<PAGE>   1

                                    FORM 10-K

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

(Mark One)

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
         EXCHANGE ACT OF 1934 [FEE REQUIRED]

FOR THE FISCAL YEAR ENDED                December 31, 1998
                          ------------------------------------------------------

                                       OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
         EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

FOR THE TRANSITION PERIOD FROM                      N/A
                               -------------------------------------------------

COMMISSION FILE NUMBER                            0-15680
                       ---------------------------------------------------------

              JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)

              Massachusetts                              04-2921566
----------------------------------------    ------------------------------------
     (STATE OR OTHER JURISDICTION OF        (I.R.S. EMPLOYER IDENTIFICATION NO.)
     INCORPORATION OR ORGANIZATION)

    200 Clarendon Street, Boston, MA                        02116  
----------------------------------------    ------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                 (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (800) 722-5457
                                                    --------------

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:  NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: UNITS OF INVESTOR 
LIMITED PARTNERSHIP INTEREST

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
                                    Yes [X]        No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing. (See
definition of affiliate in Rule 405.) Not applicable, since the securities are
non-voting

NOTE: If a determination as to whether a particular person or entity is an
affiliate cannot be made without involving unreasonable effort and expense, the
aggregate market value of the common stock held by non-affiliates may be
calculated on the basis of assumptions reasonable under the circumstances,
provided that the assumptions are set forth in this Form.

                         Exhibit Index on Pages 22 - 26
                                  Page 1 of 27


<PAGE>   2



                                TABLE OF CONTENTS




                                     PART I


Item 1    Business                                                           3
Item 2    Properties                                                         5
Item 3    Legal Proceedings                                                  6
Item 4    Submission of Matters to a Vote of Security Holders                7


                                     PART II


Item 5    Market for the Partnership's Securities and Related
            Security Holder Matters                                          7
Item 6    Selected Financial Data                                            8
Item 7    Management's Discussion and Analysis of Financial
            Condition and Results of Operations                              9
Item 8    Financial Statements and Supplementary Data                       17
Item 9    Changes in and Disagreements with Accountants
            on Accounting and Financial Disclosure                          17


                                    PART III


Item 10   Directors and Executive Officers of the Registrant                17
Item 11   Executive Compensation                                            20
Item 12   Security Ownership of Certain Beneficial Owners
            and Management                                                  20
Item 13   Certain Relationships and Related Transactions                    20


                                     PART IV


Item 14   Exhibits, Financial Statement Schedules and Reports 
            on Form 8-K                                                     22

          Signatures                                                        27


                                       2
<PAGE>   3



                                     PART I
ITEM 1 - BUSINESS

The Registrant, John Hancock Realty Income Fund Limited Partnership (the
"Partnership"), is a limited partnership organized on June 12, 1986 under the
Massachusetts Uniform Limited Partnership Act. As of December 31, 1998, the
partners in the Partnership consisted of John Hancock Realty Equities, Inc. (the
"General Partner"), John Hancock Realty Funding, Inc. (the "John Hancock Limited
Partner"), and 3,712 Investor Limited Partners (the "Investors") owning 91,647
Units of Investor Limited Partnership Interests (the "Units"). The John Hancock
Limited Partner and the Investors are collectively referred to as the Limited
Partners. The initial capital of the Partnership was $2,000 representing capital
contributions of $1,000 from the General Partner and $1,000 from the John
Hancock Limited Partner. During the offering period, the John Hancock Limited
Partner made additional capital contributions of $7,330,760. There have been no
changes in the number of Units outstanding subsequent to the termination of the
offering period. The Amended Agreement of Limited Partnership of the Partnership
(the "Partnership Agreement") authorized the sale of up to 100,000 Units of
Investor Limited Partnership Interests.

The Units were offered and sold to the public during the period from September
9, 1986 to September 9, 1987, pursuant to a Registration Statement on Form S-11
under the Securities Act of 1933. The Partnership sold the Units for $500 per
Unit. No established public market exists on which the Units may be traded.

The Partnership is engaged in the business of acquiring, improving, holding for
investment and disposing of existing, income-producing, commercial and
industrial properties on an all-cash basis, free and clear of mortgage
indebtedness. Although the Partnership's properties were acquired and are held
free and clear of mortgage indebtedness, the Partnership may incur mortgage
indebtedness on its properties under certain circumstances, as specified in the
Partnership Agreement.

The latest date on which the Partnership is due to terminate is December 31,
2016, unless it is sooner terminated in accordance with the terms of the
Partnership Agreement. It is expected that in the ordinary course of the
Partnership's business, the properties of the Partnership will be disposed of,
and the Partnership terminated, before December 31, 2016. As initially stated in
its Prospectus, it was expected that the Partnership would be dissolved upon the
sale of its last remaining property, which at that time was expected to be
within seven to ten years following the date such property was acquired by the
Partnership. As of December 31, 1998, the Partnership had four properties
remaining in its portfolio, all of which were listed for sale. One of these
properties, the Carnegie Center, was sold on January 7,1999. Upon the sale of
the last remaining property, the operations of the Partnership will terminate,
and the Partnership will be dissolved, in accordance with the terms of the
Partnership Agreement.

The Partnership's equity real estate investments are subject to various risk
factors. Although the risks of equity investing are reduced when properties are
acquired on an unleveraged basis, the major risk of owning income-producing
properties is the possibility that the properties will not generate income
sufficient to meet operating expenses and to fund adequate reserves for repairs,
replacements, contingencies and anticipated obligations. The income received
from properties may be affected by many factors, including: i) adverse changes
in general economic conditions and local conditions, such as competitive
over-building, a decrease in employment, or adverse changes in real estate
zoning laws, which may reduce the desirability of real estate in the area or ii)
other circumstances over which the Partnership may have little or no control,
such as fires, earthquakes and floods. To the extent that the Partnership's
properties are leased in any substantial portion to a specific retail,
industrial or office tenant, the financial failure of any such major tenant,
resulting in the termination of the tenant's lease or non-payment of rental
amounts due, would likely cause at least a temporary reduction in cash flow from
any such property and might result in a decrease in the market value of that
property.

Under various federal, state and local laws, ordinances and regulations, an
owner or operator of real property may become liable for the costs of removal or
remediation of certain hazardous substances released on or in its property. Such
laws often impose such liability without regard to whether the owner or operator
knew of, or was responsible for, the release of such hazardous substances. If
any such substances were found in or on any property owned by the Partnership,
the Partnership could be exposed to liability and be required to incur
substantial remediation costs. The presence of such substances or the failure to
undertake proper remediation could adversely affect the ability to finance,
refinance or dispose of such property.


                                       3
<PAGE>   4



ITEM 1 - BUSINESS (CONTINUED)

On February 17, 1987, the Partnership acquired the Marlboro Square Shopping
Center property (Marlboro Square), a neighborhood shopping center located in
Marlboro, Massachusetts. Market conditions in Marlboro have weakened since the
Partnership acquired the property and remain depressed. An excess of supply over
demand for retail space has resulted in continued high vacancy rates and
competitive pricing for available space in the Marlboro area. The General
Partner anticipates that vacancy rates for retail space in the Marlboro,
Massachusetts area will persist based upon both the lack of demand and the
amount of available retail space in the area. Given the existing supply and
demand conditions in the Marlboro area, the General Partner's projection of
future leasing activity and the projected capital requirements of the property,
the General Partner listed Marlboro Square for sale during September 1998
because it did not believe that the property would be likely to appreciate in
value during the foreseeable future. On March 17, 1999, the Partnership sold
Marlboro Square to a non-affiliated buyer and received net sales proceeds of
$1,132,000. During the second quarter of 1999, the General Partner intends to
make a distribution from the net sales proceeds, in accordance with the
Partnership Agreement.

On November 20, 1987, the Partnership acquired the Crossroads Square Shopping
Center, a neighborhood shopping center located in Jacksonville, Florida. During
the second quarter of 1997, the anchor tenant at Crossroads Square that occupied
49% of the property under a lease scheduled to expire in August 2010 informed
the General Partner of its intention to vacate its space during the second half
of 1998. During December 1998, the tenant vacated the space. As of the date of
this Report, the tenant has continued to meet its scheduled rental obligations.
The General Partner is seeking a replacement tenant for the space. The General
Partner does not believe that this situation is likely to have a materially
adverse effect on the Partnership's liquidity.

Although retail market conditions in the market in which the Crossroads Square
Shopping Center ("Crossroads Square") is located have declined since the
Partnership purchased the property, market occupancy levels and rental rates
have stabilized over recent years. During August 1998, the General Partner
listed Crossroads Square for sale based upon the existing real estate market
conditions in the Jacksonville, Florida area, where the Crossroads Square is
located, and the property's projected income performance. Subsequent to listing
Crossroads Square for sale, the General Partner became aware that the property
was environmentally contaminated with certain hazardous materials. The General
Partner then sought to determine the scope of the contamination and to determine
the impact on the future operating costs, repair and maintenance expenses and
market value of the property. The General Partner currently estimates that to
remediate the contamination will cost approximately $450,000. The General
Partner continues to seek a buyer for the property. The presence of these
hazardous materials could adversely affect the Partnership's ability to dispose
of the property and the Partnership could be exposed to liability and be
required to incur substantial remediation costs.

On February 25, 1988, the Partnership acquired the Warner Plaza Shopping Center
("Warner Plaza"), a neighborhood shopping center located in Chandler, Arizona.
The Partnership acquired Warner Plaza exclusive of areas totaling 55,562
rentable square feet owned by a non-affiliate of the Partnership. Real estate
market conditions have declined in the Chandler area since the Partnership
acquired the property. However, steady population growth in the Chandler area
over the past few years has increased demand for available retail space and
stimulated the development of new retail space. Given these market conditions
and the status of the property, the General Partner listed the Warner Plaza for
sale during June 1998. On March 18, 1999, the Partnership sold Warner Plaza to a
non-affiliated buyer and received net sales proceeds of $6,217,000. During the
second quarter of 1999, the General Partner intends to make a distribution from
the net sales proceeds, in accordance with the Partnership Agreement.

On December 22, 1987, the Partnership acquired the Carnegie Center, a
multi-tenant office/industrial facility located in Cincinnati, Ohio. After the
Partnership acquired the Carnegie Center, the Cincinnati industrial real estate
market experienced an oversupply of office/industrial space that resulted in a
decline in rental rates and an increase in vacancy rates. Since late 1994, when
the Carnegie Center's occupancy declined to 35%, the General Partner gradually
improved the property's occupancy to approximately 70%. Given the existing
status of the property, the projected future capital requirements necessary for
the property to maintain its competitive position within the market and the
existing conditions in the Cincinnati real estate market, the General Partner
listed the Carnegie Center for sale during July 1998. On January 7, 1999, the
Partnership sold the Carnegie Center to a non-affiliated buyer and received net
sales proceeds of $4,096,441. During February 1999, the Partnership distributed
$4,092,955 of the net sales proceeds, of which $3,528,410 was distributed to the
Investors, and $564,545 was distributed to the John Hancock Limited Partner. The
Partnership retained $3,486 in working capital reserves.


                                       4
<PAGE>   5



ITEM 1 - BUSINESS (CONTINUED)

On October 24, 1986, the Partnership acquired the 1300 North Dutton Avenue
property, an office/industrial facility located in Santa Rosa, California. The
tenant that had leased all of the rentable space at the property notified the
Partnership during 1994 that it would not renew its lease, which expired on
January 31, 1995. The property remained vacant after January 31, 1995 until the
General Partner secured a new tenant, Union Oil Company of California, to occupy
the entire property under a five-year lease which commenced in October 1996. Due
to this lease at the property and the then existing favorable market conditions
in the Santa Rosa, California area, the General Partner listed the property for
sale during October 1996. On September 29, 1997, the Partnership sold the
property to a non-affiliated buyer and received net sales proceeds of
$2,673,278. During November 1997, the Partnership distributed $2,126,210 of the
net sales proceeds, of which $1,832,940 was distributed to the Investors, and
$293,270 was distributed to the John Hancock Limited Partner. The Partnership
retained $547,068 in working capital reserves.

On September 13, 1988, the Partnership acquired the J.C. Penney Credit
Operations Center, an office/service center located in Albuquerque, New Mexico
and 100% occupied by J.C. Penney. During the first quarter of 1995, the General
Partner negotiated an extension of J.C. Penney's lease through June 2006 and
listed the J.C. Penney Credit Operations Center for sale during July 1995 based
upon this lease extension and the then existing favorable real estate market
conditions in Albuquerque, New Mexico. On December 29, 1995, the Partnership
sold the J.C. Penney Credit Operations Center to a non-affiliated buyer and
received net sales proceeds of $5,392,032. During February 1996, the Partnership
distributed $5,315,526 of the net sales proceeds, of which $4,582,350 was
distributed to the Investors, and $733,176 was distributed to the John Hancock
Limited Partner. The Partnership retained $76,506 in working capital reserves.

Within the power accorded to the General Partner under the terms of the
Partnership Agreement, the General Partner contracted, effective as of January
1, 1992, with Hancock Realty Investors Incorporated ("HRI"), a wholly-owned,
indirect subsidiary of John Hancock Mutual Life Insurance Company ("John
Hancock"), to assist the General Partner in the performance of its management
duties as enumerated in the Partnership Agreement. Effective May 28, 1993, HRI
subcontracted with John Hancock to assist HRI in the performance of its duties
as enumerated in the January 1, 1992 contract. The Partnership has not incurred
any additional costs or expenses as a result of these agreements. The General
Partner is further described in Item 10 ("Directors and Executive Officers of
the Partnership") of this Report.

Industry segment information has not been provided since the Partnership is
engaged in only one industry segment.

ITEM 2 - PROPERTIES

At December 31, 1998, the Partnership held four properties in its portfolio.
Three of these properties, the Carnegie Center, Warner Plaza and Marlboro Square
were sold during the first quarter of 1999.

MARLBORO SQUARE SHOPPING CENTER

On February 17, 1987, the Partnership purchased the Marlboro Square Shopping
Center ("Marlboro Square"), located in Marlboro, Massachusetts, from a
non-affiliated seller. The property consists of two buildings. One of the
buildings contains 39,150 rentable square feet, and the other building contains
3,000 rentable square feet, for a total of 42,150 rentable square feet of space.

For the year ended December 31, 1998, the average occupancy of Marlboro Square
was 62%. At December 31, 1998 Marlboro Square's occupancy was 44%.

CROSSROADS SQUARE SHOPPING CENTER

On November 20, 1987, the Partnership purchased the Crossroads Square Shopping
Center ("Crossroads Square"), located in Jacksonville, Florida, from a
non-affiliated seller. Crossroads Square contains 174,196 rentable square feet
of space with a total land area in excess of 18.5 acres.

For the year ended December 31, 1998, the average occupancy of Crossroads Square
was 95%. At December 31, 1998, Crossroads Square's occupancy was 95%.


                                       5
<PAGE>   6



ITEM 2 - PROPERTIES (CONTINUED)

CARNEGIE CENTER OFFICE/WAREHOUSE

On December 22, 1987, the Partnership purchased Carnegie Center, located in
Cincinnati, Ohio, from a non-affiliated seller. The property consists of two
buildings containing an aggregate of 128,059 rentable square feet with a total
land area of approximately 7.8 acres.

For the year ended December 31, 1998, the average occupancy of Carnegie Center
was 73%. At December 31, 1998, Carnegie Center's occupancy was 69%.

WARNER PLAZA SHOPPING CENTER

On February 25, 1988, the Partnership purchased 92,848 rentable square feet of
the Warner Plaza Shopping Center ("Warner Plaza") (which consists of a total of
148,410 rentable square feet), located in Chandler, Arizona, from a
non-affiliated seller.

For the year ended December 31, 1998, average occupancy, for the portion of
Warner Plaza which is owned by the Partnership, was 96%. At December 31, 1998
occupancy for such portion was 100%.

The foregoing properties are described more fully in Items 1 and 2 of this
Report and Note 4 to the Financial Statements included in Item 8 of this Report.

ITEM 3 - LEGAL PROCEEDINGS

In February 1996, a putative class action complaint was filed in the Superior
Court in Essex County, New Jersey by a single investor in a limited partnership
affiliated with the Partnership. The complaint named as defendants the
Partnership, the General Partner, certain other affiliates of the General
Partner, and certain unnamed officers, directors, employees and agents of the
named defendants.

The plaintiff sought unspecified damages stemming from alleged
misrepresentations and omissions in the marketing and offering materials
associated with the Partnership and two limited partnerships affiliated with the
Partnership. The complaint alleged, among other things, that the marketing
materials for the Partnership and the affiliated limited partnerships did not
contain adequate risk disclosures.

On March 18, 1997, the court certified a class of investors who were original
purchasers in the Partnership. The certification order should not be construed
as suggesting that any member of the class is entitled to recover, or will
recover, any amount in the action.

The Partnership and the other defendants have answered the complaint, denying
the material allegations and raising numerous affirmative defenses. Discovery
has commenced, and the Partnership and other defendants have produced documents
relating to the plaintiff's claims. No depositions are scheduled. The court has
heard the defendants' motion to dismiss certain claims on grounds of the
expiration of the statutes of limitations and has stated it intends to hold a
further hearing on that matter to determine whether the case can be resolved by
the disposition of certain claims. The Partnership and the other defendants
intend to move to decertify the class and for summary judgment dismissing the
breach of contract claims.

The General Partner believes the allegations are totally without merit and will
continue to vigorously contest the action.

In September 1997, a complaint for damages was filed in the Superior Court of
the State of California for the County of Los Angeles by an investor in John
Hancock Realty Income Fund-II Limited Partnership ("RIF-II"), a limited
partnership affiliated with the Partnership. The complaint named the General
Partner as a defendant.


                                       6
<PAGE>   7



ITEM 3 - LEGAL PROCEEDINGS (CONTINUED)

The plaintiff sought unspecified damages that allegedly arose from the General
Partner's refusal to provide, without reasonable precautions on plaintiff's use
of, a list of investors in the Partnership and in RIF-II. Plaintiff alleges that
the General Partner's refusal unconditionally to provide a list was a breach of
contract and a breach of the General Partner's fiduciary duty.

In 1998, the plaintiff amended the complaint to name the Partnership and RIF-II
as defendants. As a result of the defendants' demurrer (motion to dismiss), in
May 1998 plaintiff's additional claims for tortuous interference with
prospective economic advantage and intentional interference with contract, were
dismissed. In addition, as a result of a motion for summary judgment, in August
1998, the court dismissed all claims involving RIF II, leaving only the breach
of contract and breach of fiduciary duty claims involving the Partnership. On
the eve of trial, plaintiffs dismissed without prejudice those claims not
previously dismissed by the court, and subsequently filed a notice of appeal
from the dismissal of the claims that the court had dismissed on motion.

There can be no assurances given as to the timing, costs or outcome of this
legal proceeding.

There are no other material pending legal proceedings, other than ordinary
routine litigation incidental to the business of the Partnership, to which the
Partnership is a party or to which any of its properties is subject.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders of the Partnership
during the fourth quarter of 1998.

                                     PART II

ITEM 5 - MARKET FOR THE PARTNERSHIP'S SECURITIES AND RELATED SECURITY HOLDER 
         MATTERS

(a)  MARKET INFORMATION

The Partnership's outstanding securities consist of 91,647 Units originally sold
for $500 per Unit. The Units were offered and sold to the public during the
period from September 9, 1986 to September 9, 1987. No established public market
exists on which the Units may be traded. Consequently, holders of Units may not
be able to liquidate their investments in the event of an emergency, or for any
other reason. Additionally, the assignment or other transfer of Units would be
subject to compliance with the minimum investment and suitability standards
imposed by the Partnership or by applicable law, including state "Blue Sky"
laws.

(b)  NUMBER OF SECURITY HOLDERS

<TABLE>
<CAPTION>
                                                  Number of              Number of Units
                                            record holders as of        outstanding as of
       Title of Class                         December 31, 1998         December 31, 1998
       --------------                       --------------------        -----------------
       <S>                                          <C>                       <C>   
       Units of Investor Limited
       Partnership Interests                        3,712                     91,647
</TABLE>

(c)  DIVIDEND HISTORY AND RESTRICTIONS

During the fiscal year ended December 31, 1998, the Partnership distributed cash
in the aggregate amount of $2,001,645 to the Partners. All of this amount was
generated from Distributable Cash from Operations (defined in the Partnership
Agreement). During the fiscal year ended December 31, 1997, the Partnership
distributed cash in the aggregate amount of $4,210,949 to the Partners. Of this
amount, $2,084,739 was generated from Distributable Cash from Operations, and
$2,126,210 was generated from Distributable Cash from Sales or Financings
Operations (defined in the Partnership Agreement). These amounts were
distributed in accordance with the Partnership Agreement.


                                       7
<PAGE>   8



ITEM 5 - MARKET FOR THE PARTNERSHIP'S SECURITIES AND RELATED SECURITY HOLDER 
         MATTERS (CONTINUED)

(c)  DIVIDEND HISTORY AND RESTRICTIONS (CONTINUED)

The following table reflects aggregate cash distributions with respect to
Distributable Cash from Operations and Distributable Cash from Sales or
Financings made during 1997 and 1998:

<TABLE>
<CAPTION>
                                                                          Amount Paid to
           Date of                 Amount of        Amount Paid to        John Hancock          Amount Paid       Distribution
        Distribution             Distribution       General Partner      Limited Partner       to Investors         Per Unit
        ------------             ------------       ---------------      ---------------       ------------       -------------
     <S>                          <C>                   <C>                  <C>                <C>                  <C>   
     February 14, 1997            $  521,185            $5,212               $      -           $  515,973           $ 5.63
     May 15, 1997                    521,184             5,212                      -              515,972             5.63
     August 15, 1997                 521,185             5,212                      -              515,973             5.63
     November 14,1997*             2,647,395             5,212                293,270            2,348,913            25.63
     February 13, 1998               509,151             5,092                      -              504,059             5.50
     May 15, 1998                    498,041             4,980                      -              493,061             5.38
     August 14, 1998                 497,396             4,335                      -              493,061             5.38
     November 13, 1998               497,057             3,997                      -              493,060             5.38
</TABLE>

     * Includes Distributable Cash from Sales or Financings

The source of future distributions from cash from operations is dependent upon
cash generated by the Partnership's investments and the use of working capital
reserves for leasing costs and capital expenditures. Distributions of Cash from
Operations during the year ended 1998 represent a 5% return on Investors'
Invested Capital. The Partnership's Cash Provided by Operations (defined in the
Partnership Agreement) was not sufficient to provide Investors with cash
distributions at an annualized rate of 5% of Investors Invested Capital. The
Partnership used reserves to be able to continue making cash distributions to
Investors of an annualized rate of 5%. The General Partner currently anticipates
that the Partnership will likely be able to sell all of its remaining
investments during 1999 and, therefore, is unable to project the amount of
distributions of Cash from Operations in 1999, if any. For further discussion on
the financial condition and results of operations of the Partnership see Item 7
of this Report.

ITEM 6 - SELECTED FINANCIAL DATA

The following table sets forth selected financial information regarding the
Partnership's financial position and operating results for the five-year period
ended December 31, 1998. This information should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Financial Statements and Notes thereto, which are included in
Items 7 and 8, respectively, of this Report.

<TABLE>
<CAPTION>
                                                                           Years Ended December 31,
                                                   1998             1997             1996               1995             1994
                                                ----------      -----------       -----------       -----------      -----------

<S>                                             <C>             <C>               <C>               <C>              <C>        
Rental income                                   $2,544,074      $ 2,861,166       $ 2,614,989       $ 3,065,751      $ 3,618,826
Interest income                                    100,005          107,469           171,767           173,286          110,982
(Loss)/gain on sale of property                          -           (5,321)                -           128,539                -
Property write-downs                                     -         (668,520)       (1,907,093)                -         (512,000)
Net income/(loss)                                1,050,152          636,383          (851,115)        1,551,706        1,497,221
Net income/(loss) per Unit (b)                      11.53              8.41             (5.60)           17.42             17.02
Ordinary tax income (a)                            761,396        1,167,990         1,130,346         1,480,158        2,128,148
Ordinary tax income per Unit (b)                     8.68             13.33             12.74            16.80             23.61
Cash distribution per Unit from
    operations                                      21.64             22.52             23.44            25.00             25.00
Distributable cash from sales
    or financings                                        -        2,126,210                 -         5,315,526                -
Cash distribution per Unit from sales or
    financings                                           -            20.00             50.00                 -                -
Cash and cash equivalents at
    December 31                                  2,055,017        2,502,844         2,197,847         8,397,420        3,124,999
Total assets at December 31                     21,026,013       21,765,879        25,375,190        33,605,444       34,325,239
</TABLE>


                                       8
<PAGE>   9



ITEM 6 - SELECTED FINANCIAL DATA (CONTINUED)

(a)      The ordinary tax income (loss) for the Partnership was allocated as 
         follows:

<TABLE>
<CAPTION>
                                                                           Years Ended December 31,
                                                   1998            1997              1996              1995             1994
                                                 --------       ----------        ----------        ----------       ----------

     <S>                                         <C>            <C>               <C>               <C>              <C>       
     General Partner                             $  7,614       $   11,680        $   11,303        $   14,802       $   21,281
     John Hancock Limited Partner                 (41,901)         (65,297)          (48,573)          (74,321)         (56,684)
     Investors                                    795,683        1,221,607         1,167,586         1,539,677        2,163,551
                                                 --------       ----------        ----------        ----------       ----------
         Total                                   $761,396       $1,167,990        $1,130,346        $1,480,158       $2,128,148
                                                 ========       ==========        ==========        ==========       ==========
</TABLE>

(b)      The actual ordinary tax income/(loss) per Unit has not been presented
         because the actual ordinary tax income/(loss) is allocated between
         tax-exempt and tax-paying entities based upon the respective number of
         Units held by each group at December 31, 1998, 1997, 1996, 1995 and
         1994. The ordinary tax income per Unit as presented was computed by
         dividing the Investors' share of ordinary tax income by the number of
         Units outstanding at December 31, 1998, 1997, 1996, 1995 and 1994,
         respectively.

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

GENERAL

During the offering period from September 9, 1986 to September 9, 1987, the
Partnership sold 91,647 Units representing gross proceeds (exclusive of the John
Hancock Limited Partner's contribution which was used to pay sales commissions,
acquisition fees and organizational and offering expenses) of $45,823,500. The
proceeds of the offering were used to acquire investment properties and fund
reserves. These properties are described more fully in Item 2 of this Report and
Note 4 to the Financial Statements included in Item 8 of this Report.

IMPACT OF YEAR 2000

The General Partner and John Hancock Mutual Life Insurance Company, the General
Partner's ultimate parent (together, John Hancock) along with the Partnership,
have developed a plan to modify or replace significant portions of the
Partnership's computer information and automated technologies so that its
systems will function properly with respect to the dates in the year 2000 and
thereafter. The Partnership presently believes that with modifications to
existing systems and conversions to new technologies, the year 2000 will not
pose significant operational problems for its computer systems. However, if
certain modifications and conversions are not made, or are not completed timely,
the year 2000 issue could have an adverse impact on the operations of the
Partnership.

John Hancock as early as 1994 had begun assessing, modifying and converting the
software related to its significant systems and has initiated formal
communications with its significant business partners and customers to determine
the extent to which John Hancock's interface systems are vulnerable to those
third parties' failure to remediate their own year 2000 issues. While John
Hancock is developing alternative third party processing arrangements as it
deems appropriate, there is no guarantee that the systems of other companies on
which the Partnership's systems rely will be converted timely or will not have
an adverse effect on the Partnership's systems.

The Partnership expects the project to be substantially complete by early 1999.
This completion target was derived utilizing numerous assumptions of future
events, including availability of certain resources and other factors. However,
there can be no guarantee that this completion target will be achieved.


                                       9
<PAGE>   10



ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS (CONTINUED)

FORWARD-LOOKING STATEMENTS

In addition to historical information, certain statements contained herein
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Those statements appear in a number of places in this
Report and include statements regarding the intent, belief or expectations of
the General Partner with respect to, among other things, the prospective sale of
Partnership properties, actions that would be taken in the event of lack of
liquidity, unanticipated leasing costs, repair and maintenance expenses,
distributions to the General Partner and to Investors, the possible effects of
tenants vacating space at Partnership properties, the absorption of existing
retail space in certain geographical areas, possible liability for the costs or
remediation of hazardous substances, impact of the year 2000 on computer systems
and the impact of inflation.

Forward-looking statements involve numerous known and unknown risks and
uncertainties, and they are not guarantees of future performance. The following
factors, among others, could cause actual results or performance of the
Partnership and future events to differ materially from those expressed or
implied in the forward-looking statements: general economic and business
conditions; any and all general risks of real estate ownership, including
without limitation adverse changes in general economic conditions and adverse
local conditions, the fluctuation of rental income from properties, changes in
property taxes, utility costs or maintenance costs and insurance, fluctuations
of real estate values, competition for tenants, uncertainties about whether real
estate sales under contract will close; the ability of the Partnership to sell
its properties; adverse effects on the possible financing, refinancing or
disposal of properties resulting from the presence of hazardous materials; and
other factors detailed from time to time in the filings with the Securities and
Exchange Commission.

Readers are cautioned not to place undue reliance on forward-looking statements,
which reflect the General Partner's analysis only as of the date hereof. The
Partnership assumes no obligation to update forward-looking statements. See also
the Partnership's reports to be filed from time to time with the Securities and
Exchange Commission pursuant to the Securities Exchange Act of 1934, as amended.

LIQUIDITY AND CAPITAL RESOURCES

The latest date on which the Partnership is due to terminate is December 31,
2016, unless it is sooner terminated in accordance with the terms of the
Partnership Agreement. It is expected that in the ordinary course of the
Partnership's business, the properties of the Partnership will be disposed of,
and the Partnership terminated, before December 31, 2016.

As initially stated in its Prospectus, it was expected that the Partnership
would be dissolved upon the sale of its last remaining property, which at that
time was expected to be within seven to ten years following the date such
property was acquired by the Partnership. As of December 31, 1998, the
Partnership had four properties remaining in its portfolio, all of which are
listed for sale (described below). Three of these properties, the Carnegie
Center, Marlboro Square and Warner Plaza, were sold during the first quarter of
1999. The General Partner currently anticipates that the Partnership will likely
be able to sell its last remaining property, Crossroads Square, during 1999.
Upon the sale of the last remaining property, the operations of the Partnership
will terminate, and the Partnership will be dissolved, in accordance with the
terms of the Partnership Agreement.

At December 31, 1998, the Partnership had $2,055,017 in cash and cash
equivalents and $63,879 in restricted cash. Cash and cash equivalents decreased
by $447,827 from 1997. This decrease occurred because the Partnership's Cash
Provided by Operations (defined in the Partnership Agreement) was not sufficient
to provide the Investors with cash distributions at an annualized rate of 5% of
Investors Invested Capital. Therefore, the Partnership used reserves to be able
to continue making cash distributions to Investors at an annualized rate of 5%.


                                       10
<PAGE>   11



ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS (CONTINUED)

LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

The Partnership's working capital reserve has a current balance of approximately
$1,075,000. The General Partner anticipates that such amount should be
sufficient to satisfy the Partnership's general liquidity requirements.
Liquidity would, however, be materially adversely affected by a significant
reduction in revenues or significant unanticipated operating costs or
unanticipated capital expenditures. If any or all of these events were to occur,
to the extent that working capital reserves would be insufficient to satisfy the
cash requirements of the Partnership, it is anticipated that additional funds
would be obtained through a reduction of cash distributions to Investors, bank
loans, short-term loans from the General Partner or its affiliates or the sale
or financing of Partnership properties.

During 1998, cash from working capital reserves in the aggregate amount of
$152,073 was used for the payment of leasing costs incurred at the Carnegie
Center, Marlboro Square, Crossroads Square, and Warner Plaza properties. Due to
the fact that three of the Partnership's properties were sold during the first
quarter of 1999 and the one remaining property is currently listed for sale, the
General Partner is unable to estimate the amount of leasing costs that the
Partnership may actually incur during 1999. However, the General Partner
anticipates that the current balance in the working capital reserve would be
sufficient to pay any such costs.

During the years ended December 31, 1998 and 1997, approximately $92,000 and
$115,000, respectively, of cash from operations was used to fund non-recurring
maintenance and repair expenses incurred at the Partnership's properties. Due to
the fact that three of the Partnership's properties were sold during the first
quarter of 1999 and the one remaining property is currently listed for sale, the
General Partner is unable to estimate the amount of non-recurring maintenance
and expenses that the Partnership may actually incur during 1999. However, the
General Partner anticipates that the current balance in the working capital
reserve would be sufficient to pay any such costs.

The Partnership has incurred approximately $446,000 in legal expenses in
connection with the class action lawsuit (see Part I, Item 3 of this Report). Of
this amount, approximately $268,000 relates to the Partnership's own defense and
approximately $178,000 relates to the indemnification of the General Partner and
its Affiliates for their defense. In addition, the Partnership incurred
approximately $248,000 in legal expenses in connection with the lawsuit filed in
the Superior Court of the State of California for the County of Los Angeles by
an investor in the Partnership (see Part I, Item 3 of this Report). Of this
amount, approximately $177,000 relates to the Partnership's own defense and
approximately $106,000 relates to the indemnification of the General Partner and
its Affiliates for their defense. These expenses are funded from the operations
of the Partnership.

At the present time, the General Partner cannot estimate the aggregate amount of
legal expenses and indemnification claims to be incurred and their impact on the
Partnership's future operations. Liquidity would, however, be materially
adversely affected by a significant increase in such legal expenses and related
indemnification costs. If such increases were to occur, to the extent that cash
from operations and the working capital reserve would be insufficient to satisfy
the cash requirements of the Partnership, it is anticipated that additional
funds would be obtained through a reduction of cash distributions to Investors,
bank loans, short-term loans from the General Partner or its Affiliates, or the
sale or financing of Partnership investments.

Cash in the amount of $2,001,645 generated from the Partnership's operations was
distributed to the General Partner and Investors during 1998. Due to the fact
that all of the Partnership's investments are listed for sale, the General
Partner is unable to estimate the amount of cash distributions the Partnership's
operations will generate during 1999.


                                       11
<PAGE>   12



ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS (CONTINUED)

LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

At December 31, 1998, Marlboro Square's occupancy was 44%. During 1998, one new
tenant took occupancy of 6,600 square feet, or 16% of the property, under a
lease that expires in January 2000, at which time the tenant will have the
option to renew its lease for a five-year term. Approximately $20,000 in leasing
costs was incurred in connection with this new lease. However, three tenants
having leases representing 16,600 square feet, or 39% of the property, vacated
the property during 1998. One tenant's lease, representing approximately 7% of
the property, expired. Of the other two tenants, one, with a lease for
approximately 28% of the property that is scheduled to expire July 2005, was
delinquent in rental payments due since September 1998 and vacated the property
during October 1998. As a result, the General Partner terminated the tenant's
lease effective October 27, 1998 and brought an action against this former
tenant to obtain full collection of all delinquent and future obligations due
under the lease agreement. During the first quarter of 1999, the Partnership
reached a settlement agreement with this former tenant whereby the Partnership
agreed to dismiss the action in exchange for a one-time payment of $92,500, the
amount of which has been received. The other tenant, with a lease for
approximately 4% of the property that was scheduled to expire in January 2001,
became delinquent in rental payments due beginning in February 1998. As a
result, the General Partner terminated the tenant's lease effective May 12,
1998. The General Partner has reached a settlement agreement with the former
tenant whereby the Partnership agreed to release the former tenant from all past
due and future rental obligations in exchange for $2,000.

Given the existing supply and demand conditions in the Marlboro area, the
General Partner's projection of future leasing activity and the projected
capital requirements of the property, the General Partner listed Marlboro Square
for sale during September 1998 because it did not believe that the property
would be likely to appreciate in value during the foreseeable future. On January
13, 1999, the General Partner entered into a Purchase and Sale Agreement (the
"Marlboro Agreement") on behalf of the Partnership for the sale of Marlboro
Square to a non-affiliated buyer. On March 17, 1999, the Partnership sold
Marlboro Square to a non-affiliated buyer and received net sales proceeds of
$1,132,000. During the second quarter of 1999, the General Partner intends to
make a distribution from the net sales proceeds, in accordance with the
Partnership Agreement.

Since late 1994, when the Carnegie Center's occupancy declined to 35%, the
General Partner gradually improved the property's occupancy to approximately
70%. Given the status of the property, the projected future capital requirements
necessary for the property to maintain its competitive position within the
market and the existing conditions in the Cincinnati real estate market, the
General Partner listed the Carnegie Center for sale during July 1998. On January
7, 1999, the Partnership sold the Carnegie Center to a non-affiliated buyer and
received net sales proceeds of $4,096,441. During February 1999, the Partnership
distributed $4,092,955 of the net sales proceeds, of which $3,528,410 was
distributed to the Investors, and $564,545 was distributed to the John Hancock
Limited Partner. The Partnership retained $3,486 in working capital reserves.

During the first quarter of 1998, a tenant at the Warner Plaza property with a
lease for approximately 6,200 square feet, or 7% of the property, vacated the
property and filed for bankruptcy under Chapter 7 of the U.S Bankruptcy Code.
The General Partner found a replacement tenant to take occupancy of this space
effective September 15, 1998. Warner Plaza is currently 100% occupied.

Over the past few years steady population growth in the Chandler, Arizona area,
where the Warner Plaza property is located, has increased demand for available
retail space and stimulated the development of new retail space. Given these
market conditions as well as the existing status of the property, the General
Partner listed the Warner Plaza for sale during June 1998. On January 29, 1999,
the General Partner entered into a Purchase and Sale Agreement (the "Warner
Agreement") on behalf of the Partnership for the sale of Warner Plaza to a
non-affiliated. On March 18, 1999, the Partnership sold Warner Plaza to a
non-affiliated buyer and received net sales proceeds of $6,217,000. During the
second quarter of 1999, the General Partner intends to make a distribution from
the net sales proceeds, in accordance with the Partnership Agreement.

During the second quarter of 1997, the anchor tenant at the Crossroads Square
property that occupies 49% of the property under a lease scheduled to expire in
August 2010 informed the General Partner of its intention to vacate its space
during the second half of 1998. During December 1998, the tenant vacated the
space. The tenant continues to meet its scheduled rental obligations. The
General Partner is seeking a replacement tenant for the space. The General
Partner does not believe that this situation is likely to have a materially
adverse effect on the Partnership's liquidity.


                                       12
<PAGE>   13



ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS (CONTINUED)

LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

One tenant at the Crossroads Square property has a clause in its lease that may
be exercisable if the anchor tenant described above ceases to operate at the
property and a replacement tenant is not secured. Such clause provides that the
tenant may: i) reduce rental payments to the lesser of the fixed monthly rent or
2% of gross receipts if the anchor ceases to operate for 180 days, and, ii)
terminate lease obligations if the cessation of operations continues for an
additional six months and a substitute tenant has not been provided. This tenant
occupies approximately 10,500 square feet, or 6% of the property, under a lease
that is scheduled to expire in July 2005. The General Partner does not believe
that any reduction in rental payments or any possible lease termination that may
result from the anchor tenant vacating the property is likely to have a
materially adverse affect on the Partnership's liquidity.

The General Partner listed the Crossroads Square for sale during August 1998
based upon the existing real estate market conditions in the Jacksonville,
Florida area, where the Crossroads Square is located and the property's
projected income performance. Subsequent to listing Crossroads Square for sale,
the General Partner became aware that the property was environmentally
contaminated with certain hazardous materials. The General Partner then sought
to determine the scope of the contamination and to determine the impact on the
future operating costs, repair and maintenance expenses and market value of the
property. The General Partner currently estimates that to remediate the
contamination would cost approximately $450,000.
The General Partner continues to seek a buyer for the property.

The General Partner evaluated the carrying value of each of the Partnership's
properties as of December 31, 1998 by comparing such value to the respective
property's future undiscounted cash flows and the then most recent internal
appraisal. Based on such evaluations, the General Partner determined that no
impairment in values exist with respect to its properties and no write-downs
were recorded as of December 31, 1998. The General Partner will continue to
conduct property valuations, using internal or independent appraisals, in order
to assist in its evaluation of whether a permanent impairment in value exists on
any of the Partnership's properties.

RESULTS OF OPERATIONS

Average occupancy for the Partnership's properties was as follows:

                                                   Years ended December 31,
                                               1998          1997          1996
                                               ----          ----          ----
     Marlboro Square Shopping Center            62%           65%           81%
     Crossroads Square Shopping Center          95%           95%           93%
     Carnegie Center Office/Industrial          73%           68%           61%
     Warner Plaza Shopping Center               96%           99%          100%

RESULTS OF OPERATIONS - 1998 COMPARED WITH 1997

Net income for 1998 was $1,050,152 as compared to $636,383 in 1998. The 1997
results include a $668,520 write-down of the value of the Marlboro Square
property and a $5,321 non-recurring loss resulting from the sale of the 1300
North Dutton Avenue property as well as approximately $196,000 of operating
income from the 1300 North Dutton Avenue property. Excluding these amounts, net
income decreased by 7% during 1998 as compared to 1997.

Rental income for 1998 decreased by $317,092, or 11%, as compared to 1997. This
decrease is primarily due to the sale of the 1300 North Dutton Avenue property
on September 29, 1997. Excluding rental income generated by the 1300 North
Dutton Avenue property, rental income was consistent between periods. Increases
in rental income at the Crossroads Square and Carnegie Center properties were
offset by decreases in rental income at Marlboro Square and Warner Plaza.

Interest income for the year ended December 31, 1998 decreased by $7,464, or 7%
as compared to 1997. This decrease is primarily due a decrease in working
capital reserves, which declined due to an increase in general and
administrative expenses.

Depreciation expense for 1998 decreased by $295,019, or 44%, as compared to
1997. This decrease is primarily due to the reclassification of the Crossroads
Square, Warner Plaza, Carnegie Center and Marlboro Square properties as
"Property Held for Sale" during 1998. Accordingly, no depreciation has been
recorded on these properties since the time that they were listed for sale. In
addition, depreciation expense also declined due to the write-down in value of
Marlboro Square's carrying value at December 31, 1997.


                                       13
<PAGE>   14



ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS (CONTINUED)

RESULTS OF OPERATIONS (CONTINUED)

The Partnership's share of property operating expenses was consistent between
1998 and 1997; however, excluding amounts attributable to 1300 North Dutton
Avenue, the Partnership's share of property operating expenses increased by 23%.
Increases in the Partnership's share of property operating expenses at the
Marlboro Square and Crossroads Square properties were partially offset by a
decrease in the Partnership's share of property operating expenses at the Warner
Plaza. The Partnership's share of property operating expenses was consistent
between periods at the Carnegie Center.

The Partnership's share of property operating expenses at the Marlboro Square
increased $38,000 during 1998 as compared to 1997 primarily due to a decrease in
occupancy at the property, and therefore, decreases in tenant reimbursements for
such expenses.

The Partnership's share of property operating expenses at Crossroads Square
increased in 1998 as compared to 1997 primarily due to an increase in
non-recurring maintenance and repair expenses during 1998 as compared to 1997.
The property incurred approximately $50,000 and $15,000 of non-recurring
maintenance and repair expenses during 1998 and 1997, respectively.

The Partnership's share of property operating expenses at Warner Plaza decreased
in 1998 as compared to 1997 primarily due to an decrease in non-recurring
maintenance and repair expenses during 1998 as compared to 1997. The property
incurred approximately $23,000 and $75,000 of non-recurring maintenance and
repair expenses during 1998 and 1997, respectively. This decrease in the
Partnership's share of property operating expenses was partially offset by an
increase in certain operating expenses as well as a decrease in average
occupancy between periods, and therefore decreases in tenant reimbursements for
such expenses.

General and administrative expenses increased during 1998 by $324,094, or 84%,
as compared to the 1997. This increase is primarily due to an increase in legal
fees incurred by the Partnership in connection with the legal proceedings
described in Item 3 of Part I of this Report.

Amortization of deferred expenses for 1998 decreased by $71,145, or 53%, as
compared to 1997. This decrease is primarily due to reclassifying deferred
expenses to "Property Held for Sale" and, accordingly, no longer amortizing such
amounts.

Management fee expense, which is equal to 3.5% of Cash from Operations (as
defined in the Partnership Agreement), decreased during 1998 by $21,535, or 29%,
as compared to the same period in 1997. This decrease was due to a decline in
Cash from Operations between periods which resulted from the sale of the 1300
North Dutton Avenue property as well as from an increase in general and
administrative expenses between periods.

RESULTS OF OPERATIONS - 1997 COMPARED WITH 1996

Net income for the year ended December 31, 1997 was $636,383 as compared to a
net loss of 851,115 in 1996. The 1997 results include a $668,520 write-down of
the value of the Marlboro Square property and a $5,321 non-recurring loss
resulting from the sale of the 1300 North Dutton Avenue property. Included in
the results for 1996 are write-downs in the value of the Marlboro Square and
Carnegie Center properties in the aggregate amount of $1,907,093. Excluding
these amounts, net income increased by 23% in 1997 as compared to 1996 due to
increases in the performance of the Carnegie Center, Crossroads Square, and 1300
North Dutton Avenue properties. These increases were partially offset by
declines in the performance of the Marlboro Square and Warner Plaza properties,
and by legal fees incurred in connection with the class action lawsuit
(described in Item 3 of Part l of this Report).

Rental income for the year ended December 31, 1997 increased by $246,177, or 9%,
as compared to 1996. This increase is primarily due to an increase in rental
income at the 1300 North Dutton Avenue property (which property was sold by the
Partnership on September 29, 1997). In addition, increases in rental income at
the Crossroads Square and Carnegie Center properties were partially offset by
decreases in rental income at the Marlboro Square and Warner Plaza properties.
Rental income increased at the 1300 North Dutton Avenue and Carnegie Center
properties due to increases in average occupancy at the properties. Rental
income increased at the Crossroads Square property primarily because a tenant
that was delinquent in making some of its rental payments during 1996 satisfied
its past due 1996 rental payments during 1997 as well as made all of its
scheduled 1997 rental payments.


                                       14
<PAGE>   15



ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS (CONTINUED)

RESULTS OF OPERATIONS (CONTINUED)

Rental income decreased by 9% at Warner Plaza primarily due to a decline in
percentage rent at the property which resulted from one of the tenants at the
property vacating its space, as described above. Rental income at Marlboro
Square decreased by 8% between periods primarily due to a decline in average
occupancy. Rental income also decreased at Marlboro Square because rental rates
on leases executed since 1996 are less than rental rates contracted under prior
leases.

Interest income for the year ended December 31, 1997 decreased by $64,298, or
37%, as compared to 1996. This decrease was primarily due to the interest earned
during the first quarter of 1996 on the net sales proceeds received from the
sale of J.C. Penney, which was sold on December 29, 1995. The Partnership
distributed the majority of such net sales proceeds in February 1996. This
decrease was partially offset by interest earned on the net sales proceeds
received from the sale of the 1300 North Dutton Avenue property. The Partnership
distributed a substantial portion of such net sales proceeds in November 1997.
Interest income declined further due to a decrease in the interest earned on the
Partnership's working capital reserves as a result of a reduced amount of such
reserves through most of 1997.

The Partnership's share of property operating expenses for the year ended
December 31, 1997 increased by $84,697, or 27%, as compared to 1996 primarily
due to increases in the Partnership's share of property operating expenses at
the Crossroads Square, Marlboro Square and 1300 North Dutton Avenue properties.
These increases were partially offset by decreases in the Partnership's share of
property operating expenses at the Carnegie Center and Warner Plaza properties.

The Partnership's share of property operating expenses at the Crossroads Square
property increased in 1997 as compared to 1996, primarily due to legal fees paid
in connection with the collection of past due rent from a tenant that had been
in bankruptcy. The property incurred approximately $15,000 and $20,000 in
non-recurring maintenance and repair expenses in 1997 and 1996, respectively.

The Partnership's share of property operating expenses at the Marlboro Square
property was consistent between 1997 and 1996. However, non-recurring
maintenance and repair expenses of approximately $2,000 and $9,000 were incurred
at the property during 1997 and 1996, respectively. Excluding these amounts, the
Partnership's share of property operating expenses at the property increased by
17% in 1997 as compared to 1996. This increase is primarily due to a decrease in
occupancy at the property, and therefore, decreases in tenant reimbursements for
such expenses.

The Partnership's share of property operating expenses at the Carnegie Center
property decreased during 1997 by 34% as compared to 1996. The property incurred
approximately $4,000 and $25,000 of non-recurring maintenance and repair
expenses during 1997 and 1996, respectively. Excluding these amounts, the
Partnership's share of property operating decreased by 19% between years. This
decrease is primarily due to a successful appeal of the property's 1996 assessed
value that resulted in a refund of a portion that year's real estate taxes
during 1997. In addition, an increase in occupancy at the property resulted in
an increase in tenant reimbursements for such expenses.

The Partnership's share of property operating expenses increased at the Warner
Plaza property by 120% in 1997 as compared to 1996 due to non-recurring
maintenance and repair expenses. The property incurred approximately $75,000 and
$21,000 of such expenses during 1997 and 1996, respectively. Excluding these
amounts, the Partnership's share of property operating expenses at the property
was consistent between periods.

The Partnership's share of property operating expenses at the 1300 North Dutton
Avenue property increased by 33% in 1997 as compared to 1996. The property
incurred approximately $20,000 of non-recurring maintenance and repair expenses
during 1997. Excluding this amount, the Partnership's share of property
operating expenses was consistent between periods.

General and administrative expenses for the year ended December 31, 1997
increased by $24,031, or 7%, as compared to 1996. The increase in 1997 as
compared to 1996 is primarily due to legal fees incurred by the Partnership in
connection with the class action complaint (See Item 3 Part l of this Report).
Excluding such legal fees, general and administrative expenses were consistent
between years.


                                       15
<PAGE>   16


ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS (CONTINUED)

RESULTS OF OPERATIONS (CONTINUED)

Amortization of deferred expenses for the year ended December 31, 1997 decreased
by $75,223, or 36%, as compared to 1996. This decrease is primarily due to the
write-down in carrying values of two of the Partnership's properties during
1996. The net book value of the properties plus any unamortized deferred
expenses relating to the properties at the time the properties were written down
were combined to arrive at each property's carrying value (estimated market
value) after its write-down. Accordingly, some deferred expense amounts that
were amortized during 1996 are now included in the property's carrying value and
were depreciated during 1997. This decrease was partially offset by the
amortization of leasing costs incurred at the Crossroads Square property in 1996
and 1997, and at the Carnegie Center property in 1997. In addition, included in
amortization expense during the period in 1997 is a write-off of approximately
$9,000 of unamortized leasing costs relating to the tenant's lease at Marlboro
Square that was terminated in February 1997 (as described above).

Depreciation expense for the year ended December 31, 1997 decreased by $104,429,
or 14%, as compared to 1996. This decrease is primarily due to the
reclassification of the 1300 North Dutton Avenue property as "Property Held for
Sale" during the fourth quarter of 1996. Accordingly, no depreciation was
recorded on this property during 1997. In addition, depreciation expense
declined further between periods due the write-down of two of the Partnership's
properties during 1996.

During 1997, the General Partner determined that the value of the Marlboro
Square property had been impaired. As a result, the Partnership reduced the
carrying amount of the property by $668,520 and this amount was charged directly
to operations. During 1996, the General Partner determined that the values of
the Carnegie Center and Marlboro Square properties had been impaired. As a
result, the Partnership reduced the carrying amount of the Carnegie Center and
Marlboro Square properties by $1,247,093 and $660,000, respectively, and these
amounts were charged directly to operations.

The General Partner believes that inflation has had no significant impact on the
Partnership's operations during the last three fiscal years, and the General
Partner anticipates that inflation will not have a significant impact during
1999.

CASH FLOW

The following table provides the calculations of Cash from Operations and
Distributable Cash from Operations, which are calculated in accordance with
Section 17 of the Partnership Agreement:

<TABLE>
<CAPTION>
                                                                           Years Ended December 31,
                                                       1998           1997           1996           1995           1994
                                                    ----------     ----------     ----------     ----------     ----------
<S>                                                 <C>            <C>            <C>            <C>            <C>       
Net cash provided by
    operating activities (a)                        $1,705,891     $2,066,766     $2,239,462     $2,431,249     $3,118,434
Net change in operating assets
    and liabilities (a)                               (219,531)        45,830       (201,460)        77,507          7,210
                                                    ----------     ----------     ----------     ----------     ----------
Cash provided by operations (a)                      1,486,360      2,112,596      2,038,002      2,508,756      3,125,644
Increase in working capital reserves                        --        (39,893)            --       (194,438)      (811,326)
Add:Accrual basis Partnership
    management fee                                      53,641         75,176         76,619         83,939         83,939
                                                    ----------     ----------     ----------     ----------     ----------
Cash from operations (b)                             1,540,001      2,147,879      2,114,621      2,398,257      2,398,257
Decrease in working capital reserves                   500,747             --         74,507             --             --
Less: Accrual basis Partnership
      management fee                                   (53,641)       (75,176)       (76,619)       (83,939)       (83,939)
                                                    ----------     ----------     ----------     ----------     ----------
Distributable cash from operations (b)              $1,987,107     $2,072,703     $2,112,509     $2,314,318     $2,314,318
                                                    ==========     ==========     ==========     ==========     ==========

Allocation to General Partner                       $   14,864     $   20,727     $   21,125     $   23,143     $   23,143
Allocation to John Hancock
    Limited Partner                                         --             --             --             --             --
Allocation to Investors                              1,972,243      2,051,976      2,091,384      2,291,175      2,291,175
                                                    ----------     ----------     ----------     ----------     ----------
Distributable cash from operations (b)              $1,987,107     $2,072,703     $2,112,509     $2,314,318     $2,314,318
                                                    ==========     ==========     ==========     ==========     ==========
</TABLE>

(a)    Net cash provided by operating activities, net change in operating assets
       and liabilities, and cash provided by operations are as calculated in the
       Statements of Cash Flows included in Item 8 of this Report.

(b)    As defined in the Partnership Agreement. Distributable Cash from
       Operations should not be considered as an alternative to net income (i.e.
       not an indicator of performance) or to reflect cash flows or availability
       of discretionary funds.


                                       16
<PAGE>   17



ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS (CONTINUED)

CASH FLOW (CONTINUED)

On February 12, 1999, the Partnership made a cash distribution in the aggregate
amount of $4,587,569. Of this amount, $494,613 was generated from Distributable
Cash from Operation for the year ended December 31, 1998, less amounts
previously distributed, and $4,092,956 was generated from Cash from Sales during
the first quarter of 1999. These amounts were distributed in accordance with the
Partnership Agreement and were allocated as follows:

                                            From 1998            From 1999
                                           Dist. Cash           Dist. Cash
                                         From Operations        From Sales
                                         ---------------        ----------

    Investors                                $493,061           $3,528,410
    John Hancock Limited Partner                   --              564,545
    General Partner                             1,552                   --
                                             --------           ----------
                                             $494,613           $4,092,955
                                             ========           ==========

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The response to this Item appears beginning on page F-1 of this Report.

ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
         FINANCIAL DISCLOSURE

No events requiring disclosure under this Item have occurred.

                                    PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP

(a-b)  IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS

By virtue of its organization as a limited partnership, the Partnership has no
directors or executive officers. As indicated in Item 1 of this Report, the
General Partner of the Partnership is John Hancock Realty Equities, Inc., a
Delaware corporation. Pursuant to the terms of the Partnership Agreement, the
General Partner is solely responsible for the management of the Partnership's
business. The names and ages of the directors and executive officers of the
General Partner at December 31, 1998 were as follows:

             Name                            Title                          Age
             ----                            -----                          ---

    William M. Fitzgerald         President and Director                     55
    Malcolm G. Pittman, III       Director                                   47
    Susan M. Shephard             Director                                   46
    Richard E. Frank              Treasurer (Chief Accounting Officer)       37

The term of office and other positions held by the persons listed above appear
in paragraph (e) below.


                                       17
<PAGE>   18



ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP (CONTINUED)

(c)  IDENTIFICATION OF CERTAIN SIGNIFICANT PERSONS

The General Partner is responsible for the identification, analysis, purchase,
operation, and disposal of specific Partnership real estate investments. The
General Partner has established a Real Estate Investment Committee utilizing
senior real estate personnel of John Hancock and its Affiliates (defined in the
Partnership Agreement) to review each proposed investment. The members of the
Real Estate Investment Committee are designated each year at the annual meeting
of the Board of Directors of John Hancock Realty Equities, Inc. The current
members of the committee are as follows:

           Name                          Title                             Age
           ----                          -----                             ---

     Edward P. Dowd            Senior Vice President of                     56
                               John Hancock's Real Estate
                               Investment Group

     Kevin McGuire             Vice President of John Hancock's             52
                               Real Estate Investment Group,
                               President of John Hancock Realty
                               Services Corp. and subsidiaries

     Stephen Kindl             Senior Investment Officer of                 41
                               John Hancock's Real Estate
                               Investment Group, Assistant Vice
                               President of John Hancock Realty
                               Equities, Inc.

(d)  FAMILY RELATIONSHIPS

There exist no family relationships among any of the foregoing directors or
officers of the General Partner.

(e)  BUSINESS EXPERIENCE

William M. Fitzgerald (age 55) joined John Hancock in 1968. He has been
President and a Director of the General Partner, and a Senior Investment Officer
of John Hancock, since June 1993 and a Managing Director of Hancock Realty
Investors Incorporated since November 1991. His term as a Director of the
General Partner expires in May 1999. From 1987 to 1991, Mr. Fitzgerald was a
Senior Vice President of John Hancock Properties, Inc. Prior to that time, he
held a number of positions including Senior Real Estate Management Officer and
Real Estate Management Officer of John Hancock. He holds an M.B.A. from Boston
University and an A.B. from Boston College.

Malcolm G. Pittman III (age 47) joined John Hancock in 1986 as an Assistant
Counsel. He has been a Director of the General Partner since November 1991. His
term as a Director of the General Partner expires in May 1999. Mr. Pittman has
been a Counsel of John Hancock's Real Estate Law Division since 1993. From 1989
to 1993, he was an Associate Counsel of John Hancock. He holds a J.D. from Yale
Law School and a B.A. from Oberlin College.

Susan M. Shephard (age 46) joined John Hancock in 1985 as an Attorney. She has
been a Director of the General Partner since November 1991. Her term as a
Director of the General Partner expires in May 1999. Ms. Shephard has been a
Mortgage Investment Officer of John Hancock since 1991. From 1988 to 1991, she
was an Associate Counsel of John Hancock and from 1987 to 1988, she was an
Assistant Counsel of John Hancock. She holds a J.D. from Georgetown University
Law Center and a B.A. from the University of Rhode Island.

Richard E. Frank (age 37) joined John Hancock in 1983. He served as Treasurer of
the General Partner from June 1993 until March 1999. Mr. Frank had been an
Associate Investment Officer of John Hancock since January 1995. From 1993 to
1995, he was a Senior Financial Administrator of John Hancock; from 1991 to
1993, he was an Associate of Hancock Realty Investors, Incorporated; from 1990
to 1991 he held the position of Assistant Treasurer of John Hancock Realty
Services Corp. He holds a B.S. from Stonehill College.


                                       18
<PAGE>   19



ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP (CONTINUED)

(e)  BUSINESS EXPERIENCE (CONTINUED)

Edward P. Dowd (age 56) joined John Hancock in 1970. He has been a Director of
Hancock Realty Investors, Incorporated since 1991, and a Director of John
Hancock Realty Services Corp. and subsidiaries and John Hancock Property
Investors Corp. since 1987. Mr. Dowd has been a Senior Vice President of John
Hancock since 1991. From 1989 to 1990, he was a Vice President of John Hancock
and from 1986 to 1989, he was a Second Vice President of John Hancock. Prior to
that time, he held a number of positions including Senior Real Estate Investment
Officer and Real Estate Investment Officer of John Hancock. From July 1982 to
May 1986, Mr. Dowd was President of the General Partner. He holds an A.B. from
Boston College.

Kevin McGuire (age 52) joined John Hancock in 1968. He has been a Vice President
of John Hancock since June 1993 and President of John Hancock Realty Services
Corp. and subsidiaries since July 1993. He has been a Managing Director and a
Director of Hancock Realty Investors Incorporated since 1991, and a Director of
John Hancock Property Investors Corp. since 1987. Mr. McGuire served as an
interim basis President of the General Partner from May 1991 to November 1991
and was President of John Hancock Properties, Inc. from 1987 to 1991. Prior to
that time, he held a number of positions including Second Vice President, Senior
Real Estate Investment Officer and Real Estate Investment Officer of John
Hancock. He holds an M.B.A. from Babson College and an A.B. from Boston College.

Stephen Kindl (age 41) joined John Hancock in 1995 as a Senior Real Estate
Investment Officer. Prior to joining John Hancock, he held a number of positions
with Aetna Real Estate Investment, Inc., including Managing Director and
Director. He holds an M.B.A. from the University of Hartford and a B.S. from the
University of Connecticut.

Virginia H. Lomasney (age 37) joined John Hancock in 1983. She was appointed
Treasurer of the General Partner effective March 25, 1999. Ms. Lomasney has been
an Associate Investment Officer of John Hancock since 1993. She holds an M.B.A.
from Bentley College and a B.S. from Boston University.

(f)  INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS

None

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Under Section 16(a) of the Securities Exchange Act of 1934, as amended, the
General Partner's directors and executive officers, as well as any person
holding more than ten percent of the Units, are required to report their initial
ownership of Units and any subsequent change in such ownership to the Securities
and Exchange Commission and the Partnership (such requirements hereinafter
referred to as "Section 16(a) filing requirements"). Specific time deadlines for
Section 16(a) filing requirements have been established.

To the Partnership's knowledge, no officer or director of the General Partner
has or had an ownership interest in the Partnership at any time during the 1998
fiscal year or as of the date hereof. In addition, to the Partnership's
knowledge, the Commonwealth of Massachusetts Pension Reserve Investment Trust
Fund, the only greater than ten percent holder of the Units, was not required to
file any reports relating to Section 16(a) filing requirements during the 1998
fiscal year.


                                       19
<PAGE>   20



ITEM 11 - EXECUTIVE COMPENSATION

None of the officers or directors of the General Partner or any of the Real
Estate Investment Committee members referred to in Item 10(c) receive any
current or proposed direct remuneration from the Partnership in their capacities
as officers, directors or Real Estate Investment Committee members, pursuant to
any standard arrangements or otherwise, nor is any such remuneration currently
proposed. In addition, the Partnership has not given and does not propose to
give any options, warrants or rights, including stock appreciation rights, to
any such persons in such capacities. No long-term incentive plan exists with any
such persons in such capacities and no remuneration plan or arrangement exists
with any such persons resulting from resignation, retirement or any other
termination. Therefore, tables relating to these topics have been omitted.

Compensation Committee Interlocks and Insider Participation:

The Partnership did not have a Compensation Committee in 1998 and does not
currently have such a committee. During the 1997 fiscal year, no current or
former officer or employee of the General Partner or its Affiliates participated
in deliberations regarding the General Partner's or its Affiliates' compensation
as it relates to the Partnership.

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

(a)  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

       No person or group, including the General Partner, is known by the
       General Partner to own beneficially more than 5% of the Partnership's
       91,647 outstanding Units as of December 31, 1998, except as follows:

<TABLE>
<CAPTION>
            Title                                                     Amount and                Percent
             of                   Name and Address                     Nature of                  of
            Class                of Beneficial Owner             Beneficial Ownership            Class
            -----                -------------------             --------------------           -------
         <S>                 <C>                                     <C>                         <C>
         Units of            The Commonwealth of                     10,000 Units                10.91%
         Investor            Massachusetts Pension                   owned directly
         Limited             Reserve Investment
         Partnership         Trust Fund
         Interests           125 Summer Street, 10th Floor
                             Boston, MA
</TABLE>

(b)  SECURITY OWNERSHIP OF MANAGEMENT

         By virtue of its organization as a Limited Partnership, the Partnership
         has no officers or directors. Neither the General Partner nor any
         officer or director of the General Partner possesses the right to
         acquire a beneficial ownership of Units.

(c)  CHANGES IN CONTROL

         The Partnership does not know of any arrangements the operations of
         which may at a subsequent date result in a change of control of the
         Partnership.

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

See Note 6 of the Notes to the Financial Statements included in Item 8 of this
Report for a description of certain transactions and related amounts paid by the
Partnership to the General Partner and its Affiliates (as defined in the
Partnership Agreement) during the years ended 1998, 1997 and 1996.

In accordance with the terms of the Partnership Agreement, the General Partner
and/or its Affiliates are entitled to the following types of compensation, fees,
profits/(losses), expense reimbursements and distributions:

The General Partner shall receive a Partnership Management Fee (defined in the
Partnership Agreement) for managing the normal operations of the Partnership in
an amount equal to 3.5% of cash flow from operations. The General Partner was
paid a Partnership Management Fee totaling $53,641, $75,176 and $76,619 during
the years ended December 31, 1998, 1997 and 1996, respectively.


                                       20
<PAGE>   21



ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED)

An Affiliate of the General Partner is entitled to receive a Property Management
Fee (defined in the Partnership Agreement) for providing property management
services to the Partnership's properties. The Partnership is obligated to pay a
fee equal to the amount customarily charged in arms-length transactions by other
entities rendering services in an area where the Partnership's properties are
located, but in no event may such fees exceed 6% of the gross receipts of any
property under management. To date, no Affiliate of the General Partner has
provided property management services to the Partnership's properties;
therefore, the Partnership did not pay any such fees during the years ended
December 31, 1998, 1997 or 1996.

The General Partner and its Affiliates are entitled to receive reimbursement for
expenses relating to the administrative services necessary to the prudent
operation of the Partnership, such as legal, accounting, computer, transfer
agent and other services. The amounts charged to the Partnership for such
administrative services may not exceed the lesser of the General Partner's or
such Affiliates' costs or 90% of those which the Partnership would be required
to pay to independent parties for comparable services in the same or comparable
geographic locations. The Partnership reimbursed the General Partner for
$250,276, $252,103 and $171,710 of such expenses during the years ended December
31, 1998, 1997 and 1996, respectively.

Upon disposition of any property, the General Partner is entitled to a
Subordinated Disposition Fee (defined in the Partnership Agreement) in the
amount of 3% of the sales price of each property sold. However, no such
Subordinated Disposition Fees may be paid to the General Partner unless and
until the Investors and the John Hancock Limited Partner have received a return
of their total Invested Capital (defined in the Partnership Agreement) plus the
Cumulative Return on Investment (defined in the Partnership Agreement) of 12%
per annum for all fiscal years ended prior to the date of payment. Such
Subordinated Disposition Fees may not exceed 50% of the competitive real estate
commission in the area where the property is located or, together with any other
brokerage commission payable to or by any other person, exceed 6% of the
contract sales price of such property. The Partnership did not pay any such fees
to the General Partner during the years ended December 31, 1998, 1997 or 1996.

A share of the Partnership's Distributable Cash from Operations (defined in the
Partnership Agreement) may be distributed to the General Partner and the John
Hancock Limited Partner. Distributable Cash from Operations is distributable 1%
to the General Partner and the remaining 99% among the Investors, the General
Partner and the John Hancock Limited Partner, in accordance with Section 8 of
the Partnership Agreement (described more fully in Note 3 to the Financial
Statements included in Item 8 of this Report). The General Partner's Share of
Distributable Cash from Operations was $14,864, $20,727 and $21,125 for the
years ended December 31, 1998, 1997 and 1996, respectively. In accordance with
the Partnership Agreement, the John Hancock Limited Partner was not entitled to
receive any such distributions during the 1998, 1997 and 1996 fiscal years.

A share of Cash from Sales or Financings (defined in the Partnership Agreement)
may be distributable to the General Partner and the John Hancock Limited
Partner. Cash from Sales or Financings are distributable in accordance with
Section 8 of the Partnership Agreement (described more fully in Note 3 to the
Financial Statements included in Item 8 of this Report). The John Hancock
Limited Partner's share of Cash from Sales or Financings was $0, $293,270 and $0
during the years ended December 31, 1998, 1997 and 1996, respectively. In
accordance with the Partnership Agreement, the General Partner was not entitled
to receive any such distributions during the years ended 1998, 1997 or 1996.

A share of the Partnership's profits or losses for tax purposes (defined in the
Partnership Agreement) is allocable to the General Partner and the John Hancock
Limited Partner. Such allocation generally approximates, insofar as practicable,
their percentage share of Distributable Cash from Operations and of Cash from
Sales or Financings. The General Partner is generally allocated 1% of the
Partnership's losses for tax purposes, while the John Hancock Limited Partner is
allocated tax losses associated with the Partnership's sales commissions funded
by the John Hancock Limited Partner's Capital Contributions. The General
Partner's share of such profits or losses were profits of $7,614, $11,680 and
$11,303 during the years ended December 31, 1998, 1997 and 1996, respectively.
The John Hancock Limited Partner's share of such profits or losses were losses
of $41,901, $65,297 and $48,573 during the years ended December 31, 1998, 1997
and 1996 respectively.


                                       21
<PAGE>   22



ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED)

The following table reflects compensation, fees, profits/(losses), expense
reimbursements or distributions from the Partnership to the General Partner
and/or its Affiliates:

                                                   Years Ended December 31,
                                                 1998        1997        1996
                                               --------    --------    --------
     Partnership management
        fee expense                            $ 53,641    $ 75,176    $ 76,619
     Reimbursement for operating
        expenses                                250,276     252,103     171,710
     General Partner's share of
        Distributable Cash from Operations       14,864      20,727      21,125
     John Hancock Limited Partner's share
        of Cash from Sales or Financings             --     293,270          --
     General Partner's share of profits
        for tax purposes                          7,614      11,680      11,303
     John Hancock Limited Partner's share
        of losses for tax purposes              (41,901)    (65,297)    (48,573)


The Partnership provides indemnification to the General Partner and its
Affiliates for acts or omissions of the General Partner or its Affiliates
performed in good faith on behalf of the Partnership, subject to certain
specified exceptions, as described in the following paragraph.

The Partnership Agreement provides that General Partner and its Affiliates
performing services on behalf of the Partnership shall be entitled to indemnity
from the Partnership for any loss, damage, or claim by reason of any act
performed or omitted to be performed by the General Partner in good faith on
behalf of the Partnership and in a manner within the scope of the authority
granted to the General Partner by the Partnership Agreement and in the best
interest of the Partnership, except that they shall not be entitled to be
indemnified in respect of any loss, damage, or claim incurred by reason of
fraud, negligence, misconduct, or breach of fiduciary duty. Any indemnity shall
be provided out of and to the extent of Partnership assets only. The Partnership
shall not advance any funds to the General Partner or its Affiliates for legal
expenses and other costs incurred as a result of any legal action initiated
against the General Partner or its Affiliates by a Limited Partner in the
Partnership, except under certain specified circumstances.

The General Partner believes that this indemnification applies to costs incurred
in the legal proceedings described in Item 3 of Part I of this Report.
Accordingly, the Partnership indemnified the General Partner and its Affiliates
for costs of $189,111, $54,092 and $41,475 relating to such legal proceedings in
the years ended December 31, 1998, 1997 and 1996, respectively.

                                     PART IV

ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)      (1) and (2)   -   Listed on Index to Financial Statements and Financial
                           Statement Schedules.
         (3)           -   Listing of Exhibits

  EXHIBIT NUMBER                                           PAGE NUMBER OR
       UNDER                                              INCORPORATION BY
  REGULATION S-K                 DESCRIPTION                  REFERENCE
  --------------                 -----------              ----------------
  
       4            Instruments defining the rights
                    of security holders

       4.1          Amended Agreement of Limited         Exhibit A to the
                    Partnership*                         final Prospectus
                                                         dated September 4, 1986
                                                         filed under the
                                                         Partnership's Form S-11
                                                         Registration Statement
                                                         (File 33-6451)


                                       22
<PAGE>   23



ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 
          (CONTINUED)

        4.2         The Seventeenth Amendment and        Exhibit 4.2 to the
                    Restatement of Certificate of        Partnership's Report
                    Limited Partnership filed with       on Form 10-K dated
                    the Massachusetts Secretary of       December 31, 1987
                    State on September 15, 1987*         (File 0-15680)

       10           Material contracts and other 
                    documents

       10.1         Form of Escrow Agreement*            Exhibit 10.1 to
                                                         the Partnership's
                                                         Form S-11
                                                         Registration Statement
                                                         (File 33-6451)

       10.2         Letter from John Hancock             Exhibit 10.1 to
                    Subsidiaries, Inc. containing        the Partnership's
                    undertaking as to the net            Form S-11
                    worth of the General Partner*        Registration Statement
                                                         (File 33-6451)

       10.3         Documents relating to
                    1300 North Dutton Avenue

            (a)     Agreement of Purchase and Sale       Exhibit 10.3(a) to
                    dated September 30, 1986, and        the Post-Effective
                    First Amendment to Agreement of      Amendment No. 1 to
                    Purchase and Sale dated              the Partnership's
                    October 22, 1986, between            Form S-11
                    Park Campus Associates and           Registration Statement
                    John Hancock Realty Income Fund      (File 33-6451)
                    Limited Partnership*

            (b)     Lease dated June 12, 1986, and       Exhibit 10.3(b) to
                    First Amendment to Lease dated       the Post-Effective
                    June 12, 1986, between               Amendment No. 1 to
                    Park Campus Associates and           the Partnership's
                    Mag Media Ltd.*                      Form S-11
                                                         Registration Statement
                                                         (File 33-6451)

            (c)     Amended and Restated Statements      Exhibit 10.3(c) to
                    of Development Policy and            the Post-Effective
                    Declarations of Restrictions of      Amendment No. 1 to
                    Santa Rosa Business Park dated       the Partnership's
                    June 5, 1986*                        Form S-11
                                                         Registration Statement
                                                         (File 33-6451)

            (d)     Declaration of Covenants,            Exhibit 10.3(d) to
                    Conditions and Restrictions of       the Post-Effective
                    Park Campus dated October 2,         Amendment No. 1 to
                    1986*                                the Partnership's
                                                         Form S-11
                                                         Registration Statement
                                                         (File 33-6451)


                                       23
<PAGE>   24



ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 
          (CONTINUED)

            (e)    Purchase and Sale Agreement          Exhibit 1 to the
                   between John Hancock Realty          Partnership's Report
                   Income Fund Limited Partnership      on Form 8-K dated
                   and GHB Holdings, Inc. dated         September 29, 1997
                   June 18, 1997                        (File 0-15680)

       10.4        Documents relating to
                   Marlboro Square Shopping Center

            (a)    Agreement of Purchase and Sale       Exhibit 10.4(a) to
                   dated January 17, 1987, between      the Post-Effective
                   Marlborough GLR Realty Trust         Amendment No. 2 to
                   and John Hancock Realty Equities,    the Partnership's 
                   Inc.*                                Form S-11 Registration 
                                                        Statement (File 33-6451)

       10.5        Documents relating to
                   Crossroads Square Shopping Center

            (a)    Agreement of Purchase and Sale       Exhibit 1 to the
                   dated November 20, 1987, between     Partnership's
                   Crossroads Square Limited            Report on
                   Partnership and John Hancock         Form 8-K dated
                   Realty Income Fund Limited           December 8, 1987
                   Partnership*                         (File 0-15680)

            (b)    Limited Warranty Deed dated          Exhibit 2 to the
                   November 20, 1987, relating          Partnership's
                   to Crossroads Square Shopping        Report on
                   Center*                              Form 8-K dated
                                                        December 8, 1987
                                                        (File 0-15680)

            (c)    Master Lease Agreement               Exhibit 3 to the
                   dated November 18, 1987,             Partnership's
                   relating to Crossroads Square        Report on
                   Shopping Center*                     Form 8-K dated
                                                        December 8, 1987
                                                        (File 0-15680)

       10.6        Documents relating to Carnegie
                   Center Office/Warehouse

            (a)    Agreement of Purchase and Sale       Exhibit 1 to the
                   between Carnegie Properties          Partnership's
                   Partnership, Carnegie Properties     Report on
                   Partnership II and John Hancock      Form 8-K dated
                   Realty Income Fund Limited           January 22, 1988
                   Partnership*                         (File 0-15680)

            (b)    General Warranty Deed dated          Exhibit 2 to the
                   December 22, 1987, between           Partnership's
                   Carnegie Properties Partnership      Report on
                   and John Hancock Realty Income       Form 8-K dated
                   Fund Limited Partnership*            January 22, 1988
                                                        (File 0-15680)


                                       24
<PAGE>   25


ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 
          (CONTINUED)

            (c)     General Warranty Deed dated         Exhibit 3 to the
                    December 22, 1987, between          Partnership's
                    Carnegie Properties Partnership     Report on
                    II and John Hancock Realty Income   Form 8-K dated
                    Fund Limited Partnership*           January 22, 1988
                                                        (File 0-15680)

       10.7         Documents relating to Warner
                    Plaza Shopping Center


            (a)     Agreement of Purchase and Sale      Exhibit 1 to the
                    between First Republic bank         Partnership's
                    Dallas, N.A., and John Hancock      Report on
                    Realty Income Fund Limited          Form 8-K dated
                    Partnership*                        March 17, 1988
                                                        (File 0-15680)

            (b)     Special Warranty Deed dated         Exhibit 2 to the
                    February 24, 1988, between          Partnership's
                    First Republic bank, Dallas,        Report on
                    N.A., and John Hancock              Form 8-K dated
                    Realty Income Fund Limited          March 17, 1988
                    Partnership*                        (File 0-15680)

       10.8         Documents relating to
                    J.C. Penney Credit Operations
                    Center

            (a)     Agreement of Purchase and Sale      Exhibit 1 to the
                    between Noro-Rocky Mountains        Partnership's
                    B.V., a Netherlands Corporation,    Report on
                    and John Hancock Realty Income      Form 8-K dated
                    Fund Limited Partnership*           November 17, 1988
                                                        (File 0-15680)

            (b)     Warranty and Guaranty dated         Exhibit 2 to the
                    August 18, 1988, between            Partnership's
                    Noro-Rocky Mountains                Report on
                    B.V., a Netherlands Corporation,    Form 8-K dated
                    and John Hancock Realty Income      November 17, 1988
                    Fund Limited Partnership*           (File 0-15680)

            (c)     Purchase and Sale Agreement         Exhibit 1 to the
                    between John Hancock Realty         Partnership's Report
                    Income Fund Limited Partnership     on Form 8-K dated
                    and 4580 Paradise Blvd.             December 29, 1995
                    Associates Limited Partnership      (File 0-15680)
                    dated November 20, 1995*

       10.9         Documents relating to
                    Management Agreement

            (a)     Management Agreement dated          Exhibit 10.9(a) to the
                    January 1, 1992, between            Partnership's Report on
                    Hancock Realty Investors            Form 10-K dated
                    Incorporated and John Hancock       December 31, 1992
                    Realty Equities, Inc.*              (File 0-15680)


                                       25
<PAGE>   26



ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K 
          (CONTINUED)

          (b)   Agreement Concerning Subcontracting      Exhibit 10.9(b) to the
                of Management Services Pertaining to     Partnership's Report on
                John Hancock Realty Income Fund          Form 10-K dated
                Limited Partnership dated May 28, 1993   December 31, 1993
                between John Hancock Realty Equities,    (File 0-15680)
                Inc., Hancock Realty Investors,
                Incorporated and John Hancock Mutual
                Life Insurance Company*


     10.10      Documents relating to Executive
                Compensation Plans and Arrangements

          (a)   Amended Agreement of                     Exhibit A to the Final
                Limited Partnership*                     Prospectus dated 
                                                         September 4, 1986,
                                                         filed under the 
                                                         Partnership's Form
                                                         S-11 Registration
                                                         Statement (File
                                                         33-6451)

(b) No reports on Form 8-K were filed during the quarter ended December 31,
    1998.

(c) Exhibits - See Item 14 (a) (3) of this Report.

(d) Financial Statement Schedules - The response to this portion of Item 14 is
    submitted as a separate section of this Report commencing on Page F-15.


  -----------------------------
  +Filed herewith
  *Incorporated by reference



                                       26
<PAGE>   27




                                   SIGNATURES


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 31st day of March,
1999.


                                     JOHN HANCOCK REALTY INCOME FUND
                                     LIMITED PARTNERSHIP


                                     By: John Hancock Realty Equities, Inc.
                                         General Partner


                                     By: 
                                         -------------------------------------
                                         William M. Fitzgerald, President


Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities indicated on the 31st day of March, 1998.


           Signatures                                Title
           ----------                                -----


                                     President (Principal Executive Officer) and
                                     Director of John Hancock Realty Equities,
                                     Inc. (General Partner of Registrant)
     -----------------------------
     William M. Fitzgerald




                                     Treasurer (Chief Accounting Officer) of
                                     John Hancock Realty Equities, Inc.
                                     (General Partner of Registrant)
     -----------------------------
     Virginia H. Lomasney




                                     Director of John Hancock Realty Equities,
                                     Inc. (General Partner of Registrant)
     -----------------------------
     Malcolm G. Pittman, III




                                     Director of John Hancock Realty Equities,
                                     Inc. (General Partner of Registrant)
     -----------------------------
     Susan M. Shephard





                                       27
<PAGE>   28




                           ANNUAL REPORT ON FORM 10-K



                   ITEM 8, ITEM 14(a)(1) AND (2), (c) AND (d)


                          INDEX TO FINANCIAL STATEMENTS


                              FINANCIAL STATEMENTS


                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996



               JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP



                              BOSTON, MASSACHUSETTS







<PAGE>   29



               JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
                      (A MASSACHUSETTS LIMITED PARTNERSHIP)



         INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

                         (ITEMS 8 AND 14(a)(1) AND (2))



1.     Financial Statements:                                            Page
                                                                        ----

         Report of Independent Auditors                                  F-3

         Balance Sheets at December 31, 1998 and 1997                    F-4

         Statements of Operations for the Years Ended
         December 31, 1998, 1997 and 1996                                F-5

         Statements of Partners' Equity for the Years Ended
         December 31, 1998, 1997 and 1996                                F-6

         Statements of Cash Flows for the Years Ended
         December 31, 1998, 1997 and 1996                                F-7

         Notes to Financial Statements                                   F-8




All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and, therefore, have been omitted.



                                      F-2

<PAGE>   30



               

                         Report of Independent Auditors



To the Partners
John Hancock Realty Income Fund Limited Partnership

We have audited the accompanying balance sheets of John Hancock Realty Income
Fund Limited Partnership (the "Partnership") as of December 31, 1998 and 1997,
and the related statements of operations, partners' equity and cash flows for
each of the three years in the period ended December 31, 1998. Our audits also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements and schedule are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial position referred to above present fairly, in all
material respects, the financial position of John Hancock Realty Income Fund
Limited Partnership at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.



                                             ERNST & YOUNG LLP

Boston, Massachusetts
February 3, 1999



                                      F-3


<PAGE>   31

               JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
                      (A MASSACHUSETTS LIMITED PARTNERSHIP)



                                 BALANCE SHEETS

                                     ASSETS

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                                1998             1997
                                                            -----------      -----------

<S>                                                         <C>              <C>        
Cash and cash equivalents                                   $ 2,055,017      $ 2,502,844
Restricted cash                                                  63,879           58,400
Other assets                                                     77,433           90,816

Property held for sale                                       18,829,684               --

Deferred expenses, net of accumulated
   amortization of $444,317 in 1997                                  --          360,166

Investment in property:
   Land                                                              --        6,198,330
   Buildings and improvements                                        --       17,342,479
                                                            -----------      -----------
                                                                     --       23,540,809
   Less: accumulated depreciation                                    --       (4,787,156)
                                                            -----------      -----------
                                                                     --       18,753,653
                                                            -----------      -----------

       Total assets                                         $21,026,013      $21,765,879
                                                            ===========      ===========


                        LIABILITIES AND PARTNERS' EQUITY

Liabilities:

Accounts payable and accrued expenses                       $   309,631      $   263,396
Accounts payable to affiliates                                  316,299          150,907
                                                            -----------      -----------
       Total liabilities                                        625,930          414,303

Partners' equity/(deficit):

   General Partner's deficit                                   (253,231)        (245,328)
   Limited Partners' equity                                  20,653,314       21,596,904
                                                            -----------      -----------

       Total partners' equity                                20,400,083       21,351,576
                                                            -----------      -----------

       Total liabilities and partners' equity               $21,026,013      $21,765,879
                                                            ===========      ===========
</TABLE>






                       See Notes to Financial Statements



                                      F-4

<PAGE>   32

               JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
                      (A MASSACHUSETTS LIMITED PARTNERSHIP)

                            STATEMENTS OF OPERATIONS


                                                 YEARS ENDED DECEMBER 31,
                                              1998         1997         1996
                                           ----------   ----------   ----------

Income:

     Rental income                         $2,544,074   $2,861,166   $2,614,989
     Interest income                          100,005      107,469      171,767
     Loss on sale of property                      --       (5,321)          --
                                           ----------   ----------   ----------

       Total income                         2,644,079    2,963,314    2,786,756

Expenses:

     Depreciation                             372,850      667,869      772,298
     Property operating expenses              395,257      396,136      311,439
     General and administrative expenses      708,821      384,727      360,696
     Amortization of deferred expenses         63,358      134,503      209,726
     Management fee                            53,641       75,176       76,619
     Property write-downs                          --      668,520    1,907,093
                                           ----------   ----------   ----------

       Total expenses                       1,593,927    2,326,931    3,637,871
                                           ----------   ----------   ----------

       Net income/(loss)                   $1,050,152   $  636,383   $ (851,115)
                                           ==========   ==========   ==========


Allocation of net income/(loss):

     General Partner                           10,502   $    6,364   $   (8,511)
     John Hancock Limited Partner             (16,927)    (141,179)    (329,810)
     Investors                              1,056,577      771,198     (512,794)
                                           ----------   ----------   ----------
                                           $1,050,152   $  636,383   $ (851,115)
                                           ----------   ==========   ==========

Net income/(loss) per Unit                 $    11.53   $     8.41   $    (5.60)
                                           ==========   ==========   ==========




                        See Notes to Financial Statements

                                      F-5
<PAGE>   33

               JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
                      (A MASSACHUSETTS LIMITED PARTNERSHIP)




                         STATEMENTS OF PARTNERS' EQUITY
                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996




<TABLE>
<CAPTION>
                                                                  GENERAL          LIMITED
                                                                  PARTNER         PARTNERS           TOTAL
                                                                 ---------       -----------      -----------

<S>                                                              <C>             <C>              <C>        
Partners' equity/(deficit) at January 1, 1996
   (91,647 Units outstanding)                                    $(200,634)      $33,463,320      $33,262,686

Less: Cash distributions                                           (21,699)       (7,463,730)      (7,485,429)

Add: Net income                                                     (8,511)         (842,604)        (851,115)
                                                                 ---------       -----------      -----------

Partners' equity/(deficit) at December 31, 1996
   (91,647 Units outstanding)                                    $(230,844)      $25,156,986      $24,926,142

Less: Cash distributions                                           (20,848)       (4,190,101)      (4,210,949)

Add: Net income                                                      6,364           630,019          636,383
                                                                 ---------       -----------      -----------

Partners' equity/(deficit) at December 31, 1997
   (91,647 Units outstanding)                                     (245,328)       21,596,904       21,351,576

Less: Cash distributions                                           (18,405)       (1,983,240)      (2,001,645)

Add: Net income                                                     10,502         1,039,650        1,050,152
                                                                 ---------       -----------      -----------

Partners' equity/(deficit) at December 31, 1998
   (91,647 Units outstanding)                                    $(253,231)      $20,653,314      $20,400,083
                                                                 =========       ===========      ===========
</TABLE>







                        See Notes to Financial Statements


                                      F-6
<PAGE>   34
               JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
                      (A MASSACHUSETTS LIMITED PARTNERSHIP)

                            STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                 YEARS ENDED DECEMBER 31,
                                                                         1998               1997               1996
                                                                     -----------        -----------        -----------

<S>                                                                  <C>                <C>                <C>         
Operating activities:

Net income/(loss)                                                    $ 1,050,152        $   636,383        $  (851,115)

   Adjustments to reconcile net income/(loss) to
   net cash provided by operating activities:

      Amortization of deferred expenses                                   63,358            134,503            209,726
      Depreciation                                                       372,850            667,869            772,298
      Property write-downs                                                    --            668,520          1,907,093
      Loss on sale of property                                                --              5,321                 --
                                                                     -----------        -----------        -----------
                                                                       1,486,360          2,112,596          2,038,002
   Changes in operating assets and liabilities:
      Decrease/(increase) in restricted cash                              (5,479)               732             (9,527)
      (Increase)/decrease in other assets                                 13,383            (11,817)           104,697
      (Decrease)/increase in accounts payable and
         accrued expenses                                                 46,235            (76,691)            57,689
      Increase in accounts payable
         to affiliates                                                   165,392             41,946             48,601
                                                                     -----------        -----------        -----------

           Net cash provided by operating activities                   1,705,891          2,066,766          2,239,462

Investing activities:

   Proceeds from sale of property                                             --          2,673,278                 --
   Investment in property
   Increase in deferred expenses                                        (152,073)          (224,098)          (953,606)
                                                                     -----------        -----------        -----------

           Net cash (used in)/provided by investing activities          (152,073)         2,449,180           (953,606)

Financing activities:

   Cash distributed to Partners                                       (2,001,645)        (4,210,949)        (7,485,429)
                                                                     -----------        -----------        -----------

           Net cash used in financing activities                      (2,001,645)        (4,210,949)        (7,485,429)
                                                                     -----------        -----------        -----------

           Net increase/(decrease) in cash and
               cash equivalents                                         (447,827)           304,997         (6,199,573)

           Cash and cash equivalents at
               beginning of year                                       2,502,844          2,197,847          8,397,420
                                                                     -----------        -----------        -----------

           Cash and cash equivalents at
               end of year                                           $ 2,055,017        $ 2,502,844        $ 2,197,847
                                                                     ===========        ===========        ===========
</TABLE>



                       See Notes to Financial Statements


                                      F-7
<PAGE>   35
               JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
                      (A MASSACHUSETTS LIMITED PARTNERSHIP)

                          NOTES TO FINANCIAL STATEMENTS

1.   ORGANIZATION OF PARTNERSHIP

         John Hancock Realty Income Fund Limited Partnership (the "Partnership")
         was formed under the Massachusetts Uniform Limited Partnership Act on
         June 12, 1986. As of December 31, 1998, the Partnership consisted of
         John Hancock Realty Equities, Inc. (the "General Partner"), a
         wholly-owned, indirect subsidiary of John Hancock Mutual Life Insurance
         Company; John Hancock Realty Funding, Inc. (the "John Hancock Limited
         Partner"); and 3,712 Investor Limited Partners (the "Investors"),
         owning 91,647 Units of Investor Limited Partnership Interests (the
         "Units"). The John Hancock Limited Partner and the Investors are
         collectively referred to as the Limited Partners. The initial capital
         of the Partnership was $2,000, representing capital contributions of
         $1,000 from the General Partner and $1,000 from the John Hancock
         Limited Partner. The Amended Agreement of Limited Partnership of the
         Partnership (the "Partnership Agreement") authorized the issuance of up
         to 100,000 Units of Limited Partnership Interests at $500 per unit.
         During the offering period, which terminated on September 9, 1987,
         91,647 Units were sold and the John Hancock Limited Partner made
         additional capital contributions of $7,330,760. There have been no
         changes in the number of Units outstanding subsequent to the
         termination of the offering period.

         The Partnership is engaged in the business of acquiring, improving,
         holding for investment and disposing of existing, income-producing,
         commercial and industrial properties on an all-cash basis, free and
         clear of mortgage indebtedness. Although the Partnership's properties
         were acquired and are held free and clear of mortgage indebtedness, the
         Partnership may incur mortgage indebtedness on its properties under
         certain circumstances, as specified in the Partnership Agreement.

         The latest date on which the Partnership is due to terminate is
         December 31, 2016, unless it is sooner terminated in accordance with
         the terms of the Partnership Agreement. It is expected that in the
         ordinary course of the Partnership's business, the properties of the
         Partnership will be disposed of, and the Partnership terminated, before
         December 31, 2016.

         As initially stated in its Prospectus, it was expected that the
         Partnership would be dissolved upon the sale of its last remaining
         property, which at that time was expected to be within seven to ten
         years following the date such property was acquired by the Partnership.
         As of December 31, 1998, the Partnership has four properties remaining
         in its portfolio, all of which are listed for sale. One of these
         properties, the Carnegie Center, was sold on January 7, 1999. Upon the
         sale of the last remaining property, the operations of the Partnership
         will terminate, and the Partnership will be dissolved, in accordance
         with the terms of the Partnership Agreement.

2.   SIGNIFICANT ACCOUNTING POLICIES

         The Partnership maintains its accounting records and recognizes rental
         revenue on the accrual basis.

         The preparation of financial statements in conformity with generally
         accepted accounting principles requires management to make estimates
         and assumptions that affect the reported amounts of assets and
         liabilities and disclosure of contingent assets and liabilities at the
         date of the financial statements and the reported amounts of revenue
         and expenses during the reporting period. Actual results may differ
         from those estimates.

         Cash equivalents are highly liquid investments with original maturities
         of three months or less when purchased. These investments are recorded
         at cost plus accrued interest, which approximates market value.
         Restricted cash represents funds restricted for tenant security
         deposits and other escrows.

         Property held for sale is recorded at the lower of its carrying amount,
         at the time the property is listed for sale, or its fair value, less
         cost to sell. Carrying amount includes the property's cost, as
         described below, less accumulated depreciation thereon and less any
         property write-downs for impairment in value and plus any related
         unamortized deferred expenses.

         Investments in property are recorded at cost less any property
         write-downs for impairment in values. Cost includes the initial
         purchase price of the property plus acquisition costs and the cost of
         significant improvements.


                                      F-8
<PAGE>   36
               JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
                      (A MASSACHUSETTS LIMITED PARTNERSHIP)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2.   SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         The Partnership measures impairment in value in accordance with
         Financial Accounting Standards Board Statement No. 121, "Accounting for
         the Impairment of Long-Lived Assets to Be Disposed Of" ("Statement
         121"). Statement 121 requires impairment losses to be recorded on
         long-lived assets used in operations where indicators of impairment are
         present and the undiscounted cash flows estimated to be generated by
         those assets are less than the assets' carrying amounts.

         Depreciation has been provided on a straight-line basis over the
         estimated useful lives of the various assets: thirty years for the
         buildings and five years for related improvements. Maintenance and
         repairs are charged to operations as incurred.

         Deferred expenses relating to tenant improvements and lease commissions
         are amortized on a straight-line basis over the terms of the leases to
         which they relate. During 1993, the Partnership reduced the period over
         which its remaining deferred acquisition fees are amortized from thirty
         years, the estimated useful life of the buildings owned by the
         Partnership, to four and one-half years, the then estimated remaining
         life of the Partnership.

         The net income/(loss) per Unit for each year is computed by dividing
         the Investors' share of net income/(loss) by the number of Units
         outstanding during each year.

         No provision for income taxes has been made in the financial statements
         as such taxes are the responsibility of the individual partners and not
         of the Partnership.

3.   THE PARTNERSHIP AGREEMENT

         Distributable Cash from Operations (defined in the Partnership
         Agreement) is distributed 99% to the Limited Partners and 1% to the
         General Partner. The Limited Partners' share of Distributable Cash from
         Operations is distributed as follows: first, to the Investors until
         they receive a 7% non-cumulative, non-compounded annual cash return on
         their Invested Capital (defined in the Partnership Agreement); second,
         to the John Hancock Limited Partner until it receives a 7%
         non-cumulative, non-compounded annual cash return on its Invested
         Capital; and third, to the Investors and the John Hancock Limited
         Partner in proportion to their respective Capital Contributions
         (defined in the Partnership Agreement). However, any Distributable Cash
         from Operations which is available as a result of the reduction of
         working capital reserves funded by Capital Contributions of the
         Investors will be distributed 100% to the Investors.

         Cash from Sales or Financings (defined in the Partnership Agreement) is
         first used to pay all debts and liabilities of the Partnership then due
         and is then used to fund any reserves for contingent liabilities. Cash
         from Sales or Financings is then distributed as follows: first, to the
         Limited Partners until they receive an amount equal to their Invested
         Capital with the distribution being made between the Investors and the
         John Hancock Limited Partner in proportion to their respective Capital
         Contributions; second, to the Investors until they have received, with
         respect to all previous distributions during the year, their Cumulative
         Return on Investment (defined in the Partnership Agreement); third, to
         the John Hancock Limited Partner until it has received, with respect to
         all previous distributions during the year, its Cumulative Return on
         Investment; fourth, to the General Partner to pay any Subordinated
         Disposition Fees (defined in the Partnership Agreement); and fifth, 99%
         to the Limited Partners and 1% to the General Partner, with the
         distribution being made between the Investors and the John Hancock
         Limited Partner in proportion to their respective Capital
         Contributions.

         Cash from the sale of the last of the Partnership's properties is to be
         distributed in the same manner as Cash from Sales or Financings, except
         that before any other distribution is made to the Partners, each
         Partner shall first receive from such cash, an amount equal to the then
         positive balance, if any, in such Partner's Capital Account after
         crediting or charging to such account the profits or losses for tax
         purposes from such sale. To the extent, if any, that a Partner is
         entitled to receive a distribution of cash based upon a positive
         balance in its capital account prior to such distribution, such
         distribution will be credited against the amount of such cash the
         Partner would have been entitled to receive based upon the manner of
         distribution of Cash from Sales or Financings, as specified in the
         previous paragraph.


                                      F-9
<PAGE>   37
               JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
                      (A MASSACHUSETTS LIMITED PARTNERSHIP)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3.   THE PARTNERSHIP AGREEMENT (CONTINUED)

         Profits from the normal operations of the Partnership for each fiscal
         year are allocated to the Limited Partners and General Partner in the
         same amounts as Distributable Cash from Operations for that year. If
         such profits are less than Distributable Cash from Operations for any
         year, they are allocated in proportion to the amounts of Distributable
         Cash from Operations for that year. If such profits are greater than
         Distributable Cash from Operations for any year, they are allocated 99%
         to the Limited Partners and 1% to the General Partner, with the
         allocation made between the John Hancock Limited Partner and the
         Investors in proportion to their respective Capital Contributions.
         Losses from the normal operations of the Partnership are allocated 99%
         to the Limited Partners and 1% to the General Partner, with the
         allocation made between the John Hancock Limited Partner and the
         Investors in proportion to their respective Capital Contributions.
         Depreciation deductions are allocated 1% to the General Partner and 99%
         to the Investors, and not to the John Hancock Limited Partner.

         Profits and Losses from Sales or Financings are generally allocated 99%
         to the Limited Partners and 1% to the General Partners. In connection
         with the sale of the last of the Partnership's properties, and
         therefore the dissolution of the Partnership, profits will be allocated
         to any Partners having a deficit balance in their Capital Account in an
         amount equal to the deficit balance. Any remaining profits will be
         allocated in the same order as cash from the sale would be distributed.

         Neither the General Partner nor any Affiliate (as defined in the
         Partnership Agreement) of the General Partner shall be liable,
         responsible or accountable in damages to any of the Partners or the
         Partnership for any act or omission of the General Partner in good
         faith on behalf of the Partnership within the scope of the authority
         granted to the General Partner by the Partnership Agreement and in the
         best interest of the Partnership, except for acts or omissions
         constituting fraud, negligence, misconduct or breach of fiduciary duty.
         The General Partner and its Affiliates performing services on behalf of
         the Partnership shall be entitled to indemnity from the Partnership for
         any loss, damage, or claim by reason of any act performed or omitted to
         be performed by the General Partner in good faith on behalf of the
         Partnership and in a manner within the scope of the authority granted
         to the General Partner by the Partnership Agreement and in the best
         interest of the Partnership, except that they shall not be entitled to
         be indemnified in respect of any loss, damage, or claim incurred by
         reason of fraud, negligence, misconduct, or breach of fiduciary duty.
         Any indemnity shall be provided out of and to the extent of Partnership
         assets only. The Partnership shall not advance any funds to the General
         Partner or its Affiliates for legal expenses and other costs incurred
         as a result of any legal action initiated against the General Partner
         or its Affiliates by a Limited Partner in the Partnership, except under
         certain specified circumstances.

4.   INVESTMENT IN PROPERTY

         Investment in property at cost and reduced by write-downs consists of
         managed, fully-operating, commercial real estate as follows:

                                                                  December 31,
                                                                      1997
                                                                  ------------

           Marlboro Square Shopping Center                        $ 1,000,000
           Crossroads Square Shopping Center                       12,266,920
           Carnegie Center Office/Warehouse                         3,800,000
           Warner Plaza Shopping Center                             6,473,889
                                                                  -----------
               Total                                              $23,540,809
                                                                  ===========

         The real estate market is cyclical in nature and is materially affected
         by general economic trends and economic conditions in the market where
         a property is located. As a result, determination of real estate values
         involves subjective judgments. These judgments are based on current
         market conditions and assumptions related to future market conditions.
         These assumptions involve, among other things, the availability of
         capital, occupancy rates, rental rates, interest rates and inflation
         rates. Amounts ultimately realized from each property may vary
         significantly from the values presented and the differences could be
         material. Actual market values of real estate can be determined only by
         negotiation between the parties in a sales transaction.


                                      F-10
<PAGE>   38
               JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
                      (A MASSACHUSETTS LIMITED PARTNERSHIP)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4.   INVESTMENT IN PROPERTY (CONTINUED)

         On September 29, 1997, the Partnership sold the 1300 North Dutton
         Avenue property to a non-affiliated buyer for a net sales price of
         $2,673,278, after deductions for commissions and selling expenses
         incurred in connection with the sale of the property. This transaction
         resulted in a non-recurring loss of $5,321, representing the difference
         between the net sales price and the property's carrying value of
         $2,678,599.

         During 1997, the General Partner determined that the estimated future
         undiscounted cash flows from the Marlboro Square Shopping Center
         property were less than the property's carrying value, due, in general,
         to weak real estate market conditions for similar properties in the
         areas where these properties are located. Accordingly, the Partnership
         wrote-down the carrying amounts of the Marlboro Square Shopping Center
         by $668,520. This write-down represents the difference between the
         property's carrying value and its estimated fair market value.

         During 1996, the General Partner determined that the estimated future
         undiscounted cash flows from the Carnegie Center and Marlboro Square
         Shopping Center properties were less than their respective carrying
         amounts, due, in general, to weak real estate market conditions for
         similar properties in the areas where these properties are located.
         Accordingly, the Partnership wrote-down the carrying amounts of the
         Carnegie Center and Marlboro Square Shopping Center by $1,247,093 and
         $660,000, respectively. These write-downs represent the difference
         between the property's carrying value and its estimated fair market
         value.

5.   PROPERTY HELD FOR SALE

         During 1998, the Marlboro Square Shopping Center, Crossroads Square
         Shopping Center, Carnegie Center Office/Warehouse and Warner Plaza
         Shopping Center were listed for sale. Accordingly, these properties are
         classified as "Property Held for Sale" on the Balance Sheet at December
         31, 1998 at their carrying values, which are not in excess of their
         estimated fair values, less selling costs.

         The Partnership leases its properties to non-affiliated tenants under
primarily long-term operating leases.

         At December 31, 1998, future minimum rentals on non-cancelable leases
         relating to the above properties were as follows:

                           1999                          $ 2,319,995
                           2000                            2,090,103
                           2001                            1,946,723
                           2002                            1,850,910
                           2003                            1,673,875
                           Thereafter                      5,944,645
                                                         -----------
                              Total                      $15,826,251
                                                         ===========

         Property held for sale consists of commercial real estate as follows:

                                                         December 31,
                                                            1998
                                                         ------------

           Marlboro Square Shopping Center               $   989,981
           Crossroads Square Shopping Center               9,070,837
           Carnegie Center Office/Warehouse                3,763,285
           Warner Plaza Shopping Center                    5,005,581
                                                         -----------
                  Total                                  $18,829,684
                                                         ===========



                                      F-11
<PAGE>   39
               JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
                      (A MASSACHUSETTS LIMITED PARTNERSHIP)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6.   DEFERRED EXPENSES

         Deferred expenses consist of the following:

<TABLE>
<CAPTION>
                                                                                                      Unamortized Balance at
                                                                                                           December 31,
           Description                                                                                1998            1997
           -----------                                                                                ----          --------

              <S>                                                                                     <C>            <C>     
              Tenant improvements were amortized over the terms of the leases 
              to which they relate. During 1998, the General Partner listed all 
              of its remaining properties for sale. Accordingly, the unamortized
              balance is included in carrying cost of "Properties Held for Sale".                       --           $221,699
                                                                                                                   
              Lease Commissions were amortized over the terms of the leases to                                     
              which they relate. During 1998, the General Partner listed all of                                    
              its remaining properties for sale. Accordingly, the unamortized                                      
              balance is included in carrying cost of                                                              
              "Properties Held for Sale".                                                               --            138,467
                                                                                                      ----           --------
                                                                                                      $ --           $360,166
                                                                                                      ====           ========
</TABLE>

7.   TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES

         Fees and expenses incurred or paid by the General Partner or its
         affiliates on behalf of the Partnership and to which the General
         Partner or its affiliates are entitled to reimbursement from the
         Partnership were as follows:

<TABLE>
<CAPTION>
                                                                                           Years Ended December 31,
                                                                                1998                1997               1996
                                                                              --------            --------            --------
           <S>                                                                <C>                 <C>                 <C>     
           Reimbursement for operating expenses                               $250,276            $252,103            $171,710
           Partnership management fee expense                                   53,641              75,176              76,619
                                                                              --------            --------            --------

                  Total                                                       $303,917            $327,279            $248,329
                                                                              ========            ========            ========
</TABLE>

         These expenses are included in expenses on the Statements of
         Operations.

         The Partnership provides indemnification to the General Partner and its
         Affiliates for any acts or omissions of the General Partner good faith
         on behalf of the Partnership, except for acts or omissions constituting
         fraud, negligence, misconduct or breach of fiduciary duty. The General
         Partner believes that this indemnification applies to the legal
         proceedings described in Note 8. Accordingly, included in the
         Statements of Operations for the years ended December 31, 1998, 1997,
         and 1996 were $189,111, $54,092, and $41,475, respectively,
         representing the Partnership's share of costs incurred by the General
         Partner and its Affiliates relating to such legal proceedings. As of
         December 31, 1998, the Partnership has incurred a total of $284,678 as
         its share of the costs incurred by the General Partner and its
         Affiliates resulting from these matters.

         Accounts payable to affiliates represents amounts due to the General
         Partner or its affiliates for various services provided to the
         Partnership, including amounts to indemnify the General Partner or its
         affiliates for claims incurred by them in connection with their actions
         as General Partner of the Partnership. All amounts accrued by the
         Partnership to indemnify the General Partner or its affiliates for
         legal fees incurred by them shall not be paid unless or until all
         conditions set forth in the Partnership Agreement for such payment have
         been fulfilled.

         The General Partner serves in a similar capacity for two other
         affiliated real estate limited partnerships.


                                      F-12
<PAGE>   40

               JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
                      (A MASSACHUSETTS LIMITED PARTNERSHIP)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8.   FEDERAL INCOME TAXES

         A reconciliation of the net (loss)/income reported in the Statements of
         Operations to the net income reported for federal income tax purposes
         is as follows:

<TABLE>
<CAPTION>
                                                                          Years Ended December 31,

                                                                   1998             1997             1996
                                                                ----------       ----------       ----------

          <S>                                                   <C>              <C>              <C>        
          Net (loss)/income per Statements of
            Operations                                          $1,050,152       $  636,383       $ (851,115)

          Add/(deduct): Excess of book gain over tax
                          gain on disposition of assets                 --         (131,409)              --
                        Excess of tax depreciation
                          over book depreciation                  (385,605)        (162,002)         (87,266)
                        Excess of book amortization
                          over tax amortization                      6,222           44,071           96,919
                        Other income/(loss)                          7,774            2,573               --
                        Impairment write-down                           --          668,520        1,907,093
                        Other expenses                              82,853          109,854           64,715
                                                                ----------       ----------       ----------

          Net income for federal income tax purposes            $  761,396       $1,167,990       $1,130,346
                                                                ==========       ==========       ==========
</TABLE>


9.   CONTINGENCIES

         In February 1996, a putative class action complaint was filed in the
         Superior Court in Essex County, New Jersey by a single investor in a
         limited partnership affiliated with the Partnership. The complaint
         named as defendants the Partnership, the General Partner, certain other
         Affiliates of the General Partner, and certain unnamed officers,
         directors, employees and agents of the named defendants. The plaintiff
         sought unspecified damages stemming from alleged misrepresentations and
         omissions in the marketing and offering materials associated with the
         Partnership and two limited partnerships affiliated with the
         Partnership. On March 18, 1997, the court certified a class of
         investors who were original purchasers in the Partnership.



                                      F-13
<PAGE>   41
               JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
                      (A MASSACHUSETTS LIMITED PARTNERSHIP)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

9.   CONTINGENCIES (CONTINUED)

         The Partnership and the other defendants have answered the complaint,
         denying the material allegations and raising numerous affirmative
         defenses. Discovery has commenced, and the Partnership and other
         defendants have produced documents relating to the plaintiff's claims.
         No depositions are scheduled. The court has heard the defendants'
         motion to dismiss certain claims on grounds of the expiration of the
         statutes of limitations and has stated it intends to hold a further
         hearing on that matter to determine whether the case can be resolved by
         the disposition of certain claims. The Partnership and the other
         defendants intend to move to decertify the class and for summary
         judgment dismissing the breach of contract claims.

         In September 1997, a complaint for damages was filed in the Superior
         Court of the State of California for the County of Los Angeles by an
         investor in John Hancock Realty Income Fund-II Limited Partnership
         ("RIF-II"), a limited partnership affiliated with the Partnership. The
         complaint named the General Partner as a defendant. The plaintiff
         sought unspecified damages that allegedly arose from the General
         Partner's refusal to provide, without reasonable precautions on
         plaintiff's use of, a list of investors in the Partnership and in
         RIF-II. Plaintiff alleges that the General Partner's refusal
         unconditionally to provide a list was a breach of contract and a breach
         of the General Partner's fiduciary duty.

         In 1998, the plaintiff amended the complaint to name the Partnership
         and RIF-II as defendants. As a result of the defendants' demurrer
         (motion to dismiss), in May 1998 plaintiff's additional claims for
         tortuous interference with prospective economic advantage and
         intentional interference with contract, were dismissed. In addition, as
         a result of a motion for summary judgment, in August 1998, the court
         dismissed all claims involving RIF II, leaving only the breach of
         contract and breach of fiduciary duty claims involving the Partnership.
         On the eve of trial, plaintiffs dismissed without prejudice those
         claims not previously dismissed by the court, and subsequently filed a
         notice of appeal from the dismissal of the claims that the court had
         dismissed on motion.

         The Partnership provides indemnification to the General Partner and its
         Affiliates for acts or omissions of the General Partner in good faith
         on behalf of the Partnership, except for acts or omissions constituting
         fraud, negligence, misconduct or breach of fiduciary duty. The General
         Partner believes that this indemnification applies to the class action
         complaint described above.

         The Partnership has incurred an aggregate of approximately $694,000 in
         legal expenses in connection with these legal proceedings. Of this
         amount, approximately $446,000 relates to the Partnership's own defense
         and approximately $284,000 relates to the indemnification of the
         General Partner and its Affiliates for their defense. These expenses
         are funded from the operations of the Partnership.

         At the present time, the General Partner cannot estimate the aggregate
         amount of legal expenses and indemnification claims to be incurred and
         their impact on the Partnership's Financial Statements, taken as a
         whole. Accordingly, no provision for any liability which could result
         from the eventual outcome of these matters has been made in the
         accompanying financial statements. However, while it is still too early
         to estimate potential damages, they could possibly be material.

         During August 1998, the General Partner became aware that the property
         was environmentally contaminated with certain hazardous materials. The
         General Partner then sought to determine the scope of the contamination
         and to determine the impact on the future operating costs, repair and
         maintenance expenses and market value of the property. The General
         Partner currently estimates that to remediate the contamination will
         cost approximately $450,000. The General Partner has listed the
         property for sale and continues to seek a buyer for the property. The
         presence of these hazardous materials could adversely affect the
         Partnership's ability to dispose of the property and the Partnership
         could be exposed to liability and be required to incur substantial
         remediation costs.


                                      F-14
<PAGE>   42
               JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
                      (A MASSACHUSETTS LIMITED PARTNERSHIP)

                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)

10.  SUBSEQUENT EVENTS

         On February 12, 1999, the Partnership made a cash distribution in the
         aggregate amount of $4,587,569. Of this amount, $494,613 was from
         Distributable Cash from Operations for the quarter ended December 31,
         1998 and $4,092,956 was from Distributable Cash from Sales during the
         first quarter of 1999. These amounts were distributed in accordance
         with the Partnership Agreement and were allocated as follows:

                                                      From 1998        From 1999
                                                     Dist. Cash       Dist. Cash
                                                   From Operations    From Sales
                                                   ---------------    ----------

                Investors                              $493,061       $3,528,410
                John Hancock Limited Partner                 --          564,546
                General Partner                           1,552               --
                                                       --------       ----------
                                                       $494,613       $4,092,956
                                                       ========       ==========


10.  SUBSEQUENT EVENTS (CONTINUED)

         On March 17, 1999, the Partnership sold the Marlboro Square Shopping
         Center and received net sales proceeds of approximately $1,132,000,
         after deductions for commissions and selling expenses. This transaction
         generated a gain of approximately $142,000, representing the difference
         between the net sales price and the property's carrying value of
         $990,000.

         On March 18, 1999, the Partnership sold the Warner Plaza Shopping
         Center and received net sales proceeds of approximately $6,217,000,
         after deductions for commissions and selling expenses. This transaction
         generated a gain of approximately $1,211,000, representing the
         difference between the net sales price and the property's carrying
         value of 5,006,000.




                                      F-15