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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, 2004 is taken from the audited financial statements at that date.

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

(continued)

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

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

Note 1. SIGNIFICANT ACCOUNTING POLICIES:

We, the management of National Health Investors, Inc., believe that the unaudited financial statements to which these notes are attached include all adjustments which are necessary to fairly present the financial position, results of operations and cash flows of National Health Investors, Inc. ("NHI" or the "Company"). We assume that users of these interim financial statements have read or have access to the audited December 31, 2004 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. Accordingly, footnotes and other disclosures which would substantially duplicate the disclosure contained in our most recent annual report to stockholders have been omitted. This interim financial information is not necessarily indicative of the results that may be expected for a full year for a variety of reasons including, but not limited to, acquisitions and dispositions, changes in interest rates, rents and the timing of debt and equity financings. Our audited December 31, 2004 financial statements are available at our web site: www.nhinvestors.com.

Note 2. NEW ACCOUNTING PRONOUNCEMENTS:

In May 2003 the FASB issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. SFAS 150 is generally effective for NHI July 1, 2003. The adoption of SFAS 150 has not had a material effect on NHI's financial statements.

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

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

In December 2004, the FASB has issued FASB Statement No. 123 (Revised 2004), Share-Based Payment ("Statement 123R"). The new FASB rule requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. The Company will be required to apply Statement 123R beginning January 1, 2006. The scope of Statement 123R includes a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The Company does not expect the adoption of Statements 123R to have a significant impact on its financial statements.

Note 3. STOCK OPTION PLAN

NHI has stock option plans that provide for the granting of options to key employees and directors of NHI to purchase shares of common stock at a price no less than the market value of the stock on the date the option is granted. Options to purchase 135,000 shares vested immediately upon grant and may be exercised at any time prior to expiration. Options to purchase 15,104 shares vest approximately six years after grant and may be exercised at any time prior to expiration, (formerly during a 30 day vesting period prior to expiration). The term of the options is five years (135,000 shares) or six years (15,104 shares). The following table summarizes option activity:

The weighted average remaining contractual life of options outstanding at March 31, 2005 is 2.65 years. NHI's Board of Directors has authorized an additional 295,904 shares of common stock that may be issued under the stock option plans.

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 NHI's net income or earnings per share in the first quarter of 2005 and 2004.

Note 4. REAL ESTATE PROPERTIES:

The following table summarizes NHI's real estate properties by facilities that we lease to others and facilities that are operated by others:

(Dollars in thousands)

Foreclosure and Other Troubled Real Estate Properties

We have previously treated the Washington State, New England, Kansas and Missouri properties described below as foreclosure properties for federal income tax purposes. With certain elections, unqualified income generated by the properties is expected to be treated as qualified income for up to six years from the purchase date for purpose of the income-source tests that must be satisfied by REITs to maintain their tax status.

Washington State Properties - During 1998, we took over the operations of four long-term care properties in Washington State. The operating results of these facilities were included in our financial statements from 1998 until the operations were disposed of during 2003 and 2004. Note 10 includes the results of disposal and discontinued operations of these properties.

New England Properties - During 1999, we took over the operations of three nursing homes and one retirement center in New Hampshire and four nursing homes in Massachusetts. During 2001, we sold the properties to a not-for-profit entity and provided 100% financing. We have not recorded the sale of the assets and continue to record the results of operations of these properties each period. Any future cash received from the buyer will be reported as a deposit until the down payment and continuing investment criteria of Statement of Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate" ("SFAS 66") are met, at which time we will account for the sale under the full accrual method. Management believes that the carrying amount of these properties at March 31, 2005 of $26,691,000 is realizable.

Kansas and Missouri Properties - In July 2001 we took over the operations of nine nursing homes in Kansas and Missouri and have included the operating results of these facilities in our consolidated financial statements since that date. During 2004, we sold the properties to a not-for-profit entity and provided 100% financing. We have not recorded the sale of the assets and continue to record the results of operations of these properties each period. Any future cash received from the buyer will be reported as a deposit until the down payment and continuing investment criteria of Statement of Financial Accounting Standards No. 66, "Accounting for Sale of Real Estate" ("SFAS 66") are met, at which time we will account for the sale under the full accrual method. Management believes that the carrying amount of these properties at March 31, 2005 of $20,198,000 is realizable.

Manor House of Charlotte - During 2002, we took over ownership of an assisted living facility in Charlotte, North Carolina. The property was immediately leased to a new operator. In January 2005, this facility was sold generating net proceeds of $3,546,000, and a gain of $1,599,000, which is included in discontinued operations.

Marriott Senior Living Services - In July 2003, we reached an agreement with Marriott Senior Living Services ("Marriott") to terminate their leases with us on four assisted living facilities, two of which are located in Florida, one in Texas and one in New Jersey. Under the terms of the settlement with Marriott, we were paid $6,211,000 to settle our claims for certain deferred maintenance and repairs, for accrued real estate taxes, and to compensate us for future rental periods. $1,487,000 has been reserved for maintenance and repairs, $223,000 was allocated to property taxes and $4,408,000 was recognized as rental income in the third quarter of 2003. The four facilities were leased to new operators.

Based on our impairment analysis, as a result of further defaults of covenants in the facility leases and continued deferred maintenance of the facilities, we recorded an impairment of $2,550,000 during the first quarter of 2005 on the two Florida facilities. We had previously recorded an impairment of $5,400,000 during the third quarter of 2003 on one of the Florida facilities. Lease income of $491,000 and $565,000 was recognized on these four facilities for the three months ended March 31, 2005 and 2004, respectively. In February 2005, the facility in Dallas, Texas was sold for proceeds of $7,911,000 and a loss of $851,000, which is included in discontinued operations. We believe that the carrying amount of these remaining three properties at March 31, 2005 of $25,822,000 is realizable.

Note 5. MORTGAGE AND OTHER NOTES RECEIVABLE:

Installment Method Mortgage Receivable

Autumn Hills Convalescent Centers, Inc. (HSM of Texas, new borrower) - In January 2003, NHI foreclosed on the properties, consisting of thirteen long-term healthcare facilities in Texas, and sold them to an unrelated not-for-profit entity providing seller financing. NHI accounts for the sale of the properties using the installment method, consistent with the provisions of SFAS 66. Note A under the loan is in the amount of $34,859,000, payable at $353,000 monthly at 10.50%, and is due in September 2014. Note B under the loan is in the amount of $11,071,000, payable interest only at prime rate (beginning in October 2006), and is due in September 2009. Management believes the remaining carrying amount of $24,486,000 at March 31, 2005 is realizable. The average recorded investment in the loan was $24,558,000 and $27,320,000 for the three months ended March 31, 2005 and 2004, respectively. The related amount of interest income recognized on the loan was $1,041,000 and $720,000 for the three months ended March 31, 2005 and 2004, respectively.

Mortgage Receivable

Ashton Woods - At March 31, 2005, we hold 75%, or $4,050,000, of a $5,419,000 first mortgage with Ashton Woods. The remaining 25% of the loan is held by SouthTrust Bank. The loan is secured by a first mortgage on a nursing home located in Atlanta, Georgia and is further secured by the lease payments which are made by Ashton Woods Healthcare, Inc. Note A under the loan is in the amount of $4,250,000, amortizing over 25 years at 6.5% per annum and due in September, 2013. Note B in the amount of $1,256,000, is payable out of excess cash flow of the facility and if not repaid by September, 2013, is forgiven in full. Management's analysis of the future expected cash flows consistent with SFAS 114, historical occupancy and operating income of the project resulted in the recognition of a $3,000,000 writedown of this mortgage loan value during 2002. Management believes that the remaining carrying amount of $1,036,000 at March 31, 2005 is supported by the value of the collateral. The average recorded investment in the Ashton Woods loan was $1,043,000, and $1,096,000 for the three months ended March 31, 2005, and 2004, respectively. The related amount of interest income recognized on the loan was $50,000, and $52,000 for the three months ended March 31, 2005, and 2004, respectively.

American Medical Associates, Inc. ("AMA") - AMA, the borrower of two first mortgage loans secured by three Florida based nursing homes, filed for bankruptcy protection in January 2003. Management's analysis of the future expected cash flows consistent with SFAS 114, historical occupancy and operating income of the project resulted in the recording of a $5,200,000 writedown of this mortgage loan value during 2002.

On May 1, 2004, NHI provided financing to the new purchasers of the three Florida-based nursing homes formerly owned by American Medical Associates, Inc. The amount of the new mortgage loans total $14,500,000 and the notes mature May 14, 2009. We are also committed to funding up to $1,750,000 in working capital loans to the purchaser.

Management believes that the remaining carrying amount of $8,140,000 at March 31, 2005 (after the $5,200,000 writedown in 2002 of the original mortgage), is supported by the value of the collateral. The average recorded investment in the AMA loan was $8,176,000, and $8,382,000 for the three months ended March 31, 2005, and 2004, respectively. The related amount of interest income recognized on the loan was $271,000, and $-0- for the three months ended March 31, 2005, and 2004, respectively.

Borrower Bankruptcy and Other Non-Performing Loans

Midwest Nursing Home Investors, Inc. ("Midwest") - An approximate $8,735,000 first mortgage loan made to Midwest in 1997 is secured by two nursing homes in Kansas and one in Wisconsin. The properties were cross defaulted and cross collateralized and managed by Rainmakers, LLC who operates long-term care facilities in Kansas, Missouri, Illinois and Wisconsin. Payments to NHI were past due and the loan was in default on a number of technical covenants. Management's analysis of the future expected cash flows consistent with SFAS 114, historical occupancy and operating income of the project resulted in the recording of a $2,000,000 writedown of this mortgage loan value during 2002 and an additional writedown of $2,000,000 during 2003.

These properties were foreclosed on in October 2004, resulting in real estate with an original carrying value of $4,324,000. The remaining carrying value of $4,324,000 at March 31, 2005, is believed by management to be realizable. The average recorded investment in the Midwest loan, before foreclosure in October 2004, was $4,324,000 for the three months ended March 31, 2004. Rental income of $116,000 was recognized on these properties for the three months ended March 31, 2005. The related amount of interest income recognized on the former loan was $-0- for the three months ended March 31, 2004.

Allgood HealthCare, Inc. ("Allgood") - We have two loans secured by five Georgia nursing home properties which are operated by Allgood. As a result of payment and technical defaults beginning in 2002, the loans have been declared in default and the principal amount due has been accelerated. In January 2003, the borrowers filed for bankruptcy protection. Management's analysis of the future expected cash flows consistent with SFAS 114, historical occupancy and operating income of the project resulted in the recording of a $2,000,000 writedown of this mortgage loan in the first quarter of 2005, as a result of the declines in cash flow from the facilities collateralizing the loans. We had previously recorded a $5,000,000 writedown of this mortgage loan in 2002. During the third quarter of 2003, NHI received a $1,000,000 payment from the estate of the owner of Allgood. Based on management's updated analysis of the future expected cash flows of this note, this payment was applied to reduce the principal balance outstanding. Beginning in January 2004, the borrower voluntarily began making monthly payments of $86,700.

Management believes that the remaining carrying amount of $13,716,000 at March 31, 2005 is supported by the value of the collateral. The average recorded investment in the Allgood loans was $14,716,000 and $15,716,000 for the three months ended March 31, 2005 and 2004, respectively. The related amount of interest income recognized on the loans was $260,000 for the three months ended March 31, 2005 and 2004.

Somerset on Lake Saunders - Management's analysis of the future cash flows consistent with SFAS 114, historical occupancy and operating income of the project resulted in the recording of a $1,500,000 writedown of this mortgage loan value during the first quarter of 2003. This loan was sold in January 2004 for cash proceeds of $1,750,000 resulting in a gain of $1,302,000, which is included in loan recoveries.

Note 6. INVESTMENTS IN MARKETABLE SECURITIES:

Our investments in marketable securities include available for sale securities. Unrealized gains and losses on available for sale securities are recorded in stockholders' equity in accordance with SFAS 115. Realized gains and losses from securities sales are determined based upon specific identification of the securities.

Marketable securities consist of the following:

Gross unrealized gains and gross unrealized losses related to available for sale securities are as follows:

Our available for sale marketable securities consist of the common stock of other publicly traded REITs. None of these available for sale marketable securities have stated maturity dates.

During the three months ended March 31, 2005 and 2004, we received and recognized $1,108,000 and $1,131,000, respectively, of dividend and interest income from our marketable securities. Such income is included in non-operating income in the consolidated statements of income.

Proceeds from the sale of investments in marketable securities during the three months ended March 31, 2005 were $10,308,000. Gross investment gains of $9,072,000 were realized on these sales during the three months ended March 31, 2005, $5,022,000 of which is included in security recoveries and $4,050,000 of which is included in non-operating income in the consolidated statements of income.

Proceeds from the sale of investments in available for sale securities during the three months ended March 31, 2004 were $8,661,000. Gross investment gains of $1,355,000 were realized on these sales during the three months ended March 31, 2004, $687,000 of which is included in security recoveries and $668,000 of which is included in non-operating income in the consolidated statements of income.

Assisted Living Concepts, Inc. Convertible Debentures - During 2002, in order to protect our status as a REIT, we sold a portion of our investments in Assisted Living Concepts, Inc. convertible debentures to an employee of our former investment advisor, NHC. Proceeds included a note receivable of $5,818,000 after a cash payment of $650,000 received in 2001. No gain or loss was realized on this sale during 2002. Our collateral on the note consisted of the underlying securities. As a result, the note receivable was subject to a risk of accounting loss if the underlying value of the collateral declined below the carrying value of the note receivable. The note was a non-recourse promissory note which bore interest at a variable rate (LIBOR plus .5% ) and provided for periodic escalation of the rate. The note was scheduled to mature June 30, 2012, and had a balance of $4,593,000 at December 31, 2003, after payments of $1,225,000 during 2003. The note was collected in full in February 2004 for proceeds of $4,593,000.

The carrying value but not the face amount of the ALC debentures owned by us was reduced by $731,000 related to a securities litigation settlement prior to 2004. ALC debentures with a face amount of $532,000 and a carrying value of $486,000 were called by ALC prior to 2004. The remaining ALC debentures with a face amount of $4,655,000 and a carrying value of $4,013,000 were called during January 2004 for proceeds of $4,700,000 resulting in a gain of $687,000 which is included in security recoveries for the three months ended March 31, 2004 discussed above.

LTC Properties, Inc. Common Stock - During 1998 and 1999, NHI purchased 774,800 shares of LTC common stock for $10,762,000. As a result of an other than temporary impairment in value of its investment and in accordance with the provision of SFAS 115, NHI has recognized a $5,555,000 loss on this investment during the year ended December 31, 2002. NHI believes that the carrying value of this investment of $13,443,000 at March 31, 2005 is realizable.

Note 7. DEBT

Non-recourse Mortgage Note

Integrated Health Services, Inc. ("IHS") - Effective September 1, 2001, IHS deeded six nursing homes to a subsidiary of NHI in return for the forgiveness of debt held jointly by SouthTrust Bank and NHI. We recorded these six nursing homes and certain non-recourse debt to SouthTrust Bank at the estimated fair value of the properties of approximately $44,689,000. NHI leases the facilities to IHS under a 66-month lease with minimum payments equal to approximately $3,078,000 per year plus additional rent based on cash flow of the facilities. We collect these rent payments and serviced our debt to SouthTrust Bank, which debt service was substantially equal to the rent payments collected.

Through a separate participation agreement, NHI and SouthTrust each beneficially owned 50% of the lease revenue. Our interest in the lease revenue was represented by a $19,052,000 note receivable from SouthTrust Bank. We had a legal right of offset as it relates to the non-recourse debt and note receivable with SouthTrust Bank. Therefore, the note receivable offset the non-recourse debt in the consolidated balance sheet. Our net investment was composed of $13,692,000 of realty, reduced by $25,637,000 of debt. This $19,052,000 note receivable was applied against the $44,689,000 non-recourse mortgage bank note payable balance and this debt (with a weighted average interest rate of 6% and maturing in 2007) was paid off in January 2005.

Note 8. COMMITMENTS, CONTINGENCIES AND GUARANTEES:

At March 31, 2005, we were committed, subject to due diligence and financial performance goals, to fund approximately $51,750,000 in health care real estate projects, $11,750,000 of which is expected to be funded within the next 12 months. The commitments include a $50,000,000 construction loan/sale leaseback agreement for up to ten assisted living facilities.

We are also committed to funding up to $1,750,000 in working capital loans to the purchasers of three Florida-based nursing homes formerly owned by American Medical Associates, Inc., maturing in May 2005, consisting of $750,000 at a 6% interest rate, and $1,000,000 at an interest rate of prime plus 2%.

We have also guaranteed bank loans in the amount of $119,000 to key employees utilized for the exercise of stock options. The loan guarantees, which are limited to $100,000 per individual per year, are with full recourse, are collateralized by marketable securities, and are guaranteed by the individual borrowers. None of the outstanding loans are to or for any director or executive officer. Our potential accounting loss related to these guaranteed bank loans, if all collateral failed, is the face amount of the guaranteed loans outstanding. We have not accrued a liability for our potential obligation under these guarantees.

We believe that we have operated our business so as to qualify as a REIT under Section 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 our 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.

Contingency related to damaged property

One of our owned nursing home properties, leased to a subsidiary of NHC and located in Nashville, Tennessee, was damaged by a tragic fire on September 25, 2003 which resulted in the loss of life or critical injury to a number of patients. The lease requires NHC to indemnify and hold harmless NHI from any and all demands and claims arising from its use of the property. Although NHI had been named as a defendant in 32 lawsuits, 30 of these lawsuits have been settled at no cost to NHI. At March 31, 2005, NHI has not accrued any liability for this contingent liability but will continue to monitor the situation and establish liability reserves when appropriate.

A provision of the lease allows that if substantial damage occurs during the lease term, NHC may terminate the lease with respect to the damaged property. During October 2004, NHC exercised its right to terminate the lease on the Nashville facility. As a result, NHI is entitled to receive all property insurance proceeds paid as a result of the fire. NHI retains the right to the bed license following lease termination. Until building repairs or a replacement building is completed, no additional rent will be received on the Nashville facility. Prior to the fire, NHI received annualized rent of $250,000 per year on the Nashville facility. NHI has received $2,654,000 in insurance proceeds as of March 31, 2005, which amount is being held in reserve pending determination of the ultimate repair, disposition or replacement of the building.

Note 9. EARNINGS PER COMMON SHARE:

Basic earnings per share is based on the weighted average number of common shares outstanding during the year. Net income is reduced by dividends to holders of cumulative convertible preferred stock.

Diluted earnings per share assumes, if dilutive, the conversion of convertible subordinated debentures, the conversion of cumulative convertible preferred stock and the exercise of stock options using the treasury stock method. Net income is increased for interest expense on the convertible subordinated debentures, if dilutive.

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

In accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share", the above incremental shares were excluded from the computation of diluted earnings per share, since inclusion of these incremental shares in the calculation would have been anti-dilutive.

Note 10. DISCONTINUED OPERATIONS

During the three months ended March 31, 2005, we sold two assisted living facilities with carrying amounts totaling $10,709,000 for proceeds of $11,457,000. We recognized a gain of $748,000 on the sale of these facilities.

During the year ended December 31, 2004, we sold three nursing facilities (one previously designated as "held for sale") with carrying amounts totaling $2,846,000 for proceeds of $4,389,000. We recognized a gain of $1,543,000 on the sale of these facilities.

During the year ended December 31, 2003, we sold a medical office building with a carrying amount of $2,113,000 for proceeds of $4,045,000, resulting in a $1,932,000 net gain on the sale of this facility and sold two nursing facilities with a carrying amount of $5,597,000 for proceeds of $5,200,000 resulting in a net loss of $397,000 on these facilities. Additionally, we designated one additional nursing facility as "held for sale", consistent with the provisions of SFAS 144.

For the three months ended March 31, 2005 and 2004, we have reclassified the operations, including the net gain on the sale of these facilities, as discontinued operations in accordance with SFAS 144.

Income from discontinued operations related to these facilities are as follows:

Note 11. INVESTMENTS IN REAL ESTATE MORTGAGE INVESTMENT CONDUITS

On November 9, 1993, NHI purchased for $34,196,000 a participating interest in a REMIC in the form of nine classes of certificates issued in the aggregate principal amount of $172,928,000 (the "1993 REMIC"). On December 29, 1995, NHI purchased for $6,158,000 a participating interest in a real estate mortgage investment conduit ("REMIC") in the form of one class of certificates issued in the aggregate principal amount of $146,104,000 (the "1995 REMIC").

1993 REMIC - During 2003 we collected $21,032,000 on the 1993 REMIC and extended the due date of the three remaining mortgages until December 31, 2004. During 2003 and the first six months of 2004, we recognized additional interest income of $709,000 and $1,182,000, respectively, reflecting amortization of our carrying value to the amount ultimately expected to be collected in December 2004.

Collections of $13,126,000 were received during the first six months of 2004, of which $2,246,000 (the amount recognized as a writedown in 2000) is included in REMIC recoveries, and resulting in no balance outstanding at December 31, 2004.

1995 REMIC - At December 31, 2003 the net carrying value of the 1995 REMIC was $6,346,000. At December 31, 2003, we had a potential obligation of $3,006,000 for advances received from the servicer of the 1995 REMIC. During the second quarter of 2004 we applied the repayment obligation accrued of $3,006,000 against the carrying value of the 1995 REMIC, and recorded a writedown of $3,339,000 in value, resulting in no balance outstanding at December 31, 2004. No interest income was recognized on the 1995 REMIC during the year ended December 31, 2004, nor the quarter ended March 31, 2005.

Note 12 - CUMULATIVE CONVERTIBLE PREFERRED STOCK

8.5% Preferred Stock - In February and March 1994, NHI issued $109,558,000 of non-voting, 8.5% cumulative convertible preferred stock ("8.5% Preferred Stock") with a liquidation preference of $25.00 per share. Until called in April, 2004, dividends at an annual rate of $2.125 were cumulative from the date of issuance and were paid quarterly.

On April 30, 2004, 100% of NHI's 8.5% cumulative convertible preferred stock, with a balance of 747,994 shares or $18,700,000, was called by NHI for redemption into common stock of NHI at a conversion rate of .905 shares of common stock for each share of preferred stock. This resulted in an additional 676,922 shares of common stock issued and outstanding. Dividends on the preferred stock were accrued and paid through April 30, 2004. During 2004 no preferred shares were converted.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Overview

National Health Investors, Inc. ("NHI" or the "Company") is a real estate investment trust ("REIT") that invests primarily in income producing health care properties with emphasis on the long-term care sector. As of March 31, 2005, we had interests in real estate owned, and investments in mortgages, preferred stock and marketable securities resulting in total invested assets of $452,950,000. Our mission is to invest in health care real estate which generates current income that will be distributed to stockholders. We have pursued this mission by making mortgage loans and acquiring properties to lease nationwide primarily in the long-term health care industry.

As of March 31, 2005, we were diversified with investments in 159 health care facilities located in 17 states consisting of 116 long-term care facilities, one acute care hospital, four medical office buildings, 15 assisted living facilities, six retirement centers and 17 residential projects for the developmentally disabled. These investments consisted of approximately $130,732,000 aggregate carrying value amount of loans to 16 borrowers and $267,454,000 of purchase leaseback transactions with 14 lessees. Of these 159 facilities, 17 were acquired through foreclosure and are owned and 38 are leased to National HealthCare Corporation ("NHC"). The facilities acquired through foreclosure are operated by others and managed by subsidiaries of NHC. NHC was our investment advisor until November 1, 2004, when we assigned our Advisory Agreement with National HealthCare Corporation to a new independent company, HealthCare Advisors, LLC, formed by NHI's President and Board Chairman, W. Andrew Adams. Consistent with our strategy of diversification, we have reduced the portion of our portfolio operated or managed by NHC from 100.0% of total invested assets on October 17, 1991 to 12.00% of total invested assets on March 31, 2005.

At March 31, 2005, 25.05% of the total invested assets of the health care facilities were operated by publicly-traded operators, 70.31% by regional operators, and 4.65% by small operators.

Areas of Focus

Coinciding with the implementation of the Prospective Payment System for Medicare Payments to nursing homes in 1999 and the resulting decrease in revenues to health care providers, we significantly curtailed our new investments. Instead, we focused our attention on returning our non-performing loans to performing status. Although our efforts are not complete, we continue to make progress in this regard.

We also focused on lowering our debt. Our debt to capitalization ratio on March 31, 2005 was 22.3%, the lowest level in our 13 year history. Our liquidity is also strong with cash and marketable securities of $142,685,000 exceeding our total debt outstanding of $121,010,00 at March 31, 2005.

Reflecting this progress and our improving outlook for the healthcare industry, we have made some new investments in 2005 while continuing to monitor and improve our existing properties. Even as we make new investments, however, we expect to maintain a relatively low level of debt vs. equity compared to our historical levels.

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.

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

1) Valuations and impairments to our investments - 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 were imposed effective October 1, 2002 followed by only modest improvements implemented for the fiscal year beginning October 1, 2003 and 2004. 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 for our lessees and mortgagees. We have determined that impairment of certain of our investments have occurred as the result of these events.

Decisions about valuations and impairments of our investments require significant judgments 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 and 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 amount of the property and may be affected by management's plans, if any, to dispose 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" ("SFAS 114"). On a quarterly basis, NHI 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.

We evaluate our marketable securities for other-than-temporary impairments consistent with the provisions of Statement of Financial Accountant Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). An impairment of a marketable security would be considered "other-than-temporary" unless we have the ability and intent to hold the investment for a period of time sufficient for a forecasted market price recovery up to (or beyond) the cost of the investment and evidence indicates the cost of the investment is recoverable within a reasonable period of time.

While we believe that the carrying amounts of our properties, notes receivable, marketable securities and other investments are realizable, it is possible that future events could require us to make significant adjustments or revisions to these estimates.

2) 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, there are certain of our customers for which we have determined, based on insufficient historical collections and the lack of expected future collections, that revenue for interest or rent is not realizable. For these nonperforming investments, our policy is to recognize interest or rental income when assured, which we consider to be the period the amounts are collected. We identify investments as nonperforming if a required payment is not received within 30 days of the date it is due. This policy could cause our revenues to vary significantly from period to period. Revenue from minimum lease payments under our leases is recognized on a straight-line basis as required under SFAS 13 to the extent that future lease payments are considered collectible. Lease payments that depend on a factor directly related to future use of the property, such as an increase in annual revenues over a base year revenues, are considered to be contingent rentals and are excluded from minimum lease payments in accordance with SFAS 13.

3) 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 our 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.

4) Revenue recognition - third party payors - Approximately two-thirds of our facility operating revenues are derived from Medicare, Medicaid, and other government programs. Amounts earned under these programs are subject to review by the third party payors. In our opinion, adequate provision has been made for any adjustments that may result from these reviews. Any differences between our estimates of settlements and final determinations are reflected in operations in the year finalized.

Liquidity and Capital Resources

Sources and Uses of Funds

We have generated net cash from operating activities during the first three months of 2005 totaling $18,083,000, an increase of $7,359,000 compared to $10,724,000 in the prior period. Net cash from operating activities generally includes net income adjusted for non-cash items such as depreciation and amortization, working capital changes, investment writedowns and recoveries, and gain on asset disposals. The $18,083,000 net cash provided from operating activities for the first three months of 2005 is composed of increases due to net income of $16,794,000, depreciation of $3,212,000 and working capital decreases of $3,247,000. These amounts were offset primarily by net loan, realty and security recoveries of $472,000, gain on sale of marketable securities of $4,050,000, and gain on sale of real estate of $748,000.

Net loan, realty, and security recoveries of $472,000 includes a $5,022,000 recovery from the sale of Assisted Living Concepts, Inc. common stock, as a result of the acquisition of all the outstanding shares of ALC by Extendicare, Inc. by merger. This amount is reduced by an impairment writedown of $2,550,000 on two Florida facilities previously leased to Marriott Senior Living Services, as a result of further defaults of covenants in the facility leases and continued deferred maintenance of the facilities, as discussed in Note 4 of Notes to Interim Condensed Consolidated Financial Statements. This amount is also reduced by a writedown of $2,000,000 on two mortgage loans with Allgood HealthCare, Inc., as a result of declines in cash flow from the facilities collateralizing the loans, as discussed in Note 5.

The gain on sale of marketable securities of $4,050,000 is attributable to the sale, as a result of merger, of Assisted Living Concepts, Inc. common stock which realized gross investment gains of $9,072,000 before the classification of $5,022,000 as a recovery of previous writedowns on the Assisted Living Concepts, Inc. investment. The net gain on the sale of real estate of $748,000 is composed of the following: (1) a gain of $1,599,000 from the sale of an assisted living facility in Charlotte, North Carolina, and; (2) a loss of $851,000 from the sale of an assisted living facility in Dallas, Texas, and both of which were sold as a result of never achieving their expected profitability as discussed in Note 4 of Notes to Interim Condensed Consolidated Financial Statements.

Net cash provided by operating activities increased from $10,724,000 in the first three months of 2004 to $18,083,000 in the first three months of 2005 due primarily to a $6,118,000 decrease in working capital, and $1,241,000 of items affecting net income in the first three months of 2005. The $10,724,000 net cash provided from operating activities for the first three months of 2004 is composed of increases due to net income of $13,435,000 and depreciation of $3,567,000. These amounts were offset by loan and security recoveries of $1,989,000, gain on sale of marketable securities of $668,000, discount and deferred income amortization of $779,000, and working capital increases of $2,871,000.

Net cash used in investing activities during the first three months of 2005 totaled $4,652,000 compared to $16,379,000 provided in the prior period. Cash flows provided from investing activities during the first three months of 2005 included collections on mortgage and other notes receivable of $1,131,000 compared to $7,638,000 for the prior period. Collections on real estate mortgage investment conduits provided $345,000 during the prior period of 2004. Marketable securities were sold or called and converted to cash of $10,308,000 during the first three months of 2005, compared to $8,661,000 for the prior period. The $10,308,000 cash proceeds relate to the sale, as a result of merger, of the Assisted Living Concepts, Inc. common stock discussed above. Disposition of property and equipment provided $11,457,000 of cash proceeds for the first three months of 2005. The $11,457,000 cash proceeds relate to the sale of the Charlotte, North Carolina assisted living facility for $3,546,000 and the sale of the assisted living facility in Dallas, Texas for $7,911,000 as discussed above.

Cash flows used in investing activities during the first three months of 2005 included investments in real estate properties of $5,757,000 and in mortgage and other notes receivable of $21,791,000. The $5,757,000 investment in real estate properties relates to the purchase for $5,000,000 and lease of two Texas based facilities which were purchased as a part of our plan to expand our core business and $757,000 related to current operating facilities. The $21,791,000 investment in mortgage notes receivable includes an $18,931,000 Heritage Hall loan purchase, $2,500,000 related to a facility with Legend HealthCare, and $360,000 applicable to current operators, all a part of our plan to expand our core business. Cash flows used in investing activities in the prior period included investments in real estate properties of $265,000.

Net cash used in financing activities during the first three months of 2005 totaled $48,593,000 compared to $18,578,000 in the prior period. Cash flows used in financing activities for the first three months of 2005 included principal payments on debt of $34,470,000 and dividends paid to stockholders of $15,838,000. The $34,470,000 principal payments on debt includes $25,637,000 applicable to the early payoff of 6% non-recourse debt due in 2007 to SouthTrust Bank as discussed in Note 7, $8,224,000 applicable to the early payoff of 5% first mortgage notes due in 2006 through 2021, and $609,000 of routine principal payments. This debt was repaid with cash that was earning less than the cost of the repaid debt and as a result was immediately accretive to earnings. This compares to the corresponding prior period activity of principal payments on debt of $4,796,000 and dividends paid to stockholders of $13,782,000.

Preferred Stock Conversion

On April 30, 2004, 100% of NHI's 8.5% cumulative convertible preferred stock, with a balance of 747,994 shares or $18,700,000 was called by NHI for redemption into common stock of NHI at a conversion rate of .905 shares of common stock for each share of preferred stock. This resulted in an additional 676,922 shares of common stock issued and outstanding. Consequently, preferred dividends for the first three months of 2005 decreased $397,000, offset by increased common dividends of approximately $305,000 on the new common shares. Cash flow was increased by $92,000 in the first three months of 2005, due to the difference in total dividends paid on the newly issued common shares versus the dividends paid on the converted preferred stock.

Contractual Obligations and Contingent Liabilities

As of March 31, 2005, our contractual payment obligations and contingent liabilities were as follows:

First mortgage notes totaling $8,224,000 at December 31, 2004, with a weighted average interest rate of 5.0% and maturing in 2006 and 2021 were paid off in January 2005. A non-recourse mortgage bank note of $25,637,000 at December 31, 2004, with a weighted average interest rate of 6.0%, and maturing in 2007 was paid off in January 2005.

We have guaranteed additional debt obligations totaling approximately $119,000 which are not included in the table above because we do not expect to fund these commitments.

Interest payments have not been included in the above table due to the difficulty in projecting variable rate interest. In the first three months of 2005, our cash payments for interest were $3,702,000.

Liquidity and Capital Resources

At March 31, 2005, our liquidity is strong, with cash and marketable securities of $142,685,000 exceeding $121,010,000 of total debt outstanding. Further, our debt to book capitalization ratio declined to 22.3%, the lowest level in our 13 year history.

In the first quarter of 2005, we paid off ahead of schedule $33,861,000 of debt. The early payoff debt included $25,637,000 applicable to a 6% non-recourse debt due in 2007 to SouthTrust Bank and $8,224,000 of 5% first mortgage notes due in 2006 through 2021. The interest cost of the debt exceeded the earnings on available cash, as discussed above.

Our next significant debt maturities (primarily related to our $100 million unsecured public notes) are in 2007.

We intend to comply with REIT dividend requirements that we distribute 90% of our taxable income for the year ended December 31, 2005 and thereafter. NHI declared a dividend of 45 cents per common share to shareholders of record on March 31, 2005 payable on May 10, 2005. The 2004 fourth quarter dividend of $.5750 per share was paid on January 10, 2005 and included a $.15 per share special dividend.

Commitments

At March 31, 2005, we were committed, subject to due diligence and financial performance goals, to fund approximately $51,750,000 in health care real estate projects, $11,750,000 of which is expected to be funded within the next 12 months. The commitments include a $50,000,000 construction loan/sale leaseback agreement for up to ten assisted living facilities.

We are also committed to funding up to $1,750,000 in working capital loans to the purchasers of three Florida-based nursing homes formerly owned by American Medical Associates, Inc., maturing in May 2005, consisting of $750,000 at a 6% interest rate, and $1,000,000 at an interest rate of prime plus 2%.

We currently have sufficient liquidity to finance current investments for which we are committed as well as to repay or refinance borrowings at or prior to their maturity.

Debt and Related Guarantees and Contingencies

See contingency related to damaged property in Note 8 of Notes to Condensed consolidated Financial Statements.

Foreclosures, Troubled Real Estate Properties, Borrower Bankruptcies, and Non-Performing Loans

Our borrowers, tenants and the properties we operate as foreclosure properties have experienced financial pressures and difficulties similar to those experienced by the health care industry in general since 1997. Governments at both the federal and state levels have enacted legislation to lower or at least slow the growth in payments to health care providers. Furthermore, the costs of professional liability insurance have increased significantly during this same period.

A number of our real estate property operators and mortgage loan borrowers have experienced bankruptcy. Others have been forced to surrender properties to us in lieu of foreclosure and have otherwise failed to make timely payments on their obligations to us.

The following table summarizes our writedowns and recoveries for the three months ended March 31, 2005 and 2004, recorded in accordance with the provisions of SFAS 114 and SFAS 144:

This Certification accompanies the Quarterly Report on Form 10-Q of the Issuer for the quarterly period ended March 31, 2005.

This Certification is executed as of May 2, 2005.

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