SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
                                 Amendment No. 5

Filed by the Registrant / /
Filed by a Party other than the Registrant /X/

Check the appropriate box:

/X/     Preliminary Proxy Statement                          / /  Confidential, for Use of the Commission Only
/ /     Definitive Proxy Statement                                (as permitted by Rule 14a-6(e)(2))
/ /     Definitive Additional Materials
/ /     Soliciting Material Pursuant to Rule 14a-11(c)
        or Rule 14a-12

          PROMETHEUS INCOME PARTNERS, a California limited partnership
                (Name of Registrant as Specified in Its Charter)

           PROMETHEUS DEVELOPMENT CO., INC., a California corporation
    (Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

Payment of Filing Fee (Check the appropriate box):

/ /    No fee required.

/X/    Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

       (1)   Title of each class of securities to which transaction applies:

             Units of limited partner interest

       (2)   Aggregate number of securities to which transaction applies: 15,544

       (3)   Per unit price or other underlying value of transaction computed
             pursuant to Exchange Act Rule 0-11 (set forth the amount on which
             the filing fee is calculated and state how it was determined):

             $1,714. The per unit price is equal to the merger consideration to
             be received per limited partner unit in the registrant.

       (4)   Proposed maximum aggregate value of transaction: $26,642,416

       (5)   Total Fee Paid: $4,878(1)

/X/    Fee paid previously with preliminary materials.

/X/    Check box if any part of the fee is offset as provided by Exchange Act
       Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
       paid previously. Identify the previous filing by registration statement
       number, or the form or schedule and the date of its filing.

(1)    Amount previously paid: $4,493. Additional fee calculated on the basis of
       proposed increase in consideration from prior filing of $4.18 million.
(2)    Form, Schedule or Registration Statement no.: preliminary Schedule 14A





(3)    Filing Party: Prometheus Development Co., Inc.
(4)    Date Filed: June 28, 2000 and February 28, 2001




                                      -2-







                           PROMETHEUS INCOME PARTNERS

To the limited partners of Prometheus Income Partners-YOUR VOTE IS VERY
IMPORTANT

       You are cordially invited to attend a meeting of the limited partners of
Prometheus Income Partners. At the meeting, holders of the units of limited
partner interests in Prometheus Income Partners will consider and vote on the
proposals of Prometheus Development Co., Inc., Prometheus Income Partners'
general partner, described in the accompanying notice of meeting and proxy
statement.

       The primary substantive proposal to be voted upon at the meeting is the
proposed merger of PIP Acquisition, LLC with and into Prometheus Income
Partners. PIP Acquisition is a wholly owned subsidiary of PIP Partners -
General, LLC, which is an affiliate of the general partner of the partnership
and the owner of 18.2% of the outstanding units. Prometheus Income Partners, PIP
Partners and Prometheus Development Co. are all under the common control of
Sanford Diller, who is also the principal beneficial owner of these entities. As
more fully described below and in the accompanying proxy statement, in the
proposed transaction, if approved and consummated, each limited partner of
Prometheus Income Partners other than PIP Partners will be entitled to receive
$1,714 in cash per unit. After the merger, PIP Partners will hold all of the
units. A majority of the units (50% or more), or 9,498 units, must be voted in
favor of the merger proposal for the proposal to be approved.

       The date, time and place of the meeting are as follows:

             March __, 2002
             1:30 p.m., local time
             [Location]

       In connection with the proposed merger, please note that:

       o    Prometheus Income Partners, PIP Partners, PIP Acquisition and
            Prometheus Development Co. are all under the common control of
            Sanford Diller. The interests of these entities are different from
            and in substantial conflict with those of the limited partners.
            Because of the relationship among Prometheus Development Co. (the
            partnership's general partner), PIP Partners and PIP Acquisition,
            the merger and all of the proposed transactions related to the
            merger as discussed in this document are not the product of
            arm's-length negotiation between unaffiliated parties. PIP
            Acquisition and PIP Partners are making this offer with a view to
            ultimately making a profit and, therefore, there is a conflict that
            is described more fully in the accompanying materials between their
            desire to acquire your units at a relatively lower price and your
            desire to sell your units at a relatively higher price. However, the
            partnership's independent financial advisor has opined that the
            proposed merger consideration is fair, from a financial point of
            view, to the limited partners of the partnership (except for PIP
            Partners and its affiliates, as to whom no opinion is rendered).

       o    The merger consideration was determined on the basis of an
            independent appraisal of the market value of the partnership's
            properties. This appraised market value could

                                      -1-




            be greater than or less than the amount for which these properties
            could be sold at any given time.

       o    If the merger occurs, you will not receive any future distributions
            from operating cash flow of Prometheus Income Partners or upon any
            sale or refinancing of the properties owned by it.

       o    Due to construction defects in the partnership's properties, there
            have been no cash distributions since 1996, although Prometheus
            Income Partners has generated income to the limited partners on
            which the limited partners may have been subject to income tax. The
            general partner estimates that as of September 30, 2001, these tax
            liabilities approximated $176 per unit owned by each limited
            partner, assuming their prior use of all passive activity losses
            generated by the partnership, that the maximum marginal income tax
            rates for an individual resident in California would be applicable
            and that such income would be treated for this purpose as ordinary
            income. As a result of the merger, the limited partners will retain
            no interest in the partnership. Thus, after the current fiscal year
            of Prometheus Income Partners, there will be no additional tax
            liability for the limited partners with respect to the partnership,
            and PIP Partners, as holder of all interests in the partnership,
            will bear all risk of loss to the partnership's properties.

       o    If the merger is not consummated, 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.
            As of the date hereof, 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. If the merger is consummated,
            you will receive no further cash distributions from or with respect
            to the partnership (other than the merger consideration).

       o    There is only a sporadic secondary trading market in the units. To
            the best of Prometheus Income Partners' knowledge, the highest sale
            price in the last two years in the secondary market was $601 per
            unit, other than a block purchase by PIP Partners for $1,200 per
            unit and tender offers for a limited number of units at prices
            ranging from $650 to $800 per unit.

       For further information on the factors considered by Prometheus
Development Co. in approving the merger, please see the disclosure beginning on
page 30 of the accompanying proxy statement.

       The partnership has retained Houlihan Lokey Howard & Zukin as an
independent advisor to assess the fairness of the consideration to be received
in the merger by the limited partners that are not affiliated with PIP Partners.
Houlihan Lokey has opined that the proposed merger

                                       -2-




consideration is fair, from a financial point of view, to the unaffiliated
limited partners of the partnership.

       The merger will provide you with the opportunity to liquidate your
investment in Prometheus Income Partners for cash at a price and on terms that
Prometheus Development Co. believes are fair to the limited partners. If the
transaction occurs, the reporting obligations of the partnership under the
federal securities laws are expected to cease. Unlike in a liquidation of
Prometheus Income Partners, the merger will not require limited partners to
continue to hold interests in Prometheus Income Partners until all contingent
liabilities have been settled.

       The merger will not happen unless limited partners holding greater than
50% of the units approve the merger proposal. PIP Partners has agreed to vote
neutrally with respect to the merger proposal, meaning that PIP Partners will
vote its units for or against the proposal in the same proportion as the total
number of units voted by unaffiliated limited partners. For example, if
unaffiliated limited partners holding 67% of the units voted in person or by
proxy vote for the merger proposal, then PIP Partners will vote only 67% of its
units for the merger proposal. PIP Partners intends to vote all of its units for
the adjournment proposal described in the accompanying notice of meeting and
proxy statement.

       The enclosed Proxy Statement is dated March __, 2002 and is first being
mailed to limited partners on or about March __, 2002. Only limited partners who
held their units at the close of business on March __, 2002 will be entitled to
vote at the meeting.

       Prometheus Development Co., considering, among other factors, that the
limited partners will be able to liquidate their interests in Prometheus Income
Partners, and considering the opinion of Houlihan Lokey described above, has
determined that the transaction is fair to the partnership and its limited
partners and recommends that you vote for the merger proposal and for the
adjournment proposal. A vote for the merger proposal is a vote to have PIP
Acquisition merge with and into Prometheus Income Partners, and to pay the
merger consideration to each limited partner (other than PIP Partners) in
respect of the units held by them. A vote for the adjournment proposal is a vote
to allow Prometheus Development Co. the discretion, in the event that
insufficient proxies or votes for the merger proposal have been received or cast
to approve the merger, to adjourn the meeting to allow Prometheus Development
Co. to continue to solicit proxies.

       The enclosed Proxy Statement explains in detail the terms of the proposed
transaction and related matters. Please carefully review and consider all of
this information.

       The approval of the merger is an important decision for Prometheus Income
Partners and its limited partners. Whether or not you plan to attend the
meeting, please complete, date, sign and promptly return the accompanying proxy
in the enclosed self-addressed stamped envelope. Returning your proxy does NOT
deprive you of your right to attend the meeting and to vote in person.

       Your vote is important. If you return your proxy, you do not have to
attend the meeting in order to vote your units.

                                      -3-




       On behalf of the general partner, I thank you for your support and
appreciate your consideration of these matters.

                                Prometheus Development Co., Inc., a California
                                corporation

                                /s/     John J. Murphy
                                    ---------------------------------
                                By:     John J. Murphy
                                Title:  Vice President


Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the transaction, passed upon the
merits or fairness of this transaction or passed upon the accuracy or adequacy
of the disclosure contained in this document. Any representation to the contrary
is a criminal offense.


                                      -4-






                           PROMETHEUS INCOME PARTNERS
                      NOTICE OF MEETING OF LIMITED PARTNERS

       Notice is hereby given that a meeting of the limited partners of
Prometheus Income Partners, a California limited partnership, will be held at
1:30 p.m., local time, on March __, 2002, at [Location].

       The purposes of the meeting are:

       1.   To consider and vote on a proposal to approve the Agreement and Plan
of Merger dated as of March 6, 2002 by and among Prometheus Income Partners, PIP
Partners - General, LLC, a California limited liability company, and PIP
Acquisition, LLC, a California limited liability company and a wholly owned
subsidiary of PIP Partners, each an affiliate of Prometheus Development Co.,
Inc. (the general partner of Prometheus Income Partners), pursuant to which (a)
PIP Acquisition will be merged with and into Prometheus Income Partners and (b)
each outstanding limited partner unit of Prometheus Income Partners (other than
units held by PIP Partners) will be converted into the right to receive $1,714
in cash. Approval of this proposal will also constitute approval of all of the
transactions contemplated by the merger, including the merger of PIP Acquisition
with and into Prometheus Income Partners.

       2.   To consider and vote on a proposal to permit Prometheus Development
Co., the general partner of Prometheus Income Partners, to adjourn the meeting
to permit further solicitation of proxies in the event that there are not
sufficient votes at the time of the meeting to approve the merger proposal.

       3.   To transact such other business as may properly come before the
meeting or any adjournment or postponement of the meeting.

       These items of business are described in this Proxy Statement. Only
limited partners of Prometheus Income Partners of record at the close of
business on March __, 2002, the record date, are entitled to notice of and to
vote at the meeting. You may vote in person at the meeting, even if you have
returned a proxy. If you return your proxy, you do not have to attend the
meeting in order to vote your units.

       If the merger proposal is approved and the merger is consummated, limited
partners will have no dissenter's or appraisal rights with respect to the
merger.

                                      By:  Prometheus Development Co., Inc., a
                                           California corporation


                                      /s/        John J. Murphy
                                           ----------------------------
                                      By:        John J. Murphy
                                      Title:     Vice President

Redwood City, California
March __, 2002




       Whether or not you plan to attend the meeting, we urge you to complete,
date, sign and promptly return the accompanying proxy in the enclosed
self-addressed stamped envelope. Returning your proxy does NOT deprive you of
your right to attend the meeting and to vote your units in person.

                                      -2-





                                 PROXY STATEMENT

                                       of

                        PROMETHEUS DEVELOPMENT CO., INC.

                              Dated March __, 2002







                   QUESTIONS AND ANSWERS ABOUT THE TRANSACTION

       The following questions and answers are intended to provide brief answers
to some commonly asked questions. These questions and answers do not, and are
not intended to, address all questions that may be important to you.

Q:     What is the transaction?

A:     The transaction is a statutory merger whereby PIP Acquisition, LLC, a
       wholly owned subsidiary of PIP Partners - General, LLC and an affiliate
       of Prometheus Development Co., Inc., the general partner of Prometheus
       Income Partners, will merge into Prometheus Income Partners. If a
       majority of the units of limited partner interest of Prometheus Income
       Partners are voted for transaction and the other conditions to the
       transaction described below are satisfied, PIP Acquisition will merge
       into Prometheus Income Partners, and you will be entitled to receive
       merger consideration equal to $1,714 in cash per limited partnership
       unit. Following the merger, you will no longer be a limited partner of
       Prometheus Income Partners. Instead, PIP Partners will hold all of the
       outstanding units.

Q:     How was the merger consideration determined?

A:     The merger consideration was determined based on the sum each limited
       partnership unit would receive under the partnership's partnership
       agreement upon liquidation after giving effect to (i) the sale of the
       partnership's rental properties for the market value thereof as
       determined by an independent appraisal, (ii) the repayment in full of the
       existing mortgages on these properties (together with the applicable
       prepayment penalty in respect of such repayment) and (iii) restricted and
       unrestricted cash held by the partnership as of December 31, 2001, not
       including the net recoveries received or to be received by the
       partnership in settlement of the construction defect litigation
       prosecuted by the partnership, without regard to any reduction in the
       deemed liquidation value of the partnership attributable to the
       anticipated costs to repair existing construction defects in these
       properties and without reduction for any other liabilities of the
       partnership. As of the date of the attached proxy statement, any attempt
       to put a value on the cost of these repairs would be speculative; however
       the cost to repair these defects is currently estimated by the
       partnership to be at least $12 million and could involve as much as $14
       million or more, in any case substantially in excess of the expected net
       litigation recoveries of approximately $10.8 million so excluded. Please
       see the disclosure in response to the question What is the status of the
       construction defects and the related litigation? beginning on page 5.

Q:     When will the merger consideration be paid?

A:     The merger consideration will be paid to the limited partners (other than
       PIP Partners) promptly following the approval and consummation of the
       merger. PIP Partners, which currently holds 3,451 units (18.2% of the
       outstanding units), will not receive any merger consideration in respect
       of the units it holds at the time of the merger.

Q:     What are the principal benefits to the limited partners of the
       transactions?

                                      -1-




A:     The principal benefits include:

       o  Upon the completion of the transaction, the limited partners, other
          than PIP Partners, will receive $1,714, in cash, in exchange for each
          of their units and, accordingly, those limited partners would no
          longer bear the risks inherent in the ownership and operation of real
          property through Prometheus Income Partners. This price has been fixed
          based on an independent appraisal of the market value of partnership's
          apartment properties. The merger consideration to be paid to the
          limited partners is over $800 greater than the price paid for units in
          recent transactions of which Prometheus Development Co. is aware,
          other than a privately negotiated purchase of a large block of units
          by PIP Partners.

       o  The merger will discontinue the recognition by the limited partners of
          undistributed income for tax purposes and will allow limited partners
          to receive cash to at least partially pay tax liabilities previously
          incurred with respect to undistributed income of Prometheus Income
          Partners. The properties of the partnership have significant
          construction defects. Because of the need to accumulate cash reserves
          to satisfy obligations to the mortgageholders on Prometheus Income
          Partners' properties with respect to these defects, and the need
          determined by Prometheus Development Co. for additional cash reserves
          to fix these defects, no distributions to limited partners have been
          made since 1996, yet the limited partners have continued to recognize
          income with respect to the units and may have incurred tax liabilities
          in respect thereof. The general partner estimates that as of September
          30, 2001, these tax liabilities approximated $176 per unit owned by
          each limited partner, assuming their prior use of all passive activity
          losses generated by the partnership, that the maximum marginal income
          tax rates for an individual resident in California would be applicable
          and that such income would be treated for this purpose as ordinary
          income. The property manager of the partnership's properties, an
          affiliate of the general partner, has been paid certain fees and
          reimbursed certain expenses under its management contract during this
          period.

       o  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. As of the date hereof, 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. In addition,
          if repairs of the properties are not completed by December 2002, the
          partnership's lenders have the right to require the partnership to
          retain additional cash reserves, which could require further
          suspension of distributions to limited partners. If the merger is
          consummated, you will receive no further cash distributions from or
          with respect to the partnership (other than the merger consideration).

                                      -2-




       o  You will no longer bear the risk that the cost to repair construction
          defects in the partnership's properties will exceed current estimates
          of, cash reserves for and net litigation recoveries with respect to
          these amounts.

       o  You will not longer bear the risk of uninsured loss of the
          partnership's properties through fire, earthquake or condemnation.

       o  You will receive $1,714 in cash for each unit you hold, regardless of
          costs to repair existing defects and any reduction in the value of the
          partnership's properties in excess of related net litigation
          recoveries.

Q:     What are the principal detriments to the limited partners of the
       transactions?

A:     The principal detriments include:

       o  No representative unaffiliated with Prometheus Development Co. (the
          general partner) has been retained to act solely on behalf of limited
          partners for the purposes of negotiating the terms of the merger.
          Prometheus Income Partners, PIP Partners, PIP Acquisition and
          Prometheus Development Co. are all under the common control of Sanford
          Diller. The interests of these entities are different from and in
          substantial conflict with those of the unaffiliated limited partners.
          Because of the relationship among Prometheus Development Co., PIP
          Partners and PIP Acquisition, the merger and all of the proposed
          transactions related to the merger as discussed in this document are
          not the product of arm's-length negotiation between unaffiliated
          parties. PIP Acquisition and PIP Partners are making this offer with a
          view to ultimately making a profit and, therefore, there is a conflict
          that is described more fully below between their desire to acquire
          your units at a relatively lower price and your desire to sell your
          units at a relatively higher price.

       o  Following the merger, the limited partners, other than PIP Partners,
          will cease to participate in future earnings or growth, if any, of
          Prometheus Income Partners or benefit from increases, if any, in the
          value of the partnership or its properties.

       o  Limited partners do not have any dissenters' rights or other rights of
          appraisal under the state law which governs Prometheus Income
          Partners, the partnership agreement of Prometheus Income Partners or
          otherwise in connection with the merger proposal. Therefore,
          dissenting limited partners do not have the right to have their units
          independently appraised if they disapprove of the merger.

       o  The limited partners will forego alternatives to the merger. These
          alternatives might include a separate sale of all of the assets of
          Prometheus Income Partners (which could be for more or less than the
          appraised market value of the partnership's properties on the basis of
          which the merger consideration was calculated) and subsequent
          liquidation of Prometheus Income Partners, other possible PIP Partners
          acquisitions of units or the continuation of Prometheus Income
          Partners under its current ownership structure.


                                      -3-





Q:     Has any independent party reviewed the fairness of the proposed merger
       consideration?

A:     Yes. The  partnership  retained  Houlihan  Lokey Howard  &  Zukin,  a
       nationally  recognized  investment banking firm with extensive experience
       in  transactions  in the nature of the merger,  to assess the fairness of
       the  consideration  to be received  in the  proposed  transaction  by the
       limited  partners that are not  affiliated  with PIP  Partners.  Houlihan
       Lokey has opined that the proposed merger  consideration  is fair, from a
       financial  point  of  view,  to the  unaffiliated  limited  partners.  As
       described  more fully  below,  Houlihan  Lokey has been paid a fee by the
       partnership for the services provided.

Q:     Why doesn't Prometheus Income Partners just sell all of its properties
       and liquidate?

A:     Prometheus Development Co. believes that the merger provides the limited
       partners with an opportunity to dispose of their investment in Prometheus
       Income Partners more quickly than would likely occur in a liquidation of
       Prometheus Income Partners' properties. Unlike in a liquidation, the
       merger proposal will not require limited partners to continue to hold
       interests in Prometheus Income Partners until all contingent and other
       liabilities of Prometheus Income Partners have been settled.

       In addition, in a liquidation it is uncertain what price the limited
       partners would receive. Prometheus Development Co. does not believe that
       the underlying properties would be fairly valued in the market due to the
       current construction defects affecting the properties. Prometheus
       Development Co. and PIP Partners believe that a third-party would apply a
       substantial discount to the value of the units as a result of the
       existence of these known defects.

Q:     How was the amount that I will receive for my units determined?

A:     Prometheus Development Co., and PIP Partners, PromHill, The DNS Trust,
       Helen Diller and Sanford Diller, as the acquiring parties, obtained an
       independent appraisal of the partnership's properties based on sales
       comparisons of similar properties and capitalization of the income
       generating capabilities of these property and without regard to existing
       defects. This appraisal determined the combined market value of these
       properties as of September 2001 to be approximately $53,200,000. The
       merger consideration was based on the value the holder of each limited
       partnership unit would be entitled to receive for each unit if the
       partnership were liquidated immediately following a sale of these
       properties at the appraised market value (without regard to significant
       declines in value since the date of the appraisal for similar properties
       in the same geographic region in which these properties are located)
       after giving effect to each of the following:

       o  the repayment (including the applicable prepayment penalty) of
          existing mortgages on these properties.

       o  reconciliation of other assets and liabilities of the partnership on
          the date of the merger.

                                      -4-




          This value was not reduced to account for any diminution in value of
          the properties as a result of substantial construction defects known
          to exist at each property or for any other liabilities of the
          partnership, and does not include the net recoveries by the
          partnership in settlement of its construction defect litigation. As
          noted above, the estimated costs to repair these defects is
          substantially in excess of these recoveries.

          Prometheus Development Co. and the acquiring parties considered this
          methodology to be a fair, reasonable and appropriate methodology for
          determining the merger consideration, given the inherent uncertainties
          in determining the actual cost to repair existing defects.

Q:     What do I get if the merger takes place?

A:     Following the merger of Prometheus Income Partners and PIP Partners, you
       will be entitled to receive the merger consideration for each unit you
       hold. If Prometheus Income Partners does not participate in the merger,
       you will continue to have the current right to receive distributions, if
       any, in accordance with the partnership agreement of Prometheus Income
       Partners when cash becomes available for distribution.

       Please note that cash distributions to limited partners were suspended in
       1996. The terms of the mortgages on Prometheus Income Partners'
       properties require that a security account be maintained for each
       property to cover contingent liabilities with respect to construction
       defects in these properties. These security accounts are additional
       collateral for the lender, and total, as of September 30, 2001,
       approximately $5,821,000. In addition, pursuant to its discretion under
       the partnership agreement of Prometheus Income Partners, the partnership
       currently maintains an additional reserve account totaling as of
       September 30, 2001 approximately $3,923,000 to cover additional
       contingent liabilities related to construction defects. 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 hereof, 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. In addition, if
       repairs of the properties are not completed by December 2002, the
       partnership's lenders have the right to require the partnership to retain
       additional cash reserves, which could require further suspension of
       distributions to limited partners. If the merger is consummated, you will
       receive no further cash distributions from or with respect to the
       partnership (other than the merger consideration).

Q:     What is the status of the construction defects and the related
       litigation?

                                      -5-




A:     The hardboard siding used at both properties owned by Prometheus Income
       Partners is failing to perform as expected. Moisture has accumulated in
       the walls of the apartment projects through a combination of construction
       defects and endemic problems with the hardboard siding, causing rot and
       decay in the wood, framing and siding. In addition to the hardboard
       siding problems, routine roofing inspection has uncovered failing roof
       substrate at dormer roof assemblies for both properties owned by
       Prometheus Income Partners. This has been sufficient to cause deflection
       and decay of the roof and its structural support, requiring replacement.

       Two lawsuits had been filed by Prometheus Income Partners, one for each
       property. The total claimed damages for both properties currently was
       approximately $19.6 million. A claim had also been filed by one of the
       defendants in these lawsuits against the partnership. The partnership has
       entered into settlement agreements regarding all of this litigation.
       Under these settlements, the partnership is entitled to aggregate net
       recoveries of approximately $10.8 million, of which approximately $4.5
       million has been received by the partnership as of the date hereof. The
       cost to repair the defects that were the subject of this litigation is
       expected to be in excess of $12 million and could involve as much as $14
       million or more.

Q:     Does the transaction require the vote of the limited partners?

A:     Yes. Approval of the merger proposal by the limited partners is a
       condition to Prometheus Income Partners' participation in the merger. The
       affirmative vote of the limited partners holding more than 50% of the
       units outstanding as of March __, 2002, is required to approve the merger
       proposal. The record date is the date fixed by Prometheus Development Co.
       to determine the limited partners entitled to vote at the meeting.

       PIP Partners has agreed to vote neutrally with respect to the merger
       proposal, meaning that PIP Partners will vote its units for or against
       the proposal in the same proportion as the total number of units voted by
       unaffiliated limited partners. For example, if unaffiliated limited
       partners holding 67% of the units voted in person or by proxy vote for
       the merger proposal, then PIP Partners will vote only 67% of its units
       for the merger proposal. PIP Partners intends to vote all of its units
       for the adjournment proposal described in the accompanying notice of
       meeting and this proxy statement.

Q:     If the limited partners approve the merger, is it certain that Prometheus
       Income Partners will participate in the merger?

A:     No. Prometheus Income Partner's participation in the merger is subject to
       several other closing conditions, including: refinancing the existing
       mortgages on the partnership's properties on terms satisfactory to PIP
       Acquisition and PIP Partners; the partnership's having generally
       unencumbered title to its properties except for known existing
       encumbrances; and no material adverse effect of any recent occurrences on
       the properties or the partnership. In addition, PIP Partners must have
       adequate resources to pay the merger consideration. PIP Partners believes
       that it has or will have such resources.

                                      -6-




       Limited partners should be aware that the satisfaction or waiver of each
       of the closing conditions is a condition to Prometheus Income Partners'
       participation in the transaction. Therefore, it is possible that the
       failure of the partnership to satisfy a condition could cause the
       transaction to fail to close. The parties to the Agreement and Plan of
       Merger dated as of March 6, 2002 by and among Prometheus Income Partners,
       PIP Partners and PIP Acquisition also have the right to terminate the
       transaction in its entirety by mutual agreement, but do not have any
       current intention of doing so.

Q:     What happens if I vote against the merger proposal?

A:     If you vote against the merger proposal, but holders of more than 50% of
       the units in Prometheus Income Partners outstanding as of the record date
       vote for the merger proposal and Prometheus Income Partners participates
       in the transaction, you will be required to give up your units and
       entitled to receive $1,714 in cash per unit. If you fail to return your
       proxy or mark "ABSTAIN" on your proxy, the effect will be the same as a
       vote against the merger proposal.

Q:     Do limited partners have dissenters' or appraisal rights in connection
       with the merger?

A:     No. Limited partners are not entitled to exercise dissenters' rights or
       other rights of appraisal in connection with the merger.

Q:     When do you expect the merger to be completed?

A:     We are working to complete the merger as quickly as possible. We expect
       to complete the merger as soon as practicable following the meeting, or
       within ten days of the meeting.

Q:     What are the tax consequences of the merger to the limited partners?

A:     In general, a limited partner will recognize gain or loss on the
       conversion of units into cash as a result of the merger. This gain or
       loss will be equal to the difference between the limited partner's
       "amount realized" from the merger and the limited partner's adjusted tax
       basis in the units converted. The "amount realized" will be $1,714 per
       unit.

       This gain or loss should be treated as capital gain or loss. However, a
       portion of this gain or loss that is attributable to "unrealized
       receivables" (which includes recapture of some previous depreciation
       deductions) and "inventory items" (as defined in section 751 of the
       Internal Revenue Code of 1986 as amended) may be treated as ordinary
       income or ordinary loss.

Q:     What other matters will be voted on at the meeting?

A:     In addition to asking you to vote on the merger proposal, we are asking
       you to consider and vote on a proposal to permit Prometheus Development
       Co. to adjourn the meeting to permit further solicitation of proxies in
       the event that there are not sufficient votes at the time of the meeting
       to approve the merger proposal.

                                      -7-




       A vote for the merger proposal is not also a vote for the adjournment
       proposal. You must vote separately on each proposal. The affirmative vote
       of limited partners holding more than 50% of the units present in person
       or by proxy at the meeting is required to approve the adjournment
       proposal. If you fail to return your proxy and do not vote in person at
       the meeting, it will have no effect on the adjournment proposal. If you
       mark "ABSTAIN" on your proxy and do not vote in person at the meeting,
       the effect will be the same as a vote against the adjournment proposal.
       Approval of the adjournment proposal by the limited partners is not a
       condition to Prometheus Income Partners' participation in the merger.
       Approval of the adjournment proposal by the limited partners will permit
       the adjournment of the meeting to solicit additional proxies in the event
       that there are not sufficient votes at the time of the meeting to approve
       the merger proposal.

       Prometheus Development Co. recommends that you vote for the adjournment
       proposal. PIP Partners intends to vote all of its units in favor of the
       adjournment proposal.

       Other than the merger proposal and the adjournment proposal, Prometheus
       Development Co. does not expect to ask you to vote on any other matters
       at the meeting. However, if matters other than the merger proposal and
       the adjournment proposal are properly brought before the meeting, or any
       adjournments or postponements of the meeting, the persons appointed as
       proxies will have discretion to vote or act on those matters according to
       their best judgment.

Q:     What do I need to do now?

A:     Please complete, date and sign your proxy and then return it in the
       enclosed envelope as soon as possible so that your units may be
       represented at the meeting.

Q:     Can I fax my proxy vote?

A:     Yes. First complete, date and sign your proxy. Then fax the proxy to
       (212) 929-0308.

Q:     May I change my vote after I have mailed my signed proxy?

A:     Yes. Just send in a later dated, signed proxy prior to the meeting or
       attend the meeting and vote in person. Taking either of these steps will
       revoke any previously submitted proxy. You may also revoke any previously
       submitted proxy by written notice to Prometheus Development Co. prior to
       the meeting. Additional proxy cards are available from MacKenzie
       Partners, Inc., Prometheus Development Co.'s proxy solicitor for the
       meeting.

Q:     When can I expect to receive payment for my units?

A:     After the consummation of the merger, Prometheus Income Partners will
       send you a letter of transmittal. Upon receipt of a completed letter of
       transmittal from you, a check for $1,714 per unit you own at that time
       will be mailed to you.

                       WHO CAN HELP ANSWER YOUR QUESTIONS?


                                      -8-




       If you have more questions about the transaction or would like additional
copies of this Proxy Statement, you should contact:

                            MacKenzie Partners, Inc.
                                156 Fifth Avenue
                               New York, NY 10010
                                 (800) 322-2885
                           proxy@mackenziepartners.com


                                      -9-





                                     SUMMARY

       This summary highlights selected information included in this Proxy
Statement. This summary may not contain all of the information that is important
to you. To understand the merger proposal and the proposed merger fully and for
a more complete description of the legal terms of the merger and other
considerations that may be important to you, you should read carefully this
entire document and the other documents to which we have referred you. The terms
of the merger are contained in the merger agreement, a copy of which is attached
to this Proxy Statement as Appendix A, and which is incorporated in this Proxy
Statement by reference.

       Parties to the Transaction

       Prometheus Income Partners

       Background. Prometheus Income Partners, a California limited partnership,
was formed on April 15, 1985. Prometheus Development Co., Inc., a California
corporation, is the general partner of the partnership. The principal business
of Prometheus Income Partners is to invest in, construct, hold, operate, and
ultimately sell two residential rental properties in Santa Clara, California:
Alderwood Apartments and Timberleaf Apartments. Prometheus Income Partners is
governed by the California Revised Limited Partnership Act and its Second
Amended and Restated Limited Partnership Agreement, dated October 1, 1992, a
copy of which is attached to this Proxy Statement as Appendix B.

       The principal investment objectives of Prometheus Income Partners are to
preserve and protect Prometheus Income Partners' capital, to obtain capital
appreciation from the sale of its 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 Prometheus Income Partners.

       No public trading market exists or is expected to be established for the
units, although an informal secondary market for trading in units has developed.
Prometheus Development Co. is aware of three brokers who quote prices in units,
and through which a small number of units, usually less than 1% of issued and
outstanding units, are traded each year. Historically, limited liquidity has
been provided in this market due to occasional purchases of units by PIP
Partners - General, an affiliate of the General Partner of the partnership, and
others unaffiliated with the general partner directly from limited partners and
through these brokers. PIP Partners has purchased these units to increase its
equity stake in Prometheus Income Partners. Other than the tender offers
disclosed below under the caption "Recent Tender Offers" beginning on page 49,
PIP Partners never solicited offers from others to sell their units, but instead
responded from time to time to limited partners who expressed interest in
selling their units. PIP Partners has acquired a total of 3,451 units, all since
January 1, 1997.

       The principal executive offices of Prometheus Income Partners are located
at 350 Bridge Parkway, Redwood City, California 94065-1517, telephone number
650-596-5393.

       Construction Defects; Reserve Accounts. The hardboard siding used at both
Alderwood and Timberleaf is failing to perform as expected. This has resulted in
certain construction

                                      -10-




defects in the partnership's properties. The partnership has entered into final
settlement agreements of these lawsuits providing for a net recovery to the
partnership of approximately $10.8 million, of which the partnership as of the
date hereof has received approximately $4.5 million. The general partner expects
that the amount of these recoveries will not be sufficient to repair the
construction defects.

       Under Prometheus Income Partners' financing arrangements, it is required
to maintain a security account with respect to each property to fund correction
of defects in the properties. Prior to the refinancing, quarterly cash
distributions to the limited partners were suspended in 1996, and this cash was
reserved for contingent liabilities with respect to construction defects. This
cash was then deposited into security accounts as additional collateral for the
lender who provided the funds for the refinancing. Cash held in these security
accounts was $3,366,000 and $2,455,000 for Alderwood and Timberleaf,
respectively, as of September 30, 2001. 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.

       Principal Unitholders. Other than PIP Partners, which owns 18.2% of the
outstanding units, no person of record owns or is known by Prometheus Income
Partners to own beneficially more than 5% of the outstanding units.

       Prometheus Development Co., Inc. a California corporation, is the general
partner of Prometheus Income Partners. The principal business of Prometheus
Development Co. is acting as general partner of limited partnerships and
managing their real estate. All of the outstanding shares of capital stock of
Prometheus Development Co. are held by Sanford N. Diller and Helen P. Diller as
Trustees of The DNS Trust. Although Helen Diller has the same rights as Sanford
Diller with respect to the management of The DNS Trust and Prometheus
Development Co., Ms. Diller is not involved in the operations of The DNS Trust
or any of the other entities described in this document. Instead, Mr. Diller
ultimately controls and manages these entities.

       The principal executive offices of Prometheus Development Co. are located
at 350 Bridge Parkway, Redwood City, California 94065-1517, telephone number
650-596-5393.

       PIP Partners - General, LLC

       PIP Partners - General, LLC was formed in 1996 to acquire and hold units.
PIP Partners - General conducts no other business. PromHill, Inc., a corporation
owned and controlled by Sanford N. Diller, is the Manager of PIP Partners. 99%
of the member interests of PIP Partners - General are held by Sanford N. Diller
and Helen P. Diller as Trustees of The DNS Trust, and 1% of these interests are
held by Jaclyn Safier, the Dillers' daughter. The DNS Trust is also the sole
shareholder of Prometheus Development Co. Thus, Mr. Diller controls Prometheus
Development Co., PromHill, The DNS Trust and PIP Partners - General.

       PIP Partners - General initially acquired units in a tender offer
described below. Since that time, PIP Partners -General has acquired additional
units. In June 2000, PIP Partners - General purchased 1,487.5 units from Prom
Investment Partners, a third party unaffiliated with Prometheus Development Co.,
PIP Partners - General or Mr. Diller, and two investment funds (Liquidity Fund
Growth--Plus Partners, a California limited partnership and Liquidity Fund

                                      -11-




Appreciation and Income Partners, a California limited partnership) affiliated
with Prom Investment Partners but also unaffiliated with Prometheus, PIP
Partners - General or Mr. Diller for $1,200 per unit. The similarity of the name
of Prom Investment Partners does not reflect any affiliation with Prometheus
Development Co. or any of its affiliates; the use of such nomenclature is common
in the investment community. This purchase price was arrived at pursuant to
arm's-length negotiations. Under its agreement with Prom, if PIP Partners -
General acquires additional units prior to June 2002 for a price greater than
$1,200 per unit, PIP Partners has agreed to pay Prom such excess with respect to
each unit purchase by PIP Partners - General from Prom.

       The principal executive offices of PIP Partners - General are located at
350 Bridge Parkway, Redwood City, California 94065-1517, telephone number
650-596-5393.

       PIP Acquisition

       PIP Acquisition, LLC is a newly formed California limited liability
company which was organized by PIP Partners in connection with the merger. PIP
Partners owns all of the member interests in PIP Acquisition. Thus, The DNS
Trust and Sanford Diller ultimately control PIP Acquisition. The principal
executive offices of PIP Acquisition are located at 350 Bridge Parkway, Redwood
City, California 94065-1517, telephone number 650-596-5393.

For a more complete description of the parties involved in the merger and the
construction defects and the litigation related to them, please see the
disclosure under the caption "The Parties" beginning on page 45.

       Effects of the Transaction

       In the merger, if approved and consummated, PIP Acquisition will merge
with and into Prometheus Income Partners. Each unit in Prometheus Income
Partners will be converted at the effective time of the merger into the right to
receive merger consideration. The merger consideration of $1,714 was calculated
based upon the sum each limited partnership unit would receive under the
partnership's partnership agreement upon liquidation after giving effect to (i)
the sale of the partnership's rental properties for the market value thereof as
determined by a recently obtained independent appraisal, (ii) the repayment in
full of the existing mortgages on these properties (together with the applicable
prepayment penalty in respect of such repayment) and (iii) restricted and
unrestricted cash held by the partnership as of December 31, 2001, not including
net recoveries by the partnership in settlement of the construction defect
litigation, and without regard to costs to repair existing construction defects
in these properties, which are expected to substantially exceed these net
litigation recoveries, and without reduction for any other liabilities of the
partnership. PIP Partners - General, which currently holds 3,451 units (18.2% of
the outstanding units), will not receive any merger consideration in respect of
the units it holds at the time of the merger.

       Following completion of the transaction, the current limited partners
other than PIP Partners will no longer have any interest in, and will not be
limited partners of, Prometheus Income Partners and, therefore, will not
participate in Prometheus Income Partners' future earnings and potential growth.
PIP Partners will become the owner of all outstanding units.

                                      -12-





Following the completion of the transaction, Prometheus Income Partners expects
to cease to be a reporting company and the units will cease to be registered
under the Securities Exchange Act of 1934.

       Fairness of the Merger

       Each of Prometheus Development Co., PIP Partners, PromHill, PIP
Acquisition, The DNS Trust, and the Dillers believes the terms of the merger to
be fair to the partnership and its limited partners. For a discussion of the
fairness of the merger, please see the discussion under the caption "Fairness of
the Transaction" beginning on page 28. Houlihan Lokey has opined that the merger
consideration is fair, from a financial point of view, to the limited partners
that are not affiliated with PIP Partners. Please see "Opinion of Financial
Advisor," beginning on page 72.

       The Meeting

       The meeting of limited partners of Prometheus Income Partners will be
held at 1:30 p.m., local time, on March __, 2002, at [location]. At the meeting,
limited partners will be asked to consider and vote on the merger proposal. In
addition, Prometheus Development Co. is asking the limited partners to consider
and vote on a proposal to permit Prometheus Development Co. to adjourn the
meeting to permit further solicitation of proxies in the event that there are
not sufficient votes at the time of the meeting to approve the merger proposal.
The merger agreement provides that Prometheus Development Co. will recommend the
adjournment of the meeting for ten days if on the date of the meeting Prometheus
Income Partners has not received duly executed proxies that constitute a
sufficient number of votes to approve the merger proposal. However, if proxies
representing enough votes to defeat the merger proposal regardless of the number
of additional votes later cast in favor of the proposal have been submitted, the
meeting will not be adjourned to permit further solicitation.

       Other than the merger proposal and the adjournment proposal, Prometheus
Development Co. does not expect to ask the limited partners to vote on any other
matters at the meeting. However, if matters other than the merger proposal and
the adjournment proposal are properly brought before the meeting, or any
adjournments or postponements of the meeting, the persons appointed as proxies
will have discretion to vote or act on those matters according to their best
judgment.

       As of the record date, PIP Partners beneficially owned an aggregate of
3,451 units, representing in the aggregate approximately 18.2% of the units
outstanding on the record date. Pursuant to the Third Amended and Restated
Agreement and Plan of Merger entered into among the partnership, PIP Partners
and PIP Acquisition, PIP Partners has agreed to vote neutrally with respect to
the merger proposal, meaning that PIP Partners will vote its units for or
against the proposal in the same proportion as the total number of units voted
by the other limited partners. For example, if unaffiliated limited partners
holding 67% of the units voted in person or by proxy vote for the merger
proposal, then PIP Partners will vote 67% of its units for the merger proposal.
PIP Partners intends to vote all of its units for the adjournment proposal
described in the accompanying notice of meeting and proxy statement.

                                      -13-




       To be approved, a majority of units, or 9,498 units, must be voted in
favor of the merger proposal. Based on the following computations, and because
PIP Partners has agreed to vote the units held by it for and against the
transaction in the same proportion as the votes actually cast by limited
partners unaffiliated with PIP Partners, limited partners unaffiliated with PIP
Partners holding a minimum of 6,047 units cast their votes in favor of the
proposal for it to be possible that the proposal will be approved, and if
limited partners unaffiliated with PIP Partners holding at least 7,772 units (a
majority of the units held by limited partners not affiliated with PIP Partners)
vote in favor of the proposal then the proposal will be approved.

       o  If limited partners unaffiliated with PIP Partners holding only 6,047
          units vote at the Meeting, and all of these votes are cast for the
          merger proposal, then pursuant to the Agreement and Plan of Merger,
          PIP Partners will be obligated to vote all of its 3,451 units in favor
          of the proposal. Thus, a total of 9,498 votes will be cast in favor of
          the proposal, and the proposal will be approved.

       o  If limited partners unaffiliated with PIP Partners holding 15,544
          units (all of the outstanding units held by unaffiliated limited
          partners) vote at the Meeting, and 7,772 of these votes are in favor
          of the proposal, PIP Partners will be obligated to vote 1,726 units in
          favor of the proposal and 1,725 units against the proposal. Thus, a
          total of 9,498 votes will be cast in favor of the proposal, and the
          proposal will be approved.

       Record Date; Voting Power

       Prometheus Development Co. has fixed the close of business on March __,
2002, as the record date for determination of the limited partners entitled to
notice of and to vote at the meeting and any adjournment or postponement of the
meeting. As of the record date, there were 18,995 units, including those units
held by PIP Partners, issued and outstanding and held of record by ______
holders. Holders of record of units are entitled to one vote for each unit that
they hold on the merger proposal, the adjournment proposal and any other matter
that may properly come before the meeting.

       Quorum; Vote Required

       The necessary quorum for the transaction of business at the meeting is
the presence in person or by proxy of limited partners holding a majority of the
units outstanding on the record date. For purposes of determining the presence
of a quorum, proxies marked "ABSTAIN" will be counted as present at the meeting.

       The affirmative vote of limited partners holding greater than 50% of the
units outstanding on the record date is required to approve the merger proposal.
The affirmative vote of limited partners holding more than 50% of the units
present in person or by proxy at the meeting is required to approve the
adjournment proposal. Because PIP Partners has agreed to vote its units in the
same proportion as the other limited partners, the merger can be approved
without the affirmative vote of at least a majority of the units held by the
limited partners unaffiliated with Prometheus Development Co., PIP Partners and
Mr. Diller if a number of these holders do not vote in person or by proxy at the
meeting. For example, if unaffiliated limited partners holding 33% of the units
(and no others), which constitute less than a majority of the units held by
non-

                                      -14-




affiliates, were to vote at the meeting and all such units were voted in favor
of the merger, these votes, together with the affirmative vote of the units held
by PIP Partners, would be sufficient to approve the merger.

       A vote for the merger proposal is not also a vote for the adjournment
proposal. You must vote separately on each proposal.

       If you mark "ABSTAIN" on your proxy and do not vote in person at the
meeting, the effect will be the same as a vote against the merger proposal. If
you fail to return your proxy and do not vote in person at the meeting, as a
result of the agreement of PIP Partners to vote as have the voting limited
partners, the effect on the merger proposal will depend on how other limited
partners vote. If you fail to return your proxy, your units will have no effect
on the outcome of the adjournment proposal. If you mark "ABSTAIN" on your proxy
and do not vote in person at the meeting, the effect will be the same as a vote
against the adjournment proposal. If you sign and return your proxy but do not
give instructions on your proxy, your units will be voted for the merger
proposal and for the adjournment proposal.

       Approval of the merger proposal by the limited partners is a condition to
Prometheus Income Partners' participation in the merger. Therefore, if we do not
receive votes for the merger proposal from limited partners holding greater than
50% of the units (including those units held by PIP Partners and voted as
described above), the merger proposal will not be approved and Prometheus Income
Partners will not participate in the merger. Approval of the adjournment
proposal by the limited partners is not a condition to Prometheus Income
Partners' participation in the merger. Approval of the adjournment proposal by
the limited partners will permit the adjournment of the meeting to solicit
additional proxies in the event that there are not sufficient votes at the time
of the meeting to approve the merger proposal.

       Changing Your Vote

       You may revoke your proxy at any time before it is voted at the meeting
(1) by sending in a later dated, signed proxy, (2) by written notice of
revocation to Prometheus Development Co., or (3) by attending the meeting and
voting in person.

                                     -15-






       Structure of the Transaction

       The following depicts the current ownership and control structure of the
partnership:



                                                 Pre-Transaction
                                                 ---------------


                                           __________________________
                                           |                        |
                                           |   Sanford Diller and   |
                                           |      Helen Diller      |
                                           |________________________|
                                                         |
                                                         |
                                                         | 100%, as trustees
                                           ______________|__________
                                           |                        |
                                           |       DNS Trust        |
                                           |      And Family        |       ____________________
                                           |________________________        |                  |
                                                         |                  |   Jaclyn Safier  |
                                                         |                  |                  |
                   ______________________________________|                  |__________________|
                  |                                      |                           |  1%
                  |                                      |     ______________________|
                  | 100%                                 |     |
   ___________________________             ________________________
   |                         |             |                       |
   |        Prometheus       |             |     PIP Partners -    |
   |      Development Co.    |             |         General       |
   |_________________________|             |_______________________|
                  |                                      |
                  |                                      |
                  |                                      |  100%
                  |                                      |
                  |                        _________________________          _______________           ______________
                  |                        |                       |         |              |           |            |
                  |                        |  PIP Acquisition      |         |   Limited    |           |  Limited   |
                  |                        |                       |         |   Partner1   |-----------|  Partnerx  |
                  |                        |_______________________|         |______________|           |____________|
                  |                                      |                           |                         |
                  |                                      | 18%                       |           81%           |
                  |                                      |                           |                         |
                  |_________________________             |___________________________|__________________________|
                                           |                    |
                                           |                    |
                                           |  1%*               |   99%
                                           |                    |
                                         _____________________________
                                         |                           |
                                         |    Prometheus Income      |
                                         |        Partners           |
                                         |___________________________|

                                          * Prometheus Development Co.'s interest is a general partner interest, as
                                          more fully described under the caption "The Partnership Agreement of
                                          Prometheus Income Partners" beginning on page 49.



                                      -16-





       Assuming Prometheus Income Partners approves the merger proposal and
participates in the merger, the following figures depict the structure of the
transaction and the ownership interest of the parties to the transaction:




                                                  Post-Transaction
                                                  ----------------

                                             __________________________
                                             |                        |
                                             |   Sanford Diller and   |
                                             |      Helen Diller      |
                                             |________________________|
                                                         |
                                                         |
                                                         | 100%, as trustees
                                             ______________|__________
                                             |                        |
                                             |       DNS Trust        |
                                             |      And Family        |                              ____________________
                                             |________________________|                              |                  |
                                                         |                                           |   Jaclyn Safier  |
                                                         |                                           |                  |
                     ____________________________________|_____________________________________      |__________________|
                     |                                                                        |        |       |
                     |  100%                                                                  |  99%   |       |  1%
                     |                                                                        |        |       |
           ______________________                                                   ______________________
           |                    |                                                   |                     |
           |     Prometheus     |                                                   |      PIP Partners-  |
           |   Development Co.  |                                                   |        General      |
           |____________________|                                                   |_____________________|
                     |                                                                            |
                     |  1%*                                                                       |  99%
                     |_____________________________               ________________________________|
                                                   |              |
                                                   |              |
                                                   |              |
                                             ______|______________|___
                                             |                        |
                                             |   Prometheus Income    |
                                             |        Partners        |
                                             |________________________|

                                          * Prometheus Development Co.'s interest is a general partner interest, as
                                          more fully described under the caption "The Partnership Agreement of
                                          Prometheus Income Partners" beginning on page 49.



                                      -17-





       Conflicts of Interest

       In considering the recommendations of each of Prometheus Development Co.,
Prometheus Income Partners, PIP Partners, PromHill, The DNS Trust, Helen Diller
and Sanford Diller, limited partners should be aware that PIP Partners,
PromHill, The DNS Trust, Helen Diller and Sanford Diller, as the acquiring
parties of units, have interests in the transaction or relationships that
present actual or potential conflicts of interest in connection with the
transaction. Prometheus Income Partners, PIP Partners, PIP Acquisition,
PromHill, The DNS Trust and Prometheus Development Co. are all under the common
control of Sanford Diller. The interests of these entities are different from
and in substantial conflict with those of the limited partners. Because of the
relationship among Prometheus Development Co., PIP Partners and PIP Acquisition,
the merger and all of the proposed transactions related to the merger as
discussed in this document are not the product of arm's-length negotiation
between unaffiliated parties. PIP Acquisition and PIP Partners are making this
offer with a view to ultimately making a profit and, therefore, there is a
conflict that is described more fully in the accompanying materials between
their desire to acquire your units at a relatively lower price and your desire
to sell your units at a relatively higher price.

       The transaction has been initiated and structured by Prometheus
Development Co. and individuals who are managers of Prometheus Development Co.
The transaction provides some benefits to the affiliates of Prometheus
Development Co. that are in conflict with the benefits provided to the limited
partners. Sanford Diller, as the natural person ultimately controlling both
Prometheus Development Co. and PIP Partners, has an economic interest separate
from that of the limited partners in structuring the transaction to maximize the
benefits to PIP Partners in seeking to realize future profits from the
partnership that the current limited partners will not participate in if the
merger is consummated, although PIP Partners will not receive the merger
consideration.

       Prometheus Income Partners currently has no officers. After the merger,
Prometheus Development Co. believes that all of the persons who currently are
officers and employees of Prometheus Development Co. will continue to be
officers and employees of Prometheus Development Co., although none of these
individuals has entered into a written agreement to remain with Prometheus
Development Co.

       Conditions to the Transaction

       The obligations of PIP Acquisition, PIP Partners and Prometheus Income
Partners to effect the merger are subject to the fulfillment or waiver of the
following conditions:

       o  The existing mortgages on the partnership's properties shall have been
          refinanced on terms satisfactory to PIP Acquisition and PIP General.

       o  No court or other governmental entity shall have issued an order that
          prohibits consummation of the merger, restricts the operations of
          Prometheus Income Partners or PIP Acquisition which would result in a
          material adverse effect, or instituted any proceeding seeking any
          similar type of order.


                                      -18-




       o  All material approvals from governmental entities necessary for the
          consummation of the merger shall have been obtained.

       o  PIP Partners having obtained the financing necessary to pay the merger
          consideration.

       o  The opinion of Houlihan Lokey Howard & Zukin as to the fairness of the
          merger consideration, from a financial point of view, to the limited
          partners not affiliated with PIP Partners shall not have been
          withdrawn.

       The obligations of Prometheus Income Partners are further subject to the
condition or waiver by Prometheus Income Partners at or prior to the effective
date of the merger that the representations and warranties of PIP Partners shall
be true and correct.

       The obligations of PIP Acquisition and PIP Partners are further subject
to the conditions or waiver at or prior to the effective date of the merger
that:

       o  the representations and warranties of Prometheus Income Partners are
          true and correct at and as of the closing date;

       o  if necessary, the holder of indebtedness of Prometheus Income Partners
          consents to the merger on terms acceptable to PIP Partners; and

       o  there is no material adverse change in the assets, business, financial
          condition or prospects of Prometheus Income Partners.

       The merger may be terminated at any time prior to the effective date of
       the merger:

       o  by the mutual written consent of Prometheus Income Partners and PIP
          Partners;

       o  in the event of a material breach of the Agreement if not cured within
          thirty (30) days; or

       o  by PIP Partners or Prometheus Income Partners if the merger has not
          yet been consummated on or before June 30, 2002.

       Consideration and Financing

       All costs and expenses incurred in connection with the transaction (other
than the fee to be paid by the partnership to Houlihan Lokey) will be paid by
PIP Partners. These include an estimated $5,200 in SEC filing fees, $375,000 in
legal fees, $15,000 in accounting fees, $20,000 in solicitation costs and fees,
and $15,000 in printing costs. In addition:

       o  PIP Partners will pay cash consideration to the limited partners other
          than PIP Partners in the amount equal to $1,714 per unit;

       o  If the existing mortgages on the partnership's properties are
          refinanced as contemplated in connection with the merger, the
          partnership will incur a prepayment

                                      -19-




          penalty under the existing terms of its financing arrangements of
          approximately $3.4 million; and

       o  If PIP Partners and PIP Acquisition were to waive the condition to the
          merger that the existing mortgages on the partnership's properties be
          refinanced, the partnership may be required to pay certain fees
          relating to its mortgage debt. Under the terms of its current
          financing, the partnership may have to pay to its lender an assumption
          fee of approximately $261,000 upon consummation of the merger if the
          merger is deemed to be a transfer of the partnership's properties
          under the applicable loan documents and the loan is not then paid.

       Any consent or other fees to be paid by the partnership as a result of
the merger, whether or not financed by PIP Partners, will not be deducted from
the merger consideration.

       The source of the merger consideration to be paid by PIP Partners to the
limited partners will be a contribution of funds from Sanford N. Diller, who
ultimately controls PIP Partners, or an entity controlled by Mr. Diller. Mr.
Diller intends to use cash available on hand, or, if insufficient cash is
available, he intends to borrow such funds from an entity controlled by Mr.
Diller from existing capital resources of such entity which has agreed to make
the funds available without recourse to the consideration paid to the limited
partners in the merger. Such borrowing, if needed, will be personally guaranteed
by Mr. Diller. Such borrowings will be repaid upon maturity out of current
resources of Mr. Diller and the DNS Trust.

       Proxy Solicitation

       Proxies are being solicited by and on behalf of Prometheus Development
Co., as general partner of Prometheus Income Partners. In addition to
solicitation by mail, Prometheus Development Co. and the officers and directors
of Prometheus Development Co. may solicit proxies by telephone, facsimile,
electronic mail, regular mail or delivery service. No additional compensation
will be paid to these persons for these solicitation services. Pursuant to a
letter agreement dated June 20, 2001 between MacKenzie Partners, Inc. and
Prometheus Development Co., MacKenzie agreed to distribute this Proxy Statement
to limited partners, provide information with respect to the merger to limited
partners, and provide advisory services to Prometheus Development Co. with
respect to the merger. Prometheus Development Co. agreed to pay MacKenzie a fee
of $9,500 plus out-of-pocket expenses incurred by MacKenzie in rendering these
services.

       Accounting Treatment

       PIP Partners will account for the transaction under the "purchase" method
of accounting in accordance with generally accepted accounting principles.

       Federal Income Tax Consequences

       In general, a limited partner will recognize gain or loss on the
conversion of units into cash as a result of the merger. This gain or loss will
be equal to the difference between the limited partner's "amount realized" from
the merger and the limited partner's adjusted tax basis in the units converted.
The "amount realized" will be $1,714 per unit, plus the amount of

                                      -20-




Prometheus Income Partners' liabilities allocable to the units as determined
under Section 752 of the Internal Revenue Code.

       This gain or loss should be treated as capital gain or loss that would be
taxed at a maximum rate of 20%. However, a portion of this gain or loss that is
attributable to "unrealized receivables" (which includes recapture of some
previous depreciation deductions) and "inventory items" (as defined in section
751 of the Internal Revenue Code of 1986 as amended) may be treated as ordinary
income or ordinary loss. In addition, a portion of any gain realized to the
extent of unrecaptured section 1250 depreciation would be taxed at a maximum
rate of 25%.


       You should consult your tax advisor as to the particular tax consequences
of the transaction.

       The transaction, as structured, will permit PIP Partners, and its members
(the DNS Trust and Ms. Safier), to defer substantial tax liability that would be
incurred if the partnership's properties were disposed of in a taxable sale
followed by a liquidation of the partnership. This tax liability will be
deferred until these properties are eventually sold or PIP Partners sells its
equity interests in the partnership.

       Counsel to Prometheus Development Co. has not opined on any tax-related
matters related to the merger.

       Prometheus Development Co. believes that a limited partner who held units
from the date of initial of offering of the units, where there are no unusual
circumstances, will have funds sufficient to pay any tax liability assessed as a
result of the merger and other tax liabilities previously incurred with respect
to which no distributions have been made.


                                      -21-





               SUMMARY SELECTED FINANCIAL DATA OF THE PARTNERSHIP

       The following table sets forth a summary of certain financial data for
Prometheus Income Partners.

       The selected financial and operating data of Prometheus Income Partners
for the three months ended September 30, 2001 and September 30, 2000 are derived
from unaudited financial statements of Prometheus Income Partners which, in the
opinion of Prometheus Development Co., include all adjustments (consisting only
of normal recurring items) necessary for a fair presentation of Prometheus
Income Partners' financial position and results of operations. The results set
forth for the nine months ended September 30, 2001 and September 30, 2000 are
not necessarily indicative of results to be expected for a full year.

       This summary should be read in conjunction with Prometheus Income
Partners' financial statements and notes thereto appearing in Prometheus Income
Partners' Quarterly Report on Form 10-Q for the quarter ended September 30, 2001
and in Prometheus Income Partners' Annual Report on Form 10-K for the year ended
December 31, 2000, which are included with this Proxy Statement and incorporated
by reference.



                                                                                                        As of and For the Nine
                                                                                                        Months Ended September
                                                           As of and For the Year Ended December 31,              30,
                                                           -----------------------------------------  --------------------------
                                               2000        1999        1998     1997       1996       2001        2000
                                               ----        ----        ----     ----       ----       ----        ----
                                                          (Unaudited, In thousands, except per unit amounts)
                                                          --------------------------------------------------
Income Statement Data:
Total revenues (1).................            $7,247      $6,106     $5,991    $5,558     $4,997      $5,999       $5,245
Operating  expenses................             1,421       1,400      1,807     1,104      1,310       1,249        1,176
                                                -----       -----      -----     -----    -------      ------       ------
Gross profit.......................             5,826       4,706      4,184     4,454      3,687       4,750        4,069
Other expenses(2)(3)(4)                         3,417       3,275      3,288     3,977      3,860       2,720        2,601
                                                -----       -----      -----     -----      -----      ------       ------
Net income (Loss)                              $2,409      $1,431       $896      $477   ($  173)      $2,030       $1,468
                                                =====      ======       ====      ====   ========       =====       ======

Net income (Loss) allocated to limited
partners...........................            $2,385      $1,417    $   887      $472    $ (171)      $2,010       $1,453
                                                           ======     ======      ====    =======       =====       ======

Net income (Loss) per limited
partnership unit (5)                            $ 126         $75        $47       $25       $(9)       $ 106         $ 77
                                                =====         ===        ===       ===       ====       =====         ====

Balance Sheet Data:
Real estate (6)....................            21,977      22,105     22,328    22,573     22,929      21,898       21,921
Total Assets (7)...................            31,088      28,873     27,830    27,016     25,259      32,845       30,176
Total Liabilities (8)..............            26,318      26,512     26,900    26,982     25,702      26,045       26,347
Partners' equity...................             4,770       2,361        930        34      (443)       6,800        3,829
limited partners'
equity.............................             5,124       2,739      1,322       435       (38)       7,133        4,192
limited partners' equity per limited
partner unit (5)...................              $270       $ 144        $70      $ 23       ($2)       $ 376        $ 221



(1)  Consists principally of rental and interest income.
(2) Includes payments to general partner and affiliates of $372,000, $300,000,
$303,000, $278,000 and $265,000 for 2000, 1999, 1998, 1997 and 1996,
respectively, and $300,000 and $274,000 for the nine months ended


                                      -22-




September 30, 2001 and 2000, respectively, consisting in each case principally
of property management and construction management fees.
(3) Includes payments to general partner and affiliates of $572,000, $481,000,
$475,000, $391,000 and $378,000 for 2000, 1999, 1998, 1997 and 1996,
respectively, and $450,000 and $358,000 for the nine months ended September 30,
2001 and 2000, respectively, consisting principally of reimbursements for
operating and administrative expenses incurred by such persons, consisting
principally of property payroll taxes, insurance and payroll processing fees,
postage, copying costs, professional services, personnel training and marketing
costs.
(4) Includes interest and amortization expense, depreciation and general and
administrative expense.
(5) Based on weighted average number of units outstanding during the applicable
period.
(6) Consists of land, buildings and improvements and accumulated depreciation.
(7) Includes cash and cash equivalents, restricted cash, and deferred financing
costs, net of accumulated amortization.
(8) Includes notes payable.


                                      -23-




                                   BACKGROUND

       Reasons for the Merger

       Since at least as early as 1997, limited partners from time to time have
been contacting Prometheus Development Co. to express dissatisfaction with the
economic situation of Prometheus Income Partners, including the lack of current
distributions (and the uncertainty of when such distributions might resume), the
current recognition of taxable income and the lack of appreciation of the
saleable value of the limited partnership units. These contacts became
increasingly frequent throughout 2000, such that the general partner was being
contacted by limited partners regarding these issues at least weekly. Many of
these limited partners have informed Prometheus Development Co. that they (or
the beneficial owners they represent) are individuals who invested in Prometheus
Income Partners as part of their retirement planning, and that these limited
partners believe that the recent economics of the units are unsatisfactory for
this purpose. Several limited partners had expressed concern over the potential
impact of construction defects and the related litigation. These contacts always
have been initiated by or on behalf of the limited partners and have not
included any general or specific proposal by the limited partners for providing
liquidity. The general partner has felt constrained in discussing various
matters with the limited partners because it is limited as a practical matter in
the information it can provide to limited partners due to the regulation of
disclosure under the Securities Exchange Act and the recent pendency of
litigation involving the partnership.

       Increasingly, limited partners were asking for information on how to sell
their units; and while trading activity in the units in secondary markets had
been increasing, volume remained and remains low. While the general partner on
the one hand, and PIP Partners, PromHill, The DNS Trust, Helen Diller and
Sanford Diller, on the other hand as the parties seeking to acquire beneficial
ownership of the units in the merger (PIP Partners, PromHill, the DNS Trust and
Mr. and Mrs. Diller are sometimes referred to collectively in this proxy
statement as the "acquiring parties") believe in the long-term profitability of
the business of Prometheus Income Partners, they recognize the risks involved
and the expressed interests of many limited partners to sell their units. PIP
Partners and other unaffiliated parties periodically have purchased units in the
secondary trading market. Please see the discussion under the caption "The
Parties - Prometheus Income Partners - Recent Transactions" beginning on page
57. As a practical and regulatory matter, the number of units that can be
purchased by PIP Partners and other parties in these sporadic transactions is
severely limited. Thus despite these occasional purchases, the current market
for units is thin and illiquid. See the discussion under the caption "Additional
Information Concerning Units" beginning on page 80 for the details of these
purchases in the secondary market. While the general partner can not value the
units with precision due to uncertainties related to substantial construction
defects, the general partner believes that private and market purchases from
limited partners had and would continue to involve a substantial discount from
the value of the units as derived from the underlying market value of the
partnership's property given the substantial defects therein, with or without
ascribing any value to the recently settled litigation. In reaching this
conclusion, the general partner also considered its experience as to the
substantial discount real estate professionals impose in instances where
substantial construction defects exist. For these reasons, in July 1999 the
general partner began investigating available alternatives to provide liquidity
for the limited partners at a fair price. At that time, the general partner
considered a variety of options for achieving liquidity for the

                                      -24-



limited partners, including principally those discussed below. In general,
discussion regarding these matters involved Mr. Diller, John Murphy, a Vice
President of the general partner, and Vicki Mullins, also a Vice President of
the general partner. In reviewing these options, the general partner deemed it
important to reduce the substantial costs associated with managing an entity
that is a reporting company under the Exchange Act with over 1,000 limited
partners. By reducing the number of limited partners to one and eliminating the
need of quarterly and annual filings under the Exchange Act, the partnership
estimates it will save $100,000 annually in legal, accounting, administrative
and other costs. This savings was factored into the determination of the price
PIP Partners is willing to pay for units and the structure of potential
transactions PIP was willing to consider. In considering acceptable transaction
structures, PIP Partners also considered the elimination of fiduciary duties of
the general partner to unaffiliated parties.

       In June 1999, Prom Investment Partners, LLC, a limited partner not
affiliated with the general partner or any of the acquiring parties, contacted
the partnership to request pleadings and other court filings regarding the
construction defect litigation and copies of the mortgage notes for each of the
partnership's properties. Prometheus Development Co. sent to Prom Investment
Partners the mortgage notes, but directed it to the public record for the court
filings, and shortly thereafter it inquired whether Prom Investment Partners
would be interested in selling its units. In or about October 1999, Prom
Investment Partners contacted Mr. Murphy regarding the interest of the general
partner or its affiliates in buying Prom Investment Partners' units. No
agreement as to the possible terms of the proposed sale was reached at that
time.

       In January 2000, the general partner began investigating in greater
detail potential alternatives for providing limited partner liquidity involving
an acquisition of units by an affiliate of the general partner.

       In or about March 2000, PIP Partners contacted Prom Investment Partners
regarding a possible sale of units. Prom Investment Partners proposed a sale at
a price per unit higher than the price per unit to which Prom Investment
Partners and PIP Partners eventually agreed. PIP Partners evaluated this
proposal in light of internal valuations and forecasts. In April 2000, Prom
Investment Partners agreed with PIP Partners that Prom Investment Partners,
together with certain of its affiliates, would sell all of their units to PIP
Partners at a price of $1,200 per unit. However, pursuant to this agreement, if
PIP Partners acquires any units from any other person within two years following
the date of this purchase at a purchase price greater than $1,200 per unit, PIP
Partners agreed to pay Prom Investment Partners and its affiliates the excess of
the price paid over $1,200 per unit for each unit purchased from them by PIP
Partners. PIP Partners completed its purchase of 1,487.5 units from Prom
Investment Partners and two of its affiliated investment funds on June 20, 2000.
Any excess that would be payable by PIP Partners under this arrangement as a
result of the merger was considered by PIP Partners in evaluating the proposed
merger.

       In May 2000, Prometheus Development Co., PIP Partners, Messrs. Diller and
Murphy and Ms. Mullins, on behalf of the various affiliates they represented,
revisited the alternatives discussed below and for the reasons set forth below
decided to proceed with a merger in structure identical to the merger but in
which the consideration to be paid with respect to each unit would be fixed at
$1,200. They based the $1,200 in cash to be offered by PIP Partners for each
unit each limited partner holds on various factors including their estimate of
the fair market value of

                                      -25-




the underlying real estate properties at approximately $55,100,000, the
potential for an increase or decrease in that value, the effects of the
then-pending litigation and the likelihood of success in that litigation on the
value of Prometheus Income Partners, the transaction costs incurred as part of
the merger, the tax consequences of the merger to PIP Partners and the
illiquidity of the units. They also gave substantial weight to the fact that
Prom Investment Partners, an unaffiliated third party with substantial real
estate experience, had agreed to accept $1,200 per unit for a substantial block
of units.

       In June 2000 and September 2000, Prometheus Development Co. and the
acquiring parties filed preliminary proxy solicitation and related materials
with the Securities and Exchange Commission relating to a proposed merger
involving merger consideration fixed at $1,200 per unit.

       In October 2000, the general partner and the acquiring parties reviewed
the partnership's financial performance for the nine months ended September 30,
2000 and compared these results to previously projected results upon which they
based in part their original evaluation of the fairness to the limited partners
of the originally proposed fixed consideration of $1,200 per unit. In fact,
actual results for this period materially exceeded projected performance.
Because of this, in order to reevaluate the basis upon which to value the
limited partnership units, the general partner and the acquiring parties
determined to obtain an independent appraisal of the market value of the
partnership's real estate properties. By letter dated November 22, 2000, the
general partner informed the limited partners that it was seeking such appraisal
and would reexamine the merger and the merger consideration in light of this
appraisal.

       In December 2000, the general partner and the acquiring parties received
an appraisal of the partnership's real estate properties that valued these
properties at $68,900,000, substantially in excess of the approximately
$55,100,000 previously estimated by the general partner and relied upon, in
part, in assessing the fairness of the merger consideration as proposed prior to
such time. Based on this appraisal, the general partner and the acquiring
parties reconsidered the merger consideration being offered and potential
alternatives to the transaction and proposed a modified transaction in which the
merger consideration to be offered would be based on a deemed liquidation value
of the partnership's properties based upon the independently appraised market
value. The contemplated offer would have involved the payment of a fixed amount
of $1,200, plus a contingent payment based on the actual costs to repair
construction defects and the ultimate recoveries in the then-pending litigation.
Previously, the general partner and the acquiring parties believed that the sale
of a substantial block of units to Prom Partners, who are sophisticated real
estate professionals, provided independent market validation of the values
ascribed by the acquiring parties to these uncertainties. Given the length of
time that passed since that sale by Prom Partners, the general partner and the
acquiring parties no longer were comfortable that such sale provided such
validation. Accordingly, they made the determination that offering the deemed
liquidation value, calculated based on the appraised value as set forth above
and below (with minimum proceeds to the limited partners equal to the previously
offered fixed merger consideration of $1,200) to be a fairer and more prudent
course of action.

       In February 2001, and again in April and July 2001, Prometheus
Development Co. and the acquiring parties filed revised preliminary proxy
solicitation and related materials with the Securities and Exchange Commission
reflecting the revised proposed transaction. On August 31,

                                      -26-




2001, with the parties having been unable to obtain clearance from the
Commission of their proxy materials for distribution to the limited partners,
the merger agreement embodying the previously proposed transaction, as the same
had been amended to that date, terminated on its terms.

       In September 2001, the acquiring parties continued to evaluate possible
transaction structures in which they would acquire the limited partnership units
held by unaffiliated parties. Similarly, Prometheus Development Co. considered
alternatives to realizing value and providing liquidity for the limited
partners. Each of the acquiring parties and the general partner considered
substantial declines in the rental market in which the partnership's properties
are located, including decreasing occupancy and rental rates in these
properties. In order to better understand the changes in the value of these
properties, the parties obtained a new independent appraisal. This appraisal,
dated September 17, 2001, valued these properties at $53,171,000.

       On October 3, 2001, the partnership entered into a settlement agreement
that provided for final settlement of the remaining construction defect
litigation. Following this settlement, the acquiring parties proposed a merger
involving the merger consideration described in this proxy statement. The
proposed merger consideration was based on an estimate of the deemed liquidation
value of the partnership based on the more recent independently appraised value
of the partnership's properties, without credit for net recoveries received in
the construction defect litigation or applying any reduction for existing
construction defects in these properties, which are expected to substantially
exceed those recoveries, and without reduction for any other liabilities of the
partnership. On October 5, 2001, the partnership retained Houlihan Lokey Howard
& Zukin to evaluate the fairness, from a financial point of view, of the merger
consideration to be received by the limited partners unaffiliated with the PIP
Partners. By letter dated October 17, 2001, the general partner advised the
limited partners of the settlement of all construction defects litigation, the
retention of Houlihan Lokey and the intention of PIP Partners to propose a new
merger transaction.

       In October 2001, the partnership was contacted by a limited partner
seeking certain non-public information and indicating its interest in possibly
making an offer to acquire the partnership's properties. On various occasions in
November and December 2001, the partnership communicated with this limited
partner through counsel by telephone and by correspondence in order to provide
this limited partner with an opportunity to make an offer for the partnership's
properties. No confidentiality or other agreement was executed by this limited
partner, no offer was made and no framework for an offer was suggested. In
January 2002, the general partner concluded that no offer was forthcoming from
this limited partner and so advised PIP Partners. PIP Partners then determined
to proceed with the merger as described in this proxy statement.

       Having determined to proceed with the merger, in January 2002 the
acquiring parties reviewed the independent appraisal of the partnership's
properties obtained in September 2001, as well as publicly available information
regarding residential real estate trends in the geographic area in which the
partnership's properties are located. In light of the reported downward trend in
rental rates, as well as the partnership's own experience of decreasing rental
rates in the last quarter of 2001, the acquiring parties concluded that
conducting a new independent appraisal would not result in a greater appraised
value than that established by the September 2001 appraisal. In the interest of
fairness to the limited partners, the acquiring parties determined to

                                      -27-




proceed with the merger, with the merger consideration being calculated on the
basis of the September 2001 independent appraisal.

       On March 6, 2002, Houlihan Lokey delivered to the general partner its
written opinion that the merger consideration is fair, from a financial point of
view, to the limited partners unaffiliated with PIP Partners. PIP Partners, PIP
Acquisition and the partnership then entered into a merger agreement dated as of
March 6, 2002 providing for the merger as described in this proxy statement.

       Fairness of the Transaction

       For the reasons set forth below, each of Prometheus Development Co.,
Inc., PromHill, Inc., PIP Partners - General, LLC, PIP Acquisition, LLC, The DNS
Trust and the Dillers has separately concluded that the transaction is both
substantively and procedurally fair to the limited partners, notwithstanding
that no unaffiliated purchaser of the units or the partnership's properties was
sought. In reaching such conclusion, as discussed more fully below, these
parties considered principally the following factors:

       o Appraised Value. The merger consideration is derived from the market
value of the partnership's properties, as determined based on an independent
third-party appraisal of these properties.

       o Current and Historical Market Prices. Since January 1, 1998, the
maximum price paid for units in the secondary market was $601. This does not
include the sale of units pursuant to recent tender offers at $650, $700 and
$800 per unit or PIP Partners' block purchase for $1,200. Please see the
disclosure under the captions "Recent Transactions" beginning on page 57 and
"Additional Information Concerning Units" beginning on page 80. Prometheus
Development Co. and the acquiring parties believe the there has been no
significant change in the trading price of the units despite past improvements
in the financial condition of Prometheus Income Partners because the market for
the units is not liquid and due to the uncertain status of the construction
defects and the previously uncertain status of the related litigation.

       o Net Book Value. As of September 30, 2001, limited partners' equity per
unit was $376, substantially below the merger consideration offered. See
"Summary Selected Financial Data of the Partnership" beginning on page 22.

       o Liquidation Value. The merger consideration constitutes an
approximation of the liquidation value of the units based on a deemed sale of
the partnership's properties at their appraised market value (which gives no
effect to known or unknown construction defects), without credit for the net
proceeds realized from the litigation and without any reduction for the
estimated costs to repair existing construction defects, which the general
partner and the acquiring parties expect to be substantially in excess of the
litigation proceeds and believe would be discounted from the purchase price any
potential purchaser of the partnership's properties would pay for them, and
without regard to any reduction for other liabilities of the partnership.


                                  -28-





       o Block Sale. The merger consideration will be substantially in excess of
the $1,200 per unit accepted by a sophisticated unaffiliated third parties in a
block purchase of units by PIP General.

       o Going Concern Value. The acquiring parties believe that companies in
the business of owning and operating real estate rental properties are generally
valued in the market based on the underlying liquidation value of those
properties, rather than a separate going concern value for the company itself.
However, the independent appraisal is based in part on the income approach and
direct capitalization (as described under the caption "Appraisal" on pages 67
through 72), which the general partner and the acquiring parties believe give
due consideration and effect to the value of the partnership as a going concern,
rather than solely based on an abstract liquidation value of the properties. As
such, they believe basing the merger consideration on the appraisal gives fair
and adequate consideration to the going concern value of the partnership. In any
case, rental and occupancy rates in the geographical area in which the
partnership's properties are located (including those for these properties
themselves), continue to decline. The general partner and the acquiring parties
believe the prospect of further declines would further adversely impact the
going concern value of the partnership.

       Each of the general partner and the acquiring parties believes that the
transaction is procedurally and substantively fair to the limited partners
because the merger consideration is based on an independent appraisal of the
partnership's properties, and although the merger consideration does not include
litigation proceeds, it also gives no effect and applies no reduction for the
construction defects not accounted for in such appraisal, which costs are
expected to substantially exceed these proceeds, or reduction for any other
liabilities of the partnership.

       The acquiring parties also believe the determination of the merger
consideration and the proposed transaction were procedurally fair to the limited
partners even though there are no persons in the position of "independent
directors" or other unaffiliated representatives to act solely on behalf of the
limited partners unaffiliated with PIP Partners and the acquiring parties. The
appraisal was conducted by a party unaffiliated with and independent of the
general partner and the acquiring parties. The appraisal was conducted in
accordance with applicable professional standards, as noted therein. By being
based in part on the income approach and direct capitalization (as described
under the caption "Appraisal" on pages 67 through 72), the acquiring parties
believe the appraisal gives due consideration and effect to the value of the
partnership as a going concern, rather than solely based in the liquidation
value of the properties. Finally, the method for calculating the deemed
liquidation value of the partnership based on the independently appraised value
of its properties gives due and objective consideration and effect to those
factors not reflected in the appraisal, primarily cash on hand, does not include
net recoveries in the partnership's construction defect litigation and does not
apply any reduction to account for the anticipated cost to repair the defects in
these properties, which is expected to be in substantial excess of those
litigation recoveries, and without reduction for any other liabilities of the
partnership. In addition, the general partner has obtained the opinion of an
independent financial advisor that the merger consideration is fair, from a
financial point of view, to the limited partners not affiliated with PIP
Partners.

       By virtue of having obtained an independent appraisal of the market value
of the partnership's real estate properties and having considered alternatives
for realizing upon that

                                      -29-




market value, as well as the general partner having obtained the opinion of an
independent financial advisor as to the fairness of the consideration to be
received by the unaffiliated limited partners, the general partner and the
acquiring parties believe that the determination of the merger consideration to
be paid is procedurally fair to the limited partners. They also believe the
merger consideration to be substantively fair to the limited partners by virtue
of having used this appraisal to determine a liquidation value of the
partnership and basing the merger consideration thereon, while eliminating their
exposure to the risk of incurring the costs to repair the partnership's
properties.

       In concluding that the transaction is fair to the limited partners, the
general partner and the acquiring parties further considered in detail the
positive and negative factors discussed below, the evaluation of which, in the
view of each of the general partner and the acquiring parties, supported its
conclusions regarding the fairness of the transaction. The general partner and
the acquiring parties also considered the positive and negative factors
discussed below with respect to the alternatives to the transaction. In the view
of the general partner and the acquiring parties, the negative factors were not
sufficient, either individually or in the aggregate, to outweigh the benefits of
the proposed transaction in the form of the merger to the limited partners.

       Positive Factors Considered

       In determining that the merger is fair to the limited partners and in
recommending approval of the merger, the general partner and the acquiring
parties each considered the following factors which they believe support their
respective determinations regarding the fairness of the transaction and
recommendations:

       o  The limited partners will be able to liquidate their investments. No
          significant market for the sale of units currently exists or is
          expected to develop in which limited parties can liquidate their
          investments. Upon the completion of the transaction, the limited
          partners, other than PIP Partners, will be entitled to receive the
          cash merger consideration and those limited partners will no longer
          bear the risks inherent in the ownership of the properties through the
          partnership.

       o  The merger consideration each limited partner will receive is based on
          the market value of the partnership's properties as determined by
          independent appraisal. The general partner and the acquiring parties
          believe this validates the fairness of the price to be paid in the
          merger. The true market value of the partnership's properties could be
          greater than the appraised market value.

       o  The merger consideration being offered is no less than the amount the
          limited partners would receive if the partnership's properties were
          liquidated at current market values. The merger also eliminates the
          exposure of the limited partners to potential unanticipated costs to
          repair the partnership's properties (the overall repair costs being
          expected to be substantially in excess of related litigation
          recoveries), and to any reduction in the value of these properties
          attributable to such defects or reduction for any other liabilities of
          the partnership.


                                      -30-




       o  Based on their experience as to the substantial discount real estate
          professionals impose in instances where substantial construction
          defects exist, the general partner and the acquiring parties believe
          that the presence of significant construction defects would cause the
          partnership and/or its properties to be sold at a price less than the
          merger consideration.

       o  Ultimately, the known and unknown construction defects will have to be
          repaired to maintain the continued viability of the partnership's
          properties as income producing assets. Established reserves, together
          with the amounts recovered in settlement of litigation, may be
          insufficient to fund these repairs in a timely manner. If the
          partnership does not have sufficient cash to fund these repairs as
          required, the partnership would have to obtain additional capital
          resources to fund these repairs. This could result in substantial cost
          to the partnership or substantial dilution of the limited partners'
          interests in the partnership. There is no assurance capital resources
          would be available to the partnership on commercially reasonable
          terms. If not, then the partnership would have to consider other
          alternatives, such as a sale of the properties at what the general
          partner believes would then be substantially depressed prices. If the
          merger is consummated, the limited partners would no longer bear the
          risks of these uncertainties.

       o  The general partner's independent financial advisor has opined that
          the merger consideration is fair, from a financial point of view, to
          the limited partners not affiliated with PIP Partners.

       o  The cash price to be received by the limited partners per unit is over
          $900 greater than the highest price paid in open market transactions
          for units over the past two years and $800 greater than any price paid
          for units of which the partnership is aware.

       o  PIP Partners did not require Prometheus Income Partners to make
          significant representations, warranties or covenants with respect to
          its past, present or future operations or profitability or the
          condition of the partnership's properties, including known
          construction defects. Accordingly, there is little risk that the
          merger will not be consummated on that basis if approved by the unit
          holders.

       o  Pursuant to the Agreement and Plan of Merger, PIP Partners has agreed
          to vote its units for or against the merger in the same proportion as
          the unaffiliated limited partners who vote on the merger at the
          meeting. This means that the merger will be approved only if a
          majority of those unaffiliated limited partners voting on the
          transaction vote for the merger.

       o  The merger will allow limited partners to receive cash to at least
          partially pay tax liabilities related to income recognized since 1997
          (the partnership having recognized a loss in 1996) with respect to
          undistributed partnership income that has been reserved for
          conditional liabilities related to the construction defects. It is
          uncertain whether and when Prometheus Income Partners will be able to
          make distributions of income to the limited partners under its credit
          agreements or otherwise, given the status of construction defects in
          its properties. Cash distributions will only resume

                                      -31-




          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. As of the date hereof, 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. In addition,
          if repairs of the properties are not completed by December 2002, the
          partnership's lenders have the right to require the partnership to
          retain additional cash reserves, which could require further
          suspension of distributions to limited partners. If the merger is
          consummated, you will receive no further cash distributions from or
          with respect to the partnership (other than the merger consideration).
          Commencing with the tax year following the tax year in which the
          closing of the transaction occurs, the limited partners will not incur
          income for tax purposes with respect to which they have received no
          corresponding cash distribution.

       o  If the merger is not consummated, the limited partners would continue
          to own units. This likely would be true for the foreseeable future
          because there is no assurance that in the absence of a liquidation the
          limited partners would have a liquidity event with respect to their
          units until the expiration of the term of Prometheus Income Partners
          under its partnership agreement. The general partner would be under no
          obligation to seek a sale of the properties prior to the expiration of
          the partnership's term. Therefore, the limited partners would continue
          to be exposed to the risks inherent in the ownership of real property,
          such as fluctuations in occupancy rates, operating expenses and rental
          rates, which in turn may be affected by general and local economic
          conditions, the supply of and demand for properties of the type owned
          by Prometheus Income Partners and federal and local laws and
          regulations affecting the ownership and operation of real estate.
          Although the properties owned by the partnership had experienced
          positive rental growth and high occupancy for the last few years,
          there have been recent downturns in rental and occupancy rates for
          these properties and generally in the market in which they are
          located, and there still exists a significant risk of further
          downturns given current economic conditions. These factors could also
          adversely impact any future price at which the units or the
          partnership's properties could be sold. If the merger is consummated,
          the limited partners would no longer have their units subject to the
          risk of the real property ownership and operation, including the risks
          of substantial loss of use of the partnership's properties as a result
          of existing defects or otherwise.

       o  The merger consideration of $1,714 per unit represents a multiple of
          13.4x annual net income of the partnership per limited partner unit
          for the fiscal year ended December 31, 2000 and a multiple of 15.9x
          annualized net income for the partnership based on its financial
          results for the nine months ended September 30, 2001.

       o  Notwithstanding the pendency of various public filings indicating the
          intention of PIP Partners to acquire the outstanding units for
          consideration less than the merger


                                      -32-




          consideration, no person has made any bid to acquire any significant
          number of units or the partnership's properties.

       Overall, the general partner and each of the acquiring parties believe
these factors combine to give limited partners the opportunity to realize their
investment at a fair price that would not be afforded through other alternatives
while eliminating the risks of loss that would be attendant to retaining limited
partnership interests in a real estate limited partnership fraught with
substantial uncertainties of structural defects.

       Negative Factors Considered

       Each of the general partner and the acquiring parties also considered the
following negative factors:

       o  PIP Partners, PIP Acquisition and Prometheus Development Co. are all
          under the common control of Sanford Diller and, therefore, Prometheus
          Development Co. has substantial conflicts of interest with respect to
          the approval of the merger. The merger consideration was determined
          without any arms-length negotiations between PIP Partners and either
          Prometheus Development Co. or any other person acting independently on
          behalf of the limited partners. In structuring the transaction, only
          Prometheus Development Co. represented the interests of the limited
          partners.

       o  PIP Partners is making this offer with a view to making a profit and,
          therefore, there is a conflict between PIP Partners desire to purchase
          your units at a low price and your desire to sell your units at a high
          price. PIP Partners believes that it can profit from its ownership of
          the partnership notwithstanding the prevailing risks and
          uncertainties. Affiliates of Prometheus Development Co. will hold 100%
          of the units if the transaction is completed. Consequently, affiliates
          of Prometheus Development Co. will continue to have the opportunity to
          benefit from any future earnings growth and increases in the value of
          Prometheus Income Partners and its properties.

       o  Prometheus Development Co. has not contacted any third-party
          unaffiliated with the Prometheus Development Co. concerning a possible
          sale of the partnership's underlying properties to that third-party, a
          tender offer by that third-party for the units for cash, or any other
          acquisition of units by that third-party.

       o  The limited partners will not have the benefit for tax purposes of
          future losses (if any) of Prometheus Income Partners, including any
          losses related to construction defects, to offset other sources of
          income.

       o  Following the transaction, the limited partners, other than PIP
          Partners, will cease to participate in future earnings or growth, if
          any, of Prometheus Income Partners or benefit from increases, if any,
          in the value of Prometheus Income Partners or its properties.

       o  If limited partners owning more than 50% of the units vote for the
          merger proposal, their approval will bind all limited partners.
          Therefore, a limited partner may vote


                                      -33-



          against the merger proposal and nevertheless have its units converted
          into the right to receive cash in the merger if the requisite vote of
          the limited partners is obtained.

       o  Limited partners do not have any dissenters' rights or other rights of
          appraisal under the state law which governs Prometheus Income
          Partners, the partnership agreement of Prometheus Income Partners or
          otherwise in connection with the merger proposal. Therefore,
          dissenting limited partners do not have the right to have their units
          independently appraised if they disapprove of the merger or the merger
          consideration.

       o  The limited partners will not be able to benefit from potential
          alternatives to the merger. These alternatives include a separate sale
          of all of the assets of Prometheus Income Partners and subsequent
          liquidation of Prometheus Income Partners, other possible acquisitions
          of units or the continuation of Prometheus Income Partners under its
          current ownership structure.

       o  If the merger occurs, limited partners will not receive any future
          distributions from operating cash flow of Prometheus Income Partners,
          if and when reinstituted, or upon a sale or refinancing of the
          properties owned by Prometheus Income Partners.

       o  Limited partners will not receive any interest in net litigation
          recoveries expected to be approximately $10.8 million.

       o  Affiliates of Prometheus Development Co. have a separate economic
          interest in structuring the transaction to achieve favorable tax
          treatment. Limited partners will recognize gain or loss on the
          conversion of their units into cash in the merger.

       o  The obligations of PIP Partners are subject to the condition that the
          existing mortgages on the partnership's properties be refinanced on
          terms satisfactory to PIP Partners. There is no assurance that
          refinancing will be available on such terms.

       o  The merger may be approved even though a majority of the units held by
          limited partners unaffiliated with Prometheus Development Co. do not
          approve the merger. This is because PIP Partners will vote its units
          according to the percentage of units voting in person or by proxy at
          the meeting in favor of the merger. Thus, units not voted at the
          meeting will not be taken into account by PIP Partners in determining
          the percentage of its own units to be voted in favor of the merger.

       In the view of the general partner and the acquiring parties, these
negative factors were not sufficient, either individually or in the aggregate,
to outweigh the benefits of the proposed transaction to the limited partners.

       In evaluating the fairness of the transaction, the general partner and
the acquiring parties also considered the information on weighted average
private sales prices for units of which it was aware. Over the past two years,
other than the block purchase by PIP Partners, units have been sold for between
$495 and $601 (this does not include the sale of units pursuant to recent tender
offers at $650, $700 and $800 per unit), far less than the merger consideration
of $1,714 per unit. However, none of the acquiring parties placed significant
emphasis or weight on these

                                      -34-




prices and ranges and none considered these prices and ranges to be material
factors in making their determinations and recommendations because, at present,
there is no established public trading market for the units, nor is one expected
to develop. Moreover, liquidity is limited to sporadic private sales which
generally involve a relatively small percentage of the units outstanding. Each
of the general partner and the acquiring parties believes that the fair value of
the units (based on the potential value of Prometheus Income Partners' real
estate) is substantially higher than recent trading prices.

       Regarding the price being paid, these persons believe the lack of a
significant change in the trading price of the units as the financial condition
of Prometheus Income Partners has improved reflects the weak market for the
units. In a more efficient market, they believe that recent trading prices would
be higher than they currently are and recently have been.

       Alternatives to the Transaction Considered

       The decision to pursue the merger, and, in part, the assessment by the
general partner and the acquiring parties of the fairness of the merger,
included a review of different alternatives identified as having the potential
to achieve the investment objectives of limited partners as expressed to the
general partner. They considered three alternatives to the merger:

       o  liquidation of Prometheus Income Partners through a sale of its
          properties and distribution of the net cash proceeds of the
          liquidation;

       o  a negotiated tender offer by PIP Partners - General for a percentage
          of the units; and

       o  continuation of the business of Prometheus Income Partners, with
          Prometheus Income Partners continuing to be owned by the current
          limited partners, including PIP Partners.

       The general partner did not consider any other form of transaction in
which the limited partners would receive anything other than cash (including the
deferred cash right included in the merger consideration). Discussion of these
alternatives were limited to Mr. Diller, Mr. Murphy, Ms. Mullins and the
partnership's legal advisors.



       Liquidation

       One alternative to the transaction considered was to liquidate Prometheus
Income Partners' assets, distribute the net cash proceeds of the liquidation to
the partners and then dissolve Prometheus Income Partners. The general partner
and the acquiring parties determined that Prometheus Income Partners should not
pursue this alternative for the reasons discussed below. Because of the negative
factors discussed below, they did not deem it warranted to solicit expressions
of interest regarding the purchase of the properties of Prometheus Income
Partners.

       In a liquidation, Prometheus Development Co. would market the
partnership's properties and, if a potential purchaser were interested in
purchasing Alderwood or Timberleaf or both, Prometheus Development Co. would
negotiate and enter into an agreement for the sale of the


                                      -35-




property or properties. Prometheus Development Co. would be required to obtain
the approval of limited partners holding at least 50% of the units before the
sale could close. If the limited partners approved the sale of both properties
and these sales were closed, Prometheus Development Co. would proceed to
liquidate the partnership in accordance with the provisions of the partnership
agreement of Prometheus Income Partners and applicable law.

       Pursuant to the partnership agreement of Prometheus Income Partners, net
proceeds from a sale and liquidation would be distributed in the following order
to the extent of the funds are available:

             (1)    To the payment of current partnership obligations,
                    liabilities and expenses.

             (2)    To the setting up of reserves that the general partner deems
                    necessary for the payment of partnership debts or
                    liabilities, whether then payable or not yet payable,
                    including any contingent or unforeseen liabilities or
                    obligations.

             (3)    In proportion to, and to the extent of, the positive capital
                    account balances of the partners.

             (4)    100% to the limited partners until each limited partner has
                    received an amount equal to a preferred percentage return on
                    its invested capital plus the limited partners' remaining
                    invested capital.

             (5)    A disposition fee of up to 3% of the sales price to the
                    general partner.

             (6)    The balance:

                    (a)  85% to the limited partners; and

                    (b)  15% to the general partner.

       Benefits of liquidation. Prometheus Development Co. considered the
primary benefits of a sale and liquidation to be the following:

       o  Upon the completion of a liquidation, the limited partners would be
          entitled to receive cash in exchange for their units and, accordingly,
          limited partners would no longer bear the risks inherent in the
          ownership of the properties through Prometheus Income Partners,
          including the uncertainty as to whether the partnership will have
          adequate funds to make necessary repairs to its properties.

       o  The limited partners would participate in their pro rata share of net
          litigation recoveries in accordance with the partnership agreement and
          subject to the liabilities of the partnership.

       o  A liquidation would not take place unless greater than 50% of the
          units vote for the transaction. This procedure grants the limited
          partners in the aggregate the opportunity to choose whether to
          liquidate their interests or veto the transaction.


                                      -36-




       o  In the absence of a sale of one or both properties, it is unclear
          whether and when Prometheus Income Partners would be able to make
          distributions of income to the limited partners, given the status of
          construction defects in the properties. 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 hereof, 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. In addition,
          if repairs of the properties are not completed by December 2002, the
          partnership's lenders have the right to require the partnership to
          retain additional cash reserves, which could require further
          suspension of distributions to limited partners. If the merger is
          consummated, you will receive no further cash distributions from or
          with respect to the partnership (other than the merger consideration).

       o  Commencing with the tax year following the tax year in which the
          closing of a liquidation occurs, the limited partners would no longer
          need to include in their federal and state income tax returns the
          various items of income, loss, deduction and credit as previously
          reported on Schedule K-1s delivered by Prometheus Income Partners and
          would not incur income for tax purposes with respect to which they
          have received no cash distribution.

       Disadvantages of Liquidation. The general partner and the acquiring
parties also considered the following disadvantages of liquidating Prometheus
Income Partners:

       o  Based on their experience as to the substantial discount real estate
          professionals impose in instances where substantial structural
          construction defects exist, the general partner and the acquiring
          parties believe that the presence of significant construction defects
          would cause the partnership and/or its properties to be sold at a
          price per unit substantially less than the merger consideration.

       o  There can be no assurance that Prometheus Development Co. would be
          able to sell Prometheus Income Partners' properties for prices that
          would result in a distribution to the limited partners that is equal
          or greater than the consideration they would receive in the merger.
          Any distribution of proceeds from the sale of the properties would be
          subject to the prior satisfaction of the partnership's liabilities.
          Given the outstanding defects in these properties, there is no
          assurance that the price at which the properties could be sold would
          be sufficient to satisfy the partnership's liabilities.

       o  A potential purchaser could require the limited partners to place all
          or a substantial portion of the purchase price in escrow pending the
          repair of construction defects,


                                      -37-




          and depending on the ultimate costs to repair these defects, might
          require some of the funds in escrow to be returned to the purchaser.

       o  So long as the existing construction defects remain, the existing
          loans would not be assumable by a buyer of the properties.

       o  Until the properties of Prometheus Income Partners are sold and the
          partnership is liquidated and terminated, limited partners would
          continue to receive Schedule K-1s from Prometheus Income Partners, and
          Prometheus Income Partners would continue to have SEC reporting
          obligations.

       o  Limited partners do not have any dissenters' rights or other rights of
          appraisal under the state law which governs Prometheus Income
          Partners, the partnership agreement of Prometheus Income Partners or
          otherwise in connection with a sale and liquidation. Therefore,
          dissenting limited partners would not have the right to have their
          units independently appraised if they disapprove of the liquidation.

       o  The limited partners would not be able to benefit from the
          alternatives to a liquidation. These alternatives include the merger,
          other possible acquisitions of units or the continuation of Prometheus
          Income Partners under its current ownership structure.

       o  No assurance can be given that a liquidation would be consummated.

       o  If a liquidation occurred, the limited partners would not receive any
          future distributions from operating cash flow of Prometheus Income
          Partners if and when reinstituted, the liquidation of the security
          accounts, upon a sale or refinancing of the properties owned by
          Prometheus Income Partners, or upon the dissolution of Prometheus
          Income Partners.

       Tender Offer

       Another alternative to the transaction considered by the general partner
and the acquiring parties was to make a cash tender offer for the units. In a
tender offer, those limited partners who tendered their units, and whose units
were accepted for purchase, would realize most of the benefits the limited
partners would receive in the merger.

       The primary benefit the merger offers which is not offered by a tender
offer is that, due to the legal structure of Prometheus Income Partners, as a
practical matter PIP Partners would be restricted in the number of units it
could acquire by way of tender offer. Importantly, if more than 50% of the units
are transferred in any given year, Prometheus Income Partners would suffer
adverse tax consequences as a result of a reassessment of its properties,
estimated by the general partner to result in the payment of additional property
taxes of approximately $188,000 annually and subject to further ordinary course
annual adjustments. In addition, if PIP Partners held more than 50% of the
units, it would essentially be unable under applicable law to purchase the
balance of the units at a later date, and thus unable to provide the other
limited partners with liquidity, unless it held more than 90% of the units.
Thus, PIP Partners might not be able to offer


                                      -38-




liquidity to all limited partners who desired liquidity. In addition, a discount
would be applied to the price paid due to the costs inherent in continuing to
have minority partners. Another significant benefit to the merger versus a
tender offer is that following a tender offer Prometheus Income Partners might
continue to be required to satisfy its current reporting obligations pursuant to
SEC rules.

       The primary advantage to pursuing a tender offer versus the merger is
that those limited partners who do not wish to tender their units are not
required to do so. In the merger, if a majority of the units are voted in favor
of the merger and the merger takes place, each limited partner other than PIP
Partners will be entitled to receive the merger consideration for each unit each
limited partner holds. In a tender offer, those limited partners not tendering
their units would retain those units.

       The general partner also considered soliciting third party interest in
making a tender offer for the units. However, for the reasons set forth above as
to why the general partner and the acquiring parties believe the partnership's
properties would be undervalued in a sale, they believe the units would be
similarly undervalued in the price a third party would be willing to pay in a
tender offer. This is particularly true because there would be no mechanism
available in connection with a tender offer to escrow a part of the purchase
price to cover contingent liabilities of the partnership.

       Continued Ownership of Prometheus Income Partners

       Benefits of continued ownership. Another alternative to the transaction
considered by the general partner and the acquiring parties was to continue
Prometheus Income Partners in accordance with its existing business plan, with
Prometheus Income Partners continuing to be owned by the limited partners. This
will be the result if Prometheus Income Partners does not participate in the
merger. The general partner and the acquiring parties considered the primary
benefits of continuing the business of Prometheus Income Partners to be as
follows:

       o  Limited partners of Prometheus Income Partners would continue to have
          the right to receive distributions of net cash flow arising from
          operations and the sale or refinancing of Prometheus Income Partners'
          properties if and when Prometheus Development Co. determines that
          there were adequate reserves for contingent and other liabilities.

       o  Continued ownership of Prometheus Income Partners by the limited
          partners affords the limited partners with the opportunity to
          participate in any future appreciation in the partnership's
          properties.

       o  As discussed above, the general partner believes that the presence of
          significant construction defects would cause the partnership and/or
          its properties to be sold at a disproportionate discount from their
          fair market value.

       o  The limited partners would participate in their pro rata share of net
          litigation recoveries in accordance with the partnership agreement and
          subject to the liabilities of the partnership.


                                      -39-




       o  The limited partners would be able to benefit from potential future
          transactions involving the sale of the units. These alternatives
          include a future merger or tender offer at a higher price, although
          there can be no assurance that an opportunity with respect to future
          transactions would materialize.

       Disadvantages of Continued Ownership. The general partner and the
acquiring parties also considered the relative disadvantages to the limited
partners of continuing Prometheus Income Partners under its current business
plan, as follows:

       o  The availability of future commercially reasonable opportunities to
          provide liquidity to the limited partners is highly speculative. While
          the general partner may from time to time consider various
          alternatives for limited partner liquidity, including a sale of the
          partnership's properties if and when commercially reasonable to do so,
          the limited partners will not have any assurance of when or if another
          liquidation transaction will occur until the expiration of the term of
          Prometheus Income Partners under its partnership agreement. The
          general partner would be under no obligation to seek a sale of the
          properties prior to the expiration of the partnership's term. While a
          sale of one or both properties could be effected well in advance of
          such date, the general partner is required to act in the best
          interests of the partnership in evaluating whether or not to pursue
          and consummate such sale based on circumstances that prevail from time
          to time.

       o  Continued ownership by the limited partners would fail to secure the
          benefits to the limited partners that are expected to result from the
          merger, including providing immediate liquidity to the limited
          partners of their investment. At present, there is no established
          public trading market for the units and liquidity opportunities
          generally are limited to sporadic private sales. To date, these sales
          are at a price far less than the merger consideration and typically
          involve only a very limited number of units.

       o  The limited partners would continue to own units and therefore would
          continue to be exposed to the risks inherent in the ownership of real
          property, such as fluctuations in occupancy rates, operating expenses
          and rental rates, which in turn may be affected by general and local
          economic conditions, the supply and demand for properties of the type
          owned by Prometheus Income Partners and federal and local laws and
          regulations affecting the ownership and operation of real estate. The
          financial results of the partnership are materially dependent on
          occupancy rates and rental rates. Although the properties owned by the
          partnership had experienced positive rental growth and high occupancy
          for the last few years, there have been recent downturns in rental and
          occupancy rates for these properties and in the market in which they
          are located, and still exists a risk of further downturns in the
          future based on current economic conditions.

       o  As discussed above, the known and unknown construction defects will
          have to be repaired to maintain the continued viability of the
          partnership's properties as income producing assets. There can be no
          assurance that established reserves, together with the amounts
          recovered in settlement of litigation, will be sufficient to fund
          these repairs in a timely manner. If the partnership does not have
          sufficient cash to fund


                                      -40-




          these repairs as required, the partnership would have to obtain
          additional capital resources to fund these repairs. This could result
          in substantial cost to the partnership or substantial dilution of the
          limited partnership's interests in the partnership. There is no
          assurance capital resources would be available to the partnership on
          commercially reasonable terms. If not, then the partnership would have
          to consider other alternatives, such as a sale of the properties at
          what the general partner believes to be substantially depressed
          prices. If the merger is consummated, the limited partners would no
          longer bear the risks of these uncertainties.

       o  Until the properties of Prometheus Income Partners are sold and the
          partnership is liquidated and terminated, limited partners would
          continue to receive Schedule K-1s from the partnership, and the
          partnership would continue to have SEC reporting obligations.

       o  The limited partners would be forced to continue to pay taxes on
          partnership income which is not being distributed due to contractual
          and anticipated cash reserve requirements.

                                   THE MEETING

       Time, Date and Place

       This Proxy Statement is being furnished to limited partners of Prometheus
Income Partners in connection with the solicitation of proxies by and on behalf
of Prometheus Development Co., as general partner of Prometheus Income Partners,
for use at the meeting of limited partners to be held at 1:30 p.m., local time,
on March __, 2002, at [location], and at any adjournments or postponements of
the meeting.

                            Matters to be Considered

       At the meeting, the limited partners will be asked to consider and vote
on the merger proposal and the adjournment proposal and to consider any other
matters as may properly come before the meeting. A vote for the merger proposal
is not also a vote for the adjournment proposal. You must vote separately on
each proposal.

       Approval of the merger proposal by the limited partners is a condition to
Prometheus Income Partners' participation in the merger.

       Approval of the adjournment proposal will permit the adjournment of the
meeting to solicit additional proxies in the event that there are not sufficient
votes at the time of the meeting to approve the merger proposal. The merger
provides that Prometheus Development Co. will recommend the adjournment of the
meeting for ten days if on the date of the meeting Prometheus Income Partners
has not received duly executed proxies which, when added to the number of votes
represented in person at the meeting by persons who at that time intend to vote
for the merger proposal, will constitute a sufficient number of votes to approve
the merger proposal. However, if limited partners holding greater than a
majority of the outstanding units have indicated their intention to vote
against, and have submitted duly executed proxies voting against, the merger
proposal, the merger does not require Prometheus Development Co. to

                                      -41-




recommend adjournment of the meeting. Approval of the adjournment proposal by
the limited partners is not a condition to Prometheus Income Partners'
participation in the transaction.

       Other than the merger proposal and the adjournment proposal, Prometheus
Development Co. does not expect to ask the limited partners to vote on any other
matters at the meeting. However, if matters other than the merger proposal and
the adjournment proposal are properly brought before the meeting, or any
adjournments or postponements of the meeting, the persons appointed as proxies
will have discretion to vote or act on those matters according to their best
judgment.

       Recommendations of the General Partner and the Acquiring Parties

       Prometheus Development Co., Prometheus Income Partners, PIP Partners, PIP
Acquisition, PromHill, The DNS Trust, Helen Diller and Sanford Diller,
considering, among other factors, the opportunity for the limited partners to
achieve liquidity, have each determined, as discussed and for the reasons set
forth above, that the merger is procedurally and substantively fair to
Prometheus Income Partners and all of its limited partners who are unaffiliated
with the acquiring parties. Accordingly, these parties have approved the merger
and the transactions contemplated by the merger, and each of these parties
recommends that limited partners of Prometheus Income Partners vote for the
merger proposal and for the adjournment proposal.

       Record Date; Voting Power

       Prometheus Development Co. has fixed the close of business on March __,
2002, as the record date for determination of the limited partners entitled to
notice of and to vote at the meeting and any adjournment or postponement of the
meeting. Only holders of record of units at the close of business on March __,
2002 are entitled to notice of and to vote at the meeting. As of the record
date, there were 18,995 units in Prometheus Income Partners outstanding and held
of record by ____ holders of record. Holders of record of units are entitled to
one vote for each unit that they hold on the merger proposal, the adjournment
proposal and any other matter that may properly come before the meeting.

       Quorum

       The necessary quorum for the transaction of business at the meeting is
the presence in person or by proxy of limited partners holding a majority of the
units in Prometheus Income Partners outstanding on the record date. For purposes
of determining the presence of a quorum, proxies marked "ABSTAIN" will be
counted by Prometheus Development Co. as present at the meeting.

       In the event that there are insufficient votes present at the meeting to
constitute a quorum, and proxies and votes for the merger proposal represent
fewer than 50% of the units, the units for which proxies have been received
marked in favor of the adjournment proposal may be voted to adjourn the meeting
to a later date. Notice of the adjourned meeting need not be given if the time
and place of the adjourned meeting is announced at the meeting, the adjournment
is for not more than forty-five days from the date of the original meeting and
no new record date is set.

       Vote Required


                                      -42-




       A vote for the merger proposal is not also a vote for the adjournment
proposal. You must vote separately on each proposal. The affirmative vote of
limited partners holding greater than 50% of the units outstanding on the record
date is required to approve the merger proposal. The affirmative vote of limited
partners holding more than 50% of the units present in person or by proxy at the
meeting is required to approve the adjournment proposal.

       Limited partners are urged to complete, date, sign and promptly return
the enclosed proxy. All properly executed proxies received by Prometheus
Development Co. prior to the meeting that are not revoked will be voted at the
meeting in accordance with the instructions indicated on the proxies.

       If you mark "ABSTAIN" on your proxy and do not vote in person at the
meeting, the effect will be the same as a vote against the merger proposal. If
you fail to return your proxy and do not vote in person at the meeting, as a
result of the agreement of PIP Partners to vote as have the voting limited
partners, the effect on the merger proposal will depend on how other limited
partners vote. If you fail to return your proxy, your units will have no effect
on the outcome of the adjournment proposal. If you mark "ABSTAIN" on your proxy
and do not vote in person at the meeting, the effect will be the same as a vote
against the adjournment proposal. If you sign and return your proxy but do not
give instructions on your proxy, your units will be voted for the merger
proposal and for the adjournment proposal.

       Approval of the merger proposal by the limited partners is a condition to
Prometheus Income Partners' participation in the merger. Therefore, if we do not
receive votes for the merger proposal from limited partners holding greater than
50% of the units, the merger proposal will not be approved and Prometheus Income
Partners will not participate in the merger.

       Approval of the adjournment proposal by the limited partners is not a
condition to Prometheus Income Partners' participation in the transaction.
Approval of the adjournment proposal by the limited partners will permit the
adjournment of the meeting to solicit additional proxies in the event that there
are not sufficient votes at the time of the meeting to approve the merger
proposal.

       Changing Your Vote

       You may revoke your proxy at any time before it is voted at the meeting
(1) by sending in a later dated, signed proxy, (2) by written notice of
revocation to Prometheus Development Co. or (3) by attending the meeting and
voting in person.

       Solicitation of Proxies

       Proxies are being solicited by and on behalf of Prometheus Development
Co., as general partner of Prometheus Income Partners. In addition to
solicitation by mail, Prometheus Development Co. and the officers and directors
of Prometheus Development Co., principally Mr. Murphy and Ms. Mullins, may
solicit proxies by telephone, telegram or facsimile transmission. No additional
compensation will be paid to these persons for these solicitation services.
Prometheus Income Partners will request that brokerage firms, fiduciaries and
other custodians forward copies of this Proxy Statement and the enclosed form of
proxy to the beneficial owners of units held of record by them, and Prometheus
Income Partners will

                                      -43-




reimburse those brokerage firms, fiduciaries and other custodians for their
reasonable expenses incurred in forwarding this material. Prometheus Income
Partners has retained persons to aid it in the solicitation. Pursuant to a
letter agreement dated June 20, 2001 between MacKenzie Partners, Inc. and
Prometheus Development Co., MacKenzie Partners agreed to distribute this Proxy
Statement to limited partners, provide information with respect to the merger to
limited partners, and provide advisory services to Prometheus Development Co.
with respect to the merger. Prometheus Development Co. agreed to pay MacKenzie
Partners a fee of $9,500 plus out-of-pocket expenses incurred by MacKenzie in
rendering these services.

       The matters to be considered at the meeting are of great importance to
Prometheus Income Partners and to the limited partners. Please read and
carefully consider the information presented in this Proxy Statement and the
other documents to which we have referred you and complete, date, sign and
promptly return the enclosed proxy. Completed proxies should be returned as soon
as possible. You may return your proxy as follows:

       by regular mail, in the enclosed postage-paid envelope, to:

                MacKenzie Partners, Inc.
                156 Fifth Avenue
                New York, NY  10010
                (800) 322-2885
                proxy@mackenziepartners.com

            or by fax to:

                (212) 929-0308

       List of Limited Partners

       Under the federal securities laws, a limited partner who is entitled to
vote at the meeting may request in writing a list of the other limited partners
entitled to vote at the meeting to enable the requesting limited partner to mail
soliciting materials to the other limited partners. Alternatively, a limited
partner of Prometheus Income Partners who is entitled to vote at the meeting may
request that Prometheus Income Partners mail copies of any proxy statement, form
of proxy or other soliciting material furnished by the requesting limited
partner to the other limited partners. The requesting limited partner must
reimburse Prometheus Income Partners for Prometheus Income Partners' reasonable
expenses incurred in connection with performing these services. Any requests
referred to in this paragraph should be made in writing to: Prometheus
Development Co., Inc., 350 Bridge Parkway, Redwood City, California 94065-1517.

       At the time of making the request, the requesting limited partner must,
if its units are held through a nominee, provide Prometheus Income Partners with
a statement from the nominee or other independent third party confirming the
limited partner's beneficial ownership. In addition, the requesting limited
partner must provide Prometheus Income Partners with an affidavit or similar
document that:

       o  identifies the proposal that will be the subject of the limited
          partner's solicitation;


                                      -44-




       o  states that the limited partner will not use the list for any purpose
          other than to solicit limited partners with respect to the same action
          for which Prometheus Income Partners is soliciting votes; and

       o  states that the limited partner will not disclose the information
          provided to it to any person other than a beneficial owner for whom
          the request was made and an employee or agent to the extent necessary
          to effectuate the communication or solicitation.

       Upon termination of any solicitation by the requesting limited partner,
the requesting limited partner must return to Prometheus Income Partners,
without keeping any copies, the information provided by Prometheus Income
Partners and any information derived from that information. A limited partner is
only entitled to the foregoing information with respect to Prometheus Income
Partners.

       The partnership agreement of Prometheus Income Partners provides that a
current list of limited partners is open to inspection, examination and copying
by a limited partner of Prometheus Income Partners or that limited partner's
duly authorized representative at all reasonable times.

                                   THE PARTIES

       Prometheus Income Partners

       Background

       Prometheus Income Partners, a California limited partnership, was formed
on April 15, 1985, under the California Revised Limited Partnership Act, for the
purpose of acquiring the Alderwood and Timberleaf properties. Prometheus
Development Co., Inc., a California corporation, is the general partner of
Prometheus Income Partners. The principal business of Prometheus Income Partners
is to invest in, construct, hold, operate, and ultimately sell its properties.
The principal investment objectives of the partnership are to preserve and
protect its capital, to obtain capital appreciation from the sale of its
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 it.

       With the proceeds of two bank loans, an affiliate of Prometheus
Development Co. purchased the Timberleaf site from an unaffiliated third party
in January 1985. With the proceeds of another bank loan, Prometheus Development
Co. leased the Alderwood site from a local school district with a purchase
option in April 1985. Ownership of Timberleaf and the interest under the
Alderwood lease subsequently were transferred to the partnership.

       Beginning in February 1987 through December 1987, Prometheus Income
Partners offered and sold 19,000 limited partnership units for $19,000,000. The
sale of these units was registered under the Securities Act of 1933, as amended,
pursuant to a Registration Statement that was declared effective on February 12,
1987; the offering and sale of the units was completed in December 1987. The net
proceeds of that offering, together with the proceeds of

                                      -45-




additional bank loans, were used to satisfy the construction loans with respect
to the Alderwood and Timberleaf properties and to exercise the purchase option
for the Alderwood land site.

       Prometheus Income Partners 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. Prometheus Income Partners has no employees, officers or
directors. Prometheus Real Estate Group, Inc., a California corporation,
previously known as Prom Management Group, Inc., a California corporation doing
business as Maxim Property Management, the majority of which is beneficially
owned by Mr. Diller, employs all of the personnel for the operation of
Prometheus Income Partners' properties pursuant to a Management and Operating
Agreement, dated as of October 1, 1992, by and between Prometheus Income
Partners and Prometheus Real Estate Group. The senior management personnel of
Prometheus Real Estate Group also act in these capacities for certain other real
estate partnerships in which Mr. Diller and other officers of Prometheus
Development Co. hold interests. Prometheus Real Estate Group receives various
fees and reimbursement of various expenses from Prometheus Income Partners under
the Management and Operating Agreement.

       Prometheus Income Partner'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. Its properties are located in an
area that contains numerous other competitive residential rental properties. The
income of the properties may be affected by various 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 these
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. Prometheus Development Co. is unable to predict the
effect, if any, of these events on the future operations of Prometheus Income
Partners. There is no assurance there will be a ready market for the sale of the
properties or, if sold, that a sale could be made on favorable terms.

       Properties

       Prometheus Income Partners owns the 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 fully completed by December 31, 1986. Lease-up activities began in November
1986 and continued through the third quarter of 1987. The complex contains 234
apartment units housed in 19 two-story


                                      -46-




buildings on a 9.4 acre site. Covered and uncovered parking for 468 cars is
provided. The Timberleaf luxury garden apartment complex is located at 2147
Newhall Street in Santa Clara, California. Construction began in November 1985
and was fully 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.

       Alderwood and Timberleaf are encumbered by first mortgage liens, which
secure promissory notes payable as of September 30, 2001 in the amount of
$16,543,000 and $9,090,000 respectively. 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, by their
terms are subject to a prepayment penalty, which as of the date hereof would be
approximately $3.4 million. The holder of the Notes has advised the partnership
that it is not willing to reduce or waive the prepayment penalty in the event of
any refinancing of the Notes.

       Construction Defects

       In June 1996, Prometheus Development Co. learned that the hardboard
siding used at both Alderwood and Timberleaf was beginning to fail. That was the
first indication of potential product failure at these properties, and the
general partner commissioned a survey of the sites.

       On June 26, 1996, experts conducted the first visual inspection of
Alderwood with respect to the defects on behalf of Prometheus Income Partners.
Throughout 1997 and 1998, the partnership inspected and investigated Alderwood
with respect to the construction defects, and in March and November 1998,
various defendants inspected and investigated Alderwood as well. Similarly, on
July 11, 1996 experts conducted the first visual inspection of Timberleaf.
Additional investigations took place in 1997, 1998 and 2000.

       As of the dates of these inspections, moisture had accumulated in the
walls of these projects through a combination of construction defects and
endemic problems with the hardboard siding. Sufficient moisture over time causes
rot and decay in the wood, framing and siding which necessitates repairs which,
in some cases, are structural in nature. Rot and decay, which form inside the
wall, are not visible, and until rot and decay have caused changes in the
physical appearance of the exterior of the buildings, it is difficult to
ascertain all the locations where rot and decay exist. On September 23, 1996,
Prometheus Income Partners filed two lawsuits (since settled) against the siding
manufacturer, the general contractor, the subcontractors and the architects, one
for each of its properties, regarding problems at the properties stemming from
the hardboard siding. Each of these persons denied responsibility for the
defects. In October 1997, a cross-claim was filed by one of the defendants in
each of these lawsuits against the partnership seeking relief against other
parties to the litigation if either filing party is found liable in the
litigation. This cross claim was tendered to the partnership's insurance
carrier, counsel for whom denied all allegations.

       As part of the inspections discussed above, certain structural issues
caused by the defects in the hardboard siding were uncovered at Alderwood and
Timberleaf and were rebuilt as part of an immediate repair process. Prometheus
Development Co. subsequently determined that additional immediate repairs were
necessary, which, with the exception of roof repairs noted

                                      -47-




below, have been completed. Prometheus Development Co. continues to monitor the
condition of the properties to look for any other signs of rot and decay that
would necessitate immediate attention and repair.

       In addition to the hardboard siding problems, in September 1999 routine
roofing inspection uncovered failing roof substrate at dormer roof assemblies
for Alderwood and Timberleaf. Prometheus Development Co. traced the cause of
this roofing problem to inadequate venting of the roof space. Inadequate venting
leads to condensation in roof areas. This has been sufficient to cause
deflection and decay of the roof and its structural support, requiring
replacement. Prometheus Development Co. has received design specifications for
remedial roof repairs and has completed a prototype repair of four dormer roof
assemblies. A bid based on the approved scope for additional dormer roof repair
as recommended by our engineer is currently being reviewed and once fully
negotiated will be executed. These repairs will begin as soon as possible.

       As of the date of this proxy statement, all litigation regarding these
defects has been settled. In total, from all Alderwood and Timberleaf
settlements, defendants have agreed to pay the partnership an aggregate of $14.6
million. Of this amount, the partnership is entitled receive a net amount of
approximately $10.8 million.

       The terms of the mortgages on the properties require that a security
account be maintained for each property to cover contingent liabilities with
respect to defects in the properties' hardboard siding. These security accounts
are additional collateral for the lender, and total, as of September 30, 2001,
approximately $5,821,000. These security accounts must be maintained until such
time as the partnership's lender has determined that these accounts contain
sufficient cash to complete the repairs of the partnership's properties.

       In addition to the security accounts mandated under the partnerships'
financing arrangements, Prometheus Development Co. has determined that it is in
the best interest of the partnership to continue building reserves for the
potential cost of dealing with known and unknown construction defects. The
partnership currently maintains an additional account totaling as of September
30, 2001 approximately $3,923,000, which is primarily intended to cover
additional contingent liabilities related to the construction defects and other
matters. Cash distributions will only resume when a determination has been made
that the partnership has adequate cash reserves (including in the security
accounts) 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 hereof, 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. In addition, if
repairs of the properties are not completed by December 2002, the partnership's
lenders have the right to require the partnership to retain additional cash
reserves, which could require further suspension of distributions to limited
partners. If the merger is consummated, you will receive no further cash
distributions from or with respect to the partnership (other than the merger
consideration).

                                      -48-




       The extent and magnitude of the construction defects continues to worsen
with time. Prometheus Development Co. has begun making these repairs using the
cash reserve funds currently held. As of September 30, 2000, Prometheus Income
Partners had spent approximately $2,854,000 on emergency and permanent repairs,
together with litigation expenditures above those being paid out of the amounts
to be received by the partnership in settlement of its construction defects
litigation. This amount is not included in the partnership's current estimates
of costs to repair construction defects.

       Recent Tender Offers

       The following are the sole tender offers that, to the best knowledge of
Prometheus Development Co., have been made for units.

       Beginning in 1996, competing tender offers were made for units. One
tender offer from Prom Investment Partners commenced in December 1996. In
response to that offer, PIP Partners made a similar offer, which commenced in
January 1997. An aggregate 2,750.5 units were tendered to and purchased by these
bidders per unit - 1,430 to PIP Partners and 1,320.5 to Prom Investment
Partners, 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 pursuant to these offers for $495 per
unit.

       During 1998, Bond Purchase, LLC, a third party not affiliated with PIP
Partners, Prometheus Development Co. or Mr. Diller, made an unsuccessful offer
to purchase units. The offer was for less than 5% of outstanding units and
nominal legal costs were incurred by Prometheus Income Partners. 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, a third party not affiliated
with PIP Partners, Prometheus Development Co. or Mr. Diller, 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. On October 1, 2000 and January 1, 2001, Everest
Properties was admitted as a limited partner with respect to 289 units and 15
units, respectively, that were tendered pursuant to this tender offer.

       On March 5, 2001, Everest Management, LLC 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 and subsequently was extended
by Everest to April 20, 2001. On July 1, 2001, Everest was admitted as a limited
partner as to an additional 639.5 units acquired pursuant to this tender offer.

       On September 4, 2001, Equity Resource Lexington Fund, L.P. , a third
party not affiliated with PIP Partners, Prometheus Development Co. or Mr.
Diller, by letter to the limited partners, made a tender offer to purchase an
unspecified number of units at a price of $700 per unit. By its terms, this
offer was set to expire on October 4, 2001. By letter to the limited partners
dated October 29, 2001 from Equity Resource Lexington, the expiration of this
tender offer was purportedly extended to November 29, 2001. As of the date
hereof, the general partner has been advised by the offeror that 492 units have
been tendered pursuant to this offer.

       The Partnership Agreement of Prometheus Income Partners


                                      -49-





       Pursuant to the partnership agreement of Prometheus Income Partners,
Prometheus Development Co. is the sole general partner of the partnership. All
of the outstanding shares of the general partner are owned by The DNS Trust. Mr.
Sanford N. Diller and Mrs. Helen Diller are the sole trustees and beneficiaries
of The DNS Trust. Mr. Diller is also President, Secretary and a director of the
general partner. The DNS Trust is also the principal beneficial owner of PIP
Partners - General; thus, PIP Partners and the partnership are affiliates. The
general partner has responsibility for all aspects of the partnership's
operations. The partnership agreement of Prometheus Income Partners contains
provisions relating to the rights and obligations of the general partner, the
limited partners and the partnership, including without limitation, the
financial arrangement between the general partner and the partnership.

       The partnership agreement provides, and, as parties thereto, the limited
partners agree, that the general partner and its affiliates have the right to
contract with or otherwise deal with the partnership subject in certain cases to
the approval of the limited partners.

       Subject to certain limitations contained in the partnership agreement,
the partnership is to distribute quarterly all distributable cash from
operations as follows:

             (1)   initially 100% to the limited partners until the limited
       partners have received a sum each year equal to a 10% simple annual rate
       of return on their investment;

             (2)   after the receipt by the limited partners of this 10% return,
       100% to the general partner until the general partner has received 5% of
       the aggregate cash distributed to the limited partners in that year; and

             (3)   thereafter, 95% to the limited partners and 5% to the general
       partner.

       The partnership agreement provides that cash received from the sale or
refinancing of the properties would be used or distributed to the extent funds
are available as follows:

             (1)   to the payment of current partnership obligations,
       liabilities and expenses;

             (2)   to the setting up of reserves which the general partner may
       deem necessary for partnership debts or liabilities, whether payable or
       not yet payable, including any contingent or unforeseen liabilities or
       obligations; and

             (3)   100% to the limited partners until each limited partner has
       received an amount equal to:

                   (a)   the excess of a 10% annual simple rate of return on the
             limited partners' investment (plus an amount necessary to provide
             limited partners subscribing for units on or prior to June 1, 1987,
             an 11% annual simple rate of return for calendar 1988 on invested
             capital) less the sum of all previous cash distributions during the
             term of the partnership other than distributions of invested
             capital;

                   (b)   the limited partners' remaining invested capital; and

                                      -50-




                   (c)   to the general partner a commission fee of up to 3% of
             the proceeds of a sale of a property (see below for a more complete
             explanation of this commission).

             (4)   The balance: 85% to the limited partners, 15% to the general
                   partner.

       However, distributions of net proceeds from a sale or refinancing arising
from the termination of Prometheus Income Partners would be distributed first in
proportion to, and to the extent of, the positive capital account balances of
the limited partners and the general partner and then as set forth above.

       The commission the general partner is entitled to receive as set forth
above is equal to the lesser of (a) 3% of gross sale price of the property and
(b) one-half of the competitive real estate brokerage commission which would be
charged by unaffiliated parties rendering similar services. However, all real
estate brokerage commissions or similar fees payable to all persons involved in
the sale of a property may not exceed 6% of the sales price.

       The partnership agreement further provides for the allocation of the net
profits and net losses among the general partner and the limited partners.

       If, immediately prior to the dissolution and termination of the
partnership, the general partner's capital account has a deficit balance and the
partnership's assets available for distribution upon dissolution and termination
are insufficient to provide distributions to limited partners equal to their
aggregate invested capital, the general partner shall be obligated to contribute
to the partnership that amount of capital if any equal to the lesser of:

             o   an amount sufficient to restore its capital account to zero and

             o   1.01% of the aggregate capital contributions of the limited
       partners, less any capital previously contributed by the general partner.

       If Prometheus Development Co. ceases to be the general partner of the
partnership upon the occurrence of certain terminating events, including
withdrawal, removal as a result of the majority vote of the limited partners,
bankruptcy, reorganization or dissolution and termination of Prometheus
Development Co., then the partnership will, at its election, either

             o   purchase Prometheus Development Co.'s interest; or

             o   convert to that of a special limited partnership interest.

       Upon conversion of its interest to that of a special limited partner,
Prometheus Development Co. would retain the same rights to profits, losses, and
distributions as before the terminating event and would be entitled to the
voting rights accorded other limited partners. If Prometheus Development Co.'s
interest is repurchased, it would receive from the partnership the then present
value of its interest in the partnership, determined by agreement of Prometheus
Development Co. and the partnership. If the parties cannot agree, the purchase
price would be determined in accordance with the then current rules of the
American Arbitration Association, with the expense of arbitration borne equally
by the parties. If the termination of Prometheus

                                      -51-



Development Co. was voluntary, the method of payment for its interest would be
under a non-interest bearing unsecured, promissory note with principal payable
from distributions which Prometheus Development Co. otherwise would have
received under this Agreement if it had remained as general partner. If the
termination is involuntary, the method of payment would be a promissory note
bearing interest at the reference rate of the bank specified by Prometheus
Development Co., with equal payments of principal and interest over a term of
five years.

       Prometheus Income Partners is permitted to engage in various transactions
involving Prometheus Development Co. and its affiliates, as more fully described
in the partnership agreement.

       The partnership agreement provides that Prometheus Income Partners will
reimburse its general partner, or its affiliates for:

             o  the actual cost to the general partner or its affiliates of
       goods and materials used for or by the partnership and obtained from
       entities which are not affiliated with the general partner;

             o  expenses for specified administrative services;

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

             o  funds advanced to the partnership by the general partner or its
       affiliates pursuant to the management agreement.

       However, no reimbursement for 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 Prometheus Income Partners would be
       required to pay to independent third parties for comparable services.

       For 2000 and 2001 to date, Prometheus Development Co. or its affiliates,
other than the management company (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.

       The partnership agreement exculpates the general partner, its officers,
directors and affiliates from liabilities to Prometheus Income Partners and
indemnifies the general partner, its officers, directors and affiliates against
liability to third parties resulting from its or their acts or omissions, so
long as the conduct was in the best interests of the partnership, except in the
event these liabilities or losses resulted from misconduct or negligence (gross
or ordinary). As a result of the exculpation and indemnification provisions, a
limited partner may be entitled to a more limited right of action than he or she
would otherwise have if these provisions were not included in the partnership
agreement.

                                  -52-




       For further information regarding the partnership agreement of Prometheus
Income Partners, review the partnership agreement of Prometheus Income Partners,
filed as Appendix B hereto.

       Repurchase Rights

       Pursuant to the partnership agreement the general partner may allocate up
to 10% of distributable cash from operations on an annual basis for the
repurchase of units from limited partners. During its existence, the partnership
may repurchase only up to 5% of the outstanding units, although the general
partner may increase the percentage of units eligible for repurchase. The
repurchase price is equal to 80% of the value of the units repurchased, as
determined by the general partner, utilizing a sales/liquidation analysis that
is based on independent appraisals. As noted elsewhere in this document, the
general partner believes the current repurchase price as so calculated would be
substantially below the merger consideration. Repurchases are required to be
made on a first come, first served basis. On January 1, 1994, the partnership
acquired five units from a limited partner pursuant to these repurchase rights
at a price of $309 per unit. The valuation method used for this repurchase did
not follow the provisions set forth in the partnership agreement. Instead, the
partnership and the limited partner agreed to a valuation method which is used
by real estate brokers in the area the properties were located, based upon an
estimated market value of the properties, less debt prepayment penalties and a
discount as provided in the partnership agreement

       Prometheus Income Partners made no repurchases under this Limited
Liquidity Plan during the years ended December 31, 2001, 2000, 1999, 1998 and
1997 and has made no repurchases thereunder to date in 2002. Prometheus Income
Partners has not repurchased units because of the lack of availability of cash
for such purpose after the establishment of the reserves described above.

       Financing

       Each of the properties is subject to a Loan Agreement and a Deed of
Trust, Security Agreement and Fixture Filing with Assignment of Rents in
connection with certain debt incurred by the partnership as part of the
refinancing of the properties in 1997. Under these documents, the partnership
has issued a non-recourse Note with respect to each property, secured by a first
deed of trust. These Notes bear fixed interest of 6.99% for Alderwood, and 7.09%
for Timberleaf. The refinancing of these Notes on terms satisfactory to PIP
Partners is a condition to the consummation of the merger.

       The terms of the Notes require, among other things, that the partnership
maintain a security account with respect to each property. These security
accounts are additional collateral for the lender. Cash held in these security
accounts was $3,366,000 and $2,455,000 for Alderwood and Timberleaf,
respectively, as of September 30, 2001. On an annual basis, for each property,
the partnership is obligated to contribute an amount 10% of the current value of
the security account to the security account . If the total cash flow for a
property is less than the required contribution, Prometheus Income Partners may
contribute an amount equal to the total cash flow, but will be obligated to
continue to deposit all cash flow into the security accounts until the total
deposits equals the required contribution.

                                      -53-




       If the construction defects repairs are not 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 Prometheus Income
Partners 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 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.

       Cash and cash equivalents not being held by the lender are comprised of
cash invested in market rate, checking and investment accounts. Cash balances
were approximately $3,568,000, $1,942,000 and $1,183,000 as of December 31,
2000, 1999 and 1998, respectively. As of September 30, 2001, the cash balance
was $3,923,000.

       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.
The reinstatement and level of future distributions, if and when reinstituted,
will be dependent on several factors, including the degree of damage caused by
the construction defects, determination of liability for potential costs and
expenses of dealing with the construction defect problems, and continued
stabilized operations at the properties.

       As of the date hereof, 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. In addition, if
repairs of the properties are not completed by December 2002, the partnership's
lenders have the right to require the partnership to retain additional cash
reserves, which could require further suspension of distributions to limited
partners. If the merger is consummated, you will receive no further cash
distributions from or with respect to the partnership (other than the merger
consideration).

       Restriction Under Loan Documents. Prometheus Income Partners agreed to
maintain insurance for the properties, maintain the properties in good order,
not to transfer the properties, not seek to change the zoning of the properties,
and not to operate the properties as condominiums or cooperatives.

       With respect to transfers, the loan documents may limit mergers involving
the partnership, unless the consent of the lender is obtained. A violation of
these provisions may allow the lender thereunder to, among other things,
accelerate the payment of all principal and interest and charge Prometheus
Income Partners as a prepayment penalty. If the consummation of the merger
confers upon the lender the right to accelerate the loans and the loans are not

                                      -54-




refinanced, PIP Partners will seek to obtain the consent of the lender. If an
acceptable agreement can be concluded, any fee incurred with respect to
obtaining this consent will be paid by PIP Partners. However, Prometheus Income
Partners has not entered into any substantive discussions to date regarding such
consent.

       Distributions

       Distributions to limited partners began with the quarter ending September
30, 1987. The limited partners collectively received aggregate distributions of
distributable cash from Operations in 1995 of approximately $1,550,000 (or
$81.60 per unit) and approximately $375,000 in 1996 ($19.74 per unit). Cash
distributions were suspended in 1996. No distributions were made for 1996, 1997,
1998, 1999, 2000 or 2001, or to date in 2002.

       Quarterly distributions have been suspended in order to continue building
reserves for the potential cost of dealing with the construction defect
problems. Had these reserves not been necessary, the general partner estimates
that the distributions from 1996 through September 30, 2001 would have
approximated an aggregate of $10,700,000, or $563 per limited partner unit. At
this time, the general partner cannot predict when distributions will resume;
however, it is Prometheus Development Co.'s current intention to resume
distributions as soon as reasonably possible and prudent. 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. In addition,
the security accounts must be maintained until such time as the partnership's
lender has determined that these accounts contain sufficient cash to complete
the repairs of the partnership's properties. The reinstatement and level of
future distributions, if and when reinstituted, will be dependent on several
factors, including the degree of damage caused by construction defects,
determination of liability for potential costs and expenses of dealing with the
construction defects, and continued stabilized operations at the properties.

       As of the date hereof, 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. In addition, if
repairs of the properties are not completed by December 2002, the partnership's
lenders have the right to require the partnership to retain additional cash
reserves, which could require further suspension of distributions to limited
partners. If the merger is consummated, you will receive no further cash
distributions from or with respect to the partnership (other than the merger
consideration).

       Executive Officers

       Prometheus Income Partners 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. After the


                                      -55-




merger, all of the persons who currently are officers and employees of
Prometheus Development Co. will continue to be officers and employees of
Prometheus Development Co.

       Sanford N. Diller. Age 74. President, Secretary and sole Director. Mr.
Diller supervises the acquisition, disposition and financial structuring of
properties. Mr. Diller founded Prometheus Development Co., 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 41. Vice President. Ms. Mullins' responsibilities
include supervising all property operations, information systems and finance, as
well as managing the disposition and financial structuring of properties. Ms.
Mullins came to Prometheus Development Co. in March 1994 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. in January 1995 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.

       Helen Diller. Age 72. Trustee of The DNS Trust. Ms. Diller has not been
employed for the past five years. She is not involved in the management of The
DNS Trust or any of the other entities described in this document.

            Prometheus Income Partners does not pay or employ directly any
officers or directors. Compensation to executives and employees of Prometheus
Development Co. is not based on the operations of Prometheus Income Partners.
Prometheus Real Estate Group, the property manager of the partnership's
properties, and its affiliates receive a management fee as compensation for
services rendered and reimbursement of certain partnership expenses.

       During the last five years, none of the above has been convicted in a
criminal proceeding excluding traffic violations or similar misdemeanors, nor
have any of the above been a party to a civil proceeding of a judicial or
administrative body of competent jurisdiction and as a result of this proceeding
was or is subject to a judgment, decree or final order enjoining future
violations of, or prohibiting or mandating activities subject to, federal or
state securities laws or finding any violation with respect to these laws. All
of the above are U.S. citizens.

       Principal Unitholders

       Other than PIP Partners, which as of October 31, 2001 owns 18.2% of the
outstanding units, no person of record owns or is known by the Registrant to
directly own beneficially more

                                      -56-




than 5% of the outstanding units. 99% of the membership interests of PIP
Partners are held by Sanford N. Diller and Helen P. Diller as Trustees of The
DNS Trust, and 1% of these interests are held by Jaclyn B. Safier. Thus, through
PIP Partners, Mr. Diller, Mrs. Diller and The DNS Trust indirectly beneficially
own these units.

       Prometheus Development Co. owns no units. However, Prometheus Development
Co., pursuant to the partnership agreement of Prometheus Income Partners, has
discretionary control over most of the decisions made for Prometheus Income
Partners. In addition, Mr. Diller, the holder of 99% of the outstanding equity
of Prometheus Development Co., beneficially holds 18.2% of the units through PIP
Partners, as described above, and is the sole executive officer of Prometheus
Development Co. who beneficially owns units.

       Following the merger, PIP Partners will own all of the units.

       Recent Transactions

       In 1994, a total of five units were repurchased by Prometheus Income
Partners from a limited partner unaffiliated with Prometheus Development Co.
pursuant to the repurchase program established under the partnership agreement
and described above under the caption "Repurchase Rights" beginning on page 53.
Since 1994, Prometheus Income Partners has made no repurchases under this
Limited Liquidity Plan, principally due to the lack of availability of cash for
such purpose after the establishment of the reserves described above.

       The current market for units is thin and illiquid. Prometheus Development
Co. is aware of three companies who quote prices for units, and through which a
small number of units, usually less than 1% of issued and outstanding units, are
traded each year. When the partnership is contacted by a limited partner
regarding the possible sale of units, the partnership identifies these three
companies, whom the partnership believes are brokers, to the limited partner and
provides contact information. The partnership also indicates the interest of PIP
Partners in acquiring units.

       PIP Partners acquired 7.5283% of the outstanding units in 1997. During
1998, 1999 and 2000, PIP Partners acquired 0.716%, 1.2371%, and 0.855% of
outstanding units, respectively at prices ranging from $495 to $550 per unit. In
June 2000, PIP Partners purchased 1,487.5 units from Prom Investment Partners
and two of its affiliates (Liquidity Fund Growth--Plus Partners, a California
limited partnership and Liquidity Fund Appreciation and Income Partners, a
California limited partnership), for $1,200 per unit. This purchase price was
arrived at pursuant to arm's-length negotiations between PIP Partners and Prom
Investment Partners. PIP Partners is controlled by The DNS Trust, and Sanford
and Helen Diller.

       On February 17, 2000, a limited partner unaffiliated with Prometheus
Development Co. contacted Prometheus Income Partners requesting information on
how to dispose of its units. Prometheus Income Partners responded with an
information letter describing the secondary market for units. On April 11, 2000,
the limited partner initiated a transaction whereby it would sell 2.5 units to
PIP Partners at a price of $525 per unit. The transaction was confirmed and the
funds were disbursed to the limited partner on May 1, 2000, and these units were
transferred on July 1, 2000.


                                      -57-




       Other than as described above and under the caption "Background - Reasons
for the Merger" beginning on page 24, neither PIP Partners, Prometheus
Development Co. nor any party affiliated with either of them has made any effort
to purchase or sell units or been willing to buy or sell units. However, PIP
Partners has contacted the three companies mentioned above and asked these
companies to contact it when units become available for purchase.

       PIP Partners - General, LLC

       PIP Partners - General, LLC was formed in 1996 to make a tender offer for
units as described above under the caption "Recent Tender Offers" on page 49.
The DNS Trust is also the sole shareholder of Prometheus Development Co. Since
that time, PIP Partners has acquired additional units. PIP Partners conducts no
other business. It is controlled by The DNS Trust and Sanford Diller, who also
control Prometheus Development Co. The Manager of PIP Partners is PromHill,
Inc., a California corporation which is beneficially owned by The DNS Trust.
PromHill is solely in the business of acting as a manager of limited liability
companies and a general partner of partnerships affiliated with the general
partner. The DNS Trust beneficially owns 99% of the interests in PIP Partners.
The sole director of the Manager is Sanford N. Diller, who is also the
President, Secretary and the sole director of Prometheus Development Co. Vicki
R. Mullins and John J. Murphy are also executive officers of the Manager. The
principal executive offices of PIP Partners - General are located at 350 Bridge
Parkway, Redwood City, California 94065-1517, telephone number 650-596-5393.

       PIP Acquisition

       PIP Acquisition, LLC is a newly formed California limited liability
company which was organized by PIP Partners in connection with the transactions
contemplated by the merger. PIP Acquisition is a nonsubstantive transitory
merger vehicle that will be merged out of existence at the effective time of the
merger. Accordingly, it is not expected to have significant assets or
liabilities other than those arising under the merger or to engage in any
activities other than those incident to its formation and the merger. PIP
Acquisition is a wholly owned subsidiary of PIP Partners. It is controlled by
The DNS Trust and Sanford Diller, the same entities who control Prometheus
Development Co. The principal executive offices of the PIP Acquisition are
located at 350 Bridge Parkway, Redwood City, California 94065-1517, telephone
number 650-596-5393.

                                   THE MERGER

       Effects of the Merger on Prometheus Income Partners

       If the merger proposal is approved by the limited partners and Prometheus
Income Partners participates in the transaction, then the effects of the
transaction with respect to Prometheus Income Partners will be as follows:

       o  Limited partners other than PIP Partners - General will receive the
          merger consideration of $1,714 in cash for each unit held by them. The
          current limited partners of Prometheus Income Partners other than PIP
          Partners will no longer have


                                      -58-




          any interest in and will not be limited partners and, therefore, will
          not participate in Prometheus Income Partners' future earnings and
          potential growth.

       o  Prometheus Development Co. will own the general partner interest in
          Prometheus Income Partners and PIP Partners will own all of the
          outstanding units. Sanford Diller, Helen Diller and Jaclyn Safier will
          thus hold all of the equity of Prometheus Income Partners.

       o  Prometheus Development Co. intends to seek deregistration of the units
          under the Exchange Act, and, if deregistration is obtained, all SEC
          reporting obligations of Prometheus Income Partners will cease
          pursuant to Section 12(g)(4) and 15(d) of the Exchange Act, because
          the units will be held by fewer than 300 persons. No future
          transaction would be subject to Rule 13e-3 of the Exchange Act.

       o  Limited partners will receive final Schedule K-1s from Prometheus
          Income Partners after the closing of the transaction and thereafter
          will no longer receive Schedule K-1s from Prometheus Income Partners.

       o  PIP Partners intends to continue to retain all senior management of
          Prometheus Development Co. to continue to manage Prometheus Income
          Partners.

       No Dissenters' Rights

       If limited partners owning more than 50% of the units vote for the merger
proposal, this approval will bind all limited partners. Limited partners do not
have any dissenters' rights or other rights of appraisal, under the Act which
governs Prometheus Income Partners, the partnership agreement of Prometheus
Income Partners or otherwise, in connection with the merger. Therefore,
dissenting limited partners do not have the right to have an appraisal of
Prometheus Income Partners to confirm the fair market value of their units if
they disapprove of the action of the limited partners that voted for the merger
proposal.

       Federal Income Tax Consequences

       The following summary is a general discussion of some of the federal
income tax consequences that are relevant to limited partners. This summary is
based on the Internal Revenue Code of 1986, as amended, applicable Treasury
regulations under the Internal Revenue Code, administrative rulings, practice
and procedures and judicial authority, all as effective as of the date of the
transaction. All of the foregoing are subject to change or alternative
construction with possible retroactive effect, and any change or alternative
construction could affect the continuing accuracy of this summary. This summary
does not discuss all aspects of federal income taxation that may be relevant to
a particular limited partner in light of that limited partner's specific
circumstances or to limited partners subject to special treatment under federal
income tax laws, including except where otherwise noted, foreign persons,
dealers in securities, banks, insurance companies and tax-exempt organizations.
In addition, except as otherwise expressly indicated, this summary does not
describe any aspect of state, local, foreign or other tax laws.

                                      -59-




       Each limited partner should consult its tax advisor as to the particular
tax consequences to that limited partner of the transaction.

       Taxable Gain or Loss

       In general, a limited partner will recognize gain or loss on the
conversion of units into cash as a result of the merger. This gain or loss will
be equal to the difference between the limited partner's "amount realized" from
the merger and the limited partner's adjusted tax basis in the units converted.
The "amount realized" will be the amount of the merger consideration ($1,714 per
unit), plus the amount of Prometheus Income Partners' liabilities allocable to
the units as determined under Section 752 of the Internal Revenue Code. In
general, a limited partner's initial tax basis in its units equals its cash
investment in Prometheus Income Partners, increased by that limited partner's
share of Prometheus Income Partner's non-recourse liabilities at the time the
units were acquired. Prometheus Development Co. is not in a position to
determine the tax basis for each of the limited partners.

       A limited partner's initial basis is generally increased by:

       o  that limited partner's share of Partnership taxable income including
          its allocable share of taxable income for the year in which the merger
          occurs, and

       o  any increases in that limited partner's share of non-recourse
          liabilities of Prometheus Income Partners.

       A limited partner's initial basis is generally decreased (but not below
       zero) by:

       o  that limited partner's share of Partnership cash distributions,

       o  any decreases in that limited partner's share of non-recourse
          liabilities of Prometheus Income Partners,

       o  that limited partner's share of losses of Prometheus Income Partners
          including an allocable share of tax loss for the year in which the
          merger occurs, and

       o  that limited partner's share of nondeductible expenditures of
          Prometheus Income Partners that are not chargeable to capital.

       If a limited partner's adjusted tax basis is less than its share of
Prometheus Income Partners' non-recourse liabilities, including the effect of
net loss allocations and/or distributions exceeding the cost of its units, that
limited partner's gain will exceed the cash proceeds it receives pursuant to the
merger.

       Character of Gain or Loss

       Except as described below, the gain or loss recognized by a limited
partner upon receipt of cash in the merger will generally be treated as a
capital gain or loss if the units were held by the limited partner as a capital
asset. This capital gain or loss will be treated as long-term capital gain or
loss if the limited partner's holding period for the units exceeds one year.

                                      -60-




       If any portion of the amount realized by a limited partner is
attributable to "unrealized receivables," which includes recapture of certain
depreciation deductions previously taken, or "inventory items," as defined in
Section 751 of the Internal Revenue Code, then a portion of the limited
partner's gain or loss may be ordinary rather than capital. In addition, a
limited partner will be allocated its pro rata share of Prometheus Income
Partners' taxable income or loss for the year in which the merger occurs, and
therefore, will recognize ordinary income or loss in an amount equal to its
allocable share of Prometheus Income Partners' ordinary income or loss. As
described above, this allocation by Prometheus Income Partners to the limited
partner for the year in which the merger occurs will affect the limited
partner's tax basis in its units and, therefore, the taxation of the amount of
that limited partner's taxable gain or loss upon the conversion of its units
into cash in the merger.

       Passive Activity Losses

       Under Section 469 of the Internal Revenue Code, a non-corporate taxpayer
or personal service corporation generally can deduct "passive activity losses"
in any year only to the extent of the person's passive activity income for that
year. Closely-held corporations may not offset these losses against so-called
"portfolio" income. Substantially all post-1986 losses of limited partners from
Prometheus Income Partners should be considered passive activity losses. limited
partners may have "suspended" passive losses from Prometheus Income Partners
(i.e., post-1986 net taxable losses in excess of statutorily permitted
"phase-in" amounts which have not been used to offset income from other passive
activities) which may be available to shelter gain from the receipt of cash in
the merger in the manner described below.

       Limited partners that recognize a gain on the conversion of their units
into cash in the merger will be entitled to use their current and "suspended"
passive activity losses (if any) from Prometheus Income Partners and other
passive sources to offset that gain. limited partners that recognize a loss on
the conversion of their units into cash in the merger will be entitled to deduct
that loss currently (subject to other applicable limitations) against the sum of
their passive activity income from Prometheus Income Partners for that year (if
any) plus any passive activity income from other sources for that year. The
balance of any "suspended" losses from Prometheus Income Partners that were not
otherwise utilized against passive activity income as described in the two
preceding sentences will no longer be suspended and will therefore be deductible
(subject to any other applicable limitations) by that limited partner against
any other income of that limited partner for that year, regardless of the
character of that income. Accordingly, limited partners should consult their tax
advisors concerning whether, and the extent to which, they have available
suspended passive activity losses from Prometheus Income Partners or other
investments that may be used to offset gain from the conversion of their units
into cash in the merger.

       Information Reporting, Backup Withholding and FIRPTA

       A limited partner whose units are converted into cash in the merger must
file an information statement with its federal income tax return for the year in
which the merger occurs which provides the information specified in Treasury
Regulation Section 1.751-1(a)(3).


                                      -61-




       Limited partners (other than tax-exempt persons, corporations and some
foreign persons) may be subject to 31% backup withholding unless they provide a
taxpayer identification number and certify that the taxpayer identification
number is correct or properly certify that they are awaiting a taxpayer
identification number. See the instructions to the letter of transmittal which
will be sent to you after the merger is completed.

       Gain realized by a foreign limited partner on the conversion of units
into cash in the merger will be subject to federal income tax under the Foreign
Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under the FIRPTA
provisions of the Internal Revenue Code, the transferee of an interest held by a
foreign person in a partnership which owns United States real property generally
is required to deduct and withhold 10% of the amount realized on the
disposition. Amounts withheld would be creditable against a foreign limited
partner's federal income tax liability and, if in excess thereof, a refund could
be obtained from the Internal Revenue Service by filing a United States income
tax return. See the instructions to the letter of transmittal which will be sent
to you after the merger is completed.

       Consequences to a Tax-Exempt Limited Partner

       Although certain entities are generally exempt from federal income
taxation, these tax-exempt entities (including individual retirement accounts
(an "IRA")) are subject to federal income tax on any "unrelated business taxable
income" ("UBTI"). UBTI generally includes, among other things, income (other
than, in the case of property which is not "debt-financed property," interest,
dividends, real property rents not dependent upon income or profits, and gain
from disposition of non-inventory property) derived by certain trusts (including
IRAs) from a trade or business or by certain other tax-exempt organizations from
a trade or business, the conduct of which is not substantially related to the
exercise of the organization's charitable, educational or other exempt purpose
and income to the extent derived from debt-financed property. Subject to certain
exceptions, "debt-financed property" is generally any property which is held to
produce income and with respect to which there is an "acquisition indebtedness"
at any time during the taxable year. Acquisition indebtedness is generally
indebtedness incurred by a tax-exempt entity directly or through a partnership:

               (a)  on acquiring or improving a property;

               (b)  before acquiring or improving a property if the indebtedness
                    would not have been incurred but for this acquisition or
                    improvement; or

               (c)  after acquiring or improving a property if the indebtedness
                    would not have been incurred but for this PIP Partners -
                    General or improvement and the incurrence of this
                    indebtedness was reasonably foreseeable at the time of the
                    PIP Partners - General or improvement.

       To the extent Prometheus Income Partners holds debt-financed property or
inventory or other assets as a dealer, a tax-exempt limited partner (including
an IRA) could realize UBTI on the conversion of a unit to cash. In addition, a
tax-exempt limited partner will realize UBTI upon the conversion of a unit to
cash, if the limited partner held its units as inventory or otherwise as dealer
property, or acquired its units with acquisition indebtedness. However, any

                                      -62-




UBTI recognized by a tax-exempt limited partner as a result of a conversion of a
unit to cash, in general, may be offset by the limited partner's net operating
loss carryover (determined without taking into account any amount of income or
deduction which is excluded in computing UBTI), subject to applicable
limitations.

       Anticipated Accounting Treatment

       Prometheus Income Partners will account for the transaction under the
"purchase" method of accounting in accordance with generally accepted accounting
principles.

       Regulatory Requirements

       Except for the filing of the certificate of merger with the Secretary of
State of the State of California pursuant to the Act, after the approval of the
merger proposal and compliance with federal and state securities laws, neither
PIP Partners nor Prometheus Development Co. is aware of any material United
States federal or state or foreign governmental regulatory requirement necessary
to be complied with or approval that must be obtained in connection with the
transaction.

                              THE MERGER AGREEMENT

       This section of the Proxy Statement describes various aspects of the
proposed transaction, including material provisions of the merger agreement. A
copy of the Merger Agreement is attached to this Proxy Statement as Appendix A,
and is incorporated in this Proxy Statement by reference. Limited partners are
urged to read carefully the merger agreement in its entirety.

       Parties to the Merger

       For a description of the parties to the transaction, the disclosure under
the caption "Summary - Parties to the Transaction" beginning on page 10 hereto.

       Structure; Consideration

       The transaction is a statutory merger whereby PIP Acquisition, an
affiliate of Prometheus Development Co. and wholly owned subsidiary of PIP
Partners, will merge into Prometheus Income Partners.

       If the partnership participates in the transaction, you will become
entitled to receive the Liquidation Value for each of your units, and you will
no longer be a limited partner of Prometheus Income Partners. The current holder
of the equity of PIP Acquisition, PIP Partners, who is an affiliate of
Prometheus Development Co., will hold all of the units. Member interests in PIP
Acquisition will be converted on a one-for-one basis into units.

       Calculation of Merger Consideration

       Upon consummation of the merger, each limited partner will be entitled to
receive, in cash, $1,714 for each unit held by them. The following table sets
forth as of December 31, 2001 the acquiring parties' calculation of the merger
consideration:

                                      -63-




       Appraised value                $53,200,000
       Less 2% selling cost            (1,064,000)
                                      ------------
       Deemed net sales price          52,136,000

       Outstanding mortgage           (25,548,000)
       Estimated costs to repair           -

       GP 1% disposition fee             (532,000)
       Prepayment penalty              (3,389,000)
                                       -----------
       Available proceeds              22,667,000
       Restricted Cash                  5,852,000
       Unrestricted cash                4,036,000
                                       ----------
       Amount available
         for distribution             $32,555,000
                                       ==========


       Number of units outstanding:    18,995
                                       ======

            Amount available for
               distribution per unit:  $1,714
                                       ======

       The above calculation applies (i) no credit for net litigation recoveries
expected to be approximately $10.8 million, (ii) no reduction for anticipated
costs to repair existing defects, which costs are estimated by the partnership
as of the date hereof to be in excess of $12 million and could involve as much
as $14 million or more and (iii) no reduction for any other liabilities of the
partnership.

       Closing of the Transaction

       The closing of the transaction will take place at a time and on a date
which will be no later than twenty business days after the later of satisfaction
or waiver of all conditions precedent to the closing of the transaction set
forth in the merger, including the approval of the merger proposal. PIP
Acquisition shall be merged with and into Prometheus Income Partners. Prometheus
Income Partners shall succeed to all of the assets and liabilities of PIP
Acquisition.

       Consent of Lender

       PIP Partners - General will pay any and all fees with respect to
obtaining consent to the transaction by Prometheus Income Partners' lender, if
necessary, but does not anticipate any fees will be required.

       Payment of Merger Consideration

       Following the effective time of the merger, upon receipt by Prometheus
Development Co. of a letter of transmittal from a limited partner, the limited
partner will be entitled to receive a check in an amount equal to the product
obtained by multiplying the number of units held by that limited partner by
$1,714. Each holder of a unit shall cease to have any rights with respect
thereto, except the right to receive the merger consideration.

                                      -64-



       Expenses

       PIP Partners - General will pay all charges and expenses relating to the
merger other than the fee to be paid by the partnership to Houlihan Lokey. These
include an estimated $5,200 in SEC filing fees, $375,000 in legal fees, $15,000
in accounting fees, $20,000 in solicitation costs and fees, and $15,000 of
printing costs. None of the payment agent, Prometheus Development Co., nor any
of their respective affiliates will be liable to any limited partner for any
merger consideration delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.

       Representations and Warranties

       Prometheus Income Partners represented and warranted that:

       o  Prometheus Income Partners is duly organized and existing as a limited
partnership in good standing with full power and authority to conduct its
business, and has the power and authority to execute and deliver this merger and
consummate the transactions contemplated by that document, subject to the
approval of the limited partners.

       o  Other than potentially with respect to the partnership's financing
arrangements, the execution, delivery and performance of the merger does not
conflict with any mortgage, result in the creation of any lien, or otherwise
adversely affect the rights or privileges of Prometheus Income Partners.

       o  Other than certain mortgages, taxes and liens not yet due and payable,
covenants, conditions and restrictions of record, Prometheus Income Partners has
good and marketable title to all of Prometheus Income Partners' assets free and
clear of all liens.

       o  Other than the construction defects litigation discussed in this
document, Prometheus Income Partners is involved in no material litigation.

       o  The opinion of its financial advisor as to the fairness of the merger
consideration, from a financial point of view, to the limited partners not
affiliated with PIP Partners has been obtained.

       PIP Acquisition and PIP Partners - General represented and warranted
that:

       o  Each of them is duly organized and existing as a limited liability
company in good standing with full power and authority to conduct its business,
and has the power and authority to execute and deliver the merger and consummate
the transactions contemplated by that document.

       o  PIP Partners has adequate funds available out of current resources to
pay the $1,714 in cash for each unit to all holders of units (other than PIP
Partners - General). While as of the date of the merger agreement PIP Partners
had such funds, at the time the merger is consummated, PIP Partners may need to
have acquired additional financing to complete the


                                      -65-




merger. Please see the disclosure under the caption "Consideration and
Financing" beginning on page 19.

       Certain Covenants

       Prometheus Income Partners agreed to hold a meeting of the limited
partners at which the limited partners will have the opportunity to vote their
units for or against the transactions contemplated by this Agreement. PIP
Partners agreed to vote its units for or against the transactions contemplated
by this Agreement in the same proportion as the total number of units voted by
limited partners unaffiliated with PIP Partners.

       Conditions

       The obligations of PIP Acquisition, PIP Partners and Prometheus Income
Partners to effect the merger are subject to the fulfillment or waiver of the
following conditions:

       o   The existing mortgages on the partnership's properties shall have
been refinanced on terms satisfactory to PIP General and PIP Acquisition.

       o   No court or other governmental entity shall have issued an order that
prohibits consummation of the merger, restricts the operations of Prometheus
Income Partners or PIP Partners which would result in a material adverse effect,
or instituted any proceeding seeking any similar order.

       o   All material approvals (if any) from governmental entities necessary
for the consummation of the merger shall have been obtained.

       o   PIP Partners having obtained the financing necessary to pay the
merger consideration.

       o   The opinion of Houlihan Lokey shall not have been withdrawn.

       The obligations of Prometheus Income Partners are further subject to the
condition (or waiver by Prometheus Income Partners) at or prior to the effective
date of the merger that the representations and warranties of PIP Acquisition
and PIP Partners shall be true and correct, and the merger shall have been
approved by the limited partners. If a material condition to the merger is
waived by the partnership, the general partner and the acquiring parties intend
to resolicit the approval of the transaction by the limited partners. If a
material condition to the merger is waived by the acquiring parties, the general
partner and the acquiring parties do not intend to resolicit the approval of the
transaction by the limited partners.

       The obligations of PIP Acquisition and PIP Partners are further subject
to the conditions (or waiver by PIP Acquisition) at or prior to the effective
date of the merger that the representations and warranties of Prometheus Income
Partners set forth in this document shall be true and correct at and as of the
closing date, and the holders of the deeds of trust referred to in the merger
consent to the merger on terms acceptable to PIP Partners, and there is no
material adverse change in the assets, business, financial condition or
prospects of Prometheus Income Partners.


                                      -66-




       Termination

       The merger agreement may be terminated at any time prior to the effective
date of the merger by the mutual written consent of Prometheus Income Partners
and PIP Partners - General upon written notice given to the other party of a
material breach of the Agreement if not cured within thirty (30) days, or by PIP
Partners or Prometheus Income Partners if the merger has not yet been
consummated on or before June 30, 2002.

                                    APPRAISAL


       The general partner engaged CB Richard Ellis, an independent appraiser
("Appraiser"), to appraise the real properties owned by the partnership as of
September 17, 2001.

       Experience of Appraiser. Since its founding, Appraiser has provided
information, research, appraisal, and consulting services to clients throughout
the United States, including major New York Stock Exchange firms and insurance
companies and over seventy companies engaged in the management and operation of
partnerships and real estate investment trusts. The activities of Appraiser
include financial advisory services, asset and securities valuations, industry
and company research and analysis, litigation support and expert witness
services, and due diligence investigations in connection with both publicly
registered and privately placed securities transactions.

       2001 Portfolio Appraisal

       Summary of Methodology. At the request of the general partner, Appraiser
evaluated the real estate on a summary basis utilizing the sales comparison and
income approach to valuation. Appraisers typically use up to three approaches in
valuing real property:

   o    the cost approach;

   o    the income approach; and

   o    the sales comparison approach.

The type and age of a property, lease terms, market conditions and the quantity
and quality of data affect the applicability of each approach in a specific
appraisal situation.

       The value estimated by the cost approach incorporates separate estimates
of the value of the unimproved site and the value of improvements, less observed
physical wear and tear and functional or economic obsolescence. The income
approach estimates a property's capacity to produce income through an analysis
of the rental stream, operating expenses, net income and estimated residual
value. Net income may then be processed into a value through either direct
capitalization or discounted cash flow analysis, or a combination of these two
methods. The sales comparison approach involves a comparative analysis of the
subject property with other similar properties that have sold recently or that
are currently offered for sale in the market.

       The cost approach was considered to be less reliable than the income
approach given the primary criteria used by buyers of the type of property
appraised in the Appraisal.


                                      -67-




       In conducting the Appraisal, representatives of Appraiser reviewed and
relied upon, without independent verification, certain information supplied by
the property managers, general partner and the partnership, including, but not
limited to: lease abstracts and information relating to the creditworthiness of
tenants; financial schedules of current lease rates, income, expenses, capital
expenditures, reserve requirements, cash flow and related financial information;
property descriptive information and rent able square footage, information
relating to the condition of each property, including any deferred maintenance,
capital budgets, status of ongoing or newly planned property additions,
reconfigurations, improvements and other factors affecting the physical
condition of the property improvements; and information relating to renewal and
purchase options.

       Representatives of Appraiser also performed site inspections of all of
the properties. In the course of these site visits, the physical facilities of
the properties were inspected and information on the local market, the subject
property and the tenant was gathered. Where necessary, information gathered
during the site visits was supplemented by information provided by management,
telephonic surveys and reviews of published information.

       In addition, Appraiser discussed with management of the properties, the
condition of each property (including any deferred maintenance, renovations,
reconfigurations and other factors affecting the physical condition of the
improvements), competitive conditions in net lease property markets, tenant
credit trends affecting the properties, certain lease and financing terms, and
historical and anticipated lease revenues and expenses. Appraiser also reviewed
historical operating statements, and 2001 operating budgets for the partnership
and/or the properties.

       Appraiser also reviewed the acquisition criteria and parameters used by
real estate investors utilizing published information and information derived
from interviews with buyers, owners and managers of similar leased properties.

       Sales Approach. The Sales Comparison Approach is a method of comparing
the subject property to recent sales and/or listings of similar types of
properties located near the subject or in competing areas. Each of these sales
must be analyzed to establish the elements of similarity. The reliability of
this technique depends on (1) the degree of similarity between the subject and
the comparable properties; (2) the length of time since the comparable sales
were consummated; (3) the accuracy of the date of the comparable sales; and (4)
the absence of unusual conditions affecting the comparable sale or the subject
property.

       Each comparable sale is adjusted and compared to the subject property
giving due consideration to the following potential adjustments, each in
accordance with valuation practices generally accepted in the real estate
industry. These elements of adjustment considered in this Appraisal consisted
principally of:

       o    the nature of the real property rights conveyed;
       o    financing terms;
       o    conditions to the sale;
       o    prevailing market conditions;
       o    actual location; and
       o    physical characteristics.


                                      -68-




Among these elements of comparison, conditions of sale reflect an adjustment if
the sale is not an arms-length transaction or to account for special credits,
concessions and similar distinguishing characteristics. Adjustments for
financing terms involve conversion of the transaction price of the comparable
sale into its cash equivalent or modification to reflect the financing of the
subject property. Market conditions reflect an adjustment in the change in the
prices paid for real property due to changes in the particular market over time.

       Within the subject area there were three properties that were determined
to be appropriate comparable sales transactions. The following sets forth the
actual value per unit for each of these properties and the indicated value per
apartment unit in these properties as adjusted for the factors noted above:


                                                  Unadjusted     Indicated Value
                                                Value Per Unit      Per Unit
                                                --------------   ---------------
Arios-Apartments, Cupertino CA                     $230,846        $160,900
Villa De Anza, Cupertino CA                        $258,333        $164,687
Waterford Place Apartments, San Jose CA            $210,084        $142,857
Stoneridge, Walnut Creek, CA                       $158,824        $158,824
Summit At Skyline, Pacifica, CA                    $181,122        $180,669


       Based on the indicated value range, a price per unit near the middle of
the range, as adjusted based on the factors described above, was deemed by the
Appraiser to be the most appropriate for the subject properties. This price was
further adjusted to reflect deferred maintenance on Alderwood and Timberleaf in
the aggregate amounts of $1,959,000 and $1,120,000, respectively. The deferred
maintenance adjustment is an estimate of price reduction a buyer of a property
would request due to maintenance issues noted during the due diligence and
inspection period afforded buyers of real estate, but does not include any
adjustment with respect to the cost (estimated or otherwise) to repair existing
construction defects. Accordingly the following is a summary of the Sales
Comparison Approach:

                    Value per unit         Total Value
                    --------------         -----------
Alderwood             $154,017             $36,040,000
Timberleaf            $152,258             $18,880,000


       The sales used in this analysis were considered by the Appraiser to be
comparable to the subject, and the required adjustments for differences were
based on the application of the types of adjustments described above, which were
deemed by the Appraiser to be based upon reasonable and well-supported
rationale.

       Income Approach. The Income Approach reflects the subject's
income-producing capabilities. The Income Approach is based on the direct
capitalization method, which is applied to determine the value of the simple
interest in each property based upon the lease that encumbers the property. This
approach is based on the assumption that value is created by the expectation of
benefits to be derived in the future. The Income Approach is applicable to the
subject properties leased in the open market. Market participants are currently
analyzing properties based on their income generating capability. Therefore, the
Income Approach is considered to be a reasonable and substantiated value
indicator and has been heavily weighted in

                                      -69-



the final value indicator and has been heavily weighted in the final value
estimates by CB Richard Ellis, Inc. The value indicated by the income approach
represents the amount an investor would probably pay for the expectation of
receiving the net cash flow from the property during the subject lease term and
the proceeds from the ultimate sale of the property.

       Direct capitalization is a method used to convert a single year's
estimated stabilization net operating income into a value indicated utilizing an
overall capitalization rate. The capitalization rate was determined based on
three different techniques. The following table summarizes the results.

                                       Overall Capitalization Conclusion

Source
- ------
Comparable Sales                               7.50%
National Investor Survey                       8.00%
Market Participants                          7 to 8.0%

CB Richard Ellis, Inc. Estimate                 7.5%


       The Income Approach calculates an indicated stabilized value by dividing
the stabilized net operating income by the capitalization rate. The stabilized
net operating income "Going-In Operating Income" is determined by taking the
effective gross income less the estimated operating expenses and reserves for
replacement. Effective gross income is determined by estimating market rates for
the various apartment unit floor plans with similar units in comparable projects
to arrive at the potential rental income for the subject. The effective gross
income will also consider loss to lease, vacancy, collection loss, and rent
concession, if any. In estimating the operating expenses, the actual operating
history has been analyzed, along with expense data from industry publications
and comparable apartment properties. Reserves for replacement of physical assets
that wear out or need replacement over time have been estimated based on
discussion with knowledgeable market participants who indicate a range of $150
to $500 per unit for comparable properties. CB Richard Ellis estimated $400 for
the subject properties.

       The final industry standard adjustment to calculate value is an
adjustment to the indicated stabilizing value for deferred maintenance. This
adjustment was $1,959,000 and $1,120,000 for Alderwood and Timberleaf,
respectively.


                    Summary Of Appraisal Valuation Parameters

                                                  Alderwood      Timberleaf

Going-In Net Operating Income                     $2,844,000      $1,372,000
Capitalization Rate                                    7.5%             7.5%
Estimated Value less Deferred Maintenance        $37,921,000     $18,281,000


       Conclusion as to Value. Based on the valuation methodology described
above, Appraiser estimated the value of each of the properties as follows:


                                      -70-





                                     Alderwood       Timberleaf      Total

Cost Approach                                N/A            N/A            N/A
Sales Comparison Approach            $36,040,000    $18,880,000    $54,920,000
Income Capitalization Approach       $36,000,000    $17,200,000    $53,200,000

Reconciled Value                     $36,000,000    $17,200,000    $53,200,000


       The Cost Approach typically results in a reliable value indication when
there is evidence for an estimate of replacement cost and there is minimal
depreciation contributing to a loss in value of the subject property. Because
the partnership's properties have been materially depreciated, the reliability
of the Cost Approach with respect to these properties was considered to be
substantially diminished. Accordingly, Cost Approach analysis was not performed
by the Appraiser.

       Ultimately, as between the Sales Comparison Approach and the Income
Capitalization Approach, the Appraiser determined that the Income Capitalization
Approach was the most reliable indicator of the value of the Alderwood and
Timberleaf properties. This conclusion was based principally on the fact that
the subject properties are income-producing properties leased on a unit-by-unit
basis in the open market. The Appraiser believed that the fact that the values
derived through application of the Sales Approach did not differ materially from
those derived by application of the Income Capitalization Approach further
substantiated the reliance on the Income Capitalization Approach valuation
method in determining the final appraised value of the subject properties.

       Based on the foregoing, the values of the subject properties were
appraised as follows:

                   Location         Value Conclusion
                   --------         ----------------
                   Alderwood           $36,000,000

                  Timberleaf           $17,200,000


       Assumptions, Limitations and Qualifications of the 2001 Portfolio
Appraisal.

       Appraiser utilized certain assumptions to determine the appraised value
of the properties. Principally, in addition to the assumptions described above,
the Appraisal assumes that the owner of the property has good and marketable
title of the subject properties and that the subject properties are free from
material defects and in good condition appropriate to their intended use as
residential rental properties. See the appraisal for a complete description of
the assumptions, limiting conditions and qualifications applicable to the
Appraisal.

       The Appraisal represents Appraiser's opinion of the value of the
portfolios of properties as of September 17, 2001 in the context of the
information available on such date. Events occurring after the valuation date
could affect the properties or the assumptions used in preparing the Appraisal.
Appraiser has no obligation to update the Appraisal on the basis of subsequent
events. In connection with the preparation of the Appraisal, Appraiser was not

                                      -71-



engaged to, and consequently did not, prepare a written report or compendium of
its analysis for internal or external use by the partnership beyond the analysis
set forth in Appendix C.

       Compensation and Material Relationships. The partnership paid Appraiser
an aggregate fee of $6,000 for preparing the original appraisal and an
additional $6,000 for reperforming the appraisal as of September 17, 2001. In
addition, Appraiser is entitled to reimbursement for reasonable legal, travel
and out-of-pocket expenses incurred in preparing the Appraisal, and is entitled
to indemnification against certain liabilities, including certain liabilities
under federal securities laws. The fee was negotiated between the general
partner and Appraiser and payment thereof is not dependent upon completion of
any transaction.

    PIP Partners selected CB Richard Ellis, Inc. to appraise the partnership's
    properties because it is a nationally recognized real estate firm engaged in
    the appraisal of residential income properties and has substantial
    experience in transactions similar to the merger. The fee paid to the
    Appraiser was fixed and not dependent in any respect on the outcome of the
    Appraisal.

       CB Richard Ellis has, in the past, provided appraisal services to PIP
Partners - General, the partnership, the general partner and certain of their
affiliates and may continue to do so, and has received, and may receive,
customary fees for the rendering of these services. During the last two years,
affiliates of PIP Partners paid to CB Richard Ellis approximately $166,000
consisting of approximately $38,000 in appraisal fees (for properties other than
those of the partnership) and approximately $128,000 in leasing commissions as
compensation for CB Richard Ellis obtaining tenants for various commercial
properties. Other than the payment of these fees and commissions from time to
time, CB Richard Ellis has no interest, as an equity holder or otherwise, in
Prometheus Income Partners, the acquiring parties or the merger

       CB Richard Ellis has, in the past, provided appraisal services to PIP
Partners - General, the partnership, the general partner and certain of their
affiliates and may continue to do so, and has received, and may receive,
customary fees for the rendering of these services.


                          OPINION OF FINANCIAL ADVISOR


       Prometheus Income Partners retained Houlihan Lokey Howard & Zukin
Financial Advisors, Inc. (Houlihan Lokey) to render an opinion on behalf of
those limited partners not affiliated with PIP Partners (referred to below as
the unaffiliated limited partners) as to the fairness, from a financial point of
view, of the consideration to be received by them in connection with the merger.

       The general partner chose to retain Houlihan Lokey on behalf of the
unaffiliated limited partners based upon Houlihan Lokey's experience in the
valuation of businesses and their securities in connection with
recapitalizations and similar transactions, especially with respect to real
estate investment trusts and other real estate-related companies. Houlihan Lokey
is a nationally recognized investment banking firm that is engaged in providing
financial advisory services and rendering fairness opinions in connection with
mergers and acquisitions, leveraged

                                      -72-



buyouts, business and securities valuations for a variety of regulatory and
planning purposes, recapitalizations, financial restructurings and private
placements of debt and equity securities.

       On March 6, 2002, Houlihan Lokey delivered its verbal opinion to the
general partner to the effect that, as of the date of such opinion, on the basis
of its analysis and subject to the limitations described below, the
consideration of $1,714 per limited partnership unit in cash to be received by
the unaffiliated limited partners in connection with the merger is fair from a
financial point of view. The Houlihan Lokey opinion does not address the
underlying business decision to effect the merger; nor does it constitute a
recommendation to any limited partner as to how they should vote at the
partnership meeting with respect to the merger or any other proposal to be
considered at that meeting. Houlihan Lokey has no obligation to update its
opinion.

       The full text of Houlihan Lokey's written opinion dated as of March 6,
2002, which describes the assumptions made, general procedures followed, matters
considered and limitations on the review undertaken by Houlihan Lokey in
rendering its opinion, is attached as Appendix D to this proxy statement and is
incorporated herein by reference. The Houlihan Lokey opinion is directed to the
unaffiliated limited partners for their use in connection with their
consideration of the merger proposal. While this brief summary of the Houlihan
Lokey opinion highlights what the partnership considers to be the information
most important to you, the partnership urges you to read the entire opinion
carefully in order to fully understand how Houlihan Lokey arrived at the
conclusion in its opinion.

       As compensation to Houlihan Lokey for its services in connection with the
merger, the partnership agreed to pay Houlihan Lokey an aggregate fee of
$175,000 in addition to Houlihan Lokey's expenses in connection therewith, with
half of the $175,000 fee having been paid to Houlihan Lokey upon the signing of
the retainer agreement, dated October 5, 2001, between Houlihan Lokey and the
partnership, and the remainder of the fee to be paid promptly upon Houlihan
Lokey's delivery of its opinion. No portion of Houlihan Lokey's fee is
contingent upon the successful completion of the merger, any other related
transaction, or the conclusions reached in the Houlihan Lokey opinion. The
partnership also agreed to indemnify Houlihan Lokey and related persons against
certain liabilities, including liabilities under federal securities laws that
arise out of the engagement of Houlihan Lokey, and to reimburse Houlihan Lokey
for certain expenses. In the past two years Houlihan Lokey has not been engaged
by Prometheus Income Partners, PIP Partners or any of the their respective
affiliates, and currently there is no mutual understanding that Houlihan Lokey
will provide financial advisory services to Prometheus Income Partners, PIP
Partners or any of their respective affiliates in the future.

       Houlihan Lokey was not asked to opine as to Prometheus Income Partners'
underlying business decision to effect the merger. Houlihan Lokey did not, and
was not requested by the partnership or any other person to, solicit third party
indications of interest in acquiring all or any part of the partnership, its
properties or other assets or the limited partnership units or to make any
recommendations as to the form or amount of consideration in connection with the
merger. Houlihan Lokey was not asked to opine and does not express any opinion
as to:

                                      -73-




       o  the tax consequences of the merger, including, but not limited to, tax
          or legal consequences to Prometheus Income Partners or any of its
          limited partners;

       o  the realizable value of limited partnership units or the prices at
          which the limited partnership units may trade in the future following
          the merger; or

       o  the fairness of any aspect of the merger or any other related
          transactions not expressly addressed in its fairness opinion.

Houlihan Lokey did not perform an independent appraisal of the assets of
Prometheus Income Partners. Houlihan Lokey did not negotiate the merger or
advise Prometheus Income Partners, its general partner, or its limited partners
with respect to possible alternatives to the merger.

       In arriving at its fairness opinion, among other things, Houlihan Lokey:

       1)  met and held other discussions with certain members of the senior
           management of the general partner during October 2001 and January
           2002 to discuss the operations, financial condition, future prospects
           and projected operations and performance of the partnership;

       2)  visited the Alderwood and Timberleaf Apartment properties in Santa
           Clara, California on October 16, 2001;

       3)  reviewed the partnership's annual report on Form 10-K for the fiscal
           year ended December 31, 2000, its quarterly report on Form 10-Q for
           the quarter ended September 30, 2001, and the partnership's
           internally prepared, unaudited income statement and balance sheet for
           the quarter and year ended December 31, 2001; the quarterly report
           and quarterly/annual income statement and balance sheet having been
           identified by members of senior management of the general partner as
           including the partnership's most current financial statements;

       4)  reviewed a representation letter dated March 6, 2002, from the
           partnership as to the difference between (a) the general partner's
           estimate to correct the construction defects to the properties
           described on pages 47 through 49 of this proxy statement and (b) the
           proceeds resulting from the settlement of the partnership's
           construction defects litigation;

       5)  reviewed the amount of cash restricted for the purpose of correcting
           the construction defects;

       6)  reviewed a draft of the preliminary proxy statement furnished to
           Houlihan Lokey on March 6, 2002;


                                      -74-



       7)  reviewed the following appraisal reports::

          o Appraisal of the properties dated September 17, 2001 prepared by CB
            Richard Ellis, Inc. (CB Richard Ellis); and

          o Appraisal of the properties dated December 5, 2000 prepared by CB
            Richard Ellis;

       8)   reviewed a draft of the form of Agreement and Plan of Merger by and
            among Prometheus Income Partners, PIP Partners and PIP Acquisition
            furnished to Houlihan Lokey on March 6, 2002;

       9)   held discussions with a representative of CB Richard Ellis regarding
            the aforementioned appraisals in both October 2001 and January 2002;

       10)  reviewed certain other publicly available financial data for certain
            companies that Houlihan Lokey deemed comparable to the partnership;

       11)  reviewed copies of the following documents and agreements the
            general partner delivered to Houlihan Lokey:

          o promissory notes and related agreements dated December 23, 1997,
            each between Prometheus Income Partners and the lender holding a
            mortgage on the partnership's properties; and -

          o Second Amended and Restated Limited Partnership Agreement of
            Prometheus Income Partners;

       12)  reviewed certain other documents related to Prometheus Income
            Partners that the general partner delivered to Houlihan Lokey; and

       13)  conducted such other studies, analyses and inquiries that Houlihan
            Lokey deemed appropriate.

Analyses

       The following is a summary of the material financial analyses used by
Houlihan Lokey in connection with providing its opinion. This summary is
qualified in its entirety by reference to the full text of such opinion, which
is attached as Appendix D to this proxy statement. You are urged to read the
full text of the Houlihan Lokey opinion carefully and in its entirety.

                                      -75-




       In determining the estimated enterprise value of Prometheus Income
Partners, Houlihan Lokey considered the partnership's properties to be the
primary assets of the partnership. Accordingly, Houlihan Lokey concluded that
the value of these properties served as a reasonable proxy for the enterprise
value of the partnership.

       In order to determine the estimated enterprise value of Prometheus Income
Partners, Houlihan Lokey primarily used the following methodologies:

          o   Appraised Value Approach,

          o   Market/Comparable Public Company Approach,

          o   Direct Capitalization Approach, and

          o   Discount to Net Asset Value Approach.

These analyses required studies of the overall real estate market in the greater
Santa Clara, California area, economic and industry conditions in the area in
which Prometheus Income Partners operates, and consideration of the
partnership's historical and anticipated future operating results.

            Appraised Value Approach. Houlihan Lokey reviewed CB Richard Ellis'
September 2001 appraisal, which concluded that, as of September 17, 2001, the
appraised value of the partnership's properties was, in aggregate, approximately
$56.2 million of gross asset value and approximately $53.1 million (net of
certain deferred maintenance). These properties are the most material assets of
the partnership. Accordingly, Houlihan Lokey concluded that the appraised value
of these properties served as a reasonable proxy for the enterprise value of the
partnership. Given the change in the real estate market since CB Richard Ellis'
September 2001 appraisal, which resulted in lower real estate values in the area
in which the properties are located, Houlihan Lokey calculated an enterprise
value of the partnership under this approach in the range of 95% to 100% of the
appraised value of the properties in CB Richard Ellis' September 2001 appraisal,
or in the range of $53.4 million to $56.2 million.

       In connection with the Appraised Value Approach, Houlihan Lokey performed
the following:

          o reviewed CB Richard Ellis' September 2001 appraisal;

          o held discussions with CB Richard Ellis regarding its September 2001
            appraisal and certain underlying assumptions and conclusions set
            forth in this appraisal, as well as changes in the real estate
            market since CB Richard Ellis' September 2001 appraisal;

          o held discussions with senior management of the general partner to
            discuss CB Richard Ellis' September 2001 appraisal, as well as
            changes in the real estate market since CB Richard Ellis' September
            2001 appraisal; and

                                      -76-




          o performed various analyses using publicly available information to
            independently corroborate the reasonableness of certain of the
            assumptions and conclusions set forth in CB Richard Ellis' September
            2001 appraisal and changes to the real estate market since CB
            Richard Ellis' September 2001 appraisal.

       Market/Comparable Public Company Approach. Houlihan Lokey reviewed
financial information of certain publicly traded companies that are comparable
to Prometheus Income Partners. The comparable companies consisted of residential
real estate investment trusts selected solely by Houlihan Lokey including:

          o    AMLI Residential Properties Trust,
          o    Associated Estate Realty Corporation,
          o    BRE Properties, Inc.,
          o    Camden Property Trust,
          o    Mid-America Apartment Communities, Inc,
          o    Post Properties, Inc.,
          o    Summit Properties, Inc., and
          o    Town & Country Trust (collectively, the Comparables).

       Houlihan Lokey calculated certain financial ratios of the Comparables
based on the most recent publicly available information. The analysis indicated,
among other things, that the ratio (the Capitalization Rate) of net operating
income (NOI) to enterprise value exhibited by the Comparables ranged from (i) a
low of 7.3% to a high of 9.8% based on the latest twelve months financial
results, and (ii) a low of 7.4% to a high of 8.8% based on the projected next
fiscal year financial results.

       Houlihan Lokey derived enterprise value indications for Prometheus Income
Partners by applying a range of selected Capitalization Rates to estimates of
the partnership's representative NOI. The partnership's representative NOI was
estimated based on discussions with members of senior management of the general
partner, review of the partnership's historical financial results, consideration
of current market trends, and review of CB Richard Ellis' September 2001
appraisal. Consideration was given to the level of current rents achieved by the
properties, the expenses associated with operating the properties, and the
general location and quality of the properties. Based on the above, Houlihan
Lokey calculated indications of the range of enterprise values between $38.0
million and $59.3 million.

       Direct Capitalization Approach. Houlihan Lokey derived an indication of
the enterprise value for Prometheus Income Partners by applying capitalization
rates to estimates of the partnership's representative NOI. Houlihan Lokey
utilized publicly available information regarding capitalization rates exhibited
in transactions involving assets similar in type and location to the properties.
Such information was provided by Market Monitor, a publication that compiles
pricing information for transactions involving real estate assets in major
metropolitan areas, including San Jose, California.

                                      -77-




       By applying selected capitalization rates of 8.0% to 8.5% to the
estimated representative NOI of the properties, as discussed above, Houlihan
Lokey calculated an enterprise value indication of the partnership to be in the
range of $42.5 million to $63.0 million.

       Discount to Net Asset Value Approach. Houlihan Lokey also considered that
the Comparables have enterprise values (measured as the total market value of
equity plus preferred stock and debt) that reflect a discount (or premium) to
their underlying net asset value. This discount (or premium) tends to reflect
the difference between the value perceived by investors in owning assets
directly on the one hand and the value of owning the securities issued by the
Comparables on the other hand. Houlihan Lokey derived an indication of
enterprise value for Prometheus Income Partners by applying the range of
discounts (or premiums) exhibited by the Comparables to the estimated net asset
value of the partnership's properties. In applying this approach, Houlihan Lokey
reviewed publicly available information which indicated that the Comparables
currently tend to trade at a discount to net asset value. The median discount of
the Comparables was -4%. The observed range of discounts and premiums was
observed to be as low as -16% (discount to net asset value) and as high as +16%
(premium to net asset value). Houlihan Lokey then applied this range of observed
discounts/premiums, to the value indicated in CB Richard Ellis' September 2001
appraisal, which Houlihan Lokey used as a proxy for net asset value. Based upon
the selected range of discounts to net asset value, Houlihan Lokey calculated an
indication of enterprise value for the partnership to be $47.3 million to $65.3
million.

       Enterprise Value Range Determination. Based on the analyses and factors
described above, Houlihan Lokey determined the enterprise value of Prometheus
Income Partners to be reasonably stated in the range of $53.4 million to $56.2
million, which is consistent with the conclusions reached in CB Richard Ellis'
September 2001 appraisal and changes to the real estate market since that
appraisal was prepared.

       Adjustments to Determine Amount Available For Distribution to Limited
Partners. After determining Prometheus Income Partners' range of enterprise
values from $53.4 million to $56.2 million, Houlihan Lokey considered certain
liabilities and other assets of Prometheus Income Partners and, therefore, made
the following adjustments to determine the amounts available for distribution to
the limited partners:

          o estimated transaction expenses that would be associated with selling
            the properties (estimated to be approximately $1.07 to $1.12 million
            based upon a 2.0% sales commission, which, based upon various market
            studies such as Korpaz, Houlihan Lokey determined to be reasonable);

          o current mortgage debt outstanding ($25.55 million);

          o mortgage prepayment penalty to be paid by the partnership resulting
            from payment of the mortgage on the properties which is a condition
            to the completion of the merger ($3.39 million);

          o an estimated expenditure of $3.08 million resulting from the
            shortfall between a current estimate prepared by the partnership's
            management needed for repair of

                                      -78-




            the construction defects ($13.9 million) and proceeds relating to
            the settlement of litigation regarding such construction defects
            ($10.85 million) based on a representation from partnership
            management that it intends to correct the construction defects in a
            timely manner and, barring unforeseen circumstances, it anticipates
            that the costs to be incurred will be commensurate, in the
            aggregate, with its estimate;

          o certain disposition fees payable to the general partner as provided
            for in the Partnership Agreement ($0.53 to $0.56 million); and

          o certain cash and cash equivalents at December 31, 2001 in the amount
            of $9.89 million (which excludes any monies received in connection
            with the settlement of the construction defects claim).

       These adjustments result in a range of net values from $29.66 to $32.38
million, or $1,561 to $1,705 per Partnership Unit. Houlihan Lokey noted that the
general partner, in determining the price to offer the limited partners in
connection with the merger, considered the CB Richard Ellis appraised value for
the Partnership's properties and adjusted for the items set forth above as well
as certain costs associated with deferred maintenance at the properties
(approximately $3.1 million). Though Houlihan Lokey considered such deferred
maintenance expenses, based upon its due diligence Houlihan Lokey considered
that there is uncertainty associated with the amount that will actually be paid
by Prometheus Income Partners in connection with the deferred maintenance.
Houlihan Lokey also considered the net costs that are likely to result from the
difference between the amount that the partnership will receive in settlement of
the construction defects litigation and the actual cost to the partnership of
correcting the construction defects. Such net costs amount to $3.1 million (as
set forth in the aforementioned adjustments), which Houlihan Lokey believes the
partnership will absorb in connection with repairing the construction defects.
As set forth above, based upon consideration of all of the aforementioned
adjustments to enterprise value, Houlihan Lokey concluded that the proceeds
available to the limited partners are in the range of $1,561 and $1,705 per
unit.

Conclusion

       Based on the above analyses and consideration of the contemplated
payment, in cash, of $1,714 per limited partnership unit, Houlihan Lokey
determined that the consideration to be received by the limited partners (other
than those affiliated with PIP Partners) in connection with the merger is fair
to such limited partners, from a financial point of view.

       In arriving at its fairness opinion, Houlihan Lokey reviewed key economic
and market indicators, including, but not limited to, growth in the U.S. Gross
Domestic Product, inflation rates, interest rates, consumer spending levels,
manufacturing productivity levels, unemployment rates and general stock market
performance. Houlihan Lokey's opinion is based on the business, economic, market
and other conditions as they existed as of March 6, 2002. In rendering its
opinion, Houlihan Lokey has relied upon and assumed, without independent
verification, that the accuracy and completeness of the financial and other
information provided orally or in writing to Houlihan Lokey by the general
partner (including, but not limited to, the representation letter

                                      -79-



described above) were reasonably prepared and reflect the best currently
available estimates of the financial results and condition of the partnership;
and that no material changes have occurred in the information reviewed between
the date the information was provided and the date of the Houlihan Lokey
opinion. Houlihan Lokey did not independently verify the accuracy or
completeness of the information supplied to it with respect to the partnership
(including, but not limited to, the representation letter described above) and
does not assume responsibility for it. Houlihan Lokey did not make any
independent appraisal of the properties or other assets of the partnership.
Houlihan Lokey considered, but did not rely on, the appraisals of CB Richard
Ellis in reaching its conclusion.

       The summary set forth above describes the material points of more
detailed analyses performed by Houlihan Lokey in arriving at its fairness
opinion. The preparation of a fairness opinion is a complex analytical process
involving various determinations as to the most appropriate and relevant methods
of financial analysis and application of those methods to the particular
circumstances and is therefore not readily susceptible to summary description.
In arriving at its opinion, Houlihan Lokey made qualitative judgments as to the
significance and relevance of each analysis and factor. Accordingly, Houlihan
Lokey believes that its analyses and the summary set forth herein must be
considered as a whole and that selecting portions of its analyses, without
considering all analyses and factors, or portions of this summary, could create
an incomplete and/or inaccurate view of the processes underlying the analyses
set forth in Houlihan Lokey's fairness opinion. In its analysis, Houlihan Lokey
made numerous assumptions with respect to the partnership, the merger, industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of the respective entities.
The estimates contained in such analyses are not necessarily indicative of
actual values or predictive of future results or values, which may be more or
less favorable than suggested by such analyses. Additionally, analyses relating
to the value of businesses or securities of the partnership are not appraisals.
Accordingly, such analyses and estimates are inherently subject to substantial
uncertainty.


                     ADDITIONAL INFORMATION CONCERNING UNITS

       As of March __, 2002, there were 18,995 units outstanding and _____
holders of record of those units.

       Except as described below, privately negotiated sales and sales through
intermediaries currently are the only means available to a limited partner to
liquidate an investment in units because the units are not listed or traded on
any exchange or quoted on any NASDAQ list or system. High and low sales prices
of units may be obtained through certain entities such as Partnership Profiles,
Inc., an independent, third-party source which reports this type of information;
however, the gross sales prices reported by Partnership Profiles, Inc. do not
necessarily reflect the net sales proceeds received by sellers of units, which
typically are reduced by commissions and other secondary market transaction
costs to amounts less than the reported prices.

                                      -80-





       The table below sets forth the high and low sales prices from April 1998
through December 2001 for all sales of units as reported to Prometheus
Development Co. on a quarterly basis (other than pursuant to the tender offers
described above under the caption "Recent Tender Offers"):


                                                          Trading Prices
        Period                            Amount      High           Low
        ------                            ------      ----           ---
        1998        2nd   Quarter         50 units    $495          $495
                    3rd   Quarter         116 units   $505          $450
                    4th   Quarter              No Trades
        1999        1st   Quarter         85 units    $601          $500
                    2nd   Quarter         79 units    $503          $500
                    3rd   Quarter         20 units    $530          $503
                    4th   Quarter         131 units   $530          $530
        2000        1st   Quarter         100 units   $550          $550
                    2nd   Quarter         60 units    $525          $525
                    3rd   Quarter              No Trades
                    4th   Quarter              No Trades
        2001        1st   Quarter              No Trades
                    2nd   Quarter          8 units    $561          $561
                    3rd   Quarter              No Trades
                    4th Quarter                No Trades

       The table below sets forth the number of units purchased and the prices
paid by PIP Partners - General from April 1998 through December 2001 (other than
pursuant to the tender offers described above under the caption "Recent Tender
Offers"):


        Period                                Amount           Trading Price
        ------                                ------           -------------
        1998        2nd   Quarter             50 units             $495
                    3rd   Quarter             96 units             $495
                    4th   Quarter                    No Trades
        1999        1st   Quarter             55 units             $503
                    2nd   Quarter             29 units             $503
                    3rd   Quarter             10 units             $503
                    4th   Quarter             131 units            $530
        2000        1st   Quarter             100 units            $550
                    2nd   Quarter             60 units             $525
                    3rd   Quarter                    No Trades
                    4th   Quarter                    No Trades
        2001        1st   Quarter                    No Trades
                    2nd Quarter                      No Trades
                    3rd   Quarter                    No Trades
                    4th Quarter                      No Trades


                                      -81-




       The units currently are registered under Section 12(g) of the Exchange
Act, which means, among other things, that Prometheus Income Partners is
required to file periodic reports with the Securities and Exchange Commission
and to comply with the Commission's proxy rules. The parties expect that the
consummation of the merger will cause the units to cease to be registered under
Section 12(g)(4) of the Exchange Act because the units will be held by fewer
than 300 persons.

       Principal Holders of Units

       As of March __, 2002, PIP Partners - General held 18.2% of the
outstanding units, or 3,451 units. 99% of the member interests of PIP Partners
are held by Sanford N. Diller and Helen P. Diller as Trustees of The DNS Trust,
and 1% of these interests are held by Jaclyn P. Safier, the Diller's daughter.
No other units were beneficially held by Prometheus Development Co., Prometheus
Income Partners, PIP Partners, PIP Acquisition, or any officers, directors,
employees and affiliates of Prometheus Development Co., Prometheus Income
Partners, PIP Partners or PIP Acquisition. No other person was known to
Prometheus Development Co. to own beneficially 5% or more of the outstanding
units.

       Other than the past contacts, transactions and negotiations described in
this Proxy Statement, no contacts, transactions or negotiations concerning a
merger, consolidation, acquisition, tender offer or other acquisition of units,
election of directors or sale or other transfer of a material amount of assets
of Prometheus Income Partners which are known by Prometheus Income Partners to
have been entered into or to have occurred in the past two years between any
affiliates of Prometheus Income Partners or between Prometheus Income Partners
or any of its affiliates and any person who is not affiliated with Prometheus
Income Partners and who would have a direct interest in those matters.

       Contracts, Arrangements and Understandings

       Except for the merger agreement and the partnership agreement, none of
Prometheus Income Partners, Prometheus Development Co., PIP Acquisition or PIP
Partners - General or any of the named persons, has any arrangement, contract,
relationship or understanding with any person with respect to any units,
including any arrangement, contract, relationship or understanding concerning
the transfer or the voting of any units, any joint venture, any loan or option
arrangement, any put or call, any guarantee of a loan, any guarantee against
loss, or any giving or withholding of any authorization, consent or proxy.

       Plans or Proposals

       Except as generally described in this Proxy Statement, none of Prometheus
Income Partners, Prometheus Development Co., PIP Partners - General, PIP
Acquisition, or any of the natural persons named in this document, has any plan
or proposal regarding any action or transaction which is to occur after the
transaction to which this Proxy Statement relates and which relates to or would
result in any extraordinary corporate transaction involving Prometheus Income
Partners, any sale or transfer of a material amount of Prometheus Income
Partners' assets, any change in Prometheus Income Partners' management, any
material change in

                                      -82-



Prometheus Income Partners' present distribution rate or policy or indebtedness
or capitalization, or any other material change in Prometheus Income Partners'
structure or business.

         CERTAIN FINANCIAL PROJECTIONS AND VALUATIONS OF THE PARTNERSHIP

       Prometheus Income Partners does not as a matter of course publicly
disclose internal budgets, valuations, plans, estimates, forecasts or
projections as to future revenues, earnings or other financial information. The
projected financial data set forth below reflect information which was contained
in projections prepared by Prometheus Development Co. These projections were
based upon a variety of estimates and assumptions; the material ones are set
forth below. The estimates and assumptions underlying the projections involved
judgments with respect to, among other things, future economic, competitive, and
financial market conditions and future business decisions which may not be
realized and are inherently subject to significant business, economic and
competitive uncertainties, all of which are difficult to predict and many of
which are beyond the control of Prometheus Income Partners. While Prometheus
Development Co. believes these estimates and assumptions are reasonable, there
can be no assurance that the projections will be accurate, and actual results
may vary materially from those shown. In light of the uncertainties inherent in
forward-looking information of any kind, the inclusion of these projections in
this document should not be regarded as a representation by Prometheus Income
Partners, Prometheus Development Co. or any other person that the anticipated
results will be achieved and limited partners are cautioned not to place undue
reliance on this information.

       Historical and projected financial performance of the partnership are
substantially dependent on occupancy rates and rental rates. In recent years
(including the most recently concluded fiscal year), the partnership's
properties have had occupancy rates of approximately 99%. Since December 31,
2000, the partnership has experienced decreases in occupancy and rental rates in
both of its properties. There can be no assurance that prior levels in these
rates will reoccur, that current occupancy rates will be maintained or that
growth rates will not decrease or increase in the future. In fact, occupancy
rates have declined for Alderwood to 95% and for Timberleaf to 94% as of
September 30, 2001.

       Except as required by law, Prometheus Income Partners does not intend to
update or otherwise revise any of the projections set forth below. The
information set forth below should be read together with the information
contained in Prometheus Income Partners' Quarterly Report on Form 10-Q for the
quarter ended September 30, 2001 and its Annual Report on Form 10-K for the year
ended December 31, 2000, which are being mailed with this Proxy Statement to all
limited partners, and the other information included or incorporated by
reference in this Proxy Statement.

       The financial information for 2000 and 1999 is provided for comparison
purposes only. All numbers are in thousands of dollars, and are unaudited.


                                                      2001 Estimate         2000           1999
                                                      -------------         -----          ----
Total Revenues                                              $ 7,891       $ 7,247       $ 6,106


                                      -83-




Total Operating Expenses                                      6,958         4,838         4,675
                                                              -----         -----         -----
Net Income                                                    $ 933       $ 2,409       $ 1,431
                                                                ===         =====         =====
Net Cash Flow                                               $ 2,751       $ 2,324       $ 1,327
Beginning Cash (Including Restricted Cash)                   10,290         6,500         5,173
                                                             ------         -----         -----
Ending Cash (Including Restricted Cash)                    $ 13,041       $ 8,824       $ 6,500
                                                             ======       =======         =====



       While the general partner has not updated the foregoing estimates for
fiscal 2001, based on operating results for the nine months ended September 30,
2001, actual total revenues, net income, net cash flow and ending cash for
fiscal 2001 will be less than projected, and total operating expenses are
expected to increase, principally due to decreased occupancy and rental rates
and increased marketing costs attributable thereto. As of the date hereof, the
general partner is unable to quantify these expected variations.

                         RELATED SECURITY HOLDER MATTERS

       Because the merger may be considered a "going private" transaction,
Prometheus Income Partners, PIP Partners - General, PromHill, Inc., Prometheus
Development Co., Sanford N. Diller And Helen P. Diller as Trustees of The DNS
Trust, Helen P. Diller and Sanford N. Diller have filed a Schedule 13E-3 with
the SEC with respect to the transaction. Therefore, each of them has been
included as a filing person on this Schedule 13E-3. The Schedule 13E-3 requires
the persons filing the Schedule 13E-3 to furnish certain additional information
with respect to transactions of the filing persons involving Prometheus Income
Partners or the units.

                           FORWARD-LOOKING STATEMENTS

       This Proxy Statement and the documents incorporated by reference contain
certain forward-looking statements regarding the operations and business of
Prometheus Income Partners. Statements in this document that are not historical
facts are "forward-looking statements." These forward-looking statements include
those relating to:

       o  Prometheus Income Partners' future business prospects;

       o  possible acquisitions; and

       o  projected revenues, working capital, liquidity, capital needs,
          interest costs and income.

       The words "estimate," "project," "intend," "expect" and similar
expressions are intended to identify forward-looking statements. These
forward-looking statements are found at various places throughout this Proxy
Statement. Wherever they occur in this Proxy Statement or in other statements
attributable to Prometheus Income Partners, Prometheus Development Co.,
forward-

                                      -84-



looking statements are necessarily estimates reflecting best judgments.
However, these statements still involve a number of risks and uncertainties that
could cause actual results to differ materially from those suggested by the
forward-looking statements. This forward-looking statements should, therefore,
be considered in light of various important factors, including those set forth
in this Proxy Statement and other factors set forth from time to time in
Prometheus Income Partners' reports and other information filed with the SEC.
You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. Prometheus Income Partners
disclaims any intent or obligation to update forward-looking statements, except
as required by law. Moreover, Prometheus Income Partners, through senior
management of Prometheus Development Co. may from time to time make
forward-looking statements about the matters described in this document or other
matters concerning Prometheus Income Partners.

       Prometheus Income Partners does not as a matter of course make available
any projections, forecasts, internal budgets, plans or estimates as to future
performance, revenues, earnings or other financial information, and the
forecasts set forth above are included in this proxy statement only because the
forecasts contained in projections prepared by Prometheus Development Co. prior
to or in the course of the inception of or in the course of this transaction.
These forecasts were not prepared with a view to disclosure to any person or in
compliance with Generally Accepted Accounting Principles or standards regarding
projections and forecasts. These forecasts were prepared solely for internal use
and are subjective in many respects and thus susceptible to various
interpretations and periodic revision based on actual experience and business
developments. The estimates and assumptions underlying the projections involved
judgments with respect to, among other things, future economic, competitive, and
financial market conditions, contingencies and future business decisions which
may not be realized and are inherently subject to significant financial, market,
business, economic and competitive uncertainties, all of which are difficult to
predict and many of which are beyond the control of Prometheus Income Partners.

       While Prometheus Development Co. believes these estimates and assumptions
are reasonable, there can be no assurance that the projections will be accurate,
and actual results may vary materially from those shown. These projections were
based upon a variety of estimates and assumptions, the material ones of which
are set forth above. The forecast of 2001 performance was completed in November
2000. Due to the passage of time and changes in circumstances, including
settlement of the then-pending litigation, many of the assumptions on which they
were based may no longer be valid. It is expected that there will be differences
between the actual and forecast results and that the actual results may be
materially higher or lower than those projected. Inclusion of the foregoing
forecasts should not be regarded as an indication that Prometheus Income
Partners, PIP Acquisition, Prometheus Development Co. or PIP Partners - General
considers it an accurate prediction of future events. In light of the
uncertainties inherent in forward-looking information of any kind, the inclusion
of these projections in this document should not be regarded as a representation
by Prometheus Income Partners, Prometheus Development Co., PIP Acquisition or
PIP Partners - General or any other person that the anticipated results will be
achieved and limited partners are cautioned not to place undue reliance on this
information.

                            LIMITED PARTNER PROPOSALS

                                      -85-




       If the merger of Prometheus Income Partners is consummated, there will be
no limited partners of Prometheus Income Partners other than PIP Partners -
General. If the transaction is not consummated with respect to Prometheus Income
Partners, limited partners would continue to be entitled to participate in
future meetings in accordance with the terms of the partnership agreement of
Prometheus Income Partners. Other than the meeting scheduled to consider and
vote on the merger proposal, there are no meetings scheduled, and Prometheus
Development Co. cannot predict when, if ever, future meetings may be called.
Meetings may be called upon notice by Prometheus Development Co. to the limited
partners or by notice to Prometheus Development Co. by limited partners holding
at least 10% of the outstanding units. Any proposals by limited partners
intended to be presented at a meeting must be received by Prometheus Income
Partners not less than 60 nor more than 90 days prior to this meeting, provided
that, in the event that Prometheus Income Partners gives less than 10 days'
notice or prior public disclosure of the date of the meeting, notice must be
received by Prometheus Income Partners no later than the close of business on
the tenth day following this notice or prior public disclosure. For a limited
partner to bring other business before a meeting, timely notice must be received
by Prometheus Income Partners within the time limits described above. This
notice must include a description of the proposed business, the reasons
therefore, and other specific matters. In each case, the notice must be given to
Prometheus Income Partners at Prometheus Income Partners' principal address. Any
limited partner desiring a copy of the partnership agreement of Prometheus
Income Partners will be furnished a copy without charge upon written request to
Prometheus Income Partners.

                       WHERE YOU CAN FIND MORE INFORMATION

       As required by law, Prometheus Income Partners files reports, proxy
statements and other information with the Commission. You can read and copy
these materials at the public reference facilities maintained by the Commission
at:

             Room 1024
             450 Fifth Street, N.W.
             Washington, D.C.  20549

       and at the following regional offices of the Commission:

             Woolworth Building
             233 Broadway
             New York, New York 10279

       and

             Suite 1400
             500 West Madison Street
             Chicago, Illinois 60661.

       For further information concerning the Commission's public reference
rooms, you may call the Commission at 1-800-SEC-0330. Some of this information
may also be accessed on the World Wide Web through the SEC's Internet address at
"http://www.sec.gov."

                                      -86-




       Copies of the Schedule 13E-3 may be read and copied at the public
reference facilities maintained by the Commission, which facilities are listed
above, or may be accessed on the World Wide Web through the Commission's
Internet address at "http://www.sec.gov." Copies of the Schedule 13E-3 and
copies of the documents listed in above are also available for inspection and
copying at the principal executive offices of Prometheus Income Partners during
its regular business hours by any interested limited partner of Prometheus
Income Partners or a representative of that limited partner who has been so
designated in writing.

       You should rely only on the information contained in (or incorporated by
reference into) this Proxy Statement in connection with your consideration of
the merger proposal. Neither Prometheus Development Co. nor Prometheus Income
Partners has authorized anyone to give any information different from the
information contained in (or incorporated by reference into) this Proxy
Statement. This Proxy Statement is dated March __, 2002. You should not assume
that the information contained in this Proxy Statement is accurate as of any
later date, and the mailing of this Proxy Statement to limited partners shall
not create any implication to the contrary.

                       ANNUAL REPORT AND QUARTERLY REPORT

       Prometheus Income Partner's Annual Report on Form 10-K for the year ended
December 31, 2000 (not including exhibits to that report) and Quarterly Report
on Form 10-Q for the quarter ended September 30, 2001 are being mailed with this
Proxy Statement to all limited partners.

                 INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

       The Commission allows us to "incorporate by reference" the information we
file with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this Proxy Statement. We incorporate by reference the
documents listed below:

       o  Annual Report on Form 10-K for the year ended December 31, 2000,
          including the financial statements set forth in that document;

       o  Quarterly Report on Form 10-Q for the quarter ended March 31, 2001,
          including the financial statements set forth in that document;

       o  Quarterly Report on Form 10-Q for the quarter ended June 30, 2001,
          including the financial statements set forth in that document;

       o  Quarterly Report on Form 10-Q for the quarter ended September 30,
          2001, including the financial statements set forth in that document;
          and

       o  Current Reports on Form 8-K dated February 15, 2002, October 11, 2001,
          May 22, 2001, April 2, 2001, March 12, 2001 and March 5, 2001,
          respectively.

                                      -87-




       We will mail these filings within one business day to any person,
including any beneficial owner, to whom this Proxy Statement is delivered, at no
cost, upon written or oral request to 350 Bridge Parkway, Redwood City,
California 94065-1517.

       All documents filed by us with the SEC under section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, after the date hereof
and before the date of our meeting are incorporated by reference into and will
be a part of this proxy statement from the date of filing of these documents.

                                  OTHER MATTERS

       Prometheus Income Partners does not know of any matter other than those
described in this Proxy Statement that will be presented for action at the
meeting. If other matters properly come before the meeting, the persons named as
proxies intend to vote the units represented by those proxies in accordance with
the judgment of Prometheus Development Co.

       Any copies of any written instructions, forms or other materials related
to oral solicitations of proxies will be filed as exhibits to this document.

       Prometheus Development Co. has made no provision to grant limited
partners unaffiliated with Prometheus Development Co. access to the corporate
files of Prometheus Development Co., nor to provide counsel to any unaffiliated
limited partners at Prometheus Development Co.'s expense.

                                      -88-





                                   APPENDIX A

                          Agreement and Plan of Merger




                          AGREEMENT AND PLAN OF MERGER

            This Agreement and Plan of Merger (this "Agreement") is entered into
as of March 6, 2002, by and among Prometheus Income Partners, a California
limited partnership (the "Partnership"), PIP Partners - General, LLC, a
California limited liability company ("PIP General"), and PIP Acquisition, LLC,
a California limited liability company and a wholly-owned subsidiary of PIP
General ("Acquisition").

            WHEREAS, the parties desire to merge Acquisition with and into the
Partnership (the "Merger") on the terms and conditions hereinafter set forth and
in accordance with the provisions of Sections 15678.1-.9 of the California
Revised Uniform Limited Partnership Act, as amended (the "Act") and Sections
17550-17556 of the Beverly-Killea Limited Liability Company Act (the "LLC Act");
and

            WHEREAS, Acquisition has been formed for such purpose.

            NOW THEREFORE, BE IT RESOLVED, that in consideration of the mutual
covenants and agreements contained herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:


                                    ARTICLE I
                                 TERMS OF MERGER

            Acquisition shall be merged with and into the Partnership in a
statutory merger in accordance with the Act and the LLC Act on the terms and
subject to the conditions set forth in this Agreement.


                                   ARTICLE II
                                EFFECT OF MERGER

            On the "Effective Date" (as defined below):

            (1) Acquisition shall be merged with and into the Partnership;

            (2) the Partnership shall possess all the rights, privileges,
immunities and franchises of Acquisition, and all property, real, personal and
mixed, and debts due on whatever account, and every other interest belonging to
or due to Acquisition (including, but not limited to, liability for any fees or
franchise taxes due and owing to the Secretary of State of California as of the
Effective Date) shall be deemed to be transferred to and vested in the
Partnership, without further act, deed or transfer;





            (3) the Partnership shall thenceforth be responsible for and subject
to all of the debts, liabilities and obligations of Acquisition in the same
manner as if the Partnership had itself incurred them;

            (4) any claim, existing action, or proceeding pending by or against
Acquisition may be prosecuted to judgment by the Partnership; and

            (5) neither the rights of creditors nor any liens upon the property
of Acquisition shall be impaired by the Merger.

The "Effective Date" shall be the date following the satisfaction of the
conditions set forth in Article VIII hereof on which a Certificate of Merger is
filed with the Secretary of State of the State of California in accordance with
the Act and the LLC Act, which date shall be not greater than twenty days
following the approval of the Merger by the limited partners of the Partnership
(the "Limited Partners").


                                   ARTICLE III
                    MANNER AND BASIS OF CONVERTING INTERESTS

            As of the Effective Date, by virtue of the Merger and without any
action on the part of any party hereto:

            (1) Each limited partner interest in the Partnership (each, a
"Unit") outstanding immediately prior to the Effective Date (other than any such
Unit held by PIP General) shall be converted into and shall become the right to
receive cash (without interest thereon) in an amount equal to $1,714.00 (the
"Merger Consideration") upon surrender of a duly executed letter of transmittal
by the holder of such Unit in form and substance reasonably satisfactory to PIP
General. As of the Effective Date, each such Unit shall no longer be outstanding
and shall automatically be cancelled and retired and shall cease to exist, and
the holder of such Unit shall cease to have any rights with respect thereto,
except the right to receive the Merger Consideration.

            (2) As of the Effective Date, each member interest in Acquisition
issued and outstanding as of the Effective Date shall be converted into one
newly-issued Unit.


                                   ARTICLE IV
                       CHARTER DOCUMENTS; GENERAL PARTNER

            (1) The Certificate of Limited Partnership and Second Amended and
Restated Limited Partnership Agreement of the Partnership dated October 1, 1992
(the "Partnership Agreement"), each as in effect on the Effective Date, shall be
the charter documents of the Partnership until duly amended or changed in
accordance with the Partnership Agreement and the Act.

                                       2




            (2) Subject to and in accordance with the Partnership Agreement,
Prometheus Development Co., Inc. will continue as the general partner of the
Partnership.


                                    ARTICLE V
                   PARTNERSHIP REPRESENTATIONS AND WARRANTIES

            The Partnership hereby represents and warrants that:

            (1) The Partnership has been duly organized and is existing as a
limited partnership in good standing under the laws of the State of California
with full power and authority to own and lease its properties and to conduct its
business as currently conducted.

            (2) The Partnership has the power and authority to execute and
deliver this Agreement, to consummate the transactions contemplated hereby and
to perform its obligations under this Agreement. The execution and delivery by
it of this Agreement, and the consummation of the transactions contemplated
hereby, have been duly authorized by all necessary action by the Partnership
other than the approval of Limited Partners holding at least 50% of the issued
and outstanding Units. This Agreement (assuming the due authorization, execution
and delivery hereof by the other parties hereto) constitutes the legal, valid
and binding obligation of the Partnership, enforceable against it in accordance
with the terms hereof.

            (3) Other than as follows, the execution, delivery and performance
of this Agreement and the consummation of the transactions will not (i) conflict
with or result in a breach or violation of any terms or provision of, or
constitute a default under (with or without notice or passage of time, or both),
or otherwise give any person a basis for accelerated or increased rights or
termination or nonperformance under, any indenture, mortgage, deed of trust,
loan or credit agreement, lease, license or other agreement or instrument to
which the Partnership is a party or by which the Partnership or its assets is
bound or affected, (ii) result in the violation of the provisions of the
formation documents of the Partnership or any legal requirement applicable to or
binding upon the Partnership, (iii) result in the creation or imposition of any
lien upon any property or asset of the Partnership, (iv) require the consent of
any person to the transactions contemplated hereby that has not heretofore been
obtained other than the consent of the Limited Partners and of The Prudential
Insurance Company of America or (v) otherwise adversely affect the contractual
or other legal rights or privileges of the Partnership:

                (a) Deed of Trust, Security Agreement and Fixture Filing with
            Assignment of Rents and Proceeds dated as of December 23, 1997, with
            respect to Alderwood; and

                                       3




                (b) Deed of Trust, Security Agreement and Fixture Filing with
            Assignment of Rents and Proceeds dated as of December 23, 1997, with
            respect to Timberleaf.

            (4) Other than as follows, or as otherwise disclosed in this
Agreement as of the date of this Agreement, the Partnership has good and
marketable title to all of the Partnership's assets free and clear of all liens:

                Mortgages and liens not yet due and payable, convenants,
                conditions and restrictions of record

            (5) Other than the hardboard siding litigation discussed in the
Partnership's Quarterly Report on Form 10-Q for the period ended September 30,
2001, as of the date of this Agreement, neither the Partnership nor its assets
is involved in material litigation.

            (6) The Partnership has received the opinion (the "Opinion") of
Houlihan Lokey Howard & Zukin that the Merger Consideration is fair, from a
financial point of view, to the Limited Partners other than PIP General and its
affiliates.


                                   ARTICLE VI
                                 VOTING OF UNITS

            (1) The Partnership hereby covenants and represents that as promptly
as practicable following the date hereof it shall hold a meeting (the "Meeting")
of the Limited Partners at which the Limited Partners will have the opportunity
to vote their Units for or against the transactions contemplated by this
Agreement.

            (2) At the Meeting, PIP General hereby covenants and represents that
it shall vote its Units for or against the transactions contemplated by this
Agreement in the same proportion as the total number of Units voted by Limited
Partners unaffiliated with PIP General or the General Partner.

            (3) The Partnership shall use reasonable commercial efforts to
obtain the approval of the Merger by the Limited Partners at the Meeting.


                                   ARTICLE VII
           PIP GENERAL AND ACQUISITION REPRESENTATIONS AND WARRANTIES

            Each of PIP General and Acquisition hereby represents and warrants
that:

            (1) Such party has been duly organized and is existing as a limited
liability company in good standing under the State of California with full power
and

                                       4




authority to own and lease its properties and to conduct its business as
currently conducted.

            (2) Such party has the power and authority to execute and deliver
this Agreement, to consummate the transactions contemplated hereby and to
perform its obligations under this Agreement. The execution and delivery by such
party of this Agreement, and the consummation by it of the transactions
contemplated hereby, have been duly authorized by all necessary limited
liability company action. This Agreement (assuming the due authorization,
execution and delivery hereof by the other parties hereto) constitutes the
legal, valid and binding obligation of such party, enforceable against it in
accordance with the terms hereof.

            (3) Such party's execution, delivery and performance of this
Agreement and the consummation by it of the transactions contemplated hereby
will not (i) conflict with or result in a breach or violation of any terms or
provision of, or constitute a default under (with or without notice or passage
of time, or both), or otherwise give any person a basis for accelerated or
increased rights or termination or nonperformance under, any indenture,
mortgage, deed of trust, loan or credit agreement, lease, license or other
agreement or instrument to which such party is a party or by which it or its
assets is bound or affected, (ii) result in the violation of the provisions of
the formation documents of such party or any legal requirement applicable to or
binding upon such party, (iii) result in the creation or imposition of any lien
upon any property or asset of such party, (iv) require the consent of any person
to the transactions contemplated hereby that has not heretofore been obtained or
(v) otherwise adversely affect the contractual or other legal rights or
privileges of such party.

            (4) Acquisition, PIP General and their affiliates have adequate
funds available out of current resources to pay the Merger Consideration to all
holders of Units (other than PIP General and its affiliates).


                                  ARTICLE VIII
                                   CONDITIONS

            (1) The obligations of each party hereto to effect the Merger shall
be subject to the fulfillment (or waiver by each party hereto) at or prior to
the Effective Date of the following conditions:

                (a) No court or other governmental entity of competent
            jurisdiction shall have enacted, issued, promulgated, enforced or
            entered any statute, rule, regulation, judgment, decree, injunction
            or other order (whether temporary, preliminary or permanent) (i)
            that is in effect and prohibits consummation of the Merger or any
            other transactions with respect to any party hereto expressly
            contemplated by this Agreement, or (ii) that is enacted, issued,
            promulgated, enforced or entered after the date

                                       5




            of this Agreement and, in any such case, is in effect and imposes
            restrictions on any party hereto with respect to the business
            operations thereof that would result in a material adverse effect on
            the assets, business, financial condition or prospects thereof
            (clauses (i) and (ii), collectively, and "Order"), and no
            governmental entity shall have instituted any proceeding or
            threatened to institute any proceeding seeking any such Order, and
            no other person shall have instituted any proceeding seeking any
            such Order which is reasonably likely to succeed.

                (b) All material actions by, and all consents, approvals, orders
            or authorizations from, or filings with, governmental entities of
            competent authority necessary for the consummation of the Merger or
            any other transactions expressly contemplated by this Agreement
            shall have been obtained or made, as the case may be.

                (c) The Opinion shall not have been withdrawn.

            (2) The obligations of the Partnership to effect the Merger and the
other transactions relating to the Partnership which are contemplated by this
Agreement to be performed by it are further subject to the condition (or waiver
by the Partnership) that:

                (a) the representations and warranties of PIP General and
            Acquisition set forth herein shall be true and correct at and as of
            the closing date; and

                (b) this agreement and the transactions contemplated hereby
            shall have been approved and adopted by the requisite approval of
            the Limited Partners.

            (3) The obligations of PIP General and Acquisition to effect the
Merger and the other transactions contemplated by this Agreement which are to be
performed by it are further subject to the conditions (or waiver by PIP General
and Acquisition) that:

                (a) the representations and warranties of the Partnership set
            forth herein shall be true and correct at and as of the closing
            date;

                (b) the holders of the deeds of trust referred to in Article V,
            Section 3 above consent (if necessary) to the Merger on terms
            acceptable to PIP General and Acquisition;

                (c) there is no material adverse change, from and after the date
            hereof, in the assets, business, financial condition or prospects of
            the Partnership; and

                                       6




                (d) the outstanding indebtedness with respect to the
            Partnership's properties shall have been refinanced on terms
            satisfactory to PIP General in its sole and absolute discretion.


                                   ARTICLE IX
                                   TERMINATION

            This Agreement may be terminated at any time prior to the Effective
Date (regardless of whether or not the requisite approvals of the Limited
Partners have been obtained) as follows:

            (1) by the mutual written consent of the Partnership, PIP General
and Acquisition;

            (2) by the Partnership, on the one hand, or PIP General and
Acquisition, on the other hand, upon written notice given to the other if any
judgment, injunction, order, decree or action by any governmental entity of
competent authority preventing the consummation of the transactions contemplated
by this Agreement shall have become final and nonappealable;

            (3) by PIP General or Acquisition upon written notice given to the
Partnership, upon a material breach on the part of the Partnership of any
representation, warranty, covenant, obligation or agreement of the Partnership
set forth herein that is not curable or, if curable, is not cured within thirty
(30) days after written notice of such breach is given by PIP General or
Acquisition to the Partnership;

            (4) by the Partnership upon written notice given to PIP General or
Acquisition, upon a material breach on the part of PIP General or Acquisition of
any representation, warranty, covenant, obligation or agreement of PIP General
or Acquisition set forth herein that is not curable or, if curable, is not cured
within thirty (30) days after written notice of such breach is given by the
Partnership to PIP General or Acquisition; or

            (5) by PIP General, Acquisition or the Partnership if the Merger has
not yet been consummated on or before June 30, 2002.


                                    ARTICLE X
                                  MISCELLANEOUS

            (1) The parties hereto each agree to do, execute, acknowledge and
deliver all such further acts, instruments and assurances, and to take all such
further action, including, without limitation, the execution and filing of such
instruments in the State of California and any other State as should be
necessary or desirable to carry out this Agreement and to consummate and effect
the Merger.

                                       7




            (2) This Agreement shall be governed by and construed in accordance
with the laws of California.

            (3) All of the representations, warranties, covenants, agreements
and undertakings set forth in this Agreement or in any instrument delivered
pursuant to this Agreement confirming the representations, warranties,
covenants, agreements and undertakings set forth in this Agreement shall
terminate as of the Effective Date, and shall have no further force or effect.

            (4) Whether or not the transactions contemplated by this Agreement
are consummated, all costs and expenses incurred in connection with this
Agreement, including, without limitations, the fees, expenses and disbursements
of counsel, financial advisors and accountants, shall be paid by PIP General
and/or Acquisition.

            (5) None of the General Partner, PIP General, Acquisition or any
payment agent retained in connection herewith, nor any of their respective
affiliates, will be liable to any Limited Partner for any Merger Consideration
delivered to a public official pursuant to any applicable abandoned property,
escheat or similar law.

                                       8




            IN WITNESS WHEREOF, the Partnership, PIP General and Acquisition
have each caused this Agreement to be effective as of the date and the year
first written above.

                                  PROMETHEUS INCOME PARTNERS,
                                  a California Limited Partnership

                                  By:  PROMETHEUS DEVELOPMENT CO., INC.,
                                       a California Corporation, its General
                                       Partner

                                       By:  /s/ John J. Murphy
                                            ---------------------
                                            Name:  John J. Murphy
                                            Title: Vice President


                                  PIP ACQUISITION, LLC, a California Limited
                                  Liability Company

                                  By:  PROMHILL, INC., a California Corporation,
                                       its Manager

                                       By:  /s/ John J. Murphy
                                            ------------------
                                            Name:  John J. Murphy
                                            Title: Vice President


                                  PIP PARTNERS - GENERAL, LLC, a California
                                  Limited Liability Company

                                  By:  PROMHILL, INC., a California Corporation,
                                       its Manager

                                       By:  /s/ John J. Murphy
                                            ------------------
                                            Name:  John J. Murphy
                                            Title: Vice President


                                       9











                                   APPENDIX B
  Second Amended and Restated Limited Partnership Agreement of the Partnership

        SECOND AMENDED AND RESTATED
        LIMITED PARTNERSHIP AGREEMENT OF
        PROMETHEUS INCOME PARTNERS
        A CALIFORNIA LIMITED PARTNERSHIP

        THIS SECOND AMENDED AND RESTATED LIMITED PARTNERSHIP
AGREEMENT is made by and among Prometheus Development Co., Inc.,
a California corporation, as the General Partner, and Prom XX,
Inc., a California corporation, as the Initial Limited Partner,
and the parties admitted as Limited Partners.

        RECITALS

        Alderwood Apartments, Ltd., a California Limited Partnership
(the "Partnership"), was organized under the California Revised
Limited Partnership Act and under a Limited Partnership
Agreement, dated as of April 15, 1985 (the "Original Agreement"),
with Prometheus Partners-Alderwood Apartments, Ltd., a California
Limited Partnership, as its general partner.  Prometheus
Development Co., Inc. was added as a general partner of the
Partnership on September 2, 1986.  Upon the withdrawal of the
Partnership's original general partner, Prometheus Development
Co., Inc. became the sole general partner of the Partnership on
September 4, 1986.  The Partnership's name was changed to
Prometheus Development/Income Partners, a California Limited
Partnership, in September 1986.  In December 1986, the
Partnership's name was changed to Prometheus Income Partners, a
California Limited Partnership.

        The General Partner and the Initial Limited Partner entered
into the First Amended and Restated Limited Partnership
Agreement, dated as of September 19, 1986 (the "Amended
Agreement"), under which the Original Agreement was amended to
provide for the public sale of Units.

        The General Partner has contributed $1,000 to the capital of
the Partnership.  The Initial Limited Partner has contributed $10
to the capital of the Partnership and shall withdraw as a Limited
Partner and have its interest redeemed at cost upon the admission
of additional Limited Partners.

        The Partnership plans to develop, to hold, and ultimately to
sell two multi-family apartment complexes located in Santa Clara,
California.  The principal investment objectives of the
Partnership are to preserve and protect the Partnership's
capital, to obtain capital appreciation from the effective
management and sale of the Properties, and to provide "tax
sheltered" distributions of cash from operations beginning in
1987.

        The Partners now desire to amend and restate the Amended
Agreement.

        NOW, THEREFORE, the Partnership's amended and restated
partnership agreement is set forth in its entirety as follows:


        ARTICLE 1

        DEFINITIONS

        As used in this Agreement, the following terms have the
definitions hereinafter indicated.  These terms shall supersede
and replace any other definitions contained in the California
Revised Limited Partnership Act.

        "Acquisition Expenses" shall mean expenses including but not
limited to legal fees and expenses, travel and communication
expenses, costs of appraisals, accounting fees and expenses,
title insurance, and miscellaneous expenses related to selection
and acquisition of the Properties.

        "Acquisition Fees" shall mean the total of all fees and
commissions paid by any party in connection with the purchase of
the Properties by the Partnership, including real estate
commissions, selection fees, development fees, non-recurring
management fee or any fee of a similar nature, however
designated.

        "Act" shall mean the California Revised Limited Partnership
Act, as amended from time to time.

        "Affiliate" shall mean (i) any Person or entity directly or
indirectly controlling, controlled by or under common control
with another Person or entity, (ii) any Person or entity owning
or controlling 10% or more of the outstanding voting securities
of such other entity, (iii) any officer, director or partner of
such entity, and (iv) any company for which such Person or entity
acts as an officer, director, trustee or partner.

        "Agreement" shall mean this Second Amended and Restated
Limited Partnership Agreement as it may be amended or restated
from time to time.

        "Assignee" shall mean a person who has acquired a beneficial
interest in one or more Units from a Limited Partner or an
assignee thereof but who is not a Substituted Limited Partner.

        "Broker/Dealers" shall refer to the NASD registered broker-
dealer firms which have entered into a Selling Agreement with the
Principal Distributor for the sale of Units.

        "Capital Contributions" shall mean $1,000 per Unit for all
Units sold including those sold net of underwriting commissions
and the Distributor Fee pursuant to Section 3.5 of the Agreement.

        "Certificate(s) of Limited Partnership" shall mean the
document, and any amendments thereto, required to be executed by
the General Partner and/or Limited Partners and filed in the
Office of the California Secretary of State, and in the
appropriate governmental offices or county recorders of other
states in which the Partnership may do business, in order to
create the Partnership and to obtain and preserve the limitations
on personal liability of the Limited Partners under applicable
law.

        "Completion Date" shall mean the date on which the offering
of Units terminates, which shall be the earlier of (a) the date
all of the Units are sold, (b) February 12, 1988, unless the
offering is extended by the General Partner for up to an
additional 12 months, or (c) the date the General Partner, in its
sole discretion, terminates the offering.

        "Completion Guaranty" shall mean the guaranty of the General
Partner to the Partnership, pursuant to Section 6.11 of the
Agreement, that the Properties will be completed free and clear
of all financing and construction liens (except any liens secured
by deeds of trust described in the Prospectus) at a total cost
not to exceed approximately $28,807,000, exclusive of negative
cash flow associated with lease-up expenses and the first year of
operations.

        "Completion Guaranty Fee" shall mean a fee equal to $600,000
payable to the General Partner in consideration for the
Completion Guaranty.

        "Control Person" shall mean those persons who perform a
function similar to the chairman of the board or a member of the
board of directors, executive management (such as the president,
vice president, corporate secretary or treasurer), senior
management (such as the vice president of an operating division
who reports directly to executive management), or a person
holding 5% or more equity interest in the General Partner or its
Affiliates or having the power to direct or control the direction
of the General Partner or its Affiliates, whether through
ownership of voting securities, by contract or otherwise.

        "Cost of Partnership Property" shall mean the total
consideration paid to acquire a Property, whether paid to the
seller, the General Partner or any other person, including cash
and all liens and mortgages on the Property but excluding points
and prepaid interest and the "Cost Of All Partnership Properties"
shall be the sum total of the "Cost of Partnership Property" for
each Property.

        "Credit Enhancement" shall mean a credit instrument
including but not limited to a bond from a AAA insurance company,
a forward commitment from a lender or a letter of credit
satisfactory to and for the benefit of the lender of the
permanent financing insuring that the loans secured by the
Properties will be paid within a specified period after the
permanent financing is funded.

        "Distributable Cash from Operations" shall mean the funds
provided from Partnership operations, excess Working Capital
Reserves and interest on the Partnership's cash and investments,
without deduction for non-cash expenses (such as depreciation and
amortization and any accrued debt service not yet payable), but
after deducting cash funds used to pay all other expenses, debt
payments, capital improvements and repairs, replacements, and
after provision for Working Capital Reserves.

        "Distributions" (whether or not this term is capitalized)
shall mean any cash distributed to the Partners arising from
their interests in the Partnership but shall not include any
compensation to the General Partner or its Affiliates or any
Partnership expense reimbursements.

        "Distributor Fee" shall mean the fee equal to 1% of gross
offering proceeds which is payable to the Principal Distributor.

        "Drexel" shall mean Drexel Burnham Lambert Incorporated, the
investment banker which may provide permanent financing for the
Properties.

        "Effective Gross Collections" shall mean all funds collected
from the Properties, including rents, security deposits and
furniture rentals, and revenues from carport, storage and
laundry.

        "Escrow Agent" shall mean Security Pacific National Bank,
333 S. Beaudry, Los Angeles, California.

        "Financial Forecast" shall mean the forecast included in the
Prospectus as Exhibit A.

        "Front-End Fees" shall mean any fee, commission or expense
paid by any party for any services to the Partnership during the
Partnership's organization and acquisition phase, including
Organization and Offering Expenses, investment advisory fees,
Acquisition Fees, Acquisition Expenses, Initial Partnership
Management Fee, Completion Guaranty Fee, Initial Property
Management Fee and similar fees however designated.

        "General Partner" shall mean Prometheus Development Co.,
Inc., a California corporation, in its capacity as the general
partner of the Partnership, or the successor general partner of
the Partnership.

        "Gross Offering Proceeds" (whether or not this term is
capitalized) shall mean the aggregate amount of cash contributed
to the Partnership by purchasers of Units before deduction of
underwriting commissions and the Distributor Fee or any other
fees, received on or before the Completion Date.  For purposes of
calculating underwriting commissions and the Distribution Fee,
Gross Offering Proceeds shall not include the proceeds from any
Units sold net of underwriting commissions and the Distributor
Fee.

        "IRA" shall mean an Individual Retirement Account.

        "Incentive Priority Return" shall mean the amount in
addition to the 10% Priority Return necessary to provide an 11%
simple return for the period from January 1, 1988 through
December 31, 1988, on the Invested Capital of each Limited
Partner who subscribes for Units on or before June 1, 1987, or
any later date determined at the discretion of the General
Partner.  This return shall be paid out of Net Proceeds from Sale
or Refinancing.

        "Initial Lease-Up Fee" shall mean that one-time fee equal to
$106,000 payable to the General Partner pursuant to Section
7.5(d) of the Agreement for obtaining initial tenants for the
Properties.

        "Initial Limited Partner" shall mean Prom XX, Inc., a
California corporation, in its capacity as the initial limited
partner of the Partnership.

        "Initial Partnership Management Fee" shall mean that fee
equal to $291,000 payable to the General Partner, pursuant to
Section 7.3 of the Agreement, for organizing the Partnership,
arranging for and negotiating construction financing, arranging
for and negotiating permanent financing, obtaining (in connection
with the permanent financing) a Credit Enhancement satisfactory
to the lender of the permanent financing, insuring that the
Partnership will meet certain obligations, selecting and
supervising professionals to perform services for the
Partnership, establishing Partnership accounts, including an
escrow account for use in connection with the offering of the
Units, and establishing a reporting system for submitting tax
information and periodic reports to the Limited Partners and
regulatory authorities.

        "Initial Property Management Fee" shall mean the excess of
the Property Management Fee earned during the Lease-Up Period
over 5% of the Effective Gross Collections for such period.

        "Internal Revenue Code" shall mean the Internal Revenue Code
of 1986, as amended from time to time.

        "Invested Capital" for a Limited Partner shall mean that
Limited Partner's Capital Contributions less the sum of all
distributions (but not distributions of Distributable Cash from
Operations) made to the Limited Partner and any prior owners of
the Units.

        "Investment in Properties" shall mean the amount of Gross
Offering Proceeds paid or allocated to the purchase, development,
construction or improvement of Properties, Working Capital
Reserves not in excess of 5% of the Gross Offering Proceeds and
any other cash payments such as interest and taxes but excluding
Front-End Fees.

        "Lease-Up Period" shall mean the period commencing on the
date certificates of occupancy are issued with respect to the
Properties' units and terminating on the date the aggregate
occupancy rate of the Properties is equal to 50% or more.

        "Lender" shall mean the commercial or institutional lender
which will provide permanent financing or construction financing
for the Properties.

        "Limited Partners" shall mean the Initial Limited Partner
and any other persons who are admitted to the Partnership as
additional or Substituted Limited Partners.  Reference to a
"Limited Partner" shall be to any one of the Limited Partners.

        "Loan Commitment Guaranty" shall mean the obligation of the
General Partner through December 31, 1991, to loan sufficient
funds or to arrange for a loan of funds to the Partnership to
cover any Operating Deficit for any calendar quarter.

        "Majority Vote" shall mean the vote of Limited Partners who
are entitled to vote, consent or act and are holders of record of
a majority of the outstanding Units.

        "Net Proceeds from Sale or Refinancing" shall mean, unless
otherwise specified (i) the net cash funds or proceeds (including
lump sum prepayments by buyers) resulting from the financing,
refinancing or sale of Partnership assets, after deduction of all
expenses incurred in connection therewith, including any real
estate commissions (and the Subordinated Property Disposition
Interest) and brokerage fees paid to third parties, plus (ii) all
net cash proceeds subsequently received on any installment
payments on promissory notes and/or installment contracts held by
the Partnership in connection with the sale of Partnership assets
after payment of or provision for any underlying indebtedness
related to assets sold plus cash reserves and working capital on
hand, less (iii) such amounts for Working Capital Reserves and
other reserves as the General Partner deems necessary for future
Partnership operations.

        "Net Profits" and "Net Losses" shall mean the profits and
losses of the Partnership determined in accordance with
accounting methods followed for federal income tax purposes.

        "Operating Deficit" shall mean for any period the excess of
(i) all expenses from ongoing operations excluding the effect of
non-operating, extraordinary or capital items of the Partnership
paid in cash (which excludes non-cash expenses such as
depreciation, amortization and any accrued debt service not yet
payable) less (ii) the sum of funds provided from Partnership
operations, Working Capital Reserves and interest on the
Partnership's cash and short term investments.

        "Organization and Offering Expenses" shall mean those
expenses incurred in connection with the registration of the
Units and the subsequent offer and sale of the Units under
applicable federal and state securities laws (or exemptions
therefrom), including underwriting commissions and the Distribu-
tor Fee, and any other expenses actually incurred and directly
related to the qualification, offer and sale of Units including
without limitation such expenses as: (i) registration and
qualification fees, filing fees and taxes, (ii) the costs of
printing, amending, supplementing and distributing the
Registration Statement and Prospectus, (iii) the costs of
obtaining regulatory clearance, (iv) the costs of printing and
distributing sales materials used in connection with the offer
and sale of Units, (v) the costs related to investor and
Broker/Dealer sales meetings, (vi) accounting and legal fees
incurred by the Partnership in connection with any of the
foregoing, and (vii) escrow fees.

        "Partners" shall mean the General Partner and the Limited
Partners, collectively, and reference to a "Partner" shall be to
any one of the Partners.

        "Partnership" shall mean Prometheus Income Partners, a
California Limited Partnership.

        "Person" (whether or not this term is capitalized) shall
mean any natural person, partnership, corporation, association or
other legal entity.

        "Principal Distributor" shall mean Prometheus Capital, Inc.,
a California corporation.

        "Principal Distributor Agreement" shall mean that certain
agreement between the Principal Distributor and the Partnership
concerning the sale of the Units.

        "Properties" shall mean both the Alderwood Apartments and
the Timberleaf Apartments, as more specifically described in the
Prospectus.  "Property" shall mean one of the Properties.

        "Property Management Fee" shall mean the fee payable to the
General Partner, pursuant to Section 7.5 of the Agreement, for
the ordinary property management services related to the
Properties.

        "Prospectus" shall mean the final prospectus as filed by the
Partnership with the Securities and Exchange Commission pursuant
to Rule 424(b) and as supplemented from time to time.

        "Proxy" shall mean a written authorization signed by a
Partner or the Partner's attorney-in-fact giving another person
the power to vote with respect to the interest of that Partner.
"Signed" for the purposes of this definition means the placing of
Partner's name on the proxy (whether by manual signature,
typewriting, telegraphic transmission, or otherwise) by the
Partner or Partner's attorney-in-fact.

        "Qualified Plan" shall mean any trust established pursuant
to the terms of a Keogh plan or corporate pension, profit sharing
or stock bonus plan which meets the requirements of Section 401
et seq. of the Internal Revenue Code.

        "Reference Rate" shall mean the rate of interest announced
from time to time by a specified bank as its "reference rate,"
"prime rate" or comparable rate.  For purposes of the interest
rate reimbursements described herein, interest will be compounded
daily on a 360-day year.

        "Registration Statement" shall mean the Registration
Statement on Form S-11 (Reg. No. 33-9164), as amended, filed by
the Partnership with the Securities and Exchange Commission for
the registration of the Units.

        "Selling Agreement" shall mean that certain Selling
Agreement between the Principal Distributor and a Broker/Dealer
relating to the offer and sale of Units.

        "Subordinated Property Disposition Interest" shall mean an
amount to be paid to the General Partner upon sale or exchange of
a Property in the amount up to 3% of the gross sales price of a
Property, subordinated as indicated in Section 7.8(a) of the
Agreement.

        "Subscriber" shall mean a person who has completed a
subscription agreement and submitted it together with payment for
the number of Units being purchased to the General Partner.

        "Subscription Agreement" shall mean the prescribed
subscription agreement, a form of which is included as Exhibit D
to the Prospectus, which must be executed as a condition
precedent to becoming a Limited Partner.

        "Substituted Limited Partner" shall mean an assignee of a
Limited Partner or a substituted Limited Partner who is admitted
at the discretion of the General Partner, as a Limited Partner
pursuant to Section 11.5 of the Agreement.

        "10% Priority Return" shall mean a 10% per annum cumulative
simple preferred return on the Invested Capital of each Limited
Partner, computed from the last day of the calendar quarter in
which the Limited Partner was admitted to the Partnership.

        "Unit" shall mean a unit of limited partnership interest in
the Partnership.

        "Working Capital Reserves" shall mean the reserve cash
necessary for the Partnership to meet its ongoing operating
expenses as well as any other anticipated cash obligations
whether of a capital nature or otherwise.  All additions to and
reductions from Working Capital Reserves shall be determined at
the sole discretion of the General Partner.

        ARTICLE 2

        GENERAL PROVISIONS

        2.1     Formation of the Partnership

                The parties hereto confirm that the Partnership was
formed under the Act with such variations and terms as provided
in this Agreement.

        2.2     Name of the Partnership

                The name of the Partnership shall be "Prometheus
Income Partners, a California Limited Partnership," or such other
name as shall be selected from time to time by the General
Partner upon written notice to the Limited Partners.

        2.3     Purposes

                Subject to the limitations set forth in this
Agreement, the purposes of the Partnership are to develop and
hold the Properties as an investment; to raise capital for the
foregoing; to develop, manage, operate, lease, alter, improve and
maintain the Properties; to acquire additional personal property
and construct or renovate such additional real estate
improvements on the Properties as are appropriate to the
operation of the Properties; to act in all other respects as the
owner of the Properties; to finance and refinance by mortgage or
unsecured loan or any combination thereof; ultimately to sell,
transfer, exchange or otherwise dispose of part or all of the
Properties; and to conduct such other activities as may be
necessary or incidental to or desirable in connection with the
foregoing.

        2.4     Principal Place of Business and Office of the
Partnership

                The principal place of business and office of the
Partnership shall be located at 20300 Stevens Creek Boulevard,
Suite 100, Cupertino, California 95014, or such other place or
places as the General Partner may from time to time designate by
notice to the Limited Partners.  In addition, the Partnership may
maintain such other offices as the General Partner deems
advisable.


        2.5     Term

                The Partnership shall commence upon the filing with
the California Secretary of State of the Certificate of Limited
Partnership and shall continue until December 31, 2016, unless
sooner dissolved and terminated pursuant to the provisions of
Article 13 hereof.

        2.6     General Partner

                The name and place of business of the General Partner
is as follows:

                Prometheus Development Co., Inc.
                20300 Stevens Creek Boulevard, Suite 100
                Cupertino, California 95014

        2.7     Certificate of Limited Partnership

                The General Partner has caused to be filed a
Certificate of Limited Partnership with the California Secretary
of State in accordance with the terms of the Act.

        2.8     Other Acts/Filings

                The Partners and Assignees shall from time to time
execute or cause to be executed all such certificates, fictitious
business name statements, and other documents, and do or cause to
be done all such filings, recordings, publishings, and other acts
as the General Partner may deem necessary or appropriate to
comply with the requirements of law for the formation and
operation of the Partnership in all jurisdictions in which the
Partnership shall desire to conduct business.

        2.9     Agent for Service of Process

                The agent for service of process for the Partnership
in California shall be Stephen R. Koch or such other eligible
individual California resident or corporation qualified to act as
an agent for service of process as the General Partner shall
designate.

        ARTICLE 3

        CAPITAL CONTRIBUTIONS AND RELATED MATTERS

        3.1     Capital Contributions by the General Partner

                The General Partner has contributed $1,000 to the
capital of the Partnership in consideration of its interest in
the Partnership.  Except as provided in Section 5.7, the General
Partner shall not be required to make any additional
contributions to the Partnership or to reimburse any other
Partner.

        3.2     Capital Contributions by the Initial Limited Partner
and the Limited Partners

                (a)     Initial Limited Partner.  The Initial Limited
Partner has contributed the sum of $10 to the capital of the
Partnership.  Upon the admission of additional Limited Partners
pursuant to Section 3.2(b), the Initial Limited Partner's
interest shall be redeemed at cost and the Initial Limited
Partner shall have no further interest in the Partnership.

                (b)     Initial Offering.  The Partnership intends to
offer for subscription up to 19,000 Units for the price of $1,000
per Unit, subject to Section 3.5, and admit each person who
subscribes for at least five Units (two Units if the person
subscribing is an IRA or Qualified Plan) as an additional Limited
Partner in the Partnership, subject to the provisions of Section
3.4 of this Agreement; provided, however, that the General
Partner, in its sole discretion, may waive the minimum Unit
purchase requirement with respect to any investor, provided that
any initial investor (other than an IRA or a Qualified Plan)
shall purchase no less than 2.5 Units ($2,500).  Each purchaser
shall contribute $1,000 per Unit, subject to Section 3.5, to the
capital of the Partnership, payable in full in cash upon
subscription.

        3.3     No Action or Consent Necessary by Limited Partners
for Admission of Other Limited Partners

                No action or consent by Limited Partners shall be
required in connection with the admission of new or Substituted
Limited Partners to the Partnership.  Only the consent of the
General, Partner is necessary for the admission or substitution
of any Limited Partners to the Partnership.

        3.4     Subscriptions and Admission

                (a)     The General Partner shall admit as Limited
Partners Subscribers who have been accepted and who submitted
subscriptions on or before the Completion Date, and amend any
documents necessary for admission, not later than (i) 15 days
after the release from escrow of the Subscriber's funds to the
Partnership or (ii) the last day of each calendar month.
Subscriptions will be accepted or rejected by the Partnership
within 30 days of their receipt; if rejected, all funds shall be
returned to the Subscriber within 10 business days of the
decision to reject.

                (b)     Initially, subscriber funds shall be deposited in
an escrow account at Security Pacific National Bank, and Security
Pacific National Bank, shall be the Escrow Agent.  While held in
such account, subscription funds shall be invested in
permissible, short-term, highly liquid investments in which there
is appropriate safety of principal.  Subscription funds shall not
be released from the escrow account until subscriptions for at
least 4,000 Units have been received, accepted and deposited in
such account.  After this minimum amount has been received, at
the sole discretion of the General Partner, the subscription
funds may be released to the Partnership from the escrow account.
In any event, no subscription funds will be released from the
escrow account until such funds equal at least $4,000,000.  The
General Partner, at its discretion, may terminate the offering of
Units at any time prior to the release of subscription funds from
the escrow account to the Partnership.  If the $4,000,000 minimum
is not received prior to the Completion Date or the offering is
terminated prior to the release of subscription funds from the
escrow account, subscription funds together with any interest
earned thereon shall be returned promptly to the investors.
After 4,000 or more Units have been sold and the General Partner
has requested the release of the Subscribers' funds from the
escrow account, investors shall be admitted to the Partnership.
After release of the Subscribers' funds from the escrow account,
subsequent subscriptions shall be deposited in a Partnership
account and any interest earned thereon shall remain in the
Partnership.

                (c)     The General Partner may decline to accept any
Subscriber for Units for any reason.  If rejected, all
subscription monies shall be returned to the Subscriber promptly.

        3.5     Purchase of Units by General Partner and Related
Parties

                The purchase of Units by the General Partner, its
Affiliates, certain of its agents, Broker/Dealers, and their
employees shall be net of any underwriting commissions and the
Distributor Fee.  Any such Units purchased by the General
Partner, its Affiliates, certain of its agents, Broker/Dealers,
or their employees shall be held as Limited Partner Units and be
entitled to all rights as such.  If the subscription funds are
released to the Partnership in accordance with Section 3.4(b),
the General Partner or its Affiliates shall be obligated to
purchase any Units remaining unsold on the Completion Date.  The
General Partner and its Affiliates shall hold all Units they
purchase for investment purposes and not for resale.

        3.6     Assessments or Additional Contributions

                Units are nonassessable, and no Limited Partner shall
be required to make additional contributions to the capital of
the Partnership in excess of the Limited Partner's subscription.

        3.7     No Withdrawal of Contributions

                No Limited Partner shall have the right to withdraw a
contribution to the Partnership.

        3.8     Return of Capital

                There is no agreement for or time set for the return
of any contribution of any Limited Partner.  To the extent funds
are available therefor, the General Partner may return
contributions out of operating revenue or out of proceeds of sale
or refinancing or any other assets of the Properties, after
reserving sufficient funds for payment of debts, working capital,
contingencies, replacements, and withdrawals of capital, if any,
and to the extent of available funds, the General Partner shall
return said capital at dissolution and termination, as set forth
in this Agreement.

        3.9     No Interest on Capital Contributions

                No Partner shall be entitled to interest of any kind
on account of a Capital Contribution.

        3.10    No Priority

                Except as otherwise provided in this Agreement, no
limited Partner shall have priority over any other Limited
Partner as to return of contributions, allocations of income,
gain, loss, deduction, credit, or as to distributions.

        3.11    Securities Laws

                To accomplish the purposes of this Article, the
General Partner is hereby authorized to do all things necessary
to admit Limited Partners, including, but not limited to,
registering the Units for sale with the Securities and Exchange
Commission, qualifying the Units for sale with state securities
regulatory authorities or perfecting exemptions from
qualification, and entering into such underwriting or agency
arrangements for the offer and sale of Units upon such terms and
conditions as the General Partner may deem advisable.

        3.12    Temporary Investment of Partnership Capital

                Proceeds from the sale of Units and other Partnership
funds shall be held in one or more Partnership accounts for the
exclusive use of the Partnership and may be temporarily invested
in (a) obligations with a maturity of one year or less that are
issued or insured by the United States government or its
agencies, (b) repurchase agreements covering such governmental
obligations, (c) certificates of deposit and banker's acceptances
issued by banks having a net worth of at least $50,000,000, (d)
investment grade commercial paper, (e) bank accounts, or (f)
money market funds.  Any interest thereon shall inure to the
benefit of the Partnership, and the Limited Partners shall not
receive interest on funds contributed by them.

        3.13    Investment in Properties

        The Partnership shall apply to Investment in Properties a
minimum percentage of Gross Offering Proceeds which is equal to
the greater of:

                (a)     80% of the Gross Offering Proceeds reduced by
 .1625% for each 1% of indebtedness encumbering the Properties; or

                (b)     67% of the Gross Offering Proceeds.

        The "percentage of indebtedness encumbering Partnership
Properties" is the percentage resulting when the indebtedness on
the Properties (whether the debt is on a Property when purchased
or placed on Property at the time of purchase) is divided by the
Cost of All Partnership Properties excluding Front-End Fees.

        ARTICLE 4

        TAX ALLOCATIONS

        4.1     Definitions

        For purposes of this Article 4, the following phrases shall
have the meanings indicated below:

        "Minimum Gain" shall have the meaning ascribed in the
Treasury Regulations under Section 704(b) of the Internal Revenue
Code, i.e., generally, the excess, if any, of the outstanding
balance of nonrecourse liabilities to which the Properties are
subject over the Partnership's adjusted basis in the Properties
for tax purposes.  Should such definition of "minimum gain" be
changed, the General Partner may, in its discretion and without
the consent of the Limited Partners, modify the definition of
"Minimum Gain" contained herein to effectuate the intent of the
Partners as expressed in Section 4.2.

        "Operating Net Profits" and "Operating Net Losses" shall
mean Net Profits and Net Losses other than Net Profits and Net
Losses realized on sales or other, dispositions of the
Properties.

        4.2     General Rule

        It is the intention of the Partners that each Partner's
distributive share of tax items shall be determined and allocated
in accordance with the allocation provisions of this Agreement to
the fullest extent permitted by Sections 704(b) and (c) of the
Internal Revenue Code.  Therefore, if the Partnership is advised
by counsel or its accountants that the allocation provisions of
this Agreement are unlikely to be respected for federal income
tax purposes, the General Partner is granted the authority in
Section 15.2 to amend the allocation provisions of this Agreement
to the extent deemed necessary by counsel or its accountants to
effect the plan of allocations and distributions of Distributable
Cash from Operations and Net Proceeds from Sale or Refinancing
provided in this Agreement.  The General Partner shall have the
discretion to adopt and revise such rules, conventions and
procedures as it believes appropriate with respect to the
admission of Limited Partners to reflect Partners' interests in
the Partnership at the close of the year.

        4.3     Allocation to Initial Limited Partner

        During the period that the Initial Limited Partner is the
only Limited Partner in the Partnership, Net Profits and Net
Losses shall be allocated 1% to the General Partner and 99% to
the Initial Limited Partner.  Thereafter, Net Profits and Net
Losses shall generally be allocated as set forth in Sections 4.4
to 4.8.

        4.4     Net Profits and Net Losses from Operations

                (a)     If Distributable Cash from Operations is
distributed during the year in question, Operating Net Profits
shall be allocated among the General Partner and the Limited
Partners in proportion to the Distributable Cash from Operations
distributed to them, provided that in no event will the Limited
Partners receive an allocation in excess of 99% of the Operating
Net Profits.  If no cash is distributed during the year in
question, Operating Net Profits shall be allocated 99% to the
Limited Partners and 1% to the General Partner.

                (b)     Operating Net Losses shall be allocated 1% to the
General Partner and 99% to the Limited Partners.

        4.5     Net Profits and Net Losses on Sale or Other
Disposition of a Property

                (a)     Net Profits realized on sale or other disposition
of either or both of the Properties shall be allocated and
capital account balances determined prior to any distribution of
Net Proceeds from Sale or Refinancing.  Such Net Profits shall be
allocated first 99% to the Limited Partners and 1% to the General
Partner until the capital account balances of the Limited
Partners in the aggregate equal the amount of Net Proceeds from
Sale or Refinancing which would be distributable to the Limited
Partners pursuant to Section 5.4(c)(1) before any distribution
could be made pursuant to Section 5.4(c)(2); second if the
Partnership does not treat the Subordinated Property Disposition
Interest as deductible or includible in the basis of the Property
to which it relates, an amount of Net Profits equal to such
Subordinated Property Disposition Interest shall be allocated to
the General Partner; and thereafter 85% to the Limited Partners
and 15% to the General Partner.  With respect to Net Profits
allocated to the Limited Partners, if a Limited Partner's capital
account balance (on a per Unit basis) equals the amount of Net
Proceeds from Sale or Refinancing which must be distributed to
such Limited Partner before a distribution can be made under
Section 5.4(c)(2) while other Limited Partners' capital account
balances are less than such amount on a per Unit basis, the
portion of Net Profits, if any, that would otherwise be allocated
to the Limited Partner whose capital account balance equals such
amount shall be instead allocated to Limited Partners whose
capital accounts are less than such amounts.

                (b)     Notwithstanding the provisions of Section 4.5(a),
upon the sale or disposition of a Property, before allocating Net
Profits under Section 4.5(a), (i) Net Profits up to an amount
equal to the sum of the negative capital account balances of the
Partners having negative capital account balances shall be
allocated to the Partners having negative capital account
balances in the ratio that the negative capital account balance
of each bears to the aggregate negative capital account balances,
and (ii) Net Profits thereafter shall be allocated pursuant to
Section 4.5(a).

                (c)     Net Losses realized on sale of either or both of
the Properties shall be allocated first to Partners with positive
capital accounts, in the proportion that the capital account
balance of each bears to        the aggregate capital account balances
of all Partners with positive capital accounts, and thereafter
99% to the Limited Partners and 1% to the General Partner.

        4.6     Allocation of Nonrecourse Deductions and Minimum Gain
Chargeback

        Allocations under this Agreement of nonrecourse deductions,
as defined in Treasury Regulation Section 1.704-1(b)(4)(iv), are
intended to be made in accordance with the Regulations under
Section 704(b) of the Internal Revenue Code.  In the event the
General Partner shall determine that it is advisable to modify
the allocations contained in this Agreement to comply with such
Regulations, the General Partner is authorized hereby to make
such modifications.  If there is a net decrease in Minimum Gain
during a taxable year, all Partners with a deficit capital
account balance at the end of such year (excluding from each
Partner's deficit capital account balance any amount that such
Partner is obligated to restore under this Agreement as well as
any addition thereto pursuant to the next to last sentence of
Treasury Regulation Section 1.704-1(b)(4)(iv)(f) computed with
respect to the amount of Minimum Gain after such net decrease)
will be allocated, before any other allocation is made of
Partnership items for such taxable year, items of income and gain
for such year (and, if necessary, subsequent years) in the amount
and in the proportions needed to eliminate such deficits as
quickly as possible.  For purposes of the preceding sentence,
Partners' capital accounts shall be reduced for the items
described in Treasury Regulation Sections 1.704-
1(b)(2)(ii)(d)(4), (5), and (6).  The Minimum Gain chargeback
allocated in any taxable year shall consist first of gains
recognized from the disposition of items of Partnership Property
subject to one or more nonrecourse liabilities of the Partnership
to the extent of the decrease in Minimum Gain attributable to the
disposition of such items of Property, with the remainder of such
Minimum Gain chargeback, if any, made up of a pro rata portion of
the Partnership's other items of income and gain for that year.
If, however, such gains exceed the amount of the Minimum Gain
chargeback, a proportional share of each such gain shall
constitute a part of the Minimum Gain chargeback.

        4.7     Provisional Allocation

        In the event that an amount claimed by the Partnership,
which constitutes a deductible expense in any tax year of the
Partnership, is treated as a payment made to a Partner in his
capacity as a member of the Partnership for income tax purposes,
income and gain of the Partnership for such year shall first be
allocated to the recipient of such payment and no deductions and
losses of the Partnership shall be allocated thereto.

        4.8     Special Allocations

        Notwithstanding any other provision of this Agreement to the
contrary:

                (a)     Operating Net Losses allocable to the Limited
Partners shall be first allocated to any Limited Partner whose
capital account balance is greater in amount than the capital
account balance of any other Limited Partner, until such time as
the balance in each Limited Partner's capital account on a per
Unit basis equals the balance in the capital account of every
other Limited Partner, and thereafter among all Limited Partners
on a per Unit basis.

                (b)     In no event shall any losses be allocated to any
Limited Partner whose capital account has been reduced to zero
(unless such Limited Partner agrees to make up any negative
balance in his capital account) until the capital accounts of all
Limited Partners have been reduced to zero.  If any Limited
Partner's capital account has been reduced to zero at any time
when any other Limited Partners' capital accounts have positive
balances, any such losses shall be allocated among such Limited
Partners with positive capital account balances in the proportion
which such positive balances bear to each other (for purposes of
determining proportionality such positive capital account
balances shall be determined as of the date of such allocation).
After the capital accounts of all Partners have been reduced to
zero, losses shall again be allocated as otherwise provided in
this Agreement, except that in no event shall losses be allocated
to any Limited Partner if such allocation would not be recognized
under Section 704 of the Internal Revenue Code and such losses
shall be reallocated first to Limited Partners with respect to
whom such allocation would be recognized and thereafter to the
General Partner.

                (c)     Any recapture under Section 1245 or Section 1250
of the Internal Revenue Code shall be allocated to those Partners
who were allocated the deductions to which such recapture
relates.

                (d)     In the event any of the Partners receive an
adjustment, allocation or distribution described in Treasury
Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) or (6) which
results in a deficit in the capital account balance of such
Partners, such Partners shall be allocated 100% of all items of
income or gain to the extent of the lesser of (i) the amount of
such adjustment, allocation or distribution, or (ii) the deficit
in such Partner's capital account balance, pro rata in accordance
with such amount.

                (e)     Nondeductible, nonamortizable syndication
expenses (other than underwriting commissions and the
        Distributor Fee) shall be allocated 100% to the Limited
Partners and divided among such Limited Partners from time to
time so that to the extent possible an equal amount of such
expenses is     allocated to each Unit.  Underwriting commissions
and the Distributor Fee shall be allocated directly to the
Limited Partner with respect to whose Units such commissions and
fees were actually charged.

        ARTICLE 5

        DISTRIBUTIONS OF CASH

        5.1     Prior to Admission of Additional Limited Partners

                During the period that the initial Limited Partner is
the only limited partner in the Partnership, all distributions of
cash shall be made at the sole discretion of the General Partner
and shall be made 1% to the General Partner and 99% to the
Initial Limited Partner.

        5.2     Subsequent to Admission of Additional Limited Partners

        After the period specified in Section 5.1, Partnership
distributions shall be made in the manner set forth in Sections
5.3 and 5.4.

        5.3     Distributions of Cash from Operations

        Distributable Cash from Operations shall be distributed
quarterly and initially shall be distributed 100% to the Limited
Partners until the Limited Partners have received a sum each year
equal to a 10% Priority Return, as determined from time to time;
provided, however, that Distributable Cash from Operations
realized by the Partnership during 1987 shall be apportioned
among the Limited Partners in a manner which reflects the number
of days in 1987 after the date on which the Escrow Agent or the
General Partner received a Limited Partner's Capital
Contribution.  The Incentive Priority Return will be distributed
from Net Proceeds from Sale or Refinancing.  After the receipt by
the Limited Partners of a 10% Priority Return, Distributable Cash
from Operations shall be distributed 100% to the General Partner
until the General Partner has received 5% of the aggregate cash
distributed to the Limited Partners in that year pursuant to the
first sentence of this Section 5.3.  Thereafter, Distributable
Cash from Operations shall be distributed 95% to the Limited
Partners and 5% to the General Partner in that year.

        5.4     Distributions of Net Proceeds from Sale or Refinancing

        Net Proceeds from Sale or Refinancing shall be utilized or
distributed in the following priority (to the extent funds are
available):

                (a)     To the payment of current Partnership
obligations, liabilities and expenses.

                (b)     To the setting up of reserves which the General
Partner may, in its sole discretion, deem necessary for
Partnership debts or liabilities, whether payable or not yet
payable, including any contingent or unforeseen liabilities or
obligations.  Such reserves may be held for disbursement by the
General Partner in the Partnership bank account or delivered to
an independent escrow holder selected by the General Partner to
be held for the purpose of disbursing such reserves in payment of
any of the Partnership's contingent liabilities or liabilities
not yet due.  At such time as the General Partner shall
determine, any balance remaining in such reserves shall be
distributed in accordance with this Section 5.4.

                (c)     The balance shall be distributed to Partners in
the following order:

                        (1)     100% to the Limited Partners until each
Limited Partner has received an amount equal to (i) the excess of
(A) a 10% Priority Return, less (B) the sum of all previous cash
distributions during the term of the Partnership other than
distributions of Invested Capital pursuant to this Section
5.4(c)(1), (ii) if applicable to a Limited Partner, an Incentive
Priority Return and (iii) the Limited Partners' remaining
Invested Capital.  Notwithstanding the foregoing, the General
Partner shall be entitled to its Subordinated Property
Disposition Interest upon the sale of either or both of the
Properties, as subordinated in the manner set forth in Section
7.8 (a).

                        (2)     The balance:

                                (A)     85% to the Limited Partners; and

                                (B)     15% to the General Partner.

                        (3)     Notwithstanding the foregoing provisions of
this Section 5.4, distributions of Net Proceeds from Sale or
Refinancing arising from the termination of the Partnership
(which term shall, for this purpose, mean the sale or other
disposition of both of the Properties) shall (after all Net
Profits from such sale or other disposition have been allocated
pursuant to Article 4) be distributed first in proportion to, and
to the extent of, the positive capital account balances of the
Partners, and thereafter as set forth above.

        5.5     Consent to Distributions

        Any distribution made to a Partner pursuant to this
Agreement shall be deemed to be consented to by the Partners.

        5.6     Capital Accounts

        Individual capital accounts shall be maintained for each
Partner.  Each Partner's capital account shall consist of such
Partner's original contribution of capital increased by such
Partner's (a) additional contributions of capital, and (b)
allocable share of Partnership income and gains (including income
exempt from tax) and decreased by such Partner's share of (c)
distributions, (d) allocable share of Partnership losses, and (e)
expenditures of the Partnership not deductible in computing its
taxable income and not properly added to the tax basis of any
Partnership asset.  The foregoing provisions and the other
provisions of this Agreement relating to capital accounts are
intended to comply with applicable Treasury Regulations
promulgated under Section 704 of the Internal Revenue Code and
shall be interpreted and applied in a manner consistent with such
Regulations.  In the event the General Partner shall determine it
is advisable to modify the manner in which the capital accounts,
or any credits or debits thereto, are computed in order to comply
with such Regulations, the General Partner may make such
modifications, provided such modification is not likely to have a
material effect on the amounts distributed to any Partner
pursuant to Article 5 hereof upon dissolution of the Partnership.

        5.7     General Partner's Obligation to Make Up Negative
Capital Account

        If, immediately prior to the dissolution and termination of
the Partnership, the General Partner's capital account has a
deficit balance and the Partnership assets available for
distribution upon dissolution and termination are insufficient to
provide distributions to Limited Partners equal to their Invested
Capital, the General Partner shall be obligated to contribute to
the Partnership that amount of capital (if any) equal to the
lesser of (a) an amount sufficient to restore its capital account
to zero, or (b) 1.01% of the aggregate Capital Contributions of
the Limited Partners, less any capital previously contributed by
the General Partner.

        5.8     Limited Partners' Share of Allocations and
Distributions

        Except as otherwise provided in this Agreement, allocations
of income, gain, loss, deduction, credit, and distributions to
the Limited Partners as a group shall be further allocated and
distributed among the Limited Partners in proportion to the ratio
of the number of Units owned by the Limited Partner to the total
outstanding Units as of the relevant dates of determining such
allocations and distributions.  Units held by the General Partner
or its Affiliates will be treated similarly.

        Allocations of tax items shall be determined using an
interim closing of the books as of the date Limited Partners are
deemed admitted pursuant to such convention or other method as
the General Partner shall select for the Partnership.

        5.9     Allocation Between Assignor and Assignee

        The portion of the income, gain, loss, deductions and
credits of the Partnership for any fiscal year of the Partnership
during which a Unit is assigned by a Limited Partner (or by an
Assignee or successor in interest to a Limited Partner) that is
allocable in respect of such Unit shall be apportioned between
the assignor and the assignee of the Unit on the basis of the
number of days during such fiscal year that each is the owner
thereof, without regard to (a) the results of Partnership
operations before or after the effective date of the assignment,
or (b) any distributions made to the Partners before or after the
effective date of the assignment; provided, however, that (i)
gain or loss on the sale or other disposition of either or both
of the Properties shall be allocated to the owner of the Unit on
the date of such sale or other disposition, (ii) distributions of
Net Proceeds from Sale or Refinancing shall be made to the owner
of record of the Unit on the date of the sale or refinancing,
(iii) the General Partner may in its sole discretion modify the
foregoing allocation in any reasonable manner required or
permitted by the Internal Revenue Code or applicable regulations
or rulings thereunder.  The effective date of an assignment of a
Unit shall be as designated by the General Partner pursuant to
Section 11.3(b).

        5.10    Timing of Distributions

        Quarterly distributions, if any, will be made to holders of
record as of the last day of the respective quarter.
Distributions will be made without regard to the number of days
during the quarter that a person is a Limited Partner.

        5.11    Limitations on Distributions

        The Partnership may be restricted from making distributions
under the terms of notes, mortgages or other types of debt
obligations which it may issue or assume in conjunction with
borrowed funds, and notwithstanding the provisions of this
Article 5, distributions may also be restricted or suspended,
whenever the General Partner determines, in its absolute
discretion, that such action is in the best interests of the
Partnership.  All distributions are subject to the payment of
Partnership expenses and the maintenance of reasonable reserves.

        ARTICLE 6

        MANAGEMENT OF THE PARTNERSHIP

        6.1     Management Powers of the General Partner

        The Partnership shall be managed by the General Partner.
Subject only to the limitations specifically contained in this
Agreement, the General Partner shall have the full, exclusive and
absolute right, power and authority to manage and control the
Partnership and the property, assets and business thereof.  The
General Partner shall have all of the rights, powers and
authority conferred upon it by law or under other provisions of
this Agreement.  Without limiting the generality of the
foregoing, such powers include the right, in the General
Partner's sole discretion, on terms and conditions determined by
the General Partner, subject only to the provisions of Section
6.2. to:

                (a)     Acquire, purchase, renovate, improve, and own the
Properties and any other property or assets that the General
Partner determines are necessary or appropriate or in the best
interests of the business of the Partnership, and to acquire and
exercise options for the purchase of any such property;

                (b)     Construct buildings and make other improvements
on the real estate owned by the Partnership;

                (c)     Borrow money (including but not limited to sums
under the mortgage loans for the Properties and any Credit
Enhancement required in connection with the permanent financing),
issue evidences of indebtedness in connection therewith,
refinance, increase the amount of, modify, amend or change the
terms of, or extend the time for the payment of, any indebtedness
or obligation of the Partnership, secure such indebtedness by
mortgage, deed of trust, pledge or other lien on Partnership
assets, and prepay in whole or in part, refund, refinance,
increase, modify, consolidate, or extend the maturity of, any
indebtedness or obligation of the Partnership;

                (d)     Cause the Partnership and itself as General
Partner to offer and sell Units through the Principal Distributor
which shall engage the Broker/Dealers to assist in the sale of
Units;

                (e)     Pay all expenses, underwriting commissions and
the Distributor Fee incurred in connection with the sale of
Units;

                (f)     Sell, exchange, lease or otherwise dispose of the
real estate and other property and assets owned by the
Partnership, or any part thereof, or any interest therein;

                (g)     Enter into any partnership agreement or joint
venture with any person acceptable to the General Partner and
which is engaged in any business or transaction in which the
Partnership is authorized to engage in; provided, however, that
the Partnership shall have a controlling interest in such other
venture and duplicate property management or other fees shall not
be paid with respect to such venture.  The Partnership shall not
be permitted to invest in a joint venture arrangement with
another partnership formed by the General Partner or its
Affiliates unless (i) such other partnership has investment
objectives which are substantially identical with those of the
Partnership, (ii) the compensation of the sponsor of the other
partnership should be substantially identical with the
Partnership's compensation of the General Partner and its
Affiliates, (iii) the Partnership has a right of first refusal to
buy the property owned by the venture if the other partnership
desires to sell, and (iv) the investment of each partnership in
the venture is on substantially the same terms and conditions;

                (h)     Sue on, defend or compromise any and all claims
or liabilities in favor of or against the Partnership and to
submit any or all such claims or liabilities to arbitration
(including without limitation claims of the Partnership in
respect of unpaid Capital Contributions, or amounts which may be
required to be returned to the Partnership);

                (i)     File applications, communicate and otherwise deal
with any and all governmental agencies having jurisdiction over,
or in any way affecting, the Partnership's assets or any part
thereof or any other aspect of the Partnership business;

                (j)     Make or revoke any election permitted the
Partnership by any taxing authority;

                (k)     Maintain such insurance coverage for public
liability, fire and casualty, and any and all other insurance
necessary or appropriate to the business of the Partnership
(including without limitation errors and omission insurance,
subject to the limitations of Section 6.7(e), the policy for
which shall be considered the sole property of the General
Partner), in such amount and of such type, as it shall determine
from time to time;

                (l)     Determine whether or not to apply any insurance
proceeds for either Property to the restoration of such Property
or to distribute the same;

                (m)     Retain legal counsel, auditors and other
professionals in connection with the Partnership business and to
pay therefor such remuneration as the General Partner may deem
reasonable and proper;

                (n)     Retain other services of any kind or nature in
connection with the Partnership business and to pay therefor such
remuneration as the General Partner may deem reasonable and
proper;

                (o)     Employ persons in connection with the Partnership
business on such terms and for such compensation as the General
Partner may deem reasonable and proper, subject however to the
limitations set forth in Article 7 and provided that any
agreements for services with the General Partner or its
Affiliates shall be terminated immediately on the dissolution of
the Partnership;

                (p)     Negotiate and conclude agreements on behalf of
the Partnership with respect to any of the rights, powers and
authority conferred upon the General Partner;

                (q)     Purchase, lease, rent, or otherwise acquire or
obtain the use of machinery, equipment, tools, materials, and all
other kinds and types of real or personal property that may in
any way be deemed necessary, convenient, or advisable in
connection with carrying on the business of the Partnership;

                (r)     Guaranty the payment of money or the performance
of any contract or obligation by any person, firm, or corporation
on behalf of the Partnership;

                (s)     Alter, improve, repair, raze, refurbish, replace
and rebuild either or both Properties;

                (t)     Repurchase Units on behalf of the Partnership in
accordance with Section 11.7 if such purchase does not impair the
capital or operation of the Partnership;

                (u)     Act directly or through Affiliates, under non-
exclusive listings, as a real estate broker for the purchase and
sale of the Properties, and enter into listing agreements or
other agreements with third party brokers with regard to the
acquisition and disposition of Partnership assets;

                (v)     File tax returns on behalf of the Partnership and
elect such methods of cost recovery or make any other tax
elections or determinations as the General Partner shall deem
desirable;

                (w)     Enter into the transactions described in or
contemplated by the Prospectus;

                (x)     Amend this Agreement pursuant to the terms of any
Power of Attorney from Limited Partners or pursuant to the terms
of this Agreement;

                (y)     Require in any or all Partnership contracts that
the General Partner and its Affiliates shall not have any
personal liability thereon and that the person or entity
contracting with the Partnership is to look solely to the
Partnership assets for satisfaction, and to require the
satisfaction of contracts on which the General Partner and its
Affiliates have personal liability prior to contracts on which
they have no such personal liability;

                (z)     Execute, acknowledge, and deliver any and all
instruments, on behalf of the Partnership or otherwise, which it
shall deem necessary or appropriate to effectuate the rights,
authority and power of the General Partner, and to take all such
action in connection therewith as it shall in its discretion deem
necessary or appropriate;

                (aa)    Hold each of the Properties in its own name or in
the name of an Affiliate thereof (and assume loans in connection
therewith) and temporarily hold title thereto for the purpose of
facilitating the development of the Properties, the borrowing of
money or the obtaining of financing by the Partnership, or for
any other purpose related to the business of the Partnership;
provided that each of the Properties is purchased by the
Partnership for a purchase price no greater than the cost of such
Property to the General Partner; and provided further that there
is no difference in the interest rates of the loans secured by
the Properties at the time acquired by the General Partner and
the time acquired by the Partnership nor any other benefit
arising out of the transaction to the General Partner.

                (bb)    Make or arrange long-term and short-term loans,
including loans from its Affiliates, to the Partnership, receive
interest or other financing charges or fees, provided that the
interest charges or fees are not in excess of amounts charged by
third party financing institutions on comparable loans for the
same purpose or, if the funds for a loan are obtained by the
General Partner or one of its Affiliates from a lending
institution, the rate and other fees which the General Partner or
its Affiliates is required to pay the lending institution;

                (cc)    Execute, deliver and perform under the mortgage
loans, the Credit Enhancement, and related documents; and

                (dd)    Perform any and all other acts the General
Partner deems necessary or appropriate to the Partnership
business.

        6.2     Restrictions on General Partner

        The General Partner, without the approval of a Majority Vote
of Limited Partners or such other vote as may be specified, shall
have no authority to:

                (a)     Do any act in contravention of this Agreement;

                (b)     Confess a judgment against the Partnership;

                (c)     Possess Partnership property or assign rights to
Partnership property, for other than a Partnership purpose;

                (d)     Perform any act (other than an act required by
this Agreement or any act performed in good faith reliance upon
counsel's opinion) which would, at the time such act occurs,
subject any Limited Partner to liability as a general partner in
any jurisdiction; provided, however, that no such act shall be
performed without first obtaining the approval of any Limited
Partner who may be subjected to general partner liability as a
result of the act;

                (e)     Use Distributable Cash from Operations or Net
Proceeds from Sale or Refinancing to acquire real property;

                (f)     Commingle, or cause the Partnership to commingle,
Partnership funds with those of any other person or entity except
the funds of other limited partnerships sponsored by the General
Partner or its Affiliates held in an account or accounts
established and maintained for the purpose of making
disbursements to (i) Partners and creditors of the Partnership
and to the holders of Units and (ii) partners and creditors of
such other limited partnership; provided, however, that any such
accounts shall be structured and maintained in such a manner that
Partnership funds are protected from claims of such other
partnerships and their creditors;

                (g)     Cause the Partnership to purchase, sell, assign
or lease either or both of the Properties, including a purchase
from or a sale or lease to the General Partner or its Affiliates,
except for the assignment of the Properties by Affiliates of the
General Partner to the Partnership and the leasing of the rental
units of the Properties as set forth in the Prospectus;

                (h)     Directly or indirectly pay or award any finder's
fees, commissions, or other compensation to any person engaged by
a potential investor for investment advice as an inducement to
such advisor to advise the purchaser regarding the purchase of
Units; provided, however, that the General Partner shall not be
prohibited from paying underwriting commissions, the Distributor
Fee, other normal commissions, sales incentives, or from
reimbursing accountable expenses incurred in connection with the
offering in accordance with Section 7.1, in an aggregate amount
of up to 10% of the Gross Offering Proceeds (plus up to .5% of
the Gross Offering Proceeds for due diligence expenses) payable
to the Principal Distributor, which may reallow some or all of
the underwriting commissions, Distributor Fee and due diligence
expenses to the Broker/Dealers;

                (i)     Cause the Partnership to enter into any agreement
with the General Partner or its Affiliates unless that agreement
is subject to termination without penalty by the Partnership upon
notice of sixty (60) days or less;

                (j)     Receive a rebate or participate in any reciprocal
business arrangements which would enable it to do so;

                (k)     Cause the Partnership to exchange Units for
property;

                (l)     Cause the Partnership to loan money to the
General Partner or its Affiliates;

                (m)     Cause the Partnership to invest in a limited
partnership interest of another partnership;

                (n)     Cause the Partnership to enter into any loans
secured by either or both of the Properties if the outstanding
principal and accrued and unpaid interest under the Partnership's
secured loans, including the principal under the contemplated
loan, would exceed 80% of the then current value of its
Properties; or

                (o)     Provide or cause its Affiliates to provide
insurance brokerage services to the Partnership.

        6.3     Limited Partners Have No Management Powers

        The Limited Partners shall have no voice or participation in
the management of the Partnership business, and no power to bind
the Partnership or to act on behalf of the Partnership in any
manner whatsoever, except by specifically authorized voting
rights contained in this Agreement.

        6.4     General Partner's Duty to Devote Time

        The General Partner shall devote such time and attention to
the business of the Partnership as it shall determine, in the
exercise of its reasonable judgment, to be necessary for the
conduct of the Partnership business; provided, however, that the
General Partner shall not be required to devote full time and
attention to the Partnership or to its business.

        6.5     General Partner May Engage in Other Activities

        The General Partner and its officers, directors,
shareholders, agents, employees and Affiliates shall have the
right to engage in any other business (including, but not limited
to, acting as a partner in other partnerships formed for the
purpose of investing in real estate) and to compete, directly or
indirectly, with the business of the Partnership, and neither the
Partnership nor any Partners shall have any rights or claims as a
result of such activities.  Furthermore, the General Partner
shall not be obligated to share any business opportunities with
the Partnership or with the Limited Partners.  The Partners
hereby waive any and all rights and claims which they may
otherwise have against the General Partner and its officers,
directors, shareholders, agents, employees and Affiliates as a
result of any such activities.

        6.6     Dealing with the Partnership

        Except as limited by Section 6.2, the General Partner and
any Affiliates shall have the right to contract or otherwise deal
with the Partnership for the sale or lease of property, the
rendition of services and other purposes, and to receive payments
and fees from the Partnership in connection therewith as the
General Partner shall determine, provided that such payments or
fees for services, other than those specifically covered in
Article 7, shall be equal to the lesser of (i) the cost to the
General Partner and its Affiliates for providing such services,
or (ii) 90% of the competitive price which would be charged by
independent parties providing similar services in the same or a
comparable geographic location, and provided that such agreements
are terminable upon no more than 60 days' notice.

        6.7     Liability and Indemnity

                (a)     General.  The Partnership, its receiver or its
trustee, shall indemnify the General Partner and its Affiliates
against and save them harmless from any loss, (including, but not
limited to, attorneys' fees and court costs), suffered by the
Partnership which arises out of any action or inaction of the
General Partner or its Affiliates, if the General Partner or its
Affiliates have determined, in good faith, that such course of
conduct was in the best interest of the Partnership and that such
course of conduct did not constitute negligence or misconduct of
the General Partner or its Affiliates.  The General Partner and
its Affiliates shall be indemnified by the Partnership against
any losses, judgments, liabilities, expenses and amounts paid in
settlement of any claims sustained by them in connection with the
Partnership, provided that the same were not the result of
negligence or misconduct on the part of the General Partner or
its Affiliates.

                (b)     Partnership Assets Must First Be Used.  All
judgments against the Partnership and the General Partner or
Affiliates wherein the General Partner or such other persons are
entitled to indemnification, must first be satisfied from
Partnership assets before the General Partner or such other
persons are responsible for these obligations.

                (c)     No Presumption.  The termination of any action,
suit or proceeding by judgment or settlement shall not, of
itself, create a presumption that the General Partner or its
Affiliates are not entitled to indemnification or are not
entitled to the protection afforded by this Section 6.7.

                (d)     Securities Laws.  Notwithstanding Section 6.7(a),
the General Partner and its Affiliates and any person acting as a
Broker/Dealer shall not be indemnified for any losses,
liabilities or expenses arising from or out of an alleged
violation of federal or state securities laws unless (i) there
has been a successful adjudication on the merits of each count
involving alleged securities law violations as to the particular
indemnitee, or (ii) such claims have been dismissed with
prejudice on the merits by a court of competent jurisdiction as
to the particular indemnitee, or (iii) a court of competent
jurisdiction approved a settlement of the claims against a
particular indemnitee.  In any claim for indemnification of
federal or state securities law violations, the party seeking
indemnification shall place before the court the position of the
Securities and Exchange Commission and the Massachusetts state
securities commission with respect to the issue of
indemnification for securities law violations.

                (e)     Insurance.  The Partnership shall not incur the
cost of that portion of any insurance other than public liability
insurance, which insures any party against any liability for
which indemnification is prohibited under this Section 6.7.

                (f)     Advances from Partnership.  The advance of
Partnership funds to the General Partner or its Affiliates for
legal expenses and other costs incurred as a result of a legal
action is permissible only if (i) the legal action relates to the
performance of duties or services by the General Partner or its
Affiliates, (ii) the legal action is initiated by a third party
who is not a Limited Partner, and (iii) the General Partner and
its Affiliates undertake to repay the advanced funds to the
Partnership in cases in which they would not be entitled to
indemnification.

        6.8     Reserves

        The Partnership shall maintain reasonable reserves for
normal repairs, replacements, working capital, and contingencies
in an initial amount to be determined by the General Partner,
which may be increased or decreased from time to time as
determined by the General Partner.

        6.9     Fiduciary Duty of the General Partner

        The General Partner shall have fiduciary responsibility for
the safekeeping and use of all funds and assets of the
Partnership, whether or not in its possession or control, and it
shall not employ, or permit another to employ, such funds or
assets in any manner except for the benefit of the Partnership.

        6.10    Loan Commitment Guaranty

        The General Partner shall lend or arrange to lend to the
Partnership as provided in the Loan Commitment Guaranty Agreement
the amount of any Operating Deficit for any calendar quarter for
the period beginning January 1, 1987 through December 31, 1991.
Such a loan shall be made within 15 days after the Operating
Deficit for the quarter is determined, and shall bear interest at
the rate then charged to the Partnership by its principal lender
and shall be repaid when funds are available to the Partnership.

        6.11    Completion Guaranty

        The General Partner guaranties pursuant to the Completion
Guaranty Agreement that the Properties will be completed free and
clear of all financing and construction liens (except any liens
secured by deeds of trust described in the Prospectus) at a total
cost to the Partnership not to exceed approximately $28,807,000,
including the purchase price of the Properties, but excluding
negative cash flow associated with lease-up expenses and the
first year of operations.  This guaranty shall survive the
admission of Limited Partners to the Partnership.  The General
Partner does not warrant compliance with the conditions or
standards of the construction agreements with respect to the
Properties.

        ARTICLE 7

        COMPENSATION AND REIMBURSEMENT OF
        EXPENSES TO THE GENERAL PARTNER
        AND ITS AFFILIATES

        The General Partner and its Affiliates shall be entitled to
receive as a cost of the Partnership each and all of the
following amounts as fees, compensation, and reimbursement in
addition to their rights to reimbursement of ongoing expenses as
set forth in Article 14.

        7.1     Reimbursement of Expenses

                (a)     Organization and Offering Expenses.  To the
extent that Organization and Offering Expenses and services were
paid or furnished by the General Partner or its Affiliates rather
than from Partnership funds, the General Partner or its
Affiliates shall receive a reimbursement for all such expenses
and services.  The Partnership shall not be required to pay or
reimburse the General Partner or any Affiliate of the General
Partner for Organization and Offering Expenses which exceed
fifteen percent (15%) of the Gross Offering Proceeds as of the
Completion Date.

                (b)     Other Expenses.  The Partnership shall reimburse
the General Partner or its Affiliates for the actual cost to the
General Partner or its Affiliates (or pay directly the actual
cost) of goods and materials used for or by the Partnership and
obtained from entities unaffiliated with the General Partner.
The Partnership shall also pay or reimburse the General Partner
or its Affiliates for expenses incurred in connection with the
provision of administrative services necessary to the prudent
operation of the Partnership, provided that such reimbursement
shall be at the lower of (i) actual cost to the General Partner
or its Affiliates, or (ii) 90% of the competitive price which
would be charged by independent parties for comparable
administrative services in the same geographical location.

                (c)     Nonreimbursable Expenses.  The General Partner
will pay and will not be reimbursed by the Partnership for the
following expenses: (i) salaries, fringe benefits, travel
expenses and other administrative items of individuals who are
Control Persons of the General Partner or its Affiliates, (ii)
those overhead expenses of the General Partner or its Affiliates
which include their rent, depreciation, utilities and capital
equipment, (iii) Organization and Offering Expenses in excess of
15% of Gross Offering Proceeds, (iv) expenses related to the
performance of those services for which the General Partner or
its Affiliates are entitled to compensation by way of the
Property Management Fee, Initial Partnership Management Fee,
Completion Guaranty Fee or Subordinated Property Disposition
Interest and (v) all other expenses which are unrelated to the
business of the Partnership.

        7.2     Reimbursement for Sums Advanced to the Partnership

        To the extent that the General Partner or its Affiliates
have advanced or will advance funds to the Partnership, the
General Partner or its Affiliates shall be reimbursed for such
funds.

        7.3     Initial Partnership Management Fee

        In consideration for organizing the Partnership, arranging
for and negotiating construction financing, arranging for and
negotiating permanent financing, obtaining (in connection with
the permanent financing) a Credit Enhancement satisfactory to the
lender of the permanent financing, selecting and supervising
professionals to perform services for the Partnership,
establishing Partnership accounts, including an escrow account
for use in connection with the offering of Units, and
establishing a reporting system for submitting tax information
and periodic reports to the Limited Partners and regulatory
authorities, the General Partner shall receive an Initial
Partnership Management Fee of $291,000, which shall be payable
proportionately from Capital Contributions and any remaining
balance due on the Completion Date.

        7.4     Completion Guaranty Fee

        The General Partner shall receive a Completion Guaranty Fee,
in consideration for the Completion Guaranty, in the amount of
$600,000 payable proportionately from Capital Contributions and
any remaining balance due on the Completion Date; provided,
however, that in no event shall such fee exceed 90% of the
competitive price which would be charged by a non-Affiliate for
rendering similar services in the same or a comparable geographic
location.

        7.5     Property Management Fee; Initial Lease-Up Fee

                (a)     The General Partner shall act as the property
manager and shall receive a Property Management Fee equal to five
percent (5%) of the Effective Gross Collections in managing the
Properties including acting as a liaison with tenants and
monitoring and supervising the following services: (i) collection
of rentals, (ii) payment of all mortgages, (iii) obtaining and
maintaining appropriate insurance for the Properties, (iv)
leasing activities, (v) property inspection and maintenance, (vi)
accounting, services, (vii) legal services, (viii) tax
calculations and payments, (ix) bookkeeping services and (x)
similar ordinary management services necessary for the orderly
management of the Properties.  However, during the Lease-Up
Period of the Properties, the Property Management Fee shall equal
the greater of (A) five percent (5%) of the Effective Gross
Collections or (B) one-half (1/2) of five percent (5%) of the
Effective Gross Collections assuming the Properties were leased
at their market rates.  Additional sums shall also be payable to
the General Partner for performing certain extraordinary
services, including without limitation data processing services,
payroll services and collections with respect to the Properties.

                (b)     In addition, the General Partner shall receive,
to the extent that the manager performs services outside the
normal and customary services provided by independent third party
property managers, reimbursement for direct salary expenses of
employees performing such services.  The provision of such
services does not constitute part of the duties or obligations of
the General Partner in its capacity as General Partner of the
Partnership.

                (c)     The Property Management Fee shall be paid monthly
to the General Partner, or any unaffiliated property management
firm which the General Partner in its sole discretion may select.
To the extent that the Partnership has insufficient cash to pay
the Property Management Fee in any amount, the fee shall be
accrued and paid as soon as the Partnership has sufficient cash
available.

                (d)     The Property Manager shall also receive a one-
time Initial Lease-Up Fee of $106,000 for extraordinary services
provided during the lease-up of the Properties, including but not
limited to establishing a marketing plan, maintaining on-site
personnel, showing units and interviewing and evaluating
prospective tenants.  The Initial Lease-Up Fee shall be paid
monthly from rental revenues, prorated over the period commencing
with the completion of the Properties and continuing until the
Properties are 95% occupied.  In no event shall the Initial
Lease-Up Fee exceed 90% of the competitive price which would be
charged by a non-Affiliate for rendering similar services in the
same or a comparable geographic location.

        7.6     Share of Distributable Cash from Operations

        The General Partner shall receive its share of Distributable
Cash from Operations as set forth in Sections   5.1 and 5.3.

        7.7     Subordinated Property Disposition Interest

        For brokerage services in connection with the sale of a
Property, the Partnership shall pay the General Partner a
Subordinated Property Disposition Interest.  The Subordinated
Property Disposition Interest shall equal the lesser of: (i) a
percentage of the gross sales price of a Property equal to
onehalf of the percentage rate customarily charged for similar
services by unaffiliated parties that render the same services as
an ongoing public activity in the same geographic location for
comparable property, or (ii) three percent (3%) of the gross
sales price of a Property.  The Subordinated Property Disposition
Interest shall be payable upon the close of escrow of the sale of
each Property; provided, however, that payment shall be
subordinated as provided in Section 7.8(a).  Notwithstanding the
foregoing to the contrary, the aggregate commissions paid to all
persons for the sale of the Properties, whether or not they are
Affiliates of the General Partner, shall not exceed six percent
(6%) of the selling price of each Property, but otherwise there
is no limitation on or subordination of real estate commissions
paid to non-Affiliates.  Any Subordinated Property Disposition
Interest not paid to the General Partner due to a lack of
available cash shall be a liability of the Partnership and shall
be paid when cash becomes available.

        7.8     Fees and Share Upon Sale or Refinancing

        The General Partner shall receive the following items of
distribution and compensation:

                (a)     Upon the sale of a Property, the Subordinated
Property Disposition Interest will be subordinated to   the return
to the Limited Partners of the portion of their Invested Capital
attributable to the Property sold plus a 10% Priority Return and,
as appropriate, the Incentive Priority Return on the average
daily balance of Invested Capital attributable to the Property
sold.  A Limited Partner's portion of Invested Capital
attributable to the Property sold will be calculated by
multiplying his Invested Capital by a fraction, the numerator of
which shall equal the cost of the Property sold and the
denominator of which shall equal the cost of both of the
Properties; provided, however, that the Subordinated Property
Disposition Interest shall not be paid to the General Partner
until the Limited Partners have received at least a 6% cumulative
simple return on their total Invested Capital.

                (b)     Upon a sale or a refinancing of a Property, its
share of Net Proceeds from Sale or Refinancing as set forth in
Section 5.4.

        7.9     Loans by the General Partner to the Partnership

        The General Partner or its Affiliates may, but are not
obligated to (except as set forth in Section 6.10), loan or
advance funds to the Partnership, and receive interest or other
financing charges or fees, provided that the interest charges or
fees are not in excess of amounts charged by third party
financing institutions on comparable loans for the same purpose
or, if the funds for a loan are obtained by the General Partner
from a lending institution, the rate and other fees which the
General Partner is required to pay to the lending institution.
In no event shall the General Partner or its Affiliates charge
the Partnership a prepayment charge or penalty in connection with
any loans or advances to the Partnership from the General Partner
or its Affiliates.

        7.10    Fees Payable on Cessation as the General Partner

        If the General Partner ceases to be the General Partner
pursuant to Section 12.1, any fee, commission, or reimbursement
of expenses payable according to the provisions of this Agreement
which is then accrued, but not yet paid, shall be paid by the
Partnership to the General Partner or, if appropriate, an
Affiliate thereof, in cash, within 30 days of the date the
General Partner ceases to be the General Partner.

        ARTICLE 8

        BOOKS, RECORDS, ACCOUNTS AND REPORTS

        8.1     Books and Records

                (a)     The Partnership shall continuously maintain an
office in the State of California, at which the following books
and records shall be kept:

                        (1)     A current list of the full name and last
known business or residence address of each Partner set forth in
alphabetical order together with the contribution and the share
in profits and losses of each Partner;

                        (2)     A copy of the Certificate of Limited
Partnership and all certificates of amendments thereto, together
with executed copies of any powers of attorney pursuant to which
any such certificate has been executed;

                        (3)     Copies of the Partnership's federal, state,
and local income tax or information returns and reports, if any,
for the six most recent taxable years;

                        (4)     Copies of this Agreement and all amendments
thereto;

                        (5)     Financial statements of the Partnership for
the six most recent fiscal years;

                        (6)     The Partnership's books and records for at
least the current and past three fiscal years; and

                        (7)     Copies of each appraisal of the Properties.

                (b)     The Partnership shall also maintain at its
principal office such additional books and records as are
necessary for the operation of the Partnership.

        8.2     Limited Partners' Rights Regarding Books, Records and
Tax Information

                (a)     Upon the request of a Limited Partner, the
General Partner shall promptly deliver to the Limited Partner, at
the expense of the Partnership, a copy of the items set forth in
Sections 8.1(a)(1), (2), and (4).

                (b)     Each Limited Partner or any person designated by
a Limited Partner to act on his behalf has the right upon
reasonable request:

                        (1)     To inspect and copy during normal business
hours, at the Limited Partner's expense, any of the Partnership's
records required to be kept of the Partnership; and

                        (2)     To obtain from the General Partner promptly
after becoming available, at the Limited Partner's expense, a
copy of the Partnership's federal, state and local income tax or
information returns for each year.

                (b)     The General Partner shall promptly furnish to a
Limited Partner a copy of any amendment to this Agreement
executed by the General Partner pursuant to a power of attorney
from the Limited Partner.

                (c)     The General Partner shall send to each Partner
within 75 days after the end of each taxable year such
information as is necessary to complete federal and state income
tax or information returns.

        8.3     Accounting Basis and Fiscal Year

        The Partnership's books and records (a) shall be kept on a
basis chosen by the General Partner in accordance with the
accounting methods followed by the Partnership for federal income
tax purposes, (b) shall reflect all Partnership transactions, (c)
shall be appropriate and adequate for the Partnership's business
and for the carrying out of all provisions of this Agreement, and
(d) shall be closed and balanced the end of each Partnership
fiscal year.  The fiscal year of the Partnership shall be the
calendar year, unless otherwise determined by the General
Partner.

        8.4     Reports

                (a)     Annual Statements.  The General Partner shall
have prepared at least annually, at Partnership expense:  (i)
annual financial statements including a balance sheet, statement
of income or loss, statement of partners' equity, statement of
changes in financial position and a cash flow statement, all of
which, except the cash flow statement, shall be prepared in
accordance with generally accepted accounting principles and
accompanied by an auditor's report containing an opinion of an
independent certified public accountant; (ii) Partnership
information necessary in the preparation of the Limited Partners'
federal and state income tax returns; (iii) a report of the
activities of the Partnership during the period covered by the
report; (iv) a statement as to the reimbursements received during
the year by the General Partner and its Affiliates from the
Partnership, including a verification of the allocation of the
costs to the Partnership by independent certified public
accountants; (v) a tabular comparison of the results from
operations with the Financial Forecast; and (vi) a report
identifying distributions from (A) Distributable Cash from
Operations of that year, (B) Distributable Cash from Operations
of prior years, and (C) Net Proceeds from Sale or Refinancing and
other sources.  Copies of the financial statements and reports
shall be distributed to each Limited Partner within 120 days
after the close of each taxable year of the Partnership;
provided, however, that all Partnership information necessary in
the preparation of the Limited Partners' federal income tax
returns shall be distributed to each Limited Partner not later
than 75 days after the close of each fiscal year of the
Partnership.

                (b)     Quarterly Reports.  The General Partner shall
cause to be prepared quarterly, at Partnership expense, a report
containing: (i) a statement of the compensation received by the
General Partner and its Affiliates during the quarter from the
Partnership, which statement shall set forth the services
rendered by the General Partner and its Affiliates and the amount
of fees received; (ii) a balance sheet which may be unaudited;
(iii) a statement of income for the quarter then ended, which may
be unaudited; (iv) a cash flow statement for the quarter then
ended, which may be unaudited; and (v) other relevant
information.  Copies of the statements shall be distributed to
each Limited Partner within 60 days after the end of each
quarterly period.  The information required by Form 10-Q (if
required to be filed with the Securities and Exchange Commission)
will be supplied to each Limited Partner within 45 days after the
end of each quarterly period.

                (c)     Unaudited Financial Statements.  Until the
Partnership is registered under Section 12(g) of the Securities
Exchange Act of 1934, as amended, the General Partner shall cause
to be prepared, at Partnership expense, a semi-annual report
covering the first six months of Partnership operations in each
calendar year, and semi-annually thereafter, unaudited financial
statements (consisting of a balance sheet, a statement of income
or loss for the first six-month period and a statement of cash
flow for the first six-month period) and a statement of other
pertinent information regarding the Partnership and its
activities during the six-month period covered by the report.
Copies of the statements and other pertinent information shall be
distributed to each Limited Partner within 60 days after the
close of the six-month period covered by the report of the
Partnership.  If the Partnership has more than 35 Limited
Partners, Limited Partners representing at least five percent
(5%) of the Units may make a written request to the General
Partner for an income statement of the Partnership for the
initial three-month, six-month, or nine-month period of the
current fiscal year ended more than 30 days prior to the date of
the request and a balance sheet of the Partnership as of the end
of that period.  The statement shall be delivered or mailed to
the Limited Partners making the request within 30 days
thereafter.  Copies of the financial statements, if any, filed
with the Securities and Exchange Commission shall be distributed
to each Limited Partner within 60 days after the close of the
quarterly period covered by the report of the Partnership.

                (d)     General Partner's Certificate.  The financial
statements referred to in this Section 8.4 which are unaudited
shall be accompanied by a certificate of the General Partner that
such financial statements were prepared without audit from the
books and records of the Partnership.

        8.5     Tax Returns

        The General Partner, at Partnership expense, shall cause to
be prepared income tax returns for the Partnership and shall
further cause such returns to be timely filed with the
appropriate authorities.

        8.6     Filings with Regulatory Agencies

        The General Partner, at Partnership expense, shall cause to
be prepared and timely filed with appropriate federal and state
regulatory and administrative bodies, all reports required to be
filed with such entities under then current applicable laws,
rules and regulations.  Any Limited Partner shall be provided
with a copy of any such report upon request at such Limited
Partner's expense.

        8.7     Tax Matters Partner

        The General Partner is hereby designated as the "tax matters
partner" of the Partnership in accordance with Section 6231(a)(7)
of the Internal Revenue Code and is authorized, at the
Partnership's sole cost and expense, to represent the Partnership
and each Limited Partner in connection with all examinations of
the Partnership affairs by tax authorities, including resulting
administrative and judicial proceedings, and to expend
Partnership funds for professional services and costs connected
therewith.  Each Limited Partner agrees to cooperate with the
General Partner and to do or refrain from doing any and all
things reasonably required by the General Partner to conduct such
proceeding.  The General Partner shall have the right to settle
any audits without the consent of the other Partners and to take
any and all other actions on behalf of the Partners or the
Partnership in connection with any tax audit or judicial review
proceeding to the extent permitted by applicable law and
regulations.

        ARTICLE 9

        CERTAIN MATTERS AND VOTING RIGHTS AFFECTING LIMITED PARTNERS

        9.1     Limitations

        No Limited Partner shall (a) have the authority or power in
his capacity as a Limited Partner to act as agent for or on
behalf of the Partnership or any other Partner, to do any act
which would be binding on the Partnership or any other Partner,
or to incur any expenditures on behalf of or with respect to the
Partnership, (b) have any of his obligations to make
contributions or to return distributions compromised except upon
approval of the General Partner, or as otherwise required by
Section 15666 of the Act, (c) have any right to demand or receive
property other than money upon distribution from the Partnership,
or (d) be compelled to accept a distribution of any asset in kind
from the Partnership in lieu of a proportionate distribution of
money being made to other Partners.

        9.2     Liability of Limited Partners

        The liability of each Limited Partner (in the capacity as a
Limited Partner) for the losses, debts and obligations of the
Partnership shall be limited to the Limited Partner's Capital
Contribution, and the Limited Partner's share of any
undistributed assets of the Partnership; provided, however, that
under applicable partnership law, a Limited Partner may, under
certain circumstances, be required to return to the Partnership
amounts previously distributed to such Limited Partner for the
benefit of Partnership creditors, with interest.  Any such
obligation to return distributions and pay interest shall be the
sole obligation of the Limited Partners and not of the General
Partner.

        9.3     Voting Rights

                (a)     Limited Partners shall have the right, by
Majority Vote to take the following actions:

                        (1)     Amend this Agreement, subject to the
conditions contained in Article 15 hereof;

                        (2)     Dissolve and wind up the Partnership;

                        (3)     Remove the General Partner;

                        (4)     Approve or disapprove the sale of either or
both of the Properties, except in the orderly liquidation and
winding up of the Partnership upon its dissolution;

                        (5)     Admit a general partner or elect to
continue the business of the Partnership after the removal of the
General Partner where there is no remaining general partner; and

                        (6)     Elect to continue the business of the
Partnership as set forth in Section 13.2(b).

                (b)     The unanimous approval of all the Limited
Partners shall be required for the admission of a general partner
or the election to continue the business of the Partnership after
the general partner ceases to be a general partner (other than by
removal) where there is no remaining general partner.

                (c)     Notwithstanding any provision contained in the
Act to the contrary, the Limited Partners shall have no voting
rights other than as expressly set forth in this Agreement.

        ARTICLE 10

        MEETINGS

        10.1    Place of Meetings

        Meetings of the Partners may be held at any place within or
outside of California, at a time and place convenient to the
Limited Partners, as determined by the General Partner.

        10.2    Calling of Meetings

        A meeting of the Partners may be called by the General
Partner or by Limited Partners holding more than ten percent
(10%) of the outstanding Units for any matters on which the
Limited Partners may vote.

        10.3    Notices

                (a)     Whenever Partners are required or permitted to
take any action at a meeting, a written notice of the meeting
shall be given not less than 15, nor more than 60 days before the
date of the meeting to each Partner entitled to vote at the
meeting.  The notice shall state the place, date, and hour of the
meeting and the general nature of the business to be transacted,
and no other business may be transacted.

                (b)     Notice of a Partners' meeting or any report shall
be given either personally or by mail or other means of written
communication, addressed to the Partner at the address of the
Partner appearing on the books of the Partnership or given by the
Partner to the Partnership for the purpose of notice, or, if no
address appears or is given, at the place where the principal
executive office of the Partnership is located or by publication
at least once in a newspaper of general circulation in the county
in which the principal executive office is located.  The notice
or report shall be deemed to have been given at the time when
delivered personally or deposited in the mail or sent by other
means of written communication.  An affidavit of mailing of any
notice or report in accordance with the provisions of this
Article, executed by the General Partner, shall be prima facie
evidence of the giving of the notice or report.

        If any notice or report addressed to the Partner at the
address of the Partner appearing on the books of the Partnership
is returned to the Partnership by the United States Postal
Service marked to indicate that the United States Postal Service
is unable to deliver the notice or report to the Partner at the
address, all future notices or reports shall be deemed to have
been duly given without further mailing if they are available for
the Partner at the principal executive office of the Partnership
for a period of one year from the date of the giving of the
notice or report to all other Partners.

                (c)     Upon written request to the General Partner by
any person entitled to call a meeting of Partners, the General
Partner shall provide, within 10 days from the date the request
is received, the Partners entitled to vote with a notice of the
meeting specifying that the meeting will be held at the time
requested by the person calling the meeting, not less than 15 nor
more than 60 days after the receipt of the request.

        10.4    Adjournment

        When a Partners' meeting is adjourned to another time or
place, notice need not be given of the adjourned meeting if the
time and place thereof are, announced at the meeting at which the
adjournment is taken.  At the adjourned meeting the Partnership
may transact any business which might have been transacted at the
original meeting.  If the adjournment is for more than 45 days or
if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be
given to each Partner of record entitled to vote at the meeting
in accordance with this Article 10.

        10.5    Waiver of Notice and Consent to Meeting

        The transactions of any meeting of Partners, however called
and noticed, and wherever held, are as valid as though had at a
meeting duly held after regular call and notice, if a quorum is
present either in person or by proxy, and if, either before or
after the meeting, each of the Persons entitled to vote, not
present in person or by proxy, signs a written waiver of notice
or a consent to the holding of the meeting or an approval of the
minutes thereof.  All waivers, consents, and approvals shall be
filed with the Partnership records or made a part of the minutes
of the meeting.  Attendance of a person at a meeting shall
constitute a waiver of notice of the meeting, except when the
person objects, at the beginning of the meeting to the
transaction of any business because the meeting is not lawfully
called or convened and except that attendance at a meeting is not
a waiver of any right to object to the consideration of matters
required to be included in the notice of the meeting but not so
included, if the objection is expressly made at the meeting.
Neither the business to be transacted at nor the purpose of any
meeting of Partners need be specified in any written waiver of
notice, except as provided in Section 10.6.

        10.6    Validity of Vote for Certain Matters

        Any Partner approval at a meeting, other than unanimous
approval by those entitled to vote, pursuant to Section 9.3
hereof, shall be valid only if the general nature of the proposal
so approved was stated in the notice of meeting or in any written
waiver of notice.

        10.7    Quorum

                (a)     A majority of the Units held by Limited Partners
represented in person or by proxy shall constitute a quorum at a
meeting of Partners.

                (b)     The Partners present at a duly called or held
meeting at which a quorum is present may continue to transact
business until adjournment notwithstanding the withdrawal of
enough Partners to leave less than a quorum, if any action taken
(other than adjournment) is approved by the requisite vote
necessary under Section 9.3.

                (c)     In the absence of a quorum, any meeting of
Partners may be adjourned from time to time by the vote of a
majority of the outstanding Units held by Limited Partners
represented either in person or by proxy, but no other business
may be transacted, except as provided in Section 10.7(b).

        10.8    Action Without a Meeting

        Any action which may be taken at any meeting of the Partners
may be taken without a meeting if a consent in writing, setting
forth the action so taken, shall be signed by Partners having not
less than the minimum number of votes that would be necessary to
authorize or take that action at a meeting at which all entitled
to vote thereon were present and voted.  In the event the Limited
Partners are requested to consent on a matter without a meeting,
each Partner shall be given notice of the matter to be voted upon
in the same manner as described in Section 10.3. In the event the
General Partner, or Limited Partners representing more than ten
percent (10%) of the Units, request a meeting for the purpose of
discussing or voting on the matter, the notice of a meeting shall
be given in accordance with Section 10.3 and no action shall be
taken until the meeting is held.  Unless delayed in accordance
with the provisions of the preceding sentence, any action taken
without a meeting shall be effective 15 days after the required
minimum number of voters have signed the consent, however, the
action will be effective immediately if the General Partner and
Limited Partners holding at least ninety percent (90%) of the
outstanding Units have signed the consent.

        10.9    Use of Proxies

        The use of proxies in connection with this Article 10 will
be governed in the same manner as in the case of corporations
formed under the California General Corporation Law.

        10.10  Record Date

        In order that the Partnership may determine the Partners of
record entitled to notices of meeting or to vote, or entitled to
receive any distribution or to exercise any rights in respect of
any other lawful action, the General Partner, or Limited Partners
holding more than ten percent (10%) of the outstanding Units, may
fix, in advance, a record date, which is not more than 60 nor
less than 15 days prior to the date of the meeting and not more
than 60 days prior to any other action.  If no record date is
fixed:

                (a)     The record date for determining Partners entitled
to notice of or to vote at a meeting of Partners shall be at the
close of business on the business day next preceding the day on
which notice is given or, if notice is waived, at the close of
business on the business day next preceding the day on which the
meeting is held.

                (b)     The record date for determining Partners entitled
to give consent to Partnership action in writing without a
meeting shall be the day on which the first written consent is
given.

                (c)     The record date for determining Partners for any
other purpose shall be at the close of business on the day on
which the General Partner adopts it, or the 60th day prior to the
date of the other action, whichever is later.

                (d)     The determination of Partners of record entitled
to notice of or to vote at a meeting of Partners shall apply to
any adjournment of the meeting unless the General Partner, or the
Limited Partners who called the meeting, fix a new record date
for the adjourned meeting, but the General Partner, or the
Limited Partners who called the meeting, shall fix a new record
date if the meeting is adjourned for more than 45 days from the
date set for the original meeting.

        ARTICLE 11

        ASSIGNMENT OF INTERESTS;
        SUBSTITUTED LIMITED PARTNERS; LIMITED LIQUIDITY PLAN

        11.1    Sale, Transfer, or Assignment of Interest of the
General Partner

        The General Partner may not sell or transfer all or any Part
of its general partnership interest (not including any Units it
holds) in the Partnership except in connection with the merger,
consolidation, or reorganization of the General Partner into
another entity or the transfer of ownership of the ownership
interest in the General Partner or the assumption of the rights
and duties of the General Partner or by another entity in
connection with any such transaction or as set forth in Article
7.  The General Partner may also hold Units, the sale or transfer
of which is subject to Section 11.2.  Notwithstanding the
foregoing, the General Partner may assign any part of its
interest in subordinated distributions under Section 5.4(c) to
any person or entity.

        11.2    Assignment of Units

        A Limited Partner may not sell, transfer, assign, pledge, or
otherwise dispose of any or a part of his Units (whether
voluntarily or by operation of law) (hereinafter collectively
referred to as an "assignment"), except as follows and as set
forth in Section 11.7:

                (a)     A Limited Partner may assign one or more of his
Units if in compliance with this Section 11.2 and Sections 11.5
or 11.6. No consent or approval of any of the Limited Partners
shall be required for such assignment.

                (b)     Any assignment must be by a written instrument,
in a form satisfactory to the General Partner and accepted by it,
which instrument has been duly executed by the assignor of such
Units.  A Limited Partner shall notify the General Partner of an
assignment or transfer by operation of law of a beneficial
interest in any Units which occurs without a transfer of record
ownership.

                (c)     An Assignee shall be required to pay a reasonable
sum to reimburse the Partnership and the General Partner in
connection with such assignment, with such sum to be determined
by the General Partner in its sole discretion.  The sum shall be
intended to cover any legal fees, accounting fees, overhead
charges, and other fees or expenses incurred by the Partnership
and its counsel as a result of any such assignment.

                (d)     The General Partner may require an opinion of
counsel, in form and substance satisfactory to it in its sole
discretion, by counsel experienced in securities laws matters,
covering (i) that the proposed assignment will be in compliance
with applicable securities laws, rules and regulations, and (ii)
such other matters as may be determined by the General Partner in
its sole discretion.  The fee for such  counsel shall be paid by
the assignor.

        Any purported assignment of Units which is not in compliance
with this Agreement is hereby declared to be null and void and of
no force or effect whatsoever.

        11.3    Assignee's Rights

                (a)     An assignment of a Unit does not entitle the
Assignee to become or to exercise any rights of a Partner.  An
assignment entitles the Assignee to receive, to the extent
assigned, only the distributions and allocation of profits and
losses to which the assignor would be entitled after the
effective date of assignment as set forth below.  A Limited
Partner remains a Partner upon assignment of all or part of the
Limited Partner's Units, subject to the possibility of the
Assignee becoming a Substituted Limited Partner pursuant to
Section 11.5.

                (b)     The "effective date" of an assignment shall be
that date specified in the written instrument whereby the General
Partner consents to the assignment, which date shall not be later
than the first day of the quarter following receipt by the
General Partner of a written notice of assignment and the
fulfillment of all conditions precedent to such assignment
provided for in this Agreement.  Notwithstanding anything to the
contrary contained in this Agreement, the Partnership and the
General Partner shall be entitled to treat an assignor or
transferor of Units as the absolute owner thereof in all
respects, and shall incur no liability for allocations of income,
gain, loss, deductions, credits, or distributions made to such
assignor or transferor until the effective date of an assignment
shall have passed.

        11.4    No Assignment Allowed Under Certain Circumstances

        Anything herein contained to the contrary notwithstanding,
no Limited Partner shall have the right, without express written
approval from the General Partner, to assign his Units, or any
portion thereof, if such assignment would result (directly or
indirectly) in the (a) termination of the Partnership for tax
purposes; (b) violation of the Securities Act of 1933 or any
rules or regulations thereunder, or any applicable state
securities laws or any rules or regulations thereunder; (c)
violation of any investment representation given by such Limited
Partner in connection with his acquisition of Units; (d)
treatment of the Partnership as an association taxable as a
corporation; or (e) acquisition by an Assignee who is a resident
alien, non-resident alien, sellers or related parties of the
sellers of the Properties, or holder of a mortgage loan on the
Properties.

        11.5    Substituted Limited Partners

                (a)     An Assignee shall not become a Substituted
Limited Partner unless the General Partner gives its express
written consent to such substitution (which consent may not be
unreasonably withheld) and receives such instruments and
documents, and a reasonable transfer fee, as the General Partner
shall require.

                (b)     The assignor Limited Partner shall cease to be,
and the Assignee shall become, a Limited Partner, as to the Units
so assigned, as of the date on which the Assignee has satisfied
the requirements set forth above and as of the date of
effectiveness.

                (c)     The General Partner is hereby authorized to do
all things necessary to effect the admission of any such
Substituted Limited Partner, including, but not limited to, the
filing of an amended Certificate of Limited Partnership (if
necessary), and each Limited Partner hereby agrees (and each
Substituted Limited Partner, upon the execution of the
instruments referred to in Section 11.5(a), shall be deemed to
have agreed) that he shall, at the request of the General
Partner, execute and deliver any such amended Certificate of
Limited Partnership.

                (d)     Unless and until any Assignee, transferee, heir
or legatee becomes a Substituted Limited Partner, his status and
rights shall be limited to the rights of an Assignee.  An
Assignee who does not become a Substituted Limited Partner shall
have no right to inspect the Partnership's books or to vote on
any of the matters on which a Limited Partner would be entitled
to vote.  An Assignee who has become a Substituted Limited
Partner has, to the extent the assignor's Units are assigned, the
rights and powers, and is subject to the restrictions and
liabilities, of a Limited Partner under this Agreement.  In no
event, however, is an assignor released from the assignor's
liabilities, if any, to the Partnership pursuant to Sections
15622(d), 15652 and 15666 of the Act.

                (e)     The General Partner shall cause this Agreement
and any separate Certificate of Limited Partnership (if required
by law) to be amended to reflect the substitution of Limited
Partners at least once in each fiscal quarterly period of the
Partnership.

                (f)     Any person admitted to the Partnership as a
Substituted Limited Partner shall be subject to and bound by all
the provisions of this Agreement as if originally a party to this
Agreement.

        11.6    Death, Incompetency or Bankruptcy of a Limited Partner

        The death, adjudication of incompetency or bankruptcy of a
Limited Partner shall not dissolve the Partnership.  If a Limited
Partner who is an individual dies or a court of competent
jurisdiction adjudges the Limited Partner to be incompetent to
manage the Limited Partner's personal property, the Limited
Partner's executor, administrator, guardian, conservator, or
other legal representative may exercise all the Limited Partner's
rights for the purposes of settling the Limited Partner's estate
or administering the Limited Partner's property.  The executor,
administrator, guardian, conservator, or other legal
representative, as applicable, of the deceased, incompetent or
bankrupt Limited Partner shall nevertheless continue to be liable
for all of his obligations as a Limited Partner.

        11.7    Limited Liquidity Plan

        Commencing on January 1, 1989, and each year thereafter, the
Limited Partners shall have the option to have their Units
repurchased by the Partnership or a person designated by the
Partnership subject to the terms and conditions set forth in this
Section 11.7.

                (a)     Purchase Price.  The purchase price of any Units
repurchased by the Partnership or person designated by the
Partnership pursuant to this Section 11.7 shall equal 80% of the
value of such Units as established by the General Partner.  The
General Partner shall use a sales/liquidation analysis of the
Partnership to establish the value of the Units.  Such analysis
shall determine the net proceeds from a sale of the Properties,
based on independent appraisals, adjusted for Working Capital
Reserves, increased by the book value of other Partnership assets
and decreased by Partnership debts, obligations and disposition
costs.  The General Partner shall then determine, in accordance
with the provisions of Sections 5.3 and 5.4, the amount of such
proceeds which would be distributed to any Limited Partner
requesting repurchase.  This amount shall be the established
value of a Limited Partner's Units, of which a Limited Partner
would receive 80% if his Units are repurchased.

                (b)     Appraisal.  Upon receipt of a repurchase request
from a Limited Partner, the Partnership shall have the Properties
appraised by an independent M.A.I. appraiser; provided, however,
that if the Properties have been appraised at any time during the
12 months preceding the repurchase request, the General Partner,
in its sole discretion, may elect to use either or both of the
prior appraisals and forego the reappraisal of either or both of
the Properties.  The purchase of Units under this plan shall be
suspended during any period when one or both of the Properties
are being reappraised.  The expense of the appraisals shall be
borne by the Partnership.

                (c)     Exercise.  Repurchases shall be made on a
quarterly basis.  A Limited Partner shall provide the Partnership
with written notice of the election to have his Units
repurchased.  The repurchase shall be made in the calendar
quarter following the quarter in which the notice is received by
the Partnership.  The Partnership shall, if necessary, have one
or both of the Properties appraised, calculate the value of the
Units and provide the Limited Partner notice of the purchase
price for his Units no later than 45 days prior to the date the
repurchase is scheduled to occur.  The Limited Partner shall have
30 days to confirm or revoke his repurchase election.  If no
notice is received within this period, the Limited Partner shall
be deemed to have revoked the repurchase election.  If in any
quarter the requests for repurchase exceed the funds available
for repurchase, priority shall be given to the requests in the
order in which they were received by the Partnership.  If a
Limited Partner's request for repurchase is not satisfied in a
given quarter, such Partner's priority based on the date his
request was received shall carry over to subsequent quarters.
Any Limited Partners electing not to proceed will be given
priority in the order in which their elections are received in
any subsequent quarter.

                (d)     Funding.  Each quarter the General Partner shall
review the requests for repurchase and based on the number of
requests, allocate up to 10% of the Distributable Cash from
Operations for the purpose of making repurchases.  Any funds set
aside for repurchases which are not used in the quarter so
allocated shall be promptly distributed with the next
distribution to the Partners in accordance with Section 5.3.

                (e)     Limitations.  The Partnership shall not
repurchase in the aggregate more than 5% of the outstanding Units
(exclusive of Units owned by the General Partner, its Affiliates
or their employees) as of the Completion Date; provided, however,
the General Partner, at its discretion, may increase the
percentage of Units eligible for repurchase on a temporary or
permanent basis.  In addition, repurchases shall not be made if
they would result in a "termination" of the Partnership within
the meaning of Section 708(b) of the Internal Revenue Code.

        ARTICLE 12

        TERMINATION OF THE GENERAL PARTNER

        12.1    Cessation of the General Partner

                (a)     The General Partner shall cease to be the General
Partner of the Partnership only upon the happening of any of the
following events (hereinafter referred to as a "Terminating
Event" and the General Partner affected as the "Terminated
General Partner"):

                        (1)     The General Partner withdraws from the
Partnership:

                        (2)     The General Partner is removed as the
General Partner of the Partnership pursuant to Section 9.3(a)(3);

                        (3)     Ninety (90) days after the Limited Partners
have received written notification (which notification shall be
given by the General Partner as prompted, as practicable) that an
order for relief against the General Partner has been entered
under Chapter 7 of the federal bankruptcy law, or that the
General Partner (i) has made a general assignment for the benefit
of creditors, (ii) has filed a voluntary petition under the
federal bankruptcy law, (iii) has filed a petition or answer
seeking for the General Partner any bankruptcy, reorganization,
arrangement, composition, readjustment, liquidation, dissolution
or similar relief under any statute, law, or regulation, (iv) has
filed an answer or other pleading admitting or failing to contest
the material allegations of a petition filed against the General
Partner in any proceeding of this nature, or (v) has sought,
consented to, or acquiesced in the appointment of a trustee,
receiver, or liquidator of the General Partner or of any or all
substantial part of the General Partner's properties;

                        (4)     Ninety (90) days after the Limited Partners
have received written notification (which notification shall be
given by the General Partner as promptly as practicable) of one
of the following events: (i) commencement of any proceeding
against the General Partner seeking reorganization, arrangement,
composition, readjustment, liquidation, dissolution or similar
relief under any statute, law, or regulation, and the proceeding
has not been dismissed, or (ii) if within 60 days after the
appointment without the General Partner's consent or acquiescence
of a trustee, receiver, or liquidator of the General Partner or
of any or all substantial part of the General Partner's
properties, the appointment is not vacated or stayed, or within
60 days after the expiration of any such stay, the appointment is
not vacated; and

                        (5)     The dissolution and termination of the
General Partner.

                (b)     Upon a Terminating Event where the business of
the Partnership is continued, the interest of the Terminated
General Partner in the Partnership shall be converted or
purchased as set forth in Section 12.2 below.

                (c)     Upon a Terminating Event, the agency relationship
between the Partnership and the Terminated General Partner shall
be terminated, and the Terminated General Partner shall have no
liability for any debts or liabilities of the Partnership
incurred after the Terminating Event.

        12.2    Conversion or Purchase of Interest of Former General
Partner

                (a)     If the business of the Partnership continues
after a Terminating Event, the Terminated General Partner's
interest shall, at the election of the Partnership, either (i)
convert to that of a special limited partner interest or (ii) be
purchased by the Partnership.  Whether the General Partner's
interest is converted or repurchased, the Partnership shall pay
all amounts then accrued and owing to the General Partner and its
Affiliates.  The Partnership shall provide notice of its election
under this Section 12.2 to the Terminated General Partner within
30 days from the date of the election to continue its business.
If notice is not so provided, the Terminated General Partner's
interest shall be converted.  Upon conversion of its interest to
that of a special Limited Partner, the Terminated General Partner
shall retain the same rights to profits, losses, and
distributions as before the Terminating Event and shall be
entitled to the voting rights accorded other Limited Partners.
If the Terminated General Partner's interest is repurchased, it
shall receive from the Partnership the then present value of its
interest in the Partnership, determined by agreement of the
Terminated General Partner and the Partnership.  If such parties
cannot agree, the purchase price shall be determined in
accordance with the then current rules of the American
Arbitration Association, with the expense of arbitration borne
equally by the parties.  If the termination of the Terminated
General Partner was voluntary, the method of payment for its
interest shall be under a non-interest bearing unsecured,
promissory note with principal payable from distributions which
the Terminated General Partner otherwise would have received
under this Agreement if it had remained as General Partner.  If
the termination is involuntary, the method of payment shall be
under a promissory note bearing interest at the Reference Rate of
the bank specified by the Terminated General Partner, with equal
payments of principal and interest over a term of five years.

                (b)     If a Terminating Event Occurs and the business of
the Partnership is not continued, then the Partnership shall be
terminated and its assets distributed in accordance with Article
13.

        12.3    Withdrawal by the General Partner

                (a)     The General Partner may withdraw from the
Partnership only upon providing the Limited Partners with 60
days' notice of its intent to withdraw, obtaining Majority Vote
of the Limited Partners consenting to such withdrawal and upon
the appointment of a successor general Partner by Majority Vote
of the Limited Partners.

                (b)     A withdrawal by the General Partner under the
conditions stated above shall not act as a breach of this
Agreement.  In the event of a withdrawal by the General Partner
meeting the requirements of this Section 12.3, the withdrawing
General Partner shall be entitled to have his interest purchased
or converted to that of a special Limited Partner in accordance
with Section 12.2.

        12.4    Termination of Executory Contracts With the General
Partner or Affiliates

        Upon a Terminating Event as set forth in Section 12.1, all
executory contracts between the Partnership and the Terminated
General Partner or any Affiliate thereof may be terminated by the
Partnership effective upon 60 days prior written notice of such
termination to the party so terminated.  The Terminated General
Partner or any Affiliate thereof may also terminate and cancel
any such executory contract effective upon 60 days prior written
notice to the Partnership.

        12.5    Reports After Removal

        Within 90 days after the Limited Partners have voted to
remove the General Partner, the General Partner shall have
Prepared, at Partnership expense, unaudited financial statements
(balance sheet, statement of income or loss, statement of
Partners' equity, and statement of changes in financial position)
Prepared in accordance with generally accepted accounting
principles and shall cause such statements to be mailed to the
Limited Partners as soon as possible after receipt thereof.


        ARTICLE 13

        DISSOLUTION AND TERMINATION OF THE PARTNERSHIP

        13.1    Dissolution

        The Partnership shall be dissolved and its affairs shall be
wound up upon the happening of the first to occur of the
following:

                (a)     Upon the General Partner ceasing to be the
general partner of the Partnership as set forth in Section 12.1
(a) hereof (other than by removal) unless (i) there is at least
one other General Partner and all other remaining General
Partner(s) elect to continue the business of the Partnership or
(ii) all Limited Partners agree to continue the business of the
Partnership and to admit one or more General Partners pursuant to
the voting right set forth in Section 9.3(b);

                (b)     On a date designated by vote of the limited
Partners pursuant to the exercise of the voting right set forth
in Section 9.3(a)(2);

                (c)     The sale or other disposition of all of the
Partnership's assets and the receipt in cash of the proceeds
thereof;

                (d)     Upon entry of a decree judicial dissolution; or

                (e)     On December 31, 2016.

        13.2    Continuation of the Business of the Partnership

        The business of the Partnership may be continued as follows:

                (a)     If the General Partner ceases to be a general
partner of the Partnership, any then remaining General Partner,
without the necessity for the consent of the Limited Partners,
shall have the right to continue the business of the Partnership.

                (b)     In all other events where a dissolution his
occurred, upon a Majority Vote of the Limited Partners consenting
to the continuation of the business of the Partnership, except
that if the General Partner ceases to be the general partner of
the Partnership (other than by removal) and there is no remaining
General Partner, the admission of a new General Partner or the
election to continue the business of the Partnership shall
require the unanimous consent of all Limited Partners.

        13.3    Liquidation

                (a)     In the event of dissolution as provided in
Section 13.1, if there has been no election to continue the
Partnership as provided for in this Agreement and following any
sale of the Partnership's real or personal property, the liquid
assets of the Partnership shall be distributed as follows:

                        (1)     All of the Partnership's debts and
liabilities to persons (including Partners to the extent
permitted by law) shall be paid and discharged, but excluding
secured creditors whose obligations will be assumed or otherwise
transferred on the liquidation of Partnership assets and any
reserve deemed necessary by the General Partner for the payment
of such debts shall be set aside; and

                        (2)     The balance of such assets of the
Partnership shall be distributed to the Partners in amounts equal
to the Partners' positive balances in their capital accounts and
otherwise in accordance with Article 5.

                (b)     Upon dissolution, each Limited Partner shall look
solely to the assets of the Partnership for the return of his
Invested Capital, and shall be entitled only to a cash
distribution of Partnership property and assets in return
thereof.  If the Partnership property remaining after the payment
or discharge of the debts and liabilities of the Partnership is
insufficient to return the Invested Capital of each Limited
Partner, such Limited Partner shall have no recourse against any
other Limited Partner or against the General Partner, except to
the extent provided in Section 5.7.  The winding up of the
affairs of the Partnership and the distribution of its assets
shall be conducted exclusively by the General Partner, who is
hereby authorized to do any and all acts and things authorized by
law for these purposes.  In the event of dissolution or
bankruptcy of the General Partner or removal of the General
Partner by the Limited Partners and there is a failure to appoint
a new General Partner, the winding up of the affairs of the
Partnership and the distribution of its assets shall be conducted
by the remaining General Partner, if any, or by such person as
may be selected by a Majority Vote of the Limited Partners, which
person is hereby authorized to do any and all acts and things
authorized by law for these purposes.

                (c)     In the event the Partnership is "liquidated"
within the meaning of Treasury Regulation Section 1.704-
1(b)(2)(ii)(g), (i) distributions shall be made pursuant to
Section 13.3 to the Partners who have positive capital accounts
in compliance with Treasury Regulation Section
1.7041(b)(2)(ii)(b)(2), and (ii) if the General Partner's capital
account has a deficit balance (after giving effect to all
contributions, distributions, and allocations for all taxable
years, including the year during which such liquidation occurs),
the General Partner shall contribute to the capital of the
Partnership the amount necessary to restore such deficit balance
in compliance with Section 5.7. Distributions pursuant to the
preceding sentence may be distributed to a trust established for
the benefit of the Partners for the purposes of liquidating
Partnership assets, collecting amounts owed to the Partnership,
and paying any contingent or unforeseen liabilities or
obligations of the Partnership or of the General Partner arising
out of or in connection with the Partnership.  The assets of any
such trust shall be distributed to the Partners from time to
time, in the reasonable discretion of the General Partner, in the
same proportions as the amount distributed to such trust by the
Partnership would otherwise have been distributed to the Partners
pursuant to this Agreement.

        13.4    Cancellation of Certificate of Limited Partnership

        Upon the completion of the distribution of Partnership
assets as provided in this Article 13 and the termination of the
Partnership, the General Partner or other person acting as
liquidator (or the Limited Partners, if necessary) shall cause
the Certificate of Limited Partnership of the Partnership to be
cancelled and shall take such other actions as may be necessary
to legally terminate the Partnership.

        ARTICLE 14

        PARTNERSHIP EXPENSES

        14.1    Reimbursement to General Partner

        The Partnership shall reimburse the General Partner for
those items specifically set forth in Article 7.

        14.2    Payment of Expenses of the Partnership

        All of the ongoing Partnership expenses shall be billed
directly to and paid by the Partnership.  The Partnership's
expenses will include the following:

                (a)     Organization and Offering Expenses (subject to
the limitation in Section 7.1).

                (b)     Expenses connected with the Properties, which may
include, but are not limited to: (i) expenses in connection with
the acquisition, development, financing, refinancing and
disposition of the Properties; (ii) expenses in connection with
the replacement, alteration, repair, remodeling, refurbishment,
and leasing of the Properties; (iii) direct salary expenses for
employees, other than Control Persons, of the General Partner or
its Affiliates performing services outside the normal scope of
activities required by the General Partner; (iv) all operational
costs of the Properties, including taxes, utilities, insurance,
cost of maintenance and repair, mortgage payments, and all costs
of borrowed money, taxes, and assessments on Partnership property
and other taxes applicable to the Partnership; (v) all costs
associated with the sale of the Properties, including the costs
of servicing any seller financing; (vi) legal, accounting, audit,
appraisal, engineering and other fees; and (vi) fees and expenses
paid to independent contractors, mortgage bankers, brokers and
servicers, leasing agents, consultants, on-site managers, real
estate brokers, insurance brokers, and other agents.

                (c)     Expenses of Partnership administration, including
all accounting, documentation, professional, asset management,
and reporting expenses of the Partnership, which may include, but
are not limited to: (i) preparation and documentation of
Partnership bookkeeping, accounting, and audits; (ii) preparation
and documentation of budgets, economic surveys, cash flow
projections, and working capital requirements; (iii) preparation
and documentation of Partnership state and federal tax returns;
(iv) printing, engraving, and other expenses and taxes incurred
in connection with the issuance, distribution, transfer,
registration, and recording of documents evidencing ownership of
Units or in connection with the business of the Partnership; (v)
expenses of insurance as required in connection with the business
of the Partnership; (vi) expenses in connection with
distributions made by the Partnership to, and communications,
bookkeeping and clerical work necessary in maintaining relations
with limited Partners, including the cost of printing and mailing
to such persons reports of the Partnership and of preparation of
proxy statements and solicitations of proxies in connection
therewith; (vii) expenses in connection with preparing and
mailing reports required to be furnished to Limited Partners for
investor, tax reporting, or other purposes, or expenses
associated with furnishing reports to Limited Partners which the
General Partner deems to be in the best interests of the
Partnership; (viii) expenses of revising, amending, converting,
modifying, or terminating the Partnership; (ix) costs incurred in
connection with any litigation in which the Partnership is
involved as well as any examination, investigation, or other
proceedings conducted by any regulatory agency of the
Partnership, including legal and accounting fees incurred in
connection therewith; (x) costs of any computer equipment or
services used for or by the Partnership; (xi) costs of any
accounting, statistical, or bookkeeping equipment necessary for
the maintenance of the books and records of the Partnership;
(xii) costs of preparation and dissemination of informational
material and documentation relating to potential sale,
refinancing, or other disposition of Partnership property; (xiii)
supervision and expenses of professionals employed by the
Partnership in connection with any of the foregoing, including
attorneys, accountants, and appraisers; and (xiv) other
Partnership administration expenses.

                (d)     Other costs or expenses necessary or advisable
for the operation of the business of the Partnership.


        ARTICLE 15

        AMENDMENTS OF PARTNERSHIP DOCUMENTS

        15.1    Amendments in General

        Except as otherwise provided in this Agreement, this
Agreement may be amended only with the consent of the General
Partner and by a Majority Vote of the Limited Partners.

        15.2    Amendments Without Consent of Limited Partners

        In addition to any amendments otherwise authorized herein,
amendments may be made to this Agreement from time to time by the
General Partner, without the consent of any of the Limited
Partners, which (a) add to the representations, duties or
obligations of the General Partner or surrender any right or
power granted to the General Partner herein, for the benefit of
the Limited Partners; (b) correct any error, resolve any
ambiguity, or supplement any provision which may be inconsistent
with another provision hereof, or make any other provision with
respect to matters or questions arising under this Agreement that
is not inconsistent with the provisions of this Agreement; (c)
delete or add any provision of this Agreement required to be so
deleted or added by the Securities Exchange Commission or any
state securities commission or similar governmental authority for
the benefit or protection of the Limited Partners; (d) amend this
Agreement and any Certificate of Limited Partnership (if
required) to admit Limited Partners pursuant to Article 3 and
Section 11.5; (e) reflect reductions in the Capital Contributions
of the Limited Partners resulting from a return of capital; (f)
amend this Agreement upon advice of counsel or accountants that
the provisions contained herein are unlikely to be given effect
for federal income tax purposes, to the minimum extent necessary;
any such new allocation shall not give rise to any claim or cause
of action by any Limited Partner or Assignee; (g) elect for the
Partnership to be governed by any successor California statute
governing limited partnerships; (h) would make an amendment
desirable to effectuate the intent of the Partners, as long as
any Partner who is adversely affected in any material respect by
such an amendment consents to the amendment if there occurs any
change in the law governing limited partnerships; (i) makes any
change necessary or advisable in the discretion of the General
Partner to cause the Partnership to be treated as a partnership
for federal income tax purposes, and (j) makes any other change
which does not adversely affect the rights of the Limited
Partners or Assignees in any material respect; provided, however,
that the General Partner shall not have the right under this
subsection 15.2(j) to amend Articles 4, 5, 6 or 9, or Article 7,
if the amendment would increase the General Partner or its
Affiliates compensation or reimbursements.

        15.3    Amendments Needing Consent of Affected Partners

        Notwithstanding any other provision of this Agreement,
without the consent of the Partner or Partners to be adversely
affected by any amendment to this Agreement, this Agreement may
not be amended to (a) convert a Limited Partner's interest into a
General Partner's interest, (b) modify the limited liability of a
Limited Partner, (c) increase, add or alter any obligation of the
General Partner, (d) adversely affect the status of the
Partnership as a partnership for federal income tax purposes, or
(e) otherwise modify the compensation, distributions, or rights
of reimbursement to which the General Partner is entitled or
affect the duties of the General Partner or the indemnification
to which the General Partner and its Affiliates are entitled
under Section 6.7.

        15.4    Amendments to Certificates of Limited Partnership

                (a)     The General Partner shall cause to be filed with
the California Secretary of State, within 30 days after the
happening of any of the following events, an amendment to the
Certificate of Limited Partnership reflecting the occurrence of
any of the following events:

                        (1)     A change in the name of the Partnership;

                        (2)     A change in either of the following:

                                (i)     The street address of the
Partnership's principal executive office.

                                (ii)    If the principal executive office is
not in California, the street address of an office in California;

                        (3)     A change in the address of or withdrawal of
the General Partner, or a change in the address of the agent for
service of process, unless a corporate agent is designated, or
appointment of a new agent for service of process;

                        (4)     The admission of a General Partner and that
Partner's address; and

                        (5)     The discovery by the General Partner of any
false or erroneous material statement contained in the
Certificate of Limited Partnership.

                (b)     Any Certificate of Limited Partnership filed or
recorded in jurisdictions other than California shall be amended
as required by applicable law.

                (c)     The Certificate of Limited Partnership may also
be amended at any time in any other manner deemed appropriate by
the General Partner.

        15.5    Amendments After Change of Law

        This Agreement and any other Partnership documents may be
amended and refiled, if necessary, by the General Partner without
the consent of the Limited Partners if there occurs any change
that permits or requires an amendment of this Agreement under the
Act or of any other Partnership document under applicable law, so
long as no Partner is adversely affected in any material respect
(or consent is given by such Partner).

        ARTICLE 16

        MISCELLANEOUS PROVISIONS

        16.1    Notices

                (a)     Any written notice, offer, demand or
communication required or permitted to be given by any provision
of this Agreement shall be deemed to have been sufficiently given
for all purposes if delivered personally to the party to whom the
same is directed or if sent by certified mail addressed (i) if to
the General Partner, to the principal place of business and
office of the Partnership specified in this Agreement and (ii) if
to a Limited Partner, to such Limited Partner's address as set
forth on his Subscription Agreement or any other address provided
to the General Partner by such Limited Partner.

                (b)     Any such notice that is sent by certified mail
shall be deemed to be given two (2) days after the date on which
the same is mailed.

                (c)     The General Partner may change its address for
purposes of this Agreement by giving written notice of such
change to the Limited Partners, and any Limited Partner may
change his address for purposes of this Agreement by giving
written notice of such change to the General Partner, in the
manner hereinbefore provided for the giving of notices.

        16.2    Article and Section Headings

        The Article and Section headings in this Agreement are
inserted for convenience and identification only and are in no
way intended to define or limit the scope, extent or intent of
this Agreement or any of the provisions hereof.

        16.3    Construction

        Whenever the singular number is used herein, the same shall
include the plural; and the neuter, masculine and feminine
genders shall include each other.  If any language is stricken or
deleted from this Agreement, such language shall be deemed never
to have appeared herein and no other implication shall be drawn
therefrom.  The language in all parts of this Agreement shall be
in all cases construed according to its fair meaning and not
strictly for or against the General Partner or the Limited
Partners.

        16.4    Severability

        If any covenant, condition, term or provision of this
Agreement is illegal, or if the application thereof to any Person
or in any circumstance shall to any extent be judicially
determined to be invalid or unenforceable, the remainder of this
Agreement, or the application of such covenant, condition, term
or provision to Persons or in circumstances other than those to
which it is held invalid or unenforceable, shall not be affected
thereby, and each covenant, condition, term and provision of this
Agreement       shall be valid and enforceable to the fullest extent
permitted by law.

        16.5    Governing Law

        This    Agreement shall be construed and enforced in
accordance with, and governed by, the internal laws of the State
of California.

        16.6    Counterparts

        This    Agreement may be executed in one or more counterparts
each of which shall, for all purposes, be deemed an original and
all of such counterparts, taken together, shall constitute one
and the same Agreement binding on all of the Partners.

        16.7    Entire Agreement

        This Agreement constitutes the entire agreement of the
parties.  All prior agreements among the parties, whether written
or oral, are merged herein and shall be of no force or effect.
This Agreement cannot be changed, modified or discharged orally
but only by an agreement in writing.  There are no
representations, warranties, or agreements other than those set
forth in this Agreement, the Subscription Agreement, or the
Prospectus, if any.

        16.8    Cross-References

        All cross-references in this Agreement, unless specifically
directed to another Agreement or document, refer to provisions in
this Agreement.

        16.9    Power of Attorney to the General Partner

                (a)     Each Limited Partner hereby irrevocably makes,
constitutes, and appoints the General Partner and any person
designated by it, with full substitution, its agent and attorney-
in-fact in his name, place and stead, to make, execute, swear to
and acknowledge, amend, file, record and deliver the following
documents and any other documents deemed by the General Partner
necessary for the business of the Partnership: (i) any
Certificate of Limited Partnership, required or permitted to be
filed on behalf of the Partnership, and any and all certificates
as necessary to qualify or continue the Partnership as a limited
partnership or partnership wherein the Limited Partners thereof
have limited liability in the states where the Partnership may be
doing business, and all instruments which effect a change or
modification of the Partnership in accordance with this
Agreement; (ii) this Agreement and any amendments thereto in
accordance with this Agreement; (iii) any other instrument which
is now or which may hereafter be required or advisable to be
filed for or on behalf of the Partnership; (iv) any agreement to
secure payment of additional contributions due from that Limited
Partner; (v) any document which may be required to effect the
continuation of the Partnership, the admission of an additional
or Substituted Limited Partner, or the dissolution and
termination of the Partnership (provided such continuation,
admission or dissolution and termination is in accordance with
the terms of this Agreement), or to reflect any reductions in
amount of contributions of Partners; (vi) any document,
instrument, application, certificate, or order required to be
made, executed, acknowledged, or sworn to in connection with the
withdrawal or receipt from escrow of any cash of a Limited
Partner in connection with his purchase of Units, consistent with
the Prospectus; in each case having the power to execute such
instruments on his behalf, whether the undersigned approved of
such action or not; and (vii) any additions, deletions and
corrections to the Subscription Agreement which does not
adversely affect the position of the Limited Partners.

                (b)     This Power of Attorney is a special Power of
Attorney coupled with an interest, and shall not be revoked and
shall survive the assignment, delivery, or transfer by the
undersigned of all or part of his interest in the Partnership
and, being coupled with an interest, shall survive the death or
disability or cessation of the existence as a legal entity of the
undersigned, except that where the assignee has been approved by
said attorney, as General Partner of the Partnership, for
admission to the Partnership as a Substituted Limited Partner,
this Power of Attorney shall survive the delivery of such
assignment for the sole purpose of enabling said attorney to
execute, acknowledge and file any instrument necessary to
effectuate said substitution.

                (c)     Each Limited Partner hereby gives and grants to
his said attorney full power and authority to do and perform each
and every act and thing whatsoever requisite, necessary or
appropriate to be done in or in connection with this Power of
Attorney as fully to all intents and purposes as he might or
could do if personally present, hereby ratifying all that his
said attorney shall lawfully do or cause to be done by virtue of
this Power of Attorney.

                (d)     The existence of this Power of Attorney shall not
preclude execution of any such instrument by the undersigned
individually on any such matter.  A person dealing with the
Partnership may conclusively presume and rely on the fact that
any such instrument executed by such agent and attorney-in-fact
is authorized, regular and binding without further inquiry.

                (e)     This Power of Attorney may be exercised by an
officer of the General Partner by a facsimile signature of such
officer, or by listing all of the Limited Partners executing any
instrument with a single signature of one of the officers of the
General Partner acting as attorney-in-fact for all of them.

        16.10  Further Assurances

        The Limited Partners shall execute and deliver such further
instruments and do such further acts and things as may be
required to carry out the intent and purposes of this Agreement.

        16.11  Successors and Assigns

        Subject in all respects to the limitations on
transferability contained herein, this Agreement shall be binding
upon, and shall inure to the benefit of, the heirs,
administrators, personal representatives, successors and assigns
of the respective parties hereto.

        16.12  Waiver of Action for Partition

        Each of the parties hereto irrevocably waives during the
term of the Partnership and during the period of its liquidation
following any dissolution, any right that he may have to maintain
any action for partition with respect to any of the assets of the
Partnership.

        16.13  Creditors

        None of the provisions of this Agreement shall be for the
benefit of or enforceable by any of the creditors of the
Partnership or the Partners.

        16.14  Remedies

        The rights and remedies of the Partners hereunder shall not
be mutually exclusive, and the exercise by any Partner of any
right to which he is entitled shall not preclude the exercise of
any other right he may have.

        16.15  Authority

        Each individual executing this Agreement on behalf of a
partnership, corporation, or other entity warrants that he is
authorized to do so and that this Agreement will constitute the
legally binding obligation of the entity which he represents.

        16.16  Tax Elections

        The General Partner shall cause the Partnership to make all
elections required or permitted to be made for income tax
purposes in such manner as the General Partner in its sole
discretion deems appropriate or necessary.  However, it is not
anticipated that the General Partner will elect, in accordance
with Section 754 of the Internal Revenue Code, to adjust the
basis of the Partnership property as described in Sections 734
and 743 of the Internal Revenue Code.

        16.17  Signatures

        The signature of the General Partner shall be sufficient to
bind the Partnership to any agreement or on any document,
including, but not limited to, documents drawn or agreements made
in connection with the acquisition or disposition of any assets.

        16.18  Withholding Taxes

        In the event that the Partnership is obligated to withhold
taxes with respect to any Partner:

                (a)     Any tax required to be withheld shall be charged
to that Partner's capital account as if the amount of such tax
had been distributed to such Partner;

                (b)     The General Partner shall have the right to make
a loan to such Partner in an amount equal to the amount of tax
required to be withheld to the extent that cash is needed to make
the withholding payments attributable to that Partner; and

                (c)     The General Partner may retain appropriate
portions of a Partner's distributions until any withholding
obligations relating to that Partner are satisfied and may apply
such distributions to any loan made pursuant hereto.


        IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of ________________, 1987.

GENERAL PARTNER:
Prometheus Development Co., Inc., a California corporation


By /S/ SANFORD N. DILLER
     Sanford N. Diller
     President


INITIAL LIMITED PARTNER:
Prom XX, Inc., a California corporation


By /S/ SANFORD N. DILLER
     Sanford N. Diller
     President


ADDITIONAL LIMITED PARTNERS

Pursuant to Signatures on Subscription Agreement


Upon admission of the additional
Limited Partners set forth in
Schedule A, the Initial Limited
Partner hereby withdraws as a Partner
of the Partnership upon redemption
for the cost of its interest.


Prom XX, Inc.,
a California corporation


By /S/ SANFORD N. DILLER
     Sanford N. Diller
     President






John Ghio
Page 2

                                   APPENDIX C

                       Appraisal of CB Richard Ellis, Inc.




CB[GRAPHIC OMITTED]Richard Ellis

                               COMPLETE APPRAISAL

                                 SUMMARY REPORT

                                       OF

                       ALDERWOOD AND TIMBERLEAF APARTMENTS
                      900 Pepper Tree & 2147 Newhall Street
                   Santa Clara, Santa Clara County, California
                              CBREI File No. 01-822

                                  DATE OF VALUE

                               September 17, 2001

                                  PREPARED FOR

                                    John Ghio
          PROMETHEUS INCOME PARTNERS, A CALIFORNIA LIMITED PARTNERSHIP
                               350 Bridge Parkway
                         Redwood City, California 94065

                                   PREPARED BY

                             CB RICHARD ELLIS, INC.
                          VALUATION & ADVISORY SERVICES
                          350 Sansome Street, Suite 840
                         San Francisco, California 94104





September 17, 2001



John Ghio
PROMETHEUS INCOME PARTNERS, A CALIFORNIA LIMITED PARTNERSHIP
350 Bridge Parkway
Redwood City, California  94065


RE:     Appraisal of ALDERWOOD AND TIMBERLEAF APARTMENTS
        900 Pepper Tree & 2147 Newhall Street
        Santa Clara, Santa Clara County, California
        CBREI File No. 01-822


Dear Mr. Ghio:


At your  request  and  authorization,  CB Richard  Ellis,  Inc.  has  prepared a
Complete  Appraisal  presented in a summary appraisal report of the market value
in the referenced real property.

The subject is comprised of two garden apartment buildings.  Alderwood Apartment
is a 234 unit  apartment  complex  built in 1986 situated on a 9.42 acre site in
Santa  Clara,  Santa Clara  County,  California.  Currently  the property is 92%
occupied.  Timberleaf  Apartments is a 124 units apartment complex built in 1986
situated on a 4.94 acre site in Santa  Clara,  Santa Clara  County,  California.
Currently it is 92% occupied.  The subject is more fully described,  legally and
physically within the enclosed report.

Data,  information,  and  calculations  leading  to  the  value  conclusion  are
incorporated in the report following this letter.  The report,  in its entirety,
including all  assumptions and limiting  conditions,  is an integral part of and
inseparable from this letter.

The date of value in this  assignment is  subsequent to September 11, 2001,  the
date of the  attack  on the  World  Trade  Center  in New  York  City and on the
Pentagon in  Washington,  D.C. The scope of this appraisal  assignment  does not
include the  measurement of any effect of these events on the real estate market
or on the value of the subject property.  Therefore, the value opinion and other
conclusions expressed in this report are subject to the extraordinary assumption
that these events have had no effect on the marketability or market value of the
subject property.  The client and intended users of this appraisal are cautioned
that if this extraordinary  assumption is incorrect, the value opinion and other
conclusions expressed in this report could be significantly different.

Based on the analysis contained in the following report, the market value of the
subject is concluded as follows:





John Ghio
Page 2

The  following  appraisal  sets  forth the most  pertinent  data  gathered,  the
techniques  employed,  and the  reasoning  leading to the opinion of value.  The
analyses,  opinions and conclusions were developed based on, and this report has
been prepared in  conformance  with,  our  interpretation  of the guidelines and
recommendations  set forth in the Uniform  Standards of  Professional  Appraisal
Practice  (USPAP),  the  requirements  of the Code of  Professional  Ethics  and
Standards of Professional  Appraisal  Practice of the Appraisal  Institute,  The
Financial  Institutions Reform,  Recovery, and Enforcement Act of 1989 (FIRREA),
Title XI Regulations.

The report is for the sole use of the client;  however,  client may provide only
complete,  final  copies  of the  appraisal  report  in its  entirety  (but  not
component  parts) to third  parties who shall review such reports in  connection
with loan underwriting or securitization  efforts.  Appraiser is not required to
explain or testify as to appraisal  results  other than to respond to the client
for routine and  customary  questions.  Please note that our consent to allow an
appraisal report prepared by CB Richard Ellis,  Inc. or portions of such report,
to become part of or be referenced in any public offering,  the granting of such
consent will be at our sole discretion and, if given,  will be on condition that
we will  be  provided  with an  Indemnification  Agreement  and/or  Non-Reliance
letter, in a form and content satisfactory to us, by a party satisfactory to us.
We do  consent  to your  submission  of the  reports  to rating  agencies,  loan
participants or your auditors in its entirety (but not component  parts) without
the need to provide us with an  Indemnification  Agreement  and/or  Non-Reliance
letter.

It has  been a  pleasure  to  assist  you in this  assignment.  If you  have any
questions  concerning  the  analysis,  or if CB Richard  Ellis,  Inc.  can be of
further service, please contact us.


Respectfully submitted,

CB RICHARD ELLIS, INC.
VALUATION & ADVISORY SERVICES




/s/ Susan R. Mullahey                            /s/ Elizabeth Champagne
- ----------------------------------------------   -------------------------------
Susan R. Mullahey                                Elizabeth Champagne, MAI
Senior Real Estate Analyst                       Senior Managing Director
California Cert.  AG010520                       California Cert. AG025144

Phone:   415-986-7259                            Phone:   415-986-7395
Fax:     415-986-6862                            Fax:     415-986-6862
Email:   smullahey@cbre.com                      Email:   echampagne@cbre.com





- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS               CERTIFICATION OF THE APPRAISAL
- --------------------------------------------------------------------------------


                         Certification of the Appraisal

We certify to the best of our knowledge and belief:

1.   The statements of fact contained in this report are true and correct.

2.   The reported  analyses,  opinions,  and conclusions are limited only by the
     reported   assumptions  and  limiting  conditions  and  are  our  personal,
     impartial and unbiased professional analyses, opinions, and conclusions.

3.   We have no present or  prospective  interest in or bias with respect to the
     property  that is the subject of this report and have no personal  interest
     in or bias with respect to the parties involved with this assignment.

4.   Our engagement in this  assignment was not  contingent  upon  developing or
     reporting predetermined results.

5.   Our  compensation for completing this assignment is not contingent upon the
     development  or  reporting of a  predetermined  value or direction in value
     that favors the cause of the client,  the amount of the value opinion,  the
     attainment of a stipulated  result, or the occurrence of a subsequent event
     directly  related  to the  intended  use of  this  appraisal,  such  as the
     approval of a loan.

6.   This appraisal assignment was not based upon a requested minimum valuation,
     a specific valuation , or the approval of a loan.

7.   Our analyses, opinions, and conclusions were developed, and this report has
     been prepared,  in conformity  with the Uniform  Standards of  Professional
     Appraisal Practice of The Appraisal  Foundation and the requirements of the
     Code of  Professional  Ethics and the Standards of  Professional  Appraisal
     Practice of the Appraisal Institute.  In addition,  this report conforms to
     the  requirements  of the  Financial  Institutions  Reform,  Recovery,  and
     Enforcement Act (FIRREA).

8.   The use of this  report is subject  to the  requirements  of the  Appraisal
     Institute relating to review by its duly authorized representatives.

9.   Elizabeth  Champagne,  MAI has completed the requirements of the continuing
     education program of the Appraisal Institute.

10.  Susan R. Mullahey has and Elizabeth Champagne,  MAI has not made a personal
     inspection of the property that is the subject of this report.

11.  No one provided professional assistance to the persons signing this report.

12.  Susan R. Mullahey and Elizabeth Champagne, MAI have extensive experience in
     the appraisal/review of similar property types.

13.  Susan R. Mullahey and Elizabeth  Champagne,  MAI are currently certified in
     the state where the subject is located.

14.  Valuation and Advisory Services operates as an independent  economic entity
     within CB Richard Ellis, Inc. Although other employees of CB Richard Ellis,
     Inc.  divisions may be contacted as a part of our routine  market  research
     investigations,  absolute client confidentiality and privacy are maintained
     at all times with regard to this assignment without conflict of interest.


/s/ Susan R. Mullahey                            /s/ Elizabeth Champagne
- ----------------------------------------------   -------------------------------
Susan R. Mullahey                                Elizabeth Champagne, MAI
Senior Real Estate Analyst                       Senior Managing Director
California Cert.  AG010520                       California Cert. AG025144

- --------------------------------------------------------------------------------

                                        i





- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS                          SUBJECT PHOTOGRAPHS
- --------------------------------------------------------------------------------


                               Subject Photographs
                         [photo of property - Alderwood]


- --------------------------------------------------------------------------------
                           TYPICAL VIEW OF THE SUBJECT

- --------------------------------------------------------------------------------
                        [photo of property - Timberleaf]

- --------------------------------------------------------------------------------

                           TYPICAL VIEW OF THE SUBJECT

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
                                       ii





- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS                     SUMMARY OF SALIENT FACTS
- --------------------------------------------------------------------------------


                            Summary of Salient Facts

- --------------------------------------------------------------------------------
                                       iii





- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS                     SUMMARY OF SALIENT FACTS
- --------------------------------------------------------------------------------


                            Summary of Salient Facts

- --------------------------------------------------------------------------------
                                       iv





- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS                            TABLE OF CONTENTS
- --------------------------------------------------------------------------------


                                TABLE OF CONTENTS

CERTIFICATION OF THE APPRAISAL...............................................i

SUBJECT PHOTOGRAPHS.........................................................ii

SUMMARY OF SALIENT FACTS....................................................ii

TABLE OF CONTENTS............................................................v

INTRODUCTION.................................................................1

AREA ANALYSIS................................................................6

NEIGHBORHOOD ANALYSIS.......................................................10

MARKET ANALYSIS.............................................................12

SITE ANALYSIS...............................................................24

IMPROVEMENT ANALYSIS........................................................26

TAX AND ASSESSMENT DATA.....................................................28

HIGHEST AND BEST USE........................................................29

APPRAISAL METHODOLOGY.......................................................31

SALES COMPARISON APPROACH...................................................32

INCOME CAPITALIZATION APPROACH..............................................39

RECONCILIATION OF VALUE.....................................................50

ASSUMPTIONS AND LIMITING CONDITIONS.........................................51

ADDENDA

- --------------------------------------------------------------------------------
                                        v





- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS                                 INTRODUCTION
- --------------------------------------------------------------------------------


                                  INTRODUCTION

PROPERTY IDENTIFICATION


The subject's  street address is 900 Pepper Tree & 2147 Newhall  Street,  in
Santa Clara, Santa Clara County, California.

OWNERSHIP AND PROPERTY HISTORY


Title to the  property  is  currently  vested in the name of  Prometheus  Income
Partners,  who acquired title to the property in 1987 for an undisclosed amount.
There have been no ownership  transfers of the property in the last three years.
As of the date of value, the subject is not being marketed for sale.

DATE OF INSPECTION


The subject was inspected on September 17, 2001.

DATE OF VALUE


The date of value is September 17, 2001.

DATE OF REPORT


The date of report is the date indicated on the letter of transmittal.

PURPOSE OF THE APPRAISAL


The purpose of this  appraisal  is to estimate  the market  value of the subject
property. Market value is defined as follows:

The most probable price which a property  should bring in a competitive and open
market under all conditions  requisite to a fair sale, the buyer and seller each
acting  prudently and  knowledgeably,  and assuming the price is not affected by
undue stimulus.  Implicit in this definition is the consummation of a sale as of
a specified date and the passing of title from seller to buyer under  conditions
whereby:

    buyer and seller are typically motivated;
    both  parties  are well  informed or well  advised,  and acting in what they
    consider their own best interests;
    a reasonable time is allowed for exposure in the open market;
    payment is made in terms of cash in U.S.  dollars  or in terms of  financial
    arrangements comparable thereto; and

- --------------------------------------------------------------------------------
                                        1





- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS                                 INTRODUCTION
- --------------------------------------------------------------------------------


    the  price  represents  the  normal  consideration  for  the  property  sold
    unaffected by special or creative financing or sales concessions  granted by
    anyone associated with the sale. (1)

PREMISE OF THE APPRAISAL


The premise of this appraisal valuation is "as is" on the date of value.

TERMS AND DEFINITIONS


The Glossary of Terms in the Addenda  provides  definitions  for terms that are,
and may be used in this appraisal.


INTENDED USE AND USER OF REPORT


This appraisal is to aid in internal decisions by the client,  Prometheus Income
Partners, a California Limited Partnership.


PROPERTY RIGHTS APPRAISED


The interest appraised represents the fee simple estate.


APPRAISAL DEVELOPMENT AND REPORTING PROCESS


The  following  steps  were  completed  by  CB  Richard  Ellis,  Inc.  for  this
assignment:

1.   identified the subject property;
2.   understood the intended use of the report;
3.   applied appropriate appraisal methodology;
4.   analyzed  the  comparable  data to arrive at a probable  range of value via
     each approach to value used in this report;
5.   reconciled  the results of each approach into a reasonable  and  defensible
     final estimate of value for the subject, as defined herein; and
6.   estimated a reasonable exposure time and marketing time associated with the
     value estimate.

To develop the opinion of value,  CB Richard  Ellis,  Inc.  performed a Complete
Appraisal as defined by the Uniform Standards of Professional Appraisal Practice
(USPAP).  This means that no departures  from  Standard 1 were invoked.  In this
Complete  Appraisal,  CB Richard Ellis, Inc. used all appropriate  approaches to
value.  Furthermore,  the value conclusion  reflects all known information about
the subject, market conditions, and available data.

This  appraisal  of the  subject  has been  presented  in the form of a  Summary
Report,  which is intended to comply with the reporting  requirements  set forth
under Standards Rule 2-2(b) of the USPAP. That is,

- ----------
1 The definition of market value is taken from Uniform Standards of Professional
Appraisal  Practice  adopted by the Appraisal  Standards  Board of The Appraisal
Foundation,  1997 Edition. This definition is also compatible with the OTS, RTC,
FDIC, NCUA, and the Board of Governors of the Federal Reserve System  definition
of market value.  This  definition is compatible  with the  definition of market
value contained in The Dictionary of Real Estate Appraisal, Third Edition.

- --------------------------------------------------------------------------------
                                        2





- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS                                 INTRODUCTION
- --------------------------------------------------------------------------------


this report  incorporates,  a summary of explanation of the data,  reasoning and
analysis  which were used to develop  the  opinion of value.  This  report  also
includes  summary  descriptions  of the subject and the market for the  property
type.

SPECIAL APPRAISAL INSTRUCTIONS


There have been no special appraisal instructions for this assignment.


EXPOSURE TIME


Exposure time is not intended to be a prediction of a date of sale or a one-line
statement.  Instead,  it is an integral  part of the  appraisal  analysis and is
based on one or more of the following:

    o   statistical information about days on the market
    o   information gathered through sales verification
    o   interviews of market participants.

The reasonable  exposure period is a function of price, time, and use. It is not
an isolated estimate of time alone. Exposure time is different for various types
of real estate and under various market conditions.


Exposure  time is the  estimated  length of time the  property  would  have been
offered  prior to a  hypothetical  market  value sale on the  effective  date of
appraisal.  It is a  retrospective  estimate based on an analysis of recent past
events,  assuming a competitive  and open market.  It assumes not only adequate,
sufficient,  and reasonable time but also adequate,  sufficient,  and reasonable
marketing  effort.  Exposure  time  is  therefore  interrelated  with  appraisal
conclusion of value.


In consideration of these factors, we have analyzed the following:

    o   exposure  periods of comparable sales revealed during the course of this
        appraisal;
    o   the CB Richard Ellis, Inc. National Investor Survey; and
    o   knowledgeable real estate professionals.

The following table presents the information derived from these sources:

- --------------------------------------------------------------------------------

                                       3





- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS                                 INTRODUCTION
- --------------------------------------------------------------------------------


Based on the foregoing  analysis,  an exposure time of 12 months is  reasonable,
defensible,  and appropriate.  CB Richard Ellis,  Inc. assumes the subject would
have been competitively priced and aggressively promoted regionally.


MARKETING TIME

Marketing  time is the period a prospective  investor would forecast to sell the
subject  property  immediately  after the date of value, at the value estimated.
The  marketing  time is an estimate  of the number of months it will  require to
sell the  subject  from the date of  value,  into the  future.  The  anticipated
marketing  time  is  essentially  a  measure  of the  perceived  level  of  risk
associated with the marketability,  or liquidity,  of the subject property.  The
marketing  time estimate is based on the data used in estimating  the reasonable
exposure time, in addition to an analysis of the  anticipated  changes in market
conditions following the date of appraisal.

The future price for the subject (at the end of the  marketing  time) may or may
not equal the  appraisal  estimate.  The future price  depends on  unpredictable
changes in the physical  real estate,  demographic  and  economic  trends,  real
estate markets in general,  supply/demand characteristics for the property type,
and many other factors.

Based on the premise that present market  conditions are the best  indicators of
future performance,  a prudent investor will forecast that, under the conditions
described above, the subject will require a marketing time of 12 months.

- --------------------------------------------------------------------------------

                                       4





- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS                                AREA ANALYSIS
- --------------------------------------------------------------------------------

                                   [AREA MAP ]

- --------------------------------------------------------------------------------

                                       5





- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS                                AREA ANALYSIS
- --------------------------------------------------------------------------------

                                  AREA ANALYSIS

CITY OF SANTA CLARA

Overview

The City of Santa  Clara is  located  in the  northern  portion  of Santa  Clara
County,  approximately  50 miles  south of San  Francisco  and 40 miles south of
Oakland.  The City is bordered by Campbell to the south,  Sunnyvale to the east,
Los Altos to the west, and San Jose to the east.  Santa Clara  encompasses  18.3
square  miles.  There is very little land  available  for  development  in Santa
Clara, the lack of which keeps new construction to a minimum.

Social Forces

Between 1980 and 1990, the population of Santa Clara increased 5.3%, from 88,924
to 93,672. In 1995 the population was estimated at 98,300. The city's population
is anticipated to rise to 103,700 by this year, and 109,300 by 2015, an increase
of 11.2% over 1995.

Santa  Clara's  total number of households is expected to rise 1.8% between 1995
and 2000,  from 37,090 to 37,770.  By 2020, it is anticipated to rise to 41,350,
an increase of 11.5% over the year 1995.

The following chart illustrates  population growth projections by sector for the
City of Santa Clara.


- -------------------------------------------------------------------------------------------
                                                      SANTA CLARA DEMOGRAPHICS

                                                             1990 - 2020
- -------------------------------------------------------------------------------------------
                                       1990       1995       2000       2010       2020
- -------------------------------------------------------------------------------------------
Population                            93,672     98,300    103,700    105,700    109,300
Mean Household Income (1995 $'s)     $60,521    $61,700    $67,000    $78,000    $86,700
Households                            36,665     37,090     37,770     39,310     41,350
Average Household Size                  2.49       2.59       2.69       2.64       2.59
- -------------------------------------------------------------------------------------------
Source:  ABAG, Projections 2000
- -------------------------------------------------------------------------------------------


Economic Forces

The following table shows the major employers in the City of Santa Clara.

- --------------------------------------------------------------------------------

                                        6





- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS                                AREA ANALYSIS
- --------------------------------------------------------------------------------


- --------------------------------------------------------------------------------
                         MAJOR EMPLOYERS IN SANTA CLARA
- --------------------------------------------------------------------------------
               Employer                         Business             Employees
- --------------------------------------------------------------------------------
Hewlett Packard                         Computers & Components         2,000 +
IBM                                     Computers & Components         2,000 +
Intel Corporation                       Semiconductors                 2,000 +
Digital Equipment                       Semiconductors           1,000 - 2,000
Integrated Device Technology            Computer Components      1,000 - 2,000

- --------------------------------------------------------------------------------
Source: Santa Clara Chamber of Commerce
- --------------------------------------------------------------------------------


Between 1980 and 1990,  total  employment in Santa Clara  increased  3.0%,  from
99,901 to 102,940 jobs. By 1995 this had dropped to 100,490. Total employment is
projected to grow 50.5% by 2010,  to  approximately  151,280 jobs. By 2020 total
employment  is  anticipated  to reach 161,850 jobs, an increase of 7.0% over the
year 2010. Santa Clara's employment presently constitutes approximately 12.1% of
the county's total employment.

The following chart illustrates  employment growth projections by sector for the
City of Santa Clara between 1990 and 2020.

    ------------------------------------------------------------------------
                     EMPLOYMENT GROWTH PROJECTIONS 1990-2020

                               CITY OF SANTA CLARA
    ------------------------------------------------------------------------
                                                                 1995-2020
                              1990     1995     2010     2020    % Change
    ------------------------------------------------------------------------
    Agriculture/Mining           270      260      300      290   (3.3%)
    Manufacturing/Wholesale   54,040   49,140   67,320   68,600    39.6%
    Retail                    12,010   11,510   16,390   17,220    49.6%
    Service                   26,230   29,210   50,810   58,680   100.9%
    Other                     10,390   10,370   16,460   17,060    64.5%
    ------------------------------------------------------------------------
    TOTAL                    102,940  100,490  151,280  161,850    61.1%
    ------------------------------------------------------------------------
    Sources:  ABAG, Projections 2000
    ------------------------------------------------------------------------


Spending, Income and Inflation

Mean household  income,  measured in constant 1995 dollars,  rose  approximately
15.7% between 1980 and 1990,  from $52,305 to $60,521.  In 1995 it was estimated
at $61,300.  Mean household income is anticipated to rise 34.3% by the year 2010
to $82,300 and 44.4% by 2020 to $88,500.

The following table presents  historical and projected mean household incomes in
1990 dollars for the City of Santa Clara and Santa Clara County.

- --------------------------------------------------------------------------------

                                       7





- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS                                AREA ANALYSIS
- --------------------------------------------------------------------------------



- ---------------------------------------------------------------------------------------
                       SANTA CLARA COUNTY HOUSEHOLD INCOME
- ---------------------------------------------------------------------------------------
                                                                               95-20
        Area             1980       1990       1995        2010       2020     % Chg
- ---------------------------------------------------------------------------------------
Santa Clara County      $57,803   $70,262     $74,300     $97,200    $105,300   41.7%
City of Santa Clara     $52,305   $60,521     $61,300     $82,300     $88,500   44.4%
- ---------------------------------------------------------------------------------------
Sources:  Projections 2000, ABAG
- ---------------------------------------------------------------------------------------


Real Estate

As previously indicated,  Santa Clara is almost completely built-out with only a
limited  amount of available  land for new  construction.  The city  encompasses
37,873  dwelling  units,  approximately  45% of which are single family detached
homes.  Santa Clara is adjacent to the upscale  communities of Cupertino and Los
Altos, which are primarily single family residential  developments.  The upscale
residential  communities  in and  around  Santa  Clara have  helped the  overall
economic  health of the area which also promotes the growth of local  commercial
services.

- --------------------------------------------------------------------------------

                                       8





- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS                        NEIGHBORHOOD ANALYSIS
- --------------------------------------------------------------------------------

                               [NEIGHBORHOOD MAP]


- --------------------------------------------------------------------------------

                                       9





- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS                        NEIGHBORHOOD ANALYSIS
- --------------------------------------------------------------------------------


                              NEIGHBORHOOD ANALYSIS


LOCATION


The  neighborhood is located in the City of Santa Clara. The City of Santa Clara
is located in center of Santa Clara County.


BOUNDARIES


The neighborhood boundaries are detailed as follows:

       North:       El Camino Real
       South:       Interstate 280
       East:        Interstate 880
       West:        Lawrence Expressway


LAND USE


Land uses within the subject  neighborhood  consist of a  harmonious  mixture of
commercial  and  residential  development.  The immediate area  surrounding  the
subject is a newer area of development, consisting primarily of residential uses
with much of the  development  being  built  during  the 1970s  and  1980s.  The
majority of the single-family  residential  development within a one mile radius
of the subject may be  described as tract homes in the  $350,000-$500,000  price
range.


GROWTH PATTERNS

Growth patterns have occurred primarily along primary  commercial  thoroughfares
such as El Cmaino Real,  Homestead Road, Meridian Road, San Tomas Expressway and
Lawrence Expressway.


ACCESS


Primary access to the subject neighborhood is provided by Interstate 280 and 880
as well as San Tomas and Lawrence Expressway.


DEMOGRAPHICS


Population  growth and new  household  formations  have been on an upward  trend
within the subject neighborhood.


Selected neighborhood  demographics in a one-, three-, and five-mile radius from
the subject are shown in the following table:


- --------------------------------------------------------------------------------
                                       10





- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS                        NEIGHBORHOOD ANALYSIS
- --------------------------------------------------------------------------------

We are only  showing  one set of  demographics,  however,  the sites are located
relatively close and have basically similar demographics.


CONCLUSION


As shown above, the population within the subject  neighborhood has shown growth
over the  past  five  years.  The  neighborhood  currently  has a strong  income
demographic  profile.  The outlook for the  neighborhood is for good performance
with  improvement  over the next  several  years.  As a result,  the  demand for
existing developments is expected to be strong.

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                                       11





- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS                              MARKET ANALYSIS
- --------------------------------------------------------------------------------


                                 MARKET ANALYSIS

In order to support basic  assumptions  regarding future demand for all types of
real  estate,  the  following  research  was  undertaken.  In  addition  to  the
information  contained  in this  document,  current  market  conditions  for the
subject  property  and an  analysis of sales  activity,  price  trends,  etc. is
contained  in both the  approaches  to value  utilized  herein.  Information  is
included from various Bay Area articles  regarding  local  economic  conditions.
This market analysis document is separated into two primary categories:

               Bay Area and Silicon Valley Apartment Market Overview

               Santa Clara County & Palo Alto Apartment Market


HOUSING MARKET OVERVIEW


Over the last several years California has experienced a strong economy and as a
result  housing  construction  has  improved.   Housing  construction  forecasts
prepared  by the  Construction  Industry  Research  Board  are  presented  as an
indicator  of  the  California  housing  market.  This  data  indicates  housing
construction  dropped  in 1992  and  bottomed  out in 1993.  Activity  increased
substantially since 1996.


Historical figures from the Construction  Industry Research Board's Forecast are
presented below:



- --------------------------------------------------------------------------------------------------------------------------
                                                      CALIFORNIA HOUSING CONSTRUCTION
- --------------------------------------------------------------------------------------------------------------------------
                                                                                                       Annual % Change
                                                                                                      -------------------

           1992     1993     1994     1995     1996     1997       1998       1999       2000     97-98    98-99    99-00
- --------------------------------------------------------------------------------------------------------------------------
Single   76,187   69,900   77,100   68,700   74,900    84,800     94,000    116,000    129,000      11.3     22.9     11.2
Multi    21,220   14,800   19,900   16,600   19,400    26,900     31,600     37,000     45,000      17.5     17.1     21.6
- --------------------------------------------------------------------------------------------------------------------------
Total    97,407   84,700   97,000   85,300   94,300   111,700    126,000    153,000    174,000      12.8     21.4     13.7
- --------------------------------------------------------------------------------------------------------------------------
Source:  Construction Industry Research Board
- --------------------------------------------------------------------------------------------------------------------------

The decreases in  construction  and sluggish  recovery  through 1993 reflect the
slide in the  state's  economy and the  pessimistic  market  psychology  despite
relatively  low mortgage  interest  rates.  Although a  significant  increase in
activity was recorded in 1994  signaling  increased  consumer  confidence,  1995
results proved to be disappointing. Activity in 1996, however, indicates a 10.6%
increase in activity  over 1995 totals and 1997  figures  demonstrate  a gain of
18.45% over 1996. The  construction  expansion  continued  through 1998, with an
increase in residential  construction of 12.80%. The housing  construction level
grew in 1999 with an estimated increase of 21.42% over 1998. The number for 2000
was a more conservative growth rate of 13.73%.


BAY AREA MULTIFAMILY MARKET


The Bay Area includes  nine counties  including  Alameda,  Contra Costa,  Marin,
Napa, San Francisco, San Mateo, Santa Clara, Solano, and Sonoma.


- --------------------------------------------------------------------------------

                                       12





- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS                              MARKET ANALYSIS
- --------------------------------------------------------------------------------


The statistical  data presented  subsequently  is based on figures  compiled and
published by Realdata, Inc. on a semi-annual basis.


VACANCY


Vacancy  rates  for  multifamily  properties  in  the  Bay  Area  have  remained
relatively stable since 1986, rarely rising above 5 percent.


Historical Vacancy: The overall vacancy rate for the Bay Area as of 1999 was 3.7
percent.  The following table summarizes the multifamily market vacancy rates in
the Bay Area.


- ----------------------------------------------------------------------------------------------
                              BAY AREA MULTIFAMILY
                                     VACANCY
- ----------------------------------------------------------------------------------------------
                                                                                      Avg.
   County     1990  1991   1992  1993   1994  1995   1996  1997  1998   1999  2000  1990-2000
- ----------------------------------------------------------------------------------------------
Alameda        3.1%  3.7%   2.6%  5.2%   4.8%  3.4%   3.2%  3.4%  3.7%    3.7  2.7%      3.6%
Contra Costa   3.7%  4.0%   2.7%  6.0%   5.7%  5.1%   4.8%  4.4%  3.5%    3.9  2.9%      4.2%
Marin          2.4%  5.6%   3.1%  2.6%   3.2%  3.6%   2.6%  3.4%  3.2%    4.2  2.7%      3.3%
Napa           1.6%  2.5%   1.2%  3.1%   2.9%  4.2%   2.5%  3.2%  2.2%    2.6  2.3%      2.6%
San Francisco  6.2%  3.2%   3.3%  4.9%   4.1%  3.1%   3.7%  3.3%  2.8%    2.9  1.8%      3.6%
San Mateo      2.8%  3.5%   1.6%  3.8%   3.4%  3.3%   2.9%  4.4%  4.7%    4.3  3.4%      3.5%
Santa Clara    2.6%  2.7%   3.4%  4.9%   4.0%  2.2%   2.6%  2.8%  3.8%    3.6  2.4%      3.2%
Solano         2.7%  2.8%   2.2%  4.8%   5.1%  5.0%   4.6%  4.3%  4.0%    4.1  2.2%      3.8%
Sonoma         2.2%  3.2%   4.1%  5.4%   6.0%  5.0%   3.6%  3.2%  2.8%    3.3  2.5%      3.8%
- ----------------------------------------------------------------------------------------------
Average        3.2%  3.3%   2.9%  5.0%   4.5%  3.4%   3.3%  3.5%  3.4%    3.7  2.6%      3.5%
- ----------------------------------------------------------------------------------------------
Source:  RealData, Inc.
- ----------------------------------------------------------------------------------------------


The most current  information  states that the total vacancy rate in Santa Clara
County was 2.4%, as of December  2000.  This rate is slightly lower than the Bay
Area market  average of 2.6%,  and is lower than the nine-year  average  vacancy
rate within the County of 3.2%.


RENTS


Rents in the Bay Area were generally stable from 1992 through 1994 and increased
rapidly from 1995 to present.


Rental Increases: Overall, the peak full year for rental increases was 1996 when
the  average  overall  rent  increase  in the Bay  Area was  13.9  percent.  The
following table summarizes historical rental increases by county.


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                                       13





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ALDERWOOD AND TIMBERLEAF APARTMENTS                              MARKET ANALYSIS
- --------------------------------------------------------------------------------


- ----------------------------------------------------------------------------------------------------
                    BAY AREA HISTORIC MULTIFAMILY RENT INCREASES
- ----------------------------------------------------------------------------------------------------
                                                                                            Avg.
   County       1990  1991  1992  1993   1994   1995    1996   1997   1998  1999    2000  1990-2000
- ----------------------------------------------------------------------------------------------------
Alameda         4.2%  1.7%  1.6%  1.8%   1.0%   2.0%   12.0%   9.5%   7.1%    5.3%  34.8%      7.4%
Contra Costa    5.4%  2.6%  1.4%  1.1%  -0.1%   3.3%    7.5%   6.2%   9.8%    9.5%  25.2%      6.5%
Marin           6.3%  3.7%  1.7% -3.3%   4.3%   3.6%    7.7%  11.4%  10.0%    5.8%  17.2%      6.2%
Napa            9.4%  3.9% -5.4%  0.3%   1.0%   1.2%    3.7%   5.8%   7.9%    7.2%  14.4%      4.5%
San Francisco   8.4%  3.4% -2.0%  1.1%   1.7%   2.6%   20.5%  15.6%  14.0%    7.2%  35.8%      9.8%
San Mateo       5.1%  3.3%  0.9%  3.2%   1.9%   4.4%   18.8%   7.1%  10.8%    7.9%  37.4%      9.2%
Santa Clara     4.3%  3.3% -0.7%  2.7%   0.1%  10.2%   17.5%  10.7%   3.0%    7.0%  38.8%      8.8%
Solano          7.0%  4.1%  1.6% -0.6%   0.6%   0.0%    2.5%   4.2%   7.2%    8.8%  16.2%      4.7%
Sonoma          7.4%  3.5%  1.2% -0.6%  -1.2%   2.4%    5.9%   7.7%  10.0%    5.6%  17.7%      5.4%
- ----------------------------------------------------------------------------------------------------
Average         5.6%  3.4%  0.3%  1.0%   0.9%   5.9%   13.9%   9.9%   8.8%    7.0%  34.0%      8.2%
- ----------------------------------------------------------------------------------------------------
Source:  RealData, Inc.
- ----------------------------------------------------------------------------------------------------


Prior to 1997,  rental  increases in Santa Clara County were typically below the
overall  market  average.  However,  rental  increases have been positive in all
years averaging 5.8% per year. As evidenced in the table,  many Bay Area markets
experienced  rapid rent  increases  in 1996  through  2000,  with San  Francisco
leading the group for the first three of those four years.  The subject and some
of the rental  comparables  shown in the  Income  Capitalization  Approach  have
experienced  rental rate  increases  in the past year.  According to the subject
manager,  from December 1999 to January 2001 rents at the subject  property have
increased 25% to 50%, depending on unit type.


Apartment  rental  rates in Santa Clara  County are higher on average than rents
Bay Area wide.  The  following  table  summarizes  rental  rates per square foot
within San Francisco and the Bay Area.



- ---------------------------------------------------------------------------------------
                        RENTAL RATES PER SQUARE FOOT PER MONTH
                                UNFURNISHED APARTMENTS
                                  DECEMBER 2000
- ---------------------------------------------------------------------------------------
     County      Studio  1B/1B     2B/1B    2B/1+B   3B/1B  3B/1+B   4B/1+B     Avg.
- ---------------------------------------------------------------------------------------
Santa Clara Co.   $3.04    $2.52      $2.19   $2.24   $1.50   $2.16     $2.00    $2.36
Bay Area          $2.75    $2.75      $2.20   $1.86   $1.93   $1.63     $1.93    $2.05
- ---------------------------------------------------------------------------------------
Source:  RealData, Inc.
- ---------------------------------------------------------------------------------------


- ---------------------------------------------------------------------------------------
                           RENTAL RATES PER UNIT PER MONTH
                                UNFURNISHED APARTMENTS
                                  DECEMBER 2000
- ---------------------------------------------------------------------------------------
     County      Studio  1B/1B     2B/1B    2B/1+B   3B/1B  3B/1+B   4B/1+B     Avg.
- ---------------------------------------------------------------------------------------
Santa Clara Co.   1,382    1,763      1,954   2,242   1,535   2,648     2,900   $1,959
Bay Area          1,319    1,524      1,624   1,925   1,626   2,337     1,711   $1,685
- ---------------------------------------------------------------------------------------
Source:  RealData, Inc.
- ---------------------------------------------------------------------------------------

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                                       14





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ALDERWOOD AND TIMBERLEAF APARTMENTS                              MARKET ANALYSIS
- --------------------------------------------------------------------------------


Historically,  the  expanding  employment  base in the area has kept demand at a
high level and the market has been seen large rental increases over the last two
years. Discussions with market participants indicated that the current market is
softer than has been seen over the past two years but is still  considered  very
healthy with most vacancy rates still under 5%.  However,  rents have  flattened
out and in the more expensive  market slight downward trend is noted. The future
of apartment  rents is uncertain  and is dependent  upon the strength of the Bay
Area economy. Most think rents will remain relatively flat for the near term due
to the down turn in the economy.


HISTORIC HOUSING SUPPLY


The construction of new housing units in Santa Clara County reached a decade low
in  1992,  with  the  development  of  an  estimated  2,836  units.  Multifamily
construction  had been the  dominant  unit of  construction  through  the 1980s;
however,  the  development of single family housing has become more prevalent in
the 1990s.  The following  table  summarizes the historical  permit  activity in
Santa Clara since 1988.


             -----------------------------------------------------
                                BUILDING PERMITS
                               SANTA CLARA COUNTY
             -----------------------------------------------------
               Year         Single         Multi        Total
             -----------------------------------------------------
             1988          3,676         2,789         6,465
             1989          2,548         2,311         4,859
             1990          1,675         3,646         5,321
             1991          1,663         2,102         3,765
             1992          1,693         1,143         2,836
             1993          1,822         1,617         3,439
             1994          2,127         1,827         3,954
             1995          2,199         1,285         3,484
             1996          4,043         3,459         7,502
             1997          4,367         4,443         8,810
             1998          3,911         3,615         7,526
             1999          3,353         3,690         7,043
             -----------------------------------------------------
             9 yr. Avg      2,756          2,661        5,417
             5 yr. Avg      3,575          3,298        6,873
             -----------------------------------------------------
             Source:   Northern   California  Real  Estate Report
             -----------------------------------------------------


As can be seen in the preceding table, the nine-year  average permit issuance is
5,417  units per year.  This  increases  to 6,873 per year based on a  five-year
average.


According to this historical permit activity, multifamily permits have accounted
for 44% of residential  permits  issued on a five-year  average and 48% of total
permits based on an nine-year  average.  Single family housing has accounted for
56% based on a  five-year  average  and 52% based on a  nine-year  average.  The
following  chart  summarizes the data of single family and  multifamily  housing
permit issuance.

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                                       15





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ALDERWOOD AND TIMBERLEAF APARTMENTS                              MARKET ANALYSIS
- --------------------------------------------------------------------------------


                --------------------------------------------------
                          SANTA CLARA COUNTY HISTORICAL
                                 PERMIT ACTIVITY
                --------------------------------------------------
                                           9 Yr. Avg   5 Yr. Avg
                --------------------------------------------------
                Single Family Dwellings:        52%         56%
                Multifamily Dwellings:          48%         44%
                --------------------------------------------------
                  Total                        100%        100%
                --------------------------------------------------
                Source:   Northern California Real Estate Report
                --------------------------------------------------


These  statistics  will be utilized to  determine  future  demand for housing in
Santa Clara County.


During  recent  years,  the increase in housing  supply has been limited  though
increasing  in Santa Clara County.  The  historically  strong market  conditions
spurred an  increase in supply but the supply was  generally  not able to keep a
pace adequate to meet demand.  The economic strength of the late 1990's resulted
in several new projects being planned  and/or built (mostly in the  southernmost
communities  of  San  Jose,  Morgan  Hill,  and  Gilroy).   Collectively   these
communities  increased the county's  housing supply by a greater  magnitude than
that experienced at any time during the past several years.


DEMAND ANALYSIS


Demand  for  housing  in the local  area is  related  to  employment  growth and
convenient  access  to  nearby  freeways,  and  shopping  areas,  as well as the
desirable quality of the surrounding neighborhood.


According  to  forecasts  prepared by the  Association  of Bay Area  Governments
(ABAG),  the  population  of Santa  Clara  County  will grow by a total of 14.9%
between 2000 and 2020.  This represents  approximately  13,070 new residents per
year.  Employment growth for the same period is forecast to be 22.5%. The growth
of employment over population in the county should keep demand for housing high.
In addition, strict zoning ordinances,  condominium conversions, and the lack of
available   developable   land  should  continue  to  ensure  high   residential
occupancies and limited  construction within developed  neighborhoods.  ABAG has
projected that between 2000 and 2020, the Santa Clara County housing market will
require 97,860 new dwelling units.


According to the historical permit activity,  multifamily permits have accounted
for 44% of  residential  permits  issued  since 1995 and single  family  housing
permits  accounted for 56% of the total.  Projections by the  Association of Bay
Area  Government  indicate  that  between  2000 and 2020 an average of 4,893 new
housing units will be required annually.

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                                       16





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ALDERWOOD AND TIMBERLEAF APARTMENTS                              MARKET ANALYSIS
- --------------------------------------------------------------------------------


       -----------------------------------------------------------
                      SANTA CLARA COUNTY HOUSEHOLD
                             PROJECTIONS
       -----------------------------------------------------------
                                                     Avg. Annual
                               2000        2020        Change
       -----------------------------------------------------------
       Households            567,080     664,930         4,893
       -----------------------------------------------------------
       Source:  ABAG, Projections 2000
       -----------------------------------------------------------


Based on  historical  permit  activity,  44% of the  additions  to  supply  were
multifamily and 56% were single family. If these statistics remain constant,  an
average of 2,153  multifamily  units will be required annually (44% x 4,893) and
2,740 single-family units will be required annually (56% x 4,893).  Between 1988
and 1999, an average of 2,756  single-family units and 2,661 multifamily housing
units were added to supply on an annual basis  totaling  5,417  units,  slightly
more than the projected  requirements.  Based on permit information,  it appears
that construction activity has responded to the strong economic conditions.


IMPACT OF THE ECONOMIC SLOW DOWN IN THE BAY AREA


Economic Downturn


The  quarterly  survey of the  national  economy by the  Anderson  School at the
University of California,  Los Angeles (UCLA),  said the economic  slump,  while
brief,  would  mark  the end of the  gold-rush  mentality  spawned  by the  `New
Economy'.  Overall, the widely-respected economic forecast said the U.S. economy
faces a 90 percent  chance of going into recession this year and will only stage
a weak  recovery  by year's end.  "If history is a guide,  the worst part of the
adjustment  will be over in 2001,  and a recovery  to be  complete  in 2002." In
December 2000, at a time when most other  forecasters were predicting  continued
growth,  the UCLA survey  pegged the  likelihood  of a  recession  in 2001 at 60
percent. A recession is defined as two consecutive quarters of contracting gross
domestic product (GDP).


Leamer  said there are major  warning  signs the nearly  10-year  U.S.  economic
expansion is over.  Manufacturers  are scaling back hours at plants, a potential
prelude to layoffs, and the unemployment rate is creeping up. Combined that with
a flood of grim  corporate  profit  reports issued by many U.S. firms making the
chance of  recession  nearly  certain,  the report  said.  The  survey  sees GDP
contracting  to 0.2  percent in Q2 2001 and 0.7 percent  the  following  quarter
before  growing  again at 0.1  percent  in Q4.  For 2001,  GDP was pegged at 0.7
percent,  a far cry from the  whopping  5 percent  in 2000.  "Don't  expect  the
adjustment  to be complete by 2002 and don't  expect  growth rates like 1998 and
1999," the report said.  "It'll be 3's not 5's." The U.S. Federal Reserve Bank's
recent  aggressive  moves to cut  interest  rates have also  helped to lower the
recession  risk a bit,  but they  won't be enough to offset  likely  substantial
declines in business  investment and consumer spending for major items like cars
and computers, Leamer said.


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                                       17





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ALDERWOOD AND TIMBERLEAF APARTMENTS                              MARKET ANALYSIS
- --------------------------------------------------------------------------------


Leamer said fears over the future should also rein in consumer  spending,  which
had been fueled by a high-flying  stock market over the past few years.  Instead
of saving money,  many Americans used their  windfalls to snap up expensive cars
and homes in the belief the good times would never end.  Now that equity  prices
have returned to earth, consumers and business realize they have to be much more
prudent with their  pocketbooks.  "The lifestyle of the year 2002 is going to be
one in which we  prepare  for the  future in the  old-fashioned  way:  Mainly we
save," Leamer said in an interview.  "Businesses will continue to invest in tech
and the 'New  Economy' but they will do it in a considered  and more  thoughtful
way."


The UCLA report pegged  consumption  growth dropping sharply from 5.3 percent in
2000 to 1.7  percent  in 2001.  After  that,  however,  it is  expected  to rise
slightly to 2.2 percent,  the forecast  said. The UCLA report also predicted the
U.S.  unemployment rate would climb to 4.8 percent in 2001, up from 4 percent in
2000. The report also predicted a continued jobless rate increase in 2002 to 6.1
percent, which if reached would mark the highest since 1994.


Overall  inflation  was also  expected to remain tame,  easing to 2.7 percent in
2001 and 1.8  percent  in 2002.  Inflation  was 3.4  percent  in 2000.  The core
inflation  rate,  measured as the consumer  price index minus food and fuel, was
expected  to fall to 2.3  percent in 2001 from 2.4  percent in 2000,  the report
said. CPI will dip to 1.7 percent in 2002, according to the forecast.


Local Impact


Furthermore,  the survey by economists at the Anderson  School at the University
of  California,  Los Angeles  (UCLA),  said an  increasing  number of layoffs in
Silicon  Valley and a slow-down in  investment  in  technology  and software are
ominous signs for the state which has the world's  sixth-largest  economy.  "The
outlook is gloomy only compared to where we have been," Tom Lieser, the report's
author,  said in an interview.  "We may still avoid  recession in California but
energy is the wild card."


The  near-term  significant  problem in the Bay Area is the dramatic  decline in
high-tech  stock wealth that once fueled  frantic  consumer  spending and helped
keep state coffers flush,  Lieser said. The forecast saw personal  income growth
dipping steeply from 11.5 percent in 2000 to 4.9 percent in 2001. This will rise
again to 5.1 percent in 2002, the report said.  "What we are getting is a little
more significant than just a slowdown," Lieser said. "It is going to put us back
in a weaker growth pattern for California."


The energy crisis remains a wild card in the calculations, Lieser said, although
he warned that it could hurt the state in the long run. So far,  California  has
spent  billions of dollars to keep the lights on in the crisis  stemming  from a
flawed  deregulation  law in 1996 that allowed  wholesale  power prices to float
freely but kept strict  price caps on the amount  utilities  could  charge their
customers.  As a result,  the state's two biggest  utilities are on the brink of
bankruptcy and continued power shortages  threaten


- --------------------------------------------------------------------------------

                                       18





- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS                              MARKET ANALYSIS
- --------------------------------------------------------------------------------


millions of California  homes and  businesses  with more rolling  blackouts this
summer.  However,  a huge bond  issue  will  help  repay the state for its power
purchases   and  a  separate  UCLA  report  on  the  energy  crisis  said  these
expenditures  will likely only have a small impact on the state's  economy.  The
rolling  blackouts,  while a  nuisance,  may in fact have a small  effect on the
state's productivity, Christopher Thornberg wrote in the energy report. "An hour
without power can be viewed as an extended  coffee break for most businesses and
lost production  during the downtime can be made up through speeding the pace of
operations  after the power returns,"  Thornberg said.  Still,  Lieser added the
energy crisis remains a factor which could help push California and the Bay Area
in particular into recession,  especially since most indicators already point to
a slowing economy.


A more important  consequence of the energy crisis is that businesses may in the
long-term  decide not to relocate to the Bay Area and many others  already  here
may pack up and leave if the  energy  crisis is not  resolved.  "The  effects of
brownouts and  blackouts,  if prolonged,  could  discourage  business  expansion
significantly," Lieser wrote in the report.


Residential  construction will also perk up a bit in 2001, but not nearly enough
to bring relief to the state's tight  housing  market,  Lieser said.  The report
pegged the number of residential  building  permits at 154,000 units in 2001, up
from 149,000 units in 2000.  But the figure was expected to dip again to 151,000
units in 2002, the report said.


Growth in payrolls  was expected to fall from 3.8 percent in 2000 to 2.4 percent
in 2001. This will ease even further to 1.6 percent in 2002, the forecast said.


EMPLOYMENT


According  to the Sate of  California  Employment  Development  Department,  the
unemployment  rate in the San Clara County was an estimated  4.2 percent  during
June 2001.  Unemployment  within the City of Palo Alto in June was 2.1%. Overall
unemployment  in June 2000 was 2.2% and in 1999 averaged 3.0%.  Based upon these
figures it appears the local economy is still strong.


Santa Clara County  reported  1,019,900 wage and salary jobs in June 2001 versus
1,045,200 wage and salary jobs in March 2001, a decrease of 25,300 jobs from the
March figure or 5,060 per month. The labor force in June 2000 was 1,009, 900 and
in 1999 the annual average was 965,500.


Despite   ongoing   corporate   re-structuring   and  some  near-term   economic
uncertainty,  the information available indicates that employment is expected to
remain strong which should have a positive impact on both the local and regional
apartment markets over the long term.


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                                       19






- --------------------------------------------------------------------------------
ALDERWOOD AND TIMBERLEAF APARTMENTS                              MARKET ANALYSIS
- --------------------------------------------------------------------------------


OCCUPANCY


Properties of similar  quality and appeal are located in the subject  area.  The
most comparable of these are summarized in the following table as well as within
the Income Approach.


Competitive apartment properties in the subject's vicinity have been surveyed in
order  to  identify  the  occupancy  trends  within  the  immediate   submarket.
Discussions with property management at the following comparables indicated that
historically  the market has been extremely tight with few vacancies and several
increases in asking rents since the beginning of 2000. The Bay Area in total has
seen a decrease in rents.  The  comparable  data is  summarized in the following
table:

The comparable  properties  surveyed reported  occupancy rates of 95% or better,
and all are  currently  in average  to good  condition.  Based on the  foregoing
analysis,  CB Richard Ellis,  Inc.'s conclusion of stabilized  occupancy for the
subject is illustrated in the following table.

- --------------------------------------------------------------------------------

                                       20





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ALDERWOOD AND TIMBERLEAF APARTMENTS                              MARKET ANALYSIS
- --------------------------------------------------------------------------------


Our estimate of the stabilized  occupancy  rate  represents  economic  occupancy
which includes collection loss.


Throughout 2000 the entire Bay Area region  witnessed a major  tightening in the
multi-family  market with a  significant  drop in  vacancies  and  unprecedented
increases in rental rates.  Over the last several years supply has not been able
to keep up with the huge demand for housing that has resulted  from the economic
boom experienced in the region, and more specifically,  the Silicon Valley area,
which includes Palo Alto.  However,  more recently in the second quarter of 2001
there has been some  softening in the  apartment  market and  property  managers
report a slight  increase in vacancies and a general  flattening of rents.  This
has historically been typical of the later winter months.


Overall,  demand for housing in California is expected to increase in the coming
years. According to The Association of Bay Area Governments,  the largest demand
for new housing  units between now and the year 2005 is expected to occur in the
area.  This demand for new units is expected to keep  vacancies  low and housing
prices and multifamily market rents high.


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                                       21





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ALDERWOOD AND TIMBERLEAF APARTMENTS                                SITE ANALYSIS
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                                   [SITE MAP]





                                  [Site map 2]

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                                       22





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ALDERWOOD AND TIMBERLEAF APARTMENTS                                SITE ANALYSIS
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                                  SITE ANALYSIS

The following is for Alderwood:

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                                       23





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ALDERWOOD AND TIMBERLEAF APARTMENTS                                SITE ANALYSIS
- --------------------------------------------------------------------------------


The following is for Timberleaf:

CONCLUSION


The site is well located and afforded average access and visibility from roadway
frontage. The size of the site is typical for the area and use, and there are no
known detrimental uses in the immediate  vicinity.  Overall,  there are no known
factors which are considered to prevent the site from development to its highest
and best use, as if vacant, or adverse to the existing use of the site.


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                                       24





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ALDERWOOD AND TIMBERLEAF APARTMENTS                         IMPROVEMENT ANALYSIS
- --------------------------------------------------------------------------------


                              IMPROVEMENT ANALYSIS


The following chart depicts the subject's unit mix and building area.


Alderwood:

Timberleaf:

Building plans and specifications  were not provided for the preparation of this
appraisal.  The following is a description of the subject improvements and basic
construction features derived from CB Richard Ellis, Inc.'s physical inspection.


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ALDERWOOD AND TIMBERLEAF APARTMENTS                         IMPROVEMENT ANALYSIS
- --------------------------------------------------------------------------------


There is some deferred  maintenance for a replacement of both project's roof and
siding that are deducted from the values herein.  The costs were provided by the
borrower  and we have relied upon these  figures.  We reserve the right to amend
our value conclusions if the cost to cure is different than utilized herein.


CONCLUSION


The  improvements  are  considered  to be in average  overall  condition and are
considered  to be  typical  for the age and  location  in regard to  improvement
design and layout, as well as interior and exterior  amenities.  Overall,  there
are no  known  factors  which  could  be  considered  to  adversely  impact  the
marketability of any of the subject units or the overall property.


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ALDERWOOD AND TIMBERLEAF APARTMENTS                      TAX AND ASSESSMENT DATA
- --------------------------------------------------------------------------------


                             TAX AND ASSESSMENT DATA


In  California,  all real property is assessed at 100% of full cash value (which
is  interpreted  to mean  market  value of the fee simple  estate  interest)  as
determined by the County Assessor.  Generally a reassessment  occurs only when a
property  is  sold  (or  transferred)  or  when  new  construction   occurs  (as
differentiated from replacing existing construction). Assessments for properties
that were  acquired  before the tax year 1975/76 were  stabilized  as of the tax
year  1975/76.  Property  taxes are  limited by State law to 1% of the  assessed
value plus voter-approved obligations. If no sale (or transfer) occurs or no new
building  takes  place,  assessments  may not increase by more than 2% annually.
Taxes are  payable in two equal  installments,  which  become  delinquent  after
December 10 and April 10,  respectively.  The  following  table  summarizes  the
current assessed value and property taxes for the subject.

Alderwood:

Timberleaf:

The subject property's special  assessments  consist of vector control,  traffic
mitigation, flood control and open space district funds.

Tax and Assessment Conclusion:  CB Richard Ellis Valuation and Advisory Services
assumes that all taxes are current.  If the subject sold for the value estimated
in this report,  a reassessment at that value would most likely occur,  with tax
increases  limited to 2% annually  thereafter  until the property is sold again.
The  consequences of this  reassessment  have been considered in the appropriate
valuation sections.


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ALDERWOOD AND TIMBERLEAF APARTMENTS                         HIGHEST AND BEST USE
- --------------------------------------------------------------------------------


                              HIGHEST AND BEST USE


In  appraisal  practice,  the  concept of highest  and best use  represents  the
premise  upon which value is based.  The four  criteria the highest and best use
must meet are:


                         o    legal permissibility;
                         o    physical possibility;
                         o    financial feasibility; and
                         o    maximum profitability.


Highest and best use analysis  involves  assessing the subject both as if vacant
and as improved.


AS VACANT


Legal Permissibility


The legally  permissible  uses were discussed in detail in the site analysis and
zoning sections of this report.


Physical Possibility

The physical characteristics of the subject site were discussed in detail in the
site  analysis.  Overall,  a wide  range of  legally  permissible  uses would be
physically possible.


Financial Feasibility


The  financial  feasibility  of a specific  property  is market  driven,  and is
influenced by surrounding  land uses. Based on the subject's  specific  location
and physical  characteristics,  multi-family residential development of the site
in a manner which is  complimentary to the surrounding land uses would represent
the most likely financially feasible option.


Current market conditions and development  activity indicate  development of the
site with a multi-family  residential use would be economically feasible at this
time.


Maximum Profitability


The use which  results in the  maximum  profitability  of the site is beyond the
scope of this assignment.  The recipient of the property's  productivity  (e.g.,
the lender,  equity investor,  the public, etc.) greatly determines what the use
should  be.  Regardless,   the  use  for  the  subject  should  conform  to  the
neighborhood trends and be consistent with existing land uses.


CONCLUSION:  HIGHEST AND BEST USE AS VACANT

Based on the foregoing analysis,  the highest and best use of the site as though
vacant would be for multi-family residential development.


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ALDERWOOD AND TIMBERLEAF APARTMENTS                         HIGHEST AND BEST USE
- --------------------------------------------------------------------------------


AS IMPROVED


Legal Permissibility


The subject site was approved for apartment development and the improvements are
a legally conforming use.


Physical Possibility


The subject  improvements were discussed in detail in the Improvement  Analysis.
The layout and positioning of the  improvements are functional for apartment use
based on comparison to neighborhood properties.


Financial Feasibility


The financial  feasibility  for an apartment  property is based on the amount of
rent which can be generated,  less operating  expenses required to generate that
income;  if a residual amount exists then the land is being to a productive use.
As will be  indicated  in the Income  Capitalization  Approach,  the  subject is
capable of producing a positive net cash flow and continued  utilization  of the
improvements for apartment is considered financially feasible.


Maximum Profitability


The  maximally  profitable  use of the  subject as  improved  should  conform to
neighborhood  trends and be consistent with existing land uses. Although several
uses may generate  sufficient  revenue to satisfy the required rate of return on
investment  and provide a return on the land,  the single use that  produces the
highest  price or value is  typically  the  highest and best use.  However,  the
recipient of the  property's  productivity  greatly  determines  what actual use
maximizes  profitability.  It  appears  there  are no  alternative  uses  of the
existing  improvements which would produce a higher net income and/or value over
time than the current use.


CONCLUSION: HIGHEST AND BEST USE AS IMPROVED


Based on the foregoing,  the highest and best use of the property as improved is
consistent with the existing use, as an apartment development.


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                                       29




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ALDERWOOD AND TIMBERLEAF APARTMENTS                        APPRAISAL METHODOLOGY
- --------------------------------------------------------------------------------


                              APPRAISAL METHODOLOGY


In appraisal practice,  an approach to value is included or omitted based on its
applicability  to the property type being valued and the quality and quantity of
information available.


COST APPROACH


The Cost Approach is based upon the proposition the informed purchaser would pay
no more for the  subject  than the cost to produce a  substitute  property  with
equivalent utility.  This approach is particularly  applicable when the property
being appraised involves relatively new improvements which represent the highest
and best use of the land or when relatively  unique or specialized  improvements
are  located  on the site and for  which  there  exist  few  sales or  leases of
comparable properties.


SALES COMPARISON APPROACH


The Sales Comparison Approach utilizes sales of comparable properties,  adjusted
for  differences,  to indicate a value for the  subject.  Valuation is typically
accomplished  using physical units of comparison  such as price per square foot,
price per unit,  price per floor,  etc., or economic units of comparison such as
gross  rent  multiplier.  Adjustments  are  applied  to the  physical  units  of
comparison  derived from the comparable sale. The unit of comparison  chosen for
the subject is then used to yield a total value.  Economic  units of  comparison
are not adjusted, but rather analyzed as to relevant differences, with the final
estimate derived based on the general comparisons.


INCOME CAPITALIZATION APPROACH


The Income  Capitalization  Approach  reflects  the  subject's  income-producing
capabilities.  This approach is based on the assumption that value is created by
the expectation of benefits to be derived in the future.  Specifically estimated
is the amount an  investor  would be willing to pay to receive an income  stream
plus  reversion  value  from a  property  over a period of time.  The two common
valuation  techniques  associated  with the Income  Capitalization  Approach are
direct capitalization and the discounted cash flow (DCF) analysis.


METHODOLOGY APPLICABLE TO THE SUBJECT


In valuing the  subject,  only the Sales  Comparison  and Income  Capitalization
Approaches are applicable and have been used.


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ALDERWOOD AND TIMBERLEAF APARTMENTS                    SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------


                            SALES COMPARISON APPROACH


The following table summarizes the most comparable data utilized in the analysis
with  a  comparable  map  presented  on the  following  page.  A  more  detailed
description of each transaction is included in the Addenda.

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                                       31





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ALDERWOOD AND TIMBERLEAF APARTMENTS                    SALES COMPARISON APPROACH
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                                      [MAP]


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                                       32





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ALDERWOOD AND TIMBERLEAF APARTMENTS                    SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------


                           ANALYSIS OF IMPROVED SALES

Improved Sale One


This  comparable  represents the acquisition of a three-story  garden  apartment
complex,  developed  in 1999.  The  complex  is located  in the  Cupertino  in a
mixed-use area near  Interstate  280. This project was developed at a density of
about 31 units per acre and offers seven plan styles  including  four  different
one-bedroom/one-bathroom  floor plans and three  two-bedroom/two-bathroom  floor
plans. Arioso Apartments sold for $46,500,000 for this 201-unit development.  At
the time of sale,  this  comparable  was in lease-up and was reported to have an
actual occupancy of about 68%. However,  it was our understanding  that the sale
was subject to stabilized  occupancy.  The property,  upon stabilization,  would
have a pro forma net operating  income per unit of about $16,772 per year, which
results in an overall rate of about 7.25%.


Arioso  Apartments is  constructed of wood frame and stucco and was in excellent
condition  at the time of sale.  A  downward  adjustment  is  warranted  for the
apartment market conditions since this comparable's date of sale, as compared to
the  subject's  date of  value.  The  comparable  would be  considered  slightly
inferior  as it had some  absorption  at the time of sale;  however,  due to the
strong  market  conditions  at the time of the sale,  the  remaining  absorption
period was nominal.  Further,  the closing  sale date was subject to  stabilized
occupancy.  Due to its newly  built  condition,  the  comparable  is  considered
superior in  condition  and a downward  adjustment  is applied.  The location is
slightly inferior.  The average unit size is superior,  being larger on average.
Overall, the subject is considered superior to this comparable.


Improved Sale Two


The Villa De Anza Apartments represents the sale of a two-story garden apartment
complex in November of 2000. This property is located in Cupertino. This project
offers large  two-bedroom/two-bathroom  floor plans.  At the time of sale,  this
comparable was reported to have an actual occupancy of 100% which was generating
a net operating income per unit of about $15,500 per year. This is actual income
in place and not pro forma.  The sale price was  $31,000,000,  or  $258,333  per
unit, which resulted in a 6.0% capitalization  rate. This complex is constructed
of wood frame and stucco and was in average condition at the time of sale.


A downward adjustment for date of sale was made since the rental rates and sales
activity have declined since the time of the purchase.  An upward adjustment for
age is made to the  comparable.  A downward  adjustment  was made for the larger
average unit size of this comparable.


Improved Sale Three

This  comparable is The Waterford  place  Apartments in San Jose. It is a garden
apartment  complex  completed  in 1999  with a total of 238  units in one-,  and
two-bedroom plans,  averaging 923 square


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                                       33





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ALDERWOOD AND TIMBERLEAF APARTMENTS                    SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------


feet per unit (NRA).  Project amenities  include pool, spa, fitness center,  and
clubhouse. Units are equipped individually with washer/dryers.  The property was
100%  occupied  at the time of sale,  with an NOI of  approximately  $17,857 per
unit. It was purchased in June 2000 per a confidential  source for  $50,000,000,
or $210,084 per unit.


A downward adjustment for date of sale was made since the rental rates and sales
activity have declined since the time of the purchase.  A downward adjustment is
made for the comparable's superior age and superior average unit size. An upward
adjustment was made for it inferior  location in San Jose where rental rates are
typically lower than in Cupertino on average.


Improved Sale Four


This is the  pending  sale of a  340-unit  apartment  complex  in Walnut  Creek.
Stoneridge  was built in 1972 and has an average  unit size of 979 square  feet.
The  property  was  listed  for  $56,800,000  and  is  just  closed  escrow  for
$54,000,000  or $158,824 per unit. A broker  familiar  with the sale  reported a
6.6% capitalization rate on existing income.


As this is a recent  sale it  reflects  current  market  conditions  and no time
adjustment is needed.  This complex is located in Walnut Creek and is considered
an inferior location.  The complex is older construction than the subject and is
inferior  in  quality  and  appeal.  An  upward  adjustment  for this  factor is
warranted.


This property  previously sold in November 2000 for $144,118 per unit.  However,
according  to a market  participant,  the  property  was not  placed on the open
market at this time and the  previous  owners  had not  brought  the units up to
market rent levels.


Improved Sale Five


This  comparable  represents  the  acquisition of a two-story  garden  apartment
complex,  developed in 1973 and last  renovated in  1999/2000.  This project was
developed  at a density of about 28 units per acre and offers  three plan styles
including a  one-bedroom/one-bathroom  units, a  two-bedroom/one-bathroom  floor
plan,  and a  two-bedroom/two-bathroom  floor  plan.  At the time of sale,  this
comparable  was  reported  to have an  actual  occupancy  of about 95% which was
generating  a net  operating  income  per unit of about  $13,131  per year.  The
indicated capitalization rate is 7.25%.


This property is constructed of wood frame and stucco and was in average to good
condition at the time of sale with minimal deferred maintenance. The building is
located  in the  western  San  Mateo  County in  Pacific  the  Hickey  Boulevard
interchange with I-280.


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ALDERWOOD AND TIMBERLEAF APARTMENTS                    SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------


An upward  adjustment is made for the comparable's  inferior age and location in
Pacifica and an upward for its inferior average unit size.


SUMMARY OF ADJUSTMENTS


Based on the foregoing discussions, the following table presents the adjustments
warranted to each sale,  as compared to the subject.  The  following  adjustment
grid  implies a level of  accuracy  which may not exist in the  current  market.
However,  the grid has been included in order to illustrate the magnitude of the
warranted  adjustments.  Use  of  an  adjustment  grid  in  making  quantitative
adjustments is only  appropriate  and reliable when the extent of adjustment for
each particular factor is well supported and the dollar or percentage adjustment
is derived  through  either paired sales  analysis or other data relevant to the
market.  In  instances  where  paired  sales  and  market  data  is not  readily
available,  the  appraiser  must  use his  best  judgment  to make a  reasonable
estimate for the appropriate warranted adjustment.

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ALDERWOOD AND TIMBERLEAF APARTMENTS                    SALES COMPARISON APPROACH
- --------------------------------------------------------------------------------

SALES COMPARISON APPROACH CONCLUSION

Based  on the  preceding  discussions  of  each  comparable  and  the  foregoing
adjustment  analysis,  a price per unit  indication near the middle of the range
indicated by the comparables is the most appropriate for the subject.

The following table presents the estimated value for the subject as indicated by
the Sales Comparison Approach.



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                                       36





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ALDERWOOD AND TIMBERLEAF APARTMENTS                    SALES COMPARISON APPROACH
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ALDERWOOD AND TIMBERLEAF APARTMENTS               INCOME CAPITALIZATION APPROACH
- --------------------------------------------------------------------------------


                         INCOME CAPITALIZATION APPROACH

The following table summarizes the most comparable data utilized in the analysis
with  a  comparable  map  presented  on the  following  page.  A  more  detailed
description of each comparable is included in the Addenda.

Details on the rental comparables are included in the addenda.


SUBJECT QUOTED RENTS


The following table depicts the subject's unit mix and quoted rental rates.

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                                       38





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ALDERWOOD AND TIMBERLEAF APARTMENTS               INCOME CAPITALIZATION APPROACH
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ESTIMATE OF MARKET RENT


In order to estimate the market rates for the various  floor plans,  the subject
unit types have been compared with similar units in the comparable projects. The
following is a discussion of each unit type.


One-Bedroom Units

The  subject's  quoted  rental rates are higher than the range  indicated by the
rent  comparables.  The  subject's  rent roll  indicates  that a majority of the
occupied  one  bedroom  units are  leased at below the  quoted  rates,  which is
indicative of recent rental  increases which have taken effect.  The most recent
leases of one bedroom  units have been signed at the quoted  rates.  Considering
the available  data,  monthly  market rent for the subject units is estimated at
the quoted  rates.  It is above the  comparables,  but recent  leasing  activity
indicates these rents are achievable.


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                                       39





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ALDERWOOD AND TIMBERLEAF APARTMENTS               INCOME CAPITALIZATION APPROACH
- --------------------------------------------------------------------------------


Two-Bedroom Units

The  subject's  quoted  rental rates are within the range  indicated by the rent
comparables.  The subject's  rent roll indicates that a majority of the occupied
two bedroom units are leased at below the quoted  rates,  which is indicative of
recent rental  increases which have taken effect.  The most recent leases of two
bedroom  units have been signed at the quoted rates.  Considering  the available
data, monthly market rent for the subject units is estimated the quoted rates.

MARKET RENT CONCLUSIONS


Based on the foregoing analysis and discussion, the following is the estimate of
potential rental income for the subject:

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                                       40





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ALDERWOOD AND TIMBERLEAF APARTMENTS               INCOME CAPITALIZATION APPROACH
- --------------------------------------------------------------------------------

RENT ADJUSTMENTS


Rent  adjustments  are sometimes  necessary to account for differences in rental
rates applicable to different units within similar floor plans due to items such
as location  within the property,  view,  and level of  amenities.  These rental
adjustments may be in the form of rent premiums or rent  discounts.  In the case
of the subject, rent adjustments are not applicable.


POTENTIAL RENTAL INCOME CONCLUSION


Within this  analysis,  potential  rental  income is  estimated  based on market
rental  rates over the next twelve  months in addition  to any  applicable  rent
adjustments.  This  method  of  calculating  potential  rental  income  is  most
prevalent in the local market and is  consistent  with the method used to derive
overall capitalization rates from the comparable sales data. This shown later in
the direct cap.


RENT ROLL ANALYSIS


The rent roll  analysis  serves as a cross check to the  estimate of market rent
for the subject.  The  collections  shown on the rent roll include rent premiums
and/or discounts. A copy of the rent roll are included in the addenda.


LOSS TO LEASE


Within the local market,  buyers and sellers typically  recognize a reduction in
potential rental income due to the difference between market and contract rental
rates. In this market, lease rates are typically now flat and are anticipated to
roll to market every 6 to 12 months on average.  Therefore, loss to lease factor
was not applied.


VACANCY AND COLLECTION LOSS


The subject's  estimated  stabilized  occupancy rate was previously analyzed and
discussed in the Market Analysis (including an analysis of collection loss). The
subject's historical and projected vacancy is detailed as follows:


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                                       41





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ALDERWOOD AND TIMBERLEAF APARTMENTS               INCOME CAPITALIZATION APPROACH
- --------------------------------------------------------------------------------

RENT CONCESSIONS


Rent  concessions  have  started to  re-occur  at the subject and in the market.
Therefore, we estimated a 5% concession amount for the subject.


EFFECTIVE GROSS INCOME


The subject's  historical  and pro forma  effective  gross income is detailed as
follows:


Alderwood:

Timberleaf:

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                                       42





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ALDERWOOD AND TIMBERLEAF APARTMENTS               INCOME CAPITALIZATION APPROACH
- --------------------------------------------------------------------------------


OPERATING EXPENSE ANALYSIS


In  estimating  the  operating  expenses for the subject,  the actual  operating
history has been  analyzed,  along with  expense  data from IREM and  comparable
apartment  properties (not presented  herein).  The following table presents the
available operating expense history for the subject.

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                                       43





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ALDERWOOD AND TIMBERLEAF APARTMENTS               INCOME CAPITALIZATION APPROACH
- --------------------------------------------------------------------------------


Reserves for Replacement


Reserves  for  replacement   have  been  estimated  based  on  discussions  with
knowledgeable  market  participants  who  indicate a range from $150 to $500 per
unit for comparable properties. We estimated $400 for the subject.


DIRECT CAPITALIZATION

Direct  capitalization  is a method  used to convert a single  year's  estimated
stabilized  net  operating  income  into  a  value  indication.   The  following
subsections   represent   different   techniques   for   deriving   an   overall
capitalization rate for direct capitalization.


Comparable Sales


The OAR's  confirmed for the comparable  sales analyzed in the Sales  Comparison
Approach are as follows:

Based on the subject's current  occupancy level and its competitive  position in
the local  market  versus the  comparables,  an OAR in the upper  portion of the
range indicated by the comparables is considered appropriate.


Published Investor Surveys


The results of the most recent National Investor Survey, published by CB Richard
Ellis, Inc., are summarized in the following table.







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                                       44





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ALDERWOOD AND TIMBERLEAF APARTMENTS               INCOME CAPITALIZATION APPROACH
- --------------------------------------------------------------------------------

The subject is considered  to be a Class A/B property.  Because of the subject's
location,  an OAR near the  middle to lower end of the  range  indicated  in the
preceding table is considered appropriate.


Market Participants


Most noted rates around 7.0 to 8.0%.


CAPITALIZATION RATE CONCLUSION


The following table summarizes the OAR conclusions.

DIRECT CAPITALIZATION SUMMARY


A summary of the direct capitalization of the subject at stabilized occupancy is
illustrated in the following table.


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                                       45





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ALDERWOOD AND TIMBERLEAF APARTMENTS               INCOME CAPITALIZATION APPROACH
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                                       46





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ALDERWOOD AND TIMBERLEAF APARTMENTS               INCOME CAPITALIZATION APPROACH
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                                       47





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ALDERWOOD AND TIMBERLEAF APARTMENTS               INCOME CAPITALIZATION APPROACH
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CONCLUSION OF INCOME CAPITALIZATION APPROACH

The  conclusions  via the  valuation  methods  employed for this approach are as
follows:

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                                       48




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ALDERWOOD AND TIMBERLEAF APARTMENTS                      RECONCILIATION OF VALUE
- --------------------------------------------------------------------------------


                             RECONCILIATION OF VALUE


The value indications from the approaches to value are summarized as follows:

The Cost Approach  typically  gives a reliable  value  indication  when there is
evidence  for  the   replacement   cost  estimate  and  when  there  is  minimal
depreciation   contributing  to  a  loss  in  value  which  must  be  estimated.
Considering the amount of depreciation present in the property,  the reliability
of the Cost  Approach is somewhat  diminished.  Therefore,  the Cost Approach is
considered less applicable to the subject and is not used herein.


In the Sales  Comparison  Approach,  the subject property is compared to similar
properties  that have been sold recently or for which  listing  prices or offers
are known. The sales used in this analysis are considered  fairly  comparable to
the subject,  and the required  adjustments  were based on  reasonable  and well
supported  rationale.  In addition,  market participants are currently analyzing
purchase prices on investment properties as they relate to available substitutes
in the market. Therefore, the Sales Comparison Approach is considered to provide
a reliable  value  indication  and has been given  emphasis  in the final  value
reconciliation.


The Income  Capitalization  Approach is applicable to the subject property since
it  is  an  income  producing  property  leased  in  the  open  market.   Market
participants are currently analyzing properties based on their income generating
capability.  Therefore, the Income Capitalization Approach is considered to be a
reasonable and  substantiated  value indicator and has been heavily  weighted in
the final value estimate.


Based on the  foregoing,  the market value of the subject has been  concluded as
follows:

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ALDERWOOD AND TIMBERLEAF APARTMENTS          ASSUMPTIONS AND LIMITING CONDITIONS
- --------------------------------------------------------------------------------


                       ASSUMPTIONS AND LIMITING CONDITIONS


   Unless otherwise  specifically noted in the body of the report, it is assumed
    that title to the property or properties  appraised is clear and  marketable
    and that there are no recorded or unrecorded  matters or exceptions to total
    that would adversely affect  marketability or value. CB Richard Ellis,  Inc.
    is not aware of any title defects nor has it been advised of any unless such
    is specifically  noted in the report. CB Richard Ellis, Inc.,  however,  has
    not examined  title and makes no  representations  relative to the condition
    thereof.  Documents  dealing  with  liens,  encumbrances,   easements,  deed
    restrictions,  clouds and other  conditions  that may affect the  quality of
    title have not been reviewed.  Insurance against financial loss resulting in
    claims that may arise out of defects in the subject  property's title should
    be sought from a qualified  title  company  that issues or insures  title to
    real property.

   Unless  otherwise  specifically  noted  in the  body  of this  report,  it is
    assumed:  that the existing improvements on the property or properties being
    appraised are structurally sound, seismically safe and code conforming; that
    all building systems (mechanical/electrical, HVAC, elevator, plumbing, etc.)
    are in good  working  order  with no major  deferred  maintenance  or repair
    required;  that the roof and  exterior are in good  condition  and free from
    intrusion  by the  elements;  that the  property  or  properties  have  been
    engineered in such a manner that the improvements, as currently constituted,
    conform to all  applicable  local,  state,  and federal  building  codes and
    ordinances.  CB Richard Ellis, Inc.  professionals are not engineers and are
    not competent to judge matters of an engineering  nature.  CB Richard Ellis,
    Inc. has not retained independent  structural,  mechanical,  electrical,  or
    civil engineers in connection with this appraisal and,  therefore,  makes no
    representations relative to the condition of improvements.  Unless otherwise
    specifically  noted in the body of the report:  no problems  were brought to
    the  attention of CB Richard  Ellis,  Inc. by ownership  or  management;  CB
    Richard  Ellis,  Inc.  inspected  less than 100% of the entire  interior and
    exterior  portions of the  improvements;  and CB Richard Ellis, Inc. was not
    furnished any engineering  studies by the owners or by the party  requesting
    this  appraisal.  If  questions  in these areas are critical to the decision
    process of the  reader,  the  advice of  competent  engineering  consultants
    should be obtained  and relied  upon.  It is  specifically  assumed that any
    knowledgeable  and prudent  purchaser  would, as a precondition to closing a
    sale,  obtain a satisfactory  engineering  report relative to the structural
    integrity of the property and the integrity of building systems.  Structural
    problems and/or building system problems may not be visually detectable.  If
    engineering  consultants  retained  should  report  negative  factors  of  a
    material nature, or if such are later discovered,  relative to the condition
    of improvements,  such information could have a substantial  negative impact
    on the  conclusions  reported in this  appraisal.  Accordingly,  if negative
    findings are reported by engineering  consultants,  CB Richard  Ellis,  Inc.
    reserves the right to amend the appraisal conclusions reported herein.

   Unless otherwise stated in this report, the existence of hazardous  material,
    which may or may not be  present on the  property  was not  observed  by the
    appraisers. CB Richard Ellis, Inc. has no knowledge of the existence of such
    materials on or in the property.  CB Richard Ellis,  Inc.,  however,  is not
    qualified  to detect such  substances.  The presence of  substances  such as
    asbestos,  urea  formaldehyde foam insulation,  contaminated  groundwater or
    other potentially  hazardous materials may affect the value of the property.
    The value  estimate is  predicated on the  assumption  that there is no such
    material  on or in the  property  that  would  cause  a loss  in  value.  No
    responsibility  is assumed for any such conditions,  or for any expertise or
    engineering  knowledge  required  to discover  them.  The client is urged to
    retain an expert in this field, if desired.

   We have  inspected,  as  thoroughly  as  possible by  observation,  the land;
    however,  it was  impossible to personally  inspect  conditions  beneath the
    soil.  Therefore,  no  representation  is made as to  these  matters  unless
    specifically considered in the appraisal.

   All furnishings,  equipment and business  operations,  except as specifically
    stated  and  typically  considered  as  part  of real  property,  have  been
    disregarded  with only real property  being  considered in the report unless
    otherwise stated. Any existing or proposed improvements,  on or off-site, as
    well as any alterations or repairs  considered,  are assumed to be completed
    in a  workmanlike  manner  according  to standard  practices  based upon the
    information  submitted to CB Richard Ellis,  Inc. This report may be subject
    to  amendment  upon  re-inspection  of the subject  property  subsequent  to
    repairs,  modifications,  alterations  and completed new  construction.  Any
    estimate  of  Market  Value  is as of the  date  indicated;  based  upon the
    information, conditions and projected levels of operation.

   It is assumed that all factual data furnished by the client,  property owner,
    owner's  representative,  or  persons  designated  by the client or owner to
    supply said data are  accurate  and correct  unless  otherwise  specifically
    noted in the appraisal report.  Unless otherwise  specifically  noted in the
    appraisal  report,  CB Richard Ellis, Inc. has no reason to believe that any
    of the data  furnished  contain any  material  error.  Information  and data
    referred to in this paragraph  include,  without being limited to, numerical
    street addresses,  lot and block numbers,  Assessor's  Parcel Numbers,  land
    dimensions, square footage area of the land, dimensions of the improvements,
    gross building areas,  net rentable areas,  usable areas,  unit count,  room
    count, rent schedules,  income data, historical operating expenses, budgets,
    and related data.  Any material  error in any of the above data could have a
    substantial impact on the conclusions reported. Thus, CB Richard Ellis, Inc.
    reserves the right to amend  conclusions  reported if made aware of any such
    error.  Accordingly,


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    the client-addressee should carefully review all assumptions, data, relevant
    calculations,  and conclusions  within 30 days after the date of delivery of
    this  report and should  immediately  notify CB Richard  Ellis,  Inc. of any
    questions or errors.

   The date of value to which any of the conclusions  and opinions  expressed in
    this report apply, is set forth in the Letter of Transmittal.  Further, that
    the dollar  amount of any value  opinion  herein  rendered is based upon the
    purchasing  power of the  American  Dollar on that date.  This  appraisal is
    based on market conditions existing as of the date of this appraisal.  Under
    the terms of the  engagement,  we will  have no  obligation  to revise  this
    report to reflect events or conditions which occur subsequent to the date of
    the appraisal.  However, CB Richard Ellis, Inc. will be available to discuss
    the  necessity  for  revision  resulting  from changes in economic or market
    factors affecting the subject.

   CB Richard Ellis,  Inc.  assumes no private deed  restrictions,  limiting the
    use of the subject property in any way.

   Unless  otherwise  noted in the body of the report,  it is assumed that there
    are no  mineral  deposit  or  subsurface  rights of value  involved  in this
    appraisal,  whether  they be  gas,  liquid,  or  solid.  Nor are the  rights
    associated with extraction or exploration of such elements considered unless
    otherwise  stated in this appraisal  report.  Unless  otherwise stated it is
    also assumed that there are no air or  development  rights of value that may
    be transferred.

   CB Richard Ellis, Inc.  is not aware of any contemplated  public initiatives,
    governmental development controls, or rent controls that would significantly
    affect the value of the subject.

   The estimate of Market  Value,  which may be defined  within the body of this
    report,  is subject to change with  market  fluctuations  over time.  Market
    value  is  highly  related  to  exposure,   time  promotion  effort,  terms,
    motivation,  and conclusions surrounding the offering. The value estimate(s)
    consider the productivity and relative  attractiveness of the property, both
    physically and economically, on the open market.

   Any cash flows  included in the  analysis are  forecasts of estimated  future
    operating  characteristics are predicated on the information and assumptions
    contained  within  the  report.  Any  projections  of income,  expenses  and
    economic  conditions  utilized  in this  report are not  predictions  of the
    future.  Rather, they are estimates of current market expectations of future
    income and expenses.  The achievement of the financial  projections  will be
    affected by  fluctuating  economic  conditions  and is dependent  upon other
    future occurrences that cannot be assured.  Actual results may vary from the
    projections considered herein. CB Richard Ellis, Inc. does not warrant these
    forecasts will occur.  Projections may be affected by  circumstances  beyond
    the current realm of knowledge or control of CB Richard Ellis, Inc.

   Unless  specifically set forth in the body of the report,  nothing  contained
    herein shall be construed to represent any direct or indirect recommendation
    of CB Richard Ellis,  Inc. to buy, sell, or hold the properties at the value
    stated. Such decisions involve substantial investment strategy questions and
    must be specifically addressed in consultation form.

   Also, unless  otherwise noted in the body of this report,  it is assumed that
    no changes in the present zoning  ordinances or  regulations  governing use,
    density,  or shape are being considered.  The property is appraised assuming
    that all required licenses,  certificates of occupancy,  consents,  or other
    legislative or administrative  authority from any local, state, nor national
    government or private entity or organization have been or can be obtained or
    renewed for any use on which the value estimates contained in this report is
    based, unless otherwise stated.

   This study may not be  duplicated  in whole or in part  without the  specific
    written  consent of CB Richard  Ellis,  Inc.  nor may this  report or copies
    hereof be transmitted to third parties  without said consent,  which consent
    CB  Richard  Ellis,  Inc.  reserves  the  right to deny.  Exempt  from  this
    restriction  is  duplication  for the internal  use of the  client-addressee
    and/or   transmission  to  attorneys,   accountants,   or  advisors  of  the
    client-addressee.  Also exempt from this  restriction is transmission of the
    report to any court,  governmental  authority,  or regulatory  agency having
    jurisdiction  over the  party/parties  for whom this appraisal was prepared,
    provided  that this report and/or its contents  shall not be  published,  in
    whole or in part, in any public document without the express written consent
    of CB Richard Ellis,  Inc. which consent CB Richard Ellis, Inc. reserves the
    right to deny. Finally, this report shall not be advertised to the public or
    otherwise used to induce a third party to purchase the property or to make a
    "sale" or "offer for sale" of any "security",  as such terms are defined and
    used in the Securities Act of 1933, as amended. Any third party, not covered
    by the exemptions  herein, who may possess this report, is advised that they
    should rely on their own  independently  secured  advice for any decision in
    connection  with  this  property.  CB  Richard  Ellis,  Inc.  shall  have no
    accountability or responsibility to any such third party.

   Any value estimate provided in the report applies to the entire property, and
    any pro ration or  division  of the title  into  fractional  interests  will
    invalidate  the  value  estimate,  unless  such pro  ration or  division  of
    interests has been set forth in the report.

   The  distribution  of the total  valuation  in this report  between  land and
    improvements  applies  only  under  the  existing  program  of  utilization.
    Component  values for land and/or  buildings  are not intended to be used in
    conjunction with any other property or appraisal and are invalid if so used.

   The maps, plats, sketches,  graphs, photographs and exhibits included in this
    report are for  illustration  purposes  only and are to be utilized  only to
    assist in  visualizing  matters  discussed  within  this  report.  Except as
    specifically  stated,  data


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    relative to size or area of the subject and  comparable  properties has been
    obtained from sources deemed accurate and reliable. None of the exhibits are
    to be removed, reproduced, or used apart from this report.

   No opinion is intended to be  expressed  on matters  which may require  legal
    expertise or specialized  investigation or knowledge beyond that customarily
    employed by real estate  appraisers.  Values and opinions  expressed presume
    that  environmental  and  other  governmental   restrictions/conditions   by
    applicable  agencies  have been met,  including  but not  limited to seismic
    hazards,  flight patterns,  decibel  levels/noise  envelopes,  fire hazards,
    hillside  ordinances,  density,  allowable uses,  building  codes,  permits,
    licenses,  etc. No survey,  engineering study or architectural  analysis has
    been made known to CB Richard Ellis, Inc. unless otherwise stated within the
    body of this report.  If the Consultant has not been supplied with a termite
    inspection,  survey or occupancy permit, no responsibility or representation
    is assumed or made for any costs  associated  with obtaining same or for any
    deficiencies discovered before or after they are obtained. No representation
    or warranty is made concerning obtaining these items. CB Richard Ellis, Inc.
    assumes no responsibility  for any costs or consequences  arising due to the
    need,  or the lack of need,  for flood  hazard  insurance.  An agent for the
    Federal Flood Insurance  Program should be contacted to determine the actual
    need for Flood Hazard Insurance.

   Acceptance  and/or use of this  report  constitutes  full  acceptance  of the
    Contingent and Limiting Conditions and special assumptions set forth in this
    report. It is the  responsibility of the Client, or client's  designees,  to
    read in  full,  comprehend  and  thus  become  aware  of the  aforementioned
    contingencies and limiting conditions.  Neither the Appraiser nor CB Richard
    Ellis,  Inc.  assumes  responsibility  for any situation  arising out of the
    Client's failure to become familiar with and understand the same. The Client
    is advised to retain  experts  in areas that fall  outside  the scope of the
    real estate appraisal/consulting profession if so desired.

   CB Richard Ellis, Inc. assumes that the subject property analyzed herein will
    be under prudent and competent management and ownership; neither inefficient
    or super-efficient.

   It is assumed  that there is full  compliance  with all  applicable  federal,
    state, and local environmental  regulations and laws unless noncompliance is
    stated, defined and considered in the appraisal report.

   No survey of the  boundaries  of the property was  undertaken.  All areas and
    dimensions  furnished are presumed to be correct. It is further assumed that
    no encroachments to the realty exist.

   The Americans with  Disabilities Act (ADA) became effective January 26, 1992.
    Notwithstanding  any  discussion  of  possible  readily  achievable  barrier
    removal  construction  items in this report,  CB Richard Ellis, Inc. has not
    made a specific compliance survey and analysis of this property to determine
    whether it is in conformance with the various  detailed  requirements of the
    ADA. It is possible that a compliance survey of the property together with a
    detailed  analysis  of the  requirements  of the ADA could  reveal  that the
    property is not in compliance  with one or more of the  requirements  of the
    ADA.  If so, this fact could have a negative  effect on the value  estimated
    herein. Since CB Richard Ellis, Inc. has no specific information relating to
    this  issue,  nor is CB  Richard  Ellis,  Inc.  qualified  to  make  such an
    assessment,  the effect of any possible non-compliance with the requirements
    of the ADA  was not  considered  in  estimating  the  value  of the  subject
    property.

   Client shall not indemnify  Appraiser or hold Appraiser  harmless  unless and
    only to the extent  that the Client  misrepresents,  distorts,  or  provides
    incomplete  or  inaccurate  appraisal  results to others,  which acts of the
    Client proximately result in damage to Appraiser. The Client shall indemnify
    and hold Appraiser  harmless from any claims,  expenses,  judgments or other
    items or costs arising as a result of the Client's failure or the failure of
    any of the  Client's  agents to  provide a  complete  copy of the  appraisal
    report  to any  third  party.  In the event of any  litigation  between  the
    parties,  the  prevailing  party to such  litigation  shall be  entitled  to
    recover from the other reasonable attorney fees and costs.

   The report is for the sole use of the  client;  however,  client may  provide
    only complete, final copies of the appraisal report in its entirety (but not
    component  parts)  to  third  parties  who  shall  review  such  reports  in
    connection with loan  underwriting or securitization  efforts.  Appraiser is
    not  required to explain or testify as to  appraisal  results  other than to
    respond to the client for routine and customary questions.  Please note that
    our consent to allow an appraisal report prepared by CB Richard Ellis,  Inc.
    or portions of such report, to become part of or be referenced in any public
    offering,  the granting of such consent will be at our sole  discretion and,
    if  given,   will  be  on  condition  that  we  will  be  provided  with  an
    Indemnification  Agreement and/or Non-Reliance letter, in a form and content
    satisfactory  to us, by a party  satisfactory  to us. We do  consent to your
    submission  of the reports to rating  agencies,  loan  participants  or your
    auditors  in its  entirety  (but not  component  parts)  without the need to
    provide us with an Indemnification Agreement and/or Non-Reliance letter.

   The date of value in this assignment is subsequent to September 11, 2001, the
    date of the  attack  on the World  Trade  Center in New York City and on the
    Pentagon in Washington, D.C. The scope of this appraisal assignment does not
    include  the  measurement  of any effect of these  events on the real estate
    market or on the value of the subject property. Therefore, the value opinion
    and  other  conclusions   expressed  in  this  report  are  subject  to  the
    extraordinary  assumption  that  these  events  have  had no  effect  on the
    marketability  or market  value of the  subject  property.  The  client  and
    intended


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    users of this appraisal are cautioned that if this extraordinary  assumption
    is  incorrect,  the value  opinion and other  conclusions  expressed in this
    report could be significantly different.


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ALDERWOOD AND TIMBERLEAF APARTMENTS                                      ADDENDA
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                                     ADDENDA


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ALDERWOOD AND TIMBERLEAF APARTMENTS               ADDENDUM A   Glossary of Terms
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                                   ADDENDUM A

                                GLOSSARY OF TERMS


assessed value Assessed     value  applies in ad valorem  taxation and refers to
  the value of a property  according  to the tax rolls.  Assessed  value may not
  conform to market value, but it is usually  calculated in relation to a market
  value base. (+)

cash equivalency     The  procedure  in which  the  sale  prices  of  comparable
  properties sold with atypical financing are adjusted to reflect typical market
  terms.

contract,  coupon,  face, or nominal rent     The nominal rent payment specified
  in the lease contract.  It does not reflect any offsets for free rent, unusual
  tenant improvement conditions,  or other factors that may modify the effective
  rent payment.

coupon rent
  See  Contract, Coupon, Face, or Nominal Rent

 effective rent     1) The  rental  rate net of  financial  concessions  such as
  periods of no rent  during a lease term;  may be  calculated  on a  discounted
  basis,  reflecting  the time  value of money,  or on a  simple,  straight-line
  basis. (++) 2) The economic rent paid by the lessee when normalized to account
  for financial  concessions,  such as escalation  clauses,  and other  factors.
  Contract,  or normal,  rents must be converted  to  effective  rents to form a
  consistent basis of comparison between comparables.

face rent
  See  Contract, Coupon, Face, or Nominal Rent

fee simple  estate     Absolute ownership  unencumbered by any other interest or
  estate,  subject only to the limitations imposed by the governmental powers of
  taxation, eminent domain, police power, and escheat. |+| |+|

floor area ratio (FAR)     The relationship  between the above-ground floor area
  of a building,  as described by the building code, and the area of the plot on
  which it stands; in planning and zoning, often expressed as a decimal, e.g., a
  ratio of 2.0 indicates that the permissible  floor area of a building is twice
  the total land area; also called building-to-land ratio. |+| |+|

full  service  lease     A lease in which rent  covers all  operating  expenses.
  Typically,  full service leases are combined with an expense stop, the expense
  level covered by the contract lease  payment.  Increases in expenses above the
  expense  stop level are passed  through to the tenant and are known as expense
  pass-throughs.

going  concern  value     Going concern value is the value of a proven  property
  operation.  It includes the  incremental  value  associated  with the business
  concern,  which is  distinct  from the value of the real  estate  only.  Going
  concern value includes an intangible  enhancement of the value of an operating
  business enterprise which is produced by the assemblage of the land, building,
  labor,   equipment,   and  marketing   operation.   This  process  creates  an
  economically viable business that is expected to continue. Going concern value
  refers to the total  value of a property,  including  both real  property  and
  intangible personal property attributed to the business value. (+)

gross building  area (GBA)     The sum of all areas at each floor as measured to
  the exterior walls.

insurable value     Insurable   Value  is  based  on  the   replacement   and/or
  reproduction  cost of physical  items that are  subject to loss from  hazards.
  Insurable  value is that  portion of the value of an asset or asset group that
  is  acknowledged  or recognized  under the  provisions  of an applicable  loss
  insurance policy.  This value is often controlled by state law and varies from
  state to state.(+)

investment value     Investment  value  is  the  value  of  an  investment  to a
  particular investor based on his or her investment  requirements.  In contrast
  to market value, investment value is value to an individual,  not value in the
  marketplace.  Investment value reflects the subjective  relationship between a
  particular  investor  and  a  given  investment.  When  measured  in  dollars,
  investment value is the price an investor would pay for an investment in light
  of its perceived capacity to satisfy his or her desires,  needs, or investment
  goals. To estimate  investment  value,  specific  investment  criteria must be
  known.  Criteria to evaluate a real estate  investment are not necessarily set
  down by the individual investor;  they may be established by an expert on real
  estate and its value, that is, an appraiser. (+)

leased fee
  See leased fee estate

leased fee estate     An ownership interest held by a landlord with the right of
  use and occupancy  conveyed by lease to others.  The rights of the lessor (the
  leased fee owner) and the leased fee are specified by contract terms contained
  within the lease.|+| |+|


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ALDERWOOD AND TIMBERLEAF APARTMENTS               ADDENDUM I      QUALIFICATIONS
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leasehold
  See leasehold estate

leasehold estate     The  interest  held by the  lessee  (the  tenant or renter)
  through a lease  conveying  the rights of use and  occupancy for a stated term
  under certain conditions.|+| |+|

load factor     The amount added to usable area to calculate the rentable  area.
  It is also referred to as a "rentable add-on factor" which, according to BOMA,
  "is computed by dividing the difference  between the usable square footage and
  rentable  square footage by the amount of the usable area.  Convert the figure
  into a percentage by multiplying by 100.

market value "as if complete" on the appraisal  date     Market   value   as  if
  complete  on the  appraisal  date is an  estimate  of the  market  value  of a
  property with all construction,  conversion, or rehabilitation  hypothetically
  completed,  or under other specified hypothetical conditions as of the date of
  the appraisal. With regard to properties wherein anticipated market conditions
  indicate that stabilized occupancy is not likely as of the date of completion,
  this  estimate of value should  reflect the market value of the property as if
  complete and prepared for occupancy by tenants.

market value "as is" on the appraisal date     Market   value  "as  is"  on  the
  appraisal  date is an  estimate  of the  market  value  of a  property  in the
  condition  observed upon  inspection  and as it physically  and legally exists
  without hypothetical conditions, assumptions, or qualifications as of the date
  of appraisal.

market  value  Market     value is one of the central  concepts of the appraisal
  practice.  Market value is differentiated from other types of value in that it
  is created by the  collective  patterns of the market.  Market value means the
  most probable  price which a property  should bring in a competitive  and open
  market under all  conditions  requisite  to a fair sale,  the buyer and seller
  each  acting  prudently  and  knowledgeably,  and  assuming  the  price is not
  affected by undue stimulus. Implicit in this definition is the consummation of
  a sale as of a  specified  date and the  passing of title from seller to buyer
  under conditions  whereby: 1) A reasonable time is allowed for exposure in the
  open market; 2) Both parties are well informed or well advised,  and acting in
  what they consider their own best interests; 3) Buyer and seller are typically
  motivated;  4) Payment is made in terms of cash in U.S. dollars or in terms of
  financial  arrangements  comparable thereto;   and 5) The price represents the
  normal  consideration for the property sold  unaffected by special or creative
  financing  or sales  concessions  granted by anyone  associated with the sale.
  [Section:]

marketing period     The time it takes an interest  in real  property to sell on
  the market subsequent to the date of an appraisal. ++

net lease     Lease  in which  all or some of the  operating  expenses  are paid
  directly by the tenant.  The landlord  never takes  possession  of the expense
  payment.  In a Triple Net Lease all operating  expenses are the responsibility
  of the tenant, including property taxes, insurance,  interior maintenance, and
  other   miscellaneous   expenses.   However,   management  fees  and  exterior
  maintenance are often the  responsibility of the lessor in a triple net lease.
  A modified net lease is one in which some expenses are paid  separately by the
  tenant and some are included in the rent.

net rentable  area (NRA)     1) The  area  on  which  rent is  computed.  2) The
  Rentable Area of a floor shall be computed by measuring to the inside finished
  surface  of the  dominant  portion  of the  permanent  outer  building  walls,
  excluding any major vertical penetrations of the floor. No deductions shall be
  made for columns and projections necessary to the building. Include space such
  as mechanical room, janitorial room, restrooms, and lobby of the floor. (*)

nominal rent
  See  Contract, Coupon, Face, or Nominal Rent

prospective future value "upon completion of  construction"  Prospective  future
  value "upon completion of construction" is the prospective value of a property
  on  the  future  date  that  construction  is  completed,  based  upon  market
  conditions  forecast to exist, as of that completion  date. The value estimate
  at this stage is stated in current dollars unless otherwise indicated.

prospective future value "upon reaching stabilized occupancy" Prospective future
  value "upon  reaching  stabilized  occupancy"  is the  prospective  value of a
  property at a future point in time when all improvements  have been physically
  constructed and the property has been leased to its optimum level of long-term
  occupancy.  The value  estimate  at this  stage is stated in  current  dollars
  unless otherwise indicated.

reasonable  exposure  time     The   estimated   length  of  time  the  property
  interest  being  appraised  would have been offered on the market prior to the
  hypothetical  consummation  of a sale at market value on the effective date of
  the appraisal;  a retrospective estimate based upon an analysis of past events
  assuming a competitive and open market. (++)


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ALDERWOOD AND TIMBERLEAF APARTMENTS               ADDENDUM I      QUALIFICATIONS
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rent
  See
  full service lease
  net lease
  contract, coupon, face, or nominal rent
  effective rent

shell space     Space  which  has  not  had any  interior  finishing  installed,
  including even basic improvements such as ceilings and interior walls, as well
  as partitions, floor coverings, wall coverings, etc..

Usable Area     1) The area actually used by individual  tenants.  2) The Usable
  Area of an office building is computed by measuring to the finished surface of
  the  office  side of  corridor  and other  permanent  walls,  to the center of
  partitions  that separate the office from adjoining  usable areas,  and to the
  inside  finished  surface  of the  dominant  portion  of the  permanent  outer
  building  walls.  Excludes areas such as mechanical  rooms,  janitorial  room,
  restrooms, lobby, and any major vertical penetrations of a multi-tenant floor.
  (*)

use value     Use value is a concept  based on the  productivity  of an economic
  good.  Use value is the value a specific  property has for a specific use. Use
  value focuses on the value the real estate  contributes  to the  enterprise of
  which it is a part,  without regard to the property's  highest and best use or
  the monetary amount that might be realized upon its sale. (+)

value appraised     During  the real  estate  development  process,  a  property
  typically  progresses  from a state  of  unimproved  land to  construction  of
  improvements to stabilized occupancy.  In general, the market value associated
  with the property increases during these stages of development. After reaching
  stabilized  occupancy,  ongoing  forces  affect the property  during its life,
  including a physical wear and tear,  changing  market  conditions,  etc. These
  factors  continually  influence the property's market value at any given point
  in time.
  See also
  market value "as is" on the appraisal date
  market value "as if complete" on the appraisal date
  prospective future value "upon completion of construction"
  prospective future value "upon reaching stabilized occupancy"


- --------

+ The Appraisal of Real Estate, Eleventh Edition, Appraisal Institute, 1996.

+The Dictionary of Real Estate Appraisal, Third Edition, 1993.
+

Section: The Office of the Comptroller of the Currency,  12 CFR Part 34, Subpart
C, 34.42(f),  August 24, 1990. This definition is compatible with the definition
of market value  contained in The  Dictionary  of Real Estate  Appraisal,  Third
Edition, and the Uniform Standards of Professional Appraisal Practice adopted by
the Appraisal Standards Board of The Appraisal  Foundation,  1992 edition.  This
definition is also  compatible  with the OTS, RTC, FDIC,  NCUA, and the Board of
Governors of the Federal Reserve System definition of market value.

* 1990 BOMA  Experience  Exchange  Report,  Income/Expense  Analysis  for Office
Buildings (Building Owners and Managers Association, 1990)

++ Statement  on Appraisal  Standard  No. 6,  Appraisal  Standards  Board of The
Appraisal Foundation, September 19, 1992.





                                   APPENDIX D

                    Opinion of Houlihan Lokey Howard & Zukin



March 6, 2002

Prometheus Income Partners
c/o Mr. John J. Murphy
Vice President and Chief Financial Officer
Prometheus Development Co., Inc., General Partner of
Prometheus Income Partners
350 Bridge Parkway
Redwood City, CA  94065-1517

Dear Mr. Murphy:

We understand  the following  with respect to  Prometheus  Income  Partners (the
"Partnership" hereinafter) and its general partner,  Prometheus Development Co.,
Inc. (the "General Partner"):

o    The  Partnership  is  a  California  limited   partnership  that  owns  two
     residential  rental  properties  in Santa  Clara,  California  known as the
     "Alderwood" and "Timberleaf" apartments.
o    The  Partnership's  properties  have been recently  appraised by CB Richard
     Ellis, Inc. ("CBRE").
o    Since 1996, the Partnership  had been involved with litigation  relating to
     certain construction  defects at Alderwood and Timberleaf.  This litigation
     has been settled.
o    PIP  Partners - General,  LLC, an affiliate  of the General  Partner  ("PIP
     General"),   has   formed  and   controls   PIP   Acquisition,   LLC  ("PIP
     Acquisition").  PIP General owns  approximately  18.2% of the Partnership's
     issued  and  outstanding   limited   partnership   units.  PIP  Acquisition
     previously had proposed a merger transaction  whereby PIP Acquisition would
     merge into the  Partnership  and the holders of the  Partnership's  limited
     partnership units (the "Limited Partners"),  other than PIP General,  would
     be entitled to receive  certain  consideration  consisting  of an immediate
     cash payment as well as a contingent  payment.  Such merger transaction was
     described in certain  filings the  Partnership has made with the Securities
     and Exchange Commission.
o    PIP  Acquisition has proposed a transaction  whereby PIP  Acquisition  will
     merge into the Partnership and the Limited Partners  (excluding PIP General
     and its  affiliates)  shall be entitled to receive  cash  consideration  of
     $1,714 per share.
o    Following  such merger  transaction  the Limited  Partners,  other than PIP
     General  and its  affiliates,  will no  longer  have  any  interest  in the
     Partnership.

The  merger  of PIP  Acquisition  with  the  Partnership,  the  payment  of cash
consideration  to  the  Limited  Partners,   other  than  PIP  General  and  its
affiliates,  and other  related  transactions  disclosed  to Houlihan  Lokey are
referred to collectively herein as the "Transaction."





Prometheus Income Partners
c/o Mr. John J. Murphy
March 6, 2002                                                                -2-


You have  requested  our  opinion  (the  "Opinion")  as to the matters set forth
below.  The  Opinion  does not  address the  Partnership's  underlying  business
decision to effect the Transaction.  We have not been requested to, and did not,
solicit third party  indications of interest in acquiring all or any part of the
Partnership.   Furthermore,   at  your  request,  we  have  not  negotiated  the
Transaction or advised you with respect to alternatives to it.

In  connection  with  this  Opinion,  we have made such  reviews,  analyses  and
inquiries as we have deemed necessary and appropriate  under the  circumstances.
Among other things, we have:

     1)  met and held  other  discussions  with  certain  members  of the senior
         management of the general  partner during October 2001 and January 2002
         to discuss the operations,  financial  condition,  future prospects and
         projected operations and performance of the partnership;

     2)  visited the  Alderwood  and  Timberleaf  Apartment  properties in Santa
         Clara, CA on October 16, 2001;

     3)  reviewed the  partnership's  annual  report on Form 10-K for the fiscal
         year ended December 31, 2001, its quarterly report on Form 10-Q for the
         quarter ended  September  30, 2001,  and the  partnership's  internally
         prepared,  unaudited income statement and balance sheet for the quarter
         and  year  ended   December  31,  2001;   the   quarterly   report  and
         quarterly/annual   income  statement  and  balance  sheet  having  been
         identified by members of senior  management  of the general  partner as
         including the partnership's most current financial statements;

     4)  reviewed  a  representation  letter  dated  March  6,  2002,  from  the
         partnership  as to the  difference  between (a) the  general  partner's
         estimate to correct the construction defects to the properties, and (b)
         the  proceeds  resulting  from  the  settlement  of  the  partnership's
         construction defects litigation;

     5)  reviewed the amount of cash  restricted  for the purpose of  correcting
         the construction defects;

     6)  reviewed  the  preliminary  proxy  statement  filed with the SEC by the
         Partnership dated March 6, 2002;

     7)  reviewed the following appraisal reports:

         o    Appraisal  of  the  Alderwood  and  Timberleaf   Apartments  dated
              September 17, 2001 prepared by CB Richard Ellis,  Inc. (CB Richard
              Ellis); and
         o    Appraisal  of  the  Alderwood  and  Timberleaf   Apartments  dated
              December 5, 2000  prepared by CB Richard  Ellis,  Inc. (CB Richard
              Ellis);

     8)  reviewed a draft of the form of  Agreement  and Plan of Merger dated as
         of March 6, 2002 by and  among the  Partnership,  PIP  General  and PIP
         Acquisition;

     9)  held discussions  with a  representative  of CB Richard Ellis regarding
         the aforementioned appraisals in both October 2001 and January 2002;





Prometheus Income Partners
c/o Mr. John J. Murphy
March 6, 2002                                                                -3-


     10) reviewed  certain other publicly  available  financial data for certain
         companies that Houlihan Lokey deemed comparable to the partnership;

     11) reviewed  copies of the following  documents and agreements the general
         partner delivered to Houlihan Lokey:

              o    promissory  notes and related  agreements  dated December 23,
                   1997, each between  Prometheus Income Partners and the lender
                   holding a mortgage  on the  partnership's  properties;  and
              o    Second Amended and Restated Limited Partnership  Agreement of
                   Prometheus Income Partners;

     12) reviewed certain other documents  related to Prometheus Income Partners
         that the general partner delivered to Houlihan Lokey; and

     13) conducted  such other  studies,  analyses and  inquiries  that Houlihan
         Lokey deemed appropriate.

We have relied upon and  assumed,  without  independent  verification,  that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect  the best  currently  available  estimates  of the future  financial
results and  condition of the  Partnership,  and that there has been no material
change  in  the  assets,  financial  condition,  business  or  prospects  of the
Partnership  since  the  date  of the  most  recent  financial  statements  made
available to us.

We  have  not  independently  verified  the  accuracy  and  completeness  of the
information supplied to us with respect to the Partnership and do not assume any
responsibility  with respect to it. We have not made any physical  inspection or
independent appraisal of any of the properties or assets of the Partnership. Our
opinion is necessarily based on business,  economic, market and other conditions
as they exist and can be evaluated by us at the date of this letter.

Based upon the foregoing,  and in reliance  thereon,  it is our opinion that the
consideration to be received by the Limited Partners, other than PIP General and
its  affiliates,  in connection  with the  Transaction  is fair from a financial
point of view.

HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.





                                   APPENDIX E

                        Consent of CB Richard Ellis, Inc.


We hereby consent to the use of our name and to the description of our
Appraisal, dated September 17, 2001, under the caption "Appraisal" in, and to
the inclusion of such Appraisal as Appendix C to, the Proxy Statement of
Prometheus Income Partners.


Dated: March 5, 2002                           CB RICHARD ELLIS, INC.

                                                  By: /s/ Elizabeth Champagne
                                                      -----------------------






                                   APPENDIX F

                    Consent of Houlihan Lokey Howard & Zukin

We hereby consent to the inclusion of our opinion letter, dated March ____,
2002, to Prometheus Income Partners (the "Partnership") as an exhibit to the
Proxy Statement of the Partnership on Schedule 14A (the "Proxy Statement") and
to the references to our firm in the Proxy Statement. In giving such consent, we
do not admit that we come within the category of persons whose consent is
required under, nor do we admit that we are "experts" for purposes of, the
Securities Act of 1933, as amended, and the rules and regulations promulgated
thereunder.

Houlihan Lokey Howard & Zukin Financial Advisors, Inc.







                                 REVOCABLE PROXY
            THIS PROXY IS SOLICITED ON BEHALF OF THE GENERAL PARTNER

       The undersigned hereby appoints ________________, or any of them, with
full power of substitution, as attorneys, agents and proxies (the "Proxies") to
vote on behalf of the undersigned at the meeting of limited partners of
Prometheus Income Partners to be held at 1:30 p.m., local time, on _______ March
__, 2002, at [location], or any adjournment or postponement of the meeting:

       (1)  Proposal to approve the Agreement and Plan of Merger dated as of
February __, 2002 by and among Prometheus Income Partners, a California limited
partnership, PIP Partners - General, LLC, a California limited liability
company, and PIP Acquisition, LLC, a California limited liability company. This
proposal, together with the merger and all of the transactions contemplated by
the merger agreement, is referred to in the accompanying Proxy Statement as the
"merger proposal." Approval of the merger proposal will also constitute approval
of all of the transactions contemplated by the merger agreement.

                         / / FOR / / AGAINST / / ABSTAIN

       (2)  Proposal to permit Prometheus Development Co. to adjourn the meeting
to permit further solicitation of proxies in the event that there are not
sufficient votes at the time of the meeting to approve the merger proposal. This
proposal is referred to in the accompanying Proxy Statement as the "adjournment
proposal."

                         / / FOR / / AGAINST / / ABSTAIN

            THE GENERAL PARTNER AND THE ACQUIRING PARTIES RECOMMEND A
          VOTE FOR THE MERGER PROPOSAL AND FOR THE ADJOURNMENT PROPOSAL

       This proxy when properly executed will be voted in the manner directed in
this document by the undersigned limited partner. If no direction is made on
this card, this proxy will be voted FOR the merger proposal and FOR the
adjournment proposal. This proxy also authorizes the proxies to vote at their
discretion on any other matter that may properly come before the meeting or any
adjournment or postponement thereof.





       Instructions For Returning Proxy. Please mark, sign, date and return this
proxy promptly using the enclosed postage paid envelope or via facsimile, to:

       MacKenzie Partners, Inc.
       156 Fifth Avenue
       New York, NY  10010
       (212) 929-0308

                                              By:
                                                  -----------------------------
                                                  Name:
                                                       ------------------------

                                              By:
                                                  -----------------------------
                                                  Name:
                                                       ------------------------


       Please sign exactly as name appears hereon. When units are held by joint
tenants, both should sign. When signing as an attorney, executor, administrator,
trustee or guardian, please give full title of the signer. If a corporation,
please sign name by President or other authorized officer. If a partnership,
please sign partnership name by authorized person.

       Questions and Information. If you have questions regarding the merger
proposal or need assistance in completing your proxy, you may call:

       MacKenzie Partners, Inc.
       (800) 322-2885

       Please mark address changes or corrections above. For all other
corrections or changes, please contact MacKenzie Partners, Inc. at the number
listed above.

       PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY AS INSTRUCTED
ABOVE.







                                TABLE OF CONTENTS
                                -----------------
                                                                           Page
                                                                           ----

QUESTIONS AND ANSWERS ABOUT THE TRANSACTION...................................1

WHO CAN HELP ANSWER YOUR QUESTIONS?...........................................8

SUMMARY.......................................................................9

            Parties to the Transaction........................................9

                        Prometheus Income Partners............................9

                        PIP Partners - General, LLC..........................10

                        PIP Acquisition......................................11

            Effects of the Transaction.......................................11

            Fairness of the Merger...........................................12

            The Meeting..................................................... 12

                        Record Date; Voting Power............................13

                        Quorum; Vote Required................................13

                        Changing Your Vote...................................14

            Structure of the Transaction.....................................14

            Conflicts of Interest............................................17

            Conditions to the Transaction....................................17

            Consideration and Financing......................................18

            Proxy Solicitation...............................................19

            Accounting Treatment.............................................19

            Federal Income Tax Consequences..................................19

SUMMARY SELECTED FINANCIAL DATA OF THE PARTNERSHIP...........................21

BACKGROUND...................................................................23

            Reasons for the Merger...........................................23

            Fairness of the Transaction......................................26

                        Positive Factors Considered..........................28

                        Negative Factors Considered..........................31

            Alternatives to the Transaction Considered.......................33

                        Liquidation..........................................34

                        Tender Offer.........................................36

                        Continued Ownership of Prometheus
                        Income Partners......................................37

THE MEETING..................................................................39

            Time, Date and Place.............................................39

            Matters to be Considered.........................................39

            Recommendations of the General Partner and
            the Acquiring Parties............................................40

            Record Date; Voting Power........................................40

            Quorum...........................................................41

            Vote Required....................................................41





                                TABLE OF CONTENTS
                                -----------------
                                   (continued)
                                                                           Page
                                                                           ----

            Changing Your Vote...............................................42

            Solicitation of Proxies..........................................42

            List of Limited Partners.........................................42

THE PARTIES..................................................................43

            Prometheus Income Partners.......................................43

                        Background...........................................43

                        Properties...........................................45

                        Construction Defects.................................45

                        Recent Tender Offers.................................47

                        The Partnership Agreement of
                        Prometheus Income Partners. .........................48

                        Repurchase Rights....................................51

                        Financing............................................51

                        Distributions........................................53

                        Executive Officers...................................53

                        Principal Unitholders................................54

                        Recent Transactions..................................55

            PIP Partners - General, LLC......................................56

            PIP Acquisition..................................................56

THE MERGER...................................................................56

            Effects of the Merger on Prometheus Income Partners..............56

            No Dissenters' Rights............................................57

            Federal Income Tax Consequences..................................57

            Taxable Gain or Loss.............................................58

                        Character of Gain or Loss............................58

                        Passive Activity Losses..............................59

                        Information Reporting, Backup Withholding
                        and FIRPTA...........................................59

                        Consequences to a Tax-Exempt Limited Partner.........60

            Anticipated Accounting Treatment.................................61

            Regulatory Requirements..........................................61

THE MERGER AGREEMENT.........................................................61

            Parties to the Merger............................................61

            Structure; Consideration.........................................61

            Calculation of Merger Consideration..............................61

            Closing of the Transaction.......................................62

            Consent of Lender................................................62

            Payment of Merger Consideration..................................62

            Expenses.........................................................63






                                TABLE OF CONTENTS
                                -----------------
                                   (continued)
                                                                           Page
                                                                           ----

            Representations and Warranties...................................63

            Certain Covenants................................................63

            Conditions.......................................................64

            Termination......................................................64

APPRAISAL....................................................................65

            2001 Portfolio Appraisal.........................................65

            Summary of Methodology...........................................65

            Sales Approach...................................................66

            Income Approach..................................................67

            Conclusion as to Value...........................................68

            Assumptions, Limitations and Qualifications
            of the 2001 Portfolio Appraisal..................................69

            Compensation and Material Relationships..........................69

ADDITIONAL INFORMATION CONCERNING UNITS......................................70

            Principal Holders of Units.......................................71

            Contracts, Arrangements and Understandings.......................72

            Plans or Proposals...............................................72

CERTAIN FINANCIAL PROJECTIONS AND VALUATIONS OF THE PARTNERSHIP..............72

RELATED SECURITY HOLDER MATTERS..............................................74

FORWARD-LOOKING STATEMENTS...................................................74

LIMITED PARTNER PROPOSALS....................................................75

WHERE YOU CAN FIND MORE INFORMATION..........................................76

ANNUAL REPORT AND QUARTERLY REPORT...........................................77

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE..............................77

OTHER MATTERS................................................................77

APPENDIX A Agreement and Plan of Merger.......................................1

APPENDIX B Second Amended and Restated Limited Partnership Agreement
of Prometheus Income Partners.................................................1

APPENDIX C Appraisal of CB Richard Ellis, Inc.................................2

APPENDIX D Opinion of Houlihan Lokey Howard & Zukin.......................3

APPENDIX E Consent of CB Richard Ellis, Inc...................................4

APPENDIX F Consent of Houlihan Lokey Howard & Zukin.......................5

REVOCABLE PROXY THIS PROXY IS SOLICITED ON BEHALF OF THE GENERAL PARTNER......1