<PAGE>   1


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-QSB


(Mark One) 
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ________________ to _________________

Commission file No. 0-12969


                         TOUCHSTONE SOFTWARE CORPORATION
             (Exact name of registrant as specified in its charter)


          Delaware                                              95-3778226
          --------                                              ----------
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                             Identification No.)


                  2124 Main Street, Huntington Beach, CA 92648
                  --------------------------------------------
               (Address of principal executive offices)(Zip Code)


Registrant's telephone number, including area code:   (714) 969-7746


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.

                        Yes X                No _____

                         As of August 1, 1997 there were
                  7,842,235 shares of Common Stock outstanding


                                       1


<PAGE>   2

                         PART I - FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS

                         TOUCHSTONE SOFTWARE CORPORATION
                           CONSOLIDATED BALANCE SHEET
                                  JUNE 30, 1997
                                   (UNAUDITED)

<TABLE>
<S>                                                               <C>       
  A S S E T S
  -----------
  Current assets:
      Cash and cash equivalents.......................           $ 1,226,078
      Restricted cash ................................               500,000
      Investments ....................................             7,861,824
      Income tax refund receivable ...................                32,790
      Accounts receivable, net .......................               387,139
      Inventories ....................................               187,101
      Prepaid expenses and other current assets ......               247,276
                                                                 -----------
        Total current assets .........................            10,442,208

  Investments ........................................             3,182,720
  Property, net ......................................               537,958
  Other assets .......................................                30,174
                                                                 -----------
                                                                 $14,193,060
                                                                 ===========

  LIABILITIES AND SHAREHOLDERS' EQUITY
  ------------------------------------
  Current liabilities:
      Accounts payable ...............................           $ 1,655,102
      Accrued payroll and related expenses ...........               334,915
      Accrued cooperative advertising costs ..........               703,015
      Other accrued liabilities ......................               719,295
                                                                 -----------
        Total current liabilities ....................             3,412,327

  Deferred compensation ..............................                74,500
  Deferred lease obligation ..........................                56,292

  Shareholders' equity:
      Preferred stock, $.001 par value, 3,000,000
      shares authorized, none issued or outstanding
      Common stock, $.001 par value; 20,000,000 shares
      authorized; issued and outstanding, 
      7,842,235 shares                                                 7,842
      Additional paid-in capital .....................            18,628,794
      Accumulated deficit ............................            (7,962,606)
      Notes receivable from sale of common stock .....               (24,089)
                                                                 -----------
        Total shareholders' equity ...................            10,649,941
                                                                 -----------
                                                                 $14,193,060
                                                                 ===========

</TABLE>








           See accompanying notes to consolidated financial statements


                                       2

<PAGE>   3


                         TOUCHSTONE SOFTWARE CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                           Three months                            Six  months
                                                          ended June 30,                         ended June 30,
                                                     1997               1996                1997              1996
                                                     ----               ----                ----              ----
<S>                                              <C>              <C>                   <C>               <C>          
Revenues:
   Product sales                                  $  1,799,858     $   1,620,582         $  4,668,070      $  2,275,126
   Royalty income                                       62,465            61,678              133,276           163,205
                                                  ------------     -------------         ------------      ------------
         Total revenues                              1,862,323         1,682,260            4,801,346         2,438,331
Cost of sales                                          835,453           690,591            1,920,251         1,389,552
                                                  ------------     -------------         ------------      ------------
         Gross profit                                1,026,870           991,669            2,881,095         1,048,779
Operating expenses:
   Sales and marketing                               1,233,480         1,247,983            2,599,458         2,198,291
   General and administrative                          391,047           327,121              719,256           784,438
   Research and development                            739,861           344,382            1,295,510           604,932
   Litigation settlement and related costs                             1,375,000                              1,811,941
                                                  ------------     -------------         ------------      ------------
   Total operating expenses                          2,364,388         3,294,486            4,614,224         5,399,602
                                                  ------------     -------------         ------------      ------------
         Loss from operations                       (1,337,518)       (2,302,817)          (1,733,129)       (4,350,823)
Other income, net                                      187,480           214,392              366,985           404,662
                                                  ------------     -------------         ------------      ------------
Net loss                                          $ (1,150,038)    $  (2,088,425)        $ (1,366,144)     $ (3,946,161)
                                                  ============     =============         ============      =============

Net loss per share                                $      (0.15)    $      (0.28)         $      (0.18)     $      (0.53)
                                                  ============     ============          ============      ============

Weighted average shares                              7,842,000         7,484,000            7,827,000         7,425,000
                                                  ============     =============         ============      ============

</TABLE>




           See accompanying notes to consolidated financial statements



                                       3


<PAGE>   4


                         TOUCHSTONE SOFTWARE CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                               Six months             Six months
                                                                                  ended                  ended
                                                                              June 30, 1997          June 30, 1996
                                                                              -------------          -------------
<S>                                                                            <C>                  <C>         
Cash flows from operating activities:
   Net loss                                                                   $ (1,366,144)          $(3,946,161)
   Adjustments to reconcile net loss to net
     cash flows (used in) provided by operating activities:
     Depreciation and amortization                                                 128,132               144,179
     Provision for doubtful accounts                                                36,612                36,804
     Provision for obsolete inventories                                             48,816                71,858
     Write-off of software development costs                                       151,073
     Other                                                                          (3,624)               16,288
     Issuance of common stock in litigation settlement                                                   625,000
     Changes in operating assets and liabilities:
     Income tax refund receivable                                                                        657,400
     Accounts receivable                                                            43,991              (469,350)
     Inventories                                                                   491,537              (208,017)
     Prepaid expenses and other current assets                                      71,954              (186,207)
     Other assets                                                                                          2,499
     Accounts payable                                                           (1,052,592)            1,000,936
     Accrued liabilities                                                            (4,701)              369,225
                                                                              -------------          -----------
         Net cash used in operating activities                                  (1,454,946)           (1,885,546)

Cash flows from investing activities:
   Capitalized software development costs                                                                (88,818)
   Purchase of investments                                                     (14,792,042)           (5,818,015)
   Sale of investments                                                          14,733,479             6,487,560
   Purchases of property                                                          (184,260)             (169,983)
   Sale of property                                                                                        7,800
                                                                              ------------           -----------
         Net cash provided by (used in) investing activities                      (242,823)              418,544

Cash flows from financing activities:
   Proceeds from exercise of stock warrants and
     options and repayment on notes receivable                                      30,371                47,751
                                                                              ------------           -----------
         Net cash provided by financing activities                                  30,371                47,751
                                                                              ------------           -----------

Net decrease in cash and cash equivalents                                       (1,667,398)           (1,419,251)
Cash and cash equivalents, beginning of period                                   2,893,476            12,918,643
                                                                              ------------           -----------
Cash and cash equivalents, end of period                                      $  1,226,078           $11,499,392
                                                                              ============           ===========

Supplemental cash flow information:
Interest paid                                                                 $      1,483           $        --
                                                                              ============           ===========
Income taxes paid                                                             $         --           $        --
                                                                              ============           ===========

</TABLE>







          See accompanying notes to consolidated financial statements.



                                       4



<PAGE>   5
                         TOUCHSTONE SOFTWARE CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1997
                                   (UNAUDITED)

1.   GENERAL
     -------

         The consolidated financial statements of TouchStone Software
Corporation (the Company) include the financial statements of the Company's
wholly-owned subsidiary, TouchStone Europe Ltd. These consolidated financial
statements have been prepared by the Company, without audit, and include all
adjustments which are, in the opinion of management, necessary for a fair
presentation of the results of operations for the three and six months ended
June 30, 1997 and 1996, the financial position at June 30, 1997, and the cash
flows for the six months ended June 30, 1997 and 1996, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures in such financial statements are adequate to make the
information presented not misleading. However, the results of operations for the
six months ended June 30, 1997 are not necessarily indicative of the results to
be expected for the full year. These condensed consolidated financial statements
should be read in conjunction with the TouchStone Software Corporation
consolidated financial statements and notes thereto included in the Company's
Annual Report filed with the Securities and Exchange Commission on Form 10-KSB
for the year ended December 31, 1996.

2.   ACCOUNTS RECEIVABLE
     -------------------

         At June 30, 1997, accounts receivable is presented net of allowance for
doubtful accounts, reseller rebate reserves, and product return reserves of
approximately $96,100, $497,900, and $411,900, respectively. Certain
distributors' accounts resulted in credit balances and therefore were
reclassified to accounts payable.

3.   FINANCING ARRANGEMENTS
     ----------------------

         In September 1996, the Company negotiated a bank line of credit which
allows for borrowings up to $500,000 and expires in September 1997. Borrowings
will bear interest at the bank prime rate, and are collateralized by a $500,000
certificate of deposit. The prime rate was 8.5% at June 30, 1997. There were no
borrowings under this line of credit at June 30, 1997. This borrowing facility
requires the Company to maintain minimum shareholders' equity of $10,000,000,
minimum aggregate cash, cash equivalents and investments of $12,000,000,
prohibits acquisitions of other entities without the prior approval of the bank,
and restricts the payments of cash dividends.

4.   SOFTWARE DEVELOPMENT COSTS
     --------------------------

         During the second quarter of 1997, the Company wrote-off previously
capitalized cost of $151,000 which had been incurred to develop the Company's
e.Support product as the recovery of such costs through anticipated future sales
is not reasonably assured. The Company currently has no software development
costs capitalized.

 5.   SUBSEQUENT EVENT
      ----------------

         On July 24, 1997, the Company reduced the exercise price of 712,300
stock options to $1.50 per share which was the fair market value on that date.
These stock options had been exercisable at prices ranging from $1.85 to $3.00
per share.



                                       5

<PAGE>   6



ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           ---------------------------------------
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS
           ---------------------------------------------

         This quarterly report on Form 10-QSB contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to those discussed under the caption "Business Risks" contained herein.

GENERAL

         The Company's revenues consist of product sales and royalty income.
Royalty income is derived, for the most part, from international sales of the
Company's products under agreements with co-publishers, principally those who
sell the Company's products in Europe.

         Product revenues are recorded at the time products are shipped, less
estimated reserves for product returns. Currently the Company uses historical
experience for international shipments and retail sell-through information for
domestic shipments to establish these reserves. The Company's operations are
subject to substantial risk of product returns from distributors and retailers
either through the exercise by the Company's customers of contractual return
rights or as a result of the Company's policy of assisting customers in
balancing and updating inventories. Although the Company attempts to monitor and
manage the volume of its sales to its customers, large shipments in anticipation
of demand which is subsequently unrealized can lead to overstocking by the
distributors and substantial product returns. Certain of the Company's customer
agreements also provide for rebates to customers should the price of the
Company's products decline subsequent to shipment. The Company accrues for such
rebates when such price declines are known or become anticipated.

         Cost of sales includes the cost of blank diskettes, compact disks,
software duplication, packaging materials and user manuals, in addition to
amortization of software development costs, royalties paid to other software
development companies under various agreements, and inventory obsolescence
reserves. Sales and marketing expense consists primarily of salaries and
commissions paid to the Company's sales, customer service and technical support
personnel and expenditures for retail product merchandising and promotions. The
Company's products can be expected to have short product life cycles,
characterized by decreases in retail prices as a given product's life cycle
advances. In order for the Company to maintain satisfactory gross margins, the
Company will need to introduce new products to offset declining margins
associated with older products. Research and development expense consists
primarily of salaries and related benefits paid to computer programmers to
research and design new software products. In addition to amounts expensed for
research and development activities, salaries paid to the Company's software
programmers and fees paid to outside software development consulting firms for
further development and enhancement after technological feasibility of a product
has been established are capitalized in accordance with Statement of Financial
Accounting Standards (SFAS) No. 86. The Company did not capitalize any software
development costs during the six months ended June 30, 1997.

         Due to its experience with product returns, the Company increased
product sale reserves substantially in the first and second quarters of 1996,
and deferred a significant portion of revenue on shipments of WINCheckIt 4.0 and
CheckIt Diagnostic Kit during those periods.

         Results of operations for the three and six-month periods ended June
30, 1997 were adversely affected by a charge to expense of $151,000 for costs
which had been incurred in connection with the development of the Company's
e.Support product.

         The Company's quarterly operating results may fluctuate significantly
due to a variety of factors, including changes in the Company's product and
customer mix, the number and timing of new product introductions by the Company
or its competitors, pricing pressures, general economic conditions, and other
factors. Products are generally shipped as orders are received and, accordingly,
the Company has historically operated with relatively little backlog. As a
result, quarterly revenue will depend on the volume and timing of orders
received during a particular quarter, both of which are difficult to forecast.
In addition, the Company will continue to incur product development, marketing,
and promotional expenses based upon management's expectations as to future
sales. Since many of these expenses are committed in advance, the Company
generally is unable to adjust spending in a timely manner to compensate for any



                                       6


<PAGE>   7

unexpected shortfall in sales. If operating revenues do not meet the Company's
expectations in any given quarter, operating results may be adversely affected.

         In addition, the software industry has seasonal elements. In recent
years the software industry has experienced decreased demand for software
products in the second and third quarters. These seasonal elements, together
with the other factors which impact quarterly results, can cause revenues and
net income to vary.

         The demands on the Company's management and resources has increased
over the past two years. It is likely that the Company will be required to hire
and train additional technical, marketing, and administrative personnel;
implement additional operating and financial controls; install additional
reporting and management information systems for order processing, system
monitoring, customer service and financial reporting; and otherwise improve
coordination between the design, development, duplication and packaging,
marketing, sales, service, and finance functions. The Company's future operating
results will depend on management's ability to successfully maintain controls
and build the infrastructure.






                                       7

<PAGE>   8



PRODUCTS

The following table sets forth the products currently marketed by the Company:


<TABLE>
<CAPTION>

                                                                                             INITIAL RELEASE
PRODUCT TITLE                              DESCRIPTION                                            DATE
-------------                              -----------                                            ----
<S>                   <C>                                                                    <C>

e.Support(TM)         e.Support  is an  electronic  support  system  which allows users to   December 1996
                      communicate  with multiple vendors from one simple user interface on   (Testing)
                      the  user's  system.  e.Support  allows  the user to send a  Problem
                      Report,  Information  Request,  Registration,  "How To"  Request  or
                      Feedback  to a vendor  electronically  via a modem,  LAN or Internet
                      connection,  and  contains the option to include  system  diagnostic
                      information, and user-attached files.

PC-cillin(R)          PC-cillin  provides  automatic  protection  from  computer  viruses.   November 1995
                      PC-cillin    monitors    virus    sources,     adjusts    protection   (last update
                      automatically,  and removes viruses.  PC-cillin  utilizes the latest   July 1997)
                      in ActiveX  technology  and  includes the new  patent-pending  Macro
                      Shield(TM)that  detects  known  and  unknown  macro  viruses.  A  new
                      version, PC-cillin NT, is now available to operate on Windows NT.

CheckIt(R)            For use with DOS, Windows 3.1 and Windows 95, this multi-utility        March 1996 
                      Diagnostic Kit package is designed to meet the specific needs of both
                      technicians and technical users. It includes the new CheckIt 4
                      program, a portable, self-booting DOS utility that
                      provides extensive hardware testing and configuration
                      analysis features; the new WINCheckIt Pro, an advanced
                      version of WINCheckIt; Qualitas RAMexam, a comprehensive
                      PC memory test; plus a four-volume McGraw-Hill Technical
                      Reference Library on CD-ROM, computer screwdrivers, and a
                      set of three loopback plugs.

WINCheckIt(R)         This  Windows-based  utility  provides a suite of diagnostic  tools,   October 1995
4.0                   normally  found in  separate  programs,  that have been  designed to
                      work in both Windows 95 and Windows 3.1 environments.
                      WINCheckIt includes an uninstall utility, a modem test, a
                      comprehensive CD-ROM diagnostic utility, and a four-volume
                      McGraw-Hill technical reference library on CD-ROM.

FastMove!(R)          A file  synchronization and transfer program with ZIPSync that keeps   March 1995
                      the files and directories on desktop PCs, laptops,  networks and Zip   (last update
                      drive,  synchronized  and  up-to-date  with the  click of a  button.   October 1996)
                      ZIPSync is the first utility of its kind to synchronize  and catalog
                      files on a Zip drive.  FastMove!  Includes  an Ultra  Flex  Parallel
                      Transfer Cable.

</TABLE>



                                       8


<PAGE>   9



RESULTS OF OPERATIONS

         The following information should be read in conjunction with the
unaudited consolidated financial statements included herein. All dollar amounts
presented have been rounded to the nearest thousand and all percentages are
approximate.

         The following table sets forth certain statement of operations data as
a percentage of total revenues for the three and six months ended June 30, 1997
and 1996:

<TABLE>
<CAPTION>

                                                     Three months                           Six months
                                                    ended June 30,                        ended June 30,
                                               1997             1996                  1997              1996
                                               ----             ----                  ----              ----
<S>                                            <C>              <C>                   <C>               <C>  
Revenue:
     Product sales                             96.6%            96.3%                 97.2%             93.3%
     Royalty income                             3.4              3.7                   2.8               6.7
                                            -------           ------                ------           -------
         Total revenue                        100.0            100.0                 100.0             100.0
Cost of sales                                  44.9             41.1                  40.0              57.0
                                            -------           ------                ------           -------
         Gross profit                          55.1             58.9                  60.0              43.0
                                            -------           ------                ------           -------
Sales and marketing                            66.2             74.2                  54.1              90.1
General and administrative                     21.0             19.4                  15.0              32.2
Research and development                       39.7             20.5                  27.0              24.8
Litigation costs                                                81.6                                    74.3
                                            -------           ------                ------           -------
Total operating expenses                      126.9            195.7                  96.1             221.4
                                            -------           ------                ------           -------
Loss from operations                          (71.8)          (136.8)                (36.1)           (178.4)
Other income, net                              10.0             12.7                   7.6              16.6
                                            -------           ------                ------           -------
         Net loss                             (61.8)%         (124.1)%               (28.5)%         (161.8)%
                                            =======           ======                ======           ======
</TABLE>


COMPARISON OF THREE MONTHS ENDED JUNE 30, 1997 AND 1996

         Revenue. Product sales increased from 1996 to 1997 due to improved
sales of the Company's PC-cillin and CheckIt Diagnostic Kit products at the
retail store level. Sales of WINCheckIt 4.0 also increased in 1997 as compared
to 1996, but were substantially less than they were in the first quarter of
1997.

         Royalty income remained relatively constant from 1996 to 1997. Due to
the increase in product sales, royalty income decreased as a percentage of total
revenues, from 3.7% in 1996 to 3.4% in 1997.

         Gross Profit. Gross profit as a percentage of total revenues decreased
from 58.9% in 1996 to 55.1% in 1997. The primary reason for this decline was
higher royalty costs incurred primarily in connection with sales of PC-cillin
II. Such increased costs were offset somewhat by reduced amortization of
software development costs.

         Sales and Marketing Expense. The increase in sales and marketing
expense was primarily attributable to an increase in the number of customer
service and marketing personnel in 1997 as compared to 1996. Retail promotion
costs increased from 1996 to 1997, but such increased costs were somewhat offset
by a decline in media advertising expenses and by reduced costs of the Company's
European operations. Further, sales and marketing expense increased in 1997 due
to marketing development costs incurred in connection with the Company's
e.Support product line. Due to the increase in product sales, sales and
marketing expenses declined as a percentage of total revenues from 74.2% in 1996
to 66.2% in 1997.

         General and Administrative Expense. The increase in general and
administrative expense from 1996 to 1997 was primarily due to legal costs
incurred in connection with certain terminated acquisition activities. As a
percentage of total revenues, general and administrative expenses increased from
19.4% in 1996 to 21.0% in 1997.

         Research and Development Expense. Included in research and development
expense during the three months ended June 30, 1997 was a one-time charge of
$151,000 to write-off previously capitalized costs incurred to develop the
Company's e.Support product. Additionally, research and development 



                                       9


<PAGE>   10

expense increased in 1997 from 1996 as the Company hired additional programmers
and increased use of outside programmers to develop existing product upgrades
and new products. Research and development expense increased as a percentage of
total revenues, from 20.5% in 1996 to 39.7% in 1997.

         Litigation Settlement and Related Costs. In June 1996 the Company
reached an agreement to settle three shareholder class action and derivative
suits against the Company and certain of its officers and directors. Under the
principal terms of the agreement, the Company established a settlement fund
consisting of $500,000 and 200,000 newly-issued shares of common stock in June
1996 which were valued at $625,000, the fair market value of the stock at the
settlement date.

         Other Income. Other income is comprised primarily of interest earned on
the Company's investments. Investment income declined in the second quarter of
1997 compared to the second quarter of 1996 as the Company reduced investment
holdings in 1997 to fund operations.

COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 AND 1996

         Revenue. Product sales increased from 1996 to 1997 due to improved
sales of the Company's PC-cillin and CheckIt Diagnostic Kit products at the
retail store level. Sales of WINCheckIt 4.0 also increased in 1997 as compared
to 1996, but have been declining since the beginning of 1997.

         Product sales during the second quarter of 1997 decreased by $1,079,000
from the amount reported in the first quarter of 1997 primarily because of the
decline in sales of PC-cillin. Management attributes the decline in PC-cillin II
sales to increasing competitive pressure for anti-virus software products at the
retail level.

         Royalty income declined due to decreased sales of the Company's
products by European copublishers in the first quarter of 1997. Royalty income
decreased as a percentage of total revenues, from 6.7% in 1996 to 2.8% in 1997.

         Gross Profit. Gross profit as a percentage of total revenues increased
from 43.0% in 1996 to 60.0% in 1997. The gross profit for the six months ended
June 30, 1996 was unusually low due to inventory write-offs resulting from
returned product which could not be resold in the first quarter of 1996.
Additionally, gross profit is higher in 1997 due to decreased amortization of
software development costs.

         Sales and Marketing Expense. The increase in sales and marketing
expense was primarily attributable to an increase in the number of customer
service and marketing personnel in 1997 as compared to 1996. Additionally,
retail promotion and advertising costs also increased from 1996 to 1997.
Further, sales and marketing expense increased in 1997 due to marketing research
costs incurred in connection with the Company's e.Support product line. Such
increased costs were offset somewhat by reduced costs of the Company's European
operations. Due to the increase in product sales, sales and marketing expenses
declined as a percentage of total revenues from 90.1% in 1996 to 54.1% in 1997.

         General and Administrative Expense. General and administrative expense
in the six months ended June 30, 1996 included compensation expense recorded in
connection with the resignation of a Company officer. Excluding this cost,
general and administrative expense increased in 1997 from 1996 levels due to
legal costs incurred in connection with certain terminated acquisition
activities. As a percentage of total revenues, general and administrative
expenses declined from 32.2% in 1996 to 15.0% in 1997.

         Research and Development Expense. Included in research and development
expense during the six months ended June 30, 1997 was a one-time charge of
$151,000 to write-off previously capitalized costs incurred to develop the
Company's e.Support product. Additionally, research and development expense
increased in 1997 from 1996 as the Company hired additional programmers and
increased use of outside programmers to develop existing product upgrades and
new products. Research and development expense increased as a percentage of
total revenues, from 24.8% in 1996 to 27.0% in 1997.



                                       10


<PAGE>   11


         Litigation Settlement and Related Costs. In June 1996 the Company
reached an agreement to settle three shareholder class action and derivative
suits against the Company and certain of its officers and directors. Under the
principal terms of the agreement, the Company established a settlement fund
consisting of $500,000 and 200,000 newly-issued shares of common stock in June
1996 which were valued at $625,000, the fair market value of the stock at the
settlement date.

         Other Income. Other income is comprised primarily of interest earned on
the Company's investments. Investment income declined in the six months ended
June 30, 1997 compared to the six months ended June 30, 1996 as the Company
reduced investment holdings in 1997 to fund operations.

LIQUIDITY AND CAPITAL RESOURCES

         During the six months ended June 30, 1997 the Company used cash
resources of $1,455,000 for operating activities and purchased equipment
totaling $184,000. The Company sold investments in debt securities totaling
$14,733,000, and purchased similar securities aggregating $14,792,000. The
Company also received proceeds from exercises of common stock options
aggregating $30,000.

         The Company's cash, cash equivalents, restricted cash, and investments
totaled $12,771,000 at June 30, 1997. Working capital decreased from $7,152,000
at December 31, 1996 to $7,030,000 at June 30, 1997. Cash and cash equivalents
decreased from $2,894,000 at December 31, 1996 to $1,226,000 at June 30, 1997.
The decline in cash and cash equivalents and working capital was due primarily
to the net loss incurred by the Company in the six months ended June 30, 1997.

         In September 1996 the Company negotiated a bank line of credit which
allows for borrowings up to $500,000 and expires in September 1997. Borrowings
will bear interest at the bank prime rate, and are collateralized by a $500,000
certificate of deposit. The bank prime rate at June 30, 1997 was 8.5%. There
were no borrowings under the bank line of credit at June 30, 1997. This
borrowing facility requires the Company to maintain minimum shareholders' equity
of $10,000,000, minimum aggregate cash, cash equivalents and investments of
$12,000,000, prohibits acquisitions of other entities without the prior approval
of the bank, and restricts the payments of cash dividends. The Company is
currently in negotiation with its bank to extend the term of the line of credit.

         Management believes that the Company's existing cash and periodic
borrowings under the line of credit will be sufficient to fund the Company's
operations at currently anticipated levels through June 30, 1998. The Company
plans to use its cash resources to finance new product development and existing
product enhancements, expand internationally, expand the direct sales force for
corporate customers, and for general corporate customers. The execution of such
plans may include strategic acquisitions of or investments in complementary
businesses, products or technologies.

RECENT ACCOUNTING PRONOUNCEMENT

          In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, Earnings Per Share (SFAS
128) which is effective for financial statements issued for periods ending after
December 15, 1997. SFAS No. 128 requires the disclosure of basic and diluted
earnings per share. For the three and six month periods ended June 30, 1997, the
amount reported as net loss per share is not materially different than would
have been reported for basic and diluted loss per share in accordance with SFAS
No. 128.

BUSINESS RISKS

         This report on Form 10-QSB contains forward-looking statements that
involve risks and uncertainties. The actual future results of the Company could
differ materially from those statements. Factors that could cause or contribute
to such differences include, but are not limited to, those discussed below and
elsewhere in this report

         These risk factors include the risk that the products under development
prove more difficult to develop than currently anticipated, resulting in delays
in reaching the market or even in planned products having to be abandoned.
Moreover, with or without delays in bringing new products to market, it is
possible that the Company's competitors will bring to market successful
competing products which reduce the size of, or eliminate altogether, the market
for the Company's planned products. Furthermore, several 


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<PAGE>   12


of the products under consideration involve complicated communication systems,
which is an area where the Company has little experience, and thus it may find
that the technological problems are more difficult than presently anticipated.
In addition, the software industry is characterized by rapid change and
technological advancement, including a trend by hardware manufacturers to
feature pre-loaded software packages in computers. This could reduce demand for
the Company's products, if such pre-loaded software performs many of the same
functions as the Company's currently marketed or currently under-development
software.

         With respect to statements regarding the sales force and the hope to
broaden the Company's customer base, the Company intends on entering markets
that are new for it and in so doing will compete against other companies having
greater resources. There is a risk that the Company will not be able to
penetrate these new markets successfully, but will nonetheless incur sales and
administrative expenses in attempting to do so, as well as research and
development costs. With regard to the hoped for expansion of the Company's
presence at retail chains, the Company competes against many other software
vendors both directly, in the form of directly competing products, and
indirectly, with even non-competing products for limited shelf space at
retailers and distributors. To a large extent, the Company's success in this
regard will be a function of the Company's ability to develop the planned
products identified in this report, along with market acceptance of the
Company's products currently being sold at retail.

         The Company has made significant commitments of time, effort, and
expense in its efforts to develop and bring to market the e.Support product. In
the second quarter of 1997, management wrote-off previously capitalized costs
incurred to develop e.Support aggregating $151,000 due to concerns that such
costs may not be recoverable from future sales of the e.Support product. The
success of e.Support depends largely on the Company's ability to market and sell
e.Support directly to computer hardware manufacturers, software publishers, and
on-line service providers. The Company has limited experience in marketing and
selling its software products to such businesses. There is a risk that the
Company will not be able to successfully market and sell e.Support to such
customers. There is a similar risk that e.Support products will not gain
sufficient consumer/marketplace acceptance.

         The Company is significantly dependent upon the continued availability
of certain key executives. The loss or unavailability of any of these executives
for an extended period of time could have a material adverse effect on the
Company's business operations and prospects. To the extent that the services of
any of these executives would be unavailable to the Company for any reason, the
Company would be required to procure other personnel to manage and operate the
Company. There can be no assurance that the Company would be able to locate or
employ such qualified personnel on acceptable terms.



                                       12


<PAGE>   13



                           PART II - OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS
           -----------------

         On October 9, 1996 an entity known as Intervention, Incorporated
("Intervention") filed an action against the Company in the Superior Court of
the State of California, Santa Clara County (C 96-04476). Intervention claims
that it is a non-profit corporation bringing an action for the interests of the
general public. In essence, Intervention claims that the Company is engaged in
unfair competition and is violating California's Fair Packaging and Labeling Act
by filling the Software packages to "substantially less than their capacities."
Intervention seeks injunctive relief, unspecified attorneys' fees and damages of
$1,000,000. The Company understands that eight other software companies have
been named as defendants in identical lawsuits in three different counties, and
that a petition to coordinate these actions has been granted. The Company
believes this suit is without merit and intends to defend itself vigorously.
Based on its current knowledge the Company does not believe that this matter
will have a material adverse effect on the financial condition or results of
operations of the Company.

ITEM 2.    CHANGES IN SECURITIES
           ---------------------

         On July 24, 1997, the Company reduced the exercise price of 712,300
stock options to $1.50 per share which was the fair market value on that date.
These stock options had been exercisable at prices ranging from $1.85 to $3.00
per share.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES
           -------------------------------

Not applicable.

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

None.

ITEM 5.    OTHER INFORMATION
           -----------------

None

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K
           --------------------------------

a.    Exhibits

      Exhibit 27 - Financial Data Schedule.

b.    Reports on Form 8-K

      None




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                               S I G N A T U R E S
                               -------------------

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




                                                TOUCHSTONE SOFTWARE CORPORATION
                                                           (Registrant)



/s/ Larry S. Jordan                                 President, Chief Executive
---------------------------------------------       Officer and Director
    Larry S. Jordan    Dated: August 11, 1997





/s/ Ronald R. Maas                                  Executive Vice President,
---------------------------------------------       Chief Financial Officer,
    Ronald R. Maas     Dated: August 11, 1997       Principal Accounting Officer
                                                    and Director




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