SECURITIES AND EXCHANGE COMMISSION
                    WASHINGTON, DC  20549


                          FORM 10-K


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

             For the fiscal year ended December 31, 1997

                             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         Preferred Share Purchase Rights

      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, 1998, was to the best of the
Company's knowledge approximately $22,450,000 million (based upon the
February 28, 1998 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, 1998, approximately 6,257,000 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 1998 Annual
Meeting of Stockholders to be held on June 3, 1998 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 corporate computing applications.  The Company is
a supplier of display products, and has historically sold most of its
display products in the document image processing ("DIP") market.
Cornerstone's ImageAccel display products, the first generation of which
was introduced in 1992, consist of controllers, proprietary software
drivers, and large screen, high resolution monitors.  In 1994, the
Company began providing software toolkits for scanning and DIP
applications.  In November 1995, the Company began shipments of
InputAccel; a software product designed to automate the conversion of
documents into electronic images.  Software toolkits and InputAccel
together compose the product lines for the Company's software division.

                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.

                In recent years substantially all of the Company's revenues
have been attributable to sales of display products based on its
ImageAccel technology, though software products contributed 13% of total
revenues for 1997. The ImageAccel family of display products consists of
controller boards and monitors designed to enhance user productivity by
providing excellent legibility and fast image display speeds. ImageAccel
products incorporate a   "scale-to-gray" image enhancement algorithm
that significantly improves the legibility of small characters typically
found in business documents.   These products, together with existing
and planned software, are expected to account for substantially all of
the Company's future revenues.


                The Company's software business has grown more rapidly than
its display business in the past three years. 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 Image & Scanner Interface
Specification ("ISIS"), an industry standard interface for scanners.
ISIS provides a key component for InputAccel; a software product
designed to automate the conversion of documents into electronic images.


                The Company's display and software products are used by a
diverse set of customers in a wide variety of 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.  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

DISPLAY PRODUCTS- Cornerstone offers a range of color and
grayscale monitors and controllers designed primarily for visually
demanding applications such as document image processing.  All
controllers are based on Cornerstone's ImageAccel architecture.
ImageAccel, 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 3.0 was introduced in November 1996 and is
built using an industry-standard graphics controller chip.

Cornerstone has been shipping grayscale products since 1987
and color products since 1992.  Color products presently represent a
significant portion of display revenues and are expected to represent
substantially all of display revenues in future periods.

SOFTWARE PRODUCTS- InputAccel is the Company's flagship
software product. InputAccel is 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 the ISIS interface, is
a foundation linking various technologies into an upgradeable system
that provides system management, control, and reporting functions. The
integration platform is an open server platform that can
incorporate/utilize various software modules from Cornerstone as well as
products from third parties, including application vendors, scanner
manufacturers, and other providers.


Market Applications

                The Company's products are used by a diverse set of
customers in a wide variety of document imaging and other enterprise
related applications.  In an increasingly competitive business
environment, many organizations are turning to document image processing
and document management as means of improving quality, service, 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 sales leads for its sales personnel, 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 direct to end-users or
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 1997, one U.S. distributor represented 14% of the
Company's net sales.  The Company believes that in the event of the loss
of one of its major distributors, over time, other distributors could
replace the distributor 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 majority of the Company's products are used in
connection with a complex DIP system that includes important elements
supplied by other vendors.  As a result, purchasers of DIP systems
typically rely on system integrators and VARs 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
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 Filenet.

                In 1997, international sales represented approximately 32%
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 products 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 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 1997, 1996, and 1995 research and development expenses were $7.9
million, $9.6 million and $7.8 million, respectively.  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
monitors and some important components used in its controller 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.
To address this issue, the Company has, in the past, entered into
significant purchase commitments.  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 either 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 and financial condition.

Competition

        DISPLAY PRODUCTS- The market for display products is highly
competitive.  The Company believes the principal competitive factors are
price, product features, availability, quality, service and support,
support of industry standards, and reputation.  Competition for display
products comes from manufacturers of monitors and controller cards such
as NEC, Hitachi, and Matrox; private label resellers such as Viewsonic;
and providers of computers and workstations, such as Compaq and Dell.

        SOFTWARE PRODUCTS- In addition to price, service, support,
and reputation, support of the Company's integration platform by
independent software vendors and ease of product implementation are
important competitive factors for InputAccel, the Company's data capture
product. The Company believes that it currently competes favorably with
respect to these factors.

        For both display and software products, 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, 1997, the Company had 223 employees. The
Company employs 33 people in finance and administrative functions, 87 in
marketing and sales, 30 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
are 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          48      President, Chief Executive Officer and
                                        Director
John Finegan                    48      Chief Financial Officer and
                                        Secretary
Kimra Hawley                    41      Sr. Vice President & GM, Software
                                        Division
Johannes Schmidt                34      Chief Technical Officer


                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
Chief Financial Officer 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.


                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 was a principal with
MarketBound Associates, a marketing consulting firm and from 1983 to
1989 a Product Marketing Manager with Amdahl Corporation.  Ms. Hawley
received a B.S. in Psychology from Pittsburgh State 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.




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 each of the past 3 years, first quarter revenues were
lower than the preceding fourth quarter revenues.  The Company expects
this trend to continue in 1998.    Although the Company was profitable
in the third and fourth quarters of 1997, there can be no assurance that
the Company's revenues will achieve 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 may be materially adversely affected.

                 In addition, a significant portion of the Company's sales
is made through 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 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 1997, international sales represented approximately 32%
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 products 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 products.  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 supplier's 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 of
approximately 86,000 square feet in San Jose, California.  This facility
is leased through 1998.  All Company functions, except warehousing of
finished product and certain sales activities, are performed at this
facility.  Finished products are shipped from a leased warehouse
facility in San Jose and from a contract warehouse facility in Duiven,
The Netherlands.  Cornerstone's European sales activities are conducted
from leased facilities near Munich, Germany and London, England.
Certain other sales activities are conducted from 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.


<PAGE>

























                                   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,
1997.  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
                                 ------------------------------------------
1997                             March 31,  June 30,   Sept. 30,  Dec. 31,
-----------------------------    ---------  ---------  ---------  ---------
Net revenues                      $26,014    $21,243    $21,436    $23,161
Gross profit                        9,050      7,966      7,554      7,936
Operating income (loss)               912       (130)       (52)       134
Net income (loss)                   1,056       (131)         7        150
Basic and Diluted EPS                0.14      (0.02)      0.00       0.02

Stock prices:
  High                               9.88       9.25       8.00       7.00
  Low                                7.00       6.50       5.00       4.50


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
Basic and Diluted EPS               (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

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 168 stockholders of record at February
28, 1998.

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,
                              -------------------------------------------------
                                1997      1996      1995      1994       1993
                              --------- --------- --------- --------- ---------
<S>                           <C>       <C>       <C>       <C>       <C>
Consolidated Statements of
    Operations Data:
----------------------------
Net revenues                   $91,854   $96,847   $91,156   $70,248   $43,631
Gross profit                    32,508    30,700    33,564    27,946    16,048
Operating income (loss)            863    (1,901)    7,537     7,446     5,708
Net income (loss)                1,081    (1,163)    6,158     4,816     3,814
Diluted net income
   (loss) per share              $0.15    ($0.15)    $0.81     $0.66     $0.61
Shares used in per share
   calculations                  7,285     7,548     7,586     7,316     6,206

Consolidated Balance
   Sheets Data:
----------------------------
Working capital                $30,968   $35,065   $34,563   $27,125   $13,919
Total assets                    47,760    54,843    52,556    37,035    28,857
Long term obligations              --        --        --        --        253
Stockholders' equity            33,923    39,018    39,331    29,697    21,046
</TABLE>


<PAGE>
























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,
                                        --------------------------------
                                           1997       1996       1995
                                        ---------- ---------- ----------
Net revenues                                100.0%     100.0%     100.0%
Cost of revenues                             64.6%      68.3%      63.2%
                                        ---------- ---------- ----------
    Gross profit                             35.4%      31.7%      36.8%
                                        ---------- ---------- ----------

Sales and marketing                          20.0%      16.9%      13.0%
Research and development                      8.6%       9.9%       8.5%
General and administrative                    5.9%       5.5%       4.4%
Restructuring charge                          --         1.4%       --
Purchased in-process technology               --         --         2.6%
                                        ---------- ---------- ----------
    Operating income (loss)                   0.9%      -2.0%       8.3%

Interest income                               0.9%       0.3%       0.5%
                                        ---------- ---------- ----------
    Income (loss) before income tax           1.8%      -1.7%       8.8%
Provision (benefit) for income tax            0.6%      -0.5%       2.0%
                                        ---------- ---------- ----------
       Net income (loss)                      1.2%      -1.2%       6.8%
                                        ========== ========== ==========

Revenues

The Company's revenues decreased by 5% in 1997 to $91.9 million from
$96.8 million in 1996 and increased by 6% in 1996 from $91.2 million in
1995. The decrease in revenue compared to 1996 was attributable to lower
revenues for display products, with 1997 revenues of $79.6 million
reduced 11% from 1996. This decrease was primarily attributable to lower
prices, though unit shipments in the second half of 1997 were lower than
the same period of 1996.   Revenues for software products increased 73%
to $12.3 million in 1997, adjusting for the disposition of the Pegasus
storage product line in January, 1997.

Gross Profit

Gross profit increased by 6% to $32.5 million in 1997 from $30.7 million
in 1996 while decreasing 9% in 1996 from $33.6 million in 1995.  Gross
profit margin increased to 35.4% in 1997 from 31.7% in 1996.  The
increase in gross profit and gross profit margin from 1996 to 1997 was
due primarily to increased sales of higher margin software products.
While management expects gross margins for 1998 to remain relatively
consistent with 1997,  there can be no assurance that the Company's
gross profit and gross margins will not decline in future periods.

Sales and Marketing

Sales and marketing expenses increased by 12% in 1997 to $18.3 million
from $16.3 million in 1996 and by 37% in 1996 from $11.9 million in
1995. Sales and marketing expenses increased as a percentage of revenue
from 13.0% in 1995, to 16.9% in 1996 and to 20% in 1997. The increases
in 1997 and 1996 were largely 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 software
products.  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 software products.

Research and Development

Research and development expenses decreased by 17% in 1997 to $7.9
million from $9.6 million in 1996 and increased by 23% in 1996 from $7.8
million in 1995. Research and development expenses have fluctuated as a
percentage of revenue from 8.6% in 1995 to 9.9% in 1996 and  to 8.5% in
1997. The decrease in 1997 was due to reduced development costs for
display products, partially offset by an increase for software products.
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 display division engineering
equipment totaling $400,000.

The Company believes that continued investment in research and
development is critical to its future growth, especially for its
software products, and the Company expects to continue to commit
substantial resources to research and development.  As a result,
quarterly research and development expenses may increase in the near
term.


General and Administrative

General and administrative expenses increased by 2% in 1997 to $5.4
million from $5.3 million in 1996 and by 32% in 1996 from $4.0 million
in 1995.  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 increased from 4.4% in 1995 to 5.5%
in 1996 and 5.9% in 1997.

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.

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 and Other Income

Interest and other income increased in 1997 to $787,000 from $254,000 in
1996 and from $496,000 in 1995.  The increase in 1997 resulted from
additional interest earned on larger invested cash balances and exchange
rate gains.

Provision (benefit) for Income Taxes

The provision (benefit) for income taxes as a percentage of pretax
income (loss) was 34%, (29)% and 23% for 1997, 1996 and 1995,
respectively, after being offset by reductions in the deferred tax asset
valuation allowance of $1.2 million in 1995.  The reduction in the
valuation allowance was recognized based on expected earnings in future
periods.



Liquidity and Capital Resources

At December 31, 1997, the Company had cash and cash equivalents of
approximately  $12.3 million, a decrease of $6.2 million from December
31, 1996, while all marketable securities held at December 31, 1996
matured during 1997.  At December 31, 1997, the working capital totaled
$31.0 million, a decrease of $4.1 million from December 31, 1996.  At
December 31, 1997, 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, 1997 letters of credit securing inventory
purchases totaling approximately $7.6 million were outstanding under
this agreement.  The agreement expires July 1, 1999.

Net cash provided by operating activities was $1.3 million in 1997
compared to $9.0 million in 1996.  The decrease in net cash provided by
operating activities from 1996 to 1997 was due primarily to a decrease
in accounts payable and a slight increase to inventory compared to a
significant decrease in 1996.  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 used for investing activities was $1.3 million in 1997 compared
to $4.1 million provided by investing activities in 1996, the difference
related primarily to the maturities of marketable securities in 1996.
Additions to property and equipment were $1.3 million and $1.7 million
for 1997 and 1996, respectively.

On February 20, 1997, the Company's Board of Directors authorized the
use of up to $5 million to repurchase the Company's common stock.  This
amount was increased to $15 million on Sept 17, 1997.  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 were and will continue to be made from
time-to-time on the open market or in privately negotiated transactions.
The timing and volume of purchases are dependent upon market conditions
and other factors.  The Company intends to use cash on hand to fund its
purchases. A total of $6.5 million of repurchases were made in 1997.

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 1998.  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.

The following consolidated financial statements of the Company and
auditor's report are included in Item 8 and appear following Item 14:

      Report of Independent Accountants

      Consolidated Balance Sheets  -  At December 31, 1997 and 1996

      Consolidated Statements of Operations - Years Ended December 31, 1997,
      1996, and 1995

      Consolidated Statements of Stockholders' Equity - Years Ended December
      31, 1997, 1996, and 1995

      Consolidated Statements of Cash Flows  -  Years Ended December 31, 1997,
      1996, and 1995

      Notes to Consolidated Financial Statements


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 1997 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 1998 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 1998 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
1998 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.

        Consolidated Balance Sheets as of December 31,  1997 and 1996

        Consolidated Statements of Operations for each of the three years in
         the period ended December 31, 1997

        Consolidated Statements of Stockholders' Equity for each of the three
          years in the period ended December 31, 1997


        Consolidated Statements of Cash Flows for each of the three years in
          the period ended December 31, 1997

        Notes to Consolidated Financial Statements

        Report of Coopers & Lybrand, L.L.P.
          Independent Accountants


        2.      Financial Statement Schedule.


              --      Report of Coopers & Lybrand, L.L.P.  Independent
                      Accountants on Financial Statement Schedule

        Schedule VIII   --      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.

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.
      4.3xx     Rights Agreement dated September 9, 1997
      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.
      21.1+     Subsidiaries of the Company.
      23.1      Consent of Coopers & Lybrand.
      24.1      Power of Attorney
      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.
   xx    Incorporated by reference to an exhibit to the Company's
          Registration Statement on Form 8-A filed on September 10, 1997.
   *     Confidential Treatment has been granted for the deleted portions of
          this document.

<PAGE>





                                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 30, 1998.

                                 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:

        Signature                          Title                     Date
--------------------------  -----------------------------------  -------------
/s/ Thomas T. van Overbeek  President, Chief Executive           March 30, 1998
--------------------------  Officer and Director
    Thomas T. van Overbeek  (Principal Executive Officer)


/s/ John Finegan            Vice President, Finance and          March 30, 1998
--------------------------  Administration and CFO
    John Finegan            (Principal Financial and Accounting
                            Officer)

/s/ E. David Crockett       Chairman of the Board                March 30, 1998
--------------------------  of Directors
    E. David Crockett

/s/ Stephen J. Sheafor      Director                             March 30, 1998
--------------------------
    Stephen J. Sheafor

/s/ James E. Crawford III   Director                             March 30, 1998
--------------------------
    James E. Crawford III

/s/ Daniel D. Tompkins      Director                             March 30, 1998
--------------------------
    Daniel D. Tompkins

/s/ Bruce Silver            Director                             March 30, 1998
--------------------------
    Bruce Silver

<PAGE>










































                       CORNERSTONE IMAGING, INC.
                     CONSOLIDATED BALANCE SHEETS
                   (in thousands, except par value)
<TABLE>
<CAPTION>
                                                              December 31,
                                                       ----------------------
                                                          1997        1996
                                                       ----------  ----------
<S>                                                    <C>         <C>
                         ASSETS
Current assets:
  Cash and cash equivalents                              $12,284     $18,486
  Marketable securities                                                  --
  Accounts receivable, net of allowance for doubtful
     accounts of $960 in 1997 and $750 in 1996            15,887      17,181
  Inventories                                             10,933      10,710
  Prepaid expenses and other current
    assets                                                 1,122         816
  Deferred income taxes                                    4,579       3,697
                                                       ----------  ----------
      Total current assets                                44,805      50,890
Property and equipment, net                                2,516       2,859
Deferred income taxes and other assets                       439       1,094
                                                       ----------  ----------
                                                         $47,760     $54,843
                                                       ==========  ==========

          LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable                                        $6,609     $10,093
  Accrued compensation and related liabilities             1,071       1,066
  Accrued liabilities                                      3,212       2,619
  Accrued warranty                                         1,931       1,286
  Deferred revenue                                          1014         761
                                                       ----------  ----------
       Total current liabilities                          13,837      15,825
                                                       ----------  ----------
Commitments and contingency (note 6)

Common stock, $0.01 par value; authorized: 25,000
   shares; issued and outstanding: 6,660 shares
   and 7,558 shares at December 31, 1997 and
   1996, respectively                                         67          76
Additional paid-in capital                                24,747      30,914
Retained earnings                                          9,109       8,028
                                                       ----------  ----------
     Stockholders' equity                                 33,923      39,018
                                                       ----------  ----------
                                                         $47,760     $54,843
                                                       ==========  ==========
</TABLE>
    The accompanying notes are an integral part of these
              consolidated financial statements
<PAGE>
                        CORNERSTONE IMAGING, INC.
                 CONSOLIDATED STATEMENTS OF OPERATIONS
                (in thousands, except per share amounts)
<TABLE>
<CAPTION>
                                              Year Ended December 31,
                                        --------------------------------
                                           1997       1996       1995
                                        ---------- ---------- ----------
<S>                                     <C>        <C>        <C>
Net revenues                              $91,854    $96,847    $91,156
Cost of revenues                           59,346     66,147     57,592
                                        ---------- ---------- ----------
    Gross profit                           32,508     30,700     33,564
                                        ---------- ---------- ----------

Sales and marketing                        18,341     16,335     11,877
Research and development                    7,888      9,563      7,758
General and administrative                  5,416      5,299      3,985
Restructuring charge                          --       1,404        --
Purchased in-process technology               --         --       2,407
                                        ---------- ---------- ----------
    Operating income (loss)                   863     (1,901)     7,537

Interest income                               787        254        496
                                        ---------- ---------- ----------
    Income (loss) before income tax         1,650     (1,647)     8,033
Provision (benefit) for income tax            569       (484)     1,875
                                        ---------- ---------- ----------
       Net income (loss)                   $1,081    ($1,163)    $6,158
                                        ========== ========== ==========

Basic EPS                                   $0.15     ($0.15)     $0.86
                                        ========== ========== ==========

Diluted EPS                                 $0.15     ($0.15)     $0.81
                                        ========== ========== ==========

Shares used in Basic EPS calculation        7,248      7,548      7,202
                                        ========== ========== ==========

Shares used in Diluted EPS calculation      7,285      7,548      7,586
                                        ========== ========== ==========
</TABLE>
       The accompanying notes are an integral part of these
              consolidated financial statements
<PAGE>









                               CORNERSTONE IMAGING, INC.
                      CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                     (in thousands)
<TABLE>
<CAPTION>
                                                                   Unrealized
                                                                     Loss on                Total
                                     Common Stock      Additional  Marketable               Stock-
                                   ------------------   Paid-in    Securities,  Retained   holders'
                                    Shares    Amount    Capital        Net      Earnings    Equity
                                   --------- -------- ------------ ----------- ---------- ----------
<S>                                <C>       <C>      <C>          <C>         <C>        <C>
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 (loss)                             --       --           --         --      (1,163)    (1,163)
                                   --------- -------- ------------ ----------- ---------- ----------
Balances, December 31, 1996           7,558       76       30,914         --       8,028     39,018
  Common stock issued under:
    Stock option plan                    53       --          116         --         --         116
    Employee Stock Purchase Plan         91        1          447         --         --         448
  Common stock repurchased           (1,007)     (10)      (6,447)                           (6,457)
  Common stock received for Pegasus     (35)      --         (332)        --         --        (332)
  Tax benefit from disqualifying
    dispositions of common stock         --       --           49         --         --          49
  Net income (loss)                      --       --           --         --       1,081      1,081
                                   --------- -------- ------------ ----------- ---------- ----------
Balances, December 31, 1997           6,660      $67      $24,747       $ --      $9,109    $33,923
                                   ========= ======== ============ =========== ========== ==========
</TABLE>
    The accompanying notes are an integral part of these
              consolidated financial statements
<PAGE>





                        CORNERSTONE IMAGING, INC.
                 CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (in thousands)
<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                               --------------------------------
                                                  1997       1996       1995
                                               ---------- ---------- ----------
<S>                                            <C>        <C>        <C>
Cash flows from operating activities:
  Net income (loss)                               $1,081    ($1,163)    $6,158
  Adjustments to reconcile net income
  (loss) to net cash provided by (used
   in) operating activities:
     Depreciation and amortization                 1,668      1,708      1,218
     Loss on asset to be disposed of                 --         496        --
     Non-recurring charge; purchased
      in-process technology                          --         --       2,407
     Deferred income taxes                          (353)      (389)    (2,699)
  (Increase) decrease in assets and
   liabilities:
     Accounts receivable                           1,294        704     (7,084)
     Inventories                                    (223)     3,365     (7,807)
     Prepaid expenses and other current
      assets                                        (306)     1,343       (867)
     Other assets                                    126        238        (66)
     Accounts payable                             (3,487)     1,268      4,638
     Accrued compensation and related
      liabilities                                      5        (43)       119
     Accrued liabilities and deferred
      revenue                                      1,542      1,451      1,812
                                               ---------- ---------- ----------
         Net cash provided by (used
           in) operating activities                1,347      8,978     (2,171)
                                               ---------- ---------- ----------
Cash flows from investing activities:
  Purchase of marketable securities                 --       (4,595)   (21,846)
  Maturities of marketable securities               --       10,365     28,155
  Property and equipment additions                (1,324)    (1,707)    (2,603)
  Pegasus acquisition, less cash acquired           --         --         (632)
                                               ---------- ---------- ----------
         Net cash provided by (used
           in) investing activities               (1,324)     4,063      3,074
                                               ---------- ---------- ----------
Cash flows from financing activities:
  Common stock received from Pegasus
      sale                                          (332)      --         --
  Repurchase of common stock                      (6,457)      --         --
  Issuance of common stock                           564        774        658
                                               ---------- ---------- ----------
         Net cash provided by (used
           in) financing activities               (6,225)       774        658
                                               ---------- ---------- ----------
Net increase (decrease) in cash and
   cash equivalents                               (6,202)    13,815      1,561
Cash and cash equivalents at beginning of year    18,486      4,671      3,110
                                               ---------- ---------- ----------
Cash and cash equivalents at end of year         $12,284    $18,486     $4,671
                                               ========== ========== ==========
Supplemental cash flow disclosures:
Cash paid during the year for taxes               $1,203       $287     $3,247
Cash paid during the year for interest           $   --     $   --         $10
Common stock issued in connection with the
   acquisitions                                  $   --     $   --      $2,026
Tax benefit from disqualifying dispositions          $49        $46       $682
Unrealized holding gain (loss) on marketable
   securities, net                               $   --         $30       $110
</TABLE>
    The accompanying notes are an integral part of these
             consolidated financial statements.
<PAGE>








































                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.      Business of the Company:

        Cornerstone Imaging, Inc. (the Company) develops, markets and
services display products and software products for document image
processing (DIP) and related applications.  Substantially all of the
Company's revenues in recent years have been attributable to sales of
display products based on its ImageAccel technology, though software
products represented 13% of revenues for 1997 and have increased at
faster rates than display products in recent years.  The ImageAccel
family of graphics controller cards and monitors are used in conjunction
with personal computers and are designed to enhance user productivity by
providing high document legibility and fast image display speeds.

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,
Cornerstone Imaging (UK) Ltd, 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.


        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 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, 1997, 1996, and 1995 was $5.3million, $4.2 million, and $3.3
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:

        The Company had adopted the provisions of Statement of Financial
Accounting Standards No. 128, Earning Per Share (SFAS 128), effective
with the year ended December 31, 1997.  SFAS 128 requires the
presentation of basic and diluted EPS.  Basic EPS is computed by
dividing income available to common stockholders by the weighted average
number of common shares outstanding for that period.  Diluted EPS is
computed giving effect to all dilutive potential common shares that were
outstanding during the period.  Dilutive potential common shares consist
of incremental common shares issuable upon exercise of stock options,
warrants and convertible securities for all periods.

        In accordance with the disclosure requirements of SFAS 128, a
reconciliation of the numerator and denominator of basic and diluted EPS
is provided as follows:

<TABLE>
<CAPTION>
                                              Year Ended December 31,
                                        --------------------------------
                                           1997       1996       1995
                                        ---------- ---------- ----------
<S>                                     <C>        <C>        <C>
Net income (loss)                          $1,081    ($1,163)    $6,158
  (numerator)

Shares used in basic EPS calculations
  (denominator)                             7,248      7,548      7,202

Dilutive effect of stock options               37        --         384

Shares used in diluted EPS calculations     7,285      7,548      7,586

Basic EPS                                   $0.15     ($0.15)     $0.86

Diluted EPS                                 $0.15     ($0.15)     $0.81
</TABLE>

        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, 1997 and 1996, accounts
receivable from distributors totaled $12.5 million and $11.6 million,
respectively.  Substantially all cash and cash equivalents are held by
one bank.



        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.

        Recent Pronouncement:

        During June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"),
"Reporting Comprehensive Income."  This statement establishes
requirements for disclosure of comprehensive income and becomes
effective for the Company for fiscal years beginning after December 15,
1997, with reclassification of earlier financial statements for
comparative purposes.  Comprehensive income generally represents all
changes in stockholders' equity except those resulting from investments
or contributions by stockholders.  The Company is evaluating alternative
formats for presenting this information, but does not expect this
pronouncement to materially impact the Company's results of operations.

        In June 1997, the FASB issued SFA No. 131, Disclosures about
segments of an Enterprise on Related Information, which changes the way
public companies report information about operating segments.  SFAS No.
131, which is based on the management approach to segment reporting,
establishes requirements to report elected segment information quarterly
and to report entity-wide disclosures about products and services, major
customers and the major countries in which the entity holds assets and
reports revenues.  The Company has not yet evaluated the effects of this
change or its reporting segment information.

        During October 1997, the American Institute of Certified Public
Accountants issued Statement of Position 97-2 ("SOP 97-2"), "Software
Revenue Recognition."  This statement establishes requirements for
revenue recognition for software companies for fiscal years beginning
after December 15, 1997.  The Company is currently evaluating the impact
of SOP 97-2 and has not determined the result, if any, on the Company's
financial position, results of operations or cash flows.

        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.      Balance Sheet Components (in thousands):

        Inventories:                      1997      1996
                                        --------- ---------
     Raw materials                          $483    $1,645
     Work in process                         856     1,455
     Finished goods                        9,594     7,610
                                        --------- ---------
                                         $10,933   $10,710
                                        ========= =========

        Property and equipment:           1997      1996
                                        --------- ---------
     Office equipment and machinery       $6,718    $5,812
     Software                                760       606
     Capitalized Software                    --        126
     Leasehold improvements                1,707     1,317
                                        --------- ---------
                                           9,185     7,861
     Less accumulated depreciation
        and amortization                  (6,669)   (5,002)
                                        --------- ---------
                                          $2,516    $2,859
                                        ========= =========

4.      Line of Credit

        The Company has a line of credit facility with a bank which
expires on July 1, 1999.  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 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.  At December 31, 1997
letters of credit securing inventory purchases totaling $7.6 were
outstanding under this agreement.


5.      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,

     1998                 $ 1,049
     1999                     214
                          -------
     Total                $ 1,263
                          =======

        Rent expense was approximately $920,000, $957,000, and $597,000 in
1997, 1996, and 1995, respectively.

6.      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 2,474,852 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, 1997, 1996, and 1995
is as follows (in thousands except the per share amounts):

<TABLE>
<CAPTION>
                                                      Options Outstanding
                                       -------------------------------------------
                             Shares                                       Weighted-
                            Available  Number                             average
                              for        of                               Exercise
                             Grant     Shares    Price Per Share Amount    Price
                            --------   ------- ---------------- --------- --------
<S>                         <C>        <C>     <C>              <C>       <C>
Balance, December 31, 1994      163       927   $0.40 - $26.00    $9,236    $9.96

   Plan Amendment               350
   Options granted             (646)      646  $13.00 - $25.25    10,047    15.57
   Options canceled             157      (157)  $0.40 - $26.00    (2,467)   15.71
   Options exercised                     (138)  $0.40 - $18.75      (225)    1.63
                            --------   -------                  ---------
Balance, December 31, 1995       24     1,278   $0.40 - $25.25    16,591    12.99

   Plan Amendment               500
   Options granted           (1,396)    1,396   $5.50 - $18.00    12,300     8.81
   Options canceled             978      (978)  $1.60 - $25.20   (14,476)   14.80
   Options exercised                     (127)  $0.40 -  $8.63      (173)    1.37
   Options expired              174      (174)  $1.60 - $20.25    (2,642)   15.14
                            --------   -------                  ---------
Balance, December 31, 1996      280     1,395   $0.40 - $18.50    11,600     8.32

   Plan Amendment               400
   Options granted           (1,068)    1,068   $4.63 -  $9.25     7,325     6.86
   Options canceled             427      (427)  $5.60 - $15.25    (3,554)    8.31
   Options exercised                      (53)  $0.40 -  $8.63      (115)    2.18
   Options expired               88       (88)  $3.00 - $15.25      (759)    8.66
                            --------   -------                  ---------
Balance, December 31, 1997      127     1,895   $0.40 - $16.25   $14,497     7.65
                            ========   =======                  =========
</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, 1997:
<TABLE>
<CAPTION>
                          Options Oustanding             Options Exercisable
                  ----------------------------------  -----------------------
                               Weighted
                    Number      Average    Weighted      Number     Weighted
                  Outstanding  Remaining   Average    Exercisable   Average
    Range of         as of    Contractual  Exercise      as of      Exercise
 Exercise Prices   12/31/97   Life (Years)  Price       12/31/97     Price
----------------  ----------- ----------- ----------  ------------ ----------
<S>               <C>         <C>         <C>         <C>          <C>
                    (000s)                               (000s)
 $1.39 -  $1.39            3         6.5      $1.39             3      $1.39
 $3.00 -  $6.88          544         8.9       5.40            57       5.63
 $7.00 -  $9.50        1,298         8.5       8.36           371       8.50
$13.50 - $18.50           50         6.4      14.20            37      14.12
                  -----------                         ------------
                       1,895         8.5      $7.65           468      $8.56
                  ===========                         ============
</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 1997, 1996, and 1995:

                                            Group A    Group B
                                           ---------  ---------
   Risk-free interest rates                    6.09%      6.14%
   Expected life                           3.2 years  3.9 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 1997,
1996, and 1995 was $3.53, $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
1997, 1996, and 1995:

                                             1997       1996       1995
                                           ---------  ---------  ---------
   Risk-free interest rates                    5.32%      5.46%      6.77%
   Expected life                            0.5 years  0.5 years  0.9 years
   Volatility                                    66%        66%        66%
   Dividend yield                              --         --         --

        The weighted average fair value of those purchase rights granted
in 1997, 1996, and 1995 was $6.11, $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):


                                             1997       1996       1995
                                           ---------  ---------  ---------
   Net income (loss)- proforma              ($1,238)   ($4,036)    $5,441
   Basic EPS - proforma                      ($0.17)    ($0.53)     $0.76
   Diluted EPS - proforma                    ($0.17)    ($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.

7.      Significant Customers and Export Revenues:

        For the years ended December 31 1997, 1996, and 1995 one customer
accounted for 14%, 12%, and 12%, respectively, of the Company's
revenues.

        Export revenues, principally to Europe, as a percentage of total
revenues were 32%, 29%, and 29% for the years ended December 31, 1997,
1996, and 1995, respectively.  Income and assets of the Company's
foreign subsidiaries were not significant.

8.      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.

9.     Acquisitions & Divestitures:

        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 received 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 was 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.

        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.


10.     Income Taxes:

Income tax expense (benefit) consists of (in thousands):

                                     1997      1996      1995
                                   --------- --------- ---------
Current:
  Federal                              $444     ($247)   $3,589
  State and local                       414       --        985
  Foreign                                47       152       --
                                   --------- --------- ---------
                                       $905      ($95)   $4,574
                                   --------- --------- ---------
Deferred:
  Federal                             ($193)    ($185)  ($2,249)
  State and local                      (143)     (204)     (450)
                                   --------- --------- ---------
                                      ($336)    ($389)  ($2,699)
                                   --------- --------- ---------
Total:
  Federal                              $251     ($432)   $1,340
  State and local                       271      (204)      535
  Foreign                                47       152       --
                                   --------- --------- ---------
                                       $569     ($484)   $1,875
                                   ========= ========= =========

      The Company's effective tax rate differs from the statutory
federal income tax rate as shown in the following schedule:

                                     1997      1996      1995
                                   --------- --------- ---------
Statutory federal income tax rate      34.0%    -34.0%     34.0%
State taxes                             5.8%     -6.1%      6.8%
Foreign taxes                           --        9.2%      --
Research and development credits        --        --       -3.1%
Foreign sales corporation               --        --       -2.2%
Tax exempt interest                    -1.0%     -2.2%     -1.7%
Change in valuation allowance           --        --      -15.4%
Other, net                             -4.2%      3.7%      4.9%
                                   --------- --------- ---------
                                       34.6%    -29.4%     23.3%
                                   ========= ========= =========

       The components of the deferred tax asset (in thousands):

                                               1997      1996
                                             --------- ---------
Deferred tax assets:
  Provision for doubtful accounts                $362      $676
  Inventory reserves                            1,144     1,001
  State taxes                                     104       --
  Accrued liabilities                           1,354     1,257
  Depreciation and basis differences              950     1,142
  Net operating loss carryforwards                --        460
  Research & development tax
   credit carryforwards                         1,073       115
                                             --------- ---------
       Total deferred tax asset                $4,987    $4,651
                                             ========= =========

        At December 31, 1997, the Company had $315,497 of research and
development tax credits and $418,000 of AMT credits available to offset
future U.S. federal income tax.  These carryforwards expire in 2012.
For California franchise tax purposes, the Company has research and
development credit carryforwards for $178,712.





11.     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 $168,000, $156,000, and $117,000
during 1997, 1996, and 1995, respectively.


12.       Stock Repurchases

        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.
This amount was increased to $15 million on September 17, 1997.  The
Company repurchased 1 million shares of stock for a total of $6.5
million in 1997. 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 have
been and will continue to 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.


<PAGE>




























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, 1997 and
1996, and the related consolidated statements of operations ,
stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1997.  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, 1997 and
1996, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997
in conformity with generally accepted accounting principles.



COOPERS & LYBRAND L.L.P.
San Jose, California
January 31, 1998

<PAGE>
















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 21.

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, 1998

<PAGE>































                  CORNERSTONE IMAGING, INC.

      SCHEDULE II  -  VALUATION AND QUALIFYING ACCOUNTS
                             (in thousands)

                                          Additions
                              Balance at  Charged to               Balance
                              beginning   costs and                 at end
Description                    of year     expenses   Deductions   of year
----------------------------  ----------  ----------  ----------  ----------
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

Year ended December 31, 1997
   Allowance for bad debt          $750        $248        ($38)       $960
   Inventory reserve             $1,390      $1,180       ($845)     $1,725