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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



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 MARCH 31, 2004
|- | -------------------------------------------------------------------------------------------------------------------------------------



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 STREET RICHMOND, 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)



---



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 x No ̈



At May 1, 2004, there were 55,785,217 outstanding shares of common stock, no
par value, of the registrant.



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##### Table of Contents

CORNERSTONE REALTY INCOME TRUST, INC.

FORM 10-Q



INDEX



|                              |  |                                                                                            |  |           
|----------------------------- |  | ------------------------------------------------------------------------------------------ |  | ----------
|                              |  |                                                                                            |  | PageNumber
|PART I. FINANCIAL INFORMATION |  |                                                                                           
|                              |  |                                                                                           
|Item 1.                       |  | Financial Statements (Unaudited)                                                           |  |           
|                              |  |                                                                                           
|                              |  | Consolidated Balance SheetsMarch 31, 2004 and December 31, 2003                           |  | 3         
|                              |  |                                                                                           
|                              |  | Consolidated Statements of OperationsThree months ended March 31, 2004 and March 31, 2003 |  | 4         
|                              |  |                                                                                           
|                              |  | Consolidated Statement of Shareholders EquityThree months ended March 31, 2004           |  | 5         
|                              |  |                                                                                           
|                              |  | Consolidated Statements of Cash FlowsThree months ended March 31, 2004 and March 31, 2003 |  | 6         
|                              |  |                                                                                           
|                              |  | Notes to Consolidated Financial Statements                                                 |  | 7         
|                              |  |                                                                                           
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations      |  | 11        
|                              |  |                                                                                           
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk                                 |  | 17        
|                              |  |                                                                                           
|Item 4.                       |  | Controls and Procedures                                                                    |  | 18        
|                              | 
|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                                                           |  | 19        
|                              | 
|Signatures                    |  | 20                                                                                        
|                              | 
|Certifications                |  | 28                                                                                        



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CORNERSTONE REALTY INCOME TRUST, INC.

CONSOLIDATED BALANCE SHEETS (UNAUDITED)



|                                                                                                                                                                   |  |                                      |           |   |                   |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------ | --------- | - | ----------------- | - | --------- | -
|                                                                                                                                                                   |  | (In thousands, except pershare data) |          
|                                                                                                                                                                   |  | March 31, 2004                       |           |   | December 31, 2003 |  
|ASSETS                                                                                                                                                             |  |                                      |           |   |                   |   |           |  
|Investment in rental property:                                                                                                                                     |  |                                      |           |   |                   |   |           |  
|Land                                                                                                                                                               |  | $                                    | 161,292   |   |                   | $ | 160,192   |  
|Buildings and property improvements                                                                                                                                |  |                                      | 1,115,385 |   |                   |   | 1,103,043 |  
|Furniture, fixtures and other                                                                                                                                      |  |                                      | 39,269    |   |                   |   | 38,735    |  
|Real estate under development                                                                                                                                      |  |                                      | 6,737     |   |                   |   | 5,450     |  
|                                                                                                                                                                   |  |                                      |           |   |                   |   |           |  
|                                                                                                                                                                   |  |                                      | 1,322,683 |   |                   |   | 1,307,420 |  
|Less accumulated depreciation                                                                                                                                      |  |                                      | (238,189  | ) |                   |   | (224,535  | )
|                                                                                                                                                                   |  |                                      |           |   |                   |   |           |  
|                                                                                                                                                                   |  |                                      | 1,084,494 |   |                   |   | 1,082,885 |  
|Cash and cash equivalents                                                                                                                                          |  |                                      | 1,809     |   |                   |   | 1,393     |  
|Prepaid expenses                                                                                                                                                   |  |                                      | 4,675     |   |                   |   | 5,334     |  
|Deferred financing costs, net                                                                                                                                      |  |                                      | 6,183     |   |                   |   | 5,924     |  
|Investment in real estate joint ventures                                                                                                                           |  |                                      | 1,925     |   |                   |   | 2,649     |  
|Other assets                                                                                                                                                       |  |                                      | 24,049    |   |                   |   | 26,257    |  
|                                                                                                                                                                   |  |                                      |           |   |                   |   |           |  
|Total Assets                                                                                                                                                       |  | $                                    | 1,123,135 |   |                   | $ | 1,124,442 |  
|                                                                                                                                                                   |  |                                      |           |   |                   |   |           |  
|LIABILITIES and SHAREHOLDERS EQUITY                                                                                                                               |  |                                      |           |   |                   |   |           |  
|Liabilities                                                                                                                                                        |  |                                      |           |   |                   |   |           |  
|Notes payable-secured                                                                                                                                              |  | $                                    | 815,631   |   |                   | $ | 801,754   |  
|Distributions payable                                                                                                                                              |  |                                      | 76        |   |                   |   | 76        |  
|Accounts payable and accrued expenses                                                                                                                              |  |                                      | 12,896    |   |                   |   | 14,950    |  
|Rents received in advance                                                                                                                                          |  |                                      | 493       |   |                   |   | 884       |  
|Tenant security deposits                                                                                                                                           |  |                                      | 2,008     |   |                   |   | 1,889     |  
|                                                                                                                                                                   |  |                                      |           |   |                   |   |           |  
|Total Liabilities                                                                                                                                                  |  |                                      | 831,104   |   |                   |   | 819,553   |  
|Minority interest of unit holders in operating partnership                                                                                                         |  |                                      | 18,616    |   |                   |   | 18,884    |  
|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     |   |                   |   | 2,680     |  
|Common stock, no par value, authorized 100,000 shares; issued and outstanding 55,664 shares and 55,534 shares, respectively                                        |  |                                      | 540,146   |   |                   |   | 538,969   |  
|Deferred compensation                                                                                                                                              |  |                                      | (302      | ) |                   |   | (456      | )
|Distributions greater than net income                                                                                                                              |  |                                      | (269,109  | ) |                   |   | (255,188  | )
|                                                                                                                                                                   |  |                                      |           |   |                   |   |           |  
|Total Shareholders Equity                                                                                                                                         |  |                                      | 273,415   |   |                   |   | 286,005   |  
|                                                                                                                                                                   |  |                                      |           |   |                   |   |           |  
|Total Liabilities and Shareholders Equity                                                                                                                         |  | $                                    | 1,123,135 |   |                   | $ | 1,124,442 |  
|                                                                                                                                                                   |  |                                      |           |   |                   |   |           |  



See
accompanying notes to consolidated financial statements.





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CORNERSTONE REALTY INCOME TRUST, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)



|                                                                                                         |  |                                      |         |   |                |   |         |  
|-------------------------------------------------------------------------------------------------------- |  | ------------------------------------ | ------- | - | -------------- | - | ------- | -
|                                                                                                         |  | (In thousands, exceptper share data) |        
|                                                                                                         |  | Three Months Ended                   |        
|                                                                                                         |  | March 31, 2004                       |         |   | March 31, 2003 |  
|REVENUE:                                                                                                 |  |                                      |         |   |                |   |         |  
|Rental income                                                                                            |  | $                                    | 42,477  |   |                | $ | 38,367  |  
|Other property income                                                                                    |  |                                      | 1,955   |   |                |   | 1,631   |  
|                                                                                                         |  |                                      |         |   |                |   |         |  
|Total revenues                                                                                           |  |                                      | 44,432  |   |                |   | 39,998  |  
|EXPENSES:                                                                                                |  |                                      |         |   |                |   |         |  
|Property and maintenance                                                                                 |  |                                      | 12,399  |   |                |   | 11,334  |  
|Taxes and insurance                                                                                      |  |                                      | 6,319   |   |                |   | 5,514   |  
|Property management                                                                                      |  |                                      | 1,244   |   |                |   | 988     |  
|General and administrative                                                                               |  |                                      | 986     |   |                |   | 813     |  
|Depreciation and amortization of real estate assets                                                      |  |                                      | 13,948  |   |                |   | 12,043  |  
|Severance costs and organizational charges                                                               |  |                                      | 760     |   |                |   |        |  
|Other depreciation                                                                                       |  |                                      | 6       |   |                |   | 6       |  
|Other                                                                                                    |  |                                      | 83      |   |                |   | 99      |  
|                                                                                                         |  |                                      |         |   |                |   |         |  
|Total expenses                                                                                           |  |                                      | 35,745  |   |                |   | 30,797  |  
|                                                                                                         |  |                                      |         |   |                |   |         |  
|Income before interest income (expense)                                                                  |  |                                      | 8,687   |   |                |   | 9,201   |  
|Interest income                                                                                          |  |                                      | 28      |   |                |   | 6       |  
|Interest expense                                                                                         |  |                                      | (11,542 | ) |                |   | (10,915 | )
|                                                                                                         |  |                                      |         |   |                |   |         |  
|Loss before gains on sales of investments and minority interest of unit holders in operating partnership |  |                                      | (2,827  | ) |                |   | (1,708  | )
|Minority interest of unit holders in operating partnership                                               |  |                                      | 89      |   |                |   | 12      |  
|                                                                                                         |  |                                      |         |   |                |   |         |  
|Loss from continuing operations                                                                          |  |                                      | (2,738  | ) |                |   | (1,696  | )
|Discontinued operations:                                                                                 |  |                                      |         |   |                |   |         |  
|Income from discontinued operations                                                                      |  |                                      |        |   |                |   | 11      |  
|Gain on sales of investments                                                                             |  |                                      |        |   |                |   | 1,971   |  
|                                                                                                         |  |                                      |         |   |                |   |         |  
|Net (loss) income                                                                                        |  | $                                    | (2,738  | ) |                | $ | 286     |  
|Distributions to preferred shareholders                                                                  |  |                                      | (76     | ) |                |   | (76     | )
|                                                                                                         |  |                                      |         |   |                |   |         |  
|Net (loss) income available to common shareholders                                                       |  | $                                    | (2,814  | ) |                | $ | 210     |  
|                                                                                                         |  |                                      |         |   |                |   |         |  
|Net loss per share from continuing operations-basic and diluted                                          |  | $                                    | (0.05   | ) |                | $ | (0.04   | )
|                                                                                                         |  |                                      |         |   |                |   |         |  
|Net (loss) income per share from discontinued operations-basic and diluted                               |  | $                                    |        |   |                | $ | 0.04    |  
|                                                                                                         |  |                                      |         |   |                |   |         |  
|Net (loss) income per share-basic and diluted                                                            |  | $                                    | (0.05   | ) |                | $ |        |  
|                                                                                                         |  |                                      |         |   |                |   |         |  
|Distributions per common share                                                                           |  | $                                    | 0.20    |   |                | $ | 0.28    |  
|                                                                                                         |  |                                      |         |   |                |   |         |  
|Weighted average number of common shares outstanding-basic and diluted                                   |  |                                      | 55,632  |   |                |   | 48,819  |  
|                                                                                                         |  |                                      |         |   |                |   |         |  



See
accompanying notes to consolidated financial statements.



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CORNERSTONE REALTY INCOME TRUST, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
(UNAUDITED)



|                                                                    |  |                      |  |                    |         |                          |     |                      |   |                      |  |   |                                    |   |  |                           |          |   |  |   |         |  
|------------------------------------------------------------------- |  | -------------------- |  | ------------------ | ------- | ------------------------ | --- | -------------------- | - | -------------------- |  | - | ---------------------------------- | - |  | ------------------------- | -------- | - |  | - | ------- | -
|( In thousands, except per share data)                              |  | NumberofCommonShares |  | Common StockAmount |         | Number ofPreferredShares |     | PreferredStockAmount |   | DeferredCompensation |  |   | DistributionsGreaterThan NetIncome |   |  | Total ShareholdersEquity |         
|Balance at December 31, 2003                                        |  | 55,534               |  | $                  | 538,969 |                          | 127 |                      | $ | 2,680                |  | $ | (456                               | ) |  | $                         | (255,188 | ) |  | $ | 286,005 |  
|Net loss                                                            |  |                     |  |                    |        |                          |    |                      |   |                     |  |   |                                   |   |  |                           | (2,738   | ) |  |   | (2,738  | )
|Cash distributions declared to common shareholders ($.20 per share) |  |                     |  |                    |        |                          |    |                      |   |                     |  |   |                                   |   |  |                           | (11,107  | ) |  |   | (11,107 | )
|Cash distributions for Series A Convertible Preferred Stock         |  |                     |  |                    |        |                          |    |                      |   |                     |  |   |                                   |   |  |                           | (76      | ) |  |   | (76     | )
|Amortization of deferred compensation                               |  |                     |  |                    |        |                          |    |                      |   |                     |  |   | 154                                |   |  |                           |         |   |  |   | 154     |  
|Shares issued through dividend reinvestment plan                    |  | 130                  |  |                    | 1,177   |                          |    |                      |   |                     |  |   |                                   |   |  |                           |         |   |  |   | 1,177   |  
|                                                                    |  |                      |  |                    |         |                          |     |                      |   |                      |  |   |                                    |   |  |                           |          |   |  |   |         |  
|Balance at March 31, 2004                                           |  | 55,664               |  | $                  | 540,146 |                          | 127 |                      | $ | 2,680                |  | $ | (302                               | ) |  | $                         | (269,109 | ) |  | $ | 273,415 |  
|                                                                    |  |                      |  |                    |         |                          |     |                      |   |                      |  |   |                                    |   |  |                           |          |   |  |   |         |  



See accompanying notes to consolidated
financial statements.



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CORNERSTONE REALTY INCOME TRUST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



|                                                                                 |  |                    |         |   |                |   |         |  
|-------------------------------------------------------------------------------- |  | ------------------ | ------- | - | -------------- | - | ------- | -
|                                                                                 |  | (In thousands)     |        
|                                                                                 |  | Three Months Ended |        
|                                                                                 |  | March 31, 2004     |         |   | March 31, 2003 |  
|Cash flow from operating activities:                                             |  |                    |         |   |                |   |         |  
|Net (loss) income                                                                |  | $                  | (2,738  | ) |                | $ | 286     |  
|Adjustments to reconcile net income to net cash provided by operating activities |  |                    |         |   |                |   |         |  
|Gain on sales of rental property                                                 |  |                    |        |   |                |   | (1,971  | )
|Depreciation and amortization                                                    |  |                    | 13,948  |   |                |   | 12,211  |  
|Severance costs and organizational charge                                        |  |                    | 650     |   |                |   |        |  
|Minority interest of unit holders in operating partnership                       |  |                    | (89     | ) |                |   | (12     | )
|Amortization of deferred compensation                                            |  |                    | 154     |   |                |   | 64      |  
|Amortization of deferred financing costs                                         |  |                    | 368     |   |                |   | 274     |  
|Amortization of mortgage notes payable premium                                   |  |                    | (880    | ) |                |   | (89     | )
|Changes in operating assets and liabilities:                                     |  |                    |         |   |                |   |         |  
|Operating assets                                                                 |  |                    | 2,991   |   |                |   | 1,436   |  
|Operating liabilities                                                            |  |                    | (2,978  | ) |                |   | (2,279  | )
|                                                                                 |  |                    |         |   |                |   |         |  
|Net cash provided by operating activities                                        |  |                    | 11,426  |   |                |   | 9,920   |  
|Cash flow from investing activities:                                             |  |                    |         |   |                |   |         |  
|Development of real estate assets                                                |  |                    | (1,288  | ) |                |   | (11     | )
|Major renovations                                                                |  |                    | (624    | ) |                |   | (366    | )
|Capital improvements                                                             |  |                    | (3,461  | ) |                |   | (2,629  | )
|Net funding of real estate reserve for replacement                               |  |                    | 600     |   |                |   | (440    | )
|Net proceeds from the sale of rental property                                    |  |                    |        |   |                |   | 15,007  |  
|                                                                                 |  |                    |         |   |                |   |         |  
|Net cash (used in) provided by investing activities                              |  |                    | (4,773  | ) |                |   | 11,561  |  
|Cash flow from financing activities:                                             |  |                    |         |   |                |   |         |  
|Proceeds (repayments) from/of short-term borrowings, net                         |  |                    |        |   |                |   | 326     |  
|Proceeds (repayments) from/borrowings on secured line of credit, net             |  |                    | (1,992  | ) |                |   |        |  
|Proceeds from secured notes payable                                              |  |                    | 25,810  |   |                |   |        |  
|Repayments of secured notes payable                                              |  |                    | (19,061 | ) |                |   | (1,069  | )
|Payment of financing costs                                                       |  |                    | (627    | ) |                |   |        |  
|Shares issued through dividend reinvestment plan and exercise of stock options   |  |                    | 1,177   |   |                |   | 1,656   |  
|Cash distributions to operating partnership unit holders                         |  |                    | (361    | ) |                |   | (665    | )
|Cash distributions paid to preferred shareholders                                |  |                    | (76     | ) |                |   | (76     | )
|Cash distributions paid to common shareholders                                   |  |                    | (11,107 | ) |                |   | (13,542 | )
|                                                                                 |  |                    |         |   |                |   |         |  
|Net cash used in financing activities                                            |  |                    | (6,237  | ) |                |   | (13,370 | )
|Increase in cash and cash equivalents                                            |  |                    | 416     |   |                |   | 8,111   |  
|Cash and cash equivalents, beginning of year                                     |  |                    | 1,393   |   |                |   | 1,380   |  
|                                                                                 |  |                    |         |   |                |   |         |  
|Cash and cash equivalents, end of period                                         |  | $                  | 1,809   |   |                | $ | 9,491   |  
|                                                                                 |  |                    |         |   |                |   |         |  
|Supplemental information:                                                        |  |                    |         |   |                |   |         |  
|Non-cash transactions:                                                           |  |                    |         |   |                |   |         |  
|Real estate assets acquired                                                      |  | $                  | 10,902  |   |                |   |        |  
|Assumption of mortgage notes                                                     |  |                    | 10,000  |   |                |   |        |  
|Issuance of operating partnership units                                          |  |                    | 182     |   |                |   |        |  
|Conversion of operating partnership units to common stock                        |  |                    |        |   |                | $ | 9,374   |  



See accompanying notes to consolidated
financial statements.





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CORNERSTONE REALTY INCOME TRUST, INC

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2004



|(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, 2003
Annual Report on Form 10-K. Operating results for the three months ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.



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 did not grant any options to purchase shares during the three months ended March 30, 2004. The Companys options to purchase shares are
exercisable after six months after the date of grant, therefore no 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 |       
|                                                                                                          |  | March 31,         |       
|                                                                                                          |  | 2004              |        |   | 2003 |  
|Net (loss) income, as reported                                                                            |  | $                 | (2,738 | ) |      | $ | 286 |  
|Add: Stock-based employee compensation expense included in reported net income                            |  |                   | 110    |   |      |   | 64  |  
|Deduct: Stock-based employee compensation expense determined under fair value based method for all awards |  |                   | (110   | ) |      |   | (64 | )
|                                                                                                          |  |                   |        |   |      |   |     |  
|Pro forma net (loss) income as if the fair value method had been applied to all option grants             |  | $                 | (2,738 | ) |      | $ | 286 |  
|                                                                                                          |  |                   |        |   |      |   |     |  
|Earnings per share                                                                                        |  |                   |        |   |      |   |     |  
|Basic-as reported                                                                                         |  | $                 | (0.05  | ) |      | $ |    |  
|Basic-pro forma                                                                                           |  | $                 | (0.05  | ) |      | $ |    |  
|Diluted-as reported                                                                                       |  | $                 | (0.05  | ) |      | $ |    |  
|Diluted-pro forma                                                                                         |  | $                 | (0.05  | ) |      | $ |    |  



Recent Accounting
Pronouncements



In January 2003, the Financial Accounting
Standards Board issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46) and subsequently revised FIN 46 in December 2003. Effective January 1, 2004, the Company adopted the provisions of FIN 46. The Company did
not identify any variable interest entities (VIEs) of which the Company is the primary beneficiary, thus, the Company was not required to consolidate any VIEs.



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



Acquisition



During the first quarter of 2004, the Company acquired 138 apartment homes for a purchase price of $10.9 million. The Company assumed a $10.0 million
note, issued $0.2 million in the form of non-preferred operating partnership units and made cash payments of $0.7 million to fund the acquisition. The Companys allocation of purchase price to various components of investment in rental property
and intangible assets, if any, is preliminary and subject to change.



7



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##### Table of Contents

Development



During the first quarters of 2004 and 2003, the Company capitalized interest, real estate taxes, insurance and other costs
in the amount of $63,685 and $11,395, respectively, to its development projects. Construction in process was $6.7 million and $1.4 million as of March 31, 2004 and 2003, respectively.



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 $1.9 million. This gain was originally reported at $1.4 million on our 2003 first quarter Form 10-Q and was subsequently adjusted in our unaudited Quarterly Financial Data in our December 31, 2003 Form 10-K.
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.



The components of income from operations related to discontinued operations
for the three months ended March 31, 2003 are shown below. These include the results of operations through the date of sale for the three months ended March 31, 2003 (dollars in thousands):



|                                    |  |                                 |      
|----------------------------------- |  | ------------------------------- | -----
|                                    |  | ThreeMonthsEnded March 31, 2003
|                                    |  |                                 |      
|Rental and other property income    |  | $                               | 369  
|Expenses:                           |  |                                 |      
|Property and maintenance            |  |                                 | 142  
|Taxes and insurance                 |  |                                 | 54   
|Depreciation of real estate assets  |  |                                 | 162  
|                                    |  |                                 |      
|Total expenses                      |  |                                 | 358  
|Net income                          |  |                                 | 11   
|Gain on sales of investments        |  |                                 | 1,971
|                                    |  |                                 |      
|Income from discontinued operations |  | $                               | 1,982
|                                    |  |                                 |      



The Company had no
assets that qualified as held for disposition as defined by SFAS No. 144 at March 31, 2004.



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



Fixed Rate Debt



The Companys fixed rate debt as of March 31, 2004 represented 73.4% of the Companys debt. At March 31, 2004 and 2003, the outstanding fixed
rate debt was $598.7 million and $531.5 million, respectively, including the fair value premium adjustments aggregating $17.5 million and $0.5 million, respectively. The fair value premium adjustment was recorded in connection with assumption of
above market rate debt in connection with the acquisition of apartment communities. These premiums are amortized into interest expense (which reduces interest expense) over the remaining term of the related indebtedness on the effective interest
method. Scheduled maturities are at various dates from October 2004 to November 2041. The weighted-average interest rate was 6.5% and 7.1% for 2004 and 2003, respectively.



During the first quarter of 2004, the Company entered into a $2.8 million secured financing. The note bears interest at a
fixed interest rate of 4.5% per annum. The note is secured by one apartment community and the maturity date is April 2014. The note requires monthly installments, including principal and interest. The financing proceeds were used to pay off the
existing fixed debt on this apartment community.



During the
first quarter of 2004, the Company repaid $15.1 million in fixed rate debt with variable rate debt, as discussed below.



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Variable Rate Debt



The Companys variable rate debt at March 31, 2004 represented 26.6% of the Companys debt. At March 31, 2004 and
2003, the outstanding variable rate debt was $216.9 million and $71.8 million, respectively. The weighted-average interest rate was 2.6% and 3.2% for 2004 and 2003, respectively.



During the first quarter of 2004, the Company entered into two secured financings, totaling $23.0 million, which are secured
by three apartment communities. The two notes bear interest at the Discount Mortgage Backed Security index plus 82 basis points (1.87% at March 31, 2004), and mature in March 2009. The financing proceeds were used to pay off the $15.1 million of the
existing fixed rate debt on the three apartment communities and $7.2 million on the revolving credit facility. These notes require monthly installments, including principal and interest.



In conjunction with the 2004 acquisition described above, the Company assumed a $10.0 million note, secured by one apartment
community. The note bears interest at LIBOR plus 1.5% and the maturity date is November 2007. The note requires payments of interest only.



The aggregate maturities of principal, including monthly installments for secured debt for the five years subsequent to March 31, 2004 are as follows (in
thousands):



|                                      |  |        |        
|------------------------------------- |  | ------ | -------
|Year                                  |  | Amount
|2004                                  |  | $      | 39,338 
|2005                                  |  |        | 108,648
|2006                                  |  |        | 96,608 
|2007                                  |  |        | 19,289 
|2008                                  |  |        | 56,697 
|Thereafter                            |  |        | 477,547
|                                      |  |        |        
|                                      |  | $      | 798,127
|Fair Value Adjustment of Assumed Debt |  |        | 17,504 
|                                      |  |        |        
|                                      |  | $      | 815,631
|                                      |  |        |        



|(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 an 85% 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. 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. As of March 31, 2004, 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.



The Limited Partnership acquired an
additional phase of an existing apartment community with 138 apartment homes for a purchase price of $10.9 million. The total consideration for the transaction includes the assumption of $10.0 million in secured financing, the issuance of $0.2
million in the form of non-preferred operating partnership units and cash payments totaling $0.7 million. The non-preferred operating partnership units shall convert into preferred operating partnership units over time or as certain lease-up and
stabilization criteria are met.



|(5) | Severance and Organizational Costs
|--- | ----------------------------------



On March 31, 2004, the Companys Co-Chief Operating Officer ceased to serve as an officer and employee of the Company and her employment agreement
with the Company was terminated. In addition, the Company terminated the lease for its Fort Worth, Texas office. These charges are included in the Consolidated Statements of Operations under the category Severance costs and organizational
charges. The majority of the $0.8 million charge will be paid out over a period of 30 months.



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|(6) | 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 Ended March 31,
|                                                                                                                    |  | 2004                         |        |   | 2003
|Numerator:                                                                                                          |  |                              |        |   |      |   |       
|Net (loss) income available to common shareholders                                                                  |  | $                            | (2,814 | ) |      | $ | 210   
|Numerator for basic and diluted earnings per share-income available to common stockholders after assumed conversion |  | $                            | (2,814 | ) |      | $ | 210   
|Denominator:                                                                                                        |  |                              |        |   |      |   |       
|Denominator for basic earnings per share-weighted-average shares                                                    |  |                              | 55,632 |   |      |   | 48,819
|Effect of dilutive securities:                                                                                      |  |                              |        |   |      |   |       
|Stock options                                                                                                       |  |                              |       |   |      |   |      
|                                                                                                                    |  |                              |        |   |      |   |       
|Denominator for diluted earnings per share-adjusted weighted-average shares and assumed conversions                 |  |                              | 55,632 |   |      |   | 48,819
|Basic and diluted earnings per common share                                                                         |  | $                            | (0.05  | ) |      | $ |      
|                                                                                                                    |  |                              |        |   |      |   |       



The conversion of the
operating partnership units is 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 2,092,335 for the three months ended March 31, 2004
and 2003, respectively.



|(7) | Subsequent Events
|--- | -----------------



On April 15, 2004, the Company issued 250,000 common shares to The Reserve at Mayfaire, LLC as consideration for a 25% interest in a joint venture, which
is developing a 264 apartment home community in Wilmington, North Carolina for a total cost of approximately $24 million.



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##### Table of Contents

|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, 2003
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 in 2003. 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.



Overview



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, develop and manage existing residential apartment communities located in the southeastern United States
and Texas. As of March 31, 2004, the Company owned 89 apartment communities, which comprised a total of 23,329 apartment homes. The Companys apartment communities are located in Georgia, North Carolina, South Carolina, Texas and Virginia.



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.



The Companys operations are affected by the following factors: demand for apartment communities in the Companys markets and the effect on occupancy levels and rental rates, job growth, overbuilding of apartment communities, low
mortgage interest rates and the availability of refinancing.



As of March 31, 2004, the Company provided third party management services in connection with seven apartment communities with a total of 1,822 apartment homes.



The Company, as the general partner, also has approximately an 85% 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 uses property operating income (rental and other property income
less property operating expenses as defined below) as a measure to evaluate performance of the apartment communities. Property operating income is not deemed to be an alternative to net income, as determined in accordance with generally accepted
accounting principles. In addition, this measure, as calculated by the Company, may not be comparable to similarly entitled measures reported by other companies.Property operating expenses include the following expense categories: property
and maintenance, taxes and insurance and property management. Property operating income increased 10.4% to $24.5 million in 2004 from $22.2 million in 2003. Overall, rental revenues were up due to the addition of the rental operations of the
Merry Land apartment communities and lower vacancies.This increase was offset by the decline in the rental rates. Operating property expenses were higher due to the expenses incurred from the Merry Land apartment communities and an increase
in utility and insurance costs. Interest expense increased to $11.5 million in 2004 from $10.9 million in 2003. Depreciation and amortization of real estate assets increased $1.9 million during 2004 over 2003. The Company recorded a $0.8 million
severance and organizational charge during 2004. The Company reported net loss available to common shareholders of $2.8 million due to the items mentioned above. Each of these items will be described in further detail later in our discussion.



11



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##### Table of Contents

Results of Operations



Income and occupancy



The principal source of the Companys revenue is the rental operation of its apartment communities. The Companys property operations for the
three months ended March 31, 2004 include the results of operations of 89 apartment communities acquired to date.



Total revenue for the three months ended March 31, 2004 and 2003 was $44.4 million and $40.0 million, respectively. At the end of the first quarter of
2004, the Company owned 2,106 more apartment homes than it owned for the same period in 2003. The increase in revenue is primarily due to the rental income generated from the additional apartment communities acquired through the Merry Land merger
and lower vacancies. The increase was offset by the decline in rental rates.



Other property income for the three months ended March 31, 2004 was $2.0 million and $1.6 million for the same period in 2003. The majority of other property income includes ancillary income, various fees charged to
tenants and third party management income. The increase in other property income is due to the additional apartment communities acquired through the Merry Land merger and the addition of the third party management income.



The Company will continue to add revenue-enhancing improvements in an effort
to improve the apartment communities marketability, economic occupancies, and rental rates.



Overall economic occupancy (scheduled rent divided by gross potential rent) for the Companys apartment communities averaged 88% and 86% for the
three months ended March 31, 2004 and 2003, respectively.



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 March 31, 2004 were $20.0 million and $17.8 million for the same period in 2003. The
increase is primarily due to the Merry Land merger, increases in property insurance costs and higher utility costs. The operating expense ratio (the ratio of property operating expenses to rental income) was 47.0% and 46.5% for the three months
ended March 31, 2004 and 2003, respectively.



Depreciation
expense for the three months ended March 31, 2004 was $13.9 million and $12.0 million for the same period in 2003. The increase in depreciation expense is due to the Merry Land merger and the depreciation associated with capital improvements made
during 2004 and 2003. In addition, in conjunction with the Merry Land merger, the Company allocated a portion of the Merry Land purchase price to an intangible asset based on a valuation of in-place leases at the time of the merger in the amount of
$1.1 million. None of the intangible asset value was attributable to above or below market rates, but rather attributable to foregone costs associated with having in-place leases. The Company recorded $0.1 million of amortization of the net
intangibles in 2004.



General and administrative expenses
totaled 2.3% and 2.1% of rental income for the three months ended March 31, 2004 and 2003, respectively. These expenses represent the administrative expenses of the Company as distinguished from the property operating expenses of the Companys
apartment communities.



On March 31, 2004, the Companys
Co-Chief Operating Officer ceased to serve as an officer and employee of the Company and her employment agreement with the Company was terminated. In addition, the Company terminated the lease for its Fort Worth, Texas office. These charges are
included in the Consolidated Statements of Operations under the category Severance costs and organizational charges. The majority of the $0.8 million charge will be paid out over a period of 30 months.



Interest income



The Companys interest income increased $22,685 for the three months
ended March 31, 2004 over 2003. The increase is due to the interest income earned on the notes receivables assumed in connection with the Merry Land merger.



Interest expense



The Company incurred $11.5 million and $10.9 million of interest expense during the three months ended March 31, 2004 and 2003, respectively, associated
with borrowings under its secured and unsecured lines of credit, existing and assumed mortgage notes, amortization of deferred financing costs and interest associated with the Companys capital leases. The increase was principally a result of
the following:



| |  | $0.8 million related to the interest expense associated with the mortgage notes assumed with the Merry Land merger.
| | - | -------------------------------------------------------------------------------------------------------------------



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| |  | $0.5 million related to the interest on variable mortgage notes. The increase was due to the 2004 and 2003 refinancings, from fixed to variable rate debt.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | $93,260 related to the amortization of the deferred financing cost associated with the 2004 and 2003 financings.
| | - | ----------------------------------------------------------------------------------------------------------------



| |  | $14,820 related to imputed interest associated with the Companys capital leases.
| | - | ---------------------------------------------------------------------------------



The increase was offset by a decrease of $0.5 million related to the interest on the secured and unsecured lines of credit
and a decrease of $0.3 million related to the interest on the existing and assumed fixed mortgage notes, excluding the notes assumed with the Merry Land merger. The decrease was due to the 2004 and 2003 refinancings of fixed rate debt with variable
rate debt.



The overall weighted average interest rate for all
borrowings was 5.5% and 6.2% during 2004 and 2003, respectively. Interest expense is reduced by the amortization of the fair value premium adjustment recorded in connection with the assumption of above market rate debt in connection with the
acquisition of apartment communities. The premiums are amortized over the remaining term of the related indebtedness on the effective interest method. Premium amortization for the three months ended March 31, 2004 and 2003 was $0.9 million and $0.1
million, 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 $1.9 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.



Net Loss Available to Common Shareholders



Net loss available to common shareholders was $2.8 million ($0.05 per share) for the three months ended March 31, 2004 compared to net income available to
common shareholders of $0.2 million ($0.00 per share) for the same period in 2003. The decrease resulted primarily from the increase of $1.9 million in depreciation and amortization of real estate assets, and $0.8 million in severance costs and
organizational charges incurred in 2004 and $0.6 million in interest expense. Each of these items is described earlier in our discussion.



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 79 stabilized apartment communities, containing 20,961 apartment homes that the Company has owned since January 1, 2003, representing approximately 90% of the Companys 23,329 apartment
homes. The two apartment communities sold in the first quarter of 2003 have been eliminated from the calculation. Property management expenses are excluded from this evaluation. For the three months ended March 31, 2004, same-community
property operating income (total revenues less property operating expenses), decreased 2%, total revenues decreased 1% and property operating expenses remained the same compared to the same period in 2003.



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.



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##### Table of Contents

The following is a reconciliation of the same community property operating income to net
(loss) income as determined in accordance with generally accepted accounting principles (in thousands):



|                                                           |  |                             |         |   |      |   |         |  
|---------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                           |  | Three Months EndedMarch 31, |        
|                                                           |  | 2004                        |         |   | 2003 |  
|Comparable properties (same communities)                   |  |                             |         |   |      |   |         |  
|Rental and other property income                           |  | $                           | 38,974  |   |      | $ | 39,392  |  
|Property operating expenses                                |  |                             | (16,871 | ) |      |   | (16,847 | )
|                                                           |  |                             |         |   |      |   |         |  
|Property operating income                                  |  |                             | 22,103  |   |      |   | 22,545  |  
|Non-comparable properties (remaining communities)          |  |                             |         |   |      |   |         |  
|Rental and other property income                           |  |                             | 5,458   |   |      |   | 606     |  
|Property operating expenses                                |  |                             | (1,847  | ) |      |   | (201    | )
|                                                           |  |                             |         |   |      |   |         |  
|Property operating income                                  |  |                             | 3,611   |   |      |   | 405     |  
|Unallocated expenses                                       |  |                             |        |   |      |   | 200     |  
|Depreciation and amortization of real estate assets        |  |                             | (13,948 | ) |      |   | (12,043 | )
|Property management                                        |  |                             | (1,244  | ) |      |   | (988    | )
|General and administrative                                 |  |                             | (986    | ) |      |   | (813    | )
|Severance costs and organizational charges                 |  |                             | (760    | ) |      |   |        |  
|Other depreciation                                         |  |                             | (6      | ) |      |   | (6      | )
|Other                                                      |  |                             | (83     | ) |      |   | (99     | )
|Interest income                                            |  |                             | 28      |   |      |   | 6       |  
|Interest expense                                           |  |                             | (11,542 | ) |      |   | (10,915 | )
|Minority interest of unit holders in operating partnership |  |                             | 89      |   |      |   | 12      |  
|Net income from discontinued operations                    |  |                             |        |   |      |   | 1,982   |  
|                                                           |  |                             |         |   |      |   |         |  
|Net (loss) income                                          |  | $                           | (2,738  | ) |      | $ | 286     |  
|                                                           |  |                             |         |   |      |   |         |  



Liquidity and
Capital Resources



Liquidity is the ability to meet
present and future financial obligations either through the sale of existing assets or by the acquisition of additional funds through working capital management. Both the coordination of asset and liability maturities and effective working capital
management are important to the maintenance of liquidity. The Companys primary sources of liquidity are cash flows from operations as determined by rental rates, occupancy levels and property operating expenses; proceeds from its lines of
credit; reinvestment of distributions; and proceeds from secured debt.



The Companys demands for liquidity include normal property operating activities, payment of principal and interest on outstanding debt, capital expenditures, acquisition of apartment communities, payment of distributions and
development costs.



The Company has met and expects to
continue to meet short-term liquidity requirements, generally through the cash flow from operations, equity raised from its dividend reinvestment plan, and borrowings on its lines of credit. It is expected that rental income will be adequate to meet
all normal property operating expenses, payment of distributions, budgeted capital improvements, and scheduled principal and interest payments on debt in 2004. At March 31, 2004, the Company had $38.4 million available under its lines of credit and
$1.8 million in cash and cash equivalents. In addition, the Company had $9.7 million in reserves held by various lenders for capital expenditures, real estate taxes and insurance.



The Company expects to meet certain long-term liquidity requirements, such as scheduled debt maturities, the repayment of
financing on development activities, and possible property acquisitions, through secured borrowings, possible refinancing, disposition of certain assets that, in our evaluation, may no longer meet our investment requirements, or issuance of
operating partnership units.



Our long-term ability to pay
distributions to our various stakeholders is dependent upon cash flows from our apartment communities. While we have substantial cash flow from our operations, on a short-term basis, our cash flow is less than our cash needs and we have had to seek
alternative funding sources. During 2004, our cash flow from operating activities was $11.4 million. Cash required to fund capital improvements to our apartment communities was $2.4 million. Distributions to our preferred stockholders, operating
partnership unit holders and common stockholders were approximately $11.5 million in 2004.



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##### Table of Contents

In the event that there continues to be an economic downturn or the national economy does not recover
sufficiently and the cash flow from operations are no longer adequate, the Company has additional means, such as its borrowing availability on its lines of credit, to help meet our short term liquidity demands.



The Company considers on a regular basis what level of distributions to
common shareholders is appropriate, and there is no assurance that the Companys distribution to common shareholders will continue at the current level.



Operating Activities



For the three months ended March 31, 2004, our net cash provided by operating activities was $11.4 million, compared to $9.9 million for the same period
in 2003.



Investing Activities



For the three months ended March 31, 2004, our net cash used in investing
activities was $4.8 million compared to net cash provided by of $11.6 million for the same period in 2003. Majority of our investing activities relate to investments in acquisitions and in our existing apartment communities through capital
expenditures and redevelopment, as well dispositions of apartment communities. In 2003, the Company received net proceeds of $15.0 million from the sale of two apartment communities.



Real Estate under Development



The Companys development projects are to be completed during 2005. The Companys share of estimated future cash
expenditures to complete these projects will be funded through advances on construction loans.



Financing Activities



For the three months ended March 31, 2004, our net cash used in financing activities was $6.2 million compared to $13.4 million for the same period in 2003. In 2004, our financing activities related to mortgage financings, payment of
distributions and payment of our principal debt amortization.



The following is a summary of the Companys financing activities for the three months ended March 31, 2004:



| |  | Assumed $10.0 million variable rate debt.
| | - | -----------------------------------------



| |  | Financed $23.0 million in variable rate mortgage notes.
| | - | -------------------------------------------------------



| |  | Financed $2.8 million in a fixed rate mortgage note.
| | - | ----------------------------------------------------



| |  | Paid $0.6 million in deferred financing costs associated with the above $23.0 million and $2.8 million financings.
| | - | ------------------------------------------------------------------------------------------------------------------



| |  | Repaid $17.9 million in fixed rate mortgage notes using proceeds from the above financings.
| | - | -------------------------------------------------------------------------------------------



| |  | Paid scheduled debt maturities in the amount of $1.2 million.
| | - | -------------------------------------------------------------



| |  | Issued $1.2 million of shares through the dividend reinvestment plan.
| | - | ---------------------------------------------------------------------



| |  | Paid distributions in the amount of $11.5 million to common and preferred shareholders and operating partnership unit holders.
| | - | ------------------------------------------------------------------------------------------------------------------------------



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 funding these cash requirements as needed from a variety of sources
including equity raised from its dividend reinvestment plan and debt provided by its lines of credit.



Capital resources are expected to grow with the future sale of the Companys shares and from cash flows from operations. Approximately 10.4% of all
2004 common stock distributions, or $1.2 million, was reinvested in additional common shares. In general, the Companys liquidity and capital resources are believed to be sufficient to meet its cash requirements during 2004.



15



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##### Table of Contents

The Company capitalized $3.1 million of improvements to its various apartment communities during 2004.
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 $1.7 million. Revenue enhancing capital
expenditures, including interior upgrades, gating and access systems totaled $1.0 million for 2004. Redevelopment expenditures, including amenities that add a material new feature or revenue source at our acquired apartment communities, totaled $0.4
million. The Company capitalized costs of $1.3 million in development costs for 2004. The Companys total non-real estate capital additions, such as computer software, computer equipment, furniture and fixtures and property improvements to the
Companys management offices and its corporate offices, was approximately $1.0 million and is reflected on the balance sheet in the other asset category.



The Company is also required by various lenders to fund a replacement reserve in advance for capital improvements.



The Companys capital improvement budget is reviewed continually and
adjustments will be made if deemed necessary.



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 an 85% 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. 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. As of March 31, 2004, 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.



The Limited Partnership acquired an additional phase of an existing apartment community with 138 apartment homes for a purchase price of $10.9 million.
The total consideration for the transaction includes the assumption of $10.0 million in secured financing, the issuance of $0.2 million in the form of non-preferred operating partnership units and cash payments totaling $0.7 million. The
non-preferred operating partnership units shall convert into preferred operating partnership units over time or as certain lease-up and stabilization criteria are met.



Recent Accounting Pronouncements



In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46) and subsequently revised FIN 46 in December 2003. Effective January 1, 2004, the Company adopted the provisions of FIN 46. The Company did not identify any variable interest entities (VIEs) of which the Company is
the primary beneficiary, thus, the Company was not required to consolidate any VIEs.



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##### Table of Contents

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



During 2004, the Company entered into two secured variable rate financings and assumed one variable rate note, totaling $33.0 million. The notes are
secured by four apartment communities and the maturity dates vary through March 2009. Two notes require monthly installments, including principal and interest and the note assumed requires payments of interest only. The Company also refinanced an
apartment community with a $2.8 million fixed rate note, with a maturity date of April 2014. The note requires monthly installments, including principal and interest.



There have been no other material changes since December 31, 2003. 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 Registration 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).                                                                             
|           | 
|10.1       |  | Employment Separation and Consulting Agreement dated as of March 31, 2004, between Debra A. Jones and Cornerstone Realty Income Trust, Inc. (FILED HEREWITH).                                                                                                                          
|           | 
|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 March 31, 2004, 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 February 17, 2004 and filed February 18, 2004 |  | 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: May 6, 2004 |  |  |  | BY:                                                |  | /s/ Stanley J. Olander, Jr.
|                  |  |  |  |                                                    |  |                             | 
|                  |  |  |  |                                                    |  |                             |  | Stanley J. Olander, Jr. President and Chief Financial Officer



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