Hanco*ck John Bond Fund SEC Form 485BPOS Filed March 26, 1999 (2024)

Submission Parts

JOHN HANco*ck BOND TRUST

FILE NO. 2-66906 FILE NO. 811-3006================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-1A --------- REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (X) Pre-Effective Amendment No. ( ) Post-Effective Amendment No. 44 (X) REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 (X) Amendment No. 48 (X) --------- JOHN HANco*ck BOND TRUST (Exact Name of Registrant as Specified in Charter) 101 Huntington Avenue Boston, Massachusetts 02199-7603 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, (617) 375-1700 --------- SUSAN S. NEWTON Vice President and Secretary John Hanco*ck Advisers, Inc. 101 Huntington Avenue Boston, Massachusetts 02199 (Name and Address of Agent for Service) --------- APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:It is proposed that this filing will become effective:( ) immediately upon filing pursuant to paragraph (b) of Rule 485(X) on April 1, 1999 pursuant to paragraph (b) of Rule 485( ) 75 days after filing pursuant to paragraph (a) of Rule 485( ) on (date) pursuant to paragraph (a) of Rule 485If appropriate, check the following box:[ ] This post-effective amendment designates a new effective date for a previously filed post-effective amendment.<PAGE>- -------------------------------------------------------------------------------- JOHN HANco*ck Income Funds [LOGO] Prospectus April 1, 1999- --------------------------------------------------------------------------------As with all mutual funds, the Securities and Exchange Commissionhas not judged whether these funds are good investments or whether theinformation in this prospectus is adequate and accurate. Anyone who indicatesotherwise is committing a federal crime.Bond FundGovernment Income FundHigh Yield Bond Fund Intermediate Government Fund Strategic Income Fund[LOGO] JOHN HANco*ck FUNDS A Global Investment Management Firm 101 Huntington Avenue, Boston, Massachusetts 02199-7603<PAGE>Contents- --------------------------------------------------------------------------------<TABLE><S> <C> <C>A fund-by-fund summary Bond Fund 4of goals, strategies, risks, performance and expenses. Government Income Fund 6 High Yield Bond Fund 8 Intermediate Government Fund 10 Strategic Income Fund 12 Policies and instructions for Your accountopening, maintaining and closing an account in any Choosing a share class 14income fund. How sales charges are calculated 14 Sales charge reductions and waivers 15 Opening an account 16 Buying shares 17 Selling shares 18 Transaction policies 20 Dividends and account policies 20 Additional investor services 21 Further information on the Fund detailsincome funds. Business structure 22 Financial highlights 23 For more information back cover</TABLE><PAGE>Overview- --------------------------------------------------------------------------------FUND INFORMATION KEYConcise fund-by-fund descriptions begin on the next page. Each descriptionprovides the following information:[Clip Art] Goal and strategy The fund's particular investment goals and thestrategies it intends to use in pursuing those goals.[Clip Art] Main risks The major risk factors associated with the fund.[Clip Art] Past performance The fund's total return, measured year-by-year andover time.[Clip Art] Your expenses The overall costs borne by an investor in the fund,including sales charges and annual expenses.JOHN HANco*ck INCOME FUNDSThese funds seek current income without sacrificing total return. Some of thefunds also invest for stability of principal. Each fund has its own strategy andits own risk profile.WHO MAY WANT TO INVESTThese funds may be appropriate for investors who:o are seeking a regular stream of income o want to diversify their portfolioso are seeking a mutual fund for the income portion of an asset allocation portfolioo are retired or nearing retirementIncome funds may NOT be appropriate if you:o are investing for maximum return over a long time horizono require absolute stability of your principalRISKS OF MUTUAL FUNDSMutual funds are not bank deposits and are not insured or guaranteed by the FDICor any other government agency. Because you could lose money by investing inthese funds, be sure to read all risk disclosure carefully before investing.THE MANAGEMENT FIRMAll John Hanco*ck income funds are managed by John Hanco*ck Advisers, Inc. Foundedin 1968, John Hanco*ck Advisers is a wholly owned subsidiary of John Hanco*ckMutual Life Insurance Company and manages more than $30 billion in assets. 3<PAGE>Bond Fund GOAL AND STRATEGY[Clip Art] The fund seeks to generate a high level of current income consistentwith prudent investment risk. In pursuing this goal, the fund normally investsin a diversified portfolio of debt securities. These include corporate bonds anddebentures as well as U.S. government and agency securities. Most of thesesecurities are investment-grade, although the fund may invest up to 25% ofassets in junk bonds rated as low as CC/Ca and their unrated equivalents. Thereis no limit on the fund's average maturity. In managing the fund's portfolio, the managers concentrate on sector allocation,industry allocation and securities selection: deciding which types of bonds andindustries to emphasize at a given time, and then which individual bonds to buy.When making sector and industry allocations, the managers try to anticipateshifts in the business cycle, using top-down analysis to determine which sectorsand industries may benefit over the next 12 months.In choosing individual securities, the managers use bottom-up research to findsecurities that appear comparatively undervalued. The managers look at bonds ofall different quality levels and maturities from many different issuers,potentially including foreign governments and corporations. The fund intends to keep its exposure to interest rate movements generally inline with those of its peers. The fund may use certain derivatives (investmentswhose value is based on indices, securities or currencies), especially inmanaging its exposure to interest rate risk, although it does not intend to usethem extensively.In abnormal market conditions, the fund may temporarily invest more than 35% ofassets in investment-grade short-term securities. In these and other cases, thefund might not achieve its goal.The fund may trade securities actively, which could increase its transactioncosts (thus lowering performance) and increase your taxable dividends.================================================================================PORTFOLIO MANAGERSJames K. Ho, CFA- ---------------------------------------Executive vice president of adviser Joined team in 1988 Joined adviser in 1985Began career in 1977Benjamin Matthews- ---------------------------------------Vice president of adviser Joined team in 1995 Joined adviser in 1995 Began career in 1970Anthony A. Goodchild- ---------------------------------------Senior vice president of adviser Joined team in 1998 Joined adviser in 1994Began career in 1968PAST PERFORMANCE[Clip Art] The graph shows how the fund's total return has varied from year toyear, while the table shows performance over time (along with a broad-basedmarket index for reference). This information may help provide an indication ofthe fund's risks and potential rewards. The average annual figures reflect salescharges; the year-by-year and index figures do not, and would be lower if theydid. All figures assume dividend reinvestment. Past performance does notindicate future results.[The information below was represented by a bar graph in the printed materials.]- -------------------------------------------------------------------------------- Class A year-by-year total returns -- calendar years- --------------------------------------------------------------------------------1989 1990 1991 1992 1993 1994 1995 1996 1997 199812.13% 6.68% 16.59% 8.19% 11.69% -2.74% 19.46% 4.05% 9.64% 7.50%Best quarter: Q2 '95, 6.57% Worst quarter: Q1 '94, -2.71%<PAGE>- -------------------------------------------------------------------------------- Average annual total returns -- for periods ending 12/31/98- -------------------------------------------------------------------------------- Life of 1 year 5 year 10 year Class B Class A 2.65% 6.36% 8.66% -- Class B - began 11/23/93 1.75% 6.24% -- 6.46% Index 8.29% 7.16% 9.19% 6.89% Index: Lehman Brothers Corporate Bond Index, an unmanaged index of U.S.corporate bonds and Yankee bonds.4<PAGE>MAIN RISKS[Clip Art] The major factors in this fund's performance are interest rates andcredit risk. When interest rates rise, bond prices generally fall. Generally, anincrease in the fund's average maturity will make it more sensitive to interestrate risk.The fund could lose money if any bonds it owns are downgraded in credit ratingor go into default. In general, lower-rated bonds have higher credit risks. Ifcertain sectors or investments don't perform as the fund expects, it couldunderperform its peers or lose money.To the extent that the fund makes investments with additional risks, those riskscould increase volatility or reduce performance:o Junk bonds and foreign securities may make the fund more sensitive to market or economic shifts in the U.S. and abroad.o If interest rate movements cause the fund's mortgage-related and callable securities to be paid off substantially earlier or later than expected, the fund's share price or yield could be hurt.o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price.o Certain derivatives could produce disproportionate gains or losses.Any U.S. government guarantees on portfolio securities do not apply to thesesecurities' market value or current yield, or to fund shares. ================================================================================YOUR EXPENSES [Clip Art] Transaction expenses are charged directly to your account. Operatingexpenses are paid from the fund's assets, and therefore are paid by shareholdersindirectly. Because Class C shares have a short history, their expenses arebased on Class B expenses. - -------------------------------------------------------------------------------- Shareholder transaction expenses Class A Class B Class C- -------------------------------------------------------------------------------- Maximum sales charge (load) on purchases as a % of purchase price 4.50% none none Maximum deferred sales charge (load) as a % of purchase or sale price, whichever is less none(1) 5.00% 1.00%- -------------------------------------------------------------------------------- Annual operating expenses Class A Class B Class C- -------------------------------------------------------------------------------- Management fee 0.50% 0.50% 0.50% Distribution and service (12b-1) fees 0.30% 1.00% 1.00% Other expenses 0.28% 0.28% 0.28% Total fund operating expenses 1.08% 1.78% 1.78% The hypothetical example below shows what your expenses would be if you invested $10,000 over the time frames indicated, assuming you reinvested all distributions and that the average annual return was 5%. The example is for comparison only, and does not represent the fund's actual expenses and returns, either past or future.- -------------------------------------------------------------------------------- Expenses Year 1 Year 3 Year 5 Year 10- -------------------------------------------------------------------------------- Class A $555 $778 $1,019 $1,708 Class B - with redemption $681 $860 $1,164 $1,908 - without redemption $181 $560 $ 964 $1,908 Class C - with redemption $281 $560 $ 964 $2,095 - without redemption $181 $560 $ 964 $2,095 (1) Except for investments of $1 million or more; see "How sales charges arecalculated."FUND CODESClass A- ---------------------------------------Ticker JHNBXCUSIP 410223101Newspaper BondASEC number 811-2402Class B- ---------------------------------------Ticker JHBBXCUSIP 410223309Newspaper BondBSEC number 811-2402Class C- ---------------------------------------Ticker --CUSIP 410223200Newspaper --SEC number 811-2402 5<PAGE>Government Income Fund GOAL AND STRATEGY[Clip Art] The fund seeks a high level of current income consistent withpreservation of capital. Maintaining a stable share price is a secondary goal.In pursuing these goals, the fund normally invests at least 80% of assets inU.S. government and agency securities. There is no limit on the fund's averagematurity. The fund may invest in higher-risk securities, including dollar-denominatedforeign government securities and asset-backed securities. It may also invest upto 10% of assets in foreign governmental high-yield securities (junk bonds)rated as low as B and their unrated equivalents. In managing the fund's portfolio, the managers consider interest rate trends todetermine which types of bonds to emphasize at a given time. The fund typicallyfavors mortgage-related securities when it anticipates that interest rates willbe relatively stable, and favors U.S. Treasuries at other times. Becausehigh-yield bonds often respond to market movements differently from U.S.government bonds, the fund may use them to manage volatility.The fund may use certain derivatives (investments whose value is based onindices, securities or currencies), especially in managing its exposure tointerest rate risk, although it does not intend to use them extensively.In abnormal market conditions, the fund may temporarily invest more than 20% ofassets in high-quality short-term securities. In these and other cases, the fundmight not achieve its goal.The fund may trade securities actively, which could increase its transactioncosts (thus lowering performance) and increase your taxable dividends. ================================================================================PORTFOLIO MANAGERSBarry H. Evans, CFA- ---------------------------------------Senior vice president of adviser Joined team in 1995 Joined adviser in 1986Began career in 1986Dawn Baillie- ---------------------------------------Joined team in 1998Joined adviser in 1985Began career in 1985PAST PERFORMANCE[Clip Art] The graph shows how the fund's total return has varied from year toyear, while the table shows performance over time (along with a broad-basedmarket index for reference). This information may help provide an indication ofthe fund's risks and potential rewards. The average annual figures reflect salescharges; the year-by-year and index figures do not, and would be lower if theydid. All figures assume dividend reinvestment. Past performance does notindicate future results.[The information below was represented by a bar graph in the printed materials.]- -------------------------------------------------------------------------------- Class B year-by-year total returns -- calendar years- --------------------------------------------------------------------------------1989 1990 1991 1992 1993 1994 1995 1996 1997 199810.55% 6.98% 15.78% 5.30% 7.65% -5.29% 17.71% 1.29% 8.67% 7.96%Best quarter: Q3 '91, 6.57% Worst quarter: Q1 '94, -3.52% - -------------------------------------------------------------------------------- Average annual total returns -- for periods ending 12/31/98- -------------------------------------------------------------------------------- Life of 1 year 5 year 10 year Class A Class A - began 9/30/94 3.80% -- -- 7.79% Class B 2.96% 5.49% 7.40% -- Index 8.49% 6.45% 8.34% 7.69%Index: Lehman Brothers Government Bond Index, an unmanaged index of U.S.Treasury and government agency bonds. 6<PAGE>MAIN RISKS[Clip Art] The major factor in this fund's performance is interest rates. Wheninterest rates rise, bond prices generally fall. Generally, an increase in thefund's average maturity will make it more sensitive to interest rate risk.A fall in worldwide demand for U.S. government securities could also lower theprices of these securities.The fund could lose money if any bonds it owns are downgraded in credit ratingor go into default. In general, lower-rated bonds have higher credit risks. Ifcertain sectors or investments don't perform as the fund expects, it couldunderperform its peers or lose money.To the extent that the fund makes investments with additional risks, those riskscould increase volatility or reduce performance:o If interest rate movements cause the fund's mortgage-related and callable securities to be paid off substantially earlier or later than expected, the fund's share price or yield could be hurt.o Junk bonds and foreign securities could make the fund more sensitive to market or economic shifts in the U.S. and abroad.o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price.o Certain derivatives could produce disproportionate gains or losses.Any governmental guarantees on portfolio securities do not apply to thesesecurities' market value or current yield, or to fund shares. ================================================================================ YOUR EXPENSES[Clip Art] Transaction expenses are charged directly to your account. Operatingexpenses are paid from the fund's assets, and therefore are paid by shareholdersindirectly. Because Class C shares are new, their expenses are based on Class Bexpenses.- -------------------------------------------------------------------------------- Shareholder transaction expenses Class A Class B Class C- -------------------------------------------------------------------------------- Maximum sales charge (load) on purchases as a % of purchase price 4.50% none none Maximum deferred sales charge (load) as a % of purchase or sale price, whichever is less none(1) 5.00% 1.00%- -------------------------------------------------------------------------------- Annual operating expenses Class A Class B Class C- -------------------------------------------------------------------------------- Management fee 0.63% 0.63% 0.63% Distribution and service (12b-1) fees 0.25% 1.00% 1.00% Other expenses 0.22% 0.22% 0.22% Total fund operating expenses 1.10% 1.85% 1.85% Management fee reduction (at least until 4/1/00) 0.13% 0.13% 0.13% Annual operating expenses 0.97% 1.72% 1.72% The hypothetical example below shows what your expenses would be if you invested $10,000 over the time frames indicated, assuming you reinvested all distributions and that the average annual return was 5%. The example is for comparison only, and does not represent the fund's actual expenses and returns, either past or future.- -------------------------------------------------------------------------------- Expenses Year 1 Year 3 Year 5 Year 10- -------------------------------------------------------------------------------- Class A $545 $772 $1,017 $1,719 Class B - with redemption $675 $869 $1,189 $1,962 - without redemption $175 $569 $ 989 $1,962 Class C - with redemption $275 $569 $ 989 $2,159 - without redemption $175 $569 $ 989 $2,159(1) Except for investments of $1 million or more; see "How sales charges arecalculated." FUND CODESClass A- ---------------------------------------Ticker JHGIXCUSIP 41014P854Newspaper GvIncASEC number 811-3006Class B- ---------------------------------------Ticker TSGIXCUSIP 41014P847Newspaper GvIncBSEC number 811-3006 Class C- ---------------------------------------Ticker --CUSIP 41014P797Newspaper --SEC number 811-3006 7<PAGE>High Yield Bond FundGOAL AND STRATEGY [Clip Art] The fund seeks to maximize current income without assuming unduerisk. Capital appreciation is a secondary goal. In pursuing these goals, thefund normally invests at least 65% of assets in U.S. and foreign bonds ratedBBB/Baa or lower and their unrated equivalents. The fund may invest up to 30% ofassets in junk bonds rated CC/Ca and their unrated equivalents. There is nolimit on the fund's average maturity. In managing the fund's portfolio, the managers concentrate on industryallocation and securities selection: deciding which types of industries toemphasize at a given time, and then which individual bonds to buy. The managersuse top-down analysis to determine which industries may benefit from current andfuture changes in the economy.In choosing individual securities, the managers use bottom-up research to findsecurities that appear comparatively undervalued. The managers look at thefinancial condition of the issuers as well as the collateralization and otherfeatures of the securities themselves.The managers also look at companies' financing cycles to determine which typesof securities (for example, bonds, preferred stocks or common stocks) to favor.The fund typically invests in a broad range of industries, although it mayinvest up to 40% of assets in electric utilities and telecommunicationscompanies. The fund may use certain higher-risk investments, including derivatives(investments whose value is based on indices, securities or currencies) andrestricted or illiquid securities. In addition, the fund may invest up to 20% ofnet assets in U.S. and foreign stocks.In abnormal market conditions, the fund may temporarily invest more than 35% ofassets in investment-grade short-term securities. In these and other cases, thefund might not achieve its goal. ================================================================================PORTFOLIO MANAGERSArthur N. Calavritinos, CFA- ---------------------------------------Vice president of adviser Joined team in 1995 Joined adviser in 1988 Began career in 1986Frederick L. Cavanaugh, Jr.- ---------------------------------------Senior vice president of adviser Joined team in 1988 Joined adviser in 1986Began career in 1975Janet L. Clay, CFA- ---------------------------------------Vice president of adviser Joined team in 1998 Joined adviser in 1995 Began career in 1990PAST PERFORMANCE[Clip Art] The graph shows how the fund's total return has varied from year toyear, while the table shows performance over time (along with a broad-basedmarket index for reference). This information may help provide an indication ofthe fund's risks and potential rewards. The average annual figures reflect salescharges; the year-by-year and index figures do not, and would be lower if theydid. All figures assume dividend reinvestment. Past performance does notindicate future results.[The information below was represented by a bar graph in the printed materials.]- -------------------------------------------------------------------------------- Class B year-by-year total returns -- calendar years- -------------------------------------------------------------------------------- 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998- -5.05% -6.57% 33.84% 13.33% 21.40% -6.06% 14.53% 15.13% 16.88% -11.88%Best quarter: Q1 '91, 13.37% Worst quarter: Q3 '98, -18.05% - -------------------------------------------------------------------------------- Average annual total returns -- for periods ending 12/31/98- -------------------------------------------------------------------------------- Life of 1 year 5 year 10 year Class A Class A - began 6/30/93 -15.21% 4.82% -- 5.67% Class B -15.89% 4.75% 7.53% -- Index 1.87% 8.57% 10.55% 8.90%Index: Lehman Brothers High Yield Bond Index, an unmanaged index of high yieldbonds. 8<PAGE>MAIN RISKS [Clip Art] The major factors in the fund's performance are interest rates andcredit risk. When interest rates rise, bond prices generally fall. Generally, anincrease in the fund's average maturity will make it more sensitive to interestrate risk. Credit risk depends largely on the perceived financial health of bond issuers.In general, lower-rated bonds have higher credit risks. Junk bond prices canfall on bad news about the economy, an industry or a company. Share price, yieldand total return may fluctuate more than with less aggressive bond funds.The fund could lose money if any bonds it owns are downgraded in credit ratingor go into default. If certain industries or investments don't perform as thefund expects, it could underperform its peers or lose money.To the extent that the fund makes investments with additional risks, those riskscould increase volatility or reduce performance:o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political upheavals.o If interest rate movements cause the fund's callable securities to be paid off substantially earlier or later than expected, the fund's share price or yield could be hurt.o If the fund concentrates its investments in telecommunications or electric utilities, its performance could be tied more closely to those industries than to the market as a whole.o Stock investments may go down in value due to stock market movements or negative company or industry events.o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price.o Certain derivatives could produce disproportionate gains or losses.The fund may trade securities actively, which could increase its transactioncosts (thus lowering performance) and increase your taxable dividends.================================================================================YOUR EXPENSES [Clip Art] Transaction expenses are charged directly to your account. Operatingexpenses are paid from the fund's assets, and therefore are paid by shareholdersindirectly. Because Class C shares have a short history, their expenses arebased on Class B expenses. - -------------------------------------------------------------------------------- Shareholder transaction expenses Class A Class B Class C- -------------------------------------------------------------------------------- Maximum sales charge (load) on purchases as a % of purchase price 4.50% none none Maximum deferred sales charge (load) as a % of purchase or sale price, whichever is less none(1) 5.00% 1.00%- -------------------------------------------------------------------------------- Annual operating expenses Class A Class B Class C- -------------------------------------------------------------------------------- Management fee 0.52% 0.52% 0.52% Distribution and service (12b-1) fees 0.25% 1.00% 1.00% Other expenses 0.20% 0.20% 0.20% Total fund operating expenses 0.97% 1.72% 1.72% The hypothetical example below shows what your expenses would be if you invested $10,000 over the time frames indicated, assuming you reinvested all distributions and that the average annual return was 5%. The example is for comparison only, and does not represent the fund's actual expenses and returns, either past or future.- -------------------------------------------------------------------------------- Expenses Year 1 Year 3 Year 5 Year 10- -------------------------------------------------------------------------------- Class A $545 $745 $ 962 $1,586 Class B - with redemption $675 $842 $1,133 $1,830 - without redemption $175 $542 $ 933 $1,830 Class C - with redemption $275 $542 $ 933 $2,030 - without redemption $175 $542 $ 933 $2,030(1) Except for investments of $1 million or more; see "How sales charges arecalculated."FUND CODESClass A- ---------------------------------------Ticker JHHBXCUSIP 41014P839Newspaper HiYldASEC number 811-3006Class B- ---------------------------------------Ticker TSHYXCUSIP 41014P821Newspaper HiYldBSEC number 811-3006Class C- ---------------------------------------Ticker --CUSIP 41014P813Newspaper --SEC number 811-3006 9<PAGE>Intermediate Government FundGOAL AND STRATEGY [Clip Art] The fund seeks a high level of current income consistent withpreservation of capital and maintenance of liquidity. In pursuing this goal, thefund normally invests at least 80% of assets in U.S. government and agencysecurities. Although the fund may invest in bonds of any maturity, it maintainsa dollar-weighted average maturity of between three and ten years. In managing the fund's portfolio, the managers consider interest rate trends todetermine which types of bonds to emphasize at a given time. The managerstypically favor mortgage-related securities when they anticipate that interestrates will be relatively stable, and favor U.S. Treasuries at other times. Themanagers also invest in non-Treasury securities to enhance the fund's currentyields.The fund may use certain derivatives (investments whose value is based onindices or other securities), especially in managing its exposure to interestrate risk. It may also invest up to 20% of assets in asset-backed or corporatedebt securities in the highest credit category (those rated AAA/Aaa and theirunrated equivalents). However, it does not intend to use any of theseinvestments extensively. In abnormal market conditions, the fund may temporarily invest more than 20% ofassets in high-quality short-term securities. In these and other cases, the fundmight not achieve its goal.The fund may trade securities actively, which could increase its transactioncosts (thus lowering performance) and increase your taxable dividends. ================================================================================PORTFOLIO MANAGERSBarry H. Evans, CFA- ---------------------------------------Senior vice president of adviser Joined team in 1995 Joined adviser in 1986Began career in 1986Dawn Baillie- ---------------------------------------Joined team in 1998Joined adviser in 1985Began career in 1985PAST PERFORMANCE[Clip Art] The graph shows how the fund's total return has varied from year toyear, while the table shows performance over time (along with broad-based marketindices for reference). This information may help provide an indication of thefund's risks and potential rewards. The average annual figures reflect salescharges; the year-by-year and index figures do not, and would be lower if theydid. All figures assume dividend reinvestment. Past performance does notindicate future results.[The information below was represented by a bar graph in the printed materials.]- -------------------------------------------------------------------------------- Class A year-by-year total returns -- calendar years- -------------------------------------------------------------------------------- 1992 1993 1994 1995 1996 1997 1998 6.56% 3.95% 1.07% 10.27% 3.32% 8.79% 8.58% Best quarter: Q3 '98, 4.85% Worst quarter: Q1 '96, -1.35%- -------------------------------------------------------------------------------- Average annual total returns -- for periods ending 12/31/98- -------------------------------------------------------------------------------- Life of Life of 1 year 5 year Class A Class B Class A - began 12/31/91 5.33% 5.70% 5.57% -- Class B - began 12/31/91 4.77% 5.62% -- 5.32% Index 1 8.17% 6.12% 6.44% 6.44% Index 2 9.85% 7.18% 6.76% 6.76%Index 1: Lipper Intermediate U.S. Government Index, an unmanaged index ofintermediate-term government bonds.Index 2: Lehman Brothers Government Bond Index, an unmanaged index of U.S.Treasury and government agency bonds. 10<PAGE>MAIN RISKS [Clip Art] The major factor in this fund's performance is interest rates. Wheninterest rates rise, bond prices generally fall. Generally, an increase in thefund's average maturity will make it more sensitive to interest rate risk. A fall in worldwide demand for U.S. government securities could also lower theprices of these securities.The fund could lose money if any bonds it owns are downgraded in credit ratingor go into default. If certain sectors or investments don't perform as the fundexpects, it could underperform its peers or lose money.To the extent that the fund makes investments with additional risks, those riskscould increase volatility or reduce performance:o If interest rate movements cause the fund's mortgage-related and callable securities to be paid off substantially earlier or later than expected, the fund's share price or yield could be hurt.o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price.o Certain derivatives could produce disproportionate gains or losses.Any U.S. government guarantees on portfolio securities do not apply to thesesecurities' market value or current yield, or to fund shares. ================================================================================YOUR EXPENSES [Clip Art] Transaction expenses are charged directly to your account. Operatingexpenses are paid from the fund's assets, and therefore are paid by shareholdersindirectly. Because Class C shares are new, their expenses are based on Class Bexpenses. - -------------------------------------------------------------------------------- Shareholder transaction expenses Class A Class B Class C- -------------------------------------------------------------------------------- Maximum sales charge (load) on purchases as a % of purchase price 3.00% none none Maximum deferred sales charge (load) as a % of purchase or sale price, whichever is less none(1) 3.00% 1.00%- -------------------------------------------------------------------------------- Annual operating expenses Class A Class B Class C- -------------------------------------------------------------------------------- Management fee 0.40% 0.40% 0.40% Distribution and service (12b-1) fees 0.25% 1.00% 1.00% Other expenses 0.51% 0.51% 0.51% Total fund operating expenses 1.16% 1.91% 1.91% The hypothetical example below shows what your expenses would be if you invested $10,000 over the time frames indicated, assuming you reinvested all distributions and that the average annual return was 5%. The example is for comparison only, and does not represent the fund's actual expenses and returns, either past or future.- -------------------------------------------------------------------------------- Expenses Year 1 Year 3 Year 5 Year 10- -------------------------------------------------------------------------------- Class A $415 $657 $ 919 $1,667 Class B - with redemption $494 $800 $1,032 $1,775 - without redemption $194 $600 $1,032 $1,775 Class C - with redemption $294 $600 $1,032 $2,233 - without redemption $194 $600 $1,032 $2,233(1) Except for investments of $1 million or more; see "How sales charges arecalculated."FUND CODESClass A- ---------------------------------------Ticker TAUSXCUSIP 41014P102Newspaper IntGvASEC number 811-3006Class B- ---------------------------------------Ticker TSUSXCUSIP 41014P201Newspaper --SEC number 811-3006 Class C- ---------------------------------------Ticker --CUSIP 41014P789Newspaper --SEC number 811-3006 11<PAGE>Strategic Income FundGOAL AND STRATEGY [Clip Art] The fund seeks a high level of current income. In pursuing this goal,the fund invests primarily in the following types of securities:o foreign government and corporate debt securities from developed and emerging marketso U.S. government and agency securitieso U.S. junk bondsAlthough the fund invests in securities rated as low as CC/Ca and their unratedequivalents, it generally intends to keep its average credit quality in theinvestment-grade range. There is no limit on the fund's average maturity.In managing the portfolio, the managers allocate assets among the three majorsectors based on analysis of economic factors such as projected internationalinterest rate movements, industry cycles and political trends.Within each sector, the managers look for securities that are appropriate forthe overall portfolio in terms of yield, credit quality, structure and industrydistribution. In selecting securities, relative yields and risk/reward ratiosare the primary considerations.The fund may use certain higher-risk investments, including derivatives(investments whose value is based on indices, securities or currencies) andrestricted or illiquid securities. In addition, the fund may invest up to 10% ofnet assets in U.S. or foreign stocks.In abnormal market conditions, the fund may temporarily invest extensively ininvestment-grade short- term securities. In these and other cases, the fundmight not achieve its goal.The fund may trade securities actively, which could increase its transactioncosts (thus lowering performance) and increase your taxable dividends. ================================================================================PORTFOLIO MANAGERSFrederick L. Cavanaugh, Jr.- ---------------------------------------Senior vice president of adviser Joined team in 1986 Joined adviser in 1986Began career in 1975Arthur N. Calavritinos, CFA- ---------------------------------------Vice president of adviser Joined team in 1995 Joined adviser in 1988 Began career in 1986PAST PERFORMANCE[Clip Art] The graph shows how the fund's total return has varied from year toyear, while the table shows performance over time (along with a broad-basedmarket index for reference). This information may help provide an indication ofthe fund's risks and potential rewards. The average annual figures reflect salescharges; the year-by-year and index figures do not, and would be lower if theydid. All figures assume dividend reinvestment. Past performance does notindicate future results.[The information below was represented by a bar graph in the printed materials.]- -------------------------------------------------------------------------------- Class A year-by-year total returns -- calendar years- -------------------------------------------------------------------------------- 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998- -0.41% -9.83% 33.58% 7.68% 13.93% -3.02% 18.73% 11.63% 12.67% 5.41% Best quarter: Q1 '91, 15.09% Worst quarter: Q3 '90, -6.68%- -------------------------------------------------------------------------------- Average annual total returns -- for periods ending 12/31/98- -------------------------------------------------------------------------------- Life of 1 year 5 year 10 year Class B Class A 0.61% 7.83% 7.94% -- Class B - began 10/4/93 -0.20% 7.78% -- 8.25% Index 9.47% 7.30% 9.33% 6.89%Index: Lehman Brothers Government/Corporate Bond Index, an unmanaged index ofU.S. government, U.S. corporate and Yankee bonds. 12<PAGE>MAIN RISKS[Clip Art] The fund's risk profile depends on its sector allocation. In general,investors should expect fluctuations in share price, yield and total return thatare above average for bond funds. When interest rates rise, bond prices generally fall. Generally, an increase inthe fund's average maturity will make it more sensitive to interest rate risk.A fall in worldwide demand for U.S. government securities could also lower theprices of these securities.The fund could lose money if any bonds it owns are downgraded in credit ratingor go into default. In general, lower-rated bonds have higher credit risks, andtheir prices can fall on bad news about the economy, an industry or a company.If certain allocation strategies or certain industries or investments don'tperform as the fund expects, it could underperform its peers or lose money. To the extent that the fund makes investments with additional risks, those riskscould increase volatility or reduce performance:o Foreign investments carry additional risks, including potentially unfavorable currency exchange rates, inadequate or inaccurate financial information and social or political upheavals. These risks are greater in emerging markets.o If interest rate movements cause the fund's callable securities to be paid off substantially earlier or later than expected, the fund's share price or yield could be hurt.o Stock investments may go down in value due to stock market movements or negative company or industry events.o In a down market, higher-risk securities and derivatives could become harder to value or to sell at a fair price.o Certain derivatives could produce disproportionate gains or losses. ================================================================================YOUR EXPENSES [Clip Art] Transaction expenses are charged directly to your account. Operatingexpenses are paid from the fund's assets, and therefore are paid by shareholdersindirectly. Because Class C shares have a short history, their expenses arebased on Class B expenses. - -------------------------------------------------------------------------------- Shareholder transaction expenses Class A Class B Class C- -------------------------------------------------------------------------------- Maximum sales charge (load) on purchases as a % of purchase price 4.50% none none Maximum deferred sales charge (load) as a % of purchase or sale price, whichever is less none(1) 5.00% 1.00%- -------------------------------------------------------------------------------- Annual operating expenses Class A Class B Class C- -------------------------------------------------------------------------------- Management fee 0.40% 0.40% 0.40% Distribution and service (12b-1) fees 0.30% 1.00% 1.00% Other expenses 0.22% 0.22% 0.22% Total fund operating expenses 0.92% 1.62% 1.62% The hypothetical example below shows what your expenses would be if you invested $10,000 over the time frames indicated, assuming you reinvested all distributions and that the average annual return was 5%. The example is for comparison only, and does not represent the fund's actual expenses and returns, either past or future.- -------------------------------------------------------------------------------- Expenses Year 1 Year 3 Year 5 Year 10- -------------------------------------------------------------------------------- Class A $540 $730 $ 936 $1,530 Class B - with redemption $665 $811 $1,081 $1,733 - without redemption $165 $511 $ 881 $1,733 Class C - with redemption $265 $511 $ 881 $1,922 - without redemption $165 $511 $ 881 $1,922(1) Except for investments of $1 million or more; see "How sales charges arecalculated."FUND CODESClass A- ---------------------------------------Ticker JHFIXCUSIP 410227102Newspaper StrIncASEC number 811-4651Class B- ---------------------------------------Ticker STIBXCUSIP 410227300Newspaper StrIncBSEC number 811-4651Class C- ---------------------------------------Ticker --CUSIP 410227888Newspaper --SEC number 811-4651 13<PAGE>Your account- --------------------------------------------------------------------------------CHOOSING A SHARE CLASS Each share class has its own cost structure, including a Rule 12b-1 plan thatallows it to pay fees for the sale and distribution of its shares. Yourfinancial representative can help you decide which share class is best for you. - -------------------------------------------------------------------------------- Class A- --------------------------------------------------------------------------------o Front-end sales charges, as described at right.o Distribution and service (12b-1) fees of 0.25% (0.30% for Bond and Strategic Income).- -------------------------------------------------------------------------------- Class B- --------------------------------------------------------------------------------o No front-end sales charge; all your money goes to work for you right away.o Distribution and service (12b-1) fees of 1.00%.o A deferred sales charge, as described on following page. o Automatic conversion to Class A shares after either five years (Intermediate Government) or eight years (all other funds), thus reducing future annual expenses. - -------------------------------------------------------------------------------- Class C- --------------------------------------------------------------------------------o No front-end sales charge; all your money goes to work for you right away.o Distribution and service (12b-1) fees of 1.00%.o A 1.00% contingent deferred sales charge on shares sold within one year of purchase.o No automatic conversion to Class A shares, so annual expenses continue at the Class C level throughout the life of your investment.For actual past expenses of each share class, see the fund-by-fund informationearlier in this prospectus.Because 12b-1 fees are paid on an ongoing basis, Class B and Class Cshareholders could end up paying more expenses over the long term than if theyhad paid a sales charge.Investors purchasing $1 million or more of Class B or Class C shares may want toconsider the lower operating expenses of Class A shares.- --------------------------------------------------------------------------------HOW SALES CHARGES ARE CALCULATEDClass A Sales charges are as follows: - -------------------------------------------------------------------------------- Sales charges - Intermediate Government- -------------------------------------------------------------------------------- As a % of As a % of your Your investment offering price investment Up to $99,999 3.00% 3.09% $100,000 - $499,999 2.50% 2.56% $500,000 - $999,999 2.00% 2.04% $1,000,000 and over See below- -------------------------------------------------------------------------------- Sales charges - all other funds- -------------------------------------------------------------------------------- As a % of As a % of your Your investment offering price investment Up to $99,999 4.50% 4.71% $100,000 - $249,999 3.75% 3.90% $250,000 - $499,999 2.75% 2.83% $500,000 - $999,999 2.00% 2.04% $1,000,000 and over See belowInvestments of $1 million or more Class A shares are available with no front-endsales charge. However, there is a contingent deferred sales charge (CDSC) on anyshares sold within one year of purchase, as follows:- -------------------------------------------------------------------------------- CDSC on $1 million+ investments - all funds- -------------------------------------------------------------------------------- CDSC on shares Your investment being sold First $1M - $4,999,999 1.00% Next $1 - $5M above that 0.50% Next $1 or more above that 0.25%For purposes of this CDSC, all purchases made during a calendar month arecounted as having been made on the last day of that month.The CDSC is based on the lesser of the original purchase cost or the currentmarket value of the shares being sold, and is not charged on shares you acquiredby reinvesting your dividends. To keep your CDSC as low as possible, each timeyou place a request to sell shares we will first sell any shares in your accountthat are not subject to a CDSC.14 YOUR ACCOUNT<PAGE>Class B and Class C Shares are offered at their net asset value per share,without any initial sales charge. However, you may be charged a contingentdeferred sales charge (CDSC) on shares you sell within a certain time after youbought them, as described in the tables below. There is no CDSC on sharesacquired through reinvestment of dividends. The CDSC is based on the originalpurchase cost or the current market value of the shares being sold, whichever isless. The CDSCs are as follows: - -------------------------------------------------------------------------------- Class B deferred charges- -------------------------------------------------------------------------------- CDSC on Intermediate CDSC on all Years after Government shares other fund shares purchase being sold being sold 1st year 3.00% 5.00% 2nd year 2.00% 4.00% 3rd year 2.00% 3.00% 4th year 1.00% 3.00% 5th year none 2.00% 6th year none 1.00% After 6th year none none - -------------------------------------------------------------------------------- Class C deferred charges- -------------------------------------------------------------------------------- Years after purchase CDSC 1st year 1.00% After 1st year none For purposes of these CDSCs, all purchases made during a calendar month arecounted as having been made on the first day of that month.CDSC calculations are based on the number of shares involved, not on the valueof your account. To keep your CDSC as low as possible, each time you place arequest to sell shares we will first sell any shares in your account that carryno CDSC. If there are not enough of these to meet your request, we will sellthose shares that have the lowest CDSC.- --------------------------------------------------------------------------------SALES CHARGE REDUCTIONS AND WAIVERSReducing your Class A sales charges There are several ways you can combinemultiple purchases of Class A shares of John Hanco*ck funds to take advantage ofthe breakpoints in the sales charge schedule. The first three ways can becombined in any manner.o Accumulation Privilege -- lets you add the value of any Class A shares you already own to the amount of your next Class A investment for purposes of calculating the sales charge. Retirement plans investing $1 million in Class B shares may add that value to Class A purchases to calculate charges.o Letter of Intention -- lets you purchase Class A shares of a fund over a 13-month period and receive the same sales charge as if all shares had been purchased at once.o Combination Privilege -- lets you combine Class A shares of multiple funds for purposes of calculating the sales charge.To utilize: complete the appropriate section of your application, or contactyour financial representative or Signature Services, or consult the SAI (see theback cover of this prospectus).Group Investment Program A group may be treated as a single purchaser under theaccumulation and combination privileges. Each investor has an individualaccount, but the group's investments are lumped together for sales chargepurposes, making the investors potentially eligible for reduced sales charges.There is no charge, no obligation to invest (although initial investments musttotal at least $250), and individual investors may close their accounts at anytime.To utilize: contact your financial representative or Signature Services to findout how to qualify, or consult the SAI (see the back cover of this prospectus).CDSC waivers As long as Signature Services is notified at the time you sell, theCDSC for each share class will generally be waived in the following cases:o to make payments through certain systematic withdrawal planso to make certain distributions from a retirement plano because of shareholder death or disabilityo to purchase a John Hanco*ck Declaration annuityTo utilize: if you think you may be eligible for a CDSC waiver, contact yourfinancial representative or Signature Services, or consult the SAI (see the backcover of this prospectus). YOUR ACCOUNT 15<PAGE>Reinstatement privilege If you sell shares of a John Hanco*ck fund, you mayreinvest some or all of the proceeds in the same share class of any John Hanco*ckfund within 120 days without a sales charge, as long as Signature Services isnotified before you reinvest. If you paid a CDSC when you sold your shares, youwill be credited with the amount of the CDSC. All accounts involved must havethe same registration.To utilize: contact your financial representative or Signature Services.Waivers for certain investors Class A shares may be offered without front-endsales charges or CDSCs to various individuals and institutions, including:o selling brokers and their employees and sales representativeso financial representatives utilizing fund shares in fee-based investment products under signed agreement with John Hanco*ck Fundso fund trustees and other individuals who are affiliated with these or other John Hanco*ck fundso individuals transferring assets from an employee benefit plan into a John Hanco*ck fundo certain insurance company contract holders (one-year CDSC usually applies)o participants in certain retirement plans with at least 100 eligible employees (one-year CDSC applies)To utilize: if you think you may be eligible for a sales charge waiver, contactSignature Services or consult the SAI (see the back cover of this prospectus).- --------------------------------------------------------------------------------OPENING AN ACCOUNT1 Read this prospectus carefully.2 Determine how much you want to invest. The minimum initial investments for the John Hanco*ck funds are as follows: o non-retirement account: $1,000 o retirement account: $250 o group investments: $250 o Monthly Automatic Accumulation Plan (MAAP): $25 to open; you must invest at least $25 a month o fee-based clients of selling brokers who placed at least $2 billion in John Hanco*ck funds: $250 3 Complete the appropriate parts of the account application, carefully following the instructions. You must submit additional documentation when opening a trust, corporate or power of attorney account. For more information, please contact your financial representative or call Signature Services at 1-800-225-5291. 4 Complete the appropriate parts of the account privileges application. By applying for privileges now, you can avoid the delay and inconvenience of having to file an additional application if you want to add privileges later.5 Make your initial investment using the table on the next page. You and your financial representative can initiate any purchase, exchange or sale of shares.16 YOUR ACCOUNT<PAGE>- --------------------------------------------------------------------------------Buying shares- -------------------------------------------------------------------------------- Opening an account Adding to an accountBy check[Clip Art] o Make out a check for the o Make out a check for the investment amount, payable to investment amount payable to "John Hanco*ck Signature "John Hanco*ck Signature Services, Inc." Services, Inc." o Deliver the check and your o Fill out the detachable completed application to your investment slip from an financial representative, or account statement. If no slip mail them to Signature is available, include a note Services (address below). specifying the fund name, your share class, your account number and the name(s) in which the account is registered. o Deliver the check and your investment slip or note to your financial representative, or mail them to Signature Services (address below).By exchange[Clip Art] o Call your financial o Call your financial representative or Signature representative or Signature Services to request an Services to request an exchange. exchange.By wire[Clip Art] o Deliver your completed o Instruct your bank to wire the application to your financial amount of your investment to: representative, or mail it to First Signature Bank & Trust Signature Services. Account # 900000260 Routing # 211475000 o Obtain your account number by calling your financial Specify the fund name, your share representative or Signature class, your account number and Services. the name(s) in which the account is registered. Your bank may o Instruct your bank to wire the charge a fee to wire funds. amount of your investment to: First Signature Bank & Trust Account # 900000260 Routing # 211475000 Specify the fund name, your choice of share class, the new account number and the name(s) in which the account is registered. Your bank may charge a fee to wire funds.By phone[Clip Art] See "By wire" and "By exchange." o Verify that your bank or credit union is a member of the Automated Clearing House (ACH) system. o Complete the "Invest By Phone" and "Bank Information" sections on your account application. o Call Signature Services to verify that these features are in place on your account. o Tell the Signature Services representative the fund name, your share class, your account number, the name(s) in which the account is registered and the amount of your investment.- ----------------------------------------Address:John Hanco*ck Signature Services, Inc.1 John Hanco*ck Way, Suite 1000Boston, MA 02217-1000Phone Number: 1-800-225-5291Or contact your financial representativefor instructions and assistance.- ----------------------------------------To open or add to an account using the Monthly Automatic Accumulation Program,see "Additional investor services." YOUR ACCOUNT 17<PAGE>- --------------------------------------------------------------------------------Selling shares- -------------------------------------------------------------------------------- Designed for To sell some or all of your sharesBy letter[Clip Art] o Accounts of any type. o Write a letter of instruction or complete a o Sales of any amount. stock power indicating the fund name, your share class, your account number, the name(s) in which the account is registered and the dollar value or number of shares you wish to sell. o Include all signatures and any additional documents that may be required (see next page). o Mail the materials to Signature Services. o A check will be mailed to the name(s) and address in which the account is registered, or otherwise according to your letter of instruction.By phone[Clip Art] o Most accounts. o For automated service 24 hours a day using your o Sales of up to $100,000. touch-tone phone, call the EASI-Line at 1-800-338-8080. o To place your order, call your financial representative or Signature Services between 8 A.M. and 4 P.M. Eastern Time on most business days.By wire or electronic funds transfer (EFT)[Clip Art] o Requests by letter to sell o To verify that the any amount (accounts of any telephone redemption type). privilege is in place on an account, or to request the o Requests by phone to sell form to add it to an up to $100,000 (accounts existing account, call with telephone redemption Signature Services. privileges). o Amounts of $1,000 or more will be wired on the next business day. A $4 fee will be deducted from your account. o Amounts of less than $1,000 may be sent by EFT or by check. Funds from EFT transactions are generally available by the second business day. Your bank may charge a fee for this service.By exchange[Clip Art] o Accounts of any type. o Obtain a current prospectus for the fund into which you o Sales of any amount. are exchanging by calling your financial representative or Signature Services. o Call your financial representative or Signature Services to request an exchange. By check[Clip Art] o Government Income, o Request checkwriting on your Intermediate Government account application. and Strategic Income only. o Verify that the shares to be sold were purchased more than o Any account with 10 days earlier or were checkwriting privileges. purchased by wire. o Sales of over $100. o Write a check for any amount over $100. 18 YOUR ACCOUNT<PAGE>Selling shares in writing In certain circ*mstances, you will need to make yourrequest to sell shares in writing. You may need to include additional items withyour request, as shown in the table below. You may also need to include asignature guarantee, which protects you against fraudulent orders. You will needa signature guarantee if:o your address of record has changed within the past 30 dayso you are selling more than $100,000 worth of shareso you are requesting payment other than by a check mailed to the address of record and payable to the registered owner(s)You will need to obtain your signature guarantee from a member of the SignatureGuarantee Medallion Program. Most brokers and securities dealers are members ofthis program. A notary public CANNOT provide a signature guarantee.- --------------------------------------------------------------------------------Seller Requirements for written requests- -------------------------------------------------------------------------------- [Clip Art]Owners of individual, joint, sole o Letter of instruction.proprietorship, UGMA/UTMA (custodialaccounts for minors) or general o On the letter, the signatures andpartner accounts. titles of all persons authorized to sign for the account, exactly as the account is registered. o Signature guarantee if applicable (see above).Owners of corporate or association o Letter of instruction.accounts. o Corporate resolution, certified within the past 12 months. o On the letter and the resolution, the signature of the person(s) authorized to sign for the account. o Signature guarantee if applicable (see above).Owners or trustees of trust accounts. o Letter of instruction. o On the letter, the signature(s) of the trustee(s). o Provide a copy of the trust document certified within the past 12 months. o Signature guarantee if applicable (see above).Joint tenancy shareholders with rights o Letter of instruction signed byof surviorship whose co-tenants are surviving tenant.deceased. o Copy of death certificate. o Signature guarantee if applicable (see above).Executors of shareholder estates. o Letter of instruction signed by executor. o Copy of order appointing executor, certified within the past 12 months. o Signature guarantee if applicable (see above).Administrators, conservators, o Call 1-800-225-5291 forguardians and other sellers or account instructions.types not listed above. - ----------------------------------------Address:John Hanco*ck Signature Services, Inc.1 John Hanco*ck Way, Suite 1000Boston, MA 02217-1000Phone Number: 1-800-225-5291Or contact your financial representativefor instructions and assistance.- ----------------------------------------To sell shares through a systematic withdrawal plan, see "Additional investorservices." YOUR ACCOUNT 19<PAGE>- --------------------------------------------------------------------------------TRANSACTION POLICIESValuation of shares The net asset value per share (NAV) for each fund and classis determined each business day at the close of regular trading on the New YorkStock Exchange (typically 4 P.M. Eastern Time). The funds use market prices invalui ng portfolio securities, but may use fair-value estimates if reliablemarket prices are unavailable.Buy and sell prices When you buy shares, you pay the NAV plus any applicablesales charges, as described earlier. When you sell shares, you receive the NAVminus any applicable deferred sales charges. Execution of requests Each fund is open on those days when the New York StockExchange is open, typically Monday through Friday. Buy and sell requests areexecuted at the next NAV to be calculated after Signature Services receives yourrequest in good order. At times of peak activity, it may be difficult to place requests by phone.During these times, consider using EASI-Line or sending your request in writing.In unusual circ*mstances, any fund may temporarily suspend the processing ofsell requests, or may postpone payment of proceeds for up to three business daysor longer, as allowed by federal securities laws.Telephone transactions For your protection, telephone requests may be recordedin order to verify their accuracy. Also for your protection, telephonetransactions are not permitted on accounts whose names or addresses have changedwithin the past 30 days. Proceeds from telephone transactions can only be mailedto the address of record.Exchanges You may exchange shares of one John Hanco*ck fund for shares of thesame class of any other, generally without paying any additional sales charges.The registration for both accounts involved must be identical. Class B and ClassC shares will continue to age from the original date and will retain the sameCDSC rate as they had before the exchange, except that the rate will change tothe new fund's rate if that rate is higher. A CDSC rate that has increased willdrop again with a future exchange into a fund with a lower rate.To protect the interests of other investors in the fund, a fund may cancel theexchange privileges of any parties that, in the opinion of the fund, are usingmarket timing strategies or making more than seven exchanges per owner orcontrolling party per calendar year. A fund may also refuse any exchange order.A fund may change or cancel its exchange policies at any time, upon 60 days'notice to its shareholders.Certificated shares Most shares are electronically recorded. If you wish to havecertificates for your shares, please write to Signature Services. Certificatedshares can only be sold by returning the certificates to Signature Services,along with a letter of instruction or a stock power and a signature guarantee.Sales in advance of purchase payments When you place a request to sell sharesfor which the purchase money has not yet been collected, the request will beexecuted in a timely fashion, but the fund will not release the proceeds to youuntil your purchase payment clears. This may take up to ten business days afterthe purchase.- --------------------------------------------------------------------------------DIVIDENDS AND ACCOUNT POLICIESAccount statements In general, you will receive account statements as follows:o after every transaction (except a dividend reinvestment) that affects your account balanceo after any changes of name or address of the registered owner(s)o in all other circ*mstances, every quarterEvery year you should also receive, if applicable, a Form 1099 tax informationstatement, mailed by January 31.Dividends The funds generally declare dividends daily and pay them monthly.Capital gains, if any, are distributed annually, typically after the end of afund's fiscal year. Most of these funds' dividends are income dividends. Yourdividends begin accruing the day after the fund receives payment and continuethrough the day your shares are actually sold.Dividend reinvestments Most investors have their dividends reinvested inadditional shares of the same fund and class. If you choose this option, or ifyou do not indicate any choice, your dividends will be reinvested on thedividend record date. Alternatively, you can choose to have a check for yourdividends mailed to you. However, if the check is not deliverable, yourdividends will be reinvested.20 YOUR ACCOUNT<PAGE>Taxability of dividends Dividends you receive from a fund, whether reinvested ortaken as cash, are generally considered taxable. Dividends from a fund'sshort-term capital gains are taxable as ordinary income. Dividends from a fund'slong-term capital gains are taxable at a lower rate. Whether gains areshort-term or long-term depends on the fund's holding period. Some dividendspaid in January may be taxable as if they had been paid the previous December.The Form 1099 that is mailed to you every January details your dividends andtheir federal tax category, although you should verify your tax liability withyour tax professional.Taxability of transactions Any time you sell or exchange shares, it isconsidered a taxable event for you. Depending on the purchase price and the saleprice of the shares you sell or exchange, you may have a gain or a loss on thetransaction. You are responsible for any tax liabilities generated by yourtransactions.Small accounts (non-retirement only) If you draw down a non-retirement accountso that its total value is less than $1,000, you may be asked to purchase moreshares within 30 days. If you do not take action, your fund may close out youraccount and mail you the proceeds. Alternatively, Signature Services may chargeyou $10 a year to maintain your account. You will not be charged a CDSC if youraccount is closed for this reason, and your account will not be closed if itsdrop in value is due to fund performance or the effects of sales charges. Year 2000 compliance The adviser and the funds' service providers are takingsteps to address any year 2000-related computer problems. However, there is somerisk that these problems could disrupt the issuers in which the funds invest,the funds' operations or financial markets generally. - --------------------------------------------------------------------------------ADDITIONAL INVESTOR SERVICESMonthly Automatic Accumulation Program (MAAP) MAAP lets you set up regularinvestments from your paycheck or bank account to the John Hanco*ck fund(s) ofyour choice. You determine the frequency and amount of your investments, and youcan terminate your program at any time. To establish:o Complete the appropriate parts of your account application.o If you are using MAAP to open an account, make out a check ($25 minimum) for your first investment amount payable to "John Hanco*ck Signature Services, Inc." Deliver your check and application to your financial representative or Signature Services.Systematic withdrawal plan This plan may be used for routine bill payments orperiodic withdrawals from your account. To establish:o Make sure you have at least $5,000 worth of shares in your account.o Make sure you are not planning to invest more money in this account (buying shares during a period when you are also selling shares of the same fund is not advantageous to you, because of sales charges).o Specify the payee(s). The payee may be yourself or any other party, and there is no limit to the number of payees you may have, as long as they are all on the same payment schedule.o Determine the schedule: monthly, quarterly, semi-annually, annually or in certain selected months.o Fill out the relevant part of the account application. To add a systematic withdrawal plan to an existing account, contact your financial representative or Signature Services.Retirement plans John Hanco*ck Funds offers a range of retirement plans,including traditional, Roth and Education IRAs, SIMPLE plans, SEPs, 401(k) plansand other pension and profit-sharing plans. Using these plans, you can invest inany John Hanco*ck fund (except tax-free income funds) with a low minimuminvestment of $250 or, for some group plans, no minimum investment at all. Tofind out more, call Signature Services at 1-800-225-5291. YOUR ACCOUNT 21<PAGE>Fund details- --------------------------------------------------------------------------------BUSINESS STRUCTUREThe diagram below shows the basic business structure used by the John Hanco*ckincome funds. Each fund's board of trustees oversees the fund's businessactivities and retains the services of the various firms that carry out thefund's operations. The trustees of the Government Income, High Yield Bond and IntermediateGovernment funds have the power to change these funds' respective investmentgoals without shareholder approval.Management fees The management fees paid to the investment adviser by the JohnHanco*ck income funds last fiscal year are as follows:- -------------------------------------------------------------------------------- Fund % of net assets- -------------------------------------------------------------------------------- Bond 0.50% Government Income 0.63% High Yield Bond 0.52% Intermediate Government 0.40% Strategic Income 0.40% [The following information was represented as a flow chart in the printed material.] ----------------- Shareholders ----------------- Distribution andshareholder services ------------------------------------------------- Financial services firms and their representatives Advise current and prospective share- holders on their fund investments, often in the context of an overall financial plan. ------------------------------------------------- ------------------------------------------------- Principal distributor John Hanco*ck Funds, Inc. Markets the funds and distributes shares through selling brokers, financial planners and other financial representatives. ------------------------------------------------- ------------------------------------------------------ Transfer agent John Hanco*ck Signature Services, Inc. Handles shareholder services, including record- keeping and statements, distribution of dividends, and processing of buy and sell requests. ------------------------------------------------------ ------------------------------------ Investment adviser John Hanco*ck Advisers, Inc. 101 Huntington Avenue Boston, MA 02199-7603 Manages the funds' business and investment activities. ------------------------------------ ------------------------------------ Custodian Investors Bank & Trust Co. Holds the funds' assets, settles all portfolio trades and collects most of the valuation data required for calculating each fund's NAV. ------------------------------------ Asset management ------------------------------------ Trustees Oversee the funds' activities. ------------------------------------22 FUND DETAILS<PAGE>- --------------------------------------------------------------------------------FINANCIAL HIGHLIGHTSThese tables detail the performance of each fund's share classes, includingtotal return information showing how much an investment in the fund hasincreased or decreased each year.Bond FundFigures audited by __________________.<TABLE><CAPTION>- ----------------------------------------------------------------------------------------------------------------------------- Class A - period ended: 12/93 12/94 12/95 12/96 - ----------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Per share operating performance Net asset value, beginning of period $15.29 $15.53 $13.90 $15.40 Net investment income (loss) 1.14 1.12 1.12 1.09 Net realized and unrealized gain (loss) on investments and financial futures contracts 0.62 (1.55) 1.50 (0.50) Total from investment operations 1.76 (0.43) 2.62 0.59 Less distributions: Dividends from net investment income (1.14) (1.12) (1.12) (1.09) Distributions from net realized gain on investments sold and financial futures contracts (0.38) (0.08) -- -- Total distributions (1.52) (1.20) (1.12) (1.09) Net asset value, end of period $15.53 $13.90 $15.40 $14.90 Total investment return at net asset value(3) (%) 11.80 (2.75) 19.40 4.11 Ratios and supplemental data Net assets, end of period (000s omitted) ($) 1,505,754 1,326,058 1,535,204 1,416,116 Ratio of expenses to average net assets (%) 1.41 1.26 1.13 1.14 Ratio of net investment income (loss) to average net assets (%) 7.18 7.74 7.58 7.32 Portfolio turnover rate (%) 107 85 103(6) 123 <CAPTION>- ----------------------------------------------------------------------------------------------------------------------------- Class B - period ended: 12/93(7) 12/94 12/95 12/96 - ----------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Per share operating performance Net asset value, beginning of period $15.90 $15.52 $13.90 $15.40 Net investment income (loss) 0.11 1.04 1.02 0.98 Net realized and unrealized gain (loss) on investments and financial futures contracts -- (1.54) 1.50 (0.50) Total from investment operations 0.11 (0.50) 2.52 0.48 Less distributions: Dividends from net investment income (0.11) (1.04) (1.02) (0.98) Distributions from net realized gain on investments sold and financial futures contracts (0.38) (0.08) -- -- Total distributions (0.49) (1.12) (1.02) (0.98) Net asset value, end of period $15.52 $13.90 $15.40 $14.90 Total investment return at net asset value(3) (%) 0.90(4) (3.13) 18.66 3.38 Ratios and supplemental data Net assets, end of period (000s omitted) ($) 4,125 40,299 98,739 134,112 Ratio of expenses to average net assets (%) 1.63(5) 1.78 1.75 1.84 Ratio of net investment income (loss) to average net assets (%) 0.57(5) 7.30 6.87 6.62 Portfolio turnover rate (%) 107 85 103(6) 123 </TABLE><PAGE> <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- Class A - period ended: 5/97(1) 5/98 11/98(8) - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Per share operating performance Net asset value, beginning of period $14.90 $14.78 $15.25 Net investment income (loss) 0.44 1.05(2) 0.49(2) Net realized and unrealized gain (loss) on investments and financial futures contracts (0.12) 0.47 0.09 Total from investment operations 0.32 1.52 0.58 Less distributions: Dividends from net investment income (0.44) (1.05) (0.49) Distributions from net realized gain on investments sold and financial futures contracts -- -- -- Total distributions (0.44) (1.05) (0.49) Net asset value, end of period $14.78 $15.25 $15.34 Total investment return at net asset value(3) (%) 2.22(4) 10.54 3.87(4) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 1,361,924 1,327,728 1,336,017 Ratio of expenses to average net assets (%) 1.11(5) 1.08 1.08(5) Ratio of net investment income (loss) to average net assets (%) 7.38(5) 6.90 6.35(5) Portfolio turnover rate (%) 58 198 122 <CAPTION> - ------------------------------------------------------------------------------------------------------------------- Class B - period ended: 5/97(1) 5/98 11/98(8) - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Per share operating performance Net asset value, beginning of period $14.90 $14.78 $15.25 Net investment income (loss) 0.40 0.95(2) 0.43(2) Net realized and unrealized gain (loss) on investments and financial futures contracts (0.12) 0.47 0.09 Total from investment operations 0.28 1.42 0.52 Less distributions: Dividends from net investment income (0.40) (0.95) (0.43) Distributions from net realized gain on investments sold and financial futures contracts -- -- -- Total distributions (0.40) (0.95) (0.43) Net asset value, end of period $14.78 $15.25 $15.34 Total investment return at net asset value(3) (%) 1.93(4) 9.78 3.51(4) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 132,885 165,983 218,417 Ratio of expenses to average net assets (%) 1.81(5) 1.78 1.78(5) Ratio of net investment income (loss) to average net assets (%) 6.68(5) 6.18 5.65(5) Portfolio turnover rate (%) 58 198 122 </TABLE> - --------------------------------------------------------------------------------Class C - period ended: 11/98(7,8)- --------------------------------------------------------------------------------Per share operating performanceNet asset value, beginning of period $15.61Net investment income (loss) 0.14Net realized and unrealized gain (loss) on investments,foreign currency transactions and financial futures contracts (0.27)Total from investment operations (0.13)Less distributions: Dividends from net investment income (0.14)Net asset value, end of period $15.34Total investment return at net asset value(3) (%) (0.85)(4)Ratios and supplemental dataNet assets, end of period (000s omitted) ($) 1,435Ratio of expenses to average net assets (%) 1.78(5)Ratio of net investment income (loss) to average net assets (%) 5.65(5)Portfolio turnover rate (%) 122(1) Effective May 31, 1997, the fiscal year end changed from December 31 to May 31.(2) Based on the average of the shares outstanding at the end of each month.(3) Assumes dividend reinvestment and does not reflect the effect of sales charges.(4) Not annualized.(5) Annualized.(6) Portfolio turnover rate excludes merger activity.(7) Class B shares began operations on November 23, 1993. Class C shares began operations on October 1, 1998.(8) Unaudited. FUND DETAILS 23<PAGE>Government Income FundFigures audited by Ernst & Young LLP.<TABLE><CAPTION>- ------------------------------------------------------------------------------------------------------------------------------ Class A - period ended: 10/94(1) 10/95(2) 10/96 - ------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> Per share operating performance Net asset value, beginning of period $8.85 $8.75 $9.32 Net investment income (loss)(2) 0.06 0.72 0.65(4) Net realized and unrealized gain (loss) on investments, options and financial futures contracts (0.10) 0.57 (0.25) Total from investment operations (0.04) 1.29 0.40 Less distributions: Dividends from net investment income (0.06) (0.72) (0.65) Net asset value, end of period $8.75 $9.32 $9.07 Total investment return at net asset value(5) (%) (0.45)(6,7) 15.32(7) 4.49 Total adjusted investment return at net asset value(5) (%) (0.46)(6) 15.28 -- Ratios and supplemental data Net assets, end of period (000s omitted) ($) 223 470,569 396,323 Ratio of expenses to average net assets(7) (%) 0.12(6) 1.19 1.17 Ratio of net investment income (loss) to average net assets(7) (%) 0.71(6) 7.38 7.10 Portfolio turnover rate (%) 92 102(9) 106 Debt outstanding at end of period (000s omitted)(10) ($) -- -- -- Average daily debt outstanding during the period (000s omitted)(10) ($) 349 N/A N/A Average monthly shares outstanding during the period (000s omitted) 28,696 N/A N/A Average daily debt outstanding per share during the period(10) ($) 0.01 N/A N/A <CAPTION>- ------------------------------------------------------------------------------------------------------------------------------ Class B - period ended: 10/93 10/94 10/95(2)- ------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> Per share operating performance Net asset value, beginning of period $9.83 $10.05 $8.75 Net investment income (loss) 0.70 0.65 0.65 Net realized and unrealized gain (loss) on investments, options and financial futures contracts 0.24 (1.28) 0.57 Total from investment operations 0.94 (0.63) 1.22 Less distributions: Dividends from net investment income (0.72) (0.65) (0.65) Distributions from net realized gain on investments sold -- (0.02) -- Total distributions (0.72) (0.67) (0.65) Net asset value, end of period $10.05 $8.75 $9.32 Total investment return at net asset value(5) (%) 9.86(7) (6.42)(7) 14.49(7) Total adjusted investment return at net asset value(5) (%) 9.85 (6.43) 14.47 Ratios and supplemental data Net assets, end of period (000s omitted) ($) 293,413 241,061 226,954 Ratio of expenses to average net assets (%) 2.00(7) 1.93(7) 1.89(7) Ratio of net investment income (loss) to average net assets (%) 7.06(7) 6.98(7) 7.26(7) Portfolio turnover rate (%) 138 92 102(9) Debt outstanding at end of period (000s omitted)(10) ($) -- -- -- Average daily debt outstanding during the period (000s omitted)(10) ($) 503 349 N/A Average monthly shares outstanding during the period (000s omitted) 26,378 28,696 N/A Average daily debt outstanding per share during the period(10) ($) 0.02 0.01 N/A </TABLE> <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------------------ Class A - period ended: 5/97(3) 5/98 11/98(11)- ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> Per share operating performance Net asset value, beginning of period $9.07 $8.93 $9.25 Net investment income (loss)(2) 0.37(4) 0.62(4) 0.29(4) Net realized and unrealized gain (loss) on investments, options and financial futures contracts (0.14) 0.32 0.21 Total from investment operations 0.23 0.94 0.50 Less distributions: Dividends from net investment income (0.37) (0.62) (0.29) Net asset value, end of period $8.93 $9.25 $9.46 Total investment return at net asset value(5) (%) 2.57(6) 10.82 5.53(6) Total adjusted investment return at net asset value(5) (%) -- -- -- Ratios and supplemental data Net assets, end of period (000s omitted) ($) 359,758 339,572 349,102 Ratio of expenses to average net assets(7) (%) 1.13(8) 1.10 1.10(8) Ratio of net investment income (loss) to average net assets(7) (%) 7.06(8) 6.79 6.22(8) Portfolio turnover rate (%) 129 106 107 Debt outstanding at end of period (000s omitted)(10) ($) -- -- -- Average daily debt outstanding during the period (000s omitted)(10) ($) N/A N/A N/A Average monthly shares outstanding during the period (000s omitted) N/A N/A N/A Average daily debt outstanding per share during the period(10) ($) N/A N/A N/A <CAPTION> - ------------------------------------------------------------------------------------------------------------------------------------ Class B - period ended: 10/96 5/97(3) 5/98 11/98(11)- ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Per share operating performance Net asset value, beginning of period $9.32 $9.08 $8.93 $9.25 Net investment income (loss) 0.58(4) 0.33(4) 0.55(4) 0.26(4) Net realized and unrealized gain (loss) on investments, options and financial futures contracts (0.24) (0.15) 0.32 0.21 Total from investment operations 0.34 0.18 0.87 0.47 Less distributions: Dividends from net investment income (0.58) (0.33) (0.55) (0.26) Distributions from net realized gain on investments sold -- -- -- -- Total distributions (0.58) (0.33) (0.55) (0.26) Net asset value, end of period $9.08 $8.93 $9.25 $9.46 Total investment return at net asset value(5) (%) 3.84 2.02(6) 10.01 5.15(6) Total adjusted investment return at net asset value(5) (%) -- -- -- -- Ratios and supplemental data Net assets, end of period (000s omitted) ($) 178,124 153,390 117,830 148,523 Ratio of expenses to average net assets (%) 1.90 1.86(8) 1.85 1.83(8) Ratio of net investment income (loss) to average net assets (%) 6.37 6.32(8) 6.05 5.49(8) Portfolio turnover rate (%) 106 129 106 107 Debt outstanding at end of period (000s omitted)(10) ($) -- -- -- -- Average daily debt outstanding during the period (000s omitted)(10) ($) N/A N/A N/A N/A Average monthly shares outstanding during the period (000s omitted) N/A N/A N/A N/A Average daily debt outstanding per share during the period(10) ($) N/A N/A N/A N/A </TABLE> (1) Class A shares began operations on September 30, 1994.(2) On December 22, 1994, John Hanco*ck Advisers, Inc. became the investment adviser of the fund.(3) Effective May 31, 1997, the fiscal year end changed from October 31 to May 31.(4) Based on the average of the shares outstanding at the end of each month.(5) Assumes dividend reinvestment and does not reflect the effect of sales charges.(6) Not annualized.(7) Excludes interest expense, which equalled 0.01% and 0.04% for Class A for the years ended October 31, 1994 and 1995, respectively, and 0.01%, 0.01% and 0.02% for Class B for the years ended October 31, 1993, 1994 and 1995, respectively.(8) Annualized.(9) Portfolio turnover rate excludes merger activity.(10) Debt outstanding consists of reverse repurchase agreements entered into during the year.(11) Unaudited.24 FUND DETAILS<PAGE>High Yield Bond FundFigures audited by Ernst & Young LLP.<TABLE><CAPTION>- ------------------------------------------------------------------------------------------------------------------------------- Class A - period ended: 10/93(1) 10/94 10/95(2) 10/96 - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Per share operating performance Net asset value, beginning of period $8.10 $8.23 $7.33 $7.20 Net investment income (loss) 0.33 0.80(4) 0.72 0.76(4) Net realized and unrealized gain (loss) on investments 0.09 (0.83) (0.12) 0.35 Total from investment operations 0.42 (0.03) 0.60 1.11 Less distributions: Dividends from net investment income (0.29) (0.82) (0.73) (0.76) Distributions from net realized gain on investments sold -- (0.05) -- -- Total distributions (0.29) (0.87) (0.73) (0.76) Net asset value, end of period $8.23 $7.33 $7.20 $7.55 Total investment return at net asset value(5) (%) 4.96(6) (0.59) 8.83 16.06 Ratios and supplemental data Net assets, end of period (000s omitted) ($) 2,344 11,696 26,452 52,792 Ratio of expenses to average net assets (%) 0.91(7) 1.16 1.16 1.10 Ratio of net investment income (loss) to average net assets (%) 12.89(7) 10.14 10.23 10.31 Portfolio turnover rate (%) 204 153 98 113 <CAPTION>- ------------------------------------------------------------------------------------------------------------------------------- Class B - period ended: 10/93 10/94 10/95(2) 10/96 - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Per share operating performance Net asset value, beginning of period $7.43 $8.23 $7.33 $7.20 Net investment income (loss) 0.80 0.74(4) 0.67 0.70(4) Net realized and unrealized gain (loss) on investments 0.75 (0.83) (0.13) 0.35 Total from investment operations 1.55 (0.09) 0.54 1.05 Less distributions: Dividends from net investment income (0.75) (0.76) (0.67) (0.70) Distributions from net realized gain on investments sold -- (0.05) -- -- Total distributions (0.75) (0.81) (0.67) (0.70) Net asset value, end of period $8.23 $7.33 $7.20 $7.55 Total investment return at net asset value(5) (%) 21.76 (1.33) 7.97 15.24 Ratios and supplemental data Net assets, end of period (000s omitted) ($) 154,214 160,739 180,586 242,944 Ratio of expenses to average net assets (%) 2.08 1.91 1.89 1.82 Ratio of net investment income (loss) to average net assets (%) 10.07 9.39 9.42 9.49 Portfolio turnover rate (%) 204 153 98 113 </TABLE> <TABLE> <CAPTION> - ----------------------------------------------------------------------------------------------------------------------- Class A - period ended: 5/97(3) 5/98 11/98(8)- ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Per share operating performance Net asset value, beginning of period $7.55 $7.87 $8.26 Net investment income (loss) 0.45 0.78(4) 0.39(4) Net realized and unrealized gain (loss) on investments 0.32 0.51 (1.69) Total from investment operations 0.77 1.29 (1.30) Less distributions: Dividends from net investment income (0.45) (0.78) (0.39) Distributions from net realized gain on investments sold -- (0.12) -- Total distributions (0.45) (0.90) (0.39) Net asset value, end of period $7.87 $8.26 $6.57 Total investment return at net asset value(5) (%) 10.54(6) 17.03 (15.85)(6) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 97,925 273,277 267,167 Ratio of expenses to average net assets (%) 1.05(7) 0.97 0.95(7) Ratio of net investment income (loss) to average net assets (%) 10.19(7) 9.33 10.84(7) Portfolio turnover rate (%) 78 100 25 <CAPTION> - ----------------------------------------------------------------------------------------------------------------------- Class B - period ended: 5/97(3) 5/98 11/98(8)- ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Per share operating performance Net asset value, beginning of period $7.55 $7.87 $8.26 Net investment income (loss) 0.42 0.71(4) 0.36(4) Net realized and unrealized gain (loss) on investments 0.32 0.51 (1.69) Total from investment operations 0.74 1.22 (1.33) Less distributions: Dividends from net investment income (0.42) (0.71) (0.36) Distributions from net realized gain on investments sold -- (0.12) -- Total distributions (0.42) (0.83) (0.36) Net asset value, end of period $7.87 $8.26 $6.57 Total investment return at net asset value(5) (%) 10.06(6) 16.16 (16.19)(6) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 379,024 798,170 767,247 Ratio of expenses to average net assets (%) 1.80(7) 1.72 1.70(7) Ratio of net investment income (loss) to average net assets (%) 9.45(7) 8.62 10.09(7) Portfolio turnover rate (%) 78 100 25 </TABLE> <TABLE><CAPTION>- ------------------------------------------------------------------------------------------------ Class C - period ended: 5/98(1) 11/98(8)- ------------------------------------------------------------------------------------------------ <S> <C> <C> Per share operating performance Net asset value, beginning of period $8.45 $8.26 Net investment income (loss)(4) 0.06 0.36 Net realized and unrealized gain (loss) on investments (0.19) (1.69) Total from investment operations (0.13) (1.33) Less distributions: Dividends from net investment income (0.06) (0.36) Distributions from net realized gain on investments sold -- -- Total distributions (0.06) (0.36) Net asset value, end of period $8.26 $6.57 Total investment return at net asset value(5) (%) (1.59)(6) (16.20)(6) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 3,195 19,022 Ratio of expenses to average net assets (%) 1.72(7) 1.70(7) Ratio of net investment income (loss) to average net assets (%) 6.70(7) 10.09(7) Portfolio turnover rate (%) 100 25</TABLE> (1) Class A shares began operations on June 30, 1993. Class C shares began operations on May 1, 1998.(2) On December 22, 1994, John Hanco*ck Advisers, Inc. became the investment adviser of the fund.(3) Effective May 31, 1997, the fiscal year end changed from October 31 to May 31.(4) Based on the average of the shares outstanding at the end of each month.(5) Assumes dividend reinvestment and does not reflect the effect of sales charges.(6) Not annualized.(7) Annualized.(8) Unaudited. FUND DETAILS 25<PAGE>Intermediate Government FundFigures audited by Ernst & Young LLP.<TABLE><CAPTION>- --------------------------------------------------------------------------------------------------------------------------- Class A - period ended: 3/94 3/95(1) 3/96 - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Per share operating performance Net asset value, beginning of period $10.05 $9.89 $9.79 Net investment income (loss) 0.41 0.49 0.62 Net realized and unrealized gain (loss) on investments (0.16) (0.11) (0.08) Total from investment operations 0.25 0.38 0.54 Less distributions: Dividends from net investment income (0.41) (0.48) (0.64) Distributions from net realized gain on investments sold -- -- -- Total distributions (0.41) (0.48) (0.64) Net asset value, end of period $9.89 $9.79 $9.69 Total investment return at net asset value(4) (%) 2.51 3.98 5.60 Total adjusted investment return at net asset value(4,5) (%) 2.27 3.43 4.83 Ratios and supplemental data Net assets, end of period (000s omitted) ($) 24,310 12,950 29,024 Ratio of expenses to average net assets (%) 0.75(7) 0.80(7) 0.75(7) Ratio of adjusted expenses to average net assets(9) (%) 0.99(7) 1.35(7) 1.45(7) Ratio of net investment income (loss) to average net assets (%) 4.09 4.91 6.49 Ratio of adjusted net investment income (loss) to average assets(9) (%) 3.85 4.36 5.79 Fee reduction per share(3) ($) 0.02 0.05 0.07 Portfolio turnover rate (%) 244 341 423(10)<CAPTION>- --------------------------------------------------------------------------------------------------------------------------- Class B - period ended: 3/94 3/95(1) 3/96 - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Per share operating performance Net asset value, beginning of period $10.05 $9.89 $9.79 Net investment income (loss) 0.34 0.43 0.57 Net realized and unrealized gain (loss) on investments (0.16) (0.11) (0.10) Total from investment operations 0.18 0.32 0.47 Less distributions: Dividends from net investment income (0.34) (0.42) (0.57) Distributions from net realized gain on investments sold -- -- -- Total distributions (0.34) (0.42) (0.57) Net asset value, end of period $9.89 $9.79 $9.69 Total investment return at net asset value(4) (%) 1.85 3.33 4.92 Total adjusted investment return at net asset value(4,5) (%) 1.61 2.78 4.15 Ratios and supplemental data Net assets, end of period (000s omitted) ($) 11,626 9,506 8,532 Ratio of expenses to average net assets (%) 1.40(7) 1.45(7) 1.40(7) Ratio of adjusted expenses to average net assets(9) (%) 1.64(7) 2.00(7) 2.10(7) Ratio of net investment income (loss) to average net assets (%) 3.44 4.26 5.80 Ratio of adjusted net investment income (loss) to average net assets(9) (%) 3.20 3.71 5.10 Fee reduction per share(3) ($) 0.02 0.05 0.07 Portfolio turnover rate (%) 244 341 423(10)</TABLE><PAGE> <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------------------ Class A - period ended: 3/97 5/97(2) 5/98 11/98(11)- ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Per share operating performance Net asset value, beginning of period $9.69 $9.37 $9.46 $9.72 Net investment income (loss) 0.67 0.11(3) 0.62(3) 0.30(3) Net realized and unrealized gain (loss) on investments (0.25) 0.09 0.26 0.23 Total from investment operations 0.42 0.20 0.88 0.53 Less distributions: Dividends from net investment income (0.66) (0.11) (0.62) (0.30) Distributions from net realized gain on investments sold (0.08) -- -- -- Total distributions (0.74) (0.11) (0.62) (0.30) Net asset value, end of period $9.37 $9.46 $9.72 $9.95 Total investment return at net asset value(4) (%) 4.56 2.13(6) 9.56 5.51(6) Total adjusted investment return at net asset value(4,5) (%) 4.19 1.93(6) 9.49 -- Ratios and supplemental data Net assets, end of period (000s omitted) ($) 22,043 22,755 163,358 171,864 Ratio of expenses to average net assets (%) 0.75 0.75(8) 1.09 1.09(8) Ratio of adjusted expenses to average net assets(9) (%) 1.12 1.92(8) 1.16 -- Ratio of net investment income (loss) to average net assets (%) 6.99 7.07(8) 6.43 5.99(8) Ratio of adjusted net investment income (loss) to average assets(9) (%) 6.62 5.90(8) 6.36 -- Fee reduction per share(3) ($) 0.04 0.02 0.01 -- Portfolio turnover rate (%) 427 77 250(10) 126 <CAPTION> - ------------------------------------------------------------------------------------------------------------------------------------ Class B - period ended: 3/97 5/97(2) 5/98 11/98(11)- ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Per share operating performance Net asset value, beginning of period $9.69 $9.37 $9.46 $9.72 Net investment income (loss) 0.60 0.10(3) 0.55(3) 0.26(3) Net realized and unrealized gain (loss) on investments (0.24) 0.09 0.26 0.23 Total from investment operations 0.36 0.19 0.81 0.49 Less distributions: Dividends from net investment income (0.60) (0.10) (0.55) (0.26) Distributions from net realized gain on investments sold (0.08) -- -- -- Total distributions (0.68) (0.10) (0.55) (0.26) Net asset value, end of period $9.37 $9.46 $9.72 $9.95 Total investment return at net asset value(4) (%) 3.84 2.01(6) 8.74 5.12(6) Total adjusted investment return at net asset value(4,5) (%) 3.47 1.81(6) 8.67 -- Ratios and supplemental data Net assets, end of period (000s omitted) ($) 6,779 6,451 19,113 49,494 Ratio of expenses to average net assets (%) 1.43 1.50(8) 1.84 1.84(8) Ratio of adjusted expenses to average net assets(9) (%) 1.80 2.67(8) 1.91 -- Ratio of net investment income (loss) to average net assets (%) 6.30 6.04(8) 5.66 5.24(8) Ratio of adjusted net investment income (loss) to average net assets(9) (%) 5.93 4.87(8) 5.59 -- Fee reduction per share(3) ($) 0.04 0.02 0.01 -- Portfolio turnover rate (%) 427 77 250(10) 126 </TABLE> (1) On December 22, 1994, John Hanco*ck Advisers, Inc. became the investment adviser of the fund.(2) Effective May 31, 1997, the fiscal year end changed from March 31 to May 31.(3) Based on the average of the shares outstanding at the end of each month.(4) Assumes dividend reinvestment and does not reflect the effect of sales charges.(5) An estimated total return calculation that does not take into consideration fee reductions by the adviser during the periods shown.(6) Not annualized.(7) Beginning on December 31, 1991 (commencement of operations) through March 31, 1995, the expenses used in the ratios represented the expenses of the fund plus expenses incurred indirectly from John Hanco*ck Adjustable U.S. Government Fund (the "Portfolio"), the mutual fund in which the fund invested all of its assets. The expenses used in the ratios for the fiscal year ended March 31, 1996 include the expenses of the Portfolio through September 22, 1995.(8) Annualized.(9) Unreimbursed, without fee reduction.(10) Portfolio turnover rate excludes merger activity.(11) Unaudited.26 FUND DETAILS<PAGE>Strategic Income FundFigures audited by ____________________________.<TABLE><CAPTION>- ------------------------------------------------------------------------------------------------------------------------------ Class A - period ended: 5/94 5/95 5/96 5/97 - ------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Per share operating performance Net asset value, beginning of period $7.55 $7.17 $7.15 $7.27 Net investment income (loss) 0.68 0.64 0.66(1) 0.64(1) Net realized and unrealized gain (loss) on investments, foreign currency transactions and financial futures contracts (0.33) (0.02) 0.12 0.27 Total from investment operations 0.35 0.62 0.78 0.91 Less distributions: Dividends from net investment income (0.58) (0.55) (0.66) (0.64) Distributions in excess of net investment income (0.05) -- -- -- Distributions from net realized gain on investments sold -- -- -- -- Distributions from capital paid-in (0.10) (0.09) -- -- Total distributions (0.73) (0.64) (0.66) (0.64) Net asset value, end of period $7.17 $7.15 $7.27 $7.54 Total investment return at net asset value(2) (%) 4.54 9.33 11.37 12.99 Ratios and supplemental data Net assets, end of period (000s omitted) ($) 335,261 327,876 369,127 416,916 Ratio of expenses to average net assets (%) 1.32 1.09 1.03 1.00 Ratio of net investment income (loss) to average net assets (%) 8.71 9.24 9.13 8.61 Portfolio turnover rate (%) 91 55 78 132 <CAPTION>- ------------------------------------------------------------------------------------------------------------------------------ Class B - period ended: 5/94(3) 5/95 5/96 5/97 - ------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Per share operating performance Net asset value, beginning of period $7.58 $7.17 $7.15 $7.27 Net investment income (loss) 0.40 0.60(1) 0.61(1) 0.59 Net realized and unrealized gain (loss) on investments, foreign currency transactions and financial futures contracts (0.41) (0.02) 0.12 0.27 Total from investment operations (0.01) 0.58 0.73 0.86 Less distributions: Dividends from net investment income (0.32) (0.52) (0.61) (0.59) Distributions in excess of net investment income (0.03) -- -- -- Distributions from net realized gain on investments sold -- -- -- -- Distributions from capital paid-in (0.05) (0.08) -- -- Total distributions (0.40) (0.60) (0.61) (0.59) Net asset value, end of period $7.17 $7.15 $7.27 $7.54 Total investment return at net asset value(2) (%) (0.22)(4) 8.58 10.61 12.21 Ratios and supplemental data Net assets, end of period (000s omitted) ($) 77,691 134,527 206,751 328,487 Ratio of expenses to average net assets (%) 1.91(5) 1.76 1.73 1.70 Ratio of net investment income (loss) to average net assets (%) 8.12(5) 8.55 8.42 7.90 Portfolio turnover rate (%) 91 55 78 132 </TABLE><PAGE> <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------- Class A - period ended: 5/98 11/98(8) - -------------------------------------------------------------------------------------------------- <S> <C> <C> Per share operating performance Net asset value, beginning of period $7.54 $7.84 Net investment income (loss) 0.64(1) 0.30(1) Net realized and unrealized gain (loss) on investments, foreign currency transactions and financial futures contracts 0.34 (0.26) Total from investment operations 0.98 0.04 Less distributions: Dividends from net investment income (0.64) (0.30) Distributions in excess of net investment income -- -- Distributions from net realized gain on investments sold (0.04) -- Distributions from capital paid-in -- -- Total distributions (0.68) (0.30) Net asset value, end of period $7.84 $7.58 Total investment return at net asset value(2) (%) 13.43 0.59(4) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 489,375 505,719 Ratio of expenses to average net assets (%) 0.92 0.88(5) Ratio of net investment income (loss) to average net assets (%) 8.20 7.87(5) Portfolio turnover rate (%) 112 35 <CAPTION> - -------------------------------------------------------------------------------------------------- Class B - period ended: 5/98 11/98(8) - -------------------------------------------------------------------------------------------------- <S> <C> <C> Per share operating performance Net asset value, beginning of period $7.54 $7.84 Net investment income (loss) 0.59(1) 0.27(1) Net realized and unrealized gain (loss) on investments, foreign currency transactions and financial futures contracts 0.34 (0.26) Total from investment operations 0.93 0.01 Less distributions: Dividends from net investment income (0.59) (0.27) Distributions in excess of net investment income -- -- Distributions from net realized gain on investments sold (0.04) -- Distributions from capital paid-in -- -- Total distributions (0.63) (0.27) Net asset value, end of period $7.84 $7.58 Total investment return at net asset value(2) (%) 12.64 0.24(4) Ratios and supplemental data Net assets, end of period (000s omitted) ($) 473,428 561,000 Ratio of expenses to average net assets (%) 1.62 1.58(5) Ratio of net investment income (loss) to average net assets (%) 7.50 7.15(5) Portfolio turnover rate (%) 112 35 </TABLE> <TABLE><CAPTION>- --------------------------------------------------------------------------------------------Class C - period ended: 5/98(6) 11/98(8)- --------------------------------------------------------------------------------------------<S> <C> <C> Per share operating performanceNet asset value, beginning of period $7.87 $7.84Net investment income (loss) 0.05(1) 0.27Net realized and unrealized gain (loss) on investments,foreign currency transactions and financial futures contracts (0.03)(7) (0.26)Total from investment operations 0.02 0.01Less distributions: Dividends from net investment income (0.05) (0.27)Net asset value, end of period $7.84 $7.58Total investment return at net asset value(2) (%) 0.23(4) 0.23(4)Ratios and supplemental dataNet assets, end of period (000s omitted) ($) 601 9,742Ratio of expenses to average net assets (%) 1.62(5) 1.58(5)Ratio of net investment income (loss) to average net assets (%) 7.34(5) 6.98(5)Portfolio turnover rate (%) 112 35</TABLE>(1) Based on the average of the shares outstanding at the end of each month.(2) Assumes dividend reinvestment and does not reflect the effect of sales charges.(3) Class B shares began operations on October 4, 1993.(4) Not annualized.(5) Annualized.(6) Class C shares began operations on May 1, 1998.(7) The amount shown for a share outstanding does not correspond with the aggregate net gain (loss) on investments for the period ended May 31, 1998, due to the timing of purchases and redemptions of fund shares in relation to fluctuating market values of the fund's investments.(8) Unaudited. FUND DETAILS 27<PAGE>For more information- --------------------------------------------------------------------------------Two documents are available that offer further information on John Hanco*ckincome funds:ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERSIncludes financial statements, a discussion of the market conditions andinvestment strategies that significantly affected performance, as well as theauditors' report (in annual report only).STATEMENT OF ADDITIONAL INFORMATION (SAI)The SAI contains more detailed information on all aspects of the funds. Thecurrent annual report is included in the SAI.A current SAI has been filed with the Securities and Exchange Commission and isincorporated by reference into (is legally a part of) this prospectus.To request a free copy of the current annual/semiannual report or the SAI,please contact John Hanco*ck:By mail:John Hanco*ck SignatureServices, Inc.1 John Hanco*ck Way, Suite 1000Boston, MA02217-1000By phone: 1-800-225-5291By EASI-Line: 1-800-338-8080By TDD: 1-800-544-6713On the Internet: www.jhanco*ck.com/fundsOr you may view or obtain these documents from the SEC:In person: at the SEC's PublicReference Room in Washington, DCBy phone: 1-800-SEC-0330By mail: Public Reference SectionSecurities and Exchange CommissionWashington, DC 20549-6009(duplicating fee required)On the Internet: www.sec.gov[LOGO] JOHN HANco*ck FUNDS A Global Investment Management Firm 101 Huntington Avenue Boston, Massachusetts 02199-7603JOHN HANco*ck(R) (C) 1999 John Hanco*ck Funds, Inc. INCPN 4/99<PAGE> JOHN HANco*ck GOVERNMENT INCOME FUND Class A, Class B and Class C Shares Statement of Additional Information April 1, 1999This Statement of Additional Information provides information about John Hanco*ckGovernment Income Fund (the "Fund"), in addition to the information that iscontained in the combined Income Funds' Prospectus dated April 1, 1999 (the"Prospectus"). The Fund is a diversified series of John Hanco*ck Bond Trust (the"Trust").This Statement of Additional Information is not a prospectus. It should be readin conjunction with the Prospectus, a copy of which can be obtained free ofcharge by writing or telephoning: John Hanco*ck Signature Services Inc. 1 John Hanco*ck Way, Suite 1000 Boston, Massachusetts 02217-1000 1-800-225-5291 TABLE OF CONTENTS Page Organization of the Fund.............................................. 2Investment Objective and Policies..................................... 2Investment Restrictions............................................... 18Those Responsible for Management...................................... 21Investment Advisory and Other Services................................ 30Distribution Contracts................................................ 32Sales Compensation.................................................... 34Net Asset Value....................................................... 35Initial Sales Charge on Class A Shares................................ 36Deferred Sales Charge on Class B and Class C Shares................... 39Special Redemptions................................................... 43Additional Services and Programs...................................... 43Description of the Fund's Shares...................................... 45Tax Status............................................................ 46Calculation of Performance............................................ 51Brokerage Allocation.................................................. 53Transfer Agent Services............................................... 55Custody of Portfolio.................................................. 55Independent Auditors.................................................. 55Appendix A- Description of Investment Risk............................ A-1Appendix B-Description of Bond Ratings................................ B-1Financial Statements.................................................. F-1 1<PAGE>ORGANIZATION OF THE FUNDThe Fund is a series of the Trust, an open-end investment management companyorganized as a Massachusetts business trust under the laws of The Commonwealthof Massachusetts. Prior to December 22, 1994, the Fund was called TransamericaGovernment Income Fund. Prior to August 30, 1996, the Fund was a series of JohnHanco*ck Series, Inc., a Maryland corporation.John Hanco*ck Advisers, Inc. (the "Adviser") is the Fund's investment adviser.The Adviser is an indirect wholly-owned subsidiary of John Hanco*ck Mutual LifeInsurance Company (the "Life Company"), a Massachusetts life insurance companychartered in 1862, with national headquarters at John Hanco*ck Place, Boston,Massachusetts.INVESTMENT OBJECTIVE AND POLICIESThe following information supplements the discussion of the Fund's investmentobjectives and policies discussed in the Prospectus. Appendix A contains furtherinformation describing investment risks. The investment objective of the Fund isnon-fundamental. There is no assurance that the Fund will achieve its investmentobjective.The Fund's investment objective is to earn a high level of current incomeconsistent with preservation of capital by investing primarily in securitiesthat are issued or guaranteed as to principal and interest by the U.S.Government, its agencies or instrumentalities. The Fund may seek to enhance itscurrent return and may seek to hedge against changes in interest rates byengaging in transactions involving options (subject to certain limits), futuresand options on futures.The Fund expects that under normal market conditions, it will invest a least 80%of its total assets in U.S. Government securities (and related repurchaseagreements and forward commitments) which include: 1. Obligations issued by the U.S. Treasury differing only in theirinterest rates, maturities and times of issuance: (a) U.S. Treasury bills with a maturity of one year or less; (b) U.S. Treasury notes with maturities of one to ten years; or (c) U.S. Treasury bonds generally with maturities greater than ten years; and 2. Obligations issued or guaranteed by the U.S. Government, itsagencies or instrumentalities which may be supported by: (a) the full faith and credit of the U.S. Government (e.g., direct pass-through certificates of the Government National Mortgage Association ("Ginnie Mae")); (b) the right of the issuer to borrow from the U.S. Government (e.g., securities of the Federal Home Loan banks); or (c) the credit of the instrumentality (e.g., bonds issued by Federal National Mortgage Association.) 2<PAGE>The Adviser will attempt to minimize excessive fluctuations in net asset valueper share, so at times the highest yielding government securities then availablemay not be selected for investment if, in the view of the Adviser, futureinterest rate movements could result in depreciation of value of suchsecurities. The Fund may take full advantage of the entire range of maturitiesof U.S. Government securities and may adjust the dollar-weighted averagematurity of its portfolio from time to time based in large part on the Adviser'sexpectation as to future changes in interest rates.As to the balance of the Fund's assets, where consistent with the investmentobjective, the Fund may: 1. invest in U.S. dollar denominated securities issued or guaranteed byforeign governments which are considered stable by the Adviser, or any of thepolitical subdivisions, instrumentalities, authorities or agencies of thesegovernments. These securities generally will be rated within the four highestrating categories by a nationally recognized rating organization (e.g. Standard& Poor's Rating Group ("S&P") or Moody's Investors Service, Inc. ("Moody's")) orif not so rated, determined to be of equivalent quality in the opinion of theAdviser; provided that the Fund may invest up to 10% of its total assets insecurities which may be rated B or better by a nationally recognized ratingorganization. 2. invest in other "asset backed securities" which are not included as"government asset backed": securities and are rated in one of the two highestrating categories by a nationally recognized credit rating organization or ifnot so rated, determined to be of equivalent investment quality in the opinionthe Adviser; 3. engage in hedging transactions, including options, interest ratefutures contracts and options thereon, subject to certain limitations describedbelow; 4. enter into repurchase agreements and reverse repurchase agreementsand invest in when issued securities and restricted securities, subject tocertain limitations described below; 5. invest in (for liquidity purposes) high quality, short-term debtsecurities with remaining maturities of one year or less ("money marketinstruments") such as certificates of deposit, bankers' acceptances, corporatedebt securities, commercial paper and related repurchase agreements.Government Securities. The Fund may invest in U.S. Government securities, whichare obligations issued or guaranteed by the U.S. Government and its agencies,authorities or instrumentalities. Certain U.S. Government securities, includingU.S. Treasury bills, notes and bonds, and Government National MortgageAssociation certificates ("Ginnie Maes"), are supported by the full faith andcredit of the United States. Certain other U.S. Government securities, issued orguaranteed by Federal agencies or government sponsored enterprises, are notsupported by the full faith and credit of the United States, but may besupported by the right of the issuer to borrow from the U.S. Treasury. Thesesecurities include obligations of the Federal Home Loan Mortgage Corporation("Freddie Macs"), and obligations supported by the credit of theinstrumentality, such as Federal National Mortgage Association Bonds ("FannieMaes").Custodial Receipts. The Fund may acquire custodial receipts for U.S. governmentsecurities. Custodial receipts evidence ownership of future interest payments,principal payments or both, and include Treasury Receipts, Treasury InvestorsGrowth Receipts ("TIGRs"), and Certificates of Accrual on Treasury Securities("CATS"). Custodial receipts are not considered U.S. government securities. 3<PAGE>Bank and Corporate Obligations. The Fund may invest in commercial paper.Commercial paper represents short-term unsecured promissory notes issued inbearer form by banks or bank holding companies, corporations and financecompanies. The commercial paper purchased by the Fund consists of direct U.S.dollar denominated obligations of domestic or foreign issuers. Bank obligationsin which the Fund may invest include certificates of deposit, bankers'acceptances and fixed time deposits. Certificates of deposit are negotiablecertificates issued against funds deposited in a commercial bank for a definiteperiod of time and earning a specified return.Bankers' acceptances are negotiable drafts or bills of exchange, normally drawnby an importer or exporter to pay for specific merchandise, which are "accepted"by a bank, meaning, in effect, that the bank unconditionally agrees to pay theface value of the instrument on maturity. Fixed time deposits are bankobligations payable at a stated maturity date and bearing interest at a fixedrate. Fixed time deposits may be withdrawn on demand by the investor, but may besubject to early withdrawal penalties which vary depending upon marketconditions and the remaining maturity of the obligation. There are nocontractual restrictions on the right to transfer a beneficial interest in afixed time deposit to a third party, although there is no market for suchdeposits. Bank notes and bankers' acceptances rank junior to domestic depositliabilities of the bank and pari passu with other senior, unsecured obligationsof the bank. Bank notes are not insured by the Federal Deposit InsuranceCorporation or any other insurer. Deposit notes are insured by the FederalDeposit Insurance Corporation only to the extent of $100,000 per depositor perbank.Mortgage-Backed Securities. The Fund may invest in mortgage pass-throughcertificates and multiple-class pass-through securities, such as real estatemortgage investment conduits REMIC, CMOs and stripped mortgage-backed securities("SMBS"), and other types of "Mortgage-Backed Securities" that may be availablein the future.Guaranteed Mortgage Pass-Through Securities. Guaranteed mortgage pass-throughsecurities represent participation interests in pools of residential mortgageloans and are issued by U.S. Governmental or private lenders and guaranteed bythe U.S. Government or one of its agencies or instrumentalities, including butnot limited to Ginnie Mae, Fannie Mae and Freddie Macs.Multiple-Class Pass-Through Securities and Collateralized Mortgage Obligations.CMOs and REMIC pass-through or participation certificates may be issued by,among others, U.S. Government agencies and instrumentalities as well as privatelenders. CMOs and REMIC certificates are issued in multiple classes and theprincipal of and interest on the mortgage assets may be allocated among theseveral classes of CMOs or REMIC certificates in various ways. Each class ofCMOs or REMIC certificates, often referred to as a "tranche," is issued at aspecific adjustable or fixed interest rate and must be fully retired no laterthan its final distribution date. Generally, interest is paid or accrues on allclasses of CMOs or REMIC certificates on a monthly basis.Typically, CMOs are collateralized by Ginnie Mae, Fannie Mae or Freddie Maccertificates but also may be collateralized by other mortgage assets such aswhole loans or private mortgage pass-through securities. Debt service on CMOs isprovided from payments of principal and interest on collateral of mortgagedassets and any reinvestment income thereon.A REMIC is a CMO that qualifies for special tax treatment under the InternalRevenue Code of 1986, as amended (the "Code"), and invests in certain mortgagesprimarily secured by interests in real property and other permitted investments.Investors may purchase "regular" or "residual" interests in REMICs, although theFund does not intend, absent a change in current tax law, to invest in residualinterests. 4<PAGE>Stripped Mortgage-Backed Securities. SMBS are derivative multiple-classmortgage-backed securities. SMBS are usually structured with two classes thatreceive different proportions of interest and principal distributions on a poolof mortgage assets. A typical SMBS will have one class receiving some of theinterest and most of the principal, while the other class will receive most ofthe interest and the remaining principal. In the most extreme case, one classwill receive all of the interest (the "interest only" class) while the otherclass will receive all of the principal (the "principal only" class). The yieldsand market risk of interest only and principal only SMBS, respectively, may bemore volatile than those of other fixed income securities. The staff of the SECconsiders privately issued SMBS to be illiquid.Structured or Hybrid Notes. The Fund may invest in "structured" or "hybrid"notes. The distinguishing feature of a structured or hybrid note is that theamount of interest and/or principal payable on the note is based on theperformance of a benchmark asset or market other than fixed income securities orinterest rates. Examples of these benchmarks include stock prices, currencyexchange rates and physical commodity prices. Investing in a structured noteallows the Fund to gain exposure to the benchmark market while fixing themaximum loss that the Fund may experience in the event that market does notperform as expected. Depending on the terms of the note, the Fund may forego allor part of the interest and principal that would be payable on a comparableconventional note; the Fund's loss cannot exceed this foregone interest and/orprincipal. An investment in structured or hybrid notes involves risks similar tothose associated with a direct investment in the benchmark asset.Risk Factors Associated with Mortgage-Backed Securities. Investing inMortgage-Backed Securities involves certain risks, including the failure of acounter-party to meet its commitments, adverse interest rate changes and theeffects of prepayments on mortgage cash flows. In addition, investing in thelowest tranche of CMOs and REMIC certificates involves risks similar to thoseassociated with investing in equity securities. Further, the yieldcharacteristics of Mortgage-Backed Securities differ from those of traditionalfixed income securities. The major differences typically include more frequentinterest and principal payments (usually monthly), the adjustability of interestrates, and the possibility that prepayments of principal may be madesubstantially earlier than their final distribution dates.Prepayment rates are influenced by changes in current interest rates and avariety of economic, geographic, social and other factors and cannot bepredicted with certainty. Both adjustable rate mortgage loans and fixed ratemortgage loans may be subject to a greater rate of principal prepayments in adeclining interest rate environment and to a lesser rate of principalprepayments in an increasing interest rate environment. Under certain interestrate and prepayment rate scenarios, the Fund may fail to recoup fully itsinvestment in Mortgage-Backed Securities notwithstanding any direct or indirectgovernmental, agency or other guarantee. When the Fund reinvests amountsrepresenting payments and unscheduled prepayments of principal, it may receive arate of interest that is lower than the rate on existing adjustable ratemortgage pass-through securities. Thus, Mortgage-Backed Securities, andadjustable rate mortgage pass-through securities in particular, may be lesseffective than other types of U.S.Government securities as a means of "locking in" interest rates.Conversely, in a rising interest rate environment, a declining prepayment ratewill extend the average life of many Mortgage-Backed Securities. Thispossibility is often referred to as extension risk. Extending the average lifeof a Mortgage-Backed Security increases the risk of depreciation due to futureincreases in market interest rates. 5<PAGE> Indexed Securities. The Fund may invest in indexed securities, includingfloating rate securities that are subject to a maximum interest rate ("cappedfloaters") up to 10% of the Fund's total assets and leveraged inverse floatingrate securities ("inverse floaters"). The interest rate or, in some cases, theprincipal payable at the maturity of an indexed security may change positivelyor inversely in relation to one or more interest rates, financial indices orother financial indicators ("reference prices"). An indexed security may beleveraged to the extent that the magnitude of any change in the interest rate orprincipal payable on an indexed security is a multiple of the change in thereference price. Thus, indexed securities may decline in value due to adversemarket changes in interest rates or other reference prices.Inverse Floating Rate Securities. The Fund may invest in inverse floating ratesecurities. The interest rate on an inverse floating rate security resets in theopposite direction from the market rate of interest to which the inversefloating rate security is indexed. An inverse floating rate security may beconsidered to be leveraged to the extent that its interest rate varies by amultiple of the index rate of interest. A higher degree of leverage in theinverse floating rate security is associated with greater volatility in themarket value of such security.The inverse floating rate securities that the Fund may invest in include but arenot limited to, an inverse floating rate class of a government agency issued CMOand a government agency issued yield curve note. Typically, an inverse floatingrate class of a CMO is one of two components created from the cash flows from apool of fixed rate mortgages. The other component is a floating rate security inwhich the amount of interest payable varies directly with a market interest rateindex. A yield curve note is a fixed income security that bears interest at afloating rate that is reset periodically based on an interest rate benchmark.The interest rate resets on a yield curve note in the opposite direction fromthe interest rate benchmark. Risk Associated with Specific Types of Derivative Debt. Different types ofderivative debt securities are subject to different combinations of prepayment,extension and/or interest rate risk. Conventional mortgage pass-throughsecurities and sequential pay CMOs are subject to all of these risks, but aretypically not leveraged. Thus, the magnitude of exposure may be less than formore leveraged Mortgage-Backed Securities.The risk of early prepayments is the primary risk associated with interest onlydebt securities ("IOs"), super floaters, other leveraged floating rateinstruments and Mortgage-Backed Securities purchased at a premium to their parvalue. In some instances, early prepayments may result in a complete loss ofinvestment in certain of these securities. The primary risks associated withcertain other derivative debt securities are the potential extension of averagelife and/or depreciation due to rising interest rates.These securities include floating rate securities based on the Cost of FundsIndex ("COFI floaters"), other "lagging rate" floating rate securities, floatingrate securities that are subject to a maximum interest rate ("capped floaters"),Mortgage-Backed Securities purchased at a discount, leveraged inverse floatingrate securities ("inverse floaters"), principal only debt securities ("POs"),certain residual or support tranches of CMOs and index amortizing notes. Indexamortizing notes are not Mortgage-Backed Securities, but are subject toextension risk resulting from the issuer's failure to exercise its option tocall or redeem the notes before their stated maturity date. Leveraged inverseIOs combine several elements of the Mortgage-Backed Securities described aboveand thus present an especially intense combination of prepayment, extension andinterest rate risks. 6<PAGE>Planned amortization class ("PAC") and target amortization class ("TAC") CMObonds involve less exposure to prepayment, extension and interest rate risk thanother Mortgage-Backed Securities, provided that prepayment rates remain withinexpected prepayment ranges or "collars." To the extent that prepayment ratesremain within these prepayment ranges, the residual or support tranches of PACand TAC CMOs assume the extra prepayment, extension and interest rate riskassociated with the underlying mortgage assets.Other types of floating rate derivative debt securities present more complextypes of interest rate risks. For example, range floaters are subject to therisk that the coupon will be reduced to below market rates if a designatedinterest rate floats outside of a specified interest rate band or collar. Dualindex or yield curve floaters are subject to depreciation in the event of anunfavorable change in the spread between two designated interest rates. X- resetfloaters have a coupon that remains fixed for more than one accrual period.Thus, the type of risk involved in these securities depends on the terms of eachindividual X-reset floater.Mortgage "Dollar Roll" Transactions. The Fund may enter into mortgage "dollarroll" transactions with selected banks and broker-dealers pursuant to which theFund sells Mortgage-Backed Securities and simultaneously contracts to repurchasesubstantially similar (same type, coupon and maturity) securities on a specifiedfuture date. The Fund will only enter into covered rolls. A "covered roll" is aspecific type of dollar roll for which there is an offsetting cash position or acash equivalent security position which matures on or before the forwardsettlement date of the dollar roll transaction. Covered rolls are not treated asa borrowing or other senior security and will be excluded from the calculationof the Fund's borrowing and other senior securities. For financial reporting andtax purposes, the Fund treats mortgage dollar rolls as two separatetransactions; one involving the purchase of a security and a separatetransaction involving a sale.Pay-In-Kind, Delayed and Zero Coupon Bonds. The Fund may invest in pay-in-kind,delayed and zero coupon bonds. These are securities issued at a discount fromtheir face value because interest payments are typically postponed untilmaturity. The amount of the discount rate varies depending on factors includingthe time remaining until maturity, prevailing interest rates, the security'sliquidity and the issuer's credit quality. These securities also may take theform of debt securities that have been stripped of their interest payments. Aportion of the discount with respect to stripped tax-exempt securities or theircoupons may be taxable. The market prices of pay-in-kind, delayed and zerocoupon bonds generally are more volatile than the market prices ofinterest-bearing securities and are likely to respond to a greater degree tochanges in interest rates than interest-bearing securities having similarmaturities and credit quality. The Fund's investments in pay-in-kind, delayedand zero coupon bonds may require the Fund to sell certain of its portfoliosecurities to generate sufficient cash to satisfy certain income distributionrequirements. See "Tax Status." At times when the Fund invests in pay-in-kind,delayed and zero coupon bonds, it will not be pursuing its primary objective ofmaximizing current income.Swaps, Caps, Floors and Collars. As one way of managing its exposure todifferent types of investments, the Fund may enter into interest rate swaps andother types of swap agreements such as caps, collars and floors. In a typicalinterest rate swap, one party agrees to make regular payments equal to afloating interest rate times a "notional principal amount," in return forpayments equal to a fixed rate times the same amount, for a specified period oftime. Swaps may also depend on other prices or rates, such as the value of anindex or mortgage prepayment rates. 7<PAGE>In a typical cap or floor agreement, one party agrees to make payments onlyunder specified circ*mstances, usually in return for payment of a fee by theother party. For example, the buyer of an interest rate cap obtains the right toreceive payments to the extent that a specified interest rate exceeds anagreed-upon level, while the seller of an interest rate floor is obligated tomake payment to the extent that a specified interest rate falls below anagreed-upon level. An interest rate collar combines elements of buying a cap andselling a floor.Swap agreements will tend to shift the Fund's investment exposure from one typeof investment to another. For example, if the Fund agreed to exchange paymentsin dollars for payments in a foreign currency, the swap agreement would tend todecrease the Fund's exposure to U.S. interest rates and increase its exposure toforeign currency and interest rates. Caps and floors have an effect similar tobuying or writing options. Depending on how they are used, swap agreements mayincrease or decrease the overall volatility of the Fund's investments and itsshare price and yield.Swap agreements are sophisticated hedging instruments that typically involve asmall investment of cash relative to the magnitude of risks assumed. As aresult, swaps can be highly volatile and may have a considerable impact on theFund's performance. Swap agreements are subject to risks related to thecounterparty's ability to perform, and may decline in value if thecounterparty's creditworthiness deteriorates. The Fund may also suffer losses ifit is unable to terminate outstanding swap agreements or reduce its exposurethrough offsetting transactions. The Fund will maintain in a segregated accountwith its custodian, cash or liquid securities equal to the net amount, if any,of the excess of the Fund's obligations over its entitlements with respect toswap, cap, collar or floor transactions.Asset-Backed Securities. The Fund may invest a portion of their assets inasset-backed securities. Asset backed securities, like Ginnie Mae certificates,are securities which represent a participation in or are secured by and payablefrom, a stream of payments generated by particular assets, most often a pool ofassets similar to one another. Types of other asset backed securities includeautomobile receivable securities, credit card receivable securities and mortgagebacked securities such as collateralized mortgage obligations ("CMOs") and realestate mortgage investment conduits ("REMICs").Asset-backed securities are often subject to more rapid repayment than theirstated maturity date would indicate as a result of the pass-through ofprepayments of principal on the underlying loans. During periods of declininginterest rates, prepayment of loans underlying asset-backed securities can beexpected to accelerate. Accordingly, the Fund's ability to maintain positions insuch securities will be affected by reductions in the principal amount of suchsecurities resulting from prepayments, and its ability to reinvest the returnsof principal at comparable yields is subject to generally prevailing interestrates at that time.Credit card receivables are generally unsecured and the debtors on suchreceivables are entitled to the protection of a number of state and federalconsumer credit laws, many of which give such debtors the right to set-offcertain amounts owed on the credit cards, thereby reducing the balance due.Automobile receivables generally are secured, but by automobiles rather thanresidential real property. Most issuers of automobile receivables permit theloan servicers to retain possession of the underlying obligations. If theservicer were to sell these obligations to another party, there is a risk thatthe purchaser would acquire an interest superior to that of the holders of theasset-backed securities. In addition, because of the large number of vehiclesinvolved in a typical issuance and technical requirements under state laws, thetrustee for the holders of the automobile receivables may not have a propersecurity interest in the underlying automobiles. Therefore, there is thepossibility that, in some cases, recoveries on repossessed collateral may not beavailable to support payments on these securities. 8<PAGE>Lower Rated High Yield Debt Obligations. The Fund may invest in high yielding,fixed income securities rated below investment grade (e.g., rated below Baa byMoody's or below BBB by S&P), sometimes referred to as junk bonds. No more than10% of the Fund's total assets may be invested in these securities, and the Fundmay not invest in securities rated lower than B by a nationally recognizedrating organization. Ratings are based largely on the historical financialcondition of the issuer. Consequently, the rating assigned to any particularsecurity is not necessarily a reflection of the issuer's current financialcondition, which may be better or worse than the rating would indicate.See Appendix B to this Statement of Additional Information which describes thecharacteristics of corporate bonds in the various rating categories.Debt obligations rated in the lower ratings categories, or which are unrated,involve greater volatility of price and risk of loss of principal and income. Inaddition, lower ratings reflect a greater possibility of an adverse change infinancial condition affecting the ability of the issuer to make payments ofinterest and principal. The high yield fixed income market is relatively new andits growth occurred during a period of economic expansion. The market has notyet been fully tested by an economic recession.The market price and liquidity of lower rated fixed income securities generallyrespond to short term corporate and market developments to a greater extent thando the price and liquidity of higher rated securities because such developmentsare perceived to have a more direct relationship to the ability of an issuer ofsuch lower rated securities to meet its ongoing debt obligations.Reduced volume and liquidity in the high yield bond market or the reducedavailability of market quotations will make it more difficult to dispose of thebonds and to value accurately the Fund's assets. The reduced availability ofreliable, objective data may increase the Fund's reliance on management'sjudgment in valuing high yield bonds. In addition, the Fund's investments inhigh yield securities may be susceptible to adverse publicity and investorperceptions, whether or not justified by fundamental factors. The Fund'sinvestments, and consequently its net asset value, will be subject to the marketfluctuations and risks inherent in all securities. Brady Bonds. The Fund may invest up to 10% of total assets in Brady Bonds andother sovereign debt securities of countries that have restructured or are inthe process of restructuring sovereign debt pursuant to the Brady Plan. BradyBonds are debt securities described as part of a restructuring plan created byU.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtornations to restructure their outstanding external indebtedness (generally,commercial bank debt). In restructuring its external debt under the Brady Planframework, a debtor nation negotiates with its existing bank lenders as well asmultilateral institutions such as the World Bank and the International MonetaryFund (the "IMF"). The Brady Plan facilitate the exchange of commercial bank debtfor newly issued debt (known as Brady Bonds). The World Bank and the IMF providefunds pursuant to loan agreements or other arrangements which enable the debtornation to collateralize the new Brady Bonds or to repurchase outstanding bankdebt at a discount. Under these arrangements IMF debtor nations are required toimplement domestic monetary and fiscal reforms. These reforms have included theliberalization of trade and foreign investment, the privatization of state-ownedenterprises and the setting of targets for public spending and borrowing. Thesepolicies and programs promote the debtor country's ability to service itsexternal obligations and promote its economic growth and development. The BradyPlan only sets forth general guiding principles for economic reform and debtreduction, emphasizing that solutions must be negotiated on a case-by-case basisbetween debtor nations and their creditors. The Adviser believes that economicreforms undertaken by countries in connection with the issuance of Brady Bondsmake the debt of countries which have issued or have announced plans to issueBrady Bonds an attractive opportunity for investment. 9<PAGE>Brady Bonds have recently been issued by Argentina, Brazil, Bulgaria, CostaRica, Dominican Republic, Ecuador, Jordan, Mexico, Nigeria, Poland, thePhilippines, Uruguay and Venezuela and may be issued by other countries. Over$130 billion in principal amount of Brady Bonds have been issued to date, thelargest portion having been issued by Argentina and Brazil. Brady Bonds mayinvolve a high degree of risk, may be in default or present the risk of default.Agreements implemented under the Brady Plan to date are designed to achieve debtand debt-service reduction through specific options negotiated by a debtornation with its creditors. As a result, the financial packages offered by eachcountry differ. The types of options have included the exchange of outstandingcommercial bank debt for bonds issued at 100% of face value of such debt, bondsissued at a discount of face value of such debt, bonds bearing an interest ratewhich increases over time and bonds issued in exchange for the advancement ofnew money by existing lenders. Certain Brady Bonds have been collateralized asto principal due at maturity by U.S. Treasury zero coupon bonds with a maturityequal to the final maturity of such Brady Bonds, although the collateral is notavailable to investors until the final maturity of the Brady Bonds. Collateralpurchases are financed by the IMF, the World Bank and the debtor nations'reserves. In addition, the first two or three interest payments on certain typesof Brady Bonds may be collateralized by cash or securities agreed upon bycreditors. Although Brady Bonds may be collateralized by U.S. Governmentsecurities, repayment of principal and interest is not guaranteed by the U.S.Government.Ratings as Investment Criteria In general, the ratings of Moody's and S&Prepresent the opinions of these agencies as to the quality of the securitieswhich they rate. It should be emphasized however, that ratings are relative andsubjective and are not absolute standards of quality. These rating will be usedby the Fund as initial criteria for the selection of portfolio securities. Amongthe factors which will be considered are the long-term ability of the issuer topay principal and interest and general economic trends. Appendix B containsfurther information concerning the rating of Moody's and S&P and theirsignificance. Subsequent to its purchase by the Fund, an issue of securities maycease to be rated, or its rating may be reduced below the minimum required forpurchase by the Fund. Neither of these events will require the sale of thesecurities by the Fund.Subsequent to its purchase by the Fund, an issue of securities may cease to berated or its rating may be reduced below the minimum required for purchase bythe Fund. Neither of these events will require the sale of the securities by theFund, but the Adviser will consider the event in its determination of whetherthe Fund should continue to hold the securities.Investments in Foreign Securities. The Fund may invest in U.S. dollardenominated securities of foreign governments. These securities will generallybe rated within the four highest rating categories by a nationally recognizedrating organization S&P or Moody's or if not so rated, determined to be ofequivalent quality in the opinion of the Adviser; provided that the Fund mayinvest up to 10% of its total assets in securities which may be rated B orbetter by a nationally recognized rating organization.Risks of Foreign Securities. Investments in foreign securities may involve agreater degree of risk than those in domestic securities. There is generallyless publicly available information about foreign companies in the form ofreports and ratings similar to those that are published about issuers in theUnited States. Also, foreign issuers are generally not subject to uniformaccounting, auditing and financial reporting requirements comparable to thoseapplicable to United States issuers. 10<PAGE>Because foreign securities may be denominated in currencies other than the U.S.dollar, changes in foreign currency exchange rates will affect the Fund's netasset value, the value of dividends and interest earned, gains and lossesrealized on the sale of securities, and any net investment income and gains thatthe Fund distributes to shareholders. Securities transactions undertaken in someforeign markets may not be settled promptly, so that the Fund's investments onforeign exchanges may be less liquid and subject to the risk of fluctuatingcurrency exchange rates pending settlement.Foreign securities will be purchased in the best available market, whetherthrough over-the-counter markets or exchanges located in the countries whereprincipal offices of the issuers are located. Foreign securities markets aregenerally not as developed or efficient as those in the United States. Whilegrowing in volume, they usually have substantially less volume than the New YorkStock Exchange, and securities of some foreign issuers are less liquid and morevolatile than securities of comparable United States issuers. Fixed commissionson foreign exchanges are generally higher than negotiated commissions on UnitedStates exchanges, although the Fund will endeavor to achieve the most favorablenet results on its portfolio transactions. There is generally less governmentsupervision and regulation of securities exchanges, brokers and listed issuersthan in the United States.With respect to certain foreign countries, there is the possibility of adversechanges in investment or exchange control regulations, expropriation,nationalization or confiscatory taxation, limitations on the removal of funds orother assets of the Fund, political or social instability, or diplomaticdevelopments which could affect United States investments in those countries.Moreover, individual foreign economies may differ favorably or unfavorably fromthe United States economy in terms of growth of gross national product, rate ofinflation, capital reinvestment, resource self-sufficiency and balance ofpayments position.The dividends in some cases, capital gains, and interest payable on certain ofthe Fund's foreign portfolio securities may be subject to foreign withholding orother foreign taxes, thus reducing the net amount of income or gains availablefor distribution to the Fund's shareholders.Repurchase Agreements. The Fund may invest in repurchase agreements. In arepurchase agreement the Fund buys a security for a relatively short period(usually not more than 7 days) subject to the obligation to sell it back to theissuer at a fixed time and price plus accrued interest. The Fund will enter intorepurchase agreements only with member banks of the Federal Reserve System andwith "primary dealers" in U.S. Government securities. The Adviser willcontinuously monitor the creditworthiness of the parties with whom the Fundenters into repurchase agreements.The Fund has established a procedure providing that the securities serving ascollateral for each repurchase agreement must be delivered to the Fund'scustodian either physically or in book-entry form and that the collateral mustbe marked to market daily to ensure that each repurchase agreement is fullycollateralized at all times. In the event of bankruptcy or other default by aseller of a repurchase agreement, the Fund could experience delays inliquidating the underlying securities during the period in which the Fund seeksto enforce its rights thereto, possible subnormal levels of income, a decline invalue of the underlying securities or lack of access to income during thisperiod, and the expense of enforcing its rights. 11<PAGE>Reverse Repurchase Agreements. The Fund may also enter into reverse repurchaseagreements which involve the sale of government securities held in its portfolioto a bank with an agreement that the Fund will buy back the securities at afixed future date at a fixed price plus an agreed amount of "interest" which maybe reflected in the repurchase price. Reverse repurchase agreements areconsidered to be borrowings by the Fund. Reverse repurchase agreements involvethe risk that the market value of securities purchased by the Fund with proceedsof the transaction may decline below the repurchase price of the securities soldby the Fund which it is obligated to repurchase. The Fund will also continue tobe subject to the risk of a decline in the market value of the securities soldunder the agreements because it will reacquire those securities upon effectingtheir repurchase. To minimize various risks associated with reverse repurchaseagreements, the Fund will establish a separate account consisting of liquidsecurities, of any type or maturity, in an amount at least equal to therepurchase prices of the securities (plus any accrued interest thereon) undersuch agreements. The Fund will not enter into reverse repurchase agreements andother borrowings exceeding in the aggregate more than 33 1/3% of the marketvalue of its total assets. The Fund will not make additional investments whileborrowings (including reverse repurchase agreements) are in excess of 5% of theFund's total assets. The Fund will enter into reverse repurchase agreements onlywith federally insured banks or savings and loan associations which are approvedin advance as being creditworthy by the Trustees. Under procedures establishedby the Trustees, the Adviser will monitor the creditworthiness of the banksinvolved.Restricted Securities. The Fund may purchase securities that are not registered("restricted securities") under the Securities Act of 1933 ("1933 Act"),including commercial paper issued in reliance on section 4(2) of the 1933 Actand securities offered and sold to "qualified institutional buyers" under Rule144A under the 1933 Act. The Fund will not invest more than 10% of its totalassets in illiquid investments, based upon a continuing review of the tradingmarkets for specific Section 4(2) paper or Rule 144A securities, that they areliquid, they will not be subject to the 10% limit on illiquid investments. TheTrustees may adopt guidelines and delegate to the Adviser the daily function ofdetermining and monitoring the liquidity of restricted securities. The Trustees,however, will retain sufficient oversight and be ultimately responsible for thedeterminations. The Trustees will carefully monitor the Fund's investments inthese securities, focusing on such important factors, among others, asvaluation, liquidity and availability of information. This investment practicecould have the effect of increasing the level of illiquidity in the Fund ifqualified institutional buyers become for a time uninterested in purchasingthese restricted securities.Options on Securities, Securities Indices and Currency. The Fund may purchaseand write (sell) call and put options on any securities in which it may invest,on any securities index based on securities in which it may invest. Theseoptions may be listed on national domestic securities exchanges or foreignsecurities exchanges or traded in the over-the-counter market. The Fund maywrite covered put and call options and purchase put and call options to enhancetotal return, as a substitute for the purchase or sale of securities or toprotect against declines in the value of portfolio securities and againstincreases in the cost of securities to be acquired.Writing Covered Options. A call option on securities or currency written by theFund obligates the Fund to sell specified securities or currency to the holderof the option at a specified price if the option is exercised at any time beforethe expiration date. A put option on securities or currency written by the Fundobligates the Fund to purchase specified securities or currency from the optionholder at a specified price if the option is exercised at any time before theexpiration date. Options on securities indices are similar to options onsecurities, except that the exercise of securities index options requires cashsettlement payments and does not involve the actual purchase or sale ofsecurities. In addition, securities index options are designed to reflect pricefluctuations in a group of securities or segment of the securities market ratherthan price fluctuations in a single security. Writing covered call options maydeprive the Fund of the opportunity to profit from an increase in the marketprice of the securities or foreign currency assets in its portfolio. Writingcovered put options may deprive the Fund of the opportunity to profit from adecrease in the market price of the securities or foreign currency assets to beacquired for its portfolio. 12<PAGE>All call and put options written by the Fund are covered. A written call optionor put option may be covered by (i) maintaining cash or liquid securities,either of which may be quoted or denominated in any currency, in a segregatedaccount with a value at least equal to the Fund's obligation under the option,(ii) entering into an offsetting forward commitment and/or (iii) purchasing anoffsetting option or any other option which, by virtue of its exercise price orotherwise, reduces the Fund's net exposure on its written option position. Awritten call option on securities is typically covered by maintaining thesecurities that are subject to the option in a segregated account. The Fund maycover call options on a securities index by owning securities whose pricechanges are expected to be similar to those of the underlying index.The Fund may terminate its obligations under an exchange traded call or putoption by purchasing an option identical to the one it has written. Obligationsunder over-the-counter options may be terminated only by entering into anoffsetting transaction with the counterparty to such option. Such purchases arereferred to as "closing purchase transactions."Purchasing Options. The Fund would normally purchase call options inanticipation of an increase, or put options in anticipation of a decrease("protective puts"), in the market value of securities. The Fund may also sellcall and put options to close out its purchased options.The purchase of a call option would entitle the Fund, in return for the premiumpaid, to purchase specified securities or currency at a specified price duringthe option period. The Fund would ordinarily realize a gain on the purchase of acall option if, during the option period, the value of such securities orcurrency exceeded the sum of the exercise price, the premium paid andtransaction costs; otherwise the Fund would realize either no gain or a loss onthe purchase of the call option.The purchase of a put option would entitle the Fund, in exchange for the premiumpaid, to sell specified securities or currency at a specified price during theoption period. The purchase of protective puts is designed to offset or hedgeagainst a decline in the market value of the Fund's portfolio securities. Putoptions may also be purchased by the Fund for the purpose of affirmativelybenefiting from a decline in the price of securities or currencies which it doesnot own. The Fund would ordinarily realize a gain if, during the option period,the value of the underlying securities or currency decreased below the exerciseprice sufficiently to cover the premium and transaction costs; otherwise theFund would realize either no gain or a loss on the purchase of the put option.Gains and losses on the purchase of put options may be offset by countervailingchanges in the value of the Fund's portfolio securities.The Fund's options transactions will be subject to limitations established byeach of the exchanges, boards of trade or other trading facilities on which suchoptions are traded. These limitations govern the maximum number of options ineach class which may be written or purchased by a single investor or group ofinvestors acting in concert, regardless of whether the options are written orpurchased on the same or different exchanges, boards of trade or other tradingfacilities or are held or written in one or more accounts or through one or morebrokers. Thus, the number of options which the Fund may write or purchase may beaffected by options written or purchased by other investment advisory clients ofthe Adviser. An exchange, board of trade or other trading facility may order theliquidation of positions found to be in excess of these limits, and it mayimpose certain other sanctions. 13<PAGE>Risks Associated with Options Transactions. There is no assurance that a liquidsecondary market on a domestic or foreign options exchange will exist for anyparticular exchange-traded option or at any particular time. If the Fund isunable to effect a closing purchase transaction with respect to covered optionsit has written, the Fund will not be able to sell the underlying securities orcurrencies or dispose of assets held in a segregated account until the optionsexpire or are exercised. Similarly, if the Fund is unable to effect a closingsale transaction with respect to options it has purchased, it would have toexercise the options in order to realize any profit and will incur transactioncosts upon the purchase or sale of underlying securities or currencies.Reasons for the absence of a liquid secondary market on an exchange include thefollowing: (i) there may be insufficient trading interest in certain options;(ii) restrictions may be imposed by an exchange on opening transactions orclosing transactions or both; (iii) trading halts, suspensions or otherrestrictions may be imposed with respect to particular classes or series ofoptions; (iv) unusual or unforeseen circ*mstances may interrupt normaloperations on an exchange; (v) the facilities of an exchange or the OptionsClearing Corporation may not at all times be adequate to handle current tradingvolume; or (vi) one or more exchanges could, for economic or other reasons,decide or be compelled at some future date to discontinue the trading of options(or a particular class or series of options). If trading were discontinued, thesecondary market on that exchange (or in that class or series of options) wouldcease to exist. However, outstanding options on that exchange that had beenissued by the Options Clearing Corporation as a result of trades on thatexchange would continue to be exercisable in accordance with their terms.The Fund's ability to terminate over-the-counter options is more limited thanwith exchange-traded options and may involve the risk that broker-dealersparticipating in such transactions will not fulfill their obligations. TheAdviser will determine the liquidity of each over-the-counter option inaccordance with guidelines adopted by the Trustees.The writing and purchase of options is a highly specialized activity whichinvolves investment techniques and risks different from those associated withordinary portfolio securities transactions. The successful use of optionsdepends in part on the Adviser's ability to predict future price fluctuationsand, for hedging transactions, the degree of correlation between the options andsecurities or currency markets.Futures Contracts and Options on Futures Contracts. To seek to increase totalreturn or hedge against changes in interest rates and securities prices. TheFund may purchase and sell various kinds of futures contracts, and purchase andwrite call and put options on these futures contracts. The Fund may also enterinto closing purchase and sale transactions with respect to any of thesecontracts and options. The futures contracts may be based on various securities(such as U.S. Government securities), securities indices, and any otherfinancial instruments and indices. All futures contracts entered into by theFund are traded on U.S. or foreign exchanges or boards of trade that arelicensed, regulated or approved by the Commodity Futures Trading Commission("CFTC").Futures Contracts. A futures contract may generally be described as an agreementbetween two parties to buy and sell particular financial instruments orcurrencies for an agreed price during a designated month (or to deliver thefinal cash settlement price, in the case of a contract relating to an index orotherwise not calling for physical delivery at the end of trading in thecontract). 14<PAGE>Positions taken in the futures markets are not normally held to maturity but areinstead liquidated through offsetting transactions which may result in a profitor a loss. While futures contracts on securities or currency will usually beliquidated in this manner, the Fund may instead make, or take, delivery of theunderlying securities or currency whenever it appears economically advantageousto do so. A clearing corporation associated with the exchange on which futurescontracts are traded guarantees that, if still open, the sale or purchase willbe performed on the settlement date. Hedging and Other Strategies. Hedging is an attempt to establish with morecertainty than would otherwise be possible the effective price or rate of returnon portfolio securities or securities that the Fund proposes to acquire. Whensecurities prices are falling, the Fund can seek to offset a decline in thevalue of its current portfolio securities through the sale of futures contracts.When securities prices are rising, the Fund, through the purchase of futurescontracts, can attempt to secure better rates or prices than might later beavailable in the market when it effects anticipated purchases.The Fund may, for example, take a "short" position in the futures market byselling futures contracts in an attempt to hedge against an anticipated declinein market prices. Such futures contracts may include contracts for the futuredelivery of securities held by the Fund or securities with characteristicssimilar to those of the Fund's portfolio securities. If, in the opinion of the Adviser, there is a sufficient degree of correlationbetween price trends for the Fund's portfolio securities and futures contractsbased on other financial instruments, securities indices or other indices, theFund may also enter into such futures contracts as part of its hedging strategy.Although under some circ*mstances prices of securities in the Fund's portfoliomay be more or less volatile than prices of such futures contracts, the Adviserwill attempt to estimate the extent of this volatility difference based onhistorical patterns and compensate for any differential by having the Fund enterinto a greater or lesser number of futures contracts or by attempting to achieveonly a partial hedge against price changes affecting the Fund's portfoliosecurities.When a short hedging position is successful, any depreciation in the value ofportfolio securities will be substantially offset by appreciation in the valueof the futures position. On the other hand, any unanticipated appreciation inthe value of the Fund's portfolio securities would be substantially offset by adecline in the value of the futures position.On other occasions, the Fund may take a "long" position by purchasing futurescontracts. This would be done, for example, when the Fund anticipates thesubsequent purchase of particular securities when it has the necessary cash, butexpects the prices or currency exchange rates then available in the applicablemarket to be less favorable than prices that are currently available. The Fundmay also purchase futures contracts as a substitute for transactions insecurities to alter the investment characteristics of or currency exposureassociated with portfolio securities or to gain or increase its exposure to aparticular securities market or currency.Options on Futures Contracts. The Fund may purchase and write options on futuresfor the same purposes as its transactions in futures contracts. The purchase ofput and call options on futures contracts will give the Fund the right (but notthe obligation) for a specified price to sell or to purchase, respectively, theunderlying futures contract at any time during the option period. As thepurchaser of an option on a futures contract, the Fund obtains the benefit ofthe futures position if prices move in a favorable direction but limits its riskof loss in the event of an unfavorable price movement to the loss of the premiumand transaction costs. 15<PAGE>The writing of a call option on a futures contract generates a premium which maypartially offset a decline in the value of the Fund's assets. By writing a calloption, the Fund becomes obligated, in exchange for the premium (upon exerciseof the option) to sell a futures contract if the option is exercised, which mayhave a value higher than the exercise price. Conversely, the writing of a putoption on a futures contract generates a premium which may partially offset anincrease in the price of securities that the Fund intends to purchase. However,the Fund becomes obligated (upon exercise of the option) to purchase a futurescontract if the option is exercised, which may have a value lower than theexercise price. The loss incurred by the Fund in writing options on futures ispotentially unlimited and may exceed the amount of the premium received.The holder or writer of an option on a futures contract may terminate itsposition by selling or purchasing an offsetting option of the same series. Thereis no guarantee that such closing transactions can be effected. The Fund'sability to establish and close out positions on such options will be subject tothe development and maintenance of a liquid market.Other Considerations. The Fund will engage in futures and related optionstransactions either for bona fide hedging purposes or to seek to increase totalreturn as permitted by the CFTC. To the extent that the Fund is using futuresand related options for hedging purposes, futures contracts will be sold toprotect against a decline in the price of securities (or the currency in whichthey are quoted or denominated) that the Fund owns or futures contracts will bepurchased to protect the Fund against an increase in the price of securities itintends to purchase. The Fund will determine that the price fluctuations in thefutures contracts and options on futures used for hedging purposes aresubstantially related to price fluctuations in securities held by the Fund orsecurities or instruments which it expects to purchase. As evidence of itshedging intent, the Fund expects that on 75% or more of the occasions on whichit takes a long futures or option position (involving the purchase of futurescontracts), the Fund will have purchased, or will be in the process ofpurchasing, equivalent amounts of related securities in the cash market at thetime when the futures or option position is closed out. However, in particularcases, when it is economically advantageous for the Fund to do so, a longfutures position may be terminated or an option may expire without thecorresponding purchase of securities or other assets.To the extent that the Fund engages in nonhedging transactions in futurescontracts and options on futures, the aggregate initial margin and premiumsrequired to establish these nonhedging positions will not exceed 5% of the netasset value of the Fund's portfolio, after taking into account unrealizedprofits and losses on any such positions and excluding the amount by which suchoptions were in-the-money at the time of purchase.Transactions in futures contracts and options on futures involve brokeragecosts, require margin deposits and, in the case of contracts and optionsobligating the Fund to purchase securities or currencies, require the Fund toestablish a segregated account consisting of cash or liquid securities in anamount equal to the underlying value of such contracts and options.While transactions in futures contracts and options on futures may reducecertain risks, these transactions themselves entail certain other risks. Forexample, unanticipated changes in interest rates or securities prices orcurrency exchange rates may result in a poorer overall performance for the Fundthan if it had not entered into any futures contracts or options transactions.Perfect correlation between the Fund's futures positions and portfolio positionswill be impossible to achieve. In the event of an imperfect correlation betweena futures position and a portfolio position which is intended to be protected,the desired protection may not be obtained and the Fund may be exposed to riskof loss. In addition, it is not possible to hedge fully or protect againstcurrency fluctuations affecting the value of securities denominated in foreigncurrencies because the value of such securities is likely to fluctuate as aresult of independent factors not related to currency fluctuations. 16<PAGE>Some futures contracts or options on futures may become illiquid under adversemarket conditions. In addition, during periods of market volatility, a commodityexchange may suspend or limit trading in a futures contract or related option,which may make the instrument temporarily illiquid and difficult to price.Commodity exchanges may also establish daily limits on the amount that the priceof a futures contract or related option can vary from the previous day'ssettlement price. Once the daily limit is reached, no trades may be made thatday at a price beyond the limit. This may prevent the Fund from closing outpositions and limiting its losses.Lending of Securities. The Fund may lend portfolio securities to brokers,dealers, and financial institutions if the loan is collateralized by cash orU.S. Government securities according to applicable regulatory requirements. TheFund may reinvest any cash collateral in short-term securities and money marketsfunds. When the Fund lends portfolio securities, there is a risk that theborrower may fail to return the securities involved in the transaction. As aresult, the Fund may incur a loss or, in the event of the borrower's bankruptcy,the Fund may be delayed in or prevented from liquidating the collateral. It is afundamental policy of the Fund not to lend portfolio securities having a totalvalue exceeding 30% of its total assets.Rights and Warrants. The Fund may purchase warrants and rights which aresecurities permitting, but not obligating, their holder to purchase theunderlying securities at a predetermined price subject to the Fund's FundamentalInvestment Restriction. Generally, warrants and stock purchase rights do notcarry with them the right to receive dividends or exercise voting rights withrespect to the underlying securities, and they do not represent any rights inthe assets of the issuer. As a result, an investment in warrants and rights maybe considered to entail greater investment risk than certain other types ofinvestments. In addition, the value of warrant and rights does not necessarilychange with the value of the underlying securities, and they cease to have valueif they are not exercised on or prior to their expiration date. Investment inwarrants and rights increases the potential profit or loss to be realized fromthe investment of a given amount of the Fund's assets as compared with investingthe same amount in the underlying stock.Forward Commitment and When-Issued Securities. The Fund may purchase securitieson a when-issued or forward commitment basis. "When-issued" refers to securitieswhose terms are available and for which a market exists, but which have not beenissued. The Fund will engage in when-issued transactions with respect tosecurities purchased for its portfolio in order to obtain what is considered tobe an advantageous price and yield at the time of the transaction. Forwhen-issued transactions, no payment is made until delivery is due, often amonth or more after the purchase. In a forward commitment transaction, the Fundcontracts to purchase securities for a fixed price at a future date beyondcustomary settlement time.When the Fund engages in forward commitment and when-issued transactions, itrelies on the seller to consummate the transaction. The failure of the issuer orseller to consummate the transaction may result in the Fund losing theopportunity to obtain a price and yield considered to be advantageous. Thepurchase of securities on a when-issued and forward commitment basis alsoinvolves a risk of loss if the value of the security to be purchased declinesprior to the settlement date. 17<PAGE>On the date the Fund enters into an agreement to purchase securities on a when-issued or forward commitment basis, the Fund will segregate in a separateaccount cash or liquid securities, of any type or maturity, equal in value tothe Fund's commitment. These assets will be valued daily at market, andadditional cash or securities will be segregated in a separate account to theextent that the total value of the assets in the account declines below theamount of the when-issued commitments. Alternatively, the Fund may enter intooffsetting contracts for the forward sale of other securities that it owns.Short-Term Trading and Portfolio Turnover. Short-term trading means the purchaseand subsequent sale of a security after it has been held for a relatively briefperiod of time. The Fund may engage in short-term trading in response to stockmarket conditions, changes in interest rates or other economic trends anddevelopments, or to take advantage of yield disparities between various fixedincome securities in order to realize capital gains or improve income.Short-term trading may have the effect of increasing portfolio turnover rate. Ahigh rate of portfolio turnover (100% or greater) involves correspondinglygreater brokerage transaction expenses and may make it more difficult for theFund to qualify as a regulated investment company for federal income taxpurposes. The Fund's portfolio turnover rate is set forth in the table under thecaption "Financial Highlights" in the Prospectus.INVESTMENT RESTRICTIONSFundamental Investment Restrictions. The following investment restrictions willnot be changed without the approval of a majority of the Fund's outstandingvoting securities which, as used in the Prospectus and this Statement ofAdditional Information, means the approval by the lesser of (1) the holders of67% or more of the Fund's shares represented at a meeting if more than 50% ofthe Fund's outstanding shares are present in person or by proxy at that meetingor (2) more than 50% of the Fund's outstanding shares.The Fund may not:(1) Borrow money in an amount in excess of 33-1/3% of its total assets, and thenonly as a temporary measure for extraordinary or emergency purposes (except thatit may enter into a reverse repurchase agreement within the limits described inthe Prospectus or this Statement of Additional Information), or pledge, mortgageor hypothecate an amount of its assets (taken at market value) in excess of 15%of its total assets, in each case taken at the lower of cost or market value.For the purpose of this restriction, collateral arrangements with respect tooptions, futures contracts, options on futures contracts and collateralarrangements with respect to initial and variation margins are not considered apledge of assets.(2) Underwrite securities issued by other persons except insofar as the Fund maytechnically be deemed an underwriter under the Securities Act of 1933 in sellinga portfolio security.(3) Purchase or retain real estate (including limited partnership interests butexcluding securities of companies, such as real estate investment trusts, whichdeal in real estate or interests therein and securities secured by real estate),or mineral leases, commodities or commodity contracts (except contracts for thefuture delivery of fixed income securities, stock index and currency futures andoptions on such futures) in the ordinary course of its business. The Fundreserves the freedom of action to hold and to sell real estate or mineralleases, commodities or commodity contracts acquired as a result of the ownershipof securities. 18<PAGE>(4) Invest in direct participation interests in oil, gas or other mineralexploration or development programs.(5) Make loans to other persons except by the purchase of obligations in whichthe Fund is authorized to invest and by entering into repurchase agreements;provided that the Fund may lend its portfolio securities not in excess of 30% ofits total assets (taken at market value). Not more than 10% of the Fund's totalassets (taken at market value) will be subject to repurchase agreements maturingin more than seven days. For these purposes the purchase of all or a portion ofan issue of debt securities shall not be considered the making of a loan.(6) Purchase the securities of any issuer if such purchase, at the time thereof,would cause more than 5% of its total assets (taken at market value) to beinvested in the securities of such issuer, other than securities issued orguaranteed by the United States or any state or political subdivision thereof,or any political subdivision of any such state, or any agency or instrumentalityof the United States, any state or political subdivision thereof, or anypolitical subdivision of any such state. In applying these limitations, aguarantee of a security will not be considered a security of the guarantor,provided that the value of all securities issued or guaranteed by thatguarantor, and owned by the Fund, does not exceed 10% of the Fund's totalassets. In determining the issuer of a security, each state and each politicalsubdivision agency, and instrumentality of each state and each multi-stateagency of which such state is a member is a separate issuer. Where securitiesare backed only by assets and revenues of a particular instrumentality, facilityor subdivision, such entity is considered the issuer.(7) Invest in companies for the purpose of exercising control or management.(8) Purchase or retain in its portfolio any securities issued by an issuer anyof whose officers, directors, trustees or security holders is an officer orTrustee of such Fund, or is a member, partner, officer or Director of theAdviser, if after the purchase of the securities of such issuer by the Fund oneor more of such persons owns beneficially more than 1/2 of 1% of the shares orsecurities, or both, all taken at market value, of such issuer, and such personsowning more than 1/2 of 1% of such shares or securities together ownbeneficially more than 5% of such shares or securities, or both, all taken atmarket value.(9) Purchase any securities or evidences of interest therein on margin, exceptthat the Fund may obtain such short-term credit as may be necessary for theclearance of purchases and sales of securities and the Fund may make deposits onmargin in connection with futures contracts and related options.(10) Sell any security which the Fund does not own unless by virtue of itsownership of other securities it has at the time of sale a right to obtainsecurities without payment of further consideration equivalent in kind andamount to the securities sold and provided that if such right is conditional thesale is made upon equivalent conditions.(11) Knowingly invest in securities which are subject to legal or contractualrestrictions on resale or for which there is no readily available market (e.g.,trading in the security is suspended or market makers do not exist or will notentertain bids or offers), except for repurchase agreements, if, as a resultthereof more than 10% of the Fund's total assets (taken at market value) wouldbe so invested.(12) Issue any senior security (as that term is defined in the InvestmentCompany Act of 1940 (the "Investment Company Act") if such issuance isspecifically prohibited by the Investment Company Act or the rules andregulations promulgated thereunder. For the purpose of this restriction,collateral arrangements with respect to options, futures contracts and optionson futures contracts and collateral arrangements with respect to initial andvariation margins are not deemed to be the issuance of a senior security. 19<PAGE>(13) The Fund may not invest more than 25% of its total assets (taken at marketvalue) in the securities of issuers engaged in any one industry. Obligationsissued or guaranteed by the U.S. Government or its agencies andinstrumentalities are not subject to the foregoing 25% limitation. In addition,for purposes of this limitation, determinations of what constitutes an industryare made in accordance with specific industry codes set forth in the StandardIndustrial Classification Manual and without considering groups of industries(e.g., all utilities, to be an industry).(14) Purchase securities of any issuer (other than securities issued orguaranteed by the U.S. Government or its agencies or instrumentalities) if suchpurchase, at the time thereof, would cause the Fund to hold more than 10% of anyclass of securities of such issuer. For this purpose, all indebtedness of anissuer shall be deemed a single class and all preferred stock of an issuer shallbe deemed a single class.Non-Fundamental Investment Restrictions. The following investment restrictionsare designated as non-fundamental and may be changed by the Trustees withoutshareholder approval.(1) The Fund may not purchase a security if, as a result, (i) more than 10% ofthe Fund's total assets would be invested in the securities of other investmentcompanies, (ii) the Fund would hold more than 3% of the total outstanding votingsecurities of any one investment company, or (iii) more than 5% of the Fund'stotal assets would be invested in the securities of any one investment company.These limitations do not apply to (a) the investment of cash collateral,received by the Fund in connection with lending of the Fund's portfoliosecurities, in the securities of open-end investment companies or (b) thepurchase of shares of any investment company in connection with a merger,consolidation, reorganization or purchase of substantially all of the assets ofanother investment company. Subject to the above percentage limitations, theFund may, in connection with the John Hanco*ck Group of Funds DeferredCompensation Plan for Independent Trustees/Directors, purchase securities ofother investment companies within the John Hanco*ck Group of Funds.If a percentage restriction or rating restriction on investment or utilizationof assets is adhered to at the time an investment is made or assets are soutilized, a later change in percentage resulting from changes in the value ofthe Fund's portfolio securities or a later change in the rating of a portfoliosecurity will not be considered a violation of policy. 20<PAGE> <TABLE><CAPTION>THOSE RESPONSIBLE FOR MANAGEMENTThe business of the Fund is managed by its Trustees who elect officers who areresponsible for the day-to-day operations of the Fund and who execute policiesformulated by the Trustees. Several of the officers and Trustees of the Fund arealso Officers and Directors of the Adviser or Officers and Directors of theFund's principal distributor, John Hanco*ck Funds, Inc. ("John Hanco*ck Funds"). Positions Held Principal Occupation(s)Name and Address With the Company During the Past Five Years- ---------------- ---------------- -------------------------- <S> <C> <C> Edward J. Boudreau, Jr. * Trustee, Chairman and Chief Chairman, Director and Chief101 Huntington Avenue Executive Officer (1, 2) Executive Officer, the Adviser;Boston, MA 02199 Chairman, Director and ChiefOctober 1944 Executive Officer, The Berkeley Financial Group, Inc. ("The Berkeley Group"); Chairman and Director, NM Capital Management, Inc. ("NM Capital"), John Hanco*ck Advisers International Limited ("Advisers International") and Sovereign Asset Management Corporation ("SAMCorp"); Chairman and Chief Executive Officer, John Hanco*ck Funds, Inc. ("John Hanco*ck Funds"); Chairman, First Signature Bank and Trust Company; Director, John Hanco*ck Insurance Agency, Inc. ("Insurance Agency, Inc."), John Hanco*ck Advisers International (Ireland) Limited ("International Ireland"), John Hanco*ck Capital Corporation and New England/Canada Business Council; Member, Investment Company Institute Board of Governors; Director, Asia Strategic Growth Fund, Inc.; Trustee, Museum of Science; Director, John Hanco*ck Freedom Securities Corporation (until September 1996); Director, John Hanco*ck Signature Services, Inc. ("Signature Services") (until January 1997). - ------------------* Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940.(1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees.(2) A member of the Investment Committee of the Adviser. 21<PAGE> Positions Held Principal Occupation(s)Name and Address With the Company During the Past Five Years- ---------------- ---------------- -------------------------- <S> <C> <C> Stephen L. Brown* Trustee Chairman and Chief ExecutiveJohn Hanco*ck Place Officer, John Hanco*ck Mutual LifeP.O. Box 111 Insurance Company; Director, theBoston, MA 02117 Adviser, John Hanco*ck Funds,July 1937 Insurance Agency, John Hanco*ck Subsidiaries, Inc., The Berkeley Group, Federal Reserve Bank of Boston, Signature Services (until January 1997;) Trustee, John Hanco*ck Asset Management (until March 1997). James F. Carlin Trustee Chairman and CEO, Carlin233 West Central Street Consolidated, Inc.Natick, MA 01760 (management/investments); Director,April 1940 Arbella Mutual (insurance), Health Plan Services, Inc., Massachusetts Health and Education Tax Exempt Trust, Flagship Healthcare, Inc., Carlin Insurance Agency, Inc., West Insurance Agency, Inc. (until May 1995), Uno Restaurant Corp.; Chairman, Massachusetts Board of Higher Education (since 1995). - ------------------* Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940.(1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees.(2) A member of the Investment Committee of the Adviser. 22<PAGE> Positions Held Principal Occupation(s)Name and Address With the Company During the Past Five Years- ---------------- ---------------- -------------------------- <S> <C> <C> William H. Cunningham Trustee Chancellor, University of Texas601 Colorado Street System and former President of theO'Henry Hall University of Texas, Austin, Texas;Austin, TX 78701 Lee Hage and Joseph D. JamailJanuary 1944 Regents Chair of Free Enterprise; Director, LaQuinta Motor Inns, Inc. (hotel management company) (1985-1998); Jefferson-Pilot Corporation (diversified life insurance company) and LBJ Foundation Board (education foundation); Advisory Director, Chase Bank (formerly Texas Commerce Bank - Austin). Ronald R. Dion Trustee President and Chief Executive250 Boylston Street Officer, R.M. Bradley & Co., Inc.;Boston, MA 02116 Director, The New England CouncilMarch 1946 and Massachusetts Roundtable; Trustee, North Shore Medical Center and a corporator of the Eastern Bank; Trustee, Emmanuel College. Harold R. Hiser, Jr. Trustee Executive Vice President,123 Highland Avenue Schering-Plough CorporationShort Hill, NJ 07078 (pharmaceuticals) (retired 1996);October 1931 Director, ReCapital Corporation (reinsurance) (until 1995).- ------------------* Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940.(1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees.(2) A member of the Investment Committee of the Adviser. 23<PAGE> Positions Held Principal Occupation(s)Name and Address With the Company During the Past Five Years- ---------------- ---------------- -------------------------- <S> <C> <C> Anne C. Hodsdon * Trustee and President (1,2) President, Chief Operating Officer,101 Huntington Avenue Chief Investment Officer andBoston, MA 02199 Director, the Adviser, The BerkeleyAugust 1953 Group; Executive Vice President and Director, John Hanco*ck Funds; Director, Advisers International, Insurance Agency, Inc. and International Ireland; President and Director, SAMCorp. and NM Capital; Executive Vice President, the Adviser (until December 1994); Director, Signature Services (until January 1997).Charles L. Ladner Trustee Senior Vice President and ChiefUGI Corporation Financial Officer, UGI CorporationP.O. Box 858 (Public Utility Holding Company)Valley Forge, PA 19482 (retired 1998); Vice President andFebruary 1938 Director for AmeriGas, Inc. (retired 1998); Vice President of AmeriGas Partners, L.P. (until 1997); Director, EnergyNorth, Inc. (until 1995).- ------------------* Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940.(1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees.(2) A member of the Investment Committee of the Adviser. 24<PAGE> Positions Held Principal Occupation(s)Name and Address With the Company During the Past Five Years- ---------------- ---------------- -------------------------- <S> <C> <C> Leo E. Linbeck, Jr. Trustee Chairman, President, Chief Executive3810 W. Alabama Officer and Director, LinbeckHouston, TX 77027 Corporation (a holding companyAugust 1934 engaged in various phases of the construction industry and warehousing interests); Former Chairman, Federal Reserve Bank of Dallas (1992, 1993); Chairman of the Board, Linbeck Construction Corporation; Director, Duke Energy Corporation (a diversified energy company), Daniel Industries, Inc. (manufacturer of gas measuring products and energy related equipment), GeoQuest International Holdings, Inc. (a geophysical consulting firm); Director, Greater Houston Partnership. Steven R. Pruchansky Trustee (1) Director and President, Mast4327 Enterprise Avenue Holdings, Inc. (since 1991);Naples, FL 34104 Director, First Signature Bank &August 1944 Trust Company (until August 1991); Director, Mast Realty Trust (until 1994); President, Maxwell Building Corp. (until 1991).- ------------------* Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940.(1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees.(2) A member of the Investment Committee of the Adviser. 25<PAGE> Positions Held Principal Occupation(s)Name and Address With the Company During the Past Five Years- ---------------- ---------------- -------------------------- <S> <C> <C> Richard S. Scipione * Trustee (1) General Counsel, John Hanco*ck MutualJohn Hanco*ck Place Life Insurance Company; Director,P.O. Box 111 the Adviser, John Hanco*ck Funds,Boston, MA 02117 Signator Investors, Inc., InsuranceAugust 1937 Agency, Inc., John Hanco*ck Subsidiaries, Inc., SAMCorp. and NM Capital; The Berkeley Group; JH Networking Insurance Agency, Inc.; Signature Services (until January 1997).Norman H. Smith Trustee Lieutenant General, United States243 Mt. Oriole Lane Marine Corps; Deputy Chief of StaffLinden, VA 22642 for Manpower and Reserve Affairs,March 1933 Headquarters Marine Corps; Commanding General III Marine Expeditionary Force/3rd Marine Division (retired 1991).- ------------------* Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940.(1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees.(2) A member of the Investment Committee of the Adviser. 26<PAGE> Positions Held Principal Occupation(s)Name and Address With the Company During the Past Five Years- ---------------- ---------------- -------------------------- <S> <C> <C> John P. Toolan Trustee Director, The Smith Barney Muni Bond13 Chadwell Place Funds, The Smith Barney Tax-FreeMorristown, NJ 07960 Money Funds, Inc., Vantage MoneySeptember 1930 Market Funds (mutual funds), The Inefficient-Market Fund, Inc. (closed-end investment company) and Smith Barney Trust Company of Florida; Chairman, Smith Barney Trust Company (retired December, 1991); Director, Smith Barney, Inc., Mutual Management Company and Smith Barney Advisers, Inc. (investment advisers) (retired 1991); Senior Executive Vice President, Director and member of the Executive Committee, Smith Barney, Harris Upham & Co., Incorporated (investment bankers) (until 1991). Osbert M. Hood Senior Vice President and Chief Senior Vice President , Chief101 Huntington Avenue Financial Officer Financial Officer and Treasurer, theBoston, MA 02199 Adviser, the Berkeley Group and JohnAugust 1952 Hanco*ck Funds, Inc.; Vice President and Chief Financial Officer, John Hanco*ck Mutual Life Insurance Company Retail Sector (until 1997).- ------------------* Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940.(1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees.(2) A member of the Investment Committee of the Adviser. 27<PAGE> Positions Held Principal Occupation(s)Name and Address With the Company During the Past Five Years- ---------------- ---------------- -------------------------- <S> <C> <C> John A. Morin Vice President Vice President and Secretary, the101 Huntington Avenue Adviser, The Berkeley Group,Boston, MA 02199 Signature Services, John Hanco*ckJuly 1950 Funds, NM Capital and SAMCorp.; Clerk, Insurance Agency, Inc.; Counsel, John Hanco*ck Mutual Life Insurance Company (until February 1996). Susan S. Newton Vice President and Secretary Vice President, the Adviser; John101 Huntington Avenue Hanco*ck Funds, Signature ServicesBoston, MA 02199 and The Berkeley Group.March 1950James J. Stokowski Vice President, Treasurer and Chief Vice President, the Adviser.101 Huntington Avenue Accounting OfficerBoston, MA 02199November 1946- ------------------* Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940.(1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees.(2) A member of the Investment Committee of the Adviser.</TABLE>All of the officers listed are officers or employees of the Adviser oraffiliated companies. Some of the Trustees and officers may also be officersand/or Directors and/or Trustees of one or more of the other funds for which theAdviser serves as investment adviser. 28<PAGE>As of March 3, 1999 the officers and Trustees of the Fund as a groupbeneficially owned less than 1% of the outstanding shares of the Fund. As ofthat date, the following shareholders were the only record holders thatbeneficially owned of 5% or more of the outstanding shares of the Fund: Percentage of TotalName and Outstanding SharesAddress of Shareholder Class of Shares of the Class of the Fund- ---------------------- --------------- ------------------------MLPF&S B 19.51%Sole Benefit of Its CustomersAttn: Fund Administration 974U04800 Deerlake Drive East 2nd FloorJacksonville FL 32246-6484 The following tables provide information regarding the compensation paid by theFund and the other investment companies in the John Hanco*ck Fund Complex to theIndependent Trustees for their services for the Fund's most recently completedfiscal year. Messrs. Boudreau and Scipione and Ms. Hodsdon, each anon-Independent Trustee, and each of the officers of the Fund are interestedpersons of the Adviser, are compensated by the Adviser and/or its affiliates andreceive no compensation from the Fund for their services. Total Compensation from all Aggregate Compensation Funds in John Hanco*ck Fund Trustees from the Fund (1) Complex to Trustees(2)- -------- ----------------- ----------------------James F. Carlin $ 3,607 $ 74,000William H. Cunningham* 3,607 74,000Charles F. Fretz 2,978 74,250Harold R. Hiser, Jr.* 3,442 74,000Charles L. Ladner 3,673 74,250Leo E. Linbeck, Jr. 3,607 74,250Patricia P. McCarter* 2,445 74,250Steven R. Pruchansky* 3,752 77,250Norman H. Smith* 3,721 77,250John P. Toolan* 3,673 74,250 -------- ---------Total $34,505 $ 747,750(1) Compensation for the fiscal year ended May 31, 1998.(2) The total compensation paid by the John Hanco*ck Fund Complex to the Independent Trustees as of the calendar year ended December 31, 1997. As of this date, there were sixty-seven funds in the John Hanco*ck Funds Complex with each of these Independent Trustees serving on thirty-two funds. As of December 31, 1997, the value of the aggregate deferredcompensation from all funds in the John Hanco*ck Funds Complex for Mr. Cunninghamwas $220,106, for Mr. Hiser was $103,868, for Ms. McCarter was $159,075, for Mr.Pruchansky was $68,102, for Mr. Smith was $70,607 and for Mr. Toolan was$281,131 under the John Hanco*ck Group of Funds Deferred Compensation Plan forIndependent Trustees. 29<PAGE>INVESTMENT ADVISORY AND OTHER SERVICESThe Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603,was organized in 1968 and has more than $30 billion in assets under managementin its capacity as investment adviser to the Fund and the other mutual funds andpublicly traded investment companies in the John Hanco*ck group of funds, havinga combined total of over 1,400,000 shareholders. The Adviser is an affiliate ofthe Life Company, one of the most recognized and respected financialinstitutions in the nation. With total assets under management of more than $100billion, the Life Company is one of the ten largest life insurance companies inthe United States, and carries a high rating from Standard & Poor's and A.M.Best. Founded in 1862, the Life Company has been serving clients for over 130years.The Fund has entered into an investment management contract (the "AdvisoryAgreement") with the Adviser which was approved by the Fund's shareholders.Pursuant to the Advisory Agreements, the Adviser will: (a) furnish continuouslyan investment program for the Fund and determine, subject to the overallsupervision and review of the Trustees, which investments should be purchased,held, sold or exchanged and (b) provide supervision over all aspects of theFund's operations except those which are delegated to a custodian, transferagent or other agent.The Fund bears all cost of its organization and operation, including but notlimited to expenses of preparing, printing and mailing all shareholders'reports, notices, prospectuses, proxy statements and reports to regulatoryagencies; expenses relating to the issuance, registration and qualification ofshares; government fees; interest charges; expenses of furnishing toshareholders their account statements; taxes; expenses of redeeming shares;brokerage and other expenses connected with the execution of portfoliosecurities transactions; expenses pursuant to the Fund's plan of distribution;fees and expenses of custodian including those for keeping books and accounts,maintaining a committed line of credit, and calculating the net asset value ofshares; fees and expenses of transfer agents and dividend disbursing agents;legal, accounting, financial, management, tax and auditing fees and expenses ofthe Fund (including and allocable portion of the cost of the Adviser's employeesrendering such services to the Fund); the compensation and expenses of Trusteeswho are not other wise affiliated with the Trust, the Adviser or any of theiraffiliates; expenses of Trustees' and shareholders' meeting; trade associationmemberships; insurance premiums; and any extraordinary expenses.As compensation for its services under the Advisory Agreements, the Fund paysthe Adviser monthly a fee based on a stated percentage of the average of thedaily net assets of the Fund as follows: FeeAverage Daily Net Assets (Annual Rate)- ------------------------ -------------First $200 million 0.650%Next $300 million 0.625%Over $500 million 0.600% From time to time, the Adviser may reduce its fee or make other arrangements tolimit the Fund's expenses to a specified percentage of average daily net assets.The Adviser retains the right to reimpose a fee and recover any other paymentsto the extent that, at the end of any fiscal year, the Fund's annual expensesfall below this limit. Effective after December 4, 1998, the Adviser hastemporarily reduced its advisory fee to 0.50% of the average of the daily netassets of the Fund. 30<PAGE>Securities held by the Fund may also be held by other funds or investmentadvisory clients for which the Adviser or its affiliates provide investmentadvice. Because of different investment objectives or other factors, aparticular security may be bought for one or more funds or clients when one ormore are selling the same security. If opportunities for purchase or sale ofsecurities by the Adviser for the Fund or for other funds or clients for whichthe Adviser renders investment advice arise for consideration at or about thesame time, transactions in such securities will be made, insofar as feasible,for the Fund or clients in a manner deemed equitable to all of them. To theextent that transactions on behalf of more than one client of the Adviser or itsaffiliates may increase the demand for securities being purchased or the supplyof securities being sold, there may be an adverse effect on price.Pursuant to the Advisory Agreement, the Adviser is not liable for any error ofjudgment or mistake of law or for any loss suffered by the Fund in connectionwith the matters to which their respective contracts relate, except a lossresulting from willful misfeasance, bad faith or gross negligence on the part ofthe Adviser in the performance of its duties or from its reckless disregard ofthe obligations and duties under the Advisory Agreement.Under the Advisory Agreement, the Fund may use the name "John Hanco*ck" or anyname derived from or similar to it only for as long as the Advisory Agreement orany extension, renewal or amendment thereof remains in effect. If the Fund'sAdvisory Agreement is no longer in effect, the Fund (to the extent that itlawfully can) will cease to use such name or any other name indicating that itis advised by or otherwise connected with the Adviser. In addition, the Adviseror the Life Company may grant the non-exclusive right to use the name "JohnHanco*ck" or any similar name to any other corporation or entity, including butnot limited to any investment company of which the Life Company or anysubsidiary or affiliate thereof or any successor to the business of anysubsidiary or affiliate thereof shall be the investment adviser.The continuation of the Advisory Agreement and Distribution Agreement wasapproved by all of the Trustees. The Advisory Agreement and the DistributionAgreement discussed below will continue in effect from year to year, providedthat its continuance is approved annually both (i) by the holders of a majorityof the outstanding voting securities of the Trust or by the Trustees, and (ii)by a majority of the Trustees who are not parties to the Agreement, or"interested persons" of any such parties. Both Agreements may be terminated on60 days written notice by any party or by a vote of a majority of theoutstanding voting securities of the Fund and will terminate automatically ifassigned.The Advisory fees payable by the Fund to the Adviser, were as follows:12/22/94-10/31/95 $1,612,80611/1/95-10/31/96 $3,952,66911/1/96-5/31/97 $1,999,6436/1/97-5/31/98 $3,155,183Administrative Services Agreement. The Fund previously was a party to anadministrative services agreement (the "Services Agreement") with TransamericaFund Management Company ("TFMC"), pursuant to which TFMC performed bookkeepingand accounting services and functions, including preparing and maintainingvarious accounting books, records and other documents and keeping such generalledgers and portfolio accounts as are reasonably necessary for the operation ofthe Fund. Other administrative services included communications in response toshareholder inquiries and certain printing expenses of various financialreports. In addition, such staff and office space, facilities and equipment wasprovided as necessary to provide administrative services to the Fund. TheServices Agreement was amended in connection with the appointment of the Adviseras adviser to the Fund to permit services under the Agreement to be provided tothe Fund by the Adviser and its affiliates. The Services Agreement wasterminated during the 1995 fiscal year. 31<PAGE>The amount of $16,694 for the Fund reflects the total of administrative servicesfees paid to the Adviser for the fiscal year ended October 31, 1995:Accounting and Legal Services Agreement. The Trust, on behalf the Fund, is aparty to an Accounting and Legal Services Agreement with the Adviser. Pursuantto this agreement, the Adviser provides the Fund with certain tax, accountingand legal services. For the fiscal year ended October 31, 1996, the Fund paidthe Adviser $96,304 for services under this agreement. For the period fromNovember 1, 1996 to May 31, 1997, the Fund paid the Adviser $59,313 for servicesunder this agreement. For the fiscal year ended May 31, 1998, the Fund paid theAdviser $88,284 under this agreement.In order to avoid conflicts with portfolio trades for the Fund, the Adviser andthe Fund have adopted extensive restrictions on personal securities trading bypersonnel of the Adviser and its affiliates. Some of these restrictions are:pre-clearance for all personal trades and a ban on the purchase of initialpublic offerings, as well as contributions to specified charities of profits onsecurities held for less than 91 days. These restrictions are a continuation ofthe basic principle that the interests of the Fund and its shareholders comefirst.DISTRIBUTION CONTRACTSThe Fund has a Distribution Agreement with John Hanco*ck Funds. Under theagreement, John Hanco*ck Funds is obligated to use its best efforts to sellshares of each class of the Fund. Shares of the Fund are also sold by selectedbroker-dealers (the "Selling Brokers") which have entered into selling agencyagreements with John Hanco*ck Funds. John Hanco*ck Funds accepts orders for thepurchase of the shares of the Fund that are continually offered at net assetvalue next determined, plus any applicable sales charge, if any. In connectionwith the sale of Fund shares, John Hanco*ck Funds and Selling Brokers receivecompensation from a sales charge imposed, in the case of Class A shares, at thetime of sale. In the case of Class B or Class C shares, the broker receivescompensation immediately but John Hanco*ck Funds is compensated on a deferredbasis.For the fiscal years ended October 31, 1995, 1996, for the period from November1, 1996 to May 31, 1997 and for the fiscal year ended May 31, 1998, thefollowing amounts reflect (a) the total underwriting commissions for sales ofthe Fund's Class A shares and (b) the portion of such amount retained by JohnHanco*ck Funds. The remainder of the underwriting commissions were reallowed toSelling Brokers. 10/31/1995 (a) $35,314 and (b) $6,44210/31/1996 (a)$515,753 and (b) $65,449 11/1/96-5/31/97 (a)$105,964 and (b)$115,4306/1/97-5/31/98 (a)$176,340 and (b) $20,547The Fund's Trustees adopted Distribution Plans with respect to each class ofshares (the "Plans") pursuant to Rule 12b-1 under the Investment Company Act of1940. Under the Plans, the Fund will pay distribution and service fees at anaggregate annual rate of up to 0.25% for Class A shares and 1.00% for Class Band Class C shares, of the Fund's average daily net assets attributable toshares of that class. However, the service fee will not exceed 0.25% of theFund's average daily net assets attributable to each class of shares. Thedistribution fees will be used to reimburse John Hanco*ck Funds for itsdistribution expenses, including but not limited to: (i) initial and ongoingsales compensation to Selling Brokers and others (including affiliates of JohnHanco*ck Funds) engaged in the sale of Fund shares; (ii) marketing, promotionaland overhead expenses incurred in connection with the distribution of Fundshares; and (iii) with respect to Class B and Class C shares only, interestexpenses on unreimbursed distribution expenses. The service fees will be used to 33<PAGE>compensate Selling Brokers and others for providing personal and accountmaintenance services to shareholders. In the event that John Hanco*ck Funds isnot fully reimbursed for payments or expenses under the Class A Plan, theseexpenses will not be carried beyond twelve months from the date they wereincurred. Unreimbursed expenses under the Class B and Class C Plans will becarried forward together with interest on the balance of these unreimbursedexpenses. The Fund does not treat unreimbursed expenses under Class B and ClassC Plans as a liability of the Fund, because the Trustees may terminate the ClassB and/or Class C Plans at any time. For the fiscal year ended May 31, 1998 anaggregate of $12,062,593 of distribution expenses or 8.40% of the average netassets of the Fund's Class B shares was not reimbursed or recovered by JohnHanco*ck Funds through the receipt of deferred sales charges or Rules 12b-1 feesin prior periods. Class C shares of the Fund did not commence operations untilApril 1, 1999; therefore there are no unreimbursed expenses to report.The Plans were approved by a majority of the voting securities of the Fund. ThePlans and all amendments were approved by the Trustees, including a majority ofthe Trustees who are not interested persons of the Fund and who have no director indirect financial interest in the operation of the Plans ( the "IndependentTrustees"), by votes cast in person at meetings called for the purpose of votingon such Plans.Pursuant to the Plans, at least quarterly, John Hanco*ck Funds provide the Fundwith a written report of the amounts expended under the Plans and the purposefor which these expenditures were made. The Trustees review these reports on aquarterly basis to determine their continued appropriateness.The Plans provide that they will continue in effect only so long as theircontinuance is approved at least annually by a majority of both the Trustees andIndependent Trustees. The Plans provide that they may be terminated withoutpenalty, (a) by vote of a majority of the Independent Trustees, (b) by a vote ofa majority of the Fund's outstanding shares of the applicable class upon 60days' written notice to John Hanco*ck Funds, and (c) automatically in the eventof assignment. Each of the Plans further provides that it may not be amended toincrease the maximum amount of the fees for the services described thereinwithout the approval of a majority of the outstanding shares of the class of theapplicable Fund which has voting rights to that Plan. Each of the Plans providethat no material amendment to the Plan will be effective unless it is approvedby a vote of a majority of the Trustees and the Independent Trustees of theFund. The holders of Class A, Class B and Class C shares have exclusive votingrights with respect to the Plan applicable to their respective class of shares.In adopting the Plans, the Trustees concluded that, in their judgment, these isa reasonable likelihood that the Plans will benefit the holders of theapplicable class of shares of the Fund.Amounts paid to John Hanco*ck Funds by any class of shares of the Fund will notbe used to pay the expenses incurred with respect to any other class of sharesof the Fund; provided, however, that expenses attributable to the Fund as awhole will be allocated, to the extent permitted by law, according to a formulabased upon gross sales dollars and/or average daily net assets of each suchclass, as may be approved from time to time by vote of a majority of Trustees.From time to time, the Fund may participate in joint distribution activitieswith other Funds and the costs of those activities will be borne by the Fund inproportion to the relative net asset value of the participating Funds. 33<PAGE>During the fiscal year ended May 31, 1998, the Fund paid John Hanco*ck Funds thefollowing amounts of expenses in connection with their services. Class C sharesdid not commence operations until April 1, 1999; therefore, there are notexpenses to report.<TABLE><CAPTION> Expense Items ------------- Printing and Mailing of Interest, Prospectuses Compensation to Expenses of Carrying or to New Selling John Hanco*ck Other Finance Advertising Shareholders Brokers Funds Charges ----------- ------------ ------- ----- ------- <S> <C> <C> <C> <C> <C> Class A $14,308 $1,954 $188,804 $24,236 $0 Class B $ 9,863 $1,536 $ 86,654 $16,580 $0</TABLE>SALES COMPENSATIONAs part of their business strategies, each of the John Hanco*ck funds, along withJohn Hanco*ck Funds, pay compensation to financial services firms that sell thefunds' shares. These firms typically pass along a portion of this compensationto your financial representative.Compensation payments originate from two sources: from sales charges and from12b-1 fees that are paid out of the funds' assets. The sales charges and 12b-1fees paid by investors are detailed in the prospectus and under "DistributionContracts" in this Statement of Additional Information. The portions of theseexpenses that are reallowed to financial services firms are shown on the nextpage.Whenever you make an investment in the Fund, the financial services firmreceives either a reallowance from the initial sales charge or a commission, asdescribed below. The firm also receives the first year's service fee at thistime. Beginning with the second year after an investment is made, the financialservices firm receives an annual service fee of 0.25% of its total eligible netassets. This fee is paid quarterly in arrears.Financial services firms selling large amounts of fund shares may receive extracompensation. This compensation, which John Hanco*ck Funds pays out of its ownresources, may include asset retention fees as well as reimbursem*nt formarketing expenses. 34<PAGE><TABLE><CAPTION> Sales charge Maximum First year paid by investors Reallowance Service fee Maximum (% of offering or commission (% of net Total compensation (1) --------------- ---------- Class A Investments price) (% of offering price) investment) (% of offering price)- ------------------- ------ --------------------- ----------- --------------------- <S> <C> <C> <C> <C> Up to $99,999 4.50% 3.76% 0.25% 4.00%$100,000 - $249,999 3.75% 3.01% 0.25% 4.00%$250,000 - $499,999 2.75% 2.06% 0.25% 2.30%$500,000 - $999,999 2.00% 1.51% 0.25% 1.75%Regular investments of $1 millionOr moreFirst $1M - $4,999,999 -- 0.75% 0.25% 1.00%Next $1M - $5M above that -- 0.25% 0.25% 0.50% (2)Next $1 or more above that -- 0.00% 0.25% 0.25% (2) Maximum First year Reallowance service fee Maximum total or commission (% of net compensationClass B Investments (% of offering price) investment) (% of offering price)- ------------------- --------------------- ----------- ---------------------All amounts 3.75% 0.25% 4.00% Maximum reallowance First year Maximum or commission service fee total compensationClass C investments (% of offering price) (% of net (% of offering price)- ------------------- --------------------- ---------- --------------------- investment) ---------- All amounts 0.75% 0.25% 1.00%</TABLE>(1) Reallowance/commission percentages and service fee percentages arecalculated from different amounts, and therefore may not equal totalcompensation percentages if combined using simple addition.(2) For Group Investment Program sales, the maxim total compensation forinvestments of $1 million or more is 1.00% of the offering price (one year CDSCof 1.00% applies for each sale.)CDSC revenues collected by John Hanco*ck Funds may be used to pay commissionswhen there is no initial sales charge.NET ASSET VALUEFor purposes of calculating the net asset value ("NAV") of the shares of theFund, the following procedures are utilized wherever applicable. 35<PAGE>Debt investment securities are valued on the basis of valuations furnished by aprincipal market maker or a pricing service, both of which generally utilizeelectronic data processing techniques to determine valuations for normalinstitutional size trading units of debt securities without exclusive relianceupon quoted prices.Equity securities traded on a principal exchange or NASDAQ National MarketIssues are generally valued at last sale price on the day of valuation.Securities in the aforementioned category for which no sales are reported andother securities traded over-the-counter are generally valued at the meanbetween the current closing bid and asked prices.Short-term debt investments which have a remaining maturity of 60 days or lessare generally valued at amortized cost which approximates market value. Ifmarket quotations are not readily available or if in the opinion of the Adviserany quotation or price is not representative of true market value, the fairvalue of the security may be determined in good faith in accordance withprocedures approved by the Trustees.Foreign securities are valued on the basis of quotations from the primary marketin which they are traded. Any assets or liabilities expressed in terms offoreign currencies are translated into U.S. dollars by the custodian bank basedon London currency exchange quotations as of 5:00 p.m., London time (12:00 noon,New York time) on the date of any determination of the Fund's NAV. If quotationsare not readily available, or the value has been materially affected by theevents occurring after closing of a foreign market, assets are valued by amethod that Trustees believe accurately reflects fair value.The NAV for each class of the Fund is determined each business day at the closeof regular trading on the New York Stock Exchange (typically 4:00 p.m. EasternTime) by dividing a class net assets by the number of its shares outstanding. Onany day an international market is closed and the New York Stock Exchange isopen, any foreign securities will be valued at the prior day's close with thecurrent day's exchange rate. Trading of foreign securities may take place onSaturdays and U.S. business holidays on which the Fund's NAV is not calculated.Consequently, the Fund's portfolio securities may trade and the NAV of theFund's redeemable securities may be significantly affected on days when ashareholder has no access to the Fund.INITIAL SALES CHARGE ON CLASS A SHARESShares of the Fund are offered at a price equal to their net asset value plus asales charge which, at the option of the purchaser, may be imposed either at thetime of purchase (the "initial sales charge alternative") or on a contingentdeferred basis (the "deferred sales charge alternative"). Share certificateswill not be issued unless requested by the shareholder in writing, and then onlywill be issued for full shares. The Trustees of the Fund reserve the right tochange or waive the Fund's minimum investment requirements and to reject anyorder to purchase shares (including purchase by exchange) when in the judgmentof the Adviser such rejection is in the Fund's best interest.The sales charges applicable to purchases of Class A shares of the Fund aredescribed in the Prospectus. Methods of obtaining reduced sales charges referredto generally in the Prospectus are described in detail below. In calculating thesales charge applicable to current purchases of Class A shares, the investor isentitled to accumulate current purchases with the greater of the current value(at offering price) of the Class A shares of the Fund, owned by the investor, orif John Hanco*ck Signature Services, Inc. ("Signature Services") is notified bythe investor's dealer or the investor at the time of the purchase, the cost ofthe Class A shares owned. 36<PAGE>Without Sales Charge. Class A shares may be offered without a front-end salescharge or contingent deferred sales chares ("CDSC") to various individuals andinstitutions as follows:o A Trustee or officer of the Trust; a Director or officer of the Adviser and its affiliates or Selling Brokers; employees or sales representatives of any of the foregoing; retired officers, employees or Directors of any of the foregoing; a member of the immediate family (spouse, children, grandchildren, mother, father, sister, brother, mother-in-law, father-in-law, daughter-in-law, son-in-law, niece, nephew, grandparents and same sex domestic partner) of any of the foregoing, or any fund, pension, profit sharing or other benefit plan of the individuals described above.o A broker, dealer, financial planner, consultant or registered investment advisor that has entered into a signed agreement with John Hanco*ck Funds providing specifically for the use of Fund shares in fee-based investment products or services made available to their clients.o A former participant in an employee benefit plan with John Hanco*ck funds, when he or she withdraws from his or her plan and transfers any or all of his or her plan distributions directly to the Fund.o A member of a class action lawsuit against insurance companies who is investing settlement proceeds.o Retirement plans participating in Merrill Lynch servicing programs, if the Plan has more than $3 million in assets or 500 eligible employees at the date the Plan Sponsor signs the Merrill Lynch Recordkeeping Service Agreement. See your Merrill Lynch financial consultant for further information.o Retirement plans investing through the PruArray Program sponsored by Prudential Securities.o Pension plans transferring assets from a John Hanco*ck variable annuity contract to the Fund pursuant to an exemptive application approved by the Securities Exchange Commission.o Existing full service clients of the Life Company who were group annuity contract holders as of September 1, 1994, and participant directed retirement plans with at least 100 eligible employees at the inception of the Fund account. Each of these investors may purchase Class A shares with no initial sales charge. However, if the shares are redeemed within 12 months after the end of the calendar year in which the purchase was made, a CDSC will be imposed at the following rate: Amount Invested CDSC Rate --------------- --------- $1 to $4,999,999 1.00% Next $5 million to $9,999,999 0.50% Amounts of $10 million and over 0.25%Class A shares may also be purchased without an initial sales charge inconnection with certain liquidation, merger or acquisition transactionsinvolving other investment companies or personal holding companies. 37<PAGE> Combination Privilege. In calculating the sales charge applicable to purchasesof Class A shares made at one time, the purchases will be combined to reducesales charges if made by (a) an individual, his or her spouse and their childrenunder the age of 21, purchasing securities for his or their own account, (b) atrustee or other fiduciary purchasing for a single trust, estate or fiduciaryaccount and (c) groups which qualify for the Group Investment Program (seebelow). A company's (not an individual's) qualified and non-qualified retirementplan investments can be combined to take advantage of this privilege. Furtherinformation about combined purchases, including certain restrictions on combinedgroup purchases, is available from Signature Services or a Selling Broker'srepresentative.Accumulation Privilege. Investors (including investors combining purchases) whoare already Class A shareholders may also obtain the benefit of the reducedsales charge by taking into account not only the amount being invested but alsothe investor's purchase price or current value of the Class A shares of all JohnHanco*ck funds which carry a sales charge already held by such person. Class Ashares of John Hanco*ck money market funds will only be eligible for theaccumulation privilege if the investor has previously paid a sales charge on theamount of those shares. Retirement plan investors may include the value of ClassB shares if Class B shares held are greater than $1 million. Retirement plansmust notify Signature Services to utilize. A company's (not an individual's)qualified and non-qualified retirement plan investments can be combined to takeadvantage of this privilege. Group Investment Program. Under the Combination and Accumulation Privileges, allmembers of a group may combine their individual purchases of Class A shares topotentially qualify for breakpoints in the sales charge schedule. This featureis provided to any group which (1) has been in existence for more than sixmonths, (2) has a legitimate purpose other than the purchase of mutual fundshares at a discount for its members, (3) utilizes salary deduction or similargroup methods of payment, and (4) agrees to allow sales materials of the fund inits mailings to members at a reduced or no cost to John Hanco*ck Funds. Letter of Intention. Reduced sales charges are also applicable to investmentsmade pursuant to a Letter of Intention (the "LOI"), which should be readcarefully prior to its execution by an investor. The Fund offers two optionsregarding the specified period for making investments under the LOI. Allinvestors have the option of making their investments over a specified period ofthirteen (13) months. Investors who are using the Fund as a funding medium for aretirement plan, however, may opt to make the necessary investments called forby the LOI over a forty-eight (48) month period. These retirement plans includetraditional, Roth and Education IRAs, SEP, SARSEP, 401(k), 403(b) (includingTSAs), SIMPLE IRA, SIMPLE 401(k), Money Purchase Pension, Profit Sharing andSection 457 plans. An individual's non-qualified and qualified retirement planinvestments cannot be combined to satisfy LOI of 48 months. Non-qualified andqualified retirement plan investments cannot be combined to satisfy an LOI of 48months. Such an investment (including accumulations and combinations but notincluding reinvested dividends) must aggregate $100,000 or more invested duringthe specified period from the date of the LOI or from a date within ninety (90)days prior thereto, upon written request to Signature Services. The sales chargeapplicable to all amounts invested under the LOI is computed as if the aggregateamount intended to be invested had been invested immediately. If such aggregateamount is not actually invested, the difference in the sales charge actuallypaid and the sales charge payable had the LOI not been in effect is due from theinvestor. However, for the purchases actually made with the specified period(either 13 or 48 months), the sales charge applicable will not be higher thanthat which would have been applied (including accumulations and combinations)had the LOI been for the amount actually invested. 38<PAGE>The LOI authorizes Signature Services to hold in escrow sufficient Class Ashares (approximately 5% of the aggregate) to make up any difference in salescharges on the amount intended to be invested and the amount actually invested,until such investment is completed within the specified period, at which timethe escrow shares will be released. If the total investment specified in the LOIis not completed, the Class A shares held in escrow may be redeemed and theproceeds used as required to pay such sales charges as may be due. By signingthe LOI, the investor authorizes Signature Services to act as hisattorney-in-fact to redeem any escrowed Class A shares and adjust the salescharge, if necessary. A LOI does not constitute a binding commitment by aninvestor to purchase, or by the Fund to sell, any additional shares and may beterminated at any time.DEFERRED SALES CHARGE ON CLASS B AND CLASS C SHARESInvestments in Class B and Class C shares are purchased at net asset value pershare without the imposition of an initial sales charge so that the Fund willreceive the full amount of the purchase payment.Contingent Deferred Sales Charge. Class B and Class C shares which are redeemedwithin six years or one year of purchase, respectively, will be subject to aCDSC at the rates set forth in the Prospectus as a percentage of the dollaramount subject to the CDSC. The charge will be assessed on an amount equal tothe lesser of the current market value or the original purchase cost of theClass B or Class C shares being redeemed. No CDSC will be imposed on increasesin account value above the initial purchase prices, including all shares derivedfrom reinvestment of dividends or capital gains distributions.Class B shares are not available to full-service retirement plans administeredby Signature Services or the Life Company that had more than 100 eligibleemployees at the inception of the Fund account.The amount of the CDSC, if any, will vary depending on the number of years fromthe time of payment for the purchase of Class B shares until the time ofredemption of such shares. Solely for purposes of determining the number ofyears from the time of any payment for the purchase of both Class B and Class Cshares, all payments during a month will be aggregated and deemed to have beenmade on the first day of the month.In determining whether a CDSC applies to a redemption, the calculation will bedetermined in a manner that results in the lowest possible rate being charged.It will be assumed that your redemption comes first from shares you have heldbeyond the six-year CDSC redemption period for Class B or one year CDSCredemption period for Class C or those you acquired through dividend and capitalgain reinvestment, and next from the shares you have held the longest during thesix-year period for Class B shares. For this purpose, the amount of any increasein a share's value above its initial purchase price is not regarded as a shareexempt from CDSC. Thus, when a share that has appreciated in value is redeemedduring the CDSC period, a CDSC is assessed only on its initial purchase price.When requesting a redemption for a specific dollar amount, please indicate ifyou require the proceeds to equal the dollar amount requested. If not indicated,only the specified dollar amount will be redeemed from your account and theproceeds will be less any applicable CDSC. 39<PAGE>Example:You have purchased 100 shares at $10 per share. The second year after yourpurchase, your investment's net asset value per share has increased by $2 to$12, and you have gained 10 additional shares through dividend reinvestment.If you redeem 50 shares at this time your CDSC will be calculated as follows: oProceeds of 50 shares redeemed at $12 per shares (50 x 12) $600.00 o*Minus Appreciation ($12 - $10) x 100 shares (200.00) o Minus proceeds of 10 shares not subject to CDSC (dividend reinvestment) (120.00) ------- oAmount subject to CDSC $280.00 *The appreciation is based on all 100 shares in the lot not just the shares being redeemed.Proceeds from the CDSC are paid to John Hanco*ck Funds and are used in whole orin part by John Hanco*ck Funds to defray its expenses related to providingdistribution-related services to the Fund in connection with the sale of theClass B and Class C shares, such as the payment of compensation to selectSelling Brokers for selling Class B and Class C shares. The combination of theCDSC and the distribution and service fees facilitates the ability of the Fundto sell the Class B and Class C shares without a sales charge being deducted atthe time of the purchase.Waiver of Contingent Deferred Sales Charge. The CDSC will be waived onredemptions of Class B and Class C shares and of Class A shares that are subjectto a CDSC, unless indicated otherwise, in the circ*mstances defined below:For all account types:* Redemptions made pursuant to the Fund's right to liquidate your account if you own shares worth less than $1,000.* Redemptions made under certain liquidation, merger or acquisition transactions involving other investment companies or personal holding companies.* Redemptions due to death or disability. (Does not apply to trust accounts unless trust is being dissolved.)* Redemptions made under the Reinstatement Privilege, as described in "Sales Charge Reductions and Waivers" in the Prospectus.* Redemptions where the proceeds are used to purchase a John Hanco*ck Declaration Variable annuity.* Redemptions of Class B (but not Class C) shares made under a periodic withdrawal plan, or redemptions for fees charged by planners or advisors for advisory services, as long as your annual redemptions do not exceed 12% of your account value, including reinvested dividends, at the time you established your periodic withdrawal plan and 12% of the value of subsequent investments (less redemptions) in that account at the time you notify Signature Services. (Please note that this waiver does not apply to periodic withdrawal plan redemptions of Class A or Class C shares that are subject to a CDSC.) 40<PAGE>* Redemptions by Retirement plans participating in Merrill Lynch servicing programs, if the Plan has less than $3 million in assets or 500 eligible employees at the date the Plan Sponsor signs the Merrill Lynch Recordkeeping Service Agreement. See your Merrill Lynch financial consultant for further information.* Redemptions of Class A shares by retirement plans that invested through the PruArray Program sponsored by Prudential Securities.For Retirement Accounts (such as traditional, Roth and Education IRAs, SIMPLEIRA, SIMPLE 401(k), Rollover IRA, TSA, 457, 403(b), 401(k), Money PurchasePension Plan, Profit-Sharing Plan and other plans as described in the InternalRevenue Code) unless otherwise noted.* Redemptions made to effect mandatory or life expectancy distributions under the Internal Revenue Code.* Returns of excess contributions made to these plans.* Redemptions made to effect distributions to participants or beneficiaries from employer sponsored retirement plans under sections 401(a) (such as Money Purchase Pension Plans and Profit-Sharing/401(k) Plans, 457 and 408 (SEPs and SIMPLE IRAs) of the Internal Revenue Code.* Redemptions from certain IRA and retirement plans that purchased shares prior to October 1, 1992 and certain IRA plans that purchased shares prior to May 15, 1995.Please see matrix for some examples. 41<PAGE> <TABLE><CAPTION>CDSC Waiver Matrix for Class B and Class C <S> <C> <C> <C> <C> <C> - ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Type of 401 (a) Plan 403 (b) 457 IRA, IRA Non-Distribution (401 (k), Rollover retirement MPP, PSP)- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Death or Waived Waived Waived Waived WaivedDisability- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Over 70 1/2 Waived Waived Waived Waived for 12% of account mandatory value annually distributions in periodic or 12% of payments account value annually in periodic payments.- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Between 59 1/2 Waived Waived Waived Waived for Life 12% of accountand 70 1/2 Expectancy or value annually 12% of account in periodic value annually payments in periodic payments.- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Under 59 1/2 Waived for Waived for Waived for Waived for 12% of account(Class B only) annuity annuity annuity annuity value annually payments (72t) payments (72t) payments (72t) payments (72t) in periodic or 12% of or 12% of or 12% of or 12% of payments account value account value account value account value annually in annually in annually in annually in periodic periodic periodic periodic payments. payments. payments. payments.- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Loans Waived Waived N/A N/A N/A- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Termination of Not Waived Not Waived Not Waived Not Waived N/APlan- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Hardships Waived Waived Waived N/A N/A- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Qualified Domestic Waived Waived Waived N/A N/ARelations Orders- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Termination of Waived Waived Waived N/A N/AEmployment BeforeNormal Retirement Age- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Return of Waived Waived Waived Waived N/AExcess - ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------</TABLE> If you qualify for a CDSC waiver under one of these situations, you must notifySignature Services at the time you make your redemption. The waiver will begranted once Signature Services has confirmed that you are entitled to thewaiver. 42<PAGE>SPECIAL REDEMPTIONSAlthough it would not normally do so, the Fund has the right to pay theredemption price of shares of the Fund in whole or in part in portfoliosecurities as prescribed by the Trustees. When the shareholder sells portfoliosecurities received in this fashion, the shareholder will incur a brokeragecharge. Any such security would be valued for the purpose of making such paymentat the same value as used in determining the Fund's net asset value. The Fundhas elected to be governed by Rule 18f-1 under the Investment Company Act. Underthat rule, the Fund must redeem their shares for cash except to the extent tothat the redemption payments to any shareholder during any 90-day period wouldexceed the lesser of $250,000 or 1% of the Fund's net asset value at thebeginning of such period.ADDITIONAL SERVICES AND PROGRAMSExchange Privilege. The Fund permits exchanges of shares of any class of theFund for shares of the same class in any other John Hanco*ck fund offering thatclass.Exchanges between funds with shares that are not subject to a CDSC are based ontheir respective net asset values. No sales charge or transaction charge isimposed. Shares of the Fund which are subject to a CDSC may be exchanged intoshares of any of the other John Hanco*ck funds that are subject to a CDSC withoutincurring the CDSC; however, the shares acquired in an exchange will be subjectto the CDSC schedule of the shares acquired if and when such shares are redeemed(except that shares exchanged into John Hanco*ck Short-Term Strategic Income Fundand John Hanco*ck Intermediate Government Fund will retain the exchanged fund'sCDSC schedule). For purposes of computing the CDSC payable upon redemption ofshares acquired in an exchange, the holding period of the original shares isadded to the holding period of the shares acquired in an exchange.If a shareholder exchanges Class B shares purchased prior to January 1, 1994(except John Hanco*ck Short-Term Strategic Income Fund) for Class B shares of anyother John Hanco*ck fund, the acquired shares will continue to be subject to theCDSC schedule that was in effect when the exchanged shares were purchased.The Fund reserves the right to require that previously exchanged shares (andreinvested dividends) be in the Fund for 90 days before a shareholder ispermitted a new exchange.The Fund may refuse any exchange order. The Fund may change or cancel itsexchange policies at any time, upon 60 days' notice to its shareholders.An exchange of shares is treated as a redemption of shares of one fund and thepurchase of shares of another for Federal Income Tax purposes. An exchange mayresult in a taxable gain or loss. See "TAX STATUS".Systematic Withdrawal Plan. The Fund permits the establishment of a SystematicWithdrawal Plan. Payments under this plan represent proceeds from the redemptionof shares of the Fund. Since the redemption price of the shares of the Fund maybe more or less than the shareholder's cost, depending upon the market value ofthe securities owned by the Fund at the time of redemption, the distribution ofcash pursuant to this plan may result in realization of gain or loss forpurposes of Federal, state and local income taxes. The maintenance of aSystematic Withdrawal Plan concurrently with purchases of additional shares ofthe Fund could be disadvantageous to a shareholder because of the initial salescharge payable on such purchases of Class A shares and the CDSC imposed onredemptions of Class B and Class C shares and because redemptions are taxableevents. Therefore, a shareholder should not purchase shares at the same time aSystematic Withdrawal Plan is in effect. The Fund reserve the right to modify ordiscontinue the Systematic Withdrawal Plan of any shareholder on 30 days' priorwritten notice to such shareholder, or to discontinue the availability of suchplan in the future. The shareholder may terminate the plan at any time by givingproper notice to Signature Services. 43<PAGE>Monthly Automatic Accumulation Program ("MAAP"). The program is explained in theProspectus. The program, as it relates to automatic investment checks, issubject to the following conditions:The investments will be drawn on or about the day of the month indicated.The privilege of making investments through the MAAP may be revoked by SignatureServices without prior notice if any investment is not honored by theshareholder's bank. The bank shall be under no obligation to notify theshareholder as to the non-payment of any checks.The program may be discontinued by the shareholder either by calling SignatureServices or upon written notice to Signature Services which is received at leastfive (5) business days prior to the order date of any investment.Reinstatement and Reinvestment Privilege. If Signature Services is notifiedprior to reinvestment, a shareholder who has redeemed the Fund's shares may,within 120 days after the date of redemption, reinvest without payment of asales charge any part of the redemption proceeds in shares of the same class ofthe Fund or another John Hanco*ck fund, subject to the minimum investment limitof that fund. The proceeds from the redemption of Class A shares may bereinvested at net asset value without paying a sales charge in Class A shares ofany John Hanco*ck fund. If a CDSC was paid upon a redemption, a shareholder mayreinvest the proceeds from this redemption at net asset value in additionalshares of the class from which the redemption was made. The shareholder'saccount will be credited with the amount of any CDSC charged upon the priorredemption and the new shares will continue to be subject to the CDSC. Theholding period of the shares acquired through reinvestment will, for purposes ofcomputing the CDSC payable upon a subsequent redemption, include the holdingperiod of the redeemed shares.To protect the interests of other investors in the Fund, the Fund may cancel thereinvestment privilege of any parties that, in the opinion of the Fund, areusing market timing strategies or making more than seven exchanges per owner orcontrolling party per calendar year. Also, the Fund may refuse any reinvestmentrequest.The Fund may change or cancel its reinvestment policies at any time.A redemption or exchange of Fund shares is a taxable transaction for Federalincome tax purposes even if the reinvestment privilege is exercised, and anygain or loss realized by a shareholder on the redemption or other disposition ofFund shares will be treated for tax purposes as described under the caption "TAXSTATUS". 44<PAGE>Retirement plans participating in Merrill Lynch's servicing programs:Class A shares are available at net asset value for plans with $3 million inplan assets or 500 eligible employees at the date the Plan Sponsor signs theMerrill Lynch Recordkeeping Service Agreement. If the plan does not meet eitherof these limits, Class A shares are not available.For participating retirement plans investing in Class B shares, shares willconvert to Class A shares after eight years, or sooner if the plan attainsassets of $5 million (by means of a CDSC-free redemption/purchase at net assetvalue).DESCRIPTION OF THE FUND'S SHARESThe Trustees of the Trust are responsible for the management and supervision ofthe Fund. The Declaration of Trust permits the Trustees to issue an unlimitednumber of full and fractional shares of beneficial interest of the Fund withoutpar value. Under the Declaration of Trust, the Trustees have the authority tocreate and classify shares of beneficial interest in separate series and in oneor more classes, without further action by shareholders. The Trustees have alsoauthorized shares of this Fund and one other series and the issuance of threeclasses of shares of the Fund, designated as Class A, Class B and Class C.Additional series may be added in the future.The shares of each class of the Fund represent an equal proportionate interestin the aggregate net assets attributable to the classes of the Fund. Holders ofeach class of shares have certain exclusive voting rights on matters relating totheir respective distribution plans. The different classes of the Fund may beardifferent expenses relating to the cost of holding shareholder meetingsnecessitated by the exclusive voting rights of any class of shares.Dividends paid by the Fund, if any, with respect to each class of shares will becalculated in the same manner, at the same time and on the same day and will bein the same amount, except for differences resulting from the facts that (i) thedistribution and service fees relating to each class of shares will be borneexclusively by that class, (ii) Class B and Class C shares will pay higherdistribution and service fees than Class A shares and (iii) each class of shareswill bear any class expenses properly allocable to that class of shares, subjectto the conditions the Internal Revenue Service imposes with respect to themultiple-class structures. Similarly, the net asset value per share may varydepending on which class of shares are purchased. No interest will be paid onuncashed dividend or redemption checks.In the event of liquidation, shareholders of each class are entitled to sharepro rata in the net assets of the Fund available for distribution to theseshareholders. Shares entitle their holders to one vote per share, are freelytransferable and have no preemptive, subscription or conversion rights. Whenissued, shares are fully paid and non-assessable, except as set forth below.Unless otherwise required by the Investment Company Act or the Declaration ofTrust, the Fund has no intention of holding annual meetings of shareholders.Fund shareholders may remove a Trustee by the affirmative vote of at leasttwo-thirds of the Trust's outstanding shares and the Trustees shall promptlycall a meeting for such purpose when requested to do so in writing by the recordholders of not less than 10% of the outstanding shares of the Trust.Shareholders may, under certain circ*mstances, communicate with othershareholders in connection with requesting a special meeting of shareholders.However, at any time that less than in a majority of the Trustees holding officewere elected by the shareholders, the Trustees will call a special meeting ofshareholders for the purpose of electing Trustees. 45<PAGE>Under Massachusetts law, shareholders of a Massachusetts business trust could,under certain circ*mstances, be held personally liable for acts or obligationsof the trust. However, the Trust's Declaration of Trust contains an expressdisclaimer of shareholder liability for acts, obligations and affairs of theTrust. The Declaration of Trust also provides for indemnification out of theTrust's assets for all losses and expenses of any shareholder held personallyliable by reason of being or having been a shareholder. The Declaration of Trustalso provides that no series of the Trust shall be liable for the liabilities ofany other series. Furthermore, no fund included in the Prospectus shall beliable for the liabilities of any other John Hanco*ck fund. Liability istherefore limited to circ*mstances in which the Trust itself would be unable tomeet its obligations, and the possibility of this occurrence is remote.The Fund reserves the right to reject any application which conflicts with theFund's internal policies or the policies of any regulatory authority. JohnHanco*ck Funds does not accept starter, credit card or third party checks. Allchecks returned by the post office as undeliverable will be reinvested at netasset value in the fund or funds from which a redemption was made or dividendpaid. Information provided on the account application may be used by the Fund toverify the accuracy of the information or for background or financial historypurposes. A joint account will be administered as a joint tenancy with right ofsurvivorship, unless the joint owners notify Signature Services of a differentintent. A shareholder's account is governed by the laws of The Commonwealth ofMassachusetts. For telephone transactions, the transfer agent will take measuresto verify the identity of the caller, such as asking for name, account number,Social Security or other taxpayer ID number and other relevant information. Ifappropriate measures are taken, the transfer agent is not responsible for anylosses that may occur to any account due to an unauthorized telephone call. Alsofor your protection telephone transactions are not permitted on accounts whosenames or addresses have changed within the past 30 days. Proceeds from telephonetransactions can only be mailed to the address of record.Selling activities for the Fund may not take place outside the U.S. exempt withU.S. military bases, APO addresses and U.S. diplomats. Brokers of record onNon-U.S. investors' accounts with foreign mailing addresses are required tocertify that all sales activities have occurred, and in the future will occur,only in the U.S. A Foreign corporation may purchase shares of the Fund only ifit has a U.S. mailing address.TAX STATUSEach series of the Trust, including the Fund is treated as a separate entity fortax purposes. The Fund has qualified and elected to be treated as a "regulatedinvestment company" under Subchapter M of the Internal Revenue Code of 1986, asamended (the "Code"), and intends to continue to so qualify for each taxableyear. As such and by complying with the applicable provisions of the Coderegarding the sources of its income, the timing of its distributions, and thediversification of its assets, the Fund will not be subject to Federal incometax on taxable income (including net realized capital gains) which isdistributed to shareholders in accordance with the timing requirements of theCode.The Fund will be subject to a 4% non-deductible Federal excise tax on certainamounts not distributed (and not treated as having been distributed) on a timelybasis in accordance with annual minimum distribution requirements. The Fundintends under normal circ*mstances to seek to avoid or minimize liability forsuch tax. 46<PAGE>Distributions from the Fund's current or accumulated earnings and profits("E&P") will be taxable under the Code for investors who are subject to tax. Ifthese distributions are paid from the Fund's "investment company taxableincome," they will be taxable as ordinary income; and if they are paid from theFund's "net capital gain," they will be taxable as capital gain. (Net capitalgain is the excess (if any) of net long-term capital gain over net short-termcapital loss, and investment company taxable income is all taxable income andcapital gains, other than those gains and losses included in computing netcapital gain, after reduction by deductible expenses). Some distributions may bepaid to shareholders as if they had been received on December 31 of the previousyear. The tax treatment described above will apply without regard to whetherdistributions are received in cash or reinvested in additional shares of theFund.Distributions, if any, in excess of E&P will constitute a return of capitalunder the Code, which will first reduce an investor's federal tax basis in Fundshares and then, to the extent such basis is exceeded, will generally give riseto capital gains. Shareholders who have chosen automatic reinvestment of theirdistributions will have a federal tax basis in each share received pursuant tosuch a reinvestment equal to the amount of cash they would have received hadthey elected to receive the distribution in cash, divided by the number ofshares received in the reinvestment.The Fund may be subject to withholding and other taxes imposed by foreigncountries with respect to its investments in foreign securities. Some taxconventions between certain countries and the U.S. may reduce or eliminate suchtaxes. Investors may be entitled to claim U.S. foreign tax credits or deductionswith respect to such taxes, subject to certain provisions and limitationscontained in the Code, if the Fund so elects. If more than 50% of the value ofthe Fund's total assets at the close of any taxable year consists of stock orsecurities of foreign corporations, the Fund may file an election with theInternal Revenue Service pursuant to which shareholders of the Fund will berequired to (i) include in ordinary gross income (in addition to taxabledividends and distributions actually received) their pro rata shares ofqualified foreign taxes paid by the Fund even though not actually received bythem, and (ii) treat such respective pro rata portions as qualified foreigntaxes paid by them. The Fund probably will not satisfy this 50% requirement.If the Fund makes this election, shareholders may then deduct such pro rataportions of qualified foreign taxes in computing their taxable incomes, or,alternatively, use them as foreign tax credits, subject to applicablelimitations, against their U.S. Federal income taxes. Shareholders who do notitemize deductions for Federal income tax purposes will not, however, be able todeduct their pro rata portion of qualified foreign taxes paid by the Fund,although such shareholders will be required to include their share of such taxesin gross income. Shareholders who claim a foreign tax credit for such foreigntaxes may be required to treat a portion of dividends received from the Fund asa separate category of income for purposes of computing the limitations on theforeign tax credit. Tax-exempt shareholders will ordinarily not benefit fromthis election. Each year (if any) that the Fund files the election describedabove, its shareholders will be notified of the amount of (i) each shareholder'spro rata share of qualified foreign taxes paid by the Fund and (ii) the portionof Fund dividends which represents income from each foreign country. The Fundthat cannot or does not make this election may deduct such taxes in determiningthe amount it has available for distribution to shareholders, and shareholderswill not, in this event, include these foreign taxes in their income, nor willthey be entitled to any tax deductions or credits with respect to such taxes. 47<PAGE>The amount of the Fund's net realized capital gains, if any, in any given yearwill vary depending upon the Adviser's current investment strategy and whetherthe Adviser believes it to be in the best interest of the Fund to dispose ofportfolio securities or enter into options or futures transactions that willgenerate capital gains. At the time of an investor's purchase of Fund shares, aportion of the purchase price is often attributable to realized or unrealizedappreciation in the Fund's portfolio. Consequently, subsequent distributionsfrom such appreciation may be taxable to such investor even if the net assetvalue of the investor's shares is, as a result of the distributions, reducedbelow the investor's cost for such shares, and the distributions in realityrepresent a return of a portion of the purchase price.Upon a redemption or other disposition of shares of the Fund (including byexercise of the exchange privilege) in a transaction that is treated as a salefor tax purposes, a shareholder may realize a taxable gain or loss dependingupon the amount of the proceeds and the investor's basis in his shares. Any gainor loss will be treated as capital gain or loss if the shares are capital assetsin the shareholder's hands. A sales charge paid in purchasing shares of the Fundcannot be taken into account for purposes of determining gain or loss on theredemption or exchange of such shares within 90 days after their purchase to theextent shares of the Fund or another John Hanco*ck fund are subsequently acquiredwithout payment of a sales charge pursuant to the reinvestment or exchangeprivilege. Such disregarded load will result in an increase in the shareholder'stax basis in the shares subsequently acquired. Also, any loss realized on aredemption or exchange may be disallowed to the extent the shares disposed ofare replaced with other shares of the same Fund within a period of 61 daysbeginning 30 days before and ending 30 days after the shares are disposed of,such as pursuant to automatic dividend reinvestments. In such a case, the basisof the shares acquired will be adjusted to reflect the disallowed loss. Any lossrealized upon the redemption of shares with a tax holding period of six monthsor less will be treated as a long-term capital loss to the extent of any amountstreated as distributions of long-term capital gain with respect to such shares.Shareholders should consult their own tax advisers regarding their particularcirc*mstances to determine whether a disposition of Fund shares is properlytreated as a sale for tax purposes, as is assumed in the foregoing discussion.Although its present intention is to distribute, at least annually, all netcapital gain, if any, the Fund reserves the right to retain and reinvest all orany portion of the excess, as computed for Federal income tax purposes, of netlong-term capital gain over net short-term capital loss in any year. The Fundwill not in any event distribute net capital gain realized in any year to theextent that a capital loss is carried forward from prior years against suchgain. To the extent such excess was retained and not exhausted by thecarryforward of prior years' capital losses, it would be subject to Federalincome tax in the hands of the Fund. Upon proper designation by the Fund, eachshareholder would be treated for Federal income tax purposes as if the Fund haddistributed to him on the last day of its taxable year his pro rata share ofsuch excess, and he had paid his pro rata share of the taxes paid by the Fundand reinvested the remainder in the Fund. Accordingly, each shareholder would(a) include his pro rata share of such excess as capital gain income in hisreturn for his taxable year in which the last day of such Fund's taxable yearfalls, (b) be entitled either to a tax credit on his return for, or to a refundof, his pro rata share of the taxes paid by such Fund, and (c) be entitled toincrease the adjusted tax basis for his shares in such Fund by the differencebetween his pro rata share of such excess and his pro rata share of such taxes.For Federal income tax purposes, the Fund is generally permitted to carryforward a net capital loss in any year to offset its own net capital gains, ifany, during the eight years following the year of the loss. To the extentsubsequent net capital gains are offset by such losses, they would not result inFederal income tax liability to the Fund and, as noted above, would not bedistributed as such to shareholders. The Fund has $18,749,417 of capital losscarryforwards, available to the extent provided by regulations, to offset futurenet realized capital gains.These carryforwards expire at various amounts and times from 2002 through 2006. 48<PAGE>The Fund is required to accrue income on any debt securities that have more thana de minimis amount of original issue discount (or debt securities acquired at amarket discount, if the Fund elects to include market discount in incomecurrently) prior to the receipt of the corresponding cash payments. The mark tomarket or constructive sales rules applicable to certain options, futures andforward contracts may also require the Fund to recognize income or gain withouta concurrent receipt of cash. However, the Fund must distribute to shareholdersfor each taxable year substantially all of its net income and net capital gains,including such income or gain, to qualify as a regulated investment company andavoid liability for any federal income or excise tax. Therefore, the Fund mayhave to dispose of its portfolio securities under disadvantageous circ*mstancesto generate cash, or borrow cash, to satisfy these distribution requirements.A state income (and possibly local income and/or intangible property) taxexemption is generally available to the extent (if any) the Fund's distributionsare derived from interest on (or, in the case of intangible property taxes, thevalue of its assets is attributable to) certain U.S. Government obligations,provided in some states that certain thresholds for holdings of such obligationsand/or reporting requirements are satisfied. The Fund will not seek to satisfyany threshold or reporting requirements that may apply in particular taxingjurisdictions, although the Fund may in its sole discretion provide relevantinformation to shareholders.The Fund will be required to report to the Internal Revenue Service (the "IRS")all taxable distributions to shareholders, as well as gross proceeds from theredemption or exchange of Fund shares, except in the case of certain exemptrecipients, i.e., corporations and certain other investors distributions towhich are exempt from the information reporting provisions of the Code. Underthe backup withholding provisions of Code Section 3406 and applicable Treasuryregulations, all such reportable distributions and proceeds may be subject tobackup withholding of federal income tax at the rate of 31% in the case ofnon-exempt shareholders who fail to furnish the Fund with their correct taxpayeridentification number and certain certifications required by the IRS or if theIRS or a broker notifies the Fund that the number furnished by the shareholderis incorrect or that the shareholder is subject to backup withholding as aresult of failure to report interest or dividend income. The Fund may refuse toaccept an application that does not contain any required taxpayer identificationnumber or certification that the number provided is correct. If the backupwithholding provisions are applicable, any such distributions and proceeds,whether taken in cash or reinvested in shares, will be reduced by the amountsrequired to be withheld. Any amounts withheld may be credited against ashareholder's U.S. federal income tax liability. Investors should consult theirtax advisers about the applicability of the backup withholding provisions.The Fund may be required to account for its transactions in forward rolls orswaps, caps, floors and collars in a manner that, under certain circ*mstances,may limit the extent of its participation in such transactions. Additionally,the Fund may be required to recognize gain, but not loss, if a swap or othertransaction is treated as a constructive sale of an appreciated financialposition in the Fund's portfolio. The Fund may have to sell portfolio securitiesunder disadvantageous circ*mstances to generate cash, or borrow cash, to satisfythese distribution requirements.Investments in debt obligations that are at risk of or are in default presentspecial tax issues for the Fund. Tax rules are not entirely clear about issuessuch as when the Fund may cease to accrue interest, original issue discount, ormarket discount, when and to what extent deductions may be taken for bad debtsor worthless securities, how payments received on obligations in default shouldbe allocated between principal and income, and whether exchanges of debtobligations in a workout context are taxable. These and other issues will beaddressed by the Fund that holds such obligations in order to reduce the risk ofdistributing insufficient income to preserve its status as a regulatedinvestment company and seek to avoid becoming subject to Federal income orexcise tax. 49<PAGE>Limitations imposed by the Code on regulated investment companies like the Fundmay restrict the Fund's ability to enter into options, futures, foreign currencypositions and foreign currency forward transactions.Certain options, futures and forward foreign currency transactions undertaken bythe Fund may cause such Fund to recognize gains or losses from marking to marketeven though its positions have not been sold or terminated and affect thecharacter as long-term or short-term (or, in the case of certain currencyforwards, options and futures, as ordinary income or loss) and timing of somecapital gains and losses realized by the Fund. Also, certain of the Fund'slosses on its transactions involving options, futures and forward foreigncurrency contracts and/or offsetting or successor portfolio positions may bedeferred rather than being taken into account currently in calculating theFund's taxable income or gains. Certain of such transactions may also cause theFund to dispose of investments sooner than would otherwise have occurred. Thesetransactions may therefore affect the amount, timing and character of the Fund'sdistributions to shareholders. The Fund will take into account the special taxrules (including consideration of available elections) applicable to options,futures or forward contracts in order to seek to minimize any potential adversetax consequences.Different tax treatment, including penalties on certain excess contributions anddeferrals, certain pre-retirement and post-retirement distributions and certainprohibited transactions, is accorded to accounts maintained as qualifiedretirement plans. Shareholders should consult their tax advisers for moreinformation.The foregoing discussion relates solely to U.S. Federal income tax law asapplicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domesticcorporations, partnerships, trusts or estates) subject to tax under such law.The discussion does not address special tax rules applicable to certain classesof investors, such as tax-exempt entities, insurance companies, and financialinstitutions. Dividends, capital gain distributions, and ownership of or gainsrealized on the redemption (including an exchange) of Fund shares may also besubject to state and local taxes. Shareholders should consult their own taxadvisers as to the Federal, state or local tax consequences of ownership ofshares of, and receipt of distributions from, the Fund in their particularcirc*mstances.Non-U.S. investors not engaged in a U.S. trade or business with which theirinvestment in a Fund is effectively connected will be subject to U.S. Federalincome tax treatment that is different from that described above. Theseinvestors may be subject to nonresident alien withholding tax at the rate of 30%(or a lower rate under an applicable tax treaty) on amounts treated as ordinarydividends from the Fund and, unless an effective IRS Form W-8 or authorizedsubstitute for Form W-8 is on file, to 31% backup withholding on certain otherpayments from the Fund. Non-U.S. investors should consult their tax advisersregarding such treatment and the application of foreign taxes to an investmentin the Fund.The Fund is not subject to Massachusetts corporate excise or franchise taxes.The Fund anticipates that, provided that the Fund qualifies as a regulatedinvestment company under the Code, it will also not be required to pay anyMassachusetts income tax. 50<PAGE>CALCULATION OF PERFORMANCE The Fund may advertise yield, where appropriate. For the 30-day period endedNovember 30, 1998, the yields of the Fund's Class A and Class B shares were4.48% and 4.00%, respectively. Class C shares commenced operations on April 1,1999; therefore, there is no yield to report. The Fund's yield is computed by dividing net investment income per sharedetermined for a 30-day period by the maximum offering price per share (whichincludes the full sales charge) on the last day of the period, according to thefollowing standard formula: 6 Yield = 2 ( [ ( a - b ) + 1 ] - 1 ) ------- cd Where: a = dividends and interest earned during the period. b = net expenses accrued during the period. c = the average daily number of fund shares outstanding during the period that would be entitled to receive dividends. d = the maximum offering price per share on the last day of the period (NAV where applicable).Total Return. Average annual total return is determined separately for each class of shares.Set forth below are tables showing the performance on a total return basis(i.e., with all dividends and distributions reinvested) of a hypothetical $1,000investment in the Class A and Class B shares of the Fund. Class C sharescommenced operations on April 1, 1999; therefore, there is no average annualtotal return to report. <TABLE><CAPTION> Class A Shares Class A Shares Class B Shares Class B Shares Class B Shares One Year Ended 9/30/94* to One Year Ended Five Years Ended Ten Years Ended 11/30/98 11/30/98 11/30/98 11/30/98 11/30/98 -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> 4.77% 7.91% 3.87% 5.57% 7.41%* Commencement of operations.</TABLE> Total Return. The Fund's total return is computed by finding the average annualcompounded rate of return over the 1-year, 5-year, and 10-year periods thatwould equate the initial amount invested to the ending redeemable valueaccording to the following formula: 51<PAGE> n ________ T = \ / ERV / P - 1P = a hypothetical initial payment of $1,000.T = average annual total return.n = number of years.ERV = ending redeemable value of a hypothetical $1,000 investment made at the beginning of the 1-year and life-of-fund periods.Because each class has its own charge and fee structure, the classes havedifferent performance results. In the case of each class, this calculationassumes the maximum sales charge is included in the initial investment or theCDSC is applied at the end of the period. This calculation assumes that alldividends and distributions are reinvested at net asset value on thereinvestment dates during the period. The "distribution rate" is determined byannualizing the result of dividing the declared dividends of the Fund during theperiod stated by the maximum offering price or net asset value at the end of theperiod. Excluding the Fund's sales charge from the distribution rate produces ahigher rate. In addition to average annual total returns, the Fund may quote unaveraged orcumulative total returns reflecting the simple change in value of an investmentover a stated period. Cumulative total returns may be quoted as a percentage oras a dollar amount, and may be calculated for a single investment, a series ofinvestments, and/or a series of redemptions, over any time period. Total returnsmay be quoted with or without taking the Fund's sales charge on Class A sharesor the CDSC on Class B or Class C shares into account. Excluding the Fund'ssales charge on Class A shares and the CDSC on Class B or Class C shares from atotal return calculation produces a higher total return figure. From time to time, in reports and promotional literature, the Fund's yield andtotal return will be compared to indices of mutual funds and bank depositvehicles such as Lipper Analytical Services, Inc.'s "Lipper--Fixed Income FundPerformance Analysis," a monthly publication which tracks net assets, totalreturn, and yield on fixed income mutual funds in the United States. Ibottsonand Associates, CDA Weisenberger and F.C. Towers are also used for comparisonpurposes, as well as the Russell and Wilshire Indices.Performance rankings and ratings reported periodically in national financialpublications such as MONEY MAGAZINE, FORBES, BUSINESS WEEK, THE WALL STREETJOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S, etc. will also beutilized. The Fund's promotional and sales literature may make reference to theFund's "beta." Beta reflects the market-related risk of the Fund by showing howresponsive the Fund is to the market.The performance of the Fund is not fixed or guaranteed. Performance quotationsshould not be considered to be representations of performance of the Fund forany period in the future. The performance of the Fund is a function of manyfactors including its earnings, expenses and number of outstanding shares.Fluctuating market conditions; purchases, sales and maturities of portfoliosecurities; sales and redemptions of shares of beneficial interest; and changesin operating expenses are all examples of items that can increase or decreasethe Fund's performance. 52<PAGE>BROKERAGE ALLOCATIONDecisions concerning the purchase and sale of portfolio securities and theallocation of brokerage commissions are made by the Adviser pursuant torecommendations made by an investment committee of the Adviser, which consistsof officers and directors of the Adviser and affiliates and Trustees who areinterested persons of the Fund. Orders for purchases and sales of securities areplaced in a manner which, in the opinion of the Adviser, will offer the bestprice and market for the execution of each such transaction. Purchases fromunderwriters of portfolio securities may include a commission or commissionspaid by the issuer and transactions with dealers serving as market makersreflect a "spread." Debt securities are generally traded on a net basis throughdealers acting for their own account as principals and not as brokers; nobrokerage commissions are payable on these transactions.In the U.S. Government securities market, securities are generally traded on a"net" basis with dealers acting as principal for their own account without astated commission, although the price of the security usually includes a profitto the dealer. On occasion, certain money market instruments and agencysecurities may be purchased directly from the issuer, in which case nocommissions or premiums are paid. In other countries, both debt and equitysecurities are traded on exchanges at fixed commission rates. Commissions onforeign transactions are generally higher than the negotiated commission ratesavailable in the U.S. There is generally less government supervision andregulation of foreign stock exchanges and broker-dealers than in the U.S.The Fund's primary policy is to execute all purchases and sales of portfolioinstruments at the most favorable prices consistent with best execution,considering all of the costs of the transaction including brokerage commissions.This policy governs the selection of brokers and dealers and the market in whicha transaction is executed. Consistent with the foregoing primary policy, theRules of Fair Practice of the NASD and other policies that the Trustees maydetermine, the Adviser may consider sales of shares of the Fund as a factor inthe selection of broker-dealers to execute a Fund's portfolio transactions.To the extent consistent with the foregoing, the Fund will be governed in theselection of brokers and dealers, and the negotiation of brokerage commissionrates and dealer spreads, by the reliability and quality of the services,including primarily the availability and value of research information and to alesser extent statistical assistance furnished to the Adviser of the Fund, andtheir value and expected contribution to the performance of the Fund. It is notpossible to place a dollar value on information and services to be received frombrokers and dealers, since it is only supplementary to the research efforts ofthe Adviser. The receipt of research information is not expected to reducesignificantly the expenses of the Adviser. The research information andstatistical assistance furnished by brokers and dealers may benefit the LifeCompany or other advisory clients of the Adviser, and conversely, brokeragecommissions and spreads paid by other advisory clients of the Adviser may resultin research information and statistical assistance beneficial to the Fund. TheFund will make no commitments to allocate portfolio transactions upon anyprescribed basis. While the Adviser's officers will be primarily responsible forthe allocation of the Fund's brokerage business, the policies and practices ofthe Adviser in this regard must be consistent with the foregoing and at alltimes be subject to review by the Trustees.The negotiated brokerage commissions of the Fund are as follows: 53<PAGE>(a) $25,004 for the fiscal year ended May 31, 1998, (b) $59,080 for the periodfrom November 1, 1996 to May 31, 1997 (c) $135,622 for the fiscal year endedOctober 31, 1996; and (d) $15,814 for the fiscal year ended October 31, 1995.As permitted by Section 28(e) of the Securities Exchange Act of 1934, the Fundmay pay to a broker which provides brokerage and research services to the Fundan amount of disclosed commission in excess of the commission which anotherbroker would have charged for effecting that transaction. This practice issubject to a good faith determination by the Trustees that the price isreasonable in light of the services provided and to policies that the Trusteesmay adopt from time to time. For the fiscal year ended May 31, 1998, the Funddid not pay any commissions to compensate brokers for research services such asindustry, economic and company reviews and evaluations of securities.The Adviser's indirect parent, the Life Company is the indirect sole shareholderof Signator Investors, Inc., a broker dealer ("Signator" or "AffiliatedBroker"). Pursuant to procedures determined by the Trustees and consistent withthe above policy of obtaining best net results, the Fund may execute portfoliotransactions with or through Affiliated Brokers. For the fiscal years endedOctober 31, 1995 and 1996, the Fund paid no brokerage commission to anyAffiliated Broker. For the period from November 1, 1996 to May 31, 1997, theFund paid no brokerage commissions to any Affiliated Broker. For the fiscal yearended May 31, 1998, the Fund paid no brokerage commissions to any AffiliatedBroker.Signator may act as broker for the Fund on exchange transactions, subject,however, to the general policy of the Fund set forth above and the proceduresadopted by the Trustees pursuant to the Investment Company Act. Commissions paidto an Affiliated Broker must be at least as favorable as those which theTrustees believe to be contemporaneously charged by other brokers in connectionwith comparable transactions involving similar securities being purchased orsold. A transaction would not be placed with an Affiliated Broker if the Fundwould have to pay a commission rate less favorable than the Affiliated Broker'scontemporaneous charges for comparable transactions for its other most favored,but unaffiliated, customers, except for accounts for which the Affiliated Brokeracts as a clearing broker for another brokerage firm, and any customers of theAffiliated Broker not comparable to the Fund as determined by a majority of theTrustees who are not interested persons (as defined in the Investment CompanyAct) of the Fund, the Adviser or the Affiliated Broker. Because the Adviser,which is affiliated with the Affiliated Broker, has, as an investment adviser tothe Fund, the obligation to provide investment management services, whichincludes elements of research and related investment skills, such research andrelated skills will not be used by the Affiliated Brokers as a basis fornegotiating commissions at a rate higher than that determined in accordance withthe above criteria.Other investment advisory clients advised by the Adviser may also invest in thesame securities as the Fund. When these clients buy or sell the same securitiesat substantially the same time, the Adviser may average the transactions as toprice and allocate the amount of available investments in a manner which theAdviser believes to be equitable to each client, including the Fund. In someinstances, this investment procedure may adversely affect the price paid orreceived by the Fund or the size of the position obtainable for it. On the otherhand, to the extent permitted by law, the Advisers may aggregate securities tobe sold or purchased for the Fund with those to be sold or purchased for otherclients managed by it in order to obtain best execution. 54<PAGE>TRANSFER AGENT SERVICESJohn Hanco*ck Signature Services Inc., 1 Hanco*ck Way, Suite 1000, Boston, MA02217-1000, a wholly-owned indirect subsidiary of the Life Company, is thetransfer and dividend paying agent for the Fund. The Fund pays SignatureServices an annual fee of $20.00 for each Class A shareholder account, $22.50for each Class B shareholder account and $20.50 for each Class C shareholderaccount. The Fund also pays certain out-of-pocket expenses and these expensesare aggregated and charged to the Fund and allocated to each class on the basisof their relative net asset values.CUSTODY OF PORTFOLIOPortfolio securities of the Fund are held pursuant to a custodian agreementbetween the Fund and Investors Bank & Trust Company, 200 Clarendon Street,Boston, Massachusetts 02116. Under the custodian agreement, Investors Bank &Trust Company performs custody, portfolio and fund accounting services.INDEPENDENT AUDITORS Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts 02116, has beenselected as the independent auditors of the Fund. The financial statements ofthe Fund included in the Prospectus and this Statement of Additional Informationfor the Fund's fiscal year ended May 31, 1998 have been audited by Ernst & YoungLLP for the periods indicated in their report, appearing elsewhere herein, andare included in reliance upon such report given upon the authority of such firmas experts in accounting and auditing. 55<PAGE>APPENDIX-AMORE ABOUT RISKA fund's risk profile is largely defined by the fund's principal securities andinvestment practices. You may find the most concise description of the fund'srisk profile in the prospectus.A fund is permitted to utilize -- within limits established by the trustees --certain other securities and investment practices that have higher risks andopportunities associated with them. To the extent that the fund utilizes thesesecurities or practices, its overall performance may be affected, eitherpositively or negatively. On the following pages are brief definitions ofcertain associated risks with them, with examples of related securities andinvestment practices included in brackets. See the "Investment Objectives andPolicies" and "Investment Restrictions" sections of this Statement of AdditionalInformation for a description of this Fund's investment policies. The fundfollows certain policies that may reduce these risks.As with any mutual fund, there is no guarantee that the fund will earn income orshow a positive total return over any period of time -- days, months or years.TYPES OF INVESTMENT RISKCorrelation risk The risk that changes in the value of a hedging instrument willnot match those of the asset being hedged (hedging is the use of one investmentto offset the effects of another investment). Incomplete correlation can resultin unanticipated risks. (e.g., currency contracts, futures and related options,options on securities and indices, swaps, caps, floors and collars).Credit risk The risk that the issuer of a security, or the counterparty to acontract, will default or otherwise become unable to honor a financialobligation. (e.g., non- investment-grade debt securities, borrowing; reverserepurchase agreements, covered mortgage dollar roll transactions, repurchaseagreements, securities lending, brady bonds, foreign debt securities, in-kind,delayed and zero coupon debt securities, asset-backed securities,mortgage-backed securities, participation interest, options on securities,structured securities and swaps, caps floors and collars).Currency risk The risk that fluctuations in the exchange rates between the U.S.dollar and foreign currencies may negatively affect an investment. Adversechanges in exchange rates may erode or reverse any gains produced by foreigncurrency-denominated investments, and may widen any losses.(e.g., foreign debtsecurities, currency contracts, swaps, caps, floors and collars).Extension risk The risk that an unexpected rise in interest rates will extendthe life of a mortgage-backed security beyond the expected prepayment time,typically reducing the security's value.(e.g. mortgage-backed securities andstructured securities).Interest rate risk The risk of market losses attributable to changes in interestrates. With fixed-rate securities, a rise in interest rates typically causes afall in values, while a fall in rates typically causes a rise in values. (e.g.,non-investment-grade debt securities, covered mortgage dollar roll transactions,brady bonds, foreign debt securities, in-kind, delayed and zero coupon debtsecurities, asset-backed securities, mortgage-backed securities, participationinterest, swaps, caps, floors and collars). A-1<PAGE>Leverage risk Associated with securities or practices (such as borrowing) thatmultiply small index or market movements into large changes in value. (e.g.borrowing; reverse repurchase agreements, covered mortgage dollar rolltransactions, when-issued securities and forward commitments, currencycontracts, financial futures and options; securities and index options,structured securities, swaps, caps, floors and collars).o Hedged When a derivative (a security whose value is based on another security or index) is used as a hedge against an opposite position that the fund also holds, any loss generated by the derivative should be substantially offset by gains on the hedged investment, and vice versa. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains.o Speculative To the extent that a derivative is not used as a hedge, the fund is directly exposed to the risks of that derivative. Gains or losses from speculative positions in a derivative may be substantially greater than the derivative's original cost.Liquidity risk The risk that certain securities may be difficult or impossibleto sell at the time and the price that the seller would like. The seller mayhave to lower the price, sell other securities instead, or forego an investmentopportunity, any of which could have a negative effect on fund management orperformance. (e.g. non-investment-grade debt securities, restricted and illiquidsecurities, mortgage-backed securities, participation interest, currencycontracts, futures and related options; securities and index options, structuredsecurities, swaps, caps, floors and collars).Management risk The risk that a strategy used by a fund's management may fail toproduce the intended result. Common to all mutual funds.Market risk The risk that the market value of a security may move up and down,sometimes rapidly and unpredictably. Market risk may affect a single issuer, anindustry, a sector of the bond market or the market as a whole. Common to allstocks and bonds and the mutual funds that invest in them. (e.g. coveredmortgage dollar roll transactions, short-term trading, when-issued securitiesand forward commitments, brady bonds, foreign debt securities, in-kind, delayedand zero coupon debt securities, restricted and illiquid securities, rights andwarrants, financial futures and options; and securities and index options,structured securities).Natural event risk The risk of losses attributable to natural disasters, cropfailures and similar events.Opportunity risk The risk of missing out on an investment opportunity becausethe assets necessary to take advantage of it are tied up in less advantageousinvestments.(e.g. covered mortgage dollar roll transactions, when-issuedsecurities and forward commitments, currency contracts, financial futures andoptions; securities and securities and index options).Political risk The risk of losses attributable to government or politicalactions, from changes in tax or trade statutes to governmental collapse and war.(e.g., brady bonds and foreign debt securities). A-2<PAGE>Prepayment risk The risk that unanticipated prepayments may occur during periodsof falling interest rates, reducing the value of mortgage-backed securities.(e.g., mortgage backed securities).Valuation risk The risk that a fund has valued certain of its securities at ahigher price than it can sell them for. (e.g., non-investment-grade debtsecurities, participation interest, structured securities, swaps, caps, floorsand collars). A-3<PAGE> APPENDIX BDESCRIPTION OF BOND RATINGSThe ratings of Moody's Investors Service, Inc. and Standard & Poor's RatingsGroup represent their opinions as to the quality of various debt instrumentsthey undertake to rate. It should be emphasized that ratings are not absolutestandards of quality. Consequently, debt instruments with the same maturity,coupon and rating may have different yields while debt instruments of the samematurity and coupon with different ratings may have the same yield.MOODY'S INVESTORS SERVICE, INC.Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carrythe smallest degree of investment risk and are generally referred to as "giltedge." Interest payments are protected by a large or by an exceptionally stablemargin and principal is secure. While the various protective elements are likelyto change, such changes as can be visualized are most unlikely to impair thefundamentally strong position of such issues.Aa: Bonds which are rated Aa are judged to be of high quality by all standards.Together with the Aaa group they comprise what are generally known as high gradebonds. They are rated lower than the best bonds because margins of protectionmay not be as large as in Aaa securities or fluctuations of protective elementsmay be of greater amplitude or there may be other elements present which makethe long-term risks appear somewhat larger than in Aaa securities.A: Bonds which are rated A possess many favorable investment attributes and areto be considered as upper medium grade obligations. Factors giving security toprincipal and interest are considered adequate but elements may be present whichsuggest a susceptibility to impairment at some time in the future.Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,they are neither highly protected nor poorly secured. Interest payments andprincipal security appear adequate for the present but certain protectiveelements may be lacking or may be characteristically unreliable over any greatlength of time. Such bonds lack outstanding investment characteristics and infact have speculative characteristics as well.Ba: Bonds which are rated Ba are judged to have speculative elements; theirfuture cannot be considered as well assured. Often the protection of interestand principal payments may be very moderate and thereby not well safeguardedduring both good and bad times over the future. Uncertainty of positioncharacterizes bonds in this class.B: Bonds which are rated B generally lack the characteristics of desirableinvestment. Assurance of interest and principal payments or of maintenance ofother terms of the contract over any long period of time may be small.Caa: Bonds which are rated Caa are of poor standing. Such issues may be indefault or there may be present elements of danger with respect to principal orinterest.Ca: Bonds which are rated Ca represented obligations which are speculative in ahigh degree. Such issues are often in default or have other marked shortcomings. B-1<PAGE>STANDARD & POOR'S RATINGS GROUPAAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.Capacity to pay interest and repay principal is extremely strong.AA: Debt rated AA has a very strong capacity to pay interest and repay principaland differs from the highest rated issues only in small degree.A: Debt rated A has a strong capacity to pay interest and repay principal,although it is somewhat more susceptible to the adverse effects of changes incirc*mstances and economic conditions than debt in higher rated categories.BBB: Debt rated BBB is regarded as having an adequate capacity to pay interestand repay principal. Whereas it normally exhibits adequate protectionparameters, adverse economic conditions or changing circ*mstances are morelikely to lead to a weakened capacity to pay interest and repay principal fordebt in this category than in higher rated categories.BB, B: Debt rated BB, and B is regarded, on balance, as predominantlyspeculative with respect to capacity to pay interest and repay principal inaccordance with the terms of the obligation. BB indicates the lowest degree ofspeculation and CC the highest degree of speculation. While such debt willlikely have some quality and protective characteristics, these are outweighed bylarge uncertainties or major risk exposures to adverse conditions.CCC: Debt rated 'CCC' has a currently identifiable vulnerability to default, andis dependent upon favorable business, financial, and economic conditions to meettimely payment of interest and repayment of principal. In the event of adversebusiness, financial or economic conditions, it is not likely to have thecapacity to pay interest and repay principal. The 'CCC' rating category is alsoused for debt subordinated to senior debt that is assigned an actual or implied'B' or 'B-' rating.CC: The rating 'CC' is typically applied to debt subordinated to senior debtthat is assigned an actual or implied 'CCC' rating.FITCH INVESTORS SERVICE ("Fitch")AAA, AA, A, BBB - Bonds rated AAA are considered to be investment grade and ofthe highest quality. The obligor has an extraordinary ability to pay interestand repay principal, which is unlikely to be affected by reasonably foreseeableevents. Bonds rated AA are considered to be investment grade and of highquality. The obligor's ability to pay interest and repay principal, while verystrong, is somewhat less than for AAA rated securities or more subject topossible change over the term of the issue. Bonds rated A are considered to beinvestment grade and of good quality. The obligor's ability to pay interest andrepay principal is considered to be strong, but may be more vulnerable toadverse changes in economic conditions and circ*mstances than bonds with higherratings. Bonds rated BBB are considered to be investment grade and ofsatisfactory quality. The obligor's ability to pay interest and repay principalis considered to be adequate. Adverse changes in economic conditions andcirc*mstances, however, are more likely to weaken this ability than bonds withhigher ratings. B-2<PAGE>TAX-EXEMPT NOTE RATINGSMoody's - MIG-1 and MIG-2. Notes rated MIG-1 are judged to be of the bestquality, enjoying strong protection from established cash flow or funds fortheir services or from established and broad-based access to the market forrefinancing or both. Notes rated MIG-2 are judged to be of high quality withample margins of protection, though not as large as MIG-1.S&P - SP-1 and SP-2. SP-1 denotes a very strong or strong capacity to payprincipal and interest. Issues determined to possess overwhelming safetycharacteristics are given a plus (+) designation (SP-1+). SP-2 denotes asatisfactory capacity to pay principal and interest.Fitch - FIN-1 and FIN-2. Notes assigned FIN-1 are regarded as having thestrongest degree of assurance for timely payment. A plus symbol may be used toindicate relative standing. Notes assigned FIN-2 reflect a degree of assurancefor timely payment only slightly less in degree than the highest category.CORPORATE AND TAX-EXEMPT COMMERCIAL PAPER RATINGSMoody's - Commercial Paper ratings are opinions of the ability of issuers torepay punctually promissory obligations not having an original maturity inexcess of nine months. Prime-1, indicates highest quality repayment capacity ofrated issue and Prime-2 indicates higher quality.S&P - Commercial Paper ratings are a current assessment of the likelihood oftimely payment of debts having an original maturity of no more than 365 days.Issues rated A have the greatest capacity for a timely payment and thedesignation 1, 2 and 3 indicates the relative degree of safety. Issues rated"A-1+" are those with an "overwhelming degree of credit protection."Fitch - Commercial Paper ratings reflect current appraisal of the degree ofassurance of timely payment. F-1 issues are regarded as having the strongestdegree of assurance for timely payment. (+) is used to designate the relativeposition of an issuer within the rating category. F-2 issues reflect anassurance of timely payment only slightly less in degree than the strongestissues. The symbol (LOC) may follow either category and indicates that a letterof credit issued by a commercial bank is attached to the commercial paper note.Other Considerations - The ratings of S&P, Moody's, and Fitch represent theirrespective opinions of the quality of the municipal securities they undertake torate. It should be emphasized, however, that ratings are general and are notabsolute standards of quality. Consequently, municipal securities with the samematurity, coupon and ratings may have different yields and municipal securitiesof the same maturity and coupon with different ratings may have the same yield. B-3<PAGE> FINANCIAL STATEMENTSThe financial statements listed below are included in the Fund's respective 1998Annual Report to Shareholders for the year ended May 31, 1998 (filedelectronically on July 30, 1998, accession number 0001010521-98-000300) and 1998Semiannual Report to Shareholders for the year ended November 30, 1998 (filedelectronically on January 29, 1999, accession number 0001010521-99-000087) andare included in and incorporated by reference into Part B of this registrationstatement of John Hanco*ck Government Income Fund (files nos. 811-03006 and2-66906).John Hanco*ck Bond Trust John Hanco*ck Government Income Fund Statement of Assets and Liabilities as of May 31, 1998. Statement of Operations for the fiscal year ended May 31, 1998 Statement of Changes in Net Assets for each of the periods indicated therein. Financial Highlights for each of the periods indicated therein. Schedule of Investments as of May 31, 1998. Notes to Financial Statements. Report to Independent Auditors. Statement of Assets and Liabilities as of November 30, 1998. (unaudited) Statement of Operations for the fiscal year ended November 30, 1998. (unaudited) Statement of Changes in Net Assets for each of the periods indicated therein. (unaudited) Financial Highlights for each of the periods indicated therein. (unaudited) Schedule of Investments as of November 30, 1998. (unaudited) Notes to Financial Statements. F-1<PAGE> JOHN HANco*ck HIGH YIELD BOND FUND Class A, Class B and Class C Shares Statement of Additional Information April 1, 1999This Statement of Additional Information provides information about John Hanco*ckHigh Yield Bond Fund (the "Fund"), in addition to the information that iscontained in the combined Income Funds' Prospectus dated April 1, 1999 (the"Prospectus"). The Fund is a diversified series of John Hanco*ck Bond Trust (the"Trust").This Statement of Additional Information is not a prospectus. It should be readin conjunction with the Prospectus, a copy of which can be obtained free ofcharge by writing or telephoning: John Hanco*ck Signature Services Inc. 1 John Hanco*ck Way, Suite 1000 Boston, Massachusetts 02217-1000 1-800-225-5291 TABLE OF CONTENTS Page Organization of the Fund................................................. 2Investment Objective and Policies........................................ 2Investment Restrictions.................................................. 20Those Responsible for Management......................................... 22Investment Advisory and Other Services................................... 32Distribution Contracts................................................... 35Sales Compensation....................................................... 37Net Asset Value.......................................................... 38Initial Sales Charge on Class A Shares................................... 39Deferred Sales Charge on Class B and Class C Shares...................... 42Special Redemptions...................................................... 46Additional Services and Programs......................................... 46Description of the Fund's Shares......................................... 48Tax Status............................................................... 49Calculation of Performance............................................... 54Brokerage Allocation..................................................... 56Transfer Agent Services.................................................. 58Custody of Portfolio..................................................... 58Independent Auditors..................................................... 58Appendix A- Description of Investment Risk............................... A-1Appendix B-Description of Bond Ratings................................... B-1Financial Statements..................................................... F-1 1<PAGE>ORGANIZATION OF THE FUND The Fund is a series of the Trust, an open-end investment management companyorganized as a Massachusetts business trust under the laws of The Commonwealthof Massachusetts. Prior to August 30, 1996, the Fund was a series of JohnHanco*ck Series, Inc., a Maryland corporation. John Hanco*ck Advisers, Inc. (the "Adviser") is the Fund's investment adviser.The Adviser is an indirect wholly-owned subsidiary of John Hanco*ck Mutual LifeInsurance Company (the "Life Company"), a Massachusetts life insurance companychartered in 1862 ,with national headquarters at John Hanco*ck Place, Boston,Massachusetts.INVESTMENT OBJECTIVE AND POLICIESThe following information supplements the discussion of the Fund's investmentobjective and policies discussed in the Prospectus. Appendix A contains furtherinformation describing investment risks. The investment objective of the Fund isnon-fundamental. There is no assurance that the Fund will achieve its investmentobjective. The Fund's primary investment objective is to maximize current income withoutassuming undue risk by investing in a diversified portfolio consisting primarilyof lower-rated, high yielding, fixed income securities, such as: domestic andforeign corporate bonds; debentures and notes; convertible securities; preferredstocks; and domestic and foreign government obligations. As a secondaryobjective, the Fund seeks capital appreciation, but only when it is consistentwith the primary objective of maximizing current income. Under normal market conditions, at least 65% of the Fund's total assets may beinvested in bonds or debentures rated "Baa" or lower by Moody's, or "BBB" orlower by S&P; however, no more than 30% of the Fund's total assets may beinvested in securities that are rated as low as "CC" by S&P or "Ca" by Moody's.Unrated securities will also be considered for investment by the Fund when theAdviser believes that the issuer's financial condition, or the protectionafforded by the terms of the securities themselves, limits the risk to the Fundto a degree comparable to that of rated securities consistent with the Fund'sobjectives and policies.The Fund's investments in debt securities may include zero coupon bonds andpayment-in-kind bonds. Zero coupon bonds are issued at a significant discountfrom their principal amount in lieu of paying interest periodically.Payment-in-kind bonds allow the issuer, at its option, to make current interestpayments on the bonds either in cash or in additional bonds. The market pricesof zero coupon and payment-in-kind bonds are affected to a greater extent byinterest rate changes, and thereby tend to be more volatile than securitieswhich pay interest periodically and in cash. The Fund accrues income on thesesecurities for tax and accounting purposes, and this income is required to bedistributed to shareholders. Because no cash is received at the time incomeaccrues on these securities, the Fund may be forced to liquidate otherinvestments to make distributions. At times when the Fund invests in zero-couponand payment-in-kind bonds, it will not be pursuing its primary objective ofmaximizing current income.Although the Fund intends to maintain investment emphasis on debt securities ofdomestic issuers, the Fund may invest without limitation in debt securities offoreign issuers, including those issued by supranational entities such as theWorld Bank. The Fund may also purchase debt securities issued in an any countrydeveloped or undeveloped. Investments in securities of issuers innon-industrialized countries generally involve more risk and may be consideredspeculative. The Fund may also enter into forward foreign currency exchangecontracts for the purchase or sale of foreign currency for hedging purposes. Therisks of foreign investments should be carefully considered by investors. 2<PAGE>Included among domestic debt securities eligible for purchase by the Fund areadjustable and variable or floating rate securities, mortgage related securities(including stripped securities, collateralized mortgage obligations andmulti-class pass-through securities), asset-backed securities and callablebonds. Callable bonds have a provision permitting the issuer, at its option to"call" or redeem the bonds. If an issuer were to redeem bonds held by the Fundduring a time of declining interest rates, the Fund might not be able toreinvest the proceeds in bonds providing the same coupon return as the bondsredeemed.To the extent that the Fund does not invest in the securities described above,the Fund may: 1. invest (for liquidity purposes ) in high quality, short-term debtsecurities with remaining maturities of one year or less ("money marketinstruments") including government obligations, certificates of deposit,bankers' acceptances, short-term corporate debt securities, commercial paper andrelated repurchase agreements; 2. invest up to 10% of its total assets in municipal obligations,including municipal bonds issued at a discount, in circ*mstances where theAdviser determines that investing in such obligations would facilitate theFund's ability to accomplish its investment objectives; 3. lend its portfolio securities, enter into repurchase agreements andreverse repurchase agreements, purchase restricted and illiquid securities andpurchase securities on a when issued or forward commitment basis; 4. write (sell) covered call and put options and purchase call and putoptions on debt securities and securities indices in an effort to increasecurrent income and for hedging purposes; and 5. purchase and sell interest rate futures contracts on debt securitiesand securities index futures contracts, and write and purchase options on thesefutures contracts for hedging purposes.During periods of unusual market conditions when the Adviser believes thatinvesting for temporary defensive purposes is appropriate, part or all of theassets of the Fund may be invested in cash or cash equivalents consisting of: 1. obligations of banks (including certificates of deposit, bankers'acceptances and repurchase agreements ) with assets of $100,000,0000 or more; 2. commercial paper rated within the two highest rating categories of anationally recognized rating organization; 3. investment grade short-term notes; 4. obligations issued or guaranteed by the U.S. Government or any ofits agencies or instrumentalities; and 3<PAGE> 5. related repurchase agreements.Common Stock. The Fund may invest up to 20% of net assets in common stocks ofU.S. and foreign companies. Stock market movements may lower the value of theFund's investments in stocks. A company's stock price may also fluctuatesignificantly in response to other factors such as disappointing earningsreports, loss of major customers, litigation or changes in governmentregulations affecting the company or its industry. The Fund can invest incompanies of any size including small-capitalization companies, whose stockprices may be more volatile than those of larger companies.Government Securities. The Fund may invest in U.S. Government securities, whichare obligations issued or guaranteed by the U.S. Government and its agencies,authorities or instrumentalities. Certain U.S. Government securities, includingU.S. Treasury bills, notes and bonds, and Government National MortgageAssociation certificates ("Ginnie Maes"), are supported by the full faith andcredit of the United States. Certain other U.S. Government securities, issued orguaranteed by Federal agencies or government sponsored enterprises, are notsupported by the full faith and credit of the United States, but may besupported by the right of the issuer to borrow from the U.S. Treasury. Thesesecurities include obligations of the Federal Home Loan Mortgage Corporation("Freddie Macs"), and obligations supported by the credit of theinstrumentality, such as Federal National Mortgage Association Bonds ("FannieMaes").Custodial Receipts. The Fund may acquire custodial receipts for U.S. governmentsecurities. Custodial receipts evidence ownership of future interest payments,principal payments or both, and include Treasury Receipts, Treasury InvestorsGrowth Receipts ("TIGRs"), and Certificates of Accrual on Treasury Securities("CATS"). Custodial receipts are not considered U.S. government securities.Bank and Corporate Obligations. The Fund may invest in commercial paper.Commercial paper represents short-term unsecured promissory notes issued inbearer form by banks or bank holding companies, corporations and financecompanies. The commercial paper purchased by the Fund consists of direct U.S.dollar denominated obligations of domestic or foreign issuers. Bank obligationsin which the Fund may invest include certificates of deposit, bankers'acceptances and fixed time deposits. Certificates of deposit are negotiablecertificates issued against funds deposited in a commercial bank for a definiteperiod of time and earning a specified return.Bankers' acceptances are negotiable drafts or bills of exchange, normally drawnby an importer or exporter to pay for specific merchandise, which are "accepted"by a bank, meaning, in effect, that the bank unconditionally agrees to pay theface value of the instrument on maturity. Fixed time deposits are bankobligations payable at a stated maturity date and bearing interest at a fixedrate. Fixed time deposits may be withdrawn on demand by the investor, but may besubject to early withdrawal penalties which vary depending upon marketconditions and the remaining maturity of the obligation. There are nocontractual restrictions on the right to transfer a beneficial interest in afixed time deposit to a third party, although there is no market for suchdeposits. Bank notes and bankers' acceptances rank junior to domestic depositliabilities of the bank and pari passu with other senior, unsecured obligationsof the bank. Bank notes are not insured by the Federal Deposit InsuranceCorporation or any other insurer. Deposit notes are insured by the FederalDeposit Insurance Corporation only to the extent of $100,000 per depositor perbank. 4<PAGE>Municipal Obligations. The Fund may invest in a variety of municipal obligationswhich consist of municipal bonds, municipal notes and municipal commercialpaper.Municipal Bonds. Municipal bonds are issued to obtain funds for various publicpurposes including the construction of a wide range of public facilities such asairports, highways, bridges, schools, hospitals, housing, mass transportation,streets and water and sewer works. Other public purposes for which municipalbonds may be issued include refunding outstanding obligations, obtaining fundsfor general operating expenses and obtaining funds to lend to other publicinstitutions and facilities. In addition, certain types of industrialdevelopment bonds are issued by or on behalf of public authorities to obtainfunds for many types of local, privately operated facilities. Such debtinstruments are considered municipal obligations if the interest paid on them isexempt from federal income tax. The payment of principal and interest by issuersof certain obligations purchased by the Fund may be guaranteed by a letter ofcredit, note repurchase agreement, insurance or other credit facility agreementoffered by a bank or other financial institution. Such guarantees and thecreditworthiness of guarantors will be considered by the Adviser in determiningwhether a municipal obligation meets the Fund's investment quality requirements.No assurance can be given that a municipality or guarantor will be able tosatisfy the payment of principal or interest on a municipal obligation.Municipal Notes. Municipal notes are short-term obligations of municipalities,generally with a maturity ranging from six months to three years. The principaltypes of such notes include tax, bond and revenue anticipation notes and projectnotes.Municipal Commercial Paper. Municipal commercial paper is a short-termobligation of a municipality, generally issued at a discount with a maturity ofless than one year. Such paper is likely to be issued to meet seasonal workingcapital needs of a municipality or interim construction financing. Municipalcommercial paper is backed in many cases by letters of credit, lendingagreements, note repurchase agreements or other credit facility agreementsoffered by banks and other institutions.Federal tax legislation enacted in the 1980s placed substantial new restrictionson the issuance of the bonds described above and in some cases eliminated theability of state or local governments to issue municipal obligations for some ofthe above purposes. Such restrictions do not affect the Federal income taxtreatment of municipal obligations in which the Fund may invest which wereissued prior to the effective dates of the provisions imposing suchrestrictions. The effect of these restrictions may be to reduce the volume ofnewly issued municipal obligations.Issuers of municipal obligations are subject to the provisions of bankruptcy,insolvency and other laws affecting the rights and remedies of creditors, suchas the Federal Bankruptcy Act, and laws, if any, which may be enacted byCongress or state legislatures extending the time for payment of principal orinterest, or both, or imposing other constraints upon enforcement of suchobligations. There is also the possibility that as a result of litigation orother conditions the power or ability of any one or more issuers to pay when duethe principal of and interest on their municipal obligations may be affected.The yields of municipal bonds depend upon, among other things, general moneymarket conditions, general conditions of the municipal bond market, size of aparticular offering, the maturity of the obligation and rating of the issue. Theratings of S&P, Moody's and Fitch Investors Service ("Fitch") represent theirrespective opinions on the quality of the municipal bonds they undertake torate. It should be emphasized, however, that ratings are general and notabsolute standards of quality. Consequently, municipal bonds with the samematurity, coupon and rating may have different yields and municipal bonds of thesame maturity and coupon with different ratings may have the same yield. SeeAppendix B for a description of ratings. Many issuers of securities choose notto have their obligations rated. Although unrated securities eligible forpurchase by the Fund must be determined to be comparable in quality tosecurities having certain specified ratings, the market for unrated securitiesmay not be as broad as for rated securities since many investors rely on ratingorganizations for credit appraisal. 5<PAGE>Mortgage-Backed Securities. The Fund may invest in mortgage pass-throughcertificates and multiple-class pass-through securities, such as real estatemortgage investment conduits REMIC, CMOs and stripped mortgage-backed securities("SMBS"), and other types of "Mortgage-Backed Securities" that may be availablein the future.Guaranteed Mortgage Pass-Through Securities. Guaranteed mortgage pass-throughsecurities represent participation interests in pools of residential mortgageloans and are issued by U.S. Governmental or private lenders and guaranteed bythe U.S. Government or one of its agencies or instrumentalities, including butnot limited to Ginnie Mae, Fannie Mae and Freddie Macs.Multiple-Class Pass-Through Securities and Collateralized Mortgage Obligations.CMOs and REMIC pass-through or participation certificates may be issued by,among others, U.S. Government agencies and instrumentalities as well as privatelenders. CMOs and REMIC certificates are issued in multiple classes and theprincipal of and interest on the mortgage assets may be allocated among theseveral classes of CMOs or REMIC certificates in various ways. Each class ofCMOs or REMIC certificates, often referred to as a "tranche," is issued at aspecific adjustable or fixed interest rate and must be fully retired no laterthan its final distribution date. Generally, interest is paid or accrues on allclasses of CMOs or REMIC certificates on a monthly basis.Typically, CMOs are collateralized by Ginnie Mae, Fannie Mae or Freddie Maccertificates but also may be collateralized by other mortgage assets such aswhole loans or private mortgage pass-through securities. Debt service on CMOs isprovided from payments of principal and interest on collateral of mortgagedassets and any reinvestment income thereon.A REMIC is a CMO that qualifies for special tax treatment under the InternalRevenue Code of 1986, as amended (the "Code"), and invests in certain mortgagesprimarily secured by interests in real property and other permitted investments.Investors may purchase "regular" or "residual" interests in REMICs, although theFund does not intend, absent a change in current tax law, to invest in residualinterests.Stripped Mortgage-Backed Securities. SMBS are derivative multiple-classmortgage-backed securities. SMBS are usually structured with two classes thatreceive different proportions of interest and principal distributions on a poolof mortgage assets. A typical SMBS will have one class receiving some of theinterest and most of the principal, while the other class will receive most ofthe interest and the remaining principal. In the most extreme case, one classwill receive all of the interest (the "interest only" class) while the otherclass will receive all of the principal (the "principal only" class). The yieldsand market risk of interest only and principal only SMBS, respectively, may bemore volatile than those of other fixed income securities. The staff of the SECconsiders privately issued SMBS to be illiquid.Structured or Hybrid Notes. The Fund may invest in "structured" or "hybrid"notes. The distinguishing feature of a structured or hybrid note is that theamount of interest and/or principal payable on the note is based on theperformance of a benchmark asset or market other than fixed income securities orinterest rates. Examples of these benchmarks include stock prices, currencyexchange rates and physical commodity prices. Investing in a structured noteallows the Fund to gain exposure to the benchmark market while fixing themaximum loss that the Fund may experience in the event that market does notperform as expected. Depending on the terms of the note, the Fund may forego allor part of the interest and principal that would be payable on a comparableconventional note; the Fund's loss cannot exceed this foregone interest and/orprincipal. An investment in structured or hybrid notes involves risks similar tothose associated with a direct investment in the benchmark asset. 6<PAGE>Participation Interests. The Fund may invest in participation interests.Participation interests, which may take the form of interests in, or assignmentsof certain loans, are acquired from banks who have made these loans or aremembers of a lending syndicate. The Fund's investments in participationinterests may be subject to its 15% of total assets limitation on investments inilliquid securities.Risk Factors Associated with Mortgage-Backed Securities. Investing inMortgage-Backed Securities involves certain risks, including the failure of acounter-party to meet its commitments, adverse interest rate changes and theeffects of prepayments on mortgage cash flows. In addition, investing in thelowest tranche of CMOs and REMIC certificates involves risks similar to thoseassociated with investing in equity securities. Further, the yieldcharacteristics of Mortgage-Backed Securities differ from those of traditionalfixed income securities. The major differences typically include more frequentinterest and principal payments (usually monthly), the adjustability of interestrates, and the possibility that prepayments of principal may be madesubstantially earlier than their final distribution dates.Prepayment rates are influenced by changes in current interest rates and avariety of economic, geographic, social and other factors and cannot bepredicted with certainty. Both adjustable rate mortgage loans and fixed ratemortgage loans may be subject to a greater rate of principal prepayments in adeclining interest rate environment and to a lesser rate of principalprepayments in an increasing interest rate environment. Under certain interestrate and prepayment rate scenarios, the Fund may fail to recoup fully itsinvestment in Mortgage-Backed Securities notwithstanding any direct or indirectgovernmental, agency or other guarantee. When the Fund reinvests amountsrepresenting payments and unscheduled prepayments of principal, it may receive arate of interest that is lower than the rate on existing adjustable ratemortgage pass-through securities. Thus, Mortgage-Backed Securities, andadjustable rate mortgage pass-through securities in particular, may be lesseffective than other types of U.S.Government securities as a means of "locking in" interest rates.Conversely, in a rising interest rate environment, a declining prepayment ratewill extend the average life of many Mortgage-Backed Securities. Thispossibility is often referred to as extension risk. Extending the average lifeof a Mortgage-Backed Security increases the risk of depreciation due to futureincreases in market interest rates. Indexed Securities. The Fund may invest in indexed securities, includingfloating rate securities that are subject to a maximum interest rate ("cappedfloaters") up to 10% of the Fund's total assets and leveraged inverse floatingrate securities ("inverse floaters"). The interest rate or, in some cases, theprincipal payable at the maturity of an indexed security may change positivelyor inversely in relation to one or more interest rates, financial indices orother financial indicators ("reference prices"). An indexed security may beleveraged to the extent that the magnitude of any change in the interest rate orprincipal payable on an indexed security is a multiple of the change in thereference price. Thus, indexed securities may decline in value due to adversemarket changes in interest rates or other reference prices. 7<PAGE>Risk Associated with Specific Types of Derivative Debt. Different types ofderivative debt securities are subject to different combinations of prepayment,extension and/or interest rate risk. Conventional mortgage pass-throughsecurities and sequential pay CMOs are subject to all of these risks, but aretypically not leveraged. Thus, the magnitude of exposure may be less than formore leveraged Mortgage-Backed Securities.The risk of early prepayments is the primary risk associated with interest onlydebt securities ("IOs"), super floaters, other leveraged floating rateinstruments and Mortgage-Backed Securities purchased at a premium to their parvalue. In some instances, early prepayments may result in a complete loss ofinvestment in certain of these securities. The primary risks associated withcertain other derivative debt securities are the potential extension of averagelife and/or depreciation due to rising interest rates.These securities include floating rate securities based on the Cost of FundsIndex ("COFI floaters"), other "lagging rate" floating rate securities, floatingrate securities that are subject to a maximum interest rate ("capped floaters"),Mortgage-Backed Securities purchased at a discount, leveraged inverse floatingrate securities ("inverse floaters"), principal only debt securities ("POs"),certain residual or support tranches of CMOs and index amortizing notes. Indexamortizing notes are not Mortgage-Backed Securities, but are subject toextension risk resulting from the issuer's failure to exercise its option tocall or redeem the notes before their stated maturity date. Leveraged inverseIOs combine several elements of the Mortgage-Backed Securities described aboveand thus present an especially intense combination of prepayment, extension andinterest rate risks.Planned amortization class ("PAC") and target amortization class ("TAC") CMObonds involve less exposure to prepayment, extension and interest rate risk thanother Mortgage-Backed Securities, provided that prepayment rates remain withinexpected prepayment ranges or "collars." To the extent that prepayment ratesremain within these prepayment ranges, the residual or support tranches of PACand TAC CMOs assume the extra prepayment, extension and interest rate riskassociated with the underlying mortgage assets.Other types of floating rate derivative debt securities present more complextypes of interest rate risks. For example, range floaters are subject to therisk that the coupon will be reduced to below market rates if a designatedinterest rate floats outside of a specified interest rate band or collar. Dualindex or yield curve floaters are subject to depreciation in the event of anunfavorable change in the spread between two designated interest rates. X- resetfloaters have a coupon that remains fixed for more than one accrual period.Thus, the type of risk involved in these securities depends on the terms of eachindividual X-reset floater.Convertible Securities. The Fund may invest in convertible securities.Convertible securities may be converted at either a stated price or stated rateinto underlying shares of common stock of the same issuer. Convertiblesecurities have general characteristics similar to both fixed income and equitysecurities. The market value of convertible securities declines as interestrates increase, and increases as interest rates decline. In addition, because ofthe conversion feature, the market value of convertible securities tends to varywith fluctuations in the market value of the underlying common stocks andtherefore will also react to variations in the general market for equitysecurities. A unique feature of convertible securities is that as the marketprice of the underlying common stock declines, convertible securities tend totrade increasingly on a yield basis, and consequently may not experience marketvalue declines to the same extent as the underlying common stock. When themarket price of the underlying common stock increases, the prices of theconvertible securities tend to rise as a reflection of the value of theunderlying common stock. While no securities investments are without risk,investments in convertible securities generally entail less risk thaninvestments in common stock of the same issuer. However, the issuers ofconvertible securities may default on their obligations. 8<PAGE>Mortgage "Dollar Roll" Transactions. The Fund may enter into mortgage "dollarroll" transactions with selected banks and broker-dealers pursuant to which theFund sells Mortgage-Backed Securities and simultaneously contracts to repurchasesubstantially similar (same type, coupon and maturity) securities on a specifiedfuture date. The Fund will only enter into covered rolls. A "covered roll" is aspecific type of dollar roll for which there is an offsetting cash position or acash equivalent security position which matures on or before the forwardsettlement date of the dollar roll transaction. Covered rolls are not treated asa borrowing or other senior security and will be excluded from the calculationof the Fund's borrowing and other senior securities. For financial reporting andtax purposes, the Fund treats mortgage dollar rolls as two separatetransactions; one involving the purchase of a security and a separatetransaction involving a sale. The Fund does not currently intend to enter intomortgage rolls that are accounted for as financing.Pay-In-Kind, Delayed and Zero Coupon Bonds. The Fund may invest in pay-in-kind,delayed and zero coupon bonds. These are securities issued at a discount fromtheir face value because interest payments are typically postponed untilmaturity. The amount of the discount rate varies depending on factors includingthe time remaining until maturity, prevailing interest rates, the security'sliquidity and the issuer's credit quality. These securities also may take theform of debt securities that have been stripped of their interest payments. Aportion of the discount with respect to stripped tax-exempt securities or theircoupons may be taxable. The market prices of pay-in-kind, delayed and zerocoupon bonds generally are more volatile than the market prices ofinterest-bearing securities and are likely to respond to a greater degree tochanges in interest rates than interest-bearing securities having similarmaturities and credit quality. The Fund's investments in pay-in-kind, delayedand zero coupon bonds may require the Fund to sell certain of its portfoliosecurities to generate sufficient cash to satisfy certain income distributionrequirements. See "Tax Status." At times when the Fund invests in pay-in-kind,delayed and zero coupon bonds, it will not be pursuing its primary objective ofmaximizing current income. Swaps, Caps, Floors and Collars. As one way of managing its exposure todifferent types of investments, the Fund may enter into interest rate swaps andother types of swap agreements such as caps, collars and floors. The Fund mayenter into currency swaps, caps, collars and floors. In a typical interest rateswap, one party agrees to make regular payments equal to a floating interestrate times a "notional principal amount," in return for payments equal to afixed rate times the same amount, for a specified period of time. If a swapagreement provides for payment in different currencies, the parties might agreeto exchange the notional principal amount as well. Swaps may also depend onother prices or rates, such as the value of an index or mortgage prepaymentrates.In a typical cap or floor agreement, one party agrees to make payments onlyunder specified circ*mstances, usually in return for payment of a fee by theother party. For example, the buyer of an interest rate cap obtains the right toreceive payments to the extent that a specified interest rate exceeds anagreed-upon level, while the seller of an interest rate floor is obligated tomake payment to the extent that a specified interest rate falls below anagreed-upon level. An interest rate collar combines elements of buying a cap andselling a floor. 9<PAGE>Swap agreements will tend to shift the Fund's investment exposure from one typeof investment to another. For example, if the Fund agreed to exchange paymentsin dollars for payments in a foreign currency, the swap agreement would tend todecrease the Fund's exposure to U.S. interest rates and increase its exposure toforeign currency and interest rates. Caps and floors have an effect similar tobuying or writing options. Depending on how they are used, swap agreements mayincrease or decrease the overall volatility of the Fund's investments and itsshare price and yield.Swap agreements are sophisticated hedging instruments that typically involve asmall investment of cash relative to the magnitude of risks assumed. As aresult, swaps can be highly volatile and may have a considerable impact on theFund's performance. Swap agreements are subject to risks related to thecounterparty's ability to perform, and may decline in value if thecounterparty's creditworthiness deteriorates. The Fund may also suffer losses ifit is unable to terminate outstanding swap agreements or reduce its exposurethrough offsetting transactions. The Fund will maintain in a segregated accountwith its custodian, cash or liquid securities equal to the net amount, if any,of the excess of the Fund's obligations over its entitlements with respect toswap, cap, collar or floor transactions.Asset-Backed Securities. The Fund may invest a portion of their assets inasset-backed securities. Asset backed securities, like Ginnie Mae certificates,are securities which represent a participation in or are secured by and payablefrom, a stream of payments generated by particular assets, most often a pool ofassets similar to one another. Types of other asset backed securities includeautomobile receivable securities, credit card receivable securities and mortgagebacked securities such as collateralized mortgage obligations ("CMOs") and realestate mortgage investment conduits ("REMICs").Asset-backed securities are often subject to more rapid repayment than theirstated maturity date would indicate as a result of the pass-through ofprepayments of principal on the underlying loans. During periods of declininginterest rates, prepayment of loans underlying asset-backed securities can beexpected to accelerate. Accordingly, the Fund's ability to maintain positions insuch securities will be affected by reductions in the principal amount of suchsecurities resulting from prepayments, and its ability to reinvest the returnsof principal at comparable yields is subject to generally prevailing interestrates at that time.Credit card receivables are generally unsecured and the debtors on suchreceivables are entitled to the protection of a number of state and federalconsumer credit laws, many of which give such debtors the right to set-offcertain amounts owed on the credit cards, thereby reducing the balance due.Automobile receivables generally are secured, but by automobiles rather thanresidential real property. Most issuers of automobile receivables permit theloan servicers to retain possession of the underlying obligations. If theservicer were to sell these obligations to another party, there is a risk thatthe purchaser would acquire an interest superior to that of the holders of theasset-backed securities. In addition, because of the large number of vehiclesinvolved in a typical issuance and technical requirements under state laws, thetrustee for the holders of the automobile receivables may not have a propersecurity interest in the underlying automobiles. Therefore, there is thepossibility that, in some cases, recoveries on repossessed collateral may not beavailable to support payments on these securities.Lower Rated High Yield Debt Obligations. The Fund may invest in high yielding,fixed income securities rated below investment grade (e.g., rated below Baa byMoody's or below BBB by S&P), sometimes referred to as junk bonds. Ratings arebased largely on the historical financial condition of the issuer. Consequently,the rating assigned to any particular security is not necessarily a reflectionof the issuer's current financial condition, which may be better or worse thanthe rating would indicate. 10<PAGE>See Appendix B to this Statement of Additional Information which describes thecharacteristics of corporate bonds in the various rating categories. The Fundmay invest in comparable quality unrated securities which, in the opinion of theAdviser, offer comparable yields and risks to those securities which are rated.Debt obligations rated in the lower ratings categories, or which are unrated,involve greater volatility of price and risk of loss of principal and income. Inaddition, lower ratings reflect a greater possibility of an adverse change infinancial condition affecting the ability of the issuer to make payments ofinterest and principal. The high yield fixed income market is relatively new andits growth occurred during a period of economic expansion. The market has notyet been fully tested by an economic recession.The market price and liquidity of lower rated fixed income securities generallyrespond to short term corporate and market developments to a greater extent thando the price and liquidity of higher rated securities because such developmentsare perceived to have a more direct relationship to the ability of an issuer ofsuch lower rated securities to meet its ongoing debt obligations.Reduced volume and liquidity in the high yield bond market or the reducedavailability of market quotations will make it more difficult to dispose of thebonds and to value accurately the Fund's assets. The reduced availability ofreliable, objective data may increase the Fund's reliance on management'sjudgment in valuing high yield bonds. In addition, the Fund's investments inhigh yield securities may be susceptible to adverse publicity and investorperceptions, whether or not justified by fundamental factors. The Fund'sinvestments, and consequently its net asset value, will be subject to the marketfluctuations and risks inherent in all securities.Ratings as Investment Criteria In general, the ratings of Moody's and S&Prepresent the opinions of these agencies as to the quality of the securitieswhich they rate. It should be emphasized however, that ratings are relative andsubjective and are not absolute standards of quality. These rating will be usedby the Fund as initial criteria for the selection of portfolio securities. Amongthe factors which will be considered are the long-term ability of the issuer topay principal and interest and general economic trends. Appendix B containsfurther information concerning the rating of Moody's and S&P and theirsignificance. Subsequent to its purchase by the Fund, an issue of securities maycease to be rated, or its rating may be reduced below the minimum required forpurchase by the Fund. Neither of these events will require the sale of thesecurities by the Fund.Subsequent to its purchase by the Fund, an issue of securities may cease to berated or its rating may be reduced below the minimum required for purchase bythe Fund. Neither of these events will require the sale of the securities by theFund, but the Adviser will consider the event in its determination of whetherthe Fund should continue to hold the securities.Investments in Foreign Securities. The Fund may invest in securities of foreignissuers, including debt and equity securities of corporate and governmentalissuers in countries with emerging economies or securities markets. The Fund mayalso invest in American Depository Receipts ("ADRs"), European DepositoryReceipts ("EDRs") or other securities convertible into securities of foreignissuers. These securities may not necessarily be denominated in the samecurrency as the securities into which they may be converted but rather in thecurrency of the market in which they are traded. ADRs are receipts typicallyissued by an American bank or trust company which evidence ownership ofunderlying securities issued by a foreign corporation. EDRs are receipts issuedin Europe by banks or depositories which evidence a similar ownershiparrangement. Generally, ADRs, in registered form, are designed for use in U.S.securities markets and EDRs, in bearer form, are designed for use in Europeansecurities markets. 11<PAGE>Foreign Currency Transactions. The Fund may engage in foreign currencytransactions. The foreign currency exchange transactions of the Fund may beconducted on a spot (i.e., cash) basis at the spot rate for purchasing orselling currency prevailing in the foreign exchange market. The Fund may enterinto forward foreign currency exchange contracts involving currencies of thedifferent countries in which it may invest as a hedge against possiblevariations in the foreign exchange rate between these currencies. Forwardcontracts are agreements to purchase or sell a specified currency at a specifiedfuture date and price set at the time of the contract. Transaction hedging isthe purchase or sale of forward foreign currency contracts with respect tospecific receivables or payables of the Fund accruing in connection with thepurchase and sale of its portfolio securities quoted or denominated in the sameor related foreign currencies. Portfolio hedging is the use of forward foreigncurrency contracts to offset portfolio security positions denominated or quotedin the same or related foreign currencies. The Fund's dealings in forwardforeign currency exchange contracts will be limited to hedging either specifiedtransactions or portfolio positions. The Fund will not attempt to hedge all ofits foreign portfolio positions.If the Fund enters into a forward contract requiring it to purchase foreigncurrency, its custodian bank will segregate cash or liquid securities, of anytype or maturity, in a separate account of the Fund in an amount necessary tocomplete the forward contract. These assets will be valued at market daily andif the value of the securities in the separate account declines, additional cashor securities will be placed in the account so that the value of the accountwill equal the amount of the Fund's commitment in purchased forward contracts.Hedging against a decline in the value of currency does not eliminatefluctuations in the prices of portfolio securities or prevent losses if theprices of these securities decline. These transactions also preclude theopportunity for gain if the value of the hedged currency rises. Moreover, it maynot be possible for the Fund to hedge against a devaluation that is so generallyanticipated that the Fund is not able to contract to sell the currency at aprice above the devaluation level it anticipates.The cost to the Fund of engaging in foreign currency exchange transactionsvaries with factors such as the currency involved, the length of the contractperiod and the prevailing market conditions. Since transactions in foreigncurrency are usually conducted on a principal basis, no fees or commissions areinvolved.Risks of Foreign Securities. Investments in foreign securities may involve agreater degree of risk than those in domestic securities. There is generallyless publicly available information about foreign companies in the form ofreports and ratings similar to those that are published about issuers in theUnited States. Also, foreign issuers are generally not subject to uniformaccounting, auditing and financial reporting requirements comparable to thoseapplicable to United States issuers.Because foreign securities may be denominated in currencies other than the U.S.dollar, changes in foreign currency exchange rates will affect the Fund's netasset value, the value of dividends and interest earned, gains and lossesrealized on the sale of securities, and any net investment income and gains thatthe Fund distributes to shareholders. Securities transactions undertaken in someforeign markets may not be settled promptly, so that the Fund's investments onforeign exchanges may be less liquid and subject to the risk of fluctuatingcurrency exchange rates pending settlement. 12<PAGE>Foreign securities will be purchased in the best available market, whetherthrough over-the-counter markets or exchanges located in the countries whereprincipal offices of the issuers are located. Foreign securities markets aregenerally not as developed or efficient as those in the United States. Whilegrowing in volume, they usually have substantially less volume than the New YorkStock Exchange, and securities of some foreign issuers are less liquid and morevolatile than securities of comparable United States issuers. Fixed commissionson foreign exchanges are generally higher than negotiated commissions on UnitedStates exchanges, although the Fund will endeavor to achieve the most favorablenet results on its portfolio transactions. There is generally less governmentsupervision and regulation of securities exchanges, brokers and listed issuersthan in the United States.With respect to certain foreign countries, there is the possibility of adversechanges in investment or exchange control regulations, expropriation,nationalization or confiscatory taxation, limitations on the removal of funds orother assets of the Fund, political or social instability, or diplomaticdevelopments which could affect United States investments in those countries.Moreover, individual foreign economies may differ favorably or unfavorably fromthe United States economy in terms of growth of gross national product, rate ofinflation, capital reinvestment, resource self-sufficiency and balance ofpayments position.The dividends in some cases, capital gains, and interest payable on certain ofthe Fund's foreign portfolio securities may be subject to foreign withholding orother foreign taxes, thus reducing the net amount of income or gains availablefor distribution to the Fund's shareholders.Repurchase Agreements. The Fund may invest in repurchase agreements. In arepurchase agreement the Fund buys a security for a relatively short period(usually not more than 7 days) subject to the obligation to sell it back to theissuer at a fixed time and price plus accrued interest. The Fund will enter intorepurchase agreements only with member banks of the Federal Reserve System andwith "primary dealers" in U.S. Government securities. The Adviser willcontinuously monitor the creditworthiness of the parties with whom the Fundenters into repurchase agreements.The Fund has established a procedure providing that the securities serving ascollateral for each repurchase agreement must be delivered to the Fund'scustodian either physically or in book-entry form and that the collateral mustbe marked to market daily to ensure that each repurchase agreement is fullycollateralized at all times. In the event of bankruptcy or other default by aseller of a repurchase agreement, the Fund could experience delays inliquidating the underlying securities during the period in which the Fund seeksto enforce its rights thereto, possible subnormal levels of income, a decline invalue of the underlying securities or lack of access to income during thisperiod, and the expense of enforcing its rights.Reverse Repurchase Agreements. The Fund may also enter into reverse repurchaseagreements which involve the sale of government securities held in its portfolioto a bank with an agreement that the Fund will buy back the securities at afixed future date at a fixed price plus an agreed amount of "interest" which maybe reflected in the repurchase price. Reverse repurchase agreements areconsidered to be borrowings by the Fund. Reverse repurchase agreements involvethe risk that the market value of securities purchased by the Fund with proceedsof the transaction may decline below the repurchase price of the securities soldby the Fund which it is obligated to repurchase. The Fund will also continue tobe subject to the risk of a decline in the market value of the securities soldunder the agreements because it will reacquire those securities upon effectingtheir repurchase. To minimize various risks associated with reverse repurchaseagreements, the Fund will establish a separate account consisting of liquidsecurities, of any type or maturity, in an amount at least equal to therepurchase prices of the securities (plus any accrued interest thereon) undersuch agreements. The Fund will not enter into reverse repurchase agreements andother borrowings exceeding in the aggregate more than 33 1/3% of the marketvalue of its total assets. The Fund will enter into reverse repurchaseagreements only with federally insured banks or savings and loan associationswhich are approved in advance as being creditworthy by the Trustees. Underprocedures established by the Trustees, the Adviser will monitor thecreditworthiness of the banks involved. 13<PAGE>Restricted Securities. The Fund may purchase securities that are not registered("restricted securities") under the Securities Act of 1933 ("1933 Act"),including commercial paper issued in reliance on section 4(2) of the 1933 Actand securities offered and sold to "qualified institutional buyers" under Rule144A under the 1933 Act. The Fund will not invest more than 15% of its netassets in illiquid investments. If the Trustees determine, based upon acontinuing review of the trading markets for specific Section 4(2) paper or Rule144A securities, that they are liquid, they will not be subject to the 15% limiton illiquid investments. The Trustees may adopt guidelines and delegate to theAdviser the daily function of determining and monitoring the liquidity ofrestricted securities. The Trustees, however, will retain sufficient oversightand be ultimately responsible for the determinations. The Trustees willcarefully monitor the Fund's investments in these securities, focusing on suchimportant factors, among others, as valuation, liquidity and availability ofinformation. This investment practice could have the effect of increasing thelevel of illiquidity in the Fund if qualified institutional buyers become for atime uninterested in purchasing these restricted securities.Options on Securities, Securities Indices and Currency. The Fund may purchaseand write (sell) call and put options on any securities in which it may invest,on any securities index based on securities in which it may invest or on anycurrency in which Fund investments may be denominated. These options may belisted on national domestic securities exchanges or foreign securities exchangesor traded in the over-the-counter market. The Fund may write covered put andcall options and purchase put and call options to enhance total return, as asubstitute for the purchase or sale of securities or currency, or to protectagainst declines in the value of portfolio securities and against increases inthe cost of securities to be acquired.Writing Covered Options. A call option on securities or currency written by theFund obligates the Fund to sell specified securities or currency to the holderof the option at a specified price if the option is exercised at any time beforethe expiration date. A put option on securities or currency written by the Fundobligates the Fund to purchase specified securities or currency from the optionholder at a specified price if the option is exercised at any time before theexpiration date. Options on securities indices are similar to options onsecurities, except that the exercise of securities index options requires cashsettlement payments and does not involve the actual purchase or sale ofsecurities. In addition, securities index options are designed to reflect pricefluctuations in a group of securities or segment of the securities market ratherthan price fluctuations in a single security. Writing covered call options maydeprive the Fund of the opportunity to profit from an increase in the marketprice of the securities or foreign currency assets in its portfolio. Writingcovered put options may deprive the Fund of the opportunity to profit from adecrease in the market price of the securities or foreign currency assets to beacquired for its portfolio.All call and put options written by the Fund are covered. A written call optionor put option may be covered by (i) maintaining cash or liquid securities,either of which may be quoted or denominated in any currency, in a segregatedaccount with a value at least equal to the Fund's obligation under the option,(ii) entering into an offsetting forward commitment and/or (iii) purchasing anoffsetting option or any other option which, by virtue of its exercise price orotherwise, reduces the Fund's net exposure on its written option position. Awritten call option on securities is typically covered by maintaining thesecurities that are subject to the option in a segregated account. The Fund maycover call options on a securities index by owning securities whose pricechanges are expected to be similar to those of the underlying index. 14<PAGE>The Fund may terminate its obligations under an exchange traded call or putoption by purchasing an option identical to the one it has written. Obligationsunder over-the-counter options may be terminated only by entering into anoffsetting transaction with the counterparty to such option. Such purchases arereferred to as "closing purchase transactions."Purchasing Options. The Fund would normally purchase call options inanticipation of an increase, or put options in anticipation of a decrease("protective puts"), in the market value of securities or currencies of the typein which it may invest. The Fund may also sell call and put options to close outit* purchased options.The purchase of a call option would entitle the Fund, in return for the premiumpaid, to purchase specified securities or currency at a specified price duringthe option period. The Fund would ordinarily realize a gain on the purchase of acall option if, during the option period, the value of such securities orcurrency exceeded the sum of the exercise price, the premium paid andtransaction costs; otherwise the Fund would realize either no gain or a loss onthe purchase of the call option.The purchase of a put option would entitle the Fund, in exchange for the premiumpaid, to sell specified securities or currency at a specified price during theoption period. The purchase of protective puts is designed to offset or hedgeagainst a decline in the market value of the Fund's portfolio securities or thecurrencies in which they are denominated. Put options may also be purchased bythe Fund for the purpose of affirmatively benefiting from a decline in the priceof securities or currencies which it does not own. The Fund would ordinarilyrealize a gain if, during the option period, the value of the underlyingsecurities or currency decreased below the exercise price sufficiently to coverthe premium and transaction costs; otherwise the Fund would realize either nogain or a loss on the purchase of the put option. Gains and losses on thepurchase of put options may be offset by countervailing changes in the value ofthe Fund's portfolio securities.The Fund's options transactions will be subject to limitations established byeach of the exchanges, boards of trade or other trading facilities on which suchoptions are traded. These limitations govern the maximum number of options ineach class which may be written or purchased by a single investor or group ofinvestors acting in concert, regardless of whether the options are written orpurchased on the same or different exchanges, boards of trade or other tradingfacilities or are held or written in one or more accounts or through one or morebrokers. Thus, the number of options which the Fund may write or purchase may beaffected by options written or purchased by other investment advisory clients ofthe Adviser. An exchange, board of trade or other trading facility may order theliquidation of positions found to be in excess of these limits, and it mayimpose certain other sanctions.Risks Associated with Options Transactions. There is no assurance that a liquidsecondary market on a domestic or foreign options exchange will exist for anyparticular exchange-traded option or at any particular time. If the Fund isunable to effect a closing purchase transaction with respect to covered optionsit has written, the Fund will not be able to sell the underlying securities orcurrencies or dispose of assets held in a segregated account until the optionsexpire or are exercised. Similarly, if the Fund is unable to effect a closingsale transaction with respect to options it has purchased, it would have toexercise the options in order to realize any profit and will incur transactioncosts upon the purchase or sale of underlying securities or currencies. 15<PAGE>Reasons for the absence of a liquid secondary market on an exchange include thefollowing: (i) there may be insufficient trading interest in certain options;(ii) restrictions may be imposed by an exchange on opening transactions orclosing transactions or both; (iii) trading halts, suspensions or otherrestrictions may be imposed with respect to particular classes or series ofoptions; (iv) unusual or unforeseen circ*mstances may interrupt normaloperations on an exchange; (v) the facilities of an exchange or the OptionsClearing Corporation may not at all times be adequate to handle current tradingvolume; or (vi) one or more exchanges could, for economic or other reasons,decide or be compelled at some future date to discontinue the trading of options(or a particular class or series of options). If trading were discontinued, thesecondary market on that exchange (or in that class or series of options) wouldcease to exist. However, outstanding options on that exchange that had beenissued by the Options Clearing Corporation as a result of trades on thatexchange would continue to be exercisable in accordance with their terms.The Fund's ability to terminate over-the-counter options is more limited thanwith exchange-traded options and may involve the risk that broker-dealersparticipating in such transactions will not fulfill their obligations. TheAdviser will determine the liquidity of each over-the-counter option inaccordance with guidelines adopted by the Trustees.The writing and purchase of options is a highly specialized activity whichinvolves investment techniques and risks different from those associated withordinary portfolio securities transactions. The successful use of optionsdepends in part on the Adviser's ability to predict future price fluctuationsand, for hedging transactions, the degree of correlation between the options andsecurities or currency markets.Futures Contracts and Options on Futures Contracts. To seek to increase totalreturn or hedge against changes in interest rates, securities prices or currencyexchange rates, the Fund may purchase and sell various kinds of futurescontracts, and purchase and write call and put options on these futurescontracts. The Fund may also enter into closing purchase and sale transactionswith respect to any of these contracts and options. The futures contracts may bebased on various securities (such as U.S. Government securities), securitiesindices, foreign currencies and any other financial instruments and indices. Allfutures contracts entered into by the Fund are traded on U.S. or foreignexchanges or boards of trade that are licensed, regulated or approved by theCommodity Futures Trading Commission ("CFTC").Futures Contracts. A futures contract may generally be described as an agreementbetween two parties to buy and sell particular financial instruments orcurrencies for an agreed price during a designated month (or to deliver thefinal cash settlement price, in the case of a contract relating to an index orotherwise not calling for physical delivery at the end of trading in thecontract).Positions taken in the futures markets are not normally held to maturity but areinstead liquidated through offsetting transactions which may result in a profitor a loss. While futures contracts on securities or currency will usually beliquidated in this manner, the Fund may instead make, or take, delivery of theunderlying securities or currency whenever it appears economically advantageousto do so. A clearing corporation associated with the exchange on which futurescontracts are traded guarantees that, if still open, the sale or purchase willbe performed on the settlement date. 16<PAGE> Hedging and Other Strategies. Hedging is an attempt to establish with morecertainty than would otherwise be possible the effective price or rate of returnon portfolio securities or securities that a Fund proposes to acquire or theexchange rate of currencies in which portfolio securities are quoted ordenominated. When securities prices are falling, the Fund can seek to offset adecline in the value of its current portfolio securities through the sale offutures contracts. When securities prices are rising, the Fund, through thepurchase of futures contracts, can attempt to secure better rates or prices thanmight later be available in the market when it effects anticipated purchases.The Fund may seek to offset anticipated changes in the value of a currency inwhich its portfolio securities, or securities that it intends to purchase, arequoted or denominated by purchasing and selling futures contracts on suchcurrencies.The Fund may, for example, take a "short" position in the futures market byselling futures contracts in an attempt to hedge against an anticipated declinein market prices or foreign currency rates that would adversely affect thedollar value of the Fund's portfolio securities. Such futures contracts mayinclude contracts for the future delivery of securities held by the Fund orsecurities with characteristics similar to those of the Fund's portfoliosecurities. Similarly, the Fund may sell futures contracts on any currencies inwhich its portfolio securities are quoted or denominated or in one currency tohedge against fluctuations in the value of securities denominated in a differentcurrency if there is an established historical pattern of correlation betweenthe two currencies. If, in the opinion of the Adviser, there is a sufficient degree of correlationbetween price trends for the Fund's portfolio securities and futures contractsbased on other financial instruments, securities indices or other indices, theFund may also enter into such futures contracts as part of its hedging strategy.Although under some circ*mstances prices of securities in the Fund's portfoliomay be more or less volatile than prices of such futures contracts, the Adviserwill attempt to estimate the extent of this volatility difference based onhistorical patterns and compensate for any differential by having the Fund enterinto a greater or lesser number of futures contracts or by attempting to achieveonly a partial hedge against price changes affecting the Fund's portfoliosecurities.When a short hedging position is successful, any depreciation in the value ofportfolio securities will be substantially offset by appreciation in the valueof the futures position. On the other hand, any unanticipated appreciation inthe value of the Fund's portfolio securities would be substantially offset by adecline in the value of the futures position.On other occasions, the Fund may take a "long" position by purchasing futurescontracts. This would be done, for example, when the Fund anticipates thesubsequent purchase of particular securities when it has the necessary cash, butexpects the prices or currency exchange rates then available in the applicablemarket to be less favorable than prices that are currently available. The Fundmay also purchase futures contracts as a substitute for transactions insecurities or foreign currency, to alter the investment characteristics of orcurrency exposure associated with portfolio securities or to gain or increaseits exposure to a particular securities market or currency.Options on Futures Contracts. The Fund may purchase and write options on futuresfor the same purposes as its transactions in futures contracts. The purchase ofput and call options on futures contracts will give the Fund the right (but notthe obligation) for a specified price to sell or to purchase, respectively, theunderlying futures contract at any time during the option period. As thepurchaser of an option on a futures contract, the Fund obtains the benefit ofthe futures position if prices move in a favorable direction but limits its riskof loss in the event of an unfavorable price movement to the loss of the premiumand transaction costs. 17<PAGE>The writing of a call option on a futures contract generates a premium which maypartially offset a decline in the value of the Fund's assets. By writing a calloption, the Fund becomes obligated, in exchange for the premium (upon exerciseof the option) to sell a futures contract if the option is exercised, which mayhave a value higher than the exercise price. Conversely, the writing of a putoption on a futures contract generates a premium which may partially offset anincrease in the price of securities that the Fund intends to purchase. However,the Fund becomes obligated (upon exercise of the option) to purchase a futurescontract if the option is exercised, which may have a value lower than theexercise price. The loss incurred by a Fund in writing options on futures ispotentially unlimited and may exceed the amount of the premium received.The holder or writer of an option on a futures contract may terminate itsposition by selling or purchasing an offsetting option of the same series. Thereis no guarantee that such closing transactions can be effected. The Fund'sability to establish and close out positions on such options will be subject tothe development and maintenance of a liquid market.Other Considerations. The Fund will engage in futures and related optionstransactions either for bona fide hedging purposes or to seek to increase totalreturn as permitted by the CFTC. To the extent that the Fund is using futuresand related options for hedging purposes, futures contracts will be sold toprotect against a decline in the price of securities (or the currency in whichthey are quoted or denominated) that the Fund owns or futures contracts will bepurchased to protect the Fund against an increase in the price of securities orthe currency in which they are quoted or denominated) it intends to purchase.The Fund will determine that the price fluctuations in the futures contracts andoptions on futures used for hedging purposes are substantially related to pricefluctuations in securities held by the Fund or securities or instruments whichit expects to purchase. As evidence of its hedging intent, the Fund expects thaton 75% or more of the occasions on which it takes a long futures or optionposition (involving the purchase of futures contracts), the Fund will havepurchased, or will be in the process of purchasing, equivalent amounts ofrelated securities or assets of the Fund denominated in the related currency inthe cash market at the time when the futures or option position is closed out.However, in particular cases, when it is economically advantageous for the Fundto do so, a long futures position may be terminated or an option may expirewithout the corresponding purchase of securities or other assets.To the extent that the Fund engages in nonhedging transactions in futurescontracts and options on futures, the aggregate initial margin and premiumsrequired to establish these nonhedging positions will not exceed 5% of the netasset value of the Fund's portfolio, after taking into account unrealizedprofits and losses on any such positions and excluding the amount by which suchoptions were in-the-money at the time of purchase.Transactions in futures contracts and options on futures involve brokeragecosts, require margin deposits and, in the case of contracts and optionsobligating the Fund to purchase securities or currencies, require the Fund toestablish a segregated account consisting of cash or liquid securities in anamount equal to the underlying value of such contracts and options.While transactions in futures contracts and options on futures may reducecertain risks, these transactions themselves entail certain other risks. Forexample, unanticipated changes in interest rates or securities prices orcurrency exchange rates may result in a poorer overall performance for the Fundthan if it had not entered into any futures contracts or options transactions.Perfect correlation between the Fund's futures positions and portfolio positionswill be impossible to achieve. In the event of an imperfect correlation betweena futures position and a portfolio position which is intended to be protected,the desired protection may not be obtained and the Fund may be exposed to riskof loss. In addition, it is not possible to hedge fully or protect againstcurrency fluctuations affecting the value of securities denominated in foreigncurrencies because the value of such securities is likely to fluctuate as aresult of independent factors not related to currency fluctuations. 18<PAGE>Some futures contracts or options on futures may become illiquid under adversemarket conditions. In addition, during periods of market volatility, a commodityexchange may suspend or limit trading in a futures contract or related option,which may make the instrument temporarily illiquid and difficult to price.Commodity exchanges may also establish daily limits on the amount that the priceof a futures contract or related option can vary from the previous day'ssettlement price. Once the daily limit is reached, no trades may be made thatday at a price beyond the limit. This may prevent the Fund from closing outpositions and limiting its losses. Lending of Securities. The Fund may lend portfolio securities to brokers,dealers, and financial institutions if the loan is collateralized by cash orU.S. Government securities according to applicable regulatory requirements. TheFund may reinvest any cash collateral in short-term securities and money marketsfunds. When the Fund lends portfolio securities, there is a risk that theborrower may fail to return the securities involved in the transaction. As aresult, the Fund may incur a loss or, in the event of the borrower's bankruptcy,the Fund may be delayed in or prevented from liquidating the collateral. It is afundamental policy of the Fund not to lend portfolio securities having a totalvalue exceeding 33 1/3% of its total assets. Rights and Warrants. The Fund may purchase warrants and rights which aresecurities permitting, but not obligating, their holder to purchase theunderlying securities at a predetermined price subject to the Fund's FundamentalInvestment Restriction. Generally, warrants and stock purchase rights do notcarry with them the right to receive dividends or exercise voting rights withrespect to the underlying securities, and they do not represent any rights inthe assets of the issuer. As a result, an investment in warrants and rights maybe considered to entail greater investment risk than certain other types ofinvestments. In addition, the value of warrant and rights does not necessarilychange with the value of the underlying securities, and they cease to have valueif they are not exercised on or prior to their expiration date. Investment inwarrants and rights increases the potential profit or loss to be realized fromthe investment of a given amount of the Fund's assets as compared with investingthe same amount in the underlying stock.Forward Commitment and When-Issued Securities. The Fund may purchase securitieson a when-issued or forward commitment basis. "When-issued" refers to securitieswhose terms are available and for which a market exists, but which have not beenissued. The Fund will engage in when-issued transactions with respect tosecurities purchased for its portfolio in order to obtain what is considered tobe an advantageous price and yield at the time of the transaction. Forwhen-issued transactions, no payment is made until delivery is due, often amonth or more after the purchase. In a forward commitment transaction, the Fundcontracts to purchase securities for a fixed price at a future date beyondcustomary settlement time.When the Fund engages in forward commitment and when-issued transactions, itrelies on the seller to consummate the transaction. The failure of the issuer orseller to consummate the transaction may result in the Fund losing theopportunity to obtain a price and yield considered to be advantageous. Thepurchase of securities on a when-issued and forward commitment basis alsoinvolves a risk of loss if the value of the security to be purchased declinesprior to the settlement date. 19<PAGE>On the date the Fund enters into an agreement to purchase securities on a when-issued or forward commitment basis, the Fund will segregate in a separateaccount cash or liquid securities, of any type or maturity, equal in value tothe Fund's commitment. These assets will be valued daily at market, andadditional cash or securities will be segregated in a separate account to theextent that the total value of the assets in the account declines below theamount of the when-issued commitments. Alternatively, the Fund may enter intooffsetting contracts for the forward sale of other securities that it owns.Short-Term Trading and Portfolio Turnover. Short-term trading means the purchaseand subsequent sale of a security after it has been held for a relatively briefperiod of time. The Fund may engage in short-term trading in response to stockmarket conditions, changes in interest rates or other economic trends anddevelopments, or to take advantage of yield disparities between various fixedincome securities in order to realize capital gains or improve income.Short-term trading may have the effect of increasing portfolio turnover rate. Ahigh rate of portfolio turnover (100% or greater) involves correspondinglygreater brokerage transaction expenses and may make it more difficult for theFund to qualify as a regulated investment company for federal income taxpurposes. The Fund's portfolio turnover rate is set forth in the table under thecaption "Financial Highlights" in the Prospectus.INVESTMENT RESTRICTIONSFundamental Investment Restrictions. The following investment restrictions willnot be changed without the approval of a majority of the Fund's outstandingvoting securities which, as used in the Prospectus and this Statement ofAdditional Information, means the approval by the lesser of (1) the holders of67% or more of the Fund's shares represented at a meeting if more than 50% ofthe Fund's outstanding shares are present in person or by proxy at that meetingor (2) more than 50% of the Fund's outstanding shares.The Fund may not:1. Borrow money, except: (i) for temporary or short-term purposes or for the clearance of transactions in amounts not to exceed 33 1/3% of the value of the fund's total assets (including the amount borrowed) taken at market value; (ii) in connection with the redemption of fund shares or to finance failed settlements of portfolio trades without immediately liquidating portfolio securities or other assets, (iii) in order to fulfill commitments or plans to purchase additional securities pending the anticipated sale of other portfolio securities or assets; (iv) in connection with entering into reverse repurchase agreements and dollar rolls, but only if after each such borrowing there is asset coverage of at least 300% as defined in the 1940 Act; and (v) as otherwise permitted under the 1940 Act. For purposes of this investment restriction, the deferral of trustees' fees and transactions in short sales, futures contracts, options on futures contracts, securities or indices and forward commitment transactions shall not constitute borrowing.2. Act as an underwriter, except to the extent that in connection with the disposition of portfolio securities, the Fund may be deemed to be an underwriter for purposes of the Securities Act of 1933.3. Purchase, sell or invest in real estate, but subject to its other investment policies and restrictions may invest in securities of companies that deal in real estate or are engaged in the real estate business. These companies include real estate investment trusts and securities secured by real estate or interests in real estate. The fund may hold and sell real estate acquired through default, liquidation or other distributions of an interest in real estate as a result of the fund's ownership of securities. 20<PAGE>4. Invest in commodities or commodity futures contracts, except for transactions in financial derivative contracts, such as forward currency contracts; financial futures contracts and options on financial futures contracts; options on securities, currencies and financial indices; and swaps, caps, floors, collars and swaptions.5. Make loans, except that the fund (1) may lend portfolio securities in accordance with the fund's investment policies up to 33 1/3% of the fund's total assets taken at market value, (2) enter into repurchase agreements, and (3) purchase all or a portion of an issue of publicly distributed debt securities, bank loan participation interests, bank certificates of deposit, bankers' acceptances, debentures or other securities, whether or not the purchase is made upon the original issuance of the securities.6. With respect to 75% of the fund's total assets, the fund may not invest more than 5% of the fund's total assets in the securities of any single issuer or own more than 10% of the outstanding voting securities of any one issuer, in each case other than (i) securities issued or guaranteed by the U.S. Government, its agencies or its instrumentalities or (ii) securities of other investment companies.7. Issue senior securities, except to the extent permitted by the 1940 Act.8. Purchase the securities of issuers conducting their principal activity in the same industry if, immediately after such purchase, the value of its investments in such industry would equal or exceed 25% of its total assets taken at market value at the time of such purchase, except that (i) the fund may invest up to 40% of the value of its total assets in the securities of issuers engaged in the electric utility and telephone industries and (ii) this limitation does not apply to investments in obligations of the U.S. Government or any of its agencies or instrumentalities. The fund may not concentrate its investments in the securities of issuers engaged in the electric utility industry or the telephone industry unless yields available for four consecutive weeks in the four highest rating categories on new issue bonds in either industry (issue size of $50 million or more) have averaged greater than the yields of new issue long-term industrial bonds similarly rated (issue size of $50 million or more) and, in the opinion the adviser, the relative return available from the electric utility or telephone industry and the relative risk, marketability, quality and availability of securities of this industry justifies such an investment.Non-Fundamental Investment Restrictions. The following investment restrictionsare designated as non-fundamental and may be changed by the Trustees withoutshareholder approval.1. Purchase a security if, as a result, (i) more than 10% of the fund's total assets would be invested in the securities of other investment companies, (ii) the fund would hold more than 3% of the total outstanding voting securities of any one investment company, or (iii) more than 5% of the Fund's total assets would be invested in the securities of any one investment company. These limitations do not apply to (a) the investment of cash collateral, received by the fund in connection with lending of the fund's portfolio securities, in the securities of open-end investment companies or (b) the purchase of shares of any investment company in connection with a merger, consolidation, reorganization or purchase of substantially all of the assets of another investment company. Subject to the above percentage limitations, the fund may, in connection with the John Hanco*ck Group of Funds Deferred Compensation Plan for Independent Trustees/Directors, purchase securities of other investment companies within the John Hanco*ck Group of Funds. 21<PAGE>2. Invest in the securities of an issuer for the purpose of exercising control or management, but it may do so where it is deemed advisable to protect or enhance the value of an existing investment.3. Purchase securities on margin.4. Invest more than 15% of its net assets in securities which are illiquid.THOSE RESPONSIBLE FOR MANAGEMENTThe business of the Fund is managed by its Trustees who elect officers who areresponsible for the day-to-day operations of the Fund and who execute policiesformulated by the Trustees. Several of the officers and Trustees of the Fund arealso Officers and Directors of the Adviser or Officers and Directors of theFund's principal distributor, John Hanco*ck Funds, Inc. ("John Hanco*ck Funds"). 22<PAGE> <TABLE><CAPTION> Positions Held Principal Occupation(s)Name and Address With the Company During the Past Five Years- ---------------- ---------------- -------------------------- <S> <C> <C> Edward J. Boudreau, Jr. * Trustee, Chairman and Chief Chairman, Director and Chief101 Huntington Avenue Executive Officer (1, 2) Executive Officer, the Adviser;Boston, MA 02199 Chairman, Director and ChiefOctober 1944 Executive Officer, The Berkeley Financial Group, Inc. ("The Berkeley Group"); Chairman and Director, NM Capital Management, Inc. ("NM Capital"), John Hanco*ck Advisers International Limited ("Advisers International") and Sovereign Asset Management Corporation ("SAMCorp"); Chairman and Chief Executive Officer, John Hanco*ck Funds, Inc. ("John Hanco*ck Funds"); Chairman, First Signature Bank and Trust Company; Director, John Hanco*ck Insurance Agency, Inc. ("Insurance Agency, Inc."), John Hanco*ck Advisers International (Ireland) Limited ("International Ireland"), John Hanco*ck Capital Corporation and New England/Canada Business Council; Member, Investment Company Institute Board of Governors; Director, Asia Strategic Growth Fund, Inc.; Trustee, Museum of Science; Director, John Hanco*ck Freedom Securities Corporation (until September 1996); Director, John Hanco*ck Signature Services, Inc. ("Signature Services") (until January 1997). - -------------------* Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940.(1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees.(2) A member of the Investment Committee of the Adviser. 23<PAGE> Positions Held Principal Occupation(s)Name and Address With the Company During the Past Five Years- ---------------- ---------------- -------------------------- <S> <C> <C> Stephen L. Brown* Trustee Chairman and Chief ExecutiveJohn Hanco*ck Place Officer, John Hanco*ck Mutual LifeP.O. Box 111 Insurance Company; Director, theBoston, MA 02117 Adviser, John Hanco*ck Funds,July 1937 Insurance Agency, John Hanco*ck Subsidiaries, Inc., The Berkeley Group, Federal Reserve Bank of Boston, Signature Services (until January 1997;) Trustee, John Hanco*ck Asset Management (until March 1997). James F. Carlin Trustee Chairman and CEO, Carlin233 West Central Street Consolidated, Inc.Natick, MA 01760 (management/investments); Director,April 1940 Arbella Mutual (insurance), Health Plan Services, Inc., Massachusetts Health and Education Tax Exempt Trust, Flagship Healthcare, Inc., Carlin Insurance Agency, Inc., West Insurance Agency, Inc. (until May 1995), Uno Restaurant Corp.; Chairman, Massachusetts Board of Higher Education (since 1995). - -------------------* Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940.(1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees.(2) A member of the Investment Committee of the Adviser. 24<PAGE> Positions Held Principal Occupation(s)Name and Address With the Company During the Past Five Years- ---------------- ---------------- -------------------------- <S> <C> <C> William H. Cunningham Trustee Chancellor, University of Texas601 Colorado Street System and former President of theO'Henry Hall University of Texas, Austin, Texas;Austin, TX 78701 Lee Hage and Joseph D. JamailJanuary 1944 Regents Chair of Free Enterprise; Director, LaQuinta Motor Inns, Inc. (hotel management company) (1985-1998); Jefferson-Pilot Corporation (diversified life insurance company) and LBJ Foundation Board (education foundation); Advisory Director, Chase Bank (formerly Texas Commerce Bank - Austin). Ronald R. Dion Trustee President and Chief Executive250 Boylston Street Officer, R.M. Bradley & Co., Inc.;Boston, MA 02116 Director, The New England CouncilMarch 1946 and Massachusetts Roundtable; Trustee, North Shore Medical Center and a corporator of the Eastern Bank; Trustee, Emmanuel College. Harold R. Hiser, Jr. Trustee Executive Vice President,123 Highland Avenue Schering-Plough CorporationShort Hill, NJ 07078 (pharmaceuticals) (retired 1996);October 1931 Director, ReCapital Corporation (reinsurance) (until 1995).- -------------------* Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940.(1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees.(2) A member of the Investment Committee of the Adviser. 25<PAGE> Positions Held Principal Occupation(s)Name and Address With the Company During the Past Five Years- ---------------- ---------------- -------------------------- <S> <C> <C> Anne C. Hodsdon * Trustee and President (1,2) President, Chief Operating Officer,101 Huntington Avenue Chief Investment Officer andBoston, MA 02199 Director, the Adviser, The BerkeleyAugust 1953 Group; Executive Vice President and Director, John Hanco*ck Funds; Director, Advisers International, Insurance Agency, Inc. and International Ireland; President and Director, SAMCorp. and NM Capital; Executive Vice President, the Adviser (until December 1994); Director, Signature Services (until January 1997).Charles L. Ladner Trustee Senior Vice President and ChiefUGI Corporation Financial Officer, UGI CorporationP.O. Box 858 (Public Utility Holding Company)Valley Forge, PA 19482 (retired 1998); Vice President andFebruary 1938 Director for AmeriGas, Inc. (retired 1998); Vice President of AmeriGas Partners, L.P. (until 1997); Director, EnergyNorth, Inc. (until 1995).- -------------------* Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940.(1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees.(2) A member of the Investment Committee of the Adviser. 26<PAGE> Positions Held Principal Occupation(s)Name and Address With the Company During the Past Five Years- ---------------- ---------------- -------------------------- <S> <C> <C> Leo E. Linbeck, Jr. Trustee Chairman, President, Chief Executive3810 W. Alabama Officer and Director, LinbeckHouston, TX 77027 Corporation (a holding companyAugust 1934 engaged in various phases of the construction industry and warehousing interests); Former Chairman, Federal Reserve Bank of Dallas (1992, 1993); Chairman of the Board, Linbeck Construction Corporation; Director, Duke Energy Corporation (a diversified energy company), Daniel Industries, Inc. (manufacturer of gas measuring products and energy related equipment), GeoQuest International Holdings, Inc. (a geophysical consulting firm); Director, Greater Houston Partnership. Steven R. Pruchansky Trustee (1) Director and President, Mast4327 Enterprise Avenue Holdings, Inc. (since 1991);Naples, FL 34104 Director, First Signature Bank &August 1944 Trust Company (until August 1991); Director, Mast Realty Trust (until 1994); President, Maxwell Building Corp. (until 1991).- -------------------* Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940.(1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees.(2) A member of the Investment Committee of the Adviser. 27<PAGE> Positions Held Principal Occupation(s)Name and Address With the Company During the Past Five Years- ---------------- ---------------- -------------------------- <S> <C> <C> Richard S. Scipione * Trustee (1) General Counsel, John Hanco*ck MutualJohn Hanco*ck Place Life Insurance Company; Director,P.O. Box 111 the Adviser, John Hanco*ck Funds,Boston, MA 02117 Signator Investors, Inc., InsuranceAugust 1937 Agency, Inc., John Hanco*ck Subsidiaries, Inc., SAMCorp. and NM Capital; The Berkeley Group; JH Networking Insurance Agency, Inc.; Signature Services (until January 1997).Norman H. Smith Trustee Lieutenant General, United States243 Mt. Oriole Lane Marine Corps; Deputy Chief of StaffLinden, VA 22642 for Manpower and Reserve Affairs,March 1933 Headquarters Marine Corps; Commanding General III Marine Expeditionary Force/3rd Marine Division (retired 1991).- -------------------* Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940.(1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees.(2) A member of the Investment Committee of the Adviser. 28<PAGE> Positions Held Principal Occupation(s)Name and Address With the Company During the Past Five Years- ---------------- ---------------- -------------------------- <S> <C> <C> John P. Toolan Trustee Director, The Smith Barney Muni Bond13 Chadwell Place Funds, The Smith Barney Tax-FreeMorristown, NJ 07960 Money Funds, Inc., Vantage MoneySeptember 1930 Market Funds (mutual funds), The Inefficient-Market Fund, Inc. (closed-end investment company) and Smith Barney Trust Company of Florida; Chairman, Smith Barney Trust Company (retired December, 1991); Director, Smith Barney, Inc., Mutual Management Company and Smith Barney Advisers, Inc. (investment advisers) (retired 1991); Senior Executive Vice President, Director and member of the Executive Committee, Smith Barney, Harris Upham & Co., Incorporated (investment bankers) (until 1991). Osbert M. Hood Senior Vice President and Chief Senior Vice President , Chief101 Huntington Avenue Financial Officer Financial Officer and Treasurer, theBoston, MA 02199 Adviser, the Berkeley Group and JohnAugust 1952 Hanco*ck Funds, Inc.; Vice President and Chief Financial Officer, John Hanco*ck Mutual Life Insurance Company Retail Sector (until 1997).- -------------------* Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940.(1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees.(2) A member of the Investment Committee of the Adviser. 29<PAGE> Positions Held Principal Occupation(s)Name and Address With the Company During the Past Five Years- ---------------- ---------------- -------------------------- <S> <C> <C> John A. Morin Vice President Vice President and Secretary, the101 Huntington Avenue Adviser, The Berkeley Group,Boston, MA 02199 Signature Services, John Hanco*ckJuly 1950 Funds, NM Capital and SAMCorp.; Clerk, Insurance Agency, Inc.; Counsel, John Hanco*ck Mutual Life Insurance Company (until February 1996). Susan S. Newton Vice President and Secretary Vice President, the Adviser; John101 Huntington Avenue Hanco*ck Funds, Signature ServicesBoston, MA 02199 and The Berkeley Group.March 1950James J. Stokowski Vice President, Treasurer and Chief Vice President, the Adviser.101 Huntington Avenue Accounting OfficerBoston, MA 02199November 1946- -------------------* Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940.(1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees.(2) A member of the Investment Committee of the Adviser.</TABLE> 30<PAGE>All of the officers listed are officers or employees of the Adviser oraffiliated companies. Some of the Trustees and officers may also be officersand/or Directors and/or Trustees of one or more of the other funds for which theAdviser serves as investment adviser. As of March 3, 1999 the officers and Trustees of the Fund as a groupbeneficially owned less than 1% of the outstanding shares of the Fund. As ofthat date, the following shareholders were the only record holders thatbeneficially owned 5% or more of the outstanding shares of the Fund: Percentage of TotalName and Outstanding SharesAddress of Shareholder Class of Shares Of the Class of the Fund- ---------------------- --------------- ------------------------MLPF&S For The Sole Benefit of A 9.25%Its CustomersAttn: Fund Administration 97BY34800 Deerlake Drive East 2nd FloorJacksonville FL 32246-6484MLPFS For The Sole Benefit of B 25.13%Its CustomersAttn: Fund Administration 973R94800 Deerlake Drive East 2nd FloorJacksonville FL 32246-6484MLPFS For The Sole Benefit of C 30.70%Its CustomersAttn: Fund Administration4800 Deerlake Drive East 2nd FloorJacksonville FL 32246-6484 The following tables provide information regarding the compensation paid by theFund and the other investment companies in the John Hanco*ck Fund Complex to theIndependent Trustees for their services for the Fund's most recently completedfiscal year. Messrs. Boudreau and Scipione and Ms. Hodsdon, each anon-Independent Trustee, and each of the officers of the Fund are interestedpersons of the Adviser, are compensated by the Adviser and/or its affiliates andreceive no compensation from the Fund for their services. 31<PAGE> Total Compensation from all Aggregate Compensation from Funds in John Hanco*ck Fund Trustees the Fund (1) Complex to Trustees(2)- -------- ------------ ----------------------James F. Carlin $5,557 $74,000William H. Cunningham* 5,557 74,000Charles F. Fretz 4,592 74,250Harold R. Hiser, Jr.* 5,197 74,000Charles L. Ladner 5,687 74,250Leo E. Linbeck, Jr. 5,557 74,250Patricia P. McCarter* 3,777 74,250Steven R. Pruchansky* 5,785 77,250Norman H. Smith* 5,717 77,250John P. Toolan* 5,687 74,250 ------- ---------Total $53,115 $747,750(1) Compensation for the fiscal year ended May 31, 1998.(2) The total compensation paid by the John Hanco*ck Fund Complex to the Independent Trustees as of the calendar year ended December 31, 1997. As of this date, there were sixty-seven funds in the John Hanco*ck Funds Complex with each of these Independent Trustees serving on thirty-two funds. As of December 31, 1997, the value of the aggregate deferredcompensation from all funds in the John Hanco*ck Funds Complex for Mr. Cunninghamwas $220,106, for Mr. Hissed was $103,868, for Ms. McCarter was $159,075, forMr. Pruchansky was $68,102, for Mr. Smith was $70,607 and for Mr. Toolan was$281,133 under the John Hanco*ck Group of Funds Deferred Compensation Plan forIndependent Trustees.INVESTMENT ADVISORY AND OTHER SERVICESThe Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603,was organized in 1968 and has more than $30 billion in assets under managementin its capacity as investment adviser to the Fund and the other mutual funds andpublicly traded investment companies in the John Hanco*ck group of funds, havinga combined total of over 1,400,000 shareholders. The Adviser is an affiliate ofthe Life Company, one of the most recognized and respected financialinstitutions in the nation. With total assets under management of more than $100billion, the Life Company is one of the ten largest life insurance companies inthe United States, and carries a high rating from Standard & Poor's and A.M.Best. Founded in 1862, the Life Company has been serving clients for over 130years.The Fund has entered into an investment management contract (the "AdvisoryAgreement") with the Adviser which was approved by the Fund's shareholders.Pursuant to the Advisory Agreements, the Adviser will: (a) furnish continuouslyan investment program for the Fund and determine, subject to the overallsupervision and review of the Trustees, which investments should be purchased,held, sold or exchanged and (b) provide supervision over all aspects of theFund's operations except those which are delegated to a custodian, transferagent or other agent. 32<PAGE>The Fund bears all cost of its organization and operation, including but notlimited to expenses of preparing, printing and mailing all shareholders'reports, notices, prospectuses, proxy statements and reports to regulatoryagencies; expenses relating to the issuance, registration and qualification ofshares; government fees; interest charges; expenses of furnishing toshareholders their account statements; taxes; expenses of redeeming shares;brokerage and other expenses connected with the execution of portfoliosecurities transactions; expenses pursuant to the Fund's plan of distribution;fees and expenses of custodian including those for keeping books and accounts,maintaining a committed line of credit, and calculating the net asset value ofshares; fees and expenses of transfer agents and dividend disbursing agents;legal, accounting, financial, management, tax and auditing fees and expenses ofthe Fund (including and allocable portion of the cost of the Adviser's employeesrendering such services to the Fund); the compensation and expenses of Trusteeswho are not otherwise affiliated with the Trust, the Adviser or any of theiraffiliates; expenses of Trustees' and shareholders' meeting; trade associationmemberships; insurance premiums; and any extraordinary expenses.As compensation for its services under the Advisory Agreements, the Fund paysthe Adviser monthly a fee based on a stated percentage of the average of thedaily net assets of the Fund as follows: FeeAverage Daily Net Assets (Annual Rate)- ------------------------ -------------First $75 million 0.625%Next $75 million 0.5625%Over $150 million 0.500%From time to time, the Adviser may reduce its fee or make other arrangements tolimit the Fund's expenses to a specified percentage of average daily net assets.The Adviser retains the right to reimpose a fee and recover any other paymentsto the extent that, at the end of any fiscal year, the Fund's annual expensesfall below this limit.Securities held by the Fund may also be held by other funds or investmentadvisory clients for which the Adviser or its affiliates provide investmentadvice. Because of different investment objectives or other factors, aparticular security may be bought for one or more funds or clients when one ormore are selling the same security. If opportunities for purchase or sale ofsecurities by the Adviser for the Fund or for other funds or clients for whichthe Adviser renders investment advice arise for consideration at or about thesame time, transactions in such securities will be made, insofar as feasible,for the Fund or clients in a manner deemed equitable to all of them. To theextent that transactions on behalf of more than one client of the Adviser or itsaffiliates may increase the demand for securities being purchased or the supplyof securities being sold, there may be an adverse effect on price.Pursuant to the Advisory Agreement, the Adviser is not liable for any error ofjudgment or mistake of law or for any loss suffered by the Fund in connectionwith the matters to which their respective contracts relate, except a lossresulting from willful misfeasance, bad faith or gross negligence on the part ofthe Adviser in the performance of its duties or from its reckless disregard ofthe obligations and duties under the Advisory Agreement.Under the Advisory Agreement, the Fund may use the name "John Hanco*ck" or anyname derived from or similar to it only for as long as the Advisory Agreement orany extension, renewal or amendment thereof remains in effect. If the Fund'sAdvisory Agreement is no longer in effect, the Fund (to the extent that itlawfully can) will cease to use such name or any other name indicating that itis advised by or otherwise connected with the Adviser. In addition, the Adviseror the Life Company may grant the non-exclusive right to use the name "JohnHanco*ck" or any similar name to any other corporation or entity, including butnot limited to any investment company of which the Life Company or anysubsidiary or affiliate thereof or any successor to the business of anysubsidiary or affiliate thereof shall be the investment adviser. 33<PAGE>The continuation of the Advisory Agreement and Distribution Agreement wasapproved by all of the Trustees. The Advisory Agreement and the DistributionAgreement discussed below will continue in effect from year to year, providedthat its continuance is approved annually both (i) by the holders of a majorityof the outstanding voting securities of the Trust or by the Trustees, and (ii)by a majority of the Trustees who are not parties to the Agreement, or"interested persons" of any such parties. Both Agreements may be terminated on60 days written notice by any party or by a vote of a majority of theoutstanding voting securities of the Fund and will terminate automatically ifassigned.The Advisory fees payable by the Fund to the Adviser, were as follows: 12/22/94-10/31/95 $897,349 11/1/95-10/31/96 $1,326,701 11/1/96-5/31/97 $1,204,001 6/1/97-5/31/98 $3,997,329Administrative Services Agreement. The Fund previously was a party to anadministrative services agreement (the "Services Agreement") with TransamericaFund Management Company ("TFMC"), pursuant to which TFMC performed bookkeepingand accounting services and functions, including preparing and maintainingvarious accounting books, records and other documents and keeping such generalledgers and portfolio accounts as are reasonably necessary for the operation ofthe Fund. Other administrative services included communications in response toshareholder inquiries and certain printing expenses of various financialreports. In addition, such staff and office space, facilities and equipment wasprovided as necessary to provide administrative services to the Fund. TheServices Agreement was amended in connection with the appointment of the Adviseras adviser to the Fund to permit services under the Agreement to be provided tothe Fund by the Adviser and its affiliates. The Services Agreement wasterminated during the 1995 fiscal year.The amount of $13,697 for the Fund reflects the total of administrative servicesfees paid to the Adviser for the fiscal year ended October 31, 1995.Accounting and Legal Services Agreement. The Trust, on behalf the Fund, is aparty to an Accounting and Legal Services Agreement with the Adviser. Pursuantto this agreement, the Adviser provides the Fund with certain tax, accountingand legal services. For the fiscal year ended October 31, 1996, The Fund paidthe Adviser $37,927 for services under this agreement. For the period fromNovember 1, 1996 to May 31, 1997, the Fund paid the Adviser $42,106 for servicesunder this agreement. For the fiscal year ended May 31, 1998, the Fund paid theAdviser $136,741 under this agreement.In order to avoid conflicts with portfolio trades for the Fund, the Adviser andthe Fund have adopted extensive restrictions on personal securities trading bypersonnel of the Adviser and its affiliates. Some of these restrictions are:pre-clearance for all personal trades and a ban on the purchase of initialpublic offerings, as well as contributions to specified charities of profits onsecurities held for less than 91 days. These restrictions are a continuation ofthe basic principle that the interests of the Fund and its shareholders comefirst. 34<PAGE>DISTRIBUTION CONTRACTSThe Fund has a Distribution Agreement with John Hanco*ck Funds. Under theagreement, John Hanco*ck Funds is obligated to use its best efforts to sellshares of each class of the Fund. Shares of the Fund are also sold by selectedbroker-dealers (the "Selling Brokers") which have entered into selling agencyagreements with John Hanco*ck Funds. John Hanco*ck Funds accepts orders for thepurchase of the shares of the Fund which are continually offered at net assetvalue next determined, plus any applicable sales charge, if any. In connectionwith the sale of Fund shares, John Hanco*ck Funds and Selling Brokers receivecompensation from a sales charge imposed, in the case of Class A shares, at thetime of sale. In the case of Class B or Class C shares, the broker receivecompensation immediately but John Hanco*ck Funds is compensated on a deferredbasis.For the fiscal years ended October 31, 1995, 1996, for the period from November1, 1996 to May 31, 1997 and for the fiscal year ended May 31, 1998, thefollowing amounts reflect (a) the total underwriting commissions for sales ofthe Fund's Class A shares and (b) the portion of such amount retained by JohnHanco*ck Funds. The remainder of the underwriting commissions were reallowed toSelling Brokers. 10/31/1995 (a) $239,238 and (b) $19,285 11/1/95-10/31/1996 (a) $696,959 and (b) $72,221 11/1/96-5/31/1997 (a) $946,242 and (b)$115,430 6/1/97-5/31/198 (a)$4,186,986 and (b)$461,370The Fund's Trustees adopted Distribution Plans with respect to each class ofshares (the "Plans") pursuant to Rule 12b-1 under the Investment Company Act of1940. Under the Plans, the Fund will pay distribution and service fees at anaggregate annual rate of up to 0.25% for Class A shares and 1.00% for Class Band Class C shares, of the Fund's average daily net assets attributable toshares of that class. However, the service fee will not exceed 0.25% of theFund's average daily net assets attributable to each class of shares. Thedistribution fees will be used to reimburse John Hanco*ck Funds for itsdistribution expenses, including but not limited to: (i) initial and ongoingsales compensation to Selling Brokers and others (including affiliates of JohnHanco*ck Funds) engaged in the sale of Fund shares; (ii) marketing, promotionaland overhead expenses incurred in connection with the distribution of the Fund'sshares; and (iii) with respect to Class B and Class C shares only, interestexpenses on unreimbursed distribution expenses. The service fees will by used tocompensate Selling Brokers and others for providing personal and accountmaintenance services to shareholders. In the event that John Hanco*ck Funds isnot fully reimbursed for payments or expenses under the Class A Plan, theseexpenses will not be carried beyond twelve months from the date they wereincurred. Unreimbursed expenses under the Class B and Class C Plans will becarried forward together with interest on the balance of these unreimbursedexpenses. The Fund does not treat unreimbursed expenses under Class B and ClassC Plans as a liability of the Fund, because the Trustees may terminate the ClassB and/or Class C Plans at any time. For the fiscal year ended May 31, 1998 anaggregate of $13,113,933 of distribution expenses or 2.23% of the average netassets of the Fund's Class B shares was not reimbursed or recovered by JohnHanco*ck Funds through the receipt of deferred sales charges or Rules 12b-1 feesin prior periods. Class C shares of the Fund did not commence operations untilMay 1, 1998; therefore, there are no unreimbursed expenses to report. 35<PAGE>The Plans were approved by a majority of the voting securities of the Fund. ThePlans and all amendments were approved by the Trustees, including a majority ofthe Trustees who are not interested persons of the Fund and who have no director indirect financial interest in the operation of the Plans ( the "IndependentTrustees"), by votes cast in person at meetings called for the purpose of votingon such Plans.Pursuant to the Plans, at least quarterly, John Hanco*ck Funds provide the Fundwith a written report of the amounts expended under the Plans and the purposefor which these expenditures were made. The Trustees review these reports on aquarterly basis to determine their continued appropriateness.The Plans provide that they will continue in effect only so long as theircontinuance is approved at least annually by a majority of both the Trustees andIndependent Trustees. The Plans provide that they may be terminated withoutpenalty, (a) by vote of a majority of the Independent Trustees, (b) by a vote ofa majority of the Fund's outstanding shares of the applicable class upon 60days' written notice to John Hanco*ck Funds, and (c) automatically in the eventof assignment. Each of the Plans further provides that it may not be amended toincrease the maximum amount of the fees for the services described thereinwithout the approval of a majority of the outstanding shares of the class of theFund which has voting rights to that Plan. Each of the Plans provide that nomaterial amendment to the Plan will be effective unless it is approved by a voteof a majority of the Trustees and the Independent Trustees of the Fund. Theholders of Class A, Class B and Class C shares have exclusive voting rights withrespect to the Plan applicable to their respective class of shares. In adoptingthe Plans, the Trustees concluded that, in their judgment, these is a reasonablelikelihood that the Plans will benefit the holders of the applicable class ofshares of the Fund.Amounts paid to John Hanco*ck Funds by any class of shares of the Fund will notbe used to pay the expenses incurred with respect to any other class of sharesof the Fund; provided, however, that expenses attributable to the Fund as awhole will be allocated, to the extent permitted by law, according to a formulabased upon gross sales dollars and/or average daily net assets of each suchclass, as may be approved from time to time by vote of a majority of Trustees.From time to time, the Fund may participate in joint distribution activitieswith other Funds and the costs of those activities will be borne by the Fund inproportion to the relative net asset value of the participating Funds.During the fiscal year ended May 31, 1998, the Fund paid John Hanco*ck Funds thefollowing amounts of expenses in connection with their services. Class C sharesof the Fund did not commence operations until May 1, 1998; therefore, there areno expenses to report. 36<PAGE><TABLE><CAPTION> Expense Items ------------- Printing and Mailing of Interest, Prospectuses Compensation to Expenses of Carrying or to New Selling John Hanco*ck Other Finance Advertising Shareholders Brokers Funds Charges ----------- ------------ ------- ----- ------- <S> <C> <C> <C> <C> <C> Class A $ 100,683 $ 2,832 $ 55,829 $ 295,531 $0Class B $1,279,619 $32,558 $759,899 $3,819,668 $0Class C $0 $0 $0 $0 $0</TABLE>SALES COMPENSATIONAs part of their business strategies, each of the John Hanco*ck funds, along withJohn Hanco*ck Funds, pay compensation to financial services firms that sell thefunds' shares. These firms typically pass along a portion of this compensationto your financial representative.Compensation payments originate from two sources: from sales charges and from12b-1 fees that are paid out of the funds' assets. The sales charges and 12b-1fees paid by investors are detailed in the prospectus and under "DistributionContracts" in this Statement of Additional Information. The portions of theseexpenses that are reallowed to financial services firms are shown on the nextpage.Whenever you make an investment in the Fund, the financial services firmreceives either a reallowance from the initial sales charge or a commission, asdescribed below. The firm also receives the first year's service fee at thistime. Beginning with the second year after an investment is made, the financialservices firm receives an annual service fee of 0.25% of its total eligible netassets. This fee is paid quarterly in arrears.Financial services firms selling large amounts of fund shares may receive extracompensation. This compensation, which John Hanco*ck Funds pays out of its ownresources, may include asset retention fees as well as reimbursem*nt formarketing expenses. 37<PAGE><TABLE><CAPTION> Maximum Sales charge Reallowance First year Maximum paid by investors or commission Service fee total compensation (1)Class A Investments (% of offering (% of offering price) (% of net (% of offering price)- ------------------- --------------- --------------------- ---------- --------------------- price) investment) ------ ----------- <S> <C> <C> <C> <C> Up to $99,999 4.50% 3.76% 0.25% 4.00%$100,000 - $249,999 3.75% 3.01% 0.25% 4.00%$250,000 - $499,999 2.75% 2.06% 0.25% 2.30%$500,000 - $999,999 2.00% 1.51% 0.25% 1.75%Regular investments of $1 millionor moreFirst $1M - $4,999,999 -- 0.75% 0.25% 1.00%Next $1M - $5M above that -- 0.25% 0.25% 0.50% (2)Next $1 or more above that -- 0.00% 0.25% 0.25% (2) Maximum First year Reallowance Service fee Maximum total or commission (% of net CompensationClass B investments (% of offering price) investment) (% of offering price)- ------------------- --------------------- ----------- ---------------------All amounts 3.75% 0.25% 4.00% Maximum reallowance First year Maximum or commission service fee total compensationClass C investments (% of offering price) (% of net (% of offering price)- ------------------- --------------------- ---------- --------------------- investment) -----------All amounts 0.75% 0.25% 1.00%</TABLE>(1) Reallowance/commission percentages and service fee percentages arecalculated from different amounts, and therefore may not equal totalcompensation percentages if combined using simple addition.(2) For Group Investment Programs sales, the maximum total compensation forinvestments of $1 million or more is 1.00% of the offering price (one year CDSCof 1.00% applies for each sales).CDSC revenues collected by John Hanco*ck Funds may be used to pay commissionswhen there is no initial sales charge.NET ASSET VALUEFor purposes of calculating the net asset value ("NAV") of the shares of theFund, the following procedures are utilized wherever applicable. 38<PAGE>Debt investment securities are valued on the basis of valuations furnished by aprincipal market maker or a pricing service, both of which generally utilizeelectronic data processing techniques to determine valuations for normalinstitutional size trading units of debt securities without exclusive relianceupon quoted prices.Equity securities traded on a principal exchange or NASDAQ National MarketIssues are generally valued at last sale price on the day of valuation.Securities in the aforementioned category for which no sales are reported andother securities traded over-the-counter are generally valued at the meanbetween the current closing bid and asked prices.Short-term debt investments which have a remaining maturity of 60 days or lessare generally valued at amortized cost which approximates market value. Ifmarket quotations are not readily available or if in the opinion of the Adviserany quotation or price is not representative of true market value, the fairvalue of the security may be determined in good faith in accordance withprocedures approved by the Trustees.Foreign securities are valued on the basis of quotations from the primary marketin which they are traded. Any assets or liabilities expressed in terms offoreign currencies are translated into U.S. dollars by the custodian bank basedon London currency exchange quotations as of 5:00 p.m., London time (12:00 noon,New York time) on the date of any determination of the Fund's NAV. If quotationsare not readily available, or the value has been materially affected by theevents occurring after closing of a foreign market, assets are valued by amethod that Trustees believe accurately reflects fair value.The NAV for each class of the Fund is determined each business day at the closeof regular trading on the New York Stock Exchange (typically 4:00 p.m. EasternTime) by dividing a class net assets by the number of its shares outstanding. Onany day an international market is closed and the New York Stock Exchange isopen, any foreign securities will be valued at the prior day's close with thecurrent day's exchange rate. Trading of foreign securities may take place onSaturdays and U.S. business holidays on which the Fund's NAV is not calculated.Consequently, the Fund's portfolio securities may trade and the NAV of theFund's redeemable securities may be significantly affected on days when ashareholder has no access to the Fund.INITIAL SALES CHARGE ON CLASS A SHARESShares of the Fund are offered at a price equal to their net asset value plus asales charge which, at the option of the purchaser, may be imposed either at thetime of purchase (the "initial sales charge alternative") or on a contingentdeferred basis (the "deferred sales charge alternative"). Share certificateswill not be issued unless requested by the shareholder in writing, and then onlywill be issued for full shares. The Trustees of the Fund reserve the right tochange or waive the Fund's minimum investment requirements and to reject anyorder to purchase shares (including purchase by exchange) when in the judgmentof the Adviser such rejection is in the Fund's best interest.The sales charges applicable to purchases of Class A shares of the Fund aredescribed in the Prospectus. Methods of obtaining reduced sales charges referredto generally in the Prospectus are described in detail below. In calculating thesales charge applicable to current purchases of Class A shares, the investor isentitled to accumulate current purchases with the greater of the current value(at offering price) of the Class A shares of the Fund, owned by the investor, orif John Hanco*ck Signature Services, Inc. ("Signature Services") is notified bythe investor's dealer or the investor at the time of the purchase, the cost ofthe Class A shares owned. 39<PAGE>Without Sales Charge. Class A shares may be offered without a front-end salescharge or CDSC to various individuals and institutions as follows:o A Trustee or officer of the Trust; a Director or officer of the Adviser and its affiliates or Selling Brokers; employees or sales representatives of any of the foregoing; retired officers, employees or Directors of any of the foregoing; a member of the immediate family (spouse, children, grandchildren, mother, father, sister, brother, mother-in-law, father-in-law, daughter-in-law, son-in-law, niece, nephew, grandparents and same sex domestic partner) of any of the foregoing, or any fund, pension, profit sharing or other benefit plan of the individuals described above.o A broker, dealer, financial planner, consultant or registered investment advisor that has entered into a signed agreement with John Hanco*ck Funds providing specifically for the use of Fund shares in fee-based investment products or services made available to their clients.o A former participant in an employee benefit plan with John Hanco*ck funds, when he or she withdraws from his or her plan and transfers any or all of his or her plan distributions directly to the Fund.o A member of a class action lawsuit against insurance companies who is investing settlement proceeds.o Retirement plans participating in Merrill Lynch servicing programs, if the Plan has more than $3 million in assets or 500 eligible employees at the date the Plan Sponsor signs the Merrill Lynch Recordkeeping Service Agreement. See your Merrill Lynch financial consultant for further information.o Retirement plans investing through the PruArray Program sponsored by Prudential Securities.o Pension plans transferring assets from a John Hanco*ck variable annuity contract to the Fund pursuant to an exemptive application approved by the Securities Exchange Commission.o Existing full service clients of the Life Company who were group annuity contract holders as of September 1, 1994, and participant directed retirement plans with at least 100 eligible employees at the inception of the Fund account. Each of these investors may purchase Class A shares with no initial sales charge. However, if the shares are redeemed within 12 months after the end of the calendar year in which the purchase was made, a CDSC will be imposed at the following rate: Amount Invested CDSC Rate --------------- --------- $1 to $4,999,999 1.00% Next $5 million to $9,999,999 0.50% Amounts of $10 million and over 0.25%Class A shares may also be purchased without an initial sales charge inconnection with certain liquidation, merger or acquisition transactionsinvolving other investment companies or personal holding companies. 40<PAGE> Combination Privilege. In calculating the sales charge applicable to purchasesof Class A shares made at one time, the purchases will be combined to reducesales charges if made by (a) an individual, his or her spouse and their childrenunder the age of 21, purchasing securities for his or their own account, (b) atrustee or other fiduciary purchasing for a single trust, estate or fiduciaryaccount and (c) groups which qualify for the Group Investment Program (seebelow). A company's (not an individual's) qualified and non-qualified retirementplan investments can be combined to take advantage of this privilege. Furtherinformation about combined purchases, including certain restrictions on combinedgroup purchases, is available from Signature Services or a Selling Broker'srepresentative.Accumulation Privilege. Investors (including investors combining purchases) whoare already Class A shareholders may also obtain the benefit of the reducedsales charge by taking into account not only the amount being invested but alsothe investor's purchase price or current value of the Class A shares of all JohnHanco*ck funds which carry a sales charge already held by such person. Class Ashares of John Hanco*ck money market funds will only be eligible for theaccumulation privilege if the investor has previously paid a sales charge on theamount of those shares. Retirement plan investors may include the value of ClassB shares if Class B shares held are greater than $1 million. Retirement plansmust notify Signature Services to utilize. A company's (not an individual's)qualified and non-qualified retirement plan investments can be combined to takeadvantage of this privilege. Group Investment Program. Under the Combination and Accumulation Privileges, allmembers of a group may combine their individual purchases of Class A shares topotentially qualify for breakpoints in the sales charge schedule. This featureis provided to any group which (1) has been in existence for more than sixmonths, (2) has a legitimate purpose other than the purchase of mutual fundshares at a discount for its members, (3) utilizes salary deduction or similargroup methods of payment, and (4) agrees to allow sales materials of the fund inits mailings to members at a reduced or no cost to John Hanco*ck Funds. Letter of Intention. Reduced sales charges are also applicable to investmentsmade pursuant to a Letter of Intention (the "LOI"), which should be readcarefully prior to its execution by an investor. The Fund offers two optionsregarding the specified period for making investments under the LOI. Allinvestors have the option of making their investments over a specified period ofthirteen (13) months. Investors who are using the Fund as a funding medium for aretirement plan, however, may opt to make the necessary investments called forby the LOI over a forty-eight (48) month period. These retirement plans includeTraditional, Roth and Education IRAs, SEP, SARSEP, 401(k), 403(b) (includingTSAs), SIMPLE IRA, SIMPLE 401(k), Money Purchase Pension, Profit Sharing andSection 457 plans. An individual's non-qualified and qualified retirement planinvestments cannot be combined to satisfy an LOI of 48 months. Such aninvestment (including accumulations and combinations but not includingreinvested dividends) must aggregate $100,000 or more invested during thespecified period from the date of the LOI or from a date within ninety (90) daysprior thereto, upon written request to Signature Services. The sales chargeapplicable to all amounts invested under the LOI is computed as if the aggregateamount intended to be invested had been invested immediately. If such aggregateamount is not actually invested, the difference in the sales charge actuallypaid and the sales charge payable had the LOI not been in effect is due from theinvestor. However, for the purchases actually made with the specified period(either 13 or 48 months), the sales charge applicable will not be higher thanthat which would have been applied (including accumulations and combinations)had the LOI been for the amount actually invested. 41<PAGE>The LOI authorizes Signature Services to hold in escrow sufficient Class Ashares (approximately 5% of the aggregate) to make up any difference in salescharges on the amount intended to be invested and the amount actually invested,until such investment is completed within the specified period, at which timethe escrow shares will be released. If the total investment specified in the LOIis not completed, the Class A shares held in escrow may be redeemed and theproceeds used as required to pay such sales charges as may be due. By signingthe LOI, the investor authorizes Signature Services to act as hisattorney-in-fact to redeem any escrowed Class A shares and adjust the salescharge, if necessary. A LOI does not constitute a binding commitment by aninvestor to purchase, or by the Fund to sell, any additional shares and may beterminated at any time.DEFERRED SALES CHARGE ON CLASS B AND CLASS C SHARESInvestments in Class B and Class C shares are purchased at net asset value pershare without the imposition of an initial sales charge so the Fund will receivethe full amount of the purchase payment.Contingent Deferred Sales Charge. Class B and Class C shares which are redeemedwithin six years or one year of purchase, respectively will be subject to acontingent deferred sales charge ("CDSC") at the rates set forth in theProspectus as a percentage of the dollar amount subject to the CDSC. The chargewill be assessed on an amount equal to the lesser of the current market value orthe original purchase cost of the Class B or Class C shares being redeemed. NoCDSC will be imposed on increases in account value above the initial purchaseprices, including all shares derived from reinvestment of dividends or capitalgains distributions.Class B shares are not available to full-service retirement plans administeredby Signature Services or the Life Company that had more than 100 eligibleemployees at the inception of the Fund account.The amount of the CDSC, if any, will vary depending on the number of years fromthe time of payment for the purchase of Class B shares until the time ofredemption of such shares. Solely for purposes of determining the number ofyears from the time of any payment for the purchase of both Class B and Class Cshares, all payments during a month will be aggregated and deemed to have beenmade on the first day of the month.In determining whether a CDSC applies to a redemption, the calculation will bedetermined in a manner that results in the lowest possible rate being charged.It will be assumed that your redemption comes first from shares you have heldbeyond the six-year CDSC redemption period for Class B or one year CDSCredemption period for Class C, or those you acquired through dividend andcapital gain reinvestment, and next from the shares you have held the longestduring the six-year period for Class B shares. For this purpose, the amount ofany increase in a share's value above its initial purchase price is not regardedas a share exempt from CDSC. Thus, when a share that has appreciated in value isredeemed during the CDSC period, a CDSC is assessed only on its initial purchaseprice.When requesting a redemption for a specific dollar amount, please indicate ifyou require the proceeds to equal the dollar amount requested. If not indicated,only the specified dollar amount will be redeemed from your account and theproceeds will be less any applicable CDSC. 42<PAGE>Example:You have purchased 100 shares at $10 per share. The second year after yourpurchase, your investment's net asset value per share has increased by $2 to$12, and you have gained 10 additional shares through dividend reinvestment.If you redeem 50 shares at this time your CDSC will be calculated as follows: oProceeds of 50 shares redeemed at $12 per shares (50 x 12) $600.00 o*Minus Appreciation ($12 - $10) x 100 shares (200.00) o Minus proceeds of 10 shares not subject to CDSC (dividend reinvestment) (120.00) ------- oAmount subject to CDSC $280.00 *The appreciation is based on all 100 shares in the lot not just the shares being redeemed.Proceeds from the CDSC are paid to John Hanco*ck Funds and are used in whole orin part by John Hanco*ck Funds to defray its expenses related to providingdistribution-related services to the Fund in connection with the sale of theClass B and Class C shares, such as the payment of compensation to selectSelling Brokers for selling Class B and Class C shares. The combination of theCDSC and the distribution and service fees facilitates the ability of the Fundto sell the Class B and Class C shares without a sales charge being deducted atthe time of the purchase.Waiver of Contingent Deferred Sales Charge. The CDSC will be waived onredemptions of Class B and Class C shares and of Class A shares that are subjectto a CDSC, unless indicated otherwise, in the circ*mstances defined below:For all account types:* Redemptions made pursuant to the Fund's right to liquidate your account if you own shares worth less than $1,000.* Redemptions made under certain liquidation, merger or acquisition transactions involving other investment companies or personal holding companies.* Redemptions due to death or disability. (Does not apply to Trust accounts unless trust is being dissolved.)* Redemptions made under the Reinstatement Privilege, as described in "Sales Charge Reductions and Waivers" in the Prospectus.* Redemptions where the proceeds are used to purchase a John Hanco*ck Declaration Variable Annuity.* Redemptions of Class B (but not Class C) shares made under a periodic withdrawal plan, or redemptions for fees charged by planners or advisors for advisory services, as long as your annual redemptions do not exceed 12% of your account value, including reinvested dividends, at the time you established your periodic withdrawal plan and 12% of the value of subsequent investments (less redemptions) in that account at the time you notify Signature Services. (Please note that this waiver does not apply to periodic withdrawal plan redemptions of Class A or Class C shares that are subject to a CDSC.) 43<PAGE>* Redemptions by Retirement plans participating in Merrill Lynch servicing programs, if the Plan has less than $3 million in assets or 500 eligible employees at the date the Plan Sponsor signs the Merrill Lynch Recordkeeping Service Agreement. See your Merrill Lynch financial consultant for further information.* Redemptions of Class A or Class C shares by retirement plans that invested through the PruArray Program sponsored by Prudential Securities.For Retirement Accounts (such as Traditional, Roth and Education IRAs, SIMPLEIRA, SIMPLE 401(k), Rollover IRA, TSA, 457, 403(b), 401(k), Money PurchasePension Plan, Profit-Sharing Plan and other plans as described in the InternalRevenue Code) unless otherwise noted.* Redemptions made to effect mandatory or life expectancy distributions under the Internal Revenue Code.* Returns of excess contributions made to these plans.* Redemptions made to effect distributions to participants or beneficiaries from employer sponsored retirement plans under sections 401(a) (such as Money Purchase Pension Plans and Profit-Sharing/401(k) Plans), 457 and 408 (SEPs and SIMPLE IRAs) of the Internal Revenue Code.* Redemptions from certain IRA and retirement plans that purchased shares prior to October 1, 1992 and certain IRA plans that purchased shares prior to May 15, 1995.Please see matrix for some examples. 44<PAGE> <TABLE><CAPTION>CDSC Waiver Matrix for Class B and Class C <S> <C> <C> <C> <C> <C>- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Type of 401 (a) Plan 403 (b) 457 IRA, IRA Non-Distribution (401 (k), Rollover retirement MPP, PSP)- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Death or Waived Waived Waived Waived WaivedDisability- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Over 70 1/2 Waived Waived Waived Waived for 12% of account mandatory value annually distributions in periodic or 12% of payments account value annually in periodic payments.- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Between 59 1/2 Waived Waived Waived Waived for Life 12% of accountand 70 1/2 Expectancy or value annually 12% of account in periodic value annually payments in periodic payments.- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Under 59 1/2 Waived for Waived for Waived for Waived for 12% of account(Class B only) annuity annuity annuity annuity value annually payments (72t) payments (72t) payments (72t) payments (72t) in periodic or 12% of or 12% of or 12% of or 12% of payments account value account value account value account value annually in annually in annually in annually in periodic periodic periodic periodic payments. payments. payments. payments.- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Loans Waived Waived N/A N/A N/A- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Termination of Not Waived Not Waived Not Waived Not Waived N/APlan - ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Hardships Waived Waived Waived N/A N/A- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Qualified Domestic Waived Waived Waived N/A N/ARelations Orders- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Termination of Waived Waived Waived N/A N/AEmployment BeforeNormal Retirement Age- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Return of Waived Waived Waived Waived N/AExcess - ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------</TABLE> If you qualify for a CDSC waiver under one of these situations, you must notifySignature Services at the time you make your redemption. The waiver will begranted once Signature Services has confirmed that you are entitled to thewaiver. 45<PAGE>SPECIAL REDEMPTIONSAlthough the Fund would not normally do so, the Fund has the right to pay theredemption price of shares of the Fund in whole or in part in portfoliosecurities as prescribed by the Trustees. When the shareholder sells portfoliosecurities received in this fashion, the shareholder will incur a brokeragecharge. Any such security would be valued for the purpose of making such paymentat the same value as used in determining the Fund's net asset value. The Fundhas elected to be governed by Rule 18f-1 under the Investment Company Act. Underthat rule, the Fund must redeem their shares for cash except to the extent tothat the redemption payments to any shareholder during any 90-day period wouldexceed the lesser of $250,000 or 1% of the Fund's net asset value at thebeginning of such period.ADDITIONAL SERVICES AND PROGRAMSExchange Privilege. The Fund permits exchanges of shares of any class of thefund for shares of the same class in any other John Hanco*ck fund offering thatclass. Exchanges between funds with shares that are not subject to a CDSC are based ontheir respective net asset values. No sales charge or transaction charge isimposed. Shares of the Fund which are subject to a CDSC may be exchanged intoshares of any of the other John Hanco*ck funds that are subject to a CDSC withoutincurring the CDSC; however, the shares acquired in an exchange will be subjectto the CDSC schedule of the shares acquired if and when such shares are redeemed(except that shares exchanged into John Hanco*ck Short-Term Strategic Income Fundand John Hanco*ck Intermediate Government Fund will retain the exchanged fund'sCDSC schedule). For purposes of computing the CDSC payable upon redemption ofshares acquired in an exchange, the holding period of the original shares isadded to the holding period of the shares acquired in an exchange. If a shareholder exchanges Class B shares purchased prior to January 1, 1994(except John Hanco*ck Short-Term Strategic Income Fund) for Class B shares of anyother John Hanco*ck fund, the acquired shares will continue to be subject to theCDSC schedule that was in effect when the exchanged shares were purchased.The Fund reserves the right to require that previously exchanged shares (andreinvested dividends) be in the Fund for 90 days before a shareholder ispermitted a new exchange.The Fund may refuse any exchange order. The Fund may change or cancel itsexchange policies at any time, upon 60 days' notice to its shareholders.An exchange of shares is treated as a redemption of shares of one fund and thepurchase of shares of another for Federal Income Tax purposes. An exchange mayresult in a taxable gain or loss. See "TAX STATUS".Systematic Withdrawal Plan. The Fund permits the establishment of a SystematicWithdrawal Plan. Payments under this plan represent proceeds from the redemptionof shares of the Fund. Since the redemption price of the shares of the Fund maybe more or less than the shareholder's cost, depending upon the market value ofthe securities owned by the Fund at the time of redemption, the distribution ofcash pursuant to this plan may result in realization of gain or loss forpurposes of Federal, state and local income taxes. The maintenance of aSystematic Withdrawal Plan concurrently with purchases of additional shares ofthe Fund could be disadvantageous to a shareholder because of the initial salescharge payable on such purchases of Class A shares and the CDSC imposed onredemptions of Class B and Class C shares and because redemptions are taxableevents. Therefore, a shareholder should not purchase shares at the same time aSystematic Withdrawal Plan is in effect. The Fund reserves the right to modifyor discontinue the Systematic Withdrawal Plan of any shareholder on 30 days'prior written notice to such shareholder, or to discontinue the availability ofsuch plan in the future. The shareholder may terminate the plan at any time bygiving proper notice to Signature Services. 46<PAGE>Monthly Automatic Accumulation Program ("MAAP"). The program is explained in theProspectus. The program, as it relates to automatic investment checks, issubject to the following conditions:The investments will be drawn on or about the day of the month indicated.The privilege of making investments through the MAAP may be revoked by SignatureServices without prior notice if any investment is not honored by theshareholder's bank. The bank shall be under no obligation to notify theshareholder as to the non-payment of any checks.The program may be discontinued by the shareholder either by calling SignatureServices or upon written notice to Signature Services which is received at leastfive (5) business days prior to the order date of any investment.Reinstatement and Reinvestment Privilege. If Signature Services is notifiedprior to reinvestment, a shareholder who has redeemed the Fund's shares may,within 120 days after the date of redemption, reinvest without payment of asales charge any part of the redemption proceeds in shares of the same class ofthe Fund or another John Hanco*ck fund, subject to the minimum investment limitof that fund. The proceeds from the redemption of Class A shares may bereinvested at net asset value without paying a sales charge in Class A shares ofany John Hanco*ck fund. If a CDSC was paid upon a redemption, a shareholder mayreinvest the proceeds from this redemption at net asset value in additionalshares of the class from which the redemption was made. The shareholder'saccount will be credited with the amount of any CDSC charged upon the priorredemption and the new shares will continue to be subject to the CDSC. Theholding period of the shares acquired through reinvestment will, for purposes ofcomputing the CDSC payable upon a subsequent redemption, include the holdingperiod of the redeemed shares.To protect the interests of other investors in the Fund, the Fund may cancel thereinvestment privilege of any parties that, in the opinion of the Fund, areusing market timing strategies or making more than seven exchanges per owner orcontrolling party per calendar year. Also, the Fund may refuse any reinvestmentrequest.The Fund may change or cancel its reinvestment policies at any time.A redemption or exchange of Fund shares is a taxable transaction for Federalincome tax purposes even if the reinvestment privilege is exercised, and anygain or loss realized by a shareholder on the redemption or other disposition ofFund shares will be treated for tax purposes as described under the caption "TAXSTATUS". 47<PAGE>Retirement plans participating in Merrill Lynch's servicing programs:Class A shares are available at net asset value for plans with $3 million inplan assets or 500 eligible employees at the date the Plan Sponsor signs theMerrill Lynch Recordkeeping Service Agreement. If the plan does not meet eitherof these limits, Class A shares are not available.For participating retirement plans investing in Class B shares, shares willconvert to Class A shares after eight years, or sooner if the plan attainsassets of $5 million (by means of a CDSC-free redemption/purchase at net assetvalue).DESCRIPTION OF THE FUND'S SHARESThe Trustees of the Trust are responsible for the management and supervision ofthe Fund. The Declaration of Trust permits the Trustees to issue an unlimitednumber of full and fractional shares of beneficial interest of the Fund withoutpar value. Under the Declaration of Trust, the Trustees have the authority tocreate and classify shares of beneficial interest in separate series and in oneor more classes, without further action by shareholders. As of the date of thisStatement of Additional Information, the Trustees have authorized shares of thisFund and one other series and the issuance of three classes of shares of theFund, designated as Class A, Class B and Class C.Additional series may be added in the future.The shares of each class of the Fund represent an equal proportionate interestin the aggregate net assets attributable to the classes of the Fund. Holders ofeach class of shares have certain exclusive voting rights on matters relating totheir respective distribution plans. The different classes of the Fund may beardifferent expenses relating to the cost of holding shareholder meetingsnecessitated by the exclusive voting rights of any class of shares.Dividends paid by the Fund, if any, with respect to each class of shares will becalculated in the same manner, at the same time and on the same day and will bein the same amount, except for differences resulting from the facts that (i) thedistribution and service fees relating to each class will be borne exclusivelyby that class, (ii) Class B and Class C shares will pay higher distribution andservice fees than Class A shares and (iii) each class of shares will bear anyclass expenses properly allocable to that class of shares, subject to theconditions the Internal Revenue Service imposes with respect to themultiple-class structures. Similarly, the net asset value per share may varydepending on which class of shares are purchased. No interest will be paid onuncashed dividend or redemption checks.In the event of liquidation, shareholders of each class are entitled to sharepro rata in the net assets of the Fund available for distribution to theseshareholders. Shares entitle their holders to one vote per share, are freelytransferable and have no preemptive, subscription or conversion rights. Whenissued, shares are fully paid and non-assessable, except as set forth below.Unless otherwise required by the Investment Company Act or the Declaration ofTrust, the Fund has no intention of holding annual meetings of shareholders.Fund shareholders may remove a Trustee by the affirmative vote of at leasttwo-thirds of the Trust's outstanding shares and the Trustees shall promptlycall a meeting for such purpose when requested to do so in writing by the recordholders of not less than 10% of the outstanding shares of the Trust.Shareholders may, under certain circ*mstances, communicate with othershareholders in connection with requesting a special meeting of shareholders.However, at any time that less than in a majority of the Trustees holding officewere elected by the shareholders, the Trustees will call a special meeting ofshareholders for the purpose of electing Trustees. 48<PAGE>Under Massachusetts law, shareholders of a Massachusetts business trust could,under certain circ*mstances, be held personally liable for acts or obligationsof the trust. However, the Trust's Declaration of Trust contains an expressdisclaimer of shareholder liability for acts, obligations and affairs of theTrust. The Declaration of Trust also provides for indemnification out of theTrust's assets for all losses and expenses of any shareholder held personallyliable by reason of being or having been a shareholder. The Declaration of Trustalso provides that no series of the Trust shall be liable for the liabilities ofany other series. Furthermore, no fund included in the Prospectus shall beliable for the liabilities of any other John Hanco*ck fund. Liability istherefore limited to circ*mstances in which the Trust itself would be unable tomeet its obligations, and the possibility of this occurrence is remote.The Fund reserves the right to reject any application which conflicts with theFund's internal policies or the policies of any regulatory authority. JohnHanco*ck Funds does not accept starter, credit card or third party checks. Allchecks returned by the post office as undeliverable will be reinvested at netasset value in the fund or funds from which a redemption was made or dividendpaid. Information provided on the account application may be used by the Fund toverify the accuracy of the information or for background or financial historypurposes. A joint account will be administered as a joint tenancy with right ofsurvivorship, unless the joint owners notify Signature Services of a differentintent. A shareholder's account is governed by the laws of The Commonwealth ofMassachusetts. For telephone transactions, the transfer agent will take measuresto verify the identity of the caller, such as asking for name, account number,Social Security or other taxpayer ID number and other relevant information. Ifappropriate measures are taken, the transfer agent is not responsible for anylosses that may occur to any account due to an unauthorized telephone call. Alsofor your protection telephone transactions are not permitted on accounts whosenames or addresses have changed within the past 30 days. Proceeds from telephonetransactions can only be mailed to the address of record.Selling activities for the Fund may not take place outside the U.S. exempt withU.S. military bases, APO addresses and U.S. diplomats. Brokers of record onNon-U.S. investors' accounts with foreign mailing addresses are required tocertify that all sales activities have occurred, and in the future will occur,only in the U.S. A Foreign corporation may purchase shares of the Fund only ifit has a U.S. mailing address.TAX STATUSEach series of the Trust, including the Fund is treated as a separate entity fortax purposes. The Fund has qualified and elected to be treated as a "regulatedinvestment company" under Subchapter M of the Internal Revenue Code of 1986, asamended (the "Code"), and intends to continue to so qualify for each taxableyear. As such and by complying with the applicable provisions of the Coderegarding the sources of its income, the timing of its distributions, and thediversification of its assets, the Fund will not be subject to Federal incometax on taxable income (including net realized capital gains) which isdistributed to shareholders in accordance with the timing requirements of theCode.The Fund will be subject to a 4% non-deductible Federal excise tax on certainamounts not distributed (and not treated as having been distributed) on a timelybasis in accordance with annual minimum distribution requirements. The Fundintends under normal circ*mstances to seek to avoid or minimize liability forsuch tax. 49<PAGE>Distributions from the Fund's current or accumulated earnings and profits("E&P") will be taxable under the Code for investors who are subject to tax. Ifthese distributions are paid from the Fund's "investment company taxableincome," they will be taxable as ordinary income; and if they are paid from theFund's "net capital gain," they will be taxable as capital gain. (Net capitalgain is the excess (if any) of net long-term capital gain over net short-termcapital loss, and investment company taxable income is all taxable income andcapital gains, other than those gains and losses included in computing netcapital gain, after reduction by deductible expenses). Some distributions may bepaid to shareholders as if they had been received on December 31 of the previousyear. The tax treatment described above will apply without regard to whetherdistributions are received in cash or reinvested in additional shares of theFund.Distributions, if any, in excess of E&P will constitute a return of capitalunder the Code, which will first reduce an investor's federal tax basis in Fundshares and then, to the extent such basis is exceeded, will generally give riseto capital gains. Shareholders who have chosen automatic reinvestment of theirdistributions will have a federal tax basis in each share received pursuant tosuch a reinvestment equal to the amount of cash they would have received hadthey elected to receive the distribution in cash, divided by the number ofshares received in the reinvestment.Foreign exchange gains and losses realized by the Fund in connection withcertain transactions involving foreign currency-denominated debt securities,certain foreign currency futures and options, foreign currency forwardcontracts, foreign currencies, or payables or receivables denominated in aforeign currency are subject to Section 988 of the Code, which generally causessuch gains and losses to be treated as ordinary income and losses and may affectthe amount, timing and character of distributions to shareholders. Transactionsin foreign currencies that are not directly related to the Fund's investment instock or securities, possibly including speculative currency positions orcurrency derivatives not used for hedging purposes, may increase the amount ofgain it is deemed to recognize from the sale of certain investments orderivatives held for less than three months, which gain is limited under theCode to less than 30% of gross income for each taxable year, and could underfuture Treasury regulations produce income not among the types of "qualifyingincome" from which the Fund must derive at least 90% of its gross income foreach taxable year. If the net foreign exchange loss for a year treated asordinary loss under Section 988 were to exceed the Fund's investment companytaxable income computed without regard to such loss but after considering thepost-October loss regulations the resulting overall ordinary loss for such yearwould not be deductible by the Fund or its shareholders in future years.The Fund may be subject to withholding and other taxes imposed by foreigncountries with respect to its investments in foreign securities. Some taxconventions between certain countries and the U.S. may reduce or eliminate suchtaxes. Investors may be entitled to claim U.S. foreign tax credits or deductionswith respect to such taxes, subject to certain provisions and limitationscontained in the Code, if the Fund so elects. If more than 50% of the value ofthe Fund's total assets at the close of any taxable year consists of stock orsecurities of foreign corporations, the Fund may file an election with theInternal Revenue Service pursuant to which shareholders of the Fund will berequired to (i) include in ordinary gross income (in addition to taxabledividends and distributions actually received) their pro rata shares ofqualified foreign taxes paid by the Fund even though not actually received bythem, and (ii) treat such respective pro rata portions as qualified foreigntaxes paid by them. The Fund probably will not satisfy this 50% requirement. 50<PAGE>If the Fund makes this election, shareholders may then deduct such pro rataportions of qualified foreign taxes in computing their taxable incomes, or,alternatively, use them as foreign tax credits, subject to applicablelimitations, against their U.S. Federal income taxes. Shareholders who do notitemize deductions for Federal income tax purposes will not, however, be able todeduct their pro rata portion of qualified foreign taxes paid by the Fund,although such shareholders will be required to include their share of such taxesin gross income. Shareholders who claim a foreign tax credit for such foreigntaxes may be required to treat a portion of dividends received from the Fund asa separate category of income for purposes of computing the limitations on theforeign tax credit. Tax-exempt shareholders will ordinarily not benefit fromthis election. Each year (if any) that the Fund files the election describedabove, its shareholders will be notified of the amount of (i) each shareholder'spro rata share of qualified foreign taxes paid by the Fund and (ii) the portionof Fund dividends which represents income from each foreign country. A Fund thatcannot or does not make this election may deduct such taxes in determining theamount it has available for distribution to shareholders, and shareholders willnot, in this event, include these foreign taxes in their income, nor will theybe entitled to any tax deductions or credits with respect to such taxes.The Fund is permitted to acquire stock in foreign corporations. If the Fundinvests in stock (including an option to acquire stock such as is inherent in aconvertible bond) of certain foreign corporations that receive at least 75% oftheir annual gross income from passive sources (such as interest, dividends,certain rents and royalties or capital gain) or hold at least 50% of theirassets in investments producing such passive income ("passive foreign investmentcompanies"), the Fund could be subject to federal income tax and additionalinterest charges on "excess distributions" received from such companies or gainfrom the sale of stock in such companies, even if all income or gain actuallyreceived by the Fund is timely distributed to its shareholders. The Fund wouldnot be able to pass through to its shareholders any credit or deduction for sucha tax. An election may be available to ameliorate these adverse taxconsequences, but any such election could require the Fund to recognize taxableincome or gain without the concurrent receipt of cash. Those investments couldalso result in the treatment of associated capital gains as ordinary income. TheFund may limit and/or manage its holdings in passive foreign investmentcompanies to minimize its tax liability or maximize its return from theseinvestments.The amount of the Fund's net realized capital gains, if any, in any given yearwill vary depending upon the Adviser's current investment strategy and whetherthe Adviser believes it to be in the best interest of the Fund to dispose ofportfolio securities or enter into options or futures transactions that willgenerate capital gains. At the time of an investor's purchase of Fund shares, aportion of the purchase price is often attributable to realized or unrealizedappreciation in the Fund's portfolio. Consequently, subsequent distributionsfrom such appreciation may be taxable to such investor even if the net assetvalue of the investor's shares is, as a result of the distributions, reducedbelow the investor's cost for such shares, and the distributions in realityrepresent a return of a portion of the purchase price.Upon a redemption or other disposition of shares of the Fund (including byexercise of the exchange privilege) in a transaction that is treated as a salefor tax purposes, a shareholder may realize a taxable gain or loss dependingupon the amount of the proceeds and the investor's basis in his shares. Any gainor loss will be treated as capital gain or loss if the shares are capital assetsin the shareholder's hands. A sales charge paid in purchasing Class A shares ofthe Fund cannot be taken into account for purposes of determining gain or losson the redemption or exchange of such shares within 90 days after their purchaseto the extent shares of the Fund or another John Hanco*ck fund are subsequentlyacquired without payment of a sales charge pursuant to the reinvestment orexchange privilege. Such disregarded load will result in an increase in theshareholder's tax basis in the shares subsequently acquired. Also, any lossrealized on a redemption or exchange may be disallowed to the extent the sharesdisposed of are replaced with other shares of the same Fund within a period of61 days beginning 30 days before and ending 30 days after the shares aredisposed of, such as pursuant to automatic dividend reinvestments. In such acase, the basis of the shares acquired will be adjusted to reflect thedisallowed loss. Any loss realized upon the redemption of shares with a taxholding period of six months or less will be treated as a long-term capital lossto the extent of any amounts treated as distributions of long-term capital gainwith respect to such shares. Shareholders should consult their own tax advisersregarding their particular circ*mstances to determine whether a disposition ofFund shares is properly treated as a sale for tax purposes, as is assumed in theforegoing discussion. 51<PAGE>Although its present intention is to distribute, at least annually, all netcapital gain, if any, the Fund reserves the right to retain and reinvest all orany portion of the excess, as computed for Federal income tax purposes, of netlong-term capital gain over net short-term capital loss in any year. The Fundwill not in any event distribute net capital gain realized in any year to theextent that a capital loss is carried forward from prior years against suchgain. To the extent such excess was retained and not exhausted by thecarryforward of prior years' capital losses, it would be subject to Federalincome tax in the hands of the Fund. Upon proper designation by the Fund, eachshareholder would be treated for Federal income tax purposes as if the Fund haddistributed to him on the last day of its taxable year his pro rata share ofsuch excess, and he had paid his pro rata share of the taxes paid by the Fundand reinvested the remainder in the Fund. Accordingly, each shareholder would(a) include his pro rata share of such excess as long-term capital gain incomein his return for his taxable year in which the last day of such Fund's taxableyear falls, (b) be entitled either to a tax credit on his return for, or to arefund of, his pro rata share of the taxes paid by such Fund, and (c) beentitled to increase the adjusted tax basis for his shares in such Fund by thedifference between his pro rata share of such excess and his pro rata share ofsuch taxes.For Federal income tax purposes, the Fund is generally permitted to carryforward a net capital loss in any year to offset its own net capital gains, ifany, during the eight years following the year of the loss. To the extentsubsequent net capital gains are offset by such losses, they would not result inFederal income tax liability to the Fund and, as noted above, would not bedistributed as such to shareholders. As of May 31, 1998, the Fund has no capitalloss carryforwards.The Fund is required to accrue income on any debt securities that have more thana de minimis amount of original issue discount (or debt securities acquired at amarket discount, if the Fund elects to include market discount in incomecurrently) prior to the receipt of the corresponding cash payments. The mark tomarket or constructive sales rules applicable to certain options, futures andforward contracts may also require the Fund to recognize income or gain withouta concurrent receipt of cash. However, the Fund must distribute to shareholdersfor each taxable year substantially all of its net income and net capital gains,including such income or gain, to qualify as a regulated investment company andavoid liability for any federal income or excise tax. Therefore, the Fund mayhave to dispose of its portfolio securities under disadvantageous circ*mstancesto generate cash, or borrow cash, to satisfy these distribution requirements.A state income (and possibly local income and/or intangible property) taxexemption is generally available to the extent (if any) the Fund's distributionsare derived from interest on (or, in the case of intangible property taxes, thevalue of its assets is attributable to) certain U.S. Government obligations,provided in some states that certain thresholds for holdings of such obligationsand/or reporting requirements are satisfied. The Fund will not seek to satisfyany threshold or reporting requirements that may apply in particular taxingjurisdictions, although the Fund may in its sole discretion provide relevantinformation to shareholders. 52<PAGE>The Fund will be required to report to the Internal Revenue Service (the "IRS")all taxable distributions to shareholders, as well as gross proceeds from theredemption or exchange of Fund shares, except in the case of certain exemptrecipients, i.e., corporations and certain other investors distributions towhich are exempt from the information reporting provisions of the Code. Underthe backup withholding provisions of Code Section 3406 and applicable Treasuryregulations, all such reportable distributions and proceeds may be subject tobackup withholding of federal income tax at the rate of 31% in the case ofnon-exempt shareholders who fail to furnish the Fund with their correct taxpayeridentification number and certain certifications required by the IRS or if theIRS or a broker notifies the Fund that the number furnished by the shareholderis incorrect or that the shareholder is subject to backup withholding as aresult of failure to report interest or dividend income. The Fund may refuse toaccept an application that does not contain any required taxpayer identificationnumber or certification that the number provided is correct. If the backupwithholding provisions are applicable, any such distributions and proceeds,whether taken in cash or reinvested in shares, will be reduced by the amountsrequired to be withheld. Any amounts withheld may be credited against ashareholder's U.S. federal income tax liability. Investors should consult theirtax advisers about the applicability of the backup withholding provisions.The Fund may be required to account for its transactions in forward rolls orswaps, caps, floors and collars in a manner that, under certain circ*mstances,may limit the extent of its participation in such transactions. Additionally,the Fund may be required to recognize gain, but not loss, if a swap or othertransaction is treated as a constructive sale of an appreciated financialposition in the Fund's portfolio. The Fund may have to sell portfolio securitiesunder disadvantageous circ*mstances to generate cash, or borrow cash, to satisfythese distribution requirements.Investments in debt obligations that are at risk of or are in default presentspecial tax issues for the Fund. Tax rules are not entirely clear about issuessuch as when the Fund may cease to accrue interest, original issue discount, ormarket discount, when and to what extent deductions may be taken for bad debtsor worthless securities, how payments received on obligations in default shouldbe allocated between principal and income, and whether exchanges of debtobligations in a workout context are taxable. These and other issues will beaddressed by the Fund that holds such obligations in order to reduce the risk ofdistributing insufficient income to preserve its status as a regulatedinvestment company and seek to avoid becoming subject to Federal income orexcise tax.Limitations imposed by the Code on regulated investment companies like the Fundmay restrict the Fund's ability to enter into options, futures, foreign currencypositions and foreign currency forward transactions.Certain options, futures and forward foreign currency transactions undertaken bythe Fund may cause such Fund to recognize gains or losses from marking to marketeven though its positions have not been sold or terminated and affect thecharacter as long-term or short-term (or, in the case of certain currencyforwards, options and futures, as ordinary income or loss) and timing of somecapital gains and losses realized by the Fund. Also, certain of the Fund'slosses on its transactions involving options, futures and forward foreigncurrency contracts and/or offsetting or successor portfolio positions may bedeferred rather than being taken into account currently in calculating theFund's taxable income or gains. Certain of such transactions may also cause theFund to dispose of investments sooner than would otherwise have occurred. Thesetransactions may therefore affect the amount, timing and character of the Fund'sdistributions to shareholders. The Fund will take into account the special taxrules (including consideration of available elections) applicable to options,futures or forward contracts in order to seek to minimize any potential adversetax consequences. 53<PAGE>Different tax treatment, including penalties on certain excess contributions anddeferrals, certain pre-retirement and post-retirement distributions and certainprohibited transactions, is accorded to accounts maintained as qualifiedretirement plans. Shareholders should consult their tax advisers for moreinformation.The foregoing discussion relates solely to U.S. Federal income tax law asapplicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domesticcorporations, partnerships, trusts or estates) subject to tax under such law.The discussion does not address special tax rules applicable to certain classesof investors, such as tax-exempt entities, insurance companies, and financialinstitutions. Dividends, capital gain distributions, and ownership of or gainsrealized on the redemption (including an exchange) of Fund shares may also besubject to state and local taxes. Shareholders should consult their own taxadvisers as to the Federal, state or local tax consequences of ownership ofshares of, and receipt of distributions from, the Fund in their particularcirc*mstances.Non-U.S. investors not engaged in a U.S. trade or business with which theirinvestment in the Fund is effectively connected will be subject to U.S. Federalincome tax treatment that is different from that described above. Theseinvestors may be subject to nonresident alien withholding tax at the rate of 30%(or a lower rate under an applicable tax treaty) on amounts treated as ordinarydividends from the Fund and, unless an effective IRS Form W-8 or authorizedsubstitute for Form W-8 is on file, to 31% backup withholding on certain otherpayments from the Fund. Non-U.S. investors should consult their tax advisersregarding such treatment and the application of foreign taxes to an investmentin the Fund.The Fund is not subject to Massachusetts corporate excise or franchise taxes.The Fund anticipates that, provided that the Fund qualifies as a regulatedinvestment company under the Code, it will also not be required to pay anyMassachusetts income tax.CALCULATION OF PERFORMANCE The Fund may advertise yield, where appropriate. For the 30-day period endedNovember 30, 1998, the yields of the Fund's Class A, Class B and Class C shareswere 11.77%, 11.58% and 11.51%, respectively. The Fund's yield is computed by dividing net investment income per sharedetermined for a 30-day period by the maximum offering price per share (whichincludes the full sales charge) on the last day of the period, according to thefollowing standard formula: 6 Yield = 2 ( [ ( a - b ) + 1 ] - 1 ) ------- cd 54<PAGE>Where: a = dividends and interest earned during the period. b = net expenses accrued during the period. c = the average daily number of fund shares outstanding during the period that would be entitled to receive dividends. d = the maximum offering price per share on the last day of the period (NAV where applicable).Total Return. Average annual total return is determined separately for each class of shares. Set forth below are tables showing the performance on a total return basis(i.e., with all dividends and distributions reinvested) of a hypothetical $1,000investment in the Class A, Class B and Class C shares of the Fund. Class A Shares Class A Shares Class A Shares One Year Ended Five Years Ended 6/30/93* to 11/30/98 11/30/98 11/30/98 -------- -------- -------- -13.42% 5.31% 5.97% Class B Shares Class B Shares Class B Shares One Year Ended Five Years Ended Ten Years Ended Class C Shares 11/30/98 11/30/98 11/30/98 5/1/98* to 11/30/98 -------- -------- -------- ------------------- -14.12% 5.23% 7.71% -29.32% * Commencement of operations.Total Return. The Fund's total return is computed by finding the average annualcompounded rate of return over the 1-year, 5-year, and 10-year periods thatwould equate the initial amount invested to the ending redeemable valueaccording to the following formula: n ________ T = \ / ERV / P - 1P = a hypothetical initial payment of $1,000.T = average annual total return.n = number of years.ERV = ending redeemable value of a hypothetical $1,000 investment made at the beginning of the 1-year and life-of-fund periods.Because each class has its own charge and fee structure, the classes havedifferent performance results. In the case of each class, this calculationassumes the maximum sales charge is included in the initial investment or theCDSC is applied at the end of the period. This calculation assumes that alldividends and distributions are reinvested at net asset value on thereinvestment dates during the period. The "distribution rate" is determined byannualizing the result of dividing the declared dividends of the Fund during theperiod stated by the maximum offering price or net asset value at the end of theperiod. Excluding the Fund's sales charge from the distribution rate produces ahigher rate. 55<PAGE>In addition to average annual total returns, the Fund may quote unaveraged orcumulative total returns reflecting the simple change in value of an investmentover a stated period. Cumulative total returns may be quoted as a percentage oras a dollar amount, and may be calculated for a single investment, a series ofinvestments, and/or a series of redemptions, over any time period. Total returnsmay be quoted with or without taking the Fund's sales charge on Class A sharesor the CDSC on Class B or Class C shares into account. Excluding the Fund'ssales charge on Class A shares and the CDSC on Class B or Class C shares from atotal return calculation produces a higher total return figure.From time to time, in reports and promotional literature, the Fund's yield andtotal return will be compared to indices of mutual funds and bank depositvehicles such as Lipper Analytical Services, Inc.'s "Lipper--Fixed Income FundPerformance Analysis," a monthly publication which tracks net assets, totalreturn, and yield on fixed income mutual funds in the United States. Ibottsonand Associates, CDA Weisenberger and F.C. Towers are also used for comparisonpurposes, as well as the Russell and Wilshire Indices.Performance rankings and ratings reported periodically in national financialpublications such as MONEY MAGAZINE, FORBES, BUSINESS WEEK, THE WALL STREETJOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S, etc. will also beutilized. The Fund's promotional and sales literature may make reference to theFund's "beta." Beta reflects the market-related risk of the Fund by showing howresponsive the Fund is to the market.The performance of the Fund is not fixed or guaranteed. Performance quotationsshould not be considered to be representations of performance of the Fund forany period in the future. The performance of the Fund is a function of manyfactors including its earnings, expenses and number of outstanding shares.Fluctuating market conditions; purchases, sales and maturities of portfoliosecurities; sales and redemptions of shares of beneficial interest; and changesin operating expenses are all examples of items that can increase or decreasethe Fund's performance.BROKERAGE ALLOCATIONDecisions concerning the purchase and sale of portfolio securities and theallocation of brokerage commissions are made by the Adviser pursuant torecommendations made by an investment committee of the Adviser, which consistsof officers and directors of the Adviser and affiliates and Trustees who areinterested persons of the Fund. Orders for purchases and sales of securities areplaced in a manner which, in the opinion of the Adviser, will offer the bestprice and market for the execution of each such transaction. Purchases fromunderwriters of portfolio securities may include a commission or commissionspaid by the issuer and transactions with dealers serving as market makersreflect a "spread." Debt securities are generally traded on a net basis throughdealers acting for their own account as principals and not as brokers; nobrokerage commissions are payable on these transactions. In the U.S. Government securities market, securities are generally traded on a"net" basis with dealers acting as principal for their own account without astated commission, although the price of the security usually includes a profitto the dealer. On occasion, certain money market instruments and agencysecurities may be purchased directly from the issuer, in which case nocommissions or premiums are paid. In other countries, both debt and equitysecurities are traded on exchanges at fixed commission rates. Commissions onforeign transactions are generally higher than the negotiated commission ratesavailable in the U.S. There is generally less government supervision andregulation of foreign stock exchanges and broker-dealers than in the U.S. 56<PAGE>The Fund's primary policy is to execute all purchases and sales of portfolioinstruments at the most favorable prices consistent with best execution,considering all of the costs of the transaction including brokerage commissions.This policy governs the selection of brokers and dealers and the market in whicha transaction is executed. Consistent with the foregoing primary policy, theRules of Fair Practice of the NASD and other policies that the Trustees maydetermine, the Adviser may consider sales of shares of the Fund as a factor inthe selection of broker-dealers to execute the Fund's portfolio transactions.To the extent consistent with the foregoing, the Fund will be governed in theselection of brokers and dealers, and the negotiation of brokerage commissionrates and dealer spreads, by the reliability and quality of the services,including primarily the availability and value of research information and to alesser extent statistical assistance furnished to the Adviser of the Fund, andtheir value and expected contribution to the performance of the Fund. It is notpossible to place a dollar value on information and services to be received frombrokers and dealers, since it is only supplementary to the research efforts ofthe Adviser. The receipt of research information is not expected to reducesignificantly the expenses of the Adviser. The research information andstatistical assistance furnished by brokers and dealers may benefit the LifeCompany or other advisory clients of the Adviser, and conversely, brokeragecommissions and spreads paid by other advisory clients of the Adviser may resultin research information and statistical assistance beneficial to the Fund. TheFund will make no commitments to allocate portfolio transactions upon anyprescribed basis. While the Adviser's officers will be primarily responsible forthe allocation of the Fund's brokerage business, the policies and practices ofthe Adviser in this regard must be consistent with the foregoing and at alltimes be subject to review by the Trustees.The negotiated brokerage commissions of the Fund are as follows:(a) $356,682 for the fiscal year ended May 31, 1998, (b) $67,481 for the periodfrom November 1, 1996 to May 31, 1997 (c) $39,163 for the fiscal year endedOctober 31, 1996; and (d) $40,228 for the fiscal year ended October 31, 1995.As permitted by Section 28(e) of the Securities Exchange Act of 1934, the Fundmay pay to a broker which provides brokerage and research services to the Fundan amount of disclosed commission in excess of the commission which anotherbroker would have charged for effecting that transaction. This practice issubject to a good faith determination by the Trustees that the price isreasonable in light of the services provided and to policies that the Trusteesmay adopt from time to time. For the fiscal year ended May 31, 1998, the Fundpaid $12,630 in commissions to compensate brokers for research services such asindustry, economic and company reviews and evaluations of securities.The Adviser's indirect parent, the Life Company is the indirect sole shareholderof Signator Investors, Inc., a broker dealer ("Signator" or "AffiliatedBroker"). Pursuant to procedures determined by the Trustees and consistent withthe above policy of obtaining best net results, the Fund may execute portfoliotransactions with or through Affiliated Brokers. For the fiscal years endedOctober 31, 1995 and 1996, the Fund paid no brokerage commission to anyAffiliated Broker. For the period from November 1, 1996 to May 31, 1997, theFund paid no brokerage commissions to any Affiliated Broker. For the fiscal yearended May 31, 1998, the Fund paid no brokerage commissions to any AffiliatedBroker. 57<PAGE>Signator may act as broker for the Fund on exchange transactions, subject,however, to the general policy of the Fund set forth above and the proceduresadopted by the Trustees pursuant to the Investment Company Act. Commissions paidto an Affiliated Broker must be at least as favorable as those which theTrustees believe to be contemporaneously charged by other brokers in connectionwith comparable transactions involving similar securities being purchased orsold. A transaction would not be placed with an Affiliated Broker if the Fundwould have to pay a commission rate less favorable than the Affiliated Broker'scontemporaneous charges for comparable transactions for its other most favored,but unaffiliated, customers, except for accounts for which the Affiliated Brokeracts as a clearing broker for another brokerage firm, and any customers of theAffiliated Broker not comparable to the Fund as determined by a majority of theTrustees who are not interested persons (as defined in the Investment CompanyAct) of the Fund, the Adviser or the Affiliated Broker. Because the Adviser,which is affiliated with the Affiliated Broker, has, as an investment adviser tothe Fund, the obligation to provide investment management services, whichincludes elements of research and related investment skills, such research andrelated skills will not be used by the Affiliated Brokers as a basis fornegotiating commissions at a rate higher than that determined in accordance withthe above criteria.Other investment advisory clients advised by the Adviser may also invest in thesame securities as the Fund. When these clients buy or sell the same securitiesat substantially the same time, the Adviser may average the transactions as toprice and allocate the amount of available investments in a manner which theAdviser believes to be equitable to each client, including the Fund. In someinstances, this investment procedure may adversely affect the price paid orreceived by the Fund or the size of the position obtainable for it. On the otherhand, to the extent permitted by law, the Advisers may aggregate securities tobe sold or purchased for the Fund with those to be sold or purchased for otherclients managed by it in order to obtain best execution.TRANSFER AGENT SERVICESJohn Hanco*ck Signature Services Inc., 1 Hanco*ck Way, Suite 1000, Boston, MA02217-1000, a wholly-owned indirect subsidiary of the Life Company, is thetransfer and dividend paying agent for the Fund. The Fund pays SignatureServices an annual fee of $20.00 for each Class A shareholder account, $22.50for each Class B shareholder account and $21.50 for each Class C shareholderaccount. The Fund also pays certain out-of-pocket expenses and these expensesare aggregated and charged to the Fund and allocated to each class on the basisof their relative net asset values.CUSTODY OF PORTFOLIOPortfolio securities of the Fund are held pursuant to a custodian agreementbetween the Fund and Investors Bank & Trust Company, 200 Clarendon Street,Boston, Massachusetts 02116. Under the custodian agreement, Investors Bank &Trust Company performs custody, portfolio and fund accounting services.INDEPENDENT AUDITORS Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts 02116, has beenselected as the independent auditors of the Fund. The financial statements ofthe Fund included in the Prospectus and this Statement of Additional Informationfor the Fund's fiscal year ended May 31, 1998 have been audited by Ernst & YoungLLP for the periods indicated in their report, appearing elsewhere herein, andare included in reliance upon such report given upon the authority of such firmas experts in accounting and auditing. 58<PAGE>APPENDIX-AMORE ABOUT RISKA fund's risk profile is largely defined by the fund's principal securities andinvestment practices. You may find the most concise description of the fund'srisk profile in the prospectus.A fund is permitted to utilize -- within limits established by the trustees --certain other securities and investment practices that have higher risks andopportunities associated with them. To the extent that the fund utilizes thesesecurities or practices, its overall performance may be affected, eitherpositively or negatively. On the following pages are brief definitions ofcertain associated risks with them, with examples of related securities andinvestment practices included in brackets. See the "Investment Objectives andPolicies" and "Investment Restrictions" sections of this Statement of AdditionalInformation for a description of this Fund's investment policies. The fundfollows certain policies that may reduce these risks.As with any mutual fund, there is no guarantee that the fund will earn income orshow a positive total return over any period of time -- days, months or years.TYPES OF INVESTMENT RISKCorrelation risk The risk that changes in the value of a hedging instrument willnot match those of the asset being hedged (hedging is the use of one investmentto offset the effects of another investment). Incomplete correlation can resultin unanticipated risks. (e.g., currency contracts, futures and related options,options on securities and indices, swaps, caps, floors and collars).Credit risk The risk that the issuer of a security, or the counterparty to acontract, will default or otherwise become unable to honor a financialobligation. (e.g., non- investment-grade debt securities, borrowing; reverserepurchase agreements, covered mortgage dollar roll transactions, repurchaseagreements, securities lending, brady bonds, foreign debt securities, in-kind,delayed and zero coupon debt securities, asset-backed securities,mortgage-backed securities, participation interest, options on securities,structured securities and swaps, caps floors and collars).Currency risk The risk that fluctuations in the exchange rates between the U.S.dollar and foreign currencies may negatively affect an investment. Adversechanges in exchange rates may erode or reverse any gains produced by foreigncurrency-denominated investments, and may widen any losses.(e.g., foreign debtsecurities, currency contracts, swaps, caps, floors and collars).Extension risk The risk that an unexpected rise in interest rates will extendthe life of a mortgage-backed security beyond the expected prepayment time,typically reducing the security's value.(e.g. mortgage-backed securities andstructured securities).Interest rate risk The risk of market losses attributable to changes in interestrates. With fixed-rate securities, a rise in interest rates typically causes afall in values, while a fall in rates typically causes a rise in values. (e.g.,non-investment-grade debt securities, covered mortgage dollar roll transactions,brady bonds, foreign debt securities, in-kind, delayed and zero coupon debtsecurities, asset-backed securities, mortgage-backed securities, participationinterest, swaps, caps, floors and collars). A-1<PAGE>Leverage risk Associated with securities or practices (such as borrowing) thatmultiply small index or market movements into large changes in value. (e.g.borrowing; reverse repurchase agreements, covered mortgage dollar rolltransactions, when-issued securities and forward commitments, currencycontracts, financial futures and options; securities and index options,structured securities, swaps, caps, floors and collars).o Hedged When a derivative (a security whose value is based on another security or index) is used as a hedge against an opposite position that the fund also holds, any loss generated by the derivative should be substantially offset by gains on the hedged investment, and vice versa. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains.o Speculative To the extent that a derivative is not used as a hedge, the fund is directly exposed to the risks of that derivative. Gains or losses from speculative positions in a derivative may be substantially greater than the derivative's original cost.Liquidity risk The risk that certain securities may be difficult or impossibleto sell at the time and the price that the seller would like. The seller mayhave to lower the price, sell other securities instead, or forego an investmentopportunity, any of which could have a negative effect on fund management orperformance. (e.g. non-investment-grade debt securities, restricted and illiquidsecurities, mortgage-backed securities, participation interest, currencycontracts, futures and related options; securities and index options, structuredsecurities, swaps, caps, floors and collars).Management risk The risk that a strategy used by a fund's management may fail toproduce the intended result. Common to all mutual funds.Market risk The risk that the market value of a security may move up and down,sometimes rapidly and unpredictably. Market risk may affect a single issuer, anindustry, a sector of the bond market or the market as a whole. Common to allstocks and bonds and the mutual funds that invest in them. (e.g. coveredmortgage dollar roll transactions, short-term trading, when-issued securitiesand forward commitments, brady bonds, foreign debt securities, in-kind, delayedand zero coupon debt securities, restricted and illiquid securities, rights andwarrants, financial futures and options; and securities and index options,structured securities).Natural event risk The risk of losses attributable to natural disasters, cropfailures and similar events.Opportunity risk The risk of missing out on an investment opportunity becausethe assets necessary to take advantage of it are tied up in less advantageousinvestments.(e.g. covered mortgage dollar roll transactions, when-issuedsecurities and forward commitments, currency contracts, financial futures andoptions; securities and securities and index options).Political risk The risk of losses attributable to government or politicalactions, from changes in tax or trade statutes to governmental collapse and war.(e.g., brady bonds and foreign debt securities). A-2<PAGE>Prepayment risk The risk that unanticipated prepayments may occur during periodsof falling interest rates, reducing the value of mortgage-backed securities.(e.g., mortgage backed securities).Valuation risk The risk that a fund has valued certain of its securities at ahigher price than it can sell them for. (e.g., non-investment-grade debtsecurities, participation interest, structured securities, swaps, caps, floorsand collars). A-3<PAGE> APPENDIX BDESCRIPTION OF BOND RATINGSThe ratings of Moody's Investors Service, Inc. and Standard & Poor's RatingsGroup represent their opinions as to the quality of various debt instrumentsthey undertake to rate. It should be emphasized that ratings are not absolutestandards of quality. Consequently, debt instruments with the same maturity,coupon and rating may have different yields while debt instruments of the samematurity and coupon with different ratings may have the same yield.MOODY'S INVESTORS SERVICE, INC.Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carrythe smallest degree of investment risk and are generally referred to as "giltedge." Interest payments are protected by a large or by an exceptionally stablemargin and principal is secure. While the various protective elements are likelyto change, such changes as can be visualized are most unlikely to impair thefundamentally strong position of such issues.Aa: Bonds which are rated Aa are judged to be of high quality by all standards.Together with the Aaa group they comprise what are generally known as high gradebonds. They are rated lower than the best bonds because margins of protectionmay not be as large as in Aaa securities or fluctuations of protective elementsmay be of greater amplitude or there may be other elements present which makethe long-term risks appear somewhat larger than in Aaa securities.A: Bonds which are rated A possess many favorable investment attributes and areto be considered as upper medium grade obligations. Factors giving security toprincipal and interest are considered adequate but elements may be present whichsuggest a susceptibility to impairment at some time in the future.Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,they are neither highly protected nor poorly secured. Interest payments andprincipal security appear adequate for the present but certain protectiveelements may be lacking or may be characteristically unreliable over any greatlength of time. Such bonds lack outstanding investment characteristics and infact have speculative characteristics as well.Ba: Bonds which are rated Ba are judged to have speculative elements; theirfuture cannot be considered as well assured. Often the protection of interestand principal payments may be very moderate and thereby not well safeguardedduring both good and bad times over the future. Uncertainty of positioncharacterizes bonds in this class.B: Bonds which are rated B generally lack the characteristics of desirableinvestment. Assurance of interest and principal payments or of maintenance ofother terms of the contract over any long period of time may be small.Caa: Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be present elements of danger with respect toprincipal or interest.Ca: Bonds which are rated Ca represented obligations which are speculative ina high degree. Such issues are often in default or have other marked shortcomings. B-1<PAGE>STANDARD & POOR'S RATINGS GROUPAAA: Debt rated AAA has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong.AA: Debt rated AA has a very strong capacity to pay interest and repay principaland differs from the highest rated issues only in small degree.A: Debt rated A has a strong capacity to pay interest and repay principal,although it is somewhat more susceptible to the adverse effects of changes incirc*mstances and economic conditions than debt in higher rated categories.BBB: Debt rated BBB is regarded as having an adequate capacity to pay interestand repay principal. Whereas it normally exhibits adequate protectionparameters, adverse economic conditions or changing circ*mstances are morelikely to lead to a weakened capacity to pay interest and repay principal fordebt in this category than in higher rated categories.BB, B: Debt rated BB, and B is regarded, on balance, as predominantlyspeculative with respect to capacity to pay interest and repay principal inaccordance with the terms of the obligation. BB indicates the lowest degree ofspeculation and CC the highest degree of speculation. While such debt willlikely have some quality and protective characteristics, these are outweighed bylarge uncertainties or major risk exposures to adverse conditions.CCC: Debt rated 'CCC' has a currently identifiable vulnerability to default, andis dependent upon favorable business, financial, and economic conditions to meettimely payment of interest and repayment of principal. In the event of adversebusiness, financial or economic conditions, it is not likely to have thecapacity to pay interest and repay principal. The 'CCC' rating category is alsoused for debt subordinated to senior debt that is assigned an actual or implied'B' or 'B-' rating.CC: The rating 'CC' is typically applied to debt subordinated to senior debtthat is assigned an actual or implied 'CCC' rating.FITCH INVESTORS SERVICE ("Fitch")AAA, AA, A, BBB - Bonds rated AAA are considered to be investment grade and ofthe highest quality. The obligor has an extraordinary ability to pay interestand repay principal, which is unlikely to be affected by reasonably foreseeableevents. Bonds rated AA are considered to be investment grade and of highquality. The obligor's ability to pay interest and repay principal, while verystrong, is somewhat less than for AAA rated securities or more subject topossible change over the term of the issue. Bonds rated A are considered to beinvestment grade and of good quality. The obligor's ability to pay interest andrepay principal is considered to be strong, but may be more vulnerable toadverse changes in economic conditions and circ*mstances than bonds with higherratings. Bonds rated BBB are considered to be investment grade and ofsatisfactory quality. The obligor's ability to pay interest and repay principalis considered to be adequate. Adverse changes in economic conditions andcirc*mstances, however, are more likely to weaken this ability than bonds withhigher ratings. B-2<PAGE>TAX-EXEMPT NOTE RATINGSMoody's - MIG-1 and MIG-2. Notes rated MIG-1 are judged to be of the bestquality, enjoying strong protection from established cash flow or funds fortheir services or from established and broad-based access to the market forrefinancing or both. Notes rated MIG-2 are judged to be of high quality withample margins of protection, though not as large as MIG-1.S&P - SP-1 and SP-2. SP-1 denotes a very strong or strong capacity to payprincipal and interest. Issues determined to possess overwhelming safetycharacteristics are given a plus (+) designation (SP-1+). SP-2 denotes asatisfactory capacity to pay principal and interest.Fitch - FIN-1 and FIN-2. Notes assigned FIN-1 are regarded as having thestrongest degree of assurance for timely payment. A plus symbol may be used toindicate relative standing. Notes assigned FIN-2 reflect a degree of assurancefor timely payment only slightly less in degree than the highest category.CORPORATE AND TAX-EXEMPT COMMERCIAL PAPER RATINGSMoody's - Commercial Paper ratings are opinions of the ability of issuers torepay punctually promissory obligations not having an original maturity inexcess of nine months. Prime-1, indicates highest quality repayment capacity ofrated issue and Prime-2 indicates higher quality.S&P - Commercial Paper ratings are a current assessment of the likelihood oftimely payment of debts having an original maturity of no more than 365 days.Issues rated A have the greatest capacity for a timely payment and thedesignation 1, 2 and 3 indicates the relative degree of safety. Issues rated"A-1+" are those with an "overwhelming degree of credit protection."Fitch - Commercial Paper ratings reflect current appraisal of the degree ofassurance of timely payment. F-1 issues are regarded as having the strongestdegree of assurance for timely payment. (+) is used to designate the relativeposition of an issuer within the rating category. F-2 issues reflect anassurance of timely payment only slightly less in degree than the strongestissues. The symbol (LOC) may follow either category and indicates that a letterof credit issued by a commercial bank is attached to the commercial paper note.Other Considerations - The ratings of S&P, Moody's, and Fitch represent theirrespective opinions of the quality of the municipal securities they undertake torate. It should be emphasized, however, that ratings are general and are notabsolute standards of quality. Consequently, municipal securities with the samematurity, coupon and ratings may have different yields and municipal securitiesof the same maturity and coupon with different ratings may have the same yield. B-3<PAGE> FINANCIAL STATEMENTSThe financial statements listed below are included in the Fund's respective 1998Annual Report to Shareholders for the year ended May 31, 1998 (filedelectronically on July 30, 1998, accession number 0001010521-98-000300) and 1998Semiannual Report to Shareholders for the year ended November 30, 1998 (filedelectronically on January 29, 1999, accession number 0001010521-99-000087) andare included in and incorporated by reference into Part B of this registrationstatement of John Hanco*ck High Yield Bond Fund (files nos. 811-03006 and2-66906).John Hanco*ck Bond TrustJohn Hanco*ck High Yield Bond Fund Statement of Assets and Liabilities as of May 31, 1998. Statement of Operations for the fiscal year ended May 31, 1998. Statement of Changes in Net Assets for each of the periods indicated therein. Financial Highlights for each of the periods indicated therein. Schedule of Investments as of May 31, 1998. Notes to Financial Statements. Report to Independent Auditors. Statement of Assets and Liabilities as of November 30, 1998. (unaudited) Statement of Operations for the fiscal year ended November 30, 1998. (unaudited) Statement of Changes in Net Assets for each of the periods indicated therein. (unaudited) Financial Highlights for each of the periods indicated therein. (unaudited) Schedule of Investments as of November 30, 1998. (unaudited) Notes to Financial Statements. F-1<PAGE> JOHN HANco*ck INTERMEDIATE GOVERNMENT FUND Class A, Class B and Class C Shares Statement of Additional Information April 1, 1999 This Statement of Additional Information provides information about the JohnHanco*ck Intermediate Government Fund (the "Fund"), in addition to theinformation that is contained in the combined Income Funds' Prospectus datedApril 1, 1999 (the "Prospectus"). The Fund is a diversified series of JohnHanco*ck Bond Trust (the "Trust"). This Statement of Additional Information is not a prospectus. It should be readin conjunction with the Prospectus, a copy of which can be obtained free ofcharge by writing or telephoning: John Hanco*ck Signature Services, Inc. 1 John Hanco*ck Way, Suite 1000 Boston, Massachusetts 02117-1000 1-800-225-5291 TABLE OF CONTENTS Page Organization of the Fund............................................ 2Investment Objective and Policies................................... 2Investment Restrictions............................................. 14Those Responsible for Management.................................... 16Investment Advisory and Other Services.............................. 26Distribution Contracts.............................................. 29Sales Compensation.................................................. 31Net Asset Value..................................................... 32Initial Sales Charge on Class A Shares.............................. 33Deferred Sales Charge on Class B and Class C Shares................. 36Special Redemptions................................................. 40Additional Services and Programs.................................... 40Description of the Fund's Shares.................................... 42Tax Status.......................................................... 43Calculation of Performance.......................................... 47Brokerage Allocation................................................ 48Transfer Agent Services............................................. 50Custody of Portfolio................................................ 50Independent Auditors................................................ 50Appendix A- Description of Investment Risk.......................... A-1Appendix B-Description of Bond Ratings.............................. B-1Financial Statements................................................ F-1 1<PAGE>ORGANIZATION OF THE FUND The Fund is a series of the Trust, an open-end investment management companyorganized as a Massachusetts business trust under the laws of The Commonwealthof Massachusetts. Prior to April 1, 1999, the fund was called John Hanco*ckIntermediate Maturity Government Fund. Prior to September 22, 1995, the Fund wascalled John Hanco*ck Adjustable U.S.Government Trust. John Hanco*ck Advisers, Inc. (the "Adviser") is the Fund's investment adviser.The Adviser is an indirect wholly-owned subsidiary of John Hanco*ck Mutual LifeInsurance Company (the "Life Company"), a Massachusetts life insurance companychartered in 1862, with national headquarters at John Hanco*ck Place, Boston,Massachusetts.INVESTMENT OBJECTIVE AND POLICIESThe following information supplements the discussion of the Fund's investmentobjective and policies discussed in the Prospectus. Appendix A contains furtherinformation describing investment risks. The Fund's investment objective isnon-fundamental. There is no assurance that the Fund will achieve its investmentobjective.The Fund seeks to earn a high level of current income, consistent withpreservation of capital and maintenance of liquidity. The Fund seeks to achieveits investment objective by investing primarily in U.S. Government securities,including mortgage-backed securities issued or guaranteed by U.S. Governmentagencies. Since the U.S. Government has never defaulted on its obligations, itssecurities are considered unmatched as a safe and reliable income source. TheFund may also invest in obligations of the Tennessee Valley Authority and theWorld Bank and medium-term debt obligations of governmental issuers. Undernormal market conditions, the Fund intends to maintain a weighted averageremaining maturity or average remaining life of three to ten years.Under normal conditions, at least 80% of the Fund's total assets will be in U.S.Government securities that consist of the following:1. U.S. Treasury obligations, which differ only in their interest rates,maturities and time of issuance, including U.S. Treasury bills (maturity of oneyear or less), U.S. Treasury notes (maturity of one to ten years), and U.S.Treasury bonds (generally maturities greater than ten years); and2. Obligations issued or guaranteed by the U.S. Government, its agenciesor instrumentalities which are supported by: (i) the full faith and credit ofthe U.S. Government (e.g., securities issued by the Government National MortgageAssociation ("GNMA")), (ii) the right of the issuer to borrow an amount limitedto a specific line of credit from the U.S. Government (e.g., securities of theFederal Home Loan Bank Board) or (iii) the credit of the instrumentality (e.g.,bonds issued by the Federal Home Loan Mortgage Association ("FHLMC") or FederalNational Mortgage Association ("FNMA").In general, investments in shorter and intermediate term (three to ten years)debt securities are less sensitive to interest rate changes and provide morestability than longer-term (ten years or more) investments. Shares of the Fundare not deposits or obligations of, or guaranteed or endorsed by, any bank.Also, Fund shares are not federally insured by the Federal Deposit InsuranceCorporation, the Federal Reserve Board or any other government agency. Alltemporary defensive investments are required to be high quality. 2<PAGE> Ratings as Investment Criteria. In general, the ratings of Moody's InvestorsService, Inc. ("Moody's") and Standard & Poor's Ratings Group ("S&P") representsthe opinions of these agencies as to the quality of the securities that theyrate. It should be emphasized, however, that such ratings are relative andsubjective and are not absolute standards of quality. These ratings will be usedby the Fund as initial criteria for the selection of portfolio securities. Amongthe factors that will be considered are the long-term ability of the issuer topay principal and interest and general economic trends. Appendix B containsfurther information concerning the ratings of Moody's and S&P and theirsignificance. Subsequent to its purchase by the Fund, an issue of securities maycease to be rated or its rating may be reduced below the minimum required forpurchase by the Fund. Neither of these events will require the sale of thesecurities by the Fund. Structured Securities. The Fund may invest in structured securities includingnotes, bonds or debentures, the value of the principal of and/or interest onwhich is to be determined by reference to changes in the value of specificcurrencies, interest rates, commodities, indices or other financial indicators(the "Reference") or the relative change in two or more References. The interestrate or the principal amount payable upon maturity or redemption may beincreased or decreased depending upon changes in the applicable Reference. Theterms of the structured securities may provide that in certain circ*mstances noprincipal is due at maturity and, therefore, may result in the loss of theFund's investment. Structured securities may be positively or negativelyindexed, so that appreciation of the Reference may produce an increase ordecrease in the interest rate or value of the security at maturity. In addition,the change in interest rate or the value of the security at maturity may be amultiple of the change in the value of the Reference. Consequently, structuredsecurities entail a greater degree of market risk than other types of debtobligations. Structured securities may also be more volatile, less liquid andmore difficult to accurately price than less complex fixed income investments.Mortgage Backed Securities. The Fund may invest in mortgage pass-throughcertificates and multiple-class pass-through securities, such as real estatemortgage investment conduits ("REMIC") pass-through certificates, collateralizedmortgage obligations ("CMOs") and stripped mortgage-backed securities ("SMBS"),and other types of "Mortgage-Backed Securities" that may be available in thefuture.Guaranteed Mortgage Pass-Through Securities. Guaranteed mortgage pass-throughsecurities represent participation interests in pools of residential mortgageloans and are issued by U.S. Governmental or private lenders and guaranteed bythe U.S. Government or one of its agencies or instrumentalities, including butnot limited to the Government National Mortgage Association ("GNMA"), theFederal National Mortgage Association ("FNMA") and the Federal Home LoanMortgage Corporation ("FHLMC"). GNMA certificates are guaranteed by the fullfaith and credit of the U.S. Government for timely payment of principal andinterest on the certificates. FNMA certificates are guaranteed by FNMA, afederally chartered and privately owned corporation, for full and timely paymentof principal and interest on the certificates. FHLMC certificates are guaranteedby FHLMC, a corporate instrumentality of the U.S. Government, for timely paymentof interest and the ultimate collection of all principal of the related mortgageloans.Multiple-Class Pass-Through Securities and Collateralized Mortgage Obligations.CMOs and REMIC pass-through or participation certificates may be issued by,among others, U.S. Government agencies and instrumentalities as well as privatelenders. CMOs and REMIC certificates are issued in multiple classes and theprincipal of and interest on the mortgage assets may be allocated among theseveral classes of CMOs or REMIC certificates in various ways. Each class ofCMOs or REMIC certificates, often referred to as a "tranche," is issued at aspecific adjustable or fixed interest rate and must be fully retired no laterthan its final distribution date. Generally, interest is paid or accrues on allclasses of CMOs or REMIC certificates on a monthly basis. 3<PAGE>Typically, CMOs are collateralized by GNMA, FNMA or FHLMC certificates but alsomay be collateralized by other mortgage assets such as whole loans or privatemortgage pass-through securities. Debt service on CMOs is provided from paymentsof principal and interest on collateral of mortgaged assets and any reinvestmentincome thereon.A REMIC is a CMO that qualifies for special tax treatment under the InternalRevenue Code of 1986, as amended (the "Code") and invests in certain mortgagesprimarily secured by interests in real property and other permitted investments.Investors may purchase "regular" or "residual" interest in REMICS, although theFund does not intend, absent a change in current tax law, to invest in residualinterests.Stripped Mortgage-Backed Securities. SMBS are derivative multiple-classmortgage-backed securities. SMBS are usually structured with two classes thatreceive different proportions of interest and principal distributions on a poolof mortgage assets. A typical SMBS will have one class receiving some of theinterest and most of the principal, while the other class will receive most ofthe interest and the remaining principal. In the most extreme case, one classwill receive all of the interest (the "interest only" class) while the otherclass will receive all of the principal (the "principal only" class). The yieldsand market risk of interest only and principal only SMBS, respectively, may bemore volatile than those of other fixed income securities. The staff of theSecurities and Exchange Commission ("SEC") considers privately issued SMBS to beilliquid.Risk Factors Associated with Mortgage-Backed Securities. Investing inMortgage-Backed Securities involves certain risks, including the failure of acounter-party to meet its commitments, adverse interest rate changes and theeffects of prepayments on mortgage cash flows. In addition, investing in thelowest tranche of CMOs and REMIC certificates involves risks similar to thoseassociated with investing in equity securities. Further, the yieldcharacteristics of Mortgage-Backed Securities differ from those of traditionalfixed-income securities. The major differences typically include more frequentinterest and principal payments (usually monthly), the adjustability of interestrates, and the possibility that prepayments of principal may be madesubstantially earlier than their final distribution dates.Prepayment rates are influenced by changes in current interest rates and avariety of economic, geographic, social and other factors and cannot bepredicted with certainty. Both adjustable rate mortgage loans and fixed ratemortgage loans may be subject to a greater rate of principal prepayments in adeclining interest rate environment and to a lesser rate of principalprepayments in an increasing interest rate environment. Under certain interestrate and prepayment rate scenarios, the Fund may fail to recoup fully itsinvestment in Mortgage-Backed Securities notwithstanding any direct or indirectgovernmental, agency or other guarantee. When the Fund reinvests amountsrepresenting payments and unscheduled prepayments of principal, it may receive arate of interest that is lower than the rate on existing adjustable ratemortgage pass-through securities. Thus, Mortgage-Backed Securities, andadjustable rate mortgage pass-through securities in particular, may be lesseffective than other types of U.S. Government securities as a means of "lockingin" interest rates. 4<PAGE>Conversely, in a rising interest rate environment, a declining prepayment ratewill extend the average life of many Mortgage-Backed Securities. Thispossibility is often referred to as extension risk. Extending the average lifeof a Mortgage-Backed Security increases the risk of depreciation due to futureincreases in market interest rates.Risk Associated With Specific Types of Derivative Debt Securities. Differenttypes of derivative debt securities are subject to different combinations ofprepayment, extension and/or interest rate risk. Conventional mortgagepass-through securities and sequential pay CMOs are subject to all of theserisks, but are typically not leveraged. Thus, the magnitude of exposure may beless than for more leveraged Mortgage-Backed Securities.Planned amortization class ("PAC") and target amortization class ("TAC") CMObonds involve less exposure to prepayment, extension and interest rate risk thanother Mortgage-Backed Securities, provided that prepayment rates remain withinexpected prepayment ranges or "collars." To the extent that prepayment ratesremain within these prepayment ranges, the residual or support tranches of PACand TAC CMOs assume the extra prepayment, extension and interest rate riskassociated with the underlying mortgage assets.The risk of early prepayments is the primary risk associated with interest onlydebt securities ("IOs"), super floaters, other leveraged floating rateinstruments and Mortgage-Backed Securities purchased at a premium to their parvalue. In some instances, early prepayments may result in a complete loss ofinvestment in certain of these securities. The primary risks associated withcertain other derivative debt securities are the potential extension of averagelife and/or depreciation due to rising interest rates.These securities include floating rate securities based on the Cost of FundsIndex ("COFI floaters"), other "lagging rate" floating rate securities, floatingrate securities that are subject to a maximum interest rate ("capped floaters"),Mortgage- Backed Securities purchased at a discount, leveraged inverse floatingrate securities ("inverse floaters"), principal only debt securities ("POs"),certain residual or support tranches of CMOs and index amortizing notes. Indexamortizing notes are not Mortgage-Backed Securities, but are subject toextension risk resulting from the issuer's failure to exercise its option tocall or redeem the notes before their stated maturity date. Leveraged inverseIOs combine several elements of the Mortgage- Backed Securities described aboveand thus present an especially intense combination of prepayment, extension andinterest rate risks.Other types of floating rate derivative debt securities present more complextypes of interest rate risks. For example, range floaters are subject to therisk that the coupon will be reduced to below market rates if a designatedinterest rate floats outside of a specified interest rate band or collar. Dualindex or yield curve floaters are subject to depreciation in the event of anunfavorable change in the spread between two designated interest rates. X-resetfloaters have a coupon that remains fixed for more than one accrual period.Thus, the type of risk involved in these securities depends on the terms of eachindividual X-reset floater.Repurchase Agreements. In a repurchase agreement the Fund buys a security for arelatively short period (usually not more than 7 days) subject to the obligationto sell it back to the issuer at a fixed time and price, plus accrued interest.The Fund will enter into repurchase agreements only with member banks of theFederal Reserve System and with "primary dealers" in U.S. Government securities.The Adviser will continuously monitor the creditworthiness of the parties withwhom the Fund enters into repurchase agreements. 5<PAGE>The Fund has established a procedure providing that the securities serving ascollateral for each repurchase agreement must be delivered to the Fund'scustodian either physically or in book-entry form and that the collateral mustbe marked to market daily to ensure that each repurchase agreement is fullycollateralized at all times. In the event of bankruptcy or other default by aseller of a repurchase agreement, the Fund could experience delays inliquidating the underlying securities during the period in which the Fund seeksto enforce its rights thereto, possible subnormal levels of income or lack ofaccess to income during this period as well as the expense of enforcing itsrights.Reverse Repurchase Agreements. The Fund may also enter into reverse repurchaseagreements which involve the sale of U.S. Government securities held in itsportfolio to a bank or securities firm with an agreement that the Fund will buyback the securities at a fixed future date at a fixed price plus an agreedamount of interest which may be reflected in the repurchase price. Reverserepurchase agreements are considered to be borrowings by the Fund. The Fund willuse proceeds obtained from the sale of securities pursuant to reverse repurchaseagreements to purchase other investments. The use of borrowed funds to makeinvestments is a practice known as "leverage," which is considered speculative.Use of reverse repurchase agreements is an investment technique that is intendedto increase income. Thus, the Fund will enter into a reverse repurchaseagreement only when the Adviser determines that the interest income to be earnedfrom the investment of the proceeds is greater than the interest expense of thetransaction. However, there is a risk that interest expense will neverthelessexceed the income earned. Reverse repurchase agreements involve the risk thatthe market value of securities purchased by the Fund with proceeds of thetransaction may decline below the repurchase price of the securities sold by theFund that it is obligated to repurchase. The Fund will also continue to besubject to the risk of a decline in the market value of the securities soldunder the agreements because it will reacquire those securities upon effectingtheir repurchase. To minimize various risks associated with reverse repurchaseagreements, the Fund will establish a separate account consisting of liquidsecurities (plus any accrued interest thereon) under such agreements. Inaddition, the Fund will not enter into reverse repurchase agreements or borrowmoney, except that as a temporary measure for extraordinary or emergencypurposes the Fund may borrow from banks in aggregate amounts at any one timeoutstanding not exceeding 33 1/3% of the total assets (including the amountborrowed) of the Fund valued at market and the Fund may not purchase anysecurities at any time when borrowings exceed 5% of the total assets of the Fund(taken at market). Forward commitment transactions shall not constituteborrowings and interest paid on any borrowings will reduce the Fund's netinvestment income. The Fund will enter into reverse repurchase agreements onlywith selected registered broker/dealers or with federally insured banks orsavings and loan associations that are approved in advance as being creditworthyby the Trustees. Under procedures established by the Trustees, the Adviser willmonitor the creditworthiness of the firms involved.Restricted Securities. The Fund may purchase securities that are not registered("restricted securities") under the Securities Act of 1933 ("1933 Act"),including commercial paper issued in reliance on Section 4(2) of the 1933 Actand securities offered and sold to "qualified institutional buyers" under Rule144A under the 1933 Act. The Fund will not invest more than 15% of its netassets in illiquid investments. If the Trustees determine, based upon acontinuing review of the trading markets for specific Section 4(2) paper or Rule144A securities, that they are liquid, they will not be subject to the 15% limiton illiquid investments . The Trustees may adopt guidelines and delegate to theAdviser the daily function of determining the monitoring and liquidity ofrestricted securities. The Trustees, however, will retain sufficient oversightand be ultimately responsible for the determinations. The Trustees willcarefully monitor the Fund's investments in these securities, focusing on suchimportant factors, among others, as valuation, liquidity and availability ofinformation. This investment practice could have the effect of increasing thelevel of illiquidity in the Fund if qualified institutional buyers become for atime uninterested in purchasing these restricted securities. 6<PAGE> Options on Securities and Securities Indices. The Fund may purchase and write(sell) call and put options on any securities in which it may invest or on anysecurities index based on securities in which it may invest. These options maybe listed on national domestic securities exchanges or traded in theover-the-counter market. The Fund may write covered put and call options andpurchase put and call options to enhance total return, as a substitute for thepurchase or sale of securities, or to protect against declines in the value ofportfolio securities and against increases in the cost of securities to beacquired.Writing Covered Options. A call option on securities written by the Fundobligates the Fund to sell specified securities to the holder of the option at aspecified price if the option is exercised at any time before the expirationdate. A put option on securities written by a Fund obligates the Fund topurchase specified securities from the option holder at a specified price if theoption is exercised at any time before the expiration date. Options onsecurities indices are similar to options on securities, except that theexercise of securities index options requires cash settlement payments and doesnot involve the actual purchase or sale of securities. In addition, securitiesindex options are designed to reflect price fluctuations in a group ofsecurities or segment of the securities market rather than price fluctuations ina single security. Writing covered call options may deprive the Fund of theopportunity to profit from an increase in the market price of the securities inits portfolio. Writing covered put options may deprive the Fund of theopportunity to profit from a decrease in the market price of the securities tobe acquired for its portfolio.All call and put options written by the Funds are covered. A written call optionor put option may be covered by (i) maintaining cash or liquid securities in asegregated account with a value at least equal to the Fund's obligation underthe option, (ii) entering into an offsetting forward commitment and/or (iii)purchasing an offsetting option or any other option which, by virtue of itsexercise price or otherwise, reduces the Fund's net exposure on its writtenoption position. A written call option on securities is typically covered bymaintaining the securities that are subject to the option in a segregatedaccount. The Fund may cover call options on a securities index by owningsecurities whose price changes are expected to be similar to those of theunderlying index.The Fund may terminate its obligations under an exchange traded call or putoption by purchasing an option identical to the one it has written. Obligationsunder over-the-counter options may be terminated only by entering into anoffsetting transaction with the counterparty to such option. Such purchases arereferred to as "closing purchase transactions."Purchasing Options. The Fund would normally purchase call options inanticipation of an increase, or put options in anticipation of a decrease("protective puts") in the market value of securities of the type in which itmay invest. The Fund may also sell call and put options to close out itspurchased options. 7<PAGE>The purchase of a call option would entitle the Fund, in return for the premiumpaid, to purchase specified securities at a specified price during the optionperiod. The Fund would ordinarily realize a gain on the purchase of a calloption if, during the option period, the value of such securities exceeded thesum of the exercise price, the premium paid and transaction costs; otherwise theFund would realize either no gain or a loss on the purchase of the call option.The purchase of a put option would entitle the Fund, in exchange for the premiumpaid, to sell specified securities at a specified price during the optionperiod. The purchase of protective puts is designed to offset or hedge against adecline in the market value of the Fund's portfolio securities. Put options mayalso be purchased by the Fund for the purpose of affirmatively benefiting from adecline in the price of securities which it does not own. The Fund wouldordinarily realize a gain if, during the option period, the value of theunderlying securities decreased below the exercise price sufficiently to coverthe premium and transaction costs; otherwise the Fund would realize either nogain or a loss on the purchase of the put option. Gains and losses on thepurchase of put options may be offset by countervailing changes in the value ofthe Fund's portfolio securities.The Fund's options transactions will be subject to limitations established byeach of the exchanges, boards of trade or other trading facilities on which suchoptions are traded. These limitations govern the maximum number of options ineach class which may be written or purchased by a single investor or group ofinvestors acting in concert, regardless of whether the options are written orpurchased on the same or different exchanges, boards of trade or other tradingfacilities or are held or written in one or more accounts or through one or morebrokers. Thus, the number of options which the Fund may write or purchase may beaffected by options written or purchased by other investment advisory clients ofthe Adviser. An exchange, board of trade or other trading facility may order theliquidation of positions found to be in excess of these limits, and it mayimpose certain other sanctions.Risks Associated with Options Transactions. There is no assurance that a liquidsecondary market on a domestic or foreign options exchange will exist for anyparticular exchange-traded option or at any particular time. If the Fund isunable to effect a closing purchase transaction with respect to covered optionsit has written, the Fund will not be able to sell the underlying securities ordispose of assets held in a segregated account until the options expire or areexercised. Similarly, if the Fund is unable to effect a closing sale transactionwith respect to options it has purchased, it would have to exercise the optionsin order to realize any profit and will incur transaction costs upon thepurchase or sale of underlying securities.Reasons for the absence of a liquid secondary market on an exchange include thefollowing: (i) there may be insufficient trading interest in certain options;(ii) restrictions may be imposed by an exchange on opening transactions orclosing transactions or both; (iii) trading halts, suspensions or otherrestrictions may be imposed with respect to particular classes or series ofoptions; (iv) unusual or unforeseen circ*mstances may interrupt normaloperations on an exchange; (v) the facilities of an exchange or the OptionsClearing Corporation may not at all times be adequate to handle current tradingvolume; or (vi) one or more exchanges could, for economic or other reasons,decide or be compelled at some future date to discontinue the trading of options(or a particular class or series of options). If trading were discontinued, thesecondary market on that exchange (or in that class or series of options) wouldcease to exist. However, outstanding options on that exchange that had beenissued by the Options Clearing Corporation as a result of trades on thatexchange would continue to be exercisable in accordance with their terms. 8<PAGE>The Fund's ability to terminate over-the-counter options is more limited thanwith exchange-traded options and may involve the risk that broker-dealersparticipating in such transactions will not fulfill their obligations. TheAdviser will determine the liquidity of each over-the-counter option inaccordance with guidelines adopted by the Trustees.The writing and purchase of options is a highly specialized activity whichinvolves investment techniques and risks different from those associated withordinary portfolio securities transactions. The successful use of optionsdepends in part on the Adviser's ability to predict future price fluctuationsand, for hedging transactions, the degree of correlation between the options andsecurities markets.Futures Contracts and Options on Futures Contracts. To seek to increase totalreturn or hedge against changes in interest rates or securities prices, the Fundmay purchase and sell various kinds of futures contracts, and purchase and writecall and put options on these futures contracts. The Fund may also enter intoclosing purchase and sale transactions with respect to any of these contractsand options. The futures contracts may be based on various securities (such asU.S. Government securities), securities indices and any other financialinstruments and indices. All futures contracts entered into by the Fund aretraded on U.S. exchanges or boards of trade that are licensed, regulated orapproved by the Commodity Futures Trading Commission ("CFTC").Futures Contracts. A futures contract may generally be described as an agreementbetween two parties to buy and sell particular financial instruments for anagreed price during a designated month (or to deliver the final cash settlementprice, in the case of a contract relating to an index or otherwise not callingfor physical delivery at the end of trading in the contract).Positions taken in the futures markets are not normally held to maturity but areinstead liquidated through offsetting transactions which may result in a profitor a loss. While futures contracts on securities will usually be liquidated inthis manner, the Fund may instead make, or take, delivery of the underlyingsecurities whenever it appears economically advantageous to do so. A clearingcorporation associated with the exchange on which futures contracts are tradedguarantees that, if still open, the sale or purchase will be performed on thesettlement date.Hedging and Other Strategies. Hedging is an attempt to establish with morecertainty than would otherwise be possible the effective price or rate of returnon portfolio securities or securities that the Fund proposes to acquire. Whensecurities prices are falling, the Fund can seek to offset a decline in thevalue of its current portfolio securities through the sale of futures contracts.When securities prices are rising, the Fund, through the purchase of futurescontracts, can attempt to secure better rates or prices than might later beavailable in the market when it effects anticipated purchases.The Fund may, for example, take a "short" position in the futures market byselling futures contracts in an attempt to hedge against an anticipated declinein market prices that would adversely affect the value of the Fund's portfoliosecurities. Such futures contracts may include contracts for the future deliveryof securities held by the Fund or securities with characteristics similar tothose of the Fund's portfolio securities.If, in the opinion of the Adviser, there is a sufficient degree of correlationbetween price trends for the Fund's portfolio securities and futures contractsbased on other financial instruments, securities indices or other indices, theFund may also enter into such futures contracts as part of its hedging strategy.Although under some circ*mstances prices of securities in the Fund's portfoliomay be more or less volatile than prices of such futures contracts, the Adviserwill attempt to estimate the extent of this volatility difference based onhistorical patterns and compensate for any differential by having the Fund enterinto a greater or lesser number of futures contracts or by attempting to achieveonly a partial hedge against price changes affecting the Fund's portfoliosecurities. 9<PAGE>When a short hedging position is successful, any depreciation in the value ofportfolio securities will be substantially offset by appreciation in the valueof the futures position. On the other hand, any unanticipated appreciation inthe value of the Fund's portfolio securities would be substantially offset by adecline in the value of the futures position.On other occasions, the Fund may take a "long" position by purchasing futurescontracts. This would be done, for example, when the Fund anticipates thesubsequent purchase of particular securities when it has the necessary cash, butexpects the prices then available in the applicable market to be less favorablethan prices that are currently available. The Fund may also purchase futurescontracts as a substitute for transactions in securities, to alter theinvestment characteristics of portfolio securities or to gain or increase itsexposure to a particular securities market.Options on Futures Contracts. The Fund may purchase and write options on futuresfor the same purposes as its transactions in futures contracts. The purchase ofput and call options on futures contracts will give the Fund the right (but notthe obligation) for a specified price to sell or to purchase, respectively, theunderlying futures contract at any time during the option period. As thepurchaser of an option on a futures contract, the Fund obtains the benefit ofthe futures position if prices move in a favorable direction but limits its riskof loss in the event of an unfavorable price movement to the loss of the premiumand transaction costs.The writing of a call option on a futures contract generates a premium which maypartially offset a decline in the value of the Fund's assets. By writing a calloption, the Fund becomes obligated, in exchange for the premium (upon exerciseof the option) to sell a futures contract if the option is exercised, which mayhave a value higher than the exercise price. Conversely, the writing of a putoption on a futures contract generates a premium which may partially offset anincrease in the price of securities that the Fund intends to purchase. However,the Fund becomes obligated (upon exercise of the option) to purchase a futurescontract if the option is exercised, which may have a value lower than theexercise price. The loss incurred by the Fund in writing options on futures ispotentially unlimited and may exceed the amount of the premium received.The holder or writer of an option on a futures contract may terminate itsposition by selling or purchasing an offsetting option of the same series. Thereis no guarantee that such closing transactions can be effected. The Fund'sability to establish and close out positions on such options will be subject tothe development and maintenance of a liquid market.Other Considerations. The Fund will engage in futures and related optionstransactions either for bona fide hedging purposes or to seek to increase totalreturn as permitted by the CFTC. To the extent that the Fund is using futuresand related options for hedging purposes, futures contracts will be sold toprotect against a decline in the price of securities that the Fund owns orfutures contracts will be purchased to protect the Fund against an increase inthe price of securities it intends to purchase. The Fund will determine that theprice fluctuations in the futures contracts and options on futures used forhedging purposes are substantially related to price fluctuations in securitiesheld by the Fund or securities or instruments which it expects to purchase. Asevidence of its hedging intent, the Fund expects that on 75% or more of theoccasions on which it takes a long futures or option position (involving thepurchase of futures contracts), the Fund will have purchased, or will be in theprocess of purchasing, equivalent amounts of related securities in the cashmarket at the time when the futures or option position is closed out. However,in particular cases, when it is economically advantageous for the Fund to do so,a long futures position may be terminated or an option may expire without thecorresponding purchase of securities or other assets. 10<PAGE>To the extent that the Fund engages in nonhedging transactions in futurescontracts and options on futures, the aggregate initial margin and premiumsrequired to establish these nonhedging positions will not exceed 5% of the netasset value of the Fund's portfolio, after taking into account unrealizedprofits and losses on any such positions and excluding the amount by which suchoptions were in-the-money at the time of purchase.Transactions in futures contracts and options on futures involve brokeragecosts, require margin deposits and, in the case of contracts and optionsobligating the Fund to purchase securities, require the Fund to establish asegregated account consisting of cash or liquid securities in an amount equal tothe underlying value of such contracts and options.While transactions in futures contracts and options on futures may reducecertain risks, these transactions themselves entail certain other risks. Forexample, unanticipated changes in interest rates or securities prices may resultin a poorer overall performance for the Fund than if it had not entered into anyfutures contracts or options transactions.Perfect correlation between the Fund's futures positions and portfolio positionswill be impossible to achieve. In the event of an imperfect correlation betweena futures position and a portfolio position which is intended to be protected,the desired protection may not be obtained and the Fund may be exposed to riskof loss.Some futures contracts or options on futures may become illiquid under adversemarket conditions. In addition, during periods of market volatility, a commodityexchange may suspend or limit trading in a futures contract or related option,which may make the instrument temporarily illiquid and difficult to price.Commodity exchanges may also establish daily limits on the amount that the priceof a futures contract or related option can vary from the previous day'ssettlement price. Once the daily limit is reached, no trades may be made thatday at a price beyond the limit. This may prevent the Fund from closing outpositions and limiting its losses. Forward Commitment and When-Issued Securities. The Fund may purchase securitieson a when-issued or forward commitment basis. "When-issued" refers to securitieswhose terms are available and for which a market exists, but which have not beenissued. The Fund will engage in when-issued transactions with respect tosecurities purchased for its portfolio in order to obtain what is considered tobe an advantageous price and yield at the time of the transaction. Forwhen-issued transactions, no payment is made until delivery is due, often amonth or more after the purchase. In a forward commitment transaction, the Fundcontracts to purchase securities for a fixed price at a future date beyondcustomary settlement time.When the Fund engages in forward commitment and when-issued transactions, itrelies on the seller to consummate the transaction. The failure of the issuer orseller to consummate the transaction may result in the Fund's losing theopportunity to obtain a price and yield considered to be advantageous. Thepurchase of securities on a when-issued and forward commitment basis alsoinvolves a risk of loss if the value of the security to be purchased declinesprior to the settlement date. 11<PAGE>On the date the Fund enters into an agreement to purchase securities on awhen-issued or forward commitment basis, the Fund will segregate in a separateaccount cash or liquid securities on any type of maturity, equal in value to theFund's commitment. These assets will be valued daily at market, and additionalcash or securities will be segregated in a separate account to the extent thatthe total value of the assets in the account declines below the amount of thewhen-issued commitments. Alternatively, the Fund may enter into offsettingcontracts for the forward sale of other securities that it owns. Mortgage "Dollar Roll" Transactions. The Fund may enter into mortgage "dollarroll" transactions with selected banks and broker-dealers pursuant to which theFund sells mortgage-backed securities and simultaneously contracts to repurchasesubstantially similar (same type, coupon and maturity) securities on a specifiedfuture date. The Fund will only enter into covered rolls. A "covered roll" is aspecific type of dollar roll for which there is an offsetting cash position or acash equivalent security position that matures on or before the forwardsettlement date of the dollar roll transaction. Covered rolls are not treated asa borrowing or other senior security and will be excluded from the calculationof the Fund's borrowings and other senior securities. For financial reportingand tax purposes, the Fund treats mortgage dollar rolls as two separatetransactions; one involving the purchase of a security and a separatetransaction involving a sale. Asset-Backed Securities. The Fund may invest a portion of its assets inasset-backed securities which are rated in the highest rating category by anationally recognized statistical rating organization (e.g., S&P or Moody's) orif not so rated, of equivalent investment quality in the opinion of the Adviser.Asset-backed securities are often subject to more rapid repayment than theirstated maturity date would indicate as a result of the pass-through ofprepayments of principal on the underlying loans. During periods of declininginterest rates, prepayment of loans underlying asset-backed securities can beexpected to accelerate. Accordingly, the Fund's ability to maintain positions inthese securities will be affected by reductions in the principal amount of suchsecurities resulting from prepayments, and its ability to reinvest the returnsof principal at comparable yields is subject to generally prevailing interestrates at that time.Credit card receivables are generally unsecured and the debtors on suchreceivables are entitled to the protection of a number of state and federalconsumer credit laws, many of which give such debtors the right to set-offcertain amounts owed on the credit cards, thereby reducing the balance due.Automobile receivables generally are secured, but by automobiles rather thanresidential real property. Most issuers of automobile receivables permit theloan servicers to retain possession of the underlying obligations. If theservicer were to sell these obligations to another party, there is a risk thatthe purchaser would acquire an interest superior to that of the holders of theasset-backed securities. In addition, because of the large number of vehiclesinvolved in a typical issuance and technical requirements under state laws, thetrustee for the holders of the automobile receivables may not have a propersecurity interest in the underlying automobiles. Therefore, there is thepossibility that, in some cases, recoveries on repossessed collateral may not beavailable to support payments on these securities.Swaps, Caps, Floors and Collars. As one way of managing its exposure todifferent types of investments, the Fund and may enter into interest rate swapsand other types of swap agreements such as caps, collars and floors. In atypical interest rate swap, one party agrees to make regular payments equal to afloating interest rate times a "notional principal amount," in return forpayments equal to a fixed rate times the same amount, for a specified period oftime. Swaps may also depend on other prices or rates, such as the value of anindex or mortgage prepayment rates. 12<PAGE>In a typical cap or floor agreement, one party agrees to make payments onlyunder specified circ*mstances, usually in return for payment of a fee by theother party. For example, the buyer of an interest rate cap obtains the right toreceive payments to the extent that a specified interest rate exceeds anagreed-upon level, while the seller of an interest rate floor is obligated tomake payments to the extent that a specified interest rate falls below anagreed-upon level. An interest rate collar combines elements of buying a cap andselling a floor.Swap agreements will tend to shift the Fund's investment exposure from one typeof investment to another. Caps and floors have an effect similar to buying orwriting options. Depending on how they are used, swap agreements may increase ordecrease the overall volatility of a Fund's investments and its share price andyield.Swap agreements are sophisticated hedging instruments that typically involve asmall investment of cash relative to the magnitude of risks assumed. As aresult, swaps can be highly volatile and may have a considerable impact on theFund's performance. Swap agreements are subject to risks related to thecounterparty's ability to perform, and may decline in value if thecounterparty's creditworthiness deteriorates. The Fund may also suffer losses ifit is unable to terminate outstanding swap agreements or reduce its exposurethrough offsetting transactions. The Fund will maintain in a segregated accountwith its custodian, cash or liquid securities equal to the net amount, if any,of the excess of the Fund's obligations over its entitlements with respect toswap, cap, collar or floor transactions.Pay-In-Kind, Delayed and Zero Coupon Bonds. The Fund may invest in pay-in-kind,delayed and zero coupon bonds. These are securities issued at a discount fromtheir face value because interest payments are typically postponed untilmaturity. The amount of the discount rate varies depending on factors includingthe time remaining until maturity, prevailing interest rates, the security'sliquidity and the issuer's credit quality. These securities also may take theform of debt securities that have been stripped of their interest payments. Aportion of the discount with respect to stripped tax-exempt securities or theircoupons may be taxable. The market prices in pay-in-kind, delayed and zerocoupon bonds generally are more volatile than the market prices ofinterest-bearing securities and are likely to respond to a greater degree tochanges in interest rates than interest-bearing securities having similarmaturities and credit quality. The Fund's investments in pay-in-kind, delayedand zero coupon bonds may require the Fund to sell certain of its portfoliosecurities to generate sufficient cash to satisfy certain income distributionrequirements. See "TAX STATUS."Lending of Securities. The Fund may lend portfolio securities to brokers,dealers, and financial institutions if the loan is collateralized by cash orU.S. Government securities according to applicable regulatory requirements. TheFund may reinvest any cash collateral in short-term securities and money marketfunds. When the Fund lends portfolio securities, there is a risk that theborrower may fail to return the securities involved in the transaction. As aresult, the Fund may incur a loss or, in the event of the borrower's bankruptcy,the Fund may be delayed in or prevented from liquidating the collateral. It is afundamental policy of the Fund not to lend portfolio securities having a totalvalue exceeding 33 1/3% of its total assets. 13<PAGE>Rights and Warrants. The Fund may purchase warrants and rights which aresecurities permitting, but not obligating, their holder to purchase theunderlying securities at a predetermined price, subject to the Fund's InvestmentRestrictions. Generally, warrants and stock purchase rights do not carry withthem the right to receive dividends or exercise voting rights with respect tothe underlying securities, and they do not represent any rights in the assets ofthe issuer. As a result, an investment in warrants and rights may be consideredto entail greater investment risk than certain other types of investments. Inaddition, the value of warrants and rights does not necessarily change with thevalue of the underlying securities, and they cease to have value if they are notexercised on or prior to their expiration date. Investment in warrants andrights increases the potential profit or loss to be realized from the investmentof a given amount of the Fund's assets as compared with investing the sameamount in the underlying stock.Short-Term Trading and Portfolio Turnover. Short-term trading means the purchaseand subsequent sale of a security after it has been held for a relatively briefperiod of time. The Fund does not invest for the purpose of seeking short-termprofits. The Fund's investment securities may be changed, however, withoutregard to the holding period of these securities (subject to certain taxrestrictions), when the Adviser deems that this action will help achieve theFund's objective given a change in an issuer's operations or changes in generalmarket conditions. Short-term trading may have the effect of increasingportfolio turnover rate. A high rate of portfolio turnover (100% or greater)involves correspondingly greater expenses. The Fund's portfolio rate is setforth in the table under the caption "Financial Highlights" in the Prospectus.INVESTMENT RESTRICTIONSFundamental Investment Restrictions. The following investment restrictions willnot be changed without the approval of a majority of the Fund's outstandingvoting securities which, as used in the Prospectus and this Statement ofAdditional Information, means the approval by the lesser of (1) the holders of67% or more of the Fund's shares represented at a meeting if more than 50% ofthe Fund's outstanding shares are present in person or by proxy at that meetingor (2) more than 50% of the Fund's outstanding shares.The Fund may not:1. borrow money, except that as a temporary measure for extraordinary or emergency purposes the Fund may borrow from banks in aggregate amounts at any one time outstanding not exceeding 33 1/3% of the total assets (including the amount borrowed) of the Fund valued at market; and the Fund may not purchase any securities at any time when borrowings exceed 5% of the total assets of the Fund (taken at market value). This borrowing restriction does not prohibit the use of reverse repurchase agreements (see "Reverse Repurchase Agreements"). For purposes of this investment restriction, forward commitment transactions shall not constitute borrowings. Interest paid on any borrowings will reduce the Fund's net investment income;2. make short sales of securities or purchase any security on margin, except that the Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of securities (this restriction does not apply to securities purchased on a when-issued basis); 14<PAGE>3. underwrite securities issued by other persons, except insofar as the Fund may technically be deemed an underwriter under the Securities Act of 1933 in selling a security, and except that the Fund may invest all or substantially all of its assets in another registered investment company having substantially the same investment objectives as the Fund;4. make loans to other persons except (a) through the lending of securities held by the Fund, (b) through the purchase of debt securities in accordance with the investment policies of the Fund (the entry into repurchase agreements is not considered a loan for purposes of this restriction);5. with respect to 75% of its total assets, purchase the securities of any one issuer (except securities issued or guaranteed by the U.S. Government and its agencies or instrumentalities, as to which there are no percentage limits or restrictions) if immediately after and as a result of such purchase (a) more than 5% of the value of its assets would be invested in that issuer, or (b) the Fund would hold more than 10% of the outstanding voting securities of that issuer, except that the Fund may invest all or substantially all of its assets in another registered investment company having substantially the same investment objectives as the Fund;6. purchase or sell real estate (including limited partnership interests) other than securities secured by real estate or interests therein including mortgage-related securities or interests in oil, gas or mineral leases in the ordinary course of business (the Fund reserves the freedom of action to hold and to sell real estate acquired as a result of the ownership of securities);7. invest more than 25% of its total assets in the securities of issuers whose principal business activities are in the same industry (excluding obligations of the U.S. Government, its agencies and instrumentalities and repurchase agreements) except that the Fund may invest all or substantially all of its assets in another registered investment company having substantially the same objectives as the Fund;8. issue any senior security (as that term is defined in the Investment Company Act of 1940 (the "Investment Company Act")) if such issuance is specifically prohibited by the Investment Company Act or the rules and regulations promulgated thereunder; or9. invest in securities of any company if, to the knowledge of the Trust, any officer or director of the Trust or its Adviser owns more than 1/2 of 1% of the outstanding securities of such company, and all such officers and directors own in the aggregate more than 5% of the outstanding securities of such company.Non-Fundamental Investment Restrictions. The following investment restrictionsare designated as non-fundamental and may be changed by the Trustees withoutshareholder approval.The Fund may not:(a) invest in companies for the purpose of exercising control or management, except that the Fund may invest all or substantially all of its assets in another registered investment company having substantially the same investment restrictions as the Fund; 15<PAGE>(b) purchase a security if, as a result, (i) more than 10% of the Fund's total assets would be invested in the securities of other investment companies, (ii) the Fund would hold more than 3% of the total outstanding voting securities of any one investment company, or (iii) more than 5% of the Fund's total assets would be invested in the securities of any one investment company. These limitations do not apply to (a) the investment of cash collateral, received by the Fund in connection with lending the Fund's portfolio securities, in the securities of open-end investment companies or (b) the purchase of shares of any investment company in connection with a merger, consolidation, reorganization or purchase of substantially all of the assets of another investment company. Subject to the above percentage limitations, the Fund may, in connection with the John Hanco*ck Group of Funds Deferred Compensation Plan for Independent Trustees/Directors, purchase securities of other investment companies within the John Hanco*ck Group of Funds. (c) invest in commodities, except that the Fund may purchase and sell: forward commitments, when-issued securities, securities index put or call warrants, repurchase agreements, options on securities and securities indices, futures contracts on securities and securities indices and options on these futures, entered into in accordance with the Fund's investment policies; (d) invest more than 15% of its net assets in illiquid securities.If a percentage restriction on investment or utilization of assets as set forthabove is adhered to at the time an investment is made, a later change inpercentage resulting from changes in the value of the Fund's assets will not beconsidered a violation of the restriction.THOSE RESPONSIBLE FOR MANAGEMENTThe business of the Fund is managed by the Trustees of the Trust who electofficers who are responsible for the day-to-day operations of the Fund and whoexecute policies formulated by the Trustees. Several of the officers andTrustees of the Trust are also Officers and Directors of the Adviser or Officersand Directors of the Fund's principal distributor, John Hanco*ck Funds, Inc.("John Hanco*ck Funds"). 16<PAGE> <TABLE><CAPTION> Positions Held Principal Occupation(s)Name and Address With the Company During the Past Five Years- ---------------- ---------------- -------------------------- <S> <C> <C> Edward J. Boudreau, Jr. * Trustee, Chairman and Chief Chairman, Director and Chief101 Huntington Avenue Executive Officer (1, 2) Executive Officer, the Adviser;Boston, MA 02199 Chairman, Director and ChiefOctober 1944 Executive Officer, The Berkeley Financial Group, Inc. ("The Berkeley Group"); Chairman and Director, NM Capital Management, Inc. ("NM Capital"), John Hanco*ck Advisers International Limited ("Advisers International") and Sovereign Asset Management Corporation ("SAMCorp"); Chairman and Chief Executive Officer, John Hanco*ck Funds, Inc. ("John Hanco*ck Funds"); Chairman, First Signature Bank and Trust Company; Director, John Hanco*ck Insurance Agency, Inc. ("Insurance Agency, Inc."), John Hanco*ck Advisers International (Ireland) Limited ("International Ireland"), John Hanco*ck Capital Corporation and New England/Canada Business Council; Member, Investment Company Institute Board of Governors; Director, Asia Strategic Growth Fund, Inc.; Trustee, Museum of Science; Director, John Hanco*ck Freedom Securities Corporation (until September 1996); Director, John Hanco*ck Signature Services, Inc. ("Signature Services") (until January 1997). - -------------------* Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940.(1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees.(2) A member of the Investment Committee of the Adviser. 17<PAGE> Positions Held Principal Occupation(s)Name and Address With the Company During the Past Five Years- ---------------- ---------------- -------------------------- <S> <C> <C> Stephen L. Brown* Trustee Chairman and Chief ExecutiveJohn Hanco*ck Place Officer, John Hanco*ck Mutual LifeP.O. Box 111 Insurance Company; Director, theBoston, MA 02117 Adviser, John Hanco*ck Funds,July 1937 Insurance Agency, John Hanco*ck Subsidiaries, Inc., The Berkeley Group, Federal Reserve Bank of Boston, Signature Services (until January 1997;) Trustee, John Hanco*ck Asset Management (until March 1997). James F. Carlin Trustee Chairman and CEO, Carlin233 West Central Street Consolidated, Inc.Natick, MA 01760 (management/investments); Director,April 1940 Arbella Mutual (insurance), Health Plan Services, Inc., Massachusetts Health and Education Tax Exempt Trust, Flagship Healthcare, Inc., Carlin Insurance Agency, Inc., West Insurance Agency, Inc. (until May 1995), Uno Restaurant Corp.; Chairman, Massachusetts Board of Higher Education (since 1995). - -------------------* Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940.(1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees.(2) A member of the Investment Committee of the Adviser. 18<PAGE> Positions Held Principal Occupation(s)Name and Address With the Company During the Past Five Years- ---------------- ---------------- -------------------------- <S> <C> <C> William H. Cunningham Trustee Chancellor, University of Texas601 Colorado Street System and former President of theO'Henry Hall University of Texas, Austin, Texas;Austin, TX 78701 Lee Hage and Joseph D. JamailJanuary 1944 Regents Chair of Free Enterprise; Director, LaQuinta Motor Inns, Inc. (hotel management company) (1985-1998); Jefferson-Pilot Corporation (diversified life insurance company) and LBJ Foundation Board (education foundation); Advisory Director, Chase Bank (formerly Texas Commerce Bank - Austin). Ronald R. Dion Trustee President and Chief Executive250 Boylston Street Officer, R.M. Bradley & Co., Inc.;Boston, MA 02116 Director, The New England CouncilMarch 1946 and Massachusetts Roundtable; Trustee, North Shore Medical Center and a corporator of the Eastern Bank; Trustee, Emmanuel College. Harold R. Hiser, Jr. Trustee Executive Vice President,123 Highland Avenue Schering-Plough CorporationShort Hill, NJ 07078 (pharmaceuticals) (retired 1996);October 1931 Director, ReCapital Corporation (reinsurance) (until 1995).- -------------------* Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940.(1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees.(2) A member of the Investment Committee of the Adviser. 19<PAGE> Positions Held Principal Occupation(s)Name and Address With the Company During the Past Five Years- ---------------- ---------------- -------------------------- <S> <C> <C> Anne C. Hodsdon * Trustee and President (1,2) President, Chief Operating Officer,101 Huntington Avenue Chief Investment Officer andBoston, MA 02199 Director, the Adviser, The BerkeleyAugust 1953 Group; Executive Vice President and Director, John Hanco*ck Funds; Director, Advisers International, Insurance Agency, Inc. and International Ireland; President and Director, SAMCorp. and NM Capital; Executive Vice President, the Adviser (until December 1994); Director, Signature Services (until January 1997).Charles L. Ladner Trustee Senior Vice President and ChiefUGI Corporation Financial Officer, UGI CorporationP.O. Box 858 (Public Utility Holding Company)Valley Forge, PA 19482 (retired 1998); Vice President andFebruary 1938 Director for AmeriGas, Inc. (retired 1998); Vice President of AmeriGas Partners, L.P. (until 1997); Director, EnergyNorth, Inc. (until 1995).- -------------------* Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940.(1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees.(2) A member of the Investment Committee of the Adviser. 20<PAGE> Positions Held Principal Occupation(s)Name and Address With the Company During the Past Five Years- ---------------- ---------------- -------------------------- <S> <C> <C> Leo E. Linbeck, Jr. Trustee Chairman, President, Chief Executive3810 W. Alabama Officer and Director, LinbeckHouston, TX 77027 Corporation (a holding companyAugust 1934 engaged in various phases of the construction industry and warehousing interests); Former Chairman, Federal Reserve Bank of Dallas (1992, 1993); Chairman of the Board, Linbeck Construction Corporation; Director, Duke Energy Corporation (a diversified energy company), Daniel Industries, Inc. (manufacturer of gas measuring products and energy related equipment), GeoQuest International Holdings, Inc. (a geophysical consulting firm); Director, Greater Houston Partnership. Steven R. Pruchansky Trustee (1) Director and President, Mast4327 Enterprise Avenue Holdings, Inc. (since 1991);Naples, FL 34104 Director, First Signature Bank &August 1944 Trust Company (until August 1991); Director, Mast Realty Trust (until 1994); President, Maxwell Building Corp. (until 1991).- -------------------* Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940.(1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees.(2) A member of the Investment Committee of the Adviser. 21<PAGE> Positions Held Principal Occupation(s)Name and Address With the Company During the Past Five Years- ---------------- ---------------- -------------------------- <S> <C> <C> Richard S. Scipione * Trustee (1) General Counsel, John Hanco*ck MutualJohn Hanco*ck Place Life Insurance Company; Director,P.O. Box 111 the Adviser, John Hanco*ck Funds,Boston, MA 02117 Signator Investors, Inc., InsuranceAugust 1937 Agency, Inc., John Hanco*ck Subsidiaries, Inc., SAMCorp. and NM Capital; The Berkeley Group; JH Networking Insurance Agency, Inc.; Signature Services (until January 1997).Norman H. Smith Trustee Lieutenant General, United States243 Mt. Oriole Lane Marine Corps; Deputy Chief of StaffLinden, VA 22642 for Manpower and Reserve Affairs,March 1933 Headquarters Marine Corps; Commanding General III Marine Expeditionary Force/3rd Marine Division (retired 1991).- -------------------* Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940.(1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees.(2) A member of the Investment Committee of the Adviser. 22<PAGE> Positions Held Principal Occupation(s)Name and Address With the Company During the Past Five Years- ---------------- ---------------- -------------------------- <S> <C> <C> John P. Toolan Trustee Director, The Smith Barney Muni Bond13 Chadwell Place Funds, The Smith Barney Tax-FreeMorristown, NJ 07960 Money Funds, Inc., Vantage MoneySeptember 1930 Market Funds (mutual funds), The Inefficient-Market Fund, Inc. (closed-end investment company) and Smith Barney Trust Company of Florida; Chairman, Smith Barney Trust Company (retired December, 1991); Director, Smith Barney, Inc., Mutual Management Company and Smith Barney Advisers, Inc. (investment advisers) (retired 1991); Senior Executive Vice President, Director and member of the Executive Committee, Smith Barney, Harris Upham & Co., Incorporated (investment bankers) (until 1991). Osbert M. Hood Senior Vice President and Chief Senior Vice President , Chief101 Huntington Avenue Financial Officer Financial Officer and Treasurer, theBoston, MA 02199 Adviser, the Berkeley Group and JohnAugust 1952 Hanco*ck Funds, Inc.; Vice President and Chief Financial Officer, John Hanco*ck Mutual Life Insurance Company Retail Sector (until 1997).- -------------------* Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940.(1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees.(2) A member of the Investment Committee of the Adviser. 23<PAGE> Positions Held Principal Occupation(s)Name and Address With the Company During the Past Five Years- ---------------- ---------------- -------------------------- <S> <C> <C> John A. Morin Vice President Vice President and Secretary, the101 Huntington Avenue Adviser, The Berkeley Group,Boston, MA 02199 Signature Services, John Hanco*ckJuly 1950 Funds, NM Capital and SAMCorp.; Clerk, Insurance Agency, Inc.; Counsel, John Hanco*ck Mutual Life Insurance Company (until February 1996). Susan S. Newton Vice President and Secretary Vice President, the Adviser; John101 Huntington Avenue Hanco*ck Funds, Signature ServicesBoston, MA 02199 and The Berkeley Group.March 1950James J. Stokowski Vice President, Treasurer and Chief Vice President, the Adviser.101 Huntington Avenue Accounting OfficerBoston, MA 02199November 1946- -------------------* Trustee may be deemed to be an "interested person" of the Fund as defined in the Investment Company Act of 1940.(1) Member of the Executive Committee. The Executive Committee may generally exercise most of the powers of the Board of Trustees.(2) A member of the Investment Committee of the Adviser.</TABLE> 24<PAGE>All of the officers listed are officers or employees of the Adviser oraffiliated companies. Some of the Trustees and officers may also be officersand/or directors and/or Trustees of one or more of the other funds for which theAdviser serves as investment adviser. As March 3, 1999, the officers and Trustees of the Fund as a group beneficiallyowned less than 1% of the outstanding shares of the Fund. As of that date, thefollowing shareholders were the only record holders that beneficially owned 5%or more of the outstanding shares of the Fund: Percentage of TotalName and Outstanding SharesAddress of Shareholder Class of Shares of the Class of the Fund- ---------------------- --------------- ------------------------MLPF&S For The Sole A 5.76%Benefit of Its CustomersAttn: Fund Administration 979E74800 Deerlake Drive East 2nd FloorJacksonville FL 32246-6484MLPF&S For The Sole B 54.33%Benefit of Its CustomersAttn: Fund Administration 979E74800 Deerlake Drive East 2nd FloorJacksonville FL 32246-6484 The following tables provide information regarding the compensation paid by theFund and the other investment companies in the John Hanco*ck Fund Complex to theIndependent Trustees for their services. Messrs. Boudreau and Scipione, and Ms.Hodsdon, each a non-Independent Trustees, and each of the officers of the Fundwho are interested persons of the Adviser, are compensated by the Adviser and/orits affiliates and receive no compensation from the Fund for their services. Total Compensation from all Aggregate Compensation Funds in John Hanco*ck Fund Trustees from the Fund (1) Complex to Trustees(2)- -------- ----------------- ----------------------James F. Carlin $ 953 $ 74,000William H. Cunningham * 953 74,000Charles F. Fretz 776 74,250Harold R. Hiser, Jr. * 889 74,000Charles L. Ladner 978 74,250Leo E. Linbeck, Jr. 953 74,250Patricia P. McCarter 627 74,250Steven R. Pruchansky 983 77,250Norman H. Smith 971 77,250John P. Toolan * 978 74,250 ------ --------Total $9,061 $747,750 25<PAGE>(1) Compensation for the fiscal year ended May 31, 1998.(2) The total compensation paid by the John Hanco*ck Fund Complex to the Independent Trustees as of the calendar year ended December 31, 1997. As of this date, there were sixty-seven funds in the John Hanco*ck Fund Complex with each of these Independent Trustees serving on thirty-two funds.* As of December 31, 1997, the value of the aggregate deferred compensation from all funds in the John Hanco*ck Fund Complex for Mr. Cunningham was $220,106 , for Mr. Hiser was $103,868 , for Ms. McCarter was $159,075, for Mr. Pruchansky was $68,102, for Mr. Smith was $70,607 and for Mr. Toolan was $281,133 under the John Hanco*ck Deferred Compensation Plan for Independent Trustees. Mr. Fretz and Ms. McCarter resigned effective October 1, 1998.INVESTMENT ADVISORY AND OTHER SERVICESThe Adviser, located at 101 Huntington Avenue, Boston, Massachusetts 02199-7603,was organized in 1968 and has more than $30 billion in assets under managementin its capacity as investment adviser to the Fund and the other mutual funds andpublicly traded investment companies in the John Hanco*ck group of funds, havinga combined total of over 1,400,000 shareholders. The Adviser is an affiliate ofthe Life Company, one of the most recognized and respected financialinstitutions in the nation. With total assets under management of more than $100billion, the Life Company is one of the ten largest life insurance companies inthe United States and carries a high rating from Standard & Poor's and A.M.Best. Founded in 1862, the Life Company has been serving clients for over 130years.The Fund has entered into an investment management contract (the "AdvisoryAgreement") with the Adviser which was approved by the Fund's shareholders.Pursuant to the Advisory Agreement, the Adviser will (a) furnish continuously aninvestment program for the Fund and determine, subject to the overallsupervision and review of the Trustees, which investments should be purchased,held, sold or exchanged and (b) provide supervision over all aspects of theFund's operations except those which are delegated to a custodian, transferagent or other agent.The Fund bears all costs of its organization and operation, including but notlimited to expenses of preparing, printing and mailing all shareholders'reports, notices, prospectuses, proxy statements and reports to regulatoryagencies; expenses relating to the issuance, registration and qualification ofshares; government fees; interest charges; expenses of furnishing toshareholders their account statements; taxes; expenses of redeeming shares;brokerage and other expenses connected with the execution of portfoliosecurities transactions; expenses pursuant to the Fund's plan of distribution;fees and expenses of custodians including those for keeping books and accounts,maintaining a committed line of credit, and calculating the net asset value ofshares; fees and expenses of transfer agents and dividend disbursing agents;legal, accounting, financial, management, tax and auditing fees and expenses ofthe Fund (including an allocable portion of the cost of the Adviser's employeesrendering such services to the Fund); the compensation and expenses of Trusteeswho are not otherwise affiliated with the Trust, the Adviser or any of theiraffiliates; expenses of Trustees' and shareholders' meetings; trade associationmemberships; insurance premiums; and any extraordinary expenses.As compensation for its services under the Advisory Agreement, the Fund pays theAdviser monthly a fee based on a stated percentage, equal on an annual basis to0.40%, of the average daily net assets of the Fund. 26<PAGE>From time to time, the Adviser may reduce its fee or make other arrangements tolimit the Fund's expenses to a specified percentage of average daily net assets.The Adviser retains the right to reimpose a fee and recover any other paymentsto the extent that, at the end of any fiscal year, the Fund's annual expensesfall below this limit.Securities held by the Fund may also be held by other funds or investmentadvisory clients for which the Adviser or its affiliates provides investmentadvice. Because of different investment objectives or other factors, aparticular security may be bought for one or more funds or clients when one ormore are selling the same security. If opportunities for purchase or sale ofsecurities by the Adviser for the Fund or for other funds or clients, for whichthe Adviser renders investment advice arise for consideration at or about thesame time transactions in such securities will be made insofar as feasible, forthe respective funds or clients in a manner deemed equitable to all of them. Tothe extent that transactions on behalf of more than one client of the Adviser orits respective affiliates may increase the demand for securities being purchasedor the supply of securities being sold, there may be an adverse effect on price.Pursuant to the Advisory Agreement, the Adviser is not liable for any error ofjudgment or mistake of law or for any loss suffered by the Fund in connectionwith the matters to which its Advisory Agreement relates, except a lossresulting from willful misfeasance, bad faith or gross negligence on the part ofthe Adviser in the performance of its duties or from reckless disregard of theobligations and duties under the Advisory Agreement.Under the Advisory Agreement, the Fund may use the name "John Hanco*ck" or anyname derived from or similar to it only for so long as the applicable AdvisoryAgreement or any extension, renewal or amendment thereof remains in effect. Ifthe Fund's Advisory Agreement is no longer in effect, the Fund (to the extentthat it lawfully can) will cease to use such name or any other name indicatingthat it is advised by or otherwise connected with the Adviser. In addition, theAdviser or the Life Company may grant the non-exclusive right to use the name"John Hanco*ck" or any similar name to any other corporation or entity, includingbut not limited to any investment company of which the Life Company or anysubsidiary or affiliate thereof or any successor to the business of anysubsidiary or affiliate thereof shall be the investment adviser.Under the Fund's master/feeder structure (which was terminated on September 22,1995 pursuant to an Agreement and Plan of Liquidation and Termination dated June13, 1995) existing for the fiscal years ended March 31, 1995 and 1996 (untilSeptember 22, 1995), the Fund invested all of its assets in Adjustable U.S.Government Fund (the "Portfolio"). During these years, advisory fees payable bythe Portfolio to Transamercia Fund Management Company ("TFMC'), the Portfolio'sformer investment adviser, and borne indirectly by the Fund, amounted to$107,596 and $0, respectively. For the fiscal years ended March 31, 1995, 1996,1997, for the period April 1, 1997 to May 31, 1997 and for the fiscal year endedMay 31, 1998, advisory fees paid by the Portfolio to the Adviser and borneindirectly by the Fund, amounted to $35,865, $137,927, $132,601, $19,526 and$412,737, respectively. For the years ended March 31, 1995, 1996, 1997 and forthe period April 1, 1997 to May 31, 1997 TFMC (until December 22, 1994), theAdviser received fees of $0, $0, $10,548 and $0, respectively.The continuation of the Advisory Agreement and Distribution Agreement wasapproved by all of the Trustees. The Advisory Agreement and the DistributionAgreement will continue in effect from year to year, provided that itscontinuance is approved annually both (i) by the holders of a majority of theoutstanding voting securities of the Trust or by the Trustees, and (ii) bymajority of the Trustees who are not parties to the Agreement or "interestedpersons" of any such parties. Both agreements may be terminated on 60 dayswritten notice by any party or by a vote of a majority of the outstanding votingsecurities of the Fund and will terminate automatically if assigned. 27<PAGE>Administration Agreement. Pursuant to an administration agreement, datedDecember 22, 1994, the Adviser provided the Fund with general office facilitiesand supervised the overall administration of the Fund including, among otherresponsibilities, the negotiation of contracts and fees with, and the monitoringof performance and billings of the independent contractors and agents of theFund, the preparation and filing of all documents required for compliance by theFund with applicable laws and regulations and arranging for the maintenance ofbooks and records (other than accounting books and records) of the Fund. TheAdviser paid all compensation of the Trustees, officers and employees of theFund who were affiliated persons of the Adviser. The administration agreementterminated in September 1995.Under the administration agreement, the Adviser would have received from theFund, a fee at an annual rate of 0.10% of the Fund's average daily net assets,subject to the expense limitation provisions described below. For the fiscalyear ended March 31, 1995, administration fees paid by the Fund to TFMC, theFund's former administrator would have amounted to $21,511 and the Adviser wouldhave received $7,171 for the year ended March 31, 1995; however, all such feeswere not imposed pursuant to the fee and expense limitation arrangements then ineffect.Under the administration agreement, neither the Adviser nor its personnel wasliable for any error of judgment or mistake of law or for any act or omission inthe administration of the Fund except for willful misfeasance, bad faith orgross negligence in the performance of its duties or from reckless disregard ofits obligations and duties under the administration agreement.Administrative Services Agreement. During the fiscal year ended March 31, 1995,the Fund was a party to an administrative services agreement with TFMC (the"Services Agreement"), pursuant to which TFMC performed bookkeeping andaccounting services and functions, including preparing and maintaining variousaccounting books, records and other documents and keeping such general ledgersand portfolio accounts as are reasonably necessary for the operation of theFund. Other administrative services included communications in response toshareholder inquiries and certain printing expenses of various financialreports. In addition, such staff and office space, facilities and equipment wasprovided as necessary to provide the required administrative services. TheServices Agreement was amended in connection with the appointment of the Adviseras administrator to the Fund to permit services under the Agreement to beprovided by the Adviser and its affiliates. The Services Agreement wasterminated during the fiscal year ended March 31, 1995.For the fiscal year ended March 31, 1995, the Fund paid to TFMC (pursuant to theServices Agreement) $9,604 of which $8,164 was paid to TFMC and $1,440 was paidfor certain data processing and pricing information services.For the fiscal year ended March 31, 1995, the Portfolio paid TFMC (pursuant tothe Services Agreement) $24,461 of which $17,704 was paid to TFMC and $6,757 waspaid for certain data processing and pricing information services.Accounting and Legal Services Agreement. The Trust, on behalf of the Fund, is aparty to an Accounting and Legal Services Agreement with the Adviser. Pursuantto this Agreement, the Adviser provides the Fund with certain tax, accountingand legal services. For the period from April 1, 1997 to May 31, 1997, the Fundpaid the Adviser $915 for services under this Agreement. From the effective dateof July 1, 1996 to March 31, 1997, the Fund paid the Adviser $4,508 under thisagreement. For the fiscal year ended May 31, 1998, the Fund paid to the Adviser$18,259 under this Agreement. 28<PAGE>In order to avoid conflicts with portfolio trades for the Fund, the Adviser andthe Fund have adopted extensive restrictions on personal securities trading bypersonnel of the Adviser and its affiliates. Some of these restrictions are:pre-clearance for all personal trades and a ban on the purchase of initialpublic offerings, as well as contributions to specified charities of profits onsecurities held for less than 91 days. These restrictions are a continuation ofthe basic principle that the interests of the Fund and its shareholders comefirst.DISTRIBUTION CONTRACTSThe Fund has a Distribution Agreement with John Hanco*ck Funds. Under theagreement, John Hanco*ck Funds is obligated to use its best efforts to sellshares of each class on behalf of the Fund. Shares of the Fund are also sold byselected broker-dealers (the "Selling Brokers") which have entered into sellingagency agreements with John Hanco*ck Funds. John Hanco*ck Funds accepts orders forthe purchase of the shares of the Fund that are continually offered at net assetvalue next determined, plus any applicable sales charge, if any. In connectionwith the sale of fund shares, John Hanco*ck Funds and Selling Brokers receivecompensation from a sales charge imposed, in the case of Class A shares, at thetime of sale. In the case of Class B or Class C shares, the broker receivescompensation immediately but John Hanco*ck Funds is compensated on a deferredbasis.Total underwriting commissions for sales of the Fund's Class A shares for thefiscal years ended March 31, 1996 and 1997 were $4,976 and $26,470,respectively, for the period from April 1, 1997 to May 31, 1997 and for thefiscal year ended May 31, 1998 were $7,357 and $96,964, respectively. Of suchamounts, $0, $6,000, $557 and $13,316, respectively, were retained by JohnHanco*ck Funds in 1996, 1997, for the period from April 1, 1997 to May 31, 1997and for the fiscal year ended May 31, 1998. The remainder of the underwritingcommissions were reallowed to Selling Brokers.The Fund's Trustees adopted Distribution Plans with respect to each class ofshares (the "Plans"), pursuant to Rule 12b-1 under the Investment Company Act of1940. Under the Plans the Fund will pay distribution and service fees at anaggregate annual rate of up to 0.25% for Class A shares and 1.00% for Class Band Class C shares, of the Fund's average daily net assets attributable toshares of that class. However, the service fee will not exceed 0.25% of theFund's average daily net assets attributable to each class of shares. Thedistribution fees will be used to reimburse the John Hanco*ck Funds for itsdistribution expenses, including but not limited to: (i) initial and ongoingsales compensation to Selling Brokers and others (including affiliates of theJohn Hanco*ck Funds) engaged in the sale of Fund shares; (ii) marketing,promotional and overhead expenses incurred in connection with the distributionof Fund shares; and (iii) with respect to Class B and Class C shares only,interest expenses on unreimbursed distribution expenses. The service fees willbe used to compensate Selling Brokers and others for providing personal andaccount maintenance services to shareholders. In the event that John Hanco*ckFunds is not fully reimbursed for payments or expenses under the Class A Plan,these expenses will not be carried beyond twelve months from the date they wereincurred. Unreimbursed expenses under the Class B and Class C Plans will becarried forward together with interest on the balance of these unreimbursedexpenses. The Fund does not treat unreimbursed expenses under the Class B andClass C Plans as a liability of the Fund, because the Trustees may terminate theClass B and/or Class C Plans at any time. For the fiscal year ended May 31,1998, an aggregate of $626,536 of distribution expenses or 5.48% of the averagenet assets of the Class B shares of the Fund, was not reimbursed or recovered bythe John Hanco*ck Funds through the receipt of deferred sales charges or 12b-1fees in prior periods. Class C shares of the Fund did not commence operationsuntil April 1, 1999; therefore, there are no unreimbursed expenses to report. 29<PAGE>The Plans were approved by a majority of the voting securities of the Fund. ThePlans and all amendments were approved by the Trustees, including a majority ofthe Trustees who are not interested persons of the Fund and who have no director indirect financial interest in the operation of the Plans (the "IndependentTrustees"), by votes cast in person at meetings called for the purpose of votingon these Plans.Pursuant to the Plans, at least quarterly, John Hanco*ck Funds provides the Fundwith a written report of the amounts expended under the Plans and the purposefor which these expenditures were made. The Trustees review these reports on aquarterly basis to determine their continued appropriateness.The Plans provide that they will continue in effect only so long as itscontinuance is approved at least annually by a majority of both the Trustees andthe Independent Trustees. The Plans provide that they may be terminated withoutpenalty (a) by a vote of a majority of the Independent Trustees, or (b) by avote of a majority of the Fund's outstanding shares of the applicable class ineach case upon 60 days' written notice to John Hanco*ck Funds and (c)automatically in the event of assignment. The Plans further provide that theymay not be amended to increase the maximum amount of the fees for the servicesdescribed therein without the approval of a majority of the outstanding sharesof the class of the Fund which has voting rights with respect to the Plan. EachPlan provides that no material amendment to the Plans will be effective unlessit is approved by a majority vote of the Trustees and the Independent Trusteesof the Fund. The holders of Class A, Class B and Class C shares have exclusivevoting rights with respect to the Plan applicable to their respective class ofshares. In adopting the Plans, the Trustees concluded that, in their judgment,there is a reasonable likelihood that the Plans will benefit the holders of theapplicable class of shares of the Fund.Amounts paid to John Hanco*ck Funds by any class of shares of the Fund will notbe used to pay the expenses incurred with respect to any other class of sharesof the Fund; provided, however, that expenses attributable to the Fund as awhole will be allocated, to the extent permitted by law, according to a formulabased upon gross sales dollars and/or average daily net assets of each suchclass, as may be approved from time to time by vote of a majority of theTrustees. From time to time, the Fund may participate in joint distributionactivities with other Funds and the costs of those activities will be borne byeach Fund in proportion to the relative net asset value of the participatingFunds.During the fiscal year ended May 31, 1998, the Fund paid John Hanco*ck Funds thefollowing amounts of expenses in connection with their services for the Fund.Class C shares of the Fund did not commence operations until April 1, 1999;therefore, there are no expenses to report. 30<PAGE><TABLE><CAPTION> Expense Items ------------- Printing and Interest, Mailing of Expenses of Carrying or Prospectus to Compensation John Other New to Selling Hanco*ck Finance Advertising Shareholders Brokers Funds Charges ----------- ------------ ------- ----- ------- <S> <C> <C> <C> <C> <C> Class A $24,408 $7,203 $159,535 $38,157 $0Class B $22,894 $5,278 $ 54,987 $31,474 $0</TABLE>SALES COMPENSATIONAs part of their business strategies, each of the John Hanco*ck funds, along withJohn Hanco*ck Funds, pay compensation to financial services firms that sell thefunds' shares. These firms typically pass along a portion of this compensationto your financial representative.Compensation payments originate from two sources: from sales charges and from12b-1 fees that are paid out of the funds' assets. The sales charges and 12b-1fees paid by investors are detailed in the prospectus and under "DistributionContracts" in this Statement of Additional Information. The portions of theseexpenses that are reallowed to financial services firms are shown on the nextpage.Whenever you make an investment in the fund, the financial services firmreceives either a reallowance from the initial sales charge or a commission, asdescribed below. The firm also receives the first year's service fee at thistime. Beginning with the second year after an investment is made, the financialservices firm receives an annual service fee of 0.25% of its total eligible netassets. This fee is paid quarterly in arrears.Financial services firms selling large amounts of fund shares may receive extracompensation. This compensation, which John Hanco*ck Funds pays out of its ownresources, may include asset retention fees as well as reimbursem*nt formarketing expenses. 31<PAGE><TABLE><CAPTION> Sales charge Maximum First year Paid by investors reallowance Service fee Maximum (% of offering or commission (% of net total compensation (1) --------------- ---------- Class A Investments price) (% of offering price) investment) (% of offering price) ------ --------------------- ----------- --------------------- <S> <C> <C> <C> <C> Up to $99,999 3.00% 2.26% 0.25% 2.50%$100,000 - $499,999 2.50% 2.01% 0.25% 2.25%$500,000 - $999,999 2.00% 1.51% 0.25% 1.75%Regular investments of $1 millionor moreFirst $1M - $4,999,999 -- 0.75% 0.25% 1.00%Next $1M - $5M above that -- 0.25% 0.25% 0.50% (2)Next $1 or more above that -- 0.00% 0.25% 0.25% (2) Maximum First year reallowance service fee Maximum or commission (% of net total compensationClass B investments (% of offering price) investment) (% of offering price) --------------------- ----------- ---------------------All amounts 2.25% 0.25% 2.50% Maximum First year reallowance service fee MaximumClass C investments or commission (% of net total compensation (% of offering price) investment) (% of offering price) --------------------- ----------- ---------------------All amounts 0.75% 0.25% 1.00%</TABLE>(1) Reallowance/commission percentages and service fee percentages arecalculated from different amounts, and therefore may not equal totalcompensation percentages if combined using simple addition.(2) For Group Investment Program sales, the maximum total compensation forinvestments of $1 million or more is 1.00% of the offering price (one year CDSCof 1.00% applies for each sale).CDSC revenues collected by John Hanco*ck Funds may be used to pay commissionswhen there is no initial sales charge.NET ASSET VALUEFor purposes of calculating the net asset value ("NAV") of the Fund's shares,the following procedures are utilized wherever applicable.Debt investment securities are valued on the basis of valuations furnished by aprincipal market maker or a pricing service, both of which generally utilizeelectronic data processing techniques to determine valuations for normalinstitutional size trading units of debt securities without exclusive relianceupon quoted prices. 32<PAGE>Short-term debt investments which have a remaining maturity of 60 days or lessare generally valued at amortized cost which approximates market value. Ifmarket quotations are not readily available or if in the opinion of the Adviserany quotation or price is not representative of true market value, the fairvalue of the security may be determined in good faith in accordance withprocedures approved by the Trustees.Foreign securities are valued on the basis of quotations from the primary marketin which they are traded. Any assets or liabilities expressed in terms offoreign currencies are translated into U.S. dollars by the custodian bank basedon London currency exchange quotations as of 5:00 p.m., London time (12:00 noon,New York time) on the date of any determination of the Fund's NAV. If quotationsare not readily available, or the value has been materially affected by theevents occurring after closing of a foreign market, assets are valued by amethod that Trustees believe accurately reflects fair value.The NAV for each fund and class is determined each business day at the close ofregular trading on the New York Stock Exchange (typically 4:00 p.m. EasternTime) by dividing a class's net assets by the number of its shares outstanding.On any day an international market is closed and the New York Stock Exchange isopen, any foreign securities will be valued at the prior day's close with thecurrent day's exchange rate. Trading of foreign securities may take place onSaturdays and U.S. business holidays on which the Fund's NAV is not calculated.Consequently, the Fund's portfolio securities may trade and the NAV of theFund's redeemable securities may be significantly affected on days when ashareholder has no access to the Fund.INITIAL SALES CHARGE ON CLASS A SHARESShares of the Fund are offered at a price equal to their net asset value plus asales charge which, at the option of the purchaser, may be imposed either at thetime of purchase (the "initial sales charge alternative") or on a contingentdeferred basis (the "deferred sales charge alternative"). Share certificateswill not be issued unless requested by the shareholder in writing, and then theywill only be issued for full shares. The Trustees reserve the right to change orwaive the Fund's minimum investment requirements and to reject any order topurchase shares (including purchase by exchange) when in the judgment of theAdviser such rejection is in the Fund's best interest.The sales charges applicable to purchases of Class A shares of the Fund aredescribed in the Prospectus. Methods of obtaining reduced sales charges referredto generally in the Prospectus are described in detail below. In calculating thesales charge applicable to current purchases of Class A shares of the Fund, theinvestor is entitled to accumulate current purchases with the greater of thecurrent value (at offering price) of the Class A shares of the Fund owned by theinvestor, or if John Hanco*ck Signature Services, Inc. ("Signature Services") isnotified by the investor's dealer or the investor at the time of the purchase,the cost of the Class A shares owned.Without Sales Charge. Class A shares may be offered without a front-end salescharge or CDSC to various individuals and institutions as follows: o A Trustee or officer of the Trust; a Director or officer of the Adviser and its affiliates or Selling Brokers; employees or sales representatives of any of the foregoing; retired officers, employees or Directors of any of the foregoing; a member of the immediate family (spouse, children, grandchildren, mother, father, sister, brother, mother-in-law, father-in-law, daughter-in-law, son-in-law, niece, nephew, grandparents and same sex domestic partner) of any of the foregoing; or any fund, pension, profit sharing or other benefit plan for the individuals described above. 33<PAGE> o A broker, dealer, financial planner, consultant or registered investment advisor that has entered into a signed agreement with John Hanco*ck Funds providing specifically for the use of Fund shares in fee-based investment products or services made available to their clients. o A former participant in an employee benefit plan with John Hanco*ck funds, when he or she withdraws from his or her plan and transfers any or all of his or her plan distributions directly to the Fund. o A member of a class action lawsuit against insurance companies who is investing settlement proceeds. o Retirement plans participating in Merrill Lynch servicing programs, if the Plan has more than $3 million in assets or 500 eligible employees at the date the Plan Sponsor signs the Merrill Lynch Recordkeeping Service Agreement. See your Merrill Lynch financial consultant for further information. o Retirement plans investing through the PruArray Program sponsored by Prudential Securities. oPension plans transferring assets from a John Hanco*ck variable annuity contract to the Fund pursuant to an exemptive application approved by the Securities Exchange Commission. o Existing full service clients of the Life Company who were group annuity contract holders as of September 1, 1994, and participant directed retirement plans with at least 100 eligible employees at the inception of the Fund account. Each of these investors may purchase Class A shares with no initial sales charge. However, if the shares are redeemed within 12 months after the end of the calendar year in which the purchase was made, a CDSC will be imposed at the following rate: Amount Invested CDSC Rate --------------- --------- $1 to $4,999,999 1.00% Next $5 million to $9,999,999 0.50% Amounts of $10 million and over 0.25%Class A shares may also be purchased without an initial sales charge inconnection with certain liquidation, merger or acquisition transactionsinvolving other investment companies or personal holding companies. Combination Privilege. In calculating the sales charge applicable to purchasesof Class A shares made at one time, the purchases will be combined to reducesales charges if made by (a) an individual, his or her spouse and their childrenunder the age of 21, purchasing securities for his or their own account, (b) atrustee or other fiduciary purchasing for a single trust, estate or fiduciaryaccount and (c) groups which qualify for the Group Investment Program (seebelow). A company's (not an individual's) qualified and non-qualified retirementplan investments can be combined to take advantage of this privilege. Furtherinformation about combined purchases, including certain restrictions on combinedgroup purchases, is available from Signature Services or a Selling Broker'srepresentative. 34<PAGE> Accumulation Privilege. Investors (including investors combining purchases) whoare already Class A shareholders may also obtain the benefit of the reducedsales charge by taking into account not only the amount being invested but alsothe investor's purchase price or current value of the Class A shares of all JohnHanco*ck funds which carry a sales charge already held by such person. Class Ashares of John Hanco*ck money market funds will only be eligible for theaccumulation privilege if the investor has previously paid a sales charge on theamount of those shares. Retirement plan investors may include the value of ClassB shares if Class B shares held are greater than $1 million. Retirement plansmust notify Signature Services to utilize. A company's (not an individual's)qualified and non-qualified retirement plan investments can be combined to takeadvantage of this privilege. Group Investment Program. Under the Combination and Accumulation Privileges, allmembers of a group may combine their individual purchases of Class A shares topotentially qualify for breakpoints in the sales charge schedule. This featureis provided to any group which (1) has been in existence for more than sixmonths, (2) has a legitimate purpose other than the purchase of mutual fundshares at a discount for its members, (3) utilizes salary deduction or similargroup methods of payment, and (4) agrees to allow sales materials of the fund inits mailings to members at a reduced or no cost to John Hanco*ck Funds. Letter of Intention. Reduced sales charges are also applicable to investmentsmade pursuant to a Letter of Intention (the "LOI"), which should be readcarefully prior to its execution by an investor. The Fund offers two optionsregarding the specified period for making investments under the LOI. Allinvestors have the option of making their investments over a specified period ofthirteen (13) months. Investors who are using the Fund as a funding medium for aretirement plan, however, may opt to make the necessary investments called forby the LOI over a forty-eight (48) month period. These retirement plans includetraditional, Roth and Education IRAs, SEP, SARSEP, 401(k), 403(b), (includingTSAs), SIMPLE IRA, SIMPLE 401(k), Money Purchase Pension, Profit Sharing andSection 457 plans. An individual's non-qualified and qualified retirement planinvestments cannot be combined to satisfy an LOI of 48 months. Such aninvestment (including accumulations and combinations but not includingreinvested dividends) must aggregate $50,000 or more invested during thespecified period from the date of the LOI or from a date within ninety (90) daysprior thereto, upon written request to Signature Services. The sales chargeapplicable to all amounts invested under the LOI is computed as if the aggregateamount intended to be invested had been invested immediately. If such aggregateamount is not actually invested, the difference in the sales charge actuallypaid and the sales charge payable had the LOI not been in effect is due from theinvestor. However, for the purchases actually made within the specified period(either 13 or 48 months), the sales charge applicable will not be higher thanthat which would have been applied (including accumulations and combinations)had the LOI been for the amount actually invested. The LOI authorizes Signature Services to hold in escrow sufficient Class Ashares (approximately 5% of the aggregate) to make up any difference in salescharges on the amount intended to be invested and the amount actually invested,until such investment is completed within the specified period, at which timethe escrowed Class A shares will be released. If the total investment specifiedin the LOI is not completed, the Class A shares held in escrow may be redeemedand the proceeds used as required to pay such sales charge as may be due. Bysigning the LOI, the investor authorizes Signature Services to act as his or herattorney-in-fact to redeem any escrowed Class A shares and adjust the salescharge, if necessary. A LOI does not constitute a binding commitment by aninvestor to purchase, or by the Fund to sell, any additional Class A shares andmay be terminated at any time. 35<PAGE>DEFERRED SALES CHARGE ON CLASS B AND CLASS C SHARESInvestments in Class B and Class C shares are purchased at net asset value pershare without the imposition of an initial sales charge so that the Fund willreceive the full amount of the purchase payment.Contingent Deferred Sales Charge. Class B and Class C shares which are redeemedwithin four years or one year of purchase, respectively, will be subject to acontingent deferred sales charge ("CDSC") at the rates set forth in theProspectus as a percentage of the dollar amount subject to the CDSC. The chargewill be assessed on an amount equal to the lesser of the current market value orthe original purchase cost of the Class B or Class C shares being redeemed. NoCDSC will be imposed on increases in account value above the initial purchaseprices, including all shares derived from reinvestment of dividends or capitalgains distributions.Class B shares are not available to full-service retirement plans administeredby Signature Services or the Life Company that had more than 100 eligibleemployees at the inception of the Fund account.The amount of the CDSC, if any, will vary depending on the number of years fromthe time of payment for the purchase of Class B shares until the time ofredemption of such shares. Solely for purposes of determining the number ofyears from the time of any payment for the purchases of both Class B and Class Cshares, all payments during a month will be aggregated and deemed to have beenmade on the first day of the month.In determining whether a CDSC applies to a redemption, the calculation will bedetermined in a manner that results in the lowest possible rate being charged.It will be assumed that your redemption comes first from shares you have heldbeyond the four-year CDSC redemption period for Class B or one year CDSCredemption period for Class C, or those you acquired through dividend andcapital gain reinvestment, and next from the shares you have held the longestduring the four-year period for Class B shares. For this purpose, the amount ofany increase in a share's value above its initial purchase price is not regardedas a share exempt from CDSC. Thus, when a share that has appreciated in value isredeemed during the CDSC period, a CDSC is assessed only on its initial purchaseprice.When requesting a redemption for a specific dollar amount please indicate if yourequire the proceeds to equal the dollar amount requested. If not indicated,only the specified dollar amount will be redeemed from your account and theproceeds will be less any applicable CDSC.Example:You have purchased 100 shares at $10 per share. The second year after yourpurchase, your investment's net asset value per share has increased by $2 to$12, and you have gained 10 additional shares through dividend reinvestment. Ifyou redeem 50 shares at this time your CDSC will be calculated as follows: 36<PAGE> oProceeds of 50 shares redeemed at $12 per shares (50 x 12) $ 600.00 o*Minus Appreciation ($12 - $10) x 100 shares ( 200.00) o Minus proceeds of 10 shares not subject to CDSC (dividend reinvest ( 120.00) ------- oAmount subject to CDSC $ 280.00 *The appreciation is based on all 100 shares in the lot not just the shares being redeemed.Proceeds from the CDSC are paid to John Hanco*ck Funds and are used in whole orin part by John Hanco*ck Funds to defray its expenses related to providingdistribution-related services to the Fund in connection with the sale of theClass B and Class C shares, such as the payment of compensation to selectSelling Brokers for selling Class B and Class C shares. The combination of theCDSC and the distribution and service fees facilitates the ability of the Fundto sell the Class B and Class C shares without a sales charge being deducted atthe time of the purchase.Waiver of Contingent Deferred Sales Charge. The CDSC will be waived onredemptions of Class B and Class C shares and of Class A shares that are subjectto a CDSC, unless indicated otherwise, in the circ*mstances defined below:For all account types:* Redemptions made pursuant to the Fund's right to liquidate your account if you own shares worth less than $1,000.* Redemptions made under certain liquidation, merger or acquisition transactions involving other investment companies or personal holding companies.* Redemptions due to death or disability. (Does not apply to trust accounts unless trust is being dissolved.)* Redemptions made under the Reinstatement Privilege, as described in "Sales Charge Reductions and Waivers" of the Prospectus.* Redemptions where the proceeds are used to purchase a John Hanco*ck Declaration Variable annuity.* Redemptions of Class B (but not Class C) shares made under a periodic withdrawal plan, or redemptions for fees charged by planners or advisors for advisory services, as long as your annual redemptions do not exceed 12% of your account value, including reinvested dividends, at the time you established your periodic withdrawal plan and 12% of the value of subsequent investments (less redemptions) in that account at the time you notify Signature Services. (Please note that this waiver does not apply to periodic withdrawal plan redemptions of Class A or Class C shares that are subject to a CDSC.)* Redemptions by Retirement plans participating in Merrill Lynch servicing programs, if the Plan has less than $3 million in assets or 500 eligible employees at the date the Plan Sponsor signs the Merrill Lynch Recordkeeping Service Agreement. See your Merrill Lynch financial consultant for further information. 37<PAGE>* Redemptions of Class A shares by retirement plans that invested through the PruArray Program sponsored by Prudential Securities.For Retirement Accounts (such as traditional, Roth and Education IRAs, SIMPLEIRA, SIMPLE 401(k), Rollover IRA, TSA, 457, 403(b), 401(k), Money PurchasePension Plan, Profit-Sharing Plan and other plans as described in the InternalRevenue Code) unless otherwise noted.* Redemptions made to effect mandatory or life expectancy distributions under the Internal Revenue Code.* Returns of excess contributions made to these plans.* Redemptions made to effect distributions to participants or beneficiaries from employer sponsored retirement plans under sections 401(a) (such as Money Purchase Pension Plans and Profit-Sharing/401(k) Plans), 457 and 408 (SEPs and SIMPLE IRAs) of the Internal Revenue Code.* Redemptions from certain IRA and retirement plans that purchased shares prior to October 1, 1992 and certain IRA accounts that purchased shares prior to May 15, 1995.Please see matrix for some examples. 38<PAGE> <TABLE><CAPTION>CDSC Waiver Matrix for Class B and Class C <S> <C> <C> <C> <C> <C> - ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Type of 401 (a) Plan 403 (b) 457 IRA, IRA Non-Distribution (401 (k), Rollover retirement MPP, PSP)- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Death or Waived Waived Waived Waived WaivedDisability - ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Over 70 1/2 Waived Waived Waived Waived for 12% of account mandatory value annually distributions in periodic or 12% of payments account value annually in periodic payments.- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Between 59 1/2 Waived Waived Waived Waived for Life 12% of accountand 70 1/2 Expectancy or value annually 12% of account in periodic value annually payments in periodic payments.- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Under 59 1/2 Waived for Waived for Waived for Waived for 12% of account(Class B only) annuity annuity annuity annuity value annually payments (72t) payments (72t) payments (72t) payments (72t) in periodic or 12% of or 12% of or 12% of or 12% of payments account value account value account value account value annually in annually in annually in annually in periodic periodic periodic periodic payments. payments. payments. payments.- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Loans Waived Waived N/A N/A N/A- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Termination of Not Waived Not Waived Not Waived Not Waived N/APlan - ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Hardships Waived Waived Waived N/A N/A- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Qualified Domestic Waived Waived Waived N/A N/ARelations Orders- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Termination of Waived Waived Waived N/A N/AEmployment BeforeNormal Retirement Age- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------Return of Waived Waived Waived Waived N/AExcess- ----------------------- ----------------- ----------------- ---------------- ----------------- ----------------</TABLE> If you qualify for a CDSC waiver under one of these situations, you must notifySignature Services at the time you make your redemption. The waiver will begranted once Signature Services has confirmed that you are entitled to thewaiver. 39<PAGE>SPECIAL REDEMPTIONSAlthough it would not normally do so, the Fund has the right to pay theredemption price of shares of the Fund in whole or in part in portfoliosecurities as prescribed by the Trustees. When the shareholder sells portfoliosecurities received in this fashion, the shareholder will incur a brokeragecharge. Any such securities would be valued for the purposes of making suchpayment at the same value as used in determining net asset value. The Fund haselected to be governed by Rule 18f-1 under the Investment Company Act. Underthat rule, the Fund must redeem its shares for cash except to the extent thatthe redemption payments to any shareholder during any 90-day period would exceedthe lesser of $250,000 or 1% of the Fund's net asset value at the beginning ofsuch period.ADDITIONAL SERVICES AND PROGRAMSExchange Privilege. The Fund permits exchanges of shares of any class of a fundfor shares of the same class in any other John Hanco*ck fund offering that class. Exchanges between funds with shares that are not subject to a CDSC are based ontheir respective net asset values. No sales charge or transaction charge isimposed. Shares of the Fund which are subject to a CDSC may be exchanged intoshares of any of the other John Hanco*ck funds that are subject to a CDSC withoutincurring the CDSC; however, the shares acquired in an exchange will be subjectto the CDSC schedule of the shares acquired if and when such shares are redeemed(except that shares exchanged into John Hanco*ck Short-Term Strategic IncomeFund, and John Hanco*ck Intermediate Government Fund will retain the exchangedfund's CDSC schedule). For purposes of computing the CDSC payable uponredemption of shares acquired in an exchange, the holding period of the originalshares is added to the holding period of the shares acquired in an exchange. If a shareholder exchanges Class B shares purchased prior to January 1, 1994(except John Hanco*ck Short-Term Strategic Income Fund) for Class B shares of anyother John Hanco*ck fund, the acquired shares will continue to be subject to theCDSC schedule that was in effect when the exchanged shares were purchased.The Fund reserves the right to require that previously exchanged shares (andreinvested dividends) be in the Fund for 90 days before a shareholder ispermitted a new exchange.The Fund may refuse any exchange order. The Fund may change or cancel itsexchange policies at any time, upon 60 days' notice to its shareholders.An exchange of shares is treated as a redemption of shares of one fund and thepurchase of shares of another for Federal Income Tax purposes. An exchange mayresult in a taxable gain or loss. See "TAX STATUS".Systematic Withdrawal Plan. The Fund permits the establishment of a SystematicWithdrawal Plan. Payments under this plan represent proceeds arising from theredemption of Fund shares. Since the redemption price of the Fund shares may bemore or less than the shareholder's cost, depending upon the market value of thesecurities owned by the Fund at the time of redemption, the distribution of cashpursuant to this plan may result in realization of gain or loss for purposes ofFederal, state and local income taxes. The maintenance of a SystematicWithdrawal Plan concurrently with purchases of additional shares of the Fundcould be disadvantageous to a shareholder because of the initial sales chargepayable on such purchases of Class A shares and the CDSC imposed on redemptionsof Class B and Class C shares and because redemptions are taxable events.Therefore, a shareholder should not purchase shares at the same time aSystematic Withdrawal Plan is in effect. The Fund reserves the right to modifyor discontinue the Systematic Withdrawal Plan of any shareholder on 30 daysprior written notice to such shareholder, or to discontinue the availability ofsuch plan in the future. The shareholder may terminate the plan at any time bygiving proper notice to Signature Services. 40<PAGE>Monthly Automatic Accumulation Program ("MAAP"). The program is explained in theProspectus. The program, as it relates to automatic investment checks, issubject to the following conditions:The investments will be drawn on or about the day of the month indicated.The privilege of making investments through the MAAP may be revoked by SignatureServices without prior notice if any investment is not honored by theshareholder's bank. The bank shall be under no obligation to notify theshareholder as to the non-payment of any checks.The program may be discontinued by the shareholder either by calling SignatureServices or upon written notice to Signature Services which is received at leastfive (5) business days prior to the order date of any investment.Reinstatement or Reinvestment Privilege. If Signature Services is notified priorto reinvestment, a shareholder who has redeemed Fund shares may, within 120 daysafter the date of redemption, reinvest without payment of a sales charge anypart of the redemption proceeds in shares of the same class of the Fund oranother John Hanco*ck fund, subject to the minimum investment limit of that fund.The proceeds from the redemption of Class A shares may be reinvested at netasset value without paying a sales charge in Class A shares of the Fund or inClass A shares of any John Hanco*ck fund. If a CDSC was paid upon a redemption, ashareholder may reinvest the proceeds from this redemption at net asset value inadditional shares of the class from which the redemption was made. Theshareholder's account will be credited with the amount of any CDSC charged uponthe prior redemption and the new shares will continue to be subject to the CDSC.The holding period of the shares acquired through reinvestment will, forpurposes of computing the CDSC payable upon a subsequent redemption, include theholding period of the redeemed shares.To protect the interests of other investors in the Fund, the Fund may cancel thereinvestment privilege of any parties that, in the opinion of the Fund, areusing market timing strategies or making more than seven exchanges per owner orcontrolling party per calendar year. Also, the Fund may refuse any reinvestmentrequest.The Fund may change or cancel its reinvestment policies at any time.A redemption or exchange of Fund shares is a taxable transaction for Federalincome tax purposes even if the reinvestment privilege is exercised, and anygain or loss realized by a shareholder on the redemption or other disposition ofFund shares will be treated for tax purposes as described under the caption "TAXSTATUS." 41<PAGE>Retirement plans participating in Merrill Lynch's servicing programs:Class A shares are available at net asset value for plans with $3 million inplan assets or 500 eligible employees at the date the Plan Sponsor signs theMerrill Lynch Recordkeeping Service Agreement. If the plan does not meet eitherof these limits, Class A shares are not available.For participating retirement plans investing in Class B shares, shares willconvert to Class A shares after eight years, or sooner if the plan attainsassets of $5 million (by means of a CDSC-free redemption/purchase at net assetvalue).DESCRIPTION OF THE FUND'S SHARESThe Trustees of the Trust are responsible for the management and supervision ofthe Fund. The Declaration of Trust permits the Trustees to issue an unlimitednumber of full and fractional shares of beneficial interest of the Fund, withoutpar value. Under the Declaration of Trust, the Trustees have the authority tocreate and classify shares of beneficial interest in separate series, withoutfurther action by shareholders. As of the date of this Statement of AdditionalInformation, the Trust has two Funds and only one series and the Trustees havenot authorized any additional series of the Fund, although they may do so in thefuture. The Declaration of Trust also authorizes the Trustees to classify andreclassify the shares of the Fund, or any new series of the Trust into one ormore classes. The Trustees have also authorized the issuance of three classes ofshares of the Fund, designated as Class A, Class B and Class C.The shares of each class of the Fund represent an equal proportionate interestin the aggregate net assets attributable to that class or series of the Fund.Holders of each class of shares have certain exclusive voting rights on mattersrelating to their respective distribution plans. The different classes of theFund may bear different expenses relating to the cost of holding shareholdermeetings necessitated by the exclusive voting rights of any class of shares.Dividends paid by the Fund, if any, with respect to each class of shares will becalculated in the same manner, at the same time and on the same day and will bein the same amount, except for differences resulting from the facts that (i) thedistribution and service fees relating to each class of shares will be borneexclusively by that class, (ii) Class B and Class C shares will pay higherdistribution and service fees than Class A shares and (iii) each Class of shareswill bear any class expenses properly allocable to that class of shares, subjectto the conditions the Internal Revenue Service imposes with respect to themultiple-class structures. Similarly, the net asset value per share may varydepending on which class of shares are purchased. No interest will be paid onuncashed dividend or redemption checks.In the event of liquidation, shareholders of each class are entitled to sharepro rata in the net assets of the Fund available for distribution to theseshareholders. Shares entitle their holders to one vote per share, are freelytransferable and have no preemptive, subscription or conversion rights. Whenissued, shares are fully paid and non-assessable, except as set forth below.Unless otherwise required by the Investment Company Act or the Declaration ofTrust, the Fund has no intention of holding annual meetings of shareholders.Fund shareholders may remove a Trustee by the affirmative vote of at leasttwo-thirds of the Trust's outstanding shares and the Trustees shall promptlycall a meeting for such purpose when requested to do so in writing by the recordholders of not less than 10% of the outstanding shares of the Trust.Shareholders may, under certain circ*mstances, communicate with othershareholders in connection with requesting a special meeting of shareholders.However, at any time that less than a majority of the Trustees holding officewere elected by the shareholders, the Trustees will call a special meeting ofshareholders for the purpose of electing Trustees. 42<PAGE>Under Massachusetts law, shareholders of a Massachusetts business trust could,under certain circ*mstances, be held personally liable for acts or obligationsof the Trust. However, the Declaration of Trust contains an express disclaimerof shareholder liability for acts, obligations or affairs of the Fund. TheDeclaration of Trust also provides for indemnification out of the Fund's assetsfor all losses and expenses of any shareholder held personally liable by reasonof being or having been a shareholder. The Declaration of Trust also providesthat no series of the Trust shall be liable for the liabilities of any otherseries. Furthermore, no fund included in this Fund's prospectus shall be liablefor the liabilities of any other John Hanco*ck Fund. Liability is thereforelimited to circ*mstances in which the Fund itself would be unable to meet itsobligations, and the possibility of this occurrence is remote.The Fund reserves the right to reject any application which conflicts with theFund's internal policies or the policies of any regulatory authority. JohnHanco*ck Funds does not accept starter, credit card or third party checks. Allchecks returned by the post office as undeliverable will be reinvested at netasset value in the fund or funds from which a redemption was made or dividendpaid. Information provided on the account application may be used by the Fund toverify the accuracy of the information or for background or financial historypurposes. A joint account will be administered as a joint tenancy with right ofsurvivorship, unless the joint owners notify Signature Services of a differentintent. A shareholder's account is governed by the laws of The Commonwealth ofMassachusetts. For telephone transactions, the transfer agent will take measuresto verify the identity of the caller, such as asking for name, account number,Social Security or other taxpayer ID number and other relevant information. Ifappropriate measures are taken, the transfer agent is not responsible for anylosses that may occur to any account due to an unauthorized telephone call. Alsofor your protection telephone transactions are not permitted on accounts whosenames or addresses have changed within the past 30 days. Proceeds from telephonetransactions can only be mailed to the address of record.Selling activities for the Fund may not take place outside the U.S. exempt withU.S. military bases, APO addresses and U.S. diplomats. Brokers of record onNon-U.S. investors' accounts with foreign mailing addresses are required tocertify that all sales activities have occurred, and in the future will occur,only in the U.S. A Foreign corporation may purchase shares of the Fund only ifit has a U.S. mailing address.TAX STATUSThe Fund has qualified and has elected to be treated as a "regulated investmentcompany" under Subchapter M of the Internal Revenue Code of 1986, as amended(the "Code") and intends to continue to qualify for each taxable year. As suchand by complying with the applicable provisions of the Code regarding thesources of its income, the timing of its distributions, and the diversificationof its assets, the Fund will not be subject to Federal income tax on its taxableincome (including net realized capital gains) which is distributed toshareholders in accordance with the timing requirements of the Code.The Fund will be subject to a 4% nondeductible Federal excise tax on certainamounts not distributed (and not treated as having been distributed) on a timelybasis in accordance with annual minimum distribution requirements. The Fundintends under normal circ*mstances to seek to avoid or minimize liability forsuch tax by satisfying such distribution requirements. 43<PAGE>Distributions from the Fund's current or accumulated earnings and profits("E&P") will be taxable under the Code for investors who are subject to tax. Ifthese distributions are paid from the Fund's "investment company taxableincome," they will be taxable as ordinary income; and if they are paid from theFund's "net capital gain," they will be taxable as capital gain. (Net capitalgain is the excess (if any) of net long-term capital gain over net short-termcapital loss, and investment company taxable income is all taxable income andcapital gains, other than those gains and losses included in computing netcapital gain, after reduction by deductible expenses). Some distributions may bepaid to shareholders as if they had been received on December 31 of the previousyear. The tax treatment described above will apply without regard to whetherdistributions are received in cash or reinvested in additional shares of theFund.Distributions, if any, in excess of E&P will constitute a return of capitalunder the Code, which will first reduce an investor's federal tax basis in Fundshares and then, to the extent such basis is exceeded, will generally give riseto capital gains. Shareholders who have chosen automatic reinvestment of theirdistributions will have a federal tax basis in each share received pursuant tosuch a reinvestment equal to the amount of cash they would have received hadthey elected to receive the distribution in cash, divided by the number ofshares received in the reinvestment.The amount of net realized capital gains, if any, in any given year will varydepending upon the Adviser's current investment strategy and whether the Adviserbelieves it to be in the best interests of the Fund to dispose of portfoliosecurities and/or engage in options, futures or forward transactions willgenerate capital gains. At the time of an investor's purchase of Fund shares, aportion of the purchase price is often attributable to realized or unrealizedappreciation in the Fund's portfolio. Consequently, subsequent distributions onthese shares from such appreciation may be taxable to such investor even if thenet asset value of the investor's shares is, as a result of the distributions,reduced below the investor's cost for such shares, and the distributions inreality represent a return of a portion of the purchase price.Upon a redemption or other disposition of shares of the Fund (including byexercise of the exchange privilege) in a transaction that is treated as a salefor tax purposes, a shareholder may realize a taxable gain or loss dependingupon the amount of the proceeds and the investor's basis in his shares. Suchgain or loss will be treated as capital gain or loss if the shares are capitalassets in the shareholder's hands. A sales charge paid in purchasing shares ofthe Fund cannot be taken into account for purposes of determining gain or losson the redemption or exchange of such shares within 90 days after their purchaseto the extent shares of the Fund or another John Hanco*ck Fund are subsequentlyacquired without payment of a sales charge pursuant to the reinvestment orexchange privilege. This disregarded charge will result in an increase in theshareholder's tax basis in the shares subsequently acquired. Also, any lossrealized on a redemption or exchange may be disallowed to the extent the sharesdisposed of are replaced with other shares of the Fund within a period of 61days beginning 30 days before and ending 30 days after the shares are disposedof, such as pursuant to automatic dividend reinvestments. In such a case, thebasis of the shares acquired will be adjusted to reflect the disallowed loss.Any loss realized upon the redemption of shares with a tax holding period of sixmonths or less will be treated as a long-term capital loss to the extent of anyamounts treated as distributions of long-term capital gain with respect to suchshares. Shareholders should consult their own tax advisers regarding theirparticular circ*mstances to determine whether a disposition of Fund shares isproperly treated as a sale for tax purposes, as is assumed in the foregoingdiscussion. 44<PAGE>Although its present intention is to distribute, at least annually, all netcapital gain, if any, the Fund reserves the right to retain and reinvest all orany portion of the excess, as computed for Federal income tax purposes, of netlong-term capital gain over net short-term capital loss in any year. The Fundwill not in any event distribute net capital gain realized in any year to theextent that a capital loss is carried forward from prior years against suchgain. To the extent such excess was retained and not exhausted by thecarryforward of prior years' capital losses, it would be subject to Federalincome tax in the hands of the Fund. Upon proper designation of this amount bythe Fund, each shareholder would be treated for Federal income tax purposes asif the Fund had distributed to him on the last day of its taxable year his prorata share of such excess, and he had paid his pro rata share of the taxes paidby the Fund and reinvested the remainder in the Fund. Accordingly, eachshareholder would (a) include his pro rata share of such excess as capital gainin his return for his taxable year in which the last day of the Fund's taxableyear falls, (b) be entitled either to a tax credit on his return for, or to arefund of, his pro rata share of the taxes paid by the Fund, and (c) be entitledto increase the adjusted tax basis for his shares in the Fund by the differencebetween his pro rata share of such excess and his pro rata share of such taxes.For Federal income tax purposes, the Fund is permitted to carry forward a netcapital loss in any year to offset its own net capital gains, if any, during theeight years following the year of the loss. To the extent subsequent net capitalgains are offset by such losses, they would not result in Federal income taxliability to the Fund and, as noted above, would not be distributed as such toshareholders. The Fund has $17,040,448 of capital loss carryforwards, availableto the extent provided by regulations, as to offset future net realized capitalgains. These carryforwards expire at various amounts and times from 1999 through2005.The Fund's dividends and capital gain distributions will not qualify for thecorporate dividends-received deduction.The Fund is required to accrue income on any debt securities that have more thana de minimis amount of original issue discount (or debt securities acquired at amarket discount, if the Fund elects to include market discount in incomecurrently) prior to the receipt of the corresponding cash payments. However, theFund must distribute to shareholders for each taxable year substantially all ofits net income, including such income, to qualify as a regulated investmentcompany and avoid liability for any federal income or excise tax. Therefore, theFund may have to dispose of its portfolio securities under disadvantageouscirc*mstances to generate cash, or borrow cash, to satisfy these distributionrequirements.A state income (and possibly local income and/or intangible property) taxexemption is generally available to the extent (if any) the Fund's distributionsare derived from interest on (or, in the case of intangibles property taxes, thevalue of its assets is attributable to) certain U.S. Government obligations,provided in some states that certain thresholds for holdings of such obligationsand/or reporting requirements are satisfied. The Fund will not seek to satisfyany threshold or reporting requirements that may apply in particular taxingjurisdictions, although the Fund may in its sole discretion provide relevantinformation to shareholders.The Fund will be required to report to the Internal Revenue Service (the "IRS")all taxable distributions to shareholders, as well as gross proceeds from theredemption or exchange of Fund shares, except in the case of certain exemptrecipients, i.e., corporations and certain other investors distributions towhich are exempt from the information reporting provisions of the Code. Underthe backup withholding provisions of Code Section 3406 and applicable Treasuryregulations, all such reportable distributions and proceeds may be subject tobackup withholding of federal income tax at the rate of 31% in the case ofnon-exempt shareholders who fail to furnish the Fund with their correct taxpayeridentification number and certain certifications required by the IRS or if theIRS or a broker notifies the Fund that the number furnished by the shareholderis incorrect or that the shareholder is subject to backup withholding as aresult of failure to report interest or dividend income. The Fund may refuse toaccept an application that does not contain any required taxpayer identificationnumber or certification that the number provided is correct. If the backupwithholding provisions are applicable, any such distributions and proceeds,whether taken in cash or reinvested in shares, will be reduced by the amountsrequired to be withheld. Any amounts withheld may be credited against ashareholder's U.S. federal income tax liability. Investors should consult theirtax advisers about the applicability of the backup withholding provisions. 45<PAGE>The Fund may be required to account for its transactions in forward rolls orswaps, caps, floors and collars in a manner that, under certain circ*mstances,may limit the extent of its participation in such transactions. Additionally,the Fund may be required to recognize gain, but not loss, if a swap or othertransaction is treated as a constructive sale of an appreciated financialposition in the Fund's portfolio. The Fund may have to sell portfolio securitiesunder disadvantageous circ*mstances to generate cash, or borrow cash, to satisfythese distribution requirements.Different tax treatment, including penalties on certain excess contributions anddeferrals, certain pre-retirement and post-retirement distributions and certainprohibited transactions, is accorded to accounts maintained as qualifiedretirement plans. Shareholders should consult their tax advisers for moreinformation.The foregoing discussion relates solely to U.S. Federal income tax law asapplicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domesticcorporations, partnerships, trusts or estates) subject to tax under such law.The discussion does not address special tax rules applicable to certain classesof investors, such as tax-exempt entities, insurance companies, and financialinstitutions. Dividends, capital gain distributions, and ownership of or gainsrealized on the redemption (including an exchange) of Fund shares may also besubject to state and local taxes. Shareholders should consult their own taxadvisers as to the Federal, state or local tax consequences of ownership ofshares of, and receipt of distributions from, the Fund in their particularcirc*mstances.Non-U.S. investors not engaged in a U.S. trade or business with which theirinvestment in the Fund is effectively connected will be subject to U.S. Federalincome tax treatment that is different from that described above. Theseinvestors may be subject to nonresident alien withholding tax at the rate of 30%(or a lower rate under an applicable tax treaty) on amounts treated as ordinarydividends from a Fund and, unless an effective IRS Form W-8 or authorizedsubstitute for Form W-8 is on file, to 31% backup withholding on certain otherpayments from the Fund. Non-U.S. investors should consult their tax advisersregarding such treatment and the application of foreign taxes to an investmentin the Fund.The Fund is not subject to Massachusetts corporate excise or franchise taxes.The Fund anticipates that, provided that the Fund qualifies as a regulatedinvestment company under the Code, it will also not be required to pay anyMassachusetts income tax. 46<PAGE>CALCULATION OF PERFORMANCE For the 30-day fiscal period ended November 30, 1998, the annualized yield forthe Fund's Class A and Class B shares were 4.48% and 3.87%, respectively. Theaverage annual return for the Fund's Class A and Class B shares for the periodfrom December 31, 1991 (inception of the Fund) through November 30, 1998 were5.59% and 5.35%, respectively. For the one year fiscal year ended November 30,1998, the average annual returns were 5.93% and 5.40%, respectively. For thefive year period ended November 30, 1998, the average annual returns were 5.66%and 5.48%, respectively. Class C shares commenced operations on April 1, 1999;therefore, there is no yield to report. The Fund's yield is computed by dividing net investment income per sharedetermined for a 30-day period by the maximum offering price per share (whichincludes the full sales charge, where applicable) on the last day of the period,according to the following standard formula: 6 Yield = 2 ( [ ( a - b ) + 1 ] - 1 ) ------- cd Where:a = dividends and interest earned during the period.b = net expenses accrued during the period.c = the average daily number of fund shares outstanding during the period that would be entitled to receive dividends.d = the maximum offering price per share on the last day of the period (NAV where applicable).Total return is computed by finding the average annual compounded rate of returnover the 1-year, 5-year, and 10-year periods that would equate the initialamount invested to the ending redeemable value according to the followingformula: n ________ T = \ / ERV / P - 1Where:P = a hypothetical initial investment of $1,000.T = average annual total returnn = number of yearsERV= ending redeemable value of a hypothetical $1,000 investment made at designated periods or fraction thereof.Because each class has its own sales charge and fee structure, the classes havedifferent performance results. In the case of each class, this calculationassumes the maximum sales charge is included in the initial investment or theCDSC applied at the end of the period, respectively. This calculation assumesthat all dividends and distributions are reinvested at net asset value on thereinvestment dates during the period. The "distribution rate" is determined byannualizing the result of dividing the declared dividends of the Fund during theperiod stated by the maximum offering price or net asset value at the end of theperiod. Excluding the Fund's sales charge from the distribution rate produces ahigher rate. 47<PAGE>In addition to average annual total returns, the Fund may quote unaveraged orcumulative total returns reflecting the simple change in value of an investmentover a stated period. Cumulative total returns may be quoted as a percentage oras a dollar amount, and may be calculated for a single investment, a series ofinvestments, and/or a series of redemptions, over any time period. Total returnsmay be quoted with or without taking the Fund's sales charge on Class A sharesor the CDSC on Class B or Class C shares into account. Excluding the Fund'ssales charge on Class A shares and the CDSC on Class B or Class C shares from atotal return calculation produces a higher total return figure.From time to time, in reports and promotional literature, the Fund's totalreturn and/or yield will be compared to indices of mutual funds and bank depositvehicles such as Lipper Analytical Services, Inc.'s "Lipper -- Fixed Income FundPerformance Analysis," a monthly publication which tracks net assets, totalreturn, and yield on fixed income mutual funds in the United States. Ibbotsonand Associates, CDA Weisenberger and F.C. Towers are also used for comparisonpurposes, as well a the Russell and Wilshire Indices.Performance rankings and ratings reported periodically in national financialpublications such as MONEY Magazine, FORBES, BUSINESS WEEK, THE WALL STREETJOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S, may also beutilized. The Fund's promotional and sales literature may make reference to theFund's "beta." Beta is a reflection of the market-related risk of the Fund byshowing how responsive the Fund is to the market.The performance of the Fund is not fixed or guaranteed. Performance quotationsshould not be considered to be representations of performance of the Fund forany period in the future. The performance of the Fund is a function of manyfactors including its earnings, expenses and number of outstanding shares.Fluctuating market conditions; purchases, sales and maturities of portfoliosecurities; sales and redemptions of shares of beneficial interest; and changesin operating expenses are all examples of items that can increase or decreasethe Fund's performance.BROKERAGE ALLOCATIONDecisions concerning the purchase and sale of portfolio securities and theallocation of brokerage commissions are made by the Adviser pursuant torecommendations made by an investment committee of the Adviser, which consistsof officers and directors of the Adviser and affiliates and Trustees who areinterested persons of the Fund. Orders for purchases and sales of securities areplaced in a manner which, in the opinion of the Adviser, will offer the bestprice and market for the execution of each such transaction. Purchases fromunderwriters of portfolio securities may include a commission or commissionspaid by the issuer and transactions with dealers serving as market makers toreflect a "spread." Debt securities are generally traded on a net basis throughdealers acting for their own account as principals and not as brokers; nobrokerage commissions are payable on these transactions. 48<PAGE> In the U.S. Government securities market, securities are generally traded on a"net" basis with dealers acting as principal for their own account without astated commission, although the price of the security usually includes a profitto the dealer. On occasion, certain money market instruments and agencysecurities may be purchased directly from the issuer, in which case nocommissions or premiums are paid. In other countries, both debt and equitysecurities are traded on exchanges at fixed commission rates. Commissions onforeign transactions are generally higher than the negotiated commission ratesavailable in the U.S. There is generally less government supervision andregulation of foreign stock exchanges and broker-dealers than in the U.S. The Fund's primary policy is to execute all purchases and sales of portfolioinstruments at the most favorable prices consistent with best execution,considering all of the costs of the transaction including brokerage commissions.This policy governs the selection of brokers and dealers and the market in whicha transaction is executed. Consistent with the foregoing primary policy, theRules of Fair Practice of the National Association of Securities Dealers, Inc.and other policies as the Trustees may determine, the Adviser may consider salesof shares of the Fund as a factor in the selection of broker-dealers to executethe Fund's portfolio transactions.To the extent consistent with the foregoing, the Fund will be governed in theselection of brokers and dealers, and the negotiation of brokerage commissionrates and dealer spreads, by the reliability and quality of the services,including primarily the availability and value of research information and to alesser extent statistical assistance furnished to the Adviser of the Fund, andtheir value and expected contribution to the performance of the Fund. It is notpossible to place a dollar value on information and services to be received frombrokers and dealers, since it is only supplementary to the research efforts ofthe Adviser. The receipt of research information is not expected to reducesignificantly the expenses of the Adviser. The research information andstatistical assistance furnished by brokers and dealers may benefit the LifeCompany or other advisory clients of the Adviser, and conversely, brokeragecommissions and spreads paid by other advisory clients of the Adviser may resultin research information and statistical assistance beneficial to the Fund. TheFund will not make any commitment to allocate portfolio transactions upon anyprescribed basis. While the Adviser's officers will be primarily responsible forthe allocation of the Fund's brokerage business, the policies in this regardmust be consistent with the foregoing and will at all times be subject to reviewby the Trustees. For the years ended March 31, 1997 and 1996, no negotiatedbrokerage commissions were paid on portfolio transactions. For the period fromApril 1, 1997 to May 31, 1997 and for the fiscal year ended May 31, 1998, nonegotiated brokerage commissions were paid on portfolio transactions.As permitted by Section 28(e) of the Securities Exchange Act of 1934, the Fundmay pay to a broker which provides brokerage and research services to the Fundan amount of disclosed commission in excess of the commission which anotherbroker would have charged for effecting that transaction. This practice issubject to a good faith determination by the Trustees that such price isreasonable in light of the services provided and to such policies as theTrustees may adopt from time to time. During the fiscal year ended May 31, 1998,the Fund did not pay commissions to compensate any brokers for research servicessuch as industry, economic and company reviews and evaluations of securities.The Adviser's indirect parent, the Life Company, is the indirect soleshareholder of Signator Investors, Inc., a broker dealer ("Signator" or"Affiliated Broker"). Pursuant to procedures determined by the Trustees andconsistent with the above policy of obtaining best net results, the Fund mayexecute portfolio transactions with or through Affiliated Brokers. During theyears ended March 31, 1997 and 1996, the Fund did not execute any portfoliotransactions with any Affiliated Broker. For the period from April 1, 1997 toMay 31, 1997 and for the fiscal year ended May 31, 1998, the Fund did notexecute any portfolio transactions with any Affiliated Broker. 49<PAGE>Signator may act as broker for the Fund on exchange transactions, subject,however, to the general policy of the Fund set forth above and the proceduresadopted by the Trustees pursuant to the Investment Company Act. Commissions paidto an Affiliated Broker must be at least as favorable as those which theTrustees believe to be contemporaneously charged by other brokers in connectionwith comparable transactions involving similar securities being purchased orsold. A transaction would not be placed with an Affiliated Broker if the Fundwould have to pay a commission rate less favorable than the Affiliated Broker'scontemporaneous charges for comparable transactions for its other most favored,but unaffiliated, customers, except for accounts for which the Affiliated Brokeracts as a clearing broker for another brokerage firm, and any customers of theAffiliated Broker not comparable to the Fund as determined by a majority of theTrustees who are not interested persons (as defined in the Investment CompanyAct) of the Fund, the Adviser or the Affiliated Broker. Because the Adviser,which is affiliated with the Affiliated Brokers, has, as an investment adviserto the Fund, the obligation to provide investment management services, whichincludes elements of research and related investment skills, such research andrelated skills will not be used by the Affiliated Broker as a basis fornegotiating commissions at a rate higher than that determined in accordance withthe above criteria.Other investment advisory clients advised by the Adviser may also invest in thesame securities as the Fund. When these clients buy or sell the same securitiesat substantially the same time, the Adviser may average the transactions as toprice and allocate the amount of available investments in a manner which theAdviser believes to be equitable to each client, including the Fund. In someinstances, this investment procedure may adversely affect the price paid orreceived by the Fund or the size of the position obtainable for it. On the otherhand, to the extent permitted by law, the Adviser may aggregate the securitiesto be sold or purchased for the Fund with those to be sold or purchased forother clients managed by it in order to obtain best execution.TRANSFER AGENT SERVICESJohn Hanco*ck Signature Services, Inc., 1 John Hanco*ck Way, Suite 1000, Boston,MA 02217- 1000, a wholly owned indirect subsidiary of the Life Company, is thetransfer and dividend paying agent for the Fund. The Fund pays SignatureServices an annual fee of $19.00 for each Class A shareholder account and $21.50for each Class B shareholder account and $20.50 for each Class C shareholderaccount. The Fund also pays certain out-of-pocket expenses and these expensesare aggregated and charged to the Fund and allocated to each class on the basisof their relative net asset values.CUSTODY OF PORTFOLIOPortfolio securities of the Fund are held pursuant to custodian agreementsbetween the Fund and Investors Bank & Trust Company, 200 Clarendon Street,Boston, Massachusetts 02116. Under the custodian agreement, Investors Bank &Trust Company performs custody, portfolio and fund accounting services. 50<PAGE>INDEPENDENT AUDITORS Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts 02116, has beenselected as the independent auditors of the Fund. The financial statements ofthe Fund included in the Prospectus and this Statement of Additional Informationfor the Fund's fiscal year ended May 31, 1998 have been audited by Ernst & YoungLLP for the periods indicated in their report, appearing elsewhere herein, andare included in reliance upon such report given upon the authority of such firmas experts in accounting and auditing. 51<PAGE> APPENDIX-AMORE ABOUT RISKA fund's risk profile is largely defined by the fund's principal securities andinvestment practices. You may find the most concise description of the fund'srisk profile in the prospectus.A fund is permitted to utilize -- within limits established by the trustees --certain other securities and investment practices that have higher risks andopportunities associated with them. To the extent that the fund utilizes thesesecurities or practices, its overall performance may be affected, eitherpositively or negatively. On the following pages are brief definitions ofcertain associated risks with them, with examples of related securities andinvestment practices included in brackets. See the "Investment Objectives andPolicies" and "Investment Restrictions" sections of this Statement of AdditionalInformation for a description of this Fund's investment policies. The fundfollows certain policies that may reduce these risks.As with any mutual fund, there is no guarantee that the fund will earn income orshow a positive total return over any period of time -- days, months or years.TYPES OF INVESTMENT RISKCorrelation risk The risk that changes in the value of a hedging instrument willnot match those of the asset being hedged (hedging is the use of one investmentto offset the effects of another investment). Incomplete correlation can resultin unanticipated risks. (e.g., currency contracts, futures and related options,options on securities and indices, swaps, caps, floors and collars).Credit risk The risk that the issuer of a security, or the counterparty to acontract, will default or otherwise become unable to honor a financialobligation. (e.g., non- investment-grade debt securities, borrowing; reverserepurchase agreements, covered mortgage dollar roll transactions, repurchaseagreements, securities lending, brady bonds, foreign debt securities, in-kind,delayed and zero coupon debt securities, asset-backed securities,mortgage-backed securities, participation interest, options on securities,structured securities and swaps, caps floors and collars).Currency risk The risk that fluctuations in the exchange rates between the U.S.dollar and foreign currencies may negatively affect an investment. Adversechanges in exchange rates may erode or reverse any gains produced by foreigncurrency-denominated investments, and may widen any losses.(e.g., foreign debtsecurities, currency contracts, swaps, caps, floors and collars).Extension risk The risk that an unexpected rise in interest rates will extendthe life of a mortgage-backed security beyond the expected prepayment time,typically reducing the security's value.(e.g. mortgage-backed securities andstructured securities).Interest rate risk The risk of market losses attributable to changes in interestrates. With fixed-rate securities, a rise in interest rates typically causes afall in values, while a fall in rates typically causes a rise in values. (e.g.,non-investment-grade debt securities, covered mortgage dollar roll transactions,brady bonds, foreign debt securities, in-kind, delayed and zero coupon debtsecurities, asset-backed securities, mortgage-backed securities, participationinterest, swaps, caps, floors and collars).Leverage risk Associated with securities or practices (such as borrowing) thatmultiply small index or market movements into large changes in value. (e.g.borrowing; reverse repurchase agreements, covered mortgage dollar rolltransactions, when-issued securities and forward commitments, currencycontracts, financial futures and options; securities and index options,structured securities, swaps, caps, floors and collars). A-1<PAGE>o Hedged When a derivative (a security whose value is based on another security or index) is used as a hedge against an opposite position that the fund also holds, any loss generated by the derivative should be substantially offset by gains on the hedged investment, and vice versa. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains.o Speculative To the extent that a derivative is not used as a hedge, the fund is directly exposed to the risks of that derivative. Gains or losses from speculative positions in a derivative may be substantially greater than the derivative's original cost.Liquidity risk The risk that certain securities may be difficult or impossibleto sell at the time and the price that the seller would like. The seller mayhave to lower the price, sell other securities instead, or forego an investmentopportunity, any of which could have a negative effect on fund management orperformance. (e.g. non-investment-grade debt securities, restricted and illiquidsecurities, mortgage-backed securities, participation interest, currencycontracts, futures and related options; securities and index options, structuredsecurities, swaps, caps, floors and collars).Management risk The risk that a strategy used by a fund's management may fail toproduce the intended result. Common to all mutual funds.Market risk The risk that the market value of a security may move up and down,sometimes rapidly and unpredictably. Market risk may affect a single issuer, anindustry, a sector of the bond market or the market as a whole. Common to allstocks and bonds and the mutual funds that invest in them. (e.g. coveredmortgage dollar roll transactions, short-term trading, when-issued securitiesand forward commitments, brady bonds, foreign debt securities, in-kind, delayedand zero coupon debt securities, restricted and illiquid securities, rights andwarrants, financial futures and options; and securities and index options,structured securities).Natural event risk The risk of losses attributable to natural disasters, cropfailures and similar events.Opportunity risk The risk of missing out on an investment opportunity becausethe assets necessary to take advantage of it are tied up in less advantageousinvestments.(e.g. covered mortgage dollar roll transactions, when-issuedsecurities and forward commitments, currency contracts, financial futures andoptions; securities and securities and index options).Political risk The risk of losses attributable to government or politicalactions, from changes in tax or trade statutes to governmental collapse and war.(e.g., brady bonds and foreign debt securities).Prepayment risk The risk that unanticipated prepayments may occur during periodsof falling interest rates, reducing the value of mortgage-backed securities.(e.g., mortgage backed securities).Valuation risk The risk that a fund has valued certain of its securities at ahigher price than it can sell them for. (e.g., non-investment-grade debtsecurities, participation interest, structured securities, swaps, caps, floorsand collars). A-2<PAGE> APPENDIX BThe ratings of Moody's Investors Service, Inc. and Standard & Poor's Corporationrepresent their opinions as to the quality of various debt instruments. Theirratings are a generally accepted barometer of credit risk. They are, however,subject to certain limitations from an investor's standpoint. Such limitationsinclude the following: the rating of an issue is heavily weighted by pastdevelopments and does not necessarily reflect probable future conditions; thereis frequently a lag between the time a rating is assigned and the time it isupdated; and there are varying degrees of difference in credit risk ofsecurities in each rating category. Therefore, it should be understood, thatratings are not absolute standards of quality. Consequently, debt instrumentswith the same maturity, coupon and rating may have different yields while debtinstruments of the same maturity and coupon with different ratings may have thesame yield.Description of Bond Ratings Moody's Investors Service, Inc. Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carrythe smallest degree of investment risk and are generally referred to as "giltedge." Interest payments are protected by a large or by an exceptionally stablemargin and principal is secure. While the various protective elements are likelyto change, such changes as can be visualized are most unlikely to impair thefundamentally strong position of such issues.Aa: Bonds which are rated Aa are judged to be of high quality by all standards.Together with the Aaa group they comprise what are generally known as high gradebonds. They are rated lower than the best bonds because margins of protectionmay not be as large as in Aaa securities or fluctuations of protective elementsmay be of greater amplitude or there may be other elements present which makethe long-term risks appear somewhat larger than in Aaa securities.A: Bonds which are rated A possess many favorable investment attributes and areto be considered as upper medium grade obligations. Factors giving security toprincipal and interest are considered adequate, but elements may be presentwhich suggest a susceptibility to impairment sometime in the future.Baa: Bonds which are rated Baa are considered as medium grade obligations, i.e.,they are neither highly protected nor poorly secured. Interest payments andprincipal security appear adequate for the present but certain protectiveelements may be lacking or may be characteristically unreliable over any greatlength of time. Such bonds lack outstanding investment characteristics and infact have speculative characteristics as well.Ba: Bonds which are rated Ba are judged to have speculative elements; theirfuture cannot be considered as well assured. Often the protection of interestand principal payments may be very moderate and thereby not well safeguardedduring both good and bad times over the future. Uncertainty of positioncharacterizes bonds in this class. B-1<PAGE>B: Bonds which are rated b generally lack the characteristics of desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may besmall.Caa: Bonds which are rated Caa are of poor standing. Such issues may bein default or there may be present elements of danger with respect to principleor interest.Ca: Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings.C: Bonds which are rated C are the lowest rated class of bonds andissues so rated can be regarded as having extremely poor prospects of everattaining any real investment standing.Standard & Poor's Ratings GroupAAA: Bonds rated AAA have the higher rating assigned by Standard & Poor's.Capacity to pay interest and repay principal is extremely strong.AA: Bonds rated AA have a very strong capacity to pay interest and repayprincipal and differ from the higher rated issues only in small degree.A: Bonds rated A have a very strong capacity to pay interest and repayprincipal, although they are somewhat more susceptible to the adverse effects ofchanges in circ*mstances and economic conditions than bonds in higher ratedcategories.BBB: Bonds rated BBB are regarded as having an adequate capacity to pay interestand repay principal. Whereas they normally exhibit adequate protectionparameters, adverse economic conditions or changing circ*mstances are morelikely to lead to a weakened capacity to pay interest and repay principal forbonds in this category than in higher rated categories.BB, B, CCC, CC: Debt rated BB, B, CCC and CC is regarded, on balance, aspredominantly speculative with respect to capacity to pay interest and repayprincipal in accordance with the terms of the obligation. BB indicates thelowest degree of speculation and CC the highest degree of speculation. Whilesuch debt will likely have some quality and protective characteristics, theseare outweighed by large uncertainties or major risk exposures to adverseconditions.C: The rating C is reserved for income bonds on which no interest is being paid. B-2<PAGE> FINANCIAL STATEMENTSThe financial statements listed below are included in the Fund's respective 1998Annual Report to Shareholders for the year ended May 31, 1998 (filedelectronically on July 30, 1998, accession number 0001010521-98-000300) and 1998Semiannual Report to Shareholders for the year ended November 30, 1998 (filedelectronically on January 29, 1999, accession number 0001010521-99-000087) andand are included in and incorporated by reference into Part B of thisregistration statement of John Hanco*ck Intermediate Government Fund formerlyJohn Hanco*ck Intermediate Maturity Government Fund (files nos. 811-03006 and2-66906).John Hanco*ck Bond Trust John Hanco*ck John Hanco*ck Intermediate Government Fund formerly John Hanco*ck Intermediate Maturity Government Fund Statement of Assets and Liabilities as of May 31, 1998. Statement of Operations for the fiscal year ended May 31, 1998. Statement of Changes in Net Assets for each of the periods indicated therein. Financial Highlights for each of the periods indicated therein. Schedule of Investments as of May 31, 1998. Notes to Financial Statements. Report to Independent Auditors. Statement of Assets and Liabilities as of November 30, 1998. (unaudited) Statement of Operations for the fiscal year ended November 30, 1998. (unaudited) Statement of Changes in Net Assets for each of the periods indicated therein. (unaudited) Financial Highlights for each of the periods indicated therein. (unaudited) Schedule of Investments as of November 30, 1998. (unaudited) Notes to Financial Statements. F-1<PAGE> JOHN HANco*ck BOND TRUST PART C. OTHER INFORMATIONItem. 23. Exhibits:The exhibits to this Registration Statement are listed in the Exhibit Indexhereto and are incorporated herein by reference.Item 24. Persons Controlled by or under Common Control with Registrant.No person is directly or indirectly controlled by or under common control withRegistrant.Item. 25. Indemnification.Indemnification provisions relating to the Registrant's Trustees, officers,employees and agents is set forth in Article VII of the Registrant's By Lawsincluded as Exhibit 2 herein.Under Section 12 of the Distribution Agreement, John Hanco*ck Funds, Inc. ("JohnHanco*ck Funds") has agreed to indemnify the Registrant and its Trustees,officers and controlling persons against claims arising out of certain acts andstatements of John Hanco*ck Funds.Section 9(a) of the By-Laws of John Hanco*ck Mutual Life Insurance Company ("theInsurance Company") provides, in effect, that the Insurance Company will,subject to limitations of law, indemnify each present and former director,officer and employee of the Insurance Company who serves as a Trustee or officerof the Registrant at the direction or request of the Insurance Company againstlitigation expenses and liabilities incurred while acting as such, except thatsuch indemnification does not cover any expense or liability incurred or imposedin connection with any matter as to which such person shall be finallyadjudicated not to have acted in good faith in the reasonable belief that hisaction was in the best interests of the Insurance Company. In addition, no suchperson will be indemnified by the Insurance Company in respect of any finaladjudication unless such settlement shall have been approved as in the bestinterests of the Insurance Company either by vote of the Board of Directors at ameeting composed of directors who have no interest in the outcome of such vote,or by vote of the policyholders. The Insurance Company may pay expenses incurredin defending an action or claim in advance of its final disposition, but onlyupon receipt of an undertaking by the person indemnified to repay such paymentif he should be determined not to be entitled to indemnification.Article IX of the respective By-Laws of John Hanco*ck Funds and John Hanco*ckAdvisers, Inc. ("the Adviser") provide as follows: C-1<PAGE>"Section 9.01. Indemnity. Any person made or threatened to be made a party toany action, suit or proceeding, whether civil, criminal, administrative orinvestigative, by reason of the fact that he is or was at any time since theinception of the Corporation a director, officer, employee or agent of theCorporation or is or was at any time since the inception of the Corporationserving at the request of the Corporation as a director, officer, employee oragent of another corporation, partnership, joint venture, trust or otherenterprise, shall be indemnified by the Corporation against expenses (includingattorney's fees), judgments, fines and amounts paid in settlement actually andreasonably incurred by him in connection with such action, suit or proceeding ifhe acted in good faith and the liability was not incurred by reason of grossnegligence or reckless disregard of the duties involved in the conduct of hisoffice, and expenses in connection therewith may be advanced by the Corporation,all to the full extent authorized by the law.""Section 9.02. Not Exclusive; Survival of Rights: The indemnification providedby Section 9.01 shall not be deemed exclusive of any other right to which thoseindemnified may be entitled, and shall continue as to a person who has ceased tobe a director, officer, employee or agent and shall inure to the benefit of theheirs, executors and administrators of such a person."Insofar as indemnification for liabilities under the Securities Act of 1933 (the"Act") may be permitted to Trustees, officers and controlling persons of theRegistrant pursuant to the Registrant's Declaration of Trust and By-Laws of JohnHanco*ck Funds, the Adviser, or the Insurance Company or otherwise, theRegistrant has been advised that in the opinion of the Securities and ExchangeCommission such indemnification is against policy as expressed in the Act andis, therefore, unenforceable. In the event that a claim for indemnificationagainst such liabilities (other than the payment by the Registrant in thesuccessful defense of any action, suit or proceeding) is asserted by suchTrustee, officer or controlling person in connection with the securities beingregistered, the Registrant will, unless in the opinion of its counsel the matterhas been settled by controlling precedent, submit to a court of appropriatejurisdiction the question whether indemnification by it is against public policyas expressed in the Act and will be governed by the final adjudication of suchissue.Item 26. Business and Other Connections of Investment Advisers.For information as to the business, profession, vocation or employment of asubstantial nature of each of the officers and Directors of the Adviser,reference is made to Form ADV (801-8124) filed under the Investment Advisers Actof 1940, which is incorporated herein by reference.Item 27. Principal Underwriters.(a) John Hanco*ck Funds acts as principal underwriter for the Registrant and alsoserves as principal underwriter or distributor of shares for John Hanco*ck CashReserve, Inc., John Hanco*ck Bond Trust, John Hanco*ck Current Interest, JohnHanco*ck Series Trust, John Hanco*ck Tax-Free Bond Trust, John Hanco*ck CaliforniaTax-Free Income Fund, John Hanco*ck Capital Series, John Hanco*ck Special EquitiesFund, John Hanco*ck Sovereign Bond Fund, John Hanco*ck Tax-Exempt Series, JohnHanco*ck Strategic Series, John Hanco*ck World Fund, John Hanco*ck InvestmentTrust, John Hanco*ck Institutional Series Trust, John Hanco*ck Investment Trust IIand John Hanco*ck Investment Trust III. C-2<PAGE>(b) The following table lists, for each director and officer of John Hanco*ckFunds, the information indicated.<TABLE><CAPTION> Name and Principal Positions and Offices Positions and Offices Business Address with Underwriter with Registrant ---------------- ---------------- --------------- <S> <C> <C>Edward J. Boudreau, Jr. Director, Chairman, Trustee, Chairman, and 101 Huntington Avenue President and Chief Chief Executive OfficerBoston, Massachusetts Executive OfficerAnne C. Hodsdon Director, Executive Vice Trustee, President, Chief Investment101 Huntington Avenue President Officer and Chief Operating OfficerBoston, MassachusettsRobert H. Watts Director, Executive Vice NoneJohn Hanco*ck Place President and Chief P.O. Box 111 Compliance OfficerBoston, MassachusettsOsbert M. Hood Senior Vice President and None101 Huntington Avenue Chief Financial OfficerBoston, MassachusettsDavid A. King Director None380 Stuart StreetBoston, MassachusettsRichard O. Hansen Senior Vice President None101 Huntington AvenueBoston, MassachusettsJohn A. Morin Vice President and Vice President101 Huntington Avenue SecretaryBoston, MassachusettsSusan S. Newton Vice President Vice President and 101 Huntington Avenue SecretaryBoston, Massachusetts</TABLE> C-3<PAGE><TABLE><CAPTION> Name and Principal Positions and Offices Positions and Offices Business Address with Underwriter with Registrant ---------------- ---------------- --------------- <S> <C> <C>Stephen L. Brown Director NoneJohn Hanco*ck PlaceP.O. Box 111Boston, MassachusettsThomas E. Moloney Director NoneJohn Hanco*ck PlaceP.O. Box 111Boston, MassachusettsJeanne M. Livermore Director NoneJohn Hanco*ck PlaceP.O. Box 111Boston, MassachusettsRichard S. Scipione Director TrusteeJohn Hanco*ck PlaceP.O. Box 111Boston, MassachusettsJohn M. DeCiccio Director NoneJohn Hanco*ck PlaceP.O. Box 111Boston, MassachusettsFoster L. Aborn Director NoneJohn Hanco*ck PlaceP.O. Box 111Boston, MassachusettsDavid F. D'Alessandro Director NoneJohn Hanco*ck PlaceP.O. Box 111Boston, MassachusettsWilliam C. Fletcher Director None53 State StreetBoston, Massachusetts</TABLE> C-4<PAGE><TABLE><CAPTION> Name and Principal Positions and Offices Positions and Offices Business Address with Underwriter with Registrant ---------------- ---------------- --------------- <S> <C> <C>James V. Bowhers President None101 Huntington AvenueBoston, MassachusettsAnthony P. Petrucci Executive Vice President None101 Huntington AvenueBoston, MassachusettsCharles H. Womack Senior Vice President None6501 Americas ParkwaySuite 950Albuquerque, New Mexico*kathleen M. Graveline Senior Vice President NoneJohn Hanco*ck PlaceP.O. Box 111Boston, Massachusetts Keith Hartstein Senior Vice President None101 Huntington AvenueBoston, MassachusettsPeter Mawn Senior Vice President NoneJohn Hanco*ck PlaceP.O. Box 111Boston, MassachusettsJ. William Bennintende Vice President None101 Huntington AvenueBoston, MassachusettsKaren F. Walsh Vice President None101 Huntington AvenueBoston, MassachusettsGary Cronin Vice President None101 Huntington AvenueBoston, MassachusettsKristine Pancare Vice President None101 Huntington AvenueBoston, MassachusettsRenee M. Humphrey Vice President None101 Huntington AvenueBoston, Massachusetts</TABLE> C-5<PAGE>(c) None.Item 28. Location of Accounts and Records. The Registrant maintains the records required to be maintained by it under Rules 31a-1 (a), 31a-a(b), and 31a-2(a) under the Investment Company Act of 1940 at its principal executive offices at 101 Huntington Avenue, Boston Massachusetts 02199-7603. Certain records, including records relating to Registrant's shareholders and the physical possession of its securities, may be maintained pursuant to Rule 31a-3 at the main office of Registrant's Transfer Agent and Custodian.Item 29. Management Services. Not applicable.Item 30. Undertakings. Not applicable C-6<PAGE> SIGNATURESPursuant to the requirements of the Securities Act of 1933 and the InvestmentCompany Act of 1940, the Registrant certifies that it meets all the requirementsfor effectiveness of this Registration Statement pursuant to Rule 485(b) underthe Securities and Exchange Act of 1933 and has duly caused this RegistrationStatement to be signed on its behlaf by the undersigned, thereto dulyauthorized, in the City of Boston, and The Commonwealth of Massachusetts on the26th day of March, 1999. JOHN HANco*ck BOND TRUST By: * ----------------------------- Edward J. Boudreau, Jr. Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, thisRegistration Statement has been signed below by the following persons in thecapacities and on the dates indicated.<TABLE><CAPTION> Signature Title Date --------- ----- ---- <S> <C> <C> * Chairman and Chief Executive March 26, 1999 - ----------------------- Officer (Principal Executive Officer) Edward J. Boudreau, Jr. /s/James J. Stokowski Senior Vice President, Treasurer - ------------------ and Chief Accounting Officer James J. Stokowski *- ---------------------------- TrusteeStephen L. Brown * Trustee - ---------------------------- James F. Carlin * Trustee - ---------------------------- William H. Cunningham * Trustee - ---------------------------- Ronald R. Dion * Trustee - ---------------------------- Harold R. Hiser, Jr. * Trustee - ---------------------------- Anne C. Hodsdon </TABLE> C-7<PAGE> Signature Title Date --------- ----- ---- *- ---------------------------- TrusteeCharles L. Ladner *- ---------------------------- TrusteeLeo E. Linbeck, Jr. *- ---------------------------- TrusteeSteven R. Pruchansky *- ---------------------------- TrusteeRichard S. Scipione *- ---------------------------- TrusteeNorman H. Smith *- ---------------------------- TrusteeJohn P. Toolan By: /s/Susan S. Newton March 26, 1999 ------------------ Susan S. Newton, Attorney-in-Fact, under Powers of Attorney dated Filed herewith. C-8<PAGE> POWER OF ATTORNEY The undersigned Trustee of John Hanco*ck Bank and Thrift OpportunityFund, John Hanco*ck Bond Trust, John Hanco*ck California Tax-Free Income Fund,John Hanco*ck Current Interest, John Hanco*ck Institutional Series Trust, JohnHanco*ck Investment Trust, John Hanco*ck Patriot Global Dividend Fund, JohnHanco*ck Patriot Preferred Dividend Fund, John Hanco*ck Patriot Premium DividendFund I, John Hanco*ck Patriot Premium Dividend Fund II, John Hanco*ck PatriotSelect Dividend Trust, John Hanco*ck Series Trust, and John Hanco*ck Tax-Free BondTrust, (each a "Trust"), and Director of John Hanco*ck Cash Reserve, Inc., (a"Corporation") does hereby severally constitute and appoint Edward J. Boudreau,Jr., Susan S. Newton, and James J. Stokowski, and each acting singly, to be mytrue, sufficient and lawful attorneys, with full power to each of them, and eachacting singly, to sign for me, in my name and in the capacity indicated below,any Registration Statement on Form N-1A and any Registration Statement on FormN-14 to be filed by the Trust or the Corporation under the Investment CompanyAct of 1940, as amended ( the "1940 Act"), and under the Securities Act of 1933,as amended (the "1933 Act"), and any and all amendments to said RegistrationStatements, with respect to the offering of shares and any and all otherdocuments and papers relating thereto, and generally to do all such things in myname and on my behalf in the capacity indicated to enable the Trust orCorporation to comply with the 1940 Act and the 1933 Act, and all requirementsof the Securities and Exchange Commission thereunder, hereby ratifying andconfirming my signature as it may be signed by said attorneys or each of them toany such Registration Statements and any and all amendments thereto. IN WITNESS WHEREOF, I have hereunder set my hand on this Instrument asof the 1st day of January, 1999./s/James F. Carlin /s/Leo E. Linbeck- ------------------ -----------------Jams F. Carlin, Trustee Leo E. Linbeck, Jr., Trustee/s/William H. Cunningham /s/Steven R. Pruchansky- ------------------------ -----------------------William H. Cunningham, Trustee Steven R. Pruchansky, Trustee/s/Ronald R. Dion /s/Norman H. Smith- ----------------- ------------------Ronald R. Dion, Trustee Norman H. Smith, Trustee/s/Harold R. Hiser /s/John P. Toolan- ------------------ -----------------Harold R. Hiser, Jr., Trustee John P. Toolan, Trustee/s/Charles L. Ladner- --------------------Charles L. Ladner, Trustees:corpsecty:trustees\pwrattypanel B<PAGE> POWER OF ATTORNEY The undersigned Trustee of John Hanco*ck Bank and Thrift OpportunityFund, John Hanco*ck Bond Trust, John Hanco*ck California Tax-Free Income Fund,John Hanco*ck Capital Series, John Hanco*ck Current Interest, John Hanco*ckDeclaration Trust, John Hanco*ck Income Securities Trust, John Hanco*ckInstitutional Series Trust, John Hanco*ck Investment Trust, John Hanco*ckInvestment Trust II, John Hanco*ck Investment Trust III, John Hanco*ck InvestorsTrust, John Hanco*ck Patriot Global Dividend Fund, John Hanco*ck Patriot PreferredDividend Fund, John Hanco*ck Patriot Premium Dividend Fund I, John Hanco*ckPatriot Premium Dividend Fund II, John Hanco*ck Patriot Select Dividend Trust,John Hanco*ck Series Trust, John Hanco*ck Sovereign Bond Fund, John Hanco*ckSpecial Equities Fund, John Hanco*ck Strategic Series, John Hanco*ck Tax-ExemptSeries Fund, John Hanco*ck Tax-Free Bond Trust, and John Hanco*ck World Fund,(each a "Trust"), and Director of John Hanco*ck Cash Reserve, Inc., (a"Corporation") does hereby severally constitute and appoint Edward J. Boudreau,Jr., Susan S. Newton, and James J. Stokowski, and each acting singly, to be mytrue, sufficient and lawful attorneys, with full power to each of them, and eachacting singly, to sign for me, in my name and in the capacity indicated below,any Registration Statement on Form N-1A and any Registration Statement on FormN-14 to be filed by the Trust or the Corporation under the Investment CompanyAct of 1940, as amended ( the "1940 Act"), and under the Securities Act of 1933,as amended (the "1933 Act"), and any and all amendments to said RegistrationStatements, with respect to the offering of shares and any and all otherdocuments and papers relating thereto, and generally to do all such things in myname and on my behalf in the capacity indicated to enable the Trust orCorporation to comply with the 1940 Act and the 1933 Act, and all requirementsof the Securities and Exchange Commission thereunder, hereby ratifying andconfirming my signature as it may be signed by said attorneys or each of them toany such Registration Statements and any and all amendments thereto. IN WITNESS WHEREOF, I have hereunder set my hand on this Instrument asof the 1st day of January, 1999./s/Anne C. Hodsdon- ------------------Anne C. Hodsdon, Trustee/s/Richard S. Scipione- ----------------------Richard S. Scipione, Trustees:corpsecty:trustees\pwrattypanelsAB<PAGE> POWER OF ATTORNEY The undersigned Trustee of John Hanco*ck Bank and Thrift OpportunityFund, John Hanco*ck Bond Trust, John Hanco*ck California Tax-Free Income Fund,John Hanco*ck Capital Series, John Hanco*ck Current Interest, John Hanco*ckDeclaration Trust, John Hanco*ck Income Securities Trust, John Hanco*ckInstitutional Series Trust, John Hanco*ck Investment Trust, John Hanco*ckInvestment Trust II, John Hanco*ck Investment Trust III, John Hanco*ck InvestorsTrust, John Hanco*ck Patriot Global Dividend Fund, John Hanco*ck Patriot PreferredDividend Fund, John Hanco*ck Patriot Premium Dividend Fund I, John Hanco*ckPatriot Premium Dividend Fund II, John Hanco*ck Patriot Select Dividend Trust,John Hanco*ck Series Trust, John Hanco*ck Sovereign Bond Fund, John Hanco*ckSpecial Equities Fund, John Hanco*ck Strategic Series, John Hanco*ck Tax-ExemptSeries Fund, John Hanco*ck Tax-Free Bond Trust, and John Hanco*ck World Fund,(each a "Trust"), and Director of John Hanco*ck Cash Reserve, Inc., (a"Corporation") does hereby severally constitute and appoint Susan S. Newton, andJames J. Stokowski, and each acting singly, to be my true, sufficient and lawfulattorneys, with full power to each of them, and each acting singly, to sign forme, in my name and in the capacity indicated below, any Registration Statementon Form N-1A and any Registration Statement on Form N-14 to be filed by theTrust or the Corporation under the Investment Company Act of 1940, as amended (the "1940 Act"), and under the Securities Act of 1933, as amended (the "1933Act"), and any and all amendments to said Registration Statements, with respectto the offering of shares and any and all other documents and papers relatingthereto, and generally to do all such things in my name and on my behalf in thecapacity indicated to enable the Trust or Corporation to comply with the 1940Act and the 1933 Act, and all requirements of the Securities and ExchangeCommission thereunder, hereby ratifying and confirming my signature as it may besigned by said attorneys or each of them to any such Registration Statements andany and all amendments thereto. IN WITNESS WHEREOF, I have hereunder set my hand on this Instrument asof the 1st day of January, 1999./s/Edward J. Boudreau, Jr.- --------------------------Edward J. Boudreau, Jr., Trustees:corpsecty:trustees\pwrtyattypanelsAB EJB<PAGE> POWER OF ATTORNEY ----------------- The undersigned Trustee of John Hanco*ck Bank and Thrift OpportunityFund, John Hanco*ck Bond Trust, John Hanco*ck California Tax-Free Income Fund,John Hanco*ck Capital Series, John Hanco*ck Current Interest, John Hanco*ckDeclaration Trust, John Hanco*ck Income Securities Trust, John Hanco*ckInstitutional Series Trust, John Hanco*ck Investment Trust, John Hanco*ckInvestment Trust II, John Hanco*ck Investment Trust III, John Hanco*ck InvestorsTrust, John Hanco*ck Patriot Global Dividend Fund, John Hanco*ck Patriot PreferredDividend Fund, John Hanco*ck Patriot Premium Dividend Fund I, John Hanco*ckPatriot Premium Dividend Fund II, John Hanco*ck Patriot Select Dividend Trust,John Hanco*ck Series Trust, John Hanco*ck Sovereign Bond Fund, John Hanco*ckSpecial Equities Fund, John Hanco*ck Strategic Series, John Hanco*ck Tax-ExemptSeries Fund, John Hanco*ck Tax-Free Bond Trust, and John Hanco*ck World Fund,(each a "Trust"), does hereby severally constitute and appoint Edward J.Boudreau, Jr., Susan S. Newton, and James J. Stokowski, and each acting singly,to be my true, sufficient and lawful attorneys, with full power to each of them,and each acting singly, to sign for me, in my name and in the capacity indicatedbelow, any Registration Statement on Form N-1A and any Registration Statement onForm N-14 to be filed by the Trust or the Corporation under the InvestmentCompany Act of 1940, as amended ( the "1940 Act"), and under the Securities Actof 1933, as amended (the "1933 Act"), and any and all amendments to saidRegistration Statements, with respect to the offering of shares and any and allother documents and papers relating thereto, and generally to do all such thingsin my name and on my behalf in the capacity indicated to enable the Trust orCorporation to comply with the 1940 Act and the 1933 Act, and all requirementsof the Securities and Exchange Commission thereunder, hereby ratifying andconfirming my signature as it may be signed by said attorneys or each of them toany such Registration Statements and any and all amendments thereto. IN WITNESS WHEREOF, I have hereunder set my hand on this Instrument asof the 17th day of March, 1999. /s/Stephen L Brown ------------------ Stephen L. Brown, Trustee<PAGE> John Hanco*ck Bond Trust (File no. 2-66906) INDEX TO EXHIBITS99.(a) Articles of Incorporation. Amended and Restated Declaration of Trust dated 7/1/96.**99.(a).1 Amendment of Section 5.11 and Establishment and Designation of class C shares of Beneficial Interest of High Yield Bond Fund dated March 10, 1998.+99.(a).2 Amendment of Section 5.11 and Establishment and Designation of Class C shares of Beneficial Interest of Government Income and Intermediate Government dated December 8, 1998.+99.(b) By-Laws. Amended and Restated By-Laws dated November 19, 1996.***99.(c) Instruments Defining Rights of Security Holders. See Exhibit 99.(a) and 99.(b).99.(d) Investment Advisory Contracts. Investment Advisory Agreement between John Hanco*ck Advisers, Inc. and the Registrant on behalf of John Hanco*ck Intermediate Maturity Government Fund.*99.(d).1 Investment Management Contract between John Hanco*ck Advisers, Inc. and the Registrant on behalf of John Hanco*ck Government Income Fund and John Hanco*ck Yield Bond Fund dated August 30, 1996.***99.(e) Underwriting Contracts. Distribution Agreement between John Hanco*ck Broker Distribution Services, Inc. and the Registrant.*99.(e).1 Form of soliciting Dealer Agreement between John Hanco*ck Funds, Inc. and the John Hanco*ck funds.+99.(e).2 Form of Financial Institution Sales and Service Agreement between John Hanco*ck Funds, Inc. and the John Hanco*ck funds.*99.(e).3 Amendment to Distribution Agreement dated August 30, 1996.***99.(f) Bonus or Profit Sharing Contracts. Not Applicable.99.(g) Custodian Agreements. Master Custodian Agreement between the John Hanco*ck Funds and Investors Bank & Trust Company dated December 15, 1992.*99.(h) Other Material Contracts. Amended and Restated Master Transfer Agency and Service Agreement between John Hanco*ck funds and John Hanco*ck Signature Services, Inc. dated June 1, 1998.****99.(i) Legal Opinion. Not Applicable.99.(j) Other Opinions. Auditors Consent.+99.(k) Omitted Financial Statements. Not Applicable.99.(l) Initial Capital Agreements. Not Applicable.99.(m) Rule 12b-1 Plan. Rule 12b-1 Plans for Class A and Class B Shares for John Hanco*ck Intermediate Maturity Government Fund dated December 22, 1994.*99.(m).1 Rule 12b-1 Plans for Class A and Class B Shares for John Hanco*ck High Yield Bond Fund dated August 30, 1996.***99.(m).2 Rule 12b-1 Plans for Class A and Class B Shares for John Hanco*ck Government Income Fund dated August 30, 1996.***99.(m).3 Rule 12b-1 Plan for Class C shares for John Hanco*ck High Yield Bond Fund dated May 1, 1998.+<PAGE>Financial Data Schedule. Government Income-Annual Government Income-Semiannual High Yield Total Return Fund-Annual High Yield Total Return Fund-Semiannual Intermediate Maturity Government-Annual Intermediate Maturity Government-Semiannual99.(o) John Hanco*ck Funds Class A, Class B and Class C amended and restated Multiple Class Plan pursuant to Rule 18f-3 for John Hanco*ck Bond Trust Fund.***** Previously filed electronically with Registration Statement and/or post-effective amendment no. 30, file nos. 811-03006 and 2-66906 on May 15, 1995, accession number 0000950135-95-001202.** Previously filed electronically with Registration Statements and/or post-effective amendment no. 35 file nos. 811-03006 and 2-66906 on August 28, 1996, accession number 0001010521-96-000148.*** Previously filed electronically with post-effective amendment number 36 (file nos. 811-3006 and 2-66906) on February 28, 1997, accession number 0001010521-97-000232.**** Previously filed electronically with post-effective amendment number 41 (file nos. 811-3006 and 2-66906) on July 6, 1998, accession number 0001010521-98-000288. + Filed herewith.

ESTABLISHMENT AND DESIGNATION

JOHN HANco*ck BOND TRUST John Hanco*ck High Yield Bond Fund Amendment of Section 5.11 and Establishment and Designation of Class C Shares of Beneficial Interest of John Hanco*ck High Yield Bond Fund, a Series of John Hanco*ck Bond Trust Amendment of Section 5.11 The undersigned, being a majority of the Trustees of John Hanco*ck BondTrust, a Massachusetts business trust (the "Trust"), acting pursuant to Section8.3 of the Amended and Restated Declaration of Trust dated July 1, 1996, asamended from time to time (the "Declaration of Trust"), do hereby amend Section5.11 as follows: 1. Section 5.11 (a) shall be deleted and replaced with the following: Without limiting the authority of the Trustees set forth in Section 5.1 to establish and designate any further Series or Classes, the Trustees hereby establish the following Series, each of which consists of Class A Shares and Class B Shares: John Hanco*ck Government Income Fund, John Hanco*ck High Yield Bond Fund, and John Hanco*ck Intermediate Maturity Government Fund (the "Existing Series"). Establishment and Designation of Class C Shares The undersigned, being a majority of the Trustees of John Hanco*ck BondTrust, a Massachusetts business trust (the "Trust"), acting pursuant to Sections5.1 and 5.11 of the Amended and Restated Declaration of Trust dated July 1,1996, as amended from time to time (the "Declaration of Trust"), do herebyestablish and designate an additional class of shares of John Hanco*ck High YieldBond Fund (the "Fund") as follows: 1. The additional class of Shares of the Fund established and designated hereby is "Class C Shares". 2. Class C Shares shall be entitled to all of the rights and preferences accorded to Shares under the Declaration of Trust. 3. The purchase price of Class C Shares, the method of determining the net asset value of Class C Shares, and the relative dividend rights of holders of Class C Shares shall be established by the Trustees of the Trust in accordance with the provisions of the Declaration of Trust and shall be as set forth in the Prospectus and Statement of Additional Information of the Fund included in the Trust's Registration Statement, as amended from time to time, under the Securities Act of 1933, as amended and/or the Investment Company Act of 1940, as amended.<PAGE> The Declaration of Trust is hereby amended to the extent necessary toreflect the amendment of Section 5.11 and the establishment of an additionalclass of Shares, effective May 1, 1998. Capitalized terms not otherwise defined herein shall have the meaningsset forth in the Declaration of Trust. IN WITNESS WHEREOF, the undersigned have executed this instrument onthe 10th day of March 1998./s/Edward J. Boudreau, Jr. s/ Leo E. Linbeck, Jr.- -------------------------- ----------------------Edward J. Boudreau, Jr. Leo E. Linbeck, Jr./s/James F. Carlin /s/Steven R. Pruchansky- ------------------ -----------------------James F. Carlin Steven R. Pruchansky/s/William H. Cunningham - ------------------------ -----------------William H. Cunningham Richard S. Scipione/s/Harold R. Hiser, Jr. s/Norman H. Smith- ----------------------- -----------------Harold R. Hiser, Jr. Norman H. Smith/s/Anne C. Hodsdon /s/John P. Toolan- ------------------ -----------------Anne C. Hodsdon John P. Toolan/s/Charles L. Ladner- --------------------Charles L. Ladner The Declaration of Trust, a copy of which, together with all amendmentsthereto, is on file in the office of the Secretary of State of The Commonwealthof Massachusetts, provides that no Trustee, officer, employee or agent of theTrust or any Series thereof shall be subject to any personal liabilitywhatsoever to any Person, other than to the Trust or its shareholders, inconnection with Trust Property or the affairs of the Trust, save only thatarising from bad faith, willful misfeasance, gross negligence or recklessdisregard of his/her duties with respect to such Person; and all such Personsshall look solely to the Trust Property, or to the Trust Property of one or morespecific Series of the Trust if the claim arises from the conduct of suchTrustee, officer, employee or agent with respect to only such Series, forsatisfaction of claims of any nature arising in connection with the affairs ofthe Trust.<PAGE>STATE OF FLORIDA ) )ssCOUNTY OF PASCO ) Then personally appeared the above-named Edward J. Boudreau, Jr., JamesF. Carlin, William H. Cunningham, Charles F. Fretz, Harold R. Hiser, Jr., AnneC. Hodsdon, Charles L. Ladner, Leo E. Linbeck, Jr., Patricia P. McCarter, StevenR. Pruchansky, Richard S. Scipione, Norman H. Smith, and John P. Toolan, whoacknowledged the foregoing instrument to be his or her free act and deed, beforeme, this 10th day of March, 1998. /s/ Michele N. Jones -------------------- Notary Public My Commission Expires: 8/25/00s:\dectrust\amendmts\98bond.doc

ESTABLISHMENT AND DESIGNATION

JOHN HANco*ck BOND TRUST John Hanco*ck Government Income Fund John Hanco*ck Intermediate Maturity Government Fund Amendment of Section 5.11 and Establishment and Designation of Class C Shares of Beneficial Interest of John Hanco*ck Government Income Fund, and John Hanco*ck Intermediate Maturity Government Fund, each a Series of John Hanco*ck Bond Trust Amendment of Section 5.11 The undersigned, being a majority of the Trustees of John Hanco*ck BondTrust, a Massachusetts business trust (the "Trust"), acting pursuant to Section8.3 of the Amended and Restated Declaration of Trust dated July 1, 1996, asamended from time to time, do hereby amend Section 5.11, effective April 1,1999, as follows: 1. Section 5.11 (a) shall be deleted and replaced with the following: Without limiting the authority of the Trustees set forth in Section 5.1 to establish and designate any further Series or Classes, the Trustees hereby establish the following Series, each of which consists of Class A Shares, Class B Shares, and Class C Shares: John Hanco*ck Government Income Fund, John Hanco*ck High Yield Bond Fund, and John Hanco*ck Intermediate Maturity Government Fund (the "Existing Series"). Establishment and Designation of Class C Shares The undersigned, being a majority of the Trustees of John Hanco*ck BondTrust, a Massachusetts business trust (the "Trust"), acting pursuant to Sections5.1 and 5.11 of the Amended and Restated Declaration of Trust dated July 1,1996, as amended from time to time (the "Declaration of Trust"), do herebyestablish and designate an additional class of shares of John Hanco*ck GovernmentIncome Fund and John Hanco*ck Intermediate Maturity Government Fund (the"Funds"), effective April 1, 1999, as follows: 1. The additional class of Shares of the Funds established and designated hereby is "Class C Shares". 2. Class C Shares shall be entitled to all of the rights and preferences accorded to Shares under the Declaration of Trust. 3. The purchase price of Class C Shares, the method of determining the net asset value of Class C Shares, and the relative dividend rights of holders of Class C Shares shall be established by the Trustees of the Trust in accordance with the provisions of the Declaration of Trust and shall be as set forth in the Prospectus and Statement of Additional Information of the Funds included in the Trust's Registration Statement, as amended from time to time, under the Securities Act of 1933, as amended and/or the Investment Company Act of 1940, as amended.<PAGE> The Declaration of Trust is hereby amended to the extent necessary toreflect the amendment of Section 5.11 and the establishment of an additionalclass of Shares, effective April 1, 1999. Capitalized terms not otherwise defined herein shall have the meaningsset forth in the Declaration of Trust. IN WITNESS WHEREOF, the undersigned have executed this instrument onthe 8th day of December 1998./s/Edward J. Boudreau, Jr. /s/Charles L. Ladner- -------------------------- --------------------Edward J. Boudreau, Jr. Charles L. Ladner/s/James F. Carlin - ------------------ ---------------James F. Carlin Leo E. Linbeck, Jr./s/William H. Cunningham /s/Steven R. Pruchansky- ------------------------ -----------------------William H. Cunningham Steven R. Pruchansky/s/Ronald R. Dion /s/Richard S. Scipione- ----------------- ----------------------Ronald R. Dion Richard S. Scipione/s/Harold R. Hiser, Jr. /s/Norman H. Smith- ----------------------- ------------------Harold R. Hiser, Jr. Norman H. Smith/s/Anne C. Hodsdon /s/John P. Toolan- ------------------ -----------------Anne C. Hodsdon John P. Toolan The Declaration of Trust, a copy of which, together with all amendmentsthereto, is on file in the office of the Secretary of State of The Commonwealthof Massachusetts, provides that no Trustee, officer, employee or agent of theTrust or any Series thereof shall be subject to any personal liabilitywhatsoever to any Person, other than to the Trust or its shareholders, inconnection with Trust Property or the affairs of the Trust, save only thatarising from bad faith, willful misfeasance, gross negligence or recklessdisregard of his/her duties with respect to such Person; and all such Personsshall look solely to the Trust Property, or to the Trust Property of one or morespecific Series of the Trust if the claim arises from the conduct of suchTrustee, officer, employee or agent with respect to only such Series, forsatisfaction of claims of any nature arising in connection with the affairs ofthe Trust.<PAGE>COMMONWEALTH OF MASSACHUSETTS ) )ssCOUNTY OF SUFFOLK ) Then personally appeared the above-named Edward J. Boudreau, Jr., JamesF. Carlin, William H. Cunningham, Ronald R. Dion, Harold R. Hiser, Jr., Anne C.Hodsdon, Charles L. Ladner, Steven R. Pruchansky, Richard S. Scipione, Norman H.Smith, and John P. Toolan, who acknowledged the foregoing instrument to be hisor her free act and deed, before me, this 8th day of December, 1998. /s/Ann Marie White ------------------ Notary Public My Commission Expires:10/20/00s:\dectrust\amendmts\bond\establishclassc.doc

DEALER AGREEMENT

Selling Agreement [JOHN HANco*ck LOGO] John Hanco*ck Funds, Inc. Boston Massachusetts 02199-7603<PAGE> John Hanco*ck Funds, Inc. 101 Huntington Avenue Boston, MA 02199-7603 Selling Agreement John Hanco*ck Funds, Inc. ("the Distributor" or "Distributor," "we" or "us")is the principal distributor of the shares of beneficial interest (the"securities") of each of the John Hanco*ck Funds, (the "Funds"). Such Funds arethose listed on Schedule A hereto which may be amended or supplemented from timeto time by the Distributor to include additional Funds for which the Distributoris the principal distributor. You represent that you are a member of theNational Association of Securities Dealers, Inc. (the "NASD"), and, accordingly,we invite you to become a non-exclusive soliciting dealer to distribute thesecurities of the Funds and you agree to solicit orders for the purchase of thesecurities on the following terms. Securities are offered pursuant to eachFund's prospectus and statement of additional information, as such prospectusand statement of additional information may be amended from time to time. To theextent that the prospectus or statement of additional information containsprovisions that are inconsistent with the terms of this Agreement, the terms ofthe prospectus or statement of additional information shall be controlling.Offerings1. You agree to abide by the Conduct Rules of the NASD and to all other rulesand regulations that are now or may become applicable to transactions hereunder,including state and federal rules plus John Hanco*ck Funds administrativeprocedures.2. As principal distributor of the Funds, we shall have full authority to takesuch action as we deem advisable in respect of all matters pertaining to thedistribution. This offer of shares of the Funds to you is made only in suchjurisdictions in which we may lawfully sell such shares of the Funds.3. You shall not make any representation concerning the Funds or theirsecurities except those contained in the then-current prospectus or statement ofadditional information for each Fund.4. With the exception of listings of product offerings, you agree not to furnishor cause to be furnished to any person or display or publish any information ormaterials relating to any Fund (including, without limitation, promotionalmaterials, sales literature, advertisem*nts, press releases, announcements,posters, signs and other similar materials), except such information andmaterials as may be furnished to you by the Distributor or the Fund. All othermaterials must receive written approval by the Distributor before distributionor display to the public. Use of all approved advertising and sales literaturematerials is restricted to appropriate distribution channels.5. You are not authorized to act as our agent. Nothing shall constitute you as asyndicate, association, joint venture, partnership, unincorporated business orother separate entity or otherwise partners with us, but you shall be liable foryour proportionate share of any tax, liability or expense based on any claimarising from the sale of shares of the Funds under this Agreement. We shall notbe under any liability to you, except for obligations expressly assumed by us inthis Agreement and liabilities under Section 11(f) of the Securities Act of1933, and no obligations on our part shall be implied or inferred.6. Dealer Compliance/Suitability Standards - Certain mutual funds distributed bythe Distributor are being offered with two or more classes of shares of the sameinvestment portfolio ("Fund") - refer to each Fund prospectus for availabilityand details. It is essential that the following minimum compliance/suitabilitystandards be adhered to in offering and selling shares of these Funds toinvestors. All dealers offering shares of the Funds and their associated personsagree to comply with these general suitability and compliance standards. <PAGE>Suitability With two classes of shares of certain funds available to individualinvestors, it is important that each investor purchases not only the fund thatbest suits his or her investment objective but also the class of shares thatoffers the most beneficial distribution financing method for the investor basedupon his or her particular situation and preferences. Fund share recommendationsand orders must be carefully reviewed by you and your registered representativesin light of all the facts and circ*mstances, to ascertain that the class ofshares to be purchased by each investor is appropriate and suitable. Theserecommendations should be based on several factors, including but not limitedto: (a) the amount of money to be invested initially and over a period of time; (b) the current level of sales loads imposed by the Fund; (c) the period of time over which the client expects to retain the investment; (d) the anticipated level of yield from fixed income funds; (e) any other relevant circ*mstances such as the availability of reduced sales charges under letters of intent and/or rights of accumulation. There are instances when one distribution financing method may be moreappropriate than another. For example, shares subject to a front-end salescharge may be more appropriate than shares subject to a contingent deferredsales charge for large investors who qualify for a significant quantity discounton the front-end sales charge. In addition, shares subject to a contingentdeferred sales charge may be more appropriate for investors whose orders wouldnot qualify for quantity discounts and who, therefore, may prefer to defer salescharges, and also for investors who determine it to be advantageous to have allof their funds invested without deduction of a front-end sales commission.However, if it is anticipated that an investor may redeem his or her shareswithin a short period of time, the investor may, depending on the amount of hisor her purchase, bear higher distribution expenses by purchasing shares subjectto a CDSC than if he or she had purchased shares subject to a front-end salescharge.Compliance Your supervisory procedures should be adequate to assure that anappropriate person reviews and approves transactions entered into pursuant tothis Selling Agreement for compliance with the foregoing standards. In certaininstances, it may be appropriate to discuss the purchase with the registeredrepresentatives involved or to review the advantages and disadvantages ofselecting one class of shares over another with the client. The Distributor willnot accept orders for Class B shares in any Fund from you for accountsmaintained in street name. Trades for Class B shares will only be accepted inthe name of the shareholder.7. Other Class Shares - Certain mutual funds distributed by the Distributor maybe offered with Class shares other than A, B and C. Refer to each Fundprospectus for availability and details. Some Class shares are designed forinstitutional investors and qualified benefit plans, including pension funds,and are sold without a sales charge or 12b-1 fee. If a commission is paid to youfor transactions in Class shares other than A, B and C it will be paid by theDistributor out of its own resources.Sales8. Orders for securities received by you from investors will be for the sale ofthe securities at the public offering price, which will be the net asset valueper share as determined in the manner provided in the relevant Fund'sprospectus, as now in effect or as amended from time to time, after receipt byus (or the relevant Fund's transfer agent) of the purchase application andpayment for the securities, plus the relevant sales charges set forth in therelevant Fund's then- current prospectus (the "Public Offering Price"). Theprocedures relating to the handling of orders shall be subject to ourinstructions which we will forward from time to time to you. All orders aresubject to acceptance by us, and we reserve the right in our sole discretion toreject any order. In addition to the foregoing, you acknowledge and agree to the initial andsubsequent investment minimums, which may vary from year to year, as describedin the then-current prospectus for each Fund.9. You agree to sell the securities only (a) to your customers at the publicoffering price then in effect, or (b) back to the Funds at the currently quotednet asset value. No sales may be made to other broker-dealers. <PAGE>10. The amount of sales charge to be reallowed to you (the "Reallowance") as apercentage of the offering price is set forth in the then-current prospectus ofeach Fund. If a sales charge on the purchase is reduced in accordance with theprovisions of the relevant Fund's then-current prospectus pertaining to "Methodsof Obtaining Reduced Sales Charges," the Reallowance shall be reduced pro rata.11. We shall pay a Reallowance subject to the provisions of this agreement asset forth in Schedule B hereto on all purchases made by your customers pursuantto orders accepted by us (a) where an order for the purchase of securities isobtained by a registered representative in your employ and remitted to uspromptly by you, (b) where a subsequent investment is made to an accountestablished by a registered representative in your employ or (c) where asubsequent investment is made to an account established by a broker/dealer otherthan you and is accompanied by a signed request from the account shareholderthat your registered representative receive the Reallowance for that investmentand/or for subsequent investments made in such account. If for any reason, apurchase transaction is reversed, you shall not be entitled to receive or retainany part of the Reallowance on such purchase and shall pay to us on demand infull the amount of the Reallowance received by you in connection with any suchpurchase. We may withhold and retain from the amount of the Reallowance due youa sum sufficient to discharge any amount due and payable by you to us.12. Certain of the Funds have adopted a plan under Investment Company Act Rule12b-1 ("Distribution Plan" as described in the prospectus). To the extent youprovide distribution and marketing services in the promotion of the sale ofshares of these Funds, including furnishing services and assistance to yourcustomers who invest in and own shares of such Funds and including, but notlimited to, answering routine inquiries regarding such Funds and assisting inchanging distribution options, account designations and addresses, you may beentitled to receive compensation from us as set forth in Schedule C hereto. Allcompensation, including 12b-1 fees, shall be payable to you only to the extentthat funds are received and in the possession of the Distributor.13. We will advise you as to the jurisdictions in which we believe the shareshave been qualified for sale under the respective securities laws of suchjurisdictions, but we assume no responsibility or obligations as to your rightto sell the shares of the Funds in any state or jurisdiction.14. Orders may be placed through: John Hanco*ck Funds, Inc. 101 Huntington Avenue Boston, MA 02199-7603 1-800-338-4265Settlement15. Settlements for wire orders shall be made within three business days afterour acceptance of your order to purchase shares of the Funds. Certificates, whenrequested, will be delivered to you upon payment in full of the sum due for thesale of the shares of the Funds. If payment is not so received or made, wereserve the right forthwith to cancel the sale, or, at our option, to liquidatethe shares of the Fund subject to such sale at the then prevailing net assetvalue, in which latter case you will agree to be responsible for any lossresulting to the Funds or to us from your failure to make payments as aforesaid.Indemnification16. The parties to this agreement hereby agree to indemnify and hold harmlesseach other, their officers and directors, and any person who is or may be deemedto be a controlling person of each other, from and against any losses, claims,damages, liabilities or expenses (including reasonable fees of counsel), whetherjoint or several, to which any such person or entity may become subject insofaras such losses, claims, damages, liabilities or expenses (or actions in respectthereof) arise out of or are based upon (a) any untrue statement or allegeduntrue statement of material fact, or any omission or alleged omission to statea material fact made or omitted by it herein, or (b) any willful misfeasance orgross misconduct by it in the performance of its duties and obligationshereunder. <PAGE>17. National Securities Clearing Corporation (NSCC) Indemnity - Shareholder andHouse Accounts - In consideration of the Distributor and John Hanco*ck SignatureServices ("JHSS") liquidating, exchanging and/or transferring unissued shares ofthe Funds for your customers without the use of original or underlyingdocumentation supporting such instructions (e.g., a signed stock power orsignature guarantee), you hereby agree to indemnify the Distributor, InvestorServices and each respective Fund against any losses, including reasonableattorney's fees, that may arise from such liquidation exchange and/or transferof unissued shares upon your direction. This indemnification shall apply only tothe liquidation, exchange and/or transfer of unissued shares in shareholder andhouse accounts executed as wire orders transmitted via the NSCC's Fund/SERVsystem. You represent and warrant to the Funds, the Distributor and InvestorServices that all such transactions shall be properly authorized by yourcustomers. The indemnification in this Section 16 shall not apply to any losses(including attorney's fees) caused by a failure of the Distributor, InvestorServices or a Fund to comply with any of your instructions governing any of theabove transactions, or any negligent act or omission of the Distributor,Investor Services or a Fund, or any of their directors, officers, employees oragents. All transactions shall be settled upon your confirmation through NSCCtransmission to Investor Services.Miscellaneous18. We will supply to you at our expense additional copies of the prospectus andstatement of additional information for each of the Funds and any printedinformation supplemental to such material in reasonable quantities upon request.19. Any notice to you shall be duly given if mailed to you at your address asregistered from time to time with the NASD.20. Miscellaneous provisions, if any, are attached hereto and incorporatedherein by reference.21. In the event your firm is appointed or selected by us to sellinsurance-related securities products, this agreement will be supplemented bySchedule D, which will include the terms, including additional terms, andconditions of the distribution by you of such products, and such Schedule ishereby incorporated herein by reference and made a part of this SellingAgreement. In the case of any conflict between this Selling Agreement and Schedule Dwith respect to insurance-related securities products, Schedule D shallcontrol.22. We reserve the right to reject any order received by us from a broker-dealerthat does not have an existing selling agreement with us. It is yourresponsibility to inform us of all clearing arrangements with broker-dealersordering our funds and to assist us in securing a selling agreement from them orindemnify us for any errors or omissions in the solicitation or ordering of ourfunds.Termination23. This agreement, which shall be construed in accordance with the laws of theCommonwealth of Massachusetts, may be terminated by any party hereto upon athirty (30) day written notice. This agreement may not be assigned except bywritten consent of all the parties. Automatic termination of this agreementoccurs if the dealer: 1.) Files a bankruptcy petition; 2.) Is terminated as anNASD member; 3.) Uses unapproved sales literature; 4.) Is subject toderegistration by state. Discretionary termination: Hanco*ck reserves the right to terminate thisagreement at any time at its sole discretion upon thirty (30) days' notice.Hanco*ck may also suspend payment of commissions for reasonable cause with orwithout notice. <PAGE><TABLE><CAPTION> <S> <C> <C> DATE: ______________________SOLICITING DEALER PROFILE Firm CRD Number: ______________________ -------------------------------------------------- Name of Organization By:__________________________________________________ Authorized Signature of Soliciting Dealer --------------------------------------------------- Please Print or Type Name --------------------------------------------------- Title --------------------------------------------------- Print or Type Address --------------------------------------------------- Telephone Number Mutual Fund Coordinator:_____________________________________ In order to service you efficiently, please provide the following information on your Mutual Funds Operations Department: Operations Manager:_______________________________________________ Order Room Manager:_______________________________________________ Operations Address:_______________________________________________ -----------------------------------------------Telephone:______________________________ Fax:_______________________________- -------------------------------------------------------------------------------- TO BE COMPLETED BY: TO BE COMPLETED BY: JOHN HANco*ck FUNDS, INC. JOHN HANco*ck SIGNATURE SERVICES, INC.By:_____________________________________ By:_______________________________________________________________________ _________________________________ Title Title- -------------------------------------------------------------------------------- Pay Office Branch Number:____________________________________________ (If no pay office branch number is indicated, we will assume #001.) DEALER NUMBER:___________________________________________________ (to be assigned by John Hanco*ck Signature Services Corporation)</TABLE> <PAGE><TABLE><CAPTION> John Hanco*ck Funds, Inc. [ ] SCHEDULE A [ ] Dated January 1, 1998 to the Selling Agreement Relating to Shares of John Hanco*ck Funds <S> <C> Growth Funds Tax-Free Income Funds John Hanco*ck Emerging Growth Fund John Hanco*ck California Tax-Free Income Fund John Hanco*ck Financial Industries Fund John Hanco*ck High Yield Tax-Free Fund John Hanco*ck Growth Fund John Hanco*ck Massachusetts Tax-Free Income FundJohn Hanco*ck Regional Bank Fund John Hanco*ck New York Tax-Free Income Fund John Hanco*ck Special Equities Fund John Hanco*ck Tax-Free Bond Fund John Hanco*ck Special Opportunities Fund John Hanco*ck Special Value Fund International/Global Funds John Hanco*ck European Equity Fund Growth and Income Funds John Hanco*ck Global Fund John Hanco*ck Growth and Income Fund John Hanco*ck Global Health Sciences Fund John Hanco*ck Independence Equity Fund John Hanco*ck Global Technology Fund John Hanco*ck Sovereign Balanced Fund John Hanco*ck International Fund John Hanco*ck Sovereign Investors Fund John Hanco*ck Pacific Basin Equities Fund John Hanco*ck Short-Term Strategic Income Fund Income Funds John Hanco*ck World Bond Fund John Hanco*ck Bond Fund John Hanco*ck Government Income Fund Money Market John Hanco*ck High Yield Bond Fund John Hanco*ck Money Market Fund John Hanco*ck Intermediate Maturity Government Fund John Hanco*ck U.S. Government Cash Reserve John Hanco*ck Sovereign U.S. Government Income Fund John Hanco*ck Strategic Income Fund</TABLE>From time to time John Hanco*ck Funds, Inc., as principal distributor of the JohnHanco*ck funds, will offer additional funds for sale. These funds willautomatically become part of this Agreement and will be subject to all itsprovisions unless otherwise directed by John Hanco*ck Funds, Inc. <PAGE> John Hanco*ck Funds, Inc. [ ] Schedule B [ ] Dated May 1, 1998 to the Selling Agreement Relating to Shares of John Hanco*ck FundsReallowanceI. The Reallowance paid to the selling Brokers for sales of John Hanco*ck Fundsis set forth in each Fund's then-current prospectus. No commission will be paidon sales of any John Hanco*ck Fund that is without a sales charge. Purchases ofClass A shares of $1 million or more, or purchases into an account or accountswhose aggregate value of fund shares is $1 million or more, will be made at netasset value with no initial sales charge. On purchases of this type, JohnHanco*ck Funds, Inc. may pay a commission as set forth in each Fund'sthen-current prospectus. John Hanco*ck Funds, Inc. will pay Brokers for sales ofClass B shares of the Funds a marketing fee as set forth in each Fund'sthen-current prospectus. II. If, at any time, the sales charges on any class of shares offered hereinexceed the maximum sales charges permitted by the NASD Conduct Rules, JohnHanco*ck Funds reserves the right to amend, modify or curtail payment of any orall compensation due on such shares immediately and without notice.<PAGE> John Hanco*ck Funds, Inc. [ ] Schedule C [ ] Dated September 1, 1998 to the Selling Agreement Relating to Shares of John Hanco*ck FundsFirst Year Service FeesPursuant to the Distribution Plan applicable to each of the Funds listed inSchedule A, John Hanco*ck Funds, Inc. will advance to you a First Year ServiceFee related to the purchase of Class A shares (only if subject to sales charge)or Class B shares of any of the Funds, as the case may be, sold by your firm.This Service Fee will be compensation for your personal service and/or themaintenance of shareholder accounts ("Customer Servicing") during thetwelve-month period immediately following the purchase of such shares, in theamount not to exceed .25 of 1% of net assets invested in Class A shares or ClassB shares of the Fund, as the case may be, purchased by your customers.Service Fee Subsequent to the First YearPursuant to the Distribution Plan applicable to each of the Funds listed inSchedule A, the Distributor will pay you quarterly, in arrears, a Service Feecommencing at the end of the twelve-month period immediately following thepurchase of Class A shares (only if subject to sales charge) or Class B shares,as the case may be, sold by your firm, for Customer Servicing, in an amount notto exceed .25 of 1% of the average daily net assets attributable to the Class Ashares or Class B shares of the Fund, as the case may be, purchased by yourcustomers, provided your firm has under management with the Funds combinedaverage daily net assets for the preceding quarter of no less than $1 million,or an individual representative of your firm has under management with the Fundscombined average daily net assets for the preceding quarter of no less than$250,000 (an "Eligible Firm"). Effective October 1, 1995 for Dealers that have entered into a Wrap FeeAgreement with the Distributor, the following provisions shall apply withrespect to the payment of service fees:Pursuant to the Distribution Plan applicable to each of the Funds listed inSchedule A, the Distributor will pay you quarterly, in arrears, a Service Feecommencing immediately following the purchase of Class A shares at net assetvalue sold by your firm, for Customer Servicing, in an amount not to exceed .25of 1% of the average daily net assets attributable to the Class A shares of theFund purchased by your customers, provided your firm has under management withJohn Hanco*ck Funds combined average daily net assets (in any class of shares offunds listed on Schedule A plus assets in wrap (fee-based) accounts) for thepreceding quarter of no less than $1 million, or an individual representative ofyour firm has under management with the Funds combined average daily net assetsfor the preceding quarter of no less than $250,000 (an "Eligible Firm"). Thissection is only applicable to firms which have executed the SUPPLEMENT TO THESELLING DEALER AGREEMENT specifically applicable to fee-based arrangements.Retirement Multi-Fund Family ProgramAn initial and subsequent service fee will be paid to broker/dealers sellingoutside funds in the John Hanco*ck Funds, Inc. Retirement Multi-Fund FamilyProgram, according to the schedule outlined below.Funds offered in the program and the service fees payable are subject to changeat the discretion of John Hanco*ck Funds, Inc.Initial Fee Payable Immediately* o State Street Global Advisors S&P 500 Index Fund (SSGA) .00% o All Other Funds .50%Subsequent Fee Payable After One Year o State Street Global Advisors S&P 500 Index Fund (SSGA) .00% o All Other Funds .15%* No initial fee is paid upon an exchange between any outside funds and the Distributor.

TRANSFER AGENCY AGREEMENT

AMENDED AND RESTATED MASTER TRANSFER AGENCY AND SERVICE AGREEMENT BETWEEN JOHN- --------------------------------------------------------------------------------HANco*ck FUNDS AND JOHN HANco*ck SIGNATURE SERVICES, INC.- --------------------------------------------------------------------------------Amended and Restated Master Transfer Agency and Service Agreement made as of the1st day of June, 1998 by and between each investment company advised by JohnHanco*ck Advisers, Inc., having its principal office and place of business at 101Huntington Avenue, Boston, Massachusetts, 02199, and John Hanco*ck SignatureServices, Inc., a Delaware corporation having its principal office and place ofbusiness at 101 Huntington Avenue, Boston, Massachusetts 02199 ("JHSS"). WITNESSETH:WHEREAS, each investment company desires to appoint JHSS as its transfer agent,dividend disbursing agent and agent in connection with certain other activities;andWHEREAS, JHSS desires to accept such appointment;NOW, THEREFORE, in consideration of the mutual covenants herein contained,the parties hereto agree as follows:Article 1 DefinitionsWhenever used in this Agreement, the following words and phrases, unless thecontext otherwise requires, shall have the following meanings: (a)"Fund" shall mean the investment company which has adopted this agreement and is listed on Appendix A hereto. If the Fund is a Massachusetts business trust or Maryland corporation, it may in the future establish and designate other separate and distinct series of shares, each of which may be called a "series" or a "portfolio"; in such case, the term "Fund" shall also refer to each such separate series or portfolio. (b)"Board" shall mean the board of directors/trustees/managing general partners/director general partners of the Fund, as the case may be.Article 2 Terms of Appointment; Duties of JHSS2.01 Subject to the terms and conditions set forth in this Agreement, the Fundhereby employs and appoints JHSS to act, and JHSS agrees to act, as transferagent and dividend dispersing agent with respect to the authorized and issuedshares of beneficial interest ("Shares") of the Fund subject to this Agreementand to provide to the shareholders of the Fund ("Shareholders") such services inconnection therewith as may be set out in the prospectus of the Fund from timeto time.2.02 JHSS agrees that it will perform the following services: (a) In accordance with procedures established from time to time by agreement between the Fund and JHSS, JHSS shall: (i)Receive for acceptance, orders for the purchase of Shares, and promptly deliver payment and appropriate documentation therefor to the Fund's Custodian authorized pursuant to the 1<PAGE> Fund's Declaration of Trust or Articles of Incorporation (the "Custodian"); (ii)Pursuant to purchase orders, issue the appropriate number of Shares and hold such Shares in the appropriate Shareholder account; (iii)Receive for acceptance, redemption requests and redemption directions and deliver the appropriate documentation therefor to the Custodian; (iv)At the appropriate time as and when it receives monies paid to it by the Custodian with respect to any redemption, pay over or cause to be paid over in the appropriate manner such monies as instructed by the redeeming Shareholders; (v)Effect transfers of Shares by the registered owners thereof upon receipt of appropriate instructions; (vi)Prepare and transmit payments for dividends and distributions declared by the Fund, processing the reinvestment of distributions on the Fund at the net asset value per share for the Fund next computed after the payment (in accordance with the Fund's then-current prospectus); (vii)Maintain records of account for and advise the Fund and its Shareholders as to the foregoing; and (viii)Record the issuance of Shares of the Fund and maintain pursuant to Rule 17Ad-10(e) of the rules and regulations of the Securities Exchange Act of 1934 a record of the total number of Shares of the Fund which are authorized, based upon data provided to it by the Fund, and issued and outstanding. JHSS shall also provide the Fund, on a regular basis, with the total number of Shares which are authorized and issued and outstanding and shall have no obligation, when recording the issuance of Shares, to monitor the issuance of these Shares or to take cognizance of any laws relating to the issue or sale of these Shares, which functions shall be the sole responsibility of the Fund. (b) In calculating the number of Shares to be issued on purchase or reinvestment, or redeemed or repurchased, or the amount of the purchase payment or redemption or repurchase payments owed, JHSS shall use the net asset value per share (as described in the Fund's then-current prospectus) computed by it or such other person as may be designated by the Fund's Board. All issuances, redemptions or repurchases of the Funds' shares shall be effected at net asset values per share next computed after receipt of the orders therefore and said orders shall become irrevocable at the time as of which said value is next computed. (c) In addition to and not in lieu of the services set forth in the above paragraph (a), JHSS shall: (i) perform all of the customary services of a transfer agent and dividend disbursing agent including but not limited to: maintaining all Shareholder accounts, preparing Shareholder meeting lists, mailing proxies, receiving and tabulating proxies, mailing Shareholder reports and prospectuses to current Shareholders, withholding taxes on U.S. resident and non-resident alien accounts, preparing and filing appropriate forms required with respect to dividends and distributions by federal authorities for all Shareholders, preparing and mailing confirmation forms and statements of account to Shareholders for all purchases and redemptions of Shares and other confirmable transactions in Shareholder accounts, preparing and mailing activity statements for Shareholders, and providing 2<PAGE> Shareholder account information and (ii) provide a system which will enable the Fund to monitor the total number of the Fund's Shares sold in each State. (d) In addition, the Fund shall (i) identify to JHSS in writing those transactions and assets to be treated as exempt from the blue sky reporting for each State and (ii) verify the establishment of transactions for each State on the system prior to activation and thereafter monitor the daily activity for each State. The responsibility of JHSS for the Fund's blue sky State registration status is solely limited to the initial establishment of transactions subject to blue sky compliance by the Fund and the reporting of these transactions to the Fund as provided above. (e) Additionally, JHSS shall: (i) Utilize a system to identify all share transactions which involve purchase and redemption orders that are processed at a time other than the time of the computation of net asset value per share next computed after receipt of such orders, and shall compute the net effect upon the Fund of the transactions so identified on a daily and cumulative basis. (ii) If upon any day the cumulative net effect of such transactions upon the Fund is negative and exceeds a dollar amount equivalent to 1/2 of 1 cent per share, JHSS shall promptly make a payment to the Fund in cash or through the use of a credit in the manner described in paragraph (iv) below, in such amount as may be necessary to reduce the negative cumulative net effect to less than 1/2 of 1 cent per share. (iii) If on the last business day of any month the cumulative net effect upon the Fund of such transactions (adjusted by the amount of all prior payments and credits by JHSS and the Fund) is negative, the Fund shall be entitled to a reduction in the fee next payable under the Agreement by an equivalent amount, except as provided in paragraph (iv) below. If on the last business day in any month the cumulative net effect upon the Fund of such transactions (adjusted by the amount of all prior payments and credits by JHSS and the Fund) is positive, JHSS shall be entitled to recover certain past payments and reductions in fees, and to a credit against all future payments and fee reductions that may be required under the Agreement as herein described in paragraph (iv) below. (iv) At the end of each month, any positive cumulative net effect upon a Fund of such transactions shall be deemed to be a credit to JHSS which shall first be applied to permit JHSS to recover any prior cash payments and fee reductions made by it to the Fund under paragraphs (ii) and (iii) above during the calendar year, by increasing the amount of the monthly fee under the Agreement next payable in an amount equal to prior payments and fee reductions made by JHSS during such calendar year, but not exceeding the sum of that month's credit and credits arising in prior months during such calendar year to the extent such prior credits have not previously been utilized as contemplated by this paragraph. Any portion of a credit to JHSS not so used by it shall remain as a credit to be used as payment against the amount of any future negative cumulative net effects that would otherwise require a cash payment or fee reduction to be made to the Fund pursuant to paragraphs (ii) or (iii) above (regardless of whether or not the credit or any portion thereof arose in the same calendar year as that in which the negative cumulative net effects or any portion thereof arose). 3<PAGE> (v) JHSS shall supply to the Fund from time to time, as mutually agreed upon, reports summarizing the transactions identified pursuant to paragraph (i) above, and the daily and cumulative net effects of such transactions, and shall advise the Fund at the end of each month of the net cumulative effect at such time. JHSS shall promptly advise the Fund if at any time the cumulative net effects exceeds a dollar amount equivalent to 1/2 of 1 cent per share. (vi) In the event that this Agreement is terminated for whatever cause, or this provision 2.02 (d) is terminated pursuant to paragraph (vii) below, the Fund shall promptly pay to JHSS an amount in cash equal to the amount by which the cumulative net effect upon the Fund is positive or, if the cumulative net effect upon the Fund is negative, JHSS shall promptly pay to the Fund an amount in cash equal to the amount of such cumulative net effect. (vii) This provision 2.02 (e) of the Agreement may be terminated by JHSS at any time without cause, effective as of the close of business on the date written notice (which may be by telex) is received by the Fund.Procedures applicable to certain of these services may be established from timeto time by agreement between the Fund and JHSS.Article 3 Fees and Expenses3.01 For performance by JHSS pursuant to this Agreement, the Fund agrees to payJHSS a fee as set out in Appendix A attached hereto. Such fees and out-of-pocketexpenses and advances identified under Section 3.02 below may be changed fromtime to time subject to mutual written agreement between the Fund and JHSS.3.02 In addition to the fee paid under Section 3.01 above, the Fund agrees toreimburse JHSS for out-of-pocket expenses or advances incurred by JHSS for theitems set out in the fee schedule attached hereto. In addition, any otherexpenses incurred by JHSS at the request or with the consent of the Fund, willbe reimbursed by the Fund.3.03 The Fund agrees to pay all fees and reimbursable expenses promptlyfollowing the mailing of the respective billing notice. Postage for mailing ofproxies to all shareholder accounts shall be advanced to JHSS by the Funds atleast seven (7) days prior to the mailing date of such materials.Article 4 Representations and Warranties of JHSSJHSS represents and warrants to the Fund that:4.01 It is a corporation duly organized and existing and in good standing underthe laws of the State of Delaware, and is duly qualified and in good standing asa foreign corporation under the Laws of The Commonwealth of Massachusetts.4.02 It has corporate power and authority to enter into and perform itsobligations under this Agreement. 4<PAGE>4.03 All requisite corporate proceedings have been taken to authorize it toenter into and perform this Agreement.4.04 It has and will continue to have access to the necessary facilities,equipment and personnel to perform its duties and obligations under thisAgreement.Article 5 Representations and Warranties of the FundThe Fund represents and warrants to JHSS that:5.01 It is a business trust duly organized and existing and in good standingunder the laws of The Commonwealth of Massachusetts or, in the case of JohnHanco*ck Cash Reserve, Inc., a Maryland corporation duly organized and existingand in good standing under the laws of the State of Maryland.5.02 It has power and authority to enter into and perform this Agreement.5.03 All proceedings required by the Fund's Declaration of Trust or Articles ofIncorporation and By-Laws have been taken to authorize it to enter into andperform this Agreement.5.04 It is an open-end investment company registered under the InvestmentCompany Act of 1940, as amended (the "1940 Act").5.05 A registration statement under the Securities Act of 1933, as amended, withrespect to the shares of the Fund subject to this Agreement has becomeeffective, and appropriate state securities law filings have been made and willcontinue to be made.Article 6 Indemnification6.01 JHSS shall not be responsible for, and the Fund shall indemnify and holdJHSS harmless from and against, any and all losses, damages, costs, charges,counsel fees, payments, expenses and liabilities arising out of or attributableto: (a) All actions of JHSS or its agents or subcontractors required to be taken pursuant to this Agreement, provided that such actions are taken in good faith and without negligence or willful misfeasance. (b) The Fund's refusal or failure to comply with the terms of this Agreement, or which arise out of the Fund's bad faith, gross negligence or willful misfeasance or which arise out of the reckless disregard of any representation or warranty of the Fund hereunder. (c) The reliance on or use by JHSS or its agents or subcontractors of information, records and documents which (i) are received by JHSS or its agents or subcontractors and furnished to it by or on behalf of the Fund, and (ii) have been prepared and/or maintained by the Fund or any other person or firm on behalf of the Fund. (d) The reliance on, or the carrying out by JHSS or its agents or subcontractors of, any instructions or requests of the Fund. 5<PAGE> (e) The offer or sale of Shares in violation of any requirement under the federal securities laws or regulations or the securities laws or regulations of any state that Fund Shares be registered in that state or in violation of any stop order or other determination or ruling by any federal agency or any state with respect to the offer or sale of Shares in that state. (f) It is understood and agreed that the assets of the Fund may be used to satisfy the indemnity under this Article 6 only to the extent that the loss, damage, cost, charge, counsel fee, payment, expense and liability arises out of or is attributable to services hereunder with respect to the Shares of such Fund.6.02 JHSS shall indemnify and hold harmless the Fund from and against any andall losses, damages, costs, charges, counsel fees, payments, expenses andliabilities arising out of or attributed to any action or failure or omission toact by JHSS as a result of JHSS's lack of good faith, negligence or willfulmisfeasance.6.03 At any time JHSS may apply to any officer of the Fund for instructions, andmay consult with legal counsel with respect to any matter arising in connectionwith the services to be performed by JHSS under this Agreement, and JHSS and itsagents or subcontractors shall not be liable and shall be indemnified by theFund for any action taken or omitted by it in reliance upon such instructions orupon the opinion of such counsel. JHSS, its agents and subcontractors shall beprotected and indemnified in acting upon any paper or document furnished by oron behalf of the Fund, reasonably believed to be genuine and to have been signedby the proper person or persons, or upon any instruction, information, data,records or documents provided JHSS or its agents or subcontractors by machinereadable input, telex, CRT data entry or other similar means authorized by theFund, and shall not be held to have notice of any change of authority of anyperson, until receipt of written notice thereof from the Fund. JHSS, its agentsand subcontractors shall also be protected and indemnified in recognizing sharecertificates which are reasonably believed to bear the proper manual orfacsimile signatures of the officer of the Fund, and the proper countersignatureof any former transfer agent or registrar, or of a co-transfer agent orco-registrar.6.04 In the event either party is unable to perform its obligations under theterms of this Agreement because of acts of God, strikes, equipment ortransmission failure or damage reasonably beyond its control, or other causesreasonably beyond its control, such party shall not be liable for damages to theother for any damages resulting from such failure to perform or otherwise fromsuch causes.6.05 Neither party to this Agreement shall be liable to the other party forconsequential damages under any provision of this Agreement or for any act orfailure to act hereunder.6.06 In order that the indemnification provisions contained in this Article 6shall apply, upon the assertion of a claim for which either party may berequired to indemnify the other, the party seeking indemnification shallpromptly notify the other party of such assertion, and shall keep the otherparty advised with respect to all developments concerning such claim. The partywho may be required to indemnify shall have the option to participate with theparty seeking indemnification in the defense of such claim. The party seekingindemnification shall in no case confess any claim or make any compromise in anycase in which the other party may be required to indemnify it except with theother party's prior written consent. 6<PAGE>Article 7 Covenants of the Fund and JHSS7.01 The Fund shall promptly furnish to JHSS the following: (a) A certified copy of the resolution(s) of the Trustees of the Trust or the Directors of the Corporation authorizing the appointment of JHSS and the execution and delivery of this Agreement. (b) A copy of the Fund's Declaration of Trust or Articles of Incorporation and By-Laws and all amendments thereto.7.02 JHSS hereby agrees to establish and maintain facilities and proceduresreasonably acceptable to the Fund for safekeeping of share certificates andfacsimile signature imprinting devices, if any; and for the preparation or use,and for keeping account of, such certificates and devices.7.03 JHSS shall keep records relating to the services to be performed hereunder,in the form and manner as it may deem advisable. To the extent required bySection 31 of the Investment Company Act of 1940 and the rules and regulationsof the Securities and Exchange Commission thereunder, JHSS agrees that all suchrecords prepared or maintained by JHSS relating to the services to be performedby JHSS hereunder are the property of the Fund and will be preserved, maintainedand made available in accordance with such Act and rules, and will besurrendered to the Fund promptly on and in accordance with the Fund's request.7.04 JHSS and the Fund agree that all books, records, information and datapertaining to the business of the other party which are exchanged or receivedpursuant to the negotiation or the carrying out of this Agreement shall remainconfidential, and shall not be voluntarily disclosed to any other person withoutthe consent of the other party to this Agreement, except as may be required bylaw.7.05 JHSS agrees that, from time to time or at any time requested by the Fund,JHSS will make reports to the Fund, as requested, of JHSS's performance of theforegoing services.7.06 JHSS will cooperate generally with the Fund to provide informationnecessary for the preparation of registration statements and periodic reports tobe filed with the Securities and Exchange Commission, including registrationstatements on Form N-1A, semi-annual reports on Form N-SAR, periodic statements,shareholder communications and proxy materials furnished to holders of shares ofthe Fund, filings with state "blue sky" authorities and with United States andforeign agencies responsible for tax matters, and other reports and filings oflike nature.7.07 In case of any requests or demands for the inspection of the Shareholderrecords of the Fund, JHSS will endeavor to notify the Fund and to secureinstructions from an authorized officer of the Fund as to such inspection. JHSSreserves the right, however, to exhibit the Shareholder records to any personwhenever it is advised by its counsel that it may be held liable for the failureto exhibit the Shareholder records to such person. 7<PAGE>Article 8 No Partnership or Joint Venture8.01 The Fund and JHSS are not currently partners of or joint venturers witheach other and nothing in this Agreement shall be construed so as to make thempartners or joint venturers or impose any liability as such on them.Article 9 Termination of Agreement9.01 This Agreement may be terminated by either party upon one hundred twenty(120) days' written notice to the other party.9.02 Should the Fund exercise its right to terminate, all out-of-pocket expensesassociated with the movement of records and material will be borne by the Fund.Additionally, JHSS reserves the right to charge for any other reasonableexpenses associated with such termination.Article 10 Assignment10.01 Except as provided in Section 10.03 below, neither this Agreement nor anyrights or obligations hereunder may be assigned by either party without thewritten consent of the other party.10.02 This Agreement shall inure to the benefit of and be binding upon theparties and their respective permitted successors and assigns.10.03 JHSS may, without further consent on the part of the Fund, subcontract forthe performance hereof with (i) Boston Finanacial Data Services, Inc., aMassachusetts corporation ("BE") which is duly registered as a transfer agentpursuant to Section 17A(c)(1) of the Securities Exchange Act of 1934 ("Section17A(c)(1)") or any other entity registered as a transfer agent under Section17A(c)(1) JHSS deems appropriate in order to comply with the terms andconditions of this Agreement; provided, however, that JHSS shall be as fullyresponsible to the Fund for the acts and omissions of any subcontractor as it isfor its own acts and omissions.Article 11 Amendment11.01 This Agreement may be amended or modified by a written agreement executedby both parties and authorized or approved by a resolution of the Trustees ofthe Trust or Directors of the Corporation.Article 12 Massachusetts Law to Apply12.01 This Agreement shall be construed and the provisions thereof interpretedunder and in accordance with the internal substantive laws of The Commonwealthof Massachusetts.Article 13 Merger of Agreement13.01 This Agreement constitutes the entire agreement between the parties heretoand supersedes any prior agreement with respect to the subject hereof whetheroral or written. 8<PAGE>Article 14 Limitation on Liability14.01 If the Fund is a Massachusetts business trust, JHSS expressly acknowledgesthe provision in the Fund's Declaration of Trust limiting the personal liabilityof the trustees and shareholders of the Fund; and JHSS agrees that it shall haverecourse only to the assets of the Fund for the payment of claims or obligationsas between JHSS and the Fund arising out of this Agreement, and JHSS shall notseek satisfaction of any such claim or obligation from the trustees orshareholders of the Fund. In any case, each Fund, and each series or portfolioof each Fund, shall be liable only for its own obligations to JHSS under thisAgreement and shall not be jointly or severally liable for the obligations ofany other Fund, series or portfolio hereunder.IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executedin their names and on their behalf under their seals by and through their dulyauthorized officers, as of the day and year first above written. JOHN HANco*ck FUNDS Listed on Appendix A By: /s/Anne C. Hodsdon ------------------- Anne C. Hodsdon President JOHN HANco*ck SIGNATURE SERVICES, INC. By: /s/Charles J. McKenney, Jr. --------------------------- Charles J. McKenney, Jr. Vice President 9<PAGE> EXHIBIT A TRANSFER AGENT FEE SCHEDULE, EFFECTIVE JUNE 1, 1998 Effective June 1, 1998, the transfer agent fees payable monthly underthe transfer agent agreement between each fund and John Hanco*ck SignatureServices, Inc. shall be the following rates plus certain out-of-pocket expensesas described to the Board:<TABLE><CAPTION> Annual Rate Per Account Class A Shares Class B Shares Class C Shares* -------------- -------------- --------------- <S> <C> <C> <C> $19.00 $21.50 $20.50Equity Fund - -----------John Hanco*ck Capital Series- -JH Independence Equity Fund* - -JH Special Value Fund* John Hanco*ck Special Equities Fund John Hanco*ck World Fund - -JH Pacific Basin Fund - -JH Global Rx Fund - -JH European Equity Fund John Hanco*ck Investment Trust - -JH Growth and Income Fund*- -JH Sovereign Balanced Fund - -JH Sovereign Investors Fund* John Hanco*ck Investment Trust II - -JH Financial Industries Fund- -JH Regional Bank Fund John Hanco*ck Investment Trust III - -John Hanco*ck Global Fund - -John Hanco*ck Growth Fund* - -John Hanco*ck International Fund*- -John Hanco*ck Special Opportunities Fund*John Hanco*ck Series Trust- -JH Emerging Growth Fund*- -JH Global Technology Fund</TABLE> 10<PAGE><TABLE><CAPTION> Annual Rate Per Account ----------------------- Class A Shares Class B Shares Class C Shares* -------------- -------------- --------------- <S> <C> <C> <C>Money Market Funds $20.00 $22.50 $21.50- ------------------John Hanco*ck Current Interest- -JH Money Market Fund*- -JH US Government Cash Reserve (Class A Shares only)John Hanco*ck Cash Reserve, Inc. (Class A Shares only) Annual Rate Per Account ----------------------- Class A Shares Class B Shares -------------- -------------- <S> <C> <C>Tax Free Funds $20.00 $22.50- --------------John Hanco*ck Tax-Exempt Series Fund - -JH Massachusetts Tax-Free Income Funds- -JH New York Tax-Free Income FundJohn Hanco*ck California Tax-Free Income FundJohn Hanco*ck Tax-Free Bond Trust - -JH High Yield Tax-Free Fund - -JH Tax Free Bond Fund Annual Rate Per Account ----------------------- Class A Shares Class B Shares Class C Shares* -------------- -------------- --------------- <S> <C> <C> <C> Income Funds $20.00 $22.50 $21.50 -----------John Hanco*ck Sovereign Bond Fund John Hanco*ck Strategic Series - -JH Strategic Income Fund* - -JH Sovereign US Government Income Fund John Hanco*ck Investment Trust III - -JH Short-Term Strategic Income Fund - -JH World Bond Fund John Hanco*ck Bond Trust - -JH Government Income Fund - -JH HighYield Bond Fund* - -JH Intermediate Maturity Government Fund</TABLE><PAGE> The following funds are at a % of daily net assets of the Fund.Out-of-pocket expenses are paid by John Hanco*ck Signature Services, Inc. % of Daily Net Assets of the ClassClass Y Shares 0.10%John Hanco*ck Special Equities FundJohn Hanco*ck Sovereign Investors Fund % of Daily Net Assets of the FundJohn Hanco*ck Institutional Series Trust 0.05%- -JH Active Bond Fund- -JH Dividend Performers Fund- -JH Small Capitalization Value Fund- -JH Global Bond Fund- -JH Independence Balanced Fund- -JH Independence Diversified Core Equity Fund II- -JH Independence Growth Fund- -JH Independence Medium Capitalization Fund- -JH Independence Value Fund- -JH International Equity Fund- -JH Multi-Sector Growth Fund- -JH Small Capitalization Growth FundThese fees are agreed to by the undersigned as of June 1, 1998. /s/Anne C. Hodsdon ------------------- Anne C. Hodsdon President of Each Fund /s/Charles McKenney, Jr. ----------------------- Charles McKenney, Jr. Vice President of John Hanco*ck Signature Services, Inc.

AUDITORS CONSENT

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORSWe consent to the references to our firm under the captions "FinancialHighlights" for the John Hanco*ck Government Income Fund, John Hanco*ck High YieldBond Fund and John Hanco*ck Intermediate Government Fund (formerly, John Hanco*ckIntermediate Maturity Government Fund (the three funds comprising the JohnHanco*ck Bond Trust) in the John Hanco*ck Income Funds Prospectus and "IndependentAuditors" in the John Hanco*ck Government Income Fund Class A, Class B and ClassC Shares Statement of Additional Information, the John Hanco*ck High Yield BondFund Class A, Class B and Class C Shares Statement of Additional Information andthe John Hanco*ck Intermediate Government Fund Class A, Class B and Class CShares Statement of Additional Information and to the incorporation by referencein Post-Effective Amendment Number 44 to Registration Statement (Form N-1A, No.2-66906) of our reports dated July 10, 1998 on the financial statements andfinancial highlights of John Hanco*ck Government Income Fund, John Hanco*ck HighYield Bond Fund and John Hanco*ck Intermediate Maturity Government Fund. /s/ERNST & YOUNG LLP -------------------- ERNST & YOUNG LLPBoston, MassachusettsMarch 24, 1999

DISTRIBUTION PLAN

JOHN HANco*ck BOND TRUST JOHN HANco*ck HIGH YIELD BOND FUND Distribution Plan Class C Shares May 1, 1998 Article I. This Plan This Distribution Plan (the "Plan") sets forth the terms and conditionson which John Hanco*ck Bond Trust (the "Trust") on behalf of John Hanco*ck HighYield Bond Fund (the "Fund"), a series portfolio of the Trust, on behalf of itsClass C shares, will, after the effective date hereof, pay certain amounts toJohn Hanco*ck Funds, Inc. ("JH Funds") in connection with the provision by JHFunds of certain services to the Fund and its Class C shareholders, as set forthherein. Certain of such payments by the Fund may, under Rule 12b-1 of theSecurities and Exchange Commission, as from time to time amended (the "Rule"),under the Investment Company Act of 1940, as amended (the "Act"), be deemed toconstitute the financing of distribution by the Fund of its shares. This Plandescribes all material aspects of such financing as contemplated by the Rule andshall be administered and interpreted, and implemented and continued, in amanner consistent with the Rule. The Fund and JH Funds heretofore entered into aDistribution Agreement, dated December 22, 1994 (the "Agreement"), the terms ofwhich, as heretofore and from time to time continued, are incorporated herein byreference. Article II. Distribution and Service Expenses The Fund shall pay to JH Funds a fee in the amount specified in ArticleIII hereof. Such fee may be spent by JH Funds on any activities or expensesprimarily intended to result in the sale of Class C shares of the Fund,including, but not limited to the payment of Distribution Expenses (as definedbelow) and Service Expenses (as defined below). Distribution Expenses includebut are not limited to, (a) initial and ongoing sales compensation out of suchfee as it is received by JH Funds or other broker-dealers ("Selling Brokers")that have entered into an agreement with JH Funds for the sale of Class C sharesof the Fund, (b) direct out-of pocket expenses incurred in connection with thedistribution of Class C shares of the Fund, including expenses related toprinting of prospectuses and reports to other than existing Class C shareholdersof the Fund, and preparation, printing and distribution of sales literature andadvertising materials, (c) an allocation of overhead and other branch officeexpenses of JH Funds related to the distribution of Class C shares of the Fund,(d) interest expenses on unreimbursed distribution expenses related to Class Cshares, as described in Article IV and (e) distribution expenses incurred inconnection with the distribution of a corresponding class of any open-end,registered investment company which sells all or substantially all its assets tothe Fund or which merges or otherwise combines with the Fund. Service Expenses include payments made to, or on account of accountexecutives of selected broker-dealers (including affiliates of JH Funds) andothers who furnish personal and shareholder account maintenance services toClass C shareholders of the Fund.<PAGE> Article III. Maximum Expenditures The expenditures to be made by the Fund pursuant to this Plan, and thebasis upon which such expenditures will be made, shall be determined by theFund, and in no event shall such expenditures exceed 1.00% of the average dailynet asset value of the Class C shares of the Fund (determined in accordance withthe Fund's prospectus as from time to time in effect) on an annual basis tocover Distribution Expenses and Service Expenses, provided that the portion ofsuch fee used to cover Service Expenses, shall not exceed an annual rate of upto 0.25% of the average daily net asset value of the Class C shares of the Fund.Such expenditures shall be calculated and accrued daily and paid monthly or atsuch other intervals as the Trustees shall determine. Article IV. Unreimbursed Distribution Expenses In the event that JH Funds is not fully reimbursed for payments made orexpenses incurred by it as contemplated hereunder, in any fiscal year, JH Fundsshall be entitled to carry forward such expenses to subsequent fiscal years forsubmission to the Class C shares of the Fund for payment, subject always to theannual maximum expenditures set forth in Article III hereof; provided, however,that nothing herein shall prohibit or limit the Trustees from terminating thisPlan and all payments hereunder at any time pursuant to Article IX hereof. Article V. Expenses Borne by the Fund Notwithstanding any other provision of this Plan, the Trust, the Fundand its investment adviser, John Hanco*ck Advisers, Inc. (the "Adviser"), shallbear the respective expenses to be borne by them under the Investment ManagementContract between them, dated August 30, 1996 as from time to time continued andamended (the "Management Contract"), and under the Fund's current prospectus asit is from time to time in effect. Except as otherwise contemplated by thisPlan, the Trust and the Fund shall not, directly or indirectly, engage infinancing any activity which is primarily intended to or should reasonablyresult in the sale of shares of the Fund. Article VI. Approval by Trustees, etc. This Plan shall not take effect until it has been approved, togetherwith any related agreements, by votes, cast in person at a meeting called forthe purpose of voting on this Plan or such agreements, of a majority (orwhatever greater percentage may, from time to time, be required by Section 12(b)of the Act or the rules and regulations thereunder) of (a) all of the Trusteesof the Fund and (b) those Trustees of the Fund who are not "interested persons"of the Fund, as such term may be from time to time defined under the Act, andhave no direct or indirect financial interest in the operation of this Plan orany agreements related to it (the "Independent Trustees"). Article VII. Continuance This Plan and any related agreements shall continue in effect for solong as such continuance is specifically approved at least annually in advancein the manner provided for the approval of this Plan in Article VI. Article VIII. Information JH Funds shall furnish the Fund and its Trustees quarterly, or at suchother intervals as the Fund shall specify, a written report of amounts expendedor incurred for Distribution Expenses and Services Expenses pursuant to thisPlan and the purposes for which such expenditures were made and such otherinformation as the Trustees may request.<PAGE> Article IX. Termination This Plan may be terminated (a) at any time by vote of a majority ofthe Trustees, a majority of the Independent Trustees, or a majority of theFund's outstanding voting Class C shares, or (b) by JH Funds on 60 days' noticein writing to the Fund. Article X. Agreements Each Agreement with any person relating to implementation of this Planshall be in writing, and each agreement related to this Plan shall provide: (a) That, with respect to the Fund, such agreement may be terminated at any time, without payment of any penalty, by vote of a majority of the Independent Trustees or by vote of a majority of the Fund's then outstanding Class C shares. (b) That such agreement shall terminate automatically in the event of its assignment. Article XI. Amendments This Plan may not be amended to increase the maximum amount of the feespayable by the Fund hereunder without the approval of a majority of theoutstanding voting Class C shares of the Fund. No material amendment to the Planshall, in any event, be effective unless it is approved in the same manner as isprovided for approval of this Plan in Article VII. Article XII. Limitation of Liability The names "John Hanco*ck Bond Trust" and "John Hanco*ck High Yield BondFund" are the designations of the Trustees under the Amended and RestatedDeclaration of Trust, dated July 1, 1996, as amended and restated from time totime. The Amended and Restated Declaration of Trust has been filed with theSecretary of State of the Commonwealth of Massachusetts. The obligations of theTrust and the Fund are not personally binding upon, nor shall resort be had tothe private property of, any of the Trustees, shareholders, officers, employeesor agents of the Fund, but only the Fund's property shall be bound. No series ofthe Trust shall be responsible for the obligations of any other series of theTrust. IN WITNESS WHEREOF, the Fund has executed this amended and restatedDistribution Plan effective as of the 1st day of May, 1998 in Boston,Massachusetts. JOHN HANco*ck BOND TRUST -- JOHN HANco*ck HIGH YIELD BOND FUND By:/s/ Anne C. Hodsdon ---------------------- President JOHN HANco*ck FUNDS, INC. By: /s/ Edward J. Boudreau, Jr. ------------------------------- Chairman, President & CEOs:\funds\bond\hybond\12b1plnc.doc

FINANCIA DATA SCHEDULE

<TABLE> <S> <C><ARTICLE> 6<SERIES> <NUMBER> 091 <NAME> JOHN HANco*ck GOVERNMENT INCOME FUND - CLASS A <S> <C><PERIOD-TYPE> YEAR<FISCAL-YEAR-END> MAY-31-1998<PERIOD-START> NOV-01-1997<PERIOD-END> MAY-31-1998<INVESTMENTS-AT-COST> 440,366,034<INVESTMENTS-AT-VALUE> 450,392,642<RECEIVABLES> 7,726,105<ASSETS-OTHER> 169,881<OTHER-ITEMS-ASSETS> 0<TOTAL-ASSETS> 458,288,628<PAYABLE-FOR-SECURITIES> 142,886<SENIOR-LONG-TERM-DEBT> 0<OTHER-ITEMS-LIABILITIES> 743,658<TOTAL-LIABILITIES> 886,544<SENIOR-EQUITY> 0<PAID-IN-CAPITAL-COMMON> 466,997,579<SHARES-COMMON-STOCK> 36,721,182<SHARES-COMMON-PRIOR> 40,303,205<ACCUMULATED-NII-CURRENT> 0<OVERDISTRIBUTION-NII> (96,525)<ACCUMULATED-NET-GAINS> (19,515,572)<OVERDISTRIBUTION-GAINS> 0<ACCUM-APPREC-OR-DEPREC> 10,016,602<NET-ASSETS> 457,402,084<DIVIDEND-INCOME> 6,205<INTEREST-INCOME> 39,112,329<OTHER-INCOME> 0<EXPENSES-NET> 6,530,873<NET-INVESTMENT-INCOME> 32,587,661<REALIZED-GAINS-CURRENT> 1,684,188<APPREC-INCREASE-CURRENT> 16,293,385<NET-CHANGE-FROM-OPS> 50,565,234<EQUALIZATION> 0<DISTRIBUTIONS-OF-INCOME> (23,933,295)<DISTRIBUTIONS-OF-GAINS> 0<DISTRIBUTIONS-OTHER> 0<NUMBER-OF-SHARES-SOLD> 3,514,206<NUMBER-OF-SHARES-REDEEMED> 8,394,226<SHARES-REINVESTED> 1,297,997<NET-CHANGE-IN-ASSETS> (55,746,573)<ACCUMULATED-NII-PRIOR> 0<ACCUMULATED-GAINS-PRIOR> (21,199,760)<OVERDISTRIB-NII-PRIOR> (56,331)<OVERDIST-NET-GAINS-PRIOR> 0<GROSS-ADVISORY-FEES> 3,155,183<INTEREST-EXPENSE> 0<GROSS-EXPENSE> 6,530,873<AVERAGE-NET-ASSETS> 352,020,633<PER-SHARE-NAV-BEGIN> 8.93<PER-SHARE-NII> 0.62<PER-SHARE-GAIN-APPREC> 0.32<PER-SHARE-DIVIDEND> (0.62)<PER-SHARE-DISTRIBUTIONS> 0<RETURNS-OF-CAPITAL> 0<PER-SHARE-NAV-END> 9.25<EXPENSE-RATIO> 1.10<AVG-DEBT-OUTSTANDING> 0<AVG-DEBT-PER-SHARE> 0 </TABLE>

FINANCIAL DATA SCHEDULE

<TABLE> <S> <C><ARTICLE> 6<SERIES> <NUMBER> 092 <NAME> JOHN HANco*ck GOVERNMENT INCOME FUND - CLASS B <S> <C><PERIOD-TYPE> YEAR<FISCAL-YEAR-END> MAY-31-1998<PERIOD-START> NOV-01-1997<PERIOD-END> MAY-31-1998<INVESTMENTS-AT-COST> 440,366,034<INVESTMENTS-AT-VALUE> 450,392,642<RECEIVABLES> 7,726,105<ASSETS-OTHER> 169,881<OTHER-ITEMS-ASSETS> 0<TOTAL-ASSETS> 458,288,628<PAYABLE-FOR-SECURITIES> 142,886<SENIOR-LONG-TERM-DEBT> 0<OTHER-ITEMS-LIABILITIES> 743,658<TOTAL-LIABILITIES> 886,544<SENIOR-EQUITY> 0<PAID-IN-CAPITAL-COMMON> 466,997,579<SHARES-COMMON-STOCK> 12,742,073<SHARES-COMMON-PRIOR> 171,841,111<ACCUMULATED-NII-CURRENT> 0<OVERDISTRIBUTION-NII> (96,525)<ACCUMULATED-NET-GAINS> (19,515,572)<OVERDISTRIBUTION-GAINS> 0<ACCUM-APPREC-OR-DEPREC> 10,016,602<NET-ASSETS> 457,402,084<DIVIDEND-INCOME> 6,205<INTEREST-INCOME> 39,112,329<OTHER-INCOME> 0<EXPENSES-NET> 6,530,873<NET-INVESTMENT-INCOME> 32,587,661<REALIZED-GAINS-CURRENT> 1,684,188<APPREC-INCREASE-CURRENT> 16,293,385<NET-CHANGE-FROM-OPS> 50,565,234<EQUALIZATION> 0<DISTRIBUTIONS-OF-INCOME> (8,694,560)<DISTRIBUTIONS-OF-GAINS> 0<DISTRIBUTIONS-OTHER> 0<NUMBER-OF-SHARES-SOLD> 1,846,293<NUMBER-OF-SHARES-REDEEMED> 6,793,426<SHARES-REINVESTED> 505,095<NET-CHANGE-IN-ASSETS> (55,746,573)<ACCUMULATED-NII-PRIOR> 0<ACCUMULATED-GAINS-PRIOR> (21,199,760)<OVERDISTRIB-NII-PRIOR> (56,331)<OVERDIST-NET-GAINS-PRIOR> 0<GROSS-ADVISORY-FEES> 3,155,183<INTEREST-EXPENSE> 0<GROSS-EXPENSE> 6,530,873<AVERAGE-NET-ASSETS> 143,580,815<PER-SHARE-NAV-BEGIN> 8.93<PER-SHARE-NII> 0.55<PER-SHARE-GAIN-APPREC> 0.32<PER-SHARE-DIVIDEND> (0.55)<PER-SHARE-DISTRIBUTIONS> 0<RETURNS-OF-CAPITAL> 0<PER-SHARE-NAV-END> 9.25<EXPENSE-RATIO> 1.85<AVG-DEBT-OUTSTANDING> 0<AVG-DEBT-PER-SHARE> 0 </TABLE>

FINANCIAL DATA SCHEDULE

<TABLE> <S> <C><ARTICLE> 6<SERIES> <NUMBER> 091 <NAME> JOHN HANco*ck GOVERNMENT INCOME FUND - CLASS A <S> <C><PERIOD-TYPE> 6-MOS<FISCAL-YEAR-END> MAY-31-1998<PERIOD-START> JUN-01-1998<PERIOD-END> NOV-30-1998<INVESTMENTS-AT-COST> 536,810,140<INVESTMENTS-AT-VALUE> 551,445,762<RECEIVABLES> 5,946,021<ASSETS-OTHER> 164,031<OTHER-ITEMS-ASSETS> 0<TOTAL-ASSETS> 557,555,814<PAYABLE-FOR-SECURITIES> 59,235,949<SENIOR-LONG-TERM-DEBT> 0<OTHER-ITEMS-LIABILITIES> 694,567<TOTAL-LIABILITIES> 59,930,516<SENIOR-EQUITY> 0<PAID-IN-CAPITAL-COMMON> 496,965,421<SHARES-COMMON-STOCK> 36,905,709<SHARES-COMMON-PRIOR> 36,721,182<ACCUMULATED-NII-CURRENT> 0<OVERDISTRIBUTION-NII> (96,525)<ACCUMULATED-NET-GAINS> (14,078,553)<OVERDISTRIBUTION-GAINS> 0<ACCUM-APPREC-OR-DEPREC> 14,834,955<NET-ASSETS> 497,625,298<DIVIDEND-INCOME> 0<INTEREST-INCOME> 17,405,467<OTHER-INCOME> 0<EXPENSES-NET> 3,097,779<NET-INVESTMENT-INCOME> 14,307,688<REALIZED-GAINS-CURRENT> 5,432,746<APPREC-INCREASE-CURRENT> 4,818,353<NET-CHANGE-FROM-OPS> 24,558,787<EQUALIZATION> 0<DISTRIBUTIONS-OF-INCOME> (10,695,275)<DISTRIBUTIONS-OF-GAINS> 0<DISTRIBUTIONS-OTHER> 0<NUMBER-OF-SHARES-SOLD> 6,606,638<NUMBER-OF-SHARES-REDEEMED> 7,009,760<SHARES-REINVESTED> 587,649<NET-CHANGE-IN-ASSETS> 40,223,214<ACCUMULATED-NII-PRIOR> 0<ACCUMULATED-GAINS-PRIOR> (19,511,299)<OVERDISTRIB-NII-PRIOR> (95,659)<OVERDIST-NET-GAINS-PRIOR> 0<GROSS-ADVISORY-FEES> 1,510,575<INTEREST-EXPENSE> 0<GROSS-EXPENSE> 3,097,779<AVERAGE-NET-ASSETS> 342,783,497<PER-SHARE-NAV-BEGIN> 9.25<PER-SHARE-NII> 0.29<PER-SHARE-GAIN-APPREC> 0.21<PER-SHARE-DIVIDEND> (0.29)<PER-SHARE-DISTRIBUTIONS> 0<RETURNS-OF-CAPITAL> 0<PER-SHARE-NAV-END> 9.46<EXPENSE-RATIO> 1.10<AVG-DEBT-OUTSTANDING> 0<AVG-DEBT-PER-SHARE> 0 </TABLE>

FINANCIAL DATA SCHEDULE

<TABLE> <S> <C><ARTICLE> 6<SERIES> <NUMBER> 092 <NAME> JOHN HANco*ck GOVERNMENT INCOME FUND - CLASS B <S> <C><PERIOD-TYPE> 6-MOS<FISCAL-YEAR-END> MAY-31-1998<PERIOD-START> JUN-01-1998<PERIOD-END> NOV-30-1998<INVESTMENTS-AT-COST> 536,810,140<INVESTMENTS-AT-VALUE> 551,445,762<RECEIVABLES> 5,946,021<ASSETS-OTHER> 164,031<OTHER-ITEMS-ASSETS> 0<TOTAL-ASSETS> 557,555,814<PAYABLE-FOR-SECURITIES> 59,235,949<SENIOR-LONG-TERM-DEBT> 0<OTHER-ITEMS-LIABILITIES> 694,567<TOTAL-LIABILITIES> 59,930,516<SENIOR-EQUITY> 0<PAID-IN-CAPITAL-COMMON> 496,965,421<SHARES-COMMON-STOCK> 15,701,326<SHARES-COMMON-PRIOR> 12,742,073<ACCUMULATED-NII-CURRENT> 0<OVERDISTRIBUTION-NII> (96,525)<ACCUMULATED-NET-GAINS> (14,078,553)<OVERDISTRIBUTION-GAINS> 0<ACCUM-APPREC-OR-DEPREC> 14,834,955<NET-ASSETS> 497,625,298<DIVIDEND-INCOME> 0<INTEREST-INCOME> 17,405,467<OTHER-INCOME> 0<EXPENSES-NET> 3,097,779<NET-INVESTMENT-INCOME> 14,307,688<REALIZED-GAINS-CURRENT> 5,432,746<APPREC-INCREASE-CURRENT> 4,818,353<NET-CHANGE-FROM-OPS> 24,558,787<EQUALIZATION> 0<DISTRIBUTIONS-OF-INCOME> (3,613,279)<DISTRIBUTIONS-OF-GAINS> 0<DISTRIBUTIONS-OTHER> 0<NUMBER-OF-SHARES-SOLD> 6,676,642<NUMBER-OF-SHARES-REDEEMED> 3,912,977<SHARES-REINVESTED> 195,588<NET-CHANGE-IN-ASSETS> 40,223,214<ACCUMULATED-NII-PRIOR> 0<ACCUMULATED-GAINS-PRIOR> (19,511,299)<OVERDISTRIB-NII-PRIOR> (95,659)<OVERDIST-NET-GAINS-PRIOR> 0<GROSS-ADVISORY-FEES> 1,510,575<INTEREST-EXPENSE> 0<GROSS-EXPENSE> 3,097,779<AVERAGE-NET-ASSETS> 131,305,187<PER-SHARE-NAV-BEGIN> 9.25<PER-SHARE-NII> 0.26<PER-SHARE-GAIN-APPREC> 0.21<PER-SHARE-DIVIDEND> (0.26)<PER-SHARE-DISTRIBUTIONS> 0<RETURNS-OF-CAPITAL> 0<PER-SHARE-NAV-END> 9.46<EXPENSE-RATIO> 1.83<AVG-DEBT-OUTSTANDING> 0<AVG-DEBT-PER-SHARE> 0 </TABLE>

FINANCIAL DATA SCHEDULE

<TABLE> <S> <C><ARTICLE> 6<SERIES> <NUMBER> 101 <NAME> JOHN HANco*ck HIGH YIELD BOND FUND - CLASS A <S> <C><PERIOD-TYPE> YEAR<FISCAL-YEAR-END> MAY-31-1998<PERIOD-START> NOV-01-1997<PERIOD-END> MAY-31-1998<INVESTMENTS-AT-COST> 1,043,459,657<INVESTMENTS-AT-VALUE> 1,059,141,441<RECEIVABLES> 34,798,148<ASSETS-OTHER> 9,234<OTHER-ITEMS-ASSETS> 372,474<TOTAL-ASSETS> 1,094,321,297<PAYABLE-FOR-SECURITIES> 17,548,248<SENIOR-LONG-TERM-DEBT> 0<OTHER-ITEMS-LIABILITIES> 2,131,069<TOTAL-LIABILITIES> 19,679,317<SENIOR-EQUITY> 0<PAID-IN-CAPITAL-COMMON> 1,039,456,407<SHARES-COMMON-STOCK> 33,080,281<SHARES-COMMON-PRIOR> 12,436,729<ACCUMULATED-NII-CURRENT> 628,343<OVERDISTRIBUTION-NII> 0<ACCUMULATED-NET-GAINS> 19,033,474<OVERDISTRIBUTION-GAINS> 0<ACCUM-APPREC-OR-DEPREC> 15,523,756<NET-ASSETS> 1,074,641,980<DIVIDEND-INCOME> 5,835,191<INTEREST-INCOME> 73,598,087<OTHER-INCOME> 0<EXPENSES-NET> 11,868,394<NET-INVESTMENT-INCOME> 67,564,884<REALIZED-GAINS-CURRENT> 38,263,835<APPREC-INCREASE-CURRENT> (604,038)<NET-CHANGE-FROM-OPS> 105,224,681<EQUALIZATION> 0<DISTRIBUTIONS-OF-INCOME> 16,953,911<DISTRIBUTIONS-OF-GAINS> 2,604,121<DISTRIBUTIONS-OTHER> 0<NUMBER-OF-SHARES-SOLD> 31,229,630<NUMBER-OF-SHARES-REDEEMED> 11,797,149<SHARES-REINVESTED> 1,211,071<NET-CHANGE-IN-ASSETS> 597,693,091<ACCUMULATED-NII-PRIOR> 415,886<ACCUMULATED-GAINS-PRIOR> (4,858,582)<OVERDISTRIB-NII-PRIOR> 0<OVERDIST-NET-GAINS-PRIOR> 0<GROSS-ADVISORY-FEES> 3,997,329<INTEREST-EXPENSE> 0<GROSS-EXPENSE> 11,868,394<AVERAGE-NET-ASSETS> 181,452,621<PER-SHARE-NAV-BEGIN> 7.87<PER-SHARE-NII> 0.78<PER-SHARE-GAIN-APPREC> 0.51<PER-SHARE-DIVIDEND> (0.78)<PER-SHARE-DISTRIBUTIONS> (0.12)<RETURNS-OF-CAPITAL> 0<PER-SHARE-NAV-END> 8.26<EXPENSE-RATIO> 0.97<AVG-DEBT-OUTSTANDING> 0<AVG-DEBT-PER-SHARE> 0 </TABLE>

FINANCIAL DATA SCHEDULE

<TABLE> <S> <C><ARTICLE> 6<SERIES> <NUMBER> 102 <NAME> JOHN HANco*ck HIGH YIELD BOND FUND - CLASS B <S> <C><PERIOD-TYPE> YEAR<FISCAL-YEAR-END> MAY-31-1998<PERIOD-START> NOV-01-1997<PERIOD-END> MAY-31-1998<INVESTMENTS-AT-COST> 1,043,459,657<INVESTMENTS-AT-VALUE> 1,059,141,441<RECEIVABLES> 34,798,148<ASSETS-OTHER> 9,234<OTHER-ITEMS-ASSETS> 372,474<TOTAL-ASSETS> 1,094,321,297<PAYABLE-FOR-SECURITIES> 17,548,248<SENIOR-LONG-TERM-DEBT> 0<OTHER-ITEMS-LIABILITIES> 2,131,069<TOTAL-LIABILITIES> 19,679,317<SENIOR-EQUITY> 0<PAID-IN-CAPITAL-COMMON> 1,039,456,407<SHARES-COMMON-STOCK> 96,618,698<SHARES-COMMON-PRIOR> 48,136,933<ACCUMULATED-NII-CURRENT> 628,343<OVERDISTRIBUTION-NII> 0<ACCUMULATED-NET-GAINS> 19,033,474<OVERDISTRIBUTION-GAINS> 0<ACCUM-APPREC-OR-DEPREC> 15,523,756<NET-ASSETS> 1,074,641,980<DIVIDEND-INCOME> 5,835,191<INTEREST-INCOME> 73,598,087<OTHER-INCOME> 0<EXPENSES-NET> 11,868,394<NET-INVESTMENT-INCOME> 67,564,884<REALIZED-GAINS-CURRENT> 38,263,835<APPREC-INCREASE-CURRENT> (604,038)<NET-CHANGE-FROM-OPS> 105,224,681<EQUALIZATION> 0<DISTRIBUTIONS-OF-INCOME> 50,686,687<DISTRIBUTIONS-OF-GAINS> 8,869,961<DISTRIBUTIONS-OTHER> 0<NUMBER-OF-SHARES-SOLD> 61,535,597<NUMBER-OF-SHARES-REDEEMED> 15,737,486<SHARES-REINVESTED> 2,683,654<NET-CHANGE-IN-ASSETS> 597,693,091<ACCUMULATED-NII-PRIOR> 415,886<ACCUMULATED-GAINS-PRIOR> (4,858,582)<OVERDISTRIB-NII-PRIOR> 0<OVERDIST-NET-GAINS-PRIOR> 0<GROSS-ADVISORY-FEES> 3,997,329<INTEREST-EXPENSE> 0<GROSS-EXPENSE> 11,868,394<AVERAGE-NET-ASSETS> 587,564,632<PER-SHARE-NAV-BEGIN> 7.87<PER-SHARE-NII> 0.71<PER-SHARE-GAIN-APPREC> 0.51<PER-SHARE-DIVIDEND> (0.71)<PER-SHARE-DISTRIBUTIONS> (0.12)<RETURNS-OF-CAPITAL> 0<PER-SHARE-NAV-END> 8.26<EXPENSE-RATIO> 1.72<AVG-DEBT-OUTSTANDING> 0<AVG-DEBT-PER-SHARE> 0 </TABLE>

FINANCIAL DATA SCHEDULE

<TABLE> <S> <C><ARTICLE> 6<SERIES> <NUMBER> 101 <NAME> JOHN HANco*ck HIGH YIELD BOND FUND - CLASS A <S> <C><PERIOD-TYPE> 6-MOS<FISCAL-YEAR-END> MAY-31-1998<PERIOD-START> JUN-01-1998<PERIOD-END> NOV-30-1998<INVESTMENTS-AT-COST> 1,216,476,633<INVESTMENTS-AT-VALUE> 1,028,693,475<RECEIVABLES> 35,273,255<ASSETS-OTHER> 52,475<OTHER-ITEMS-ASSETS> 243,193<TOTAL-ASSETS> 1,064,262,398<PAYABLE-FOR-SECURITIES> 9,342,394<SENIOR-LONG-TERM-DEBT> 0<OTHER-ITEMS-LIABILITIES> 1,483,504<TOTAL-LIABILITIES> 10,825,898<SENIOR-EQUITY> 0<PAID-IN-CAPITAL-COMMON> 1,249,622,098<SHARES-COMMON-STOCK> 40,658,351<SHARES-COMMON-PRIOR> 33,080,281<ACCUMULATED-NII-CURRENT> 530,525<OVERDISTRIBUTION-NII> 0<ACCUMULATED-NET-GAINS> (9,062,604)<OVERDISTRIBUTION-GAINS> 0<ACCUM-APPREC-OR-DEPREC> (187,653,519)<NET-ASSETS> 1,053,436,500<DIVIDEND-INCOME> 4,175,300<INTEREST-INCOME> 55,581,335<OTHER-INCOME> 0<EXPENSES-NET> 7,693,752<NET-INVESTMENT-INCOME> 52,062,883<REALIZED-GAINS-CURRENT> (28,096,078)<APPREC-INCREASE-CURRENT> (203,177,275)<NET-CHANGE-FROM-OPS> (179,210,470)<EQUALIZATION> 0<DISTRIBUTIONS-OF-INCOME> 13,626,503<DISTRIBUTIONS-OF-GAINS> 0<DISTRIBUTIONS-OTHER> 0<NUMBER-OF-SHARES-SOLD> 17,831,240<NUMBER-OF-SHARES-REDEEMED> 11,153,044<SHARES-REINVESTED> 899,874<NET-CHANGE-IN-ASSETS> 21,205,480<ACCUMULATED-NII-PRIOR> 628,343<ACCUMULATED-GAINS-PRIOR> 19,033,474<OVERDISTRIB-NII-PRIOR> 0<OVERDIST-NET-GAINS-PRIOR> 0<GROSS-ADVISORY-FEES> 2,604,438<INTEREST-EXPENSE> 0<GROSS-EXPENSE> 7,693,883<AVERAGE-NET-ASSETS> 249,828,928<PER-SHARE-NAV-BEGIN> 8.26<PER-SHARE-NII> 0.39<PER-SHARE-GAIN-APPREC> (1.69)<PER-SHARE-DIVIDEND> (0.39)<PER-SHARE-DISTRIBUTIONS> 0<RETURNS-OF-CAPITAL> 0<PER-SHARE-NAV-END> 6.57<EXPENSE-RATIO> 0.95<AVG-DEBT-OUTSTANDING> 0<AVG-DEBT-PER-SHARE> 0 </TABLE>

FINANCIAL DATA SCHEDULE

<TABLE> <S> <C><ARTICLE> 6<SERIES> <NUMBER> 102 <NAME> JOHN HANco*ck HIGH YIELD BOND FUND - CLASS B <S> <C><PERIOD-TYPE> 6-MOS<FISCAL-YEAR-END> MAY-31-1998<PERIOD-START> JUN-01-1998<PERIOD-END> NOV-30-1998<INVESTMENTS-AT-COST> 1,216,476,633<INVESTMENTS-AT-VALUE> 1,028,693,475<RECEIVABLES> 35,273,255<ASSETS-OTHER> 52,475<OTHER-ITEMS-ASSETS> 243,193<TOTAL-ASSETS> 1,064,262,398<PAYABLE-FOR-SECURITIES> 9,342,394<SENIOR-LONG-TERM-DEBT> 0<OTHER-ITEMS-LIABILITIES> 1,483,504<TOTAL-LIABILITIES> 10,825,898<SENIOR-EQUITY> 0<PAID-IN-CAPITAL-COMMON> 1,249,622,098<SHARES-COMMON-STOCK> 116,762,107<SHARES-COMMON-PRIOR> 96,618,698<ACCUMULATED-NII-CURRENT> 530,525<OVERDISTRIBUTION-NII> 0<ACCUMULATED-NET-GAINS> (9,062,604)<OVERDISTRIBUTION-GAINS> 0<ACCUM-APPREC-OR-DEPREC> (187,653,519)<NET-ASSETS> 1,053,436,500<DIVIDEND-INCOME> 4,175,300<INTEREST-INCOME> 55,581,335<OTHER-INCOME> 0<EXPENSES-NET> 7,693,752<NET-INVESTMENT-INCOME> 52,062,883<REALIZED-GAINS-CURRENT> (28,096,078)<APPREC-INCREASE-CURRENT> (203,177,275)<NET-CHANGE-FROM-OPS> (179,210,470)<EQUALIZATION> 0<DISTRIBUTIONS-OF-INCOME> 38,059,127<DISTRIBUTIONS-OF-GAINS> 0<DISTRIBUTIONS-OTHER> 0<NUMBER-OF-SHARES-SOLD> 34,908,271<NUMBER-OF-SHARES-REDEEMED> 16,575,722<SHARES-REINVESTED> 1,810,860<NET-CHANGE-IN-ASSETS> 21,205,480<ACCUMULATED-NII-PRIOR> 628,343<ACCUMULATED-GAINS-PRIOR> 19,033,474<OVERDISTRIB-NII-PRIOR> 0<OVERDIST-NET-GAINS-PRIOR> 0<GROSS-ADVISORY-FEES> 2,604,438<INTEREST-EXPENSE> 0<GROSS-EXPENSE> 7,693,883<AVERAGE-NET-ASSETS> 751,706,891<PER-SHARE-NAV-BEGIN> 8.26<PER-SHARE-NII> 0.36<PER-SHARE-GAIN-APPREC> (1.69)<PER-SHARE-DIVIDEND> (0.36)<PER-SHARE-DISTRIBUTIONS> 0<RETURNS-OF-CAPITAL> 0<PER-SHARE-NAV-END> 6.57<EXPENSE-RATIO> 1.70<AVG-DEBT-OUTSTANDING> 0<AVG-DEBT-PER-SHARE> 0 </TABLE>

FINANCIAL DATA SCHEDULE

<TABLE> <S> <C><ARTICLE> 6<SERIES> <NUMBER> 103 <NAME> JOHN HANco*ck HIGH YIELD BOND FUND - CLASS C <S> <C><PERIOD-TYPE> 6-MOS<FISCAL-YEAR-END> MAY-31-1998<PERIOD-START> JUN-01-1998<PERIOD-END> NOV-30-1998<INVESTMENTS-AT-COST> 1,216,476,633<INVESTMENTS-AT-VALUE> 1,028,693,475<RECEIVABLES> 35,273,255<ASSETS-OTHER> 52,475<OTHER-ITEMS-ASSETS> 243,193<TOTAL-ASSETS> 1,064,262,398<PAYABLE-FOR-SECURITIES> 9,342,394<SENIOR-LONG-TERM-DEBT> 0<OTHER-ITEMS-LIABILITIES> 1,483,504<TOTAL-LIABILITIES> 10,825,898<SENIOR-EQUITY> 0<PAID-IN-CAPITAL-COMMON> 1,249,622,098<SHARES-COMMON-STOCK> 2,894,781<SHARES-COMMON-PRIOR> 386,768<ACCUMULATED-NII-CURRENT> 530,525<OVERDISTRIBUTION-NII> 0<ACCUMULATED-NET-GAINS> (9,062,604)<OVERDISTRIBUTION-GAINS> 0<ACCUM-APPREC-OR-DEPREC> (187,653,519)<NET-ASSETS> 1,053,436,500<DIVIDEND-INCOME> 4,175,300<INTEREST-INCOME> 55,581,335<OTHER-INCOME> 0<EXPENSES-NET> 7,693,752<NET-INVESTMENT-INCOME> 52,062,883<REALIZED-GAINS-CURRENT> (28,096,078)<APPREC-INCREASE-CURRENT> (203,177,275)<NET-CHANGE-FROM-OPS> (179,210,470)<EQUALIZATION> 0<DISTRIBUTIONS-OF-INCOME> 475,071<DISTRIBUTIONS-OF-GAINS> 0<DISTRIBUTIONS-OTHER> 0<NUMBER-OF-SHARES-SOLD> 2,820,795<NUMBER-OF-SHARES-REDEEMED> 345,968<SHARES-REINVESTED> 33,186<NET-CHANGE-IN-ASSETS> 21,205,480<ACCUMULATED-NII-PRIOR> 628,343<ACCUMULATED-GAINS-PRIOR> 19,033,474<OVERDISTRIB-NII-PRIOR> 0<OVERDIST-NET-GAINS-PRIOR> 0<GROSS-ADVISORY-FEES> 2,604,438<INTEREST-EXPENSE> 0<GROSS-EXPENSE> 7,693,883<AVERAGE-NET-ASSETS> 9,263,599<PER-SHARE-NAV-BEGIN> 8.26<PER-SHARE-NII> 0.36<PER-SHARE-GAIN-APPREC> (1.69)<PER-SHARE-DIVIDEND> (0.36)<PER-SHARE-DISTRIBUTIONS> 0<RETURNS-OF-CAPITAL> 0<PER-SHARE-NAV-END> 6.57<EXPENSE-RATIO> 1.70<AVG-DEBT-OUTSTANDING> 0<AVG-DEBT-PER-SHARE> 0 </TABLE>

FINANCIAL DATA SCHEDULE

<TABLE> <S> <C><ARTICLE> 6<SERIES> <NUMBER> 051 <NAME> JOHN HANco*ck INTERMEDIATE MATURITY GOVERNMENT FUND - CLASS A <S> <C><PERIOD-TYPE> YEAR<FISCAL-YEAR-END> MAY-31-1998<PERIOD-START> NOV-01-1997<PERIOD-END> MAY-31-1998<INVESTMENTS-AT-COST> 180,139,630<INVESTMENTS-AT-VALUE> 181,113,447<RECEIVABLES> 1,839,497<ASSETS-OTHER> 25,692<OTHER-ITEMS-ASSETS> 0<TOTAL-ASSETS> 182,978,636<PAYABLE-FOR-SECURITIES> 0<SENIOR-LONG-TERM-DEBT> 0<OTHER-ITEMS-LIABILITIES> 507,483<TOTAL-LIABILITIES> 507,483<SENIOR-EQUITY> 0<PAID-IN-CAPITAL-COMMON> 198,654,009<SHARES-COMMON-STOCK> 16,813,847<SHARES-COMMON-PRIOR> 2,405,279<ACCUMULATED-NII-CURRENT> 14,620<OVERDISTRIBUTION-NII> 0<ACCUMULATED-NET-GAINS> (17,173,457)<OVERDISTRIBUTION-GAINS> 0<ACCUM-APPREC-OR-DEPREC> 975,981<NET-ASSETS> 182,471,153<DIVIDEND-INCOME> 0<INTEREST-INCOME> 7,733,924<OTHER-INCOME> 0<EXPENSES-NET> 1,206,907<NET-INVESTMENT-INCOME> 6,527,017<REALIZED-GAINS-CURRENT> 1,939,903<APPREC-INCREASE-CURRENT> (317,027)<NET-CHANGE-FROM-OPS> 8,149,893<EQUALIZATION> 0<DISTRIBUTIONS-OF-INCOME> 5,879,115<DISTRIBUTIONS-OF-GAINS> 0<DISTRIBUTIONS-OTHER> 0<NUMBER-OF-SHARES-SOLD> 19,270,176<NUMBER-OF-SHARES-REDEEMED> 5,318,845<SHARES-REINVESTED> 457,237<NET-CHANGE-IN-ASSETS> 153,265,270<ACCUMULATED-NII-PRIOR> 8,468<ACCUMULATED-GAINS-PRIOR> (773,899)<OVERDISTRIB-NII-PRIOR> 0<OVERDIST-NET-GAINS-PRIOR> 0<GROSS-ADVISORY-FEES> 412,737<INTEREST-EXPENSE> 0<GROSS-EXPENSE> 1,283,942<AVERAGE-NET-ASSETS> 91,470,204<PER-SHARE-NAV-BEGIN> 9.46<PER-SHARE-NII> 0.62<PER-SHARE-GAIN-APPREC> 0.26<PER-SHARE-DIVIDEND> (0.62)<PER-SHARE-DISTRIBUTIONS> 0<RETURNS-OF-CAPITAL> 0<PER-SHARE-NAV-END> 9.72<EXPENSE-RATIO> 1.09<AVG-DEBT-OUTSTANDING> 0<AVG-DEBT-PER-SHARE> 0 </TABLE>

FINANCIAL DATA SCHEDULE

<TABLE> <S> <C><ARTICLE> 6<SERIES> <NUMBER> 052 <NAME> JOHN HANco*ck INTERMEDIATE MATURITY GOVERNMENT FUND - CLASS B <S> <C><PERIOD-TYPE> YEAR<FISCAL-YEAR-END> MAY-31-1998<PERIOD-START> NOV-01-1997<PERIOD-END> MAY-31-1998<INVESTMENTS-AT-COST> 180,139,630<INVESTMENTS-AT-VALUE> 181,113,447<RECEIVABLES> 1,839,497<ASSETS-OTHER> 25,692<OTHER-ITEMS-ASSETS> 0<TOTAL-ASSETS> 182,978,636<PAYABLE-FOR-SECURITIES> 0<SENIOR-LONG-TERM-DEBT> 0<OTHER-ITEMS-LIABILITIES> 507,483<TOTAL-LIABILITIES> 507,483<SENIOR-EQUITY> 0<PAID-IN-CAPITAL-COMMON> 198,654,009<SHARES-COMMON-STOCK> 1,967,219<SHARES-COMMON-PRIOR> 681,925<ACCUMULATED-NII-CURRENT> 14,620<OVERDISTRIBUTION-NII> 0<ACCUMULATED-NET-GAINS> (17,173,457)<OVERDISTRIBUTION-GAINS> 0<ACCUM-APPREC-OR-DEPREC> 975,981<NET-ASSETS> 182,471,153<DIVIDEND-INCOME> 0<INTEREST-INCOME> 7,733,924<OTHER-INCOME> 0<EXPENSES-NET> 1,206,907<NET-INVESTMENT-INCOME> 6,527,017<REALIZED-GAINS-CURRENT> 1,939,903<APPREC-INCREASE-CURRENT> (317,027)<NET-CHANGE-FROM-OPS> 8,149,893<EQUALIZATION> 0<DISTRIBUTIONS-OF-INCOME> 647,299<DISTRIBUTIONS-OF-GAINS> 0<DISTRIBUTIONS-OTHER> 0<NUMBER-OF-SHARES-SOLD> 3,198,138<NUMBER-OF-SHARES-REDEEMED> 1,950,374<SHARES-REINVESTED> 37,530<NET-CHANGE-IN-ASSETS> 153,265,270<ACCUMULATED-NII-PRIOR> 8,468<ACCUMULATED-GAINS-PRIOR> (773,899)<OVERDISTRIB-NII-PRIOR> 0<OVERDIST-NET-GAINS-PRIOR> 0<GROSS-ADVISORY-FEES> 412,737<INTEREST-EXPENSE> 0<GROSS-EXPENSE> 1,283,942<AVERAGE-NET-ASSETS> 11,432,023<PER-SHARE-NAV-BEGIN> 9.46<PER-SHARE-NII> 0.55<PER-SHARE-GAIN-APPREC> 0.26<PER-SHARE-DIVIDEND> (0.55)<PER-SHARE-DISTRIBUTIONS> 0<RETURNS-OF-CAPITAL> 0<PER-SHARE-NAV-END> 9.72<EXPENSE-RATIO> 1.84<AVG-DEBT-OUTSTANDING> 0<AVG-DEBT-PER-SHARE> 0 </TABLE>

FINANCIAL DATA SCHEDULE

<TABLE> <S> <C><ARTICLE> 6<SERIES> <NUMBER> 051 <NAME> JOHN HANco*ck INTERMEDIATE MATURITY GOVERNMENT FUND - CLASS A <S> <C><PERIOD-TYPE> 6-MOS<FISCAL-YEAR-END> MAY-31-1998<PERIOD-START> JUN-01-1998<PERIOD-END> NOV-30-1998<INVESTMENTS-AT-COST> 228,824,117<INVESTMENTS-AT-VALUE> 230,704,661<RECEIVABLES> 2,340,465<ASSETS-OTHER> 25,610<OTHER-ITEMS-ASSETS> 0<TOTAL-ASSETS> 233,070,736<PAYABLE-FOR-SECURITIES> 11,438,177<SENIOR-LONG-TERM-DEBT> 0<OTHER-ITEMS-LIABILITIES> 274,220<TOTAL-LIABILITIES> 11,712,397<SENIOR-EQUITY> 0<PAID-IN-CAPITAL-COMMON> 233,187,880<SHARES-COMMON-STOCK> 17,269,081<SHARES-COMMON-PRIOR> 16,813,847<ACCUMULATED-NII-CURRENT> 9,071<OVERDISTRIBUTION-NII> 0<ACCUMULATED-NET-GAINS> (13,839,025)<OVERDISTRIBUTION-GAINS> 0<ACCUM-APPREC-OR-DEPREC> 2,000,413<NET-ASSETS> 221,358,339<DIVIDEND-INCOME> 0<INTEREST-INCOME> 7,055,755<OTHER-INCOME> 0<EXPENSES-NET> 1,204,245<NET-INVESTMENT-INCOME> 5,851,510<REALIZED-GAINS-CURRENT> 3,334,432<APPREC-INCREASE-CURRENT> 1,024,432<NET-CHANGE-FROM-OPS> 10,210,374<EQUALIZATION> 0<DISTRIBUTIONS-OF-INCOME> 5,015,662<DISTRIBUTIONS-OF-GAINS> 0<DISTRIBUTIONS-OTHER> 0<NUMBER-OF-SHARES-SOLD> 3,181,326<NUMBER-OF-SHARES-REDEEMED> 3,146,385<SHARES-REINVESTED> 0<NET-CHANGE-IN-ASSETS> 38,887,186<ACCUMULATED-NII-PRIOR> 14,620<ACCUMULATED-GAINS-PRIOR> (17,173,457)<OVERDISTRIB-NII-PRIOR> 0<OVERDIST-NET-GAINS-PRIOR> 0<GROSS-ADVISORY-FEES> 398,554<INTEREST-EXPENSE> 0<GROSS-EXPENSE> 1,204,245<AVERAGE-NET-ASSETS> 166,752,201<PER-SHARE-NAV-BEGIN> 9.72<PER-SHARE-NII> 0.30<PER-SHARE-GAIN-APPREC> 0.23<PER-SHARE-DIVIDEND> (0.30)<PER-SHARE-DISTRIBUTIONS> 0<RETURNS-OF-CAPITAL> 0<PER-SHARE-NAV-END> 9.95<EXPENSE-RATIO> 1.09<AVG-DEBT-OUTSTANDING> 0<AVG-DEBT-PER-SHARE> 0 </TABLE>

FINANCIAL DATA SCHEDULE

<TABLE> <S> <C><ARTICLE> 6<SERIES> <NUMBER> 052 <NAME> JOHN HANco*ck INTERMEDIATE MATURITY GOVERNMENT FUND - CLASS B <S> <C><PERIOD-TYPE> 6-MOS<FISCAL-YEAR-END> MAY-31-1998<PERIOD-START> JUN-01-1998<PERIOD-END> NOV-30-1998<INVESTMENTS-AT-COST> 228,824,117<INVESTMENTS-AT-VALUE> 230,704,661<RECEIVABLES> 2,340,465<ASSETS-OTHER> 25,610<OTHER-ITEMS-ASSETS> 0<TOTAL-ASSETS> 233,070,736<PAYABLE-FOR-SECURITIES> 11,438,177<SENIOR-LONG-TERM-DEBT> 0<OTHER-ITEMS-LIABILITIES> 274,220<TOTAL-LIABILITIES> 11,712,397<SENIOR-EQUITY> 0<PAID-IN-CAPITAL-COMMON> 233,187,880<SHARES-COMMON-STOCK> 4,973,183<SHARES-COMMON-PRIOR> 1,967,219<ACCUMULATED-NII-CURRENT> 9,071<OVERDISTRIBUTION-NII> 0<ACCUMULATED-NET-GAINS> (13,839,025)<OVERDISTRIBUTION-GAINS> 0<ACCUM-APPREC-OR-DEPREC> 2,000,413<NET-ASSETS> 221,358,339<DIVIDEND-INCOME> 0<INTEREST-INCOME> 7,055,755<OTHER-INCOME> 0<EXPENSES-NET> 1,204,245<NET-INVESTMENT-INCOME> 5,851,510<REALIZED-GAINS-CURRENT> 3,334,432<APPREC-INCREASE-CURRENT> 1,024,432<NET-CHANGE-FROM-OPS> 10,210,374<EQUALIZATION> 0<DISTRIBUTIONS-OF-INCOME> 841,397<DISTRIBUTIONS-OF-GAINS> 0<DISTRIBUTIONS-OTHER> 0<NUMBER-OF-SHARES-SOLD> 4,730,611<NUMBER-OF-SHARES-REDEEMED> 1,762,417<SHARES-REINVESTED> 0<NET-CHANGE-IN-ASSETS> 38,887,186<ACCUMULATED-NII-PRIOR> 14,620<ACCUMULATED-GAINS-PRIOR> (17,173,457)<OVERDISTRIB-NII-PRIOR> 0<OVERDIST-NET-GAINS-PRIOR> 0<GROSS-ADVISORY-FEES> 398,554<INTEREST-EXPENSE> 0<GROSS-EXPENSE> 1,204,245<AVERAGE-NET-ASSETS> 31,980,049<PER-SHARE-NAV-BEGIN> 9.72<PER-SHARE-NII> 0.26<PER-SHARE-GAIN-APPREC> 0.23<PER-SHARE-DIVIDEND> (0.26)<PER-SHARE-DISTRIBUTIONS> 0<RETURNS-OF-CAPITAL> 0<PER-SHARE-NAV-END> 9.95<EXPENSE-RATIO> 1.84<AVG-DEBT-OUTSTANDING> 0<AVG-DEBT-PER-SHARE> 0 </TABLE>