<PAGE>   1


                                    FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

(Mark One)

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

     FOR THE QUARTERLY PERIOD ENDED             September 30, 1998     
                                    --------------------------------------------

                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

     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 
INCORPORATION OR ORGANIZATION)                               IDENTIFICATION NO.)


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


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


                                       N/A
--------------------------------------------------------------------------------
      (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE
                                  LAST REPORT)


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 [ ]          




<PAGE>   2

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


                                      INDEX





PART I:  FINANCIAL INFORMATION                                              PAGE

         Item 1 - Financial Statements:

                  Balance Sheets at September 30, 1998 and
                  December 31, 1997                                            3

                  Statements of Operations for the Three and Nine
                  Months Ended September 30, 1998 and 1997                     4

                  Statements of Partners' Equity for the
                  Nine Months Ended September 30, 1998 and
                  Year Ended December 31, 1997                                 5

                  Statements of Cash Flows for the Nine
                  Months Ended September 30, 1998 and 1997                     6

                  Notes to Financial Statements                             7-12

         Item 2 - Management's Discussion and Analysis of
                  Financial Condition and Results of Operations            13-18


PART II: OTHER INFORMATION                                                    20





                                       2
<PAGE>   3
               JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
                      (A MASSACHUSETTS LIMITED PARTNERSHIP)


                          PART I: FINANCIAL INFORMATION

                          ITEM 1: FINANCIAL STATEMENTS

                                 BALANCE SHEETS
                                   (UNAUDITED)


                                     ASSETS
<TABLE>
<CAPTION>
                                                                SEPTEMBER 30,   DECEMBER 31,
                                                                    1998            1997
                                                                ------------    -----------
<S>                                                             <C>             <C>        

Cash and cash equivalents                                       $ 2,290,075     $ 2,502,844
Restricted cash                                                      59,400          58,400
Other assets                                                        254,921          90,816
Property held for sale                                           18,780,091

Deferred expenses, net of accumulated
    amortization of $329,823 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                                     $21,384,487     $21,765,879
                                                                ===========     ===========


                        LIABILITIES AND PARTNERS' EQUITY

Liabilities:

Accounts payable and accrued expenses                           $   428,458     $   263,396
Accounts payable to affiliates                                      214,969         150,907
                                                                -----------     -----------
               Total liabilities                                    643,427         414,303

Partners' equity/(deficit):

     General Partners' deficit                                     (250,795)       (245,328)
     Linited Partners' equity                                    20,991,855      21,596,904
                                                                -----------     -----------
          Total partners' equity                                 20,741,060      21,351,576
                                                                -----------     -----------
          Total liabilities and partners' equity                $21,384,487     $21,765,879
                                                                ===========     ===========

</TABLE>



                        See Notes to Financial Statements




                                       3
<PAGE>   4
               JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
                      (A MASSACHUSETTS LIMITED PARTNERSHIP)


                            STATEMENTS OF OPERATIONS
                                   (UNAUDITED)



<TABLE>
<CAPTION>
                                                  THREE MONTHS ENDING              NINE MONTHS ENDING
                                                      SEPTEMBER 30,                   SEPTEMBER 30,
                                                 1998           1997               1998           1997
                                              ----------     ----------         ----------     ----------
<S>                                           <C>            <C>                <C>            <C>       

Income:
     Rental income                            $  635,133     $  755,991         $1,908,452     $2,198,387
     Interest income
                                                  22,715         20,434             72,475         64,236
     Loss on sale of property
                                                      --         (5,321)                --         (5,321)
                                              ----------     ----------         ----------     ----------

                       Total income              657,848        771,104          1,980,927      2,257,302

Expenses:
     Depreciation
                                                  57,484        164,928            372,850        502,940
     Property operating expenses
                                                 110,698         84,784            251,488        283,998
     General & administrative expenses
                                                 132,858         54,524            349,854        261,134
     Amortization of deferred expenses
                                                  18,986         40,207             64,380        100,330
     Management fee
                                                  14,517         18,904             48,285         56,676
                                              ----------     ----------         ----------     ----------

           Total expense                         334,543        363,347          1,086,857      1,205,078
                                               ----------     ----------         ----------     ----------

          Net income/(loss)                   $  323,305     $  407,757         $  894,070     $1,052,224
                                              ==========     ==========         ==========     ==========

Allocation of net income/(loss):

    General Partner
                                                   3,233          4,077              8,941         10,522
    John Hancock Limited Partner
                                                  (2,945)       (13,018)           (16,927)       (37,600)
    Investor                                   1,079,302
                                                                323,017            416,698        902,056
                                              ==========     ==========         ==========     ==========
                                              $  323,305     $  407,757         $  894,070     $1,052,224
                                              ==========     ==========         ==========     ==========

Net Income per Unit                           $     3.52     $     4.55         $     9.84     $    11.78
                                              ==========     ==========         ==========     ==========


</TABLE>




                        See Notes to Financial Statements


                                       4

<PAGE>   5
               JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
                      (A MASSACHUSETTS LIMITED PARTNERSHIP)


                         STATEMENTS OF PARTNERS' EQUITY
                                   (UNAUDITED)


                    NINE MONTHS ENDED SEPTEMBER 30, 1998 AND
                          YEAR ENDED DECEMBER 31, 1997


<TABLE>
<CAPTION>
                                                         GENERAL          LIMITED
                                                         PARTNER          PARTNER          TOTAL
                                                        ---------       -----------      -----------
<S>                                                    <C>             <C>              <C>    
    
Partners' equity/(deficit) at January 1, 1997
     (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                                  (14,408)       (1,490,178)      (1,504,586)

Add: Net Income                                             8,941           885,129          894,070
                                                        ---------       -----------      -----------

Partners' equity/(deficit) at September 30, 1998
     (91,647 Units outstanding)                         $(250,795)      $20,991,855      $20,741,060
                                                        =========       ===========      ===========
</TABLE>









                        See Notes to Financial Statements



                                       5

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


                            STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                     NINE MONTHS ENDED
                                                                        SEPTEMBER 30,
                                                                    1998            1997
                                                                -----------      -----------
<S>                                                             <C>              <C>        

Operating activities:

     Net income/(loss)                                          $   894,070      $ 1,052,224

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

     Depreciation                                                   372,850          502,940
     Amortization of deferred expenses                               64,380          100,330
     Loss/(gain) on sale of property                                     --            5,321
                                                                -----------      -----------

                                                                  1,331,300        1,660,815

Changes in operating assets and liabilities:
     (Increase) in restricted cash                                   (1,000)           4,777
     (Increase) in other assets                                    (164,105)        (186,488)
     Increase/(decrease) in accounts payable and
       accrued expenses                                             165,062           40,393
     Increase in accounts payable to affiliates                      64,062           30,818
                                                                -----------      -----------

          Net cash provided by operating activities               1,395,319        1,550,315

Investing activities:

     Proceeds from sale                                                  --        2,673,278
     Increase in deferred expenses                                 (103,502)        (134,382)
                                                                -----------      -----------

          Net cash used in investing activities                    (103,502)       2,538,896

Financing activities:

     Cash distributed to Partners                                (1,504,586)      (1,563,554)
                                                                -----------      -----------

          Net cash used in financing activities                  (1,504,586)      (1,563,554)
                                                                -----------      -----------

          Net decrease in cash and cash equivalents                (212,769)       2,525,657

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

          Cash and cash equivalents at end of period            $ 2,290,075      $ 4,723,504
                                                                ===========      ===========

</TABLE>


                        See Notes to Financial Statements




                                       6

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


                          NOTES TO FINANCIAL STATEMENTS
                                   (UNAUDITED)

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 September 30, 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 3,760
     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 September 30, 1998,
     and the date hereof, the Partnership has four properties remaining in its
     portfolio, all of which are listed for sale. 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 accompanying unaudited financial statements have been prepared in
     accordance with generally accepted accounting principles for interim
     financial information and with the instructions to Form 10-Q and Rule 10-01
     of Regulation S-X. Accordingly, they do not include all of the information
     and footnotes required by generally accepted accounting principles for
     complete financial statements. In the opinion of management, all
     adjustments (consisting of normal recurring accruals) considered necessary
     for a fair presentation have been included. Operating results for the
     nine-month period ended September 30, 1998 are not necessarily indicative
     of the results that may be expected for the year ending December 31, 1998.
     For further information, refer to the financial statements and footnotes
     thereto included in the Partnership's Annual Report on Form 10-K for the
     year ended December 31, 1997.

     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 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.




                                       7

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


                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                   (UNAUDITED)


2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

     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 any 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 permanent impairment in values. Cost includes the initial purchase
     price of the property plus acquisition and legal fees, other miscellaneous
     acquisition costs, and the cost of significant improvements.

     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.

     The net income per Unit for the periods hereof are computed by dividing the
     Investors' share of net income by the number of Units outstanding at the
     end of such periods.

     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.



                                       8

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


                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                   (UNAUDITED)

3. THE PARTNERSHIP AGREEMENT (CONTINUED)

     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.

     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.





                                       9

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


                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                   (UNAUDITED)


4. INVESTMENT IN PROPERTY

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

<TABLE>
<CAPTION>
                                               September 30, 1998    December 31, 1997
                                               ------------------    -----------------
         <S>                                          <C>               <C>        

         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
                                                      =====             ===========
</TABLE>

     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.

     As of September 30, 1997, 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 September
     30, 1998 at their carrying values, which are not in excess of their
     estimated fair values, less selling costs.

5. DEFERRED EXPENSES

     Deferred expenses consist of the following:

<TABLE>
<CAPTION>
                                                          Unamortized         Unamortized
                                                           Balance at          Balance at
                     Description                      September 30, 1998   December 31, 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>






                                       10

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


                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                   (UNAUDITED)


6. 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>
                                                           Nine Months Ended
                                                              September 30,
                                                           1998         1997
                                                         --------     --------
           <S>                                           <C>          <C>     

           Reimbursement for operating expenses          $ 80,373     $201,615
           Partnership management fee expense              48,285       56,676
                                                         --------     --------
                                                         $128,658     $258,291
                                                         ========     ========
</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 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 in Note 8. Accordingly, included in the Statements of
     Operations for the nine months ended September 30, 1998 and 1997 is $72,398
     and $40,759, respectively, representing the Partnership's share of costs
     incurred by the General Partner and its Affiliates relating to the class
     action complaint. Through September 30, 1998, the Partnership has accrued a
     total of $167,965 as its share of the costs incurred by the General Partner
     and its Affiliates resulting from this matter.

     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.

7. FEDERAL INCOME TAXES

     A reconciliation of the net income reported on the Statements of Operations
     to the net income reported for federal income tax purposes is as follows:

<TABLE>
<CAPTION>
                                                                 Nine Months Ended
                                                                   September 30,
                                                                 1998         1997
                                                               --------    ----------
         <S>                                                   <C>         <C>       

         Net income per Statements of Operations               $894,070    $1,052,224

         Add/(deduct):
                       Excess tax loss over book loss
                          on disposition of assets                   --      (111,709)
                       Eccess of tax depreciation
                         over book depreciation                (288,764)     (144,208)
                       Excess of book amortization
                         over tax amortization                   25,849        12,206
                                                               --------    ----------

         Net income for federal income tax purposes            $631,155    $  808,513
                                                               ========    ==========
</TABLE>




                                       11

<PAGE>   12
               JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
                      (A MASSACHUSETTS LIMITED PARTNERSHIP)


                    NOTES TO FINANCIAL STATEMENTS (CONTINUED)
                                   (UNAUDITED)


8. 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.

     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 $420,000 in
     legal expenses in connection with the class action lawsuit (see Part Il,
     Item 1 of this Report). Of this amount, approximately $252,000 relates to
     the Partnership's own defense and approximately $168,000 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 can not 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.




                                       12

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


ITEM 2: 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. The Partnership's properties are described more fully in Note 4 to the
Financial Statements included in Item 1 of Part I 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.

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, the potential effect of the presence
of hazardous materials 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; 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.





                                       13

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


ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (CONTINUED)


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 September 30, 1998, and the date
hereof, the Partnership has four properties remaining in its portfolio, all of
which are listed for sale (described below). 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 September 30, 1998, the Partnership had $2,290,075 in cash and cash
equivalents and $59,400 in restricted cash.

The Partnership has established a working capital reserve with a current balance
of approximately 3.7% of the Investors' Invested Capital (defined in the
Partnership Agreement). 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 (including
but not limited to litigation expenses), unanticipated leasing costs or
unanticipated capital expenditures. If any or all of these events were to occur,
to the extent that 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 properties.

During the nine months ended September 30, 1998, cash from working capital
reserves was used for the payment of leasing costs in the amount of $103,502
incurred at the Partnership's properties. The General Partner estimates that the
Partnership will incur approximately $56,000 of additional leasing costs at its
properties during the remainder of 1998. The General Partner anticipates that
the current balance in the working capital reserve will be sufficient to pay
such costs.

During the nine months ended September 30, 1998, approximately $51,000 of cash
from operations was used to fund non-recurring maintenance and repair expenses
incurred at the Partnership's properties. The General Partner estimates that the
Partnership will incur additional non-recurring repair and maintenance expenses
of approximately $190,000 at the properties during the remainder of 1998. These
additional expenses will be funded from the operations of the Partnership's
properties and are not expected to have a significant impact on the
Partnership's liquidity.

Cash in the amount of $1,504,586 generated from the Partnership's operations was
distributed to the General Partner and Investors during the nine months ended
September 30, 1998. The Partnership will make a distribution from its operations
during the fourth quarter of 1998 comparable to those made during the first
three quarters of 1997.

The Partnership has incurred approximately $420,000 in legal expenses in
connection with the class action lawsuit (see Part II, Item 1 of this Report).
Of this amount, approximately $252,000 relates to the Partnership's own defense
and approximately $168,000 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 properties.




                                       14

<PAGE>   15
               JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
                      (A MASSACHUSETTS LIMITED PARTNERSHIP)


ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (CONTINUED)


LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

The following table summarizes the leasing activity and occupancy status at the
Partnership's properties during the nine months ended September 30, 1998:


<TABLE>
<CAPTION>
                                       MARLBORO SQ.   CROSSROADS SQ.   CARNEGIE     WARNER PL.
                                       SHOPPING CTR.   SHOPPING CTR.    CENTER     SHOPPING CTR.
                                       ------------    ------------    --------    ------------
<S>                                     <C>              <C>            <C>           <C>   

Square Feet                             42,150           174,196        128,059       92,848

Occupancy at January 1, 1998                67%               95%            73%          98%

New Leases                                  16%                1%             2%           8%

Lease Renewals                               0%                5%             8%          10%

Leases Expired (1)                          39%                0%             6%           8%

Occupancy at September 30, 1998             44%               96%            69%         100%

Leases Scheduled to
   Expire, Balance of 1998                   0%                6%             3%           4%

Leases Scheduled to
   Commence, Balance of 1998                 0%                0%             0%           0%

</TABLE>

     (1)  Includes leases terminated by the General Partner for non-payment of
          rent and leases of tenants vacating property prior to lease expiration

At September 30, 1998, Marlboro Square's occupancy was 44%. During the first
nine months of 1998, a new tenant took occupancy of 6,600 square feet, or 16% of
the property, under a lease that will expire in January 1999, 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 the first three months of 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, is delinquent in rental payments due
since September 1998 and vacated the property during October 1998. The General
Partner will pursue all available legal remedies to obtain collection of all
delinquent and future amounts due under the tenant's lease agreement. The other
tenant, with a lease for approximately 4% of the property that was scheduled to
expire in January 2001, was delinquent in rental payments due since 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.

The General Partner anticipates that absorption of available retail space in the
Marlboro, Massachusetts area will remain sluggish for at least the remainder of
1998 based upon both the lack of demand and the oversupply of available retail
space in the area. The General Partner will continue to offer competitive rental
rates and concessions in an effort to retain existing tenants as well as to
lease the remaining vacant space at the property. 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 does not believe that the property is likely to appreciate in value
during the foreseeable future.





                                       15

<PAGE>   16
               JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
                      (A MASSACHUSETTS LIMITED PARTNERSHIP)


ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (CONTINUED)


LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

The Carnegie Center's occupancy at September 30, 1998 was 69%. During the first
nine months of 1998, the General Partner renewed leases representing
approximately 8% of the property and signed one new lease representing
approximately 2% of the property. However, one lease representing approximately
6% of the property expired. During the remainder of 1998, one lease representing
approximately 3% of the property is scheduled to expire. The Cincinnati
industrial real estate market, where the Carnegie Center is located, has an
oversupply of office/industrial space, which has resulted in a decline in rental
rates and an increase in vacancy rates. Because of these market conditions,
rental rates and concessions will be priced aggressively in an effort to retain
existing tenants as well as secure new tenants at the property.

Since late 1994, when the Carnegie Center's occupancy declined to 35%, the
General Partner has gradually improved the property's occupancy to its current
level of 75%. Given the current status of the property, the projected future
capital requirements necessary for the property to maintain its competitive
position within the market and the current conditions in the Cincinnati real
estate market, the General Partner listed the Carnegie Center for sale during
July 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.

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 current status of the property, the General
Partner listed the Warner Plaza for sale during June 1998.

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. As a result, the General Partner has commenced
efforts to find 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.

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.

Given the current real estate market conditions in the Jacksonville, Florida
area, where the Crossroads Square is located and the property's current and
projected income performance, the General Partner listed the Crossroads Square
for sale during August 1998. 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 is seeking 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. As of the date hereof, no assurances can be given that this
contamination will not have a materially adverse effect on the liquidity of the
Partnership.





                                       16

<PAGE>   17
               JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
                      (A MASSACHUSETTS LIMITED PARTNERSHIP)


ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (CONTINUED)


LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

The General Partner evaluated the carrying value of each of the Partnership's
properties as of December 31, 1997 by comparing such value to the respective
property's future undiscounted cash flows and the then most recent independent
or internal appraisal. Based on such evaluations, the General Partner determined
that the Marlboro Square property's estimated future undiscounted cash flows
were not expected to exceed its carrying value. Therefore, a write-down in value
of $668,520, representing the difference between the property's carrying value
and its then estimated market value (and not its estimated future undiscounted
cash flows) was required as of December 31, 1997. No permanent impairment in
values existed with respect to the Partnerships other properties as of December
31, 1997 and, therefore, no additional write-downs were recorded.

The General Partner will continue to conduct property valuations, using internal
or independent appraisals, in order to determine whether a permanent impairment
in value exists on any of the Partnership's properties.

RESULTS OF OPERATIONS

The Partnership generated net income of $894,070 for the nine months ended
September 30, 1998 as compared to net income of $1,052,224 for the same period
in 1997.

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

<TABLE>
<CAPTION>
                                                          Nine Months Ended
                                                             September 30,
                                                          1998         1997
                                                          ----         ----
           <S>                                            <C>          <C>

           Marlboro Square Shopping Center                 68%          65%
           Crossroads Square Shopping Center               95%          94%
           Carnegie Center Office/Warehouse                74%          67%
           Warner Plaza Shopping Center                    94%          99%

</TABLE>

Rental income for the nine months ended September 30, 1998, decreased by
$289,934, or 13%, as compared to the same period in 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 the Warner Plaza and Marlboro Square.

Interest income for the nine months ended September 30, 1998 increased by
$8,239, or 12%, as compared to the same period in 1997. This increase was
primarily due to an increase in the balance of the Partnership's working capital
reserves. The Partnership's working capital reserves increased because the
Partnership retained a portion of the net sales proceeds from the sale of the
1300 North Dutton Avenue property.

Depreciation expense for the nine months ended September 30, 1998 decreased by
$130,090, or 26%, as compared to the same period in 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 the third quarter of 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.

The Partnership's share of property operating expenses for the nine months ended
September 30, 1998 decreased by $32,510, or 11%, as compared to the same period
in 1997. This decrease is primarily due to the sale of the 1300 North Dutton
Avenue property. Excluding amounts attributable to the 1300 North Dutton Avenue
property, the Partnership's share of property operating expenses increased by 7%
primarily due to non-recurring maintenance and repair expenses incurred at the
Carnegie Center, Marlboro Square and Warner Plaza properties. Property operating
expenses at the Crossroads Square property was consistent between periods.




                                       17

<PAGE>   18
               JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
                      (A MASSACHUSETTS LIMITED PARTNERSHIP)


ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (CONTINUED)


RESULTS OF OPERATIONS (CONTINUED)

General and administrative expenses for the nine months ended September 30, 1998
increased by $88,720, or 34%, as compared to the same period during 1997. This
increase is primarily due to an increase in legal fees incurred by the
Partnership in connection with the class action compliant (see Part II, Item 1
of this Report).

Amortization of deferred expenses for the nine months ended September 30, 1998
decreased by $35,950, or 36%, as compared to the same period in 1997. This
decrease is due to the write-down in carrying value of the Marlboro Square
property at December 31, 1997 as well as 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 the first nine months of
1998 by $8,391, or 15%, as compared to the same period in 1997. This decrease
was due to a decline in Cash from Operations between periods primarily resulting
from the sale of the 1300 North Dutton Avenue property.

The General Partner believes that inflation has had no significant impact on the
Partnership's operations during the nine months ended September 30, 1998, and
the General Partner anticipates that inflation will not have a significant
impact during the remainder of 1998.





                                       18

<PAGE>   19
               JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
                      (A MASSACHUSETTS LIMITED PARTNERSHIP)



ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (CONTINUED)


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>
                                                               NINE MONTHS ENDED
                                                                 SEPTEMBER 30,
                                                              1998          1997
                                                           -----------    ----------
<S>                                                        <C>            <C>       

Net cash provided by operating activities (a)              $1,395,319     $1,550,315
Net charge in operating assets and liabilities (a)            (64,019)       110,500
                                                           ----------     ----------
Cash provided by operations (a)                             1,331,300      1,660,815
Increase in working capital reserves                               --        (97,261)

Add: Accrual basis Partnership Management fee                  48,285         56,676
                                                           ----------     ----------
Cash from operations (b)                                    1,379,585      1,620,230
Decrease in working capital reserves                          161,195
Less: Accrual basis Partnership Management fee                (48,285)       (56,676)
                                                           ----------     ----------
Distributable cash from operations (b)                     $1,492,495     $1,563,554
                                                           ==========     ==========

Allocation to General Partner                              $   13,313     $   15,636
Allocation to John Hancock Limited Partner
Allocation to Investors                                     1,479,182      1,547,918
                                                           ----------     ----------
Distributable cash from operations (b)                     $1,492,495     $1,563,554
                                                           ==========     ==========
</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 1 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.

During the fourth quarter of 1998, the Partnership will to make a cash
distribution to the Investors of $493,061, representing a 5% annualized return,
to all Investors that held units during the third quarter 1998, based on
Distributable Cash from Operations for the quarter then ended.

The source of future cash distributions is dependent upon cash generated by the
Partnership's properties and the use of working capital reserves. The General
Partner currently anticipates that the Partnership's Distributable Cash from
Operations during the fourth quarter of 1998 will be comparable to that
generated during the first three quarters of 1998.




                                       19

<PAGE>   20
               JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
                      (A MASSACHUSETTS LIMITED PARTNERSHIP)


                           PART II: OTHER INFORMATION


ITEM 1.   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 General Partner believes the allegations are totally without merit
          and intends 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.

          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. The defendants filed demurrer motions,
          asking that the complaint be dismissed at law. These motions were
          under consideration during the first quarter of 1998.

          Although the court dismissed the complaint against RIF-II during the
          second quarter of 1998, the plaintiff subsequently amended its
          complaint, again naming RIF-II as a defendant. On August 12, 1998, the
          court granted RIF-II's motion for summary adjudication of the issues
          against RIF-II. The court ruled that the plaintiff could not prevail
          upon its claims since it was not an investor of the RIF-II. RIF-II
          intends to move for a judgment dismissing it from the case. The
          Partnership continues to contest the action.

          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 2.   CHANGES IN SECURITIES

          There were no changes in securities during the third quarter of 1998.

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

          There were no defaults upon senior securities during the third quarter
          of 1998.




                                       20

<PAGE>   21
               JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
                      (A MASSACHUSETTS LIMITED PARTNERSHIP)


                     PART II: OTHER INFORMATION (CONTINUED)



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 third quarter of 1998

ITEM 5.   OTHER INFORMATION

ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

          (a)  Exhibit 27 - Financial Data Schedule

          (b)  There were no Reports on Form 8-K filed during the third quarter
               of 1998.






                                       21

<PAGE>   22
               JOHN HANCOCK REALTY INCOME FUND LIMITED PARTNERSHIP
                      (A MASSACHUSETTS LIMITED PARTNERSHIP)


                                   SIGNATURES


Pursuant to the requirements 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 13th day of November, 1998.



                                   John Hancock Realty Income Fund
                                   Limited Partnership


                                   By: John Hancock Realty Equities, Inc.,
                                       General Partner



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



                                        By: /s/ Richard E. Frank
                                            -----------------------------------
                                            Richard E. Frank, Treasurer
                                            (Chief Accounting Officer)






                                       22