**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 __________________
 **FORM
        10-QSB**
 
 **QUARTERLY
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF**
 **THE
        SECURITIES EXCHANGE ACT OF 1934**
 
 
 **For
                  the quarter ended**
              **Commission
                  File Number****September
                  30, 2005**
              **0-12969**
 
 **TOUCHSTONE
        SOFTWARE CORPORATION**
 **(Exact
        name of registrant as specified in its charter)**
 
 
 **Delaware**
              **95-3778226****(State
                  or other jurisdiction**
              **(I.R.S.
                  Employer****of
                  incorporation or organization)**
              **Identification
                  No.)****1538
                  Turnpike St., North Andover, Massachusetts**
              **01845****(Address
                  of principal executive offices)**
              **(Zip
                  Code)**
 
 
 **(978)
        686-6468**
 **(Registrant’s
        telephone number, including area code)**
 
 **None**
 **(Former
        name, former address and former**
 **fiscal
        year, if changed since last report)**
 
  Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        past 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 
        o
 
 The
        number of shares of Common Stock of the Registrant outstanding as of November
        14, 2005 was 11,440,060
        shares.
 
 
 
  **TOUCHSTONE
          SOFTWARE CORPORATION AND SUBSIDIARY**
 **Page**
                  **Number****PART
                    I.**
                **Financial
                    Information****ITEM
                    1.**
                Financial
                    StatementsConsolidated
                    Balance Sheet3⁄4September 30, 2005
                3Consolidated
                    Income Statements3⁄4Three Months Ended September 30, 2005 andSeptember
                    30, 2004 and Nine Months Ended September 30, 2005
                4And
                    September 30, 2004Consolidated
                    Statements of Cash Flows3⁄4Nine Months Ended September 30, 2005and
                    September 30, 2004
                5Notes
                    to Consolidated Financial Statements
                6-8**ITEM
                    2.**
                Management’s
                    Discussion and Analysis of Financial Condition and Results
                    ofOperations
                9-12**ITEM
                    3.**
                Controls
                    and Procedures
                12**PART
                    II.**
                **Other
                    Information****ITEM
                    1.**
                Legal
                    Proceedings
                13**ITEM
                    2.**
                Changes
                    in Securities
                13**ITEM
                    3.**
                Defaults
                    Upon Senior Securities
                13**ITEM
                    4.**
                Submission
                    of Matter To a Vote of Security Holders
                13**ITEM
                    5.**
                Other
                    Information
                13**ITEM
                    6.**
                Exhibits
                    and Reports on Form 8-K
                13Signatures
                
                14Exhibits
                
                15-17
 
  
  2
 **TOUCHSTONE
              SOFTWARE CORPORATION AND SUBSIDIARY**
  **PART
        I - FINANCIAL INFORMATION**
 
 **ITEM
        1. Financial Statements**
 **CONSOLIDATED
        BALANCE SHEET**
 **September
        30, 2005**
 **(unaudited)**
  
 **Assets**Current
                  assets:Cash
                  and cash equivalents
              
              $
              193,709Accounts
                  receivable, net
              
              
              5,052Inventories
              
              
              21,316Prepaid
                  expenses and other current assets
              
              
              10,655Total
                  current assets
              
              
              230,732Note
                  receivable, stockholder
              
              
              —Note
                  receivable, related party
              
              
              24,777Investments,
                  other
              
              
              184,527Property,
                  and equipment, net
              
              
              400,212$
              840,248**Liabilities
                  and Shareholders’ Equity**Current
                  liabilities:Accounts
                  payable
              
              $
              101,011Accrued
                  payroll and related expenses
              
              
              56,876Other
                  accrued expenses
              
              
              97,445Current
                  maturities of long term debt
              
              
              49,230Total
                  current liabilities
              
              
              304,562Long
                  term debt, net of current maturities
              
              
              186,325Total
                  liabilities
              
              
              490,887Shareholders’
                  equity:Preferred
                  stock, $.001 par value, 3,000,000 sharesauthorized,
                  none issued or outstandingCommon
                  stock, $.001 par value, 20,000,000 sharesauthorized;
                  issued and outstanding, 11,440,060 shares
              
              
              11,440Additional
                  paid-in capital
              
              
              20,979,684Accumulated
                  deficit
              
              
              (20,641,763
              )Shareholders’
                  equity, net
              
              
              349,361$
              840,248
 
  The
        accompanying notes are an integral part of these consolidated financial
        statements.
  3
  **TOUCHSTONE
          SOFTWARE CORPORATION AND SUBSIDIARY**
 ( **unaudited)**
 
 **Three
                    Months Ended**
                  **September
                    30,**
                
                **Nine
                    Months Ended**
                  **September
                    30,****2005**
                
                ******2004**
                
                ******2005**
                
                **2004**Revenues:Product
                    sales
                
                $
                322,760
                
                $
                337,503
                
                $
                1,122,978
                
                $
                1,161,276Royalty
                    income
                
                
                —
                
                
                7,285
                
                
                523
                
                
                33,243Website
                    income
                
                
                4,671
                
                
                —
                
                
                4,671
                
                
                —Total
                    revenues
                
                
                327,431
                
                
                344,788
                
                
                1,128,172
                
                
                1,194,519Cost
                    of revenues
                
                
                44,225
                
                
                58,500
                
                
                180,067
                
                
                174,228Gross
                    profit
                
                
                283,206
                
                
                286,288
                
                
                948,105
                
                
                1,020,291Operating
                    expenses:Sales,
                    marketing, general and administrative
                
                
                212,628
                
                
                179,712
                
                
                684,188
                
                
                664,830Research
                    and development
                
                
                115,117
                
                
                152,736
                
                
                356,588
                
                
                413,034Total
                    operating expenses
                
                
                327,745
                
                
                332,448
                
                
                1,040,776
                
                
                1,077,864Loss
                    from operations
                
                
                (44,539
                )
                
                (46,160
                )
                
                (92,671
                )
                
                (57,573
                )Other
                    income, net
                
                
                1,499
                
                
                2,778
                
                
                3,489
                
                
                8,352Net
                    loss
                
                $
                (43,040
                )
                $
                (43,382
                )
                $
                (89,182
                )
                $
                (49,221
                )Basic
                    earnings loss per share
                
                $
                (0.00
                )
                $
                (0.00
                )
                $
                (0.01
                )
                $
                (0.00
                )Basic
                    weighted average shares outstanding
                
                
                11,440,060
                
                
                11,440,060
                
                
                11,440,060
                
                
                11,440,060Diluted
                    earnings loss per share
                
                $
                (0.00
                )
                $
                (0.00
                )
                $
                (0.01
                )
                $
                (0.00
                )Diluted
                    weighted average shares outstanding
                
                
                11,440,060
                
                
                11,440,060
                
                
                11,440,060
                
                
                11,440,060
 
 
 
  
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
 
 4
 
 **TOUCHSTONE
          SOFTWARE CORPORATION AND SUBSIDIARY**
 
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **(unaudited)**
 
 **Nine
                      months ended**
                    **September
                      30,****2005**
                  
                  **2004**Cash
                      flows from operating activities:Net
                      loss
                  
                  $
                  (89,182
                  )
                  $
                  (49,221
                  )Adjustments
                      to reconcile net loss to net cash used in operating
                      activities:Depreciation
                  
                  
                  2,576
                  
                  
                  4,279Changes
                      in assets and liabilities:Accounts
                      receivable
                  
                  
                  20,172
                  
                  
                  1,627Inventories
                  
                  
                  3,282
                  
                  
                  (3,444
                  )Prepaid
                      expenses and other current assets
                  
                  
                  4,409
                  
                  
                  (505
                  )Accounts
                      payable
                  
                  
                  28,616
                  
                  
                  (10,541
                  )Accrued
                      liabilities
                  
                  
                  (5,949
                  )
                  
                  4,878Net
                      cash used in operating activities
                  
                  
                  (36,076
                  )
                  
                  (52,927
                  )Cash
                      flows from investing activities:Collection
                      of notes receivable - related party Metro
                  
                  
                  35,067Collection
                      of notes receivable - related party-Narath
                  
                  
                  42,184
                  
                  
                  49Additions
                      to Property and Equipment
                  
                  
                  (127,500
                  )
                  
                  —Net
                      cash (used in) investing activities
                  
                  
                  (50,249
                  )
                  
                  49Cash
                      flows from financing activities:Payment
                      on long-term debt
                  
                  
                  (9,825
                  )
                  
                  (10,660
                  )Net cash used in financing activities
                  
                  
                  (9,825
                  )
                  
                  (10,660
                  )Net
                      decrease in cash and cash equivalents
                  
                  
                  (96,150
                  )
                  
                  (63,538
                  )Cash
                      and cash equivalents, beginning of period
                  
                  
                  289,859
                  
                  
                  356,333Cash
                      and cash equivalents, end of period.
                  
                  $
                  193,709
                  
                  $
                  292,795Supplemental
                      disclosure of cash flow information:Cash
                      paid during the period for:Interest
                  
                  $
                  571
                  
                  $
                  308Income
                      taxes
                  
                  $
                  —
                  
                  $
 
 
 The
        Company has the following non-cash investing and financing activitites for
        the
        nine months ended September 30, 2005. The Company received investments with
        a
        value of $36,800 in partial payment of the note receivable, related
        party.
 
 In
        addition, the Company financed additions to property and equipment of
        $270,380.
  
 The
        accompanying notes are an integral part of these consolidated financial
        statements
  5
  **TOUCHSTONE
          SOFTWARE CORPORATION AND SUBSIDIARY**
 
 **1.**
              **Summary
                  of Significant Accounting
                  Policies**
 
 **Nature
        of Operations** **.** TouchStone Software Corporation and its subsidiary ("TouchStone" or the
        "Company") markets, and supports a line of computer prob-lem-solving utility
        software and supporting products and engineering services which sim-plify
        personal computer installation, support, and mainte-nance. TouchStone operates
        from one location in the United States. The Company markets its products,
        domestically and internationally, directly to original equipment manufacturers
        and end users.
 
 **Principles
        of Consolidation** .
        The
        consolidated financial statements of the Company include the financial
        statements of the Company’s wholly-owned subsidiary; eSupport.com, Inc.. All
        inter-company transactions and balances have been eliminated.
 
 **Basis
        of Presentation.** The
        accompanying unaudited consolidated financial statements have been prepared
        by
        the Company pursuant to the rules and regulations of the Securities and Exchange
        Commission regarding interim financial reporting. Accordingly, they do not
        include all of the information and footnotes in accordance with generally
        accepted accounting principles for complete financial statements and should
        be
        read in conjuction with the audited financial statements included in the
        Company’s Annual Report on Form 10-KSB for the year ended December 31, 2004. In
        the opinion of management, the accompanying unaudited financial statements
        contain all adjustments necessary for fair presentation of the Company’s
        financial position, results of operations and cash flows at the dates and
        for
        the periods presented. Such adjustments consisted only of normal recurring
        items.
 
 The
        operating results for the three and nine months ended September 30, 2005
        are not
        necessarily indicative of the results to be expected for the full
        year.
 
 The
        accompanying consolidated financial statements have been prepared assuming
        that
        the Company will continue as a going concern, which contemplates the realization
        of assets and the satisfaction of liabilities in the normal course of business.
        The Company previously has suffered recurring operating losses and operating
        cash flow deficits, has an accumulated deficit of $20,641,763 at September
        30,
        2005, and is dependent on its investment portfolio and cash balance to fund
        future operations. In addition, the Company is subject to a number of risks.
        Principally among these risks are marketing of its products and services,
        which
        are susceptible to increased competition from other companies and obsolescence
        of its products and services. Also among these risks are the decreased sales
        leads the Company has faced with the changes to Phoenix Technology's website.
        The Company is still working with Phoenix Technologies on a solution to the
        website change that occurred in February 2003. Phoenix has moved the Company's
        link to a more acceptable location on their website. These factors, among
        others, raise substantial doubt about the Company's ability to continue as
        a
        going concern at September 30, 2005. The financial statements do not include
        any
        adjustments that might result from the outcome of this uncertainty.
 
 Management's
        ongoing reorganization plan of providing for significant staff reductions
        in
        non-core operating and support functions, limitations on corporate travel
        and a
        realignment of senior management responsibilities has been fully executed.
        In
        order to meet its cash requirements over the next twelve months, management
        expects to supplement cash flow benefits expected from these initiatives
        with
        current cash reserves. Other additional sources of financing, including
        additional private debt or equity capital, are being explored, along with
        seeking merger candidates with whom the Company has synergies.
 
 
 **2.**
              **Earnings
                  Per Share**
 
 Pursuant
        to Statement of Financial Accounting Standards No. 128, “ *Earnings
        Per Share”* (SFAS
        128), the Company provides dual presentation of “Basic” and “Diluted” Earnings
        Per Share (EPS). Basic EPS excludes
  6
  **TOUCHSTONE
          SOFTWARE CORPORATION AND SUBSIDIARY**
  dilution
        from common stock equivalents and is computed by dividing income available
        to
        common stockholders by the weighted average number of common shares outstanding
        for the period. Diluted EPS reflects the potential dilution from common stock
        equivalents. Common stock equivalents consisted of outstanding stock options
        and
        warrants for the periods ended September 30, 2005 and 2004. At September
        30,
        2005 and 2004, the number of outstanding stock options and warrants were
        546,650
        and 760,950, respectively. On October 18, 2005, the Board of Directors of
        the
        Company voted to issue options to acquire 217,000 shares of common stock
        for the
        exercise price of $.10 a share.
 
 **3.**
              **Acquisition
                  of Software and Website**
 
 On
        May 5,
        2005 the Company entered into a software purchase agreement with 62NDS Solutions
        Ltd. (the seller) to acquire certain software technology to support scanning,
        analysis, search and updating of system software in remote devices named
        UpdateFX (the Software). The purchase price, with interest imputed at 8%,
        is
        $292,880 payable to the seller as follows: $22,500 paid at closing, $22,500
        payable at delivery (originally anticipated in October 2005) and varying
        semi-annual payment thereafter through April 2009, and 500,000 shares of
        the
        Company’s unregistered common stock valued at $25,000. During September 2005 the
        Company made a payment of $9,825 to 62NDS Solutions Ltd. The delivery of
        the
        product has been delayed until November 2005.
  The
        500,000 shares of common stock shall be issued after closing and maintained
        in
        an escrow account and shall be released from escrow on each payment date,
        in
        equal installments of 50,000 shares with the final release six months after
        the
        final payment date. The shares are subject to a lock-up agreement whereby
        the
        seller may not sell or transfer the shares for a period of six-months after
        receipt.
 
 Mr.
        Narath originally purchased two websites in April 2005 for cash consideration
        of
        $105,000. A deposit of $35,000 was paid by Mr. Narath and the balance of
        $70,000
        was due by January 2006. Mr. Narath transferred ownership of these two websites
        to the Company as payment of his personal note. On September 8, 2005 the
        Company
        was assigned ownership of the two websites from Mr. Narath and assumed the
        debt
        owed in connection with these websites.
 
 **4.**
              **Note
                  Receivable - Stockholder**
 
 In
        January 2000, the Company advanced under a promissory note, $408,000 to Pierre
        Narath, the Company's Chairman of the Board. The note bore interest at the
        prime
        rate adjusted annually at the note's anniversary date and originally matured
        February 2005. Mr. Narath had foregone payment of his 1999 and 2000 bonuses,
        which aggregated $281,000 and the Company applied this amount against the
        outstanding loan balance. At December 31, 2000, the remaining balance of
        $127,000 was reclassified as deferred compensation with the shareholder's
        equity
        section of the balance sheet, to be applied against Mr. Narath's future
        compensation. During 2001, approximately $85,000 of Mr. Narath's 2001
        compensation was applied against the remaining balance. No compensation was
        applied against the balance during 2004 and 2003. On March 29, 2005, the
        balance
        remaining was transferred to an unsecured note receivable from Mr. Narath.
        The
        balance due under the note is due and payable March 2010. Interest on this
        note
        will accrue monthly at 5% per annum and will be paid on or before the note's
        due
        date. Mr. Narath paid $7,184 on June 30, 2005, reducing the balance on that
        date
        to $35,000. On September 8, 2005 Mr Narath also transferred ownership of
        two
        websites for which he previously made a deposit of $35,000 to payoff the
        remainder of the note. At September 30, 2005 the note is paid in
        full.
 
 **5.**
              **Note
                  Receivable - Related Party**
 
 Note
        recei vable
        -
        related party of $24,777 at September 30, 2005, represents the remaining
        balance
        due from Metro Investments, LLC (“Metro”) under an amended note dated January
        2001. Metro is owned by Pierre Narath, the Company’s Chairman of the Board and
        Jason Raza, the Company’s President and Chief Executive Officer. The amended
        note was due December 31, 2004. On March 29, 2005, the note was extended
        under
        the following terms: Metro transferred investment securities with a value
        of
        $36,800 which were applied against the outstanding principal balance; the
        remaining balance will be payable in monthly installments of Mr. Narath's
        monthly consultant fee of $5,000 to the principal balance and a principal
        payment of $450 plus interest at 5.75%; and any
  7
 **TOUCHSTONE
          SOFTWARE CORPORATION AND SUBSIDIARY**
  remaining
        principal and unpaid interest outstanding will be due on or before April
        2010.
        Payments began May 1, 2005.
 
 **6.**
              **Investments**
 
 Investments,
        other at September 30, 2005, include equity instruments of privately held
        internet and technology companies. These investments are accounted for under
        the
        cost method as the Company's ownership represents less than 20% of each
        investee. The Company's carrying value of these investments approximates
        fair
        value at September 30, 2005.
 
 The
        Company regularly reviews the assumptions underlying the operating performance
        and cash flow forecasts in assessing carrying value and or impairment of
        its
        investments. At September 30, 2005, the Company has concluded there has been
        no
        further decline in the value of these investments, therefore no adjustment
        has
        been made to these investments during the quarter.
 
 **7.**
              **Income
                  Taxes**
 
 No
        provision for income taxes is shown in the accompanying consolidated income
        statements as the Company has sufficient net operating loss carryforwards
        available to offset current taxable income levels at September 30, 2005 and
        2004, respectively.
 
 **8.**
              **Stock
                  Options**
 
 The
        Company accounts for its stock-based employee compensation plan under the
        recognition and measurement principles of APB Opinion No. 25, *Accounting
        for Stock Issued to Employees,* and
        related Interpretations. No stock-based employee compensation cost is reflected
        in net income, as all options granted under those plans had an exercise price
        equal to the market value of the underlying common stock on the date of grant.
        The following table illustrates the effect on net income and earnings per
        share
        as if the company had applied the fair value recognition provisions of FASB
        Statement No. 123(R) , *Accounting
        for Stock-Based Compensation,* to
        stock-based employee compensation.
 
 
 **Three
                  Months Ended**
                **September
                  30,**
              
              **Nine
                  Months ended**
                **September
                  30,****2005**
              
              **2004**
              
              **2005**
              
              **2004**Net
                  income (loss)
                as
                  reported
              
              $
              (43,040
              )
              $
              (43,382
              )
              $
              (89,182
              )
              $
              (49,221
              )Pro
                  forma impact of
                expensing
                  options
              
              
              29
              
              
              81
              
              
              89
              
              
              243Pro
                  forma net
                Income
                  (loss)
              
              $
              (43,069
              )
              $
              (43,463
              )
              $
              (89,271
              )
              $
              (49,464
              )Earnings
                  (loss) per share:Basic-as
                  reported
              
              $
              0.00
              
              $
              0.00
              
              
              ($0.01
              )
              $
              0.00Basic-pro
                  forma
              
              $
              0.00
              
              $
              0.00
              
              
              ($0.01
              )
              $
              0.00Diluted-as
                  reported
              
              $
              0.00
              
              $
              0.00
              
              
              ($0.01
              )
              $
              0.00Diluted-pro
                  forma
              
              $
              0.00
              
              $
              0.00
              
              
              ($0.01
              )
              $
              0.00
 
 
 8
 
 **TOUCHSTONE
          SOFTWARE CORPORATION AND SUBSIDIARY**
 
 
 **ITEM
        2. Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations**
  **Overview**
 
 TouchStone
        Software Corporation, Inc. and its consolidated subsidiary, ("TouchStone"
        or
        "the Company") is a provider of system management software, which includes
        basic
        input/output (“BIOS”) software upgrades, personal computer (“PC”) diagnostics
        for personal computers and embedded systems. System management software is
        one
        of the fundamental layers in any microprocessor-based system (including PCs)
        architecture and provides an essential interface between the systems’s operating
        software and hardware. Organized in 1982 as a California corporation, the
        Company reincorporated in Delaware in January 1997. The Company’s executive
        offices are located at 1538 Turnpike Street, North Andover, Massachusetts
        01845,
        and its telephone number is (978) 686-6468.
 
 In
        January 2000, the Company formed eSupport.com, Inc. (a New Hampshire
        Corporation), a wholly-owned subsidiary, which currently conducts the day
        to day
        operations. The Company's core product is BIOS, which is the software initially
        executed after the system is turned on, tests and initializes hardware
        components, initiates the operating system and then provides advanced interface
        functions. BIOS software upgrades allow end-users of desktop PCs to extend
        the
        life of their systems and reduce the overall ownership cost of a PC. During
        the
        past several years, eSupport has grown into a full-service engineering company
        supplying not only BIOS software upgrades, but also PC diagnostics software
        and
        NRE (non-recurring engineering) services to both end-users and OEM customers.
        As
        the evolution of software and hardware has become more complex, the need
        for
        compatibility has increased in importance. The Company believes that its
        experience and customer focus allow it to quickly identify solutions and
        market
        products compatible with the array of operating systems, application programs,
        utilities and hardware products available.
 
 eSupport’s
        customers include primarily end-users, enterprises such as Fortune 500
        corporations, government agencies, major educational and financial institutions,
        designers and manufacturers of motherboards, PC systems and other
        microprocessor-based or embedded devices. eSupport markets and licenses its
        products and services worldwide.
 
 
 ***Industry
        Overview***
 
 During
        the last decade, the personal computer industry has grown rapidly - fueled
        most
        recently by the Internet. The Company believes that the market will continue
        to
        expand in the future as technological advances and increased functionality,
        combined with lower pricing, will increasingly make personal computers common
        for use in both homes and businesses. Future changes in the operating systems
        that run personal computers may contain some of the functionality of certain
        utility software of the kind marketed by the Company. The software industry,
        including the utility market, is increasingly being dominated by a few very
        large competitors. However, the Company believes that the complexities created
        by the Internet, multimedia and connectivity utilizing enhanced video, stor-age,
        animation, and audio capabilities will continue to drive the demand for new,
        sophisticated, separately installed utility soft-ware and BIOS
        upgrades.
 
 
 
 
 
 
 
 
 
  
 9
  **TOUCHSTONE
          SOFTWARE CORPORATION AND SUBSIDIARY**
  **Results
        of Operations**
  The
        following is a discussion of the financial condition and results of operations
        of the Company as of September 30, 2005 and 2004 and should be read in
        conjunction with the accompanying consolidated financial statements and notes
        thereto and the Company’s audited consolidated financial statements and notes
        thereto for the year ended December 31, 2004, included in the Company’s Annual
        Report on Form 10-KSB and is qualified in its entirety by reference
        thereto.
 
 The
        following table sets forth, for the periods indicated, certain consolidated
        statement of operations information as a percentage of the Company’s total
        revenues represented by each item. The Company’s historical results are not
        necessarily indicative of results in any future period.
 
 **Three**
                **Months**
                **ended**
              **Three**
                **Months**
                **ended**
              **Nine**
                **Months**
                **ended**
              **Nine**
                **Months**
                **ended****September
                  30,**
              **September
                  30,**
              **September
                  30,**
              **September
                  30,****2005**
              **2004**
              **2005**
              **2004**Revenues:Product
                  sales
              99%
              98%
              99%
              97%Royalty
                  income
              0
              2
              0
              3Website
                  income
              1
              -
              1
              -Total
                  revenues
              100
              100
              100
              100Cost
                  of revenues
              14
              17
              16
              15Gross
                  profit
              86
              83
              84
              85Operating
                  expenses:Sales,
                  marketing, general andadministrative
              65
              52
              61
              56Research
                  and development
              35
              44
              31
              34Total
                  operating expenses
              100
              96
              92
              90Income
                  (loss) from operations
              (14)
              (13)
              (8)
              (5)Other
                  income, net
              1
              1
              0
              1Net
                  income (loss)
              (13)%
              (12)%
              (8)%
              (4)%
 
 **Comparison
        of Nine Month Periods Ended September 30, 2005 and 2004**
 
 ***Revenues*** **.** The
        Company’s revenues consist of product sales, royalties and engineering services
        revenues. Product revenues are recorded at the time products are shipped.
        Royalty income is recognized upon receipt of a royalty report and payment
        from
        the licensor. Engineering services revenue generally consists of amounts
        charged
        for customization of the software prior to delivery and are generally recognized
        as the services are performed. For the nine months ended September 30, 2005,
        the
        Company experienced an overall decrease in revenues of approximately 6% as
        compared to the same period a year ago. The decrease in revenue is due to
        a
        decrease in some third party products which have been phased out. Royalty
        revenue is now obsolete with all contracts for Royalties cancelled. Web site
        income is derived from various clients who pay for advertising space on the
        two
        websites the Company owns. That income is earned monthly.
 
 10
  **TOUCHSTONE
          SOFTWARE CORPORATION AND SUBSIDIARY**
 ***Cost
        of Revenues.*** Cost of
        revenues consists of the cost of materials, freight expenses, royalties paid
        to
        other software development companies and direct costs associated with
        engineering services revenues. Cost of revenues as a percentage of revenue
        increased to 16% of revenues for the nine month period ended September
        30, 2005 from 15% for the same period a year ago. This is due mainly to an
        increase in costs associated with new third party products the Company has
        introduced on a test basis and the increase of shipping costs and materials.
 
 ***Sales,
        Marketing, General and Administrative*** **.** Sales,
        marketing, general and administrative expenses consist primarily of salaries
        & commissions, professional services and facilities costs. Sales, marketing,
        general and administrative expenses increased by 3%, for the nine month period
        ended September 30, 2005, from the same period one year ago. This is due
        to
        increase in advetising expenses.
  ***Research
        and Development*** **.** Research
        and development expenses consist primarily of engineering personnel and related
        expenses. Research and development expenses decreased approximately 14% for
        the
        nine month period ended September 30, 2005 from the same period one year
        ago.
        This is due to payroll decreasing slightly from a payroll
        classification.
 
 ***Other
        Income, Net*** **.** Other
        income, net consists of interest income associated with the related party
        note,
        interest income from the Company's money market accounts, and interest expense
        associated with the Company credit card. Other income decreased by approximately
        $4,800 for the nine month period ended September 30, 2005 as compared to
        the
        same period one year ago. The decrease is due to the interest of the related
        party note having lower interest income due to a re-organization of the terms
        of
        that note. The decrease is also due to the interest from the money market
        accounts being lower due to a lower cash balance in one of these accounts.
 
 **Liquidity
        and Capital Resources**
 
 During
        the nine months ended September 30, 2005, the Company had a decrease in cash
        from operating activities of approximately $36,000 as compared to a decrease
        in
        cash from operating activities of approximately $53,000 during the same nine
        month period a year ago. The main factor of this decrease in cash flow is
        the
        net operating loss the Company has had through the first nine months of
        2005.
 
 The
        Company’s cash balance at September 30, 2005 was approximately $194,000 as
        compared to approximately $293,000 a year ago.
 
 On
        May 5,
        2005 the Company entered into a software purchase agreement with 62NDS Solutions
        Ltd. (the seller) to acquire certain software technology to support scanning,
        analysis, search and updating of system software in remote devices named
        UpdateFX (the Software). The purchase price, with interest imputed at 8%,
        is
        $292,880 payable to the seller as follows: $22,500 paid at closing, $22,500
        payable at delivery (originally anticipated in October 2005) and varying
        semi-annual payment thereafter through April 2009, and 500,000 shares of
        the
        Company’s unregistered common stock valued at $25,000. During September 2005 the
        Company made a payment of $9,825 to 62NDS Solutions Ltd. The delivery of
        the
        product has been delayed until November 2005.
  The
        500,000 shares of common stock shall be issued after closing and maintained
        in
        an escrow account and shall be released from escrow on each payment date,
        in
        equal installments of 50,000 shares with the final release six months after
        the
        final payment date. The shares are subject to a lock-up agreement whereby
        the
        seller may not sell or transfer the shares for a period of six-months after
        receipt.
 
 Mr.
        Narath originally purchased two websites in April 2005 for cash consideration
        of
        $105,000. A deposit of $35,000 was paid by Mr. Narath and the balance of
        $70,000
        was due by January 2006. Mr. Narath transferred ownership of these two websites
        to the Company as payment of his personal note. On September 8, 2005 the
        Company
        was assigned ownership of the two websites from Mr. Narath and assumed the
        debt
        owed in connection with these websites.
  11
 **TOUCHSTONE
          SOFTWARE CORPORATION AND SUBSIDIARY**
 
 The
        impact of inflation during 2005 has had no material impact on our business
        and
        financial results.
 
  
 ***SPECIAL
        NOTE REGARDING FORWARD-LOOKING STATEMENTS***
 
 The
        report, other than historical financial information, includes forward-looking
        statements that involve known and unknown risks and uncertainties, including
        quarterly flucutations in results. Such statements are made pusuant to the
        "safe
        harbor" provisions established by recent securities legislations, and are
        based
        on the assumptions and expectations of the Company's management at the time
        such
        statements are made. Important factors that could cause actual results to
        differ
        include the timely availability and acceptance of new products, general market
        conditions governing supply and demand, the impact of competitive products
        and
        pricing and other risks detailed in the Company's filings with the Securities
        and Exchange Commission. Actual results may vary materially. Accordingly
        you
        should not place undue reliance on any forward-looking statements. Unless
        otherwise required by law, the Company disclaims any obligations to revise
        or
        update such forward-looking statements in order to reflect future events
        or
        developments.
 
 
 **ITEM
        3. Controls and
        Procedures**
 
 As
        of
        September 30, 2005, an evaluation was performed under the supervision and
        with
        the participation of the Company's management, including the Chief Executive
        Officer and the Accounting Manager, of the effectiveness of the design and
        operation of the Company's disclosure controls and procedures. Based on that
        evaluation, the Company’s management, including the Chief Executive Officer and
        the Accounting Manager, concluded that the Company’s disclosure controls and
        procedures were effective as of September 30, 2005. There have been no
        significant changes in the Company’s internal controls or in other factors that
        could significantly affect internal controls subsequent to September 30,
        2005.
 
  
  
  
  
  
  
  
 12
  **TOUCHSTONE
          SOFTWARE CORPORATION AND SUBSIDIARY**
 
  **PART
        II** **3⁄4** **OTHER
        INFORMATION**
  **ITEM
        1.** **Legal
        Proceedings**
  None
 
 **ITEM
        2.** **Changes
        in Securities**
 
 None
 
 **ITEM
        3.** **Defaults
        Upon Senior Securities**
  None
 
 **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
        10.15 Software Purchase Agreement (included as Exhibit 10.15 to the Company's
        quarterly
 report
        on
        Form 10-QSB for the quarter ended June 30, 2005 and incorporated herein by
        reference)
 Exhibit
        10.16 Website Purchase Agreement
 Exhibit
        31.1 Certification Pursuant to Rule 13a-14 of the Securities Exchange Act
        of
        1934
 Exhibit
        31.2 Certification Pursuant to Rule 13a-14 of the Securities Exchange Act
        of
        1934
 Exhibit
        32 Certifications Pursuant to Rule 13a-14(b) of the Securities Exchange Act
        of
        1934
  (b)
        Reports on Form 8-K
 On
        September 29, 2005, the Company filed a current report on Form 8-K to announce
        the acquisition
 of
        the
        two websites, www.totallydrivers.com and www.driversdb.com.
   
 13
 
 **TOUCHSTONE
          SOFTWARE CORPORATION AND SUBSIDIARY**
 
 **SIGNATURES**
 
 **In
        accordance with the requirements of the Exchange Act, the registrant caused
        this
        report to be signed on its behalf by the undersigned, thereunto duly
        authorized.**
  **TouchStone
                  Software Corporation**
                (Registrant)Date: November
                14, 2005
              By:
              /s/ Jason
                K. Raza**Jason
                K. Raza**Chief
                Executive Officer and President Date: November
                14, 2005
              By:
              /s/ Michelle
                L. Carrozzella**Michelle
                L. Carrozzella**Accounting
                Manager
 
 14