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
      NumberMarch 31,
      2008
              0-12969
 
 TOUCHSTONE SOFTWARE CORPORATION
 (Exact name of registrant as
specified in its charter)
 
 
 Delaware
              95-3778226(State
      or other jurisdiction
              (I.R.S.
      Employerof
      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. YesxNo 
o
  The
number of shares of Common Stock of the Registrant outstanding as of May 13,
2008  was 12,135,060
shares.





TOUCHSTONE
SOFTWARE CORPORATION AND SUBSIDIARIES


INDEX






PART
      I.
              Financial
      Information
              Page
                NumberITEM
      1.
              Financial
      StatementsConsolidated
      Balance Sheet — March 31,
      2008
              3Consolidated
      Income Statements — Three Months Ended March 31, 2008 and March 31,
      2007
              4Consolidated
      Statements of Cash Flows — Three Months Ended March 31, 2008 and March 31,
      2007
              5Notes
      to Consolidated Financial Statements
              6-7ITEM
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              8-10ITEM
      3.
              Controls
      and Procedures
              10PART
      II.
              Other
      InformationITEM
      1.
              Legal
      Proceedings
              11ITEM
      2.
              Changes
      in Securities
              11ITEM
      3.
              Defaults
      Upon Senior Securities
              11ITEM
      4.
              Submission
      of Matters To a Vote of Security Holders
              11ITEM
      5.
              Other
      Information
              11ITEM
      6.
              Exhibits
      and Reports on Form 8-K
              11Signatures
              
              12Exhibits
              
              13-14










2


TOUCHSTONE
SOFTWARE CORPORATION AND SUBSIDIARIES




PART
I – FINANCIAL INFORMATION





ITEM
1.  Financial Statements


CONSOLIDATED
BALANCE SHEET


March
31, 2008


(unaudited)







AssetsCurrent
      assets:Cash and cash
      equivalents
            
            $
            1,814,837Accounts receivable,
      net
            
            
            103,942Inventories
            
            
            7,743Prepaid expenses and other
      current assets
            
            
            24,292Total
      current assets
            
            
            1,950,814Investments
            
            
            184,527Deferred
      tax asset
            
            
            1,000,000Property
      and equipment, net
            
            
            518,971$
            3,654,312Liabilities and
      Shareholders’ EquityCurrent
      liabilities:Accounts payable
            
            $
            82,351Accrued payroll and related
      expenses
            
            
            101,837Other accrued
      expenses
            
            
            153,445Total
      current liabilities
            
            
            337,633Shareholders’
      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, 12,085,060 shares
            
            
            12,085Additional paid-in
      capital
            
            
            21,192,458Accumulated
    deficit
            
            
            (17,887,864
            )Shareholders’
      equity, net.
            
            
            3,316,679$
            3,654,312













The
accompanying notes are an integral part of these consolidated financial
statements.




3


TOUCHSTONE
SOFTWARE CORPORATION AND SUBSIDIARIES


CONSOLIDATED
INCOME STATEMENTS


(unaudited)







Three Months Ended
              March
      31,2008
            
            
            2007Revenues:Product
      sales
            
            $
            1,151,896
            
            
            $
            1,087,035NRE
            
            
            25,000
            
            
            
            —Website
      income
            
            
            11,731
            
            
            
            14,991Total
      revenues
            
            
            1,188,627
            
            
            
            1,102,026Cost
      of revenues
            
            
            16,834
            
            
            
            31,919Gross
      profit
            
            
            1,171,793
            
            
            
            1,070,107Operating
      expenses:Sales,
      marketing, general and administrative
            
            
            880,508
            
            
            
            603,555Research
      and development
            
            
            255,062
            
            
            
            137,837Total
      operating expenses
            
            
            1,135,570
            
            
            
            741,392Income
      from operations
            
            
            36,223
            
            
            
            328,715Interest
      income-net
            
            
            11,420
            
            
            
            4,876Income
      before provision for state income taxes
            
            
            47,643
            
            
            
            333,591Provision
      for state income taxes
            
            
            11,778
            
            
            
            23,368Net
      Income
            
            $
            35,865
            
            
            $
            310,225Basic
      earnings  per share
            
            $
            0.00
            
            
            $
            0.03Basic
      weighted average shares outstanding
            
            
            12,061,653
            
            
            
            11,940,060Diluted  earnings
      per share
            
            $
            0.00
            
            
            $
            0.03Diluted
      weighted average shares outstanding
            
            
            12,708,153
            
            
            
            11,940,060












The
accompanying notes are an integral part of these consolidated financial
statements.





4


TOUCHSTONE
SOFTWARE CORPORATION AND SUBSIDIARIES





CONSOLIDATED
STATEMENTS OF CASH FLOWS


(unaudited)







Three months ended
              March 31,2008
            
            
            2007Cash
      flows from operating activities:Net income
            
            $
            35,865
            
            
            $
            310,223Adjustments to reconcile net
      income to net cash provided by operating activities:Depreciation
            
            
            40,855
            
            
            
            27,285Stock
      option compensation
            
            
            25,249
            
            
            
            9,110Common
      stock issued as compensation
            
            
            33,300Changes
      in assets and liabilities:Accounts
      receivable
            
            
            (94,855
            )
            
            
            6,761Inventories
            
            
            (389
            )
            
            
            1,786Prepaid
      expenses and other current assets
            
            
            11,220
            
            
            
            (18,658
            )Accounts
      payable
            
            
            18,553
            
            
            
            16,235Accrued
      liabilities
            
            
            97,504
            
            
            
            (13,623
            )Net
      cash provided by operating activities
            
            
            167,302
            
            
            
            339,119Cash
      flows from investing activities:Additions
      to Property and Equipment
            
            
            (911
            )
            
            
            —Net
      cash (used in) investing activities
            
            
            (911
            )
            
            
            —Net
      increase in cash and cash equivalents
            
            
            166,391
            
            
            
            339,119Cash
      and cash equivalents, beginning of period
            
            
            1,648,446
            
            
            
            924,661Cash
      and cash equivalents, end of period
            
            $
            1,814,837
            
            
            $
            1,263,780Supplemental
      disclosure of cash flow information:Cash paid during the period
      for:Interest
            
            $
            235
            
            
            $
            —Income
      taxes
            
            $
            28,305
            
            
            $
            —






















The
accompanying notes are an integral part of these consolidated financial
statements.




5


TOUCHSTONE
SOFTWARE CORPORATION AND SUBSIDIARIES


Notes
to Consolidated Financial Statements







1.
              Summary of Significant
      Accounting Policies





Nature of Operations.  TouchStone
Software Corporation and its subsidiaries (“TouchStone” or the “Company”)
markets, and supports a line of computer prob­lem-solving utility software
and supporting products and engineering services which sim­plify personal
computer installation, support, and mainte­nance.  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
subsidiaries; eSupport.com, Inc. and 62nds Solutions Ltd. 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, 2007.  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 ended March 31, 2008 are not necessarily
indicative of the results to be expected for the full year.





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 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 for the periods ended March 31, 2008 and 2007.





3.
            Investments





Investments at March 31, 2008, 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 March 31, 2008.





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 March 31, 2008, 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.





4.
            StateIncome
      Tax





A provision for state income tax of
$11,778 and $23,368 has been provided for in the accompanying consolidated
income statement for the three months ended March 31, 2008 and 2007,
respectively. The Company’s state net operating loss carryforwards have either
expired or have been fully used to offset the Company’s state taxable
income.  The Company has sufficent federal operating loss
carryforwards to offset current federal taxable income.





6
 
 TOUCHSTONE
SOFTWARE CORPORATION AND SUBSIDIARIES


5.
            Stock
      Options





Effective January 1, 2006, the Company
adopted the fair value method, which is considered the preferable accounting
method, of recording stock-based employee compensation as contained in (SFAS)
No. 123 (Revised December 2004).  As a result of adopting the fair
value method for stock compensation, all future awards will be expensed over the
stock options’ vesting period.





On January 4, 2008, January 31, 2008
and March 17, 2008, the Board of Directors voted to issue options to acquire
200,000, 20,000 and 5,000 shares of common stock, respectively, for the exercise
price of $1.30, $1.20 and $1.15, respectively. In accordance with SFAS 123(R),
the Company recorded compensation expense of $25,249 and $9,110 during the three
months ended March 31, 2008 and 2007, respectively.




6.
              Related
      Party Transaction





On March
12, 2008 the Company’s board of directors unanimously approved a bonus to be
paid to the Chairman of the Board, Pierre Narath.  This bonus was paid
with cash considerations and common stock.  A cash payment was made in
March 2008 for $30,000 and 30,000 shares of common stock were issued at a value
of $1.11 per share.  In April 2008 another 30,000 shares of common
stock were issued to Mr. Narath at a value of $1.11 per share.  The
total value of this bonus is $96,600 which is recorded in the consolidated
statement of income for the three months ended March 31, 2008.





7.
            Acquisition
      of Business





On May 1, 2007, the Company executed and
consummated a Stock Purchase Agreement with the shareholders of 62nds Solutions
Ltd. where the Company acquired all of the issued and outstanding capital stock
of 62nds Solutions Ltd. In consideration for the stock of the Company issued to
the former shareholders of the acquired subsidiary, TouchStone paid $128,063,
including legal fees of $8,063, in cash and released 300,000 shares of
restricted common stock which were being held in escrow from a previous purchase
agreement for the Update FX technology. The only asset of 62nds Solutions Ltd.
at the time of acquisition was a note receivable from the Company from a
previous transaction.  The note receivable and related long-term debt
has been eliminated in consolidation.





8.
            Subsequent
      Events




On April
11, 2008 the Company announced that it had signed a definitive agreement to be
acquired by Phoenix Technologies Ltd., (Nasdaq: PTEC), the global leader in core
systems software. Under the terms of the agreement, Touchstone stockholders will
receive $1.48 in cash for each share of Touchstone common stock, representing a
29% premium over the closing price of Touchstone’s stock on April 9,
2008.




The
proposed transaction has been unanimously approved by Touchstone’s board of
directors. The transaction is expected to be completed within 90 days, subject
to various conditions, including approval by Touchstone’s stockholders and other
customary closing conditions. A special meeting of Touchstone’s stockholders
will be scheduled as soon as practicable following the preparation and filing of
proxy materials with the Securities and Exchange Commission.








7


TOUCHSTONE
SOFTWARE CORPORATION AND SUBSIDIARIES


ITEM
2.     Management’s Discussion and Analysis of Financial
Condition and Results of Operations





Overview





TouchStone
Software Corporation, Inc. and its consolidated subsidiaries, (“TouchStone” or
“the Company”) is a software developer for the personal computer industry,
specializing in system update technology. In addition, TouchStone Software
Corporation owns and operates a vast network of Internet web properties. Our
growing portfolio of Internet properties serve as the main outlet to deliver our
quality software products to our mass audience. These products include our
newest product Driver Agent and BIOS Agent.





The Company acquired two strategic web
properties in 2005, www.Totallydrivers.com and www.Driversdb.com, another two in
2006, www.Driverzone.com and www.Mrdriver.com, and four more in the current
year, www.DriverMagic.com, www.PCDrivers.com, www.DriversPlanet.com and
www.Undeleted-plus.com. The addition of these properties, along with the
existing properties of www.esupport.com and www.award-bios.com, supply the
Company with a strategic edge to aggregate customer Internet
traffic.  The increase in customer Internet traffic enhances the
Company’s ability to market its products effectively as these properties
propagate throughout the Internet, helping the Company to become a premier
destination for critical system updates. The increase in traffic from these
properties reduces theneed forother costly avenues of
marketing.  The newly acquired properties also generate advertising
revenue through various sources. The Company continues to seek media properties
to add their ever-growing portfolio.





In December 2005 the Company introduced
Driver Agent.  The Driver Agent technology is based on TouchStone’s
UpdateFX scan, analyze, search and update architecture, which was purchased
during 2005.  Driver Agent’s comprehensive technology enables users to
easily and safely determine if and when critical updates are available for their
PC’s. Through an ActiveX control, Driver Agent will safely scan a user’s PC,
provide a detailed hardware report and then allow the user to view complete
device driver history of installed devices on their system. Driver Agent cross
references the user’s hardware and driver report to a comprehensive proprietary
database compiled of greater than 110,000 updated device drivers. Subscribers to
the Driver Agent service can then quickly and safely download the latest device
drivers for their PC.





The Company’s other products are BIOS
upgrades and RegistryWizard. The 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.
TouchStone Software’s RegistryWizard is an all-in-one tool for detecting and
correcting errors in the Windows registry. The result will help a user optimize
and stabilize the performance of their computer. RegistryWizard offers full
restore points after every scan enabling you to revert to a previous restore
point should corruption of the registry occur. Included with all the diverse
data in your registry are variables that control how quickly certain operations
occur in a computer and in which order they occur. RegistryWizard is able to
examine these variables and adjust them to ensure the best performance for a
user’s PC.








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,
stor­age, animation, and audio capabilities will continue to drive the
demand for new, sophisticated, separately installed utility soft­ware and
BIOS upgrades.







Results
of Operations




The
following is a discussion of the financial condition and results of operations
of the Company as of March 31, 2008 and 2007 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, 2007, included in the Company’s Annual Report on
Form 10-KSB and is qualified in its entirety by reference thereto.





8
 
 TOUCHSTONE
SOFTWARE CORPORATION AND SUBSIDIARIES


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.







2008
            2007Revenues:Product
      sales
            97%
            99%NRE
            2
            —Website
      income
            1
            1Total
      revenues
            100
            100Cost
      of revenues
            1
            3Gross
      profit
            99
            97Operating
      expenses:Sales,
      marketing, general andadministrative
            74
            55Research
      and development
            22
            12Total
      operating expenses
            96
            67Income
      from operations
            3
            30Interest
      income (expense), net
            1
            0Provision
      for state income tax
            (1)
            (2)Net
      income
            3%
            28%








Comparison
of Three Month Periods Ended March 31, 2008  and 2007





Revenues.The Company’s
revenues consist of product sales, web advertising income and engineering
services revenues. Product revenues are recorded at the time products are
shipped.  Web advertising income is recognized upon receipt of a usage
report from the advertiser.  For the three months ended March 31,
2008, the Company experienced an overall increase in product sales of
approximately 6% as compared to the same period a year ago.   The
increase in revenue is due to the success of Driver Agent.  The
Company experienced NRE income this year from a one time engineering project.
Web advertising income decreased 22% due to some restructuring of the sites and
their campaigns. The income is derived from various clients who pay for
advertising space on the websites the Company owns.  That income is
earned monthly.





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. Cost of revenues as a percentage of
revenue decreased to 1% of revenues for the three month period ended March 31,
2008 from 3% for the same period a year ago.  This is due mainly to a
decrease in physical products being shipped to customers and almost no costs
associated with selling the DriverAgent product.





Sales, Marketing,
General and Administrative.  Sales, marketing,
general and administrative expenses consist primarily of salaries &
commissions, professional services, advertising costs and facilities
costs.  Sales, marketing, general and administrative expenses
increased approximately 46%, for the three month period ended March 31, 2008,
from the same period one year ago.  This is mainly due to the legal
costs incurred in relation to the pending transaction witb Phoenix Technologies
of approximately $128,000 and a bonus to the Company’s Chairman of the Board,
Pierre Narath, of $96,600.





9
 
 TOUCHSTONE
SOFTWARE CORPORATION AND SUBSIDIARIES


Research and
Development.  Research and
development expenses consist primarily of engineering personnel and related
expenses.  Research and development expenses increased approximately
85% for the three month period ended March 31, 2008 from the same period one
year ago.  This is due to payroll increasing slightly from annual
increases and the addition of personnel in the Engineering
department.







Liquidity
and Capital Resources





During
the three months ended March 31, 2008, the Company had cash provided by
operating activities of approximately $167,300 as compared to cash provided by
operating activities of approximately $339,100 during the same three month
period a year ago.  The main factor of this decrease in cash flow is
the reduction in net income for the first three months of 2008 compared to
2007.





The
Company’s cash balance at March 31, 2008 was approximately $1,814,800 as
compared to approximately $1,263,800 a year ago.





The
impact of inflation during 2008 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 flucuations in results.  Such statements are made pursuant
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





Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting for the Company as defined in Rule 13a-15(f)
under the Exchange Act. The Company’s internal control over financial reporting
is designed to provide reasonable assurance to the Company’s management and
board of directors regarding the preparation and fair presentation of published
financial statements and the reliability of financial reporting.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.





Management
assessed the effectiveness of the Company’s internal control over financial
reporting as of March 31, 2008. In making this assessment, management used
the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”) in Internal Control - Integrated Framework. Based
on our assessment, we believe that, as of March 31, 2008, the Company’s
internal control over financial reporting is effective based on those
criteria.





This
quarterly report does not include an attestation report of the Company’s
registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the Company’s
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management’s
report in this quarterly report on Form 10-QSB.








10
 
 TOUCHSTONE
SOFTWARE CORPORATION AND SUBSIDIARIES


PART
II —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
2.1 Agreement and Plan of Merger dated April 9, 2008 by and amoung Phoenix
Technologies Ltd., Andover Merger Sub, Inc. and TouchStone Software Corporation,
incorporated by reference to the Exhibits to the Company’s Form 8-k filed on
April 10, 2008 with the Securities and Exchange Commission





Exhibit
2.2 From of Voting Agreement, incorporated by reference to the Exhibits to
the Company’s Form 8-k filed on April 10, 2008 with the Securities and
Exchange Commission





Exhibit
99.1 Press Release dated April 10, 2008, incorporated by reference to the
Exhibits to the Company’s Form 8-k filed on April 10, 2008 with the
Securities and Exchange Commission





Exhibit
31.1 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 March 13, 2008, the
Company filed a current report on Form 8-K to discloseresults
of operations and financial conditions for the year ended December 31,
2007.





On April
10, 2008, the Company filed a current report on Form 8-K to disclose theEntry into a
Material Definitive Agreement with Phoenix Technologies.







11


TOUCHSTONE
SOFTWARE CORPORATION AND SUBSIDIARIES





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)Name
              
              Title
              
              Date/s/
      Jason K. Raza
              
              Chief
      Executive Officer and President
              
              May
      13, 2008Jason
      K. Raza

























































12