VARIABLE INSURANCE PRODUCTS III, N-30D, 1997-02-28

VARIABLE INSURANCE PRODUCTS III
N-30D, 1997-02-28

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(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS
FUND III: GROWTH & 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.

INVESTMENTS 5 A complete list of the fund's investments with their
market values.

FINANCIAL STATEMENTS 8 Statements of assets and liabilities, operations, and
changes in net assets, as well as financial highlights.

NOTES 10 Notes to the financial statements.

REPORT OF INDEPENDENT ACCOUNTANTS 12 The auditors' opinion.

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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 III: GROWTH & INCOME 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 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.
Average annual total returns will appear once the fund is a year old, and
the growth of a hypothetical $10,000 investment in the fund will appear in
the fund's next report six months from now.

General Electric Co. 2.0

International Business Machines Corp. 1.6

British Petroleum PLC ADR 1.5

AlliedSignal, Inc. 1.4

Philip Morris Companies, Inc. 1.2

TOP FIVE MARKET SECTORS AS OF DECEMBER 31, 19966
% OF FUND'S
INVESTMENTS

Finance 7.4

Health 5.2

Nondurables 4.7

Technology 4.5

Energy 3.9

ASSET ALLOCATION AS OF DECEMBER 31, 1996 *
Row: 1, Col: 1, Value: 51.4
Row: 1, Col: 2, Value: 2.0
Row: 1, Col: 3, Value: 46.1
Stocks 48.0%
Bonds 0.6%
Short-term investments 51.4%
FOREIGN INVESTMENTS 3.4%
*
(% OF FUND'S INVESTMENTS)

FUND FACTS
GOAL: high total return through a combination
of current income and capital appreciation by
investing mainly in equity securities
START DATE: December 31, 1996
SIZE: as of December 31, 1996, more than
$989 thousand
MANAGER: Beth Terrana, since December
1996, joined Fidelity in 1983
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO
INVESTMENTS DECEMBER 31, 1996

Showing Percentage of Total Value of Investment in Securities

COMMON STOCKS - 48.0%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 2.2%
AEROSPACE & DEFENSE - 1.6%
Boeing Co. 200 $ 21,261
Lockheed Martin Corp. 100 9,150
30,411
DEFENSE ELECTRONICS - 0.2%
Raytheon Co. 100 4,813
SHIP BUILDING & REPAIR - 0.4%
General Dynamics Corp. 100 7,050
TOTAL AEROSPACE & DEFENSE 42,274
BASIC INDUSTRIES - 3.5%
CHEMICALS & PLASTICS - 3.0%
du Pont (E.I.) de Nemours & Co. 100 9,438
Monsanto Co. 500 19,438
Praxair, Inc. 400 18,450
Raychem Corp. 100 8,013
Sealed Air Corp. (a) 100 4,163
59,502
PAPER & FOREST PRODUCTS - 0.5%
Kimberly-Clark Corp. 100 9,525
TOTAL BASIC INDUSTRIES 69,027
CONGLOMERATES - 3.0%
AlliedSignal, Inc. 400 26,800
American Standard Companies, Inc. (a) 100 3,825
Tyco International Ltd. 400 21,150
United Technologies Corp. 100 6,600
58,375
CONSTRUCTION & REAL ESTATE - 1.4%
BUILDING MATERIALS - 0.9%
Armstrong World Industries, Inc. 100 6,950
Masco Corp. 300 10,800
17,750
REAL ESTATE - 0.3%
Rouse Co. (The) 200 6,350
REAL ESTATE INVESTMENT TRUSTS - 0.2%
Public Storage, Inc. 100 3,100
TOTAL CONSTRUCTION & REAL ESTATE 27,200
DURABLES - 1.0%
CONSUMER DURABLES - 0.4%
Minnesota Mining & Manufacturing Co. 100 8,288
CONSUMER ELECTRONICS - 0.6%
Harman International Industries, Inc. 100 5,563
Newell Co. 200 6,300
11,863
TOTAL DURABLES 20,151
ENERGY - 3.9%
ENERGY SERVICES - 1.0%
Halliburton Co. 100 6,025
Schlumberger Ltd. 100 9,988
Weatherford Enterra, Inc. (a) 100 3,000
19,013
OIL & GAS - 2.9%
Anadarko Petroleum Corp. 100 6,475
British Petroleum PLC ADR 200 28,275

SHARES VALUE (NOTE 1)
Mobil Corp. 100 $ 12,225
Texaco, Inc. 100 9,813
56,788
TOTAL ENERGY 75,801
FINANCE - 7.4%
BANKS - 5.0%
Bank of Boston Corp. 200 12,850
Bank of New York Co., Inc. 300 10,125
BankAmerica Corp. 200 19,950
Bankers Trust New York Corp. 100 8,625
Chase Manhattan Corp. 200 17,850
Citicorp 200 20,600
First Bank System, Inc. 100 6,825
96,825
CREDIT & OTHER FINANCE - 0.5%
Household International, Inc. 100 9,225
FEDERAL SPONSORED CREDIT - 1.1%
Federal Home Loan
Mortgage Corporation 100 11,013
Federal National Mortgage Association 300 11,175
22,188
INSURANCE - 0.8%
Allstate Corp. 100 5,788
Travelers Group, Inc. (The) 200 9,075
14,863
TOTAL FINANCE 143,101
HEALTH - 5.2%
DRUGS & PHARMACEUTICALS - 2.7%
Bristol-Myers Squibb Co. 100 10,875
Glaxo PLC sponsored ADR 200 6,350
Merck & Co., Inc. 100 7,925
Schering-Plough Corp. 100 6,475
SmithKline Beecham PLC ADR 200 13,600
Warner-Lambert Co. 100 7,500
52,725
MEDICAL EQUIPMENT & SUPPLIES - 1.7%
Boston Scientific Corp. (a) 100 6,000
Johnson & Johnson 200 9,950
McKesson Corp. 100 5,600
Medtronic, Inc. 100 6,800
Nellcor, Inc. (a) 100 2,188
Pall Corp. 100 2,550
33,088
MEDICAL FACILITIES MANAGEMENT - 0.8%
Columbia/HCA Healthcare Corp. 300 12,225
Integrated Health Services, Inc. 100 2,438
14,663
TOTAL HEALTH 100,476
HOLDING COMPANIES - 0.2%
U.S. Industries, Inc. (a) 100 3,438
INDUSTRIAL MACHINERY & EQUIPMENT - 3.6%
ELECTRICAL EQUIPMENT - 2.9%
Duracell International, Inc. 100 6,988
Emerson Electric Co. 100 9,675
General Electric Co. 400 39,550
56,213
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - CONTINUED
INDUSTRIAL MACHINERY & EQUIPMENT - 0.7%
Illinois Tool Works, Inc. 100 $ 7,988
Stanley Works 200 5,400
13,388
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 69,601
MEDIA & LEISURE - 2.1%
BROADCASTING - 0.6%
Evergreen Media Corp. Class A (a) 100 2,500
Infinity Broadcasting Corp. Class A (a) 200 6,725
Jacor Communications, Inc. Class A (a) 100 2,738
11,963
ENTERTAINMENT - 0.4%
Disney (Walt) Co. 100 6,963
LEISURE DURABLES & TOYS - 0.2%
Hasbro, Inc. 100 3,888
LODGING & GAMING - 0.1%
Host Marriott Corp. (a) 100 1,600
PUBLISHING - 0.6%
Meredith Corp. 100 5,275
Times Mirror Co. Class A 100 4,975
World Color Press, Inc. (a) 100 1,925
12,175
RESTAURANTS - 0.2%
McDonald's Corp. 100 4,525
TOTAL MEDIA & LEISURE 41,114
NONDURABLES - 4.7%
AGRICULTURE - 0.3%
Pioneer Hi-Bred International, Inc. 100 7,000
FOODS - 0.6%
Campbell Soup Co. 100 8,025
Sara Lee Corp. 100 3,725
11,750
HOUSEHOLD PRODUCTS - 2.6%
Avon Products, Inc. 200 11,425
Gillette Co. 100 7,775
Premark International, Inc. 100 2,225
Procter & Gamble Co. 100 10,750
Unilever NV ADR 100 17,525
49,700
TOBACCO - 1.2%
Philip Morris Companies, Inc. 200 22,525
TOTAL NONDURABLES 90,975
PRECIOUS METALS - 0.2%
Getchell Gold Corp. (a) 100 3,838
RETAIL & WHOLESALE - 2.7%
APPAREL STORES - 0.2%
Gap, Inc. 100 3,013
DRUG STORES - 0.6%
CVS Corp. 200 8,275
Revco (D.S.), Inc. (a) 100 3,700
11,975

SHARES VALUE (NOTE 1)
GENERAL MERCHANDISE STORES - 1.0%
Consolidated Stores Corp. (a) 600 $ 19,275
RETAIL & WHOLESALE, MISCELLANEOUS - 0.9%
Home Depot, Inc. (The) 100 5,013
Lowe's Companies, Inc. 100 3,550
Toys "R" Us, Inc. (a) 300 9,000
17,563
TOTAL RETAIL & WHOLESALE 51,826
SERVICES - 0.9%
ADVERTISING - 0.5%
Omnicom Group, Inc. 200 9,150
PRINTING - 0.3%
Deluxe Corp. 200 6,550
SERVICES - 0.1%
Service Corp. International 100 2,800
TOTAL SERVICES 18,500
TECHNOLOGY - 4.5%
COMMUNICATIONS EQUIPMENT - 0.3%
Cisco Systems, Inc. (a) 100 6,363
COMPUTER SERVICES & SOFTWARE - 0.6%
Automatic Data Processing, Inc. 100 4,288
Ceridian Corp. (a) 200 8,100
12,388
COMPUTERS & OFFICE EQUIPMENT - 3.2%
Bay Networks, Inc. (a) 100 2,088
Bell & Howell Co. (a) 100 2,375
Compaq Computer Corp. (a) 100 7,425
Diebold, Inc. 100 6,288
Hewlett-Packard Co. 100 5,025
International Business Machines Corp. 200 30,200
Pitney Bowes, Inc. 100 5,450
Silicon Graphics, Inc. (a) 100 2,550
61,401
PHOTOGRAPHIC EQUIPMENT - 0.4%
Eastman Kodak Co. 100 8,025
TOTAL TECHNOLOGY 88,177
TRANSPORTATION - 0.9%
AIR TRANSPORTATION - 0.5%
AMR Corp. (a) 100 8,813
RAILROADS - 0.4%
Burlington Northern Santa Fe Corp. 100 8,638
TOTAL TRANSPORTATION 17,451
UTILITIES - 0.6%
ELECTRIC UTILITY - 0.2%
Portland General Corp. 100 4,200
GAS - 0.4%
Enron Corp. 200 8,625
TOTAL UTILITIES 12,825
TOTAL COMMON STOCKS
(Cost $944,692) 934,150
CONVERTIBLE BONDS - 0.6%
MOODY'S RATINGS PRINCIPAL VALUE
(UNAUDITED) (C) AMOUNT (NOTE 1)
DURABLES - 0.2%
TEXTILES & APPAREL - 0.2%
Nine West Group, Inc.
5 1/2%, 7/15/03 (b) B+ $ 3,000 $ 2,978
MEDIA & LEISURE - 0.3%
LODGING & GAMING - 0.3%
HFS, Inc. 4 1/2%, 10/1/99 Baa3 2,000 6,615
SERVICES - 0.1%
First Financial Management Corp.
5%, 12/15/99 A2 1,000 1,730
TOTAL CONVERTIBLE BONDS
(Cost $11,113) 11,323
CASH EQUIVALENTS - 51.4%
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 (Note 3) $ 1,000,375 1,000,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $1,955,805) $ 1,945,473
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 $2,978 or 0.3% of net
assets.
3. Standard & Poor's credit ratings are used in the absence of a rating by
Moody's Investors Service, Inc.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $955,805 and $0, respectively.
INCOME TAX INFORMATION
At December 31, 1996 the aggregate cost of investment securities for income
tax purposes was $1,955,805. Net unrealized depreciation aggregated
$10,332, of which $1,222 related to appreciated investment securities and
$11,554 related to depreciated investment securities.
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH & INCOME PORTFOLIO
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996

ASSETS

Investment in $ 1,945,473
securities, at
value
(including
repurchase
agreements
of
$1,000,000)
(cost
$1,955,805)
- - See
accompanyin
g schedule

Cash 10

Interest 307
receivable

Receivable 7,688
from
investment
adviser for
expense
reductions

TOTAL ASSETS 1,953,478

LIABILITIES

Payable for $ 955,919
investments
purchased

Accrued 20
management
fee

Other payables 7,708
and accrued
expenses

TOTAL 963,647
LIABILITIES

NET ASSETS $ 989,831

Net Assets
consist of:

Paid in capital $ 1,000,010

Undistributed 153
net
investment
income

Net unrealized (10,332
appreciation )
(depreciation
) on
investments

NET ASSETS, for $ 989,831
100,001
shares
outstanding

NET ASSET $9.90
VALUE,
offering price
and
redemption
price per
share
($989,831 (divided by)
100,001
shares)

STATEMENT OF OPERATIONS
DECEMBER 31, 1996 (COMMENCEMENT
OF OPERATIONS)

INVESTMENT $ 193
INCOME
Interest

EXPENSES

Management $ 20
fee

Transfer agent 50
fees

Accounting 238
fees and
expenses

Custodian fees 417
and
expenses

Registration 303
fees

Audit 6,700

Total 7,728
expenses
before
reductions

Expense (7,688 40
reductions )

NET 153
INVESTMENT
INCOME

Change in net (10,332
unrealized )
appreciation
(depreciation
) on
investment
securities

NET GAIN (LOSS) (10,332
)

NET INCREASE $ (10,179
(DECREASE) )
IN NET ASSETS
RESULTING
FROM
OPERATIONS

OTHER $ 7,688
INFORMATION
Expense
reductions
FMR
reimburseme
nt

STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS DECEMBER 31,
1996
(COMMENCEMENT
OF OPERATIONS)

Operations $ 153
Net
investment
income

Change in (10,332
net )
unrealized
appreciation
(depreciation
)

NET INCREASE (10,179
(DECREASE) )
IN NET
ASSETS
RESULTING
FROM
OPERATIONS

Share 1,000,010
transactions
Net proceeds
from sales of
shares

NET INCREASE 1,000,010
(DECREASE)
IN NET
ASSETS
RESULTING
FROM SHARE
TRANSACTIO
NS

TOTAL 989,831
INCREASE
(DECREASE)
IN NET ASSETS

NET ASSETS

Beginning of -
period

End of period $ 989,831
(including
undistribute
d net
investment
income of
$153)

OTHER 100,001
INFORMATION
Shares sold

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SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.

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FINANCIAL HIGHLIGHTS
DECEMBER 31,
1996
(COMMENCEMENT
OF OPERATIONS)

SELECTED
PER-SHARE
DATA

Net asset $ 10.00
value,
beginning of
period

Income from
Investment
Operations

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

Total from (.10)
investment
operations

Net asset $ 9.90
value, end of
period

TOTAL (1.00)%
RETURN B, C

RATIOS AND
SUPPLEMENT
AL DATA

Net assets, $ 990
end of period
(000 omitted)

Ratio of 1.00% A,
expenses to D
average net
assets

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

Portfolio 0% A
turnover rate

Average $ .0120
commission
rate E

A ANNUALIZED
B TOTAL RETURNS FOR PERIODS OF LESS
THAN ONE YEAR ARE NOT
ANNUALIZED AND 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 6 OF NOTES TO FINANCIAL
STATEMENTS).
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 (SEE NOTE 6 OF NOTES TO
FINANCIAL STATEMENTS).
E 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.

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

1. SIGNIFICANT ACCOUNTING POLICIES.
Growth and Income Portfolio (the fund) is a fund of Variable Insurance
Products Fund III (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 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.
INCOME TAXES. The fund intends to qualify as a regulated investment company
under Subchapter M of the Internal Revenue Code. By so qualifying, the fund
will not be 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.
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.
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 adviser, is responsible for determining that the value of the
underlying securities remains in accordance with the market value
requirements stated above.
3. JOINT TRADING ACCOUNT.
At the end of the period, the fund had 20% or more of its total investments
in repurchase agreements through a joint trading account. These repurchase
agreements were with entities whose creditworthiness has been reviewed and
found satisfactory by FMR. The maturity values of the joint trading account
investments was $1,000,375 at 6.75 %. The investments in repurchase
agreements through the joint trading account are summarized as follows:
SUMMARY OF JOINT TRADING
DATED DECEMBER 31, 1996, DUE JANUARY 2, 1997
Number of dealers or banks 20
Maximum amount with one dealer or bank 17.6%
Aggregate principal amount of agreements $19,054,743,000
Aggregate maturity amount of agreements $19,061,891,381
Aggregate market value of transferred assets $19,440,451,571
Coupon rates of transferred assets 0.0% to 15.75%
Maturity dates of transferred assets 1/15/97 to 11/15/26
4. 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.
5. 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 annualized rate of .50%
of the fund's 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 annualized rate of 1.27% 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.
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 1.00% of average net assets.
For the period, the reduction under this arrangement is shown under the
caption "Other Information" on the fund's Statement of Operations.
7. 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
100% of the outstanding shares of the fund.
REPORT OF INDEPENDENT ACCOUNTANTS

To the Trustees of Variable Insurance Products Fund III and the
Shareholders of Growth & Income 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 Growth & Income Portfolio (a fund of
Variable Insurance Products Fund III) at December 31, 1996, and the results
of its operations, the changes in its net assets, and the financial
highlights for December 31, 1996, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of
the Growth & Income Portfolio's management; our responsibility is to
express an opinion on these financial statements based on our audit. We
conducted our audit 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 audit, which included
confirmation of securities at December 31, 1996 by correspondence with the
custodian and brokers, provides a reasonable basis for the opinion
expressed above.
PRICE WATERHOUSE LLP
Boston, Massachusetts
February 11, 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
OFFICERS
Edward C. Johnson 3d, PRESIDENT
J. Gary Burkhead, SENIOR VICE PRESIDENT
William J. Hayes, VICE PRESIDENT
Beth Terrana, 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
* INDEPENDENT TRUSTEES
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Investments Institutional Operations Co.
Boston, MA
CUSTODIAN
The Chase Manhattan Bank, N.A., New York, NY

(2_FIDELITY_LOGOS)
VARIABLE INSURANCE PRODUCTS FUND III
(FORMERLY FIDELITY ADVISOR ANNUITY FUND)
MONEY MARKET FUND
GOVERNMENT INVESTMENT FUND
HIGH YIELD FUND
BALANCED PORTFOLIO (FORMERLY INCOME & GROWTH FUND)
GROWTH OPPORTUNITIES PORTFOLIO
(FORMERLY GROWTH OPPORTUNITIES FUND)
OVERSEAS FUND
ANNUAL REPORT
DECEMBER 31, 1996
CONTENTS

<TABLE>
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<S> <C> <C>
MARKET ENVIRONMENT 3 A REVIEW OF WHAT HAPPENED DURING THE PAST YEAR

MONEY MARKET FUND 4 PERFORMANCE
5 FUND TALK: THE MANAGER'S OVERVIEW
6 INVESTMENTS
8 FINANCIAL STATEMENTS

GOVERNMENT INVESTMENT FUND 10 PERFORMANCE AND INVESTMENT SUMMARY
11 FUND TALK: THE MANAGER'S OVERVIEW
12 INVESTMENTS
14 FINANCIAL STATEMENTS

HIGH YIELD FUND 16 PERFORMANCE AND INVESTMENT SUMMARY
17 FUND TALK: THE MANAGER'S OVERVIEW
18 INVESTMENTS
23 FINANCIAL STATEMENTS

BALANCED PORTFOLIO 25 PERFORMANCE AND INVESTMENT SUMMARY
26 FUND TALK: THE MANAGER'S OVERVIEW
27 INVESTMENTS
35 FINANCIAL STATEMENTS

GROWTH OPPORTUNITIES PORTFOLIO 37 PERFORMANCE AND INVESTMENT SUMMARY
38 FUND TALK: THE MANAGER'S OVERVIEW
39 INVESTMENTS
43 FINANCIAL STATEMENTS

OVERSEAS FUND 45 PERFORMANCE AND INVESTMENT SUMMARY
46 FUND TALK: THE MANAGER'S OVERVIEW
47 INVESTMENTS
51 FINANCIAL STATEMENTS

NOTES TO FINANCIAL STATEMENTS 53 NOTES TO THE FINANCIAL STATEMENTS

REPORT OF INDEPENDENT ACCOUNTANTS 57 THE AUDITORS' OPINION.

DISTRIBUTIONS 58

</TABLE>

THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR
THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUNDS. THIS REPORT IS
NOT
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUNDS 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

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 or 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.
If Fidelity had not reimbursed certain fund expenses, the life of fund
total return would have been lower.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1996 PAST 1 LIFE OF
YEAR FUND

Money Market 5.31% 5.25%

AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and show
what would have happened if the fund had achieved that return by performing
at a constant rate each year.
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 4, 1995.
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.
YIELD
4/3/96 6/26/96 10/2/96 12/30/96

Money Market 5.10% 5.15% 5.19% 5.02%

MMDA 2.71% 2.66% 2.67% 2.64%
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
Money Market
MMDA
6% -
5% -
4% -
3% -
2% -
1% -
0%
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 bank money market deposit
account (MMDA) average. The MMDA average is supplied by BANK RATE
MONITOR.(Trademark)
VARIABLE INSURANCE PRODUCTS FUND III: MONEY MARKET FUND
FUND TALK: THE MANAGER'S OVERVIEW

An interview with
Bob Litterst, Portfolio
Manager of Money
Market Fund
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 60 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 60 days, reflecting my opinion that Fed policy would remain steady
for the foreseeable future. Since that time, I've kept the maturity in the
50-60 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.

FUND FACTS
GOAL: income and share price stability by
investing in high-quality, short-term
investments
START DATE: January 4, 1995
SIZE: as of December 31, 1996, more than
$29 million
MANAGER: Robert Litterst, since January 1995;
joined Fidelity in 1992
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND III: MONEY MARKET FUND
INVESTMENTS DECEMBER 31, 1996

Showing Percentage of Total Value of Investments in Securities

BANKERS' ACCEPTANCES - 4.9%
ANNUALIZED
YIELD AT
DUE TIME OF PRINCIPAL VALUE
DATE PURCHASE AMOUNT (NOTE 1)
DOMESTIC BANKERS' ACCEPTANCES
Chase Manhattan Bank
6/9/97 5.54% $ 1,500,000 $ 1,464,358
CERTIFICATES OF DEPOSIT - 16.9%
NEW YORK BRANCH, YANKEE DOLLAR, FOREIGN BANKS - 13.5%
Bayerische Landesbank Girozentrale
1/22/97 5.53 1,000,000 1,000,000
Societe Generale, France
5/15/97 5.50 1,000,000 1,000,415
Sumitomo Bank, Ltd.
1/13/97 5.55 1,000,000 1,000,000
Westpac Banking Corp.
3/4/97 5.85 1,000,000 998,880
3,999,295
LONDON BRANCH, EURODOLLAR, FOREIGN BANKS - 3.4%
Credit Suisse
2/13/97 5.46 1,000,000 999,996
TOTAL CERTIFICATES OF DEPOSIT 4,999,291
COMMERCIAL PAPER - 45.6%
Abbey National, North America
3/10/97 5.76 1,000,000 989,422
American Brands, Inc.
1/27/97 6.01 420,000 418,196
Caisse d'Amortissement de la Dette Sociale
6/24/97 5.60 1,000,000 973,900
Chrysler Financial Corporation
1/27/97 5.51 1,000,000 996,064
2/24/97 5.60 400,000 396,676
Commerzbank U.S. Finance, Inc.
1/10/97 5.75 600,000 599,160
Den Danske Corp., Inc.
2/10/97 5.60 862,000 856,781
Electronic Data Systems
1/24/97 5.68 900,000 896,752
Enterprise Funding Corp.
2/24/97 5.46 521,000 516,780
Ford Motor Credit Corp.
3/24/97 5.66 1,000,000 987,472
General Electric Capital Corp.
1/17/97 6.07 1,275,000 1,271,572
General Motors Acceptance Corp.
2/25/97 5.71 500,000 495,761
Generale Bank
2/5/97 5.57 1,000,000 994,730
Glaxo Wellcome, PLC
2/18/97 5.50 1,000,000 992,734
J.C. Penney Funding Corp.
2/10/97 5.50 1,000,000 993,945

ANNUALIZED
YIELD AT
DUE TIME OF PRINCIPAL VALUE
DATE PURCHASE AMOUNT (NOTE 1)
National Australia Funding, Inc.
6/16/97 5.57% $ 700,000 $ 682,506
Norfolk Southern Corp.
2/4/97 5.45 136,000 135,312
Walt Disney Company
4/28/97 5.55% 100,000 98,235
Westpac Capital Corp.
2/18/97 5.80 200,000 198,494
TOTAL COMMERCIAL PAPER 13,494,492
FEDERAL AGENCIES (A) - 1.7%
FEDERAL NATIONAL MORTGAGE ASSOC. - AGENCY COUPONS
1/2/97 4.97 500,000 500,000
BANK NOTES - 10.0%
KEY BANK OF NEW YORK
1/2/97 4.93 (a) 1,000,000 999,607
KEYBANK NATIONAL ASSOCIATION
1/2/97 5.69 (a) 500,000 499,806
OLD KENT BANK (MICHIGAN)
3/7/97 5.46 750,000 752,066
PNC BANK
1/8/97 5.56 (a) 700,000 699,808
TOTAL BANK NOTES 2,951,287
MASTER NOTES (A) - 6.8%
Goldman Sachs Group, L.P. (The) (c)
2/8/97 5.50 1,000,000 1,000,000
J.P. Morgan Securities
1/7/97 5.60 1,000,000 1,000,000
TOTAL MASTER NOTES 2,000,000
MEDIUM-TERM NOTES (A) - 10.1%
General Motors Acceptance Corp.
2/1/97 5.50 1,000,000 1,000,000
Merrill Lynch & Co., Inc.
1/21/97 5.62 1,000,000 999,870
Morgan Stanley Group, Inc.
1/2/97 4.95 1,000,000 1,000,000
TOTAL MEDIUM-TERM NOTES 2,999,870
SHORT-TERM NOTES (A)(B)- 3.4%
Liquid Asset Backed Securities Trust (1996-1)
1/15/97 5.63 1,000,000 1,000,000
REPURCHASE AGREEMENTS - 0.6%Amount
MATURITY VALUE
AMOUNT (NOTE 1)
In a joint trading account
(U.S. Treasury Obligations)
dated 12/31/96 due 1/2/97:
At 7.32% $ 186,076 $ 186,000
TOTAL INVESTMENTS - 100% $ 29,595,298
Total Cost for Income Tax Purposes $ 29,595,298
LEGEND
1. The coupon rate shown on floating or adjustable rate securities
represents the rate at period end. The due dates 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 $1,000,000 or 3.3% of net
assets.
3. Restricted security; subject to resale restrictions.
VARIABLE INSURANCE PRODUCTS FUND III: MONEY MARKET FUND
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996

ASSETS

Investment in $ 29,595,298
securities, at
value
(including
repurchase
agreements
of $186,000)
- -
See
accompanyin
g schedule

Cash 119,440

Interest 258,197
receivable

TOTAL ASSETS 29,972,935

LIABILITIES

Accrued $ 4,752
management
fee

Other payables 27,667
and
accrued
expenses

TOTAL 32,419
LIABILITIES

NET ASSETS $ 29,940,516

Net Assets
consist of:

Paid in capital $ 29,940,522

Accumulated (6
net realized )
gain (loss) on
investments

NET ASSETS, for $ 29,940,516
29,940,522
shares
outstanding

NET ASSET $1.00
VALUE,
offering price

and
redemption
price per
share
($29,940,516
(divided by) 29,940,522
shares)

STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996

INTEREST $ 1,843,505
INCOME

EXPENSES

Management $ 67,435
fee

Transfer agent 20,697
fees

Accounting 40,056
fees and
expenses

Non-interested 179
trustees'
compensatio
n

Custodian fees 2,595
and
expenses

Audit 22,079

Miscellaneous 745

Total 153,786
expenses
before
reductions

Expense (711 153,075
reductions )

NET INTEREST 1,690,430
INCOME

NET REALIZED 81
GAIN (LOSS)
ON
INVESTMENTS

NET INCREASE $ 1,690,511
IN NET ASSETS
RESULTING
FROM
OPERATIONS

OTHER $ 711
INFORMATION
Expense
reductions
Custodian
interest
credits

STATEMENT OF CHANGES IN NET ASSETS
INCREASE (DECREASE) IN NET ASSETS YEAR ENDED JANUARY 4, 1995
DECEMBER 31, (COMMENCEMENT
1996 OF OPERATIONS) TO
DECEMBER 31,
1995

Operations $ 1,690,430 $ 574,410
Net interest
income

Net realized 81 (87)
gain (loss)

NET INCREASE 1,690,511 574,323
(DECREASE)
IN NET
ASSETS
RESULTING
FROM
OPERATIONS

Distributions to (1,690,430) (574,410)
shareholders
from net
interest
income

Share 36,041,110 37,951,030
transactions
at net asset
value of
$1.00 per
share
Proceeds
from sales of
shares

Reinvestmen 1,690,430 556,876
t of
distributions
from net
interest
income

Cost of (36,765,530) (9,533,394)
shares
redeemed

NET INCREASE 966,010 28,974,512
(DECREASE)
IN NET
ASSETS AND
SHARES
RESULTING
FROM SHARE
TRANSACTIO
NS

TOTAL 966,091 28,974,425
INCREASE
(DECREASE)
IN NET ASSETS

NET ASSETS

Beginning of 28,974,425 -
period

End of period $ 29,940,516 $ 28,974,425

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SEE ACCOMPANYING NOTES WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.

</TABLE>

FINANCIAL HIGHLIGHTS
YEAR ENDED JANUARY 4, 1995
DECEMBER 31, (COMMENCEMENT
OF OPERATIONS) TO
DECEMBER 31,

SELECTED PER-SHARE DATA 1996 1995

Net asset $ 1.000 $ 1.000
value,
beginning of
period

Income from .052 .051
Investment
Operations
Net interest
income

Less
Distributions

From net (.052) (.051)
interest
income

Net asset $ 1.000 $ 1.000
value, end of
period

TOTAL 5.31% 5.17%
RETURN B, C

RATIOS AND
SUPPLEMENT
AL DATA

Net assets, $ 29,941 $ 28,974
end of period
(000 omitted)

Ratio of .47% .74% 1.
expenses to , D
average net
assets

Ratio of net 5.19% 5.18% 1.
interest
income to
average net
assets

1. ANNUALIZED
2. TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN
EXPENSES NOT BEEN REDUCED DURING THE PERIODS
SHOWN.
3. TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT
ANNUALIZED AND DO NOT REFLECT CHARGES ATTRIBUTABLE TO
YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT.
INCLUSION OF THESE CHARGES WOULD REDUCE THE TOTAL
RETURNS SHOWN.
4. 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.

VARIABLE INSURANCE PRODUCTS FUND III: GOVERNMENT INVESTMENT FUND
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). If Fidelity had not
reimbursed certain fund expenses, the total returns would have been lower.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1996 PAST 1 LIFE OF
YEAR FUND

Government Investment 1.80% 8.93%

Salomon Brothers Treasury/Agency Index 2.76% 10.31%

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.
You can compare the fund's returns to the Salomon Brothers Treasury/Agency
Index - a market capitalization weighted index of U.S. Treasury and U.S.
government agency securities with fixed-rate coupons and weighted average
lives of at least one year.
Figures for more than one year assume a steady compounded rate of return
and are not the fund's year-by-year results, which fluctuated over the
periods shown. The life of fund figures are from commencement of operations
January 3, 1995.
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. Although many of the fund's investments are guaranteed
by the U.S. government, the fund itself is not guaranteed.

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)
$10,000 OVER LIFE OF FUND
IMAHDR PRASUN SHR__CHT 19961231 19970108 162838 S00000000000001
FA Annuity Govt Inv Fund SB Treasury/Agency
00614 SB022
1995/01/03 10000.00 10000.00
1995/01/31 10130.00 10195.95
1995/02/28 10350.00 10409.66
1995/03/31 10410.00 10471.57
1995/04/30 10530.00 10606.50
1995/05/31 10940.00 11041.45
1995/06/30 11010.00 11125.12
1995/07/31 10970.00 11086.50
1995/08/31 11080.00 11213.22
1995/09/30 11180.00 11314.41
1995/10/31 11340.00 11490.83
1995/11/30 11500.00 11676.80
1995/12/31 11654.15 11838.58
1996/01/31 11706.74 11913.59
1996/02/29 11454.30 11675.91
1996/03/31 11349.12 11573.17
1996/04/30 11264.97 11482.40
1996/05/31 11243.94 11479.74
1996/06/30 11370.15 11624.43
1996/07/31 11391.19 11650.39
1996/08/31 11370.15 11626.20
1996/09/30 11548.96 11819.49
1996/10/31 11790.88 12087.57
1996/11/30 11990.73 12289.07
1996/12/31 11863.43 12165.02
IMATRL PRASUN SHR__CHT 19961231 19970108 162840 R00000000000027

Let's say hypothetically that $10,000 was invested in Government Investment
Fund 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 $11,863
- - an 18.63% increase on the initial investment. With reinvested dividends
and capital gains, if any, the same $10,000 investment in the Salomon
Brothers Treasury/Agency Index would have grown to $12,165 over the same
period - a 21.65% increase.
INVESTMENT SUMMARY
COUPON DISTRIBUTION AS OF DECEMBER 31, 1996

<TABLE>
<CAPTION>
<S> <C>
% OF FUND'S
INVESTMENTS

Under 5% 2.0

5 - 5.99% 9.4

6 - 6.99% 35.8

7 - 7.99% 8.2

8 - 8.99% 23.9

9 - 9.99% 13.0

Over 10% 5.7

COUPON DISTRIBUTION SHOWS THE RANGE OF STATED INTEREST RATES ON THE FUND'S INVESTMENTS, EXCLUDING CASH EQUIVALENTS.

</TABLE>

AVERAGE YEARS TO MATURITY AS OF DECEMBER 31, 1996

<TABLE>
<CAPTION>
<S> <C>
Years 8.6

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.

</TABLE>

DURATION AS OF DECEMBER 31, 1996

<TABLE>
<CAPTION>
<S> <C>
Years 4.8

DURATION SHOWS HOW MUCH A BOND FUND'S PRICE FLUCTUATES WITH CHANGES
IN COMPARABLE INTEREST RATES. IF RATES RISE 1%, FOR EXAMPLE, A FUND
WITH A FIVE-YEAR DURATION IS
LIKELY TO LOSE ABOUT 5% OF ITS VALUE. OTHER FACTORS ALSO CAN INFLUENCE
A BOND FUND'S PERFORMANCE AND SHARE PRICE. ACCORDINGLY, A BOND FUND'S
ACTUAL PERFORMANCE MAY
DIFFER FROM THIS EXAMPLE.

</TABLE>

VARIABLE INSURANCE PRODUCTS FUND III: GOVERNMENT INVESTMENT FUND
FUND TALK: THE MANAGER'S OVERVIEW

An interview with
Robert Ives, Portfolio Manager of Government Investment Fund
Q. HOW DID THE FUND PERFORM?
A. For the 12 months that ended December 31, 1996, the fund lagged the
Salomon Brothers Treasury/Agency Index, which had a 12-month return of
2.76%.
Q. WHAT FACTORS CONTRIBUTED TO THE FUND'S PERFORMANCE?
A. One of the themes behind the bond market's performance in 1996 was the
shifting tide of the economy. The first half of the year was characterized
by a stronger-than-expected economy, punctuated by the release of
surprisingly strong unemployment figures in February. As a result, bond
yields were up across the board, and this hurt both the market and the
fund. We then had a pretty good rally from September through November as
the economy appeared to be slowing and the Federal Reserve Board did not
raise interest rates. Toward the end of the year, with investors
anticipating a continued economic slowdown, we witnessed a slight sell-off,
as the economy turned out to be stronger than anticipated. The generally
strong economy led to a drop in bond prices, which offset much of the
income return of bonds during the year. In terms of the portfolio, the
agency weighting contributed positively as spreads in that sector continued
to tighten.
Q. THE MARKET SEEMED TO PAY PARTICULARLY CLOSE ATTENTION TO FED MONETARY
POLICY. DID THIS AFFECT YOUR STRATEGY AT ALL?
A. No, not really. Because I'm not trying to ride the market's ups and
downs, I don't place as much emphasis on short-term swings. I would say,
though, that the scrutiny placed on the Fed was a bit more intense than in
the past. If the Fed had increased rates, this would have been a negative
development for the bond market. In an unpredictable environment like we've
seen throughout the period, this scrutiny was not surprising.
Q. HOW DID THE COMPOSITION OF THE PORTFOLIO EVOLVE DURING THE PERIOD?
A. I didn't alter it too much. My agency weighting went up slightly as the
environment for these issues continued to be favorable. As the period came
to a close, my non-mortgage-related agency weighting was at 49.8%. I can't
see going much higher than that. The fund's mortgage-backed positions
declined, but the fund did realize good performance in that area. With
mortgage securities, you generally get better performance in return for
taking on additional risks, including prepayment risk.
Q. THE FUND HAS SIGNIFICANT EXPOSURES IN BONDS ISSUED BY THE PRIVATE EXPORT
FUNDING CORP. (PEFCO) AND GUARANTEED TRUST CERTIFICATES (GTCS). WHAT'S THE
STORY BEHIND THESE BONDS AND HOW DID THEY PERFORM?
A. Bonds issued by PEFCO and GTCs are typically good values for the income
they can provide to the fund. PEFCO is an entity that increases the funding
available for financing exports of U.S. goods and services by making
dollar-denominated loans to foreign importers. GTCs help foreign buyers of
U.S. military equipment finance purchases. Each of these holdings performed
relatively well during the period, contributing positively to the fund's
performance.
Q. WHAT'S YOUR OUTLOOK?
A. While the Fed felt that no interest rate changes were necessary, that
may change in the near future. The economy is moving along at a decent pace
- - not too fast and not too slow. This has been an unusual expansion in that
growth has been relatively steady during this cycle. I think there's a
likelihood that the Fed will tighten rates. In the short run, since the
economy seems to be operating at the verge of full capacity, this could be
a negative development for the fixed-income markets.
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.
NOTE TO SHAREHOLDERS: Curt Hollingsworth became portfolio manager of the
fund on February 3, 1997, after the period ended. Mr. Hollingsworth joined
Fidelity in 1983 and manages various taxable bond funds.

FUND FACTS
GOAL: high current income by investing
primarily in obligations issued or guaranteed
by the U.S. government
START DATE: January 3, 1995
SIZE: as of December 31, 1996, more than
$22 million
MANAGER: Robert Ives, since 1995; joined
Fidelity in 1991
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND III: GOVERNMENT INVESTMENT FUND
INVESTMENTS DECEMBER 31, 1996

Showing Percentage of Total Value of Investment in Securities

U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS - 95.6%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
U.S. TREASURY OBLIGATIONS - 45.8%
6 1/8%, 3/31/98 $ 2,420,000 $ 2,431,713
6 7/8%, 8/31/99 1,520,000 1,551,829
12 3/4%, 11/15/10 (callable) 250,000 353,866
12%, 8/15/13 (callable) 632,000 904,057
8 7/8%, 2/15/19 3,895,000 4,835,292
10,076,757
U.S. GOVERNMENT AGENCY OBLIGATIONS - 49.8%
Farm Credit System Financial Assistance
Corp. 9 3/8%, 7/21/03 602,000 692,866
Federal Agricultural Mortgage Corp.
7.01%, 2/10/05 10,000 10,189
Federal Home Loan Bank :
9.20%, 8/25/97 450,000 459,774
8.60%, 8/25/99 300,000 318,048
8.85%, 6/21/00 40,000 43,200
6.46%, 8/24/00 220,000 221,443
6 3/4%, 4/5/04 375,000 377,873
7.38%, 8/5/04 110,000 114,968
7.46%, 9/9/04 50,000 52,485
7.70%, 9/20/04 40,000 42,538
8.09%, 12/28/04 10,000 10,878
7.59%, 3/10/05 10,000 10,581
Federal Home Loan Mortgage Corp.:
5.51%, 2/5/99 (callable) 400,000 395,436
5.76%, 6/9/00 250,000 246,250
6.155%, 9/15/00 450,000 448,313
7 3/4%, 11/7/01 500,000 527,890
6.77%, 9/15/02 150,000 151,796
8%, 1/26/05 20,000 21,634
Federal National Mortgage Association
9.15%, 4/10/98 500,000 520,000
Financing Corporation 0%, 3/26/00 512,000 419,482
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 1,052,600 1,126,682
Class 2-E, 9.40%, 5/15/02 44,475 47,695
Guaranteed Export Trust Certificates
(assets of Trust guaranteed by U.S.
Government through Export-
Import Bank):
Series 1993-C, 5.20%, 10/15/04 7,111 6,821
Series 1993-D, 5.23%, 5/15/05 14,468 13,835
Series 1994-A, 7.12%, 4/15/06 8,552 8,760
Series 1994-C, 6.61%, 9/15/99 2,150 2,167
Guaranteed Trade Trust Certificates (assets
of Trust guaranteed by U.S. Government
through Export-Import Bank)
Series 1994-B, 7 1/2%, 1/26/06 8,661 8,995
Israel Export Trust Certificates Series 1994-1
(assets of Trust guaranteed by U.S.
Government through Export-Import Bank)
6.88%, 1/26/03 15,294 15,485
Overseas Private Investment Corp. (U.S.
Government guaranteed participation
certificate) Series 1994-1995,
6.08%, 8/15/04 140,000 137,453

PRINCIPAL VALUE
AMOUNT (NOTE 1)
Private Export Funding Corp. secured:
7.90%, 3/31/00 $ 400,000 $ 419,300
5 1/2%, 3/15/01 600,000 582,108
6.24%, 5/15/02 20,000 19,791
5.65%, 3/15/03 263,250 258,485
6.86%, 4/30/04 1,000,000 1,014,610
State of Israel (guaranteed by U.S.
Government through Agency for
International Development):
5 1/4%, 3/15/98 100,000 99,371
4 7/8%, 9/15/98 30,000 29,469
6 1/8%, 8/15/99 150,000 150,033
8%, 11/15/01 20,000 21,325
6 1/4%, 8/15/02 352,000 348,871
6 1/8%, 3/15/03 70,000 68,566
6 5/8%, 2/15/04 180,000 179,710
7 5/8%, 8/15/04 330,000 346,948
5.89%, 8/15/05 485,000 460,360
8 1/2%, 4/1/06 10,000 10,920
U.S. Government Guaranteed Notes
Series 1992-A (Detroit,
Michigan) 6.99%, 8/1/00 300,000 306,750
U.S. Housing & Urban Development
6.98%, 8/1/05 180,000 182,975
10,953,129
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $21,204,622) 21,029,886
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES - 0.4%
Federal National Mortgage Association:
6.345%, 3/1/99 78,483 78,238
6 1/2%, 2/1/10 1,810 1,795
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $80,601) 80,033
COLLATERALIZED MORTGAGE OBLIGATIONS - 2.0%
U.S. GOVERNMENT AGENCY - 2.0%
Federal Home Loan Mortgage Corporation
planned amortization class Series 1727
Class D, 6 1/2%, 8/15/14 190,000 190,950
Federal National Mortgage Association:
Series 1994-M3 Class A,
7.71%, 4/1/06 20,145 20,501
sequential pay Series 1996-M5
Class A1, 7.141%, 7/25/10 229,060 233,713
TOTAL COLLATERALIZED
MORTGAGE OBLIGATIONS
(Cost $441,871) 445,164
CASH EQUIVALENTS - 2.0%
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 $ 445,167 $ 445,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $22,172,094) $ 22,000,083
OTHER INFORMATION
Purchases and sales of long-term U.S. government and government agency
obligations aggregated $31,814,476 and $19,812,094, respectively.
INCOME TAX INFORMATION
At December 31, 1996, the aggregate cost of investment securities for
income tax purposes was $22,178,779. Net unrealized depreciation aggregated
$178,696, of which $112,287 related to appreciated investment securities
and $290,983 related to depreciated investment securities.
At December 31, 1996, the fund had a capital loss carryforward of
approximately $140,000 all of which will expire on December 31, 2004.
VARIABLE INSURANCE PRODUCTS FUND III: GOVERNMENT INVESTMENT FUND
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996

ASSETS

Investment in $ 22,000,083
securities, at
value
(including
repurchase
agreements
of $445,000)
(cost
$22,172,094)
- - See
accompanyin
g schedule

Cash 24

Interest 444,173
receivable

TOTAL ASSETS 22,444,280

LIABILITIES

Payable for $ 1,644
fund shares
redeemed

Accrued 8,259
management
fee

Other payables 8,099
and
accrued
expenses

TOTAL 18,002
LIABILITIES

NET ASSETS $ 22,426,278

Net Assets
consist of:

Paid in capital $ 22,738,400

Undistributed 5,949
net
investment
income

Accumulated (146,060
undistributed )
net realized
gain (loss) on
investments
and foreign
currency
transactions

Net unrealized (172,011
appreciation )
(depreciation
) on
investments

NET ASSETS, for $ 22,426,278
2,090,716
shares
outstanding

NET ASSET $10.73
VALUE,
offering price

and
redemption
price per
share
($22,426,278
(divided by) 2,090,716
shares)

STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996

INVESTMENT $ 1,259,597
INCOME
Interest

EXPENSES

Management $ 79,250
fee

Transfer agent 11,566
fees

Accounting 60,051
fees and
expenses

Non-interested 67
trustees'
compensatio
n

Custodian fees 2,019
and
expenses

Audit 19,086

Legal 299

Miscellaneous 60

Total 172,398
expenses
before
reductions

Expense (1,559 170,839
reductions )

NET 1,088,758
INVESTMENT
INCOME

REALIZED AND (135,520
UNREALIZED )
GAIN (LOSS)
Net realized
gain (loss) on

investment
securities

Change in net (385,329
unrealized )
appreciation
(depreciation
)
on
investment
securities

NET GAIN (LOSS) (520,849
)

NET INCREASE $ 567,909
(DECREASE)
IN NET ASSETS
RESULTING
FROM
OPERATIONS

OTHER $ 626
INFORMATION
Expense
reductions
Custodian
interest
credits

FMR 933
reimburseme
nt

$ 1,559

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 $ 1,088,758 $ 279,228
Net
investment
income

Net realized (135,520) 210,750
gain (loss)

Change in (385,329) 213,318
net
unrealized
appreciation
(depreciation
)

NET INCREASE 567,909 703,296
(DECREASE)
IN NET
ASSETS
RESULTING
FROM
OPERATIONS

Distributions to (1,093,330) (287,183)
shareholders
From net
investment
income

From net - (208,860)
realized gain

TOTAL (1,093,330) (496,043)
DISTRIBUTION
S

Share 11,917,492 10,213,975
transactions
Net proceeds
from sales of
shares

Reinvestmen 1,093,330 496,043
t of
distributions

Cost of (784,643) (191,751)
shares
redeemed

NET INCREASE 12,226,179 10,518,267
(DECREASE)
IN NET
ASSETS
RESULTING
FROM SHARE
TRANSACTIO
NS

TOTAL 11,700,758 10,725,520
INCREASE
(DECREASE)
IN NET ASSETS

NET ASSETS

Beginning of 10,725,520 -
period

End of period $ 22,426,278 $ 10,725,520
(including
undistributed
net
investment
income of
$5,949 and
$0,
respectively)

OTHER
INFORMATION
Shares

Sold 1,092,352 940,275

Issued in 101,705 45,095
reinvestment
of
distributions

Redeemed (71,379) (17,332)

Net increase 1,122,678 968,038
(decrease)

<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> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA YEAR ENDED JANUARY 3, 1995
DECEMBER 31, (COMMENCEMENT
1996 OF OPERATIONS) TO
DECEMBER 31, 1995

</TABLE>

Net asset $ 11.080 $ 10.000
value,
beginning of
period

Income from .553 .330
Investment
Operations
Net
investment
income

Net realized (.353) 1.320
and
unrealized
gain (loss)

Total from .200 1.650
investment
operations

Less
Distributions

From net (.550) (.330)
investment
income

From net - (.240)
realized gain

Total (.550) (.570)
distributions

Net asset $ 10.730 $ 11.080
value, end of
period

TOTAL 1.80% 16.54%
RETURN B, C

RATIOS AND
SUPPLEMENT
AL DATA

Net assets, $ 22,426 $ 10,726
end of period
(000 omitted)

Ratio of .96% D 1.00% A
expenses to , D
average net
assets

Ratio of net 6.10% 5.87% A
investment
income to
average net
assets

Portfolio 115% 220% A
turnover rate

5. ANNUALIZED
6. 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).
7. TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE
NOT ANNUALIZED AND DO NOT REFLECT CHARGES
ATTRIBUTABLE TO YOUR INSURANCE COMPANY'S SEPARATE
ACCOUNT. INCLUSION OF THESE CHARGES WOULD REDUCE
THE TOTAL RETURNS SHOWN.
8. 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).

VARIABLE INSURANCE PRODUCTS FUND III: HIGH YIELD FUND
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). If Fidelity had not
reimbursed certain fund expenses, the life of fund total return would have
been lower.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1996 PAST 1 LIFE OF
YEAR FUND

High Yield 13.61% 16.85%

Merrill Lynch High Yield Master Index 11.06% 15.43%

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.
You can compare the fund's returns to 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.
Figures for more than one year assume a steady compounded rate of return
and are not the fund's year-by-year results, which fluctuated over the
periods shown. The life of fund figures are from commencement of operations
January 3, 1995.
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.

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)
$10,000 OVER LIFE OF FUND
IMAHDR PRASUN SHR__CHT 19961231 19970110 144725 S00000000000001
FA Annuity High Yield ML High Yield Master
00615 ML002
1995/01/03 10000.00 10000.00
1995/01/31 9960.00 10141.30
1995/02/28 10350.00 10457.72
1995/03/31 10500.00 10603.26
1995/04/30 10920.00 10851.52
1995/05/31 11160.00 11190.55
1995/06/30 11120.00 11276.02
1995/07/31 11400.00 11404.93
1995/08/31 11410.00 11474.15
1995/09/30 11580.00 11605.42
1995/10/31 11770.00 11687.69
1995/11/30 11800.00 11801.78
1995/12/31 12012.24 11991.22
1996/01/31 12302.69 12180.60
1996/02/29 12427.24 12198.94
1996/03/31 12375.33 12165.81
1996/04/30 12468.77 12171.32
1996/05/31 12645.26 12259.10
1996/06/30 12603.73 12332.74
1996/07/31 12593.35 12416.47
1996/08/31 12790.61 12544.69
1996/09/30 13195.51 12813.84
1996/10/31 13237.04 12954.27
1996/11/30 13465.44 13216.17
1996/12/31 13646.65 13317.87
IMATRL PRASUN SHR__CHT 19961231 19970110 144727 R00000000000027

Let's say hypothetically that $10,000 was invested in High Yield Fund 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 $13,647 - a 36.47%
increase on the initial investment. With reinvested dividends and capital
gains, if any, the same $10,000 investment in the Merrill Lynch High Yield
Master Index would have grown to $13,318 over the same period - a 33.18%
increase.
INVESTMENT SUMMARY
TOP FIVE HOLDINGS AS OF DECEMBER 31, 1996
(BY ISSUER, EXCLUDING CASH EQUIVALENTS) % OF FUND'S
INVESTMENTS

Grupo Televisa SA de CV 4.3

Unisys Corp. 3.0

Nextlink Communications 2.9

Airplanes Pass Through Trust 2.7

Time Warner, Inc. 2.3

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

Media & Leisure 21.0

Utilities 9.5

Retail & Wholesale 7.7

Technology 7.7

Nondurables 7.6

QUALITY DIVERSIFICATION AS OF DECEMBER 31, 1996
(MOODY'S RATINGS) % OF FUND'S
INVESTMENTS

Aaa, Aa, A 0.0

Baa 0.0

Ba 12.8

B 48.7

Caa, Ca, C 9.3

Nonrated 5.3

TABLE EXCLUDES CASH EQUIVALENTS.
WHERE MOODY'S RATINGS ARE NOT AVAILABLE, WE HAVE USED S&P RATINGS. UNRATED
DEBT SECURITIES THAT ARE EQUIVALENT TO BA AND BELOW AT DECEMBER 31, 1996
ACCOUNT FOR 5.3% OF THE FUND'S INVESTMENTS.
VARIABLE INSURANCE PRODUCTS FUND III: HIGH YIELD FUND
FUND TALK: THE MANAGER'S OVERVIEW

An interview with
Margaret Eagle,
Portfolio Manager of
High Yield Fund
Q. HOW DID THE FUND PERFORM, MARGARET?
A. The high-yield market has performed quite well over the past year and
the fund's performance reflects that, beating the Merrill Lynch High Yield
Master Index, which returned 11.06% for the year ending December 31, 1996.
Q. WHAT FACTORS INFLUENCED THE FUND'S PERFORMANCE?
A. Many of the fund's larger holdings performed well. The high-yield bonds
of Revlon, best known for its cosmetic line, rose as the company increased
revenues and improved cash flow. Satellite broadcaster Echostar
Communications' bonds appreciated not only because it launched its second
satellite, but also because of its quickly growing subscriber base, which
grew at a better-than-expected pace. Another satellite company, PanAmSat,
was boosted by rising revenues and improved cash flow. Its bonds rose
further when the company was purchased by GM Hughes Electronics Corp. Also,
several smaller holdings - such as Foamex - also posted strong returns
during the year. The company, a maker of foam for bedding, furniture, car
seats and other applications, saw its bonds rise as it cut costs, sold
assets to pay down debt and improved its operations overall.
Q. WERE THERE PARTICULAR INDUSTRIES THAT DID WELL DURING THE YEAR?
A. Yes, radio and oil and gas companies were among the market's best
performers. Recent legislation has allowed radio companies to own more
stations in a given market. That change set off a wave of mergers and
acquisitions among radio companies. Among the fund's best performing
holdings in this industry were SFX Broadcasting and Chancellor Radio
Broadcasting. I have found attractive opportunities in U.K. cable
companies, such as Diamond Cable, in part because of the trend toward
consolidation among cable holdings in that region. Thanks mainly to rising
oil and gas prices caused by rising demand and tight supply, energy
holdings such as Flores & Rucks, Chesapeake Energy and United Meridian
performed well.
Q. THE FUND HAS A NUMBER OF HOLDINGS IN VARIOUS TELECOMMUNICATIONS AREAS.
CAN YOU TELL US WHICH COMPANIES WITHIN THAT INDUSTRY WERE PARTICULARLY
ATTRACTIVE?
A. Sure. I added to the fund's holdings in alternative local telephone
companies, such as Nextlink, which are in the process of establishing local
telephone networks to serve business. In my view, the business prospects
for many of these companies appear to be solid because deregulation of the
telephone industry is expected to allow long-distance carriers to enter the
local telephone market. When they do, they're likely to do it with the help
of these alternative local telephone companies.
Q. WERE THERE ANY DISAPPOINTMENTS?
A. Yes, the fund's investments in wireless cable bonds such as American
Telecasting, People's Choice and CS Wireless Systems were disappointing.
The main reason for their lagging the overall high-yield market was that
investors appeared to have expected consolidation to occur much more
quickly than it has played out.
Q. WHAT'S YOUR OUTLOOK?
A. Throughout the past 12 months, the number of high-yield companies that
defaulted has dropped to well below historical levels. I wouldn't be
surprised to see it move back up to more historical levels in the year
ahead. But I'm not overly concerned because I don't see defaults rising
much higher than historical levels, which is about 3% annually. A slow
growth, low inflationary environment - such as we've seen during the past
year - is generally a good backdrop for the high-yield market. If current
conditions hold and 1997 brings more of the same, high-yield bonds could
continue to perform well.
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 a high level of income and
the potential for capital gains by investing
primarily in high-yielding bonds
START DATE: January 3, 1995
SIZE: as of December 31, 1996, more than
$91 million
MANAGER: Margaret Eagle, since January
1995; joined Fidelity in 1980
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND III: HIGH YIELD FUND
INVESTMENTS DECEMBER 31, 1996

Showing Percentage of Total Value of Investment in Securities

CORPORATE BONDS - 75.6%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
CONVERTIBLE BONDS - 0.5%
ENERGY - 0.5%
OIL & GAS - 0.5%
Kelley Oil & Gas Partners Ltd.:
7 7/8%, 12/15/99 B3 $ 250,000 $ 237,499
sub. deb. 8 1/2%, 4/1/00 B3 232,000 220,400
457,899
UTILITIES - 0.0%
TELEPHONE SERVICES - 0.0%
GST Telecommunications, Inc.
0%, 12/15/05 (c)(d) - 20,000 15,400
TOTAL CONVERTIBLE BONDS 473,299
NONCONVERTIBLE BONDS - 75.1%
AEROSPACE & DEFENSE - 1.6%
AEROSPACE & DEFENSE - 1.5%
Alliant Techsystems, Inc.
11 3/4%, 3/1/03 B2 40,000 44,400
RHI Holdings, Inc.
11 7/8%, 3/1/99 B2 1,000,000 1,000,000
Rohr, Inc. 11 5/8%, 5/15/03 Ba3 70,000 78,400
Wyman-Gordon Co.
10 3/4%, 3/15/03 Ba3 250,000 268,125
1,390,925
SHIP BUILDING & REPAIR - 0.1%
Newport News Shipbuilding, Inc.
9 1/4%, 12/1/06 (c) B1 80,000 82,600
TOTAL AEROSPACE & DEFENSE 1,473,525
BASIC INDUSTRIES - 6.6%
CHEMICALS & PLASTICS - 2.7%
Astor Corp. 10 1/2%,
10/15/16 (c) B3 580,000 594,500
Foamex-JPS Automotive
LP/Foamex JPS Capital Corp.
0%, 7/1/04 (d) Caa 570,000 473,100
Foamex LP/Foamex Capital
Corp. 11 1/4%, 10/1/02 B1 500,000 532,500
Freedom Chemical Co.
10 5/8%, 10/15/06 (c) B3 320,000 336,000
Plastic Specialties &
Technologies, Inc.
11 1/4%, 12/1/03 B3 120,000 126,000
Texas Petrochemicals Corp.
11 1/8%, 7/1/06 B3 350,000 371,000
2,433,100
METALS & MINING - 0.8%
Kaiser Aluminum & Chemical
Corp. 12 3/4%, 2/1/03 B2 680,000 725,900
PACKAGING & CONTAINERS - 0.6%
Gaylord Container Corp.
12 3/4%, 5/15/05 (d) Caa 450,000 493,875
PAPER & FOREST PRODUCTS - 2.5%
Container Corp. of America gtd.:
10 3/4%, 5/1/02 B1 50,000 54,000
9 3/4%, 4/1/03 B1 490,000 514,500
11 1/4%, 5/1/04 B1 150,000 162,000

PRINCIPAL VALUE
AMOUNT (NOTE 1)
Florida Coast Paper Co. LLC/
Florida Coast Paper Finance
Corp., Series B,
12 3/4% 6/1/03 B3 $ 190,000 $ 206,150
Repap Wisconsin, Inc.
9 7/8%, 5/1/06 Caa 100,000 101,500
Repap New Brunswick,
Inc. yankee:
8 7/8%, 7/15/00 (f) B1 560,000 557,200
9 7/8%, 7/15/00 B1 100,000 103,750
10 5/8%, 4/15/05 B3 360,000 379,800
Stone Container Corp.
11 7/8%, 8/1/16 B1 110,000 116,600
2,195,500
TOTAL BASIC INDUSTRIES 5,848,375
DURABLES - 1.4%
AUTOS, TIRES, & ACCESSORIES - 0.9%
Aetna Industries, Inc.
11 7/8%, 10/1/06 B3 300,000 322,500
Blue Bird Body Co.
10 3/4%, 11/15/06 (c) B2 80,000 83,600
Delco Remy International, Inc.
10 5/8%, 8/1/06 (c) B2 280,000 296,800
Safelite Glass Corp.
9 7/8%, 12/15/06 (c) B3 30,000 30,900
733,800
HOME FURNISHINGS - 0.3%
Interlake Corp.
12 1/8%, 3/1/02 B3 275,000 284,625
TEXTILES & APPAREL - 0.2%
Dan River, Inc.
10 1/8%, 12/15/03 B3 80,000 80,800
Pillowtex Corp.
10%, 11/15/06 (c) B2 110,000 114,675
195,475
TOTAL DURABLES 1,213,900
ENERGY - 4.2%
ENERGY SERVICES - 1.3%
Empire Gas Corp.
7%, 7/15/04 (e) Caa 1,390,000 1,191,925
OIL & GAS - 2.9%
Chesapeake Energy Corp.
10 1/2%, 6/1/02 Ba3 690,000 748,650
Flores & Rucks, Inc.:
13 1/2%, 12/1/04 B1 390,000 466,050
9 3/4%, 10/1/06 B3 100,000 106,000
Forcenergy, Inc.
9 1/2%, 11/1/06 B2 160,000 166,800
KCS Energy, Inc.
11%, 1/15/03 B1 220,000 238,700
Mesa Operating Co.
10 5/8%, 7/1/06 B2 580,000 630,750
United Meridian Corp.
10 3/8%, 10/15/05 B2 190,000 207,575
2,564,525
TOTAL ENERGY 3,756,450
CORPORATE BONDS - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
FINANCE - 5.7%
CLOSED END INVESTMENT COMPANY - 2.7%
Airplanes Pass Through Trust
Class D, 10 7/8%, 3/15/19 Ba2 $ 2,190,000 $ 2,436,375
CREDIT & OTHER FINANCE - 0.3%
Homeside, Inc.
11 1/4%, 5/15/03 Ba1 240,000 267,600
SAVINGS & LOANS - 2.7%
First Nationwide Holdings, Inc.
12 1/4%, 5/15/01 Ba2 50,000 56,750
First Nationwide Parent Holdings Ltd.
12 1/2%, 4/15/03 B2 700,000 775,250
First Nationwide Escrow Corp.
10 5/8%, 10/1/03 (c) Ba3 1,480,000 1,598,400
2,430,400
TOTAL FINANCE 5,134,375
HEALTH - 1.1%
MEDICAL EQUIPMENT & SUPPLIES - 1.1%
Dade International, Inc.
11 1/8%, 5/1/06 B3 700,000 757,750
IMED Corp. 9 3/4%
12/1/06 (c) B3 230,000 234,025
991,775
HOLDING COMPANIES - 0.5%
BPC Holdings Corp.
12 1/2%, 6/15/06 Caa 350,000 371,000
Gray Communications System,
Inc. 10 5/8%, 10/1/06 B3 80,000 84,800
455,800
INDUSTRIAL MACHINERY & EQUIPMENT - 4.8%
ELECTRICAL EQUIPMENT - 2.6%
Motors & Gears, Inc.
10 3/4%, 11/15/06 (c) B3 250,000 257,500
Omnipoint Corp.:
11 5/8%, 8/15/06 (c) B2 1,200,000 1,245,000
11 5/8%, 8/15/06 B2 750,000 778,125
2,280,625
INDUSTRIAL MACHINERY & EQUIPMENT - 1.4%
Calmar, Inc.
1 1/2%, 8/15/05 B3 750,000 776,250
International Knife & Saw, Inc.
11 3/8%, 11/15/06 (c) B3 150,000 154,875
MVE, Inc. 12 1/2%, 2/15/02 B3 140,000 148,400
Rayovac Corp.
10 1/4%, 11/1/06 (c) B3 150,000 153,750
1,233,275
POLLUTION CONTROL - 0.8%
Allied Waste of North America,
Inc. 10 1/4%, 12/1/06 (c) B3 440,000 462,000
Envirosource, Inc.
9 3/4%, 6/15/03 B3 300,000 279,750
741,750
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 4,255,650

PRINCIPAL VALUE
AMOUNT (NOTE 1)
MEDIA & LEISURE - 15.8%
BROADCASTING - 10.1%
American Telecasting, Inc.
0%, 8/15/05 (d) Caa $ 70,000 $ 25,900
Bell Cablemedia PLC (d):
0%, 7/15/04 B2 280,000 243,600
yankee 0%, 9/15/05 B2 200,000 162,000
Chancellor Radio Broadcasting
Co. 12 1/2%, 10/1/04 B3 100,000 111,500
CS Wireless Systems, Inc.
0%, 3/1/06 (d) Caa 680,000 244,800
Diamond Cable Communications
PLC yankee (d):
0%, 9/30/04 B3 950,000 779,000
0%, 12/15/05 B3 225,000 160,031
Grupo Televisa SA de
CV yankee:
11 3/8%, 5/15/03 Ba3 430,000 459,025
11 7/8%, 5/15/06 Ba3 1,310,000 1,447,550
0%, 5/15/08 (d) Ba3 3,000,000 1,980,000
NWCG Holdings Corp. 0%,
6/15/99 Caa 420,000 348,600
Peoples Choice TV Corp. unit
0%, 6/1/04 (d) Caa 1,440,000 604,800
Spanish Broadcasting System, Inc.
7 1/2%, 6/15/02 B3 700,000 736,750
SFX Broadcasting, Inc.
10 3/4%, 5/15/06 B3 1,470,000 1,543,500
Videotron Holdings
PLC yankee (d):
0%, 7/1/04 B3 90,000 77,850
0%, 8/15/05 B3 130,000 104,650
9,029,556
ENTERTAINMENT - 0.6%
AMF Group, Inc., Series B,
10 7/8%, 3/15/06 B2 540,000 569,700
LEISURE DURABLES & TOYS - 1.5%
ICON Health and Fitness, Inc.
13%, 7/15/02 B3 1,170,000 1,316,250
LODGING & GAMING - 1.7%
Grand Casinos, Inc.
10 1/8%, 12/1/03 Ba3 770,000 773,850
Horseshoe Gaming LLC
12 3/4%, 9/30/00 B1 620,000 669,600
Wyndham Hotel Corp.
10 1/2%, 5/15/06 B2 110,000 116,600
1,560,050
RESTAURANTS - 1.9%
SC International Services, Inc.
13%, 10/1/05 B3 1,490,000 1,683,700
TOTAL MEDIA & LEISURE 14,159,256
NONDURABLES - 7.5%
FOODS - 5.0%
Fresh Del Monte Produce NV
10%, 5/1/03 Caa 1,150,000 1,104,000
Gorges/Quik-to-Fix Foods, Inc.
11 1/2%, 12/1/06 (c) B3 1,300,000 1,347,125
CORPORATE BONDS - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
NONDURABLES - CONTINUED
FOODS - CONTINUED
International Home Foods, Inc.
10 3/8%, 11/1/06 (c) B2 $ 770,000 $ 802,725
Specialty Foods Corp.
10 1/4%, 8/15/01 B3 1,310,000 1,224,850
4,478,700
HOUSEHOLD PRODUCTS - 2.5%
Revlon Worldwide Corp.
secured 0%, 3/15/98 B3 1,390,000 1,204,088
Revlon Consumer Products
Corp. 10 1/2%, 2/15/03 B3 1,000,000 1,048,750
2,252,838
TOTAL NONDURABLES 6,731,538
RETAIL & WHOLESALE - 7.6%
APPAREL STORES - 0.2%
Mothers Work, Inc.
12 5/8%, 8/1/05 B3 130,000 135,200
GENERAL MERCHANDISE STORES - 1.1%
K mart Corp.:
8.71%, 4/7/97 Ba2 50,000 50,188
8.70%, 8/1/97 Ba2 250,000 250,625
9.55%, 6/30/98 Ba2 250,000 252,813
7.24%, 7/6/99 Ba3 500,000 480,000
1,033,626
GROCERY STORES - 5.8%
Dominick's Finer Foods, Inc.,
Series B, 10 7/8%, 5/1/05 B2 200,000 221,500
Pathmark Stores, Inc.:
11 5/8%, 6/15/02 Caa 1,290,000 1,319,025
12 5/8%, 6/15/02 Caa 60,000 61,500
Ralph's Grocery Co.:
10.45%, 6/15/04 B1 170,000 178,925
11%, 6/15/05 B3 1,100,000 1,144,000
Smith's Food & Drug Centers,
Inc. 11 1/4%, 5/15/07 B3 1,660,000 1,826,000
Star Markets, Inc.
13%, 11/1/04 B3 370,000 417,175
5,168,125
RETAIL & WHOLESALE, MISCELLANEOUS - 0.5%
Cole National Group, Inc.
9 7/8%, 12/31/06 (c) B2 300,000 309,000
Guitar Center Management Co.,
Inc. 11%, 7/1/06 B2 170,000 180,200
489,200
TOTAL RETAIL & WHOLESALE 6,826,151
SERVICES - 2.5%
ADVERTISING - 0.3%
Lamar Advertising Co.
9 5/8%, 12/1/06 B1 300,000 309,000
LEASING & RENTAL - 0.6%
GPA Holland 8.94%, 2/16/99 - 500,000 510,625

PRINCIPAL VALUE
AMOUNT (NOTE 1)
PRINTING - 1.2%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa $ 1,090,000 $ 1,051,850
SERVICES - 0.4%
Iron Mountain, Inc.
10 1/8%, 10/1/06 B3 60,000 63,300
Outsourcing Solutions, Inc.
11%, 11/1/06 (c) B3 100,000 104,750
Pierce Leahy Corp.
11 1/8%, 7/15/06 B3 160,000 175,200
343,250
TOTAL SERVICES 2,214,725
TECHNOLOGY - 6.8%
COMMUNICATIONS EQUIPMENT - 2.6%
Echostar Satellite Broadcasting
Corp. 0%, 3/15/04 (d) Caa 1,270,000 962,025
Echostar Communications Corp.
0%, 6/1/04 (d) B2 1,680,000 1,381,800

2,343,825
COMPUTER SERVICES & SOFTWARE - 0.3%
ICG Holdings, Inc.
0%, 9/15/05 (d) - 370,000 260,850
COMPUTERS & OFFICE EQUIPMENT - 3.8%
Dictaphone Corp.
11 3/4%, 8/1/05 B3 90,000 80,550
Exide Electronics Group, Inc.
11 1/2%, 5/15/06 B3 570,000 607,050
Unisys Corp.:
12%, 4/15/03 B1 1,920,000 2,054,400
11 3/4%, 10/15/04 B1 590,000 629,088
3,371,088
ELECTRONICS - 0.1%
Advanced Micro Devices, Inc.
11%, 8/1/03 Ba1 120,000 129,900
TOTAL TECHNOLOGY 6,105,663
TRANSPORTATION - 0.0%
AIR TRANSPORTATION - 0.0%
US Air, Inc. 9 5/8%, 2/1/01 B3 40,000 39,800
UTILITIES - 9.0%
CELLULAR - 4.8%
Comunicaciones Celulares SA
yankee 0%, 11/15/03 (d) B3 70,000 46,200
Fonorola, Inc.
12 1/2%, 8/15/02 B2 1,020,000 1,116,900
Microcell Telecommunications,
Inc. 0%, 6/1/06 (d) B3 1,710,000 953,325
Millicom International Cellular
SA 0%, 6/1/06 (d) B3 790,000 489,800
Mobile Telecommunications
Technologies Corp.
13 1/2%, 12/15/02 B3 480,000 480,000
CORPORATE BONDS - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
UTILITIES - CONTINUED
CELLULAR - CONTINUED
Pagemart Nationwide, Inc.
0%, 2/1/05 exchangeable (d) - $ 270,000 $ 185,625
RSL Communications Ltd./RSL
Communications PLC unit
12 1/4%, 11/15/06 (c) - 600,000 606,000
Sprint Spectrum LP/Sprint
Spectrum Finance Corp.
11%, 8/15/06 B2 340,000 365,500
4,243,350
TELEPHONE SERVICES - 4.2%
Brooks Fiber Properties, Inc.
0%, 11/1/06 (c)(d) - 430,000 274,125
Call-Net Enterprises, Inc.
yankee 0%, 12/1/04 (d) B2 360,000 295,200
GST USA, Inc.
0%, 12/15/05 (d) - 160,000 98,000
MFS Communications, Inc.
0%, 1/15/06 (d) B1 171,000 124,830
Nextlink Communications, Inc.
12 1/2%, 4/15/06 - 2,420,000 2,601,500
Pagemart, Inc.
0%, 11/1/03 (d) - 80,000 63,200
Teleport Communications
Group, Inc.
9 7/8%, 7/1/06 B1 310,000 328,600
3,785,455
TOTAL UTILITIES 8,028,805
TOTAL NONCONVERTIBLE BONDS 67,235,788
TOTAL CORPORATE BONDS
(Cost $64,940,535) 67,709,087
COMMERCIAL MORTGAGE SECURITIES - 0.5%
Lehman Structured Securities
Corp. Series 1996-1 Class E-2,
7.995%, 6/25/26 BB 188,973 175,804
Lennar Central Partners LP
Series 1995-1 Class F,
11.70%, 5/15/05 (c) - 100,000 100,719
Resolution Trust Corp.
sequential pay Series 1994-C1
Class F, 8%, 6/25/26 B 238,228 214,703
TOTAL COMMERCIAL MORTGAGE SECURITIES
(Cost $459,080) 491,226
COMMON STOCKS - 2.0%
SHARES VALUE (NOTE 1)
BASIC INDUSTRIES - 0.0%
CHEMICALS & PLASTICS - 0.0%
Foamex-JPS Automotive LP/Foamex JPS
Capital Corp. (warrants) (a) 530 $ 12,720
Sterling Chemical Holdings (warrants) (a) 340 11,900
24,620
ENERGY - 1.0%
OIL & GAS - 1.0%
Flores & Rucks, Inc. (a) 13,000 692,250
Mesa, Inc. (a) 35,400 185,850
878,100
HEALTH - 0.1%
MEDICAL FACILITIES MANAGEMENT - 0.1%
Tenet Healthcare Corp. (a) 5,000 109,375
HOLDING COMPANIES - 0.0%
SDW Holdings Corp. (warrants) (a) 3,889 20,028
MEDIA & LEISURE - 0.3%
BROADCASTING - 0.3%
CS Wireless Systems, Inc. (a) 187 -
PanAmSat Corp. (a) 8,200 229,600
Telemundo Group, Inc. Class A (a) 600 17,400
247,000
NONDURABLES - 0.1%
HOUSEHOLD PRODUCTS - 0.1%
Revlon, Inc. Class A (a) 2,200 65,725
SERVICES - 0.2%
Protection One, Inc. (a) 18,300 180,713
TECHNOLOGY - 0.2%
COMPUTERS & OFFICE EQUIPMENT - 0.2%
Bell & Howell Co. (a) 7,400 175,750
Exide Electronics Group, Inc.
(warrants) (a)(c) 390 11,700
187,450
TRANSPORTATION - 0.0%
AIR TRANSPORTATION - 0.0%
Trans World Airlines, Inc. (a) 128 872
UTILITIES - 0.1%
CELLULAR - 0.1%
Comunicaciones Cellulares SA
(warrants) (a)(c) 70 4,900
Intercel, Inc. (warrants) (a) 2,944 20,608
Microcell Telecommunications, Inc. (a):
(warrants) 6,840 85,500
(conditional warrants) 6,840 4,275
115,283
TOTAL COMMON STOCKS
(Cost $1,375,325) 1,829,166
PREFERRED STOCKS - 8.1%
SHARES VALUE (NOTE 1)
CONVERTIBLE PREFERRED STOCKS - 0.5%
ENERGY - 0.4%
OIL & GAS - 0.4%
Mesa, Inc. Series A, pay-in-kind 8% 54,937 $ 350,223
RETAIL & WHOLESALE - 0.1%
GROCERY STORES - 0.1%
Supermarkets General Holdings Corp.
exchangeable pay-in-kind $3.52 (a) 4,160 112,320
TOTAL CONVERTIBLE PREFERRED STOCKS 462,543
NONCONVERTIBLE PREFERRED STOCKS - 7.6%
FINANCE - 1.6%
SAVINGS & LOANS - 1.6%
Chevy Chase Capital Corp.,
Series A, $5.1875 20,000 1,035,000
First Nationwide Bank 11 1/2% 1,778 203,359
Greater New York Savings Bank,
Series B, 12% 5,660 183,950
1,422,309
MEDIA & LEISURE - 4.9%
BROADCASTING - 4.2%
Cablevision Systems Corp., Series H,
$11.75 exchangeable pay-in-kind 5,548 518,738
PanAmSat Corp. 12 3/4% pay-in-kind 892 1,092,700
Time Warner, Inc., Series M,
10 1/4% pay-in-kind 1,922 2,085,370
3,696,808
PUBLISHING - 0.7%
K-III Communications Corp.:
Series B, $11.625 pay-in-kind (a) 1,165 117,956
Series D, $200 exchangeable 5,400 526,500
644,456
TOTAL MEDIA & LEISURE 4,341,264
NONDURABLES - 0.0%
HOUSEHOLD PRODUCTS - 0.0%
Revlon Group, Inc., Series B,
exchangeable 14 7/8% 310 31,000
TECHNOLOGY - 0.7%
COMPUTER SERVICES & SOFTWARE - 0.7%
ICG Holdings, Inc.
14 1/4% pay-in-kind 517 571,285
UTILITIES - 0.4%
ELECTRIC UTILITY - 0.4%
El Paso Electric Co., Series A,
11.40% pay-in-kind 3,469 385,058
TOTAL NONCONVERTIBLE PREFERRED STOCKS 6,750,916
TOTAL PREFERRED STOCKS
(Cost $6,716,970) 7,213,459
CASH EQUIVALENTS - 13.8%
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 $ 12,346,628 $ 12,342,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $85,833,910) $ 89,584,938
LEGEND
1. Non-income producing
2. Standard & Poor's corporation 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 $9,221,069 or 10.1% of net
assets.
4. Debt obligation initially issued in zero coupon form which converts to
coupon form at a specified rate and date.
5. Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date.
6. 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 $92,130,187 and $54,796,158, 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 amounted to $48 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 0.0% AAA, AA, A 0.0%
Baa 0.0% BBB 0.0%
Ba 12.6% BB 9.6%
B 48.5% B 54.9%
Caa 9.3% CCC 5.6%
Ca, C 0.0% CC, C 0.0%
D 0.0%
The percentage not rated by both S&P and Moody's amounted to 5.3%. FMR has
determined that unrated debt securities that are lower quality account for
5.3% 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 $85,836,910. Net unrealized appreciation aggregated
$3,748,028, of which $4,581,166 related to appreciated investment
securities and $833,138 related to depreciated investment securities.
At December 31, 1996, the fund had a capital loss carryforward of
approximately $334,000 all of which will expire on December 31, 2004.
VARIABLE INSURANCE PRODUCTS FUND III: HIGH YIELD FUND
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996

ASSETS

Investment in $ 89,584,938
securities, at
value
(including
repurchase
agreements
of
$12,342,000)

(cost
$85,833,910)
- - See
accompanyin
g schedule

Cash 157,284

Receivable for 32,341
investments
sold

Dividends 80,853
receivable

Interest 1,299,258
receivable

TOTAL ASSETS 91,154,674

LIABILITIES

Payable for $ 70,464
investments
purchased

Accrued 43,774
management
fee

Other payables 33,912
and
accrued
expenses

TOTAL 148,150
LIABILITIES

NET ASSETS $ 91,006,524

Net Assets
consist of:

Paid in capital $ 87,768,094

Accumulated (512,598
undistributed )
net realized
gain (loss) on
investments
and foreign
currency
transactions

Net unrealized 3,751,028
appreciation
(depreciation
) on
investments

NET ASSETS, for $ 91,006,524
7,450,173
shares
outstanding

NET ASSET $12.22
VALUE,
offering price

and
redemption
price per
share
($91,006,524
(divided by)
7,450,173
shares)

STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996

INVESTMENT $ 476,562
INCOME
Dividends

Interest 6,287,261

TOTAL 6,763,823
INCOME

EXPENSES

Management $ 398,059
fee

Transfer agent 44,346
fees

Accounting 60,420
fees and
expenses

Non-interested 250
trustees'
compensatio
n

Custodian fees 3,642
and
expenses

Audit 20,757

Legal 1,086

Miscellaneous 193

Total 528,753
expenses
before
reductions

Expense (296 528,457
reductions )

NET 6,235,366
INVESTMENT
INCOME

REALIZED AND (464,842
UNREALIZED )
GAIN (LOSS)
Net realized
gain (loss) on

investment
securities

Change in net 3,053,642
unrealized
appreciation
(depreciation
) on
investment
securities

NET GAIN (LOSS) 2,588,800

NET INCREASE $ 8,824,166
(DECREASE)
IN NET ASSETS
RESULTING
FROM
OPERATIONS

OTHER $ 296
INFORMATION
Expense
reductions
Directed
brokerage
arrangement

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 $ 6,235,366 $ 1,303,649
Net
investment
income

Net realized (464,842) 124,375
gain (loss)

Change in 3,053,642 697,386
net
unrealized
appreciation
(depreciation
)

NET INCREASE 8,824,166 2,125,410
(DECREASE)
IN NET
ASSETS
RESULTING
FROM
OPERATIONS

Distributions to (6,331,279) (1,337,415)
shareholders
From net
investment
income

From net (39,619) (65,240)
realized gain

TOTAL (6,370,898) (1,402,655)
DISTRIBUTION
S

Share 45,611,505 40,127,909
transactions
Net proceeds
from sales of
shares

Reinvestmen 6,370,898 1,402,655
t of
distributions

Cost of (4,652,655) (1,029,811)
shares
redeemed

NET INCREASE 47,329,748 40,500,753
(DECREASE)
IN NET
ASSETS
RESULTING
FROM SHARE
TRANSACTIO
NS

TOTAL 49,783,016 41,223,508
INCREASE
(DECREASE)
IN NET ASSETS

NET ASSETS

Beginning of 41,223,508 -
period

End of period $ 91,006,524 $ 41,223,508

OTHER
INFORMATION
Shares

Sold 3,746,827 3,529,704

Issued in 523,996 121,758
reinvestment
of
distributions

Redeemed (381,476) (90,636)

Net increase 3,889,347 3,560,826
(decrease)

<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> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA YEAR ENDED JANUARY 3, 1995
DECEMBER 31, (COMMENCEMENT
1996 OF OPERATIONS) TO
DECEMBER 31, 1995

</TABLE>

Net asset $ 11.580 $ 10.000
value,
beginning of
period

Income from .920 .410
Investment
Operations
Net
investment
income

Net realized .650 1.600
and
unrealized
gain (loss)

Total from 1.570 2.010
investment
operations

Less
Distributions

From net (.920) (.410)
investment
income

From net (.010) (.020)
realized gain

Total (.930) (.430)
distributions

Net asset $ 12.220 $ 11.580
value, end of
period

TOTAL RETURN B, 13.61% 20.12%
C

Ratios and
Supplementa
l Data

Net assets, $ 91,007 $ 41,224
end of period
(000 omitted)

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

Ratio of net 9.31% 9.23% A
investment
income to
average net
assets

Portfolio 92% 98% A
turnover rate

1. ANNUALIZED
2. THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN
EXPENSES NOT BEEN REDUCED DURING THE PERIODS SHOWN.
3. TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT
ANNUALIZED AND DO NOT REFLECT CHARGES ATTRIBUTABLE TO
YOUR INSURANCE COMPANY'S SEPARATE ACCOUNT. INCLUSION
OF THESE CHARGES WOULD REDUCE THE TOTAL RETURNS SHOWN.
4. 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.

VARIABLE INSURANCE PRODUCTS FUND III: BALANCED 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). If Fidelity had not
reimbursed certain fund expenses, the life of fund total return would have
been lower.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1996 PAST 1 LIFE OF
YEAR FUND

Balanced 9.98% 11.95%

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

Lehman Brothers Aggregate Bond Index 3.63% 10.82%

AVERAGE ANNUAL TOTAL RETURNS take the fund's cumulative return and show
what would have happened if the fund had achieved that return by performing
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 -
and the performance of the Lehman Brothers Aggregate Bond Index, which is 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.
Figures for more than one year assume a steady compounded rate of return
and are not the fund's year-by-year results, which fluctuated over the
periods shown. The life of fund figures are from commencement of operations
January 3, 1995.
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.

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)
$10,000 OVER LIFE OF FUND
IMAHDR PRASUN SHR__CHT 19961231 19970116 100903 S00000000000001
VIP III: Balanced SP Standard & Poor 500 LB
Aggregate Bond
00616 SP001 LB001
1995/01/03 10000.00 10000.00
10000.00
1995/01/31 9990.00 10258.23
10197.90
1995/02/28 10190.00 10658.00
10440.37
1995/03/31 10260.00 10972.51
10504.42
1995/04/30 10390.00 11295.66
10651.15
1995/05/31 10610.00 11747.14
11063.32
1995/06/30 10740.00 12020.03
11144.43
1995/07/31 10880.00 12418.61
11119.54
1995/08/31 10920.00 12449.78
11253.74
1995/09/30 11020.00 12975.16
11363.22
1995/10/31 10890.00 12928.84
11511.00
1995/11/30 11210.00 13496.42
11683.49
1995/12/31 11391.59 13756.36
11847.46
1996/01/31 11473.17 14224.63
11926.13
1996/02/29 11319.47 14356.49
11718.83
1996/03/31 11227.28 14494.74
11637.37
1996/04/30 11258.01 14708.39
11571.92
1996/05/31 11380.93 15087.72
11548.42
1996/06/30 11452.64 15145.21
11703.51
1996/07/31 11227.28 14476.09
11735.54
1996/08/31 11298.98 14781.39
11715.87
1996/09/30 11780.44 15613.29
11920.04
1996/10/31 12098.00 16043.91
12184.08
1996/11/30 12733.12 17256.66
12392.78
1996/12/31 12528.25 16914.81
12277.55
IMATRL PRASUN SHR__CHT 19961231 19970116 100905 R00000000000027

Let's say hypothetically that $10,000 was invested in Balanced 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 $12,528 - a 25.28%
increase on the initial investment. For comparison, look at how both the
S&P 500 and Lehman Brothers Aggregate Bond Index did over the same period.
With reinvested dividends and capital gains, if any, the same $10,000
investment in the S&P 500 would have grown to $16,915 - a 69.15% increase.
If you had put $10,000 in the bond index, it would have grown to $12,278 -
a 22.78% increase.
INVESTMENT SUMMARY
TOP FIVE STOCKS AS OF DECEMBER 31, 1996
% OF FUND'S
INVESTMENTS

Citicorp 2.2

General Electric Co. 2.2

Chase Manhattan Corp. 2.1

Philip Morris Companies, Inc. 2.0

Unilever NV ADR 1.9

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

Finance 22.5

Nondurables 8.1

Energy 7.4

Health 7.2

Industrial Machinery & Equipment 6.2

ASSET ALLOCATION AS OF DECEMBER 31, 1996*
Row: 1, Col: 1, Value: 2.8
Row: 1, Col: 2, Value: 33.6
Row: 1, Col: 3, Value: 63.6
Row: 1, Col: 1, Value: 45.0
Row: 1, Col: 2, Value: 39.0
Row: 1, Col: 3, Value: 28.0
Row: 2, Col: 1, Value: 31.0
Row: 2, Col: 2, Value: 40.0
Row: 2, Col: 3, Value: 67.0
Row: 3, Col: 1, Value: 90.0
Row: 3, Col: 2, Value: 60.0
Row: 3, Col: 3, Value: 46.0
Stocks 64.5%
Bonds 32.7%
Short-term investments 2.8%
FOREIGN INVESTMENTS 11.7%
*
% OF FUND'S
INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW

An interview with
Bettina Doulton,
Portfolio Manager of
Balanced Portfolio
Q. HOW DID THE FUND PERFORM, BETTINA?
A. Given the structure of the fund - namely its mix of equities and
fixed-income investments - the fund's performance typically will fall
between that of its two benchmark indices, the Standard & Poor's 500 Index
and the Lehman Brothers Aggregate Bond Index - a broad measure of the U.S.
taxable bond market. Since the fund's asset allocations are fixed, I try to
add value and positive relative returns within each of the asset classes.
Over the past 12 months, the fund performed better than the Lehman Brothers
Aggregate Bond Index, which returned 3.63% over that period, but
underperformed the S&P 500, which returned 22.96%.
Q. WHAT FACTORS AFFECTED THE FUND'S PERFORMANCE OVER THE PAST YEAR?
A. Holdings in the finance and energy sectors were positives for
performance over the period. Despite some volatility in the bond market,
the financials performed well as the entire sector was revalued. Investors
were attracted to many companies' fundamentals - or business prospects - as
well as their modest revenue growth, tight expense control, decent credit
quality and more aggressive capital management. Citicorp, Bank of Boston
and NationsBank were among the fund's successful investments in this
sector. In the energy sector, better-than-forecast commodity prices - a
result of a favorable supply/demand situation - created a positive
backdrop. British Petroleum and Schlumberger were the standout performers
in this industry. In addition, the recent revaluation of General Electric
has been exciting and profitable. Investors increasingly were drawn to the
company's strong, predictable growth prospects and superior capital
management skills. Disappointments during the period included
Pharmacia-Upjohn, Xerox and WalMart. In each case, the performance of these
companies failed to meet expectations.
Q. WHAT SORTS OF THEMES DID YOU PURSUE WITH THE STOCK PORTION OF THE
PORTFOLIO?
A. I've concentrated on looking across industries for companies with some
sort of competitive advantage, be it a dominant market position, a low-cost
infrastructure, new products, free cash flow or outstanding management.
Given that we appear to be in the later stages of the economic cycle and
the business environment is increasingly competitive, the companies with at
least one of these advantages should differentiate themselves and excel. I
also focused equity investments on larger-capitalization companies with
predictable earnings prospects, a strategy that worked well in hindsight.
Further, I continued to pursue restructuring stories. Regardless of where
we are in the economic cycle, it's often profitable to invest in companies
taking on self-help actions. Unilever is a new investment for the fund, and
it would fall in this category. Under the direction of a new CEO, this
company is focused on improving its relatively lackluster returns by
eliminating the drag of underperforming businesses and investing in those
operations that can provide growth. Also, a new compensation system has
better aligned management bonuses with shareholder returns. Chase Manhattan
is another addition to the fund's top holdings. Following its merger with
Chemical Bank, this company is well-positioned to leverage its strong
positions as a global capital allocator and reduce its cost base.
Q. WHAT HAS BEEN THE STRUCTURE OF THE BOND PORTION OF THE FUND?
A. The bond portfolio's duration - or interest rate sensitivity - has been
kept in line with the overall bond market as represented by the fund's
benchmark index. This strategy has worked well given the volatility of the
bond market over the past year. The bond portfolio was overweighted versus
the index in mortgage-backed securities and corporate bonds, helping its
performance. Corporates performed well relative to Treasuries because
supply was limited, company cash flows were strong and corporations were
working down debt. Mortgage-backed securities benefited from a relatively
stable interest rate environment that led to diminished refinancing
activity.
Q. WHAT'S YOUR OUTLOOK?
A. Given the maturity of the developed world's economic cycle and the
diminishing benefits of restructuring actions, fewer companies will sustain
strong internal profit growth. Market share gains, globalization, improved
productivity, capital redeployment and execution will characterize success.
Merger and acquisition activity is expected to accelerate as companies seek
to bolster market positions, grow revenue bases and exploit cost synergies.
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 income and growth of capital
by investing in a diversified portfolio of stocks
and bonds
START DATE: January 3, 1995
SIZE: as of December 31, 1996, more than
$103 million
MANAGER: Bettina Doulton, since March 1996;
joined Fidelity in 1986
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORFOLIO
INVESTMENTS DECEMBER 31, 1996

Showing Percentage of Total Value of Investment in Securities

COMMON STOCKS - 63.0%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 2.6%
AEROSPACE & DEFENSE - 1.5%
Boeing Co. 814 $ 86,542
Lockheed Martin Corp. 10,300 942,450
Rockwell International Corp. 5,100 310,463
Sundstrand Corp. 2,700 114,750
1,454,205
DEFENSE ELECTRONICS - 0.6%
Raytheon Co. 12,900 620,813
SHIP BUILDING & REPAIR - 0.5%
General Dynamics Corp. 7,100 500,550
Newport News Shipbuilding, Inc. (a) 780 11,700
512,250
TOTAL AEROSPACE & DEFENSE 2,587,268
BASIC INDUSTRIES - 5.0%
CHEMICALS & PLASTICS - 4.3%
Air Products & Chemicals, Inc. 10,400 718,900
du Pont (E.I.) de Nemours & Co. 5,200 490,750
Goodrich (B.F.) Co. 1,500 60,750
Monsanto Co. 35,000 1,360,625
Nalco Chemical Co. 3,000 108,375
Olin Corp. 2,600 97,825
Praxair, Inc. 15,900 733,388
Witco Corp. 24,700 753,350
4,323,963
METALS & MINING - 0.1%
Aluminum Co. of America 1,000 63,750
Martin Marietta Materials, Inc. 3,000 69,750
133,500
PAPER & FOREST PRODUCTS - 0.6%
Kimberly-Clark Corp. 6,100 581,025
TOTAL BASIC INDUSTRIES 5,038,488
CONGLOMERATES - 3.3%
AlliedSignal, Inc. 25,800 1,728,600
Textron, Inc. 500 47,125
Tyco International Ltd. 13,200 697,950
United Technologies Corp. 12,600 831,600
3,305,275
CONSTRUCTION & REAL ESTATE - 0.2%
BUILDING MATERIALS - 0.2%
Masco Corp. 5,500 198,000
DURABLES - 2.6%
AUTOS, TIRES, & ACCESSORIES - 0.5%
Eaton Corp. 3,000 209,252
General Motors Corp. 1,000 55,750
Johnson Controls, Inc. 3,100 256,913
Scania AB Class B 100 2,489
524,404
CONSUMER DURABLES - 1.7%
Minnesota Mining & Manufacturing Co. 19,800 1,640,925
CONSUMER ELECTRONICS - 0.4%
Newell Co. 13,500 425,250
TOTAL DURABLES 2,590,579

SHARES VALUE (NOTE 1)
ENERGY - 6.2%
ENERGY SERVICES - 1.0%
Baker Hughes, Inc. 2,400 $ 82,800
Halliburton Co. 4,000 241,000
Schlumberger Ltd. 6,400 639,200
963,000
OIL & GAS - 5.2%
Atlantic Richfield Co. 300 39,750
British Petroleum PLC:
ADR 8,381 1,184,864
Ord. 103,833 1,245,062
Mobil Corp. 5,300 647,925
Royal Dutch Petroleum Co.:
ADR 7,900 1,348,925
Ord. 500 87,629
Texaco, Inc. 4,000 392,500
Total SA:
Class B 400 32,554
sponsored ADR 1,800 72,450
Unocal Corp. 4,600 186,875
5,238,534
TOTAL ENERGY 6,201,534
FINANCE - 15.6%
BANKS - 10.4%
Bank of Boston Corp. 16,300 1,047,275
BankAmerica Corp. 18,700 1,865,325
Bankers Trust New York Corp. 8,400 724,500
Canadian Imperial Bank of Commerce 9,900 436,558
Chase Manhattan Corp. 23,800 2,124,150
Citicorp 21,500 2,214,500
First Bank System, Inc. 400 27,300
National City Corp. 6,300 282,713
NationsBank Corp. 17,600 1,720,400
10,442,721
CREDIT & OTHER FINANCE - 1.9%
American Express Co. 32,700 1,847,550
Associates First Capital Corp. 1,000 44,125
1,891,675
FEDERAL SPONSORED CREDIT - 2.2%
Federal Home Loan Mortgage
Corporation 10,800 1,189,350
Federal National Mortgage Association 28,000 1,043,000
2,232,350
INSURANCE - 1.1%
Allstate Corp. 11,000 636,625
ITT Hartford Group, Inc. 3,900 263,250
Travelers Group, Inc. (The) 4,000 181,500
1,081,375
TOTAL FINANCE 15,648,121
HEALTH - 6.9%
DRUGS & PHARMACEUTICALS - 6.7%
American Home Products Corp. 16,500 967,313
Bristol-Myers Squibb Co. 12,100 1,315,875
Glaxo PLC sponsored ADR 13,400 425,450
Glaxo Holdings PLC 3,000 48,821
Merck & Co., Inc. 12,200 966,850
Novartis AG (Reg.) 300 342,825
Pharmacia & Upjohn, Inc. 24,100 954,963
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
HEALTH - CONTINUED
DRUGS & PHARMACEUTICALS - CONTINUED
Pfizer, Inc. 4,400 $ 364,650
SmithKline Beecham PLC ADR 19,400 1,319,200
6,705,947
MEDICAL EQUIPMENT & SUPPLIES - 0.2%
Baxter International, Inc. 5,900 241,900
TOTAL HEALTH 6,947,847
HOLDING COMPANIES - 0.1%
CINergy Corp. 2,800 93,450
INDUSTRIAL MACHINERY & EQUIPMENT - 5.5%
ELECTRICAL EQUIPMENT - 3.4%
Emerson Electric Co. 6,900 667,575
General Electric Co. 22,300 2,204,913
General Signal Corp. 8,600 367,650
Grainger (W.W.), Inc. 2,300 184,575
3,424,713
INDUSTRIAL MACHINERY & EQUIPMENT - 1.2%
Caterpillar, Inc. 3,100 233,275
Cooper Industries, Inc. 11,300 476,013
Harnischfeger Industries, Inc. 6,200 298,375
Stanley Works (The) 600 16,200
Tenneco, Inc. 3,400 153,425
1,177,288
POLLUTION CONTROL - 0.9%
Browning-Ferris Industries, Inc. 19,800 519,750
WMX Technologies, Inc. 10,800 352,350
872,100
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 5,474,101
MEDIA & LEISURE - 0.3%
BROADCASTING - 0.0%
CS Wireless Systems, Inc. (a) 11 -
ENTERTAINMENT - 0.2%
Cedar Fair LP (depositary unit) 5,000 185,000
PUBLISHING - 0.1%
Knight-Ridder, Inc. 3,600 137,700
McGraw-Hill, Inc. 300 13,838
151,538
TOTAL MEDIA & LEISURE 336,538
NONDURABLES - 7.4%
BEVERAGES - 0.4%
Anheuser-Busch Companies, Inc. 9,800 392,000
FOODS - 0.6%
Flowers Industries, Inc. 3,900 83,850
General Mills, Inc. 5,900 373,913
Kellogg Co. 1,200 78,750
Nabisco Holdings Corp. Class A 3,200 124,400
660,913
HOUSEHOLD PRODUCTS - 4.4%
Clorox Co. 3,700 371,388
Procter & Gamble Co. 14,800 1,591,000
Unilever PLC Ord. 6,900 167,249
Unilever NV:
ADR 11,000 1,927,750
Ord. 2,000 353,642
4,411,029

SHARES VALUE (NOTE 1)
TOBACCO - 2.0%
Philip Morris Companies, Inc. 17,700 $ 1,993,463
TOTAL NONDURABLES 7,457,405
RETAIL & WHOLESALE - 2.3%
APPAREL STORES - 0.1%
Footstar, Inc. (a) 3,022 75,172
DRUG STORES - 0.8%
CVS Corp. 10,500 434,438
Rite Aid Corp. 8,920 354,570
789,008
GENERAL MERCHANDISE STORES - 1.2%
Dayton Hudson Corp. 2,000 78,500
Sears, Roebuck & Co. 2,300 106,088
Wal-Mart Stores, Inc. 43,200 988,200
1,172,788
RETAIL & WHOLESALE, MISCELLANEOUS - 0.2%
Toys "R" Us, Inc. (a) 7,600 228,000
TOTAL RETAIL & WHOLESALE 2,264,968
SERVICES - 0.4%
PRINTING - 0.4%
Deluxe Corp. 10,800 353,700
Donnelley (R.R.) & Sons Co. 900 28,238
381,938
SERVICES - 0.0%
Block (H&R), Inc. 1,700 49,300
TOTAL SERVICES 431,238
TECHNOLOGY - 2.6%
COMMUNICATIONS EQUIPMENT - 0.0%
Lucent Technologies, Inc. 1,000 46,250
Hyperion Telecommunications, Inc.
(warrants) (a)(c) 60 1,200
47,450
COMPUTERS & OFFICE EQUIPMENT - 1.2%
Exide Electronics Group, Inc.
(warrants) (a)(c) 10 300
International Business Machines Corp. 1,000 151,000
Pitney Bowes, Inc. 19,000 1,035,500
1,186,800
ELECTRONICS - 0.6%
Thomas & Betts Corp. 13,050 579,094
PHOTOGRAPHIC EQUIPMENT - 0.8%
Eastman Kodak Co. 10,100 810,525
TOTAL TECHNOLOGY 2,623,869
TRANSPORTATION - 0.7%
AIR TRANSPORTATION - 0.0%
Viad Corp. 1,000 16,500
RAILROADS - 0.6%
Burlington Northern Santa Fe Corp. 6,600 570,075
TRUCKING & FREIGHT - 0.1%
Consolidated Freightways, Inc. 4,600 102,350
TOTAL TRANSPORTATION 688,925
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
UTILITIES - 1.3%
CELLULAR - 0.0%
Microcell Telecommunications, Inc. (a):
(warrants) 600 $ 7,500
(conditional warrants) 600 375
7,875
ELECTRIC UTILITY - 0.2%
Allegheny Power System, Inc. 1,200 36,450
Edison International 3,000 59,625
GPU, Inc. 1,000 33,625
Ohio Edison Co. 2,100 47,775
Portland General Corp. 1,000 42,000
219,475
GAS - 0.5%
Consolidated Natural Gas Co. 6,000 331,500
El Paso Natural Gas Co. 362 18,281
Enron Corp. 4,300 185,438
535,219
TELEPHONE SERVICES - 0.6%
Ameritech Corp. 4,600 278,875
BCE, Inc. 3,000 142,904
MCI Communications Corp. 5,000 163,438
585,217
TOTAL UTILITIES 1,347,786
TOTAL COMMON STOCKS
(Cost $55,926,252) 63,235,392
PREFERRED STOCKS - 1.5%
CONVERTIBLE PREFERRED STOCKS - 1.3%
AEROSPACE & DEFENSE - 0.2%
DEFENSE ELECTRONICS - 0.2%
Loral Space & Communications Ltd.
$3.00 (c) 4,000 227,000
ENERGY - 0.6%
OIL & GAS - 0.6%
Occidental Petroleum Corp.
Indexed $3.00 9,100 536,900
Tosco Financing Trust $2.875 (c) 1,700 87,338
TOTAL ENERGY 624,238
MEDIA & LEISURE - 0.2%
LODGING & GAMING - 0.2%
Host Marriott Financial Trust
$3.375 (a)(c) 3,000 160,125
RETAIL & WHOLESALE - 0.3%
APPAREL STORES - 0.3%
TJX Companies, Inc., Series E, $7.00 1,000 261,875
TOTAL CONVERTIBLE PREFERRED STOCKS 1,273,238

SHARES VALUE (NOTE 1)
NONCONVERTIBLE PREFERRED STOCKS - 0.2%
FINANCE - 0.0%
SAVINGS & LOANS - 0.0%
Chevy Chase Capital Corp.,
Series A, $5.1875 200 $ 10,350
Greater New York Savings Bank
Series B, 12%, 231 7,508
TOTAL FINANCE 17,858
MEDIA & LEISURE - 0.2%
BROADCASTING - 0.1%
Time Warner, Inc., Series M,
10 1/4% pay-in-kind 138 149,730
PUBLISHING - 0.1%
K-III Communications Corp., Series D,
$200 exchangeable 600 58,500
TOTAL MEDIA & LEISURE 208,230
TOTAL NONCONVERTIBLE PREFERRED STOCKS 226,088
TOTAL PREFERRED STOCKS
(Cost $1,401,508) 1,499,326
CORPORATE BONDS - 14.8%
MOODY'S RATINGS PRINCIPAL
(UNAUDITED) (B) AMOUNT
CONVERTIBLE BONDS - 0.2%
INDUSTRIAL MACHINERY & EQUIPMENT - 0.2%
INDUSTRIAL MACHINERY & EQUIPMENT - 0.1%
Cooper Industries, Inc.
7.05%, 1/1/15 A3 $ 50,000 52,875
POLLUTION CONTROL - 0.1%
WMX Technologies, Inc.
2%, 1/24/05 A2 80,000 73,200
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 126,075
MEDIA & LEISURE - 0.0%
LEISURE DURABLES & TOYS - 0.0%
Hasbro Corp. 6%, 11/15/98 A3 24,000 31,620
TOTAL CONVERTIBLE BONDS 157,695
NONCONVERTIBLE BONDS - 14.6%
AEROSPACE & DEFENSE - 0.3%
AEROSPACE & DEFENSE - 0.3%
Alliant Techsystems, Inc.
11 3/4%, 3/1/03 B2 13,000 14,430
Lockheed Martin Corp.
7.20%, 5/1/36 A3 300,000 310,476
324,906
SHIP BUILDING & REPAIR - 0.0%
Newport News Shipbuilding,
Inc. 9 1/4%, 12/1/06 (c) B1 10,000 10,325
TOTAL AEROSPACE & DEFENSE 335,231
CORPORATE BONDS - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
BASIC INDUSTRIES - 0.3%
CHEMICALS & PLASTICS - 0.1%
Atlantis Group, Inc.
11%, 2/15/03 B2 $ 10,000 $ 10,400
Foamex-JPS Automotive LP/
Foamex JPS Capital Corp.
0%, 7/1/04 (e) Caa 10,000 8,300
Foamex LP/Foamex Capital
Corp. 11 7/8%, 10/1/04 B3 20,000 21,400
Freedom Chemical Co.
10 5/8%, 10/15/06 (c) B3 60,000 63,000
Sterling Chemicals Holdings,
Inc. 11 3/4%, 8/15/06 B3 20,000 21,100
124,200
IRON & STEEL - 0.0%
AK Steel Corp.
9 1/8%, 12/15/06 (c) Ba2 40,000 41,050
Republic Engineered Steels, Inc.
9 7/8%, 12/15/01 B3 10,000 9,350
WCI Steel, Inc.
10%, 12/1/04 (c) B1 10,000 10,100
60,500
METALS & MINING - 0.1%
Commonwealth Aluminum
Corp. 10 3/4%, 10/1/06 B2 20,000 20,600
Kaiser Aluminum & Chemical
Corp. 12 3/4%, 2/1/03 B2 20,000 21,350
Renco Metals, Inc.
11 1/2%, 7/1/03 B2 20,000 21,000
62,950
PAPER & FOREST PRODUCTS - 0.1%
Doman Industries Ltd. yankee
8 3/4%, 3/15/04 Ba3 40,000 37,500
Repap New Brunswick, Inc.
yankee 10 5/8%, 4/15/05 B3 30,000 31,650
Stone Container Corp.
11 7/8%, 8/1/16 B1 10,000 10,600
79,750
TOTAL BASIC INDUSTRIES 327,400
CONGLOMERATES - 0.0%
Jordan Industries, Inc.:
10 3/8%, 8/1/03 B3 20,000 19,800
0%, 8/1/05 (e) Caa 10,000 7,950
27,750
CONSTRUCTION & REAL ESTATE - 0.1%
CONSTRUCTION - 0.1%
McDermott J Ray SA
9 3/8%, 7/15/06 B1 60,000 63,000

PRINCIPAL VALUE
AMOUNT (NOTE 1)
DURABLES - 0.7%
AUTOS, TIRES, & ACCESSORIES - 0.0%
Delco Remy International, Inc.
10 5/8%, 8/1/06 (c) B2 $ 10,000 $ 10,600
Lear Corp. 9 1/2%, 7/15/06 B1 25,000 26,750
37,350
HOME FURNISHINGS - 0.1%
Interlake Corp.
12 1/8%, 3/1/02 B3 40,000 41,400
Knoll, Inc. 10 7/8%, 3/15/06 B3 58,000 64,090
105,490
TEXTILES & APPAREL - 0.6%
Dan River, Inc.
10 1/8%, 12/15/03 B3 10,000 10,100
Levi Strauss & Co.
6.80%, 11/1/03 (c) Baa 570,000 566,956
577,056
TOTAL DURABLES 719,896
ENERGY - 0.6%
ENERGY SERVICES - 0.1%
Petroliam Nasional BHD
yankee 6 7/8%, 7/1/03 (c) A1 130,000 130,186
OIL & GAS - 0.5%
Flores & Rucks, Inc.
9 3/4%, 10/1/06 B3 30,000 31,800
KCS Energy, Inc.
11%, 1/15/03 B1 20,000 21,700
Norcen Energy Resources Ltd.
yankee 7 3/8%, 5/15/06 Baa 150,000 152,325
Ras Laffan Liquid Natural
Gas Co. Ltd. yankee
8.29%, 3/15/14 (c) A3 300,000 304,005
509,830
TOTAL ENERGY 640,016
FINANCE - 6.9%
BANKS - 1.9%
ABN Amro Bank NV (Chicago)
6 5/8%, 10/31/01 Aa3 500,000 500,175
Capital One Bank
6.74%, 5/31/99 Baa 260,000 260,780
HSBC Americas, Inc.
7%, 11/1/06 Baa 500,000 493,600
Midland Bank PLC yankee
7 5/8%, 6/15/06 A1 250,000 258,865
Signet Bank
7.80%, 9/15/06 Baa 250,000 259,378
Summit Bancorp.
8 5/8%, 12/10/02 BBB 100,000 108,421
1,881,219
ASSET-BACKED SECURITIES - 2.2%
Airplanes Pass Through Trust
Class D 10 7/8%, 3/15/19 Ba2 80,000 89,000
Capital Equipment Receivables
Trust 6.11%, 7/15/99 Aaa 1,410,000 1,410,000
CORPORATE BONDS - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
FINANCE - CONTINUED
ASSET-BACKED SECURITIES - CONTINUED
Green Tree Financial Corp.
6.10%, 4/15/27 Aaa $ 84,950 $ 84,167
Sears Credit Account Master
Trust II 6 1/2%, 10/15/03 Aaa 630,000 635,311
2,218,478
CREDIT & OTHER FINANCE - 2.6%
Ahmanson Capital Trust I
8.36%, 12/1/26 (c) Baa 250,000 252,638
Associates Corp. of
North America
6 1/2%, 9/9/98 Aa3 250,000 251,548
CIT Group Holdings, Inc.
6 1/4%, 9/30/99 Aa3 860,000 860,894
Chase Capital I
7.67%, 12/1/26 A1 300,000 293,331
First Securities Capital I
8.41%, 12/15/26 (c) A3 250,000 252,488
General Electric Capital Corp.
6.94%, 4/13/09 (d) Aaa 480,000 486,706
HMC Acquisition Properties,
Inc. 9%, 12/15/07 Ba3 60,000 60,900
MCN Investment Corp.
6.03%, 2/1/01 Baa 180,000 176,191
2,634,696
SAVINGS & LOANS - 0.2%
First Nationwide Parent
Holdings Ltd.
12 1/2%, 4/15/03 B2 80,000 88,600
First Nationwide Escrow Corp.
10 5/8%, 10/1/03 (c) Ba3 80,000 86,400
175,000
TOTAL FINANCE 6,909,393
HEALTH - 0.3%
MEDICAL EQUIPMENT & SUPPLIES - 0.0%
Wright Medical Technology, Inc.
10 3/4%, 7/1/00 B3 20,000 20,200
MEDICAL FACILITIES MANAGEMENT - 0.3%
Columbia/HCA Healthcare
Corp. 6 1/2%, 3/15/99 A2 240,000 241,145
Quest Diagnostics, Inc.
10 3/4%, 12/15/06 B2 10,000 10,525
251,670
TOTAL HEALTH 271,870
HOLDING COMPANIES - 0.0%
Gray Communications System, Inc.
10 5/8%, 10/1/06 B3 20,000 21,200
Veritas Holding GMBH
9 5/8%, 12/15/03 (c) BB- 10,000 10,100
31,300

PRINCIPAL VALUE
AMOUNT (NOTE 1)
INDUSTRIAL MACHINERY & EQUIPMENT - 0.5%
ELECTRICAL EQUIPMENT - 0.2%
Motors & Gears, Inc.
10 3/4%, 11/15/06 (c) B3 $ 60,000 $ 61,800
Magnetek, Inc.
10 3/4%, 11/15/98 B1 50,000 51,875
Omnipoint Corp.:
11 5/8%, 8/15/06 (c) B2 10,000 10,375
11 5/8%, 8/15/06 B2 20,000 20,750
144,800
INDUSTRIAL MACHINERY & EQUIPMENT - 0.3%
International Knife & Saw, Inc.
11 3/8%, 11/15/06 (c) B3 10,000 10,325
Tenneco, Inc.
8.075%, 10/1/02 Baa 300,000 318,240
328,565
POLLUTION CONTROL - 0.0%
Allied Waste of North America,
Inc. 10 1/4%, 12/1/06 (c) B3 10,000 10,500
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 483,865
MEDIA & LEISURE - 0.9%
BROADCASTING - 0.2%
Benedek Communications Corp.
0%, 5/15/06 (e) - 10,000 5,725
CS Wireless Systems, Inc.
0%, 3/1/06 (e) Caa 40,000 14,400
Diamond Cable Communi-
cations PLC yankee
0%,12/15/05 (e) B3 20,000 14,225
Granite Broadcasting Corp.:
10 3/8%, 5/15/05 B3 10,000 10,250
9 3/8%, 12/1/05 B3 10,000 9,675
NWCG Holdings Corp.
0%, 6/15/99 Caa 10,000 8,300
Peoples Choice TV Corp.
unit 0%, 6/1/04 (e) Caa 30,000 12,600
SFX Broadcasting, Inc.
10 3/4%, 5/15/06 B3 10,000 10,500
Telewest PLC 0%, 10/1/07 (e) B1 30,000 20,850
UIH Australia/PAC, Inc.,
Series B, 0%, 5/15/06 (e) B2 90,000 46,800
153,325
ENTERTAINMENT - 0.1%
Alliance Gaming Corp.
12 7/8%, 6/30/03 B2 40,000 42,500
AMF Group, Inc., Series B:
10 7/8%, 3/15/06 B2 20,000 21,100
0%, 3/15/06 (e) B2 10,000 6,613
Cinemark USA, Inc.
9 5/8%, 8/1/08 B2 10,000 10,125
Viacom, Inc. 8%, 7/7/06 B1 30,000 29,100
109,438
CORPORATE BONDS - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
MEDIA & LEISURE - CONTINUED
LEISURE DURABLES & TOYS - 0.0%
ICON Health and Fitness, Inc.
13%, 7/15/02 B3 $ 40,000 $ 45,000
ICON Fitness Corp.
0%, 11/15/06 (c)(e) - 10,000 5,250
50,250
LODGING & GAMING - 0.6%
American Skiing Co.
12%, 7/15/06 (c) B3 20,000 21,050
Aztar Corp.
13 3/4%, 10/1/04 B2 10,000 10,650
Circus Circus Enterprises, Inc.
7%, 11/15/36 Baa 300,000 293,085
Grand Casinos, Inc.
10 1/8%, 12/1/03 Ba3 130,000 130,650
HMH Properties, Inc.
9 1/2%, 5/15/05 Ba3 60,000 62,550
Horseshoe Gaming LLC
12 3/4%, 9/30/00 B1 50,000 54,000
571,985
PUBLISHING - 0.0%
Hollinger International
Publishing, Inc.
9 1/4%, 2/1/06 B1 20,000 19,800
TOTAL MEDIA & LEISURE 904,798
NONDURABLES - 0.7%
FOODS - 0.3%
International Home Foods, Inc.
10 3/8%, 11/1/06 (c) B2 30,000 31,275
Quaker Oats Co.:
9.05%, 12/15/03 A3 100,000 111,682
9.10%, 12/15/03 A3 100,000 111,954
Specialty Foods Corp.
11 1/8%, 10/1/02 B3 30,000 28,500
283,411
HOUSEHOLD PRODUCTS - 0.1%
Revlon Worldwide Corp.
secured 0%, 3/15/98 B3 140,000 121,275
Revlon Consumer Products
Corp. 10 1/2%, 2/15/03 B3 15,000 15,731
137,006
TOBACCO - 0.3%
Philip Morris Companies, Inc.
6.95%, 6/1/06 A2 250,000 252,965
TOTAL NONDURABLES 673,382
RETAIL & WHOLESALE - 1.0%
APPAREL STORES - 0.1%
Mothers Work, Inc.
12 5/8%, 8/1/05 B3 10,000 10,400
Specialty Retailers, Inc.
10%, 8/15/00 B1 30,000 31,200
41,600

PRINCIPAL VALUE
AMOUNT (NOTE 1)
GENERAL MERCHANDISE STORES - 0.9%
Dayton Hudson Corp.:
6.80%, 10/1/01 Baa $ 500,000 $ 500,220
6.40%, 2/15/03 Baa 400,000 389,548
Pantry, Inc. 12%, 11/15/00 B2 20,000 19,150
908,918
GROCERY STORES - 0.0%
Pathmark Stores, Inc.
11 5/8%, 6/15/02 Caa 20,000 20,450
RETAIL & WHOLESALE, MISCELLANEOUS - 0.0%
Guitar Center Management Co.,
Inc. 11%, 7/1/06 B2 10,000 10,600
TOTAL RETAIL & WHOLESALE 981,568
SERVICES - 0.0%
PRINTING - 0.0%
Sullivan Graphics, Inc.
12 3/4%, 8/1/05 Caa 20,000 19,300
SERVICES - 0.0%
Outsourcing Solutions, Inc.
11%, 11/1/06 (c) B3 10,000 10,475
TOTAL SERVICES 29,775
TECHNOLOGY - 0.5%
COMMUNICATIONS EQUIPMENT - 0.1%
Echostar Satellite Broadcasting
Corp. 0%, 3/15/04 (e) Caa 90,000 68,175
Hyperion Telecommunications,
Inc., Series B,
0%, 4/15/03 (e) - 60,000 34,050
102,225
COMPUTERS & OFFICE EQUIPMENT - 0.4%
Bell & Howell Co.
0%, 3/1/05 (e) B3 50,000 36,500
Comdisco, Inc.
6.70%, 8/6/99 Baa 250,000 251,820
Dictaphone Corp.
11 3/4%, 8/1/05 B3 10,000 8,950
Exide Electronics Group, Inc.
11 1/2%, 5/15/06 B3 10,000 10,650
Unisys Corp.:
11 3/4%, 10/15/04 B1 10,000 10,663
12%, 4/15/03 B1 60,000 64,200
382,783
TOTAL TECHNOLOGY 485,008
TRANSPORTATION - 0.5%
AIR TRANSPORTATION - 0.3%
Atlas Air, Inc.
12 1/4%, 12/1/02 Ba3 30,000 33,450
Delta Air Lines, Inc.
8 1/4%, 12/27/07 (d) Baa 270,000 304,981
338,431
RAILROADS - 0.2%
Burlington Northern Santa Fe
Corp. 7.29%, 6/1/36 Baa 150,000 154,766
TOTAL TRANSPORTATION 493,197
CORPORATE BONDS - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
NONCONVERTIBLE BONDS - CONTINUED
UTILITIES - 1.3%
CELLULAR - 0.7%
Arch Communications Group,
Inc. 0%, 3/15/08 (e) B3 $ 90,000 $ 51,413
Intercel, Inc. 0%, 5/1/06 (e) B2 30,000 18,375
Microcell Telecommunications,
Inc. 0%, 6/1/06 (e) B3 150,000 83,625
Millicom International Cellular
SA 0%, 6/1/06 (e) B3 270,000 167,400
360 Degrees Communications
Co. 7 1/8%, 3/1/03 Ba2 400,000 395,164
715,977
ELECTRIC UTILITY - 0.0%
AES China Generating Ltd.
yankee 10 1/8%, 12/15/06 Ba3 10,000 10,375
GAS - 0.4%
Columbia Gas System, Inc.
6.61%, 11/28/02 Baa 379,000 376,063
TELEPHONE SERVICES - 0.2%
Brooks Fiber Properties, Inc.
0%, 11/1/06 (c)(e) - 10,000 6,375
GST USA, Inc.
0%, 12/15/05 (e) - 44,000 26,950
Intermedia Communications,
Inc. 0%, 5/15/06 (e) B3 40,000 26,300
MFS Communications, Inc. (e):
0%, 1/15/04 B1 40,000 34,700
0%, 1/15/06 B1 60,000 43,800
Pagemart, Inc.
0%, 11/1/03 (e) - 60,000 47,400
Shared Technologies Fairchild
Communications Corp.
0%, 3/1/06 (e) Caa 37,000 30,895
216,420
TOTAL UTILITIES 1,318,835
TOTAL NONCONVERTIBLE BONDS 14,696,284
TOTAL CORPORATE BONDS
(Cost $14,708,425) 14,853,979
U.S. GOVERNMENT AND GOVERNMENT AGENCY
OBLIGATIONS - 11.1%
U.S. TREASURY OBLIGATIONS - 9.4%
6 3/4%, 6/30/99 Aaa 700,000 712,362
6 7/8%, 7/31/99 Aaa 3,800,000 3,877,178
7%, 7/15/06 Aaa 2,200,000 2,285,602
12%, 8/15/13 (callable) Aaa 1,100,000 1,573,517
8 1/8%, 8/15/19 Aaa 825,000 954,294
TOTAL U.S. TREASURY OBLIGATIONS 9,402,953

PRINCIPAL VALUE
AMOUNT (NOTE 1)
U.S. GOVERNMENT AGENCY OBLIGATIONS - 1.7%
Federal Home Loan Bank :
7.56%, 9/1/04 Aaa $ 310,000 $ 325,829
7.59%, 3/10/05 Aaa 190,000 201,043
Government Trust Certificates
(assets of Trust guaranteed by
U.S. Government through
Defense Security Assistance
Agency) Class 2-E
9.40%, 5/15/02 Aaa 138,366 148,385
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 165,458 171,080
State of Israel (guaranteed by
U.S. Government through
Agency for International
Development):
8%, 11/15/01 Aaa 220,000 234,573
5 5/8%, 9/15/03 Aaa 350,000 333,795
5.89%, 8/15/05 Aaa 310,000 294,251
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS 1,708,956
TOTAL U.S. GOVERNMENT AND
GOVERNMENT AGENCY OBLIGATIONS
(Cost $11,208,608) 11,111,909
U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES - 4.3%
Federal Home Loan Government
7%, 6/1/99 to 7/1/01 Aaa 498,972 502,400
Federal National Mortgage
Association:
5 1/2%, 2/1/03 to 2/1/26 Aaa 1,242,131 1,184,793
6%, 4/1/11 Aaa 488,190 469,269
7 1/2%, 10/1/26 Aaa 985,933 985,312
Government National Mortgage
Association 7%,10/15/23
to 4/15/26 Aaa 1,156,291 1,132,510
TOTAL U.S. GOVERNMENT AGENCY -
MORTGAGE-BACKED SECURITIES
(Cost $4,272,952) 4,274,284
U.S. GOVERNMENT AGENCY - 1.1%
Federal Home Loan Mortgage
Corporation planned
amortization class
Series 1645 Class ZA,
5 1/2%, 4/15/05 Aaa 602,750 589,944
U.S. GOVERNMENT AGENCY - CONTINUED
PRINCIPAL VALUE
AMOUNT (NOTE 1)
Federal National Mortgage
Association planned
amortization class
Series 1993-129 Class D,
6.10%, 6/25/05 Aaa $ 500,000 $ 497,266
TOTAL U.S. GOVERNMENT AGENCY
(Cost $1,077,852) 1,087,210
COMMERCIAL MORTGAGE SECURITIES - 0.2%
Wells Fargo Capital Markets
Apartment Financing Trust
6.56%, 12/29/05 (c)
(Cost $241,162) Aaa 250,000 250,000
FOREIGN GOVERNMENT OBLIGATIONS - 1.2%
Manitoba Province yankee
6 3/8%, 10/15/99 A1 470,000 471,706
Quebec Province yankee (d):
6.86%, 4/15/26 A2 250,000 247,235
7.22%, 7/22/36 A2 500,000 524,120
TOTAL FOREIGN GOVERNMENT OBLIGATIONS
(Cost $1,209,908) 1,243,061
CASH EQUIVALENTS - 2.8%
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 $ 2,860,072 2,859,000
TOTAL INVESTMENT IN SECURITIES -100%
(Cost $92,905,667) $ 100,414,161
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 $2,631,236 or 2.6% of net
assets.
4. Debt obligation initially issued at one coupon which converts to a
higher coupon at a specified date.
5. Debt obligation initially issued in zero coupon form which converts to
coupon form at a specified rate and date.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $164,353,812 and $110,446,771, respectively, of which U.S.
government and government agency obligations aggregated $35,586,586 and
$33,384,491, 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 amounted to $34,092 for the
period (see Note 4 of Notes to Financial Statements).
The market value of futures contracts opened and closed during the period
amounted to $14,268,932 and $15,811,555, 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 25.4% AAA, AA, A 24.2%
Baa 4.7% BBB 5.2%
Ba 0.9% BB 0.9%
B 2.0% B 2.0%
Caa 0.2% CCC 0.1%
Ca, C 0.0% CC, C 0.0%
D 0.0%
Distribution of investments by country of issue, as a percentage of total
value of investment in securities, is as follows:
United States 88.3%
United Kingdom 4.7
Netherlands 4.2
Canada 2.0
Others (individually less than 1%) 0.8
TOTAL 100.0%
INCOME TAX INFORMATION
At December 31, 1996, the aggregate cost of investment securities for
income tax purposes was $92,931,565. Net unrealized appreciation aggregated
$7,482,596, of which $8,090,435 related to appreciated investment
securities and $607,839 related to depreciated investment securities.
At December 31, 1996, the fund had a capital loss carryforward of
approximately $372,000 all of which will expire on December 31, 2004.
VARIABLE INSURANCE PRODUCTS FUND III: BALANCED PORTFOLIO
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996

ASSETS

Investment in $ 100,414,161
securities, at
value
(including
repurchase
agreements
of
$2,859,000)
(cost
$92,905,667)
- - See
accompanyin
g schedule

Cash 6,515

Receivable for 2,046,354
investments
sold

Receivable for 489,749
fund shares
sold

Dividends 150,163
receivable

Interest 532,790
receivable

TOTAL ASSETS 103,639,732

LIABILITIES

Payable for $ 469,857
investments
purchased

Accrued 38,194
management
fee

Other payables 22,049
and
accrued
expenses

TOTAL 530,100
LIABILITIES

NET ASSETS $ 103,109,632

Net Assets
consist of:

Paid in capital $ 93,337,476

Undistributed 2,677,878
net
investment
income

Accumulated (414,550
undistributed )
net realized
gain (loss) on
investments
and foreign
currency
transactions

Net unrealized 7,508,828
appreciation
(depreciation
) on
investments
and assets
and liabilities
in
foreign
currencies

NET ASSETS, for $ 103,109,632
8,434,143
shares
outstanding

NET ASSET $12.23
VALUE,
offering price

and
redemption
price per
share
($103,109,63
2 (divided by)
8,434,143
shares)

STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996

INVESTMENT $ 1,114,701
INCOME
Dividends

Interest 2,113,614

TOTAL 3,228,315
INCOME

EXPENSES

Management $ 356,604
fee

Transfer agent 43,812
fees

Accounting 59,115
fees and
expenses

Non-interested 358
trustees'
compensatio
n

Custodian fees 55,454
and
expenses

Registration 25
fees

Audit 21,222

Legal 1,195

Miscellaneous 166

Total 537,951
expenses
before
reductions

Expense (11,411 526,540
reductions )

NET 2,701,775
INVESTMENT
INCOME

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

Investment (623,737
securities )

Foreign 133,355
currency
transactions

Futures 98,897 (391,485
contracts )

Change in net
unrealized
appreciation
(depreciation
) on:

Investment 6,512,003
securities

Assets and (64,618
liabilities in )
foreign
currencies

Futures (4,099 6,443,286
contracts )

NET GAIN (LOSS) 6,051,801

NET INCREASE $ 8,753,576
(DECREASE)
IN NET ASSETS
RESULTING
FROM
OPERATIONS

OTHER $ 10,083
INFORMATION
EXPENSE
REDUCTIONS
Directed
brokerage
arrangement
s

Custodian 1,328
interest
credits

$ 11,411

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 $ 2,701,775 $ 527,063
Net
investment
income

Net realized (391,485) 442,330
gain (loss)

Change in 6,443,286 1,065,542
net
unrealized
appreciation
(depreciation
)

NET INCREASE 8,753,576 2,034,935
(DECREASE)
IN NET
ASSETS
RESULTING
FROM
OPERATIONS

Distributions to (26,804) (507,432)
shareholders
From net
investment
income

From net (192,158) (289,961)
realized gain

TOTAL (218,962) (797,393)
DISTRIBUTION
S

Share 51,928,218 42,321,007
transactions
Net proceeds
from sales of
shares

Reinvestmen 218,962 797,393
t of
distributions

Cost of (727,396) (1,200,708)
shares
redeemed

NET INCREASE 51,419,784 41,917,692
(DECREASE)
IN NET
ASSETS
RESULTING
FROM SHARE
TRANSACTIO
NS

TOTAL 59,954,398 43,155,234
INCREASE
(DECREASE)
IN NET ASSETS

NET ASSETS

Beginning of 43,155,234 -
period

End of period $ 103,109,632 $ 43,155,234
(including
undistribute
d net
investment
income of
$2,677,878
and
$2,907,
respectivel
y)

OTHER
INFORMATION
Shares

Sold 4,616,047 3,901,795

Issued in 19,533 71,902
reinvestment
of
distributions

Redeemed (64,658) (110,476)

Net increase 4,570,922 3,863,221
(decrease)

<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> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA YEAR ENDED JANUARY 3, 1995
DECEMBER 31, (COMMENCEMENT
1996 OF OPERATIONS) TO
DECEMBER 31, 1995

</TABLE>

Net asset $ 11.17 $ 10.00
value,
beginning of
period

Income from
Investment
Operations

Net .33 .14
investment
income

Net realized .78 1.25
and
unrealized
gain (loss)

Total from 1.11 1.39
investment
operations

Less
Distributions

From net (.01) F (.14)
investment
income

From net (.04) F (.08)
realized gain

Total (.05) (.22)
distributions

Net asset $ 12.23 $ 11.17
value, end of
period

TOTAL 9.98% 13.92%
RETURN A, B

RATIOS AND
SUPPLEMENT
AL DATA

Net assets, $ 103,110 $ 43,155
end of period
(000 omitted)

Ratio of .72% 1.42% C
expenses to
average net
assets

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

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

Portfolio 163% 248%
turnover rate

Average $ .0165
commission
rate E

A 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 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. F THE AMOUNTS SHOWN REFLECT
CERTAIN RECLASSIFICATIONS RELATED TO BOOK TO TAX
DIFFERENCES (SEE NOTE 1 OF NOTES TO FINANCIAL
STATEMENTS).

VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO
PERFORMANCE AND INVESTMENT SUMMARY

PERFORMANCE
There are several ways to evaluate a fund's historical performance period.
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). If Fidelity
had not reimbursed certain fund expenses, the life of fund total return
would have been lower.
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1996 PAST 1 LIFE OF
YEAR FUND

Growth Opportunities 18.27% 25.24%

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

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.
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.

UNDERSTANDING PERFORMANCE
How a fund did yesterday is no guarantee of how
it will do tomorrow. The stock market, for example,
has a history of growth in the long run and volatility
in the short run. In turn, the share price and return
of a fund that invests in stocks will vary. That
means if you sell your shares during a market
downturn, you might lose money. But if you can
ride out the market's ups and downs, you may
have a gain.
(checkmark)
Figures for more than one year assume a steady compounded rate of return
and are not the fund's year-by-year results, which fluctuated over the
periods shown. The life of fund figures are from commencement of operations
January 3, 1995.
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 19961231 19970108 095155 S00000000000001
VIP III: Growth Opp SP Standard & Poor 500
00617 SP001
1995/01/03 10000.00 10000.00
1995/01/31 10060.00 10258.23
1995/02/28 10370.00 10658.00
1995/03/31 10560.00 10972.51
1995/04/30 10930.00 11295.66
1995/05/31 11440.00 11747.14
1995/06/30 11790.00 12020.03
1995/07/31 12180.00 12418.61
1995/08/31 12260.00 12449.78
1995/09/30 12470.00 12975.16
1995/10/31 12560.00 12928.84
1995/11/30 12920.00 13496.42
1995/12/31 13251.81 13756.36
1996/01/31 13444.45 14224.63
1996/02/29 13434.43 14356.49
1996/03/31 13393.72 14494.74
1996/04/30 13607.45 14708.39
1996/05/31 13912.77 15087.72
1996/06/30 14024.73 15145.21
1996/07/31 13617.62 14476.09
1996/08/31 13699.05 14781.39
1996/09/30 14360.59 15613.29
1996/10/31 14950.89 16043.91
1996/11/30 16080.60 17256.66
1996/12/31 15673.50 16914.81
IMATRL PRASUN SHR__CHT 19961231 19970108 095157 R00000000000027

Let's say hypothetically that $10,000 was invested in Growth Opportunities
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 $15,673
- - a 56.73% increase on the initial investment. With reinvested dividends
and capital gains, if any, the same $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 FIVE STOCKS AS OF DECEMBER 31, 1996
% OF FUND'S
INVESTMENTS

Philip Morris Companies, Inc. 7.4

Federal National Mortgage Association 7.1

General Motors Corp. 4.0

Compaq Computer Corp. 3.1

Fleet Financial Group, Inc. 3.0

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

Finance 18.0

Technology 14.1

Nondurables 8.6

Energy 7.2

Durables 6.4

ASSET ALLOCATION AS OF DECEMBER 31, 1996*
Row: 1, Col: 1, Value: 4.8
Row: 1, Col: 2, Value: 15.3
Row: 1, Col: 3, Value: 79.90000000000001
Stocks 79.9%
Bonds 15.3%
Short-term investments 4.8%
FOREIGN INVESTMENTS 8.4%
*
% OF FUND'S
INVESTMENTS
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO
FUND TALK: THE MANAGER'S OVERVIEW

An interview with
George Vanderheiden,
Portfolio Manager of Growth Opportunities Portfolio
Q. HOW DID THE FUND PERFORM, GEORGE?
A. For the past 12 months ending December 31, 1996, the fund slightly
underperformed the Standard & Poor's 500 Index, which rose 22.96%.
Q. WHY DID THE FUND TRAIL ITS INDEX?
A. I am disappointed the fund didn't do better during the past year. The
problem wasn't so much with the stock selection, but with the portion of
the fund invested in bonds. The Treasury bonds were purchased as a hedge
against the slowing corporate earnings pattern that I saw occurring.
Q. WHAT IS YOUR THINKING ON BONDS NOW?
A. I believe earnings will probably be flat in 1997. And since the stock
market is already selling at historically high valuations, I think bonds
may offer good value in a slowing economy. Current long bond yields of 6.8%
are over three times the current level of stock market dividend yields of
2.1%. Looking at stock market history, the only other time I have found
this ratio to be higher in recent times was prior to the October 1987 drop
in stock prices, when the bond yield was 9% and the stock dividend yield
was 2.7%.
Q. IF YOU CONSIDER STOCK MARKET VALUATIONS HIGH, WHAT STRATEGIES ARE YOU
USING TO MINIMIZE RISK IN YOUR EQUITY SELECTIONS?
A. I am pursuing 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. A common way to determine the
value of a growth stock is to look at its price-to-earnings ratio, or how
many times earnings the market thinks that stock is worth. To give an
example, both Philip Morris and Coca-Cola are growth stocks that have grown
their earnings-per-share at an 18% growth rate over the past 10 years. But
I bought Philip Morris and not Coca-Cola during the period because I
thought Philip Morris was a growth stock at a reasonable price, while I
didn't think Coca-Cola was reasonably priced. Let me explain by pointing
out what the market was paying for each stock's total return at the
beginning of October, midway through the period covered by this report.
Coke was at $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 was at $93 with a consensus earnings-per-share estimate of
$7.70 for 1996, thereby producing a price-to-earnings ratio of almost 12
times. Litigation concerns were obviously dragging down Philip Morris'
ratio, but litigation worries have been around for 15 years and this was
the biggest gap between Philip Morris' price-to-earnings ratio and Coke's.
This is why I invested in Philip Morris and not Coca-Cola.
Q. WHAT HAVE BEEN THE SUCCESSES OVER THE PAST YEAR?
A. Among the successes, the big sector weighting in financial stocks
helped, particularly the holdings in Fannie Mae - the Federal National
Mortgage Association - Freddie Mac - the Federal Home Loan Mortgage
Corporation - and Allstate. Also, certain stocks within the technology
sector contributed strong returns, including Compaq Computer, Intel and
IBM. Finally, the energy sector was a good contributor, with such stocks as
Royal Dutch, British Petroleum, Louisiana Land & Exploration and Tosco
providing strong performance.
Q. AND THE DISAPPOINTMENTS?
A. My biggest disappointment was that, during the period, I didn't have a
heavier representation in quality blue chips, such as General Electric and
Microsoft, and not investing in other blue chips that performed well over
the period, such as Coca-Cola, Merck and Johnson & Johnson. I was put off
by the valuations of these stocks being at the upper end of the historical
range, but to my surprise they went to even higher valuations.
Q. WHAT'S YOUR OUTLOOK, GEORGE?
A. The bull market that started in October 1990 is moving into its seventh
year and penetrated the 6500 level earlier this month. My feeling is to be
cautious short-term and optimistic long-term. I don't know if the next 1000
points will be up or down, but I do feel that the next 6000 points will be
up. My caution near-term is due to the slowing earnings environment, the
high levels of optimism and bullishness, and the post-presidential election
year that historically has been a difficult period for stocks. Factors that
feed my longer-term optimism are the benign inflation environment, the
growing spread of capitalism throughout the world, and the aging of the
baby boomers, which has positive implications for savings and the financial
markets. In spite of being cautious near-term, I continue to aggressively
use all the resources of Fidelity to identify and select the best ideas for
this fund.
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 capital growth by investing
primarily in common stocks and securities
convertible into common stocks
START DATE: January 3, 1995
SIZE: as of December 31, 1996, more than
$383 million
MANAGER: George Vanderheiden, since
inception; joined Fidelity in 1971
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO
INVESTMENTS DECEMBER 31, 1996

Showing Percentage of Total Value of Investment in Securities

COMMON STOCKS - 79.9%
SHARES VALUE (NOTE 1)
AEROSPACE & DEFENSE - 1.0%
AEROSPACE & DEFENSE - 0.5%
Boeing Co. 15,500 $ 1,648,813
Gulfstream Aerospace Corp. (a) 7,800 189,150
1,837,963
DEFENSE ELECTRONICS - 0.5%
Raytheon Co. 43,600 2,098,250
TOTAL AEROSPACE & DEFENSE 3,936,213
BASIC INDUSTRIES - 4.3%
CHEMICALS & PLASTICS - 2.7%
Air Products & Chemicals, Inc. 10,400 718,900
du Pont (E.I.) de Nemours & Co. 72,200 6,813,875
Raychem Corp. 16,300 1,306,038
Union Carbide Corp. 31,400 1,283,475
10,122,288
METALS & MINING - 0.1%
Reynolds Metals Co. 5,500 310,063
PACKAGING & CONTAINERS - 0.6%
Owens-Illinois, Inc. (a) 87,800 1,997,450
Tupperware Corp. 7,500 402,188
2,399,638
PAPER & FOREST PRODUCTS - 0.9%
Boise Cascade Corp. 21,500 682,625
Champion International Corp. 34,600 1,496,450
International Paper Co. 18,200 734,825
Temple-Inland, Inc. 5,800 313,925
Willamette Industries, Inc. 4,000 278,500
3,506,325
TOTAL BASIC INDUSTRIES 16,338,314
CONSTRUCTION & REAL ESTATE - 0.9%
CONSTRUCTION - 0.7%
Centex Corp. 17,300 650,913
DR Horton, Inc. 20,936 227,679
Fleetwood Enterprises, Inc. 47,562 1,307,955
Kaufman & Broad Home Corp. 25,600 329,600
Lennar Corp. 800 21,800
U.S. Home Corp. (a) 2,700 70,200
2,608,147
ENGINEERING - 0.2%
Fluor Corp. 11,100 696,525
TOTAL CONSTRUCTION & REAL ESTATE 3,304,672
DURABLES - 6.4%
AUTOS, TIRES, & ACCESSORIES - 6.1%
Cummins Engine Co., Inc. 17,100 786,600
Dana Corp. 14,300 466,538
Discount Auto Parts, Inc. (a) 8,100 189,338
Federal-Mogul Corp. 18,300 402,600
General Motors Corp. 274,200 15,286,650Goodyear Tire & Rubber Co.
8,200 421,275
Honda Motor Co. Ltd. 37,000 1,056,231
Magna International, Inc. Class A 46,300 2,575,318
Superior Industries International, Inc. 36,600 846,375
Volvo AB Class B 56,500 1,241,414
23,272,339

SHARES VALUE (NOTE 1)
CONSUMER ELECTRONICS - 0.2%
Newell Co. 17,000 $ 535,500
Whirlpool Corp. 3,400 158,525
694,025
TEXTILES & APPAREL - 0.1%
Burlington Industries, Inc. (a) 52,000 572,000
TOTAL DURABLES 24,538,364
ENERGY - 7.2%
ENERGY SERVICES - 0.2%
McDermott International, Inc. 35,400 588,525
OIL & GAS - 7.0%
Amerada Hess Corp. 16,600 960,725
Anadarko Petroleum Corp. 2,400 155,400
Atlantic Richfield Co. 23,800 3,153,500
British Petroleum PLC ADR 29,671 4,194,738
Burlington Resources, Inc. 36,300 1,828,613
Canada Occidental Petroleum Ltd. 37,500 603,184
Elf Aquitaine SA sponsored ADR 8,500 384,625
Enron Oil & Gas Co. 2,500 63,125
Kerr-McGee Corp. 8,100 583,200
Louisiana Land & Exploration Co. 28,200 1,512,225
Noble Affiliates, Inc. 4,100 196,288
Occidental Petroleum Corp. 24,700 577,363
Royal Dutch Petroleum Co. ADR 50,900 8,691,175
Santa Fe Energy Resources, Inc. (a) 25,300 351,038
Sun Co., Inc. 24,200 589,875
Tosco Corp. 27,600 2,183,850
Total SA:
Class B 2,653 215,716
sponsored ADR 10,268 413,287
Ultramar Diamond Shamrock Corp. 1,000 31,625
Union Pacific Resources Group, Inc. 6,700 195,975
26,885,527
TOTAL ENERGY 27,474,052
FINANCE - 18.0%
BANKS - 3.4%
Canadian Imperial Bank of Commerce 3,100 136,700
Fleet Financial Group, Inc. 233,482 11,644,915
NationsBank Corp. 6,700 654,925
State Street Boston Corp. 7,300 470,850
12,907,390
CREDIT & OTHER FINANCE - 0.1%
Transamerica Corp. 2,600 205,400
FEDERAL SPONSORED CREDIT - 9.5%
Federal Home Loan Mortgage Corporation 83,200 9,162,400
Federal National Mortgage Association 725,400 27,021,150
36,183,550
INSURANCE - 4.5%
AFLAC, Inc. 13,750 587,813
Allmerica Financial Corp. 41,800 1,400,300
Allstate Corp. 91,759 5,310,552
American International Group, Inc. 32,500 3,518,125
CIGNA Corp. 1,700 232,263
Equitable of Iowa Companies 2,100 96,338
General Re Corp. 15,300 2,413,575
Loews Corp. 3,300 311,025
MGIC Investment Corp. 4,100 311,600
Provident Companies, Inc. 1,500 72,563
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
FINANCE - CONTINUED
INSURANCE - CONTINUED
Providian Corp. 31,300 $ 1,608,038
Reliastar Financial Corp. 2,400 138,600
Torchmark Corp. 19,100 964,550
Travelers/Aetna Property Casualty Corp.
Class A 4,800 169,800
UNUM Corp. 1,900 137,275
17,272,417
SAVINGS & LOANS - 0.3%
Golden West Financial Corp. 19,800 1,249,875
SECURITIES INDUSTRY - 0.2%
United Asset Management Corp. 35,600 947,850
TOTAL FINANCE 68,766,482
HEALTH - 4.1%
DRUGS & PHARMACEUTICALS - 0.9%
Astra AB Class A Free shares 29,300 1,441,548
Novartis AG 600 685,650
Pharmacia & Upjohn, Inc. 2,500 99,063
Schering-Plough Corp. 21,800 1,411,550
3,637,811
MEDICAL EQUIPMENT & SUPPLIES - 0.2%
Allegiance Corp. 2,780 76,798
Baxter International, Inc. 5,500 225,500
Biomet, Inc. 32,700 494,588
796,886
MEDICAL FACILITIES MANAGEMENT - 3.0%
Columbia/HCA Healthcare Corp. 235,750 9,606,813
Humana, Inc. (a) 32,900 629,213
Tenet Healthcare Corp. (a) 35,400 774,375
United HealthCare Corp. 8,300 373,500
11,383,901
TOTAL HEALTH 15,818,598
HOLDING COMPANIES - 0.3%
U.S. Industries, Inc. (a) 29,000 996,875
INDUSTRIAL MACHINERY & EQUIPMENT - 1.6%
ELECTRICAL EQUIPMENT - 0.8%
Emerson Electric Co. 4,100 396,675
General Electric Co. 15,600 1,542,450
Scientific-Atlanta, Inc. 19,300 289,500
Sensormatic Electronics Corp. 10,000 167,500
Westinghouse Electric Corp. 26,100 518,738
2,914,863
INDUSTRIAL MACHINERY & EQUIPMENT - 0.5%
Caterpillar, Inc. 23,700 1,783,425
Dover Corp. 2,000 100,500
Illinois Tool Works, Inc. 600 47,925
Kaydon Corp. 200 9,425
Kennametal, Inc. 300 11,663
1,952,938
POLLUTION CONTROL - 0.3%
Browning-Ferris Industries, Inc. 42,700 1,120,875
TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 5,988,676

SHARES VALUE (NOTE 1)
MEDIA & LEISURE - 1.5%
BROADCASTING - 0.0%
HSN, Inc. (a) 5,040 $ 119,700
ENTERTAINMENT - 0.3%
Cedar Fair LP (depositary unit) 1,400 51,800
Royal Caribbean Cruises Ltd. 47,900 1,119,663
1,171,463
LEISURE DURABLES & TOYS - 0.5%
Nintendo Co. Ltd. Ord. 28,100 2,009,047
LODGING & GAMING - 0.5%
Circus Circus Enterprises, Inc. (a) 43,900 1,509,063
Mirage Resorts, Inc. (a) 5,900 127,588
Sun International Hotels Ltd. Ord. (a) 8,900 324,850
1,961,501
RESTAURANTS - 0.2%
Brinker International, Inc. (a) 15,100 241,600
Darden Restaurants, Inc. 8,200 71,750
McDonald's Corp. 7,100 321,275
634,625
TOTAL MEDIA & LEISURE 5,896,336
NONDURABLES - 8.6%
HOUSEHOLD PRODUCTS - 0.0%
Premark International, Inc. 8,500 189,125
TOBACCO - 8.6%
Philip Morris Companies, Inc. 250,800 28,246,350
RJR Nabisco Holdings Corp. 109,760 3,731,840
UST, Inc. 23,400 757,575
32,735,765
TOTAL NONDURABLES 32,924,890
PRECIOUS METALS - 0.1%
Barrick Gold Corp. 5,800 166,065
Santa Fe Pacific Gold Corp. 24,000 369,000
535,065
RETAIL & WHOLESALE - 5.0%
APPAREL STORES - 0.3%
TJX Companies, Inc. 21,300 1,009,088
DRUG STORES - 0.1%
CVS Corp. 5,700 235,838
GENERAL MERCHANDISE STORES - 1.8%
Federated Department Stores, Inc. (a) 62,000 2,115,750
Wal-Mart Stores, Inc. 208,700 4,774,013
6,889,763
GROCERY STORES - 0.0%
Safeway, Inc. 1,900 81,225
RETAIL & WHOLESALE, MISCELLANEOUS - 2.8%
Circuit City Stores, Inc. 91,900 2,768,488
Home Depot, Inc. (The) 66,400 3,328,300
Lowe's Companies, Inc. 54,000 1,917,000
Officemax, Inc. (a) 44,575 473,609
Office Depot, Inc. (a) 20,200 358,550
Rex Stores Corp. (a) 9,700 78,813
Tandy Corp. 8,000 352,000
Toys "R" Us, Inc. (a) 49,600 1,488,000
10,764,760
TOTAL RETAIL & WHOLESALE 18,980,674
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SERVICES - 0.0%
ADVERTISING - 0.0%
Interpublic Group of Companies, Inc. 2,700 $ 128,250
SERVICES - 0.0%
HCIA, Inc. (a) 3,300 113,850
TOTAL SERVICES 242,100
TECHNOLOGY - 14.1%
COMMUNICATIONS EQUIPMENT - 0.2%
Cisco Systems, Inc. (a) 12,000 763,500
Nokia Corp. AB sponsored ADR 2,200 126,775
890,275
COMPUTER SERVICES & SOFTWARE - 1.3%
America Online, Inc. (a) 12,800 425,600
Automatic Data Processing, Inc. 25,600 1,097,600
Electronic Data Systems Corp. 23,600 1,020,700
Microsoft Corp. (a) 7,800 644,475
Oracle Systems Corp. (a) 19,050 795,338
Policy Management Systems Corp. (a) 19,200 885,600
Sabre Group Holdings, Inc. Class A (a) 1,300 36,238
4,905,551
COMPUTERS & OFFICE EQUIPMENT - 7.8%
Adaptec, Inc. (a) 3,200 128,000
Bay Networks, Inc. (a) 66,900 1,396,538
Compaq Computer Corp. (a) 158,400 11,761,200
Hewlett-Packard Co. 30,600 1,537,650
Ingram Micro, Inc. Class A (a) 1,200 27,600
International Business Machines Corp. 75,900 11,460,900
SCI Systems, Inc. (a) 31,700 1,414,613
Seagate Technology (a) 35,300 1,394,350
Silicon Graphics, Inc. (a) 6,700 170,850
Tech Data Corp. (a) 13,600 372,300
29,664,001
ELECTRONIC INSTRUMENTS - 1.0%
Applied Materials, Inc. (a) 26,800 963,125
KLA Instruments Corp. (a) 5,700 202,350
Lam Research Corp. (a) 13,900 390,938
Novellus System, Inc. (a) 11,800 639,413
Teradyne, Inc. (a) 33,400 814,125
Varian Associates, Inc. 12,700 646,113
3,656,064
ELECTRONICS - 3.8%
AMP, Inc. 66,900 2,567,288
Atmel Corp. (a) 13,100 433,938
Intel Corp. 20,400 2,671,125
Methode Electronics, Inc. Class A 84,300 1,707,075
Microchip Technology, Inc. (a) 2,100 106,838
Micron Technology, Inc. 14,700 428,138
Molex, Inc. 9,275 330,422
Motorola, Inc. 7,100 435,763
National Semiconductor Corp. (a) 15,000 365,625
Solectron Corp. (a) 65,300 3,485,388
Storage Technology Corp. (a) 10,600 504,825
Texas Instruments, Inc. 20,200 1,287,750
Xilinx, Inc. (a) 8,200 301,863
14,626,038
TOTAL TECHNOLOGY 53,741,929

SHARES VALUE (NOTE 1)
TRANSPORTATION - 0.7%
RAILROADS - 0.6%
Bombardier, Inc. Class B 15,800 $ 291,600
Burlington Northern Santa Fe Corp. 7,700 665,087
CSX Corp. 28,200 1,191,450
2,148,137
SHIPPING - 0.1%
Stolt-Nielsen SA Class B sponsored ADR 15,100 283,125
Stolt-Nielsen SA 4,500 84,938
368,063
TOTAL TRANSPORTATION 2,516,200
UTILITIES - 6.1%
CELLULAR - 2.2%
AirTouch Communications, Inc. (a) 59,700 1,507,400
360 Degrees Communications Co. (a) 6,406 148,139
Vodafone Group PLC sponsored ADR 164,700 6,814,463
Vodafone Group PLC 23,800 100,700
8,570,702
GAS - 0.2%
Enron Corp. 18,300 789,188
TELEPHONE SERVICES - 3.7%
Ameritech Corp. 28,900 1,752,063
Bell Atlantic Corp. 22,000 1,424,500
BellSouth Corp. 47,100 1,901,663
Deutsche Telekom AG (a) 13,700 285,287
MCI Communications Corp. 93,100 3,043,206
NYNEX Corp. 42,000 2,021,250
SBC Communications, Inc. 49,800 2,577,150
Sprint Corp. 24,000 957,000
13,962,119
TOTAL UTILITIES 23,322,009
TOTAL COMMON STOCKS
(Cost $259,232,490) 305,321,449
U.S. TREASURY OBLIGATIONS - 15.3%
PRINCIPAL
AMOUNT
8 1/8%, 8/15/19 $ 18,640,000 21,561,261
6 1/4%, 8/15/23 27,253,000 25,549,688
stripped principal:
0%, 2/15/19 6,750,000 1,490,940
0%, 8/15/19 10,000,000 2,139,300
0%, 8/15/20 20,000,000 3,983,000
0%, 11/15/21 20,000,000 3,670,800
TOTAL U.S. TREASURY OBLIGATIONS
(Cost $58,342,737) 58,394,989
CASH EQUIVALENTS - 4.8%
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 $ 18,433,910 18,427,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $336,002,227) $ 382,143,438
LEGEND
1. Non-income producing
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $243,870,479 and $72,809,274, respectively, of which U.S.
government and government agency obligations aggregated $38,124,493 and
$5,600,182, 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 amounted to $46,677 for the
period (see Note 4 of Notes to Financial Statements).
The market value of futures contracts opened and closed during the period
amounted to $2,410,871 and $2,416,594, respectively.
INCOME TAX INFORMATION
At December 31, 1996, the aggregate cost of investment securities for
income tax purposes was $336,123,748. Net unrealized appreciation
aggregated $46,019,690, of which $51,068,262 related to appreciated
investment securities and $5,048,572 related to depreciated investment
securities.
The fund hereby designates approximately $3,331,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
VARIABLE INSURANCE PRODUCTS FUND III: GROWTH OPPORTUNITIES PORTFOLIO
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996

ASSETS

Investment in $ 382,143,438
securities, at
value
(including
repurchase
agreements
of
$18,427,000)

(cost
$336,002,227
) - See
accompanyin
g schedule

Cash 545

Receivable for 899,141
investments
sold

Receivable for 582,054
fund shares
sold

Dividends 704,645
receivable

Interest 1,206,680
receivable

TOTAL ASSETS 385,536,503

LIABILITIES

Payable for $ 2,202,818
investments
purchased

Accrued 191,807
management
fee

Other payables 56,458
and
accrued
expenses

TOTAL 2,451,083
LIABILITIES

NET ASSETS $ 383,085,420

Net Assets
consist of:

Paid in capital $ 321,575,737

Undistributed 6,366,110
net
investment
income

Accumulated 9,002,398
undistributed
net realized
gain (loss) on
investments
and foreign
currency
transactions

Net unrealized 46,141,175
appreciation
(depreciation
) on
investments
and assets
and liabilities
in
foreign
currencies

NET ASSETS, for $ 383,085,420
24,875,768
shares
outstanding

NET ASSET $15.40
VALUE,
offering price

and
redemption
price per
share
($383,085,42
0 (divided by)
24,875,768
shares)

STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996

INVESTMENT $ 4,744,488
INCOME
Dividends

Interest 3,722,828

TOTAL 8,467,316
INCOME

EXPENSES

Management $ 1,679,264
fee

Transfer agent 184,791
fees

Accounting 167,116
fees and
expenses

Non-interested 1,341
trustees'
compensatio
n

Custodian fees 61,549
and
expenses

Registration 76
fees

Audit 24,980

Legal 4,523

Miscellaneous 591

Total 2,124,231
expenses
before
reductions

Expense (23,025 2,101,206
reductions )

NET 6,366,110
INVESTMENT
INCOME

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

Investment 9,083,873
securities

Foreign (986
currency )
transactions

Futures 5,723 9,088,610
contracts

Change in net
unrealized
appreciation
(depreciation
) on:

Investment 35,811,811
securities

Assets and 1,079 35,812,890
liabilities in
foreign
currencies

NET GAIN (LOSS) 44,901,500

NET INCREASE $ 51,267,610
(DECREASE)
IN NET ASSETS
RESULTING
FROM
OPERATIONS

OTHER $ 21,657
INFORMATION
Expense
reductions
Directed
brokerage
arrangement
s

Custodian 1,368
interest
credits

$ 23,025

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 $ 6,366,110 $ 1,265,580
Net
investment
income

Net realized 9,088,610 1,487,955
gain (loss)

Change in 35,812,890 10,328,285
net
unrealized
appreciation
(depreciation
)

NET INCREASE 51,267,610 13,081,820
(DECREASE)
IN NET
ASSETS
RESULTING
FROM
OPERATIONS

Distributions to - (1,304,508)
shareholders
From net
investment
income

From net (705,098) (830,141)
realized gain

TOTAL (705,098) (2,134,649)
DISTRIBUTION
S

Share 170,852,927 152,442,844
transactions
Net proceeds
from sales of
shares

Reinvestmen 705,098 2,134,649
t of
distributions

Cost of (3,337,769) (1,222,012)
shares
redeemed

NET INCREASE 168,220,256 153,355,481
(DECREASE)
IN NET
ASSETS
RESULTING
FROM SHARE
TRANSACTIO
NS

TOTAL 218,782,768 164,302,652
INCREASE
(DECREASE)
IN NET ASSETS

NET ASSETS

Beginning of 164,302,652 -
period

End of period $ 383,085,420 $ 164,302,652
(including
undistribute
d net
investment
income of
$6,366,110
and $0,
respectivel
y)

OTHER
INFORMATION
Shares

Sold 12,499,499 12,503,896

Issued in 53,538 164,965
reinvestment
of
distributions

Redeemed (246,129) (100,001)

Net increase 12,306,908 12,568,860
(decrease)

<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> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA YEAR ENDED JANUARY 3, 1995
DECEMBER 31, (COMMENCEMENT
1996 OF OPERATIONS) TO
DECEMBER 31, 1995

</TABLE>

Net asset $ 13.07 $ 10.00
value,
beginning of
period

Income from
Investment
Operations

Net .26 .11
investment
income

Net realized 2.12 3.14
and
unrealized
gain (loss)

Total from 2.38 3.25
investment
operations

Less
Distributions

From net - (.11)
investment
income

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

Total (.05) (.18)
distributions

Net asset $ 15.40 $ 13.07
value, end of
period

TOTAL 18.27% 32.52%
RETURN A, B

RATIOS AND
SUPPLEMENT
AL DATA

Net assets, $ 383,085 $ 164,303
end of period
(000 omitted)

Ratio of .77% .85% C
expenses to
average net
assets

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

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

Portfolio 28% 38%
turnover rate

Average $ .0367
commission
rate F

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 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.

VARIABLE INSURANCE PRODUCTS FUND III: OVERSEAS FUND
PERFORMANCE AND INVESTMENT SUMMARY

PERFORMANCE
There are several ways to evaluate a fund's historical performance period.
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). If Fidelity
had not reimbursed certain fund expenses, the total returns would have been
lower.
AVERAGE ANNUAL TOTAL RETURNS
PERIOD ENDED DECEMBER 31, 1996 PAST 1 LIFE OF
YEAR FUND

Overseas 12.84% 11.53%

Morgan Stanley EAFE Index 6.05% 8.61%

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.
You can compare the fund's returns 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.
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 show. The life of fund figures are from commencement of operations
January 3, 1995.
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.

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)
$10,000 OVER LIFE OF FUND
IMAHDR PRASUN SHR__CHT 19961231 19970116 082952 S00000000000001
FA Annuity Overseas Fund MS EAFE Index
00618 MS001
1995/01/03 10000.00 10000.00
1995/01/31 9920.00 9615.02
1995/02/28 9930.00 9587.43
1995/03/31 10230.00 10185.41
1995/04/30 10460.00 10568.47
1995/05/31 10470.00 10442.49
1995/06/30 10610.00 10259.36
1995/07/31 10960.00 10898.07
1995/08/31 10670.00 10482.34
1995/09/30 10790.00 10687.07
1995/10/31 10580.00 10399.80
1995/11/30 10710.00 10689.16
1995/12/31 11020.16 11119.83
1996/01/31 11211.21 11165.48
1996/02/29 11251.40 11203.22
1996/03/31 11422.49 11441.14
1996/04/30 11714.34 11773.77
1996/05/31 11704.27 11557.11
1996/06/30 11794.85 11622.15
1996/07/31 11482.87 11282.47
1996/08/31 11563.38 11307.19
1996/09/30 11885.42 11607.57
1996/10/31 11764.66 11488.79
1996/11/30 12378.55 11945.91
1996/12/31 12435.04 11792.24
IMATRL PRASUN SHR__CHT 19961231 19970116 082955 R00000000000027

Let's say hypothetically that $10,000 was invested in Overseas Fund 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 $12,435 - a 24.35%
increase on the initial investment. With reinvested dividends and capital
gains, if any, the same $10,000 investment in the Morgan Stanley EAFE Index
would have grown to $11,792 over the same period - a 17.92% 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. 1.9

Total SA Class B 1.7

Novartis AG (Reg.) 1.6

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

Finance 13.3

Durables 11.9

Basic Industries 10.8

Utilities 8.4

Energy 8.1

GEOGRAPHIC DIVERSIFICATION AS OF DECEMBER 31, 1996
(EXCLUDING CASH EQUIVALENTS) % OF FUND'S
INVESTMENTS

Japan 23.2

United Kingdom 12.3

France 9.3

Germany 6.5

Netherlands 5.8

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 III: OVERSEAS FUND
FUND TALK: THE MANAGER'S OVERVIEW

An interview with Richard Mace, Portfolio Manager of Overseas Fund
Q. RICK, HOW DID THE FUND PERFORM?
A. 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 managements 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, 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 and British Petroleum. Additionally, I added to positions that I
considered value holdings in Europe, such as Veba, Alcatel and Volvo - and
that, in my opinion, exemplified some of the themes I discussed before.
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. Some 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.
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.
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 increase the value of the fund's
shares by investing mainly in stocks in
Europe, the Far East and the Pacific Basin
START DATE: January 3, 1995
SIZE: as of December 31, 1996, more than
$45 million
MANAGER: Richard Mace, since March 1996;
joined Fidelity in 1987
(checkmark)
VARIABLE INSURANCE PRODUCTS FUND III: OVERSEAS FUND
INVESTMENTS DECEMBER 31, 1996

Showing Percentage of Total Value of Investment in Securities

COMMON STOCKS - 84.4%
SHARES VALUE (NOTE 1)
ARGENTINA - 0.1%
Perez Companc Class B 9,789 $ 68,829
AUSTRALIA - 1.4%
Brambles Industries Ltd. 9,900 193,184
CSR Ltd. 43,198 151,078
Coles Myer Ltd. 17,900 73,700
Western Mining Holdings Ltd. 25,919 163,372
Woolworths Ltd. 26,200 63,100
644,434
BELGIUM - 0.4%
Credit Communal Holding/Dexia (b) 1,000 91,206
Delhaize Freres & Cie Le Lion SA 1,600 95,018
186,224
BRAZIL - 1.0%
Multicanal Participacoes SA
sponsored ADR (a) 2,300 29,469
Telebras sponsored ADR 5,600 428,400
457,869
CANADA - 2.4%
Alcan Aluminium Ltd. 7,000 236,167
BCE, Inc. 3,100 147,668
Bre-X Minerals Ltd. (a) 7,700 121,888
Bro-X Minerals Ltd. (a) 1,070 1,873
Canadian Natural Resources Ltd. (a) 5,100 139,884
Canada Occidental Petroleum Ltd. 1,800 28,953
Greenstone Resources Ltd. (a) 3,300 38,396
Inco Ltd. 11,000 351,060
Renaissance Energy Ltd. (a) 1,400 47,642
1,113,531
DENMARK - 0.5%
Den Danske Bank Group AS 800 64,467
International Service Systems AS, Series B 4,400 115,701
Unidanmark AS Class A 700 36,220
216,388
EMERGING MARKETS - 0.1%
GT Global Developing Markets Fund 1,500 17,438
Templeton Dragon Fund, Inc. 600 9,678
27,116
FINLAND - 1.7%
Cultor OY, Series 1 1,500 81,430
Huhtamaki Ord. 4,600 213,758
Metsa-Serla Ltd. Class B 9,100 68,173
Nokia Corp. AB, Series A 700 40,554
Pohjola Class B 5,900 132,600
UPM-Kymmene Corp. 2,100 44,005
Valmet OY 8,100 142,469
Valmet OY (b) 2,500 43,646
766,635
FRANCE - 9.3%
Alcatel Alsthom Compagnie
Generale d'Electricite SA 7,491 601,589
Axa SA 3,608 229,410
Canal Plus SA 939 207,340
CLF-Dexia 1,500 130,636
Compagnie de Saint Gobain 200 28,285
Credit Commercial de France Ord. 1,100 50,867
Eramet SA 4,550 238,459
Generale des Eaux, Cie 450 55,751
Groupe Danone 900 125,376

SHARES VALUE (NOTE 1)
Lafarge Coppee SA 1,830 $ 109,765
Michelin SA (Compagnie Generale des
Etablissements) Class B 8,759 472,716
Nationale Elf Aquitaine 3,700 336,707
Paribas SA (Cie Financiere) Class A 400 27,044
Pechiney SA Class A 12,284 514,555
Peugeot SA Ord. 500 56,262
Rhone Poulenc SA Class A 700 23,859
Societe Generale Class A 600 64,855
Total SA Class B 9,599 780,497
Usinor Sacilor 9,674 140,730
Valeo SA 100 6,166
4,200,869
GERMANY - 6.3%
BASF AG 3,200 121,440
Bayer AG 9,200 375,997
Buderus AG 100 49,303
Continental Gummi-Werke AG 5,600 100,993
Daimler-Benz AG Ord. (a) 4,000 275,446
Dresdner Bank AG Ord. 1,500 44,810
Hoechst AG Ord. 2,500 117,013
Karstadt AG 100 32,436
Mannesmann AG Ord. 300 130,003
New Germany Fund, Inc. (The) 2,900 38,788
Veba AG Ord. 20,300 1,175,464
Volkswagen AG 900 373,078
2,834,771
HONG KONG - 2.0%
Great Eagle Holdings Ltd. 24,000 98,985
HSBC Holdings PLC 19,100 415,522
Hong Kong & China Gas Co. Ltd. 54,000 104,376
Hutchison Whampoa Ltd. Ord. 6,000 47,127
Hysan Development Co. Ltd. 36,000 143,358
Oriental Press Group Ltd. (warrants) (a) 5,800 412
Peregrine Investments Holdings Ltd. 20,000 34,262
Wharf Holdings Ltd. (b) 10,000 49,906
893,948
INDONESIA - 0.1%
Matahari Putra Prima PT (For. Reg.) 22,500 26,196
IRELAND - 0.7%
Bank of Ireland, Inc. 26,400 241,040
Independent Newspapers PLC 20,133 100,015
341,055
ITALY - 1.4%
Credito Italiano Ord. 38,100 41,865
Eni Spa 57,000 292,998
Magneti Marelli Spa 25,800 32,122
Montedison Spa Ord. (a) 18,204 12,448
Olivetti & Co. Spa Ord. (a) 103,300 36,230
Pirelli Spa Ord. 38,500 71,091
SAI (Sta Assieuratrice Industriale) Spa 5,000 45,903
Telecom Italia Spa 18,500 48,017
Telecom Italia Mobile Spa 18,500 46,859
627,533
JAPAN - 22.1%
Acom Co. Ltd. 1,000 42,605
Amway Japan Ltd. 4,300 137,956
Aoyama Trading Co. Ord. 6,400 170,004
Asahi Chemical Industry Co. Ltd. 6,000 33,946
Asahi Breweries Ltd. 6,000 62,096
Bank of Tokyo-Mitsubishi Ltd. 3,000 55,627
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
JAPAN - CONTINUED
Bridgestone Corp. 4,000 $ 75,895
Canon, Inc. 27,000 596,119
Citizen Watch Co. Ltd. Ord. 11,000 78,741
DDI Corp. Ord. 22 145,339
Daiwa House Industry Co. Ltd. 7,000 89,953
Daiwa Securities Co. Ltd. 23,000 204,312
Denny's Japan Co. Ltd. 2,000 61,061
Daito Trust Construction Co. 17,900 199,146
Fuji Bank Ltd. 7,000 102,027
Fuji Photo Film Co. Ltd. 21,000 691,850
Fujitsu Ltd. 9,000 83,829
Hitachi Koki Co. Ltd. Ord. 4,000 28,599
Hitachi Ltd. 27,000 251,488
Hitachi Maxell Ltd. 10,000 220,785
Honda Motor Co. Ltd. 15,000 428,202
Hoya Corp. 1,000 39,241
Ito-Yokado Co. Ltd. 7,000 304,269
Jusco Co. Ltd. 1,000 33,894
Kao Corp. 2,000 23,286
Kobe Steel Ltd. Ord. (a) 19,000 39,983
Komatsu Ltd. Ord. 28,000 229,409
Kyocera Corp. 1,000 62,268
Matsushita Electric Industrial Co. Ltd. 23,000 374,903
Minebea Co. Ltd. 19,000 158,620
Minolta Camera Co. Ltd. 4,000 24,183
Mitsubishi Electric Co. Ord. 18,000 107,115
Mitsubishi Estate Co. Ltd. 6,000 61,578
Mitsubishi Heavy Industries Ltd. 31,000 245,968
NEC Corp. 3,000 36,223
NKK Corp. (a) 17,000 38,266
Namco Ltd. 1,600 48,987
Nichido Fire & Marine Insurance
Co. Ltd. (a) 250 1,423
Nichiei Co. Ltd. 600 44,243
Nikko Securities Co. Ltd. 13,000 96,869
Nintendo Co. Ltd. Ord. 5,100 364,631
Nippon Telegraph & Telephone Corp. Ord. 5 37,861
Nitto Denko Corp. 2,000 29,323
Nomura Securities Co. Ltd. 21,000 315,136
Omron Corp. 4,000 75,205
Onward Kashiyama & Co. Ltd. 9,000 126,520
Orix Corp. 7,000 290,987
Ricoh Co. Ltd. Ord. 15,000 172,057
Rohm Co. Ltd. 2,000 131,091
Sakura Bank Ltd. 25,000 178,525
Sankyo Co. Ltd. 6,000 169,728
Sekisui Chemical Co. Ltd. 6,000 60,543
Sony Corp. 5,600 366,572
TDK Corp. 3,000 195,343
Takeda Chemical Industries Ltd. (a) 32,000 670,634
Toyota Motor Corp. 30,000 861,578
Uni Charm Corp. Ord. 2,000 48,987
Uny Co. Ltd. 7,000 127,986
York Benimaru Co. 400 11,143
9,964,158
KOREA (SOUTH) - 0.3%
Korea Electric Power Corp. 4,890 142,360

SHARES VALUE (NOTE 1)
MEXICO - 0.4%
Cifra SA Class C (a) 40,000 $ 48,688
Gruma SA Class B sponsored
ADR (a)(b) 2,200 52,800
Tubos De Acero De Mexico ADR (a) 3,700 58,738
160,226
MALAYSIA - 0.1%
Arab Malaysian Corp. BHD 9,000 44,902
MULTI-NATIONAL- 0.0%
Morgan Stanley Asia-Pacific Fund, Inc. 900 8,775

NETHERLANDS - 5.8%
AKZO Nobel NV 3,200 436,961
DSM NV 1,700 167,610
ING Groep NV 10,460 376,446
KBB NV Ord. 900 64,832
KLM Royal Dutch Air Lines NV 2,110 59,333
Koninklijke KNP BT NV 800 17,451
New Holland NV (a) 3,900 81,413
Philips Electronics NV (Bearer) 7,800 315,917
Royal Dutch Petroleum Co. Ord. 3,040 532,787
Unilever NV Ord. 2,000 353,642
Vendex International NV 500 21,379
Vendex International NV (b) 4,300 183,863
2,611,634
NETHERLANDS ANTILLES - 0.3%
Schlumberger Ltd. 1,500 149,813
NORWAY - 1.3%
Den Norske Bank AS Class A Free shares 48,300 185,536
Norsk Hydro AS 4,100 222,421
Orkla AS Class B (non-vtg.) 800 50,674
Saga Petroleum AS Class B 7,900 123,863
582,494
PERU - 0.0%
Compania de Minas Buenaventura SA
Class B sponsored ADR 1,600 27,000
PORTUGAL - 0.1%
Telecel Comunicacoes Pessoais SA (a) 500 31,905
SINGAPORE - 0.1%
Kim Engineering Holdings Ltd. 61,000 55,791
SOUTH AFRICA - 0.2%
JCI Ltd. (a) 8,000 78,658
SPAIN - 3.6%
ACERINOX SA (Reg.) 700 101,101
Banco Bilbao Vizcaya SA Ord. (Reg.) 6,900 372,384
Banco de Santander SA Ord. (Reg.) 4,800 307,091
Banco Intercontinental Espanol 800 123,982
FOCSA (Fomento Construcciones y
Contratas SA) 900 83,840
Tabacalera SA, Series A 8,000 344,291
Telefonica de Espana SA Ord. 13,700 318,004
1,650,693
SWEDEN - 5.5%
ABB AB, Series B 300 33,812
Astra AB Class A Free shares 2,700 132,839
Assi Doman Ab Free shares 1,600 44,382
COMMON STOCKS - CONTINUED
SHARES VALUE (NOTE 1)
SWEDEN - CONTINUED
Bure Investment AB (b) 1,300 $ 15,373
Electrolux AB 3,200 185,002
Esselte AB Class B Free shares 1,900 41,885
Investor AB Class B Free shares 4,500 198,076
Nordbanken AB 3,000 90,443
Scania AB:
Class B 10,200 253,896
Series B (warrants) (a) 3,100 2,761
Skandinaviska Enskilda Banken
Class A Free shares 5,300 54,163
Skandia Foersaekrings AB 5,700 160,607
Svenska Cellulosa AB (SCA)
Class B Ord. 2,500 50,550
Svenska Handelsbanken 1,500 42,922
Swedish Match Co. 48,000 168,184
Volvo AB Class B 45,000 988,737
2,463,632
SWITZERLAND - 2.8%
Credit Suisse Group (Reg.) 2,300 235,745
Nestle SA (Reg.) 166 177,817
Novartis AG (Reg.) 624 713,076
Roche Holding AG participation
certificates 17 131,983
1,258,621
UNITED KINGDOM - 12.3%
Asda Group PLC 45,900 96,711
BAT Industries PLC Ord. 5,400 44,771
Barclays PLC Ord. 12,800 219,045
Barratt Developments PLC 35,000 151,087
Bass PLC Ord. 6,200 87,301
Blue Circle Industries PLC 9,200 56,262
Boots Co. PLC (The) 6,900 71,155
British Airways PLC Ord. 5,400 56,102
British Aerospace PLC 3,600 78,812
British Petroleum PLC Ord. 39,576 474,556
British Telecommunications PLC Ord. 17,200 116,381
Cable & Wireless PLC Ord. 11,800 98,641
Caradon PLC 60,100 247,083
Christies International PLC 200 795
Cookson Group PLC 100,200 404,218
Courtaulds PLC Ord. 800 5,413
Dixons Group PLC 25,000 232,540
Glaxo Holdings PLC 14,000 227,829
Granada Group PLC 17,400 257,228
Grand Metropolitan PLC 38,446 301,630
ICI (Imperial Chemical Industries)
PLC Ord. 3,000 39,545
Ladbroke Group PLC Ord. 12,100 48,087
Lloyds TSB Group PLC 54,063 399,149
Lucas Varity PLC 5,600 21,392
National Grid Co. PLC 27,400 91,526
National Westminster Bank PLC Ord. 8,200 96,360
Prudential Corp. PLC 8,705 73,365
Redland PLC Ord. 10,300 65,106
Rentokil Group PLC 3,000 22,612
Rolls Royce PLC Ord. 26,371 116,096
Rugby Group PLC 36,000 57,968
Sears PLC 56,200 90,494
Shell Transport & Trading Co. PLC
(Reg.) 23,000 398,324
ADR 500 51,188

SHARES VALUE (NOTE 1)
SmithKline Beecham PLC Ord. 20,740 $ 287,063
Unigate PLC 7,900 56,296
Unilever PLC Ord. 7,200 174,520
Vodafone Group PLC sponsored ADR 500 20,688
Vodafone Group PLC 48,925 207,007
Wickes PLC 11,300 3,871
5,548,217
UNITED STATES OF AMERICA - 2.1%
Alumax, Inc. (a) 9,700 323,738
Aluminum Co. of America 5,300 337,875
Jefferson Smurfit Corp. (a) 500 8,031
Kaiser Aluminum Corp. (a) 11,000 127,875
MCI Communications Corp. 3,100 101,331
Newmont Mining Corp. 1,000 44,750

943,600
TOTAL COMMON STOCKS
(Cost $35,482,772) 38,127,877
PREFERRED STOCKS - 1.3%
CONVERTIBLE PREFERRED STOCKS - 0.0%
JAPAN - 0.0%
AJL participating trust exchangeable 1,300 21,288
NONCONVERTIBLE PREFERRED STOCKS - 1.3%
GERMANY - 0.2%
Volkswagen AG 200 64,736
ITALY - 1.1%
SAI Sta Assicuratrice Industriale Spa 7,000 25,023
Stet (Societa Finanziaria
Telefonica) Spa 116,400 392,754
Telecom Italia Mobile Spa de Risp 55,800 80,906
498,683
TOTAL NONCONVERTIBLE PREFERRED STOCKS 563,419
TOTAL PREFERRED STOCKS
(Cost $444,744) 584,707
CONVERTIBLE BONDS - 0.2%
PRINCIPAL VALUE
AMOUNT (NOTE 1)
BERMUDA - 0.2%
MBL International Finance of
Bermuda 3%, 11/30/02
(Cost $90,280) Aa2 $ 80,000 84,800
GOVERNMENT OBLIGATIONS - 0.1%
UNITED STATES OF AMERICA - 0.1%
U.S. Treasury Bills, yields at
date of purchase 4.94% to
4.97%, 3/6/97 (c)
(Cost $34,636) 35,000 34,696
CASH EQUIVALENTS - 14.0%
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 $ 6,333,374 $ 6,331,000
TOTAL INVESTMENT IN SECURITIES - 100%
(Cost $42,383,432) $ 45,163,080
FUTURES CONTRACTS
EXPIRATION UNDERLYING FACE UNREALIZED
DATE AMOUNT AT VALUE GAIN/(LOSS)
PURCHASED
5 Nikkei 225 Stock
Index Contracts March, 1997 $ 484,500 $ (15,797)
THE FACE VALUE OF FUTURES PURCHASED AS A PERCENTAGE OF TOTAL INVESTMENT
IN SECURITIES -1.1%
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 $436,794 or 1.0% 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 $24,783.
OTHER INFORMATION
Purchases and sales of securities, other than short-term securities,
aggregated $42,918,481 and $23,044,893, 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 amounted to $8,195 for the
period (see Note 4 of Notes to Financial Statements).
The market value of futures contracts opened and closed during the period
amounted to $713,604 and $205,984, respectively.
INCOME TAX INFORMATION
At December 31, 1996, the aggregate cost of investment securities for
income tax purposes was $42,391,330. Net unrealized appreciation aggregated
$2,771,750 of which $4,290,318 related to appreciated investment securities
and $1,518,568 related to depreciated investment securities.
The fund hereby designates approximately $489,000 as a capital gain
dividend for the purpose of the dividend paid deduction.
MARKET SECTOR DIVERSIFICATION
As a Percentage of Total Value of Investment in Securities
Aerospace & Defense 0.4%
Basic Industries 10.8
Cash Equivalents 14.1
Construction & Real Estate 3.1
Durables 11.9
Energy 8.1
Finance 13.3
Health 5.3
Holding Companies 0.1
Industrial Machinery & Equipment 4.2
Media & Leisure 2.5
Nondurables 5.2
Precious Metals 0.9
Retail & Wholesale 4.2
Services 0.7
Technology 6.1
Transportation 0.7
Utilities 8.4
100.0%
VARIABLE INSURANCE PRODUCTS FUND III: OVERSEAS FUND
FINANCIAL STATEMENTS

STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996

ASSETS

Investment in $ 45,163,080
securities, at
value
(including
repurchase
agreements
of
$6,331,000)
(cost
$42,383,432)
- -
See
accompanyin
g schedule

Receivable for 102,313
investments
sold

Receivable for 9,757
fund shares
sold

Dividends 63,630
receivable

Interest 200
receivable

TOTAL ASSETS 45,338,980

LIABILITIES

Payable to $ 10,611
custodian
bank

Payable for 57,646
investments
purchased

Accrued 30,279
management
fee

Payable for 375
daily
variation on
futures
contracts

Other payables 35,171
and
accrued
expenses

TOTAL 134,082
LIABILITIES

NET ASSETS $ 45,204,898

Net Assets
consist of:

Paid in capital $ 42,012,643

Distributions in (36,291
excess of net )
investment
income

Accumulated 464,379
undistributed
net realized
gain (loss) on
investments
and foreign
currency
transactions

Net unrealized 2,764,167
appreciation
(depreciation
) on
investments
and assets
and liabilities
in
foreign
currencies

NET ASSETS, for $ 45,204,898
3,775,844
shares
outstanding

NET ASSET $11.97
VALUE,
offering price
and
redemption
price per
share
($45,204,898
(divided by) 3,775,844
shares)

STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996

INVESTMENT $ 627,018
INCOME
Dividends

Special 86,646
dividend from
Volvo AB

Interest 270,381

984,045

Less foreign (79,992
taxes )
withheld

TOTAL 904,053
INCOME

EXPENSES

Management $ 251,105
fee

Transfer agent 22,299
fees

Accounting 60,125
fees and
expenses

Non-interested 123
trustees'
compensatio
n

Custodian fees 161,210
and
expenses

Registration 8
fees

Audit 19,171

Legal 524

Miscellaneous 189

Total 514,754
expenses
before
reductions

Expense (18,773 495,981
reductions )

NET 408,072
INVESTMENT
INCOME

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

Investment 1,484,108
securities

Foreign (1,172
currency )
transactions

Futures (7,323 1,475,613
contracts )

Change in net
unrealized
appreciation
(depreciation
) on:

Investment 2,189,442
securities

Assets and 417
liabilities in
foreign
currencies

Futures (15,797 2,174,062
contracts )

NET GAIN (LOSS) 3,649,675

NET INCREASE $ 4,057,747
(DECREASE)
IN NET ASSETS
RESULTING
FROM
OPERATIONS

OTHER $ 18,773
INFORMATION
Expense
reductions
FMR
reimburseme
nt

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 $ 408,072 $ 77,870
Net
investment
income

Net realized 1,475,613 (47,389)
gain (loss)

Change in 2,174,062 590,105
net
unrealized
appreciation
(depreciation
)

NET INCREASE 4,057,747 620,586
(DECREASE)
IN NET
ASSETS
RESULTING
FROM
OPERATIONS

Distributions to (430,983) (77,870)
shareholders
From net
investment
income

In excess of - (13,153)
net
investment
income

From net (964,072) -
realized gain

TOTAL (1,395,055) (91,023)
DISTRIBUTION
S

Share 26,228,208 17,966,550
transactions
Net proceeds
from sales of
shares

Reinvestmen 1,395,055 91,023
t of
distributions

Cost of (2,675,949) (992,244)
shares
redeemed

NET INCREASE 24,947,314 17,065,329
(DECREASE)
IN NET
ASSETS
RESULTING
FROM SHARE
TRANSACTIO
NS

TOTAL 27,610,006 17,594,892
INCREASE
(DECREASE)
IN NET ASSETS

NET ASSETS 17,594,892 -
Beginning of
period

End of period $ 45,204,898 $ 17,594,892
(including
distribution
s in excess
of net
investment
income of
$36,291
and
$14,210,
respectivel
y)

OTHER
INFORMATION
Shares

Sold 2,280,628 1,690,464

Issued in 118,507 8,327
reinvestment
of
distributions

Redeemed (229,159) (92,923)

Net increase 2,169,976 1,605,868
(decrease)

<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> <C> <C> <C> <C> <C>
SELECTED PER-SHARE DATA YEAR ENDED JANUARY 3, 1995
DECEMBER 31, (COMMENCEMENT
1996 OF OPERATIONS) TO
DECEMBER 31, 1995

</TABLE>

Net asset $ 10.96 $ 10.00
value,
beginning of
period

Income from
Investment
Operations

Net .12 E .05
investment
income

Net realized 1.28 .97
and
unrealized
gain (loss)

Total from 1.40 1.02
investment
operations

Less
Distributions

From net (.12) F (.05)
investment
income

In excess of - (.01)
net
investment
income

From net (.27) F -
realized gain

Total (.39) (.06)
distributions

Net asset $ 11.97 $ 10.96
value, end of
period

TOTAL 12.84% 10.20%
RETURN A, B

RATIOS AND
SUPPLEMENT
AL DATA

Net assets, $ 45,205 $ 17,595
end of period
(000 omitted)

Ratio of 1.49% C 1.50% C
expenses to
average net
assets

Ratio of net 1.23% 1.23%
investment
income to
average net
assets

Portfolio 80% 43%
turnover rate

Average $ .0172
commission
rate D

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 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). D 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. E INVESTMENT
INCOME PER SHARE REFLECTS A SPECIAL DIVIDEND FROM
VOLVO AB WHICH AMOUNTED TO $.02 PER SHARE. F THE
AMOUNTS SHOWN REFLECT CERTAIN RECLASSIFICATIONS RELATED
TO BOOK TO TAX DIFFERENCES (SEE NOTE 1 OF NOTES TO
FINANCIAL STATEMENTS).

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

1. SIGNIFICANT ACCOUNTING POLICIES.
The Money Market Fund, Government Investment Fund, High Yield Fund,
Balanced Portfolio (formerly Income and Growth Fund), Growth Opportunities
Portfolio (formerly Growth Opportunities Fund) and Overseas Fund (the
funds) are funds of Variable Insurance Products Fund III (the trust)
(formerly Fidelity Advisor Annuity Fund). 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.
Each fund is authorized to issue an unlimited number of shares. Shares of
each 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 funds:
SECURITY VALUATION:
MONEY MARKET FUND. 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.
GOVERNMENT INVESTMENT FUND AND HIGH YIELD FUND. 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.
BALANCED PORTFOLIO. 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.

GROWTH OPPORTUNITIES PORTFOLIO AND OVERSEAS FUND. 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 funds 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 and foreign currency options, 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, each fund is not subject to income taxes to
the extent that it distributes substantially all of its taxable income for
the fiscal year. The schedules of investments include information regarding
income taxes under the caption "Income Tax Information."
INVESTMENT INCOME:
MONEY MARKET FUND. Interest income, which includes amortization of premium
and accretion of discount, is accrued as earned.
GOVERNMENT INVESTMENT, HIGH YIELD, BALANCED, GROWTH OPPORTUNITIES AND
OVERSEAS FUNDS. 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 funds are 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, if any, is
accrued as earned. Investment income is recorded net of foreign taxes
withheld where recovery of such taxes is uncertain.
1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 for the Money Market Fund. Distributions
are recorded on the ex-dividend date for all other funds. 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, partnerships, non-taxable dividends and losses deferred
due to wash sales and excise tax regulations.
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,
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 funds generally use 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 funds, 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 funds, 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 funds'
investment adviser, is responsible for determining that the value of the
underlying securities remains in accordance with the market value
requirements stated above.
DELAYED DELIVERY TRANSACTIONS. The funds, as applicable, may purchase or
sell securities on a delayed delivery basis. Payment and delivery may take
place a month or more after the date of the transaction. The price of the
underlying securities and the date when the securities will be delivered
and paid for are fixed at the time the transaction is negotiated. The fund
may receive compensation for interest forgone in the purchase of a delayed
delivery security. With respect to purchase commitments, the fund
identifies securities as segregated in its custodial records with a value
at least equal to the amount of the commitment. Losses may arise due to
changes in the market value of the underlying securities or if the
counterparty does not perform under the contract.
FUTURES CONTRACTS AND OPTIONS. The funds, as applicable, may use futures
contracts and options to manage their exposure to the stock and bond
markets and to fluctuations in interest rates and currency values. Buying
futures, writing puts, and buying calls tend to increase the funds'
exposure to the underlying instrument. Selling futures, buying puts, and
writing calls tend to decrease the funds' exposure to the underlying
instrument, or hedge other fund investments. Futures contracts involve, to
varying degrees, risk of loss in excess of each applicable fund's 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. Exchange-traded
options are valued using the last sale price or, in the absence of a sale,
the last offering price. Options traded over-the-counter are valued using
dealer-supplied valuations.
RESTRICTED SECURITIES. The funds are 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
funds 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
each applicable fund's schedule of investments.
4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
MANAGEMENT FEE. As each fund's investment adviser, FMR receives a monthly
fee.
For the Money Market Fund, 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 an 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 for the fund. 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 .24% of average net assets. For the
period, the management fee was equivalent to an annual rate of .21% of
average net assets.
For all other funds, FMR receives a monthly fee that is calculated on the
basis of a group rate plus a fixed individual fund fee rate applied to the
average net assets of each 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 for the Balanced, Growth Opportunities, and the Overseas funds.
The rates ranged from .1100% to .3700% for the period for the Government
Investment and High Yield funds. 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
Balanced, .30% for the Government Investment and Growth Opportunities, and
.45% for the High Yield and Overseas funds, respectively. For the period,
the management fees were equivalent to annual rates of .44%, .59%, .48%,
.61%, and .76% respectively of average net assets for the Government
Investment, High Yield, Balanced, Growth Opportunities and Overseas funds,
respectively. Effective August 1, 1996, FMR voluntarily agreed to reduce
Balanced Portfolio's individual fund fee rate from .20% to .15%.
SUB-ADVISER FEE. As the Money Market 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.
FMR, on behalf of the High Yield, Balanced, Growth Opportunities, and
Overseas funds, 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 funds' 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%, .06%, .07%, .06%, .07% and .07%
of the average net assets of the Money Market, Government Investment, High
Yield, Balanced, Growth Opportunities and Overseas funds, respectively.
ACCOUNTING FEES. Fidelity Service Co. (FSC), an affiliate of FMR, maintains
the funds' accounting records. The fee is based on the level of average net
assets for the month plus out-of-pocket expenses.
BROKERAGE COMMISSIONS. Certain funds placed a portion of their 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 each applicable fund's schedule of
investments.
5. EXPENSE REDUCTIONS.
FMR voluntarily agreed to reimburse operating expenses (excluding interest,
taxes, brokerage commissions and extraordinary expenses) above annual rates
of 1.00% of average net assets for the Money Market, High Yield and
Government Investment funds, and 1.50% of average net assets for the
Balanced, Growth Opportunities, and Overseas funds.
5. EXPENSE REDUCTIONS - CONTINUED
In addition, FMR agreed to reimburse a portion of the Government Investment
and Overseas funds' operating expenses.
FMR has also directed certain portfolio trades to brokers who paid a
portion of certain fund's expenses. In addition, certain funds have entered
into an arrangement with their custodian whereby interest earned on
uninvested cash balances was used to offset a portion of certain fund's
expenses.
For the period, the reductions under these arrangements are shown under the
caption "Other Information" on each applicable fund's Statement of
Operations.
6. BENEFICIAL INTEREST.
At the end of the period, an affiliate of FMR was record owner of 11% of
the outstanding shares of the Government Investment Fund. In addition,
certain unaffiliated insurance companies were record owners of 10% or more
of the total outstanding shares of the following funds:
BENEFICIAL INTEREST
FUND UNAFFILIATED INSURANCE COMPANIES
#OF % OF OWNERSHIP
Balanced 1 100
Government Investment 1 89
Growth Opportunities 1 100
High Yield 1 100
Money Market 1 100
Overseas 1 100
7. FUND LIQUIDATION INFORMATION.
In September 1996, the Board of Trustees approved a proposal to liquidate
Money Market Fund, Government Investment Fund, High Yield Fund, and
Overseas Fund, which would be a taxable transaction, and to transfer the
assets of those funds at fair market value to Money Market Portfolio,
Investment Grade Bond Portfolio, High Income Portfolio, and Overseas
Portfolio, respectively, of the Variable Insurance Products trusts. The
transfer of assets will have no tax impact on the owners of the variable
annuity contracts. The liquidation of the funds and the transfer of the
funds' assets are expected to occur in the first quarter of 1997.
REPORT OF INDEPENDENT ACCOUNTANTS

To the Trustees of Fidelity Variable Insurance Products Fund III (formerly
Fidelity Advisor Annuity Fund) and the Shareholders of Money Market Fund,
Government Investment Fund, High Yield Fund, Balanced Fund Portfolio
(formerly Income & Growth Fund), Growth Opportunites Portfolio (formerly
Growth Opportunities Fund) and Overseas Fund:
In our opinion, the accompanying statements of assets and liabilities,
including the schedules 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 Money Market Fund, Government
Investment Fund, High Yield Fund, Balanced Portfolio (formerly Income &
Growth Fund), Growth Opportunities Portfolio (formerly Growth
Opportunities Fund) and Overseas Fund (funds of Fidelity Variable
Insurance Products Fund III (formerly Fidelity Advisor Annuity Fund)) at
December 31, 1996, the results of their operations for the year then ended,
and the changes in their 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 Fidelity
Variable Insurance Products Fund III '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 11, 1997
DISTRIBUTIONS

The Board of Trustees of Fidelity Variable Insurance Products Fund III
voted to pay to shareholders of record at the opening of business on
February 7, 1997, the following distributions derived from capital gains
realized from sales of portfolio securities, and dividends derived from net
investment income:
DIVIDENDS CAPITAL GAINS
Money Market Fund - -
Government Investment Fund - -
High Yield Fund - -
Balanced Portfolio $0.31 -
Growth Opportunities Portfolio $0.25 $0.35
Overseas Fund - $0.13

INVESTMENT ADVISER
Fidelity Management & Research Company
Boston, MA
INVESTMENT SUB-ADVISERS
FMR Texas Inc., Irving, TX
MONEY MARKET FUND
Fidelity Management & Research (U.K.) Inc.,
London, England
BALANCED AND GROWTH OPPORTUNITIES PORTFOLIOS,
HIGH YIELD AND OVERSEAS FUNDS
Fidelity Management & Research (Far East) Inc.,
Tokyo, Japan
BALANCED AND GROWTH OPPORTUNITIES PORTFOLIOS,
HIGH YIELD AND OVERSEAS FUNDS
Fidelity International Investment Advisors
Pembroke, Bermuda
OVERSEAS FUND
Fidelity International Investment Advisors (U.K.) Limited
Kent, England
OVERSEAS FUND
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
Sarah H. Zenoble, VICE PRESIDENT
Bettina Doulton, VICE PRESIDENT
Kevin E. Grant, VICE PRESIDENT
Bob Litterst, VICE PRESIDENT
Richard R. Mace, Jr., VICE PRESIDENT
George A. Vanderheiden, VICE PRESIDENT
Thomas D. Maher, ASSISTANT VICE PRESIDENT - MONEY MARKET FUND
Arthur S. Loring, SECRETARY
Kenneth A. Rathgeber, TREASURER
Robert H. Morrison, MANAGER, SECURITY TRANSACTIONS
John H. Costello, ASSISTANT TREASURER
Leonard M. Rush, ASSISTANT TREASURER
Thomas J. Simpson, ASSISTANT TREASURER - MONEY MARKET FUND
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
* INDEPENDENT TRUSTEES
ADVISORY BOARD
William O. McCoy
GENERAL DISTRIBUTOR
Fidelity Distributors Corporation
Boston, MA
TRANSFER AND SHAREHOLDER
SERVICING AGENT
Fidelity Investments Institutional Operations Co.
Boston, MA
CUSTODIANS
The Bank of New York, New York, NY
MONEY MARKET, GOVERNMENT INVESTMENT AND
HIGH YIELD FUNDS
The Chase Manhattan Bank, N.A., New York, NY
BALANCED PORTFOLIO AND OVERSEAS FUND
Brown Brothers Harriman & Co., Boston, MA
GROWTH OPPORTUNITIES PORTFOLIO