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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended September 30, 2003



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | -----------------------------------------------------------------------------------------



For the transition period from
 to



Commission File Number 1-12875



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CORNERSTONE REALTY INCOME TRUST, INC.

(Exact name of registrant as specified in its charter)



|VIRGINIA                                                       |  | 54-1589139                       
|-------------------------------------------------------------- |  | ---------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)



|306 EAST MAIN STREETRICHMOND, VIRGINIA   |  | 23219     
|---------------------------------------- |  | ----------
|(Address of principal executive offices) |  | (Zip Code)



(804) 643-1761

(Registrants telephone number, including area code)



Not Applicable

(Former name, former address, and former fiscal year, if changed since last report)



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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes  x    No ̈



Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes ̈No  x



At November 1, 2003, there were
57,517,216 outstanding shares of common stock, no par value, of the registrant.



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CORNERSTONE REALTY INCOME TRUST, INC.

FORM 10-Q



INDEX



|                              |  |                                                                                                                                                                |  | PageNumber
|----------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------
|PART I. FINANCIAL INFORMATION |  |                                                                                                                                                               
|                              |  |                                                                                                                                                               
|Item 1.                       |  | Financial Statements (Unaudited)                                                                                                                               |  |           
|                              |  |                                                                                                                                                               
|                              |  | Consolidated Balance SheetsSeptember 30, 2003 and December 31, 2002                                                                                           |  | 3         
|                              |  |                                                                                                                                                               
|                              |  | Consolidated Statements of OperationsThree months ended September 30, 2003 and September 30, 2002 Nine months ended September 30, 2003 and September 30, 2002 |  | 4         
|                              |  |                                                                                                                                                               
|                              |  | Consolidated Statement of Shareholders EquityNine months ended September 30, 2003                                                                            |  | 5         
|                              |  |                                                                                                                                                               
|                              |  | Consolidated Statements of Cash FlowsNine months ended September 30, 2003 and September 30, 2002                                                              |  | 6         
|                              |  |                                                                                                                                                               
|                              |  | Notes to Consolidated Financial Statements                                                                                                                     |  | 7         
|                              |  |                                                                                                                                                               
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                          |  | 12        
|                              |  |                                                                                                                                                               
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk                                                                                                     |  | 18        
|                              |  |                                                                                                                                                               
|Item 4.                       |  | Controls and Procedures                                                                                                                                        |  | 19        
|                              | 
|PART II OTHER INFORMATION:    |  |                                                                                                                                                               
|                              |  |                                                                                                                                                               
|Item 1.                       |  | Legal Proceedings (not applicable).                                                                                                                            |  |           
|                              |  |                                                                                                                                                               
|Item 2.                       |  | Changes in Securities and Use of Proceeds ( not applicable).                                                                                                   |  |           
|                              |  |                                                                                                                                                               
|Item 3.                       |  | Defaults Upon Senior Securities (not applicable).                                                                                                              |  |           
|                              |  |                                                                                                                                                               
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders (not applicable).                                                                                          |  |           
|                              |  |                                                                                                                                                               
|Item 5.                       |  | Other Information (not applicable).                                                                                                                            |  |           
|                              |  |                                                                                                                                                               
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                                                                               |  | 20        
|                              | 
|Signatures                    |  | 21                                                                                                                                                            





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CORNERSTONE REALTY INCOME TRUST, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)



|                                                                                                                                                                   |  | September 30,2003                      |           |   | December 31,2002 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------- | --------- | - | ---------------- | -
|                                                                                                                                                                   |  | (In thousands, except pershare dollar) |          
|ASSETS                                                                                                                                                             |  |                                        |           |   |                  |  
|Investment in rental property:                                                                                                                                     |  |                                        |           |   |                  |  
|Land                                                                                                                                                               |  | $                                      | 165,547   |   |                  | $
|Buildings and property improvements                                                                                                                                |  |                                        | 1,102,272 |   |                  |  
|Furniture and fixtures                                                                                                                                             |  |                                        | 37,199    |   |                  |  
|Assets available for sale, net                                                                                                                                     |  |                                        |          |   |                  |  
|                                                                                                                                                                   |  |                                        |           |   |                  |  
|                                                                                                                                                                   |  |                                        | 1,305,018 |   |                  |  
|Less accumulated depreciation                                                                                                                                      |  |                                        | (210,948  | ) |                  |  
|                                                                                                                                                                   |  |                                        |           |   |                  |  
|                                                                                                                                                                   |  |                                        | 1,094,070 |   |                  |  
|Cash and cash equivalents                                                                                                                                          |  |                                        | 1,891     |   |                  |  
|Prepaid expenses                                                                                                                                                   |  |                                        | 2,482     |   |                  |  
|Deferred financing costs, net                                                                                                                                      |  |                                        | 6,026     |   |                  |  
|Investment in joint ventures                                                                                                                                       |  |                                        | 1,506     |   |                  |  
|Other assets                                                                                                                                                       |  |                                        | 32,489    |   |                  |  
|                                                                                                                                                                   |  |                                        |           |   |                  |  
|Total Assets                                                                                                                                                       |  | $                                      | 1,138,464 |   |                  | $
|                                                                                                                                                                   |  |                                        |           |   |                  |  
|LIABILITIES and SHAREHOLDERS EQUITY                                                                                                                               |  |                                        |           |   |                  |  
|Liabilities                                                                                                                                                        |  |                                        |           |   |                  |  
|Notes payable-unsecured                                                                                                                                            |  | $                                      |          |   |                  | $
|Notes payable-secured                                                                                                                                              |  |                                        | 796,093   |   |                  |  
|Distributions payable                                                                                                                                              |  |                                        | 76        |   |                  |  
|Accounts payable and accrued expenses                                                                                                                              |  |                                        | 19,495    |   |                  |  
|Rents received in advance                                                                                                                                          |  |                                        | 463       |   |                  |  
|Tenant security deposits                                                                                                                                           |  |                                        | 1,782     |   |                  |  
|                                                                                                                                                                   |  |                                        |           |   |                  |  
|Total Liabilities                                                                                                                                                  |  |                                        | 817,909   |   |                  |  
|Minority interest of unit holders in operating partnership                                                                                                         |  |                                        | 19,337    |   |                  |  
|                                                                                                                                                                   |  |                                       
|Shareholders equity                                                                                                                                               |  |                                        |           |   |                  |  
|Preferred stock, no par value, authorized 25,000 shares; $25 liquidation preference, Series A Cumulative Convertible Redeemable;
issued and outstanding 127 shares |  |                                        | 2,680     |   |                  |  
|Preferred stock, no par value, authorized 607 shares; Series B Convertible; issued and outstanding 605 shares                                                      |  |                                        | 3,922     |   |                  |  
|Common stock, no par value, authorized 100,000 shares; issued and outstanding 54,772 shares and 48,361 shares,
respectively                                        |  |                                        | 536,833   |   |                  |  
|Deferred compensation                                                                                                                                              |  |                                        | (517      | ) |                  |  
|Distributions greater than net income                                                                                                                              |  |                                        | (241,700  | ) |                  |  
|                                                                                                                                                                   |  |                                        |           |   |                  |  
|Total Shareholders Equity                                                                                                                                         |  |                                        | 301,218   |   |                  |  
|                                                                                                                                                                   |  |                                        |           |   |                  |  
|Total Liabilities and Shareholders' Equity                                                                                                                         |  | $                                      | 1,138,464 |   |                  | $
|                                                                                                                                                                   |  |                                        |           |   |                  |  



See
accompanying notes to consolidated financial statements.



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CORNERSTONE REALTY INCOME TRUST, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)



|                                                                                                           |  | Three Months Ended                    |         |   | Nine Months Ended |  
|---------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | - | ----------------- | -
|                                                                                                           |  | September 30,2003                     |         |   | September 30,2002 |  
|                                                                                                           |  | (In thousands, except per share data) |        
|REVENUE:                                                                                                   |  |                                       |         |   |                   |  
|Rental income                                                                                              |  | $                                     | 42,686  |   |                   | $
|Other property income                                                                                      |  |                                       | 2,286   |   |                   |  
|                                                                                                           |  |                                       |         |   |                   |  
|Total revenues                                                                                             |  |                                       | 44,972  |   |                   |  
|EXPENSES:                                                                                                  |  |                                       |         |   |                   |  
|Property and maintenance                                                                                   |  |                                       | 13,774  |   |                   |  
|Taxes and insurance                                                                                        |  |                                       | 6,049   |   |                   |  
|Property management                                                                                        |  |                                       | 1,132   |   |                   |  
|General and administrative                                                                                 |  |                                       | 1,036   |   |                   |  
|Other depreciation                                                                                         |  |                                       | 6       |   |                   |  
|Depreciation of rental property                                                                            |  |                                       | 13,460  |   |                   |  
|Other                                                                                                      |  |                                       | 58      |   |                   |  
|                                                                                                           |  |                                       |         |   |                   |  
|Total expenses                                                                                             |  |                                       | 35,515  |   |                   |  
|                                                                                                           |  |                                       |         |   |                   |  
|Income before interest income (expense)                                                                    |  |                                       | 9,457   |   |                   |  
|Interest income                                                                                            |  |                                       | 108     |   |                   |  
|Interest expense                                                                                           |  |                                       | (11,932 | ) |                   |  
|                                                                                                           |  |                                       |         |   |                   |  
|(Loss) income from continuing operations before minority interest of unit holders in operating partnership |  |                                       | (2,367  | ) |                   |  
|Minority interest of unit holders in operating partnership                                                 |  |                                       | 84      |   |                   |  
|                                                                                                           |  |                                       |         |   |                   |  
|(Loss) income from continuing operations                                                                   |  |                                       | (2,283  | ) |                   |  
|Discontinued operations:                                                                                   |  |                                       |         |   |                   |  
|(Loss) income from discontinued operations                                                                 |  |                                       | (3      | ) |                   |  
|Gain on sales of investments                                                                               |  |                                       |        |   |                   |  
|                                                                                                           |  |                                       |         |   |                   |  
|Net (loss) income                                                                                          |  | $                                     | (2,286  | ) |                   | $
|Distributions to preferred shareholders                                                                    |  |                                       | (76     | ) |                   |  
|                                                                                                           |  |                                       |         |   |                   |  
|Net (loss) income available to common shareholders                                                         |  | $                                     | (2,362  | ) |                   | $
|                                                                                                           |  |                                       |         |   |                   |  
|Net (loss) income per common share from continuing operations-basic and diluted                            |  | $                                     | (0.04   | ) |                   | $
|                                                                                                           |  |                                       |         |   |                   |  
|Net (loss) income per common share from discontinued operations-basic and diluted                          |  | $                                     | 0.00    |   |                   | $
|                                                                                                           |  |                                       |         |   |                   |  
|Net (loss) income per common share                                                                         |  | $                                     | (0.04   | ) |                   | $
|                                                                                                           |  |                                       |         |   |                   |  
|Distributions per common share                                                                             |  | $                                     | 0.20    |   |                   | $
|                                                                                                           |  |                                       |         |   |                   |  
|Weighted average number of common shares outstanding-basic and diluted                                     |  |                                       | 54,729  |   |                   |  
|                                                                                                           |  |                                       |         |   |                   |  



See
accompanying notes to consolidated financial statements.



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CORNERSTONE REALTY INCOME TRUST, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY (UNAUDITED)



|                                                                                            |  | NumberofCommonShares                  |   |  | CommonStockAmount |         |   | NumberofPreferredShares |     | PreferredStockAmount |   | DeferredCompensation |  |   | DistributionsGreaterThan NetIncome |   |  | TotalShareholdersEquity |         
|------------------------------------------------------------------------------------------- |  | ------------------------------------- | - |  | ----------------- | ------- | - | ----------------------- | --- | -------------------- | - | -------------------- |  | - | ---------------------------------- | - |  | ------------------------ | --------
|                                                                                            |  | (In thousands, excepy per share data) |  
|Balance at December 31, 2002                                                                |  | 48,361                                |   |  | $                 | 487,303 |   |                         | 127 |                      | $ | 2,680                |  | $ | (638                               | ) |  | $                        | (202,271
|Net loss                                                                                    |  |                                      |   |  |                   |        |   |                         |    |                      |   |                     |  |   |                                   |   |  |                          | (4,800  
|Cash distributions declared to common shareholders ($.68 per share)                         |  |                                      |   |  |                   |        |   |                         |    |                      |   |                     |  |   |                                   |   |  |                          | (34,402 
|Cash distributions for Series A Convertible Preferred Stock                                 |  |                                      |   |  |                   |        |   |                         |    |                      |   |                     |  |   |                                    |   |  |                          | (227    
|Purchase of common shares                                                                   |  | (26                                   | ) |  |                   | (190    | ) |                         |    |                      |   |                     |  |   |                                   |   |  |                          |        
|Issuance of common shares in connection with the acquisition of Merry Land Properties, Inc. |  | 4,993                                 |   |  |                   | 36,147  |   |                         |    |                      |   |                     |  |   |                                   |   |  |                          |        
|Issuance of Series B Convertible Preferred Shares                                           |  |                                      |   |  |                   |        |   |                         | 605 |                      |   | 3,922                |  |   |                                   |   |  |                          |        
|Conversion of minority interest of unit holders in operating partnership                    |  | 887                                   |   |  |                   | 9,374   |   |                         |    |                      |   |                     |  |   |                                   |   |  |                          |        
|Restricted stock grants                                                                     |  | 11                                    |   |  |                   | 89      |   |                         |    |                      |   |                     |  |   | (89                                | ) |  |                          |        
|Amortization of deferred compensation                                                       |  |                                      |   |  |                   |        |   |                         |    |                      |   |                     |  |   | 210                                |   |  |                          |        
|Shares issued through dividend reinvestment plan                                            |  | 546                                   |   |  |                   | 4,110   |   |                         |    |                      |   |                     |  |   |                                   |   |  |                          |        
|                                                                                            |  |                                       |   |  |                   |         |   |                         |     |                      |   |                      |  |   |                                    |   |  |                          |         
|Balance at September 30, 2003                                                               |  | 54,772                                |   |  | $                 | 536,833 |   |                         | 732 |                      | $ | 6,602                |  | $ | (517                               | ) |  | $                        | (241,700
|                                                                                            |  |                                       |   |  |                   |         |   |                         |     |                      |   |                      |  |   |                                    |   |  |                          |         



See
accompanying notes to consolidated financial statements.





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CORNERSTONE REALTY INCOME TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



|                                                                                 |  | Nine Months Ended |        
|-------------------------------------------------------------------------------- |  | ----------------- | -------
|                                                                                 |  | September 30,2003 |        
|                                                                                 |  | (In thousands)    |        
|Cash flow from operating activities:                                             |  |                   |        
|Net (loss) income                                                                |  | $                 | (4,800 
|Adjustments to reconcile net income to net cash provided by operating activities |  |                   |        
|Gain on sales of investments                                                     |  |                   | (1,391 
|Depreciation                                                                     |  |                   | 38,549 
|Minority interest of unit holders in operating partnership                       |  |                   | (170   
|Amortization of deferred compensation                                            |  |                   | 210    
|Amortization of deferred financing costs                                         |  |                   | 1,081  
|Amortization of mortgage notes payable premium                                   |  |                   | (1,179 
|Changes in operating assets and liabilities (net of amounts acquired):           |  |                   |        
|Operating assets                                                                 |  |                   | (2,837 
|Operating liabilities                                                            |  |                   | 3,446  
|                                                                                 |  |                   |        
|Net cash provided by operating activities                                        |  |                   | 32,909 
|Cash flow from investing activities:                                             |  |                   |        
|Acquisition of rental property, net                                              |  |                   | (3,474 
|Development of real estate assets                                                |  |                   | (347   
|Major renovations                                                                |  |                   | (1,785 
|Capital improvements                                                             |  |                   | (10,054
|Net funding of real estate reserve for replacement                               |  |                   | (1,584 
|Net proceeds from the sale of rental property                                    |  |                   | 15,018 
|                                                                                 |  |                   |        
|Net cash used in investing activities                                            |  |                   | (2,226 
|Cash flow from financing activities:                                             |  |                   |        
|Proceeds (repayments) from/of short-term borrowings                              |  |                   | (77,913
|Proceeds from secured notes payable                                              |  |                   | 144,086
|Repayments of secured notes payable                                              |  |                   | (61,724
|Payment of deferred financing costs                                              |  |                   | (2,588 
|Shares issued through dividend reinvestment plan and exercise of stock options   |  |                   | 4,110  
|Purchase of common stock                                                         |  |                   | (190   
|Cash distributions to operating partnership unit holders                         |  |                   | (1,324 
|Cash distributions paid to preferred shareholders                                |  |                   | (227   
|Cash distributions paid to common shareholders                                   |  |                   | (34,402
|                                                                                 |  |                   |        
|Net cash used in financing activities                                            |  |                   | (30,172
|Increase (decrease) in cash and cash equivalents                                 |  |                   | 511    
|Cash and cash equivalents, beginning of year                                     |  |                   | 1,380  
|                                                                                 |  |                   |        
|Cash and cash equivalents, end of period                                         |  | $                 | 1,891  
|                                                                                 |  |                   |        
|Supplemental information:                                                        |  |                   |        
|Non-cash transactions:                                                           |  |                   |        
|Real estate assets acquired                                                      |  |                   |       
|Assumption of mortgage notes                                                     |  |                   |       
|Issuance of operating partnership units                                          |  |                   |       
|Conversion of operating partnership unit to common stock                         |  |                   | 9,374  
|Merry Land acquisitions:                                                         |  |                   |        
|Real estate assets acquired                                                      |  |                   | 148,268
|Issuance of common stock                                                         |  |                   | 36,285 
|Issuance of preferred stock                                                      |  |                   | 3,930  
|Assumption of mortgage notes                                                     |  |                   | 110,464
|Operating assets acquired                                                        |  |                   | 9,001  
|Operating liabilities acquired                                                   |  |                   | 3,163  



See
accompanying notes to consolidated financial statements.



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CORNERSTONE REALTY INCOME TRUST, INC

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2003



|(1) | Basis of Presentation
|--- | ---------------------



The accompanying interim unaudited financial statements have been prepared in accordance with the instructions for Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information required by accounting principles generally accepted in the United States. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation of financial position have been included. These unaudited financial statements should be read in conjunction with the Companys audited consolidated financial statements contained in the Companys December 31, 2002
Annual Report on Form 10-K. Operating results for the nine months ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.



Certain previously reported amounts have been reclassified to conform with
the current year financial statement presentation.



The
Company did not have any items of comprehensive income requiring separate reporting and disclosure for the periods presented.



Stock Option Compensation



The Company granted 5,000 options to purchase shares during the three months ended September 30, 2003 and no options were granted during the three months
ended September 30, 2002. During the nine months ended September 30, 2003 and 2002, the company granted 64,550 and 57,612 options, respectively. The Companys options to purchase shares generally vest immediately upon grant, therefore the
compensation expense would occur in the period granted. The following information about stock-based employee compensation costs reconciles the difference of accounting for employee stock based compensation under the intrinsic value method of APB No.
25 and related interpretations and the fair value method prescribed under SFAS No. 123 (in thousands):



|                                                                                              |  | Three MonthsEnded September 30,                                                                   |        |   | Nine MonthsEnded September 30, |  
|--------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------- | ------ | - | ------------------------------ | -
|                                                                                              |  | 2003                                                                                              |        |   | 2002                           |  
|Net (loss) income, as reported                                                                |  | $                                                                                                 | (2,286 | ) |                                | $
|Add:                                                                                          |  | Stock-based employee compensation expense included in reported net income                         |        |   | 100                            |  
|Deduct:                                                                                       |  | Stock-based employee compensation expense determined under fair value based method for all awards |        |   | (101                           | )
|                                                                                              |  |                                                                                                   |        |   |                                |  
|Pro forma net (loss) income as if the fair value method had been applied to all option grants |  | $                                                                                                 | (2,287 | ) |                                | $
|                                                                                              |  |                                                                                                   |        |   |                                |  
|Earnings per share                                                                            |  |                                                                                                   |        |   |                                |  
|                                                                                              |  | Basic-as reported                                                                                 |        | $ | (0.04                          | )
|                                                                                              |  | Basic-pro forma                                                                                   |        | $ | (0.04                          | )
|                                                                                              |  | Diluted-as reported                                                                               |        | $ | (0.04                          | )
|                                                                                              |  | Diluted-pro forma                                                                                 |        | $ | (0.04                          | )



|(2) | Investment in Rental Property
|--- | -----------------------------



Acquisition of Merry Land Properties, Inc.



On May 28, 2003, the Company completed the acquisition of Merry Land Properties, Inc. (Merry Land), which owned nine apartment communities
containing 1,966 apartment homes, interests in two real estate joint ventures, two parcels of undeveloped land that the Company plans to develop into additional apartment homes and a third party property management business. The acquisition was
structured as a merger of Merry Land into a wholly owned qualified REIT subsidiary of the Company. The merger qualified as a tax-free reorganization and was accounted for under the purchase method of accounting. The Company used various valuation
methods to allocate the purchase price between land, buildings and improvements, equipment and debt assumed. The Companys allocation of the purchase price is preliminary and is subject to change, as valuations of certain assets and liabilities
are being finalized. Currently the purchase price is approximately $158.6 million, which includes the issuance of equity, assumption of debt and the fair value adjustment to debt. Under the terms of the merger agreement, each Merry Land shareholder
received 1.818 of the Companys common shares and 0.220 of the Companys Series B convertible preferred shares. A total of 5.0 million common shares and 0.6 million of the Companys Series B convertible preferred shares were issued as
a result of the merger. The Series B convertible preferred shares met the conversion conditions and were converted to common shares on October 1, 2003. In addition, the Company



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assumed approximately $90.6 million of Merry Lands debt with a fair value of $110.5 million at the date of assumption. No goodwill was recorded as a
result of this transaction.



Disposition of Investments



During the first quarter of 2003, the Company closed on
the sale of two apartment communities containing a total of 395 apartment homes for a total of $15.85 million and recognized a gain of $1.4 million. As a result of the sales, the Companys financial statements have been prepared with these two
apartment communities results of operations and the gain from sale isolated and shown as discontinued operations. All historical statements presented have been restated to conform to this presentation in accordance with SFAS No.
144.



The components of income from operations related to
discontinued operations for the three and nine months ended September 30, 2003 and 2002 are shown below. These include the results of operations through the date of sale for the three and nine months ended September 30, 2003 and a full period of
operations for the three and nine months ended September 30, 2002 (dollars in thousands):



|                                           |  | Three Months Ended September 30, |    | Nine Months EndedSeptember 30,
|------------------------------------------ |  | -------------------------------- | -- | ------------------------------
|                                           |  | 2003                             |    |                               
|Rental and other property income           |  | $                                | 1  |                               
|Expenses:                                  |  |                                  |    |                               
|Property and maintenance                   |  |                                  | 1  |                               
|Taxes and insurance                        |  |                                  | 3  |                               
|Depreciation of rental property            |  |                                  |   |                               
|                                           |  |                                  |    |                               
|Total expenses                             |  |                                  | 4  |                               
|                                           |  |                                  |    |                               
|Net (loss) income                          |  |                                  | (3 | )                             
|Gain on sales of investments               |  |                                  |   |                               
|                                           |  |                                  |    |                               
|Income (loss) from discontinued operations |  | $                                | (3 | )                             
|                                           |  |                                  |    |                               



The Company had no
assets that qualified as held for disposition as defined by SFAS No. 144 at September 30, 2003.



Development



In connection with the Merry Land merger, the Company acquired two parcels of undeveloped land in the amount of $3.5 million. The land relating to
construction in process is classified as land on the Companys balance sheet. Capitalized interest and real estate taxes aggregated approximately $70,377 and $64,522 for the nine months ended September 30, 2003 and 2002,
respectively. Land associated with construction in process was $5.2 million and $1.3 million as of September 30, 2003 and 2002, respectively.



|(2) | Real Estate Joint Ventures
|--- | --------------------------



In connection with the Merry Land merger, the Company acquired interest in two joint ventures. The Company acquired a 35% interest in an apartment
community under development. The Company acquired a 10% interest in a completed apartment community. The Company has accounted for its investment under the equity method of accounting.



|(3) | Notes Payable
|--- | -------------



Secured



In connection with the Merry Land merger, the Company assumed nine fixed or variable rate mortgage notes with an aggregate principal amount of $90.6
million. These mortgages were recorded at a fair value of $110.5 million at the date of assumption. The difference between the fair value and the principal amount is being amortized as an adjustment to interest expense over the term of the
respective notes. The mortgage notes bear a weighted interest rate of 7.9% per annum and an effective weighted average interest rate of 3.8%, including the effect of the fair value adjustment. The fixed rate mortgage notes are payable in monthly
installments, including principal and interest. The variable rate mortgage note requires payments of interest only. Prepayment penalties apply for early retirements on the fixed rate mortgage notes. Scheduled maturities are at various dates through
December 2003 and one mortgage notes matures November 2041.



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In the third quarter of 2003, the Company completed a plan of refinancing in which the Companys
unsecured line of credit was replaced with a combination of a new secured line of credit from a commercial bank and three additional secured financing transactions. The following summarizes the new financings:



On May 30, 2003, the Company entered into a $50 million secured line of
credit. The secured credit facility is divided into two loans, a $40 million revolving credit facility and a $10 million swing line secured revolving credit facility. The secured line of credit bears interest at LIBOR plus 157.5 basis
points and the maturity date is May 30, 2005. The secured line of credit requires quarterly payments of interest only and is secured by seven apartment communities. The Company is obligated to pay lenders a quarterly commitment fee equal to .25% per
annum of the unused portion of the line. At September 30, 2003, the outstanding balance was $7 million on the revolving credit facility and no amount was outstanding on the swing line.



On June 27, 2003, the Company entered into a $50 million secured financing.
The note bears interest at LIBOR plus 125 basis points. The maturity date is July 9, 2005 with three one-year extension options. The note requires payments of interest only and is secured by five apartment communities. The note is prepayable after
one year without penalty. At September 30, 2003, the outstanding balance was $50 million.



On July 17, 2003, the Company entered into $38.5 million in secured financing which is represented by four promissory notes. The notes bear interest at the Discount Mortgage Backed Security index plus 82 basis points
(1.87% at September 30, 2003), and the maturity date is August 1, 2008. These notes require payments of interest only and are secured by four apartment communities. The notes are prepayable after one year with 1% penalty. At September 30, 2003, the
outstanding balance was $38.5 million.



On August 29, 2003,
the Company entered into $13.325 million in secured financing secured by one apartment community. The note bears interest at the Discount Mortgage Backed Security index plus 82 basis points (1.95% at September 30, 2003), and the maturity date is
September 1, 2008. The notes requires payment of interest only. The note is prepayable after one year with 1% penalty. At September 30, 2003, the outstanding balance was $13.25 million.



Proceeds from these financings repaid the outstanding balance of the Companys $85 million unsecured line of credit,
described below, and repaid outstanding secured loans totaling approximately $23.4 million. The remainder of the proceeds from these financings will be used for excess borrowing capacity, working capital needs and other corporate purposes.



The aggregate maturities of principal, including monthly
installments of principal and the non-cash fair value market adjustment of $19.3 million, for secured debt for the five years subsequent to September 30, 2003 are as follows (in thousands):



|Year       |  | Amount
|---------- |  | ------
|2003       |  | $     
|2004       |  |       
|2005       |  |       
|2006       |  |       
|2007       |  |       
|Thereafter |  |       
|           |  |       
|           |  | $     
|           |  |       



Unsecured



Upon completion of the financings described above, the
Companys $85 million unsecured line of credit was repaid and terminated on July 17, 2003. At September 30, 2003 there was no outstanding balance, and on September 30, 2002, borrowings on the unsecured line of credit was $50 million.



During May 2003, the Companys $7.5 million unsecured
line of credit for general corporate purposes was replaced with a $10 million swing line secured revolving line of credit, described above. There were no amounts outstanding under the unsecured line of credit arrangement as of September
30, 2003 and 2002.



|(4) | Operating Partnership
|--- | ---------------------



Effective October 1, 2001, State Street, LLC and State Street I, LLC, each a North Carolina limited liability company (collectively, the Limited
Partners), and the Company, as the sole general partner, formed Cornerstone NC Operating Limited Partnership, a Virginia limited partnership (the Limited Partnership). The Company has approximately a 78% interest in the Limited
Partnership. The Limited Partners are minority limited partners and are not otherwise related to the Company. The Limited Partners contributed and agreed to contribute property to the Limited Partnership in exchange for preferred and non-preferred
operating partnership units. The non-preferred operating partnership units convert into preferred operating partnership units over time or as certain lease-up and stabilization criteria are met. Beginning October 1, 2002, the Limited Partners became
able to elect to redeem a portion of the preferred operating partnership units. If the Limited Partners make the election, the



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Company, at its option, will convert the preferred operating partnership units for either common shares of the Company on a one-for-one basis or cash in an
amount per unit equal to the closing price of a common share of the Company on the exercise date (or other specified price if there is no closing price on that date), subject to anti-dilution adjustments.



During the second quarter of 2003, 319,715 non-preferred operating
partnership units were converted to preferred operating units. As of September 30, 2003, there were 1,807,145 preferred operating partnership units eligible for conversion into common shares on a one-for-one basis or cash, at the Companys
option. During the first quarter of 2003, a total of 887,125 preferred operating partnership units were converted into common shares on a one-to-one basis.



|(5) | Earnings Per Share
|--- | ------------------



The following table sets forth the computation of basic and diluted earnings per share in accordance with FAS 128 (in thousands, except per share data):



|                                                                                                                             |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30,
|---------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------
|                                                                                                                             |  | 2003                            |        |   | 2002                          
|Numerator:                                                                                                                   |  |                                 |        |   |                               
|Net (loss) income available to common shareholders                                                                           |  | $                               | (2,362 | ) |                               
|Numerator for basic and diluted earnings per share  (loss) income available to common stockholders after assumed
conversion |  | $                               | (2,362 | ) |                               
|Denominator:                                                                                                                 |  |                                 |        |   |                               
|Denominator for basic earnings per share-weighted- average shares                                                            |  |                                 | 54,729 |   |                               
|Effect of dilutive securities:                                                                                               |  |                                 |        |   |                               
|Stock options                                                                                                                |  |                                 |       |   |                               
|                                                                                                                             |  |                                 |        |   |                               
|Denominator for diluted earnings per share-adjusted weighted-average shares and assumed conversions                          |  |                                 | 54,729 |   |                               
|                                                                                                                             |  |                                 |        |  
|Basic and diluted earnings per common share                                                                                  |  | $                               | (0.04  | ) |                               
|                                                                                                                             |  |                                 |        |   |                               
|Basic and diluted earnings per common share from continuing operations                                                       |  | $                               | (0.04  | ) |                               
|                                                                                                                             |  |                                 |        |   |                               
|Basic and diluted earnings per common share from discontinued operations                                                     |  | $                               |       |   |                               
|                                                                                                                             |  |                                 |        |   |                               





The conversion of the operating partnership units are not included in earnings per common share calculations since their effect is not dilutive. The
weighted average of the operating partnership units was 1,807,145 and 2,085,253 for the three months ended September 30, 2003 and 2002, respectively. For the nine months ended September 30, 2003 and 2002, the weighted average of the operating
partnership units was 1,864,203 and 1,783,735, respectively.



In addition, the Series B Convertible preferred shares issued in connection with the Merry Land merger are non-dividend paying and at September 30, 2003 conditions for conversion have not been met. Therefore, these shares are not included
in the dilutive earnings per common share calculation. The Series B Convertible preferred shares met the conditions for and were converted to common shares on October 1, 2003.



|(6) | Recent Accounting Pronouncements
|--- | --------------------------------



In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to SFAS No. 123s fair value method of accounting for
stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and Accounting Principles Board (APB) Opinion No. 28, Interim Financial Reporting, to require disclosure in the summary of significant
accounting policies of the effects of an entitys accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. SFAS No. 148 is effective for fiscal
years beginning after December 15, 2002. The Company adopted the new accounting standard effective as of the first quarter of fiscal year 2003.



In November 2002, the FASB issued Interpretation 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. This statement requires that a liability for the fair value of a guarantee be recognized at the time the obligation is undertaken. The statement also requires that the liability be measured over the term
of the related guarantee. This statement is effective for all guarantees entered into subsequent to December 31, 2002. For all guarantees entered into prior to December 31, 2002, there is to be no change in accounting; however, disclosure of



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managements estimate of its future obligation under the guarantee is to be made. The company currently does not have any guarantee obligations to which
Interpretation 45 applies.



In January 2003, the FASB issued
Interpretation 46, Consolidation of Variable Interest Entities. This statement refines the identification process of variable interest entities and how an entity assesses its interests in a variable interest entity to decide whether to
consolidate that entity. The Company has formed wholly-owned subsidiaries for financing purposes and such financings is reflected in the consolidated financial statements. Currently, the Company does not anticipate this Statement having a material
impact on its consolidated financial statements.



In May 2003,
the FASB issued Statement 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150 impacts the accounting for minority interests in limited life subsidiaries and requires that
those interests be reclassified to liabilities and measured at settlement value. The effective date of FAS 150 for certain limited life subsidiaries has been deferred for an indefinite period. All other provisions of FAS 150 became effective July 1,
2003. The application of FAS 150 did not have an impact on our financial statements, and we do not currently have any limited life subsidiaries subject to the limited life subsidiary provisions.



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|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- |  | -------------------------------------------------------------------------------------



The following information should be read in conjunction with the Cornerstone Realty Income Trust, Inc. December 31, 2002
Annual Report on Form 10-K as well as the financial statements and notes included in Item 1 of this report. This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include, without limitation, statements concerning anticipated improvements in financial operations from completed and planned property renovations, and from the
substitution of fixed rate for variable rate debt. Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievement of the Company to be materially different from the
results of operations or plans expressed or implied by such forward-looking statements. Such factors include, among other things, unanticipated adverse business developments affecting the Company, adverse changes in the real estate markets and
general and local economies and business conditions, and adverse changes with respect to the availability and terms of debt financing, a reduction of the portion of dividends that are reinvested through the Companys dividend reinvestment plan
and achieving any benefits of the Merry Land Properties, Inc. (Merry Land) merger. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could
be inaccurate, and therefore there can be no assurance that such statements included in this quarterly report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the
inclusion of such information should not be regarded as a representation by the Company or any other person that the results or conditions described in such statements or the objectives and plans of the Company will be achieved.



Business



Cornerstone Realty Income Trust, Inc. (together with its subsidiaries, the
Company) is a self-administered and self-managed REIT headquartered in Richmond, Virginia. The business of the Company is to acquire and operate existing residential apartment communities located in the southern United States. As of
September 30, 2003, the Company owned 89 apartment communities, which comprised a total of 23,189 apartment homes. The Companys apartment communities are located in Georgia, North Carolina, South Carolina, Texas and Virginia.



On May 28, 2003, the Company completed the acquisition of Merry Land, which
owned nine apartment communities containing 1,966 apartment homes located in South Carolina and Georgia, interests in two joint ventures, two parcels of undeveloped land that the Company plans to develop into additional apartment homes and a third
party property management business. This purchase price is preliminary and subject to change, as valuations of certain assets and liabilities are being finalized. Currently the purchase price is approximately $158.6 million, which includes the
issuance of equity, assumption of debt and the fair value adjustment to debt.



The Company, as the general partner, also has approximately a 78% interest in the Cornerstone NC Operating Limited Partnership. This partnership holds certain apartment communities in North Carolina and was formed by
the Company and the prior owner, which is a minority limited partner and is not otherwise related to the Company.



The Company owns and operates multifamily apartment communities that generate rental and other property related income through the leasing of apartment
homes to a diverse base of tenants. The Company separately evaluates the performance of each of its apartment communities. However, because each of the apartment communities has similar economic characteristics, facilities, services and tenants, the
apartment communities have been aggregated into a single apartment communities segment. All segment disclosure is included in or can be derived from the Companys consolidated financial statements.



Results of Operations



Income and occupancy



Substantially all of the Companys income is generated from the rental
of apartment communities. The Companys property operations for the three and nine months ended September 30, 2003 include the results of operations of 89 apartment communities acquired to date, including apartment communities acquired through
the Merry Land merger on May 28, 2003. The operations of the two apartment communities sold during the first quarter of 2003 are reflected in discontinued operations.



Total revenue for the three months ended September 30, 2003 and 2002 was $45.0 million and $39.8 million, respectively. For
the nine months ended September 30, 2003 and 2002 total revenue was $127.0 million and $120.5 million, respectively. Other revenue included reimbursement for water submetering and ancillary income. For the nine months ended September 30, 2003, other
revenue also included approximately $366,000 which represents the excess recoveries from casualty insurance over the cost of the damage. At the end of the third quarter of 2003, the Company owned 2,578 more apartment homes than it owned for the same
period in 2002. The increases in revenue are primarily due to the effect of the rental income generated from the apartment communities acquired through the Merry Land merger and the full effect in 2003 of the 2002 acquisitions; however, the increase
was offset by the increase in rental concessions and the decrease in economic occupancy, discussed below, which resulted from the continuing soft market conditions in the major markets in which the Company operates. The increase in revenues is also
offset by the $0.3 million allowance adjustment to tenant accounts receivable recorded in the third quarter of 2002. The Company will continue to add revenue-enhancing improvements in an effort to improve the apartment communities
marketability, economic occupancies, and rental rates.



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Overall economic occupancy (scheduled rent divided by gross potential rent) for the Companys
apartment communities averaged 89% for the three months ended September 30, 2003 and 2002. For the first nine months of 2003 and 2002, economic occupancy was 88% and 89%, respectively. The decrease in 2003 is attributable to softening in overall
market conditions in the major markets in which the Company operates. Average physical occupancy in the third quarter of 2003 was 93% compared with 92% a year ago. For the first nine months of 2003 and 2002 average physical occupancy was 92%.



Expenses



Property operating expenses include the following expense categories:
property and maintenance, taxes and insurance and property management. Property operating expenses for the three months ended September 30, 2003 were $21.0 million and $19.1 million for the same period in 2002. For the nine months ended September
30, 2003 and 2002, property operating expenses were $57.9 million and $51.5 million, respectively. The increase is primarily due to the Merry Land merger and the full effect in 2003 of the apartment communities acquired in 2002. Increases in
property insurance costs, real estate tax assessment and higher utility costs also contributed to the increases in property operating expenses. The operating expense ratio (the ratio of property operating expenses to rental income) was 49.1% and
50.2% for the three months ended September 30, 2003 and 2002, respectively. For the first nine months of 2003 and 2002, operating expense ratio was 48.0% and 44.7%, respectively.



Depreciation expense for the three months ended September 30, 2003 was $13.5 million and $11.4 million for the same period
in 2002. For the nine months ended September 30, 2003 and 2002, depreciation expense was $38.4 million and $33.6 million, respectively. The increase in depreciation expense is due to the Merry Land merger and the full effect of depreciation of the
2002 acquisitions and the depreciation associated with capital improvements made during 2003 and 2002.



General and administrative expenses totaled $1.0 million, or 2.4% of rental income for the three months ended September 30, 2003, and $0.9 million, or
2.4% for the same period in 2002. For the first nine months of 2003 and 2002, these expenses were $2.7 million, or 2.3% and 2.4% of rental income, respectively. These expenses represent the administrative expenses of the Company as distinguished
from the property operating expenses of the Companys apartment communities.



Interest and investment income and expense



The Companys interest income increased $103,192 for the three months ended September 30, 2003 over 2002. Interest income increased $142,933 for the nine months ended September 30, 2003 over 2002. The increase is
due to the interest income earned on the notes receivables assumed in connection with the Merry Land merger.



The Company incurred interest expense of $11.9 million and $10.7 million during the three months ended September 30, 2003 and 2002, respectively. Interest
expense for the first nine months of 2003 was $34.3 million and $31.0 million for the same period of 2002. The increase is due to secured debt assumed with the Merry Land merger and three full quarters impact of the fixed and variable rate
mortgage notes placed or assumed on three apartment communities during 2002. Weighted average interest rates on the Companys debt was 5.8% for the third quarter of 2003 and 6.7% for the same period in 2002. For the nine months ended September
30, 2003 and 2002, weighted average interest rates were 6.0% and 6.5%, respectively.



Income from discontinued operations



During the first quarter of 2003, the Company sold two apartment communities containing a total of 395 apartment homes for a total sales price of $15.85 million and recognized a gain of $1.4 million. As a result of
the sales, the Companys financial statements presented have been prepared with these two apartment communities results of operations and the gain from sale isolated and shown as discontinued operations. All historical
statements have been restated to conform to this presentation in accordance with SFAS No. 144.



Comparable property operations



Property operating income is a measure the Company uses to evaluate performance and is not deemed to be an alternative to net income, as determined in accordance with accounting principles generally accepted in the United States. In
addition, this measure, as calculated by the Company, may not be comparable to similarly entitled measures reported by other companies. The Companys same-community property portfolio consists of 74 stabilized apartment communities,
containing 20,101 apartment homes that the Company has owned since January 1, 2002, representing approximately 87% of the Companys 23,189 apartment homes. The two apartment communities sold in the first quarter of 2003 have been eliminated
from the calculation. For the three months ended September 30, 2003, same-community property operating income (total revenues less property operating expenses), decreased 3%, total revenues decreased 2% and property operating expenses decreased 1%
over the same period in 2002. For nine months ended September 30, 2003, same-community property operating income decreased 8% from the same period of 2002. Total revenues in the first nine months of 2003 decreased 3% while property operating
expenses increased 6% compared with the first nine months of 2002. The decrease in rental income is primarily due to the soft overall market conditions, which resulted in increased rental concessions and lower average occupancies. The Companys
property operating expenses increased primarily due to higher utility costs, real estate tax assessments and property insurance costs. In order to make a meaningful comparison of property operating income for these apartment communities, the
write-offs of tenant receivables were excluded.



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If this adjustment had been considered for the three months ended September 30, 2003 over 2002, property
operating income would have decreased 2%; total revenues would have decreased 2%; and property operating expenses would have decreased 1%. If this adjustment had been considered for the nine months ended September 30, 2003 over 2002 property
operating income would have decreased 10%; total revenues would have decreased 4%; and property operating expenses would have increased 6%.



Property operating expenses primarily consist of property taxes and insurance, repairs and maintenance, utilities, payroll costs, and advertising and
marketing. In addition, property operating expenses excludes depreciation, general and administrative, other expenses, interest income and expenses and minority interest, as these are not considered in the operating performance of the apartment
communities. The following is a reconciliation of the same community property operating income to income from continuing operations as determined in accordance with generally accepted accounting principles (in thousands):



|                                                           |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|---------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | -
|                                                           |  | 2003                            |         |   | 2002                           |  
|Comparable properties (same communities)                   |  |                                 |         |   |                                |  
|Rental and other income                                    |  | $                               | 39,923  |   |                                | $
|Property operating expenses                                |  |                                 | (16,972 | ) |                                |  
|                                                           |  |                                 |         |   |                                |  
|Property operating income                                  |  |                                 | 22,951  |   |                                |  
|                                                           |  |                                 |         |  
|Remaining                                                  |  |                                 |         |   |                                |  
|Rental and other income                                    |  |                                 | 7,228   |   |                                |  
|Property operating expenses                                |  |                                 | (3,983  | ) |                                |  
|                                                           |  |                                 |         |   |                                |  
|Property operating income (loss)                           |  |                                 | 3,245   |   |                                |  
|                                                           |  |                                 |         |  
|Depreciation of rental property                            |  |                                 | (13,460 | ) |                                |  
|Unallocated expenses                                       |  |                                 | (2,179  | ) |                                |  
|General and administrative                                 |  |                                 | (1,036  | ) |                                |  
|Other depreciation                                         |  |                                 | (6      | ) |                                |  
|Other                                                      |  |                                 | (58     | ) |                                |  
|Interest income                                            |  |                                 | 108     |   |                                |  
|Interest expense                                           |  |                                 | (11,932 | ) |                                |  
|Minority interest of unit holders in operating partnership |  |                                 | 84      |   |                                |  
|                                                           |  |                                 |         |   |                                |  
|Income (loss) from continuing operations                   |  | $                               | (2,283  | ) |                                | $
|                                                           |  |                                 |         |   |                                |  



Liquidity and
Capital Resources



The Companys primary sources of
liquidity are rental income generated from the apartment communities, proceeds from the secured credit facility, reinvestment of distributions, and proceeds from secured debt.



The Company expects to continue to meet short-term and long-term liquidity requirements, through rental income generated
from the apartment communities, equity raised from its dividend reinvestment plan, through secured borrowings, or possible refinancing, or through the disposition of certain assets that, in the Companys evaluation, may no longer meet our
investment requirements. It is expected that the above will be adequate to meet all normal property operating expenses, payment of distributions, budgeted capital improvements, possible property acquisitions, scheduled debt maturities and scheduled
principal payments of mortgage debt for 2003. At September 30, 2003, the Company had $1.9 million in cash and cash equivalents.



Acquisition of Merry Land Properties, Inc.



On May 28, 2003, the Company completed the acquisition of Merry Land which owned nine apartment communities containing 1,966 apartment homes, interests in
two real estate joint ventures, two parcels of undeveloped land that the Company plans to develop into additional apartment homes and a third party property management business. The acquisition was structured as a merger of Merry Land into a wholly
owned qualified REIT subsidiary of the Company. The merger qualified as a tax-free reorganization and was accounted for under the purchase method of accounting. The Company used various valuation methods to allocate the purchase price between land,
buildings and improvements, equipment and debt assumed. The Companys allocation of the purchase price is preliminary and is subject to change, as valuation of certain assets and liabilities are being finalized. Currently the purchase price is
approximately $158.6 million, which includes the issuance of equity, assumption of debt and the fair value adjustment to debt. Under the terms of the merger agreement, each Merry Land shareholder received 1.818 of the Companys common shares
and 0.220 of the Companys Series B convertible preferred shares. A total of 5.0 million common shares and 0.6 million of the Companys Series B convertible preferred shares were issued as a result of the merger. The Series B convertible
preferred shares met the conversion conditions and were converted to common shares on October 1, 2002. In addition, the Company assumed approximately $90.6



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million of Merry Lands debt with a fair value of $110.5 million at the date of assumption. No goodwill was recorded as a result of this transaction.



Notes Payable



Secured



In connection with the Merry Land merger, the Company assumed nine fixed or
variable rate mortgage notes with an aggregate principal amount of $90.6 million. These mortgages were recorded at a fair value of $110.5 million at the date of assumption. The difference between the fair value and the principal amount is being
amortized as an adjustment to interest expense over the term of the respective notes. The mortgage notes bear a weighted interest rate of 7.9% per annum and an effective weighted average interest rate of 3.8%, including the effect of the fair value
adjustment. The fixed rate mortgage notes are payable in monthly installments, including principal and interest. The variable rate mortgage note requires payments of interest only. Prepayment penalties apply for early retirements on the fixed rate
mortgage notes. Scheduled maturities are at various dates through December 2003 and one mortgage note matures November 2041.



During the third quarter of 2003, the Company completed a plan of refinancing in which the Companys unsecured line of credit was replaced with a
combination of a new secured line of credit from a commercial bank and three additional secured financing transactions. The following summarizes the new financings:



On May 30, 2003, the Company entered into a $50 million secured line of credit. The secured credit facility is divided into
two loans, a revolving credit facility and a $10 million swing line. The secured line of credit bears interest at LIBOR plus 157.5 basis points and the maturity date is May 30, 2005. The secured line of credit requires payments of
interest only and is secured by seven apartment communities. The Company is obligated to pay lenders a quarterly commitment fee equal to .25% per annum of the unused portion of the line. At September 30, 2003, the outstanding balance was $7 million
on the revolving credit facility and no amount was outstanding on the swing line.



On June 27, 2003, the Company entered into a $50 million secured financing. The note bears interest at LIBOR plus 125 basis points with a maturity date of July 9, 2005 with three one-year extension options. The note
requires payments of interest only and is secured by five apartment communities. The note is prepayable after one year without penalty. At September 30, 2003, the outstanding balance was $50 million.



On July 17, 2003, the Company entered into $38.5 million in secured
financings, which is represented by four promissory notes. The notes bear interest at the Discount Mortgage Backed Security index plus 82 basis points (1.87% at September 30, 2003), and the maturity date is August 1, 2008. These notes require
payments of interest only and are secured by four apartment communities. The notes are prepayable after one year with 1% penalty. At September 30, 2003, the outstanding balance was $38.5 million.



On August 29, 2003, the Company entered into $13.325 million in secured
financing secured by one apartment community. The note bears interest at the Discount Mortgage Backed Security index plus 82 basis points (1.95% at September 30, 2003), and the maturity date is September 1, 2008. The notes requires payment of
interest only. The note is prepayable after one year with 1% penalty. At September 30, 2003, the outstanding balance was $13.25 million.



Proceeds from these financings repaid the outstanding balance of the Companys $85 million unsecured line of credit, described below, and repaid
outstanding secured loans totaling approximately $23.4 million. The remainder of the proceeds from these financings will be used for excess borrowing capacity, working capital needs and other corporate purposes.



Unsecured



Upon completion of the financings described above, the Companys $85
million unsecured line of credit was repaid and terminated on July 17, 2003. At September 30, 2003 there was no outstanding balance, and at September 30, 2002, borrowings on the unsecured line of credit were $50 million.



During May 2003, the Companys $7.5 million unsecured line of credit
for general corporate purposes was replaced with a $10 million swing line secured revolving line of credit, described above. There were no amounts outstanding under the unsecured line of credit arrangement as of September 30, 2003 and
2002.



Capital Requirements



The Company has an ongoing capital expenditure plan to fund its renovation
program for its apartment communities. Capital expenditures include capital replacements, initial capital expenditures, and redevelopment enhancements. The Company anticipates that it will continue to operate as it did in 2002 and fund these cash
needs from a variety of sources including rental income generated from the apartment communities, equity raised from its dividend reinvestment plan and debt provided by its secured credit facility.



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Effective April 2003, the Companys quarterly dividend rate policy was $.20 per common share.



The Company capitalized $11.8 million of improvements to its
various apartment communities during the first nine months of 2003. The asset preservation capital expenditures, including floor coverings, HVAC equipment, roofs, appliances, siding, exterior painting, parking lots, and other non-revenue enhancing
capital expenditures, totaled $6.9 million. Revenue enhancing capital expenditures, including interior upgrades, gating and access systems, totaled $3.3 million for the nine months ended September 30, 2003. Redevelopment expenditures, including
amenities that add a material new feature or revenue source at a property on our recently acquired apartment communities, totaled $1.6 million. It is anticipated that approximately $6 million in additional capital improvements will be completed
during 2003 on the current portfolio. The Company is also required by various lenders to fund replacement reserves in advance for capital improvements. The majority of the capital improvements funded from these reserves are included in the above
capital improvements. Capital improvements during 2003 are currently expected to be at approximately the same level as those experienced in 2002. The Companys capital improvement budget is reviewed on-going and adjustments will be made if
deemed necessary.



Capital resources are expected to grow with
the future sale of its shares through dividend reinvestment. Approximately 12% of the 2003 common stock distributions, or $4.1 million, was reinvested in additional common shares. In general, the Companys liquidity and capital resources are
believed to be adequate to meet its cash and debt requirements in 2003.



Operating Partnership



Effective
October 1, 2001, State Street, LLC and State Street I, LLC, each a North Carolina limited liability company (collectively, the Limited Partners), and the Company, as the sole general partner, formed Cornerstone NC Operating Limited
Partnership, a Virginia limited partnership (the Limited Partnership). The Company has approximately a 78% interest in the Limited Partnership. The Limited Partners are minority limited partners and are not otherwise related to the
Company. The Limited Partners contributed and agreed to contribute property to the Limited Partnership in exchange for preferred and non-preferred operating partnership units. The non-preferred operating partnership units convert into preferred
operating partnership units over time or as certain lease-up and stabilization criteria are met. Beginning October 1, 2002, the Limited Partners became able to elect to redeem a portion of the preferred operating partnership units. If the Limited
Partners make the election, the Company, at its option, will convert the preferred operating partnership units for either common shares of the Company on a one-for-one basis or cash in an amount per unit equal to the closing price of a common share
of the Company on the exercise date (or other specified price if there is no closing price on that date), subject to anti-dilution adjustments.



During the second quarter of 2003, 319,715 non-preferred operating partnership units were converted to preferred operating units. As of September 30,
2003, there were 1,807,145 preferred operating partnership units eligible for conversion into common shares on a one-for-one basis or cash, at the Companys option. During the first quarter of 2003, a total of 887,125 preferred operating
partnership units were converted into common shares on a one-to-one basis.



Recent Accounting Pronouncements



In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. SFAS
No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to SFAS No. 123s fair value method of accounting for stock-based employee compensation. SFAS No. 148 also amends the
disclosure provisions of SFAS No. 123 and Accounting Principles Board (APB) Opinion No. 28, Interim Financial Reporting, to require disclosure in the summary of significant accounting policies of the effects of an entitys
accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. SFAS No. 148 is effective for fiscal years beginning after December 15, 2002. The Company
adopted the new accounting standard effective as of the first quarter of fiscal year 2003.



In November 2002, the FASB issued Interpretation 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. This statement requires
that a liability for the fair value of a guarantee be recognized at the time the obligation is undertaken. The statement also requires that the liability be measured over the term of the related guarantee. This statement is effective for all
guarantees entered into subsequent to December 31, 2002. For all guarantees entered into prior to December 31, 2002, there is to be no change in accounting; however, disclosure of managements estimate of its future obligation under the
guarantee is to be made. The company currently does not have any guarantee obligations to which Interpretation 45 applies.



In January 2003, the FASB issued Interpretation 46, Consolidation of Variable Interest Entities. This statement refines the identification
process of variable interest entities and how an entity assesses its interests in a variable interest entity to decide whether to consolidate that entity. The Company has formed wholly-owned subsidiaries for financing purposes and such financings is
reflected in the consolidated financial statements. Currently, the Company does not anticipate this Statement having a material impact on its consolidated financial statements.



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In May 2003, the FASB issued Statement 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. SFAS No. 150 impacts the accounting for minority interests in limited life subsidiaries and requires that those interests be reclassified to liabilities and measured at settlement value. The
effective date of FAS 150 for certain limited life subsidiaries has been deferred for an indefinite period. All other provisions of FAS 150 became effective July 1, 2003. The application of FAS 150 did not have an impact on our financial statements,
and we do not currently have any limited life subsidiaries subject to the limited life subsidiary provisions.



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##### Table of Contents

|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk
|------- |  | ----------------------------------------------------------



In connection with the Merry Land Properties, Inc. merger, the Company assumed nine fixed or variable rate mortgage notes with an aggregate principal
amount of $90.6 million. The mortgages were recorded at a fair value of $110.5 million at the date of assumption. The mortgage notes bear a weighted effective interest rate of 3.8%, including the effect of the fair value adjustment.



Also, during the second quarter of 2003, the Company entered into a new $50
million secured line of credit and one additional secured financing transaction totaling $50 million with variable interest rates. Maturity dates vary through July 2008. The financings require payments of interest only and are secured by 12
apartment communities.



During the third quarter of 2003, the
Company entered into two secured financing transactions totaling $51.83 million secured by five apartment communities. The maturity dates vary through September 1, 2008. The notes require payment of interest only.



There have been no other material changes since December 31, 2002. See the
information provided in the Companys Annual Report on Form 10-K under Item 7-Managements Discussion and Analysis of Financial Condition and Results of Operations.



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##### Table of Contents

|Item 4. |  | Controls and Procedures
|------- |  | -----------------------



Senior management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Companys disclosure
controls and procedures as of the end of the period covered by this report. Based on this evaluation process, the Chief Executive Officer and Chief Financial Officer have concluded that the Companys disclosure controls and procedures are
effective and that there have been no changes in the Companys internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting. Since that evaluation process was completed, there have been no significant changes in internal controls or in other factors that could significantly affect these controls.



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##### Table of Contents

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



|(a) | Exhibits
|--- | --------



|ExhibitNo. |  | Description                                                                                                                                                                                                                                                                            
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           | 
|2.1        |  | Agreement and Plan of Merger among Cornerstone Realty Income Trust, Inc., Cornerstone Merger Sub, Inc. and Merry Land Properties, Inc. dated February 19, 2003. (Incorporated by
reference to Exhibit 2.1 to Current Report on Form 8-K dated February 19, 2003; SEC File No. 1-12875.)
|           | 
|2.2        |  | Purchase and Sale Agreement dated February 19, 2003 by and among Merry Land Properties, Inc. and Merry Land & Investment Company, LLC. (Incorporated by reference to Exhibit
2.2 to Current Report on Form 8-K dated February 19, 2003; SEC File No. 1-12875)                          
|           | 
|3.1        |  | Amended and Restated Articles of Incorporation of Cornerstone Realty Income Trust, Inc., as amended (Incorporated by reference to Exhibit 3.1 to Resistration Statement filed on
Form 8-A/A dated August 18, 2003; SEC File No. 1-12875.)                                              
|           | 
|3.2        |  | Bylaws of Cornerstone Realty Income Trust, Inc. (Amended Through February 13, 2003). (Incorporated by reference to Exhibit 3.3 to Annual Report on Form 10-K filed March 28, 2003;
SEC Filed No. 1-12875.)                                                                             
|           | 
|31.1       |  | Certification of the registrants Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH).                                                                                                                                                  
|           | 
|31.2       |  | Certification of the registrants Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH).                                                                                                                                                  
|           | 
|32.1       |  | Certification of the Companys Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (FILED
HEREWITH).                                                                                                       
|           | 
|32.2       |  | Certification of the Companys Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Action of 2002 (FILED
HEREWITH).                                                                                                    



|(b) | The following table lists the reports on Form 8-K filed by the Company during the quarter ended September 30, 2003, the items reported and the financial statements included in such
filings.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|Type and Date of Reports                               |  | Items Reported |  | Financials Statements Filed
|------------------------------------------------------ |  | -------------- |  | ---------------------------
|Form 8-K dated July 17, 2003 and filed August 1, 2003  |  | 2, 5, 7        |  | None                       
|                                                       |  |               
|Form 8-K dated August 5, 2003 and filed August 6, 2003 |  | 7(c), 12       |  | None                       



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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.



|               |  |  |  | Cornerstone Realty Income Trust, Inc. (Registrant)
|-------------- |  |  |  | --------------------------------------------------
|               |  |  | 
|DATE: 11-13-03 |  |  |  | BY:                                               
|               |  |  |  |                                                   





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