** **

**UNITED STATES****SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

| **(Mark  One)** |   |                                                                                                                                                                                                                                                                                                                                                                                               |
|-----------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| **ý**      |   | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                          |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                               |
|            |   | **For  the fiscal year ended****December  31, 2002**                                                                                                                                                                                                                                                                                                                                               |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| **OR**          |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                               |
| **o**           |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                                                                                      |
|            |   |                                                                                                                                                                                                                                                                                                                                                                                               |
|            |   | **For  the transition period  from                             to                             ** |
|            |   | **Commission  file number  0-19244**                                                                                                                                                                                                                                                                                                                                                          |
|                 |        |                                                                                                                                                                                                                                                                                                                                                                                                    |  |  |

| **Krupp Government Income Trust**                       |
|---------------------------------------------------------|
| (Exact name of  registrant as specified in its charter) |

 

| **Massachusetts**                                                                                    |   | **04-3089272**                     |
|------------------------------------------------------------------------------------------------------|--------|------------------------------------|
| (State or other  jurisdiction of incorporation or organization)                                      |   | (IRS Employer  Identification No.) |
|                                                                                                 |   |                               |
| **One  Beacon Street, Boston, Massachusetts**                                                        |   | **02108**                          |
| (Address of principal  executive offices)                                                            |   | (Zip Code)                         |
|                                                                                                 |   |                               |
| (Registrant’s telephone number, including area  code)    **(617) 523-0066** |
|                                                                                                 |
| Securities registered pursuant to Section 12(b) of  the Act:                                         |

 

| **Title**                     |   | **Name of Exchange on which Registered** |
|-------------------------------|--------|------------------------------------------|
| Shares of Beneficial Interest |   | None                                     |

 

Securities registered pursuant to Section 12(g) of theAct:    **None**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes  ý  No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. o.

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Exchange Act Rule12b-2).

 

Yes o  No ý

 

Aggregate market value ofvoting securities held by non-affiliates: Not applicable.

 

Documents incorporated byreference: see Item 15

 

The exhibit index islocated on pages 14-18

 

 

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PART I

 

This Form 10-K containsforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933 and Section 21E of the Securities Exchange Act of 1934.  Actual results could differ materially fromthose projected in the forward-looking statements as a result of a number offactors, including those identified herein.

 

ITEM 1.  BUSINESS

 

Krupp Government IncomeTrust (the “Trust”) was formed on November 1, 1989 by filing a Declaration ofTrust in the Commonwealth of Massachusetts. The Trust is authorized to sell and issue not more than 17,510,000shares of beneficial interest (“the Shares”). The Trust raised approximately $300 million through a public offering ofShares of beneficial interest and used the proceeds available for investmentprimarily to acquire participating insured mortgages (“PIMs”), participatinginsured mortgage investments (“PIMIs”) and mortgage-backed securities (“MBS”).  The Trust considers itself to be engaged inonly one industry segment, investment in mortgages.

 

The Trust has elected tobe treated as a real estate investment trust (“REIT”), under the InternalRevenue Code of 1986, as amended.  TheTrust shall terminate on December 31, 2029 unless earlier terminated by theaffirmative vote of holders of a majority of the outstanding Shares entitled tovote thereon.  See Note A of Notes toFinancial Statements included in Appendix A of this report for additionalinformation.

 

The Trust’s investments inPIMs on multi-family residential properties consist of (1) an insured mortgageloan insured as to principal and basic interest, and (2) a participatingmortgage.  The insured mortgages wereissued or originated under or in connection with the housing programs of theFederal Housing Administration (“FHA”) under the authority of the Department ofHousing and Urban Development (“HUD”). PIMs provide the Trust with monthly payments of principal and basicinterest and may also provide for Trust participation in the current revenuestream and in residual value, if any, from a sale or other realization of theunderlying property.  The borrowerconveys the participation rights to the Trust through a subordinated promissorynote and mortgage.  The participationfeatures are neither insured nor guaranteed.

 

The PIMIs consist of (1)an insured mortgage issued by Government National Mortgage Association (“GNMA”)or originated under the lending program of the FHA insured as to principal andbasic interest, (2) an additional loan (“Additional Loan”) to the borrower orowners of the borrower in excess of mortgage amounts insured or guaranteedunder GNMA or FHA programs that increases the Trust’s total financing withrespect to that property and (3) a participating mortgage. Additional Loansassociated with insured mortgages issued or originated in connection with HUDinsured programs cannot, under government regulations, be collateralized by amortgage on the underlying property.  TheseAdditional Loans are typically collateralized by a security interestsatisfactory to Berkshire Mortgage Advisors Limited Partnership (“theAdvisor”).  The Additional Loans areneither insured nor guaranteed.  In addition,the participation features related to the participating mortgage are neitherinsured nor guaranteed. Additional Loans provide the Trust with semi-annualinterest payments and may provide additional interest in the future while theparticipating mortgage provides for Trust participation in the net income andresidual value, if any, of the underlying property.

 

The Trust also hasinvestments in MBS collateralized by single-family and multi-family mortgageloans issued or originated by GNMA, Fannie Mae or the Federal Home LoanMortgage Corporation (“FHLMC”).  FannieMae and FHLMC guarantee the principal and basic interest of the Fannie Mae andFHLMC MBS, respectively.  GNMAguarantees the timely payment of principal and interest on its MBS, and HUDinsures the pooled mortgage loans underlying the GNMA MBS.

 

The Trust will distributeall proceeds from prepayments or other realizations of mortgage assets toinvestors either through quarterly dividends or special dividends.

 

Although the Trust willterminate no later than December 31, 2029, the value of the PIMs and PIMIs maybe realized by the Trust through repayment or sale as early as ten years fromthe dates of the closings of the permanent loans, and the Trust may realize thevalue of all of its other investments within that time frame thereby resultingin a dissolution of the Trust significantly prior to December 31, 2029.

 

The Trust anticipatesthat there will be sufficient cash flow from the mortgages to meet cashrequirements.  To the extent that theTrust’s cash flow should be insufficient to meet the Trust’s operating expensesand liabilities, it will be necessary for the Trust to obtain additional fundsby liquidating its investment in one or more mortgages or by borrowing.  The Trust may pledge mortgages as securityfor any permitted borrowing.

 

The Trust may not borrowfunds in connection with the acquisition or origination of mortgages.  However, it may borrow funds to meet workingcapital requirements of the Trust.  Inthis event, the Trust may borrow funds from third parties on a short-termbasis.  The Declaration of Trust limitsthe amount that may be borrowed by the Trust. Borrowing agreements between the Trust and a lender may also restrictthe amount of indebtedness that the Trust may incur.  The Declaration of Trust prohibits the Trust from issuing debtsecurities to institutional lenders and banks, and the Trust may not issue debtsecurities to the public except in some

 

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circumstances.  The Trust, under some circumstances, mayborrow funds from the Advisor, a trustee or an affiliate of the Trust or anytrustee.  However, a majority of theindependent trustees, not otherwise interested in such transaction, mustapprove the transaction as being fair, competitive and commercially reasonableand no less favorable to the Trust than loans between unaffiliated lenders andborrowers under the same circumstances. The Trust has not borrowed any funds during the past and does not intendto do so in the future.

 

The FHA coinsurance loanprogram under Section 221(d)(4) of the National Housing Act provides for loanswith 40 year terms.  However, thisprogram allows for a call option at any time after ten years, upon one year’snotice.  The subordinated promissorynotes and subordinated mortgages that secure the participation feature of theinsured mortgages and PIMs and the notes that evidence the Additional Loansprovide for acceleration of maturity at the earlier of the sale of theunderlying property or the call date.

 

From time to time, theTrust expects that it may realize the principal and participation in residualvalue, if any, of its mortgages before maturity.  It is expected that the mortgages will be repaid after a periodof ownership of approximately ten years from the dates of the closings of thepermanent loans.  Realization of thevalue of mortgages may, however, be made at an earlier or later date.

 

The Trust will notunderwrite securities of other issuers, offer securities in exchange forproperty or invest in securities of other issuers for the purpose of exercisingcontrol and has not engaged in any of these actives during the past.  The Declaration of Trust does not permit theTrust to issue senior securities.  TheTrust has not repurchased or reacquired any of its Shares from shareholders inthe past.  The Trust may not make loansto the Advisor, any trustee, any affiliate of the Advisor or any trustee or anyother person, other than mortgage investments of the type described above.  The Trust has not made any loans other thanmortgage investments during the past.

 

The Trust’s investmentsare not expected to be subject to seasonal fluctuations, although net incomemay vary somewhat from quarter to quarter based upon the participation featuresof its investments.  The requirementsfor compliance with federal, state and local regulations to date have notmaterially adversely affected the Trust’s operations, and the Trust anticipatesno material adverse effect in the future.

 

To qualify as a REIT forfederal income tax purposes, the Trust made a valid election to be so treatedand must continue to satisfy a range of complex requirements including criteriarelated to its ownership structure, the nature of its assets, the sources ofits income and the amount of its dividends to shareholders.  The Trust intends to qualify as a REIT ineach year of operation, however, certain factors may have an adverse effect onthe Trust’s REIT status.  If for anytaxable year, the Trustees and the Advisor determine that any of the asset,income, or dividend tests are not likely to be satisfied, the Trust may berequired to borrow money, dispose of mortgages or take other action to avoidloss of REIT status.

 

Additionally, if theTrust does not qualify as a REIT for any taxable year, it will be subject tofederal income tax as if it were a corporation and the shareholders will betaxed as shareholders of a corporation. If the Trust were taxed as a corporation, the payment of such tax by theTrust would substantially reduce the funds available for dividends toshareholders. To the extent that dividends had been made in anticipation of theTrust’s qualification as a REIT, the Trust might be required to borrowadditional funds or to liquidate certain investments in order to pay theapplicable tax. Moreover, should the Trust’s election to be taxed as a REIT beterminated or voluntarily revoked, the Trust may not be able to elect to betreated as a REIT for the following five-year period.

 

As of December 31, 2002,no personnel were directly employed by the Trust.

 

ITEM 2.  PROPERTIES

 

None.

 

ITEM 3.  LEGAL PROCEEDINGS

 

There are no pendinglegal proceedings to which the Trust, any director, officer or affiliate of theTrust is a party to which would have a material effect on the Trust and thereare no material pending legal proceedings which any of its investments aresubject to.

 

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

 

None.

 

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PART II

 

ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

There currently is noestablished public trading market for the Shares.

 

The number of investorsholding Shares as of December 31, 2002 is approximately 10,800.

 

The Trust has and intendsto continue declaring and paying dividends on a quarterly basis.  The Trustees established a dividend rate perShare per quarter of $.17 per Share per quarter for 2002 and 2001.  The Trustees have reduced the dividend rateto $0.06 per share beginning with the February 2003 dividend.

 

ITEM 6.  SELECTED FINANCIAL DATA

 

The following table setsforth selected financial information regarding the Trust’s financial positionand operating results. This information should be read in conjunction withManagement’s Discussion and Analysis of Financial Condition and Results ofOperations and the Financial Statements and Supplementary Data, which areincluded in Item 7 and Item 8 (Appendix A) of this report, respectively.

 
|                                 |   | **(Amounts in thousands, except for per Share amounts)** |   |
|--------------------------------------|--------|----------------------------------------------------------|--------|
|                                 |   | **2002**                                                 |   | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                 |   |                                                     |   |   |   |   |   |   |   |   |   |
| Total revenues                       |   | $                                                        | 9,011  |   | $ | 18,532 |   | $ | 11,076 |   | $ | 15,632 |   | $ | 21,922 |   |
|                                 |   |                                                     |   |   |   |   |   |   |   |   |   |
| Net income                           |   | $                                                        | 7,782  |   | $ | 15,972 |   | $ | 8,429 |   | $ | 12,317 |   | $ | 14,836 |   |
|                                 |   |                                                     |   |   |   |   |   |   |   |   |   |
| Net income per  Share                |   | $                                                        | 0.52   |   | $ | 1.06 |   | $ | 0.56 |   | $ | 0.82 |   | $ | 0.99 |   |
|                                 |   |                                                     |   |   |   |   |   |   |   |   |   |
| Weighted average  Shares outstanding |   | 15,053                                                   |   | 15,053 |   | 15,053 |   | 15,053 |   | 15,053 |   |
|                                 |   |                                                     |   |   |   |   |   |   |   |   |   |
| Total assets at  December 31         |   | $                                                        | 62,521 |   | $ | 130,786 |   | $ | 140,131 |   | $ | 142,096 |   | $ | 171,422 |   |
|                                 |   |                                                     |   |   |   |   |   |   |   |   |   |
| Average  dividends per Share         |   | $                                                        | 4.98   |   | $ | 1.61 |   | $ | 0.68 |   | $ | 2.60 |   | $ | 4.16 |   |

 

ITEM 7.                          MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Certain statements inthis Management’s Discussion and Analysis of Financial Condition and Results ofOperations and elsewhere in this Form 10-K constitute “forward-lookingstatements” within the meaning of the Federal Private Securities LitigationReform Act of 1995.  Theseforward-looking statements involve known and unknown risks, uncertainties andother factors which may cause the Trust’s actual results, performance orachievements to be materially different from any future results, performance orachievements expressed or implied by these forward-looking statements.  These factors include, among other things,federal, state or local regulations; adverse changes in general economic orlocal conditions; the inability of the borrower to meet financial obligationson additional loans; pre-payments of mortgages; failure of borrowers to payparticipation interests due to poor operating results at properties underlyingthe mortgages  and uninsured losses andpotential conflicts of interest between the Trust and its affiliates, includingthe Advisor.

 

## Liquidityand Capital Resources

 

At December 31, 2002 theTrust had liquidity, consisting of cash and cash equivalents, of approximately$2.0 million as well as the cash inflows provided by PIMs, PIMIs, MBS, cash andcash equivalents.  The Trust may alsoreceive additional cash flow from the participation features of its PIMs andPIMIs.  The Trust anticipates that thesesources will be adequate to provide the Trust with sufficient liquidity to meetits obligations, including providing dividends to its investors.

 

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The most significantdemands on the Trust’s liquidity are quarterly dividends paid to investors ofapproximately $900,000, and special dividends. Funds for dividends come frominterest income received on PIMs, PIMIs, MBS and cash and cash equivalents netof operating expenses and the principal collections received on PIMs, PIMIs andMBS.  The portion of dividends fundedfrom principal collections and cash reserves reduces the capital resources ofthe Trust. As the capital resources of the Trust decrease, the total cash flowsto the Trust will also decrease which may result in periodic adjustments to thedividends paid to the investors.

 

The Advisor periodically reviews the dividend rate to determine whetheran adjustment is necessary based on projected future cash flows.  The current dividend rate is $0.06 per Shareper quarter.  The Trustees, based on theAdvisor’s recommendations, generally set a dividend rate that provides forlevel quarterly dividends.  To theextent quarterly dividends do not fully utilize the cash available fordistribution and cash balances increase, the Advisor may adjust the dividendrate or distribute such funds through a special dividend.

 

In addition to providingguaranteed or insured monthly principal and interest payments from the insuredfirst mortgage or GNMA MBS backed by an insured first mortgage portion of a PIMor PIMI, the Trust’s investments in PIMs and PIMIs also may provide additionalincome through the interest on the Additional Loan portion of the PIMIs as wellas participation interest based on operating cash flow and an increase in thevalue realized upon the sale or refinance of the underlying properties.  However, collection of the Additional Loanprincipal and interest and interest from the participation feature are neitherguaranteed nor insured and depend upon the successful operations of theunderlying properties.

 

In addition toparticipation interest received from PIM and PIMI payoffs discussed below, theTrust also received participation interest based on cash flow generated byproperty operations from Rivergreens of $63,557 during 2002.

 

The three remaining PIMIinvestments all operate under workout agreements with the Trust.  The Mountain View and Windward Lakesagreements have modified the borrowers’ obligations to make Additional Loaninterest payments, regardless of whether the property generated sufficientrevenues to do so, to an obligation to pay Additional Loan interest only if theproperty generates Surplus Cash, as defined by HUD, while the Lifestylesagreement eliminated the borrower’s obligation to make Additional Loan interestpayments but provides for a sharing of Surplus Cash.  The Trust did not receive any Additional Loan interest or SurplusCash payments from any of its PIMIs during 2002.  Beginning in 2002, the Trust has recognized Additional Loanincome previously deferred with respect to Windward Lakes since the propertygenerated Surplus Cash during 2001.  Forthe underlying property’s fiscal year ending December 31, 2001, Mountain Viewdid not generate any Surplus Cash.  Forthe underlying property’s fiscal year ending January 31, 2002, Lifestyles didgenerate approximately $60,000 of Surplus Cash; however the Lifestyles borrowerasked and the Trust agreed to permit the use of all Surplus Cash to fundvarious capital projects at the property. Therefore, the Trust did notrecognize any income related to its share of surplus cash.  For the underlying property’s fiscal yearending December 31, 2001, Windward Lakes did generate approximately $215,000 ofSurplus Cash.  The Windward Lakes borrowerasked and the Trust agreed to permit the use of all Surplus Cash to fund aportion of a major roof replacement project at the property.

 

The Trust’s participationin current operations at Windward Lakes is 50% of any Surplus Cash asdetermined under HUD guidelines, and the Additional Loan interest is payableout of its share of Surplus Cash.  Anyunpaid Additional Loan interest accrues at 7.5% per annum.  When the property is sold or refinanced, theTrust will receive 50% of any net proceeds remaining after repayment of theinsured mortgage, the Additional Loan, the interest rate relief, accrued andunpaid Additional Loan interest and the Borrower’s equity up to the point thatthe Trust has received a cumulative, non-compounded 10% preferred return on itsinvestment in the PIMI.

 

The Windward LakesAdditional Loan was scheduled to mature in July of 2002.  However, the Advisor agreed to extend thematurity date of the Additional Loan to December 31, 2003.  In return, the borrower agreed to modify theParticipating Appreciation Interest provision under the Subordinated PromissoryNote.  Under this agreement, anappraisal of the property would take place prior to December 31, 2002 todetermine the floor value for the Participating Appreciation Interest provisionif the property is not sold prior to July 1, 2003.  If the property is sold to an unrelated third party prior to July1, 2003, the floor will continue to be the value of the property upon sale.  If the property is neither sold norrefinanced but repaid by the borrower prior to July 31, 2003, the floor will bethe value determined by the appraisal completed as of December 31, 2002.  In all other situations the ParticipatingAppreciation Interest will be based on the greater of the floor value or thevalue determined at the time of sale, refinance or payoff.  Under either scenario, the call provision inthe Subordinated Promissory Note would be reduced from 12 months to 6months.  The floor value determined byappraisal is $19,000,000.

 

In May 1998, the borroweron the Lifestyles PIMI defaulted on its debt service payment on the insuredfirst mortgage.  Subsequently, the Trustagreed to a new workout that runs through 2007.  Under its terms, the Trust agreed to reduce the effectiveinterest rate on the insured first mortgage by 1.75% retroactively for 1998 toclear the default, by 1.75% for 1999, and by 1.5% each year thereafter until2007.  An affiliate of the Advisorrefunds approximately .25% per annum to the Trust related to the 

 

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interest reduction.  In addition, the base interest provision onthe Additional Loan was eliminated.  Theborrower made a $550,000 equity contribution, which was escrowed, for theexclusive purpose of correcting deferred maintenance and making capitalimprovements to the property.  Theescrow has been used up for paint, building repairs, parking lot repairs, a newfitness facility, clubhouse remodeling and landscaping.  Any Surplus Cash that is generated byproperty operations will be split evenly between the Trust and theborrower.  When the property is sold orrefinanced, the first $1,100,000 of any proceeds remaining after the insuredmortgage is paid off will be split 50% / 50% between the Trust and theborrower; the next $1,690,220 of proceeds will be split 75% to the Trust and25% to the borrower; and any remaining proceeds will be split 50% / 50%.  The first two splits would be appliedtowards the principal repayment of the Additional Loan while any remainingproceeds would be considered participation interest.  The borrower’s new equity and the reduction in the effectiveinterest rate on the insured first mortgage provided funds for repairs andimprovements.

 

The borrower of theLifestyes PIMI contacted the Advisor regarding a payoff of the Additional Loanprincipal in full and a purchase of the Ginnie Mae MBS at par.  The Advisor agreed to these payoff terms andthe transaction was completed on March 12, 2003.  The Trust received $9,746,038 for the sale of the Ginnie Mae MBSand $1,817,665 for the full payoff of the Additional Loan.  As a result the Trust has reversed theremaining valuation allowance of $666,539 and recognized $343,660 of deferredincome on the Lifestyles Additional Loan as Additional Loan Interest in 2002.  The Trust has declared a special dividend of$0.77 per share from the proceeds of the Lifestyles PIMI which will be paid inthe first half of 2003.

 

Mountain View is similarto Lifestyles with respect to competitive market conditions.  In June 1999, the Trust approved a secondworkout that runs through 2004.  Underits terms, the Trust agreed to reduce the effective interest rate on theinsured first mortgage by 1.25% retroactively for 1999 and each year thereafteruntil 2004, and to change the participation terms.  The workout eliminated the preferred return feature, forgave$288,580 of previous accruals of Additional Loan interest related to the firstworkout, and changed the Trust’s participation in Surplus Cash generated by theproperty and its application towards Additional Loan interest.  The Trust will receive 75% of the first$130,667 of Surplus Cash and 50% of any remaining Surplus Cash on an annualbasis to pay Additional Loan interest. Unpaid Additional Loan interest related to the second workout willaccrue and be payable if there are sufficient proceeds from a sale orrefinancing of the property.  Inaddition, the borrower repaid $153,600 of the Additional Loan and fundedapproximately $54,000 to a reserve for property improvements.

 

During 2002, operatingresults at Mountain View have continued to deteriorate.  Both a fire at the property in early 2001and soft market conditions has affected occupancy and rental rate income.  A building with 20 three-bedroom apartmentswas out of service for 18 months as a result of a fire.  All construction work was completed inmid-2002, with insurance proceeds covering the total cost of therestoration.  A portion of the lost rentwas covered by insurance as well. Occupancy in the remaining units has been affected by local economicconditions.  These factors have made therental market much more competitive for apartments owners, and the use ofconcessions to attract potential renters has increased throughout the market.  Consequently, rental income is down thisyear.  At the same time, both insurancecosts and real estate taxes have increased dramatically, further deterioratingoperating results.  As a result of thefactors described above, the Trust maintains a valuation allowance of$1,032,272 at December 31, 2002.

 

Under each of therestructurings described above, management determined that the new interestrate levels of the loan were at or above the then prevailing rate for similarinstruments and therefore did not meet the criteria for a troubled debt restructuring.  Accordingly, these restructuring and newrates were accounted for prospectively and not as a troubled debtrestructuring.

 

Whether the operatingperformance at any of the properties mentioned above provide sufficient cashflow from operations to pay either the Additional Loan principal and interestor participation income will depend on factors that the Trust has little or nocontrol over.  Should the properties beunable to generate sufficient cash flow to pay the Additional Loan interest, itwould reduce the Trust’s distributable cash flow and could affect the value ofthe Additional Loan collateral.

 

There are contractualrestrictions on the repayment of the PIMs and PIMIs.  During the first five years of the investment, borrowers areprohibited from repayment. During the second five years, the PIM borrowers canprepay the insured first mortgage by paying the greater of a prepayment premiumor the participation due at the time of the prepayment.  Similarly, the PIMI borrowers can prepay theinsured first mortgage and the Additional Loan by satisfying any contractualobligations.  The participation featuresand Additional Loans are neither insured nor guaranteed.  If the prepayment of the PIM or PIMI resultsfrom the foreclosure on the underlying property or an insurance claim, theTrust would probably not receive any participation income or any amounts dueunder the Additional Loan.

 

During the fourth quarterof 2002, the borrower on the Rivergreens I PIM notified the Advisor of itsintention to refinance the property. This transaction would require a payoff of the Insured Mortgage as wellas all amounts that would be due to the Trust under the PIM loandocuments.  An independent appraisalfirm has been contracted to appraise the property’s value to determine whetherthere has been a sufficient increase in value for the Trust to earn anyparticipation interest.  Currently, theborrower’s expectation is that the transaction will occur in the first half of2003.

 

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On January 21, 2003, theTrust received a prepayment of the Mill Ponds I PIM of $7,430,727 representingthe principal proceeds on the first mortgage. The underlying property value had not increased sufficiently to meet thecriteria for the Trust to earn any participation interest.  The Trust has declared a specialdistribution of $0.50 per share from the proceeds of the Mill Ponds I PIM whichwill be paid in the first half of 2003.

 

On August 27, 2002, theTrust received $4,856,759 representing the principal proceeds on the firstmortgage loan from the Rosemont Apartments MBS.  In addition, the Trust received a prepayment premium of $194,270from this payoff.  On September 12,2002, the Trust paid a special dividend of $0.34 per share from the proceeds ofthe Rosemont Apartments MBS prepayment.

 

On July 25, 2002, theTrust received $13,676,641 representing the principal proceeds on the firstmortgage loan from the Lincoln Green Apartments PIM.  On June 28, 2002, the Trust received a prepayment of the LincolnGreen Apartments Subordinated Promissory Note. The Trust received $725,000 of Shared Appreciation Interest and $278,785of Shared Income Interest and Minimum Additional Interest.  On August 28, 2002, the Trust paid a specialdividend of $0.99 per share from the proceeds of the Lincoln Green ApartmentsPIM prepayment.

 

On May 15, 2002, theTrust received $8,884,123 representing the principal proceeds on the firstmortgage loan from the River View Apartments PIM.  In addition, the Trust received a prepayment premium of $88,841from the payoff.  On June 4, 2002, theTrust paid a special dividend of $0.61 per share from the proceeds of the RiverView Apartments PIM prepayment.

 

On May 15, 2002, theTrust received $2,487,447 representing the principal proceeds on the firstmortgage loan from the Parkwest Apartments MBS.  In addition, the Trust received a prepayment premium of $49,749from this payoff.  On June 19, 2002, theTrust paid a special dividend of $0.17 per share from the proceeds of theParkwest Apartments MBS prepayment.

 

On January 3, 2002, theTrust received $18,330,825 representing the principal proceeds on the firstmortgage loan from the Red Run PIMI plus $120,296 of interest on the firstmortgage loan.  On December 31, 2001 theTrust received a prepayment of the Red Run Additional Loan and SubordinatedPromissory Note.  The Trust received$2,900,000 of Additional Loan Principal, $238,369 of Shared AppreciationInterest, $3,506,952 of Preferred Interest and $67,667 of Base Interest on theAdditional Loan.  On January 16, 2002,the Trust paid a special dividend of $1.68 per share from the proceeds of theRed Run PIMI prepayment.

 

On January 2, 2002, theTrust received a prepayment of the Waterford Apartments Subordinate PromissoryNote.  The Trust received $379,725 ofMinimum Additional Interest and $425,643 of Shared Appreciation Interest.  On January 17, 2002, the Trust received$6,625,742 representing the principal proceeds on the first mortgage loan.  In addition, the Trust received a prepaymentpremium of $66,257 from the payoff.  OnMarch 1, 2002, the Trust paid a special dividend of $0.51 per share from theproceeds of the Waterford Apartments PIM prepayment.

 

Due to the significantnumber of prepayments of mortgage investments in 2002, the Trust saw a decreasein its overall mortgage investments of approximately 48% during 2002.  In addition, due to the cumulativeprepayments since inception through December 31, 2002, the Trust has approximately23% of its original mortgage investments remaining.

 

On July 23, 2001, theTrust received a prepayment of the Seasons Subordinated Promissory Note and theSeasons Additional Loan.  The Trustreceived $1,924,649 of Additional Loan principal, $180,916 of surplus cash, $847,450of preferred interest, $1,052,455 of contingent interest, $69,129 of BaseInterest on the Additional Loan and $1,299,562 which represents the Trust’sportion of the residual split.  TheTrust received $8,567,890 representing the principal proceeds on the firstmortgage note on July 26, 2001.  Inaddition, the Trust recognized $180,633 of Additional Loan interest that hadbeen previously received and recorded in deferred income on additionalloans.  On August 17, 2001, the Advisorpaid a special dividend of $0.93 per share from the proceeds of the SeasonsPIMI prepayment.

 

The payoff of the SeasonsPIMI was a result of the sale of the underlying property by the borrower,Maryland Associates Limited Partnership (“MALP”), which is an affiliate of theAdviser, to an affiliate of MALP’s general partner.  Because the sale of the underlying property was to an affiliate,the Independent Trustees of the Trust were required to approve the transaction,which they did based upon a number of factors, including an appraisal of theunderlying property prepared by an independent third party MAI appraiser.  The purchase price paid by the affiliate forthe underlying property was $1.6 million greater than the value indicated bysuch appraisal.  Both the Trustees andthe Advisor believed that the market capitalization rate utilized in theappraisal was too high based on their knowledge of recent sales in the marketand agreed that the true fair value was the negotiated purchase price paid bythe affiliate.

 

The Trust has the optionto call certain PIMs and all the PIMIs by accelerating their maturity if theloans are not prepaid by the tenth year after permanent funding. If the callfeature is exercised then the insurance feature of the loan would be canceled.  Therefore, the Advisor will determine themerits of exercising the call option for each PIM and PIMI as economicconditions

 

7

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warrant.  Such factors as the condition of the asset,local market conditions, the interest rate environment and available financingwill have an impact on these decisions.

 

## Critical AccountingPolicies

 

The Trust’s criticalaccounting policies relate to revenue recognition related to the Trust’s PIMand PIMI investments, impaired mortgage loans, amortization of Prepaid Fees andExpenses and the carrying value of its MBS. The Trust’s policies are as follows:

 

The Trust accounts forits MBS portion of a PIM or PIMI investment in accordance with the FinancialAccounting Standards Board’s Statement 115, “Accounting for Certain Investmentsin Debt and Equity Securities” (“FAS 115”), under the classification of held tomaturity as these investments have a participation feature.  As a result, the Trust would not sell orotherwise dispose of the MBS. Accordingly, the Trust has both the intention and ability to hold theseinvestments to expected maturity. The Trust carries these MBS at amortizedcost.  The insured mortgage portion ofthe FHA PIM or FHA PIMI is carried at amortized cost.  The Trust holds these mortgages at amortized cost since they arefully insured by FHA.  The AdditionalLoans are carried at amortized cost unless the Advisor of the Trust believesthere is an impairment in value, in which case a valuation allowance isestablished in accordance with FAS 114 “Accounting by Creditors for Impairmentof a Loan” and FAS 118 “Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures”. The Trust, in accordance with FAS 115, classifies its MBS portfolio asavailable-for-sale.  The Trust classifiesits MBS portfolio as available-for-sale as a portion of the MBS portfolio mayremain after all of the PIMs and PIMIs payoff and that it will be necessary tothen sell the remaining MBS portfolio at that time in order to close out theTrust.  In addition, other situationssuch as liquidity needs could arise which would necessitate the sale of aportion of the MBS portfolio.  As such,the Trust carries its MBS at fair market value and reflects any unrealized gains(losses) as a separate component of Shareholders’ Equity. The Trust amortizespurchase premiums or discounts over the life of the underlying mortgages usingthe effective interest method.

 

Basic interest isrecognized based on the stated rate of the Department of Housing and UrbanDevelopment (“HUD”) Insured Mortgage loan (less the servicer’s fee) or thecoupon rate of the Government National Mortgage Association (“GNMA”) MBS. TheTrust recognizes interest related to the participation features when the amountbecomes fixed and the transaction that gives rise to such amount is finalized,cash is received and all contingencies are resolved. This could be the sale orrefinancing of the underlying real estate, which results in a cash payment tothe Trust or a cash payment made to the Trust from surplus cash relative to theparticipation feature.  The Trust defersthe recognition of Additional Loan interest payments as income to the extentthese interest payments were from escrows established with the proceeds of theAdditional Loan. When the properties underlying the PIMI’s generate sufficientcash flow to make the required Additional Loan interest payments and theAdditional Loan value is deemed collectible, the Trust recognizes income asearned and commences amortization of the deferred interest amounts into incomeover the remaining estimated term of the Additional Loan. During periods wheremortgage loans are impaired the Trust suspends amortizing deferred interest.

 

The Trust also fullyreserves the portion of any Additional Loan interest payment satisfied throughthe issuance of an operating loan and any associated interest due on suchoperating loan.  The Trust willrecognize the income related to the operating loan when the borrower repaysamounts due under the operating loan.

 

Impaired loans are thoseAdditional Loans which the Advisor believes that the collection of all amountsdue in accordance with the contractual terms of the loan agreement are notlikely.  Impaired loans are measuredbased on the fair value of the underlying collateral net of estimated sellingcosts.  The Trust measures impairment onthese loans quarterly.  Interestreceived on the impaired loans is applied against the loan principal.

 

Prepaid fees and expensesrepresent prepaid acquisition fees and expenses and prepaid participationservicing fees paid for the acquisition and servicing of PIMs and PIMIs.  The Trust amortizes prepaid acquisition feesand expenses using a method that approximates the effective interest methodover a period of ten to twelve years, which represents the estimated life ofthe underlying mortgage.  The Trustamortizes prepaid participation servicing fees using a method that approximatesthe effective interest method over a ten year period beginning at final endorsementof the loan if a HUD-insured mortgage loan or a GNMA MBS.  Upon the repayment of a PIM or PIMI anyunamortized acquisition fees and expenses and unamortized participationservicing fees related to such loan are expensed.

 

ITEM 7AQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

## Assessmentof Credit Risk

 

The Trust’s investmentsin insured mortgages and MBS are guaranteed and/or insured by Fannie Mae,FHLMC, GNMA and HUD and therefore the certainty of their cash flows and therisk of material loss of the amounts invested depends on the creditworthinessof these entities.

 

8

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Fannie Mae and FHLMC arefederally chartered private corporations that guarantee obligations originatedunder its programs.  These obligationsare not guaranteed by the U.S. Government or the Federal Home Loan BankBoard.  However, Fannie Mae and FHLMCare two of the largest corporations in the United States with significantexperience in mortgage securitizations. In addition, their MBS instruments carry the highest credit rating givento financial instruments.  GNMAguarantees the full and timely payment of principal and basic interest on thesecurities it issues, which represents interest in pooled mortgages insured byHUD.  Obligations insured by HUD, an agencyof the U.S. Government, are backed by the full faith and credit of the U.S.Government.

 

Collection of theprincipal and interest of the Additional Loans and interest on theparticipation features have similar risks as those associated with higher riskdebt instruments, including:  relianceon the owner’s operating skills, ability to maintain occupancy levels, controloperating expenses, ability to maintain the properties and obtain adequateinsurance coverage.  Operations also maybe affected by adverse changes in general economic conditions, adverse localconditions, and changes in governmental regula­tions, real estate zoning laws,or tax laws, and other circumstances over which the Trust may have little or nocontrol.

 

TheTrust’s investments also include cash and cash equivalents of approximately$1.5 million of Agency paper, which is issued by Government SponsoredEnterprises with a credit rating equal to the top rating category of anationally recognized statistical rating organization.

 

Interest Rate Risk

 

The Trust’s primarymarket risk exposure is to interest rate risk, which can be defined as theexposure of the Trust’s net income, comprehensive income or financial conditionto adverse movements in interest rates. At December 31, 2002, the Trust’s PIMs, PIMIs and MBS comprise themajority of the Trust’s assets. Decreases in interest rates may accelerate the prepayment of the Trust’sinvestments. The Trust does not utilize any derivatives or other instruments tomanage this risk as the Trust plans to hold its PIM and PIMI investments toexpected maturity while it is expected that substantially all of the MBS willprepay over the same time period, thereby mitigating any potential interestrate risk to the disposition value of any remaining MBS.

 

The Trust monitorsprepayments and considers prepayment trends, as well as dividend requirementsof the Trust, when setting regular dividend policy.  For MBS, the fund forecasts prepayments based on trends in similarsecurities as reported by statistical reporting entities such asBloomberg.  For PIMs and PIMIs, theTrust incorporates prepayment assumptions into planning as individualproperties notify the Trust of the intent to prepay or as they are scheduled tomature.

 

The following tableprovides information about the Trust’s financial instruments that are sensitiveto changes in interest rates.  Formortgage investments, the table presents principal cash flows and relatedweighted average interest rates (“WAIR”) by expected maturity dates.  The expected maturity date is contractualmaturity adjusted for expectations of prepayments.

 
|                              |   | **Expected maturity dates ($ in thousands)** |   |
|-----------------------------------|--------|----------------------------------------------|--------|
|                              |   | **2003**                                     |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **Thereafter** |   | **Total  Face Value** |   | **Fair Value(1)** |   |
|                              |   |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-sensitive  assets:       |   |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                              |   |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| MBS                               |   | 557                                          |   | 454 |   | 378 |   | 308 |   | 258 |   | 3,934 |   | 5,889 |   | 6,313 |   |
| WAIR                              |   | 7.95                                         | %      | 7.95 | % | 7.95 | % | 7.95 | % | 7.95 | % | 7.95 | % | 7.95 | % |   |   |
|                              |   |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| PIMS                              |   | 16,950                                       |   | — |   | — |   | — |   | — |   | — |   | 16,950 |   | 17,708 |   |
| WAIR                              |   | 8.07                                         | %      | — |   | — |   | — |   | — |   | — |   | 8.07 | % |   |   |
|                              |   |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| PIMIS                             |   | 9,918                                        |   | 166 |   | 180 |   | 196 |   | 213 |   | 21,582 |   | 32,255 |   | 34,329 |   |
| WAIR                              |   | 7.84                                         | %      | 7.84 | % | 8.35 | % | 8.35 | % | 8.35 | % | 8.35 | % | 7.51 | % |   |   |
|                              |   |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Additional Loans                  |   | 5,689                                        |   | — |   | — |   | — |   | — |   | — |   | 5,689 |   | 4,538 |   |
| WAIR                              |   | 4.98                                         | %      | — |   | — |   | — |   | — |   | — |   | 4.98 | % |   |   |
|                              |   |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Interest-  Sensitive Assets |   | $                                            | 33,114 |   | $ | 620 |   | $ | 558 |   | $ | 504 |   | $ | 471 |   | $ | 25,516 |   | $ | 60,783 |   | $ | 62,888 |   |
|                                   |        |                                              |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

9

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(1) The methodology usedby the Trust to estimate the fair value of each class of financial instrumentis described in Note J to the Trust’s financial statements presented inAppendix A to this report.  As describedin that note, the Trust does not include an estimate of value for theparticipation interest associated with its PIM and PIMI investments.

 

Also included in the Trust’s assets are cash and cashequivalents.  Due to the short termmaturity of these investments generally less than three months, the Trust isnot exposed to significant interest rate risk on these investments.

 

Operations

 

The following discussionrelates to the operations of the Trust during the years ended December 31,2002, 2001 and 2000.  Dollars are statedin thousands, except for per Share amounts.

 
|                                                  |   | **Years Ended December 31,** |   |
|-------------------------------------------------------|--------|------------------------------|--------|
|                                                  |   | **2002  Amount**             |   | **2001  Amount** |   | **2000  Amount** |   |
| Interest income  on PIMs and PIMIs:                   |   |                         |   |   |   |   |   |
| Basic interest                                        |   | $                            | 4,531  |   | $ | 7,901 |   | $ | 8,087 |   |
| Additional Loan  interest                             |   | 984                          |   | 1,515 |   | 744 |   |
| Participation  interest                               |   | 2,027                        |   | 7,603 |   | 505 |   |
| Interest income  on MBS                               |   | 1,238                        |   | 1,251 |   | 1,376 |   |
| Interest income  on cash and cash equivalents         |   | 230                          |   | 262 |   | 365 |   |
| Trust expenses                                        |   | (1,199                       | )      | (1,671 | ) | (1,618 | ) |
| Amortization of  prepaid fees and expenses            |   | (696                         | )      | (1,353 | ) | (1,030 | ) |
| Reduction of  provision for impaired Additional Loans |   | 667                          |   | 464 |   | — |   |
|                                                  |   |                         |   |   |   |   |   |
| Net income                                            |   | $                            | 7,782  |   | $ | 15,972 |   | $ | 8,429 |   |
|                                                  |   |                         |   |   |   |   |   |
| Weighted average  Shares outstanding                  |   | 15,053,135                   |   | 15,053,135 |   | 15,053,135 |   |

 

The Trust’s net incomedecreased in 2002 when compared to 2001 due primarily to decreases in basicinterest income on PIMs and PIMIs, additional loan interest and participationinterest net of decreases in asset management fees and amortization expense.  Basic interest income on PIMs and PIMIsdecreased due to payoffs of the Lincoln Green Apartments, Waterford Apartments,and the River View Apartments PIMs and the Red Run PIMI in 2002 and the SeasonsPIMI in 2001.  Additional loan interestdecreased due to the payoff of the Red Run PIMI in 2002 and the Seasons PIMI in2001 net of the recognition of deferred revenue from the Windward Lakes PIMIbeginning in 2002.  Participation incomewas greater in 2001 due to the amount received from payoffs in 2001 whencompared to the amount received from payoffs in 2002.  Asset management fees decreased due to the decline in the Trust’sasset base as a result of principal collections and prepayments.  Amortization expense decreased due to thefull recognition of prepaid fees and expenses associated with the Lincoln GreenApartments PIM, Riverview Apartments PIM, Waterford Apartments PIM and the RedRun PIMI payoffs and the full recognition of prepaid fees and expensesassociated with the Life Styles and Windward Lakes PIMIs and the fullrecognition of acquisition costs associated with the Mill Pond and RivergreensPIMs.

 

The Trust’s net incomeincreased in 2001 when compared to 2000 due primarily to increases inAdditional Loan and participation interest and a decrease in provision forimpaired mortgage loans.  AdditionalLoan interest increased primarily due to the recognition of deferred revenuefrom the Season’s and the Red Run Additional Loan payoffs.  Participation interest increased due to thecollection of participation interest from the Season’s and Red Runpayoffs.  The provision for impairedmortgage loans decreased due to an improvement in the operating performance ofthe Lifestyles apartments.

 

ITEM 8.                                   FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

 

See Appendix A tothis report.

 

10

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ITEM 9.                                   CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

PART III

 

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

 

Information as to the Trustees and Executive Officersof Krupp Government Income Trust is as follows:

 

| **Name and  Age** |                     | **Position with Krupp  Government Income Trust** |                                      | **Date of  Election** |           | **Term  Expires** |      |
|-------------------|--------------------------|--------------------------------------------------|-------------------------------------------|-----------------------|----------------|-------------------|-----------|
|              |                     |                                             |                                      |                  |           |              |      |
|              | Douglas Krupp (56)       |                                             | Chairman of Board of Trustees and Trustee |                  | May, 1996      |              | May, 2003 |   |
| *                 | Charles N. Goldberg (61) |                                             | Trustee                                   |                  | March, 1990    |              | May, 2003 |   |
| *                 | J. Paul Finnegan (78)    |                                             | Trustee                                   |                  | March, 1990    |              | May, 2003 |   |
| *                 | Stephen Puleo (68)       |                                             | Trustee                                   |                  | February, 2001 |              | May, 2003 |   |
|              | Alan Reese (49)          |                                             | Treasurer                                 |                  | February, 2003 |              | N/A       |   |
|              | Scott D. Spelfogel (42)  |                                             | Clerk                                     |                  | July, 1990     |              | N/A       |   |
|              | MaryBeth Bloom (29)      |                                             | Assistant Clerk                           |                  | November, 2000 |              | N/A       |   |

 

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* Independent Trustee

 

Douglas Krupp co-foundedand serves as Co-Chairman and Chief Executive Officer of The Berkshire Group,an integrated real estate financial services firm engaged in real estateacquisition and property management, investment sponsorship, venture capitalinvesting, mortgage banking, financial management, and ownership of twooperating companies through private equity investments. Mr. Krupp has held theposition of Co-Chairman since The Berkshire Group was established as The KruppCompanies in 1969 and he has served as the Chief Executive Officer since 1992.He is a graduate of Bryant College where he also received an honorary Doctor ofScience in Business Administration in 1989.

 

Charles N. Goldberg iscurrently a partner of Oppel, Goldberg and Saenz, LLC.  Prior to that, he was of counsel to the lawfirm of Broocks, Baker & Lange, L.L.P., which position he held fromDecember of 1997 to May of 2000.  Priorto joining Broocks, Baker & Lange, L.L.P., Mr. Goldberg was a partner inthe law firm of Hirsch****& Westheimer from March of 1996 toDecember of 1997.  Prior to Hirsch &Westheimer, he was the Managing Partner of Goldberg Brown, Attorneys at Lawfrom 1980 to March of 1996. He received a B.B.A. degree and a J.D. degree fromthe University of Texas.  He is a memberof the State Bar of Texas and is admitted to practice before the U.S. Court ofAppeals, Fifth Circuit and U.S. District Court, Southern District of Texas.  He currently serves as a Trustee of KruppGovernment Income Trust and Krupp Government Income Trust II.

 

J. Paul Finnegan retiredas a partner of Coopers & Lybrand in 1987. Since then, he has been engaged in business as a consultant, director,and arbitrator.  Mr. Finnegan holds aB.A. degree from Harvard College, a J.D. degree from Boston College Law Schooland an ASA degree from Bentley College. Mr. Finnegan is a Certified Public Accountant and an attorney. Mr.Finnegan currently serves as a Trustee of Krupp Government Income Trust andKrupp Government Income Trust II and as director of Scituate Federal SavingsBank.

 

Stephen Puleo iscurrently engaged in business as a consultant and director.  He retired as a director of Coopers &Lybrand, where he worked from 1995 to 1997 primarily servicing real estateindustry clients.  From 1993 to 1994,Mr. Puleo was a tax director for Deloitte & Touche.  From 1984 to 1993, Mr. Puleo held thepositions of Executive Vice President and Chief Financial Officer of apredecessor to The Berkshire Group. Prior to that, Mr. Puleo was the Chairman of the National Real EstateIndustry Group of Coopers & Lybrand where he provided various real estateservices and was a senior tax partner in charge of the Northeast Region. He isa graduate of McNeese State University and attended the Executive DevelopmentProgram at the Tuck School of Business at Dartmouth College.  He is a Certified Public Accountant andcurrently serves as director of Simpson Housing Limited Partnership of Denver,Colorado.  He currently serves as aTrustee of Krupp Government Income Trust and Krupp Government Income Trust II.

 

Alan Reese is theExecutive Vice President, Corporate Operations and Chief Financial Officer ofBerkshire Mortgage Finance.  Mr. Reesejoined Berkshire Mortgage Finance in February of 2003 and is currentlyresponsible for the accounting, financial planning and reporting, treasury,information technology, mortgage trading desk and loan servicing functions.  Prior to joining Berkshire Mortgage Finance,Mr. Reese was the Chief Financial Officer of Visible Markets, Inc. from 2000 to2001 and was

 

11

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engaged in business as aconsultant from 2001-January, 2003. Prior to Visible Markets, Inc., he was the Senior Vice President andChief Financial Officer of Mortgage Lenders Network USA, Inc. from1998-2000.  Mr. Reese held severalpositions with BankBoston Corporation from 1990 to 1998 and most recently heldthe position of Director of Operations, National Consumer Lending from1996-1998.  In addition, Mr. Reese wasemployed with Coopers & Lybrand from 1976 to 1990, and was a partner from1987-1990.  Mr. Reese presently serveson the Board of Trustees for Berklee College of Music.  He received a B.B.A. degree from theUniversity of Wisconsin - Eau Claire and is a Certified Public Accountant.

 

Scott D. Spelfogel is theClerk of the Trust, Senior Vice President and General Counsel to The BerkshireGroup.  Prior to 1997, he served as VicePresident and Assistant General Counsel. Before joining the firm in November 1988, he was a litigator in privatepractice in Boston.  He received aBachelor of Science degree in Business Administration from Boston University, aJuris Doctor Degree from Syracuse University’s College of Law, and a Master ofLaws degree in Taxation from Boston University Law School. He is admitted topractice law in Massachusetts and New York, is a member of the American,Boston, Massachusetts and New York State bar associations and is a licensedreal estate broker in Massachusetts.

 

MaryBeth Bloom is theAssistant Clerk of the Trust and is Assistant General Counsel to The BerkshireGroup.  Prior to joining the company inAugust, 2000, she was an attorney with John Hancock Financial Services.  She received a B.A. degree from the Collegeof the Holy Cross in 1995 and a J.D. degree from New England School of Law in1998.  She is admitted to practice lawin Massachusetts and New York and is a member of the American Bar Association.

 

In addition, thefollowing are deemed to be Executive Officers of the registrant:

 

George Krupp (age 58) isthe Co-Founder and Co-Chairman of The Berkshire Group, an integrated realestate financial services firm engaged in real estate acquisition and property management,investment sponsorship, venture capital investing, mortgage banking, financialmanagement, and ownership of two operating companies through private equityinvestments. Mr. Krupp has held the position of Co-Chairman since The BerkshireGroup was established as The Krupp Companies in 1969.  Mr. Krupp attended the University of Pennsylvania and HarvardUniversity and holds a Master’s Degree in History from Brown University.  Douglas and George Krupp are brothers.

 

Peter F. Donovan (age 49)is Chief Executive Officer of Berkshire Mortgage Finance which position he hasheld since January of 1998 and in this capacity, he oversees the strategicgrowth plans of this mortgage banking firm. Berkshire Mortgage Finance is the 12th largest in the United Statesbased on servicing and asset management of a $16.4 billion loan portfolio.  Previously he served as President ofBerkshire Mortgage Finance from January of 1993 to January of 1998 and in thatcapacity he directed the production, underwriting, servicing and assetmanagement activities of the firm. Prior to that, he was Senior Vice President of Berkshire MortgageFinance and was responsible for all participating mortgage originations.  Before joining the firm in 1984, he wasSecond Vice President, Real Estate Finance for Continental Illinois NationalBank & Trust, where he managed a $300 million construction loan portfolioof commercial properties.  Mr. Donovanreceived a B.A. from Trinity College and an M.B.A. degree from NorthwesternUniversity.  Mr. Donovan is currently amember of the Advisory Council for Fannie Mae.

 

Ronald Halpern (age 61)is President and Chief Operating Officer of Berkshire Mortgage Finance.  He has served in these positions sinceJanuary of 1998 and in this capacity, he is responsible for the overalloperations of the Company.  Prior toJanuary of 1998, he was Executive Vice President, managing the underwriting,closing, portfolio management and servicing departments for Berkshire MortgageFinance.  Before joining the firm in1987, he held senior management positions with the Department of Housing andUrban Development in Washington D.C. and several HUD regional offices. Mr.Halpern has over 30 years of experience in real estate finance which includeshis experience as prior Chairman of the MBA Multifamily Housing Committee.   He holds a B.A. degree from the Universityof the City of New York and a J.D. degree from Brooklyn Law School.

 

Carol J.C. Mills (age 53)is Senior Vice President for Loan Management of Berkshire Mortgage Finance andin this capacity, she is responsible for the Asset Management functions ofBerkshire Mortgage Finance. She manages the estimated $16.4 billion portfolioof loans.  Ms. Mills joined Berkshire inDecember 1997 as Vice President and was promoted to Senior Vice President inJanuary 1999.  From January 1989 throughNovember 1997, Ms. Mills was Vice President of First Winthrop Corporation andWinthrop Financial Associates, in Cambridge, MA.  Ms. Mills earned a B.A. degree from Mount Holyoke College and aMaster of Architecture degree from Harvard University.  Ms. Mills is a member of the Real EstateFinance Association, New England Women in Real Estate and the Mortgage BankersAssociation.  Ms. Mills is currently amember of the Servicing Advisory Council for Freddie Mac.

 

ITEM 11.  EXECUTIVE COMPENSATION

 

Except for theIndependent Trustees as described below, the Trustees and Officers of the Trusthave not been and will not be compensated by the Trust for their services.  However, the Officers will be compensated bythe Advisor or an affiliate of the Advisor.

 

12

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## Compensationof Trustees

The Trust paid each ofthe Independent Trustees (Charles N. Goldberg, J. Paul Finnegan and StephenPuleo) a fee of $25,000 in 2002.

 

ITEM 12.      SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED TO STOCKHOLERMATTERS

 

As of January 8, 2003, noperson owned of record or was known by the Advisor to own beneficially morethan 5% of the Trust’s 15,053,135 outstanding Shares. The only shares held bythe Advisor or any of its affiliates consist of the original 10,000 Shares.

 
| **Class of  Stock**           |   | **Name of Beneficial  Owner**                         |   | **Amount and Nature of Beneficial Interest** |   | **Percent  of Class** |
|-------------------------------|--------|-------------------------------------------------------|--------|----------------------------------------------|--------|-----------------------|
| Shares of Beneficial Interest |   | Douglas Krupp  One Beacon Street  Boston, Mass. 02108 |   | 10,000 Shares**                              |   | ***                   |
|                          |   |                                                  |   |                                         |   |                  |
| Shares of Beneficial Interest |   | All Directors and Officers                            |   | 10,000 Shares                                |   | ***                   |

 

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** Mr. Krupp is abeneficial owner of the 10,000 Shares held by Berkshire Mortgage Advisors LimitedPartnership, the Advisor to the Company, by virtue of being a director ofBerkshire Funding Corporation, the general partner of Berkshire MortgageAdvisors Limited Partnership.  In eachcase where Mr. Krupp is a beneficial owner of Shares he has shared voting andinvestment powers.

 

*** The amount owned doesnot exceed one percent of the Shares of beneficial interest of the Trustoutstanding as of January 8, 2003.

 

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS

 

Under the terms of theAdvisory Service Agreement, the Advisor receives an Asset Management Fee equalto 0.75% per annum of the value of the Trust’s actual and committed investedassets payable quarterly.  During 2002,the Advisor received $561,859 related to the Asset Management Fee.

 

The Trust also reimbursesaffiliates of the Advisor for certain costs incurred in connection withmaintaining the books and records of the Trust, the preparation and mailing offinancial reports, tax information and other communications to investors and legalfees and expenses.  During 2002, TheBerkshire Companies Limited Partnership and Berkshire Mortgage Finance LimitedPartnership, affiliates of the Advisor, received a total of $223,787 inreimbursements.

 

ITEM 14.  CONTROLS AND PROCEDURES

 

(a) Evaluation ofDisclosure Controls and Procedures

 

Within the 90 days priorto the date of this Annual Report on Form 10-K, the Chairman of the Board andChief Accounting Officer carried out an evaluation of the effectiveness of thedesign and operation of the Trust’s disclosure controls and procedures.  Based upon that evaluation, the Chairman ofthe Board and the Chief Accounting Officer concluded that the Trust’sdisclosure controls and procedures were effective as of the date of theirevaluation in timely alerting them to material information relating to theTrust required to be included in this Annual Report on Form 10-K.

 

(b) Changes in InternalControls

 

There were no significantchanges in the Trust’s internal controls or in other factors that couldsignificantly affect such internal controls subsequent to the date of theevaluation described in paragraph (a) above.

 

13

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###### PARTIV

 

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES ANDREPORTS ON FORM 8-K

 
| (a)    |   | 1.                  | Financial Statements - see Index to Financial  Statements, Schedule and Supplementary Data included under Item 8, Appendix  A, on page F-2 of this report.                                                                                                                                                                            |
|--------|--------|---------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                |                                                                                                                                                                                                                                                                                                                                  |   |
|   |   | 2.                  | Financial Statement Schedule - see Index to  Financial Statements, Schedule and Supplementary Data included under Item 8,  Appendix A, on page F-2 of this report.   All other schedules are omitted as they are not applicable, not  required or the information is provided in the Financial Statements or the  Notes thereto. |
| (b)    |   | Reports on Form 8-K |

 

| **Date of  Report** |   | **Event Reported**                  |   | **Financial Statements  Included** |
|---------------------|--------|-------------------------------------|--------|------------------------------------|
| December 31, 2002   |   | Updates on Potential   Loan Payoffs |   | None                               |

 
| (c)    |   | Exhibits:                                                                                  |
|--------|--------|--------------------------------------------------------------------------------------------|
|   |   |                                                                                       |   |   |
|   |   | Number and DescriptionUnder Regulation S-K                                                 |
|   |   |                                                                                       |   |
|   |   | The following reflects all applicable Exhibits  required under Item 601 of Regulation S-K: |
|   |   |                                                                                       |   |
|   |   | (4)                                                                                        | Instruments defining  the rights of security holders including indentures: |
|   |   |                                                                                       |   |
|   |   |                                                                                       | (4.1) | Second Amended and Restated Declaration of Trust  filed with The Massachusetts Secretary of State on April 12, 1990 [Included  as Exhibit 4.4 to Prospectus included in Pre-effective Amendment No. 3 to  Registrant’s Registration Statement on Form S-11 dated April 16, 1990 (File  No. 33-31942)].* |
|   |   |                                                                                       |   |   |
|   |   |                                                                                       | (4.2) | Subscription Agreement Specimen [Included as Exhibit  C to Prospectus included in Pre-effective Amendment No. 2 to Registrant’s  Registration Statement on Form S-11 dated March 23, 1990 (File No.  33-31942)].* |
|   |   |                                                                                       |   |
|   |   | (10)                                                                                       | Material Contracts: |
|   |   |                                                                                       |   |
|   |   |                                                                                       | (10.1) | Advisory Services Agreement dated October 22, 1990  between the Trustee and Krupp Mortgage Advisors Limited Partnership. [Exhibit  10.1 to Registrant’s report on Form 10-K for the year ended December 31, 1994  (File No. 0-19244)].* |
|   |   |                                                                                       |   |   |
|   |   |                                                                                       | (10.2) | Assignment and Assumption Agreement dated December  29, 1994 by and between Berkshire Realty Advisors Limited Partnership  (formerly known as Krupp Realty Advisors Limited Partnership (“Assignor”) and  Berkshire Mortgage Advisors Limited Partnership (“Assignee”) [Exhibit 10.2 to  Registrant’s report on Form 10-K for the year ended December 31, 1994 (File  No. 0-19244)].* |
|   |   |                                                                                       |   |   |
|   |   |                                                                                       | (10.3) | Waiver and Standstill Agreement, dated as of August  22, 2002, by and among Krupp Government Income Trust, Krupp Government Income  Trust II, Berkshire Income Realty, Inc. and Berkshire Income Realty - OP, L.P  + |
|   |   |                                                                                       |   |   |
|   |   |                                                                                       | (10.4) | Form of Amended and Restated Voting Agreement among  Krupp Government Income Trust, Krupp Government Income Trust II and Berkshire  Income Realty, Inc. + |
|   |   |                                                                                       |   |   |
|   |   |                                                                                       | (10.5) | Extension and Waiver and Standstill Agreement, dated  March 5, 2003, by and among Krupp Government Income Trust, Krupp Government  Income Trust II, Berkshire Income Realty, Inc. and Berkshire Income Realty,  OP, L.P. + |
|        |        |                                                                                            |  |  |  |

 

14

----

 
|   |   |   | Lifestyles Apartments     |
|--------|--------|--------|---------------------------|
|   |   |   |                      |   |
|   |   |   | (10.6)                    | Subordinated Promissory Note dated December 11, 1990  between Lifestyles At Boot Ranch (the “Mortgagor”) and Krupp Government  Income Trust (the “Holder”) [Exhibit 10.1 to Registrant’s Annual Report on  Form 10-K for the fiscal year ended December 31, 1990 (File No. 33-31942)].* |
|   |   |   |                      |   |
|   |   |   | (10.7)                    | Agreement RE Subordinated Note dated December 11,  1990 between Krupp Government Income Trust and Krupp Mortgage Corporation  [Exhibit 10.2 to Registrant’s Annual Report on Form 10-K for the fiscal year  ended December 31, 1990 (File No. 33-31942)].* |
|   |   |   |                      |   |
|   |   |   | (10.8)                    | Subordinated Multifamily Mortgage dated December 11,  1990 between Lifestyles at Boot Ranch (the “Mortgagor”) and Krupp Government  Income Trust (the “Mortgagee”) [Exhibit 10.3 to Registrant’s Annual Report on  Form 10-K for the fiscal year ended December 31, 1990 (File No. 33-31942)].* |
|   |   |   |                      |   |
|   |   |   | (10.9)                    | Additional Loan Agreement dated December 11, 1990  between FL-Tampa, Inc. and M & D Palm Harbor, Inc (collectively, the  “Borrowers”) and Krupp Government Income Trust (the “Holder”) [Exhibit 10.4  to Registrant’s Annual Report on Form 10-K for the fiscal year ended December  31, 1990 (File No. 33-31942)].* |
|   |   |   |                      |   |
|   |   |   | (10.10)                   | Additional Loan Note dated December 11, 1990 between  FL-Tampa, Inc and M & D Palm Harbor, Inc. (collectively, the “Borrowers”)  and Krupp Government Income Trust (the “Holder”) [Exhibit 10.5 to  Registrant’s Annual Report on Form 10-K for the fiscal year ended December  31, 1990 (File No. 33-31942)].* |
|   |   |   |                      |   |
|   |   |   | (10.11)                   | Mortgage Note dated December 11, 1990 between  Lifestyles at Boot Ranch (the “Borrower”) and Krupp Mortgage Corporation (the  “Holder”). [Exhibit 10.6 to Registrant’s Annual Report on Form 10-K for the  fiscal year ended December 31, 1990 (File No. 0-19244)].* |
|   |   |   |                      |   |
|   |   |   | (10.12)                   | GNMA Purchase Agreement dated December 11, 1990  between Krupp Government Income Trust and Krupp Mortgage Corporation.  [Exhibit 10.7 to Registrant’s Annual Report on Form 10-K for the fiscal year  ended December 31, 1990 (File No. 0-19244)].* |
|   |   |   |                      |   |
|   |   |   | (10.13)                   | Modification Agreement by and between Krupp  Government Income Trust and Lifestyles at Boot Ranch and M&D Palm Harbor,  and FL-Tampa Inc. [Exhibit 10.1 to Registrant’s report on Form 10-Q for the  quarter ended September 30, 1996 (File No. 0-19244)].* |
|   |   |   |                      |   |
|   |   |   | (10.14)                   | Escrow Deposit Agreement by and between Krupp  Government Income Trust and M&D Palm Harbor, and FL-Tampa Inc. the  general partners of Lifestyles at Boot Ranch. [Exhibit 10.2 to Registrant’s  report on Form 10-Q for the quarter ended September 30, 1996 (File No. 0-19244)].* |
|   |   |   |                      |   |
|   |   |   | (10.15)                   | Second Modification Agreement by and between Krupp  Government Income Trust and Lifestyles at Boot Ranch and M&D Palm Harbor  Partnership and FL-Tampa, Inc.   [Exhibit 10.1 to Registrant’s report on Form 10-K for the fiscal year  ended December 31, 1999 (File No. 0-19244)].* |
|   |   |   |                      |   |
|   |   |   | Windward Lakes Apartments |
|   |   |   |                      |   |
|   |   |   | (10.16)                   | Subordinated Promissory Note dated December 28, 1990  between the McNab-K C 3 Limited Partnership (the “Mortgagor”) and Krupp  Government Income Trust (the “Holder”) [Exhibit 10.6 to Registrant’s Annual  Report on Form 10-K for the fiscal year ended December 31, 1990 (File No.  33-31942)].* |
|   |   |   |                      |   |
|   |   |   | (10.17)                   | Additional Loan Agreement dated December 28, 1990  between George Krupp, Douglas Krupp and Krupp GP, Inc. (collectively, the  “Borrowers”) and Krupp Government Income Trust (the “Holder”) [Exhibit 10.7  to Registrant’s Annual Report on Form 10-K for the fiscal year ended December  31, 1990 (File No. 33-31942)].* |
|   |   |   |                      |   |
|   |   |   | (10.18)                   | Additional Loan Note dated December 28, 1990 between  Krupp GP, Inc., George Krupp and Douglas Krupp (collectively, the  “Borrowers”) and Krupp Government Income Trust (the “Holder”) [Exhibit 10.8  to Registrant’s Annual Report on Form 10-K for the fiscal year ended December  31, 1990 (File No. 33-31942)].* |

 

15

----

 
|   |   |   | (10.19)              | Agreement RE Subordinated Note dated December 28,  1990 between Krupp Government Income Trust and Love Funding Corporation.  [Exhibit 10.11 to Registrant’s Annual Report on Form 10-K for the fiscal year  ended December 31, 1991 (File No. 0-19244)].*                                                                                                                                                                                                                                        |
|--------|--------|--------|----------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   | (10.20)              | Subordinated Multi-family Mortgage dated December  28, 1991 between McNab-KC3 Limited Partnership (the “Borrower”) and Krupp  Government Income Trust (the “Lender”). [Exhibit 10.12 to Registrant’s Annual  Report on Form 10-K for the fiscal year ended December 31, 1991 (File No.  0-19244)].*                                                                                                                                                                          |
|   |   |   |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |   | (10.21)              | GNMA Purchase Agreement dated December 28, 1991  between Krupp Government Income Trust and Love Funding Corporation. [Exhibit  10.13 to Registrant’s Annual Report on Form 10-K for the fiscal year ended  December 31, 1991 (File No. 0-19244)].*                                                                                                                                                                                                                                               |
|   |   |   |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |   | (10.22)              | Modification Agreement between Krupp Government  Income Trust, Love Funding Corporation, McNab-KC3 Limited Partnership, and  Krupp GP, Inc. [Exhibit 10.19 to Registrant’s report on Form 10-K for the  fiscal year ended December 31, 1999 (File No. 0-19244)].*                                                                                                                                                                                                                                |
|   |   |   |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |   | (10.23)              | Extension of and Second Modification to the  Additional Loan Agreement and Additional Loan Note dated July 1, 2002,  between George Krupp, an individual, Douglas Krupp, an individual and Krupp  GP, Inc., a Massachusetts Corporation (collectively, the “Borrowers”) and  Krupp Government Income Trust, a Massachusetts business trust (the “Holder”)  [Exhibit 10.1 to the Registrant’s report on Form 10-Q for the quarter ended  June 30, 2002 (File 0-19244)] *      |
|   |   |   |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |   | (10.24)              | Extension of and Third Modification to the  Additional Loan Agreement and Additional Loan Note dated September 1, 2002  between George Krupp, an individual, Douglass Krupp, and individual and Krupp  GP, Inc., a Massachusetts corporation (collectively the “Borrowers”) and  Krupp Government Income Trust, a Massachusetts business Trust (the “Holder”)  [Exhibit 10.1 to Registrant’s report on Form 10-Q for the quarter ended  September 30, 2002 (File 0-19244)] * |
|   |   |   |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |   | (10.25)              | Fourth Modification Agreement dated December 31,  2002 between Krupp Government Income Trust, McNab- KC3 Limited Partnership,  Krupp GP Inc., George Krupp and Douglas Krupp. +                                                                                                                                                                                                                                                                                                                       |
|   |   |   |                 |
|   |   |   | Mill Pond Apartments |
|   |   |   |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |   | (10.26)              | Subordinated Promissory Note dated May 28, 1991  between Mill Pond Limited Partnership (the “Mortgagor”) and Krupp Government  Income Trust (the “Holder”) [Exhibit 19.5 to Registrant’s report on Form 10-Q  for the quarter ended June 30, 1991 (File No. 0-19244)].*                                                                                                                                                                                                      |
|   |   |   |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |   | (10.27)              | Agreement RE Subordinated Promissory Note dated May  28, 1991 between Krupp Government Income Trust and Krupp Mortgage Corporation  [Exhibit 19.6 to Registrant’s report on Form 10-Q for the quarter ended June  30, 1991 (File No. 0-19244)].*                                                                                                                                                                                                                                                 |
|   |   |   |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |   | (10.28)              | Subordinated Multifamily Mortgage dated May 28, 1991  between Mill Pond Limited Partnership (the “Mortgagor”) and Krupp Government  Income Trust (the “Mortgagee”) [Exhibit 19.7 to Registrant’s report on Form  10-Q for the quarter ended June 30, 1991 (File No. 0-19244)].*                                                                                                                                                                                              |
|   |   |   |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |   | (10.29)              | Mortgage Note dated May 28, 1991 between Krupp  Mortgage Corporation (the “Holder”) and Mill Pond Apartments (the “Borrower”)  [Exhibit 19.8 to Registrant’s report on Form 10-Q for the quarter ended June  30, 1991 (File No. 0-19244)].*                                                                                                                                                                                                                                  |
|   |   |   |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |   | (10.30)              | Participation Agreement dated May 28, 1991 between  Krupp Mortgage Corporation (the “Mortgagee”) and Krupp Government Income  Trust [Exhibit 19.9 to Registrant’s report on Form 10-Q for the quarter ended  June 30, 1991 (File No. 0-19244)].*                                                                                                                                                                                                                                       |
|   |   |   |                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |   | (10.31)              | Assignment of Open End Mortgage Deed and Security  Agreement dated May 28, 1991 between Krupp Mortgage Corporation (the  “Assignor”) and Krupp Government Income Trust (the “Assignee”) [Exhibit 19.1  to Registrants report on Form 10-Q for the quarter ended September 30, 1991  (File No. 0-19244)].*                                                                                                                                                                         |

 

16

----

 
|   |   |   | Rivergreens Apartments   |
|--------|--------|--------|--------------------------|
|   |   |   |                     |   |
|   |   |   | (10.32)                  | Subordinated Promissory Note dated November 14, 1991  between Rivergreens Associates Limited Partnership (the “Mortgagor”) and  Krupp Government Income Trust (the “Holder”).  [Exhibit 10.33 to Registrant’s Annual Report on Form 10-K for  the fiscal year ended December 31, 1991 (File No. 0-19244)].* |
|   |   |   |                     |   |
|   |   |   | (10.33)                  | Agreement Re-Subordinated Promissory Note dated  November 14, 1991 between Krupp Government Income Trust and Krupp Mortgage  Corporation. [Exhibit 10.34 to Registrant’s Annual Report on Form 10-K for  the fiscal year ended December 31, 1991 (File No. 0-19244)].* |
|   |   |   |                     |   |
|   |   |   | (10.34)                  | Subordinated Multifamily Deed of Trust dated  November 14, 1991 between Rivergreens Associates Limited Partnership (the  “Borrower”), Oregon Title Insurance Company (the “Trustee”) and Krupp  Government Income Trust (the “Lender”). [Exhibit 10.35 to Registrant’s Annual  Report on Form 10-K for the fiscal year ended December 31, 1991 (File No.  0-19244)].* |
|   |   |   |                     |   |
|   |   |   | (10.35)                  | Mortgage Note dated November 14, 1991 between Krupp  Mortgage Corporation and Rivergreens Associates Limited Partnership. [Exhibit  10.36 to Registrant’s Annual Report on Form 10-K for the fiscal year ended  December 31, 1991 (File No. 0-19244)].* |
|   |   |   |                     |   |
|   |   |   | (10.36)                  | Participation Agreement dated November 14, 1991  between Krupp Mortgage Corporation and Krupp Government Income Trust.  [Exhibit 10.37 to Registrant’s Annual Report on Form 10-K for the fiscal year  ended December 31, 1991 (File No. 0-19244)].* |
|   |   |   |                     |   |
|   |   |   | Mountain View Apartments |
|   |   |   |                     |   |
|   |   |   | (10.37)                  | Subordinated Promissory Note dated April 21, 1992  between Mountain View Ltd. (the “Mortgagor”) and Krupp Government Income  Trust (the “Holder”). [Exhibit 19.1 to Registrant’s report on Form 10-Q for  the quarter ended June 30, 1992 (File No. 0-19244)].* |
|   |   |   |                     |   |
|   |   |   | (10.38)                  | Agreement RE Subordinated Promissory Note dated  April 21, 1992 between Krupp Government Income Trust and Krupp Mortgage  Corporation.  [Exhibit 19.2 to  Registrant’s report on Form 10-Q for the quarter ended June 30, 1992 (File  No. 0-19244)].* |
|   |   |   |                     |   |
|   |   |   | (10.39)                  | Subordinated Multifamily Mortgage dated April 21,  1992 between Mountain View Ltd. (the “Mortgagor”) and Krupp Government Income  Trust (the “Mortgagee”).  [Exhibit  19.3 to Registrant’s report on Form 10-Q for the quarter ended June 30, 1992  (File No. 0-19244)].* |
|   |   |   |                     |   |
|   |   |   | (10.40)                  | Additional Loan Agreement dated April 21, 1992  between Philip P. Mulkey, Henry V. Bragg and Gregory V. Bragg (collectively,  the “Borrowers”) and Krupp Government Income Trust (the “Holder”). [Exhibit  19.4 to Registrant’s report on Form 10-Q for the quarter ended June 30, 1992  (File No. 0-19244)].* |
|   |   |   |                     |   |
|   |   |   | (10.41)                  | Additional Loan Note dated April 21, 1992 between  Philip P. Mulkey, Henry V. Bragg and Gregory V. Bragg (collectively, the  “Borrowers”) and Krupp Government Income Trust (the “Holder”). [Exhibit 19.5  to Registrant’s report on Form 10-Q for the quarter ended June 30, 1992 (File  No. 0-19244)].* |
|   |   |   |                     |   |
|   |   |   | (10.42)                  | Mortgage Note dated April 21, 1992 between Mountain  View Ltd. (the “Borrower”) and Krupp Mortgage Corporation (the “Holder”).  [Exhibit 19.6 to Registrant’s report on Form 10-Q for the quarter ended June  30, 1992 (File No. 0-19244)].* |
|   |   |   |                     |   |
|   |   |   | (10.43)                  | Modification Agreement by and between Krupp  Government Income Trust and Mountain View Ltd. [Exhibit 10.1 to Registrant’s  report Form 10-Q for the quarter ended September 30, 1995 (File No.  0-19244)].* |
|   |   |   |                     |   |
|   |   |   | (10.44)                  | Second Modification Agreement by and between Krupp  Government Trust and Mountain View LTD. [Exhibit 10.1 to Registrant’s report  Form 10-Q for the quarter ended June 30, 1999 (File No. 0-19244)]* |
|   |   |   |                     |   |
|   |   | (99)   | Other:                   |   |
|   |   |   |                     |   |
|   |   |   | (99.1)                   | Chairman of the Board Certification pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.+ |

 

17

----

 
|   |   |   | (99.2) | Chief Accounting Officer Certification pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.+ |
|--------|--------|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------|

 

----

* Incorporated by reference

+ Filed herewith

 

18

----

 

SIGNATURES

 

Pursuant to therequirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized, on the 14th day of March,2003.

 
|            | KRUPP GOVERNMENT INCOME TRUST                                                                 |
|-----------------|-----------------------------------------------------------------------------------------------|
|            |                                                                                          |
|            |                                                                                          |
|            |                                                                                          |
| By:   | /s/ Douglas Krupp                                                                             |   |
|            | Douglas Krupp, Chairman of Board of Trustees and a  Trustee of Krupp  Government Income Trust |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities indicated, on the 14th day of March, 2003.

 
| **Signatures**                 |   | **Title(s)** |
|--------------------------------|--------|--------------|
|                           |   |         |
|  /s/ Douglas  Krupp       |   |         | Chairman of Board of Trustees and a  Trustee of Krupp Government Income Trust |
| Douglas Krupp                  |   |
|                           |   |         |   |
|  /s/ Alan  Reese          |   |         | Treasurer of Krupp Government Income Trust |
| Alan Reese                     |   |         |   |
|                           |   |         |   |
|  /s/ Charles  N. Goldberg |   |         | Trustee of Krupp Government Income Trust |
| Charles N. Goldberg            |   |         |   |
|                           |   |         |   |
|  /s/ J. Paul  Finnegan    |   |         | Trustee of Krupp Government Income Trust |
| J. Paul Finnegan               |   |         |   |
|                           |   |         |   |
|  /s/ Stephen  Puleo       |   |         | Trustee of Krupp Government Income Trust |
| Stephen Puleo                  |   |         |   |

 

19

----

 

# Certifications

 

I, Douglas Krupp, certify that:

 

1.               I have reviewedthis annual report on Form 10-K of Krupp Government Income Trust;

 

2.               Based on myknowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report.

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)              presented in thisannual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officers and I have indicated in this annual report whetherthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| Date: March 14, 2003 |                  |   |
|----------------------|-----------------------|--------|
|                 |                  |   |
|                 |                  |   |
|                 | /s/ Douglas Krupp     |   |
|                 | Douglas Krupp         |   |
|                 | Chairman of the Board |   |

 

20

----

 

# Certifications

 

I, Alan Reese, certify that:

 

1.                  Ihave reviewed this annual report on Form 10-K of Krupp Government Income Trust;

 

2.               Based on myknowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report.

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a.               designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;

 

b.              evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c.               presented in thisannual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a.               all significant deficienciesin the design or operation of internal controls which could adversely affectthe registrant’s ability to record, process, summarize and report financialdata and have identified for the registrant’s auditors any material weaknessesin internal controls; and

 

b.              any fraud, whetheror not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officers and I have indicated in this annual report whetherthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| Date: March 14, 2003 |                      |   |
|----------------------|---------------------------|--------|
|                 |                      |   |
|                 |                      |   |
|                 | /s/ Alan Reese            |   |
|                 | Alan Reese                |   |
|                 | Chief Accounting  Officer |   |

 

21

----

 

APPENDIX A

 

KRUPP GOVERNMENT INCOMETRUST

 

 

 

FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA

ITEM 8 of FORM 10-K

 

ANNUAL REPORT TO THESECURITIES AND EXCHANGE COMMISSION

For the Year EndedDecember 31, 2002

 

F-1

----

 

KRUPP GOVERNMENT INCOMETRUST

 

INDEX TO FINANCIALSTATEMENTS, SCHEDULE AND SUPPLEMENTARY DATA

 

 
| Report  of Independent Accountants                                                                       | F-3        |
|----------------------------------------------------------------------------------------------------------|------------|
|                                                                                                     |       |
| Balance Sheets at December 31, 2002 and  2001                                                            | F-4        |
|                                                                                                     |       |
| Statements  of Income and Comprehensive Income for the Years Ended December 31, 2002,  2001 and 2000     | F-5        |
|                                                                                                     |       |
| Statements of Changes in Shareholders’ Equity  for the Years Ended December 31, 2002, 2001 and 2000 | F-6        |
|                                                                                                     |       |
| Statements of Cash Flows for  the Years Ended December 31, 2002, 2001 and 2000                           | F-7        |
|                                                                                                     |       |
| Notes  to Financial Statements                                                                           | F-8 - F-19 |
|                                                                                                     |       |
| Schedule  II – Valuation and Qualifying Accounts                                                    | F-20       |
|                                                                                                     |       |
| Supplementary Data - Selected Quarterly  Financial Data (Unaudited)                                      | F-21       |

 

 

All other schedules are omitted as they are not applicable or notrequired, or the information is provided in the financial statements or thenotes thereto.

 

F-2

----

 

REPORT OF INDEPENDENT ACCOUNTANTS

 

 

To the Board of Trustees and the Shareholders ofKrupp Government Income Trust:

 

In our opinion, the financial statements listed in the accompanyingindex present fairly, in all material respects, the financial position of KruppGovernment Income Trust (the “Trust”) at December 31, 2002 and 2001, and theresults of its operations and its cash flows for each of the three years in theperiod ended December 31, 2002 in conformity with accounting principlesgenerally accepted in the United States of America.  In addition, in our opinion, the financial statement schedulelisted in the accompanying index presents fairly, in all material respects, theinformation set forth therein when read in conjunction with the relatedfinancial statements.   These financialstatements and financial statement schedule are the responsibility of theTrust’s management; our responsibility is to express an opinion on thesefinancial statements and financial statement schedule based on our audits. Weconducted our audits of these statements in accordance with auditing standardsgenerally accepted in the United States of America which require that we planand perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

 

PricewaterhouseCoopers LLP

Boston, Massachusetts

March 14, 2003

 

F-3

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KRUPP GOVERNMENT INCOMETRUST

 

BALANCE SHEETS

 

December 31, 2002 and2001

 
|                                                                                                                       |   | **2002**   |       | **2001**    |   |
|----------------------------------------------------------------------------------------------------------------------------|--------|------------|------------|-------------|--------|
| ASSETS                                                                                                                     |   |       |       |        |   |
| Participating  Insured Mortgage Investments (“PIMIs”) (Notes B, C, J and K):                                     |   |       |       |        |   |
| Insured  Mortgages                                                                                                         |   | $          | 32,255,154 |        | $      | 50,811,558 |   |
| Additional  Loans, net of impairment provision of $1,032,272 and $1,698,811, respectively                                  |   | 4,537,719  |       | 3,871,180   |   |
| Participating  Insured Mortgages (“PIMs”) (Notes B, D, J and K)                                                  |   | 16,949,637 |       | 46,416,493  |   |
| Mortgage-Backed  Securities and insured mortgage loan (“MBS”) (Notes B, E and J)                                 |   | 6,313,121  |       | 14,971,348  |   |
|                                                                                                                       |   |       |       |        |   |
| Total mortgage  investments                                                                                                |   | 60,055,631 |       | 116,070,579 |   |
|                                                                                                                       |   |       |       |        |   |
| Cash and cash  equivalents (Notes B and J)                                                                                 |   | 1,986,243  |       | 13,154,231  |   |
| Interest  receivable and other assets                                                                                      |   | 370,542    |       | 756,832     |   |
| Prepaid  acquisition fees and expenses, net of accumulated amortization of $738,546  and $6,249,229, respectively (Note B) |   | 46,160     |       | 541,044     |   |
| Prepaid  participation servicing fees, net of accumulated amortization of $683,812 and  $1,999,913, respectively (Note B)  |   | 62,497     |       | 263,455     |   |
|                                                                                                                       |   |       |       |        |   |
| Total assets                                                                                                               |   | $          | 62,521,073 |        | $      | 130,786,141 |   |
|                                                                                                                       |   |       |       |        |   |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                  |   |       |       |        |   |
|                                                                                                                       |   |       |       |        |   |
| Deferred income  on Additional Loans (Note B)                                                                              |   | $          | 1,351,768  |        | $      | 2,336,154 |   |
| Other  liabilities                                                                                                         |   | 48,938     |       | 20,485      |   |
|                                                                                                                       |   |       |       |        |   |
| Total  liabilities                                                                                                         |   | 1,400,706  |       | 2,356,639   |   |
|                                                                                                                       |   |       |       |        |   |
| Commitments  (Note H)                                                                                                      |   |       |       |        |   |
|                                                                                                                       |   |       |       |        |   |
| Shareholders’  equity (Notes A, F, H and K):                                                                          |   |       |       |        |   |
| Common stock, no  par value; 17,510,000  Shares authorized; 15,053,135 Shares  issued and outstanding                      |   | 60,668,605 |       | 127,850,874 |   |
|                                                                                                                       |   |       |       |        |   |
| Accumulated  comprehensive income (Note B)                                                                                 |   | 451,762    |       | 578,628     |   |
|                                                                                                                       |   |       |       |        |   |
| Total  Shareholders’ equity                                                                                           |   | 61,120,367 |       | 128,429,502 |   |
|                                                                                                                       |   |       |       |        |   |
| Total  liabilities and Shareholders’ equity                                                                           |   | $          | 62,521,073 |        | $      | 130,786,141 |   |

 

The accompanying notesare an integralpart of the financial statements.

 

F-4

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KRUPP GOVERNMENT INCOMETRUST

 

STATEMENTS OF INCOME ANDCOMPREHENSIVE INCOME

 

For the Years EndedDecember 31, 2002, 2001 and 2000

 
|                                                                |   | **2002**   |      | **2001**   |   | **2000**   |   |
|---------------------------------------------------------------------|--------|------------|-----------|------------|--------|------------|--------|
|                                                                |   |       |      |       |   |       |   |
| Revenues:                                                           |   |       |      |       |   |       |   |
| Interest income  - PIMs and PIMIs:                                  |   |       |      |       |   |       |   |
| Basic interest                                                      |   | $          | 4,530,671 |       | $      | 7,901,086  |   | $ | 8,086,930 |   |
| Additional Loan  Interest                                           |   | 984,386    |      | 1,515,330  |   | 744,080    |   |
| Participation  interest                                             |   | 2,027,808  |      | 7,602,737  |   | 504,612    |   |
| Interest income  - MBS                                              |   | 1,237,926  |      | 1,251,710  |   | 1,375,643  |   |
| Interest income  - cash and cash equivalents                        |   | 229,786    |      | 261,513    |   | 364,803    |   |
|                                                                |   |       |      |       |   |       |   |
| Total revenues                                                      |   | 9,010,577  |      | 18,532,376 |   | 11,076,068 |   |
|                                                                |   |       |      |       |   |       |   |
| Expenses:                                                           |   |       |      |       |   |       |   |
| Asset management  fee to an affiliate (Note G)                      |   | 561,859    |      | 950,966    |   | 1,007,651  |   |
| Expense  reimbursements to affiliates (Note G)                      |   | 202,936    |      | 243,109    |   | 256,564    |   |
| Amortization of  prepaid fees and expenses (Note B)                 |   | 695,842    |      | 1,352,788  |   | 1,029,734  |   |
| General and  administrative (Note G)                                |   | 434,134    |      | 477,102    |   | 353,007    |   |
| Reduction of  provision for impaired mortgage loans (Notes B and C) |   | (666,539   | )         | (463,807   | )      | —     |   |
|                                                                |   |       |      |       |   |       |   |
| Total expenses                                                      |   | 1,228,232  |      | 2,560,158  |   | 2,646,956  |   |
|                                                                |   |       |      |       |   |       |   |
| Net income (Note  I)                                                |   | 7,782,345  |      | 15,972,218 |   | 8,429,112  |   |
|                                                                |   |       |      |       |   |       |   |
| Other  comprehensive income:-                                       |   |       |      |       |   |       |   |
| Net increase  (decrease) in unrealized gain on MBS                  |   | (126,866   | )         | 133,752    |   | 213,560    |   |
|                                                                |   |       |      |       |   |       |   |
| Total  comprehensive income                                         |   | $          | 7,655,479 |       | $      | 16,105,970 |   | $ | 8,642,672 |   |
|                                                                |   |       |      |       |   |       |   |
| Basic earnings  per Share                                           |   | $          | .52       |       | $      | 1.06       |   | $ | .56 |   |
|                                                                |   |       |      |       |   |       |   |
| Weighted average  Shares outstanding                                |   | 15,053,135 |      | 15,053,135 |   | 15,053,135 |   |

 

The accompanying notesare an integralpart of the financial statements.

 

F-5

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KRUPP GOVERNMENT INCOMETRUST

 

STATEMENTS OF CHANGES INSHAREHOLDERS’ EQUITY

 

For the Years EndedDecember 31, 2002, 2001 and 2000

 
|                              |   | **Common  Stock** | ** **  | **Retained   Earnings** | ** ** | **Accumulated   Comprehensive   Income** | ** ** | **Total   Shareholders’   Equity** |    |
|-----------------------------------|--------|-------------------|-------------|-------------------------|------------|------------------------------------------|------------|-----------------------------------------|---------|
|                              |   |              |        |                    |       |
|                              |   |              |        |                    |       |
|                              |   |              |        |                    |       |                                     |       |                                    |    |
| Balance at  December 31, 1999     |   | $                 | 137,921,227 |                    | $          | —                                   |       | $                                       | 231,316 |   | 138,152,543 |   |
|                              |   |              |        |                    |       |                                     |       |                                    |    |
| Dividends                         |   | (1,807,021        | )           | (8,429,112              | )          | —                                   |       | (10,236,133                             | )       |
|                              |   |              |        |                    |       |                                     |       |                                    |    |
| Net income                        |   | —            |        | 8,429,112               |       | —                                   |       | 8,429,112                               |    |
|                              |   |              |        |                    |       |                                     |       |                                    |    |
| Change in  unrealized gain on MBS |   | —            |        | —                  |       | 213,560                                  |       | 213,560                                 |    |
|                              |   |              |        |                    |       |                                     |       |                                    |    |
| Balance at  December 31, 2000     |   | 136,114,206       |        | —                  |       | 444,876                                  |       | 136,559,082                             |    |
|                              |   |              |        |                    |       |                                     |       |                                    |    |
| Dividends                         |   | (8,263,332        | )           | (15,972,218             | )          | —                                   |       | (24,235,550                             | )       |
|                              |   |              |        |                    |       |                                     |       |                                    |    |
| Net income                        |   | —            |        | 15,972,218              |       | —                                   |       | 15,972,218                              |    |
|                              |   |              |        |                    |       |                                     |       |                                    |    |
| Change in  unrealized gain on MBS |   | —            |        | —                  |       | 133,752                                  |       | 133,752                                 |    |
|                              |   |              |        |                    |       |                                     |       |                                    |    |
| Balance at  December 31, 2001     |   | 127,850,874       |        | —                  |       | 578,628                                  |       | 128,429,502                             |    |
|                              |   |              |        |                    |       |                                     |       |                                    |    |
| Dividends                         |   | (67,182,269       | )           | (7,782,345              | )          | —                                   |       | (74,964,614                             | )       |
|                              |   |              |        |                    |       |                                     |       |                                    |    |
| Net income                        |   | —            |        | 7,782,345               |       | —                                   |       | 7,782,345                               |    |
|                              |   |              |        |                    |       |                                     |       |                                    |    |
| Change in  unrealized gain on MBS |   | —            |        | —                  |       | (126,866                                 | )          | (126,866                                | )       |
|                              |   |              |        |                    |       |                                     |       |                                    |    |
| Balance at  December 31, 2002     |   | $                 | 60,668,605  |                    | $          | —                                   |       | $                                       | 451,762 |   | $ | 61,120,367 |   |
|                                   |        |                   |             |                         |            |                                          |            |                                         |         |  |  |  |  |

 

Shares issued andoutstanding for each of the three years ended December 31, are 15,053,135

 

The accompanying notesare an integralpart of the financial statements.

 

F-6

----

 

KRUPP GOVERNMENT INCOMETRUST

 

STATEMENTS OF CASH FLOWS

 

For the Years EndedDecember 31, 2002, 2001 and 2000

 
|                                                                               |   | **2002**    |      | **2001**    |   | **2000**    |   |
|------------------------------------------------------------------------------------|--------|-------------|-----------|-------------|--------|-------------|--------|
| Operating  activities:                                                             |   |        |      |        |   |        |   |
| Net income                                                                         |   | $           | 7,782,345 |        | $      | 15,972,218  |   | $ | 8,429,112 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |   |        |      |        |   |        |   |
| Amortization of  discounts                                                         |   | (170,891    | )         | (110        | )      | (2,202      | )      |
| Reduction of  provision for impaired mortgage loans                                |   | (666,539    | )         | (463,807    | )      | —      |   |
| Amortization of  prepaid fees and expenses                                         |   | 695,842     |      | 1,352,788   |   | 1,029,734   |   |
| Changes in  assets and liabilities:                                                |   |        |      |        |   |        |   |
| Decrease  (increase) in interest receivable and other assets                       |   | 386,290     |      | 325,580     |   | (108,921    | )      |
| Decrease in  deferred income on Additional Loans                                   |   | (984,386    | )         | (1,214,331  | )      | (367,536    | )      |
| Increase  (decrease) in other liabilities                                          |   | 28,453      |      | (495        | )      | (4,045      | )      |
|                                                                               |   |        |      |        |   |        |   |
| Net cash  provided by operating activities                                         |   | 7,071,114   |      | 15,971,843  |   | 8,976,142   |   |
|                                                                               |   |        |      |        |   |        |   |
| Investing  activities:                                                             |   |        |      |        |   |        |   |
| Principal  collections on PIMs and Insured Mortgages                               |   | 48,023,260  |      | 9,416,268   |   | 816,846     |   |
| Principal  collections on MBS                                                      |   | 8,702,252   |      | 1,699,012   |   | 1,174,687   |   |
| Additional Loan  prepayments                                                       |   | —      |      | 4,943,617   |   | —      |   |
|                                                                               |   |        |      |        |   |        |   |
| Net cash  provided by investing activities                                         |   | 56,725,512  |      | 16,058,897  |   | 1,991,533   |   |
|                                                                               |   |        |      |        |   |        |   |
| Financing  activity:                                                               |   |        |      |        |   |        |   |
| Dividends                                                                          |   | (74,964,614 | )         | (24,235,550 | )      | (10,236,133 | )      |
|                                                                               |   |        |      |        |   |        |   |
| Net increase  (decrease) in cash and cash equivalents                              |   | (11,167,988 | )         | 7,795,190   |   | 731,542     |   |
|                                                                               |   |        |      |        |   |        |   |
| Cash and cash  equivalents, beginning of year                                      |   | 13,154,231  |      | 5,359,041   |   | 4,627,499   |   |
|                                                                               |   |        |      |        |   |        |   |
| Cash and cash  equivalents, end of year                                            |   | $           | 1,986,243 |        | $      | 13,154,231  |   | $ | 5,359,041 |   |
|                                                                               |   |        |      |        |   |        |   |
| Non cash  activities:                                                              |   |        |      |        |   |        |   |
| (Decrease)  increase in Fair Value of MBS                                          |   | $           | (126,866  | )           | $      | 133,752     |   | $ | 213,560 |   |

 

The accompanying notesare an integralpart of the financial statements.

 

F-7

----

 

KRUPP GOVERNMENT INCOMETRUST

 

NOTES TO FINANCIAL STATEMENTS

 

A.            Organization

 

Krupp Government Income Trust (the “Trust”) was formedon November 1, 1989 by filing a Declaration of Trust in The Commonwealth ofMassachusetts.  The Trust is authorizedto sell and issue not more than 17,510,000 shares of beneficial interest (the“Shares”).  The Trust was organized forthe purpose of investing in commercial and multi-family loans and mortgagebacked securities.  Berkshire MortgageAdvisors Limited Partnership (“BMALP”)(the “Advisor”), acquired 10,000 of suchShares for $200,000 and 14,999,999 Shares were sold for $299,480,263 net of purchasevolume discounts of $519,717 under a public offering which commenced on April19, 1990 and ended on July 15, 1991. Under the Dividend Reinvestment Plan (“DRP”), 43,136 Shares were soldfor $819,356 during its public offering. The Trust shall terminate on December31, 2029, unless earlier terminated by the affirmative vote of holders of amajority of the outstanding Shares entitled to vote thereon.

 

B.            SignificantAccounting Policies

 

The Trust uses the following accounting policies forfinancial reporting purposes:

 

Basis of Presentation

 

The accompanying financial statements have beenprepared on the accrual basis of accounting in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”).

 

MBS

 

The Trust, in accordance with the Financial AccountingStandards Board’s Statement 115, “Accounting for Certain Investments in Debtand Equity Securities” (“FAS 115”), classifies its MBS portfolio asavailable-for-sale.  The Trustclassifies its MBS portfolio as available-for-sale as a portion of the MBSportfolio may remain after all of the PIMs and PIMIs payoff and that it will benecessary to then sell the remaining MBS portfolio at that time in order toclose out the Trust.  In addition, othersituations such as liquidity needs could arise which would necessitate the saleof a portion of the MBS portfolio.  Assuch, the Trust carries its MBS at fair market value and reflects anyunrealized gains (losses) as a separate component of Shareholders’ Equity. TheTrust amortizes purchase premiums or discounts over the life of the underlyingmortgages using the effective interest method.

 

PIMs and PIMIs

 

The Trust accounts for its MBS portion of a PIM orPIMI investment in accordance with FAS 115, under the classification of held tomaturity as these investments have a participation feature.  As a result, the Trust would not sell orotherwise dispose of the MBS. Accordingly, the Trust has both the intention and ability to hold theseinvestments to expected maturity. The Trust carries these MBS at amortizedcost.

 

The insured mortgage portion of the FHA PIM or FHAPIMI is carried at amortized cost.  TheTrust holds these mortgages at amortized cost since they are fully insured byFHA.

 

The Additional Loans are carried at amortized costunless the Advisor of the Trust believes there is an impairment in value, inwhich case a valuation allowance is established in accordance with FAS 114“Accounting by Creditors for Impairment of a Loan” and FAS 118 “Accounting byCreditors for Impairment of a Loan- Income Recognition and Disclosures”.

 

Basic interest is recognized based on the stated rateof the Department of Housing and Urban Development (“HUD”) Insured Mortgageloan (less the servicer’s fee) or the coupon rate of the Government NationalMortgage Association (“GNMA”) MBS.  TheTrust recognizes interest related to the participation features when the amountbecomes fixed and the transaction that gives rise to such amount is finalized,cash is received and all contingencies are resolved. This could be the sale orrefinancing of the underlying real estate which results in a cash payment tothe Trust or a cash payment made to the Trust from surplus cash relative to theparticipation feature. The Trust defers the recognition of Additional Loaninterest payments as income to the extent these interest payments were fromescrows established with the proceeds of the Additional Loan. When theproperties underlying the PIMI’s generate sufficient cash flow to make therequired Additional Loan interest payments and the Additional Loan value isdeemed collectible, the Trust recognizes income as earned and commencesamortization of the deferred interest amounts into income over the remainingestimated term of the Additional Loan. During periods where mortgage loans areimpaired the Trust suspends amortizing deferred interest.

 

F-8

----

 

The Trust also fully reserves the portion of anyAdditional Loan interest payment satisfied through the issuance of an operatingloan and any associated interest due on such operating loan.  The Trust will recognize the income relatedto the operating loan when the borrower repays amounts due under the operatingloan.

 

Impaired Mortgage Loans

 

Impaired loans are those Additional Loans for whichthe Advisor believes that the collection of all amounts due in accordance withthe contractual terms of the loan agreement are not likely.  Impaired loans are measured based on thefair value of the underlying collateral net of estimated selling costs.  The Trust measures impairment on these loansquarterly.  Interest received on theimpaired loans is applied against the loan principal.

 

Cash Equivalents

 

The Trust includes all short-term investments withmaturities of three months or less from the date of acquisition in cash andcash equivalents.  The Trust invests itscash primarily in agency paper and money market funds with a commercial bankand has not experienced any loss to date on its invested cash.

 

Prepaid Fees and Expenses

 

Prepaid fees and expenses represent prepaid acquisitionfees and expenses and prepaid participation servicing fees paid for theacquisition and servicing of PIMs and PIMIs. The Trust amortizes prepaid acquisition fees and expenses using a methodthat approximates the effective interest method over a period of ten to twelveyears, which represents the estimated life of the underlying mortgage.   

 

The Trust amortizes prepaid participation servicingfees using a method that approximates the effective interest method over a tenyear period beginning at final endorsement of the loan if a HUD-insuredmortgage loan or a GNMA MBS.

 

Upon the repayment of a PIM or PIMI any unamortizedacquisition fees and expenses and unamortized participation servicing feesrelated to such loan are expensed.

 

Income Taxes

 

The Trust has elected to be taxed as a REIT under theInternal Revenue Code of 1986, as amended, and believes it will continue tomeet all such qualifications. Accordingly, the Trust will not be subject to federal income taxes onamounts distributed to shareholders provided it distributes annually at least90% of its REIT taxable income and meets certain other requirements forqualifying as a REIT. Therefore, no provision for federal income taxes has beenrecorded in the financial statements.

 

Estimates and Assumptions

 

The preparation of financial statements in accordancewith GAAP requires management to make estimates and assumptions that affect thereported amount of assets and liabilities, contingent assets and liabilitiesand revenues and expenses during the period. Significant estimates include the net carrying value of Additional Loansand the unrealized gains on MBS investments. Actual results could differ from those estimates.

 

C.            PIMIs

 

The Trust had investments in three PIMIs on December31, 2002 and four PIMIs on December 31, 2001 that provide the permanentfinancing of multi-family housing.  Onecomponent of a PIMI is either a securitized HUD-insured first mortgage loanissued and guaranteed by GNMA or a sole participation interest in a first mortgageloan originated under the FHA lending program and insured by HUD (collectivelythe “Insured Mortgages”).  The FHA firstmortgage or the first mortgage underlying the GNMA security

 

F-9

----

 

provided the borrower (generally a limitedpartnership) with a below market interest rate loan in exchange for providingthe Trust with participation in a percentage of the cash generated fromproperty operations and in a percentage of any appreciation of the underlying propertyto a preferred return, then a percentage of any appreciation thereafter.  The borrower conveys these rights to theTrust through a subordinated promissory note and mortgage. In addition, theTrust made an Additional Loan to the owners of the borrower to provideadditional funds for the construction and permanent financing of theproperty.  The owners generallycollateralize the Additional Loan through a pledge and security agreement thatpledges their ownership interests in the borrower, and their share of anydistributions made from surplus cash generated by the property and the proceedsrealized upon the refinancing of the property, sale of the property or sale ofthe partnership interests.  Amountspayable under the Additional Loan are neither guaranteed nor insured.

 

The Trust receives level monthly principal andinterest (“Basic Interest”) payments amortizing over thirty to forty years onthe Insured Mortgage, and is entitled to receive participation income under thesubordinated promissory note and mortgage, and semi-annual interest payments(“Additional Loan Interest”) and preferred interest under the Additional Loan(“Preferred Interest”).  The Trustreceives principal and interest payments on the Insured Mortgages currently,because these payments are insured or guaranteed; however, there arelimitations to the amount and obligation to pay participation income,Additional Loan Interest and Preferred Interest.

 

The subordinated promissory note and mortgage entitlesthe Trust to receive (i) Participating Income Interest generally equal to 50%of (a) all distributable Surplus Cash (as defined in the regulatory agreementof the HUD-insured first mortgage) generated by the property (b) anyunrestricted cash generated from property operations and (c) to the extentavailable, unexpended reserves and escrows, and (ii) Participating AppreciationInterest generally equal to 50% of the net proceeds or value of the propertyupon the sale, refinancing, maturity or accelerated maturity, or permittedprepayment of all amounts due under the Insured Mortgage and Additional Loanless the Outstanding Indebtedness, as defined. Amounts received by the Trust pursuant to the subordinated promissorynote as Participating Income Interest reduce amounts payable as PreferredInterest and may reduce amounts payable as Base Interest under the AdditionalLoan.

 

The Insured Mortgage and subordinated promissory notegenerally have maturities of 30 to 40 years, however, under the subordinatedpromissory note the Trust can generally accelerate these maturity dates at anytime after the tenth anniversary of final endorsement for coinsurance orinsurance, but in certain cases for construction loans after the eleventh ortwelfth anniversary of initial endorsement (commencement of construction) forcoinsurance or insurance, upon giving twelve months written notice for thepayment of all accrued participation interest through the accelerated maturitydate.  The Trust can accelerate thematurity date for payment of amounts due under the subordinated promissory noteand the insured mortgage if the contract of insurance or coinsurance with theSecretary of HUD on the insured mortgage is canceled prior to the acceleratedmaturity date.

 

Additional Loan Interest is payable from the followingsources: (i) any Surplus Cash received pursuant to the subordinated promissorynote as Participating Income Interest, (ii) amounts conveyed to the Trust bythe owners of the borrowing entity representing distributions of Surplus Cashand (iii) amounts in reserve accounts established with the Additional Loanproceeds, if available, and any interest earned on these amounts.  If these sources are not sufficient to makeAdditional Loan Interest payments, the owners of the borrowing entity mustnotify the Trust of the amount of the shortfall and at its option the Trustcould require a capital call from the owners of the borrowing entity.  The capital call would be equal to 50% ofthe Additional Loan Interest shortfall and the Trust in certain situationscould convert the remaining 50% into an operating loan.

 

In addition to the Additional Loan Interest payments,the Additional Loan requires the payment of Preferred Interest representing acumulative, non-compounded preferred return from the date of final endorsementto the date of calculation at interest rates ranging from 9.5% to 11% per annumon the outstanding balance of the Insured Mortgage plus the Additional Loan andany other funds advanced by the Trust to the borrowing entity or the owners ofthe borrowing entity less: (i) interest payments, paid to the Trust under theInsured Mortgage, (ii) Participating Income Interest and (iii) Additional LoanInterest payments made under the Additional Loan.

 

The Insured Mortgage and subordinated promissory notegenerally cannot be prepaid for a term of five years from the constructioncompletion date or final endorsement and thereafter may be prepaid in wholewithout penalty provided all participation interest and amounts under theInsured Mortgage are paid.  Any prepaymentrequires not less than ninety nor more than 180 days prior written notice.

 

F-10

----

 

The Additional Loan generally may not be prepaidbefore the fifth anniversary of the Agreement or the construction completiondate and thereafter may be prepaid in full without penalty provided PreferredInterest and any amounts due under the Insured Mortgage and subordinatedpromissory note are paid in full.

 

On January 3, 2002, the Trust received $18,330,825representing the principal proceeds on the first mortgage loan from the Red RunPIMI plus $120,296 of interest on the first mortgage loan.  On December 31, 2001 the Trust received aprepayment of the Red Run Additional Loan and Subordinated PromissoryNote.  The Trust received $2,900,000 ofAdditional Loan Principal, $238,369 of Shared Appreciation Interest, $3,506,952of Preferred Interest and $67,667 of Base Interest on the Additional Loan.  On January 16, 2002, the Trust paid a specialdividend of $1.68 per share from the proceeds of the Red Run PIMI prepayment.

 

On July 23, 2001, the Trust received a prepayment ofthe Seasons Subordinated Promissory Note and the Seasons Additional Loan.  The Trust received $1,924,649 of AdditionalLoan principal, $180,916 of surplus cash, $847,450 of preferred interest,$1,052,455 of contingent interest, $69,129 of Base Interest on the AdditionalLoan and $1,299,562 which represents the Trust’s portion of the residualsplit.  The Trust received $8,567,890representing the principal proceeds on the first mortgage note on July 26,2001.  In addition, the Trust recognized$180,633 of Additional Loan interest that had been previously received andrecorded in deferred income on additional loans.  On August 17, 2001, the Advisor paid a special dividend of $0.93per share from the proceeds of the Seasons PIMI prepayment.

 

The payoff of the Seasons PIMI was a result of thesale of the underlying property by the borrower, Maryland Associates LimitedPartnership (“MALP”), which is an affiliate of the Advisor, to an affiliate ofMALP’s general partner.  Because thesale of the underlying property was to an affiliate, the Independent Trusteesof the Trust were required to approve the transaction, which they did basedupon a number of factors, including an appraisal of the underlying propertyprepared by an independent third party MAI appraiser.  The purchase price paid by the affiliate for the underlyingproperty was $1.6 million greater than the value indicated by suchappraisal.  Both the Trustees and theAdvisor believed that the market capitalization rate utilized in the appraisalwas too high based on their knowledge of recent sales in the market and agreedthat the true fair value was the ultimate purchase price paid by the affiliate.

 

The Trust’s participation in current operations atWindward Lakes is 50% of any Surplus Cash as determined under HUD guidelines,and the Additional Loan interest is payable out of its share of SurplusCash.  Any unpaid Additional Loaninterest accrues at 7.5% per annum. When the property is sold or refinanced, the Trust will receive 50% ofany net proceeds remaining after repayment of the insured mortgage, theAdditional Loan, the interest rate relief, accrued and unpaid Additional Loaninterest and the Borrower’s equity up to the point that the Trust has receiveda cumulative, non-compounded 10% preferred return on its investment in thePIMI.

 

The Windward Lakes Additional Loan was scheduled tomature in July of 2002.  However, theAdvisor agreed to extend the maturity date of the Additional Loan to December31, 2003.  In return, the borroweragreed to modify the Participating Appreciation Interest provision under theSubordinated Promissory Note.  Underthis agreement, an appraisal of the property would take place prior to December31, 2002 to determine the floor value for the Participating AppreciationInterest provision if the property is not sold prior to July 1, 2003.  If the property is sold to an unrelatedthird party prior to July 1, 2003, the floor will continue to be the value ofthe property upon sale.  If the propertyis neither sold nor refinanced but repaid by the borrower prior to July 31,2003, the floor will be the value determined by the appraisal completed as ofDecember 31, 2002.  In all other situationsthe Participating Appreciation Interest will be based on the greater of thefloor value or the value determined at the time of sale, refinance orpayoff.  Under either scenario, the callprovision in the Subordinated Promissory Note will be reduced from 12 months to6 months.  The floor valued determinedby appraisal is $19,000,000.

 

In June 1999, the Trust approved a second workout ofthe Mountain View Apartment PIMI that runs through 2004.  Under its terms, the Trust agreed to reducethe effective interest rate on the insured first mortgage by 1.25%retroactively for 1999 and each year thereafter until 2004, and to change theparticipation terms.  The workouteliminated the preferred return feature, forgave $288,580 of previous accrualsof Additional Loan interest related to the first workout, and changed theTrust’s participation in Surplus Cash generated by the property and itsapplication towards Additional Loan interest. The Trust will receive 75% of the first $130,667 of Surplus Cash and 50%of any remaining Surplus Cash on an annual basis to pay Additional Loaninterest.  Unpaid Additional Loaninterest related to the second workout will accrue and be payable if there aresufficient proceeds from a sale or refinancing of the property.  In addition, the borrower repaid $153,600 ofthe Additional Loan and funded approximately $54,000 to a reserve for propertyimprovements.

 

F-11

----

 

During 2002, operating results at Mountain View havedeteriorated.  Both a fire at theproperty in early 2001 and soft market conditions has affected occupancy andrental rate income.  A building with 20three-bedroom apartments was out of service for 18 months as a result of afire.  All construction work wascompleted in mid-2002, with insurance proceeds covering the total cost of therestoration.  A portion of the lost rentwas covered by insurance as well. Occupancy in the remaining units has been affected by local economicconditions.  Layoffs and businessreorganizations at various nearby facilities have resulted in some lostoccupancy at Mountain View: one of the most common reasons residents cite forleaving the property is for a job transfer. The other major reason is for a home purchase.  These factors have made the rental market much more competitivefor apartments owners, and the use of concessions to attract potential rentershas increased throughout the market. Consequently, rental income is down this year.  At the same time, both insurance costs and real estate taxes haveincreased dramatically, further deteriorating operating results.  As a result of the factors described above,the Trust maintains a valuation allowance of $1,032,272.

 

In May 1998, the borrower on the Lifestyles PIMIdefaulted on its debt service payment on the insured first mortgage.  Subsequently, the Trust agreed to a newworkout that runs through 2007.  Underits terms, the Trust agreed to reduce the effective interest rate on theinsured first mortgage by 1.75% retroactively for 1998 to clear the default, by1.75% for 1999, and by 1.5% each year thereafter until 2007.  An affiliate of the Advisor refundsapproximately .25% per annum to the Trust related to the interest reduction.  In addition, the base interest provision onthe Additional Loan was eliminated.  Theborrower made a $550,000 equity contribution, which was escrowed, for theexclusive purpose of correcting deferred maintenance and making capitalimprovements to the property.  Theescrow has been used up for paint, building repairs, parking lot repairs, a newfitness facility, clubhouse remodeling and landscaping.  Any Surplus Cash that is generated byproperty operations will be split evenly between the Trust and the borrower.  When the property is sold or refinanced, thefirst $1,100,000 of any proceeds remaining after the insured mortgage is paidoff will be split 50% / 50% between the Trust and the borrower; the next$1,690,220 of proceeds will be split 75% to the Trust and 25% to the borrower;and any remaining proceeds will be split 50% / 50%.  The first two splits would be applied towards the principalrepayment of the Additional Loan while any remaining proceeds would beconsidered participation interest.  Theborrower’s new equity and the reduction in the effective interest rate on theinsured first mortgage provided funds for repairs and improvements.

 

During the fourth quarter, the borrower of theLifestyles PIMI contacted the Advisor regarding a payoff of the Additional Loanprincipal in full and a purchase of the Ginnie Mae MBS at par.  The Advisor agreed to these terms andcompleted the transaction on March 12, 2003. As a result, the Trust reversed the remaining valuation allowance of$666,539 and recognized $343,660 of deferred income on the LifestylesAdditional Loan as Additional Loan Interest in 2002.

 

At December 31, 2002 and 2001 there are no PIMIswithin the Trust’s portfolio that are delinquent as to principal or interest.

 

TheTrust’s investments in PIMIs consist of the following at December 31, 2002 and2001:

 
|                 |   | **Original   Loan   Amount** | ** ** | **Approximate   Monthly   Payments** | ** ** | **Interest  Rate** | ** ** | **Maturity   Date** | ** ** | **Balance Outstanding   at December 31,** |   |
|----------------------|--------|------------------------------|------------|--------------------------------------|------------|--------------------|------------|---------------------|------------|-------------------------------------------|--------|
|                 |   | ** **                   | ** ** | ** **                           | ** ** |               |
| **Insured Mortgage** |   | ** **                   | ** ** | ** **                           | ** ** |               |
|                 |   |                         |       |                                 |       |               |       |                |       | **2002**                                  |   | **2001** |   |
| Lifestyles  (GNMA)   |   | $                            | 10,292,394 |                                 | $          | 63,000             |       | 7.000               | %(a)       | 05/01/2032                                |   | $ | 9,765,191 |   | $ | 9,837,873 |   |
|                 |   |                         |       |                                 |       |               |       |                |       |                                      |   |   |   |
| Windward (GNMA)      |   | 14,000,778                   |       | 103,000                              |       | 8.500              | %          | 06/01/2032          |       | 13,342,264                                |   | 13,434,399 |   |
|                 |   |                         |       |                                 |       |               |       |                |       |                                      |   |   |   |
| Mountain View  (FHA) |   | 9,547,700                    |       | 58,000                               |       | 6.875              | %(b)       | 01/01/2034          |       | 9,147,699                                 |   | 9,208,461 |   |
|                 |   |                         |       |                                 |       |               |       |                |       |                                      |   |   |   |
| Red Run (FHA)        |   | 19,019,600                   |       | —                               |       | —             |       | —              |       | —                                    |   | 18,330,825 |   |
|                 |   |                         |       |                                 |       |               |       |                |       |                                      |   |   |   |
|                 |   | $                            | 52,860,472 |                                 | $          | 224,000            |       |                |       |                                      |   | $ | 32,255,154 | (c) | $ | 50,811,558 |   |
|                      |        |                              |            |                                      |            |                    |            |                     |            |                                           |        |  |  |  |  |  |  |  |

 

F-12

----

 
|                |   | **Outstanding Balance** | ** ** | **Maturity   Date** |       | **Base   Interest   Rate** |   | **Preferred   Interest   Rate** |   |
|---------------------|--------|-------------------------|------------|---------------------|------------|----------------------------|--------|---------------------------------|--------|
|                |   | ** **              |       |                |       |
| **Additional Loan** |   | **2002**                |       | **2001**            | ** ** |                       |   |                            |
| Lifestyles (a):     |   |                    |       |                |       |                       |   |                            |   |   |   |
| Due  Contractually  |   | $                       | 1,817,665  |                | $          | 1,817,665                  |   | 05/14/2007                      |   | — |   | — |   |
| Interest applied    |   | (118,968                | )          | (118,968            | )          |                       |   |                            |   |   |   |
| Recorded Value      |   | 1,698,697               |       | 1,698,697           |       |                       |   |                            |   |   |   |
|                |   |                    |       |                |       |                       |   |                            |   |   |   |
| Windward            |   | 2,471,294               |       | 2,471,294           |       | 12/31/2003                 |   | 7.5                             | %      | 10 | % |
|                |   |                    |       |                |       |                       |   |                            |   |   |   |
| Mountain View  (b)  |   | 1,400,000               |       | 1,400,000           |       | 09/16/2003                 |   | 7.0                             | %      | — |   |
|                |   |                    |       |                |       |                       |   |                            |   |   |   |
|                |   | $                       | 5,569,991  | (d)                 | $          | 5,569,991                  |   |                            |   |   |   |   |   |
|                     |        |                         |            |                     |            |                            |        |                                 |        |  |  |  |  |  |

 

----

(a)                            TheTrust entered into an Agreement which reduced the interest rate on the InsuredMortgage by 1.75% per annum effective January 1, 1998 for a period oftwenty-four months and by 1.5% per annum for 2000 though 2007. An affiliate ofthe Advisor refunds approximately .25% per annum to the Trust related to theinterest reduction.  The Trust will notreceive any Additional Loan interest or Preferred Return due to the workout,but will receive a share of any cash generated from property operations andfrom proceeds of a sale or refinance.

 

(b)                           TheTrust entered into a second modification agreement which reduced the interestrate on the Insured Mortgage by 1.25% per annum effective January 1, 1999 andcontinuing through December 31, 2004. The Agreement eliminated the Preferred Interest required under theAdditional Loan and changed the Trust’s participation in the surplus cashgenerated by the property.  Furthermore,debt service relief provided by the first modification was permanentlyforgiven.

 

(c)                            Theaggregate cost for federal income tax purposes is $32,255,154.

 

(d)                           Theaggregate cost for federal income tax purposes is $5,688,959.

 

ImpairedAdditional Loans

 

The Advisor of theTrust determined that the Lifestyles Additional Loan was impaired.  As a result, during 1998, a valuationallowance of $1,130,346 was established to adjust the carrying amount of theloan to the estimated fair market value of the collateral less anticipatedcosts of sale.  During 2001, the Trustreceived $118,968 of interest on the Additional Loan which was reflected as areduction of the carrying amount of the loan and the valuation allowance.  In addition in the fourth quarter of 2001,the Trust further reduced the valuation allowance by $344,839 to $666,539 basedupon the current estimated fair value of the underlying property.  As a result of the payoff proposal discussedabove, the Trust has reversed the remaining valuation allowance of $666,539.  The Trust did not receive any interestpayments on the Lifestyles Additional Loan during 2002 or 2000 and did notrecognize any interest income during 2001 or 2000.  In connection with the anticipated payoff of the Lifestyles PIMI,the Trust recognized $343,660 of Additional Loan base interest in 2002 which waspreviously recorded as deferred income.

 

The Advisor of theTrust has determined that the Mountain View Additional Loan is impaired.  As a result, during 1998, a valuationallowance of $984,000 was established to adjust the carrying amount of the loanto the then estimated fair market value of the collateral less anticipatedcosts of sale. During 1999, the Trust increased the valuation allowance ofMountain View by $48,272.  The Trustwill reflect interest receipts as reductions to the carrying amount of the loanand the valuation allowance until the valuation allowance is zero.  The Trust did not receive any interestpayments or recognize any income on the Mountain View Additional Loan during2002, 2001 or 2000.

 

F-13

----

 

The activity in the valuation allowance together withthe related recorded and carrying value of the mortgage loans is as follows:

 
|                          |   | **Recorded   Value** |      | **Valuation   Allowance** |   | **Carrying   Value** |   |
|-------------------------------|--------|----------------------|-----------|---------------------------|--------|----------------------|--------|
|                          |   |                 |      |                      |
|                          |   |                 |      |                      |   |                 |   |
| Lifestyles                    |   | $                    | 1,698,697 |                      | $      | —               |   | $ | 1,698,697 |   |
|                          |   |                 |      |                      |   |                 |   |
| Mountain View                 |   | 1,400,000            |      | 1,032,272                 |   | 367,728              |   |
|                          |   |                 |      |                      |   |                 |   |
| Balance at  December 31, 2002 |   | $                    | 3,098,697 |                      | $      | 1,032,272            |   | $ | 2,066,425 |   |

 

The Trust also hasdeferred income related to Lifestyles and Mountain View of $343,659 and$367,383, respectively.

 

A reconciliationof activity for each of the three years in the period ended December 31, is asfollows:

 

Insured Mortgages 

 
|                            |   | **2002**    |       | **2001**   |       | **2000**   |   |
|---------------------------------|--------|-------------|------------|------------|------------|------------|--------|
|                            |   |        |       |       |       |       |   |
| Balance at  beginning of period |   | $           | 50,811,558 |       | $          | 59,752,085 |   | $ | 60,129,492 |   |
|                            |   |        |       |       |       |       |   |
| Insured Mortgage  prepayments   |   | (18,330,825 | )          | (8,575,180 | )          | —     |   |
|                            |   |        |       |       |       |       |   |
| Principal  collections          |   | (225,579    | )          | (365,347   | )          | (377,407   | )      |
|                            |   |        |       |       |       |       |   |
| Balance at end  of period       |   | 32,255,154  |       | $          | 50,811,558 |       | $      | 59,752,085 |   |
|                                 |        |             |            |            |            |            |        |  |  |  |

 

Additional Loans

 
|                                 |   | **2002** |      | **2001**   |   | **2000**  |   |
|--------------------------------------|--------|----------|-----------|------------|--------|-----------|--------|
|                                 |   |     |      |       |   |      |   |
| Balance at  beginning of period      |   | $        | 3,871,180 |       | $      | 8,350,990 |   | $ | 8,350,990 |   |
|                                 |   |     |      |       |   |      |   |
| Interest  received and recognized as |   | —   |      |       |   |      |   |
| Additional Loan  prepayment          |   |     |      | (118,968   | )      | —    |   |
|                                 |   |     |      |       |   |      |   |
| Additional Loan  prepayments         |   | —   |      | (4,824,649 | )      | —    |   |
|                                 |   |     |      |       |   |      |   |
| Adjustment to  valuation allowance   |   | 666,539  |      | 463,807    |   | —    |   |
|                                 |   |     |      |       |   |      |   |
| Balance at end  of period            |   | $        | 4,537,719 |       | $      | 3,871,180 |   | $ | 8,350,990 |   |

 

Property descriptions:

•                  LifestylesApartments (“Lifestyles”) is a 236-unit garden style apartment complex locatedin Palm Harbor, Florida.

•                  Windward LakesApartments (“Windward”) is a 276-unit garden style apartment complex located inPompano Beach, Florida.

•                  Mountain ViewApartments (“Mountain View”) is a 256-unit apartment complex located inMadison, Alabama.

 

F-14

----

 

D.            PIMs

 

At December 31, 2002 and 2001, the Trust hadinvestments in two PIMs and five PIMs, respectively.  The Trust’s PIMs consist of a sole participation interest in a HUD-insuredfirst mortgage loan originated under the FHA lending program (the “InsuredMortgages”), and participation interests in the revenue stream and appreciationof the underlying property above specified base levels. The borrower conveysthese participation features to the Trust generally through a subordinatedpromissory note and mortgage (the “Agreements”).

 

The Trust receives guaranteed level monthly paymentsof principal and interest, amortized over thirty to forty years.  HUD insures the FHA mortgage loans. Theborrower usually cannot prepay the insured mortgage during the first five yearsbut may prepay it thereafter subject to a 9% prepayment penalty in years sixthrough nine, a 1% prepayment penalty in year ten and no prepayment penaltythereafter. The Trust may receive income related to its participation interestsin the underlying property, however, these amounts are neither insured norguaranteed.

 

Generally, the participation features consist of thefollowing:  (i) “Minimum AdditionalInterest” at rates ranging from .5% to .75% per annum calculated on the unpaidprincipal balance of the Insured Mortgage on the underlying property, (ii)“Shared Income Interest” ranging from 25% to 30% of the monthly gross rentalincome generated by the underlying property in excess of a specified base, butonly to the extent that it exceeds the amount of Minimum Additional Interestreceived during such month, and (iii) “Shared Appreciation Interest” rangingfrom 25% to 30% of any increase in value of the underlying property in excessof a specified threshold.

 

Payment of participation interest from the operationsof the property is limited to 50% of net revenue or Surplus Cash as defined byor HUD.  Payment of participationinterest at the time of the prepayment of the PIM or upon its maturitygenerally cannot exceed 50% of any increase in value of the underlyingproperty.

 

Shared Appreciation Interest is payable when one ofthe following occurs: (1) the sale of the underlying property to an unrelatedthird party on a date which is later than five years from the date of theAgreement, (2) the maturity date or accelerated maturity date of the Agreement,or (3) prepayment of amounts due under the Agreement and the Insured Mortgage.

 

Under the Agreement, the Trust, upon giving twelvemonths written notice, can accelerate the maturity date of the Agreement to adate not earlier than ten years from the date of the Agreement for (a) thepayment of all participation interest due under the Agreement as of theaccelerated maturity date, or (b) the payment of all participation interest dueunder the Agreement plus all amounts due on the first mortgage note on theproperty.

 

On July 25, 2002, the Trust received $13,676,641representing the principal proceeds on the first mortgage loan from the LincolnGreen Apartments PIM. On June 28, 2002, the Trust received a prepayment of theLincoln Green Apartments Subordinated Promissory Note.  The Trust received $725,000 of SharedAppreciation Interest and $278,785 of Shared Income Interest and MinimumAdditional Interest.  On August 28,2002, the Trust paid a special dividend of $0.99 per share from the proceeds ofthe Lincoln Green Apartments PIM prepayment.

 

On May 15, 2002, the Trust received $8,884,123representing the principal proceeds on the first mortgage loan from the RiverView Apartments PIM.  In addition, theTrust received a prepayment premium of $88,841 from the payoff.  On June 4, 2002, the Trust paid a specialdividend of $0.61 per share from the proceeds of the River View Apartments PIMprepayment.

 

On January 2, 2002, the Trust received a prepayment ofthe Waterford Apartments Subordinate Promissory Note.  The Trust received $379,725 of Minimum Additional Interest and$425,643 of Shared Appreciation Interest. On January 17, 2002, the Trust received $6,625,742 representing theprincipal proceeds on the first mortgage loan. In addition, the Trust received a prepayment premium of $66,257 from thepayoff.  On March 1, 2002, the Trustpaid a special dividend of $0.51 per share from the proceeds of the WaterfordApartments PIM prepayment.

 

At December 31, 2002 and 2001 there are no InsuredMortgage loans within the Trust’s portfolio that are delinquent of principal orinterest.

 

F-15

----

 

The Trust’s PIMs consisted of the following atDecember 31, 2002 and 2001:

 
| **PIM**               |   | **Original   Loan   Amount** | ** ** | **Approximate   Monthly   Payments** | ** ** | **Interest  Rate** | ** ** | **Maturity  Date** | ** ** | **Balance Outstanding at December 31,** |   |
|-----------------------|--------|------------------------------|------------|--------------------------------------|------------|--------------------|------------|--------------------|------------|-----------------------------------------|--------|
|                  |   |                         |       |                                 |       |
|                  |   |                         |       |                                 | **2002**   |               | **2001**   |               |
| River View  (GNMA)    |   | $                            | 9,284,877  |                                 | $          | —             |       | —             |       | —                                  |   | $ | — |   | $ | 8,905,107 |   |
|                  |   |                         |       |                                 |       |               |       |               |       |                                    |   |   |   |
| Mill Pond (FHA)       |   | 7,812,100                    |       | 55,200                               |       | 8.150              | %          | 01/01/2033         |       | 7,430,727                               |   | 7,484,720 |   |
|                  |   |                         |       |                                 |       |               |       |               |       |                                    |   |   |   |
| Waterford (FHA)       |   | 6,935,900                    |       | —                               |       | —             |       | —             |       | —                                  |   | 6,625,742 |   |
|                  |   |                         |       |                                 |       |               |       |               |       |                                    |   |   |   |
| Rivergreens  (FHA)    |   | 10,003,000                   |       | 69,500                               |       | 8.005              | %          | 04/01/2033         |       | 9,518,910                               |   | 9,588,286 |   |
|                  |   |                         |       |                                 |       |               |       |               |       |                                    |   |   |   |
| Lincoln Green  (FNMA) |   | 15,565,000                   |       | —                               |       | —             |       | —             |       | —                                  |   | 13,812,638 |   |
|                  |   |                         |       |                                 |       |               |       |               |       |                                    |   |   |   |
| Total                 |   | $                            | 49,600,877 |                                 | $          | 124,700            |       |               |       |                                    |   | 16,949,637 | (a) | $ | 46,416,493 |   |
|                       |        |                              |            |                                      |            |                    |            |                    |            |                                         |        |  |  |  |  |  |  |

 

----

(a)               The aggregate costfor federal income tax purposes is $16,949,637.

 

A reconciliation of activity for each of the threeyears in the period ended December 31, is as follows:

 
|                            |   | **2002**    |       | **2001** |   | **2000**   |   |
|---------------------------------|--------|-------------|------------|----------|--------|------------|--------|
|                            |   |        |       |     |   |       |   |
| Balance at beginning  of period |   | $           | 46,416,493 |     | $      | 46,892,234 |   | $ | 47,331,673 |   |
|                            |   |        |       |     |   |       |   |
| Insured Mortgage  prepayments   |   | (29,186,506 | )          |     |   |       |   |
|                            |   |        |       |     |   |       |   |
| Principal  collections          |   | (280,350    | )          | (475,741 | )      | (439,439   | )      |
|                            |   |        |       |     |   |       |   |
| Balance at end  of period       |   | $           | 16,949,637 |     | $      | 46,416,493 |   | $ | 46,892,234 |   |

 

Property descriptions:

 

•          Mill PondApartments (“Mill Pond”) is a 146-unit apartment complex in Bellbrook, Ohio.

•          RivergreensApartments (“Rivergreens”) is a 208-unit apartment complex in Gladstone,Oregon.

 

E.             MBS

 

At December 31, 2002, the Trust’s MBS portfolio had anamortized cost of $5,861,359 and gross unrealized gains of $451,762.  At December 31, 2001, the Trust’s MBSportfolio had an amortized cost of $9,546,823 and gross unrealized gains of$578,628.  At December 31, 2001, theTrust’s FHA insured mortgage loan had an amortized cost of $4,845,897 and agross unrealized gain of $327,232.  TheTrust’s MBS have maturities ranging from 2008 to 2032.

 

On August 27, 2002, the Trust received $4,856,759representing the principal proceeds on the first mortgage loan from theRosemont Apartments MBS.  In addition,the Trust received a prepayment premium of $194,270 from this payoff.  On September 12, 2002, the Trust paid aspecial dividend of $0.34 per share from the proceeds of the RosemontApartments MBS prepayment.

 

F-16

----

 

On May 15, 2002 the Trust received $2,487,447representing the principal proceeds on the first mortgage loan from theParkwest Apartments MBS.  In addition,the Trust received a prepayment premium of $49,749 from this payoff.  On June 19, 2002, the Trust paid a specialdividend of $0.17 per share from the proceeds of the Parkwest Apartments MBSprepayment.

 

| **Maturity Date** |   | **Fair Value** | ** ** | **Unrealized   Gain/(Loss)** |   |
|-------------------|--------|----------------|------------|------------------------------|--------|
|              |
|              |   |           |       |                         |   |
| 2003 – 2007  |   | $              | —     |                         | $      | — |   |
| 2008 – 2012  |   | 41,065         |       | 1,294                        |   |
| 2013 – 2032  |   | 6,272,056      |       | 450,468                      |   |
|              |   |           |       |                         |   |
| Total             |   | $              | 6,313,121  |                         | $      | 451,762 |   |

 

F.             Shareholders’Equity

 

Under the Declaration of Trust and commencing with theinitial closing of the public offering of shares, the Trust has declared andpaid dividends on a quarterly basis. During the period in which the Trust qualifies as a REIT, the Trust hasand will pay quarterly dividends aggregating at least 90% of taxable income onan annual basis to be allocated to the shareholders in proportion to theirrespective number of shares.

 

In order for the Trust to maintain its REIT statuswith respect to the requirements of Share ownership, the Declaration of Trustprohibits any investor from owning, directly or indirectly, more than 9.8% ofthe outstanding Shares unless an exemption is granted by the Trustees andempowers the Trustees to refuse to permit any transfer of Shares which, intheir opinion, would jeopardize the status of the Trust as a REIT.

 

G.            RelatedParty Transactions

 

Under the terms of the Advisory Service Agreement, theAdvisor receives an Asset Management Fee equal to .75% per annum of the valueof the Trust’s actual and committed invested assets payable quarterly. TheTrust also reimburses affiliates of the Advisor for certain costs incurred inconnection with maintaining the books and records of the Trust, the preparationand mailing of financial reports, tax information and other communications toinvestors and legal fees and expenses. Included in general and administrative expenses are legal fees andexpenses paid by the Trust to an affiliate of $20,851, $12,033 and $3,305, forthe years ended December 31, 2002, 2001 and 2000, respectively.

 

The Trust received interest collections on AdditionalLoans with affiliates of the Advisor of $155,738 in 2001 and $173,544 in2000.  In addition, the Trust received$3,431,133 in 2001 and $174,505 in 2000 related to Participation Interestincome.

 

H.            OriginalShares

 

Upon termination of the Trust, an affiliate of theAdvisor is committed to pay to holders of Original Shares the amount (if any)by which (a) the Shareholders’ Original Investments exceed (b) all Dividends(as defined in the prospectus) paid by the Trust with respect to such OriginalShares.  Original Shares are thoseShares purchased during the Trust’s initial public offering either throughpurchase or through the dividend reinvestment program and held until the lastmortgage held by the Trust is repaid or disposed of.

 

F-17

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I.              FederalIncome Taxes

 
| Net income per  statement of income         |                                                                  | $      | 7,782,345 |   |
|---------------------------------------------|-----------------------------------------------------------------------|--------|-----------|--------|
|                                        |                                                                  |   |      |
| Less:                                       | Book to tax difference for Additional Loan interest  income           |   | (984,386  | )      |
|                                        |                                                                  |   |      |
| Less:                                       | Reduction of provision for impaired mortgage loans                    |   | (666,539  | )      |
|                                        |                                                                  |   |      |
| Less:                                       | Book to tax difference for amortization of prepaid  fees and expenses |   | (884,100  | )      |
|                                        |                                                                  |   |      |
| Net income for  federal income tax purposes |                                                                  | $      | 5,247,320 |   |

 

The Trust paid dividends of $4.98 per share during2002 which represents approximately $0.35 from ordinary income and $4.63represents a non-taxable distribution for federal income tax purposes.

 

The basis of the Trust’s assets for financialreporting purposes is less than its tax basis by approximately $5,576,000 and$7,021,000 at December 31, 2002 and 2001, respectively.  The basis of the Trust’s liabilities forfinancial reporting purposes exceeded its tax basis by approximately $1,351,000and $2,314,000 at December 31, 2002 and 2001, respectively.

 

J.                                        FairValue Disclosures of Financial Instruments

 

The Trust uses the following methods and assumptionsto estimate the fair value of each class of financial instruments:

 

Cash and Cash Equivalents

 

The carrying amount approximates fair value because ofthe short maturity of those instruments.

 

MBS

 

The Trust estimates the fair value of MBS based onquoted market prices while it estimates the fair value of insured mortgagesbased on quoted prices of MBS with similar interest rates. Based on theestimated fair value determined using these methods and assumptions the Trust’sinvestments in MBS had gross unrealized gains of approximately $452,000 atDecember 31, 2002 and $906,000 at December 31, 2001.

 

PIMs and PIMIs

 

There is no active trading market for theseinvestments.  Accordingly, managementestimates the fair value of the PIMs and the insured mortgage portion of thePIMIs using quoted market prices of MBS having the same stated coupon rate asthe Insured Mortgages. Additional Loans are based on the lower of the estimatedcollection value of the loan or the remaining principal balance of the loan asan estimate of the fair value of the loan is not practicable.  Management does not include anyparticipation income in the Trust’s estimated fair values, as Management doesnot believe it can predict the time of realization of the feature with anycertainty.  Based on the estimated fairvalue determined using these methods and assumptions, the Trust’s investmentsin PIMs and PIMIs had gross unrealized gains of approximately $2,832,000 atDecember 31, 2002 and $2,403,000 at December 31, 2001.

 

F-18

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At December 31, 2002 and 2001, the Trust estimated thefair value of its financial instruments as follows:

 

|                       |   | **(amounts in thousands)** |   |
|----------------------------|--------|----------------------------|--------|
|                       |   | **2002**                   |   | **2001** |   |
|                       |   | **Fair   Value**           |   | **Carrying   Value** |   | **Fair   Value** |   | **Carrying   Value** |   |
|                       |   |                       |   |   |   |
|                       |   |                       |   |   |   |   |   |   |   |
| Cash and cash  equivalents |   | $                          | 1,986  |   | $ | 1,986 |   | $ | 13,154 |   | $ | 13,154 |   |
|                       |   |                       |   |   |   |   |   |   |   |
| MBS                        |   | 6,313                      |   | 6,313 |   | 15,299 |   | 14,971 |   |
|                       |   |                       |   |   |   |   |   |   |   |
| PIMs and PIMIs:            |   |                       |   |   |   |   |   |   |   |
| PIMs                       |   | 17,708                     |   | 16,950 |   | 47,803 |   | 46,416 |   |
| Insured  mortgages         |   | 34,329                     |   | 32,255 |   | 51,828 |   | 50,812 |   |
| Additional Loans           |   | 4,538                      |   | 4,538 |   | 3,871 |   | 3,871 |   |
|                       |   |                       |   |   |   |   |   |   |   |
|                       |   | $                          | 64,874 |   | $ | 62,042 |   | $ | 131,955 |   | $ | 129,224 |   |

 

K.                                  SubsequentEvent 

 

On January 21, 2003, the Trust received a prepaymentof the Mill Ponds I PIM of $7,430,727 representing the principal proceeds onthe first mortgage.  The underlyingproperty value had not increased sufficiently to meet the criteria for theTrust to earn any participation interest. The Trust has declared a special dividend of $0.50 per share from theproceeds of the Mill Ponds I PIM which will be paid in the first half of 2003.

 

On March 12, 2003, the Trust received a pre-payment ofthe Lifestyles PIMI of $11,588,271 representing the sale proceeds of the GinnieMae MBS at par of $9,746,038, accrued interest on the MBS of $24,568 and fullpayment of the Additional Loan of $1,817,665. The Trust has declared a special dividend of $0.77 per share from theproceeds of the Lifestyles PIMI which will be paid in the first half of 2003.

 

F-19

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KRUPP GOVERNMENT INCOMETRUST

 

SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS

 
| 2002                                  |   | **Balance at   beginning   of period** |      | **Charged to   costs and   expenses** |   | **Reversals**  |   | **Balance at end of   period** |     |
|---------------------------------------|--------|----------------------------------------|-----------|---------------------------------------|--------|----------------|--------|-------------------------------------|----------|
|                                  |   |                                   |      |                                  |   |
|                                  |   |                                   |      |                                  |   |
|                                  |   |                                   |      |                                  |   |
| **Description**                       |   |                                   |      |                                  |   |
|                                  |   |                                   |      |                                  |   |           |   |                                |     |
| Additional Loan  impairment provision |   | $                                      | 1,698,811 |                                  | $      | —         |   | $                                   | (666,539 | ) | $ | 1,032,272 |   |
|                                  |   |                                   |      |                                  |   |           |   |                                |     |
|                                  |   |                                   |      |                                  |   |           |   |                                |     |
| 2001                                  |   | **Balance at   beginning   of period** |      | **Charged to   costs and   expenses** |   | **Recoveries** |   | **Balance at   end of   period**    |     |
|                                  |   |                                   |      |                                  |   |
|                                  |   |                                   |      |                                  |   |
|                                  |   |                                   |      |                                  |   |
| **Description**                       |   |                                   |      |                                  |   |
|                                  |   |                                   |      |                                  |   |           |   |                                |     |
| Additional Loan  impairment provision |   | $                                      | 2,162,618 |                                  | $      | —         |   | $                                   | (463,807 | ) | $ | 1,698,811 |   |
|                                  |   |                                   |      |                                  |   |           |   |                                |     |
|                                  |   |                                   |      |                                  |   |           |   |                                |     |
| 2000                                  |   | **Balance at   beginning   of period** |      | **Charged to   costs and   expenses** |   | **Recoveries** |   | **Balance at   end of   period**    |     |
|                                  |   |                                   |      |                                  |   |
|                                  |   |                                   |      |                                  |   |
|                                  |   |                                   |      |                                  |   |
| **Description**                       |   |                                   |      |                                  |   |
|                                  |   |                                   |      |                                  |   |           |   |                                |     |
| Additional Loan  impairment provision |   | $                                      | 2,162,618 |                                  | $      | —         |   | $                                   | —   |   | $ | 2,162,618 |   |

 

F-20

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KRUPP GOVERNMENT INCOMETRUST

 

SUPPLEMENTARY DATA

SELECTED QUARTERLYFINANCIAL DATA

 
|                |   | **For the Quarter Ended** |      |
|---------------------|--------|---------------------------|-----------|
|                |   | **March 31,  2002**       |      | **June 30,  2002** |   | **September 30,  2002** |   | **December 31,  2002** |   |
|                |   |                      |      |   |   |
|                |   |                      |      |   |   |   |   |   |   |
| Total revenues      |   | $                         | 2,671,810 |   | $ | 2,907,424 |   | $ | 1,460,584 |   | $ | 1,970,759 |   |
|                |   |                      |      |   |   |   |   |   |   |
| Net income          |   | $                         | 2,086,813 |   | $ | 2,328,365 |   | $ | 1,056,691 |   | $ | 2,310,476 |   |
|                |   |                      |      |   |   |   |   |   |   |
| Earnings per  Share |   | $                         | 0.14      |   | $ | 0.15 |   | $ | 0.07 |   | $ | 0.16 |   |

 
|                |   | **For the Quarter Ended** |      |
|---------------------|--------|---------------------------|-----------|
|                |   | **March 31,  2001**       |      | **June 30,  2001** |   | **September 30,  2001** |   | **December 31,  2001** |   |
|                |   |                      |      |   |   |
|                |   |                      |      |   |   |   |   |   |   |
| Total revenues      |   | $                         | 2,795,745 |   | $ | 2,731,138 |   | $ | 6,059,462 |   | $ | 6,946,031 |   |
|                |   |                      |      |   |   |   |   |   |   |
| Net income          |   | $                         | 2,140,379 |   | $ | 2,045,187 |   | $ | 5,360,536 |   | $ | 6,426,116 |   |
|                |   |                      |      |   |   |   |   |   |   |
| Earnings per  Share |   | $                         | 0.14      |   | $ | 0.14 |   | $ | 0.35 |   | $ | 0.43 |   |

 

F-21

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