UNITED STATES
                  SECURITIES AND EXCHANGE COMMISSION
                       Washington, D.C. 20549


                              FORM 10-QSB

(Mark One)

[X]  Quarterly report pursuant to Section 13 or 15(d) of the
     Securities Exchange Act of 1934
                  For the quarterly period ended July 31, 2006

[ ]  Transition report pursuant to Section 13 or 15(d) of the
     Securities Exchange Act of 1934
                  For the transition period from              to
                                                 ------------    -------------

                  Commission file number     0-20303
                                         -------------------------------------


              TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
------------------------------------------------------------------------------
   (Exact name of small business issuer as specified in its charter)


            Delaware                                 13-2846796
-----------------------------------     --------------------------------------
  (State or other jurisdiction of                 (I.R.S. Employer
  incorporation or organization)                 Identification No.)

      P.O. Box 382, 4 Hardscrabble Heights, Brewster, New York  10509
------------------------------------------------------------------------------
               (Address of principal executive offices)

                              (845) 277-8100
------------------------------------------------------------------------------
                      (Issuer's telephone number)


------------------------------------------------------------------------------
          (Former name, former address and former fiscal year,
                      if changed since last report)


      Check whether the registrant filed all documents and reports
to be filed by Section 12, 13 or 15(d) of the Exchange Act after
the distribution of securities under a plan confirmed by the court.

Yes___X___	No ________



               APPLICABLE ONLY TO CORPORATE ISSUERS

     State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:  As
of September 8, 2006: 2,914,738 shares of Common Stock, par value
$0.0001 per share.


Transitional Small Business Disclosure Format (check one):
Yes         No    X
   --------   ----------

<PAGE>

                                PART I

                        FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS

        The financial statements for the Company's fiscal
quarter ended July 31, 2006 are attached to this Report,
commencing at page F-1.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

        Except for historical information, the material
contained in this Management's Discussion and Analysis or Plan
of Operation is forward-looking.  For the purposes of the safe
harbor protection for forward-looking statements provided by the
Private Securities Litigation Reform Act of 1995, readers are
urged to review the list of certain important factors set forth
in "Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of
1995" contained in the Company's Annual Report on Form 10-KSB
for the fiscal year ended October 31, 2005 ("Fiscal 2005"),
which may cause actual results to differ materially from those
described.

BACKGROUND

        Touchstone Applied Science Associates, Inc. (the "Company"
or "TASA") competes exclusively in the assessment marketplace.
With the advent of No Child Left Behind legislation ("NCLB"),
the Company's Board of Directors and management made the
strategic decision to focus the organization on the fast-growing
assessment segment of the K-12 education market. As a result of
the Company's decision to compete in this arena, there has been a
shift in the Company's revenues from proprietary test revenues
to custom development and services revenues.  For the fiscal
year ended October 31, 2004 ("Fiscal 2004"), revenues were $11.2
million, and for the fiscal year ended October 31, 2005 ("Fiscal
2005"), revenues were $11.7 million. Over the past ten years,
assessment revenues have increased from $2.1 million to $11.7
million, representing a compounded annual growth rate of
approximately 15%.

        The Company has recently completed three acquisitions which
have greatly expanded the types of services that the Company can
offer to its clients and prospective clients in the assessment
marketplace.  In January 2005, the Company acquired all of the
outstanding stock of Assessment and Evaluation Concepts Inc.
("AEC"), a firm with experience and relationships in the
educational assessment field which complement the Company's
experience and relationships.  On July 1, 2005, the Company
completed the acquisition of all of the outstanding stock of
Achievement Data, Inc. ("ADI").  ADI provides on-line testing
capabilities to state testing programs and also offers an
electronic testing engine.  Effective as of May 31, 2006, the
Company acquired all of the outstanding stock of Questar
Educational Systems, Inc. ("Questar").  Questar provides test
delivery, scoring and score analysis capabilities for state
testing programs. The Company has included proforma financial
results of operations for the ADI and Questar acquisitions
within the footnotes to the financial statements included in
this Quarterly Report.

        As a result of these acquisitions and because of the
industry shift from proprietary to custom work, the Company
believes that the descriptions of its revenues as either custom
or proprietary are no longer representative of the Company's
business.  As a consequence, the Company is combining categories
in the reporting of its assessment revenues.  However, to
understand the growth of our businesses for prior versus current
periods, we will be reporting revenues with Questar and without
Questar.

RESULTS OF OPERATIONS

        The following table compares the revenues for the
fiscal quarter and nine months ended July 31, 2006 versus the
fiscal quarter and nine months ended July 31, 2005.  The results
of operations for the fiscal quarter and nine months ended July
31, 2006 include the results of operations of Questar since the
date of acquisition (June 1, 2006) through July 31, 2006.  The
results of operations for the fiscal quarter and nine months
ended July 31, 2005 include the results of operations of ADI
after the date of acquisition (July 1, 2005) through July 31,
2005.  Pro forma results of operations inclusive of the Questar
and ADI acquisitions for these periods are included in the notes
to the consolidated financial statements filed with this Report.

         RESULTS OF OPERATIONS FOR THE NINE MONTH PERIODS AND
       FISCAL QUARTERS ENDED ON JULY 31, 2006 AND ON JULY 31, 2005

<TABLE>
<CAPTION>
                                          RESULTS OF OPERATIONS


                               Nine Months                         Three Months
                             Ended July 31,                       Ended July 31,
                             --------------                       --------------

                                                    %                                    %
                           2006         2005      Change        2006         2005      Change
                           ----         ----      ------        ----         ----      ------
                             (in thousands                      (in thousands
                              of dollars)                        of dollars)

<S>                   <C>          <C>         <C>         <C>          <C>         <C>

Revenues:

  Excluding              $ 9,959.7    $8,008.9      24%        $3,404.0     $2,975.8     14%
  Questar


  Questar                $ 5,138.2    $     --     100%        $5,138.2     $     --    100%
                         ---------    --------                 --------     --------

Total Revenues           $15,097.9    $8,008.9      89%        $8,542.2     $2,975.8    187%
                         =========    ========                 ========     ========


</TABLE>



        The following are selected ratios as a percentage of
revenues on the Company's financial statements:


                                        Nine Months          Three Months
                                       Ended July 31,        Ended July 31,
                                       --------------        --------------

                                      2006       2005       2006       2005
                                      ----       ----       ----       ----
                                      (in percentages)      (in percentages)

Revenues                              100%          100%       100%        100%

  Gross Profit                         44            52         50          51

Operating Expense:

  Selling Expense                       9            14          6          13

General & Administrative               32            32         32          32

Income from Operations                  3             6         12           6

  Other Income (Expense)               (1)            1         (2)          1

Income before Taxes                     2             7         10           7

Income Taxes                            2             3          4           2

Net Income                              *             5          6           5

____________
*Less than 1%

        REVENUES.  Revenues for the nine-month period ended
        --------
July 31, 2006 (the "current period") were $15,097,954
representing an 89% increase, or $7,089,009, from $8,008,945 for
the nine-month period ended July 31, 2005 (the "comparable
period").  Net revenues for the three months ended July 31, 2006
(the "current quarter") increased by 187%, or $5,566,404, to
$8,542,237 as compared to net revenues of $2,975,833 in the
three months ended July 31, 2005 (the "comparable quarter").

        Assessment revenues excluding Questar increased by 24%
year-to-date and have increased by 14% for the current quarter
over the comparable quarter. This increase has taken place
because the Company has increased its custom contract business
with the expansion of its Indiana Core 40 and Idaho ESL
programs. Additionally, the BETA and AEC units increased
revenues during the current period and current quarter.

        Assessment revenues including Questar increased by 89%
year-to-date and have increased by 187% for the current quarter
over the comparable quarter. The Questar acquisition was completed
on May 31, 2006. Consequently, Questar's revenues for June and July,
2006 are included in the current period and current quarter financial
statements.

        COST OF GOODS SOLD.  Cost of goods sold increased by
        ------------------
$4,661,540, or 121%, to $8,498,438 for the current period from
$3,836,898 in the comparable period.  Cost of goods sold is now
56% of revenues versus 48% in the comparable period.  Cost of
goods sold for the current quarter increased by 192%, or
$2,805,269, to $4,265,846 in the current quarter from $1,460,577
in the comparable quarter. Cost of goods sold is now 50% of
revenues for the current quarter versus 49% for the comparable
quarter.  The increase can be attributed to the higher start-up
costs associated with large operation contracts. The Company, as
a whole, is bidding on larger administration contracts that
inherently have lower margins, but higher revenues and gross
margin dollars. While the start-up costs associated with the
large contracts may be unique for each such contract, management
expects that the Company will be able to utilize its experiences
to make the start-up processes for future contracts more
efficient.

        GROSS PROFIT.  Gross profit from operations increased
        ------------
by $2,427,469, from $4,172,047 in the comparable period to
$6,599,516 in the current period.  The gross profit margin is
now 44% in the current period versus 52% in the comparable
period.   For the current quarter, the gross profit increased to
$4,276,391 versus $1,515,256 in the comparable quarter.  The
gross profit margin is now 50% in the current quarter versus 51%
in the comparable quarter.   The increase in gross margin
percentage was the result of a change in mix of the contracts
with fewer large start up operation contracts and more mature
contracts in the current quarter together with the addition of
the Questar gross margins attained on certain projects during
this reporting period. The Company budgets for, and now expects,
relative stability in its gross margin percentages, though
fluctuations may occur from time to time due to contract and
product mix.

        SELLING EXPENSE.  Selling expense increased for the
        ---------------
current period by 24%, or $270,138, versus the comparable
period, or from $1,138,711 to $1,408,849. For the current
quarter, selling expense increased by 31%, or $123,320, or from
$392,577 in the comparable quarter to $515,897 in the current
quarter.  Selling expenses are 9% of revenues in the current
period versus 14% in the comparable period. For the current
quarter, selling expenses as a percentage of revenues decreased
to 6% from 13% in the comparable quarter.   We anticipate selling
expenses, in terms of whole dollars, to increase modestly over the
next twelve months as we revamp our marketing and sales organizations
to effect revenue gains, but to decline as a percentage of revenue.

        The increase in selling expense is due to the
Company's decision to invest in marketing and sales personnel in
anticipation of its acquisition of Questar, completed as of May
31, 2006.  The marketing and sales organization will be a
corporate resource for TASA and all of its subsidiaries.
Because the sales process has a long lead-time, management
determined that it was necessary to expand the sales force now
with the anticipation that future revenues attributable to an
expanded sales force will exceed the future costs associated
with such sales force.

        GENERAL AND ADMINISTRATIVE (G&A) EXPENSES.  General
        -----------------------------------------
and administrative expenses increased by $2,278,979, or 90%, for
the current period and are now $4,813,287 versus $2,534,308 for
the comparable period.  For the current period and the
comparable period, G&A is 32% of revenues.  For the current
quarter, G&A expenses increased by $1,768,679, or 188%, and are
now $2,708,464 versus $939,785 in the comparable quarter.  G&A
is 32% of revenues in the current quarter and  the comparable
quarter. The dollar increase in G&A costs is associated with the
enlarged organization, including TASA and its existing
subsidiaries, and now, Questar.

        An amount of $151,777 of the G&A increase relates to
the expensing of employee stock option compensation attributable
to options that were granted between February 1, 2006 and July
31, 2006, as required by accounting principles adopted by the
Company in February 2006.  Overall a majority of the increase
in general and administrative expenses in the current quarter
is attributable to a combination of both the expensing of
employee stock option compensation and the increased level of
general and administrative expenses due to the inclusion of ADI
and Questar.

        OTHER INCOME (EXPENSE).  The Company had net other
        ----------------------
income (expense) of ($149,281) for the current period versus net
other income of $90,334 for the comparable period.  For the
current quarter, the Company had net other income (expense) of
($169,739) versus net other income of $23,700 for the comparable
quarter.  Net other income (expense) decreased for the current
quarter because of interest expenses associated with the
acquisitions of ADI and Questar.  Other income (expense) for
both the current period and the current quarter includes
amortization of deferred gain on the sale/leaseback of the
Company's headquarters building in July 2003, of $94,079 in both
the current period and the comparable period, and $31,359 in
each of the current quarter and the comparable quarter.

        INCOME FROM OPERATIONS. Income from the Company's
        ----------------------
operations for the current period was $377,380 versus $ 499,028
for the comparable period.  For the current quarter, the Company
had income from operations of $ 1,052,030 versus $182,894 in the
comparable quarter.

        EBITDA.  EBITDA represents net (loss) income from
        ------
operations before the non-cash charges for interest, taxes,
depreciation and amortization.  We present EBITDA because we
consider such information an important supplemental measure of
our performance.  We believe EBITDA facilitates comparisons of
the Company to its competitors and other similarly situated
companies and comparisons of the Company's results over time.
The calculation of EBITDA excludes differences unrelated to
operating performance, such as variations in capital structures
(affecting interest expense), taxation (tax attributes may vary
based on time and historical results rather than current
operations), and the age and mix of tangible and intangible
assets (affecting depreciation and amortization expense required
by GAAP).  In addition, we are presenting "Adjusted EBITDA"
which excludes the effects of the grant of employee stock
options during the period, which are now required to be expensed
in the Company's financial statements.

        EBITDA is a non-GAAP financial measure and should not
be used as a substitute for the directly comparable GAAP
financial measure.  In order to facilitate an understanding of
the components of EBITDA and their effect on the results of
operations, the following table is provided as a reconciliation
of reported (loss) income from operations to EBITDA and Adjusted
EBITDA.



                                                 EBITDA

                                Nine Months Ended          Three Months Ended
                                    July 31,                      July 31,
                                 2006       2005            2006          2005
                                 ----       ----            ----          ----

Income from
  operations                  $377,380    $499,028       $1,052,030     $182,894
Depreciation &
  amortization                 779,082     485,945          400,029      164,776
                            ----------    --------       ----------     --------
EBITDA                      $1,156,462    $984,973       $1,452,059     $347,670
Stock option
  compensation
  expense                      151,777          --           65,192           --
                            ----------    --------       ----------     --------
Adjusted EBITDA             $1,308,237    $984,973       $1,517,251     $347,670
                            ==========    ========       ==========     ========



        NET INCOME AND EARNINGS PER SHARE.  Net income for the
        ---------------------------------
current period was $72,639 versus net income of $365,422 in the
comparable period. For the current quarter, the Company had net
income of $483,492 versus net income of $148,184 in the
comparable quarter.

        INCOME TAXES. Income taxes accrued for both federal and
        ------------
state purposes for the current quarter and the current period were
$398,799 and $155,460, respectively.  The Company updates the
income tax accrual quarterly for changes in book to tax income.
The Company uses an estimated consolidated federal and state tax
rate of approximately 40% when estimating its current accrual.
For the current quarter, the Company recognized approximately
$45,000 in income tax expense for Fiscal 2005 as a result of an
under-accrual of estimated income taxes in such fiscal year.

        EARNINGS PER SHARE. For the current period, the Company
        ------------------
had net income of $.02 per share versus $.12 per share (diluted)
in the comparable period. For the current quarter, the Company had
$.10 earnings per share (diluted) versus $.05 earnings per share
(diluted) in the comparable quarter.

        The Company's diluted weighted average shares
outstanding increased during the period by approximately 66% due
to the stock issued in the acquisition of Questar.

LIQUIDITY AND CAPITAL RESOURCES

        WORKING CAPITAL. Working capital increased by $98,671
        ---------------
during the current period from $3,106,382 at October 31, 2005,
to $3,205,053 at July 31, 2006.  This increase resulted
primarily from an increase in accounts receivable due to the
Questar acquisition.  However, this increase was partially offset
by an increase in the short-term maturities of the long-term
portion of debt. The ratio of current assets to current
liabilities was approximately 2.23 to 1 at October 31, 2005
versus 1.37 to 1.0 at July 31, 2006.

        CASH FLOW PROVIDED BY (USED IN) OPERATING ACTIVITIES.
        ----------------------------------------------------
During the current period, the Company had net cash provided by
(used in) operating activities of ($403,284) as compared to
$342,439 in the comparable period.  The increase in cash used in
operating activities in the current period resulted primarily
from an increase in accounts receivable that was partially
offset by an increase in accounts payable.

        CASH FLOW USED IN INVESTING ACTIVITIES. During the
        --------------------------------------
current period, the Company had net cash used in investing
activities of $15,572,845, as compared to net cash used in
investing activities of $2,308,503 in the comparable period.
The $15,572,845 in cash used in investing activities resulted
primarily from the acquisition of Questar during the current
period.

        CASH FLOW PROVIDED BY FINANCING ACTIVITIES. In the
        ------------------------------------------
current period, the Company had net cash provided by financing
activities of $16,577,757 as compared to $1,593,528 in the
comparable period.  The cash provided by financing activities in
the current period resulted primarily from the financing
provided for the acquisition of Questar and from the proceeds
from the exercise of employee stock options and warrants.

        During the current period, options to purchase 5,000
shares of the Company's Common Stock were exercised resulting in
aggregate proceeds to the Company of $4,700. Warrants for the
purchase of 138,047 shares of Common Stock were exercised in the
comparable period providing proceeds to the Company of $155,303.
During the current period, options to purchase 92,500 shares of
the Company's Common Stock were granted to existing employees of
the Company pursuant to the 2000 Stock Incentive Plan, and options
to purchase 50,000 shares were granted to new employees.  The
options granted during the current period had exercise prices
equal, or in some cases plus a premium, to the closing sales price
on the date of the grant,  These exercise prices ranged from $2.85
to $4.50 per share, and are all subject to vesting periods contained
in the individual grants. In addition, during the current period
pursuant to the Directors Stock Option Plan, options to purchase
12,500 shares of Common Stock were granted to non-employee
directors at an exercise price of $2.96 per share.  These
options become exercisable in three equal installments
commencing on the first anniversary date of the grant.

        ACQUISITION OF QUESTAR.  On May 31, 2006, the Company
        ----------------------
acquired all of the outstanding shares of Questar. The Company
financed the acquisition through senior debt and a private
equity investment.  The Company entered into a loan agreement
(the "Loan Agreement") with TD Banknorth, N.A. ("Banknorth"),
pursuant to which the Company borrowed a term loan in an
aggregate principal amount of $9,600,000, obtained a revolving
line of credit in the amount of $4,000,000 and had issued on its
behalf a standby letter of credit in the original stated amount
of $194,750 against availability under the revolving line of
credit.  The Loan Agreement contains ongoing financial covenants
which are measured on an annual basis.  The term loan is
interest-only for the first six months of the loan, and then is
payable in fifty-four equal monthly installments of principal
and interest on a five year amortization schedule.  The Company
has entered into an interest rate swap agreement with Banknorth
pursuant to which Banknorth is paying the Company 250 basis
points over the one month USD LIBOR BBA rate and the Company is
paying Banknorth a fixed rate of 7.95% on a value of $9,600,000
declining concurrently with the term loan.  The interest rate
swap agreement expires after thirty months on December 1, 2008.
The term loan balloons on May 30, 2011.  Advances under the
revolving line of credit are based on a borrowing base of
eligible accounts receivable and eligible inventory of the
Company and Questar.  The revolving line of credit is available
until April 30, 2008.  Both the term loan and the revolving loan
are secured by the assets of the Company and by the assets of
Questar.  The proceeds from the loans were used to pay a portion
of the purchase price for the shares of Questar and closing
costs for the transaction, and for working capital.

        The Company also entered into a securities purchase
agreement with Camden Partners Strategic Fund III, L.P. and
Camden Partners Strategic Fund III-A, L.P. (collectively, the
"Investors"), pursuant to which the Company issued and sold to
the Investors 1,666,667 shares of its Series A-1 Convertible
Preferred Stock ("Series A-1 Preferred Stock") valued at
$7,500,000, based on a price of $4.50 per share.  The proceeds
from the sale of stock were used to pay a portion of the
purchase price for the shares of Questar and closing costs for
the transaction, with the balance being retained by the Company
for working capital.  Two members of the Company's Board of
Directors, Donald W. Hughes and David L. Warnock are also
principals of each of the Investors.

        The Company has entered into employment agreements for
an initial twenty-four month term with certain members of the
management of Questar.  Such employment agreements with the
Questar management team include non-competition covenants and
proprietary rights agreements.

        ACQUISITION OF ADI.  On July 1, 2005, the Company
        ------------------
completed the acquisition of all of the outstanding stock of
ADI.  ADI provides on-line testing capabilities to state testing
programs and also offers an electronic testing engine.  The
total consideration paid by the Company for the ADI stock was
$1,650,000, consisting of $1,155,000 in cash, the issuance of
89,488 shares of Common Stock of the Company (valued at
$331,650, based on the average of closing prices for the
Company's Common Stock for the five trading days preceding the
closing) and $163,350 in subordinated promissory notes issued to
two of the former stockholders of ADI.  The promissory notes
bear interest at the rate of 5% per annum and are payable in six
semi-annual installments of principal plus interest.

        In connection with the acquisition of ADI, the Company
entered into a loan agreement with its bank, pursuant to which
the Company borrowed an aggregate principal amount of
$1,200,000, almost all of which was used to pay the purchase
price for the shares of ADI and closing costs for the
transaction, with the balance being retained by the Company for
working capital.  Borrowings under the loan incur interest at
the rate of 6.25% per annum.  Interest only payments are due for
the first year, and thereafter monthly payments of principal and
interest of $23,339 through July 2011. As part of the financing
that occurred in May 2006, this outstanding balance was
refinanced.

        The Company has entered into employment agreements for
an initial forty-month term with two of the former shareholders
of ADI.  In addition, the former shareholders of ADI who are
continuing with ADI were granted an aggregate of 60,000 options
to purchase additional shares of the Company's Common Stock, at
an exercise price of $3.75 per share, subject to vesting upon
the completion of one year of employment.  The Company also
entered into an employment agreement for an initial twenty-eight
month term with a key employee of ADI.

        ACQUISITION OF AEC.  In January 2005, the Company
        ------------------
acquired all of the outstanding stock of AEC in consideration of
$83,000 in cash and 12,000 shares of the Company's Common Stock.
In addition, options to purchase 50,000 shares of the Company's
Common Stock were granted to offiers of AEC pursuant to the 2000
Stock Incentive Plan on the date of the closing exercisable at
$3.06 per share. The options are exercisable commencing one year
from the closing, through January 2015.  In addition, the Company
entered into two-year employment agreements with the two officers
of AEC.  Pursuant to the agreements, the officers of AEC are
entitled to a base salary and bonuses determined by the
attainment of certain performance goals.  Goodwill totaling
$118,074 was recorded as a result of the acquisition.

        Long-term debt, operating leases and other long-term
obligations outstanding as of July 31, 2006 mature as follows:

<TABLE>
<CAPTION>

                                 Payments Due

<S>               <C>              <C>             <C>             <C>             <C>
                                        1-12            13-36            37-60         More than 60
Obligations            Total            Months          Months           Months        Months
-----------            -----            ------          ------           ------        ------------


Long-term debt       $13,876,922      $1,051,860      $3,708,403       $9,116,659        $     --

Operating leases       6,371,080       1,155,858       2,265,622        2,167,180         782,420

Other long-term
obligations (1)        5,568,895       3,077,018       2,031,460          460,417              --
                     -----------      ----------      ----------       ----------        --------

Total
obligations          $25,816,897      $5,284,736      $8,005,485      $11,744,256        $782,420
                     ===========      ==========      ==========      ===========        ========

_______________
(1)  Related to employment contracts in effect at the end of the
current quarter.

</TABLE>


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        The preparation of financial statements and related
disclosures in conformity with accounting principles generally
accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in
the unaudited Consolidated Financial Statements and accompanying
notes. Estimates are used for, but not limited to, the
accounting for the allowance for doubtful accounts, inventories,
income taxes and loss contingencies. Management bases its
estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances. Actual results could differ from these estimates
under different assumptions or conditions.

        The Company believes the following critical accounting
policies, among others, may be impacted significantly by
judgment, assumptions and estimates used in the preparation of
the unaudited Consolidated Financial Statements:

        *  Revenues from the Company's sales of its
    proprietary tests, including sales of the related ancillary
    materials, are recognized when the Company ships the
    physical product from its warehouse.  The Company's
    revenues from performance of assessment consulting and
    psychometric services under long-term contracts are
    recognized on the percentage-of-completion basis pursuant
    to the provisions of Statement of Position No. 81-1,
    "Accounting for Performance of Construction-Type and
    Certain Production-Type Contracts" and Accounting Research
    Bulletin No. 45, "Long-Term Construction-Type Contracts".
    For each contract, the Company compares the costs incurred
    in the course of performing such contract during a fiscal
    period to the total estimated costs of full performance of
    the contract, and recognizes a proportionate amount of
    revenue for such period.

        *  In July 2003, the Company sold its headquarters
    building to 26 Palmer LLC for $2,875,000.  The building and
    related improvements had a net book value of $1,458,481.
    The Company reported a gain on the sale totaling
    $1,254,383, net of closing costs totaling $162,136.  The
    building was then leased by the Company under a ten year
    lease agreement.  As a result of the sale-leaseback of the
    building, the gain has been deferred and will be recognized
    over the ten-year term of the lease as other income for
    each period.

        *  Deferred tax assets are recorded based on the
    Company's projected future taxable income and the resulting
    utilization of the deferred tax assets. To the extent that
    the Company would not be able to realize all or part of its
    deferred tax assets in the future, an adjustment to the
    deferred tax assets would be necessary and charged to income.

        * Goodwill and other intangible assets are
    deemed to have indefinite lives and are no longer amortized
    but are subject to annual impairment tests.  If impairment
    exists, it would be necessary to record an impairment
    expense, resulting in a reduction in income.

        *  The process of writing and calibrating a test
    passage takes approximately two years, and all costs
    associated with the process are capitalized during this
    period. Amortization of these costs begins once the
    development period has elapsed, which in most cases,
    represents the point in time at which the new test passage is
    placed into the test passage bank and becomes available to be
    utilized within the Company's existing tests, or the point in
    time at which a newly developed test becomes available for
    sale.  Costs capitalized in connection with the development
    of passages used in the Company's DRP Test have been
    estimated to have a useful life of eleven years and,
    accordingly, are being amortized over an eleven-year period.
    Such amortization costs are included in the costs of goods
    sold in that period.  Costs capitalized in connection with
    the development of passages used in all other of the
    Company's tests have been estimated to have a useful life of
    seven years and, accordingly, are being amortized over a
    seven-year period.  If these estimates of the useful lives of
    test passages prove to be shorter periods, the Company would
    be required to accelerate the amortization of these passages,
    resulting in a reduction in income.

        *  Effective February 1, 2006, the Company's 2000
    Stock Incentive Plan (the "Plan") is accounted for in
    accordance with the recognition and measurement provisions
    of Statement of Financial Accounting Standards ("FAS") No.
    123 (revised 2004), Share-Based Payment ("FAS No. 123"R"),
    which replaces FAS No. 123, Accounting for Stock-Based
    Compensation, and supersedes Accounting Principles Board
    Opinion" (""APB") No. 25, Accounting for Stock Issued to
    Employees, and related interpretations. FAS No. 123(R)
    requires compensation costs related to share-based payment
    transactions, including employee stock options, to be
    recognized in the financial statements. In addition, the
    Company adheres to the guidance set forth within Securities
    and Exchange Commission" (""SEC") Staff Accounting
    Bulletin" (""SAB") No. 107, which provides the Staff's
    views regarding the interaction between FAS No. 123(R) and
    certain SEC rules and regulations and provides
    interpretations with respect to the valuation of share-
    based payments for public companies.

        Prior to February 1, 2006, the Company accounted
    for similar transactions in accordance with APB No. 25
    which employed the intrinsic value method of measuring
    compensation cost. Accordingly, compensation expense was
    not recognized for fixed stock options if the exercise
    price of the option equaled or exceeded the fair value of
    the underlying stock at the grant date.

        While FAS No. 123 encouraged recognition of the
    fair value of all stock-based awards on the date of grant
    as expense over the vesting period, companies were
    permitted to continue to apply the intrinsic value-based
    method of accounting prescribed by APB No. 25 and disclose
    certain pro-forma amounts as if the fair value approach of
    FAS No. 123 had been applied.  In December 2002, FAS No.
    148, Accounting for Stock-Based Compensation-Transition and
    Disclosure, an amendment of FAS No. 123, was issued, which,
    in addition to providing alternative methods of transition
    for a voluntary change to the fair value method of
    accounting for stock-based employee compensation, required
    more prominent pro-forma disclosures in both the annual and
    interim financial statements. The Company complied with
    these disclosure requirements for all applicable periods
    prior to February 1, 2006.

        In adopting FAS No. 123(R), the Company applied
    the modified prospective approach to transition. Under the
    modified prospective approach, the provisions of FAS No.
    123(R) are to be applied to new awards and to awards
    modified, repurchased, or cancelled after the required
    effective date. Additionally, compensation cost for the
    portion of awards for which the requisite service has not
    been rendered that are outstanding as of the required
    effective date shall be recognized as the requisite service
    is rendered on or after the required effective date. The
    compensation cost for that portion of awards shall be based
    on the grant-date fair value of those awards as calculated
    for either recognition or pro-forma disclosures under FAS
    No. 123.

        As a result of the adoption of FAS No. 123(R),
    the Company's results for the nine-month period ended July
    31, 2006 include stock option compensation expense totaling
    $151,777. Such amount has been included in the Consolidated
    Statements of Operations within general and administrative
    expenses.  The Company recognized related tax benefits
    associated with share-based compensation arrangements
    totaling approximately $60,000 during the nine-month period
    ended July 31, 2006.  The impact of the adoption is a
    reduction of net income before tax and after tax for the
    nine months ended July 31, 2006 of $151,777 and $91,777,
    respectively.  In addition, basic and diluted net income
    per share is decreased by approximately $(0.02).  There was
    no impact on cash flows from operations and cash flows from
    financing activities.  Stock option compensation expense
    calculated and disclosed under APB No. 25 in the Notes to
    the Consolidated Statements of Operations for the three
    months ended July 31, 2005 totaled $141,134

        Stock option compensation expense in 2006 is the
    estimated fair value of options granted amortized on a
    straight-line basis over the requisite service period for
    the entire portion of the award.  The Company has not
    adjusted the expense by the amount the estimated fair value
    of options forfeited as indicated in FAS No. 123(R) since
    the forfeiture rate based upon historical data was
    determined to be immaterial.

ITEM 3. CONTROLS AND PROCEDURES

The Certifications required by Item 307 of Regulation S-B are
set forth after the signatures to this Report.

        (a) Evaluation of disclosure controls and
procedures.  As of the end of the most recent fiscal quarter
covered by this Quarterly Report on Form 10-QSB, the Company
evaluated the effectiveness of the design and operation of its
"disclosure controls and procedures" ("Disclosure Controls"),
and its "internal controls and procedures for financial
reporting" ("Internal Controls").  This evaluation (the
"Evaluation") was done under the supervision and with the
participation of management, including Andrew Simon, the
Company's Chief Executive Officer ("CEO") and James Williams,
the Company's Chief Financial Officer ("CFO").  Rules adopted by
the SEC require that in each periodic report filed pursuant to
the Securities Exchange Act of 1934, as amended (the "Exchange
Act"); the Company presents the conclusion about the
effectiveness of the Company's Disclosure Controls and Internal
Controls based on and as of the date of the Evaluation.

        Disclosure Controls are procedures that are designed
with the objective of ensuring that information required to be
disclosed in our reports filed under the Exchange Act, such as
this Quarterly Report, is recorded, processed, summarized and
reported within the time periods specified in the rules and
forms.  Disclosure Controls are also designed with the objective
of ensuring that such information is accumulated and
communicated to the Company's management, including the CEO and
CFO, as appropriate to allow for timely decisions regarding
required disclosure.  Internal Controls are procedures which are
designed with the objective of providing reasonable assurance
that (1) the Company's transactions are properly authorized; (2)
the Company's assets are safeguarded against unauthorized or
improper use; and (3) the Company's transactions are properly
recorded and reported, all to permit the preparation of our
financial statements in conformity with generally accepted
accounting principles.

        The Company's management does not expect that the
Company's Disclosure Controls or Internal Controls will prevent
all errors and all fraud. Any control system, no matter how well
conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system
are met.  Further, the design of a control system must reflect
the fact that there are resource constraints, and the benefits
of controls must be considered relative to their costs.  Because
of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the
Company have been detected.  These inherent limitations include
the realities that judgments in decision-making can be faulty
and that breakdowns can occur because of simple error or
mistake.  Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more
people, or by management override of the control.  The design of
any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can
be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions; over time,
control may become inadequate because of changes in conditions,
or the degree of compliance with the policies or procedure may
deteriorate.  Because of the inherent limitations in a cost-
effective control system, misstatements due to error or fraud
may occur and not be detected.

        The Evaluation included a review of the controls'
objectives and design, the controls' implementation by the
Company and the effect of the controls on the information
generated for use in this Quarterly Report.  In the course of
the Evaluation, we sought to identify data errors, controls
problems or acts of fraud and to confirm that appropriate
corrective action, including process improvements, were being
undertaken.  This type of evaluation will continue to be done on
a quarterly basis so that the conclusions concerning controls
effectiveness can be reported in each Quarterly Report on Form
10-QSB and the Annual Report on Form 10-KSB.  The Company's
Internal Controls are also evaluated on an ongoing basis by the
Company's finance personnel and by the Company's independent
auditors in connection with their audit and review activities.
The overall goals of these various evaluation activities are to
monitor the Company's Disclosure Controls and Internal Controls
and to make modifications as necessary; it is the Company's
intent in this regard that the Disclosure Controls and the
Internal Controls will be maintained as dynamic systems change
(including improvements and corrections) as conditions warrant.

        Among other matters, the Company sought in the
Evaluation to determine whether there were any "significant
deficiencies" or "material weaknesses" in the Company's Internal
Controls, or whether the Company had identified any acts of
fraud involving personnel who have a significant role in the
Company's Internal Controls.  This information was important
both for the Evaluation generally and because items 4, 5 and 6
in the Section 302 Certification require that the CEO and CFO
disclose that information to the Board's Audit Committee and to
the Company's independent auditors and to report on related
matters in this section of the Quarterly Report.  In the
professional auditing literature, "significant deficiencies" are
referred to as "reportable conditions"; these are control issues
that could have a significant adverse effect on the ability to
record, process, summarize and report financial data in the
financial statements.  A "material weakness" is defined in the
auditing literature as a particularly serious reportable
condition where the internal control does not reduce to a
relatively low level the risk that misstatements caused by error
or fraud may occur in amounts that would be material in relation
to the financial statements and not be detected within a timely
period by employees in the normal course of performing their
assigned functions.  The Company also sought to deal with other
controls matters in the Evaluation, and in case a problem was
identified, we considered what revision, improvement and/or
correction to make in accordance with on-going procedures.

        An evaluation was carried out under the supervision
and with the participation of the Company's management,
including the CEO and the CFO, of the effectiveness of the
design and operation of our disclosure controls and procedures
(as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange
Act) as of the end of the period covered by this Quarterly
Report.  Based upon that Evaluation, the Company's CEO and CFO
have concluded that the Company's disclosure controls and
procedures were effective at the end of the period covered by
this Quarterly Report and that information required to be
disclosed by the Company in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in SEC rules and
forms.

        As previously disclosed the Company acquired Questar
during this reporting period and is thus including in its Statement
of Operations financial results for that entity. The Company has
yet to assess, or conclude as to the effectiveness of, Questar's
internal controls and procedures. The Company is in the process
of performing such assessment of Questar's internal controls and
procedures.

        (b) Changes in internal controls.  There was no change
in the Company's internal controls over financial reporting
occurring in the Company's fiscal quarter covered by this
Quarterly Report that has materially affected, or is reasonably
likely to materially affect, the Company's internal controls
over financial reporting.

<PAGE>

                               PART II

                         OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

        None.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

        Upon consummation of the transactions described in
Item 5 below, the Company (a) issued to the selling shareholders
of Questar, 222,222 shares of Series A-2 Convertible Preferred
Stock ("Series A-2 Preferred Stock") (valued at $4.50 per
share), as part payment of the purchase price at closing and (b)
delivered to the escrow agent, 1,111,111 shares of the Series A-
2 Preferred Stock (valued at $4.50 per share), which will be
deemed earned by, and will be released to, the former
shareholders of Questar, if revenue goals over the earn out
period of the three fiscal years ending October 31, 2007, 2008
and 2009, are met.  The issuance and sale of the Series A-2
Preferred Stock did not involve a public offering pursuant to
the exemption from registration provided by Section 4(2) of the
Act.  With respect to the 222,222 shares of Series A-2 Preferred
Stock issued as part payment of the purchase price at closing,
the Company has agreed to include the shares of Common Stock
underlying the Series A-2 Preferred Stock in a registration
statement if, and when, filed by the Company, upon demand of the
Investors, at any time following one year after the issuance
date of the Series A-1 Preferred Stock.  With respect to the
escrowed shares, the Company has agreed to file a registration
statement under the Act for the shares of Common Stock into
which the Series A-2 Preferred Stock will be convertible, upon
demand of the former shareholders of Questar following the
release, if any, of the escrowed shares, or to include such
shares of Common Stock in a registration statement if, and when,
filed by the Company with respect to the shares of Common Stock
beneficially owned by the Investors.

        The Company issued 1,666,667 shares of the Series A-1
Convertible Preferred Stock to Camden III and Camden III-A, in a
transaction not involving a public offering pursuant to the exemption
from registration provided by Section 4(2) of the Act.  The Company
has agreed to file a registration statement under the Act with
respect to the shares of Common Stock underlying the Series A-1
Preferred Stock, upon demand of the Investors, at any time following
one year after the issuance date of the Series A-1 Preferred Stock.

        Initially, the shares of Series A-1 Preferred Stock
and Series A-2 Preferred Sock are convertible into shares of
Common Stock on a one-for-one basis.  The conversion rate is
subject to anti-dilution adjustments set forth in the
Certificate of Designations.  For the first three years after
the issuance, neither Series A-1 Preferred Stock nor Series A-2
Preferred Stock will accrue dividends.  Thereafter, dividends
will accrue at the rate of 8% per annum, payable in cash or
additional shares of Series A Preferred Stock, at the election
of the Company; provided, however, that no escrowed shares of Series
A-2 Preferred Stock will accrue any dividends until, and after the
time when, the Series A-2 Preferred Stock is released to the
selling shareholders of Questar in accordance with the Escrow
Agreement.

        Each share of Series A-1 Preferred Stock is entitled
to cast one vote per each share of Common Stock into which such
share of Series A-1 Preferred Stock is convertible as of the
record date for a stockholder vote.  Each share of Series A-2
Preferred Stock that has been issued to the selling shareholders
of Questar on the closing date is entitled to cast one vote per
each share of Common Stock into which such share of Series A-2
Preferred Stock is convertible as of the record date for a
stockholder vote.  The shares of Series A-2 Preferred Stock that
are held in escrow pending release if the earn out hurdles are
satisfied, will not be entitled to vote so long as such shares
remain in escrow.  The shares of Series A-1 Preferred Stock and
Series A-2 Preferred Stock which are entitled to vote shall vote
together with the Common Stock as a single class.

        Upon closing of the acquisition of Questar, the
Company issued to Signal Hill Capital Group, LLC, a five-year
warrant to purchase up to 50,000 shares of the Company's Common
Stock, at an exercise price of $4.50 per share.  The warrant was
issued as part of the consideration paid to Signal Hill for its
role as the Company's investment banker and financial advisor in
the acquisition of Questar and the financing thereof.  Neither
the warrant nor the underlying shares of Common Stock have been
registered under the Act, in reliance upon the exemption from
registration pursuant to Section 4(2) of the Act.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

        None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None.

ITEM 5. OTHER INFORMATION

        On May 31, 2006, the Company acquired all of the
outstanding shares of Questar. Total consideration paid by the
Company was $20,000,000 consisting of $15,000,000 in cash, the
issuance of 222,222 shares of Series A-2 Preferred Stock of the
Company valued at $1,000,000 and a $4,000,000 promissory note.
The Company has also agreed to pay additional consideration in
2010 if Questar achieves certain revenue goals during the three
fiscal years ending October 31, 2007, 2008 and 2009.  The
maximum contingent earn out payment is $12,500,000, of which up
to $10,000,000 shall be paid half in cash and half in Series A-2
Preferred Stock and $2,500,000 shall be paid, if earned, at the
election of the Company, in cash or additional shares of Series
A-2 Preferred Stock, or any combination thereof, valued at fair
market value at the time of issuance.

        The Company reported the acquisition of Questar in a
Current Report on Form 8-K filed with the Securities and
Exchange Commission on June 6, 2006, and as amended on August
14, 2006 (collectively, the "Questar 8-K"), and the information
contained in the Questar 8-K is hereby incorporated herein by
reference pursuant to Rule 12b-23 under the Securities Exchange
Act of 1934, as amended.

ITEM 6. EXHIBITS

        3.1  Amended Certificate of Designations of Series A
             Convertible Preferred Stock filed with the
             Secretary of State of Delaware on May 25, 2006
             (incorporated by reference from the Company's
             Current Report on Form 8-K, filed on June 6,
             2006, as amended on August 14, 2006
             (collectively, the "Questar 8-K"))

        4.1  Voting Agreement, dated as of May 31, 2006, by
             and among Camden Partners Strategic Fund III,
             L.P., Camden Partners Strategic Fund III-A,
             L.P. and Touchstone Applied Science Associates,
             Inc. (incorporated by reference from the
             Questar 8-K)

        4.2  Investor Rights Agreement, dated as of May 31,
             2006, by and among Camden Partners Strategic
             Fund III, L.P., Camden Partners Strategic Fund
             III-A, L.P. and Touchstone Applied Science
             Associates, Inc. (incorporated by reference
             from the Questar 8-K)

        4.3  Questar Investor Rights Agreement, dated as of
             May 31, 2006, by and among John Adams, David
             Ihle, Theodore Naegeli, Terry Appleman, Mark
             Budde, MaJeana Hallstrom, Greg Lindstrom and
             Susan Trent, and Touchstone Applied Science
             Associates, Inc. (incorporated by reference
             from the Questar 8-K)

        4.4  Warrant Certificate issued to Signal Hill
             Capital Group, LLC dated May 31, 2006
             (incorporated by reference from the Questar 8-K)

       10.1  Stock Purchase Agreement, dated as of May 31,
             2006, by and among John Adams, David Ihle,
             Theodore Naegeli, Terry Appleman, Mark Budde,
             MaJeana Hallstrom, Greg Lindstrom and Susan
             Trent, and Touchstone Applied Science
             Associates, Inc. (incorporated by reference
             from the Questar 8-K)

       10.2  Subordinated Note, dated May 31, 2006, issued
             by Touchstone Applied Science Associates, Inc.
             to Questar Data Systems, Inc., as paying agent
             for the selling shareholders of Questar
             Educational Systems, Inc. (incorporated by
             reference from the Questar 8-K)

       10.3  Escrow Agreement, dated as of May 31, 2006, by
             and among John Adams, David Ihle, Theodore
             Naegeli, Terry Appleman, Mark Budde, MaJeana
             Hallstrom, Greg Lindstrom, Susan Trent, and
             Rider, Weiner & Frankel, P.C. and Touchstone
             Applied Science Associates, Inc. (incorporated
             by reference from the Questar 8-K)

       10.4  Loan Agreement, dated as of May 31, 2006, by
             and among Touchstone Applied Science
             Associates, Inc., Questar Educational Systems,
             Inc. and TD Banknorth, N.A. (incorporated by
             reference from the Questar 8-K)

       10.5  Security Agreement, dated as of May 31, 2006,
             between Touchstone Applied Science Associates,
             Inc. and TD Banknorth, N.A. (incorporated by
             reference from the Questar 8-K)

       10.6  Security Agreement, dated as of May 31, 2006,
             between Questar Educational Systems, Inc. and
             TD Banknorth, N.A. (incorporated by reference
             from the Questar 8-K)

       10.7  Series A Convertible Preferred Stock Purchase
             Agreement, dated as of May 31, 2006, by and
             among Camden Partners Strategic Fund III, L.P.,
             Camden Partners Strategic Fund III-A, L.P. and
             Touchstone Applied Science Associates, Inc.
             (incorporated by reference from the Questar 8-K)

       31.1  Certification Pursuant To 18 U.S.C. Section
             1350, As Adopted Pursuant To Section 302 of The
             Sarbanes-Oxley Act of 2002 (filed herewith)

       31.2  Certification Pursuant To 18 U.S.C. Section
             1350, As Adopted Pursuant To Section 302 of The
             Sarbanes-Oxley Act of 2002 (filed herewith)

       32    Certification Pursuant To 18 U.S.C. Section
             1350, As Adopted Pursuant To Section 906 of The
             Sarbanes-Oxley Act of 2002 (filed herewith)

<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES


           Index to Consolidated Financial Statements (Unaudited)
         for the Fiscal Quarter and Nine Months Ended July 31, 2006



     Consolidated Balance Sheets                                   F-2

     Consolidated Statements of Operations                         F-4

     Consolidated Statements of Cash Flows                         F-5

     Notes to Consolidated Financial Statements                    F-7



                                F-1

<PAGE>
                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES


                       CONSOLIDATED BALANCE SHEETS



                                                  July 31,        October 31,
                                                    2006              2005
                                                    ----              ----
                                                (UNAUDITED)

ASSETS
------

Current assets:

  Cash and temporary investments                $1,891,258        $1,289,630
  Accounts receivable, net of allowance
   for doubtful accounts of
   $1,647 and $2,683, respectively               8,384,992         2,886,915
  Inventories                                      466,381           467,762
  Prepaid expenses and
   other current assets                            611,630           397,420
  Restricted cash                                   43,783            20,347
  Deferred income taxes                            571,417           571,417
                                                ----------        ----------

        Total current assets                    11,969,461         5,633,491
                                                ----------        ----------


Property, plant and equipment - net of
  accumulated depreciation of $862,747
   and $488,863, respectively                    3,751,740           675,999
                                                ----------        ----------


Other assets:
  Test passage bank and test development,
    net of accumulated amortization of
     $3,907,252 and $3,579,751, respectively     2,901,979         2,750,239
  Goodwill                                      18,479,653         1,969,542
  Deferred income taxes                            553,559           492,677
  Other assets                                     536,537           252,931
                                                ----------        ----------


        Total assets                           $38,192,929       $11,774,879
                                               ===========       ===========

                                F-2


See notes to consolidated financial statements.


<PAGE>



                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                   CONSOLIDATED BALANCE SHEETS (Continued)


                                                  July 31,        October 31,
                                                    2006              2005
                                                    ----              ----
                                                (UNAUDITED)

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

Current liabilities:
  Lines of credit                                 $925,000        $       --
  Current maturities of long-term debt           1,051,860           166,750
  Accounts payable                               3,079,881           489,428
  Accrued expenses                               1,466,627         1,427,963
  Other Liabilities                                255,699           317,529
  Due to former shareholders -
    Questar Educational Services                 1,859,902                --
  Deferred gain on sale of building -
    current portion                                125,439           125,439
                                                ----------        ----------


        Total current liabilities                8,764,408         2,527,109
                                                ----------        ----------


Long-term debt:
  Long-term debt, net of current portion        12,825,062         1,396,212
  Deferred gain on sale of building, net
    of current portion                             742,176           836,255
                                                ----------        ----------


        Total liabilities                       22,331,646         4,759,576
                                                ----------        ----------

Stockholders' equity:
  Preferred stock, $.0001 par value,
    5,000,000 shares authorized,
    1,888,889 and 0 shares issued
    and outstanding, respectively                      189                --
  Common stock, $.0001 par value,
    20,000,000 shares authorized,
    2,914,738 and 2,909,738 shares issued
    and outstanding, respectively                      291               291
  Additional paid-in capital                    14,935,694         6,164,387


Retained earnings                                  925,109           850,625
                                                ----------        ----------


        Total stockholders' equity              15,861,283         7,015,303
                                                ----------        ----------


Total liabilities and stockholders' equity     $38,192,929       $11,774,879
                                               ===========       ===========


See notes to consolidated financial statements.

                                F-3

<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                    CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>

                                                      Nine Months Ended               Three Months Ended
                                                           July 31,                        July 31,
                                                       ----------------               ------------------
                                                   2 0 0 6         2 0 0 5        2 0 0 6          2 0 0 5
                                                   -------         -------        -------          -------
                                                 (UNAUDITED)     (UNAUDITED)    (UNAUDITED)      (UNAUDITED)

<S>                                           <C>             <C>            <C>              <C>
Net revenue                                       $15,097,954     $8,008,945     $8,542,237       $2,975,833

Cost of goods sold                                  8,498,438      3,836,898      4,265,846        1,460,577
                                                  -----------     ----------     ----------       ----------

Gross profit                                        6,599,516      4,172,047      4,276,391        1,515,256
                                                  -----------     ----------     ----------       ----------

Operating expenses:
  Selling expenses                                  1,408,849      1,138,711        515,897          392,577
  General and administrative expenses               4,813,287      2,534,308      2,708,464          939,785
                                                  -----------     ----------     ----------       ----------


Total operating expenses                            6,222,136      3,673,019      3,224,361        1,332,362
                                                  -----------     ----------     ----------       ----------


Income from operations                                377,380        499,028      1,052,030          182,894


Other income (expense):
Gain on sale/leaseback of building                     94,079         94,079         31,359           31,359
Interest income (expense) net                        (243,360)        (3,745)      (201,098)          (7,659)
                                                  -----------     ----------     ----------       ----------


Income before income taxes                            228,099        589,362        882,291          206,594


Income taxes                                          155,460        223,940        398,799           58,410
                                                  -----------     ----------     ----------       ----------


Net income                                        $    72,639     $  365,422     $  483,492       $  148,184
                                                  ===========     ==========     ==========       ==========

Weighted average shares outstanding:
Basic                                               4,801,318      2,774,768      4,803,627        2,829,104

Diluted                                             5,007,338      2,964,884      5,009,645        3,052,577


Basic earnings per share                          $       .02     $      .13     $      .10       $      .05
Diluted earnings per share                        $       .01     $      .12     $      .10       $      .05


</TABLE>



See notes to consolidated financial statements.

                                F-4

<PAGE>


                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

                    CONSOLIDATED STATEMENTS OF CASH FLOWS



                                                  Nine Months Ended July 31,
                                                  --------------------------
                                                    2006              2005
                                                    ----              ----
                                                 (UNAUDITED)       (UNAUDITED)




OPERATING ACTIVITIES
Net income (loss)                                 $  72,639        $  365,422
Adjustments to reconcile net income to
  net cash provided by operating activities:
  Depreciation and amortization                     778,186           485,945
  Deferred income taxes                             (60,882)          163,197
  (Gain) on sale/leaseback of building              (94,079)          (94,079)
  Stock option expense                              151,777                --

Changes in operating assets and liabilities:
  Accounts receivable                            (2,065,166)         (845,127)
  Inventories                                         1,381           (45,847)
  Restricted cash                                   (23,436)               --
  Prepaid expense and other current assets         (113,619)           38,138
  Deferred revenue                                  (61,830)          684,123
  Accounts payable and accrued expenses           1,011,745          (409,333)
                                                 ----------         ---------



NET CASH FLOWS PROVIDED BY (USED IN) FROM
OPERATING ACTIVITIES                               (403,284)          342,439
                                                 ----------         ---------


INVESTING ACTIVITIES
  Acquisition of property, plant and
    equipment                                      (460,095)         (191,932)
  Test passage bank and test development           (479,241)         (668,523)
  Cash and fees paid to acquire stock
    of Questar Educational Systems, Inc.        (14,555,869)               --
  Cash and fees paid to acquire stock
    of Assessment & Evaluation Concepts Inc.             --           (83,000)
  Cash and fees paid to acquire stock
    of Achievement Data Inc.                             --        (1,365,048)

  Software development costs                        (28,030)               --
  Other assets                                      (49,610)               --
                                                 ----------         ---------


CASH USED IN INVESTING ACTIVITIES               (15,572,845)       (2,308,503)
                                                 ----------         ---------



See notes to consolidated financial statements.

                                F-5

<PAGE>


                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

              CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)



                                                  Nine Months Ended July 31,
                                                  --------------------------
                                                    2006              2005
                                                    ----              ----
                                                 (UNAUDITED)       (UNAUDITED)



FINANCING ACTIVITIES
  Repayment of long-term debt                    (1,286,040)          (26,214)
  Proceeds from long-term debt                    9,600,000         1,451,382
  Net Borrowings on line of credit                  925,000                --
  Costs associated with obtaining
    long-term debt                                 (282,767)          (12,033)
  Proceeds from the exercise of warrants                 --           155,303
  Proceeds from the exercise of
    employee stock options                            4,700            25,090


  Proceeds from issuance of Series A-1
    Preferred Stock                               7,500,000                --
  Non-cash warrants issued                          116,864                --


CASH PROVIDED BY FINANCING ACTIVITIES            16,577,757         1,593,528
                                                 ----------         ---------


NET CHANGE IN CASH AND TEMPORARY INVESTMENTS        601,628          (372,536)


CASH AND TEMPORARY INVESTMENTS
AT BEGINNING OF PERIOD                            1,289,630         1,751,487
                                                 ----------         ---------


CASH AND TEMPORARY INVESTMENTS
AT END OF PERIOD                                 $1,891,258        $1,378,951
                                                 ==========        ==========


SUPPLEMENTAL CASH FLOW INFORMATION:
  Interest paid                                    $135,854           $12,412
                                                 ==========        ==========
  Income taxes paid                                $170,002            $7,683
                                                 ==========        ==========


Noncash investing and financing activities:
  Stock issued in acquisition of AEC                     --           $39,000
                                                 ==========         =========
  Stock issued in acquisition of ADI                     --          $331,650
                                                 ==========         =========
  Note payable issued in acquisition
    of QES                                       $4,000,000                --
                                                 ==========         =========
  Stock issued in acquisition of QES             $1,000,000                --
                                                 ==========         =========


See notes to consolidated financial statements.


                                F-6

<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                               July 31, 2006


NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------------

In the opinion of management, the accompanying condensed unaudited
consolidated financial statements of Touchstone Applied Science
Associates, Inc. ("TASA") and its subsidiaries contain all
adjustments necessary to present fairly the Company's consolidated
financial position as of July 31, 2006 and October 31, 2005, the
consolidated statements of operations for the nine months and three
months ended July 31, 2006 and 2005 and cash flows for the nine
months ended July 31, 2006 and 2005.

The consolidated results of operations for the nine and three months
ended July 31, 2006 and 2005 are not necessarily indicative of the
results to be expected for the full year.

The accounting policies followed by the Company are set forth in Note
1 to the Company's consolidated financial statements included in its
Annual Report on Form 10-KSB for the fiscal year ended October 31,
2005.


NOTE 2 - ACQUISITIONS
---------------------

On July 1, 2005, the Company completed the acquisition of all of the
outstanding stock of Achievement Data, Inc. ("ADI").  ADI provides
on-line testing capabilities to state testing programs and also
offers an electronic testing engine.  The total consideration paid by
the Company for the ADI stock was $1,650,000, consisting of
$1,155,000 in cash, the issuance of 89,488 shares of Common Stock of
the Company (valued at $331,650, based on the average of closing
prices for the Company's Common Stock for the five trading days
preceding the closing) and $163,350 in subordinated promissory notes
issued to two of the former stockholders of ADI.  The promissory
notes incur interest at the rate of 5% per annum and are payable
through six semi-annual installments of principal plus interest.

                                F-7

<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                               July 31, 2006


NOTE 2 - ACQUISITIONS (continued)
---------------------------------

In connection with the acquisition of ADI, the Company entered into a
loan agreement with its bank, pursuant to which the Company borrowed
an aggregate principal amount of $1,200,000, almost all of which was
used to pay the purchase price for the shares of ADI and closing
costs for the transaction, with the balance being retained by the
Company for working capital.  Borrowings under the loan incur
interest at the rate of 6.25% per annum.  Interest only payments are
due for the first year, and thereafter monthly payments of principal
and interest of $23,339 through July 2011.  The note is secured by
the assets of the Company and is guaranteed by BETA and ADI. As part
of the financing that occurred in May 2006, this outstanding balance
was refinanced.

The Company has entered into employment agreements for an initial
forty-month term with two of the former shareholders of ADI.  In
addition, the former shareholders of ADI who are continuing with ADI
were granted an aggregate of 60,000 options to purchase additional
shares of the Company's Common Stock, at an exercise price of $3.75
per share, subject to vesting upon the completion of one year of
employment.  The Company also entered into an employment agreement
for an initial twenty-eight month term with a key employee of ADI.

On May 31, 2006 the Company acquired all of the outstanding shares of
Questar. Total consideration paid by the Company was $20,000,000
consisting of $15,000,000 in cash, the issuance of 222,222 shares of
Series A-2 Preferred Stock of the Company valued at $1,000,000 and a
$4,000,000 promissory note.  The Company has also agreed to pay
additional consideration in 2010 if Questar achieves certain revenue
goals during the three fiscal years ending October 31, 2007, 2008 and
2009.  The maximum contingent earn out payment is $12,500,000, of
which up to $10,000,000 shall be paid half in cash and half in Series
A-2 Preferred Stock and $2,500,000 shall be paid, if earned, at the
election of the Company, in cash or additional shares of Series A-2
Preferred Stock, or any combination thereof, valued at fair market
value at the time of issuance.

The Company financed the acquisition of Questar through senior debt
and a private equity investment.  The Company entered into a loan
agreement (the "Loan Agreement") with TD Banknorth, N.A.
("Banknorth"), pursuant to which the Company borrowed a term loan in
an aggregate principal amount of $9,600,000, obtained a revolving
line of credit in the amount of $4,000,000 and had issued on its
behalf a standby letter of credit in the original stated amount of
$194,750 against availability under the revolving line of credit.
The Loan Agreement contains ongoing financial covenants which are
measured on an annual basis.  The term loan is interest-only for the
first six months of the loan, and then is payable in fifty-four equal
monthly installments of principal and interest on a five year
amortization schedule.  The Company has entered into an interest rate
swap agreement with Banknorth pursuant to which Banknorth is paying
the Company 250 basis points over the one month USD LIBOR BBA rate
and the Company is paying Banknorth a fixed rate of 7.95% on a value
of $9,600,000 declining concurrently with the term loan. The interest
rate swap agreement expires after thirty months on December 1, 2008.
The term loan balloons on May 30, 2011.  Advances under the revolving
line of credit are based on a borrowing base of eligible accounts
receivable and eligible inventory of the Company and Questar.  The
revolving line of credit is available until April 30, 2008.  Both the
term loan and the revolving loan are secured by the assets of the
Company and by the assets of Questar.  The proceeds from the loans
were used to pay a portion of the purchase price for the shares of
Questar and closing costs for the transaction, and for working
capital.

                                F-8

<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                               July 31, 2006


NOTE 2 - ACQUISITIONS (continued)
---------------------------------

The Company also entered into a securities purchase agreement with
Camden Partners Strategic Fund III, L.P. and Camden Partners
Strategic Fund III-A, L.P. (collectively, the "Investors"), pursuant
to which the Company issued and sold to the Investors 1,666,667
shares of its Series A-1 Convertible Preferred Stock ("Series A-1
Preferred Stock") (valued at $7,500,000, based on a price of $4.50
per share).  The proceeds from the sale of the Series A-1 Preferred
Stock were used to pay a portion of the purchase price for the shares
of Questar and closing costs for the transaction, with the balance
being retained by the Company for working capital.  Two members of
the Company's Board of Directors, Donald W. Hughes and David L. Warnock,
are also principals of each of the Investors.

The purchase price in the acquisition contained an allocation to
Goodwill in the amount of $16,510,110. This amount is estimated at
this time as the Company has not fully determined the individual
values of other intangible assets, such as finite-lived intangibles,
purchased from Questar. Any assignment of value to other intangible
assets will reduce the amount of estimated Goodwill that is currently
reflected in these financial statements as such valuation may result
in future amortization of any finite-lived assets. The accompanying
financial statements do not include any amortization expense that may
result from the recognition of finite-lived intangibles upon
completion of management's valuation.

The Company has entered into employment agreements for an initial
twenty-four month term with certain members of the management of
Questar.  Such employment agreements with the Questar management team
include non-competition covenants and proprietary rights agreements.



The following unaudited pro forma income statement data presents the
                        --- -----
consolidated results of operations of the Company had the acquisitions
of ADI and Questar occurred at the beginning of the earliest period
presented:

<TABLE>
<CAPTION>
                                Nine months ended July 31,              Three months ended July, 31,
                                --------------------------              ----------------------------
                                  2006              2005                  2006               2005
                                  ----              ----                  ----               ----

<S>                         <C>              <C>                    <C>                <C>
Net revenue                    $36,525,830       $29,514,657            $12,840,844        $8,552,635
Net income                     $ 2,407,150       $ 2,043,981            $   534,176        $  526,016
Basic earnings per share             $ .50             $ .42                  $ .11             $ .11
Diluted earnings per share           $ .48             $ .41                  $ .11             $ .11

</TABLE>

The above pro forma information does not purport to be indicative of
what would have occurred had the acquisition been made as of such
date or the results which may occur in the future.

                                F-9


<PAGE>
                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                                July 31, 2006


NOTE 3 - ACCOUNTS RECEIVABLE
----------------------------

Accounts receivable consist of the following:

                                          July 31,        October 31,
                                            2006              2005
                                            ----              ----
                                        (UNAUDITED)

Billed, net of allowance                $6,667,597        $2,559,630
Unbilled (costs in excess of billing)    1,717,395           327,285
                                        ----------        ----------

                                        $8,384,992        $2,886,915
                                        ==========        ==========


Management expects that the unbilled accounts receivable will be
collected; therefore, no allowance for doubtful accounts has been
recorded on this balance.  Allowances for doubtful accounts at July
31, 2006 and October 31, 2005 are based on prior collection
experience and pertain to billed accounts receivable.

NOTE 4 - OTHER LIABILITIES
--------------------------

Other liabilities consist of the following:


                                          July 31,        October 31,
                                            2006              2005
                                            ----              ----
                                        (UNAUDITED)

Billings in excess of costs             $  30,390          $  22,921
Customer advance                          225,309            294,608
                                        ---------          ---------

                                        $ 255,699          $ 317,529
                                        =========          =========


NOTE  5 - ACCRUED EXPENSES
--------------------------

Accrued expenses consist of the following:

                                          July 31,        October 31,
                                            2006              2005
                                            ----              ----
                                        (UNAUDITED)

Retirement plans                        $  229,811         $ 262,723
Compensation                               586,107           174,590
Professional fees                           45,981           208,828
Royalties                                    2,767            12,571
Outside Service                             11,426           212,024
Rent                                       111,152            93,084
Purchases                                       --            93,405
Consulting                                      --           128,573
Interest                                    94,425                --
Corporate Tax                              122,465                --
Other                                      262,493           242,165
                                        ----------        ----------

                                        $1,466,627        $1,427,963
                                        ==========        ==========


                                F-10

<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                                July 31, 2006


NOTE 6 - STOCK-BASED COMPENSATION
---------------------------------

The Company has a 2000 Stock Option Plan (the "Plan") which is
described more fully in Note 11 to the Company's Annual Report on Form
10-KSB for the year ended October 31, 2005.

Effective February 1, 2006, the Company's Plan is accounted for in
accordance with the recognition and measurement provisions of
Statement of Financial Accounting Standards ("FAS") No. 123 (revised
2004), Share-Based Payment ("FAS No. 123(R)"), which replaces FAS No.
123, Accounting for Stock-Based Compensation, and supersedes
Accounting Principles Board Opinion ("APB") No. 25, Accounting for
Stock Issued to Employees, and related interpretations. FAS No. 123(R)
requires compensation costs related to share-based payment
transactions, including employee stock options, to be recognized in
the financial statements. In addition, the Company adheres to the
guidance set forth within Securities and Exchange Commission ("SEC")
Staff Accounting Bulletin ("SAB") No. 107, which provides the Staff's
views regarding the interaction between SFAS No. 123(R) and certain
SEC rules and regulations and provides interpretations with respect to
the valuation of share-based payments for public companies.

Prior to February 1, 2006, the Company accounted for similar
transactions in accordance with APB No. 25 which employed the
intrinsic value method of measuring compensation cost. Accordingly,
compensation expense was not recognized for fixed stock options if the
exercise price of the option equaled or exceeded the fair value of the
underlying stock at the grant date.

While FAS No. 123 encouraged recognition of the fair value of all
stock-based awards on the date of grant as expense over the vesting
period, companies were permitted to continue to apply the intrinsic
value-based method of accounting prescribed by APB No. 25 and disclose
certain pro-forma amounts as if the fair value approach of FAS No. 123
had been applied.  In December 2002, FAS No. 148, Accounting for
Stock-Based Compensation-Transition and Disclosure, an amendment of
FAS No. 123, was issued, which, in addition to providing alternative
methods of transition for a voluntary change to the fair value method
of accounting for stock-based employee compensation, required more
prominent pro-forma disclosures in both the annual and interim
financial statements. The Company complied with these disclosure
requirements for all applicable periods prior to February 1, 2006.

In adopting FAS No. 123(R), the Company applied the modified
prospective approach to transition. Under the modified prospective
approach, the provisions of FAS No. 123(R) are to be applied to new
awards and to awards modified, repurchased, or cancelled after the
required effective date. Additionally, compensation cost for the
portion of awards for which the requisite service has not been
rendered that are outstanding as of the required effective date shall
be recognized as the requisite service is rendered on or after the
required effective date. The compensation cost for that portion of
awards shall be based on the grant-date fair value of those awards as
calculated for either recognition or pro-forma disclosures under FAS
123.

                                F-11


<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                                July 31, 2006


NOTE 6 - STOCK-BASED COMPENSATION (continued)
---------------------------------------------

As a result of the adoption of FAS No. 123(R), the Company's results
for the three-month period ended July 31, 2006 include stock option
compensation expense totaling $65,192 and for nine-months ended July
31, 2006, $151,777. Such amount has been included in the Consolidated
Statements of Operations within general and administrative expenses.
The Company recognized related tax benefits associated with share-
based compensation arrangements totaling approximately $26,000 during
the three-month period ended July 31, 2006 and $60,000 during the
nine-month period ended July 31, 2006.  The impact of the adoption is
a reduction of net income before tax and after tax for the three
months ended July 31, 2006 of $65,192 and $39,192 and for the nine-
months ended July 31, 2006 of $151,777 and $91,777, respectively.  In
addition, basic and diluted net income per share is decreased by
approximately $0.02.  There was no impact on cash flows from
operations and cash flows from financing activities.  Stock option
compensation expense calculated and disclosed under APB No. 25 in the
Notes to the Consolidated Statements of Operations for the three
months ended July 31, 2005 totaled $141,134.

Stock option compensation expense in 2006 is the estimated fair value
of options granted amortized on a straight-line basis over the
requisite service period for the entire portion of the award.  The
Company has not adjusted the expense by the amount the estimated fair
value of options forfeited as indicated in FAS No. 123(R) since the
forfeiture rate based upon historical data was determined to be
immaterial.

The weighted average estimated fair value of stock options granted in
the three months ended July 31, 2006 and 2005 was $3.56 and $3.75,
respectively.  The fair value of options at the date of grant was
estimated using the Black-Scholes option pricing model. During 2006,
the Company took into consideration guidance under FAS No. 123(R) and
SEC Staff Accounting Bulletin No. 107 (SAB 107) when reviewing and
updating assumptions. The expected volatility is based upon historical
volatility of our stock and other contributing factors. The expected
term is based upon observation of actual time elapsed between date of
grant and exercise of options for all employees.  Previously such
assumptions were determined based on historical data.

The assumptions made in calculating the fair values of options
are as follows:


                                               Three Months Ended
                                   July 31, 2006                July 31, 2005
                                   -------------                -------------

    Expected term (in years)            10                           10
    Expected volatility                125%                         121%
    Expected dividend yield              0%                           0%
    Risk-free interest rate           4.88%                        4.23%


                                F-12

<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                                July 31, 2006


NOTE 6 -STOCK-BASED COMPENSATION (continued)
--------------------------------------------

The following table addresses the additional disclosure
requirements of FAS No. 123(R) in the period of adoption. The
table illustrates the effect on net income and income per share
as if the fair value recognition provisions of FAS No. 123(R) had
been applied to all outstanding and unvested employee awards in
all prior periods:

<TABLE>
<CAPTION>

                                    For the Three          For the Nine           For the Three
                                    Months Ended           Months Ended           Months Ended
                                  January 31, 2006         July 31, 2005          July 31, 2005
                                  ----------------         -------------          -------------
                                     (UNAUDITED)            (UNAUDITED)            (UNAUDITED)
<S>                              <C>                     <C>                    <C>
Net income (loss)
 attributable to common
 stockholders, as reported           ($159,975)              $365,422               $148,184
Add: Stock-based compensation
 included in report net
 income (loss)                              --                     --                     --
Deduct: Total stock based
 compensation expense
 determined under the fair
 value based method for all
 awards, net of tax                     95,798                183,532                 83,269
                                     ---------               --------               --------
Pro forma net income
 attributable to common
 stockholders                        ($225,773)              $181,890               $ 64,915
                                     =========               ========               ========
Net income per share:
Basic net income (loss per
 share - as reported                    ($0.05)                 $0.13                  $0.05
Diluted net income (loss)
 per share - as reported                ($0.05)                 $0.12                  $0.05

Basic net income (loss) per
 share - pro forma                      ($0.09)                 $0.07                  $0.02
Diluted net income (loss)
 per share - pro forma                      --                  $0.06                  $0.02

</TABLE>


The Company granted 7,500 and 12,500 options to purchase shares
of the Company's Common Stock under the 2000 Plan and the
Directors Plan, respectively, during the three months ended April
30, 2006 at exercise prices of $2.85 per share and $2.96 per
share, respectively.  During the three months ended July 31,
2006 the Company granted 135,000 options to officers of the
company at exercise prices of $4.50 per share.

                                F-13

<PAGE>

                 TOUCHSTONE APPLIED SCIENCE ASSOCIATES, INC.
                              AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                                July 31, 2006


NOTE 6 -STOCK-BASED COMPENSATION (continued)
--------------------------------------------

      The following table represents stock options
granted, exercised, and forfeited for all Company stock
option plans during the quarter ended July 31, 2006.


<TABLE>
<CAPTION>
                                         Weighted      Weighted
                                         Average       Average
                                         Exercise      Remaining
                          Number of      Price         Contractual     Intrinsic
                          Shares         per Share     Term            Value
                          ------------------------------------------------------

<S>                    <C>               <C>         <C>             <C>
Stock Options
Outstanding at
May 1, 2006               797,713           $2.76

Granted                   135,000            4.50

Exercised                  (1,000)           2.10

Forfeited/expired         (41,250)           4.376
--------------------------------------------------------------------------------

Outstanding at                                          5 years,
July 31, 2006             890,463            $2.97      9 months        $692,671
--------------------------------------------------------------------------------

Exercisable at                                          4 years,
July 31, 2006             706,713            $ 2.68     10 months       $777,296

</TABLE>


The intrinsic value of all stock options exercised during the three
months ended July 31, 2006, was $1,650.  Cash received from the
exercise of all stock options during the three months ended July 31,
2006, was $2,100.  There were 34,500 stock options exercised during
the three months ended July 31, 2005 which resulted in cash proceeds
to the Company of $25,090.

As of July 31, 2006, there was $413,951 of total unrecognized
compensation cost, net of estimated forfeitures, related to all
unvested stock options and shares, which is expected to be recognized
over a weighted average period of approximately 3 years.


NOTE 7 - AMENDMENT TO LINE OF CREDIT AGREEMENT
----------------------------------------------

In May 2006, the Company's line of credit agreement was refinanced to
increase the credit line from $1,200,000 to $4,000,000 and extended
the due date of the loan to April 30, 2008.  The Company borrowed
$925,000 under the line of credit during the three months ended July
31, 2006.  The line is secured by the assets of the Company.

                                F-14

<PAGE>

                               SIGNATURE

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

                                 TOUCHSTONE APPLIED SCIENCE
                                 ASSOCIATES, INC.



                                 By: /s/ ANDREW L. SIMON
                                     -----------------------------
                                     Andrew L. Simon
                                     President and Chief Executive
                                     Officer

                                 By: /s/ JAMES J. WILLIAMS
                                     ------------------------------
                                     James Williams
                                     Vice President and Chief
                                     Financial Officer

Date:  September 14, 2006

<PAGE>
                           EXHIBIT INDEX

        3.1 Amended Certificate of Designations of Series A Convertible
            Preferred Stock filed with the Secretary of State of Delaware
            on May 25, 2006 (incorporated by reference from the Company's
            Current Report on Form 8-K, filed on June 6, 2006, as amended
            on August 14, 2006 (collectively, the "Questar 8-K"))

        4.1 Voting Agreement, dated as of May 31, 2006, by and among
            Camden Partners Strategic Fund III, L.P., Camden Partners
            Strategic Fund III-A, L.P. and Touchstone Applied Science
            Associates, Inc. (incorporated by reference from the Questar
            8-K)

        4.2 Investor Rights Agreement, dated as of May 31, 2006, by and
            among Camden Partners Strategic Fund III, L.P., Camden
            Partners Strategic Fund III-A, L.P. and Touchstone Applied
            Science Associates, Inc. (incorporated by reference from the
            Questar 8-K)

        4.3 Questar Investor Rights Agreement, dated as of May 31, 2006,
            by and among John Adams, David Ihle, Theodore Naegeli, Terry
            Appleman, Mark Budde, MaJeana Hallstrom, Greg Lindstrom and
            Susan Trent, and Touchstone Applied Science Associates, Inc.
            (incorporated by reference from the Questar 8-K)

        4.4 Warrant Certificate issued to Signal Hill Capital Group, LLC
            dated May 31, 2006 (incorporated by reference from the
            Questar 8-K)

       10.1 Stock Purchase Agreement, dated as of May 31, 2006, by and
            among John Adams, David Ihle, Theodore Naegeli, Terry
            Appleman, Mark Budde, MaJeana Hallstrom, Greg Lindstrom and
            Susan Trent, and Touchstone Applied Science Associates, Inc.
            (incorporated by reference from the Questar 8-K)

       10.2 Subordinated Note, dated May 31, 2006, issued by Touchstone
            Applied Science Associates, Inc. to Questar Data Systems,
            Inc., as paying agent for the selling shareholders of Questar
            Educational Systems, Inc. (incorporated by reference from the
            Questar 8-K)

       10.3 Escrow Agreement, dated as of May 31, 2006, by and among John
            Adams, David Ihle, Theodore Naegeli, Terry Appleman, Mark
            Budde, MaJeana Hallstrom, Greg Lindstrom, Susan Trent, and
            Rider, Weiner & Frankel, P.C. and Touchstone Applied Science
            Associates, Inc. (incorporated by reference from the Questar
            8-K)

       10.4 Loan Agreement, dated as of May 31, 2006, by and among
            Touchstone Applied Science Associates, Inc., Questar
            Educational Systems, Inc. and TD Banknorth, N.A.
            (incorporated by reference from the Questar 8-K)

       10.5 Security Agreement, dated as of May 31, 2006, between
            Touchstone Applied Science Associates, Inc. and TD Banknorth,
            N.A. (incorporated by reference from the Questar 8-K)

       10.6 Security Agreement, dated as of May 31, 2006, between Questar
            Educational Systems, Inc. and TD Banknorth, N.A.
            (incorporated by reference from the Questar 8-K)

       10.7 Series A Convertible Preferred Stock Purchase Agreement,
            dated as of May 31, 2006, by and among Camden Partners
            Strategic Fund III, L.P., Camden Partners Strategic Fund III-
            A, L.P. and Touchstone Applied Science Associates, Inc.
            (incorporated by reference from the Questar 8-K)

       31.1 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
            Pursuant To Section 302 of The Sarbanes-Oxley Act of 2002
            (filed herewith)

       31.2 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
            Pursuant To Section 302 of The Sarbanes-Oxley Act of 2002
            (filed herewith)

       32   Certification Pursuant To 18 U.S.C. Section 1350, As Adopted
            Pursuant To Section 906 of The Sarbanes-Oxley Act of 2002
            (filed herewith)