|**SECURITIES AND EXCHANGE COMMISSION**                                                                                
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|**WASHINGTON, D.C.  20549******                                                                                       
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|**FORM 10-K**                                                                                                         
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|(Mark One)                                                                                                            
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|Commission file number 333-37173                                                                                      
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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)                                                                                                         
|                                                                                                                      
|100 Vine Street, Suite 1402, Murfreesboro, Tennessee 37130                                                            
|(Address of principal executive offices)                                                                              
|(Zip Code)                                                                                                            
|                                                                                                                      
|(615) 890-2020                                                                                                        
|(Company's telephone number including area code)                                                                      
|                                                                                                                      
|Securities registered pursuant to Section 12(b) 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 $103,917,534 as of February    
|18, 2003.  The number of shares of Common Stock outstanding as of February 1, 2003 was 9,570,323.                     
|                                                                                                                      

**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
Health Care Facilities).  We additionally own first and second mortgage secured promissory notes with an
outstanding balance of $65.6 million (the Notes) originally acquired on December 31, 1997 from our then
sole owner National HealthCare L.P.  NHR leases the Healthcare Facilities (the Leases) to National
HealthCare Corporation (NHC), a successor by merger to National HealthCare L.P.  The Leases covering
the Healthcare Facilities are "triple net" leases.  NHR's revenues are derived primarily from the interest and
principal payments on the Notes and from rent payments, primarily from NHC, under the Leases.

Thirty of the Notes (representing approximately $45.1 million in principal amount and collateralized
with 12 nursing facilities) are due from Florida Convalescent Centers, Inc. or an affiliate (FCC).
Approximately $23.2 million of these notes are second mortgages behind approximately $18.7 million in
first mortgage tax exempt debt held by third parties.The $18.7 million first mortgage tax exempt debt is
additionally secured with letters of credit issued by Norwest Bank Minnesota N.A.These 12 nursing
facilities were managed by NHC through July 31, 1999.  Since August 1, 1999, the 12 centers have been
leased by FCC to third parties:  first to Integrated Health Services, Inc. (IHS) a publicly owned long term
care company which filed for bankruptcy on February 2, 2000 and since the second quarter of 2002 to
Schwartzberg Associates, a private multi-state long-term care company.  The FCC Notes remaining
outstanding bear interest at 10.25% and are due in 2004.  In December 2002, two of the FCC Notes were sold
at par and with a right of repurchase and contingent purchase requirement.

The remaining 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 are reporting all current payments as a deposit until an adequate amount is collected to
recognize the sale.  During this time, the assets of the properties will remain as assets on our balance sheet
and depreciated as if they are owned by us.  In December 2002, one of the other remaining Notes was sold
at par and with a right to repurchase and contingent purchase requirement.

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.  This
agreement also provides that prior to the earlier to occur of (i) the termination of the Advisory Agreement
for any reason and (ii) NHC ceasing to be actively engaged as the investment advisor for National Health
Investors, Inc. (NHI), we will not (without the prior approval of NHI) transact business with any party,
person, company or firm other than NHC.  It is the intent of this restriction that we will not be actively or
passively engaged in the pursuit of additional investment opportunities, but rather will focus upon its
capacities as landlord and note holder of those certain assets initially conveyed to it.

**Credit Facility**

Our credit facility of $95 million matured in December 2002, but was extended for another one year
term upon the December, 2002, payment to the credit facility group of $26.5 million.  The extended credit
facility bears interest at variable rates, currently at the Eurodollar rate plus 2.95% (4.3688% at December
31, 2002).  Of the $26.5 million in principal repaid, $10.6 million was obtained by the prepayment of that
amount of first mortgage debt owed to us by NHC, and $15.7 million by the sale of three mortgage note
receivables to National Health Investors, Inc. (NHI).  These notes were sold at par, but with NHR
maintaining a right to repurchase the notes at par after July 1, 2003 and NHI maintaining the right to put the
notes to NHR at par beginning January 2, 2004, either on thirty (30) days notice.

**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.  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.  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 2002 was $493,000.   Either
party may terminate the Advisory Agreement on 90 days notice.

*Objectives and Policies*.  We were organized to own the Healthcare Facilities and Notes.  Because
of the competitive restrictions contained in the Advisory Agreement, we do not currently intend to seek
further 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, but do not anticipate purchasing
from, leasing to or financing other operations.  Subject to the Advisory Agreement, 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 (the "Master Agreement") with NHC regarding the Health Care
Facilities 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 renewal term (if applicable), NHC is obligated to pay annual base
rent plus additional rent described below.  During the second renewal term, NHC is required to pay annual
base rent based on the then fair market rental of the leased property as negotiated at that time between NHC
and NHR.  In addition, in each year after 1999, NHC was originally obligated to pay percentage rent to NHR
equal to 3% of the amount by which gross revenues of each NHC leased Health Care Facility in such later
year exceeds the gross revenues of such Health Care Facility in 1999.  However, effective January 1, 2000,
NHR and NHC amended the terms of the Master Agreement as it relates to percentage rent. Under the terms
of the amended agreement, 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 NHC leased health care facility in such
later quarter exceeds the gross revenues of such health care facility in the applicable quarter of 1999.  NHR
recognized $805,000 of percentage rent from NHC during 2002.

The Master Agreement is a "triple net lease", under which NHC is responsible to pay all taxes,
utilities, insurance premium costs, repairs (including structural portions of the buildings, and other charges
relating to the ownership and operation of the  Health Care 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 on, or other
environmental responsibility with respect to the  Health Care 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).  We account for the transaction under the deposit method in accordance with the
provisions of SFAS 66.  Consistent with the deposit method, we have not recorded the sale of the assets and
continue to record depreciation expense each period.  Any cash received from the buyer (which totals
$1,822,000 as of December 31, 2002) is reported as deposit on real estate properties sold until the down
payment and continuing investment criteria of SFAS 66 are met, at which time we will account for the sale
under the full accrual method.  The principal officer of the entity that currently owns the three properties
obtained through foreclosure was also the principal officer of the company which owned the properties prior
to the foreclosure.

**Advisory Agreement**

We entered into the Advisory 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 expiring 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 amount paid to NHC in 2002,
2001 and 2000 was $492,000, $504,000 and $503,000, 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, Mr. W. Andrew
Adams, Mr. Robert G. Adams, Ms. Charlotte A. Swafford and Mr. Donald K. Daniel are employees of NHC;
Mr. LaRoche was an employee until his retirement from management responsibilities in May 2002.  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.

**Investor Information**

We maintain a worldwide web site at www.nationalhealthrealty.com.  We publish to this web site
our 10-Q's, this 10-K, 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 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, all of which we hereby incorporate
herein by reference as though copied verbatim:

The NHR Code of Ethics and Standards of Conduct.

The NHR Restated Audit Committee Charter.

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, 2002 | Rent (1)  
|Long-Term Care Centers              |                    |        |               |           
|The Aristocrat                      | Naples, FL         | 60     | $ 4,410,707   | $   96,000
|NHC HealthCare, Clinton             | Clinton, SC        | 131    | 2,657,262     | 645,266   
|The Health Center at Coconut Creek  | Coconut Creek, FL  | 120    | 8,567,362     | 775,000   
|The Health Center of Daytona Beach  | Daytona Beach, FL  | 60     | 5,021,181     | 380,000   
|NHC HealthCare, Farragut            | Farragut, TN       | 60     | 6,748,471     | 625,116   
|NHC HealthCare, Garden City         | Murrells Inlet, SC | 88     | 4,179,041     | 626,530   
|NHC HealthCare, Greenville          | Greenville, SC     | 176    | 3,887,000     | 1,157,654 
|NHC HealthCare, Lexington           | Lexington, SC      | 120    | 5,140,898     | 810,400   
|NHC HealthCare, Mauldin             | Mauldin, SC        | 120    | 6,589,213     | 489,330   
|AdamsPlace                          | Murfreesboro, TN   | 60     | 4,623,389     | 527,383   
|The Imperial Health Care Center     | Naples, FL         | 113    | 4,995,554     | 570,000   
|NHC HealthCare, North Augusta       | North Augusta, SC  | 132    | 3,729,419     | 1,010,050 
|The Health Center of Windermere     | Orlando, FL        | 120    | 6,512,670     | 535,000   
|NHC HealthCare, Parklane            | Columbia, SC       | 120    | 6,220,655     | 735,676   
|Charlotte Harbor Health Care Center | Port Charlotte, FL | 180    | 6,725,019     | 1,010,000 
|NHC HealthCare, West Plains         | West Plains, MO    | 120    | 2,858,853     | 625,571   
|                                    |                    |        |               |           
|Assisted Living Facilities          |                    |        |               |           
|The Place at Vero Beach             | Vero Beach, FL     | 84     | 8,340,461     | 1,187,000 
|NHC Place/Anniston                  | Anniston, AL       | 68     | 4,232,968     | 321,374   
|AdamsPlace                          | Murfreesboro, TN   | 84     | 4,902,529     | 52,620    
|The Place at Merritt Island         | Merritt Island, FL | 84     | 6,105,158     | 765,000   
|The Place at Stuart                 | Stuart, FL         | 84     | 5,465,541     | 751,000   
|NHC Place/Farragut                  | Farragut, TN       | 84     | 6,948,309     | 211,012   
|                                    |                    |        |               |           
|Retirement Center                   |                    |        |               |           
|AdamsPlace                          | Murfreesboro, TN   | 58     | 14,237,063    | 1,497,540 

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

The following table includes certain information regarding Healthcare Facilities accounted for under
the deposit method in accordance with the provisions of SFAS 66:

|                                  |                  |        | Net Book      | Base    
|--------------------------------- | ---------------- | ------ | ------------- | --------
|                                  |                  | No. of | Value at      | Annual  
|Name of Facility                  | Location         | Beds   | Dec. 31, 2002 | Rent (2)
|Long-Term Care Centers            |                  |        |               |         
|                                  |                  |        |               |         
|Brownsburg Health Care Center(2)  | Brownsburg, IN   | 178    | 2,531,963     | ---     
|Castleton Health Care Center(2)   | Indianapolis, IN | 120    | 1,185,285     | ---     
|Ladoga Health Care Center(1), (2) | Ladoga, IN       | 0      | 500,000       | ---     
|Plainfield Health Care Center(2)  | Plainfield, IN   | 199    | 1,648,598     | ---     

(1)Closed - not currently in operation.

(2)Sold for a note receivable, but subject to deposit method accounting.  See explanation of the
Indiana facilities on page 4.

*Mortgage Notes.*  Currently we own approximately 33 mortgage notes representing approximately
$49.8 million loaned to the owners of approximately 15 nursing homes.  The loans were utilized by the initial
owners to acquire land, then construct and equip the nursing homes or to provide working capital.  The
mortgage notes are secured by mortgages on each of the facilities.  Certain of our the mortgage notes
(representing approximately $45.1 million of the principal amount) are due from FCC or affiliates. The FCC
notes bear interest at 10.25% and are due in 2004.  Approximately $23,192,000 of our mortgage notes on
eight facilities from FCC are secured by second mortgages.  The first mortgage notes on the eight Florida
nursing homes, totaling approximately $18,705,000 million at December 31, 2002, are tax exempt and are
additionally secured with letters of credit issued by Norwest Bank Minnesota N.A. Accordingly, Norwest
Bank Minnesota N.A. holds a first mortgage which is senior to our second mortgage on these eight Florida
nursing homes.  The balance of the mortgage notes are secured by separate makers, guarantors and
properties.

Effective December 31, 2002, we sold to NHI at par three mortgage notes receivable secured by
three long-termhealth care facilities in Florida.  We received cash in the amount of $15,717,000.  NHR
maintains the right to repurchase the notes at par after July 1, 2003 and NHI maintains 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.  Either party may exercise their right on thirty (30) days notice.  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 account for the sale of the notes receivable to NHI as a borrowing from NHI rather than a sale of the
notes.  We continue to recognize the notes receivable on our consolidated balance sheet as of December 31,
2002.

**ITEM 3**

**LEGAL PROCEEDINGS**

We are not subject to any significant pending litigation.  The HealthCare 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 Health Care 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 Health Care Facilities, management believes
that the ultimate resolution of all pending proceedings will have no material adverse effect on us or our
operations.

**ITEM 4**

**SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

The annual meeting of the shareholders was held on April 16, 2002, and the results were included
in the March 31, 2002, Form 10-Q filed with the SEC on May 10, 2002.

**PART II**

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

**ITEM 5**

**MARKET FOR REGISTRANT'S COMMON EQUITY**

**AND RELATED STOCKHOLDER MATTERS**

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.

The shares are listed on the American Stock Exchange (AMEX) under the symbol "NHR".  On
January 31, 2003 the last reported sale price for the Common Stock on the AMEX was $15.75.  As of
December 31, 2002 we had approximately 4,878 shareholders, of which approximately 1,878 are holders of
record with the balance indicated by security listing positions.

High and low stock prices and dividends for 2002 and 2001 were:

|              | 2002        | 2001     
|------------- | ----------- | ---------
|              |             | Cash     
|              | Sales Price | Dividends
|Quarter Ended | High        | Low      
|March 31      | $17.250     | $14.900  
|June 30       | 19.300      | 16.050   
|September 30  | 19.250      | 11.750   
|December 31   | 16.120      | 13.500   

******ITEM 6**

**SELECTED FINANCIAL DATA**

(in thousands, except share amounts)

|                                    | Year Ended December 31
|----------------------------------- | ----------------------
|                                    | 2002                  
|                                    |                       
|Net revenues                        | $     24,773          
|Net income                          | 8,498                 
|Net income per share                |                       
|Basic                               | .89                   
|Diluted                             | .87                   
|Mortgages & other investments       | 65,562                
|Real estate properties, net         | 138,963               
|Total assets                        | 214,941               
|Long term debt                      | 79,488                
|Total stockholders' equity          | 114,476               
|                                    |                       
|Common shares outstanding           | 9,570,323             
|                                    |                       
|Weighted average common shares      |                       
|Basic                               | 9,570,323             
|Diluted                             | 9,770,730             
|                                    |                       
|Common dividends declared per share | $         1.33        

******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 health care facilities, including 16 licensed skilled nursing facilities,
six assisted living facilities and one independent living center (the Health Care Facilities), and owns 33 first
and second mortgage promissory notes with principal balances totaling $49,845,000 (the Notes) at December
31, 2002 and secured by the real property of health care facilities.

*Competitive Restrictions*

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 82
long-term care health care facilities with 10,499 beds in 11 states.  The advisory services agreement provides
that prior to the earlier to occur of (i) the termination of the advisory agreement for any reason or (ii) NHC
ceasing to be actively engaged as the investment advisor for National Health Investors, Inc. (NHI), we will
not (without the prior approval of NHI) transact business with any party, person, company or firm other than
NHC. It is the intent of the foregoing restriction that we will not be actively or passively engaged in the
pursuit of additional investment opportunities, but rather we will focus upon our capacities as landlord and
note holder of those certain assets conveyed to us by NHC's predecessor.

CRITICAL ACCOUNTING POLICIES

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.

In December 2001, the SEC requested that all registrants list their three to five most "critical
accounting policies" in MD&A.  The SEC indicated that a "critical accounting policy" is one which is both
important to the portrayal of the Company's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect
of matters that are inherently uncertain.  We believe that our following accounting policies fit this definition:

*Valuations of and Impairments to Our Investment*s

Since 1999 the long-term health care industry has experienced material reductions in government
and private insurance reimbursements.  While some legislative relief was granted in 2000 and 2001,
additional reductions in reimbursement have been imposed effective October 1, 2002.  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.  Based on events occurring during the first and fourth quarters of 2002, we determined that
impairment of certain of our investments had occurred.

Decisions about valuations and impairments of our investments require significant judgements and
estimates on the part of management.  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 and general economic conditions 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.

*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 made.  This policy could cause our revenues to vary significantly from period to period.

*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 32.0%.  This debt of
$63,771,000 includes a term loan with a principal amount of $58,157,000.Our credit facility of $95 million
matured in December, 2002, but was extended for another one year term upon the payment to the credit
facility group of $26.5 million in December 2002.  The extended credit facility bears interest at variable
rates, currently at the Eurodollar rate plus 2.95% (4.3688% at December 31, 2002).  Of the $26.5 million in
principal repaid, $10.6 million was obtained by the prepayment of that amount of first mortgage debt owed
to us by NHC, and $15.7 million by the sale of three mortgage note receivables to National Health Investors,
Inc. (NHI).  These notes were sold at par, but with NHR maintaining a right to repurchase the notes at par
after July 1, 2003 and NHI maintaining the right to put the notes to NHR at par beginning January 2, 2004,
either on thirty (30) days notice.

In order to address our $58.2 million of 2003 debt maturities and our potential 2004 obligation to
repurchase the $15.7 million of mortgage notes from NHI, we plan to obtain proceeds from the refinancing
of certain assets through first mortgage notes with community banks and existing lenders.  Although we
believe that we will be successful in refinancing our obligations, no assurance can be given in this regard.
Our cash flows from operating activities will not be adequate to meet these entire obligations.  The inability
to obtain adequate refinancing prior to December 31, 2003 would have a material adverse effect on our
financial position, results of operation and cash flows.

*Leases*

We lease our 23 health care facilities to various lessees: 14 properties are leased to NHC, and nine
properties that were previously leased to NHC 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, 2002, all payments are current.  Our leases
with NHC and the nine separate lessees have initial five or ten year terms with provisions for two five year
renewal terms.

*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.  We received cash from NHI equal to our carrying amount.  The transfer agreement
with NHI includes provisions that allow us the ability to repurchase the transferred notes at any time at a
price equal to the outstanding principal and interest balance.  The agreement also provides that, beginning
July 1, 2003, NHI may put the notes back to us at a price equal to the outstanding principal and interest
balance.  As the 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
Extinguishments of Liabilities" (SFAS 140), we account for the transfer of notes receivable to NHI as a
borrowing from NHI rather than as a sale of the notes.  We continue to recognize the notes receivable on our
consolidated balance sheet as of December 31, 2002, and will continue to recognize interest income on the
notes.  Additionally, we have recognized an obligation to NHI on our consolidated balance sheet as of
December 31, 2002 and will recognize interest expense on such obligation.

*FCC Notes*

Of the $65,562,000 of mortgage and other notes receivable, $45,083,000 is due from Florida
Convalescent Centers, Inc. (FCC) of Sarasota, Florida.  The FCC notes bear interest at 10.25% and
substantially all of the notes mature October 31, 2004. The FCC notes may be prepaid without penalty.  If
prepayment occurs, we will apply some or all of the proceeds against our bank debt.  If not so used, we will
attempt to reinvest any amounts prepaid. Our existing line of credit requires a portion of the prepayments
to be used to reduce bank debt. In the event that we use any prepayments to pay down existing debt, a
reduction of our cash flow will result.  However, no dividend reductions are expected in the near future.

Effective July 31, 1999, the FCC centers were leased to Integrated Health Systems, Inc. (IHS), which
filed for bankruptcy protection on February 2, 2000.  Pursuant to court order, the IHS lease was terminated
and the FCC centers re-leased to Schwartzberg Associates, a private multi-state long-term care company,
during the second quarter of 2002.  The ability of FCC to service the mortgage notes held by us is dependent
on Schwartzberg Associates' ability to make its lease payments to FCC.  Our payments from FCC are current
as of December 31, 2002.

Approximately $23,192,000 of our notes receivable from FCC are secured by second mortgages on
eight Florida nursing homes.  The first mortgage notes on these eight facilities total approximately
$18,705,000 at December 31, 2002, are tax exempt and are additionally secured with letters of credit issued
by Norwest Bank Minnesota N.A.  Accordingly, Norwest Bank currently holds a first mortgage that is senior
to our second mortgage on these eight Florida nursing homes.

*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 Health Services Management of Indiana, LLC (HSMI) to 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 account 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 have not recorded the sale of the
assets and continue to record depreciation expense each period. Any cash received from the buyer (which
since the sale totals $1,822,000 as of December 31, 2002) is reported as deposit on real estate properties sold
until the down payment and continuing investment criteria of SFAS 66 are met, at which time we will
account for the sale under the full accrual method.

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 2002 events,
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.  We
believe that the carrying amount of these assets of $5,866,000 at December 31, 2002, after the above write-downs is realizable.  It is possible that additional events could occur that, if adverse to NHR, would indicate
a further impairment of the net carrying amount of these real estate properties.  If such adverse events occur,
we will record additional losses in the period the events occur or become known.

*Sources and Uses of Funds*

Our leasing and mortgage services generated net cash from operating activities during 2002 in the
amount of $21,067,000 compared to $17,427,000 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 working capital changes. The year to year increase is due primarily to
reduced interest expense andincreases in accounts payable and accrued liabilities.

Cash flows provided by investing activities during 2002 included no purchases of property and
equipment compared to a net investment of $46,000 in the purchase of property and equipment in the prior
year.  Also, cash of $10,737,000 was provided by the prepayment of two mortgage notes receivable
compared to no prepayment in the prior year.  Net collections on mortgage notes receivable of $3,487,000
during 2002 compared to $3,634,000 in the prior year.  Cash flows used in investing activities during 2002
include an investment in marketable securities of $3,483,000 compared to no investment in marketable
securities in the prior year.

Cash flows from financing activities included $15.7 million of proceeds from NHI.  Payments on
debt were $32,543,000 in 2002 compared to $4,614,000 of payments on debt in the same period last year.
Cash flows used in financing activities included $12,728,000 to pay dividends to stockholders ($12,728,000
last year), $1,618,000 to pay cash distributions to minority partners of our operating partnership ($1,618,000
last year), and $432,000 to payment of financing costs (none 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. Dividends in the amount of $1.33 per
share were declared for payment during 2002.

NHI maintains the right to resell three mortgage notes receivable to NHR at the then par value
beginning January 2, 2004 or require us to make the debt service payments required under the notes.  Par
value of the notes is $15.7 million at December 31, 2002.

During the fourth quarter of 2001, NHC, as the holder of certain promissory notes made by National
Health Corporation and previously guaranteed in part by us, released our guarantee.  Therefore, there is no
longer any potential liability on our part for any default by National or NHC on any of their outstanding debt.

RESULTS OF OPERATIONS

*Year Ended December 31, 2002 Compared to the Year Ended December 31, 2001*

Net income for the year ended December 31, 2002 is $8,498,000 versus $8,877,000 for the same
period in 2001, a decrease of 4.3%. Diluted earnings per common share decreased 5 cents or 5.4% to 87 cents
in the 2002 period from 92 cents in the 2001 period.

Total revenues for the year ended December 31, 2002 increased $122,000 or .01% to $24,773,000
from $24,651,000 for the year ended December 31, 2001. Revenues from rental income increased $437,000
or 2.7% when compared to the same period in 2001. Revenues from mortgage interest decreased $449,000
or 5.5% in 2002 as compared to the same period in 2001.

The increase in rental income is due primarily to the recognition of $379,000 of percentage rent and
due to receipt of $58,000 of past due rent receivable from a prior year.  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 resulted from reductions in the principal of the  mortgage
notes receivable.

Total expenses for the year ended December 31, 2002 increased $552,000 or 3.8% to $15,199,000
from $14,647,000 for the year ended December 31, 2001. Interest expense decreased $2,758,000 or 45.3%
in 2002 as compared to the 2001 period. Depreciation of real estate decreased $608,000 or 8.2%. General
and administrative costs decreased $47,000 or 5.5%.  Realty and loan losses increased $3,752,000.

Interest expense decreased due to a decrease in the interest rate of variable rate debt compared to a
year ago and, to a lesser extent, due to payments of principal on long-term debt.

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 2002 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.  We
believe that the carrying amount of these assets of $5,866,000, at December 31, 2002 is realizable.  It is
possible that additional events could occur that, if adverse to NHR, would indicate a further impairment of
the net carrying amount of these real estate properties.  If such adverse events occur, we will record
additional losses in the period the events occur or become known.

During 2002, we recovered $268,000 principal and accrued interest which had been written off in
the prior year.

*Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000*

Net income for the year ended December 31, 2001 is $8,877,000 versus $7,939,000 for the same
period in 2000, an increase of 11.8%. Diluted earnings per common share increased 9 cents or 10.8% to 92
cents in the 2001 period from 83 cents in the 2000 period.

Total revenues for the year ended December 31, 2001 decreased $523,000 or 2.1% to $24,651,000
from $25,174,000 for the year ended December 31, 2000. Revenues from rental income increased $152,000
or .01% when compared to the same period in 2000. Revenues from mortgage interest decreased $657,000
or 7.4% in 2001 as compared to the same period in 2000.

The increase in rental income is due primarily to the recognition of $425,000 of 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 increase is offset in part due to the sale of property previously leased to a third party.

The decrease in mortgage interest income resulted from reductions in the principal of the  mortgage
notes receivable.

Total expenses for the year ended December 31, 2001 decreased $1,579,000 or 9.7% to $14,647,000
from $16,226,000 for the year ended December 31, 2000. Interest expense decreased $1,885,000 or 23.7%
in 2001 as compared to the 2000 period. Depreciation of real estate increased $201,000 or 2.8%. General and
administrative costs decreased $143,000 or 14.3%.

Interest expense decreased due to a decrease in the interest rate of variable rate debt compared to a
year ago. Depreciation increased as a result of our placing newly constructed assets in service and property
acquisitions, particularly the purchase of the Indiana properties in November 2000.

During 2001, we concluded that based on certain events, the mortgage and other notes receivable
required the writeoff of principal and previously accrued interest income of $268,000.  It is possible that
additional events could occur that, if adverse to NHR, would indicate a further impairment of the net carrying
amount of these investments.  If such adverse events occur, we will record the additional losses in the period
the events are known.

FUNDS FROM OPERATIONS

We have adopted the definition of Funds From Operations ("FFO") prescribed by the National
Association of Real Estate Investment Trusts ("NAREIT").  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 form operations, investing or financing activities as a measure of liquidity.
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.

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

|Year Ended December 31,                                 | 2002      | 2001      | 2000       
|------------------------------------------------------- | --------- | --------- | -----------
|                                                        |           |           |            
|Net income applicable to common stockholder's           | $   9,574 | $ 10,004  | $   8,948  
|Adjustments:                                            |           |           |            
|Real estate depreciation                                | 6,785     | 7,393     | 7,192      
|Impairment losses related to depreciable property       | 4,288     | ---       | ---        
|Adjustment for minority interest - affiliates           | (2,327)   | (1,961)   | (1,819)    
|Funds from operations applicable to common stockholders | $18,320   | $15,436   | $14,321    
|                                                        |           |           |            
|Basic funds from operations per share                   | $    1.91 | $    1.61 | $      1.50
|Diluted funds from operations per share                 | $    1.88 | $    1.59 | $      1.49
|                                                        |           |           |            
|Weighted average shares:                                |           |           |            
|Basic                                                   | 9,570,323 | 9,570,323 | 9,575,959  
|Diluted                                                 | 9,770,370 | 9,697,116 | 9,592,814  

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, but the facilities that secure the FCC Notes were
initially leased by FCC to Integrated Health Systems, Inc. (IHS), which filed for bankruptcy protection
February 2, 2000. By court order, the lease was terminated in 2002.  FCC immediately re-leased the
properties to Schwartzberg Associates, a private, multi-state long-term care company.  The ability of FCC
to service the mortgage notes held by us is initially dependent on Schwartzberg Associates' ability to make
its lease payments to FCC or, in the absence of lease payments, FCC's ability to operate or release these
facilities.All FCC note payments are current as of December 31, 2002.

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 December 1999, the staff of the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 (SAB 101) regarding revenue recognition in financial statements.  SAB 101 was effective
January 1, 2000; but implementation was delayed until the fourth quarter of 2000.  Our implementation of
SAB 101 in the fourth quarter of 2000 did not have a material impact on our financial position, results of
operations or cash flows.

From June 1998 through June 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133) and various amendments and interpretations.  SFAS 133, as amended, establishes
accounting and reporting standards requiring that every derivative instrument be recorded in the balance
sheet as either an asset or liability and measured at its fair value.  SFAS 133, as amended, requires that
changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting
criteria are met.  We adopted SFAS 133, as amended, effective January 1, 2001.  The adoption of SFAS 133,
as amended, did not have a material impact on our financial position, results of operations or cash flows.

During August 2001, the FASB issued Statement of Accounting Standards No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets" (SFAS 144).  SFAS 144 is effective for fiscal years
beginning after December 15, 2001 and supersedes certain existing accounting literature, which literature
we currently use to evaluate the recoverability of our real estate properties.  We have adopted the provisions
of SFAS 144 effective January 1, 2002.  The implementation of SFAS 144 has not had a material effect on
our financial position, results of operations or cash flows.

In December 2001, the American Institute of Certified Public Accountants issued Statement of
Position 01-6, "Accounting by Certain Entities (including Entities with Trade Receivables) That Lend to or
Finance the Activities of Others" (SOP 01-6).  SOP 01-6 is effective for fiscal years beginning after
December 15, 2001, and we have adopted the provisions of SOP 01-6 effective January 1, 2002.  The
adoption of SOP 01-6 has not had a material effect on our financial position, results of operations or cash
flows.

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 its 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 DISCLOSURE 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, 2002, $63,700,000 of our long-term debt 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 $281,000 and a 10% reduction in interest rates would
result in annual interest expense declining $281,000. The remaining $15,788,000 of our long-term debt bears
interest at fixed rates.  A hypothetical 10% change in interest rates has no impact on our future earnings and
cash flows related to these instruments.

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.

******ITEM 8**

**FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

*The below report is a copy of the report previously issued by Arthur Andersen LLP in conjunction
with its audits of National Health Realty, Inc. and Subsidiaries as of, and for the three-year period ended,
December 31, 2001.  A copy of this report has been provided as required by the American Institute of
Certified Public Accountant's Interpretation of Statement on Auditing Standards No. 58,*Reports on Audited
Financial**Statements,*and guidance issued by the Securities and Exchange Commission in response to the
indictment of Arthur Andersen LLP in March 2002.  During 2002, Arthur Andersen LLP substantially ceased
operations, including providing auditing and accounting services to public companies, and, as such, has not
reissued this report.  Additionally, Arthur Andersen LLP has not consented to the use of this audit report.
Accordingly, limitations may exist on (a) investor's rights to sue Arthur Andersen LLP under Section 11 of
the Securities Act for false and misleading financial statements, if any, and the effect, if any, on the due
diligence defense of directors and officers, and (b) investor's legal rights to sue and recover damages from
Arthur Andersen LLP for material misstatements or omissions, if any, in any registration statements and
related prospectuses that include, or incorporate by reference, financial statements previously audited by
Arthur Andersen LLP.*

**REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS**

To National Health Realty, Inc.:

We have audited the accompanying consolidated balance sheets of **NATIONAL HEALTH REALTY, INC.**(a Maryland corporation) and subsidiaries as of December 31, 2001 and 2000, and the related consolidated
statements of income, stockholders' equity and cash flows for the years ended December 31, 2001, 2000,
and 1999.  These consolidated financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
consolidated 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 consolidated financial statements referred to above present fairly, in all material respects,
the financial position of National Health Realty, Inc. and subsidiaries as of December 31, 2001 and 2000,
and the results of their operations and their cash flows for the years ended December 31, 2001, 2000, and
1999, in conformity with accounting principles generally accepted in the United States.

ARTHUR ANDERSEN LLP

Nashville, Tennessee

January 15, 2002

**REPORT OF INDEPENDENT AUDITORS**

To the 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, 2002 and the related consolidated statements of income, stockholders'
equity and cash flows for the year then ended.  These consolidated financial statements are the responsibility
of management.  Our responsibility is to express an opinion on these financial statements based on our audit.
The consolidated balance sheet of National Health Realty, Inc. and Subsidiaries as of December 31, 2001
and the related consolidated statements of income, cash flows and stockholders' equity for the years ended
December 31, 2001 and 2000 were audited by other auditors who have ceased operations and whose report
dated January 15, 2002 expressed an unqualified opinion on those financial statements.

We conducted our audit in accordance with auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the 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 audit provides a
reasonable basis for our opinion.

In our opinion, the 2002 consolidated 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, 2002 and the consolidated results of its operations and its cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States.

/s/ Ernst & Young LLP

Nashville, Tennessee

January 23, 2003

|PART I.   FINANCIAL INFORMATION                                                                                               
|------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                              
|**Item 1.     Financial Statements**.                                                                                         
|                                                                                                                              
|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 partners                                                                                             
|Deposit on real estate properties sold                                                                                        
|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; 9,570,323                                                                                       
|shares 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                                                                                                    
|Investment interest and other income                                                                                        
|                                                                                                                            
|                                                                                                                            
|EXPENSES:                                                                                                                   
|Interest                                                                                                                    
|Depreciation of real estate                                                                                                 
|Amortization and write-off of loan costs                                                                                    
|Realty and loan losses                                                                                                      
|General and administrative                                                                                                  
|                                                                                                                            
|                                                                                                                            
|INCOME BEFORE MINORITY INTERESTS                                                                                            
|IN CONSOLIDATED SUBSIDIARIES                                                                                                
|                                                                                                                            
|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                                                                                                   
|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:                                                                                         
|Purchase of real estate properties, net                                                                                       
|Increase in deposit on real estate properties sold                                                                            
|Investment in mortgage notes receivable                                                                                       
|Collection and sale of mortgage notes receivable                                                                              
|Purchase of marketable securities                                                                                             
|NET CASH PROVIDED BY (USED IN) 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                                                                                       
|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 2001 and 2000, NHR acquired real estate properties                                                                     
|in exchange for its rights under mortgage notes receivable:                                                                   
|Mortgage and other notes receivable                                                                                           
|Land                                                                                                                          
|Buildings and improvements                                                                                                    
|                                                                                                                              
|                                                                                                                              
|*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 12/31/99                                                                                                         
|                                                                                                                            
|Net income                                                                                                                  
|Shares canceled                                                                                                             
|Dividends to common shareholders                                                                                            
|($1.33 per share)                                                                                                           
|                                                                                                                            
|BALANCE AT 12/31/00                                                                                                         
|                                                                                                                            
|Net income                                                                                                                  
|Dividends to common shareholders                                                                                            
|($1.33 per share)                                                                                                           
|                                                                                                                            
|BALANCE AT 12/31/01                                                                                                         
|                                                                                                                            
|Net income                                                                                                                  
|Unrealized gains on marketable                                                                                              
|securities, net                                                                                                             
|Total comprehensive income                                                                                                  
|Dividends to common share-                                                                                                  
|holders ($1.33 per share)                                                                                                   
|                                                                                                                            
|BALANCE AT 12/31/02                                                                                                         
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|                                                                                                                            
|The accompanying notes to consolidated financial statements are an integral part of these consolidated financial statements.
|                                                                                                                            



**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**DECEMBER 31, 2002 AND 2001**

**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 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 of up to 40 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 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 $20,502,000) 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.

*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 health care 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 and held to maturity 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 $296,000 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.  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.  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 9 for additional disclosures about our stock option plan.

*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.  For each of the years ended December 31,
2001 and 2000, our comprehensive income was equal to our net income.

*New Accounting Pronouncements* -In August 2001, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS 144).  SFAS 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets and the accounting and reporting provisions for the disposal
of a segment of a business.  SFAS 144 also broadens the scope of defining discontinued operations.  NHR
adopted SFAS 144 on January 1, 2002.  The adoption of SFAS 144 has not had a significant effect on our
financial position, results or operations or cash flows.

In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145, "Recission
of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
(SFAS 145).  SFAS 145 rescinds Statement of Financial Accounting Standards No. 4, "Reporting Gains and
Losses from Extinguishment of Debt" (SFAS 4), which required all gains and losses from extinguishment
of debt to be aggregated and, if material, classified as an extraordinary item, net of the related income tax
effect.  As a result, the criteria in APB 30 will now be used to classify those gains and losses.  The provisions
of SFAS 145 are effective for financial statements issued for fiscal years beginning after May 15, 2002, and
interim periods within those fiscal years.  We do not believe that the adoption of SFAS 145 (effective
January 1, 2003), will have a significant effect on our financial position, results of operations or cash flows.

In December 2001, the American Institute of Certified Public Accountants issued Statement of
Position 01-6, "Accounting by Certain Entities (including Entities with Trade Receivables) That Lend to or
Finance the Activities of Others" (SOP 01-6).  SOP 01-6 is effective for fiscal years beginning after
December 15, 2001, and we have adopted the provisions of SOP 01-6 effective January 1, 2002.  The
adoption of SOP 01-6 has not had a material effect on our financial position, results of operations or cash
flows.

**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 2002, 2001 and 2000, we recognized $805,000, $425,000 and $310,000 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 health care facilities referred to below) was
$16,822,000, $16,385,000 and $16,233,000 during 2002, 2001, and 2000, respectively.

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, 2002, 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 health
care facilities referred to above) are as follows:



|2003       | $15,405,000
|---------- | -----------
|2004       | 15,405,000 
|2005       | 15,405,000 
|2006       | 15,405,000 
|2007       | 15,405,000 
|Thereafter | ---        

*Tax Treatment of the Transfer -*The transfer of assets was treated as a nontaxable exchange under
Section 351 of the Internal Revenue Code of 1986, as amended.  For federal income tax purposes, no gain
or loss was recognized by NHC or by its unitholders upon the transfer of assets to NHR or upon the
distribution of the shares of NHR.  The tax basis of shares of NHR received by NHC unitholders in the
distribution was $16.54 per share for most unitholders.

*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 is for a stated term expiring 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, NHC is entitled to annual compensation of the
greater of 2% of our gross consolidated revenues or the actual expenses incurred by NHC.  During 2002,
2001, and 2000, our compensation to NHC under the Advisory Agreement was $493,000, $504,000, and
$503,000, respectively.

NHC is also the Advisor of National Health Investors, Inc. (NHI).  Pursuant to our Advisory
Agreement, we have agreed that as long as NHC is obligated both under the NHR Advisory Agreement and
the NHI Advisory Agreement, we will only do business with NHC and will not compete with NHI.  As a
result, we are severely limited in our ability to grow and expand our business.  Furthermore, we will not seek
additional third party investments to expand our investment portfolio.

**NOTE 4.  REAL ESTATE PROPERTIES**

The following table summarizes our real estate properties by type of facility and by state as of
December 31, 2002:

|                                 | 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     | $10,362     
|Indiana                          | 3          | 700      | 5,970         | 804         
|Missouri                         | 1          | 123      | 3,728         | 992         
|South Carolina                   | 7          | 6,145    | 36,215        | 9,957       
|Tennessee                        | 2          | 874      | 11,474        | 2,122       
|Total Long-Term Care Centers     | 19         | 13,617   | 98,207        | 24,237      
|                                 |            |          |               |             
|**Assisted Living Facilities:**  |            |          |               |             
|Alabama                          | 1          | 268      | 5,468         | 1,503       
|Florida                          | 3          | 3,414    | 21,722        | 5,225       
|Tennessee                        | 2          | 886      | 13,434        | 2,470       
|Total Assisted Living Facilities | 6          | 4,568    | 40,624        | 9,198       
|                                 |            |          |               |             
|**Independent Living Centers:**  |            |          |               |             
|Tennessee                        | 1          | 2,021    | 14,930        | 1,569       
|Total Independent Living Centers | 1          | 2,021    | 14,930        | 1,569       
|Total                            | 26         | $20,206  | $153,761      | $35,004     

*Indiana Long-Term Care Centers*

During 2000, we leased the three facilities in operation 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, we account 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 have not recorded the sale of the
assets and continue to record depreciation expense each period. Any cash received from the buyer (which
since the sale totals $1,822,000 as of December 31, 2002) is reported as deposit on real estate properties sold
until the down payment and continuing investment criteria of SFAS 66 are met, at which time we will
account for the sale under the full accrual method.

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.  We believe that the carrying amount of these assets of $5,866,000 at December 31, 2002 is
realizable.  It is possible that additional events could occur that, if adverse to NHR, would indicate a further
impairment of the net carrying amount of these real estate properties.  If such adverse events occur, we will
record additional losses in the period the events occur or become known.

**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, 2002:

|Final     | Number |                                                         |                   
|--------- | ------ | ------------------------------------------------------- | ------------------
|Payment   | of     |                                                         | Principal         
|Date      | Loans  | Payment Terms                                           | Amount            
|          |        |                                                         | ***(in thousands)*
|2004      | 23     | Monthly payments from $1,000 to $71,000, which include  |                   
|          |        | interest at 10.25%                                      | $32,015           
|          |        |                                                         |                   
|2004-2016 | 3      | Monthly payments from $2,000 to $53,000, which include  |                   
|          |        | interest ranging from the prime rate plus 2% to 10.25%  | 15,717            
|          |        |                                                         |                   
|2005      | 4      | Monthly payments from $11,000 to $35,000, which include |                   
|          |        | interest at 10.25%                                      | 7,245             
|          |        |                                                         |                   
|2006      | 3      | Monthly payments from $10,000 to $43,000, which include |                   
|          |        | interest at 10.25%                                      | 5,822             
|          |        |                                                         |                   
|2014      | 1      | Monthly payments of $38,250, which include interest at  |                   
|          |        | 8.5%                                                    | 4,501             
|          |        |                                                         |                   
|2003-2016 | 1      | Monthly payments of $5,000, which include               |                   
|          |        | interest ranging at the prime rate plus 2%              | 262               
|          |        |                                                         |                   
|          |        |                                                         | $65,562           

On December 30, 2002, we received prepayments of approximately $10,603,000 on two of our
mortgage notes receivable from NHC.**

*Florida Convalescent Centers, Inc.*

Approximately $45,083,000 of the mortgage and other notes receivable is due from Florida
Convalescent Centers, Inc. or affiliates (FCC) of Sarasota, Florida.  The notes bear interest at 10.25% and
the majority of the notes mature October 31, 2004.  The notes may be prepaid without penalty.  If
prepayment occurs, we will apply some or all of the proceeds against our bank term loan.  If not so used, we
will attempt to reinvest the balance available.  Our existing line of credit requires a portion of the
prepayments to be used to reduce bank debt.

Effective July 31, 1999, the 14 FCC centers were leased to Integrated Health Systems, Inc. (IHS),
which filed for bankruptcy protection on February 2, 2000.  Pursuant to court order, the IHS lease was
terminated and the FCC centers re-leased to Schwartzberg Associates, a private multi-state long-term care
company during the second quarter of  2002.  The ability of FCC to service the mortgage notes held by NHR
is dependent on Schwartzberg Associates' ability to make its lease payments to FCC.  As of December 31,
2002, FCC has made all required payments to NHR under the terms of the note agreements.

Approximately $23,192,000 of our notes receivable from FCC are secured by second mortgages on
eight Florida nursing homes.  The first mortgage notes on these eight Florida nursing homes, totaling
approximately $18,705,000 at December 31, 2002, are tax exempt and are additionally secured with letters
of credit issued by Norwest Bank Minnesota N.A. Accordingly, Norwest Bank Minnesota N.A. holds a first
mortgage which is senior to NHR's second mortgage on these eight Florida nursing homes.

During 2002, we received principal and interest income of $268,000 on mortgage and other notes
receivable from FCC, which amount had been written off in 2001.

*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.  We received cash from NHI equal to our carrying amount.  The transfer agreement
with NHI includes provisions that allow us the ability to repurchase the transferred notes after July 1, 2003
at a price equal to the then outstanding principal and interest balance.  The agreement also provides that,
beginning January 2, 2004, NHI may put the notes back to us at a price equal to the then outstanding
principal and interest balance or require us to make the debt service payments required under the notes.  As
the 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
Extinguishments of Liabilities" (SFAS 140), we account for the transfer of notes receivable to NHI as a
borrowing rather than as a sale of the notes.  We continue to recognize the notes receivable on our
consolidated balance sheet as of December 31, 2002, and will continue to recognize interest income on the
notes.  Additionally, we have recognized an obligation to NHI on our consolidated balance sheet as of
December 31, 2002 and will recognize interest expense on such obligation.

**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, 2002, the fair value of the shares is $3,618,000.  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.

**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, 2002 and 2001, 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 | 2002            
|                                  |                  |            |                 
|Term loan, principal and interest | Variable,        |            |                 
|payable quarterly                 | 4.4%             | 2003       | $58,157         
|                                  |                  |            |                 
|Borrowing from NHI                | 8.8              | 2016       | 15,717          
|                                  |                  |            |                 
|Senior secured notes due to NHC,  |                  |            |                 
|principal and interest payable    |                  |            |                 
|semiannually                      | 8.3              | 2003       | 1,736           
|                                  |                  |            |                 
|Senior secured notes due to NHC,  |                  |            |                 
|principal and interest payable    |                  |            |                 
|semiannually                      | 8.4              | 2005       | 3,878           
|                                  |                  |            |                 
|First mortgage revenue bonds      | Variable         | ----       | ---             
|                                  |                  |            | $79,488         



The aggregate principal maturities of all debt for the five years subsequent to December 31, 2002
are as follows:

|2003 | $62,792,000
|---- | -----------
|2004 | 10,503,000 
|2005 | 1,146,000  
|2006 | 303,000    
|2007 | 323,000    

In December 2002, we  negotiated  a one-year extension of our bank term loan, which was scheduled
to mature on December 31, 2002.  Our lenders agreed to the extension subject to principal reduction of
approximately $26,531,000 in December 2002.  We plan to obtain proceeds from the refinancing of certain
assets through first mortgage notes with community banks and existing lenders in order to satisfy the debt
obligation in 2003.  Although we believe that we will be successful in refinancing our December 2003 debt
obligation, no assurance can be given in this regard.  Our cash flows from operating activities will not be
adequate to retire the entire debt obligation.  The inability to obtain adequate refinancing prior to December
31, 2003 would have a material adverse effect on our financial position, results of operation and cash flows.
	Certain loan agreements require maintenance of specified operating ratios and stockholders' equity
by NHR.  As of December 31, 2002, we have met all such covenants or obtained appropriate waivers.

During the fourth quarter of 2001, NHC, as the holder of certain promissory notes made by National
Health Corporation (National) and previously guaranteed in part by us, released our guarantee.  Therefore,
there is no longer any potential liability on our part as a result of a default by National or NHC on any of
their outstanding debt.

**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.

**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, 1999 | 382,000   | $  8.50       
|Options granted               | 15,000    | 6.50          
|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          

At December 31, 2002, all 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, 2002
is 2.8 years.  We have reserved 500,000 shares of common stock for issuance under the stock option plan.
At December 31, 2002, 66,802 shares of common stock may be issued under the 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 our earnings per share.

**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 2002:

|Dividend         | Taxable as      | Non-Taxable       |        
|---------------- | --------------- | ----------------- | -------
|Payment Date     | Ordinary Income | Return of Capital | Totals 
|                 |                 |                   |        
|April 15, 2002   | $ .320734       | $.011766          | $ .3325
|July 15, 2002    | .320734         | .011766           | .3325  
|October 15, 2002 | .320734         | .011766           | .3325  
|January 15, 2003 | .320734         | .011766           | .3325  
|                 | $1.282936       | $ .047064         | $1.3300

******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
|-------------------------- | ----------- | ----------- | ----------- | -----------
|                           |             |             |             |            
|2002                       |             |             |             |            
|                           |             |             |             |            
|Net Revenues               | $6,177      | $6,125      | $6,283      | $6,188     
|Net Income                 | 2,137       | 2,815       | 3,143       | 403        
|Basic Earnings Per Share   | .22         | .29         | .33         | .05        
|Diluted Earnings Per Share | .22         | .29         | .32         | .04        
|                           |             |             |             |            
|2001                       |             |             |             |            
|                           |             |             |             |            
|Net Revenues               | $6,176      | $6,188      | $6,170      | $6,117     
|Net Income                 | 1,779       | 2,213       | 2,453       | 2,432      
|Basic Earnings Per Share   | .19         | .23         | .26         | .25        
|Diluted Earnings Per Share | .19         | .23         | .25         | .25        

******ITEM 9**

**CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON**

**ACCOUNTING AND FINANCIAL DISCLOSURE**

On July 1, 2002, the Board of Directors of National Health Realty, Inc. determined to dismiss its
independent accountants, Arthur Andersen LLP ("Andersen") and appointed Ernst & Young LLP ("EY") as
its new independent accountants.  The decision to change accountants was approved by NHC's Board of
Directors upon the recommendation of its Audit Committee.

During the two year period ended December 31, 2001 and for the subsequent period through the date
hereof, there were no disagreements between NHR and Andersen on any matter of accounting principles of
practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved
to Andersen'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 the two year period ended December 31, 2001 and for the
subsequent period through the date hereof.

The audit reports of Andersen on the consolidated financial statements of NHR and subsidiaries as
of and for the two years in the period ended December 31, 2001 did 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's two year period ended December 31, 2001, and the subsequent period through the
date hereof, NHR did not consult with EY regarding any of the matters or events set forth in Item
304(a)(2)(i) and (ii) of Regulation S-K.

**PART III**

**ITEM 10**

**DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT**

***Directors and Executive Officers*****

The Board of Directors is divided into three classes.  Directors will hold office until the annual
meeting for the year in which their term expires and until their successor is elected and qualified.  As each
of their terms expire, the successor shall be elected to a three-year term. A director may be removed from
office for cause only.  Officers serve at the pleasure of the Board of Directors for a term of one year.  The
following table sets forth the current directors and executive officers of NHR:

|                        |     | Current Term as  | Officer of NHR's 
|----------------------- | --- | ---------------- | -----------------
|Name                    | Age | Director Expires | Predecessor Since
|                        |     |                  |                  
|Robert G. Adams         | 56  | 2003             | 1985             
|Olin O. Williams        | 72  | 2003             | ---              
|W. Andrew Adams         | 57  | 2005             | 1973             
|Ernest G. Burgess, III  | 63  | 2005             | 1975             
|Joseph M. Swanson       | 64  | 2004             | ---              
|Richard F. LaRoche, Jr. | 57  | ----             | 1974             
|Donald K. Daniel        | 56  | ----             | 1985             
|Charlotte A. Swafford   | 55  | ----             | 1985             
|Kenneth D. DenBesten    | 50  | ----             | 1992             

W. Andrew Adams, Robert G. Adams, Dr. Olin O. Williams and Ernest G. Burgess are currently
directors of National HealthCare Corporation.  W. Andrew Adams and Richard F. LaRoche are directors of
National Health Investors, Inc.  All executive officers serve in similar capacities with NHC and NHI.

Dr. Olin O. Williams has been a physician in private practice in Tennessee for more than 25 years
and is now retired.  Dr. Williams now serves on the Board of the Bank of Murfreesboro, headquartered in
Murfreesboro, Tennessee.  Dr. Williams is on our audit committee as well as that of NHC.

W. Andrew Adams is the President and a Director of the Company and has been the Chief Executive
Officer of NHC since 1981, and on its Board since 1974.  He has extensive long-term health care experience
and served as President of the National Council of Health Centers, the trade association for multi-facility
long-term health care companies.  He is also the President and Chairman of the Board of National
HealthCare Corporation and National Health Investors, Inc., and he is Chairman of the Board of Assisted
Living Concepts, Inc.  In addition, Mr. Adams serves on the Board of Directors of SunTrust Bank, Nashville.
He has an M.B.A. degree from Middle Tennessee State University.

Robert G. Adams is Senior Vice President and a Director of the Company and also serves in those
positions for NHC.  He has a B.S. degree from Middle Tennessee State University.  He is Chief Operating
Officer for NHC.

Ernest G. Burgess (Director) is a retired (1995) Senior Vice President of NHC.  He has an M.S.
degree from the University of Tennessee. He also serves on the Board of National HealthCare Corporation.
He serves as chairman of our audit committee, and on the audit committee of NHC.

Richard F. LaRoche is Secretary and General Counsel of the Company and was its Vice President
until May 2002 when he retired from active management positions.  He also served in those positions for
NHC since 1971.  He has a law degree from Vanderbilt University and an A.B. degree from Dartmouth
College.  Mr. LaRoche currently serves as a director, Secretary and General Counsel of National Health
Investors, Inc. and National HealthCare Corporation.  He also serves on the board of Z-Tel Technologies,
Inc., and is on its audit committee.

Joseph M. Swanson is currently serving as interim director to fill the position formerly held by Dr.
J. K. Twilla.  Swanson is the owner of Swanson Development Company, a multi-county real estate
development and leasing company with approximately three million square feet of buildings and 200 tenants.
He is also the developer of over 300 acres of commercial and residential property.  Swanson is also the
owner and president of a 70 year old manufacturing and distribution company.  He was a founding
shareholder and director of First City Bank in 1986 and since 1995 has served as a director of Bank of
Murfreesboro.  Mr. Swanson is also a majority partner in a commercial contracting company and trustee of
a commercial real estate unitrust that owns real estate.  He serves on the Audit Committee of NHR.

Donald K. Daniel (Vice President & Controller) joined NHC in 1977 as Controller.  He received a
B.A. degree from Harding University and an M.B.A. from the University of Texas.  He is a certified public
accountant.

Kenneth D. DenBesten (Vice President/Finance) has served NHC as Vice President/Finance since
1992.  From 1987 to 1992, he was employed by Physicians Health Care, most recently as Chief Operating
Officer.  From 1984 to 1986, he was employed by Health America Corporation as Treasurer, Vice President
of Finance and Chief Financial Officer.  Mr. DenBesten received a B.S. in business administration and an
M.S. in Finance from the University of Arizona.

Charlotte A. Swafford (Treasurer) has been Treasurer of the Company since 1985.  She joined NHC
in1973 and has served as Staff Accountant, Accounting Supervisor and Assistant Treasurer.  She has a B.S.
degree from Tennessee Technological University.

**ITEM 11**

**EXECUTIVE COMPENSATION**

Information about our Executive Officer and Board of Directors compensation, including stock
option information, is set out in prose and tabular detail in our definitive 2003 Proxy Statement which is
accompanying this annual report on Form 10-K.  This information is incorporated by reference herein as
though copied verbatim.

**ITEM 12**

**SECURITY OWNERSHIP OF CERTAIN**

**BENEFICIAL OWNERS AND MANAGEMENT**

|                                            | Number of NHR       |                        
|------------------------------------------- | ------------------- | -----------------------
|                                            | Shares Beneficially | Percentage of Total NHR
|Names and Addresses of Beneficial Owner     | Owned (3)           | Shares(1)              
|                                            |                     |                        
|W. Andrew Adams, President                  |                     |                        
|801 Mooreland Lane                          |                     |                        
|Murfreesboro, TN 37128                      | 1,128,581(2)        | 10.4%                  
|                                            |                     |                        
|Dr. Olin O. Williams, Director              |                     |                        
|2007 Riverview Drive                        |                     |                        
|Murfreesboro, TN 37129                      | 113,645             | 1.2%                   
|                                            |                     |                        
|Joseph M. Swanson, Director                 |                     |                        
|1188 Park Avenue                            |                     |                        
|Murfreesboro, TN 37129                      | ---                 | *                      
|                                            |                     |                        
|Robert G. Adams, Director & Sr. V.P.        |                     |                        
|2217 Battleground Drive                     |                     |                        
|Murfreesboro, TN 37129                      | 485,309             | 5.1%                   
|                                            |                     |                        
|Ernest G. Burgess, Director                 |                     |                        
|7097 Franklin Road                          |                     |                        
|Murfreesboro, TN 37129                      | 155,000             | 1.6%                   
|                                            |                     |                        
|Richard F. LaRoche, Jr.                     |                     |                        
|Secretary and General Counsel               |                     |                        
|2103 Shannon Drive                          |                     |                        
|Murfreesboro, TN 37130                      | 372,714             | 4.0%                   
|                                            |                     |                        
|Donald K. Daniel                            |                     |                        
|Vice President & Controller                 |                     |                        
|1441 Haynes Drive                           |                     |                        
|Murfreesboro, TN 37129                      | 139,273             | 1.4%                   
|                                            |                     |                        
|Charlotte A. Swafford                       |                     |                        
|Treasurer                                   |                     |                        
|915 Main Street                             |                     |                        
|Murfreesboro, TN 37130                      | 152,978             | 1.6%                   
|                                            |                     |                        
|Kenneth D. DenBesten                        |                     |                        
|Vice President/Finance                      |                     |                        
|1610 Wexford Drive                          |                     |                        
|Murfreesboro, TN 37129                      | 20,870              | *                      
|                                            |                     |                        
|National Health Corporation                 |                     |                        
|P. O. Box 1398                              |                     |                        
|Murfreesboro, TN 37133                      | 1,271,147(2)        | 11.8%                  
|                                            |                     |                        
|National Financial Services Corporation     |                     |                        
|200 Liberty Street                          |                     |                        
|New York, NY 10281                          | 546,380             | 5.7%                   
|                                            |                     |                        
|T. Rowe Price Associates, Inc.              |                     |                        
|100 E. Pratt Street                         |                     |                        
|Baltimore, MD 21202                         | 794,100(4)          | 8.3%                   
|                                            |                     |                        
|T. Rowe Price Small-Cap Value Fund, Inc.    |                     |                        
|100 E. Pratt Street                         |                     |                        
|Baltimore, MD 21202                         | 650,000(4)          | 6.8%                   
|                                            |                     |                        
|All Executive Officers and Directors of NHR | 2,568,370           | 26.8%                  

(1)	Based on 9,570,323 shares outstanding at December 31, 2002.  This ownership is for SEC purposes and
not for purposes of real estate investment trust regulations.

(2)	Included as shares beneficially owned are units of limited partnership interest in NHR/OP, L.P., our
operating subsidiary.  Although these units cannot vote, they may be exchanged for shares of our
common stock.  This exchange has income tax consequences to the holder, but not to us.

(3)	Except as otherwise noted, all shares are owned beneficially with sole voting and investment power.
Included in the amounts above are 20,000 shares each optioned to Mr. Burgess and Dr. Williams, as well
as the options to Messrs. Adams, LaRoche, Daniel, DenBesten and Ms. Swafford.  571,754 shares
attributed to Mr. Adams are actually units of limited partnership interest in NHR/OP, L.P., which may
be, under certain conditions, convertible into the common shares of NHR.

(4)	These securities are owned by various individual and institutional investors which T. Rowe Price
Associates, Inc. (Price Associates) serves as investment adviser with power to direct investments and/or
sole power to vote the securities.  For purposes of the reporting requirements of the Securities Exchange
Act of 1934, Price Associates is deemed to be a beneficial owner of such securities; however, Price
Associates expressly disclaims that it is, in fact, the beneficial owner of such securities.

******ITEM 13**

**CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**



**The Assumed Liabilities**

We were transferred the Healthcare Facilities subject to Assumed Liabilities of approximately $86.4
million at December 31, 1997.  We immediately repaid $71.6 million of the Assumed Liabilities with the
proceeds of the NHR Credit Agreement in the amount of $75 million currently with AmSouth Bank as agent
(principal balance outstanding at December 31, 2002 of $58,157,000).  The balance of the Assumed
Liabilities includes $11.6 million of secured liabilities at fixed rates of 8.4% and 8.3%, which are amortizing
and will be paid in full by the end of the calendar year 2005 and $3.2 million of first mortgage revenue bonds
which were purchased by us during 2002.

Although we are subject to the Assumed Liabilities, NHC has remained liable on certain unassumed
portions of such debt in certain percentages.  We have agreed to indemnify NHC in respect of such
continuing liability.

Of the Assumed Liabilities, approximately $11.6 million is represented by fixed rate first mortgage
notes.  We have obtained the consent of the holders of these notes who have agreed that our liability is
limited to 28% of the total outstanding mortgage notes in question which are cross collateralized with other
debt of NHC.

**The Leases**

The Master Lease Agreement with NHC provides that each Lease will be for an initial term expiring
on December 31, 2007 (the Initial Term). Provided that NHC is not then in default and gives at least six
months notice, NHC has the option to renew all (but without NHR's consent not less than all) of the Leases
for a further five-year term expiring December 31, 2012 (the First Renewal Term); and, provided that NHC
is not then in default and gives at least six (6) months notice, NHC will have the option to renew all (but not
less than all) of the Leases for a term expiring December 31, 2017 (the Second Renewal Term).

During the Initial Term and both Renewal Terms (if applicable), NHC is obligated to pay us annual
base rent for the respective  Healthcare Facilities in the respective amounts which upon completion of
construction will initially aggregate $15,494,437.  Additionally, in each quarter of each year after 1999, NHC
is obligated to pay percentage rent to us equal to 3% of the amount by which gross revenues of each NHC
leased health care facility in such later quarter exceed the gross revenues of such health care facility in the
applicable quarter of 1999.

The Master Agreement and the respective Leases will also obligate NHC to pay as "other additional
rent" all real estate taxes, utility charges and other charges imposed by third parties and which, if not paid,
might become a levy or a lien upon the property.  Base rent, other additional rent and percentage rent are
collectively referred to in the Master Agreement as "rent."

Each Lease of a Healthcare Facility is what is commonly known as a "triple net lease" or "absolute
net lease," under which NHC is responsible for paying all taxes, utilities, insurance premium costs, repairs
(including to structural portions of the buildings constituting a part of the Healthcare Facilities) 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  Healthcare
Facility by NHC or persons claiming under NHC and related activities, as well as to be fully responsible for,
and to indemnify and hold NHR harmless against, all costs related to any hazardous substances or materials
on, or other environmental responsibility with respect to, each  Healthcare Facility.

The Master Agreement provides that if during the Lease Term or within six months after termination
of such Term we receive a bona fide third party offer to purchase any Healthcare Facility, then, prior to
accepting such third party offer, we shall give NHC a 15-day right of first refusal during which NHC may
elect to purchase such  Healthcare Facility on the same terms and conditions offered by the third party.  NHC
also is granted a thirty day right of first refusal to lease an  Healthcare Facility expiring six months after the
expiration of the Lease Term, on the same terms and conditions as offered by a third party, and accepted by
us.

The Master Agreement described above applies only to the 24 Leases of the Healthcare Facilities.
We and NHC anticipate that any future leases of additional healthcare facilities between them will also
become subject to the Master Agreement with appropriate modifications to fit the specific situation.  The
foregoing summary of certain of the provisions of the Master Agreement does not purport to be complete
and is subject to and qualified in its entirety by reference to all provisions of the Master Agreement.

Although NHC has with our consent terminated nine of the leases, (all in Florida), we have re-leased
each facility to third parties on terms substantially to those above described.  NHC remains obligated to its
total rent payment owed pursuant to the Master Lease, but receives credit for rent payments made by the new
lessees on these nine properties.

**Advisory, Administrative Services and Facilities Agreement (the Advisory Agreement)**

***Services of Advisor*****

Under the Advisory Agreement, we engage NHC and NHC, as Advisor, agrees to use its best efforts
(a) to present to us a continuing and suitable investment program consistent with our investment policy; (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 Agreement, the Advisor is subject
to the supervision of and policies established by our Board of Directors.

The specific duties of the Advisor under the Advisory Agreement include providing us with
economic information and evaluations with respect to additional investment opportunities, formulating an
investment program and selecting potential investments for us and recommending the terms thereof; and also
evaluating and making recommendations as to the possible sale or other disposition of our assets. The
Advisor also is responsible for recommending selections of tenants, lenders, providers of professional and
specialized services and handling other managerial functions with respect to our properties. The Advisor is
also obligated to provide office and clerical facilities adequate for our operations, and to provide or obtain
others to provide accounting, custodial, funds collection and payment, stockholder and debenture holder
communications, legal and other services necessary in connection with our operations. The Advisor also
undertakes to keep our Directors informed as to developments in the healthcare and REIT industries useful
to our existing and potential future business and investments.

The NHR Advisory Agreement also obligates the Advisor to handle or arrange for the handling of
our financial and other records. The Advisor is also required to keep its own records with respect to its
services under the NHR Advisory Agreement. Annually, or as more frequently requested by our Directors,
the Advisor is obligated to report to our Directors its estimated costs in providing services under the NHR
Advisory Agreement and such information as the Advisor may reasonably obtain concerning the cost to other
REITs specializing in healthcare facility investments of administrative and advisory services comparable
to those provided by the Advisor, in order that our Directors may evaluate the performance of the Advisor
and the efficiency of the arrangements provided to us under the Advisory Agreement.

***Restrictions on Investment Activities*****

The Advisory Agreement provides that prior to the earlier to occur of (i) the termination, for any
reason, of the Advisory Agreement or (ii) NHC ceasing to be actively engaged as the investment advisor for
NHI, we will not (without the prior approval of NHI) transact business with any party, person, company or
firm other than NHC.  It is the intent of the foregoing restriction that we will not be actively or passively
engaged in the pursuit of additional investment opportunities, but rather we will focus upon our capacities
as landlord and note holder of those certain assets, conveyed to us on December 31, 1997 by NHC.

***Term*****

The Advisory Agreement is for a stated term expiring 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.

Upon termination of the Advisory Agreement for any reason, the Advisor is obligated to deliver all
our property that the Advisor is holding in its capacity as Advisor, to render a full accounting to us and to
cooperate with our Directors to provide an orderly management transition. We are obligated, upon such
termination, to pay NHC all compensation for services through the date of termination, including any
compensation the payment of which was deferred during the period the Advisory Agreement was in effect.

***Compensation*****

For its services under the Advisory Agreement, NHC  is entitled to annual compensation of the
greater of (i) two percent (2%) of our gross consolidated revenues calculated according to generally accepted
accounting principles, or (ii) the actual expenses incurred by NHC as outlined in the Advisory Agreement.
The actual amounts paid in 2002, 2001 and 2000 were $493,000, $504,000 and $503,000, respectively.

***Payment of Expenses*****

The Advisory Agreement provides that NHC shall pay all expenses incurred in performing its
obligations thereunder, without regard to the amount of compensation received under the Advisory
Agreement. Expenses specifically listed as expenses to be borne by NHC without reimbursement include:
the cost of accounting, statistical or bookkeeping equipment necessary for the maintenance of our books and
records; employment expenses of the officers and directors and personnel of NHC and all expenses,
including travel expenses, of NHC incidental to the investigation and acquisition of properties for us prior
to the time our Directors definitively decide to acquire the property or to have NHC continue with the
acquisition process, whether the property is acquired or not, and after our Directors definitively decide to
dispose of a property; advertising and promotional expenses incurred in seeking and disposing of
investments for us; rent, telephone, utilities, office furniture and furnishings and other office expenses
incurred by or allocable to NHC for its own benefit and account regardless of whether incurred or used in
connection with rendering the services to us provided for in the NHR Advisory Agreement;  all
miscellaneous administrative and other expenses of NHC, whether or not relating to the performance by
NHC of its functions under the NHR Advisory Agreement; fees and expenses paid to independent
contractors, appraisers, consultants, attorneys, managers and other agents retained by or on our behalf and
expenses directly connected with the acquisition, financing, refinancing, disposition and ownership of real
estate interests or of other property (including insurance premiums, legal services, brokerage and sales
commissions, maintenance, repair and improvement of property); insurance as required by our Directors
(including our Directors' liability insurance); expenses connected with payments of dividends or
distributions in cash or any other form made or caused to be made by our Directors to REIT shareholders
and expenses connected with payments of interest to holders of our debentures; all expenses connected with
communication to holders of our securities and the other bookkeeping and clerical work necessary in
maintaining relations with holders of securities, including the cost of printing and mailing certificates for
securities and proxy solicitation materials and reports to holders of our securities; transfer agent's,
registrar's, dividend disbursing agent's, dividend reinvestment plan agent's and indenture trustee's fees and
charges.  The NHR Advisory Agreement also confirms that NHC shall pay all costs and expenses which it
is obligated to pay as tenant under any lease of healthcare facilities from us.

The NHR Advisory Agreement also confirms that NHC is responsible for all our legal and auditing
fees and expenses and legal, auditing accounting, underwriting, brokerage, listing, registration and other fees
and printing, engraving and other expenses and taxes incurred in connection with our organization, but such
expenses incurred after January 1, 1998 for the issuance, distribution, transfer, registration and listing of our
shares shall remain our obligation.

The NHR Advisory Agreement provides that, except as NHC may have responsibility for such costs
as tenant under the lease of any property from us, we are responsible to pay our own expenses of the
following types: dividends, the cost of borrowed money; taxes on income and taxes and assessments on real
property and all other taxes applicable to us including, without limitation, franchise and excise fees; except
as assumed by NHC, all ordinary and necessary expenses incurred with respect to and allocable to our
prudent operation and business including, without limitation, any fees, salaries and other employment costs,
taxes and expenses paid to our Directors, officers and employees who are not also employees of NHC.

******PART IV**

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

**ITEM 14**

**CONTROLS AND PROCEDURES**

**Evaluation of the Company's Disclosure Controls and Internal Controls.**  Within the 90 days
prior to the date of this Annual Report on Form 10-K, an evaluation was performed under the supervision
and with the participation of the Company's management, including the Chief Executive Officer ("CEO")
and Principal Accounting Officer ("PAO"), of the effectiveness of the design and operation of the
Company's disclosure controls and procedures.

**CEO and PAO Certifications.**  Appearing immediately following the Signatures section of this
Annual Report are the Certifications of the CEO and PAO as required in accord with Section 302 of the
Sarbanes-Oxley Act of 2002 (the Section 302 Certification).  This section of the Annual Report which you
are currently reading is the information concerning the Controls Evaluation referred to in the Section 302
Certifications and this information should be read in conjunction with the Section 302 Certifications for a
more complete understanding of the topics presented.

**Disclosure Controls and Internal Controls.**  Disclosure Controls are procedures that are designed
with the objection of ensuring that information required to be disclosed in our reports filed under the
Securities Exchange Act of 1934 (Exchange Act), such as this Annual Report, is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange Commission's
(SEC) rules and forms.  Disclosure Controls are also designed with the objective of ensuring that such
information is accumulated and communicated to our management, including the CEO and PAO, as
appropriate to allow timely decisions regarding required disclosure.  Internal Controls are procedures which
are designed with the objective of providing reasonable assurance that (1) our transactions are properly
authorized; (2) our assets are safeguarded against unauthorized or improper use; and (3) our transactions are
properly recorded and reported, all to permit the preparation of our financial statements in conformity with
generally accepted accounting principles.

**Limitations on the Effectiveness of Controls.**  The Company's management, including the CEO
and PAO, does not expect that our Disclosure Controls 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 benefits 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, within the company have
been detected.  These inherent limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simply error or mistake.  Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more people, or by management
override of the control.  The design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions; over time, control may become inadequate because of
changes in condition, or the degree of compliance with the policies or procedures may deteriorate.  Because
of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur
and not be detected.

**Scope of the Controls Evaluation.**  Among other matters, we sought in our evaluation to determine
whether there were any "significant deficiencies" or "material weaknesses" in the Company's Internal
Controls, or whether the company had identified any acts of fraud involving personnel who have a significant
role in the Company's Internal Controls.  This information was important both for the Controls Evaluation
generally and because items 5 and 6 in the Section 302 Certifications of the CEO and CFO require that the
CEO and PAO disclose that information to our Board's Audit Committee and to our independent auditors
and to report on related matters in this section of the Annual Report.  In the professional auditing literature,
"significant deficiencies" are referred to as "reportable conditions"; these are control issues that could have
a significant adverse effect on the ability to record, process, summarize and report financial data in the
financial statements.  A "material weakness" is defined in the auditing literature as a particularly serious
reportable condition where the internal control does not reduce to a relatively low level the risk that
misstatements caused by error or fraud may occur in amounts that would be material in relation to the
financial statements and not be detected within a timely period by employees in the normal course of
performing their assigned functions.  We also sought to deal with other controls matters in the Controls
Evaluation, and in each case if a problem was identified, we considered what revision, improvement and/or
correction to make in accord with our on-going procedures.

In accord with SEC requirements, the CEO and PAO note that, since the date of the Controls
Evaluation to the date of the Annual Report, there have been no significant changes in Internal Controls or
in other factors that could significantly affect Internal Controls, including any corrective actions with regard
to significant deficiencies and material weaknesses.

**Conclusions.**  Based upon the Controls Evaluation, our CEO and PAO have concluded that, subject
to the limitations noted above, our Disclosure Controls are effective to ensure that material information
relating to National Health Realty, Inc. and its consolidated subsidiaries is made known to management,
including the CEO and PAO, particularly during the period when our periodic reports are being prepared,
and that our Internal Controls are effective to provide reasonable assurance that our financial statements are
fairly presented in conformity with generally accepted accounting principles.

**ITEM 15**

**EXHIBITS, FINANCIAL STATEMENT SCHEDULES,**

**AND REPORTS ON FORM 8-K**

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 Public Accountants and Independent
Auditors 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.

b)	Reports on Form 8-K: None.****

**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 6th day of March, 2003.

|
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|
|
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|
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|

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        | President and Director        |              
|W. Andrew Adams            | Chief Executive Officer       | March 6, 2003
|                           |                               |              
|/s/ Donald K. Daniel       | Vice President and Controller |              
|Donald K. Daniel           | Principal Accounting Officer  | March 6, 2003
|                           |                               |              
|/s/ Robert G. Adams        |                               |              
|Robert G. Adams            | Director                      | March 6, 2003
|                           |                               |              
|/s/ Olin O. Williams       |                               |              
|Olin O. Williams           | Director                      | March 6, 2003
|                           |                               |              
|/s/ Ernest G. Burgess, III |                               |              
|Ernest G. Burgess, III     | Director                      | March 6, 2003
|                           |                               |              
|                           |                               |              
|/s/ Joseph M. Swanson      | Director                      | March 6, 2003
|Joseph M. Swanson          |                               |              

**CERTIFICATION**

I, W. Andrew 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 annual 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 annual
report;

4.	The registrant's other certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:

a.	designed such disclosure controls and procedures 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 annual report is
being prepared;

b.	evaluated the effectiveness of the registrant's disclosure controls and procedures as of a
date within 90 days prior to the filing date of this annual report (the "Evaluation Date");
and

c.	presented in this annual report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;

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

a.	all significant deficiencies in the design or operation of internal controls which could
adversely affect the registrant's ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any material weaknesses in internal
controls; and

b.	any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant's internal controls; and

6.	The registrant's other certifying officers and I have indicated in this annual report whether there
were significant changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|Date: March 6, 2003
|-------------------
|                   
|                   
|                   
|                   

**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 annual 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 annual
report;

4.	The registrant's other certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:

a.	designed such disclosure controls and procedures 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 annual report is
being prepared;

b.	evaluated the effectiveness of the registrant's disclosure controls and procedures as of a
date within 90 days prior to the filing date of this annual report (the "Evaluation Date");
and

c.	presented in this annual report our conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the Evaluation Date;

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

a.	all significant deficiencies in the design or operation of internal controls which could
adversely affect the registrant's ability to record, process, summarize and report financial
data and have identified for the registrant's auditors any material weaknesses in internal
controls; and

b.	any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant's internal controls; and

6.	The registrant's other certifying officers and I have indicated in this annual report whether there
were significant changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

|Date: March 6, 2003
|-------------------
|                   
|                   
|                   
|                   

**EXHIBIT INDEX**

ExhibitNo. 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                                                                           | Consent of Independent Auditors****                                         

**EXHIBIT 13**

**NATIONAL HEALTH REALTY, INC.**

**INDEX TO FINANCIAL STATEMENT SCHEDULES**

Financial Statement Schedules

Report of Independent Public Accountants on Financial Statement Schedules

Report of Independent Auditors 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.

*The below report is a copy of the report previously issued by Arthur Andersen LLP in conjunction
with its audits of National Health Realty, Inc. and Subsidiaries as of, and for the three-year period ended,
December 31, 2001.  A copy of this report has been provided as required by the American Institute of
Certified Public Accountant's Interpretation of Statement on Auditing Standards No. 58,*Reports on Audited
Financial**Statements,*and guidance issued by the Securities and Exchange Commission in response to the
indictment of Arthur Andersen LLP in March 2002.  During 2002, Arthur Andersen LLP substantially ceased
operations, including providing auditing and accounting services to public companies, and, as such, has not
reissued this report.  Additionally, Arthur Andersen LLP has not consented to the use of this audit report.
Accordingly, limitations may exist on (a) investor's rights to sue Arthur Andersen LLP under Section 11 of
the Securities Act for false and misleading financial statements, if any, and the effect, if any, on the due
diligence defense of directors and officers, and (b) investor's legal rights to sue and recover damages from
Arthur Andersen LLP for material misstatements or omissions, if any, in any registration statements and
related prospectuses that include, or incorporate by reference, financial statements previously audited by
Arthur Andersen LLP.*

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

ON FINANCIAL STATEMENT SCHEDULES

To National Health Realty, Inc.:

We have audited, in accordance with auditing standards generally accepted in the United States, the
consolidated financial statements of National Health Realty, Inc. included in Item 8 of this Form 10-K, and
have issued our report thereon dated January 15, 2002.  Our audits were made for the purpose of forming
an opinion on the basic consolidated financial statements taken as a whole.  The financial statement
schedules listed in the accompanying index to Exhibit 13 are the responsibility of the Company's
management and are presented for purposes of complying with the Securities and Exchange Commission's
rules and are not otherwise a required part of the basic consolidated financial statements.  The financial
statement schedules have been subjected to the auditing procedures applied in the audits of the basic
consolidated financial statements and, in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic consolidated financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Nashville, Tennessee

January 15, 2002

REPORT OF INDEPENDENT AUDITORS

ON FINANCIAL STATEMENT SCHEDULES

To the Stockholders of National Health Realty, Inc.:

We have audited the consolidated financial statements of National Health Realty, Inc. and
Subsidiaries as of December 31, 2002, and for the year ended December 31, 2002, and have issued our report
thereon dated January 23, 2003 (included elsewhere in this Registration Statement).  Our audit also included
the 2002 financial statement schedules listed in Exhibit 13 of this Registration Statement.  These schedules
are the responsibility of the Company's management.  Our responsibility is to express an opinion based on
our audit.  The 2001 and 2000 financial statement schedules were audited by other auditors, who have ceased
operations and whose report dated January 15, 2002 expressed an unqualified opinion on those financial
statement schedules.

In our opinion, the 2002 financial statement schedules referred to above, when considered in relation
to the 2002 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, 2003

|NATIONAL HEALTH REALTY, INC.                            
|--------------------------------------------------------
|SCHEDULE III  - REAL ESTATE AND ACCUMULATED DEPRECIATION
|DECEMBER 31, 2002                                       
|                                                        
|Column A                                                
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|Description                                             
|Health Care Centers (6)                                 
|Florida                                                 
|                                                        
|Health Care Centers (4)                                 
|Indiana                                                 
|                                                        
|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)    See Notes 3 and 4 of Notes to Consolidated Financial Statements.

(B)    The aggregate cost for federal income tax purposes is approximately $172,624,000.

(C)    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, 2002, 2001 AND 2000            
|                                                                
|                                                                
|                                                                
|                                                                
|Investment in Real Estate:                                      
|Balance at beginning of period                                  
|Additions through cash expenditures                             
|Additions in exchange for rights under mortgage notes receivable
|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                          
|Balance at end of year                                          

|NATIONAL HEALTH REALTY, INC.                
|--------------------------------------------
|SCHEDULE IV  - MORTGAGE LOANS ON REAL ESTATE
|DECEMBER 31, 2002                           
|                                            
|Column A                                    
|                                            
|                                            
|                                            
|                                            
|Description                                 
|                                            
|LONG-TERM CARE FACILITIES:                  
|First Mortgage Loans:                       
|Clearwater, Largo, Sun City & Tampa         
|Florida (A)(B)                              
|                                            
|Jacksonville & Pinnellas, Florida(E)        
|                                            
|Sarasota, Florida(F)                        
|                                            
|Ocoee, Florida (D)                          
|                                            
|Second Mortgage and other Loans:            
|Gainesville, Ocala, Orlando,                
|N. Miami Beach, Port St. Lucie, Vero        
|Beach, W. Palm Beach and Winter             
|Haven, Florida (A)(C)                       
|                                            

|(A) | Approximately $45,083,000 mortgage and other notes receivable are due from a single debtor that operates 14 licensed nursing centers in Florida.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------
|(B) | Balloon payments of approximately $20,151,000 due at maturity.                                                                                  
|(C) | Balloon payments of approximately $20,701,000 due at maturity.                                                                                  
|(D) | Balloon payment of approximately $2,131,000 due at maturity.                                                                                    
|(E) | Balloon payments of approximately $8,886,000 due at maturity.                                                                                   
|(F) | Balloon payments of approximately $1,578,000 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, 2002, 2001 AND 2000                           
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Reconciliation of mortgage loans:                                              
|Balance at beginning of period                                                 
|Additions:                                                                     
|New mortgage loans                                                             
|                                                                               
|Deductions during period:                                                      
|Collection of principal                                                        
|Acquisition of property and equipment in exchange for mortgage notes receivable
|                                                                               
|Balance at end of period                                                       



EXHIBIT 16

LETTER REGARDING CHANGES IN CERTIFYING ACCOUNTANT

July 2, 2002

Office of the Chief Accountant

Securities and Exchange Commission

450 Fifth Street, NW

Washington, DC 20549

Dear Sir/Madam:

We have read the 1st, 2nd, 3rd, and 4th paragraphs of Item 4 included in the Form 8-K dated July 2,
2002 of National Health Realty, Inc. to be filed with the Securities and Exchange Commission
and are in agreement with the statements contained therein.

Very truly yours,

/s/ Arthur Andersen LLP

Arthur Andersen LLP

cc: Donald K. Daniel

Vice President and Controller

EXHIBIT 21

NATIONAL HEALTH REALTY, INC.

SUBSIDIARY OF NATIONAL HEALTH REALTY, INC.

Subsidiary
State of OrganizationNHR/OP, L.P.
DelawareNHR/Delaware, Inc.
Delaware

EXHIBIT 23

CONSENT OF INDEPENDENT AUDITORS

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

/s/ERNST & YOUNG LLP

Nashville, Tennessee

March 5, 2003