SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K/A

                Annual Report Pursuant to Section 13 or 15(d)

                     Of the Securities Exchange Act of 1934

For the Year Ended December 31, 2001                           Commission File
                                                                   No. 0-16950

Prometheus Income Partners, a California limited partnership
------------------------------------------------------------
   (Exact Name of Registrant as Specified in its Charter)

            California                                         77-0082138
--------------------------------------------             ---------------------
(State or Other Jurisdiction of                               (I.R.S. Employer
 Incorporation or Organization)                             Identification No.)

350 Bridge Parkway
Redwood City, CA                                               94065-1517
--------------------------------------------             ---------------------
(Address of Principal Executive Offices)                      (Zip Code)

              Registrant's Telephone Number, Including Area Code:
                                 (650) 596-5300

          Securities registered pursuant to Section 12(b) of the Act:
                                      None

          Securities registered pursuant to Section 12(g) of the Act:
                      Units of 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
                              -----             -----

No market for the Units of Limited  Partnership  Interest exists and therefore a
market value for such Units cannot be determined.


                       DOCUMENTS INCORPORATED BY REFERENCE

Prospectus,  dated February 12, 1987, and Supplement No. 1, dated  September 18,
1987,   incorporated  into  Registration   Statement  Form  S-11   (Registration
#33-9164),  thereto filed pursuant to Section 424(b) under the Securities Act of
1933, and Solicitation/Recommendation  Statement pursuant to Section 14(d)(4) of
the Securities  Exchange Act of 1934, Schedule 14D-9, dated November 4, 1996 and
Schedules 14D-91A,  Amendments 1, 2 and 3, dated November 15, 1996, December 12,
1996 and December 20, 1996,  respectively are incorporated into Parts I, II, III
and IV.

Exhibit index located on page 23


<PAGE>


                                Table of Contents
                                   Form 10-K/A


Part I                                                                    Page

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

Part II

   Item 5  Market for Registrant's Units and Related Security
             Holder Matters..................................................6
   Item 6  Selected Financial Data...........................................8
   Item 7  Management's Discussion and Analysis of Financial
             Conditions and Results of Operations...........................10
   Item 8  Financial Statements and Supplementary Data......................20
   Item 9  Changes in and Disagreements with Accountants on
             Accounting and Financial Disclosure............................20

Part III

   Item 10 Directors and Executive Officers of the Registrant...............21
   Item 11 Executive Compensation...........................................21
   Item 12 Security Ownership of Certain Beneficial Owners and Management...22
   Item 13 Certain Relationships and Related Transactions...................22

Part IV

   Item 14 Exhibits, Financial Statement Schedules and
             Reports on Form 8-K.........................................23-38




<PAGE>


                                     PART I


ITEM 1. BUSINESS

        Prometheus   Income   Partners,   a  California   limited   partnership,
(hereinafter  referred to as "Partnership" or "Registrant")  was formed on April
15, 1985,  under the California  Revised  Limited  Partnership  Act.  Prometheus
Development Co., Inc., a California  corporation,  is the General Partner of the
Partnership.

        The principal  business of the  Partnership is to invest in,  construct,
hold,  operate,  and ultimately sell two residential  rental properties in Santa
Clara, California,  Alderwood Apartments ("Alderwood") and Timberleaf Apartments
("Timberleaf"),  (collectively,  the  "Properties").  The  principal  investment
objectives  of the  Partnership  are to preserve  and protect the  Partnership's
capital,  to obtain capital  appreciation from the sale of the Properties,  and,
beginning  in 1987,  to  provide  "tax  sheltered"  distributions  of cash  from
operations due to the cost recovery and other non-cash tax deductions  available
to the Partnership. See Item 7, Liquidity and Capital Resources and Construction
Defects discussions concerning deferment and resumption of distributions.  For a
further  description of the Properties and the business of the Partnership;  see
Item 2 below,  and the section  entitled  "Business of the  Partnership"  (pages
24-26)  and  "Properties"  (pages  27-35)  in  the  Prospectus.   For  financial
information, see Item 8, below.

        Beginning  in February  1987  through  December  1987,  the  Partnership
offered and sold 19,000 Units of Limited  Partnership  Interests  ("Units")  for
$19,000,000.  The net proceeds of this  offering,  together with the proceeds of
the permanent financing, were used to satisfy construction loans with respect to
Alderwood and Timberleaf  and to exercise the purchase  option for the Alderwood
land site.

        The  Partnership's  investments  in real  property  are affected by, and
subject to, the general  competitive  conditions of the residential  real estate
rental market in the Santa Clara area. The Partnership's  Properties are located
in  an  area  which  contains  numerous  other  competitive  residential  rental
properties.

        The  Partnership  is  engaged  solely  in the  business  of real  estate
investment.  The business of the  Partnership is not seasonal.  The  Partnership
does not engage in foreign  operations or derive revenues from foreign  sources.
The  Partnership  has no  employees,  officers or  directors.  The  officers and
employees of the General  Partner and its  Affiliates  perform  services for the
Partnership.

        The income of the  Properties  may be  affected  by factors  outside the
Partnership's control. For example,  changes in the supply of rental properties,
population  shifts, the availability of mortgage funds or changes in zoning laws
could affect  apartment rental rates. It is also possible that some form of rent
control may be legislated at the state or local level. Expenses of operating the
Properties,  such as administrative and maintenance costs and real estate taxes,
are subject to change due to inflation,  supply  factors or  legislation.  These
increases in expenses may be offset by increases in rental rates,  although such
increases may be limited due to market  conditions or other factors as discussed
above.  Certain expenses,  such as debt service,  are at fixed rates and are not
affected by inflation.  The General Partner is unable to predict the effect,  if
any, of such events on the future  operations  of the  Partnership.  There is no
assurance  there will be a ready  market for the sale of the  Properties  or, if
sold, such a sale would be made on favorable terms.

                                       3

<PAGE>


ITEM 2. PROPERTIES

        The  Partnership   has  constructed  two  residential   income-producing
properties,  Alderwood and Timberleaf, both in Santa Clara, California. The City
of Santa Clara, with a population of approximately 104,000, is the third largest
city  in  Santa  Clara  County,  commonly  referred  to as  Silicon  Valley,  is
approximately  47 miles south of San Francisco,  encompasses  1,300 square miles
and has a population of  approximately  1.7 million  people,  making it the most
populous of the nine counties in the greater San Francisco Bay Area.

        The Alderwood luxury garden  apartment  complex is located at 900 Pepper
Tree Lane in Santa Clara,  California.  Construction  began in November 1985 and
was completed by December 31, 1986.  The complex  contains 234  apartment  units
housed in 19  two-story  buildings  on a 9.4 acre site.  Covered  and  uncovered
parking  for 468 cars is  provided.  See  Item 7,  Management's  Discussion  and
Analysis of Financial Conditions and Results of Operations,  for a discussion of
current operations.

        The  Timberleaf  luxury  garden  apartment  complex  is  located at 2147
Newhall Street in Santa Clara,  California.  Construction began in November 1985
and was completed by December 31, 1986. The complex contains 124 apartment units
housed in nine  buildings of two or three  stories on a five acre site.  Covered
and  uncovered  parking  for 248  cars is  provided.  See  Item 7,  Management's
Discussion and Analysis of Financial Conditions and Results of Operations, for a
discussion of current operations.

        Alderwood and Timberleaf are encumbered by first mortgage  liens,  which
secure  promissory  notes payable in the amount of $16,488,000  and  $9,060,000,
respectively. The notes payable (collectively, the "Notes") bear interest at the
rate of 6.99% per annum for Alderwood,  and 7.09% per annum for Timberleaf,  and
mature in 2007. The Notes,  if prepaid more than thirty (30) days from maturity,
are subject to a prepayment penalty.

                                       4

<PAGE>


ITEM 3. LEGAL PROCEEDINGS

        See Item 7 for a discussion of construction defects.


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

        No matter was submitted to a vote of security holders during the period
covered by this report.

                                       5


<PAGE>


                                     PART II


ITEM 5.   MARKET  FOR THE  REGISTRANT'S  UNITS  AND  RELATED  SECURITY  HOLDER
          MATTERS

          A)  No public  trading  market exists or is expected to be established
              for  the  Registrant's   Units.  The  Units  were  issued  by  the
              Partnership for $1,000 per Unit. The General Partner established a
              Limited  Liquidity  Plan  which  commenced  in 1989  and  provides
              Limited Partners with the option,  subject to certain  conditions,
              to have their Units  repurchased by the  Partnership  (or a person
              designated  by the  Partnership).  A  further  description  of the
              repurchase terms can be found in the section entitled "Business of
              the  Partnership-Limited  Liquidity  Plan"  (pages  24-25)  in the
              Prospectus.

          B)  At December 31, 2001,  the 18,995  outstanding  Units were held by
              979 investors.

          C)  Tender Offers To Purchase Units

              During 1996, competing tender offers were made for limited partner
              interests ("Units") in the Partnership. One tender offer from Prom
              Investment  Partners,  LLC  ("Prom"),  an  unrelated  third party,
              commenced  in  December  1996.  The second  tender  offer from PIP
              Partners - General,  LLC ("PIP  Partners"),  an  affiliate  of the
              General Partner,  commenced in January 1997. An aggregate  2,750.5
              Units were tendered and purchased by these bidders -- 1,430 to PIP
              Partners and 1,320.5 to Prom,  or 7.5283% and 6.9518% of the total
              outstanding   Units,   respectively.   Under   the  terms  of  the
              Partnership Agreement, the transfers were effective as of April 1,
              1997. All Units were purchased for $495 per unit.

              During 1998, Bond Purchase, LLC, an unrelated third party, made an
              unsuccessful  offer to purchase Units. The offer was for less than
              5% of  outstanding  Units and nominal legal costs were incurred by
              the Partnership. On October 16, 1998, Bond Purchase, LLC cancelled
              its transfer request and no Units were acquired by it.

              On  June  27,  2000,  Everest  Management,  LLC  ("Everest"),   an
              unrelated  third  party,  made a tender  offer for up to 2% of the
              units, or 379 units, for $650 per unit. This tender expired by its
              terms  on July  31,  2000.  Under  the  terms  of the  Partnership
              Agreement, Everest was admitted as a limited partner on October 1,
              2000  and  January  1,  2001  with  respect  to 289 and 15  Units,
              respectively,  that were  tendered  pursuant to this tender offer,
              for a total 1.600% of the outstanding Units.

              On March 5, 2001, Everest made another tender offer for up to 1.6%
              of the  units,  or 300  units,  for $800  per  unit.  This  tender
              originally  was set to expire  by its terms on March 30,  2001 but
              subsequently  was extended by Everest to April 20, 2001. Under the
              terms of the Partnership Agreement, Everest Properties II, LLC was
              admitted as a limited  partner on July 1, 2001 as to an additional
              639.5 Units  tendered  pursuant to this tender offer,  for a total
              3.367% of the outstanding Units.

              Everest and its  affiliates own a combined total of 943.5 Units or
              4.9671% of the outstanding Units.

              On  September  4, 2001,  Equity  Resource  Lexington  Fund,  L.P.,
              ("Equity  Resource"),  an unrelated  third party, by letter to the
              limited  partners,  made a tender offer to purchase an unspecified
              number of units at a price of $700 per unit.  By its  terms,  this
              offer was set to  expire  on  October  4,  2001.  By letter to the
              limited

                                       6


              partners  dated  October  29,  2001  from  Equity  Resource,   the
              expiration  of this  tender  offer  was  purportedly  extended  to
              November 29, 2001.  Under the terms of the Partnership  Agreement,
              Equity  Resource  was  admitted  as  a  limited  partner  with  an
              effective  date of January 1, 2002 with  respect to 492 Units that
              were  tendered  pursuant  to this  tender  offer,  for a total  of
              2.5902% of the outstanding Units.

          D)  Distributions  to Limited  Partners  began with the quarter ending
              September 30, 1987. Cash distributions were suspended in 1996. See
              Item 7, Liquidity and Capital  Resources and Construction  Defects
              for  discussions   concerning  the  deferment  and  resumption  of
              distributions.

              No distributions were made for 1997, 1998, 1999, 2000, and 2001.

                                       7

<PAGE>


ITEM 6.    SELECTED FINANCIAL DATA

          The following  represent  selected  financial data for the Partnership
for the years ended  December 31, 2001,  2000,  1999,  1998,  and 1997. The data
should be read in  conjunction  with the financial  statements and related notes
included  elsewhere in this Form 10-K/A.  The selected  financial data presented
below are unaudited.  Refer also to Item 7, Management's Discussion and Analysis
of Financial Conditions and Results of Operations.

                                  For the Years Ended December 31,
                          ------------------------------------------------------

                          2001      2000       1999       1998      1997
                          ----      ----       ----       ----      ----
                          (Restated)

                                (In Thousands, Except for Unit Data)

Rental revenues           $7,387    $6,695     $5,674     $5,578    $5,256

Net income                $2,589    $2,409     $1,431     896       $477

Net income
  per $1,000 limited
    partnership unit      $135      $126       $75        $47       $25

Cash and cash
equivalents
per $1,000 limited
partnership unit          $210      $186       $101       $62       $34

Number of units used
    in computation        18,995    18,995     18,995     18,995    18,995

Total assets              $44,127   $31,088    $28,873    $27,830   $27,016

Notes payable             $25,548   $25,879    $26,188    $26,476   $26,723

                                       8


<PAGE>


ITEM 6a.   SELECTED FINANCIAL DATA

         The following represent selected financial data for the Partnership for
the quarters  ended March 31, June 30,  September  30, and December 31, 2001 and
2000. The data should be read in conjunction  with the financial  statements and
related notes  included  elsewhere in this Form 10-K/A.  The selected  financial
data  presented  below  are  unaudited.  Refer  also  to  Item  7,  Management's
Discussion and Analysis of Financial Conditions and Results of Operations.


<TABLE>
<CAPTION>

                                                                        For The Three Months Ended
                                         -----------------------------------------------------------------------------------

                                         Dec 31,   Sept. 30,   June 30,   Mar 31,   Dec 31,   Sept. 30,   June 30,   Mar 31,
                                         2001      2001        2001       2001      2000      2000        2000       2000
                                         ----      ----        ----       ----      ----      ----        ----       ----
                                         (Restated)
                                                                   (In Thousands, Except For Unit Data)

<S>                                      <C>       <C>         <C>        <C>       <C>       <C>         <C>        <C>
Rental revenues                          $1,747    $1,776      $1,935     $1,929    $1,856    $1,724      $1,595     $1,520

Net income                               $692      $599        $512       $786      $921      $602        $427       $459

Net income
  per $1,000 limited
    partnership unit                     $36       $31         $27        $41       $49       $31         $22        $24

Cash and cash equivalents per
  $1,000 limited partnership unit        $210      $205        $208       $205      $186      $147        $115       $105

Number of units used in
    computation                          18,995    18,995      18,995     18,995    18,995    18,995      18,995     18,995

Total assets                             $44,127   $32,845     $32,128    $31,769   $31,088   $30,176     $29,554    $29,296

Notes payable                            $25,548   $25,633     $25,716    $25,799   $25,879   $25,958     $26,036    $26,113

</TABLE>

                                      9


<PAGE>


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
         AND RESULTS OF OPERATIONS

         The following  discussion  is based on the financial  statements of the
Partnership as of and for the years ended December 31, 2001, 2000 and 1999. This
information  should  be read in  conjunction  with  the  accompanying  financial
statements and notes thereto, included in Item 14.

Introduction
------------

          The Partnership was organized in April 1985. Construction of Alderwood
and  Timberleaf  commenced in November 1985 and was completed by December  1986.
Lease-up  activities  began in  November  1986 and  continued  through the third
quarter of 1987. The Partnership  Registration  Statement was declared effective
on February 12, 1987 and completed in December 1987. This Item should be read in
conjunction with the financial  statements,  footnotes and other Items contained
elsewhere in this report.


Liquidity and Capital Resources
-------------------------------

          The  primary  sources  of  funding  for the  Partnership's  activities
through 1987 were capital  contributions of its Limited  Partners,  construction
financing and permanent  financing.  The  Partnership  obtained  $15,800,000  in
permanent financing in November 1987. These proceeds,  together with the Limited
Partners' capital  contributions,  were applied towards the various construction
costs and offering expenses as outlined in the Prospectus. In addition, proceeds
from the loan were used to purchase the previously  leased  Alderwood land site.
Once  lease-up  began in 1986,  operating  expenses,  debt  service  and Limited
Partner  distributions  were  funded from  apartment  rental  receipts  and cash
reserves.

          Quarterly  distributions  have  been  suspended  in order to  continue
building reserves for the potential cost of dealing with the construction defect
problems. See Construction Defects below for a more comprehensive  discussion of
this matter.

          Each  property  has a  non-recourse  note  payable  (collectively  the
"Notes"),  secured by a first deed of trust.  These Notes bear fixed interest of
6.99% for Alderwood, and 7.09% for Timberleaf.

          The  terms  of the  Notes  and the  Security  Agreement,  Disbursement
Agreement and Assignment of Agreements  (collectively the "Agreements")  require
that each property maintain a hardboard siding security account.  These security
accounts are additional  collateral for the lender.  Cash held in these security
accounts  was  $3,384,000   and   $2,486,000   for  Alderwood  and   Timberleaf,
respectively,  as of December 31, 2001. Until the Completion Date, as defined in
the  Agreements,   annually  the  Partnership  is  obligated  to  contribute  an
additional 10%, as defined in the Agreements, or monthly cash flow, whichever is
less,  and shall be deposited into each security  account.  Should the hardboard
siding repairs not be completed by December 2002, or every two years thereafter,
and  insufficient  cash has been  accumulated to cure the defects based upon the
lender's  determination  of the cost, then all cash flow shall be deposited into
each  applicable  security  account,  as  necessary,  to fully  fund the cost of
construction.  If the  projected  cash  flow is  insufficient  to  satisfy  this
deficiency  contribution,  then the Partnership has 60 days to fund the shortage
over the projected  cash flow. No  withdrawals  are permitted  from the security
accounts except to cure the siding  defects.  The lender shall have the right to
hire its own consultants to review,  approve and inspect the  construction.  All
such  reasonable  fees and expenses  incurred by the lender shall be paid by the
Partnership.  Should construction not be completed by the Completion Date due to
an act of force majeure, the Completion Date can be further extended to complete
the construction work.

                                       10


<PAGE>


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
         AND RESULTS OF OPERATIONS (Continued)

          The  Partnership  was involved in  litigation  involving  construction
defects at its Properties (see  "Construction  Defects" for a more comprehensive
discussion of the matter).  The  Defendants  have settled both the Alderwood and
Timberleaf litigation. The $4,533,000 of Timberleaf net settlement proceeds were
received  by the  Partnership  in 2001,  and are  segregated  in a reserve  bank
account and are designated as restricted cash in the balance sheet. Timberleaf's
settlement proceeds,  including accumulated interest income, total approximately
$4,585,000 as of December 31, 2001.  The Alderwood  net  settlement  proceeds of
$6,299,000 were received on March 5, 2002. A receivable for those net settlement
proceeds  was recorded in the balance  sheet as of December  31,  2001.  All the
settlement proceeds,  including accumulated interest income, is reserved for use
to pay all siding related design and construction repair expenditures.

          Cash  and  cash  equivalents  not  being  held by the  lender  or from
settlement  proceeds are comprised of cash invested in market rate, checking and
investment accounts.  Cash balances were approximately  $4,036,000,  $3,568,000,
and $1,942,000, at December 31, 2001, 2000 and 1999, respectively.

          Cash distributions will only resume when a determination has been made
that the Partnership has adequate cash reserves  (including  restricted cash) to
complete repairs of the construction  defects in the  Partnership's  Properties.
This  determination  can only be made  when the  costs  to  repair  construction
defects to the Partnership's  Properties have been determined with a high degree
of certainty. Therefore, it is uncertain when cash distributions will resume. As
of the date of this report,  the  Partnership  anticipates  that  following  the
receipt  by the  Partnership  of  all  settlement  proceeds  in  respect  of the
construction  defects litigation,  the Partnership will have sufficient reserves
to enable it to begin  distributions to limited  partners during 2002.  However,
there can be no assurances given as to when  distributions  will actually resume
and the level at which any such distributions will be made. The hardboard siding
security accounts must be maintained until such time as the Partnership's lender
has determined the repair work has been  completed.  In addition,  if repairs of
the Properties are not completed by December 2002, the Partnership's  lender has
the right to  require  the  Partnership  to retain  additional  cash  collateral
reserves,  which could require further  suspension of  distributions  to Limited
Partners.

Construction Defects
--------------------

          In June  1996,  the  General  Partner  became  aware of defects in the
hardboard siding used in both of the Partnership's  Properties. On September 23,
1996, the Partnership  filed two lawsuits (since  settled)  seeking  recovery of
costs to repair those defects from the manufacturer of the hardboard  siding, as
well as the general contractor, the subcontractors,  and the architects involved
in the original construction of the two Properties.

          Since June 1996, the General  Partner has determined  that the defects
did not reduce the assets' value to an amount below their net book value,  based
on a comparison of future cash flows to the carrying amount of the Properties at
the end of  subsequent  reporting  periods.  This  continues  to be the  case at
December 31, 2001. The General  Partner has also determined  that,  although the
construction  defects may be substantial in nature, the Properties will continue
to function as safe,  inhabitable,  income-generating  Properties without a full
repair  of the  defects  for an  indeterminate  amount  of time.  As  such,  the
Partnership  has been under no obligation to undertake a major repair project to
remedy the construction defects at either of the Properties. The Partnership has
made  certain  emergency  repairs to the  Properties  since  June 1996,  and has
expensed  those  repair  costs as incurred  with no  consideration  of potential
recoveries from the ongoing litigation or potential  settlement  thereof.  As of
December 31, 2001, the cost of emergency  repairs  charged to expense since June
1996  totaled  approximately  $3,457,000.  This  amount is not  included  in the
Partnership's current estimates.

                                       11

<PAGE>


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
         AND RESULTS OF OPERATIONS (Continued)

Construction Defects (Continued)
---------------------

to repair construction defects.

          In 2001, the Partnership's  litigation against the responsible parties
was settled. In total, from all Alderwood and Timberleaf settlements, defendants
agreed to pay the  Partnership  an aggregate  of  $14,600,000.  The  Partnership
received net proceeds (after payment of attorney's fees,  litigation costs and a
litigation  management fee of 3% of the gross settlement  amount to an affiliate
of the Partnership's  General Partner) of $10,832,000.  The net proceeds related
to the  Timberleaf  property of $4,533,000  were received by the  Partnership in
2001. The Alderwood litigation was settled on October 3, 2001 and net settlement
proceeds of  $6,299,000  were received by the  Partnership  on March 5, 2002. As
such, a receivable for the Alderwood net settlement  proceeds was recorded as of
December 31, 2001. The General Partner believes that these  settlements were, in
substance,  payment for non-operating costs to be incurred by the Partnership to
repair the defects at both Properties.

          In 2001,  upon learning that the  defendants  in the  litigation  were
willing to resolve the lawsuits in return for a  substantial  settlement  to the
Partnership,  the General  Partner  made the decision to utilize the proceeds of
the settlement to undertake a major repair project  related to the  construction
defects.  The General Partner is currently  engaged in the process of developing
an updated repair plan, and anticipates  that the repairs will occur during 2002
and 2003. In light of the settlement  recovery,  the General Partner is hopeful,
that under prevailing circumstances and market conditions, it can develop a plan
to repair the  construction  defects,  including all costs  associated  with the
repairs,   (including  rent  concessions  and  lost  rents)  for   approximately
$12,500,000 to $14,000,000,  an amount that exceeds the net settlement  proceeds
received by the Partnership.  This preliminary  projection of the cost to repair
the construction defects is an estimate, and as such it could change in the near
term due to  certain  factors  that  could be  encountered  in either the design
engineering phase, and / or actual construction phase due to hidden defects that
are not evident until the current siding is removed and the underlying  wall and
flooring structures are exposed and examined.  As such, the cost to repair could
change,  and the change could be material to this  preliminary  projection.  The
Partnership has recorded a construction defects reserve liability of $10,832,000
in the  accompanying  Balance  Sheet  at  December  31,  2001  equal  to the net
settlement proceeds. All construction repair expenditures up to $10,832,000 will
be charged to the reserve  liability  and amounts in excess of  $10,832,000,  if
any, will be expensed as incurred.  None of the expenditures  made to repair the
construction  defects will be capitalized,  due to the fact that the repairs are
not  considered  a  betterment  that will  extend the life of the  Partnership's
assets.  The construction  defects repairs are intended to restore the assets to
their original condition as though the defects had never existed.

          The  expenditures for the repair costs will be made from cash reserves
that the  Partnership  possesses at December 31, 2001,  along with the cash from
the net  settlement  proceeds  received  by the  Partnership  on March 5,  2002,
including  accumulated  interest  on all cash  reserves.  The terms of the Notes
require each  Property  maintain a Hardboard  Siding  security  account to cover
potential  liabilities  with  respect to defects  in the  Properties'  hardboard
siding,  to the  extent  that the  Partnership  was  unable  to make  sufficient
recoveries  from the  responsible  parties.  These  security  accounts  serve as
additional  collateral  for  the  lender  and,  as of  December  31,  2001,  the
Partnership  has provided  $5,852,000  toward  these  accounts.  These  security
accounts  must be  maintained  until such time as the  Partnership's  lender has
determined that these accounts  contain  sufficient cash to complete the repairs
of the  Partnership's  Properties.  Additionally,  the  settlement  proceeds  of
$4,585,000 related to the Timberleaf  property,  included  accumulated  interest
income,  have been segregated by the Partnership in a reserve bank account.  The
sum of these two amounts, or

                                       12

<PAGE>


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
         AND RESULTS OF OPERATIONS (Continued)

Construction Defects (Continued)
---------------------

$10,437,000, is reflected as restricted cash in the accompanying balance sheet
as of December 31, 2001, as it will be utilized to fund the repair costs.

          The  Securities  and  Exchange  Commission   encourages  companies  to
disclose  forward-looking  information so that investors can better understand a
company's future prospects and make informed investment  decisions.  This Annual
Report on Form  10-K/A  contains  such  forward-looking  statements  within  the
meaning of the Private  Securities  Litigation Reform Act of 1995. Words such as
"anticipate,"  "estimate," "expects," "projects," "intends," "plans," "believes"
and words of similar  substance used in connection with any discussion of future
operations or financial  performance  identify  forward-looking  statements.  In
particular,  statements  relating to working capital,  liquidity and the cost to
repair   construction    defects   are   forward-looking    statements.    These
forward-looking   disclosures  are  found  at  various  places  throughout  this
document. Wherever they occur in this document,  forward-looking disclosures are
necessarily   estimates   reflecting  judgments  based  on  currently  available
information.  However,  these  disclosures  still  involve a number of risks and
uncertainties  that could cause actual results to differ  materially  from those
suggested by the forward-looking disclosures.  These forward-looking disclosures
should,  therefore,  be  considered  in  light  of  various  important  factors,
including those set forth in the preceding paragraphs.  The limited partners are
cautioned  not to place  undue  reliance on these  forward-looking  disclosures,
which speak only as of the date hereof. The Partnership  disclaims any intent or
obligation  to update  forward-looking  disclosures,  except as required by law.
Moreover,  the Partnership,  through its General Partner,  may from time to time
make forward-looking disclosures about the matters described in this document or
other matters concerning the Partnership.

          While the General  Partner  believes the estimated  cost to repair the
construction  defects and estimate of the costs  associated with the repairs and
assumptions are reasonable,  there can be no assurance that these estimates will
prove to be accurate,  and actual results may vary  materially from those shown.
These  estimates were based upon a variety of estimates and  assumptions.  It is
expected that there will be differences between the actual and estimated cost to
repair the construction defects and all costs associated with the repairs may be
materially  higher or lower than those  estimated.  Inclusion of these estimates
should not be regarded as an indication that the General Partner considers it an
accurate prediction of future events. In light of the uncertainties  inherent in
forward-looking  information  of any kind,  the inclusion of this  projection in
this document should not be regarded as a  representation  by the Partnership or
its General Partner that the anticipated cost to repair the construction defects
and all costs  associated with the repairs will be achieved and limited partners
are cautioned not to place undue reliance on this information.

          The  Partnership is under no obligation,  and expressly  disclaims any
obligation,  to update or alter any  forward-looking  statements,  whether  as a
result of new  information,  future  events or  otherwise.  All  forward-looking
statements  contained  herein are  qualified in their  entirety by the foregoing
cautionary statements.

                                       13

<PAGE>


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
         AND RESULTS OF OPERATIONS (Continued)

Results of Operations
---------------------

COMPARISON OF THE YEAR ENDED DECEMBER 31, 2001 TO THE YEAR ENDED DECEMBER 31,
2000.

Following  is a table,  for  comparative  purposes,  presenting  the  results of
operations for the years ended December 31, 2001 and 2000.

                                                        For the years ended
                                                            December 31,
                                                        2001           2000
                                                      --------       --------
                                                      (Restated)
                                                           (In Thousands)
         REVENUES
           Rental and other resident revenue           $7,456         $6,783
           Interest                                       415            464
                                                      --------        -------


              Total revenues                             7,871         7,247
                                                      --------       --------


         EXPENSES
           Interest and amortization                     1,837         1,860
           Operating and administrative                  2,763         2,360
           Depreciation                                    682           618
                                                      ----------     ---------

              Total expenses                             5,282         4,838
                                                      ----------     ---------

         NET INCOME                                     $2,589        $2,409
                                                      ==========     =========

         For the years ended  December 31, 2001 and 2000,  the average  occupied
rent obtained from leased units, and the average  occupancy  percentages were as
follows:

                                   Average Occupied Rental Rates
                                   -----------------------------

                                        2001       2000
                                        ----       ----

     One Bedroom Units                $1,575     $1,641
     Two Bedroom Units                $1,931     $2,115

                                      Average Occupancy
                                      -----------------

                                        2001       2000
                                        ----       ----

       Alderwood                         96%        98%
       Timberleaf                        95%        99%

                                       14

<PAGE>


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
         AND RESULTS OF OPERATIONS (Continued)

RENTAL AND OTHER RESIDENT  REVENUE:  Both  Properties are located in Santa Clara
County, in an area commonly  referred to as Silicon Valley.  With the decline in
the economy, and specifically in the high tech industry, the primary employer in
the Silicon Valley,  job growth no longer  continued to climb as in prior years,
and actually  decreased by 45,000 jobs between  December 31, 2000 and 2001.  The
fourth quarter ending December 31, 2001 saw unemployment  rise to 6.1% from 1.5%
at December 31, 2000.  Commencing in the later half of 2000 and continuing  into
2001,  unemployment  rose, new job growth was non-existent  with jobs decreasing
This  decline in jobs,  coupled with new housing  units (both single  family and
multi-family)  coming on line has resulted in a softening of the rental  market.
As a result,  average rental rates obtained from leased units  decreased  28.79%
from 2000 to 2001.  Concessions  were  utilized  to increase  occupancy,  and to
remain  competitive in the Santa Clara market.  At the same time, rental revenue
as presented in the  Statements of Income in Item 14 continues to appear strong,
increasing 10% between years,  due to residents whose leases had not yet reached
the end of their term. As with newly leased units,  upon lease  expiration those
current residents who did renew their leases,  renewed at significantly  reduced
market rental rates. Rental revenues are recognized when contractually due based
on  the  terms  of  signed  lease  agreements,  which  range  in  duration  from
month-to-month to one year. Average quarterly  occupancy went from a high of 99%
for Alderwood and Timberleaf, respectively as of the quarter ending December 31,
2000 to a low in the third quarter 2001 of 94% and 93%, respectively.  Given the
sharp decrease in  employment,  many  residents  terminated  their leases early,
while remaining contractually and economically bound to the terms of their lease
agreement  until their  respective  units were either  re-leased  or their lease
expired.  For those former  residents whose units were leased before their lease
expiration date, they remained  obligated for the short fall in the rental rates
through the end of their lease term.

INTEREST  INCOME:  While more cash,  including  the  Timberleaf  net  settlement
proceeds,  were placed in interest bearing accounts in 2001 as compared to 2000,
less interest income was earned due to declining interest rates.

OPERATING  AND   ADMINISTRATIVE   EXPENSES:   These  expenses   include  on-site
management,  maintenance,  utilities,  marketing and other  expenses  related to
earning  rental  revenues.  Some of the  operating  expenses  vary as  occupancy
changes throughout the year. Others, such as property taxes, do not fluctuate in
response to changing  occupancy  levels.  Operating  expenses  increased  17% or
$403,000  between 2001 and 2000. The significant  increase in expenses from 2000
to 2001  reflected  the  following.  The  softening  residential  rental  market
resulted in an increase in expenditures of $125,000 in (1) additional  personnel
for leasing and unit turnover maintenance; (2) turnover costs for unit cleaning,
painting and minor  refurbishment  supplies,  and labor in those instances where
the  work  could  not be  accomplished  by the  resident  staff;  and (3)  media
advertising  costs.  Additionally,  rising  energy  costs due to the  California
energy crisis added $33,000 in utility costs over 2000.  Insurance  premiums for
liability and property  coverage  increased $21,000  year-to-year.  Professional
services  increased  $126,000  year-to-year,  principally  due  to a  change  in
accounting  firms, and to the retention of an independent  financial  advisor to
evaluate  the  fairness  from a  financial  point  of view of the  consideration
proposed to be paid by an  affiliate of the General  Partner to acquire  limited
partnership units in the Partnership held by limited partners  unaffiliated with
the General Partner. Management fees increased $59,000 due to the revenue stream
(as noted in the  Rental  and Other  Resident  Revenue  section  above)  and for
management  supervision fees on contracted major  non-recurring  maintenance and
improvement projects.

                                       15

<PAGE>


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
         AND RESULTS OF OPERATIONS (Continued)

INTEREST AND AMORTIZATION:  Interest expense on the Notes,  which both commenced
in December 1997, is at a fixed rate of 6.99% per annum for Alderwood, and 7.09%
per annum for Timberleaf and decreased $23,000  year-to-year.  Monthly principal
and interest payments under these Notes are $114,659 and $63,587,  respectively.
Amortization of financing costs remained  constant  between years at $30,000 per
year.

DEPRECIATION:  Depreciation  expense was $682,000 and $618,000 in 2001 and 2000,
respectively, primarily due to the acquisition of assets.

NET  INCOME:  Net income  increased  between  years to  $2,589,000  in 2001 from
$2,409,000  in 2000.  While newly leased  rental rates and  occupancy  decreased
between years rental  revenue  reported a net increase due to continuing  rental
revenue  earned  from  leases  executed  before  the  rental  market   softened.
Offsetting  the  revenue   increase,   were  increased  levels  of  expenditures
associated  with the softening  residential  rental market and for  professional
services.

COMPARISON  OF THE YEAR ENDED  DECEMBER 31, 2000 TO THE YEAR ENDED  DECEMBER 31,
1999.

Following  is a table,  for  comparative  purposes,  presenting  the  results of
operations for the years ended December 31, 2000 and 1999.

                                                 For the years ended
                                                    December 31,
                                                   2000       1999
                                                   ----       ----
                                                   (In Thousands)
         REVENUES
           Rental                               $6,783      $5,856
           Interest                                464         250
                                                -------    --------


                Total revenues                   7,247       6,106
                                                -------    --------


         EXPENSES
           Interest and amortization             1,860       1,881
           Operating                             2,360       2,221
           Depreciation                            618         573
                                                -------    --------

              Total expenses                     4,838       4,675
                                                -------    --------

         NET INCOME                             $2,409      $1,431
                                                =======    ========

                                       16

<PAGE>


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
         AND RESULTS OF OPERATIONS (Continued)


         For the years ended  December 31, 2000 and 1999,  the average  occupied
rent obtained from leased units, and the average  occupancy  percentages were as
follows:

                                     Average Occupied Rental Rates
                                     -----------------------------

                                            2000       1999
                                            ----       ----

       One Bedroom Units                   $1,641     $1,285
       Two Bedroom Units                   $2,115     $1,567

                                     Average Occupancy
                                     -----------------

                                            2000       1999
                                            ----       ----

       Alderwood                             98%        97%
       Timberleaf                            99%        97%


RENTAL AND OTHER RESIDENT  REVENUE:  The Silicon Valley saw continued job growth
and low unemployment between 1999 and 2000. The unemployment rate for the fourth
quarter 2000 decreased to 1.5% from 2.3% in the fourth  quarter of 1999.  During
2000,  24,100  jobs  were  created,  an  increase  of 2.4%  over  1999.  The low
unemployment  rate  coupled  with a robust job market in turn  created a housing
shortage  driving  up the  value of  housing  prices  -- both  home  prices  and
apartment rents. The strong  residential  rental market  conditions  allowed the
maintenance   of  high  occupancy   without  the  need  to  offer   concessions.
Additionally,  no new housing units  permitted  continued  market rate growth in
rental rates, as evidenced by average  occupied rental rates  increasing  27.48%
from 1999 to 2000.  While  average  occupied  rent  obtained  from leased  units
increased  27.48%  during 2000,  the  Statements  of Income in Item 14,  reflect
rental revenues increasing 18%. The lower increase in rental revenue as compared
to the average  occupied  rental  rates from  leased  units is  attributable  to
current  residents  whose  leases had not yet reached the end of their term.  As
with newly leased  units,  upon lease  expiration  those  current  residents who
renewed  their  leases,  renewed at  significantly  higher  market rental rates.
Rental  revenues are  recognized  when  contractually  due based on the terms of
signed lease  agreements,  which range in duration  from  month-to-month  to one
year.

INTEREST  INCOME:  Cash flow  increased  to  $1,626,000  in 2000 as  compared to
$759,000 in 1999.  This increase in cash invested in interest  bearing  accounts
accounted for the more than doubling the interest  earned in 2000 as compared to
1999.

OPERATING  AND   ADMINISTRATIVE   EXPENSES:   These  expenses   include  on-site
management,  maintenance,  utilities,  marketing and other  expenses  related to
earning  rental  revenues.  Some of the  operating  expenses  vary as  occupancy
changes throughout the year. Others, such as property taxes, do not fluctuate in
response  to changing  occupancy  levels.  Operating  expenses  increased  6% or
$139,000  between 2000 and 1999. The significant  increase in expenses from 1999
to 2000 reflected the following.  Payroll  increased  $67,000 due principally to
higher rental  commissions and incentive  bonuses related to the stronger market
forcing units to turnover as residents  either purchased homes or moved to other
apartments;  higher  salaries as the shortage of high tech  industry  applicants
increased  salaries for all  businesses in the rental  market,  and increases in
benefits.  Insurance  premiums for  liability  and property  coverage  increased
$12,000  year-to-year.  Management  fees  increased  $72,000  due to the revenue
stream (as noted in the Rental and Other Resident Revenue section above) and

                                       17

<PAGE>


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
         AND RESULTS OF OPERATIONS (Continued)

for management  supervision fees on contracted major  non-recurring  maintenance
and improvement projects.

INTEREST EXPENSE AND  AMORTIZATION:  Interest  expense on the Notes,  which both
commenced in December 1997, is at a fixed rate of 6.99% per annum for Alderwood,
and 7.09% per annum for  Timberleaf.  Monthly  principal  and interest  payments
under  these notes are  $114,659  and  $63,587,  respectively.  Amortization  of
financing costs remained constant between years at $30,000 per year.

DEPRECIATION:  Depreciation  expense was $618,000 and $573,000 in 2000 and 1999,
respectively, primarily due to the acquisition of assets.

NET INCOME:  Net income  increased  $978,000 between years to $2,409,000 in 2000
from  $1,431,000 in 1999,  due  principally to the strength of the rental market
which contributed $927,000;  interest income contributed $214,000, as reduced by
an increase in expenses of $163,000,  principally for  expenditures  relating to
residential rental market conditions.

Economic Environment
--------------------

         Both the national and California  economy and  specifically the economy
of Santa  Clara  County  in which  the  Partnership  owns  and  manages  its two
Properties  have been and  continue to be in a  recession.  This has resulted in
reduced occupancy rates, and reductions in market rental rates.

         The  Partnership's  property type and geographic  location provide some
degree of risk  moderation  but are not immune to a prolonged  down cycle in the
real estate market in which the Partnership  operates.  Although the Partnership
believes it is well positioned to meet the challenges ahead, it is possible that
further reductions in occupancy and market rental rates will result in reduction
of rental revenues, operating income, cash flows.

Inflation
---------

         Inflationary  increases would likely have a negative effect on property
operating  results and such increases may be at a greater rate of increases than
property rental rates in a period of recession.  However,  the ability to affect
increases  in rental  rates may be  impacted  by market  conditions  such as the
supply of rental housing or local economic conditions. Certain expenses, such as
property  taxes and debt  service,  may not be impacted by  inflation.  Property
taxes are affected primarily by limits placed by legislation.  Debt financing is
at a fixed rate. The Partnership  believes it effectively manages its Properties
and other  expenses  but  understands  that a return to higher  annual  rates of
inflation would result in increases to operating expenses.

Critical Accounting Polices
---------------------------

         The Partnership's most significant accounting policies are described in
the notes to the Financial Statements.  The most critical policies relate to the
categories  of Related  Party  Transactions  (Note 3),  Debt and Debt  Covenants
(Notes 2, 4 and 6), and Real  Estate  (Notes 1, 4 and 5). All of these  policies
are  mandatory  under  accounting  principles  generally  accepted in the United
States and the  regulations of the Securities and Exchange  Commission.  Each of
these  policies  has a  material  effect on the timing of  revenue  and  expense
recognition for significant Partnership operations.

                                       18

<PAGE>


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS
         AND RESULTS OF OPERATIONS (Continued)

Recent Accounting Pronouncement
-------------------------------

         In  August  2001,  the  Financial  Accounting  Standards  Board  issued
Statement  of  Financial  Accounting  Standards  No.  144,  Accounting  for  the
Impairment  or Disposal of  Long-Lived  Assets  ("SFAS  144"),  which  addresses
financial  accounting and reporting for the impairment or disposal of long-lived
assets and supersedes SFAS No. 121,  Accounting for the Impairment of Long-Lived
Assets and for  Long-Lived  Assets to be  Disposed  Of, and the  accounting  and
reporting  provisions of Accounting  Principles  Board Opinion No. 30, Reporting
the Results of Operations for a disposal of a segment of a business. SFAS 144 is
effective  for fiscal years  beginning  after  December  15, 2001,  with earlier
application encouraged.  The Partnership expects to adopt SFAS 144 as of January
1, 2002 and has not yet determined the impact,  if any, that the adoption of the
SFAS 144 will  have on the  Partnership's  financial  position  and  results  of
operations.

                                       19

<PAGE>


ITEM 7a. QUALITATIVE AND QUANTITATIVE INFORMATION ABOUT MARKET RISK

         The Company has no debt subject to variable  rates of interest and does
not invest in derivatives or similar types of instruments.


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The response to this item is  submitted  as a separate  section of this
Form 10-K. See Item 14.


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

       None.

                                       20

<PAGE>


                                    PART III


ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The   Partnership   has  no  directors  or  executive   officers.   For
informational  purposes  only,  the  following  are  the  names  and  additional
information  relating to controlling persons,  directors,  executives and senior
management of  Prometheus  Development  Co.,  Inc.,  the General  Partner of the
Registrant.

Sanford N. Diller.  Age 73. President,  Secretary and sole Director.  Mr. Diller
  supervises  the   acquisition,   disposition  and  financial   structuring  of
  properties.  Mr. Diller founded the General Partner,  and effectively controls
  all of its outstanding stock. Mr. Diller received his undergraduate  education
  at the  University of  California at Berkeley and his Doctor of  Jurisprudence
  from the  University  of San  Francisco.  He has been an attorney  since 1953.
  Since  the  mid  1960's,  he  has  been  involved  in the  development  and/or
  acquisition of more than 70 properties,  totaling more than 13,000 residential
  units and over 2,000,000 square feet of office space.

Vicki R. Mullins. Age 42. Vice President. Ms. Mullins'  responsibilities include
  supervising all property operations,  information systems and finance, as well
  as manages the  disposition  and  financial  structuring  of  properties.  Ms.
  Mullins came to Prometheus  Development  Co. from The Irvine Company where she
  spent seven years as Vice President of Finance and Accounting, and Director of
  Internal Controls. Prior to the Irvine Company, she spent six years with Ernst
  & Young as an audit manager.  Ms. Mullins is a Certified Public Accountant and
  holds a B.S. degree in Accounting with honors from the University of Illinois.

John J. Murphy. Age 40. Vice President.  Mr. Murphy's  responsibilities  include
  managing all financial,  accounting and reporting  activities,  and insurance.
  Mr. Murphy came to Prometheus  Development Co. from KPMG Peat Marwick where he
  spent  seven  years  and  was  a  Senior  Manager.  He is a  Certified  Public
  Accountant  and  holds a B.S.  degree  in  Accounting  with  honors  from  the
  University of San Francisco.


ITEM 11. EXECUTIVE COMPENSATION

         The  Partnership  does  not pay or  employ  directly  any  officers  or
directors.  Compensation  to executives and employees of the General  Partner is
not based on the  operations  of the  Partnership.  The General  Partner and its
affiliates  receive a management fee as compensation  for services  rendered and
reimbursement  of  certain  Partnership  expenses.   See  Item  7,  Management's
Discussion  and  Analysis of  Financial  Conditions  and  Results of  Operations
(Critical Accounting  Policies),  and Item 13, Certain Relationships and Related
Transactions.

                                       21

<PAGE>


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT

         (a)  Other  than PIP  Partners  -  General,  LLC ("PIP  Partners"),  an
              affiliate  of the General  Partner,  which owns  18.1679%,  of the
              outstanding  limited partner Units, no person of record owns or is
              known by the  Registrant to own  beneficially  more than 5% of the
              outstanding Units.

         (b)  The General Partner owns no Units.  However,  the General Partner,
              pursuant to the Partnership  Agreement,  has discretionary control
              over most of the decisions made for the Partnership. The executive
              officers of the General Partner, as a group, own no Units.

              PIP Partners,  acquired  7.5283% of  outstanding  Limited  Partner
              Units in the  Partnership  during  1997.  (See Item 5 for  further
              discussion.)  During 1998,  1999, and 2000, PIP Partners  acquired
              .716%,  1.2371% and 8.6865% of outstanding  Limited Partner Units,
              respectively.  No Units were  acquired in 2001. As of December 31,
              2001 PIP Partners owns 18.1679% of the outstanding Units.

         (c)  Not applicable.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         The  Partnership  pays or has paid fees to the General  Partner and its
Affiliates.  See  Footnote  4 -  Related  Party  Transactions  of the  financial
statements  found in Item 14 and the  Prospectus  (pages  14-16 and 46-48) filed
pursuant to Rule 424(b) under the Securities Act of 1934,  which is incorporated
by reference herein.

                                       22

<PAGE>


                                     PART IV

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

(a)  1.  FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

                                                                            Page
                                                                            ----

        Report of Ernst & Young LLP, Independent Auditors...................25

        Report of Arthur Andersen LLP, Independent Auditors.................26

      Financial Statements:

        Balance Sheets as of December 31, 2001 and 2000.....................27

        Statements of Income for the years ended
          December 31, 2001, 2000 and 1999..................................28

        Statements of Partners' Capital (Deficit) for the
          years ended December 31, 2001, 2000 and 1999......................29

        Statements of Cash Flows for the years ended
          December 31, 2001, 2000 and 1999..................................30

        Notes to Financial Statements.......................................31

   2.  FINANCIAL STATEMENT SCHEDULES:

        Schedule III - Real Estate and Accumulated Depreciation .........37-38

           All other  schedules are omitted because they are not required or the
           required  information  is shown in the financial  statements or notes
           thereto.

(b)  The following reports on Form 8-K's were filed during the period covered by
this report.

           The company  filed Form 8-K on November  27,  2000,  with  respect to
           matters not required to be disclosed in a Form 10-K filing.

           The  company  filed  Form 8-K on March 5, 2001,  with  respect to the
           notification  of the change in  accounting  firms for the fiscal year
           ended December 31, 2000.

           The company  filed Form 8-K on March 12, 2001 with respect to matters
           not required to be disclosed in a Form 10-K filing.

           The  company  filed  Form 8-K on April 2, 2001,  with  respect to the
           notification  of the settlement  reached with selected  defendants in
           the Timberleaf litigation.

           The  company  filed  Form 8-K on May 24,  2001,  with  respect to the
           notification of the settlement reached with the remaining  defendants
           in the Timberleaf litigation.

                                       23

<PAGE>


                                     PART IV

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


(b)    The following  reports on Form 8-K's were filed during the period covered
       by this report, (Continued).

           The company  filed Form 8-K on October 11, 2001,  with respect to the
           notification  of the  settlement  reached with the  defendants in the
           Alderwood litigation.

           The  company  filed  Form 8-K on March 5, 2002,  with  respect to the
           notification  of the Limited  Partners  summarizing  the  settlements
           reached  with  the   defendants  in  the  Alderwood  and   Timberleaf
           litigations and the impacts on cash flow and future distributions.

(c)    No additional exhibits are required pursuant to Item 601(b) of Regulation
       S-K.

                                       24

<PAGE>


              Report of Ernst & Young LLP, Independent Auditors


To the Partners
Prometheus Income Partners,
A California limited partnership:

We have audited the accompanying balance sheets of Prometheus Income Partners, a
California  limited  partnership,  as of  December  31,  2001 and 2000,  and the
related statements of income,  partners' capital  (deficit),  and cash flows for
the years then ended. Our audits also included the financial statement schedules
listed in the Index at Item 14(a). These financial  statements and schedules are
the  responsibility of the Partnership's  management.  Our  responsibility is to
express an opinion on these  financial  statements  and  schedules  based on our
audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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  statements  referred to above present fairly, in
all material respects,  the financial position of Prometheus Income Partners,  a
California limited  partnership,  at December 31, 2001 and 2000, and the results
of its operations and its cash flows for the years then ended in conformity with
accounting  principles  generally  accepted in the United  States.  Also, in our
opinion,  the related financial  statement schedules when considered in relation
to the basic  financial  statements as a whole,  present  fairly in all material
respects the information set forth therein.

As discussed in Note 7, the accompanying financial statements have been restated
to reflect the reversal of an accrual previously made in error.



/s/ Ernst & Young LLP


San Francisco, California
March 1, 2002, except for Notes 1, 5 and 7, as to which the date is May 10,
2002.

                                       25


<PAGE>


             REPORT OF ARTHUR ANDERSEN LLP, INDEPENDENT AUDITORS


To the Partners of
Prometheus Income Partners,
a California limited partnership:

We have  audited  the  accompanying  statements  of  income,  partners'  capital
(deficit) and cash flows for each of the two years in the period ended  December
31, 1999 of Prometheus Income Partners, a California limited partnership.  These
financial statements are the responsibility of the Partnership's management. Our
responsibility  is to express an opinion on these financial  statements based on
our audit.

We conducted our audit in accordance with auditing standards  generally accepted
in the United States. 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 audit  provides a  reasonable  basis for our
opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the results of income and cash flows of Prometheus Income
Partners,  a California  limited  partnership,  for the year ended  December 31,
1999, in conformity with accounting  principles generally accepted in the United
States.



/s/ Arthur Andersen LLP


San Francisco, California
March 28, 2000

                                       26

<PAGE>


                           PROMETHEUS INCOME PARTNERS
                        a California limited partnership

                                 BALANCE SHEETS

                        As of December 31, 2001 and 2000

                      (In Thousands, Except for Unit Data)

                                                         2001            2000
                                                     ----------     ----------
                                                     (Restated)

ASSETS

   Real Estate
     Land, buildings and improvements                 $31,881         $30,778
     Construction in progress                             776              44
     Accumulated depreciation                          (9,483)         (8,801)
                                                      --------        --------
                                                       23,174          22,021

   Cash and cash equivalents                            4,036           3,568
   Restricted cash                                     10,437           5,256
   Deferred financing costs, net of
     accumulated amortization of $120 and $90             179             209
   Accounts receivable and other assets                     2              34
   Receivable from settlement of construction
     defects litigation                                 6,299              --
                                                      --------        --------

     Total assets                                     $44,127         $31,088
                                                      ========        ========

LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)

   Notes payable                                      $25,548         $25,879
   Accounts payable and accrued liabilities               388             439
   Construction defects reserve                        10,832              --
                                                      --------        --------

     Total liabilities                                 36,768          26,318
                                                      --------        --------

   Commitments and contingencies (see Notes 4 5, and 6)

   Partners' Capital (Deficit)
     General partner deficit                             (328)           (354)
     Limited partners' capital,
       18,995 limited partnership
       units issued and outstanding                     7,687           5,124
                                                      --------        --------

     Total partners' capital (deficit)                  7,359           4,770
                                                      --------        --------

     Total liabilities and partners' capital
       (deficit)                                      $44,127         $31,088
                                                      ========        ========

                             See accompanying notes.

                                       27

<PAGE>


                           PROMETHEUS INCOME PARTNERS
                        a California limited partnership

                              STATEMENTS OF INCOME

             For the years ended December 31, 2001, 2000 and 1999

                      (In Thousands, Except for Unit Data)



                                        2001             2000           1999
                                      --------         --------       --------
                                      (Restated)

REVENUES
   Rental                              $7,387           $6,695         $5,674
   Interest                               415              464            250
   Other                                   69               88            182
                                      --------         --------       --------

     Total revenues                     7,871            7,247          6,106
                                      --------         --------       --------


EXPENSES
   Interest and amortization            1,837            1,860          1,881
   Operating                            1,731            1,421          1,400
   Depreciation                           682              618            573
   Administrative                          44               40             40
   Payments to general partner
     and affiliates:
     Management fees                      431              372            300
     Operating and administrative         557              527            481
                                      --------         --------       --------
     Total expenses                     5,282            4,838          4,675
                                      --------         --------       --------

NET INCOME                             $2,589           $2,409         $1,431
                                      ========         ========       ========


Net income per $1,000
   limited partnership
   unit                                  $135             $126            $75
                                      ========         ========       ========

Number of limited partnership
   units used in computation           18,995           18,995         18,995
                                      ========         ========       ========


                             See accompanying notes.

                                       28

<PAGE>


                           PROMETHEUS INCOME PARTNERS
                        a California limited partnership

                   STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)

             For the years ended December 31, 2001, 2000 and 1999

                                 (In Thousands)


                                                General     Limited
                                                Partner     Partners     Total
                                                -------     ---------    -----

Balance as of   December 31, 1998                $(392)      $1,322      $930

     Net Income                                     14        1,417     1,431
                                                -------     ---------  -------

Balance as of December 31, 1999                   (378)       2,739     2,361

     Net Income                                     24        2,385     2,409
                                                -------     ---------  -------

Balance as of December 31, 2000                   (354)       5,124     4,770

     Net Income (Restated)                          26        2,563     2,589
                                                -------     ---------  -------

Balance as of December 31, 2001 (Restated)       $(328)      $7,687    $7,359
                                                =======     =========  =======



                             See accompanying notes.

                                       29

<PAGE>


                           PROMETHEUS INCOME PARTNERS
                        a California limited partnership

                            STATEMENTS OF CASH FLOWS
              For the years ended December 31, 2001, 2000 and 1999
                                 (In Thousands)

                                                     2001      2000      1999
                                                   --------  --------  --------
                                                    (Restated)

CASH FLOWS FROM OPERATING ACTIVITIES
   Net income                                       $2,589    $2,409    $1,431
   Adjustments to reconcile net income to net
     cash provided by (used in) operating
     activities:
       Depreciation                                    682       618       573
       Amortization                                     30        30        30
       Increase in restricted cash                  (5,181)     (698)     (568)
       Decrease (increase) in accounts
         receivable and other assets                    32        (5)       32
       (Decrease) increase in payables
         and accrued liabilities                       (51)      115      (101)
                                                   --------   -------   -------

   Net cash (used in) provided by operating
     activities                                     (1,899)    2,469     1,397
                                                   --------   -------   -------

CASH FLOWS USED IN INVESTING ACTIVITIES
   Additions to buildings and improvements          (1,103)     (490)     (350)
     Construction in progress                         (732)      (44)       --
                                                   --------   -------   -------

   Cash used in investing activities                (1,835)     (534)     (350)
                                                   --------   -------   -------

CASH FLOWS PROVIDED BY (USED IN) FINANCING
ACTIVITIES
   Principal reductions on notes payable              (331)     (309)     (288)
   Proceeds from settlement of construction
      defects litigation, net of direct
      costs incurred                                 4,533        --        --
                                                   --------   -------   -------

   Net cash provided by (used in) financing
     activities                                      4,202      (309)     (288)
                                                   --------   -------   -------

Net increase in cash and cash equivalents              468     1,626       759

Cash and cash equivalents at beginning of year       3,568    1, 942     1,183
                                                   --------   -------   -------

Cash and cash equivalents at end of year            $4,036    $3,568    $ 1,942
                                                   ========   =======   =======

SUPPLEMENTAL DISCLOSURE OF NON-CASH
OPERATING ACTIVITY
   Receivable from settlement of construction
     defects litigation                             $6,299    $    --   $    --
                                                   ========   =======   =======

                             See accompanying notes.

                                       30

<PAGE>


                           PROMETHEUS INCOME PARTNERS
                        a California limited partnership


                          NOTES TO FINANCIAL STATEMENTS
                           December 31, 2001 and 2000

1.     ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       Prometheus  Income  Partners,   a  California  limited  partnership  (the
"Partnership"), was formed to invest in, construct, hold, operate and ultimately
sell two multi-family apartment projects, Alderwood Apartments ("Alderwood") and
Timberleaf  Apartments  ("Timberleaf"),   located  in  Santa  Clara,  California
(collectively,  the "Properties"). The General Partner is Prometheus Development
Co., Inc., ("Prometheus") a California corporation.  The Partnership operates in
one segment, residential real estate.

       In accordance with the terms of the Partnership Agreement, income or loss
is  allocated  1% to the General  Partner and 99% to the Limited  Partners.  Net
income or loss per limited  partner  unit is computed by dividing the net income
or loss  allocable  to the Limited  Partners by the number of units  outstanding
during the period in which the income or losses are allocated.

       The  preparation of financial  statements in conformity  with  accounting
principles  generally accepted in the United States 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 revenues  and expenses
during the reporting period. Actual results could differ from those estimates.

       Real  estate,  which  includes  development  costs,  construction  costs,
property taxes and interest  incurred during the construction  period, is valued
at cost unless  circumstances  indicate that cost cannot be recovered,  in which
case the  carrying  value is reduced to  estimated  fair value.  At December 31,
2001,  the  Partnership's  management  believes  that the carrying  value of the
Partnership's real estate does not exceed its estimated fair value.

       None of the  expenditures  to repair the  hardboard  siding  construction
defects  will be  capitalized  inasmuch  as the  repairs  are not  considered  a
betterment  that  will  extend  the life of the  Partnership's  assets,  but are
considered a correction  of a past  deficiency in the assets.  The  construction
defects  repairs  will  restore  the  assets  to  their  original  condition  by
maintaining the existing condition of the Properties.

       Maintenance  and repair  expenses are charged to  operations as incurred.
Buildings,   asset   replacements  and  improvements  are  capitalized  and  are
depreciated  using the  straight-line  method over their estimated useful lives,
which range from 5 to 40 years, as follows.

              Buildings                           40 years
              Land Improvements                   30 years
              Structural Improvements             30 years
              Personal property                    5 years

       Loan fees,  incurred  in  conjunction  with the notes  payable  have been
deferred and are amortized,  using the straight-line  method which  approximates
the effective interest method, over the terms of the related notes payable.

                                       31

<PAGE>


                 NOTES TO FINANCIAL STATEMENTS  (Continued)

1.     ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
       (Continued)

       All leases are  classified  as  operating  leases.  Rental  revenues  are
recognized when contractually due based on the terms of signed lease agreements,
which range in duration from month-to-month to one year.

       No income  taxes are levied on the  Partnership;  rather,  such taxes are
levied on the individual partners.  Consequently,  no provision or liability for
federal  or  California  income  taxes has been  reflected  in the  accompanying
financial  statements.  The net income or loss for financial  reporting purposes
differs  from  the  net  income  or  loss  for  income  tax  reporting  purposes
principally  due to  differences  in useful lives and  depreciation  methods for
buildings and  improvements,  amortization of  construction  period interest and
taxes. Reconciliations of net income per the federal tax return to net income as
reported in the accompanying  financial  statements for the years ended December
31, 2001, 2000 and 1999 follows (unaudited):

                                             2001        2000         1999
                                         ----------  ----------    ---------
                                         (Restated)
                                                  (In Thousands)

Net income per federal tax return         $  2,557    $  2,348     $  1,318
Prepaid rental receipts                          3         (7)           24
Depreciation                                    29          68           89
                                         ----------  ----------    ---------
Net income per accompanying Statement
    of Income                             $  2,589    $  2,409     $  1,431
                                         ==========  ==========    =========


       Syndication  costs incurred in raising Limited  Partners' capital are not
charged to Limited Partners' capital for tax reporting purposes.

       The   carrying   amount  of  certain  of  the   Partnership's   financial
instruments,  including  accounts  receivable,  accounts  payable,  and  accrued
liabilities,  approximates  fair value due to the  relatively  short maturity of
such instruments.  The fair value of the notes payable approximates the carrying
value  as of  December  31,  2001  based  on  current  rates  available  to  the
Partnership for debt with similar terms.

       Cash and  cash  equivalents  consist  of  amounts  held in  market  rate,
checking and  investment  accounts with  maturities of three months or less. The
Partnership  maintains  its  cash and cash  equivalents  in high  credit-quality
depository institutions.

                                       32

<PAGE>


                 NOTES TO FINANCIAL STATEMENTS   (Continued)

1.     ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
       (Continued)

       Restricted cash, designated as lender's cash collateral, is invested in a
government  fund with original  maturities of three months or less.  (See Note 6
for further discussion.) The Timberleaf settlement proceeds are maintained in an
investment  account  with a  maturity  of three  months  or  less,  and are also
designated as restricted cash.

Recent Accounting Pronouncement
-------------------------------

       In August 2001, the Financial Accounting Standards Board issued Statement
of Financial  Accounting  Standards No. 144,  Accounting  for the  Impairment or
Disposal of Long-Lived Assets ("SFAS 144"), which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No.  121,  Accounting  for the  Impairment  of  Long-Lived  Assets  and for
Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions
of  Accounting  Principal  Board  Opinion  No.  30,  Reporting  the  Results  of
Operations for a disposal of a segment of a business.  SFAS 144 is effective for
fiscal  years  beginning  after  December 15,  2001,  with  earlier  application
encouraged.  The Partnership expects to adopt SFAS 144 as of January 1, 2002 and
has not yet  determined  the impact,  if any,  that the adoption of the SFAS 144
will have on the Partnership's financial position and results of operations.

2.     NOTES PAYABLE

       The Partnership had the following notes payable (the "Notes") at December
31, 2001 and 2000:

                                                         2001              2000
                                                         ----              ----
                                                          (In Thousands)

Non recourse note payable,  secured by a
first   deed  of  trust  on   Alderwood;
interest is payable monthly at a rate of
6.99% per annum;  the balance is payable
at maturity, December 2007.                          $ 16,488          $ 16,703

Non recourse note payable,  secured by a
first  deed  of  trust  on   Timberleaf;
interest is payable monthly at a rate of
7.09% per annum;  the balance is payable
at maturity, December 2007.                             9,060             9,176
                                                     --------          --------


                                                     $ 25,548          $ 25,879
                                                     ========          ========

       One of the  terms  of the  Notes  requires  that  cash be set  aside in a
hardboard  siding security  account,  as additional  collateral.  See Note 6 for
further discussion.

       Cash paid for interest in each of the years ended 2001, 2000 and 1999 was
approximately $1,807,000, $1,830,000, and $1,851,000, respectively.

                                       33


<PAGE>


                 NOTES TO FINANCIAL STATEMENTS  (Continued)

2.     NOTES PAYABLE (Continued)

       As of December 31, 2001,  maturities on the Notes (In  Thousands)  are as
follows:

       2002                                  $   355
       2003                                      381
       2004                                      409
       2005                                      439
       2006                                      470
       Thereafter                             23,494
                                            ----------
                                             $25,548

       The Notes,  if prepaid  more than  thirty  (30) days from  maturity,  are
subject to a prepayment penalty.


3.     RELATED PARTY TRANSACTIONS

       Prometheus Real Estate Group,  Inc.  ("Prometheus"),  an affiliate of the
General  Partner,  manages the  Properties.  Management fees and payments to the
General Partner and affiliates represent  compensation for services provided and
certain expense  reimbursements  in accordance  with the Partnership  Agreement,
which specifically provides for:


       o    The actual cost to the General  Partner or its  affiliates  of goods
            and  materials  used for or by the  Partnership  and  obtained  from
            entities  which  are not  affiliated  with the  General  Partner;  o
            Expenses for specified administrative services;

       o    Other  administrative  services,  provided  that these  services are
            necessary to the prudent operation of the Partnership; and

       o    Funds  advanced to the  Partnership  by the  General  Partner or its
            affiliates pursuant to the management agreement.

       However no reimbursement for the administrative services is permitted for
services for which the General Partner or its affiliates receive a separate fee,
and the amount of these expenses may not exceed the lesser of:

       o    The actual cost of these services; and

       o    90% of the amount which the Partnership  would be required to pay to
            independent third parties for comparable services.

       For 2001, 2000 and 1999 the General Partner or its affiliates, other than
Prometheus   (which  was  entitled  to  additional   reimbursements   under  the
Partnership's  management  agreement),  did not  receive any  reimbursement  for
direct or other administrative and out-of-pocket expenses.

                                       34

<PAGE>


                 NOTES TO FINANCIAL STATEMENTS  (Continued)

4.     COMMITMENTS

       Commencing on January 1, 1989,  under the terms of the Limited  Liquidity
Plan  ("Plan"),  the  Partnership  may  repurchase  up to 5% in aggregate of the
outstanding units from the Limited Partners, at the Limited Partners' option, in
accordance with the Partnership  Agreement.  The General Partner may allocate up
to 10% of the  distributable  cash from  operations  in the current year for the
purpose of making such  repurchases.  The price of any units  repurchased by the
Partnership will be determined in accordance with the Partnership Agreement. The
Partnership  made no repurchases  under the Plan during the years ended December
31, 2001, 2000 and 1999.

5.     LITIGATION SETTLEMENT - CONSTRUCTION DEFECTS

       In June  1996,  the  General  Partner  became  aware  of  defects  in the
hardboard siding used in both of the Partnership's properties. At that time, the
General Partner began seeking recovery of costs to repair those defects from the
manufacturer of the hardboard  siding,  as well as the general  contractor,  the
subcontractors,  and the architects involved in the original construction of the
two properties.

       Since June 1996, the General  Partner has determined that the defects did
not reduce the assets' value to an amount below their net book value, based on a
comparison of future cash flows to the carrying  amount of the properties at the
end of subsequent  reporting periods.  This continues to be the case at December
31,  2001.  The  General  Partner  has  also  determined   that,   although  the
construction  defects may be substantial in nature, the properties will continue
to function as safe,  inhabitable,  income-generating  properties without a full
repair  of the  defects  for an  indeterminate  amount  of time.  As  such,  the
Partnership  has been under no obligation to undertake a major repair project to
remedy the construction defects at either of the properties. The Partnership has
made  certain  emergency  repairs to the  properties  since  June 1996,  and has
expensed  those  repair  costs as incurred  with no  consideration  of potential
recoveries from the ongoing litigation or potential  settlement  thereof.  As of
December 31, 2001, the cost of emergency  repairs  charged to expense since June
1996 totaled approximately $3,457,000.

       In 2001, the Partnership's litigation against the responsible parties was
settled with net proceeds (after legal costs) to the Partnership of $10,832,000.
The net proceeds related to the Timberleaf  property of $4,533,000 were received
by the  Partnership in 2001. The Alderwood  litigation was settled on October 3,
2001 and net settlement  proceeds of $6,299,000 were received by the Partnership
on March 5,  2002.  As such,  a  receivable  for the  Alderwood  net  settlement
proceeds was recorded as of December 31, 2001. The General Partner believes that
these  settlements  were, in substance,  payment for  non-operating  costs to be
incurred by the Partnership to repair the defects at both properties.

       In 2001, upon learning that the defendants in the litigation were willing
to  resolve  the  lawsuits  in  return  for  a  substantial  settlement  to  the
Partnership,  the General  Partner  made the decision to utilize the proceeds of
the settlement to undertake a major repair project  related to the  construction
defects.  The General Partner is currently  engaged in the process of developing
an updated repair plan, and anticipates  that the repairs will occur during 2002
and 2003. In light of the settlement  recovery,  the General Partner is hopeful,
that under prevailing circumstances and market conditions, it can develop a plan
to repair the  construction  defects,  including all costs  associated  with the
repairs,   (including  rent  concessions  and  lost  rents)  for   approximately
$12,500,000 to $14,000,000,  an amount that exceeds the net settlement  proceeds
received by the Partnership.  This preliminary  projection of the cost to repair
the construction  defects is an estimate,  and as such the estimate could change
in the near term due to certain  factors that could be encountered in either the
design engineering phase,

                                       35

<PAGE>


                 NOTES TO FINANCIAL STATEMENTS  (Continued)

5.     LITIGATION SETTLEMENT - CONSTRUCTION DEFECTS (Continued)

and / or actual  construction  phase due to hidden  defects that are not evident
until the  current  siding  is  removed  and the  underlying  wall and  flooring
structures  are exposed and examined.  As such, the cost to repair could change,
and the change could be material to this preliminary projection. The Partnership
has recorded a  construction  defects  reserve  liability of  $10,832,000 in the
accompanying  Balance  Sheet at December  31,  2001 equal to the net  settlement
proceeds. All construction repair expenditures up to $10,832,000 will be charged
to the reserve  liability and amounts in excess of $10,832,000,  if any, will be
expensed as incurred.  None of the expenditures  made to repair the construction
defects will be capitalized, due to the fact that the repairs are not considered
a  betterment  that  will  extend  the  life of the  Partnership's  assets.  The
construction  defects  repairs  are  intended  to  restore  the  assets to their
original condition as though the defects had never existed.

6.     RESTRICTED CASH - CASH COLLATERAL

       The  terms  of  the  Notes  and  the  Security  Agreement,  Disbursements
Agreement and Assignment of Agreements (collectively the "Agreements") (See Note
2 for further discussion) require that each Property maintain a hardboard siding
security  account.  These security  accounts are  additional  collateral for the
lender.  Cash held in these security  accounts was $3,384,000 and $2,468,000 for
Alderwood  and  Timberleaf,  respectively,  at  December  31,  2001.  Until  the
Completion  Date, as defined in the Agreements,  the Partnership is obligated to
contribute annually, an additional 10%, as defined in the Agreements, or monthly
cash flow, whichever is less and, shall be deposited into each security account.
Should the hardboard  siding repairs not be completed by December 2002, or every
two years  thereafter,  and  insufficient  cash has been accumulated to cure the
defects based upon the lender's  determination  of the cost,  then all cash flow
shall be deposited into each applicable security account, as necessary, to fully
fund the cost of  construction.  If the projected cash flow is  insufficient  to
satisfy this deficiency  contribution,  then the Partnership has 60 days to fund
the shortage over the projected cash flow. No withdrawals are permitted from the
security  accounts except to cure the siding defects.  The lender shall have the
right  to  hire  its  own  consultants  to  review,   approve  and  inspect  the
construction. All such reasonable fees and expenses incurred by the lender shall
be paid by the Partnership.

       Should construction not be completed by the Completion Date due to an act
of force majeure,  the Completion  Date can be further  extended to complete the
construction work.

       The  security  accounts  are to be  invested  in  either  a  treasury  or
government fund.

7.     SUBSEQUENT EVENT

       The defendants in the Alderwood  construction  defect litigation  settled
the litigation on October 3, 2001. The defendants  agreed to pay the Partnership
$8,500,000.  Of this amount,  the Partnership  received on March 5, 2002,  after
payment of litigation expenses including legal fees, $6,299,000.

Restatement:

       Subsequent  to  year  end,  the   Partnership   reevaluated  its  initial
accounting for the Alderwood and Timberleaf litigation settlements and concluded
that  $1,667,000,  representing  estimated  repair costs in excess of actual net
settlement proceeds,  was a disclosable  commitment and not a probable liability
as of December 31,  2001.  Accordingly,  the  financial  statements  and certain
information  in Notes 1 and 5 have  been  revised  to  reflect  the  effects  of
reversing  the accrual.  The reversal  resulted in an increase in net income and
Partner's  capital of  $1,667,000  and a reduction in the  construction  defects
reserve and total liabilities of $1,667,000.

                                       36

<PAGE>


                                                                    SCHEDULE III




                           PROMETHEUS INCOME PARTNERS
                        a California limited partnership

                   REAL ESTATE AND ACCUMULATED DEPRECIATION

                             As of December 31, 2001

                                 (In Thousands)

<TABLE>
<CAPTION>


                                                        Cost Capitalized      Gross Amount at Which
                                                           Subsequent               Carried
                                                         To Acquisition       at Close of Period(1)
                                                  --------------------------- ---------------------
                                                  Build-                            Build-           Accumu-
                                   Cost to        ings and             Carry-       ings and         lated De-   Date of     Date
                         Encum-    the Partner-   Improve-   Improve-  ing          Improve-  Total  preciation  Construc-  Acquired
Description              brances   ship Land      ments      ments     Costs  Land  ments      (3)      (4)      tion         (2)
-----------              ----------------------   --------------------------- ---------------------  ---------------------  --------

<S>                      <C>       <C>            <C>        <C>       <C>    <C>   <C>      <C>     <C>        <C>         <C>
Alderwood Apts.
Santa Clara,
 California              $16,488   $5,931         $  --      $12,950   $441  $5,931 $14,472  $20,403 $6,066     11/86       12/87(5)

Timberleaf Apts.
Santa Clara,
 California                9,060    3,145            --        6,961    510   3,145   8,333   11,478  3,417     11/86       11/86


 Total                   $25,548   $9,076         $  --      $19,911   $951  $9,076 $22,805  $31,881 $9,483
                         =======   ======         =====      =======   ====  ====== =======  ======= ======

</TABLE>


                                       37

<PAGE>


                                                                    SCHEDULE III
                           PROMETHEUS INCOME PARTNERS
                        a California limited partnership

             REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)

                             As of December 31, 2001

                                 (In Thousands)


NOTES:

(1)  The aggregate cost for federal income tax purposes is $29,849.

(2)  Depreciation is computed on lives ranging from 5 to 40 years.

(3)  Balance, December 31, 1998                                        $29,938

     Additions                                                             350
                                                                       -------

     Balance, December 31, 1999                                         30,288

     Additions                                                           1,103

     Balance, December 31, 2000                                         30,778

     Additions                                                             490
                                                                       -------

     Balance  December 31, 2001                                        $31,881
                                                                       =======

(4)  Balance, December 31, 1998                                        $ 7,610

     Provision charged to expense                                          573
                                                                       -------

     Balance, December 31, 1999                                          8,183

     Provision charged to expense                                          618
                                                                       -------

     Balance, December 31, 2000                                          8,801

     Provision charged to expense                                          682
                                                                       -------

     Balance, December 31, 2001                                        $ 9,483


(5)  The Land site was leased through November 1987 and acquired in December
     1987.

                                       38

<PAGE>


                                     SIGNATURES


       Pursuant to the requirement of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant in the capacities and on the date indicated.


                              PROMETHEUS INCOME PARTNERS,
                              a California limited partnership

                              By PROMETHEUS DEVELOPMENT CO., INC.,
                              a California corporation,
                              Its General Partner





Date:   May 14, 2002       By     /s/ Vicki R. Mullins
        ------------              --------------------------------
                                  Vicki R. Mullins,
                                  Vice President




Date:  May 14, 2002        By     /s/ John J. Murphy
       ------------               --------------------------------
                                  John J. Murphy,
                                  Vice President

       Supplemental  Information to be furnished with Report,  filed pursuant to
Section 15(d) of the Act by  Registrants,  which have not registered  Securities
pursuant to Section 12 of the Act:

       None

                                       39