**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,
                  2006**
              **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
        10, 2006 was 11,940,060
        shares.
 
 
 
  **TOUCHSTONE
          SOFTWARE CORPORATION AND SUBSIDIARY**
  INDEX
 **Page**
                  **Number****PART
                    I.**
                **Financial
                    Information****ITEM
                    1.**
                Financial
                    StatementsConsolidated
                    Balance Sheet3⁄4September 30, 2006
                3Consolidated
                    Income Statements3⁄4Three Months Ended September 30, 2006 andSeptember
                    30, 2005 and Nine Months Ended September 30, 2006 and September
                    30,
                    2005
                4Consolidated
                    Statements of Cash Flows3⁄4Nine Months Ended September 30, 2006and
                    September 30, 2005
                5Notes
                    to Consolidated Financial Statements
                6-7**ITEM
                    2.**
                Management’s
                    Discussion and Analysis of Financial Condition and Results
                    ofOperations
                8-11**ITEM
                    3.**
                Controls
                    and Procedures
                11**PART
                    II.**
                **Other
                    Information****ITEM
                    1.**
                Legal
                    Proceedings
                12**ITEM
                    2.**
                Changes
                    in Securities
                12**ITEM
                    3.**
                Defaults
                    Upon Senior Securities
                12**ITEM
                    4.**
                Submission
                    of Matter To a Vote of Security Holders
                12**ITEM
                    5.**
                Other
                    Information
                12**ITEM
                    6.**
                Exhibits
                    and Reports on Form 8-K
                12Signatures
                
                13Exhibits
                
                14-16
  2
 **TOUCHSTONE
          SOFTWARE CORPORATION AND SUBSIDIARY**
  **PART
          I - FINANCIAL INFORMATION**
  **ITEM
            1. Financial Statements**
 **CONSOLIDATED
            BALANCE SHEET**
 **September
            30, 2006**
 **(unaudited)**
 
 **Assets**Current
                      assets:Cash
                      and cash equivalents
                  
                  $
                  687,329Accounts
                      receivable, net
                  
                  
                  14,081Inventories
                  
                  
                  14,017Prepaid
                      expenses and other current assets
                  
                  
                  44,684Total
                      current assets
                  
                  
                  760,111Investments
                  
                  
                  184,527Property
                      and equipment, net
                  
                  
                  450,168$
                  1,394,806**Liabilities
                      and Shareholders’ Equity**Current
                      liabilities:Accounts
                      payable
                  
                  $
                  72,529Accrued
                      payroll and related expenses
                  
                  
                  57,923Other
                      accrued expenses
                  
                  
                  52,077Current
                      maturities of long term debt
                  
                  
                  60,245Total
                      current liabilities
                  
                  
                  242,774Long
                      term debt, net of current maturities
                  
                  
                  135,905Total
                      liabilities
                  
                  
                  378,679Shareholders’
                      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, 11,940,060 shares
                  
                  
                  11,940Additional
                      paid-in capital
                  
                  
                  21,019,268Accumulated
                      deficit
                  
                  
                  (20,015,081
                  )Shareholders’
                      equity, net.
                  
                  
                  1,016,127$
                  1394,806
 
 
 The
            accompanying notes are an integral part of these consolidated financial
            statements.
  3
 **TOUCHSTONE
            SOFTWARE CORPORATION AND SUBSIDIARY**
  **CONSOLIDATED
            INCOME STATEMENTS**
 ( **unaudited)**
 
 **Three
                      Months Ended**
                    **September
                      30,**
                  
                  **Nine
                      Months Ended**
                    **September
                      30,****2006**
                  
                  **2005**
                  
                  ******2006**
                  
                  **2005**Revenues:Product
                      sales
                  
                  $
                  763,195
                  
                  $
                  322,760
                  
                  $
                  2,252,512
                  
                  $
                  1,122,978Royalty
                      income
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  523Website
                      income
                  
                  
                  13,713
                  
                  
                  4,671
                  
                  
                  49,610
                  
                  
                  4,671Total
                      revenues
                  
                  
                  776,908
                  
                  
                  327,431
                  
                  
                  2,302,122
                  
                  
                  1,128,172Cost
                      of revenues
                  
                  
                  17,633
                  
                  
                  44,225
                  
                  
                  184,758
                  
                  
                  180,067Gross
                      profit
                  
                  
                  759,275
                  
                  
                  283,206
                  
                  
                  2,117,364
                  
                  
                  948,105Operating
                      expenses:Sales,
                      marketing, general and administrative
                  
                  
                  460,378
                  
                  
                  212,628
                  
                  
                  1,134,092
                  
                  
                  684,188Research
                      and development
                  
                  
                  130,105
                  
                  
                  115,117
                  
                  
                  417,352
                  
                  
                  356,588Total
                      operating expenses
                  
                  
                  590,483
                  
                  
                  327,745
                  
                  
                  1,551,444
                  
                  
                  1,040,776Income
                      (loss) from operations
                  
                  
                  168,792
                  
                  
                  (44,539
                  )
                  
                  565,920
                  
                  
                  (92,671
                  )Interest
                      income (expense), net
                  
                  
                  237
                  
                  
                  1,499
                  
                  
                  (8,710
                  )
                  
                  3,489Net
                      Income (loss)
                  
                  $
                  169,029
                  
                  $
                  (43,040
                  )
                  $
                  557,210
                  
                  $
                  (89,182
                  )Basic
                      earnings (loss) per share
                  
                  $
                  0.01
                  
                  $
                  (0.00
                  )
                  $
                  0.05
                  
                  $
                  (0.01
                  )Basic
                      weighted average shares outstanding
                  
                  
                  11,940,060
                  
                  
                  11,440,060
                  
                  
                  11,940,060
                  
                  
                  11,440,060Diluted
                      earnings (loss) per share
                  
                  $
                  0.01
                  
                  $
                  (0.00
                  )
                  $
                  0.05
                  
                  $
                  (0.01
                  )Diluted
                      weighted average shares outstanding
                  
                  
                  12,022,574
                  
                  
                  11,440,060
                  
                  
                  12,009,463
                  
                  
                  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,****2006**
                  
                  **2005**Cash
                      flows from operating activities:Net
                      income (loss)
                  
                  $
                  557,210
                  
                  $
                  (89,182
                  )Adjustments
                      to reconcile net income (loss) to net cash provided by (used
                      in) operating
                      activities:Depreciation
                  
                  
                  72,161
                  
                  
                  2,576Stock
                      option compensation
                  
                  
                  15,083Changes
                      in assets and liabilities:Accounts
                      receivable
                  
                  
                  2,160
                  
                  
                  20,172Inventories
                  
                  
                  16,619
                  
                  
                  3,282Prepaid
                      expenses and other current assets
                  
                  
                  (36,517
                  )
                  
                  4,409Accounts
                      payable
                  
                  
                  (5,527
                  )
                  
                  28,616Accrued
                      liabilities
                  
                  
                  (13,224
                  )
                  
                  (5,949
                  )Net
                      cash provided by (used in) operating activities
                  
                  
                  607,965
                  
                  
                  (36,076
                  )Cash
                      flows from investing activities:Collection
                      of notes receivable - related party
                  
                  
                  8,427
                  
                  
                  77,251Additions
                      to Property and Equipment
                  
                  
                  (114,914
                  )
                  
                  (127,500
                  )Net
                      cash (used in) investing activities
                  
                  
                  (106,487
                  )
                  
                  (50,249
                  )Cash
                      flows from financing activities:Payments
                      on long term debt
                  
                  
                  (35,575
                  )
                  
                  (9,825
                  )Net
                      cash (used in) financing activities
                  
                  
                  (35,575
                  )
                  
                  (9,825
                  )Net
                      increase (decrease) in cash and cash equivalents
                  
                  
                  465,903
                  
                  
                  (96,150
                  )Cash
                      and cash equivalents, beginning of period
                  
                  
                  221,426
                  
                  
                  289,859Cash
                      and cash equivalents, end of period.
                  
                  $
                  687,329
                  
                  $
                  193,709Supplemental
                      disclosure of cash flow information:Cash
                      paid during the period for:Interest
                  
                  $
                  17,549
                  
                  $
                  571Income
                      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**
 **Notes
            to Consolidated Financial Statements**
 
 **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 conjunction with the audited financial statements included in
            the
            Company’s Annual Report on Form 10-KSB for the year ended December 31, 2005.
            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, 2006
            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 and warrants for the periods ended
            September 30, 2006 and 2005. At September 30, 2006 and 2005, the number
            of
            outstanding stock options and warrants were 896,900 and 546,650, respectively.
 
 **3.**
                  **Investments**
 
 Investments
            at September 30, 2006, 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, 2006.
 
 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, 2006, 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.
 
 6
 
 **TOUCHSTONE
                SOFTWARE CORPORATION AND SUBSIDIARY**
 **4.**
                  **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, 2006 and 2005, respectively.
 
 
 **5.**
                  **Stock
                      Options**
 Prior
            to
            January 1, 2006, the Company accounted 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 income, as all options granted under those plans prior to January
            1, 2006 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
            (loss) 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,****2006**
                  
                  **2005**
                  
                  **2006**
                  
                  **2005**Net
                      income (loss)
                    as
                      reported
                  
                  $
                  169,029
                  
                  $
                  (43,040
                  )
                  $
                  557,210
                  
                  $
                  (89,182
                  )Pro
                      forma impact of
                    expensing
                      options
                  
                  
                  1,394
                  
                  
                  29
                  
                  
                  4,986
                  
                  
                  89Pro
                      forma net
                    Income
                      (loss)
                  
                  $
                  167,635
                  
                  $
                  (43,069
                  )
                  $
                  552,224
                  
                  $
                  (89,271
                  )Earnings
                      per share:Basic-as
                      reported
                  
                  $
                  0.01
                  
                  $
                  0.00
                  
                  $
                  0.05
                  
                  
                  ($0.01
                  )Basic-pro
                      forma
                  
                  $
                  0.01
                  
                  $
                  0.00
                  
                  $
                  0.05
                  
                  
                  ($0.01
                  )Diluted-as
                      reported
                  
                  $
                  0.01
                  
                  $
                  0.00
                  
                  $
                  0.05
                  
                  
                  ($0.01
                  )Diluted-pro
                      forma
                  
                  $
                  0.01
                  
                  $
                  0.00
                  
                  $
                  0.05
                  
                  
                  ($0.01
                  )
  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 prescribed
            is SFAS
            No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure”,
            the Company elected to use the “prospective method.” The prospective method
            requires expense to be recognized for all awards granted, modified or
            settled
            beginning in the year of adoption. Historically, the Company applied
            the
            intrinsic method as provided in Accounting Principles Board Opinion No.
            25,
“Accounting for Stock Issued to Employees” and related interpretations and
            accordingly, no compensation cost had been recognized for stock options
            in prior
            periods. 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
            May 5,
            2006, the Board of Directors of the Company voted to issue options to
            acquire
            250,000 shares of common stock for the exercise price of $.34. In accordance
            with SFAS 123(R), the Company recorded compensation expense of $9,313
            during the
            quarter ended September 30, 2006.
  7
 
 **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.
 
 In
            December 2005 the Company introduced its newest product, 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
            90,000 updated device drivers. Subscribers to the Driver Agent service
            can then
            quickly and safely download the latest device drivers for their PC.
 
 The
            Company acquired two strategic web properties in 2005, www.totallydrivers.com
            and www.driversdb.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 the need for other
            costly
            avenues of marketing. The newly acquired properties also generate advertising
            revenue through various sources.
 
 The
            Company acquired another strategic web property during May 2006.
            www.driverzone.com is yet another tool for the Company to aggregate customer
            Internet traffic for the Company’s products. This particular web property has
            propagated on the various search agents over time and carries a high
            ranking on
            these agents’ lists. The increase in traffic from this property continues to
            reduce the need for other costly avenues of marketing. The newly acquired
            properties also generate advertising revenue through various sources.
  8
 
 **TOUCHSTONE
                SOFTWARE CORPORATION AND SUBSIDIARY**
 ***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.
  **Results
            of Operations**
  The
            following is a discussion of the financial condition and results of operations
            of the Company as of September 30, 2006 and 2005 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, 2005, 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,****2006**
                  **2005**
                  **2006**
                  **2005**Revenues:Product
                      sales
                  98%
                  99%
                  98%
                  99%Website
                      income
                  2
                  1
                  2
                  1Total
                      revenues
                  100
                  100
                  100
                  100Cost
                      of revenues
                  2
                  14
                  8
                  16Gross
                      profit
                  98
                  86
                  92
                  84Operating
                      expenses:Sales,
                      marketing, general and administrative
                  59
                  65
                  49
                  61Research
                      and development
                  17
                  35
                  18
                  31Total
                      operating expenses
                  76
                  100
                  67
                  92Income
                      from operations
                  22
                  (14)
                  25
                  (8)Interest
                      income (expense), net
                  —
                  1
                  (1)
                  —Net
                      income
                  22%
                  (13)%
                  24%
                  (8)%
 
 
 9
 **TOUCHSTONE
              SOFTWARE CORPORATION AND SUBSIDIARY**
  **Comparison
            of Nine Month Periods Ended September 30, 2006 and 2005**
 
 ***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 nine months ended September
            30, 2006,
            the Company experienced an overall increase in product sales of approximately
            100% as compared to the same period a year ago. The increase in revenue
            is due
            to the full integration of Driver Agent. Web advertising income increased
            from
            the prior period and 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
            8% of revenues for the nine month period ended September 30, 2006 from
            16% for
            the same period a year ago. This is due mainly to a decrease in physical
            products being shipped to customers and a decrease in sales of third
            party
            products.
 
 ***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 66%, for the nine month period ended September 30, 2006,
            from the
            same period one year ago. This is due to increase in advetising expenses
            related
            to the payments made to our strategic vendors.
  ***Research
            and Development*** **.** Research
            and development expenses consist primarily of engineering personnel and
            related
            expenses. Research and development expenses increased approximately 17%
            for the
            nine month period ended September 30, 2006 from the same period one year
            ago.
            This is due to payroll increasing 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.
            Other income decreased by approximately $12,200 for the nine month period
            ended
            September 30, 2006 as compared to the same period one year ago. The decrease
            is
            due to the interest accrued on the long term debt.
 
 **Liquidity
            and Capital Resources**
 
 During
            the nine months ended September 30, 2006, the Company had cash provided
            by
            operating activities of approximately $608,000 as compared to cash used
            in
            operating activities of approximately $36,100 during the same nine month
            period
            a year ago. The main factor of this increase in cash flow is the net
            operating
            income the Company has had through the first nine months of 2006.
 
 The
            Company’s cash balance at September 30, 2006 was approximately $687,300 as
            compared to approximately $193,700 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%,
            was $292,880 payable to the seller as follows: $22,500 paid at closing,
            $22,500
            payable at delivery and varying semi-annual payments thereafter through
            April
            2009, and 500,000 shares of the Company’s unregistered common stock valued at
            $25,000. Payments of $45,000, including interest of $9,425, were made
            during the
            nine months ended September 30, 2006. Interest is accrued monthly.
 
 The
            500,000 shares of common stock were 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
  10
 **TOUCHSTONE
              SOFTWARE CORPORATION AND SUBSIDIARY**
 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.
  The
            impact of inflation during 2006 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, 2006, 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, 2006. 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, 2006.
 
  
  
  11
 **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
            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
            August
            10, 2006, the Company filed a current report on Form 8-K to disclose results
            of operations
            and financial conditions for the first quarter 2006
  October
            5, 2006, the Company filed a current report on Form 8-K to announce entry
            into
            an agreement with
            PDE
            Publications and Drivers.com
 
  12
 **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)
 **Name**
                    **Title**
                    **Date**/s/
                        Jason K. Raza
                      **Jason
                        K. Raza**
                    Chief
                        Executive Officer and President
                    November
                        10, 2006/s/
                        Michelle L. Carrozzella
                      **Michelle
                        L. Carrozzella**
                    Accounting
                        Manager
                    November
                      10, 2006
  
 ****  ****
 13