13375.52 15678.49
1990/04/30 12911.77 15286.53
1990/05/31 13766.04 16776.96
1990/06/30 13628.98 16662.88
1990/07/31 13295.66 16609.56
1990/08/31 12233.98 15108.05
1990/09/30 11284.97 14372.29
1990/10/31 10997.21 14310.49
1990/11/30 11785.41 15234.95
1990/12/31 12059.63 15660.00
1991/01/31 12706.36 16342.78
1991/02/28 13581.35 17511.29
1991/03/31 13863.09 17935.06
1991/04/30 13927.87 17978.11
1991/05/31 14692.28 18754.76
1991/06/30 14091.53 17895.79
1991/07/31 14890.40 18729.74
1991/08/31 15204.71 19173.63
1991/09/30 15100.36 18853.43
1991/10/31 15351.81 19106.07
1991/11/30 14690.09 18336.09
1991/12/31 15851.00 20433.74
1992/01/31 16065.02 20053.67
1992/02/29 16586.70 20314.37
1992/03/31 16383.45 19918.24
1992/04/30 16896.70 20503.84
1992/05/31 17031.76 20604.31
1992/06/30 16882.65 20297.30
1992/07/31 17400.02 21127.46
1992/08/31 17018.80 20694.35
1992/09/30 17195.47 20938.54
1992/10/31 17401.32 21011.83
1992/11/30 18032.60 21728.33
1992/12/31 18527.78 21995.59
1993/01/31 19080.85 22180.35
1993/02/28 19509.47 22482.00
1993/03/31 20090.87 22956.37
1993/04/30 20007.33 22400.83
1993/05/31 20369.33 23001.17
1993/06/30 20608.92 23067.88
1993/07/31 20889.31 22975.60
1993/08/31 21688.44 23846.38
1993/09/30 21605.52 23662.76
1993/10/31 21803.09 24152.58
1993/11/30 21422.06 23923.13
1993/12/31 21917.23 24212.60
1994/01/31 22882.50 25035.83
1994/02/28 22293.23 24357.36
1994/03/31 21360.60 23295.38
1994/04/30 22096.65 23593.56
1994/05/31 22306.96 23980.49
1994/06/30 22169.14 23392.97
1994/07/31 22909.62 24160.26
1994/08/31 24088.35 25150.83
1994/09/30 23693.72 24534.64
1994/10/31 24180.06 25086.67
1994/11/30 23389.76 24173.01
1994/12/31 23465.84 24531.50
1995/01/31 23832.73 25167.60
1995/02/28 24741.48 26148.38
1995/03/31 25595.80 26920.02
1995/04/30 26307.69 27712.81
1995/05/31 27100.48 28820.49
1995/06/30 27489.85 29489.99
1995/07/31 28547.77 30467.88
1995/08/31 28905.84 30544.36
1995/09/30 29865.49 31833.33
1995/10/31 29521.83 31719.68
1995/11/30 30798.28 33112.18
1995/12/31 31700.57 33749.92
1996/01/31 32621.81 34898.76
1996/02/29 32731.39 35222.28
1996/03/31 33075.93 35561.47
1996/04/30 33506.60 36085.64
1996/05/31 33868.37 37016.29
1996/06/30 33558.28 37157.32
1996/07/31 31921.71 35515.71
1996/08/31 32576.34 36264.74
1996/09/30 33971.73 38305.72
1996/10/31 34523.00 39362.19
1996/11/30 36831.42 42337.58
1996/12/31 36228.48 41498.87
IMATRL PRASUN SHR__CHT 19961231 19970120 075111 R00000000000123

Let's say hypothetically $10,000 was invested in Equity-Income Portfolio on
December 31, 1986. As the chart shows, by December 31, 1996, the value of
the investment would have grown to $36,228 - a 262.28% 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 $41,499 over the same
period - a 314.99% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1996
% OF FUND'S
INVESTMENTS

British Petroleum PLC ADR 3.2

Aetna, Inc. 2.5

General Electric Co. 2.2

Intel Corp. 2.0

Royal Dutch Petroleum Co. ADR 1.8

TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 19966
% OF FUND'S
INVESTMENTS

Finance 16.4

Energy 14.6

Health 13.3

Technology 7.9

Nondurables 7.9

ASSET ALLOCATION AS OF DECEMBER 31, 1996 *
Row: 1, Col: 1, Value: 6.8
Row: 1, Col: 2, Value: 1.7
Row: 1, Col: 3, Value: 91.5
Stocks 91.5%
Bonds 1.7%
Short-term investments 6.8%
FOREIGN INVESTMENTS 8.1%
*
(% OF FUND'S INVESTMENTS)
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW

NOTE TO SHAREHOLDERS: Stephen Petersen became Portfolio Manager of
Equity-Income Portfolio on January 6, 1997, after the period ended.
Q. HOW DID THE FUND PERFORM, STEPHEN?
A. While performing well on an absolute basis, the fund underperformed the
Standard & Poor's 500 Index, which returned 22.96% for the 12 months ended
December 31, 1996.
Q. WHY WERE THE FUND'S RETURNS DISAPPOINTING DURING THE PAST SIX MONTHS?
A. There are a couple of reasons. Primarily, though, it's because of the
equity-income style of investing that the fund follows. Equity-income fund
managers seek to own stocks of quality companies that also have attractive
dividend yields equal to or greater than the market average. Having that
sort of orientation attracts equity-income style managers to utility
stocks, financial stocks and cyclical stocks such as automobiles and basic
industries. As a group, the industries I just mentioned - with the
exception of financial stocks - performed well on an absolute basis but
underperformed the overall market during the past year. As in 1995, the
strong performance of the overall stock market was primarily concentrated
in technology stocks and larger market-capitalization stocks such as Coca
Cola and Gillette.
Q. AND THE FUND DIDN'T HAVE LARGE HOLDINGS IN MANY OF THE OUTPERFORMING
STOCKS?
A. Exactly. The past 12 months have not really been a stock picker's
market, but one in which the S&P 500 managed to outperform most actively
managed mutual funds such as this one. Also, the fund had a fairly large
weighting in mid-cap stocks that also underperformed the market average.
Q. WHAT HOLDINGS DID PERFORM WELL?
A. Some of the fund's top holdings performed well, including General
Electric, IBM and Philip Morris. The fund also was helped by its weighting
in financial stocks such as Aetna, the Federal National Mortgage
Association, Citicorp and American Express. However, some of the fund's
utility stocks and convertible bonds were drags on performance.
Q. YOU TOOK OVER THE FUND IN EARLY JANUARY 1997. WHAT ARE YOUR PLANS FOR
THE FUND? WHAT CHANGES CAN SHAREHOLDERS EXPECT FROM YOU?
A. As an equity-income manager, my investment strategy is to look for
better-than-average yielding large-cap stocks with attractive attributes
that will lead to capital appreciation over time. I try to buy stocks that
are currently out-of-favor within this framework, and try to avoid taking
large positions in certain segments of the market, such as mid-cap stocks
or convertible bonds. Once the out-of-favor stocks appreciate, I sell them
and buy other out-of-favor stocks. Mine is a methodical, straight-forward
process that emphasizes individual stock picking more than anything else.
Q. WHAT DO YOU LOOK FOR IN DIVIDEND-YIELDING STOCKS?
A. I usually buy stocks that have dividend yields equal to or above the
average yield of the S&P 500 - currently about 2%. If I own companies with
lower yields, it's because the company has decided to distribute excess
capital to shareholders in other ways, such as stock repurchase programs.
This is consistent with my strategy of owning companies that are strong
income producers with higher-than-average dividends, along with stocks of
undervalued companies that I think have the potential to appreciate over
time.
Q. DOES THE FUND OWN TURNAROUND STOCKS OR COMPANIES THAT ARE UNDERGOING
POSITIVE CHANGE?
A. Yes. While my goal is to have the fund primarily invested in quality
companies with consistent earnings growth, I would like to own some
companies that haven't performed well in the market recently, and therefore
may have lower valuations and better opportunity for capital appreciation.
It's an approach I've used in the past with some other funds I've managed
and it's worked well.
Q. WHAT'S YOUR OUTLOOK FOR THE MONTHS AHEAD?
A. I don't sense that there's been any significant change in the mood of
the market - it still favors consistent earnings growth. Since the market
continues to reward stocks of large-cap companies with consistent earnings,
it's quite difficult to outperform the general market, especially with the
equity-income style of investing. However, as everyone knows, the economic
recovery has been underway since 1991 - historically, quite a long period
of time for a strong economy without an interruption or correction.
Therefore, I'm trying to structure the fund so it can perform relatively
well when and if the market changes course. While I think the outlook for
this fund remains good, investors should be cautious after the past two
years of more than 20% returns from the overall market.

Showing Percentage of Total Value of Investment in Securities

COMMON STOCKS - 89.7%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 5.0%
AEROSPACE & DEFENSE - 3.3%
Alliant Techsystems, Inc. (a) 215,000 $ 11,825,000
Boeing Co. 834,000 88,716,750
Lockheed Martin Corp. 425,603 38,942,675
Northrop Grumman Corp. 874,500 72,364,875
Thiokol Corp. 376,700 16,857,325
228,706,625
DEFENSE ELECTRONICS - 0.7%
Litton Industries, Inc. (a) 1,042,500 49,649,063
SHIP BUILDING & REPAIR - 1.0%
General Dynamics Corp. 991,500 69,900,750
TOTAL AEROSPACE & DEFENSE 348,256,438
BASIC INDUSTRIES - 4.6%
CHEMICALS & PLASTICS - 2.8%
IMC Fertilizer Group, Inc. 1,084,900 42,446,713
Monsanto Co. 1,940,000 75,417,500
Raychem Corp. 239,400 19,181,925
Synetic, Inc. (a)(d) 1,157,582 56,142,727
193,188,865
METALS & MINING - 1.8%
Alcan Aluminium Ltd. 1,400,000 47,233,468
Aluminum Co. of America 740,900 47,232,375
Inco Ltd. 1,029,193 32,846,186
127,312,029
TOTAL BASIC INDUSTRIES 320,500,894
CONGLOMERATES - 2.1%
AlliedSignal, Inc. 1,055,100 70,691,700
Coltec Industries, Inc. (a) 1,371,600 25,888,950
Tyco International Ltd. 962,742 50,904,983
147,485,633
CONSTRUCTION & REAL ESTATE - 0.5%
BUILDING MATERIALS - 0.5%
Masco Corp. 1,045,400 37,634,400
DURABLES - 2.1%
AUTOS, TIRES, & ACCESSORIES - 0.2%
Snap-on Tools Corp. 335,150 11,939,719
CONSUMER DURABLES - 0.3%
Minnesota Mining &
Manufacturing Co. 269,500 22,334,813
CONSUMER ELECTRONICS - 1.2%
Sunbeam-Oster, Inc. 3,092,300 79,626,725
TEXTILES & APPAREL - 0.4%
Reebok International Ltd. 687,700 28,883,400
TOTAL DURABLES 142,784,657
ENERGY - 14.5%
ENERGY SERVICES - 1.1%
BJ Services Co. (a) 144,100 7,349,100
Schlumberger Ltd. 720,600 71,969,925
79,319,025
OIL & GAS - 13.4%
Amerada Hess Corp. 464,500 26,882,938
Amoco Corp. 150,000 12,075,000
British Petroleum PLC ADR 1,591,493 224,997,323
Burlington Resources, Inc. 566,700 28,547,513

SHARES VALUE (NOTE 1)
Chevron Corp. 929,600 $ 60,424,000
Exxon Corp. 1,040,000 101,920,000
Lomak Petroleum, Inc. 329,000 5,634,125
Mobil Corp. 136,300 16,662,675
Occidental Petroleum Corp. 1,665,200 38,924,050
Pennzoil Co. 1,100,400 62,172,600
Royal Dutch Petroleum Co. ADR 724,500 123,708,375
Texaco, Inc. 1,080,000 105,975,000
Tosco Corp. 216,600 17,138,475
Total SA Class B 594,700 48,355,183
Unocal Corp. 1,447,665 58,811,391
932,228,648
TOTAL ENERGY 1,011,547,673
FINANCE - 15.2%
BANKS - 7.8%
Bank of Boston Corp. 1,127,100 72,416,175
Bank of New York Co., Inc. 1,675,000 56,531,250
BankAmerica Corp. 734,700 73,286,325
Chase Manhattan Corp. 1,040,000 92,820,000
Citicorp 874,400 90,063,200
First Bank System, Inc. 592,530 40,440,173
National City Corp. 1,057,785 47,468,102
SunTrust Banks, Inc. 767,300 37,789,525
U.S. Bancorp 728,700 32,745,956
543,560,706
CREDIT & OTHER FINANCE - 0.7%
American Express Co. 905,172 51,142,218
FEDERAL SPONSORED CREDIT - 1.5%
Federal Home Loan
Mortgage Corporation 100,900 11,111,613
Federal National Mortgage
Association 2,478,700 92,331,575
103,443,188
INSURANCE - 4.4%
Aetna, Inc. 2,135,700 170,856,000
Allstate Corp. 774,999 44,853,056
ITT Hartford Group, Inc. 663,300 44,772,750
Travelers Group, Inc. (The) 1,011,667 45,904,375
306,386,181
SAVINGS & LOANS - 0.5%
Great Western Financial Corp. 1,184,100 34,338,900
SECURITIES INDUSTRY - 0.3%
Lehman Brothers Holdings, Inc. 598,800 18,787,350
TOTAL FINANCE 1,057,658,543
HEALTH - 12.2%
DRUGS & PHARMACEUTICALS - 5.4%
American Home Products Corp. 1,773,000 103,942,125
Barr Laboratories, Inc. (a)(d) 1,141,800 28,973,175
Bristol-Myers Squibb Co. 675,400 73,449,750
Genentech, Inc. special (a) 534,400 28,657,200
Lilly (Eli) & Co. 495,800 36,193,400
Schering-Plough Corp. 219,700 14,225,575
Sepracor, Inc. (a) 475,000 7,896,875
Warner-Lambert Co. 1,049,000 78,675,000
372,013,100
MEDICAL EQUIPMENT & SUPPLIES - 3.6%
Bard (C.R.), Inc. 1,173,500 32,858,000
Cardiac Control Systems, Inc. (a)(d) 99,800 149,700
Cardinal Health, Inc. 1,768,700 103,026,775
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
HEALTH - CONTINUED
MEDICAL EQUIPMENT & SUPPLIES - CONTINUED
Nellcor, Inc. (a) 421,700 $ 9,224,688
U.S. Surgical Corp. 2,707,000 106,588,125
251,847,288
MEDICAL FACILITIES MANAGEMENT - 3.2%
Beverly Enterprises, Inc. (a)(d) 5,522,000 70,405,500
Columbia/HCA Healthcare Corp. 2,422,350 98,710,763
Integramed America, Inc. (a)(d) 605,500 983,938
PacifiCare Health Systems, Inc.
Class B (a) 624,000 53,196,000
US Diagnostic Labs, Inc. (a) 100,000 925,000
224,221,201
TOTAL HEALTH 848,081,589
HOLDING COMPANIES - 0.1%
Koor Industries Ltd. sponsored ADR 617,300 10,494,100
INDUSTRIAL MACHINERY & EQUIPMENT - 4.2%
ELECTRICAL EQUIPMENT - 2.3%
American Superconductor Corp. (a) 419,800 4,460,375
General Electric Co. 1,572,800 155,510,600
159,970,975
INDUSTRIAL MACHINERY & EQUIPMENT - 0.8%
Caterpillar, Inc. 695,000 52,298,750
POLLUTION CONTROL - 1.1%
WMX Technologies, Inc. 2,405,200 78,469,650
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 290,739,375
MEDIA & LEISURE - 4.4%
ENTERTAINMENT - 1.7%
All American Communications, Inc. (a) 280,434 3,785,859
GC Cos., Inc. (a) 251,100 8,694,338
Viacom, Inc. Class B (non-vtg.)(a) 3,148,500 109,803,938
122,284,135
LEISURE DURABLES & TOYS - 1.4%
Hasbro, Inc. 2,490,500 96,818,188
LODGING & GAMING - 0.7%
HFS, Inc. 365,000 21,808,750
Mirage Resorts, Inc. (a) 266,600 5,765,225
WMS Industries, Inc. (a) 981,800 19,636,000
47,209,975
PUBLISHING - 0.6%
Harcourt General, Inc. 385,600 17,785,800
Hollinger International, Inc. Class A 1,989,400 22,878,100
40,663,900
TOTAL MEDIA & LEISURE 306,976,198
NONDURABLES - 7.9%
BEVERAGES - 0.9%
Anheuser-Busch Companies, Inc. 1,595,300 63,812,000
FOODS - 1.0%
General Mills, Inc. 1,060,600 67,215,525
HOUSEHOLD PRODUCTS - 4.5%
Avon Products, Inc. 90,600 5,175,525
Colgate-Palmolive Co. 330,000 30,442,500
Gillette Co. 1,250,700 97,241,925
Procter & Gamble Co. 810,800 87,161,000
Stanhome, Inc. 474,900 12,584,850

SHARES VALUE (NOTE 1)
Unilever NV ADR 200,000 $ 35,050,000
Unilever PLC Ord. 1,705,400 41,337,105
308,992,905
TOBACCO - 1.5%
Philip Morris Companies, Inc. 944,800 106,408,100
TOTAL NONDURABLES 546,428,530
PRECIOUS METALS - 0.0%
Naxos Resources Ltd. (a) 60,200 233,275
RETAIL & WHOLESALE - 5.4%
APPAREL STORES - 0.0%
Limited, Inc. (The) 90,800 1,668,450
DRUG STORES - 1.0%
Rite Aid Corp. 1,187,100 47,187,225
Walgreen Co. 634,200 25,368,000
72,555,225
GENERAL MERCHANDISE STORES - 1.8%
Consolidated Stores Corp. (a) 2,066,125 66,374,266
Wal-Mart Stores, Inc. 573,800 13,125,675
Woolworth Corp. (a) 2,100,800 45,955,000
125,454,941
RETAIL & WHOLESALE, MISCELLANEOUS - 2.6%
Staples, Inc. (a) 2,095,700 37,853,581
Tandy Corp. 1,817,800 79,983,200
Toys "R" Us, Inc. (a) 1,180,000 35,400,000
U.S. Office Products Co. (a) 750,800 25,621,050
178,857,831
TOTAL RETAIL & WHOLESALE 378,536,447
SERVICES - 1.2%
ADVERTISING - 0.5%
Interpublic Group of Companies, Inc. 658,500 31,278,750
PRINTING - 0.6%
Harland (John H.) Co. 1,251,300 41,292,900
SERVICES - 0.1%
HealthCare COMPARE Corp. (a) 223,800 9,483,525
TOTAL SERVICES 82,055,175
TECHNOLOGY - 7.6%
COMPUTER SERVICES & SOFTWARE - 0.7%
Equifax, Inc. 1,568,900 48,047,563
COMPUTERS & OFFICE EQUIPMENT - 3.2%
Hewlett-Packard Co. 1,000,000 50,250,000
International Business Machines Corp. 730,000 110,230,000
Pitney Bowes, Inc. 991,000 54,009,500
Silicon Graphics, Inc. (a) 444,200 11,327,100
225,816,600
ELECTRONIC INSTRUMENTS - 0.3%
Varian Associates, Inc. 360,900 18,360,788
ELECTRONICS - 2.1%
AMP, Inc. 187,500 7,195,313
Intel Corp. 1,059,000 138,662,813
145,858,126
PHOTOGRAPHIC EQUIPMENT - 1.3%
Eastman Kodak Co. 988,500 79,327,125
Panavision, Inc. (a)(d) 437,400 9,076,050
88,403,175
TOTAL TECHNOLOGY 526,486,252
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
TRANSPORTATION - 1.7%
AIR TRANSPORTATION - 1.1%
Northwest Airlines Corp. Class A (a) 1,976,200 $ 77,318,825
RAILROADS - 0.6%
CSX Corp. 217,900 9,206,275
Conrail, Inc. 286,826 28,575,040
37,781,315
TOTAL TRANSPORTATION 115,100,140
UTILITIES - 1.0%
TELEPHONE SERVICES - 1.0%
LCI International, Inc. (a) 649,400 13,962,100
Southern New England
Telecommunications Corp. 670,300 26,057,913
WorldCom, Inc. (a) 1,103,800 28,767,788
68,787,801
TOTAL COMMON STOCKS
(Cost $5,403,361,996) 6,239,787,120
CONVERTIBLE PREFERRED STOCKS - 1.8%
FINANCE - 1.2%
INSURANCE - 0.8%
Aetna, Inc. Class C 6.25% 760,000 60,325,000
SECURITIES INDUSTRY - 0.4%
Salomon, Inc. $2.03 840,700 25,641,350
TOTAL FINANCE 85,966,350
HEALTH - 0.6%
MEDICAL EQUIPMENT & SUPPLIES - 0.6%
U.S. Surgical Corp. $2.20 (c) 1,027,500 39,301,875
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $109,599,084) 125,268,225
CONVERTIBLE BONDS - 1.7%
MOODY'S RATINGS PRINCIPAL
(UNAUDITED) (B) AMOUNT
CONSTRUCTION & REAL ESTATE - 0.5%
REAL ESTATE INVESTMENT TRUSTS - 0.5%
Liberty Property exchangeable
8%, 7/1/01 B1 $ 27,985,000 35,785,819
ENERGY - 0.1%
OIL & GAS - 0.1%
Lomak Petroleum, Inc.
6%, 2/1/07 (c) - 10,000,000 10,750,000
HEALTH - 0.5%
MEDICAL FACILITIES MANAGEMENT - 0.5%
NovaCare, Inc.
5 1/2%, 1/15/00 B1 38,787,000 34,811,333
MEDIA & LEISURE - 0.1%
LEISURE DURABLES & TOYS - 0.1%
Hasbro Corp. 6%, 11/15/98 A3 3,000,000 3,952,500

MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (B) AMOUNT (NOTE 1)
RETAIL & WHOLESALE - 0.2%
RETAIL & WHOLESALE, MISCELLANEOUS - 0.2%
US Office Products Co.
5 1/2%, 2/1/01 B3 $ 10,000,000 $ 13,200,000
TECHNOLOGY - 0.3%
COMPUTERS & OFFICE EQUIPMENT - 0.3%
Unisys Corp.
8 1/4%, 8/1/00 B3 22,579,000 21,901,630
TOTAL CONVERTIBLE BONDS
(Cost $111,371,760) 120,401,282
CASH EQUIVALENTS - 6.8%
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 $ 468,719,704 468,544,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $6,092,876,840) $ 6,954,000,627
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. 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 $50,051,875 or 0.7% of net
assets.
4. 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
Advanced Medical, Inc. $ - $ 2,059,931 $ - $ -
Barr Laboratories, Inc. - - - 28,973,175
Beverly Enterprises, Inc. - - - 70,405,500
Cardiac Control
Systems, Inc. - - - 149,700
Integramed
America, Inc. - - - 983,938
Panavision, Inc. 527,021 - - 9,076,050
Synetic, Inc. 2,831,088 - - 56,142,727
TOTALS $ 3,358,109 $ 2,059,931 $ - $ 165,731,090
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $11,836,384,153 and $10,451,663,817, respectively, of which U.S.
government and government agency obligations aggregated $0 and
$328,865,673, 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 $3,583,630, 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 0.1% AAA, AA, A 0.1%
Baa 0.0% BBB 0.0%
Ba 0.0% BB 0.0%
B 1.5% B 0.8%
Caa 0.0% CCC 0.2%
Ca, C 0.0% CC, C 0.0%
D 0.0%
The percentage not rated by both S&P and Moody's amounted to 0.1%. FMR has
determined that unrated debt securities that are lower quality account for
0.1% of the total value of investment in securities.
The fund participated in the bank borrowing program. The maximum loan and
average daily balances during the period for which loans were outstanding
amounted to $21,073,000 and $6,793,750, respectively. The weighted average
interest rate was 5.8% (see Note 5 of Notes to Financial Statements).
INCOME TAX INFORMATION
At December 31, 1996, the aggregate cost of investment securities for
income tax purposes was $6,108,113,364. Net unrealized appreciation
aggregated $845,887,263, of which $912,793,695 related to appreciated
investment securities and $66,906,432 related to depreciated investment
securities.
The fund hereby designates approximately $446,325,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME PORTFOLIO
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES

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DECEMBER 31, 1996

ASSETS

Investment in securities, at $ 6,954,000,627
value (including repurchase agreements of $468,544,000) (cost $6,092,876,840) -
See accompanying schedule

Cash 1,686,975

Receivable for investments sold 20,320,841

Receivable for fund shares sold 4,023,402

Dividends receivable 8,912,470

Interest receivable 3,117,054

Other receivables 122,761

TOTAL ASSETS 6,992,184,130

LIABILITIES

Payable for investments purchased $ 22,508,059

Payable for fund shares redeemed 5,207,198

Accrued management fee 2,904,152

Other payables and 474,698
accrued expenses

TOTAL LIABILITIES 31,094,107

NET ASSETS $ 6,961,090,023

Net Assets consist of:

Paid in capital $ 5,393,181,590

Undistributed net investment income 117,454,549

Accumulated undistributed net realized gain (loss) on investments and foreign 589,335,531
currency transactions

Net unrealized appreciation (depreciation) on investments 861,118,353
and assets and liabilities in
foreign currencies

NET ASSETS, for 330,981,233 $ 6,961,090,023
shares outstanding

NET ASSET VALUE, offering price $21.03
and redemption price per
share ($6,961,090,023 (divided by) 330,981,233 shares)

</TABLE>

STATEMENT OF OPERATIONS

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YEAR ENDED DECEMBER 31, 1996

INVESTMENT INCOME $ 103,954,015
Dividends

Interest 46,819,075

TOTAL INCOME 150,773,090

EXPENSES

Management fee $ 30,150,885

Transfer agent fees 3,382,642

Accounting fees and expenses 809,457

Non-interested trustees' compensation 37,037

Custodian fees and expenses 148,790

Registration fees 42,083

Audit 88,174

Legal 36,257

Interest 4,392

Miscellaneous 34,321

Total expenses before reductions 34,734,038

Expense reductions (1,419,527 33,314,511
)

NET INVESTMENT INCOME 117,458,579

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

Investment securities (including 597,126,563
realized gain of $529,821
on sales of investments in
affiliated issuers)

Foreign currency transactions (9,078 597,117,485
)

Change in net unrealized appreciation (depreciation) on:

Investment securities 91,004,487

Assets and liabilities in (11,569 90,992,918
foreign currencies )

NET GAIN (LOSS) 688,110,403

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 805,568,982

OTHER INFORMATION $ 1,390,319
Expense reductions
Directed brokerage arrangements

Custodian interest credits 29,208

$ 1,419,527

</TABLE>

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

Operations $ 117,458,579 $ 88,914,157

Net investment income

Net realized gain (loss) 597,117,485 220,997,465

Change in net unrealized appreciation (depreciation) 90,992,918 715,587,919

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 805,568,982 1,025,499,541

Distributions to shareholders (7,876,787) (84,729,039)

From net investment income

From net realized gain (225,801,230) (121,254,353)

TOTAL DISTRIBUTIONS (233,678,017) (205,983,392)

Share transactions 1,829,128,598 1,784,340,253

Net proceeds from sales of shares

Reinvestment of distributions 233,678,017 205,981,922

Cost of shares redeemed (553,042,238) (214,815,736)

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 1,509,764,377 1,775,506,439

TOTAL INCREASE (DECREASE) IN NET ASSETS 2,081,655,342 2,595,022,588

NET ASSETS

Beginning of period 4,879,434,681 2,284,412,093

End of period (including undistributed net investment income of $117,454,549 and $8,997,355, $ 6,961,090,023 $ 4,879,434,681

respectively)

OTHER INFORMATION

Sold 93,794,843 103,951,843

Issued in reinvestment of distributions 12,390,139 12,868,445

Redeemed (28,467,146) (12,384,683)

Net increase (decrease) 77,717,836 104,435,605

</TABLE>

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SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.

</TABLE>

FINANCIAL HIGHLIGHTS

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YEARS ENDED DECEMBER 31,

SELECTED PER-SHARE DATA 1996 1995 1994 1993 C 1992

</TABLE>

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<CAPTION>
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Net asset value, beginning of period $ 19.27 $ 15.35 $ 15.44 $ 13.40 $ 11.85

Income from Investment Operations

Net investment income .35 .41 .41 .37 .40

Net realized and unrealized gain (loss) 2.30 4.69 .64 2.06 1.57

Total from investment operations 2.65 5.10 1.05 2.43 1.97

Less Distributions

From net investment income (.03) (.40) (.37) (.35) (.42)

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

From net realized gain (.86) (.78) (.77) - -

Total distributions (.89) (1.18) (1.14) (.39) (.42)

Net asset value, end of period $ 21.03 $ 19.27 $ 15.35 $ 15.44 $ 13.40

TOTAL RETURN A, B 14.28% 35.09% 7.07% 18.29% 16.89%

RATIOS AND SUPPLEMENTAL DATA

Net assets, end of period (000 omitted) $ 6,961,090 $ 4,879,435 $ 2,284,412 $ 1,318,500 $ 592,880

Ratio of expenses to average net assets .58% .61% .60% .62% .65%

Ratio of expenses to average net assets after expense reductions.56% D .61% .58% .62% .65%
D

Ratio of net investment income to average net assets 1.97% 2.56% 2.83% 2.87% 3.52%

Portfolio turnover rate 186% 87% 134% 120% 74%

Average commission rate E $ .0426

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).
TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE
THE TOTAL RETURNS SHOWN.
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.
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).
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

5. SIGNIFICANT ACCOUNTING POLICIES.
Equity-Income Portfolio (the fund) is a fund of Variable Insurance Products
Fund (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 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). 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.
6. 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 SEC), 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
2. OPERATING POLICIES - CONTINUED
REPURCHASE AGREEMENTS - CONTINUED
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).
7. 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.
8. 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 .20%. For
the period, the management fee was equivalent to an annual rate of .51% 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.
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.
9. 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.
10. 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 1.50% 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.
11. 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 20% 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 29%.
12. 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 and the Shareholders of
Equity-Income Portfolio:
We have audited the accompanying statement of assets and liabilities of
Variable Insurance Products Fund: Equity-Income Portfolio, including the
schedule of portfolio investments, as of December 31, 1996, and the related
statement of operations for the year then ended, the statement of changes
in net assets for each of the two years in the period then ended and the
financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility
of the fund's management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 1996 by correspondence with the
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position
of Variable Insurance Products Fund: Equity-Income Portfolio as of December
31, 1996, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the
period then ended, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 10, 1997
DISTRIBUTIONS

The Board of Trustees of Equity-Income Portfolio voted to pay on February
7, 1997, to shareholders of record at the opening of business on February
7, 1997, a distribution of $1.81 per share derived from capital gains
realized from sales of portfolio securities and a dividend of $.36 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
William J. Hayes, VICE PRESIDENT
Stephen Petersen, 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: MONEY MARKET PORTFOLIO

ANNUAL REPORT
DECEMBER 31, 1996
CONTENTS

<TABLE>
<CAPTION>
<S> <C> <C>
PERFORMANCE 3 How the fund has done over time.

FUND TALK 4 The manager's review of fund performance, strategy
and outlook.

INVESTMENTS 5 A complete list of the fund's investments with their
market values.

FINANCIAL STATEMENTS 9 Statements of assets and liabilities, operations, and
changes in net assets, as well as financial highlights.

NOTES 11 Notes to the financial statements.

REPORT OF INDEPENDENT ACCOUNTANTS 12 The auditors' opinion.

</TABLE>

To evaluate a money market fund's historical performance, you can look at
either total return or yield. Total return reflects the change in value of
an investment, assuming reinvestment of the fund's dividend income. Yield
measures the income paid by a fund. Since a money market fund tries to
maintain a $1 share price, yield is an important measure of performance.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED PAST 1 PAST 5 PAST 10
DECEMBER 31, 1996 YEAR YEARS YEARS

MONEY MARKET 5.41% 4.53% 5.96%

AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and show you
what would have happened if the fund had achieved that return by performing
at a constant rate each year.
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.
If Fidelity had not reimbursed certain fund expenses, the past five and ten
year total returns would have been lower. Yield will vary.
YIELD
Row: 1, Col: 1, Value: 5.56
Row: 1, Col: 2, Value: 2.83
Row: 2, Col: 1, Value: 5.13
Row: 2, Col: 2, Value: 2.71
Row: 3, Col: 1, Value: 5.159999999999999
Row: 3, Col: 2, Value: 2.66
Row: 4, Col: 1, Value: 5.3
Row: 4, Col: 2, Value: 2.67
Row: 5, Col: 1, Value: 5.28
Row: 5, Col: 2, Value: 2.64
Money Market
MMDA
6% -
5% -
4% -
3% -
2% -
1% -
0%
12/27/95 4/3/96 6/26/96 10/2/96 12/30/96

MONEY MARKET 5.56% 5.13% 5.16% 5.30% 5.28%

MMDA 2.83% 2.71% 2.66% 2.67% 2.64
YIELD refers to the income paid by the fund over a given period. Yields for
money market funds are usually for seven-day periods, expressed as annual
percentage rates. A yield that assumes income earned is reinvested or
compounded is called an effective yield. The chart above shows the fund's
current seven-day yield at quarterly intervals over the past year. You can
compare these yields to the all taxable money market funds average and the
bank money market deposit account (MMDA) average. The MMDA average is
supplied by BANK RATE MONITOR. TM

COMPARING PERFORMANCE
There are some important differences between a
bank money market deposit account (MMDA)
and a money market fund. First, the U.S.
Government neither insures nor guarantees a
money market fund. In fact, there is no assurance
that a money fund will maintain a $1 share price.
Second, a money market fund returns to its
shareholders income earned by the fund's
investments after expenses. This is in contrast to
banks, which set their MMDA rates periodically
based on current interest rates, competitors' rates,
and internal criteria.
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND: MONEY MARKET PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW

An interview with Bob Litterst, Portfolio Manager of Money Market Portfolio
Q. BOB, WHAT WAS THE INVESTING ENVIRONMENT LIKE OVER THE PAST YEAR?
A. It has gone through some interesting changes. At the beginning of the
period, the economy was growing slowly, inflationary pressures were mild
and it seemed a balanced budget agreement was in the offing. The Federal
Reserve Board reduced short-term rates in January, and market participants
were optimistic that additional rate cuts would occur in the months ahead.
But things changed dramatically, beginning with Fed Chairman Alan
Greenspan's Congressional testimony in February suggesting that market
expectations of further rate cuts were excessive. February's employment
report then came in well above most analysts' predictions, depicting a much
stronger labor market than previously thought. Stronger economic signals
caused participants to revise their expectations regarding monetary policy,
and short-term rates rose. Ultimately, the economy grew at a 4.7% annual
rate in the second quarter, well above a non-inflationary pace. As a
result, short-term interest rates rose higher through the second quarter
and into the summer.
Q. BUT THE FED DIDN'T RAISE RATES . . .
A. That's right, for two reasons. First, the key inflation indices were
well-behaved. Rising wages didn't get translated into higher prices. And
second, the Fed anticipated a slowdown in economic activity in the second
half of the year. Minutes from the Fed's Open Market Committee meetings
indicated that the Fed did adopt a tightening bias in July and maintained
it through its November meeting. Nonetheless, the Fed did not take direct
action on short-term interest rates. During September and October, the
market breathed a sigh of relief as the Fed's economic projections turned
out to be correct. Job growth decelerated, third quarter gross domestic
product (GDP) slowed sharply and inflation numbers were reassuring. With
the economy slowing and inflation subdued, tightening fears subsided and
short-term rates retraced their earlier rise.
Q. WHAT HAS YOUR STRATEGY BEEN THROUGH THIS FLUCTUATING MARKET?
A. At the start of the period, the fund's average maturity was 70 days
because I felt rates were on a downward trend and I wanted to lock in
higher yields. When market sentiment shifted and rates rose in anticipation
of an increase in the federal funds rate, I shortened the average maturity
somewhat - to help me position the fund so I could reinvest at ever-higher
yields as the fund's existing holdings matured. In the summer, I shortened
the maturity further to the 50-day range because the potential for Fed
tightening was strong, and, again, I wanted to be able to obtain higher
yields going forward. From that point, I increased the average maturity of
the fund by purchasing some securities further out on the yield curve that
I felt were factoring in the worst case scenario regarding potential Fed
tightening. At the end of September, the fund's average maturity was back
out to 70 days, reflecting my opinion that Fed policy would remain steady
for the foreseeable future. Since that time, I've kept the maturity in the
60-70 day range.
Q. WHAT DO YOU SEE LOOKING OUT OVER THE NEXT SEVERAL MONTHS?
A. The consumer retrenched a great deal in the third quarter after
contributing to strong GDP growth in the first half of the year. The debate
at this point is whether this slowdown is a "pause to refresh" or the
beginning of a new trend where consumers are too debt-strapped to keep on
spending. Recent economic data suggest that fourth-quarter real GDP growth
may be stronger than initially expected, led by consumption, trade and
construction spending. Nevertheless, I expect Fed monetary policy to be
stable at least through the first quarter of 1997. If the economy grows at
an above-trend pace and/or wage and price pressures accelerate,
expectations of tightening should reappear. On the other hand, I think it's
unlikely the Fed will ease because of concern about tight labor market
conditions and rising wage pressures. Additionally, in December Greenspan
warned of "irrational exuberance" in the equity markets, a condition that
probably would not cause the Fed to increase rates, but might restrict its
ability to ease if the economy weakens.
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.

Showing Percentage of Total Value of Investment in Securities

BANKERS' ACCEPTANCES - 0.7%
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT
(NOTE 1)
Chase Manhattan Bank
2/3/97 5.42% $ 3,062,567 $ 3,047,547
5/13/97 5.64 3,000,000 2,939,280
6/12/97 5.54 2,270,786 2,215,811
TOTAL BANKERS' ACCEPTANCES 8,202,638
CERTIFICATES OF DEPOSIT - 33.0%
DOMESTIC CERTIFICATES OF DEPOSIT - 5.5%
American Express Centurion Bank
1/13/97 5.47 10,000,000 10,000,000
1/16/97 5.50 3,000,000 3,000,000
Bank of America-Illinois
3/24/97 5.43 500,000 500,288
Bank of New York, NY
1/29/97 5.31 (a) 3,000,000 3,000,000
Chase Manhattan Bank
1/8/97 5.85 10,000,000 10,000,000
Corestates Bank
1/10/97 5.58 (a) 10,000,000 9,997,181
Mellon Bank, N.A.
1/29/97 5.60 15,000,000 15,000,000
Morgan Guaranty Trust, NY
8/12/97 5.78 4,000,000 3,998,612
8/12/97 5.80 5,000,000 4,997,870
60,493,951
CHICAGO BRANCH, YANKEE DOLLAR, FOREIGN BANKS - 1.9%
ABN-AMRO Bank
3/10/97 5.40 10,000,000 10,000,000
3/18/97 5.80 2,000,000 1,998,271
12/23/97 5.70 5,000,000 4,997,659
Bank of Montreal
1/7/97 5.45 4,000,000 3,999,290
20,995,220
NEW YORK BRANCH, YANKEE DOLLAR, FOREIGN BANKS - 17.3%
Bank of Scotland Treasury Services
3/20/97 5.48 10,000,000 10,000,000
Bank of Tokyo-Mitsubishi Ltd.
1/6/97 5.60 5,000,000 5,000,000
1/16/97 5.48 4,000,000 3,999,996
2/24/97 5.45 3,000,000 3,000,000
3/3/97 5.50 7,000,000 7,000,000
Bayerische Hypotheken-und Weschel
4/7/97 5.40 6,000,000 6,000,000
Bayerische Landesbank Girozentrale
1/22/97 5.53 6,000,000 6,000,000
Bayerische Vereinsbank A.G.
2/3/97 5.57 25,000,000 25,000,000
Caisse Nationale de Credit Agricole
2/18/97 5.41 5,000,000 5,000,000
6/16/97 5.50 5,000,000 5,000,000
Canadian Imperial Bank of Commerce
1/27/97 5.40 8,000,000 8,000,000
Commerzbank, Germany
2/26/97 5.42 10,000,000 10,001,825
2/26/97 5.73 1,000,000 999,764

DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT
(NOTE 1)
Landesbank Hessen-Thuringen
9/5/97 6.20% $ 15,000,000 $ 15,000,968
9/11/97 6.11 14,000,000 13,998,147
National Bank of Canada
2/24/97 5.40 4,000,000 4,000,000
National Westminster Bank, PLC
2/18/97 5.42 5,000,000 5,000,000
5/1/97 5.42 3,000,000 3,000,163
Royal Bank of Canada
8/13/97 5.80 5,000,000 4,997,861
Sanwa Bank, Ltd.
1/13/97 5.50 4,000,000 4,000,000
1/17/97 5.52 2,000,000 2,000,000
2/28/97 5.50 2,000,000 2,000,016
3/27/97 5.71 2,000,000 2,000,000
Societe Generale, France
1/9/97 5.50 8,000,000 7,999,941
5/22/97 5.53 7,000,000 7,000,877
6/10/97 5.53 5,000,000 5,007,585
Sumitomo Bank, Ltd.
1/13/97 5.55 3,000,000 3,000,000
1/17/97 5.53 2,000,000 2,000,000
1/21/97 5.54 3,000,000 3,000,000
2/18/97 5.50 4,000,000 4,000,000
Westdeutsche Landesbank
3/10/97 5.40 2,000,000 2,000,000
4/9/97 5.45 3,000,000 3,000,000
4/21/97 5.50 2,000,000 2,000,000
190,007,143
LONDON BRANCH, EURODOLLAR, FOREIGN BANKS - 8.3%
ABN-AMRO Bank
3/27/97 5.60 15,000,000 15,000,344
Abbey National, Treasury Services
2/14/97 5.40 2,000,000 1,999,911
2/18/97 5.42 4,000,000 4,000,000
3/17/97 5.43 10,000,000 10,000,000
4/16/97 5.50 5,000,000 4,999,260
Bank of Nova Scotia
3/6/97 5.40 10,000,000 10,000,000
Bank of Tokyo-Mitsubishi Ltd.
1/28/97 5.50 1,000,000 1,000,037
2/18/97 5.46 3,000,000 2,999,987
2/25/97 5.46 2,000,000 2,000,000
3/3/97 5.48 3,000,000 3,000,050
Banque Nationale de Paris
2/13/97 5.56 5,000,000 5,000,105
Bayerische Hypotheken-und Weschel
3/10/97 5.80 4,000,000 4,000,000
Bayerische Vereinsbank A.G.
3/11/97 5.42 6,000,000 6,000,113
Canadian Imperial Bank of Commerce
3/19/97 5.45 2,000,000 2,000,000
Sanwa Bank, Ltd.
1/24/97 5.49 1,000,000 1,000,019
1/29/97 5.51 2,000,000 2,000,029
1/31/97 5.51 2,000,000 2,000,031
CERTIFICATES OF DEPOSIT - CONTINUED
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT
(NOTE 1)
LONDON BRANCH, EURODOLLAR, FOREIGN BANKS - CONTINUED
Sumitomo Bank, Ltd.
1/6/97 5.50% $ 3,000,000 $ 3,000,009
1/6/97 5.55 1,000,000 1,000,010
2/21/97 5.49 2,000,000 2,000,028
Westpac Banking Corp.
3/24/97 5.52 8,000,000 8,003,610
91,003,543
TOTAL CERTIFICATES OF DEPOSIT 362,499,857
COMMERCIAL PAPER - 45.3%
ABN-AMRO North America Finance, Inc.
3/10/97 5.57 5,000,000 4,949,000
6/19/97 5.50 5,000,000 4,874,424
A.H. Robins Company, Inc.
2/27/97 5.40 1,000,000 991,561
AVCO Financial Services
2/10/97 5.39 10,000,000 9,941,000
American Express Credit Corp.
3/19/97 5.37 25,000,000 24,717,667
Asset Securitization Coop. Corp.
2/18/97 5.43 2,000,000 1,985,680
2/18/97 5.44 2,000,000 1,985,627
2/26/97 5.44 1,000,000 991,631
BHF Finance (Delaware), Inc.
2/19/97 5.50 3,000,000 2,977,746
Bank of Nova Scotia
3/17/97 5.40 5,000,000 4,944,583
Bayerische Vereinsbank A.G.
2/18/97 5.42 5,000,000 4,964,533
Bear Stearns Cos., Inc.
2/14/97 5.41 2,000,000 1,986,922
2/26/97 5.38 3,000,000 2,975,243
Beneficial Corp.
3/17/97 5.48 5,000,000 4,943,646
CIT Group Holdings, Inc.
3/17/97 5.48 8,000,000 7,909,833
Caisse d'Amortissement de la Dette Sociale
2/24/97 5.42 15,000,000 14,880,300
2/24/97 5.43 10,000,000 9,920,050
6/3/97 6.01 10,000,000 9,755,625
6/24/97 5.60 2,000,000 1,947,800
Caisse des Depots et Consignations
2/19/97 5.41 2,000,000 1,985,518
3/13/97 5.47 5,000,000 4,946,750
Cheltenham & Gloucester PLC
2/28/97 5.41 10,000,000 9,914,289
Chrysler Financial Corporation
1/23/97 5.50 2,000,000 1,993,339
1/24/97 5.50 2,000,000 1,993,036
1/27/97 5.51 2,000,000 1,992,128
2/24/97 5.60 4,000,000 3,966,760
Citibank Credit Card Master Trust I (Dakota Certificate Program)
1/23/97 5.43 2,000,000 1,993,449
2/6/97 5.41 1,000,000 994,660
2/21/97 5.40 5,000,000 4,962,246
Commercial Credit Co.
2/26/97 5.52 5,000,000 4,957,455
CoreStates Capital Corp.
1/8/97 5.55 (a) 5,000,000 5,000,000

DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT
(NOTE 1)
Delaware Funding Corporation
1/27/97 5.65% $ 4,678,000 $ 4,659,013
Electronic Data Systems
1/24/97 5.68 2,000,000 1,992,780
2/14/97 5.58 4,000,000 3,972,965
Eiger Capital Corp.
1/13/97 5.45 2,000,000 1,996,387
1/23/97 5.65 4,000,000 3,986,263
Enterprise Funding Corp.
1/29/97 5.41 4,000,000 3,983,293
1/31/97 5.61 2,553,000 2,541,150
2/19/97 5.43 1,540,000 1,528,744
2/20/97 5.49 2,000,000 1,984,916
2/25/97 5.49 2,000,000 1,983,408
2/27/97 5.51 4,000,000 3,965,483
Ford Motor Credit Corp.
3/17/97 5.66 10,000,000 9,885,417
3/24/97 5.66 24,000,000 23,699,333
GTE Corp.
1/15/97 5.53 2,000,000 1,995,722
Generale Bank
4/10/97 5.44 5,000,000 4,926,850
6/19/97 5.53 15,000,000 14,621,158
General Electric Capital Corp.
2/19/97 5.42 15,000,000 14,891,383
3/3/97 5.52 1,000,000 990,731
3/12/97 5.76 6,000,000 5,934,667
3/18/97 5.39 15,000,000 14,832,484
6/4/97 5.44 10,000,000 9,773,706
General Electric Co.
3/3/97 5.37 3,000,000 2,973,058
General Motors Acceptance Corp.
2/20/97 5.70 2,000,000 1,984,597
2/24/97 5.71 2,000,000 1,983,350
2/25/97 5.71 4,000,000 3,966,083
3/3/97 5.45 10,000,000 9,909,008
3/31/97 5.70 5,000,000 4,931,520
5/7/97 5.51 5,000,000 4,906,200
4/14/97 5.63 4,000,000 3,937,342
4/15/97 5.63 2,000,000 1,968,367
6/23/97 5.62 5,000,000 4,868,688
6/30/97 5.62 3,000,000 2,918,025
Goldman Sachs Group, L.P. (The)
4/29/97 5.50 10,000,000 9,824,639
5/12/97 5.45 7,000,000 6,864,997
IBM Credit Corp.
3/3/97 5.39 1,000,000 991,020
3/10/97 5.38 5,000,000 4,949,945
3/12/97 5.38 2,000,000 1,979,389
Matterhorn Capital Corp.
1/10/97 5.50 3,647,000 3,642,013
Merrill Lynch & Co., Inc.
2/4/97 5.43 5,000,000 4,974,760
2/4/97 5.63 15,000,000 14,922,508
2/27/97 5.45 4,000,000 3,966,117
3/11/97 5.76 3,000,000 2,967,800
3/12/97 5.68 1,000,000 989,257
5/15/97 5.44 10,000,000 9,802,722
Morgan Stanley Group, Inc.
2/4/97 5.40 3,000,000 2,984,927
2/10/97 5.40 7,000,000 6,958,623
COMMERCIAL PAPER - CONTINUED
DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT
(NOTE 1)
National Australia Funding, Inc.
1/27/97 5.78% $ 5,000,000 $ 4,979,723
3/13/97 5.60 5,000,000 4,946,553
National Bank of Canada
1/6/97 5.50 1,000,000 999,240
Nationwide Building Society
2/25/97 5.45 1,000,000 991,826
3/6/97 5.40 10,000,000 9,905,334
New Center Asset Trust
2/19/97 5.63 2,000,000 1,985,082
3/17/97 5.39 3,000,000 2,966,875
J.C. Penney Funding Corp.
2/10/97 5.50 5,000,000 4,969,722
2/13/97 5.50 1,000,000 993,490
PHH Corp.
1/24/97 5.45 2,000,000 1,993,100
2/6/97 5.43 1,000,000 994,630
2/7/97 5.43 1,000,000 994,481
2/14/97 5.51 5,000,000 4,966,694
Preferred Receivables Funding Corp.
1/16/97 5.39 2,000,000 1,995,542
1/23/97 5.65 3,000,000 2,989,697
1/24/97 5.40 1,000,000 996,582
1/27/97 5.40 1,000,000 996,136
1/28/97 5.66 3,950,000 3,933,351
2/25/97 5.53 2,000,000 1,983,286
Sherwood Medical Company
2/26/97 5.51 5,751,000 5,702,244
Southern Company Group
1/21/97 5.40 5,000,000 4,985,139
Textron, Inc.
1/15/97 5.63 1,000,000 997,822
1/16/97 5.63 1,000,000 997,666
Unifunding, Inc.
1/21/97 5.41 2,000,000 1,994,067
3/4/97 5.45 3,000,000 2,972,229
Westpac Capital Corp.
3/13/97 5.70 10,000,000 9,890,739
TOTAL COMMERCIAL PAPER 498,774,559
FEDERAL AGENCIES (A) - 6.9%
FEDERAL HOME LOAN BANK - AGENCY COUPONS - 0.5%
3/4/97 5.40 5,000,000 4,995,982
FEDERAL NATIONAL MORTGAGE ASSOC. - AGENCY COUPONS - 6.4%
1/2/97 4.97 9,500,000 9,500,000
1/2/97 5.42 15,000,000 14,991,002
1/29/97 5.60 6,000,000 5,998,023
3/9/97 5.40 25,000,000 24,979,620
3/13/97 5.43 10,000,000 9,993,023
3/20/97 5.49 5,000,000 4,998,867
70,460,535
TOTAL FEDERAL AGENCIES 75,456,517
BANK NOTES - 2.4%
Fifth Third Bank - Cincinnati
2/24/97 5.80 5,000,000 4,997,971

DUE ANNUALIZED YIELD AT PRINCIPAL VALUE DATE TIME OF PURCHASE AMOUNT
(NOTE 1)
First National Bank of Boston
3/6/97 5.44% $ 12,000,000 $ 12,000,000
Key Bank of New York
1/2/97 4.93 (a) 5,000,000 4,998,034
PNC Bank
1/8/97 5.56 (a) 4,300,000 4,298,820
TOTAL BANK NOTES 26,294,825
MASTER NOTES (A) - 2.2%
Goldman Sachs Group, L.P. (The) (c)
2/8/97 5.50 5,000,000 5,000,000
J.P. Morgan Securities
1/7/97 5.60 13,000,000 13,000,000
Norwest Corp.
1/2/97 5.99 6,000,000 6,000,000
TOTAL MASTER NOTES 24,000,000
MEDIUM-TERM NOTES - 2.8%
Associates Corp. of North America
7/15/97 5.95 2,250,000 2,257,754
Beneficial Corp.
1/19/97 5.50 (a) 5,000,000 4,999,777
General Motors Acceptance Corp.
2/1/97 5.50 (a) 5,000,000 5,000,000
2/13/97 5.64 (a) 2,000,000 1,999,952
Merrill Lynch & Co., Inc.
1/21/97 5.62 (a) 4,000,000 3,999,505
Morgan Stanley Group, Inc.
1/2/97 4.95 (a) 4,000,000 4,000,000
Norwest Corp.
4/22/97 5.55 (a) 6,000,000 6,000,000
Transamerica Life Insurance and Annuity Co. (c)
3/16/97 5.57 (a) 3,000,000 3,000,000
TOTAL MEDIUM-TERM NOTES 31,256,988
SHORT-TERM NOTES (A) - 4.7%
Capital One Funding Corp. (1994-B)
1/8/97 5.84 3,477,000 3,477,000
Capital One Funding Corp. (1995-E)
1/8/97 5.84 5,800,000 5,800,000
Liquid Asset Backed Securities Trust (1996-1) (b)
1/15/97 5.63 4,000,000 4,000,000
Liquid Asset Backed Securities Trust (1996-2) (b)
1/2/97 5.59 7,000,000 7,000,000
SMM Trust (1996-B) (b)
1/6/97 5.61 5,500,000 5,500,000
SMM Trust (1996-I) (b)
1/29/97 5.71 5,000,000 5,000,000
SMM Trust (1996-P) (b)
1/16/97 5.64 7,000,000 7,000,000
SMM Trust (1996-V) (b)
3/26/97 5.64 14,000,000 14,000,000
TOTAL SHORT-TERM NOTES 51,777,000
REPURCHASE AGREEMENTS - 2.0%
MATURITY VALUE
AMOUNT (NOTE 1)
In a joint trading account
(U.S. Government Obligations)
dated 12/31/96 due 1/2/97:
At 7.32% $ 11,619,725 $ 11,615,000
(U.S. Government Obligations)
dated 12/12/96 due 1/15/97:
At 5.50% 10,051,944 10,000,000
TOTAL REPURCHASE AGREEMENTS 21,615,000
TOTAL INVESTMENTS - 100% $1,099,877,384
Total Cost for Income Tax Purposes - $ 1,099,877,384
LEGEND
1. The coupon rate shown on floating or adjustable rate securities
represents the rate at period end. The due date on these types of
securities reflects the next interest rate reset date or, when applicable,
the final maturity date.
2. 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 $42,500,000 or 3.8% of net
assets.
3. Restricted security; subject to resale restrictions.
INCOME TAX INFORMATION
At December 31, 1996, the fund had a capital loss carryforward of
approximately $29,000 which will expire on December 31, 2002.
VARIABLE INSURANCE PRODUCTS FUND: MONEY MARKET 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 $21,615,000) - See accompanying $ 1,099,877,384
schedule

Cash 20,039,138

Receivable for investments sold 92,000

Interest receivable 6,464,974

TOTAL ASSETS 1,126,473,496

LIABILITIES

Accrued management fee $ 197,699

Other payables and 120,704
accrued expenses

TOTAL LIABILITIES 318,403

NET ASSETS $ 1,126,155,093

Net Assets consist of:

Paid in capital $ 1,126,168,743

Accumulated net realized gain (loss) on investments (13,650)

NET ASSETS, for 1,126,168,743 $ 1,126,155,093
shares outstanding

NET ASSET VALUE, offering price $1.00
and redemption price per
share ($1,126,155,093 (divided by) 1,126,168,743 shares)

</TABLE>

STATEMENT OF OPERATIONS

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

INTEREST INCOME $ 52,233,571

EXPENSES

Management fee $ 1,949,037

Transfer agent fees 695,000

Accounting fees and expenses 120,582

Non-interested trustees' compensation 10,374

Custodian fees and expenses 32,905

Audit 31,416

Legal 5,045

Miscellaneous 2,722

Total expenses before reductions 2,847,081

Expense reductions (34,785 2,812,296
)

NET INTEREST INCOME 49,421,275

NET REALIZED GAIN (LOSS) 49,076
ON INVESTMENTS

NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 49,470,351

OTHER INFORMATION
Expense reductions

Transfer agent interest credits $ 34,785

</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 $ 49,421,275 $ 43,984,366
Net interest income

Net realized gain (loss) 49,076 16,876

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 49,470,351 44,001,242

Distributions to shareholders from net interest income (49,421,275) (43,984,366)

Share transactions at net asset value of $1.00 per share 1,994,407,823 1,212,453,074
Proceeds from sales of shares

Reinvestment of distributions from net interest income 49,421,275 43,984,366

Cost of shares redeemed (1,726,597,066) (1,196,186,142)

NET INCREASE (DECREASE) IN NET ASSETS AND SHARES RESULTING FROM SHARE TRANSACTIONS 317,232,032 60,251,298

TOTAL INCREASE (DECREASE) IN NET ASSETS 317,281,108 60,268,174

NET ASSETS

Beginning of period 808,873,985 748,605,811

End of period $ 1,126,155,093 $ 808,873,985

</TABLE>

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

</TABLE>

FINANCIAL HIGHLIGHTS
YEARS ENDED DECEMBER 31,

SELECTED PER-SHARE DATA 1996 1995 1994 1993 1992

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000

Income from Investment Operations .052 .057 .042 .032 .038
Net interest income

Less Distributions

From net interest income (.052) (.057) (.042) (.032) (.038)

Net asset value, end of period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000

TOTAL RETURN A 5.41% 5.87% 4.25% 3.23% B 3.90%

RATIOS AND SUPPLEMENTAL DATA

Net assets, end of period (000 omitted) $ 1,126,155 $ 808,874 $ 748,606 $ 353,104 $ 301,002

Ratio of expenses to average net assets after expense .30% .33% .27% .22% C .24%
reductions

Ratio of net interest income to average net assets 5.28% 5.72% 4.32% 3.16% 3.85%

</TABLE>

A TOTAL RETURNS DO NOT REFLECT CHARGES ATTRIBUTABLE TO YOUR INSURANCE
COMPANY'S SEPARATE ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE THE
TOTAL RETURNS.
B THE TOTAL RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN
REDUCED DURING THE PERIOD.
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.
NOTES TO FINANCIAL STATEMENTS
For the period ended December 31, 1996

4. SIGNIFICANT ACCOUNTING POLICIES.
Money Market Portfolio (the fund) is a fund of Variable Insurance Products
Fund (the trust) and is authorized to issue an unlimited number of shares.
The trust is registered under the Investment Company Act of 1940, as
amended (the 1940 Act), as an open-end management investment company
organized as a Massachusetts business trust. The 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. As permitted under Rule 2a-7 of the 1940 Act, and
certain conditions therein, securities are valued initially at cost and
thereafter assume a constant amortization to maturity of any discount or
premium.
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."
INTEREST INCOME. Interest income, which includes amortization of premium
and accretion of discount, is accrued as earned.
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. Dividends are declared daily and paid
monthly from net interest income.
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.
5. OPERATING POLICIES.
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 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.
6. 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 basic fund fee rate of .03% of the
fund's average net assets, plus a fixed income group fee rate and a
income-based fee. 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 income-based
fee is added only when the fund's gross yield exceeds 5%. At that time the
income-based fee would equal 6% of that portion of the fund's gross income
that represents a gross yield of more than 5% per year. The maximum income
based component is 0.24% of average net assets. For the period, the
management fee was equivalent to an annual rate of .21% of average net
assets.
SUB-ADVISER FEE. As the fund's investment sub-adviser, FMR Texas Inc., a
wholly owned subsidiary of FMR, receives a fee from FMR of 50% of the
management fee payable to FMR. The fee is paid prior to any voluntary
expense reimbursements which may be in effect.
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., 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.
7. EXPENSE REDUCTIONS.
The fund has entered into an arrangement with its 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 this arrangement
is shown under the caption "Other Information" on the fund's Statement Of
Operations.
8. BENEFICIAL INTEREST.
At the end of the period, Fidelity Investments Life Insurance Company
(FILI) and its subsidiaries, affiliates of FMR, were record owners of
approximately 50% of the outstanding shares of the fund. In addition, an
unaffiliated insurance company was record owner of 11% of the total
outstanding shares of the fund.
9. ASSET TRANSFER INFORMATION.
In September 1996, the Board of Trustees approved a proposal to liquidate
Fidelity Advisor Annuity Money Market Fund and transfer the assets of
Fidelity Advisor Annuity Money Market 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 and the Shareholders of
Money Market Portfolio:
We have audited the accompanying statement of assets and liabilities of
Variable Insurance Products Fund: Money Market Portfolio, including the
schedule of portfolio investments, as of December 31, 1996, and the related
statement of operations for the year then ended, the statement of changes
in net assets for each of the two years in the period then ended, and the
financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility
of the fund's management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 1996 by correspondence with the
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position
of Variable Insurance Products Fund: Money Market Portfolio as of December
31, 1996, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the
period then ended, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Dallas, Texas
February 11, 1997

INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
INVESTMENT SUB-ADVISERS
FMR Texas Inc., Irving, TX
OFFICERS
Edward C. Johnson 3d, PRESIDENT
J. Gary Burkhead, SENIOR VICE PRESIDENT
Sarah H. Zenoble, VICE PRESIDENT
Robert Litterst, VICE PRESIDENT
Arthur S. Loring, SECRETARY
Kenneth A. Rathgeber, TREASURER
Thomas D. Maher, ASSISTANT VICE PRESIDENT
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
Thomas J. Simpson, 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 Bank of New York, New York, NY
* INDEPENDENT TRUSTEES

(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS
FUND: HIGH INCOME 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: HIGH INCOME PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY

High Income 14.03% 14.96% 11.12%

Merrill Lynch High Yield Master Index 11.06% 12.76% 11.25%

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 Merrill Lynch High Yield
Master Index - a market capitalization weighted index of all domestic and
yankee high-yield bonds. Issues included in the index have maturities of at
least one year and have a credit rating lower than BBB-/Baa3, but are not
in default. 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. 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.
If Fidelity had not reimbursed certain fund expenses, the fund's five and
10 year total returns 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. The fund includes high yielding, lower-rated
securities which are subject to greater price volatility and may involve
greater risk of default. The market for these securities may be less
liquid.
$10,000 OVER 10 YEARS
IMAHDR PRASUN SHR__CHT 19961231 19970110 144943 S00000000000001
VIP: High Income ML High Yield Master
00152 ML002
1986/12/31 10000.00 10000.00
1987/01/31 10364.57 10282.75
1987/02/28 10543.92 10452.51
1987/03/31 10639.95 10568.08
1987/04/30 10307.45 10337.62
1987/05/31 10211.62 10291.04
1987/06/30 10432.16 10433.29
1987/07/31 10443.32 10490.06
1987/08/31 10529.83 10595.18
1987/09/30 10163.16 10351.40
1987/10/31 9677.16 10074.83
1987/11/30 9962.17 10329.61
1987/12/31 10121.62 10466.77
1988/01/31 10454.39 10753.19
1988/02/29 10767.39 11044.97
1988/03/31 10690.03 11026.71
1988/04/30 10773.35 11058.55
1988/05/31 10757.33 11116.27
1988/06/30 10982.80 11328.81
1988/07/31 11097.12 11448.53
1988/08/31 11044.12 11486.14
1988/09/30 11132.65 11601.92
1988/10/31 11253.84 11782.68
1988/11/30 11210.87 11826.82
1988/12/31 11299.96 11876.86
1989/01/31 11571.50 12054.97
1989/02/28 11628.42 12135.98
1989/03/31 11479.00 12125.19
1989/04/30 11351.87 12160.97
1989/05/31 11561.62 12384.85
1989/06/30 11892.76 12560.32
1989/07/31 11814.47 12619.80
1989/08/31 11745.94 12682.14
1989/09/30 11334.95 12561.40
1989/10/31 10849.01 12362.72
1989/11/30 10858.15 12390.42
1989/12/31 10828.39 12379.22
1990/01/31 10589.03 12137.27
1990/02/28 10425.98 11960.52
1990/03/31 10315.98 12122.20
1990/04/30 10346.54 12183.79
1990/05/31 10559.13 12403.87
1990/06/30 10725.46 12644.18
1990/07/31 10891.12 12911.38
1990/08/31 10708.93 12417.11
1990/09/30 10455.01 11877.07
1990/10/31 10201.31 11574.83
1990/11/30 10440.59 11672.88
1990/12/31 10586.58 11841.08
1991/01/31 10811.19 12008.46
1991/02/28 11410.15 12899.77
1991/03/31 11814.44 13454.41
1991/04/30 12233.71 13933.54
1991/05/31 12413.40 14001.58
1991/06/30 12682.93 14283.24
1991/07/31 13162.10 14625.48
1991/08/31 13341.78 14932.88
1991/09/30 13641.26 15123.08
1991/10/31 14105.46 15572.46
1991/11/30 14225.25 15752.34
1991/12/31 14300.12 15935.34
1992/01/31 15063.79 16492.49
1992/02/29 15610.72 16902.09
1992/03/31 16115.35 17137.92
1992/04/30 16229.29 17262.66
1992/05/31 16424.63 17538.01
1992/06/30 16603.69 17755.91
1992/07/31 16929.25 18115.67
1992/08/31 17287.37 18355.50
1992/09/30 17466.43 18564.65
1992/10/31 17205.98 18330.18
1992/11/30 17417.60 18589.77
1992/12/31 17612.93 18829.13
1993/01/31 18085.00 19292.78
1993/02/28 18393.49 19657.97
1993/03/31 18817.96 19998.78
1993/04/30 18941.76 20142.33
1993/05/31 19224.74 20413.47
1993/06/30 19719.95 20796.99
1993/07/31 19914.49 21020.53
1993/08/31 20126.73 21220.91
1993/09/30 20197.47 21325.62
1993/10/31 20674.99 21727.34
1993/11/30 20869.54 21846.17
1993/12/31 21205.57 22064.62
1994/01/31 21913.02 22548.16
1994/02/28 21886.74 22386.01
1994/03/31 21149.43 21656.52
1994/04/30 20935.99 21403.44
1994/05/31 20974.80 21327.18
1994/06/30 20897.18 21405.68
1994/07/31 20974.80 21556.15
1994/08/31 20974.80 21705.88
1994/09/30 21130.02 21697.66
1994/10/31 20935.99 21752.80
1994/11/30 20761.36 21567.76
1994/12/31 20858.38 21807.67
1995/01/31 21091.22 22115.82
1995/02/28 21815.10 22805.86
1995/03/31 22086.75 23123.24
1995/04/30 22734.51 23664.64
1995/05/31 23319.59 24403.97
1995/06/30 23382.28 24590.37
1995/07/31 23946.46 24871.49
1995/08/31 24134.52 25022.44
1995/09/30 24531.54 25308.72
1995/10/31 24761.39 25488.13
1995/11/30 24886.77 25736.93
1995/12/31 25179.31 26150.05
1996/01/31 25764.39 26563.05
1996/02/29 26189.93 26603.04
1996/03/31 26121.13 26530.79
1996/04/30 26511.00 26542.81
1996/05/31 26877.94 26734.23
1996/06/30 27015.54 26894.82
1996/07/31 26923.80 27077.42
1996/08/31 27313.67 27357.05
1996/09/30 28116.34 27944.01
1996/10/31 28024.61 28250.25
1996/11/30 28322.74 28821.39
1996/12/31 28712.61 29043.17
IMATRL PRASUN SHR__CHT 19961231 19970110 144946 R00000000000123

Let's say hypothetically that $10,000 was invested in High Income Portfolio
on December 31, 1986. As the chart shows, by December 31, 1996, the value
of the investment would have grown to $28,713 - a 187.13% increase on the
initial investment. With reinvested dividends and capital gains, if any, a
$10,000 investment in the Merrill Lynch High Yield Master Index would have
grown to $29,043 over the same period - a 190.43% increase.
INVESTMENT SUMMARY
TOP FIVE HOLDINGS AS OF DECEMBER 31, 1996
(BY ISSUER, EXCLUDING CASH EQUIVALENTS) % OF FUND'S
INVESTMENTS

PanAmSat Corp. 3.5

U.S. Government Obligations 3.2

Time Warner, Inc., Series M, exchangeable 2.3
pay-in-kind

Millicom International Cellular SA 0%, 6/1/06 2.2

Viacom, Inc. 8% 7/7/06 1.9

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

Media & Leisure 29.3

Utilities 8.5

Basic Industries 7.3

Industrial Machinery & Equipment 5.4

Technology 5.4

QUALITY DIVERSIFICATION AS OF DECEMBER 31, 1996
(MOODY'S RATINGS) % OF FUND'S
INVESTMENTS

Aaa, Aa, A 3.2

Baa 0.0

Ba 5.7

B 49.5

Caa, Ca, C 7.4

Nonrated 2.9

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 AT DECEMBER 31, 1996, ACCOUNT FOR 2.9% OF THE
FUND'S INVESTMENTS.
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW

An interview with
Barry Coffman, Portfolio Manager of High Income Portfolio
Q. HOW DID THE FUND PERFORM, BARRY?
A. Last year was a good year for the high-yield market and the fund's
performance reflects that. The fund performed well and outperformed its
benchmark, the Merrill Lynch High Yield Master Index, which had a total
return of 11.06% for the 12 months ending December 31, 1996.
Q. WHY DID THE FUND BEAT THE BENCHMARK?
A. Credit spreads - which measure the difference in yields between bonds of
various credit qualities - narrowed during the year, primarily due to the
economy's continued strength and strong demand for high-yield bonds from
mutual funds, pension plans and insurance companies. As spreads narrowed,
lower-quality B-rated securities - which the fund emphasizes - did better
than higher-quality BB-rated securities. The latter are much more sensitive
to interest rate changes than B-rated securities, and went down in value
when interest rates rose.
Q. WHICH HOLDINGS WERE AMONG THE FUND'S BEST PERFORMERS DURING THE YEAR?
A. Satellite company PanAmSat, which was the fund's largest holding at the
end of the year, as well as one of its best performers, continued to post
strong revenues and cash flows. In addition, the company announced a merger
with a division of GM Hughes, giving its bonds an added boost. The fund's
holdings in Harcor Energy, Inc. also performed well thanks to rising energy
prices, its drilling successes and the relatively high coupon the bonds
carried. The company also did an equity offering during the year to help
reduce its debt, which had a very positive effect on its bond prices.
Q. THE FUND'S STAKE IN STOCKS ISSUED BY HIGH-YIELD COMPANIES (THOSE WITH
BELOW-INVESTMENT-GRADE CREDIT RATINGS) ROSE DURING THE YEAR. HOW DID THE
FUND'S EQUITY HOLDINGS PERFORM?
A. Generally speaking, the fund's holdings in common stocks did well. One
worth particular note was the stock of Flores & Rucks - another energy
company - which more than tripled in price during the year. The fund also
owned the high-yield debt issued by the company, which also performed
relatively well. Another strong equity performer was Host Marriott. The
full-service hotel industry had a tremendous year, benefiting from rising
occupancy rates and the lack of any new supply in most major markets. The
fund's debt holdings issued by Host Marriott also performed well.
Q. EVEN THOUGH THE HIGH-YIELD MARKET HAD A GOOD YEAR, THERE MUST HAVE BEEN
SOME DISAPPOINTMENTS.
A. That's true, and two come to mind. First, bonds issued by Marvel
Entertainment - best known for its comic books and trading cards - tumbled
when the company declared bankruptcy. The fund no longer holds these bonds.
The second disappointment was the fund's holdings in wireless cable
companies. Investors had anticipated that the regional Bell operating
companies would partner with these companies to deliver wireless cable
services. But when some of those expected combinations failed to
materialize, it sent shock waves throughout the industry. However, I
continued to hold onto People's Choice and CS Wireless Systems because I
felt that their balance sheets were solid enough to allow them to proceed
on rolling out wireless cable services.
Q. AT THE END OF THE PERIOD, 11.5% OF THE FUND'S INVESTMENTS WERE IN CASH
OR CASH EQUIVALENTS. WHAT WAS THE RATIONALE FOR THAT?
A. There were several reasons. First, there were rather healthy new cash
inflows coming into the fund at the end of the period. Second, as has been
the case historically there was a relatively low level of news bonds issued
in December. Finally, given current spreads, I was being very selective in
adding new positions to the fund.
Q. WHAT IS YOUR OUTLOOK?
A. It's been a while since the high-yield market has witnessed credit
spreads as narrow as they were at the end of the period. Given that, it's
hard for me to be extremely bullish about the prospects for the high-yield
market. However, I believe that there are still attractive opportunities
out there. The economy looks like it is cooperating now, but given current
spread levels and the increasing likelihood of a slowdown in economic
growth in 1997, I'll likely look to relatively higher-quality companies in
more defensive industries, such as media and telecommunications. In my
view, the penalty for being wrong with riskier situations outweighs the
potential rewards. As a result, capital preservation has become a priority
and earning an attractive coupon could look favorable relative to the
returns from other markets.

VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME PORTFOLIO
INVESTMENTS DECEMBER 31, 1996

Showing Percentage of Total Value of Investment in Securities

CORPORATE BONDS - 65.5%
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
CONVERTIBLE BONDS - 1.1%
MEDIA & LEISURE - 0.6%
PUBLISHING - 0.6%
Hollinger liquid yield option
note yankee 0%, 10/5/13 B2 $ 30,000,000 $ 10,612,500
RETAIL & WHOLESALE - 0.5%
RETAIL & WHOLESALE, MISCELLANEOUS - 0.5%
Comcast Corp. 1 1/8%,
4/15/07 B1 15,000,000 7,518,750
UTILITIES - 0.0%
TELEPHONE SERVICES - 0.0%
GST Telecommunications, Inc.
0%, 12/15/05 (c)(f) - 70,000 53,900
TOTAL CONVERTIBLE BONDS 18,185,150
NONCONVERTIBLE BONDS - 64.4%
AEROSPACE & DEFENSE - 0.5%
AEROSPACE & DEFENSE - 0.4%
RHI Holdings, Inc. 11 7/8%,
3/1/99 B2 2,160,000 2,160,000
Wyman-Gordon Co.
10 3/4%, 3/15/03 Ba3 4,490,000 4,815,525
6,975,525
SHIP BUILDING & REPAIR - 0.1%
Newport News Shipbuilding, Inc.
9 1/4%, 12/1/06 (f) B1 1,430,000 1,476,475
TOTAL AEROSPACE & DEFENSE 8,452,000
BASIC INDUSTRIES - 6.9%
CHEMICALS & PLASTICS - 2.4%
American Pacific Corp.
11%, 2/21/02 (f) - 743,750 706,559
Atlantis Group, Inc.
11%, 2/15/03 B2 7,785,000 8,096,400
Foamex-JPS Automotive LP/
Foamex JPS Capital Corp.
0%, 7/1/04 (c) Caa 2,760,000 2,290,800
Foamex LP/Foamex Capital Corp.:
9 1/2%, 6/1/00 B1 380,000 381,900
11 7/8%, 10/1/04 B3 2,480,000 2,653,600
Freedom Chemical Co. 10 5/8%,
10/15/06 (f) B3 5,940,000 6,237,000
Plastic Containers, Inc.
10%, 12/15/06 (f) B1 1,285,000 1,323,550
Plastic Specialties &
Technologies, Inc.
11 1/4%, 12/1/03 B3 9,770,000 10,258,500
Sterling Chemicals Holdings, Inc.
11 3/4%, 8/15/06 B3 5,420,000 5,718,100
37,666,409
IRON & STEEL - 1.3%
AK Steel Corp. 9 1/8%,
12/15/06 (f) Ba2 8,340,000 8,558,925
Republic Engineered Steels, Inc.
9 7/8%, 12/15/01 B3 4,620,000 4,319,700
WCI Steel, Inc. 10%,
12/1/04 (f) B1 6,840,000 6,908,400
19,787,025

MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
METALS & MINING - 0.8%
Commonwealth Aluminum Corp.
10 3/4%, 10/1/06 B2 $ 7,190,000 $ 7,405,700
Renco Metals, Inc.
11 1/2%, 7/1/03 B2 4,660,000 4,893,000
12,298,700
PACKAGING & CONTAINERS - 0.1%
Crown Packaging Holdings Ltd.
0%, 11/1/03 (c) Ca 6,840,000 1,710,000
PAPER & FOREST PRODUCTS - 2.3%
Doman Industries Ltd. yankee
8 3/4%, 3/15/04 Ba3 12,660,000 11,868,750
Repap New Brunswick, Inc.
yankee 10 5/8%, 4/15/05 B3 8,390,000 8,851,450
SD Warren Co., Series B,
12%, 12/15/04 B1 3,790,000 4,093,200
Specialty Paperboard, Inc.
9 3/8%, 10/15/06 (f) B1 5,000,000 5,100,000
Stone Container Corp.
11 7/8%, 8/1/16 B1 6,290,000 6,667,400
36,580,800
TOTAL BASIC INDUSTRIES 108,042,934
CONGLOMERATES - 0.8%
Jordan Industries, Inc.:
10 3/8%, 8/1/03 B3 11,895,000 11,776,050
0%, 8/1/05 (c) Caa 1,070,000 850,650
12,626,700
CONSTRUCTION & REAL ESTATE - 1.0%
CONSTRUCTION - 1.0%
McDermott J Ray SA
9 3/8%, 7/15/06 B1 10,000,000 10,500,000
WCI Communities LP
17%, 7/24/98 (e) - 5,000,000 5,000,000
15,500,000
DURABLES - 2.7%
AUTOS, TIRES, & ACCESSORIES - 1.2%
APS, Inc. 11 7/8%, 1/15/06 B2 960,000 1,039,200
Blue Bird Body Co. 10 3/4%,
11/15/06 (f) B2 6,645,000 6,944,025
Delco Remy International, Inc.
10 5/8%, 8/1/06 (f) B2 4,840,000 5,130,400
Lear Corp. 9 1/2%, 7/15/06 B1 5,150,000 5,510,500
18,624,125
HOME FURNISHINGS - 1.0%
Interlake Corp.
12 1/8%, 3/1/02 B3 10,000,000 10,350,000
Knoll, Inc. 10 7/8%, 3/15/06 B3 5,280,000 5,834,400
16,184,400
TEXTILES & APPAREL - 0.5%
Dan River, Inc.
10 1/8%, 12/15/03 B3 4,620,000 4,666,200
Hat Brands, Inc. (g):
Series B, 12 5/8%, 9/15/02 - 1,520,000 836,000
Series D, 12 5/8%, 9/15/02 - 680,000 374,000
Pillowtex Corp.
10%, 11/15/06 (f) B2 1,710,000 1,782,675
7,658,875
TOTAL DURABLES 42,467,400
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
ENERGY - 2.1%
OIL & GAS - 2.1%
Flores & Rucks, Inc.
9 3/4%, 10/1/06 B3 $ 8,360,000 $ 8,861,600
Forcenergy, Inc.
9 1/2%, 11/1/06 B2 2,520,000 2,627,100
Harcor Energy, Inc.
14 7/8%, 7/15/02 B3 13,060,000 15,051,650
KCS Energy, Inc.
11%, 1/15/03 B1 4,725,000 5,126,625
Plains Resources, Inc., Series B,
10 1/4%, 3/15/06 B2 790,000 841,350
TOTAL ENERGY 32,508,325
FINANCE - 2.2%
SAVINGS & LOANS - 2.2%
First Nationwide Parent Holdings
Ltd. 12 1/2%, 4/15/03 B2 17,480,000 19,359,100
First Nationwide Escrow Corp.
10 5/8%, 10/1/03 (f) Ba3 12,970,000 14,007,600
33,366,700
SECURITIES INDUSTRY - 0.0%
ECM Corp. extendible
14%, 6/1/02 (f) - 288,264 317,090
TOTAL FINANCE 33,683,790
HEALTH - 1.5%
MEDICAL EQUIPMENT & SUPPLIES - 1.4%
Wright Medical Technology, Inc.
10 3/4%, 7/1/00 B3 20,920,000 21,129,200
MEDICAL FACILITIES MANAGEMENT - 0.1%
Quest Diagnostics, Inc.
10 3/4%, 12/15/06 B2 1,810,000 1,905,025
TOTAL HEALTH 23,034,225
HOLDING COMPANIES - 0.5%
Gray Communications System, Inc.
10 5/8%, 10/1/06 B3 5,135,000 5,443,100
Veritas Holding GMBH
9 5/8%, 12/15/03 (f) BB- 2,140,000 2,161,400
7,604,500
INDUSTRIAL MACHINERY & EQUIPMENT - 4.8%
ELECTRICAL EQUIPMENT - 2.8%
Magnetek, Inc.
10 3/4%, 11/15/98 B1 11,675,000 12,112,813
Motors & Gears, Inc.
10 3/4%, 11/15/06 (f) B3 15,170,000 15,625,100
Omnipoint Corp.:
11 5/8%, 8/15/06 B2 9,280,000 9,628,000
11 5/8%, 8/15/06 (f) B2 3,190,000 3,309,625
Telex Communications, Inc.
12%, 7/15/04 B2 3,500,000 3,745,000
44,420,538

MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - 1.3%
Goss Graphic System, Inc.
12%, 10/15/06 B2 $ 2,090,000 $ 2,152,700
Howmet Corp. 10%, 12/1/03 B3 2,050,000 2,219,125
International Knife & Saw, Inc.
11 3/8%, 11/15/06 (f) B3 2,310,000 2,385,075
MVE, Inc. 12 1/2%, 2/15/02 B3 5,595,000 5,930,700
Thermadyne Holdings Corp.:
10 1/4%, 5/1/02 B1 1,484,000 1,541,505
10 3/4%, 11/1/03 B3 5,226,000 5,435,040
19,664,145
POLLUTION CONTROL - 0.7%
Allied Waste of North America, Inc.
10 1/4%, 12/1/06 (f) B3 3,570,000 3,748,500
Norcal Waste Systems, Inc.
13%, 11/15/05 (d) B3 6,850,000 7,603,500
11,352,000
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 75,436,683
MEDIA & LEISURE - 17.4%
BROADCASTING - 5.3%
American Telecasting, Inc. (c):
0%, 6/15/04 Caa 2,500,000 1,000,000
0%, 8/15/05 Caa 500,000 185,000
Benedek Communications Corp.
0%, 5/15/06 (c) - 2,880,000 1,648,800
Comcast UK Cable Partners Ltd.
0%, 11/15/07 B2 952,000 661,640
CS Wireless Systems, Inc.
0%, 3/1/06 (c) Caa 24,360,000 8,769,600
Diamond Cable Communications
PLC yankee
0%,12/15/05 (c) B3 17,110,000 12,169,488
Granite Broadcasting Corp.:
10 3/8%, 5/15/05 B3 3,360,000 3,444,000
9 3/8%, 12/1/05 B3 2,010,000 1,944,675
Jacor Communications Co.
9 3/4%, 12/15/06 B2 3,190,000 3,253,800
NWCG Holdings Corp.
0%, 6/15/99 Caa 21,815,000 18,106,450
Peoples Choice TV Corp. unit
0%, 6/1/04 (c) Caa 23,430,000 9,840,600
SFX Broadcasting, Inc.
10 3/4%, 5/15/06 B3 2,375,000 2,493,750
Telewest PLC 0%, 10/1/07 (c) B1 4,770,000 3,315,150
Tevecap SA 12 5/8%,
11/26/04 (f) B2 7,200,000 7,362,000
UIH Australia/PAC, Inc.,
Series B, 0%, 5/15/06 (c) B2 15,870,000 8,252,400
United International Holdings, Inc.
0%, 11/15/99:
Discount Notes B3 1,070,000 765,050
Sr. Discount Notes B3 1,000,000 715,000
83,927,403
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
MEDIA & LEISURE - CONTINUED
ENTERTAINMENT - 4.3%
AMF Group, Inc., Series B:
10 7/8%, 3/15/06 B2 $ 11,900,000 $ 12,554,500
Alliance Gaming Corp.
12 7/8%, 6/30/03 B2 8,560,000 9,095,000
0%, 3/15/06 (c) B2 17,280,000 11,426,400
Cinemark USA, Inc.
9 5/8%, 8/1/08 B2 4,300,000 4,353,750
Viacom, Inc. 8%, 7/7/06 B1 30,620,000 29,701,400
67,131,050
LEISURE DURABLES & TOYS - 2.0%
ICON Fitness Corp.
0%, 11/15/06 (f) - 9,440,000 4,956,000
ICON Health and Fitness, Inc.
13%, 7/15/02 B3 16,480,000 18,540,000
IHF Holdings, Inc.
0%, 11/15/04 (c) Caa 10,250,000 8,097,500
31,593,500
LODGING & GAMING - 4.8%
American Skiing Co.
12%, 7/15/06 (f) B3 5,310,000 5,588,775
Aztar Corp.
13 3/4%, 10/1/04 B2 1,570,000 1,672,050
Grand Casinos, Inc.
10 1/8%, 12/1/03 Ba3 24,720,000 24,843,600
HMH Properties, Inc.
9 1/2%, 5/15/05 Ba3 20,510,000 21,381,675
Horseshoe Gaming LLC
12 3/4%, 9/30/00 B1 17,850,000 19,278,000
Wyndham Hotel Corp.
10 1/2%, 5/15/06 B2 1,810,000 1,918,600
74,682,700
PUBLISHING - 0.3%
Hollinger International
Publishing, Inc.
9 1/4%, 2/1/06 B1 4,830,000 4,781,700
RESTAURANTS - 0.7%
Host Marriott Travel Plazas, Inc.
9 1/2%, 5/15/05 B1 10,690,000 11,144,325
TOTAL MEDIA & LEISURE 273,260,678
NONDURABLES - 3.3%
FOODS - 1.4%
International Home Foods, Inc.
10 3/8%, 11/1/06 (f) B2 8,070,000 8,412,975
Specialty Foods Corp.:
10 1/4%, 8/15/01 B3 4,030,000 3,768,050
11 1/8%, 10/1/02 B3 10,670,000 10,136,500
22,317,525
HOUSEHOLD PRODUCTS - 1.9%
Revlon Worldwide Corp. secured
0%, 3/15/98 B3 34,100,000 29,539,125
TOTAL NONDURABLES 51,856,650

MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
RETAIL & WHOLESALE - 4.4%
APPAREL STORES - 2.3%
Lamonts Apparel, Inc. 10 1/4%,
11/1/99 pay-in-kind (f)(g) - $ 2,201,000 $ 93,543
Mothers Work, Inc.
12 5/8%, 8/1/05 B3 25,190,000 26,197,600
Specialty Retailers, Inc.:
10%, 8/15/00 B1 2,250,000 2,340,000
11%, 8/15/03 B3 7,220,000 7,581,000
36,212,143
GENERAL MERCHANDISE STORES - 0.4%
Pantry, Inc. 12%, 11/15/00 B2 7,260,000 6,951,450
GROCERY STORES - 1.4%
Food 4 Less Holdings, Inc.
0%, 7/15/05 (c) Caa 17,500,000 10,937,500
Pathmark Stores, Inc.
11 5/8%, 6/15/02 Caa 2,382,000 2,435,595
Star Markets, Inc.
13%, 11/1/04 B3 6,905,000 7,785,388
21,158,483
RETAIL & WHOLESALE, MISCELLANEOUS - 0.3%
Guitar Center Management Co.,
Inc. 11%, 7/1/06 B2 3,650,000 3,869,000
TOTAL RETAIL & WHOLESALE 68,191,076
SERVICES - 3.1%
PRINTING - 1.0%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa 16,010,000 15,449,650
SERVICES - 2.1%
Celestica International, Inc. yankee
10 1/2%, 12/31/06 (f) B2 10,060,000 10,563,000
Outsourcing Solutions, Inc.
11%, 11/1/06 (f) B3 3,860,000 4,043,350
Prime Succession Acquisition Corp.
10 3/4%, 8/15/04 (f) B 1,390,000 1,508,150
Protection One Alarm
Monitoring, Inc.
13 5/8%, 6/30/05 Caa 18,300,000 17,019,000
33,133,500
TOTAL SERVICES 48,583,150
TECHNOLOGY - 4.3%
COMMUNICATIONS EQUIPMENT - 1.7%
Echostar Satellite Broadcasting
Corp. 0%, 3/15/04 (c) Caa 17,390,000 13,172,925
Hyperion Telecommunications, Inc.,
Series B, 0%, 4/15/03 (c) - 23,550,000 13,364,625
26,537,550
COMPUTERS & OFFICE EQUIPMENT - 2.6%
Dictaphone Corp.
11 3/4%, 8/1/05 B3 14,440,000 12,923,800
Exide Electronics Group, Inc.
11 1/2%, 5/15/06 B3 6,380,000 6,794,700
CORPORATE BONDS - CONTINUED
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
TECHNOLOGY - CONTINUED
COMPUTERS & OFFICE EQUIPMENT - CONTINUED
Unisys Corp.:
10 5/8%, 10/01/99 B1 $ 4,080,000 $ 4,222,800
12%, 4/15/03 B1 12,300,000 13,161,000
11 3/4%, 10/15/04 B1 3,190,000 3,401,338
40,503,638
TOTAL TECHNOLOGY 67,041,188
TRANSPORTATION - 1.2%
AIR TRANSPORTATION - 0.3%
US Air Inc., pass through trust
8 5/8%, 9/1/98 B1 5,000,000 5,012,500
RAILROADS - 0.9%
Transtar Holdings LP/Transtar
Cap Corp. 0%, 12/15/03 (c) B- 17,941,000 14,173,390
TOTAL TRANSPORTATION 19,185,890
UTILITIES - 7.7%
CELLULAR - 4.7%
Arch Communications Group, Inc.
0%, 3/15/08 (c) B3 23,890,000 13,647,163
Microcell Telecommunications, Inc.
0%, 6/1/06 (c) B3 29,540,000 16,468,550
Millicom International Cellular SA
0%, 6/1/06 (c) B3 56,710,000 35,160,200
Mobile Telecommunications
Technologies Corp.
13 1/2%, 12/15/02 B3 7,555,000 7,555,000
USA Mobile Communications, Inc.
9 1/2%, 2/1/04 B2 1,280,000 1,209,600
74,040,513
ELECTRIC UTILITY - 0.2%
AES China Generating Ltd.
yankee 10 1/8%, 12/15/06 Ba3 2,200,000 2,282,500
TELEPHONE SERVICES - 2.8%
Brooks Fiber Properties, Inc.
0%, 11/1/06 (c)(f) - 13,850,000 8,829,375
GST USA, Inc.
0%, 12/15/05 (c) - 12,430,000 7,613,375
MFS Communications, Inc. (c):
0%, 1/15/04 B1 9,520,000 8,258,600
0%, 1/15/06 B1 18,490,000 13,497,700
Pagemart, Inc.
0%, 11/1/03 (c) - 1,330,000 1,050,700
Shared Technologies Fairchild
Communications Corp.
0%, 3/1/06 (c) Caa 6,290,000 5,252,150
44,501,900
TOTAL UTILITIES 120,824,913
TOTAL NONCONVERTIBLE BONDS 1,008,300,102
TOTAL CORPORATE BONDS
(Cost $999,782,437) 1,026,485,252
U.S. GOVERNMENT AND GOVERNMENT
AGENCY OBLIGATIONS - 3.2%
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
U.S. TREASURY OBLIGATIONS - 3.2%
5.875%, 11/30/01
(Cost $49,531,250) Aaa $ 50,000,000 $ 49,273,500
COMMERCIAL MORTGAGE SECURITIES - 0.0%
Meritor Mortgage Security Corp.
commercial Series 1987-1
Class B, 9.40%, 2/1/00 (f)(g)
(Cost $182,359) - 1,350,000 208,440
COMMON STOCKS - 9.2%
SHARES
AEROSPACE & DEFENSE - 0.4%
Thiokol Corp. 133,900 5,992,025
BASIC INDUSTRIES - 0.4%
CHEMICALS & PLASTICS - 0.3%
American Azide (warrants) (a)(e) 102 1
American Pacific Corp. (warrants) (a)(e) 60,714 15,179
Foamex International, Inc. 307,600 5,075,400
5,090,580
PACKAGING & CONTAINERS - 0.1%
Gaylord Container Corp. Class A (a) 240,800 1,474,900
TOTAL BASIC INDUSTRIES 6,565,480
DURABLES - 0.0%
TEXTILES & APPAREL - 0.0%
Hat Brands, Inc. (warrants) (a)(e) 27,466 89,263
HM/Hat Brands Trust Class I Unit (a)(e) 340,000 210,800
300,063
ENERGY - 0.7%
OIL & GAS - 0.7%
Flores & Rucks, Inc. (a) 150,000 7,987,500
Harcor Energy, Inc. (a) 355,000 1,730,625
Harcor Energy, Inc. (warrants) (a) 330,000 660,000
10,378,125
FINANCE - 1.2%
INSURANCE - 1.2%
American Financial Group, Inc. 474,700 17,919,925
Penncorp. Financial Group, Inc. 25,000 900,000
18,819,925
SECURITIES INDUSTRY - 0.0%
ECM Corp. LP (f) 3,000 300,000
TOTAL FINANCE 19,119,925
HEALTH - 0.0%
MEDICAL EQUIPMENT & SUPPLIES - 0.0%
Wright Medical Technology, Inc.
(warrants) (a) 3,212 417,560
HOLDING COMPANIES - 0.0%
SDW Holdings Corp. (a):
(warrants) 3,720 19,158
Series B (warrants) 4,450 75,650
94,808
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - 0.5%
POLLUTION CONTROL - 0.5%
Allied Waste Industries, Inc. (a) 755,300 $ 6,986,525
MEDIA & LEISURE - 3.2%
BROADCASTING - 1.7%
American Radio Systems Corp.
Class A (a) 342,800 9,341,300
Benedek Communications Corp.
(warrants) (a) 57,600 172,800
CS Wireless Systems, Inc. (a)(f) 6,699 0
Jacor Communications, Inc. Class A (a) 209,400 5,732,325
PanAmSat Corp. (a) 254,200 7,117,600
United International Holdings, Inc.
Class A (a) 441,100 5,403,475
27,767,500
ENTERTAINMENT - 0.0%
Live Entertainment, Inc. (a)(e):
$2.00 (warrant) 232,000 11,600
$2.72 (warrant) 221,765 11,088
22,688
LEISURE DURABLES & TOYS - 0.1%
IHF Capital, Inc. (a)(f):
Series H (warrants) 10,250 1,127,500
Series I (warrants) 5,890 206,150
1,333,650
LODGING & GAMING - 0.7%
Bally Gaming International, Inc.
(warrants) (a) 90,000 157,500
Host Marriott Corp. (a) 651,300 10,420,800
Motels of America, Inc. (a) 3,000 105,000
10,683,300
PUBLISHING - 0.7%
Big Flower Press Holdings, Inc. (a) 580,500 10,884,375
TOTAL MEDIA & LEISURE 50,691,513
NONDURABLES - 1.0%
HOUSEHOLD PRODUCTS - 1.0%
Renaissance Cosmetics, Inc. unit (f) 12,750 12,750,000
Revlon, Inc. Class A (a) 113,300 3,384,838
16,134,838
RETAIL & WHOLESALE - 0.4%
APPAREL STORES - 0.1%
Lamonts Apparel, Inc. (a) 35,870 4,484
Lamonts Apparel, Inc. (warrants) (a) 66,214 1
Mothers Work (a)(h) 209,100 2,143,275
2,147,760
GROCERY STORES - 0.3%
Food 4 Less Holdings, Inc.
(warrants) (a)(e) 9,348 112,176
Smith's Food & Drug Center, Inc. 149,100 4,622,100
4,734,276
RETAIL & WHOLESALE, MISCELLANEOUS - 0.0%
Barry's Jewelers, Inc. (warrants) (a) 5,697 712
Town & Country Jewelry Manufacturing
Corp. Class A (a) 8,374 3,140
3,852
TOTAL RETAIL & WHOLESALE 6,885,888

SHARES VALUE (NOTE 1)
SERVICES - 0.4%
Protection One, Inc. (a) 505,900 $ 4,995,763
Protection One, Inc. (warrants) (a) 74,560 521,920
Vestar/LPA Investment Corp. (a) 5,177 51,770
5,569,453
TECHNOLOGY - 0.2%
COMMUNICATIONS EQUIPMENT - 0.1%
Hyperion Telecommunications, Inc.
(warrants) (a)(f) 23,550 471,000
COMPUTERS & OFFICE EQUIPMENT - 0.1%
Exide Electronics Group, Inc. (a) 117,600 1,734,600
Exide Electronics Group, Inc.
(warrants) (a)(f) 6,380 191,400
1,926,000
TOTAL TECHNOLOGY 2,397,000
UTILITIES - 0.8%
CELLULAR - 0.3%
Arch Communications Group, Inc. (a) 351,737 3,297,534
Intercel, Inc. (warrants) (a) 53,504 374,528
Microcell Telecommunications, Inc. (a):
(warrants) 118,160 1,477,000
(conditional warrants) 118,160 73,850
5,222,912
ELECTRIC UTILITY - 0.0%
El Paso Electric Co. (a) 6,900 44,850
TELEPHONE SERVICES - 0.5%
WorldCom, Inc. (a) 300,000 7,818,750
TOTAL UTILITIES 13,086,512
TOTAL COMMON STOCKS
(Cost $131,566,252) 144,619,715
PREFERRED STOCKS - 10.6%
CONVERTIBLE PREFERRED STOCKS - 1.4%
FINANCE - 0.5%
INSURANCE - 0.5%
Pennsylvania Corp. Financial Group, Inc.
Series II, $3.50 (f) 150,000 8,700,000
MEDIA & LEISURE - 0.9%
BROADCASTING - 0.4%
Benedek Communications Corp. 15% 57,600 5,673,600
LODGING & GAMING - 0.5%
Host Marriott Financial Trust
$3.375 (a)(f) 151,200 8,070,300
TOTAL MEDIA & LEISURE 13,743,900
RETAIL & WHOLESALE - 0.0%
RETAIL & WHOLESALE, MISCELLANEOUS - 0.0%
Town & Country Corp. pay-in-kind 128 96
TOTAL CONVERTIBLE PREFERRED STOCKS 22,443,996
NONCONVERTIBLE PREFERRED STOCKS - 9.2%
ENERGY - 0.0%
OIL & GAS - 0.0%
Gulf Canada Resources Ltd.,
Series 1, adj. rate 193,351 627,648
PREFERRED STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
NONCONVERTIBLE PREFERRED STOCKS - CONTINUED
FINANCE - 0.7%
SAVINGS & LOANS - 0.7%
California Federal Bank
Series B, $10.625 15,610 $ 1,726,856
Chevy Chase Capital Corp.,
Series A, $5.1875 180,000 9,315,000
11,041,856
HOLDING COMPANIES - 0.1%
SDW Holdings Corp. (f) 44,500 1,624,250
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
ELECTRICAL EQUIPMENT - 0.1%
Ampex Corp. 8% (a)(e) 1,589 1,235,114
MEDIA & LEISURE - 7.2%
BROADCASTING - 7.0%
Cablevision Systems Corp., Series H,
$11.75 exchangeable pay-in-kind 193,949 18,134,232
Chancellor Radio Broadcasting Co.,
Series A, exchangeable (a) 64,300 7,137,300
PanAmSat Corp. 12 3/4% pay-in-kind 39,533 48,427,925
Time Warner, Inc., Series M,
exchangeable pay-in-kind 33,341 36,174,985
109,874,442
PUBLISHING - 0.2%
K-III Communications Corp., Series B,
$11.625 pay-in-kind (a) 27,428 2,777,085
TOTAL MEDIA & LEISURE 112,651,527
NONDURABLES - 0.0%
HOUSEHOLD PRODUCTS - 0.0%
Renaissance Cosmetics, Inc.
pay-in-kind 14% (f) 446 383,560
SERVICES - 0.2%
Loewen Group Capital LP,
Series A, $2.36 91,000 2,411,500
TECHNOLOGY - 0.9%
COMPUTER SERVICES & SOFTWARE - 0.9%
ICG Holdings, Inc.
exchangeable pay-in-kind 12,269 13,557,245
TOTAL NONCONVERTIBLE PREFERRED STOCKS 143,532,700
TOTAL PREFERRED STOCKS
(Cost $154,537,705) 165,976,696
CASH EQUIVALENTS - 11.5%
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 $ 179,625,334 $179,558,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $1,515,158,003) $ 1,566,121,603
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. Restricted securities - Investment in securities not registered under
the Securities Act of 1933 (see Note 2 of Notes to Financial Statements).
Additional information on each holding is as follows:
ACQUISITION ACQUISITION COST
SECURITY DATE (000S)
American Azide (warrants) 2/5/92 $ 1
American Pacific Corp. (warrants) 2/5/92 $ 15,179
Ampex Corp. 8% 2/16/95 $ 834,225
Food 4 Less Holdings, Inc. 12/30/92
(warrants) to 5/17/93 $ 229,281
Hat Brands, Inc. 9/2/92 to
(warrants) 2/23/94 $ -
HM/Hat Brands Trust
Class I Unit 2/22/94 $ 340,000
Live Entertainment, Inc.
(warrants):
$2.00 3/23/93 $ 220,717
$2.72 3/23/93 $ 131,863
WCI Communities LP
17%, 7/24/98 7/24/95 $ 4,937,231
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 $171,166,067 or 10.8% of net
assets.
7. Non-income producing - issuer filed for protection under the Federal
Bankruptcy Code or is in default of interest payment.
8. 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
Mothers Work 153,555 - - 2,143,275
TOTALS $ 153,555 $ - $ - $ 2,143,275
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $1,751,402,823 and $1,372,062,734, respectively, of which U.S.
government and government agency obligations aggregated $123,798,438 and
$76,085,547, 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 $10,168 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 3.2% AAA, AA, A 3.2%
Baa 0.0% BBB 0.0%
Ba 5.6% BB 11.0%
B 48.6% B 45.1%
Caa 7.2% CCC 4.1%
Ca, C 0.1% CC, C 0.0%
D 0.0%
The percentage not rated by both S&P and Moody's amounted to 2.9%. FMR has
determined that unrated debt securities that are lower quality account for
2.9% of the total value of investment in securities.
INCOME TAX INFORMATION
At December 31, 1996, the aggregate cost of investment securities for
income tax purposes was $1,515,230,055. Net unrealized appreciation
aggregated $50,891,548, of which $82,915,487 related to appreciated
investment securities and $32,023,939 related to depreciated investment
securities.
The fund hereby designates approximately $5,382,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND: HIGH INCOME 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 $179,558,000) (cost $1,515,158,003) $ 1,566,121,603
- - See accompanying schedule

Cash 837

Receivable for investments sold 2,334,175

Receivable for fund shares sold 6,562,145

Dividends receivable 1,357,186

Interest receivable 20,619,080

TOTAL ASSETS 1,596,995,026

LIABILITIES

Payable for investments purchased $ 6,205,205

Payable for fund shares redeemed 1,019,389

Accrued management fee 759,029

Other payables and 189,597
accrued expenses

TOTAL LIABILITIES 8,173,220

NET ASSETS $ 1,588,821,806

Net Assets consist of:

Paid in capital $ 1,409,715,693

Undistributed net investment income 113,174,121

Accumulated undistributed net realized gain (loss) on investments and foreign 14,968,408
currency transactions

Net unrealized appreciation (depreciation) on investments 50,963,584
and assets and liabilities in foreign currencies

NET ASSETS, for 126,885,405 shares outstanding $ 1,588,821,806

NET ASSET VALUE, offering price $12.52
and redemption price per share ($1,588,821,806 (divided by) 126,885,405 shares)

</TABLE>

STATEMENT OF OPERATIONS

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

INVESTMENT INCOME $ 14,136,865
Dividends

Interest 108,216,784

TOTAL INCOME 122,353,649

EXPENSES

Management fee $ 7,422,311

Transfer agent fees 670,254

Accounting fees and expenses 662,535

Non-interested trustees' compensation 9,623

Registration fees 4,022

Custodian fees and expenses 57,474

Audit 47,856

Legal 15,253

Miscellaneous 9,056

Total expenses before reductions 8,898,384

Expense reductions (53,442 8,844,942
)

NET INVESTMENT INCOME 113,508,707

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

Investment securities 15,835,086

Foreign currency transactions 2,041 15,837,127

Change in net unrealized appreciation (depreciation) on:

Investment securities 35,061,068

Assets and liabilities in 4,554 35,065,622
foreign currencies

NET GAIN (LOSS) 50,902,749

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 164,411,456

OTHER INFORMATION $ 36,272
Expense reductions
Directed brokerage arrangements

Custodian interest credits 17,170

$ 53,442

</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 $ 113,508,707 $ 76,879,046
Net investment income

Net realized gain (loss) 15,837,127 21,706,316

Change in net unrealized appreciation (depreciation) 35,065,622 49,316,188

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 164,411,456 147,901,550

Distributions to shareholders (81,893,762) (43,871,918)
From net investment income

From net realized gain (16,022,693) -

TOTAL DISTRIBUTIONS (97,916,455) (43,871,918)

Share transactions 1,058,212,273 747,404,302
Net proceeds from sales of shares

Reinvestment of distributions 97,916,455 43,871,918

Cost of shares redeemed (673,801,481) (424,723,050)

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 482,327,247 366,553,170

TOTAL INCREASE (DECREASE) IN NET ASSETS 548,822,248 470,582,802

NET ASSETS

Beginning of period 1,039,999,558 569,416,756

End of period (including undistributed net investment income of $113,174,121 and
$76,334,012, respectively) $ 1,588,821,806 $ 1,039,999,558

OTHER INFORMATION
Shares

Sold 89,104,560 66,375,373

Issued in reinvestment of distributions 8,680,536 4,326,619

Redeemed (57,202,172) (37,385,468)

Net increase (decrease) 40,582,924 33,316,524

</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

Net asset value, beginning of period $ 12.050 $ 10.750 $ 11.990 $ 10.820 $ 9.550

Income from Investment Operations .927 .856 .770 .728 .790
Net investment income

Net realized and unrealized gain (loss) .643 1.224 (.910) 1.332 1.290

Total from investment operations 1.570 2.080 (.140) 2.060 2.080

Less Distributions

From net investment income (.920) (.780) (.730) (.794) (.810)

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

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

Total distributions (1.100) (.780) (1.100) (.890) (.810)

Net asset value, end of period $ 12.520 $ 12.050 $ 10.750 $ 11.990 $ 10.820

TOTAL RETURN A, B 14.03% 20.72% (1.64)% 20.40% 23.17%

RATIOS AND SUPPLEMENTAL DATA

Net assets, end of period (000 omitted) $ 1,588,822 $ 1,040,000 $ 569,417 $ 463,931 $ 200,591

Ratio of expenses to average net assets .71% .71% .71% .64% .67%
D

Ratio of net investment income to average net assets 9.09% 9.32% 8.75% 8.69% 10.98%

Portfolio turnover rate 123% 132% 122% 155% 160%

Average commission rate E $ .0370

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

</TABLE>

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

1. SIGNIFICANT ACCOUNTING POLICIES.
High Income Portfolio (the fund) is a fund of Variable Insurance Products
Fund (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 of variable life insurance products. 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 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 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 foreign
currency transactions, market discount, partnerships, 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 SEC), 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
2. OPERATING POLICIES - CONTINUED
REPURCHASE AGREEMENTS - CONTINUED
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,
restricted securities (excluding 144A issues) amounted to $6,685,221 or
0.4% of net assets.
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 .45%. For
the period, the management fee was equivalent to an annual rate of .59% of
average net assets.
SUB-ADVISER FEE. As the fund's investment sub-advisers, Fidelity Management
& Research (U.K.) Inc., and Fidelity Management & Research (Far East) Inc.,
each a wholly owned subsidiary of FMR, receive a fee from FMR of 110% and
105% respectively, of costs incurred in connection with each sub-advisory
agreement.
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 .05% 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 Investments Life Insurance Company
(FILI) and its subsidiaries, affiliates of FMR, were the record owners of
approximately 16% of the outstanding shares of the fund. In addition, two
unaffiliated insurance companies were each record owner of 10% or more of
the total outstanding shares of the fund, totaling 53%.
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.
8. ASSET TRANSFER INFORMATION.
In September 1996, the Board of Trustees approved a proposal to liquidate
Fidelity Advisor Annuity High Yield Fund and transfer the assets of
Fidelity Advisor Annuity High Yield 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 and the Shareholders of
High Income Portfolio:
We have audited the accompanying statement of assets and liabilities of
Variable Insurance Products Fund: High Income Portfolio, including the
schedule of portfolio investments, as of December 31, 1996, and the related
statement of operations for the year then ended, the statement of changes
in net assets for each of the two years in the period then ended and the
financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility
of the fund's management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 1996 by correspondence with the
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position
of Variable Insurance Products Fund: High Income Portfolio as of December
31, 1996, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then
ended, and the financial highlights for each of the five years in the
period then ended, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 10, 1997
DISTRIBUTIONS

The Board of Trustees of High Income Portfolio voted to pay on February 7,
1997, to shareholders of record at the opening of business on February 7,
1997, a distribution of $.11 per share derived from capital gains realized
from sales of portfolio securities and a dividend of $.89 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
Fred L. Henning, Jr., VICE PRESIDENT
Robert A. Lawrence, VICE PRESIDENT
Barry J. Coffman, 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
The Bank of New York, New York, NY

(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS
FUND: OVERSEAS 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 15 The auditors' opinion.

</TABLE>

DISTRIBUTIONS
The Board of Trustees of Overseas Portfolio voted to pay on February 7,
1997, to shareholders of record at the opening of business on
February 7, 1997, a distribution of $1.31 per share derived from capital
gains realized from sales of portfolio securities and a dividend of
$.33 per share from net investment income.

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: OVERSEAS PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY

OVERSEAS 13.15% 9.15% 7.88%

Morgan Stanley EAFE Index 6.05% 8.15% 7.38%

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 figures to the performance of the Morgan Stanley
Capital International Europe, Australasia, Far East (EAFE) Index - a market
capitalization weighted, unmanaged index of over 1,000 foreign stocks.

UNDERSTANDING PERFORMANCE
Many markets around the globe offer the potential
for significant growth over time; however,
investing in foreign markets means assuming
greater risks than investing in the United States.
Factors like changes in a country's financial
markets, its local political and economic
climate, and the fluctuating value of its currency
create these risks. For these reasons an
international fund's performance may be more
volatile than a fund that invests exclusively in the
United States.
(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 28, 1987.
If Fidelity had not reimbursed certain fund expenses, the fund's life of
fund total return 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. Foreign investments involve greater risks and
potential rewards than U.S. investments. These risks include political and
economic uncertainties of foreign countries, as well as the risk of
currency fluctuations.
$10,000 OVER LIFE OF FUND
IMAHDR PRASUN SHR__CHT 19961231 19970114 110207 S00000000000001
VIP: Overseas MS EAFE Index
00154 MS001
1987/01/28 10000.00 10000.00
1987/01/31 10000.00 9997.46
1987/02/28 10010.00 10296.66
1987/03/31 10460.00 11140.41
1987/04/30 11220.00 12319.18
1987/05/31 11060.00 12319.14
1987/06/30 10520.00 11926.66
1987/07/31 10400.00 11905.82
1987/08/31 11320.00 12798.54
1987/09/30 11070.00 12597.05
1987/10/31 8760.00 10831.98
1987/11/30 8840.00 10938.65
1987/12/31 9462.16 11263.46
1988/01/31 9138.32 11464.55
1988/02/29 9381.20 12228.75
1988/03/31 9806.24 12980.64
1988/04/30 9968.16 13169.27
1988/05/31 9786.00 12747.12
1988/06/30 9613.96 12411.13
1988/07/31 9543.12 12800.51
1988/08/31 9209.16 11968.24
1988/09/30 9603.84 12491.19
1988/10/31 10028.88 13559.96
1988/11/30 10211.04 14367.68
1988/12/31 10231.28 14447.79
1989/01/31 10534.87 14701.99
1989/02/28 10717.03 14777.56
1989/03/31 10707.38 14487.53
1989/04/30 11023.50 14621.89
1989/05/31 10615.60 13826.42
1989/06/30 10574.81 13593.67
1989/07/31 11563.97 15300.67
1989/08/31 11482.39 14612.54
1989/09/30 12196.21 15278.16
1989/10/31 11533.38 14664.33
1989/11/30 12155.42 15401.50
1989/12/31 12920.24 15969.77
1990/01/31 12746.88 15375.56
1990/02/28 12449.36 14302.43
1990/03/31 12919.92 12812.46
1990/04/30 12991.52 12710.78
1990/05/31 13840.58 14161.09
1990/06/30 14147.46 14036.37
1990/07/31 14863.53 14234.08
1990/08/31 13349.56 12851.83
1990/09/30 12081.09 11060.74
1990/10/31 13206.34 12784.21
1990/11/30 12797.16 12030.10
1990/12/31 12705.10 12224.98
1991/01/31 12827.85 12620.40
1991/02/28 13260.02 13973.29
1991/03/31 12872.18 13134.44
1991/04/30 13155.20 13263.42
1991/05/31 13186.64 13401.82
1991/06/30 12463.37 12417.04
1991/07/31 13081.82 13027.11
1991/08/31 13123.75 12762.56
1991/09/30 13658.34 13481.84
1991/10/31 13752.68 13672.96
1991/11/30 13260.02 13034.64
1991/12/31 13721.24 13707.79
1992/01/31 13888.95 13415.00
1992/02/29 13599.52 12934.85
1992/03/31 13323.28 12080.93
1992/04/30 14152.01 12138.36
1992/05/31 14768.23 12950.85
1992/06/30 14491.99 12336.56
1992/07/31 13567.65 12020.83
1992/08/31 13450.78 12774.79
1992/09/30 12908.92 12522.52
1992/10/31 12027.08 11865.66
1992/11/30 11963.33 11977.32
1992/12/31 12250.20 12039.27
1993/01/31 12600.81 12037.79
1993/02/28 12847.62 12401.41
1993/03/31 13738.91 13482.39
1993/04/30 14651.94 14761.90
1993/05/31 14967.16 15073.67
1993/06/30 14597.60 14838.49
1993/07/31 15173.67 15357.91
1993/08/31 15988.88 16186.97
1993/09/30 15901.92 15822.62
1993/10/31 16478.00 16310.23
1993/11/30 15782.36 14884.55
1993/12/31 16825.82 15959.32
1994/01/31 17923.63 17308.60
1994/02/28 17607.51 17260.66
1994/03/31 17170.60 16517.22
1994/04/30 17738.58 17218.03
1994/05/31 17520.13 17119.18
1994/06/30 17334.44 17361.11
1994/07/31 17793.20 17528.07
1994/08/31 18000.73 17943.05
1994/09/30 17531.05 17377.92
1994/10/31 17891.50 17956.61
1994/11/30 17214.29 17093.61
1994/12/31 17115.99 17200.65
1995/01/31 16406.01 16539.88
1995/02/28 16449.17 16492.41
1995/03/31 16955.64 17521.06
1995/04/30 17440.09 18180.00
1995/05/31 17682.31 17963.28
1995/06/30 17847.46 17648.27
1995/07/31 18640.19 18746.98
1995/08/31 18122.72 18031.85
1995/09/30 18386.96 18384.02
1995/10/31 18023.62 17889.85
1995/11/30 18232.82 18387.61
1995/12/31 18783.33 19128.45
1996/01/31 19135.65 19206.98
1996/02/29 19177.79 19271.92
1996/03/31 19471.10 19681.17
1996/04/30 20012.59 20253.37
1996/05/31 20023.87 19880.67
1996/06/30 20170.53 19992.56
1996/07/31 19572.63 19408.23
1996/08/31 19719.29 19450.76
1996/09/30 20294.62 19967.48
1996/10/31 20091.56 19763.16
1996/11/30 21140.70 20549.50
1996/12/31 21253.51 20285.15
IMATRL PRASUN SHR__CHT 19961231 19970114 110211 R00000000000123

Let's say hypothetically that $10,000 was invested in Overseas Portfolio on
January 28, 1987, when the fund started. As the chart shows, by December
31, 1996, the value of the investment would have grown to $21,254 - a
112.54% increase on the initial investment. With reinvested dividends and
capital gains, if any, a $10,000 investment in the Morgan Stanley EAFE
Index would have grown to $20,285 over the same period - a 102.85%
increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1996
% OF FUND'S
INVESTMENTS

Veba AG Ord 2.6

Volvo AB Class B 2.2

Toyota Motor Corp. 2.0

Novartis AG (Reg.) 1.8

Total SA Class B 1.7

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

Finance 14.3

Durables 12.4

Basic Industries 10.7

Utilities 8.5

Energy 8.3

TOP FIVE COUNTRIES AS OF DECEMBER 31, 1996
(EXCLUDING CASH EQUIVALENTS) % OF FUND'S
INVESTMENTS

Japan 22.4

United Kingdom 12.7

France 9.4

Germany 6.6

Netherlands 6.0

TOP COUNTRIES ARE BASED ON THE LOCATION OF THE ISSUER OF EACH SECURITY,
INDICATING WHERE THE FUND IS EXPOSED TO POLITICAL AND CREDIT RISKS.
PERCENTAGES ARE ADJUSTED FOR THE EFFECT OF OPEN FUTURES CONTRACTS, IF
APPLICABLE.
VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW

An interview with
Richard Mace,
Portfolio Manager
of Overseas Portfolio
Q. RICK, HOW DID THE FUND PERFORM?
A. Quite well. For the 12-month period that ended December 31, 1996, the
fund outperformed the Morgan Stanley Capital International EAFE Index,
which tracks the performance of stocks in Europe, Australia and the Far
East. The index had a total return of 6.05% for the period.
Q. WHAT WERE SOME OF THE MORE SIGNIFICANT CHANGES YOU MADE TO THE PORTFOLIO
OVER THE COURSE OF THE YEAR?
A. I continued to sell Japanese stocks in order to keep the fund
underweighted in Japan relative to the EAFE Index. I've placed the proceeds
from these sales in European cyclical stocks, which tend to benefit from a
strong economy. This strategy has been effective in moving the fund into
undervalued European equities that I believe have appealing risk/reward
characteristics. It also has limited the fund's exposure to the negative
effects of the weak Japanese yen and the underperforming Japanese stock
market.
Q. DOES THIS MEAN YOU HAVE A NEGATIVE VIEW ON JAPAN?
A. Not at all. In fact, I solidified the fund's position in what I consider
my value holdings in Japan. These are companies that I believe will benefit
from the weak yen, the recent Japanese economic revival, world economic
growth and solid management intent on raising the value of their
businesses. I only invest with conviction, and I believed in the fund's
remaining Japanese holdings. Some examples included Toyota and Honda, and
broad-based export companies such as Canon.
Q. BASED ON YOUR INVESTMENTS DURING THE PERIOD, YOU SAW OPPORTUNITIES IN
EUROPE . . .
A. Six months ago, I saw great potential in Europe. Stocks were generally
undervalued, there was the potential for economic recovery and some
companies were taking steps to raise shareholder value. Some stocks have
appreciated and realized their underlying value. Economic growth has come,
although not as uniformly as I would have hoped. Additionally, many more
corporate managements have been proactive in growing the value of their
businesses by restructuring their balance sheets, selling off
poor-performing subsidiaries and redeploying excess cash more efficiently.
Q. WHAT SPECIFIC TYPES OF COMPANIES DID YOU LIKE IN EUROPE?
A. As I said before, I looked for cyclical names - especially in the energy
sector. I believed many European energy stocks' prices did not reflect
rising oil prices and were discounting lower oil prices that never came to
pass. Some energy stocks in the fund were Total, Royal Dutch Petroleum,
Shell Transport & Trading and British Petroleum.
Q. MANY OF THE FUND'S CANADIAN HOLDINGS ARE RELATIVELY NEW TO THE
PORTFOLIO. WHAT WAS THE STORY THERE?
A. Many Canadian oil and gas, natural resources and bank stocks were
attractively valued during the period. Two additions included Canadian
Natural Resources and Inco.
Q. DID YOU HAVE ANY DISAPPOINTMENTS?
A. Yes. One would be the weakness of the Japanese market. I consider
another to be the legal and governmental impediments to recognizing
shareholder value in Europe. For example, it's not yet legal in many
European countries for corporations to buy back stock, even though many
corporate managements seek to do so. I also continue to be disappointed by
the problems that arise from partial government ownership of companies.
Take the case of Eramet, which is one of the fund's French holdings. It's
been reported in the media that the French government, a partial owner of
Eramet, is pressuring the company's management to sell a nickel mine it
owns in the colony of New Caledonia. The government has denied the report.
However, it's also been reported that the government will take steps to
oust the management if they choose not to comply. I think it's unfortunate
that the government may be unduly influencing management's decision-making
process.
Q. WHAT'S YOUR OUTLOOK?
A. I'm hopeful that the economic recoveries that have begun in Europe and
Japan will continue. I think the key to a company's stock price will be the
company's shareholder-friendly attitude, reflected in stock buybacks or a
proactive management. Therefore, I will try to position the fund in
companies that could benefit from economic growth and that are focused on
providing returns for shareholders.

VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS PORTFOLIO
INVESTMENTS DECEMBER 31, 1996

Showing Percentage of Total Value of Investment in Securities

COMMON STOCKS - 86.9%
SHARES VALUE (NOTE 1)
ARGENTINA - 0.2%
Perez Companc Class B 406,980 $ 2,861,596
AUSTRALIA - 1.4%
Brambles Industries Ltd. 375,600 7,329,296
CSR Ltd. 1,521,102 5,319,811
Coles Myer Ltd. 680,400 2,801,427
Western Mining Holdings Ltd. 917,611 5,783,849
Woolworths Ltd. 1,143,300 2,753,519
23,987,902
BELGIUM - 0.2%
Credit Communal Holding/Dexia (b) 26,000 2,371,343
Delhaize Freres & Cie Le Lion SA 22,000 1,306,491
3,677,834
BERMUDA - 0.2%
Fuji International Trust unit
sponsored ADR (a)(b) 100 2,630,565
BRAZIL - 1.0%
Multicanal Participacoes SA
sponsored ADR (a) 90,500 1,159,531
Telebras sponsored ADR 213,300 16,317,450
17,476,981
CANADA - 2.5%
Alliance Communications Corp.
Class B (non-vtg.) (a) 28,900 255,090
Alcan Aluminium Ltd. 259,900 8,768,556
BCE, Inc. 102,800 4,896,845
Bre-X Minerals Ltd. (a) 289,700 4,585,834
Bro-X Minerals Ltd. (a) 41,630 72,883
Canada Occidental Petroleum Ltd. 66,600 1,071,255
Canadian Natural Resources Ltd. (a) 190,400 5,222,337
Greenstone Resources Ltd. (a) 138,000 1,605,646
Inco Ltd. 403,600 12,880,694
Renaissance Energy Ltd. (a) 64,100 2,181,322
41,540,462
DENMARK - 0.5%
Den Danske Bank Group AS 31,900 2,570,617
International Service Systems AS,
Series B 178,100 4,683,264
Unidanmark AS Class A 32,500 1,681,652
8,935,533
EMERGING MARKETS - 0.1%
GT Global Developing Markets Fund 51,000 592,875
Templeton Dragon Fund, Inc. 22,500 362,812
955,687
FINLAND - 1.8%
Cultor OY, Series 1 56,100 3,045,470
Huhtamaki Ord. 176,300 8,192,521
Metsa-Serla Ltd. Class B 343,400 2,572,592
Nokia Corp. AB, Series A 31,800 1,842,317
Pohjola Class B 226,500 5,090,496
UPM-Kymmene Corp. 77,200 1,617,693
Valmet OY 317,100 5,577,412
Valmet OY (b) 108,000 1,885,521
29,824,022
FRANCE - 9.4%
Alcatel Alsthom Compagnie
Generale d'Electricite SA 280,739 22,545,668
Axa SA 134,018 8,521,376
CLF-Dexia 56,000 4,877,071

SHARES VALUE (NOTE 1)
Canal Plus SA 35,300 $ 7,794,566
Compagnie de Saint Gobain 9,500 1,343,545
Credit Commercial de France Ord. 50,500 2,335,260
Eramet SA 159,097 8,338,032
Generale des Eaux, Cie 18,500 2,292,004
Groupe Danone 33,000 4,597,110
Lafarge Coppee SA 70,190 4,210,048
Michelin SA (Compagnie Generale des
Etablissements) Class B 325,824 17,584,451
Nationale Elf Aquitaine 139,400 12,685,669
Paribas SA (Cie Financiere) Class A 13,300 899,224
Pechiney SA Class A 468,480 19,623,806
Peugeot SA Ord. 18,000 2,025,434
Rhone Poulenc SA Class A 24,800 845,303
Societe Generale Class A 25,800 2,788,786
Total SA Class B 338,215 27,500,333
Usinor Sacilor 374,300 5,445,019
Valeo SA 4,900 302,119
156,554,824
GERMANY - 6.3%
Allianz Versich Holdings Ord. (Reg.) 450 817,094
BASF AG 125,100 4,747,551
Bayer AG 291,500 11,913,396
Buderus AG 2,900 1,429,776
Continental Gummi-Werke AG 207,200 3,736,724
Daimler-Benz AG Ord. (a) 151,600 10,439,403
Dresdner Bank AG Ord. 55,700 1,663,954
Hoechst AG Ord. 98,900 4,629,020
Karstadt AG 3,700 1,200,130
Mannesmann AG Ord. 10,500 4,550,114
New Germany Fund, Inc. (The) 106,000 1,417,750
Veba AG Ord. 756,800 43,822,230
Volkswagen AG 35,600 14,757,314
105,124,456
HONG KONG - 2.1%
Great Eagle Holdings Ltd. 994,000 4,099,632
HSBC Holdings PLC 700,000 15,228,570
Hong Kong & China Gas Co. Ltd. 2,220,000 4,291,034
Hutchison Whampoa Ltd. Ord. 234,000 1,837,934
Hysan Development Co. Ltd. 1,481,000 5,897,576
Oriental Press Group Ltd. (warrants) (a) 337,800 24,021
Peregrine Investments Holdings Ltd. 1,168,000 2,000,905
Wharf Holdings Ltd. (b) 380,000 1,896,438
35,276,110
INDONESIA - 0.2%
Matahari Putra Prima PT (For. Reg.) 2,724,000 3,171,465
IRELAND - 0.8%
Bank of Ireland, Inc. 998,600 9,117,508
Independent Newspapers PLC 824,216 4,094,458
13,211,966
ITALY - 1.5%
Credito Italiano Ord. 1,430,300 1,571,635
Eni Spa 2,141,500 11,007,995
Magneti Marelli Spa 1,524,400 1,897,970
Montedison Spa Ord. (a) 1,294,852 885,413
Olivetti & Co. Spa Ord. (a) 4,522,150 1,586,031
Pirelli Spa Ord. 1,593,200 2,941,860
SAI (Sta Assieuratrice Industriale) Spa 193,100 1,772,756
Telecom Italia Mobile Spa 711,400 1,801,933
Telecom Italia Spa 709,700 1,842,042
25,307,635
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
JAPAN - 22.3%
Acom Co. Ltd. 35,900 $ 1,529,504
Amway Japan Ltd. 159,900 5,130,039
Aoyama Trading Co. Ord. 221,800 5,891,712
Asahi Breweries Ltd. 241,000 2,494,179
Asahi Chemical Industry Co. Ltd. 250,000 1,414,403
Bank of Tokyo-Mitsubishi Ltd. 120,000 2,225,097
Bridgestone Corp. 160,000 3,035,791
Canon, Inc. 886,000 19,561,535
Citizen Watch Co. Ltd. Ord. 445,000 3,185,425
DDI Corp. Ord. 802 5,298,249
Daito Trust Construction Co. 704,400 7,836,792
Daiwa House Industry Co. Ltd. 280,000 3,598,103
Daiwa Securities Co. Ltd. 811,000 7,204,226
Denny's Japan Co. Ltd. 67,000 2,045,537
Fuji Bank Ltd. 256,000 3,731,263
Fuji Photo Film Co. Ltd. 775,000 25,532,557
Fujitsu Ltd. 346,000 3,222,768
Hitachi Koki Co. Ltd. Ord. 144,000 1,029,547
Hitachi Ltd. 1,041,000 9,696,248
Hitachi Maxell Ltd. 353,000 7,793,704
Honda Motor Co. Ltd. 541,000 15,443,812
Hoya Corp. 31,000 1,216,473
Ito-Yokado Co. Ltd. 277,000 12,040,362
Jusco Co. Ltd. 51,000 1,728,590
Kao Corp. 136,000 1,583,441
Kobe Steel Ltd. Ord. (a) 733,000 1,542,492
Komatsu Ltd. Ord. 1,144,000 9,373,006
Kyocera Corp. 26,000 1,618,974
Matsushita Electric Industrial Co. Ltd. 877,000 14,295,213
Minebea Co. Ltd. 707,000 5,902,337
Minolta Camera Co. Ltd. 141,000 852,445
Mitsubishi Electric Co. Ord. 672,000 3,998,965
Mitsubishi Estate Co. Ltd. 265,000 2,719,707
Mitsubishi Heavy Industries Ltd. 1,001,000 7,942,389
NEC Corp. 132,000 1,593,790
NKK Corp. (a) 684,000 1,539,664
Namco Ltd. 69,100 2,115,610
Nichiei Co. Ltd. 27,900 2,057,309
Nikko Securities Co. Ltd. 537,000 4,001,449
Nintendo Co. Ltd. Ord. 190,800 13,641,501
Nippon Telegraph &
Telephone Corp. Ord. 220 1,665,890
Nitto Denko Corp. 107,000 1,568,780
Nomura Securities Co. Ltd. 755,000 11,329,883
Omron Corp. 156,000 2,932,988
Onward Kashiyama & Co. Ltd. 307,000 4,315,740
Orix Corp. 242,000 10,059,853
Ricoh Co. Ltd. Ord. 578,000 6,629,927
Rohm Co. Ltd. 80,000 5,243,639
Sakura Bank Ltd. 913,000 6,519,741
Sankyo Co. Ltd. 216,000 6,110,220
Sekisui Chemical Co. Ltd. 232,000 2,341,009
Sho Bond Corp. Ord. 1,800 48,435
Sony Corp. 211,500 13,844,631
TDK Corp. 106,000 6,902,113
Tadano Ltd. 17,000 120,664
Takeda Chemical Industries Ltd. (a) 1,216,000 25,484,088
Toyota Motor Corp. 1,148,000 32,969,728
Uni Charm Corp. Ord. 75,000 1,836,999
Uny Co. Ltd. 221,000 4,040,707
York Benimaru Co. 22,300 621,207
371,250,450

SHARES VALUE (NOTE 1)
KOREA (SOUTH) - 0.3%
Korea Electric Power Corp. 200,070 $ 5,824,523
MEXICO - 0.4%
Cifra SA Class C (a) 1,824,100 2,220,282
Gruma SA Class B sponsored ADR (a)(b) 83,400 2,001,600
Tubos De Acero De Mexico ADR (a) 144,900 2,300,288
6,522,170
MALAYSIA - 0.1%
Arab Malaysian Corp. BHD 362,000 1,806,058
MULTI-NATIONAL - 0.0%
Morgan Stanley Asia-Pacific Fund, Inc. 35,200 343,200
NETHERLANDS - 6.0%
AKZO Nobel NV 112,000 15,293,641
DSM NV 61,900 6,102,968
ING Groep NV 426,862 15,362,389
KBB NV Ord. 34,300 2,470,838
KLM Royal Dutch Air Lines NV 76,896 2,162,325
Koninklijke KNP BT NV 32,600 711,115
New Holland NV (a) 146,000 3,047,750
Philips Electronics NV (Bearer) 292,900 11,863,102
Royal Dutch Petroleum Co. Ord. 115,500 20,242,406
Unilever NV Ord. 76,600 13,544,500
Vendex International NV 18,400 786,762
Vendex International NV (b) 188,500 8,060,030
99,647,826
NETHERLANDS ANTILLES - 0.4%
Schlumberger Ltd. 60,300 6,022,463
NORWAY - 1.4%
Den Norske Bank AS Class A
Free shares 1,903,000 7,310,050
Norsk Hydro AS 156,350 8,481,828
Orkla AS Class B (non-vtg.) 30,400 1,925,619
Saga Petroleum AS Class B 323,100 5,065,851
22,783,348
PERU - 0.1%
Compania de Minas Buenaventura SA
Class B sponsored ADR (a) 78,600 1,326,375
PORTUGAL - 0.1%
Telecel Comunicacoes Pessoais SA (a) 19,700 1,257,041
SINGAPORE - 0.1%
Kim Engineering Holdings Ltd. 2,529,000 2,313,055
SOUTH AFRICA - 0.2%
JCI Ltd. (a) 280,000 2,753,019
SPAIN - 3.6%
ACERINOX SA (Reg.) 27,050 3,906,829
Banco Bilbao Vizcaya SA Ord. (Reg.) 258,000 13,923,935
Banco de Santander SA Ord. (Reg.) 193,000 12,347,602
Banco Intercontinental Espanol 30,600 4,742,305
FOCSA (Fomento Construcciones y
Contratas SA) 30,664 2,856,528
Tabacalera SA, Series A 276,700 11,908,176
Telefonica de Espana SA Ord. 474,500 11,014,069
60,699,444
SWEDEN - 5.6%
ABB AB, Series B 15,000 1,690,597
Assi Doman AB Free shares 59,500 1,650,449
Astra AB Class A Free shares 102,400 5,038,038
Bure Investment AB (b) 62,000 733,176
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SWEDEN - CONTINUED
Electrolux AB 115,000 $ 6,648,515
Esselte AB Class B Free shares 86,700 1,911,295
Investor AB Class B Free shares 161,300 7,099,918
Nordbanken AB 113,900 3,433,803
Scania AB Class B 377,500 9,396,648
Scania AB, Series B (warrants) (a) 170,000 151,395
Skandia Foersaekrings AB 230,000 6,480,623
Skandinaviska Enskilda Banken Class A
Free shares 198,600 2,029,593
Svenska Cellulosa AB (SCA)
Class B Ord. 95,400 1,928,989
Svenska Handelsbanken 54,000 1,545,188
Swedish Match Co. 1,807,000 6,331,418
Volvo AB Class B 1,674,500 36,791,989
92,861,634
SWITZERLAND - 3.3%
Credit Suisse Group (Reg.) 88,700 9,091,502
Julius Baer Holding AG 1,600 1,673,351
Nestle SA (Reg.) 5,925 6,346,795
Novartis AG (Reg.) 26,258 30,006,347
Roche Holding AG
participation certificates 900 6,987,328
54,105,323
UNITED KINGDOM - 12.7%
Asda Group PLC 1,738,900 3,663,845
BAT Industries PLC Ord. 200,100 1,659,013
Barclays PLC Ord. 518,000 8,864,467
Barratt Developments PLC 1,384,725 5,977,525
Bass PLC Ord. 236,100 3,324,491
Blue Circle Industries PLC 409,800 2,506,095
Boots Co. PLC (The) 303,600 3,130,802
British Airways PLC Ord. 203,600 2,115,271
British Aerospace PLC 134,500 2,944,493
British Petroleum PLC Ord. 1,498,136 17,964,149
British Telecommunications PLC Ord. 725,500 4,908,987
Cable & Wireless PLC Ord. 321,400 2,686,724
Caradon PLC 2,104,700 8,652,843
Christies International PLC 86,800 344,957
Cookson Group PLC 3,517,200 14,188,789
Courtaulds PLC Ord. 42,800 289,600
Dixons Group PLC 1,022,700 9,512,736
Glaxo Holdings PLC 524,800 8,540,333
Granada Group PLC 652,900 9,651,945
Grand Metropolitan PLC 1,446,745 11,350,496
ICI (Imperial Chemical Industries)
PLC Ord. 123,300 1,625,283
Ladbroke Group PLC Ord. 463,000 1,840,036
Lloyds TSB Group PLC 2,158,267 15,934,550
Lucas Varity PLC 210,000 802,198
National Grid Co. PLC 1,046,400 3,495,342
National Westminster Bank PLC Ord. 304,020 3,572,594
Prudential Corp. PLC 362,913 3,058,616
Redland PLC Ord. 428,000 2,705,375
Rentokil Group PLC 112,800 850,196
Rolls Royce PLC Ord. 945,384 4,161,968
Rugby Group PLC 1,465,600 2,359,938
Sears PLC 2,152,400 3,465,838
Shell Transport & Trading Co. PLC:
(Reg.) 940,000 16,279,324
ADR 17,300 1,771,088
SmithKline Beecham PLC Ord. 786,347 10,883,860

SHARES VALUE (NOTE 1)
Unigate PLC 313,800 $ 2,236,164
Unilever PLC Ord. 269,600 6,534,821
Vodafone Group PLC 1,713,404 7,249,601
Vodafone Group PLC sponsored ADR 18,400 761,300
Wickes PLC 806,200 276,204
212,141,857
UNITED STATES OF AMERICA - 2.1%
Alumax, Inc. (a) 360,100 12,018,338
Aluminum Co. of America 196,000 12,495,000
Jefferson Smurfit Corp. (a) 20,700 332,494
Kaiser Aluminum Corp. (a) 414,300 4,816,238
MCI Communications Corp. 115,500 3,775,406
Newmont Mining Corp. 42,500 1,901,875
35,339,351
TOTAL COMMON STOCKS
(Cost $1,250,112,325) 1,447,534,175
PREFERRED STOCKS - 1.6%
CONVERTIBLE PREFERRED STOCKS - 0.1%
JAPAN - 0.1%
AJL participating trust exchangeable 71,700 1,174,088
NONCONVERTIBLE PREFERRED STOCKS - 1.5%
GERMANY - 0.3%
Volkswagen AG 13,900 4,499,578
ITALY - 1.2%
SAI (Sta Assicuratrice Industriale) Spa 587,000 2,098,584
Stet (Societa Finanziaria
Telefonica) Spa 4,463,700 15,061,323
Telecom Italia Mobile Spa de Risp 2,219,000 3,217,406
20,377,313
TOTAL NONCONVERTIBLE PREFERRED STOCKS 24,876,891
TOTAL PREFERRED STOCKS
(Cost $17,409,312) 26,050,979
CORPORATE BONDS - 0.3%
MOODY'S PRINCIPAL VALUE
RATINGS (C) AMOUNT (NOTE 1)
BERMUDA - 0.3%
MBL International Finance of
Bermuda 3%, 11/30/02
(Cost $4,974,627) Aa2 $ 4,392,000 4,655,520
GOVERNMENT OBLIGATIONS - 0.0%
U.S. Treasury Bills, yield at date of purchase
4.97% to 5.33%, 3/6/97 (c)
(Cost $491,752) 500,000 495,650
CASH EQUIVALENTS - 11.2%
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 $ 186,103,763 $ 186,034,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $1,459,022,016) $ 1,664,770,324
FUTURES CONTRACTS
EXPIRATION UNDERLYING FACE UNREALIZED
DATE AMOUNT AT VALUE GAIN/(LOSS)
PURCHASED
142 Nikkei 225 Stock
Index Contracts Mar. 1997 $ 13,759,800 $ (470,340)
THE FACE VALUE OF FUTURES PURCHASED AS A PERCENTAGE OF TOTAL INVESTMENT IN
SECURITIES - 0.8%
LEGEND
1. Non-income producing
2. 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 $19,578,673 or 1.2% of net
assets.
3. A portion of the security was pledged to cover margin requirements for
futures contracts. At the period end, the value of securities pledged
amounted to $421,303.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $1,375,490,679 and $1,257,669,344, respectively.
The market value of futures contracts opened and closed during the period
amounted to $21,162,620 and $6,694,480 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 $362,193 for the period
(see Note 4 of Notes to Financial Statements).
MARKET SECTOR DIVERSIFICATION (UNAUDITED)
As a Percentage of Total Value of Investment in Securities
Aerospace & Defense 0.4%
Basic Industries 10.7
Construction & Real Estate 3.3
Durables 12.4
Energy 8.3
Finance 14.3
Health 5.7
Holding Companies 0.1
Industrial Machinery & Equipment 4.3
Media & Leisure 2.6
Nondurables 5.3
Precious Metals 0.9
Retail & Wholesale 4.5
Services 0.7
Repurchase Agreements 11.2
Technology 6.1
Transportation 0.7
Utilities 8.5
100.0%
INCOME TAX INFORMATION
At December 31, 1996, the aggregate cost of investment securities for
income tax purposes was $1,461,448,025. Net unrealized appreciation
aggregated $203,322,299, of which $263,621,221 related to appreciated
investment securities and $60,298,922 related to depreciated investment
securities.
The fund hereby designates approximately $90,538,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
For the period, interest and dividends from foreign countries were
$36,399,701. Taxes accrued or paid to foreign countries were $4,140,215.
VARIABLE INSURANCE PRODUCTS FUND: OVERSEAS 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 $186,034,000) (cost $1,459,022,016) $ 1,664,770,324
- -
See accompanying schedule

Cash 343,982

Receivable for investments sold 4,499,183

Receivable for fund shares sold 1,381,858

Dividends receivable 2,631,493

Interest receivable 10,980

Other receivables 48,345

TOTAL ASSETS 1,673,686,165

LIABILITIES

Payable for investments purchased $ 3,244,113

Payable for fund shares redeemed 1,450,217

Accrued management fee 1,031,065

Payable for daily variation on 16,374
futures contracts

Other payables and 343,158
accrued expenses

TOTAL LIABILITIES 6,084,927

NET ASSETS $ 1,667,601,238

Net Assets consist of:

Paid in capital $ 1,325,904,904

Undistributed net investment income 22,748,929

Accumulated undistributed net realized gain (loss) on investments and foreign 113,659,177
currency transactions

Net unrealized appreciation (depreciation) on investments 205,288,228
and assets and liabilities in foreign currencies

NET ASSETS, for 88,524,438 $ 1,667,601,238
shares outstanding

NET ASSET VALUE, offering price $18.84
and redemption price per share ($1,667,601,238 (divided by) 88,524,438 shares)

</TABLE>

STATEMENT OF OPERATIONS

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

INVESTMENT INCOME $ 4,427,657
Special dividend from Volvo AB
Class B

Dividends 31,954,205

Interest 10,284,426

46,666,288

Less foreign taxes withheld (4,140,215
)

TOTAL INCOME 42,526,073

EXPENSES

Management fee $ 11,667,177

Transfer agent fees 892,751

Accounting fees and expenses 760,136

Non-interested trustees' compensation 8,998

Custodian fees and expenses 881,998

Registration fees 7,276

Audit 50,845

Legal 22,968

Miscellaneous 6,000

Total expenses before reductions 14,298,149

Expense reductions (132,276 14,165,873
)

NET INVESTMENT INCOME 28,360,200

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

Investment securities 114,832,092

Foreign currency transactions (198,995
)

Futures contracts (238,000 114,395,097
)

Change in net unrealized appreciation (depreciation) on:

Investment securities 47,133,390

Assets and liabilities in 9,027
foreign currencies

Futures contracts (470,340 46,672,077
)

NET GAIN (LOSS) 161,067,174

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 189,427,374

OTHER INFORMATION $ 131,377
Expense reductions
Directed brokerage arrangements

Custodian interest credits 899

$ 132,276

</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 $ 28,360,200 $ 24,265,663
Net investment income

Net realized gain (loss) 114,395,097 10,642,375

Change in net unrealized appreciation (depreciation) 46,672,077 85,131,645

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 189,427,374 120,039,683

Distributions to shareholders (16,689,141) (4,893,543)
From net investment income

From net realized gain (18,358,055) (1,797,170)

In excess of net realized gain - (3,096,373)

TOTAL DISTRIBUTIONS (35,047,196) (9,787,086)

Share transactions 649,592,564 466,436,535
Net proceeds from sales of shares

Reinvestment of distributions 35,047,196 9,787,086

Cost of shares redeemed (514,552,645) (541,043,324)

NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM SHARE TRANSACTIONS 170,087,115 (64,819,703)

TOTAL INCREASE (DECREASE) IN NET ASSETS 324,467,293 45,432,894

NET ASSETS 1,343,133,945 1,297,701,051
Beginning of period

End of period (including undistributed net investment income of $22,748,929 and
$18,738,964, respectively) $ 1,667,601,238 $ 1,343,133,945

OTHER INFORMATION
Shares

Sold 37,069,614 29,090,043

Issued in reinvestment of distributions 2,053,145 652,472

Redeemed (29,349,715) (33,802,732)

Net increase (decrease) 9,773,044 (4,060,217)

</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 $ 17.06 $ 15.67 $ 15.48 $ 11.53 $ 13.09

Income from Investment Operations

Net investment income .32 F, G .17 .19 .06 .16

Net realized and unrealized gain (loss) 1.88 1.34 .08 4.16 (1.54)

Total from investment operations 2.20 1.51 .27 4.22 (1.38)

Less Distributions

From net investment income (.20) (.06) (.08) (.18) (.18)

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

From net realized gain (.22) (.02) - - -

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

Total distributions (.42) (.12) (.08) (.27) (.18)

Net asset value, end of period $ 18.84 $ 17.06 $ 15.67 $ 15.48 $ 11.53

TOTAL RETURN A, B 13.15% 9.74% 1.72% 37.35% (10.72)%

RATIOS AND SUPPLEMENTAL DATA

Net assets, end of period (000 omitted) $ 1,667,601 $ 1,343,134 $ 1,297,701 $ 777,961 $ 180,837

Ratio of expenses to average net assets .93% .91% .92% 1.03% 1.14%

Ratio of expenses to average net assets after expense reductions .92% D .91% .92% 1.03% 1.14%

Ratio of net investment income to average net assets 1.84% 1.88% 1.28% 1.21% 1.86%

Portfolio turnover rate 92% 50% 42% 42% 61%

Average commission rate E $ .0137

A 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). B 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 EFFECTIVE JANUARY 1, 1993, THE FUND ADOPTED STATEMENT OF
POSITION 93-2, "DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT
PRESENTATION OF INCOME,
CAPITAL GAIN, AND RETURN OF CAPITAL DISTRIBUTIONS BY INVESTMENT
COMPANIES." AS A RESULT, NET INVESTMENT INCOME PER SHARE MAY
REFLECT CERTAIN RECLASSIFICATIONS
RELATED TO BOOK TO TAX DIFFERENCES. D FMR 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. F NET INVESTMENT INCOME
PER SHARE INCLUDES A
SPECIAL DIVIDEND FROM VOLVO AB CLASS B WHICH AMOUNTED TO $.05 PER
SHARE. G NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED
ON AVERAGE SHARES
OUTSTANDING DURING THE PERIOD.

</TABLE>

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

4. SIGNIFICANT ACCOUNTING POLICIES.
Overseas Portfolio (the fund) is a fund of Variable Insurance Products Fund
(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 quotations are readily available
are valued at the last sale price, or if no sale price, at the closing bid
price in the principal market in which such securities are normally traded.
Securities (including restricted securities) for which quotations are not
readily available 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 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. Certain foreign currency gains (losses) are taxable as
ordinary income and, therefore, increase (decrease) taxable ordinary income
available for distribution.
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). 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.
5. 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 SEC), 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
2. OPERATING POLICIES - CONTINUED
JOINT TRADING ACCOUNT - CONTINUED
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. 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.
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).
6. 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.
7. 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 .45%. For the
period, the management fee was equivalent to an annual rate of .76% of
average net assets.
SUB-ADVISER FEE. FMR, on behalf of the fund, entered into sub-advisory
agreements with Fidelity Management & Research (U.K.) Inc., Fidelity
Management & Research Far East Inc., and Fidelity International Investment
Advisors (FIIA). In addition, FIIA entered into a sub-advisory agreement
with its subsidiary, Fidelity International Investment Advisors (U.K.)
Limited (FIIAL U.K.). Under the sub-advisory arrangements, FMR may receive
investment advice and research services and may grant the sub-advisers
investment management authority to buy and sell securities. FMR pays its
sub-advisers either a portion of its management fee or a fee based on costs
incurred for these services. FIIA pays FIIAL U.K. a fee based on costs
incurred for either service.
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.
8. 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 1.50% 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.
9. 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 15% 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 35%.
10. ASSET TRANSFER INFORMATION.
In September 1996, the Board of Trustees approved a proposal to liquidate
Fidelity Advisor Annuity Overseas Fund and transfer the assets of Fidelity
Advisor Annuity Overseas 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 and the Shareholders of
Overseas Portfolio:
We have audited the accompanying statement of assets and liabilities of
Variable Insurance Products Fund: Overseas Portfolio, including the
schedule of portfolio investments, as of December 31, 1996, and the related
statement of operations for the year then ended, the statement of changes
in net assets for each of the two years in the period then ended and the
financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility
of the fund's management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 1996 by correspondence with the
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position
of Variable Insurance Products Fund: Overseas Portfolio as of December 31,
1996, the results of its operations for the year then ended, the changes in
its net assets for each of the two years in the period then ended, and the
financial highlights for each of the five years in the period then ended,
in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
February 10, 1997
INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
INVESTMENT SUB-ADVISERS
Fidelity Management & Research (U.K.) Inc.,
London, England
Fidelity Management & Research (Far East) Inc.,
Tokyo, Japan
Fidelity International Investment Advisors
Pembroke, Bermuda
Fidelity International Investment Advisors (U.K.) Limited
Kent, England
OFFICERS
Edward C. Johnson 3d, PRESIDENT
J. Gary Burkhead, SENIOR VICE PRESIDENT
William J. Hayes, VICE PRESIDENT
Robert A. Lawrence, VICE PRESIDENT
Richard R. Mace, 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: 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>

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

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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

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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

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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

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YEARS ENDED DECEMBER 31,

SELECTED PER-SHARE DATA 1996 1995 1994 1993 C 1992

</TABLE>

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<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

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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 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.

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

<TABLE>
<CAPTION>
<S> <C> <C>
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

<TABLE>
<CAPTION>
<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

<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

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

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

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

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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

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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>

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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

</TABLE>

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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>
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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.

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.

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