UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 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 September 30, 1996
                                
[  ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
  SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to  _________________

Commission file No. 0-12969


                 TouchStone Software Corporation
     (Exact name of registrant as specified in its charter)
                                
                                
            California                                    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


     Indicated  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 November 7, 1996 there were
                  7,769,735 shares of Common Stock outstanding
     
<PAGE>
                                
                                
                 PART I - FINANCIAL INFORMATION
          
          
ITEM 1.   Financial Statements
------------------------------
      
     The accompanying  financial statements and notes thereto do not contain all
information required by generally accepted accounting  principles to be included
in a full set of financial statements.

     In  the  opinion  of  management,  the  financial  statements  reflect  all
adjustments  necessary for a fair  presentation  of the  registrant's  financial
position and results of operations.  However,  the results of operations for the
three and nine months ended September 30, 1996 are not necessarily indicative of
the results to be expected for the full year.  TouchStone  Software  Corporation
Consolidated Balance Sheet September 30, 1996 (Unaudited)
<TABLE>
<S>                                                   <C>
A S S E T S
Current assets:
 Cash and cash equivalents ........................   $  4,475,466
 Investments ......................................      5,800,012
 Income tax refund receivable .....................        307,900
 Accounts receivable, net .........................        484,536
 Inventories ......................................        329,237
 Prepaid expenses and other current assets ........        307,508
 Employee advances ................................         23,148
                                                            ------
     Total current assets .........................     11,727,807

Investments .......................................      4,212,551
Property, net .....................................        395,608
Software development costs, net ...................        155,726
Other assets ......................................         30,176
                                                            ------
                                                      $ 16,521,868
                                                      ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
 Accounts payable .................................   $  2,213,916
 Accrued payroll and related expenses .............        472,208
 Accrued cooperative advertising costs ............        575,664
 Other accrued liabilities ........................        960,911
                                                           -------
     Total current liabilities ....................      4,222,699

Deferred compensation .............................         72,000
Deferred lease obligation .........................         42,996

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;  7,695,485 shares issued
  and outstanding .................................          7,695
 Additional paid-in capital .......................     18,568,687
 Accumulated  deficit .............................     (6,368,120)
 Notes receivable from sale of common stock .......        (24,089)
                                                           ------- 
     Net shareholders' equity .....................     12,184,173
                                                        ----------
                                                      $ 16,521,868
                                                      ============

</TABLE>
                                
                                
   See accompanying notes to consolidated financial statements

<PAGE>

                 TouchStone Software Corporation
              Consolidated Statements of Operations
                           (Unaudited)
<TABLE>
<CAPTION>

                                                  Three months                  Nine  months
                                               ended September 30,           ended September 30,
                                                  1996           1995            1996           1995
                                              --------      ---------      ----------      ---------
<S>                                        <C>            <C>             <C>            <C>
Revenues:
 Product sales .........................   $ 2,366,084    $ 3,449,259   $ 4,641,210    $ 9,471,386
 Royalty income ........................        94,792         67,424       257,997        226,704
                                           -----------    -----------   -----------    -----------
     Total revenues ....................     2,460,876      3,516,683     4,899,207      9,698,090
Cost of Sales ..........................     1,026,179        916,975     2,415,731      2,821,583
                                           -----------    -----------   -----------    -----------
     Gross Profit ......................     1,434,697      2,599,708     2,483,476      6,876,507

Operating expenses:
 Sales and marketing ...................     1,250,996      1,306,320     3,449,287      3,147,055
 General and administrative ............       340,014        457,199     1,124,453      1,262,673
 Research and development ..............       407,240        170,726     1,012,172        443,997
 Litigation settlement and related costs          --             --       1,811,941           --   
Total operating expenses ...............     1,998,250      1,934,245     7,397,853      4,853,725
                                           -----------    -----------   -----------    -----------
 Income (loss) from operations .........      (563,553)       665,463    (4,914,377)     2,022,782

Other income, net ......................       208,588         97,504       613,250        129,203
                                           -----------    -----------   -----------    -----------
Income (loss) before provision
 for income taxes ......................      (354,965)       762,967    (4,301,127)     2,151,985
Provision for income taxes .............          --          284,000          --          812,300
                                                                        -----------    -----------
Net  income (loss) .....................   ($  354,965)   $   478,967   ($4,301,127)   $ 1,339,685
                                           ===========    ===========   ===========    ===========

Net income (loss) per share of
 common stock outstanding ..............   ($     0.05)   $      0.07   ($     0.57)   $      0.19
                                           ===========    ===========   ===========    ===========
Weighted average shares ................     7,669,000      7,267,000     7,507,000      6,909,000
                                           ===========    ===========   ===========    ===========
  
  
</TABLE>



   See accompanying notes to consolidated financial statements
<PAGE>

                         TouchStone Software Corporation
                      Consolidated Statements of Cash Flows
                                   (Unaudited)
<TABLE>
<CAPTION>
                                
                                                          Nine months       Nine months
                                                            ended             ended
                                                      September 30, 1996 September 30, 1995
<S>                                                    <C>             <C>
Cash flow from operating activities:
 Net income (loss) .................................   ($ 4,301,127)   $  1,339,685
 Adjustments to reconcile net income to net cash
 flows provided by operating activities:
  Depreciation and amortization ....................        236,756         267,138
  Provision for doubtful accounts ..................         61,304          98,600
  Provision for obsolete inventories ...............        103,858         124,800
  Change in deferred lease obligation ..............         20,721          14,850
  Amortization of investment premium ...............          5,096            --
  Loss (gain) on disposal of assets ................         (1,382)            947
  Issuance of common stock in litigation settlement         625,000            --
 Changes in operating assets and liabilities:
  Income tax refund receivable .....................        690,990            --
  Accounts receivable ..............................       (320,787)        491,784
  Inventories ......................................       (134,817)       (186,801)
  Prepaid expenses and other current assets ........       (190,491)        (19,130)
  Employee advances ................................         (3,723)        (10,795)
  Other assets .....................................          2,501         (18,326)
  Accounts payable .................................        179,625          62,310
  Accrued liabilities ..............................        291,626         206,854
                                                            -------         -------
    Net cash provided by (used in)
      operating activities .........................     (2,734,850)      2,371,916
Cash flow from investing activities:
 Sale of investments ...............................      7,530,560            --
 Capitalized software development costs ............       (141,076)       (284,316)
 Purchase of investments ...........................    (12,929,123)     (2,006,530)
 Purchases of property .............................       (254,517)       (136,208)
 Sale of property ..................................          7,800            --
                                                              -----              

    Net cash used in
     investing activities ..........................     (5,786,356)     (2,427,054)

Cash flow from financing activities:
 Principal payments on notes payable ...............           --          (456,071)
   Principal payments under capital
 lease obligations .................................           --            (4,124)
 Issuance of common stock, net .....................           --        15,372,693
 Other prepaid financing costs .....................           --            (1,000)
 Proceeds from exercise of stock warrants and
 options and repayment on notes receivable .........         78,029         244,960
                                                             ------         -------
    Net cash provided by
     financing activities ..........................         78,029      15,156,458
                                                             ------      ----------
Net increase (decrease) in cash and cash equivalents     (8,443,177)     15,101,320
Cash and cash equivalents, beginning of period .....     12,918,643       1,298,201
                                                         ----------       ---------
Cash and cash equivalents, end of period ...........   $  4,475,466    $ 16,399,521
                                                       ============    ============

Supplemental cash flow information:
  Interest paid ....................................           --      $      7,717
                                                                       ============
  Income taxes paid ................................           --      $  1,020,701
                                                                       ============
</TABLE>
                                
                                
   See accompanying notes to consolidated financial statements

<PAGE>

                         TouchStone Software Corporation
                   Notes to Consolidated Financial Statements
                               September 30, 1996
                                   (Unaudited)
                                
1.   General
------------
    

     The consolidated  financial statements of the Company include the financial
statements of the Company's  wholly-owned  subsidiary,  TouchStone  Europe Ltd.,
which  commenced   operations  in  the  United  Kingdom  in  July  1995.   These
consolidated financial statements have been prepared by the Registrant,  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
nine  months  ended  September  30,  1996 and 1995,  the  financial  position at
September 30, 1996,  and the cash flows for the nine months ended  September 30,
1996 and 1995,  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  Registrant  believes  that the  disclosures  in such
financial  statements  are  adequate  to  make  the  information  presented  not
misleading.  These condensed consolidated financial statements should be read in
conjunction with the TouchStone Software  Corporation  financial  statements and
notes thereto  included in the  TouchStone  Software  Corporation  Annual Report
filed with the  Securities  and Exchange  Commission on Form 10-KSB for the year
ended December 31, 1995.

  Net income (loss) per share

     Certain shares reserved for outstanding  common stock purchase warrants and
options have been  considered  common stock equiva lents in computing net income
per share for the three and nine months ended  September  30, 1995.  Such common
equivalent shares were not included in the calculation of the net loss per share
for the three and nine months  ended  September  30, 1996 as their  effect would
have been antidilutive.

2.   Accounts Receivable
------------------------

     At September  30, 1996,  accounts  receivable is presented net of allowance
for doubtful accounts,  reseller rebate reserves, and product return reserves of
approximately   $140,000,   $484,500,   and  $435,800,   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  which  expires  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 8.25% at September  30,
1996.  There were no borrowings under this line of credit at September 30, 1996.
This borrowing  facility requires the Company to maintain minimum  shareholders'
equity  of  $10,000,000  and  minimum   aggregate  cash,  cash  equivalents  and
investments of $12,000,000.  This line of credit also prohibits  acquisitions of
other entities without the prior approval of the bank.

4.   Litigation Settlement
--------------------------

     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 the Company's common stock. See Part II, Item 1 Legal Proceedings.


<PAGE>

                         TouchStone Software Corporation
                   Notes to Consolidated Financial Statements
                               September 30, 1996
                                   (Unaudited)

5.   New Accounting Pronouncement
---------------------------------
  
     In October 1995, the Financial  Accounting Standards Board issued Statement
of Financial  Accounting  Standards (SFAS) No. 123,  "Accounting for Stock-Based
Compensation,"  which becomes effective for the Company  beginning  December 31,
1996.  SFAS No. 123 requires  expanded  disclosures of stock-based  compensation
arrangements  with employees and encourages (but does not require)  compensation
cost to be measured  based on the fair value of the equity  instrument  awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25, which
recognizes  compensation  cost  based  on the  intrinsic  value  of  the  equity
instrument awarded. The Company will continue to apply APB Opinion No. 25 to its
stock-based  compensation awards to employees and will disclose the required pro
forma  effect on net  income  or loss and  earnings  per share in its  financial
statements for the year ended December 31, 1996.
  
6.   Shareholder Rights Plan
----------------------------

     In  September  1996 the  Board of  Directors  approved  the  adoption  of a
Shareholder  Rights  Plan.  The Rights Plan  provides  for the  distribution  to
TouchStone Software  Corporation's  stockholders of one preferred stock purchase
"Right" for each outstanding  share of TouchStone  common stock. The Rights have
an exercise price of $15 per Right, subject to subsequent adjustment. Initially,
the  Rights  will  trade  with  the  Company's  common  stock,  and  will not be
exercisable until the occurrence of certain takeover-related events.
  
     The Rights Plan provides  that if a person or group  acquires 15 percent or
more of the  Company's  common  stock  without the  approval  of the Board,  the
holders of the Rights,  other than the acquiring person or group,  would,  under
certain  circumstances,  have the  right to  purchase  additional  shares of the
Company's  common  stock  having a market  value equal to two times the exercise
price of the Right.  In  addition,  if the  Company is  thereafter  merged  into
another entity, or if 50 percent or more of the Company's consolidated assets or
earning power are sold,  then the Right will entitle its holder,  other than the
acquiring person or group, to buy common shares of the acquiring entity having a
market value equal to two time the exercise price of the Right.
  
     The Rights were  distributed  to holders of the  Company's  common stock of
record on  October 4, 1996,  as a  dividend,  and will  expire,  unless  earlier
redeemed, on September 26, 2006.


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  and retail  sell-through  information to establish  these  reserves.
Shipments of the Company's  products into the domestic market are reserved until
there is  reasonable  information  that the  product has been sold at the retail
level.  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. The Company maintains  allowances for projected returns;  however there
can be no assurance that actual levels of returns will not significantly  exceed
amounts anticipated by the Company. 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,  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 SFAS 86.

     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.  The  Company  recorded  an  expense  of
$1,375,000 in the second quarter of 1996 related to such settlement.

     The Company's  performance  during the last half of 1995 and the first nine
months of 1996 was adversely  affected by an unanticipated  slowdown in the sale
of some of its Windows 95 related products. As a result of that slowdown and its
experience  with  returned  products,  the  Company  not only had to make  large
adjustments  to revenue in the fourth  quarter of 1995,  but had to increase the
calculation  for the required  reserves on all shipment of products in the three
and nine  months  ended  September  30,  1996.  The  slowdown  in sales  and the
Company's  reserve  policy  combined  with  increased  selling and  research and
development  expenses as reflected in the accompanying  unaudited,  consolidated
financial statements,  have adversely affected profitability and resulted in net
losses of  $355,000  and  $4,301,000  during  the three  and nine  months  ended
September  30,  1996,  respectively,  as compared to net income of $479,000  and
$1,340,000   during  the  three  and  nine  months  ended  September  30,  1995,
respectively.  In  order to  improve  operating  results,  the  Company's  plans
include,  but are not limited to, the  introduction of new software  products in
the fourth  quarter  of 1996 and the  expansion  of  marketing  channels  by the
promotion of products  directly to corporate  and  institutional  customers.  No
assurance  may be given that the  implementation  of such  plans will  result in
profitable operating results.

     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.

Products

     The following table sets forth selected  products  currently offered by the
Company:

                                                            Initial Release
Product Title         Description                                Date
-------------  ----------------------------------       ----------------------

e.support   e.support  is  an  electronic  support          October, 1996
            system which allows millions of  users          
            to   communicate  with  thousands   of
            vendors from one simple user interface
            on 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   to
            optionally  include system  diagnostic
            information,  up  to  5  user-attached
            files  and/or up to 5 vendor-specified
            files.
            
Check-It    For  use  with  DOS, Windows  3.1  and          March, 1996
Diagnostic  Windows 95, this multi-utility package
Kit         is designed to meet the specific needs
            of   both  technicians  and  technical
            users.  It includes the new Check3It 4
            program, a portable, self-booting  DOS
            utility    that   provides   extensive
            hardware   testing  and  configuration
            analysis features; the new WINCheck3It
            Pro,    an    advanced   version    of
            WINCheck3It;   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.
            
PC-cillin   Designed for use with Windows  95  and          November, 1995
95          the   Internet,   PC-cillin   provides   
            complete  protection  from  new  virus
            sources       and         increasingly
            sophisticated  types  of  viruses.  It
            automatically    adjusts    protection
            levels  based  on  the  level  of  the
            threat,   provides  one-button   virus
            pattern   updates,  and  intelligently
            scans  for  viruses when  needed.   In
            addition,  a  powerful  Clean   Wizard
            automatically removes viruses step-by-
            step, without harming system files.
            
WINCheck-It This Windows-based utility provides  a          October,1995
4.0         suite  of  diagnostic tools,  normally   
            found in separate programs, that  have
            been  designed to work in both Windows
            95   and   Windows  3.1  environments.
            WINCheck3It   now   includes   a   new
            uninstall  utility, a  modem  test,  a
            comprehensive    CD-ROM     diagnostic
            utility, and a four-volume McGraw-Hill
            technical reference library on CD-ROM.
            
FastMove!   A  file  synchronization and  transfer          March, 1995
2.0         program  with ZIPSync that  keeps  the
            files and directories on desktop  PCs,
            laptops,   networks  and  Zip   drive,
            synchronized and up-to-date  with  the
            click  of  a button.  ZIPSync  is  the
            first   utility   of   its   kind   to
            synchronize and catalog files on a Zip
            drive.   FastMove! Is  also  available
            with  the Ultra Flex Parallel Transfer
            Cable.
            
AutoHelp/   This  utility is a diagnostic software          May, 1995
Check-It    package  available  only  to  hardware
Diagnostics manufacturers on an OEM basis  and  is
            "bundled"   as  part  of  a   personal
            computer  system. This  product  helps
            customers  perform remote  diagnostics
            and   upload   the   results   to    a
            manufacturer's    technical    support
            staff.  Hewlett-Packard was the  first
            personal   computer  manufacturer   to
            license this product for use on the HP
            Multimedia   6100   line    of    home
            computers.
            


RESULTS OF OPERATIONS

     The following  table sets forth certain  statement of operations  data as a
percentage  of total  revenues  for the  three  and nine-  month  periods  ended
September 30:
<TABLE>
<CAPTION>

                                             Three months          Nine months
                                          ended September 30,   ended September 30,
                                             1996      1995       1996      1995
<S>                                         <C>       <C>       <C>       <C>
Revenues:
  Product sales .......................      96.1%     98.1%     94.7%     97.7%
  Royalty income ......................       3.9       1.9       5.3       2.3
     Total revenues ...................     100.0     100.0     100.0     100.0
Cost of sales .........................      41.7      26.1      49.3      29.1
     Gross profit .....................      58.3      73.9      50.7      70.9
Sales and marketing ...................      50.8      37.1      70.4      32.4
General and administrative ............      13.8      13.0      22.9      13.0
Research and development ..............      16.5       4.9      20.7       4.6
Litigation settlement and related costs        --        --      37.0        --
     Total operating expenses .........      81.1      55.0     151.0      50.0
Income (loss) from operations .........     (22.8)     18.9    (100.3)     20.9
Other income ..........................       8.5       2.8      12.5       1.3
Income (loss) before taxes(14.3) ......      21.7     (87.8)     22.2
Provision for income taxes ............        --       8.1        --       8.4
     Net income (loss) ................     (14.3)%    13.6%    (87.8)%    13.8%
</TABLE>

Comparison of Three Months Ended September 30, 1996 and 1995

Revenues

     Total  product  sales for the three  months ended  September  30, 1996 were
$2,366,000,  a decrease of $1,083,000,  or 31.4%, compared to $3,449,000 for the
three months ended  September 30, 1995,  primarily due to the lower sales of the
WINCheckIt  product line.  Additionally,  revenues for the third quarter of 1995
included  sales  of WIN 95  Advisor.  Sales  of the  current  leading  products,
PC-cillin and CheckIt  Diagnostic Kit, did not offset the declining sales of the
WINCheckIt products.

     For the three months ended September 30, 1996,  royalty income was $95,000,
an increase of $28,000, or 40.6%, compared to $67,000 for the three months ended
September 30, 1995.  This  increase was  primarily due to royalties  earned from
sales of PC-cillin during the third quarter of 1996. Royalty income increased as
a  percentage  of total  revenues,  from  1.9%  during  the three  months  ended
September 30, 1995 to 3.9% for the three months ended September 30, 1996.

Gross Profit

     Gross profit for the three months ended  September 30, 1996 was $1,435,000,
a decrease of $1,165,000,  or 44.8%, compared to $2,600,000 for the three months
ended  September  30,  1995.  Gross  profit as a  percentage  of total  revenues
declined  from 73.9% in the third  quarter of 1995 to 58.3% in the third quarter
of 1996.  This decrease was primarily  attributable  to increased  royalty costs
paid to other  software  companies  in  relation  to  product  sales,  primarily
incurred in connection with sales of the Compa ny's PC-cillin  product ($361,000
in the three months ended  September  30, 1996,  compared to $8,000 in the three
months ended  September 30,  1995).  Additionally,  the gross profit  percentage
declined due to the lower sales  volume in relation to certain  fixed costs that
were  established  for higher sales volumes.  Such  increased  costs were offset
somewhat by a decline in  amortization  of  software  development  costs,  which
decreased  from $90,000 in the three months ended  September 30, 1995 to $52,000
in the three  months  ended  September  30,  1996,  and by lower  freight  costs
($91,000 in the three months ended  September 30, 1995 as compared to $24,000 in
the three months ended September 30, 1996).

Sales and Marketing Expense

     Sales and marketing  expense for the three months ended  September 30, 1996
was $1,251,000,  a decrease of $55,000,  or 4.2%, compared to $1,306,000 for the
three months ended  September 30, 1995.  Increases in salaries and related costs
due to additional customer service, technical support and marketing personnel in
1996  as  compared  to 1995  were  more  than  offset  by a  decline  in  retail
promotional  expenditures.  Due to the  decline  in  product  sales,  sales  and
marketing expenses increased as a percentage of total revenues from 37.1% in the
third  quarter  of 1995 to 50.8% in the  third  quarter  of  1996.  The  Company
continues to make  investment in sales and marketing to support  future  revenue
growth, but such revenue growth may lag the expense level.

General and Administrative Expense

     General and administrative expense for the three months ended September 30,
1996 was $340,000,  a decrease of $117,000,  or 25.6%,  compared to $457,000 for
the  three  months  ended   September  30,  1995.  This  decrease  is  primarily
attributable to a decline in profit-sharing  bonuses paid to employees ($165,000
in the three months ended  September  30, 1995, as compared to none in the three
months ended  September 30,  1996).  The decline in  profit-sharing  bonuses was
somewhat offset by an increase in salaries,  legal and accounting  expense. As a
percentage of total revenues, general and administrative expenses increased from
13.0% to 13.8%  during the three months  ended  September  30, 1995 to the three
months ended September 30, 1996, respectively.

Research and Development Expense

     Research and  development  expense for the three months ended September 30,
1996 was  $407,000,  an increase of  $236,000,  or 138.5%,  compared to $171,000
during the three months ended September 30, 1995. The increase was  attributable
primarily to the hiring of additional  programmers  and increased use of outside
programmers  to develop  new  products,  and to salary  increases  for  existing
programmers.  Research and development expense also increased as a percentage of
total revenues, from 4.9% for the three months ended September 30, 1995 to 16.5%
for the three months ended September 30, 1996.

Other Income

     During the three months ended  September 30, 1995,  the Company's  interest
income exceeded its interest expense by approximately  $98,000.  Interest income
exceeded  interest  expense in the three months  ended  September  30, 1996,  by
approximately $209,000, as interest-bearing investments increased.

Comparison of Nine Months Ended September 30, 1996 and 1995

Revenues

     Total  product  sales for the nine  months  ended  September  30, 1996 were
$4,641,000,  a decrease of $4,830,000,  or 51.0%, compared to $9,471,000 for the
nine months ended  September 30, 1995,  as sales of WINCheckIt  4.0 in 1996 were
significantly  less than  expected.  Although  sales of  PC-cillin  and  CheckIt
Diagnostic Kit met  management's  expectations,  sales of these products did not
offset  declining sales of the WINCheckIt  product line.  Additionally,  product
sales for the nine months  ended  September  30, 1995  included  sales of WIN 95
Advisor.


     For the nine months ended September 30, 1996,  royalty income was $258,000,
an increase of $31,000, or 13.8%, compared to $227,000 for the nine months ended
September  30,  1995.  The  increase  in  royalty  income was  primarily  due to
royalties  earned from sales of PC-cillin in the third quarter of 1996.  Royalty
income  increased as a percentage of total  revenues,  from 2.3% during the nine
months ended  September 30, 1995 to 5.3% for the nine months ended September 30,
1996.

Gross Profit

     Gross profit for the nine months ended September 30, 1996 was $2,483,000, a
decrease of  $4,394,000,  or 63.9%,  compared to $6,877,000  for the nine months
ended  September  30,  1995.  Gross  profit as a  percentage  of total  revenues
declined  from  70.9%  in 1995 to 50.7% in 1996.  This  decrease  was  primarily
attributable  to  increased  royalty  costs  paid to  other  software  companies
($884,000 in the nine months ended  September 30, 1996,  compared to $282,000 in
the nine months ended September 30, 1995), primarily incurred in connection with
sales of the  Company's  PC-  cillin  product.  Additionally,  the gross  profit
percentage  was lower  because  the sales  volume is low in  relation to certain
fixed  costs.  Such  increased  costs  were  offset  somewhat  by a  decline  in
amortization of software development costs, which decreased from $228,000 in the
nine months  ended  September  30,  1995 to  $135,000  in the nine months  ended
September  30, 1996,  and by lower  freight  costs  ($237,000 in the nine months
ended  September  30,  1995 as  compared  to  $98,000 in the nine  months  ended
September 30, 1996).

Sales and Marketing Expense

     Sales and  marketing  expense for the nine months ended  September 30, 1996
was $3,449,000, an increase of $139,000, or 9.6%, compared to $3,147,000 for the
nine months ended September 30, 1995.  This increase was primarily  attributable
to an  increase  in the  number  of  customer  service,  technical  support  and
marketing personnel in 1996 as compared to 1995.  Additionally,  direct mail and
media  advertising  costs  increased in 1996 as compared to 1995.  Further,  the
Company's  consulting  costs  increased  in 1996 from 1995 levels to support the
Company's attempts to increase sales internationally.  Such increased costs were
offset somewhat by a decline in retail  promotional  expenditures.  Due to these
additional  expenditures  and the decline in product sales,  sales and marketing
expenses  increased as a  percentage  of total  revenues  from 32.4% in the nine
months ended  September 30, 1995 to 70.4% in the nine months ended September 30,
1996.

General and Administrative Expense

     General and administrative  expense for the nine months ended September 30,
1996 was $1,124,000,  a decrease of $139,000,  or 11.0%,  compared to $1,263,000
for the nine months  ended  September  30,  1995.  This  decrease  is  primarily
attributable to a decline in profit-sharing  bonuses paid to employees ($466,000
in the nine months ended  September  30,  1995,  as compared to none in the nine
months ended September 30, 1996).  Such decreased costs were partially offset by
compensation  expense  related  to a  stock  buy-  back  agreement  incurred  in
connection with the  resignation of a Company  officer.  Additionally,  investor
relations,  audit,  rent,  and  depreciation  costs  increased  in  1996.  As  a
percentage of total revenues, general and administrative expenses increased from
13.0% to 22.9%  during the nine  months  ended  September  30,  1995 to the nine
months ended September 30, 1996, respectively.

Research and Development Expense

     Research and  development  expense for the nine months ended  September 30,
1996 was $1,012,000,  an increase of $568,000,  or 128.0%,  compared to $444,000
during the nine months ended  September 30, 1995. The increase was  attributable
primarily to the hiring of additional  programmers  and increased use of outside
programmers  to develop  new  products,  and to salary  increases  for  existing
programmers.  Research and development expense also increased as a percentage of
total revenues,  from 4.6% for the nine months ended September 30, 1995 to 20.7%
for the nine months ended September 30, 1996.

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.


Other Income

     During the nine months ended  September 30, 1995,  the  Company's  interest
income exceeded its interest expense by approximately $129,000.  Interest income
exceeded  interest  expense in the nine months  ended  September  30,  1996,  by
approximately $613,000, as interest-bearing investments increased.

Liquidity and Capital Resources

     During the nine months ended  September 30, 1996, the Company used its cash
resources  primarily for  investments in debt securities  totaling  $12,929,000.
Additionally,  the Company used $2,735,000 for operating activities. The Company
also  invested  $141,000  in  capitalized  software  development  and  purchased
equipment  totaling  $255,000.  These expenditures were funded primarily by cash
received  from sale of  investments  of  $7,531,000.  The Company also  received
proceeds from sales of common stock aggregating $78,000.

     The Company's  working  capital has decreased from  $15,373,000 at December
31,  1995 to  $7,505,000  at  September  30,  1996.  Cash and  cash  equivalents
decreased  from  $12,919,000 at December 31, 1995 to $4,475,000 at September 30,
1996. The declines in working capital and cash and cash  equivalents were caused
primarily  by  increased  holdings  of  long-term  investments  and the net loss
incurred  by the  Company  in the nine  months  ended  September  30,  1996,  as
discussed above.

     In September 1996 the Company negotiated a bank line of credit which allows
for borrowings up to $500,000 and which expires 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  September  30, 1996 was 8.25%.
There were no  borrowings  under the bank line of credit at September  30, 1996.
This borrowing  facility requires the Company to maintain minimum  shareholders'
equity  of  $10,000,000  and  minimum   aggregate  cash,  cash  equivalents  and
investments of $12,000,000.  This line of credit also prohibits  acquisitions of
other entities without the prior approval of the bank.

     Management   believes  that  the  Company's  existing  cash  resources  and
anticipated cash flows from operations,  and periodic borrow ings under the line
of credit,  will be  sufficient  to fund the  Company's  operations at currently
anticipated levels through September 30, 1997. 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.

Business Risks

     This quarterly  report on Form 10-QSB contains  forward-looking  statements
that involve risks and  uncertainties.  The actual future  results of TouchStone
Software Corporation  ("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, as well as those
factors  discussed in the  Company's  Annual  Report on Form 10-KSB for the year
ended December 31, 1995.

     These risks  include,  but are not  limited to, 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 the planned product 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 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  with
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. 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
successfully the planned products  identified in this report,  along with market
acceptance of the Company's products currently being sold at retail. Other risks
are  detailed in the  Company's  Securities  and  Exchange  Commission  filings,
including form 10-KSB for the year ended December 31, 1995.

                   PART II - OTHER INFORMATION

ITEM 1.   Legal Proceedings
---------------------------

     On January 26,  1996,  a purported  class and  derivative  action  entitled
DARRIN J.  CARAMONTA  v.  LARRY W.  DINGUS,  ET AL.  was filed in United  States
District Court for the Central District of California,  in which Mr.  Caramonta,
on behalf of himself and all others who  purchased  the  Company's  Common Stock
between May 2, 1995 and December 21, 1995,  alleges that the Company and certain
of its officers  violated  Section  10(b) and Rule 10b-5  promulgated  under the
Securities Exchange Act of 1934, as amended, and various state statutes sounding
in fraud,  by  reporting  earnings  for the first  three  quarters  of 1995 that
allegedly  were  knowingly  inflated  due to  inadequate  reserves  for  product
returns,  in part, in order to assist the Company and the individual  defendants
in selling  Common Stock at an inflated  price in the Company's  August 25, 1995
public offering.  The derivative claims  essentially assert that the allegations
sounding in fraud constituted a breach of the individual  defendants'  fiduciary
duties.
     
     On March 13, 1996, and on March 21, 1996,  substantially  similar purported
class and derivative actions entitled JACK BODNER v. Larry W. Dingus, et al. and
MARC JAFFE v. LARRY W. DINGUS, ET AL., respectively, were also filed in the same
Court.

     On March  11,  1996,  defendants  moved to  dismiss  the  Caramonta  action
pursuant to Fed.  R. Civ. P. 12(b) (6) and Rule 9(b).  A ruling on the motion to
dismiss was pending at the time the parties reached an agreement-in-principle to
settle the litigation.

     Under the  principal  terms of the  agreement,  the Company  established  a
settlement fund consisting of $500,000 and 200,000 newly-issues shares of common
stock. The Company also adopted a written policy on insider trading.

     The Court has granted  preliminary  approval to the terms of the settlement
and has  authorized  the mailing of notice of the terms of the settlement to the
class. The Company is informed by counsel for the class that the notice has been
mailed. A final approval hereby has been scheduled for December.

     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.  A
response to the action will not be filed until approximately  November 25, 1996.
The Company  believes  this suit is without  merit and intends to defend itself
vigorously.
     
ITEM 2.   Changes in Securities

Not applicable.

ITEM 3.   Defaults Upon Senior Securities

Not applicable.

ITEM 4.   Submission of Matters to a Vote of Security Holders

None.


ITEM 5.   Other Information

None

ITEM 6.   Exhibits and Reports on Form 8-K

a.   Exhibits

  None

b.   Reports on Form 8-K

     On  September  20,  1996 the  Company  filed a  current  report on Form 8-K
announcing a dividend of Preferred  Share Purchase Rights in connection with the
adoption of a shareholder rights plan.
                                
                                
                                
                                
                                
                       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 
   Larry S. Jordan   Dated: November 13, 1996     Officer and Director





/s/Ronald R. Maas                                 Executive Vice President,
   Ronald R. MaasDated: November 13, 1996         Chief Financial Officer,
                                                  Principal Accounting
                                                  Officer and Director