SECURITIES AND EXCHANGE COMMISSION
                    WASHINGTON, DC  20549
 
 
                          FORM 10-K/A
 
 
X   ANNUAL  REPORT  PURSUANT TO SECTION 13 OR  15(d)  OF  THE
                SECURITIES EXCHANGE ACT OF 1934
 
             For the fiscal year ended December 31, 1996
 
                             OR
 
    TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
 
  For the transition period from _______ to __________
 
               Commission file number 0-22292
  ----------------------------------------------------------------------
 
                    CORNERSTONE IMAGING, INC.
     (Exact name of registrant as specified in its charter)
 
       Delaware                                   77-0104275
(State or other jurisdiction of              (I.R.S. Employer
 incorporation or organization)              Identification No)
 
       1710 Fortune Drive,   San Jose, CA             95131
     (Address of principal executive offices)        (Zip Code)
 
Registrant's telephone number, including area code (408) 435-8900
 
Securities registered pursuant to Section 12 (b) of the Act:
 
   Title of each class        Name of each exchange on which registered
           None                                  None
 
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
 
      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
                                       ------
 
                  [Cover page 1 of 2 pages]
 
      Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best  of registrant's  knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [__]
 
     The aggregate market value of voting stock held by non-affiliates
of the Registrant as of February 28, 1997, was to the best of the
Company's knowledge approximately $55,000,000 million (based upon the
February 28, 1997 closing price for shares of the Registrant's Common
Stock as reported  by the Nasdaq National Market).  Shares of Common
Stock held by each officer, director and holder of 5% or more of the
outstanding Common Stock have been excluded in that such persons may
be deemed to be affiliates.  This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
 
     On February 28, 1997, approximately 7,500,000 shares of the
Registrant's Common Stock, $0.01 par value, were outstanding.
 
 
             DOCUMENTS INCORPORATED BY REFERENCE
 
1.    Portions of the Registrant's Proxy Statement for the 1997 Annual
Meeting of Stockholders to be held on June 4, 1997 are incorporated by
reference into Part III.
 
                  [Cover page 2 of 2 pages]
 
 
 
                           PART I
 
This  Annual report on Form 10-K may contain forward-looking statements
that  involve  risks  and  uncertainties.    The Company's  actual
results may differ  materially  from  the results  discussed  in any such
forward-looking  statements. Factors that might cause such a difference
include, but  are not  limited  to,  those discussed below under  the
caption "Risk  Factors" as well as the following:  the emergence  of the
document image processing market, potential fluctuations in   quarterly
results,  competition,  new  products   and technological   change,
general  economic  conditions   and dependence on capital spending of
customers, a lengthy sales cycle  and dependence on system sales,
international sources of supply, limited sources of supply and reliance
upon third- party  manufacturers and distributors, and  dependence  upon
key personnel.
 
 
Item 1.        Business
 
            The   Company  develops,  markets  and  services hardware and
software products for document image processing (DIP)  display and
related applications.  In the  U.S.,  the Company  is a leading supplier
of DIP display subsystems,  a component  of  a  total  DIP display
system.   Cornerstone's ImageAccel  subsystems, the first generation  of
which  was introduced  in  1992,  consist of  controllers,  proprietary
software  and  large screen, high resolution  monitors.   In 1994, the
Company began providing DIP software toolkits.  In November 1995, the
Company began shipments of InputAccel,  a software  product  designed to
automate  the  conversion  of documents into electronic images.
 
           Document image processing, which is often used in conjunction
with  other  computer  applications,   enables multiple users to
electronically capture, file, and retrieve documents.   DIP  systems
allow users quick  access  to  the actual  document  images,  require
little  physical  storage space and reduce the risk of misfiling, theft
and accidental loss or destruction of documents.  DIP systems can store
any document image, including photographs, diagrams, letterhead,
handwriting, and other graphic formats.
 
           Substantially  all of the Company's  revenues  in recent
years have been attributable to sales of DIP display subsystems   based
on  its  ImageAccel   technology.   The ImageAccel  family of products
are board level  accelerators installed in personal computers and are
designed to  enhance user productivity by providing high document
legibility  and fast  image  display speeds.  These products, together
with existing  and planned software, are expected to account  for
substantially all of the Company's future revenues.
 
           On  an  average per employee or "per seat" basis, Cornerstone
believes labor costs of a DIP system user exceed DIP  system  costs,
thereby  making  user  productivity   a critical  DIP system purchasing
consideration. The Company's display  products increase user productivity
by  optimizing document display legibility and delivering sub second
image display speeds.
 
           ImageAccel products incorporate a proprietary "scale-to-gray"
image enhancement algorithm that significantly  improves the legibility
of  small  characters typically  found  in  business  documents.
ImageAccel   is currently  supported  by  over  60  independent
application software developers, establishing its application programming
interface as a de facto DIP standard.
 
           Software  tools  allow integrators  and  software developers
to save both time and money by offering  stable, supported   libraries
of  software  code  to   drive    DIP peripherals  rather  than having to
develop  such  software themselves.   Most of these tools are based on
Cornerstone's ISIS (Image & Scanner Interface Specification),  an
industry standard interface for scanners.
 
           ISIS  provides a key component of InputAccel,  an open,
high-throughput, standard integration platform and set of   software
modules  that  automate  the  conversion  and indexing  of  paper
documents  into  electronically  stored images.   InputAccel's
integration platform with ISIS  is  a foundation  linking various
technologies into an upgradeable system   that  provides  system
management,  control,   and reporting  functions. The integration
platform  is  an  open platform  that  can incorporate/utilize input
software  from Cornerstone   as  well  as  products  from  third
parties, including  application vendors, scanner  manufacturers,  and
other providers.
 
           The Company's products are used by a diverse  set of
customers  in  a  wide  variety  of  document   imaging applications,
such as insurance claim processing, credit and loan  application
processing and the storage  of  personnel records and technical manuals.
Most often, DIP systems  are used  by  large,  service-oriented companies
and  government agencies   for  which  document  management  or
transaction processing is critical. Cornerstone distributes its products
primarily through   distributors,   systems integrators, and OEMs.  A
significant portion of the Company's sales are made through systems
integrators and distributors and the Company relies  on  certain  key
domestic and  Asian  suppliers  for important  components.  There can be
no assurance  that  the loss  of  a  major  system integrator,
distributor,  or  key supplier,  or a change in exchange rates  would not
have  a material adverse effect on the Company's business or results of
operations   over  the  short  term,  thereby   causing fluctuations in
its quarterly results.
 
 
Technology and Products
 
           Cornerstone offers a range of color and grayscale display
subsystems and controllers designed  primarily  for visually  demanding
applications  such  as  document  image processing.    A   Cornerstone
subsystem  consists   of   a controller,  proprietary software and a
large  screen,  high resolution   monitor.    All   subsystems   are
based   on Cornerstone's ImageAccel architecture and offer:
 
     -  High resolution (up to 3,000,000 displayable pixels)
     -  Image enhancement using scale-to-gray
     -  Document image decompression
     -  Acceleration  for Microsoft Windows  and  IBM  OS/2
        Presentation Manager operating environments
     -  Driver software that optimizes performance
     -  High screen refresh rates that minimize flicker
     -  Full page or larger monitors
 
           The  Company believes that for DIP system  users, document
legibility and image display  speed  are  two  key components   of
productivity.   The  Company's   technology strategy  for its display
products is focused on  maximizing legibility   and   image  display
speed,  while   providing graphics  functionality found on general
purpose  products. The Company is currently delivering its fourth
generation of document  image  display controllers, with  each
generation providing improved legibility, speed and functionality.  The
Company's  product designs address two sets of functionality necessary
for document image processing display subsystems: Display  and general
purpose graphics functions and document image processing functions
 
           The ImageAccel integrated circuit, introduced  in 1992,  has
powered the entire family of Cornerstone display controllers,   providing
a  common   software   interface, functionality,  and  scale-to-gray
image enhancement  across the  entire  product  line.  ImageAccel 2.0,
introduced  in February 1995, integrated display and DIP functionality
and includes the following capabilities:
 
      -  Scale-to-gray engine with image decompression  and
         rotation functions
 
      -  A high speed BitBLT (bit block transfer)  engine
         optimized for Windows and OS/2 Presentation Manager
 
     -  Integrated PCI, ISA and MCA host bus interface
 
     -   Clear  color  image  rendering  hardware  for  the
         accurate display of 24 bit photo-realistic images using
         8 bit display hardware.
 
         ImageAccel 3.0,  was introduced in November 1996, and added the
following capabilities:
 
          - Support for JBIG, an image compression algorithm
            enabling smaller file sizes
          - A Netscape plug-in viewing of scanned documents
            on the internet
          - Smart Image, to intelligently adjust brightness
            and contrast.
 
          Display products for document image processing and other
visually demanding environments must have significant software content
due to:
 
          - Demand for high performance in  increasingly
            complex graphical user interface environments
          - Requirement  for very high speed decompression
            and scaling of document images
          - Requirement to enhance scanned images
 
           Document  imaging application software  typically runs on
users' personal computers under Microsoft Windows or OS/2.  The Company
works closely with Microsoft and IBM   in order  to most effectively
exploit the capabilities of their respective graphical user interfaces.
 
          Cornerstone has been shipping grayscale subsystems since  1987
and color subsystems since 1992.  Color products presently  represent  a
significant  majority  of   display revenues  and  are  expected to
continue to  increase  as  a percentage of total display revenues.
 
 
Market Applications
 
           The Company's products are used by a diverse  set of
customers  in  a wide variety of document  imaging   and related
applications.   In  an  increasingly   competitive business  environment,
many organizations  are  turning  to document  image  processing as a
means of improving  quality and  productivity.   Most often, DIP  systems
are  used  by large,  service-oriented companies and  government
agencies for  which  management  is critical.  The  leading  industry
segments  for  DIP  systems are financial and  non-financial services,
manufacturing, health care, and government.   DIP systems  enable  users
to manage the flow of documents  more efficiently  and to provide
improved service through  faster and more accurate retrieval of documents
by multiple users.
 
 
Sales and Marketing
 
           The  Company's  sales  and  marketing  activities include
participation in industry trade shows and  seminars and  advertising in
major trade publications.  Through these and   other   activities,  the
Company  generates   display subsystem  sales leads for its distributors
and  resellers. The  Company  delivers  its display products  to  end
users primarily through arrangements with  distributors and system
integrators.  Software  tools  are  typically  sold  to  DIP software
and  hardware suppliers.  InputAccel  software  is typically  sold
through system integrators and  value  added resellers.
 
 
          Distributors
 
          In the United States, the Company sells a majority of  its
display products through distributors  of  computer products,   which  in
turn  resell  them  to  value   added resellers, system integrators and
end users.  During   1996, one  U.S.  distributor represented in excess
of 10%  of  the Company's net sales.  The Company believes that in the
event of the loss of one of its major distributors, over time, the
distributor could be replaced by other distributors and such loss would
not have a long term effect on the Company.   The Company   has
international  distributors  in   all   major countries in Europe, Asia,
and Latin America.
 
 
          Systems Integrators and Value-Added Resellers
 
           The  Company's subsystems are used in  connection with  a
complex DIP system that includes important elements supplied by other
vendors.  As a result, purchasers  of  DIP systems,  as  well as
InputAccel, typically rely  on  system integrators  to oversee the
acquisition and installation  of key  hardware  and software components
of  the  overall  DIP system.  Accordingly, a significant portion of the
Company's display subsystem and InputAccel sales to end users are made
through system integrators and value-added resellers.
 
 
          OEMs
 
              Software tools  are sold or licensed  to  such hardware and
software suppliers as Fujitsu, Kodak, Caere and Lotus.
 
            In 1996, international sales represented approximately 29% of
the Company's revenues and the  Company expects  that international sales
will continue  to  account for  a  significant portion of its revenues in
future.   The Company intends to continue to expand its operations
outside of  the  United  States  and enter additional  international
markets, which will require significant management attention and
financial resources.  International sales are subject to inherent  risks,
including unexpected changes in  regulatory requirements,   tariffs  and
other  barriers,   fluctuating exchange   rates,  difficulties  in
staffing  and  managing foreign operations and the possibility of greater
difficulty in accounts receivable collection.  To date, the Company has
avoided  the  risk of fluctuating exchange rates  associated with
international sales by generally selling its  products in  United  States
currency, but there can be  no  assurance that  the Company will be able
to continue to do so  in  the future.   There  can  be no assurance that
these  or  other factors  will  not  have a material adverse  effect  on
the Company's  future international sales and, consequently,  on the
Company's  business, operating  results  and  financial condition.   The
Company  currently  purchases  the   color display  monitors  it
incorporates into  its  color  display subsystems  from  a  Japanese
manufacturer.  Although   the Company's  importation  of such monitors
is  not  currently affected by tariffs on Japanese electronic goods,
there  can be  no assurance that trading policies adopted by the United
States  or  Japan  will  not decrease  the  availability  of products
imported from Japan such as the monitors purchased by  the Company, and
as a result increase the Company's cost of  obtaining such monitors.  In
addition, there can  be  no assurance  that  such trading policies  will
not  adversely impact   the  Company's  ability  to  market  its
products internationally.  In purchasing components and monitors from
international sources, the Company is susceptible to foreign currency
fluctuations, which could materially increase  its cost  of acquiring
such components and monitors and  have  a material adverse effect on the
Company's business, operating results, and financial condition.
 
 
Research and Development
 
           The  Company believes that its future success  in the  DIP
market will depend in large part on its ability  to enhance  its  current
product line, develop  new  products, maintain   technological
competitiveness  and  satisfy   an evolving  range  of  customer
requirements.   The  Company's research  and development group is
responsible for exploring new   directions  and  applications  of  core
technologies, incorporating new technologies into products and
maintaining strong  research  relationships outside  the  Company.   The
Company  seeks to leverage its direct investment in research and
development  by  supporting  efforts  by   independent software   and
hardware  vendors   to   develop   products complementary  to its
products.   During   1996,  1995  1994 research  and  development
expenses were $9.6 million,  $7.8 million  and $5.3 million,
respectively. As of December  31, 1996, the Company's research and
development group consisted of  73, 68 and 53 full-time employees,
respectively with the majority  in software development .  The Company
intends  to continue  to  make substantial investments  in  product  and
technology  research  and development  and  to  continue  to participate
actively in the development of industry standards.
 
 
Patents and Other Proprietary Rights
 
           The  Company does not currently have any  patents and  relies
on a combination of trade secret, copyright, and trademark   laws,
nondisclosure  and   other   contractual agreements and technical
measures to protect its proprietary rights in its products.  There  can
be no assurance that  it will  develop proprietary products or
technologies that  are patentable, that any issued patent will provide it
with  any competitive  advantages or will not be challenged  by  third
parties,  or  that the patents of others will  not  have  an adverse
effect  on the Company's ability  to  do  business. Furthermore, there
can be no assurance that others will  not independently   develop
similar  products,  duplicate   the Company's products or, if patents are
issued to the Company, design around the patents issued to the Company.
There  can be  no  assurance that the steps taken by the  Company  will
prevent   misappropriation  of  its  technology,  and   such protections
may  not preclude competitors  from  developing products  with  features
similar to the Company's  products. In addition, effective copyright and
trade secret protection may  be unavailable or limited in certain foreign
countries. The Company believes that its products and trademarks do not
infringe  upon  the  proprietary rights  of  third  parties. There can be
no assurance, however, that third parties  will not  assert infringement
claims against the Company  in  the future  or that such claims will not
require the Company  to enter   into  royalty  arrangements  or  result
in   costly litigation.   Because the DIP industry is  characterized  by
rapid  technological  change,  the  Company  believes   that factors such
as the technological and creative skills of its personnel,   new  product
developments,  frequent   product enhancements,   name   recognition
and   reliable   product maintenance   are   more  important  to
establishing   and maintaining  a  technology  leadership  position  than
the various legal protections of its technology.
 
 
Service and Technical Support
 
           An important element in the Company's strategy is to   provide
comprehensive  service  and  support  of   its products.   The  Company
believes that responsive  technical support   and   customer  service
are  essential   customer requirements and provides extensive support for
its products by  telephone,  fax  and electronic  bulletin  boards.   The
Company  provides  resellers and distributors  with  product support
and  training  programs.   The  Company's  display products  have  a
limited warranty of three to  five  years. For  an  additional  charge,
the Company offers enhanced service programs.   The Company has not
experienced any significant maintenance problems or unusual
warranty expenses to date.
 
 
Manufacturing and Suppliers
 
           All  manufacturing and assembly and  some product shipping
operations are performed for Cornerstone by  third parties.   Monitors
are received and shipped by the  Company as  complete  assemblies.
Controllers  are  assembled  and tested  by  third parties that
specialize in the manufacture of  printed circuit board assemblies.  The
Company currently sources  all major components directly and consigns
them  to its assembly subcontractors.  The Company currently has sole
source suppliers for its color and grayscale  monitors  and some
important  components used in its products,  including integrated
circuits.  Business  disruptions  or   financial difficulties  of  a
sole-source  supplier  could  adversely affect  the Company by increasing
the cost of goods sold  or reducing  the  availability of such monitors
or  components. To  date,  the  Company has generally been  able  to
obtain adequate supplies of these components and monitors, however, the
Company has had difficulty in obtaining components from certain sole
sourced suppliers.  To address this issue,  the Company  has, in the
past, entered into significant purchase commitments, agreed to
accelerated or prepaid payment terms, purchased and consigned suppliers'
inventory, and  may  take similar or additional actions in the future.
If the Company were  unable  to  obtain  a sufficient  supply  of
required monitors  and  components, it could  experience  significant
delays  in  manufacturing its products,  resulting  in  lost orders  or
customers.  While controllers and  monitors  are sold  separately,
customers generally require both for their display subsystem.  As a
result, lack of availability of the controller  or monitor could
adversely affect  the  sale  of both.   Although the Company has
attempted to mitigate these risks  by  identifying alternative sources of
monitors  and components,  there  can  be  no  assurance  that
continuing difficulties with certain suppliers or a change in suppliers
would not result in significant delays in obtaining adequate supplies of
monitors and components or adversely affect  the quality  of such supply
and as a consequence have a material adverse  effect on the Company's
business, operating results or financial condition.
 
 
Competition
 
           The  document image processing market  is  highly competitive.
The Company believes the principal competitive factors   in   the
display  subsystem  market   are   image legibility,  image  display
speed,  reliability,   quality, customer service and support, support of
industry standards, reputation and price.  In addition, support of the
company's integration  platform  by independent software  vendors  and
ease of product implementation will be important competitive factors  for
InputAccel, the Company's data capture product. The  Company  believes
that it currently competes  favorably with respect to these factors.
 
           The Company has a number of current and potential competitors,
many of which have significantly greater financial, technical, marketing
and other resources than does the Company.   The Company expects
additional competition from other established and emerging companies if
the  DIP  market continues to develop and expand.  Increased competition
could  result in additional  price  reductions, reduced  margins  and
loss  of market  share,  which  could materially adversely affect the
Company.  There  can  be  no assurance   that  the  Company  will  be
able  to   compete successfully against current and future competitors or
that competitive  pressures faced by the Company will not materially
adversely affect its business, operating  results and financial condition.
 
 
Employees
 
           As of December 31, 1996, the Company had 243 employees.  The
Company employs 35 people  in  finance  and administrative functions, 104
in marketing and sales, 31  in operations  and  73 in engineering and
product  development. In addition,  the Company hires temporary employees
on an as needed  basis to meet production requirements.  None of  the
employees is represented by a labor union or is subject to a collective
bargaining agreement.  The Company believes  that its employee relations
are good.
 
 
Executive Officers
 
The executive officers of the Company are as follows:
 
Name                      Age     Position
--------------           -----  ------------------------------------------
Thomas T. van Overbeek     47   President, Chief Executive Officer and Director
John Finegan               47   Chief Financial Officer and Secretary
Kenneth E. Westrick        39   Sr. Vice President & GM, Display Division
Kimra Hawley               40   Sr. Vice  President & GM, Software Division
George Yule, Jr.           57   Vice President, Operations
Johannes Schmidt           33   Chief Technical Officer
James Mannos               52   Vice President, Engineering
Robert Hooven              43   Vice  President,  Worldwide Sales
 
           Thomas T. van Overbeek joined Cornerstone as President in
1988.  Mr. van Overbeek was also elected to the Board  of Directors in
1988.  He was elected Chief Executive Officer in July 1990.  Prior to
joining Cornerstone, Mr. van Overbeek held various positions from March
1984 to May  1988 at   Western  Digital  Corporation-Paradise  Systems,
most recently as President of Paradise Systems.  Paradise Systems is a
manufacturer of video products for personal computers.
 
           John Finegan joined the Company in July 1989 and was elected
Vice President of Finance and Administration in July 1990.  Mr. Finegan
was elected Secretary in June 1993.  From September 1988 until joining
Cornerstone, Mr. Finegan was a self-employed financial consultant.  From
March 1984 to September 1988, he was Vice President of Finance at Faraday
Electronics-Western Digital.  Western Digital manufactures peripheral
products for  personal computers.   Mr. Finegan holds a B.S. in
Engineering from Tufts University and  a M.B.A. from the University of
Massachusetts.
 
           Kenneth  E. Westrick joined the Company in  April 1988  as
Director of Sales, a position he held until January 1990.    In  February
1990  Mr.  Westrick  became  Managing Director of Cornerstone's European
operations.  Mr. Westrick was elected Vice President of Worldwide Sales
in April 1993. In  March of 1995, he became General Manager of the
Display Division  and  in  November 1996 was appointed  Senior  Vice
President and General Manager for the Display Division.   He received
his B.A. in Economics from Northwestern University and his M.B.A. from
Stanford University.
 
           Kimra Hawley joined Cornerstone in February  1992 as  the
Product Marketing Manager and was promoted to  Vice President of Input
Subsystems and Software Tools in November 1994   and  in  November  1996
was  appointed  Senior  Vice President  and  General Manager for the
Software  Division. From  1989  to 1992, Ms. Hawley-Foster was a
principal  with MarketBound Associates, a marketing consulting firm and
from 1983  to  1989  a  Product  Marketing  Manager  with  Amdahl
Corporation.    Ms.  Hawley-Foster  received   a   B.S.   in Psychology
from Pittsburgh State University.
 
           George  Yule, Jr. joined Cornerstone in  February 1993  and
was elected Vice President of Operations in  April 1993.  From February
1989 to October 1992 he was employed at Logitech, Inc., a manufacturer of
computer mice and handheld scanners,  in  various  capacities, most
recently  as  Vice President  of  Operations.  For  the  four  years
prior  to joining   Logitech,  he  was  a  Senior  Commodity   Manager
responsible  for procurement at Sun Microsystems,  Inc.,  an engineering
workstation manufacturer.   Mr.  Yule  holds  a B.S.E.E.  from Worcester
Polytechnic Institute and a  M.B.A. from Stanford University.
 
           Johannes Schmidt joined Cornerstone in June  1994 when  the
company  he  founded,  Pixel  Translations,   was acquired  by
Cornerstone.  In 1995, Mr. Schmidt assumed  the role  of  Vice  President
of Software  Development  and  in November  1996 was appointed Chief
Technical  Officer.   Mr. Schmidt  founded Pixel Translations in 1990
and  served  as President and CEO.  From 1986 to 1990, Mr. Schmidt served
as Manager  of  Applications Development at Calera Recognition, Inc.,  an
OCR  company.   Mr.  Schmidt  holds  a  B.S.   in Engineering   and
Applied  Science  from   the   California Institute of Technology.
 
          James Mannos  joined the Company in November  1995 as  Vice
President of Engineering.  Prior  to  joining  the Company,  Mr.  Mannos
was Vice President of Engineering  for Abekas  Video  Systems, a
manufacturer of  high-end  digital video   processing  equipment,  and
Vice  President/General Manager of the Microsystems Group for Sony
Corporation.  Mr. Mannos  holds a B.S. and M.S. in Electrical Engineering
and Computer  Science from Massachusetts Institute of Technology and  a
Ph.D. from University of California at Berkeley.  Mr. Mannos  also
earned  NASA  and Massachusetts  Institute  of Technology endowed
fellowships.
 
           Robert Hooven joined the Company in 1989 as Sales Director
for the Eastern Region, a position he  held  until 1992.  In April 1992,
Mr. Hooven became Managing Director of Cornerstone's European operations.
Mr. Hooven  was  elected Vice  President of Sales in December 1995.  Mr.
Hooven holds a B.S. in Business from Norwich University.
 
 
Risk Factors
 
           Substantially all of the Company's  revenues  and net  income
in recent years have been attributable to  sales of  DIP display and
software products and these products are currently expected to account
for substantially all  of  the Company's  future revenues and net income.
Although  demand for DIP systems (including the Company's products) has
grown in  recent years, the DIP market is still a relatively small and
emerging market and there can be no assurance that  the market  for  DIP
systems will continue to grow  or  grow  at historical rates.  If the DIP
market fails to grow or  grows more  slowly  than  the Company currently
anticipates,  its business, operating results and financial condition
would be materially and adversely affected.
 
           The Company's quarterly operating results have in the  past
and may in the future vary significantly depending on  factors  such as
seasonality, the timing of new  product introductions, product mix,
changes in pricing  policies  by the Company, its competitors or
suppliers, market acceptance of  new and enhanced versions of the
Company's products, the timing  of  significant  orders and  relatively
long  sales cycles.  In addition, a substantial portion of the Company's
revenues  in  each  quarter results from orders  booked  and shipped in
that quarter.  The Company's expenses are  based, in  part, on its
expected future revenues.  As a result,  if revenue levels are below
expectations, operating results are likely  to  be  adversely affected
and  net  income  may  be disproportionately affected because only a
small portion  of the  Company's expenses vary with its revenues.   In
recent periods,    the   Company   has   experienced    significant
seasonality.  Revenues and net income have been stronger  in the  fourth
quarter and weaker in the  first  quarter.   In 1996,  31% of the
Company's revenues were recognized in  the Company's  quarter  ending
December  31,  1996,  and  first quarter  1996 revenues  were lower than
fourth quarter  1995 revenues.   The  Company expects this trend to
continue  in 1997.   The  Company had been profitable in recent quarters,
but had losses of $ 2.5 million and $387,000 in the quarters ended  March
31, 1996 and June 30, 1996 and  for  the  year ended   December  31,
1996.   Although  the   company   was profitable in the third  and fourth
quarters of 1996,  there can be no assurance that the Company's revenues
will achieve historical  revenue growth in future periods,  or  that  the
Company  will  remain  profitable on a  quarterly  basis  or regain
profitability.  As a result,  the  Company  believes that
period-to-period  comparisons  of  its   results   of operations are not
necessarily meaningful and should not  be relied on as indications of
future performance.  Due to  all of  the  forgoing factors, it is likely
that in some  future quarters,  the  Company's operating results  will
be  below expectations  of public market analysts and investors.    In
such an event, the price of the Company's stock would likely be
materially adversely affected.
 
             In  addition,  a  significant  portion  of  the Company's
sales  are made thorough systems integrators  and distributors and the
Company relies on certain key suppliers for  important  components.
There can be no assurance  that the  loss of a major system integrator,
distributor, or  key supplier  would not have a material adverse  effect
on  the Company's  business or results of operations over the  short
term, thereby causing fluctuations in its quarterly results.
 
            The  DIP  industry  is  characterized  by  rapid
technological   change,  including   emergence   of   faster
microprocessors,  frequent  new product  introductions,  and evolving
industry standards.  The introduction of  products embodying  new
technology and the emergence of new  industry standards  can  create
downward price  pressure  and  render existing  products obsolete and
unmarketable.  The Company's future  success  will depend on its ability
to  address  the increasingly   sophisticated  needs  of  its  customers
by enhancing  its  current  products  and  by  developing   and
introducing  on a timely basis new products that  keep  pace with
technological  developments  and  emerging   industry standards.  There
can be no assurance that the Company  will be   successful   in
developing  and   marketing   product enhancements   or   new  products
that   respond   to   the technological  change or evolving industry
standards,  that the  company  will  not experience difficulties  that
could delay  or  prevent the successful development, introduction, and
sale  of  these products, or that its new products  and product
enhancements will adequately meet the  requirements of  the  marketplace
and achieve market acceptance.  If  the Company is unable, for
technological or any other reason, to develop,  introduce,  and  sell its
products  in  a  timely manner,  the  Company's  business,  operating
results,  and financial   condition  will  be  materially  and
adversely affected.
 
          The Company's future success is directly dependent upon  the
capital  expenditure  budgets  of  the  Company's customers and the
continued demand by such customers for DIP systems.  Certain industries
to which the Company sells  its products,  such  as  the  financial
services  industry,  are highly  cyclical.   In addition, many domestic
and  foreign governmental agencies have experienced budget deficits  that
have also led to significant reductions in capital expenditures in
certain areas.  The Company's operations may in  the  future  be  subject
to substantial period-to-period fluctuations  as  a  consequence of such
industry  patterns, domestic  and foreign economic conditions and other
factors affecting capital spending.  There can be no assurance  that such
factors will not have a material adverse affect on  the Company's
business, operating results and financial condition.
 
            Sales  of  the  Company's  products  depend,  in significant
part,  upon  the  decision  of  a  prospective customer  to purchase a
DIP system, which includes  products supplied  by vendors other than the
Company.  As  a  result, sales of the Company's products are subject to a
variety  of factors  outside  of  the Company's control,  including  the
pricing  decisions of other DIP subsystem  vendors  and  the availability
and  suitability of other  DIP  products.   In addition,  the  decision
to purchase a DIP system  generally involves  a  significant commitment
of  capital,  with  the attendant  delays  frequently  associated  with
significant capital  expenditures.   For these and  other  reasons,  the
sales  cycle  associated with the purchase of a DIP  system, and
consequently  purchases  of  the  Company's  products, typically  is
lengthy and subject to a number of significant risks over which the
Company has little or no control.
 
            In   1996,   international   sales   represented
approximately 29% of the Company's revenues and the  Company expects
that international sales will continue  to  account for a significant
portion of its revenues in future periods. The  Company  intends to
continue to expand  its  operations outside   of   the   United  States
and  enter   additional international   markets,  which  will  require
significant management attention and financial resources.  International
sales  are  subject to inherent risks, including  unexpected changes  in
regulatory  requirements,  tariffs  and   other barriers,   fluctuating
exchange  rates,  difficulties   in staffing and managing foreign
operations and the possibility of greater difficulty in accounts
receivable collection.  To date,  the  Company  has  avoided the  risk
of  fluctuating exchange  rates  associated  with  international  sales
by generally  selling its products in United  States  currency, but
there can be no assurance that the Company will be able to  continue  to
do  so in the future.   There  can  be  no assurance  that  these  or
other factors  will  not  have  a material   adverse   effect   on   the
Company's future international  sales  and, consequently,  on  the
Company's business,  operating results and financial  condition.   The
Company  currently purchases the color display  monitors  it incorporates
into  its  color  display  subsystems  from  a Japanese manufacturer.
Although the Company's importation of such  monitors  is  not  currently
affected  by  tariffs  on Japanese  electronic goods, there can be no
assurance  that trading policies adopted by the United States or Japan
will not  decrease  the  availability of products  imported  from Japan
such as the monitors purchased by the Company, and  as a  result
increase  the Company's cost  of  obtaining  such monitors.  In addition,
there can be no assurance that  such trading  policies  will not
adversely impact  the  Company's ability   to   market  its  products
internationally.    In purchasing   components  and  monitors  from
international resources,  the  Company is susceptible to foreign
currency fluctuations, which could materially increase  its  cost  of
acquiring  such components and monitors and have a  material adverse
effect on the Company's business, operating results, and financial
condition.
 
           The  Company currently has sole sources for  some important
components  used  in  its  products,   including integrated  circuits.
The Company also currently  has  sole sources  for  the  video monitors
used  in  its  subsystems. Business  disruptions or financial
difficulties of  a  sole- source  supplier  could  adversely  affect  the
Company  by increasing   the  cost  of  goods  sold  or   reducing   the
availability of such components.  To date, the  Company  has been  able
to obtain adequate supplies of these  components and  monitors,  however,
the Company has had  difficulty  in obtaining  components from certain
sole  sourced  suppliers. To address this issue, the Company has, in the
past, prepaid for   products  and  has  purchased  and  consigned
certain suppliers  necessary  inventory, and the  Company  may  take
similar or additional actions in the future.  If the Company were  unable
to obtain a sufficient supply of required components and  monitors,  the
Company  could  experience significant  delays  in manufacturing  its
products,  which could result in lost orders or customers.  While
controllers and   monitors  are  sold  separately,  customers  generally
require both for their DIP subsystem.  As a result, lack  of availability
of  the controller or monitor could  adversely affect  the  sale  of
both.    Although  the  Company   has attempted to mitigate these risks
by identifying alternative sources  of sole-sourced components and
monitors, there  can be  no  assurance that continuing difficulties with
certain suppliers  or  a  change in suppliers would  not  result  in
significant   delays  in  obtaining  adequate  supplies   of components
and monitors or adversely affect the quality  of such  supply  and  as a
consequence have a material  adverse effect  on  the  Company's business,
operating  results  or financial condition.
 
            The   Company's   future  success   depends   in significant
part  upon the continued  service  of  its  key technical and senior
management personnel, none of whom  are bound  by  an  employment
agreement.  The  Company's  future success  also depends on its
continuing ability  to  attract and   retain   highly  qualified
technical  and  managerial personnel.   Competition for such personnel is
intense and there can be no assurance that the Company will retain
its key managerial and technical employees or that it will be
successful  in  attracting, assimilating or retaining  other highly
qualified technical and managerial personnel in  the future.
 
 
Item 2.        Properties
 
           The  Company's  principal administrative,  sales, marketing
and research and development facility is  located in  a  building  with
approximately 86,000  square  feet  of available  space in San Jose,
California.  This facility  is leased   through   1998.   All  Company
functions,   except warehousing   of   finished  product   and   certain
sales activities,  are  headquartered at its San Jose  facilities.
Finished  products are shipped from its warehousing facility and  from
contract  warehouse facilities  in  Kansas  City, Missouri,  San Jose,
California and Duiven, The Netherlands. Cornerstone's European sales
activities are conducted from a leased facility near Munich, Germany and
certain other sales activities  are  conducted  from  a  leased
facilities   in Illinois,  Massachusetts,  Texas,  California,  Indiana
and Virginia.   The  Company believes that  its  facilities  are adequate
for its current needs.
 
 
Item 3.        Legal Proceedings
 
          Not applicable.
 
Item  4.      Submission of Matters to a Vote of Security holders
 
          Not applicable.
 
 
                           PART II
 
Item  5.      Market for Registrant's Common  Equity  and Related
              Stockholders Matters
 
The following table sets forth selected unaudited financial information
for the Company for the eight quarters  in  the period ended December 31,
1996.  This information has  been prepared  on the same  basis  as  the
audited  financial statements  and, in the opinion of management,
contains  all adjustments necessary for a fair presentation thereof.
 
 
                  CORNERSTONE IMAGING, INC.
             CONSOLIDATED FINANCIAL INFORMATION
      (unaudited - in thousands, except per share data)
 
 
                                             Quarter Ended
                              ----------------------------------------------
                              March 31   June 30   September 30  December 31
                              --------  --------   ------------  -----------
1996
-----------------------------
Net revenues                  $17,832   $22,569        $26,687     $29,759
Gross profit                    5,378     6,865          8,385      10,072
Operating income (loss)        (3,634)     (584)           605       1,712
Net income (loss)              (2,481)     (387)           430       1,275
Net income (loss)  per share    (0.33)    (0.05)          0.06        0.17
 
Stock prices:
  High                          18.50     10.00          8.625       11.00
  Low                            8.00      6.50           5.00        6.38
 
 
1995
-----------------------------
Net revenues                  $17,723   $20,201        $24,465     $28,767
Gross profit                    6,879     7,534          8,799      10,352
Operating income                1,782     2,237            436       3,082
Net income                      1,264     1,572          1,049       2,273
Net income per share             0.17      0.21           0.14        0.30
 
Stock prices:
  High                          18.50     18.13         25.75       25.75
  Low                           13.00     11.50         13.00       12.00
 
Common stock market price
 
The  Company's common stock is traded on The Nasdaq National Market
under  the symbol CRNR.  The Company's common  stock began  trading  in
September 1993.  There were approximately 180 stockholders of record at
February 28, 1997.
 
To  date,  the  Company has not declared or  paid  any  cash dividends
on  its  common  stock.   The  Company  does  not anticipate  paying
dividends on its  common  stock  in  the foreseeable  future and, under
the current  bank  agreement, any such payment would require prior bank
approval.
 
 
Item 6.        Selected Consolidated Financial Data.
 
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements.
<TABLE>
<CAPTION>
                                                      Year Ended December 31,
                                             ------------------------------------------
                                               1996    1995     1994     1993     1992
                                             -------  ------  -------  -------  -------
<S>                                         <C>      <C>     <C>      <C>      <C>
Consolidated Statements of Operations Data:
-------------------------------------------
Net revenues                                 $96,847  $91,156  $70,248  $43,631  $23,151
Gross profit                                  30,700   33,564   27,946   16,048    9,322
Operating income (loss)                       (1,901)   7,537    7,446    5,708    1,129
Net income (loss)                             (1,163)   6,158    4,816    3,814      862
Net income (loss) share                         (.15)    0.81     0.66     0.61     0.15
Shares used in per share calculations          7,548    7,586    7,316    6,206    5,573
 
Consolidated Balance Sheets Data:
-------------------------------------------
Working capital                              $35,065  $34,563  $27,125  $13,919   $3,236
Total assets                                  54,843   52,556   37,035   28,857    9,405
Long term obligations                                                       253      259
Mandatorily redeemable preferred stock                                             8,934
Stockholders' equity (deficit)                39,018   39,331   29,697   21,046   (5,398)
</TABLE>
 
 
Item 7.          Management's  Discussion  and  Analysis  of
                 Financial Condition and Results of Operations.
 
The  following table sets forth,  for the periods indicated,
certain  financial  data  from  the  Company's  consolidated
statements of operations as a percentage of revenues.
 
 
                                      Year ended December 31,
                                     ------------------------
                                       1996    1995    1994
                                     -------  ------  ------
Net revenues                          100.0%  100.0%  100.0%
Cost of  revenues                      68.3    63.2    60.2
                                     -------  ------  ------
        Gross profit                   31.7    36.8    39.8
                                     -------  ------  ------
Sales and marketing                    16.9    13.0    12.4
Research and development                9.9     8.5     7.6
General and administrative              5.5     4.4     5.0
Restructuring  charge                   1.4      -       -
Non-recurring charge; purchased
  in-process technology                  -      2.6     4.2
                                     -------  ------  ------
        Operating income (loss)        (2.0)    8.3    10.6
Interest income                         0.3     0.5     0.8
                                     -------  ------  ------
        Pretax income (loss)           (1.7)    8.8    11.4
Provision (benefit) for income tax     (0.5)    2.0     4.5
                                     -------  ------  ------
        Net income (loss)              (1.2)%   6.8%    6.9%
                                     =======  ======  ======
 
 
Revenues
 
The  Company's revenues increased  by 6.1% in 1996 to  $96.8 million from
$91.2 million in 1995 and by 29.9% in 1995 from $70.2 million in 1994.
The slower revenue growth compared to 1995  was  primarily attributable
to a lower display  prices and  lower  display unit shipments in the
first  quarter  of 1996  offset  by  increased sales of  input
subsystems  and software tools sales.
 
 
Gross Profit
 
Gross profit decreased by 8.6% to $30.7 million in 1996 from $33.6
million in 1995 while increasing 20.4% in  1995  from $27.9  million  in
1994.  Gross profit margin  decreased  to 31.7%  in  1996 from 36.8% in
1995.  The decrease  in  gross profit and  gross profit margin from 1995
to 1996 was due to significant  price  reductions.   In  the  first  and
third quarters   of  1996  the  Company  announced  a  significant
reduction  in  the  price for most of the Company's  display products,
which was partially offset by increased  sales  of higher  margin
software  products and  decreased  component costs.   Management expects
gross margins for 1997 to remain relatively consistent with 1996.  There
can be no assurance, however,  that the Company's gross profit and gross
margins will not continue to decline in future periods.
 
 
Sales and Marketing
 
Sales  and marketing expenses increased by 37.0% in 1996  to $16.3
million from $11.9 million in 1995 and  by  36.8%  in 1995 from $8.7
million in 1994. Sales and marketing expenses increased as a percentage
of revenue from 12.4% in 1994,  to 13.0%  in 1995 and 16.9% in 1996. The
increases in 1996  and 1995  were  primarily attributed to an increase in
staffing associated  with  an  expansion  of  the  Company's   sales,
marketing and customer support organizations to support  the sales  of
new software products together with a 1996  write down  of certain trade
show equipment totaling approximately $100,000.  The Company expects
sales and marketing  expenses will  continue  to  increase in the future
as  the  Company continues to expand sales and marketing programs related
to these software products.
 
 
Research and Development
 
Research and development expenses increased by 23.1% in 1996 to  $9.6
million from $7.8 million in 1995 and by 47.2%  in 1995  from  $5.3
million in 1994. Research and  development expenses have increased as a
percentage of revenue from 7.6% in  1994 to 8.5% in 1995 and 10.0% in
1996. The increase  in 1996  was  primarily attributed to additional
staffing  and technology  acquisitions to support the development  of
new software  products  and write-downs of  certain  engineering
equipment totaling $400,000.  The engineering equipment will no   longer
be  used  in  the  development  and  production processes.   It is
expected this equipment will be  disposed of during 1997.
 
The  Company believes that continued investment in  research and
development is critical to its future  growth  and  the Company  expects
to continue to commit substantial resources to   research  and
development.   As  a  result,  quarterly research  and development
expenses are expected to  continue to increase in the near term.
 
 
General and Administrative
 
General  and administrative expenses increased by  32.5%  in 1996  to
$5.3 million from $4.0 million in 1995 and by 14.3% in  1995  from $3.5
million in 1994.  The increases in  each period  were primarily due to
increased staffing and related costs  incurred  to  support the Company's
revenue  growth, various  internal technology enhancements and
expansion  of the software business unit's activities.  As a percentage
of revenue,   general  and  administrative  expenses  decreased slightly
from 5.0% in 1994 to 4.4% in 1995 and increased to 5.5% in 1996.  The
Company expects general and administrative expenses to increase
moderately in 1997; however, there can be no assurance that the increases
will not be significant in future periods.
 
 
Restructuring Charge
 
In  the  first quarter of 1996, the Company recorded a  one- time  $1.4
million  restructuring  charge  related  to  its decision to cancel its
PrintAccel product line. This  amount included  $1.1  million  for
prepaid  royalties,  committed payments for exclusivity rights,
engineering services, and a $270,000 write-down of PrintAccel inventory.
As of December 31,  1996,  the Company had completed making such
committed payments,  terminated all sales and marketing  efforts,  and
disposed of all inventory related to this product line.
 
 
Purchased In-process Technology
 
The  1995 non-recurring charge of $2.4 million resulted from the
write-off  of  the  purchased  technology   from   the acquisition of
Pegasus  Disk Technologies, Inc.
 
The  1994 non-recurring charge of $2.9 million resulted from the
write-off  of  the  purchased  technology   from   the acquisition of
Pixel Translations, Inc.  The acquisition was accounted  for as a
purchase transaction and the charge  was not deductible for tax purposes.
 
During  February 1997, the Company entered into an agreement to  sell its
ownership interest in Pegasus.  Under the terms of  the  agreement  the
Company received  35,000  shares  of Cornerstone's  common stock and a
note  receivable  totaling approximately  $200,000.  The impact of this
transaction  on the  financial  position of the Company is not
significant. In  addition  the results of operations of Pegasus  for  the
years ended December 31, 1996 and  1995 are not material  in relation to
the Company's consolidated results.
 
 
Interest Income
 
Interest income decreased by 48.8% in 1996 to $254,000  from $496,000  in
 1995 and by 8.5% from $542,000 in  1994.   The declines  represent lower
balances in cash  equivalents  and marketable securities.
 
 
Provision (benefit) for Income Taxes
 
The provision (benefit) for income taxes as a percentage  of pretax
income (loss) was (29.4)%, 23.3% and 39.7% for  1996, 1995   and   1994,
respectively,  after  being  offset   by reductions in the deferred tax
asset valuation allowance  of $1.2  million  and $713,000 in 1995 and
1994,  respectively. The  reduction  in  the valuation allowance  was
recognized based on expected earnings in future periods.
 
In  addition, the 1994 charge of  $2.9 million for purchased in-process
technology was deducted in determining  reported income, but was not
deducted in determining taxable income.
 
The  Company has various net operating loss and  tax  credit
carryforwards  which are subject to an annual limitation  of
approximately $467,000.
 
 
Recent Pronouncement:
 
During February 1997, the Financial Accounting Standards Board
issued  Statement No.128, Earnings per Share,  (SFAS No. 128) which
specifies the computation, presentation  and disclosure  requirements for
earnings per share.   SFAS  128 will  become  effective for the Company's
1997 fiscal  year. The  impact of adopting SFAS 128 on the Company's
financial statements has not yet been determined.
 
 
Liquidity and Capital Resources
 
At  December  31,  1996,  the  Company  had  cash  and  cash equivalents
of approximately  $18.5 million, an increase  of $13.8  million from
December 31, 1995, while all  marketable securities  held at December 31,
1995 matured  during  1996. At  December  31,  1996, the working capital
totaled  $35.1 million, an increase of $502,000 from December 31, 1995.
At December  31,  1996, the Company had a line of  credit  that provides
for the issuance of commercial and standby  letters of  credit up to $15
million.  At December 31, 1996 one such letter of credit securing
inventory purchases totaling  $6.9 million was outstanding under this
agreement.  The agreement expires July 1, 1997.
 
Net  cash provided by operating activities was $9.0  million in   1996
compared  to  $2.2  million  used  in  operating activities  in 1995.
The increase in net cash  provided  by operating activities from 1995 to
1996 was due primarily  to decreases  in inventory balances and increases
in  accounts payable  as  the  Company increased its focus  on
inventory levels  and  cash  management .  Substantially  all  of  the
Company's   sales   are   made   to   distributors,   system integrators,
and  OEMs  and  the  Company  believes   that significant levels of
inventory and receivables  are  needed to  provide  ready  availability
of its products to its distribution channels.
 
Net  cash provided by investing activities was $4.1  million in  1996
compared  to  $3.1 million provided  by  investing activities  in 1995
and related primarily to the  maturities of   marketable  securities.
Additions  to   property   and equipment  were $1.7 million and $2.6
million for  1996  and 1995, respectively.
 
On  February  20,  1997, the Company's  Board  of  Directors authorized
the use of up to $5.0 million to repurchase  the Company's  common stock.
The repurchased stock is  expected to  be  held by the Company as
treasury stock to be used  to meet the Company's obligations under its
stock plans and for other corporate purposes.  Purchases will be made
from time- to-time  on  the  open  market or  in  privately  negotiated
transactions.   The timing and volume of purchases  will  be dependent
upon  market conditions and other  factors.   The Company intends to use
cash on hand to fund its purchases.
 
The  Company  believes that its cash and  cash  equivalents, together
with cash flows from operations will be sufficient to  meet  the
Company's liquidity and capital  requirements through  1997.   The
Company may, however,  seek  additional equity  or  debt  financing to
fund further expansion.   The timing  and  amount of such capital
requirements  cannot  be precisely  determined  at this time and  will
depend  on  a number  of  factors,  including  demand  for  the
Company's products,  product  mix  changes  and  competitive  factors.
Accordingly,  the  Company may require additional  funds  to support  its
working  capital  requirements  or  for  other purposes and may seek to
raise such additional funds through public or private equity or other
sources.  There can be  no assurances  that additional financing will be
available  at all  or  that it, if available, will be obtainable on
terms favorable to the Company and would not be dilutive.
 
 
Item 8.        Financial Statements and Supplementary Data.
 
                     CORNERSTONE IMAGING, INC.
                    CONSOLIDATED BALANCE SHEETS
                 (in thousands, except par value)
<TABLE>
<CAPTION>
                         ASSETS                                 December 31,
                                                               1996      1995
                                                              -------   -------
<S>                                                         <C>       <C>
Current assets:
  Cash and cash equivalents                                   $18,486   $ 4,671
  Marketable securities                                            __     5,770
  Accounts receivable, net of allowance for doubtful
     accounts of $750 in 1996 and $698 in 1995                 17,181    17,885
  Inventories                                                  10,710    14,075
  Prepaid expenses and other current
    assets                                                        816     2,159
  Deferred income taxes                                         3,697     3,228
                                                              -------   -------
      Total current assets                                     50,890    47,788
Property and equipment, net                                     2,859     3,356
Deferred income taxes and other assets                          1,094     1,412
                                                              -------   -------
                                                              $54,843   $52,556
                                                              =======   =======
 
          LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
  Accounts payable                                            $10,093    $8,825
  Accrued compensation and related liabilities                  1,066     1,109
  Accrued liabilities                                           2,619     2,077
  Accrued warranty                                              1,286       777
  Deferred revenue                                                761       437
                                                              -------    ------
       Total current liabilities                               15,825    13,225
                                                              -------    ------
Commitments and contingency (note 6)
 
Common stock, $0.01 par value; authorized: 25,000 shares
   Issued and outstanding: 7,558 shares and 7,333 shares
    at December 31, 1996 and 1995, respectively                    76        73
Additional paid-in capital                                     30,914    30,097
Unrealized holding loss on marketable securities                            (30)
Retained earnings                                               8,028     9,191
                                                              -------   -------
     Stockholders' equity                                      39,018    39,331
                                                              -------   -------
                                                              $54,843   $52,556
                                                              =======   =======
</TABLE>
 
    The accompanying notes are an integral part of these
              consolidated financial statements
 
 
                  CORNERSTONE IMAGING, INC.
            CONSOLIDATED STATEMENTS OF OPERATIONS
            (in thousands, except per share amounts)
 
                                         Year Ended December 31,
                                        --------------------------
                                          1996     1995      1994
                                        --------  -------  --------
Net revenues                            $96,847   $91,156   $70,248
Cost of revenues                         66,147    57,592    42,302
                                        --------  -------  --------
     Gross profit                        30,700    33,564    27,946
                                        --------  -------  --------
Sales and marketing                      16,335    11,877     8,733
Research and development                  9,563     7,758     5,335
General and administrative                5,299     3,985     3,521
Restructuring charge                      1,404
Non-recurring charge; purchased
   in-process technology                     --     2,407     2,911
                                        --------  -------  --------
     Operating income (loss)             (1,901)    7,537     7,446
Interest income                             254       496       542
                                        --------  -------  --------
     Income (loss) before income tax     (1,647)    8,033     7,988
Provision (benefit) for income tax         (484)    1,875     3,172
                                        --------  -------  --------
        Net income (loss)               $(1,163)  $ 6,158  $  4,816
                                        ========  =======  ========
 
Net (loss) income per share             $ (0.15)  $  0.81  $   0.66
                                        ========  =======  ========
 
Shares used in per share calculation      7,548     7,586     7,316
                                        ========  =======  ========
 
       The accompanying notes are an integral part of these
              consolidated financial statements
 
 
 
                  CORNERSTONE IMAGING, INC.
       CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                       (in thousands)
<TABLE>
<CAPTION>
                                                                   Unrealized
                                                   Additional      Loss on                      Stock-
                                    Common Stock     Paid-in       Marketable       Retained    holders'
                                   Shares  Amount    Capital       Securities, Net  Earnings    Equity
                                  -------  ------    --------      ---------------  --------    -------
<S>                              <C>      <C>       <C>           <C>              <C>         <C>
Balances, December 31, 1993         6,685   $ 67      $22,762             $  --     $(1,783)    $21,046
  Common stock issued under:
    Stock option plan                 152      1          185                                       186
    Employee Stock Purchase Plan       25                 306                                       306
  Common stock issued in
    exchange for Pixel
    Translations                      172      2        2,812                                     2,814
  Unrealized holding loss
    on marketable securities, net                                          (140)                   (140)
  Tax benefit from disqualifying
    dispositions of common stock                          669                                       669
  Net income                                                                          4,816       4,816
                                  -------  ------    --------      ---------------  --------    -------
Balances, December 31, 1994         7,034     70       26,734              (140)      3,033      29,697
  Common stock issued under:
    Stock option plan                 138      2          223                                       225
    Employee Stock Purchase Plan       36                 433                                       433
  Common stock issued in
    exchange for Pegasus Disk
    Technologies                      125      1        2,025                                     2,026
  Unrealized holding gain
    on marketable securities, net                                           110                     110
  Tax benefit from disqualifying
    dispositions of common stock                          682                                       682
  Net income                                                                          6,158       6,158
                                  -------  ------    --------      ---------------  --------    -------
Balances, December 31, 1995         7,333     73       30,097               (30)      9,191      39,331
  Common stock issued under:
    Stock option plan                 127      2          171                                       173
    Employee Stock Purchase Plan       98      1          600                                       601
  Unrealized holding gain
    on marketable securities, net                                            30                      30
  Tax benefit from disqualifying
    dispositions of common stock                           46                                        46
  Net income (loss)                                                                  (1,163)     (1,163)
                                  -------  ------    --------      ---------------  --------    -------
Balances, December 31, 1996         7,558   $ 76      $30,914            $  --       $8,028     $39,018
                                  =======  ======    ========      ===============  ========    =======
</TABLE>
 
    The accompanying notes are an integral part of these
              consolidated financial statements
 
 
                  CORNERSTONE IMAGING, INC.
            CONSOLIDATED STATEMENTS OF CASH FLOWS
                       (in thousands)
<TABLE>
<CAPTION>
                                                           Year Ended December 31,
                                                          --------------------------
                                                           1996     1995      1994
                                                         -------   -------  -------
<S>                                                     <C>      <C>       <C>
Cash flows from operating activities:
    Net income (loss)                                    ($1,163)  $ 6,158  $ 4,816
    Adjustments to reconcile net income (loss) to net
    cash provided by (used in) operating activities:
       Depreciation and amortization                       1,708     1,218      817
       Loss on asset to be disposed of                       496        --       --
       Non-recurring charge; purchased in-process
       technology                                             --     2,407    2,911
       Deferred income taxes                                (389)   (2,699)    (804)
    (Increase) decrease in assets and liabilities:
       Accounts receivable                                   704    (7,084)  (3,496)
       Inventories                                         3,365    (7,807)    (932)
       Prepaid expenses and other current assets           1,343      (867)    (394)
       Other assets                                          238       (66)     (16)
       Accounts payable                                    1,268     4,638     (174)
       Accrued compensation and related liabilities          (43)      119      298
       Accrued liabilities and deferred revenue            1,451     1,812     (437)
                                                         -------   -------  -------
            Net cash provided by (used in) operating
              activities                                   8,978    (2,171)   2,589
                                                         -------   -------  -------
Cash flows from investing activities:
    Purchase of marketable securities                     (4,595)  (21,846) (16,317)
    Maturities of marketable securities                   10,365    28,155   16,510
    Property and equipment additions                      (1,707)   (2,603)  (1,404)
    Pegasus acquisition, less cash acquired                   --      (632)      --
                                                         -------   -------  -------
            Net cash provided by (used in) investing
              activities                                   4,063     3,074   (1,211)
                                                         -------   -------  -------
Cash flows from financing activities:
    Payment of debt obligations                               --        --     (514)
    Issuance of common stock                                 774       658      492
                                                         -------   -------  -------
           Net cash provided by (used in) financing
             activities                                      774       658      (22)
                                                         -------   -------  -------
Net increase in cash and cash equivalents                 13,815     1,561    1,356
Cash and cash equivalents at beginning of year             4,671     3,110    1,754
                                                         -------   -------  -------
Cash and cash equivalents at end of year                 $18,486    $4,671   $3,110
                                                         =======   =======  =======
 
Supplemental cash flow disclosures:
Cash paid during the year for taxes                       $  287    $3,247   $5,207
Cash paid during the year for interest                    $   --    $   10   $   67
Common stock issued in connection with the
   acquisitions                                           $   --    $2,026   $2,814
Tax benefit from disqualifying dispositions               $   46    $  682   $  669
Unrealized holding gain (loss) on marketable
   securities, net                                        $   30    $  110   $ (140)
 
</TABLE>
 
    The accompanying notes are an integral part of these
             consolidated financial statements.
 
 
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1.   Business of the Company:
 
      Cornerstone  Imaging,  Inc.  (the  Company)  develops, markets  and
services  hardware and software  products  and toolkits   for  document
image  processing  (DIP)   display subsystems  and input subsystems.
These DIP systems  enable multiple  users  to  capture, file and
retrieve  images  of documents   electronically.   Substantially   all
of   the Company's revenues in recent years have been attributable to
sales   of   display  subsystems  based  on  its  ImageAccel technology.
The ImageAccel family of products are  used  in conjunction  with
personal computers and  are  designed  to enhance   user  productivity
by  providing  high   document legibility  and fast image display speeds.
These  products, together  with  existing and planned software  products
are expected  to account for substantially all of the  Company's future
revenues.   The majority of the Company's  customers comprise   a
diverse   group  of  domestic   and   foreign distributors, which in turn
resell Cornerstone  products  to value-added resellers, system
integrators and end users.
 
2.   Summary of Significant Accounting Policies:
 
     Principles of Consolidation:
 
      The  consolidated  financial  statements  include  the accounts  of
the Company and its wholly owned subsidiaries, Cornerstone  Technology
GmbH,  and  Cornerstone  Technology International,  Inc.  All significant
intercompany  accounts and transactions have been eliminated.
 
     Use of Estimates:
 
      The  preparation of financial statements in conformity with
generally  accepted  accounting  principles  requires management to make
estimates and assumptions that affect the reported  amount  of  assets
and  disclosure  of  contingent assets   and  liabilities  at  the  date
of  the  financial statements and the reported amounts of revenues and
expenses during  the  reported period.  Actual results  could  differ
from those estimates.
 
     Certain Risks and Concentrations:
 
       The   Company's  products  are  concentrated  in  the document
image   processing  industry  which   is   highly competitive  and
rapidly changing.  Revenue is  concentrated with  a relatively limited
number of customers and suppliers for   certain  components  are
concentrated  among  a   few providers.  The loss of a major customer or
any reduction in orders  by  such  a  customer, the interruption  of
certain supplier relationships, significant technological changes in the
industry, including faster microprocessors, changes  in customer
requirements,  the  infringement  of  proprietary patent, or the
emergence of a major direct competitor  could affect   operating  results
adversely.   In   addition,   a significant  portion of the Company's
revenue  derives  from international  sales.   Fluctuations  of  the
U.S.   dollar against  foreign  currencies or  local  economic
conditions could adversely affect operating results.
 
     Investments:
 
      Marketable  securities as of  December  31,  1995  are classified
as available-for-sale and are carried  at  market value.   Unrealized
holding gains and losses  on  securities are reported net of related
taxes as a separate component of stockholders' equity.
 
     Inventories:
 
     Inventories are stated at the lower of cost (determined on  a
first-in, first-out basis) or market.  The  Company's inventories
include  high technology parts  and  components that  may  be
specialized in nature  or  subject  to  rapid technological obsolescence.
 While the Company has  programs to  minimize the required inventories on
hand and  considers technological obsolescence when estimating required
reserves to  reduce recorded amounts to market values, it is possible
that such estimates would change in the near term.
 
     Property and Equipment:
 
       Property  and  equipment  are  stated  at  cost   and depreciated
on a straight-line basis over estimated  useful lives  of  three years.
Leasehold improvements are recorded at  cost  and depreciated on a
straight-line basis over  the lesser of their useful lives or the related
lease term.
 
     Accrued Warranty:
 
      The  Company  provides an accrual for future  warranty costs  based
on the relationship of sales to actual warranty costs.
 
     Revenue Recognition:
 
      Revenues  from hardware and software sales related  to the
Company's  document  imaging  products  are  recognized (except  as
noted  below) upon shipment if  no  significant vendor  obligations
remain and collection of  the  resulting receivable   is   deemed
probable.   Software   maintenance revenues  for supporting and providing
upgrades are deferred and   recognized  over  the  maintenance  period
which   is generally one year.  Training, consulting and implementation
services  are  recognized  as such services  are  performed. Unearned
income on prepaid service contracts is amortized by the  straight-line
method over the term of  the  contracts. Related costs are charged to
expense as incurred.
 
       Revenue   generated   from  products   sold   through traditional
channels where the right of  return  exists  is reduced  by  reserves
for estimated  sales  returns.   Such reserves are based on estimates
developed by management.  As unsold  products in these distribution
channels are  exposed to  rapid  changes in consumer preferences or
technological obsolescence  due  to  new operating  environments,
product updates  or  competing products, it is possible  that  these
estimates may change in the near term.
 
     Advertising:
 
      The  Company expenses the costs of advertising as  the expenses
are  incurred.  The costs of  advertising  consist primarily  of
magazine  advertisements,  brochures,   other direct production costs,
and cooperative advertising paid to the  Company's  distributors.  Costs
associated  with  trade shows  are  charged to expense upon completion of
the  trade show.   The advertising expense for the years ended December
31,  1996, 1995, and 1994 was $4.2 million, $3.3 million and $2.4
million, respectively.
 
     Income Taxes:
 
      Income  taxes  are accounted for under  the  liability method.
Under  this  method,  deferred  tax  assets   and liabilities  are
determined based  on  differences  between financial  reporting and tax
bases of assets and liabilities and  are measured using the enacted tax
rates and laws  that will  be  in  effect when the differences  are
expected  to reverse.
 
     Computation of Net Income (Loss) Per Common Share:
 
      Net  income (loss) per common share is based upon  the weighted
average  number of common  and  common  equivalent shares outstanding,
when dilutive.  Common equivalent shares are  included in the per share
calculations where the effect of  their  inclusion  would  be dilutive.
Dilutive  common equivalent shares consist of stock options.
 
     Recent Pronouncements:
 
     During February 1997 the Financial Accounting Standards Board
issued  Statement No. 128, Earnings per Share,  (SFAS 128)  which
specifies  the  computation,  presentation  and disclosure  requirements
for earnings per share.   SFAS  128 will  become  effective for the
Company's 1997 fiscal  year. The  impact of adopting SFAS 128 on the
Company's  financial statements has not yet been determined.
 
     Concentration of Credit Risk:
 
      The  Company  sells  its products primarily  in  North America  and
 Europe.  The Company performs  ongoing  credit evaluations of its
customers and generally does not  require collateral.   The Company
maintains reserves  for  potential credit   losses   which   have  been
within   management's expectations.  At  December  31,  1996  and  1995,
accounts receivable from distributors totaled $11.6 million and $13.3
million,  respectively.  Substantially  all  cash  and  cash equivalents
are held by one bank and a financial institution.
 
     Statement of Cash Flows:
 
      The  Company  considers all highly liquid  investments with  an
original maturity from date of purchase  of  three months or less to be
cash equivalents.
 
     Reclassifications:
 
      Certain  amounts have been reclassified  in  the  1995 financial
statements  to conform  to  the  presentation  at December 31, 1996.
These reclassifications had no impact on previously reported operating
income or net income.
 
3.   Marketable Securities
 
      At  December 31, 1995, marketable securities consisted of
municipal  securities  held  by  two  investment  banks, bearing
interest at rates ranging from 3.87% to 9.75% per annum, maturing
during 1996.
 
 
4.   Balance Sheet Components (in thousands):
 
       Marketable securities:                         1995
                                                  ---------
     Fair value of securities                       $5,770
     Amortized cost                                 $5,816
                                                  ---------
     Unrealized holding losses                    $     46
     Deferred tax benefit                              (16)
                                                  ---------
     Unrealized holding loss, net                 $     30
                                                  =========
 
        Inventories:                     1996         1995
                                      --------    ---------
     Raw materials                     $ 1,645     $ 2,318
     Work in process                     1,455       2,123
     Finished goods                      7,610       9,634
                                      --------    ---------
                                       $10,710     $14,075
                                      ========    =========
 
        Property and equipment:           1996        1995
                                      --------    ---------
     Office equipment and machinery     $5,812      $5,889
     Software                              606         777
     Capitalized Software                  126         126
     Leasehold improvements              1,317         635
                                      --------    ---------
                                         7,861       7,427
     Less accumulated depreciation
        and amortization                (5,002)     (4,071)
                                      --------    ---------
                                       $ 2,859      $3,356
                                      ========    =========
 
      In  1996, the Company recorded a loss of approximately $400,000
relating to the write-off of the undepreciated cost of certain assets
which will no longer be used due primarily to  changes in production
processes.  The loss was  recorded as  research  and  development costs.
It is  expected  this equipment will be disposed of during 1997.
 
 
5.   Line of Credit
 
      The  Company has a line of credit facility with a bank which
expires on July 1, 1997.  The agreement provides  for borrowings  up  to
the  lesser of $15  million  or  75%  of eligible  receivables.
Borrowings under the agreement  bear interest  at  the  bank's  prime
rate  plus  0.25%  and  are collateralized   by  accounts  receivable,
equipment   and inventory of  the Company.  The agreement requires that
the Company provide financial information to the lender,  obtain approval
 of  the  lender for any payment  of  dividends  or material  disposition
of collateral except in  the  ordinary course  of  business  and  meet
certain  financial  ratios, quarterly operating results and minimum
tangible net worth.
 
 
     6.   Commitments and Contingency:
 
     Commitments
 
      The  Company has entered into various operating leases for  their
facilities  and sales  offices.   Future  rental commitments under these
operating leases are as follows  (in thousands):
 
Year ended December 31,
 
     1997                            $   726
     1998                                696
                                     --------
     Total                           $ 1,422
                                     ========
 
      Rent expense was approximately $957,000, $597,000 and $360,000 in
1996, 1995 and 1994, respectively.
 
     Contingency
 
      In 1995, the Company was named as a defendant in three class
action  lawsuits alleging that  the  Company  falsely advertised  the
size of the viewing area  of  its  computer monitors.  The Company was
named together with the  majority of  companies who manufacture or sell
computer monitors.  In April  1996, the Company was dropped as a
defendant  and  is longer a party to any of the litigation.
 
 
7.   Stockholders' Equity:
 
      Preferred Stock:  The Board of Directors is authorized to
determine the price, rights, preferences, privileges and restrictions
(including voting rights) of  preferred  stock without any further vote
or action by the stockholders.  The Board  is also authorized to increase
or decrease the number of  shares of any series.  At December 31, 1996,
there  were 2,000,000   shares  of  $.01  par  value   preferred   stock
authorized.  No preferred shares were issued and outstanding at December
31, 1996 or 1995.
 
      Employee-Stock Purchase Plan:  The Board of  Directors has
reserved  200,000 shares of common stock  for  issuance under the 1993
Employee Stock Purchase Plan.  Employees  may elect  to  have  the
Company withhold up  to  10%  of  their compensation for the purchase of
the Company's common stock. The  amounts  withheld  are used to purchase
the  Company's common  stock  at  a price equal to 85% of the  fair
market value  of  the stock on the first day of a two-year offering or
the last day of a six-month purchase period, whichever is lower.   The
number  of shares employees  may  purchase  is subject to certain
limitations.
 
      Stock-Option  Plan:  The Company has  established  the 1993 Stock
Option/Stock Issuance Plan.  As amended, the Plan authorizes the issuance
of up to 2,074,852 shares of  common stock  over the term of the Plan,
pursuant to the  grant  of incentive  stock  and non-qualified stock
options  and  the direct issuance of shares to eligible employees,
independent consultants and non-employee directors.
 
      Under  the  Plan,  the exercise  price  per  share  is determined
by  the  Compensation Committee.   The  exercise price of an incentive
option cannot be less than 100% of the fair market value of the common
stock on the grant date  and the  exercise price of a non-qualified
option cannot be less than  85% of such fair market value.  Options
generally vest over four years and are exercisable for a term of ten
years. In  May 1996, the Company's Board of Directors approved  the grant
of new options in cancellation of previously  granted options  with
exercise prices greater than the current  fair value  of  the  Company's
common stock.  The  newly  granted options  are exercisable at the fair
value of the  Company's common  stock  at the date of the grant and will
vest  over periods  up  to  four years based in part  on  the  original
vesting commencement date.
 
      Activity  during  the years ended December 31, 1996, 1995, and
1994 is as follows (in thousands except the per share amounts):
<TABLE>
<CAPTION>
                                                       Options Outstanding
                                          -------------------------------------------
                                 Shares                                      Weighted
                               Available   Number     Price                   Average
                                  for        of        Per                   Exercise
                                 Grant     Shares      Share       Amount       Price
                               ---------   -------  ------------  -------    --------
<S>                           <C>        <C>      <C>            <C>        <C>
  Balance, December 31, 1993     142         676   $ 0.40-$13.50    2,778      $ 4.11
 
     Plan Amendment              417
     Options granted            (424)        424   $12.25-$26.00    6,880        6.23
     Options canceled             20         (20)  $ 0.40-$24.50     (163)       8.15
     Options exercised                      (144)  $ 0.40-$13.50     (186)       1.29
                               ---------   -------  ------------  -------    --------
  Balance, December 31, 1994     155         936   $ 0.40-$26.00    9,309        9.94
                               ---------   -------                -------
     Plan Amendment              350
     Options granted            (643)        643   $13.00-$25.25   10,012       15.57
     Options canceled            165        (165)  $ 0.40-$26.00   (2,448)      14.83
     Options exercised                      (138)  $ 0.40-$18.75     (225)       1.63
                               ---------   -------  ------------  -------    --------
  Balance, December 31, 1995      27       1,276   $ 0.40-$25.25   16,648       13.04
                               ---------   -------                -------
     Plan Amendment              500
     Options granted          (1,358)      1,358   $ 5.50-$18.00   11,977        8.82
     Options canceled            951        (951)  $ 1.60-$25.25  (14,184)      14.91
     Options exercised                      (127)  $ 0.40-$ 8.63     (173)       1.36
     Options expired             161        (161)  $ 0.40-$20.25   (2,436)      15.13
                               ---------   -------  ------------  -------    --------
  Balance, December 31, 1996     281       1,395   $ 0.40-$16.25  $11,832        8.48
                               =========   =======                =======
</TABLE>
 
      During 1995, the Financial Accounting Standards  Board issued
Statement No. 123, Accounting for Stock-Based Compensation (SFAS No.
123).   This standard, which establishes a fair value-based  method  for
stock-based compensation  plans,  also permits an election  to  continue
following the requirements of APB Opinion No. 25, Accounting for Stock
Issued to Employees, with disclosures of pro-forma net income and
earnings per share under the new method.  The Company  continues to
follow the requirements of APB Opinion No.  25, with disclosure of
pro-forma information concerning its  stock  option  and  employee stock
purchase plans in accordance with SFAS No. 123.
 
     The following table summarizes information with respect to stock
options outstanding at December 31, 1996:
 
<TABLE>
<CAPTION>
                                  Weighted
                                   Average          Weighted                  Weighted
                   Number         Remaining         Average         Number    Average
  Range of       Outstanding     Contractual        Exercise     Exercisable  Exercise
Exercise Prices  at 12/31/96     Life (Years)       Price        at 12/31/96   Price
---------------  -----------     ------------      ---------     -----------  --------
                   (000s)                                           (000s)
<S>            <C>             <C>               <C>            <C>          <C>
$ 0.40-$  1.60         38             3.4           $   0.91          38       $  0.91
$ 3.00-$  3.00          4             1.0           $   3.00           4       $  3.00
$ 4.40-$  5.94         72             2.1           $   5.43          55       $  5.41
$ 6.00-$  7.83        113             9.5           $   7.22           3       $  7.20
$ 8.00-$  9.50      1,079             8.9           $   8.61         181       $  8.57
$13.50-$ 13.50         36             7.2           $  13.50          22       $ 13.50
$14.25-$ 15.75         52             7.7           $  15.15          28       $ 15.06
$16.25-$ 16.25          1             9.1           $  16.25          --            --
                 -----------                                     -----------  --------
                    1,395             8.3           $   8.48         331       $  7.98
                 ===========                                     ===========  ========
</TABLE>
 
      Fair  value of each option grant is estimated  on  the date  of
the grant using the Black-Scholes option  pricing model  with the
following weighted average assumptions  used for grants in 1996 and 1995:
 
                                          Group  A     Group B
                                        -----------   ---------
            Risk-free interest rates        6.17%        6.14%
            Expected life                 4 years      3.5 years
            Volatility                        66%         66%
            Dividend yield                    --          --
 
     The weighted average expected life was calculated based on  the
exercise behavior of each group.  Group A represents officers  and
directors  who are a smaller group  holding  a greater  average number of
options than other option holders and who tend to exercise later in the
vesting period.  Group B represents all other option holders, virtually
all of whom are  employees.  This group tends to exercise earlier in the
vesting period.
 
      The  weighted  average  fair value  of  those  options granted in
1996 and 1995  was $2.80 and $7.80, respectively.
 
      The Company has also estimated the fair value for  the purchase
rights issued under the Company's  Employee  Stock Purchase Plan, under
the Black-Scholes valuation model using the following assumptions for
1996 and 1995:
 
                                              1996             1995
                                           -----------     -----------
      Risk-free interest rates              5.46%            6.77%
      Expected life                         0.50 years      0.90 years
      Volatility                               66%             66%
      Dividend yield                           --              --
 
      The  weighted  average fair value  of  those  purchase rights
granted  in  1996 and 1995   was  $2.58  and  $5.58, respectively.
 
      The  following pro forma income information  has  been prepared
following  the provisions of SFAS No. 123 (in thousands except per
share data):
 
                                                   1996      1995
                                                  -------  -------
    Net income (loss) - pro forma                $(4,036)   $5,441
    Net income (loss) - per share - pro forma    $ (0.53)   $ 0.72
 
      The  above  pro  forma effects on income  may  not  be
representative of the effects on net income for future years as  option
grants  typically vest over  several  years  and additional options are
generally granted each year.
 
 
8.   Significant Customers:
 
      For  the years ended December 31 1996, 1995, and 1994, one
customer accounted for 12%, 12%, and 11%, respectively, of  the Company's
revenues.  For the year ended December 31, 1994 a second customer
accounted for 17%
 
     Export revenues, principally to Europe, as a percentage of total
revenues were 29%, 29%, and 20% for the years ended December 31, 1996,
1995, and 1994, respectively.  Income and assets  of  the  Company's
foreign  subsidiaries  were  not significant.
 
 
9.   Restructuring Charge:
 
      During  1996,  the  Company recorded  a  $1.4  million
restructuring  charge primarily related to its  decision  to cancel  its
PrintAccel product line.  This amount  included $1.1  million for prepaid
royalties, committed payments  for exclusivity  rights, engineering
services,  and  a  $270,000 write-down  of  PrintAccel inventory.  As  of
December  31, 1996,  the  Company  had  completed  making  such
committed payments,  terminated all sales and marketing  efforts,  and
disposed of all inventory related to this product line.
 
 
10.  Acquisitions:
 
      On  July 6, 1995, the Company acquired the assets  and liabilities
of Pegasus Disk Technologies, Inc. ("Pegasus"), a  supplier  of  software
products used  in  document  image processing to manage data stored on
optical disk drives  and jukeboxes.   Under the terms of the agreement,
the  Company paid  $550,000 and issued 124,800 shares of its common stock
in  exchange for the assets and liabilities of Pegasus.  The amount
allocated to purchased in-process technology totaling $2,407,000  was
expensed  on the acquisition  date  as  the technology had not reached
technological feasibility and had no  alternative future use.  The
acquisition  was  accounted for  under the purchase method and the
results of operations of  Pegasus were included with those of the Company
from the acquisition date (see note 13).
 
      In June 1994, the Company acquired Pixel Translations, Inc.
("Pixel"), a developer of software tools used by  OEMs and integrators of
document image processing systems.  Under the  terms  of  the  agreement,
the Company  issued  172,268 shares  of  its  common  stock  in  exchange
for all the outstanding shares of Pixel stock and granted options  to
purchase  16,845  shares of the Company's  common  stock  in exchange
for  all  outstanding options  to  purchase  Pixel stock.   The
acquisition has been accounted for  under  the purchase method and the
results of operations of Pixel  were included  with  those  of the
Company from the acquisition date.
 
 
11.  Income Taxes:
 
     Income tax expense(benefit) consists of (in thousands):
 
                                  1996       1995      1994
                              --------     -------   -------
     Current:
        Federal                 $(247)     $3,589    $3,307
        State and local                       985       669
        Foreign                   152          --       --
                              --------     -------   -------
                               $  (95)     $4,574    $3,976
                              --------     -------   -------
     Deferred:
        Federal                 $(185)    $(2,249)   $ (669)
        State and local          (204)       (450)     (135)
                              --------     -------   -------
                                $(389)    $(2,699)   $ (804)
                              --------     -------   -------
     Total:
        Federal                 $(432)     $1,340    $2,638
        State and local          (204)        535       534
        Foreign                   152          --        --
                              --------     -------   -------
                                $(484)     $1,875    $3,172
                              ========     =======   =======
 
      The  Company's  effective tax rate  differs  from  the statutory
federal income tax rate as shown in the following schedule:
 
                                     1996     1995     1994
                                    -------  ------   ------
Statutory federal income tax rate   (34.0)%   34.0%    34.0%
State taxes                          (6.1)     6.8      6.1
Foreign taxes                         9.2       --       --
Purchased in-process technology       --        --     14.6
Research and development credits      --      (3.1)    (6.0)
Foreign sales corporation             --      (2.2)    (0.8)
Tax exempt interest                  (2.2)    (1.7)    (1.5)
Change in valuation allowance         --     (15.4)    (8.3)
Other, net                            3.7      4.9      1.6
                                    -------  ------   ------
                                    (29.4)%   23.3%    39.7%
                                    =======  ======   ======
 
       The components of the deferred tax asset (in thousands):
 
                                              1996      1995
                                           -------   -------
   Deferred tax assets:
      Provision for doubtful accounts      $   676   $   520
      Inventory reserves                     1,001     1,100
      State taxes                               --       253
      Accrued liabilities                    1,257       601
      Depreciation and basis differences     1,142     1,033
      Net operating loss carryforwards         460       613
      Research & development tax
         credit carryforwards                  115       142
                                           -------   -------
       Total deferred tax asset             $4,651    $4,262
                                           =======   =======
 
       At December 31,1996, the Company had approximately $2,486,000 of
net operating losses and $90,000 of  research and development tax credits
available to offset future  U.S. federal income tax.  These carryforwards
expire between 2002 and 2008.  For California franchise tax purposes,
the  Company has net operating loss carryforwards of   $2,930,000   and
research  and   development   credit carryforwards  for  $25,000.  The
California  carryforwards expire between 1997 and 2001.
 
       In  1991,  the  Company  experienced  a  "change   in ownership",
as defined by the Internal Revenue  Code.   This event  created  a
limitation on the amount  of  federal  and California  net operating loss
and tax credit  carryforwards that can be utilized to offset future
taxable income for tax reporting purposes.  Under this provision, the
amount of the net  operating  loss which can be used in any  one  year
is limited to approximately $467,000.
 
 
12.  Employee Benefit Plan
 
      The Company provides a 401(K) Plan to its employees providing tax
deferred salary deductions for eligible employees.  Participants may
make voluntary  contributions between 1% and 20% of their compensation
subject to certain annual  maximums.   The  Company  matches  50%  of
employee contributions  with a maximum of $1,000 per  employee.   The
Plan  provides for additional Company contributions  at  its discretion.
Total contributions made by the  Company  were $156,000, $117,000, and
$89,000 during 1996, 1995, and 1994, respectively.
 
 
13.  Subsequent Events
 
      Divestiture
 
      On  February  4,  1997, the Company  entered  into  an
  agreement  to  sell  its ownership  interest  in  Pegasus.
  Under  the terms of the agreement the Company will receive
  35,000  shares  of the Cornerstone's common  stock  and  a
  note  receivable  totaling  approximately  $200,000.   The
  impact  of  this transaction on the financial position  of
  the  Company is not significant.  In addition, the results
  of  operations of Pegasus for the years ended December 31,
  1996  and  1995  are  not  material  in  relation  to  the
  Company's consolidated financial statements.
 
  Stock Repurchase
 
      On February 14, 1997, the Company's Board of Directors
  authorized  the use of up to $5 million to repurchase  the
  Company's   common  stock.   The  repurchased   stock   is
  expected  to be held by the Company as treasury  stock  to
  be  used to meet the Company's obligations under its stock
  plans  and  for other corporate purposes.  Purchases  will
  be  made  from  time-to-time on  the  open  market  or  in
  privately negotiated transactions.  The timing and  volume
  of  purchases will be dependent upon market conditions and
  other  factors.  The Company intends to use cash  on  hand
  to fund its purchases.
 
  Stock-Option Plan
 
      On  February 14, 1997 the Company's Board of Directors
  authorized  an  increase in the number of shares  reserved
  for  issuance  under the Company's 1993 Stock Option/Stock
  Issuance  Plan  by 400,000 shares to 2,474,852  shares  of
  common stock for issuance under the plan.
 
 
REPORT OF INDEPENDENT ACCOUNTANTS
 
 
To the Board of Directors and
Stockholders of Cornerstone Imaging, Inc.
 
 
We have audited the accompanying consolidated balance sheets
of Cornerstone Imaging, Inc. and subsidiaries as of December
31,  1996  and 1995, and the related consolidated statements
of operations , stockholders' equity and cash flows for each
of  the  three years in the period ended December 31,  1996.
These  financial  statements are the responsibility  of  the
Company's  management.  Our responsibility is to express  an
opinion on these financial statements based on our audits.
 
We   conducted  our  audits  in  accordance  with  generally
accepted  auditing standards.  Those standards require  that
we   plan  and  perform  the  audits  to  obtain  reasonable
assurance about whether the financial statements are free of
material  misstatement.  An audit includes examining,  on  a
test  basis, evidence supporting the amounts and disclosures
in   the  financial  statements.   An  audit  also  includes
assessing  the  accounting principles used  and  significant
estimates  made  by  management, as well as  evaluating  the
overall  financial statement presentation.  We believe  that
our audits provide a reasonable basis for our opinion.
 
In  our opinion, the financial statements referred to  above
present  fairly, in all material respects, the  consolidated
financial   position  of  Cornerstone  Imaging,   Inc.   and
subsidiaries  as  of December 31, 1996  and  1995,  and  the
consolidated  results  of their operations  and  their  cash
flows  for  each  of  the three years in  the  period  ended
December  31,  1996  in conformity with  generally  accepted
accounting principles.
 
COOPERS & LYBRAND L.L.P.
San Jose, California
January 31, 1997, except for note 13 as to which the date is
February 14, 1997
 
 
                      REPORT OF INDEPENDENT ACCOUNTANTS
 
 
To the Board of Directors and
Stockholders of Cornerstone Imaging, Inc.
 
 
Our  report  on  the  consolidated financial  statements  of
Cornerstone Imaging, Inc., is included on page  41  of  this
Form  10K.   In connection with our audits of such financial
statements  we  have  also  audited  the  related  financial
statement schedule listed in the index on page 22.
 
In our opinion, the financial statement schedule referred to
above,  when  considered in relation to the basic  financial
statements taken as a whole, present fairly, in all material
respects, the information required to be included therein.
 
 
COOPERS & LYBRAND, L.L.P.
San Jose, California
January  31, 1997, except note 13 as to which the date is
February 14, 1997
 
 
Item 9.   Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure.
 
          Not applicable.
 
 
                          PART III
 
Item 10.  Directors and Officers of the Registrant.
 
           The information required by this item relating to the
Company's directors and nominees and disclosure relating to  compliance
with Section 16(a) of the Securities Exchange Act  of  1934  is included
under the captions  "Election  of Directors"  and  "Compliance  with
Section  16(a)  of   the Securities  Exchange  Act of 1934" in  the
Company's  Proxy Statement for the 1996 Annual Meeting of Stockholders
and is incorporated herein by reference.  The information  required by
this  item relating to the Company's executive  officers and  key
employees is included under the caption "Executive Officers  and  Key
Employees" in Part I of  this  Form  10-K Annual Report.
 
 
Item 11.  Executive Compensation.
 
           The information required by this item is included under   the
caption  "Executive  Compensation  and  Related Information" in the
Company's Proxy Statement for  the  1997 Annual Meeting of Stockholders
and is incorporated herein by reference.
 
 
Item  12.   Security Ownership of Certain Beneficial  Owners
and Management.
 
           The information required by this item is included under the
caption "Ownership of Securities" in the Company's Proxy  Statement for
the 1997 Annual Meeting of Stockholders and is incorporated herein by
reference.
 
 
Item 13.  Certain Relationships and Related Transactions.
 
           The information required by this item is included under  the
caption "Certain Transactions" in the  Company's Proxy  Statement for the
1997 Annual Meeting of Stockholders and is incorporated herein by
reference.
 
 
                           PART IV
 
ITEM 14.  Exhibits, Financial Statements, Schedules, and Reports on Form 10-K
 
(a)  The following documents are filed as part of this Annual
     Report on Form 10-K:
 
   1.  Financial Statements.
                                                                Page Number
 
   Consolidated Balance Sheets as of December 31,
     1996 and 1995                                                      27
 
   Consolidated Statements of Operations for each of the
     three years in the period ended December 31, 1996                  28
 
   Consolidated Statements of Stockholders' Equity for
     each of the three years in the period ended
     December 31, 1996                                                  29
 
   Consolidated Statements of Cash Flows for each of
      the three years in the period ended December 31, 1996             30
 
   Notes to Consolidated Financial Statements                      31 - 40
 
   Report of Coopers & Lybrand, L.L.P. Independent Accountants          41
 
 
   2.  Financial Statement Schedule.
 
The following consolidated financial statement schedule is filed
as part of this report and should be read in conjunction with the
consolidated financial statements:
 
 
                 Schedule
 
II    Valuation and Qualifying Accounts
 
Schedules,  other  than  those listed  above,  have  been omitted
since they are either not required, are not applicable, or the required
information is shown in the financial statements and related notes.
 
 
                  CORNERSTONE IMAGING, INC.
 
      SCHEDULE II  -  VALUATION AND QUALIFYING ACCOUNTS
 
 
 
                               Balance at  Additions             Balance
                               Beginning   Charged to   Write-    at End
Description                     of Year    Expenses      Offs    of Year
-----------------               ---------  ---------   -------   --------
  Year ended December 31, 1994
     Allowance for bad debt      $   229   $  303      $  (41)   $   491
     Inventory reserve           $   530   $1,262      $ (643)   $ 1,149
 
  Year ended December 31, 1995
     Allowance for bad debt      $   491   $  254      $  (47)   $   698
     Inventory reserve           $ 1,149   $  290      $ (140)   $ 1,299
 
  Year ended December 31, 1996
     Allowance for bad debt      $   698   $  258      $ (206)   $   750
     Inventory reserve           $ 1,299   $  904      $ (813)   $ 1,390
 
 
    3.   (a)   See Exhibit List below
         (b)   No reports on Form 8-K were filed during the
               last quarter of the fiscal year covered by this
               Form 10-K Annual Report.
 
     Exhibit List
 
     Number     Description
 
      2.1++     Agreement and Plan of Reorganization April 15, 1994
                among the Company, Pixel Translations, Inc., and
                Cornerstone Acquisition Corporation.
      3.1+      Amended and Restated Certificate of Incorporation of
                the Company.
      3.2+      Bylaws of the Company
      4.1+      Reference is made to Exhibits  3.1 and 3.2
      4.2+      Form of Investor Rights Agreement dated August 27, 1993
                by and among the Company and the investors identified herein.
      10.1+     Form of Indemnity Agreement entered into between the Company
                and its directors and officer.
      10.2+     Form of the Company's 1993 Stock Option/Stock Issuance Plan.
      10.3+     1989 Employee Stock Option Plan.
      10.4+     Key Employee Stock Purchase Plan.
      10.5+     Form of Employee Stock Purchase Plan.
      10.6+     Real Estate Lease between the Company and First Interstate
                Bank of California, as Corporate Trustee for Northern
                California Retail Clerks Union and Food Employers Joint
                Pension Trust Fund; Bank of America N.T. & S.A., as
                Corporate Trustee for Southern California United Food and
                Commercial Worker Unions and Food Employers Joint Pension
                Trust Fund; and Imperial Trust Company as Corporate
                Co-Trustee for California Butchers Pension Trust Fund,
                dated as of June 1, 1989.
      10.7+*    License Agreement between the Company and Cadtrak
                Corporation, dated December 15, 1992.
      10.8+*    Distribution Agreement between the Company and Micro D.,
                Inc., dated as of July 11, 1988.
      10.9+*    Distributor  Agreement between the Company and Law Cypress
                Distributing Company, dated as of May 2, 1990.
      10.10+*   OEM Sales Agreement between the Company and NEC Technologies,
                Inc., dated as of December 11, 1992.
      10.11+*   Systems Integrator Purchase Agreement between the Company
                and PRC, Inc., dated as of September 10, 1991.
      10.12+*   Systems Integrator Purchase Agreement between the Company
                and DST Systems, Inc., dated as of June 14, 1990.
      10.13+*   Display Technologies, Inc. Pricing Terms and Conditions.
      10.14     Intentionally left blank.
      10.15+    Loan and Security Agreement, between the Company and Plaza
                Bank of Commerce dated as of August 7, 1992.
      10.16+    Loan and Security Agreement between the Company and Comerica
                Bank-California, dated as of August 1, 1993.
      10.17+    Loan and Security Agreement, between the Company and LB
                Credit Corporation, dated as of October 21, 1992, as amended.
      10.18*    Product Support and Marketing Agreement between the Company
                and IBM, dated as of February 16, 1994.
      11.1      Statement of Computation of Per Share Earnings.
      21.1+     Subsidiaries of the Company.
      23.1      Consent of Coopers & Lybrand.
      24.1      Power of Attorney (see page 24).
      27        Financial Data Schedule
 
 
 
   +     Incorporated by reference to an exhibit to the Company's
          Registration Statement of Form S-1 (Registration No. 33-66142),
          as amended.
   ++    Incorporated by reference to an exhibit to the Company's 8-K filed
          on July 6, 1994.
   *     Confidential Treatment has been granted for the deleted portions of
          this document.
 
                         SIGNATURES
 
 
           Pursuant  to  the requirements of Section  13  or 15(d) 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 on March 28, 1997.
 
 
                                 CORNERSTONE IMAGING, INC.
 
 
                                 By: /s/  Thomas T. van Overbeek
                                          -----------------------------
                                          Thomas T. van Overbeek
                                          President, Chief Executive
                                          Officer and Director
 
 
                      POWER OF ATTORNEY
 
      KNOW  ALL PERSONS BY THESE PRESENTS, that each  person whose
signature  appears  below  constitutes  and  appoints jointly  and
severally, Thomas T.  van  Overbeek  and  John Finegan  and  each one of
them, his attorneys-in-fact,  each with  the  power  of substitution, for
him in  any  and  all capacities, to sign any and all amendments
(including  post- effective  amendments) to this Report on Form 10-K,
and  to file the same, with exhibits thereto and other documents  in
connection  therewith,  with  the  Securities  and  Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform each  and every act and thing
requisite and necessary to  be done  in  connection therewith, as fully
to all intents  and purposes as he might or could do in person, hereby
ratifying and  confirming all that each of said attorneys-in-fact,  or
his substitute or substitutes, may do or cause to be done by virtue
hereof.
 
     Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the  following persons  on  behalf
of the Registrant and in the  capacities and on the dates indicated
 
 
 
/s/ Thomas T. van Overbeek    President, Chief Executive
    Thomas T. van Overbeek    Officer and Director
                              (Principal Executive Officer)
 
/s/ John Finegan              Vice President, Finance and
    John Finegan              Administration and CFO
                              (Principal Financial and Accounting Officer)
 
/s/ E. David Crockett         Chairman of the Board
    E. David Crockett         of Directors
 
/s/ Stephen J. Sheafor        Director
    Stephen J. Sheafor
 
/s/ James E. Crawford III     Director
    James E. Crawford III
 
/s/ Daniel D. Tompkins        Director
    Daniel D. Tompkins
 
/s/ Bruce Silver              Director
    Bruce Silver