|**FORM 10-Q**                                                                                                                                     
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|**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549******                                                                           
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|Quarterly Report Under Section 13 of 15(d)

of the Securities Exchange Act of 1934                                                                
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|For quarter ended September 30, 2001                                                                                                              
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|**NATIONAL HEALTH REALTY, INC.**

(Exact name of registrant as specified in its Charter)                                                          
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|Maryland

(State or other jurisdiction of incorporation or
organization                                                                           
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|                                                                                                                                                  
|100 Vine Street

Murfreesboro, TN

(Address of principal

executive offices)                                                                      
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|Registrant's telephone number, including area code (615) 890-2020                                                                                 
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|Indicate by check mark whether the registrant                                                                                                     
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|(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.
|Yes X                                                                                                                                             
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|(2)     Has been subject to such filing requirements for the past 90 days.                                                                        
|Yes X                                                                                                                                             
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|9,570,323 shares of common stock were outstanding as of October 31, 2001.                                                                         



|**Item 1.  Financial Statements.**                                                                                 |                                    |                   
|------------------------------------------------------------------------------------------------------------------ | ---------------------------------- | ------------------
|                                                                                                                   |                                    |                   
|NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES                                                                     
|                                                                                                                   |                                    |                   
|INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS

*(in thousands, except share amounts)*                             
|                                                                                                                   |                                    |                   
|                                                                                                                   | September 30,

2001

*(unaudited)* | December 31,

2000
|ASSETS                                                                                                             |                                    |                   
|Real estate properties:                                                                                            |                                    |                   
|Land                                                                                                               | $  20,206                          | $  20,231         
|Buildings and improvements                                                                                         | 158,049                            | 156,348           
|                                                                                                                   | 178,255                            | 176,579           
|Less accumulated depreciation                                                                                      | (26,372)                           | (20,826)          
|Real estate properties, net                                                                                        | 151,883                            | 155,753           
|                                                                                                                   |                                    |                   
|Mortgage and other notes receivable                                                                                | 79,707                             | 84,132            
|Interest and rent receivable                                                                                       | 445                                | 525               
|Cash and cash equivalents                                                                                          | 4,611                              | 2,533             
|Deferred costs and other assets                                                                                    | 470                                | 414               
|Total Assets                                                                                                       | $237,116                           | $243,357          
|                                                                                                                   |                                    |                   
|LIABILITIES                                                                                                        |                                    |                   
|Debt                                                                                                               | $  97,252                          | $100,928          
|Minority interest in consolidated subsidiaries                                                                     | 15,122                             | 15,518            
|Accounts payable and other accrued expenses                                                                        | 885                                | 807               
|Accrued interest                                                                                                   | 143                                | 96                
|Dividends payable                                                                                                  | 3,182                              | 3,182             
|Distributions payable to partners                                                                                  | 404                                | 404               
|Deferred income                                                                                                    | 807                                | ---               
|Total Liabilities                                                                                                  | 117,795                            | 120,935           
|                                                                                                                   |                                    |                   
|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             | 96                                 | 96                
|Capital in excess of par value of common stock                                                                     | 135,324                            | 135,324           
|Cumulative net income                                                                                              | 31,431                             | 24,986            
|Cumulative dividends                                                                                               | (47,530)                           | (37,984)          
|Total Stockholders' Equity                                                                                         | 119,321                            | 122,422           
|Total Liabilities and Stockholders' Equity                                                                         | $237,116                           | $243,357          

*The accompanying notes to interim condensed consolidated financial statements are an integral part of these financial statements.*

*The interim condensed balance sheet at December 31, 2000 is derived from the audited financial statements at that date.*



|NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES                     
|------------------------------------------------------------------
|                                                                  
|INTERIM CONDENSED CONSOLIDATED STATEMENTS OF INCOME

*(Unaudited)*
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|REVENUES:                                                         
|Rental income                                                     
|Mortgage interest income                                          
|Investment interest and other income                              
|                                                                  
|EXPENSES:                                                         
|Interest                                                          
|Depreciation of real estate                                       
|Amortization of loan costs                                        
|General and administrative                                        
|                                                                  
|                                                                  
|INCOME BEFORE MINORITY INTEREST IN

CONSOLIDATED SUBSIDIARIES     
|                                                                  
|MINORITY INTEREST IN CONSOLIDATED
     SUBSIDIARIES               
|                                                                  
|NET INCOME                                                        
|                                                                  
|NET INCOME PER COMMON SHARE:                                      
|Basic                                                             
|Diluted                                                           
|                                                                  
|WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:                       
|Basic                                                             
|Diluted                                                           
|                                                                  
|Common dividends per share declared                               

***The accompanying notes to interim condensed consolidated financial statements are an integral part of these
financial statements.*



|NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES                                                                                                      
|---------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                   
|INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

*(unaudited)*                                                                             
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|                                                                                                                                                   
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|                                                                                                                                                   
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                                                              
|Net income                                                                                                                                         
|Depreciation of real estate                                                                                                                        
|Amortization of loan costs                                                                                                                         
|Minority interests in consolidated subsidiaries                                                                                                    
|(Increase) decrease in interest and rent receivable                                                                                                
|Increase in deferred income                                                                                                                        
|Increase in other assets                                                                                                                           
|Increase in accounts payable and accrued liabilities                                                                                               
|NET CASH PROVIDED BY OPERATING ACTIVITIES                                                                                                          
|                                                                                                                                                   
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                                                              
|Investment in mortgage notes receivable                                                                                                            
|Purchase of property and equipment, net                                                                                                            
|Collection of mortgage notes receivable                                                                                                            
|NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                                                                                                
|                                                                                                                                                   
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                                              
|Proceeds from long-term debt                                                                                                                       
|Payments on long-term debt                                                                                                                         
|Dividends paid to stockholders                                                                                                                     
|Distributions paid to partners                                                                                                                     
|NET CASH USED IN FINANCING ACTIVITIES                                                                                                              
|                                                                                                                                                   
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                                                                   
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                                                                                     
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                                                                                           
|                                                                                                                                                   
|Supplemental Information:                                                                                                                          
|Cash payments for interest expense                                                                                                                 
|                                                                                                                                                   
|During the nine months ended September 30, 2001, NHR acquired property and

equipment in exchange for its rights under first mortgage revenue bonds
|First mortgage revenue bonds                                                                                                                       
|Building and improvements                                                                                                                          

*The accompanying notes to interim condensed consolidated financial statements are an integral part of these financial statements.*

NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000

*(dollars in thousands)*Cumulative Convertible

Preferred Stock
Common Stock
Capital in

Excess of
Cumulative
Cumulative
Total

Stockholders'Shares
Amount
Shares
Amount
Par Value
Net Income
Dividends
EquityBALANCE AT 12/31/00
---
$        ---
9,570,323
$       96
$135,324
$ 24,986
$(37,984)
$122,422Net income
---
---
---
---
---
6,445
---
6,445Dividends to common share-

holders ($.6650 per share)
---
---
---
---
---
---
(9,546)
(9,546)BALANCE AT 9/30/01
---
$        ---
9,570,323
$       96
$135,324
$ 31,431
$(47,530)
$119,321BALANCE AT 12/31/99
---
$        ---
9,588,823
$       96
$135,268
$ 17,047
$(25,264)
$127,147Net income
---
---
---
---
---
5,825
---
5,825Shares canceled
---
---
(18,500)
---
56
---
---
56Dividends to common share-

holders ($.6650 per share)
---
---
---
-
---
---
(9,539)
(9,539)BALANCE AT 9/30/00
---
$        ---
9,570,323
$       96
$135,324
$ 22,872
$(34,803)
$123,489*The accompanying notes to interim condensed consolidated financial statements are an integral part of these financial statements.*









**NOTE 1.  SIGNIFICANT ACCOUNTING POLICIES:**

The unaudited financial statements to which these notes are attached include, in our opinion,
all adjustments which are necessary to fairly present the financial position, results of operations and
cash flows of National Health Realty, Inc. (NHR or the Company) and its majority owned
subsidiaries.  We assume that users of these interim financial statements have read or have access
to the audited December 31, 2000, financial statements and Management's Discussion and Analysis
of Financial Condition and Results of Operations and that the adequacy of additional disclosure
needed for a fair presentation, except in regard to material contingencies, may be determined in that
context.  See our web page at www.nationalhealthrealty.com.  Accordingly, footnotes and other
disclosures which would substantially duplicate the disclosure contained in our most recent annual
report to stockholders have been omitted.  This quarter's interim financial information is not
necessarily indicative of the results that may be expected for a full year for a variety of reasons
including changes in interest rates, rents and the timing of debt and equity financings.

**NOTE 2.  EARNINGS PER SHARE**:

Basic earnings per share is based on the weighted average number of common shares
outstanding during the year.

Diluted earnings per share assumes the exercise of stock options using the treasury stock
method.

The following table summarizes the earnings and the average number of common shares and
common equivalent shares used in the calculation of basic and diluted earnings per share.











|                                            | Three Months Ended

September 30 | Nine Months Ended

September 30
|------------------------------------------- | -------------------------------- | -------------------------------
|                                           
|BASIC:                                      | 2001                             | 2000                           
|Weighted average common shares              | 9,570,323                        | 9,570,323                      
|Net income available to common stockholders | $2,453,000                       | $ 1,908,000                    
|                                            |                                  |                                
|Net income per common share                 | $           .26                  | $            .20               
|                                            |                                  |                                
|DILUTED:                                    |                                  |                                
|Weighted average common shares              | 9,570,323                        | 9,570,323                      
|Stock options                               | 168,456                          | 17,448                         
|Average common shares outstanding           | 9,738,779                        | 9,587,771                      
|                                            |                                  |                                
|Net income available to common stockholders | $2,453,000                       | $ 1,908,000                    
|                                            |                                  |                                
|Net income per common share                 | $           .25                  | $            .20               

******NOTE 3.  COMMITMENTS, CONTINGENCIES AND GUARANTEES:**

At September 30, 2001, NHR is obligated to issue at the election of the holders 15,000 shares
of our common stock related to stock options (the NHC Options) originally issued by National
HealthCare Corporation (NHC).  The NHC Options are exercisable into an equal number of shares
of the common stock of NHC and NHR.  Thus, NHR is obligated to issue NHR common stock upon
the exercise of the NHC Options.  NHR will receive no proceeds from the exercise of the NHC
Options.  Accordingly, NHR has reserved 15,000 shares of common stock for the exercise of the
NHC Options.











At December 31, 1997, in order to protect the REIT status of NHR, 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, NHR has 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.

**NOTE 4. MORTGAGE PREPAYMENT CONTINGENCY:**

Approximately $57,829,000 of NHR's mortgage and other notes receivable is due from
Florida Convalescent Centers, Inc. (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, NHR will apply some or all of the proceeds against our bank line of credit.
If not so used, NHR will attempt to reinvest the balance available.  Although NHR's existing line
of credit requires a portion of the prepayments to be used to reduce bank debt, we may seek to obtain
a waiver of this requirement.  In the event that we use the money to reduce existing debt, a reduction
in our cash flow will result.

Effective July 31, 1999, the 14 FCC centers were leased and operated by Integrated Health
Systems, Inc. (IHS).  The ability of FCC to service the mortgage notes held by NHR is dependent
on IHS's ability to make its lease payments to FCC.  On February 2, 2000, IHS filed for bankruptcy
protection.  The financial status of IHS and its ultimate decision to retain or discard one or more of
the leases could have a material adverse impact on the financial position, results of operations and
cash flows of FCC and FCC's resultant ability to service its debt to NHR.  We have learned that IHS
is attempting to reject 5 (five) of its FCC leases, which attempt is being contested by FCC.  NHR's
payments from FCC are current as of September 30, 2001.

Approximately $24,480,000 of the notes receivable from FCC are secured by second
mortgages.  The first mortgage notes on these eight Florida nursing homes totaling approximately
$21,800,000 at December 31, 2000, 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 which is senior to NHR's second mortgage on these eight Florida nursing homes.











**NOTE 5.  DISPOSITION OF REAL ESTATE:**

*Loan Foreclosure-*

Through November 22, 2000, NHR held mortgage notes receivable from American
Healthcare Corporation or its affiliate AHC-Castleton, Inc., (collectively "AHC").  Collateral for the
loans included first and second mortgages on four long-term health care facilities located in the state
of Indiana.  NHR ceased receiving its monthly principal and interest payments in September 1999
and commenced foreclosure proceedings.

On November 22, 2000,  NHR purchased at public auction for $10,571,000 (the then carrying
amount of the principal and accrued interest on the AHC loans) the four facilities in Indiana.  NHR
also received $1,265,000 of cash based on an agreement reached with NHC, the previous manager
of the facilities.  NHR reduced the carrying amount of its investment in the principal and accrued
interest of the loans by the amount of cash received and recorded the real estate, property and
equipment of the four facilities at $9,306,000.  NHR also had a $1,630,000 first mortgage note
receivable on these properties that remained outstanding.

Following the foreclosure and effective January 1, 2001, we sold all of the real estate and
equipment of the four long-term health care centers located in Indiana, only three of which are
currently in operation.  Consideration for the sale and assumption of the $1,630,000 first mortgage
and the four properties is in the form of new mortgage notes in the total amount of $12,029,000.
NHR accounts 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, NHR has not recorded the sale of the assets and continues
to record depreciation expense each period.  Any cash received from the buyer (which totals
$807,000 as of September 30, 2001) is reported as deferred income until the down payment criterion
of SFAS 66 is met, at which time NHR will account for the sale under the full accrual method.











**NOTE 6.  DEBT**

Of our outstanding debt as of September 30, 2001, $5,609,000 was originally financed
through NHC, National Health Corporation (National) and the National Health Corporation
Leveraged Employee Stock Ownership Plan and Trust.  This debt (total outstanding balance of
$17,857,000 at September 30, 2001, of which $5,609,000 is our primary obligation) is cross-defaulted and cross collateralized with other obligations of NHC, National Health Investors, Inc.
(NHI) and National.  We are advised that those entities are in a position to timely pay any
obligations due upon maturity or call.  This debt is currently owned by NHC.

In addition, of our outstanding debt as of September 30, 2001, $3,200,000 is secured by a
mortgage of one of our health care centers and further backed by a bank letter of credit, which
expires on December 31, 2001.  We are in discussions with the bank regarding the extension of this
letter of credit but do not know now whether or not the extension will be granted.  The failure to
renew the letter of credit could cause us to repurchase this bond which would reduce cash available.

NHC, NHI and National have various debt and letters of credit maturing during 2001, which
will require adequate resources or debt refinancings to satisfy those maturities.  We believe, based
on discussions with NHC, NHI and National, that through refinancings and cash or marketable
securities on hand or other means these entities will meet the scheduled debt maturities.

Our long-term debt at September 30, 2001 includes a term loan with a principal amount of
$68,438,000 and a revolving line of credit of $20,000,000, both of which mature in December 2002.
We currently expect to either refinance the loans when due or utilize the proceeds from mortgage
loan principal receipts to retire portions of the long-term debt during 2001 and 2002.  The inability
to refinance or repay these obligations at or prior to maturity would cause us to be in default under
our debt obligations and would have a material adverse effect on our financial position and cash
flows.  ****

NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES





**NOTE 7.  NEW ACCOUNTING PRONOUNCEMENTS**

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 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. NHR has adopted SFAS 133,
as amended, effective January 1, 2001.  NHR's adoption of SFAS 133, as amended, did not have a
material impact on NHR's 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 NHR currently uses to evaluate the recoverability of its real
estate properties.  NHR will adopt the provisions of SFAS 144 effective January 1, 2002 and does
not expect such adoption to have a material effect on NHR's financial position, results of operations
or cash flows.

******Item 2.	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 our assets, through our subsidiary NHR/OP, L.P.
(the Operating Partnership), include the real estate of 26 health care facilities, including 19 licensed
skilled nursing facilities, six assisted living facilities and one independent living center (the Health
Care Facilities).  We also own 45 first and second mortgage promissory notes with principal
balances totaling $79,707,000 (the Notes) at September 30, 2001 and secured by the real property
of health care facilities.

NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES







*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 83 long-term care health care facilities with 10,808 beds in 12 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 will focus upon our capacities as landlord and note holder of those certain
assets we currently hold.

CAPITAL RESOURCES AND LIQUIDITY

Our long-term debt of $97,252,000 includes a term loan with a principal amount of
$68,438,000 and a revolving line of credit of $20,000,000, both of which mature in December 2002.
We currently expect to either refinance the loans when due or utilize the proceeds from mortgage
loan principal receipts to retire portions of the long-term debt during 2001 and 2002.  Total
scheduled debt principal maturities in 2001 are approximately $5,478,000.

At quarter end, NHR's long-term debt as a percentage of total liabilities and capital was
41.2%.  We expect our cash on hand, our operating and investing cash flows, and, as necessary, our
borrowing capacity including the extending of existing letters of credit to be adequate to repay
borrowings at or prior to their maturity, and to make dividend payments to shareholders adequate
to meet the REIT requirements.

NHR leases 23 health care facilities to various lessees: 14 properties are leased to NHC, and
effective October 1, 2000, nine properties that were previously leased to NHC are leased to nine
separate lessees not related to NHC.

The three properties that were previously leased to Health Services Management of Indiana,
LLC (HSMI) were sold to HSMI effective January 1, 2001.  The sale, however, is not recorded and
NHR continues to carry these properties on its balance sheet and to charge depreciation expense in
accordance with Statement of Financial Accounting Standards No. 66 "Accounting for Sales of Real
Estate", (SFAS 66), as more fully described in Note 5 to the financial statements.









With respect to the nine properties leased to separate lessees, NHC remains obligated under
its master lease agreement and continues to remain obligated to make the lease payments to NHR.
Lease payments made to NHR from the new lessees are credited against NHC's overall rent
obligation.

The leases with NHC and the nine separate lessees have initial five or ten year terms with
provisions for two five year renewal terms.

*FCC Notes-*

Of the $79,707,000 of first mortgage and other notes receivable, $57,829,000 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 use the proceeds to prepay some or all of our bank
line of credit and attempt to invest any unused proceeds.  In the event we use any prepayments to
pay down existing debt, a reduction of NHR's cash flow will occur.  However, no dividend
reductions are expected to result from this action.

Effective July 31, 1999, the 14 FCC centers were leased and operated by Integrated Health
Systems, Inc. (IHS).  The ability of FCC to service the mortgage notes held by NHR is dependent
on IHS's ability to make its lease payments to FCC.  On February 2, 2000, IHS filed for bankruptcy
protection.  The financial status of IHS and its ultimate decision to retain or discard one or more of
the leases could have a material adverse impact on the financial position, results of operations and
cash flows of FCC and FCC's resultant ability to service its debt to NHR.  We have learned that IHS
is attempting to reject five of its FCC leases, which attempt is being contested by FCC.  NHR's
payments from FCC are current as of September 30, 2001.

Approximately $24,480,000 of the notes receivable from FCC are secured by second
mortgages.  The first mortgage notes on these eight Florida nursing homes, totaling approximately
$21,800,000 at December 31, 2000, 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 which is senior to NHR's second mortgage on these eight Florida nursing homes.









*Loan Foreclosure-*

Through November 22, 2000, NHR held mortgage notes receivable from American
Healthcare Corporation and its affiliate AHC-Castleton, Inc (collectively "AHC").  Collateral for the
loans included first and second mortgages on four long-term health care facilities located in the state
of Indiana.  NHR ceased receiving its monthly principal and interest payments in June 1999 and
commenced foreclosure proceedings.

On November 22, 2000, NHR purchased at public auction for $10,571,000 (the then carrying
amount of the principal and accrued interest on the AHC loans) the four facilities in Indiana.  NHR
also received $1,265,000 of cash based on an agreement reached with NHC, the previous manager
of the facilities.  NHR reduced the carrying amount of its investment in the principal and accrued
interest of the loans by the amount of cash received and recorded the real estate, property and
equipment of the four facilities at $9,306,000.  NHR also had a $1,630,000 first mortgage note
receivable on these properties that remained outstanding.

Following the foreclosure and effective January 1, 2001, we sold all of the real estate and
equipment of the four long-term health care centers located in Indiana, only three of which are
currently in operation. Consideration for the sale of the properties and assumption of the $1,630,000
first mortgage is in the form of new mortgage notes in the total amount of $12,029,000.  NHR
accounts for this transaction under the deposit method in accordance with the provisions of SFAS
66.  Consistent with the deposit method, NHR has not recorded the sale of the assets and continues
to record depreciation expense each period.  Any cash received from the buyer (which totals
$807,000 as of September 30, 2001) is reported as deferred income until the down payment criterion
of SFAS 66 is met, at which time NHR will account for the sale under the full accrual method.

*Sources and Uses of Funds*-

Our leasing and mortgage services generated net cash from operating activities during the
nine months ended September 30, 2001 in the amount of $13,766,000 compared to $11,886,000 in
the prior period.  Net cash from operating activities generally includes net income plus non-cash
expenses, such as depreciation and amortization and provision for loan losses, if any, and working
capital changes.  The increase is due primarily to increased net income and decreases in interest and
rent receivable and increases in deferred income.









Cash flows provided by investing activities during the first nine months of 2001 included the
net investment of $46,000 in the purchase of property and equipment compared to investments in
the purchase of property and equipment of $2,695,000 in the prior period.  Also, cash was provided
by net collections on mortgage notes receivable of $2,795,000 during the nine months ended
September 30, 2001 compared to $2,437,000 in the prior period.

Cash flows used in financing activities for the first nine months of 2001 included no
borrowings compared to $2,000,000 of borrowings against the credit facility in the prior period.
Payments on long-term debt were $3,676,000 compared to $1,395,000 payments on long-term debt
in the same period last year.  Cash flows used in financing activities included $9,546,000 to pay
dividends to stockholders ($9,545,000 last year), and $1,215,000 to pay cash distributions to partners
($1,212,000 last year).

***Dividends-*

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.

*Debt-*

Of our outstanding debt as of September 30, 2001, $5,609,000 was originally financed
through NHC, National Health Corporation (National) and the National Health Corporation
Leveraged Employee Stock Ownership Plan and Trust.  This debt (total outstanding balance of
$17,857,000 at September 30, 2001, of which $5,609,000 is our primary obligation) is cross-defaulted and cross-collateralized with other obligations of NHC, NHI and National.  We are advised
that those entities are in a position to timely pay any obligations due upon maturity or call.   This
debt is currently owned by NHC.









In addition, of our outstanding debt as of September 30, 2001, $3,200,000 is secured by a
mortgage of one of our health care centers and further backed by a bank letter of credit, which
expires on December 31, 2001.  We are in discussions with the bank regarding the extension of this
letter of credit but do not know now whether or not the extension will be granted.  The failure to
renew the letter of credit could cause us to repurchase this bond which would reduce cash available.

NHC, NHI and National have various debt and letters of credit maturing during 2001, which
will require adequate resources or debt refinancings to satisfy those maturities.  We believe, based
on discussions with NHC, NHI and National, that through refinancings, cash and marketable
securities on hand or other means these entities will meet the scheduled debt maturities.

****Our long-term debt at September 30, 2001 includes a term loan with a principal amount of
$68,438,000 and a revolving line of credit of $20,000,000, both of which mature in December 2002.
We currently expect to either refinance the loans when due or utilize the proceeds from mortgage
loan principal receipts to retire portions of the long-term debt during 2001 and 2002.  The inability
to refinance or repay these obligations at or prior to maturity would cause us to be in default under
our debt obligations and would have a material adverse effect on our financial position and cash
flows.

Results of Operations

*Three Months Ended September 30, 2001 Compared to Three Months Ended September 30, 2000*

Net income for the three months ended September 30, 2001 is $2,453,000 versus $1,908,000
for the same period in 2000, an increase of 28.6%.  Earnings per common share increased 5 cents
or 25.0% to 25 cents in the 2001 period from 20 cents in the 2000 period.

Total revenues for the three months ended September 30, 2001 decreased $85,000 or less
than 1.3% to $6,170,000 from $6,255,000 for the three months ended September 30, 2000.
Revenues from rental income increased $135,000 or 3.4% when compared to the same period in
2000.  Revenues from mortgage interest decreased $216,000 or 9.8% in 2001 as compared to the
same period in 2000.









The increase in rental income is due primarily to the recognition of percentage rent.  The
decrease in mortgage interest income resulted primarily from decreased mortgage notes receivable
due to the receipt of monthly payments.

Total expenses for the 2001 three month period decreased $701,000 or 17.1% to $3,405,000
from $4,106,000 for the 2000 three month period.  Interest expense decreased $740,000 or 35.8%
in the 2001 three month period as compared to the 2000 period.  Depreciation of real estate increased
$75,000 or 4.2% due to the acquisition of property described in "Loan Foreclosure" above.  General
and administrative costs decreased $36,000 or 14.1%.

Interest expense decreased primarily due to decreased rates of interest on variable rate debt.
The increase in depreciation expense is due to depreciation of $98,000 for the Indiana properties.



*Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30, 2000*

Net income for the nine months ended September 30, 2001 is $6,445,000 versus $5,825,000
for the same period in 2000, an increase of 10.6%.  Diluted earnings per common share is 67 cents
in the 2001 period, compared to 61 cents in the 2000 period.

Total revenues for the nine months ended September 30, 2001 decreased $41,000 or .2% to
$18,534,000 from $18,575,000 for the nine months ended September 30, 2000.  Revenues from
rental income increased $413,000 or 3.5% when compared to the same period in 2000.  Revenues
from mortgage interest decreased $440,000 or 6.6% in 2001 as compared to the same period in 2000.

The increase in rental income is due primarily to the recognition of percentage rent.  The
decrease in mortgage interest income resulted primarily from decreased mortgage notes receivable
due to receipt of monthly payments.

Total expenses for the 2001 nine month period decreased $740,000 or 6.2% to $11,270,000
from $12,010,000 for the 2000 nine month period.  Interest expense decreased $909,000 or 15.3%
in the 2001 nine month period as compared to the 2000 period.  Depreciation of real estate increased
$260,000 or 4.9%. General and administrative costs decreased $71,000 or 9.6%.

Interest expense decreased primarily due to decreased rates of interest on variable rate debt.









FUTURE RENTAL AND MORTGAGE INTEREST INCOME UNCERTAINTIES

The rental income revenues are believed by management to be secure. However, the majority
of our lessees income is derived from their participation in the Medicare and Medicaid programs.
During 1997, the federal government enacted the Balanced Budget Act of 1997 (BBA) which
contains numerous Medicare and Medicaid cost-saving measures. As part of these cost-saving
measures, the BBA requires that nursing homes transition to a prospective payment system over a
three cost report year transition period.  Congress, however, increased certain payments to skilled
nursing facilities during 2000 by virtue of amendments to the BBA passed in late 1999.  Additional
and positive amendments to the BBA were also passed in December 2000 which became effective
April 1, 2001.  These amendments, while not impacting our rental income (other than percentage
rent), enhance the cash flows of the respective operators which in turn strengthens the value of the
Health Care Facilities and Notes.

None of our direct lessees or borrowers are in bankruptcy, but the 14 facilities that secure the
FCC Notes are leased by FCC to Integrated Health Systems, Inc. (IHS), which filed for bankruptcy
protection February 2, 2000.  All FCC note payments are current.  With respect to the three facilities
sold to HMSI, we believe that HMSI will be able to make its mortgage payments to us but no
assurances can be made by us.

The ability of FCC to service the mortgage notes held by us is dependent on IHS's ability
to make its lease payments to FCC.  IHS's financial condition also may negatively impact FCC's
ability to refinance approximately $21,800,000 of first mortgage debt superior to our second
mortgage notes of $24,480,000.  The financial status of IHS or its election to void one or more of
its leases with FCC (and we have learned they are attempting to reject five of the 14 leases) could
have a material adverse impact on the financial position, results of operations and cash flows of FCC
and FCC's resultant ability to service its debt to us.

*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.









*Impact of Inflation--*

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

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

*Forward-looking Statements--*

References throughout this document to the Company, "we" or "us" include National Health
Realty, Inc. and its subsidiaries.  In accordance with the Securities and Exchange Commission's
"Plain English" guidelines, this Quarterly Report on Form 10-Q has been written in the first person.
In this document, the words "we", "our", "ours" and "us" refer only to National Health Realty, Inc.
and its subsidiaries and not any other person.

This Quarterly Report on Form 10-Q and other information we provide from time to time,
contains certain "forward-looking" statements as that term is defined by the Private Securities
Litigation Reform Act of 1995.  All statements regarding our expected future financial position,
results of operations, cash flows, funds from operations, continued performance improvements,
ability to service and refinance our debt obligations, ability to finance growth opportunities, and
similar statements including, without limitations, those containing words such as "believes",
anticipates", "expects", "intends", "estimates", "plans", and other similar expressions are forward-looking statements.

Forward-looking statements involve known and unknown risks and uncertainties that may
cause our actual results in future periods to differ materially from those projected or contemplated
in the forward-looking statements as a result of, but not limited to, the following factors:

- national and local economic conditions, including their effect on the availability and cost of
labor, utilities and materials;
- the effect of government regulations and changes in regulations governing the healthcare
industry, including compliance with such regulations by us and our borrowers and/or lessees;
- changes in Medicare and Medicaid payment levels and methodologies and the application
of such methodologies by the government and its fiscal intermediaries;









- the ability to pay when due or refinance certain debt obligations maturing within the next 15
months;
- the availability and terms of capital to fund investments;
- the competitive environment in which we operate;



See the notes to the quarterly financial statement, and "Item 1.  Business" as is found in our
2000 Annual Report on Form 10-K for a discussion of various governmental regulations and other
operating factors relating to the healthcare industry and the risk factors inherent in them.  The
Annual Report is available on our web site at www.nationalhealthrealty.com.  You should carefully
consider those risks before making any investment decisions in the Company.  These risks and
uncertainties are not the only ones facing the Company.  There may be additional risks that we do
not presently know of or that we currently deem immaterial.  If any of the risks actually occur, our
business, financial condition or results of operations could be materially adversely affected.  In that
case, the trading price of our Common Stock could decline, and you may lose all or part of your
investment.  Given these risks and uncertainties, we can give no assurances that these forward-looking statements will, in fact, transpire and, therefore, caution investors not to place undue reliance
on them.

******Item 3.	Quantitative and Qualitative Information About Market Risk**

INTEREST RATE RISK

Our cash and cash equivalent consist of highly liquid investments with a maturity of less than
three months.  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
investments in notes receivable are fixed, a hypothetical 10% change in interest rates would have
no impact on our future earnings and cash flows related to these instruments.

As of September 30, 2001, $91,638,000 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 approximately
$375,000 and likewise, a reduction in interest rates would result in annual interest expense declining
by approximately $375,000.  A hypothetical 10% change in interest rates would not have a material
impact on the fair values of these instruments.









The remaining $5,614,000 of our long-term debt bears interest at fixed rates.  Because the
interest rates of these instruments are fixed, a hypothetical 10% change in interest rates would have
no impact on our future earnings and cash flows related to these instruments.

We currently do not use any derivative instruments to hedge our interest rate expense or for
trading purposes. The 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 1.	Legal Proceedings.  None

Item 2.	Changes in Securities.  Not applicable

Item 3.	Defaults Upon Senior Securities.  None

Item 4.	Submission of Matters to a Vote of Security Holders.  None

Item 5.	Other Information.  None

Item 6.	Exhibits and Reports on Form 8-K.

(a)        List of exhibits - none

(b)        Reports on Form 8-K - none required

****NATIONAL HEALTH REALTY, INC. AND SUBSIDIARIES

September 30, 2001

(Unaudited)

****

**SIGNATURES**

Pursuant to the requirements 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.

|                      | NATIONAL HEALTH REALTY, INC.
|--------------------- | ----------------------------
|                      | (Registrant)                
|                     
|                     
|                     
|Date November 8, 2001 | /s/ Richard F. LaRoche, Jr. 
|                      | Richard F. LaRoche, Jr.     
|                      | Secretary                   
|                     
|                     
|                     
|Date November 8, 2001 | /s/ Donald K. Daniel        
|                      | Donald K. Daniel            
|                      | Principal Accounting Officer