<PAGE>

                      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 SEPTEMBER 30, 2001 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

                     CORNERSTONE REALTY INCOME TRUST, INC.
            (Exact name of registrant as specified in its charter)

               VIRGINIA                                        54-1589139
     (State or other jurisdiction                            (IRS Employer
   of incorporation or organization)                      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__

At November 1, 2001, there were outstanding 47,408,365 shares of common stock,
no par value, of the registrant.
<PAGE>

                     CORNERSTONE REALTY INCOME TRUST, INC.
                                   FORM 10-Q

                                     INDEX

                                                                     Page Number
                                                                     -----------
PART I.   FINANCIAL INFORMATION

     Item 1.   Financial Statements (Unaudited)

               Consolidated Balance Sheets - September 30, 2001       3
               and December 31, 2000

               Consolidated Statements of Operations -                4
               Three months ended September 30, 2001 and
               September 30, 2000
               Nine months ended September 30, 2001
               and September 30, 2000

               Consolidated Statement of Shareholders' Equity-        5
               Nine months ended September 30, 2001

               Consolidated Statements of Cash Flows -                6
               Nine months ended September 30, 2001
               and September 30, 2000

               Notes to Consolidated Financial Statements             7

     Item 2.   Management's Discussion and Analysis of Financial     11
               Condition and Results of Operations

     Item 3.   Quantitative and Qualitative Disclosures about        16
               Market Risk

PART II.  OTHER INFORMATION:

     Item 1.   Legal Proceedings (not applicable).

     Item 2.   Changes in Securities (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                      17

                                       2
<PAGE>

Item 1.  Financial Statements (Unaudited)

CORNERSTONE REALTY INCOME TRUST, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)

<TABLE>
<CAPTION>
                                                                               September 30,    December 31,
                                                                                   2001             2000
                                                                               -------------    ------------
<S>                                                                            <C>              <C>
ASSETS

Investment in rental property:
Land                                                                           $ 136,063,386    $ 127,440,659
Buildings and property improvements                                              782,109,845      718,905,719
Furniture and fixtures                                                            25,162,125       22,988,397
                                                                               -------------    -------------
                                                                                 943,335,356      869,334,775
Less accumulated depreciation                                                   (119,947,558)     (91,555,114)
                                                                               -------------    -------------
                                                                                 823,387,798      777,779,661

Cash and cash equivalents                                                          9,038,235        4,140,641
Prepaid expenses                                                                   2,544,616        1,396,071
Deferred financing costs, net                                                      5,057,003        3,603,021
Other assets                                                                      16,833,647       12,861,301
                                                                               -------------    -------------

                Total Assets                                                   $ 856,861,299    $ 799,780,695
                                                                               =============    =============


LIABILITIES and SHAREHOLDERS' EQUITY

Liabilities
Notes payable-unsecured                                                        $  50,000,000    $  13,209,908
Notes payable-secured                                                            451,316,279      245,423,492
Distributions payable                                                                 75,985        7,102,594
Accounts payable                                                                     540,772          622,371
Accrued expenses                                                                   9,256,115        9,689,464
Rents received in advance                                                            435,947          356,018
Tenant security deposits                                                           1,377,692        1,374,884
                                                                               -------------    -------------

                Total Liabilities                                                513,002,790      277,778,731

Shareholders' equity
Preferred stock, no par value, authorized 25,000,000 shares;
   $25 liquidation preference, Series A Cumulative Convertible Redeemable;
   issued and outstanding 127,974 shares and 12,626,834 shares, respectively       2,694,940      265,194,014
Common stock, no par value, authorized 100,000,000
   shares; issued and outstanding 47,248,152 shares
   and 34,926,276 shares, respectively                                           476,093,543      342,454,886
Deferred compensation                                                                (28,924)         (46,996)
Distributions greater than net income                                           (134,901,050)     (85,599,940)
                                                                               -------------    -------------

                Total Shareholders' Equity                                       343,858,509      522,001,964
                                                                               -------------    -------------

                Total Liabilities and Shareholders' Equity                     $ 856,861,299    $ 799,780,695
                                                                               =============    =============
</TABLE>

See accompanying notes to consolidated financial statements.

                                       3
<PAGE>

CORNERSTONE REALTY INCOME TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
                                                             Three Months Ended                 Nine Months Ended
                                                       September 30,    September 30,    September 30,    September 30,
                                                            2001            2000              2001             2000
                                                       ------------------------------    ------------------------------
<S>                                                    <C>              <C>              <C>              <C>
REVENUE:
           Rental income                               $  38,115,083    $  37,530,551    $ 110,785,257    $ 110,058,496

EXPENSES:
                    Property and maintenance               9,441,076        9,787,076       27,983,767       27,788,557
                    Taxes and insurance                    4,117,396        4,204,697       12,765,618       12,021,651
                    Property management                      778,495          666,850        2,134,368        2,120,561
                    General and administrative               397,851          373,233        1,346,442        1,380,452
                    Other depreciation                         7,490            5,741           18,984           17,223
                    Depreciation of rental property        9,722,146        9,143,730       28,392,444       26,463,500
                    Other                                     11,691           10,050           37,708           30,149
                                                       ------------------------------    ------------------------------

                                   Total expenses         24,476,145       24,191,377       72,679,331       69,822,093
                                                       ------------------------------    ------------------------------

Income before interest and dividend income (expense)      13,638,938       13,339,174       38,105,926       40,236,403

   Interest and dividend income                               58,849           36,787          358,850          432,772
   Interest expense                                       (8,008,027)      (4,434,068)     (20,068,806)     (13,161,497)
                                                       ------------------------------    ------------------------------

Income before gains on sales of investments                5,689,760        8,941,893       18,395,970       27,507,678

   Gains on sales of investments
                                                                   -         (248,497)               -       23,157,736
                                                       ------------------------------    ------------------------------

Net income                                             $   5,689,760    $   8,693,396    $  18,395,970    $  50,665,414

Distributions to preferred shareholders
                                                             (75,992)      (7,463,762)      (7,622,607)     (22,879,732)
Excess consideration paid over book value for
   preferred stock redemption
                                                                   -                -      (27,491,631)               -
                                                       ------------------------------    ------------------------------

Net income (loss) available to common shareholders     $   5,613,768    $   1,229,634    $ (16,718,268)   $  27,785,682
                                                       ==============================    ==============================

Net income (loss) per share-basic and diluted          $        0.12    $        0.03    $       (0.40)   $        0.76
                                                       ==============================    ==============================

Distributions per common share                         $        0.28    $        0.28    $        0.84    $        0.83
                                                       ==============================    ==============================
</TABLE>

See accompanying notes to consolidated financial statements.

                                       4
<PAGE>

CORNERSTONE REALTY INCOME TRUST, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)

<TABLE>
<CAPTION>

                                                                                                   Preferred Stock
                                                                           Number                     Number of
                                                                         of Shares       Amount        Shares          Amount
                                                                       ------------------------------------------------------------
<S>                                                                     <C>          <C>               <C>           <C>
Balance at December 31, 2000                                             34,926,276  $ 342,454,886      12,626,834   $ 265,194,014

Net income                                                                        -              -               -               -
Cash distributions declared to shareholders ($.84  per share)                     -              -               -               -
Distributions for Series A Convertible Preferred Stock                            -              -               -               -
Imputed distributions on Series A Convertible Preferred Stock                     -              -               -         380,612
Exercise of stock options                                                     2,000         19,250               -               -
Purchase of common stock                                                 (1,355,900)   (14,709,590)              -               -
Preferred stock converted to common stock                                    30,315        478,975         (19,159)       (478,975)
Issuance of common shares through conversion of Series A
   Convertible Preferred Stock into common stock                         13,221,870    143,325,061     (12,479,701)   (262,400,711)
Excess consideration paid over book value for
   preferred stock redemption                                                     -              -               -               -
Amortization of deferred compensation                                             -              -               -               -
Shares issued through dividend reinvestment plan and directors plan         423,591      4,524,961               -               -
                                                                       ------------------------------------------------------------

Balance at September 30, 2001                                            47,248,152  $ 476,093,543         127,974   $   2,694,940
                                                                       ============================================================

<CAPTION>
                                                                                           Distributions
                                                                                              Greater           Total
                                                                              Deferred          than        Shareholders'
                                                                            Compensation     Net Income         Equity
                                                                        --------------------------------------------------
<S>                                                                         <C>            <C>              <C>
Balance at December 31, 2000                                                   ($46,996)   ($ 85,599,940)   $ 522,001,964

Net income                                                                            -       18,395,970       18,395,970
Cash distributions declared to shareholders ($.84  per share)                         -      (32,582,849)     (32,582,849)
Distributions for Series A Convertible Preferred Stock                                -       (7,241,988)      (7,241,988)
Imputed distributions on Series A Convertible Preferred Stock                         -         (380,612)               -
Exercise of stock options                                                             -                -           19,250
Purchase of common stock                                                              -                -      (14,709,590)
Preferred stock converted to common stock                                             -                -                -
Issuance of common shares through conversion of Series A
   Convertible Preferred Stock into common stock                                      -                -     (119,075,650)
Excess consideration paid over book value for
   preferred stock redemption                                                         -      (27,491,631)     (27,491,631)
Amortization of deferred compensation                                            18,072                -           18,072
Shares issued through dividend reinvestment plan and directors plan                   -                -        4,524,961
                                                                        --------------------------------------------------
Balance at September 30, 2001                                                  ($28,924)   ($134,901,050)   $ 343,858,509
                                                                        ==================================================
</TABLE>

See accompanying notes to consolidated financial statements.

                                       5
<PAGE>

CORNERSTONE REALTY INCOME TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                                   Nine Months Ended
                                                                                     September 30,             September 30,
                                                                                         2000                       2001
                                                                                     -------------              --------------
<S>                                                                                <C>                        <C>
Cash flow from operating activities:

   Net income                                                                      $   18,395,970              $    50,665,415
   Adjustments to reconcile net income to net cash
   provided by operating activities
     Gain on sale of rental property                                                            -                  (23,157,736)
     Depreciation                                                                      28,411,428                   26,480,723
     Amortization of deferred compensation                                                 18,072                       18,074
     Amortization of deferred financing costs                                             532,559                      342,983
     Amortization of mortgage notes payable premium                                      (169,059)                    (156,690)
     Changes in operating assets and liabilities:
       Other assets                                                                    (5,139,875)                    (830,905)
       Other liabilities                                                                 (417,798)                 (13,369,820)
                                                                                   --------------              ---------------

                              Net cash provided by operating activities                41,631,297                   39,992,044

Cash flow from investing activities:

   Acquistions of rental property                                                     (33,205,060)                 (45,073,106)
   Net proceeds from the sale of rental property                                                -                  127,933,674
   Capital improvements                                                               (14,837,885)                 (25,071,883)
                                                                                   --------------              ---------------

                              Net cash (used in) provided by investing
                                  activities                                          (48,042,945)                  57,788,685

Cash flow from financing activities:

   Proceeds from short-term borrowings                                                132,443,000                  125,351,000
   Repayments of short-term borrowings                                                (95,652,908)                (150,854,000)
   Proceeds from secured notes payable                                                180,605,000                            -
   Repayment of secured notes payable                                                    (500,791)                    (297,883)
   Shares issued through dividend reinvestment plan
       and exercise of stock options                                                    4,544,211                    4,771,815
   Payment of financing costs                                                          (1,986,541)                           -
   Purchase of common stock                                                           (14,709,590)                 (40,175,963)
   Cash payment for conversion of Series A
      Convertible Preferred Stock into common stock                                  (143,784,779)                           -
   Payment of costs associated with the conversion of Series A
      Convertible Preferred Stock into common stock                                    (2,796,914)                           -
   Cash distributions to operating partnership unitholders                                      -                      (50,190)
   Cash distributions paid to preferred shareholders                                  (14,268,597)                 (20,748,506)
   Cash distributions paid to common shareholders                                     (32,582,849)                 (30,379,277)
                                                                                   --------------              ---------------

                              Net cash provided by (used in) financing
                                  activities                                           11,309,242                 (112,383,004)

                              Increase (decrease) in cash and cash equivalents          4,897,594                  (14,602,275)

Cash and cash equivalents, beginning of year                                            4,140,641                   16,268,336
                                                                                   --------------              ---------------

Cash and cash equivalents, end of period                                           $    9,038,235              $     1,666,061
                                                                                   ==============              ===============
</TABLE>

See accompanying notes to consolidated financial statements.

                                       6
<PAGE>

                     CORNERSTONE REALTY INCOME TRUST, INC
            Notes to Consolidated Financial Statements (Unaudited)
                              September 30, 2001


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

      The accompanying 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 generally accepted accounting principles. In the opinion of
      management, all adjustments (consisting of normal recurring accruals)
      considered necessary for a fair presentation have been included. Operating
      results for the nine months ended September 30, 2001 are not necessarily
      indicative of the results that may be expected for the year ended December
      31, 2001. These financial statements should be read in conjunction with
      the Company's December 31, 2000 Annual Report on Form 10-K.

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

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

(2)   Notes Payable
      -------------

      Unsecured
      On April 18, 2001, the Company increased its unsecured line of credit to
      $100 million from $50 million. The Company borrowed $100 million to fund
      part of the cash portion of the exchange offer for the Company's Series A
      Convertible Preferred Shares, described in Note 3. The Company had
      additional borrowings under its unsecured line of credit of $12 million
      during 2001. In connection with the secured financings as described below,
      the Company repaid borrowings on the Company's unsecured line of credit in
      the amount of $65.2 million and an additional $10 million during 2001. The
      line of credit bears interest at a variable rate equal to LIBOR plus 90
      basis points if the amount outstanding is $50 million or less, and LIBOR
      plus 120 basis points if the amount is greater than $50 million. The
      maturity date is December 2002. The unsecured line of credit at September
      30, 2001 had an outstanding balance of $50 million. The Company is
      obligated to pay lenders a quarterly commitment fee equal to .25% per
      annum of the unused portion of the line.

      The Company's $7.5 million unsecured line of credit for general corporate
      purposes bears interest at LIBOR plus 120 basis points. The maturity date
      is February 1, 2002. There were no amounts outstanding at September 30,
      2001.

      Secured
      On September 7, 2001, the Company assumed $25.5 million in mortgage notes
      in conjunction with the acquisitions of two properties. This mortgage note
      was recorded at a fair value of $25.9 million at the date of assumption.
      The difference between the fair value and principal balance is being
      amortized as an adjustment to interest expense over the term of the
      respective note. The mortgage note bears interest at a fixed rate of 7.37%
      per annum and an effective interest rate of 6.75%, including the effect of
      the fair value adjustment, and a maturity date of

                                       7
<PAGE>

      October 2004. Mortgage notes are due in monthly installments, including
      principal and interest.

      On July 27, 2001, the Company placed $15.9 million of secured debt. The
      loan bears interest at a fixed rate of 7.16% per annum with a maturity
      date of August 2011. The loan is payable in monthly installments,
      including principal and interest, and is secured by 1 apartment community.
      The proceeds were used to pay down on the Company's unsecured line of
      credit.

      On June 25, 2001, the Company placed $8.525 million of secured debt. The
      loan bears interest at a fixed interest rate of 7.099% per annum with a
      maturity date of July 2011. The loan is payable in monthly installments,
      including principal and interest, and is secured by 1 apartment community.

      On June 20, 2001, the Company placed $65 million of secured debt. The loan
      bears interest at a fixed interest rate of 7.16% per annum with a maturity
      date of July 2011. The loan is payable in monthly installments, including
      principal and interest, and is secured by 8 apartment communities. A
      portion of the proceeds were used to pay down on the Company's unsecured
      line of credit and fund one of the Company's acquisitions.

      On April 9, 2001, the Company placed $15.68 million of secured debt. The
      loan bears interest at a fixed interest rate of 6.83% per annum with a
      maturity date of April 2011. The loan is payable in monthly installments,
      including principal and interest, and is secured by 1 apartment community.

      On March 23, 2001, the Company placed $75.5 million of secured debt. The
      loan is secured by 7 apartment communities. The loan bears interest at a
      fixed interest rate of 6.99% per annum. The loan is payable in monthly
      installments, interest only through April 2002 and principal and interest
      through the maturity date of March 2011.

      The aggregate maturities of principal for the five years subsequent to
      September 30, 2001, including the fair market adjustment of $1 million,
      are as follows:

                  Year                 Amount
                  ---------------------------
                  2001           $    531,124
                  2002              2,673,802
                  2003             10,302,792
                  2004             30,005,207
                  2005             11,321,429
                  Thereafter      396,481,925
                                 ------------
                                 $451,316,279
                                 ------------

(3)   Shareholders' Equity
      --------------------

      Preferred Stock
      On April 18, 2001, the Company completed its tender offer for the
      Company's outstanding Series A Convertible Preferred Shares ("Exchange
      Offer"). A total of 12,479,701 preferred shares were validly tendered and
      not withdrawn pursuant to the Exchange Offer, representing 99% of the
      issued and outstanding preferred shares. At September 30, 2001, 127,974
      preferred shares remain outstanding. The preferred shares were listed on
      the New York Stock Exchange in August 7, 2001. Of the preferred shares
      tendered, the holders of 742,168 such shares

                                       8
<PAGE>

      exchanged two common shares for each preferred share and the holders of
      11,737,533 shares exchanged one common share and $12.25 in cash for each
      preferred share. The Company issued a total of 13,221,870 common shares
      and paid $143.8 million in cash in exchange for all of the preferred
      shares tendered in the Exchange Offer. The difference between the total
      consideration given and the carrying value of the preferred shares totaled
      approximately $27.5 million, including direct transaction expenses.

(4)   Earnings Per Share
      ------------------

      The following table sets forth the computation of basic and diluted
      earnings per share in accordance with FAS 128:

<TABLE>
<CAPTION>
                                                 Three             Nine                                   Nine
                                                 Months            Months        Three Months            Months
                                                 Ended             Ended             Ended               Ended
                                                9/30/01           9/30/01           9/30/00             9/30/00
                                                -------           -------           -------             -------
<S>                                          <C>               <C>                <C>                  <C>
      Numerator:
        Netincome(loss)
        available to                          $  5,613,768     $(16,718,268)      $ 1,229,634          $27,785,682
        common shareholders
        Numerator for basic
        and diluted earnings per
        share-income
        (loss) available to                      5,613,768      (16,718,268)        1,229,634           27,785,682
        common stockholders
        after assumed conversion
      Denominator:
        Denominator for basic
        and diluted
        earnings pershare                       47,227,335       42,144,022        35,635,629           36,496,327
        weighted-average shares
      Effect of dilutive securities:
        Stock options                               54,663                -            14,993                4,405
        Series A Convertible
        Preferred Stock*
      Denominator for diluted
      earnings per share-adjusted
      weighted-average shares
      and assumed conversions                   47,281,998       42,144,022        35,650,622           36,500,732
     ---------------------------------------------------------------------------------------------------------------
      Basic and diluted earnings per
      common share                            $        .12     $       (.40)      $       .03          $       .76
     ---------------------------------------------------------------------------------------------------------------
</TABLE>
         *Series A Convertible Preferred Stock was not included in dilutive
          earnings per common share calculation since its effect was anti-
          dilutive.

                                       9
<PAGE>

(5)   Subsequent Events
      -----------------

      On October 1, 2001, the Company purchased seven apartment communities with
      1,686 units located in North Carolina for a purchase price of $126.2
      million. Two of the apartment communities, with a total of 288, units are
      currently under construction and are the second phase of two of the five
      existing properties which were acquired. The purchase price includes the
      total amount to complete the 288 units. Total consideration for the
      transaction includes the assumption of $93.6 million in secured financing
      and the issuance of $32.2 million in the form of operating partnership
      units, both described below. The Company has an approximately 88% interest
      as a general partner in Cornerstone NC Operating Limited Partnership, a
      Virginia limited partnership (the "Limited Partnership") which was
      organized by the Company to acquire the seven properties. The Company
      entered into an agreement of limited partnership (the "Agreement") with
      State Trust, LLC, and State Street I, LLC, North Carolina limited
      liability companies (the "Limited Partner"). Pursuant to the Agreement,
      the Limited Partner contributed an approximately 12% interest in the
      property to the Limited Partnership in exchange for a total of 1,262,680
      preferred operating partnership units and 1,431,590 non-preferred
      operating partnership units valued at $32.2 million. The non-preferred
      operating partnership units shall convert into preferred operating
      partnership units over time and as certain lease-up and stabilization
      criteria are met. The preferred operating partnership units shall be
      exchangeable for either cash or shares of common shares on a one-for-one
      basis, at the Company's option on or after October 1, 2002. The operating
      partnership units can be exchanged at the option of the holder.

      In conjunction with the acquisitions of seven properties mentioned above,
      the Company assumed four mortgage notes in the amount of $93.6 million.
      The debt portion of the transaction includes $46.4 million at a fixed-rate
      financing of 6.75% secured by three of the five properties and matures May
      2011; $15.2 million in variable-rate financing of LIBOR plus 120 basis
      points secured by one property; and $16 million in variable-rate financing
      of LIBOR plus 150 basis points secured by one property. Upon completion of
      the development properties, the Company will also be responsible for $16
      million in variable-rate financing of LIBOR plus 135 basis points secured
      by those properties. Mortgage notes are due in monthly installments,
      including principal and interest. Scheduled maturities for the variable-
      rate financings are at various dates through September 2006.

                                       10
<PAGE>

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

     This report contains forward-looking statements within the meaning of
     Section 27A of the Securities Act of 1993, 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, and adverse changes in the
     real estate markets and general and local economies and business
     conditions. 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.

     Results of Operations
     ---------------------

     Income and occupancy
     Substantially all of the Company's income is from the rental operation of
     apartment communities. The Company's property operations for the nine and
     three months ended September 30, 2001 include the results of operations for
     the full three quarters from 72 properties acquired before 2001 and from
     four properties acquired during 2001 from their respective acquisition
     dates. One of the properties, consisting of 48 apartment homes, acquired in
     2001 is located next to an existing apartment community owned by the
     Company. The operations of the acquired property are combined with the
     existing apartment community. The two properties acquired in September
     2001, are adjacent properties and are operated as one apartment community.

     Rental income for the nine months increased to $110.8 million in 2001 from
     $110.1 million in 2000. For the third quarter of 2001, the Company's rental
     income increased to $38.1 million, or 2%, compared to the same period in
     2000. The increase in rental income is due to the incremental effect of the
     2001 acquisition and rent increases. The increase in the nine-month income
     is also offset in part by the sale of 16 apartment communities in March
     2000. Rental income is expected to increase from the impact of
     improvements, which were made in an effort to improve the properties'
     marketability, economic occupancies, and rental rates.

     Overall economic occupancy for the Company's properties averaged 93% for
     the nine months ended September 30, 2001 and 2000. For the third quarter of
     2001 and 2000, economic occupancy averaged 92% and 93%, respectively.
     Overall average rental rates for the portfolio increased 6% from $650 at
     September 30, 2000, to $686 at September 30, 2001. For the third quarter of
     2000 and 2001 average rental rates increased 2% from $670 to $685,
     respectively. This increase is due to a combination of increased rental
     rates from new leases and property renovation as well as a lower average
     rental rate on properties disposed of compared to the

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<PAGE>

     remainder of the Company's apartment communities.

     Comparable property operations
     The Company's "same-property" portfolio consists of 69 properties,
     containing 17,014 apartment homes owned by the Company since January 1,
     2000, representing approximately 90% of the Company's 18,976 units. During
     the nine months ended September 30, 2001, rental income increased 3%,
     operating expenses increased 4% and net operating income increased 2% over
     the same period in 2000. During the third quarter of 2001, rental income
     increased 2% and operating expenses increased 4% over the same period in
     2000 and net operating income remained the same.

     Expenses
     Total expenses, excluding depreciation and general and administrative
     expenses, for the first nine months increased 2% to $42.9 million in 2001
     from $42 million in 2000. For the third quarter of 2001, these expenses
     were $14.3 million and $14.7 million for the same period in 2000. The
     operating expense ratio (the ratio of operating expenses, excluding
     depreciation, amortization, general and administrative, and other expenses,
     to rental income) was 39% and 38% for the nine and three months ended
     September 30, 2001, respectively, and 38% and 39%, respectively, for the
     same periods in 2000.

     Depreciation expense for the first nine months has increased to $28.4
     million in 2001 from $26.5 million in 2000. For the third quarter of 2001
     and 2000 depreciation expense was $9.7 million and $9.1 million,
     respectively. The increases are attributed to the 2001 acquisitions and
     capital improvements made in 2001 and 2000.

     General and administrative expenses totaled $1.3 million, or 1.2% of rental
     income for the nine months ended September 30, 2001 and $1.4 million, or
     1.3% for the same period in 2000. For the third quarter of 2001 and 2000,
     general and administrative expenses totaled 1% of rental income. These
     expenses represent the administrative expenses of the Company as
     distinguished from the operations of the Company's properties.

     Interest and investment income and expense
     The Company's interest income decreased to $358,850 for the nine months
     ended September 30, 2001 from $432,772 for the nine months ended September
     30, 2000. For the third quarter of 2001, interest income was $58,849 and
     $36,787 for the same period in 2000. The decrease is mainly due to the
     decreasing interest rates in 2001 compared to 2000. The Company incurred
     interest expense of $20.1 million and $13.2 million during the first nine
     months of 2001 and 2000. For the third quarter of 2001 and 2000, interest
     expense was $8 million and $4.4 million, respectively. The increase is due
     to an increase in activity on the Company's unsecured line of credit and
     the additional secured debt which was offset by decreasing interest rates
     during the periods.

     Liquidity and Capital Resources
     -------------------------------

     The Company's primary sources of liquidity are rental income generated from
     the properties, proceeds from lines of credit, reinvestment of
     distributions, and proceeds from secured debt.

     The Company believes rental income generated from the properties and
     borrowings on its line of credit will be sufficient to meet normal property
     operating expenses, payment of distributions,

                                       12
<PAGE>

     capital improvements, and payment of mortgage debt. At September 30, 2001,
     the Company had $9 million in cash and cash equivalents.

     In September 2000, the Board of Directors authorized the repurchase of up
     to $50 million of the Company's common shares. The Company has repurchased
     1.8 million common shares at an average price of $10.86 per share for $19.6
     million. For the nine months ended September 30, 2001, the Company has
     repurchased 1.4 million common shares at an average price of $10.85 per
     share for $14.8 million.

     On April 18, 2001, the Company completed its tender offer for the Company's
     outstanding Series A Convertible Preferred Shares ("Exchange Offer"). A
     total of 12,479,701 preferred shares were validly tendered and not
     withdrawn pursuant to the Exchange Offer, representing 99% of the issued
     and outstanding Series A Convertible Preferred Shares. At September 30,
     2001, 127,974 preferred shares remain outstanding. The preferred shares
     were listed on the New York Stock Exchange in August 7, 2001. Of the Series
     A Convertible Preferred Shares tendered, the holders of 742,168 such shares
     exchanged two common shares for each preferred share and the holders of
     11,737,533 shares exchanged one common share and $12.25 in cash for each
     preferred share. The Company issued a total of 13,221,870 common shares and
     paid $143.8 million in cash in exchange for all of the preferred shares
     tendered in the Exchange Offer. The difference between the total
     consideration given and the carrying value of the preferred shares totaled
     approximately $27.5 million, including direct transaction expenses.

     Acquisition
     On September 7, 2001, the Company purchased Poplar Place and The Enclave at
     Poplar Place Apartments, a 324- and 200-unit apartment community,
     respectively, located in Atlanta, Georgia for a total purchase price of
     $34.7 million . The Company is operating the adjacent properties as one
     apartment community. The Company assumed $25.5 millon of mortgage notes in
     conjunction with the acquisition. On June 21, 2001, the Company purchased
     Chase Gayton Apartments, a 328-unit apartment community, located in
     Richmond, Virginia for a purchase price of $21.2 million. On May 7, 2001,
     the Company purchased 48 new apartment units adjacent to the Company's
     Meadows Apartments in Asheville, North Carolina for $2.85 million. These
     acquisitions brought the total apartment units to 18,976.

     On October 1, 2001, the Company purchased seven apartment communities with
     1,686 units located in North Carolina for a purchase price of $126.2
     million. Two of the apartment communities, with a total of 288 units, are
     currently under construction and are the second phase of two of the five
     existing properties which were acquired. Total consideration for the
     transaction includes the assumption of $93.6 million in secured financing
     and the issuance of $32.2 million in the form of operating partnership
     units. (See Note 5 to the consolidated financial statements for further
     information.)

     Notes Payable
     On April 18, 2001, the Company increased its unsecured line of credit to
     $100 million from $50 million. The Company borrowed $100 million to fund
     part of the cash portion of the exchange offer for the Company's Series A
     Convertible Preferred Shares, described in Note 3 to the unaudited
     consolidated financial statements. The Company had additional borrowings
     under its unsecured line of credit of $12 million during 2001. In
     connection with the secured financings as described below, the Company
     repaid borrowings on the Company's unsecured line of credit in

                                      13
<PAGE>

     the amount of $65.2 million and an additional $10 million during 2001. The
     line of credit bears interest at a variable rate equal to LIBOR plus 90
     basis points if the amount outstanding is $50 million or less, and LIBOR
     plus 120 basis points if the amount is greater than $50 million. The
     maturity date is December 2002. The unsecured line of credit at September
     30, 2001 had an outstanding balance of $50 million. The Company is
     obligated to pay lenders a quarterly commitment fee equal to .25% per annum
     of the unused portion of the line.

     The Company's $7.5 million unsecured line of credit for general corporate
     purposes bears interest at LIBOR plus 120 basis points. The maturity date
     is February 1, 2002. There were no amounts outstanding at September 30,
     2001.

     On September 7, 2001, the Company assumed $25.5 million in mortgage notes
     in conjunction with the acquisitions of two properties. This mortgage note
     was recorded at a fair value of $25.9 million at the date of assumption.
     The difference between the fair value and principal balance is being
     amortized as a adjustment to interest expense over the term of the
     respective note. The mortgage note bears interest at a fixed rate of 7.37%
     per annum and an effective interest rate of 6.75%, including the effect of
     the fair value adjustment, and a maturity date of October 2004. Mortgage
     notes are due in monthly installments, including principal and interest.

     On July 27, 2001, the Company placed $15.9 million of secured debt. The
     loan bears interest at a fixed rate of 7.16% per annum with a maturity date
     of August 2011. The loan is payable in monthly installments, including
     principal and interest, and is secured by 1 apartment community.

     On June 25, 2001, the Company placed $8.525 million of secured debt. The
     loan bears interest at a fixed interest rate of 7.099% per annum with a
     maturity date of July 2011. The loan is payable in monthly installments,
     including principal and interest, and is secured by 1 apartment community.

     On June 20, 2001, the Company placed $65 million of secured debt. The loan
     bears interest at a fixed interest rate of 7.16% per annum with a maturity
     date of July 2011. The loan is payable in monthly installments, including
     principal and interest, and is secured by 8 apartment communities. A
     portion of the proceeds were used to pay down on the Company's unsecured
     line of credit and fund one of the Company's acquisitions.

     On April 9, 2001, the Company placed $15.68 million of secured debt. The
     loan bears interest at a fixed interest rate of 6.83% per annum with a
     maturity date of April 2011. The loan is payable in monthly installments,
     including principal and interest, and is secured by 1 apartment community.

     On March 23, 2001, the Company placed $75.5 million of secured debt. The
     loan is secured by 7 apartment communities. The loan bears interest at a
     fixed interest rate of 6.99% per annum. The loan is payable in monthly
     installments, interest only through April 2002 and principal and interest
     through the maturity date of March 2011.

     In conjunction with the acquisitions of seven properties on October 1, 2001
     which is mentioned above, the Company assumed four mortgage notes in the
     amount of $93.6 million. (See Note 5 to the consolidated financial
     statements for further information.)

                                       14
<PAGE>

     Capital  Requirements
     The Company has an ongoing capital expenditure commitment to fund its
     renovation program for recently acquired properties. In addition, the
     Company is always assessing potential acquisitions and intends to acquire
     additional properties during 2001. However, no material commitments existed
     on November 1, 2001 for the purchase of additional properties. The Company
     expects to fund the improvements and acquisitions from a variety of sources
     including equity, excess flow from operations over distributions, and
     borrowings on its unsecured line of credit. The Company may seek to obtain
     additional debt financing to meet its objectives. Given the Company's
     current debt level, the Company believes that it will be able to obtain
     debt financing from a variety of sources, both secured and unsecured.

     The Company capitalized $14.8 million of improvements to its various
     properties during the first nine months of 2001. It is anticipated that
     approximately $3 million in additional capital improvements will be
     completed during 2001 on the current portfolio.

     Capital resources are expected to grow with the future sale of its shares
     and from cash flow from operations. In the first three quarters of 2001,
     approximately 14%, or $4.5 million, of common stock dividend distributions
     were reinvested in additional common shares. In general, the Company's
     liquidity and capital resources are expected to be adequate to meet its
     cash requirements in 2001.

     Recent Accounting Pronouncements
     On January 1, 2001, Financial Accounting Standards Board Statement No. 138
     "Accounting for Derivative Financial Instruments and Hedging Activities"
     became effective. The Company currently does not have any financial
     instruments subject to this statement.

     In August 2001, the FASB issued Statement 144, "Accounting for the
     Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). The
     Statement supercedes Statement 121, "Accounting for the Impairment of Long-
     Lived Assets and for Long-Lived Assets to be Disposed of" and APB Opinion
     No. 30, "Reporting the Results of Operations-Reporting the Effects of
     Disposal of a Segment of a Business, and Extraordinary, Unusual and
     Infrequently Occurring Events and Transactions", for segments of a business
     to be disposed of. SFAS No. 144 retains the requirements of Statement 121
     relating to recognition and measurement of an impairment loss and resolves
     certain implementation issues resulting from Statement 121. This Statement
     is effective for fiscal years beginning after December 15, 2001. We are
     currently assessing the impact of this statement on the Company, however,
     we do not anticipate this statement to have a material impact on the
     consolidated financial position or results of operations of the Company.

     Impact of Inflation
     The Company does not believe that inflation had any significant impact on
     its operation of the Company in 2001. Future inflation, if any, would
     likely cause increased operating expenses, but the Company believes that
     increases in expenses would be more than offset by increases in rental
     revenues. Continued inflation may also cause capital appreciation of the
     Company's properties over time, as rental rates and replacement costs
     increase.

                                       15
<PAGE>

    Item 3. Quantitative and Qualitative Disclosures About Market Risk

    The Company secured 18 apartment communities with $180.6 million of secured
    debt with an average fixed interest rate of 7.1%. The debt assumed in the
    amount of $25.5 million has a interest rate of 7.37%. The Company marked
    this debt to market using interest rates available on similar mortgage loans
    at the time of assumption, resulting in effective interest expense of 6.75%.

    There have been no other material changes since December 31, 2000. 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.

                                       16
<PAGE>

Item 6. Exhibits and Reports on Form 8-K

  (a)   Exhibits-

        Exhibit
        No.        Description
     -----------   -----------
        3.1        Amended and Restated Articles of Incorporation of Cornerstone
                   Realty Income Trust, Inc., as amended (Incorporated by
                   reference to Exhibit 3.1 to Current Report on Form 8-K dated
                   May 12, 1998; SEC File No. 1-12875).
        3.2        Articles of Amendment to the Amended and Restated Articles of
                   Incorporation of Cornerstone Realty Income Trust, Inc.
                   (Incorporated by reference to Exhibit 3.2 to Current Report
                   on Form 8-K dated July 23, 1999; SEC File No. 1-12875).
        3.3        Bylaws of Cornerstone Realty Income Trust, Inc. (Amended
                   Through May 25, 2000). (Incorporated by reference to the
                   Exhibit of the same number to Form S-4 Registration
                   Statement, SEC File No. 1-12875, filed on February 21, 2001
                   by Cornerstone Realty Income Trust, Inc.).

  (b)   The following table lists the reports on Form 8-K filed by the Company
        during the quarter ended September 30, 2001, 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                 2,7(c)               None
        June 20, 2001 and filed
        July 9, 2001

        Form 8-K/A dated               5                    None
        April 18, 2001 and filed
        July 19, 2001

        Form 8-K/A dated               7                    None
        April 18, 2001 and filed
        August 14, 2001

        Form 8-K/A dated               7(c)                 None
        June 20, 2001 and filed
        August 30, 2001

                                       17
<PAGE>

                                  SIGNATURES
                                  ----------



     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                     Cornerstone Realty Income Trust, Inc.
                     -------------------------------------
                                 (Registrant)



DATE:    11-14-01                            BY: /s/ Stanley J. Olander
     --------------------------------           ----------------------
                                             Stanley J. Olander
                                             Chief Financial Officer

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