<PAGE>   1

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                   FORM 10-QSB

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997

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

For the transition period from ________________ to _________________

Commission file No. 0-12969

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

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

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

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

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

              Yes    X                           No 
                  -------                           -------

                        As of November 1, 1997 there were
                  7,867,585 shares of Common Stock outstanding


                                       1
<PAGE>   2

                         PART I - FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS
         --------------------

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


<TABLE>
<S>                                                          <C>         
A S S E T S 
-----------
Current assets:
  Cash and cash equivalents                                  $    740,510
  Restricted cash                                                 500,000
  Investments                                                   8,871,079
  Income tax refund receivable                                     32,790
  Accounts receivable, net                                        241,593
  Inventories                                                     190,964
  Prepaid expenses and other current assets                       219,838
                                                             ------------
       Total current assets                                    10,796,774

Investments                                                     2,085,080
Property, net                                                     455,968
Other assets                                                       31,169
                                                             ------------
                                                             $ 13,368,991
                                                             ============

LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
  Accounts payable                                           $  1,478,220
  Accrued payroll and related expenses                            410,644
  Accrued cooperative advertising costs                           778,005
  Other accrued liabilities                                       624,527
                                                             ------------
       Total current liabilities                                3,291,396

Deferred compensation                                              74,500
Deferred lease obligation                                          56,292

Shareholders' equity:
  Preferred stock, $.001 par value, 3,000,000
    shares authorized, none issued or outstanding
  Common stock, $.001 par value; 20,000,000 shares
    authorized; issued and outstanding, 7,856,335 shares            7,856
  Additional paid-in capital                                   18,639,301
  Accumulated deficit                                          (8,676,265)
  Notes receivable from sale of common stock                      (24,089)
                                                             ------------
       Total shareholders' equity                               9,946,803
                                                             ------------
                                                             $ 13,368,991
                                                             ============
</TABLE>

             See accompanying notes to consolidated financial statements

                                       2
<PAGE>   3

                         TOUCHSTONE SOFTWARE CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                          Three months                     Nine months
                                       ended September 30,             ended September 30,
                                       1997          1996             1997             1996
                                       ----          ----             ----             ----
<S>                                 <C>           <C>              <C>             <C>        
Revenues:
  Product sales                     $1,319,643    $2,366,084       $ 5,987,713     $ 4,641,210
  Royalty income                       123,612        94,792           256,888         257,997
                                    ----------    ----------       -----------     -----------
       Total revenues                1,443,255     2,460,876         6,244,601       4,899,207
Cost of sales                          484,350     1,026,179         2,404,601       2,415,731
                                    ----------    ----------       -----------     -----------
       Gross profit                    958,905     1,434,697         3,840,000       2,483,476
Operating expenses:
  Sales and marketing                1,066,253     1,250,996         3,665,711       3,449,287
  General and administrative           315,271       340,014         1,034,527       1,124,453
  Research and development             458,629       407,240         1,754,139       1,012,172
  Litigation settlement and 
   related costs                                                                     1,811,941
                                    ----------    ----------       -----------     -----------
  Total operating expenses           1,840,153     1,998,250         6,454,377       7,397,853
                                    ----------    ----------       -----------     -----------
       Loss from operations           (881,248)     (563,553)       (2,614,377)     (4,914,377)
Other income, net                      167,588       208,588           534,573         613,250
                                    ----------    ----------       -----------     -----------
Net loss                            $ (713,660)   $ (354,965)      $(2,079,804)    $(4,301,127)
                                    ==========    ==========       ===========     ===========

Net loss per share                  $    (0.09)   $   (0.05)       $     (0.27)    $     (0.57)
                                    ==========    =========        ===========     ===========

Weighted average shares              7,847,000    7,669,000          7,833,000       7,507,000
                                    ==========    =========        ===========     ===========
</TABLE>

             See accompanying notes to consolidated financial statements

                                       3
<PAGE>   4

                         TOUCHSTONE SOFTWARE CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                               Nine months         Nine months
                                                                  ended               ended
                                                           September 30, 1997   September 30, 1996
                                                           ------------------   ------------------
<S>                                                            <C>               <C>          
Cash flows from operating activities:
  Net loss                                                     $ (2,079,804)     $ (4,301,127)
  Adjustments to reconcile net loss to net
    cash flows (used in) provided by operating activities:
    Depreciation and amortization                                   189,752           236,756
    Provision for doubtful accounts                                  44,817            61,304
    Provision for obsolete inventories                              206,550           103,858
    Write-off of software development costs                         151,073
    Other                                                            11,853            24,435
    Issuance of common stock in litigation settlement                                 625,000
Changes in operating assets and liabilities:
    Income tax refund receivable                                                      690,990
    Accounts receivable                                             181,332          (320,787)
    Inventories                                                     329,940          (134,817)
    Prepaid expenses and other current assets                        99,401          (194,214)
    Other assets                                                       (995)            2,501
    Accounts payable                                             (1,229,474)          179,625
    Accrued liabilities                                              51,250           291,626
                                                               ------------      ------------
       Net cash used in operating activities                     (2,044,305)       (2,734,850)
Cash flows from investing activities:
  Capitalized software development costs                                             (141,076)
  Purchase of investments                                       (24,137,657)      (12,929,123)
  Sale of investments                                            24,162,287         7,530,560
  Purchases of property                                            (203,282)         (254,517)
  Sale of property                                                   30,350             7,800
                                                               ------------      ------------
       Net cash used in investing activities                       (148,302)       (5,786,356)

Cash flows from financing activities:
  Proceeds from exercise of stock warrants and
    options and repayment on notes receivable                        39,641            78,029
                                                               ------------      ------------
       Net cash provided by financing activities                     39,641            78,029
                                                               ------------      ------------
Net decrease in cash and cash equivalents                        (2,152,966)       (8,443,177)
Cash and cash equivalents, beginning of period                    2,893,476        12,918,643
                                                               ------------      ------------
Cash and cash equivalents, end of period                       $    740,510      $  4,475,466
                                                               ============      ============
Supplemental cash flow information:
  Interest paid                                                $      1,483      $         --
                                                               ============      ============
  Income taxes paid                                            $         --      $         --
                                                               ============      ============
</TABLE>


             See accompanying notes to consolidated financial statements.

                                       4
<PAGE>   5

                         TOUCHSTONE SOFTWARE CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1997
                                   (UNAUDITED)

1.  GENERAL
    -------

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

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

       At September 30, 1997, accounts receivable is presented net of allowance
 for doubtful accounts, reseller rebate reserves, and product return reserves of
 approximately $111,000, $334,000, and $515,000, respectively. Certain
 distributors' accounts resulted in credit balances and therefore were
 reclassified to accounts payable.

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

       In September 1997, the Company negotiated a bank line of credit which
 allows for borrowings up to $500,000 and expires in September 1998. Borrowings
 will bear interest at the bank's prime rate, and are collateralized by a
 $500,000 certificate of deposit. The bank's prime rate was 8.5% at September
 30, 1997. There were no borrowings under this line of credit at September 30,
 1997. This borrowing facility requires the Company to maintain minimum
 shareholders' equity of $9,000,000, minimum aggregate cash, cash equivalents
 and investments of $10,000,000, prohibits acquisitions of other entities
 without the prior approval of the bank, and restricts the payments of cash
 dividends.

                                       5
<PAGE>   6

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

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

GENERAL

       The Company's revenues consist of product sales and royalty income.
Royalty income is derived, from international sales of the Company's products
under agreements with co-publishers, and OEM customers in the U.S.

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

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

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

       The Company's quarterly operating results may fluctuate significantly due
to a variety of factors, including changes in the Company's product and customer
mix, the number and timing of new product introductions by the Company or its
competitors, pricing pressures, general economic conditions, and other factors.
Products are generally shipped as orders are received and, accordingly, the
Company has historically operated with relatively little backlog. As a result,
quarterly revenue will depend on the volume and timing of orders received during
a particular quarter, both of which are difficult to forecast. In addition, the
Company will continue to incur product development, marketing, and promotional
expenses based upon management's expectations as to future sales. Since many of
these expenses are committed in advance, the Company generally is unable to
adjust spending in a timely manner to compensate for any unexpected shortfall in
sales. If operating revenues do not meet the Company's expectations in any given
quarter, operating results may be adversely affected.

                                       6
<PAGE>   7

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

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

                                       7
<PAGE>   8

PRODUCTS

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

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

CheckIt           CheckIt version 5 for Windows 95! gets all the detailed system          October 1997 
                  information, tests system components, pinpoints problems,
                  locates hidden conflicts, and restores critical system files
                  for fast and easy PC troubleshooting. CheckIt automatically
                  detects problems, identifies exactly what isn't working, and
                  guides the user directly to the information and tests needed
                  to fix it.

CheckIt           The CheckIt Professional Edition features the portable,                 October 1997
Professional      self-booting diagnostics of CheckIt for DOS, new CheckIt v. 5
Edition(R)        for Windows 95, and the award-winning PC-cillin 3.0
                  Anti-Virus. Professional technicians use this product to
                  troubleshoot PC problems, test hardware components, diagnose
                  setup conflicts, optimize modem configuration, calibrate video
                  components, benchmark PC performance, and conduct burn-in and
                  certification tests. The CheckIt Professional Edition includes
                  a year of free program upgrades via the Internet.

e.Support(R)      e.Support is an electronic support system which allows users            December 1996 
                  to communicate with multiple vendors from one simple user               (Testing)
                  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 contains the option to
                  include system diagnostic information, and user-attached
                  files.

PC-cillin(R)      PC-cillin provides automatic protection from computer viruses.          November 1995 
                  PC-cillin monitors virus sources, adjusts protection                    (last update
                  automatically, and removes viruses. PC-cillin's exclusive               July 1997)
                  patent-pending Macro Trap(R) technology detects both known and
                  unknown macro viruses. PC-cillin is available for DOS,
                  Windows3.1, Windows 95, and Windows NT.

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

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

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

                                       8
<PAGE>   9

RESULTS OF OPERATIONS

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

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

<TABLE>
<CAPTION>
                                      Three months                 Nine months
                                   ended September 30,         ended September 30,
                                  1997          1996            1997         1996
                                  ----          ----            ----         ----
<S>                              <C>          <C>              <C>          <C>   
Revenue:
    Product sales                 91.4%         96.1%           95.9%        94.7%
    Royalty income                 8.6           3.9             4.1          5.3
                                 -----        ------           -----        -----
       Total revenue             100.0         100.0           100.0        100.0
Cost of sales                     33.6          41.7            38.5         49.3
                                 -----        ------           -----        -----
       Gross profit               66.4          58.3            61.5         50.7
                                 -----        ------           -----        -----
Sales and marketing               73.9          50.8            58.7         70.4
General and administrative        21.8          13.8            16.6         22.9
Research and development          31.8          16.5            28.1         20.7
Litigation costs                                                             37.0
                                 -----        -----            -----        -----
Total operating expenses         127.5          81.1           103.4        151.0
                                 -----        ------           -----        -----
Loss from operations             (61.1)        (22.8)          (41.9)      (100.3)
Other income, net                 11.6           8.5             8.6         12.5
                                 -----        ------           -----        -----
       Net loss                  (49.5)%       (14.3)%         (33.3)%      (87.8)%
                                 =====        ======           =====        =====
</TABLE>


COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996

       Revenue. Product sales decreased from 1996 to 1997 as PC-cillin sales
were impacted by the increasing competition in the anti-virus product market. A
new version of PC-cillin shipped in July but retail sales did not begin until
August. Other products also declined in sales as a result of competition and the
maturing of the WINCheckIt 4.0 product line.

       Royalty income increased slightly from 1996 to 1997. Due to the decrease
in product sales, royalty income increased as a percentage of total revenues,
from 3.9% in 1996 to 8.6% in 1997.

       Gross Profit. Gross profit as a percentage of total revenues increased
from 58.3% in 1996 to 66.4% in 1997. The primary reasons for this increase was
lower costs of material associated with a different mix of products.
Additionally, there was no amortization of development costs in 1997 as all
development costs had been previously expensed.

       Sales and Marketing Expense. The decrease in sales and marketing expense
was primarily attributable to a decrease in commissions, direct mail
advertising, and outside services in 1997 as compared to 1996. Due to the
decrease in product sales, sales and marketing expenses increased as a
percentage of total revenues from 50.8% in 1996 to 73.9% in 1997.

       General and Administrative Expense. The decrease in general and
administrative expense from 1996 to 1997 was insignificant. Due to the decrease
in product sales, general and administrative expenses increased as a percentage
of total revenues from 13.8% in 1996 to 21.8% in 1997.

       Research and Development Expense. Research and development expense
increased in 1997 from 1996 as the Company hired additional programmers to
develop new products and upgrade the Company's existing product line. In
combination with the increased expense and the decrease in product sales,
research and development expense increased as a percentage of total revenues,
from 16.5% in 1996 to 31.8% in 1997.

                                       9
<PAGE>   10

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

COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996

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

       Royalty income was not significantly different in 1997 compared to 1996.
Due to the increase in product sales, royalty income decreased as a percentage
of total revenues, from 5.3% in 1996 to 4.1% in 1997.

       Gross Profit. Gross profit as a percentage of total revenues increased
from 50.7% in 1996 to 61.5% in 1997. The gross profit for the nine months ended
September 30, 1996 was unusually low due to inventory write-offs occurring in
the first quarter of 1996 resulting from returned product. Additionally, gross
profit is higher in 1997 due to decreased amortization of software development
costs.

       Sales and Marketing Expense. The increase in sales and marketing expense
was primarily attributable to an increase in the number of customer service and
marketing personnel in 1997 as compared to 1996. Additionally, retail promotion
and advertising costs also increased from 1996 to 1997. Further, sales and
marketing expense increased in 1997 due to marketing research costs incurred in
connection with the Company's e.Support product line. Such increased costs were
offset somewhat by reduced costs of the Company's European operations. Due to
the increase in product sales, sales and marketing expenses declined as a
percentage of total revenues from 70.4% in 1996 to 58.7% in 1997.

       General and Administrative Expense. General and administrative expense in
the nine months ended September 30, 1996 included compensation expense recorded
in connection with the resignation of a Company officer. Excluding this cost,
general and administrative expense increased in 1997 from 1996 levels due to
legal costs incurred in connection with certain terminated acquisition
activities. Additionally, facility rent and equipment depreciation increased
from 1996 to 1997. As a percentage of total revenues, general and administrative
expenses declined from 22.9% in 1996 to 16.6% in 1997.

       Research and Development Expense. Included in research and development
expense during the second quarter of 1997 was a one-time charge of $151,000 to
write-off previously capitalized costs incurred to develop the Company's
e.Support product. Additionally, research and development expense increased in
1997 from 1996 as the Company hired additional programmers and increased the use
of outside programmers to develop new products and upgrade the Company's
existing product line. Research and development expense increased as a
percentage of total revenues, from 20.7% in 1996 to 28.1% in 1997.

                                       10
<PAGE>   11

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

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

LIQUIDITY AND CAPITAL RESOURCES

       During the nine months ended September 30, 1997 the Company used cash
resources of $2,044,000 for operating activities and purchased equipment
totaling $203,000. The Company sold investments in debt securities totaling
$24,162,000, and purchased similar securities aggregating $24,138,000. The
Company also received proceeds from exercises of common stock options
aggregating $40,000.

       The Company's cash, cash equivalents, restricted cash, and investments
totaled $12,197,000 at September 30, 1997. Working capital increased from
$7,152,000 at December 31, 1996 to $7,505,000 at September 30, 1997. Cash and
cash equivalents decreased from $2,894,000 at December 31, 1996 to $741,000 at
September 30, 1997. The decline in cash and cash equivalents and working capital
was due primarily to the net loss incurred by the Company in the nine months
ended September 30, 1997.

       In September 1997 the Company negotiated a bank line of credit which
allows for borrowings up to $500,000 and expires in September 1998. Borrowings
will bear interest at the bank's prime rate, and are collateralized by a
$500,000 certificate of deposit. The bank's prime rate at September 30, 1997 was
8.5%. There were no borrowings under the bank line of credit at September 30,
1997. This borrowing facility requires the Company to maintain minimum
shareholders' equity of $9,000,000, minimum aggregate cash, cash equivalents and
investments of $10,000,000, prohibits acquisitions of other entities without the
prior approval of the bank, and restricts the payments of cash dividends.

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

RECENT ACCOUNTING PRONOUNCEMENT

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

       In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income, ("SFAS No. 130"). This statement establishes standards for the reporting
of comprehensive income and its components in a financial statement that is
displayed with the same prominence as other financial statements. Comprehensive
income, as defined, includes all changes in equity (net assets) during a period
from non-owner sources. Examples of items to be included in comprehensive
income, which are excluded from net income, include foreign currency translation
adjustments and unrealized gain/loss on available-for-sale securities. The
disclosures prescribed by SFAS No. 130 are effective beginning with the first
quarter of calendar 1998.

                                       11
<PAGE>   12

       In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information, ("SFAS No. 131"). This statement
establishes standards for the way companies report information about operating
segments in annual financial statements. It also establishes standards for
related disclosure about products and services, geographic areas and major
customer. The Company has not yet determined the impact, if any, of adopting
this new standard. The disclosures prescribed by SFAS No. 131 are effective for
calendar 1998.

BUSINESS RISKS

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

       These risk factors include the risk that the products under development
prove more difficult to develop than currently anticipated, resulting in delays
in reaching the market or even in planned products having to be abandoned.
Moreover, with or without delays in bringing new products to market, it is
possible that the Company's competitors will bring to market successful
competing products which reduce the size of, or eliminate altogether, the market
for the Company's planned products. Furthermore, several of the products under
consideration involve complicated communication systems, which is an area where
the Company has little experience, and thus it may find that the technological
problems are more difficult than presently anticipated. In addition, the
software industry is characterized by rapid change and technological
advancement, including a trend by hardware manufacturers to feature pre-loaded
software packages in computers. This could reduce demand for the Company's
products, if such pre-loaded software performs many of the same functions as the
Company's currently marketed or currently under-development software.

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

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

                                       12
<PAGE>   13

                           PART II - OTHER INFORMATION

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

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

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

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

    Exhibit 27 - Financial Data Schedule.

b.  Reports on Form 8-K

    None

                                       13
<PAGE>   14

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

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

                                  TOUCHSTONE SOFTWARE CORPORATION
                                  (Registrant)

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


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

                                       14
<PAGE>   15

                                INDEX TO EXHIBIT

<TABLE>
<CAPTION>
EXHIBIT
NUMBER             DESCRIPTION
-------      -------------------------------------------------------------------
<C>          <S>                                                                
   27        Financial Data Schedule
</TABLE>

                                       15