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, 1998

[ ]  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, 1998:  5,650,313





<PAGE>
Part 1.  Financial Information
Item 1.   Financial Statements

                              CORNERSTONE IMAGING, INC.
                       CONSOLIDATED CONDENSED BALANCE SHEETS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                 June 30,     December 31,
                                                 1998         1997
                                                 -----------  -----------
                                                 (Unaudited)
<S>                                              <C>          <C>
                       ASSETS  
Current assets:
  Cash and cash equivalents ....................    $13,267      $12,284
  Accounts receivable...........................      3,726        2,946
  Deferred income taxes and
     other current assets.......................      5,365        5,521
                                                 -----------  -----------
    Total current assets........................     22,358       20,751

Property and equipment, net.....................        901        1,056
Other assets....................................        427          424
Net assets related to the 
     discontinued display division..............      4,611       15,462
                                                 -----------  -----------
                                                    $28,297      $37,693
                                                 ===========  ===========

       LIABILITIES AND STOCKHOLDERS' EQUITY 

Current liabilities:
  Accounts payable..............................       $294         $463
  Deferred revenue..............................      1,077          654
  Accrued liabilities...........................      1,576        2,653
                                                 -----------  -----------
    Total current liabilities...................      2,947        3,770
                                                 -----------  -----------

Stockholders' equity:
  Common stock..................................         59           67
  Paid in capital...............................     18,608       24,747
  Retained earnings.............................      6,683        9,109
                                                 -----------  -----------
    Stockholders' equity........................     25,350       33,923
                                                 -----------  -----------
                                                    $28,297      $37,693
                                                 ===========  ===========
</TABLE>
       The accompanying notes are an integral part of these consolidated
                        condensed financial statements
<PAGE>
                       CORNERSTONE IMAGING, INC.
             CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
                              (UNAUDITED)
                 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                    Three Months Ended    Six Months Ended
                                         June 30,            June 30,
                                   ------------------- -------------------
                                   1998      1997      1998      1997
                                   --------- --------- --------- ---------
<S>                                <C>       <C>       <C>       <C>
Net revenues from continuing 
  operations......................   $4,160    $2,970    $7,547    $5,489
Cost of revenues..................      391       180       816       351
                                   --------- --------- --------- ---------
Gross profit                          3,769     2,790     6,731     5,138

Sales and marketing...............    1,930     1,490     3,406     2,578
Research and development..........    1,047       882     2,119     2,054
General and administrative........      628       504     1,136     1,015
                                   --------- --------- --------- ---------
  Operating income (loss).........      164       (86)       70      (509)

Other income......................      149       217       293       403
                                   --------- --------- --------- ---------
  Income (loss) before (benefit)
     provision for income taxes...      313       131       363      (106)
Provision (benefit) for
     income taxes.................       94        45       109       (36)
                                   --------- --------- --------- ---------
  Net income (loss) from
     continuing operations........      219        86       254       (70)

Discontinued operations:
Net Income (loss) from operations
  of Discontinued Display
  Division........................      --       (217)     (361)      995

Estimated net loss on sale of
  Display Division................      --        --     (2,284)      --
                                   --------- --------- --------- ---------
  Net income (loss) from
    discontinued operations.......      --       (217)   (2,645)      995
                                   --------- --------- --------- ---------
  Net income (loss)...............     $219     ($131)  ($2,391)     $925
                                   ========= ========= ========= =========
Basic and diluted EPS:
  Income (loss) from
     continuing operations........    $0.04     $0.01     $0.04    ($0.01)
  Income (loss) from
     discontinued operations......     0.00     (0.03)    (0.43)     0.13
                                   --------- --------- --------- ---------
  Net income (loss)...............    $0.04    ($0.02)   ($0.39)    $0.12
                                   ========= ========= ========= =========

Shares used in EPS calculations:
   Basic .........................    5,953     7,335     6,163     7,422
   Diluted........................    6,036     7,337     6,216     7,457
                                   ========= ========= ========= =========
</TABLE>
       The accompanying notes are an integral part of these consolidated
                        condensed financial statements
<PAGE>











































                        CORNERSTONE IMAGING, INC.
            CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
                         (UNAUDITED - IN THOUSANDS)

<TABLE>
<CAPTION>

                                                           Six Months Ended
                                                               June 30,
                                                          -------------------
                                                          1998      1997
                                                          --------- ---------
<S>                                                       <C>       <C>
Cash flows from operating activities:
 Net income (loss)......................................   ($2,391)     $925
 Adjustments to reconcile net income
   (loss) to net cash provided by
   operating activities:
   Depreciation and amortization........................       448       350
 Discontinued operations                                    10,851      (602)
 (Increase) decrease in assets and liabilities:
    Accounts receivable.................................      (780)     (628)
    Deferred income taxes and other assets..............       153      (864)
    Accounts payable....................................      (168)      126
    Accrued liabilities and deferred revenue............      (654)      656
                                                          --------- ---------
    Net cash provided by operating activities...........     7,459       (37)
                                                          --------- ---------
Cash flows from investing activities:
 Property and equipment additions.......................      (293)     (308)
                                                          --------- ---------
    Net cash used in investing activities...............      (293)     (308)
                                                          --------- ---------
Cash flows from financing activities:
 Repurchase of common stock.............................    (6,630)   (2,057)
                                                          --------- ---------
    Net cash used in financing activities...............    (6,630)   (2,057)
                                                          --------- ---------
Net decrease in cash and cash equivalents...............       983    (2,389)

Cash and cash equivalents at beginning of period........    12,284    18,486
                                                          --------- ---------
Cash and cash equivalents at end of period..............   $13,267   $16,097
                                                          ========= =========
</TABLE>
       The accompanying notes are an integral part of these consolidated
                        condensed financial statements
<PAGE>






                            CORNERSTONE IMAGING, INC.
            NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
                              (UNAUDITED)

1.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

        Interim Unaudited Financial Information:

        The accompanying interim unaudited consolidated condensed financial 
statements have been prepared pursuant to the rules and regulations of 
the Securities and Exchange Commission.  The December 31, 1997 balance 
sheet data was derived from audited financial statements contained in 
the Company's 1997 Annual Report on Form 10-k but does not include all 
disclosures required by generally accepted accounting principles.  In 
addition, assets and liabilities related to the pending sale and 
discontinuation of the display division has been restated from the 
audited balance sheet. The unaudited financial statements for the six 
month periods ended June 30, 1998 and 1997 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 are not necessarily 
indicative of the results to be expected for an entire year and should 
not be relied on as such.

        Recent Pronouncements:

        As of January 1, 1998 the Company adopted Statement of Financial 
Accounting Standards No. 130, "Reporting Comprehensive Income"("SFAS 
130"). This statement establishes requirements for disclosure of 
comprehensive income and its components; however, the adoption of SFAS 
130 had no impact on the Company's net income (loss) or stockholders' 
equity.    

        In June 1997 the FASB issued Statement of Financial Accounting 
Standards No. 131, "Disclosures about segments of an Enterprise on 
Related Information"("SFAS 131"), 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.

        As of January 1, 1998 the Company has adopted the provisions of 
Statement of Position 97-2, ("SOP 97-2"), "Software Revenue Recognition, 
as amended by SOP 98-4 "Deferral of Effective Date of Certain Provisions 
of SOP 97-2".  This statement establishes requirements for revenue 
recognition for software companies. Under SOP 97-2, the Company 
recognizes product revenues and license fees upon shipment if a signed 
contract exists, the fee is fixed and determinable, collection of 
resulting receivables is probable and product returns are reasonably 
estimable. In addition, for contracts with multiple obligations (e.g. 
deliverable and undeliverable products, service, and maintenance), 
revenue must be allocated to each component of the contract based on 
evidence of its fair value. Revenue allocated to undelivered products is 
recognized when the criteria for product and license revenue set forth 
above are met. Revenue allocated to maintenance fees for ongoing 
customer support and updates is recognized ratably over the period of 
the maintenance contract.  Payments for maintenance fees are generally 
made in advance and are 
non-refundable.  Revenue related to other services is recognized as the 
related services are performed.  Royalty revenues that are contingent 
upon sale to an end user by OEMs are recognized upon receipt of a report 
of sale by the Company for the OEM.

In April 1998, the American Institute of Certified Public 
Accountants issued Statement of Position ("SOP 98-1") "Accounting for 
the Costs of Computer Software Developed or Obtained for Internal Use". 
This Statement of Position (SOP) provides guidance on accounting for the 
costs of computer software developed or obtained for internal use. The 
SOP applies to all nongovernmental entities and is effective for 
financial statements for fiscal years beginning after December 15, 1998. 
The Company has not yet determined the impact, if any, of the adoption 
of this statement on the financial statements of the Company.


2.      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 base rate and are collateralized 
by accounts receivable, equipment, and inventory of the Company. As of 
June 30, 1998 there were no borrowings under this agreement.


3.      DIVESTITURES:

        On April 17, 1998, the Company entered into a non-binding letter of 
intent to sell its display division to the current management team led 
by John Noellert, General Manager of the display division.  Upon 
completion of the sale, the display division will operate as a private 
company named Cornerstone Peripherals Technology, Inc. Under the terms 
of the letter and modifications made to it since April 17, the Company 
will sell certain assets and transfer certain liabilities associated 
with the display division. In addition, the Company will retain certain 
assets, including accounts receivable and certain inventory.  The value 
of the inventory will be realized by the Company through the sale, on 
its behalf, of that inventory by Cornerstone Peripherals Technology, 
Inc. The Company estimates it will receive, subsequent to June 30, 1998, 
proceeds in excess of $3.0 million for receivables and inventory less 
transaction expenses and certain display division liabilities.  The 
letter provides that the Company will also hold a minority equity 
interest in Cornerstone Peripherals Technology, Inc.   This minority 
interest will be carried as an asset on the Company's books at $1.0 
million.  As a result of the transaction, the Company recorded a loss of 
approximately $2.6 million for the quarter ended March 31, 1998. All 
financial statements have been restated to account for the display 
division as a discontinued operation.

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 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.


4.      INCOME TAXES:

        The Company's provision for income taxes reflect the Company's 
estimated 1998 annualized effective tax rate of 30%.


5.      STOCK REPURCHASE:

        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.  
This amount was increased to $15.0 million on September 17, 1997. 
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 it purchases.  During the six 
months ended June 30, 1998, the Company repurchased  1,053,200 shares at an 
average cost per share of $6.30 bringing the cumulative repurchases since the 
inception of the program to 2.06 million shares. 


6.      STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS:

        On March 14, 1998, 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 200,000 shares to 
2,674,852 shares of common stock for issuance under the Plan.  On the 
same date the Board also approved 100,000 shares for issuance under the 
1998 Employee Stock Purchase Plan. The proposed increases were approved 
by stockholders on June 3, 1998 at the Company's Annual Stockholder's 
Meeting.




<PAGE>





------------------------------------------------------------------------
Item 2 - Management's Discussion and Analysis of Financial Condition and 
Results of Operations.

This Quarterly Report on Form 10-Q 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 and in the section 
captioned RISK FACTORS in the Company's most recent Annual Report on 
Form 10-K. 


RESULTS OF OPERATIONS:

In recent years the majority of the Company's revenues have been 
attributable to sales of display products.  However, the Company's 
software business has grown more rapidly than its display business in 
the past three years and on April 17, 1998 the Company entered into a 
letter of intent to sell its display products division. Accordingly, the 
Company will be renamed to Input Software, Inc. and will exclusively 
develop, market, and service software products for enterprise computing 
applications.  In 1994, the Company began providing software toolkits 
for scanning and document image processing ("DIP") applications.  In 
November 1995, the Company began shipments of InputAccel-- a software 
product designed to automate the conversion of documents into electronic 
images.   

                The Company's 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. InputAccel is a data capture system that lets 
organizations integrate incoming documents-paper, fax, microfilm-with 
enterprise workflow and document management systems.  InputAccel is a 
customizable, open architecture software product that runs under Windows 
NT platform.

                The Company's products are used by a diverse set of customers 
in a wide variety of applications, such as insurance claim processing, 
loan application processing, FDA submissions, and the storage of 
personnel records and technical manuals.  Most often, data capture 
systems are used by large, service-oriented companies and government 
agencies for which document management or transaction processing is 
critical.  Data capture, which is often used in conjunction with 
document image processing, document management, and other computer 
applications, enables multiple users to electronically capture, file, 
and retrieve documents. Hence the Company's products are often sold 
through, or in conjunction with, systems integrators and value added 
resellers.  


Net Revenues

The Company's software revenues increased 40% in the second quarter of 
1998 to $4.2 million from $3.0 million in the second quarter of 1997. 
For the six months ending June 30, 1998, revenues increased 37% to $7.5 
million from revenues of $5.5 in the first six months of 1997. The 
increase in revenue is due to increased revenues from InputAccel.  


Gross Profit

Gross profit increased 35% to $3.8 million for the second quarter of 
1998 from $2.8 million for the second quarter of 1997. For the six 
months ending June 30, 1998, gross profit increased 31% to $6.7 million 
from gross profit of $5.1 in the first six months of 1997. The gross 
margin was 91% and 94% for the second quarters of 1998 and 1997, 
respectively and was 89% and 93% for the six months ended June 30, 1998 
and 1997, respectively. The decrease in gross margin percent for both 
periods is largely due to the increased percentage of revenues derived 
from software maintenance and professional services, which have lower 
margins than revenues from product licensing. The Company expects 
revenues from maintenance and services to continue to increase as a 
percentage of overall revenues.


Sales and Marketing

Sales and marketing expenses increased 30% to $1.9 million in the second 
quarter of 1998 from $1.4 million in the second quarter of 1997, and for 
the six month period ended June 30, 1998, increased 32% to $3.4 million 
from $2.6 million for the first six months of 1997. Sales and marketing 
expenses as a percentage of revenue were 46% and 50% for the second 
quarter of 1998 and 1997, respectively and was 45% and 47% for the six 
months ended June 30, 1998 and 1997, respectively.

The Company expects that sales and marketing expenses will increase in 
the future, in absolute terms, as the Company continues to expand sales 
and marketing programs related to new software products.


Research and Development

Research and development expenses increased 19% to $1.0 million in the 
second quarter of 1998 from $882,000 in the second quarter of 1997 and 
for the six month period ended June 30, 1998, remained flat at $2.1 
million. The first quarter of 1997 included a non-recurring purchase of 
technology of $240,000.

Current staffing levels exceed those of prior periods.  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 likely to increase during 1998 and beyond.



General and Administrative

General and administrative expenses in the second quarter of 1998 
increased by 25% to $628,000 from $504,000 in the second quarter of 1997 
and for the six month period ended June 30, 1998, increased by 12% to 
$1.1 million from $1.0 million in 1997. General and administrative 
expenses as a percentage of revenue were 15% and 17% for the second 
quarter of 1998 and 1997, respectively and was 15% and 18% for the six 
months ended June 30, 1998 and 1997, respectively, the percent decreases 
being primarily attributable to increased revenue levels. Certain 
general & administrative expenses have, to date, been absorbed by the 
display division. Accordingly, the Company expects general and 
administrative expenses to increase in succeeding future periods.

Divestiture

The pending sale of the display division resulted in a net loss of $2.6 
million, or 43 cents per share.  This charge includes a loss from 
display division operations in the first six months, net of tax benefit, 
of $361,000. In addition, it includes an estimated loss of $2.3 million, 
net of tax benefit, on the sale of the net assets of the display 
division.  This loss includes expenses related to the pending 
transaction and a reduction in value of certain inventory, which is not 
strategic to the new display business.


Benefit (Provision) for Income Taxes

The benefit (provision) for federal and state income taxes as a 
percentage of pretax income from operations was 30% and 34% for the 
second quarter and six month ended June 30, 1998 and 1997, respectively. 
In addition, a tax benefit reserve of 40% was netted against the 
estimated losses on the sale of the display division.


Liquidity and Capital Resources

At June 30, 1998, the Company had cash and cash equivalents of $13.3 
million, compared to $12.3 million at December 31, 1997. At June 30, 
1998, the Company had a line of credit that provides for the issuance of 
commercial and standby letters of credit up to $15.0 million.  The 
agreement, which expires July 1, 1999, had no borrowings against it as 
of June 30, 1998.

Net cash provided by operating activities was $7.5 million in the first 
six months of 1998 compared net cash used of $37,000 in the first six 
months of 1997.   

Net cash used in investing activities, exclusively additions to property 
and equipment, was $305,000 for the first six months of 1998, compared 
to  $308,000 in the first six months of 1997.

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.  
This amount was increased to $15.0 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 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, 1998, the Company 
repurchased 1,053,200 shares at an average cost per share of $6.30.

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 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 will be available at all or that it, if available, will be 
obtainable on terms favorable to the Company and would not be dilutive.


RISK FACTORS:

Limited Software Operating History; History of Losses; Future Operating 
Results Uncertain

The Company has operated its Software Division since June 1994. 
Accordingly, the Company's prospects must be considered in light of the 
risks and difficulties frequently encountered by companies in the early 
stage of development, particularly companies in new and rapidly evolving 
markets.  To 
address these risks, the Company must, among other things, respond to 
competitive developments, continue to attract, retain and motivate 
qualified personnel and continue to improve its products.  For the past 
several years, the Company has been investing in its software business 
and as a result, on a stand-alone basis, the Software Division has not 
achieved operating profitability and has incurred net losses in each 
quarter from inception through the quarter ending June 30, 1997.  As of 
June 30, 1998, the Company's Software Division had cumulative pre-tax 
operating losses of approximately $3.4 million.  The Company's operating 
losses have been due in part to the commitment of significant resources 
to the Company's research and development and sales and marketing 
departments.  The Company expects to continue to devote substantial 
resources to these areas and as a result will need to achieve 
significant quarterly revenues to achieve profitability.  In particular, 
the Company intends to continue to hire additional sales and research 
and development personnel in 1998 and beyond, which the Company believes 
is required if the Company is to achieve significant revenue growth in 
the future.  Although the Company's software related revenues generally 
have increased in recent periods, there can be no assurance that the 
Company's revenues will grow in future periods, that they will grow at 
past rates or that the Company will remain profitable on a quarterly or 
annual basis in the future. 


Operating Results Subject to Significant Fluctuations; Seasonality

The Company's quarterly revenues, expenses and operating results have 
varied significantly in the past and are likely to vary significantly in 
the future due to a variety of factors, such as demand for the Company's 
products, the size and timing of significant orders and their 
fulfillment, the number, timing and significance of product enhancements 
and new product announcements by the Company and its competitors, 
changes in pricing policies by the Company or its competitors, customer 
order deferrals in anticipation of enhancements or new products offered 
by the Company or its competitors, the ability of the Company to 
develop, introduce and market new and enhanced versions of its products 
on a timely basis, changes in the Company's level of operating expenses, 
budgeting cycles of its customers, product life cycles, software defects 
and other product quality problems, the Company's ability to attract and 
retain qualified personnel, changes in the Company's sales incentive 
plans, changes in the mix of domestic and international revenues, the 
level of international expansion, foreign currency exchange rate 
fluctuations, performance of indirect channel partners, changes in the 
mix of indirect channels through which the Company's products are 
offered, the impact of acquisitions of competitors and indirect channel 
partners, the Company's ability to control costs and general domestic 
and international economic and political conditions.  The Company 
operates with virtually no order backlog because its software products 
are shipped shortly after orders are received, which makes product 
revenues in any quarter substantially dependent on orders booked and 
shipped throughout that quarter.  As a result, if orders in the first 
month or two of a quarter fall short of expectations, it is unlikely 
that the Company will be able to meet its revenue targets for that 
quarter.  In addition, the Company achieves a significant portion of 
revenues from indirect sales channels over which the Company has little 
or no control.  Moreover, the Company's expense levels are based to a 
significant extent on the Company's expectations of future revenues and 
therefore are relatively fixed in the short term.  If revenue levels are 
below expectations, operating results are likely to be adversely and 
disproportionately affected because only a small portion of the 
Company's expenses vary with its revenues.

The Company's business has experienced and is expected to continue to 
experience seasonality, largely due to customer buying patterns.  In 
recent years, the Company has had relatively stronger demand for its 
products during the quarter ending December 31 and demand has been 
relatively weaker in the quarter ending March 31.  The Company believes 
that this pattern will continue. Based upon all of the factors described 
above, the Company believes that its quarterly revenues, expenses and 
operating results are likely to vary significantly in the future, that 
period-to-period comparisons of its operating results are not 
necessarily meaningful and that, in any event, such comparisons should 
not be relied upon as indications of future performance.  The Company 
has limited ability to forecast future revenues, and it is likely that 
in some future quarter the Company's operating results will be below the 
expectations of public securities analysts and investors.  In the event 
that operating results are below expectations, or in the event that 
adverse conditions prevail or are perceived to prevail generally or with 
respect to the Company's business, the price of the Company's Common 
Stock would likely be materially adversely affected. 


Significant Competition 

The market for the Company's products is intensely competitive and 
subject to rapid change.  In addition, because there are relatively low 
barriers to entry in the software market, the Company may encounter 
additional competition from other established and emerging companies.  
Many of the Company's competitors have longer operating histories, 
significantly greater financial, technical, marketing and other 
resources than the Company, significantly greater name recognition and a 
large installed base of customers.  As a result, the Company's 
competitors may be able to respond more quickly to new or emerging 
technologies and changes in customer requirements, or to devote greater 
resources to the development, promotion and sale of competitive 
products, than can the Company.  There is also a substantial risk that 
announcements of competing products by large competitors could result in 
the cancellation of customer orders in anticipation of the introduction 
of such new products.  In addition, current and potential competitors 
have established or may establish cooperative relationships among 
themselves or with third parties to increase the ability of their 
products to address customer needs and which may limit the Company's 
ability to sell its products through particular reseller partners.  
Accordingly, new competitors or alliances among current and new 
competitors may emerge and rapidly gain significant market share.  The 
Company also expects that competition will increase as a result of 
software industry consolidation.  Increased competition is likely to 
result in price reductions, fewer customer orders, reduced margins and 
loss of market share, any of 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 the 
competitive pressures faced by the Company will not materially adversely 
affect its business, operating results and financial condition. 


Product Concentration 

The Company currently expects the sale and license of its InputAccel 
products and software tools to account for substantially all of the 
Company's revenues for the foreseeable future.  The Company's future 
operating results are, therefore, heavily dependent upon continued 
market acceptance of its InputAccel products and enhancements to these 
products.  Consequently, a decline in the demand for, or market 
acceptance of, the Company's InputAccel products as a result of 
competition, technological change or other factors, would have a 
material adverse effect on the Company's business, operating results and 
financial condition.


Dependence on Continued Growth of the Market for Document Management 
Applications

Although demand for document capture software for document management 
applications has grown in recent years, this market is still emerging 
and there can be no assurance that it will continue to grow or that 
organizations will continue to adopt the Company's products.  The 
Company has spent, and intends to continue to spend, considerable 
resources educating potential customers about the Company's software 
products and the document processing market generally.  However, there 
can be no assurance that such expenditures will enable the Company's 
products to achieve any additional degree of market acceptance.  The 
rate at which organizations have adopted the Company's products has 
varied significantly and the Company expects to continue to experience 
such variations in the future.  There can be no assurance that the 
markets for the Company's products will continue to develop or that the 
Company's products will be accepted within such markets.  If the markets 
for the Company's products fail to develop, or develop more slowly than 
the Company currently anticipates, the Company's business, operating 
results and financial condition would be materially adversely affected.


Rapid Technological Change and New Products 

The market for the Company's products is characterized by rapid 
technological change, frequent new product introductions and 
enhancements, uncertain product life cycles, changes in customer demands 
and evolving industry standards.  The introduction of products embodying 
new technologies and the emergence of new industry standards can render 
existing products obsolete and unmarketable.  The Company's future 
success will depend upon its ability to continue to enhance its current 
products and to develop and introduce new products on a timely basis 
that keep pace with technological developments and satisfy increasingly 
sophisticated customer requirements.  As a result of the complexities 
inherent in document image processing software, new products and product 
enhancements can require long development and testing periods.  As a 
result, significant delays in the general availability of such new 
releases or significant problems in the installation or implementation 
of such new releases could have a material adverse effect on the 
Company's business, operating results and financial condition.  The 
Company has experienced delays in the past in the release of new 
products and new product enhancements. There can be no assurance that 
the Company will be successful in developing and marketing, on a timely 
and cost effective basis, new products or new product enhancements that 
respond to technological change, evolving industry standards or customer 
requirements, that the Company will not experience difficulties that 
could delay or prevent the successful development, introduction or 
marketing of these products or that the Company's new products and 
product enhancements will achieve market acceptance. 


Risk of Software Defects

Software products as complex as those offered by the Company may contain 
errors or defects, particularly when first introduced or when new 
versions or enhancements are released.  The Company has in the past 
discovered software errors in certain of its new products after their 
introduction.  There can be no assurance that, despite testing by the 
Company, defects and errors will not be found in current versions, new 
versions or enhancements of its products after commencement of 
commercial shipments, resulting in loss of revenues or delay in market 
acceptance, which could have a material adverse effect on the Company's 
business, operating results and financial condition. 


Year 2000 Compliance

The Company believes that the purchasing patterns of customers and 
potential customers may be affected by Year 2000 issues in a variety of 
ways. Many companies are expending significant resources to correct or 
patch their current software systems for Year 2000 compliance.  These 
expenditures may result in reduced funds available to purchase software 
products such as those offered by the Company. Potential customers may 
also choose to defer purchasing Year 2000 compliant products until they 
believe it is absolutely necessary, thus resulting in potentially 
stalled market sales within the industry.  Conversely, Year 2000 issues 
may cause other companies to accelerate purchases, thereby causing an 
increase in short-term demand and a consequent decrease in long-term 
demand for software products.  Additionally, Year 2000 issues could 
cause a significant number of companies, including current Company 
customers, to reevaluate their current software needs, and as a result 
switch to other systems or suppliers.  Any of the foregoing could result 
in a material adverse effect on the Company's business, operating 
results and financial condition. 


Risks Associated with International Sales and Operations

The Company anticipates that for the foreseeable future a significant 
portion of its revenues will be derived from sources outside North 
America and the Company intends to continue to expand its sales and 
support operations internationally.  In order to successfully expand 
international sales, the Company must establish additional foreign 
operations, expand its international sales channel management and 
support organizations, hire additional personnel, customize its products 
for local markets, recruit additional international resellers and 
increase the productivity of existing international resellers.  To the 
extent that the Company is unable to do so in a timely and cost-
effective manner, the Company's sales growth internationally, if any, 
will be limited, and the Company's business, operating results and 
financial condition could be materially adversely affected.  Even if the 
Company is able to successfully expand its international operations 
there can be no assurance that the Company will be able to maintain or 
increase international market demand for its products.

The Company's international operations are generally subject to a number 
of risks, including costs of customizing products for foreign countries, 
protectionist laws and business practices favoring local competition, 
dependence on local vendors, compliance with multiple, conflicting and 
changing government laws and regulations, longer sales cycles, greater 
difficulty or delay in accounts receivable collection, import and export 
restrictions and tariffs, difficulties in staffing and managing foreign 
operations, foreign currency exchange rate fluctuations, multiple and 
conflicting tax laws and regulations and political and economic 
instability.  To date, a majority of the Company's revenues and costs 
have been denominated in U.S. dollars.  However, the Company believes 
that in the future, an increasing portion of the Company's revenues and 
costs will be denominated in foreign currencies.  Although the Company 
may from time to time undertake foreign exchange hedging transactions to 
reduce its foreign currency transaction exposure, the Company does not 
currently attempt to eliminate all foreign currency transaction 
exposure. 


Dependence on Key Personnel 

The Company's success depends to a significant extent upon the efforts 
of its key management, sales and marketing, technical support and 
research and development personnel, none of whom are bound by an 
employment contract.  The loss of key management or technical personnel 
could adversely affect the Company.  The Company believes that its 
future success will depend in large part upon its continuing ability to 
attract and retain highly skilled managerial, sales and marketing, 
technical support and research and development personnel.  Like other 
software companies, the Company faces intense competition for such 
personnel, and the Company has at times experienced and continues to 
experience difficulty in recruiting qualified personnel.  There can be 
no assurance that the Company will be successful in attracting, 
assimilating and retaining additional qualified personnel in the future.  
The loss of the services of one or more of the Company's key 
individuals, or the failure to attract and retain additional qualified 
personnel, could have a material adverse effect on the Company's 
business, operating results and financial condition. 



Limited Protection of Proprietary Technology; Risks of Infringement; Use 
of Licensed Technology 

The Company relies primarily on a combination of copyright, trademark 
and trade secret laws, confidentiality procedures and contractual 
provisions to protect its proprietary rights.  The Company licenses its 
software products primarily under license agreements.  There can be no 
assurance that others will not develop technologies that are similar or 
superior to the Company's technology or design around the copyrights and 
trade secrets owned by the Company.  Despite the Company's efforts to 
protect its proprietary rights, unauthorized parties may attempt to copy 
aspects of the Company's products or to obtain and use information that 
the Company regards as proprietary. Policing unauthorized use of the 
Company's products is difficult, and although the Company is unable to 
determine the extent to which piracy of its software products exists, 
software piracy can be expected to be a persistent problem.  In 
addition, the laws of some foreign countries do not protect the 
Company's proprietary rights as fully as do the laws of the U.S. 

The Company is not aware that it is infringing any proprietary rights of 
third parties.  There can be no assurance, however, that third parties 
will not claim infringement by the Company of their intellectual 
property rights.  The Company expects that software product developers 
increasingly will be subject to infringement claims as the number of 
products and competitors in the Company's industry segment grows and the 
functionality of products in different industry segments overlaps.  Any 
such claims, with or without merit, could be time consuming to defend, 
result in costly litigation, divert management's attention and 
resources, cause product shipment delays or require the Company to enter 
into royalty or licensing agreements.  Such royalty or licensing 
agreements, if required, may not be available on terms acceptable to the 
Company, if at all.  In the event of a successful claim of product 
infringement against the Company and failure or inability of the Company 
to either license the infringed or similar technology or develop 
alternative technology on a timely basis, the Company's business, 
operating results and financial condition could be materially adversely 
affected. 

The Company relies upon certain software that it licenses from third 
parties, including software that is integrated with the Company's 
internally developed software and used in its products to perform key 
functions.  There can be no assurance that these third-party software 
licenses will continue to be available to the Company on commercially 
reasonable terms, if at all.  The loss of or inability to maintain any 
such software licenses could result in shipment delays or reductions 
until equivalent software could be developed, identified, licensed and 
integrated such delays would materially adversely affect the Company's 
business, operating results and financial condition.


Product Liability 

Although the Company's license agreements with its customers typically 
contain provisions designed to limit the Company's exposure to potential 
product liability claims, it is possible that such limitation of 
liability provisions may not be effective as a result of existing or 
future laws or unfavorable judicial decisions.  The Company has not 
experienced any material product liability claims to date; however, the 
sale and support of the Company's products may entail the risks of such 
claims, which may be substantial in light of the use of the Company's 
products in business-critical applications.  A successful product 
liability claim brought against the Company could have a material 
adverse effect on the Company's business, operating results and 
financial condition.


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 3, 1998, the Company held its Annual Meeting of 
Stockholders at the Company's headquarters in San Jose, California.  At 
the meeting, the stockholders were asked to: (1) elect Thomas T. van 
Overbeek, James Crawford III, E. David Crockett, Stephen J. Sheafor, 
Bruce Silver, Daniel D. Tompkins, and John Finegan as members of the 
Board of Directors for 1998; (2) approve an amendment to the company's 
Stock Option/Stock Issuance Plan to increase the number of shares of 
Common Stock for issuance thereunder by 200,000 shares; (3) approve the 
Company's 1998 Employee Stock Purchase Plan; and (4) ratify the 
selection of Coopers & Lybrand as the Company's independent auditors for 
fiscal year 1998.

        As of the April 14, 1998 record date established for the annual 
meeting, there were 7,666,676 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 6,819,153 shares.  
Such shares represented 88%, a quorum, of the total number of shares 
outstanding and entitled to vote.  All of the proposals, and all of the 
nominees to the board of directors, were approved by the stockholders.  
6,338,202 shares voted for the approval of the nominees to the board of 
directors, 475,738 withheld, and 5,213 instructed.  5,962,274 shares 
voted for the approval of the amendment to the company's 1993 Stock 
Option/Stock Issuance Plan, 832,079 voted against, and 24,800 shares 
abstained.  6,629,265 shares voted for the approval of the 1998 Employee 
Stock Purchase Plan, 172,960 shares voted against, and 16,928 shares 
abstained.  6,792,949 shares voted for ratification of the selection of 
Cooper & Lybrand as the Company's independent auditors, 15,394 shares 
voted against, and 10,810 shares abstained.

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


<PAGE>

                                  SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                                 CORNERSTONE IMAGING, INC.
                                                 ------------------------------
                                                 Registrant


Date: August 14, 1998                            /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