<TABLE>
<S>                          <C>
                             SECURITIES AND EXCHANGE COMMISSION

                                   Washington, D.C. 20549

                                          FORM 10-K

                        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 19
</TABLE>


<PAGE>

<TABLE>
<S>          <C>
                                       Table of Contents
                                           Form 10-K


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....................................16
   Item 9    Changes in and Disagreements with Accountants on
               Accounting and Financial Disclosure..........................................16

Part III

   Item 10   Directors and Executive Officers of the Registrant.............................17
   Item 11   Executive Compensation.........................................................17
   Item 12   Security Ownership of Certain Beneficial Owners and Management.................18
   Item 13   Certain Relationships and Related Transactions.................................18

Part IV

   Item 14   Exhibits, Financial Statement Schedules and
               Reports on Form 8-K.......................................................19-35
</TABLE>


<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  Properties II, LLC ("Everest II"), 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  II 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  Management,  LLC  ("Everest"),  an
               unrelated  third party to the  Partnership,  but an  affiliate of
               Everest  II,  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 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


                                       6
<PAGE>


               offer to purchase up to 200 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 partners dated October 29, 2001 from Equity
               Resource,  the  expiration  of this tender offer was  purportedly
               extended to November 29, 2001 for an unspecified  number of units
               at a price of $700 per unit.  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.  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 Years Ended December 31,
                               ---------------------------------------------------------------

                               2001          2000          1999          1998          1997
                               ----          ----          ----          ----          ----
                                            (In    Thousands, Except for Unit Data)
<S>                            <C>           <C>           <C>           <C>           <C>
Rental revenues                $7,387        $6,695        $5,674        $5,578        $5,256

Net income                     $922          $2,409        $1,431        $896          $477

Net income
  per $1,000 limited
     partnership unit          $49           $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
</TABLE>


                                       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. 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
                               ----       ----       ----       ----       ----       ----      ----       ----
                                                      (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 (loss)              $(975)     $599       $512       $786       $921       $602      $427       $459

Net income (loss)
  per $1,000 limited
     partnership unit          $(50)      $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


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.

           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  litigations.  The $4,534,000 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


                                       10
<PAGE>



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

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 restricted  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  definitely  determined.
Therefore, it is uncertain when cash distributions will resume. In addition, the
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.  The reinstatement and level of future
distributions,  if and when  reinstated,  will be dependent on several  factors,
including the degree of damage caused by the construction defects, and continued
stabilized operations at the Properties.  The exact total repair costs cannot be
definitely  determined  until the  repair  work has begun and has  substantially
progressed.  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 learned that the hardboard siding used
at both  Alderwood and  Timberleaf was beginning to fail. On September 23, 1996,
Prometheus Income Partners filed two lawsuits (since settled) against the siding
manufacturer, the general contractor, the subcontractors and the architects, one
for each of its Properties,  regarding problems at the Properties  stemming from
the hardboard siding.

        The extent and magnitude of the construction defects continued to worsen
with time. The General Partner began making repairs using the cash reserve funds
held.  As  of  December  31,  2001,  the  Partnership  had  spent  approximately
$3,457,000  on emergency  and  permanent  (principally  dormer roof  assemblies)
repairs,  together with out of pocket expenditures  incurred prior to receipt of
settlement  proceeds.  This amount is not included in the Partnership's  current
estimates  of costs to repair  construction  defects.  As of December  31, 2001,
approximately 50% of the dormer roof assemblies at Timberleaf were re-built.  At
Alderwood,  approximately 50% of the dormer roof assemblies were started in 2001
and were completed  during the first quarter of 2002. The remaining  dormer roof
assemblies at both Properties will be completed  concurrently with the permanent
repairs to the construction defects.

        During 2001, all litigation  regarding  these  construction  defects was
settled.  In total,  from all Alderwood and Timberleaf  settlements,  defendants
have agreed to pay the Partnership an aggregate of $14,600,000.  Of this amount,
the  Partnership  will  receive  net  proceeds  of  approximately   $10,832,000.
Timberleaf's  net proceeds of  $4,533,000  were received by the  Partnership  in
2001. The


                                       11
<PAGE>



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

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

Alderwood  litigation was settled on October 3, 2001 and net settlement proceeds
of  $6,299,000  were  received on March 5, 2002.  As such, a receivable  for the
Alderwood net settlement  proceeds was recorded as of December 31, 2001, with an
offsetting credit recorded to the Construction Defects Reserve account.

        The terms of the  mortgages  on the  Properties  require that a security
account be maintained  for each Property to cover  contingent  liabilities  with
respect to defects in the Properties'  hardboard siding. These security accounts
are additional  collateral for the lender,  and total,  as of December 31, 2001,
approximately $5,852,000.  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.

        The  $4,533,000 of Timberleaf  settlement  proceeds were received by the
Partnership  in 2001,  and are  segregated  in a reserve  bank  account  and are
designated  as  restricted  cash,  which totals  approximately  $4,585,000 as of
December 31, 2001.  The  settlement  proceeds,  including  accumulated  interest
income, is used to pay all siding related design and construction expenditures.

        In addition to the security  accounts  mandated under the  Partnerships'
financing  arrangements and from settlement proceeds,  the Partnership currently
maintains  additional accounts exclusive of the Timberleaf  settlement proceeds,
totaling as of December 31, 2001  approximately  $4,036,000,  which is primarily
intended to cover additional contingent  liabilities related to the construction
defects and other matters.

        The  General  Partner is now  engaged in the  process of  developing  an
updated  repair plan in light of the  settlement  recovery and will move forward
with repairs  estimated to occur  during 2002 and 2003.  The General  Partner is
hopeful,  that under  prevailing  circumstances  and market  conditions,  it can
develop a plan to repair the  construction  defects,  including rent concessions
and lost rents for  approximately  $12,500,000 to $14,000,000.  This preliminary
projection of the cost to repair the construction defects is an estimate, and as
such it is at least  reasonably  possible that the estimate  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.  Any
changes to this  estimate will be adjusted in the  subsequent  year in which the
change  is  calculated  and will be  recorded  in the  manner  described  in the
following paragraphs.

        The preceding  paragraphs  contain certain  forward-looking  disclosures
relating  to  working  capital,  liquidity  and the cost to repair  construction
defects,  which are based upon the General Partner's current  expectations.  The
words "estimated,"  "projected,"  "intended," "expected" and similar expressions
are  intended to identify  forward-looking  disclosures.  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 best judgments.  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


                                       12
<PAGE>




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

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 all costs  associated with the repairs and assumptions
are reasonable,  there can be no assurance that the projection will be accurate,
and actual results may vary  materially  from those shown.  This  projection was
based upon a variety of estimates  and  assumptions.  It is expected  that there
will be  differences  between  the  actual  and  projected  cost to  repair  the
construction defects and all costs associated with the repairs may be materially
higher or lower than those  projected.  Inclusion  of the  foregoing  projection
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.

        Although a  definitive  estimate  of the cost of the repair plan for the
hardboard siding is not yet finalized,  based upon the General Partner estimated
cost  to  repair  these  construction   defects,   there  is  a  short  fall  of
approximately  $1,667,000 between the net settlement proceeds of $10,832,000 and
the  General  Partner's  low  end  estimate  of  the  cost  of  engineering  and
construction repairs of $12,500,000.  The minimum loss contingency of $1,667,000
is recognized as a one-time charge in the  accompanying  Statement of Income for
the year ended December 31, 2001.

      All siding related design and construction  expenditures up to $12,500,000
 will be  offset  against  this  liability.  All  expenditures,  if  any,  above
 $12,500,000,  will be expensed as incurred in the year the actual  expenditures
 exceed  this  amount.  In the event that this  liability  exceeds  the costs to
 repair the construction defects, the remaining liability would be recognized as
 a gain upon the completion of the repairs.

        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.


                                       13
<PAGE>





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

Operations
----------

      For the years  ended  December  31,  2001,  2000,  and 1999,  the  average
   occupied  rent  obtained  from  leased  units,  and  the  average   occupancy
   percentages were as follows:

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

                                     2001        2000         1999
                                     ----        ----         ----

         One Bedroom Units         $1,575      $1,641       $1,285
         Two Bedroom Units         $1,931      $2,115       $1,567

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

                                     2001        2000         1999
                                     ----        ----         ----

         Alderwood                    96%         98%          97%
         Timberleaf                   95%         99%          97%


      Both  Properties  are located in Santa Clara  County,  in an area commonly
 referred to as Silicon Valley.  With the economic  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.  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.  The ability to affect increases in rental rates may be impacted
 by  market  conditions  such as  supply of  rental  housing  or local  economic
 conditions.  These factors have impacted the average  occupied rent and average
 occupied  percentages in all three of the years presented.  For the period from
 1999 to 2000, the Silicon  Valley  continued to see lowering  unemployment  and
 increasing new job growth. Many housing developers were breaking ground for new
 housing units.  Commencing in the later half of 2000 and continuing  into 2001,
 unemployment rose, new job growth was non-existent with jobs decreasing and new
 housing units were coming on line. As a result,  average rental rates decreased
 4% from 2000 to 2001.  Concessions were utilized to increase occupancy,  and to
 remain competitive in the Santa Clara market.

Operating 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  have  fluctuated  between  years due  principally  to the  destructive
testing,  emergency repairs and litigation fees associated with hardboard siding
defects.  These three  expenditure  components of hardboard  siding defects have
fluctuated  based upon where in the  litigation and repair cycles the Properties
happened to be. After  initial  owner  investigations,  came the  quantification
phase  wherein   preliminary   investigation   subsequently   led  to  extensive
destructive  testing and  emergency  repairs  were  undertaken  to preserve  the
assets.  Legal and expert  consultant  fees increased as the cases were prepared
for the ensuing  litigation.  In accordance with SFAS 5, the operating  expenses
for  2001  include  a one time  current  period  charge  of  $1,667,000  for the
provision for  construction  defect repair costs  (exclusive of rent concessions
and lost rents) exceeding the net settlement  proceeds  received.  In as much as
the provision is a non-cash charge, there is no affect on cash flow the for year
2001.


                                       14
<PAGE>


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

      Overall,  other than the fluctuation in operating  expenses  between years
 caused by the  expenditures  associated  with the hardboard  siding defects and
 related  litigation,  the  Properties'  income streams have not been materially
 impacted due to the  immediate  attention  given the defects and the  emergency
 repairs undertaken.

      Interest  expense  on Notes  is at a fixed  rate of 6.99%  per  annum  for
 Alderwood,  and 7.09% per annum for  Timberleaf  commencing  December 26, 1997.
 Monthly  principal  and  interest  payments  under these Notes are $114,659 and
 $63,587, respectively.

      Depreciation and amortization  remained  consistent between 2001 and 2000.
 Depreciation expense was $682,000 and $618,000 in 2001 and 2000,  respectively.
 Amortization expense was $30,000 each year.

      Although  inflation  impacts  the  Partnership's  expenses,  increases  in
 expenses can  sometimes be offset by increases in rental  rates.  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.

 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 and 6),  and Real  Estate  (Notes 1 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.

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.


                                       15
<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.


                                       16
<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., a California  corporation,  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.,  Inc.  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 39. Vice President.  Mr. Murphy's  responsibilities  include
   managing all financial,  accounting and reporting activities,  and insurance.
   Mr.  Murphy came to Prometheus  Development  Co., Inc. 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.


                                       17
<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.


                                       18s
<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...................21

          Report of Arthur Andersen LLP, Independent Auditors.................22

        Financial Statements:

          Balance Sheets as of December 31, 2001 and 2000.....................23

          Statements of Income for the years ended
            December 31, 2001, 2000 and 1999..................................24

          Statements of Partners' Capital (Deficit) for the
            years ended December 31, 2001, 2000 and 1999......................25

          Statements of Cash Flows for the years ended
            December 31, 2001, 2000 and 1999..................................26

          Notes to Financial Statements.......................................27

    2.   FINANCIAL STATEMENT SCHEDULES:

          Schedule II - Valuation and Qualifying Accounts.....................33

          Schedule III - Real Estate and Accumulated Depreciation .........34-35

             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, regarding a letter
             mailed to the limited partners.

             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, 2001.

             The company  filed Form 8-K on March 12,  2001,  regarding a letter
             mailed to the limited partners.

             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.


                                       19
<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 May 22,  2001,  with  respect to the
             notification   of  the   settlement   reached  with  the  remaining
             defendants in the Timberleaf litigation.

             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 4, 2002,  regarding  a letter
             mailed to the limited partners.

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


                                       20
<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.



/s/ Ernst & Young LLP


San Francisco, California
March 1, 2002,  except for Note 7 and  paragraph  two of Note 5,
as to which the date is March 5, 2002.


                                       21
<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 the year 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 operations  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


                                       22
<PAGE>







                           PROMETHEUS INCOME PARTNERS
                        a California limited partnership

                                 BALANCE SHEETS

                        As of December 31, 2001 and 2000

                      (In Thousands, Except for Unit Data)

<TABLE>
<CAPTION>
                                                                     2001               2000
                                                               ----------          ---------
ASSETS

<S>                                                              <C>                  <C>
   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                           387                 439
   Construction defects reserve                                    12,500                  --
                                                                 --------             -------

      Total liabilities                                            38,435              26,318
                                                                 --------             -------

   Commitments (see Note 4)

   Partners' Capital (Deficit)
      General partner deficit                                       (345)               (354)
      Limited partners' capital,
        18,995 limited partnership
        units issued and outstanding                                6,037               5,124
                                                                 --------             -------

      Total partners' capital (deficit)                             5,692               4,770

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


                             See accompanying notes.


                                       23
<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)

<TABLE>
<CAPTION>
                                                 2001               2000              1999
                                              ----------        ----------         ----------
<S>                                           <C>                 <C>               <C>
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
   Provision for estimated construction
      defects repair costs in excess of net
      settlement proceeds                        1,667                  --                --
                                              --------          ----------         ---------

      Total expenses                             6,949               4,838             4,675
                                              --------          ----------         ---------

NET INCOME                                        $922              $2,409            $1,431
                                              ========          ==========         =========


Net income per $1,000
   limited partnership
   unit                                            $49                $126               $75
                                              ========          ==========         =========

Number of limited partnership
   units used in computation                    18,995              18,995            18,995
                                              ========          ==========         =========
</TABLE>


                             See accompanying notes.

                                       24
<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                                          9        913       922
                                                     ------     ------    ------

Balance as of December 31, 2001                      $(345)     $6,037    $5,692
                                                     ======     ======    ======


                             See accompanying notes.

                                       25
<PAGE>




                           PROMETHEUS INCOME PARTNERS
                        a California limited partnership

                            STATEMENTS OF CASH FLOWS
              For the years ended December 31, 2001, 2000 and 1999
                                 (In Thousands)
<TABLE>
<CAPTION>
                                                                  2001       2000       1999
                                                                -------    -------     ------

CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                             <C>        <C>        <C>
   Net income                                                      $922     $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
        Provision for estimated construction defects
           in excess of net settlement proceeds                   1,667         --         --

        Decrease (increase) in accounts
           receivable and other assets                               32        (5)         32
        (Decrease) increase in payables
           and accrued liabilities                                 (52)       115       (101)
                                                                -------    -------    -------

   Net cash provided by operating activities                      3,281      3,167      1,965
                                                                -------    -------    -------

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               4,534         --         --
   Deposits to restricted cash                                  (5,181)      (698)      (568)
                                                                -------    -------    -------

   Net cash provided by (used in) financing activities            (978)     (1007)      (856)
                                                                -------    -------    -------

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    $    --    $    --
                                                                =======    =======    =======
</TABLE>

                             See accompanying notes.

                                       26
<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., a California corporation ("Prometheus").  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.


                                       27
<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 and the provision for estimated construction defects repair cost in excess
of net settlement  proceeds.  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:

<TABLE>
<CAPTION>
                                                    2001           2000            1999
                                                 -----------    ------------    -----------
                                                                (In Thousands)
<S>                                                <C>              <C>           <C>
Net income per federal tax return                  $  2,557         $ 2,348       $  1,318
Provision for estimated construction defects
     repair costs in excess of net settlement
     proceeds                                       (1,667)              --             --

Prepaid rental receipts
                                                          3             (7)             24
Depreciation
                                                         29              68             89
                                                 -----------    ------------    -----------
Net income per accompanying Statement
     of Income                                      $   922        $  2,409       $  1,431
                                                 ===========    ============    ===========
</TABLE>

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.


                                       28
<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:

<TABLE>
<CAPTION>
                                                                   2001                 2000
                                                                   ----                 ----
                                                                        (In Thousands)
<S>                                                            <C>                  <C>
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
                                                               ========             ========
</TABLE>

        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 $1,808,000, $1,830,000, and $1,851,000, respectively.


                                       29
<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.,  a   California   corporation
("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 neither the General Partner nor its affiliates,
other than Prometheus (which was entitled to additional reimbursements under the
Partnership's  management  agreement),  received any reimbursement for direct or
other administrative and out-of-pocket expenses.


                                       30
<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 learned that the hardboard siding used
at both  Alderwood and  Timberleaf was beginning to fail. On September 23, 1996,
Prometheus Income Partners filed two lawsuits (since settled) against the siding
manufacturer, the general contractor, the subcontractors and the architects, one
for each of its Properties,  regarding problems at the Properties  stemming from
the hardboard siding.

        During 2001, all litigation regarding  construction defects was settled.
In total, from all Alderwood and Timberleaf settlements,  defendants have agreed
to pay  the  Partnership  an  aggregate  of  $14,600,000.  Of this  amount,  the
Partnership will receive net proceeds of approximately $10,832,000. Timberleaf's
net proceeds of $4,533,000 have been received by the Partnership.  The Alderwood
litigation was settled on October 3, 2001, and settlement proceeds of $6,299,000
were  received on March 5, 2002.  As such, a receivable  for the  Alderwood  net
settlement  proceeds was recorded as of December  31, 2001,  with an  offsetting
credit recorded to the  Construction  Defects Reserve  account.  The Partnership
recognized a charge against income in connection with the litigation settlements
as further discussed below.

        Although a  definitive  estimate  of the cost of the repair plan for the
hardboard  siding  is not  yet  finalized,  based  upon  the  General  Partner's
preliminary estimate, the cost to repair the construction defects including rent
concessions  and  lost  rents  is  anticipated  to be  between  $12,500,000  and
$14,000,000.   Accordingly,   a  construction   defects  reserve   liability  of
$12,500,000,  equal to the low end of the range of estimated  repair costs,  has
been  recorded in the  accompanying  Balance  Sheet at  December  31,  2001.  In
conjunction with recording the reserve liability,  the Partnership  recognized a
charge to income of $1,667,000 in the  accompanying  Statement of Income for the
year ended December 31, 2001 for the estimated repair costs in excess of the net
settlement proceeds. All construction repair expenditures up to $12,500,000 will
be offset against the reserve liability.

        It is reasonably  possible that the future  estimated repair costs 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 the General
Partner's preliminary estimate. Any changes to the estimate will be reflected as
adjustments  to the  reserve  liability  in the periods in which the changes are
calculated with a corresponding charge reflected in the Statement of Income.


                                       31
<PAGE>



                         NOTES TO FINANCIAL STATEMENTS  (Continued)

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.


                                       32
<PAGE>
                                                                     SCHEDULE II




                           PROMETHEUS INCOME PARTNERS
                        a California limited partnership

                        VALUATION AND QUALIFYING ACCOUNTS

                             As of December 31, 2001

                                 (In Thousands)


<TABLE>
<CAPTION>

                                      Balance    Additions   Additions
                                         at     Charged to   Charged to               Balance
                                     Beginning   Costs and     Other                  at End
               Description           of Period   Expenses     Accounts   Deductions  of Period
               -----------           ---------   --------     --------   ----------  ---------


<S>                                  <C>        <C>         <C>          <C>         <C>
     Year ended December 31, 2001:
       Construction defects reserve  $     -    $  1,667    $ 10,843     $      -    $12,500

     Year ended December 31, 2000:
       None

     Year ended December 31, 1999:
       None
</TABLE>


                                       33
<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)
                                         ----------------------------   -------------------------
                                Cost
                                to
                                the      Build-                                 Build-              Accumu-
                                Partn-   ings and              Carry-           ings and            lated De-   Date of    Date
                     Encum-     ership   Improve-    Improve-  ing              Improve-    Total   preciation  Constru-   Acquired
Description          brances    Land     ments       ments     Costs    Land    ments       (3)     (4)         ction      (2)
-----------          -----------------   ----------------------------   -------------------------   --------------------   --------
<S>                  <C>        <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>


                                       34
<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                                                               490
                                                                         -------

     Balance, December 31, 2000                                           30,778

     Additions                                                             1,103
                                                                         -------

     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.


                                       35
<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:   March 28, 2002       By     /s/   Vicki R. Mullins
        --------------              ----------------------------------
                                    Vicki R. Mullins,
                                    Vice President




Date:  March 28, 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


                                       36