SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K/A

                  Annual Report Pursuant to Section 13 or 15(d)

                     Of the Securities Exchange Act of 1934



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

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

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

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

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

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

           Securities registered pursuant to Section 12(g) of the Act:
                      Units of Limited Partnership Interest

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.

                           Yes    X            No
                                 ---              ---

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


                       DOCUMENTS INCORPORATED BY REFERENCE

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

Exhibit index located on page 23


<PAGE>


                                Table of Contents
                                   Form 10-K/A

<TABLE>
<CAPTION>

Part I                                                                                    Page

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

Part II

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

Part III

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

Part IV

   Item 14   Exhibits, Financial Statement Schedules and
               Reports on Form 8-K.......................................................23-39
</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  Management,  LLC  ("Everest"),  an
                 unrelated third party,  made a tender offer for up to 2% of the
                 units, or 379 units,  for $650 per unit. This tender expired by
                 its terms on July 31, 2000.  Under the terms of the Partnership
                 Agreement, Everest was admitted as a limited partner on October
                 1, 2000 and  January 1, 2001 with  respect to 289 and 15 Units,
                 respectively, that were tendered pursuant to this tender offer,
                 for a total 1.600% of the outstanding Units.

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

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

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



                                       6
<PAGE>



                 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.  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

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

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

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


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

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

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

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

           The  terms  of the  Notes  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,  annually  the  Partnership  is
obligated to contribute,  an additional  10%, as defined,  or monthly cash flow,
whichever is less, and shall be deposited into each security account. Should the
hardboard  siding  repairs not be completed by December 2002, or every two years
thereafter, and insufficient cash has been accumulated to cure the defects based
upon the  lender's  determination  of the  cost,  then all  cash  flow  shall be
deposited into each applicable security account, as necessary, to fully fund the
cost of construction. If the projected cash flow is insufficient to satisfy this
deficiency  contribution,  then the Partnership has 60 days to fund the shortage
over the projected  cash flow. No  withdrawals  are permitted  from the security
accounts except to cure the siding  defects.  The lender shall have the right to
hire its own consultants to review,  approve and inspect the  construction.  All
such  reasonable  fees and expenses  incurred by the lender shall be paid by the
Partnership.

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


                                       10
<PAGE>




                                       11
<PAGE>


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

      The Partnership was involved in litigation involving  construction defects
at  its  Properties  (see  "Construction   Defects"  for  a  more  comprehensive
discussion  of the  matter).  This  litigation  was  settled  during  2001.  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.  The  settlement  proceeds,
including accumulated interest income, which totals approximately  $4,585,000 as
of  December  31,  2001,  will  be used to pay all  siding  related  design  and
construction  expenditures.  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.

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

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

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

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

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



                                       12
<PAGE>



thereof.  As of December 31,  2001,  the cost of  emergency  repairs  charged to
expense  since June 1996 totaled  approximately  $3,457,000.  This amount is not
included in the Partnership's current estimates



                                       13
<PAGE>



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

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

to repair construction defects.

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

      In 2001,  upon learning that the defendants in the litigation were willing
to  resolve  the  lawsuits  in  return  for  a  substantial  settlement  to  the
Partnership,  the General  Partner  made the decision to utilize the proceeds of
the settlement to undertake a major repair project  related to the  construction
defects.  The  Partnership  then developed an estimate of the cost to repair the
defects. Based on the information available at the current time, the Partnership
estimates  the cost to repair the defects to be  approximately  $12,500,000,  an
amount  that  exceeds  the  net  settlement  proceeds  received  by  $1,667,000.
Therefore,  based on the  General  Partner's  decision to  undertake  the repair
project,  the  Partnership  recorded this shortfall as a charge to income in the
accompanying Statement of Income for the year ended December 31, 2001.

      The construction defects reserve of $12,500,000 at December 31, 2001 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 the estimated
repair cost.  Any changes to this  estimate  will be adjusted in the  subsequent
year in which the change is realized  and will be recorded as  described  in the
following paragraph.

      The General  Partner is currently  engaged in the process of developing an
updated repair plan, and anticipates that the repairs will occur during 2002 and
2003. All siding related design and construction  expenditures up to $12,500,000
will be offset against the  construction  defects  reserve.  Any expenditures in
excess of $12,500,000  will be expensed in the period in which those  additional
costs are incurred. In the unlikely event that this reserve exceeds the costs to
repair the construction  defects, the remaining liability would be reversed into
income  in  the  period  in  which  the  repairs  are  completed.  None  of  the
expenditures made to repair the construction defects will be capitalized, due to
the fact that the repairs are not  considered a betterment  that will extend the
life of the Partnership's  assets. The construction defects repairs are intended
to restore  the assets to their  original  condition  as though the  defects had
never existed.

      The expenditures for the repair costs will be made from cash reserves that
the Partnership possesses at December 31, 2001, along with the cash from the net
settlement  proceeds  received by the  Partnership  on March 5, 2002,  including
accumulated interest on all cash reserves. The terms of



                                       14
<PAGE>




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

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


the  mortgages  on the  Properties  has  required  that a  security  account  be
maintained  for each  Property to cover  potential  liabilities  with respect to
defects in the Properties'  hardboard siding, to the extent that the Partnership
was unable to make sufficient  recoveries from the  responsible  parties.  These
security  accounts  serve as  additional  collateral  for the lender  and, as of
December  31,  2001,  the  Partnership  has  provided  $5,852,000  toward  these
accounts.  These  security  accounts must be  maintained  until such time as the
Partnership's  lender has determined that these accounts contain sufficient cash
to  complete  the repairs of the  Partnership's  Properties.  Additionally,  the
settlement proceeds of $4,585,000 related to the Timberleaf  property,  included
accumulated  interest  income,  have been  segregated  by the  Partnership  in a
reserve bank account. The sum of these two amounts, or $10,437,000, is reflected
as restricted cash in the accompanying balance sheet as of December 31, 2001, as
it will be utilized to fund the repair costs.

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

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



                                       15
<PAGE>




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

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


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


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

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

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

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

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


           EXPENSES
              Interest and amortization                              1,837             1,860
              Operating and administrative                           2,763             2,360
              Depreciation                                             682               618
              Provision for construction defects repair
                costs in excess of net settlement
                proceeds received                                    1,667                --
                                                                ----------         ---------

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

           NET INCOME                                                 $922            $2,409
                                                                ==========        ==========
</TABLE>



                                       16
<PAGE>



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

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

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

                                                 2001         2000
                                                 ----         ----

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

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

                                                 2001         2000
                                                 ----         ----

         Alderwood                                96%          98%
         Timberleaf                               95%          99%


RENTAL AND OTHER RESIDENT  REVENUE:  Both  Properties are located in Santa Clara
County, in an area commonly  referred to as Silicon Valley.  With the decline in
the economy, and specifically in the high tech industry, the primary employer in
the Silicon Valley,  job growth no longer  continued to climb as in prior years,
and actually  decreased by 45,000 jobs between  December 31, 2000 and 2001.  The
fourth quarter ending December 31, 2001 saw unemployment  rise to 6.1% from 1.5%
at December 31, 2000.  Commencing in the later half of 2000 and continuing  into
2001,  unemployment  rose, new job growth was non-existent  with jobs decreasing
This  decline in jobs,  coupled with new housing  units (both single  family and
multi-family)  coming on line has resulted in a softening of the rental  market.
As a result,  average rental rates obtained from leased units  decreased  28.79%
and  27.54%  for  Alderwood  and  Timberleaf,  respectively  from  2000 to 2001.
Concessions were utilized to increase  occupancy,  and to remain  competitive in
the Santa Clara  market.  At the same time,  rental  revenue as presented in the
Statements  of Income in Item 14  continues  to appear  strong,  increasing  10%
between  years,  due to  residents  whose  leases had not yet reached the end of
their term.  As with newly leased  units,  upon lease  expiration  those current
residents who did renew their leases,  renewed at  significantly  reduced market
rental rates. Rental revenues are recognized when contractually due based on the
terms of signed lease agreements, which range in duration from month-to-month to
one year. Average quarterly  occupancy went from a high of 99% for Alderwood and
Timberleaf,  respectively as of the quarter ending December 31, 2000 to a low in
the third quarter 2001 of 94% and 93%, respectively. Given the sharp decrease in
employment,  many  residents  terminated  their leases  early,  while  remaining
contractually and economically bound to the terms of their lease agreement until
their respective  units were either re-leased or their lease expired.  For those
former  residents  whose units were leased before their lease  expiration  date,
they  remained  obligated for the short fall in the rental rates through the end
of their lease term.

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

OPERATING  AND   ADMINISTRATIVE   EXPENSES:   These  expenses   include  on-site
management,  maintenance,  utilities,  marketing and other  expenses  related to
earning  rental  revenues.  Some of the  operating  expenses  vary as  occupancy
changes throughout the year. Others, such as property taxes, do not fluctuate in
response to changing  occupancy  levels.  Operating  expenses  increased  17% or
$403,000



                                       17
<PAGE>



between 2001 and 2000. The significant  increase in expenses from 2000
to 2001 reflected the following.



                                       18
<PAGE>



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

The softening  residential rental market resulted in an increase in expenditures
of  $125,000  in  (1)  additional   personnel  for  leasing  and  unit  turnover
maintenance;   (2)  turnover  costs  for  unit  cleaning,   painting  and  minor
refurbishment supplies, and labor in those instances where the work could not be
accomplished  by  the  resident  staff;   and  (3)  media   advertising   costs.
Additionally,  rising  energy costs due to the  California  energy  crisis added
$33,000  in utility  costs  over 2000.  Insurance  premiums  for  liability  and
property  coverage  increased  $21,000   year-to-year.   Professional   services
increased  $126,000  year-to-year,  principally  due to a change  in  accounting
firms, and to the retention of an independent  financial advisor to evaluate the
fairness from a financial point of view of the consideration proposed to be paid
by an affiliate of the General Partner to acquire limited  partnership  units in
the Partnership held by limited partners  unaffiliated with the General Partner.
Management  fees  increased  $56,000 due to the revenue  stream (as noted in the
Rental and Other Resident Revenue section above) and for management  supervision
fees on contracted major non-recurring maintenance and improvement projects.

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

DEPRECIATION:  Depreciation  expense was $661,000 and $618,000 in 2001 and 2000,
respectively, primarily due to the acquisition of assets.

PROVISION  FOR  ESTIMATED  CONSTRUCTION  DEFECTS  REPAIR  COSTS IN EXCESS OF NET
SETTLEMENT  PROCEEDS:  See the  "Construction  Defects"  section of Management's
Discussion and Analysis for further details on this expense in 2001.

NET  INCOME:  Net  income  decreased  between  years to  $922,000  in 2001  from
$2,409,000 in 2000, due  principally  to the $1,667,000  provision for estimated
construction  defects  repair costs in excess of net  settlement  proceeds,  and
increased  levels of  expenditures  associated  with the  softening  residential
rental market and for professional services.



                                       19
<PAGE>



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

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

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

                                                             For the years ended
                                                                December 31,
                                                             2001           2000
                                                             ----           ----
                                                               (In Thousands)
           REVENUES
              Rental                                       $6,783        $5,856
              Interest                                        464          250

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


           EXPENSES
              Interest and amortization                     1,860         1,881
              Operating                                     2,360         2,231
              Depreciation                                    618           573

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

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


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

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

                                                 2000         1999
                                                 ----         ----

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

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

                                                 2000         1999
                                                 ----         ----

         Alderwood                                98%         97%
         Timberleaf                               99%         97%


RENTAL AND OTHER RESIDENT  REVENUE:  The Silicon Valley saw continued job growth
and low unemployment between 1999 and 2000. The unemployment rate for the fourth
quarter 2000 decreased to 1.5% from 2.3% in the fourth  quarter of 1999.  During
2000,  24,100  jobs  were  created,  an  increase  of 2.4%  over  1999.  The low
unemployment rate coupled with a robust job market in turn



                                       20
<PAGE>



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

created a housing  shortage  driving up the value of housing prices -- both home
prices and apartment  rents.  The strong  residential  rental market  conditions
allowed the maintenance of high occupancy without the need to offer concessions.
Additionally,  no new housing units  permitted  continued  market rate growth in
rental rates, as evidenced by average  occupied rental rates increasing 28% from
1999 to 2000.  While average  occupied rent obtained from leased units increased
28% during 2000, the  Statements of Income in Item 14,  reflect rental  revenues
increasing  18%. The lower increase in rental revenue as compared to the average
occupied  rental rates from leased units is  attributable  to current  residents
whose  leases had not yet reached the end of their  term.  As with newly  leased
units,  upon lease expiration those current  residents who renewed their leases,
renewed at  significantly  higher  market  rental  rates.  Rental  revenues  are
recognized when contractually due based on the terms of signed lease agreements,
which range in duration from month-to-month to one year.

INTEREST  INCOME:  Cash flow  increased  to  $1,626,000  in 2000 as  compared to
$759,000 in 2001.  This increase in cash invested in interest  bearing  accounts
accounted for the more than doubling the interest  earned in 2000 as compared to
1999.

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

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

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

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



                                       21
<PAGE>



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

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

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

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

Inflation
---------

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

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

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

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.



                                       22
<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.



                                       23
<PAGE>




                                    PART III


ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

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

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

John J. Murphy. Age 39. Vice President.  Mr. Murphy's  responsibilities  include
   managing all financial,  accounting and reporting activities,  and insurance.
   Mr. Murphy came to Prometheus Development Co. from KPMG Peat Marwick where he
   spent  seven  years  and  was a  Senior  Manager.  He is a  Certified  Public
   Accountant  and  holds a B.S.  degree  in  Accounting  with  honors  from the
   University of San Francisco.


ITEM 11.   EXECUTIVE COMPENSATION

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



                                       24
<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.



                                       25
<PAGE>



                                     PART IV

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

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

                                                                            Page
                                                                            ----

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

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

        Financial Statements:

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

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

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

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

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

    2.   FINANCIAL STATEMENT SCHEDULES:

          Schedule II - Valuation and Qualifying Accounts.....................37
yy
          Schedule III - Real Estate and Accumulated Depreciation .........38-39

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

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

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

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

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

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

             The company  filed Form 8-K on May 22,  2001,  with  respect to the
             notification   of  the   settlement   reached  with  the  remaining
             defendants in the Timberleaf litigation.

                                       26
<PAGE>



                                     PART IV

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


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

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

             The company  filed Form 8-K on March 4, 2002,  with  respect to the
             notification  of the Limited  Partners  summarizing the settlements
             reached  with  the  defendants  in  the  Alderwood  and  Timberleaf
             litigations and the impacts on cash flow and future distributions.

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



                                       27
<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  four of Note 4, as to which the
date is March 5, 2002.



                                       28
<PAGE>






               REPORT OF ARTHUR ANDERSEN LLP, INDEPENDENT AUDITORS


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

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

We conducted our audit in accordance with auditing standards  generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting  the amounts and  disclosures in the financial  statements.  An audit
also includes assessing the accounting principles used and significant estimates
made by  management,  as well as  evaluating  the  overall  financial  statement
presentation.  We believe  that our audit  provides a  reasonable  basis for our
opinion.

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



/s/ Arthur Andersen LLP


San Francisco, California
March 28, 2000



                                       29
<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
                                                                   ----------           ---------
<S>                                                                   <C>                 <C>
ASSETS

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

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

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

LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)

   Notes payable                                                      $25,548             $25,879
   Accounts payable and accrued liabilities                               387                 439
   Construction defects reserve                                        12,500                  --
                                                                     --------             -------


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

   Commitments and contingencies (see Notes 4 and 5)

   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.

                                       30
<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 construction defects repair
      costs in excess of net settlement
      proceeds received                          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.

                                       31
<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.

                                       32
<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
                                                               -------    ------       ------
<S>                                                            <C>        <C>          <C>

CASH FLOWS FROM OPERATING ACTIVITIES
   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 construction defects in excess of
           net settlement proceeds received                      1,667        --           --
        Increase in restricted cash                            (5,181)     (698)        (568)
        Decrease (increase) in accounts
           receivable and other assets                            (32)       (5)           32
        (Decrease) increase in payables
           and accrued liabilities                                (52)       115        (101)
                                                              --------  --------     --------

   Net cash (used in) provided by operating activities         (1,900)     2,469        1,397
                                                              --------  --------     --------

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

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

CASH FLOWS PROVIDED BY (USED IN) FINANCING
ACTIVITIES
   Principal reductions on notes payable                         (331)     (309)        (288)
   Proceeds from settlement of construction defects
           litigation, net of direct costs incurred              4,534     (309)        (288)
                                                              --------  --------     --------

   Net cash provided by (used in) financing activities           4,203     (309)        (288)
                                                              --------  --------     --------

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

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

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

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

                             See accompanying notes.

                                       33
<PAGE>



                           PROMETHEUS INCOME PARTNERS
                        a California limited partnership


                          NOTES TO FINANCIAL STATEMENTS
                           December 31, 2001 and 2000

1.      ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

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

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

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

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


                                       34
<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.


                                       35
<PAGE>



                    NOTES TO FINANCIAL STATEMENTS (Continued)

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

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

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

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

2.      NOTES PAYABLE

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

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

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

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

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

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

        Cash paid for  interest in each of the years  ended 2001,  2000 and 1999
was approximately $1,808,000, $1,830,000, and $1,851,000, respectively.


                                       36
<PAGE>



                    NOTES TO FINANCIAL STATEMENTS (Continued)

2.      NOTES PAYABLE (Continued)

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

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

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

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


3.      RELATED PARTY TRANSACTIONS

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

         _
        |_|     The actual  cost to the  General  Partner or its  affiliates  of
                goods and materials used for or by the  Partnership and obtained
                from entities which are not affiliated with the General Partner;

        o       Expenses for specified administrative services;

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

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

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

        o       The actual cost of these services; and

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

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


                                       37
<PAGE>



                    NOTES TO FINANCIAL STATEMENTS (Continued)

4.      COMMITMENTS

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

5.      LITIGATION SETTLEMENT - CONSTRUCTION DEFECTS

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

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

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

      In 2001,  upon learning that the defendants in the litigation were willing
to  resolve  the  lawsuits  in  return  for  a  substantial  settlement  to  the
Partnership,  the General  Partner  made the decision to utilize the proceeds of
the settlement to undertake a major repair project  related to the  construction
defects.  The  Partnership  then developed an estimate of the cost to repair the
defects. Based on the information available at the current time, the Partnership
estimates  the cost to repair the defects to be  approximately  $12,500,000,  an
amount  that  exceeds  the  net  settlement  proceeds  received  by  $1,667,000.
Therefore,  based on the  General  Partner's  decision to  undertake  the repair
project,  the  Partnership  recorded this shortfall as a charge to income in the
accompanying Statement of Income for the year ended December 31, 2001.


                                       38
<PAGE>


                                       39
<PAGE>


                    NOTES TO FINANCIAL STATEMENTS (Continued)

5.      LITIGATION SETTLEMENT - CONSTRUCTION DEFECTS (Continued)

      The construction defects reserve of $12,500,000 at December 31, 2001 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 the estimated
repair cost.  Any changes to this  estimate  will be adjusted in the  subsequent
year in which the change is realized.

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.


                                       40
<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>


                                       41
<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>
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>


                                       42
<PAGE>



                                                                    SCHEDULE III
                           PROMETHEUS INCOME PARTNERS
                        a California limited partnership

              REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)

                             As of December 31, 2001

                                 (In Thousands)

<TABLE>
<CAPTION>

<S>                                                                                <C>
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
                                                                                     =======
</TABLE>


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


                                       43


                                   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:  April 24, 2002            By     /s/ Vicki R. Mullins
       --------------                   ----------------------------------------
                                        Vicki R. Mullins,
                                        Vice President




Date:  April 24, 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



                                       44