FORM 10-Q

                          SECURITIES AND EXCHANGE COMMISSION
                                WASHINGTON, D.C. 20549

(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities  Exchange
Act of 1934 For quarterly period ended September 30, 1996

[ ] 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 0-10421

                             CORNERSTONE PROPERTIES INC.
                (Exact name of registrant as specified in its charter)

                     Nevada                                       74-2170858
          (State or other jurisdiction                         (I.R.S. Employer
        of incorporation or organization)                    Identification No.)

                                 126 East 56th Street
                               New York, New York 10022
                       (Address of principal executive offices)

                                    (212) 605-7100
                 (Registrant's telephone number, including area code)

      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 [ ]


Number of shares of Common Stock outstanding as of November 14, 1996: 20,609,754

Total pages = 14
Exhibit Index located on page 11



<PAGE>
<TABLE>

                         PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements

                   CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                  (In Thousands)
<CAPTION>
                                                                         September 30,  December 31,
                                                                                 1996          1995
                                                                            ---------     ---------
                                                                          (Unaudited)
       ASSETS
<S>                                                                          <C>          <C>
Investments, at cost:
       Land ..............................................................   $  63,351    $  57,823
       Buildings and improvements ........................................     583,469      546,357
       Mortgage note receivable  (Note 1) ................................        --         30,731
       Deferred lease costs ..............................................      74,878       72,077
                                                                             ---------    ---------
                                                                               721,698      706,988
       Less: Accumulated depreciation and amortization ...................     193,421      175,167
                                                                             ---------    ---------
          Total investments ..............................................     528,277      531,821

Cash and cash equivalents ................................................      19,519        7,740
Restricted cash ..........................................................        --          4,393
Other deferred costs, net of accumulated amortization of $1,055 and $5,301       3,293        2,895
Deferred tenant receivables ..............................................      34,219       32,695
Tenant and other receivables .............................................       3,533        1,585
Notes receivable .........................................................       3,339        4,153
Other assets .............................................................       9,418          807
                                                                             ---------    ---------
Total Assets .............................................................   $ 601,598    $ 586,089
                                                                             =========    =========

       LIABILITIES AND SHAREHOLDERS' INVESTMENT

Long-term debt (Note 2) ..................................................   $ 400,405    $ 369,600
Accrued interest payable .................................................       2,101        4,327
Accrued real estate taxes payable ........................................      14,242       10,045
Accounts payable and accrued expenses ....................................       3,806        3,456
Unearned revenue and other liabilities ...................................       7,670       16,499
                                                                             ---------    ---------
Total Liabilities ........................................................     428,224      403,927
                                                                             ---------    ---------

Minority Interest ........................................................     (16,899)      (7,194)
                                                                             ---------    ---------

Commitments and Contingencies

Shareholders' Investment
Preferred Stock, $16.50 stated value, 15,000,000 shares authorized;
     3,030,303 shares issued and outstanding .............................      50,000       50,000
Common stock, 100,000,000 authorized shares ;
    shares issued and outstanding (1996-20,609,754; 1995-19,959,515)
Paid-in capital ..........................................................     174,710      181,477
Accumulated deficit ......................................................     (32,835)     (39,885)
Deferred compensation ....................................................      (1,602)      (2,236)
                                                                             ---------    ---------
Total Shareholders' Investment ...........................................     190,273      189,356
                                                                             ---------    ---------
Total Liabilities and Shareholders' Investment ...........................   $ 601,598    $ 586,089
                                                                             =========    =========
<FN>
The accompanying notes are an integral part of these consolidated financial statements
</FN>
</TABLE>
<PAGE>
<TABLE>
Item 1. Financial Statements (continued)

                      CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
                         CONSOLIDATED STATEMENTS OF OPERATIONS
            FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
                        (In Thousands, Except Per Share Amounts)
                                      (Unaudited)
<CAPTION>

                                             Three MonthsThree Months Nine Months Nine Months
                                                    Ended       Ended       Ended       Ended
                                             September 30September 30September 30September 30
                                                     1996         1995       1996        1995
                                                  -------     --------    --------    -------
<S>                                             <C>          <C>         <C>         <C>
REVENUES
       Office and parking rentals ............   $ 27,774    $ 22,132    $ 80,687    $ 64,211
       Interest and other income .............      1,227       1,135       4,076       2,707
                                                 --------    --------    --------    ---------
           Total Revenues ....................     29,001      23,267      84,763      66,918
                                                 --------    --------    --------    ---------

EXPENSES
       Building operating expenses ...........      6,092       4,431      17,540      13,631
       Real estate taxes .....................      4,870       2,943      14,186       8,565
       Interest expense ......................      7,845       6,717      23,715      22,033
       Depreciation and amortization .........      6,167       5,566      18,281      16,787
       Advisory fee ..........................       --          --          --         1,050
       Professional fees .....................        204         525         575         940
       General and administrative ............      1,416         901       3,913       1,461
       Directors' fees .......................         33          16         101          64
                                                 --------    --------    --------    ---------
           Total Expenses ....................     26,627      21,099      78,311      64,531
                                                 --------    --------    --------    ---------
                                                    2,374       2,168       6,452        2,387
                                                 --------    --------    --------    ---------
OTHER INCOME (EXPENSES)
       Net gain on interest rate swap (Note 3)        (64)       --         5,401        --
       Minority Interest .....................       (331)       (781)     (1,017)     (2,557)
                                                  --------    --------    --------    ---------
Income (loss) before extraordinary item ......      1,979       1,387      10,836        (170)

Extraordinary loss (Note 2) ..................     (3,786)       (646)     (3,786)     (4,527)
                                                  --------    --------    --------    ---------

NET INCOME (LOSS) ............................   $ (1,807)   $    741    $  7,050    $ (4,697)
                                                  ========    ========    ========    =========

NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM PER SHARE .................    $   0.05    $   0.06    $   0.40    $  (0.05)
                                                  ========    ========    ========    =========

NET INCOME (LOSS) PER SHARE .................. $    (0.13)    $   0.01    $   0.22    $  (0.36)
                                                  ========    ========    ========    =========
<FN>
The accompanying notes are an integral part of these consolidated financial statements
</FN>
</TABLE>
<PAGE>
<TABLE>
Item 1. Financial Statements (continued)

                   CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
                       CONSOLIDATED STATEMENTS OF CASH FLOWS
               FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
                                  (In Thousands)
                                    (Unaudited)
<CAPTION>

                                                                                             September 30,  September 30,
                                                                                                     1996           1995
                                                                                                 --------       --------
<S>                                                                                             <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
        Net income (loss) ...................................................................   $   7,050    $  (4,697)
        Adjustments to reconcile net income (loss) to net cash
           provided by operating activities:
              Depreciation and amortization .................................................      18,281       16,787
              Deferred compensation amortization ............................................         635          173
              Extraordinary loss ............................................................       3,786        4,527
              Unbilled rental revenue .......................................................      (1,482)      (1,177)
              Net gain on interest rate swap ................................................      (5,401)        --
              Minority interest share of income .............................................       1,017        2,557
              Decrease in accrued interest payable ..........................................      (2,226)      (5,979)
              Increase in tenant and other receivables and other assets .....................      (5,070)      (2,140)
              Increase (decrease) in accounts payable, accrued expenses,and other liabilities       3,831       (6,000)
              Write-off of deferred financing costs .........................................        --          1,355
                                                                                                ---------    ---------

              Total adjustments .............................................................      13,371       10,103
                                                                                                ---------    ---------

              Net cash provided by operating activities .....................................      20,421        5,406
                                                                                                ---------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
        Additions to investment property ....................................................      (6,128)        (626)
        Earnest deposits ....................................................................      (4,508)      (5,791)
        Deferred costs incurred on investments ..............................................        (406)        (344)
        Repayment of notes receivable from a related party ..................................         813          983
        Loan to a related party .............................................................        --           (247)
                                                                                                ---------    ---------

              Net cash used in investing activities .........................................     (10,229)      (6,025)
                                                                                                ---------    ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
        Borrowings under mortgage loan ......................................................     116,000      189,100
        Repayments under mortgage loan ......................................................     (98,121)        --
        Payments for swap termination .......................................................      (6,665)      (4,094)
        Dividend reinvestment proceeds ......................................................       4,016         --
        Debt issuance costs .................................................................        (832)        --
        Stock issuance costs ................................................................         (97)      (6,047)
        Decrease in restricted cash .........................................................       4,393        1,827
        Distribution to minority partners ...................................................      (1,422)      (2,579)
        Distributions to shareholders .......................................................     (15,685)      (9,004)
        Repayments under lines of credit ....................................................        --       (236,467)
        Proceeds from common stock offering .................................................        --         90,448
        Proceeds from preferred stock offering ..............................................        --         50,000
                                                                                                ---------    ---------

              Net cash provided by financing activities .....................................       1,587       73,184
                                                                                                ---------    ---------

INCREASE IN CASH AND CASH EQUIVALENTS .......................................................      11,779       72,565
CASH AND CASH EQUIVALENTS, beginning of period ..............................................       7,740       12,506
                                                                                                ---------    ---------
CASH AND CASH EQUIVALENTS, end of period ....................................................   $  19,519    $  85,071
                                                                                                =========    =========
<FN>
Supplemental cash flow information: (Note 4)

The accompanying notes are an integral part of these consolidated financial statements
</FN>
</TABLE>
<PAGE>
Item 1. Financial Statements (continued)

                     CORNERSTONE PROPERTIES INC. AND SUBSIDIARIES
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  SEPTEMBER 30, 1996


(1)   NATURE OF THE COMPANY'S BUSINESS
   AND SIGNIFICANT ACCOUNTING POLICIES

   Nature of the Company's Business: Cornerstone Properties Inc. (formerly known
as ARICO America Realestate Investment Company,  prior to September 18, 1995), a
Nevada corporation  (Cornerstone or the Company),  was formed on May 5, 1981, to
invest in major commercial real estate projects in North America.  The following
schedule   summarizes   the  Company's   interest,   through  its  wholly  owned
subsidiaries, in investments at September 30, 1996:

                                                       Net   Ownership
Property                 Location                  Rentable   Interest    Notes
                                                square feet
-------------------------------------------------------------------------------
One Norwest Center       Denver, Colorado         1,188,000     100%        A
Norwest Center           Minneapolis, Minnesota   1,118,000     50%
Washington Mutual Tower  Seattle, Washington      1,066,000     50%
125 Summer Street        Boston, Massachusetts      464,000     100%
Tower 56                 New York, NY               162,000     100%        B

   (A)Effective  January 1, 1996,  the Company,  through  1700  Lincoln  Inc., a
      wholly owned  subsidiary,  purchased the remaining 10 percent  interest in
      1700  Lincoln  Limited,  which  operates  One Norwest  Center,  from Hines
      Colorado Limited (HCL) for a $12,925,976  convertible  promissory note and
      349,650 newly-issued shares of common stock of the Company.

   (B)On April 24, 1996,  Cornerstone,  through  CStone-New York, Inc., a wholly
      owned  subsidiary,  converted  its mortgage note  receivable  (acquired on
      December 19, 1995) and  obtained  title to Tower 56 with the  intention of
      holding the property for investment purposes.

   General:  The  consolidated  financial  statements  included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the  Securities  and  Exchange  Commission.  Certain  information  and  footnote
disclosures  normally included in consolidated  financial statements prepared in
accordance  with  generally  accepted  accounting  principles  have been omitted
pursuant to such rules and  regulations,  although the Company believes that the
disclosures  are adequate to make the information  presented not misleading.  In
the opinion of management of the Company,  all  adjustments,  consisting only of
normal recurring  accruals,  necessary to summarize fairly the unaudited results
of operations for the three and nine month periods presented have been included.
Results  for the nine  months  ended  September  30,  1996  are not  necessarily
indicative of results which may be expected for any other interim  period or for
the year as a whole. It is suggested that these financial  statements be read in
conjunction with the audited financial  statements and notes thereto included in
the Company's latest annual report.

   Principles of Consolidation:  The accompanying  financial  statements include
the accounts of Cornerstone and its wholly owned qualified REIT subsidiaries and
controlled partnerships.  All significant intercompany balances and transactions
have been eliminated in consolidation.

   Interest Rate Swap  Agreement:  Cornerstone is a party to a forward  interest
rate swap agreement used to hedge its interest rate exposure.


Item 1. Financial Statements (continued)

   Income  (Loss) per Share:  Income  (Loss) per share is computed  based on the
weighted average number of common shares  outstanding of 20,344,270 for the nine
months ended  September 30, 1996 and  15,909,805 for the year ended December 31,
1995.  Dividends  applicable  to the  preferred  stock of  $2,625,000  have been
deducted  from the net income for the nine months  ended  September  30, 1996 in
computing earnings per share.

(2) LONG-TERM DEBT

          Property               Description             9/30/96
                                                    -------------
         One Norwest Center      Mortgage Loans      $97,927,000
                                 HCL Promissory Note  12,926,000
         Norwest Center          Mortgage Loan       110,000,000
         Washington Mutual Tower Mortgage Loan        79,100,000
         125 Summer Street       Mortgage Loan        50,000,000
         Tower 56                Mortgage Loan        17,952,000
         Corporate               Term Loan            32,500,000
                                                    =============
                          Total                     $400,405,000
                                                    =============


   Promissory  Note: The convertible  promissory note payable to HCL (Note 1) is
due on January 1, 2001 and pays interest only at LIBOR plus 50 basis points. The
note is convertible at the option of HCL into shares of common stock at $14.30 a
share after January 1, 1997. At maturity of the note,  Cornerstone has the right
to redeem the note in exchange for common  shares of the Company at the lower of
market price or $14.30 per share.

   Mortgage  Loans:  On August 2, 1996,  the Company  refinanced its $98 million
Interest-Bearing Notes, collateralized by One Norwest Center, by entering into a
$98 million  Deed of Trust and  Mortgage  Notes with  Massachusetts  Mutual Life
Insurance  Company,  Connecticut  General  Life  Insurance  Company and American
General Life  Insurance  Company.  The Mortgage Notes bear interest at a rate of
7.50 percent and mature on July 1, 2001.  Additionally,  the Company is required
to make payments of principal  based upon a thirty year  amortization  schedule.
Upon the closing of the mortgage debt,  Cornerstone paid a prepayment penalty of
approximately  $2,035,000  to  the  Interest-Bearing  Noteholders.   Unamortized
financing costs of $247,000 were written-off in connection with the refinancing.

Under the Interest Bearing Notes,  Cornerstone was obligated to pay to DBNY, for
an interest rate swap agreement used to fix the interest rates on the Notes,  an
amount equal to 0.752 percent on a notional  amount of  $107,000,000  throughout
the term of the Notes.  This  amount was  treated as a yield  adjustment  on the
long-term  debt and has been  included in interest  expense.  On August 2, 1996,
this swap was terminated at an approximate cost of $1,505,000.

As protection  against market interest rates rising prior to the maturity of the
Interest  Bearing  Notes,  on  September  29, 1993,  Cornerstone  entered into a
forward  interest rate swap  agreement  with Deutsche Bank AG. The interest rate
swap agreement was revised as part of the refinancing on the Notes. The interest
rate swap agreement is for a fixed rate of 7.14 percent on a notional  amount of
$92,800,000 for a period of five years starting July 1, 2001.

The Norwest Center loan matures December 31, 2005 and bears interest at the rate
of  8.74  percent  with  the  full  principal  due  at  maturity.  The  loan  is
collateralized  by a first  mortgage  on Norwest  Center and  assignment  of all
leases and rents.

The Washington  Mutual Tower loan matures  September 30, 2005 and bears interest
at the rate of 7.53 percent with the full principal due at maturity. The loan is
collateralized  by a first mortgage on Washington Mutual Tower and assignment of
all leases and rents.

The 125  Summer  Street  loan bears  interest  at the rate of 7.20  percent  and
matures on January 1, 2003.  Payment  terms on the loan call for  interest  only
payments for the first 5 years and a 25 year principal amortization  thereafter.
The  loan is  collateralized  by a  first  mortgage  on 125  Summer  Street  and
assignment of all leases and rents.

The  Tower 56 loan  bears  interest  at a rate of 7.674  percent  with a 30 year
principal amortization and matures on April 24, 2003. The loan is collateralized
by a first mortgage on Tower 56 and assignment of all leases and rents.

   Term Loan:  The term loan matures on December 31, 2003, and bears interest at
the rate of 5.00  percent.  The  loan  must be  prepaid  at par upon the sale of
either Norwest Center or Washington Mutual Tower.

(3)         NET GAIN ON INTEREST RATE SWAP

The Company does not trade in  derivative  instruments  but rather uses interest
rate swap  agreements to hedge the interest rate risk on its financings with the
intention of obtaining the lowest effective  interest cost on its  indebtedness.
An unrealized  gain of $7,672,000 and realized loss of $3,125,000  were recorded
as part of the Interest  Bearing Note swap revision (Note 2).  Additionally,  an
unrealized  gain of $854,000  was recorded  representing  the amount the Company
would receive if the  $92,800,000  notional  amount  forward  interest rate swap
agreement were  terminated  (Note 2). The Company has not  terminated  this swap
agreement and intends to structure its future  financings in accordance with the
policy stated above.  The future  unrealized  mark to market  adjustment on this
swap agreement will fluctuate with market interest rates.

(4)    SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest was  approximately  $25,941,000  and  $28,012,000 for the
nine months ended September 30, 1996 and 1995, respectively.  Non-cash investing
and  financing  activity:  Purchase of  minority  partnership  interest  through
issuance of $12,926,000 promissory note and 349,650 shares of common stock.

(5)    IMPACT OF NEW ACCOUNTING STANDARDS

During  1996,   Cornerstone  adopted  SFAS  #123,  "Accounting  for  Stock-Based
Compensation." The Company has elected to adopt the disclosure provisions of the
new  standard  which  require   proforma  net  income  and  earnings  per  share
disclosures.  Cornerstone  has yet to  determine  the impact on its proforma net
income and earnings per share.

(6) SUBSEQUENT EVENTS

On  November  8, 1996,  through a merger of  subsidiaries,  the  Company  issued
$66,500,000  of 8% Cumulative  Convertible  Preferred  Stock Series A to Hexalon
Real Estate,  Inc. in a transaction  exempt from registration under Section 4(2)
of the Securities Act of 1933. The result of the transaction is that the Company
acquired  $40,000,000  cash  and  the  Frick  Building  located  in  Pittsburgh,
Pennsylvania.  The Frick Building is a twenty story,  Class A landmark building,
containing  341,421 square feet of rentable area.  Hexalon,  a large real estate
investment trust, took the preferred shares (which are legended) for investment.
The  preferred  shares are  convertible  into the  Company's  Common  Stock at a
conversion price of $14.50 per share, subject to antidilution provisions.

Also on November 8, 1996, the Company  acquired One Lincoln  Centre,  located in
Oakbrook  Terrace,  Illinois for a purchase price of approximately  $49,950,000.
One Lincoln  Centre is a Class A,  sixteen  story office  building  with 297,330
square feet of  rentable  area and a 1,056  stall,  five level  parking  garage.
Cornerstone used the proceeds from the Preferred Stock placement discussed above
and general corporate funds to finance the purchase of One Lincoln Centre.


<PAGE>


Item 2

       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996


RESULTS OF OPERATIONS

   Consolidation:  Cornerstone's  principal  source of income is rental revenues
received  through its investment in three real estate  partnerships  and two fee
simple investments.  The Company's investments in the partnerships are accounted
for using the consolidation method of accounting.

   Building  Revenues and  Expenses:  For the three and nine month periods ended
September  30,  1996  compared to the same  periods in 1995,  Office and parking
rentals,  Building operating expenses and Real estate taxes increased  primarily
due to the purchase of 125 Summer Street and Tower 56 which were acquired in the
fourth  quarter  of 1995.  Minority  interest  decreased  as a result  of the 10
percent partnership interest purchase on January 1, 1996.

   Interest and Other Income:  Interest and other income  primarily  consists of
earnings from the Tower 56 mortgage note  receivable  (December 19, 1995 through
April  24,  1996),  advisory  and  management  fees  and  interest  earned  from
short-term investments.  The increase in interest and other income for the three
and nine month periods ended  September 30, 1996 as compared to the same periods
in 1995 is primarily  due to earnings on the mortgage note  receivable  and fees
from  advisory  and  management  services.  Also  included in interest and other
income is interest earned on notes  receivable from Hines Colorado Limited (HCL)
in the amount of $296,000 and $387,000 for the nine months ended  September  30,
1996 and 1995, respectively.

   Interest  Expense:  Interest expense incurred by Cornerstone  relating to its
financing activities increased in 1996 primarily due to the additional financing
incurred  related  to the  purchase  of 125 Summer  Street,  Tower 56 and the 10
percent partnership interest in 1700 Lincoln Limited.

   Administrative  Expenses:  Aggregate  administrative  expenses  for the  nine
months  ended  September  30,  1996  and 1995  were  $4,589,000  and  $3,515,000
respectively.  Aggregate  administrative  expenses  for the three  months  ended
September 30, 1996 and 1995 were  $1,653,000  and $1,442,000  respectively.  The
nine month increase is due to the change to self-administration on July 1, 1995;
however,  this increase in  administrative  expenses should be considered  along
with the 1996 advisory income from third party contracts of $915,000.

   Net gain on  interest  rate swap:  The Company  does not trade in  derivative
instruments  but rather uses interest rate swap agreements to hedge the interest
rate risk on its financings with the intention of obtaining the lowest effective
interest cost on its  indebtedness.  For 1996, a gain of $4,547,000 was recorded
as part of the One Norwest Center interest rate swap modification. Additionally,
for 1996, an unrealized  gain of $854,000 was recorded  representing  the amount
the Company would receive if the $92,800,000  notional  amount forward  interest
rate swap agreement were  terminated.  The Company has not terminated  this swap
agreement and intends to structure its future  financings in accordance with the
policy stated above.  The future  unrealized  mark to market  adjustment on this
swap agreement will fluctuate with market interest rates.

LIQUIDITY AND CAPITAL RESOURCES

   Capital Stock  Transactions:  On January 1, 1996,  the Company  purchased the
remaining 10 percent partnership interest in 1700 Lincoln Limited which operates
One Norwest  Center  from Hines  Colorado  Limited  (HCL).  In exchange  for its
interests,  HCL received a $12,925,976  convertible  promissory note and 349,650
newly-issued  shares of common stock of the Company. On August 30, 1996, through
a dividend reinvestment plan available to all shareholders, Cornerstone received
proceeds of approximately  $4,016,000 and issued an additional 300,589 shares of
common stock to shareholders.

   Funds From  Operations:  The Company  calculates  Funds from Operations (FFO)
based upon  guidance  from the National  Association  of Real Estate  Investment
Trusts.  FFO is  defined  as net  income,  excluding  gains or losses  from debt
restructuring and sales of property,  plus real estate  investment  depreciation
and amortization,  and after adjustments for unconsolidated joint ventures.  Due
to the nature of  Cornerstone's  leases,  a further  adjustment  to the standard
definition  of FFO is made to  reduce  FFO by the  amount  of free and  deferred
rental  revenue which has been  recognized in the financial  statements.  In the
opinion  of  management,  these  amounts  relate to  benefits  which will not be
realized,  in the form of increased  cash flow,  until future  periods and would
distort the FFO calculation.

   Industry  analysts  generally  consider FFO to be an  appropriate  measure of
performance of an equity Real Estate  Investment Trust such as Cornerstone.  FFO
does not represent cash generated from operating  activities in accordance  with
generally  accepted  accounting   principles  and,  therefore,   should  not  be
considered a substitute  for net income as a measure of  performance or for cash
flow from operations calculated in accordance with generally accepted accounting
principles as a measure of liquidity.

   The table below illustrates the adjustments which were made to the net income
(loss)  of  Cornerstone  in the  calculation  of FFO for the nine  months  ended
September 30, 1996 and 1995, respectively (in thousands):



                                                Funds From Operations

                                              Nine Months      Nine Months
                                                    Ended            Ended
                                             September 30,     September 30,
                                                     1996              1995
                                               ----------        ----------

              Net income (loss)                    $7,050           ($4,697)

              Plus:
                 Depreciation and amortization*    17,869            16,015
                 Amortization on rent notes           813               733
                 Extraordinary loss                 3,786             4,527
                 Real estate tax adjustment         2,107                -
              Less:
                 Net gain on swap termination      (5,401)               -
                 Free rent and deferred rents      (1,482)           (1,249)
                 Minority adjustments                (664)             (703)

              Funds From Operations               $24,078           $14,626
                                                  =======           =======

         *Depreciation  and  amortization has been adjusted for the amortization
          of  deferred  financing  costs and  depreciation  of  corporate  fixed
          assets.

   The increase in FFO is  primarily  attributable  to earnings  from 125 Summer
Street  and Tower 56 which were  acquired  in the  fourth  quarter  of 1995,  an
increased  share of  earnings  from One  Norwest  Center  due to the 10  percent
partnership  interest  purchase  on  January  1,  1996 and debt  refinancing  at
Washington Mutual Tower.

   Other Matters: The Company is not aware of any environmental issues at any of
its properties.  The Company does not believe  inflation will have a significant
effect on its results. The Company believes it has sufficient insurance coverage
at each of its properties.

   Shareholders'  Distributions:  Cornerstone  intends to distribute at least 95
percent of its taxable  income to maintain  its  qualification  as a Real Estate
Investment Trust.  Currently,  Cornerstone has no taxable income and anticipates
that FFO will exceed taxable income for the  foreseeable  future.  Cornerstone's
distribution  policy  is to pay  distributions  based  upon  FFO,  less  prudent
reserves.  Distributions of $0.60 per share were paid to common  shareholders on
August 30, 1996 (to  shareholders of record on June 30, 1996).  Distributions of
$3,500,000 were paid to preferred shareholders on August 30, 1996.

   Liquidity:  At September 30, 1996,  the Company had  $19,519,000  in cash and
cash  equivalents.   In  addition,   Cornerstone  anticipates  it  will  receive
distributions  from its real estate  partnerships and rental income from its fee
owned properties on a monthly basis which will be used to cover normal operating
expenses and pay distributions to its shareholders. Based upon its cash reserves
and other sources of funds,  Cornerstone  has  sufficient  liquidity to meet its
cash requirements for the foreseeable future.


<PAGE>



                             PART II - OTHER INFORMATION

Item 5.     OTHER INFORMATION

      See Note (6) to the Consolidated Financial Statements.

Item 6.     EXHIBITS AND REPORTS ON FORM 8-K

(a)   Exhibits:
         1) Exhibit 11.1: Statement of Computation of Earnings Per Share

         2) For EDGAR filing  purposes only,  this report  contains  Exhibit 27,
            Financial Data Schedule.

(b)   Reports on Form 8-K:

         None


<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 PROPERTIES INC.
                                (Registrant)


                                By: /s/ John S.Moody 
                                John S. Moody, President and CEO

                                Date:  November 14, 1996


                                By: /s/ Thomas P.Loftus 
                                Thomas P. Loftus, Vice President and Controller
                                (Principal Financial Officer)

                                Date:  November 14, 1996