-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FqA1+mqPTUCTVrRtyfx/+N/FaqUHdmtpL1mj0r0wLnC+qm8g/6Vg6qhrjE1DyFw3 Z2gh4J2Gb4/bWUQGO2XgMg== 0000354046-98-000003.txt : 19980520 0000354046-98-000003.hdr.sgml : 19980520 ACCESSION NUMBER: 0000354046-98-000003 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980519 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIDELITY CHARLES STREET TRUST CENTRAL INDEX KEY: 0000354046 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-03221 FILM NUMBER: 98628033 BUSINESS ADDRESS: STREET 1: 82 DEVONSHIRE ST CITY: BOSTON STATE: MA ZIP: 02109 BUSINESS PHONE: 2145064081 MAIL ADDRESS: STREET 1: 82 DEVONSHIRE STREET STREET 2: MAIL ZONE ZH-1 CITY: BOSTON STATE: MA ZIP: 02109 FORMER COMPANY: FORMER CONFORMED NAME: FIDELITY U S GOVERNMENT RESERVES FUND DATE OF NAME CHANGE: 19880201 FORMER COMPANY: FORMER CONFORMED NAME: FIDELITY FEDERAL RESERVES DATE OF NAME CHANGE: 19820215 FORMER COMPANY: FORMER CONFORMED NAME: FIDELITY UNITED STATES TREASURY TRUST DATE OF NAME CHANGE: 19811020 N-30D 1 (2_FIDELITY_LOGOS)FIDELITY ASSET MANAGER: GROWTH SM SEMIANNUAL REPORT MARCH 31, 1998 CONTENTS PRESIDENT'S MESSAGE 3 NED JOHNSON ON INVESTING STRATEGIES. PERFORMANCE 4 HOW THE FUND HAS DONE OVER TIME. MARKET RECAP 6 AN OVERVIEW OF THE MARKET'S PERFORMANCE AND THE FACTORS DRIVING IT. FUND TALK 7 THE MANAGERS' REVIEW OF FUND PERFORMANCE, STRATEGY AND OUTLOOK. INVESTMENT CHANGES 11 A SUMMARY OF MAJOR SHIFTS IN THE FUND'S INVESTMENTS OVER THE PAST SIX MONTHS. INVESTMENTS 12 A COMPLETE LIST OF THE FUND'S INVESTMENTS WITH THEIR MARKET VALUES. FINANCIAL STATEMENTS 49 STATEMENTS OF ASSETS AND LIABILITIES, OPERATIONS, AND CHANGES IN NET ASSETS, AS WELL AS FINANCIAL HIGHLIGHTS. NOTES 53 NOTES TO THE FINANCIAL STATEMENTS. THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS. MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED. NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK. FOR MORE INFORMATION ON ANY FIDELITY FUND, INCLUDING CHARGES AND EXPENSES, CALL 1-800-544-8888 FOR A FREE PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY. To reduce expenses and demonstrate respect for our environment, we have initiated a project through which we will begin eliminating duplicate copies of most financial reports and prospectuses to most households, even if they have more than one account in the fund. If additional copies of financial reports, prospectuses or historical account information are needed, please call 1-800-544-6666. PRESIDENT'S MESSAGE (photo_of_Edward_C_Johnson_3d) DEAR SHAREHOLDER: In the first quarter of 1998, the U.S. stock and bond markets responded differently to lingering uncertainty over the direction of the U.S. and global economies. On the one hand, the U.S. stock market soared to record heights as corporate earnings proved to be stronger than expected and investors shrugged off concerns about the effects of economic difficulties in Asia. On the other hand, two factors tempered returns in the bond market. First, interest-rate levels were generally positive, but were low enough to encourage a flood of new issuance that dampened performance. Second, there were concerns that continued economic strength might lead to eventual inflation, even though inflation indicators remained benign during the quarter. While it's impossible to predict the future direction of the markets with any degree of certainty, there are certain basic principles that can help investors plan for their future needs. First, investors are encouraged to take a long-term view of their portfolios. If you can afford to leave your money invested through the inevitable up and down cycles of the financial markets, you will greatly reduce your vulnerability to any single decline. We know from experience, for example, that stock prices have gone up over longer periods of time, have significantly outperformed other types of investments and have stayed ahead of inflation. Second, you can further manage your investing risk through diversification. Asset Manager funds are already diversified because they invest in stocks, bonds and short-term and money market instruments, both in the U.S. and overseas. If you have a shorter investment time horizon, you might want to consider moving some of your investment into Asset Manager: Income, which generally has a higher weighting in short-term investments compared with the other Asset Manager funds. Finally, no matter what your time horizon or portfolio diversity, it makes good sense to follow a regular investment plan, investing a certain amount of money in a fund at the same time each month or quarter and periodically reviewing your overall portfolio. By doing so, you won't get caught up in the excitement of a rapidly rising market, nor will you buy all your shares at market highs. While this strategy - known as dollar cost averaging - won't assure a profit or protect you from a loss in a declining market, it should help you lower the average cost of your purchases. If you have questions, please call us at 1-800-544-8888. We are available 24 hours a day, seven days a week to provide you the information you need to make the investments that are right for you. Best regards, Edward C. Johnson 3d PERFORMANCE: THE BOTTOM LINE 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 past five year and life of fund total returns would have been lower. CUMULATIVE TOTAL RETURNS PERIODS ENDED MARCH 31, 1998 PAST 6 PAST 1 PAST 5 LIFE OF MONTHS YEAR YEARS FUND FIDELITY ASSET MANAGER: GROWTH 13.40% 38.25% 114.16% 174.32% FIDELITY AGGR. ASSET ALLOCATION 13.29% 36.06% 119.95% N/A COMPOSITE S&P 500 (REGISTERED TRADEMARK) 17.22% 48.00% 174.71% 210.10% LB AGGREGATE BOND 4.54% 11.99% 39.89% N/A LB 3 MONTH T-BILL 2.64% 5.58% 27.62% N/A FLEXIBLE PORTFOLIO FUNDS AVERAGE 8.89% 28.72% 92.77% N/A CUMULATIVE TOTAL RETURNS show the fund's performance in percentage terms over a set period - in this case, six months, one year, five years or since the fund started on December 30, 1991. For example, if you had invested $1,000 in a fund that had a 5% return over the past year, the value of your investment would be $1,050. You can compare the fund's returns to the performance of the Fidelity Aggressive Asset Allocation Composite Index, a hypothetical combination of unmanaged indices. The composite index combines the total returns of the Standard & Poor's 500 Index, the Lehman Brothers Aggregate Bond Index and the Lehman Brothers 3 Month Treasury Bill Index weighted according to the fund's neutral mix. To measure how the fund's performance stacked up against its peers, you can compare it to the flexible portfolio funds average, which reflects the performance of mutual funds with similar objectives tracked by Lipper Analytical Services, Inc. The past six months average represents a peer group of 211 mutual funds. The benchmarks listed in the table above include reinvested dividends and capital gains, if any, and exclude the effect of sales charges. AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED MARCH 31, 1998 PAST 1 PAST 5 LIFE OF YEAR YEARS FUND FIDELITY ASSET MANAGER: GROWTH 38.25% 16.45% 17.51% FIDELITY AGGR. ASSET ALLOCATION COMPOSITE 36.06% 17.08% N/A AVERAGE ANNUAL TOTAL 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. $10,000 OVER LIFE OF FUND Asset Manager: Growth S&P 500 LB Aggregate Bond FID Aggr. Comp. (Alt) 00321 SP001 LB001 F0105 1991/12/31 10000.00 10000.00 10000.00 10000.00 1992/01/31 10367.06 9814.00 9863.96 9832.79 1992/02/29 10585.32 9941.58 9928.09 9928.85 1992/03/31 10436.51 9747.72 9872.12 9786.72 1992/04/30 10466.27 10034.30 9943.43 9994.20 1992/05/31 10684.52 10083.47 10131.06 10082.80 1992/06/30 10565.48 9933.23 10270.49 10030.65 1992/07/31 11001.98 10339.50 10480.03 10375.92 1992/08/31 10823.41 10127.54 10586.20 10268.64 1992/09/30 11071.43 10247.04 10711.68 10394.18 1992/10/31 11279.76 10282.91 10569.66 10371.52 1992/11/30 11686.51 10633.55 10572.05 10594.82 1992/12/31 11907.91 10764.35 10740.17 10733.81 1993/01/31 12079.90 10854.77 10946.12 10863.25 1993/02/28 12231.66 11002.39 11137.74 11025.99 1993/03/31 12707.16 11234.54 11184.15 11189.63 1993/04/30 12747.63 10962.67 11262.03 11041.15 1993/05/31 13010.68 11256.47 11276.37 11230.85 1993/06/30 13202.90 11289.11 11480.73 11328.95 1993/07/31 13445.72 11243.95 11545.66 11321.07 1993/08/31 13992.04 11670.10 11748.03 11677.20 1993/09/30 13931.34 11580.24 11780.30 11634.00 1993/10/31 14366.38 11819.95 11824.32 11804.96 1993/11/30 14244.97 11707.66 11723.73 11694.61 1993/12/31 15041.53 11849.32 11787.27 11802.05 1994/01/31 15622.08 12252.20 11946.42 12113.43 1994/02/28 15157.64 11920.17 11738.87 11822.99 1994/03/31 14387.09 11400.45 11449.46 11410.18 1994/04/30 14365.98 11546.37 11358.03 11479.88 1994/05/31 14482.09 11735.73 11356.44 11600.01 1994/06/30 14049.31 11448.21 11331.34 11409.94 1994/07/31 14397.64 11823.71 11556.42 11717.71 1994/08/31 14904.30 12308.48 11570.76 12032.78 1994/09/30 14682.64 12006.92 11400.46 11792.90 1994/10/31 14724.86 12277.08 11390.30 11965.75 1994/11/30 14302.64 11829.95 11365.00 11677.52 1994/12/31 13930.27 12005.39 11443.48 11814.50 1995/01/31 13583.09 12316.69 11669.95 12082.17 1995/02/28 13810.93 12796.67 11947.42 12468.34 1995/03/31 14093.00 13174.30 12020.72 12734.26 1995/04/30 14483.57 13562.28 12188.63 13031.23 1995/05/31 14841.59 14104.36 12660.29 13531.10 1995/06/30 15156.22 14432.01 12753.11 13770.98 1995/07/31 15785.47 14910.57 12724.63 14055.82 1995/08/31 15872.26 14948.00 12878.20 14131.14 1995/09/30 16143.49 15578.81 13003.49 14562.61 1995/10/31 15948.20 15523.19 13172.59 14599.91 1995/11/30 16338.77 16204.66 13369.98 15087.68 1995/12/31 16709.46 16516.76 13557.61 15345.57 1996/01/31 17260.20 17078.99 13647.64 15717.60 1996/02/29 17238.17 17237.31 13410.42 15718.76 1996/03/31 17271.22 17403.31 13317.20 15779.27 1996/04/30 17568.62 17659.83 13242.31 15903.57 1996/05/31 17766.88 18115.28 13215.42 16166.03 1996/06/30 17843.99 18184.30 13392.89 16271.19 1996/07/31 17392.38 17380.92 13429.54 15819.24 1996/08/31 17513.54 17747.48 13407.03 16029.81 1996/09/30 18240.52 18746.31 13640.67 16698.83 1996/10/31 18769.23 19263.33 13942.83 17112.13 1996/11/30 20002.89 20719.45 14181.66 18045.43 1996/12/31 19648.40 20308.99 14049.80 17761.29 1997/01/31 20465.58 21577.90 14092.82 18555.95 1997/02/28 20693.91 21747.07 14127.88 18673.00 1997/03/31 19684.45 20853.48 13971.32 18088.01 1997/04/30 20489.61 22098.44 14180.46 18916.17 1997/05/31 21739.42 23443.79 14314.51 19772.24 1997/06/30 22388.36 24494.07 14484.41 20454.68 1997/07/31 23902.55 26443.06 14875.01 21737.47 1997/08/31 23133.43 24961.72 14748.13 20843.87 1997/09/30 23998.69 26328.88 14965.64 21724.92 1997/10/31 23505.97 25449.49 15182.75 21300.41 1997/11/30 24251.05 26627.55 15252.66 22019.69 1997/12/31 24847.53 27084.74 15406.23 22344.67 1998/01/31 25035.77 27384.30 15604.02 22594.53 1998/02/28 26461.01 29359.26 15592.27 23734.86 1998/03/31 27213.97 30862.74 15645.29 24611.43 IMATRL PRASUN SHR__CHT 19980331 19980424 143632 R00000000000078 $10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was invested in Fidelity Asset Manager: Growth on December 31, 1991, shortly after the fund started. As the chart shows, by March 31, 1998, the value of the investment would have grown to $27,214 - a 172.14% increase on the initial investment. For comparison, look at how both the S&P 500, a widely recognized, unmanaged index of common stocks, and the Lehman Brothers Aggregate Bond Index, a market value weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage backed securities, with maturities of at least one year, did over the same period. With dividends and capital gains, if any, reinvested, the same $10,000 investment in the S&P 500 would have grown to $30,863 - a 208.63% increase. If $10,000 was invested in the Lehman Brothers Aggregate Bond Index, it would have grown to $15,645 - a 56.45% increase. You can also look at how the Fidelity Aggressive Asset Allocation Composite Index, did over the same period. The composite index combines the total returns of the S&P 500 (+208.63%), the Lehman Brothers Aggregate Bond Index (+56.45%) and the Lehman Brothers 3-month T-Bill Index (+32.39%) according to the fund's neutral mix,* and assumes monthly rebalancing of the mix. With dividends and interest, if any, reinvested, the same $10,000 investment would have grown to $24,611 - a 146.11% increase. UNDERSTANDING PERFORMANCE How a fund did yesterday is no guarantee of how it will do tomorrow. If you sell your shares during a market downturn, you might lose money. But if you can ride out the market's ups and downs, you may have a gain. (checkmark) * CURRENTLY 70% STOCKS, 25% BONDS AND 5% SHORT-TERM/MONEY MARKET INSTRUMENTS EFFECTIVE JANUARY 1, 1997; 65%, 30% AND 5%, RESPECTIVELY, PRIOR TO JANUARY 1, 1997. Despite being tested during the period, the U.S. stock and bond markets performed well during the six months that ended March 31, 1998. Economic trouble in Southeast Asia caused worldwide concern, but a domestic economic environment of low inflation, low interest rates and steady growth spelled positive returns for both stocks and bonds. STOCKS: The U.S. stock market showed its resiliency during the period. Despite the economic uncertainty in Southeast Asia - and the resulting concern that U.S. corporate earnings would slow - the stock market performed well. The Standard & Poor's 500 Index - a measure of the U.S. stock market - returned 17.22% during this time. In late October, after several small Southeast Asian countries devalued their currencies, a full-fledged economic crisis enveloped the region. These troubles had ripple effects throughout the world, particularly in the U.S., where the Dow Jones Industrial Average plummeted 550-plus points in one trading session. Many U.S. corporations with business exposure to Southeast Asia announced earnings disappointments. Investors showed their concern by embarking on a "flight to quality," seeking shelter in stocks of companies with minimal international exposure. Despite this turbulence, however, the continued strength of the U.S. economy seemed to buoy the stock market as low interest rates, low inflation and moderate growth combined to make for a favorable economic backdrop. After digesting the events that took place in Southeast Asia, investors regained their attraction to stocks. Through the first three months of 1998, cash inflows into stock mutual funds were very strong and the Dow itself was approaching the 9000-point barrier. BONDS: Similar to their equity counterparts, bonds benefited from the continued lack of inflationary pressure during the period. The Lehman Brothers Aggregate Bond Index - a broad gauge of the U.S. taxable investment-grade bond market - returned 4.54% during this period. Global volatility and historically low interest rates were the main stories in the last quarter of 1997. Financial problems in Asia came to a head in October, resulting in a "flight to quality." Wary stock investors sought investments offering lower volatility, helping the U.S. bond market - especially U.S. Treasuries - surge. The Lehman Brothers Corporate Bond Index returned 4.49% for the six months. Corporate bonds benefited from continued economic growth and demand for yield, although they faltered somewhat in January 1998. Investors feared a slowdown in demand from Asia would eat into corporate earnings. In spite of record new issuance in February 1998, corporates rebounded due in part to increased demand on the part of yield-hungry investors. Mortgage-backed bonds performed well during the period, even though lower interest rates resulted in more mortgage prepayment activity. The Lehman Brothers Mortgage-Backed Securities Index generated a six-month return of 4.04%. High-yield and emerging-market issues turned in strong performances throughout the first quarter of 1998. FUND TALK: THE MANAGER'S OVERVIEW An interview with Richard Habermann, Lead Portfolio Manager of Fidelity Asset Manager: Growth Q. HOW DID THE FUND PERFORM, DICK? A. I was pleased with the fund's performance. For the six months that ended March 31, 1998, the fund had a total return of 13.40%. That outperformed the 13.29% return of the Fidelity Aggressive Asset Allocation Composite Index and the 8.89% return of the Lipper flexible funds average. For the 12 months that ended March 31, 1998, the fund returned 38.25%, compared to the 36.06% return of the composite index and the 28.72% return of the Lipper peer group. Q. HOW DID THE FUND'S ASSET ALLOCATION AFFECT PERFORMANCE? A. Asset allocation decisions - more than security selection within the asset classes - helped the fund outperform the composite index and the peer group during the period. The fund was consistently overweighted in equities - the best-performing asset class during the period. However, the fund did not have a significant overweighting in equities, which helped preserve value when the stock market plummeted at the end of October in response to financial problems in Asia. In part, the fund's positioning within the fixed-income portion of the portfolio was predicated on the relatively small yield differences between short- and long-maturity securities that existed throughout much of the period. In this type of environment, I didn't feel the additional yield offered by longer-maturity securities was worth the potential risk, particularly during the latter part of the period. Accordingly, I kept the fund's allocation toward longer-maturity, fixed-income securities slightly underweighted, while keeping the money market allocation at near-neutral levels. In an effort to find additional yield in this environment, I chose to overweight high-yield securities within the fixed-income allocation, while keeping the fund's total bond exposure at below-neutral levels. In retrospect, the decision to overweight high-yield securities relative to investment-grade bonds was a key contributor of the fund's fixed-income allocation, as high-yield returns generally outpaced the returns of comparable investment-grade issues during the six-month period. Q. HOW DOES THE PRESENT ASSET ALLOCATION COMPARE TO THE FUND'S NEUTRAL MIX? A. The fund was consistently overweighted in equities, relative to its neutral mix, which calls for 70% to be invested in stocks, 25% in bonds and 5% in short-term/money market instruments. Throughout the period, equities represented anywhere from 72% to 78% of the fund's net assets, with the equity allocation ending the period at 76.2%. The fund remained slightly underweighted in bonds, with that allocation ending the period at 20%, and nearly neutral in short-term instruments, which represented 3.8% at the end of March. High-yield securities accounted for about 60% of the bond allocation, or approximately 12% of the fund's net assets as of March 31. Q. GOING FORWARD, BRAD LEWIS WILL REPLACE GEORGE VANDERHEIDEN AS THE INVESTMENT PROFESSIONAL SELECTING THE EQUITY SECURITIES OF THE PORTFOLIO. HOW WILL THIS CHANGE AFFECT THE FUND? A. The change will not affect the fund's goal of minimizing risk while attempting to maximize returns. Brad Lewis, a 13-year veteran of Fidelity, has developed an impressive track record as the manager of several funds, including Fidelity Disciplined Equity Fund since 1988. Unlike George Vanderheiden, who chose stocks for the fund based on individual company business prospects, Brad uses computer-aided, quantitative analysis - supported by fundamental research - for picking stocks. The quantitative discipline may result in the equity portion of the portfolio being spread out among a larger number of stocks relative to the larger positions in individual stocks that George tended to maintain. But overall, the fund's equity portfolio will continue to seek out and hold stocks that we feel will deliver the best returns for our shareholders. We are pleased that the equity investments will continue to be selected by a seasoned veteran like Brad. Q. WHICH STOCKS HELPED THE FUND'S PERFORMANCE? A. Financial stocks, such as Fannie Mae and Freddie Mac, performed extremely well during this period of low interest rates and robust capital markets. While a relatively small percentage of net assets, the fund's European holdings also generated healthy returns. Europe seems to be trending up as the countries there are entering a phase of restructuring and consolidation, concurrent with low interest rates and growing earnings. The health care sector, as a whole, performed well on the strength of large-capitalization pharmaceutical stocks that benefited from a "flight to quality" during the Asian crisis - meaning investors sought out large companies with household names that they perceived as safe. Pharmaceuticals also reaped the rewards of accelerated reviews by the Food and Drug Administration. Finally, retail and wholesale stocks were strong and the fund was heavily overweighted, relative to the Standard & Poor's 500 Index, in that sector. In fact, Wal-Mart, which was the fund's fifth largest equity holding at the end of March, gained 39% during the period versus a 17% return for the S&P 500. Q. WHICH STOCKS HURT PERFORMANCE? A. Consumer nondurables took a hit during the period. Specific to that sector, tobacco stocks such as RJR Nabisco and Philip Morris weakened during the period as litigation fears heightened. In addition, Columbia/HCA's growth was stunted as federal regulators intensified their investigations into the company's billing practices. Finally, many technology stocks were punished on fears that worldwide product demand would slow drastically as a result of the Asian crisis. Notably, Compaq Computer's stock dropped substantially during the period as the company struggled with inventory problems. Q. WHAT WAS YOUR STRATEGY FOR THE FUND'S BOND INVESTMENTS? A. While bonds were underweighted relative to the fund's neutral allocation of 25%, I employed several value-added strategies during the period. As I mentioned earlier, the fund reaped the rewards of its overweighted position in high-yield bonds, as they handily outpaced the returns of their investment-grade counterparts. Fred Hoff - who oversees security selection for Asset Manager: Growth's high-yield allocation - emphasized securities and sectors that performed extremely well during the period. Cable and media issues and commercial mortgage-backed securities (CMBS) - bonds that are backed by loans on commercial property, such as office buildings or retail malls - were the biggest contributors to the high-yield sector of the portfolio. Charlie Morrison - who handles security selection for Asset Manager: Growth's investment-grade fixed-income allocation - focused on several strategies during the period. Within the investment-grade allocation, investments in corporate securities were trimmed slightly on profit-taking, with a portion of the proceeds deployed to mortgage-backed securities. This transition proved beneficial, as mortgage-backed securities performed particularly well toward the end of the period when interest rates stabilized. Q. WHAT SECTORS DID YOU TARGET IN THE CORPORATE BOND MARKET? A. As I mentioned, the high-yield allocation emphasized the cable and telecommunications industries. Growth in these sectors generally depends on the health of the U.S. economy - not on Asian markets. In addition, many of these companies were able to increase their cash flows and improve their credit ratings by taking advantage of deregulation and technological advancement in the industry. Within the fund's investment-grade corporate bond allocation, securities issued by banking and finance concerns continued to be emphasized. In part, this stance was predicated on the low interest-rate environment and its favorable impact on companies in the financial sector. Q. HOW DID YOU POSITION THE SHORT-TERM/MONEY MARKET PORTION OF THE PORTFOLIO? A. I kept the fund's allocation toward short-term instruments - which were managed by John Todd of our money market group - in a fairly tight range during the period. As in prior periods, John continued to manage the fund's short-term allocation with the objective of adding value relative to a benchmark - the three-month Treasury bill - within the context of a controlled volatility framework. I increased the fund's bond allocation while reducing short-term instruments during the period in response to increasingly favorable inflation conditions and a slowing economy. At the end of the period, the fund maintained a near-neutral allocation in short-term/money market instruments, which performed admirably during the period because of beneficial security selection. Q. WHAT'S YOUR OUTLOOK? A. We're in the midst of the third-longest positive economic cycle in the post-war U.S. - following a long run in the 1960s when John F. Kennedy was president and in the 1980s when Ronald Reagan led the country. So, in its seventh year, the expansion continues to be remarkably strong. In addition, we're still witnessing decent earnings growth, moderate restructuring efforts and robust merger activity - all of which bodes well for improving the efficiency of the American economy. Even more amazing is that this growth is happening at a time when inflation is virtually non-existent. In this environment, I think both the stock and bond markets will benefit. However, I do believe that we've entered a new period of volatility in the markets, where one-time events can cause major shake-ups. I think the questions raised by the Asian financial crisis need to be monitored. Although the U.S. economy may not be drastically hurt by this turmoil, the cheapening of Asian goods could cause U.S. manufacturers to move production outside of the country, which would lead to higher unemployment and slower growth. Considering that we may be entering a period of higher volatility in the markets, it makes sense that I proceed with caution and not stray too far from the fund's neutral mix in the near future. DICK HABERMANN ON HOW THE FUND COMPARES TO BALANCED FUNDS: "WHEN EXAMINING FUNDS THAT INVEST IN MULTIPLE ASSET CLASSES, INVESTORS SHOULD BE SURE TO DISTINGUISH BETWEEN ASSET ALLOCATION FUNDS AND BALANCED FUNDS. ASSET ALLOCATION FUNDS SHIFT THEIR PORTFOLIO MIXES AMONG EQUITIES, FIXED-INCOME SECURITIES AND SHORT-TERM INSTRUMENTS, WHILE SEEKING TO ADD VALUE BY TIMING THESE SHIFTS APPROPRIATELY. IN CONTRAST, MANY BALANCED-TYPE FUNDS TEND TO KEEP THEIR ASSET MIXES FAIRLY STATIC, AND USUALLY MAINTAIN ALLOCATIONS IN ONLY TWO ASSET CLASSES, STOCKS AND BONDS. FOR INSTANCE, A `TRADITIONAL' BALANCED FUND TENDS TO SPLIT ITS INVESTMENTS BY ALLOCATING ROUGHLY 60% TO EQUITIES AND 40% TO FIXED-INCOME SECURITIES. REGARDLESS OF CHANGES IN MARKET CONDITIONS, THE ECONOMY, VALUATIONS OR OTHER FACTORS, THE ASSET MIX WITHIN BALANCED FUNDS STAYS RELATIVELY CONSTANT. IN CONTRAST, ASSET ALLOCATION FUNDS - SUCH AS THE FIDELITY ASSET MANAGER FUNDS - UTILIZE A BLENDED APPROACH TO ASSET ALLOCATION SHIFTS, COMBINING THE RESULTS FROM OUR PROPRIETARY QUANTITATIVE MODEL WITH COMPANY-BY-COMPANY SECURITY SELECTION AND ASSET-CLASS-LEVEL RESEARCH FROM OUR GLOBAL NETWORK OF ANALYSTS AND PORTFOLIO MANAGERS." FUND FACTS GOAL: MAXIMUM TOTAL RETURN OVER THE LONG TERM THROUGH INVESTING IN STOCKS, BONDS AND SHORT-TERM AND MONEY MARKET INSTRUMENTS FUND NUMBER: 321 TRADING SYMBOL: FASGX START DATE: DECEMBER 30, 1991 SIZE: AS OF MARCH 31, 1998, MORE THAN $5.1 BILLION MANAGER: RICHARD HABERMANN, SINCE 1996; MANAGER, FIDELITY ASSET MANAGER AND FIDELITY ASSET MANAGER: INCOME, SINCE 1996; FIDELITY TREND FUND, 1977-1981; FIDELITY MAGELLAN FUND, 1972-1977; JOINED FIDELITY IN 1968 (CHECKMARK) 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. INVESTMENT CHANGES TOP FIVE STOCKS AS OF MARCH 31, 1998 % OF FUND'S % OF FUND'S INVESTMENTS INVESTMENTS IN THESE STOCKS 6 MONTHS AGO FANNIE MAE 7.1 5.9 PHILIP MORRIS COMPANIES, INC. 4.3 4.9 FREDDIE MAC 2.6 2.2 COLUMBIA/HCA HEALTHCARE CORP. 2.1 1.9 WAL-MART STORES, INC. 2.0 1.6 TOP FIVE MARKET SECTORS AS OF MARCH 31, 1998 (STOCKS ONLY) % OF FUND'S % OF FUND'S INVESTMENTS INVESTMENTS IN THESE MARKET SECTORS 6 MONTHS AGO FINANCE 18.6 16.1 UTILITIES 8.7 6.1 TECHNOLOGY 7.7 11.1 RETAIL & WHOLESALE 7.7 6.5 HEALTH 6.6 5.6 TOP FIVE COUNTRIES AS OF MARCH 31, 1998 (EXCLUDING CASH EQUIVALENTS) % OF FUND'S % OF FUND'S INVESTMENTS INVESTMENTS IN THESE COUNTRIES 6 MONTHS AGO UNITED STATES 85.5 83.2 UNITED KINGDOM 3.1 2.8 NETHERLANDS 1.8 1.8 FRANCE 1.1 0.9 SWITZERLAND 0.9 0.9 TOP COUNTRIES ARE BASED UPON LOCATION OF ISSUER OF EACH SECURITY, INCLUDING WHERE THE FUND IS EXPOSED TO POTENTIAL POLITICAL AND CREDIT RISKS. ASSET ALLOCATION AS OF MARCH 31, 1998 * AS OF SEPTEMBER 30, 1997 ** ROW: 1, COL: 1, VALUE: 4.0 ROW: 1, COL: 2, VALUE: 20.0 ROW: 1, COL: 3, VALUE: 76.0 STOCKS 74% BONDS 17% SHORT-TERM INVESTMENTS 9% FOREIGN INVESTMENTS 9% STOCKS 76% BONDS 20% SHORT-TERM INVESTMENTS 4% FOREIGN INVESTMENTS 10% ROW: 1, COL: 1, VALUE: 9.0 ROW: 1, COL: 2, VALUE: 17.0 ROW: 1, COL: 3, VALUE: 74.0 * ** ASSET ALLOCATIONS IN THE PIE CHARTS REFLECT THE CATEGORIZATION OF ASSETS AS DEFINED IN THE FUND'S PROSPECTUS IN EFFECT AS OF THE TIME PERIODS INDICATED ABOVE. FINANCIAL STATEMENT CATEGORIZATIONS CONFORM TO ACCOUNTING STANDARDS AND WILL DIFFER FROM THE PIE CHART. INVESTMENTS MARCH 31, 1998 (UNAUDITED) SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENT IN SECURITIES COMMON STOCKS - 72.0% SHARES VALUE (NOTE 1) (000S) AEROSPACE & DEFENSE - 0.4% AEROSPACE & DEFENSE - 0.0% Gulfstream Aerospace Corp. (a) 47,600 $ 2,065 DEFENSE ELECTRONICS - 0.4% Raytheon Co.: Class A 88,177 5,015 Class B 245,900 14,354 19,369 TOTAL AEROSPACE & DEFENSE 21,434 BASIC INDUSTRIES - 2.9% CHEMICALS & PLASTICS - 1.7% Air Products & Chemicals, Inc. 56,800 4,707 Dow Chemical Co. 18,900 1,838 du Pont (E.I.) de Nemours & Co. 653,400 44,431 Raychem Corp. 585,700 24,343 Union Carbide Corp. 283,400 14,205 89,524 PACKAGING & CONTAINERS - 0.9% Bemis Co., Inc. 31,500 1,421 Corning, Inc. 167,600 7,416 Owens-Illinois, Inc. (a) 912,600 39,470 48,307 PAPER & FOREST PRODUCTS - 0.3% Boise Cascade Corp. 101,100 3,646 Champion International Corp. 178,000 9,668 Willamette Industries, Inc. 73,200 2,750 16,064 TOTAL BASIC INDUSTRIES 153,895 CONSTRUCTION & REAL ESTATE - 1.1% CONSTRUCTION - 0.7% Centex Corp. 145,600 5,551 D.R. Horton, Inc. 208,753 4,436 Fleetwood Enterprises, Inc. 346,400 16,129 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) CONSTRUCTION & REAL ESTATE - CONTINUED CONSTRUCTION - CONTINUED Kaufman & Broad Home Corp. 339,000 $ 11,039 U.S. Home Corp (a). 25,900 1,187 38,342 ENGINEERING - 0.4% Fluor Corp. 405,300 20,164 TOTAL CONSTRUCTION & REAL ESTATE 58,506 DURABLES - 3.6% AUTOS, TIRES, & ACCESSORIES - 2.3% Cummins Engine Co., Inc. 144,500 7,966 Discount Auto Parts, Inc. (a) 176,300 4,275 General Motors Corp. 1,249,045 84,232 Goodyear Tire & Rubber Co. 78,200 5,924 Magna International, Inc. Class A 179,100 13,984 Superior Industries International, Inc. 173,400 5,755 122,136 CONSUMER DURABLES - 0.2% Minnesota Mining & Manufacturing Co. 111,500 10,167 CONSUMER ELECTRONICS - 0.7% Newell Co. 107,800 5,222 Philips Electronics NV 193,800 14,232 Philips Electronics NV (Bearer) 222,000 16,310 35,764 HOME FURNISHINGS - 0.0% HON Industries, Inc. 6,000 221 TEXTILES & APPAREL - 0.4% Arena Brands Holdings Corp. Class B (a) 5,556 224 Burlington Industries, Inc. (a) 211,900 3,721 Jones Apparel Group, Inc. (a) 71,400 3,931 Liz Claiborne, Inc. 206,000 10,274 NIKE, Inc. Class B 108,600 4,806 Reebok International Ltd. (a) 6,000 183 Warnaco Group, Inc. Class A 39,300 1,543 24,682 TOTAL DURABLES 192,970 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) ENERGY - 5.0% ENERGY SERVICES - 0.3% McDermott International, Inc. 333,300 $ 13,769 Schlumberger Ltd. 18,100 1,371 15,140 OIL & GAS - 4.7% Amerada Hess Corp. 186,700 10,887 Amoco Corp. 22,000 1,900 Apache Corp. 17,500 643 Atlantic Richfield Co. 90,500 7,116 British Petroleum PLC: ADR 443,628 38,180 Ord. 522 8 Burlington Resources, Inc. 805,102 38,595 Chevron Corp. 52,500 4,216 Cooper Cameron Corp. (a) 8,100 489 Elf Aquitaine SA sponsored ADR 77,019 4,987 Enron Oil & Gas Co. 31,200 716 Kerr-McGee Corp. 64,000 4,452 Occidental Petroleum Corp. 1,064,900 31,215 Royal Dutch Petroleum Co. Ord. 105,600 5,983 Royal Dutch Petroleum Co. 1,021,100 58,011 Santa Fe Energy Resources, Inc. 191,400 2,105 Tosco Corp. 683,700 24,100 Total SA: Class B 47,955 5,764 sponsored ADR 111,951 6,724 USX-Marathon Group 8,900 335 Valero Energy Corp. 65,800 2,196 248,622 TOTAL ENERGY 263,762 FINANCE - 18.4% BANKS - 1.4% Credit Suisse Group (Reg.) 143,300 28,688 NationsBank Corp. 204,700 14,930 Providian Financial Corp. 357,300 20,522 Wells Fargo & Co. 30,600 10,136 74,276 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) FINANCE - CONTINUED CLOSED END INVESTMENT COMPANY - 0.1% First NIS Regional Fund (a) 274,200 $ 5,073 CREDIT & OTHER FINANCE - 1.5% CIT Group, Inc. Class A 92,400 3,015 Fleet Financial Group, Inc. 835,717 71,088 Green Tree Financial Corp. 148,800 4,232 Money Store, Inc. (The) 71,100 2,271 Transamerica Corp. 11,400 1,328 81,934 FEDERAL SPONSORED CREDIT - 9.7% Freddie Mac 2,915,900 138,323 Fannie Mae 5,995,500 379,215 517,538 INSURANCE - 5.2% AFLAC, Inc. 142,100 8,988 Allmerica Financial Corp. 157,700 10,073 Allstate Corp. 800,009 73,551 American International Group, Inc. 468,025 58,942 CIGNA Corp. 142,100 29,131 General Re Corp. 68,600 15,135 Loews Corp. 135,900 14,168 MBIA, Inc. 48,900 3,790 MGIC Investment Corp. 332,400 21,835 Nationwide Financial Services, Inc. Class A 11,700 507 PMI Group, Inc. 152,700 12,331 Provident Companies, Inc. 18,200 624 Reliastar Financial Corp. 80,637 3,714 Torchmark Corp. 372,000 17,042 Travelers Property Casualty Corp. Class A 108,800 4,787 UNUM Corp. 31,400 1,733 276,351 SAVINGS & LOANS - 0.3% Golden West Financial Corp. 132,720 12,716 SECURITIES INDUSTRY - 0.2% Nomura Securities Co. Ltd. 507,000 5,778 United Asset Management Corp. 214,700 5,851 Waddell & Reed Financial, Inc. Class A (a) 6,500 169 11,798 TOTAL FINANCE 979,686 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) HEALTH - 6.6% DRUGS & PHARMACEUTICALS - 2.7% American Home Products Corp. 383,800 $ 36,605 Amgen, Inc. 133,000 8,096 Astra AB Class A Free shares 1,176,100 24,229 Gilead Sciences, Inc. (a) 8,800 317 Merck & Co., Inc. 100,000 12,838 Novartis AG (Reg.) 11,375 20,144 Schering-Plough Corp. 463,200 37,838 Sepracor, Inc. (a) 28,100 1,198 141,265 MEDICAL EQUIPMENT & SUPPLIES - 0.7% Allegiance Corp. 17,120 677 Bard (C.R.), Inc. 91,300 3,355 Baxter International, Inc. 60,800 3,352 Biomet, Inc. 292,800 8,784 Boston Scientific Corp. (a) 71,700 4,840 Johnson & Johnson 42,900 3,145 St. Jude Medical, Inc. (a) 349,107 11,673 Sofamor/Danek Group, Inc. (a) 28,300 2,413 38,239 MEDICAL FACILITIES MANAGEMENT - 3.2% Columbia/HCA Healthcare Corp. 3,488,925 112,518 Humana, Inc. (a) 775,800 19,250 Tenet Healthcare Corp. 487,900 17,717 United HealthCare Corp. 359,600 23,284 172,769 TOTAL HEALTH 352,273 HOLDING COMPANIES - 0.1% U.S. Industries, Inc. 199,300 5,991 INDUSTRIAL MACHINERY & EQUIPMENT - 1.7% ELECTRICAL EQUIPMENT - 1.4% Alcatel Alsthom Compagnie Generale d'Electricite SA sponsored ADR 19,700 749 Alcatel Alsthom Compagnie Generale d'Electricite SA 175,500 32,974 Emerson Electric Co. 100,700 6,564 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) INDUSTRIAL MACHINERY & EQUIPMENT - CONTINUED ELECTRICAL EQUIPMENT - CONTINUED General Electric Co. 334,300 $ 28,812 Grainger (W.W.), Inc. 28,200 2,899 Scientific-Atlanta, Inc. 168,500 3,296 75,294 INDUSTRIAL MACHINERY & EQUIPMENT - 0.3% Caterpillar, Inc. 212,900 11,723 Tyco International Ltd. 43,600 2,382 Ultratech Stepper, Inc. (a) 193,600 3,945 18,050 POLLUTION CONTROL - 0.0% Browning-Ferris Industries, Inc. 11,300 369 TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 93,713 MEDIA & LEISURE - 2.6% BROADCASTING - 0.8% CBS Corp. 247,500 8,400 Comcast Corp.: Class A 29,800 1,034 Class A special 58,400 2,062 Cox Communications, Inc. Class A (a) 58,200 2,444 Orion Network Systems, Inc. warrants (a): 1/15/07 (cv .6056) 1,160 19 1/15/07 (cv .4743) 3,950 51 Tele-Communications, Inc. (a): (TCI Group), Series A 129,911 4,039 (TCI Ventures Group), Series A 681,178 11,963 Time Warner, Inc. 176,189 12,686 42,698 ENTERTAINMENT - 0.3% Cedar Fair LP (depositary unit) 25,300 696 Disney (Walt) Co. 18,700 1,996 King World Productions, Inc. 91,400 2,673 Royal Caribbean Cruises Ltd. 25,100 1,759 Viacom, Inc. (a): Class A 83,000 4,409 Class B (non-vtg.) 109,500 5,886 17,419 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) MEDIA & LEISURE - CONTINUED LEISURE DURABLES & TOYS - 0.0% Nintendo Co. Ltd. Ord. 23,000 $ 1,920 LODGING & GAMING - 0.6% Bally Gaming International, Inc. warrants 7/29/98 (a) 37,500 23 Circus Circus Enterprises, Inc. (a) 369,700 7,764 Fitzgeralds South, Inc. warrants 3/15/99 (i) 410 - Mirage Resorts, Inc. (a) 437,300 10,632 Sun International Hotels Ltd. Ord. (a) 235,300 11,147 29,566 PUBLISHING - 0.3% Cognizant Corp. 110,300 6,328 U.S. WEST Media Group 333,600 11,593 17,921 RESTAURANTS - 0.6% McDonald's Corp. 294,300 17,658 Papa John's International, Inc. (a) 36,100 1,385 Wendy's International, Inc. 493,100 11,002 30,045 TOTAL MEDIA & LEISURE 139,569 NONDURABLES - 4.8% BEVERAGES - 0.1% PepsiCo, Inc. 51,400 2,194 TOBACCO - 4.7% Philip Morris Companies, Inc. 5,451,800 227,272 RJR Nabisco Holdings Corp. 689,784 21,599 UST, Inc. 104,000 3,354 252,225 TOTAL NONDURABLES 254,419 PRECIOUS METALS - 0.1% Newmont Mining Corp. 97,131 2,969 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) RETAIL & WHOLESALE - 7.7% APPAREL STORES - 0.4% Columbia Sportswear Co. 1,400 $ 30 Gap, Inc. 133,350 6,001 Lamonts Apparel, Inc. warrants 6/10/99 (a) 47,666 - TJX Companies, Inc. 322,400 14,589 20,620 GENERAL MERCHANDISE STORES - 2.7% Federated Department Stores, Inc. 373,800 19,368 Penney (J.C.) Co., Inc. 153,800 11,641 Proffitts, Inc. (a) 124,100 4,499 Wal-Mart Stores, Inc. 2,131,400 108,302 143,810 GROCERY STORES - 0.3% Safeway, Inc. (a) 445,800 16,467 RETAIL & WHOLESALE, MISCELLANEOUS - 4.3% Circuit City Stores, Inc. - Circuit City Group 590,500 25,244 Corporate Express, Inc. (a) 183,600 1,830 Home Depot, Inc. 1,310,300 88,363 Lowe's Companies, Inc. 1,001,600 70,300 Officemax, Inc. (a) 539,375 9,641 Office Depot, Inc. (a) 166,850 5,193 Rex Stores Corp. (a) 62,600 923 Staples, Inc. (a) 353,450 8,196 Toys "R" Us, Inc. (a) 316,700 9,521 U.S. Office Products Co. (a) 356,200 6,768 Viking Office Products, Inc. (a) 221,300 5,145 231,124 TOTAL RETAIL & WHOLESALE 412,021 SERVICES - 0.8% ADVERTISING - 0.1% Interpublic Group of Companies, Inc. 35,700 2,218 LEASING & RENTAL - 0.0% Republic Industries, Inc. (a) 74,100 1,913 PRINTING - 0.0% Donnelley (R.R.) & Sons Co. 16,500 678 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) SERVICES - CONTINUED SERVICES - 0.7% Cendant Corp. (a) 810,959 $ 32,134 Medpartners, Inc. (a) 8,700 89 Reuters Group PLC ADR 62,140 4,012 36,235 TOTAL SERVICES 41,044 TECHNOLOGY - 7.7% COMMUNICATIONS EQUIPMENT - 0.1% Andrew Corp. (a) 26,300 521 Globalstar Telecommunications Ltd. warrants 2/15/04 (a)(i) 1,900 266 3Com Corp. (a) 116,700 4,194 4,981 COMPUTER SERVICES & SOFTWARE - 2.5% Automatic Data Processing, Inc. 215,400 14,661 Black Box Corp. (a) 42,300 1,560 Ceridian Corp. (a) 291,200 15,707 CompUSA, Inc. (a) 123,100 3,201 E Trade Group, Inc. (a) 90,800 2,264 Electronic Data Systems Corp. 550,800 25,268 Electronics for Imaging, Inc. (a) 286,300 7,444 First Data Corp. 340,400 11,063 Microsoft Corp. (a) 284,400 25,454 Oracle Corp. (a) 345,050 10,891 Policy Management Systems Corp. (a) 191,500 15,380 Shared Medical Systems Corp. 2,600 204 133,097 COMPUTERS & OFFICE EQUIPMENT - 1.7% Adaptec, Inc. (a) 106,000 2,080 Compaq Computer Corp. 860,100 22,255 Hewlett-Packard Co. 173,800 11,015 Ingram Micro, Inc. Class A (a) 33,500 1,244 International Business Machines Corp. 216,900 22,530 Quantum Corp. (a) 29,300 624 SCI Systems, Inc. (a) 475,800 16,950 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) TECHNOLOGY - CONTINUED COMPUTERS & OFFICE EQUIPMENT - CONTINUED Seagate Technology (a) 195,700 $ 4,941 Tech Data Corp. (a) 244,300 9,406 Western Digital Corp. (a) 78,100 1,372 92,417 ELECTRONIC INSTRUMENTS - 0.5% Applied Materials, Inc. (a) 29,600 1,045 Cognex Corp. (a) 94,800 2,026 KLA-Tencor Corp. (a) 33,100 1,266 Lam Research Corp. (a) 210,400 5,918 Novellus Systems, Inc. (a) 135,000 5,839 Teradyne, Inc. (a) 17,600 705 Thermo Electron Corp. (a) 206,000 8,317 Varian Associates, Inc. 67,200 3,721 28,837 ELECTRONICS - 2.9% Altera Corp. 44,700 1,687 AMP, Inc. 428,000 18,752 Intel Corp. 464,100 36,229 Methode Electronics, Inc. Class A 172,400 2,575 Micrel, Inc. (a) 18,800 713 Microchip Technology, Inc. (a) 8,700 183 Micron Technology, Inc. (a) 930,200 27,034 Molex, Inc. 177,044 4,747 Motorola, Inc. 90,600 5,493 Solectron Corp. (a) 1,161,000 49,052 Thomas & Betts Corp. 100,200 6,413 Uniphase Corp. (a) 8,400 353 153,231 PHOTOGRAPHIC EQUIPMENT - 0.0% Polaroid Corp. 17,500 770 TOTAL TECHNOLOGY 413,333 TRANSPORTATION - 0.4% AIR TRANSPORTATION - 0.0% Northwest Airlines Corp. Class A (a) 23,700 1,462 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) TRANSPORTATION - CONTINUED RAILROADS - 0.3% Bombardier, Inc. Class B 148,400 $ 3,664 CSX Corp. 240,000 14,280 17,944 SHIPPING - 0.1% Stolt-Nielsen SA Class B sponsored ADR 106,400 2,115 Stolt-Nielsen SA 32,500 650 2,765 TRUCKING & FREIGHT - 0.0% Yellow Corp. (a) 119,600 2,287 TOTAL TRANSPORTATION 24,458 UTILITIES - 8.1% CELLULAR - 2.8% AirTouch Communications, Inc. (a) 804,100 39,351 Century Telephone Enterprises, Inc. 24,800 1,516 McCaw International Ltd. warrants 4/15/07 (a)(i) 12,170 61 SK Telecom Ltd. 6 3 Vodafone Group PLC sponsored ADR 705,800 73,315 Vodafone Group PLC 3,312,763 34,636 148,882 ELECTRIC UTILITY - 0.5% American Electric Power Co., Inc. 203,000 10,201 Consolidated Edison, Inc. 15,400 720 Entergy Corp. 198,300 5,899 Houston Industries, Inc. 90,600 2,605 Niagara Mohawk Power Corp. (a) 108,500 1,411 PG&E Corp. 92,948 3,067 23,903 GAS - 0.0% Enron Corp. 41,900 1,943 TELEPHONE SERVICES - 4.8% AT&T Corp. 154,500 10,139 Ameritech Corp. 367,600 18,173 Bell Atlantic Corp. 246,298 25,246 BellSouth Corp. 366,600 24,768 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) UTILITIES - CONTINUED TELEPHONE SERVICES - CONTINUED Deutsche Telekom AG 102,000 $ 2,219 MCI Communications Corp. 1,427,500 70,661 SBC Communications, Inc. 460,368 20,084 Sprint Corp. 731,400 49,507 Telebras sponsored ADR 202,700 26,313 WorldCom, Inc. (a) 197,200 8,492 255,602 TOTAL UTILITIES 430,330 TOTAL COMMON STOCKS (Cost $2,607,168) 3,840,373 NONCONVERTIBLE PREFERRED STOCKS - 2.5% CONSTRUCTION & REAL ESTATE - 0.3% REAL ESTATE INVESTMENT TRUSTS - 0.3% California Federal Preferred Capital Corp. 9 1/8% 371,066 9,973 Crown America Realty Trust, Series A, 11% 18,230 979 Walden Residential Properties, Inc. 9.20% 83,400 2,210 13,162 FINANCE - 0.2% CREDIT & OTHER FINANCE - 0.1% Fresenius Medical Care Capital Trust II 7 7/8% (i) 5,340 5,375 INSURANCE - 0.1% American Annuity Group Capital Trust II 8 3/4% 1,800 1,945 SIG Capital Trust I 9 1/2% 5,381 5,557 7,502 TOTAL FINANCE 12,877 INDUSTRIAL MACHINERY & EQUIPMENT - 0.1% ELECTRICAL EQUIPMENT - 0.1% Echostar Communications Corp. 12 1/8%, pay-in-kind (c) 2,674 2,982 NONCONVERTIBLE PREFERRED STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) MEDIA & LEISURE - 1.3% BROADCASTING - 1.1% Adelphia Communications Corp. $13 14,944 $ 1,778 American Radio Systems Corp. 11 3/8%, pay-in-kind 37,662 4,293 CSC Holdings, Inc. 11 1/8%, pay-in-kind 130,853 14,950 Capstar Broadcasting Partners, Inc. 12%, pay-in-kind 4,035 474 Chancellor Media Corp.: 12%, pay-in-kind 25,646 3,103 Series A, $12.25 15,694 2,205 Granite Broadcasting Corp. 12 3/4%, pay-in-kind 2,928 3,323 SFX Broadcasting, Inc. 12 5/8% 48,785 5,757 Sinclair Capital 11 5/8% 50,145 5,541 Time Warner, Inc., Series M, 10 1/4%, pay-in-kind 15,967 17,843 59,267 PUBLISHING - 0.2% Primedia, Inc.: Series D, $10 41,288 4,387 $9.20 30,238 3,092 7,479 TOTAL MEDIA & LEISURE 66,746 NONDURABLES - 0.0% HOUSEHOLD PRODUCTS - 0.0% Revlon Group, Inc., Series B, 14 7/8% 4,600 465 RETAIL & WHOLESALE - 0.0% GROCERY STORES - 0.0% Supermarkets General Holdings Corp. $3.52, pay-in-kind (a) 18,200 373 TECHNOLOGY - 0.0% COMMUNICATIONS EQUIPMENT - 0.0% Intermedia Communications, Inc. 13 1/2%, pay-in-kind 2,102 2,575 UTILITIES - 0.6% CELLULAR - 0.3% Dobson Communications Corp. 12 1/4%, pay-in-kind (i) 4,108 4,509 Nextel Communications, Inc. 11 1/8%, pay-in-kind (i) 10,921 11,604 16,113 NONCONVERTIBLE PREFERRED STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) UTILITIES - CONTINUED TELEPHONE SERVICES - 0.3% Hyperion Telecommunications, Inc. 12 7/8%, pay-in-kind (Reg.) 2,755 $ 3,154 IXC Communications, Inc. 12 1/2%, pay-in-kind 2,070 2,525 NEXTLINK Communications, Inc. 14%, pay-in-kind 116,711 7,353 Winstar Communications, Inc. 14 1/2% (a)(i) 3,046 3,731 16,763 TOTAL UTILITIES 32,876 TOTAL NONCONVERTIBLE PREFERRED STOCKS (Cost $123,268) 132,056 CORPORATE BONDS - 15.7% MOODY'S PRINCIPAL RATINGS (D) AMOUNT (000S) CONVERTIBLE BONDS - 0.1% HEALTH - 0.0% DRUGS & PHARMACEUTICALS - 0.0% Integrated Process Equipment Corp. 6 1/4%, 9/15/04 (i) B- $ 1,930 1,720 RETAIL & WHOLESALE - 0.1% RETAIL & WHOLESALE, MISCELLANEOUS - 0.1% Sports Authority, Inc. 5 1/4%, 9/15/01 B1 2,190 1,949 TOTAL CONVERTIBLE BONDS 3,669 NONCONVERTIBLE BONDS - 15.6% AEROSPACE & DEFENSE - 0.3% AEROSPACE & DEFENSE - 0.1% BE Aerospace, Inc. 8%, 3/1/08 (i) B1 2,690 2,693 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS (D) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED AEROSPACE & DEFENSE - CONTINUED DEFENSE ELECTRONICS - 0.1% Raytheon Co.: 5.95%, 3/15/01 Baa $ 1,700 $ 1,694 6.45%, 8/15/04 Baa 2,030 2,047 Tracor, Inc. 8 1/2%, 3/1/07 B1 2,270 2,332 6,073 SHIP BUILDING & REPAIR - 0.1% Newport News Shipbuilding, Inc. 9 1/4%, 12/1/06 B1 5,870 6,208 TOTAL AEROSPACE & DEFENSE 14,974 BASIC INDUSTRIES - 0.2% CHEMICALS & PLASTICS - 0.1% Acetex Corp. yankee 9 3/4%, 10/1/03 B1 1,150 1,190 General Chemical Corp. 9 1/4%, 8/15/03 B2 1,600 1,656 Huntsman Corp. 9 1/2%, 7/1/07 (i) B2 2,760 2,812 5,658 PACKAGING & CONTAINERS - 0.1% BWAY Corp., Series B, 10 1/4%, 4/15/07 B2 1,450 1,590 U.S. Can Corp. 10 1/8%, 10/15/06 B2 790 830 2,420 PAPER & FOREST PRODUCTS - 0.0% Omega Cabinets Ltd. 10 1/2%, 6/15/07 B3 1,730 1,812 TOTAL BASIC INDUSTRIES 9,890 CONSTRUCTION & REAL ESTATE - 0.3% BUILDING MATERIALS - 0.1% American Standard, Inc. 7 3/8%, 2/1/08 Ba3 90 88 Nortek, Inc. 9 1/8%, 9/1/07 B1 4,440 4,595 4,683 CONSTRUCTION - 0.0% U.S. Home Corp. 8.88%, 8/15/07 B1 2,220 2,281 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS (D) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED CONSTRUCTION & REAL ESTATE - CONTINUED REAL ESTATE - 0.1% LNR Property Corp. 9 3/8%, 3/15/08 (i) B1 $ 4,445 $ 4,462 REAL ESTATE INVESTMENT TRUSTS - 0.1% EOP Operating LP (i): 6 3/8%, 2/15/03 Baa 1,200 1,188 6 3/4%, 2/15/08 Baa 430 426 Weeks Realty LP 6 7/8%, 3/15/05 Baa 1,000 992 2,606 TOTAL CONSTRUCTION & REAL ESTATE 14,032 DURABLES - 0.6% AUTOS, TIRES, & ACCESSORIES - 0.2% Blue Bird Body Co. 10 3/4%, 11/15/06 B2 1,440 1,595 Morris Material Handling, Inc. 9 1/2%, 4/1/08 (i) B2 230 231 Navistar International Corp. 8%, 2/1/08 (i) Ba3 3,510 3,497 Oshkosh Truck Corp. 8 3/4%, 3/1/08 (i) B3 3,940 3,979 9,302 TEXTILES & APPAREL - 0.4% Fruit of The Loom, Inc. 7 3/8%, 11/15/23 Ba1 2,490 2,132 GFSI, Inc. 9 5/8%, 3/1/07 B3 1,890 1,985 Levi Strauss & Co. 7%, 11/1/06 (i) Baa 3,150 3,186 Nine West Group, Inc. (i): 8 3/8%, 8/15/05 Ba2 2,900 2,770 9%, 8/15/07 Ba3 4,750 4,489 Polymer Group, Inc. 8 3/4%, 3/1/08 (i) B2 2,210 2,249 Unifi, Inc. 6 1/2%, 2/1/08 (i) A3 1,020 1,000 Worldtex, Inc. 9 5/8%, 12/15/07 (i) B1 5,630 5,714 23,525 TOTAL DURABLES 32,827 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS (D) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED ENERGY - 0.1% OIL & GAS - 0.1% Occidental Petroleum Corp.: 10.94%, 5/17/00 Baa $ 1,200 $ 1,314 6.39%, 11/9/00 Baa 500 503 8 1/2%, 11/9/01 Baa 530 569 Ocean Energy, Inc. 8 7/8%, 7/15/07 B3 2,800 2,982 Petroleum Geo Services ASA 7 1/8%, 3/30/28 Baa 1,300 1,302 6,670 FINANCE - 2.5% ASSET-BACKED SECURITIES - 0.7% Airplanes Pass Through Trust Class D 10 7/8%, 3/15/19 Ba2 7,040 7,850 Capital Equipment Receivables Trust 6.48%, 10/15/06 Baa2 1,000 994 Contimortgage Home Equity Loan Trust 6.26%, 7/15/12 Aaa 1,640 1,641 CPS Auto Grantor Trust 6.55%, 12/15/02 Aaa 988 996 CPS Auto Receivables Trust 6%, 8/15/03 Aaa 1,990 1,984 Dayton Hudson Credit Card Master Trust 6 1/4%, 8/25/05 Aaa 1,640 1,647 Ford Credit Auto Owner Trust: 6.40%, 5/15/02 A1 1,060 1,067 6.20%, 12/15/02 Baa3 890 883 Green Tree Financial Corp.: 6 1/2%, 6/15/27 Aaa 750 752 6.80%, 6/15/27 Aaa 750 757 6.45%, 9/15/28 Aaa 1,230 1,237 6.68%, 1/15/29 Aaa 2,280 2,304 Key Plastics, Inc. 10 1/4%, 3/15/07 A2 1,280 1,282 MBNA Master Credit Card Trust II Class A 6.55%, 1/15/07 Aaa 3,230 3,305 Olympic Automobile Receivables Trust: 6.40%, 9/15/01 Aaa 1,710 1,710 6.70%, 3/15/02 Aaa 810 820 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS (D) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED FINANCE - CONTINUED ASSET-BACKED SECURITIES - CONTINUED Premier Auto Trust: 8.05%, 4/4/00 Aaa $ 2,020 $ 2,033 6%, 5/6/00 Aaa 965 966 6.34%, 1/6/03 Aaa 2,470 2,492 Petroleum Enhanced Trust Receivables Offering Petroleum Trust 6.1875%, 2/5/03 (i) Baa 1,237 1,237 WFS Financial Owner Trust 6.55%, 10/20/04 Aaa 1,520 1,522 37,479 BANKS - 0.3% Banc One Corp. 6 1/4%, 9/1/00 Aa3 1,630 1,636 BanPonce Financial Corp. 7.72%, 4/13/00 A3 1,000 1,027 BanPonce Corp. 6.665%, 3/5/01 A3 1,650 1,665 Capital One Bank: 6.74%, 5/31/99 Baa 1,640 1,652 6.42%, 11/12/99 Baa 3,600 3,613 6 3/8%, 2/15/03 Baa 1,240 1,221 Den Danske Bank AS 7.40%, 6/15/10 (g)(i) A1 1,570 1,626 NB Capital Trust IV 8 1/4%, 4/15/27 A1 995 1,083 Summit Bancorp. 8 5/8%, 12/10/02 BBB 650 709 Union Planters National Bank 6.81%, 8/20/01 A3 1,500 1,524 15,756 CREDIT & OTHER FINANCE - 1.0% Advanced Accessory Systems LLC/AAC Capital Corp. 9 3/4%, 10/1/07 (i) B3 1,470 1,507 Ahmanson Capital Trust I 8.36%, 12/1/26 (i) Baa 1,800 1,932 AT&T Capital Corp.: 6.65%, 4/30/99 Baa 3,250 3,269 6.16%, 12/3/99 Baa 1,250 1,249 BCH Cayman Islands Ltd. yankee 7.70%, 7/15/06 A3 440 469 BankAmerica Capital II, Series 2, 8%, 12/15/26 Aa3 990 1,055 Bankers Trust Co. 5.66%, 7/21/98 (g) - 5,000 4,998 BanPonce Trust I 8.327%, 2/1/27 (i) Baa 2,850 3,041 Chrysler Financial Corp. 6 3/8%, 1/28/00 A3 3,390 3,410 Countrywide Funding Corp. 6.45%, 2/27/03 A3 1,300 1,302 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS (D) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED FINANCE - CONTINUED CREDIT & OTHER FINANCE - CONTINUED Finova Capital Corp. 6.12%, 5/28/02 Baa $ 1,000 $ 999 First Security Capital I 8.41%, 12/15/26 A3 850 926 Ford Motor Credit Co.: 5.73%, 2/23/00 A1 1,500 1,493 6.57%, 3/19/01 A1 2,500 2,530 General Electric Capital Corp. 6.94%, 4/13/09 (f) Aaa 3,000 3,027 General Motors Acceptance Corp. 6 3/4%, 7/10/02 A3 2,730 2,786 Greenpoint Capital Trust I 9.10%, 6/1/27 Ba1 1,580 1,722 Heller Financial, Inc.: 7 7/8%, 11/1/99 A3 2,230 2,285 6 1/4%, 3/1/01 A3 1,650 1,649 Household Finance Corp. 5.646%, 6/4/98 (g) - 5,000 5,000 KeyCorp Institutional Capital Series A 7.826%, 12/1/26 A1 1,550 1,605 Mellon Capital I, Series A, 7.72%, 12/1/26 A2 660 687 Money Store, Inc. 7.30%, 12/1/02 Ba2 850 881 Nordstrom Credit, Inc. 7 1/4%, 4/30/02 A2 1,200 1,250 UNICCO Service Co./UNICCO Finance Corp. 9 7/8%, 10/15/07 B3 5,410 5,532 U.S. Bancorp 8.09%, 11/15/26 A1 990 1,055 U S WEST Capital Funding, Inc. 6.95%, 1/15/37 Baa 1,300 1,355 57,014 SAVINGS & LOANS - 0.3% Chevy Chase Savings Bank FSB 9 1/4%, 12/1/08 B1 2,160 2,257 First Nationwide Parent Holdings Ltd. 12 1/2%, 4/15/03 B3 6,920 7,889 Great West Financial Trust II 8.206%, 2/1/27 A3 1,290 1,365 Great Western Financial Corp. 8.60%, 2/1/02 A3 1,000 1,074 Home Savings of America FSB 6 1/2%, 8/15/04 A3 970 970 Long Island Savings Bank: 6.20%, 4/2/01 Baa 750 749 7%, 6/13/02 Baa 1,210 1,233 15,537 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS (D) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED FINANCE - CONTINUED SECURITIES INDUSTRY - 0.2% Merrill Lynch & Co., Inc. 5.638%, 7/28/98 (g) - $ 5,000 $ 5,000 Morgan Stanley, Dean Witter, Discover & Co. 5.70%, 1/15/99 (g) A+ 4,600 4,600 9,600 TOTAL FINANCE 135,386 HEALTH - 0.5% DRUGS & PHARMACEUTICALS - 0.0% Chattem, Inc. 8 7/8%, 4/1/08 (i) B2 290 294 MEDICAL EQUIPMENT & SUPPLIES - 0.1% Graham-Field Health Products, Inc. 9 3/4%, 8/15/07 B3 3,270 3,335 McKesson Corp. 6.60%, 3/1/00 A3 1,720 1,738 5,073 MEDICAL FACILITIES MANAGEMENT - 0.4% Integrated Health Services, Inc.: 9 1/2%, 9/15/07 B2 3,370 3,572 Series A, 9 1/4%, 1/15/08 B2 7,389 7,758 Magellan Health Services, Inc. 9%, 2/15/08 (i) B3 4,070 4,111 Tenet Healthcare Corp. 8 5/8%, 1/15/07 Ba3 6,260 6,479 Vencor, Inc. 8 5/8%, 7/15/07 B1 1,260 1,416 23,336 TOTAL HEALTH 28,703 HOLDING COMPANIES - 0.0% Norfolk Southern Corp. 7.05%, 5/1/37 Baa 2,340 2,464 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS (D) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED INDUSTRIAL MACHINERY & EQUIPMENT - 0.5% ELECTRICAL EQUIPMENT - 0.1% Echostar Communications Corp. secured discount 0%, 6/1/04 (e) B2 $ 3,244 $ 3,114 Motors & Gears, Inc., Series D, 10 3/4%, 11/15/06 B3 610 653 Westinghouse Electric Corp. 8 5/8%, 8/1/12 Ba1 2,830 3,028 6,795 INDUSTRIAL MACHINERY & EQUIPMENT - 0.2% Bucyrus International, Inc. 9 3/4%, 9/15/07 B1 4,900 4,937 Exide Corp. 10%, 4/15/05 B1 890 941 Goss Graphic System, Inc. 12%, 10/15/06 B2 2,510 2,849 Roller Bearing Holdings, Inc. 0%, 6/15/09 (e)(i) - 4,780 3,107 11,834 POLLUTION CONTROL - 0.2% Allied Waste North America 10 1/4%, 12/1/06 B2 3,060 3,423 Envirosource, Inc. 9 3/8%, 6/15/03 (i) B3 1,150 1,167 WMX Technologies, Inc.: 8 1/4%, 11/15/99 Baa 440 454 6 1/4%, 10/15/00 Baa 700 699 7.10%, 8/1/26 Baa 1,570 1,624 7,367 TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 25,996 MEDIA & LEISURE - 5.5% BROADCASTING - 4.0% ACME Television LLC/ACME Financial Corp. 0%, 9/30/04 (e) B3 2,410 1,976 Adelphia Communications Corp.: 9 1/2%, 2/15/04 B3 9,038 9,297 9 7/8%, 3/1/07 B3 1,860 2,018 8 3/8%, 2/1/08 B3 8,350 8,360 Albritton Communications Co. 8 7/8%, 2/1/08 (i) B3 5,130 5,181 Ascent Entertainment Group, Inc. 0%, 12/15/04 (e) B3 2,760 1,642 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS (D) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED MEDIA & LEISURE - CONTINUED BROADCASTING - CONTINUED CSC Holdings, Inc.: 9 1/4%, 11/1/05 B1 $ 1,710 $ 1,821 9 7/8%, 5/15/06 B1 2,480 2,734 7 7/8%, 12/15/07 Ba2 2,320 2,390 10 1/2%, 5/15/16 B1 2,630 3,077 CapStar Broadcasting Partners, Inc.: 9 1/4%, 7/1/07 B2 5,260 5,497 0%, 2/1/09 (e) B3 1,660 1,241 Century Communications Corp.: 8 3/4%, 10/1/07 Ba3 5,550 5,772 0%, 1/15/08 (i) Ba3 13,980 6,081 Chancellor Radio Broadcasting Company 8 1/8%, 12/15/07 (i) Ba3 7,290 7,399 Citadel Broadcasting Co., Series B, 10 1/4%, 7/1/07 B3 870 964 Comcast UK Cable Partners Ltd. 0%, 11/15/07 (e) B2 5,150 4,249 Continental Cablevision, Inc.: 8 5/8%, 8/15/03 Baa 1,480 1,618 8.30%, 5/15/06 Baa 300 330 9%, 9/1/08 Baa 1,010 1,173 Echostar Satellite Broadcasting Corp. 0%, 3/15/04 (e) B3 1,380 1,259 Falcon Holdings 0%, 4/15/10 (e)(i) - 5,220 3,306 Falcon Holding L.P./Falcon Funding 8 3/8%, 4/15/10 (i) B2 7,460 7,440 Fox Kids Worldwide, Inc. 0%, 11/1/07 (e)(i) B1 3,690 2,352 Fox/Liberty Networks LLC/FLN Finance, Inc. 0%, 8/15/07 (e) B1 2,310 1,588 FrontierVision Operating Partners LP/ FrontierVision Capital Corp. 11%, 10/15/06 B3 7,082 7,852 FrontierVision Holdings LP/FrontierVision Holdings Capital Corp. 0%, 9/15/07 (e) Caa 4,491 3,481 Granite Broadcasting Corp.: 10 3/8%, 5/15/05 B3 3,450 3,666 9 3/8%, 12/1/05 B3 4,110 4,244 Hearst-Argyle Television, Inc. 7 1/2%, 11/15/27 Baa 1,440 1,489 Intermedia Capital Partners IV LP/Intermedia Partners IV Capital Corp. 11 1/4%, 8/1/06 B2 1,860 2,093 International Cabletel, Inc. 0%, 2/1/06 (e) B3 3,000 2,423 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS (D) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED MEDIA & LEISURE - CONTINUED BROADCASTING - CONTINUED Lenfest Communications, Inc.: 8 3/8%, 11/1/05 Ba3 $ 2,950 $ 3,061 8 1/4%, 2/15/08 (i) B2 6,300 6,371 LIN Holdings Corp. 0%, 3/1/08 (e)(i) B3 9,100 5,710 LIN Television Corp. 8 3/8%, 3/1/08 (i) B2 4,310 4,342 NTL, Inc.: 10%, 2/15/07 B3 3,440 3,707 0%, 4/1/08 (e)(i) B3 14,210 9,308 Olympus Communications LP/Olympus Capital Corp. 10 5/8%, 11/15/06 B1 1,540 1,709 Orion Network Systems, Inc.: 11 1/4%, 1/15/07 B2 1,160 1,337 0%, 1/15/07 (e) B2 2,770 2,174 Pegasus Communications Corp., Series B, 9 5/8%, 10/15/05 B3 1,440 1,508 Rogers Cablesystems Ltd. yankee 11%, 12/1/15 B2 3,400 3,927 SFX Broadcasting, Inc. 10 3/4%, 5/15/06 B3 1,225 1,357 Satelites Mexicanos SA de cv 10 1/2%, 11/1/04 (f)(i) B3 7,305 7,524 Sinclair Broadcast Group, Inc. 8 3/4%, 12/15/07 B2 3,650 3,769 TCI Communications, Inc. 6.46%, 3/6/00 Ba1 2,930 2,932 TCI Communications Financing III 9.65%, 3/31/27 Ba3 9,240 10,649 Tele-Communications, Inc. 9 1/4%, 4/15/02 Ba1 1,000 1,094 Telemundo Group, Inc. 7%, 2/15/06 (f) B1 3,090 3,291 Telewest PLC 0%, 10/1/07 (e) B1 8,410 6,791 Time Warner, Inc.: 7.95%, 2/1/00 Ba1 1,615 1,661 7 3/4%, 6/15/05 Ba1 1,100 1,162 8.18%, 8/15/07 Ba1 1,750 1,917 6.95%, 1/15/28 (i) Ba1 1,390 1,347 UIH Australia/Pacific, Inc., Series B, 0%, 5/15/06 (e) B2 7,640 5,253 United International Holdings, Inc. 0%, 2/15/08 (e)(i) B3 12,320 7,700 213,614 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS (D) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED MEDIA & LEISURE - CONTINUED ENTERTAINMENT - 0.7% AMC Entertainment, Inc. 9 1/2%, 3/15/09 B2 $ 7,360 $ 7,728 American Skiing Co. 12%, 7/15/06 B3 3,470 3,886 Bally Total Fitness Holding Corp., Series B, 9 7/8%, 10/15/07 B3 5,260 5,589 Cinemark USA, Inc. 8 1/2%, 8/1/08 (Reg. S) B2 5,120 5,126 Livent, Inc. 9 3/8%, 10/15/04 B1 5,320 5,347 Paramount Communications, Inc.: 5 7/8%, 7/15/00 Ba2 890 874 7 1/2%, 1/15/02 Ba2 630 645 Premier Parks, Inc.: 9 1/4%, 4/1/06 B3 240 245 0%, 4/1/08 (e) B3 390 249 Viacom, Inc.: 6 3/4%, 1/15/03 Ba2 530 529 7 3/4%, 6/1/05 Ba2 2,200 2,307 8%, 7/7/06 B1 5,010 5,123 37,648 LODGING & GAMING - 0.4% Aladdin Gaming Holdings/Aladdin Capital Units 0%, 3/1/10 (e)(i) Caa 3,970 2,045 Courtyard by Marriott II LP/Courtyard II Finance Co., Series B, 10 3/4%, 2/1/08 B- 2,910 3,205 HMC Acquisition Properties, Inc. 9%, 12/15/07 Ba3 4,580 4,798 HMH Properties, Inc.: 9 1/2%, 5/15/05 Ba3 6,420 6,813 8 7/8%, 7/15/07 Ba3 2,390 2,533 Sun International Hotels Ltd./Sun International North America, Inc. yankee 9%, 3/15/07 Ba3 2,220 2,314 21,708 PUBLISHING - 0.2% Garden State Newspapers, Inc.: Series B, 8 3/4%, 10/1/09. B1 3,910 4,003 8 3/4%, 10/1/09 (k) B1 4,250 4,388 News America Holdings, Inc. 8 1/2%, 2/15/05 Baa 710 782 News America, Inc. 6 5/8%, 1/9/08 (i) Baa 590 580 Sun Media Corp. yankee 9 1/2%, 2/15/07 B2 1,234 1,327 11,080 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS (D) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED MEDIA & LEISURE - CONTINUED RESTAURANTS - 0.2% Foodmaker, Inc. 9 3/4%, 6/1/02 B2 $ 2,710 $ 2,774 Host Marriott Travel Plazas, Inc. 9 1/2%, 5/15/05 Ba3 4,810 5,111 7,885 TOTAL MEDIA & LEISURE 291,935 NONDURABLES - 0.6% AGRICULTURE - 0.2% Purina Mills, Inc. 9%, 3/15/10 (i) B2 7,780 8,033 FOODS - 0.1% Chiquita Brands International, Inc. 9 5/8%, 1/15/04 B1 2,250 2,391 ConAgra, Inc. 7 1/8%, 10/1/26 Baa 1,700 1,790 Smithfield Foods, Inc. 7 5/8%, 2/15/08 (i) Ba3 1,040 1,032 5,213 HOUSEHOLD PRODUCTS - 0.2% Revlon Consumer Products Corp. 8 5/8%, 2/1/08 (i) B3 12,790 12,966 TOBACCO - 0.1% Philip Morris Companies, Inc.: 7 1/4%, 9/15/01 A2 1,700 1,748 7%, 7/15/05 A2 1,610 1,640 6.95%, 6/1/06 A2 1,510 1,552 4,940 TOTAL NONDURABLES 31,152 RETAIL & WHOLESALE - 1.2% APPAREL STORES - 0.1% AnnTaylor, Inc. 8 3/4%, 6/15/00 B3 5,200 5,200 Lamonts Apparel, Inc. 10 1/4%, 11/1/99 pay-in-kind (h)(i) - 1,584 55 Specialty Retailers, Inc. 8 1/2%, 7/15/05 Ba3 1,060 1,087 6,342 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS (D) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED RETAIL & WHOLESALE - CONTINUED GENERAL MERCHANDISE STORES - 0.4% Dayton Hudson Corp.: 6.80%, 10/1/01 Baa $ 1,800 $ 1,832 7 1/2%, 7/15/06 Baa 2,000 2,138 Federated Department Stores, Inc.: 10%, 2/15/01 Baa 2,600 2,845 8 1/8%, 10/15/02 Baa 520 553 6.79%, 7/15/27 Baa 1,100 1,116 7%, 2/15/28 Baa 1,360 1,344 Kmart Corp.: 12 1/2%, 3/1/05 Ba2 4,240 5,258 7 3/4%, 10/1/12 Ba2 310 313 8 1/4%, 1/1/22 Ba2 2,480 2,517 Penney (J.C.) Co., Inc. 6.95%, 4/1/00 A2 1,600 1,628 19,544 GROCERY STORES - 0.5% Ameriserve Food Distribution, Inc. 8 7/8%, 10/15/06 B1 3,170 3,265 Fleming Companies, Inc., Series B, 10 5/8%, 7/31/07 B3 2,440 2,599 Kroger Co. 8.15%, 7/15/06 Baa 1,000 1,103 Mrs. Fields Original Cookies, Inc. 10 1/8%, 12/1/04 (i) B2 2,000 2,005 Pathmark Stores, Inc.: 12 5/8%, 6/15/02 Caa 3,630 3,612 9 5/8%, 5/1/03 Caa 8,440 8,419 Pueblo Xtra International, Inc. 9 1/2%, 8/1/03 B3 6,600 6,404 27,407 RETAIL & WHOLESALE, MISCELLANEOUS - 0.2% Central Tractor Farm & Country, Inc. 10 5/8%, 4/1/07 B2 2,220 2,359 J Crew Operating Corp. 10 3/8%, 10/15/07 (i) B3 2,690 2,529 Metals USA, Inc. 8 5/8%, 2/15/08 (i) B2 6,430 6,414 11,302 TOTAL RETAIL & WHOLESALE 64,595 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS (D) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED SERVICES - 0.4% LEASING & RENTAL - 0.1% Brand Scaffold Services, Inc. 10 1/4%, 2/15/08 (i) B3 $ 2,000 $ 2,060 PHH Corp. 5.678%, 6/11/98 (g) - 5,000 5,000 7,060 PRINTING - 0.1% Sullivan Graphics, Inc. 12 3/4%, 8/1/05 Caa 1,830 1,922 SERVICES - 0.2% Borg-Warner Security Corp. 9 5/8%, 3/15/07 B3 1,150 1,208 Iron Mountain, Inc. 8 3/4%, 9/30/09 B3 2,990 3,087 Medaphis Corp. 9 1/2%, 2/15/05 (i) B2 7,520 7,520 11,815 TOTAL SERVICES 20,797 TECHNOLOGY - 0.4% COMPUTER SERVICES & SOFTWARE - 0.1% Federal Data Corp. 10 1/8%, 8/1/05 B3 5,160 5,354 COMPUTERS & OFFICE EQUIPMENT - 0.2% Comdisco, Inc.: 7.21%, 7/2/01 Baa 1,750 1,805 6 3/8%, 11/30/01 Baa 1,800 1,809 MediaCom LLC/MediaCom Capital Corp. 8 1/2%, 4/15/08 (i) B2 5,000 5,000 8,614 ELECTRONICS - 0.1% Advanced Micro Devices, Inc. 11%, 8/1/03 Ba1 2,350 2,538 Fairchild Semiconductor Corp.: 10 1/8%, 3/15/07 B2 1,610 1,668 11.74%, 3/15/08 pay-in-kind (k) - 2,581 2,561 6,767 TOTAL TECHNOLOGY 20,735 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS (D) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED TRANSPORTATION - 0.5% AIR TRANSPORTATION - 0.4% Delta Air Lines, Inc. 9 7/8%, 5/15/00 Baa $ 500 $ 536 Kitty Hawk, Inc. 9.95%, 11/15/04 B1 9,290 9,662 US Air, Inc.: 9 5/8%, 2/1/01 B3 1,960 2,070 10%, 7/1/03 B3 2,770 2,926 10 3/8%, 3/1/13 B1 3,340 3,816 19,010 RAILROADS - 0.0% Burlington Northern Santa Fe Corp. 7.29%, 6/1/36 Baa 1,500 1,614 SHIPPING - 0.1% Amer Reefer Co. Ltd. 10 1/4%, 3/1/08 (i) B1 1,270 1,283 Holt Group, Inc. 9 3/4%, 1/15/06 (i) Caa 2,400 2,436 3,719 TOTAL TRANSPORTATION 24,343 UTILITIES - 2.0% CELLULAR - 0.8% McCaw International Ltd. 0%, 4/15/07 (e) Caa 12,170 8,093 Nextel International, Inc. 12 1/8%, 4/15/08 (i) Caa 8,600 5,149 Nextel Communications, Inc. (e): 0%, 8/15/04 B2 1,850 1,781 0%, 9/15/07 B2 2,507 1,680 0%, 10/31/07 B2 12,200 7,930 0%, 2/15/08 (i) B2 11,480 7,319 Pagemart Wireless, Inc. 0%, 2/1/08 (e)(i) Caa 7,210 4,470 Rogers Communications, Inc. 8 7/8%, 7/15/07 B2 5,730 5,830 360 Degrees Communications Co. 7 1/8%, 3/1/03 Ba1 405 418 42,670 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS (D) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED UTILITIES - CONTINUED ELECTRIC UTILITY - 0.3% AES Corp. 8 3/8%, 8/15/07 Ba1 $ 2,760 $ 2,819 Avon Energy Partners Holdings (i): 6.73%, 12/11/02 Baa 1,680 1,701 6.46%, 3/4/08 Baa 1,320 1,304 CalEnergy, Inc. 9 1/2%, 9/15/06 Ba1 1,250 1,353 Calpine Corp. 8 3/4%, 7/15/07 Ba3 2,470 2,550 Hydro-Quebec yankee 7.40%, 3/28/25 A2 1,050 1,219 Israel Electric Corp. Ltd. (i): yankee 7 7/8%, 12/15/26 A3 660 670 7 3/4%, 12/15/27 A3 1,605 1,619 Long Island Lighting Co. 8 5/8%, 4/15/04 Baa 2,230 2,308 NIPSCO Capital Markets, Inc. 7.39%, 4/1/04 Baa 1,600 1,668 Texas Utilities Co., Series C, 6 3/8%, 1/1/08 (i) Baa 980 941 18,152 TELEPHONE SERVICES - 0.9% Cable & Wireless Communications PLC 6 3/8%, 3/6/03 Baa 1,700 1,701 GCI, Inc. 9 3/4%, 8/1/07 B2 610 648 Hyperion Telecommunications, Inc.: Series B, 0%, 4/15/03 (e) B3 7,550 5,757 12 1/4%, 9/1/04 B3 4,180 4,703 ICG Holdings, Inc. (e): 0%, 9/15/05 - 2,410 2,061 0%, 5/1/06 - 1,270 1,019 0%, 3/15/07 - 2,660 1,948 McLeodUSA, Inc.: 0%, 3/1/07 (e) B2 5,530 4,189 9 1/4%, 7/15/07 B2 2,330 2,487 8 3/8%, 3/15/08 (i) B2 480 496 NEXTLINK Communications, Inc. 9 5/8%, 10/1/07 B3 8,040 8,512 Qwest Communications International, Inc. 0%, 10/15/07 (e) B2 5,030 3,697 Teleport Communications Group, Inc. 0%, 7/1/07 (e) Baa 900 775 Winstar Communications, Inc. 11%, 3/15/08 (i) - 2,210 2,265 CORPORATE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS (D) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED UTILITIES - CONTINUED TELEPHONE SERVICES - CONTINUED Winstar Equipment 12 1/2%, 3/15/04 B3 $ 1,770 $ 2,027 WorldCom, Inc.: 9 3/8%, 1/15/04 Ba1 1,394 1,477 8 7/8%, 1/15/06 Ba1 1,180 1,286 7 3/4%, 4/1/07 Ba1 1,250 1,348 46,396 TOTAL UTILITIES 107,218 TOTAL NONCONVERTIBLE BONDS 831,717 TOTAL CORPORATE BONDS (Cost $814,573) 835,386 U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - 1.1% U.S. TREASURY OBLIGATIONS - 0.7% 5 7/8%, 10/31/98 Aaa 7,090 7,104 7 3/4%, 12/31/99 Aaa 2,964 3,069 6 1/8%, 6/30/01 Aaa 1,720 1,769 7 7/8%, 8/15/01 Aaa 810 864 5 7/8%, 11/30/01 Aaa 595 599 7%, 7/15/06 Aaa 318 344 12 3/4%, 11/15/10 (callable) Aaa 5,140 7,300 7 1/4%, 2/ 15/23 Aaa 2,310 2,636 6 7/8%, 8/15/25 Aaa 11,935 13,311 TOTAL U.S. TREASURY oBLIGATIONS 36,996 U.S. GOVERNMENT AGENCY OBLIGATIONS - 0.4% Federal Home Loan Bank: 7.66%, 7/20/04 Aaa 4,540 4,942 7.59%, 3/10/05 Aaa 2,450 2,669 U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS (D) AMOUNT (000S) (000S) U.S. GOVERNMENT AGENCY OBLIGATIONS - CONTINUED Fannie Mae: 6.97%, 4/8/04 Aaa $ 2,060 $ 2,168 7.49%, 3/2/05 Aaa 2,320 2,518 Guaranteed Export Trust Certificates (assets of Trust guaranteed by U.S. Government through Export- Import Bank) Series 1994-A, 7.12%, 4/15/06 Aaa 2,890 3,002 U.S. Department of Housing and Urban Development government guaranteed participation certificates Series 1996-A: 6.83%, 8/1/03 Aaa 4,000 4,153 7.66%, 8/1/15 Aaa 1,200 1,283 U.S. Trade Trust Certificates (assets of Trust guaranteed by U. U.S. government through Export-Import Bank) 6.69%, 1/15/09 (i) Aaa 2,047 2,100 TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS 22,835 TOTAL U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS (Cost $58,711) 59,831 U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - 2.3% FREDDIE MAC - 0.1% 5 1/2%, 2/1/03 to 5/1/03 Aaa 1,602 1,567 7%, 7/1/01 Aaa 315 318 7 1/2%, 5/1/27 to 2/1/28 Aaa 5,561 5,700 7,585 FANNIE MAE - 2.0% 5 1/2%, 4/1/03 to 6/1/03 Aaa 1,541 1,508 6%, 4/1/00 to 6/1/26 Aaa 25,109 24,642 6%, 4/1/13 (c) Aaa 11,875 11,697 6%, 4/1/28 (c) Aaa 200 193 6 1/2%, 9/1/25 to 5/1/28 Aaa 22,025 21,806 7%, 11/1/26 Aaa 672 679 7%, 4/1/28 (c) Aaa 12,422 12,550 7%, 5/1/28 (c) Aaa 21,789 21,986 7 1/2%, 4/1/28 (c) Aaa 10,188 10,449 105,510 U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS (D) AMOUNT (000S) (000S) GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 0.2% 6%, 6/15/08 to 9/15/10 Aaa $ 1,525 $ 1,518 6 1/2%, 9/15/08 to 5/15/09 Aaa 7,967 8,051 8%, 5/15/25 Aaa 530 549 10,118 TOTAL U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES (Cost $118,974) 123,213 COLLATERALIZED MORTGAGE OBLIGATIONS - 0.0% PRIVATE SPONSOR - 0.0% Credit-Based Asset Servicing and Securitization LLC Series 1997-2 Class 2-B, 7.289%, 12/29/25 (g)(h)(i) (Cost $957) Ba3 1,800 906 COMMERCIAL MORTGAGE SECURITIES - 1.0% American Southwest Financial Securities Series 1994-C2 Class B2, 8%, 12/25/01 (g)(i) - 1,670 1,693 Asset Securitization Corp. Series 1997-D5 Class A-6, 0%, 2/14/41 BBB 1,200 1,169 Berkeley Federal Bank & Trust FSB Series 1994 Class 1-B, 7.706%, 8/1/24 (g)(i) - 1,900 1,469 Blackrock Capital Funding LLC Series 1996 Class C2, 7.559%, 11/16/26 (g)(i) Aaa 162 163 BKB Commercial Mortgage Trust Series 1997-C1 Class D, 7.83%, 2/25/43 (g)(i) BBB 680 688 Bankers Trust Remic Trust 1988-1 Series 1998-S1A Class G, 0%, 11/28/02 (g)(i) Ba2 1,248 1,198 CBM Funding Corp. sequential pay Series 1996-1: Class A-3PI, 7.08%, 11/1/07 AA 990 1,027 Class B, 7.48%, 2/1/08 A 770 820 CS First Boston Mortgage Securities Corp. Series 1997-C2 Class D, 7.27%, 4/17/11 Baa 1,810 1,828 DLJ Mortgage Acceptance Corp. Series 1993-MF12 Class B-2, 10.10%, 9/18/03 (i) - 1,650 1,684 COMMERCIAL MORTGAGE SECURITIES - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS (D) AMOUNT (000S) (000S) Deutsche Mortgage and Asset Receiving Corp. Series 1998-C1 Class D, 7.231%, 7/15/12 Baa $ 1,420 $ 1,428 Equitable Life Assurance Society of the United States (The) (i): Series 174 Class B1, 7.33%, 5/15/06 Aa2 1,200 1,262 Series 1996-1 Class C1, 7.52%, 5/15/06 A2 1,000 1,056 Franchise Mortgage Acceptance Co. LLC Loan Receivables Trust (g)(i): Series 1997-A Class E, 8.104%, 4/15/19 - 500 474 Series 1997-B Class E, 7.891%, 9/15/19 - 1,050 951 First Chicago/Lennar Trust I Series 1997-CHL1 (g): Class D, 8.132%, 5/29/08 - 1,100 1,097 Class E, 8.132%, 2/28/11 - 1,800 1,573 First Union-Lehman Brothers Commercial Mortgage Trust sequential pay Series 1997-C2 Class B, 6.79%, 10/18/11 Aa2 3,870 3,917 General Motors Acceptance Corp. Commercial Mortgage Securities, Inc.: Series 1996-C1 Class F, 7.86%, 11/15/06 (i) Ba3 750 723 Series 1997-C2 Class D, 7.192%, 1/15/08 Baa 490 495 Series 1997-C2 Class E, 7.624%, 4/15/11 Baa 1,040 1,053 GS Mortgage Securities Corp. II Series 1997- GL Class A2-B, 6.86%, 7/13/30 Aaa 1,590 1,638 GAFCO Franchisee Loan Trust Series 1998-1 Class D, 14 1/2%, 6/1/16 (g)(i) - 1,650 1,305 Kidder Peabody Acceptance Corp. sequential pay, Series 1993-M1 Class A-2, 7.15%, 4/25/25 Aa2 665 662 LTC Commercial Mortgage Pass-Through Certificates Series 1996-1 Class E, 9.16%, 4/15/28 BB- 500 512 Morgan Stanley Capital I, Inc. sequential pay Series 1997-C1 Class A-1C, 7.63%, 2/15/20 Aaa 1,720 1,853 Morgan Stanley Capital One, Inc. Series 1996-MBL1 Class E, 8.661%, 5/25/21 (i) - 1,738 1,671 Morgan Stanley Capital I Series 1998-HF1 Class D, 7.10%, 2/15/08 (g) BBB 1,770 1,797 NB Commercial Mortgage sequential pay, Series FSI Class A, 7.187%, 10/20/23 (i) - 74 74 Nomura Asset Securities Corp. Series 1998 - D6 Class A4, 7.349%, 3/15/30 (g) Baa 1,420 1,413 COMMERCIAL MORTGAGE SECURITIES - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS (D) AMOUNT (000S) (000S) Nomura Depositor Trust Series 1998-ST1A Class B2, 9.938%, 1/15/03 (g)(i) - $ 1,100 $ 1,093 Oregon Commercial Mortgage, Inc. Series 1995 Class E, 9.455%, 6/25/26 (g)(i) BB 830 844 Penn Mutual Life Insurance Co. (The) Series 1996-PML (i): Class K, 7.90%, 11/15/26 - 1,750 1,289 Class L, 7.90%, 11/15/26 - 1,300 623 Resolution Trust Corp. Series 1991-M2 Class A3, 7.542%, 9/25/20 (g) Ba3 632 544 Structured Asset Securities Corp.: Series 1995-C1 Class E, 7 3/8%, 9/25/24 (i) BB 1,100 1,064 Series 1993-C1 Class E, 6.60%, 10/25/24 (i) B 1,250 525 sequential pay Series 1996 Class A-2A, 7 3/4%, 2/25/28 Aaa 528 533 commercial Series 1996-CFL Class E, 7 3/4%, 2/25/28 BB+ 820 832 Series 1996-CFL Class G, 7 3/4%, 2/25/28 (i) - 2,000 1,849 Thirteen Affiliates of General Growth Properties, Inc. (i): Series A-2, 6.602%, 11/15/12 Aaa 1,310 1,329 Series D-2, 6.992%, 11/15/12 Baa 1,410 1,409 Series E-2, 7.224%, 11/15/12 Baa 840 834 Wells Fargo Capital Markets Apartment Financing Trust 6.56%, 12/29/05 (i) Aaa 1,186 1,203 TOTAL COMMERCIAL MORTGAGE SECURITIES (Cost $48,439) 50,664 FOREIGN GOVERNMENT OBLIGATIONS (J) - 0.1% Export Development Corp. yankee 8 1/8%, 8/10/99 Aa2 620 638 Israeli State euro 6 3/8%, 12/19/01 A3 2,410 2,395 Manitoba Province yankee 6 3/8%, 10/15/99 A1 3,000 3,017 TOTAL FOREIGN GOVERNMENT OBLIGATIONS (Cost $5,994) 6,050 SUPRANATIONAL OBLIGATIONS - 0.0% MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS (D) AMOUNT (000S) (000S) Inter American Development Bank yankee 6.29%, 7/16/27 (Cost $1,590) Aaa $ 1,600 $ 1,680 BANK NOTES - 0.1% Key Bank N.A 5.555%, 8/20/99 (g) (Cost $4,993) 5,000 4,996 CERTIFICATES OF DEPOSIT - 0.5% Banque Nationale de paris yankee 5 3/4%, 7/31/98 2,300 2,299 Canadian Imperial Bank of Commerce: 5.91%, 8/28/98 5,000 5,002 yankee 6.20%, 8/1/00 1,950 1,955 Deutsche Bank AG yankee: 6.20%, 4/10/98 4,000 4,000 5.94%, 10/26/98 1,000 1,001 National Westminster Bank PLC yankee 5.94%, 6/26/98 1,000 1,000 RaboBank Nederland Coop Central yankee 6.20%, 4/10/98 3,000 3,000 Societe Generale France yankee 5.91%, 10/15/98 5,000 5,003 Westdeutsche Landesbank yankee 5.83%, 8/3/98 4,000 4,000 Westpac Banking Corp. yankee 5.885%, 8/27/98 1,000 1,000 TOTAL CERTIFICATES OF DEPOSIT (Cost $28,241) 28,260 MASTER NOTES - 0.1% First Bank National Association 5.598%, 5/15/98 (g) 2,000 1,999 Goldman Sachs Group LP (The) 5.625%, 5/4/98 (g)(k) 3,000 3,000 TOTAL MASTER NOTES (Cost $4,999) 4,999 CASH EQUIVALENTS - 4.6% MATURITY VALUE (NOTE 1) AMOUNT (000S) (000S) Investments in repurchase agreements (U.S. Treasury obligations), in a joint trading account, dated 3/31/98 due 4/1/98: at 5.80% $ 4,129 $ 4,128 at 6.08% 45,775 45,767 49,895 SHARES Taxable Central Cash Fund (b) 196,146,219 196,146 TOTAL CASH EQUIVALENTS (Cost $246,041) 246,041 TOTAL INVESTMENT IN SECURITIES - 100% (Cost $4,063,948) $ 5,334,455 LEGEND (a) Non-income producing (b) At period end, the seven-day yield of the Taxable Central Cash Fund was 5.63%. The yield refers to the income earned by investing in the fund over the seven-day period, expressed as an annual percentage. (c) Security or a portion of the security purchased on a delayed delivery or when-issued basis (see Note 2 of Notes to Financial Statements). (d) Standard & Poor's credit ratings are used in the absence of a rating by Moody's Investors Service, Inc. (e) Debt obligation initially issued in zero coupon form which converts to coupon form at a specified rate and date. The rate shown is the rate at period end. (f) Debt obligation initially issued at one coupon which converts to a higher coupon at a specified date. The rate shown is the rate at period end. (g) The coupon rate shown on floating or adjustable rate securities represents the rate at period end. (h) Non-income producing - issuer filed for protection under the Federal Bankruptcy Code or is in default of interest payment. (i) 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 $267,416,000 or 5.1% of net assets. (j) For foreign government obligations not individually rated by S&P or Moody's, the ratings listed are assigned to securities by FMR, the fund's investment adviser, based principally on S&P and Moody's ratings of the sovereign credit of the issuing government. (k) Restricted securities - Investment in securities not registered under the Securities Act of 1933 (see Note 2 of Notes to Financial Statements). Additional information on each holding is as follows: ACQUISITION COST SECURITY DATE (000S) Fairchild Semiconductor Corp. 11.74%, 3/15/08 pay-in-kind 4/3/97 $ 2,017 Garden State Newspapers Inc. 8 3/4%, 10/1/09 2/11/98 $ 4,399 Goldman Sachs Group LP (The) 5.188%, 5/4/98 8/5/97 $ 3,000 OTHER INFORMATION The composition of long-term debt holdings as a percentage of total value of investment in securities, is as follows: MOODY'S RATINGS S&P RATINGS Aaa, Aa, A 5.3% AAA, AA, A 5.0% Baa 1.6% BBB 2.2% Ba 2.5% BB 2.5% B 8.7% B 7.8% Caa 0.7% CCC 1.1% Ca, C 0.0% CC, C 0.0% D 0.0% For some foreign government obligations, FMR has assigned the ratings of the sovereign credit of the issuing government. The percentage not rated by Moody's or S&P amounted to 0.6%. FMR has determined that unrated debt securities that are lower quality account for 0.6% of the total value of investment in securities. Distribution of investments by country of issue, as a percentage of total value of investment in securities, is as follows: United States 90.1% United Kingdom 3.1 Netherlands 1.8 France 1.1 Others (individually less than 1%) 3.9 TOTAL 100.0% INCOME TAX INFORMATION At March 31,1998, the aggregate cost of investment securities for income tax purposes was $4,064,550,000. Net unrealized appreciation aggregated $1,269,905,000 of which $1,322,162,000 related to appreciated investment securities and $52,257,000 related to depreciated investment securities. FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES
AMOUNTS IN THOUSANDS (EXCEPT PER-SHARE AMOUNT) MARCH 31, 1998 (UNAUDITED) ASSETS INVESTMENT IN SECURITIES, AT VALUE (INCLUDING REPURCHASE $ 5,334,455 AGREEMENTS OF $49,895) (COST $4,063,948) - SEE ACCOMPANYING SCHEDULE CASH 20 RECEIVABLE FOR INVESTMENTS SOLD 8,428 RECEIVABLE FOR FUND SHARES SOLD 10,832 DIVIDENDS RECEIVABLE 6,587 INTEREST RECEIVABLE 17,217 OTHER RECEIVABLES 91 TOTAL ASSETS 5,377,630 LIABILITIES PAYABLE FOR INVESTMENTS PURCHASED $ 24,605 REGULAR DELIVERY DELAYED DELIVERY 57,184 PAYABLE FOR FUND SHARES REDEEMED 95,602 ACCRUED MANAGEMENT FEE 2,570 OTHER PAYABLES AND ACCRUED EXPENSES 1,231 TOTAL LIABILITIES 181,192 NET ASSETS $ 5,196,438 NET ASSETS CONSIST OF: PAID IN CAPITAL $ 3,833,005 UNDISTRIBUTED NET INVESTMENT INCOME 25,397 ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON 67,540 INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 1,270,496 AND ASSETS AND LIABILITIES IN FOREIGN CURRENCIES NET ASSETS, FOR 256,769 SHARES OUTSTANDING $ 5,196,438 NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER $20.24 SHARE ($5,196,438 (DIVIDED BY) 256,769 SHARES)
STATEMENT OF OPERATIONS
AMOUNTS IN THOUSANDS SIX MONTHS ENDED MARCH 31, 1998 (UNAUDITED) INVESTMENT INCOME $ 28,219 DIVIDENDS INTEREST 45,379 TOTAL INCOME 73,598 EXPENSES MANAGEMENT FEE $ 14,036 TRANSFER AGENT FEES 5,081 ACCOUNTING FEES AND EXPENSES 427 NON-INTERESTED TRUSTEES' COMPENSATION 13 CUSTODIAN FEES AND EXPENSES 65 REGISTRATION FEES 332 AUDIT 60 LEGAL 15 MISCELLANEOUS 18 TOTAL EXPENSES BEFORE REDUCTIONS 20,047 EXPENSE REDUCTIONS (291) 19,756 NET INVESTMENT INCOME 53,842 REALIZED AND UNREALIZED GAIN (LOSS) NET REALIZED GAIN (LOSS) ON: INVESTMENT SECURITIES 87,908 FOREIGN CURRENCY TRANSACTIONS (26) 87,882 CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON: INVESTMENT SECURITIES 470,827 ASSETS AND LIABILITIES IN FOREIGN CURRENCIES 14 470,841 NET GAIN (LOSS) 558,723 NET INCREASE (DECREASE) IN NET ASSETS RESULTING $ 612,565 FROM OPERATIONS
STATEMENT OF CHANGES IN NET ASSETS
AMOUNTS IN THOUSANDS SIX MONTHS ENDED YEAR ENDED MARCH 31, 1998 SEPTEMBER 30, (UNAUDITED) 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS $ 53,842 $ 88,541 NET INVESTMENT INCOME NET REALIZED GAIN (LOSS) 87,882 424,956 CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) 470,841 517,403 NET INCREASE (DECREASE) IN NET ASSETS RESULTING 612,565 1,030,900 FROM OPERATIONS DISTRIBUTIONS TO SHAREHOLDERS (90,145) (81,646) FROM NET INVESTMENT INCOME FROM NET REALIZED GAIN (394,438) (203,145) TOTAL DISTRIBUTIONS (484,583) (284,791) SHARE TRANSACTIONS 731,560 1,283,870 NET PROCEEDS FROM SALES OF SHARES REINVESTMENT OF DISTRIBUTIONS 481,105 282,710 COST OF SHARES REDEEMED (601,691) (953,951) NET INCREASE (DECREASE) IN NET ASSETS RESULTING 610,974 612,629 FROM SHARE TRANSACTIONS TOTAL INCREASE (DECREASE) IN NET ASSETS 738,956 1,358,738 NET ASSETS BEGINNING OF PERIOD 4,457,482 3,098,744 END OF PERIOD (INCLUDING UNDISTRIBUTED NET INVESTMENT $ 5,196,438 $ 4,457,482 INCOME OF $25,397 AND $67,056, RESPECTIVELY) OTHER INFORMATION SHARES SOLD 37,682 72,671 ISSUED IN REINVESTMENT OF DISTRIBUTIONS 26,595 17,155 REDEEMED (30,721) (53,787) NET INCREASE (DECREASE) 33,556 36,039
FINANCIAL HIGHLIGHTS SIX MONTHS ENDED YEARS ENDED SEPTEMBER 30, MARCH 31, 1998 (UNAUDITED) 1997 1996 1995 1994 1993
SELECTED PER-SHARE DATA NET ASSET VALUE, $ 19.97 $ 16.56 $ 14.88 $ 13.91 $ 13.77 $ 11.16 BEGINNING OF PERIOD INCOME FROM INVESTMENT OPERATIONS NET INVESTMENT INCOME .22 D .42 D .47 .26 .13 .18 NET REALIZED AND 2.20 4.49 1.44 1.07 .61 2.66 UNREALIZED GAIN (LOSS) TOTAL FROM INVESTMENT 2.42 4.91 1.91 1.33 .74 2.84 OPERATIONS LESS DISTRIBUTIONS FROM NET INVESTMENT (.40) (.43) (.23) (.27) (.18) (.15) INCOME FROM NET REALIZED GAIN (1.75) (1.07) - - (.37) (.08) IN EXCESS OF NET - - - (.09) (.05) - REALIZED GAIN TOTAL DISTRIBUTIONS (2.15) (1.50) (.23) (.36) (.60) (.23) NET ASSET VALUE, $ 20.24 $ 19.97 $ 16.56 $ 14.88 $ 13.91 $ 13.77 END OF PERIOD TOTAL RETURN B, C 13.40% 31.57% 12.99% 9.95% 5.39% 25.83% RATIOS AND SUPPLEMENTAL DATA NET ASSETS, END OF PERIOD $ 5,196 $ 4,457 $ 3,099 $ 2,850 $ 3,071 $ 1,243 (IN MILLIONS) RATIO OF EXPENSES TO .85% A .87% 1.02% 1.03% 1.15% 1.19% E AVERAGE NET ASSETS RATIO OF EXPENSES TO .84% A, F .86% F 1.01% F 1.02% F 1.15% 1.19% AVERAGE NET ASSETS AFTER EXPENSE REDUCTIONS RATIO OF NET INVESTMENT 2.29% A 2.36% 2.51% 3.16% 2.64% 3.02% INCOME TO AVERAGE NET ASSETS PORTFOLIO TURNOVER RATE 52% A 70% 138% 119% 104% 97% AVERAGE COMMISSION $ .0440 $ .0047 $ .0027 RATE G
ANNUALIZED TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED. 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). NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. 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. 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). 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. NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD ENDED MARCH 31, 1998 (UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES. Fidelity Asset Manager: Growth (the fund) is a fund of Fidelity Charles Street Trust (the trust) and is authorized to issue an unlimited number of shares. The trust is registered under the Investment Company Act of 1940, as amended (the 1940 Act), as an open-end management investment company organized as a Massachusetts business trust. The financial statements have been prepared in conformity with generally accepted accounting principles which require management to make certain estimates and assumptions at the date of the financial statements. The following summarizes the significant accounting policies of the fund: SECURITY VALUATION. Equity securities for which quotations are readily available are valued at the last sale price, or if no sale price, at the closing bid price. Debt securities for which quotations are readily available are valued by a pricing service at their market values as determined by their most recent bid prices in the principal market (sales prices if the principal market is an exchange) in which such securities are normally traded. Securities (including restricted securities) for which market quotations are not readily available are valued at their fair value as determined in good faith under consistently applied procedures under the general supervision of the Board of Trustees. Short-term securities with remaining maturities of sixty days or less for which quotations are not readily available are valued at amortized cost or original cost plus accrued interest, both of which approximate current value. FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing rates of exchange at period end. Purchases and sales of securities, income receipts and expense payments are translated into U.S. dollars at the prevailing exchange rate on the respective dates of the transactions. Net realized gains and losses on foreign currency transactions represent net gains and losses from sales and maturities of foreign currency contracts, disposition of foreign currencies, the difference between the amount of net investment income accrued and the U.S. dollar amount actually received, and gains and losses between trade date and settlement on purchases and sales of securities. The effects of changes in foreign currency exchange rates on investments in securities are included with the net realized and unrealized gain or loss on investment securities. INCOME TAXES. As a qualified regulated investment company under Subchapter M of the Internal Revenue Code, the fund is not subject to income taxes to the extent that it distributes substantially all of its taxable income for its fiscal year. The schedule of investments includes information regarding income taxes under the caption "Income Tax Information." 1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED INVESTMENT INCOME. Dividend income is recorded on the ex-dividend date, except certain dividends from foreign securities where the ex-dividend date may have passed, are recorded as soon as the fund is informed of the ex-dividend date. Non-cash dividends included in dividend income, if any, are recorded at the fair market value of the securities received. Interest income, which includes accretion of original issue discount, is accrued as earned. Investment income is recorded net of foreign taxes withheld where recovery of such taxes is uncertain. EXPENSES. Most expenses of the trust can be directly attributed to a fund. Expenses which cannot be directly attributed are apportioned among the funds in the trust. DISTRIBUTIONS TO SHAREHOLDERS. Distributions are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences, which may result in distribution reclassifications, are primarily due to differing treatments for paydown gains/losses on certain securities, foreign currency transactions, passive foreign investment companies (PFIC), market discount, partnerships, non-taxable dividends and losses deferred due to wash sales. The fund also utilized earnings and profits distributed to shareholders on redemption of shares as a part of the dividends paid deduction for income tax purposes. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to paid in capital. Undistributed net investment income and accumulated undistributed net realized gain (loss) on investments and foreign currency transactions may include temporary book and tax basis differences which will reverse in a subsequent period. Any taxable income or gain remaining at fiscal year end is distributed in the following year. SECURITY TRANSACTIONS. Security transactions are accounted for as of trade date. Gains and losses on securities sold are determined on the basis of identified cost. 2. OPERATING POLICIES. FOREIGN CURRENCY CONTRACTS. The fund generally uses foreign currency contracts to facilitate transactions in foreign-denominated securities. Losses may arise from changes in the value of the foreign currency or if the counterparties do not perform under the contracts' terms. The U.S. dollar value of foreign currency contracts is determined using contractual currency exchange rates established at the time of each trade. JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the Securities and Exchange Commission (the SEC), the fund, along with other affiliated entities of Fidelity Management & Research Company (FMR), may transfer uninvested cash balances into one or more joint trading 2. OPERATING POLICIES - CONTINUED JOINT TRADING ACCOUNT - CONTINUED accounts. These balances are invested in one or more repurchase agreements for U.S. Treasury or Federal Agency obligations. REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency securities are transferred to an account of the fund, or to the Joint Trading Account, at a bank custodian. The securities are marked-to-market daily and maintained at a value at least equal to the principal amount of the repurchase agreement (including accrued interest). FMR, the fund's investment adviser, is responsible for determining that the value of the underlying securities remains in accordance with the market value requirements stated above. TAXABLE CENTRAL CASH FUND. Pursuant to an Exemptive Order issued by the SEC, the fund may invest in the Taxable Central Cash Fund (the Cash Fund) managed by Fidelity Investments Money Management, Inc., (formerly FMR Texas, Inc.) an affiliate of FMR. The Cash Fund is an open-end money market fund available only to investment companies and other accounts managed by FMR and its affiliates. The Cash Fund seeks preservation of capital, liquidity, and current income by investing in U.S. Treasury securities and repurchase agreements for these securities. Income distributions from the Cash Fund are declared daily and paid monthly from net interest income. Income distributions earned by the fund are recorded as interest income in the accompanying financial statements. DELAYED DELIVERY TRANSACTIONS. The fund may purchase or sell securities on a delayed delivery basis. Payment and delivery may take place a month or more after the date of the transaction. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. The market values of the securities purchased or sold on a delayed delivery basis are identified as such in the fund's schedule of investments. The fund may receive compensation for interest forgone in the purchase of a delayed delivery security. With respect to purchase commitments, the fund identifies securities as segregated in its custodial records with a value at least equal to the amount of the commitment. Losses may arise due to changes in the market value of the underlying securities or if the counterparty does not perform under the contract. WHEN-ISSUED SECURITIES. The fund may purchase or sell securities on a when-issued basis. Payment and delivery may take place a month or more after the date of the transaction. The price of the underlying securities is fixed at the time the transaction is negotiated. The market values of the securities purchased on a when-issued or forward commitment basis are identified as such in the fund's schedule of investments. The fund may receive compensation for interest forgone in the purchase of a when-issued security. With respect to purchase commitments, the fund identifies securities 2. OPERATING POLICIES - CONTINUED WHEN-ISSUED SECURITIES - CONTINUED as segregated in its custodial records with a value at least equal to the amount of the commitment. The payables and receivables associated with the purchases and sales of when-issued securities having the same settlement date and broker are offset. When-issued securities that have been purchased from and sold to different brokers are reflected as both payables and receivables in the statement of assets and liabilities under the caption "Delayed delivery." Losses may arise due to changes in the market value of the underlying securities, if the counterparty does not perform under the contract, or if the issuer does not issue the securities due to political, economic, or other factors. RESTRICTED SECURITIES. The fund is permitted to invest in securities that are subject to legal or contractual restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are registered. Disposal of these securities may involve time-consuming negotiations and expense, and prompt sale at an acceptable price may be difficult. At the end of the period, restricted securities (excluding 144A issues) amounted to $9,949,000 or 0.2% of net assets. 3. PURCHASES AND SALES OF INVESTMENTS. Purchases and sales of securities, other than short-term securities, aggregated $1,543,908,000 and $1,149,137,000, respectively, of which U.S. government and government agency obligations aggregated $298,059,000 and $260,703,000, respectively. 4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES. MANAGEMENT FEE. As the fund's investment adviser, FMR receives a monthly fee that is calculated on the basis of a group fee rate plus a fixed individual fund fee rate applied to the average net assets of the fund. The group fee rate is the weighted average of a series of rates and is based on the monthly average net assets of all the mutual funds advised by FMR. The rates ranged from .2500% to .5200% for the period. The annual individual fund fee rate is .30%. 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. For the period, the management fee was equivalent to an annualized rate of .60% of average net assets . TRANSFER AGENT FEES. Fidelity Service Company, Inc. (FSC), an affiliate of FMR, is the fund's transfer, dividend disbursing and shareholder servicing agent. FSC receives account fees and asset-based fees that vary according to account size and type of account. 4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED TRANSFER AGENT FEES - CONTINUED FSC 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 .22% of average net assets. ACCOUNTING FEES. FSC maintains the fund's accounting records. The fee is based on the level of average net assets for the month plus out-of-pocket expenses. BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio transactions with brokerage firms which are affiliates of FMR. The commissions paid to these affiliated firms were $175,000 for the period. 5. EXPENSE REDUCTIONS. FMR has directed certain portfolio trades to brokers who paid a portion of the fund's expenses. For the period, the fund's expenses were reduced by $168,000 under this arrangement. In addition, the fund has entered into arrangements with its transfer agent whereby credits realized as a result of uninvested cash balances were used to reduce a portion of the fund's expenses. During the period, the fund's transfer agent fees were reduced by $123,000, under this arrangement. 6. LITIGATION. The fund is engaged in litigation against the obligor on the inflation adjusted debt of Siderurgica Brasileiras SA, contesting the calculation of the principal adjustment. The probability of success of this litigation cannot be predicted and the amount of recovery cannot be estimated. Any recovery from this litigation would inure to the benefit of the fund. As of period end, the fund no longer holds Siderurgica Brasileiras SA debt securities. MANAGING YOUR INVESTMENTS Fidelity offers several ways to conveniently manage your personal investments via your telephone or PC. You can access your account information, conduct trades and research your investments 24 hours a day. BY PHONE Fidelity TouchTone Xpressprovides a single toll-free number to access account balances, positions, quotes and trading. It's easy to navigate the service, and on your first call, the system will help you create a personal identification number (PIN) for security. SM (PHONE_GRAPHIC)TOUCHTONE XPRESS 1-800-544-5555 PRESS For mutual fund and brokerage trading. For quotes.* For account balances and holdings. To review orders and mutual fund activity. To change your PIN. To speak to a Fidelity representative. 0 * BY PC Fidelity's Web site on the Internet provides a wide range of information, including daily financial news, fund performance, interactive planning tools and news about Fidelity products and services. (PHONE_GRAPHIC)FIDELITY'S WEB SITE WWW.FIDELITY.COM If you are not currently on the Internet, call Fidelity at 1-800-544-7272 for significant savings on Web access from internetMCI. SM (PHONE_GRAPHIC) FIDELITY ON-LINE XPRESS+ TM Fidelity On-line Xpress+ software for Windows combines comprehensive portfolio management capabilities, securities trading and access to research and analysis tools . . . all on your desktop. Call Fidelity at 1-800-544-7272 or visit our Web site for more information on how to manage your investments via your PC. * WHEN YOU CALL THE QUOTES LINE, PLEASE REMEMBER THAT A FUND'S YIELD AND RETURN WILL VARY AND, EXCEPT FOR MONEY MARKET FUNDS, SHARE PRICE WILL ALSO VARY. THIS MEANS THAT YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. THERE IS NO ASSURANCE THAT MONEY MARKET FUNDS WILL BE ABLE TO MAINTAIN A STABLE $1 SHARE PRICE; AN INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT. TOTAL RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE, REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS, AND THE EFFECTS OF ANY SALES CHARGES. TO WRITE FIDELITY If more than one address is listed, please locate the address that is closest to you. We'll give your correspondence immediate attention and send you written confirmation upon completion of your request. (LETTER_GRAPHIC)MAKING CHANGES TO YOUR ACCOUNT (such as changing name, address, bank, etc.) Fidelity Investments P.O. Box 770001 Cincinnati, OH 45277-0002 (LETTER_GRAPHIC)FOR NON-RETIREMENT ACCOUNTS BUYING SHARES Fidelity Investments P.O. Box 770001 Cincinnati, OH 45277-0003 OVERNIGHT EXPRESS Fidelity Investments 2300 Litton Lane - KH1A Hebron, KY 41048 SELLING SHARES Fidelity Investments P.O. Box 660602 Dallas, TX 75266-0602 OVERNIGHT EXPRESS Fidelity Investments Attn: Redemptions - CP6I 400 East Las Colinas Blvd. Irving, TX 75309-5517 GENERAL CORRESPONDENCE Fidelity Investments P.O. Box 500 Merrimack, NH 03054-0500 (LETTER_GRAPHIC)FOR RETIREMENT ACCOUNTS BUYING SHARES Fidelity Investments P.O. Box 770001 Cincinnati, OH 45277-0003 SELLING SHARES Fidelity Investments P.O. Box 660602 Dallas, TX 75266-0602 OVERNIGHT EXPRESS Fidelity Investments Attn: Redemptions - CP6R 400 East Las Colinas Blvd. Irving, TX 75309-5517 GENERAL CORRESPONDENCE Fidelity Investments P.O. Box 500 Merrimack, NH 03054-0500 TO VISIT FIDELITY For directions and hours, please call 1-800-544-9797. ARIZONA 7373 N. Scottsdale Road Scottsdale, AZ CALIFORNIA 815 East Birch Street Brea, CA 851 East Hamilton Avenue Campbell, CA 527 North Brand Boulevard Glendale, CA 19100 Von Karman Avenue Irvine, CA 10100 Santa Monica Blvd. Los Angeles, CA 251 University Avenue Palo Alto, CA 1760 Challenge Way Sacramento, CA 7676 Hazard Center Drive San Diego, CA 455 Market Street San Francisco, CA 950 Northgate Drive San Rafael, CA 1400 Civic Drive Walnut Creek, CA 6300 Canoga Avenue Woodland Hills, CA COLORADO 1625 Broadway Denver, CO CONNECTICUT 48 West Putnam Avenue Greenwich, CT 265 Church Street New Haven, CT 300 Atlantic Street Stamford, CT 29 South Main Street West Hartford, CT DELAWARE 222 Delaware Avenue Wilmington, DE FLORIDA 4400 N. Federal Highway Boca Raton, FL 90 Alhambra Plaza Coral Gables, FL 4090 N. Ocean Boulevard Ft. Lauderdale, FL 1907 West State Road 434 Longwood, FL 4001 Tamiami Trail, North Naples, FL 2401 PGA Boulevard Palm Beach Gardens, FL 8065 Beneva Road Sarasota, FL 1502 N. Westshore Blvd. Tampa, FL GEORGIA 3445 Peachtree Road, N.E. Atlanta, GA 1000 Abernathy Road Atlanta, GA HAWAII 700 Bishop Street Honolulu, HI ILLINOIS One North Franklin Street Chicago, IL 1415 West 22nd Street Oak Brook, IL 1700 East Golf Road Schaumburg, IL 3232 Lake Avenue Wilmette, IL INDIANA 4729 East 82nd Street Indianapolis, IN MAINE 3 Canal Plaza Portland, ME MARYLAND 7401 Wisconsin Avenue Bethesda, MD 1 West Pennsylvania Ave. Towson, MD MASSACHUSETTS 470 Boylston Street Boston, MA 155 Congress Street Boston, MA 25 State Street Boston, MA 300 Granite Street Braintree, MA 44 Mall Road Burlington, MA 416 Belmont Street Worcester, MA MICHIGAN 280 North Woodward Ave. Birmingham, MI 29155 Northwestern Hwy. Southfield, MI MINNESOTA 7600 France Avenue South Edina, MN MISSOURI 700 West 47th Street Kansas City, MO 8885 Ladue Road Ladue, MO 200 North Broadway St. Louis, MO NEW JERSEY 150 Essex Street Millburn, NJ 56 South Street Morristown, NJ 501 Route 17, South Paramus, NJ NEW YORK 1055 Franklin Avenue Garden City, NY 999 Walt Whitman Road Melville, L.I., NY 1271 Avenue of the Americas New York, NY 71 Broadway New York, NY 350 Park Avenue New York, NY NORTH CAROLINA 4611 Sharon Road Charlotte, NC 2200 West Main Street Durham, NC OHIO 600 Vine Street Cincinnati, OH 28699 Chagrin Boulevard Woodmere Village, OH OREGON 16850 SW 72 Avenue Tigard, OR PENNSYLVANIA 1735 Market Street Philadelphia, PA 439 Fifth Avenue Pittsburgh, PA TENNESSEE 6150 Poplar Road Memphis, TN TEXAS 10000 Research Boulevard Austin, TX 4017 Northwest Parkway Dallas, TX 1155 Dairy Ashford Street Houston, TX 2701 Drexel Drive Houston, TX 400 East Las Colinas Blvd. Irving, TX 14100 San Pedro San Antonio, TX 19740 IH 45 North Spring, TX UTAH 215 South State Street Salt Lake City, UT VIRGINIA 8180 Greensboro Drive McLean, VA WASHINGTON 411 108th Avenue, N.E. Bellevue, WA 511 Pine Street Seattle, WA WASHINGTON, DC 1900 K Street, N.W. Washington, DC WISCONSIN 595 North Barker Road Brookfield, WI 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 Robert C. Pozen, Senior Vice President Robert A. Lawrence, Vice President Richard C. Habermann, Vice President Brad Lewis, Vice President Charles S. Morrison, Vice President John Todd, Vice President Eric D. Roiter, Secretary Richard A. Silver, Treasurer John H . Costello, Assistant Treasurer Leonard M. Rush, Assistant Treasurer BOARD OF TRUSTEES Ralph F. Co x * Phyllis Burke Davis * Robert M. Gates * Edward C. Johnson 3d E. Bradley Jones * Donald J. Kirk * Peter S. Lynch Marvin L. Mann * William O. McCoy * Gerald C. McDonough * Robert C. Pozen Thomas R. Williams * * INDEPENDENT TRUSTEES ADVISORY BOARD J. Gary Burkhead GENERAL DISTRIBUTOR Fidelity Distributors Corporation Boston, MA TRANSFER AND SHAREHOLDER SERVICING AGENT Fidelity Service Company, Inc. Boston, MA CUSTODIAN The Chase Manhattan Bank New York, NY FIDELITY'S ASSET ALLOCATION FUNDS Asset Manager SM Asset Manager: Growth SM Asset Manager: Income SM Fidelity Freedom Funds- Income, 2000, 2010, 2020, 2030 SM THE FIDELITY TELEPHONE CONNECTION MUTUAL FUND 24-HOUR SERVICE Exchanges/Redemptions 1-800-544-7777 Account Assistance 1-800-544-6666 Product Information 1-800-544-8888 Retirement Accounts 1-800-544-4774 (8 a.m. - 9 p.m.) TDD Service 1-800-544-0118 (for the deaf and hearing impaired) (9 a.m. - 9 p.m. Eastern time) (registered trademark) TouchTone Xpress 1-800-544-5555 SM AUTOMATED LINE FOR QUICKEST SERVICE (2_FIDELITY_LOGOS)FIDELITY ASSET MANAGER: INCOME SM SEMIANNUAL REPORT MARCH 31, 1998 CONTENTS PRESIDENT'S MESSAGE 3 NED JOHNSON ON INVESTING STRATEGIES. PERFORMANCE 4 HOW THE FUND HAS DONE OVER TIME. MARKET RECAP 6 AN OVERVIEW OF THE MARKET'S PERFORMANCE AND THE FACTORS DRIVING IT. FUND TALK 7 THE MANAGERS' REVIEW OF FUND PERFORMANCE, STRATEGY AND OUTLOOK. INVESTMENT CHANGES 11 A SUMMARY OF MAJOR SHIFTS IN THE FUND'S INVESTMENTS OVER THE PAST SIX MONTHS. INVESTMENTS 12 A COMPLETE LIST OF THE FUND'S INVESTMENTS WITH THEIR MARKET VALUES. FINANCIAL STATEMENTS 36 STATEMENTS OF ASSETS AND LIABILITIES, OPERATIONS, AND CHANGES IN NET ASSETS, AS WELL AS FINANCIAL HIGHLIGHTS. NOTES 40 NOTES TO THE FINANCIAL STATEMENTS. To reduce expenses and demonstrate respect for our environment, we have initiated a project through which we will begin eliminating duplicate copies of most financial reports and prospectuses to most households, even if they have more than one account in the fund. If additional copies of financial reports, prospectuses or historical account information are needed, please call 1-800-544-6666. THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS. MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED. NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK. FOR MORE INFORMATION ON ANY FIDELITY FUND, INCLUDING CHARGES AND EXPENSES, CALL 1-800-544-8888 FOR A FREE PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY. PRESIDENT'S MESSAGE (photo_of_Edward_C_Johnson_3d) DEAR SHAREHOLDER: In the first quarter of 1998, the U.S. stock and bond markets responded differently to lingering uncertainty over the direction of the U.S. and global economies. On the one hand, the U.S. stock market soared to record heights as corporate earnings proved to be stronger than expected and investors shrugged off concerns about the effects of economic difficulties in Asia. On the other hand, two factors tempered returns in the bond market. First, interest-rate levels were generally positive, but were low enough to encourage a flood of new issuance that dampened performance. Second, there were concerns that continued economic strength might lead to eventual inflation, even though inflation indicators remained benign during the quarter. While it's impossible to predict the future direction of the markets with any degree of certainty, there are certain basic principles that can help investors plan for their future needs. First, investors are encouraged to take a long-term view of their portfolios. If you can afford to leave your money invested through the inevitable up and down cycles of the financial markets, you will greatly reduce your vulnerability to any single decline. We know from experience, for example, that stock prices have gone up over longer periods of time, have significantly outperformed other types of investments and have stayed ahead of inflation. Second, you can further manage your investing risk through diversification. Asset Manager funds are already diversified because they invest in stocks, bonds and short-term and money market instruments, both in the U.S. and overseas. If you have a short investment time horizon, you might want to consider moving some of your investment into a money market fund, which seeks income and a stable share price by investing in high-quality, short-term investments. Of course, it's important to remember that there is no assurance that a money market fund will achieve its goal of maintaining a stable net asset value of $1.00 per share, and that these types of funds are neither insured nor guaranteed by any agency of the U.S. government Finally, no matter what your time horizon or portfolio diversity, it makes good sense to follow a regular investment plan, investing a certain amount of money in a fund at the same time each month or quarter and periodically reviewing your overall portfolio. By doing so, you won't get caught up in the excitement of a rapidly rising market, nor will you buy all your shares at market highs. While this strategy - known as dollar cost averaging - won't assure a profit or protect you from a loss in a declining market, it should help you lower the average cost of your purchases. If you have questions, please call us at 1-800-544-8888. We are available 24 hours a day, seven days a week to provide you the information you need to make the investments that are right for you. Best regards, Edward C. Johnson 3d PERFORMANCE: THE BOTTOM LINE 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 past five year and life of fund total returns would have been lower. CUMULATIVE TOTAL RETURNS PERIODS ENDED MARCH 31, 1998 PAST 6 PAST 1 PAST 5 LIFE OF MONTHS YEAR YEARS FUND FIDELITY ASSET MANAGER: INCOME 6.34% 16.49% 56.66% 70.62% FIDELITY CONSERVATIVE COMPOSITE 6.46% 16.58% 54.55% N/A S&P 500 (REGISTERED TRADEMARK) 17.22% 48.00% 174.71% 202.27% LB AGGREGATE BOND 4.54% 11.99% 39.89% N/A LB 3 MONTH T-BILL 2.64% 5.58% 27.62% N/A INCOME FUNDS AVERAGE 7.18% 22.22% 83.24% N/A CUMULATIVE TOTAL RETURNS show the fund's performance in percentage terms over a set period - in this case, six months, one year, five years or since the fund started on October 1, 1992. For example, if you had invested $1,000 in a fund that had a 5% return over the past year, the value of your investment would be $1,050. You can compare the fund's returns to the performance of the Fidelity Conservative Composite Index, a hypothetical combination of unmanaged indices. The composite index combines the total returns of the Standard & Poor's 500 Index, the Lehman Brothers Aggregate Bond Index and the Lehman Brothers 3 Month Treasury Bill Index, weighted according to the fund's neutral mix. To measure how the fund's performance stacked up against its peers, you can compare it to the income funds average, which reflects the performance of mutual funds with similar objectives tracked by Lipper Analytical Services, Inc. The past six months average represents a peer group of 74 mutual funds. The benchmarks listed in the table above include reinvested dividends and capital gains, if any, and exclude the effect of sales charges. AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED MARCH 31, 1998 PAST 1 PAST 5 LIFE OF YEAR YEARS FUND FIDELITY ASSET MANAGER: INCOME 16.49% 9.39% 10.20% FIDELITY CONSERVATIVE COMPOSITE 16.58% 9.10% N/A AVERAGE ANNUAL TOTAL 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. $10,000 OVER LIFE OF FUND Asset Manager: Income FID Conserv Composite S&P 500 LB Aggregate Bond 00328 F0056 SP001 LB001 1992/10/31 10000.00 10000.00 10000.00 10000.00 1992/11/30 10131.75 10058.70 10341.00 10002.26 1992/12/31 10335.71 10137.21 10468.19 10161.31 1993/01/31 10601.78 10234.73 10556.13 10356.17 1993/02/28 10775.92 10335.59 10699.69 10537.45 1993/03/31 11012.63 10403.50 10925.45 10581.36 1993/04/30 11095.59 10390.02 10661.06 10655.05 1993/05/31 11157.79 10454.60 10946.77 10668.61 1993/06/30 11282.63 10544.51 10978.52 10861.96 1993/07/31 11376.79 10568.86 10934.61 10923.40 1993/08/31 11628.47 10733.74 11349.03 11114.86 1993/09/30 11660.07 10744.26 11261.64 11145.39 1993/10/31 11818.44 10814.63 11494.76 11187.03 1993/11/30 11744.57 10772.19 11385.56 11091.87 1993/12/31 11926.14 10827.23 11523.32 11151.98 1994/01/31 12131.02 10961.16 11915.11 11302.55 1994/02/28 11915.04 10840.81 11592.21 11106.19 1994/03/31 11687.39 10689.04 11086.79 10832.38 1994/04/30 11698.18 10705.13 11228.70 10745.88 1994/05/31 11731.10 10753.94 11412.86 10744.37 1994/06/30 11665.22 10715.66 11133.24 10720.63 1994/07/31 11819.10 10865.25 11498.41 10933.57 1994/08/31 11940.44 10974.39 11969.85 10947.14 1994/09/30 11829.82 10895.26 11676.58 10786.02 1994/10/31 11863.39 10965.43 11939.31 10776.41 1994/11/30 11774.41 10899.32 11504.48 10752.47 1994/12/31 11763.68 10979.99 11675.09 10826.72 1995/01/31 11831.41 11125.48 11977.82 11040.99 1995/02/28 12046.30 11310.15 12444.60 11303.50 1995/03/31 12171.32 11427.24 12811.84 11372.84 1995/04/30 12330.59 11567.79 13189.15 11531.71 1995/05/31 12627.09 11830.48 13716.32 11977.95 1995/06/30 12752.88 11944.07 14034.95 12065.77 1995/07/31 12959.19 12038.69 14500.35 12038.82 1995/08/31 13074.38 12116.36 14536.74 12184.11 1995/09/30 13247.66 12280.54 15150.19 12302.65 1995/10/31 13270.83 12357.37 15096.11 12462.64 1995/11/30 13503.77 12551.07 15758.83 12649.39 1995/12/31 13726.82 12688.84 16062.34 12826.91 1996/01/31 13880.66 12828.08 16609.11 12912.09 1996/02/29 13785.70 12798.43 16763.07 12687.65 1996/03/31 13773.58 12815.21 16924.50 12599.45 1996/04/30 13785.38 12856.13 17173.97 12528.60 1996/05/31 13833.79 12944.55 17616.88 12503.16 1996/06/30 13942.35 13032.02 17684.00 12671.06 1996/07/31 13846.45 12955.05 16902.72 12705.74 1996/08/31 13881.96 13031.59 17259.20 12684.44 1996/09/30 14211.73 13272.88 18230.55 12905.49 1996/10/31 14517.86 13463.36 18733.35 13191.37 1996/11/30 14937.29 13765.99 20149.40 13417.32 1996/12/31 14799.54 13699.27 19750.24 13292.57 1997/01/31 15016.25 13910.59 20984.24 13333.27 1997/02/28 15080.03 13966.07 21148.76 13366.44 1997/03/31 14810.26 13791.38 20279.75 13218.32 1997/04/30 15080.75 14079.76 21490.45 13416.19 1997/05/31 15416.69 14340.46 22798.79 13543.01 1997/06/30 15649.97 14569.76 23820.18 13703.76 1997/07/31 16144.31 15021.48 25715.55 14073.31 1997/08/31 15948.38 14810.07 24274.97 13953.26 1997/09/30 16223.60 15102.33 25604.51 14159.05 1997/10/31 16249.53 15130.42 24749.32 14364.46 1997/11/30 16434.63 15324.82 25894.96 14430.60 1997/12/31 16635.67 15474.60 26339.58 14575.90 1998/01/31 16785.91 15630.16 26630.89 14763.03 1998/02/28 17073.26 15866.70 28551.51 14751.91 1998/03/31 17252.00 16078.55 30013.64 14802.06 IMATRL PRASUN SHR__CHT 19980331 19980422 113429 R00000000000068 $10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was invested in Fidelity Asset Manager: Income on October 31, 1992, shortly after the fund started. As the chart shows, by March 31, 1998, the value of the investment would have grown to $17,252 - a 72.52% increase on the initial investment. For comparison, look at how both the Lehman Brothers Aggregate Bond Index, a market value weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage backed securities with maturities of at least one year, and the S&P 500, a widely recognized unmanaged index of common stocks, did over the same period. With dividends and capital gains, if any, reinvested, the same $10,000 investment in the Lehman Brothers Aggregate Bond Index would have grown to $14,802 - a 48.02% increase. If $10,000 was invested in the S&P 500, it would have grown to $30,014 - a 200.14% increase. You can also look at how the Fidelity Conservative Composite Index did over the same period. The composite index combines the total returns of the S&P 500 (+200.14%), the Lehman Brothers Aggregate Bond Index (+48.02%) and the Lehman Brothers 3 Month T-Bill Index (+28.60%) according to the fund's neutral mix* and assumes monthly rebalancing of the mix. With dividends and interest, if any, reinvested, the same $10,000 investment would have grown to $16,079 - a 60.79% increase. UNDERSTANDING PERFORMANCE How a fund did yesterday is no guarantee of how it will do tomorrow. If you sell your shares during a market downturn, you might lose money. But if you can ride out the market's ups and downs, you may have a gain. (checkmark) * CURRENTLY 20% STOCKS, 50% BONDS AND 30% SHORT-TERM/MONEY MARKET INSTRUMENTS EFFECTIVE JANUARY 1, 1997; 20%, 30% AND 50%, RESPECTIVELY, PRIOR TO JANUARY 1, 1997. Despite being tested during the period, the U.S. stock and bond markets performed well during the six months that ended March 31, 1998. Economic trouble in Southeast Asia caused worldwide concern, but a domestic economic environment of low inflation, low interest rates and steady growth spelled positive returns for both stocks and bonds. STOCKS: The U.S. stock market showed its resiliency during the period. Despite the economic uncertainty in Southeast Asia - and the resulting concern that U.S. corporate earnings would slow - the stock market performed well. The Standard & Poor's 500 Index - a measure of the U.S. stock market - returned 17.22% during this time. In late October, after several small Southeast Asian countries devalued their currencies, a full-fledged economic crisis enveloped the region. These troubles had ripple effects throughout the world, particularly in the U.S., where the Dow Jones Industrial Average plummeted 550-plus points in one trading session. Many U.S. corporations with business exposure to Southeast Asia announced earnings disappointments. Investors showed their concern by embarking on a "flight to quality," seeking shelter in stocks of companies with minimal international exposure. Despite this turbulence, however, the continued strength of the U.S. economy seemed to buoy the stock market as low interest rates, low inflation and moderate growth combined to make for a favorable economic backdrop. After digesting the events that took place in Southeast Asia, investors regained their attraction to stocks. Through the first three months of 1998, cash inflows into stock mutual funds were very strong and the Dow itself was approaching the 9000-point barrier. BONDS: Similar to their equity counterparts, bonds benefited from the continued lack of inflationary pressure during the period. The Lehman Brothers Aggregate Bond Index - a broad gauge of the U.S. taxable investment-grade bond market - returned 4.54% during this period. Global volatility and historically low interest rates were the main stories in the last quarter of 1997. Financial problems in Asia came to a head in October, resulting in a "flight to quality." Wary stock investors sought investments offering lower volatility, helping the U.S. bond market - especially U.S. Treasuries - surge. The Lehman Brothers Corporate Bond Index returned 4.49% for the six months. Corporate bonds benefited from continued economic growth and demand for yield, although they faltered somewhat in January 1998. Investors feared a slowdown in demand from Asia would eat into corporate earnings. In spite of record new issuance in February 1998, corporates rebounded due in part to increased demand on the part of yield-hungry investors. Mortgage-backed bonds performed well during the period, even though lower interest rates resulted in more mortgage prepayment activity. The Lehman Brothers Mortgage-Backed Securities Index generated a six-month return of 4.04%. High-yield and emerging-market issues turned in strong performances throughout the first quarter of 1998. FUND TALK: THE MANAGER'S OVERVIEW An interview with Richard Habermann, Lead Portfolio Manager of Fidelity Asset Manager: Income Q. HOW DID THE FUND PERFORM, DICK? A. The fund performed in line with expectations. For the six months that ended March 31, 1998, the fund had a total return of 6.34%. That slightly lagged the 6.46% return of the Fidelity Conservative Composite Index. For the 12 months that ended March 31, 1998, the fund returned 16.49%, compared to the 16.58% return of the composite index. The fund's return trailed that of the income funds average tracked by Lipper Analytical Services, which returned 7.18% and 22.22% in the six- and 12-month periods, respectively. The funds in the Lipper group have the flexibility to invest a significant percentage of their assets in stocks. On average, funds in the Lipper group carry more than 40% in equities. This fund has a more conservative investment mandate. Q. HOW DID YOU POSITION THE FUND IN TERMS OF ASSET ALLOCATION? A. In light of its conservative investment mandate, the fund generally invests only about 20% of its assets in equities. However, the fund did keep a marginally overweighted position - relative to its neutral target allocation - in equities, helping it to keep pace with the composite index. While slightly underweighted relative to its neutral asset mix, the fund also benefited from its substantial position in bonds. As we learned, the Asian crisis brought with it fears of a domestic economic slowdown - a catalyst for lower inflation and bond yields and, hence, higher bond prices. I increased the bond allocation slightly toward year- end as interest rates stabilized at a lower level and inflation turned downward. Late in the period, inflation continued to drop as energy and import prices fell. Accordingly, longer-maturity securities became a more favorable choice as the yield curve steepened - meaning the differences in yield between long- and short-maturity securities widened. At that point, I re-allocated some of the fund's assets from short-term instruments into bonds during March. Q. HOW DOES THE PRESENT ASSET ALLOCATION COMPARE TO THE FUND'S NEUTRAL MIX? A. In keeping with its conservative goals, the fund's asset allocation remained within a fairly tight range of its neutral mix, which calls for 20% to be invested in stocks, 50% in bonds and 30% in short-term/money market instruments. The fund was marginally overweighted in equities at the end of the period - with a 21.5% allocation - to take advantage of the favorable environment for stocks in the first quarter of 1998. But, overall, the fund did not stray far from its neutral mix since valuations did not seem compelling enough to do so. The neutral mix is meant to be an optimal combination of securities assuming valuations among all three asset classes are at comparable levels. Q. GOING FORWARD, BRAD LEWIS WILL REPLACE GEORGE VANDERHEIDEN AS THE INVESTMENT PROFESSIONAL SELECTING THE EQUITY SECURITIES OF THE PORTFOLIO. HOW WILL THIS CHANGE AFFECT THE FUND? A. The change will not affect the fund's goal of minimizing risk while attempting to maximize returns. Brad Lewis, a 13-year veteran of Fidelity, has developed an impressive track record as the manager of several funds, including Fidelity Disciplined Equity Fund since 1988. Unlike George Vanderheiden, who chose stocks for the fund based on individual company business prospects, Brad uses computer-aided, quantitative analysis - supported by fundamental research - for picking stocks. Overall, the fund's equity portfolio will continue to seek out and hold stocks that we feel will deliver the best returns for our shareholders. We are pleased that the equity investments will continue to be selected by a seasoned veteran like Brad. Q. EVEN THOUGH EQUITIES REPRESENT THE SMALLEST PORTION OF FUND ASSETS, WHICH STOCKS HELPED THE FUND'S PERFORMANCE? A. Financial stocks, such as Fannie Mae and Freddie Mac, performed extremely well during this period of low interest rates and robust capital markets. The fund's European holdings also generated healthy returns. Europe seems to be trending up as the companies there are entering a phase of restructuring and consolidation, concurrent with low interest rates and growing earnings. The health care sector, as a whole, performed well on the strength of large-capitalization pharmaceutical stocks that benefited from a "flight to quality" during the Asian crisis - meaning investors sought out large companies with household names that they perceived as safe. Pharmaceuticals also reaped the rewards of accelerated reviews by the Food and Drug Administration. Finally, retail and wholesale stocks were strong and the fund was heavily overweighted, relative to the Standard & Poor's 500 Index, in that sector. In fact, Wal-Mart, one of the fund's larger equity holdings at the end of March, gained 39% during the period versus a 17% return for the S&P 500. Q. WHICH STOCKS HURT PERFORMANCE? A. Consumer nondurables took a hit during the period. Specific to that sector, tobacco stocks such as RJR Nabisco and Philip Morris weakened during the period as litigation fears heightened. In addition, most technology stocks were punished on fears that worldwide product demand would slow drastically as a result of the Asian crisis. Notably, Compaq Computer's stock dropped substantially during the period as the company struggled with inventory problems. Q. WHAT WAS THE STRATEGY FOR THE FUND'S BOND INVESTMENTS? A. As part of its effort to maintain a relatively conservative risk-return profile, Asset Manager: Income concentrates its bond investments in the investment-grade sector. Unfortunately, this strategy can result in relatively modest returns when high-yield securities - or those with credit ratings below investment-grade - perform well, as they did during the six-month period. Regardless, the fund's fixed-income investments - managed separately by Charlie Morrison of our fixed-income department - performed competitively, and were helped by increased allocations toward investment-grade corporate and mortgage-backed securities. The fund's corporate bond allocation - particularly securities issued by banking and finance concerns - performed well as interest rates fell and earnings prospects improved. Mortgage securities also generated healthy returns, partly due to renewed interest from yield-hungry investors. The fund's fixed-income exposure was altered slightly during the period. The fund's position in corporate securities was reduced due to profit taking and the proceeds were re-deployed largely to favorably priced mortgage-backed securities. Q. HOW WAS THE SHORT-TERM/MONEY MARKET PORTION OF THE PORTFOLIO POSITIONED? A. I kept the fund's allocation toward short-term instruments - which were managed by John Todd of our money market group - in a fairly tight range during the period. As in prior periods, John continued to manage the fund's short-term allocation with the objective of adding value relative to a benchmark - the three-month Treasury bill - within the context of a controlled volatility framework. I increased the fund's bond allocation while reducing short-term instruments during the period in response to increasingly favorable inflation conditions and a slowing economy. At the end of the period, the fund maintained a near-neutral allocation in short-term/money market instruments. The short-term/money market segment performed admirably during the period and was helped by beneficial security selection. Q. WHAT'S YOUR OUTLOOK? A. We're in the midst of the third- longest positive economic cycle in the post-war U.S. - following a long run in the 1960s when John F. Kennedy was president and in the 1980s when Ronald Reagan led the country. So, in its seventh year, the expansion continues to be remarkably strong. In addition, we're still witnessing decent earnings growth, moderate restructuring efforts and robust merger activity - all of which bodes well for improving the efficiency of the American economy. Even more amazing is that this growth is happening without stimulating the ultimate distress signal for equity and bond investors - - inflation. In this environment, I think both the stock and bond markets will benefit. However, I do believe that we've entered a new period of volatility in the markets, where one-time events can cause major shake-ups. I think the questions raised by the Asian financial crisis need to be monitored. Although the U.S. economy may not be drastically hurt by this turmoil, the cheapening of Asian goods could cause U.S. manufacturers to move production outside of the country, which would lead to higher unemployment and slower growth. Considering that we may be entering a period of higher volatility in the markets, it makes sense that I proceed with caution and not stray too far from our neutral mix in the near future. 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. DICK HABERMANN ON THE FUND'S CONSERVATIVE INVESTMENT STRATEGY: "IT IS IMPORTANT FOR INVESTORS TO REMEMBER THAT ASSET MANAGER: INCOME IS A CONSERVATIVE ASSET ALLOCATION FUND. ON A NEUTRAL BASIS, THE FUND HOLDS ONLY 20% OF ITS ASSETS IN EQUITIES, WITH 50% INVESTED IN INVESTMENT-GRADE, FIXED-INCOME SECURITIES AND 30% IN MONEY MARKET/SHORT-TERM INSTRUMENTS. OF COURSE, I CAN INCREASE OR DECREASE EXPOSURE TO ANY OF THE ASSET CLASSES BASED ON MY MARKET VIEWS. IN THE INTEREST OF RISK CONTROL, HOWEVER, I USUALLY CAP THE EQUITY ALLOCATION AT ABOUT 25%. ASSET MANAGER: INCOME - - BEING THE MOST CONSERVATIVE FUND OF THE ASSET MANAGER FAMILY - - MAY BE A REASONABLE CHOICE FOR INVESTORS WITH MODERATE TIME HORIZONS AND THOSE LOOKING FOR A LOWER-VOLATILITY ALTERNATIVE TO EQUITY AND BALANCED-TYPE FUNDS. IN ADDITION, THE FUND'S INCOME COMPONENT AND MONTHLY DIVIDEND SCHEDULE MAY BE APPEALING TO THOSE SEEKING A CONSISTENT INCOME FLOW WHILE MAINTAINING A SMALL DEGREE OF STOCK MARKET EXPOSURE. ALL OF THE ASSET MANAGER FUNDS ARE VERY RESEARCH- AND RESOURCE-INTENSIVE FUNDS, DRAWING UPON THE EXPERTISE OF FIDELITY'S GLOBAL NETWORK OF PORTFOLIO MANAGERS AND ANALYSTS. FOR INVESTORS SEEKING TO REDUCE EXPOSURE TO MORE AGGRESSIVE ASSET CLASSES, FUNDS AND SECURITIES, ASSET MANAGER: INCOME FUND MAY BE AN APPROPRIATE OPTION." FUND FACTS GOAL: HIGH CURRENT INCOME, AND CAPITAL APPRECIATION WHEN APPROPRIATE FUND NUMBER: 328 TRADING SYMBOL: FASIX START DATE: OCTOBER 1, 1992 SIZE: AS OF MARCH 31, 1998, MORE THAN $724 MILLION MANAGER: RICHARD HABERMANN, SINCE 1996; MANAGER, FIDELITY ASSET MANAGER AND FIDELITY ASSET MANAGER: GROWTH, SINCE 1996; FIDELITY TREND FUND, 1977-1981; FIDELITY MAGELLAN FUND, 1972-1977; JOINED FIDELITY IN 1968 (CHECKMARK) INVESTMENT CHANGES TOP FIVE BOND ISSUERS AS OF MARCH 31, 1998
(WITH MATURITIES GREATER THAN ONE YEAR) % OF FUND'S % OF FUND'S INVESTMENTS INVESTMENTS IN THESE BOND ISSUERS 6 MONTHS AGO FANNIE MAE 12.8 7.2 U.S. TREASURY 8.1 6.3 KEY BANK N.A. 1.1 1.4 GOVERNMENT NATIONAL MORTGAGE ASSOCIATION 0.9 1.2 U.S. DEPARTMENT OF HOUSING & 0.8 0.9 URBAN DEVELOPMENT
QUALITY DIVERSIFICATION AS OF MARCH 31, 1998 (MOODY'S RATINGS) % % OF FUND'S INVESTMENTS O 6 MONTHS AGO F F U N D ' S I N V E S T M E N T S AAA, AA, A 3 34.0 8 . 4 BAA 7 5.0 . 2 BA AND BELOW 1 2.3 . 8 NOT RATED 5 0.2 . 0 TABLE EXCLUDES SHORT-TERM INVESTMENTS. WHERE MOODY'S RATINGS ARE NOT AVAILABLE, WE HAVE USED S&P RATINGS. TOP FIVE STOCKS AS OF MARCH 31, 1998 % OF FUND'S % OF FUND'S INVESTMENTS INVESTMENTS IN THESE STOCKS 6 MONTHS AGO FANNIE MAE 1.9 1.8 PHILIP MORRIS COMPANIES, INC. 1.1 1.4 FREDDIE MAC 0.7 0.6 FLEET FINANCIAL GROUP, INC. 0.6 0.6 VODAFONE GROUP PLC 0.6 0.4 ASSET ALLOCATION AS OF MARCH 31, 1998 * AS OF SEPTEMBER 30, 1997 ** ROW: 1, COL: 1, VALUE: 28.0 ROW: 1, COL: 2, VALUE: 50.0 ROW: 1, COL: 3, VALUE: 22.0 ROW: 1, COL: 1, VALUE: 33.0 ROW: 1, COL: 2, VALUE: 46.0 ROW: 1, COL: 3, VALUE: 21.0 STOCK CLASS 22% BOND CLASS 50% SHORT-TERM CLASS 28% FOREIGN INVESTMENTS 11% STOCK CLASS 21% BOND CLASS 46% SHORT-TERM CLASS 33% FOREIGN INVESTMENTS 14% * ** ASSET ALLOCATIONS IN THE PIE CHARTS REFLECT THE CATEGORIZATION OF ASSETS AS DEFINED IN THE FUND'S PROSPECTUS IN EFFECT AS OF THE TIME PERIODS INDICATED ABOVE. FINANCIAL STATEMENT CATEGORIZATIONS CONFORM TO ACCOUNTING STANDARDS AND WILL DIFFER FROM THE PIE CHART. INVESTMENTS MARCH 31, 1998 (UNAUDITED) SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENT IN SECURITIES COMMON STOCKS - 19.8% SHARES VALUE (NOTE 1) AEROSPACE & DEFENSE - 0.1% AEROSPACE & DEFENSE - 0.0% Gulfstream Aerospace Corp. (a) 1,800 $ 78,075 DEFENSE ELECTRONICS - 0.1% Raytheon Co.: Class A 3,354 190,759 Class B 9,500 554,563 745,322 TOTAL AEROSPACE & DEFENSE 823,397 BASIC INDUSTRIES - 0.8% CHEMICALS & PLASTICS - 0.5% Air Products & Chemicals, Inc. 2,400 198,900 Dow Chemical Co. 700 68,075 du Pont (E.I.) de Nemours & Co. 25,300 1,720,400 Raychem Corp. 22,700 943,469 Union Carbide Corp. 11,000 551,375 3,482,219 PACKAGING & CONTAINERS - 0.2% Bemis Co., Inc. 1,200 54,150 Corning, Inc. 6,500 287,625 Owens-Illinois, Inc. (a) 35,400 1,531,050 1,872,825 PAPER & FOREST PRODUCTS - 0.1% Boise Cascade Corp. 3,300 119,006 Champion International Corp. 6,900 374,756 Willamette Industries, Inc. 2,800 105,175 598,937 TOTAL BASIC INDUSTRIES 5,953,981 CONSTRUCTION & REAL ESTATE - 0.3% CONSTRUCTION - 0.2% Centex Corp. 6,000 228,750 D.R. Horton, Inc. 8,548 181,645 Fleetwood Enterprises, Inc. 14,102 656,624 Kaufman & Broad Home Corp. 13,000 423,313 U.S. Home Corp. (a) 1,000 45,813 1,536,145 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) CONSTRUCTION & REAL ESTATE - CONTINUED ENGINEERING - 0.1% Fluor Corp. 15,800 $ 786,050 TOTAL CONSTRUCTION & REAL ESTATE 2,322,195 DURABLES - 1.0% AUTOS, TIRES, & ACCESSORIES - 0.6% Cummins Engine Co., Inc. 5,600 308,700 Discount Auto Parts, Inc. (a) 6,900 167,325 General Motors Corp. 47,542 3,206,114 Goodyear Tire & Rubber Co. 3,000 227,250 Magna International, Inc. Class A 6,900 538,732 Superior Industries International, Inc. 7,100 235,631 4,683,752 CONSUMER DURABLES - 0.1% Minnesota Mining & Manufacturing Co. 5,000 455,938 CONSUMER ELECTRONICS - 0.2% Newell Co. 4,300 208,281 Philips Electronics NV 7,700 565,469 Philips Electronics NV (Bearer) 9,700 712,636 1,486,386 FURNISHINGS - 0.0% HON Industries, Inc. 200 7,350 TEXTILES & APPAREL - 0.1% Burlington Industries, Inc. (a) 8,900 156,306 Jones Apparel Group, Inc. (a) 2,900 159,681 Liz Claiborne, Inc. 9,100 453,863 NIKE, Inc. Class B 4,300 190,275 Reebok International Ltd. (a) 300 9,150 Warnaco Group, Inc. Class A 1,600 62,800 1,032,075 TOTAL DURABLES 7,665,501 ENERGY - 1.4% ENERGY SERVICES - 0.1% McDermott International, Inc. 12,900 532,931 Schlumberger Ltd. 800 60,600 593,531 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) ENERGY - CONTINUED OIL & GAS - 1.3% Amerada Hess Corp. 8,200 $ 478,163 Amoco Corp. 900 77,738 Apache Corp. 700 25,725 Atlantic Richfield Co. 3,700 290,913 British Petroleum PLC: Ord. 128 1,846 ADR 18,690 1,608,508 Burlington Resources, Inc. 31,265 1,498,766 Chevron Corp. 2,300 184,719 Cooper Cameron Corp. (a) 300 18,113 Elf Aquitaine SA sponsored ADR 2,953 191,207 Enron Oil & Gas Co. 1,200 27,525 Kerr-McGee Corp. 2,800 194,775 Occidental Petroleum Corp. 45,600 1,336,650 Royal Dutch Petroleum Co. Ord. 21,200 1,201,220 Royal Dutch Petroleum Co. 22,100 1,255,556 Santa Fe Energy Resources, Inc. 7,500 82,500 Tosco Corp. 28,100 990,525 Total SA: Class B 2,037 244,841 sponsored ADR 3,945 236,947 USX-Marathon Group 400 15,050 Valero Energy Corp. 2,600 86,775 10,048,062 TOTAL ENERGY 10,641,593 FINANCE - 5.2% BANKS - 0.4% Credit Suisse Group (Reg.) 5,600 1,121,103 NationsBank Corp. 8,500 619,969 Providian Financial Corp. 13,900 798,381 Wells Fargo & Co. 1,200 397,500 2,936,953 CREDIT & OTHER FINANCE - 0.7% CIT Group, Inc. Class A 3,500 114,188 Fleet Financial Group, Inc. 57,936 4,928,181 Green Tree Financial Corp. 6,400 182,000 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) FINANCE - CONTINUED CREDIT & OTHER FINANCE - CONTINUED Money Store, Inc. (The) 2,800 $ 89,425 Transamerica Corp. 400 46,600 5,360,394 FEDERAL SPONSORED CREDIT - 2.5% Freddie Mac 113,100 5,365,181 Fannie Mae 231,900 14,667,675 20,032,856 INSURANCE - 1.4% AFLAC, Inc. 5,600 354,200 Allmerica Financial Corp. 6,400 408,800 Allstate Corp. 31,008 2,850,798 American International Group, Inc. 18,175 2,288,914 CIGNA Corp. 5,500 1,127,500 General Re Corp. 2,600 573,625 Loews Corp. 5,300 552,525 MBIA, Inc. 2,000 155,000 MGIC Investment Corp. 12,900 847,369 Nationwide Financial Services, Inc. Class A 400 17,350 PMI Group, Inc. 6,200 500,650 Provident Companies, Inc. 700 24,019 Reliastar Financial Corp. 3,273 150,763 Torchmark Corp. 16,300 746,744 Travelers Property Casualty Corp. Class A 4,300 189,200 UNUM Corp. 1,200 66,225 10,853,682 SAVINGS & LOANS - 0.1% Golden West Financial Corp. 4,500 431,156 SECURITIES INDUSTRY - 0.1% Nomura Securities Co. Ltd. 73,000 831,947 United Asset Management Corp. 8,800 239,800 Waddell & Reed Financial, Inc. Class A (a) 300 7,800 1,079,547 TOTAL FINANCE 40,694,588 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) HEALTH - 1.8% DRUGS & PHARMACEUTICALS - 0.7% American Home Products Corp. 15,400 $ 1,468,775 Amgen, Inc. 5,200 316,550 Astra AB Class A Free shares 45,966 946,936 Gilead Sciences, Inc. (a) 300 10,800 Merck & Co., Inc. 4,200 539,175 Novartis AG (Reg.) 400 708,369 Schering-Plough Corp. 17,300 1,413,194 Sepracor, Inc. (a) 1,100 46,888 5,450,687 MEDICAL EQUIPMENT & SUPPLIES - 0.2% Allegiance Corp. 620 24,529 Bard (C.R.), Inc. 3,600 132,300 Baxter International, Inc. 2,400 132,300 Biomet, Inc. 11,400 342,000 Boston Scientific Corp. (a) 3,000 202,500 Johnson & Johnson 1,700 124,631 St. Jude Medical, Inc. (a) 14,600 488,188 Sofamor/Danek Group, Inc. (a) 1,100 93,775 1,540,223 MEDICAL FACILITIES MANAGEMENT - 0.9% Columbia/HCA Healthcare Corp. 136,602 4,405,415 Humana, Inc. (a) 30,900 766,706 Tenet Healthcare Corp. 18,900 686,306 United HealthCare Corp. 14,200 919,450 6,777,877 TOTAL HEALTH 13,768,787 HOLDING COMPANIES - 0.0% U.S. Industries, Inc. 7,800 234,488 INDUSTRIAL MACHINERY & EQUIPMENT - 0.5% ELECTRICAL EQUIPMENT - 0.4% Alcatel Alsthom Compagnie Generale d'Electricite SA sponsored ADR 800 30,400 Alcatel Alsthom Compagnie Generale d'Electricite SA 6,800 1,277,640 Emerson Electric Co. 4,400 286,825 General Electric Co. 13,000 1,120,438 Grainger (W.W.), Inc. 1,100 113,094 Scientific-Atlanta, Inc. 6,500 127,156 2,955,553 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) INDUSTRIAL MACHINERY & EQUIPMENT - CONTINUED INDUSTRIAL MACHINERY & EQUIPMENT - 0.1% Caterpillar, Inc. 8,800 $ 484,550 Tyco International Ltd. 1,900 103,788 Ultratech Stepper, Inc. (a) 7,500 152,813 741,151 POLLUTION CONTROL - 0.0% Browning-Ferris Industries, Inc. 400 13,050 TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 3,709,754 MEDIA & LEISURE - 0.7% BROADCASTING - 0.3% CBS Corp. 9,600 325,800 Comcast Corp.: Class A 1,300 45,094 Class A special 2,300 81,219 Cox Communications, Inc. Class A (a) 2,400 100,800 Tele-Communications, Inc. (a): (TCI Group), Series A 4,808 149,499 (TCI Ventures Group), Series A 26,384 463,369 Time Warner, Inc. 6,800 489,600 U S WEST Media Group 12,900 448,275 2,103,656 ENTERTAINMENT - 0.1% Cedar Fair LP (depositary unit) 1,000 27,500 Disney (Walt) Co. 700 74,725 King World Productions, Inc. 3,500 102,375 Royal Caribbean Cruises Ltd. 2,600 182,163 Viacom, Inc.: Class A 3,100 164,688 Class B (non-vtg.) 4,200 225,750 777,201 LEISURE DURABLES & TOYS - 0.0% Nintendo Co. Ltd. Ord. 900 75,130 LODGING & GAMING - 0.1% Circus Circus Enterprises, Inc. (a) 14,100 296,100 Mirage Resorts, Inc. (a) 17,000 413,313 Sun International Hotels Ltd. Ord. (a) 9,200 435,850 1,145,263 PUBLISHING - 0.0% Cognizant Corp. 4,300 246,713 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) MEDIA & LEISURE - CONTINUED RESTAURANTS - 0.2% McDonald's Corp. 11,500 $ 690,000 Papa John's International, Inc. (a) 1,500 57,563 Wendy's International, Inc. 21,600 481,950 1,229,513 TOTAL MEDIA & LEISURE 5,577,476 NONDURABLES - 1.3% BEVERAGES - 0.0% PepsiCo, Inc. 2,000 85,375 TOBACCO - 1.3% Philip Morris Companies, Inc. 214,150 8,927,378 RJR Nabisco Holdings Corp. 26,761 837,954 UST, Inc. 4,000 129,000 9,894,332 TOTAL NONDURABLES 9,979,707 PRECIOUS METALS - 0.0% Newmont Mining Corp. 3,967 121,241 RETAIL & WHOLESALE - 2.1% APPAREL STORES - 0.1% Gap, Inc. 5,550 249,750 TJX Companies, Inc. 11,800 533,950 783,700 GENERAL MERCHANDISE STORES - 0.7% Federated Department Stores, Inc. (a) 15,100 782,369 Penney (J.C.) Co., Inc. 6,800 514,675 Proffitts, Inc. (a) 4,800 174,000 Wal-Mart Stores, Inc. 82,700 4,202,194 5,673,238 GROCERY STORES - 0.1% Safeway, Inc. (a) 15,800 583,613 RETAIL & WHOLESALE, MISCELLANEOUS - 1.2% Circuit City Stores, Inc. - Circuit City Group (a) 35,000 1,496,250 Corporate Express, Inc. (a) 7,600 75,763 Home Depot, Inc. 50,800 3,425,825 Lowe's Companies, Inc. 38,900 2,730,294 Officemax, Inc. (a) 20,900 373,588 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) RETAIL & WHOLESALE - CONTINUED RETAIL & WHOLESALE, MISCELLANEOUS - CONTINUED Office Depot, Inc. (a) 6,500 $ 202,313 Rex Stores Corp. (a) 2,400 35,400 Staples, Inc. (a) 13,700 317,669 Toys "R" Us, Inc. (a) 12,900 387,806 U.S. Office Products Co. (a) 15,350 291,650 Viking Office Products, Inc. (a) 8,600 199,950 9,536,508 TOTAL RETAIL & WHOLESALE 16,577,059 SERVICES - 0.2% ADVERTISING - 0.0% Interpublic Group of Companies, Inc. 1,350 83,869 LEASING & RENTAL - 0.0% Republic Industries, Inc. (a) 3,000 77,438 PRINTING - 0.0% Donnelley (R.R.) & Sons Co. 600 24,638 SERVICES - 0.2% Cendant Corp. (a) 31,725 1,257,095 Medpartners, Inc. (a) 400 4,100 Reuters Group PLC ADR 2,386 154,046 1,415,241 TOTAL SERVICES 1,601,186 TECHNOLOGY - 2.1% COMMUNICATIONS EQUIPMENT - 0.0% Andrew Corp. (a) 1,000 19,813 3Com Corp. (a) 4,700 168,906 188,719 COMPUTER SERVICES & SOFTWARE - 0.7% Automatic Data Processing, Inc. 8,400 571,725 Black Box Corp. (a) 1,700 62,688 Ceridian Corp. (a) 10,900 587,919 CompUSA, Inc. (a) 4,800 124,800 E Trade Group, Inc. (a) 3,600 89,775 Electronic Data Systems Corp. 21,300 977,138 Electronics for Imaging, Inc. (a) 11,900 309,400 First Data Corp. 13,200 429,000 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) TECHNOLOGY - CONTINUED COMPUTER SERVICES & SOFTWARE - CONTINUED Microsoft Corp. (a) 11,000 $ 984,500 Oracle Corp. (a) 15,175 478,961 Policy Management Systems Corp. (a) 9,200 738,875 Shared Medical Systems Corp. 100 7,838 5,362,619 COMPUTERS & OFFICE EQUIPMENT - 0.5% Adaptec, Inc. (a) 4,800 94,200 Compaq Computer Corp. 34,200 884,925 Hewlett-Packard Co. 6,800 430,950 Ingram Micro, Inc. Class A (a) 1,300 48,263 International Business Machines Corp. 8,600 893,325 Quantum Corp. (a) 1,300 27,706 SCI Systems, Inc. (a) 24,500 872,813 Seagate Technology (a) 7,900 199,475 Tech Data Corp. (a) 9,500 365,750 Western Digital Corp. (a) 3,000 52,688 3,870,095 ELECTRONIC INSTRUMENTS - 0.1% Applied Materials, Inc. (a) 1,200 42,375 Cognex Corp. (a) 3,700 79,088 KLA-Tencor Corp. (a) 1,300 49,725 Lam Research Corp. (a) 11,000 309,375 Novellus Systems, Inc. (a) 5,300 229,225 Teradyne, Inc. (a) 800 32,050 Thermo Electron Corp. (a) 8,000 323,000 Varian Associates, Inc. 2,600 143,975 1,208,813 ELECTRONICS - 0.8% Altera Corp. (a) 2,000 75,500 AMP, Inc. 16,600 727,288 Intel Corp. 18,000 1,405,125 Methode Electronics, Inc. Class A 900 13,444 Micrel, Inc. (a) 900 34,144 Microchip Technology, Inc. (a) 400 8,400 Micron Technology, Inc. (a) 40,700 1,182,844 Molex, Inc. 6,863 184,001 Motorola, Inc. 3,800 230,375 Solectron Corp. (a) 47,600 2,011,100 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) TECHNOLOGY - CONTINUED ELECTRONICS - CONTINUED Thomas & Betts Corp. 4,300 $ 275,200 Uniphase Corp. (a) 300 12,619 6,160,040 PHOTOGRAPHIC EQUIPMENT - 0.0% Polaroid Corp. 690 30,360 TOTAL TECHNOLOGY 16,820,646 TRANSPORTATION - 0.1% AIR TRANSPORTATION - 0.0% Northwest Airlines Corp. Class A (a) 900 55,519 RAILROADS - 0.1% Bombardier, Inc. Class B 6,500 160,468 CSX Corp. 9,400 559,300 719,768 SHIPPING - 0.0% Stolt-Nielsen SA Class B sponsored ADR 3,100 61,613 Stolt-Nielsen SA 2,400 48,000 109,613 TRUCKING & FREIGHT - 0.0% Yellow Corp. (a) 4,600 87,975 TOTAL TRANSPORTATION 972,875 UTILITIES - 2.2% CELLULAR - 0.8% AirTouch Communications, Inc. (a) 33,000 1,614,938 Century Telephone Enterprises, Inc. 1,500 61,125 Vodafone Group PLC 468,961 4,903,134 6,579,197 ELECTRIC UTILITY - 0.1% American Electric Power Co., Inc. 7,900 396,975 Consolidated Edison, Inc. 700 32,725 Entergy Corp. 7,600 226,100 Houston Industries, Inc. 3,500 100,625 Niagara Mohawk Power Corp. (a) 4,000 52,000 PG&E Corp. 3,663 120,879 929,304 GAS - 0.0% Enron Corp. 1,600 74,200 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) UTILITIES - CONTINUED TELEPHONE SERVICES - 1.3% AT&T Corp. 6,200 $ 406,875 Ameritech Corp. 14,300 706,956 Bell Atlantic Corp. 9,578 981,745 BellSouth Corp. 14,200 959,388 Deutsche Telekom AG 4,000 87,032 MCI Communications Corp. 55,800 2,762,100 SBC Communications, Inc. 17,800 776,525 Sprint Corp. 28,300 1,915,556 Telebras sponsored ADR 8,500 1,103,406 WorldCom, Inc. (a) 7,800 335,888 10,035,471 TOTAL UTILITIES 17,618,172 TOTAL COMMON STOCKS (Cost $92,829,220) 155,082,646 NONCONVERTIBLE BONDS - 22.6% MOODY'S PRINCIPAL RATINGS (C) AMOUNT AEROSPACE & DEFENSE - 0.4% DEFENSE ELECTRONICS - 0.4% Raytheon Co.: 5.95%, 3/15/01 Baa1 $ 1,300,000 1,295,489 6.45%, 8/15/04 Baa1 1,620,000 1,633,624 2,929,113 BASIC INDUSTRIES - 0.1% CHEMICALS & PLASTICS - 0.1% Methanex Corp. yankee 8 7/8%, 11/15/01 A2 900,000 942,489 CONSTRUCTION & REAL ESTATE - 0.3% REAL ESTATE INVESTMENT TRUSTS - 0.3% EOP Operating LP (e): 6 3/8%, 2/15/03 Baa1 1,050,000 1,039,479 6 3/4%, 2/15/08 Baa1 380,000 376,895 Weeks Realty LP 6 7/8%, 3/15/05 Baa2 900,000 892,751 2,309,125 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) DURABLES - 0.5% AUTOS, TIRES, & ACCESSORIES - 0.1% General Motors Corp. 9 5/8%, 12/1/00 A3 $ 630,000 $ 683,216 TEXTILES & APPAREL - 0.4% Levi Strauss & Co. 7%, 11/1/06 (e) Baa2 2,440,000 2,468,213 Unifi, Inc. 6 1/2%, 2/1/08 (e) A3 890,000 872,823 3,341,036 TOTAL DURABLES 4,024,252 ENERGY - 0.1% OIL & GAS - 0.1% Petroleum Geo Services ASA 7 1/8%, 3/30/28 Baa3 1,200,000 1,202,280 FINANCE - 13.8% BANKS - 2.0% Banc One Corp. 6 1/4%, 9/1/00 Aa3 1,300,000 1,304,875 BanPonce Financial Corp.: 6.34%, 3/29/99 A3 310,000 310,812 7.65%, 5/3/00 A3 690,000 707,209 6.69%, 9/21/00 A3 1,000,000 1,009,830 6 3/4%, 8/9/01 A3 1,660,000 1,679,073 BanPonce Corp.: 5 3/4%, 3/1/99 A3 460,000 458,335 6.665%, 3/5/01 A3 1,100,000 1,110,186 Capital One Bank 6 3/8%, 2/15/03 Baa3 1,080,000 1,063,400 Den Danske Bank AS 7.40%, 6/15/10 (e)(g) A1 1,220,000 1,263,883 Firstar Corp. 7.15%, 9/1/00 A3 1,390,000 1,396,047 Kansallis-Osake-Pankki yankee 9 3/4%, 12/15/98 A3 470,000 481,172 Marine Midland Bank euro 5.875%, 3/29/99 (g) A3 1,000,000 996,300 NB Capital Trust IV 8 1/4%, 4/15/27 AA3 660,000 718,040 Provident Bank 6 1/8%, 12/15/00 A3 1,560,000 1,557,566 Signet Banking Corp. 5.875%, 4/15/98 (g) A2 700,000 699,776 Union Planters National Bank 6.81%, 8/20/01 A3 1,000,000 1,015,710 15,772,214 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) FINANCE - CONTINUED CLOSED END INVESTMENT COMPANY - 3.3% Capital Equipment Receivables Trust 6.48%, 10/15/06 Baa2 $ 780,000 $ 775,468 Case Equipment Loan Trust: 6.15%, 9/15/02 Aaa 799,247 803,091 5.85%, 2/15/03 A3 370,000 368,594 CPS Auto Grantor Trust 6.55%, 12/15/02 Aaa 760,203 765,904 CPS Auto Receivables Trust 6%, 8/15/03 Aaa 1,730,000 1,724,864 Contimortgage Home Equity Loan Trust 6.26%, 7/15/12 Aaa 1,300,000 1,300,813 Dayton Hudson Credit Card Master Trust 6 1/4%, 8/25/05 Aaa 1,290,000 1,295,534 Ford Credit Auto Owner Trust: 6.40%, 5/15/02 A1 840,000 845,225 6.20%, 12/15/02 Baa3 780,000 774,150 Green Tree Financial Corp.: 5.80%, 2/15/27 Aaa 942,723 942,422 6.10%, 4/15/27 Aaa 808,692 809,194 6 1/2%, 6/15/27 Aaa 670,000 671,675 6.80%, 6/15/27 Aaa 650,000 656,091 6.45%, 9/15/28 Aaa 950,000 955,634 6.68%, 1/15/29 AAA 1,820,000 1,839,893 KeyCorp Auto Grantor Trust 5.80%, 7/15/00 A3 74,649 74,447 Key Plastics, Inc. 10 1/4%, 3/15/07 A2 1,030,000 1,031,770 MBNA Master Credit Card Trust II Class A 6.55%, 1/15/07 Aaa 2,580,000 2,640,088 Olympic Automobile Receivables Trust: 6.40%, 9/15/01 Aaa 1,140,000 1,139,794 6.70%, 3/15/02 Aaa 540,000 546,497 Premier Auto Trust: 4.95%, 2/2/99 A2 81,596 81,431 6%, 5/6/00 Aaa 835,885 836,662 6.35%, 7/6/00 A3 920,000 923,450 6.34%, 1/6/03 Aaa 350,000 353,063 Petroleum Enhanced Trust Receivables Offering Petroleum Trust 6.1875%, 2/5/03 (e) Baa2 1,101,409 1,101,409 Railcar Trust 7 3/4%, 6/1/04 Aaa 35,640 37,319 TMS Auto Grantor Trust 5.90%, 9/15/02 Aaa 189,471 189,560 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) FINANCE - CONTINUED CLOSED END INVESTMENT COMPANY - CONTINUED Union Federal Savings Bank Grantor Trust: 6.975%, 7/10/00 Baa2 $ 39,753 $ 39,778 7.275%, 10/10/00 Baa2 41,649 41,584 8.20%, 1/10/01 Baa2 48,822 49,203 Western Financial Grantor Trust: 6.05%, 11/1/00 Aaa 177,209 177,275 5 7/8%, 3/1/02 Aaa 674,934 687,411 WFS Financial Owner Trust 6.55%, 10/20/04 Aaa 1,170,000 1,177,789 25,657,082 CREDIT & OTHER FINANCE - 5.8% Ahmanson Capital Trust I 8.36%, 12/1/26 (e) Baa2 1,000,000 1,073,600 Associates Corp. North America 7.35%, 7/6/99 Aa3 1,500,000 1,529,550 BCH Cayman Islands Ltd. yankee 7.70%, 7/15/06 A3 270,000 287,901 BankAmerica Capital II, Series 2, 8%, 12/15/26 Aa3 860,000 916,433 Bankers Trust Co. 5.66%, 7/21/98 (g) - 10,000,000 9,995,998 BanPonce Trust I 8.327%, 2/1/27 (e) Baa1 1,550,000 1,653,773 Chrysler Financial Corp. 6 3/8%, 1/28/00 A3 1,570,000 1,579,420 Countrywide Funding Corp. 6.45%, 2/27/03 A3 1,200,000 1,202,004 First Security Capital I 8.41%, 12/15/26 A3 420,000 457,351 Ford Motor Credit Co. 6.57%, 3/19/01 A1 1,700,000 1,720,706 General Electric Capital Corp. 6.94%, 4/13/09 (d) Aaa 1,500,000 1,513,260 General Motors Acceptance Corp.: 6.55%, 4/23/99 A3 2,600,000 2,617,732 6.65%, 5/24/00 A3 1,200,000 1,214,700 6 3/4%, 7/10/02 A3 2,170,000 2,214,702 Heller Financial, Inc.: 7 7/8%, 11/1/99 A3 1,220,000 1,250,110 6 1/4%, 3/1/01 A3 1,440,000 1,438,834 Household Finance Corp. 5.7825%, 6/4/98 - 10,000,000 10,000,000 KeyCorp Institutional Capital, Series A, 7.826%, 12/1/26 A1 900,000 932,112 MCN Investment Corp. 5.84%, 2/1/99 Baa2 730,000 728,423 Mellon Capital I, Series A, 7.72%, 12/1/26 A2 570,000 593,456 Money Store, Inc. 7.30%, 12/1/02 Ba2 750,000 777,188 U.S. Bancorp 8.09%, 11/15/26 A1 860,000 916,425 U S WEST Capital Funding, Inc. 6.95%, 1/15/37 Baa1 1,000,000 1,042,520 45,656,198 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) FINANCE - CONTINUED SAVINGS & LOANS - 0.4% Great West Financial Trust II 8.206%, 2/1/27 A3 $ 1,030,000 $ 1,090,255 Home Savings of America FSB 6 1/2%, 8/15/04 A3 750,000 750,195 Long Island Savings Bank FSB: 6.20%, 4/2/01 Baa3 700,000 699,440 7%, 6/13/02 Baa 970,000 988,362 3,528,252 SECURITIES INDUSTRY - 2.3% Merrill Lynch & Co., Inc. 5.5984%, 7/28/98 - 9,000,000 8,999,910 Morgan Stanley, Dean Witter, Discover & Co. 5.60%, 1/15/99 (g) - 9,000,000 8,999,910 17,999,820 TOTAL FINANCE 108,613,566 HEALTH - 0.1% MEDICAL EQUIPMENT & SUPPLIES - 0.1% McKesson Corp. 6.60%, 3/1/00 A3 1,150,000 1,162,006 HOLDING COMPANIES - 0.2% Norfolk Southern Corp. 7.05%, 5/1/37 Baa1 1,830,000 1,927,356 INDUSTRIAL MACHINERY & EQUIPMENT - 0.4% POLLUTION CONTROL - 0.4% WMX Technologies, Inc.: 8 1/4%, 11/15/99 Baa3 970,000 999,876 6 1/4%, 10/15/00 Baa3 600,000 599,070 7.10%, 8/1/26 Baa3 1,240,000 1,282,458 2,881,404 MEDIA & LEISURE - 1.7% BROADCASTING - 1.1% Continental Cablevision, Inc.: 8 5/8%, 8/15/03 Baa3 480,000 524,693 8.30%, 5/15/06 Baa3 245,000 269,145 9%, 9/1/08 Baa3 670,000 778,078 Hearst-Argyle Television, Inc. 7 1/2%, 11/15/27 Baa3 890,000 920,109 TCI Communications, Inc. 6.46%, 3/6/00 Ba1 1,340,000 1,341,059 Tele Communications, Inc. 9 1/4%, 4/15/02 Ba1 800,000 875,560 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) MEDIA & LEISURE - CONTINUED BROADCASTING - CONTINUED Time Warner, Inc.: 7.95%, 2/1/00 Ba1 $ 745,000 $ 766,292 8.18%, 8/15/07 Ba1 1,445,000 1,583,214 6.95%, 1/15/28 (e) Ba1 1,230,000 1,192,116 8,250,266 ENTERTAINMENT - 0.5% Paramount Communications, Inc.: 5 7/8%, 7/15/00 Ba2 950,000 932,625 7 1/2%, 1/15/02 Ba2 570,000 583,994 Viacom, Inc. (a): 6 3/4%, 1/15/03 Ba2 470,000 469,507 7 3/4%, 6/1/05 Ba2 1,970,000 2,066,038 4,052,164 PUBLISHING - 0.1% News America Holdings, Inc. 8 1/2%, 2/15/05 Baa3 570,000 627,764 News America, Inc. 6 5/8%, 1/9/08 (e) Baa3 455,000 447,220 1,074,984 TOTAL MEDIA & LEISURE 13,377,414 NONDURABLES - 0.6% FOODS - 0.1% ConAgra, Inc. 7 1/8%, 10/1/26 Baa1 1,000,000 1,052,690 TOBACCO - 0.5% Philip Morris Companies, Inc.: 7 1/4%, 9/15/01 A2 1,200,000 1,233,816 7%, 7/15/05 A2 1,250,000 1,273,563 6.95%, 6/1/06 A2 1,180,000 1,212,863 3,720,242 TOTAL NONDURABLES 4,772,932 RETAIL & WHOLESALE - 0.8% GENERAL MERCHANDISE STORES - 0.8% Federated Department Stores, Inc.: 10%, 2/15/01 Baa2 2,310,000 2,528,018 8 1/8%, 10/15/02 Baa2 400,000 425,500 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) RETAIL & WHOLESALE - CONTINUED GENERAL MERCHANDISE STORES - CONTINUED Federated Department Stores, Inc.: - continued 6.79%, 7/15/27 Baa2 $ 800,000 $ 811,992 7%, 2/15/28 Baa2 1,180,000 1,166,442 Penney (J.C.) Co., Inc. 6.95%, 4/1/00 A2 1,100,000 1,119,470 6,051,422 SERVICES - 1.3% LEASING & RENTAL - 1.3% PHH Corp. 5.6775%, 6/11/98 - 10,000,000 9,999,000 TECHNOLOGY - 0.2% COMPUTERS & OFFICE EQUIPMENT - 0.2% Comdisco, Inc. 7 3/4%, 9/1/99 Baa1 1,300,000 1,329,146 TRANSPORTATION - 0.4% AIR TRANSPORTATION - 0.4% AMR Corp. 9 1/2%, 7/15/98 Baa3 2,245,000 2,267,921 Delta Air Lines, Inc. 9 7/8%, 5/15/00 Baa3 500,000 536,050 2,803,971 UTILITIES - 1.7% CELLULAR - 0.1% 360 Degrees Communications Co. 7 1/8%, 3/1/03 Ba1 875,000 903,814 ELECTRIC UTILITY - 1.0% Avon Energy Partners Holding (e): 6.73%, 12/11/02 Baa2 1,340,000 1,356,723 6.46%, 3/4/08 Baa2 1,160,000 1,146,184 Israel Electric Corp. Ltd. (e): yankee 7 7/8%, 12/15/26 A3 660,000 670,296 7 3/4%, 12/15/27 A3 1,275,000 1,285,927 Long Island Lighting Co. 8 5/8%, 4/15/04 Baa3 1,480,000 1,531,474 NIPSCO Capital Markets, Inc. 7.39%, 4/1/04 Baa1 1,000,000 1,042,188 Texas Utilities Co., Series C, 6 3/8%, 1/1/08 (e) Baa3 880,000 845,011 7,877,803 GAS - 0.0% Southwest Gas Corp. 9 3/4%, 6/15/02 Baa2 300,000 336,729 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) UTILITIES - CONTINUED TELEPHONE SERVICES - 0.6% Cable & Wireless Communications PLC 6 3/8%, 3/6/03 Baa1 $ 1,480,000 $ 1,480,844 Teleport Communications Group, Inc. 0%, 7/1/07 (j) Baa3 850,000 732,309 WorldCom, Inc.: 9 3/8%, 1/15/04 Ba1 936,000 991,879 8 7/8%, 1/15/06 Ba1 793,000 864,354 7 3/4%, 4/1/07 Ba1 250,000 269,513 4,338,899 TOTAL UTILITIES 13,457,245 TOTAL NONCONVERTIBLE BONDS (Cost $174,849,135) 177,782,721 U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - 11.8% U.S. TREASURY OBLIGATIONS - 8.1% 7 3/4%, 12/31/99 Aaa 9,662,000 10,003,165 6 5/8%, 6/30/01 Aaa 190,000 195,373 7 7/8%, 8/15/01 Aaa 2,910,000 3,105,057 5 7/8%, 11/30/01 Aaa 4,995,000 5,028,566 7%, 7/15/06 Aaa 12,505,000 13,515,154 13 7/8%, 5/15/11 (callable) Aaa 8,760,000 13,257,734 8 1/8%, 8/15/19 Aaa 1,490,000 1,864,124 71/4%, 2/15/23 Aaa 2,305,000 2,630,581 6 7/8%, 8/15/25 Aaa 12,175,000 13,578,899 63,178,653 U.S. GOVERNMENT AGENCY OBLIGATIONS - 3.7% Fannie Mae: 6.97%, 4/8/04 Aaa 1,200,000 1,263,000 7.49%, 3/2/05 Aaa 4,080,000 4,428,718 Federal Farm Credit Bank 6.47%, 6/7/05 Aaa 2,000,000 2,053,440 Federal Home Loan Bank: 7.36%, 7/1/04 Aaa 600,000 643,500 7.59%, 3/10/05 Aaa 680,000 740,880 U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) U.S. GOVERNMENT AGENCY OBLIGATIONS - CONTINUED Financing Corp. stripped principal: 0%, 5/2/04 Aaa $ 1,009,000 $ 705,160 0%, 6/6/04 Aaa 2,502,000 1,738,865 0%, 11/2/04 Aaa 1,200,000 813,264 Government Loan Trusts (assets of Trust guaranteed by U.S. Government through Agency for International Development) 8 1/2%, 4/1/06 Aaa 4,310,000 4,747,853 Government Trust Certificates (assets of Trust guaranteed by U.S. Government through Defense Security Assistance Agency): Class T-3, 9 5/8%, 5/15/02 Aaa 80,625 85,116 Class 1-C, 9 1/4%, 11/15/01 Aaa 407,208 430,827 Class 2-E, 9.40%, 5/15/02 Aaa 1,947,264 2,056,564 Israel Export Trust Certificates (assets of Trust guaranteed by U.S. Government through Export-Import Bank) Series 1994-1, 6.88%, 1/26/03 Aaa 382,353 389,832 Private Export Funding Corp. secured 6.86%, 4/30/04 Aaa 887,250 907,978 State of Israel (guaranteed by U.S. Government through Agency for International Development) 0%, 11/15/01 Aaa 585,000 475,069 U.S. Department of Housing and Urban Development Government guaranteed participation certificates: Series 1995-A, 8.27%, 8/1/03 Aaa 1,000,000 1,103,200 Series 1996-A, 6.92%, 8/1/04 Aaa 4,010,000 4,202,921 Series 1996-A, 7.63%, 8/1/14 (callable) Aaa 1,000,000 1,070,080 U.S. Trade Trust Certificates (assets of Trust guaranteed by U.S. Government through Export-Import Bank) 6.69%, 1/15/09 (e) Aaa 1,367,992 1,403,150 29,259,417 TOTAL U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS (Cost $91,944,097) 92,438,070 U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - 13.5% MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) FREDDIE MAC - 0.5% 7%, 7/1/01 Aaa $ 431,965 $ 437,123 7 1/2%, 6/1/27 to 2/1/28 Aaa 3,586,335 3,675,994 8 1/2%, 4/1/21 to 5/1/22 Aaa 112,911 118,503 4,231,620 FANNIE MAE - 12.1% 6%, 12/1/10 to 4/1/28 (f) Aaa 31,680,629 31,120,079 6 1/2%, 9/1/25 to 4/1/28 (f) Aaa 24,080,525 23,828,259 7%, 4/1/28 to 5/1/28 (f) Aaa 28,083,000 28,352,502 7 1/2%, 4/1/28 (f) Aaa 10,987,500 11,269,054 11 1/2%, 11/1/15 Aaa 306,602 347,089 12%, 11/1/19 Aaa 166,351 191,510 95,108,493 GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 0.9% 6 1/2%, 11/15/08 to 6/15/09 Aaa 5,334,308 5,390,755 9 1/2%, 8/15/16 Aaa 3,442 3,742 10%, 11/15/09 to 12/15/17 Aaa 440,499 485,197 11%, 7/15/10 to 12/15/15 Aaa 482,891 545,102 11 1/2%, 7/15/15 to 1/15/16 Aaa 388,059 446,624 6,871,420 TOTAL U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES (Cost $106,761,180) 106,211,533 COMMERCIAL MORTGAGE SECURITIES - 3.6% BKB Commercial Mortgage Trust Series 1997-C1 Class D, 7.83%, 2/25/43 (e)(g) BBB 450,000 455,344 CBM Funding Corp. sequential pay Series 1996-1: Class A-1, 7.55%, 7/1/99 AA 130,393 131,696 Class A-2, 6.88%, 7/1/02 AA 1,100,000 1,116,844 Class A-3PI, 7.08%, 11/1/07 AA 870,000 902,625 Class B, 7.48%, 2/1/08 A 680,000 723,988 CS First Boston Mortgage Securities Corp. Series 1997-C2 Class D, 7.27%, 4/17/11 Baa2 1,450,000 1,464,047 Deutsche Mortgage and Asset Receiving Corp. Series 1998-C1 Class D, 7.231%, 7/15/12 Baa2 1,320,000 1,327,013 Equitable Life Assurance Society of the United States (The) (e): Series 174 Class B1, 7.33%, 5/15/06 Aa2 1,000,000 1,051,950 Series 1996-1 Class C1, 7.52%, 5/15/06 A2 700,000 739,431 COMMERCIAL MORTGAGE SECURITIES - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) Federal Deposit Insurance Corp. Series 1994-C1 Class II-A2, 7.85%, 9/25/25 Aaa $ 386,881 $ 387,848 First Union-Lehman Brothers Commercial Mortgage Trust sequential pay Series 1997-C2 Class B, 6.79%, 10/18/11 Aa2 3,040,000 3,077,050 General Motors Acceptance Corp. Commercial Mortgage Securities, Inc.: Series 1997-C2 Class D, 7.192%, 1/15/08 Baa1 450,000 454,617 Series 1997-C2 Class E, 7.624%, 4/15/11 Baa3 950,000 962,320 GS Mortgage Securities Corp. II Series 1997- GL Class A2-B, 6.86%, 7/13/30 Aaa 1,230,000 1,267,011 Kidder Peabody Acceptance Corp. sequential pay, Series 1993-M1 Class A-2, 7.15%, 4/25/25 Aa2 436,269 434,360 Meritor Mortgage Security Corp. Series 1987-1 Class A-3, 9.40%, 6/1/99 Baa3 7,053 7,053 Morgan Stanley Capital I, Inc.: Series 1998-HF1 Class D, 7.10%, 2/15/08 (g) BBB 1,530,000 1,553,180 sequential pay Series 1997-C1 Class A-1C, 7.63%, 2/15/20 Aaa 1,150,000 1,239,125 New England Mutual Life Insurance Co. commercial Series 1993 Class 1-A, 6.70%, 12/15/23 (e) Aaa 18,543 18,543 Nomura Asset Securities Corp. (g): floater Series 1994-MD-II Class A-6, 6.936%, 7/4/03 - 382,364 386,546 Series 1998 - D6 Class A-4, 7.349%, 3/15/30 Baa2 1,320,000 1,313,400 Resolution Trust Corp.: commercial Series 1995-C1 Class A-4B, 6.65%, 2/25/27 Aaa 3,840,080 3,835,280 commercial Series 1995-C1Class C, 6.90%, 2/25/27 A2 1,200,000 1,195,875 floater Series 1993-C2 Class A-2, 6.62%, 3/25/25 (g) AAA 77,493 77,542 floater Series 1994-C1 Class A-3, 6.30%, 6/25/26 (g) AAA 297,497 297,729 Structured Asset Securities Corp.: commercial Series 1996-CFL Class E, 7 3/4%, 2/25/28 BB+ 640,000 649,400 sequential pay Series 1996 Class A-2A, 7 3/4%, 2/25/28 AAA 541,071 546,229 COMMERCIAL MORTGAGE SECURITIES - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (C) AMOUNT (NOTE 1) Thirteen Affiliates of General Growth Properties, Inc. (e): sequential pay Series A-2, 6.602%, 11/15/12 Aaa $ 1,020,000 $ 1,034,576 Series D-2, 6.992%, 11/15/12 Baa2 1,100,000 1,098,845 Series E-2, 7.224%, 11/15/12 Baa3 660,000 655,189 TOTAL COMMERCIAL MORTGAGE SECURITIES (Cost $28,112,350) 28,404,656 FOREIGN GOVERNMENT OBLIGATIONS (H) - 0.6% Export Development Corp. yankee 8 1/8%, 8/10/99 Aa2 410,000 421,583 Israeli State euro 6 3/8%, 12/19/01 A3 800,000 794,872 Ontario Province yankee 7 3/4%, 6/4/02 Aa3 3,000,000 3,181,830 TOTAL FOREIGN GOVERNMENT OBLIGATIONS (Cost $4,327,503) 4,398,285 SUPRANATIONAL OBLIGATIONS - 0.2% Inter American Development Bank yankee 6.29%, 7/16/27 (Cost $1,262,012) Aaa 1,270,000 1,333,919 CERTIFICATES OF DEPOSIT - 8.4% Banque Nationale de Paris yankee 5 3/4%, 7/31/98 4,500,000 4,498,965 Canadian Imperial Bank of Commerce yankee: 5.91%, 8/28/98 9,500,000 9,503,143 6.20%, 8/1/00 720,000 721,771 Deutsche Bank AG yankee: 6.20%, 4/10/98 6,000,000 6,000,428 5.78%, 6/1/98 10,000,000 10,000,294 5.94%, 10/26/98 4,000,000 4,003,209 First National Bank of Chicago 5.65%, 3/3/99 10,000,000 9,991,118 RaboBank Nederland Coop Central yankee 6.20%, 4/10/98 4,000,000 4,000,286 Societe Generale France yankee 5.91%, 10/15/98 8,000,000 8,004,485 Westdeutsche Landesbank yankee 5.83%, 8/3/98 7,000,000 6,999,510 Westpac Banking Corp. yankee 5.885%, 8/27/98 2,500,000 2,500,450 TOTAL CERTIFICATES OF DEPOSIT (Cost $66,198,371) 66,223,659 BANK NOTES - 1.1% PRINCIPAL VALUE AMOUNT (NOTE 1) Key Bank N.A. 5.6488%, 8/20/99 (Cost $8,987,895) $ 9,000,000 $ 8,991,360 MASTER NOTES - 1.5% First Fidelity Bancorp. 8 1/2%, 4/1/98 570,000 570,000 First Bank National Association 5.5975%, 5/15/98 (g) 4,000,000 3,998,720 Goldman Sachs Group LP (The) 5.7188%, 5/4/98 (i) 7,000,000 6,999,230 TOTAL MASTER NOTES (Cost $11,595,234) 11,567,950 CASH EQUIVALENTS - 16.9% SHARES Taxable Central Cash Fund (b) 55,967,473 55,967,473 MATURITY AMOUNT Investments in repurchase agreements (U.S. Treasury obligations), in a joint trading account at 6.08%, dated 3/31/98 due 4/1/98 $ 76,810,970 76,798,000 TOTAL CASH EQUIVALENTS (Cost $132,765,473) 132,765,473 TOTAL INVESTMENT IN SECURITIES - 100% (Cost $719,632,470) $ 785,200,272 LEGEND (a) Non-income producing (b) At period end, the seven-day yield of the Taxable Central Cash Fund was 5.63%. The yield refers to the income earned by investing in the fund over the seven-day period, expressed as an annual percentage. (c) Standard & Poor's credit ratings are used in the absence of a rating by Moody's Investors Service, Inc. (d) Debt obligation initially issued at one coupon which converts to a higher coupon at a specified date. The rate shown is the rate at period end. (e) 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 $23,250,580 or 3.2% of net assets. (f) Security, or a portion of the security, purchased on a delayed delivery or when-issued basis (see Note 2 of Notes to Financial Statements). (g) The coupon rate shown on floating or adjustable rate securities represents the rate at period end. (h) For foreign government obligations not individually rated by S&P or Moody's, the ratings listed are assigned to securities by FMR, the fund's investment adviser, based principally on S&P and Moody's ratings of the sovereign credit of the issuing government. (i) Restricted securities - Investment in securities not registered under the Securities Act of 1933 (see Note 2 of Notes to Financial Statements). Additional information on each holding is as follows: ACQUISITION COST SECURITY DATE (000S) Goldman Sachs Group LP (The) 5.7188%, 5/4/98 8/5/97 $ 7,000,000 (j) Debt Obligation initially issued in zero coupon form which converts to coupon form at a specified rate and time. The rate shown is the rate at period end. OTHER INFORMATION The composition of long-term debt holdings as a percentage of total value of investment in securities, is as follows: MOODY'S RATINGS S&P RATINGS Aaa, Aa, A 37.8% AAA, AA, A 35.8% Baa 6.9% BBB 9.1% Ba 1.7% BB 0.6% B 0.0% B 0.1% Caa 0.0% CCC 0.0% Ca, C 0.0% CC, C 0.0% D 0.0% For some foreign government obligations, FMR has assigned the ratings of the sovereign credit of the issuing government. The percentage not rated by Moody's or S&P amounted to 5.0%. Distribution of investments by country of issue, as a percentage of total value of investment in securities, is as follows: United States 88.7% United Kingdom 3.4 Canada 2.0 France 1.8 Germany 1.3 Netherlands 1.0 Others (individually less than 1%) 1.8 TOTAL 100.0% INCOME TAX INFORMATION At March 31, 1998, the aggregate cost of investment securities for income tax purposes was $719,824,699. Net unrealized appreciation aggregated $65,375,573, of which $68,830,009 related to appreciated investment securities and $3,454,436 related to depreciated investment securities. FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES
AMOUNTS IN THOUSANDS MARCH 31, 1998 (UNAUDITED) ASSETS INVESTMENT IN SECURITIES, AT VALUE (INCLUDING REPURCHASE $ 785,200,272 AGREEMENTS OF $76,798,000) (COST $719,632,470) - SEE ACCOMPANYING SCHEDULE CASH 945 RECEIVABLE FOR INVESTMENTS SOLD 3,386,983 RECEIVABLE FOR FUND SHARES SOLD 6,714,451 DIVIDENDS RECEIVABLE 242,508 INTEREST RECEIVABLE 7,192,890 OTHER RECEIVABLES 3,367 TOTAL ASSETS 802,741,416 LIABILITIES PAYABLE FOR INVESTMENTS PURCHASED $ 4,974,083 REGULAR DELIVERY DELAYED DELIVERY 66,492,965 PAYABLE FOR FUND SHARES REDEEMED 5,972,435 ACCRUED MANAGEMENT FEE 264,587 OTHER PAYABLES AND ACCRUED EXPENSES 196,312 TOTAL LIABILITIES 77,900,382 NET ASSETS $ 724,841,034 NET ASSETS CONSIST OF: PAID IN CAPITAL $ 647,602,672 UNDISTRIBUTED NET INVESTMENT INCOME 2,868,425 ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON 8,802,799 INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 65,567,138 AND ASSETS AND LIABILITIES IN FOREIGN CURRENCIES NET ASSETS, FOR 57,800,787 SHARES OUTSTANDING $ 724,841,034 NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE $12.54 PER SHARE ($724,841,034 (DIVIDED BY) 57,800,787 SHARES)
STATEMENT OF OPERATIONS
AMOUNTS IN THOUSANDS SIX MONTHS ENDED MARCH 31, 1998 (UNAUDITED) INVESTMENT INCOME $ 983,861 DIVIDENDS INTEREST 17,044,394 TOTAL INCOME 18,028,255 EXPENSES MANAGEMENT FEE $ 1,495,474 TRANSFER AGENT FEES 680,783 ACCOUNTING FEES AND EXPENSES 113,457 NON-INTERESTED TRUSTEES' COMPENSATION 1,331 CUSTODIAN FEES AND EXPENSES 17,457 REGISTRATION FEES 56,426 AUDIT 41,123 LEGAL 2,095 MISCELLANEOUS 3,004 TOTAL EXPENSES BEFORE REDUCTIONS 2,411,150 EXPENSE REDUCTIONS (38,164) 2,372,986 NET INVESTMENT INCOME 15,655,269 REALIZED AND UNREALIZED GAIN (LOSS) NET REALIZED GAIN (LOSS) ON: INVESTMENT SECURITIES 10,425,272 FOREIGN CURRENCY TRANSACTIONS (2,027) 10,423,245 CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON: INVESTMENT SECURITIES 16,361,945 ASSETS AND LIABILITIES IN FOREIGN CURRENCIES 20 16,361,965 NET GAIN (LOSS) 26,785,210 NET INCREASE (DECREASE) IN NET ASSETS RESULTING $ 42,440,479 FROM OPERATIONS
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED MARCH 31, 1998 SEPTEMBER 30, (UNAUDITED) 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS $ 15,655,269 $ 28,700,407 NET INVESTMENT INCOME NET REALIZED GAIN (LOSS) 10,423,245 17,712,684 CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) 16,361,965 33,510,799 NET INCREASE (DECREASE) IN NET ASSETS RESULTING 42,440,479 79,923,890 FROM OPERATIONS DISTRIBUTIONS TO SHAREHOLDERS (15,850,337) (29,690,585) FROM NET INVESTMENT INCOME FROM NET REALIZED GAIN (15,719,414) (12,650,000) TOTAL DISTRIBUTIONS (31,569,751) (42,340,585) SHARE TRANSACTIONS 214,712,730 256,470,143 NET PROCEEDS FROM SALES OF SHARES REINVESTMENT OF DISTRIBUTIONS 29,849,153 39,646,435 COST OF SHARES REDEEMED (177,994,070) (252,401,457) NET INCREASE (DECREASE) IN NET ASSETS RESULTING 66,567,813 43,715,121 FROM SHARE TRANSACTIONS TOTAL INCREASE (DECREASE) IN NET ASSETS 77,438,541 81,298,426 NET ASSETS BEGINNING OF PERIOD 647,402,493 566,104,067 END OF PERIOD (INCLUDING UNDISTRIBUTED NET INVESTMENT $ 724,841,034 $ 647,402,493 INCOME OF $2,868,425 AND $3,063,493, RESPECTIVELY) OTHER INFORMATION SHARES SOLD 17,407,019 21,571,779 ISSUED IN REINVESTMENT OF DISTRIBUTIONS 2,446,532 3,364,019 REDEEMED (14,414,817) (21,232,901) NET INCREASE (DECREASE) 5,438,734 3,702,897
FINANCIAL HIGHLIGHTS SIX MONTHS ENDED YEARS ENDED SEPTEMBER 30, MARCH 31, 1998 (UNAUDITED) 1997 1996 1995 1994 1993
SELECTED PER-SHARE DATA . NET ASSET VALUE, $ 12.36 $ 11.63 $ 11.46 $ 10.69 $ 11.07 $ 10.00 BEGINNING OF PERIOD INCOME FROM INVEST- MENT OPERATIONS NET INVESTMENT INCOME .28 D .56 D .61 .56 .45 .46 NET REALIZED AND .48 1.02 .20 .68 (.29) 1.04 UNREALIZED GAIN (LOSS) TOTAL FROM INVEST- .76 1.58 .81 1.24 .16 1.50 MENT OPERATIONS LESS DISTRIBUTIONS (.29) (.59) (.64) (.47) (.47) (.43) FROM NET INVEST- MENT INCOME FROM NET REALIZED GAIN (.29) (.26) - - (.04) - IN EXCESS OF NET - - - - (.03) - REALIZED GAIN TOTAL DISTRIBUTIONS (.58) (.85) (.64) (.47) (.54) (.43) NET ASSET VALUE, END $ 12.54 $ 12.36 $ 11.63 $ 11.46 $ 10.69 $ 11.07 OF PERIOD TOTAL RETURN B, C 6.34% 14.16% 7.28% 11.99% 1.46% 15.32% RATIOS AND SUPPLEMENTAL DATA NET ASSETS, END OF $ 724,841 $ 647,402 $ 566,104 $ 566,079 $ 501,349 $ 199,237 PERIOD (000 OMITTED) RATIO OF EXPENSES TO .71% A .77% .82% .79% .71% E .65% E AVERAGE NET ASSETS RATIO OF EXPENSES TO .70% A, F .76% F .80% F .79% .71% .65% AVERAGE NET ASSETS AFTER EXPENSE REDUCTIONS RATIO OF NET INVESTMENT 4.61% A 4.74% 5.03% 5.15% 4.92% 5.19% INCOME TO AVERAGE NET ASSETS PORTFOLIO TURNOVER RATE 139% A 112% 148% 157% 83% 47% AVERAGE COMMISSION $ .0420 $ .0411 $ .0286 RATE G
ANNUALIZED TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED. 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). NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. 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. 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). 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. NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD ENDED MARCH 31, 1998 (UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES. Fidelity Asset Manager: Income (the fund) is a fund of Fidelity Charles Street Trust (the trust) and is authorized to issue an unlimited number of shares. The trust is registered under the Investment Company Act of 1940, as amended (the 1940 Act), as an open-end management investment company organized as a Massachusetts business trust. The financial statements have been prepared in conformity with generally accepted accounting principles which require management to make certain estimates and assumptions at the date of the financial statements. The following summarizes the significant accounting policies of the fund: SECURITY VALUATION. 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. 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. Securities (including restricted securities) for which market quotations are not readily available are valued at their fair value as determined in good faith under consistently applied procedures under the general supervision of the Board of Trustees. Short-term securities with remaining maturities of sixty days or less for which quotations are not readily available are valued at amortized cost or original cost plus accrued interest, both of which approximate current value. FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing rates of exchange at period end. Purchases and sales of securities, income receipts and expense payments are translated into U.S. dollars at the prevailing exchange rate on the respective dates of the transactions. Net realized gains and losses on foreign currency transactions represent net gains and losses from sales and maturities of foreign currency contracts, disposition of foreign currencies, the difference between the amount of net investment income accrued and the U.S. dollar amount actually received, and gains and losses between trade date and settlement on purchases and sales of securities. The effects of changes in foreign currency exchange rates on investments in securities are included with the net realized and unrealized gain or loss on investment securities. INCOME TAXES. As a qualified regulated investment company under Subchapter M of the Internal Revenue Code, the fund is not subject to income taxes to the extent that it distributes substantially all of its taxable income for its fiscal year. The schedule of investments includes information regarding income taxes under the caption "Income Tax Information." 1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED INVESTMENT INCOME. Dividend income is recorded on the ex-dividend date, except certain dividends from foreign securities where the ex-dividend date may have passed, are recorded as soon as the fund is informed of the ex-dividend date. Non-cash dividends included in dividend income, if any, are recorded at the fair market value of the securities received. Interest income, which includes accretion of original issue discount, is accrued as earned. Investment income is recorded net of foreign taxes withheld where recovery of such taxes is uncertain. EXPENSES. Most expenses of the trust can be directly attributed to a fund. Expenses which cannot be directly attributed are apportioned among the funds in the trust. DISTRIBUTIONS TO SHAREHOLDERS. Distributions are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences, which may result in distribution reclassifications, are primarily due to differing treatments for paydown gains/losses on certain securities, foreign currency transactions, passive foreign investment companies (PFIC), market discount, non-taxable dividends, and losses deferred due to wash sales. The fund also utilized earnings and profits distributed to shareholders on redemption of shares as a part of the dividends paid deduction for income tax purposes. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to paid in capital. Undistributed net investment income and accumulated undistributed net realized gain (loss) on investments and foreign currency transactions may include temporary book and tax basis differences which will reverse in a subsequent period. Any taxable income or gain remaining at fiscal year end is distributed in the following year. SECURITY TRANSACTIONS. Security transactions are accounted for as of trade date. Gains and losses on securities sold are determined on the basis of identified cost. 2. OPERATING POLICIES. FOREIGN CURRENCY CONTRACTS. The fund generally uses foreign currency contracts to facilitate transactions in foreign-denominated securities. Losses may arise from changes in the value of the foreign currency or if the counterparties do not perform under the contracts' terms. The U.S. dollar value of foreign currency contracts is determined using contractual currency exchange rates established at the time of each trade. JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the Securities and Exchange Commission (the SEC), the fund, along with other affiliated entities of 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 2. OPERATING POLICIES - CONTINUED JOINT TRADING ACCOUNT - CONTINUED repurchase agreements for U.S. Treasury or Federal Agency obligations. REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency securities are transferred to an account of the fund, or to the Joint Trading Account, at a bank custodian. The securities are marked-to-market daily and maintained at a value at least equal to the principal amount of the repurchase agreement (including accrued interest). FMR, the fund's investment adviser, is responsible for determining that the value of the underlying securities remains in accordance with the market value requirements stated above. TAXABLE CENTRAL CASH FUND. Pursuant to an Exemptive Order issued by the SEC, the fund may invest in the Taxable Central Cash Fund (the Cash Fund) managed by Fidelity Investments Money Management, Inc., (formerly FMR Texas, Inc.) an affiliate of FMR. The Cash Fund is an open-end money market fund available only to investment companies and other accounts managed by FMR and its affiliates. The Cash Fund seeks preservation of capital, liquidity, and current income by investing in U.S. Treasury securities and repurchase agreements for these securities. Income distributions from the Cash Fund are declared daily and paid monthly from net interest income. Income distributions earned by the fund are recorded as interest income in the accompanying financial statements. DELAYED DELIVERY TRANSACTIONS. The fund may purchase or sell securities on a delayed delivery basis. Payment and delivery may take place a month or more after the date of the transaction. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. The market values of the securities purchased or sold on a delayed delivery basis are identified as such in the fund's schedule of investments. 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. RESTRICTED SECURITIES. The fund is permitted to invest in securities that are subject to legal or contractual restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are registered. Disposal of these securities may involve time-consuming negotiations and expense, and prompt sale at an acceptable price may be difficult. At the end of the period, restricted securities (excluding 144A issues) amounted to $6,999,230 or 1.0% of net assets. 3. PURCHASES AND SALES OF INVESTMENTS. Purchases and sales of securities, other than short-term securities, aggregated $489,539,465 and $380,068,831 respectively, of which U.S. government and government agency obligations aggregated $364,082,385 and $297,408,158, respectively. 4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES. MANAGEMENT FEE. As the fund's investment adviser, FMR receives a monthly fee that is calculated on the basis of a group fee rate plus a fixed individual fund fee rate applied to the average net assets of the fund. The group fee rate is the weighted average of a series of rates and is based on the monthly average net assets of all the mutual funds advised by FMR. The rates ranged from .1100% to .3700% for the period. The annual individual fund fee rate is .30%. 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. For the period, the management fee was equivalent to an annualized rate of .44% of average net assets. TRANSFER AGENT FEES. Fidelity Service Company, Inc. (FSC), an affiliate of FMR, is the fund's transfer, dividend disbursing and shareholder servicing agent. FSC receives account fees and asset-based fees that vary according to account size and type of account. FSC 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 .20% of average net assets. ACCOUNTING FEES. FSC maintains the fund's accounting records. The fee is based on the level of average net assets for the month plus out-of-pocket expenses. BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio transactions with brokerage firms which are affiliates of FMR. The commissions paid to these affiliated firms were $8,306 for the period. 5. EXPENSE REDUCTIONS. FMR has directed certain portfolio trades to brokers who paid a portion of the fund's expenses. For the period, the fund's expenses were reduced by $7,683 under this arrangement. In addition, the fund has entered into arrangements with its custodian and transfer agent whereby interest earned on uninvested cash balances was used to offset a portion of the fund's expenses. During the period, the fund's custodian and transfer agent fees were reduced by $1,960 and $28,521, respectively, under these arrangements. MANAGING YOUR INVESTMENTS Fidelity offers several ways to conveniently manage your personal investments via your telephone or PC. You can access your account information, conduct trades and research your investments 24 hours a day. BY PHONE Fidelity TouchTone Xpressprovides a single toll-free number to access account balances, positions, quotes and trading. It's easy to navigate the service, and on your first call, the system will help you create a personal identification number (PIN) for security. SM (PHONE_GRAPHIC)TOUCHTONE XPRESS 1-800-544-5555 PRESS For mutual fund and brokerage trading. For quotes.* For account balances and holdings. To review orders and mutual fund activity. To change your PIN. To speak to a Fidelity representative. 0 * BY PC Fidelity's Web site on the Internet provides a wide range of information, including daily financial news, fund performance, interactive planning tools and news about Fidelity products and services. (PHONE_GRAPHIC)FIDELITY'S WEB SITE WWW.FIDELITY.COM If you are not currently on the Internet, call Fidelity at 1-800-544-7272 for significant savings on Web access from internetMCI. SM (PHONE_GRAPHIC) FIDELITY ON-LINE XPRESS+ TM Fidelity On-line Xpress+ software for Windows combines comprehensive portfolio management capabilities, securities trading and access to research and analysis tools . . . all on your desktop. Call Fidelity at 1-800-544-7272 or visit our Web site for more information on how to manage your investments via your PC. * WHEN YOU CALL THE QUOTES LINE, PLEASE REMEMBER THAT A FUND'S YIELD AND RETURN WILL VARY AND, EXCEPT FOR MONEY MARKET FUNDS, SHARE PRICE WILL ALSO VARY. THIS MEANS THAT YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. THERE IS NO ASSURANCE THAT MONEY MARKET FUNDS WILL BE ABLE TO MAINTAIN A STABLE $1 SHARE PRICE; AN INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT. TOTAL RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE, REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS, AND THE EFFECTS OF ANY SALES CHARGES. TO WRITE FIDELITY If more than one address is listed, please locate the address that is closest to you. We'll give your correspondence immediate attention and send you written confirmation upon completion of your request. (LETTER_GRAPHIC)MAKING CHANGES TO YOUR ACCOUNT (such as changing name, address, bank, etc.) Fidelity Investments P.O. Box 770001 Cincinnati, OH 45277-0002 (LETTER_GRAPHIC)FOR NON-RETIREMENT ACCOUNTS BUYING SHARES Fidelity Investments P.O. Box 770001 Cincinnati, OH 45277-0003 OVERNIGHT EXPRESS Fidelity Investments 2300 Litton Lane - KH1A Hebron, KY 41048 SELLING SHARES Fidelity Investments P.O. Box 660602 Dallas, TX 75266-0602 OVERNIGHT EXPRESS Fidelity Investments Attn: Redemptions - CP6I 400 East Las Colinas Blvd. Irving, TX 75309-5517 GENERAL CORRESPONDENCE Fidelity Investments P.O. Box 500 Merrimack, NH 03054-0500 (LETTER_GRAPHIC)FOR RETIREMENT ACCOUNTS BUYING SHARES Fidelity Investments P.O. Box 770001 Cincinnati, OH 45277-0003 SELLING SHARES Fidelity Investments P.O. Box 660602 Dallas, TX 75266-0602 OVERNIGHT EXPRESS Fidelity Investments Attn: Redemptions - CP6R 400 East Las Colinas Blvd. Irving, TX 75309-5517 GENERAL CORRESPONDENCE Fidelity Investments P.O. Box 500 Merrimack, NH 03054-0500 TO VISIT FIDELITY For directions and hours, please call 1-800-544-9797. ARIZONA 7373 N. Scottsdale Road Scottsdale, AZ CALIFORNIA 815 East Birch Street Brea, CA 851 East Hamilton Avenue Campbell, CA 527 North Brand Boulevard Glendale, CA 19100 Von Karman Avenue Irvine, CA 10100 Santa Monica Blvd. Los Angeles, CA 251 University Avenue Palo Alto, CA 1760 Challenge Way Sacramento, CA 7676 Hazard Center Drive San Diego, CA 455 Market Street San Francisco, CA 950 Northgate Drive San Rafael, CA 1400 Civic Drive Walnut Creek, CA 6300 Canoga Avenue Woodland Hills, CA COLORADO 1625 Broadway Denver, CO CONNECTICUT 48 West Putnam Avenue Greenwich, CT 265 Church Street New Haven, CT 300 Atlantic Street Stamford, CT 29 South Main Street West Hartford, CT DELAWARE 222 Delaware Avenue Wilmington, DE FLORIDA 4400 N. Federal Highway Boca Raton, FL 90 Alhambra Plaza Coral Gables, FL 4090 N. Ocean Boulevard Ft. Lauderdale, FL 1907 West State Road 434 Longwood, FL 4001 Tamiami Trail, North Naples, FL 2401 PGA Boulevard Palm Beach Gardens, FL 8065 Beneva Road Sarasota, FL 1502 N. Westshore Blvd. Tampa, FL GEORGIA 3445 Peachtree Road, N.E. Atlanta, GA 1000 Abernathy Road Atlanta, GA HAWAII 700 Bishop Street Honolulu, HI ILLINOIS One North Franklin Street Chicago, IL 1415 West 22nd Street Oak Brook, IL 1700 East Golf Road Schaumburg, IL 3232 Lake Avenue Wilmette, IL INDIANA 4729 East 82nd Street Indianapolis, IN MAINE 3 Canal Plaza Portland, ME MARYLAND 7401 Wisconsin Avenue Bethesda, MD 1 West Pennsylvania Ave. Towson, MD MASSACHUSETTS 470 Boylston Street Boston, MA 155 Congress Street Boston, MA 25 State Street Boston, MA 300 Granite Street Braintree, MA 44 Mall Road Burlington, MA 416 Belmont Street Worcester, MA MICHIGAN 280 North Woodward Ave. Birmingham, MI 29155 Northwestern Hwy. Southfield, MI MINNESOTA 7600 France Avenue South Edina, MN MISSOURI 700 West 47th Street Kansas City, MO 8885 Ladue Road Ladue, MO 200 North Broadway St. Louis, MO NEW JERSEY 150 Essex Street Millburn, NJ 56 South Street Morristown, NJ 501 Route 17, South Paramus, NJ NEW YORK 1055 Franklin Avenue Garden City, NY 999 Walt Whitman Road Melville, L.I., NY 1271 Avenue of the Americas New York, NY 71 Broadway New York, NY 350 Park Avenue New York, NY NORTH CAROLINA 4611 Sharon Road Charlotte, NC 2200 West Main Street Durham, NC OHIO 600 Vine Street Cincinnati, OH 28699 Chagrin Boulevard Woodmere Village, OH OREGON 16850 SW 72 Avenue Tigard, OR PENNSYLVANIA 1735 Market Street Philadelphia, PA 439 Fifth Avenue Pittsburgh, PA TENNESSEE 6150 Poplar Road Memphis, TN TEXAS 10000 Research Boulevard Austin, TX 4017 Northwest Parkway Dallas, TX 1155 Dairy Ashford Street Houston, TX 2701 Drexel Drive Houston, TX 400 East Las Colinas Blvd. Irving, TX 14100 San Pedro San Antonio, TX 19740 IH 45 North Spring, TX UTAH 215 South State Street Salt Lake City, UT VIRGINIA 8180 Greensboro Drive McLean, VA WASHINGTON 411 108th Avenue, N.E. Bellevue, WA 511 Pine Street Seattle, WA WASHINGTON, DC 1900 K Street, N.W. Washington, DC WISCONSIN 595 North Barker Road Brookfield, WI 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 Robert C. Pozen, Senior Vice President Robert A. Lawrence, Vice President Richard C. Habermann, Vice President Brad Lewis, Vice President Charles S. Morrison, Vice President John Todd, Vice President Eric D. Roiter, Secretary Richard A. Silver, Treasurer John H. Costello, Assistant Treasurer Leonard M. Rush, Assistant Treasurer BOARD OF TRUSTEES Ralph F. Cox * Phyllis Burke Davis * Robert M. Gates * Edward C. Johnson 3d E. Bradley Jones * Donald J. Kirk * Peter S. Lynch Marvin L. Mann * William O. McCoy * Gerald C. McDonough * Robert C. Pozen Thomas R. Williams * * INDEPENDENT TRUSTEES ADVISORY BOARD J. Gary Burkhead GENERAL DISTRIBUTOR Fidelity Distributors Corporation Boston, MA TRANSFER AND SHAREHOLDER SERVICING AGENT Fidelity Service Company, Inc. Boston, MA CUSTODIAN The Chase Manhattan Bank New York, NY FIDELITY'S ASSET ALLOCATION FUNDS Asset Manager SM Asset Manager: Growth SM Asset Manager: Income SM Fidelity Freedom Funds- Income, 2000, 2010, 2020, 2030 SM THE FIDELITY TELEPHONE CONNECTION MUTUAL FUND 24-HOUR SERVICE Exchanges/Redemptions 1-800-544-7777 Account Assistance 1-800-544-6666 Product Information 1-800-544-8888 Retirement Accounts 1-800-544-4774 (8 a.m. - 9 p.m.) TDD Service 1-800-544-0118 (for the deaf and hearing impaired) (9 a.m. - 9 p.m. Eastern time) (registered trademark) TouchTone Xpress 1-800-544-5555 SM AUTOMATED LINE FOR QUICKEST SERVICE (2_FIDELITY_LOGOS)FIDELITY ASSET MANAGER (registered trademark) SEMIANNUAL REPORT MARCH 31, 1998 CONTENTS PRESIDENT'S MESSAGE 3 NED JOHNSON ON INVESTING STRATEGIES. PERFORMANCE 4 HOW THE FUND HAS DONE OVER TIME. MARKET RECAP 6 AN OVERVIEW OF THE MARKET'S PERFORMANCE AND THE FACTORS DRIVING IT. FUND TALK 7 THE MANAGERS' REVIEW OF FUND PERFORMANCE, STRATEGY AND OUTLOOK. INVESTMENT CHANGES 11 A SUMMARY OF MAJOR SHIFTS IN THE FUND'S INVESTMENTS OVER THE PAST SIX MONTHS. INVESTMENTS 12 A COMPLETE LIST OF THE FUND'S INVESTMENTS WITH THEIR MARKET VALUES. FINANCIAL STATEMENTS 49 STATEMENTS OF ASSETS AND LIABILITIES, OPERATIONS, AND CHANGES IN NET ASSETS, AS WELL AS FINANCIAL HIGHLIGHTS. NOTES 53 NOTES TO THE FINANCIAL STATEMENTS. REPORT OF INDEPENDENT 58 THE AUDITORS' OPINION. ACCOUNTANTS To reduce expenses and demonstrate respect for our environment, we have initiated a project through which we will begin eliminating duplicate copies of most financial reports and prospectuses to most households, even if they have more than one account in the fund. If additional copies of financial reports, prospectuses or historical account information are needed, please call 1-800-544-6666. THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS. MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED. NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK. FOR MORE INFORMATION ON ANY FIDELITY FUND, INCLUDING CHARGES AND EXPENSES, CALL 1-800-544-8888 FOR A FREE PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY. PRESIDENT'S MESSAGE (photo_of_Edward_C_Johnson_3d) DEAR SHAREHOLDER: In the first quarter of 1998, the U.S. stock and bond markets responded differently to lingering uncertainty over the direction of the U.S. and global economies. On the one hand, the U.S. stock market soared to record heights as corporate earnings proved to be stronger than expected and investors shrugged off concerns about the effects of economic difficulties in Asia. On the other hand, two factors tempered returns in the bond market. First, interest-rate levels were generally positive, but were low enough to encourage a flood of new issuance that dampened performance. Second, there were concerns that continued economic strength might lead to eventual inflation, even though inflation indicators remained benign during the quarter. While it's impossible to predict the future direction of the markets with any degree of certainty, there are certain basic principles that can help investors plan for their future needs. First, investors are encouraged to take a long-term view of their portfolios. If you can afford to leave your money invested through the inevitable up and down cycles of the financial markets, you will greatly reduce your vulnerability to any single decline. We know from experience, for example, that stock prices have gone up over longer periods of time, have significantly outperformed other types of investments and have stayed ahead of inflation. Second, you can further manage your investing risk through diversification. Asset Manager funds are already diversified because they invest in stocks, bonds and short-term and money market instruments, both in the U.S. and overseas. If you have a shorter investment time horizon, you might want to consider moving some of your investment into Asset Manager: Income, which generally has a higher weighting in short-term investments compared with the other Asset Manager funds. Finally, no matter what your time horizon or portfolio diversity, it makes good sense to follow a regular investment plan, investing a certain amount of money in a fund at the same time each month or quarter and periodically reviewing your overall portfolio. By doing so, you won't get caught up in the excitement of a rapidly rising market, nor will you buy all your shares at market highs. While this strategy - known as dollar cost averaging - won't assure a profit or protect you from a loss in a declining market, it should help you lower the average cost of your purchases. If you have questions, please call us at 1-800-544-8888. We are available 24 hours a day, seven days a week to provide you the information you need to make the investments that are right for you. Best regards, Edward C. Johnson 3d PERFORMANCE: THE BOTTOM LINE 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). CUMULATIVE TOTAL RETURNS PERIODS ENDED MARCH 31, 1998 PAST 6 PAST 1 PAST 5 LIFE OF MONTHS YEAR YEARS FUND FIDELITY ASSET MANAGER 11.28% 31.54% 89.98% 242.53% FIDELITY ASSET ALLOCATION COMPOSITE 10.64% 28.38% 86.93% N/A S&P 500 (REGISTERED TRADEMARK) 17.22% 48.00% 174.71% 415.10% LB AGGREGATE BOND 4.54% 11.99% 39.89% N/A LB 3 MONTH T-BILL 2.64% 5.58% 27.62% N/A FLEXIBLE PORTFOLIO FUNDS AVERAGE 8.89% 28.72% 92.77% N/A CUMULATIVE TOTAL RETURNS show the fund's performance in percentage terms over a set period - in this case, six months, one year, five years or since the fund started on December 28, 1988. For example, if you had invested $1,000 in a fund that had a 5% return over the past year, the value of your investment would be $1,050. You can compare the fund's returns to the performance of the Fidelity Asset Allocation Composite Index, a hypothetical combination of unmanaged indices. The composite index combines the total returns of the Standard & Poor's 500 Index, the Lehman Brothers Aggregate Bond Index and the Lehman Brothers 3 Month Treasury Bill Index weighted according to the fund's neutral mix. To measure how the fund's performance stacked up against its peers, you can compare it to the flexible portfolio funds average, which reflects the performance of mutual funds with similar objectives tracked by Lipper Analytical Services, Inc. The past six months average represents a peer group of 211 mutual funds. The benchmarks listed in the table above include reinvested dividends and capital gains, if any, and exclude the effect of sales charges. AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED MARCH 31, 1998 PAST 1 PAST 5 LIFE OF YEAR YEARS FUND FIDELITY ASSET MANAGER 31.54% 13.69% 14.22% FIDELITY ASSET ALLOCATION COMPOSITE 28.38% 13.33% N/A AVERAGE ANNUAL TOTAL 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. $10,000 OVER LIFE OF FUND Asset Manager S&P 500 FID Composite LB Aggregate Bond Asset Mgr. S&P 500 FID Composite LB Aggr. Bond 1988/12/31 10000.00 10000.00 10000.00 10000.00 1989/01/31 10378.86 10732.00 10291.60 10143.88 1989/02/28 10219.34 10464.77 10200.52 10070.36 1989/03/31 10309.07 10708.60 10320.38 10113.90 1989/04/30 10578.27 11264.38 10593.04 10325.54 1989/05/31 10887.34 11720.59 10846.43 10596.87 1989/06/30 11006.98 11653.78 10999.47 10919.52 1989/07/31 11326.02 12706.12 11415.14 11151.64 1989/08/31 11355.93 12955.15 11426.55 10986.42 1989/09/30 11355.93 12902.04 11453.98 11042.65 1989/10/31 11405.78 12602.71 11519.04 11314.55 1989/11/30 11485.54 12859.81 11656.23 11422.39 1989/12/31 11527.69 13168.44 11770.69 11452.96 1990/01/31 11158.89 12284.84 11486.90 11316.86 1990/02/28 11243.19 12443.31 11560.30 11353.48 1990/03/31 11359.10 12773.06 11674.05 11361.84 1990/04/30 11169.43 12453.74 11566.30 11257.75 1990/05/31 11759.51 13667.97 12058.22 11591.07 1990/06/30 11854.35 13575.03 12133.34 11777.05 1990/07/31 11843.81 13531.59 12207.35 11939.97 1990/08/31 11443.39 12308.34 11829.78 11780.51 1990/09/30 11211.58 11708.92 11724.02 11877.97 1990/10/31 11243.19 11658.57 11808.08 12028.78 1990/11/30 11780.58 12411.72 12162.21 12287.71 1990/12/31 12147.79 12758.00 12361.43 12479.17 1991/01/31 12795.97 13314.25 12597.16 12633.43 1991/02/28 13354.74 14266.22 12912.59 12741.27 1991/03/31 13578.25 14611.46 13052.82 12828.93 1991/04/30 13790.59 14646.53 13138.45 12967.91 1991/05/31 14137.03 15279.26 13347.09 13043.74 1991/06/30 13835.29 14579.47 13174.11 13037.11 1991/07/31 14204.08 15258.87 13438.91 13217.90 1991/08/31 14528.17 15620.51 13678.12 13503.94 1991/09/30 14550.52 15359.65 13743.09 13777.57 1991/10/31 14662.28 15565.47 13865.40 13930.97 1991/11/30 14405.24 14938.18 13769.87 14058.71 1991/12/31 15019.76 16647.11 14448.31 14476.23 1992/01/31 15236.74 16337.47 14290.39 14279.29 1992/02/29 15526.05 16549.86 14381.71 14372.13 1992/03/31 15526.05 16227.13 14277.73 14291.11 1992/04/30 15743.03 16704.21 14453.35 14394.34 1992/05/31 15899.73 16786.06 14595.28 14665.96 1992/06/30 15899.73 16535.95 14601.70 14867.80 1992/07/31 16225.20 17212.27 14998.28 15171.13 1992/08/31 16152.88 16859.42 14940.69 15324.82 1992/09/30 16273.42 17058.36 15105.93 15506.47 1992/10/31 16249.31 17118.06 15045.81 15300.89 1992/11/30 16610.94 17701.79 15246.52 15304.35 1992/12/31 16934.14 17919.52 15433.44 15547.71 1993/01/31 17225.45 18070.05 15626.36 15845.85 1993/02/28 17402.77 18315.80 15844.19 16123.24 1993/03/31 17975.71 18702.26 16006.75 16190.42 1993/04/30 18052.42 18249.67 15909.43 16303.16 1993/05/31 18435.97 18738.76 16080.30 16323.92 1993/06/30 18668.08 18793.10 16251.07 16619.76 1993/07/31 18951.91 18717.93 16271.88 16713.76 1993/08/31 19493.76 19427.34 16672.16 17006.72 1993/09/30 19481.53 19277.75 16655.16 17053.43 1993/10/31 20054.14 19676.80 16826.37 17117.15 1993/11/30 20015.09 19489.87 16696.81 16971.54 1993/12/31 20877.83 19725.69 16812.35 17063.52 1994/01/31 21555.68 20396.37 17142.55 17293.91 1994/02/28 20877.83 19843.63 16817.52 16993.45 1994/03/31 19867.84 18978.44 16382.96 16574.49 1994/04/30 19854.17 19221.37 16425.55 16442.14 1994/05/31 20018.25 19536.60 16536.26 16439.84 1994/06/30 19577.74 19057.95 16370.90 16403.51 1994/07/31 19962.97 19683.05 16716.65 16729.33 1994/08/31 20430.74 20490.06 17004.51 16750.09 1994/09/30 20182.51 19988.05 16755.23 16503.56 1994/10/31 20279.40 20437.78 16915.74 16488.86 1994/11/30 19974.87 19693.44 16669.99 16452.24 1994/12/31 19499.59 19985.49 16824.89 16565.84 1995/01/31 19344.50 20503.72 17139.38 16893.69 1995/02/28 19640.59 21302.75 17567.66 17295.35 1995/03/31 19953.26 21931.39 17836.51 17401.46 1995/04/30 20364.82 22577.27 18157.21 17644.53 1995/05/31 20847.33 23479.68 18758.73 18327.33 1995/06/30 21133.35 24025.12 19009.94 18461.69 1995/07/31 21718.80 24821.79 19252.21 18420.46 1995/08/31 21861.60 24884.09 19378.96 18642.77 1995/09/30 22219.16 25934.20 19797.94 18824.14 1995/10/31 22147.35 25841.62 19910.63 19068.94 1995/11/30 22563.87 26976.06 20401.22 19354.69 1995/12/31 23039.92 27495.62 20693.86 19626.31 1996/01/31 23534.15 28431.57 21046.40 19756.64 1996/02/29 23417.86 28695.13 20969.12 19413.22 1996/03/31 23419.07 28971.47 20994.53 19278.28 1996/04/30 23623.99 29398.51 21081.78 19169.86 1996/05/31 23872.82 30156.69 21303.90 19130.94 1996/06/30 24006.08 30271.59 21462.49 19387.85 1996/07/31 23548.68 28934.19 21122.27 19440.90 1996/08/31 23696.23 29544.41 21301.30 19408.32 1996/09/30 24523.08 31207.17 21938.89 19746.55 1996/10/31 25147.68 32067.87 22393.29 20183.96 1996/11/30 26337.40 34491.88 23244.14 20529.68 1996/12/31 25972.41 33808.59 22984.18 20338.80 1997/01/31 26760.88 35920.96 23740.59 20401.08 1997/02/28 26981.65 36202.58 23866.65 20451.83 1997/03/31 25961.97 34715.01 23280.84 20225.20 1997/04/30 26852.28 36787.50 24125.47 20527.95 1997/05/31 28171.84 39027.12 24962.14 20722.01 1997/06/30 28891.29 40775.54 25650.60 20967.97 1997/07/31 30541.76 44020.05 26959.17 21533.40 1997/08/31 29724.53 41554.04 26123.97 21349.73 1997/09/30 30689.57 43829.96 27005.00 21664.60 1997/10/31 30302.12 42366.04 26722.53 21978.89 1997/11/30 31077.03 44327.16 27401.42 22080.10 1997/12/31 31757.66 45088.26 27759.14 22302.41 1998/01/31 32017.26 45586.93 28066.99 22588.74 1998/02/28 33436.41 48874.66 29081.33 22571.73 1998/03/31 34150.13 51377.53 29878.30 22649.29 IMATRL PRASUN SHR__CHT 19980331 19980408 133545 R00000000000114 $10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was invested in Fidelity Asset Manager on December 31, 1988, shortly after the fund started. As the chart shows, by March 31, 1998, the value of the investment would have grown to $34,150 - a 241.50% increase on the initial investment. For comparison, look at how both the S&P 500, a widely recognized unmanaged index of common stocks, and the Lehman Brothers Aggregate Bond Index, a market value weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage backed securities with maturities of at least one year, did over the same period. With dividends and capital gains, if any, reinvested, the same $10,000 investment in the S&P 500 would have grown to $51,378 - a 413.78% increase. If $10,000 was invested in the Lehman Brothers Aggregate Bond Index, it would have grown to $22,648 - a 126.48% increase. You can also look at how the Fidelity Asset Allocation Composite Index, a hypothetical combination of unmanaged indices, did over the same period. The composite index combines the total returns of the S&P 500 (+413.78%), the Lehman Brothers Aggregate Bond Index (+126.48%) and the Lehman Brothers 3 Month T-Bill Index (+65.48%) according to the fund's neutral mix*, and assumes monthly rebalancing of the mix. With dividends and capital gains, if any, reinvested, the same $10,000 investment would have grown to $29,959 - a 199.59% increase. UNDERSTANDING PERFORMANCE How a fund did yesterday is no guarantee of how it will do tomorrow. If you sell your shares during a market downturn, you might lose money. But if you can ride out the market's ups and downs, you may have a gain. (checkmark) * CURRENTLY 50% STOCKS, 40% BONDS AND 10% SHORT-TERM/MONEY MARKET INSTRUMENTS EFFECTIVE JANUARY 1, 1997; 40%, 40% AND 20%, RESPECTIVELY, BETWEEN JUNE 1, 1992 AND DECEMBER 31, 1996; 30%, 40%, AND 30%, RESPECTIVELY, PRIOR TO JUNE 1, 1992. Despite being tested during the period, the U.S. stock and bond markets performed well during the six months that ended March 31, 1998. Economic trouble in Southeast Asia caused worldwide concern, but a domestic economic environment of low inflation, low interest rates and steady growth spelled positive returns for both stocks and bonds. STOCKS: The U.S. stock market showed its resiliency during the period. Despite the economic uncertainty in Southeast Asia - and the resulting concern that U.S. corporate earnings would slow - the stock market performed well. The Standard & Poor's 500 Index - a measure of the U.S. stock market - returned 17.22% during this time. In late October, after several small Southeast Asian countries devalued their currencies, a full-fledged economic crisis enveloped the region. These troubles had ripple effects throughout the world, particularly in the U.S., where the Dow Jones Industrial Average plummeted 550-plus points in one trading session. Many U.S. corporations with business exposure to Southeast Asia announced earnings disappointments. Investors showed their concern by embarking on a "flight to quality," seeking shelter in stocks of companies with minimal international exposure. Despite this turbulence, however, the continued strength of the U.S. economy seemed to buoy the stock market as low interest rates, low inflation and moderate growth combined to make for a favorable economic backdrop. After digesting the events that took place in Southeast Asia, investors regained their attraction to stocks. Through the first three months of 1998, cash inflows into stock mutual funds were very strong and the Dow itself was approaching the 9000-point barrier. BONDS: Similar to their equity counterparts, bonds benefited from the continued lack of inflationary pressure during the period. The Lehman Brothers Aggregate Bond Index - a broad gauge of the U.S. taxable investment-grade bond market - returned 4.54% during this period. Global volatility and historically low interest rates were the main stories in the last quarter of 1997. Financial problems in Asia came to a head in October, resulting in a "flight to quality." Wary stock investors sought investments offering lower volatility, helping the U.S. bond market - especially U.S. Treasuries - surge. The Lehman Brothers Corporate Bond Index returned 4.49% for the six months. Corporate bonds benefited from continued economic growth and demand for yield, although they faltered somewhat in January 1998. Investors feared a slowdown in demand from Asia would eat into corporate earnings. In spite of record new issuance in February 1998, corporates rebounded due in part to increased demand on the part of yield-hungry investors. Mortgage-backed bonds performed well during the period, even though lower interest rates resulted in more mortgage prepayment activity. The Lehman Brothers Mortgage-Backed Securities Index generated a six-month return of 4.04%. High-yield and emerging-market issues turned in strong performances throughout the first quarter of 1998. FUND TALK: THE MANAGER'S OVERVIEW An interview with Richard Habermann, Lead Portfolio Manager of Fidelity Asset Manager Q. HOW DID THE FUND PERFORM, DICK? A. I was pleased with the fund's performance. For the six months that ended March 31, 1998, the fund had a total return of 11.28%. That outperformed the 10.64% return of the Fidelity Asset Allocation Composite Index and the 8.89% return of the Lipper flexible funds average. For the 12 months that ended March 31, 1998, the fund returned 31.54%, compared to the 28.38% return of the composite index and the 28.72% return of the Lipper peer group. Q. HOW DID THE FUND'S ASSET ALLOCATION AFFECT PERFORMANCE? A. Asset allocation decisions - more than security selection within the asset classes - helped the fund outperform the composite index and the peer group during the period. The fund was consistently overweighted in equities - the best-performing asset class during the period. However, the fund did not have a significant overweighting in equities, which helped preserve value when the stock market plummeted at the end of October in response to financial problems in Asia. In contrast to equities, allocations toward fixed-income securities were underweighted during the period. In part, the fund's positioning within the fixed-income portion of the portfolio was predicated on the relatively small yield differences between short- and long-maturity securities that existed throughout much of the period. In this type of environment, I didn't feel the additional yield offered by longer-maturity securities was worth the potential risk, particularly during the latter part of the period. Accordingly, I kept the fund's allocation toward longer-maturity, fixed-income securities slightly underweighted, while keeping the money market allocation at near-neutral levels. In an effort to find additional yield in this environment, I chose to overweight high-yield securities within the fixed-income allocation, while keeping the fund's total bond exposure at below-neutral levels. In retrospect, the decision to overweight high-yield securities relative to investment-grade bonds was a key driver of the fund's returns, as high-yield returns generally outpaced the returns of comparable investment-grade issues during the six-month period. Q. HOW DOES THE PRESENT ASSET ALLOCATION COMPARE TO THE FUND'S NEUTRAL MIX? A. The fund was consistently overweighted in equities, relative to its neutral mix, which calls for 50% to be invested in stocks, 40% in bonds and 10% in short-term/money market instruments. Throughout the period, equities represented anywhere from 56% to 59% of the fund's net assets, with the equity allocation ending the period at 56.9%. The fund remained slightly underweighted in bonds, with that allocation ending the period at 33.7%, and neutral in short-term instruments, which represented 9.4% at the end of March. High-yield securities accounted for about 24% of the bond allocation, or approximately 8% of the fund's net assets as of March 31. Q. GOING FORWARD, THOMAS SPRAGUE WILL REPLACE GEORGE VANDERHEIDEN AS THE INVESTMENT PROFESSIONAL SELECTING THE EQUITY SECURITIES OF THE PORTFOLIO. HOW WILL THIS CHANGE AFFECT THE FUND? A. The sub-portfolio management change will not affect the fund's goal of minimizing risk while attempting to maximize returns. Tom Sprague, a nine-year veteran of Fidelity, has developed an impressive track record as manager of several of Fidelity's Select portfolios and of Fidelity Large Cap Stock Fund since 1996. Similar to George Vanderheiden, Tom chooses stocks based on individual company prospects. Consequently, the fund's equity portfolio will continue to seek out and hold stocks that we feel will deliver the best returns for our shareholders. We are pleased that the equity investments will continue to be selected by a seasoned veteran like Tom. Q. WHICH STOCKS HELPED THE FUND'S EQUITY ALLOCATION? A. Financial stocks, such as top holdings Fannie Mae and Freddie Mac, performed extremely well during this period of low interest rates and robust capital markets. The fund's European holdings also generated healthy returns. Europe seems to be trending up as the countries there are entering a phase of restructuring and consolidation, concurrent with low interest rates and growing earnings. The health care sector, as a whole, performed well on the strength of large-cap pharmaceutical stocks that benefited from a "flight to quality" during the Asian crisis - meaning investors sought out large companies with household names that they perceived as safe. Pharmaceuticals also reaped the rewards of accelerated reviews by the Food and Drug Administration. Finally, retail stocks were strong and the fund was heavily overweighted, relative to the Standard & Poor's 500 Index, in that sector. In fact, Wal-Mart, which was the fund's fifth largest equity holding at the end of March, gained 39% during the period versus a 17% return for the S&P 500. Q. WHICH STOCKS HURT PERFORMANCE? A. Consumer nondurables took a hit during the period. Specific to that sector, tobacco stocks such as RJR Nabisco and top holding Philip Morris weakened during the period as litigation fears heightened. In addition, most technology stocks were punished on fears that worldwide product demand would slow drastically as a result of the Asian crisis. Notably, Compaq Computer's stock dropped substantially during the period as the company struggled with inventory problems. Q. WHAT WAS YOUR STRATEGY FOR THE FUND'S BOND INVESTMENTS? A. While bonds were underweighted relative to the fund's neutral allocation of 40%, I employed several value-added strategies during the period. As I mentioned earlier, the fund reaped the rewards of its overweighted position in high-yield bonds, as they handily outpaced the returns of their investment-grade counterparts. Fred Hoff - who oversees security selection for Asset Manager's high-yield allocation - - emphasized securities and sectors that performed extremely well during the period. Cable and media issues and commercial mortgage-backed securities (CMBS) - bonds that are backed by loans on commercial property, such as office buildings or retail malls - were the biggest contributors to the high-yield sector of the portfolio. Charlie Morrison - who handles security selection for Asset Manager's investment-grade, fixed-income allocation - focused on several strategies during the period. Within the investment-grade allocation, investments in corporate securities were trimmed slightly on profit-taking, with a portion of the proceeds deployed to mortgage-backed securities. This transition proved beneficial, as mortgage-backed securities performed particularly well toward the end of the period when interest rates stabilized. Q. WHAT SECTORS DID YOU TARGET IN THE CORPORATE BOND MARKET? A. As I mentioned, the high-yield allocation emphasized the cable and telecommunications industries. Growth in these sectors generally depends on the health of the U.S. economy - not on Asian markets. In addition, many of these companies were able to increase their cash flows and improve their credit ratings by taking advantage of deregulation and technological advancement in the industry. Within the fund's investment-grade corporate bond allocation, securities issued by banking and finance concerns continued to be emphasized. In part, this stance was predicated on the low interest-rate environment and its favorable impact on companies in the financial sector. Q. HOW DID YOU POSITION THE SHORT-TERM/MONEY MARKET PORTION OF THE PORTFOLIO? A. I kept the fund's allocation toward short-term instruments - which were managed by John Todd of our money market group - in a fairly tight range during the period. As in prior periods, John continued to manage the fund's short-term allocation with the objective of adding value relative to a benchmark - the three-month Treasury bill - within the context of a controlled volatility framework. I increased the fund's bond allocation while reducing short-term instruments during the period in response to increasingly favorable inflation conditions and a slowing economy. At the end of the period, the fund maintained a near-neutral allocation in short-term/money market instruments, which performed admirably during the period because of beneficial security selection. Q. WHAT'S YOUR OUTLOOK? A. We're in the midst of the third-longest positive economic cycle in the post-war U.S. - following a long run in the 1960s when John F. Kennedy was president and in the 1980s when Ronald Reagan led the country. So, in its seventh year, the expansion continues to be remarkably strong. In addition, we're still witnessing decent earnings growth, moderate restructuring efforts and robust merger activity - all of which bodes well for improving the efficiency of the American economy. Even more amazing is that this growth is happening at a time when inflation is virtually non-existent. In this environment, I think both the stock and bond markets will benefit. However, I do believe that we've entered a new period of volatility in the markets, where one-time events can cause major shake-ups. I think the questions raised by the Asian financial crisis need to be monitored. Although the U.S. economy may not be drastically hurt by this turmoil, the cheapening of Asian goods could cause U.S. manufacturers to move production outside of the country, which would lead to higher unemployment and slower growth. Considering that we may be entering a period of higher volatility in the markets, it makes sense that I proceed with caution and not stray too far from our neutral mix in the near future. 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. DICK HABERMANN ON HOW THE FUND COMPARES TO BALANCED FUNDS: "WHEN EXAMINING FUNDS THAT INVEST IN MULTIPLE ASSET CLASSES, INVESTORS SHOULD BE SURE TO DISTINGUISH BETWEEN ASSET ALLOCATION FUNDS AND BALANCED FUNDS. ASSET ALLOCATION FUNDS SHIFT THEIR PORTFOLIO MIXES BETWEEN EQUITIES, FIXED-INCOME SECURITIES AND SHORT-TERM INSTRUMENTS, WHILE SEEKING TO ADD VALUE BY TIMING THESE SHIFTS APPROPRIATELY. IN CONTRAST, MANY BALANCED-TYPE FUNDS TEND TO KEEP THEIR ASSET MIXES FAIRLY STATIC, AND USUALLY MAINTAIN ALLOCATIONS IN ONLY TWO ASSET CLASSES, STOCKS AND BONDS. FOR INSTANCE, A `TRADITIONAL' BALANCED FUND TENDS TO SPLIT ITS INVESTMENTS BY ALLOCATING ROUGHLY 60% TO EQUITIES AND 40% TO FIXED-INCOME SECURITIES. REGARDLESS OF CHANGES IN MARKET CONDITIONS, THE ECONOMY, VALUATIONS OR OTHER FACTORS, THE ASSET MIX WITHIN BALANCED FUNDS STAYS RELATIVELY CONSTANT. IN CONTRAST, ASSET ALLOCATION FUNDS - SUCH AS THE FIDELITY ASSET MANAGER FUNDS - UTILIZE A BLENDED APPROACH TO ASSET ALLOCATION SHIFTS, COMBINING THE RESULTS FROM OUR PROPRIETARY QUANTITATIVE MODEL WITH COMPANY-BY-COMPANY SECURITY SELECTION AND ASSET-CLASS-LEVEL RESEARCH FROM OUR GLOBAL NETWORK OF ANALYSTS AND PORTFOLIO MANAGERS." FUND FACTS GOAL: HIGH TOTAL RETURN WITH REDUCED RISK OVER THE LONG TERM BY ALLOCATING ASSETS AMONG STOCKS, BONDS AND SHORT-TERM AND MONEY MARKET INSTRUMENTS OF ALL TYPES FUND NUMBER: 314 TRADING SYMBOL: FASMX START DATE: DECEMBER 28, 1988 SIZE: AS OF MARCH 31, 1998, MORE THAN $12.9 BILLION MANAGER: RICHARD HABERMANN, SINCE 1996; MANAGER, FIDELITY ASSET MANAGER: INCOME AND FIDELITY ASSET MANAGER: GROWTH, SINCE 1996; FIDELITY TREND FUND, 1977-1981; FIDELITY MAGELLAN FUND, 1972-1977; JOINED FIDELITY IN 1968 (CHECKMARK) INVESTMENT CHANGES TOP FIVE STOCKS AS OF MARCH 31, 1998 % OF FUND'S % OF FUND'S INVESTMENTS INVESTMENTS IN THESE STOCKS 6 MONTHS AGO FANNIE MAE 5.1 4.7 PHILIP MORRIS COMPANIES, INC. 3.1 3.8 FREDDIE MAC 1.9 1.7 COLUMBIA/HCA HEALTHCARE CORP. 1.5 1.5 WAL-MART STORES, INC. 1.5 1.2 TOP FIVE BOND ISSUERS AS OF MARCH 31, 1998
(WITH MATURITIES GREATER THAN ONE YEAR) % OF FUND'S % OF FUND'S INVESTMENTS INVESTMENTS IN THESE BOND ISSUERS 6 MONTHS AGO FANNIE MAE 6.2 4.1 U.S. TREASURY OBLIGATIONS 2.7 3.4 GOVERNMENT NATIONAL MORTGAGE ASSOCIATION 0.7 0.9 FREDDIE MAC 0.7 0.8 FORD MOTOR CREDIT CO. 0.6 0.9
TOP FIVE COUNTRIES AS OF MARCH 31, 1998 (EXCLUDING CASH EQUIVALENTS) % OF FUND'S % OF FUND'S INVESTMENTS INVESTMENTS IN THESE COUNTRIES 6 MONTHS AGO UNITED STATES 81.2 82.5 UNITED KINGDOM 2.4 2.3 NETHERLANDS 1.4 1.6 FRANCE 1.0 0.8 CANADA 0.8 1.3 TOP COUNTRIES ARE BASED UPON LOCATION OF ISSUER OF EACH SECURITY, INCLUDING WHERE THE FUND IS EXPOSED TO POTENTIAL POLITICAL AND CREDIT RISKS. ASSET ALLOCATION AS OF MARCH 31, 1998 * AS OF SEPTEMBER 30, 1997 ** ROW: 1, COL: 1, VALUE: 9.0 ROW: 1, COL: 2, VALUE: 34.0 ROW: 1, COL: 3, VALUE: 57.0 STOCK CLASS 56% BOND CLASS 31% SHORT-TERM CLASS 13% FOREIGN INVESTMENTS 9% STOCK CLASS 57% BOND CLASS 34% SHORT-TERM CLASS 9% FOREIGN INVESTMENTS 9% ROW: 1, COL: 1, VALUE: 13.0 ROW: 1, COL: 2, VALUE: 31.0 ROW: 1, COL: 3, VALUE: 56.0 * ** ASSET ALLOCATIONS IN THE PIE CHARTS REFLECT THE CATEGORIZATION OF ASSETS AS DEFINED IN THE FUND'S PROSPECTUS IN EFFECT AS OF THE TIME PERIODS INDICATED ABOVE. FINANCIAL STATEMENT CATEGORIZATIONS CONFORM TO ACCOUNTING STANDARDS AND WILL DIFFER FROM THE PIE CHART. INVESTMENTS MARCH 31, 1998 SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENT IN SECURITIES COMMON STOCKS - 53.0% SHARES VALUE (NOTE 1) (000S) AEROSPACE & DEFENSE - 0.3% AEROSPACE & DEFENSE - 0.0% Gulfstream Aerospace Corp. (a) 87,200 $ 3,782 DEFENSE ELECTRONICS - 0.3% Raytheon Co.: Class A 158,799 9,032 Class B 450,600 26,304 35,336 TOTAL AEROSPACE & DEFENSE 39,118 BASIC INDUSTRIES - 2.0% CHEMICALS & PLASTICS - 1.2% Air Products & Chemicals, Inc. 110,600 9,166 Dow Chemical Co. 34,600 3,365 du Pont (E.I.) de Nemours & Co. 1,196,500 81,362 Raychem Corp. 1,072,600 44,580 Union Carbide Corp. 519,200 26,025 164,498 PACKAGING & CONTAINERS - 0.6% Bemis Co., Inc. 57,700 2,604 Corning, Inc. 307,000 13,585 Owens-Illinois, Inc. 1,544,500 66,800 82,989 PAPER & FOREST PRODUCTS - 0.2% Boise Cascade Corp. 154,000 5,554 Champion International Corp. 326,000 17,706 Willamette Industries, Inc. 134,000 5,033 28,293 TOTAL BASIC INDUSTRIES 275,780 CONSTRUCTION & REAL ESTATE - 0.8% CONSTRUCTION - 0.5% Centex Corp. 283,980 10,827 D.R. Horton, Inc. 407,209 8,653 Fleetwood Enterprises, Inc. 672,087 31,294 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) CONSTRUCTION & REAL ESTATE - CONTINUED CONSTRUCTION - CONTINUED Kaufman & Broad Home Corp. 616,000 $ 20,059 U.S. Home Corp. (a) 44,900 2,057 72,890 ENGINEERING - 0.3% Fluor Corp. 760,500 37,835 TOTAL CONSTRUCTION & REAL ESTATE 110,725 DURABLES - 2.7% AUTOS, TIRES, & ACCESSORIES - 1.6% Cummins Engine Co., Inc. 264,600 14,586 Discount Auto Parts, Inc. (a) 313,400 7,600 General Motors Corp. 2,248,492 151,633 Goodyear Tire & Rubber Co. 143,200 10,847 Magna International, Inc. Class A 328,100 25,617 Superior Industries International, Inc. 338,600 11,237 221,520 CONSUMER DURABLES - 0.2% Minnesota Mining & Manufacturing Co. 233,200 21,265 CONSUMER ELECTRONICS - 0.5% Newell Co. 197,600 9,571 Philips Electronics NV 364,500 26,768 Philips Electronics NV (Bearer) 431,600 31,709 68,048 HOME FURNISHINGS - 0.0% HON Industries, Inc. 11,000 404 TEXTILES & APPAREL - 0.4% Arena Brands Holdings Corp. Class B (a) 130,444 5,269 Burlington Industries, Inc. (a) 413,300 7,259 Jones Apparel Group, Inc. (a) 135,100 7,439 Liz Claiborne, Inc. 392,500 19,576 NIKE, Inc. Class B 198,100 8,766 Reebok International Ltd. (a) 11,000 336 Warnaco Group, Inc. Class A 74,300 2,916 51,561 TOTAL DURABLES 362,798 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) ENERGY - 3.7% ENERGY SERVICES - 0.2% McDermott International, Inc. 610,400 $ 25,217 Schlumberger Ltd. 35,800 2,712 27,929 OIL & GAS - 3.5% Amerada Hess Corp. 352,500 20,555 Amoco Corp. 41,600 3,593 Apache Corp. 33,000 1,213 Atlantic Richfield Co. 176,700 13,893 British Petroleum PLC: ADR 839,078 72,213 Ord. 1,574 23 Burlington Resources, Inc. 1,474,545 70,686 Chevron Corp. 101,900 8,184 Cooper Cameron Corp. (a) 15,800 954 Elf Aquitaine SA sponsored ADR 141,057 9,133 Enron Oil & Gas Co. 57,100 1,310 Kerr-McGee Corp. 130,400 9,071 Occidental Petroleum Corp. 2,049,800 60,085 Royal Dutch Petroleum Co. Ord. 389,600 22,075 Royal Dutch Petroleum Co. 1,664,500 94,564 Santa Fe Energy Resources, Inc. 350,600 3,857 Tosco Corp. 1,353,400 47,707 Total SA: Class B 87,903 10,566 sponsored ADR 204,972 12,311 USX-Marathon Group 17,300 651 Valero Energy Corp. 120,500 4,022 466,666 TOTAL ENERGY 494,595 FINANCE - 13.8% BANKS - 1.0% Credit Suisse Group (Reg.) 263,100 52,672 NationsBank Corp. 402,300 29,343 Providian Financial Corp. 654,500 37,593 Wells Fargo & Co. 56,300 18,649 138,257 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) FINANCE - CONTINUED CLOSED END INVESTMENT COMPANY - 0.0% First NIS Regional Fund (a) 274,300 $ 5,075 CREDIT & OTHER FINANCE - 1.6% CIT Group, Inc. Class A 167,100 5,452 Fleet Financial Group, Inc. 2,315,934 196,999 Green Tree Financial Corp. 295,500 8,403 Money Store, Inc. (The) 131,400 4,197 Transamerica Corp. 22,000 2,563 217,614 FEDERAL SPONSORED CREDIT - 7.0% Freddie Mac 5,340,200 253,326 Fannie Mae 10,947,900 692,455 945,781 INSURANCE - 3.8% AFLAC, Inc. 264,600 16,736 Allmerica Financial Corp. 307,800 19,661 Allstate Corp. 1,465,013 134,690 American International Group, Inc. 857,325 107,969 CIGNA Corp. 261,900 53,690 General Re Corp. 123,900 27,335 Loews Corp. 250,000 26,063 MBIA, Inc. 95,200 7,378 MGIC Investment Corp. 609,000 40,004 Nationwide Financial Services, Inc. Class A 21,600 937 PMI Group, Inc. 297,500 24,023 Provident Companies, Inc. 33,500 1,149 Reliastar Financial Corp. 156,991 7,231 Torchmark Corp. 696,600 31,913 Travelers Property Casualty Corp. Class A 201,900 8,884 UNUM Corp. 57,600 3,179 510,842 SAVINGS & LOANS - 0.2% Golden West Financial Corp. 213,400 20,446 SECURITIES INDUSTRY - 0.2% Nomura Securities Co. Ltd. 1,280,000 14,588 United Asset Management Corp. 419,600 11,434 Waddell & Reed Financial, Inc. Class A (a) 12,800 333 26,355 TOTAL FINANCE 1,864,370 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) HEALTH - 4.8% DRUGS & PHARMACEUTICALS - 1.9% American Home Products Corp. 725,200 $ 69,166 Amgen, Inc. 243,700 14,835 Astra AB Class A Free shares 2,167,466 44,652 Gilead Sciences, Inc. (a) 16,300 587 Merck & Co., Inc. 196,400 25,213 Novartis AG (Reg.) 20,800 36,835 Schering-Plough Corp. 817,000 66,739 Sepracor, Inc. (a) 51,700 2,204 260,231 MEDICAL EQUIPMENT & SUPPLIES - 0.5% Allegiance Corp. 31,560 1,249 Bard (C.R.), Inc. 171,400 6,299 Baxter International, Inc. 111,400 6,141 Biomet, Inc. 536,300 16,089 Boston Scientific Corp. (a) 141,100 9,524 Johnson & Johnson 78,500 5,755 St. Jude Medical, Inc. (a) 635,316 21,243 Sofamor/Danek Group, Inc. (a) 57,800 4,927 71,227 MEDICAL FACILITIES MANAGEMENT - 2.4% Columbia/HCA Healthcare Corp. 6,449,622 208,000 Humana, Inc. (a) 1,458,300 36,184 Tenet Healthcare Corp. 893,600 32,449 United HealthCare Corp. 586,600 37,982 314,615 TOTAL HEALTH 646,073 HOLDING COMPANIES - 0.1% U.S. Industries, Inc. 330,600 9,936 INDUSTRIAL MACHINERY & EQUIPMENT - 1.3% ELECTRICAL EQUIPMENT - 1.0% Alcatel Alsthom Compagnie Generale d'Electricite SA sponsored ADR 36,300 1,379 Alcatel Alsthom Compagnie Generale d'Electricite SA 322,100 60,519 Emerson Electric Co. 190,600 12,425 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) INDUSTRIAL MACHINERY & EQUIPMENT - CONTINUED ELECTRICAL EQUIPMENT - CONTINUED General Electric Co. 612,200 $ 52,764 Grainger (W.W.), Inc. 51,700 5,315 Scientific-Atlanta, Inc. 308,600 6,037 138,439 INDUSTRIAL MACHINERY & EQUIPMENT - 0.3% Caterpillar, Inc. 414,700 22,834 Tyco International Ltd. 84,400 4,610 Ultratech Stepper, Inc. (a) 354,500 7,223 34,667 POLLUTION CONTROL - 0.0% Browning-Ferris Industries, Inc. 17,700 577 TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 173,683 MEDIA & LEISURE - 1.9% BROADCASTING - 0.6% CBS Corp. 453,300 15,384 Comcast Corp.: Class A 54,600 1,894 Class A special 106,900 3,775 Cox Communications, Inc. Class A (a) 106,700 4,481 Orion Network Systems, Inc. (a): warrants 1/15/07 2,550 41 warrants 1/15/07 8,520 111 Tele-Communications, Inc. (a): (TCI Group), Series A 228,582 7,107 (TCI Ventures Group), Series A 1,247,436 21,908 Time Warner, Inc. 323,682 23,305 78,006 ENTERTAINMENT - 0.3% Cedar Fair LP (depositary unit) 46,600 1,282 Disney (Walt) Co. 34,200 3,651 King World Productions, Inc. 167,500 4,899 Royal Caribbean Cruises Ltd. 111,400 7,805 Viacom, Inc. (a): Class A 145,400 7,724 Class B (non-vtg.) 200,600 10,782 36,143 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) MEDIA & LEISURE - CONTINUED LEISURE DURABLES & TOYS - 0.0% Nintendo Co. Ltd. Ord. 46,000 $ 3,840 LODGING & GAMING - 0.4% Bally Gaming International, Inc. warrants 7/29/98 (a) 149,100 93 Circus Circus Enterprises, Inc. (a) 677,000 14,217 Fitzgeralds South, Inc. warrants 3/15/99 (a)(e) 1,640 - Mirage Resorts, Inc. (a) 801,500 19,486 Sun International Hotels Ltd. Ord. (a) 440,900 20,888 54,684 PUBLISHING - 0.2% Cognizant Corp. 201,900 11,584 U.S. WEST Media Group 610,900 21,229 32,813 RESTAURANTS - 0.4% McDonald's Corp. 542,300 32,538 Papa John's International, Inc. (a) 67,600 2,594 Wendy's International, Inc. 1,011,500 22,569 57,701 TOTAL MEDIA & LEISURE 263,187 NONDURABLES - 3.5% BEVERAGES - 0.0% PepsiCo, Inc. 94,200 4,021 TOBACCO - 3.5% Philip Morris Companies, Inc. 10,109,200 421,427 RJR Nabisco Holdings Corp. 1,263,295 39,557 UST, Inc. 190,600 6,147 467,131 TOTAL NONDURABLES 471,152 PRECIOUS METALS - 0.0% Newmont Mining Corp. 188,890 5,773 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) RETAIL & WHOLESALE - 5.6% APPAREL STORES - 0.3% Columbia Sportswear Co. 2,600 $ 55 Gap, Inc. 260,750 11,734 Lamonts Apparel, Inc. warrants 6/10/99 (a) 394,561 - TJX Companies, Inc. 534,100 24,168 35,957 GENERAL MERCHANDISE STORES - 2.0% Federated Department Stores, Inc. (a) 749,200 38,818 Penney (J.C.) Co., Inc. 301,100 22,790 Proffitts, Inc. (a) 227,200 8,236 Wal-Mart Stores, Inc. 3,903,800 198,362 268,206 GROCERY STORES - 0.2% Safeway, Inc. (a) 746,000 27,555 RETAIL & WHOLESALE, MISCELLANEOUS - 3.1% Circuit City Stores, Inc. - Circuit City Group 997,000 42,622 Corporate Express, Inc. (a) 342,900 3,418 Home Depot, Inc. 2,399,800 161,837 Lowe's Companies, Inc. 1,834,500 128,759 Officemax, Inc. (a) 987,875 17,658 Office Depot, Inc. (a) 305,550 9,510 Rex Stores Corp. (a) 115,300 1,701 Staples, Inc. (a) 648,550 15,038 Toys "R" Us, Inc. (a) 617,500 18,564 U.S. Office Products Co. (a) 662,000 12,578 Viking Office Products, Inc. (a) 405,300 9,423 421,108 TOTAL RETAIL & WHOLESALE 752,826 SERVICES - 0.6% ADVERTISING - 0.1% Interpublic Group of Companies, Inc. 65,400 4,063 LEASING & RENTAL - 0.0% Republic Industries, Inc. (a) 139,900 3,611 PRINTING - 0.0% Donnelley (R.R.) & Sons Co. 30,400 1,248 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) SERVICES - CONTINUED SERVICES - 0.5% Cendant Corp. (a) 1,498,323 $ 59,371 Medpartners, Inc. (a) 16,500 169 Reuters Group PLC ADR 114,220 7,374 66,914 TOTAL SERVICES 75,836 TECHNOLOGY - 5.8% COMMUNICATIONS EQUIPMENT - 0.1% Andrew Corp. (a) 51,300 1,016 Globalstar Telecommunications Ltd. warrants 2/15/04 (a)(e) 4,540 636 3Com Corp. (a) 221,200 7,949 9,601 COMPUTER SERVICES & SOFTWARE - 1.9% Automatic Data Processing, Inc. 394,500 26,851 Black Box Corp. (a) 77,900 2,873 Ceridian Corp. (a) 515,100 27,783 CompUSA, Inc. (a) 225,500 5,863 E Trade Group, Inc. (a) 171,800 4,284 Electronic Data Systems Corp. 1,008,900 46,283 Electronics for Imaging, Inc. (a) 570,900 14,843 First Data Corp. 623,500 20,264 Microsoft Corp. (a) 520,900 46,621 Oracle Corp. (a) 648,825 20,479 Policy Management Systems Corp. (a) 406,900 32,679 Shared Medical Systems Corp. 4,800 376 249,199 COMPUTERS & OFFICE EQUIPMENT - 1.3% Adaptec, Inc. (a) 228,900 4,492 Compaq Computer Corp. 1,619,400 41,902 Hewlett-Packard Co. 318,700 20,198 Ingram Micro, Inc. Class A (a) 61,400 2,279 International Business Machines Corp. 405,900 42,163 Quantum Corp. (a) 52,000 1,108 SCI Systems, Inc. (a) 1,085,600 38,675 Seagate Technology (a) 372,300 9,401 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) TECHNOLOGY - CONTINUED COMPUTERS & OFFICE EQUIPMENT - CONTINUED Tech Data Corp. (a) 449,000 $ 17,287 Western Digital Corp. (a) 142,000 2,494 179,999 ELECTRONIC INSTRUMENTS - 0.4% Applied Materials, Inc. (a) 54,200 1,914 Cognex Corp. (a) 174,500 3,730 KLA-Tencor Corp. (a) 63,300 2,421 Lam Research Corp. (a) 454,500 12,783 Novellus Systems, Inc. (a) 268,900 11,630 Teradyne, Inc. (a) 33,900 1,358 Thermo Electron Corp. (a) 377,300 15,233 Varian Associates, Inc. 124,100 6,872 55,941 ELECTRONICS - 2.1% Altera Corp. (a) 90,600 3,420 AMP, Inc. 783,800 34,340 Intel Corp. 850,000 66,353 Methode Electronics, Inc. Class A 93,900 1,403 Micrel, Inc. (a) 36,900 1,400 Microchip Technology, Inc. (a) 16,500 347 Micron Technology, Inc. (a) 1,747,100 50,775 Molex, Inc. 326,096 8,743 Motorola, Inc. 175,700 10,652 Solectron Corp. (a) 2,245,700 94,881 Thomas & Betts Corp. 193,700 12,397 Uniphase Corp. (a) 15,200 639 285,350 PHOTOGRAPHIC EQUIPMENT - 0.0% Polaroid Corp. 34,900 1,536 TOTAL TECHNOLOGY 781,626 TRANSPORTATION - 0.3% AIR TRANSPORTATION - 0.0% Northwest Airlines Corp. Class A (a) 43,300 2,671 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) TRANSPORTATION - CONTINUED RAILROADS - 0.3% Bombardier, Inc. Class B 277,300 $ 6,846 CSX Corp. 444,200 26,430 33,276 SHIPPING - 0.0% Stolt-Nielsen SA Class B sponsored ADR 168,800 3,355 Stolt-Nielsen SA 88,600 1,772 5,127 TRUCKING & FREIGHT - 0.0% Yellow Corp. (a) 219,100 4,190 TOTAL TRANSPORTATION 45,264 UTILITIES - 5.8% CELLULAR - 2.0% AirTouch Communications, Inc. (a) 1,559,100 76,298 Century Telephone Enterprises, Inc. 45,500 2,781 McCaw International Ltd. warrants 4/15/07 (a)(e) 22,840 114 SK Telecom Ltd. 24 14 Vodafone Group PLC sponsored ADR 1,307,900 135,858 Vodafone Group PLC 4,956,523 51,822 266,887 ELECTRIC UTILITY - 0.3% American Electric Power Co., Inc. 374,800 18,834 Consolidated Edison, Inc. 29,300 1,370 Entergy Corp. 363,200 10,805 Houston Industries, Inc. 166,700 4,793 Niagara Mohawk Power Corp. (a) 186,600 2,426 PG&E Corp. 171,577 5,662 43,890 GAS - 0.0% Enron Corp. 76,800 3,562 TELEPHONE SERVICES - 3.5% AT&T Corp. 300,700 19,733 Ameritech Corp. 673,200 33,281 Bell Atlantic Corp. 451,022 46,230 BellSouth Corp. 671,500 45,368 COMMON STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) UTILITIES - CONTINUED TELEPHONE SERVICES - CONTINUED Deutsche Telekom AG 187,900 $ 4,088 MCI Communications Corp. 2,634,800 130,423 SBC Communications, Inc. 843,080 36,779 Sprint Corp. 1,339,400 90,661 Telebras sponsored ADR 386,900 50,224 WorldCom, Inc. (a) 369,100 15,894 472,681 TOTAL UTILITIES 787,020 TOTAL COMMON STOCKS (Cost $4,158,013) 7,159,762 NONCONVERTIBLE PREFERRED STOCKS - 1.6% CONSTRUCTION & REAL ESTATE - 0.2% REAL ESTATE INVESTMENT TRUSTS - 0.2% California Federal Preferred Capital Corp. 9 1/8% 621,326 16,698 Crown America Realty Trust, Series A, 11% 39,392 2,115 Walden Residential Properties, Inc. 9.20% 141,900 3,760 22,573 FINANCE - 0.1% INSURANCE - 0.1% American Annuity Group Capital Trust II 8 3/4% 4,320 4,669 SIG Capital Trust I 9 1/2% 4,358 4,500 9,169 INDUSTRIAL MACHINERY & EQUIPMENT - 0.0% ELECTRICAL EQUIPMENT - 0.0% Echostar Communications Corp. 12 1/8%, pay-in-kind (j) 5,553 6,192 MEDIA & LEISURE - 0.9% BROADCASTING - 0.8% Adelphia Communications Corp. $13 31,848 3,790 American Radio Systems Corp. 11 3/8%, pay-in-kind 80,941 9,227 NONCONVERTIBLE PREFERRED STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) MEDIA & LEISURE - CONTINUED BROADCASTING - CONTINUED CSC Holdings, Inc. 11 1/8%, pay-in-kind 213,189 $ 24,357 CapStar Broadcasting Partners, Inc. 12%, pay-in-kind 8,483 997 Chancellor Media Corp.: 12%, pay-in-kind 54,149 6,552 Series A, $12.25 32,994 4,636 Granite Broadcasting Corp. 12 3/4%, pay-in-kind 6,229 7,070 SFX Broadcasting, Inc. 12 5/8% 73,388 8,660 Sinclair Capital 11 5/8% 82,440 9,110 Time Warner, Inc., Series M, 10 1/4%, pay-in-kind 28,456 31,800 106,199 PUBLISHING - 0.1% Primedia, Inc.: Series D, $10 91,921 9,767 $9.20 45,675 4,670 14,437 TOTAL MEDIA & LEISURE 120,636 NONDURABLES - 0.0% HOUSEHOLD PRODUCTS - 0.0% Revlon Group, Inc., Series B, 14 7/8% 18,400 1,858 RETAIL & WHOLESALE - 0.0% GROCERY STORES - 0.0% Supermarkets General Holdings Corp. $3.52, pay-in-kind (a) 70,123 1,436 TECHNOLOGY - 0.0% COMMUNICATIONS EQUIPMENT - 0.0% Intermedia Communications, Inc. 13 1/2%, pay-in-kind 4,433 5,430 UTILITIES - 0.4% CELLULAR - 0.2% Dobson Communications Corp. 12 1/4%, pay-in-kind (e) 4,615 5,065 Nextel Communications, Inc. 11 1/8%, pay-in-kind (e) 15,551 16,523 21,588 NONCONVERTIBLE PREFERRED STOCKS - CONTINUED SHARES VALUE (NOTE 1) (000S) UTILITIES - CONTINUED TELEPHONE SERVICES - 0.2% Hyperion Telecommunications, Inc. 12 7/8%, pay-in-kind (Reg.) 5,680 $ 6,504 IXC Communications, Inc. 12 1/2%, pay-in-kind 4,407 5,377 NEXTLINK Communications, Inc. 14%, pay-in-kind 204,680 12,895 Winstar Communications, Inc. 14 1/2% (a)(e) 6,172 7,561 32,337 TOTAL UTILITIES 53,925 TOTAL NONCONVERTIBLE PREFERRED STOCKS (Cost $202,333) 221,219 CORPORATE BONDS - 19.0% MOODY'S RATINGS PRINCIPAL (UNAUDITED)(C) AMOUNT (000S) CONVERTIBLE BONDS - 0.0% HEALTH - 0.0% DRUGS & PHARMACEUTICALS - 0.0% Integrated Process Equipment Corp. 6 1/4%, 9/15/04 (e) B- $ 3,770 3,360 RETAIL & WHOLESALE - 0.0% RETAIL & WHOLESALE, MISCELLANEOUS - 0.0% Sports Authority, Inc. 5 1/4%, 9/15/01 B1 4,270 3,800 TOTAL CONVERTIBLE BONDS 7,160 NONCONVERTIBLE BONDS - 19.0% AEROSPACE & DEFENSE - 0.4% AEROSPACE & DEFENSE - 0.0% BE Aerospace, Inc. 8%, 3/1/08 (e) B1 5,140 5,146 CORPORATE BONDS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED)(C) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED AEROSPACE & DEFENSE - CONTINUED DEFENSE ELECTRONICS - 0.3% Raytheon Co.: 5.95%, 3/15/01 Baa $ 12,560 $ 12,516 6.45%, 8/15/04 Baa 16,920 17,062 Tracor, Inc. 8 1/2%, 3/1/07 B1 3,380 3,473 33,051 SHIP BUILDING & REPAIR - 0.1% Newport News Shipbuilding, Inc. 9 1/4%, 12/1/06 B1 9,330 9,866 TOTAL AEROSPACE & DEFENSE 48,063 BASIC INDUSTRIES - 0.2% CHEMICALS & PLASTICS - 0.1% Acetex Corp. yankee 9 3/4%, 10/1/03 B1 2,220 2,298 General Chemical Corp. 9 1/4%, 8/15/03 B2 3,850 3,985 Huntsman Corp. 9 1/2%, 7/1/07 (e) B2 5,980 6,092 12,375 PACKAGING & CONTAINERS - 0.1% BWAY Corp., Series B, 10 1/4%, 4/15/07 B2 3,200 3,508 U.S. Can Corp. 10 1/8%, 10/15/06 B2 1,650 1,733 5,241 PAPER & FOREST PRODUCTS - 0.0% Omega Cabinets Ltd. 10 1/2%, 6/15/07 B3 3,620 3,792 TOTAL BASIC INDUSTRIES 21,408 CONSTRUCTION & REAL ESTATE - 0.3% BUILDING MATERIALS - 0.0% Nortek, Inc. 9 1/8%, 9/1/07 B1 5,490 5,682 CONSTRUCTION - 0.0% U.S. Home Corp. 8.88%, 8/15/07 B1 4,610 4,737 REAL ESTATE - 0.1% LNR Property Corp. 9 3/8%, 3/15/08 (e) B1 7,380 7,408 CORPORATE BONDS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED)(C) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED CONSTRUCTION & REAL ESTATE - CONTINUED REAL ESTATE INVESTMENT TRUSTS - 0.2% EOP Operating LP (e): 6 3/8%, 2/15/03 Baa $ 10,000 $ 9,900 6 3/4%, 2/15/08 Baa 3,500 3,471 Weeks Realty LP 6 7/8%, 3/15/05 Baa 8,200 8,134 21,505 TOTAL CONSTRUCTION & REAL ESTATE 39,332 DURABLES - 0.6% AUTOS, TIRES, & ACCESSORIES - 0.1% Blue Bird Body Co. 10 3/4%, 11/15/06 B2 3,100 3,433 Morris Material Handling, Inc. 9 1/2%, 4/1/08 (e) B2 380 381 Navistar International Corp. 8%, 2/1/08 (e) Ba3 4,950 4,931 Oshkosh Truck Corp. 8 3/4%, 3/1/08 (e) B3 5,610 5,666 14,411 TEXTILES & APPAREL - 0.5% Fruit of The Loom, Inc. 7 3/8%, 11/15/23 Ba1 4,520 3,871 GFSI, Inc. 9 5/8%, 3/1/07 B3 4,520 4,746 Levi Strauss & Co. 7%, 11/1/06 (e) Baa 31,050 31,409 Nine West Group, Inc. (e): 8 3/8%, 8/15/05 Ba2 2,670 2,550 9%, 8/15/07 Ba3 8,690 8,212 Polymer Group, Inc. 8 3/4%, 3/1/08 (e) B2 3,910 3,978 Unifi, Inc. 6 1/2%, 2/1/08 (e) A3 8,120 7,963 Worldtex, Inc. 9 5/8%, 12/15/07 (e) B1 7,620 7,734 70,463 TOTAL DURABLES 84,874 ENERGY - 0.3% OIL & GAS - 0.3% Occidental Petroleum Corp.: 6.39%, 11/9/00 Baa 3,000 3,018 8 1/2%, 11/9/01 Baa 4,370 4,692 CORPORATE BONDS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED)(C) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED ENERGY - CONTINUED OIL & GAS - CONTINUED Ocean Energy, Inc. 8 7/8%, 7/15/07 B3 $ 5,700 $ 6,071 Petroleum Geo Services ASA 7 1/8%, 3/30/28 Baa 10,700 10,720 Union Oil Co. 7.67%, 4/19/02 Baa 9,660 10,201 34,702 FINANCE - 6.5% ASSET-BACKED SECURITIES - 1.9% Airplanes Pass Through Trust Class D 10 7/8%, 3/15/19 Ba2 14,820 16,524 CPS Auto Grantor Trust: 6.55%, 12/15/02 Aaa 7,792 7,851 6%, 8/15/03 Aaa 16,430 16,381 Capital Equipment Receivables Trust 6.48%, 10/15/06 Baa 8,150 8,103 Contimortgage Home Equity Loan Trust 6.26%, 7/15/12 Aaa 13,310 13,318 Dayton Hudson Credit Card Master Trust 6 1/4%, 8/25/05 Aaa 13,300 13,357 Ford Credit Auto Owner Trust: 6.40%, 5/15/02 A1 9,550 9,609 6.20%, 12/15/02 Baa 7,380 7,325 Green Tree Financial Corp.: 6 1/2%, 6/15/27 Aaa 6,200 6,216 6.80%, 6/15/27 Aaa 6,500 6,561 6.45%, 9/15/28 Aaa 10,250 10,311 6.68%, 1/15/29 AAA 18,680 18,884 Key Plastics, Inc. 10 1/4%, 3/15/07 A2 10,310 10,328 MBNA Master Credit Card Trust II Class A 6.55%, 1/15/07 Aaa 26,970 27,598 Olympic Automobile Receivables Trust: 6.40%, 9/15/01 Aaa 13,560 13,558 6.70%, 3/15/02 Aaa 6,680 6,760 Petroleum Enhanced Trust Receivables Offering Petroleum Trust 6.1875%, 2/5/03 (e) Baa 10,280 10,280 CORPORATE BONDS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED)(C) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED FINANCE - CONTINUED ASSET-BACKED SECURITIES - CONTINUED Premier Auto Trust: 8.05%, 4/4/00 Aaa $ 16,030 $ 16,136 6%, 5/6/00 Aaa 8,021 8,028 6.34%, 1/6/03 Aaa 20,000 20,175 WFS Financial Owner Trust 6.55%, 10/20/04 Aaa 11,150 11,224 258,527 BANKS - 0.8% Banc One Corp. 6 1/4%, 9/1/00 Aa3 13,240 13,290 BanPonce Financial Corp. 7.72%, 4/13/00 A3 7,000 7,190 BanPonce Corp. 6.665%, 3/5/01 A3 13,900 14,029 Capital One Bank: 6.74%, 5/31/99 Baa 12,500 12,590 6.42%, 11/12/99 Baa 14,000 14,050 6 3/8%, 2/15/03 Baa 9,860 9,708 Den Danske Bank AS 7.40%, 6/15/10 (e)(f) A1 13,080 13,550 NB Capital Trust IV 8 1/4%, 4/15/27 AA3 6,625 7,208 Summit Bancorp. 8 5/8%, 12/10/02 BBB 5,500 5,995 Union Planters National Bank 6.81%, 8/20/01 A3 10,000 10,157 107,767 CREDIT & OTHER FINANCE - 3.0% AT&T Capital Corp.: 6.41%, 8/13/99 Baa 24,000 24,085 6.16%, 12/3/99 Baa 9,000 8,995 Advanced Accessory Systems LLC/AAC Capital Corp. 9 3/4%, 10/1/07 (e) B3 3,050 3,126 Ahmanson Capital Trust I 8.36%, 12/1/26 (e) Baa 13,000 13,957 BCH Cayman Islands Ltd. yankee 7.70%, 7/15/06 A3 1,280 1,365 BankAmerica Capital II, Series 2, 8%, 12/15/26 Aa3 8,200 8,738 Bankers Trust Co. 5.66%, 7/21/98 (f) - 25,500 25,490 BanPonce Trust I 8.327%, 2/1/27 (e) Baa 20,520 21,894 Chrysler Financial Corp. 6 3/8%, 1/28/00 A3 23,400 23,540 Countrywide Funding Corp. 6.45%, 2/27/03 A3 10,900 10,918 CORPORATE BONDS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED)(C) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED FINANCE - CONTINUED CREDIT & OTHER FINANCE - CONTINUED Finova Capital Corp. 6.12%, 5/28/02 Baa $ 7,000 $ 6,993 First Security Capital I 8.41%, 12/15/26 A3 5,290 5,760 Ford Motor Credit Co.: 5.73%, 2/23/00 A1 11,500 11,445 5.83%, 2/28/00 A1 22,550 22,481 6.20%, 3/12/01 A1 10,000 10,023 6.57%, 3/19/01 A1 11,300 11,438 7%, 9/25/01 A1 19,000 19,512 General Electric Capital Corp. 6.94%, 4/13/09 (i) Aaa 22,500 22,699 General Motors Acceptance Corp. 6 3/4%, 7/10/02 A3 22,160 22,616 Greenpoint Capital Trust I 9.10%, 6/1/27 Ba1 3,400 3,706 Heller Financial, Inc.: 7 7/8%, 11/1/99 A3 15,530 15,913 6 1/4%, 3/1/01 A3 13,690 13,679 Household Finance Corp. 5.646%, 6/4/98 (f) - 27,000 27,000 KeyCorp Institutional Capital Series A 7.826%, 12/1/26 A1 11,420 11,827 Mellon Capital I, Series A, 7.72%, 12/1/26 A2 5,470 5,695 Money Store, Inc. 7.30%, 12/1/02 Ba2 8,750 9,067 Nordstrom Credit, Inc. 7 1/4%, 4/30/02 A2 10,500 10,941 U.S. Bancorp 8.09%, 11/15/26 A1 8,200 8,738 UNICCO Service Co./UNICCO Finance Corp. 9 7/8%, 10/15/07 B3 5,270 5,389 U S WEST Capital Funding, Inc. 6.95%, 1/15/37 Baa 10,590 11,040 398,070 SAVINGS & LOANS - 0.4% Chevy Chase Savings Bank FSB 9 1/4%, 12/1/08 B1 4,910 5,131 First Nationwide Parent Holdings Ltd. 12 1/2%, 4/15/03 B3 8,210 9,359 Great West Financial Trust II 8.206%, 2/1/27 A3 12,350 13,072 Great Western Financial Corp. 8.60%, 2/1/02 A3 7,000 7,518 CORPORATE BONDS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED)(C) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED FINANCE - CONTINUED SAVINGS & LOANS - CONTINUED Home Savings of America FSB 6 1/2%, 8/15/04 A3 $ 8,080 $ 8,082 Long Island Savings Bank: 6.20%, 4/2/01 Baa 6,250 6,245 7%, 6/13/02 Baa 9,680 9,863 59,270 SECURITIES INDUSTRY - 0.4% Merrill Lynch & Co., Inc. 5.638%, 7/28/98 (f) - 25,000 25,000 Morgan Stanley, Dean Witter, Discover & Co. 5.70%, 1/15/99 (f) A+ 25,400 25,400 50,400 TOTAL FINANCE 874,034 HEALTH - 0.4% DRUGS & PHARMACEUTICALS - 0.0% Chattem, Inc. 8 7/8%, 4/1/08 (e) B2 470 476 MEDICAL EQUIPMENT & SUPPLIES - 0.1% Graham-Field Health Products, Inc. 9 3/4%, 8/15/07 B3 6,420 6,548 McKesson Corp. 6.60%, 3/1/00 A3 13,610 13,752 20,300 MEDICAL FACILITIES MANAGEMENT - 0.3% Integrated Health Services, Inc.: 9 1/2%, 9/15/07 B2 7,230 7,664 Series A, 9 1/4%, 1/15/08 B2 12,620 13,251 Magellan Health Services, Inc. 9%, 2/15/08 (e) B3 4,520 4,565 Tenet Healthcare Corp. 8 5/8%, 1/15/07 Ba3 10,890 11,271 Vencor, Inc. 8 5/8%, 7/15/07 B1 2,600 2,922 39,673 TOTAL HEALTH 60,449 CORPORATE BONDS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED)(C) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED HOLDING COMPANIES - 0.2% Norfolk Southern Corp. 7.05%, 5/1/37 Baa $ 21,900 $ 23,065 INDUSTRIAL MACHINERY & EQUIPMENT - 0.5% ELECTRICAL EQUIPMENT - 0.1% Echostar Communications Corp. secured discount 0%, 6/1/04 (d) B2 5,950 5,712 Motors & Gears, Inc., Series D, 10 3/4%, 11/15/06 B3 1,170 1,252 Westinghouse Electric Corp. 8 5/8%, 8/1/12 Ba1 5,440 5,821 12,785 INDUSTRIAL MACHINERY & EQUIPMENT - 0.2% Bucyrus International, Inc. 9 3/4%, 9/15/07 B1 9,950 10,025 Exide Corp. 10%, 4/15/05 B1 1,640 1,734 Goss Graphic System, Inc. 12%, 10/15/06 B2 5,660 6,424 Roller Bearing Holdings, Inc. 0%, 6/15/09 (d)(e) - 9,790 6,364 24,547 POLLUTION CONTROL - 0.2% Envirosource, Inc. 9 3/8%, 6/15/03 (e) B3 2,400 2,436 WMX Technologies, Inc.: 8 1/4%, 11/15/99 Baa 3,675 3,788 6 1/4%, 10/15/00 Baa 5,750 5,741 7.10%, 8/1/26 Baa 13,025 13,471 25,436 TOTAL INDUSTRIAL MACHINERY & EQUIPMENT 62,768 MEDIA & LEISURE - 4.4% BROADCASTING - 3.1% ACME Television LLC/ACME Financial Corp. 0%, 9/30/04 (d) B3 4,730 3,879 Adelphia Communications Corp.: 9 1/2%, 2/15/04 B3 17,344 17,841 9 7/8%, 3/1/07 B3 3,670 3,982 8 3/8%, 2/1/08 B3 5,320 5,327 Albritton Communications Co. 8 7/8%, 2/1/08 (e) B3 4,000 4,040 CORPORATE BONDS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED)(C) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED MEDIA & LEISURE - CONTINUED BROADCASTING - CONTINUED Ascent Entertainment Group, Inc. 0%, 12/15/04 (d) B3 $ 5,240 $ 3,118 CSC Holdings, Inc.: 9 1/4%, 11/1/05 B1 4,110 4,377 9 7/8%, 5/15/06 B1 3,585 3,952 10 1/2%, 5/15/16 B1 5,120 5,990 CapStar Broadcasting Partners, Inc.: 9 1/4%, 7/1/07 B2 9,970 10,419 0%, 2/1/09 (d) B3 3,690 2,758 Century Communications Corp.: 8 3/4%, 10/1/07 Ba3 7,840 8,154 0%, 1/15/08 (e) Ba3 13,400 5,829 Chancellor Radio Broadcasting Company 8 1/8%, 12/15/07 (e) Ba3 12,210 12,393 Citadel Broadcasting Co., Series B, 10 1/4%, 7/1/07 B3 2,120 2,348 Comcast UK Cable Partners Ltd. 0%, 11/15/07 (d) B2 6,670 5,503 Continental Cablevision, Inc.: 8 5/8%, 8/15/03 Baa 8,070 8,821 8.30%, 5/15/06 Baa 805 884 9%, 9/1/08 Baa 7,280 8,454 Echostar Satellite Broadcasting Corp. 0%, 3/15/04 (d) B3 3,180 2,902 Falcon Holdings 0%, 4/15/10 (d)(e) - 8,660 5,484 Falcon Holding L.P./Falcon Funding 8 3/8%, 4/15/10 (e) B2 12,380 12,347 Fox Kids Worldwide, Inc. 0%, 11/1/07 (d)(e) B1 7,260 4,628 Fox/Liberty Networks LLC/FLN Finance, Inc. 0%, 8/15/07 (d) B1 4,795 3,297 FrontierVision Operating Partners LP/ Frontiervision Capital Corp. 11%, 10/15/06 B3 11,060 12,263 FrontierVision Holdings LP/FrontierVision Holdings Capital Corp. 0%, 9/15/07 (d) Caa 8,330 6,456 Granite Broadcasting Corp.: 10 3/8%, 5/15/05 B3 4,160 4,420 9 3/8%, 12/1/05 B3 6,580 6,794 Hearst-Argyle Television, Inc. 7 1/2%, 11/15/27 Baa 14,760 15,259 Intermedia Capital Partners IV LP/Intermedia Partners IV Capital Corp. 11 1/4%, 8/1/06 B2 4,150 4,669 International Cabletel, Inc. 0%, 2/1/06 (d) B3 5,560 4,490 CORPORATE BONDS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED)(C) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED MEDIA & LEISURE - CONTINUED BROADCASTING - CONTINUED Lenfest Communications, Inc.: 8 3/8%, 11/1/05 Ba3 $ 5,730 $ 5,945 8 1/4%, 2/15/08 (e) B2 3,580 3,620 LIN Holdings Corp. 0%, 3/1/08 (d)(e) B3 930 584 NTL, Inc.: 10%, 2/15/07 B3 7,530 8,114 0%, 4/1/08 (d)(e) B3 24,450 16,015 Olympus Communications LP/Olympus Capital Corp 10 5/8%, 11/15/06 B1 3,530 3,918 Orion Network Systems, Inc.: 11 1/4%, 1/15/07 B2 2,550 2,939 0%, 1/15/07 (d) B2 5,980 4,694 Pegasus Communications Corp., Series B, 9 5/8%, 10/15/05 B3 2,560 2,682 Rogers Cablesystems Ltd. yankee 11%, 12/1/15 B2 5,370 6,202 SFX Broadcasting, Inc. 10 3/4%, 5/15/06 B3 2,550 2,824 Satelites Mexicanos SA de cv 10 1/2%, 11/1/04 (e)(f) B3 7,270 7,488 Sinclair Broadcast Group, Inc. 8 3/4%, 12/15/07 B2 7,050 7,279 TCI Communications Financing III 9.65%, 3/31/27 Ba3 15,980 18,417 TCI Communication, Inc.: 7 3/8%, 2/15/00 Ba1 3,550 3,616 8.65%, 9/15/04 Ba1 8,100 8,885 6.82%, 9/15/10 (f) Ba1 19,280 19,337 Tele-Communications, Inc. 9 1/4%, 4/15/02 Ba1 8,500 9,303 Telemundo Group, Inc. 7%, 2/15/06 (i) B1 7,130 7,593 Telewest PLC 0%, 10/1/07 (d) B1 15,350 12,395 Time Warner, Inc.: 7.95%, 2/1/00 Ba1 12,800 13,166 7 3/4%, 6/15/05 Ba1 10,350 10,936 8.18%, 8/15/07 Ba1 14,375 15,750 6.95%, 1/15/28 (e) Ba1 11,500 11,146 UIH Australia/Pacific, Inc., Series B, 0%, 5/15/06 (d) B2 12,890 8,862 United International Holdings, Inc. 0%, 2/15/08 (d)(e) B3 18,870 11,794 424,582 CORPORATE BONDS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED)(C) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED MEDIA & LEISURE - CONTINUED ENTERTAINMENT - 0.7% AMC Entertainment, Inc. 9 1/2%, 3/15/09 B2 $ 13,670 $ 14,354 American Skiing Co. 12%, 7/15/06 B3 8,130 9,106 Bally Total Fitness Holding Corp., Series B, 9 7/8%, 10/15/07 B3 9,410 9,998 Cinemark USA, Inc. 8 1/2%, 8/1/08 (Reg. S) B2 10,000 10,013 Livent, Inc. 9 3/8%, 10/15/04 B1 6,860 6,894 Paramount Communications, Inc.: 5 7/8%, 7/15/00 Ba2 7,170 7,039 7 1/2%, 1/15/02 Ba2 3,345 3,427 Premier Parks, Inc.: 9 1/4%, 4/1/06 B3 400 409 0%, 4/1/08 (d) B3 650 414 Viacom, Inc.: 6 3/4%, 1/15/03 Ba2 7,410 7,402 7 3/4%, 6/1/05 Ba2 18,050 18,930 8%, 7/7/06 B1 8,730 8,926 96,912 LODGING & GAMING - 0.3% Aladdin Gaming Holdings/Aladdin Capital Units 0%, 3/1/10 (d)(e) Caa 7,370 3,796 Courtyard by Marriott II LP/Courtyard II Finance Co., Series B, 10 3/4%, 2/1/08 B- 3,800 4,185 HMC Acquisition Properties, Inc. 9%, 12/15/07 Ba3 6,000 6,285 HMH Properties, Inc.: 9 1/2%, 5/15/05 Ba3 10,600 11,249 8 7/8%, 7/15/07 Ba3 5,180 5,491 Sun International Hotels Ltd./Sun International North America, Inc. yankee 9%, 3/15/07 Ba3 5,120 5,338 36,344 PUBLISHING - 0.2% Garden State Newspapers, Inc.: Series B, 8 3/4%, 10/1/09 B1 7,917 8,105 8 3/4%, 10/1/09 (h) B1 8,160 8,425 News America Holdings, Inc. 8 1/2%, 2/15/05 Baa 5,770 6,355 News America, Inc. 6 5/8%, 1/9/08 (e) Baa 1,510 1,484 24,369 CORPORATE BONDS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED)(C) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED MEDIA & LEISURE - CONTINUED RESTAURANTS - 0.1% Foodmaker, Inc. 9 3/4%, 6/1/02 B2 $ 5,990 $ 6,132 Host Marriott Travel Plazas, Inc. 9 1/2%, 5/15/05 Ba3 9,550 10,147 16,279 TOTAL MEDIA & LEISURE 598,486 NONDURABLES - 0.5% FOODS - 0.1% Chiquita Brands International, Inc. 9 5/8%, 1/15/04 B1 4,370 4,643 ConAgra, Inc. 7 1/8%, 10/1/26 Baa 13,500 14,211 18,854 HOUSEHOLD PRODUCTS - 0.1% Revlon Consumer Products Corp. 8 5/8%, 2/1/08 (e) B3 13,880 14,071 TOBACCO - 0.3% Philip Morris Companies, Inc.: 7 1/4%, 9/15/01 A2 13,780 14,168 7%, 7/15/05 A2 13,480 13,734 6.95%, 6/1/06 A2 12,680 13,033 40,935 TOTAL NONDURABLES 73,860 RETAIL & WHOLESALE - 1.3% APPAREL STORES - 0.1% AnnTaylor, Inc. 8 3/4%, 6/15/00 B3 7,460 7,460 Lamonts Apparel, Inc. 10 1/4%, 11/1/99 pay-in-kind (e)(k) - 13,118 459 Specialty Retailers, Inc. 8 1/2%, 7/15/05 Ba3 2,280 2,337 10,256 CORPORATE BONDS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED)(C) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED RETAIL & WHOLESALE - CONTINUED GENERAL MERCHANDISE STORES - 0.7% Dayton Hudson Corp.: 6.80%, 10/1/01 Baa $ 9,500 $ 9,669 7 1/2%, 7/15/06 Baa 9,000 9,619 Federated Department Stores, Inc.: 10%, 2/15/01 Baa 19,900 21,778 8 1/8%, 10/15/02 Baa 6,340 6,744 6.79%, 7/15/27 Baa 8,750 8,881 7%, 2/15/28 Baa 10,800 10,676 Kmart Corp.: 12 1/2%, 3/1/05 Ba2 7,160 8,878 7 3/4%, 10/1/12 Ba2 670 677 8 1/4%, 1/1/22 Ba2 5,420 5,501 Penney (J.C.) Co., Inc. 6.95%, 4/1/00 A2 12,720 12,945 95,368 GROCERY STORES - 0.4% Ameriserve Food Distribution, Inc. 8 7/8%, 10/15/06 B1 6,510 6,705 Fleming Companies, Inc., Series B, 10 5/8%, 7/31/07 B3 5,110 5,442 Kroger Co. 8.15%, 7/15/06 Baa 7,000 7,723 Mrs. Fields Original Cookies, Inc. 10 1/8%, 12/1/04 (e) B2 3,890 3,900 Pathmark Stores, Inc.: 12 5/8%, 6/15/02 Caa 6,660 6,627 9 5/8%, 5/1/03 Caa 15,290 15,252 Pueblo Xtra International, Inc. 9 1/2%, 8/1/03 B3 11,250 10,913 56,562 RETAIL & WHOLESALE, MISCELLANEOUS - 0.1% Central Tractor Farm & Country, Inc. 10 5/8%, 4/1/07 B2 4,140 4,399 J Crew Operating Corp. 10 3/8%, 10/15/07 (e) B3 5,240 4,926 Metals USA, Inc. 8 5/8%, 2/15/08 (e) B2 7,760 7,741 17,066 TOTAL RETAIL & WHOLESALE 179,252 CORPORATE BONDS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED)(C) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED SERVICES - 0.4% LEASING & RENTAL - 0.2% Brand Scaffold Services, Inc. 10 1/4%, 2/15/08 (e) B3 $ 3,640 $ 3,749 PHH Corp. 5.678%, 6/11/98 (f) - 27,000 26,997 30,746 PRINTING - 0.1% Sullivan Graphics, Inc. 12 3/4%, 8/1/05 Caa 4,180 4,389 SERVICES - 0.1% Borg-Warner Security Corp. 9 5/8%, 3/15/07 B3 2,750 2,888 Iron Mountain, Inc. 8 3/4%, 9/30/09 B3 4,225 4,362 Medaphis Corp. 9 1/2%, 2/15/05 (e) B2 8,450 8,450 15,700 TOTAL SERVICES 50,835 TECHNOLOGY - 0.4% COMPUTER SERVICES & SOFTWARE - 0.1% Federal Data Corp. 10 1/8%, 8/1/05 B3 7,520 7,802 COMPUTERS & OFFICE EQUIPMENT - 0.2% Comdisco, Inc.: 7.21%, 7/2/01 Baa 12,000 12,380 6 3/8%, 11/30/01 Baa 13,775 13,840 MediaCom LLC/MediaCom Capital Corp. 8 1/2%, 4/15/08 (e) B2 8,290 8,290 34,510 ELECTRONICS - 0.1% Advanced Micro Devices, Inc. 11%, 8/1/03 Ba1 5,160 5,573 Fairchild Semiconductor Corp.: 10 1/8%, 3/15/07 B2 3,850 3,990 11.74%, 3/15/08 pay-in-kind (h) - 5,734 5,690 15,253 TOTAL TECHNOLOGY 57,565 CORPORATE BONDS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED)(C) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED TRANSPORTATION - 0.4% AIR TRANSPORTATION - 0.3% Delta Air Lines, Inc. 9 7/8%, 5/15/00 Baa $ 6,000 $ 6,433 Kitty Hawk, Inc. 9.95%, 11/15/04 B1 15,168 15,775 US Air, Inc.: 9 5/8%, 2/1/01 B3 5,960 6,295 10%, 7/1/03 B3 6,320 6,676 10 3/8%, 3/1/13 B1 7,185 8,209 43,388 RAILROADS - 0.1% Burlington Northern Santa Fe Corp. 7.29%, 6/1/36 Baa 10,500 11,300 SHIPPING - 0.0% Amer Reefer Co. Ltd. 10 1/4%, 3/1/08 (e) B1 2,200 2,222 Holt Group, Inc. 9 3/4%, 1/15/06 (e) Caa 4,170 4,233 6,455 TOTAL TRANSPORTATION 61,143 UTILITIES - 2.2% CELLULAR - 0.6% McCaw International Ltd. 0%, 4/15/07 (d) Caa 22,840 15,189 Nextel International, Inc. 12 1/8%, 4/15/08 (e) Caa 14,540 8,706 Nextel Communications, Inc. (d): 0%, 8/15/04 B2 3,540 3,407 0%, 9/15/07 B2 4,781 3,203 0%, 10/31/07 B2 24,360 15,834 0%, 2/15/08 (e) B2 16,940 10,799 Pagemart Wireless, Inc. 0%, 2/1/08 (d)(e) Caa 13,640 8,457 Rogers Communications, Inc. 8 7/8%, 7/15/07 B2 8,610 8,761 360 Degrees Communications Co. 7 1/8%, 3/1/03 Ba1 8,316 8,590 82,946 CORPORATE BONDS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED)(C) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED UTILITIES - CONTINUED ELECTRIC UTILITY - 0.7% AES Corp. 8 3/8%, 8/15/07 Ba1 $ 3,510 $ 3,585 Avon Energy Partners Holdings (e): 6.73%, 12/11/02 Baa 13,550 13,719 6.46%, 3/4/08 Baa 10,920 10,790 CalEnergy, Inc. 9 1/2%, 9/15/06 Ba1 2,670 2,890 Calpine Corp. 8 3/4%, 7/15/07 Ba3 5,320 5,493 Israel Electric Corp. yankee (e): 7 7/8%, 12/15/26 A3 6,380 6,480 7 3/4%, 12/15/27 A3 12,960 13,071 Long Island Lighting Co. 8 5/8%, 4/15/04 Baa 18,250 18,885 NIPSCO Capital Markets, Inc. 7.39%, 4/1/04 Baa 12,700 13,236 Texas Utilities Co., Series C, 6 3/8%, 1/1/08 (e) Baa 8,140 7,816 95,965 TELEPHONE SERVICES - 0.9% Cable & Wireless Communications PLC 6 3/8%, 3/6/03 Baa 14,020 14,028 GCI, Inc. 9 3/4%, 8/1/07 B2 1,600 1,700 Hyperion Telecommunications, Inc.: Series B, 0%, 4/15/03 (d) B3 12,470 9,508 12 1/4%, 9/1/04 B3 6,970 7,841 ICG Holdings, Inc. (d): 0%, 9/15/05 - 5,060 4,326 0%, 5/1/06 - 2,590 2,078 0%, 3/15/07 - 5,180 3,794 McLeodUSA, Inc.: 0%, 3/1/07 (d) B2 2,525 1,913 9 1/4%, 7/15/07 B2 2,000 2,135 8 3/8%, 3/15/08 (e) B2 800 827 NEXTLINK Communications, Inc. 9 5/8%, 10/1/07 B3 11,370 12,038 Qwest Communications International, Inc. 0%, 10/15/07 (d) B2 10,320 7,585 Teleport Communications Group, Inc. 0%, 7/1/07 (d) Baa 7,650 6,591 Winstar Communications, Inc. 11%, 3/15/08 (e) - 3,660 3,752 CORPORATE BONDS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED)(C) AMOUNT (000S) (000S) NONCONVERTIBLE BONDS - CONTINUED UTILITIES - CONTINUED TELEPHONE SERVICES - CONTINUED Winstar Equipment 12 1/2%, 3/15/04 B3 $ 3,760 $ 4,305 WorldCom, Inc.: 9 3/8%, 1/15/04 Ba1 10,620 11,254 8 7/8%, 1/15/06 Ba1 9,729 10,604 7 3/4%, 4/1/07 Ba1 7,450 8,031 112,310 TOTAL UTILITIES 291,221 TOTAL NONCONVERTIBLE BONDS 2,561,057 TOTAL CORPORATE BONDS (Cost $2,513,293) 2,568,217 U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - 4.3% U.S. TREASURY OBLIGATIONS - 2.7% 7 3/4%, 12/31/99 Aaa 71,638 74,168 6 7/8%, 3/31/00 Aaa 1,480 1,515 6 1/4%, 10/31/01 Aaa 10,405 10,600 5 7/8%, 11/30/01 Aaa 26,072 26,247 11 7/8%, 11/15/03 Aaa 2,788 3,600 12 3/8%, 5/15/04 Aaa 48,000 64,260 7%, 7/15/06 Aaa 1,090 1,178 11 3/4%, 2/15/10 (callable) Aaa 21,750 28,965 12 3/4%, 11/15/10 (callable) Aaa 17,680 25,111 8 7/8%, 2/15/19 Aaa 1,360 1,818 7 1/4%, 2/15/23 Aaa 1,738 1,983 6 7/8%, 8/15/25 Aaa 100,245 111,804 6 1/2% 11/15/26 Aaa 7,140 7,620 TOTAL U.S. TREASURY OBLIGATIONS 358,869 U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED)(C) AMOUNT (000S) (000S) U.S. GOVERNMENT AGENCY OBLIGATIONS - 1.6% Federal Home Loan Bank: 7.70%, 9/20/04 Aaa $ 2,360 $ 2,581 8.09%, 12/28/04 Aaa 11,000 12,281 6.85%, 5/26/05 Aaa 10,000 10,488 Freddie Mac 7.35%, 3/22/05 Aaa 5,000 5,382 Fannie Mae: 6.97%, 4/8/04 Aaa 21,970 23,123 7.49%, 3/2/05 . Aaa 4,725 5,129 6.44%, 6/21/05 Aaa 3,500 3,589 Financing Corp.: 0%, 4/15/02 Aaa 2,276 1,806 0%, 5/11/02 Aaa 2,275 1,790 0%, 12/6/02 Aaa 3,794 2,899 stripped principal 0%, 12/6/03 Aaa 3,385 2,434 0%, 2/3/03 Aaa 2,032 1,531 0%, 5/2/04 Aaa 4,033 2,812 0%, 8/8/05 Aaa 5,482 3,534 0%, 11/30/05 Aaa 1,666 1,054 Guaranteed Export Trust Certificates (assets of Trust guaranteed by U.S. Government through Export- Import Bank) Series 1994-A, 7.12%, 4/15/06 Aaa 23,039 23,936 State of Israel (guaranteed by U.S. Government through Agency for International Development): 0%, 11/15/01 Aaa 1,700 1,381 6 5/8%, 8/15/03 Aaa 22,140 22,929 5 5/8%, 9/15/03 Aaa 26,920 26,677 U.S. Department of Housing and Urban Development government guaranteed participation certificates Series 1996-A: 6.73%, 8/1/02 Aaa 22,400 23,027 6.83%, 8/1/03 Aaa 11,700 12,147 7.57%, 8/1/13 Aaa 10,090 10,762 U.S. Trade Trust Certificates (assets of Trust guaranteed by U.S. government through Export-Import Bank) 6.69%, 1/15/09 (e) Aaa 17,871 18,331 TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS 219,623 TOTAL U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS (Cost $571,870) 578,492 U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - 7.4% MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED)(C) AMOUNT (000S) (000S) FREDDIE MAC - 0.7% 5 1/2%, 8/1/02 to 5/1/03 Aaa $ 11,956 $ 11,703 6%, 10/1/23 to 9/1/25 Aaa 12,656 12,269 7%, 5/1/99 to 7/1/01 Aaa 4,819 4,873 7 1/2%, 6/1/25 to 3/1/28 Aaa 55,518 56,906 8 1/2%, 2/1/19 to 3/1/22 Aaa 326 343 86,094 FANNIE MAE - 6.0% 5 1/2%, 10/1/02 to 2/1/26 Aaa 21,153 20,615 6%, 4/1/00 to 6/1/26 Aaa 148,428 145,633 6%, 4/1/13 (j) Aaa 97,375 95,915 6%, 4/1/28 (j) Aaa 4,400 4,250 6 1/2%, 7/1/25 to 3/1/28 Aaa 188,806 186,919 7%, 8/1/25 to 11/1/26 Aaa 10,388 10,491 7%, 4/1/28 (j) Aaa 127,281 128,594 7%, 5/1/28 (j) Aaa 125,762 126,901 7 1/2%, 4/1/28 (j) Aaa 88,310 90,573 809,891 GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 0.7% 6%, 10/15/08 to 12/15/10 Aaa 30,535 30,391 6 1/2%, 12/15/07 to 8/15/09 Aaa 61,543 62,190 8%, 4/15/24 to 12/15/25 Aaa 5,363 5,552 98,133 TOTAL U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES (Cost $974,420) 994,118 COLLATERALIZED MORTGAGE OBLIGATIONS - 0.0% PRIVATE SPONSOR - 0.0% Credit-Based Asset Servicing and Securitization LLC Series 1997-2 Class 2-B, 7.289%, 12/29/25 (e)(f)(k) (Cost $1,807) Ba3 3,400 1,712 COMMERCIAL MORTGAGE SECURITIES - 2.2% MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED)(C) AMOUNT (000S) (000S) American Southwest Financial Securities Series 1994-C2 Class B2, 8%, 12/25/01 (e)(f) - $ 3,880 $ 3,935 Asset Securitization Corp. Series 1997-D5 Class A6, 6.69%, 2/14/41 (f) BBB 3,300 3,215 Bardell Associates Note Trust 12 1/2%, 11/1/08 (h) - 16,976 18,037 Blackrock Capital Funding LLC Series 1996 Class C2, 7.559%, 11/16/26 (e)(f) AAA 1,510 1,511 BKB Commercial Mortgage Trust Series 1997-C1 Class D, 7.83%, 2/25/43 (e)(f) BBB 5,378 5,442 Bankers Trust Remic Trust 1988-1 Series 1998-S1A Class G, 8.617%, 11/28/02 (e)(f) Ba2 3,301 3,169 Berkeley Federal Bank & Trust FSB Series 1994 Class 1B, 7.706%, 8/1/24 (e)(f) - 2,280 1,763 CBM Funding Corp. sequential pay Series 1996-1: Class A3PI, 7.08%, 11/1/07 AA 8,220 8,528 Class B, 7.48%, 2/1/08 A 6,410 6,825 CS First Boston Mortgage Securities Corp. Series 1997-C2 Class D, 7.27%, 4/17/11 Baa 14,700 14,842 Deutsche Mortgage and Asset Receiving Corp. Series 1998-C1 Class D, 7.231%, 7/15/12 Baa 11,800 11,863 Equitable Life Assurance Society of the United States (The) (e): Series 174 Class B1, 7.33%, 5/15/06 Aa2 10,400 10,940 Series 1996-1 Class C1, 7.52%, 5/15/06 A2 8,000 8,451 Series 174, Class D1, 7.77%, 5/15/06 Baa 6,800 7,170 Franchise Mortgage Acceptance Company LLC Loan Receivables Trust (e)(f): Series 1997-A Class E, 8.104%, 4/15/19 - 1,471 1,395 Series1997-B Class E, 7.891%, 9/15/19 - 2,307 2,090 First Chicago/Lennar Trust I, Series 1997-CHL1 (f): Class D, 8.132%, 5/29/08 - 2,000 1,994 Class E, 8.132%, 2/28/11 - 3,800 3,321 First Union-Lehman Brothers Commercial Mortgage Trust sequential pay Series 1997-C2 Class B, 6.79%, 10/18/11 Aa2 31,350 31,732 COMMERCIAL MORTGAGE SECURITIES - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED)(C) AMOUNT (000S) (000S) General Motors Acceptance Corp. Commercial Mortgage Securities, Inc.: Series1996-C1 Class F, 7.86%, 11/15/06 (e) Ba3 $ 1,250 $ 1,205 Series 1997-C2 Class D, 7.192%, 1/15/08 Baa 4,120 4,162 Series 1997-C2 Class E, 7.624%, 4/15/11 Baa 8,770 8,884 Series 1997-C2 Class F, 6 3/4%, 4/16/29 - 1,100 950 GS Mortgage Securities Corp. II Series 1997- GL Class A2-B, 6.86%, 7/13/30 Aaa 13,230 13,628 GAFCO Franchisee Loan Trust Series 1998-1 Class D, 14 1/2%, 6/1/16 (e)(f) - 4,600 3,638 Kidder Peabody Acceptance Corp. sequential pay, Series 1993-M1 Class A-2, 7.15%, 4/25/25 Aa2 5,224 5,201 Morgan Stanley Capital I, Inc. sequential pay Series 1997-C1 Class A1C, 7.63%, 2/15/20 Aaa 13,690 14,751 Morgan Stanley Capital I Series 1998-HF1 Class D, 7.10%, 2/15/08 (f) BBB 14,900 15,126 NB Commercial Mortgage sequential pay, Series FSI Class A, 7.187%, 10/20/23 (e) - 633 631 Nomura Depositor Trust Series 1998-ST1A Class B2, 9.938%, 1/15/03 (e)(f) - 2,975 2,955 Nomura Asset Securities Corp. Series 1998 - D6 Class A4, 7.349%, 3/15/30 (f) Baa 11,800 11,741 Oregon Commercial Mortgage, Inc. Series 1995 Class E, 9.455%, 6/25/26 (e)(f) BB 2,650 2,696 Penn Mutual Life Insurance Co. (The) Series 1996-PML (e): Class K, 7.90%, 11/15/26 - 750 552 Class L, 7.90%, 11/15/26 - 600 288 Resolution Trust Corp. Series 1991-M2 (f): Class A1, 7.131%, 9/25/20 Ba3 399 351 Class A3, 7.542%, 9/25/20 Ba3 1,716 1,475 Structured Asset Securities Corp.: Series 1995-C1 Class E, 7 3/8%, 9/25/24 (e) BB 2,390 2,312 sequential pay Series 1996 Class A-2A, 7 3/4%, 2/25/28 AAA 4,208 4,248 Series 1996-CFL Class E, 7 3/4%, 2/25/28 BB+ 6,820 6,920 Series 1996-CFL Class G, 7 3/4%, 2/25/28 (e) - 3,700 3,420 Series 1996-CFL Class H, 7 3/4%, 2/25/28 (e) - 1,000 816 COMMERCIAL MORTGAGE SECURITIES - CONTINUED MOODY'S RATINGS PRINCIPAL VALUE (NOTE 1) (UNAUDITED)(C) AMOUNT (000S) (000S) Thirteen Affiliates of General Growth Properties, Inc. (e): sequential pay Series A-2, 6.602%, 11/15/12 Aaa $ 10,590 $ 10,741 Series D-2, 6.992%, 11/15/12 Baa 11,380 11,368 Series E-2, 7.224%, 11/15/12 Baa 6,760 6,711 Wells Fargo Capital Markets Apartment Financing Trust 6.56%, 12/29/05 (e) Aaa 8,767 8,892 TOTAL COMMERCIAL MORTGAGE SECURITIES (Cost $283,867) 289,885 FOREIGN GOVERNMENT OBLIGATIONS (G) - 0.2% Export Development Corp. yankee 8 1/8%, 8/10/99 Aa2 4,880 5,018 Israeli State euro 6 3/8%, 12/19/01 A3 13,265 13,180 Newfoundland Province yankee 11 5/8%, 10/15/07 Baa 5,750 7,860 TOTAL FOREIGN GOVERNMENT OBLIGATIONS (Cost $25,663) 26,058 SUPRANATIONAL OBLIGATIONS - 0.1% Inter American Development Bank yankee 6.29%, 7/16/27 (Cost $12,918) Aaa 13,000 13,653 BANK NOTES - 0.2% Key Bank N.A 5.555%, 8/20/99 (f) (Cost $24,966) 25,000 24,975 CERTIFICATES OF DEPOSIT - 1.8% Australia & New Zealand Banking Group yankee Ltd. 5.825%, 7/28/98 20,000 20,004 Bank of Tokyo-Mitsubishi Ltd. yankee 6.03%, 4/20/98 28,000 28,003 Banque Nationale de paris yankee 5 3/4%, 7/31/98 12,500 12,497 Canadian Imperial Bank of Commerce: 5.91%, 8/28/98 25,000 25,008 yankee 6.20%, 8/1/00 16,760 16,801 CERTIFICATES OF DEPOSIT - CONTINUED PRINCIPAL VALUE (NOTE 1) AMOUNT (000S) (000S) Deutsche Bank AG yankee: 6.20%, 4/10/98 $ 15,500 $ 15,501 5.94%, 10/26/98 10,000 10,008 First National Bank of Chicago 5.65%, 3/3/99 25,000 24,978 RaboBank Nederland Coop Central yankee 6.20%, 4/10/98 10,000 10,001 Sanwa Bank Ltd. yankee 6.20%, 4/20/98 28,000 28,005 Societe Generale France yankee 5.91%, 10/15/98 21,600 21,612 Westdeutsche Landesbank yankee 5.83%, 8/3/98 21,000 20,999 Westpac Banking Corp. yankee 5.885%, 8/27/98 9,000 9,002 TOTAL CERTIFICATES OF DEPOSIT (Cost $242,298) 242,419 MASTER NOTES - 0.2% First Bank National Association 5.598%, 5/15/98 (f) 13,000 12,994 Goldman Sachs Group LP (The) 5.625%, 5/4/98 (f)(h) 18,000 17,998 TOTAL MASTER NOTES (Cost $30,930) 30,992 CASH EQUIVALENTS - 10.0% MATURITY AMOUNT (000S) Investments in repurchase agreements (U.S. Treasury obligations), in a joint trading account, dated 3/31/98 due 4/1/98: at 5.80% $ 4,725 4,724 at 6.08% 172,458 172,429 177,153 SHARES Taxable Central Cash Fund (b) 1,176,903,739 1,176,904 TOTAL CASH EQUIVALENTS (Cost $1,354,057) 1,354,057 TOTAL INVESTMENT IN SECURITIES - 100% (Cost $10,396,435) $ 13,505,559 LEGEND (a) Non-income producing (b) At period end, the seven-day yield of the Taxable Central Cash Fund was 5.63%. The yield refers to the income earned by investing in the fund over the seven-day period, expressed as an annual percentage. (c) Standard & Poor's credit ratings are used in the absence of a rating by Moody's Investors Service, Inc. (d) Debt obligation initially issued in zero coupon form which converts to coupon form at a specified rate and date. The rate shown is the rate at period end. (e) 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 $579,988,000 or 4.5% of net assets. (f) The coupon rate shown on floating or adjustable rate securities represents the rate at period end. (g) For foreign government obligations not individually rated by S&P or Moody's, the ratings listed are assigned to securities by FMR, the fund's investment adviser, based principally on S&P and Moody's ratings of the sovereign credit of the issuing government. (h) Restricted securities - Investment in securities not registered under the Securities Act of 1933 (see Note 2 of Notes to Financial Statements). Additional information on each holding is as follows: ACQUISITION COST SECURITY DATE (000S) Bardell Associates Note Trust 12 1/2%, 11/1/08 4/19/94 $ 18,326 Fairchild Semiconductor Corp. 11.74%, 3/15/08 pay-in-kind 4/3/97 $ 4,481 Garden State Newspapers 8 3/4%, 10/1/09 2/11/98 $ 8,446 Goldman Sachs Group LP (The) 5.625%, 5/4/98 8/5/97 $ 18,000 (i) Debt obligation initially issued at one coupon which converts to a higher coupon at a specified date. The rate shown is the rate at period end. (j) Security or a portion of the security purchased on a delayed delivery or when-issued basis (see Note 2 of Notes to Financial Statements). (k) Non-income producing - issuer filed for protection under the Federal Bankruptcy Code or is in default of interest payment. OTHER INFORMATION 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 17.2% AAA, AA, A 16.8% Baa 4.9% BBB 6.2% Ba 2.7% BB 1.9% B 5.5% B 4.9% Caa 0.5% CCC 0.8% Ca, C 0.0% CC, C 0.0% D 0.0% For some foreign government obligations, FMR has assigned the ratings of the sovereign credit of the issuing government. The percentage not rated by Moody's or S&P amounted to 0.5%. FMR has determined that unrated debt securities that are lower quality account for 0.5% of the total value of investment in securities. INCOME TAX INFORMATION At March 31, 1998, the aggregate cost of investment securities for income tax purposes was $10,401,054,000. Net unrealized appreciation aggregated $3,104,505,000, of which $3,201,732,000 related to appreciated investment securities and $97,227,000 related to depreciated investment securities. FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES
AMOUNTS IN THOUSANDS (EXCEPT PER-SHARE AMOUNT) MARCH 31, 1998 ASSETS INVESTMENT IN SECURITIES, AT VALUE (INCLUDING REPURCHASE $ 13,505,559 AGREEMENTS OF $177,153) (COST $10,396,435) - SEE ACCOMPANYING SCHEDULE CASH 39 RECEIVABLE FOR INVESTMENTS SOLD 26,608 RECEIVABLE FOR FUND SHARES SOLD 10,532 DIVIDENDS RECEIVABLE 12,627 INTEREST RECEIVABLE 65,415 OTHER RECEIVABLES 507 TOTAL ASSETS 13,621,287 LIABILITIES PAYABLE FOR INVESTMENTS PURCHASED $ 59,918 REGULAR DELIVERY DELAYED DELIVERY 447,975 PAYABLE FOR FUND SHARES REDEEMED 54,217 ACCRUED MANAGEMENT FEE 5,794 OTHER PAYABLES AND ACCRUED EXPENSES 2,898 COLLATERAL ON SECURITIES LOANED, AT VALUE 114,980 TOTAL LIABILITIES 685,782 NET ASSETS $ 12,935,505 NET ASSETS CONSIST OF: PAID IN CAPITAL $ 9,462,902 UNDISTRIBUTED NET INVESTMENT INCOME 5,921 ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON 357,449 INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 3,109,233 AND ASSETS AND LIABILITIES IN FOREIGN CURRENCIES NET ASSETS, FOR 660,278 SHARES OUTSTANDING $ 12,935,505 NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER $19.59 SHARE ($12,935,505 (DIVIDED BY) 660,278 SHARES)
STATEMENT OF OPERATIONS
AMOUNTS IN THOUSANDS SIX MONTHS ENDED MARCH 31, 1998 INVESTMENT INCOME $ 56,189 DIVIDENDS INTEREST (INCLUDING INCOME ON SECURITIES LOANED OF $513) 182,383 TOTAL INCOME 238,572 EXPENSES MANAGEMENT FEE $ 33,080 TRANSFER AGENT FEES 12,587 ACCOUNTING AND SECURITY LENDING FEES 484 NON-INTERESTED TRUSTEES' COMPENSATION 42 CUSTODIAN FEES AND EXPENSES 158 REGISTRATION FEES 136 AUDIT 130 LEGAL 41 MISCELLANEOUS 56 TOTAL EXPENSES BEFORE REDUCTIONS 46,714 EXPENSE REDUCTIONS (690) 46,024 NET INVESTMENT INCOME 192,548 REALIZED AND UNREALIZED GAIN (LOSS) NET REALIZED GAIN (LOSS) ON: INVESTMENT SECURITIES 410,921 FOREIGN CURRENCY TRANSACTIONS (58) 410,863 CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON 714,185 INVESTMENT SECURITIES NET GAIN (LOSS) 1,125,048 NET INCREASE (DECREASE) IN NET ASSETS RESULTING $ 1,317,596 FROM OPERATIONS
STATEMENT OF CHANGES IN NET ASSETS
AMOUNTS IN THOUSANDS SIX MONTHS ENDED YEAR ENDED MARCH 31, SEPTEMBER 30, 1998 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS $ 192,548 $ 377,233 NET INVESTMENT INCOME NET REALIZED GAIN (LOSS) 410,863 749,581 CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) 714,185 1,371,526 NET INCREASE (DECREASE) IN NET ASSETS RESULTING 1,317,596 2,498,340 FROM OPERATIONS DISTRIBUTIONS TO SHAREHOLDERS (208,019) (418,976) FROM NET INVESTMENT INCOME FROM NET REALIZED GAIN (679,851) (468,542) TOTAL DISTRIBUTIONS (887,870) (887,518) SHARE TRANSACTIONS 1,170,184 2,000,175 NET PROCEEDS FROM SALES OF SHARES REINVESTMENT OF DISTRIBUTIONS 873,417 871,972 COST OF SHARES REDEEMED (1,403,710) (3,290,756) NET INCREASE (DECREASE) IN NET ASSETS RESULTING 639,891 (418,609) FROM SHARE TRANSACTIONS TOTAL INCREASE (DECREASE) IN NET ASSETS 1,069,617 1,192,213 NET ASSETS BEGINNING OF PERIOD 11,865,888 10,673,675 END OF PERIOD (INCLUDING UNDISTRIBUTED NET INVESTMENT $ 12,935,505 $ 11,865,888 INCOME OF $5,921 AND $21,392, RESPECTIVELY) OTHER INFORMATION SHARES SOLD 61,869 114,774 ISSUED IN REINVESTMENT OF DISTRIBUTIONS 48,076 51,553 REDEEMED (73,819) (189,437) NET INCREASE (DECREASE) 36,126 (23,110)
FINANCIAL HIGHLIGHTS SIX MONTHS ENDED YEARS ENDED SEPTEMBER 30, MARCH 31, 1998 1997 1996 1995 1994 1993
SELECTED PER-SHARE DATA NET ASSET VALUE, $ 19.01 $ 16.49 $ 15.47 $ 14.58 $ 14.97 $ 13.50 BEGINNING OF PERIOD INCOME FROM INVESTMENT OPERATIONS NET INVESTMENT INCOME .30 D .59 D .62 .49 .34 .52 NET REALIZED AND 1.72 3.35 .96 .93 .21 2.01 UNREALIZED GAIN (LOSS) TOTAL FROM INVESTMENT 2.02 3.94 1.58 1.42 .55 2.53 OPERATIONS LESS DISTRIBUTIONS FROM NET INVESTMENT (.33) (.67) (.56) (.44) (.44) (.87) INCOME FROM NET REALIZED GAIN (1.11) (.75) - - (.45) (.19) IN EXCESS OF NET - - - (.09) (.05) - REALIZED GAIN TOTAL DISTRIBUTIONS (1.44) (1.42) (.56) (.53) (.94) (1.06) NET ASSET VALUE, $ 19.59 $ 19.01 $ 16.49 $ 15.47 $ 14.58 $ 14.97 END OF PERIOD TOTAL RETURN B, C 11.28% 25.15% 10.37% 10.09% 3.60% 19.71% RATIOS AND SUPPLEMENTAL DATA NET ASSETS, END OF $ 12,936 $ 11,866 $ 10,674 $ 11,084 $ 11,792 $ 7,266 PERIOD (IN MILLIONS) RATIO OF EXPENSES TO .77% A .79% .95% .97% 1.04% 1.09% AVERAGE NET ASSETS RATIO OF EXPENSES TO .76% A, E .78% E .93% E .97% 1.04% 1.09% AVERAGE NET ASSETS AFTER EXPENSE REDUCTIONS RATIO OF NET INVESTMENT 3.19% A 3.39% 3.64% 4.27% 3.63% 4.28% INCOME TO AVERAGE NET ASSETS PORTFOLIO TURNOVER RATE 78% A 79% 131% 137% 109% 98% AVERAGE COMMISSION $ .0462 $ .0069 $ .0045 RATE F
ANNUALIZED TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED. 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). NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES (SEE NOTE 6 OF NOTES TO FINANCIAL STATEMENTS). FOR FISCAL YEARS BEGINNING ON OR AFTER SEPTEMBER 1, 1995, A FUND IS REQUIRED TO DISCLOSE ITS AVERAGE COMMISSION RATE PER SHARE FOR SECURITY TRADES ON WHICH COMMISSIONS ARE CHARGED. THIS AMOUNT MAY VARY FROM PERIOD TO PERIOD AND FUND TO FUND DEPENDING ON THE MIX OF TRADES EXECUTED IN VARIOUS MARKETS WHERE TRADING PRACTICES AND COMMISSION RATE STRUCTURES MAY DIFFER. NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD ENDED MARCH 31, 1998 1. SIGNIFICANT ACCOUNTING POLICIES. Fidelity Asset Manager (the fund) is a fund of Fidelity Charles Street Trust (the trust) and is authorized to issue an unlimited number of shares. The trust is registered under the Investment Company Act of 1940, as amended (the 1940 Act), as an open-end management investment company organized as a Massachusetts business trust. The financial statements have been prepared in conformity with generally accepted accounting principles which require management to make certain estimates and assumptions at the date of the financial statements. The following summarizes the significant accounting policies of the fund: SECURITY VALUATION. Equity securities for which quotations are readily available are valued at the last sale price, or if no sale price, at the closing bid price. Debt securities for which quotations are readily available are valued by a pricing service at their market values as determined by their most recent bid prices in the principal market (sales prices if the principal market is an exchange) in which such securities are normally traded. Securities (including restricted securities) for which market quotations are not readily available are valued at their fair value as determined in good faith under consistently applied procedures under the general supervision of the Board of Trustees. Short-term securities with remaining maturities of sixty days or less for which quotations are not readily available are valued at amortized cost or original cost plus accrued interest, both of which approximate current value. FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing rates of exchange at period end. Purchases and sales of securities, income receipts and expense payments are translated into U.S. dollars at the prevailing exchange rate on the respective dates of the transactions. Net realized gains and losses on foreign currency transactions represent net gains and losses from sales and maturities of foreign currency contracts, disposition of foreign currencies, the difference between the amount of net investment income accrued and the U.S. dollar amount actually received, and gains and losses between trade date and settlement on purchases and sales of securities. The effects of changes in foreign currency exchange rates on investments in securities are included with the net realized and unrealized gain or loss on investment securities. INCOME TAXES. As a qualified regulated investment company under Subchapter M of the Internal Revenue Code, the fund is not subject to income taxes to the extent that it distributes substantially all of its taxable income for its fiscal year. The schedule of investments includes information regarding income taxes under the caption "Income Tax Information." 1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED INVESTMENT INCOME. Dividend income is recorded on the ex-dividend date, except certain dividends from foreign securities where the ex-dividend date may have passed, are recorded as soon as the fund is informed of the ex-dividend date. Non-cash dividends included in dividend income, if any, are recorded at the fair market value of the securities received. Interest income, which includes accretion of original issue discount, is accrued as earned. Investment income is recorded net of foreign taxes withheld where recovery of such taxes is uncertain. EXPENSES. Most expenses of the trust can be directly attributed to a fund. Expenses which cannot be directly attributed are apportioned among the funds in the trust. DISTRIBUTIONS TO SHAREHOLDERS. Distributions are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences, which may result in distribution reclassifications, are primarily due to differing treatments for paydown gains/losses on certain securities, foreign currency transactions, passive foreign investment companies (PFIC), market discount, non-taxable dividends and losses deferred due to wash sales. The fund also utilized earnings and profits distributed to shareholders on redemption of shares as a part of the dividends paid deduction for income tax purposes. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to paid in capital. Undistributed net investment income and accumulated undistributed net realized gain (loss) on investments and foreign currency transactions may include temporary book and tax basis differences which will reverse in a subsequent period. Any taxable income or gain remaining at fiscal year end is distributed in the following year. SECURITY TRANSACTIONS. Security transactions are accounted for as of trade date. Gains and losses on securities sold are determined on the basis of identified cost. 2. OPERATING POLICIES. FOREIGN CURRENCY CONTRACTS. The fund generally uses foreign currency contracts to facilitate transactions in foreign-denominated securities. Losses may arise from changes in the value of the foreign currency or if the counterparties do not perform under the contracts' terms. The U.S. dollar value of foreign currency contracts is determined using contractual currency exchange rates established at the time of each trade. JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the Securities and Exchange Commission (the SEC), the fund, along with other affiliated entities of Fidelity Management & Research Company (FMR), may transfer uninvested cash balances into one or more joint trading accounts. These balances 2. OPERATING POLICIES - CONTINUED JOINT TRADING ACCOUNT - CONTINUED are invested in one or more repurchase agreements 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. TAXABLE CENTRAL CASH FUND. Pursuant to an Exemptive Order issued by the SEC, the fund may invest in the Taxable Central Cash Fund (the Cash Fund) managed by Fidelity Investments Money Management, Inc., (formerly FMR Texas, Inc.) an affiliate of FMR. The Cash Fund is an open-end money market fund available only to investment companies and other accounts managed by FMR and its affiliates. The Cash Fund seeks preservation of capital, liquidity, and current income by investing in U.S. Treasury securities and repurchase agreements for these securities. Income distributions from the Cash Fund are declared daily and paid monthly from net interest income. Income distributions earned by the fund are recorded as interest income in the accompanying financial statements. DELAYED DELIVERY TRANSACTIONS. The fund may purchase or sell securities on a delayed delivery basis. Payment and delivery may take place a month or more after the date of the transaction. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. The market values of the securities purchased or sold on a delayed delivery basis are identified as such in the fund's schedule of investments. The fund may receive compensation for interest forgone in the purchase of a delayed delivery security. With respect to purchase commitments, the fund identifies securities as segregated in its custodial records with a value at least equal to the amount of the commitment. Losses may arise due to changes in the market value of the underlying securities or if the counterparty does not perform under the contract. WHEN-ISSUED SECURITIES. The fund may purchase or sell securities on a when-issued basis. Payment and delivery may take place a month or more after the date of the transaction. The price of the underlying securities is fixed at the time the transaction is negotiated. The market values of the securities purchased on a when-issued or forward commitment basis are identified as such in the fund's schedule of investments. The fund may receive compensation for interest forgone in the purchase of a when-issued security. With respect to purchase commitments, the fund identifies securities 2. OPERATING POLICIES - CONTINUED WHEN-ISSUED SECURITIES - CONTINUED as segregated in its custodial records with a value at least equal to the amount of the commitment. The payables and receivables associated with the purchases and sales of when-issued securities having the same settlement date and broker are offset. When-issued securities that have been purchased from and sold to different brokers are reflected as both payables and receivables in the statement of assets and liabilities under the caption "Delayed delivery." Losses may arise due to changes in the market value of the underlying securities, if the counterparty does not perform under the contract, or if the issuer does not issue the securities due to political, economic, or other factors. RESTRICTED SECURITIES. The fund is permitted to invest in securities that are subject to legal or contractual restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are registered. Disposal of these securities may involve time-consuming negotiations and expense, and prompt sale at an acceptable price may be difficult. At the end of the period, restricted securities (excluding 144A issues) amounted to $50,150,000 or 0.4% of net assets. 3. PURCHASES AND SALES OF INVESTMENTS. Purchases and sales of securities, other than short-term securities, aggregated $4,555,890,000 and $4,294,347,000, respectively, of which U.S. government and government agency obligations aggregated $2,626,339,000 and $2,250,280,000, respectively. 4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES. MANAGEMENT FEE. As the fund's investment adviser, FMR receives a monthly fee that is calculated on the basis of a group fee rate plus a fixed individual fund fee rate applied to the average net assets of the fund. The group fee rate is the weighted average of a series of rates and is based on the monthly average net assets of all the mutual funds advised by FMR. The rates ranged from .2500% to .5200% for the period. The annual individual fund fee rate is .25%. 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. For the period, the management fee was equivalent to an annualized rate of .55% of average net assets. TRANSFER AGENT FEES. Fidelity Service Company, Inc. (FSC), an affiliate of FMR, is the fund's transfer, dividend disbursing and shareholder servicing agent. FSC receives account fees and asset-based fees that vary according to 4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED TRANSFER AGENT FEES - CONTINUED account size and type of account. FSC 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 .21% of average net assets. ACCOUNTING AND SECURITY LENDING FEES. FSC maintains the fund's accounting records and administers the security lending program. The security lending fee is based on the number and duration of lending transactions. The accounting fee is based on the level of average net assets for the month plus out-of-pocket expenses. BROKERAGE COMMISSIONS. The fund placed a portion of its portfolio transactions with brokerage firms which are affiliates of FMR. The commissions paid to these affiliated firms were $249,000 for the period. 5. SECURITY LENDING. The fund loaned securities to certain brokers who paid the fund negotiated lenders' fees. These fees are included in interest income. The fund receives U.S. Treasury obligations and/or cash as collateral against the loaned securities, in an amount at least equal to 102% of the market value of the loaned securities at the inception of each loan. This collateral must be maintained at not less than 100% of the market value of the loaned securities during the period of the loan. At period end, the value of the securities loaned and the value of collateral amounted to $111,565,000 and $114,980,000, respectively. 6. EXPENSE REDUCTIONS. FMR has directed certain portfolio trades to brokers who paid a portion of the fund's expenses. For the period, the fund's expenses were reduced by $348,000 under this arrangement. In addition, the fund has entered into arrangements with its custodian and transfer agent whereby credits realized as a result of uninvested cash balances were used to reduce a portion of the fund's expenses. During the period, the fund's custodian and transfer agent fees were reduced by $1,000 and $341,000, respectively, under these arrangements. REPORT OF INDEPENDENT ACCOUNTANTS To the Trustees of Fidelity Charles Street Trust and the Shareholders of Fidelity Asset Manager: 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 Fidelity Asset Manager (a fund of Fidelity Charles Street Trust) at March 31, 1998, the results of its operations for the six months then ended, and the changes in its net assets and the financial highlights for the periods indicated, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fidelity Asset Manager'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 March 31, 1998 by correspondence with the custodian and the application of alternative auditing procedures where securities purchased were not yet received by the custodian, provide a reasonable basis for the opinion expressed above. Price Waterhouse LLP Boston, Massachusetts May 7, 1998 MANAGING YOUR INVESTMENTS Fidelity offers several ways to conveniently manage your personal investments via your telephone or PC. You can access your account information, conduct trades and research your investments 24 hours a day. BY PHONE Fidelity TouchTone Xpressprovides a single toll-free number to access account balances, positions, quotes and trading. It's easy to navigate the service, and on your first call, the system will help you create a personal identification number (PIN) for security. SM (PHONE_GRAPHIC)TOUCHTONE XPRESS 1-800-544-5555 PRESS For mutual fund and brokerage trading. For quotes.* For account balances and holdings. To review orders and mutual fund activity. To change your PIN. To speak to a Fidelity representative. 0 * BY PC Fidelity's Web site on the Internet provides a wide range of information, including daily financial news, fund performance, interactive planning tools and news about Fidelity products and services. (PHONE_GRAPHIC)FIDELITY'S WEB SITE WWW.FIDELITY.COM If you are not currently on the Internet, call Fidelity at 1-800-544-7272 for significant savings on Web access from internetMCI. SM (PHONE_GRAPHIC) FIDELITY ON-LINE XPRESS+ TM Fidelity On-line Xpress+ software for Windows combines comprehensive portfolio management capabilities, securities trading and access to research and analysis tools . . . all on your desktop. Call Fidelity at 1-800-544-7272 or visit our Web site for more information on how to manage your investments via your PC. * WHEN YOU CALL THE QUOTES LINE, PLEASE REMEMBER THAT A FUND'S YIELD AND RETURN WILL VARY AND, EXCEPT FOR MONEY MARKET FUNDS, SHARE PRICE WILL ALSO VARY. THIS MEANS THAT YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. THERE IS NO ASSURANCE THAT MONEY MARKET FUNDS WILL BE ABLE TO MAINTAIN A STABLE $1 SHARE PRICE; AN INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT. TOTAL RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE, REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS, AND THE EFFECTS OF ANY SALES CHARGES. TO VISIT FIDELITY For directions and hours, please call 1-800-544-9797. ARIZONA 7373 N. Scottsdale Road Scottsdale, AZ CALIFORNIA 815 East Birch Street Brea, CA 851 East Hamilton Avenue Campbell, CA 527 North Brand Boulevard Glendale, CA 19100 Von Karman Avenue Irvine, CA 10100 Santa Monica Blvd. Los Angeles, CA 251 University Avenue Palo Alto, CA 1760 Challenge Way Sacramento, CA 7676 Hazard Center Drive San Diego, CA 455 Market Street San Francisco, CA 950 Northgate Drive San Rafael, CA 1400 Civic Drive Walnut Creek, CA 6300 Canoga Avenue Woodland Hills, CA COLORADO 1625 Broadway Denver, CO CONNECTICUT 48 West Putnam Avenue Greenwich, CT 265 Church Street New Haven, CT 300 Atlantic Street Stamford, CT 29 South Main Street West Hartford, CT DELAWARE 222 Delaware Avenue Wilmington, DE FLORIDA 4400 N. Federal Highway Boca Raton, FL 90 Alhambra Plaza Coral Gables, FL 4090 N. Ocean Boulevard Ft. Lauderdale, FL 1907 West State Road 434 Longwood, FL 4001 Tamiami Trail, North Naples, FL 2401 PGA Boulevard Palm Beach Gardens, FL 8065 Beneva Road Sarasota, FL 1502 N. Westshore Blvd. Tampa, FL GEORGIA 3445 Peachtree Road, N.E. Atlanta, GA 1000 Abernathy Road Atlanta, GA HAWAII 700 Bishop Street Honolulu, HI ILLINOIS One North Franklin Street Chicago, IL 1415 West 22nd Street Oak Brook, IL 1700 East Golf Road Schaumburg, IL 3232 Lake Avenue Wilmette, IL INDIANA 4729 East 82nd Street Indianapolis, IN MAINE 3 Canal Plaza Portland, ME MARYLAND 7401 Wisconsin Avenue Bethesda, MD 1 West Pennsylvania Ave. Towson, MD MASSACHUSETTS 470 Boylston Street Boston, MA 155 Congress Street Boston, MA 25 State Street Boston, MA 300 Granite Street Braintree, MA 44 Mall Road Burlington, MA 416 Belmont Street Worcester, MA MICHIGAN 280 North Woodward Ave. Birmingham, MI 29155 Northwestern Hwy. Southfield, MI MINNESOTA 7600 France Avenue South Edina, MN MISSOURI 700 West 47th Street Kansas City, MO 8885 Ladue Road Ladue, MO 200 North Broadway St. Louis, MO NEW JERSEY 150 Essex Street Millburn, NJ 56 South Street Morristown, NJ 501 Route 17, South Paramus, NJ NEW YORK 1055 Franklin Avenue Garden City, NY 999 Walt Whitman Road Melville, L.I., NY 1271 Avenue of the Americas New York, NY 71 Broadway New York, NY 350 Park Avenue New York, NY NORTH CAROLINA 4611 Sharon Road Charlotte, NC 2200 West Main Street Durham, NC OHIO 600 Vine Street Cincinnati, OH 28699 Chagrin Boulevard Woodmere Village, OH OREGON 16850 SW 72 Avenue Tigard, OR PENNSYLVANIA 1735 Market Street Philadelphia, PA 439 Fifth Avenue Pittsburgh, PA TENNESSEE 6150 Poplar Road Memphis, TN TEXAS 10000 Research Boulevard Austin, TX 4017 Northwest Parkway Dallas, TX 1155 Dairy Ashford Street Houston, TX 2701 Drexel Drive Houston, TX 400 East Las Colinas Blvd. Irving, TX 14100 San Pedro San Antonio, TX 19740 IH 45 North Spring, TX UTAH 215 South State Street Salt Lake City, UT VIRGINIA 8180 Greensboro Drive McLean, VA WASHINGTON 411 108th Avenue, N.E. Bellevue, WA 511 Pine Street Seattle, WA WASHINGTON, DC 1900 K Street, N.W. Washington, DC WISCONSIN 595 North Barker Road Brookfield, WI TO WRITE FIDELITY If more than one address is listed, please locate the address that is closest to you. We'll give your correspondence immediate attention and send you written confirmation upon completion of your request. (LETTER_GRAPHIC)MAKING CHANGES TO YOUR ACCOUNT (such as changing name, address, bank, etc.) Fidelity Investments P.O. Box 770001 Cincinnati, OH 45277-0002 (LETTER_GRAPHIC)FOR NON-RETIREMENT ACCOUNTS BUYING SHARES Fidelity Investments P.O. Box 770001 Cincinnati, OH 45277-0003 OVERNIGHT EXPRESS Fidelity Investments 2300 Litton Lane - KH1A Hebron, KY 41048 SELLING SHARES Fidelity Investments P.O. Box 660602 Dallas, TX 75266-0602 OVERNIGHT EXPRESS Fidelity Investments Attn: Redemptions - CP6I 400 East Las Colinas Blvd. Irving, TX 75309-5517 GENERAL CORRESPONDENCE Fidelity Investments P.O. Box 500 Merrimack, NH 03054-0500 (LETTER_GRAPHIC)FOR RETIREMENT ACCOUNTS BUYING SHARES Fidelity Investments P.O. Box 770001 Cincinnati, OH 45277-0003 SELLING SHARES Fidelity Investments P.O. Box 660602 Dallas, TX 75266-0602 OVERNIGHT EXPRESS Fidelity Investments Attn: Redemptions - CP6R 400 East Las Colinas Blvd. Irving, TX 75309-5517 GENERAL CORRESPONDENCE Fidelity Investments P.O. Box 500 Merrimack, NH 03054-0500 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 Robert C. Pozen, Senior Vice President Robert A. Lawrence, Vice President Richard C. Habermann, Vice President Thomas Sprague, Vice President Charles S. Morrison, Vice President John Todd, Vice President Eric D. Roiter, Secretary Richard A. Silver, Treasurer John H. Costello, Assistant Treasurer Leonard M. Rush, Assistant Treasurer BOARD OF TRUSTEES Ralph F. Cox * Phyllis Burke Davis * Robert M. Gates * Edward C. Johnson 3d E. Bradley Jones * Donald J. Kirk * Peter S. Lynch Marvin L. Mann * William O. McCoy * Gerald C. McDonough * Robert C. Pozen Thomas R. Williams * ADVISORY BOARD J. Gary Burkhead * INDEPENDENT TRUSTEES GENERAL DISTRIBUTOR Fidelity Distributors Corporation Boston, MA TRANSFER AND SHAREHOLDER SERVICING AGENT Fidelity Service Company, Inc. Boston, MA CUSTODIAN The Chase Manhattan Bank New York, NY FIDELITY'S ASSET ALLOCATION FUNDS Asset Manager SM Asset Manager: Growth SM Asset Manager: Income SM Fidelity Freedom Funds- Income, 2000, 2010, 2020, 2030 SM THE FIDELITY TELEPHONE CONNECTION MUTUAL FUND 24-HOUR SERVICE Exchanges/Redemptions 1-800-544-7777 Account Assistance 1-800-544-6666 Product Information 1-800-544-8888 Retirement Accounts 1-800-544-4774 (8 a.m. - 9 p.m.) TDD Service 1-800-544-0118 for the deaf and hearing impaired (9 a.m. - 9 p.m. Eastern time) (registered trademark) TouchTone Xpress 1-800-544-5555 SM AUTOMATED LINE FOR QUICKEST SERVICE (2_FIDELITY_LOGOS)FIDELITY SHORT-INTERMEDIATE GOVERNMENT FUND SEMIANNUAL REPORT MARCH 31, 1998 CONTENTS PRESIDENT'S MESSAGE 3 NED JOHNSON ON INVESTING STRATEGIES. PERFORMANCE 4 HOW THE FUND HAS DONE OVER TIME. FUND TALK 7 THE MANAGER'S REVIEW OF FUND PERFORMANCE, STRATEGY AND OUTLOOK. INVESTMENT CHANGES 10 A SUMMARY OF MAJOR SHIFTS IN THE FUND'S INVESTMENTS OVER THE PAST SIX MONTHS. INVESTMENTS 11 A COMPLETE LIST OF THE FUND'S INVESTMENTS WITH THEIR MARKET VALUES. FINANCIAL STATEMENTS 13 STATEMENTS OF ASSETS AND LIABILITIES, OPERATIONS, AND CHANGES IN NET ASSETS, AS WELL AS FINANCIAL HIGHLIGHTS. NOTES 17 NOTES TO THE FINANCIAL STATEMENTS. THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS. MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED. NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK. FOR MORE INFORMATION ON ANY FIDELITY FUND, INCLUDING CHARGES AND EXPENSES, CALL 1-800-544-8888 FOR A FREE PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY. To reduce expenses and demonstrate respect for our environment, we have initiated a project through which we will begin eliminating duplicate copies of most financial reports and prospectuses to most households, even if they have more than one account in the fund. If additional copies of financial reports, prospectuses or historical account information are needed, please call 1-800-544-6666. PRESIDENT'S MESSAGE (PHOTO_OF_EDWARD_C_JOHNSON_3D)DEAR SHAREHOLDER: In the first quarter of 1998, the U.S. stock and bond markets responded differently to lingering uncertainty over the direction of the U.S. and global economies. On the one hand, the U.S. stock market soared to record heights as corporate earnings proved to be stronger than expected and investors shrugged off concerns about the effects of economic difficulties in Asia. On the other hand, two factors tempered returns in the bond market. First, interest-rate levels were generally positive, but were low enough to encourage a flood of new issuance that dampened performance. Second, there were concerns that continued economic strength might lead to eventual inflation, even though inflation indicators remained benign during the quarter. While it's impossible to predict the future direction of the markets with any degree of certainty, there are certain basic principles that can help investors plan for their future needs. The longer your investment time frame, the less likely it is that you will be affected by short-term market volatility. A 10-year investment horizon appropriate for saving for a college education, for example, enables you to weather market cycles in a long-term fund, which may have a higher risk potential, but also has a higher potential rate of return. An intermediate-length fund could make sense if your investment horizon is two to four years, while a short-term bond fund could be the right choice if you need your money in one or two years. If your time horizon is less than a year, you might want to consider moving some of your bond investment into a money market fund. These funds seek income and a stable share price by investing in high-quality, short-term investments. Of course, it's important to remember that there is no assurance that a money market fund will achieve its goal of maintaining a stable net asset value of $1.00 per share, and that these types of funds are neither insured nor guaranteed by any agency of the U.S. government. Finally, no matter what your time horizon or portfolio diversity, it makes good sense to follow a regular investment plan, investing a certain amount of money in a fund at the same time each month or quarter and periodically reviewing your overall portfolio. By doing so, you won't get caught up in the excitement of a rapidly rising market, nor will you buy all your shares at market highs. While this strategy - known as dollar cost averaging - won't assure a profit or protect you from a loss in a declining market, it should help you lower the average cost of your purchases. If you have questions, please call us at 1-800-544-8888. We are available 24 hours a day, seven days a week to provide you the information you need to make the investments that are right for you. Best regards, Edward C. Johnson 3d PERFORMANCE: THE BOTTOM LINE 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). You can also look at the fund's income, as reflected in the fund's yield, to measure performance. If Fidelity had not reimbursed certain fund expenses, the past five years and the life of fund total returns would have been lower. CUMULATIVE TOTAL RETURNS PERIODS ENDED MARCH 31, 1998 PAST 6 PAST 1 PAST 5 LIFE OF MONTHS YEAR YEARS FUND FIDELITY SHORT-INTERMEDIATE GOVERNMENT 3.20% 7.87% 27.25% 42.30% LB 1-5 U.S. GOVERNMENT BOND 3.39% 8.32% 31.75% N/A SB TREAS/AGENCY 1-5 YEAR 3.43% 8.29% 31.78% N/A SHORT-INTERMEDIATE U.S. GOVERNMENT 3.13% 7.95% 28.00% N/A FUNDS AVERAGE CUMULATIVE TOTAL RETURNS show the fund's performance in percentage terms over a set period - in this case, six months, one year, five years or since the fund started on September 13, 1991. For example, if you had invested $1,000 in a fund that had a 5% return over the past year, the value of your investment would be $1,050. You can compare the fund's returns to the performance of the Lehman Brothers 1-5 Year U.S. Government Bond Index - a market value weighted performance benchmark for government fixed-rate debt issues with maturities between one and five years and the Salomon Brothers Treasury/Agency 1-5 Year Index - a market value weighted index of U.S. Treasury and U.S. Government agency securities with fixed-rate coupons and weighted average lives between one and five years. To measure how the fund stacked up against its peers, you can compare it to the short-intermediate U.S. government funds average, which reflects the performance of mutual funds with similar objectives tracked by Lipper Analytical Services, Inc. The past six months average represents a peer group of 100 mutual funds. These benchmarks include reinvested dividends and capital gains, if any, and exclude the effect of sales charges. AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED MARCH 31, 1998 PAST 1 PAST 5 LIFE OF YEAR YEARS FUND FIDELITY SHORT-INTERMEDIATE GOVERNMENT 7.87% 4.94% 5.53% LB 1-5 U.S. GOVERNMENT BOND 8.32% 5.67% N/A SB TREAS/AGENCY 1-5 YEAR 8.29% 5.67% N/A SHORT-INTERMEDIATE U.S. GOVERNMENT 7.95% 5.05% N/A FUNDS AVERAGE AVERAGE ANNUAL TOTAL 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. (Note: Lipper calculates average annual total returns by annualizing each fund's total return, then taking an arithmetic average. This may produce a slightly different figure than that obtained by averaging the cumulative total returns and annualizing the result.) $10,000 OVER LIFE OF FUND Short-Intermediate Govt. LB 1-5 Year U.S. Govt 00464 LB069 1991/09/30 10000.00 10000.00 1991/10/31 10124.47 10116.21 1991/11/30 10206.40 10230.40 1991/12/31 10363.10 10424.16 1992/01/31 10270.73 10373.36 1992/02/29 10301.41 10400.56 1992/03/31 10286.46 10376.96 1992/04/30 10374.47 10477.88 1992/05/31 10511.20 10606.46 1992/06/30 10602.19 10742.90 1992/07/31 10620.67 10908.11 1992/08/31 10766.62 11016.23 1992/09/30 10813.25 11147.05 1992/10/31 10714.24 11038.93 1992/11/30 10721.93 11002.29 1992/12/31 10851.32 11123.90 1993/01/31 11000.33 11297.65 1993/02/28 11099.58 11429.82 1993/03/31 11141.22 11469.61 1993/04/30 11190.03 11555.70 1993/05/31 11192.99 11518.61 1993/06/30 11276.42 11640.89 1993/07/31 11314.31 11662.02 1993/08/31 11364.67 11800.04 1993/09/30 11382.56 11838.47 1993/10/31 11391.68 11867.25 1993/11/30 11374.03 11842.07 1993/12/31 11424.48 11889.05 1994/01/31 11516.80 11986.60 1994/02/28 11419.40 11867.25 1994/03/31 11219.00 11751.26 1994/04/30 11165.11 11683.38 1994/05/31 11169.90 11695.74 1994/06/30 11175.51 11713.50 1994/07/31 11292.35 11842.07 1994/08/31 11315.67 11878.93 1994/09/30 11247.75 11815.55 1994/10/31 11255.23 11830.38 1994/11/30 11211.34 11771.26 1994/12/31 11267.16 11797.11 1995/01/31 11430.33 11976.26 1995/02/28 11611.08 12179.01 1995/03/31 11673.28 12246.67 1995/04/30 11797.39 12372.55 1995/05/31 12051.10 12655.77 1995/06/30 12114.07 12729.50 1995/07/31 12143.32 12758.95 1995/08/31 12210.19 12847.06 1995/09/30 12277.38 12918.99 1995/10/31 12383.41 13042.84 1995/11/30 12503.72 13178.16 1995/12/31 12603.00 13290.78 1996/01/31 12715.55 13409.91 1996/02/29 12636.33 13319.32 1996/03/31 12585.83 13279.31 1996/04/30 12564.15 13268.52 1996/05/31 12563.92 13277.51 1996/06/30 12650.02 13392.38 1996/07/31 12698.67 13440.48 1996/08/31 12733.63 13474.42 1996/09/30 12851.01 13620.75 1996/10/31 13025.35 13807.54 1996/11/30 13146.05 13936.34 1996/12/31 13114.89 13902.18 1997/01/31 13166.72 13965.11 1997/02/28 13200.86 13991.64 1997/03/31 13142.47 13949.60 1997/04/30 13254.65 14083.80 1997/05/31 13341.05 14185.40 1997/06/30 13439.43 14294.87 1997/07/31 13624.99 14500.54 1997/08/31 13622.68 14483.91 1997/09/30 13737.33 14615.63 1997/10/31 13851.70 14752.29 1997/11/30 13885.72 14781.29 1997/12/31 13981.27 14891.21 1998/01/31 14136.15 15062.04 1998/02/28 14137.61 15059.34 1998/03/31 14176.84 15110.82 IMATRL PRASUN SHR__CHT 19980331 19980408 122532 R00000000000081 $10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was invested in Fidelity Short-Intermediate Government Fund on September 30, 1991, shortly after the fund started. As the chart shows, by March 31, 1998, the value of the investment would have grown to $14,177 - a 41.77% increase on the initial investment. For comparison, look at how the Lehman Brothers 1-5 Year U.S. Government Bond Index did over the same period. With dividends and capital gains, if any, reinvested, the same $10,000 investment would have grown to $15,111 - a 51.11% increase. Beginning with this report, the fund will compare its performance to that of the Lehman Brothers 1-5 Year U.S. Government Bond Index rather than the Salomon Brothers Treasury/Agency 1-5 Year Index. The indexes include the same type of bonds, and their performance is not materially different. The fund is changing to the Lehman Brothers index mainly because Lehman Brothers indexes are used by most other Fidelity bond funds. For comparison, both indexes are shown on page 4. 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) TOTAL RETURN COMPONENTS SIX MONTHS YEARS ENDED SEPTEMBER 30, ENDED MARCH 31, 1998 1997 1996 1995 1994 1993 DIVIDEND RETURN 2.88% 6.36% 6.46% 7.00% 5.55% 6.34% CAPITAL RETURN 0.32% 0.54% -1.79% 2.15% -6.73% -1.08% TOTAL RETURN 3.20% 6.90% 4.67% 9.15% -1.18% 5.26% TOTAL RETURN COMPONENTS include both dividend returns and capital returns. A dividend return reflects the actual dividends paid by the fund. A capital return reflects both the amount paid by the fund to shareholders as capital gain distributions and changes in the fund's share price. Both returns assume the dividends or capital gains paid by the fund, if any, are reinvested. DIVIDENDS AND YIELD PERIODS ENDED MARCH 31, 1998 PAST 1 PAST 6 PAST 1 MONTH MONTHS YEAR DIVIDENDS PER SHARE 4.61(CENTS) 26.69(CENTS) 56.04(CENTS) ANNUALIZED DIVIDEND RATE 5.77% 5.69% 5.99% 30-DAY ANNUALIZED YIELD 5.61% - - DIVIDENDS per share show the income paid by the fund for a set period. If you annualize this number, based on an average share price of $9.41 over the past one month, $9.41 over the past six months and $9.36 over the past one year, you can compare the fund's income over these three periods. The 30-day annualized YIELD is a standard formula for all funds based on the yields of the bonds in the fund, averaged over the past 30 days. This figure shows you the yield characteristics of the fund's investments at the end of the period. It also helps you compare funds from different companies on an equal basis. FUND TALK: THE MANAGER'S OVERVIEW MARKET RECAP A continued lack of inflationary pressure resulted in a relatively favorable investing climate for bonds during the six months that ended March 31, 1998. The Lehman Brothers Aggregate Bond Index - a broad gauge of the U.S. taxable investment-grade bond market - returned 4.54% during this period. Global volatility and historically low interest rates were the main stories in the last quarter of 1997. Financial problems in Asia came to a head in October, resulting in a "flight to quality." Wary stock investors sought investments offering lower volatility, helping the U.S. bond market - especially U.S. Treasuries - surge. The Lehman Brothers Corporate Bond Index returned 4.49% for the six-month period. Corporate bonds benefited from continued economic growth and demand for yield, although they faltered somewhat in January 1998. Investors feared a slowdown in demand in Asia would eat into corporate earnings. In spite of record new issuance in February 1998, corporates rebounded due in part to increased demand on the part of yield-hungry investors. Mortgage-backed bonds performed well during the period, even though lower interest rates resulted in more mortgage prepayment activity. The Lehman Brothers Mortgage-Backed Securities Index generated a six-month return of 4.04%. High-yield and emerging-market issues performed very well throughout the first quarter of 1998. An interview with Curt Hollingsworth, Portfolio Manager of Fidelity Short-Intermediate Government Fund Q. HOW DID THE FUND PERFORM, CURT? A. For the six-month period that ended March 31, 1998, the fund provided a total return of 3.20%. To get a sense of how the fund did compared to its competitors, the short-intermediate U.S. government funds average returned 3.13% for the same six-month period, according to Lipper Analytical Services. Additionally, the Lehman Brothers 1-5 Year U.S. Government Bond Index - which tracks the types of securities in which the fund invests - returned 3.39% for the six-month period. For the 12-month period that ended March 31, 1998, the fund had a total return of 7.87%. That performance compared to the short-intermediate U.S. government funds average's 7.95% return and the Lehman Brothers 1-5 Year U.S. Government Bond Index's 8.32% return. Q. HOW DID YOU ALLOCATE THE FUND'S INVESTMENTS DURING THE PAST SIX MONTHS? A. I continued to have a larger stake than the Lehman Brothers index in agency and mortgage securities, and maintained a smaller stake in Treasury securities. I did that because agency and mortgage securities generally offered an attractive amount of additional yield compared to Treasury securities. That was especially the case in the final months of 1997. During that timeframe, economic and currency problems in Asia prompted more investors to seek out U.S. Treasury securities, which are among the highest-quality securities in the world because they are backed by the full faith and credit of the U.S. government. As the demand for Treasuries grew, their yields fell and their prices rose. Agency securities, on the other hand, didn't rally as much, so their yield advantage over Treasuries grew and their prices looked relatively inexpensive, in my opinion. Given that, I added some additional agency holdings at year end. Q. HOW DID THE FUND'S ALLOCATION CHANGE IN 1998? A. In the beginning of 1998, agency prices strengthened and their yield advantage over Treasuries diminished. To take advantage of that strength, I sold some of the fund's agency holdings to lock in their gains in January and February. Agency securities looked inexpensive again in March and their yields once again became more attractive relative to Treasuries. So I once again bought more at the end of the period. With mortgages, I used periods of weakness and strength to buy and sell mortgage securities throughout the period in much the same fashion. Q. WITHIN THE AGENCY SECTOR, WHICH SECURITIES DID YOU FOCUS ON? A. I emphasized agency securities that are non-callable - those that can't be redeemed by their issuers before maturity. Securities typically are "called" - or redeemed - when interest rates fall enough so that the issuer can save money by issuing new securities at lower rates. A call is a positive for issuers because it gives them the opportunity to cut their borrowing costs. But holders of callable bonds are often at a disadvantage because they may have to reinvest the proceeds from the called bonds in new, lower-yielding bonds. I prefer non-callable securities because they generally perform better than callable bonds when interest rates fall and bond prices rally, and generally fare no worse than callable bonds when interest rates rise and bond prices fall. Q. WHAT'S YOUR OUTLOOK FOR THE BOND MARKET AND THE FUND? A. At the end of the period, bonds were selling at prices that reflected the best-case scenario - low inflation and falling interest rates. To illustrate, the yield on a Treasury security with a two-year maturity was virtually the same as the yield on very-short-maturity securities. To me, that suggests that many investors are expecting the Federal Reserve Board to lower interest rates. If the Fed surprises investors by hiking interest rates instead, bonds could suffer. But no matter what the direction of interest rates, I'll continue to manage the fund with approximately the same interest-rate sensitivity as the short-intermediate part of the government/agency market. 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. CURT HOLLINGSWORTH ON MORTGAGE-BACKED SECURITIES: "Mortgage securities are pools of individual home loans. Certificates backed by these loans are sold to investors, who collect interest and principal when homeowners make monthly mortgage payments. Recently, falling interest rates have incited a wave of home mortgage refinancings, subjecting some mortgage-backed securities to higher `prepayment risk' - the risk that mortgage holders will pay off their mortgages before maturity, leaving those who hold the prepaid securities to reinvest at lower interest rates. "The likelihood that a mortgage security will be prepaid is one of the most important factors I consider in choosing mortgage securities for the fund, because prepayment activity can dramatically affect mortgage securities' prices. I focus on finding those securities that I think are less susceptible to a pickup or slowdown in the pace of refinancings. For example, `seasoned' mortgage securities have been through several refinancing periods, but the mortgage holders haven't shown a propensity to prepay in spite of being presented several attractive opportunities to do so." FUND FACTS GOAL: high current income with preservation of capital FUND NUMBER: 464 TRADING SYMBOL: FLMGX START DATE: September 13, 1991 SIZE: as of March 31, 1998, more than $126 million MANAGER: Curt Hollingsworth, since 1991; manager, various Fidelity and Spartan government and mortgage funds; joined Fidelity in 1983 (checkmark) INVESTMENT CHANGES COUPON DISTRIBUTION AS OF MARCH 31, 1998 % OF FUND'S % OF FUND'S INVESTMENTS INVESTMENTS 6 MONTHS AGO LESS THAN 8.0 5.2 5% 5 - 22.2 8.4 5.99% 6 - 21.0 1.2 6.99% 7 - 6.9 24.9 7.99% 8 - 11.2 25.4 8.99% 9 - 15.3 17.8 9.99% 10% AND 14.0 17.1 OVER COUPON DISTRIBUTION SHOWS THE RANGE OF STATED INTEREST RATES ON THE FUND'S INVESTMENTS, EXCLUDING SHORT-TERM INVESTMENTS. AVERAGE YEARS TO MATURITY AS OF MARCH 31, 1998 6 MONTHS AGO YEARS 3.4 3.6 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. DURATION AS OF MARCH 31, 1998 6 MONTHS AGO YEARS 2.2 2.2 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. ASSET ALLOCATION (% OF FUND'S INVESTMENTS) AS OF MARCH 31, 1998 AS OF SEPTEMBER 30, 1997 ROW: 1, COL: 1, VALUE: 1.4 ROW: 1, COL: 2, VALUE: 34.3 ROW: 1, COL: 3, VALUE: 45.8 ROW: 1, COL: 4, VALUE: 18.5 MORTGAGE-BACKED SECURITIES 21.4% U.S. TREASURY OBLIGATIONS 31.4% U.S. GOVERNMENT AGENCY OBLIGATIONS 47.2% SHORT-TERM INVESTMENTS 0.0% MORTGAGE-BACKED SECURITIES 18.5% U.S. TREASURY OBLIGATIONS 45.8% U.S. GOVERNMENT AGENCY OBLIGATIONS 34.3% SHORT-TERM INVESTMENTS 1.4% ROW: 1, COL: 1, VALUE: 0.0 ROW: 1, COL: 2, VALUE: 47.2 ROW: 1, COL: 3, VALUE: 31.4 ROW: 1, COL: 4, VALUE: 21.4 INVESTMENTS MARCH 31, 1998 (UNAUDITED) SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENT IN SECURITIES U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - 80.1% PRINCIPAL VALUE AMOUNT (NOTE 1) U.S. TREASURY OBLIGATIONS - 45.8% 8%, 8/15/99 $ 8,000,000 $ 8,250,000 5 7/8%, 8/31/99 11,000,000 11,039,490 7 3/4%, 12/31/99 740,000 766,129 7 3/4%, 2/15/01 5,860,000 6,186,871 5 5/8%, 2/28/01 10,751,000 10,747,667 6 1/2%, 8/31/01 20,000,000 20,512,400 57,502,557 U.S. GOVERNMENT AGENCY OBLIGATIONS - 34.3% Financing Corp. stripped principal: 0%, 4/5/01 2,103,000 1,769,675 0%, 5/11/01 3,513,000 2,939,257 0%, 6/6/02 6,170,000 4,848,386 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 8,949,636 9,468,715 Class 2-E, 9.40%, 5/15/02 4,130,808 4,362,670 Class T-3, 9 5/8%, 5/15/02 4,031,274 4,255,776 Guaranteed Export Trust Certificates (assets of Trust guaranteed by U.S. Government through Export-Import Bank): Series 1994-A, 7.12%, 4/15/06 1,692,001 1,757,896 Series 1994-F, 8.187%, 12/15/04 5,381,859 5,713,893 Series 1995-A, 6.28%, 6/15/04 1,720,588 1,740,908 Series 1997-A, 6.104%, 7/15/03 2,291,667 2,297,396 Guaranteed Trade Trust Certificates (assets of Trust guaranteed by U.S. Government through Export-Import Bank) Series 1993-A, 4.86%, 4/1/98 500,000 500,000 Overseas Private Investment Corp. U.S. Government guaranteed participation certificate Series 1994-195, 6.08%, 8/15/04 1,171,200 1,174,011 Private Export Funding Corp. secured: 9 1/2%, 3/31/99 250,000 259,103 5.65%, 3/15/03 1,350,000 1,341,482 State of Israel (guaranteed by U.S. Government through Agency for International Development) 6.05%, 8/15/00 400,000 402,324 U.S. Department of Housing and Urban Development government guaranteed participation certificates Series 1996-A, 6.59%, 8/1/00 230,000 233,765 43,065,257 TOTAL U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS (Cost $100,490,080) 100,567,814 U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - 18.5% PRINCIPAL VALUE AMOUNT (NOTE 1) FREDDIE MAC - 3.8% 5 1/2%, 12/1/02 to 7/1/03 $ 4,843,454 $ 4,743,071 GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 14.7% 8 1/2%, 1/15/17 to 7/15/17 77,393 82,737 9 1/2%, 4/15/16 to 4/15/28 813,854 881,645 10%, 11/15/09 to 11/15/20 3,189,775 3,515,405 10 1/2%, 2/15/14 to 8/15/19 6,870,620 7,695,985 10 3/4%, 12/15/09 184,636 204,251 11%, 11/15/09 to 6/15/19 2,285,194 2,584,525 11 1/2%, 3/15/10 to 7/15/19 2,662,368 3,047,414 12%, 1/15/14 to 2/15/16 318,640 370,809 12 1/2%, 12/15/10 50,191 58,621 13%, 9/15/14 35,062 41,416 18,482,808 TOTAL U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES (Cost $22,942,289) 23,225,879 CASH EQUIVALENTS - 1.4% MATURITY AMOUNT Investments in repurchase agreements (U.S. Treasury Obligations) in a joint trading account at 5.92%, dated 3/31/98 due 4/1/98 $ 1,755,289 1,755,000 TOTAL INVESTMENT IN SECURITIES - 100% (Cost $125,187,369) $ 125,548,693 INCOME TAX INFORMATION At March 31, 1998, the aggregate cost of investment securities for income tax purposes was $125,187,369. Net unrealized appreciation aggregated $361,324, of which $774,741 related to appreciated investment securities and $413,417 related to depreciated investment securities. At September 30, 1997, the fund had a capital loss carryforward of approximately $10,974,000 of which $320,000, $1,404,000, $5,655,000, $2,404,000, and $1,191,000 will expire on September 30, 2001, 2002, 2003, 2004, and 2005, respectively. FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES
AMOUNTS IN THOUSANDS MARCH 31, 1998 (UNAUDITED) ASSETS INVESTMENT IN SECURITIES, AT VALUE (INCLUDING REPURCHASE $ 125,548,693 AGREEMENTS OF $1,755,000) (COST $125,187,369) - SEE ACCOMPANYING SCHEDULE CASH 402 RECEIVABLE FOR FUND SHARES SOLD 141,391 INTEREST RECEIVABLE 1,364,687 TOTAL ASSETS 127,055,173 LIABILITIES PAYABLE FOR INVESTMENTS PURCHASED $ 580,586 PAYABLE FOR FUND SHARES REDEEMED 156,828 DISTRIBUTIONS PAYABLE 81,250 ACCRUED MANAGEMENT FEE 45,721 OTHER PAYABLES AND ACCRUED EXPENSES 50,332 TOTAL LIABILITIES 914,717 NET ASSETS $ 126,140,456 NET ASSETS CONSIST OF: PAID IN CAPITAL $ 136,015,269 UNDISTRIBUTED NET INVESTMENT INCOME 64,492 ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) (10,300,629) ON INVESTMENTS NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 361,324 NET ASSETS, FOR 13,424,475 SHARES OUTSTANDING $ 126,140,456 NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER $9.40 SHARE ($126,140,456 (DIVIDED BY) 13,424,475 SHARES)
STATEMENT OF OPERATIONS
AMOUNTS IN THOUSANDS SIX MONTHS ENDED MARCH 31, 1998 (UNAUDITED) INVESTMENT INCOME $ 4,196,470 INTEREST EXPENSES MANAGEMENT FEE $ 272,170 TRANSFER AGENT FEES 141,406 ACCOUNTING FEES AND EXPENSES 30,521 NON-INTERESTED TRUSTEES' COMPENSATION 237 CUSTODIAN FEES AND EXPENSES 13,725 REGISTRATION FEES 17,258 AUDIT 17,111 LEGAL 5,125 MISCELLANEOUS 622 TOTAL EXPENSES 498,175 NET INVESTMENT INCOME 3,698,295 REALIZED AND UNREALIZED GAIN (LOSS) 729,035 NET REALIZED GAIN (LOSS) ON INVESTMENT SECURITIES CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON (563,980) INVESTMENT SECURITIES NET GAIN (LOSS) 165,055 NET INCREASE (DECREASE) IN NET ASSETS RESULTING $ 3,863,350 FROM OPERATIONS
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED MARCH 31, 1998 SEPTEMBER 30, (UNAUDITED) 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS $ 3,698,295 $ 7,884,065 NET INVESTMENT INCOME NET REALIZED GAIN (LOSS) 729,035 178,902 CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) (563,980) 135,665 NET INCREASE (DECREASE) IN NET ASSETS RESULTING 3,863,350 8,198,632 FROM OPERATIONS DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME (3,536,750) (7,517,929) SHARE TRANSACTIONS 28,652,055 51,261,094 NET PROCEEDS FROM SALES OF SHARES REINVESTMENT OF DISTRIBUTIONS 3,031,063 5,978,419 COST OF SHARES REDEEMED (26,007,576) (60,826,140) NET INCREASE (DECREASE) IN NET ASSETS RESULTING 5,675,542 (3,586,627) FROM SHARE TRANSACTIONS TOTAL INCREASE (DECREASE) IN NET ASSETS 6,002,142 (2,905,924) NET ASSETS BEGINNING OF PERIOD 120,138,314 123,044,238 END OF PERIOD (INCLUDING UNDISTRIBUTED NET INVESTMENT $ 126,140,456 $ 120,138,314 INCOME AND DISTRIBUTIONS IN EXCESS OF NET INVESTMENT INCOME OF $64,492 AND $97,053, RESPECTIVELY) OTHER INFORMATION SHARES SOLD 3,043,647 5,495,549 ISSUED IN REINVESTMENT OF DISTRIBUTIONS 322,117 639,858 REDEEMED (2,761,963) (6,514,225) NET INCREASE (DECREASE) 603,801 (378,818)
FINANCIAL HIGHLIGHTS SIX MONTHS ENDED YEARS ENDED SEPTEMBER 30, MARCH 31, 1998 (UNAUDITED) 1997 1996 1995 1994 1993
SELECTED PER-SHARE DATA NET ASSET VALUE, BEGINNING $ 9.370 $ 9.320 $ 9.490 $ 9.290 $ 9.960 $ 10.140 OF PERIOD INCOME FROM INVESTMENT .279 D .603 D .599 .648 .533 .722 OPERATIONS NET INVESTMENT INCOME NET REALIZED AND .018 .022 (.167) .174 (.648) (.209) UNREALIZED GAIN (LOSS) TOTAL FROM INVESTMENT .297 .625 .432 .822 (.115) .513 OPERATIONS LESS DISTRIBUTIONS FROM NET INVESTMENT (.267) (.575) (.602) (.622) (.555) (.623) INCOME FROM NET REALIZED - - - - - (.070) GAIN TOTAL DISTRIBUTIONS (.267) (.575) (.602) (.622) (.555) (.693) NET ASSET VALUE, $ 9.400 $ 9.370 $ 9.320 $ 9.490 $ 9.290 $ 9.960 END OF PERIOD TOTAL RETURN B, C 3.20% 6.90% 4.67% 9.15% (1.18)% 5.26% RATIOS AND SUPPLEMENTAL DATA NET ASSETS, END OF PERIOD $ 126,140 $ 120,138 $ 123,044 $ 140,471 $ 132,466 $ 168,292 (000 OMITTED) RATIO OF EXPENSES TO .80% A .81% .79% .82% .95% .61% E AVERAGE NET ASSETS RATIO OF NET INVESTMENT 5.95% A 6.45% 6.54% 6.67% 6.80% 7.19% INCOME TO AVERAGE NET ASSETS PORTFOLIO TURNOVER RATE 168% A 126% 188% 266% 184% 348%
ANNUALIZED TOTAL RETURNS FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED. THE TOTAL RETURN WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED DURING THE PERIOD SHOWN. NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE BEEN HIGHER. NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD ENDED MARCH 31, 1998 (UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES. Fidelity Short-Intermediate Government Fund (the fund) is a fund of Fidelity Charles Street Trust (the trust) and is authorized to issue an unlimited number of shares. The trust is registered under the Investment Company Act of 1940, as amended (the 1940 Act), as an open-end management investment company organized as a Massachusetts business trust. The financial statements have been prepared in conformity with generally accepted accounting principles which require management to make certain estimates and assumptions at the date of the financial statements. The following summarizes the significant accounting policies of the fund: SECURITY VALUATION. Securities 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 for which market quotations are not readily available are valued at their fair value as determined in good faith under consistently applied procedures under the general supervision of the Board of Trustees. Short-term securities with remaining maturities of sixty days or less for which quotations are not readily available are valued at amortized cost or original cost plus accrued interest, both of which approximate current value. INCOME TAXES. As a qualified regulated investment company under Subchapter M of the Internal Revenue Code, the fund is not subject to income taxes to the extent that it distributes substantially all of its taxable income for its fiscal year. The schedule of investments includes information regarding income taxes under the caption "Income Tax Information." INVESTMENT INCOME. Interest income, which includes accretion of original issue discount, is accrued as earned. DISTRIBUTIONS TO SHAREHOLDERS. Distributions are declared daily and paid monthly from net investment income. Distributions from realized gains, if any, are recorded on the ex-dividend date. Income 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 gain/losses on certain securities, market discount, capital loss carryforwards 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. Undistributed net investment income and accumulated undistributed net realized gain (loss) on investments may include temporary book and tax basis differences which will reverse in a subsequent period. Any taxable income or gain remaining at fiscal year end is distributed in the following year. SECURITY TRANSACTIONS. Security transactions are accounted for as of trade date. Gains and losses on securities sold are determined on the basis of identified cost. 2. OPERATING POLICIES. JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the fund, along with other affiliated entities of Fidelity Management & Research Company (FMR), may transfer uninvested cash balances into one or more joint trading accounts. These balances are invested in one or more repurchase agreements for U.S. Treasury or Federal Agency obligations. REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency securities are transferred to an account of the fund, or to the Joint Trading Account, at a bank custodian. The securities are marked-to-market daily and maintained at a value at least equal to the principal amount of the repurchase agreement (including accrued interest). FMR, the fund's investment adviser, is responsible for determining that the value of the underlying securities remains in accordance with the market value requirements stated above. 3. PURCHASES AND SALES OF INVESTMENTS. Purchases and sales of long-term U.S. government and government agency obligations aggregated $108,232,684 and $101,257,721, respectively. 4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES. MANAGEMENT FEE. As the fund's investment adviser, FMR receives a monthly fee that is calculated on the basis of a group fee rate plus a fixed individual fund fee rate applied to the average net assets of the fund. The group fee rate is the weighted average of a series of rates and is based on the monthly average net assets of all the mutual funds advised by FMR. The rates ranged from .1100% to .3700% for the period. The annual individual fund fee rate is .30%. 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. For the period, the management fee was equivalent to an annualized rate of .44% of average net assets. TRANSFER AGENT FEES. Fidelity Service Company, Inc. (FSC), an affiliate of FMR, is the fund's transfer, dividend disbursing and shareholder servicing agent. FSC receives account fees and asset-based fees that vary according to account size and type of account. FSC 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 .23% of average net assets. ACCOUNTING FEES. FSC maintains the fund's accounting records. The fee is based on the level of average net assets for the month plus out-of-pocket expenses. MANAGING YOUR INVESTMENTS Fidelity offers several ways to conveniently manage your personal investments via your telephone or PC. You can access your account information, conduct trades and research your investments 24 hours a day. BY PHONE Fidelity TouchTone Xpressprovides a single toll-free number to access account balances, positions, quotes and trading. It's easy to navigate the service, and on your first call, the system will help you create a personal identification number (PIN) for security. SM (PHONE_GRAPHIC)TOUCHTONE XPRESS 1-800-544-5555 PRESS For mutual fund and brokerage trading. For quotes.* For account balances and holdings. To review orders and mutual fund activity. To change your PIN. To speak to a Fidelity representative. 0 * BY PC Fidelity's Web site on the Internet provides a wide range of information, including daily financial news, fund performance, interactive planning tools and news about Fidelity products and services. (PHONE_GRAPHIC)FIDELITY'S WEB SITE WWW.FIDELITY.COM If you are not currently on the Internet, call Fidelity at 1-800-544-7272 for significant savings on Web access from internetMCI. SM (PHONE_GRAPHIC) FIDELITY ON-LINE XPRESS+ TM Fidelity On-line Xpress+ software for Windows combines comprehensive portfolio management capabilities, securities trading and access to research and analysis tools . . . all on your desktop. Call Fidelity at 1-800-544-7272 or visit our Web site for more information on how to manage your investments via your PC. * WHEN YOU CALL THE QUOTES LINE, PLEASE REMEMBER THAT A FUND'S YIELD AND RETURN WILL VARY AND, EXCEPT FOR MONEY MARKET FUNDS, SHARE PRICE WILL ALSO VARY. THIS MEANS THAT YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. THERE IS NO ASSURANCE THAT MONEY MARKET FUNDS WILL BE ABLE TO MAINTAIN A STABLE $1 SHARE PRICE; AN INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT. TOTAL RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE, REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS, AND THE EFFECTS OF ANY SALES CHARGES. TO VISIT FIDELITY For directions and hours, please call 1-800-544-9797. ARIZONA 7373 N. Scottsdale Road Scottsdale, AZ CALIFORNIA 815 East Birch Street Brea, CA 851 East Hamilton Avenue Campbell, CA 527 North Brand Boulevard Glendale, CA 19100 Von Karman Avenue Irvine, CA 10100 Santa Monica Blvd. Los Angeles, CA 251 University Avenue Palo Alto, CA 1760 Challenge Way Sacramento, CA 7676 Hazard Center Drive San Diego, CA 455 Market Street San Francisco, CA 950 Northgate Drive San Rafael, CA 1400 Civic Drive Walnut Creek, CA 6300 Canoga Avenue Woodland Hills, CA COLORADO 1625 Broadway Denver, CO CONNECTICUT 48 West Putnam Avenue Greenwich, CT 265 Church Street New Haven, CT 300 Atlantic Street Stamford, CT 29 South Main Street West Hartford, CT DELAWARE 222 Delaware Avenue Wilmington, DE FLORIDA 4400 N. Federal Highway Boca Raton, FL 90 Alhambra Plaza Coral Gables, FL 4090 N. Ocean Boulevard Ft. Lauderdale, FL 1907 West State Road 434 Longwood, FL 4001 Tamiami Trail, North Naples, FL 2401 PGA Boulevard Palm Beach Gardens, FL 8065 Beneva Road Sarasota, FL 1502 N. Westshore Blvd. Tampa, FL GEORGIA 3445 Peachtree Road, N.E. Atlanta, GA 1000 Abernathy Road Atlanta, GA HAWAII 700 Bishop Street Honolulu, HI ILLINOIS One North Franklin Street Chicago, IL 1415 West 22nd Street Oak Brook, IL 1700 East Golf Road Schaumburg, IL 3232 Lake Avenue Wilmette, IL INDIANA 4729 East 82nd Street Indianapolis, IN MAINE 3 Canal Plaza Portland, ME MARYLAND 7401 Wisconsin Avenue Bethesda, MD 1 West Pennsylvania Ave. Towson, MD MASSACHUSETTS 470 Boylston Street Boston, MA 155 Congress Street Boston, MA 25 State Street Boston, MA 300 Granite Street Braintree, MA 44 Mall Road Burlington, MA 416 Belmont Street Worcester, MA MICHIGAN 280 North Woodward Ave. Birmingham, MI 29155 Northwestern Hwy. Southfield, MI MINNESOTA 7600 France Avenue South Edina, MN MISSOURI 700 West 47th Street Kansas City, MO 8885 Ladue Road Ladue, MO 200 North Broadway St. Louis, MO NEW JERSEY 150 Essex Street Millburn, NJ 56 South Street Morristown, NJ 501 Route 17, South Paramus, NJ NEW YORK 1055 Franklin Avenue Garden City, NY 999 Walt Whitman Road Melville, L.I., NY 1271 Avenue of the Americas New York, NY 71 Broadway New York, NY 350 Park Avenue New York, NY NORTH CAROLINA 4611 Sharon Road Charlotte, NC 2200 West Main Street Durham, NC OHIO 600 Vine Street Cincinnati, OH 28699 Chagrin Boulevard Woodmere Village, OH OREGON 16850 SW 72 Avenue Tigard, OR PENNSYLVANIA 1735 Market Street Philadelphia, PA 439 Fifth Avenue Pittsburgh, PA TENNESSEE 6150 Poplar Road Memphis, TN TEXAS 10000 Research Boulevard Austin, TX 4017 Northwest Parkway Dallas, TX 1155 Dairy Ashford Street Houston, TX 2701 Drexel Drive Houston, TX 400 East Las Colinas Blvd. Irving, TX 14100 San Pedro San Antonio, TX 19740 IH 45 North Spring, TX UTAH 215 South State Street Salt Lake City, UT VIRGINIA 8180 Greensboro Drive McLean, VA WASHINGTON 411 108th Avenue, N.E. Bellevue, WA 511 Pine Street Seattle, WA WASHINGTON, DC 1900 K Street, N.W. Washington, DC WISCONSIN 595 North Barker Road Brookfield, WI TO WRITE FIDELITY If more than one address is listed, please locate the address that is closest to you. We'll give your correspondence immediate attention and send you written confirmation upon completion of your request. (LETTER_GRAPHIC)MAKING CHANGES TO YOUR ACCOUNT (such as changing name, address, bank, etc.) Fidelity Investments P.O. Box 770001 Cincinnati, OH 45277-0002 (LETTER_GRAPHIC)FOR NON-RETIREMENT ACCOUNTS BUYING SHARES Fidelity Investments P.O. Box 770001 Cincinnati, OH 45277-0003 OVERNIGHT EXPRESS Fidelity Investments 2300 Litton Lane - KH1A Hebron, KY 41048 SELLING SHARES Fidelity Investments P.O. Box 660602 Dallas, TX 75266-0602 OVERNIGHT EXPRESS Fidelity Investments Attn: Redemptions - CP6I 400 East Las Colinas Blvd. Irving, TX 75309-5517 GENERAL CORRESPONDENCE Fidelity Investments P.O. Box 500 Merrimack, NH 03054-0500 (LETTER_GRAPHIC)FOR RETIREMENT ACCOUNTS BUYING SHARES Fidelity Investments P.O. Box 770001 Cincinnati, OH 45277-0003 SELLING SHARES Fidelity Investments P.O. Box 660602 Dallas, TX 75266-0602 OVERNIGHT EXPRESS Fidelity Investments Attn: Redemptions - CP6R 400 East Las Colinas Blvd. Irving, TX 75309-5517 GENERAL CORRESPONDENCE Fidelity Investments P.O. Box 500 Merrimack, NH 03054-0500 INVESTMENT ADVISER Fidelity Management & Research Company Boston, MA OFFICERS Edward C. Johnson 3d, President Robert C. Pozen, Senior Vice President Dwight D. Churchill, Vice President Fred L. Henning, Jr., Vice President Curtis Hollingsworth, Vice President Eric D. Roiter, Secretary Richard A. Silver, Treasurer John H. Costello, Assistant Treasurer Leonard M. Rush, Assistant Treasurer BOARD OF TRUSTEES Ralph F. Cox * Phyllis Burke Davis * Robert M. Gates * Edward C. Johnson 3d E. Bradley Jones * Donald J. Kirk * Peter S. Lynch Marvin L. Mann * William O. McCoy * Gerald C. McDonough * Robert C. Pozen Thomas R. Williams * ADVISORY BOARD J. Gary Burkhead GENERAL DISTRIBUTOR Fidelity Distributors Corporation Boston, MA TRANSFER AND SHAREHOLDER SERVICING AGENT Fidelity Service Company, Inc. Boston, MA * INDEPENDENT TRUSTEES CUSTODIAN The Bank of New York New York, NY FIDELITY'S TAXABLE BOND FUNDS Capital & Income Ginnie Mae Government Securities Intermediate Bond International Bond Investment Grade Bond New Markets Income Short-Intermediate Government Short-Term Bond Spartan(registered trademark) Ginnie Mae Spartan Government Income Spartan High Income Spartan Investment Grade Bond Spartan Limited Maturity Government Spartan Short-Intermediate Government Spartan Short-Term Bond Target Timeline 1999, 2001, & 2003 SM THE FIDELITY TELEPHONE CONNECTION MUTUAL FUND 24-HOUR SERVICE Exchanges/Redemptions 1-800-544-7777 Account Assistance 1-800-544-6666 Product Information 1-800-544-8888 Retirement Accounts 1-800-544-4774 (8 a.m. - 9 p.m.) TDD Service 1-800-544-0118 for the deaf and hearing impaired (9 a.m. - 9 p.m. Eastern time) (registered trademark) TouchTone Xpress 1-800-544-4774 SM AUTOMATED LINE FOR QUICKEST SERVICE (2_FIDELITY_LOGOS)SPARTAN(registered trademark) INVESTMENT GRADE BOND FUND SEMIANNUAL REPORT MARCH 31, 1998 CONTENTS PRESIDENT'S MESSAGE 3 NED JOHNSON ON INVESTING STRATEGIES. PERFORMANCE 4 HOW THE FUND HAS DONE OVER TIME. FUND TALK 7 THE MANAGER'S REVIEW OF FUND PERFORMANCE, STRATEGY AND OUTLOOK. INVESTMENT CHANGES 10 A SUMMARY OF MAJOR SHIFTS IN THE FUND'S INVESTMENTS OVER THE PAST SIX MONTHS. INVESTMENTS 11 A COMPLETE LIST OF THE FUND'S INVESTMENTS WITH THEIR MARKET VALUES. FINANCIAL STATEMENTS 21 STATEMENTS OF ASSETS AND LIABILITIES, OPERATIONS, AND CHANGES IN NET ASSETS, AS WELL AS FINANCIAL HIGHLIGHTS. NOTES 25 NOTES TO THE FINANCIAL STATEMENTS. THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS. MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED. NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK. FOR MORE INFORMATION ON ANY FIDELITY FUND, INCLUDING CHARGES AND EXPENSES, CALL 1-800-544-8888 FOR A FREE PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY. To reduce expenses and demonstrate respect for our environment, we have initiated a project through which we will begin eliminating duplicate copies of most financial reports and prospectuses to most households, even if they have more than one account in the fund. If additional copies of financial reports, prospectuses or historical account information are needed, please call 1-800-544-6666. PRESIDENT'S MESSAGE (PHOTO_OF_EDWARD_C_JOHNSON_3D)DEAR SHAREHOLDER: In the first quarter of 1998, the U.S. stock and bond markets responded differently to lingering uncertainty over the direction of the U.S. and global economies. On the one hand, the U.S. stock market soared to record heights as corporate earnings proved to be stronger than expected and investors shrugged off concerns about the effects of economic difficulties in Asia. On the other hand, two factors tempered returns in the bond market. First, interest-rate levels were generally positive, but were low enough to encourage a flood of new issuance that dampened performance. Second, there were concerns that continued economic strength might lead to eventual inflation, even though inflation indicators remained benign during the quarter. While it's impossible to predict the future direction of the markets with any degree of certainty, there are certain basic principles that can help investors plan for their future needs. The longer your investment time frame, the less likely it is that you will be affected by short-term market volatility. A 10-year investment horizon appropriate for saving for a college education, for example, enables you to weather market cycles in a long-term fund, which may have a higher risk potential, but also has a higher potential rate of return. An intermediate-length fund could make sense if your investment horizon is two to four years, while a short-term bond fund could be the right choice if you need your money in one or two years. If your time horizon is less than a year, you might want to consider moving some of your bond investment into a money market fund. These funds seek income and a stable share price by investing in high-quality, short-term investments. Of course, it's important to remember that there is no assurance that a money market fund will achieve its goal of maintaining a stable net asset value of $1.00 per share, and that these types of funds are neither insured nor guaranteed by any agency of the U.S. government. Finally, no matter what your time horizon or portfolio diversity, it makes good sense to follow a regular investment plan, investing a certain amount of money in a fund at the same time each month or quarter and periodically reviewing your overall portfolio. By doing so, you won't get caught up in the excitement of a rapidly rising market, nor will you buy all your shares at market highs. While this strategy - known as dollar cost averaging - won't assure a profit or protect you from a loss in a declining market, it should help you lower the average cost of your purchases. If you have questions, please call us at 1-800-544-8888. We are available 24 hours a day, seven days a week to provide you the information you need to make the investments that are right for you. Best regards, Edward C. Johnson 3d PERFORMANCE: THE BOTTOM LINE 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), and the effect of the $5 account closeout fee on an average-sized account. You can also look at the fund's income, as reflected in the fund's yield, to measure performance. If Fidelity had not reimbursed certain fund expenses, the total returns and dividends would have been lower. CUMULATIVE TOTAL RETURNS PERIODS ENDED MARCH 31, 1998 PAST 6 PAST 1 PAST 5 LIFE OF MONTHS YEAR YEARS FUND SPARTAN INV. GRADE BOND 4.60% 11.93% 40.36% 51.45% LB AGGREGATE BOND 4.54% 11.99% 39.89% N/A INTERMEDIATE INVESTMENT GRADE DEBT 3.94% 10.78% 34.98% N/A FUNDS AVERAGE CUMULATIVE TOTAL RETURNS show the fund's performance in percentage terms over a set period - in this case, six months, one year, five years or since the fund started on October 1, 1992. For example, if you had invested $1,000 in a fund that had a 5% return over the past year, the value of your investment would be $1,050. You can compare the fund's returns to the performance of the Lehman Brothers Aggregate Bond Index - a market value weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed and mortgage-backed securities, with maturities of at least one year. To measure how the fund's performance stacked up against its peers, you can compare it to the intermediate investment grade debt funds average, which reflects the performance of mutual funds with similar objectives tracked by Lipper Analytical Services, Inc. The past six months average represents a peer group of 221 mutual funds. These benchmarks include reinvested dividends and capital gains, if any, and exclude the effect of sales charges. AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED MARCH 31, 1998 PAST 1 PAST 5 LIFE OF YEAR YEARS FUND SPARTAN INV. GRADE BOND 11.93% 7.02% 7.84% LB AGGREGATE BOND 11.99% 6.94% N/A INTERMEDIATE INVESTMENT GRADE DEBT 10.78% 6.17% N/A FUNDS AVERAGE AVERAGE ANNUAL TOTAL 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. (Note: Lipper calculates average annual total returns by annualizing each fund's total return, then taking an arithmetic average. This may produce a slightly different figure than that obtained by averaging the cumulative total returns and annualizing the result.) $10,000 OVER LIFE OF FUND Spartan Inv. Grade Bond LB Aggregate Bond 00448 LB001 1992/10/31 10000.00 10000.00 1992/11/30 10100.23 10002.26 1992/12/31 10335.59 10161.31 1993/01/31 10596.70 10356.17 1993/02/28 10934.98 10537.45 1993/03/31 10996.47 10581.36 1993/04/30 11037.29 10655.05 1993/05/31 11079.89 10668.61 1993/06/30 11441.55 10861.96 1993/07/31 11610.81 10923.40 1993/08/31 12007.92 11114.86 1993/09/30 12042.87 11145.39 1993/10/31 12141.98 11187.03 1993/11/30 11929.42 11091.87 1993/12/31 11964.69 11151.98 1994/01/31 12214.15 11302.55 1994/02/28 11792.85 11106.19 1994/03/31 11397.64 10832.38 1994/04/30 11282.21 10745.88 1994/05/31 11210.53 10744.37 1994/06/30 11204.45 10720.63 1994/07/31 11398.73 10933.57 1994/08/31 11397.63 10947.14 1994/09/30 11230.00 10786.02 1994/10/31 11206.19 10776.41 1994/11/30 11239.11 10752.47 1994/12/31 11345.82 10826.72 1995/01/31 11550.30 11040.99 1995/02/28 11770.37 11303.50 1995/03/31 11913.47 11372.84 1995/04/30 12065.51 11531.71 1995/05/31 12568.89 11977.95 1995/06/30 12662.03 12065.77 1995/07/31 12620.61 12038.82 1995/08/31 12779.07 12184.11 1995/09/30 12908.15 12302.65 1995/10/31 13077.08 12462.64 1995/11/30 13271.87 12649.39 1995/12/31 13457.19 12826.91 1996/01/31 13549.06 12912.09 1996/02/29 13313.02 12687.65 1996/03/31 13212.86 12599.45 1996/04/30 13123.30 12528.60 1996/05/31 13089.70 12503.16 1996/06/30 13253.71 12671.06 1996/07/31 13286.45 12705.74 1996/08/31 13264.80 12684.44 1996/09/30 13484.04 12905.49 1996/10/31 13773.70 13191.37 1996/11/30 13994.27 13417.32 1996/12/31 13876.70 13292.57 1997/01/31 13922.68 13333.27 1997/02/28 13947.96 13366.44 1997/03/31 13789.56 13218.32 1997/04/30 14004.68 13416.19 1997/05/31 14125.14 13543.01 1997/06/30 14285.21 13703.76 1997/07/31 14673.39 14073.31 1997/08/31 14551.15 13953.26 1997/09/30 14755.76 14159.05 1997/10/31 14949.72 14364.46 1997/11/30 14998.03 14430.60 1997/12/31 15164.78 14575.90 1998/01/31 15358.71 14763.03 1998/02/28 15371.17 14751.91 1998/03/31 15431.42 14802.60 IMATRL PRASUN SHR__CHT 19980331 19980408 111144 R00000000000068 $10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was invested in Spartan Investment Grade Bond Fund on October 31, 1992, shortly after the fund started. As the chart shows, by March 31, 1998, the value of the investment would have grown to $15,431 - a 54.31% increase on the initial investment which includes the effect of the $5 account closeout fee. For comparison, look at how the Lehman Brothers Aggregate Bond Index did over the same period. With dividends and capital gains, if any, reinvested, the same $10,000 would have grown to $14,802 - a 48.02% increase. 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) TOTAL RETURN COMPONENTS SIX MONTHS YEARS ENDED SEPTEMBER 30, ENDED MARCH 31, 1998 1997 1996 1995 1994 1993 DIVIDEND RETURN 3.14% 6.73% 6.33% 7.66% 6.24% 8.77% CAPITAL RETURN 1.46% 2.69% -1.88% 7.27% -13.01% 9.37% TOTAL RETURN 4.60% 9.42% 4.45% 14.93% -6.77% 18.14% TOTAL RETURN COMPONENTS include both dividend returns and capital appreciation returns. A dividend return reflects the actual dividends paid by the fund. A capital return reflects both the amount paid by the fund to shareholders as capital gain distributions and changes in the fund's share price. Both returns assume the dividends or capital gains paid by the fund, if any, are reinvested. Capital and total returns include the effect of the $5 account closeout fee on an average-sized account. DIVIDENDS AND YIELD PERIODS ENDED MARCH 31, 1998 PAST 1 PAST 6 PAST 1 MONTH MONTHS YEAR DIVIDENDS PER SHARE 5.42(CENTS) 31.80(CENTS) 64.28(CENTS) ANNUALIZED DIVIDEND RATE 6.14% 6.15% 6.28% 30-DAY ANNUALIZED YIELD 6.01% - - DIVIDENDS per share show the income paid by the fund for a set period. If you annualize this number, based on an average share price of $10.40 over the past one month, $10.37 over the past six months and $10.23 over the past one year, you can compare the fund's income over these three periods. The 30-day annualized YIELD is a standard formula for all funds based on the yields of the bonds in the fund, averaged over the past 30 days. This figure shows you the yield characteristics of the fund's investments at the end of the period. It also helps you compare funds from different companies on an equal basis. If Fidelity had not reimbursed certain fund expenses during the periods shown, the yield would have been 5.77%. FUND TALK: THE MANAGER'S OVERVIEW MARKET RECAP A continued lack of inflationary pressure resulted in a relatively favorable investing climate for bonds during the six months that ended March 31, 1998. The Lehman Brothers Aggregate Bond Index - a broad gauge of the U.S. taxable investment-grade bond market - returned 4.54% during this period. Global volatility and historically low interest rates were the main stories in the last quarter of 1997. Financial problems in Asia came to a head in October, resulting in a "flight to quality." Wary stock investors sought investments offering lower volatility, helping the U.S. bond market - especially U.S. Treasuries - surge. The Lehman Brothers Corporate Bond Index returned 4.49% for the six-month period. Corporate bonds benefited from continued economic growth and demand for yield, although they faltered somewhat in January 1998. Investors feared a slowdown in demand in Asia would eat into corporate earnings. In spite of record new issuance in February 1998, corporates rebounded due in part to increased demand on the part of yield-hungry investors. Mortgage-backed bonds performed well during the period, even though lower interest rates resulted in more mortgage prepayment activity. The Lehman Brothers Mortgage-Backed Securities Index generated a six-month return of 4.04%. High-yield and emerging-market issues performed very well throughout the first quarter of 1998. An interview with Kevin Grant, Portfolio Manager of Spartan Investment Grade Bond Fund Q. HOW DID THE FUND PERFORM, KEVIN? A. I'm pleased with the fund's performance. For the six months that ended March 31, 1998, the fund returned 4.60%. This topped the intermediate investment grade debt funds average tracked by Lipper Analytical Services, which returned 3.94%.The Lehman Brothers Aggregate Bond Index returned 4.54% during the six-month period. For the 12 months that ended March 31, 1998, the fund produced an 11.93% return, while the Lipper average and Lehman Brothers index returned 10.78% and 11.99%, respectively. Q. WHAT FACTORS LED TO THE FUND'S SOLID SHOWING? A. I positioned the fund defensively beginning last summer. Last July, I began to notice disturbing trends in the Asian markets. While the fund didn't have a considerable amount of direct Asian exposure, I began to lighten up on some of the positions that were indirectly affected by the goings-on in Asia. For example, the fund had a position in one of Mobil's liquefied natural gas projects in the Middle East, and this project had long-term contracts to sell the gas to South Korea. As events in Asia unfolded, Korean markets were negatively affected as were these particular bonds. By selling positions such as these before the Asian decline peaked, the fund avoided significant losses when the Asian markets fell in October 1997. Q. WERE THERE ANY OTHER DEVELOPMENTS THAT HELPED THE FUND'S PERFORMANCE? A. A second factor I'd highlight was the situation within the mortgage-backed sector. Six months ago, the fund was underweighted relative to its index in mortgage-backed issues because I didn't feel prices were appropriate for the level of risk involved. Mortgage securities continued to be expensive until January 1998, when interest rates plummeted due to Asian concerns and corporate bonds cheapened. In December and January - as investors began to realize that lower rates would mean higher mortgage prepayment risk - mortgage-backed issues dramatically underperformed both Treasuries and corporates. Correspondingly, the fund's underweighting in mortgage-backed investments helped significantly. When mortgage-backed issues cheapened in January, I increased the fund's mortgage-related positions to the point of being overweighted relative to the index. This overweighting helped performance in February and March, as mortgage-backed bonds rebounded and performed well. Q. CLOSER TO HOME, THE U.S. BOND MARKET ENJOYED A NICE RUN DURING THE PERIOD . . . A. It really did. We had a very strong domestic economy and virtually no inflationary pressure during the period. A lot of market followers have dubbed it the "Goldilocks" economy, meaning that it's not too hot and not too cold, but just right. I don't know when these pleasant conditions will end, but at this point it seems like everything is in place for the U.S economy to be able to maintain its strength. The Asian crises also helped the U.S. economy to an extent. Because of their problems, Asian companies are trying to export their way out of a recession by exporting higher volumes of products at lower prices. This trend also helped keep inflation at bay in the U.S. Q. WERE THERE ANY SECTORS THAT CONTRIBUTED TO PERFORMANCE? A. The wave of consolidation within the banking sector - which continued to be prevalent throughout the period - helped boost the credit quality of many of the fund's positions. When a bank with a single A rating acquires a bank with a BBB rating, the BBB bank gets an almost instantaneous quality upgrade. This strategy has worked beautifully for the fund over the past few years, as a number of its lower-quality banks have been benefactors of such acquisitions. An example within the portfolio would be H.F. Ahmanson, a savings and loan institution that was acquired by Washington Mutual during the period. Q. WHAT'S YOUR OUTLOOK? A. Knock on wood, but the outlook appears encouraging. Because capital markets reward issuers for carrying less debt, the bond market benefits when companies receive credit upgrades. Earnings and cash flows also appear healthy at this point. Mortgage-backed bonds may remain cheap, since interest rates and inflation should remain low, and volatility throughout the market looks to be minimal. In terms of the portfolio, I may look to add to the fund's corporate bond positions, either through real estate investment trusts or standard corporate issues. In an environment such as we've seen - where yields on corporate, mortgage-backed and asset-backed bonds are attractive - it's not conducive to good performance to own a lot of government-backed securities. 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. KEVIN GRANT DISCUSSES THE BENEFITS OF REAL ESTATE INVESTMENT TRUSTS: "REAL ESTATE INVESTMENT TRUSTS - - COMMONLY KNOWN AS REITS - HAVE BECOME QUITE POPULAR IN RECENT YEARS. REITS ARE PUBLICLY TRADED COMPANIES THAT MANAGE REAL ESTATE PORTFOLIOS. FOR EXAMPLE, REITS INVEST IN A WIDE VARIETY OF REAL ESTATE, FROM SHOPPING CENTERS TO OFFICE BUILDINGS AND APARTMENTS. MOST REITS TYPICALLY ISSUE ONLY EQUITY, BUT THERE ARE A FEW LARGER REITS THAT ISSUE DEBT AS WELL. "THERE WERE A COUPLE OF FORCES AT WORK THAT MADE BONDS ISSUED BY REITS ATTRACTIVE DURING THE PERIOD. FIRST, THEY WERE PRICED INEXPENSIVELY RELATIVE TO CORPORATE BONDS. SECOND, THE STOCK MARKET LATELY HAS BEEN PUNISHING ISSUERS THAT HAVE AN ABUNDANCE OF OUTSTANDING DEBT. BECAUSE OF THIS, I FELT THAT MOST REITS WOULDN'T BE ADDING DEBT TO THEIR BALANCE SHEETS. TO ME, CHEAP PRICES AND THE LIKELIHOOD THAT REITS WOULD NOT BECOME OVER-LEVERAGED EQUATED TO A SOUND BOND INVESTMENT. I MAY TRY TO ADD TO THE FUND'S REIT EXPOSURE, BUT IT COULD BE A CHALLENGE BECAUSE ATTRACTIVE REITS COULD BE HARD TO FIND. HOWEVER, THERE ARE SOME BONDS HERE AND THERE THAT MAY MAKE SENSE TO OWN. GOING FORWARD, I'LL KEEP AN EYE OUT FOR ANY INTERESTING OPPORTUNITIES." FUND FACTS GOAL: HIGH CURRENT INCOME FUND NUMBER: 448 TRADING SYMBOL: FSIBX START DATE: OCTOBER 1, 1992 SIZE: AS OF MARCH 31, 1998, MORE THAN $819 MILLION MANAGER: KEVIN GRANT, SINCE 1997; ALSO MANAGER OF SEVERAL FIDELITY INVESTMENT-GRADE TAXABLE BOND FUNDS; JOINED FIDELITY IN 1993 (CHECKMARK) INVESTMENT CHANGES QUALITY DIVERSIFICATION AS OF MARCH 31, 1998 (MOODY'S RATINGS) % % OF FUND'S INVESTMENTS O 6 MONTHS AGO F F U N D ' S I N V E S T M E N T S AAA 4 61.2 6 . 9 AA 4 3.5 . 2 A 6 11.0 . 9 BAA 1 14.6 4 . 5 BA 3 4.2 . 0 TABLE EXCLUDES SHORT-TERM INVESTMENTS. WHERE MOODY'S RATINGS ARE NOT AVAILABLE, WE HAVE USED S&P RATINGS. SECURITIES RATED AS "BA" OR BELOW WERE RATED INVESTMENT GRADE BY OTHER NATIONALLY RECOGNIZED RATING AGENCIES OR ASSIGNED AN INVESTMENT GRADE RATING AT THE TIME OF ACQUISITION BY FIDELITY. AVERAGE YEARS TO MATURITY AS OF MARCH 31, 1998 6 MONTHS AGO YEARS 7.5 8.4 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. DURATION AS OF MARCH 31, 1998 6 MONTHS AGO YEARS 4.5 4.5 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. ASSET ALLOCATION (% OF FUND'S INVESTMENTS) AS OF MARCH 31, 1998 * AS OF SEPTEMBER 30, 1997 ** CORPORATE BONDS 30.1% U.S. GOVERNMENT AND AGENCY OBLIGATIONS 12.2% U.S. GOVERNMENT AGENCY-MORTGAGE BACKED SECURITIES 30.0% OTHER 3.2% SHORT-TERM INVESTMENTS 24.5% CORPORATE BONDS 37.1% U.S. GOVERNMENT AND AGENCY OBLIGATIONS 39.4% U.S. GOVERNMENT AGENCY-MORTGAGE BACKED SECURITIES 13.3% OTHER 4.7% SHORT-TERM INVESTMENTS 5.5% ROW: 1, COL: 1, VALUE: 24.5 ROW: 1, COL: 2, VALUE: 3.2 ROW: 1, COL: 3, VALUE: 30.0 ROW: 1, COL: 4, VALUE: 12.2 ROW: 1, COL: 5, VALUE: 30.1 ROW: 1, COL: 1, VALUE: 5.5 ROW: 1, COL: 2, VALUE: 4.7 ROW: 1, COL: 3, VALUE: 13.3 ROW: 1, COL: 4, VALUE: 39.4 ROW: 1, COL: 5, VALUE: 37.1 * FOREIGN INVESTMENTS 17.4% ** FOREIGN INVESTMENTS 5.6% INVESTMENTS MARCH 31, 1998 (UNAUDITED) SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENT IN SECURITIES NONCONVERTIBLE BONDS - 30.1% MOODY'S PRINCIPAL VALUE RATINGS (B) AMOUNT (NOTE 1) AEROSPACE & DEFENSE - 0.5% DEFENSE ELECTRONICS - 0.5% Raytheon Co. 6.45%, 8/15/04 Baa1 $ 5,000,000 $ 5,042,050 CONSTRUCTION & REAL ESTATE - 0.3% REAL ESTATE INVESTMENT TRUSTS - 0.3% EOP Operating L.P.: 6 5/8%, 2/15/05 (a) Baa1 1,250,000 1,240,138 6 3/4%, 2/15/08 (a) Baa1 2,000,000 1,983,660 3,223,798 DURABLES - 1.9% CONSUMER ELECTRONICS - 0.5% Sony Corp. 6 1/8%, 3/4/03 Aa3 5,000,000 4,988,450 TEXTILES & APPAREL - 1.4% Levi Strauss & Co. 7%, 11/1/06 (a) Baa2 8,550,000 8,648,859 Unifi, Inc. 6 1/2%, 2/1/08 (a) A3 5,000,000 4,903,500 13,552,359 TOTAL DURABLES 18,540,809 ENERGY - 0.4% OIL & GAS - 0.4% Petroleum Geo Services ASA 7 1/8%, 3/30/28 Baa3 3,400,000 3,406,460 FINANCE - 13.5% ASSET-BACKED SECURITIES - 4.2% Arcadia Automobile Receivables Trust 6 1/2%, 6/17/02 Aaa 14,000,000 14,122,500 Capital Equipment Receivables Trust 6.48%, 10/15/06 Baa2 1,760,000 1,749,774 Contimortgage Home Equity Loan Trust 6.26%, 7/15/12 Aaa 5,000,000 5,003,125 Ford Credit Auto Owner Trust: 6.40%, 5/15/02 A1 1,730,000 1,740,761 6.20%, 12/15/02 Baa3 1,790,000 1,776,575 Ford Credit Grantor Trust 5.90%, 10/15/00 Aaa 294,767 294,952 Green Tree Financial Corp. 6.10%, 4/15/27 Aaa 1,005,154 1,005,777 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (B) AMOUNT (NOTE 1) FINANCE - CONTINUED ASSET-BACKED SECURITIES - CONTINUED Key Auto Finance Trust Class C 6.65%, 10/15/03 Baa3 $ 660,000 $ 660,309 Key Plastics, Inc. 10 1/4%, 3/15/07 A2 2,250,000 2,253,867 MBNA Master Credit Card Trust II Class A 6.55%, 1/15/07 Aaa 5,000,000 5,116,450 PNC Student Loan Trust I 6.314%, 1/25/01 Aaa 5,700,000 5,736,537 Premier Auto Trust: 8.05%, 4/4/00 Aaa 537,981 541,511 6%, 5/6/00 Aaa 945,346 946,225 40,948,363 BANKS - 2.6% ABN Amro Bank NV 6 5/8%, 10/31/01 Aa3 1,750,000 1,780,310 Banc One Corp. 6.70%, 3/24/00 Aa3 2,100,000 2,125,200 BanPonce Corp.: 5 3/4%, 3/1/99 A3 690,000 687,502 6.378%, 4/8/99 A3 770,000 771,040 Capital One Bank: 6.42%, 11/12/99 Baa3 4,000,000 4,014,240 6 3/8%, 2/15/03 Baa3 2,400,000 2,363,112 Central Fidelity Banks, Inc. 8.15%, 11/15/02 A1 1,000,000 1,076,450 Citicorp 7.20%, 6/15/07 A1 1,850,000 1,946,737 Fleet/Norstar Financial Group, Inc. 9%, 12/1/01 A3 250,000 271,400 Hartford National Corp. 9.85%, 6/1/99 A3 1,650,000 1,716,561 Kansallis-Osake-Pankki 10%, 5/1/02 A3 430,000 485,827 NB Capital Trust IV 8 1/4%, 4/15/27 A1 3,980,000 4,330,001 Provident Bank 6 1/8%, 12/15/00 A3 210,000 209,672 Summit Bancorp. 8 5/8%, 12/10/02 BBB 1,000,000 1,090,030 Union Planters Corp. 6 3/4%, 11/1/05 Baa2 1,200,000 1,212,924 Union Planters National Bank 6.81%, 8/20/01 A3 1,000,000 1,015,710 25,096,716 CREDIT & OTHER FINANCE - 5.0% AT&T Capital Corp.: 6.41%, 8/13/99 Baa3 2,000,000 2,007,100 6.16%, 12/3/99 Baa3 750,000 749,550 Associates Corp. of North America: 6 7/8%, 2/15/00 Aa3 1,000,000 1,018,710 7 1/2%, 5/15/99 Aa3 3,000,000 3,048,450 BCH Cayman Islands Ltd. yankee 7.70%, 7/15/06 A3 180,000 191,934 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (B) AMOUNT (NOTE 1) FINANCE - CONTINUED CREDIT & OTHER FINANCE - CONTINUED Bank of New York Co., Inc. Capital I 7.97%, 12/31/26 A1 $ 3,000,000 $ 3,190,050 BankBoston Capital Trust II 7 3/4%, 12/15/26 A2 1,750,000 1,792,700 BanPonce Trust I 8.327%, 2/1/27 (a) Baa1 1,960,000 2,091,222 Chase Capital I 7.67%, 12/1/26 Aa3 10,570,000 10,827,168 Chrysler Financial Corp. 6 3/8%, 1/28/00 A3 1,960,000 1,971,760 First Security Capital I 8.41%, 12/15/26 A3 5,420,000 5,902,001 First Union Institutional Capital I 8.04%, 12/1/26 BBB 2,000,000 2,117,060 Fleet Mortgage Group 6 1/2%, 9/15/99 A2 250,000 251,690 General Electric Capital Corp. 6.94%, 4/13/09 (c) Aaa 1,750,000 1,765,470 General Motors Acceptance Corp. 6.65%, 5/24/00 A3 2,520,000 2,550,870 JPM Capital Trust II 7.95%, 2/1/27 Aa2 4,620,000 4,867,909 KeyCorp Institutional Capital Series A 7.826%, 12/1/26 A1 1,100,000 1,139,248 MCN Investment Corp. 6.03%, 2/1/01 Baa2 800,000 799,320 PNC Institutional Capital Trust 8.315%, 5/15/27 (a) A2 2,000,000 2,161,580 48,443,792 INSURANCE - 0.5% Executive Risk Capital Trust 8 5/8%, 2/1/27 Baa3 2,750,000 3,010,618 Protective Life Corp. 7.95%, 7/1/04 A3 400,000 429,564 SunAmerica, Inc. 6.20%, 10/31/99 Baa1 1,500,000 1,501,800 4,941,982 SAVINGS & LOANS - 1.2% Ahmanson (H.F.) & Co. 9 7/8%, 11/15/99 Baa2 5,000,000 5,281,000 Great West Financial Trust II 8.206%, 2/1/27 A3 4,000,000 4,234,000 Long Island Savings Bank 6.20%, 4/2/01 Baa3 1,550,000 1,548,760 11,063,760 TOTAL FINANCE 130,494,613 HOLDING COMPANIES - 0.3% Norfolk Southern Corp. 7.05%, 5/1/37 Baa1 2,510,000 2,643,532 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (B) AMOUNT (NOTE 1) INDUSTRIAL MACHINERY & EQUIPMENT - 0.7% POLLUTION CONTROL - 0.7% WMX Technologies, Inc.: 6 1/4%, 4/1/99 Baa3 $ 2,200,000 $ 2,201,782 7.10%, 8/1/26 Baa3 4,000,000 4,136,960 6,338,742 MEDIA & LEISURE - 3.3% BROADCASTING - 2.0% Continental Cablevision, Inc.: 8.30%, 5/15/06 Baa3 735,000 807,434 9%, 9/1/08 Baa3 1,450,000 1,683,900 Hearst-Argyle Television, Inc. 7 1/2%, 11/15/27 Baa3 2,750,000 2,843,033 TCI Communication, Inc.: 7 1/4%, 6/15/99 Ba1 9,350,000 9,454,814 7 3/8%, 2/15/00 Ba1 1,000,000 1,018,500 Time Warner, Inc. 9 1/8%, 1/15/13 Ba1 3,000,000 3,569,640 19,377,321 ENTERTAINMENT - 0.8% Viacom, Inc. 7 3/4%, 6/1/05 Ba2 7,000,000 7,341,250 PUBLISHING - 0.5% News America, Inc. 6 5/8%, 1/9/08 (a) Baa3 1,400,000 1,376,060 Time Warner Entertainment Co. LP: 10.15%, 5/1/12 Baa3 500,000 643,970 8 7/8%, 10/1/12 Baa3 750,000 882,375 8 3/8%, 3/15/23 Baa3 1,750,000 1,993,863 4,896,268 RESTAURANTS - 0.0% Darden Restaurants, Inc. 6 3/8%, 2/1/06 Baa1 500,000 482,395 TOTAL MEDIA & LEISURE 32,097,234 NONDURABLES - 0.9% FOODS - 0.2% ConAgra, Inc. 7 1/8%, 10/1/26 Baa1 2,040,000 2,147,488 TOBACCO - 0.7% Philip Morris Companies, Inc.: 7%, 7/15/05 A2 2,000,000 2,037,700 6.95%, 6/1/06 A2 4,000,000 4,111,400 6,149,100 TOTAL NONDURABLES 8,296,588 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (B) AMOUNT (NOTE 1) RETAIL & WHOLESALE - 1.1% GENERAL MERCHANDISE STORES - 0.9% Dayton Hudson Corp. 6.40%, 2/15/03 Baa1 $ 1,000,000 $ 1,001,040 Federated Department Stores, Inc.: 8 1/2%, 6/15/03 Baa2 4,000,000 4,365,520 6.79%, 7/15/27 Baa2 2,000,000 2,029,980 Penney (J.C.) Co., Inc. 6.95%, 4/1/00 A2 1,400,000 1,424,780 8,821,320 GROCERY STORES - 0.2% American Stores Co. 7 1/2%, 5/1/37 Baa2 2,000,000 2,194,860 TOTAL RETAIL & WHOLESALE 11,016,180 TECHNOLOGY - 0.9% COMPUTERS & OFFICE EQUIPMENT - 0.6% Comdisco, Inc. 6 3/8%, 11/30/01 Baa1 6,000,000 6,028,440 ELECTRONICS - 0.3% Texas Instruments, Inc. 6 7/8%, 7/15/00 A3 2,600,000 2,641,938 TOTAL TECHNOLOGY 8,670,378 TRANSPORTATION - 1.1% AIR TRANSPORTATION - 0.4% Delta Air Lines, Inc. equipment trust certificate 8.54%, 1/2/07 Baa1 2,478,736 2,711,786 United Air Lines, Inc. 10 1/4%, 7/15/21 Baa3 1,000,000 1,329,530 4,041,316 RAILROADS - 0.7% Burlington Northern Santa Fe Corp.: 6 7/8%, 12/1/27 Baa2 2,000,000 1,990,000 6.53%, 7/15/37 Baa2 5,000,000 5,078,000 7,068,000 TOTAL TRANSPORTATION 11,109,316 UTILITIES - 5.2% CELLULAR - 1.0% Airtouch Communications, Inc. 7%, 10/1/03 Baa2 9,500,000 9,747,285 360 Degrees Communications Co. 7 1/8%, 3/1/03 Ba1 279,000 288,187 10,035,472 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (B) AMOUNT (NOTE 1) UTILITIES - CONTINUED ELECTRIC UTILITY - 2.6% Avon Energy Partners Holdings: 7.05%, 12/11/07 (a) Baa2 $ 6,000,000 $ 6,184,200 6.46%, 3/4/08 (a) Baa2 3,200,000 3,161,888 British Columbia Hydro & Power Authority yankee 12 1/2%, 1/15/14 Aa2 410,000 446,006 DR Investment yankee 7.10%, 5/15/02 (a) Baa1 2,000,000 2,049,125 Hydro-Quebec yankee 8%, 2/1/13 A2 250,000 280,450 Israel Electric Corp. Ltd.: yankee 7 1/4%, 12/15/06 (a) A3 1,000,000 1,024,970 7 3/4%, 12/15/27 (a) A3 5,195,000 5,239,521 Philadelphia Electric Co. 1st & ref. mtg.: 8 5/8%, 6/1/22 Baa1 300,000 317,418 8 1/4%, 9/1/22 Baa1 100,000 103,470 7 3/4%, 5/1/23 Baa1 1,000,000 1,008,150 Texas Utilities Co., Series C, 6 3/8%, 1/1/08 (a) Baa3 5,925,000 5,689,422 25,504,620 GAS - 0.4% Mitchell Energy & Development Corp. 8%, 7/15/99 Baa3 2,520,000 2,571,559 Panhandle Eastern Corp. 8 5/8%, 12/1/99 A3 1,000,000 1,039,810 3,611,369 TELEPHONE SERVICES - 1.2% Cable & Wireless Communications PLC 6 3/8%, 3/6/03 Baa1 3,460,000 3,461,972 GTE Corp. 7.83%, 5/1/23 Baa1 1,000,000 1,047,480 WorldCom, Inc.: 9 3/8%, 1/15/04 Ba1 3,486,000 3,694,114 7 3/4%, 4/1/07 Ba1 2,920,000 3,147,906 11,351,472 TOTAL UTILITIES 50,502,933 TOTAL NONCONVERTIBLE BONDS (Cost $286,780,685) 291,382,633 U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - 12.2% MOODY'S PRINCIPAL VALUE RATINGS (B) AMOUNT (NOTE 1) U.S. TREASURY OBLIGATIONS - 9.3% 5 1/2%, 12/31/00 Aaa $ 6,220,000 $ 6,198,603 6 3/8%, 9/30/01 Aaa 35,000,000 35,771,050 5 7/8%, 11/30/01 Aaa 7,030,000 7,077,242 7%, 7/15/06 Aaa 9,685,000 10,467,354 6 7/8%, 8/15/25 Aaa 22,735,000 25,356,573 6 3/8%, 8/15/27 Aaa 360,000 380,250 6 1/8%, 11/15/27 Aaa 4,850,000 4,973,530 90,224,602 U.S. GOVERNMENT AGENCY OBLIGATIONS - 2.9% Fannie Mae 6.72%, 8/1/05 Aaa 1,740,000 1,812,854 Federal Home Loan Bank: 7.31%, 6/16/04 Aaa 5,000,000 5,350,000 7.36%, 7/1/04 Aaa 7,900,000 8,472,750 7.87%, 10/20/04 Aaa 1,700,000 1,873,723 Financing Corporation 0%, 3/26/04 Aaa 5,606,000 3,934,011 Freddie Mac 8.115%, 1/31/05 Aaa 4,350,000 4,869,260 Guaranteed Export Trust Certificates (assets of Trust Guaranteed by U.S. Government through Export-Import Bank) Series 1994-C, 6.61%, 9/15/99 Aaa 28,497 28,645 U.S. Department of Housing and Urban Development Government guaranteed participation certificates Series 1995-A, 8.24%, 8/1/04 Aaa 1,000,000 1,116,920 27,458,163 TOTAL U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS (Cost $116,782,997) 117,682,765 U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - 30.0% FANNIE MAE - 27.4% 5 1/2%, 1/1/09 to 3/1/11 Aaa 15,597,073 15,129,449 6%, 4/1/13 (e) Aaa 73,500,000 72,876,719 6%, 1/1/24 to 11/1/25 Aaa 6,471,022 5,786,940 6 1/2%, 12/1/02 to 4/1/28 Aaa 93,623,498 92,491,329 6 1/2%, 4/1/13 (e) Aaa 17,000,000 16,840,271 7%, 4/1/13 to 5/1/13 (e) Aaa 59,280,000 60,014,839 8%, 12/1/21 to 12/1/24 Aaa 750,675 778,109 9 1/2%, 4/1/17 to 12/1/18 Aaa 1,335,394 1,442,037 265,359,693 FREDDIE MAC - 0.1% 7%, 6//1/01 to 7/1/01 Aaa 606,327 613,567 U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (B) AMOUNT (NOTE 1) GOVERNMENT NATIONAL MORTGAGE ASSOCATION - 2.5% 6%, 10/15/08 to 5/15/09 Aaa $ 3,805,117 $ 3,787,237 7 1/2%, 12/15/25 to 2/15/28 Aaa 19,354,800 19,844,998 9 1/2%, 7/15/16 to 3/15/22 Aaa 829,650 900,312 24,532,547 TOTAL U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES (Cost $290,441,925) 290,505,807 COMMERCIAL MORTGAGE SECURITIES - 1.2% BKB Commercial Mortgage Trust Series 1997-C1 Class A-1, 6 7/8%, 2/25/43 (a) AAA 180,242 179,792 CS First Boston Mortgage Securities Corp. Series 1997-C2 Class D, 7.27%, 4/17/11 Baa2 2,200,000 2,221,313 Equitable Life Assurance Society of the United States (The): Series 174 Class B1, 7.33%, 5/15/06 (a) Aa2 1,000,000 1,051,950 Series 1996-1 Class C1, 7.52%, 5/15/06 (a) A2 1,000,000 1,056,330 General Motors Acceptance Corp. Commercial Mortgage Securities, Inc. Series 1997-C2 Class E, 7.624%, 4/15/11 Baa3 1,880,000 1,904,381 Oregon Commercial Mortgage, Inc. Series 1995-1 Class A, 7.15%, 6/25/26 (a)(d) AAA 53,083 53,000 Structured Asset Securities Corp. sequential pay Series 1996 Class A-2A, 7 3/4%, 2/25/28 AAA 1,515,000 1,529,440 Thirteen Affiliates of General Growth Properties, Inc. sequential pay Series A-2, 6.602%, 11/15/12 (a) Aaa 3,000,000 3,042,870 Wells Fargo Capital Markets Apartment Financing Trust 6.56%, 12/29/05 (a) Aaa 575,661 583,842 TOTAL COMMERCIAL MORTGAGE SECURITIES (Cost $11,417,582) 11,622,918 FOREIGN GOVERNMENT OBLIGATIONS - 1.2% Alberta Province yankee 9 1/4%, 4/1/00 Aa2 1,650,000 1,748,324 Manitoba Province yankee 6 7/8%, 9/15/02 A1 6,300,000 6,466,131 New Brunswick Province yankee 7 5/8%, 2/15/13 A1 500,000 556,000 FOREIGN GOVERNMENT OBLIGATIONS - CONTINUED MOODY'S PRINCIPAL VALUE RATINGS (B) AMOUNT (NOTE 1) Ontario Province 7%, 8/4/05 Aa3 $ 2,000,000 $ 2,103,280 Saskatchewan Province yankee 8 1/2%, 7/15/22 A3 300,000 365,298 TOTAL FOREIGN GOVERNMENT OBLIGATIONS (Cost $11,043,936) 11,239,033 SUPRANATIONAL OBLIGATIONS - 0.5% Inter American Development Bank yankee 6.29%, 7/16/27 (Cost $4,968,550) Aaa 5,000,000 5,251,650 CERTIFICATES OF DEPOSIT - 12.7% Bank of Tokyo-Mitsubishi Ltd. yankee: 6%, 4/13/98 - 3,000,000 3,000,140 6%, 4/23/98 Aa2 37,000,000 37,003,511 Canadian Imperial Bank of Commerce NY Branch yankee 6.20%, 8/1/00 Aa3 2,500,000 2,506,150 Sanwa Bank Ltd. Japan yankee: 6 1/2%, 4/13/98 - 35,000,000 35,004,274 6.23%, 4/27/98 - 5,000,000 5,001,354 Sumitomo Bank Ltd. Japan yankee: 6.05%, 4/13/98 - 35,000,000 35,002,156 6.05%, 4/27/98 A1 5,000,000 5,000,736 TOTAL CERTIFICATES OF DEPOSIT (Cost $122,503,750) 122,518,321 CASH EQUIVALENTS - 12.1% MATURITY AMOUNT Investments in repurchase agreements (U.S. Treasury obligations), in a joint trading account at 5.92%, dated 3/31/98 due 4/1/98 $ 116,842,225 116,823,000 TOTAL INVESTMENT IN SECURITIES - 100% (Cost $960,762,425) $ 967,026,127 LEGEND (a) 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 $51,721,929 or 6.3% of net assets. (b) Standard & Poor's credit ratings are used in the absence of a rating by Moody's Investors Service, Inc. (c) Debt obligation initially issued at one coupon which converts to a higher coupon at a specified date. The rate shown is the rate at period end. (d) The coupon rate shown on floating or adjustable rate securities represents the rate at period end. (e) Security purchased on a delayed delivery or when-issued basis (see Note 2 of Notes to Financial Statements). OTHER INFORMATION The composition of long-term debt holdings as a percentage of total value of investment in securities, is as follows: MOODY'S RATINGS S&P RATINGS Aaa, Aa, A 57.9% AAA, AA, A 56.1% Baa 14.2% BBB 17.5% Ba 2.9% BB 0.9% B 0.0% B 0.0% Caa 0.0% CCC 0.0% Ca, C 0.0% CC, C 0.0% D 0.0% For some foreign government obligations, FMR has assigned the ratings of the sovereign credit of the issuing government. Distribution of investments by country of issue, as a percentage of total value of investment in securities, is as follows: United States 82.6% Japan 12.9 Canada 1.5 United Kingdom 1.2 Others (individually less than 1%) 1.8 TOTAL 100.0% INCOME TAX INFORMATION At March 31, 1998, the aggregate cost of investment securities for income tax purposes was $960,815,966. Net unrealized appreciation aggregated $6,210,161, of which $8,298,128 related to appreciated investment securities and $2,087,967 related to depreciated investment securities. At September 30, 1997, the fund had a capital loss carryforward of approximately $6,771,000 of which $105,000, $446,000 and $6,220,000 will expire on September 30, 2003, 2004, and 2005, respectively. The fund intends to elect to defer to its fiscal year ending September 30, 1998, approximately $606,000 of losses recognized during the period November 1, 1996 to September 30, 1997. At September 30, 1997, the fund was required to defer approximately $54,000 of losses on futures contracts. FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1998 (UNAUDITED) ASSETS INVESTMENT IN SECURITIES, AT VALUE (INCLUDING REPURCHASE $ 967,026,127 AGREEMENTS OF $116,823,000) (COST $960,762,425) - SEE ACCOMPANYING SCHEDULE CASH 12,329 RECEIVABLE FOR INVESTMENTS SOLD 963,013 RECEIVABLE FOR FUND SHARES SOLD 1,539,350 INTEREST RECEIVABLE 8,506,223 TOTAL ASSETS 978,047,042 LIABILITIES PAYABLE FOR INVESTMENTS PURCHASED $ 5,901,448 REGULAR DELIVERY DELAYED DELIVERY 149,731,829 PAYABLE FOR FUND SHARES REDEEMED 1,763,850 DISTRIBUTIONS PAYABLE 533,729 ACCRUED MANAGEMENT FEE 256,168 TOTAL LIABILITIES 158,187,024 NET ASSETS $ 819,860,018 NET ASSETS CONSIST OF: PAID IN CAPITAL $ 812,176,418 DISTRIBUTIONS IN EXCESS OF NET INVESTMENT INCOME (244,978) ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON 1,664,876 INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS 6,263,702 NET ASSETS, FOR 78,868,180 SHARES OUTSTANDING $ 819,860,018 NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE $10.40 PER SHARE ($819,860,018 (DIVIDED BY) 78,868,180 SHARES)
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MARCH 31, 1998 (UNAUDITED) INVESTMENT INCOME $ 22,211,226 INTEREST EXPENSES MANAGEMENT FEE $ 2,210,675 NON-INTERESTED TRUSTEES' COMPENSATION 1,207 TOTAL EXPENSES BEFORE REDUCTIONS 2,211,882 EXPENSE REDUCTIONS (918,273) 1,293,609 NET INVESTMENT INCOME 20,917,617 REALIZED AND UNREALIZED GAIN (LOSS) 9,311,652 NET REALIZED GAIN (LOSS) ON INVESTMENT SECURITIES CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) (1,796,640) ON INVESTMENT SECURITIES NET GAIN (LOSS) 7,515,012 NET INCREASE (DECREASE) IN NET ASSETS RESULTING $ 28,432,629 FROM OPERATIONS
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED MARCH 31, 1998 SEPTEMBER 30, (UNAUDITED) 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS $ 20,917,617 $ 25,681,700 NET INVESTMENT INCOME NET REALIZED GAIN (LOSS) 9,311,652 487,898 CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) (1,796,640) 11,421,374 NET INCREASE (DECREASE) IN NET ASSETS RESULTING 28,432,629 37,590,972 FROM OPERATIONS DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME (20,961,528) (25,739,925) SHARE TRANSACTIONS 386,546,119 359,111,379 NET PROCEEDS FROM SALES OF SHARES REINVESTMENT OF DISTRIBUTIONS 18,169,448 21,867,052 COST OF SHARES REDEEMED (143,080,243) (185,908,497) NET INCREASE (DECREASE) IN NET ASSETS RESULTING 261,635,324 195,069,934 FROM SHARE TRANSACTIONS TOTAL INCREASE (DECREASE) IN NET ASSETS 269,106,425 206,920,981 NET ASSETS BEGINNING OF PERIOD 550,753,593 343,832,612 END OF PERIOD (INCLUDING DISTRIBUTIONS IN EXCESS OF $ 819,860,018 $ 550,753,593 NET INVESTMENT INCOME OF $244,978 AND $201,067, RESPECTIVELY) OTHER INFORMATION SHARES SOLD 37,182,325 35,504,616 ISSUED IN REINVESTMENT OF DISTRIBUTIONS 1,750,012 2,160,519 REDEEMED (13,775,785) (18,406,632) NET INCREASE (DECREASE) 25,156,552 19,258,503
FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED YEARS ENDED SEPTEMBER 30, OCTOBER 1, 1992 MARCH 31, 1998 (COMMENCEMENT OF OPERATIONS) TO SEPTEMBER 30, (UNAUDITED) 1997 1996 1995 1994 1993
SELECTED PER-SHARE DATA
NET ASSET VALUE, $ 10.250 $ 9.980 $ 10.170 $ 9.510 $ 10.940 $ 10.000 BEGINNING OF PERIOD INCOME FROM INVESTMENT .316 D .640 D .655 .693 .668 .799 OPERATIONS NET INVESTMENT INCOME NET REALIZED AND .152 .273 (.211) .673 (1.384) .940 UNREALIZED GAIN (LOSS) TOTAL FROM INVESTMENT .468 .913 .444 1.366 (.716) 1.739 OPERATIONS LESS DISTRIBUTIONS FROM NET INVESTMENT (.318) (.643) (.634) (.686) (.704) (.798) INCOME IN EXCESS OF NET - - - - - (.001) INVESTMENT INCOME IN EXCESS OF NET - - - (.020) (.010) - REALIZED GAIN TOTAL DISTRIBUTIONS (.318) (.643) (.634) (.706) (.714) (.799) NET ASSET VALUE, $ 10.400 $ 10.250 $ 9.980 $ 10.170 $ 9.510 $ 10.940 END OF PERIOD TOTAL RETURN B, C 4.61% 9.43% 4.46% 14.94% (6.75)% 18.17% RATIOS AND SUPPLEMENTAL DATA NET ASSETS, END OF $ 819,860 $ 550,754 $ 343,833 $ 147,620 $ 106,207 $ 128,860 PERIOD (000 OMITTED) RATIO OF EXPENSES TO .38% A, E .48% E .65% .65% .65% .65% AVERAGE NET ASSETS RATIO OF NET INVESTMENT 6.15% A 6.36% 6.35% 6.92% 6.90% 7.58% INCOME TO AVERAGE NET ASSETS PORTFOLIO TURNOVER RATE 311% A 194% 169% 147% 44% 55%
A ANNUALIZED B TOTAL RETURNS DO NOT INCLUDE THE ACCOUNT CLOSEOUT FEE AND FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED. C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. E FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). NOTES TO FINANCIAL STATEMENTS For the period ended March 31, 1998 (Unaudited) 1. SIGNIFICANT ACCOUNTING POLICIES. Spartan Investment Grade Bond Fund (the fund) is a fund of Fidelity Charles Street Trust (the trust) and is authorized to issue an unlimited number of shares. The trust is registered under the Investment Company Act of 1940, as amended (the 1940 Act), as an open-end management investment company organized as a Massachusetts business trust. The financial statements have been prepared in conformity with generally accepted accounting principles which require management to make certain estimates and assumptions at the date of the financial statements. The following summarizes the significant accounting policies of the fund: SECURITY VALUATION. Securities 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. FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing rates of exchange at period end. Purchases and sales of securities, income receipts and expense payments are translated into U.S. dollars at the prevailing exchange rate on the respective dates of the transactions. Net realized gains and losses on foreign currency transactions represent net gains and losses from sales and maturities of foreign currency contracts, disposition of foreign currencies, the difference between the amount of net investment income accrued and the U.S. dollar amount actually received, and gains and losses between trade date and settlement on purchases and sales of securities. The effects of changes in foreign currency exchange rates on investments in securities are included with the net realized and unrealized gain or loss on investment securities. INCOME TAXES. As a qualified regulated investment company under Subchapter M of the Internal Revenue Code, the fund is not subject to income taxes to the extent that it distributes substantially all of its taxable income for its fiscal year. The schedule of investments includes information regarding income taxes under the caption "Income Tax Information." INVESTMENT INCOME. Interest income, which includes accretion of original issue discount, is accrued as earned. 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 among the funds in the trust. DISTRIBUTIONS TO SHAREHOLDERS. Distributions are declared daily and paid monthly from net investment income. Distributions from realized gains, if any, are recorded on the ex-dividend date. Income 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 transactions, market discount, capital loss carryforwards 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. 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 that 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. JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the fund, along with other affiliated entities of Fidelity Management & Research Company (FMR), may transfer uninvested cash balances into one or more joint trading accounts. These balances are invested in one or more repurchase agreements for U.S. Treasury or Federal Agency obligations. REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency securities are transferred to an account of the fund, or to the Joint Trading Account, at a bank custodian. The securities are marked-to-market daily and maintained at a value at least equal to the principal amount of the repurchase agreement (including accrued interest). FMR, the fund's investment adviser, is responsible for determining that the value of the underlying securities remains in accordance with the market value requirements stated above. DELAYED DELIVERY TRANSACTIONS. The fund may purchase or sell securities on a delayed delivery basis. Payment and delivery may take place a month or more after the date of the transaction. The price of the underlying securities and the date when the securities will be delivered and paid for are fixed at the time the transaction is negotiated. The market values of the securities purchased or sold on a delayed delivery basis are identified as such in the fund's schedule of investments. With respect to purchase commitments, the fund identifies securities as segregated 2. OPERATING POLICIES - CONTINUED DELAYED DELIVERY TRANSACTIONS - CONTINUED 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. RESTRICTED SECURITIES. The fund is permitted to invest in securities that are subject to legal or contractual restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are registered. Disposal of these securities may involve time-consuming negotiations and expense, and prompt sale at an acceptable price may be difficult. At the end of the period, the fund had no investments in restricted securities (excluding 144A issues). 3. PURCHASES AND SALES OF INVESTMENTS. Purchases and sales of securities, other than short-term securities, aggregated $1,163,570,058 and $957,176,018, respectively, of which U.S. government and government agency obligations aggregated $1,018,862,546 and $902,383,631, respectively. 4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES. MANAGEMENT FEE. As the fund's investment adviser, FMR pays all expenses, except the compensation of the non-interested Trustees and certain exceptions such as interest, taxes, brokerage commissions and extraordinary expenses. FMR receives a fee that is computed daily at an annual rate of .65% of the fund's average net assets. FMR also bears the cost of providing shareholder services to the fund. To offset the cost of providing these services, FMR or its affiliates collect certain transaction fees from the fund's shareholders which amounted to $5,888 for the period. 5. EXPENSE REDUCTIONS. FMR voluntarily agreed to reimburse the fund's operating expenses (excluding interest, taxes, brokerage commissions and extraordinary expenses) above an annual rate of .38% of average net assets. For the period, the reimbursement reduced the expenses by $912,775. In addition, FMR has entered into arrangements on behalf of the fund with the fund's custodian and transfer agent whereby credits realized as a result of uninvested cash balances were used to reduce a portion of the fund's expenses. During the period, the fund's expenses were reduced by $5,498 under these arrangements. MANAGING YOUR INVESTMENTS Fidelity offers several ways to conveniently manage your personal investments via your telephone or PC. You can access your account information, conduct trades and research your investments 24 hours a day. BY PHONE Fidelity TouchTone Xpressprovides a single toll-free number to access account balances, positions, quotes and trading. It's easy to navigate the service, and on your first call, the system will help you create a personal identification number (PIN) for security. SM (PHONE_GRAPHIC)TOUCHTONE XPRESS 1-800-544-5555 PRESS For mutual fund and brokerage trading. For quotes.* For account balances and holdings. To review orders and mutual fund activity. To change your PIN. To speak to a Fidelity representative. 0 * BY PC Fidelity's Web site on the Internet provides a wide range of information, including daily financial news, fund performance, interactive planning tools and news about Fidelity products and services. (PHONE_GRAPHIC)FIDELITY'S WEB SITE WWW.FIDELITY.COM If you are not currently on the Internet, call Fidelity at 1-800-544-7272 for significant savings on Web access from internetMCI. SM (PHONE_GRAPHIC) FIDELITY ON-LINE XPRESS+ TM Fidelity On-line Xpress+ software for Windows combines comprehensive portfolio management capabilities, securities trading and access to research and analysis tools . . . all on your desktop. Call Fidelity at 1-800-544-7272 or visit our Web site for more information on how to manage your investments via your PC. * WHEN YOU CALL THE QUOTES LINE, PLEASE REMEMBER THAT A FUND'S YIELD AND RETURN WILL VARY AND, EXCEPT FOR MONEY MARKET FUNDS, SHARE PRICE WILL ALSO VARY. THIS MEANS THAT YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. THERE IS NO ASSURANCE THAT MONEY MARKET FUNDS WILL BE ABLE TO MAINTAIN A STABLE $1 SHARE PRICE; AN INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT. TOTAL RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE, REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS, AND THE EFFECTS OF ANY SALES CHARGES. TO WRITE FIDELITY If more than one address is listed, please locate the address that is closest to you. We'll give your correspondence immediate attention and send you written confirmation upon completion of your request. (LETTER_GRAPHIC)MAKING CHANGES TO YOUR ACCOUNT (such as changing name, address, bank, etc.) Fidelity Investments P.O. Box 770001 Cincinnati, OH 45277-0002 (LETTER_GRAPHIC)FOR NON-RETIREMENT ACCOUNTS BUYING SHARES Fidelity Investments P.O. Box 770001 Cincinnati, OH 45277-0003 OVERNIGHT EXPRESS Fidelity Investments 2300 Litton Lane - KH1A Hebron, KY 41048 SELLING SHARES Fidelity Investments P.O. Box 660602 Dallas, TX 75266-0602 OVERNIGHT EXPRESS Fidelity Investments Attn: Redemptions - CP6I 400 East Las Colinas Blvd. Irving, TX 75309-5517 GENERAL CORRESPONDENCE Fidelity Investments P.O. Box 500 Merrimack, NH 03054-0500 (LETTER_GRAPHIC)FOR RETIREMENT ACCOUNTS BUYING SHARES Fidelity Investments P.O. Box 770001 Cincinnati, OH 45277-0003 SELLING SHARES Fidelity Investments P.O. Box 660602 Dallas, TX 75266-0602 OVERNIGHT EXPRESS Fidelity Investments Attn: Redemptions - CP6R 400 East Las Colinas Blvd. Irving, TX 75309-5517 GENERAL CORRESPONDENCE Fidelity Investments P.O. Box 500 Merrimack, NH 03054-0500 TO VISIT FIDELITY For directions and hours, please call 1-800-544-9797. ARIZONA 7373 N. Scottsdale Road Scottsdale, AZ CALIFORNIA 815 East Birch Street Brea, CA 851 East Hamilton Avenue Campbell, CA 527 North Brand Boulevard Glendale, CA 19100 Von Karman Avenue Irvine, CA 10100 Santa Monica Blvd. Los Angeles, CA 251 University Avenue Palo Alto, CA 1760 Challenge Way Sacramento, CA 7676 Hazard Center Drive San Diego, CA 455 Market Street San Francisco, CA 950 Northgate Drive San Rafael, CA 1400 Civic Drive Walnut Creek, CA 6300 Canoga Avenue Woodland Hills, CA COLORADO 1625 Broadway Denver, CO CONNECTICUT 48 West Putnam Avenue Greenwich, CT 265 Church Street New Haven, CT 300 Atlantic Street Stamford, CT 29 South Main Street West Hartford, CT DELAWARE 222 Delaware Avenue Wilmington, DE FLORIDA 4400 N. Federal Highway Boca Raton, FL 90 Alhambra Plaza Coral Gables, FL 4090 N. Ocean Boulevard Ft. Lauderdale, FL 1907 West State Road 434 Longwood, FL 4001 Tamiami Trail, North Naples, FL 2401 PGA Boulevard Palm Beach Gardens, FL 8065 Beneva Road Sarasota, FL 1502 N. Westshore Blvd. Tampa, FL GEORGIA 3445 Peachtree Road, N.E. Atlanta, GA 1000 Abernathy Road Atlanta, GA HAWAII 700 Bishop Street Honolulu, HI ILLINOIS One North Franklin Street Chicago, IL 1415 West 22nd Street Oak Brook, IL 1700 East Golf Road Schaumburg, IL 3232 Lake Avenue Wilmette, IL INDIANA 4729 East 82nd Street Indianapolis, IN MAINE 3 Canal Plaza Portland, ME MARYLAND 7401 Wisconsin Avenue Bethesda, MD 1 West Pennsylvania Ave. Towson, MD MASSACHUSETTS 470 Boylston Street Boston, MA 155 Congress Street Boston, MA 25 State Street Boston, MA 300 Granite Street Braintree, MA 44 Mall Road Burlington, MA 416 Belmont Street Worcester, MA MICHIGAN 280 North Woodward Ave. Birmingham, MI 29155 Northwestern Hwy. Southfield, MI MINNESOTA 7600 France Avenue South Edina, MN MISSOURI 700 West 47th Street Kansas City, MO 8885 Ladue Road Ladue, MO 200 North Broadway St. Louis, MO NEW JERSEY 150 Essex Street Millburn, NJ 56 South Street Morristown, NJ 501 Route 17, South Paramus, NJ NEW YORK 1055 Franklin Avenue Garden City, NY 999 Walt Whitman Road Melville, L.I., NY 1271 Avenue of the Americas New York, NY 71 Broadway New York, NY 350 Park Avenue New York, NY NORTH CAROLINA 4611 Sharon Road Charlotte, NC 2200 West Main Street Durham, NC OHIO 600 Vine Street Cincinnati, OH 28699 Chagrin Boulevard Woodmere Village, OH OREGON 16850 SW 72 Avenue Tigard, OR PENNSYLVANIA 1735 Market Street Philadelphia, PA 439 Fifth Avenue Pittsburgh, PA TENNESSEE 6150 Poplar Road Memphis, TN TEXAS 10000 Research Boulevard Austin, TX 4017 Northwest Parkway Dallas, TX 1155 Dairy Ashford Street Houston, TX 2701 Drexel Drive Houston, TX 400 East Las Colinas Blvd. Irving, TX 14100 San Pedro San Antonio, TX 19740 IH 45 North Spring, TX UTAH 215 South State Street Salt Lake City, UT VIRGINIA 8180 Greensboro Drive McLean, VA WASHINGTON 411 108th Avenue, N.E. Bellevue, WA 511 Pine Street Seattle, WA WASHINGTON, DC 1900 K Street, N.W. Washington, DC WISCONSIN 595 North Barker Road Brookfield, WI 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 Robert C. Pozen, Senior Vice President Fred L. Henning, Jr., Vice President Dwight D. Churchill, Vice President Kevin Grant, Vice President Eric D. Roiter, Secretary Richard A. Silver, Treasurer John H. Costello, Assistant Treasurer Leonard M. Rush, Assistant Treasurer BOARD OF TRUSTEES Ralph F. Cox * Phyllis Burke Davis * Robert M. Gates * Edward C. Johnson 3d E. Bradley Jones * Donald J. Kirk * Peter S. Lynch Marvin L. Mann * William O. McCoy * Gerald C. McDonough * Robert C. Pozen Thomas R. Williams * ADVISORY BOARD J. Gary Burkhead GENERAL DISTRIBUTOR Fidelity Distributors Corporation Boston, MA * INDEPENDENT TRUSTEES TRANSFER AND SHAREHOLDER SERVICING AGENT Fidelity Service Company, Inc. Boston, MA CUSTODIAN The Bank of New York New York, NY FIDELITY'S TAXABLE BOND FUNDS Capital & Income Ginnie Mae Government Securities Intermediate Bond International Bond Investment Grade Bond New Markets Income Short-Intermediate Government Short-Term Bond Spartan(registered trademark) Ginnie Mae Spartan Government Income Spartan High Income Spartan Investment Grade Bond Spartan Limited Maturity Government Spartan Short-Intermediate Government Spartan Short-Term Bond Target Timeline1999, 2001 & 2003 SM THE FIDELITY TELEPHONE CONNECTION MUTUAL FUND 24-HOUR SERVICE Exchanges/Redemptions 1-800-544-7777 Account Assistance 1-800-544-6666 Product Information 1-800-544-8888 Retirement Accounts 1-800-544-4774 (8 a.m. - 9 p.m.) TDD Service 1-800-544-0118 for the deaf and hearing impaired (9 a.m. - 9 p.m. Eastern time) (registered trademark) TouchTone Xpress 1-800-544-5555 SM AUTOMATED LINE FOR QUICKEST SERVICE (2_FIDELITY_LOGOS)SPARTAN(registered trademark) SHORT-TERM BOND FUND SEMIANNUAL REPORT MARCH 31, 1998 CONTENTS PRESIDENT'S MESSAGE 3 NED JOHNSON ON INVESTING STRATEGIES. PERFORMANCE 4 HOW THE FUND HAS DONE OVER TIME. FUND TALK 7 THE MANAGER'S REVIEW OF FUND PERFORMANCE, STRATEGY AND OUTLOOK. INVESTMENT CHANGES 10 A SUMMARY OF MAJOR SHIFTS IN THE FUND'S INVESTMENTS OVER THE PAST SIX MONTHS. INVESTMENTS 11 A COMPLETE LIST OF THE FUND'S INVESTMENTS WITH THEIR MARKET VALUES. FINANCIAL STATEMENTS 22 STATEMENTS OF ASSETS AND LIABILITIES, OPERATIONS, AND CHANGES IN NET ASSETS, AS WELL AS FINANCIAL HIGHLIGHTS. NOTES 26 NOTES TO THE FINANCIAL STATEMENTS. THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE FUND. THIS REPORT IS NOT AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS IN THE FUND UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE PROSPECTUS. MUTUAL FUND SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY DEPOSITORY INSTITUTION. SHARES ARE NOT INSURED BY THE FDIC, FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED. NEITHER THE FUND NOR FIDELITY DISTRIBUTORS CORPORATION IS A BANK. FOR MORE INFORMATION ON ANY FIDELITY FUND, INCLUDING CHARGES AND EXPENSES, CALL 1-800-544-8888 FOR A FREE PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY. To reduce expenses and demonstrate respect for our environment, we have initiated a project through which we will begin eliminating duplicate copies of most financial reports and prospectuses to most households, even if they have more than one account in the fund. If additional copies of financial reports, prospectuses or historical account information are needed, please call 1-800-544-6666. PRESIDENT'S MESSAGE (PHOTO_OF_EDWARD_C_JOHNSON_3D)DEAR SHAREHOLDER: In the first quarter of 1998, the U.S. stock and bond markets responded differently to lingering uncertainty over the direction of the U.S. and global economies. On the one hand, the U.S. stock market soared to record heights as corporate earnings proved to be stronger than expected and investors shrugged off concerns about the effects of economic difficulties in Asia. On the other hand, two factors tempered returns in the bond market. First, interest-rate levels were generally positive, but were low enough to encourage a flood of new issuance that dampened performance. Second, there were concerns that continued economic strength might lead to eventual inflation, even though inflation indicators remained benign during the quarter. While it's impossible to predict the future direction of the markets with any degree of certainty, there are certain basic principles that can help investors plan for their future needs. The longer your investment time frame, the less likely it is that you will be affected by short-term market volatility. A 10-year investment horizon appropriate for saving for a college education, for example, enables you to weather market cycles in a long-term fund, which may have a higher risk potential, but also has a higher potential rate of return. An intermediate-length fund could make sense if your investment horizon is two to four years, while a short-term bond fund could be the right choice if you need your money in one or two years. If your time horizon is less than a year, you might want to consider moving some of your bond investment into a money market fund. These funds seek income and a stable share price by investing in high-quality, short-term investments. Of course, it's important to remember that there is no assurance that a money market fund will achieve its goal of maintaining a stable net asset value of $1.00 per share, and that these types of funds are neither insured nor guaranteed by any agency of the U.S. government. Finally, no matter what your time horizon or portfolio diversity, it makes good sense to follow a regular investment plan, investing a certain amount of money in a fund at the same time each month or quarter and periodically reviewing your overall portfolio. By doing so, you won't get caught up in the excitement of a rapidly rising market, nor will you buy all your shares at market highs. While this strategy - known as dollar cost averaging - won't assure a profit or protect you from a loss in a declining market, it should help you lower the average cost of your purchases. If you have questions, please call us at 1-800-544-8888. We are available 24 hours a day, seven days a week to provide you the information you need to make the investments that are right for you. Best regards, Edward C. Johnson 3d PERFORMANCE: THE BOTTOM LINE 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), and the effect of the $5 account closeout fee on an average sized account. You can also look at the fund's income, as reflected in the fund's yield, to measure performance. If Fidelity had not reimbursed certain fund expenses, the total returns and dividends would have been lower. CUMULATIVE TOTAL RETURNS PERIODS ENDED MARCH 31, 1998 PAST 6 PAST 1 PAST 5 LIFE OF MONTHS YEAR YEARS FUND SPARTAN SHORT-TERM BOND 3.14% 7.52% 25.85% 30.38% LB 1-3 GOVT/CORP 3.12% 7.52% 31.08% N/A SHORT INVESTMENT GRADE DEBT 2.77% 7.00% 29.33% N/A FUNDS AVERAGE CUMULATIVE TOTAL RETURNS show the fund's performance in percentage terms over a set period - in this case, six months, one year or since the fund started on October 1, 1992. For example, if you had invested $1,000 in a fund that had a 5% return, over the past year, the value of your investment would be $1,050. You can compare the fund's returns to the performance of the Lehman Brothers 1-3 Year Government/Corporate Bond Index - a market value weighted performance benchmark for government and corporate fixed-rate debt issues, with maturities between one and three years. To measure how the fund's performance stacked up against its peers, you can compare it to the short investment grade debt funds average, which reflects the performance of mutual funds with similar objectives tracked by Lipper Analytical Services, Inc. The past six months average represents a peer group of 103 mutual funds. These benchmarks include reinvested dividends and capital gains, if any, and exclude the effect of sales charges. AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED MARCH 31, 1998 PAST 1 PAST 5 LIFE OF YEAR YEARS FUND SPARTAN SHORT-TERM BOND FUND 7.52% 4.71% 4.94% LB 1-3 GOVT/CORP 7.52% 5.56% N/A SHORT INVESTMENT GRADE DEBT FUNDS AVERAGE 7.00% 5.27% N/A AVERAGE ANNUAL TOTAL 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. (Note: Lipper calculates average annual total returns by annualizing each fund's total return, then taking an arithmetic average. This may produce a slightly different figure than that obtained by averaging the cumulative total returns and annualizing the result.) $10,000 OVER LIFE OF FUND Spartan Short-Term Bond LB 1-3 Year Govt/Corp 00449 LB013 1992/10/31 10000.00 10000.00 1992/11/30 10007.37 9985.91 1992/12/31 10100.06 10080.21 1993/01/31 10245.37 10187.78 1993/02/28 10362.03 10270.90 1993/03/31 10428.83 10304.27 1993/04/30 10491.81 10368.93 1993/05/31 10517.30 10345.31 1993/06/30 10633.77 10423.65 1993/07/31 10696.60 10447.49 1993/08/31 10801.74 10534.96 1993/09/30 10840.89 10568.95 1993/10/31 10900.33 10593.61 1993/11/30 10925.24 10596.72 1993/12/31 11009.87 10639.63 1994/01/31 11082.02 10707.40 1994/02/28 11001.58 10642.53 1994/03/31 10793.58 10587.81 1994/04/30 10672.90 10547.60 1994/05/31 10776.08 10561.90 1994/06/30 10637.30 10589.67 1994/07/31 10716.07 10686.05 1994/08/31 10772.43 10722.12 1994/09/30 10806.21 10698.28 1994/10/31 10793.34 10722.74 1994/11/30 10802.42 10677.76 1994/12/31 10500.90 10698.07 1995/01/31 10584.46 10845.03 1995/02/28 10686.93 10995.09 1995/03/31 10746.59 11057.48 1995/04/30 10852.82 11157.58 1995/05/31 11033.96 11350.76 1995/06/30 11103.44 11412.52 1995/07/31 11148.58 11458.12 1995/08/31 11219.00 11527.56 1995/09/30 11275.92 11584.55 1995/10/31 11374.74 11680.73 1995/11/30 11469.71 11781.25 1995/12/31 11545.13 11870.58 1996/01/31 11645.60 11972.14 1996/02/29 11604.18 11926.54 1996/03/31 11580.33 11917.84 1996/04/30 11593.17 11929.86 1996/05/31 11620.33 11957.43 1996/06/30 11710.28 12044.89 1996/07/31 11749.76 12091.74 1996/08/31 11789.36 12136.30 1996/09/30 11892.38 12247.39 1996/10/31 12024.38 12385.64 1996/11/30 12114.43 12478.50 1996/12/31 12126.29 12480.57 1997/01/31 12176.93 12540.88 1997/02/28 12207.78 12571.97 1997/03/31 12207.08 12562.23 1997/04/30 12299.58 12665.24 1997/05/31 12380.91 12753.75 1997/06/30 12475.64 12842.46 1997/07/31 12614.79 12985.06 1997/08/31 12629.16 12997.28 1997/09/30 12724.82 13097.39 1997/10/31 12809.73 13191.70 1997/11/30 12835.18 13224.86 1997/12/31 12919.79 13312.12 1998/01/31 13047.83 13440.63 1998/02/28 13069.40 13454.10 1998/03/31 13120.91 13506.54 IMATRL PRASUN SHR__CHT 19980331 19980408 111337 R00000000000068 $10,000 OVER LIFE OF FUND: Let's say hypothetically that $10,000 was invested in Spartan Short-Term Bond Fund on October 31, 1992, shortly after the fund started. As the chart shows, by March 31, 1998, the value of the investment would have grown to $13,121 - a 31.21% increase on the initial investment which includes the effect of the $5 account closeout fee. For comparison, look at how the Lehman Brothers 1-3 Year Government/Corporate Bond Index did over the same period. With dividends and capital gains, if any, reinvested, the same $10,000 investment would have grown to $13,507 - a 35.07% increase. 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) TOTAL RETURN COMPONENTS
SIX MONTHS YEARS ENDED SEPTEMBER 30, OCTOBER 1, 1992 ENDED (COMMENCEMENT MARCH 31, OF OPERATIONS) TO SEPTEMBER 30, 1998 1997 1996 1995 1994 1993
DIVIDEND RETURN 3.25% 6.67% 6.67% 6.49% 6.19% 7.79% CAPITAL RETURN -0.11% 0.32% -1.22% -2.16% -6.53% -0.11% TOTAL RETURN 3.14% 6.99% 5.45% 4.33% -0.34% 7.68% TOTAL RETURN COMPONENTS include both dividend returns and capital appreciation returns. A dividend return reflects the actual dividends paid by the fund. A capital return reflects both the amount paid by the fund to shareholders as capital gain distributions and changes in the fund's share price. Both returns assume the dividends or capital gains, if any, paid by the fund are reinvested. Capital and total returns include the effect of the $5 account closeout fee on an average-sized account. DIVIDENDS AND YIELD PERIODS ENDED MARCH 31, 1998 PAST 1 PAST 6 PAST 1 MONTH MONTHS YEAR DIVIDENDS PER SHARE 4.91(CENTS) 29.16(CENTS) 58.72(CENTS) ANNUALIZED DIVIDEND RATE 6.39% 6.46% 6.50% 30-DAY ANNUALIZED YIELD 5.85% - - DIVIDENDS per share show the income paid by the fund for a set period. If you annualize this number, based on an average share price of $ 9.05 over the past one month, $9.05 over the past six months and $9.04 over the past one year, you can compare the fund's income over these three periods. The 30-day annualized YIELD is a standard formula for all funds based on the yields of the bonds in the fund, averaged over the past 30 days. This figure shows you the yield characteristics of the fund's investments at the end of the period. It also helps you compare funds from different companies on an equal basis. If Fidelity had not reimbursed certain fund expenses during the periods shown, the yield would have been 5.60%. FUND TALK: THE MANAGER'S OVERVIEW MARKET RECAP A continued lack of inflationary pressure resulted in a relatively favorable investing climate for bonds during the six months that ended March 31, 1998. The Lehman Brothers Aggregate Bond Index - a broad gauge of the U.S. taxable investment-grade bond market - returned 4.54% during this period. Global volatility and historically low interest rates were the main stories in the last quarter of 1997. Financial problems in Asia came to a head in October, resulting in a "flight to quality." Wary stock investors sought investments offering lower volatility, helping the U.S. bond market - especially U.S. Treasuries - surge. The Lehman Brothers Corporate Bond Index returned 4.49% for the six-month period. Corporate bonds benefited from continued economic growth and demand for yield, although they faltered somewhat in January 1998. Investors feared a slowdown in demand in Asia would eat into corporate earnings. In spite of record new issuance in February 1998, corporates rebounded due in part to increased demand on the part of yield-hungry investors. Mortgage-backed bonds performed well during the period, even though lower interest rates resulted in more mortgage prepayment activity. The Lehman Brothers Mortgage-Backed Securities Index generated a six-month return of 4.04%. High-yield and emerging-market issues performed very well throughout the first quarter of 1998. An interview with Andrew Dudley, Portfolio Manager of Spartan Short-Term Bond Fund Q. HOW DID THE FUND PERFORM, ANDY? A. For the six months that ended March 31, 1998, the fund had a total return of 3.14%. That outperformed the 2.77% return of the short investment grade debt funds average tracked by Lipper Analytical Services. For the same period, the Lehman Brothers 1-3 Year Government/Corporate Bond Index returned 3.12%. For the 12 months that ended March 31, 1998, the fund returned 7.52%, while the Lipper average returned 7.00% and the Lehman Brothers index returned 7.52%. Q. WHAT FACTORS CONTRIBUTED TO THE FUND'S STRONG PERFORMANCE? A. The fund benefited from maintaining overweighted positions, relative to the index, in corporate bonds, asset-backed securities and mortgage-backed securities. Generally, these so-called spread products offered attractive yield spreads - or yield advantages - over comparable Treasuries during the period. Q. HOW WERE THE FUND'S ASSETS ALLOCATED? A. Corporate bonds and asset-backed securities - bonds backed by a pool of loans such as credit cards - accounted for about 61% of the fund's assets at the end of the period. Specifically, about 43% of the fund was invested in corporate bonds and 18% in asset-backed securities. Corporate bonds, as a group, offered only neutral returns during the six-month period, after weakening in the fourth quarter of 1997 during the economic slowdown in Asia, and then stabilizing in the first quarter of 1998. The fund was able to generate modest returns from its corporate position by emphasizing the better-performing sectors, such as cable, media and telecommunications. Growth in these sectors is much more dependent on the health of the U.S. economy, rather than on Asian markets. In addition, asset-backed securities were a very stable component of the portfolio because of their high credit quality. In fact, a majority of the fund's asset-backed position was rated Aaa. These securities offered the fund a way to get additional yield without taking on the credit risks associated with many corporate bonds. Q. WHAT ABOUT MORTGAGE-BACKED SECURITIES? A. More than half of the fund's mortgage-backed holdings were invested in commercial mortgage-backed securities (CMBS) - bonds that are backed by loans on commercial property, such as office buildings or retail malls. The market for these securities has gained considerable acceptance among investors, leading to better returns for the issues. Q. HOW MUCH OVERALL IMPACT DID THE ASIAN SITUATION HAVE ON THE FUND'S PERFORMANCE? A. Not much. The Asian situation definitely weakened the corporate bond market, but as I said, I shielded the portfolio from many of these ill effects by buying securities in sectors that were more dependent on the domestic economy. In fact, I sold many of the fund's corporate positions that did have exposure to Asia in October, helping its performance versus the benchmark and the peer group. Longer-term, I see Asia as an opportunity. The Asian turmoil has caused spread volatility in non-Treasuries, which allows me to apply Fidelity's strong research to find attractive securities that have been unfairly repriced in the past few months. Q. WHAT'S YOUR OUTLOOK FOR THE BOND MARKET? A. The yield curve was very flat at the end of the period, meaning longer-term bonds were not offering much of a yield advantage over short-term issues. As a result, many buyers of fixed-income securities tried to get additional yield by buying non-Treasury securities. Consequently, I think increased demand for these spread products will benefit their pricing. In addition, the equity markets generated healthy gains in the first quarter of 1998, which bodes well for high-grade corporate bonds in the next few months. I also expect asset-backed securities to continue to perform well as investors seek out defensive instruments in periods of turmoil. Finally, opportunities in the mortgage-backed sector will depend on the level of interest rates. These securities may underperform other fixed-income securities in the short term if the market rallies and prepayment - or refinancing - levels remain high. If that's the case, I may increase the fund's position in mortgage-backed bonds in anticipation of a rebound and outperformance in the long term. 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. ANDREW DUDLEY ON THE FLAT YIELD CURVE: "The yield curve is defined as the yield difference between shorter- and longer-maturity Treasuries. Typically, the two points of reference used in this equation are the two-year and the 30-year Treasuries. Historically, the yield curve has been positive - or upward sloping - with shorter-maturity Treasuries yielding less than longer-maturity Treasuries. While the curve remained positive at the end of the period, the difference between the yields offered by short- and long-term Treasuries has fallen - or flattened - to a level that is low by historical standards. At the end of March, the difference in yield between the two-year and the 30-year Treasury was about 0.40%, while the variance between the two-year and the 10-year Treasury was even smaller at about 0.10%. There are several factors that have an impact on the shape of the yield curve, including the strength of the economy, current and future expected levels of inflation and near-term expectations regarding the Federal Reserve Board's monetary policy. Over the past six months, Fed policy was expected to remain neutral and long-term inflation was pegged at about 1.5% to 2.0% - the perfect environment for longer rates to decline relative to shorter rates. Consequently, the yield curve has flattened." FUND FACTS GOAL: high current income with preservation of capital FUND NUMBER: 449 TRADING SYMBOL: FTBDX START DATE: October 1, 1992 SIZE: as of March 31, 1998, more than $323 million MANAGER: Andrew Dudley, since 1997; manager, Fidelity Short-Term Bond Fund and Fidelity Advisor Short-Fixed Income Fund, since 1997; joined Fidelity in 1996 (checkmark) INVESTMENT CHANGES QUALITY DIVERSIFICATION AS OF MARCH 31, 1998 (MOODY'S RATINGS) % % OF FUND'S INVESTMENTS O 6 MONTHS AGO F F U N D ' S I N V E S T M E N T S AAA 4 41.8 3 . 3 AA 7 4.1 . 5 A 1 16.9 3 . 9 BAA 2 24.6 3 . 9 BA 7 8.4 . 1 NOT RATED 1 1.9 . 3 TABLE EXCLUDES SHORT-TERM INVESTMENTS. WHERE MOODY'S RATINGS ARE NOT AVAILABLE, WE HAVE USED S&P RATINGS. SECURITIES RATED AS "BA" OR BELOW WERE RATED INVESTMENT GRADE BY OTHER NATIONALLY RECOGNIZED RATING AGENCIES OR ASSIGNED AN INVESTMENT GRADE RATING AT THE TIME OF ACQUISITION BY FIDELITY. AVERAGE YEARS TO MATURITY AS OF MARCH 31, 1998 6 MONTHS AGO YEARS 2.3 2.3 AVERAGE YEARS TO MATURITY IS BASED ON THE AVERAGE TIME UNTIL PRINCIPAL PAYMENTS ARE EXPECTED FROM EACH OF THE FUND'S BONDS, WEIGHTED BY DOLLAR AMOUNT. DURATION AS OF MARCH 31, 1998 6 MONTHS AGO YEARS 1.8 1.7 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. ASSET ALLOCATION (% OF FUND'S INVESTMENTS) AS OF MARCH 31, 1998 * AS OF SEPTEMBER 30, 1997 ** CORPORATE BONDS 61.4% U.S. GOVERNMENT AND AGENCY OBLIGATIONS 26.3% CMOS AND OTHER MORTGAGE-RELATED SECURITIES 5.7% OTHER 3.6% SHORT-TERM INVESTMENTS 3.0% CORPORATE BONDS 64.9% U.S. GOVERNMENT AND AGENCY OBLIGATIONS 23.1% CMOS AND OTHER MORTGAGE-RELATED SECURITIES 7.2% OTHER 2.5% SHORT-TERM INVESTMENTS 2.3% ROW: 1, COL: 1, VALUE: 3.0 ROW: 1, COL: 2, VALUE: 3.6 ROW: 1, COL: 3, VALUE: 5.7 ROW: 1, COL: 4, VALUE: 26.3 ROW: 1, COL: 5, VALUE: 61.4 ROW: 1, COL: 1, VALUE: 2.3 ROW: 1, COL: 2, VALUE: 2.5 ROW: 1, COL: 3, VALUE: 7.2 ROW: 1, COL: 4, VALUE: 23.1 ROW: 1, COL: 5, VALUE: 64.90000000000001 * FOREIGN INVESTMENTS 5.8% ** FOREIGN INVESTMENTS 5.7% INVESTMENTS MARCH 31, 1998 (UNAUDITED) SHOWING PERCENTAGE OF TOTAL VALUE OF INVESTMENT IN SECURITIES NONCONVERTIBLE BONDS - 61.4% MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS (A) AMOUNT (000S) (000S) BASIC INDUSTRIES - 1.1% CHEMICALS & PLASTICS - 1.1% Methanex Corp. yankee 8 7/8%, 11/15/01 A2 $ 3,500 $ 3,664 CONSTRUCTION & REAL ESTATE - 0.7% REAL ESTATE INVESTMENT TRUSTS - 0.7% EOP Operating LP 6 3/8%, 2/15/03 (c) Baa1 1,190 1,178 Weeks Realty LP 6 7/8%, 3/15/05 Baa2 1,100 1,091 2,269 DURABLES - 0.4% AUTOS, TIRES, & ACCESSORIES - 0.4% General Motors Corp. 9 5/8%, 12/1/00 A3 1,160 1,258 ENERGY - 0.2% OIL & GAS - 0.2% Occidental Petroleum Corp. 6.09%, 11/29/99 Baa3 580 581 FINANCE - 36.2% ASSET-BACKED SECURITIES - 17.7% CPS Auto Grantor Trust 6.70%, 2/15/02 Aaa 426 430 CPS Auto Receivables Trust 6%, 8/15/03 Aaa 3,000 2,991 Capital Equipment Receivables Trust: 6.57%, 3/15/01 Aa3 810 821 6.45%, 8/15/02 Aa3 1,700 1,708 Case Equipment Loan Trust: 6.15%, 9/15/02 Aaa 3,011 3,026 6.45%, 9/15/02 A3 1,330 1,320 5.85%, 2/15/03 A3 690 687 Caterpillar Financial Asset Trust 6.55%, 5/22/02 A3 380 384 Chase Manhattan Corp. 6.45%, 3/29/01 Aaa 1,900 1,912 Chevy Chase Auto Receivables Trust: 6.20%, 3/20/04 Aaa 1,014 1,016 5.97%, 10/20/04 Aaa 2,020 2,015 Citibank Credit Card Master Trust I 5 3/4%, 1/15/03 Aaa 1,300 1,293 Contimortgage Home Equity Loan Trust: 6.26%, 7/15/12 Aaa 2,450 2,452 6.30%, 7/15/12 Aaa 1,100 1,100 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS (A) AMOUNT (000S) (000S) FINANCE - CONTINUED ASSET-BACKED SECURITIES - CONTINUED Fidelity Funding Auto Trust 6.99%, 11/15/02 (c) Aaa $ 436 $ 440 Ford Credit Grantor Trust 5.90%, 10/15/00 Aaa 1,515 1,516 General Motors Acceptance Corp. Grantor Trust 1995-A, 7.15%, 3/15/00 Aaa 761 763 Green Tree Financial Corp.: 5 1/2%, 1/31/00 Aaa 163 163 5.80%, 2/15/27 Aaa 1,547 1,547 6.10%, 4/15/27 Aaa 1,471 1,472 6.45%, 5/15/27 Aaa 1,157 1,160 6 1/2%, 6/15/27 Aaa 770 772 6.65%, 7/15/27 Aaa 766 768 Key Auto Finance Trust Class C 6.65%, 10/15/03 Baa3 310 310 KeyCorp Auto Grantor Trust 5.80%, 7/15/00 A3 79 80 Norwest Automobile Trust 6.30%, 5/15/03 A2 1,130 1,133 Olympic Automobile Receivables Trust: 6.40%, 9/15/01 Aaa 1,280 1,280 6 1/8%, 11/15/04 Aaa 739 753 Onyx Acceptance Grantor Trust: 6.20%, 6/15/03 Aaa 1,744 1,748 5.95%, 7/15/04 Aaa 2,600 2,597 Petroleum Enhanced Trust Receivables Offering Petroleum Trust 6.1875%, 2/5/03 (c) Baa2 1,499 1,499 Premier Auto Trust: 4.95%, 2/2/99 A2 22 22 8.05%, 4/4/00 Aaa 3,650 3,674 6%, 5/6/00 Aaa 975 976 6.35%, 7/6/00 A3 1,690 1,696 5.82%, 12/6/02 Aaa 3,000 2,992 Reliance Auto Receivables Corp., Inc. 6.10%, 7/15/02 (c) Aaa 632 632 Standard Credit Card Master Trust I 6 3/4%, 6/7/00 Aaa 1,000 1,002 TMS Auto Grantor Trust 5.90%, 9/15/02 Aaa 315 315 Toyota Auto Receivables Grantor Trust 6.15%, 1/15/99 Baa2 169 168 Tranex Auto Receivables Owner Trust 6.33%, 8/15/03 (c) Aaa 1,026 1,029 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS (A) AMOUNT (000S) (000S) FINANCE - CONTINUED ASSET-BACKED SECURITIES - CONTINUED Union Federal Savings Bank Grantor Trust: 6.975%, 7/10/00 Baa2 $ 143 $ 143 7.275%, 10/10/00 Baa2 142 141 8.20%, 1/10/01 Baa2 147 148 WFS Financial Owner Trust: 7.05%, 11/20/03 Aaa 2,510 2,588 6.90%, 12/20/03 Aaa 1,630 1,681 Western Financial Grantor Trust 5 7/8%, 3/1/02 Aaa 1,121 1,141 57,504 BANKS - 9.0% BancOne Corp. 6.70%, 3/24/00 Aa3 1,250 1,265 Banco Latinoamericano Exportaciones SA euro: 6.45%, 9/13/99 (c) Baa2 930 927 6.90%, 12/4/99 (c) Baa2 550 559 BanPonce Corp.: 6.378%, 4/8/99 A3 940 941 6.488%, 3/3/00 A3 800 805 BanPonce Financial Corp.: 7.65%, 5/3/00 A3 1,140 1,168 6.88%, 6/16/00 A3 510 517 Capital One Bank: 6.42%, 11/12/99 Baa3 2,200 2,208 6 3/8%, 2/15/03 Baa3 900 886 First Chicago Corp. 9 7/8%, 7/1/99 A2 2,450 2,560 First Fidelity Bancorp. 9 5/8%, 8/15/99 A2 910 951 First USA Bank 6 1/2%, 12/23/99 Aa2 1,700 1,713 Kansallis-Osake-Pankki yankee 9 3/4%, 12/15/98 A3 860 880 KeyCorp. 7.45%, 4/5/00 A1 1,100 1,126 Mellon Financial Co. 6.30%, 6/1/00 A2 600 603 NationsBank Corp. 5 3/4%, 3/15/01 Aa3 3,000 2,981 Popular, Inc. 6.40%, 8/25/00 A3 1,410 1,415 Providian National Bank 6.70%, 3/15/03 Baa3 1,800 1,792 Signet Banking Corp. 5 7/8%, 4/15/98 (d) A2 3,950 3,949 Union Planters National Bank 6.53%, 8/20/99 A3 1,960 1,973 29,219 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS (A) AMOUNT (000S) (000S) FINANCE - CONTINUED CREDIT & OTHER FINANCE - 8.6% AT&T Capital Corp.: 6.65%, 4/30/99 Baa3 $ 2,500 $ 2,514 6.16%, 12/3/99 Baa3 1,940 1,939 Aristar, Inc. 7 1/2%, 7/1/99 Baa1 2,010 2,045 Associates Corp. of North America 6 3/8%, 8/15/99 Aa3 1,200 1,206 Boatmens Auto Trust 6.35%, 10/15/01 A2 610 612 Chrysler Financial Corp. 6 3/8%, 1/28/00 A3 1,720 1,730 Edison Mission Energy Funding Corp. 6.77%, 9/15/03 (c) Baa1 1,805 1,826 Finova Capital Corp. 6.27%, 9/29/00 Baa1 580 581 General Motors Acceptance Corp.: 5.45%, 3/1/99 A3 3,030 3,017 6.55%, 4/23/99 A3 1,850 1,863 9%, 10/15/02 (e) A3 3,000 3,320 Heller Financial, Inc. 6 1/4%, 3/1/01 A3 1,500 1,499 MCN Investment Corp. 5.84%, 2/1/99 Baa2 1,450 1,447 Money Store, Inc. 7.30%, 12/1/02 Ba2 650 674 North American Mortgage Co. 5.80%, 11/2/98 Baa2 750 749 Salton Sea Funding Corp. 7.02%, 5/30/00 Baa3 1,025 1,032 Union Acceptance Corp. 7.075%, 7/10/02 Baa2 229 230 U.S. West Capital Funding, Inc. 6.85%, 1/15/02 Baa1 1,540 1,569 27,853 SAVINGS & LOANS - 0.9% Golden West Financial Corp. 8 5/8%, 8/30/98 A3 100 101 Great Western Financial Corp. 6 3/8%, 7/1/00 A3 1,025 1,027 Long Island Savings Bank 6.20%, 4/2/01 Baa3 850 849 Long Island Savings Bank FSB Melville NY 7%, 6/13/02 Baa3 970 988 2,965 TOTAL FINANCE 117,541 HOLDING COMPANIES - 0.9% Norfolk Southern Corp.: 6.70%, 5/1/00 Baa1 2,000 2,025 6.95%, 5/1/02 Baa1 800 820 2,845 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS (A) AMOUNT (000S) (000S) INDUSTRIAL MACHINERY & EQUIPMENT - 0.2% POLLUTION CONTROL - 0.2% WMX Technologies, Inc. 6 1/4%, 10/15/00 Baa3 $ 750 $ 749 MEDIA & LEISURE - 6.7% BROADCASTING - 4.7% Continental Cablevision, Inc. 8 1/2%, 9/15/01 Baa3 1,854 1,971 TCI Communications, Inc.: 6 3/8%, 9/15/99 Ba1 3,075 3,084 7 3/8%, 2/15/00 Ba1 1,815 1,849 8%, 8/1/05 Ba1 1,285 1,381 Tele Communications, Inc. 9%, 1/2/02 Ba1 730 789 Time Warner, Inc.: 7.95%, 2/1/00 Ba1 4,030 4,145 7 3/4%, 6/15/05 Ba1 1,850 1,955 15,174 ENTERTAINMENT - 1.3% Paramount Communications, Inc.: 5 7/8%, 7/15/00 Ba2 1,190 1,168 7 1/2%, 1/15/02 Ba2 647 663 Viacom, Inc.: 6 3/4%, 1/15/03 Ba2 1,545 1,544 7 3/4%, 6/1/05 Ba2 745 781 4,156 PUBLISHING - 0.7% News America Holdings, Inc. 8 5/8%, 2/1/03 Baa3 2,100 2,284 TOTAL MEDIA & LEISURE 21,614 NONDURABLES - 1.8% FOODS - 0.6% Dole Food, Inc. 6 3/4%, 7/15/00 Baa3 1,990 2,006 TOBACCO - 1.2% Philip Morris Companies, Inc.: 7 1/8%, 12/1/99 A2 2,300 2,335 7 1/4%, 9/15/01 A2 1,400 1,439 3,774 TOTAL NONDURABLES 5,780 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS (A) AMOUNT (000S) (000S) RETAIL & WHOLESALE - 2.8% GENERAL MERCHANDISE STORES - 2.8% Dayton Hudson Corp.: 10%, 12/1/00 Baa1 $ 1,078 $ 1,178 6.80%, 10/1/01 Baa1 1,600 1,628 notes 9 3/4%, 7/1/02 Baa1 930 1,046 Federated Department Stores, Inc.: 10%, 2/15/01 Baa2 2,285 2,502 8 1/8%, 10/15/02 Baa2 1,595 1,697 Penney (J.C.) Co., Inc. 6.95%, 4/1/00 A2 1,100 1,119 9,170 TECHNOLOGY - 3.4% COMPUTERS & OFFICE EQUIPMENT - 3.4% Comdisco, Inc.: 5 3/4%, 1/19/99 Baa2 3,900 3,893 6 1/2%, 4/30/99 Baa1 1,000 1,005 6.86%, 7/29/99 Baa1 1,580 1,596 6.55%, 2/4/00 Baa1 4,500 4,539 11,033 TRANSPORTATION - 1.2% RAILROADS - 1.2% CSX Corp.: 9 1/2%, 8/1/00 Baa2 2,500 2,674 7.05%, 5/1/02 Baa2 1,250 1,278 3,952 UTILITIES - 5.8% CELLULAR - 0.1% 360 Degrees Communications Co. 7 1/8%, 3/1/03 Ba1 230 238 ELECTRIC UTILITY - 1.8% Avon Energy Partners Holdings 6.73%, 12/11/02 (c) Baa2 1,000 1,013 Indiana Michigan Power Co. 6.40%, 3/1/00 Baa1 2,000 2,008 Ohio Edison Co. 7 3/8%, 9/15/02 Baa2 900 932 Philadelphia Electric Co. 5 5/8%, 11/1/01 Baa1 840 824 Texas Utilities Electric Co. 7 3/8%, 11/1/99 Baa1 1,000 1,019 5,796 NONCONVERTIBLE BONDS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS (A) AMOUNT (000S) (000S) UTILITIES - CONTINUED GAS - 2.0% Arkla, Inc.: 8.60%, 9/15/98 Ba2 $ 500 $ 504 8.43%, 9/17/98 Ba1 440 444 8 7/8%, 7/15/99 Baa1 5,500 5,693 6,641 TELEPHONE SERVICES - 1.9% Cable & Wireless Communications PLC 6 3/8%, 3/6/03 Baa1 1,300 1,301 Teleport Communications Group, Inc. 0%, 7/1/07 (b) Baa3 1,110 956 WorldCom, Inc.: 9 3/8%, 1/15/04 Ba1 1,176 1,246 7.55%, 4/1/04 Ba1 1,740 1,833 8 7/8%, 1/15/06 Ba1 627 683 6,019 TOTAL UTILITIES 18,694 TOTAL NONCONVERTIBLE BONDS (Cost $199,083) 199,150 U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - 21.8% U.S. TREASURY OBLIGATIONS - 19.3% 5 1/2% 11/15/98 Aaa 2,000 1,999 5 7/8% 1/31/99 Aaa 16,655 16,700 8 7/8%, 2/15/99 Aaa 11,720 12,046 7 3/4%, 12/31/99 Aaa 8,915 9,230 6 7/8%, 3/31/00 Aaa 17,704 18,124 5 3/4% 10/31/00 Aaa 4,220 4,233 62,332 U.S. GOVERNMENT AGENCY OBLIGATIONS - 2.5% Government Trust Certificates (assets of Trust guaranteed by U.S. Government through Defense Security Assistance Agency): Class C-1, 9 1/4%, 11/15/01 Aaa 4,058 4,293 Class T-3, 9 5/8%, 5/15/02 Aaa 366 387 U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS (A) AMOUNT (000S) (000S) U.S. GOVERNMENT AGENCY OBLIGATIONS - CONTINUED Guaranteed Export Trust Certificates (assets of Trust guaranteed by U.S. Government through Export-Import Bank): Series 1994-C, 6.61%, 9/15/99 Aaa $ 207 $ 208 Series 1995-A, 6.28%, 6/15/04 Aaa 1,529 1,547 Israel Export Trust Certificates (assets of Trust guaranteed by U.S. Government through Export-Import Bank) Series 1994-1, 6.88%, 1/26/03 Aaa 641 654 Private Export Funding Corp. secured 6.86%, 4/30/04 Aaa 1,076 1,101 8,190 TOTAL U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS (Cost $70,795) 70,522 U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES - 4.5% FANNIE MAE - 2.0% 6 1/2%, 12/1/12 to 1/1/13 Aaa 5,778 5,793 11 1/2%, 11/1/15 Aaa 508 575 6,368 FREDDIE MAC - 0.5% 7%, 8/1/99 to 7/1/01 Aaa 1,542 1,559 12%, 11/1/19 Aaa 131 151 1,710 GOVERNMENT NATIONAL MORTGAGE ASSOCIATION - 2.0% 9 1/2%, 5/15/16 to 4/15/28 Aaa 2,018 2,186 11%, 2/15/10 to 9/15/19 Aaa 2,335 2,622 11 1/2%, 5/15/13 to 2/15/14 Aaa 851 973 12%, 2/15/16 Aaa 728 847 6,628 TOTAL U.S. GOVERNMENT AGENCY - MORTGAGE-BACKED SECURITIES (Cost $14,763) 14,706 COLLATERALIZED MORTGAGE OBLIGATIONS - 0.2% MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS (A) AMOUNT (000S) (000S) PRIVATE SPONSOR - 0.2% GE Capital Mortgage Services, Inc. planned amortization class Series 1994-2 Class A-4, 6%, 1/25/09 (Cost $733) Aaa $ 750 $ 746 COMMERCIAL MORTGAGE SECURITIES - 5.5% Allied Capital Commercial Mortgage Trust sequential pay Series 1998-1 Class A, 6.31%, 5/25/03 (c) Aaa 1,948 1,938 BKB Commercial Mortgage Trust Series 1997-C1 Class B, 7.218%, 2/25/43 (c)(d) AA 1,810 1,807 Bankers Trust Remic Trust 1988-1 floater Series 1998-S1A Class D, 6.5219%, 11/28/02 (c)(d) Baa2 2,270 2,261 Blackrock Capital Funding LLC Series 1996 Class C2, 7.5585%, 11/16/26 (c)(d) AAA 97 97 CBM Funding Corp. sequential pay Series 1996-1: Class A-1, 7.55%, 7/1/99 AA 102 103 Class A-2, 6.88%, 7/1/02 AA 870 883 CS First Boston Mortgage Securities Corp. sequential pay Series 1997-SPICE Class A, 6.653%, 6/20/03 (c) - 3,101 3,103 Equitable Life Assurance Society of the United States floater Series 174 Class D-2, 6.7375%, 5/15/03 (c)(d) Baa2 1,000 1,000 Federal Deposit Insurance Corp. sequential pay: Series 1994-C1 Class II-A2, 7.85%, 9/25/25 Aaa 898 900 Series 1996-C1 Class 1A, 6 3/4%, 5/25/26 Aaa 1,782 1,784 Kidder Peabody Acceptance Corp. sequential pay, Series 1993-M1 Class A-2, 7.15%, 4/25/25 Aa2 491 489 Meritor Mortgage Security Corp. Series 1987-1 Class A-3, 9.40%, 6/1/99 Baa3 12 12 Nomura Asset Securities Corp. floater Series 1994-MD-II Class A-6, 6.9369% 7/4/03 (d) - 1,249 1,262 Oregon Commercial Mortgage, Inc. Series 1995-1 Class A, 7.15%, 6/25/26 (c)(d) AAA 478 477 Resolution Trust Corp.: floater Series 1993-C2 Class A-2, 6.62%, 3/25/25 (d) AAA 312 313 floater Series 1994-C1 Class A-3, 6.30%, 6/25/26 (d) AAA 907 907 COMMERCIAL MORTGAGE SECURITIES - CONTINUED MOODY'S PRINCIPAL VALUE (NOTE 1) RATINGS (A) AMOUNT (000S) (000S) Structured Asset Securities Corp. Series 1996-C3 Class A, 6 3/4%, 6/25/30 (c) AAA $ 613 $ 615 TOTAL COMMERCIAL MORTGAGE SECURITIES (Cost $17,971) 17,951 FOREIGN GOVERNMENT OBLIGATIONS - 0.9% Ontario Province: euro 8 1/2%, 2/28/01 Aa3 800 850 global bond 6 1/8%, 6/28/00 Aa3 1,000 1,003 5 3/4%, 11/7/00 Aa3 1,010 1,004 TOTAL FOREIGN GOVERNMENT OBLIGATIONS (Cost $2,869) 2,857 SUPRANATIONAL OBLIGATIONS - 1.7% African Development Bank: 9.30%, 7/1/00 Aa1 3,540 3,779 7 3/4%, 12/15/01 Aa1 1,670 1,757 TOTAL SUPRANATIONAL OBLIGATIONS (Cost $5,562) 5,536 CERTIFICATES OF DEPOSIT - 1.0% Canadian Imperial Bank of Commerce NY Branch yankee 6.20%, 8/1/00 (Cost $3,107) Aa3 3,100 3,107 CASH EQUIVALENTS - 3.0% MATURITY AMOUNT (000S) Investments in repurchase agreements (U.S. Treasury obligations), in a joint trading account at 5.92%, dated 3/31/98 due 4/1/98 $ 9,547 9,545 TOTAL INVESTMENT IN SECURITIES - 100% (Cost $324,428) $ 324,120 LEGEND (a) Standard & Poor's credit ratings are used in the absence of a rating by Moody's Investors Service, Inc. (b) Debt obligation initially issued in zero coupon form which converts to coupon form at a specified rate and date. The rate shown is the rate at period end. (c) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end, the value of these securities amounted to $20,401,000 or 6.3% of net assets. (d) The coupon rate shown on floating or adjustable rate securities represents the rate at period end. (e) Debt obligation initially issued at one coupon which converts to a higher coupon at a specified date. The rate shown is the rate at period end. OTHER INFORMATION The composition of long-term debt holdings as a percentage of total value of investment in securities, is as follows: MOODY'S RATINGS S&P RATINGS Aaa, Aa, A 63.2% AAA, AA, A 61.0% Baa 23.9% BBB 31.3% Ba 7.1% BB 1.6% B 0.0% B 0.3% Caa 0.0% CCC 0.0% Ca, C 0.0% CC, C 0.0% D 0.0% For some foreign government obligations, FMR has assigned the ratings of the sovereign credit of the issuing government. The percentage not rated by Moody's or S&P amounted to 1.3%. INCOME TAX INFORMATION At March 31, 1998, the aggregate cost of investment securities for income tax purposes was $324,429,000. Net unrealized depreciation aggregated $309,000, of which $1,043,000 related to appreciated investment securities and $1,352,000 related to depreciated investment securities. At September 30, 1997, the fund had a capital loss carryforward of approximately $79,520,000 of which $39,973,000, $35,409,000 and $4,138,000 will expire on September 30, 2003, 2004, and 2005, respectively. The fund intends to elect to defer to its fiscal year ending September 30, 1998 approximately $2,156,000 of losses recognized during the period November 1, 1996 to September 30, 1997. FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES (EXCEPT PER-SHARE AMOUNT) MARCH 31, 1998 (UNAUDITED) ASSETS INVESTMENT IN SECURITIES, AT VALUE (INCLUDING REPURCHASE $ 324,120 AGREEMENTS OF $9,545) (COST $324,428) - SEE ACCOMPANYING SCHEDULE RECEIVABLE FOR INVESTMENTS SOLD 3 RECEIVABLE FOR FUND SHARES SOLD 779 INTEREST RECEIVABLE 3,558 TOTAL ASSETS 328,460 LIABILITIES PAYABLE TO CUSTODIAN BANK $ 14 PAYABLE FOR INVESTMENTS PURCHASED 3,138 PAYABLE FOR FUND SHARES REDEEMED 1,098 DISTRIBUTIONS PAYABLE 223 ACCRUED MANAGEMENT FEE 99 OTHER PAYABLES AND ACCRUED EXPENSES 5 TOTAL LIABILITIES 4,577 NET ASSETS $ 323,883 NET ASSETS CONSIST OF: PAID IN CAPITAL $ 407,099 DISTRIBUTIONS IN EXCESS OF NET INVESTMENT INCOME (1,396) ACCUMULATED UNDISTRIBUTED NET REALIZED GAIN (LOSS) ON (81,512) INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENTS (308) NET ASSETS, FOR 35,829 SHARES OUTSTANDING $ 323,883 NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER $9.04 SHARE ($323,883 (DIVIDED BY) 35,829 SHARES) STATEMENT OF OPERATIONS SIX MONTHS ENDED MARCH 31, 1998 (UNAUDITED) INVESTMENT INCOME $ 10,089 INTEREST EXPENSES MANAGEMENT FEE $ 946 NON-INTERESTED TRUSTEES' COMPENSATION 1 TOTAL EXPENSES BEFORE REDUCTIONS 947 EXPENSE REDUCTIONS (396) 551 NET INVESTMENT INCOME 9,538 REALIZED AND UNREALIZED GAIN (LOSS) 208 NET REALIZED GAIN (LOSS) ON INVESTMENT SECURITIES CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON (693) INVESTMENT SECURITIES NET GAIN (LOSS) (485) NET INCREASE (DECREASE) IN NET ASSETS RESULTING $ 9,053 FROM OPERATIONS STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED YEAR ENDED MARCH 31, 1998 SEPTEMBER 30, (UNAUDITED) 1997 INCREASE (DECREASE) IN NET ASSETS OPERATIONS $ 9,538 $ 19,923 NET INVESTMENT INCOME NET REALIZED GAIN (LOSS) 208 (2,472) CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) (693) 3,201 NET INCREASE (DECREASE) IN NET ASSETS RESULTING 9,053 20,652 FROM OPERATIONS DISTRIBUTIONS TO SHAREHOLDERS FROM NET INVESTMENT INCOME (9,422) (19,752) SHARE TRANSACTIONS 112,598 115,689 NET PROCEEDS FROM SALES OF SHARES REINVESTMENT OF DISTRIBUTIONS 7,934 16,035 COST OF SHARES REDEEMED (83,752) (188,730) NET INCREASE (DECREASE) IN NET ASSETS RESULTING 36,780 (57,006) FROM SHARE TRANSACTIONS TOTAL INCREASE (DECREASE) IN NET ASSETS 36,411 (56,106) NET ASSETS BEGINNING OF PERIOD 287,472 343,578 END OF PERIOD (INCLUDING DISTRIBUTIONS IN EXCESS OF $ 323,883 $ 287,472 NET INVESTMENT INCOME OF $1,396 AND $1,512, RESPECTIVELY) OTHER INFORMATION SHARES SOLD 12,433 12,804 ISSUED IN REINVESTMENT OF DISTRIBUTIONS 877 1,775 REDEEMED (9,250) (20,894) NET INCREASE (DECREASE) 4,060 (6,315)
FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED YEARS ENDED SEPTEMBER 30, OCTOBER 1, 1992 MARCH 31, 1998 (COMMENCEMENT OF OPERATIONS) TO SEPTEMBER 30, (UNAUDITED) 1997 1996 1995 1994 1993
SELECTED PER-SHARE DATA NET ASSET VALUE, $ 9.050 $ 9.020 $ 9.130 $ 9.330 $ 9.990 $ 10.000 BEGINNING OF PERIOD INCOME FROM INVESTMENT .295 D .588 D .598 .584 .574 .747 OPERATIONS NET INVESTMENT INCOME NET REALIZED AND (.013) .025 (.112) (.199) (.604) (.009) UNREALIZED GAIN (LOSS) TOTAL FROM INVESTMENT .282 .613 .486 .385 (.030) .738 OPERATIONS LESS DISTRIBUTIONS FROM NET INVESTMENT (.292) (.583) (.596) (.443) (.477) (.747) INCOME IN EXCESS OF NET - - - - (.033) (.001) INVESTMENT INCOME IN EXCESS OF NET - - - - (.010) - REALIZED GAIN RETURN OF CAPITAL - - - (.142) (.110) - TOTAL DISTRIBUTIONS (.292) (.583) (.596) (.585) (.630) (.748) NET ASSET VALUE, $ 9.040 $ 9.050 $ 9.020 $ 9.130 $ 9.330 $ 9.990 END OF PERIOD TOTAL RETURN B, C 3.15% 7.00% 5.47% 4.35% (.32)% 7.69% RATIOS AND SUPPLEMENTAL DATA NET ASSETS, END OF PERIOD $ 324 $ 287 $ 344 $ 522 $ 798 $ 1,471 (IN MILLIONS) RATIO OF EXPENSES TO .38% A, E .50% .65% .65% .54% E .20% E AVERAGE NET ASSETS RATIO OF EXPENSES TO .38% A .50% .64% F .65% .54% .20% AVERAGE NET ASSETS AFTER EXPENSE REDUCTIONS RATIO OF NET INVESTMENT 6.54% A 6.50% 6.52% 6.45% 6.42% 7.32% INCOME TO AVERAGE NET ASSETS PORTFOLIO TURNOVER RATE 116% A 105% 134% 159% 97% 112%
A ANNUALIZED B TOTAL RETURNS DO NOT INCLUDE THE ACCOUNT CLOSEOUT FEE AND FOR PERIODS OF LESS THAN ONE YEAR ARE NOT ANNUALIZED. C THE TOTAL RETURNS WOULD HAVE BEEN LOWER HAD CERTAIN EXPENSES NOT BEEN REDUCED DURING THE PERIODS SHOWN (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). D NET INVESTMENT INCOME PER SHARE HAS BEEN CALCULATED BASED ON AVERAGE SHARES OUTSTANDING DURING THE PERIOD. E FMR AGREED TO REIMBURSE A PORTION OF THE FUND'S EXPENSES DURING THE PERIOD. WITHOUT THIS REIMBURSEMENT, THE FUND'S EXPENSE RATIO WOULD HAVE BEEN HIGHER (SEE NOTE 5 OF NOTES TO FINANCIAL STATEMENTS). F FMR OR THE FUND HAS ENTERED INTO VARYING ARRANGEMENTS WITH THIRD PARTIES WHO EITHER PAID OR REDUCED A PORTION OF THE FUND'S EXPENSES. NOTES TO FINANCIAL STATEMENTS For the period ended March 31, 1998 (Unaudited) 1. SIGNIFICANT ACCOUNTING POLICIES. Spartan Short-Term Bond (the fund) is a fund of Fidelity Charles Street Trust (the trust) and is authorized to issue an unlimited number of shares. The trust is registered under the Investment Company Act of 1940, as amended (the 1940 Act), as an open-end management investment company organized as a Massachusetts business trust. The financial statements have been prepared in conformity with generally accepted accounting principles which require management to make certain estimates and assumptions at the date of the financial statements. The following summarizes the significant accounting policies of the fund: SECURITY VALUATION. Securities 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. FOREIGN CURRENCY TRANSLATION. The accounting records of the fund are maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the prevailing rates of exchange at period end. Purchases and sales of securities, income receipts and expense payments are translated into U.S. dollars at the prevailing exchange rate on the respective dates of the transactions. Net realized gains and losses on foreign currency transactions represent net gains and losses from sales and maturities of foreign currency contracts, disposition of foreign currencies, the difference between the amount of net investment income accrued and the U.S. dollar amount actually received, and gains and losses between trade date and settlement on purchases and sales of securities. The effects of changes in foreign currency exchange rates on investments in securities are included with the net realized and unrealized gain or loss on investment securities. INCOME TAXES. As a qualified regulated investment company under Subchapter M of the Internal Revenue Code, the fund is not subject to income taxes to the extent that it distributes substantially all of its taxable income for its fiscal year. The schedule of investments includes information regarding income taxes under the caption "Income Tax Information." INVESTMENT INCOME. Interest income, which includes accretion of original issue discount, is accrued as earned. EXPENSES. Most expenses of the trust can be directly attributed to a fund. Expenses which cannot be directly attributed are apportioned among the funds in the trust. 1. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED DISTRIBUTIONS TO SHAREHOLDERS. Distributions are declared daily and paid monthly from net investment income. Distributions from realized gains, if any, are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences, which may result in distribution reclassifications, are primarily due to differing treatments for paydown gains/losses on certain securities, market discount, capital loss carryforwards and losses deferred due to wash sales and excise tax regulations Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to paid in capital. 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 that 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. JOINT TRADING ACCOUNT. Pursuant to an Exemptive Order issued by the Securities and Exchange Commission, the fund, along with other affiliated entities of Fidelity Management & Research Company (FMR), may transfer uninvested cash balances into one or more joint trading accounts. These balances are invested in one or more repurchase agreements for U.S. Treasury or Federal Agency obligations. REPURCHASE AGREEMENTS. The underlying U.S. Treasury or Federal Agency securities are transferred to an account of the fund, or to the Joint Trading Account, at a bank custodian. The securities are marked-to-market daily and maintained at a value at least equal to the principal amount of the repurchase agreement (including accrued interest). FMR, the fund's investment adviser, is responsible for determining that the value of the underlying securities remains in accordance with the market value requirements stated above. RESTRICTED SECURITIES. The fund is permitted to invest in securities that are subject to legal or contractual restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are registered. Disposal of these securities may involve time-consuming negotiations and expense, and prompt sale at an acceptable price may be difficult. At the end of the period, the fund had no investments in restricted securities (excluding 144A issues). 3. PURCHASES AND SALES OF INVESTMENTS. Purchases and sales of securities, other than short-term securities, aggregated $201,086,000 and $165,675,000, respectively, of which U.S. government and 3. PURCHASE AND SALES OF INVESTMENTS - CONTINUED government agency obligations aggregated $121,179,000 and $103,744,000, respectively. 4. FEES AND OTHER TRANSACTIONS WITH AFFILIATES. MANAGEMENT FEE. As the fund's investment adviser, FMR pays all expenses, except the compensation of the non-interested Trustees and certain exceptions such as interest, taxes, brokerage commissions and extraordinary expenses. FMR receives a fee that is computed daily at an annual rate of .65% of the fund's average net assets. FMR also bears the cost of providing shareholder services to the fund. To offset the cost of providing these services, FMR or its affiliates collect certain transaction fees from the fund's shareholders which amounted to $4,000 for the period. 5. EXPENSE REDUCTIONS. FMR voluntarily agreed to reimburse the fund's operating expenses (excluding interest, taxes, brokerage commissions and extraordinary expenses) above an annual rate of .38% of average net assets. For the period, the reimbursement reduced the expenses by $392,000. In addition, FMR has entered into arrangements on behalf of the fund with the fund's custodian and transfer agent whereby credits realized as a result of uninvested cash balances were used to reduce a portion of the fund's expenses. During the period, the fund's expenses were reduced by $4,000 under these arrangements. MANAGING YOUR INVESTMENTS Fidelity offers several ways to conveniently manage your personal investments via your telephone or PC. You can access your account information, conduct trades and research your investments 24 hours a day. BY PHONE Fidelity TouchTone Xpressprovides a single toll-free number to access account balances, positions, quotes and trading. It's easy to navigate the service, and on your first call, the system will help you create a personal identification number (PIN) for security. SM (PHONE_GRAPHIC)TOUCHTONE XPRESS 1-800-544-5555 PRESS For mutual fund and brokerage trading. For quotes.* For account balances and holdings. To review orders and mutual fund activity. To change your PIN. To speak to a Fidelity representative. 0 * BY PC Fidelity's Web site on the Internet provides a wide range of information, including daily financial news, fund performance, interactive planning tools and news about Fidelity products and services. (PHONE_GRAPHIC)FIDELITY'S WEB SITE WWW.FIDELITY.COM If you are not currently on the Internet, call Fidelity at 1-800-544-7272 for significant savings on Web access from internetMCI. SM (PHONE_GRAPHIC) FIDELITY ON-LINE XPRESS+ TM Fidelity On-line Xpress+ software for Windows combines comprehensive portfolio management capabilities, securities trading and access to research and analysis tools . . . all on your desktop. Call Fidelity at 1-800-544-7272 or visit our Web site for more information on how to manage your investments via your PC. * WHEN YOU CALL THE QUOTES LINE, PLEASE REMEMBER THAT A FUND'S YIELD AND RETURN WILL VARY AND, EXCEPT FOR MONEY MARKET FUNDS, SHARE PRICE WILL ALSO VARY. THIS MEANS THAT YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. THERE IS NO ASSURANCE THAT MONEY MARKET FUNDS WILL BE ABLE TO MAINTAIN A STABLE $1 SHARE PRICE; AN INVESTMENT IN A MONEY MARKET FUND IS NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT. TOTAL RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE, REINVESTMENT OF DIVIDENDS AND CAPITAL GAINS, AND THE EFFECTS OF ANY SALES CHARGES. TO VISIT FIDELITY For directions and hours, please call 1-800-544-9797. ARIZONA 7373 N. Scottsdale Road Scottsdale, AZ CALIFORNIA 815 East Birch Street Brea, CA 851 East Hamilton Avenue Campbell, CA 527 North Brand Boulevard Glendale, CA 19100 Von Karman Avenue Irvine, CA 10100 Santa Monica Blvd. Los Angeles, CA 251 University Avenue Palo Alto, CA 1760 Challenge Way Sacramento, CA 7676 Hazard Center Drive San Diego, CA 455 Market Street San Francisco, CA 950 Northgate Drive San Rafael, CA 1400 Civic Drive Walnut Creek, CA 6300 Canoga Avenue Woodland Hills, CA COLORADO 1625 Broadway Denver, CO CONNECTICUT 48 West Putnam Avenue Greenwich, CT 265 Church Street New Haven, CT 300 Atlantic Street Stamford, CT 29 South Main Street West Hartford, CT DELAWARE 222 Delaware Avenue Wilmington, DE FLORIDA 4400 N. Federal Highway Boca Raton, FL 90 Alhambra Plaza Coral Gables, FL 4090 N. Ocean Boulevard Ft. Lauderdale, FL 1907 West State Road 434 Longwood, FL 4001 Tamiami Trail, North Naples, FL 2401 PGA Boulevard Palm Beach Gardens, FL 8065 Beneva Road Sarasota, FL 1502 N. Westshore Blvd. Tampa, FL GEORGIA 3445 Peachtree Road, N.E. Atlanta, GA 1000 Abernathy Road Atlanta, GA HAWAII 700 Bishop Street Honolulu, HI ILLINOIS One North Franklin Street Chicago, IL 1415 West 22nd Street Oak Brook, IL 1700 East Golf Road Schaumburg, IL 3232 Lake Avenue Wilmette, IL INDIANA 4729 East 82nd Street Indianapolis, IN MAINE 3 Canal Plaza Portland, ME MARYLAND 7401 Wisconsin Avenue Bethesda, MD 1 West Pennsylvania Ave. Towson, MD MASSACHUSETTS 470 Boylston Street Boston, MA 155 Congress Street Boston, MA 25 State Street Boston, MA 300 Granite Street Braintree, MA 44 Mall Road Burlington, MA 416 Belmont Street Worcester, MA MICHIGAN 280 North Woodward Ave. Birmingham, MI 29155 Northwestern Hwy. Southfield, MI MINNESOTA 7600 France Avenue South Edina, MN MISSOURI 700 West 47th Street Kansas City, MO 8885 Ladue Road Ladue, MO 200 North Broadway St. Louis, MO NEW JERSEY 150 Essex Street Millburn, NJ 56 South Street Morristown, NJ 501 Route 17, South Paramus, NJ NEW YORK 1055 Franklin Avenue Garden City, NY 999 Walt Whitman Road Melville, L.I., NY 1271 Avenue of the Americas New York, NY 71 Broadway New York, NY 350 Park Avenue New York, NY NORTH CAROLINA 4611 Sharon Road Charlotte, NC 2200 West Main Street Durham, NC OHIO 600 Vine Street Cincinnati, OH 28699 Chagrin Boulevard Woodmere Village, OH OREGON 16850 SW 72 Avenue Tigard, OR PENNSYLVANIA 1735 Market Street Philadelphia, PA 439 Fifth Avenue Pittsburgh, PA TENNESSEE 6150 Poplar Road Memphis, TN TEXAS 10000 Research Boulevard Austin, TX 4017 Northwest Parkway Dallas, TX 1155 Dairy Ashford Street Houston, TX 2701 Drexel Drive Houston, TX 400 East Las Colinas Blvd. Irving, TX 14100 San Pedro San Antonio, TX 19740 IH 45 North Spring, TX UTAH 215 South State Street Salt Lake City, UT VIRGINIA 8180 Greensboro Drive McLean, VA WASHINGTON 411 108th Avenue, N.E. Bellevue, WA 511 Pine Street Seattle, WA WASHINGTON, DC 1900 K Street, N.W. Washington, DC WISCONSIN 595 North Barker Road Brookfield, WI 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 Robert C. Pozen, Senior Vice President Fred L. Henning, Jr., Vice President Dwight D. Churchill, Vice President Eric D. Roiter, Secretary Richard A. Silver, Treasurer John H. Costello, Assistant Treasurer Leonard M. Rush, Assistant Treasurer BOARD OF TRUSTEES Ralph F. Cox * Phyllis Burke Davis * Robert M. Gates * Edward C. Johnson 3d E. Bradley Jones * Donald J. Kirk * Peter S. Lynch Marvin L. Mann * William O. McCoy * Gerald C. McDonough * Robert C. Pozen Thomas R. Williams * ADVISORY BOARD J. Gary Burkhead GENERAL DISTRIBUTOR Fidelity Distributors Corporation Boston, MA * INDEPENDENT TRUSTEES TRANSFER AND SHAREHOLDER SERVICING AGENT Fidelity Service Company, Inc. Boston, MA CUSTODIAN The Bank of New York New York, NY FIDELITY'S TAXABLE BOND FUNDS Capital & Income Ginnie Mae Government Securities Intermediate Bond International Bond Investment Grade Bond New Markets Income Short-Intermediate Government Short-Term Bond Spartan(registered trademark) Ginnie Mae Spartan Government Income Spartan High Income Spartan Investment Grade Bond Spartan Limited Maturity Government Spartan Short-Intermediate Government Spartan Short-Term Bond Target Timeline(trademark) 1999, 2001 & 2003 THE FIDELITY TELEPHONE CONNECTION MUTUAL FUND 24-HOUR SERVICE Exchanges/Redemptions 1-800-544-7777 Account Assistance 1-800-544-6666 Product Information 1-800-544-8888 Retirement Accounts 1-800-544-4774 (8 a.m. - 9 p.m.) TDD Service 1-800-544-0118 for the deaf and hearing impaired (9 a.m. - 9 p.m. Eastern time) (registered trademark) TouchTone Xpress 1-800-544-5555 SM AUTOMATED LINE FOR QUICKEST SERVICE -----END PRIVACY-ENHANCED MESSAGE-----