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 September 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 September 30, 1997:  7,500,461
 
 
 
 
 
 
 
<PAGE>
 
Part 1.  Financial Information
Item 1.   Financial Statements
 
                              CORNERSTONE IMAGING, INC.
                            CONSOLIDATED BALANCE SHEETS
                                 (In thousands)
 
<TABLE>
<CAPTION>
                                                     Sept 30,  Sept 30,
                                                   1997        1996
                                                    --------   --------
                                                   (Unaudited)
<S>                                                <C>         <C>
                       ASSETS
Current assets:
  Cash and cash equivalents                           $6,948    $18,486
  Accounts receivable                                 15,654     17,181
  Inventories                                         14,881     10,710
  Deferred income taxes and other
   current assets                                      5,664      4,513
                                                    --------   --------
    Total current assets                              43,147     50,890
 
Property and equipment, net                            2,806      2,859
Other assets                                             597      1,094
                                                    --------   --------
       Total assets                                  $46,550    $54,843
                                                    ========   ========
 
       LIABILITIES AND STOCKHOLDERS' EQUITY
 
Current liabilities:
  Accounts payable                                    $4,704    $10,093
  Deferred revenue                                       831        761
  Accrued liabilities                                  5,454      4,971
                                                    --------   --------
    Total current liabilities                         10,989     15,825
                                                    --------   --------
 
Stockholders' equity:
  Common stock                                            71         76
  Paid in capital                                     26,569     30,914
  Retained earnings                                    8,921      8,028
                                                    --------   --------
    Total stockholders' equity:                       35,561     39,018
                                                    --------   --------
       Total liabilities and
         stockholders' equity                        $46,550    $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    Nine Months Ende
                                                              Sept 30,            Sept 30,
                                                       ------------------- -------------------
                                                       1997      1996      1997      1996
                                                       --------- --------  --------  --------
<S>                                                    <C>       <C>       <C>       <C>
Net revenues                                            $21,436   $26,687   $68,693   $67,088
Cost of revenues                                         13,882    18,302    44,123    46,460
                                                       --------  --------  --------  --------
Gross profit                                              7,554     8,385    24,570    20,628
 
Sales and marketing                                       4,473     4,036    13,717    11,607
Research and development                                  1,813     2,491     6,120     7,252
General and administrative                                1,320     1,251     4,038     3,973
Restructuring charge                                         --        --        --     1,404
                                                       --------  --------  --------  --------
  Operating income (loss)                                   (52)      605       695    (3,608)
 
Other income                                                 61        10       677       129
                                                       --------  --------  --------  --------
  Income (loss) before provision
     (benefit) for income taxes                               9       617     1,372    (3,479)
Provision (benefit) for income taxes                          2       185       479    (1,045)
                                                       --------  --------  --------  --------
    Net income (loss)                                        $7      $432      $893   ($2,434)
                                                       ========  ========  ========  ========
Net income (loss) per share                               $0.00     $0.06     $0.12    ($0.33)
                                                       ========  ========  ========  ========
 
Shares used in per share calculation                      7,111     7,558     7,324     7,452
                                                       ========  ========  ========  ========
</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>
 
                                                                NNE MONTHS ENDED
                                                                    SEPTEMBER 30,
                                                             -------------------
                                                             1997      1996
                                                             --------- ---------
<S>                                                          <C>       <C>
Cash flows from operating activities:
 Net income (loss)                                               $893   ($2,434)
 Adjustments to reconcile net income
  (loss) to net cash provided by (used in
  operating activities:
  Depreciation and amortization                                 1,209     1,464
Changes in assets and liabilities:
    Accounts receivable                                         1,527     3,444
    Inventories                                                (4,171)    4,577
    Deferred income taxes and other assets                       (654)      (35)
    Accounts payable                                           (5,389)   (4,791)
    Accrued liabilities and deferred revenue                      553        99
                                                             --------- ---------
    Net cash provided by (used in)
    operating activities                                       (6,032)    2,324
                                                             --------- ---------
Cash flows from investing activities:
 Purchases of marketable securities                                --   (10,698)
 Maturities of marketable securities                               --     4,565
 Property and equipment additions                              (1,156)     (816)
 Loss on asset to be disposed of                                   --       400
                                                             --------- ---------
    Net cash provided used in investing activities             (1,156)   (6,549)
                                                             --------- ---------
Cash flows from financing activities:
 Net proceeds from issuance of common stock                       354       472
 Repurchase of common stock                                    (4,704)       --
                                                             --------- ---------
    Net cash provided by(used in) financing
    activities                                                 (4,350)      472
                                                             --------- ---------
Net decrease in cash and
 cash equivalents                                             (11,538)   (3,753)
Cash and cash equivalents at beginning
 of period                                                     18,486     4,671
                                                             --------- ---------
Cash and cash equivalents at end of
 period                                                        $6,948    $  918
                                                             ========= =========
 
 
Unrealized holding (gain) Loss on marketable
  securities, net                                                  $0       $68
                                                             ========= =========
 
</TABLE>
 
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
 
 
 
 
 
CORNERSTONE IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS
 
 
 
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Unaudited Financial Information:
(UNAUDITED)
 
The accompanying interim unaudited
consolidated condensed 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 data 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 nine month periods
ended September 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 non-
owner 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.
 
INVENTORIES:
 
            Sept 30, 1997                 Dec 31, 1996
                                                         (unaudited)
 
Raw Materials      $   732         $   1,645
Work in progress     1,206             1,455
Finished goods      12,937             7,610
                  $ 14,881         $  10,710
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 and issuance of commercial and standby letters of
credit 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
September 30, 1997 there were no borrowings under the line of
credit outstanding, and one letter of credit securing
inventory purchases totalling $6.7 million ($800 million yen)
was 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.
 
 
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.
 
 
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.  On September 17, 1997 the Board of
Directors authorized repurchases of an additional $5 million.
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 nine month
period ended September 30, 1997, the Company repurchased
617,800 shares at an average cost per share of $6.51.
 
 
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.
 
 
9. STOCKHOLDER RIGHTS PLAN:
 
 
On September 9, 1997, the Board of Directors of Cornerstone
Imaging, Inc. adopted a Stockholder Rights Plan that is
intended to protect current stockholders' interests in the
event of coercive takeover tactics.
 
The Plan provides for a dividend distribution of rights to
purchase shares of a newly created Series A Junior
Participating Preferred Stock.  Under certain circumstances,
the rights become exercisable to purchase shares of the
common stock of the Company, or securities of an acquiring
entity, at one-half market value. Shareholders of record on
September 9, 1997 were issued one right for each share of
common stock owned.
 
The issuance of the Rights has no dilutive effect, will not
affect reported earnings per share and is not taxable to the
Company or to the stockholder.  Stockholders may, under
certain circumstances, recognize taxable income if the Rights
become exercisable.
 
 
 
 
CORNERSTONE IMAGING, INC.
NOTES TO FINANCIAL STATEMENTS Continued
(UNAUDITED)
 
 
This report contains forward looking statements 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.
Item 2  -  Management's Discussion and Analysis of Financial
Condition and Results of Operations.
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, though software products
contributed 15% of total revenue in the quarter ended
September 30, 1997.  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 1997 revenues were lower
than fourth quarter 1996 revenues.  The Company expects this
trend to continue. 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 market for the Company's display subsystems has become
very competitive in recent quarters and as a result, margins
have declined. 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 19.7% to $21.4 million
in the third quarter of 1997 from $26.7 million in the third
quarter of 1996.  For the nine months ended September 30,
1997, net revenues increased 2.4% to $68.7 million over
revenues of $67.1 million in the nine months ended September
30, 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.  The decline in the third quarter
revenues is due to a decline in unit volumes and average
sales prices of the display product line.
 
 
Gross Profit
 
Gross profit decreased 9.9% to $7.6 million in the third
quarter of 1997 from $8.4 million in the third quarter of
1996.  For the nine months ended September 30, 1997 gross
profit increased 19.1% to $24.6 million from gross profit of
$20.6 million for the nine months ended September 30, 1996.
The gross margin was 35.2% and 31.4% for the third quarter of
1997 and 1996, respectively, and was 35.8% and 30.8% for the
nine months ended September 30, 1997 and 1996, respectively.
The increase in gross profit for the first nine months of
1997 relates primarily to increased software revenues. Sales
of higher margin software products and decreased display
component costs caused an increase in the gross margin in
1997.  Management expects gross margins to decline somewhat
compared with the first nine months of 1997.
 
 
Sales and Marketing
 
Sales and marketing expenses increased  12.5% to $4.5 million
in the third quarter of 1997 from $4.0 million in the third
quarter of 1996 and for the nine months ended September 30,
1997, increased 18.2% to $13.7 million over $11.6 million for
the nine months ended September 30, 1996. Sales and marketing
expenses have increased as a percentage of revenue from 17.3%
for the nine months ended September 30, 1996 to 20.0% for the
same period in 1997. The increase in 1997 as a percentage of
revenue is attributable to an increase in staffing associated
with an expansion of the Company's software division sales
organization and increased marketing and promotional expenses
for the display division.
 
The Company expects that sales and marketing expenses will
continue to increase in the future, as the Company continues
to expand programs related to it's software products.
 
 
Research and Development
 
Research and development expenses decreased 27.2% to $1.8
million in the third quarter of 1997 from $2.5 million in the
third quarter of 1996 and for the nine months ended September
30, 1997, decreased 15.6% to $6.1 million from $7.3 million
for the nine months ended September 30, 1996. The decreases
were primarily due to staffing reductions in the display
engineering group related to a change in product design
processes.
 
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.
 
General and Administrative
 
General and administrative expenses increased 5.5% to $1.3
million in the third quarter of 1997 from $1.3 million in the
third quarter of 1996 and for the nine months ended September
30, 1997, increased 1.6% to $4.0 million from $4.0 million
for the nine months ended September 30, 1996.  General and
administrative expenses increased as a percentage of revenues
from 4.7% in the third quarter of 1996 to 6.1% in the third
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 payment 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 was $61,000 in the third quarter of 1997,
compared to  $10,000 in the third quarter of 1996. Other
income for the nine month period ended September  30, 1997
increased 424.8% to $677,000 from $129,000 for the nine month
period ended September 30, 1997. The increase is the result
of net foreign exchange gains in 1997 of approximately $.5
million 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.
 
 
Provision (Benefit) for Income Taxes
 
The Company's effective income tax rate as a percentage of
pretax income was  34.9% and 30.0% for the nine month periods
ended September 30, 1996 and 1997.
 
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 non-
owner 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 September 30, 1997, the Company had cash and marketable
securities of approximately $6.9 million, a decrease from
$18.5 million at December 31, 1996, and working capital
totaling $32.1 million, and decrease of $2.9 million since
December 31, 1996.  Net cash used in operating activities was
$6.0 million in the first nine months of 1997 compared to
$2.3 million for the first nine months of 1996.  The decrease
in the cash provided by operating activities for the nine
months ended September 30, 1997 results primarily from
increased  inventory levels and reduced accounts payable.
 
At September 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 September 30,1997, one such letter of credit
securing inventory purchases totaling approximately $6.7
million
(800 million yen) was outstanding under the agreement.
 
Additions to property and equipment were $1.2 million  and
$816,000 for the first nine months of 1997 and 1996,
respectively.  Net cash used in investing activities was $1.2
million for the first nine months of 1997, compared to $6.5
million in the first nine 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. On September 17, 1997 the Board of
Directors authorized repurchase of an additional $5 million.
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 nine month
period ended September 30, 1997, the Company repurchased
617,800 shares at an average cost per share of $6.51.
 
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 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
 
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: November 11,1997                         /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