UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549





FORM
10-Q





(Mark
One)





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





For
the quarterly period ended September 30, 2008





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   000-51868





CORNERSTONE
REALTY FUND, LLC


(Exact
name of registrant as specified in its charter)





CALIFORNIA
              33-0827161(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification No.)1920
      MAIN STREET, SUITE 400, IRVINE, CA
              92614(ADDRESS
      OF PRINCIPAL EXECUTIVE OFFICES)
              (ZIP
      CODE)





949-852-1007


(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 issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the 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.





T Yes o No





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.  See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.





Large
accelerated filer £ Accelerated
filer £
Non-accelerated filer £ Smaller
Reporting Company T





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).





o Yes o No












PART
      I.
                FIFINANCIAL INFORMATIONItem
      1.
                Financial
      Statements:Condensed Balance
      Sheets as of September 30, 2008 (unaudited) and December 31,
      2007
                3Condensed
      Statements of Operations for the Three and Nine months ended September 30,
      2008 (unaudited) and September 30, 2007
    (unaudited)
                4Condensed
      Statement of Members’ Capital for the Nine months ended September 30, 2008
      (unaudited)
                5Condensed
      Statements of Cash Flows for the Nine months ended September 30, 2008
      (unaudited) and September 30, 2007 (unaudited)
                6Notes to
      Condensed Financial Statements (unaudited)
                7Item
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                11Item
      3.
                Quantitative and
      Qualitative Disclosure about Market Risk
                13Item
      4(T).
                Controls and
      Procedures
                13PART
      II.
                OTHER
      INFORMATIONItem
      1A.
                Risk Factors
                13Item
      6.
                Exhibits
                14SIGNATURES
                15


Table of Contents
  CORNERSTONEREALTY FUND, LLC


(a
California limited liability company)





CONDENSED
BALANCE SHEETS





September 30,
      2008
                              
                              
                              December 31,
      2007(unaudited)
                              
                              
                              (a)ASSETSCash
      and cash equivalents
                              
                              $
                              2,637,000
                              
                              
                              $
                              4,201,000Investments
      in real estateLand
                              
                              
                              11,779,000
                              
                              
                              
                              11,779,000Buildings
      and improvements, net
                              
                              
                              21,297,000
                              
                              
                              
                              21,689,000Intangible
      lease assets, net
                              
                              
                              393,000
                              
                              
                              
                              424,000Intangible
      in-place lease asset, net
                              
                              
                              109,000
                              
                              
                              
                              195,00033,578,000
                              
                              
                              
                              34,087,000Tenant
      and other receivables, net
                              
                              
                              265,000
                              
                              
                              
                              289,000Prepaid
      expenses and other assets
                              
                              
                              30,000
                              
                              
                              
                              65,000Leasing
      commissions, less accumulated amortization of $367,000 as of September 30,
      2008 and $269,000 as of December 31, 2007
                              
                              
                              174,000
                              
                              
                              
                              188,000Total
      assets
                              
                              $
                              36,684,000
                              
                              
                              $
                              38,830,000LIABILITIES
      AND MEMBERS’ CAPITALLiabilitiesAccounts
      payable, accrued and other liabilities
                              
                              $
                              256,000
                              
                              
                              $
                              338,000Real
      estate taxes payable
                              
                              
                              371,000
                              
                              
                              
                              228,000Tenant
      security deposits
                              
                              
                              298,000
                              
                              
                              
                              316,000Intangible
      lease liability, net
                              
                              
                              39,000
                              
                              
                              
                              61,000Total
      liabilities
                              
                              
                              964,000
                              
                              
                              
                              943,000Members’
      capital (100,000 units authorized as of September 30, 2008 and December
      31, 2007;  99,445 and 99,720 units outstanding as of September
      30, 2008 and December 31, 2007, respectively)
                              
                              
                              35,720,000
                              
                              
                              
                              37,887,000Total
      liabilities and members’ capital
                              
                              $
                              36,684,000
                              
                              
                              $
                              38,830,000





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





(a)
Derived from the audited financial statements as of December 31
2007.


3
 Table of Contents


CORNERSTONE REALTYFUND, LLC


(a
California limited liability company)





CONDENSED
STATEMENTS OF OPERATIONS


(Unaudited)





Three
      Months Ended September 30,
                                      
                                      
                                      Nine
      months Ended September 30,2008
                                      
                                      
                                      2007
                                      
                                      
                                      2008
                                      
                                      
                                      2007RevenuesRental
      revenues
                                      
                                      $
                                      837,000
                                      
                                      
                                      $
                                      859,000
                                      
                                      
                                      $
                                      2,541,000
                                      
                                      
                                      $
                                      2,511,000Tenant
      reimbursements and other income
                                      
                                      
                                      169,000
                                      
                                      
                                      
                                      163,000
                                      
                                      
                                      
                                      519,000
                                      
                                      
                                      
                                      479,0001,006,000
                                      
                                      
                                      
                                      1,022,000
                                      
                                      
                                      
                                      3,060,000
                                      
                                      
                                      
                                      2,990,000ExpensesProperty
      operating and maintenance
                                      
                                      
                                      245,000
                                      
                                      
                                      
                                      238,000
                                      
                                      
                                      
                                      759,000
                                      
                                      
                                      
                                      644,000Property
      taxes
                                      
                                      
                                      130,000
                                      
                                      
                                      
                                      152,000
                                      
                                      
                                      
                                      419,000
                                      
                                      
                                      
                                      443,000General
      and administrative
                                      
                                      
                                      65,000
                                      
                                      
                                      
                                      97,000
                                      
                                      
                                      
                                      218,000
                                      
                                      
                                      
                                      331,000Depreciation
      and amortization
                                      
                                      
                                      262,000
                                      
                                      
                                      
                                      259,000
                                      
                                      
                                      
                                      792,000
                                      
                                      
                                      
                                      788,000702,000
                                      
                                      
                                      
                                      746,000
                                      
                                      
                                      
                                      2,188,000
                                      
                                      
                                      
                                      2,206,000Interest
      and other income
                                      
                                      
                                      54,000
                                      
                                      
                                      
                                      45,000
                                      
                                      
                                      
                                      87,000
                                      
                                      
                                      
                                      102,000Income
      from continuing operations
                                      
                                      
                                      358,000
                                      
                                      
                                      
                                      321,000
                                      
                                      
                                      
                                      959,000
                                      
                                      
                                      
                                      886,000Discontinued
      operationsIncome
      from discontinued operations
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      45,000Gain
      on sale of real estate
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      320,000Net
      income
                                      
                                      $
                                      358,000
                                      
                                      
                                      $
                                      321,000
                                      
                                      
                                      $
                                      959,000
                                      
                                      
                                      $
                                      1,251,000Net
      income allocable to managing member
                                      
                                      $
                                      36,000
                                      
                                      
                                      $
                                      32,000
                                      
                                      
                                      $
                                      96,000
                                      
                                      
                                      $
                                      125,000Net
      income allocable to unit holdersContinuing
      operations
                                      
                                      $
                                      322,000
                                      
                                      
                                      $
                                      289,000
                                      
                                      
                                      $
                                      863,000
                                      
                                      
                                      $
                                      798,000Discontinued
      operations
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      328,000$
                                      322,000
                                      
                                      
                                      $
                                      289,000
                                      
                                      
                                      $
                                      863,000
                                      
                                      
                                      $
                                      1,126,000Per
      unit amountsBasic
      and diluted income from continuing operations allocable to unit
      holders
                                      
                                      $
                                      3.24
                                      
                                      
                                      $
                                      2.89
                                      
                                      
                                      $
                                      8.67
                                      
                                      
                                      $
                                      7.98Basic
      and diluted income from discontinued operations allocable to unit
      holders
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      3.28Basic
      and diluted income allocable to unit holders
                                      
                                      $
                                      3.24
                                      
                                      
                                      $
                                      2.89
                                      
                                      
                                      $
                                      8.67
                                      
                                      
                                      $
                                      11.26Basic
      and diluted weighted average units outstanding
                                      
                                      
                                      99,498
                                      
                                      
                                      
                                      100,000
                                      
                                      
                                      
                                      99,583
                                      
                                      
                                      
                                      100,000





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


4
 Table of Contents


CORNERSTONE REALTYFUND, LLC


(a
California limited liability company)





CONDENSED
STATEMENT OF MEMBERS’ CAPITAL


(Unaudited)





Balance,
      December 31, 2007
                    
                    $
                    37,887,000Cash
      distributions to unit holders
                    
                    
                    (2,866,000
                    )Cash
      distributions to managing member
                    
                    
                    (141,000
                    )Units
      repurchased and retired
                    
                    
                    (119,000
                    )Net
      income
                    
                    
                    959,000Balance,
      September 30, 2008
                    
                    $
                    35,720,000





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


5
 Table of Contents


CORNERSTONE REALTYFUND, LLC


(a
California limited liability company)





CONDENSED
STATEMENTS OF CASH FLOWS


(Unaudited)





Nine
      months Ended September 30,2008
                                    
                                    
                                    2007OPERATING
      ACTIVITIESNet
      income
                                    
                                    $
                                    959,000
                                    
                                    
                                    $
                                    1,251,000Adjustments
      to reconcile net income to net cash provided by operating
      activities:Net
      gain on sale of real estate
                                    
                                    
                                    -
                                    
                                    
                                    
                                    (320,000
                                    )Provision
      for bad debt
                                    
                                    
                                    87,000
                                    
                                    
                                    
                                    -Depreciation
      and amortization
                                    
                                    
                                    792,000
                                    
                                    
                                    
                                    788,000Changes
      in operating assets and liabilitiesOther
      assets
                                    
                                    
                                    (134,000
                                    )
                                    
                                    
                                    (58,000
                                    )Accounts
      payable, accrued and other liabilities
                                    
                                    
                                    43,000
                                    
                                    
                                    
                                    (59,000
                                    )Net
      cash provided by operating activities
                                    
                                    
                                    1,747,000
                                    
                                    
                                    
                                    1,602,000INVESTING
      ACTIVITIESInvestments
      in real estate
                                    
                                    
                                    (185,000
                                    )
                                    
                                    
                                    (158,000
                                    )Net
      proceeds received from sale of real estate
                                    
                                    
                                    -
                                    
                                    
                                    
                                    2,939,000Net
      cash (used in) provided by investing activities
                                    
                                    
                                    (185,000
                                    )
                                    
                                    
                                    2,781,000FINANCING
      ACTIVITIESCash
      distributions to unit holders
                                    
                                    
                                    (2,866,000
                                    )
                                    
                                    
                                    (1,870,000
                                    )Cash
      distributions to managing member
                                    
                                    
                                    (141,000
                                    )
                                    
                                    
                                    -Units
      repurchased and retired
                                    
                                    
                                    (119,000
                                    )
                                    
                                    
                                    -Net
      cash used in financing activities
                                    
                                    
                                    (3,126,000
                                    )
                                    
                                    
                                    (1,870,000
                                    )Net
      (decrease) increase  in cash
                                    
                                    
                                    (1,564,000
                                    )
                                    
                                    
                                    2,513,000Cash
      and cash equivalents at beginning of period
                                    
                                    
                                    4,201,000
                                    
                                    
                                    
                                    2,249,000Cash
      and cash equivalents at end of period
                                    
                                    $
                                    2,637,000
                                    
                                    
                                    $
                                    4,762,000





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


6
 Table of Contents


CORNERSTONE REALTYFUND, LLC


(a
California Limited Liability Company)





NOTES
TO CONDENSED FINANCIAL STATEMENTS


(Unaudited)





1.
            Organization
      and Business





Cornerstone
Realty Fund, LLC, a California limited liability company (the “Fund”), was
formed in October of 1998 to invest in multi-tenant business parks catering to
small business tenants.  As used in this report, “we,” “us” and “our”
refer to Cornerstone Realty Fund, LLC except where the context otherwise
requires.  Our properties are located in major metropolitan areas in
the United States and are owned on an all cash basis without debt
financing.





Our
managing member is Cornerstone Industrial Properties, LLC (“CIP”), a California
limited liability company.  Cornerstone Ventures, Inc is the managing
member of CIP.  Cornerstone Ventures, Inc. is an experienced real
estate operating company specializing in the acquisition, operation and
repositioning of multi-tenant industrial business parks catering to small
business tenants.





Our
interim unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and in accordance with the rules and
regulations of the Securities and Exchange Commission.  As permitted
by the Securities and Exchange Commission filing requirements for Form 10-Q, the
condensed financial statements do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements.  The condensed financial
statements included herein should be read in conjunction with our Annual Report
on Form 10-K for the year ended December 31, 2007.





The
interim unaudited condensed financial statements have been prepared in
accordance with our customary accounting practices.  In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a presentation in accordance with accounting principles generally
accepted in the United States have been included.  Operating results
for the nine months ended September 30, 2008 are not necessarily indicative of
the results that may be expected for the year ending December 31,
2008.





Each
member’s liability is limited pursuant to the provisions of the Beverly-Killea
Limited Liability Company Act.  The term of the Fund shall continue
until December 31, 2010, unless terminated sooner pursuant to the operating
agreement or extended by a majority vote of unit holders.





The
operating agreement, as amended and restated, provides, among other things, for
the following:





—
            Our managing member generally has
      complete and exclusive discretion in the management and control of our
      operations; however, unit holders holding the majority of all outstanding
      and issued units have certain specified voting rights which include the
      removal and replacement of the managing
  member.





—
            Net Cash Flow from Operations, as
      defined, will be distributed 90% to the unit holders and 10% to the
      managing member until the unit holders have received either an 8% or 12%
      cumulative, non-compounded annual return on their Invested Capital
      Contributions, as defined.  The 12% return applies to specified
      early investors for the twelve-month period subsequent to the date of
      their Invested Capital Contributions and is in lieu of the 8% return
      during that period.





—
            Net Sales Proceeds, as defined,
      will be distributed first, 100% to the unit holders in an amount equal to
      their Invested Capital Contributions; then, 90% to the unit holders and
      10% to the managing member until the unit holders have received an amount
      equal to the unpaid balance of their aggregate cumulative, non-compounded
      annual return on their Invested Capital Contributions; and thereafter, 50%
      to the unit holders and 50% to the managing
  member.





—
            Net Income, as defined, is
      allocated first, 10% to the managing member and 90% to the unit holders
      until Net Income allocated equals cumulative Net Losses, as defined,
      previously allocated in such proportions; second, in proportion to and to
      the extent of Net Cash Flow from Operations and Net Sales Proceeds
      previously distributed to the members, exclusive of distributions
      representing a return of Invested Capital Contributions; and then 50% to
      the managing member and 50% to the unit
  holders.


7
 Table of Contents


—
            Net Loss is allocated first, 50%
      to the managing member and 50% to the unit holders, until Net Loss
      allocated equals cumulative Net Income previously allocated in such
      proportions; then remaining Net Loss is allocated 10% to the managing
      member and 90% to the unit
holders.





—
            All allocations and distributions
      to the unit holders are to be pro rata in proportion to their ownership
      shares.





—
            Effective February 22, 2007, our
      operating agreement was amended to permit repurchase of units on such
      terms and conditions as the managing member may
      determine.





2.
            Summary
      of Significant Accounting Policies





Use
of Estimates





Our
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”).  The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the financial statements and the reported amount of revenue and
expenses during the reporting period.  Actual results could differ
materially from those estimates.





Cash
and Cash Equivalents





Cash and
cash equivalents consist primarily of interest-bearing investments with original
maturities of 90 days or less at the date of purchase.  We place our
cash with major financial institutions.  At times, cash balances may
be in excess of amounts insured by Federal agencies.





Investments
in Real Estate





Investments
in real estate are stated at cost and include land, buildings and building
improvements.  Expenditures for ordinary maintenance and repairs are
expensed to operations as incurred.  Significant replacements,
betterments and tenant improvements which improve or extend the useful lives of
the buildings are capitalized.  Depreciation of the buildings and
building improvements is computed on a straight-line basis over their estimated
useful lives of 39 years.  Tenant improvements are depreciated over
the lesser of their useful life or the related lease term.





We
evaluate the carrying value for investments in real estate in accordance with
Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting
Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets”(“SFAS 144”).  SFAS 144 requires that when events or changes in
circumstances indicate that the carrying amount of the assets might not be
recoverable, companies should evaluate the need for an impairment
write-down.  When an impairment write-down is required, the related
assets are adjusted to their estimated fair value. No assets were deemed to be
impaired at September 30, 2008.




In
accordance with Statement of Financial Accounting Standards No. 141, "Business
Combinations", we allocated the purchase price of acquired properties to land,
buildings and improvements and identified tangible and intangible assets and
liabilities associated with in-place leases (including tenant improvements,
unamortized leasing commissions, value of above and below-market leases,
acquired in-place lease values, and tenant relationships, if any) based on their
respective estimated fair values.





The fair
value of the tangible assets of the acquired properties considers the value of
the properties as if vacant as of the acquisition date.  Management
must make significant assumptions in determining the value of assets and
liabilities acquired.  Amounts allocated to land are derived from
comparable sales of land within the same region.  Amounts allocated to
buildings and improvements, tenant improvements and unamortized leasing
commissions are based on current market replacement costs and other market rate
information.





Acquired
above and below market leases are valued based on the present value of the
difference between prevailing market rates and the in-place rates over the
remaining lease term.  The value of acquired above and below market
leases is amortized over the remaining non-cancelable terms of the respective
leases as an adjustment to rental revenue on our statement of
operations.





The
amount allocated to acquired in-place leases is determined based on management’s
assessment of lost revenue and costs incurred for the period required to lease
the “assumed vacant” property to the occupancy level when
purchased.  The amount allocated to acquire in-place leases is
included in intangible assets — in-place leases in the balance sheet and
amortized to expense over the remaining non-cancelable term of the respective
leases.





Estimated
amortization associated with the intangible lease assets, in-place lease assets
and intangible lease liability for October 1, 2008 through December 31, 2008 and
each of the four subsequent years is as follows:


8
 Table of Contents




Lease
      IntangiblesOctober
      1, 2008 to December 31, 2008
                      
                      $
                      28,0002009
                      
                      
                      91,0002010
                      
                      
                      45,0002011
                      
                      
                      42,0002012
                      
                      
                      42,000Thereafter
                      
                      
                      215,000Total
                      
                      $
                      463,000





As of
September 30, 2008, accumulated depreciation and amortization related to
investments in real estate and related lease intangibles were as
follows:








Land
              
              
              Buildings
      and
                Improvements
              
              
              Intangible
                Lease
                Assets
              
              
              In-Place
                Lease
                Assets
              
              
              Intangible
                Lease
                LiabilityInvestments
      in Real Estate and related lease intangibles
              
              $
              11,779,000
              
              
              $
              23,726,000
              
              
              $
              550,000
              
              
              $
              894,000
              
              
              $
              (155,000
              )Less:
      accumulated depreciation and amortization from continuing
      operations
              
              
              —
              
              
              
              (2,429,000
              )
              
              
              (157,000
              )
              
              
              (785,000
              )
              
              
              116,000Net
      Investments in Real Estate, Real estate assets held-for sale, and related
      lease intangibles
              
              $
              11,779,000
              
              
              $
              21,297,000
              
              
              $
              393,000
              
              
              $
              109,000
              
              
              $
              (39,000
              )








As of
December 31, 2007, accumulated depreciation and amortization related to
investments in real estate and related lease intangibles were as
follows:








Land
              
              
              Buildings
      and
                Improvements
              
              
              Intangible
                Lease
                Assets
              
              
              In-Place
                Lease
                Assets
              
              
              Intangible
                Lease
                LiabilityInvestments
      in Real Estate and related lease intangibles
              
              $
              11,779,000
              
              
              $
              23,541,000
              
              
              $
              550,000
              
              
              $
              894,000
              
              
              $
              (155,000
              )Less:
      accumulated depreciation and amortization from continuing
      operations
              
              
              —
              
              
              
              (1,852,000
              )
              
              
              (126,000
              )
              
              
              (699,000
              )
              
              
              94,000Net
      Investments in Real Estate, Real estate assets held-for sale, and related
      lease intangibles
              
              $
              11,779,000
              
              
              $
              21,689,000
              
              
              $
              424,000
              
              
              $
              195,000
              
              
              $
              (61,000
              )








Depreciation
and amortization related to investments in real estate and related lease
intangibles for the three months ended September 30, 2008 and 2007 were $224,000
and $218,000, respectively.  Depreciation and amortization related to
investments in real estate and related lease intangibles for the nine months
ended September 30, 2008 and 2007 were $672,000 and $643,000,
respectively.





Leasing
Commissions





Leasing
commissions are stated at cost and amortized on a straight-line basis over the
related lease term.  As of September 30, 2008 and December 31, 2007,
we had recorded approximately $540,000 and $457,000 in leasing commissions,
respectively. Amortization expense for the three months ended September 30, 2008
and 2007 was approximately $31,000 and $30,000, respectively. Amortization
expense for the nine months ended September 30, 2008 and 2007 was approximately
$98,000 and $106,000, respectively.


9
 Table of Contents


Revenue
Recognition





Rental
revenues are recorded on an accrual basis as they are earned over the lives of
the respective tenant leases on a straight-line basis.  Included in
this calculation are contractual rent increases and amounts paid to tenants as
tenant improvement allowances.  Rental receivables are periodically
evaluated for collectability.





Accounts
Receivable





The Fund
periodically evaluates the collectability of amounts due from tenants and
maintains an allowance for doubtful accounts for estimated losses resulting from
the inability of tenants to make required payments under lease agreements. The
Fund exercises judgment in establishing these allowances and considers payment
history and current credit status of its tenants in developing these
estimates.





Fair
Value of Financial Instruments





We
believe that the recorded values of all financial instruments approximate their
fair values.





Income
Tax Matters





It is our
intent that we be treated as a partnership for income tax
purposes.  As a limited liability company, we are subject to certain
taxes and fees, including state income taxes on limited liability companies;
however, income taxes on the income or losses we realize are generally the
obligation of the members.





Concentration
of Credit Risk





We
maintain some of our cash in money market accounts which, at times, may exceed
federally insured limits.  No losses have been experienced related to
such amounts.





Impact
of New Accounting Pronouncements





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
157”), which defines fair value, establishes a framework for measuring fair
value, and expands disclosures required for fair value measurements under GAAP.
SFAS 157 emphasizes that fair value is a market-based measurement, as opposed to
a transaction-specific measurement. On February 8, 2008, the FASB issued Staff
Position No. SFAS 157-1, Application of FASB Statement No. 157 to FASB Statement
No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements
for Purposes of Lease Classification or Measurement under Statement 13 (“FSP
157-1”). FSP 157-1, which is effective upon the initial adoption of SFAS 157,
excludes SFAS Statement No. 13, "Accounting for Leases" (“SFAS 13”), as well as
other accounting pronouncements that address fair value measurements on lease
classification or measurement under SFAS 13, from the scope of SFAS
157.  On February 12, 2008, the FASB issued Staff Position No. SFAS
157-2 (“FSP 157-2”). FSP 157-2 delays the effective date of SFAS 157 for all
nonrecurring nonfinancial assets and liabilities until fiscal years beginning
after November 15, 2008.  Accordingly, FSP 157-2 will be effective
beginning January 1, 2009, and all other aspects of SFAS 157 were effective as
of January 1, 2008.  We adopted SFAS 157 and FSP 157-1 on January 1,
2008 and the adoption had no material impact on our financial
statements.





In February 2007, the FASB
issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial
Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value.  The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. SFAS 159 also establishes presentation and disclosure requirements
designed to facilitate comparisons between entities that choose different
measurement attributes for similar types of assets and liabilities. SFAS 159 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007.  Although the Company adopted SFAS 159 as of
January 1, 2008, the Company has not yet elected the fair value option for any
items permitted under SFAS 159.





In
December 2007, FASB issued SFAS No.  160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS 160”), an amendment to Accounting
Research Board No. 51.  SFAS 160’s objective is to improve the
relevance, comparability and transparency of financial information that a
reporting entity provides in its consolidated financial
statements.  The key aspects of SFAS 160 are (i) the minority
interests in subsidiaries should be presented in the consolidated balance sheet
within equity of the consolidated group, separate from the parent’s
shareholders’ equity, (ii) acquisitions or dispositions of non-controlling
interests in a subsidiary that do not result in a change of control should be
accounted for as equity transactions, (iii) a parent recognizes a gain or loss
in net income when a subsidiary is deconsolidated, measured using the fair value
of the non-controlling equity investment, (iv) the acquirer should attribute net
income and each component of other comprehensive income between controlling and
non-controlling interests based on any contractual arrangements or relative
ownership interests, and (v) a reconciliation of beginning to ending total
equity is required for both controlling and non-controlling interests. SFAS 160
is effective for fiscal years beginning on or after December 15, 2008, with
early adoption permitted, and it is to be applied prospectively.  The
adoption of this standard is not expected to have a material effect on our
financial statements.


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In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business
Combinations” (“SFAS 141(R)”).  In summary, SFAS 141(R) requires the
acquirer of a business combination to measure at fair value the assets acquired,
the liabilities assumed, and any non-controlling interest in the acquired entity
at the acquisition date, with limited exceptions.  The standard is
effective for fiscal years beginning on or after December 15, 2008, and is to be
applied prospectively, with no earlier adoption permitted.  The
adoption of this standard is not expected to have a material effect on our
financial statements.





In May
2008, the FASB issued SFAS No 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”).  In summary, SFAS 162 identifies
the sources of accounting principles and the framework for selecting the
principles to be used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with GAAP in the
United States.  This statement shall be effective 60 days following
the SEC’s approval of the Public Company Accounting Oversight Board’s amendments
to AU section 411, The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles.  We are currently evaluating the
impact of SFAS 162 on our financial statements, and the adoption of this
statement is not expected to have a material effect on our financial
statements.





Reclassification





Certain
previously reported amounts have been reclassified to conform to the current
period presentation.





3.
            Subsequent
      Event





In
October 2008, we repurchased and retired 95 units for approximately
$41,000.








Item 2.  Management’sDiscussion and Analysis of Financial
Condition and Results of Operations





The
following “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” should be read in conjunction with our financial
statements and notes thereto contained elsewhere in this
report.  Certain statements in this section and elsewhere contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995.  Such forward-looking statements may
relate to risks and other factors that may cause our future results of
operations to be materially different than those expressed or implied
herein.  Some of these risks and other factors include, but are not
limited to: (i) no assurance that our properties will continue to experience the
current level of occupancy; (ii) tenants may not be able to meet their financial
obligations; (iii) rental revenues from the properties may not be sufficient to
meet our cash requirements for operations, capital requirements and
distributions; and (iv) adverse changes to the general economy may disrupt
operations.  All forward-looking statements should be read in light of
the risks identified in Part II, Item 1A herein and in Part I, Item 1A of our
Annual Report on form 10-K for the year ended December 31, 2007.





Critical
Accounting Policies





Our
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”).  The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the financial statements and the reported amount of revenue and
expenses during the reporting period.  Actual results could differ
materially from those estimates.





There
have been no material changes to our critical accounting policies as previously
disclosed in our Annual Report on Form 10-K for the year ended December 31,
2007, as filed with the SEC.





Results
of Operations





The
current downturn in the economy may impact the success of our tenants’ retail
operations and therefore the amount of rent and expense reimbursements we
receive from our tenants.  Any reduction in our tenants’ ability to
pay base rent, percentage rent or other charges, will adversely affect our
financial condition and results of operations.  Further, our ability
to re-lease vacant spaces may be negatively impacted by the current economic
environment.  While we believe the locations of our centers and
diverse tenant base should decrease the negative impact of the economic
environment, we may see an increase in vacancy that could have a negative impact
to our revenue.  We continue to monitor our tenants’ operating
performance as well as trends evaluate any future impact.


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Continuing
operations for the three and nine months ended September 30, 2008 and 2007
consists of six multi-tenant industrial business park properties in three major
metropolitan areas.  The results of operations for the three and nine
months ended September 30, 2008 and 2007 are discussed below.





Three
months ended September 30, 2008 and 2007





Revenues
for the third quarter of 2008 decreased to approximately $1,006,000 from
approximately $1,022,000 for the comparable period of 2007.  The
decrease was due to higher vacancies offset by the renewal of existing tenants,
replacing tenants at a higher rental rate and an increase in tenant
reimbursements.





Property
operating and maintenance expenses for the third quarter of 2008 increased to
approximately $245,000 from approximately $238,000 for the comparable period of
2007.  The increase was due primarily to higher bad debt expenses
offset by a decrease in repairs and maintenance.  Property taxes for
the third quarter of 2008 decreased to approximately $130,000 from approximately
$152,000 for the comparable period of 2007.  The decrease was
primarily due to the favorable reassessment of property values.





General
and administrative expenses for the third quarter of 2008 decreased to
approximately $65,000 from approximately $97,000 for the comparable period of
2007.  The decrease was due primarily to non-recurring consulting fees
incurred in 2007.  Depreciation and amortization expenses in the third
quarter of 2008 are comparable to same period of 2007.





Interest
and other income for the third quarter of 2008 increased to approximately
$54,000 from approximately $45,000 for the comparable period of
2007.  The increase was due primarily to a property tax refund
received during third quarter of 2008 and offset by lower average cash balance
resulting in less short term investments combined with lower interest rate
during the third quarter of 2008.





Nine
months ended September 30, 2008 and 2007





Revenues
for the first nine months of 2008 decreased to approximately $3,060,000 from
approximately $2,990,000 for the comparable period of 2007.  The
increase was primarily due to the renewal of existing tenants, replacing tenants
at a higher rental rate and an increase in tenant reimbursements offset by lower
occupancy.





Property
operating and maintenance expenses increased to approximately $759,000 in the
first nine months of 2008 from approximately $644,000 in the first nine months
of 2007.  The increase is primarily due to higher snow removal and
tree pruning costs at one property due to the extreme winter season,
non-recurring professional fees and refurbishments to vacated units incurred in
2008 and an increase in the provision for bad debt.  Property taxes
decreased to approximately $419,000 in 2008 from approximately $443,000 in 2007
due primarily to the favorable reassessment of property values.





General
and administrative expenses decreased to approximately $218,000 in the first
nine months of 2008 from approximately $331,000 in the comparable period of
2007.  The decrease was due primarily to non-recurring consulting fees
incurred in 2007.  Depreciation and amortization in the first nine
months of 2008 are comparable to the same period of 2007.





Interest
and other income decreased to approximately $87,000 in the first nine months of
2008 from approximately $102,000 in the comparable period of
2007.  The decrease is due primarily to the lower average cash balance
resulting in less short term investments combined with lower interest rates
during the first nine months of 2008.





Liquidity
and Capital Resources





As of
October 31, 2008, we had approximately $2.0 million in cash and cash
equivalents.  We intend to use the existing cash balance for capital
improvements to the properties, to provide for operating reserves and fund
distributions.  Cash in excess of these needs will be available for
our unit repurchase program and for distribution to unit holders.





Our
management believes the cash on hand and the net cash generated by the
properties will be adequate to meet operating costs of the properties and the
company, and allow for cash distributions to our unit holders.




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Item 3.  Quantitative and Qualitative Disclosures about MarketRisk




We invest
our cash and cash equivalents in government backed securities and money market
accounts, which, by their nature, are subject to interest rate
fluctuations.  As of September 30, 2008, a 1% increase or decrease in
interest rates would not have material effect on our interest
income.





Item 4(T).   Controls and Procedures





Disclosure
Controls and Procedures





We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and that such information is accumulated and communicated
to our senior management, as appropriate, to allow timely decisions regarding
required disclosure.  The Chief Executive Officer and the Chief
Financial Officer at Cornerstone Ventures, Inc., the manager of our managing
member, have reviewed the effectiveness of our disclosure controls and
procedures and have concluded that the disclosure controls and procedures were
effective as of the end of the period covered by this report.  In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.





Our
management is responsible for establishing and maintaining internal control over
financial reporting, as such term is defined in Exchange Act Rules
13a-15(f).  Under the supervision and with the participation of our
management, including the Chief Executive Officer and Chief Financial Officer of
our managing member, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based on the framework in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies and procedures may deteriorate.





Based on
our evaluation as of the end of the period covered by this report, management
has concluded that we maintained effective internal control over financial
reporting as of September 30, 2008.





There
have been no changes in our internal control over financial reporting during our
most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.





PART
II - OTHER INFORMATION





Item
      1A.
            Risk
      Factors





The
following risk supplements the risks disclosed in our annual report on Form 10-K
for the fiscal year ended December 31, 2007.





Recent
disruptions in the financial markets and deteriorating economic conditions could
adversely affect the values of our investments and our ongoing results
operations.





Turmoil
in the capital markets has constrained equity and debt capital available for
investment in commercial real estate, resulting in fewer buyers seeking to
acquire commercial properties and consequent reductions in property
values.  Furthermore, the current state of the economy and the
implications of future potential weakening may negatively impact commercial real
estate fundamentals and result in lower occupancy, lower rental rates and
declining values in our current portfolio.  The current downturn may
impact our tenants’ business operations directly, reducing their ability to pay
base rent, percentage rent or other charges due to us.





The
occurrence of these events could have the following negative effects on
us:





·
            the
      values of our investments in commercial properties could decrease below
      the amounts we paid for the investments;
and





·
            revenues
      from our properties could decrease due to lower occupancy rates, reduced
      rental rates and potential increases in uncollectible
      receivables;





These
factors could impair our ability to make distributions to you and decrease the
value of your investment in us.


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 Table of Contents


Item
      6.
            Exhibits





31.1
            Certification of Chief Executive
      Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.





31.2
            Certification of Chief Financial
      Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.





32
            Certification of Chief Executive
      Officer and Chief Financial Officer Pursuant to 18 U.S.C. §1350, as
      Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.


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 Table of Contents


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this quarterly report to be signed on its
behalf by the undersigned, thereunto duly authorized this 7th day of November
2008.





CORNERSTONE
      REALTY FUND, LLCBy:
                      CORNERSTONE
      INDUSTRIAL PROPERTIES, LLCits
      Managing MemberBy:
                      CORNERSTONE
      VENTURES, INC.its
      ManagerBy:
                      /s/
      TERRY G. ROUSSELTerry
      G. Roussel, President(Principal
      Executive Officer)By:
                      /s/
      SHARON C. KAISERSharon
      C. Kaiser,Chief
      Financial Officer(Principal
      Financial Officer andPrincipal
      Accounting
Officer)





15