Form 10-Q
 
                       SECURITIES AND EXCHANGE COMMISSION
 
                              Washington, DC 20549
 
                             ----------------------
 
[X]  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934 For the Quarterly Period Ended June 30, 1997
 
[ ]  Transition Report Pursuant to Section 13 or 15(d) of the Securities
     Exchange Act of 1934 For the transition period from _______to_______
 
                            Commission File No. 0-22292
 
                            CORNERSTONE IMAGING, INC.
             (Exact name of registrant as specified in its charter)
 
    A Delaware Corporation                                77-0104275
    ----------------------                                ----------
(State or other jurisdiction of                       (I. R. S. Employer
incorporation or organization)                        Identification No.)
 
                 1710 Fortune Drive,  San Jose, California  95131
                    (Address of principal executive offices)
 
Registrant's telephone number, including area code: (408) 435-8900
 
                                   (No Change)
         ---------------------------------------------------------------
               Former name, former address and former fiscal year,
                         if changed since last report.
 
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.  Yes [X]   No [ ]
 
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of June 30, 1997:  7,297,735
 
 
 
 
 
 
 
<PAGE>
 
 
Part 1.  Financial Information
Item 1.   Financial Statements
 
                              CORNERSTONE IMAGING, INC.
                            CONSOLIDATED BALANCE SHEETS
                                 (In thousands)
 
<TABLE>
<CAPTION>
                                                   June 30,    Dec. 31,
                                                   1997        1996
                                                    --------   --------
                                                   (Unaudited)
<S>                                                <C>         <C>
                       ASSETS
Current assets:
  Cash and cash equivalents                          $16,097    $18,486
  Accounts receivable                                 12,299     17,181
  Inventories                                         14,779     10,710
  Deferred income taxes and other
   current assets                                      5,894      4,513
                                                    --------   --------
    Total current assets                              49,069     50,890
 
Property and equipment, net                            2,834      2,859
Other assets                                             597      1,094
                                                    --------   --------
       Total assets                                  $52,500    $54,843
                                                    ========   ========
 
       LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
  Accounts payable                                    $8,579    $10,093
  Deferred revenue                                       866        761
  Accrued liabilities                                  5,156      4,971
                                                    --------   --------
    Total current liabilities                         14,601     15,825
                                                    --------   --------
 
Stockholders' equity:
  Common stock                                            75         76
  Paid in capital                                     28,871     30,914
  Retained earnings                                    8,953      8,028
                                                    --------   --------
    Total stockholders' equity:                       37,899     39,018
                                                    --------   --------
       Total liabilities and
         stockholders' equity                        $52,500    $54,843
                                                    ========   ========
 
 
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
 
 
 
                       CORNERSTONE IMAGING, INC.
                    CONSOLIDATED STATEMENTS OF OPERATIONS
                              (UNAUDITED)
                 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                        Three Months Ended    Six Months Ended
                                                              June 30,            June 30,
                                                       ------------------- -------------------
                                                       1997      1996      1997      1996
                                                       --------- --------  --------  --------
<S>                                                    <C>       <C>       <C>       <C>
Net revenues                                            $21,243   $22,569   $47,257   $40,401
Cost of revenues                                         13,277    15,704    30,241    28,158
                                                       --------  --------  --------  --------
Gross profit                                              7,966     6,865    17,016    12,243
 
Sales and marketing                                       4,838     3,963     9,209     7,575
Research and development                                  1,902     2,120     4,307     4,761
General and administrative                                1,356     1,366     2,718     2,721
Restructuring charge                                         --        --        --     1,404
                                                       --------  --------  --------  --------
  Operating income (loss)                                  (130)     (584)      782    (4,218)
 
Other income (expense)                                      (69)       31       617        88
                                                       --------  --------  --------  --------
  Income (loss) before provision
     (benefit) for income taxes                            (199)     (553)    1,399    (4,130)
Provision (benefit) for income taxes                        (68)     (166)      474    (1,230)
                                                       --------  --------  --------  --------
    Net income (loss)                                     ($131)    ($387)     $925   ($2,900)
                                                       ========  ========  ========  ========
Net income (loss) per share                              ($0.02)   ($0.05)    $0.12    ($0.39)
                                                       ========  ========  ========  ========
 
Shares used in per share calculation                      7,334     7,438     7,464     7,431
                                                       ========  ========  ========  ========
 
 
 
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
 
                        CORNERSTONE IMAGING, INC.
                  CONSOLIDATED STATEMENTS OF CASH FLOWS
                         (UNAUDITED - IN THOUSANDS)
 
<TABLE>
<CAPTION>
 
                                                                SIX MONTHS ENDED
                                                                    JUNE 30,
                                                             -------------------
                                                             1997      1996
                                                             --------- ---------
<S>                                                          <C>       <C>
Cash flows from operating activities:
 Net income (loss)                                               $925   ($2,900)
 Adjustments to reconcile net income
  (loss) to net cash provided by (used in
  operating activities:
  Depreciation and amortization                                   889       995
Changes in assets and liabilities:
    Accounts receivable                                         4,882     1,969
    Inventories                                                (4,069)   (2,682)
    Deferred income taxes and other assets                     (1,381)       87
    Accounts payable                                           (1,514)   (2,651)
    Accrued liabilities and deferred revenue                      290      (963)
                                                             --------- ---------
    Net cash provided by (used in)
    operating activities                                           22    (6,145)
                                                             --------- ---------
Cash flows from investing activities:
 Purchases of marketable securities                                --    (4,595)
 Maturities of marketable securities                               --     9,169
 Property and equipment additions                                (734)   (1,379)
 Proceeds from sale of property and equipment                      --       674
                                                             --------- ---------
    Net cash provided by (used in) investing activities          (734)    3,869
                                                             --------- ---------
Cash flows from financing activities:
 Net proceeds from issuance of common stock                        --       440
 Repurchase of common stock                                    (2,057)       --
                                                             --------- ---------
    Net cash provided by(used in) financing
    activities                                                 (1,677)      440
                                                             --------- ---------
Net increase (decrease) in cash and
 cash equivalents                                              (2,389)   (1,836)
Cash and cash equivalents at beginning
 of period                                                     18,486     4,671
                                                             --------- ---------
Cash and cash equivalents at end of
 period                                                       $16,097    $2,835
                                                             ========= =========
 
 
Unrealized holding (gain) Loss on marketable
  securities, net                                                 $29       $68
                                                             ========= =========
 
</TABLE>
 
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
 
                        CORNERSTONE IMAGING, INC.
                      NOTES TO FINANCIAL STATEMENTS
                             (UNAUDITED)
 
 
 
1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
        Interim Unaudited Financial Information:
 
                The accompanying interim unaudited consolidated
financial statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission.  Certain
information and footnote disclosure normally included in the
financial statements prepared in accordance with generally
accepted accounting principles may have been condensed or omitted
pursuant to such rules and regulations, although management
believes that the disclosures are adequate to make the information
presented not misleading.  The December 31, 1996 balance sheet was
derived from audited financial statements but does not include all
disclosures required by generally accepted accounting principles.
The unaudited financial statements for the three and six month
periods ended June 30, 1997 and 1996 include, in the opinion of
management, all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the financial information
set herein.  The results of operations for the interim periods is
not necessarily indicative of the results to be expected for an
entire year.
 
Derivatives:
 
The company uses forward foreign exchange contracts to hedge
liabilities denominated in Japanese yen.  For these instruments,
risk reduction is assessed on a transaction basis and the
instruments are designated as, and effective as a hedge, and are
highly inversely correlated to the hedged item as required by
generally accepted accounting principles. Gains and losses on
these hedges are included in the carrying amount of the
liabilities and are ultimately recognized in income as part of
those carrying amounts. If a hedging instrument ceases to qualify
as a hedge, any subsequent gains and losses are recognized
currently in income.  The Company does not use any derivatives for
trading or speculative purposes.  If a derivative ceases to
qualify for hedge accounting, it is accounted for on a mark to
market basis.
 
Recent Accounting Pronouncements
 
During February 1997, the Financial Accounting Standards Board
issued statement 128, Earnings Per Share (SFAS 128), which
specifies the computation, presentation and disclosure
requirements for earnings per share.  SFAS 128 will become
effective for the Company's fourth quarter of 1997.  The impact of
adopting SFAS 128 on the Company's financial statements has not
yet been determined.
 
In June 1997, the FASB issued SFAS No. 130 Reporting Comprehensive
Income.  SFAS No. 130 establishes standards for the reporting and
display of comprehensive income and its components in a full set
of general purpose financial statements.  Comprehensive income is
defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from
nonowner sources.  The impact of adopting SFAS No.130, which is
effective for the Company in 1998, has not been determined.
 
In June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information.  SFAS No. 131
requires publicly-held companies to report financial and other
information about key revenue-producing segments of the entity for
which such information is available and is utilized  by the chief
operation decision maker.  Specific information to be reported for
individual segments includes profit or loss, certain revenue and
expense items and total assets. A reconciliation of segment
financial information to amounts reported in the financial
statements would be provided.  SFAS No. 131 is effective for the
Company in 1998 and the impact of adoption has not been
determined.
 
 
 
2.      INVENTORIES (in thousands):
        Inventory:
                                  June 30, 1997       December 31, 1996
                                   (unaudited)
                                   ---------             ---------
            Raw materials          $   1,132             $   1,645
            Work in process            1,206                 1,455
            Finished goods            12,441                 7,610
                                   ---------             ---------
                                   $  14,779             $  10,710
                                   =========             =========
 
 
 
3.      LINE OF CREDIT:
 
The Company has a line of credit facility with a bank which
expires 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 base
rate 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 and quarterly operating results. At June
30, 1997, there were no borrowings under the line of credit
outstanding.
 
4.     DIVESTITURE:
 
        On February 4, 1997, the Company entered into an agreement
to sell the assets of its Pegasus division.  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 financial statements.
 
 
5.      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 includes $1.1
million for prepaid royalties, committed payments for exclusivity
rights, engineering services, and a $270,000 write-down of
PrintACCEL inventory.  During 1996, the Company completed
making such committed payments, terminated all sales and
marketing efforts, and disposed of all inventory  related to
this product line.
 
6.      INCOME TAXES:
 
        The Company's provision for income taxes reflects the
Company's estimated 1997 annualized effective tax rate of 34%.
 
7.   STOCK REPURCHASE:
 
        On February 14, 1997, the Company's Board of Directors
authorized the use of up to $5 million to repurchase the Company's
common stock.  The repurchased stock is expected to be held by the
Company as treasury stock to be used to meet the Company's
obligations under its stock plans and for other corporate
purposes.  Purchases will be made from time-to-time on the open
market or in privately negotiated transactions.  The timing and
volume of purchases will be dependent upon market conditions and
other factors.  The Company intends to use cash on hand to fund
its purchases.  During the six month period ended June 30, 1997,
the Company repurchased 241,300 shares at an average cost per
share of $8.52.
 
 
8.      STOCK OPTION PLAN:
 
        On February 14, 1997, the Company's Board of Directors
authorized an increase in the number of shares reserved for
issuance under the Company's 1993 Stock Option/Stock Issuance Plan
by 400,000 shares to 2,474,852 shares of common stock for issuance
under the Plan.  The increase was approved by stockholders on
June 4, 1997.
 
 
 
 
Item 2  -  Management's Discussion and Analysis of Financial
Condition and Results of Operations.
 
This report contains forward looking statement that involve risks
and uncertainties.  The statements contained in this report that
are not purely historical are forward looking statements within
the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, including without limitation, statements regarding the
Company's expectations, beliefs, intentions or strategies
regarding the future.  All forward looking statements included in
this report are based on information available to the Company on
the date hereof, and the Company assumes no obligation to update
any such forward looking statements.  The Company's actual results
could differ materially from those anticipated in these forward
looking statements as a result of certain factors.
 
Factors that might cause such a difference include, but are not
limited to those discussed below and in the section captioned RISK
FACTORS in the Company's most recent Annual Report on Form 10-K 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,
inherent risks associated with international sales and
international sources of supply, limited sources of supply and
reliance upon third-party manufacturers and distributors, and
dependence upon key personnel.
 
 
RESULTS OF OPERATIONS:
__________________________________________________________________
__________
The Company develops, markets and services hardware and software
products for document image processing (DIP) display and related
applications.  In the U.S., the Company is a leading supplier of
display subsystems for DIP systems.  Cornerstone's ImageACCEL
subsystems, 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 DIP software toolkits.  In November 1995, the Company
began shipments of InputACCEL, a software product designed to
automate the conversion of documents into electronic images.
 
Document image processing, which is often used in conjunction with
other computer applications, enables multiple users to
electronically capture, file and retrieve documents.  DIP systems
allow users quick access to the actual document images, require
little physical storage space and reduce the risk of misfiling,
theft and accidental loss or destruction of documents.  DIP
systems can store any document image, including photographs,
diagrams, letterhead, handwriting, and other graphic formats.
 
Substantially all of the Company's revenues in recent years have
been attributable to sales of display subsystems based on its
ImageACCEL technology.  The ImageACCEL family of products are
controller boards and monitors installed on personal computers and
are designed to enhance user productivity by providing high
document legibility and fast image display speeds.  These
products, together with existing and planned software, are
expected to account for substantially all of the Company's future
revenues.
 
The Company's quarterly operating results have in the past and may
in the future vary significantly depending on factors such as the
timing of new product introductions, product mix, references from
DIP systems integrators, changes in pricing policies by the
Company, its competitors or suppliers, market acceptance of
current and new versions of the Company's products, forecasting of
future sales levels, timing of significant orders, seasonality,
relatively long sales cycles and color monitor lead times.
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 will likely be adversely affected because only a
small portion of the Company's expenses vary with its revenues.
In recent periods, the Company has experienced significant
seasonality.  Revenues and net income have been stronger in the
fourth quarter and weaker in the first quarter.  In 1996, 31% of
the Company's revenues were recognized in the Company's quarter
ended December 31, 1996, and first quarter 1996 revenues were
lower than fourth quarter 1995 revenues.  The Company expects this
trend to continue in 1997 and 1998. In recent years, the Company
has experienced quarterly income and losses.  There can be no
assurance that the Company's revenues will grow in future periods,
or that the Company will achieve profitability on a quarterly or
annual basis.  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 foregoing factors, it is
likely that in some future quarters, the Company's operating
results will be below the expectations of public market analysts
and investors.  In such an event, the price of the Company's
common stock would likely be materially adversely affected.
 
The Company currently sells both color and grayscale display
subsystems. The Company expects the sale of lower margin color
subsystems to continue to represent an increasing percentage of
total revenues and at some future date, perhaps all display
revenues.  There can be no assurance that the Company's current
gross margins will not decline in future periods.  In addition, a
significant portion of the Company's sales are made through
systems integrators and distributors and the Company relies on
certain key suppliers for important components of both color and
grayscale displays.  There can be no assurance that the loss of a
major system integrator, distributor, or key supplier would not
have a material adverse effect on the Company's business or
results of operations over the short term, thereby causing
fluctuations in its quarterly results.
 
The DIP industry is characterized by rapid technological change,
including emergence of faster microprocessors, frequent new
product introductions, and evolving industry standards.  The
introduction of products embodying new technology and the
emergence of new industry standards can create downward price
pressure and render existing products obsolete and unmarketable.
Price decreases over the past six quarters were due, in part, to
changing technology that led to increased competition.  The
Company's future success will depend upon 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 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 adversely affected.
 
Net Revenues
 
The Company's net revenues decreased 6.2% to $21.2 million in the
second quarter of 1997 from $22.6 million in the second quarter of
1996.  The decline in revenues was due in large part to slower
than anticipated growth in the market for production document
imaging systems.  For the six months ending June 30, 1997, net
revenues increased 17.1% to $47.3 million over revenues of $40.4
million in the first six months of 1996.   The increase in revenue
in 1997 compared to 1996 is due to increased InputAccel software
and software tools sales and higher display unit shipments
partially offset by lower display unit prices.
 
Gross Profit
 
Gross profit increased 15.9% to $8.0 million in the second quarter
of 1997 from $6.9 million in the second quarter of 1996.  For the
six months ended June 30, 1997, gross profit increased 39.3% to
$17.0 million from gross profit of $12.2 million for the first six
months of 1996.  The gross margin was 37.5%  and 30.4% for the
second quarter of 1997 and 1996, respectively, and was 36.0% and
30.3% for the six months ended June 30, 1997 and 1996,
respectively. At the end of the first quarter of 1996 and again at
the beginning of the second quarter of 1997, the Company announced
a significant reduction in the price for most of the Company's
display products.  The increase in gross profit in 1997 relates to
higher unit sales and at lower prices per unit together with a
continuing increase in color display subsystems sales. Sales of
higher margin software products and decreased display component
costs cause an increase in the gross margin in 1997.  Management
expects gross margins for the second half of 1997 to decline
somewhat compared with the first half of 1997.
 
Sales and Marketing
 
Sales and marketing expenses increased 20.0% to $4.8 million in
the second quarter of 1997 from $4.0 million in the second quarter
of 1996, and for the six month period ended June 30, 1997,
increased 21.1% to $9.2 million over $7.6 million for the first
six months of 1996.  Sales and marketing expenses have increased
as a percentage of revenue  from 18.8% for the first six months of
1996 to 19.5% for the same period in 1997. The increase in 1997 as
a percentage of revenue is primarily attributable to an increase
in staffing associated with an expansion of the Company's Software
Division sales, marketing, and customer support organizations.
 
The Company expects that sales and marketing expenses will
continue to increase in the future, in absolute terms, as the
Company continues to expand programs related to its software
products.
 
 
Research and Development
 
Research and development expenses decreased 9.5% to $1.9 million
in the second quarter of 1997 from $2.1 million in the second
quarter of 1996 and for the six month period ended June 30, 1997,
decreased 8.5% to $4.3 million from $4.7 million for the first six
months of 1996. The decreases were primarily due to staffing
reductions in the display engineering group related to a change in
product design processes, and restructuring of the software
engineering service group.
 
The Company believes that continued investment in research and
development is critical to its future growth and will continue to
commit substantial resources to this area.  As a result, quarterly
research and development expenses are expected to increase in the
second half of 1997, as compared with the first half of 1997.
 
General and Administrative
 
General and administrative expenses for the second quarter and the
first six months of 1997 were unchanged from the same periods in
1996 at $1.4 million and $2.7 million respectively.  Geberal
and administrative expenses increased as a percentage of
revenues from 6.2 % in the second quarter of 1996 to
6.4% in the second quarter of 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 includes $1.1 million for
prepaid royalties, committed payments for exclusivity rights,
engineering services, and a $270,000 write-down of PrintAccel
inventory. During 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.
 
Other Income
 
Other income (loss)was ($69,000) in the second quarter of 1997,
compared to income of $31,000 in the second quarter of 1996. Other
income for the six month period ended June 30, 1997 increased
601.1% to $617,000 from $88,000 for the six month period ended
June 30, 1996. The increase is the result of net foreign exchange
gains in 1997 of approximately $238,000 related to inventory
purchased from Japanese suppliers together with increased
interest from higher investing levels.  Foreign exchange gains in
1996 were not significant.  The Company earned interest income
primarily as a result of funds invested in debt securities.
 
Benefit (Provision) for Income Taxes
 
The Company's effective income tax as a percentage of pretax
income was 34% and 30% for the second quarter of 1997 and 1996,
respectively, and 34% and 29.8% for the six month period ended
June 30, 1997 and 1996 respectively.
 
Recent Accounting Pronouncements
 
During February 1997, the Financial Accounting Standards Board
issued statement 128, Earnings Per Share (SFAS 128), which
specifies the computation, presentation and disclosure
requirements for earnings per share.  SFAS 128 will become
effective for the Company's fourth quarter of 1997.  The impact of
adopting SFAS 128 on the Company's financial statements has not
yet been determined.
 
In June 1997, the FASB issued SFAS No. 130 Reporting Comprehensive
Income.  SFAS No. 130 establishes standards for the reporting and
display of comprehensive income and its components in a full set
of general purpose financial statements.  Comprehensive income is
defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from
nonowner sources.  The impact of adopting SFAS No.130, which is
effective for the Company in 1998, has not been determined.
 
In June 1997, the FASB issued SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information.  SFAS No. 131
requires publicly-held companies to report financial and other
information about key revenue-producing segments of the entity for
which such information is available and is utilized  by the chief
operation decision maker.  Specific information to be reported for
individual segments includes profit or loss, certain revenue and
expense items and total assets. A reconciliation of segment
financial information to amounts reported in the financial
statements would be provided.  SFAS No. 131 is effective for the
Company in 1998 and the impact of adoption has not been
determined.
 
LIQUIDITY AND CAPITAL RESOURCES
 
At June 30, 1997, the Company had cash and marketable securities
of approximately $16.1 million, a decrease from $18.5 million at
December 31, 1996, and working capital totaling $34.5 million, a
decrease from $35.1 million at December 31, 1996.   At June 30,
1997, the Company had a line of credit that provides for the
issuance of commercial and standby letters of credit up to the
lesser of $15 million or 75% of eligible receivables. At June 30,
1997, one such letter of credit securing inventory purchases
totaling approximately $7.0 million (800 million yen) was
outstanding under this agreement. Net cash provided by operating
activities was $22,000 in the first six months of 1997 compared to
net cash used in operating activities of $6.1 million for the
first six months of 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.
 
Additions to property and equipment were $734,000 and $1.4 million
for the first six months of 1997 and 1996, respectively.  Net cash
used in investing activities was $734,000 for the first six months
of 1997, compared to net cash provided of $3.9 million in the
first six months of 1996.  Cash provided by investing activities
is related primarily to maturities of short term investments.
 
On February 14, 1997, the Company's Board of Directors authorized
the use of up to $5.0 million to repurchase the Company's common
stock.  The repurchased stock is expected to be held by the
Company as treasury stock to be used to meet the Company's
obligations under its stock plans and for other corporate
purposes.  Purchases will be made from time-to-time on the open
market or in privately negotiated transactions.  The timing and
volume of purchases will be dependent upon market conditions and
other factors.  The Company intends to use cash on hand to fund
its purchases.  During the six month period ended June 30, 1997,
the Company repurchased 241,300 shares at an average cost per
share of $8.52.
 
 
The Company believes that its cash and cash equivalents, together
with cash flows from operations and the existing line of credit
will be sufficient to meet the Company's liquidity and capital
requirements for the next 12 months.  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 assurance that additional financing would
be available or that, if available, such financing would be
available on terms favorable to the Company.
 
 
PART II - OTHER INFORMATION
 
Item 1.   Legal Proceedings - Not Applicable
 
Item 2.   Changes in Securities  -  Not Applicable
 
Item 3.   Defaults Upon Senior Securities  -  Not Applicable
 
Item 4.   Submission of Matters to a Vote of Security Holders
 
         On June 4, 1997, the Company held its 1996 Annual
Meeting of Stockholders at the Company's headquarters in San Jose,
California.  At the meeting, the stockholders were asked to: (I)
elect Thomas T. van Overbeek, James Crawford III, E. David
Crockett,  Stephen J. Sheafor, Bruce Silver and Daniel D. Tompkins
as the members of the Board of Directors for 1997; (ii) approve an
amendment to the Company's 1993 Stock Option/Stock Issuance Plan
to increase the number of shares of Common Stock for issuance
thereunder by 400,000 shares to 2,474,852 shares; and (iii) ratify
the selection of Coopers & Lybrand as the Company's independent
auditors for fiscal year 1997.
 
         As of the April 15 1997 record date established for
the annual meeting, there were 7,554,505 shares of Common Stock
issued and outstanding, all of which were entitled to vote.
Present in person or by proxy at the meeting were stockholders
representing 6,244,660 shares.  Such shares represented 82.7%, a
quorum, of the total number of shares outstanding and entitled to
vote.  All of the proposals, and all nominees to the board of
directors, were approved by the stockholders.  5,713,888 shares
voted for approval of the nominees to the board of directors,
527,972 shares against, 1,722,568 shares voted for approval of the
amendment to the Company's 1993 Stock Option/Stock Issuance Plan,
996,608 shares voted against, 34,155 shares abstained and there
were 3,491,329 broker nonvotes.  6,200,853 shares voted for
ratification of the selection of Coopers & Lybrand as the
Company's independent auditors, 17,135 shares voted against,
26,672 shares abstained and there were zero broker nonvotes.
 
 
Item 5.   Other Information  -  Not Applicable
 
Item 6.   Exhibits and Reports on Form 8-K
 
               (a) Exhibits
 
                  11.1  Statement of Computation of Earnings Per Share
 
                  27    Financial Data Schedule
 
               (b)   Reports on Form 8-K - Not Applicable
 
 
                                  SIGNATURES
 
        Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
 
                                                 CORNERSTONE IMAGING, INC.
                                                 ------------------------------
                                                 Registrant
 
 
Date: August 8, 1997                            /s/ John Finegan
                                                 ------------------------------
                                                 John Finegan
                                                 Chief Financial Officer
                                                 and Secretary
                                                 (Principal Financial and
                                                 Accounting Officer)
 
 
 
                               EXHIBIT INDEX
 
 
Exhibit          Description
---------       ------------------------------------------------------------
 
11.1            Statement of Computation of Earnings per Share
 
27              Financial Data Schedule