HANCOCK JOHN STRATEGIC SERIES, N-30D, 1998-07-30

HANCOCK JOHN STRATEGIC SERIES
N-30D, 1998-07-30

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ANNUAL Report

{PHOTO OMMITTED]

Sovereign
U.S. Government
Income Fund

MAY 31, 1998

<PAGE>

TRUSTEES
Edward J. Boudreau, Jr.
Dennis S. Aronowitz
Richard P. Chapman, Jr.*
William J. Cosgrove
Douglas M. Costle
Leland O. Erdahl
Richard A. Farrell
Gail D. Fosler
William F. Glavin
Anne C. Hodsdon
Dr. John A. Moore
Patti McGill Peterson
John W. Pratt*
Richard S. Scipione
Edward J. Spellman*
*Members of the Audit Committee

OFFICERS
Edward J. Boudreau, Jr.
Chairman and Chief Executive Officer
Robert G. Freedman
Vice Chairman and
Chief Investment Officer
Anne C. Hodsdon
President and Chief Operating Officer
James B. Little
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President and Secretary
James J. Stokowski
Vice President and Treasurer
Thomas H. Connors
Second Vice President and
Compliance Officer

CUSTODIAN
Investors Bank & Trust Company
200 Clarendon Street
Boston, Massachusetts 02116

TRANSFER AGENT
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, Massachusetts 02217-1000

INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603

PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603

LEGAL COUNSEL
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109-1803

INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
160 Federal Street
Boston, Massachusetts 02110

DEAR FELLOW SHAREHOLDERS:

During the last decade, investors have become used to seeing stock market
returns averaging 15% or so each year. In the past three years, the stock market
has treated us to a record run, producing annual returns in excess of 20%.

After such a long and remarkable performance, many began this year wondering
what the market would do for an encore in 1998. The answer so far has been more
of the same, even with the recent increase in volatility caused by tremors from
Asia. This achievement continues to bolster many investors' convictions that the
market will produce these results forever, or, in the worst case, that market
declines will always be short-lived. While the economy remains solid and the
environment favorable, history and reason tell us it's a highly unlikely
scenario.

This doesn't mean we know what the market will do next, or that it's
riding for a fall. But after such a run, even in this "new era" of strong
economic growth with low inflation, we believe it would be wise for investors to
set more realistic expectations. As we've said before, markets do indeed move in
two directions. Over the long term, the market's historical results have been
more in the 10% per year range, which is still a solid result, considering it
has been produced despite wars, depressions and other social upheavals along the
way.

- --------------------------------------------------------------------------------
[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief
Executive Officer, flush right, next to third paragraph.]
- --------------------------------------------------------------------------------

In addition to adjusting, or at least re-examining, expectations, now could
also be a good time to review with your investment professional how your assets
are diversified, perhaps with an eye toward a more conservative approach.
Stocks, especially with their outsized gains of the last three years, might have
grown to represent a larger piece of your portfolio than you had originally
intended, given your objectives, time horizon and risk level.

At John Hancock Funds, our goal is to help you reach your financial objectives
and maintain wealth. One way we can do that is by helping you keep your feet on
the ground as you pursue your dreams.

Sincerely,

/s/Edward J. Boudreau, Jr.
- --------------------------
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER

<PAGE>

By Barry Evans, CFA, Portfolio Manager

John Hancock Sovereign
U.S. Government Income Fund

U.S. bond market rally ends, holding pattern begins

U.S. bonds marched to two different tunes this past year. Throughout the summer
and fall of 1997, low inflation, weaker commodity prices and a shrinking deficit
pushed bond prices higher. Asia's currency and credit problems, which seemed
destined to slow U.S. economic growth, further fueled the bond market's rally.
As interest rates tumbled, U.S. Treasuries did especially well. Yields on the
10-year Treasury fell to 5.74% by year end, down from 6.66% on May 31, 1997.

Contrary to expectations, the U.S. economy began showing signs of growing
strength by mid-January. At the same time, prices were falling worldwide as the
effects of Asia's problems reverberated in markets across the globe. The
combination of these two opposing forces N a strong economy and global deflation
N kept the bond market from moving much in either direction for the rest of the
winter and spring. Yields on the 10-year Treasury bounced around between 5.4%
and 5.8% throughout this time. With little opportunity for price gains, "spread"
securities with a yield advantage over Treasuries N including both mortgage
bonds and U.S. government agencies N became more attractive.

Fortunately, John Hancock Sovereign U.S. Government Income Fund was able to keep
pace with the market's changes. For the year ended May 31, 1998, the Fund's

"U.S. bonds marched to two different tunes this past year."

- --------------------------------------------------------------------------------
[[A 2 1/4" x 3 1/2" photo of fund management team. Caption reads: Fund
management team members (l-r): Seth Robbins, Dawn Baillie and Barry Evans]
- --------------------------------------------------------------------------------

<PAGE>

John Hancock Funds - Sovereign U.S. Government Income Fund

- --------------------------------------------------------------------------------
["Pie chart with the heading "Portfolio Diversification" at the top left hand
column. The chart is divided into 3 sections. Going from top left to right; U.S.
Government Agencies 58%; U.S. Treasuries 40%; Short-Term Investments & Other 2%.
Footnote below states "As a percentage of net assets on May 31, 1998."]
- --------------------------------------------------------------------------------

Class A and Class B shares had total returns of 10.68% and 9.93%, respectively,
at net asset value. Keep in mind that your net asset value return will be
different from this performance if you were not invested in the Fund for the
entire period and did not reinvest all distributions. By comparison, the average
general U.S. government income fund had a total return of 10.46%, according to
Lipper Analytical Services, Inc.1 During the same period, the Lehman Brothers
Government Bond Index returned 11.23%. For longer-term performance information,
please see pages six and seven.

Swapping Treasuries for mortgage bonds. As
interest rates were falling, the Fund benefited from its sizeable stake in U.S.
Treasuries. By November, Treasuries represented 47% of the Fund's net assets N
up from 18% six months earlier. After interest rates leveled off in mid-January,
however, we decided to sell Treasuries and buy mortgage bonds, whose prices had
lagged Treasuries. By May, we had cut our Treasury stake back to 40% of net
assets.

Mortgage bonds offer a yield advantage over Treasuries because they
carry additional risks. With mortgage bonds, investors take on prepayment risk N
or the risk that homeowners will prepay their mortgages before they're due so
they can refinance at lower rates. When interest rates are falling and
prepayments are picking up, prices on mortgage bonds usually increase at a
slower rate than Treasuries. By February, we were beginning to see good buying
opportunities. We focused on 30-year GNMA bonds with 7% coupons (or stated
interest rates), as well as 15-year FNMA bonds with 6.5% coupons. Our strategy
was to buy mortgage

"As interest rates were falling, the Fund benefited from its sizeable stake in
U.S. Treasuries."

bonds whose coupons were below those where most of the prepayments were
occurring and above those where most of the new mortgage bonds were being
issued. This protected the Fund somewhat from prepayments at existing interest
rate levels, while giving us the advantage of added income. As the spring
progressed and prepayments began to ease off, mortgage bonds did better than
Treasuries.

At the same time, we held on to our 19% stake in collateralized
mortgage obligations (CMOs). These are special mortgage securities that take the
cash flows from mortgage pools and separate them into different classes with
varied maturities and prepayment risks. Our longer-term CMOs, which did not
carry much prepayment risk, helped generate added income for the Fund.
Unfortunately, our shorter-term CMOs weakened as prepayments picked up. The Fund
ended the period with a 58% stake in mortgages, up from 45% six months earlier.

We also kept our duration steady at 5.4 years. Duration measures how sensitive a
bond's price is to changes in interest rates. The longer a bond's duration, the
more its price will rise as interest rates fall N or fall as interest rates
rise. A longer-than-average duration worked well for much of the period when

<PAGE>

John Hancock Funds - Sovereign U.S. Government Income Fund

- --------------------------------------------------------------------------------
["Bar Chart with the heading "Fund Performance" at the top of left hand column.
Under the heading is the footnote: "For the year ended May 31, 1998." The chart
is scaled in increments of 2% with the 12% at the top and 0% at the bottom. The
first represents the 10.68% total return for John Hancock Sovereign U.S.
Government Income Fund: Class A. The second represents the 9.93% total return
for John Hancock Sovereign U.S. Government Income Fund: Class B. The third
represents the 10.46% total return for Average general U.S. government income
fund. A Footnote below reads " Total returns for John Hancock Sovereign U.S.
Government Income Fund are at net asset value with all distributions reinvested.
The average general U.S. government income fund is tracked by Lipper Analytical
Services, Inc. See the following two pages for historical performance
information."]
- --------------------------------------------------------------------------------

interest rates were falling. With hindsight, we might have benefited from a
shorter duration in January, once rates stabilized. Since we expected the
economy to moderate and rates to fall further, however, we decided to sit tight.

Cautious optimism ahead For the foreseeable future, we plan to keep the Fund's
duration long. Once we see definite signs that the economy is slowing, we'll
lengthen duration further to take advantage of a possible decline in interest
rates. There are several reasons to expect U.S. economic growth to moderate
sometime before year end. The warm winter weather that pushed consumer spending
to unsustainable levels in the first quarter has passed. Also during the first
quarter, we saw a huge build-up in inventory, which will most likely slow
industrial production going forward. Finally, as Asia's problems deepen, we
expect U.S. exports to the region to slow and hurt gross domestic product.
Weaker trends in one or more of these

"There are several reasons to expect U.S. economic growth to moderate..."

areas could signal the beginning of an economic slowdown. We'll also be keeping
a close eye on corporate earnings, which have begun growing at a slower pace.

Even in this uncertain environment, the U.S. bond market remains attractive for
several reasons. Real interest rates ____ rates after inflation ____ are still
at historically high levels. The longer inflation remains low, the more likely
it is that real interest rates will come down, sending bond prices up. In
addition, Treasury issuance has slowed thanks to a shrinking deficit. A
diminished supply could help boost prices. On a broader scale, a stable
democracy, strong economic growth, low inflation and bond yields that are higher
than some other Western industrialized nations also make the U.S. bond market
attractive. All that remains is for an economic slowdown to lead to falling
interest rates, which would in turn re-ignite the stalled bond market.

This commentary reflects the views of the portfolio manager through the end of
the Fund's period discussed in this report. Of course, the manager's views are
subject to change as market and other conditions warrant.

1Figures from Lipper Analytical Services, Inc. include reinvested dividends and
do not take into account sales charges. Actual load-adjusted performance is
lower.

<PAGE>

John Hancock Funds - Sovereign U.S. Government Income Fund

A LOOK AT PERFORMANCE

The tables on the right show the cumulative total returns and the average annual
total returns for the John Hancock Sovereign U.S. Government Income Fund. Total
return measures the change in value of an investment from the beginning to the
end of a period, assuming all distributions were reinvested.

For Class A shares, total return figures include a maximum applicable sales
charge of 4.5%. Class B performance reflects a maximum contingent deferred sales
charge (maximum 5% and declining to 0% over six years).

All figures represent past performance and are no guarantee of future results.
Keep in mind that the total return and share price of the Fund's investments
will fluctuate. As a result, your Fund's shares may be worth more or less than
their original cost, depending on when you sell them. Please read your
prospectus carefully before you invest or send money.

CLASS A
For the period ended March 31, 1998
Since
One Five Inception
Year Years (1/3/92)
---- ----- --------

Cumulative Total Returns 6.43% 26.60% 40.88%
Average Annual Total Returns 6.43% 4.83% 5.65%

CLASS B
For the period ended March 31, 1998

One Five TEN
Year Years Years
---- ----- -----

Cumulative Total Returns 5.69% 27.32% 110.29%
Average Annual Total Returns 5.69% 4.95% 7.72%

YIELDS
As of May 31, 1998
SEC 30-DAY
YIELD
-----

John Hancock Sovereign U.S. Government Income Fund:
Class A 4.93%
John Hancock Sovereign U.S. Government Income Fund:
Class B 4.47%

<PAGE>

John Hancock Funds - Sovereign U.S. Government Income Fund

WHAT HAPPENED TO A $10,000 INVESTMENT...
The charts on the right show how much a $10,000 investment in the John Hancock
Sovereign U.S. Government Income Fund would be worth, assuming all distributions
were reinvested for the period indicated. For comparison, we've shown the same
$10,000 investment in the Lehman Brothers Government Bond Index - an unmanaged
index that measures the performance of U.S. Treasury bonds and U.S. government
agency bonds. Past performance is not indicative of future results.

- --------------------------------------------------------------------------------
Sovereign U.S. Government Fund
Class A shares

Line chart with the heading Sovereign U.S. Government Fund Class A representing
the growth of a hypothetical $10,000 investment over the life of the fund.
Within the chart are three lines. The first line represents the value of the
Lehman Brothers Government Bond Index and is equal to $14,969 as of May 31,
1998. The second line represents the value of the hypothetical $10,000
investment made in the Sovereign U.S. Government Fund on January 3, 1992, before
sales charge, and is equal to $14,965 as of May 31, 1998. The third line
represents the Sovereign U.S. Government Fund, after sales charge, and is equal
to $14,292 as of May 31, 1998.
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Sovereign U.S. Government Fund
Class B shares

Line chart with the heading Sovereign U.S. Government Fund Class B, representing
the growth of a hypothetical $10,000 investment over the life of the fund.
Within the chart are two lines. The first line represents the value of the
Lehman Brothers Government Bond Index and is equal to $21,896 as of May 31,
1998. The second line represents the value of the hypothetical $10,000
investment made in the Sovereign U.S. Government Fund, before sales charge, on
May 31, 1988, and is equal to $21,859 as of May 31, 1998.
- --------------------------------------------------------------------------------

*No contingent deferred sales charge applicable.

<PAGE>

FINANCIAL STATEMENTS

John Hancock Funds - Sovereign U.S. Government Income Fund

The Statement of Assets and Liabilities is the Fund's balance
sheet and shows the value of what the Fund owns, is due and
owes on May 31, 1998. You'll also find the net asset value and
the maximum offering price per share as of that date.

Statement of Assets and Liabilities
May 31, 1998
- -----------------------------------------------
Assets:
Investments at value - Note C:
United States government and agencies securities
(cost -D $352,003,843) ............................ $363,494,773
Joint repurchase agreement (cost - $23,000)........ 23,000
Corporate savings account ......................... 6,802
------------
363,524,575
Receivable for investments sold ................... 735,978
Receivable for shares sold ........................ 35,231
Interest receivable ............................... 4,300,750
Receivable for variation margin -D Note A ......... 51,500
Other assets ...................................... 41,657
------------
Total Assets .................. 368,689,691
-------------------------------------------------
Liabilities:
Payable for shares repurchased .................... 161,977
Dividend payable .................................. 186,508
Payable to John Hancock Advisers, Inc.
and affiliates- Note B ............................ 328,588
Accounts payable and accrued expenses ............. 81,270
------------
Total Liabilities ............. 758,343
-------------------------------------------------
Net Assets:
Capital paid-in ................................... 403,389,085
Accumulated net realized loss on investments and
financial future contracts ........................ (46,760,484)
Net unrealized appreciation of investments and
financial future contracts ........................ 11,498,920
Distributions in excess of net investment income... (196,173)
------------
Net Assets .................... $367,931,348
=================================================

Net Asset Value Per Share:
(Based on net assets and shares of beneficial
interest outstanding -D unlimited number of shares
authorized with no par value)
Class A -D $285,335,758/28,777,805 ................ $9.92
=====================================================================
Class B-D $82,595,590/8,330,255 ................... $9.92
=====================================================================
Maximum Offering Price Per Share*
Class A -D ($9.92 x 104.71%) ...................... $10.39
=====================================================================

* On single retail sales of less than $100,000. On sales of $100,000 or more and
on group sales the offering price is reduced.

The Statement of Operations summarizes the Fund's investment
income earned and expenses incurred in operating the Fund. It
also shows net gains (losses) for the periods stated.

Statement of Operations
Year ended May 31, 1998
- -----------------------------------------------
Investment Income:
Interest .......................................... $29,512,114
------------
Expenses:
Investment management fee- Note B ................. 1,941,310
Distribution and service fee- Note B
Class A ......................................... 894,247
Class B ........................................... 893,948
Transfer agent fee- Note B ........................ 1,004,778
Custodian fee ..................................... 104,730
Financial services fee- Note B .................... 68,972
Auditing fee ...................................... 51,000
Registration and filing fees ...................... 31,567
Printing .......................................... 24,052
Trustees' fees .................................... 23,453
Miscellaneous ..................................... 4,288
Legal fees ........................................ 3,831
------------
Total Expenses ................ 5,046,176
-------------------------------------------------
Net Investment Income ......... 24,465,938
-------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments
and Financial Future Contracts:
Net realized gain on investments sold .......... 3,396,877
Net realized loss on financial futures contracts (460,691)
Change in net unrealized appreciation/depreciation
of investments ................................. 11,299,891
Change in net unrealized appreciation/depreciation
of financial futures contracts ................. 73,531
------------
Net Realized and Unrealized
Gain on Investments and
Financial Futures Contracts ... 14,309,608
-------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ..... $38,775,546
=================================================

SEE NOTES TO FINANCIAL STATEMENTS.
8

<PAGE>

FINANCIAL STATEMENTS

John Hancock Funds - Sovereign U.S. Government Income Fund

Statement of Changes in Net Asset
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED NOVEMBER 1, 1996 YEAR ENDED
OCTOBER 31, 1996 TO MAY 31, 1997(1) MAY 31, 1998
---------------- ------------------ ------------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ................................. $30,058,671 $15,884,675 $24,465,938
Net realized gain (loss) on investments sold and
financial futures contracts ........................... (2,404,490) (870,868) 2,936,186
Change in net unrealized appreciation/depreciation of
investments and financial futures contracts ........... (10,781,489) (7,225,543) 11,373,422
----------- ----------- -----------
Net Increase in Net Assets Resulting from Operations.. 16,872,692 7,788,264 38,775,546
----------- ----------- -----------
Distributions to Shareholders:
Dividends from net investment income
Class A-($0.6445, $0.3584 and $0.6364 per share,
respectively) ........................................ (22,888,998) (11,731,116) (19,290,057)
Class B- ($0.5788, $0.3201 and $0.5689 per share,
respectively) ........................................ (7,168,399) (3,452,330) (5,223,588)
Distributions from capital paid-in
Class A-D (none, $0.0148 and none per share,
respectively) ........................................ - (483,787) -
Class B-D (none, $0.0143 and none per share,
respectively) ........................................ - (154,046) -
---------- ----------- -----------
Total Distributions to Shareholders ................... (30,057,397) (15,821,279) (24,513,645)
----------- ----------- -----------
From Fund Share Transactions- Net:* ................... (46,215,732) (35,417,657) (45,269,176)
----------- ----------- -----------
Net Assets:
Beginning of period ................................... 501,789,732 442,389,295 398,938,623
----------- ----------- -----------
End of period (including distributions in excess of net
investment income of $80,915, $152,625 and $196,173,
respectively) ......................................... $442,389,295 $398,938,623 $367,931,348
=========== =========== ===========
* Analysis of Fund Share Transactions:
</TABLE>

<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED NOVEMBER 1, 1996 YEAR ENDED
OCTOBER 31, 1996 TO MAY 31, 1997(1) MAY 31, 1998
---------------- ------------------ ------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Shares sold ....................... 2,701,311 $26,773,125 710,972 $6,795,126 1,581,221 $15,573,019
Shares issued to shareholders in
reinvestment of distributions ..... 1,861,397 18,201,055 1,011,535 9,744,947 1,562,529 15,369,047
---------- ----------- --------- ----------- ---------- -----------
4,562,708 44,974,180 1,722,507 16,540,073 3,143,750 30,942,066
Less shares repurchased ........... (7,742,610) (76,053,085) (3,949,720) (38,081,860) (6,008,099) (59,106,595)
---------- ----------- --------- ----------- ---------- -----------
Net decrease ...................... (3,179,902) ($31,078,905) (2,227,213) ($21,541,787) (2,864,349) ($28,164,529)
========== =========== ========= =========== ========== ===========
CLASS B
Shares sold ....................... 1,137,893 $11,221,296 412,878 $4,053,805 1,106,741 $10,958,277
Shares issued to shareholders in
reinvestment of distributions ..... 397,229 3,883,010 204,335 1,968,833 285,916 2,811,860
---------- ----------- --------- ----------- ---------- -----------
1,535,122 15,104,306 617,213 6,022,638 1,392,657 13,770,137
Less shares repurchased ........... (3,092,548) (30,241,133) (2,064,737) (19,898,508) (3,137,772) (30,874,784)
---------- ----------- --------- ----------- ---------- -----------
Net decrease ...................... (1,557,426) ($15,136,827) (1,447,524) ($13,875,870) (1,745,115) ($17,104,647)
========== =========== ========= =========== ========== ===========

(1) Effective May 31, 1997, the fiscal period end changed from October 31 to May
31.
</TABLE>

The Statement of Changes in Net Assets shows how the value of the Fund's net
assets has changed since the end of the previous period. The difference reflects
earnings less expenses, any investment gains and losses, distributions paid to
shareholders and any increase or decrease in money shareholders invested in the
Fund. The footnote illustrates the number of Fund shares sold, reinvested and
repurchased during the last three periods, along with the corresponding dollar
value.

SEE NOTES TO FINANCIAL STATEMENTS.
9

<PAGE>

FINANCIAL STATEMENTS

John Hancock Funds - Sovereign U.S. Government Income Fund

Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each
period indicated, investment returns, key ratios and supplemental data are as
follows:
- --------------------------------------------------------------------------------

YEAR ENDED OCTOBER 31, PERIOD FROM
------------------------------ NOVEMBER 1, 1996 YEAR ENDED
1993 1994 1995 1996 TO MAY 31, 1997(5) MAY 31, 1998
---- ---- ---- ---- ------------------ ------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period ........ $10.29 $10.89 $9.24 $10.01 $9.75 $9.56
------- ------- ------ ------ ------ -----
Net Investment Income ....................... 0.68(1) 0.65 0.65 0.64(1) 0.37(1) 0.64(1)
Net Realized and Unrealized Gain (Loss)
on Investments and
Financial Futures Contracts ................. 0.61 (1.34) 0.77 (0.26) (0.19) 0.36
------- ------- ------ ------ ------ -----
Total from Investment Operations ............ 1.29 (0.69) 1.42 0.38 0.18 1.00
------- ------- ------ ------ ------ -----

Less Distributions:
Dividends from Net Investment Income ........ (0.68) (0.65) (0.65) (0.64) (0.36) (0.64)
Distributions from Net Realized
Gain on Investments Sold .................... (0.01) (0.31) - - - -
Distributions from Capital Paid-In - - - - (0.01) -
------- ------- ------ ------ ----- -----
Total Distributions ......................... (0.69) (0.96) (0.65) (0.64) (0.37) (0.64)

Net Asset Value, End of Period .............. $10.89 $9.24 $10.01 $9.75 $9.56 $9.92
======= ======= ====== ====== ===== =====
Total Investment Return at Net
Asset Value(2) ............................. 12.89% (6.66%) 15.90% 4.02% 1.92%(3) 10.68%

Ratios and Supplemental Data
Net Assets, End of Period (000s omitted).... $375,416 $315,372 $370,966 $330,162 $302,589 $285,336
Ratio of Expenses to Average Net Asset...... 1.30% 1.23% 1.17% 1.15% 1.17%(4) 1.14%
Ratio of Net Investment Income to
Average Net Assets .......................... 6.47% 6.62% 6.76% 6.58% 6.69%(4) 6.48%
Portfolio Turnover Rate 273% 127% 94% 143% 88% 148%
</TABLE>

The Financial Highlights summarizes the impact of the following factors on a
single share for each period indicated: the net investment income, net realized
and unrealized gains (losses), distributions and total investment return of the
Fund. It shows how the Fund's net asset value for a share has changed since the
end of the previous period. Additionally, important relationships between some
items presented in the financial statements are expressed in ratio form.

SEEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>

Financial Highlights (continued)

Net Realized and Unrealized Gain (Loss) on
Investments and Financial Futures Contracts . 0.61 (1.34) 0.77 (0.26) (0.18) 0.36
------ ------ ----- ------ ----- -----
Total from Investment Operations ............ 1.27 (0.73) 1.37 0.32 0.15 0.93
------ ------ ----- ------ ----- -----

Less Distributions:
Dividends from Net Investment Income ........ (0.66) (0.61) (0.60) (0.58) (0.32) (0.57)
Distributions from Net Realized Gain
on Investments Sold ......................... (0.01) (0.31) - - - -
Distributions from Capital Paid-In .......... - - - - (0.01) -
------ ------ ----- ------ ----- -----
Total Distributions ......................... (0.67) (0.92) (0.60) (0.58) (0.33) (0.57)
------ ------ ----- ------ ----- -----
Net Asset Value, End of Period .............. $10.88 $9.23 $10.00 $9.74 $9.56 $9.92
====== ====== ====== ====== ====== ======
Total Investment Return at Net Asset Value(2) 12.66% (7.05%) 15.27% 3.33% 1.61%(3) 9.93%

Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) .... $244,133 $196,899 $130,824 $112,228 $96,349 $82,596
Ratio of Expenses to Average Net Assets ... 1.51% 1.64% 1.72% 1.82% 1.86%(4) 1.83%
Ratio of Net Investment Income to Average
Net Assets .................................. 6.23% 6.19% 6.24% 5.91% 5.99%(4) 5.79%
Portfolio Turnover Rate ..................... 273% 127% 94% 143% 88% 148%

(1) Based on the average of shares outstanding at the end of each month.
(2) Assumes dividend reinvestment and does not reflect the effect of sales charges.
(3) Not annualized.
(4) Annualized.
(5) Effective May 31, 1997, the fiscal period end changed from October 31 to May 31.
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>

FINANCIAL STATEMENTS

John Hancock Funds - Sovereign U.S. Government Income Fund

Schedule of Investments
May 31, 1998
- --------------------------------------------------------------------------------

The Schedule of Investments is a complete list of all securities owned by the
Sovereign U.S. Government Income Fund on May 31, 1998. It's divided into two
main categories: U.S. government and agencies securities and short-term
investments. Short-term investments, which represent the Fund's "cash" position,
are listed last.

<TABLE>
<CAPTION>
PAR VALUE
INTEREST MATURITY (000s MARKET
RATE DATE OMITTED) VALUE
ISSUER, DESCRIPTION ---- ---- -------- -----
- -------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AND AGENCIES SECURITIES
Government - U.S. (40.32%)
United States Treasury,
Bond .................................... 15.750% 11-15-01 $18,000 $23,692,500
Bond .................................... 10.750 08-15-05 17,085 22,151,728
Bond .................................... 12.750 11-15-10 6,000 8,511,540
Bond .................................... 12.000 08-15-13 23,900 35,222,625
Bond .................................... 9.250 02-15-16 24,450 33,469,850
Bond .................................... 8.125 08-15-19 1,015 1,284,604
Bond .................................... 6.125 11-15-27 12,250 12,799,290
Note .................................... 9.125 05-15-99 1,500 1,548,990
Note .................................... 8.500 02-15-00 1,450 1,518,194
Note .................................... 6.625 07-31-01 1,000 1,029,530
Note .................................... 6.125 12-31-01 7,000 7,112,630
-----------
148,341,481
-----------
Government - U.S. Agencies (58.47%)
Federal Home Loan Mortgage Corp.,
15 Yr Pass Thru Ctf ..................... 10.500 02-01-03 2,831 2,924,537
30 Yr Pass Thru Ctf ..................... 9.500 08-01-16 10,215 10,952,779
CMO REMIC 34-C .......................... 9.000 11-15-19 3,149 3,199,832
CMO REMIC 1142-H ........................ 7.950 12-15-20 10,000 10,143,700
CMO REMIC 1603-K ........................ 6.500 10-15-23 5,000 4,996,850
CMO REMIC 1608-L ........................ 6.500 09-15-23 5,000 5,025,000
CMO REMIC 1617-PM ....................... 6.500 11-15-23 10,000 10,081,200
CMO REMIC 1727-I ........................ 6.500 05-15-24 5,000 5,006,250
Deb ..................................... 6.875 11-22-06 5,000 5,114,050
Note .................................... 5.750 04-15-08 3,000 2,947,200
Federal National Mortgage Assn.,
10 Yr Pass Thru Ctf ..................... 9.050 04-10-00 2,000 2,114,380
10 Yr Pass Thru Ctf ..................... 8.900 06-12-00 5,000 5,304,700
15 Yr Pass Thru Ctf ..................... 9.000 02-01-10 4,976 5,188,123
15 Yr Pass Thru Ctf ..................... 7.500 07-01-11 3,674 3,790,267
15 Yr Pass Thru Ctf ..................... 6.500 05-01-13 14,850 14,933,457
30 Yr Pass Thru Ctf ..................... 7.000 02-01-28 to 29,376 29,789,918
03-01-28
CMO REMIC 1989-78-G ....................... 9.050 12-25-18 2,397 2,407,925
CMO REMIC 1991-76-M ....................... 9.000 07-25-06 174 174,169
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
12

<PAGE>

FINANCIAL STATEMENTS

John Hancock Funds - Sovereign U.S. Government Income Fund

PAR VALUE
INTEREST MATURITY (000s MARKET
RATE DATE OMITTED) VALUE
ISSUER, DESCRIPTION ---- ---- -------- -----
- -------------------
<S> <C> <C> <C> <C>
Government - U.S. Agencies (continued)
Federal National Mortgage Assn. (continued),
CMO REMIC 1994-60-PJ .................... 7.000% 04-25-24 $6,100 $6,317,282
CMO REMIC 1994-75-K .................... 7.000 04-25-24 3,100 3,218,172
CMO REMIC 1996-28-PK .................... 6.500 07-25-25 7,589 7,563,193
CMO REMIC G-8-E ......................... 9.000 04-25-21 5,001 5,381,030
CMO REMIC X-225C-TK ..................... 6.500 12-25-23 5,032 5,079,150
Medium Term Note ........................ 9.500 07-01-17 5,000 6,901,950
Government National Mortgage Assn.,
30 Yr Adjustable Rate Mortgage .......... 7.000# 10-20-22 to 12,412 12,771,882
10-20-23
30 Yr Pass Thru Ctf ..................... 7.500 01-15-23 to 16,260 16,783,032
02-15-26
30 Yr Pass Thru Ctf ..................... 8.000 01-15-25 6,491 6,776,650
30 Yr Pass Thru Ctf ..................... 9.000 08-15-16 to 6,910 7,474,364
12-15-17
Small Business Administration,
Pass Thru Ctf Ser 97-B .................. 7.100 02-01-17 4,871 5,090,734
Pass Thru Ctf Ser 97-D .................. 7.500 04-01-17 4,851 5,170,371
Pass Thru Ctf Ser 97-E .................. 7.300 05-01-17 2,398 2,531,145
-----------
215,153,292
-----------
TOTAL U.S. GOVERNMENT AND AGENCIES SECURITIES
(Cost $352,003,843) (98.79%) 363,494,773
-------- -----------

SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (0.01%)
Investment in a joint repurchase agreement transaction
with Toronto Dominion,
dated 05-29-98, due 06-01-98 (secured by U.S. Treasury
Notes, 5.125% thru 9.25%,
due 08-15-98 thru 11-15-05 and U.S. Treasury Bonds,
6.00% thru 12.00%, due
08-15-13 thru 08-15-27) - Note A ........ 5.570 23 23,000
-----------
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95% ...................... 6,802
-----------
TOTAL SHORT-TERM INVESTMENTS (0.01%) 29,802
-------- -----------
TOTAL INVESTMENTS (98.80%) 363,524,575
-------- -----------
OTHER ASSETS AND LIABILITIES, NET (1.20%) 4,406,773
-------- -----------
TOTAL NET ASSETS (100.00%) $367,931,348
======== ===========
# Represents rate in effect on May 31, 1998.
</TABLE>

The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.

SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>

NOTES TO FINANCIAL STATEMENTS

John Hancock Funds - Sovereign U.S. Government Income Fund

NOTE A -D
ACCOUNTING POLICIES

John Hancock Strategic Series (the "Trust") is an open-end management investment
company registered under the Investment Company Act of 1940. The Trust consists
of two series: John Hancock Sovereign U.S. Government Income Fund (the "Fund"),
and John Hancock Strategic Income Fund. The other series of the Trust is
reported in separate financial statements. The investment objective of the Fund
is to provide as high a level of income as is consistent with long-term total
return by investing in securities issued, guaranteed or otherwise backed by the
United States government, its agencies or instrumentalities.

The Trustees have authorized the issuance of multiple classes of shares of the
Fund, designated as Class A and Class B shares. The shares of each class
represent an interest in the same portfolio of investments of the Fund and have
equal rights to voting, redemptions, dividends, and liquidation, except that
certain expenses, subject to the approval of the Trustees, may be applied
differently to each class of shares in accordance with current regulations of
the Securities and Exchange Commission and the Internal Revenue Service.
Shareholders of a class which bears distribution and service expenses under
terms of a distribution plan have exclusive voting rights to that distribution
plan.

Significant accounting policies of the Fund are as follows:

JOINT REPURCHASE AGREEMENT
Pursuant to an exemptive order issued by the Securities and Exchange Commission,
the Fund, along with other registered investment companies having a management
contract with John Hancock Advisers, Inc. (the "Adviser"), a wholly owned
subsidiary of The Berkeley Financial Group, Inc., may participate in a joint
repurchase agreement transaction. Aggregate cash balances are invested in one or
more repurchase agreements, whose underlying securities are obligations of the
U.S. government and/or its agencies. The Fund's custodian bank receives delivery
of the underlying securities for the joint account on the Fund's behalf. The
Adviser is responsible for ensuring that the agreement is fully collateralized
at all times.

FEDERAL INCOME TAXES
The Fund's policy is to comply with the requirements of the Internal Revenue
Code that are applicable to regulated investment companies and to distribute all
of its taxable income, including any net realized gain on investments, to its
shareholders. Therefore, no federal income tax provision is required. For
federal income tax purposes, the Fund has $44,710,231 of capital loss
carryforwards available, to the extent provided by regulations, to offset future
net realized capital gains. If such carryforwards are used by the Fund, no
capital gains distribution will be made. The carryforwards expire as follows:
May 31, 2002 N $12,665,411, May 31, 2003 N $26,193,155, May 31, 2004 N
$3,597,046 and May 31, 2005 N $2,254,619. The Fund's tax year end is May 31.
Expired capital loss carryforwards are reclassified to capital paid-in in the
year of expiration. Additionally, net capital losses of $266,692 attributable to
security transactions incurred after October 31, 1997 are treated as arising on
the first day (June 1, 1998) of the Fund's next taxable year.

DIVIDENDS, INTEREST AND DISTRIBUTIONS
Dividend income on investment securities is recorded on the ex-dividend date.
Interest income on investment securities is recorded on the accrual basis.

The Fund records all distributions to shareholders from net investment income
and realized gains on the ex-dividend date. Such distributions are determined in
conformity with income tax regulations, which may differ from generally accepted
accounting principles. Dividends paid by the Fund with respect to each class of
shares will be calculated in the same manner, at the same time and will be in
the same amount, except for the effect of expenses that may be applied
differently to each class.

DISCOUNT ON SECURITIES

The Fund accretes discount from par value on securities from either the date of
issue or the date of purchase over the life of the security, as required by the
Internal

14
<PAGE>

NOTES TO FINANCIAL STATEMENTS

John Hancock Funds - Sovereign U.S. Government Income Fund

Revenue Code.

CLASS ALLOCATIONS
Income, common expenses and realized and unrealized gains (losses) are
determined at the Fund level and allocated daily to each class of shares based
on the relative net assets of the respective classes. Distribution and service
fees, if any, are calculated daily at the class level based on the appropriate
net assets of each class and the specific expense rate(s) applicable to each
class.

USE OF ESTIMATES
The preparation of these financial statements in accordance with generally
accepted accounting principles incorporates estimates made by management in
determining the reported amounts of assets, liabilities, revenues and expenses
of the Fund. Actual results could differ from these estimates.

EXPENSES
The majority of the expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific fund
are allocated in such manner as deemed equitable, taking into consideration,
among other things, the nature and type of expense and the relative sizes of the
funds.

BANK BORROWINGS
The Fund is permitted to have bank borrowings for temporary or emergency
purposes, including the meeting of redemption requests that otherwise might
require the untimely disposition of securities. These agreements enable the Fund
to participate with other funds managed by the Adviser in unsecured lines of
credit with banks which permit borrowings up to $800 million, collectively.
Interest is charged to each fund, based on its borrowing, at a rate equal to
0.50% over the Fed Funds Rate. In addition, a commitment fee, at rates ranging
from 0.070% to 0.075% per annum based on the average daily unused portion of the
line of credit, is allocated among the participating funds. The Fund had no
borrowing activity for the year ended May 31, 1998.

FINANCIAL FUTURES CONTRACTS
The Fund may buy and sell financial futures contracts to hedge against the
effects of fluctuations in interest rates and other market conditions. Buying
futures tends to increase the Fund's exposure to the underlying instrument.
Selling futures tends to decrease the FundOs exposure to the underlying
instrument or hedge other Fund instruments. At the time the Fund enters into a
financial futures contract, it will be required to deposit with its custodian a
specified amount of cash or U.S. government securities, known as "initial
margin," equal to a certain percentage of the value of the financial futures
contract being traded. Each day, the futures contract is valued at the official
settlement price on the board of trade or U.S. commodities exchange on which it
trades. Subsequent payments, known as "variation margin," to and from the broker
are made on a daily basis as the market price of the financial futures contract
fluctuates. Daily variation margin adjustments, arising from this "mark to
market," will be recorded by the Fund as unrealized gains or losses.

When the contracts are closed, the Fund recognizes a gain or loss. Risks of
entering into futures contracts include the possibility that there may be an
illiquid market and/or that a change in the value of the contracts may not
correlate with changes in the value of the underlying securities. In addition,
the Fund could be prevented from opening or realizing the benefits of closing
out futures positions because of position limits or limits on daily price
fluctuation imposed by an exchange.

For federal income tax purposes, the amount, character and timing of the Fund's
gains and/or losses can be affected as a result of futures contracts.

At May 31, 1998 there were the following open positions in
financial futures contracts:

UNREALIZED
APPRECIATION/
EXPIRATION OPEN CONTRACTS POSITION (DEPRECIATION)
SEPT 98 169 TREASURY BONDS LONG $3,961
SEPT 98 45 TREASURY BONDS LONG 11,250
SEPT 98 75 TREASURY BONDS LONG (9,961)
---------
$5,250
=========

At May 31, 1998, the Fund had deposited in a segregated account $620,000 par
value of U.S. Treasury Bond, 9.25%, 02-15-16 to cover margin requirements on
open financial futures contracts.

OPTIONS
Listed options will be valued at the last quoted sales price on the exchange on
which they are primarily traded. Purchased put or call over-the-counter options
will be valued at the average of the "bid" prices obtained from two independent
brokers. Written put or call over-the-counter options will be valued at the
average of the "asked" prices obtained from two independent brokers. Upon the
writing of a

<PAGE>

NOTES TO FINANCIAL STATEMENTS

John Hancock Funds - Sovereign U.S. Government Income Fund

call or put option, an amount equal to the premium received by the Fund will be
included in the Statement of Assets and Liabilities as an asset and
corresponding liability. The amount of the liability will be subsequently marked
to market to reflect the current market value of the written option.

The Fund may use option contracts to manage its exposure to the stock market.
Writing puts and buying calls will tend to increase the Fund's exposure to the
underlying instrument and buying puts and writing calls will tend to decrease
the Fund's exposure to the underlying instrument, or hedge other Fund
investments.

The maximum exposure to loss for any purchased options will be limited to the
premium initially paid for the option. In all other cases, the face (or
"notional") amount of each contract at value will reflect the maximum exposure
of the Fund in these contracts, but the actual exposure will be limited to the
change in value of the contract over the period the contract remains open.

Risks may also arise if counterparties do not perform under the contract's terms
("credit risk"), or if the Fund is unable to offset a contract with a
counterparty on a timely basis ("liquidity risk"). Exchange-traded options have
minimal credit risk as the exchanges act as counterparties to each transaction,
and only present liquidity risk in highly unusual market conditions. To minimize
credit and liquidity risks in over-the-counter option contracts, the Fund will
continuously monitor the creditworthiness of all its counterparties.

At any particular time, except for purchased options, market or credit risk may
involve amounts in excess of those reflected in the Fund's period-end Statement
of Assets and Liabilities. There were no written option transactions for the
year ended May 31, 1998.

NOTE B - MANAGEMENT FEE AND TRANSACTIONS WITH AFFILIATES
AND OTHERS
Under the present investment management contract, the Fund pays a monthly
management fee to the Adviser for a continuous investment program equivalent, on
an annual basis, to the sum of (a) 0.50% of the first $500,000,000 of the Fund's
average daily net asset value, and (b) 0.45% of the Fund's average daily net
asset value in excess of $500,000,000.

John Hancock Funds, Inc. ("JH Funds"), a wholly owned subsidiary of the Adviser,
acts as a distributor for shares of the Fund. For the year ended May 31, 1998,
net sales charges received on sales of Class A shares of the Fund amounted to
$204,425. Of this amount, $24,018 was retained and used for printing
prospectuses, advertising, sales literature, and other purposes, $40,686 was
paid as sales commissions to unrelated broker-dealers and $139,721 was paid as
sales commissions to sales personnel of John Hancock Distributors, Inc.
("Distributors"), a related broker-dealer. The Adviser's indirect parent, John
Hancock Mutual Life Insurance Company ("JHMLICo"), is the indirect sole
shareholder of Distributors.

Class B shares which are redeemed within six years of purchase will be subject
to a contingent deferred sales charge ("CDSC") at declining rates beginning at
5.00% of the lesser of the current market value at the time of redemption or the
original purchase cost of the shares being redeemed. Proceeds from the CDSC are
paid to JH Funds and are used in whole or in part to defray its expenses for
providing distribution related services to the Fund in connection with the sale
of Class B shares. For the year ended May 31, 1998 the contingent deferred sales
charges received by JH Funds amounted to $201,485.

In addition, to reimburse JH Funds for the services it provides as the
distributor of shares of the Fund, the Fund has adopted Distribution Plans with
respect to Class A and Class B pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Accordingly, the Fund will make payments to JH Funds for
distribution and service expenses, at an annual rate not to exceed 0.30% of
Class A average daily net assets and 1.00% of Class B average daily net assets
to reimburse JH Funds for its distribution and service costs. Up to a maximum of
0.25% of such payments may be service fees as defined by the amended Rules of
Fair Practice of the National Association of Securities Dealers. Under the
amended Rules of Fair Practice, curtailment of a portion of the Fund's 12b-1
payments could occur under certain circumstances.

The Fund has a transfer agent agreement with John Hancock Signature Services,
Inc. ("Signature Services"), an indirect subsidiary of JHMLICo. The Fund pays
transfer agent fees based on the

<PAGE>

NOTES TO FINANCIAL STATEMENTS

John Hancock Funds - Sovereign U.S. Government Income Fund

number of shareholder accounts and certain out-of-pocket expenses.

The Fund has an agreement with the Adviser to perform necessary tax and
financial management services for the Fund. The compensation for the year was at
an annual rate of less than 0.02% of the average net assets of the Fund.

Mr. Edward J. Boudreau, Jr., Ms. Anne C. Hodsdon and Mr. Richard S. Scipione are
trustees and/or officers of the Adviser and/or its affiliates, as well as
Trustees of the Fund. The compensation of unaffiliated Trustees is borne by the
Fund. The unaffiliated Trustees may elect to defer for tax purposes their
receipt of this compensation under the John Hancock Group of Funds Deferred
Compensation Plan. The Fund makes investments into other John Hancock funds, as
applicable, to cover its liability for the deferred compensation. Investments to
cover the Fund's deferred compensation liability are recorded on the Fund's
books as an other asset. The deferred compensation liability and the related
other asset are always equal and are marked to market on a periodic basis to
reflect any income earned by the investment as well as any unrealized gains or
losses. At May 31, 1998, the Fund's investments to cover the deferred
compensation liability had unrealized appreciation of $2,740.

NOTE C - INVESTMENT TRANSACTIONS

Purchases and proceeds from sales and maturities of obligations of the U.S.
government and its agencies, other than short-term securities, during the year
ended May 31, 1998 aggregated $574,229,515 and $618,363,551, respectively.

The cost of investments owned at May 31, 1998 (including the joint repurchase
agreement) for federal income tax purposes was $352,651,873. Gross unrealized
appreciation and depreciation of investments aggregated $12,405,064 and
$1,539,164, respectively, resulting in net unrealized appreciation of
$10,865,900.

NOTE D -
RECLASSIFICATIONS OF ACCOUNTS

During the year ended May 31, 1998, the Fund has reclassified amounts to reflect
an increase in accumulated net realized loss on investments of $2,956, a
decrease in distributions in excess of net investment income of $4,159 and a
decrease in capital paid-in of $1,203. This represents the amount necessary to
report these balances on a tax basis, excluding certain temporary differences,
as of May 31, 1998. Additional adjustments may be needed in subsequent reporting
periods. These reclassifications, which have no impact on the net asset value of
the Fund, are primarily attributable to certain differences in the computation
of distributable income and capital gains under federal tax rules versus
generally accepted accounting principles.

<PAGE>

NOTES TO FINANCIAL STATEMENTS

John Hancock Funds - Sovereign U.S. Government Income Fund

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders of John Hancock Sovereign U.S. Government Income Fund and
the Trustees of John Hancock Strategic Series

In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of John Hancock Sovereign U.S.
Government Income Fund (the "Fund") (a portfolio of John Hancock Strategic
Series) at May 31, 1998, and the results of its operations, the changes in its
net assets and the financial highlights for the periods indicated, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and the significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at May 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.

PricewaterhouseCoopers LLP
Boston, Massachusetts
July 9, 1998

TAX INFORMATION NOTICE (UNAUDITED)
For federal income tax purposes, the following information is furnished with
respect to the dividends of the Fund paid during its taxable year ended May 31,
1998. Shareholders will be mailed a 1998 U.S. Treasury Department Form 1099-DIV
in January 1999. This will reflect the total of all distributions that are
taxable for calendar year 1998.

<PAGE>

NOTES

John Hancock Funds - Sovereign U.S. Government Income Fund

<PAGE>

------------------
[LOGO] JOHN HANCOCK FUNDS BULK RATE
A Global Investment Management Firm U.S. Postage
101 Huntington Avenue, Boston, MA 02199-7603 PAID
1-800-225-5291 1-800-554-6713 (TDD) Randolph, MA
Internet: www.jhancock.com/funds Permit No. 75
------------------

This report is for the information of sharholders of the John Hancock Sovereign
U.S. Government Income Fund. It may be used as sales literature when preceded
or accompanied by the current prospectus, which details charges, investment
objectives and operating policies.

[LOGO] Printed on recycled paper 0200A 5/98
7/98

<PAGE>

[PHOTO OMITTED]

ANNUAL Report

Strategic Income Fund

MAY 31, 1998

CUSTODIAN
Investors Bank & Trust Company
200 Clarendon Street
Boston, Massachusetts 02116

TRANSFER AGENT
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, Massachusetts 02217-1000

INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603

PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603

LEGAL COUNSEL
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109-1803

INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
160 Federal Street
Boston, Massachusetts 02110

DEAR FELLOW SHAREHOLDERS:

After
such a long and remarkable performance, many began this year wondering what the
market would do for an encore in 1998. The answer so far has been more of the
same, even with the recent increase in volatility caused by tremors from Asia.
This achievement continues to bolster many investors' convictions that the
market will produce these results forever, or, in the worst case, that market
declines will always be short-lived. While the economy remains solid and the
environment favorable, history and reason tell us it's a highly unlikely
scenario.

- --------------------------------------------------------------------------------
[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to third paragraph.]
- --------------------------------------------------------------------------------

This doesn't mean we know what the market will do next, or that it's riding for
a fall. But after such a run, even in this "new era" of strong economic growth
with low inflation, we believe it would be wise for investors to set more
realistic expectations. As weOve said before, markets do indeed move in two
directions. Over the long term, the marketOs historical results have been more
in the 10% per year range, which is still a solid result, considering it has
been produced despite wars, depressions and other social upheavals along the
way.

In addition to adjusting, or at least re-examining, expectations, now could also
be a good time to review with your investment professional how your assets are
diversified, perhaps with an eye toward a more conservative approach. Stocks,
especially with their outsized gains of the last three years, might have grown
to represent a larger piece of your portfolio than you had originally intended,
given your objectives, time horizon and risk level.

At John Hancock Funds, our goal is to help you reach your financial objectives
and maintain wealth. One way we can do that is by helping you keep your feet on
the ground as you pursue your dreams.

Sincerely,

/s/Edward J. Boudreau, Jr.

EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER

<PAGE>

By Frederick Cavanaugh, Portfolio Manager

John Hancock
Strategic Income Fund

High-yield corporate bonds soar while
emerging-market bonds stumble

The performance of bond markets around the world diverged significantly over the
past 12 months. U.S. corporate high-yield bonds continued to post strong gains,
thanks to low interest rates and a healthy domestic economy. Despite a
near-record amount of new high-yield corporate bonds coming to market in the
first quarter of 1998, demand for them remained red-hot and further boosted
their prices. Western European bonds surprised some observers by gaining
significant ground despite uncertainty over the move to a unified European
currency. Back at home, the U.S. Treasury market was marked by falling yields
and rising prices as inflation fears subsided in the first half of the year.
Later, it was boosted by economic and currency turmoil in South-east Asia, which
impacted most bond markets, some for the worse and some for the better. When
Asias financial crisis erupted last fall, Latin American bonds floundered along

"...bond markets around the world diverged significantly..."

with their Southeast Asian cousins, with most bond markets in both regions
suffering negative returns. In search of a "safe haven" against rapidly
declining emerging markets, investors gravitated toward the relative safety and
stability of the U.S. Treasury market, further sending yields lower and prices
higher.

Performance review Against a mixed backdrop, we're pleased with both the
Fund's absolute and relative performance. For the year ended May 31, 1998, John
Hancock Strategic Income Fund's Class A and Class B shares posted total returns
of 13. 43% and 12.64%, respectively, at net asset value. Class C shares, which
were introduced on May 1, 1998, returned 0.23% from inception to May 31, 1998.

- --------------------------------------------------------------------------------
[A 2 1/4" x 3 1/2" photo of fund management team. Caption reads: Fund management
team memebrs: Standing (l-r): Lee Crockett, Roger Hamilton, Ted Hines, and
Carolee Bongiovi. Seated (l-r): Beverly Cleathero and Fred Cavanaugh.]
- --------------------------------------------------------------------------------

3
<PAGE>

John Hancock Funds - Strategic Income Fund

- --------------------------------------------------------------------------------
[" Chart with the heading Top Five Bond Sectors number 1 through 5. The first
one represents U.S. Treasury and Government Agencies 22%. The second represents
Telecommunications 19%. The third one represents Media 8%. The fourth represents
Foreign Governments 8%. The fifth represents Leisure 5%. A footnote at the
bottom reads As a percentage of net assets on May 31, 1998."]
- --------------------------------------------------------------------------------

Keep in mind that your net asset value return will be different from this
performance if you were not invested in the Fund for the entire period and did
not reinvest all distributions. Those returns outpaced the average multi-sector
income fund, which returned 8.94% for the same 12-month period, according to
Lipper Analytical Services, Inc.1 Please see pages six and seven for longer-term
performance information. Our relatively large stake in high-yield corporate
bonds was the main contributor to our outperformance. We saw particular strength
among our telecommunications holdings, including Nextel Communications, a

combination cellular/paging/dispatch company, and Crown Castle International,
which builds communications towers. Despite the tarnish of being issued in an
emerging market, Colombian cellular company Occidente Y Caribe Cellular also
posted strong gains. In that country, cellular phone service is quickly gaining
market share from traditional wire-line phone systems, and the

"Our relatively large stake in high-yield corporate bonds was the main
contributor..."

government has erected barriers to prevent further competition. Nextel
subsidiary Nextel International also benefited from the growth in wireless
communications services in Latin America. But the high-yield sector also handed
us several of our bigger disappointments. Australian cable company Australis
Media filed for bankruptcy after one of its planned strategic alliances fell
through. Printing press maker Goss Graphic Systems' bonds also suffered losses,
despite having a record-breaking backlog for its products, when the company
posted weaker-than-expected financial results due to a one-time charge for
closing its French operations.

Focus on quality

Another factor that helped our performance was our reduced stake in
emerging-market debt. Going back to last summer before the problems surfaced,
the Fund had as much as 20% of its assets invested in emerging markets. At the
time, these bonds were a positive for the Fund's performance because they
offered relatively attractive yields. By the end of October, however, we had
pared our emerging-market holdings back to about 14% of assets. While we weren't
able to sidestep all of the region's damage, we did dodge a fair amount of the
price declines that came in late 1997 and so far this year. More recently, we
continued to cut emerging-market holdings, mainly by eliminating Brazilian
bonds. Inflation is sky-high in that country and there is quite a bit of
uncertainty surrounding the upcoming presidential election. In contrast, we

- --------------------------------------------------------------------------------
["Table entitled "Scorecard" at bottom of left hand column. The header for the
left column is "Investment"; the header for the right column is "Recent
performance...and what's behind the numbers. The first listing is Nextel
followed by an up arrow and the phrase "Continued strong subscriber growth". The
second listing is Occidente Y Caribe followed by a up arrow with the phrase
"Strong celluar demand in Columbia". The third listing is Goss Graphic Systems
followed by a down arrow with the phrase "Weaker results due to closing of
European operation". Footnote at the bottom states See "Schedule of
Investments." Investment holdings are subject to change."]
- --------------------------------------------------------------------------------

4
<PAGE>

John Hancock Funds - Strategic Income Fund

- --------------------------------------------------------------------------------
["Bar Chart with the heading "Fund Performance" at the top of left hand column.
Under the heading is the footnote: "For the year ended May 31, 1998." The chart
is scaled in increments of 3% with the 15% at the top and 3% at the bottom. The
first represents the 13.43% total return for John Hancock Strategic Income Fund:
Class A. The second represents the 12.64% total return for John Hancock
Strategic Income Fund: Class B. The third represents the 0.23% total return for
John Hancock Strategic Income Fund: Class C. The fourth represents the 8.94%
total return for Average multi-sector income fund. A Footnote below reads "
Total returns for John Hancock Strategic Income Fund are at net asset value with
all distributions reinvested. The average multi-sector income fund is tracked by
Lipper Analytical Services, Inc. See the following two pages for historical
performance information. * From inception May 1, 1998 to May 31, 1998"]
- --------------------------------------------------------------------------------

maintained holdings in Argentina and Mexico, which have reasonable economic
growth and manageable inflation rates. By the end of the period, our stake in
emerging-market debt fell to 6%, bringing our holdings in foreign debt to 26% of
net assets.

We also eliminated our stake in New Zealand bonds, although it's not
considered an emerging market. After a recent visit there, we were convinced
that the country's currency may be poised for further weakness. And while we
believe that interest rates can fall and bond prices can rise (in New Zealand
dollar terms) in response, the costs of hedging back into U.S. dollars would
likely wipe out any yield advantage the bonds offer. We held on to our
Australian bonds, however, because we believe they can do well as interest rates
fall there, and the costs of hedging into U.S. dollars were minimal.

Given our view that the U.S. economy could experience slower growth in the
second half of 1998, we've also reduced our high-yield U.S. corporate stake
somewhat. We did this by selling lower-quality companies that we think could be
vulnerable to

"...continued weakness in Asia will mute economic growth in the U.S. ..."

declining profitability during an economic slowdown. We redeployed the proceeds,
along with those from our sales of emerging-market and New Zealand debt into
U.S. Treasuries. At the end of the period, our stake in U.S. Treasuries stood at
19%, up from 16% a year ago.

Outlook

In our view, the financial crisis in Asia will continue to plague the emerging
markets. Although emerging-market bond prices have fallen dramatically, we don't
yet see many compelling values arising in either Southeast Asia or Latin
America. Until we do, we'll likely keep our emerging-market holdings at a low
level. We believe that continued weakness in Asia will mute economic growth in
the U.S., although we think a recession is unlikely. Slower economic growth, in
turn, will probably mean that inflation should remain subdued. If a weaker U.S.
economy does materialize and the demand for high-yield corporate debt slows,
we'll probably reduce our stake in high-yield bonds in favor of further
increasing our stake in U.S. securities.

International investing involves special risks such as political and currency
risks and differences in accounting standards and financial reporting.

1 Figures from Lipper Analytical Services, Inc. include reinvested dividends and
do not take into account sales charges. Actual load-adjusted performance is
lower.

<PAGE>

John Hancock Funds - Strategic Income Fund

A LOOK AT PERFORMANCE

The tables on the right show the cumulative total returns and the average annual
total returns for the John Hancock Strategic Income Fund. Total return measures
the change in value of an investment from the beginning to the end of a period,
assuming all distributions were reinvested.

For Class A shares, total return figures include a maximum applicable sales
charge of 4.5%. Prior to September 28, 1989, different sales charge schedules
were in effect for Class A shares and are not reflected in the performance
information.

Class B performance reflects a maximum contingent deferred sales charge (maximum
5% and declining to 0% over six years).

Class C shares became effective May 1, 1998, and do not have a cumulative total
return or an average annual total return as of March 31, 1998.

All figures represent past performance and are no guarantee of future results.
Keep in mind that the total return and share price of the Fund's investments
will fluctuate. As a result, your Fund's shares may be worth more or less than
their original cost, depending on when you sell them. For a discussion of risks
associated with international investing and high-yield bonds, please see the
Fund's prospectus.

CLASS A
For the period ended March 31, 1998

One Five TEN
Year Years YEARS
---- ----- -----

Cumulative Total Returns 11.95% 56.01% 127.45%
Average Annual Total Returns 11.95% 9.30% 8.56%

CLASS B
For the period ended March 31, 1998
SINCE
One INCEPTION
Year (10/4/93)
------ ---------

Cumulative Total Returns 11.41% 48.84%
Average Annual Total Returns 11.41% 9.27%

YIELDS
As of May 31, 1998
SEC 30-DAY
YIELD
----------
John Hancock Strategic Income Fund: Class A 7.07%
John Hancock Strategic Income Fund: Class B 6.69%
John Hancock Strategic Income Fund: Class C 6.69%

6
<PAGE>

WHAT HAPPENED TO A $10,000 INVESTMENT...

The charts on the right show how much a $10,000 investment in the John Hancock
Strategic Income Fund would be worth, assuming all distributions were reinvested
for the period indicated. For comparison, weOve shown the same $10,000
investment in the Lehman Brothers Government/Corporate Bond Index N an unmanaged
index that measures the performance of U.S. government bonds, U.S. corporate
bonds and Yankee bonds.

Assuming all distributions were reinvested for the same period indicated, a
$10,000 investment in the Fund's Class C shares at inception on May 1, 1998,
would be worth $10,023 without sales charge and $9,923 with maximum sales
charge. For com-parison, the same $10,000 investment in the Lehman Brothers
Government/ Corporate Bond Index would be worth $10,108. Past performance is not
indicative of future results.

- --------------------------------------------------------------------------------
Strategic Income Fund
Class A shares

Line chart with the heading Strategic Income Fund Class A representing the
growth of a hypothetical $10,000 investment over the life of the fund. Within
the chart are three lines. The first line represents the value of the Lehman
Government/Corporate Bond Index and is equal to $24,182 as of May 31, 1998. The
second line represents the value of the hypothetical $10,000 investment made in
the Strategic Income Fund on August 18, 1986 before sales charge, and is equal
to $23,764 as of May 31, 1998. The third line represents the Strategic Income
Fund, after sales charge, and is equal to $22,694 as of May 31, 1998
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
Strategic Income Fund
Class B shares

Line chart with the heading Strategic Income Fund Class B, representing the
growth of a hypothetical $10,000 investment over the life of the fund. Within
the chart are three lines. The first line represents the value of the Strategic
Income Fund, before sales charge, and is equal to $15,156 as of May 31, 1998.
The second line represents the value of the hypothetical $10,000 investment made
in the Strategic Income Fund, after sales charge, on October 4, 1993, and is
equal to $14,956 as of May 31, 1998. The third line represents the value of the
Lehman Government/Corporate Bond Index, and is equal to $13,362 as of May 31,
1998.
- --------------------------------------------------------------------------------

<PAGE>

FINANCIAL STATEMENTS

John Hancock Funds - Strategic Income Fund

Statement of Assets and Liabilities
May 31, 1998
- --------------------------------------------------------------------------------

Assets:
Investments at value -D Note C:
Bonds (cost-D $817,906,369) ..................... $844,544,766
Common and preferred stocks and warrants
(cost - $69,034,676) ............................ 84,374,849
Joint repurchase agreement (cost - $14,893,000).. 14,893,000
Corporate savings account ....................... 206
------------
943,812,821
Foreign currency, at value (cost - $419)......... 428
Receivable for investments sold ................. 6,146,581
Receivable for foreign currency exchange
contracts sold- Note A ......................... 2,276,633
Receivable for shares sold ...................... 4,363,645
Dividends receivable ............................ 156,263
Interest receivable ............................ 17,307,169
Receivable for futures variation
margin- Note A ................................. 43,750
Other assets .................................... 35,626
------------
Total Assets ............ 974,142,916
------------------------------------------------
Liabilities:
Payable for investments purchased ............... 8,927,192
Payable for foreign currency exchange
contracts purchased- Note A ..................... 130,337
Payable for shares repurchased .................. 541,309
Dividend payable ................................ 296,047
Payable to John Hancock Advisers,
Inc. and affiliates- Note B ..................... 540,567
Accounts payable and accrued expenses ........... 303,549
------------
Total Liabilities ....... 10,739,001
------------------------------------------------
Net Assets:
Capital paid-in ................................. 937,612,328
Accumulated net realized loss on investments,
financial futures contracts and foreign
currency transactions .......................... (21,565,217)
Net unrealized appreciation of investments,
financial futures contracts and foreign
currency transactions ......................... 44,001,500
Undistributed net investment income ............. 3,355,304
------------
Net Assets .............. $963,403,915
------------------------------------------------

Net Asset Value Per Share:
(Based on net asset values and shares
of beneficial interest outstanding -
unlimited number of shares
authorized with no par value) Class A -
$489,374,853/62,431,106 ......................... $7.84
========================================================================
Class B- $473,428,435/60,396,771 ................ $7.84
========================================================================
Class C**- $600,627/76,624 ...................... $7.84
========================================================================
Maximum Offering Price Per Share*
Class A - ($7.84 x 104.71%) ..................... $8.21
========================================================================
* On single retail sales of less than $100,000. On sales of $100,000 or more
and on group sales the offering price is reduced.
** Class C shares commenced operations on May 1, 1998.

The Statement of Assets and Liabilities is the FundOs balance sheet and shows
the value of what the Fund owns, is due and owes on May 31, 1998. YouOll also
find the net asset value and the maximum offering price per share as of that
date.

SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>

FINANCIAL STATEMENTS

John Hancock Funds - Strategic Income Fund

Statement of Operations
Year ended May 31, 1998
- --------------------------------------------------------------------------------

Investment Income:
Interest ........................................ $71,733,261
Dividends (net of foreign withholding
taxes of $11,001) ............................... 5,159,820
------------
76,893,081
------------
Expenses:
Investment management fee- Note B ............... 3,388,285
Distribution and service fee- Note B
Class A ...................................... 1,352,618
Class B ...................................... 3,944,240
Class C ...................................... 207
Transfer agent fee- Note B ...................... 1,166,382
Custodian fee ................................... 230,206
Financial services fee- Note B .................. 150,061
Registration and filing fees .................... 121,113
Trustees' fees .................................. 50,419
Printing ....................................... 42,554
Auditing fee .................................... 42,000
Miscellaneous ................................... 19,143
Legal fees ...................................... 9,234
------------
Total Expenses .......... 10,516,462
------------------------------------------------
Net Investment Income ... 66,376,619
------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments,
Financial Futures Contracts and Foreign Currency Transactions:
Net realized loss on investments sold ......... (2,653,036)
Net realized gain on financial futures
contracts ..................................... 2,734,331
Net realized gain on foreign currency
transactions .................................. 9,085,480
Change in net unrealized appreciation/
depreciation of investments .................. 22,544,808
Change in net unrealized appreciation/
depreciation of financial futures contracts ... 4,688
Change in net unrealized appreciation/
depreciation of foreign currency transactions.. 2,161,246
------------
Net Realized and Unrealized Gain
on Investments, Financial Futures
Contracts and Foreign Currency
Transactions ............ 33,877,517
------------------------------------------------
Net Increase in Net Assets
Resulting from
Operations .............. $100,254,136
================================================

The Statement of Operations summarizes the FundOs investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.

SEE NOTES TO FINANCIAL STATEMENTS.

9
<PAGE>

<TABLE>
<CAPTION>
FINANCIAL STATEMENTS

John Hancock Funds - Strategic Income Fund

Statement of Changes in Net Assets
- --------------------------------------------------------------------------------

YEAR ENDED MAY 31,
--------------------
1997 1998
---------- ---------
<S> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ................................... $54,938,521 $66,376,619
Net realized gain on investments
sold, financial futures contracts
and foreign currency transactions ....................... 12,369,401 9,166,775
Change in net unrealized appreciation/
depreciation of investments, financial
futures contracts and foreign currency transactions ..... 11,444,907 24,710,742
----------- -----------
Net Increase in Net Assets Resulting from
Operations ............................................ 78,752,829 100,254,136
----------- -----------
Distributions to Shareholders:
Dividends from net investment income
Class A- ($0.6371 and $0.6408 per share,
respectively) ......................................... (33,759,527) (36,925,773)
Class B- ($0.5854 and $0.5860 per share,
respectively) ......................................... (21,178,937) (29,451,246)
Class C**- (none and $0.0477 per share,
respectively) ......................................... - (1,205)
Distributions from net realized gain on investments sold
Class A- (none and $0.0400 per share,
respectively) ......................................... - (2,270,669)
Class B- (none and $0.0400 per share,
respectively) ......................................... - (2,027,424)
----------- -----------
Total Distributions to Shareholders ................... (54,938,464) (70,676,317)
----------- -----------
From Fund Share Transactions - Net:* .................. 145,710,146 188,423,596
----------- -----------
Net Assets:
Beginning of period .................................... 575,877,989 745,402,500
----------- -----------
End of period (including undistributed
net investment income of $6,971,225 and
$3,355,304, respectively) .............................. $745,402,500 $963,403,915
============ ============
* Analysis of Fund Share Transactions:
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-----------------------------------------------
1997 1998
------------------------- --------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ --------- --------
<S> <C> <C> <C> <C>
CLASS A
Shares sold .............................. 25,714,330 $191,363,563 16,444,399 $128,645,376
Shares issued to shareholders in
reinvestment of distributions ............ 2,756,450 20,478,423 3,159,528 24,637,005
------------ ------------ ----------- ------------
28,470,780 211,841,986 19,603,927 153,282,381
Less shares repurchased .................. (23,946,698) (178,382,670) (12,444,274) (97,186,849)
------------ ------------ ----------- ------------
Net increase ............................. 4,524,082 $33,459,316 7,159,653 $56,095,532
============ ============ =========== ============
CLASS B
Shares sold .............................. 26,203,914 $194,709,218 24,192,186 $189,153,319
Shares issued to shareholders in
reinvestment of distributions ............ 1,314,586 9,776,167 1,943,551 15,161,471
------------ ------------ ----------- ------------
27,518,500 204,485,385 26,135,737 204,314,790
Less shares repurchased ................. (12,396,576) (92,234,555) (9,287,224) (72,587,321)
------------ ------------ ----------- ------------
Net increase ............................. 15,121,924 $112,250,830 16,848,513 $131,727,469
============ ============ =========== ============

CLASS C**
Shares sold .............................. - - 76,535 $599,897
Shares issued to shareholders in
reinvestment of distributions ............ - - 89 698
---------- -----------
- - 76,624 600,595
Less shares repurchased .................. - - - -
------------ ------------- ---------- -----------
Net increase ............................. - - 76,624 $600,595
============ ============= ========== ===========
</TABLE>

** Class C shares commenced operations on May 1, 1998.

The Statement of Changes in Net Assets shows how the value of the FundOs net
assets has changed since the end of the previous period. The difference reflects
earnings less expenses, any investment and foreign currency gains and losses,
distributions paid to shareholders and any increase or decrease in money
shareholders invested in the Fund. The footnote illustrates the number of Fund
shares sold, reinvested and repurchased during the last two periods, along with
the corresponding dollar value.

SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>

FINANCIAL STATEMENTS

John Hancock Funds - Strategic Income Fund
<TABLE>
<CAPTION>

Financial Highlights
Selected data for a share of beneficial interest outstanding throughout the
period indicated, investment returns, key ratios and supplemental data are
listed as follows:
- --------------------------------------------------------------------------------

YEAR ENDED MAY 31,
---------------------------------------------
1994 1995 1996 1997 1998
------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period ............. $7.55 $7.17 $7.15 $7.27 $7.54
-------- -------- -------- -------- --------
Net Investment Income ............................ 0.68 0.64 0.66(2) 0.64(2) 0.64(2)
Net Realized and Unrealized Gain (Loss)
on Investments,
Financial Futures Contracts and Foreign
Currency Transactions ........................... (0.33) (0.02) 0.12 0.27 0.34
-------- -------- -------- -------- --------
Total from Investment Operations ................. 0.35 0.62 0.78 0.91 0.98
-------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income ............. (0.58) (0.55) (0.66) (0.64) (0.64)
Distributions in Excess of Net
Investment Income ................................ (0.05) - - - -
Distributions from Net Realized Gain
on Investments Sold .............................. - - - - (0.04)
Distributions from Capital Paid-In ............... (0.10) (0.09) - - -
-------- -------- -------- -------- --------
Total Distributions ................................ (0.73) (0.64) (0.66) (0.64) (0.68)
-------- -------- -------- -------- --------
Net Asset Value, End of Period ..................... $7.17 $7.15 $7.27 $7.54 $7.84
======== ======== ======== ======== ========
Total Investment Return at Net Asset
Value(3) ........................................... 4.54% 9.33% 11.37% 12.99% 13.43%

Ratios and Supplemental Data
Net Assets, End of Period (000s omitted)......... $335,261 $327,876 $369,127 $416,916 $489,375
Ratio of Expenses to Average Net Assets .......... 1.32% 1.09% 1.03% 1.00% 0.92%
Ratio of Net Investment Income to Average
Net Assets ....................................... 8.71% 9.24% 9.13% 8.61% 8.20%
Portfolio Turnover Rate ......................... 91% 55% 78% 132% 112%
</TABLE>

The Financial Highlights summarizes the impact of the following factors on a
single share for each period indicated: net investment income, gains (losses),
dividends and total investment return of the Fund. It shows how the FundOs net
asset value for a share has changed since the end of the previous period.
Additionally, important relationships between some items presented in the
financial statements are expressed in ratio form.

SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>

<TABLE>
<CAPTION>
FINANCIAL STATEMENTS

John Hancock Funds - Strategic Income Fund

Financial Highlights (continued)
- ---------------------------------------------------------------------------------

YEAR ENDED MAY 31,
PERIOD ENDED ------------------------------------
MAY 31, 1994 1995 1996 1997 1998
------------ ------- ------ ------ --------
<S> <C> <C> <C> <C> <C>
CLASS B(1)
Per Share Operating Performance
Net Asset Value, Beginning of Period ................ $7.58 $7.17 $7.15 $7.27 $7.54
------- -------- -------- -------- --------
Net Investment Income ............................... 0.40 0.60(2) 0.61(2) 0.59 0.59(2)
Net Realized and Unrealized Gain (Loss)
on Investments,
Financial Futures Contracts and
Foreign Currency Transactions ...................... (0.41) (0.02) 0.12 0.27 0.34
------- -------- -------- -------- --------
Total from Investment Operations ................... (0.01) 0.58 0.73 0.86 0.93
------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income .............. (0.32) (0.52) (0.61) (0.59) (0.59)
Distributions in Excess of Net
Investment Income ................................. (0.03) - - - -
Distributions from Net Realized Gain
on Investments Sold ............................... - - - - (0.04)
Distributions from Capital Paid-in ................ (0.05) (0.08) - - -
------- -------- -------- -------- --------
Total Distributions ................................. (0.40) (0.60) (0.61) (0.59) (0.63)
------- -------- -------- -------- --------
Net Asset Value, End of Period ...................... $7.17 $7.15 $7.27 $7.54 $7.84
======= ======== ======== ======== ========
Total Investment Return at Net Asset Value(3)........ (0.22%)(4) 8.58% 10.61% 12.21% 12.64%

Ratios and Supplemental Data
Net Assets, End of Period (000s omitted)............. $77,691 $134,527 $206,751 $328,487 $473,428
Ratio of Expenses to Average Net Assets ............. 1.91%(5) 1.76% 1.73% 1.70% 1.62%
Ratio of Net Investment Income to Average
Net Assets .......................................... 8.12%(5) 8.55% 8.42% 7.90% 7.50%
Portfolio Turnover Rate ............................. 91% 55% 78% 132% 112%
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.
12

<PAGE>

FINANCIAL STATEMENTS

John Hancock Funds - Strategic Income Fund

Financial Highlights (continued)
- --------------------------------------------------------------------------------

PERIOD FROM
MAY 1, 1998
(COMMENCEMENT OF
OPERATIONS)
TO MAY 31, 1998
-----------------
CLASS C
Per Share Operating Performance
Net Asset Value, Beginning of Period .............. $7.87
-------------
Net Investment Income ............................. 0.05(2)
Net Realized and Unrealized Gain (Loss) on Investments,
Financial Futures Contracts and Foreign
Currency Transactions ........................... (0.03)(6)
-------------
Total from Investment Operations ................ 0.02
-------------
Less Distributions:
Dividends from Net Investment Income ....... (0.05)
-------------
Net Asset Value, End of Period .................... $7.84
=============
Total Investment Return at Net Asset Value (3)..... 0.23%(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted)........... $601
Ratio of Expenses to Average Net Assets ........... 1.62%(5)
Ratio of Net Investment Income to Average
Net Assets ........................................ 7.34%(5)
Portfolio Turnover Rate ........................... 112%

(1) Class B shares commenced operations on October 4, 1993.
(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) 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 investments of the Fund.

SEE NOTES TO FINANCIAL STATEMENTS.
13

<PAGE>

Schedule of Investments
May 31, 1998
- --------------------------------------------------------------------------------

The Schedule of Investments is a complete list of all securities owned by the
Strategic Income Fund on May 31, 1998. It has three main categories: bonds,
common and preferred stocks and warrants, and short-term investments. The bonds
are further broken down by industry groups. Under each industry group is a list
of bonds owned by the Fund. Short-term investments, which represent the FundOs
"cash" position, are listed last.

<TABLE>
<CAPTION>
PAR
VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- -------- ------- -------- ------
<S> <C> <C> <C> <C>
BONDS
Advertising (0.44%)
Outdoor Systems, Inc.,
Sr Sub Note 10-15-06 ............................... 9.375% B 4,000 $4,220,000
-----------
Aerospace (0.20%)
Jet Equipment Trust,
Equipment Trust Cert Ser 95B2 08-15-14 (R).......... 10.910 BBB- 1,500 1,957,800
-----------
Banks - Foreign (2.05%)
International Bank for Reconstruction & evelopment,
Sr Note (South Africa) 07-21-98# .................... 15.000 AAA 32,000 6,170,919

Landeskreditbank Baden- Wuerttemberg,
Sub Note (Germany) 02-01-23 (Y) ..................... 7.625 AAA 11,900 13,620,978
-----------
19,791,897
-----------
Banks - United States (0.26%)
CSBI Capital Trust I,
Sec Co. Gtd Bond 06-06-27 (R) ....................... 11.750 B- 2,340 2,527,200
-----------
Beverages (0.21%)
Pepsi-Gemex, S.A. de C.V.,
Sr Note Ser B (Mexico) 03-30-04 (Y) .................. 9.750 BB 2,000 2,060,000
-----------
Building (0.43%)
Associated Materials, Inc.,
Sr Sub Note 03-01-08 ................................ 9.250 B 2,000 2,050,000
Kevco, Inc.,
Gtd Sr Sub Note 12-01-07 ........................... 10.375 B- 2,000 2,080,000
-----------
4,130,000
-----------
Business Services - Misc (0.42%)
Spin Cycle, Inc.,
Unit (Sr Disc Note & Warrant), Step Coupon
(12.750%, 05-01-01) 05-01-05 (A), (R) ............... Zero CCC+ 3,625 2,573,750
Wesco International, Inc.,
Sr Disc Note, Step Coupon (11.125%,
06-01-03) 06-01-08 (A), (R) + ...................... 11.125 B 2,500 1,459,375
-----------
4,033,125
-----------
Chemicals (0.63%)
AEP Industries, Inc.,
Sr Sub Note 11-15-07 ............................... 9.875 B 4,000 4,120,000
PCI Chemicals Canada, Inc.,
Sec Note (Canada) 10-15-07 (Y)....................... 9.250 B+ 2,000 1,980,000
-----------
6,100,000
-----------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.
15

<PAGE>

PAR
VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- -------- ------- -------- ------
<S> <C> <C> <C> <C>
Computers (0.98%)
Unisys Corp.,
Sr Note 10-15-04 ................................... 11.750% BB- $8,150 $9,413,250
-----------
Consumer Products - Misc. (0.10%)
iamond Brands Operating Corp.,
Sr Sub Note 04-15-08 (R)............................ 10.125 CCC+ 1,000 1,010,000

Containers (0.99%)
Berry Plastics Corp.,
Sr Sub ote 04-15-04 ................................ 12.250 B3 4,000 4,360,000
Stone Container Corp.,
Unit (Sr Sub Deb & Supplemental Interest
Cert) 04-01-02 ...................................... 12.250 B- 5,000 5,137,500
----------
9,497,500
----------
Cosmetics & Personal Care (0.32%)
Global Health Sciences, Inc.,
Sr Note 05-01-08 (R) ............................... 11.000 B+ 3,150 3,087,000

iversified Operations (0.65%)
Euramax International Plc,
Sr Sub Note (United Kingdom) 10-01-06 (Y)............ 11.250 B 4,000 4,330,000
Intertek Finance Plc,
Sr Sub Note, Ser B (United Kingdom) 11-01-06 (Y)..... 10.250 B 1,850 1,942,500
----------
6,272,500
----------
Electronics (0.83%)
Communications Instruments, Inc.,
Gtd Sr Sub Note Ser B 09-15-04 ..................... 10.000 B- 2,900 2,972,500
Viasystems, Inc.,
Sr Sub Note 06-01-07 ............................... 9.750 B- 2,500 2,531,250
Zilog, Inc.,
Sr Sec Note 03-01-05 (R) ........................... 9.500 B 3,150 2,551,500
----------
8,055,250
----------
Energy (0.46%)
P & L Coal Holdings Corp.,
Sr Sub Note 05-15-08 (R) ........................... 9.625 B 4,300 4,402,125
----------
Finance (1.66%)
AEI Holding Co.,
Sr Note 11-15-07 (R) ............................... 10.000 B- 4,130 4,150,650
CEI Citicorp Holdings S.A.,
Bond (Argentina) 02-14-07 (Y) ....................... 9.750 BB- 3,000 3,000,000
Maxxam Group Holdings, Inc.,
Sr Sec Note Ser B 08-01-03 ......................... 12.000 CCC+ 3,000 3,247,500
Niantic Bay Fuel Trust,
Bond 06-04-03 (R) + ................................. 8.590 B+ 2,300 2,300,000
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>

VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- -------- ------- -------- ------
<S> <C> <C> <C> <C>
Finance (continued)
William Hill Finance Plc,
Sr Sub Note (United Kingdom) 04-30-08 (R)# .......... 10.625% B- $2,000 $3,263,500
----------
15,961,650
----------
Food (0.63%)
Archibald Candy Corp.,
Sr Sec Note 07-01-04 ............................... 10.250 B 2,000 2,130,000
Mastellone Hermanos S.A.,
Sr Bond (Argentina) 04-01-08 (R), (Y) ............... 11.750 B+ 3,900 3,958,500
----------
6,088,500
----------
Glass Products (0.28%)
VICAP S.A. de C.V.,
Gtd Sr Note (Mexico) 05-15-07 (R), (Y)............... 11.375 B+ 2,500 2,675,000
----------
Government - Foreign (8.24%)
Australia, Commonweath of,
Government Bond (Australia) 08-15-08# ............... 8.750 AAA 45,000 35,495,626
South Africa, Republic of,
Government Bond (South Africa) 06-23-17 (Y) ......... 8.500 Baa3 7,000 6,746,250
Government Bond (South Africa) 10-17-06 (Y).......... 8.375 BB+ 2,500 2,575,000
United Kingdom of Great Britain Treasury Gilts,
Government Bond (United Kingdom) 07-16-07# .......... 8.500 Aaa 8,000 15,546,498
Government Bond (United Kingdom) 06-07-21# .......... 8.000 Aaa 5,000 10,616,573
Government Bond (United Kingdom) 11-06-01# .......... 7.000 Aaa 5,000 8,439,207
----------
79,419,154
----------
Government - U.S. (19.35%)
United States Treasury,
Bond 08-15-05 ...................................... 10.750 AAA 10,000 12,965,600
Bond 02-15-16 ...................................... 9.250 AAA 11,000 15,058,010
Bond 08-15-19 ...................................... 8.125 AAA 61,500 77,835,630
Bond 02-15-27 ...................................... 6.625 AAA 19,000 20,947,500
Bond 11-15-27 ...................................... 6.125 AAA 10,100 10,552,884
Note 11-15-98 ...................................... 8.875 AAA 8,000 8,121,280
Note 08-15-04 ...................................... 7.250 AAA 10,000 10,842,200
Note 08-31-02 ...................................... 6.250 AAA 20,000 20,465,600
Note 08-15-07 ...................................... 6.125 AAA 9,300 9,596,391
----------
186,385,095
-----------
Government - U.S. Agencies (2.33%)
Federal Home Loan Mortgage Corp.,
REMIC 44-E 11-15-19 ................................ 9.000 AAA 643 665,863
Federal National Mortgage Assn.,
Global Bond (United Kingdom) 06-07-02# ............. 6.875 AAA 5,000 8,313,366
Government National Mortgage Assn.,
30 Yr Pass Thru Ctf 05-15-26 ........................ 7.500 AAA 13,050 13,449,940
-----------
22,429,169
-----------
SEE NOTES TO FINANCIAL STATEMENTS.
16

<PAGE>
PAR
VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- -------- ------- -------- ------
<S> <C> <C> <C> <C>
Leisure (5.43%)
Casino America, Inc.,
Sr Sec Note 08-01-03 ............................... 12.500% B+ $5,000 $5,625,000
Cinemark USA, Inc.,
Sr Sub Note Ser B 08-01-08 ......................... 9.625 B 4,000 4,160,000
Sr Sub Note Ser 08-01-08 .......................... 9.625 B2 1,000 1,030,000
Eldorado Resorts LLC,
Sr Sub Note 08-15-06 ............................... 10.500 B 4,000 4,400,000
Grand Casinos, Inc.,
Gtd Sr Note Ser B 10-15-04 ......................... 9.000 B+ 3,000 3,120,000
Hedstrom Corp.,
Gtd Sr Sub Note 06-01-07 ........................... 10.000 B- 4,000 4,100,000
Horseshoe Gaming LLC,
Gtd Sr Sub Note Ser B 06-15-07 ..................... 9.375 B 2,500 2,662,500
Mohegan Tribal Gaming Authority,
Sr Sec Note Ser B 11-15-02 ......................... 13.500 BB+ 5,900 7,522,500
Production Resource Group LLC,
Sr Sub Note 01-15-08 (R) ........................... 11.500 B- 3,000 2,940,000
Showboat Marina Casino Partnership/Finance Corp.,
1st Mtg Note Ser B 03-15-03 ........................ 13.500 BB- 5,000 5,850,000
Showboat, Inc.,
Sr Sub Note 08-01-09 ............................... 13.000 B 3,000 3,660,000
Sun International Hotels Ltd.,
Gtd Sr Sub Note (Bahamas) 12-15-07(Y)............... 8.625 B+ 2,000 2,060,000
Waterford Gaming LLC,
Sr Note 11-15-03 ................................... 12.750 B+ 4,729 5,225,545
----------
52,355,545
----------
Machinery (1.34%)
Clark Material Handling Co.,
Gtd Sr Note 11-15-06 ............................... 10.750 B+ 2,250 2,407,500
Columbus McKinnon Corp.,
Sr Sub Note 04-01-08 (R) ........................... 8.500 B 5,000 4,925,000
Elgar Holdings, Inc.,
Sr Note 02-01-08 (R) ............................... 9.875 B2 1,500 1,500,000
Newcor, Inc.,
Sr Sub Note 03-01-08 (R) ........................... 9.875 B- 4,000 4,050,000
----------
12,882,500
----------
Manufacturing (1.10%)
Coty, Inc.,
Sr Sub Note 05-01-05 ............................... 10.250 B+ 6,000 6,420,000
Scovill Fasteners, Inc.,
Sr Note Ser B 11-30-07 ............................. 11.250 B 4,000 4,130,000
----------
10,550,000
----------
Media (8.43%)
Adelphia Communications Corp.,
Sr Note Ser B 10-01-02 ............................ 9.250 B3 3,500 3,596,250
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.
17

<PAGE>

FINANCIAL STATEMENTS
John Hancock Funds - Strategic Income Fund
<TABLE>
<CAPTION>
PAR
VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- -------- ------- -------- ------
<S> <C> <C> <C> <C>
Media (continued)
Australis Media Ltd.,
Gtd Sr Sec isc Note, Step Coupon, Payment-in-Kind
(PIK) (15.75%, 05-15-00)
(Australia) 05-15-03 (A), (Y) ....................... 1.75% D $164 $8,177
Unit (Sr Sub Disc Note & Warrant), Step Coupon,
PIK (15.75%, 05-15-00)
(Australia) 05-15-03 (A), (Y) ....................... 1.75 D 2,000 100,000
Capstar Broadcasting Partners, Inc.,
Sr Disc Note, Step Coupon (12.75%, 02-01-02)
02-01-09 (A) ........................................ Zero B- 2,750 2,048,750
CF Cable TV, Inc.
Sr Note (Canada) 02-15-05 (Y) ....................... 11.625 BBB- 2,000 2,257,240
Chancellor Media Corp.,
Gtd Sr Sub Note 01-15-07............................ 10.500 Ba3 3,000 3,345,000
Sub Deb 01-15-09 ................................... 12.000 B 1,059 1,291,736
Citadel Broadcasting Co.,
Sr Sub Note 07-01-07 ............................... 10.250 B- 2,000 2,190,000
Comcast Corp.,
Sr Sub Deb 01-15-08 ................................ 9.500 BB+ 4,000 4,286,080
Comcast UK Cable,
Sr Disc Deb, Step Coupon (11.20%, 11-15-00)
(United Kingdom) 11-15-07 (A), (Y) .................. Zero B- 4,000 3,290,000
CSC Holdings, Inc.,
Sr Sub Deb 02-15-13 ................................ 9.875 BB- 4,000 4,370,000
Digital Television Services, Inc.
Gtd Sr Sub Note Ser B 08-01-07 ...................... 12.500 CCC 3,000 3,450,000
Falcon Holding Group L.P./Falcon Funding Corp.,
Sr Deb 04-15-10 (R) ................................ 8.375 B 5,000 4,937,500
Galaxy Telecom L.P.,
Sr Sub Note 10-01-05 ............................... 12.375 B- 5,000 5,550,000
Garden State ewspapers, Inc.,
Sr Sub Note Ser B 10-01-09 ......................... 8.750 B+ 3,500 3,552,500
Granite Broadcasting Corp.,
Sr Sub Note 05-15-08 (R) ........................... 8.875 B- 2,000 2,000,000
Intermedia Capital Partners,
Sr Note 08-01-06 ................................... 11.250 B 5,048 5,641,140
Le Groupe Videotron Ltee,
Sr Note (Canada) 02-15-05 (Y) ....................... 10.625 Ba3 1,250 1,369,713
Radio One, Inc.,
Gtd Sr Sub Note Ser B, Step Coupon (12.00%,
05-15-00) 05-15-04 (A)*** ........................... 7.000 B- 2,000 2,040,000
Rogers Cablesystems Ltd.,
Sr Note Ser B (Canada) 03-15-05 (Y) ................. 10.000 BB+ 3,000 3,315,000
Sr Sec Deb (Canada) 01-15-14# ....................... 9.650 BB+ 2,000 1,585,799
Scandinavian Broadcasting System S.A.,
Sub Deb (Luxembourg) 08-01-05 (Y) ................... 7.250 B 2,390 2,736,550
SFX Entertainment, Inc.,
Sr Sub Note 02-01-08 (R) ........................... 9.125 CCC+ 5,000 4,875,000
STC Broadcasting, Inc.,
Sr Sub Note 03-15-07 ............................... 11.000 B- 2,785 3,056,538
Sullivan Broadcasting,
Sr Sub Note 12-15-05 ............................... 10.250 B- 3,000 3,240,000
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>

Oil & Gas (2.19%)
Canadian Forest Oil Ltd.,
Gtd Sr Sub Note (Canada) 09-15-07 (Y) ............... 8.750 B 2,900 2,863,750
Cliffs Drilling Co.,
Gtd Sr Sec Note Ser B 05-15-03 ..................... 10.250 B+ 2,250 2,424,375
Comp Nav Perez Companc,
Bond (Argentina) 01-30-04 (R), (Y)................... 9.000 Ba3 3,000 3,000,000
Cross Timbers Oil Co.,
Sr Sub Note Ser B 11-01-09 ......................... 8.750 B 1,500 1,496,250
Great Lakes Carbon Corp.,
Sr Sub Note 05-15-08 (R) ........................... 10.250 B- 1,800 1,827,000
Kelly Oil & Gas Partners Ltd.,
Deb 04-01-00 ....................................... 8.500 B- 1,100 1,087,625
Newpark Resources, Inc.,
Gtd Sr Sub Note 12-15-07 ........................... 8.625 B+ 1,500 1,522,500
Parker Drilling Corp.,
Gtd Sr Note Ser B 11-15-06 ......................... 9.750 B+ 1,000 1,047,500
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>

Printing - Commercial (0.66%)
Goss Graphic Systems, Inc.,
Sr Sub Note 10-15-06 ............................... 12.000 B 3,000 3,187,500
Sullivan Graphics, Inc.,
Sr Sub Note 08-01-05 ............................... 12.750 B- 3,000 3,135,000
----------
6,322,500
----------
Retail (0.36%)
Disco S.A.,
Note (Argentina) 05-15-08 (R), (Y) .................. 9.875 BB 2,000 1,927,500
United Stationers, Inc.,
Sr Sub Note 04-15-08 (R) ........................... 8.375 B 1,500 1,500,000
----------
3,427,500
----------
Steel (1.64%)
Ameristeel Corp.,
Sr Note 04-15-08 (R) ............................... 8.750 B+ 4,100 4,120,500
Bayou Steel Corp.,
1st Mtg Bond 05-15-08 (R)........................... 9.500 B 3,000 2,981,250
Haynes International, Inc.,
Sr Note 09-01-04 ................................... 11.625 B- 2,500 2,825,000
IVACO, Inc.,
Sr Note (Canada) 09-15-05 (Y) ....................... 11.500 B+ 3,525 3,890,719
Sheffield Steel Corp.,
1st Mtg Note Ser B 12-01-05 ........................ 11.500 B- 1,875 1,940,625
----------
15,758,094
----------
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS
20
<PAGE>

FINANCIAL STATEMENTS
John Hancock Funds - Strategic Income Fund
<TABLE>
<CAPTION>
PAR
VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- -------- ------- -------- ------
<S> <C> <C> <C> <C>
Telecommunications (18.85%)
Advanced Radio Telecom Corp.,
Unit (Sr Note & Warrants) 02-15-07.................. 14.000% CCC+ $5,000 $5,150,000
Allegiance Telecom, Inc.,
Sr Disc Note, Step Coupon (11.75%,
02-15-03) 02-15-08 (A), (R) ........................ Zero B 3,500 1,925,000
American Mobile Satellite Corp./AMSC
Acquisition Co. Inc.,
Unit (Sr Note & Warrant) 04-01-08 (R) .............. 12.250 B- 3,000 2,985,000
Clearnet Communications, Inc.,
Sr Disc Note, Step Coupon (10.40%,
05-15-03) (Canada) 05-15-08# ........................ Zero B3 6,500 2,675,104
Cellular Communications International, Inc.,
Sr Disc Note, Step Coupon (9.50%, 04-01-03)
04-01-05 (A), (R) ................................... Zero B- 4,750 3,727,624
COLT Telecom Group Plc,
Unit (Sr Disc Note & Warrant), Step Coupon
(12.00%, 12-15-01) (United Kingdom)
12-15-06 (A), (Y) .................................. Zero B 5,000 3,962,500
Sr Note (United Kingdom) 11-30-07# .................. 10.125 B 1,425 2,540,329
Compagnie De Radiocomunicaciones Moviles S.A.,
Bond (Argentina) 05-08-08 (R), (Y) .................. 9.250 BBB- 2,500 2,418,750
Comunicacion Celular S.A.,
Bond, Step Coupon (13.125%, 11-15-00)
(Colombia) 11-15-03 (A), (Y) ........................ Zero B3 5,000 3,875,000
Crown Castle International Corp.,
Sr Disc Note, Step Coupon (10.625%,
11-01-02) 11-15-07 (A), (R) ........................ Zero B 5,000 3,387,500
Diva Systems Corp.,
Unit (Sr Disc Note & Warrants), Step
Coupon (12.625%, 03-01-03) 03-01-08 (A), (R)....... Zero B- 5,165 2,737,450
Dolphin Telecom Plc,
Sr Disc Note, Step Coupon (11.50%,
06-01-03) (United Kingdom) 06-01-08 (A), (R), (Y).... Zero B- 4,400 2,541,000
DTI Holdings, Inc.,
Unit (Sr Disc Note & Warrant), Step Coupon
(12.50%, 03-01-03) 03-01-08 (A), (R) ................ Zero B- 4,600 2,622,000
e.spire Communications, Inc.,
Sr Note 07-15-07 ................................... 13.750 B- 6,000 6,900,000
Echostar BS Corp.,
Gtd Sr Sec Note 07-01-02 ........................... 12.500 B- 5,000 5,612,500
Esprit Telecom Group Plc,
Sr Note (United Kingdom) 12-15-07 (Y) ............... 11.500 B- 1,550 1,643,000
Facilicom International,
Sr Note 01-15-08 (R) ............................... 10.500 B- 4,350 4,328,250
FLAG Ltd.,
Sr Note (Bermuda) 01-30-08 (R), (Y) ................. 8.250 B+ 3,500 3,552,500
Fonorola, Inc.,
Gtd Sr Sec Note (Canada) 08-15-02 (Y) ............... 12.500 BB- 4,000 4,470,000
Global Crossing Holdings Ltd.,
Sr Note 05-15-08 (R) ............................... 9.625 B 1,500 1,545,000
Globalstar L.P./Globalstar Capital Corp.,
Sr Note 06-01-05 (R) ............................... 11.500 B 1,900 1,876,250
GST Equipment Funding, Inc.,
Sr Sec Note 05-01-07 ............................... 13.250 B 5,000 5,750,000
Hermes Europe Railtel B.V.,
Sr Note (etherlands) 08-15-07 (Y) ................... 11.500 B 3,750 4,237,500
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>

FINANCIAL STATEMENTS
John Hancock Funds - Strategic Income Fund
<TABLE>
<CAPTION>
PAR
VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- -------- ------- -------- ------
<S> <C> <C> <C> <C>
Telecommunications (continued)
Innova S. de R.L.,
Sr Note (Mexico) 04-01-07 (Y) ....................... 12.875% B- $3,000 $3,157,500
Intercel, Inc.,
Unit (Sr iscount ote & Warrant), Step
Coupon (12.00%, 02-01-01) 02-01-06 (A) .............. Zero B 4,100 3,239,000
Intermedia Communications Inc.,
Sr Disc Note, Ser B, Step Coupon
(11.25%, 07-01-02) 07-15-07 (A) ..................... Zero B 3,000 2,205,000
Sr Disc Note, Step Coupon (12.50%,
05-15-01) 05-15-06 (A) .............................. Zero B 3,000 2,452,500
International Wireless Communications, Inc.,
Sr Sec Disc Note 08-15-01 .......................... Zero B- 3,000 1,200,000
Ionica Plc,
Sr Disc Note, Step Coupon (15.00%, 05-01-02)
(United Kingdom) 05-01-07 (A), (Y) .................. Zero Caa3 6,000 1,620,000
Sr Note (United Kingdom) 08-15-06 (Y)................ 13.500 Caa3 1,000 660,000
Iridium LLC/Iridium Capital Corp.,
Gtd Sr Note Ser A 07-15-05 ......................... 13.000 B- 4,150 4,461,250
IXC Communications, Inc.,
Sr Sub Note 04-15-08 (R) ........................... 9.000 CCC+ 1,900 1,897,625
McCaw International Ltd.,
Sr Disc Note, Step Coupon (13.00%, 04-15-02)
04-15-07 (A) ........................................ Zero CCC+ 7,000 4,637,500
McLeodUSA, Inc.,
Sr Note 03-15-08 (R)................................ 8.375 B+ 1,350 1,350,000
Sr Note 07-15-07 .................................. 9.250 B+ 3,000 3,131,250
Metroet Communications Corp.,
Sr Discount Note, Step Coupon (10.75%,
11-01-02) (Canada) 11-01-07 (A), (Y) ................ Zero B 3,000 2,040,000
Sr Note (Canada) 08-15-07 (Y) ....................... 12.000 B 2,250 2,587,500
Microcell Telecommunications, Inc.,
Sr Disc Note Ser B, Step Coupon (11.125%,
10-15-02) (Canada) 10-15-07 (A)# .................... Zero B- 2,500 1,098,309
Nextel Communications, Inc.,
Sr Disc Note, Step Coupon (9.75%, 02-15-99)
08-15-04 (A) ........................................ Zero CCC+ 11,000 10,642,500
NEXTLIK Communications, Inc.,
Sr Disc Note, Step Coupon (9.45%, 04-15-03)
04-15-08 (A), (R) ................................... Zero B3 4,000 2,450,000
Sr Note 10-01-07 ................................... 9.625 B 1,500 1,530,000
TL, Inc.,
Sr Note 04-01-08 (R) ............................... 9.500 B- 1,680 2,741,340
Occidente Y Caribe Cellular SA,
Sr Disc Note and Warrant Ser B , Step Coupon
(14.00%, 03-15-01) (Colombia)
03-15-04 (A), (Y) ................................... Zero B 4,000 3,520,000
Orion Network Systems,
Sr Note 01-15-07 ................................... 11.250 B+ 5,000 5,650,000
Qwest Communications International, Inc.,
Sr Note Ser B 04-01-07 ............................. 10.875 B+ 4,410 5,060,475
RC Corp.,
Sr Note 10-15-07 ................................... 10.000 B3 4,600 4,830,000
Satelites Mexicanos S.A. de C.V.,
Sr Note (Mexico) 11-01-04 (R), (Y) .................. 10.125 B- 5,000 4,987,500
Sprint Spectrum L.P.,
Sr Note 08-15-06 ................................... 11.000 B+ 3,750 4,321,875
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
FINANCIAL STATEMENTS
John Hancock Funds - Strategic Income Fund
<TABLE>
<CAPTION>
PAR
VALUE
INTEREST CREDIT (000s MARKET
ISSUER, DESCRIPTION RATE RATING* OMITTED) VALUE
- ------------------- -------- ------- -------- ------
<S> <C> <C> <C> <C>
Telecommunications (continued)
Teleport Communications Group, Inc.,
Sr Disc Note, Step Coupon (11.125%, 07-01-01)
07-01-07 (A) ........................................ Zero% B+ $4,000 $3,485,000
Teletrac, Inc.,
Sr Note Ser B 08-01-07 .............................. 14.000 B- 2,000 2,000,000
Teligent, Inc.,
Sr Note 12-01-07 .................................... 11.500 CCC 5,000 5,087,500
Viatel, Inc.,
Unit (Sr Note & Preferred Stock) 04-15-08 (R)........ 11.250 Caa1 1,500 1,560,000
Videotron Holdings Plc,
Sr Disc Note, Step Coupon (11.125%, 07-01-99)
(United Kingdom) 07-01-04 (A), (Y) .................. Zero BBB+ 4,000 3,909,120
Winstar Communications, Inc.,
Sr Disc Note, Step Coupon (14.00%, 10-15-00)
10-15-05 (A) ........................................ Zero Caa1 2,600 2,106,000
Winstar Equipment Corp.,
Gtd Sec Note 03-15-04 .............................. 12.500 B3 1,400 1,568,000
-----------
181,649,001
-----------
Transport (0.66%)
Enterprises Shipholding Corp.,
Sr Note (Greece) 05-01-08 (R), (Y) .................. 8.875 BB 3,400 3,383,000
Pacific & Atlantic Holding Inc.,
1st Mtg Note (Greece) 05-30-08 (R), (Y) ............. 11.500 B 3,000 2,977,500
-----------
6,360,500
-----------
Utilities (1.54%)
Calpine Corp.,
Sr Note 02-01-04 ................................... 9.250 BB- 2,000 2,055,000
Midland Funding Corp. II,
Deb Ser A 07-23-05 ................................. 11.750 B 4,000 4,800,400
Deb Ser B 07-23-06 ................................. 13.250 B 4,000 5,152,040
Monterrey Power S.A. de C.V.,
Sr Sec Bond (Mexico) 11-15-09 (R), (Y) .............. 9.625 BB 2,900 2,827,500
-----------
14,834,940
-----------
TOTAL BONDS
(Cost $817,906,369) (87.66%) 844,544,766
------- -----------

NUMBER OF
SHARES MARKET
OR WARRANTS VALUE
----------- ------
COMMO A PREFERRE STOCKS A WARRATS
Advanced Radio Telecom Corp., Warrant** ..................... 60,000 780,000
Allegiance Telecom, Inc., Warrant** ......................... 3,500 -
American Radio Systems Corp., 11.375%, Ser B,
Preferred Stock ............................................. 47,376 5,590,368
American Telecasting, Inc., Warrant** ....................... 4,000 400
AVI Holdings, Inc., Warrant (R)** .......................... 1,500 9,000
California Federal Bank, Ser B, 10.625%,
Preferred Stock ............................................. 6,667 724,203
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>

<TABLE>
<CAPTION>
NUMBER OF
SHARES MARKET
OR WARRANTS VALUE
---------- ------
<S> <C> <C>
COMMO A PREFERRE STOCKS A WARRATS (continued)
California Federal Bank, 11.50%, Preferred Stock............. 5,000 $552,500
Capstar Broadcasting Partners, Inc., 12.00%,
Preferred Stock ............................................. 14,266 1,478,314
Chancellor Media Corp., 7.00%, Convertible,
Preferred Stock ............................................. 20,000 2,637,500
COLT Telecom Plc, Warrant (United Kingdom) (R)** ............ 5,000 925,000
Comunicacion Celular S.A. Warrant (Colombia) (Y)** .......... 50,000 350,000
Core Cap, Inc., Common Stock (r)** .......................... 45,000 900,000
Core Cap, Inc. Ser A/I, 10.00%, Preferred Stock (r).......... 45,000 1,125,000
Credit Lyonnais Capital S.C.A., American epositary Receipt (AR),
9.50% Ser TC Preferred Stock (France) (R), (Y)............... 100,000 2,525,000
ecorative Home Accents, Inc., Common Stock** ................ 1,000 10
Earthwatch, Inc., 12.00%, Ser C, Conv Preferred
Stock (R) ................................................. 200,000 1,400,000
EchoStar Communications Corp., 12.125%, Ser B,
Preferred Stock ............................................. 1,061 1,185,668
Finlay Enterprises Inc., Common Stock** ..................... 4,000 102,500
Granite Broadcasting Corp., 12.75%, Preferred Stock.......... 45,263 5,295,720
Hyperion Telecommunications, Inc., 12.875%, Ser B,
Preferred Stock ............................................. 3,097 3,483,632
ICF Kaiser International Inc., Warrant (r)** ................ 12,000 3,000
ICG Holdings, Inc., 14.00%, Preferred Stock ................. 2,297 2,755,998
Intermedia Communications, Inc., 13.50%,
Ser B, Preferred Stock ...................................... 1,727 2,081,512
Intermedia Communications, Inc., Common Stock** ............. 15,000 1,111,875
International Wireless Inc., Warrant** ...................... 3,000 30
Ionica Plc, Warrant (United Kingdom) (R) #** ................ 8,500 552,500
IRT Property Co., Real Estate Investment Trust (REIT)........ 75,000 853,125
Kelley Oil & Gas Corp., $2.625, Preferred Stock ............. 40,000 1,020,000
KLM Royal utch Air Lines .V., Common Stock (etherlands)...... 25,000 973,437
Lasmo Plc, 10.00%, Ser A, American epositary Shares
(AS), Preferred Stock (United Kingdom) (Y) .................. 50,000 1,331,250
Loral Space & Communications Ltd., Warrant** ................ 5,000 50,000
Maxus Energy Corp., $2.50, Preferred Stock .................. 40,000 1,025,000
McCaw International Ltd., Warrant** ......................... 7,000 26,250
Metroet Communications Corp., Warrant
(Canada) (R)** .............................................. 2,250 108,000
extel Communications, Inc., 13.00%, Ser,
Preferred Stock ............................................. 2,195 2,458,400
Nextel Communications, Inc., 11.125%, Ser E,
Preferred Stock (R) ........................................ 1,716 1,819,433
Nextel Communications, Inc. (Class A),
Common Stock** .............................................. 12,394 292,034
Nextlink Communications, Inc., Warrant (R)** ................ 30,000 -
Nextlink Communications, Inc., 14.00%, Preferred Stock....... 100,500 5,979,750
Nrthwest Airlines Corp. (Class A), Common Stock** ........... 150,000 6,759,375
NTL, Inc., 13.00%, Ser B, Preferred Stock ................... 4,406 5,220,519
PG&E Corp., Common Stock .................................... 25,622 807,093
Powertel, Inc., Warrant** ................................... 2,880 27,360
PRIMEIA, Inc., 8.625%, Preferred Stock (R) .................. 25,000 2,475,000
Qualcomm Financial Trust, 5.75%, Preferred Stock ............ 60,000 2,910,000
Quantas Airways Ltd., AS, Common Stock (Australia)
(R), (Y) .................................................... 13,800 213,497
RC Corp., Common Stock** .................................... 40,000 860,000
Renaissance Cosmetics, Warrant** ............................ 4,000 4,000
Rite Aid Corp., Common Stock ................................ 14,820 530,741
Rural Cellular Corp., 11.375%, Preferred Stock (R)........... 1,750 1,758,750
SFX Broadcasting, Inc., 6.50%, Ser , Conv Preferred
Stock (R) ................................................... 25,000 2,093,750
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>

<TABLE>
<CAPTION>
NUMBER OF
SHARES MARKET
OR WARRANTS VALUE
---------- ------
<S> <C> <C>
COMMON A PREFERRED STOCKS AND WARRANTS (continued)
SFX Broadcasting, Inc., 12.625%, Ser E,
Preferred Stock ............................................. 9,568 1,129,024
SFX Entertainment, Inc. (Class A), Common Stock** ........... 27,467 $1,215,415
Station Casinos, Inc., 7.00%, Conv
Preferred Stock ............................................. 5,000 256,250
Teletrac, Inc., Warrant** ................................... 2,000 -
Time Warner, Inc., 10.25%, Ser M,
Preferred Stock ............................................ 3,576 4,058,760
TLC Beatrice International Holdings,
(Class A), Common Stock (r)** ............................. 20,000 1,040,000
Valero Energy Corp., Common Stock ........................... 46,250 1,508,906

TOTAL COMMON AND PREFERRED STOCKS AND WARRANTS
(Cost $69,034,676) (8.76%) 84,374,849
-------- -----------
PAR VALUE
INTEREST (000s
RATE OMITTED)
---- --------

SHORT-TERM IVESTMENTS
Joint Repurchase Agreement (1.55%)
Investment in a joint repurchase agreement
transaction with Toronto ominion, dated 05-29-98,
due 06-01-98 (secured by U.S. Treasury Notes, 5.125%
thru 9.25%, due 08-15-98 thru 11-15-05 and U.S.
Treasury Bonds, 6.00% thru 12.00%, due 08-15-13
thru 08-15-27)- Note A .............................. 5.570% $14,893 14,893,000

Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95% .................................. 206
------------
TOTAL SHORT-TERM INVESTMETS (1.55%) 14,893,206
-------- ------------
TOTAL INVESTMETS (97.97%) 943,812,821
-------- ------------
OTHER ASSETS A LIABILITIES, NET (2.03%) 19,591,094
-------- ------------
TOTAL NET ASSETS (100.00%)$963,403,915
======== ============
</TABLE>

SEE NOTES TO FINANCIAL STATEMENTS.
25
<PAGE>

FINANCIAL STATEMENTS

John Hanock Funds - Strategic Income Fund

NOTES TO THE SCHEULE OF IVESTMETS

* Credit ratings are unaudited and rated by Moody's Investors Service or John
Hancock Advisers, Inc. where Standard & Poor's ratings are not available.
** Non-income producing security.
***Represents rate in effect on May 31, 1998.
# Par value of foreign bonds is expressed in local currency, as shown
parenthetically in security description.
+ These securities having an aggregate value of $3,759,375 or 0.39% of the
FundOs net assets, have been purchased on a when-issued basis. The purchase
price and the interest rate of such securities are fixed at trade date, although
the Fund does not earn any interest on such securities until settlement date.
The Fund has instructed its Custodian Bank to segregate assets with a current
value at least equal to the amount of its when-issued commitments. Accordingly,
the market value of $4,809,356 of U.S. Treasury Bond, 8.125%, due 08-15-19 has
been segregated to cover the when-issued commitments.
(A) Cash interest will be paid on this obligation at the stated rate beginning
on the stated date.
(R) These securities are exempt from registration under rule 144A of the
Securities Act of 1933. Such securities may be resold, normally to qualified
institutional buyers, in transactions exempt from registration. Rule 144A
securities amounted to $169,913,932 or 17.64% of the Fund's net assets as of May
31, 1998.
(Y) Parenthetical disclosure of a foreign country in the security description
represents country of foreign issuer; however, security is U.S. dollar
denominated.

(r) Direct placement securities are restricted to resale. They have been valued
at fair value by the Trustees after considerations of restrictions as to resale,
financial condition and prospects of the issuer, general market conditions and
pertinent information in accordance with the Fund's By-Laws and the Investment
Company Act of 1940, as amended. The Fund has limited rights to registration
under the Securities Act of 1933 with respect to these restricted securities.

Additional information on each restricted security is as follows:

MARKET
VALUE AS A
PERCENTAGE MARKET
ACQUISITION ACQUISITION OF FUND'S VALUE AS OF
DATE COST NET ASSETS MAY 31, 1998
---- ---- ---------- ------------
<S> <C> <C> <C> <C>
Core Cap, Inc., Common Stock 10-31-97 $900,000 0.09% $900,000
Core Cap, Inc., Ser A/1, 10.00%,
Preferred Stock 10-31-97 1,125,000 0.12 1,125,000
ICF Kaiser International Inc., Warrant 01-04-94 15,000 0.00 3,000
TLC Beatrice International Holdings
(Class A), Common Stock 11-25-87 1,006,000 0.11 1,040,000
</TABLE>

The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.

SEE NOTES TO FINANCIAL STATEMENTS
26
<PAGE>

FINANCIAL STATEMENTS

John Hancock Funds - Strategic Income Fund

Portfolio Concentration
May 31, 1998 (Unaudited)
- --------------------------------------------------------------------------------

The Strategic Income Fund invests primarily in securities issued in the United
States of America. The performance of this Fund is closely tied to the economic
and financial conditions within the countries in which it invests. The
concentration of investments by industry category for individual securities held
by the Fund is shown in the schedule of investments. In addition, the
concentration of investments can be aggregated by various countries. The table
below shows the percentages of the Fund's investments at May 31, 1998 assigned
to country categories.

MARKET VALUE
AS A PERCETAGE
OF FUND'S
COUNTRY DIVERSIFICATION NET ASSETS
- ----------------------- ----------
Argentina ................................ 1.89%
Australia ................................ 4.51
Bahamas ................................ 0.21
Bermuda ................................ 0.37
Canada ................................ 3.56
Colombia ................................ 0.80
France ................................ 0.26
Germany ................................ 1.41
Greece ................................ 0.66
Luxembourg ................................ 0.28
Mexico ................................ 1.95
etherlands ................................ 0.54
South Africa .............................. 1.61
United Kingdom ............................ 8.16
United States ............................ 71.76
-------
TOTAL IVESTMETS 97.97%
=======

Additionally, the concentration of investments can be aggregated by the quality
rating for each debt security.

MARKET VALUE
AS A PERCETAGE
OF FUND'S
QUALITY DISTRIBUTION NET ASSETS
- -------------------- ----------
AAA ................................ 31.01%
BBB ................................ 1.79
BB ................................ 7.78
B ................................ 41.23
CCC ................................ 5.84
0.01
-------
TOTAL BONDS 87.66%
=======

SEE NOTES TO FINANCIAL STATEMENTS
27
<PAGE>

NOTES TO FINANCIALS STATEMENTS

John Hancock Funds - Strategic Income Fund

NOTE A -
ACCOUNTING POLICIES

John Hancock Strategic Series (the "Trust") is an open-end management investment
company, registered under the Investment Company Act of 1940. The Trust consists
of two series of portfolios: John Hancock Strategic Income Fund (the "Fund") and
John Hancock Sovereign U.S. Government Income Fund. The other series of the
Trust is reported in separate financial statements. The investment objective of
the Fund is a high level of current income.

The Trustees have authorized the issuance of multiple classes of shares of the
Fund, designated as Class A, Class B and Class C shares. The Trustees authorized
the issuance of Class C shares effective May 1, 1998. The shares of each class
represent an interest in the same portfolio of investments of the Fund and have
equal rights to voting, redemptions, dividends and liquidation, except that
certain expenses, subject to the approval of the Trustees, may be applied
differently to each class of shares in accordance with current regulations of
the Securities and Exchange Commission and the Internal Revenue Service.
Shareholders of a class which bears distribution and service expenses under
terms of a distribution plan have exclusive voting rights to that distribution
plan.

Significant accounting policies of the Fund are as follows:

VALUATION OF INVESTMENTS
Securities in the Fund's portfolio are valued on the basis of market quotations,
valuations provided by independent pricing services or at fair value as
determined in good faith in accordance with procedures approved by the Trustees.
Short-term debt investments maturing within 60 days are valued at amortized cost
which approximates market value. All portfolio transactions initially expressed
in terms of foreign currencies have been translated into U.S. dollars as
described in "Foreign Currency Translation" below. The Fund may invest in
indexed securities whose value is linked either directly or inversely to changes
in foreign currencies, interest rates, commodities, indices or other reference
instruments. Indexed securities may be more volatile than the reference
instrument itself, but any loss is limited to the amount of the original
investment.

JOINT REPURCHASE AGREEMENT
Pursuant to an exemptive order issued by the Securities and Exchange Commission,
the Fund, along with other registered investment companies having a management
contract with John Hancock Advisers, Inc. (the "Adviser"), a wholly owned
subsidiary of The Berkeley Financial Group, Inc., may participate in a joint
repurchase agreement transaction. Aggregate cash balances are invested in one or
more large repurchase agreements, whose underlying securities are obligations of
the U.S. government and/or its agencies. The Fund's custodian bank receives
delivery of the underlying securities for the joint account on the Fund's
behalf. The Adviser is responsible for ensuring that the agreement is fully
collateralized at all times.

INVESTMENT TRANSACTIONS
Investment transactions are recorded as of the date of purchase, sale or
maturity. Net realized gains and losses on sales of investments are determined
on the identified cost basis. Capital gains realized on some foreign securities
are subject to foreign taxes and are accrued, as applicable.

FEDERAL INCOME TAXES
The Fund's policy is to comply with the requirements of the Internal Revenue
Code which are applicable to regulated investment companies. It will not be
subject to federal income tax on taxable earnings which are distributed to
shareholders. For federal income tax purposes, net currency exchange gains and
losses from sales of foreign debt securities may be treated as ordinary income
even though such items are capital gains and losses for accounting purposes. The
Fund has $20,120,825 of capital loss carryforwards available, to the extent
provided by regulations, to offset future net realized capital gains. To the
extent that such carryforwards are used by the Fund, no capital gains
distributions will be made. The carryforwards expire as follows: May 31, 2003 -
$19,853,817 and May 31, 2004 - $267,008. Additionally, net capital losses of
$541,663 attributable to security transactions incurred after October 31, 1997
are treated as arising on the first day (June 1, 1998) of the Fund's next
taxable year.

DIVIDENDS, INTEREST AND DISTRIBUTIONS
Dividend income on investment securities is recorded on the
ex-dividend date or, in the case of some foreign securities, on the date
thereafter when the Fund is made aware of the dividend. Interest income on
investment securities is recorded on the accrual basis. Foreign income may be
subject to foreign withholding taxes which are accrued as applicable. The Fund

28
<PAGE>

NOTES TO FINANCIAL STATEMENTS

John Hancock Funds - Strategic Income Fund

records all distributions to shareholders from net investment income and
realized gains on the ex-dividend date. Such distributions are determined in
conformity with income tax regulations, which may differ from generally accepted
accounting principles. Dividends paid by the Fund with respect to each class of
shares will be calculated in the same manner, at the same time and will be in
the same amount, except for the effect of expenses that may be applied
differently to each class.

CLASS ALLOCATIONS
Income, common expenses and realized and unrealized gains (losses) are
calculated at the Fund level and allocated daily to each class of shares based
on the appropriate net assets of the respective classes. Distribution and
service fees, if any, are calculated daily at the class level based on the
appropriate net assets of each class and the specific expense rate(s) applicable
to each class.

EXPENSES
The majority of the expenses of the Trust are directly identifiable to an
individual fund. Expenses which are not readily identifiable to a specific fund
are allocated in such a manner as deemed equitable, taking into consideration,
among other things, the nature and type of expense and the relative sizes of the
funds.

DISCOUNT ON SECURITIES
The Fund accretes discount from par value on securities from either the date of
issue or the date of purchase over the life of the security, as required by the
Internal Revenue Code.

FOREIGN CURRENCY TRANSLATION
All assets and liabilities initially expressed in terms of foreign currencies
are translated into U.S. dollars based on London currency exchange quotations as
of 5:00 p.m., London time, on the date of any determination of the net asset
value of the Fund. Transactions affecting statement of operations accounts and
net realized gain/(loss) on investments are translated at the rates prevailing
at the dates of the transactions. The Fund does not isolate that portion of the
results of operations resulting from changes in foreign exchange rates on
investments from the fluctuations arising from changes in market prices of
securities held. Such fluctuations are included with the net realized and
unrealized gain or loss from investments. Reported net realized foreign exchange
gains or losses arise from sales of foreign currency, currency gains or losses
realized between the trade and settlement dates on securities transactions and
the difference between the amounts of dividends, interest and foreign
withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of
the amounts actually received or paid. Net unrealized foreign exchange gains or
losses arise from changes in the value of assets and liabilities other than
investments in securities at fiscal year end, resulting from changes in the
exchange rate.

FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency exchange contracts as a hedge
against the effect of fluctuations in currency exchange rates. A forward foreign
currency exchange contract involves an obligation to purchase or sell a specific
currency at a future date at a set price. The aggregate principal amounts of the
contracts are marked to market daily at the applicable foreign currency exchange
rates. Any resulting unrealized gains and losses are included in the
determination of the Fund's daily net assets. The Fund records realized gains
and losses at the time the forward foreign currency contract is closed out or
offset by a matching contract. Risks may arise upon entering these contracts
from potential inability of counterparties to meet the

29
<PAGE>

NOTES TO FINANCIAL STATEMENTS

John Hancock Funds - Strategic Income Fund

terms of the contract and from unanticipated movements in the value of a foreign
currency relative to the U.S. dollar.

These contracts involve market or credit risk in excess of the unrealized gain
or loss reflected in the Fund's Statement of Assets and Liabilities. The Fund
may also purchase and sell forward contracts to facilitate the settlement of
foreign currency denominated portfolio transactions, under which it intends to
take delivery of the foreign currency. Such contracts normally involve no market
risk if they are offset by the currency amount of the underlying transaction.

Open forward foreign currency exchange contracts at May 31, 1998 were as
follows:
UNREALIZED
PRINCIPAL AMOUNT EXPIRATION APPRECIATION/
CURRENCY COVERED BY CONTRACT MONTH (DEPRECIATION)
- -------- ------------------- ----- --------------

BUYS
Australian Dollar 6,118,000 JUNE 98 ($277,353)
Deutsche Mark 7,800,000 JUNE 98 147,016
----------
($130,337)
==========
SELLS
Australian Dollar 6,118,000 JUNE 98 $242,083
Australian Dollar 10,701,000 JULY 98 340,848
Australian Dollar 46,838,000 AUG 98 895,849
British Pound 11,785,000 JUNE 98 377,128
British Pound 13,562,000 JULY 98 373,867
British Pound 6,819,000 AUG 98 178,063
Deutsche Mark 7,800,000 JUNE 98 (68,775)
European Currency Unit 3,057,000 JULY 98 (62,430)
-----------
$2,276,633
===========

FINANCIAL FUTURES CONTRACTS

The Fund may buy and sell financial futures contracts for speculative purposes
and/or to hedge against the effects of fluctuations in interest rates, currency
exchange rates and other market conditions. Buying futures tends to increase the
Fund's exposure to the underlying instrument. Selling futures tends to decrease
the Fund's exposure to the underlying instrument or hedge other Fund
instruments. At the time the Fund enters into a financial futures contract, it
will be required to deposit with its custodian a specified amount of cash or
U.S. government securities, known as "initial margin," equal to a certain
percentage of the value of the financial futures contract being traded. Each
day, the futures contract is valued at the official settlement price on the
board of trade or U.S. commodities exchange on which it trades. Subsequent
payments, known as "variation margin," to and from the broker are made on a
daily basis as the market price of the financial futures contract fluctuates.
Daily variation margin adjustments, arising from this "mark to market," will be
recorded by the Fund as unrealized gains or losses.

For federal income tax purposes, the amount, character and timing of the Fund's
gains and/or losses can be affected as a result of futures contracts.

At May 31, 1998, open positions in financial futures contracts were as follows:

UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION APPRECIATION
- ---------- -------------- -------- ------------
SEPT 98 200 U.S. TREASURY BONDS LONG $4,688
=======

At May 31, 1998, the Fund had deposited in a segregated account, $400,000, par
value of U.S. Treasury Bond, 9.25%, 02-15-16 to cover margin requirements on
open financial futures contracts.

OPTIONS

Listed options will be valued at the last quoted sales price on the
exchange on which they are primarily traded. Purchased put or call
over-the-counter options will be valued at the average of the "bid" prices
obtained from two independent brokers. Written put or call over-the-counter
options will be valued at the average of the "asked" prices obtained from two
independent brokers. Upon the writing of a call or put option, an amount equal

<PAGE>

NOTES TO FINANCIAL STATEMENTS

John Hancock Funds - Strategic Income Fund

to the premium received by the Fund will be included in the Statement of Assets
and Liabilities as an asset and corresponding liability. The amount of the
liability will be subsequently marked to market to reflect the current market
value of the written option.

NOTE B -
MANAGEMENT FEE AND TRANSACTIONS
WITH AFFILIATES AND OTHERS

Under the present investment management contract, the Fund pays a monthly
management fee to the Adviser for a continuous investment program equivalent, on
an annual basis, to the sum of (a) 0.60% of the first $100,000,000 of the Fund's
average daily net asset value, (b) 0.45% of the next $150,000,000, (c) 0.40% of
the next $250,000,000, (d) 0.35% of the next $150,000,000, and (e) 0.30% of the
Fund's average daily net asset value in excess of $650,000,000.

The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly owned subsidiary of the Adviser. For the year ended May 31,
1998, net sales charges received with regard to sales of Class A shares amounted
to $2,351,277. Out of this amount, $279,714 was retained and used for printing
prospectuses, advertising, sales literature and other purposes, $1,177,631 was
paid as sales commissions to unrelated broker-dealers and $893,932 was paid as
sales commissions to sales personnel of John Hancock Distributors, Inc.
("Distributors"), a related broker-dealer. The Adviser's indirect parent, John
Hancock Mutual Life Insurance Company ("JHMLICo"), is the indirect sole
shareholder of Distributors.

Class B shares which are redeemed within six years of purchase will be subject
to a contingent deferred sales charge ("CDSC")at declining rates beginning at
5.00% of the lesser of the current market value at the time of redemption or the
original purchase cost of the shares being redeemed. Proceeds from the CDSC are
paid to JH Funds and are used in whole or in part to defray its expenses related
to providing distribution related services to the Fund in connection with the
sale of Class B shares. For the year ended May 31, 1998, contingent deferred
sales charges paid to JH Funds amounted to $938,449.

Class C shares which are redeemed within one year of purchase will be subject to
a CDSC at a rate of 1.00% of the lesser of the current market value at the time
of redemption or the original purchase cost of the shares being redeemed.
Proceeds from the CDSC are paid to JH Funds and are used in whole or in part to
defray its expenses related to providing distribution related services to the
Fund in connection with the sale of Class C shares. For the year ended May 31,
1998, there were no contingent deferred sales charges paid to JH Funds.

In addition, to reimburse JH Funds for the services it provides as the
distributor of shares of the Fund, the Fund has adopted Distribution Plans with
respect to Class A, Class B and Class C pursuant to Rule 12b-1 under the
Investment Company Act of 1940. Accordingly, the Fund will make

<PAGE>

NOTES TO FINANCIALS STATEMENTS

John Hancock Funds - Strategic Income Fund

payments to JH Funds for distribution and service expenses, at an annual rate
not to exceed 0.30% of Class A average daily net assets and 1.00% of Class B and
Class C average daily net assets to reimburse JH Funds for its distribution and
service costs. Up to a maximum of 0.25% of such payments may be service fees as
defined by the amended Rules of Fair Practice of the National Association of
Securities Dealers. Under the amended Rules of Fair Practice, curtailment of a
portion of the Fund's 12b-1 payments could occur under certain circumstances.

The Fund has a transfer agent agreement with John Hancock Signature Services,
Inc. ("Signature Services"), an indirect subsidiary of JHMLICo. The Fund pays a
transfer agent fee based on the number of shareholder accounts and certain
out-of-pocket expenses.

Mr. Edward J. Boudreau, Jr., Mr. Richard S. Scipione and Ms. Anne C. Hodsdon are
trustees and/or officers of the Adviser and/or its affiliates, as well as
Trustees of the Fund. The compensation of unaffiliated Trustees is borne by the
Fund. The unaffiliated Trustees may elect to defer for tax purposes their
receipt of this compensation under the John Hancock Group of Funds Deferred
Compensation Plan. The Fund will make investments into other John Hancock funds,
as applicable, to cover its liability for the deferred compensation. Investments
to cover the Fund's deferred compensation liability are recorded on the Fund's
books as an other asset. The deferred compensation liability and the related
other asset are always equal and are marked to market on a periodic basis to
reflect any income earned by the investment as well as any unrealized gains or
losses. At May 31, 1998, the Fund's investments to cover the deferred
compensation liability had unrealized appreciation of $3,524.

NOTE C-
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than obligations of the
U.S. government and its agencies and short-term securities, during the year
ended May 31, 1998, aggregated $771,661,529 and $649,411,255, respectively.
Purchases and proceeds from sales of obligations of the U.S. government and its
agencies aggregated $331,703,148 and $271,211,516, respectively, during the year
ended May 31, 1998.

The cost of investments owned at May 31, 1998 (including the joint repurchase
agreement) for federal income tax purposes was $902,627,612. Gross unrealized
appreciation and depreciation of investments aggregated $52,659,234 and
$11,474,231 respectively, resulting in net unrealized appreciation of
$41,185,003.

NOTE -D
RECLASSIFICATIONS OF CAPITAL ACCOUNTS
During the year ended May 31, 1998, the Fund has reclassified amounts to reflect
an increase in accumulated net realized loss on investments of $3,615,892 and a
decrease in undistributed net investment income of $3,614,316 and a decrease in
capital paid-in of $1,666. This represents the amount necessary to report these
balances on a tax basis, excluding certain temporary differences, as of May 31,
1998. Additional adjustments may be needed in subsequent reporting periods.
These reclassifications, which have no impact on the net asset value of the
Fund, are primarily attributable to the treatment of foreign currency gains and
losses in the computation of distributable income and capital gains under
federal tax rules versus generally accepted accounting principles.

32
<PAGE>

John Hancock Funds - Strategic Income Fund

REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of John Hancock Strategic Income Fund
and the Trustees of John Hancock Strategic Series

In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments (except for S&P ratings), and the related statements
of operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of John Hancock
Strategic Income Fund (the "Fund") (a portfolio of John Hancock Strategic
Series) at May 31, 1998, the results of its operations for the year then ended,
and the changes in its net assets and the financial highlights for the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and the significant
estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities at May 31, 1998 by correspondence with the custodian and brokers and
the application of alternative auditing procedures where confirmations from
brokers were not received, provide a reasonable basis for the opinion expressed
above.

PricewaterhouseCoopers LLP
Boston, Massachusetts
July 9, 1998

TAX INFORMATION NOTICE (UNAUDITED)

For federal income tax purposes, the following information is furnished with
respect to the dividends of the Fund paid during the fiscal year ended May 31,
1998.

Shareholders will be mailed a 1998 U.S. Treasury Department Form 1099-DIV in
January 1999. This will reflect the tax character of all distributions for
calendar year 1998.

With respect to the Fund's ordinary taxable income for the fiscal year ended May
31, 1998, 7.26% of the distributions qualify for the dividends received
deduction available to corporations.

<PAGE>

NOTES

John Hancock Funds - Strategic Income Fund

35
<PAGE>

NOTES

John Hancock Funds - Strategic Income Fund

35
<PAGE>

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[LOGO] JOHN HANCOCK FUNDS BULK RATE
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This report is for the information of shareholders of the John Hancock Strategic
Income Fund. It may be used as sales literature when preceded or accompanied
by the prospectus, which details charges, investment objectives and operating
policies.

9100A 5/98
7/98

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