UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-2402 John Hancock Sovereign Bond Fund (Exact name of registrant as specified in charter) 101 Huntington Avenue, Boston, Massachusetts 02199 (Address of principal executive offices) (Zip code) Susan S. Newton, Secretary 101 Huntington Avenue Boston, Massachusetts 02199 (Name and address of agent for service) Registrant's telephone number, including area code: 617-375-1702 Date of fiscal year end: May 31 Date of reporting period: November 30, 2004 ITEM 1. REPORT TO SHAREHOLDERS. JOHN HANCOCK Bond Fund 11.30.2004 Semiannual Report [A 2" x 1" John Hancock (Signature)/John Hancock Funds logo in lower, center middle of page. A tag line below reads "JOHN HANCOCK FUNDS."] [A photo of James A. Shepherdson, Chief Executive Officer, flush left next to first paragraph.] CEO CORNER Table of contents Your fund at a glance page 1 Managers' report page 2 A look at performance page 6 Growth of $10,000 page 7 Your expenses page 8 Fund's investments page 10 Financial statements page 26 For more information page 41 Dear Fellow Shareholders, The stock market made little, if any, headway for much of 2004, before finally rallying in November. After a strong start in January, the market faded and remained dull as it wrestled with a variety of uncertainties. Questions about the continuing strength of the economy, the effects of rising interest rates, and expectations for corporate earnings growth kept investors jittery. In addition, record high crude oil prices, terrorism and the uncertainty of a closely contested U.S. presidential race all weighed on the market. The picture brightened in early November with the election behind us and oil prices moderating somewhat. With one month left to go, the market seems poised to produce single-digit returns for 2004, barring some major negative occurrence. Year-to-date through November 30, 2004, the Standard & Poor's 500 Index was up 7.23%, while the Dow Jones Industrial Average advanced 1.67% and the Nasdaq Composite Index rallied from its negative stance in October to return 4.66% through November 30. Despite the Federal Reserve's four hikes in short-term interest rates, bonds still produced positive results, with the Lehman Brothers Aggregate Bond Index up 3.39%. The way this year has played out in the financial markets serves as a good reminder of why keeping a long-term perspective is such a critical element of successful investing. Getting caught up in the day-to-day twists and turns of the market and trying to act on them can wreak havoc with your portfolio and derail progress toward meeting your overall financial objectives. Since no one can predict the market's moves, the best way to reach your goals is to stay invested and stick to your plan. Investing should be a marathon, not a sprint. Do not try to time the market, and make sure you work with your investment professional to ensure that your portfolio remains properly diversified to meet your long-term objectives. For example, after several years of dominance, small-cap stocks and value stocks could now represent higher percentages of your portfolio than you may want. If you are comfortable with your financial plan, it becomes easier to ride out the market's daily ups and downs. It could also provide you with a greater chance of success over time. Sincerely, /S/ JAMES A. SHEPHERDSON James A. Shepherdson Chief Executive Officer This commentary reflects the CEO's views as of November 30, 2004. They are subject to change at any time. YOUR FUND AT A GLANCE The Fund seeks a high level of current income consistent with prudent investment risk by investing at least 80% of its assets in a diversified portfolio of bonds and other debt securities, including corporate bonds and U.S. government and agency securities. Over the last six months * Despite a series of interest rate increases by the Federal Reserve, the bond market produced positive results. * Lower-rated corporate bonds and mortgage-backed securities posted the best returns. * The Fund's defensive positioning, with reduced interest rate sensitivity and higher credit quality, enhanced performance. [Bar chart with heading "John Hancock Bond Fund." Under the heading is a note that reads "Fund performance for the six months ended November 30, 2004." The chart is scaled in increments of 3% with 0% at the bottom and 6% at the top. The first bar represents the 4.14% total return for Class A. The second bar represents the 3.78% total return for Class B. The third bar represents the 3.78% total return for Class C. The fourth bar represents the 4.38% total return for Class I. The fifth bar represents the 4.09% total return for Class R. A note below the chart reads "Total returns for the Fund are at net asset value with all distributions reinvested. These returns do not reflect the deduction of the maximum sales charge, which would reduce the performance shown above."] Top 10 issuers 22.1% Federal National Mortgage Assn. 7.3% Federal Home Loan Mortgage Corp. 7.2% United States Treasury 3.2% Financing Corp. 1.1% Government National Mortgage Assn. 0.9% Sprint Capital Corp. 0.9% Salton Sea Funding Corp. 0.8% Royal Bank of Scotland Group Plc 0.8% Midland Funding Corp. II 0.8% Residential Asset Mortgage Products, Inc. As a percentage of net assets on November 30, 2004. 1 BY HOWARD C. GREENE, CFA, BARRY H. EVANS, CFA AND BENJAMIN A. MATTHEWS, PORTFOLIO MANAGERS MANAGERS' REPORT JOHN HANCOCK Bond Fund The bond market rallied modestly during the six months ended November 30, 2004. The big story during the period was a series of short-term interest rate increases by the Federal Reserve -- its first rate hikes in more than four years. Beginning in June, the Fed raised its federal funds rate target four times in five months, each time by a quarter point. As a result, the federal funds rate doubled from 1% (a 46-year low) to 2%. The Fed's well-anticipated rate hikes came in response to improving employment growth, which accelerated during the second quarter and recently picked up again after a sluggish summer. Cautionary signs of inflation, including record-high oil prices and rising wholesale costs, also factored into the Fed's decision. As the Fed raised rates, the yields of shorter-term Treasury securities -- those maturing in three years or less -- also rose. However, Treasury securities with maturities of five years or more saw their yields decline during the period, reflecting the bond market's longer-term confidence that the Fed's gradual rate increases will keep inflation in check and the economy growing at a moderate pace. For the six-month period, the overall bond market posted positive results, as the broad Lehman Brothers U.S. Aggregate Index returned 3.82%. All segments of the bond market gained ground during the period, but corporate bonds continued to be the best performers, led by lower-quality issues. Mortgage-backed securities also posted solid returns, while Treasury and government agency bonds lagged. "The bond market rallied modestly during the six months ended November 30, 2004." Fund performance For the six months ended November 30, 2004, John Hancock Bond Fund's Class A, Class B, Class C, Class I and Class R shares posted total returns of 4.14%, 3.78%, 3.78%, 4.38% and 4.09%, respectively, at net asset value. These results outpaced the 3.71% return of the average A-rated corporate debt fund, according to Lipper, Inc., 1 and the 3.72% return of the Lehman Brothers 2 Government/Credit Bond Index. Keep in mind that your net asset value return will differ from the Fund's performance if you were not invested in the Fund for the entire period and did not reinvest all distributions. See pages six and seven for historical performance information. [Photos of Howard Greene, Barry Evans and Ben Matthews flush right next to first paragraph.] Playing defense Our primary strategy during the past six months was to position the portfolio defensively, lowering its risk profile to protect against the negative effects of rising interest rates. Our defensive approach included reducing the portfolio's interest rate sensitivity, trading up in credit quality, and increasing our exposure to securities that tend to fare better when rates rise, such as floating-rate notes. Less interest rate sensitivity In anticipation of higher interest rates -- which generally lead to declining bond prices -- we began reducing the Fund's sensitivity to interest rates in early 2004, and we continued to do so during the past six months. This positioning actually hurt relative performance somewhat during the period because rates on longer-term bonds declined, but we would rather err on the side of caution when it comes to protecting our shareholders' investments. "On balance, individual security selection in the corporate sector provided a lift to performance..." We also reduced our holdings of intermediate-term bonds -- those maturing in five to ten years -- and expanded our positions in shorter-term and longer-term bonds. This approach tends to produce the best results in a rising interest rate environment as short- and long-term yields generally converge. Among longer-term bonds, we focused on Treasury and high-quality corporate securities; at the short end of the maturity spectrum, we added floating-rate notes (which reset their interest rates at regular intervals), adjustable-rate mortgages and investment-grade corporate bonds maturing in less than two years. Upgrading credit quality Another part of our defensive strategy was reducing the portfolio's overall credit risk. Lower-quality corporate bonds significantly outperformed the rest of the bond market over the past two years, 3 and the portfolio benefited from its holdings in this segment of the market. However, given the elevated valuations of lower-rated bonds, we have been selling some of our below-investment-grade corporate securities and replacing them with higher-quality corporate bonds and mortgage-backed securities. [Table at top left-hand side of page entitled "Top five industry sectors." The first listing is Government - U.S. agencies 34%, the second is Financials 17%, the third is Utilities 9%, the fourth is Government - U.S. 7% and the fifth is Consumer discretionary 6%.] Nonetheless, we have maintained some exposure to lower-quality bonds, with an emphasis on securities that are candidates for a credit rating upgrade, particularly to investment-grade status. Bonds that are upgraded to an investment-grade credit rating typically realize a meaningful increase in value. Bonds in the portfolio that performed well after a recent credit upgrade include finance company Capital One and real estate investment trust iStar Financial. Winners and laggards among corporate bonds On balance, individual security selection in the corporate sector provided a lift to performance. One of the portfolio's top performers was forest products maker Weyerhaeuser, which benefited from better market conditions and the favorable economic environment. Duke Capital, a subsidiary of utility Duke Energy, was another strong performer in the portfolio as the company improved its balance sheet and operating performance. [Pie chart at middle of page with heading "Portfolio diversification As a percentage of net assets on 11-30-04." The chart is divided into three sections (from top to right): Corporate bonds 55%, U.S. government & agency bonds 41% and Short-term investments & other 4%.] On the downside, Hospital Corporation of America (HCA) detracted from performance. The company's operating results did not improve as forecast, and although HCA had made overtures about reducing its debt load, the company instead chose to undertake a $2.5 billion share repurchase. Consequently, we reduced our holdings. 4 [Table at top of page entitled "Scorecard." The header for the left column is "Investment" and the header for the right column is "Period's performance...and what's behind the numbers." The first listing is XM Satellite Radio, followed by an up arrow with the phrase "Strong subscriber growth; successful new products and services." The second listing is Corn Products International, followed by an up arrow with the phrase "Put on positive credit watch for a possible upgrade." The third listing is Muzak, followed by a down arrow with the phrase "Challenged by a high cost structure and limited top-line growth."] Mortgage-backed securities outperform We increased our position in mortgage-backed securities during the period as part of the general upgrade in the portfolio's credit quality. Mortgage-backed bonds performed well, benefiting from reduced interest rate volatility and slowing refinancing activity. We applied our defensive strategy to the portfolio's mortgage-backed holdings by investing in adjustable-rate and 15-year mortgages, both of which are less interest-rate sensitive than traditional 30-year mortgages. Outlook We expect the economy to continue growing at a moderate but steady rate, which should lead the Fed to continue raising short-term interest rates through the first half of 2005. Bond yields will likely follow suit, though we expect short-term rates to rise more than longer-term yields. "We expect the economy to continue growing at a moderate but steady rate, which should lead the Fed to continue raising short-term interest rates..." As a result, we believe the best way to serve our shareholders is to maintain our current defensive strategy. We intend to continue reducing the portfolio's interest rate sensitivity and upgrading its credit quality. This commentary reflects the views of the portfolio managers through the end of the Fund's period discussed in this report. The managers' statements reflect their own opinions. As such, they are in no way guarantees of future events, and are not intended to be used as investment advice or a recommendation regarding any specific security. They are also subject to change at any time as market and other conditions warrant. 1 Figures from Lipper, Inc. include reinvested dividends and do not take into account sales charges. Actual load-adjusted performance is lower. 5 A LOOK AT PERFORMANCE For the period ended November 30, 2004 Class A Class B Class C Class I 1 Class R 1 Inception date 11-9-73 11-23-93 10-1-98 9-4-01 8-5-03 Average annual returns with maximum sales charge (POP) One year -0.09% -1.10% 2.89% 5.12% 4.43% Five years 6.09 6.02 6.33 -- -- Ten years 7.02 6.93 -- -- -- Since inception -- -- 4.76 6.36 6.42 Cumulative total returns with maximum sales charge (POP) Six months -0.57 -1.22 2.78 4.38 4.09 One year -0.09 -1.10 2.89 5.12 4.43 Five years 34.42 33.95 35.91 -- -- Ten years 97.13 95.42 -- -- -- Since inception -- -- 33.23 22.08 8.56 SEC 30-day yield as of November 30, 2004 3.68 3.15 3.15 4.31 3.81 Performance figures assume all distributions are reinvested. Returns with maximum sales charge reflect a sales charge on Class A shares of 4.50%, and the applicable contingent deferred sales charge (CDSC) on Class B and Class C shares. The returns for Class C shares have been adjusted to reflect the elimination of the front-end sales charge effective July 15, 2004. The Class B shares' CDSC declines annually between years 1-6 according to the following schedule: 5, 4, 3, 3, 2, 1%. No sales charge will be assessed after the sixth year. Class C shares held for less than one year are subject to a 1% CDSC. Sales charge is not applicable for Class I and Class R shares. The returns reflect past results and should not be considered indicative of future performance. The return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Due to market volatility, the Fund's current performance may be higher or lower than the performance shown. For performance data current to the most recent month-end, please call 1-800-225-5291 or visit the Fund's Web site at www.jhfunds.com. The performance table above and the chart on the next page do not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. The Fund's performance results reflect any applicable expense reductions, without which the expenses would increase and results would have been less favorable. 1 For certain types of investors as described in the Fund's Class I and Class R share prospectuses. 6 GROWTH OF $10,000 This chart shows what happened to a hypothetical $10,000 investment in Class A shares for the period indicated. For comparison, we've shown the same investment in the Lehman Brothers Government/Credit Bond Index. Cum Value Cum Value Lehman Brothers of $10K of $10K Government/Credit Plot Date (No Load) (W/Load) Bond Index 11-30-94 $10,000 $9,500 $10,000 12-31-94 10,097 9,644 10,066 5-31-95 11,233 10,729 11,164 11-30-95 11,866 11,334 11,829 5-31-96 11,764 11,237 11,622 11-30-96 12,644 12,077 12,491 5-31-97 12,832 12,257 12,540 11-30-97 13,651 13,039 13,416 5-31-98 14,185 13,549 13,980 11-30-98 14,729 14,069 14,804 5-31-99 14,628 13,973 14,548 11-30-99 14,670 14,012 14,611 5-31-00 14,762 14,101 14,826 11-30-00 15,779 15,072 15,929 5-31-01 16,590 15,847 16,733 11-30-01 17,386 16,608 17,764 5-31-02 17,603 16,814 18,046 11-30-02 18,144 17,331 19,064 5-31-03 19,761 18,876 20,675 11-30-03 19,733 18,849 20,283 5-31-04 19,822 18,934 20,360 11-30-04 20,637 19,713 21,117 [Line chart with the heading "GROWTH OF $10,000." Within the chart are three lines. The first line represents Lehman Brothers Government/Credit Bond Index and is equal to $21,117 as of November 30, 2004. The second line represents the value of the hypothetical $10,000 investment made in the John Hancock Bond Fund, without sales charge (NAV) and is equal to $20,637 as of November 30, 2004. The third line represents the same hypothetical $10,000 investment made in the John Hancock Bond Fund, with maximum sales charge (POP) and is equal to $19,713 as of November 30, 2004.] Class B 1 Class C 1 Class I 2 Class R 2 Period beginning 11-30-94 10-1-98 9-4-01 8-5-03 Bond Fund $19,542 $13,323 $12,208 $10,856 Index 21,117 14,160 12,205 10,707 Assuming all distributions were reinvested for the period indicated, the table above shows the value of a $10,000 investment in the Fund's Class B, Class C, Class I and Class R shares, respectively, as of November 30, 2004. The Class C shares investment with maximum sales charge has been adjusted to reflect the elimination of the front-end sales charge effective July 15, 2004. Performance of the classes will vary based on the difference in sales charges paid by shareholders investing in the different classes and the fee structure of those classes. Lehman Brothers Government/Credit Bond Index is an unmanaged index that measures the performance of U.S. government bonds, U.S. corporate bonds and Yankee bonds. It is not possible to invest directly in an index. Index figures do not reflect sales charges and would be lower if they did. 1 No contingent deferred sales charge applicable. 2 For certain types of investors as described in the Fund's Class I and Class R share prospectuses. 7 YOUR EXPENSES These examples are intended to help you understand your ongoing operating expenses. Understanding fund expenses As a shareholder of the Fund, you incur two types of costs: * Transaction costs which include sales charges (loads) on purchases or redemptions (varies by share class), minimum account fee charge, etc. * Ongoing operating expenses including management fees, distribution and service fees (if applicable) and other fund expenses. We are going to present only your ongoing operating expenses here. Actual expenses/actual returns This example is intended to provide information about your fund's actual ongoing operating expenses, and is based on your fund's actual return. It assumes an account value of $1,000.00 on May 31, 2004, with the same investment held until November 30, 2004. Account value Expenses paid $1,000.00 Ending value during period on 5-31-04 on 11-30-04 ended 11-30-04 1 - ------------------------------------------------------------- Class A $1,041.40 $5.58 Class B 1,037.80 9.15 Class C 1,037.80 9.15 Class I 1,043.80 3.25 Class R 1,040.90 6.01 Together with the value of your account, you may use this information to estimate the operating expenses that you paid over the period. Simply divide your account value at November 30, 2004 by $1,000.00, then multiply it by the "expenses paid" for your share class from the table above. For example, for an account value of $8,600.00, the operating expenses should be calculated as follows: Example -- -- -- -- | My account value / | | "expenses paid" | My | / $1,000.00 = 8.6 | X $| | = actual | $8,600.00 / | | from table | expenses -- -- -- -- 8 Hypthetical example for comparison purposes This table allows you to compare your fund's ongoing operating expenses with those of any other fund. It provides an example of the Fund's hypothetical account values and hypothetical expenses based on each class's actual expense ratio and an assumed 5% annual return before expenses (which is not your fund's actual return). It assumes an account value of $1,000.00 on May 31, 2004, with the same investment held until November 30, 2004. Look in any other fund shareholder report to find its hypothetical example and you will be able to compare these expenses. Account value Expenses paid $1,000.00 Ending value during period on 5-31-04 on 11-30-04 ended 11-30-04 1 - ------------------------------------------------------------- Class A $1,019.60 $5.52 Class B 1,016.09 9.05 Class C 1,016.09 9.05 Class I 1,021.89 3.22 Class R 1,019.18 5.94 Remember, these examples do not include any transaction costs, such as sales charges; therefore, these examples will not help you to determine the relative total costs of owning different funds. If transaction costs were included, your expenses would have been higher. See the prospectus for details regarding transaction costs. 1 Expenses are equal to the Fund's annualized expense ratio of 1.09%, 1.79%, 1.79%, 0.63% and 1.17% for Class A, Class B, Class C, Class I and Class R, respectively, multiplied by the average account value over the period, multiplied by [number of days in most recent fiscal half-year/365 or 366] (to reflect the one-half year period). 9 FINANCIAL STATEMENTS FUND'S INVESTMENTS Securities owned by the Fund on November 30, 2004 (unaudited) This schedule is divided into four main categories: bonds, preferred stocks, U.S. government and agencies securities and short-term investments. Bonds, preferred stocks and U.S. government and agencies securities are further broken down by industry group. Short-term investments, which represent the Fund's cash position, are listed last. Interest Maturity Credit Par value Issuer, description rate date rating (A) (000) Value Bonds 54.88% $666,177,685 (Cost $648,867,090) Agricultural Products 0.71% 8,585,888 Corn Products International, Inc., Sr Note 8.450% 08-15-09 BBB- $7,515 8,585,888 Airlines 0.85% 10,308,249 American Airlines, Inc., Pass Thru Ctf Ser 2001-2 (L) 7.858 10-01-11 A- 4,200 4,327,274 Continental Airlines, Inc., Pass Thru Ctf Ser 1999-1A 6.545 02-02-19 A- 3,933 3,820,703 Jet Equipment Trust, Equipment Trust Ctf Ser 95B2 (B)(H)(S) 10.910 08-15-14 D 5,800 29,000 Northwest Airlines Corp., Pass Thru Ctf Ser 1996-1C 10.150 01-02-05 CCC+ 340 332,931 Pass Thru Ctf Ser 1996-1D 8.970 01-02-15 CCC+ 2,724 1,798,341 Automobile Manufacturers 0.53% 6,474,889 DaimlerChrysler North America Holding Corp., Floating Rate Med Term Note Ser D (P) 2.960 05-24-06 BBB 4,755 4,780,026 General Motors Corp., Sr Deb 8.375 07-15-33 BBB- 1,665 1,694,863 Broadcasting & Cable TV 2.97% 36,046,073 British Sky Broadcasting Group Plc, Gtd Note (United Kingdom) 7.300 10-15-06 BBB- 2,350 2,504,729 Continental Cablevision, Inc., Deb 9.500 08-01-13 BBB 3,280 3,568,935 Cox Enterprises, Note (S) 7.875 09-15-10 BBB 2,515 2,804,995 Grupo Televisa S.A., Note (Mexico) 8.000 09-13-11 BBB- 2,465 2,834,750 Innova S. de R.L., Note (Mexico) 9.375 09-19-13 B+ 1,635 1,851,637 Sr Note (Mexico) 12.875 04-01-07 B+ 314 317,598 See notes to financial statements. 10 FINANCIAL STATEMENTS Interest Maturity Credit Par value Issuer, description rate date rating (A) (000) Value Broadcasting & Cable TV (continued) Liberty Media Corp., Floating Rate Sr Note (P) 3.380% 09-17-06 BBB- $7,635 $7,733,568 Rogers Cablesystems Ltd., Sr Note Ser B (Canada) 10.000 03-15-05 BB+ 4,880 4,953,200 Shaw Communications, Inc., Sr Note (Canada) 8.250 04-11-10 BB+ 2,260 2,576,400 TCI Communications, Inc., Deb 9.800 02-01-12 BBB 2,550 3,238,074 XM Satellite Radio, Inc., Sr Sec Disc Note (Zero to 12-31-05 then 14.00%) (O) Zero 12-31-09 CCC+ 1,895 1,916,682 Sr Sec Note 12.000 06-15-10 CCC+ 1,473 1,745,505 Casinos & Gaming 0.74% 8,962,580 Harrah's Operating Co., Inc., Sr Note 7.125 06-01-07 BBB- 2,940 3,154,617 Mohegan Tribal Gaming Auth., Sr Sub Note (S) 7.125 08-15-14 B+ 1,050 1,110,375 MTR Gaming Group, Inc., Sr Note Ser B 9.750 04-01-10 B+ 1,120 1,220,800 Waterford Gaming LLC, Sr Note (S) 8.625 09-15-12 B+ 940 1,005,800 Wynn Las Vegas LLC, 1st Mtg Note (N)(S) 6.625 12-01-14 B+ 2,515 2,470,988 Commodity Chemicals 0.28% 3,406,001 RPM International, Inc., Sr Note 6.250 12-15-13 BBB 3,305 3,406,001 Construction & Farm Machinery & Heavy Trucks 0.19% 2,255,000 Case Corp., Note 7.250 08-01-05 BB- 2,200 2,255,000 Consumer Finance 1.85% 22,400,401 Capital One Bank, Sr Note 8.250 06-15-05 BBB 3,000 3,081,708 Capital One Financial Corp., Note (L) 7.250 05-01-06 BBB- 1,940 2,041,029 Ford Motor Credit Co., Floating Rate Note (P) 3.240 11-16-06 BBB- 4,515 4,513,722 Note 7.375 10-28-09 BBB- 995 1,068,214 Note 6.875 02-01-06 BBB- 3,035 3,136,187 See notes to financial statements. 11 FINANCIAL STATEMENTS Interest Maturity Credit Par value Issuer, description rate date rating (A) (000) Value Consumer Finance (continued) General Motors Acceptance Corp., Note 7.250% 03-02-11 BBB- $1,395 $1,454,349 Note 6.750 12-01-14 BBB- 1,225 1,208,349 Household Finance Corp., Note 6.750 05-15-11 A 4,140 4,627,667 Note 6.375 10-15-11 A 1,155 1,269,176 Department Stores 0.54% 6,559,406 Penney J.C. Co., Inc., Deb (L) 7.650 08-15-16 BB+ 5,735 6,559,406 Diversified Banks 1.54% 18,718,686 Bank of New York, Cap Security (S) 7.780 12-01-26 A- 5,050 5,451,828 Citigroup, Inc., Sub Bond 6.000 10-31-33 A+ 4,800 4,859,213 HSBC Bank USA, Inc., Sub Note 5.875 11-01-34 A+ 1,750 1,722,579 JP Morgan Chase & Co., Sub Bond 5.125 09-15-14 A 2,495 2,484,945 Rabobank Capital Fund II, Perpetual Bond (5.260% to 12-31-13 then variable) (S) 5.260 12-29-49 AA 1,180 1,192,191 Wachovia Corp., Sub Note 5.250 08-01-14 A- 2,970 3,007,930 Diversified Commercial Services 0.52% 6,284,615 Cendant Corp., Note 6.875 08-15-06 BBB 4,200 4,431,265 Sotheby's Holdings, Inc., Note 6.875 02-01-09 BB- 1,835 1,853,350 Diversified Financial Services (Other) 2.45% 29,680,124 General Electric Capital Corp., Med Term Note Ser A 6.750 03-15-32 AAA 2,620 2,994,186 Med Term Note Ser A 2.970 07-26-06 AAA 4,405 4,389,226 Glencore Funding LLC, Gtd Note (S) 6.000 04-15-14 BBB 4,860 4,614,006 Royal Bank of Scotland Group Plc, Perpetual Bond (7.648% to 09-30-31 then variable) (United Kingdom) 7.648 08-29-49 A 8,055 9,675,819 See notes to financial statements. 12 FINANCIAL STATEMENTS Interest Maturity Credit Par value Issuer, description rate date rating (A) (000) Value St. George Funding Co., Perpetual Bond (8.485% to 06-30-17 then variable) (Australia) (S) 8.485% 12-31-49 Baa1 $4,555 $5,131,654 Westpac Capital Trust III, Perpetual Sub Bond (5.819% to 09-30-13 then variable) (S) 5.819 12-29-49 A2 2,775 2,875,233 Diversified Metals & Mining 0.19% 2,245,000 Freeport-McMoRan Copper & Gold, Inc., Sr Note 10.125 02-01-10 B 2,000 2,245,000 Electric Utilities 7.38% 89,604,014 AES Eastern Energy L.P., Pass Thru Ctf Ser 1999-A (L) 9.000 01-02-17 BB+ 3,549 4,113,011 Beaver Valley Funding Corp., Sec Lease Obligation Bond 9.000 06-01-17 BB+ 6,799 7,995,352 BVPS II Funding Corp., Collateralized Lease Bond 8.890 06-01-17 BB- 6,607 7,491,281 DTE Energy Co., Sr Note 6.450 06-01-06 BBB 2,855 2,980,537 Duke Energy Corp., Note 7.000 10-15-06 BBB- 1,225 1,294,029 East Coast Power LLC, Sr Sec Note Ser B 7.066 03-31-12 BBB- 3,062 3,270,715 El Paso Electric Co., 1st Mtg Ser E 9.400 05-01-11 BBB 5,695 6,330,892 Empresa Electrica Guacolda S.A., Sr Sec Note (Chile) (S) 8.625 04-30-13 BBB- 2,014 2,229,413 HQI Transelect Chile S.A., Sr Note (Chile) 7.875 04-15-11 A- 3,235 3,672,964 Illinois Power Co., Mtg Bond 7.500 07-15-25 Baa3 1,885 1,943,623 IPALCO Enterprises, Inc., Sr Sec Note 8.625 11-14-11 BB- 3,000 3,360,000 Kansas Gas & Electric Co., Deb 8.290 03-29-16 BB- 3,385 3,493,967 Midland Funding Corp. II, Lease Oblig Bond Ser A (L) 11.750 07-23-05 BB- 4,892 5,111,081 Monterrey Power S.A. de C.V., Sr Sec Bond (Mexico) (S) 9.625 11-15-09 BBB- 2,445 2,897,663 Pepco Holdings, Inc., Note 3.750 02-15-06 BBB 3,360 3,372,919 See notes to financial statements. 13 FINANCIAL STATEMENTS Interest Maturity Credit Par value Issuer, description rate date rating (A) (000) Value Electric Utilities (continued) PNPP II Funding Corp., Deb 9.120% 05-30-16 BB+ $4,094 $4,777,739 Progress Energy, Inc., Sr Note 6.750 03-01-06 BBB- 2,770 2,881,357 PSE&G Energy Holdings LLC, Sr Note 7.750 04-16-07 BB- 2,360 2,525,200 System Energy Resources, Inc., Sec Bond (S) 5.129 01-15-14 BBB 3,815 3,802,754 Texas-New Mexico Power Co., Sr Note 6.125 06-01-08 BB+ 3,135 3,233,298 TransAlta Corp., Note (Canada) 5.750 12-15-13 BBB- 3,295 3,360,702 TXU Australia Holdings, L.P., Sr Note (Australia) (S) 6.750 12-01-06 A- 1,650 1,746,975 TXU Energy Co. LLC, Floating Rate Note (L)(P) 2.838 01-17-06 BBB 2,155 2,159,903 Waterford 3 Funding Corp., Sec Lease Obligation Bond 8.090 01-02-17 BBB- 5,071 5,558,639 Electrical Components & Equipment 0.37% 4,526,376 AMETEK, Inc., Sr Note 7.200 07-15-08 BBB 4,175 4,526,376 Environmental Services 0.36% 4,377,502 Allied Waste North America, Inc., Gtd Sr Sub Note Ser B (L) 10.000 08-01-09 B+ 4,179 4,377,502 Food Retail 0.52% $6,273,636 Delhaize America, Inc., Note 8.125 04-15-11 BB+ 1,400 1,610,333 Food Lion, Inc., Note 8.730 08-30-06 BB+ 2,500 2,676,670 Kroger Co. (The), Sr Note 8.150 07-15-06 BBB 1,855 1,986,633 Foreign Government 0.20% 2,462,847 Colombia, Republic of, Bond (Colombia) 9.750 04-09-11 BB+ 2,141 2,462,847 Forest Products 0.42% 5,144,763 Weyerhaeuser Co., Deb 7.125 07-15-23 BBB 4,665 5,144,763 Gas Utilities 0.17% 2,063,902 NorAm Energy Corp., Deb 6.500 02-01-08 BBB 1,925 2,063,902 See notes to financial statements. 14 FINANCIAL STATEMENTS Interest Maturity Credit Par value Issuer, description rate date rating (A) (000) Value Health Care Facilities 0.29% $3,565,786 HCA, Inc., Note 9.000% 12-15-14 BB+ $2,832 $3,318,059 Note 6.375 01-15-15 BB+ 250 247,727 Highways & Railtracks 0.15% 1,825,800 TFM S.A. de C.V., Gtd Sr Disc Deb (Mexico) 11.750 06-15-09 B 1,790 1,825,800 Homebuilding 0.47% 5,659,695 KB Home, Sr Note 5.750 02-01-14 BB+ 2,890 2,839,425 Lennar Corp., Sr Note Ser B 9.950 05-01-10 BBB- 2,615 2,820,270 Hotels, Resorts & Cruise Lines 0.74% 8,961,337 Hyatt Equities LLC, Note (S) 6.875 06-15-07 BBB 3,130 3,296,563 Meditrust, Med Term Note 7.300 01-16-06 BB- 1,945 1,998,487 Note 7.000 08-15-07 BB- 1,500 1,590,000 Starwood Hotels & Resorts Worldwide, Inc., Sr Note 7.375 05-01-07 BB+ 1,945 2,076,287 Industrial Conglomerates 0.84% 10,234,168 General Electric Co., Note 5.000 02-01-13 AAA 4,710 4,781,455 Tyco International Group S.A., Note (Luxembourg) 6.750 02-15-11 BBB 3,305 3,693,017 Note (Luxembourg) 5.800 08-01-06 BBB 1,695 1,759,696 Industrial Machinery 0.51% 6,185,768 Kennametal, Inc., Sr Note 7.200 06-15-12 BBB 2,775 3,034,618 Trinity Industries, Inc., Pass Thru Ctf (S) 7.755 02-15-09 Ba1 2,945 3,151,150 Integrated Oil & Gas 0.54% 6,545,000 Pemex Project Funding Master Trust, Gtd Note (Mexico) 9.125 10-13-10 BBB- 5,500 6,545,000 Investment Banking & Brokerage 1.30% 15,829,805 Credit Suisse First Boston USA, Inc., Note 5.500 08-15-13 A+ 2,695 2,794,788 Goldman Sachs Group, Inc., Note 5.250 04-01-13 A+ 3,805 3,855,070 Merrill Lynch & Co., Med Term Note Ser C 5.000 01-15-15 A+ 2,950 2,901,620 See notes to financial statements. 15 FINANCIAL STATEMENTS Interest Maturity Credit Par value Issuer, description rate date rating (A) (000) Value Investment Banking & Brokerage (continued) Mizuho Financial Group Cayman Ltd., Gtd Note (Cayman Islands) 8.375% 12-29-49 A2 $3,500 $3,881,850 Morgan Stanley, Sub Note 4.750 04-01-14 A 2,485 2,396,477 IT Consulting & Other Services 0.29% 3,479,232 NCR Corp., Note 7.125 06-15-09 BBB- 3,175 3,479,232 Meat, Poultry & Fish 0.12% 1,430,494 Tyson Foods, Inc., Note 7.250 10-01-06 BBB 1,345 1,430,494 Metal & Glass Containers 0.26% 3,191,875 BWAY Corp., Gtd Sr Sub Note 10.000 10-15-10 B- 1,390 1,480,350 Owens-Brockway Glass Container, Inc., Gtd Sr Sec Note 8.750 11-15-12 BB- 1,535 1,711,525 Multi-Line Insurance 0.88% 10,730,762 Cincinnati Financial Corp., Note (S) 6.125 11-01-34 A 2,270 2,220,119 Massachusetts Mutual Life Insurance Co., Surplus Note (S) 7.625 11-15-23 AA 3,985 4,819,559 New York Life Insurance Co., Note (S) 5.875 05-15-33 AA- 3,685 3,691,084 Multi-Media 1.00% 12,101,796 News America Holdings, Inc., Gtd Sr Deb 8.250 08-10-18 BBB- 3,000 3,681,186 Time Warner, Inc., Deb 9.125 01-15-13 BBB+ 6,661 8,420,610 Multi-Utilities & Unregulated Power 1.21% 14,670,479 Duke Capital LLC, Sr Note 8.000 10-01-19 BBB- 3,160 3,777,970 East Coast Power LLC, Sr Sec Note 6.737 03-31-08 BBB- 271 284,338 Salton Sea Funding Corp., Sr Sec Note Ser B 7.370 05-30-05 BB+ 3,418 3,464,024 Sr Sec Note Ser C (L) 7.840 05-30-10 BB+ 6,597 7,144,147 Office Services & Supplies 0.21% 2,580,580 Office Depot, Inc., Note 6.250 08-15-13 BBB- 2,445 2,580,580 See notes to financial statements. 16 FINANCIAL STATEMENTS Interest Maturity Credit Par value Issuer, description rate date rating (A) (000) Value Oil & Gas Refining & Marketing & Transportation 0.38% $4,672,340 Enterprise Products Operating L.P., Sr Note (S) 6.650% 10-15-34 BB+ $1,525 1,526,735 Sr Note Ser B 6.875 03-01-33 BB+ 3,055 3,145,605 Oil & Gas Exploration & Production 0.61% 7,364,566 Canadian Oil Sands Ltd., Note (Canada) (S) 4.800 08-10-09 BBB+ 2,435 2,444,774 Occidental Petroleum Corp., Sr Deb 10.125 09-15-09 BBB+ 1,925 2,375,977 TEPPCO Partners, L.P., Gtd Sr Note 7.625 02-15-12 BBB 2,215 2,543,815 Packaged Foods & Meats 0.09% 1,147,013 General Foods Corp., Deb 7.000 06-15-11 A- 1,145 1,147,013 Paper Packaging 0.56% 6,774,325 Stone Container Corp., Sr Note 9.750 02-01-11 B 2,365 2,613,325 Sr Note 8.375 07-01-12 B 3,800 4,161,000 Paper Products 0.38% 4,642,600 Donohue Forest Products, Gtd Sr Note (Canada) 7.625 05-15-07 BB 3,050 3,172,000 MDP Acquisitions Plc, Sr Note (Ireland) 9.625 10-01-12 B 1,290 1,470,600 Pharmaceuticals 0.52% 6,325,184 Medco Health Solutions, Inc., Sr Note 7.250 08-15-13 BBB 3,380 3,744,827 Wyeth, Note 5.500 03-15-13 A 2,515 2,580,357 Property & Casualty Insurance 0.29% 3,517,779 Ohio Casualty Corp., Note 7.300 06-15-14 BB 1,700 1,775,832 URC Holdings Corp., Sr Note (S) 7.875 06-30-06 AA- 1,630 1,741,947 Real Estate Investment Trusts 1.34% 16,307,289 American Health Properties, Inc., Note 7.500 01-15-07 BBB+ 2,380 2,532,113 Healthcare Realty Trust, Inc., Sr Note 8.125 05-01-11 BBB- 2,515 2,913,459 iStar Financial, Inc., Sr Note 7.000 03-15-08 BBB- 2,110 2,270,212 ProLogis Trust, Note 7.050 07-15-06 BBB+ 1,745 1,839,858 See notes to financial statements. 17 FINANCIAL STATEMENTS Interest Maturity Credit Par value Issuer, description rate date rating (A) (000) Value Real Estate Investment Trusts (continued) Spieker Properties, Inc., Note 7.125% 12-01-06 BBB+ $4,880 $5,241,266 TriNet Corporate Realty Trust, Inc., Sr Note 7.700 07-15-17 BB+ 1,325 1,510,381 Real Estate Management & Development 0.19% 2,360,172 Socgen Real Estate Co. LLC, Perpetual Bond Ser A (7.64% to 09-30-07 then variable) (S) 7.640 12-29-49 A 2,140 2,360,172 Regional Banks 0.32% 3,923,131 Colonial Bank, Sub Note 9.375 06-01-11 BBB- 1,710 2,016,668 NB Capital Trust IV, Gtd Cap Security 8.250 04-15-27 A- 1,000 1,090,714 NBD Bank N.A., Sub Deb 8.250 11-01-24 A 650 815,749 Soft Drinks 0.14% 1,714,950 Panamerican Beverages, Inc., Sr Note (Panama) 7.250 07-01-09 BBB 1,545 1,714,950 Specialized Finance 9.64% 116,970,656 Americredit Automobile Receivables Trust, Pass Thru Ctf Ser 2004-CA Class A-3 3.000 03-06-09 AAA 2,455 2,442,169 Ameriquest Mortgage Securities, Inc., Pass Thru Ctf Ser 2003-IA1 Class A-4 4.965 11-25-33 AAA 4,155 4,197,703 Bank of America Mortgage Securities, Inc., Mtg Pass Thru Ctf Ser 2004-D Class 2A1 3.649 05-25-34 AAA 6,459 6,321,398 Centex Home Equity Loan Trust, Home Equity Loan Asset-Backed Ctf Ser 2004-A Class -A Class AF-4 4.510 08-25-32 AAA 4,550 4,587,118 Citibank Credit Card Issuance Trust, Pass Thru Ctf Ser 2003-C3 Class C3 4.450 04-07-10 BBB 3,870 3,910,829 ContiMortgage Home Equity Loan Trust, Pass Thru Ctf Ser 1995-2 Class A-5 8.100 08-15-25 AAA 1,050 1,118,087 Countrywide Alternative Loan Trust, Asset Backed Pass Thru Ctf Ser 2004-24CB Class 1A1 6.000 11-25-34 AAA 6,230 6,471,701 Credit-Based Asset Servicing and Securitization LLC, Mtg Asset Backed Ctf Ser 2004-CB4 Class A3 4.632 05-25-35 AAA 2,670 2,707,018 See notes to financial statements. 18 FINANCIAL STATEMENTS Interest Maturity Credit Par value Issuer, description rate date rating (A) (000) Value Specialized Finance (continued) Deutsche Mortgage & Asset Receiving Corp., Commercial Mtg Pass Thru Ctf Ser 1998-C1 Class C 6.861% 06-15-31 A2 $3,585 $3,892,110 ESI Tractebel Acquisition Corp., Gtd Sec Bond Ser B 7.990 12-30-11 BB 890 936,956 Ford Credit Auto Owner Trust, Pass Thru Ctf Ser 2004-A Class A3 2.930 03-15-08 AAA 5,975 5,945,125 Global Signal Trust, Sub Bond Ser 2004-1A Class D (S) 5.098 01-15-34 BBB 3,270 3,271,115 Sub Bond Ser 2004-2A Class D (N)(S) 5.093 12-15-14 Baa2 1,820 1,820,000 Greenwich Capital Commercial Funding Corp., Commercial Mtg Pass Thru Ctf Ser 2003-C1 Class A-4 4.111 07-05-35 AAA 2,865 2,741,381 Commercial Mtg Pass Thru Ctf Ser 2003-C2 Class A-2 4.022 01-05-36 AAA 6,160 6,134,477 GSR Mortgage Loan Trust, Commercial Mtg Pass Thru Ctf Ser 2004-7 Class 2A-1 4.191 06-25-34 AAA 5,661 5,588,425 Household Automotive Trust, Pass Thru Ctf Ser 2004-1 Class A3 3.300 05-18-09 AAA 6,285 6,271,559 Humpuss Funding Corp., Note (S) 7.720 12-15-09 B2 1,973 1,776,428 Impac Secured Assets Corp., Mtg Pass Thru Ctf Ser 2004-1 Class A3 3.710 03-25-34 AAA 3,675 3,629,785 LB-UBS Commercial Mortgage Trust, Commercial Mtg Pass Thru Ctf Ser 2003-C3 Class A4 4.166 05-15-32 AAA 5,225 5,015,529 MBNA Master Credit Card Trust, Sub Bond Ser 1998-E Class C (S) 6.600 09-15-10 BBB 3,735 3,995,466 ONYX Acceptance Auto Trust, Pass Thru Ctf Ser 2004-C Class A3 2.940 11-15-08 AAA 2,040 2,024,541 Renaissance Home Equity Loan Trust, Asset Backed Pass Thru Ctf Ser 2004 Class AF2 (M) 3.856 01-25-35 N/R 5,855 5,855,000 Residential Asset Mortgage Products, Inc., Pass Thru Ctf Ser 2003-RS10 Class AI-5 4.910 01-25-31 AAA 4,595 4,656,385 Mtg Pass Thru Ctf Ser 2004-RS7 Class AI-2 4.000 09-25-25 AAA 4,605 4,600,485 Residential Asset Securities Corp., Asset Backed Pass Thru Ctf Ser 2004-A-KS5 Class A2 (P) 2.401 09-25-33 AAA 5,965 5,964,549 See notes to financial statements. 19 FINANCIAL STATEMENTS Interest Maturity Credit Par value Issuer, description rate date rating (A) (000) Value Specialized Finance (continued) Specialty Underwriting & Residential Finance Trust, Mtg Loan Asset Backed Ctf Ser 2003 BC4 Class A3B 4.788% 11-25-34 AAA $6,685 $6,580,943 WFS Financial Owner Trust, Pass Thru Ctf Ser 2004-3 Class A3 3.300 03-17-09 AAA 4,525 4,514,374 Telecommunication Services 5.12% 62,089,633 AT&T Corp., Sr Note 9.050 11-15-11 BB+ 3,776 4,304,640 Bellsouth Corp., Bond 5.200 09-15-14 A 2,675 2,677,424 Deutsche Telekom International Finance B.V., Bond (Coupon rate step up/down on rating) (Netherlands) 8.750 06-15-30 BBB+ 4,785 6,145,026 Qwest Capital Funding, Inc., Gtd Note (L) 7.750 08-15-06 B 3,345 3,462,075 Qwest Corp., Note (S) 9.125 03-15-12 BB- 3,940 4,481,750 SBC Communications, Inc., Bond 6.450 06-15-34 A 2,560 2,641,897 Note 6.150 09-15-34 A 830 824,074 Note 5.100 09-15-14 A 1,875 1,858,206 Sprint Capital Corp., Note 7.125 01-30-06 BBB- 8,515 8,884,917 Note 6.875 11-15-28 BBB- 1,725 1,832,975 Telecom de Puerto Rico, Sr Sub Note (Puerto Rico) 6.650 05-15-06 BBB+ 4,750 4,939,311 Telefonos de Mexico S.A. de C.V., Sr Note (Mexico) 8.250 01-26-06 BBB- 6,250 6,581,206 Telus Corp., Note (Canada) 8.000 06-01-11 BBB 4,790 5,605,450 Verizon Pennsylvania, Inc., Note Ser A (L) 5.650 11-15-11 A+ 7,525 7,850,682 Telecommunications Equipment 0.77% 9,328,949 Corning, Inc., Deb 7.000 03-15-07 BB+ 1,920 1,920,000 Med Term Note 8.300 04-04-25 Ba2 3,930 4,155,975 Note 6.300 03-01-09 BB+ 1,495 1,550,263 France Telecom S.A., Sr Note (France) 7.950 03-01-06 BBB+ 1,615 1,702,711 Thrifts & Mortgage Finance 0.29% 3,493,260 Doral Financial Corp., Floating Rate Note (Puerto Rico) (P) 2.909 07-20-07 BBB- 3,490 3,493,260 See notes to financial statements. 20 FINANCIAL STATEMENTS Interest Maturity Credit Par value Issuer, description rate date rating (A) (000) Value Tobacco 0.58% $7,081,736 Commonwealth Brands, Inc., Sr Sec Sub Note (G)(S) 10.625% 09-01-08 B $1,355 1,409,200 Phillip Morris Co., Inc., Note 6.950 06-01-06 BBB 5,445 5,672,536 Trucking 0.47% 5,743,839 CNF, Inc., Sr Deb Ser B 6.700 05-01-34 BBB- 1,975 2,023,729 ERAC USA Finance Co., Note (S) 7.950 12-15-09 BBB+ 1,985 2,300,164 Hertz Corp., Note 4.700 10-02-06 BBB- 1,405 1,419,946 Utilities Other 0.83% 10,024,330 Magellan Midstream Partners, L.P., Note 6.450 06-01-14 BBB 2,800 2,999,609 Midland Funding Corp. II, Deb Ser B 13.250 07-23-06 BB- 3,790 4,209,534 NiSource Finance Corp., Gtd Note 3.200 11-01-06 BBB 2,845 2,815,187 Wireless Telecommunication Services 0.77% 9,323,404 AT&T Wireless Services, Inc., Sr Note 8.125 05-01-12 A 1,700 2,035,192 Mobile Telesystems Finance S.A., Gtd Bond (Luxembourg) 10.950 12-21-04 BB- 900 902,250 Gtd Bond (Luxembourg) (S) 10.950 12-21-04 BB- 1,470 1,473,675 Gtd Sr Note (Luxembourg) (S) 9.750 01-30-08 BB- 720 770,400 Gtd Sr Note (Luxembourg) (S) 8.375 10-14-10 BB- 1,430 1,476,475 PTC International Finance II S.A., Gtd Sr Sub Note (Luxembourg) 11.250 12-01-09 BB+ 1,110 1,176,600 Rogers Wireless, Inc., Sr Sub Note (Canada) (S) 8.000 12-15-12 B+ 1,435 1,488,812 Credit Issuer, description rating (A) Shares Value Preferred stocks 0.28% $3,343,725 (Cost $3,448,125) Electric Utilities 0.28% 3,343,725 TNP Enterprises, Inc., 14.50%, Ser D B+ 2,895 3,343,725 See notes to financial statements. 21 FINANCIAL STATEMENTS Interest Maturity Credit Par value Issuer, description rate date rating (A) (000) Value U.S. government and agencies securities 40.87% $495,952,181 (Cost $493,119,147) Government U.S. 7.22% 87,590,462 United States Treasury, Bond (L) 6.250% 08-15-23 AAA $9,940 11,405,375 Bond (L) 5.375 02-15-31 AAA 47,375 49,862,188 Inflation Indexed Note (L) 2.000 07-15-14 AAA 6,724 6,881,427 Note (L) 4.250 11-15-14 AAA 19,610 19,441,472 Government U.S. Agency 33.65% 408,361,719 Federal Home Loan Mortgage Corp., 15 Yr Pass Thru Ctf 4.500 05-01-19 AAA 5,818 5,783,520 15 Yr Pass Thru Ctf 4.500 08-01-19 AAA 4,155 4,130,460 15 Yr Pass Thru Ctf 4.500 11-01-19 AAA 3,205 3,185,541 20 Yr Pass Thru Ctf 11.250 01-01-16 AAA 124 136,254 30 Yr Pass Thru Ctf 6.000 08-01-34 AAA 20,249 20,907,389 30 Yr Pass Thru Ctf 6.000 09-01-34 AAA 3,849 3,974,608 30 Yr Pass Thru Ctf 5.000 08-01-33 AAA 12,006 11,892,429 CMO REMIC 2640-WA 3.500 03-15-33 AAA 2,407 2,360,021 CMO REMIC 2754-PC 5.000 12-15-28 AAA 9,815 9,903,364 CMO REMIC 2836-QD 5.000 09-15-27 AAA 6,360 6,434,038 Note 4.375 02-04-10 AAA 19,460 19,443,887 Federal National Mortgage Assn., 15 Yr Pass Thru Ctf 9.000 06-01-10 AAA 1,602 1,723,579 15 Yr Pass Thru Ctf 7.500 02-01-08 AAA 144 150,600 15 Yr Pass Thru Ctf 7.000 09-01-10 AAA 288 306,160 15 Yr Pass Thru Ctf 7.000 04-01-17 AAA 1,052 1,116,910 15 Yr Pass Thru Ctf 7.000 06-01-17 AAA 255 271,199 15 Yr Pass Thru Ctf 5.000 01-01-18 AAA 11,210 11,371,870 15 Yr Pass Thru Ctf 5.000 05-01-18 AAA 22,333 22,663,114 15 Yr Pass Thru Ctf 5.000 06-01-18 AAA 3,612 3,665,857 15 Yr Pass Thru Ctf 5.000 08-01-19 AAA 12,631 12,813,332 15 Yr Pass Thru Ctf 5.000 10-01-19 AAA 17,903 18,161,778 15 Yr Pass Thru Ctf 5.000 11-01-19 AAA 10,092 10,237,602 15 Yr Pass Thru Ctf 4.500 05-01-18 AAA 11,228 11,182,737 15 Yr Pass Thru Ctf 4.500 10-01-18 AAA 22,819 22,727,245 15 Yr Pass Thru Ctf 4.500 10-01-19 AAA 5,927 5,894,037 30 Yr Pass Thru Ctf 6.500 03-01-32 AAA 1,971 2,070,560 30 Yr Pass Thru Ctf 6.500 08-01-34 AAA 8,861 9,305,938 30 Yr Pass Thru Ctf 6.500 09-01-34 AAA 6,022 6,324,679 30 Yr Pass Thru Ctf 6.000 08-01-34 AAA 7,654 7,905,500 30 Yr Pass Thru Ctf 5.500 04-01-33 AAA 16,299 16,577,663 30 Yr Pass Thru Ctf 5.500 05-01-34 AAA 6,159 6,236,828 30 Yr Pass Thru Ctf 5.500 09-01-34 AAA 31,256 31,664,001 30 Yr Pass Thru Ctf 5.500 11-01-34 AAA 6,996 7,085,137 30 Yr Pass Thru Ctf 5.000 04-01-34 AAA 12,328 12,175,268 See notes to financial statements. 22 FINANCIAL STATEMENTS Interest Maturity Credit Par value Issuer, description rate date rating (A) (000) Value Government U.S. Agency (continued) Federal National Mortgage Assn., CMO REMIC 2002-82-QL 5.000% 05-25-27 AAA $5,403 $5,469,256 CMO REMIC 2003-16-PD 5.000 10-25-16 AAA 10,690 10,813,539 CMO REMIC 2003-17-QT 5.000 08-25-27 AAA 13,365 13,396,957 CMO REMIC 2003-33-AC 4.250 03-25-33 AAA 2,038 2,033,878 CMO REMIC 2003-49-JE 3.000 04-25-33 AAA 5,471 5,255,353 CMO REMIC 2003-58-AD 3.250 07-25-33 AAA 6,113 5,964,961 CMO REMIC 2003-63-PE 3.500 07-25-33 AAA 4,087 3,958,401 Financing Corp., Bond 10.350 08-03-18 AAA 6,045 9,098,910 Bond 9.400 02-08-18 AAA 21,035 29,596,014 Government National Mortgage Assn., 30 Yr Pass Thru Ctf 10.500 01-15-16 AAA 26 29,836 30 Yr Pass Thru Ctf 10.000 06-15-20 AAA 51 57,958 30 Yr Pass Thru Ctf 10.000 11-15-20 AAA 27 30,703 30 Yr Pass Thru Ctf 10.000 03-15-25 AAA 12 13,458 30 Yr Pass Thru Ctf 9.500 11-15-19 AAA 8 9,415 30 Yr Pass Thru Ctf 9.500 03-15-20 AAA 39 44,116 30 Yr Pass Thru Ctf 9.500 06-15-20 AAA 12 14,582 30 Yr Pass Thru Ctf 9.500 12-15-20 AAA 62 70,234 30 Yr Pass Thru Ctf 9.500 01-15-21 AAA 63 71,547 30 Yr Pass Thru Ctf 9.500 05-15-21 AAA 79 89,524 30 Yr Pass Thru Ctf 6.000 12-20-33 AAA 7,049 7,291,132 30 Yr Pass Thru Ctf 5.500 10-15-33 AAA 2,273 2,316,495 30 Yr Pass Thru Ctf (M) 5.000 12-15-34 AAA 1,370 1,361,437 CMO REMIC 2003-42-XA 3.750 05-16-33 AAA 1,624 1,590,908 Interest Par value Issuer, description, maturity date rate (000) Value Short-term investments 2.87% $34,807,000 (Cost $34,807,000) Joint Repurchase Agreement 2.87% 34,807,000 Investment in a joint repurchase agreement transaction with Barclays Capital, Inc. -- Dated 11-30-04, due 12-01-04 (secured by U.S. Treasury Inflation Indexed Bonds 3.375% thru 3.625% due 04-15-32 thru 04-15-28 and U.S. Treasury Inflation Indexed Note 3.000% due 07-05-12) 1.960% $34,807 34,807,000 Total investments 98.90% $1,200,280,591 Other assets and liabilities, net 1.10% $13,388,582 Total net assets 100.00% $1,213,669,173 See notes to financial statements. 23 FINANCIAL STATEMENTS Notes to Schedule of Investments (A) Credit ratings are unaudited and are rated by Moody's Investors Service where Standard & Poor's ratings are not available unless indicated otherwise. (B) This security is fair valued in good faith under procedures established by the Board of Trustees. (G) Security rated internally by John Hancock Advisers, LLC. (H) Non-income-producing issuer filed for protection under the Federal Bankruptcy Code or is in default of interest payment. (L) All or a portion of this security is on loan as of November 30, 2004. (M) These securities having an aggregate value of $7,216,437, or 0.59% of the Fund's net assets, have been purchased as a forward commitments--that is, the Fund has agreed on trade date to take delivery of and to make payment for these securities on a delayed basis subsequent to the date of this schedule. The purchase price and interest rate of these securities are fixed at trade date, although the Fund does not earn any interest on these until settlement date. The fund has segregated assets with a current value at least equal to the amount of the forward commitments. Accordingly, the market value of $7,346,094 of Federal National Mortgage Assn., 5.500%, 09-01-34 has been segregated to cover the forward commitments. (N) These securities having an aggregate value of $4,290,988 or 0.35% of the Fund's 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 $4,409,681, 5.500%, 09-01-2034 has been segregated to cover the when-issued commitments. (O) Cash interest will be paid on this obligation at the stated rate beginning on the stated date. (P) Represents rate in effect on November 30, 2004. (S) 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 $85,469,263 or 7.04% of the Fund's net assets as of November 30, 2004. Parenthetical disclosure of a foreign country in the security description represents country of a foreign issuer; however, the security is U.S. dollar-denominated. 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. 24 FINANCIAL STATEMENTS PORTFOLIO CONCENTRATION November 30, 2004 (unaudited) This table shows the Fund's investments as a percentage of net assets aggre gated by various industry sectors. Industry sector distribution Value as a percentage of Fund's net assets - ------------------------------------------------------------------------------- Consumer discretionary 6.42% Consumer staples 2.76 Energy 1.52 Financials 17.47 Government -- foreign 0.34 Government -- U.S. 7.22 Government -- U.S. agency 33.65 Health care 0.60 Industrials 4.88 Information technology 1.45 Materials 1.67 Mortgage bonds 3.27 Short-term investments 2.87 Telecommunication services 5.72 Utilities 9.06 See notes to financial statements. 25 FINANCIAL STATEMENTS ASSETS AND LIABILITIES November 30, 2004 (unaudited) This Statement of Assets and Liabilities is the Fund's balance sheet. It shows the value of what the Fund owns, is due and owes. You'll also find the net asset value and the maximum offering price per share. Assets Investments at value (cost $1,180,241,362) including $100,004,317 of securities loaned $1,200,280,591 Cash 474 Cash segregated for futures contracts 731,000 Receivable for investments sold 13,161,544 Receivable for shares sold 71,846 Receivable for futures variation margin 26,875 Interest receivable 14,291,356 Other assets 143,015 Total assets 1,228,706,701 Liabilities Payable for investments purchased 12,690,457 Payable for shares repurchased 700,303 Dividends payable 151,321 Payable to affiliates Management fees 535,902 Distribution and service fees 80,415 Other 707,939 Other payables and accrued expenses 171,191 Total liabilities 15,037,528 Net assets Capital paid-in 1,210,011,791 Accumulated net realized loss on investments and financial futures contracts (14,358,469) Net unrealized appreciation of investments and financial futures contracts 21,168,678 Distributions in excess of net investment income (3,152,827) Net assets $1,213,669,173 Net asset value per share Based on net asset values and shares outstanding -- the Fund has an unlimited number of shares authorized with no par value Class A ($1,033,085,872 [DIV] 67,785,402 shares) $15.24 Class B ($145,574,439 [DIV] 9,551,841 shares) $15.24 Class C ($30,154,475 [DIV] 1,978,574 shares) $15.24 Class I ($4,745,740 [DIV] 311,406 shares) $15.24 Class R ($108,647 [DIV] 7,128 shares) $15.24 Maximum offering price per share Class A 1 ($15.24 [DIV] 95.5%) $15.96 1 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. See notes to financial statements. 26 FINANCIAL STATEMENTS OPERATIONS For the period ended November 30, 2004 (unaudited) 1 This 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 period stated. Investment income Interest (net of foreign withholding taxes of $8,311) $32,489,782 Dividends 592,161 Securities lending 142,324 Total investment income 33,224,267 Expenses Investment management fees 3,089,081 Class A distribution and service fees 1,565,583 Class B distribution and service fees 780,089 Class C distribution and service fees 155,797 Class R distribution and service fees 152 Class A, B and C transfer agent fees 1,315,201 Class I transfer agent fees 1,157 Class R transfer agent fees 156 Accounting and legal services fees 154,454 Custodian fees 93,511 Miscellaneous 83,935 Printing 82,065 Registration and filing fees 37,933 Trustees' fees 29,898 Professional fees 28,459 Interest 8,162 Securities lending fees 4,367 Total expenses 7,430,000 Less expense reductions (46,796) Net expenses 7,383,204 Net investment income 25,841,063 Realized and unrealized gain (loss) Net realized gain (loss) on Investments 5,575,106 Financial futures contracts (4,919,513) Change in net unrealized appreciation (depreciation) of Investments 21,782,119 Financial futures contracts 1,392,522 Net realized and unrealized gain 23,830,234 Increase in net assets from operations $49,671,297 1 Semiannual period from 6-1-04 through 11-30-04. See notes to financial statements. 27 FINANCIAL STATEMENTS CHANGES IN NET ASSETS These Statements of Changes in Net Assets show how the value of the Fund's net assets has changed during the last two periods. The difference reflects earnings less expenses, any investment gains and losses, distributions, if any, paid to shareholders and the net of Fund share transactions. Year Period ended ended 5-31-04 11-30-04 1 Increase (decrease) in net assets From operations Net investment income $59,769,750 $25,841,063 Net realized gain 21,738,223 655,593 Change in net unrealized appreciation (depreciation) (79,633,191) 23,174,641 Increase in net assets resulting from operations 1,874,782 49,671,297 Distributions to shareholders From net investment income Class A (54,665,922) (24,369,340) Class B (8,303,883) (3,098,507) Class C (1,569,152) (619,082) Class I (439,075) (118,794) Class R (3,991) (2,398) (64,982,023) (28,208,121) From Fund share transactions (169,382,863) (55,199,394) Net assets Beginning of period 1,479,895,495 1,247,405,391 End of period 2 $1,247,405,391 $1,213,669,173 1 Semiannual period from 6-1-04 through 11-30-04. Unaudited. 2 Includes distributions in excess of net investment income of $785,769 and $3,152,827, respectively. See notes to financial statements. 28 FINANCIAL HIGHLIGHTS FINANCIAL HIGHLIGHTS CLASS A SHARES The Financial Highlights show how the Fund's net asset value for a share has changed since the end of the previous period. Period ended 5-31-00 1 5-31-01 1 5-31-02 1,2 5-31-03 5-31-04 11-30-04 3 Per share operating performance Net asset value, beginning of period $14.76 $13.93 $14.69 $14.71 $15.69 $14.98 Net investment income 4 0.96 0.92 0.82 0.72 0.70 0.33 Net realized and unrealized gain (loss) on investments (0.83) 0.76 0.06 1.02 (0.65) 0.29 Total from investment operations 0.13 1.68 0.88 1.74 0.05 0.62 Less distributions From net investment income (0.96) (0.92) (0.86) (0.76) (0.76) (0.36) Net asset value, end of period $13.93 $14.69 $14.71 $15.69 $14.98 $15.24 Total return 5 (%) 0.97 12.38 6.10 12.26 0.31 4.14 6,7 Ratios and supplemental data Net assets, end of period (in millions) $1,098 $1,140 $1,144 $1,192 $1,047 $1,033 Ratio of expenses to average net assets (%) 1.11 1.12 1.11 1.12 1.09 1.09 8 Ratio of adjusted expenses to average net assets 9 (%) -- -- -- -- -- 1.10 8 Ratio of net investment income to average net assets (%) 6.69 6.38 5.51 4.84 4.55 4.29 8 Portfolio turnover (%) 162 235 189 273 241 77 See notes to financial statements. 29 FINANCIAL HIGHLIGHTS CLASS B SHARES Period ended 5-31-00 1 5-31-01 1 5-31-02 1,2 5-31-03 5-31-04 11-30-04 3 Per share operating performance Net asset value, beginning of period $14.76 $13.93 $14.69 $14.71 $15.69 $14.98 Net investment income 4 0.86 0.83 0.72 0.62 0.59 0.28 Net realized and unrealized gain (loss) on investments (0.83) 0.76 0.06 1.02 (0.65) 0.28 Total from investment operations 0.03 1.59 0.78 1.64 (0.06) 0.56 Less distributions From net investment income (0.86) (0.83) (0.76) (0.66) (0.65) (0.30) Net asset value, end of period $13.93 $14.69 $14.71 $15.69 $14.98 $15.24 Total return 5 (%) 0.27 11.64 5.37 11.48 (0.39) 3.78 6,7 Ratios and supplemental data Net assets, end of period (in millions) $197 $218 $236 $233 $164 $146 Ratio of expenses to average net assets (%) 1.81 1.78 1.81 1.82 1.79 1.79 8 Ratio of adjusted expenses to average net assets 9 (%) -- -- -- -- -- 1.80 8 Ratio of net investment income to average net assets (%) 6.00 5.71 4.81 4.15 3.84 3.59 8 Portfolio turnover (%) 162 235 189 273 241 77 See notes to financial statements. 30 FINANCIAL HIGHLIGHTS CLASS C SHARES Period ended 5-31-00 1 5-31-01 1 5-31-02 1,2 5-31-03 5-31-04 11-30-04 3 Per share operating performance Net asset value, beginning of period $14.76 $13.93 $14.69 $14.71 $15.69 $14.98 Net investment income 4 0.85 0.82 0.72 0.62 0.59 0.28 Net realized and unrealized gain (loss) on investments (0.83) 0.76 0.06 1.02 (0.64) 0.28 Total from investment operations 0.02 1.58 0.78 1.64 (0.05) 0.56 Less distributions From net investment income (0.85) (0.82) (0.76) (0.66) (0.66) (0.30) Net asset value, end of period $13.93 $14.69 $14.71 $15.69 $14.98 $15.24 Total return 5 (%) 0.28 11.60 5.36 11.48 (0.39) $3.78 6,7 Ratios and supplemental data Net assets, end of period (in millions) $24 $26 $44 $45 $32 $30 Ratio of expenses to average net assets (%) 1.80 1.82 1.81 1.82 1.79 1.79 8 Ratio of adjusted expenses to average net assets 9 (%) -- -- -- -- -- 1.80 8 Ratio of net investment income to average net assets (%) 6.01 5.66 4.81 4.15 3.84 3.59 8 Portfolio turnover (%) 162 235 189 273 241 77 See notes to financial statements. 31 FINANCIAL HIGHLIGHTS CLASS I SHARES Period ended 5-31-02 1,2,10 5-31-03 5-31-04 11-30-04 3 Per share operating performance Net asset value, beginning of period $14.96 $14.71 $15.69 $14.98 Net investment income 4 0.66 0.78 0.76 0.36 Net realized and unrealized gain (loss) on investments (0.21) 1.02 (0.64) 0.29 Total from investment operations 0.45 1.80 0.12 0.65 Less distributions From net investment income (0.70) (0.82) (0.83) (0.39) Net asset value, end of period $14.71 $15.69 $14.98 $15.24 Total return 5 (%) 3.04 6 12.71 0.78 4.38 6 Ratios and supplemental data Net assets, end of period (in millions) -- 11 $9 $5 $5 Ratio of expenses to average net assets (%) 0.68 8 0.72 0.63 0.63 8 Ratio of net investment income to average net assets (%) 5.94 8 5.23 4.98 4.75 8 Portfolio turnover (%) 189 273 241 77 32 FINANCIAL HIGHLIGHTS CLASS R SHARES Period ended 5-31-04 10 11-30-04 3 Per share operating performance Net asset value, beginning of period $14.93 $14.98 Net investment income 4 0.54 0.32 Net realized and unrealized gain on investments 0.10 0.29 Total from investment operations 0.64 0.61 Less distributions From net investment income (0.59) (0.35) Net asset value, end of period $14.98 $15.24 Total return 5 (%) 4.30 6 4.09 6 Ratios and supplemental data Net assets, end of period (in millions) -- 11 -- 11 Ratio of expenses to average net assets (%) 1.38 8 1.17 8 Ratio of net investment income to average net assets (%) 4.40 8 4.21 8 Portfolio turnover (%) 241 77 See notes to financial statements. 1 Audited by previous auditor. 2 As required, effective June 1, 2001, the Fund has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies, as revised, relating to the amortization of premiums and accretion of discounts on debt securities. The effect of this change on per share amounts for the year ended May 31, 2002, was to decrease net investment income per share by $0.04, increase (decrease) net realized and unrealized gains (losses) per share by $0.04 and, had the Fund not made these changes to amortization and accretion, the annualized ratio of net investment income to average net assets would have been 5.81%, 5.11%, 5.09% and 6.24% for Class A, Class B, Class C and Class I shares, respectively. Per share ratios and supplemental data for periods prior to June 1, 2001, have not been restated to reflect this change in presentation. 3 Semiannual period from 6-1-04 through 11-30-04. Unaudited. 4 Based on the average of the shares outstanding. 5 Assumes dividend reinvestment and does not reflect the effect of sales charges. 6 Not annualized. 7 Total return would have been lower had certain expenses not been reduced during the period shown. 8 Annualized. 9 Does not take into effect expense reductions during the period shown. 10 Class I shares and Class R shares began operations on 9-4-01 and 8-5-03, respectively. 11 Less than $500,000. See notes to financial statements. 33 NOTES TO STATEMENTS Unaudited Note A Accounting policies John Hancock Bond Fund (the "Fund") is a diversified series of John Hancock Sovereign Bond Fund, an open-end management investment company registered under the Investment Company Act of 1940. The investment objective of the Fund is to generate a high level of current income, consistent with prudent investment risk. The Trustees have authorized the issuance of multiple classes of shares of the Fund, designated as Class A, Class B, Class C, Class I and Class R shares. The shares of each class represent an interest in the same portfolio of investments of the Fund and have equal rights as 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 that bears distribution and service expenses under the 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, which have a remaining maturity of 60 days or less, may be valued at amortized cost, which approximates market value. 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, LLC (the "Adviser"), a wholly owned subsidiary of John Hancock Financial Services, 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. Some securities may be purchased on a "when issued" or "forward delivery" basis, which means that the securities will be delivered to the Fund at a future date, usually beyond the customary settlement date. 34 Discount and premium on securities The Fund accretes discount and amortizes premium from par value on securities from either the date of issue or the date of purchase over the life of the security. 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 appropriate net asset value of the respective classes. Distribution and service fees, if any, and transfer agent fees for Class I and Class R shares are calculated daily at the class level based on the appropriate net asset value of each class and the specific expense rate(s) applicable to each class. Expenses The majority of expenses are directly identifiable to an individual fund. Expenses that 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. 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. The Fund has entered into a syndicated line of credit agreement with various banks. This agreement enables the Fund to participate, with other funds managed by the Adviser, in an unsecured line of credit with banks, which permits borrowings of up to $250 million, collectively. Interest is charged to each fund based on its borrowing. In addition, a commitment fee is charged to each fund based on the average daily unused portion of the line of credit, and is allocated among the participating funds. The Fund had no borrowing activity under the line of credit during the period ended November 30, 2004. Securities lending The Fund may lend securities to certain qualified brokers who pay the Fund negotiated lender fees. The loans are collateralized at all times with cash or securities with a market value at least equal to the market value of the securities on loan. As with other extensions of credit, the Fund may bear the risk of delay of the loaned securities in recovery or even loss of rights in the collateral, should the borrower of the securities fail financially. At November 30, 2004, the Fund loaned securities having a market value of $100,104,795 collateralized by securities in the amount of $102,106,891. Securities lending expenses are paid by the Fund to the Adviser. Financial futures contracts The Fund may buy and sell financial futures contracts. 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's instruments. At the time the Fund enters into a financial futures contract, it is 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 of the board of trade or U.S. commodities exchange on which it trades. Subsequent payments to and from the broker, known as "variation margin," 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" are 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 financial 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 35 prevented from opening or realizing the benefits of closing out financial 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 financial futures contracts. On November 30, 2004, the Fund had deposited $731,000 in a segregated account to cover margin requirements on open financial futures contracts. The Fund had the following financial futures contracts open on November 30, 2004: NUMBER OF OPEN CONTRACTS CONTRACTS POSITION EXPIRATION APPRECIATION - ----------------------------------------------------------------------------------- U.S. 10-Year Treasury Note 860 Short Mar 2005 $1,129,449 Federal income taxes The Fund qualifies as a "regulated investment company" by complying with the applicable provisions of the Internal Revenue Code and will not be subject to federal income tax on taxable income that is distributed to shareholders. Therefore, no federal income tax provision is required. For federal income tax purposes, the Fund has $14,138,815 of a capital loss carryforward available, to the extent provided by regulations, to offset future net realized capital gains. To the extent that such carryforward is used by the Fund, no capital gain distributions will be made. The loss carryforward expires as follows: May 31, 2009 -- $14,103,038 and May 31, 2010 --$35,777. 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 identifies the dividend. Interest income on investment securities is recorded on the accrual basis. The Fund may place a debt obligation on non-accrual status and reduce related interest income by ceasing current accruals and writing off interest receivables when the collection of interest has become doubtful. Foreign income may be subject to foreign withholding taxes, which are accrued as applicable. The Fund records distributions to shareholders from net investment income and net realized gains on the ex-dividend date. The Fund's net investment income is declared daily as dividends to shareholders of record as of the close of business on the preceding day, and distributed monthly. During a year ended May 31, 2004, the tax character of distributions paid was as follows: ordinary income $64,982,023. Distributions paid by the Fund with respect to each class of shares are calculated in the same manner, at the same time and are in the same amount, except for the effect of expenses that may be applied differently to each class. Such distributions, on a tax basis, are determined in conformity with income tax regulations, which may differ from accounting principles generally accepted in the United States of America. Distributions in excess of tax basis earnings and profits, if any, are reported in the Fund's financial statements as a return of capital. Use of estimates The preparation of these financial statements, in accordance with accounting principles generally accepted in the United States of America, incorporates estimates made by management in determining the reported amount of assets, liabilities, revenues and expenses of the Fund. Actual results could differ from these estimates. 36 Note B Management fee and transactions with affiliates and others The Fund has an investment management contract with the Adviser. Under the investment management contract, the Fund pays a monthly management fee to the Adviser equivalent, on an annual basis, to the sum of: (a) 0.50% of the first $1,500,000,000 of the Fund's average daily net asset value, (b) 0.45% of the next $500,000,000, (c) 0.40% of the next $500,000,000 and (d) 0.35% of the Fund's average daily net asset value in excess of $2,500,000,000. The Fund has Distribution Plans with John Hancock Funds, LLC ("JH Funds"), a wholly owned subsidiary of the Adviser. The Fund has adopted Distribution Plans with respect to Class A, Class B, Class C and Class R, pursuant to Rule 12b-1 under the Investment Company Act of 1940, to reimburse JH Funds for the services it provides as distributor of shares of the Fund. Accordingly, the Fund makes monthly payments to JH Funds at an annual rate not to exceed 0.30% of Class A average daily net asset value, 1.00% of Class B and Class C average daily net asset value, and 0.50% of Class R average daily net asset value. A maximum of 0.25% of such payments may be service fees, as defined by the Conduct Rules of the National Association of Securities Dealers. Under the Conduct Rules, curtailment of a portion of the Fund's 12b-1 payments could occur under certain circumstances. In addition, under a service Plan for a Class R shares, the Fund pays up to 0.25% of Class R average daily net asset value for certain other services. Class A shares are assessed up-front sales charges. During the period ended November 30, 2004, JH Funds received net up-front sales charges of $276,531 with regard to sales of Class A shares. Of this amount, $30,952 was retained and used for printing prospectuses, advertising, sales literature and other purposes, $99,230 was paid as sales commissions to unrelated broker-dealers and $146,349 was paid as sales commissions to sales personnel of Signator Investors, Inc. ("Signator Investors"), a related broker-dealer. The Adviser's indirect parent, John Hancock Life Insurance Company ("JHLICo"), is the indirect sole shareholder of Signator Investors. Prior to July 15, 2004, Class C shares were assessed up-front sales charges. During the period ended November 30, 2004, JH Funds received net up-front sales charges of $10,072 with regard to sales of Class C shares. Of this amount, $9,901 was paid as sales commissions to unrelated broker-dealers and $171 was paid as sales commissions to sales personnel of Signator Investors. Class B shares that are redeemed within six years of purchase are 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. Class C shares that are redeemed within one year of purchase are 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 CDSCs 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 and Class C shares. During the period ended November 30, 2004, CDSCs received by JH Funds amounted to $167,695 for Class B shares and $1,033 for Class C shares. The Fund has a transfer agent agreement with John Hancock Signature Services, Inc. ("Signature Services"), an indirect subsidiary of JHLICo. For Class A, Class B and Class C shares, 37 the Fund pays a monthly transfer agent fee at an annual rate of 0.015% of each class's average daily net asset value, plus a fee based on the number of shareholder accounts and reimbursement for certain out-of-pocket expenses, aggregated and allocated to each class on the basis of its relative net asset value. For Class I shares, the Fund pays a monthly transfer agent fee at an annual rate of 0.05% of Class I average daily net asset value. For Class R shares, the Fund pays a monthly transfer agent fee at an annual rate of 0.015% of Class R average daily net asset value, plus a fee based on the number of shareholder accounts and reimbursement for certain out-of-pocket expenses. Signature Services agreed to voluntarily reduce the Fund's asset-based portion of the transfer agent fee if the total transfer agent fee exceeds the Lipper, Inc. median transfer agency fee for comparable mutual funds by 0.05%. Accordingly, the transfer agent expense for Class A, Class B and Class C shares was reduced by $46,796 during the period ended November 30, 2004. Signature Services reserves the right to terminate this limitation in the future. The Fund has an agreement with the Adviser to perform necessary tax, accounting and legal services for the Fund. The compensation for the period amounted to $154,454. The Fund also paid the Adviser the amount of $2,881 for certain publishing services, included in the printing fees. The Adviser owned 6,698 Class R shares of beneficial interest of the Fund on November 30, 2004. Mr. James A. Shepherdson is a director and/or officer of the Adviser and/or its affiliates, as well as Trustee 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 investments, as well as any unrealized gains or losses. The Deferred Compensation Plan investments had no impact on the operations of the Fund. 38 Note C Fund share transactions This listing illustrates the number of the Fund's shares sold, reinvested and repurchased during the last two periods, along with the corresponding dollar value. Year ended 5-31-04 Period ended 11-30-04 1 Shares Amount Shares Amount Class A shares Sold 5,824,845 $89,554,899 1,735,027 $26,371,375 Distributions reinvested 2,910,959 44,557,244 1,351,170 20,516,416 Repurchased (14,853,151) (227,944,897) (5,173,432) (78,485,710) Net decrease (6,117,347) ($93,832,754) (2,087,235) ($31,597,919) Class B shares Sold 965,793 $14,845,807 597,389 $9,097,229 Distributions reinvested 387,561 5,934,167 151,497 2,298,712 Repurchased (5,237,216) (80,229,304) (2,157,224) (32,791,473) Net decrease (3,883,862) ($59,449,330) (1,408,338) ($21,395,532) Class C shares Sold 348,423 $5,328,454 91,356 $1,390,218 Distributions reinvested 77,945 1,193,806 31,740 481,546 Repurchased (1,184,766) (18,155,936) (278,884) (4,231,100) Net decrease (758,398) ($11,633,676) (155,788) ($2,359,336) Class I shares Sold 88,680 $1,370,545 26,112 $398,120 Distributions reinvested 28,118 430,842 7,980 121,184 Repurchased (413,475) (6,370,177) (24,406) (370,834) Net increase (decrease) (296,677) ($4,568,790) 9,686 $148,470 Class R shares 2 Sold 6,806 $101,687 322 $4,923 Net increase 6,806 $101,687 322 $4,923 Net decrease (11,049,478) ($169,382,863) (3,641,353) ($55,199,394) 1 Semiannual period from 6-1-04 through 11-30-04. Unaudited. 2 Class R shares began operations on 8-5-03. Note D Investment transactions Purchases and proceeds from sales or maturities of securities, other than short-term securities and obligations of the U.S. government, during the period ended November 30, 2004, aggregated $798,853,002 and $786,727,571, respectively. Purchases and proceeds from sales or maturities of obligations of U.S. government aggregated $119,713,276 and $179,544,114, respectively, during the period ended November 30, 2004. The cost of investments owned on November 30, 2004, including short-term investments, for federal income tax purposes, was $1,185,146,329. Gross unrealized appreciation and depreciation of investments aggregated $30,748,676 and $15,614,414, respectively, resulting in net unrealized appreciation of $15,134,262. The difference between book basis and tax basis net unrealized appreciation of investments is attributable primarily to the tax deferral of losses on certain sales of securities and amortization of premiums and accretion of discounts on debt securities. 39 Note E Shareholder meeting On December 1, 2004, a Special Meeting of Shareholders of the Fund was held to elect nine Trustees, effective January 1, 2005. Proxies covering 53,065,023 shares of beneficial interest were voted at the meeting. The shareholders elected the following Trustees to serve until their respective successors are duly elected and qualified, with the votes tabulated as follows: WITHHELD FOR AUTHORITY - ---------------------------------------------------------- James F. Carlin 52,367,543 697,480 Richard P. Chapman, Jr. 52,363,292 701,731 William H. Cunningham 52,341,107 723,916 Ronald R. Dion 52,367,543 697,480 Charles L. Ladner 52,364,862 700,161 Dr. John A. Moore 52,383,363 681,660 Patti McGill Peterson 52,332,355 732,668 Steven R. Pruchansky 52,347,075 717,948 James A. Shepherdson 52,377,884 687,139 40 For more information The Fund's proxy voting policies, procedures and records are available without charge, upon request: By phone On the Fund's Web site On the SEC's Web site 1-800-225-5291 www.jhfunds.com/proxy www.sec.gov Trustees Charles L. Ladner, Chairman* James F. Carlin Richard P. Chapman, Jr.* William J. Cosgrove William H. Cunningham Ronald R. Dion Dr. John A. Moore* Patti McGill Peterson* Steven R. Pruchansky James A. Shepherdson Lt. Gen. Norman H. Smith, USMC (Ret.) *Members of the Audit Committee Officers James A. Shepherdson President and Chief Executive Officer Susan S. Newton Senior Vice President and Secretary William H. King Vice President and Treasurer Investment adviser John Hancock Advisers, LLC 101 Huntington Avenue Boston, MA 02199-7603 Principal distributor John Hancock Funds, LLC 101 Huntington Avenue Boston, MA 02199-7603 Custodian The Bank of New York One Wall Street New York, NY 10286 Transfer agent John Hancock Signature Services, Inc. 1 John Hancock Way, Suite 1000 Boston, MA 02217-1000 Legal counsel Wilmer Cutler Pickering Hale and Dorr LLP 60 State Street Boston, MA 02109-1803 The Fund's investment objective, risks, charges and expenses are included in the prospectus and should be considered carefully before investing. For a prospectus, call your financial professional, call John Hancock Funds at 1-800-225-5291, or visit the Fund's Web site at www.jhfunds.com. Please read the prospectus carefully before investing or sending money. How to contact us Internet www.jhfunds.com Mail Regular mail: Express mail: John Hancock John Hancock Signature Services, Inc. Signature Services, Inc. 1 John Hancock Way, Suite 1000 Mutual Fund Image Operations Boston, MA 02217-1000 529 Main Street Charlestown, MA 02129 Phone Customer service representatives 1-800-225-5291 24-hour automated information 1-800-338-8080 TDD line 1-800-554-6713 A listing of month-end portfolio holdings is available on our Web site, www.jhfunds.com. A more detailed portfolio holdings summary is available on a quarterly basis 60 days after the fiscal quarter on our Web site or upon request by calling 1-800-225-5291, or on the Securities and Exchange Commission's Web site, www.sec.gov. 41 [A 1 1/2" x 1/2" John Hancock (Signature) logo in upper left hand corner. A tag line below reads "JOHN HANCOCK FUNDS."] 1-800-225-5291 1-800-554-6713 (TDD) 1-800-338-8080 EASI-Line www.jhfunds.com Now available: electronic delivery www.jhfunds.com/edelivery This report is for the information of the shareholders of John Hancock Bond Fund. 210SA 11/04 1/05 ITEM 2. CODE OF ETHICS. Not applicable at this time. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Not applicable at this time. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Not applicable at this time. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6. SCHEDULE OF INVESTMENTS. Not applicable. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable. ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no material changes to previously disclosed John Hancock Funds - Administration Committee Charter. ITEM 10. CONTROLS AND PROCEDURES. (a) Based upon their evaluation of the registrant's disclosure controls and procedures as conducted within 90 days of the filing date of this Form N-CSR, the registrant's principal executive officer and principal accounting officer have concluded that those disclosure controls and procedures provide reasonable assurance that the material information required to be disclosed by the registrant on this report is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. (b) There were no changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 11. EXHIBITS. (a)(1) Separate certifications for the registrant's principal executive officer and principal accounting officer, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and Rule 30a-2(a) under the Investment Company Act of 1940, are attached. (b)(1) Separate certifications for the registrant's principal executive officer and principal accounting officer, as required by 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, and Rule 30a-2(b) under the Investment Company Act of 1940, are attached. The certifications furnished pursuant to this paragraph are not deemed to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certifications are not deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Registrant specifically incorporates them by reference. (c)(1) Contact person at the registrant. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. John Hancock Sovereign Bond Fund By: ------------------------------ James A. Shepherdson President and Chief Executive Officer Date: January 26, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: ------------------------------ James A. Shepherdson President and Chief Executive Officer Date: January 26, 2005 By: ----------------------- William H. King Vice President and Treasurer Date: January 26, 2005