|**UNITED STATES******                                                                                                 
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|**SECURITIES AND EXCHANGE COMMISSION**                                                                                
|**WASHINGTON, D.C.  20549******                                                                                       
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|**FORM 10-K**                                                                                                         
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|(Mark One)                                                                                                            
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|Commission file number 001-13487                                                                                      
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|**NATIONAL HEALTH REALTY, INC.**                                                                                      
|(Exact name of registrant as specified in its charter)                                                                
|                                                                                                                      
|Maryland                                                                                                              
|(State or other jurisdiction of incorporation or                                                                      
|organization)                                                                                                         
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|100 Vine Street, Suite 1402, Murfreesboro, Tennessee                                                                  
|(Address of principal executive offices)                                                                              
|                                                                                                                      
|(615) 890-2020                                                                                                        
|(Company's telephone number including area code)                                                                      
|                                                                                                                      
|Securities registered pursuant to Section 12(b) of the Act                                                            
|                                                                                                                      
|Title of Each Class                                                                                                   
|Common Stock                                                                                                          
|                                                                                                                      
|Securities registered pursuant to Section 21(g) of the Act: Same                                                      
|                                                                                                                      
|Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
|the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant    
|was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.        
|Yes X      No                                                                                                         
|                                                                                                                      
|Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained     
|herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information          
|statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]            
|                                                                                                                      
|Indicate by check mark whether the registrant is an accelerated filer.  Yes X   No                                    
|                                                                                                                      
|The aggregate market value of voting stock held by nonaffiliates of the registrant was $96,699,560 as of June 30, 2004
|The number of shares of Common Stock outstanding as of February 28, 2005 was 9,699,983.                               
|                                                                                                                      
|Documents Incorporated by Reference                                                                                   
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|The following documents are incorporated by reference into Part III, Items 10, 11, 12, and 14 of this Form 10-K:      
|The Registrant's definitive proxy statement for its 2005 shareholder's meeting.                                       

**PART 1**

**Item  1.  Business**

**General**

National Health Realty, Inc. (NHR) is a Maryland corporation formed during 1997 and in operation
since January 1, 1998.  NHR, through its subsidiary NHR/OP, L.P. (the Operating Partnership) currently
owns 16 licensed skilled nursing facilities, six assisted living facilities and one independent living center (the
Healthcare Facilities).  We additionally own first mortgage secured promissory notes with an outstanding
balance of $13.6 million (the Notes).  The Healthcare Facilities and the Notes were originally acquired on
December 31, 1997 from our then sole owner National HealthCare Corporation (NHC), (formerly National
HealthCare L.P.).  NHR leases the Healthcare Facilities pursuant to certain lease agreements.  Fourteen of
the Healthcare Facilities are leased to NHC and nine are leased to nine separate Florida corporations.  These
leases covering the Healthcare Facilities are "triple net" leases, meaning the tenant shall pay all charges and
expenses in connection with the leased property throughout the term of the lease.  NHR's revenues and
sources of cash are derived primarily from the interest and principal payments on the Notes and from rent
payments, primarily from NHC, under the leases.

The Notes are secured by nursing facilities and separate makers and guarantors.  During 2000, we
foreclosed on two of the Notes and obtained title to four nursing facilities. One of these facilities was closed
and the remaining three were sold effective January 1, 2001 to a third party for the outstanding balance of
the original notes on the four properties at the same rate of interest.  The purchaser paid no down payment,
and we reported all current payments as a deposit until November, 2003 when the amount collected became
adequate to recognize the sale.  The sale recognition resulted in recording a mortgage note receivable and
reporting a gain on sale of real estate of approximately $1.1 million.  In 2004, $105,000 related to the sale
was received, resulting in additional gain on sale of real estate of $105,000.

During 2004, 2003 and 2002, rental income was 85.5%, 69.7% and 68.5%, respectively, of revenues
and mortgage interest income was 14.0%, 25.6% and 31.5% of revenues.

At our formation, we entered into an Advisory, Administrative Services and Facilities Agreement
with NHC pursuant to which NHC provides us with investment advice, office space and personnel.  Certain
limitations on our investment opportunities provided by the original agreement have been removed effective
November 1, 2004.  See "Investment and Other Policies of NHR" below.

******Investment and Other Policies of NHR**

*General*.  Our investment objectives are:  (i) to provide current income for distribution to
stockholders, (ii) to provide the opportunity for additional returns to investors by participating in any
increase in the operating revenues of our leased properties; (iii) to provide the opportunity to realize capital
growth resulting from appreciation, if any, in the value of our portfolio properties, and (iv) to preserve and
protect stockholder's capital.  We can offer no assurance that these objectives will be realized.

*Advisory Agreement.*  We have contracted for our management with NHC.  For its services, NHC
is entitled to annual compensation of the greater of 2% of our gross consolidated revenues or the actual
expense incurred by NHC.  The actual amount paid to NHC in 2004 was $411,000.   Either party may
terminate the Advisory Agreement on 90 days notice.

*Investment Restriction Removed.*The NHR Advisory Agreement provides that we will not, without
the prior approval of National Health Investors, Inc. (NHI), be actively or passively engaged in the pursuit
of additional investment opportunities until the earlier of the termination of the Advisory Agreement or such
time as NHC is no longer actively engaged as investment advisor to NHI.  NHC announced on November
1, 2004 that it had assigned its advisory agreement with NHI to an independent company owned by W.
Andrew Adams, former NHC President.  Therefore, the restriction on NHR's investment activities has been
removed.

*Objective, Policies and Competitive Restrictions*.  We were organized to own the Healthcare
Facilities and Notes.  Because our objective is to maintain payment of our dividends and because of our
currently limited capital resources, we do not presently intend to seek further outside health care-related
investment opportunities or to provide lease or mortgage financing for such investments.  We expect to
continue to engage in transactions with NHC for expansions or improvements of our existing properties, or
the construction of new properties which are to be operated by NHC.  The Board of Directors may alter our
investment policies if they determine that such a change is in the best interests of the Company and our
stockholders.  The methods of implementing our investment policies may vary as new investment and
financing techniques are developed or for other reasons.

**NHC Master Agreement to Lease**

The Master Agreement to Lease with NHC regarding the Healthcare Facilities(the "Master
Agreement")sets forth terms and conditions applicable to all leases entered into by and between NHC and
the Company (the "Leases").  The Leases are for an initial term expiring on December 31, 2007 with two
five year renewal options at the election of NHC which allow for the renewal of the leases on an "all or
nothing" basis.  During the initial term and the first and second renewal terms (if applicable), NHC is
obligated to pay annual base rent plus additional percentage rent on a quarterly basis.  NHR recognized
$1,295,000 of percentage rent from NHC during 2004.  In 2004, 68.8% of our net revenues were derived
from leases with NHC.

The Master Agreement is a "triple net lease", under which NHC is responsible for payment of all
taxes, utilities, insurance premium costs, repairs (including structural portions of the buildings, and other
charges relating to the ownership and operation of the  Healthcare Facilities).  NHC is also obligated to
indemnify and hold harmless NHR from all claims resulting from the use and occupancy of each  Health
Care Facility by NHC or persons claiming under NHC and related activities, as well as to indemnify us
against all costs related to any release, discovery, cleanup and removal of hazardous substances or materials
or other environmental responsibility with respect to the  Healthcare Facilities.

During 2000, NHC terminated, with our consent, the individual healthcare facility Leases on nine
healthcare facilities in Florida.  We then re-leased these nine healthcare centers to separate Florida
corporations not owned or controlled by NHC.  NHC's obligations to us on these properties remain in full
force and effect, even though operational control has been transferred.  Since October 1, 2000, the nine
separate Florida corporations have made all required lease payments to NHR, and NHC has not been required

to make any lease payments with respect to those nine healthcare centers.

******Indiana Properties**

During 2000, we obtained title by foreclosure to four properties on which we previously had
mortgage notes receivable.  We immediately entered into new leases for three of the facilities, but the fourth
facility was closed.  Effective January 1, 2001 the three facilities were sold to Health Services Management
of Indiana, LLC (HSMI).  The principal officer of the entity that currently owns the three properties was also
the principal officer of the company which owned the properties prior to the foreclosure.

We accounted for the sale of the three facilities under the deposit method in accordance with the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 66.  Consistent with the deposit
method, we initially did not record the sale of the assets and continued to record depreciation expense each
period.  Any cash received from the buyer (which totaled $3,092,000 as of October 31, 2003) was reported
as a deposit on real estate properties sold awaiting the time the down payment and continuing investment
criteria of SFAS 66 were met.

Effective November 1, 2003, the criteria of SFAS 66 were met.  Therefore, the sale of the real estate
properties was recorded resulting in a gain on sale of real estate of approximately $1,149,000.  Sale proceeds
received in 2004 resulted in an additional gain on sale of real estate of approximately $105,000.  The sale
of the assets resulted in recording mortgage notes receivable of approximately $3,740,000.

**Advisory Agreement**

At our inception we entered into an agreement with NHC as "Advisor" under which NHC provides
management and advisory services to us during the term of the Advisory Agreement.  We believe the
Advisory Agreement benefits us by providing us access to NHC's extensive experience in the ownership and
management of long-term care facilities and retirement centers.  Under the Advisory Agreement, we engaged
NHC to use its best efforts (a) to present to us a continuing and suitable investment program consistent with
our investment policies adopted by the Board of Directors from time to time; (b) to manage our day-to-day
affairs and operations; and (c) to provide administrative services and facilities appropriate for such
management.  In performing its obligations under the Advisory Agreement, NHC is subject to the
supervision of and policies established by our Board of Directors.

The Advisory Agreement is for a stated term which expired December 31, 2003 and thereafter from
year to year unless earlier terminated. Either party may terminate the Advisory Agreement at any time on
90 days written notice, and we may terminate the Advisory Agreement for cause at any time.  For its services
under the Advisory Agreement, the Advisor is entitled to annual compensation of the greater of 2% of NHR's
gross consolidated revenues or the actual expense incurred by NHC.  The actual amounts paid to NHC in
2004, 2003 and 2002 were $411,000, $476,000, and $493,000, respectively.

Pursuant to the Advisory Agreement, NHC manages our day-to-day affairs and provides all such
services through its personnel.  The Advisory Agreement provides that without regard to the amount of
compensation received by NHC under the Advisory Agreement, NHC shall pay all expenses in performing
its obligations including the employment expenses of the officers and directors and personnel of NHC
providing services to us.  The Advisory Agreement further provides that we shall pay the expenses incurred
with respect to and allocable to the prudent operation and business of NHR  including any fees, salaries, and
other employment costs, taxes and expenses paid to our directors, officers and employees who are not also
employees of NHC.  Currently, other than the directors who are not employees of NHC, we do not have any
officers or employees who are not also employees of NHC.  Of our executive officers at December 31, 2004,
Mr. Robert G. Adams, Ms. Charlotte A. Swafford, Mr. Donald K. Daniel and Mr. Kenneth D. DenBesten
are employees of NHC; Mr. LaRoche was an employee until his retirement from management
responsibilities in May 2002, but remains a corporate officer for us.  All of their renumeration and
employment costs are paid by NHC, although a portion may be allocated for their services to NHR.

**Federal Income Tax**

We believe that we have operated our business so as to qualify as a REIT under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended (the Code) and we intend to continue to operate in
such a manner.  REITs are subject to highly complex rules governing ownership and relationships with
tenants which can be inadvertently transgressed; thus no assurance can be given that we will be able to
qualify at all times.  If we qualify as a REIT, we will generally not be subject to federal corporate income
taxes on our net income that is currently distributed to our stockholders.  This treatment substantially
eliminates the "double taxation" (at the corporate and stockholder levels) that typically applies to corporate
dividends.

**Requirement to Pay Dividends as a REIT**

The REIT provisions of the Code require that a REIT distribute annually 90% of its taxable income,
without regard to any capital gains or dividends paid deduction, to its shareholders.  Because NHR intends
to qualify as a REIT, the majority of our net income will be distributed to shareholders annually.  There can
be no assurance that we will be able to meet this requirement at all times.

**Investor Information**

We maintain a worldwide web site at www.nationalhealthrealty.com.  We publish to this web site
our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,  and press
releases.  We do not necessarily have these filed the same day as they are filed with the SEC or released to
the public, but rather have a policy of placing these on the web site within two (2) business days of public
release or SEC filing.

We also maintain the following documents on the web site:

*	The NHR Code of Ethics and Standards of Conduct.  This has been adopted for all
employees of our Administrative Services Contractor, officers and directors of the
Company.  The website will also disclose whether there have been any amendments or
waivers to the Code of Ethics and Standards of conduct.  To date there have been none.

*	Information on our "NHR Valuesline", which allows our staff and investors unrestricted
access to our Corporate Compliance Officer, executive officers and directors.  The toll free
number is 800-526-4064 and the communications may be incognito, if desired.

*	The NHR Restated Audit Committee Charter.

*	The NHR Compensation Committee Charter.

*	The NHR Nomination and Corporate Governance Committee Charter

We will furnish, free of charge, a copy of any of the above documents to any interested investor upon
receipt of a written request.

**Item 2.  Properties**

*Healthcare Facilities*

The following table includes certain information regarding Healthcare Facilities which are owned and
leased:

|                                    |                    |        | Net Book      | Base      
|----------------------------------- | ------------------ | ------ | ------------- | ----------
|                                    |                    | No. of | Value at      | Annual    
|Name of Facility                    | Location           | Beds   | Dec. 31, 2004 | Rent (1)  
|Long-Term Care Centers              |                    |        |               |           
|The Aristocrat                      | Naples, FL         | 60     | $ 3,906,588   | $   96,000
|NHC HealthCare, Clinton             | Clinton, SC        | 131    | 2,307,203     | 690,991   
|The Health Center at Coconut Creek  | Coconut Creek, FL  | 120    | 7,636,676     | 775,000   
|The Health Center of Daytona Beach  | Daytona Beach, FL  | 73     | 4,552,758     | 380,000   
|NHC HealthCare, Farragut            | Farragut, TN       | 60     | 5,315,569     | 669,414   
|NHC HealthCare, Garden City         | Murrells Inlet, SC | 88     | 3,929,475     | 670,928   
|NHC HealthCare, Greenville          | Greenville, SC     | 176    | 3,529,688     | 1,239,689 
|NHC HealthCare, Lexington           | Lexington, SC      | 120    | 4,685,163     | 867,828   
|NHC HealthCare, Mauldin             | Mauldin, SC        | 120    | 5,913,709     | 524,005   
|AdamsPlace                          | Murfreesboro, TN   | 90     | 4,128,680     | 564,755   
|The Imperial Health Care Center     | Naples, FL         | 113    | 4,580,889     | 570,000   
|NHC HealthCare, North Augusta       | North Augusta, SC  | 132    | 3,329,964     | 1,081,625 
|The Health Center of Windermere     | Orlando, FL        | 120    | 5,777,408     | 535,000   
|NHC HealthCare, Parklane            | Columbia, SC       | 120    | 5,599,733     | 787,808   
|Charlotte Harbor Health Care Center | Port Charlotte, FL | 180    | 6,043,553     | 1,010,000 
|NHC HealthCare, West Plains         | West Plains, MO    | 118    | 2,517,204     | 669,901   
|                                    |                    |        |               |           
|Assisted Living Facilities          |                    |        |               |           
|The Place at Vero Beach             | Vero Beach, FL     | 120    | 7,523,338     | 1,187,000 
|NHC Place/Anniston                  | Anniston, AL       | 68     | 4,334,183     | 344,147   
|AdamsPlace                          | Murfreesboro, TN   | 83     | 3,700,622     | 56,349    
|The Place at Merritt Island         | Merritt Island, FL | 84     | 5,512,680     | 765,000   
|The Place at Stuart                 | Stuart, FL         | 84     | 4,885,280     | 751,000   
|NHC Place/Farragut                  | Farragut, TN       | 84     | 6,591,810     | 225,965   
|                                    |                    |        |               |           
|Retirement Center                   |                    |        |               |           
|AdamsPlace                          | Murfreesboro, TN   | 93     | 13,480,760    | 1,497,540 

(1) Additional rent equal to three percent (3%) of the increase in gross revenues (calculated and paid
on a quarterly basis) of the HealthCare Facilities commenced in 2000.  All leases are triple net leases.

*Mortgage Notes*

**We own approximately seven mortgage notes representing approximately $13.6 million loaned to
the owners of approximately five nursing homes.  The loans were utilized by the initial owners to acquire
land, then construct and equip the nursing homes, acquire existing nursing homes,  or to provide working
capital.  The mortgage notes are secured by mortgages on each of the facilities.

In February 2004, we received prepayment of the balance (approximately $30,384,000) of 10.25%
FCC notes.  The notes had been scheduled to mature on October 31, 2004.

Effective December 31, 2002, we sold to NHI at par three mortgage notes receivable secured by
three long-termhealthcare facilities in Florida.  We received cash in the amount of $15,717,000.  NHR
maintained the right to repurchase the notes at par after July 1, 2003 and NHI maintained the right to resell
the notes to NHR at par beginning January 2, 2004 or require us to make the debt service payments required
under the notes.  As a result of the repurchase and put options, consistent with the provisions of Statement
of Financial Accounting Standards No. 140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" (SFAS 140), we accounted for the sale of the notes receivable to NHI as a
borrowing from NHI rather than a sale of the notes.  Effective December 31, 2003, NHR exercised its right
to repurchase at par the notes from NHI for approximately $14,937,000.  Consequently, the borrowing from
NHI is not recognized on our consolidated balance sheet as of December 31, 2003.

**Item 3.  Legal Proceedings**

We are not subject to any significant pending litigation.  The Health Care Facilities are subject to
claims and lawsuits in the ordinary course of business.  Our lessees and mortgagees have indemnified us
against all liabilities arising from the operation of the Healthcare Facilities, and also indemnify us against
environmental or title problems affecting the real estate underlying such facilities.  While there are lawsuits
pending against certain of the mortgagees and/or lessees of the Healthcare Facilities, management believes
that the ultimate resolution of all pending proceedings will have no material adverse effect on our financial
position or results of operations.

******Item 4.  Submission of Matters to a Vote of Security Holders**

The annual meeting of the shareholders was held on April 20, 2004, and the results were included
in the June 30, 2004, Form 10-Q filed with the SEC on August 9, 2004.

**PART II**

**----------**

**Item 5.  Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities**

Our common  shares are listed on the American Stock Exchange (AMEX) under the symbol "NHR".
On February 25, 2005 the last reported sale price for the Common Stock on the AMEX was $18.16.  As of
December 31, 2004 we had approximately 4,600 shareholders, of which approximately 1,700 are holders of
record with the balance indicated by security listing positions.

We received notice on January 20, 2005 from the American Stock Exchange (AMEX) that the
Company is currently not in compliance with the AMEX board of directors composition requirements as set
forth in Section 121A of the AMEX Company Guide.  Specifically, the Company does not currently have
a majority of independent directors serving on its board.  The warning letter gives us until May 31, 2005 to
regain compliance with the AMEX requirements.  We intend to correct the instance of noncompliance with
the AMEX Company Guide as soon as reasonably possible and will comply with the independence standards
of AMEX Company Guide Section 121A by May 31, 2005.

High and low stock prices and dividends for 2004 and 2003 were:

|              | 2004        | 2003     
|------------- | ----------- | ---------
|              |             | Cash     
|              | Sales Price | Dividends
|Quarter Ended | High        | Low      
|March 31      | $18.770     | $18.500  
|June 30       | 17.420      | 16.150   
|September 30  | 19.090      | 18.910   
|December 31   | 20.040      | 20.010   

*****Dividends*

In order to qualify for the beneficial tax treatment accorded to a REIT, we must make quarterly
distributions to holders of our Common Stock equal on an annual basis to at least 90% of our REIT taxable
income (excluding net capital gains), as defined in the Code.  Cash available for distribution to our
stockholders is primarily derived from interest payments received on its mortgages and from rental payments
received under our leases.  All distributions will be made by us at the discretion of the Board of Directors
and will depend on our cash flow and earnings, our financial condition, bank covenants and such other
factors as the Board of Directors deems relevant.  Our REIT taxable income is calculated without reference
to our cash flow.  Therefore, under certain circumstances, we may not have received cash sufficient to pay
our required distributions.

******Item 6.  Selected Financial Data**

*(dollars in thousands, except share amounts)*

|                                     | Year Ended December 31
|------------------------------------ | ----------------------
|                                     | 2004                  
|                                     |                       
|Net revenues                         | $   20,191            
|Net income                           | 11,435                
|Net income per share                 |                       
|Basic                                | 1.19                  
|Diluted                              | 1.16                  
|Mortgages and other notes receivable | 13,553                
|Real estate properties, net          | 120,926               
|Total assets                         | 150,032               
|Long term debt                       | 16,150                
|Total stockholders' equity           | 113,998               
|                                     |                       
|Common shares outstanding            | 9,699,108             
|                                     |                       
|Weighted average common shares       |                       
|Basic                                | 9,594,852             
|Diluted                              | 9,822,823             
|                                     |                       
|Common dividends declared per share  | $       1.41          

******Item 7.  Management's Discussion and Analysis of Financial Condition and Results of Operations**

****OVERVIEW

National Health Realty, Inc. (NHR or the Company) is a real estate investment trust (REIT) that
began operations on January 1, 1998. Currently NHR, through its subsidiary NHR/OP, L.P. (the Operating
Partnership), owns the real estate of 23 healthcare facilities, including 16 licensed skilled nursing facilities,
six assisted living facilities and one independent living center (the Healthcare Facilities), and owns seven
first promissory notes with principal balances totaling $13,553,000 (the Notes) at December 31, 2004 and
secured by the real property of healthcare facilities.

*Relationship With National HealthCare Corporation*

We have an advisory services agreement with National HealthCare Corporation (NHC) pursuant to
which NHC will provide us with investment advice, office space and personnel. NHC owns or manages a
total of 74 long-term healthcare facilities with 9,177 beds in 10 states.  NHC is NHR's primary tenant,
operating ten licensed skilled nursing facilities, six assisted living facilities and one independent living
center, the real estate of which facilities is owned by NHR.

*Investment Restriction Removed*

**The NHR Advisory Agreement provides that we will not, without the prior approval of NHI, be
actively or passively engaged in the pursuit of additional investment opportunities until the earlier of the
termination of the Advisory Agreement or such time as NHC is no longer actively engaged as investment
advisor to NHI.  NHC announced on November 1, 2004 that it is no longer the advisor to NHI.  Therefore,
the restriction on NHR's investment activities has been removed.

*Areas of Focus*

Management is currently focusing upon our capacities as landlord and note holder.  Our objectives
are to (1) provide current income for distribution to stockholders, (2) to provide the opportunity for
additional returns to investors by participating in any increase in the operating revenues of our leased
properties; (3) to provide the opportunity to realize capital growth resulting from appreciation, if any, in the
value of our portfolio properties, and (4) to preserve and protect stockholder's capital.  We can offer no
assurance that these objectives will be realized.

CRITICAL ACCOUNTING ESTIMATES

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

Our significant accounting policies and the associated estimates and the issues which impact these
estimates are as follows:

*Revenue Recognition - Mortgage Interest and Rental Income*

We collect interest and rent from our customers.  Generally our policy is to recognize revenues on
an accrual basis as earned.  However, we may in the future determine that, based on insufficient historical
collections and the lack of expected future collections, revenue for interest or rent is not realizable.  For any
such nonperforming investments, our policy is to recognize interest or rental income only in the period when
payments are received.  If conclusions as to the realizibility of revenue change, our revenues could vary
significantly from period to period.

*Valuations of and Impairments to Our Investment*s

Since the passage of the Balanced Budget Act of 1997 affecting Skilled Nursing Facilities (SNFs)
January 1999, the long-term care industry has experienced material reductions in government and private
insurance reimbursement.  Some legislative relief was granted in 2000 and 2001 as a result of the Balanced
Budget Refinement Act of 1999, however, some of the add-on provisions expired October 1, 2002 materially
reducing reimbursement.  Effective October 1, 2004, the Centers for Medicare and Medicaid Services (CMS)
issued the annual market basket (inflationary) increase of 2.8% for skilled nursing facilities reimbursement
of Medicare Part A.  No material changes are expected until CMS refines the current RUG III case-mix
methodology related to the clinical assessment of residents.  The long-term health care industry has also
experienced a dramatic increase in professional liability claims and in the cost of insurance to cover such
claims.  These factors have combined to cause a number of bankruptcy filings, bankruptcy court rulings and
court judgments about refinancing which have affected some of our lessees and mortgagees.

Decisions about valuations and impairments of our investments require significant judgements and
estimates on the part of management.  We monitor the liquidity and credit worthiness of our tenants and
borrowers on an on-going basis.  For real estate properties, the need to recognize an impairment is evaluated
on a property by property basis in accordance with Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144).  Recognition of an
impairment is based upon estimated future cash flows from a property compared to the carrying value of the
property.  For notes receivable, impairment recognition is based upon an evaluation of the estimated
collectibility of loan payments on a specific loan basis in accordance with Statement of Financial Accounting
Standards No. 114, "Accounting by Creditors for Impairment of a Loan - An Amendment of FASB
Statements No. 5 and 15".  While we believe that the carrying amounts of our properties and notes receivable
are realizable, it is possible that future events could require us to make significant adjustments or revisions
to these estimates.

*REIT Status and Taxes*

We believe that we have operated our business so as to qualify as a REIT under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended (the "Code") and we intend to continue to operate
in such a manner, but no assurance can be given that we will be able to qualify at all times.  If we qualify
as a REIT, we will generally not be subject to federal corporate income taxes on our net income that is
currently distributed to its stockholders.  This treatment substantially eliminates the "double taxation" (at
the corporate and stockholder levels) that typically applies to corporate dividends.  Our failure to continue
to qualify under the applicable REIT qualification rules and regulations would cause us to owe state and
federal income taxes and would have a material adverse impact on our financial position, results of
operations and cash flows.

CAPITAL RESOURCES AND LIQUIDITY

At year end, our debt as a percentage of total liabilities and capital was 11.9%.  Our debt consists
of a bank term loan in the amount of $16,150,000 which matures on May 14, 2007.The bank term loan
requires quarterly payments of $425,000 and bears interest at the variable rate of 30 day LIBOR plus 1.5%
(3.8% at December 31, 2004).  The loan agreements require that we maintain specified operating ratios and
stockholders' equity.

*Leases*

We lease our 23 healthcare facilities to various lessees: 14 properties are leased to NHC, and nine
properties that were previously leased to NHC prior to October 1, 2000 are leased to nine separate lessees
not related to NHC.  With respect to these nine properties, NHC remains obligated under its master lease
agreement and continues to remain obligated to make the lease payments to us.  Lease payments made to
us from the new lessees are credited against NHC's overall rent obligation.  At December 31, 2004, all
payments are current.  Our leases with NHC have initial ten year terms with provisions for two five year
renewal terms at the same terms as the original lease.  Our leases with the nine separate lessees have initial
five year terms with provisions for two five year renewal terms for which the base lease payments must be
negotiated on each renewal.

*FCC Notes*

On February 27, 2004, the FCC notes receivable were repaid in full (approximately $30,384,000).
Proceeds from the prepayment and cash on hand were used to repay our previous credit facility
(approximately $31,175,000).

*HSMI Sale*

Effective January 1, 2001, we sold all of the real estate and equipment of the three long-term health
care centers under lease to the lessee, Health Services Management of Indiana, LLC (HSMI).  Consideration
for the sale and assumption of the $1,630,000 first mortgage and the properties is in the form of new
mortgage notes in the total amount of $12,029,000.  We accounted for this transaction under the deposit
method in accordance with the provisions of Statement of Financial Accounting Standards No. 66,
"Accounting for Sales of Real Estate" (SFAS 66).  Consistent with the deposit method, we did not initially
record the sale of the assets and we continued to record depreciation expense related to the assets.  Cash
received from the buyer (which since the sale totaled $3,092,000 as of October 31, 2003) was reported as
a deposit on real estate properties sold until the period in which the down payment and continuing investment
criteria of SFAS 66 were met, at which time we would account for the sale under the full accrual method.
	During 2002, we concluded that based on our impairment analysis in accordance with Statement of
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS
144) and based on certain 2002 events, these real estate properties required write-downs in the amount of
$4,288,000.  As such, write-downs of $1,000,000 and $3,288,000 were recorded during the first and fourth
quarters of 2002, respectively.

Effective November 1, 2003, the initial and continuing investment criteria of SFAS 66 were met.
Therefore, the sale of the real estate properties was recorded resulting in a gain on the sale of real estate of
approximately $1,149,000.  The sale of the assets resulted in recording a mortgage notes receivable of
approximately $3,740,000.  Additional sale proceeds received in 2004 resulted in an additional gain on sale
of real estate of approximately $105,000.

*Sources and Uses of Funds*

Our leasing and mortgage services generated net cash from operating activities during 2004 in the
amount of $19,000,000 compared to $19,083,000 in the prior period. Net cash from operating activities
generally includes net income plus non-cash expenses, such as depreciation and amortization and provisions
for realty and loan losses, if any, and non-cash gains on sales of real estate, if any, adjusted by working
capital changes.

Our investing activities provided $31,253,000 of cash flows in 2004 compared to $26,004,000 in
2003.  Collections and sales of mortgage notes receivable totaled $31,042,000 in 2004 compared to
$24,707,000 in 2003.  Included in these collections are $30,384,000 of prepayments of mortgage notes
receivable in 2004 compared to prepayment of $21,982,000 in 2003.

Deposits on real estate properties sold provided no cash flow this year because the sale of property
was recognized compared to $1,270,000 in the prior year.  Distributions from an unconsolidated investment
provided $67,000 in cash compared to no cash flow in the prior year.

Net cash used in financing activities totaled $46,851,000 in 2004 compared to $45,801,000 in 2003.
Cash flows provided from borrowings included $17,000,000 in 2004 compared to $14,922,000 (from NHI)
in 2003.  Cash flows from the sale of common stock were $925,000 in 2004 and $212,000 in 2003.

Payments on debt were $48,670,000 in 2004 compared to $46,590,000 of payments on debt last year.
Cash flows used in financing activities included $14,293,000 to pay dividends to stockholders ($12,730,000
last year) and $1,813,000 to pay cash distributions to minority partners of our operating partnership
($1,615,000 last year).

*Commitments*

We intend to pay quarterly distributions to our stockholders in an amount at least sufficient to satisfy
the distribution requirements of a real estate investment trust. Such requirements necessitate that at least 90%
of our taxable income be distributed annually. The primary source for distributions will be rental and interest
income we earn on the real property and mortgage notes receivable.  Regular dividends in the amount of
$1.33 and a special dividend in the amount of $.08 were declared for payment for 2004.

Our contractual cash obligations for periods subsequent to December 31, 2004 are as follows:



|                                   |         | Less than |           |           |              
|---------------------------------- | ------- | --------- | --------- | --------- | -------------
|(in thousands)                     | Total   | 1 Year    | 2-3 Years | 4-5 Years | After 5 Years
|Long-term debt                     | $16,150 | $1,700    | $14,450   | $--       | $--          
|Total Contractual Cash Obligations | $16,150 | $1,700    | $14,450   | $     --  | $     --     

We expect that current cash on hand, marketable securities, short-term notes receivable, operating
cash flows, and as needed, our borrowing capacity will be adequate to finance our operating and financing
requirements for 2005 and 2006.

RESULTS OF OPERATIONS

*Year Ended December 31, 2004 Compared to the Year Ended December 31, 2003*

Net income for the year ended December 31, 2004 is $11,435,000 versus $11,845,000 for the same
period in 2003, a decrease of 3.5%. Diluted net income per common share decreased five cents or 4.1% to
$1.16 in 2004 from $1.21 in 2003.

Total revenues for the year ended December 31, 2004 decreased $4,317,000 or  17.6% to $20,191,000
from $24,508,000 for the year ended December 31, 2003. Revenues from rental income increased $167,000
or 1.0% when compared to the same period in 2003. Revenues from mortgage interest decreased $3,440,000
or 54.9% in 2004 as compared to the same period in 2003.  Gain on sale of real estate decreased $1,044,000.

The increase in rental income is due primarily to the recognition of $167,000 of additional percentage
rent.  Percentage rent is calculated as 3% of the amount by which gross revenues of each leased health care
facility in each quarter of each year after 1999 exceed the gross revenues of such health care facility in the
applicable quarter of 1999.

The decrease in mortgage interest income is the result of lower balances of notes receivable.  We
received prepayments on mortgages receivable totaling $30,384,000 in February 2004 and totaling
$21,982,000 in November 2003.  Mortgage interest income decreased also because of reductions in the
principal of the mortgage notes receivable due to regular monthly amortization.  The gain on sale of real estate
is the result of receiving additional proceeds related to the sale of Indiana properties originally recorded in
November, 2003.

Total expenses for the year ended December 31, 2004 decreased $3,830,000 or 33.0% to $7,782,000
from $11,612,000 for the year ended December 31, 2003. Interest expense decreased $3,212,000 or 80.4%
in 2004 as compared to the 2003 period. Depreciation of real estate decreased $356,000 or 5.6%. General and
administrative costs increased $203,000 or 24.6% due primarily to a writeoff of $252,000 of previously
capitalized costs for a transaction that did not materialize.

Interest expense decreased due primarily to principal paydowns in the fourth quarter of 2003
($22,000,000) and the first quarter of 2004 ($31,000,000) on the credit facility and the senior secured notes
payable to NHC ($4,000,000).  There was an additional principal paydown of approximately $1,723,000 on
the senior secured notes payable to NHC in the second quarter of 2004.  In addition, interest expense
decreased due to the decreased rate effective December 31, 2003 and May 14, 2004 on approximately
$14,922,000 of debt.

*Year Ended December 31, 2003 Compared to the Year Ended December 31, 2002*

Net income for the year ended December 31, 2003 is $11,845,000 versus $8,498,000 for the same
period in 2002, an increase of 39.4%. Diluted earnings per common share increased 34 cents or 39.1% to
$1.21 in the 2003 period from 87 cents in the 2002 period.

Total revenues for the year ended December 31, 2003 decreased $41,000 or .2% to $24,508,000 from
$24,549,000 for the year ended December 31, 2002. Revenues from rental income increased $266,000 or 1.6%
when compared to the same period in 2002. Revenues from mortgage interest decreased $1,456,000 or 18.8%
in 2003 as compared to the same period in 2002.  Gain on sale of real estate increased $1,149,000.

The increase in rental income is due primarily to the recognition of $324,000 of additional percentage
rent.  Percentage rent is calculated as 3% of the amount by which gross revenues of each leased health care
facility in each quarter of each year after 1999 exceed the gross revenues of such health care facility in the
applicable quarter of 1999.

The decrease in mortgage interest income is the result of lower balances of notes receivable.  We
received prepayments on mortgages receivable totaling $21,982,000 in November 2003 and totaling
$10,737,000 in December 2002.  Mortgage interest income decreased also because of reductions in the
principal of the mortgage notes receivable due to regular monthly amortization.  The gain on sale of real estate
is the result of recording the sale of Indiana properties effective November 1, 2003.

Total expenses for the year ended December 31, 2003 decreased $3,587,000 or 23.6% to $11,612,000
from $15,199,000 for the year ended December 31, 2002. Interest expense increased $668,000 or 20.1% in
2003 as compared to the 2002 period. Depreciation of real estate decreased $463,000 or 6.8%. General and
administrative costs increased $17,000 or 2.1%.  Realty and loan losses, $0 in the current year, were
$4,020,000 in the prior year.

Interest expense increased due primarily to the recognition of interest expense on a $14,937,000
obligation to NHI which started in December 2002, offset by reduced interest expenses on the credit facility.
The reduced interest on the credit facility was caused by paydowns in December 2002 and December 2003
in the amounts of $25 million and $22 million, respectively.  The reduction of interest on the credit facility
was offset in part due to an increased rate effective January 1, 2002.

During 2002, we concluded that based on our Statement of Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144) impairment analysis and on
certain events, certain real estate properties required write-downs in the net book value of $4,288,000.  Write-downs of $1,000,000 and $3,288,000 were recorded during the first and fourth quarters of 2002, respectively.

FUNDS FROM OPERATIONS

We have adopted the definition of Funds From Operations ("FFO") prescribed by the National
Association of Real Estate Investment Trusts ("NAREIT") October 1999 White Paper as amended April 1
2002. Accordingly, FFO is defined as net income (loss) applicable to common stockholders (computed in
accordance with generally accepted accounting principles "GAAP") excluding gains (or losses) from sales
of property, plus depreciation of real property and after investments for unconsolidated entities in which a
REIT holds an interest.  FFO should not be considered as an alternative to net income or any other GAAP
measurement of performance as an indicator of operating performance or as an alternative to cash flows from
operations, investing or financing activities as a measure of liquidity.  We view FFO as a measure of operating
performance and believe that FFO is helpful in evaluating a real estate investment portfolio's overall
performance considering the fact that historical cost accounting implicitly assumes that the value of real estate
assets diminishes predictably over time.

Our funds from operations for the twelve months ended December 31, 2004, on a diluted basis was
$16,643,000, an increase of $206,000 as compared to $16,437,000 for the same period in 2003.  FFO
represents net earnings available to common stockholders, excluding the effects of asset dispositions, plus
depreciation associated with real estate investments.  Diluted FFO assumes, if dilutive, the conversion of
convertible subordinated debentures, the conversion of cumulative convertible preferred stock and the
exercise of stock options using the treasury stock method.

We believe that funds from operations is an important supplemental measure of operating
performance for a real estate investment trust.  Because the historical cost accounting convention used for real
estate assets requires straight-line depreciation (except on land), such accounting presentation implies that
the value of real estate assets diminishes predictably over time.  Since real estate values instead have
historically risen and fallen with market conditions, presentations of operating results for a real estate
investment trust that use historical cost accounting for depreciation could be less informative, and should be
supplemented with a measure such as FFO.  The term FFO was designed by the real estate investment trust
industry to address this issue.  Our measure may not be comparable to similarly titled measures used by other
REITs.  Consequently, our funds from operations may not provide a meaningful measure of our performance
as compared to that of other REITs.  Since other REITs may not use our definition of FFO, caution should
be exercised when comparing our Company's FFO to that of other REITs.  Funds from operations in and of
itself does not represent cash generated from operating activities in accordance with GAAP (funds from
operations does not include changes in operating assets and liabilities) and, therefore, should not be
considered an alternative to net earnings as an indication of operating performance, or to net cash flow from
operating activities as determined by GAAP in the United States, as a measure of liquidity and is not
necessarily indicative of cash available to fund cash needs.

The following table reconciles net income (loss) applicable to common stockholders to funds from
(to) operations applicable to common stockholders:

*(in thousands, except share and per share amounts)*

|Year Ended December 31,                                 | 2004       | 2003       | 2002      
|------------------------------------------------------- | ---------- | ---------- | ----------
|                                                        |            |            |           
|Net income                                              | $ 11,435   | $ 11,845   | $ 8,498   
|Adjustments:                                            |            |            |           
|Real estate depreciation                                | 5,966      | 6,322      | 6,785     
|Gain on sale of real estate                             | (105)      | (1,149)    | --        
|Minority interest in NHR/OP, L.P.'s share of add        |            |            |           
|back for real estate related depreciation and           |            |            |           
|gain on sale of real estate                             | (653)      | (581)      | (763)     
|Funds from operations applicable to common stockholders | $ 16,643   | $ 16,437   | $14,520   
|                                                        |            |            |           
|Basic funds from operations per share                   | $     1.73 | $     1.72 | $     1.52
|Diluted funds from operations per share                 | $     1.69 | $     1.68 | $     1.49
|                                                        |            |            |           
|Weighted average shares:                                |            |            |           
|Basic                                                   | 9,594,852  | 9,575,546  | 9,570,323 
|Diluted                                                 | 9,822,823  | 9,757,238  | 9,770,370 



FUTURE RENTAL AND MORTGAGE INTEREST INCOME UNCERTAINTIES

Our rental and mortgage interest income revenues are believed by management to be secure.
However, the majority of the income of our lessees and borrowers is derived from the lessees' participation
in the Medicare and Medicaid programs.  Adverse changes in these programs or the inability of our lessees
and borrowers to participate in these programs would have a material adverse impact on the financial position,
results of operations and cash flows of our lessees and borrowers and their resultant ability to service their
obligations to us.

None of our lessees or borrowers are in bankruptcy.

INCOME TAXES

We intend at all times to qualify as a REIT under Sections 856 through 860 of the Internal Revenue
Code of 1986, as amended. Therefore, we will not be subject to federal income tax provided we distribute at
least 90% of our annual REIT taxable income to our stockholders and meet other requirements to continue
to qualify as a REIT.  Accordingly, no provision for federal income taxes has been made in the consolidated
financial statements. Our failure to continue to qualify under the applicable REIT qualification rules and
regulations would have a material adverse impact on our financial position, results of operations and cash
flows.

NEW ACCOUNTING PRONOUNCEMENTS

In May 2003 the FASB issued Statement of Financial Accounting Standards No. 150, "Accounting
for Certain Financial Instruments with Characteristics of both Liabilities and Equity."  SFAS 150 establishes
standards for classifying and measuring as liabilities certain financial instruments that embody obligations
of the issuer and have characteristics of both liabilities and equity.  SFAS 150 is generally effective for NHR
July 1, 2003.  As originally issued, SFAS 150 would have required NHR to measure the minority interests
in NHR/OP, L.P. on the consolidated balance sheet at estimated fair value at the balance sheet date, with a
charge or credit to income (specifically, interest expense) for the change in carrying value during the period.
In November 2003, the FASB deferred for an indefinite period the application of the classification and
measurement guidance in SFAS 150 to noncontrolling interests in limited-life subsidiaries (such as NHR/OP,
L.P.).  Measurement of the minority interests in NHR/OP, L.P. at estimated fair value at each balance sheet
date, if and when required, would result in significant volatility in NHR's financial position and results of
operations.

In December 2003 the FASB issued FASB Interpretation No. 46R, *Consolidation of Variable Interest
entities (Revised December 2003)*("FIN 46R").  FIN 46R provides guidance related to identifying variable
interest entities (previously known generally as special purpose entities or SPEs) and determining whether
such entities should be consolidated.  Key to the consolidation determination is whether such entities disperse
risks among the parties involved.  If those risks are not dispersed, and therefore an enterprise bears the
majority of the risks or rewards related to the variable interest entity, it would consolidate that variable interest
entity.  This Interpretation also provides guidance related to the initial and subsequent measurement of assets,
liabilities, and non-controlling interests of newly consolidated variable interest entities and requires
disclosures for both the primary beneficiary of a variable interest entity and other beneficiaries of the entity.
This interpretation replaces in its entirety FASB Interpretation No. 46, *Consolidation of Variable Interest
Entities,*that was issued by the FASB in January 2003.  The implementation of FIN 46R was required during
the Company's first quarter of 2004.  The implementation had no effect on the Company's financial
statements.

In December of 2004, the FASB issued FASB Statement No. 153, *Exchanges of Nonmonetary Assets-An Amendment of APB Opinion No. 29*("Statement 153").  Statement 153 amends APB Opinion No. 29,
*Accounting for Non-monetary Transactions*, that was issued in 1973.  The amendments made by Statement
153 are based on the principle that exchanges of non-monetary assets should be measured based on the fair
value of the assets exchanged.  Further, the amendments eliminate the narrow exception for non-monetary
exchanges of similar productive assets and replace it with a broader exception for exchanges of non-monetary
assets that do not have "commercial substance".  Previously, Opinion 29 required that he accounting for an
exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar
productive asset should be based on the recorded amount of the asset relinquished.  The provisions in
Statement 153 are effective for non-monetary asset exchanges occurring in fiscal periods beginning after June
15, 2005.  Early application is permitted and companies must apply the standard prospectively.  The Company
plans to adopt Statement 153 beginning July 1, 2005.  The future effect of Statement 153 on the Company's
financial statements will depend on whether the Company enters into certain non-monetary transactions.  The
Company, however, does not expect the adoption of Statement 153 to have a significant impact on its financial
statements.

In December 2004, the FASB issued SFAS No. 123(R), *Share-Based Payment.*SFAS No. 123(R)
replaces SFAS No. 123, *Accounting for Stock-Based Compensation*, and supersedes APB Opinion No. 25,
*Accounting for Stock Issued to Employees*.  SFAS No. 123(R) requires compensation costs related to share-based payment transactions to be recognized in the financial statements over the period that an employee
provides service in exchange for the award.  SFAS No. 123(R) is effective for periods beginning after June
15, 2005.  The Company does not expect the adoption of this pronouncement to have a significant impact on
the Company's financial statements.

IMPACT OF INFLATION

Inflation may affect us in the future by changing the underlying value of our real estate or by
impacting our cost of financing operations.

Our revenues are primarily from long-term investments. Our leases with NHC require increases in
rent income based on increases in the revenues of the leased facilities.

******Item 7A.  Quantitative and Qualitative Disclosures about Market Risk**

Interest Rate Risk

Our cash and cash equivalents consist of highly liquid investments with a maturity of less than three
months.  Substantially all of our mortgage and other notes receivable bear interest at fixed interest rates.  As
a result of the short-term nature of our cash instruments and because the interest rates on our investment in
notes receivable are fixed, a hypothetical 10% change in interest rates has no impact on our future earnings
and cash flows related to these instruments.

As of December 31, 2004, all of our long-term debt ($16,150,000) bears interest at floating interest
rates.  Because the interest rates of these instruments are variable, a hypothetical 10% increase in interest rates
would result in additional annual interest expense of $61,000 and a 10% reduction in interest rates would
result in annual interest expense declining $61,000.

We currently do not use any derivative instruments to hedge interest rate or other risks.  We do not
use derivative instruments for trading purposes.  The future use of such instruments would be subject to strict
approvals by our senior officers.  Therefore, our exposure related to such derivative instruments is not
material to our financial position, results of operations or cash flows.

Equity Price Risk

We consider our investments in marketable securities as available for sale securities and unrealized
gains and losses are recorded in stockholders' equity in accordance with Statement of Financial Accounting
Standards No. 115.  The investments in marketable securities are recorded at their fair market value based
on quoted market prices.  Thus, there is exposure to equity price risk, which is the potential change in fair
value due to a change in quoted market prices.  Hypothetically, a 10% increase in quoted market prices would
result in a related 10% increase in the fair value of our investments in marketable securities of approximately
$657,000 and 10% reduction in quoted market prices would result in a related 10% decrease in the fair value
of our investments in marketable securities of approximately $657,000.

******Item 8.  Financial Statements and Supplementary Data**

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

Board of Directors and Stockholders

National Health Realty, Inc.:

Murfreesboro, Tennessee

We have audited the accompanying consolidated balance sheet of National Health Realty, Inc. and
Subsidiaries as of December 31, 2004 and the related consolidated statements of income, stockholders'
equity and cash flows for the year then ended.  These financial statements are the responsibility of the
Company's management.  Our responsibility is to express an opinion on these financial statements based
on our audit.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of National Health Realty, Inc. and Subsidiaries at December 31, 2004 and
the results of their operations and their cash flows for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of the Company's internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 18,
2005, expressed an unqualified opinion thereon.

/s/ BDO Seidman, LLP

Memphis, Tennessee

February 18, 2005****

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholders of National Health Realty, Inc.:

We have audited the accompanying consolidated balance sheet of National Health Realty, Inc. and
Subsidiaries as of December 31, 2003 and the related consolidated statements of income, stockholders' equity
and cash flows for the years ended December 31, 2003 and 2002.  These consolidated financial statements
are the responsibility of the Company's management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of National Health Realty, Inc. and Subsidiaries at December 31, 2003 and
the consolidated results of their operations and their cash flows for the years ended December 31, 2003 and
2002, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Nashville, Tennessee

January 23, 2004

Board of Directors and Stockholders

National Health Realty, Inc.

Murfreesboro, Tennessee

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have audited management's assessment, included in the accompanying Management's Control Over
Financial Reporting, that National Health Realty, Inc. and Subsidiaries maintained effective internal control
over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)."
National Health Realty, Inc. and Subsidiaries' management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the
effectiveness of the company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, evaluating
management's assessment, testing and evaluating the design and operating effectiveness of internal control,
and performing such other procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. A company's internal control over financial
reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures
of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a material effect on the financial
statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.

In our opinion, management's assessment that National Health Realty, Inc. and Subsidiaries maintained
effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material
respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway, Commission (COSO). Also in our opinion, National Health
Realty, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheet of National Health Realty, Inc. and Subsidiaries as of
December 31, 2004 and the related consolidated statements of income, stockholders' equity and cash flows
for the year then ended and our report dated February 18, 2005 expressed an unqualified opinion.

/s/ BDO Seidman, LLP

Memphis, Tennessee

February 18, 2005

|NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES                                                                                 
|------------------------------------------------------------------------------------------------------------------------------
|CONSOLIDATED BALANCE SHEETS                                                                                                   
|*(in thousands, except share and per share amounts)*                                                                          
|                                                                                                                              
|                                                                                                                              
|                                                                                                                              
|                                                                                                                              
|ASSETS                                                                                                                        
|Real estate properties:                                                                                                       
|Land                                                                                                                          
|Buildings and improvements                                                                                                    
|                                                                                                                              
|Less accumulated depreciation                                                                                                 
|Real estate properties, net                                                                                                   
|                                                                                                                              
|Mortgage and other notes receivable                                                                                           
|Interest and rent receivable                                                                                                  
|Cash and cash equivalents                                                                                                     
|Marketable securities                                                                                                         
|Deferred costs and other assets                                                                                               
|Total Assets                                                                                                                  
|                                                                                                                              
|LIABILITIES                                                                                                                   
|Debt                                                                                                                          
|Minority interests in consolidated subsidiaries                                                                               
|Accounts payable and other accrued expenses                                                                                   
|Accrued interest                                                                                                              
|Dividends payable                                                                                                             
|Distributions payable to minority interest partners                                                                           
|Total Liabilities                                                                                                             
|                                                                                                                              
|Commitments, contingencies and guarantees                                                                                     
|                                                                                                                              
|STOCKHOLDERS' EQUITY                                                                                                          
|Cumulative convertible preferred stock,                                                                                       
|$.01 par value; 5,000,000 shares                                                                                              
|authorized; none issued and outstanding                                                                                       
|Common stock, $.01 par value;                                                                                                 
|75,000,000 shares authorized; 9,699,108 and                                                                                   
|9,590,588 shares, respectively, issued and outstanding                                                                        
|Capital in excess of par value of common stock                                                                                
|Cumulative net income                                                                                                         
|Cumulative dividends                                                                                                          
|Unrealized gains on marketable securities                                                                                     
|Total Stockholders' Equity                                                                                                    
|Total Liabilities and Stockholders' Equity                                                                                    
|                                                                                                                              
|*The accompanying notes to consolidated financial statements are an integral part of these consolidated
financial statements.*



|NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES                                                                               
|----------------------------------------------------------------------------------------------------------------------------
|CONSOLIDATED STATEMENTS OF INCOME                                                                                           
|*(in thousands, except share and per share amounts)*                                                                        
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|Year Ended December 31,                                                                                                     
|                                                                                                                            
|REVENUES:                                                                                                                   
|Rental income                                                                                                               
|Mortgage interest income                                                                                                    
|Gain on sale of real estate                                                                                                 
|                                                                                                                            
|                                                                                                                            
|EXPENSES:                                                                                                                   
|Interest                                                                                                                    
|Depreciation of real estate                                                                                                 
|Amortization of loan costs                                                                                                  
|Realty and loan losses                                                                                                      
|General and administrative                                                                                                  
|                                                                                                                            
|                                                                                                                            
|INCOME BEFORE MINORITY INTERESTS IN CONSOLI-                                                                                
|DATED SUBSIDIARIES AND NON-OPERATING INCOME                                                                                 
|                                                                                                                            
|NON-OPERATING INCOME (investment and interest income)                                                                       
|                                                                                                                            
|MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES                                                                             
|                                                                                                                            
|**NET INCOME**                                                                                                              
|                                                                                                                            
|NET INCOME PER COMMON SHARE:                                                                                                
|Basic                                                                                                                       
|Diluted                                                                                                                     
|                                                                                                                            
|WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:                                                                                 
|Basic                                                                                                                       
|Diluted                                                                                                                     
|                                                                                                                            
|                                                                                                                            
|The accompanying notes to consolidated financial statements are an integral part of these consolidated financial
statements.

|NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES                                                                                 
|------------------------------------------------------------------------------------------------------------------------------
|CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                                         
|*(in thousands)*                                                                                                              
|                                                                                                                              
|Year Ended December 31,                                                                                                       
|                                                                                                                              
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                                         
|Net income                                                                                                                    
|Depreciation of real estate                                                                                                   
|Gain on sale of real estate                                                                                                   
|Realty and loan losses                                                                                                        
|Amortization and write-off of loan costs                                                                                      
|Minority interests in consolidated subsidiaries                                                                               
|(Increase) decrease in interest and rent receivable                                                                           
|(Increase) decrease in other assets                                                                                           
|Increase in accounts payable and accrued liabilities                                                                          
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                                                                     
|                                                                                                                              
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                                         
|Sale (purchase) of real estate properties                                                                                     
|Increase in deposit on real estate properties sold                                                                            
|Collection and sale of mortgage notes receivable                                                                              
|Process from the sale of assets                                                                                               
|Distribution from unconsolidated investment                                                                                   
|Purchase of marketable securities                                                                                             
|NET CASH PROVIDED BY INVESTING ACTIVITIES                                                                                     
|                                                                                                                              
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                         
|Proceeds from debt                                                                                                            
|Payments on debt                                                                                                              
|Financing costs paid                                                                                                          
|Dividends paid to stockholders                                                                                                
|Distributions paid to minority partners                                                                                       
|Issuance of common shares                                                                                                     
|NET CASH USED IN FINANCING ACTIVITIES                                                                                         
|                                                                                                                              
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                                              
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                                                                  
|CASH AND CASH EQUIVALENTS, END OF YEAR                                                                                        
|                                                                                                                              
|SUPPLEMENTAL INFORMATION:                                                                                                     
|Cash payments for interest expense                                                                                            
|During 2003, NHR recognized the sale of property in exchange                                                                  
|for a mortgage note receivable:                                                                                               
|Mortgage notes receivable                                                                                                     
|Deposit on real estate sold                                                                                                   
|Accumulated depreciation                                                                                                      
|Land                                                                                                                          
|Building and improvements                                                                                                     
|Gain on sale of real estate                                                                                                   
|                                                                                                                              
|                                                                                                                              
|**The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.

|NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES                                                                                 
|------------------------------------------------------------------------------------------------------------------------------
|CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY                                                                               
|***(in thousands, except share and per share amounts)*                                                                        
|                                                                                                                              
|                                                                                                                              
|Preferred Stock                                                                                                               
|                                                                                                                              
|BALANCE AT 12/31/01                                                                                                           
|Net income                                                                                                                    
|Unrealized gains on marketable                                                                                                
|securities                                                                                                                    
|Total comprehensive income                                                                                                    
|Dividends to common share-                                                                                                    
|holders ($1.33 per share)                                                                                                     
|                                                                                                                              
|BALANCE AT 12/31/02                                                                                                           
|Net income                                                                                                                    
|Unrealized gains on marketable                                                                                                
|securities                                                                                                                    
|Total comprehensive income                                                                                                    
|Shares sold                                                                                                                   
|Dividends to common share-                                                                                                    
|holders ($1.49 per share)                                                                                                     
|                                                                                                                              
|BALANCE AT 12/31/03                                                                                                           
|Net income                                                                                                                    
|Unrealized gains on marketable                                                                                                
|securities                                                                                                                    
|Total comprehensive income                                                                                                    
|Shares sold                                                                                                                   
|Dividends to common share-                                                                                                    
|holders ($1.41 per share)                                                                                                     
|                                                                                                                              
|BALANCE AT 12/31/04                                                                                                           
|                                                                                                                              
|*The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.*

**NOTE 1.  ORGANIZATION**

****National Health Realty, Inc. (NHR) is a Maryland real estate investment trust (REIT) that was
incorporated on September 26, 1997.  NHR/OP, L.P. is a Delaware limited partnership that is the operating
entity of NHR.  NHR owns an 88% limited partnership interest and, through a qualified REIT subsidiary,
a 1% general partnership interest in NHR/OP, L.P.  NHR and NHR/OP, L.P. are collectively referred to
herein as "NHR".

The majority of our revenue is derived from interest income on secured mortgage loans and from
rent generated on leased properties involved in the long-term care industry.

**NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

*Basis of Presentation -*The consolidated financial statements include the accounts of NHR and its
majority owned subsidiaries.  Significant intercompany accounts and transactions have been eliminated.

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

*Real Estate Properties*- We record properties at cost.  Real property transferred from National
HealthCare Corporation (NHC) was recorded at NHC's net book value at the date of transfer.  We use the
straight-line method of depreciation for buildings and improvements over their estimated remaining useful
lives as follows:

|Buildings    | 40 Years           
|------------ | -------------------
|Improvements | 5 Years to 25 Years

In accordance with Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" (SFAS 144), we evaluate the recoverability of the carrying
values of our properties on a property by property basis.  On a quarterly basis, we review our properties for
recoverability when events or circumstances, including significant physical changes in the property,
significant adverse changes in general economic conditions and significant deteriorations of the underlying
cash flows of the property, indicate that the carrying amount of the property may not be recoverable.  The
need to recognize an impairment is based on estimated future cash flows from a property compared to the
carrying value of that property.  If recognition of an impairment is necessary, it is measured as the amount
by which the carrying value of the property exceeds the fair value of the property.

*Mortgage and Other Notes Receivable -*In accordance with Statement of Financial Accountant
Standards No. 114, "Accounting by Creditors for Impairment of a Loan - An Amendment of FASB
Statements No. 5 and 15" (SFAS 114), NHR evaluates the carrying values of its mortgage and other notes
receivable on an instrument by instrument basis.  On a quarterly basis, NHR reviews its notes receivable for
recoverability when events or circumstances, including the non-receipt of principal and interest payments,
significant deteriorations of the financial condition of the borrower, significant adverse changes in the long-term care industry and significant adverse changes in general economic conditions, indicate that the carrying
amount of the note receivable may not be recoverable.  If necessary, an impairment is measured as the
amount by which the carrying amount exceeds the discounted cash flows expected to be received under the
note receivable or, if foreclosure is probable, the fair value of the collateral securing the note receivable.

*Cash and Cash Equivalents* - Cash and cash equivalents consist of all highly liquid investments with
a maturity of three months or less.

*Federal Income Taxes* - We intend at all times to qualify as a REIT under Sections 856 through 860
of the Internal Revenue Code of 1986, as amended.  Therefore, we will not be subject to federal income tax
provided we distribute at least 90% of our annual REIT taxable income to our stockholders and meet other
requirements to continue to qualify as a REIT.  Accordingly, no provision for federal income taxes has been
made in the consolidated financial statements.  Our failure to continue to qualify under the applicable REIT
qualification rules and regulations would have a material adverse impact on our financial position, results
of operations and cash flows.

The primary difference between the tax basis and the reported amounts of our assets and liabilities
is a higher tax basis than book basis (by approximately $23,980,000) in our real estate properties.

Earnings and profits, which determine the taxability of dividends to stockholders, differ from net
income reported for financial reporting purposes due primarily to differences in the basis of assets and
differences in the estimated useful lives used to compute depreciation expense.

*Federal Excise Taxes -*We are subject to a federal excise tax computed on a calendar year basis. The
excise tax equals 4% of the amount by which 85% of our ordinary taxable income plus 95% of any capital
gain income for the calendar year exceeds our cash distributions to shareholders during the calendar year,
as defined.  We have made no provision for excise tax in the consolidated financial statements because we
believe no tax is due.

*Concentration of Credit Risks* - Our credit risks primarily relate to cash and cash equivalents and
to the investments in mortgage and other notes receivable and marketable securities.  Cash and cash
equivalents are primarily held in bank accounts and overnight investments.  The investments in mortgage
and other notes receivable relate primarily to secured loans with healthcare facilities as discussed in Note
5.   The investment in marketable securities is held in one investment as described in Note 6.

Our financial instruments, principally our investments in mortgage and other notes receivable, are
subject to the possibility of loss of the carrying values as a result of either the failure of other parties to
perform according to their contractual obligations or changes in market prices which may make the
instruments less valuable.  We obtain various collateral and other protective rights, and continually monitor
these rights, in order to reduce such possibilities of loss.

*Marketable Securities -*NHR's investments in marketable securities include available for sale
securities.  Unrealized gains and losses on available for sale securities are recorded in stockholders' equity
in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115).

NHR evaluates its marketable securities for other-than-temporary impairments consistent with the
provisions of SFAS 115.

*Deferred Costs* - Costs incurred to acquire financings are amortized by the interest method over the
term of the related debt.

*Other Assets -*Other assets include our $229,000 investment in Summerfield Development LLC
(Summerfield), a real estate development company.  Summerfield is a related party of NHR, since certain
members of NHR's management and Board of Directors are also members of Summerfield.  We carry our
investment in Summerfield at cost in the consolidated balance sheets.

*Rental Income -*We recognize rental income based on the terms of our operating leases.  Under
certain of our leases, we receive contingent rent, which is based on the increase in revenues of a lessee over
a base year or base quarter.  We recognize contingent rent annually or quarterly, as applicable, when, based
on the actual revenue of the lessee, receipt of such income is assured.  We identify leased real estate
properties as nonperforming if a required payment is not received within 30 days of the date it is due.  Our
policy related to rental income on non-performing leased real estate properties is to recognize rental income
in the period when the income is received.

*Mortgage Interest Income -*We recognize mortgage interest income based on the interest rates and
principal amounts outstanding of the mortgage notes receivable.  We identify loans as nonperforming if a
required payment is not received within 30 days of the date it is due.  Our policy related to mortgage interest
income on nonperforming mortgage loans is to recognize mortgage interest income in the period when the
income is received.

*Stock-Based Compensation* - We account for stock-based compensation arrangements under the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB 25) and related interpretations.  We have adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-based Compensation" (SFAS 123).  As a
result, no compensation cost has been recognized in the consolidated statements of income for our stock
option plan.  See Note 10 for additional disclosures about our stock option plan.

Based on the number of options granted and the historical and expected future trends of factors
affecting valuation of those options, management believes that the additional compensation cost, as
calculated in accordance with SFAS 123, has no effect on the Company's net income or earnings per share
in 2004, 2003 and 2002.

*Comprehensive Income* - Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" requires that changes in the amounts of certain items, including gains and losses
on certain securities, be shown in the consolidated financial statements.  We report our comprehensive
income in the consolidated statements of stockholders' equity.

*New Accounting Pronouncements* -In May 2003 the FASB issued Statement of Financial
Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity."  SFAS 150 establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer and have characteristics of both liabilities and
equity.  SFAS 150 is generally effective for NHR July 1, 2003.  As originally issued, SFAS 150 would have
required NHR to measure the minority interests in NHR/OP, L.P. on the consolidated balance sheet at
estimated fair value at the balance sheet date, with a charge or credit to income (specifically, interest
expense) for the change in carrying value during the period.  In November 2003, the FASB deferred for an
indefinite period the application of the classification and measurement guidance in SFAS 150 to
noncontrolling interests in limited-life subsidiaries (such as NHR/OP, L.P.).  Measurement of the minority
interests in NHR/OP, L.P. at estimated fair value at each balance sheet date, if and when required, would
result in significant volatility in NHR's financial position and results of operations.

In December 2003 the FASB issued FASB Interpretation No. 46R, *Consolidation of Variable Interest
entities (Revised December 2003)*("FIN 46R").  FIN 46R provides guidance related to identifying variable
interest entities (previously known generally as special purpose entities or SPEs) and determining whether
such entities should be consolidated.  Key to the consolidation determination is whether such entities disperse
risks among the parties involved.  If those risks are not dispersed, and therefore an enterprise bears the
majority of the risks or rewards related to the variable interest entity, it would consolidate that variable
interest entity.  This Interpretation also provides guidance related to the initial and subsequent measurement
of assets, liabilities, and non-controlling interests of newly consolidated variable interest entities and requires
disclosures for both the primary beneficiary of a variable interest entity and other beneficiaries of the entity.
This interpretation replaces in its entirety FASB Interpretation No. 46, *Consolidation of Variable Interest
Entities,*that was issued by the FASB in January 2003.  The implementation of FIN 46R was required during
the Company's first quarter of 2004.  The implementation had no effect on the Company's financial
statements.

In December of 2004, the FASB issued FASB Statement No. 153, *Exchanges of Nonmonetary
Assets-An Amendment of APB Opinion No. 29*("Statement 153").  Statement 153 amends APB Opinion No.
29, *Accounting for Non-monetary Transactions*, that was issued in 1973.  The amendments made by
Statement 153 are based on the principle that exchanges of non-monetary assets should be measured based
on the fair value of the assets exchanged.  Further, the amendments eliminate the narrow exception for non-monetary exchanges of similar productive assets and replace it with a broader exception for exchanges of
non-monetary assets that do not have "commercial substance".  Previously, Opinion 29 required that he
accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in
the same or similar productive asset should be based on the recorded amount of the asset relinquished.  The
provisions in Statement 153 are effective for non-monetary asset exchanges occurring in fiscal periods
beginning after June 15, 2005.  Early application is permitted and companies must apply the standard
prospectively.  The Company plans to adopt Statement 153 beginning July 1, 2005.  The future effect of
Statement 153 on the Company's financial statements will depend on whether the Company enters into
certain non-monetary transactions.  The Company, however, does not expect the adoption of Statement 153
to have a significant impact on its financial statements.

In December 2004, the FASB issued SFAS No. 123(R), *Share-Based Payment.*SFAS No. 123(R)
replaces SFAS No. 123, *Accounting for Stock-Based Compensation*, and supersedes APB Opinion No. 25,
*Accounting for Stock Issued to Employees*.  SFAS No. 123(R) requires compensation costs related to share-based payment transactions to be recognized in the financial statements over the period that an employee
provides service in exchange for the award.  SFAS No. 123(R) is effective for periods beginning after June
15, 2005.  The Company does not expect the adoption of this pronouncement to have a significant impact
on the Company's financial statements.

******NOTE 3.  RELATIONSHIP WITH NATIONAL HEALTHCARE CORPORATION**

*Transfer of Assets -*On December 31, 1997, we issued 8,237,423 shares of NHR common stock and
1,310,194 units of NHR/OP, L.P. to NHC in exchange for certain assets including mortgage notes receivable
(book value of $94,439,000) and the real property of 16 long-term care centers, six assisted living facilities
and one retirement center (total book value of $144,615,000) and related liabilities (total book value of
$86,414,000).  NHC simultaneously distributed the common stock of NHR and NHR/OP, L.P. units to the
NHC unitholders.

*Leases -*Concurrent with NHC's conveyance of the real property to NHR, NHR leased to NHC each
of the facilities.  Each lease is for an initial term expiring December 31, 2007, with two additional five year
renewal terms at the option of NHC, assuming no defaults.  We account for the leases as operating leases.

During the remaining initial term and each renewal term, NHC is obligated to pay NHR annual base
rent on the facilities.  In addition to base rent, in each quarter of each year after 1999, NHC is obligated to
pay percentage rent to NHR equal to 3% of the amount by which gross revenues of each NHR leased health
care facility in such later quarter exceed the gross revenues of such health care facility in the applicable
quarter of 1999.  During 2004, 2003 and 2002, we recognized $1,295,000, $1,128,000, and $805,000 of
percentage rent from NHC.  Each lease with NHR is a "triple net lease" under which NHC is responsible for
paying all taxes, utilities, insurance premium costs, repairs and other charges relating to the operation of the
facilities.  NHC is obligated at its expense to maintain adequate insurance on the facilities' assets.  Total
rental income from NHC (including the nine Florida healthcare facilities referred to below) was $17,255,000,
$17,088,000, and $16,822,000 during 2004, 2003, and 2002, respectively.  During 2004, 2003 and 2002, rent
derived from the nine Florida facilities totaled approximately $3,366,000 per year.

On October 1, 2000, NHC terminated its individual leases on nine Florida long term care facilities.
However, NHC remains obligated under its master lease agreement and continues to remain obligated to
make the lease payments to NHR on the nine Florida long term care facilities.  Also effective October 1,
2000, the facilities were leased by NHR under a five year term to nine separate limited liability corporations,
none of which are owned or operated by NHC.  Lease payments to NHR from the new lessees offset NHC's
lease obligations pursuant to the master operating lease.  Since October 1, 2000, the nine separate limited
liability corporations have made all required lease payments to NHR, and NHC has not been required to
make any lease payments with respect to those nine properties.

NHC has a right of first refusal with us to purchase any of the properties transferred from NHC
should we receive an offer from an unrelated party during the term of the lease or up to 180 days after
termination of the related lease.

At December 31, 2004, the approximate future minimum base rent commitments (which exclude
percentage rents) to be received by us on non-cancelable operating leases (including the nine Florida
healthcare facilities referred to above) are as follows:



|2005       | 15,405,000
|---------- | ----------
|2006       | 15,405,000
|2007       | 15,405,000
|2008       | --        
|Thereafter | --        

*Advisory Agreement -*We have entered into an Advisory Agreement with NHC whereby services
related to investment activities and day-to-day management and operations are provided to us by NHC as
Advisor.  The Advisor is subject to the supervision of and policies established by our Board of Directors.The Advisory Agreement expired December 31, 2003 and thereafter is renewed from year to year unless
earlier terminated. Either party may terminate the Advisory Agreement at any time on 90 days written notice,
and we may terminate the Advisory Agreement for cause at any time.

For its services under the Advisory Agreement, NHC is entitled to annual compensation of the
greater of 2% of our gross consolidated revenues or the actual expenses incurred by NHC.  During 2004,
2003, and 2002, our compensation to NHC under the Advisory Agreement was $411,000, $476,000, and
$493,000, respectively.

**The NHR Advisory Agreement provides that we will not, without the prior approval of NHI, be
actively or passively engaged in the pursuit of additional investment opportunities until the earlier of the
termination of the Advisory Agreement or such time as NHC is no longer actively engaged as investment
advisor to NHI.  NHC announced on November 1, 2004 that it is no longer the advisor to NHI.  Therefore,
the restriction on NHR's investment activities has been removed.

*Borrowing from NHC* - As discussed in Note 5, effective December 31, 2003, NHR exercised its
right to repurchase three mortgage notes receivable from NHI.  In order to exercise its repurchase right, on
December 31, 2003, NHR borrowed $14,922,000 from NHC in the form of a promissory note payable to
NHC.  While outstanding, the $14,922,000 promissory note payable to NHC bore interest at 30-day LIBOR
plus 2.25%  with a floor of 4.00%.  The promissory note payable to NHC was repaid in full in February
2004.

**NOTE 4.  REAL ESTATE PROPERTIES**

The following table summarizes our real estate properties by type of facility and by state as of
December 31, 2004 and 2003:

|**December 31, 2004**            |            |          |               |             
|-------------------------------- | ---------- | -------- | ------------- | ------------
|                                 | Number     |          |               |             
|                                 | of         |          | Buildings and | Accumulated 
|Facility Type and State          | Facilities | Land     | Improvements  | Depreciation
|*(dollar amounts in thousands)*  |            |          |               |             
|**Long-Term Care Centers:**      |            |          |               |             
|Florida                          | 6          | $  5,735 | $  40,820     | $14,057     
|Missouri                         | 1          | 123      | 3,728         | 1,334       
|South Carolina                   | 7          | 6,145    | 36,215        | 13,065      
|Tennessee                        | 2          | 874      | 11,474        | 2,904       
|Total Long-Term Care Centers     | 16         | 12,877   | 92,237        | 31,360      
|                                 |            |          |               |             
|**Assisted Living Facilities:**  |            |          |               |             
|Alabama                          | 1          | 268      | 5,468         | 2,035       
|Florida                          | 3          | 3,414    | 21,698        | 7,191       
|Tennessee                        | 2          | 886      | 13,434        | 3,394       
|Total Assisted Living Facilities | 6          | 4,568    | 40,600        | 12,620      
|                                 |            |          |               |             
|**Independent Living Centers:**  |            |          |               |             
|Tennessee                        | 1          | 2,019    | 14,931        | 2,326       
|Total Independent Living Centers | 1          | 2,019    | 14,931        | 2,326       
|Total                            | 23         | $19,464  | $147,768      | $46,306     

|**December 31, 2003**            |            |          |               |             
|-------------------------------- | ---------- | -------- | ------------- | ------------
|                                 | Number     |          |               |             
|                                 | of         |          | Buildings and | Accumulated 
|Facility Type and State          | Facilities | Land     | Improvements  | Depreciation
|*(dollar amounts in thousands)*  |            |          |               |             
|**Long-Term Care Centers:**      |            |          |               |             
|Florida                          | 6          | $  5,775 | $  40,820     | $12,250     
|Missouri                         | 1          | 123      | 3,728         | 1,163       
|South Carolina                   | 7          | 6,145    | 36,215        | 11,569      
|Tennessee                        | 2          | 874      | 11,474        | 2,513       
|Total Long-Term Care Centers     | 16         | 12,917   | 92,237        | 27,495      
|                                 |            |          |               |             
|**Assisted Living Facilities:**  |            |          |               |             
|Alabama                          | 1          | 268      | 5,468         | 1,769       
|Florida                          | 3          | 3,414    | 21,698        | 6,202       
|Tennessee                        | 2          | 886      | 13,434        | 2,932       
|Total Assisted Living Facilities | 6          | 4,568    | 40,600        | 10,903      
|                                 |            |          |               |             
|**Independent Living Centers:**  |            |          |               |             
|Tennessee                        | 1          | 2,019    | 14,930        | 1,942       
|Total Independent Living Centers | 1          | 2,019    | 14,930        | 1,942       
|Total                            | 23         | $19,504  | $147,767      | $40,340     

*Indiana Long-Term Care Centers*

During 2000, we leased three Indiana long-term care centers to Health Services Management of
Indiana, LLC (HSMI) under a master lease.  The lease was for an initial 12-month term with renewal options
at HSMI's option.  We accounted for the lease as an operating lease.  The lease also provided HSMI with
an option to purchase the facilities.

Effective January 1, 2001, we sold all of the real estate and equipment of the three long-term health
care centers under lease to HSMI.  Consideration for the sale and assumption of the $1,630,000 first
mortgage and the properties was in the form of new mortgage notes in the total amount of $12,029,000.  As
the result of our financing 100% of the sale through October 31, 2003, we accounted for this transaction
under the deposit method in accordance with the provisions of Statement of Financial Accounting Standards
No. 66, "Accounting for Sales of Real Estate" (SFAS 66).  Consistent with the deposit method, we did not
initially record the sale of the assets and continued to record depreciation expense each period. Cash received
from the buyer (which totaled $3,092,000 as of October 31, 2003) was reported as a deposit on real estate
properties sold until the down payment and continuing investment criteria of SFAS 66 were met.

During 2002, we concluded that based on certain 2002 events and our resulting SFAS 144
impairment analyses, these real estate properties required write-downs in the net book value of $4,288,000.
Write-downs of $1,000,000 and $3,288,000 were recorded during the first and fourth quarters of 2002,
respectively.

Effective November 1, 2003, the initial and continuing investment criteria for SFAS 66 were met.
Therefore, the sale of the real estate properties was recognized, resulting in a gain on the sale of real estate
of approximately $1,149,000.  In 2004 we received additional sale proceeds of approximately $105,000
resulting in a gain on the sale of real estate of approximately $105,000.  The sale of the assets resulted in
recording a mortgage note receivable of approximately $3,740,000.

******NOTE 5.  MORTGAGE AND OTHER NOTES RECEIVABLE**

The following is a summary of the terms and amounts of mortgage and other notes receivable at
December 31, 2004 and 2003:



|Final        |                                             | Interest Rate | Principal Amount at
|------------ | ------------------------------------------- | ------------- | -------------------
|Payment Date | Payment Terms for 2004                      | at 12/31/04   | 12/31/04           
|             |                                             |               | *(in thousands*)   
|2004-2006    | Collected in full in 2004                   | --            | $     --           
|             |                                             |               |                    
|2004-2016    | Collected in full in 2004                   | --            | --                 
|             |                                             |               |                    
|2004-2016    | Collected in full in 2004                   | --            | --                 
|             |                                             |               |                    
|2016         | Monthly payments of $43,318, which          |               |                    
|             | includes interest at the prime rate plus 2% | 7.25%         | 4,689              
|             |                                             |               |                    
|2014         | Monthly payments of $38,250, which          |               |                    
|             | includes interest at 8.5%                   | 8.50%         | 4,332              
|             |                                             |               |                    
|2016         | Monthly payments of $7,845, which
includes  |               |                    
|             | interest at the prime rate plus 2%          | 7.25%         | 566                
|             |                                             |               |                    
|2014         | Monthly payments of $5,396, which
includes  |               |                    
|             | interest at 9.0%                            | 9.00%         | 92                 
|             |                                             |               |                    
|2005         | Monthly payments of $72,800, which          |               |                    
|             | includes interest at 10.5% plus balance     |               |                    
|             | due December 31, 2005                       | 10.50%        | 2,088              
|             |                                             |               |                    
|2005         | Monthly payments of $10,400, which          |               |                    
|             | includes interest at 10.5% plus balance     |               |                    
|             | due December 31, 2005                       | 10.50%        | 434                
|             |                                             |               |                    
|2005         | Monthly payments of $46,800, which          |               |                    
|             | includes interest at 10.5% plus balance     |               |                    
|             | due December 31, 2005                       | 10.50%        | 1,352              
|             |                                             |               |                    
|             | Weighted Average Interest and Total         | 8.69%         | $13,553            
|             |                                             |               |                    

Florida Convalescent Centers, Inc.

At the end of 2003, approximately $30,628,000 of our mortgage and other notes receivable were due
from Florida Convalescent Centers, Inc. or affiliates (FCC) of Sarasota, Florida.  The notes bore interest at
10.25% and the majority of the notes were scheduled to mature October 31, 2004.  Approximately
$21,982,000 and $30,384,000 of FCC notes were prepaid to us in November 2003 and February 2004,
respectively.  The proceeds from the prepayments were used to pay down our credit facility.

*Transfer of Notes Receivable to NHI*

Effective December 31, 2002, we transferred three mortgage notes receivable secured by three long-term care facilities in Florida with total principal balances outstanding and a total carrying amount of
$15,717,000 to NHI at par.  We received cash from NHI equal to our carrying amount.  As the result of
certain repurchase and put options included in the transfer agreement, consistent with the provisions of
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" (SFAS 140), we accounted for the transfer of notes receivable
to NHI as a borrowing rather than as a sale of the notes.  Effective December 31, 2003, NHR exercised its
right to repurchase the notes at par for approximately $14,937,000 from NHI.  Consequently, the borrowing
from NHI is not recognized on our consolidated balance sheet as of December 31, 2003.  As discussed in
Note 3, NHR borrowed $14,922,000 from NHC in order to repurchase the notes from NHI.

**NOTE 6.  INVESTMENT IN MARKETABLE SECURITIES**

On September 17, 2002, we purchased 225,000 shares of NHI common stock for approximately
$3,483,000.  At December 31, 2004, the fair value of the shares is $6,565,000.  This investment in
marketable securities is classified as an investment in securities available for sale. Unrealized gains and
losses on available for sale securities are recorded in stockholders' equity in accordance with SFAS No. 115.
We recognized $416,000, and $383,000 of dividend income on our investments in NHI common stock during
2004 and 2003, respectively.

**NOTE 7.  DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS**

To meet the reporting requirements of Statement of Financial Accounting Standards No. 107,
"Disclosures About Fair Value of Financial Instruments", we calculate the fair value of financial instruments
using discounted cash flow techniques.  At December 31, 2004 and 2003, there were no material differences
between the carrying amounts and fair values of our financial instruments.

******NOTE 8. DEBT**

Debt consists of the following:

|                                     | Weighted Average | Final      | Principal Amount
|------------------------------------ | ---------------- | ---------- | ----------------
|*(dollar amounts in thousands*)      | Interest Rate    | Maturities | 2004            
|                                     |                  |            |                 
|Term loan, principal and interest    | Variable         |            |                 
|payable quarterly                    | 3.8%             | 2007       | $16,150         
|                                     |                  |            |                 
|Term loan, principal and interest    |                  |            |                 
|payable quarterly, repaid in 2004    | --               | --         | --              
|                                     |                  |            |                 
|Borrowing from NHC, interest payable |                  |            |                 
|monthly, principal due at maturity,  |                  |            |                 
|repaid in 2004                       | --               | --         | --              
|                                     |                  |            |                 
|Senior secured notes due to NHC,     |                  |            |                 
|principal and interest payable       |                  |            |                 
|semiannually, repaid in 2004         | --               | --         | --              
|                                     |                  |            |                 
|                                     |                  |            | $16,150         



The aggregate principal maturities of all debt for the five years subsequent to December 31, 2004
are as follows:



|2005       | $ 1,700,000
|---------- | -----------
|2006       | 1,700,000  
|2007       | 12,750,000 
|Thereafter | --         

In February 2004, we repaid our bank term loan (approximately $31,175,000).  Proceeds from the
prepayment of the FCC notes receivable and cash on hand were used to repay the term.

In May 2004, we borrowed $17,000,000 ($16,150,000 outstanding at December 31, 2004) under a
bank term loan with an interest rate of 30 day LIBOR plus 1.5% (3.8% at December 31, 2004) and a three
year term.  The proceeds of the loan were used to repay a note payable to NHC in the approximate amount
of $14,922,000 (interest rate of LIBOR + 2.25% with a floor of 4%) and a senior secured note payable to
NHC in the approximate amount of $1,723,000 (interest rate of 8.4%).  The new term note payable requires
monthly interest payments plus quarterly principal payments in the amount of $425,000 until maturity in
May 14, 2007 at which time the entire outstanding principal balance is due.

Our loan agreements require maintenance of specified operating ratios and stockholders' equity by
NHR.  As of December 31, 2004, we have met all such covenants or obtained appropriate waivers.

**NOTE 9.  COMMITMENTS, CONTINGENCIES AND GUARANTEES**

At December 31, 1997, in order to protect our REIT status, certain NHC unitholders received limited
partnership units of NHR/OP, L.P. rather than shares of common stock of NHR.  As a result of certain
unitholders' involuntary acceptance of NHR/OP, L.P. partnership units to benefit all other unitholders, we
have indemnified those certain unitholders for any tax consequence resulting from any involuntary
conversion of NHR/OP, L.P. partnership units into shares of NHR common stock.  The indemnification
expires at such time as the NHR/OP, L.P. unitholders are in a position to voluntarily convert their partnership
units into NHR common stock on a tax free basis without violating applicable REIT requirements.

We believe that we have operated our business so as to quality as a REIT under Sections 856 through
860 of the Internal Code of 1986, as amended (the "Code") and we intend to continue to operate in such a
manner, but no assurance can be given that we will be able to qualify at all times.  If we qualify as a REIT,
we will generally not be subject to federal corporate income taxes on our net income that is currently
distributed to stockholders.  This treatment substantially eliminates the "double taxation" (at the corporate
and stockholder levels) that typically applies to corporate dividends.  Our failure to continue to quality under
the applicable REIT qualification rules and regulations would cause use to owe state and federal income
taxes and would have a material adverse impact on our financial position, results of operations and cash
flows.

NHC HealthCare/Nashville, LLC, a wholly owned subsidiary of our investment advisor, NHC, is
the operator of a long-term care facility in Nashville, Tennessee which sustained extensive fire damage on
September 25, 2003.  NHC reported on October 19, 2004 that it has settled 28 of the 32 lawsuits filed against
NHC as a result of the fire.  Four suits remain to be resolved as of that date.  NHR has no ownership or
involvement in the damaged facility.

Although NHR does not own the damaged facility, NHR currently owns or leases 14 facilities to
NHC subsidiaries.  The leases require the operator to maintain replacement cost property and casualty
insurance, including business interruption coverage, with NHR being the loss payee.  NHR is also an
additional named insured on a professional and general liability policy issued by a subsidiary of NHC.
Under the terms of the leases, the operator is required to maintain limits of not less than $1,000,000 per
occurrence and $1,000,000 in the aggregate.  NHR is advised that NHC's current policy limits exceed these
requirements.  NHC and its subsidiaries are the largest group of tenants of NHR and their potential liability
from this incident and the impact, if any, on NHR cannot be determined at this time.

******NOTE 10.  STOCK OPTION PLAN**

Our stockholders have approved the 1997 Stock Option and Appreciation Rights Plan under which
options to purchase shares of our common stock are available for grant to our consultants, advisors, directors
and employees at a price no less than the market value of the stock on the date the option is granted.  The
vesting period and term of the options is six years.  The following table summarizes option activity:

|                              |           | Weighted      
|----------------------------- | --------- | --------------
|                              | Number    | Average       
|                              | of Shares | Exercise Price
|Outstanding December 31, 2000 | 397,000   | $  8.42       
|Options granted               | 15,000    | 10.74         
|Outstanding December 31, 2001 | 412,000   | 8.51          
|Options granted               | 10,000    | 16.95         
|Outstanding December 31, 2002 | 422,000   | 8.71          
|Options granted               | 15,000    | 14.80         
|Options exercised             | (25,000)  | 11.67         
|Outstanding December 31, 2003 | 412,000   | 8.75          
|Options granted               | 20,000    | 16.50         
|Options exercised             | (108,520) | 8.52          
|Options forfeited             | (20,000)  | 11.42         
|Outstanding December 31, 2004 | 303,480   | 9.17          
|                              |           |               
|Options exercisable           | 40,000    | $14.37        

At December 31, 2004, 40,000 options outstanding are exercisable.  Exercise prices on the options
range from $6.50 to $16.95.  The weighted average contractual life of options outstanding at December 31,
2004 is 1.13 years.  We have reserved 500,000 shares of common stock for issuance under the stock option
plan.  At December 31, 2004, 36,802 shares of common stock may be issued under the stock option plan.
Compensation cost for stock-based employee compensation awards is insignificant for the periods presented.

**NOTE 11.  EARNINGS PER SHARE**

We have calculated earnings per share in accordance with Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (SFAS 128).  Basic earnings per share is based on net income as
reported in the consolidated statements of income and the weighted average number of common shares
outstanding during the year.

Diluted earnings per share assumes the exercise of stock options into shares of NHR common stock
using the treasury stock method.  For purposes of calculating diluted earnings per share, there is no
adjustment to net income as reported in the consolidated statements of income.****

**NOTE 12.  LIMITS ON COMMON STOCK OWNERSHIP**

Our Articles of Incorporation limit the percentage of ownership that any person may have in our
outstanding common stock to 9.8% of the aggregate of the outstanding stock.  This limit is necessary in order
to reduce the possibility of our failing to meet the stock ownership requirements for REIT qualification under
the Internal Revenue Code of 1986, as amended.

**NOTE 13.  COMMON STOCK DIVIDENDS**

Actual and expected dividend payments to our common stockholders are characterized in

the following manner for tax purposes in 2004:

|Dividend         | Taxable as      | Non-Taxable       |        
|---------------- | --------------- | ----------------- | -------
|Payment Date     | Ordinary Income | Return of Capital | Totals 
|                 |                 |                   |        
|April 15, 2004   | $ .3325         | $     --          | $ .3325
|July 15, 2004    | .3325           | --                | .3325  
|October 15, 2004 | .3325           | --                | .3325  
|January 15, 2005 | .4125           | --                | .4125  
|                 | $1.4100         | $     --          | $1.4100

******SELECTED QUARTERLY FINANCIAL DATA**

(Unaudited, in thousands, except per share amount)

The following table sets forth selected quarterly financial data for the two most recent fiscal years.

|                           | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter
|-------------------------- | ----------- | ----------- | ----------- | -----------
|                           |             |             |             |            
|2004                       |             |             |             |            
|                           |             |             |             |            
|Net Revenues               | $5,512      | $4,989      | $4,998      | $5,148     
|Net Income                 | 3,104       | 2,570       | 2,825       | 2,936      
|Basic Earnings Per Share   | .32         | .27         | .29         | .31        
|Diluted Earnings Per Share | .32         | .26         | .29         | .30        
|                           |             |             |             |            
|2003                       |             |             |             |            
|                           |             |             |             |            
|Net Revenues               | $6,046      | $5,934      | $5,930      | $7,045     
|Net Income                 | 2,741       | 2,599       | 2,636       | 3,869      
|Basic Earnings Per Share   | .29         | .27         | .28         | .40        
|Diluted Earnings Per Share | .28         | .27         | .27         | .40        

*****Significant fourth quarter event -*During the fourth quarter of 2003, the Company recognized a gain
on the sale of real estate of approximately $1,149,000.

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

On June 15, 2004, we announced the resignation of Ernst & Young LLP (EY) as our auditors
effective upon completion of their review of the interim financial information for the second quarter of 2004
and filing of the Company's quarterly report on Form 10-Q for the quarter ending June 30, 2004.  NHR
subsequently announced on September 9, 2004 the appointment of BDO Seidman, LLP (BDO) as its new
independent accountants.

During NHR's fiscal years ended December 31, 2003 and 2002 and from January 1, 2004 through
September 9, 2004, there were no disagreements between NHR and EY on any matter of accounting
principles of practices, financial statement disclosure, or auditing scope or procedure, which disagreements,
if not resolved to EY's satisfaction would have caused them to make reference to the subject matter of the
disagreement in connection with their reports.  None of the reportable events described under Item
304(a)(1)(v) of Regulation S-K occurred within thefiscal years ended December 31, 2003 and 2002 and from
January 1, 2004 through September 9, 2004.

The audit reports of EY on the consolidated financial statements of NHR and subsidiaries as of and
for thefiscal years ended December 31, 2003 and 2002 and from January 1, 2004 through September 9, 2004did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to
uncertainty, audit scope, or accounting principles.

During NHR'sfiscal years ended December 31, 2003 and 2002 and from January 1, 2004 through
September 9, 2004,NHR did not consult with BDO regarding any of the matters or events set forth in Item
304(a)(2)(i) and (ii) of Regulation S-K.

**Item 9A.  Controls and Procedures**

**Evaluation of Disclosure Controls and Procedures -**Based on their evaluation as of December
31, 2004, the president and principal accounting officer of the Company have concluded that the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended) were sufficiently effective to ensure that the information required to be
disclosed by us in this Annual Report on Form 10-K was recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and instructions for Form 10-K.

**Management's Report on Internal Control Over Financial Reporting** **-** We are responsible for
establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f)
under the Securities Exchange Act of 1934, as amended).   We assessed the effectiveness of our internal
control over financial reporting as of December 31, 2004.  In making this assessment, our management used
the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO")
in Internal Control-Integrated Framework.  We have concluded that, as of December 31, 2004, our internal
control over financial reporting is effective based on these criteria.  Our independent registered public
accounting firm, BDO Seidman, LLP, has issued an audit report on our assessment of our internal control
over financial reporting, which is included herein.

**Changes in Internal Controls**- There were no changes in our internal controls over financial
reporting during the quarter ended December 31, 2004 that have materially affected, or are reasonably likely
to materially affect our internal controls over financial reporting.

Our management, including our President and Principal Accounting Officer, does not expect that
our disclosure controls and procedures or our internal controls will prevent all error and all fraud.  A control
system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met.  Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefit of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, with NHR have been detected.

**Item 9B.  Other Information**

None.

**PART III**

**Item 10.  Directors and Executive Officers of Registrant**

The information in our definitive 2005 proxy statement set forth under the caption *Directors and
Executive Officers of Registrant*is hereby incorporated by reference. ****

**Item 11.  Executive Compensation**

The information in our definitive 2005 proxy statement set forth under the caption *Compensation
of Directors and Executive Officers, Equity Compensation Plan Information, and Certain Transactions*is
hereby incorporated by reference.

**Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters**

The information in our definitive 2005 proxy statement set forth under the caption *Compensation
of Directors and Executive Officers, Equity Compensation Plan Information, and Certain Transactions*is
hereby incorporated by reference.

******Item 13.  Certain Relationships and Related Transactions**

None.

**Item 14.  Principal Accountant Fees and Services**

The information in our definitive 2005 proxy statement set forth under the caption*Committee
Reports*is hereby incorporated by reference.

**PART IV**

**Item 15.  Exhibits and Financial Statement Schedules**

a)	(1)	Financial Statements:

The Financial Statements are included in Item 8 and are filed as part of this report.

(2)	Financial Statement Schedules:

The Financial Statement Schedules and Reports of Independent Registered Public Accounting Firm
on Financial Statement Schedules are listed in Exhibit 13.

(3)	Exhibits:

Reference is made to the Exhibit Index of this Form 10-K Annual Report.

******SIGNATURES**



Pursuant to the requirements 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 the undersigned, thereunto duly
authorized, in the city of Murfreesboro, State of Tennessee, on the 1st day of March, 2005.

|
|
|
|
|
|
|
|
|
|

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed
on the dates indicated by the following persons in the capacities indicated.

|Signature                  | Title                           | Date         
|-------------------------- | ------------------------------- | -------------
|                           |                                 |              
|/s/ W. Andrew Adams        | Chairman                        | March 1, 2005
|W. Andrew Adams            |                                 |              
|                           |                                 |              
|/s/ Donald K. Daniel       | Sr. Vice President & Controller | March 1, 2005
|Donald K. Daniel           | Principal Accounting Officer    |              
|                           |                                 |              
|/s/ James Paul Abernathy   | Director                        | March 1, 2005
|James Paul Abernathy       |                                 |              
|                           |                                 |              
|                           |                                 |              
|/s/ Ernest G. Burgess, III | Director                        | March 1, 2005
|Ernest G. Burgess, III     |                                 |              
|                           |                                 |              
|                           |                                 |              
|/s/ Joel H. Jobe           | Director                        | March 1, 2005
|Joel H. Jobe               |                                 |              
|                           |                                 |              
|                           |                                 |              
|/s/ Joseph M. Swanson      | Director                        | March 1, 2005
|Joseph M. Swanson          |                                 |              
|                           |                                 |              

**EXHIBIT INDEX**



|Exhibit No.                                                                  | Description                                                                 
|---------------------------------------------------------------------------- | ----------------------------------------------------------------------------
|                                                                             |                                                                             
|2.1                                                                          | Plan of Restructure (incorporated by reference to Exhibit 2.1 to the        
|                                                                             | Registrant's registration statement No. 333-37173 on Form S-4).             
|                                                                            
|2.2                                                                          | Agreement of Merger (incorporated by reference to Exhibit 2.2 to the        
|                                                                             | Registrant's registration statement No. 333-37173 on Form S-4).             
|                                                                            
|3.1                                                                          | Articles of Incorporation of National Health Realty, Inc. (incorporated by  
|                                                                             | reference to Exhibit 3.1 to the Registrant's registration statement No. 333-
|                                                                             | 37173 on Form S-4).                                                         
|                                                                            
|3.2                                                                          | Bylaws of National Health Realty, Inc. (incorporated by reference to Exhibit
|                                                                             | 3.2 to the Registrant's registration statement No. 333-37173 on Form S-4).  
|                                                                            
|3.3                                                                          | Limited Partnership Agreement of NHR/OP, L.P.(incorporated by reference     
|                                                                             | to Exhibit 3.3 to the Registrant's registration statement No. 333-37173 on  
|                                                                             | Form S-4).                                                                  
|                                                                            
|10.1                                                                         | Master Agreement of Lease effective as of January 1, 1998 by and among      
|                                                                             | National Health Realty, Inc., NHR/OP, L.P. and National HealthCare          
|                                                                             | Corporation (incorporated by reference to Exhibit 10.1 to the Registrant's  
|                                                                             | registration statement No. 333-37173 on Form S-4).                          
|                                                                            
|10.2                                                                         | Advisory, Administrative Services and Facilities Agreement effective as of  
|                                                                             | January 1, 1998 between National Health Realty, Inc., NHR/OP, L.P. and      
|                                                                             | National HealthCare Corporation (incorporated by reference to Exhibit 10.2  
|                                                                             | to the Registrant's registration statement No. 333-37173 on Form S-4)       
|                                                                            
|10.3.2                                                                       | Form of National Health Realty, Inc. 1997 Stock Option and Stock            
|Appreciation Rights Plan (incorporated by reference to Exhibit 10.3.2 to the
|Registrant's registration statement No. 333-37173 on Form S-4)              
|                                                                            
|13                                                                           | Financial Statement Schedules                                               
|                                                                            
|16                                                                           | Letter Regarding Changes in Certifying Accountant                           
|                                                                             |                                                                             
|21                                                                           | Subsidiaries of the Registrant                                              
|                                                                            
|23.1                                                                         | Consent of BDO Seidman, LLP                                                 
|                                                                             |                                                                             
|23.2                                                                         | Consent of Ernst & Young LLP                                                
|                                                                             |                                                                             
|31                                                                           | Section 302 CEO/CFO Certification                                           
|                                                                             |                                                                             
|32                                                                           | Section 906 CEO/CFO Certification                                           

**EXHIBIT 13**

**NATIONAL HEALTH REALTY, INC.**

**INDEX TO FINANCIAL STATEMENT SCHEDULES**

Financial Statement Schedules

Report of Independent Registered Public Accounting Firm on Financial Statement Schedules

Report of Independent Registered Public Accounting Firm on Financial Statement Schedules

Schedule III		Real Estate and Accumulated Depreciation

Schedule IV		Mortgage Loans on Real Estate

All other schedules are not submitted because they are not applicable or not required or because
the required information is included in the financial statements or notes thereto.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ON FINANCIAL STATEMENT SCHEDULES

Board of Directors and Stockholders

National Health Realty, Inc.

Murfreesboro, Tennessee

The audit referred to in our report dated February 18, 2005 relating to the consolidated financial
statements of National Health Realty, Inc., which is contained in Item 8 of this Form 10-K included the
audit of the financial statement schedules listed in the accompanying index.  These financial statement
schedules are the responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statement schedules based upon our audit.

In our opinion, such financial statement schedules present fairly, in all material respects, the
information set forth therein.

/s/ BDO SEIDMAN, LLP

Memphis, Tennessee

February 18, 2005

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ON FINANCIAL STATEMENT SCHEDULES

To the Board of Directors and Stockholders of National Health Realty, Inc.:

We have audited the consolidated financial statements of National Health Realty, Inc. and
Subsidiaries as of December 31, 2003, and for the years ended December 31, 2003 and 2002, and have issued
our report thereon dated January 23, 2004 (included elsewhere in this Annual Report on Form 10-K).  Our
audits also included the 2003 and 2002 financial statement schedules listed in Exhibit 13 of this Annual
Report on Form 10-K.  These schedules are the responsibility of the Company's management.  Our
responsibility is to express an opinion based on our audits.

In our opinion, the 2003 and 2002 financial statement schedules referred to above, when considered
in relation to the basic financial statements taken as a whole, present fairly in all material respects the
information set forth therein.

/s/ ERNST & YOUNG LLP

Nashville, Tennessee

January 23, 2004



|NATIONAL HEALTH REALTY, INC.                            
|--------------------------------------------------------
|SCHEDULE III  - REAL ESTATE AND ACCUMULATED DEPRECIATION
|DECEMBER 31, 2004                                       
|                                                        
|Column A                                                
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|Description                                             
|Health Care Centers (6)                                 
|Florida                                                 
|                                                        
|Health Care Centers (1)                                 
|Missouri                                                
|                                                        
|Health Care Centers (7)                                 
|South Carolina                                          
|                                                        
|Health Care Centers (2)                                 
|Tennessee                                               
|                                                        
|Assisted Living Facilities (1)                          
|Alabama                                                 
|                                                        
|Assisted Living Facilities (3)                          
|Florida                                                 
|                                                        
|Assisted Living Facilities (2)                          
|Tennessee                                               
|                                                        
|Retirement Centers (1)                                  
|Tennessee                                               
|                                                        
|                                                        



(A)    The aggregate cost for federal income tax purposes is approximately $172,600,000.

(B)    Depreciation is calculated using depreciation lives up to 40 years for all completed facilities.

|NATIONAL HEALTH REALTY, INC.                               
|-----------------------------------------------------------
|SCHEDULE III  - REAL ESTATE AND ACCUMULATED DEPRECIATION   
|FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002       
|                                                           
|                                                           
|                                                           
|                                                           
|Investment in Real Estate:                                 
|Balance at beginning of period                             
|Recognition of sale of assets for mortgage notes receivable
|Cost of real estate sold                                   
|Write-down of net book value for impairment                
|Balance at end of year                                     
|                                                           
|Accumulated Depreciation:                                  
|Balance at beginning of period                             
|Addition charged to costs and expenses                     
|Recognition of sale of assets for mortgage notes receivable
|Balance at end of year                                     



|NATIONAL HEALTH REALTY, INC.                
|--------------------------------------------
|SCHEDULE IV  - MORTGAGE LOANS ON REAL ESTATE
|DECEMBER 31, 2004                           
|                                            
|Column A                                    
|                                            
|                                            
|                                            
|                                            
|Description                                 
|                                            
|LONG-TERM CARE FACILITIES:                  
|First Mortgage Loans:                       
|Brownsburg, Castleton & Plainfield,         
|Indiana (C)                                 
|                                            
|Sarasota, Florida(A)                        
|                                            
|Ocoee, Florida (B)                          
|                                            
|                                            

|(A) | Balloon payments of approximately $1,578,000 due at maturity.
|--- | -------------------------------------------------------------
|(B) | Balloon payment of approximately $2,131,000 due at maturity. 
|(C) | Balloon payments of approximately $3,874,000 due at maturity.
|    |                                                              
|(1) | See Note 5 of Notes to Consolidated Financial Statements.    
|   

|NATIONAL HEALTH REALTY, INC.                           
|-------------------------------------------------------
|SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE (Continued)
|FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002   
|                                                       
|                                                       
|                                                       
|                                                       
|                                                       
|Reconciliation of mortgage loans:                      
|Balance at beginning of period                         
|Additions:                                             
|Sale of assets for mortgage loans                      
|                                                       
|Deductions during period:                              
|Collection of principal                                
|                                                       
|Balance at end of period                               



**EXHIBIT 16**

**LETTER REGARDING CHANGES IN CERTIFYING ACCOUNTANT**

August 16, 2004

Securities and Exchange Commission

450 Fifth Street, NW

Washington, DC 20549

Gentlemen:

We have read Item 4 of Form 8-K dated August 16, 2004, of National Health Realty, Inc. and are in
agreement with the statements contained in the first, second, fourth, fifth and sixth paragraphs therein.
We have no basis to agree or disagree with other statements of the registrant contained therein.

/s/ Ernst & Young LLP

**EXHIBIT 21**

**NATIONAL HEALTH REALTY, INC.**

**SUBSIDIARY OF NATIONAL HEALTH REALTY, INC.**

|Subsidiary         | State of Organization
|------------------ | ---------------------
|                  
|NHR/OP, L.P.       | Delaware             
|                  
|NHR/Delaware, Inc. | Delaware             

**EXHIBIT 23.1**

**CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

National Health Realty, Inc.

Murfreesboro, Tennessee

We hereby consent to the incorporation by reference in the Registration Statements (Form S-3 No.
333-82737 and Form S-8 No. 333-61699) of National Health Realty, Inc. of our reports dated February 18,
2005, relating to the consolidated financial statements and financial statement schedules which appear in this
Form 10-K.

/s/BDO Seidman, LLP

Memphis, Tennessee

March 1, 2005

**EXHIBIT 23.2**

**CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

We consent to the incorporation by reference in the Registration Statements (Form S-3 No. 333-82737
and Form S-8 No. 333-61699) of National Health Realty, Inc. of our reports dated January 23, 2004, with
respect to the 2003 and 2002 consolidated financial statements and schedules of National Health Realty, Inc.
included in this Annual Report (Form 10-K) for the year ended December 31, 2004.

/S/ERNST & YOUNG LLP

Nashville, Tennessee

March 1, 2005

**EXHIBIT 31**

**CERTIFICATION**

I, Robert G. Adams, certify that:

1.	I have reviewed this annual report on Form 10-K of National Health Realty, Inc.;

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

3.	Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant's other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:

a.	Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;

b.	Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;

c.	Evaluated the effectiveness of the registrant's disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and

d.	Disclosed in this report any change in the registrant's internal control over financial reporting
that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial reporting; and

5.	The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent function);

a.	All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report financial information; and

b.	Any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant's internal control over financial reporting.

Date: March 1, 2005

| | /s/ Robert G. Adams
| | -------------------
| | Robert G. Adams    
| | President          
| |                    

**EXHIBIT 31**

**CERTIFICATION**

I, Donald K. Daniel, certify that:

1.	I have reviewed this annual report on Form 10-K of National Health Realty, Inc.;

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

3.	Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant's other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and
internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:

a.	Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;

b.	Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;

c.	Evaluated the effectiveness of the registrant's disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and

d.	Disclosed in this report any change in the registrant's internal control over financial reporting
that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely
to materially affect, the registrant's internal control over financial reporting; and

5.	The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of
internal control over financial reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent function);

a.	All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report financial information; and

b.	Any fraud, whether or not material, that involves management or other employees who have
a significant role in the registrant's internal control over financial reporting.

Date: March 1,2005

| | /s/ Donald K. Daniel                
| | ------------------------------------
| | Donald K. Daniel                    
| | Senior Vice President and Controller
| | Principal Accounting Officer        



**Exhibit 32**

**Certification of Annual Report on Form 10-K**

**of National Health Realty, Inc.**

**For The Year Ended December 31, 2004**

The undersigned hereby certify, pursuant to 18 U.S.C. Section 906 of the Sarbanes-Oxley Act of 2002,
that, to the undersigned's best knowledge and belief, the Annual Report on Form 10-K for National Health
Realty, Inc. ("Issuer") for the period ending December 31, 2004 as filed with the Securities and Exchange
Commission on the date hereof (the "Report"):

|(a) | fully complies with the requirements of section 13(a) or 15(d) of the Securities  
|--- | ----------------------------------------------------------------------------------
|    | Exchange Act of 1934; and                                                         
|   
|(b) | the information contained in the Report fairly presents, in all material respects,
|    | the financial condition and results of operations of the Issuer.                  
|   

This Certification accompanies the Annual Report on Form 10-K of the Issuer for the annual period
ended December 31, 2004.

This Certification is executed as of March 1, 2005.

| | /s/ Robert G. Adams         
| | ----------------------------
| | Robert G. Adams             
| | President                   
|
|
| | /s/ Donald K. Daniel        
| | Donald K. Daniel            
| | Principal Accounting Officer

A signed original of this written statement required by Section 906 has been provided to National Health
Realty, Inc. and will be retained by National Health Investors, Inc. and furnished to the Securities and
Exchange Commission or its staff upon request.