TOUCHSTONE SOFTWARE CORP /CA/, 424B4, 1995-08-29

TOUCHSTONE SOFTWARE CORP /CA/
424B4, 1995-08-29
PREPACKAGED SOFTWARE

Previous: SELIGMAN FRONTIER FUND INC, N-30B-2, 1995-08-29

Next: SELIGMAN HIGH INCOME FUND SERIES, NSAR-A, 1995-08-29

<PAGE>
2,300,000 SHARES

[ LOGO ]

TOUCHSTONE SOFTWARE CORPORATION

COMMON STOCK

Of the 2,300,000 shares of Common Stock offered hereby, 1,300,000 shares are
being sold by TouchStone Software Corporation (the "Company") and 1,000,000
shares are being sold by certain shareholders of the Company (the "Selling
Shareholders"). See "Principal and Selling Shareholders." The Company will not
receive any proceeds from the sale of shares by the Selling Shareholders. The
Company's Common Stock is traded on The Nasdaq Small Cap Market under the symbol
"TSSW" and has been approved for inclusion on The Nasdaq National Market upon
consummation of this offering. On August 24, 1995, the closing bid and asked
prices for a share of the Company's Common Stock, as reported by Nasdaq, were
$15 3/8 and $15 3/4, respectively. See "Price Range of Common Stock."
------------------------

See "Risk Factors" at page 5 of this Prospectus for a discussion of certain
factors that should be considered by prospective purchasers of the Common Stock
offered hereby.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.

<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
DISCOUNTS AND PROCEEDS TO SELLING
PRICE TO PUBLIC COMMISSIONS (1) COMPANY (2) SHAREHOLDERS
<S> <C> <C> <C> <C>
Per Share...... $13.50 $0.945 $12.555 $12.555
Total (3)...... $31,050,000 $2,173,500 $16,321,500 $12,555,000
<FN>
(1) Excludes a non-accountable expense allowance payable to the representatives
(the "Representatives") of the several Underwriters and the value of
warrants to be issued to the Representatives to purchase up to 230,000
shares of Common Stock (the "Representatives' Warrants"). The Company and
the Selling Shareholders have agreed to indemnify the Underwriters against
certain liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company, estimated to be $931,000,
including the Representatives' non-accountable expense allowance.
(3) Certain of the Selling Shareholders have granted the Underwriters a 45-day
option to purchase up to 345,000 additional shares of Common Stock on the
same terms and conditions as set forth above solely to cover
over-allotments, if any. If all such shares are purchased, the total Price
to Public, Underwriting Discounts and Commissions, Proceeds to the Company
and Proceeds to the Selling Shareholders would be $35,707,500, $2,499,525,
$16,321,500 and $16,886,475, respectively. See "Principal and Selling
Shareholders" and "Underwriting."
</TABLE>

The shares of Common Stock are being offered severally by the Underwriters
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and certain other conditions. The Underwriters reserve the right to
reject any order in whole or in part and to withdraw, cancel or modify the offer
without notice. It is expected that delivery of the shares will be made at the
offices of Cruttenden Roth Incorporated, Irvine, California, on or about August
30, 1995.

------------------------

CRUTTENDEN ROTH PUNK, ZIEGEL & KNOELL
INCORPORATED

THE DATE OF THIS PROSPECTUS IS AUGUST 25, 1995.
<PAGE>
[ COLOR PHOTOGRAPHS
of the Registrant's packaging for its
set-up advisor, WINCHECK-CHECKMARK-IT, FASTMOVE!
and WIN'95 ADVISOR products. ]

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
TOUCHSTONE SOFTWARE CORPORATION, CHECKIT-REGISTERED TRADEMARK-,
WINCHECK-CHECKMARK-IT-TM-, SETUP ADVISOR-TM-, CHECK-CHECKMARK-IT PRO-TM-,
CHECK-CHECKMARK-IT PRO: DELUXE-TM-, ROADTECH-TM-, SUPERHUMAN SAMURAI COMPUTER
SAFETY FUN KIT-TM-, FASTMOVE!-TM-, AUTOHELP/CHECK-CHECKMARK-IT DIAGNOSTICS-TM-
AND WIN'95 ADVISOR-TM- are trademarks of the Company. This Prospectus also
refers to trademarks of companies other than TouchStone Software Corporation.

2
<PAGE>
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED
IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND
NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE
INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THAT THERE HAS
BEEN NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, REPRESENTATIVES'
WARRANTS, OUTSTANDING WARRANTS TO PURCHASE SHARES OF COMMON STOCK AND OPTIONS TO
PURCHASE SHARES OF COMMON STOCK GRANTED OR TO BE GRANTED UNDER THE COMPANY'S
STOCK OPTION PLANS.

THE COMPANY

TouchStone Software Corporation (the "Company") is a leading developer and
publisher of utility software used to set up, maintain and manage personal
computers. The Company's CHECK-CHECKMARK-IT family of products, including
WINCHECK-CHECKMARK-IT, identifies and assists in the resolution of system
conflicts, facilitates the installation of upgrades and accessories and
substantially reduces the time and cost typically associated with diagnosing
personal computer problems. The Company's WINCHECK-CHECKMARK-IT product for
Windows-based personal computers was listed as the top selling utility software
product on Ingram Micro, Inc.'s ("Ingram Micro's") May, June and July 1995
Retail Products Best Seller List and the Company's SETUP ADVISOR product was
listed as the next best selling utility software product on the July 1995 list.
WINCHECK-CHECKMARK-IT was also awarded a WINDOWS MAGAZINE 1995 WIN 100 Award and
a Top 100 ranking in the June 1995 issue of HOME PC Magazine. The Company's
FASTMOVE! product, which was introduced in March 1995, enables users of multiple
personal computers to transfer and synchronize data files between personal
computers, while simultaneously scanning for viruses. In July 1995, the Company
released WIN'95 ADVISOR, a utility software product that will permit users to
analyze their personal computer's compatibility with Microsoft Corporation's
("Microsoft's") new operating system, Windows 95, which was released by
Microsoft on August 24, 1995.

During the last decade, the personal computer industry has grown rapidly.
The Software Publishers Association estimates that worldwide utility software
sales were approximately $847 million in 1994. Technological advances and
increased functionality, combined with lower pricing, have made personal
computers common for use in both homes and businesses. A market for
sophisticated utility software has evolved in response to the popularity of
multimedia systems utilizing technologically advanced features such as CD-ROM
drives and enhanced video, storage, animation and sound capability. In addition,
each major change of the operating system that runs a particular personal
computer may require the purchase of a new set of utility software to support a
new operating system, such as Windows 95. According to Dataquest, an industry
research firm, Microsoft is projected to sell at least 29.3 million copies of
its new Windows 95 operating system before the end of 1995.

The Company markets its products domestically through software distributors,
including Ingram Micro, Merisel Americas Inc. ("Merisel") and Tech Data
Corporation ("Tech Data"), for resale through the retail channel. The Company's
primary sales and marketing efforts in 1994 were directed at increasing demand
for products at the retail sales level and increasing the number of mall stores,
club stores and warehouse stores that carry the Company's products. Such efforts
have included using outside representatives to present the Company's products to
retail store employees, and using point-of-sale and other in-store displays in
such retail stores as CompUSA, Sam's Club, Micro Center, Egghead Software,
Computer City, Fry's Electronics, Office Depot, Best Buy and PriceCostco. The
Company estimates that the number of retail stores which carry the Company's
products increased from approximately 1,700 in 1993 to approximately 7,100 in
1995.

The Company's strategy is to leverage the technological advances and
increased functionality of the personal computer to expand its position as a
leading developer of quality utility software products for use in the home and
in businesses. The Company intends to implement this strategy by (i)
capitalizing on its brand name recognition and retailer success, (ii) exploiting
its software technology expertise, (iii) developing products for Windows 95,
(iv) expanding international distribution, (v) targeting corporate customers,
and (vi) pursuing strategic alliances and acquisitions.

3
<PAGE>
Organized in 1982, the Company is a California corporation whose principal
executive offices are located at 2124 Main Street, Huntington Beach, California
92648, and its telephone number is (714) 969-7746.

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered by the Company...... 1,300,000 shares
Common Stock offered by
Selling Shareholders.................... 1,000,000 shares
Common Stock to be outstanding after
the offering............................ 7,220,468 shares (1)
Use of proceeds by the Company........... To finance new product development and existing product
enhancements, expand international distribution, establish
a direct sales force for corporate customers and for
general corporate purposes, which may include strategic
acquisitions of or investments in complementary
businesses, products or technologies.
Nasdaq symbol............................ TSSW
</TABLE>

SUMMARY FINANCIAL INFORMATION
(in thousands, except per share data)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- --------------------
1992 1993 1994 1994 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues.................................................................. $ 3,470 $ 4,925 $ 7,202 $ 2,617 $ 6,181
Gross profit.............................................................. 2,491 3,261 4,886 1,707 4,276
Income from operations.................................................... 75 317 928 127 1,357
Net income................................................................ 41 308 800 103 861
Net income per common share............................................... $ .01 $ .06 $ .14 $ .02 $ .13
Weighted average shares outstanding....................................... 4,776 4,927 5,576 4,995 6,696
</TABLE>

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, 1995
-------------------------
ACTUAL AS ADJUSTED(2)
--------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital................................................................................. $ 2,201 $ 17,732
Total assets.................................................................................... 4,781 20,312
Long-term debt (3).............................................................................. 47 47
Shareholders' equity (4)........................................................................ 2,616 18,225
<FN>
- ------------------------
(1) Excludes 60,000 shares of Common Stock issued subsequent to June 30, 1995,
329,968 shares of Common Stock issuable upon exercise of outstanding
warrants, with exercise prices ranging from $.20 to $.50 per share, and
617,834 shares of Common Stock issuable in the future upon exercise of
options granted or to be granted under the Company's stock option plans.
See "Description of Securities -- Outstanding Warrants" and "Management --
Stock Option Plans."

(2) Adjusted to reflect the sale of 1,300,000 shares of Common Stock by the
Company in this offering at the public offering price of $13.50 and the
application of the estimated net proceeds therefrom. See "Use of Proceeds"
and "Capitalization."

(3) See Note 3 of Notes to Financial Statements.
</TABLE>

4
<PAGE>

<TABLE>
<S> <C>
(4) Includes an aggregate of $208,883 payable to the Company pursuant to
promissory notes given by officers and employees of the Company in payment
of the purchase price of Common Stock issued under the Company's stock
purchase and option plans, all of which will be paid in full upon
consummation of this offering.
</TABLE>

5
<PAGE>
RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING ANY COMMON STOCK OFFERED HEREBY.

PRODUCT CONCENTRATION AND LIFE CYCLES; DEPENDENCE ON NEW PRODUCTS

During the last quarter of 1994 and the first six months of 1995,
approximately 64% of the Company's operating revenues were attributable to sales
of WINCHECK-CHECKMARK-IT which is designed for users of Microsoft's Windows
operating system. The Company anticipates that this product, the enhanced
version of SETUP ADVISOR and the recently introduced FASTMOVE! and WIN'95
ADVISOR products will account for a substantial portion of the Company's
revenues during the current year. A decline in the demand for these products,
whether as a result of competition or other factors, could have a material
adverse effect on the Company's results of operations and financial condition.
In addition, the markets for the Company's products are characterized by rapidly
changing technology, short product life cycles, extensive competition, eroding
profit margins, frequent new product introductions and evolving industry
standards. To meet these challenges, the Company invests significant time and
resources developing new products and researching and testing their market
acceptance. The length of time required to develop the Company's products
typically ranges from six to eighteen months. In the past, the Company has
experienced delays in the introduction of new products. The Company depends on
the successful development of new products, including adaptations to new
platforms, to replace revenues from products introduced in prior years which
have begun to decline. The Company also depends on upgrades of existing products
to lengthen the life cycle of, and increase the revenue attributable to, such
products. If the Company does not accurately anticipate and successfully adapt
its products to emerging personal computer platforms, environments and
technologies, or new products are not introduced when planned or do not achieve
anticipated revenues, the Company's operating results could be materially
adversely affected. There can be no assurance that the Company will be able to
introduce new products on schedule or that such new products will achieve market
acceptance. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Product Development."

DEPENDENCE ON MICROSOFT

The Company's success is highly dependent on the continued widespread use of
Microsoft's Windows operating system for personal computers. Although the
Windows operating system is currently used by many personal computer users,
other companies, including International Business Machines Corporation, have
developed or are developing other operating systems which compete and will
compete with Microsoft's Windows. In the event that any of these alternative
operating systems become widely accepted in the personal computer marketplace,
demand for the Company's WINCHECK-CHECKMARK-IT product could adversely be
affected, thereby affecting the Company's operating results. In addition,
Microsoft introduced a new operating system, Windows 95, on August 24, 1995. The
Company recently released WIN'95 ADVISOR, a new addition to its CHECK-
CHECKMARK-IT product line designed to assist personal computer users in
determining whether their personal computers are compatible with Windows 95. A
lack of market acceptance of Windows 95 would have a material adverse effect on
sales of WIN'95 ADVISOR and the Company's operating results.

In addition, the Company's strategy of developing products based on the
Windows and Windows 95 operating systems, and releasing these products
immediately prior to or at the time of Microsoft's release of new and upgraded
Windows and Windows 95 products, is substantially dependent on its ability to
gain pre-release access to, and to develop expertise in, current and future
versions of Windows and Windows 95. There can be no assurance as to the ability
of the Company to provide products compatible with future Windows or Windows 95
releases on a timely basis without the cooperation of Microsoft. See "Business
- -- Product Development."

5
<PAGE>
QUARTERLY FLUCTUATIONS; SEASONALITY

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. There can be no assurance
that the Company will be profitable in any particular quarter.

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 Company's business may be affected by these seasonal elements in the
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Quarterly Results."

DEPENDENCE ON DISTRIBUTION CHANNELS

The Company sells its products primarily through distributors for resale to
the retail channel. In 1993, three distributors, Ingram Micro, Inc.("Ingram"),
Merisel Americas Inc. ("Merisel") and Kenfil Distribution, accounted for
approximately 20.8%, 20.7% and 10.5%, respectively, of the Company's total
product sales. During the year ended December 31, 1994, Ingram, Merisel and Tech
Data Corporation ("Tech Data") accounted for approximately 59.0%, 8.7% and 6.3%
of the Company's product sales, respectively. Of the $1.7 million in net
accounts receivable reflected on the Company's June 30, 1995 balance sheet, a
total of approximately $1,210,000, or approximately 71.2% of total net accounts
receivable, was owed to the Company by Ingram. The loss of or reduction in
orders from Ingram could have a material adverse effect on the Company's
revenues and profitability. The Company depends upon the continued viability and
financial stability of these resellers and, indirectly, on the personal computer
industry. The Company's reseller customers generally offer products of several
different companies, including products which compete with those of the Company.
Accordingly, there is a risk that these resellers may give higher priority to
products of other suppliers and reduce their efforts to sell the Company's
products. In addition, any special distribution arrangements and product pricing
arrangements that the Company may implement in one or more distribution channels
for strategic purposes could adversely affect gross profit margins for its
products.

The distribution channels through which consumer software products are sold
have been characterized by rapid change, including consolidations and financial
difficulties of certain distributors and retailers and the emergence of new
retailers such as general mass merchandisers. In addition, there are an
increasing number of companies competing for access to these channels. Retailers
of the Company's products typically have a limited amount of shelf space and
promotional resources, and there is intense competition for high quality and
adequate levels of shelf space and promotional support from the retailers. To
the extent that the number of software products available in the marketplace
increases, this competition for shelf space may also increase. Since utilities
software typically constitutes a relatively small percentage of a retailer's
sales volume, there can be no assurance that such retailers will continue to
purchase the Company's products or provide the Company's products with high
quality and adequate levels of shelf space and promotional support. See
"Business -- Distribution, Sales and Marketing."

6
<PAGE>
COMPETITION

The utility software industry is intensely competitive and consumer demand
for particular software products may be adversely affected by the increasing
number of competitive products. The Company competes primarily against other
companies offering utility software, including software companies of varying
sizes and resources. In addition, there exist a number of large,
well-capitalized software development firms that could, should they choose to do
so, provide utility software in direct competition with the Company, as well as
a number of large companies which may be in the process of developing products
which compete, in whole or in part, with the Company's products. Each of these
firms and certain of the Company's existing competitors have substantially
greater financial, technical and marketing resources than the Company. Moreover,
there are no proprietary barriers to entry that could keep its competitors from
developing similar products or selling competing products in the Company's
markets. There is no assurance that the Company will be able to successfully
compete with such concerns. Increased competition may result in loss of shelf
space and reduction in consumer demand, or sell-through of the Company's
products, any of which could have a material adverse effect on the Company's
operating results.

In addition, the Company may face increasing pricing pressures from current
and future competitors and, accordingly, there can be no assurance that
competitive pressures will not require the Company to reduce its prices. In
particular, over time, the average selling prices for the Company's products may
decline as the market for these products becomes more competitive. Any material
reduction in the price of the Company's products would negatively affect gross
margins and would require the Company to increase unit sales in order to
maintain historic levels of sales. In addition, to the extent that Microsoft or
other companies incorporate applications comparable, or perceived as comparable,
to those offered by the Company into Windows, Windows 95 or other products (or
separately offer such products), sales of the Company's products could be
materially adversely affected, and there can be no assurance that any such
action by Microsoft or others would not render the Company's Windows or Windows
95 based products noncompetitive or obsolete. As a result, there can be no
assurance that such competitors will not develop products that are superior to
the Company's products or that achieve greater market acceptance. See "Business
- -- Distribution, Sales and Marketing" and "Business -- Competition."

RISK OF PRODUCT RETURNS

The Company's business includes a 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 distributors and
retailers, large shipments in anticipation of unrealized demand can lead to
overstocking by the Company's distributors or retailers and result in
substantial product returns. Furthermore, the risk of product returns may
increase if the demand for the Company's products declines. Although the Company
maintains allowances for projected returns, there can be no assurance that
actual levels of returns will not significantly exceed amounts anticipated by
the Company. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

INTERNATIONAL OPERATIONS

The Company intends to use a substantial portion of the net proceeds from
this offering to expand the Company's international marketing and sales
activities. The Company's efforts to enhance the sale of its products to
international customers may be adversely affected by political and economic
conditions abroad. Protectionist trade legislation in either the United States
or foreign countries (such as a change in the current tariff structures, export
compliance laws or other trade policies) could adversely affect the Company's
ability to sell its products in foreign markets. Currency exchange fluctuations
could adversely affect the Company's sales in countries in which the Company
conducts business in local currencies.

7
<PAGE>
RELIANCE ON OUTSIDE RESOURCES

The Company relies upon independent contractors to perform a number of tasks
under the supervision of the Company, including product duplication and
packaging, reproduction of manuals and brochures and order fulfillment. The
Company currently does not have long-term agreements with any of these third
parties. Although the Company believes that alternative resources exist or can
be obtained, a disruption of the Company's relationship with any of these third
party contractors could adversely affect the Company's results of operations
until replacement sources were established. In addition, any material changes in
product and service quality and pricing by these outside resources could
adversely affect the Company's results of operations. See "Business --
Duplication and Packaging."

INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS

The Company regards its software as proprietary and relies primarily on a
combination of copyright, trademark and trade secret laws, employee
confidentiality and nondisclosure agreements and third-party nondisclosure
agreements and other methods of protection common in the industry. Despite these
precautions, it may be possible for an unauthorized third party to copy or
reverse-engineer certain portions of the Company's products or to obtain and use
information that the Company regards as proprietary. Although the Company may
file copyright applications with respect to programs developed for the Company's
software products, there can be no assurance that any such copyrights would
provide meaningful protection to the Company or that the Company would be able
to afford the expense of any litigation which might be necessary to enforce its
rights. The Company licenses its products primarily under "shrink wrap" license
agreements that are not signed by licensees and therefore may be unenforceable
under the laws of certain jurisdictions. In addition, the laws of some foreign
countries do not protect the Company's proprietary rights to the same extent as
do the laws of the United States. The Company is aware that unauthorized copying
occurs within the software industry and if an extensive amount of unauthorized
copying of the Company's products were to occur, the Company's operating results
could be adversely affected. Although the Company's products have never been the
subject of infringement claims, there can be no assurance that third parties
will not assert infringement claims against the Company in the future or that
any such assertion will not require the Company to enter into royalty
arrangements or result in costly litigation. See "Business Proprietary Rights."

MANAGEMENT OF GROWTH; UNCERTAINTY OF FUTURE ACQUISITIONS

The Company's business has grown rapidly during the past two years and such
growth has placed and, if sustained, will continue to place significant demands
on the Company's management and resources. 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 and finance functions. The Company's future operating results
will depend on management's ability to manage future growth and there can be no
assurance that efforts to manage future growth will be successful.

The success of the Company in accelerating its growth through strategic
acquisitions will depend upon the Company's ability to identify and acquire
complementary businesses, products or technologies. There can be no assurance
that the Company will be able to locate appropriate candidates that can be
acquired, outright or pursuant to product or technology licenses or other
arrangements, on favorable terms, if at all, or that acquired operations or
products will be integrated efficiently or prove profitable. The completion of
acquisitions may require sizable amounts of capital and is likely to involve the
diversion of management's attention from other business concerns. Moreover,
unexpected problems encountered in connection with any such acquisition could
have a material adverse effect on the Company. The Company could be forced to
alter its strategy in the future if appropriate candidates prove unavailable or
too costly.

8
<PAGE>
DEPENDENCE ON KEY PERSONNEL

The Company is dependent upon its executive officers, Larry W. Dingus, C.
Shannon Jenkins and Ronald R. Maas. The loss of any one of these key executive
officers could have a material adverse effect on the Company. Each of these
three key executive officers may voluntarily terminate his or her employment
with the Company at any time. The Company maintains a $500,000 key-person
insurance policy on the life of Ms. Jenkins and a $100,000 key-person insurance
policy each on the lives of Messrs. Dingus and Maas. There can be no assurance
that the proceeds from such insurance policies would be sufficient to compensate
the Company in the event of the death of a covered executive and these policies
do not cover the Company in the event that any executive becomes disabled or is
otherwise unable to render services to the Company. The continued success of the
Company is also dependent upon its ability to attract and retain highly
qualified software developers, marketing, sales and other personnel. Competition
for such personnel in the software industry is intense. There can be no
assurance that the Company will be able to recruit and retain such personnel.
See "Management."

CONTROL BY EXISTING MANAGEMENT

Following this offering, the current executive officers and directors of the
Company and their affiliates will continue to beneficially own approximately 21%
of the Company's outstanding Common Stock. Accordingly, the current officers and
directors of the Company will continue to have the ability to significantly
influence the outcome of elections of the Company's directors and other matters
presented to a vote of shareholders. See "Principal and Selling Shareholders."

LIMITED PRIOR MARKET; POSSIBLE VOLATILITY OF STOCK PRICE

Prior to this offering, there has been only a limited public market for the
Common Stock of the Company. The Company's Common Stock was traded in the
over-the-counter market until May 19, 1995 when it was first approved for
trading on The Nasdaq Small Cap Market. As of August 24, 1995, there were
5,980,468 shares of the Company's Common Stock outstanding of which a total of
3,753,826 shares were held by non-affiliates of the Company. For the first six
months of 1995, the high and low bid quotations for a share of the Company's
Common Stock were $5.625 and $0.750, respectively. On August 24, 1995, the
closing bid and asked quotations for a share of the Common Stock, as reported by
Nasdaq, were $15.375 and $15.750, respectively. There can be no assurance that a
more active trading market for the Common Stock will develop or be sustained
following this offering. Moreover, the price at which shares are offered hereby
should not be considered an indication of any price at which the Company's
Common Stock may trade in the future. The market price of the Common Stock will
be subject to change as a result of market conditions and other factors and no
assurance can be given that the Common Stock can be resold at a price equal to
or greater than the purchase price paid by investors in this offering. The stock
markets have experienced extreme price and volume fluctuations during certain
periods. These broad market fluctuations and other factors may adversely affect
the market price of the Company's Common Stock. See "Price Range of Common
Stock."

SHARES ELIGIBLE FOR FUTURE SALE; RIGHTS TO ACQUIRE SHARES

All of the 2,226,642 shares of the Company's Common Stock currently held by
affiliates of the Company are "restricted securities" as that term is defined in
Rule 144 promulgated under the Securities Act of 1933, as amended ("Securities
Act"). These shares may be sold only in compliance with Rule 144, pursuant to an
effective registration statement or pursuant to an exemption from registration.
Sales of substantial amounts of the Company's Common Stock under Rule 144, or
otherwise, or even the potential for such sales, could have an adverse effect on
the market price of shares of the Company's Common Stock and could impair the
Company's ability to raise capital through the sale of its equity securities.
Officers and directors of the Company, who own a total of 2,506,292 shares of
the Company's Common Stock outstanding or issuable upon exercise of stock
options, have agreed with the Representatives not to sell any of their shares
(other than those shares to be sold by them as Selling Shareholders hereunder)
without the Representatives' consent for a period of nine months after the
completion of this offering. See "Shares Eligible for Future Sale."

9
<PAGE>
In addition to the shares of Common Stock that are currently outstanding, a
total of 947,802 shares of Common Stock have been reserved for issuance upon
exercise of options and warrants granted under the Company's stock option,
employee stock purchase and other similar plans. Currently, options and warrants
to acquire 905,301 shares of Common Stock at a weighted average exercise price
of $.59 per share, have been granted pursuant to such plans. The Company has
registered an aggregate of 636,334 shares of Common Stock issuable upon exercise
of outstanding options granted or to be granted under the Company's stock option
plans. See "Shares Eligible for Future Sale" and "Underwriting."

POSSIBLE ISSUANCE OF PREFERRED STOCK; ANTI-TAKEOVER PROVISIONS

The Company is authorized to issue up to 3,000,000 shares of Preferred
Stock, par value $.001 per share. The Preferred Stock may be issued in one or
more series, the terms of which may be determined at the time of issuance by the
Board of Directors, without further action by the Company's shareholders, and
may include voting rights, preferences as to dividends and liquidation,
conversion and redemption rights and sinking fund provisions as determined by
the Board of Directors. Although the Company has no present plans to issue any
shares of Preferred Stock, the issuance of Preferred Stock in the future could
affect the rights of the holders of Common Stock and thereby reduce the value of
the Common Stock. In particular, specific rights granted to future holders of
Preferred Stock could be used to restrict the Company's ability to merge with or
sell its assets to a third party, thereby preserving control of the Company by
present owners. These provisions may also have the effect of delaying or
preventing changes in control or management of the Company which could adversely
affect the market price of the Company's Common Stock. See "Description of
Securities."

USE OF PROCEEDS

The net proceeds to the Company from the sale of the shares of Common Stock
offered by it hereby, after deducting underwriting discounts and estimated
offering expenses payable by the Company, are estimated to be approximately
$15,400,000. The Company will not receive any proceeds from the sale of shares
by the Selling Shareholders.

The Company expects to use approximately $2,500,000 of the net proceeds of
this offering to finance new product development and existing product
enhancements, approximately $1,000,000 of the net proceeds of this offering to
expand current European operations and increase international distribution of
the Company's products and approximately $1,500,000 of the net proceeds of this
offering for the establishment of a direct sales force for corporate customers
and advertising and promotion of the Company's products in the United States.
The balance of the net proceeds will be used for general corporate purposes to
support the Company's ongoing operations, including general administrative costs
and expenses.

In addition, the Company may use a portion of the balance of the net
proceeds of the offering to finance acquisitions of complementary businesses,
products or technologies if attractive opportunities arise. The Company has no
plans, commitments or agreements with respect to any such transactions at the
date of this Prospectus. There can no assurance that any such complementary
businesses, products or technologies are currently available or will be
available in the near future.

The Company has not determined the exact amounts it plans to expend on each
of such uses or the timing of such expenditures. The amounts actually expended
for each such use, if any, are at the discretion of the Company and may vary
significantly depending upon a number of factors, including future revenue
growth and the amount of cash generated by the Company's operations. To the
extent the net proceeds of this offering are not utilized immediately, they will
be invested in United States government or governmental agency securities or
short-term insured certificates of deposit.

10
<PAGE>
PRICE RANGE OF COMMON STOCK

The Company's Common Stock began trading on The Nasdaq Small Cap Market on
May 19, 1995 under the symbol "TSSW." The following table sets forth the high
and low closing bid prices for a share of Common Stock, as reported by the
National Quotation Bureau for periods prior to May 19, 1995 and as reported by
Nasdaq for periods since May 19, 1995. Bid quotations represent high and low
prices quoted between dealers, do not include commissions, mark-ups or
mark-downs and for these reasons and the limited and sporadic trading volumes
which from time to time have been experienced, may not represent actual
transactions. The Company's Common Stock has been approved for inclusion on The
Nasdaq National Market upon consummation of this offering.

<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1993
First Quarter................................................................. $ .219 $ .060
Second Quarter................................................................ .219 .060
Third Quarter................................................................. .250 .125
Fourth Quarter................................................................ .500 .188
1994
First Quarter................................................................. .625 .250
Second Quarter................................................................ .375 .125
Third Quarter................................................................. .400 .250
Fourth Quarter................................................................ 1.563 .312
1995
First Quarter................................................................. 1.500 .750
Second Quarter................................................................ 5.625 1.063
Third Quarter (through August 24, 1995)....................................... 16.375 5.250
</TABLE>

On August 24, 1995, the closing bid and asked prices for a share of the
Common Stock, as reported by Nasdaq, were $15.375 and $15.750, respectively. As
of August 24, 1995, there were approximately 5,000 holders of record of the
Company's Common Stock.

DIVIDEND POLICY

The Company has never paid any cash dividends on its Common Stock and does
not anticipate that it will pay dividends in the foreseeable future. Instead,
the Company intends to apply any earnings to the development and expansion of
its business. The terms of the Company's bank line of credit restrict the
payment of cash dividends.

11
<PAGE>
CAPITALIZATION

The following table sets forth the capitalization of the Company at June 30,
1995 and as adjusted to reflect the receipt of net proceeds from the sale of the
1,300,000 shares of Common Stock offered hereby by the Company.

<TABLE>
<CAPTION>
JUNE 30, 1995
----------------------
ACTUAL AS ADJUSTED
--------- -----------
<S> <C> <C>
(IN THOUSANDS)
Long-term debt (less current portion)..................................................... $ 47 $ 47
--------- -----------
Commitments (1)
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, 5,920,468 shares issued and
outstanding (2), 7,220,468 shares issued and outstanding as
adjusted (2)......................................................................... 6 7
Additional paid-in capital.............................................................. 2,430 17,829
Notes receivable from shareholders (3).................................................. (239) (30)
Retained earnings....................................................................... 419 419
--------- -----------
Total shareholders' equity.......................................................... 2,616 18,225
--------- -----------
Total capitalization.............................................................. $ 2,663 $ 18,272
--------- -----------
--------- -----------
<FN>
- ------------------------
(1) See Notes 4 and 10 of Notes to Financial Statements for a description of
the Company's lease obligations.
(2) Excludes 60,000 shares of Common Stock issued subsequent to June 30, 1995,
329,968 shares of Common Stock issuable upon exercise of outstanding
warrants, with exercise prices ranging from $.20 to $.50 per share, 617,834
shares of Common Stock issuable in the future upon exercise of options
granted or to be granted under the Company's stock option plans, and
230,000 shares of Common Stock issuable upon exercise of the
"Representatives' Warrants." See "Description of Securities -- Outstanding
Warrants," "Management -- Stock Option Plans" and "Underwriting."
(3) Includes amounts payable pursuant to promissory notes given by officers and
certain employees of the Company in payment of the purchase price for
shares of Common Stock under the Company's stock purchase and option plans.
See "Management -- Stock Option Plans; Stock Purchase Plans," "Management
-- Certain Transactions," and Note 5 of Notes to Financial Statements. All
of these promissory notes will be paid in full upon consummation of this
offering.
</TABLE>

12
<PAGE>
SELECTED FINANCIAL DATA

The selected financial data set forth below as of December 31, 1993 and 1994
and for each of the three years in the period ended December 31, 1994 has been
derived from the financial statements of the Company included elsewhere herein
which have been audited by Deloitte & Touche LLP, and should be read in
conjunction with those financial statements (including the notes thereto) and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" also included elsewhere herein. The selected financial data set
forth below as of December 31, 1990, 1991 and 1992, and for the years ended
December 31, 1990 and 1991 are derived from audited financial statements not
included herein. The selected financial data as of June 30, 1994 and 1995 and
for the six month periods ended June 30, 1994 and 1995, has been derived from
the unaudited financial statements of the Company and, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of operations for
such periods. The results of operations for the six months ended June 30, 1995
are not necessarily indicative of results to be expected for any future quarter
or the year ending December 31, 1995.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1990 1991 1992 1993 1994 1994 1995
--------- --------- --------- --------- --------- --------- ---------

<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues...................................... $ 3,518 $ 3,650 $ 3,470 $ 4,925 $ 7,202 $ 2,617 $ 6,181
Cost of sales................................. 477 778 979 1,664 2,316 910 1,905
--------- --------- --------- --------- --------- --------- ---------
Gross profit................................ 3,041 2,872 2,491 3,261 4,886 1,707 4,276
Sales and marketing expense................... 1,760 1,762 1,497 1,873 2,273 1,031 1,841
General and administrative expense............ 915 770 642 813 1,245 413 805
Research and development expense.............. 187 256 277 258 440 136 273
--------- --------- --------- --------- --------- --------- ---------
Income from operations........................ 179 84 75 317 928 127 1,357
Other income (expense), net................... (39) (20) (27) (29) (28) (11) 32
Provision (benefit) for income taxes.......... 7 14 7 (20) 100 13 528
--------- --------- --------- --------- --------- --------- ---------
Net income.................................... $ 133 $ 50 $ 41 $ 308 $ 800 $ 103 $ 861
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income per common shares.................. $ .03 $ .01 $ .01 $ .06 $ .14 $ .02 $ .13
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Weighted average number of shares
outstanding.................................. 3,892 4,203 4,776 4,927 5,576 4,995 6,696
<CAPTION>

SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------------------- --------------------
1990 1991 1992 1993 1994 1994 1995
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficiency).............. $ 137 $ 233 $ (168) $ 350 $ 1,446 $ 514 $ 2,201
Total assets.............................. 1,312 1,211 1,662 1,736 4,025 1,841 4,781
Long-term debt............................ 2 146 46 100 55 78 47
Notes receivable from shareholders........ (61) (71) (85) (74) (273) (79) (239)
Retained earnings (accumulated deficit)... (1,641) (1,591) (1,550) (1,242) (442) (1,139) 419
Shareholders' equity...................... 329 406 435 755 1,615 862 2,616
</TABLE>

13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

The Company is a leading developer and publisher of utility software for
personal computers. The Company recognized significant increases in revenues and
profitability during 1993 and the first seven months of 1994, attributable
primarily to the introduction in 1992 of CHECK-CHECKMARK-IT PRO for DOS-based
personal computers and the April 1994 release of SETUP ADVISOR, a Windows-based
utility that helps users install modems, fax cards, sound cards, CD-ROM drives
and other devices in their personal computer systems. Following the August 1994
introduction of WINCHECK-CHECKMARK-IT, the "All-in-One Problem Solver" for users
of Microsoft's Windows operating system, the Company's revenues and
profitability grew at an accelerated rate during the last five months of 1994
and the first quarter of 1995. Since the beginning of 1995, the Company has
introduced FASTMOVE!, software packaged with a cable to assist users of multiple
personal computers in transferring and synchronizing data files while
simultaneously scanning for viruses, and a new version of SETUP ADVISOR that has
been enhanced to address the needs of personal computer users who intend to
upgrade their personal computers to multimedia systems. On July 24, 1995, the
Company began shipping WIN'95 ADVISOR, which will permit Windows users to
analyze their personal computer's compatibility with Microsoft's new operating
system, Windows 95, which is scheduled for release in August 1995. In July 1995,
the Company received a single order from Ingram Micro, totaling over $1.7
million, for its WIN'95 ADVISOR, specifically packaged for Sam's Club.
Additional utilities for anticipated users of Windows 95 are currently under
development. There can, however, be no assurance that the Company will continue
to attain levels of revenue and profitability growth in future periods that are
comparable to those experienced in recent periods.

The Company sells its products domestically primarily through distributors
for resale to the retail channel. In 1994, three distributors accounted for
approximately 75% of the Company's product sales. These customers typically
order on an as-needed basis, and the Company operates with relatively little
backlog. Sales are recorded at the time products are shipped. However, as is the
case with other consumer product manufacturers, the Company's operations in
subsequent periods are subject to the risk of product returns through the
exercise by customers of contractual return rights or as a result of the
Company's strategic interest in 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. Furthermore, the risk of product returns may
increase if the demand for the Company's products declines. Although the Company
maintains allowances for projected returns, there can be no assurance that
actual levels of returns will not significantly exceed amounts anticipated by
the Company. The Company's revenues consist of product sales and royalty income
which, for the most part, is derived from international sales of the Company's
products under agreements with co-publishers (principally those who sell
CHECK-CHECKMARK-IT PRO in France, Germany and the United Kingdom). It is
anticipated that there will be a decrease in royalty income as a percentage of
total revenues following this offering to correspond with the Company's efforts
to increase direct international sales of its products.

Most of the Company's operating expenses are tied directly to sales volume.
Cost of sales includes the cost of blank diskettes, software duplication,
packaging materials and user manuals, in addition to amortization of software
development costs, royalties paid to other software development companies under
various agreements and inventory obsolescence reserves. Sales and marketing
expense consists primarily of salaries and commissions paid to the Company's
sales, customer service and technical support personnel and expenditures for
retail product merchandising and promotions. In addition to the base salaries of
employees in general administration, general and administrative expense includes
amounts paid to all of the Company's personnel under the Company's annual bonus
plans that are based upon the Company's overall levels of quarterly pre-tax
income. Certain of the Company's products can be expected to have short product
life cycles, characterized by decreases in retail prices as

14
<PAGE>
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. Research and
development expense during 1993 and 1994 and the six months ended June 30, 1995
was approximately $258,000, $440,000 and $273,000, respectively. In addition to
amounts expensed for research and development activities, salaries paid to the
Company's software programmers and fees paid to outside software development
consulting firms for further development and enhancement after technological
feasibility of a product has been established are capitalized in accordance with
SFAS 86. During 1993, 1994 and the six months ended June 30, 1995, approximately
$194,000, $169,000 and $199,000, respectively, of such costs were capitalized.
As described above, royalties paid to third party software developers ($139,000
in 1993, $166,000 in 1994 and $274,000 for the six months ended June 30, 1995)
are included in cost of sales. When these expenditures are added to amounts
expensed and capitalized in connection with the Company's research and
development activities, the resulting totals represent 12.0% of total revenue in
1993, 11.1% in 1994 and 12.1% for the six months ended June 30, 1995.

RESULTS OF OPERATIONS

The following table sets forth certain statement of income data as a
percentage of total revenues for the periods indicated:

PERCENTAGE OF TOTAL REVENUES

<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------------------- --------------------
1992 1993 1994 1994 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales....................................... 96.5% 95.3% 95.7% 93.9% 97.4%
Royalty income...................................... 3.5 4.7 4.3 6.1 2.6
--------- --------- --------- --------- ---------
100.0 100.0 100.0 100.0 100.0
Cost of sales......................................... 28.2 33.8 32.2 34.8 30.8
--------- --------- --------- --------- ---------
Gross profit........................................ 71.8 66.2 67.8 65.2 69.2
Sales and marketing expense........................... 43.1 38.0 31.6 39.4 29.8
General and administrative expense.................... 18.5 16.5 17.3 15.8 13.0
Research and development expense...................... 8.0 5.2 6.1 5.2 4.4
--------- --------- --------- --------- ---------
Income from operations................................ 2.2 6.5 12.8 4.8 22.0
Other income/expense.................................. .8 .7 .3 .4 .5
--------- --------- --------- --------- ---------
Income before taxes................................... 1.4 5.8 12.5 4.4 22.5
Provision/benefit for income taxes.................... .2 .5 1.4 .5 8.6
--------- --------- --------- --------- ---------
Net income............................................ 1.2% 6.3% 11.1% 3.9% 13.9%
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>

COMPARISON OF SIX MONTHS ENDED JUNE 30, 1995 AND 1994

REVENUES. Total revenues for the six months ended June 30, 1995 were
$6,181,000, an increase of $3,564,000, or 136.2%, compared to $2,617,000 for the
same period in 1994. This increase was attributable to increased sales of the
Company's WINCHECK-CHECKMARK-IT product which was first released in August 1994,
and sales of FASTMOVE!, released in March 1995. Sales of these products more
than offset declining sales of older products. The Company expects that sales of
WINCHECK-CHECKMARK-IT, FASTMOVE! and WIN'95 ADVISOR will contribute a
substantial portion of total revenues during 1995.

For the six months ended June 30, 1995, royalty income was $159,000, an
increase of $1,000, or .6%, compared to $158,000 for the six months ended June
30, 1995. Royalty income continued to decline as a percentage of total revenues,
from 6.1% during the six months ended June 30, 1994 to 2.6% during the six
months ended June 30, 1995.

GROSS PROFIT. Gross profit for the six months ended June 30, 1995 was
$4,277,000, an increase of $2,570,000, or 150.6%, compared to $1,707,000 for the
same period in 1994. Gross profit as a percentage of total revenues increased
from 65.2% during the six months ended June 30, 1994 to 69.2% for the

15
<PAGE>
six months ended June 30, 1995. This increase was primarily attributable to a
change in product mix resulting from the introduction of WINCHECK-CHECKMARK-IT
and FASTMOVE!, which have lower costs per unit than CHECK-CHECKMARK-IT
PRO:DELUXE, which represented a substantial portion of the Company's sales
during the second quarter of 1994. Such cost savings were somewhat offset by
higher royalty costs paid to other software development companies ($274,000, as
compared to $48,000 in the six months ended June 30, 1994), primarily incurred
in connection with the Company's FASTMOVE! product, and by higher freight costs
($145,000, as compared to $34,000 in the six months ended June 30, 1994),
resulting from increased product sales and higher freight-in costs for certain
product components. Also included in cost of sales for the six months ended June
30, 1995 was amortization of software development costs ($138,000, as compared
to $176,000 in the six months ended June 30, 1994).

SALES AND MARKETING EXPENSE. Sales and marketing expense for the six months
ended June 30, 1995 was $1,841,000, an increase of $810,000, or 78.6%, compared
to $1,031,000 for the six months ended June 30, 1994. This increase was
primarily attributable to increased promotional and merchandising expenditures
for the Company's products associated with its enhanced retail strategy.
Additionally, in order to support the substantial increase in sales volume
experienced in 1995, the Company was required to add sales, customer service and
technical support personnel. Although sales and marketing expense was $810,000
higher during the six months ended June 30, 1995 than in the six months ended
June 30, 1994, sales and marketing expense declined as a percentage of total
revenues from 39.4% during the six months ended June 30, 1994 to 29.8% for the
six months ended June 30, 1995. This decrease was due to the substantial
increase in sales volume experienced during the six months ended June 30, 1995.

GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense for
the six months ended June 30, 1995 was $805,000, an increase of $392,000, or
94.9%, compared to $413,000 for the six months ended June 30, 1994. As a result
of the increases in product sales and operating profits realized by the Company
during the six months ended June 30, 1995, the Company's employees were paid
higher profit sharing bonuses, and the provision for doubtful accounts
increased. However, as a percentage of total revenues, general and
administrative expenses declined from 15.8% during the six months ended June 30,
1994 to 13.0% during the six months ended June 30, 1995.

RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense for the
six months ended June 30, 1995 was $273,000, an increase of $138,000, or 102.2%,
compared to $135,000 during the six months ended June 30, 1994. This increase
was attributable primarily to the hiring of additional programmers and increased
use of outside programmers during 1995 to develop new products. However,
research and development expense decreased as a percentage of total revenues
from 5.2% for the six months ended June 30, 1994 to 4.4% for the six months
ended June 30, 1995. This decrease was attributable primarily to the substantial
increase in sales volume experienced during the second quarter of 1995.

INCOME FROM OPERATIONS. As a result of the foregoing, income from
operations for the six months ended June 30, 1995 was $1,357,000, an increase of
$1,229,000, or 960.2%, compared to $128,000 for the six months ended June 30,
1994.

PROVISION FOR INCOME TAXES. The Company's effective tax rate for the six
months ended June 30, 1995 was 38%, compared to an 11.3% effective tax rate for
the six months ended June 30, 1994. The increase in the effective tax rate is
attributable to the complete utilization during 1994 of all net operating loss
carryforwards previously available to the Company.

COMPARISON OF YEARS ENDED DECEMBER 31, 1994 AND 1993

REVENUES. Total revenues for the year ended December 31, 1994 were
$7,202,000, an increase of $2,277,000, or 46.2%, compared to $4,925,000 for the
year ended December 31, 1993. This increase was attributable to sales during the
last five months of the year of WINCHECK-CHECKMARK-IT, which was released in
August 1994. As a result, product sales for the year ended December 31, 1994
increased by $2,200,000, or 46.9%, over 1993 product sales despite declining
sales of older products.

16
<PAGE>
Royalty income was $308,000 for the year ended December 31, 1994, an
increase of $76,000, or 32.8%, compared to $232,000 for the year ended December
31, 1993. However, the 1994 increases in royalty income did not match the rate
of growth in product sales (most of which are domestic) experienced during the
year. Consequently, royalty income decreased as a percentage of total revenues
from 4.7% in 1993 to 4.3% in 1994.

GROSS PROFIT. Gross profit for 1994 was $4,886,000, an increase of
$1,625,000, or 49.8%, compared to $3,261,000 for the year ended December 31,
1993. The increase in gross profit as a percentage of product sales realized
during the past year, from 69.5% in 1993 up to 70.9% in 1994, was attributable
primarily to a change in sales mix resulting from the release of
WINCHECK-CHECKMARK-IT in late 1994. WINCHECK-CHECKMARK-IT has lower materials
and software costs per unit than does CHECK-CHECKMARK-IT PRO:DELUXE which
comprised a larger portion of the Company's product sales during the first nine
months of 1994. Gross profits also increased as a percentage of total revenues
from 66.2% in 1993 to 67.8% in 1994. Included in cost of sales are amortization
of software development costs ($367,000 in 1994, as compared to $296,000 in
1993) and royalties paid to other software development companies ($166,000 in
1994 and $139,000 in 1993) under various agreements.

SALES AND MARKETING EXPENSE. Sales and marketing expense for 1994 was
$2,273,000, an increase of $400,000, or 21.4%, compared to $1,873,000 for 1993.
This increase was attributable primarily to the promotional and merchandising
expenditures incurred in connection with the release of WINCHECK-CHECKMARK-IT.
In addition, salaries and related costs increased during 1994 as the Company
decided to perform certain marketing functions in-house, as opposed to using
outside services. These increased costs were partially offset by reductions in
consulting and other fees paid to third party service providers. Sales and
marketing expense, however, decreased as a percentage of total revenues from
38.0% in 1993 to 31.6% in 1994. This decrease was attributable primarily to the
significant increase in revenue in 1994 resulting from sales during the last
five months of 1994 of WINCHECK-CHECKMARK-IT.

GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense for
1994 was $1,245,000 an increase of $432,000 or 53.1%, compared to $813,000 for
1993. The 1994 expenses included the accrual of the minimum of $50,000 in
license royalties payable to DIC Entertainment in connection with the Company's
SUPERHUMAN SAMURAI COMPUTER SAFETY FUN KIT, a product whose sales have not
materialized as anticipated and are not expected to contribute significantly to
future sales. Excluding the effect of this accrual, general and administrative
expenses in 1994 increased by 46.8% over the 1993 level. Similarly, general and
administrative expense increased as a percentage of total revenues from 16.5% in
1993 to 17.3% in 1994. The primary reason for this increase was higher profit
sharing bonuses ($406,000 for the year ended December 31, 1994, compared to
$134,000 for the year ended December 31, 1993) which were paid as a result of
the significant increase in profits in 1994. Additionally, as sales increased
significantly in 1994, the provision for doubtful accounts increased above
amounts provided for the year ended December 31, 1993.

RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense for 1994
was $440,000, an increase of $182,000, or 70.5%, compared to $258,000 for 1993.
Research and development expense also increased as a percentage of total
revenues from 5.2% in 1993 to 6.1% in 1994. This increase reflects the hiring of
additional programmers and management personnel in 1994 in order to assist in
the development and release of new products. The additional payroll costs were
somewhat offset by a decline in consultants' fees in 1994 from 1993 levels.

INCOME FROM OPERATIONS. As a result of the foregoing, income from
operations for 1994 was $928,000, an increase of $611,000, or 192.7%, compared
to $317,000 in 1993.

PROVISION (BENEFIT) FOR INCOME TAXES. The effective tax rate for 1994 was
11% compared to a benefit of 7% in 1993. The 1994 effective rate was less than
the statutory rate primarily due to the elimination of the valuation allowance
on deferred tax assets resulting from current taxable income and the expected
utilization of net operating loss carryforwards.

17
<PAGE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1993 AND 1992

REVENUES. Total revenues for the year ended December 31, 1993 were
$4,925,000, an increase of $1,455,000, or 41.9%, compared to $3,470,000 for the
year ended December 31, 1992. This increase was attributable to sales of the
Company's CHECK-CHECKMARK-IT PRO series of products which were introduced during
the year. Sales of the CHECK-CHECKMARK-IT PRO series of products were partially
offset by declining sales of CHECK-CHECKMARK-IT LAN and CHECK-CHECKMARK-LIST,
products that were discontinued during the year in order to focus the Company's
resources on the development and marketing of the CHECK-CHECKMARK-IT PRO series
of products. As a result, product sales for the year ended December 31, 1993
increased by $1,344,000, or 40.1%, over 1992 product sales. Royalty income was
$232,000 in 1993, an increase of $110,000, or 90.2%, compared to $122,000 in
1992. Royalty income also increased as a percentage of total revenues from 3.5%
in 1992 to 4.7% in 1993.

GROSS PROFIT. Gross profit for 1993 was $3,261,000, an increase of
$770,000, or 30.9%, compared to $2,491,000 for the year ended December 31, 1992.
The decrease in gross profit as a percentage of product sales realized during
the year, from 74.4% in 1992 to 69.5% in 1993, and the corresponding decrease in
gross profits as a percentage of total revenues, from 71.8% in 1992 to 66.2% in
1993, reflect the change in sales mix as sales of CHECK-CHECKMARK-IT PRO
products, which have a greater cost per unit than the Company's other products,
accounted for a greater percentage of total product sales. Included in cost of
sales are amortization of software development costs ($296,000 in 1993, as
compared to $81,500 in 1992) and royalties paid to other software development
companies ($139,000 in 1993, as compared to $226,000 in 1992).

SALES AND MARKETING EXPENSE. Sales and marketing expense for 1993 was
$1,873,000, an increase of $376,000, or 25.1%, compared to $1,497,000 for 1992.
The increase in 1993 sales and marketing expense was attributable primarily to
higher advertising and other promotional costs incurred to launch the
CHECK-CHECKMARK-IT PRO series of products and the hiring of a director of sales.
However, sales and marketing expense decreased as a percentage of total revenues
from 43.1% in 1992 to 38.0% in 1993. This decrease was attributable primarily to
the 1993 increase in product sales, which more than offset the increase in
general and administrative expense.

GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense for
1993 was $813,000, an increase of $171,000 or 26.7%, compared to $642,000 for
1992. The primary reason for this increase was higher profit sharing bonuses
($134,000 for the year ended December 31, 1993, compared to $15,000 for the year
ended December 31, 1992) which were paid as a result of the significant increase
in profits in 1993. However, general and administrative expense decreased as a
percentage of total revenues from 18.5% in 1992 to 16.5% in 1993. This decrease
was attributable primarily to the 1993 increase in product sales, which more
than offset the increase in general and administrative expense.

RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense for 1993
was $258,000, a decrease of $19,000, or 6.9%, compared to $277,000 for 1992. In
addition, research and development expense decreased as a percentage of total
revenues from 8.0% in 1992 to 5.2% in 1993.

INCOME FROM OPERATIONS. As a result of the foregoing, income from
operations for 1993 was $317,000, an increase of $242,000, or 322.7%, compared
to $75,000 in 1992. This increase was attributable to the increases in revenue
and gross profits experienced in 1993 which, combined with reductions in
marketing and selling expense and research and development expense as a
percentage of total revenue, more than offset slight increases in general and
administrative expense as a percentage of total revenue.

PROVISION (BENEFIT) FOR INCOME TAXES. In 1992, the Company accrued state
income tax, but did not realize any benefit from federal net operating loss
carryforwards until 1993, when the Company adopted SFAS 109, "Accounting for
Income Taxes." Consequently, the Company realized a benefit for the year ended
December 31, 1993, whereas the Company's income from operations was partially
taxed (at an effective tax rate of 14.6%) for the year ended December 31, 1992.

18
<PAGE>
QUARTERLY RESULTS

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 introduction of new products by the Company or its competitors, pricing
pressures, general economic conditions and other factors. Since the Company's
customers presently order on an as-needed basis, the Company operates with
relatively little backlog and substantially all of its total revenues in each
quarter will result from orders received in that quarter. Therefore, quarterly
revenue will depend on the volume and timing of orders shipped during a quarter,
which are difficult to forecast. In addition, it can be expected that 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. There can be no assurance
that the Company will be profitable in any given quarter.

In addition, sales of software are seasonal. The Company's revenues in the
fourth quarter of each year are typically higher than revenues in the other
three quarters of the year. This seasonality may create variations in the
Company's quarterly results from year to year.

As discussed above, the increases in revenue for the three months ended
March 31, 1995 and June 30, 1995, respectively, as compared to revenues
generated during the comparable periods of 1994 were attributable to sales of
the Company's WINCHECK-CHECKMARK-IT product that was first released in August
1994. The introduction of WINCHECK-CHECKMARK-IT also significantly affected the
Company's operating results during the third and fourth quarters of 1994.

The following table sets forth certain quarterly financial data for each of
the four quarters in 1993 and 1994 and the first two quarters of 1995 that has
been derived from unaudited financial statements that, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of such quarterly information.
The operating results for any quarter are not necessarily indicative of the
results to be expected for any future quarter.

<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------------------
FISCAL 1993 FISCAL 1994 FISCAL 1995
--------------------------------------- --------------------------------------- ------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1993 1993 1993 1993 1994 1994 1994 1994 1995 1995
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Product sales.......... $ 1,174 $ 1,197 $ 1,069 $ 1,253 $ 1,174 $ 1,285 $ 1,581 $ 2,853 $ 2,761 $ 3,261
Royalty income......... 19 75 65 72 86 72 69 81 100 59
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
1,193 1,272 1,134 1,325 1,260 1,357 1,650 2,934 2,861 3,320
Cost of sales............ 357 503 390 414 419 491 498 907 750 1,155
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
Gross profit............. 836 769 744 911 841 866 1,152 2,027 2,111 2,165
Sales and marketing
expense................. 453 487 403 529 474 557 527 715 860 980
General and
administrative
expense................. 211 187 188 227 215 198 280 552 398 407
Research and development
expense................. 76 47 61 74 63 72 108 197 129 145
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
Income from operations... 96 48 92 81 89 39 237 564 724 633
Other, net............... (13 ) (6 ) (3 ) (8 ) (5 ) (7 ) (15 ) (3 ) 13 19
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
Income before taxes...... 83 42 89 73 84 32 222 561 737 652
Income tax (benefit)
provision............... 8 (8 ) -- (20 ) 9 3 25 62 280 248
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
Net income............... $ 75 $ 50 $ 89 $ 93 $ 75 $ 29 $ 197 $ 499 $ 457 $ 404
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
Net income per share..... $ .02 $ .01 $ .02 $ .01 $ .01 $ .01 $ .04 $ .08 $ .07 $ .06
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
Weighted average number
of shares outstanding... 4,449 4,508 4,506 4,927 5,116 4,807 5,147 5,576 6,570 6,765
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
</TABLE>

19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

Through 1993, the Company was required to supplement cash flow from
operations with funds provided by investors and bank loans to finance the
development of its business. Although total revenue and net income increased
substantially in 1993, cash flow from operating activities decreased to $75,000
for such year as the Company made substantial investments in accounts receivable
and inventories to accommodate its growth. During 1994, the Company was able to
finance its operations and growth primarily through cash generated from
operations of $1,268,000, supplemented by net borrowings of $210,000 under its
bank line of credit and $45,000 received from the sale of Common Stock. This
ability continued during the first six months of 1995 when the Company generated
$1,144,000 in cash from operations and was able to repay all outstanding bank
borrowings.

During 1993, the Company invested $194,000 in capitalized software
development, made debt repayments totaling $222,000 and purchased $12,000 of
property and equipment. During 1994, the Company used $169,000 of its cash
resources to invest in capitalized software development, repaid debt and capital
lease obligations aggregating $77,000, purchased $14,000 of property and
equipment and paid loan costs of $6,000. During the six months ended June 30,
1995, an additional $199,000 was used for capitalized software development, and
the Company repaid debt and capital lease obligations aggregating $393,000,
purchased $65,000 of property and equipment, and paid loan costs of $1,000.

On April 27, 1995, the Company entered into a new credit line facility which
provides for borrowings up to $300,000 and expires on May 5, 1996. Borrowings
under this line of credit bear interest at 1.5% over the prime rate as reported
by the Wall Street Journal (an effective rate of 10.5% at June 30, 1995).
Borrowings are collateralized by substantially all of the Company's assets and
guaranteed by the Company's three executive officers. The Company is required to
maintain a minimum tangible net worth of approximately $1,300,000, a ratio of
total liabilities to tangible net worth of less than 2 to 1 and minimum net
income of $1 on an annual basis. The line of credit also prohibits payment of
dividends without prior approval of the bank and limits annual capital
expenditures to $75,000. There were no borrowings outstanding under the line of
credit at June 30, 1995.

Primarily as a consequence of the increase in sales volume experienced
during 1994 and the first six months of 1995, the Company's working capital has
increased from $350,000 at December 31, 1993 to $1,446,000 at December 31, 1994
and $2,201,000 at June 30, 1995. Over the same period of time, the Company's
cash and cash equivalents at year end grew from $44,000 at December 31, 1993 to
$1,298,000 at December 31, 1994. As of June 30, 1995, the Company had cash and
cash equivalents of $1,759,000.

Management believes that the Company's existing cash resources and
anticipated cash flows from operations, when combined with the net proceeds to
the Company from this offering and periodic borrowings under the line of credit,
will be sufficient to fund the Company's operations at currently anticipated
levels. To the extent that such amounts are insufficient to finance the
Company's working capital requirements, the Company will be required to raise
additional funds through equity or debt financings. There can be no assurance
that additional equity or debt financing will be available if needed, or, if
available, will be on terms favorable to the Company or its shareholders.
Significant additional dilution may be incurred by investors in this offering as
a result of additional financings.

20
<PAGE>
BUSINESS

GENERAL

TouchStone Software Corporation (the "Company") is a leading developer and
publisher of utility software used to set up, maintain and manage personal
computers. The Company's CHECK-CHECKMARK-IT family of products, including
WINCHECK-CHECKMARK-IT, identifies and assists in the resolution of system
conflicts, facilitates the installation of upgrades and accessories and
substantially reduces the time and cost typically associated with diagnosing
personal computer problems. The Company's WINCHECK-CHECKMARK-IT product for
Windows-based personal computers was listed as the top selling utility software
product on Ingram Micro, Inc.'s ("Ingram Micro's") May, June and July 1995
Retail Products Best Seller List and the Company's SETUP ADVISOR product was
listed as the next best selling utility software product on the July 1995 list.
WINCHECK-CHECKMARK-IT was also awarded a WINDOWS MAGAZINE 1995 WIN 100 Award and
a Top 100 ranking in the June 1995 issue of HOME PC Magazine. The Company's
FASTMOVE! product, which was introduced in March 1995, enables users of multiple
personal computers to transfer and synchronize data files between personal
computers, while simultaneously scanning for viruses. In July 1995 the Company
released WIN'95 ADVISOR, a utility software product that will permit users to
analyze their personal computer's compatibility with Microsoft Corporation's
("Microsoft's") new operating system, Windows 95, which was released by
Microsoft on August 24, 1995.

INDUSTRY OVERVIEW

21
<PAGE>
STRATEGY

The Company's strategy is to leverage the technological advances and
increased functionality of the personal computer to expand its position as a
leading developer and publisher of quality utility software products for use in
the home and in businesses. Key elements of the Company's business strategy are
as follows:

CAPITALIZE ON BRAND NAME RECOGNITION AND RETAILER SUCCESS. The Company
intends to leverage its brand name recognition to introduce new products into
its distribution channel which supplies the retail market. The Company's
merchandising strategy is intended to encourage retailers to carry the Company's
product lines by allowing retailers to achieve relatively high revenues and
margins from shelf space allocated to the Company's products. The Company
believes that the consistent sell-through of new and existing products reflects
its success in achieving a reputation for product quality, customer satisfaction
and retailer support.

EXPLOIT SOFTWARE TECHNOLOGY EXPERTISE. The Company has dedicated
substantial time and effort to the development of its proprietary program
libraries from which most of its current products have been derived. These
efforts and the resulting "core" technology are critical in enabling the Company
to maintain a competitive advantage, improve quality and consistency and bring
products to market quickly. The Company's product planning team is focused on
market research and the development of product specifications that will enable
the Company to exploit opportunities presented by technological and other
changes in the personal computer industry.

DEVELOP PRODUCTS FOR WINDOWS 95. The Company believes that the release of
Windows 95 by Microsoft will generally require personal computer users, who
upgrade to Windows 95, to replace their current utility software, as such
software is not expected to be compatible with Windows 95. In addition to
releasing versions of its current utility products which will be modified to be
compatible with Windows 95, the Company expects to release new products which
also make use of the new features incorporated into Windows 95.

EXPAND INTERNATIONAL DISTRIBUTION. The Company believes that international
markets provide a significant opportunity for the Company to increase sales of
its products and the Company is making a concerted effort to expand its
international operations. In July 1995, the Company established a subsidiary in
the United Kingdom from which the Company's European sales and marketing efforts
will be directed. The Company intends to implement its domestic marketing
strategy through its European subsidiary to expand its international
distribution. In June and July 1995, the Company completed the translation of
WINCHECK-CHECKMARK-IT into the French, German and Russian languages. The Company
is also evaluating further expansion into Asia, Latin America and Australia.

TARGET CORPORATE CUSTOMERS. The Company intends to establish a sales staff
dedicated to marketing its products to large corporate customers in multiple
user packages. Presently, the Company has not addressed this market but rather
has focused primarily on individual retail customers. The Company believes that
a sales staff focused on corporate customers could substantially increase sales
of its products, and that an intensive investment of resources in developing
this capability will have a positive long range impact on the future growth of
the Company.

PURSUE STRATEGIC ALLIANCES AND ACQUISITIONS. The Company will continue to
pursue strategic alliances that, through the addition of development,
distribution or financial resources, would allow the Company to develop, publish
and market utility software products into broader markets. The Company currently
has a strategic alliance with Trend Micro Devices ("Trend"), an international
utility software developer and publisher, which developed the Company's
FASTMOVE! product that the Company is currently publishing for domestic
distribution. In addition, it is anticipated that the Company will seek to
accelerate its growth through strategic acquisition of complementary businesses,
products or technologies. The Company, however, has no plans, commitments or
agreements with respect to any such transactions at the date of this Prospectus.

22
<PAGE>
PRODUCTS

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

<TABLE>
<CAPTION>
INITIAL
RELEASE TYPICAL
PRODUCT TITLE DESCRIPTION DATE RETAIL PRICE
- ---------------------- ----------------------------------------------------------------------------- ----------- -------------
<S> <C> <C> <C>
WIN'95 ADVISOR This Windows-based utility tests a personal computer system for Windows 95 July 1995 $29.95
suitability and generates a customized preparation checklist identifying
steps that must be taken, including hardware upgrades, before Windows 95 is
installed. WIN'95 ADVISOR also creates an installation options batch file
which automates the installation of Windows 95 and includes other utilities
used to prepare the system ahead of time.

WINCHECK-CHECKMARK-IT This Windows-based utility (i) diagnoses personal computer problems, (ii) August 1994 $49.95
frees up disk space, (iii) restores critical system files and startup
information, (iv) analyzes system performance, (v) consolidates Windows
memory fragments, (vi) tests hardware reliability and (vii) removes unneeded
Windows applications.

FASTMOVE! This Windows- and DOS-based file transfer utility is packaged with a cable to March 1995 $49.95
enable a user to quickly synchronize two personal computers with up-to-date
files and scan for viruses.

SETUP ADVISOR This Windows-based utility helps users install modems, fax cards, sound April 1994 $24.95
cards, CD-ROM drives and other devices by combining a library of device setup
data with accurate system information and analysis tools. SetUp Advisor is
used to collect system information, analyze compatibility and recommend
installation settings.

CHECK-CHECKMARK-IT This DOS-based utility provides a comprehensive package of tools to June 1993 $149.95
PRO:DELUXE troubleshoot common personal computer problems. It includes a Deluxe Tool Kit
with serial and parallel loopback plugs, 5.25" and 3.5" Mini Spiral alignment
disks that test high and low density disk drives for mechanical problems and
the ROADTECH Portable Diagnostic Kit.

AUTOHELP/ This utility is a diagnostic software package available only to hardware May 1995 Not available
CHECK-CHECKMARK-IT manufacturers on an OEM basis and is "bundled" as part of a personal computer at retail
DIAGNOSTICS system. This product helps customers perform remote diagnostics and upload
the results to a manufacturer's technical support staff. Hewlett-Packard is
the first personal computer manufacturer to license AUTOHELP/CHECK-
CHECKMARK-IT DIAGNOSTICS for use on the HP Multimedia 6100 line of home
computers.
</TABLE>

23
<PAGE>
PRODUCT DEVELOPMENT

The Company believes that significant investment in research and development
is required in order to remain competitive, accelerate the rate of product
introductions, incorporate new technologies and sustain the quality of its
products. In addition to engineering and quality assurance, the Company's
research and development activities include the identification and validation of
a product's potential commercial success, as well as the incorporation of new
technologies in new products. The Company incurs significant expense in
preparing market research information and reviewing product specifications. In
addition, the Company works closely with hardware and software manufacturers to
anticipate user problems with new hardware and software. These efforts and the
resulting "core" technology are critical in enabling the Company to maintain a
competitive advantage, improve quality and consistency and bring products to
market quickly.

The product planning and development process begins with research and
analysis by both the marketing and research and development groups. The project
team typically consists of six to ten people. The Company's products require
varying degrees of development time which frequently depend on the general
complexity of the product. The typical length of research and development time
ranges from six to 18 months. Prior to release, each product undergoes careful
quality assurance testing that involves useability testing with external
evaluators and a technical review of each component of the final product and
testing on various hardware platforms. The Company endeavors, with the
assistance of personal computer hardware, software and peripheral suppliers, to
identify potential conflicts and other factors that could lead to problems with
personal computers due to incompatibility with evolving technology. The Company
then rapidly adapts its "core" technology to develop products, or enhance
existing ones, designed to assist the user in resolving the problem or adapting
to new technological environments. The Company's strategy of developing products
based on the Windows and Windows 95 operating systems and releasing these
products immediately prior to or at the time of Microsoft's release of new and
upgraded Windows and Windows 95 products is substantially dependent on its
ability to gain pre-release access to, and develop expertise in, current and
future versions of Windows and Windows 95. The Company is currently an
authorized "beta" site for Microsoft's Windows 95 operating system.

In early 1995, the Company introduced an enhanced version of SETUP ADVISOR,
which provides a number of additional features designed to assist Windows users
in upgrading their personal computer systems to attain multimedia and other
enhanced capabilities. In July 1995, the Company released WIN'95 ADVISOR, which
has been designed to assist current Windows users in determining if and how
their current systems must be modified if they anticipate installing and using
Microsoft's new Windows 95 operating system. The Company also is developing new
versions of its existing products for sale to Windows 95 users. As of August 24,
1995, the Company had two new products under development, one of which is an
anti-virus program for Windows 95 users with special features designed to
protect against virus threats resulting from use of online services such as the
Internet.

The Company has worked with other, often smaller, companies to develop
software that can be marketed and sold by the Company. These arrangements have
permitted the Company to expand its product offerings without incurring all of
the risks and costs of new product development. Typically, the agreements
between the Company and these third parties provide for joint development at
shared cost, or that the Company will reimburse the developer for costs incurred
through royalties to be paid by the Company as products are sold. The Company
also seeks to identify products developed by others that can be published by the
Company, for marketing and sale under the Company's name and trademarks and
through the Company's established channels of distribution. The FASTMOVE!
product introduced by the Company in March 1995 was originally developed by a
third party software developer, Trend Micro Devices, Inc., and was subsequently
modified by the Company. The Company will continue to pursue strategic alliances
that, through the addition of development, distribution or financial resources,
will allow the Company to develop and publish utility software products into
broader markets.

24
<PAGE>
During 1993 and 1994 and the first six months of 1995, royalty expenses were
$139,000, $166,000 and $274,000, respectively. Research and development expense
during 1993 and 1994 and the first six months of 1995 was approximately
$258,000, $440,000 and $273,000, respectively. In addition, the Company
capitalized costs of approximately $194,000, $169,000 and $199,000 during 1993,
1994 and the first six months of 1995, respectively, for the development of new
software products and the enhancement of existing products.

DISTRIBUTION, SALES AND MARKETING

The Company markets its products domestically through software distributors
for resale to the retail sales channel. In 1994, one major customer, Ingram
Micro, accounted for approximately 59% of product sales. In 1993, three major
customers, Ingram Micro, Merisel and Kenfil, accounted for an aggregate of
approximately 52% of product sales. Distribution agreements that were renewed in
1994 included those with Ingram Micro, Merisel and Tech Data. Licensed end-users
of the Company's products include individual personal computer owners,
government agencies, utilities, educational institutions, software development
companies, computer products manufacturers and others.

The Company's primary marketing and sales efforts in 1994 were directed at
increasing demand for products at the retail sales level and increasing the
number of mall stores, club stores and warehouse stores which carry the
Company's products. A key component of this strategy includes using outside
representatives to present the Company's products to store employees in such
retail stores as CompUSA, Sam's Club, Micro Center, Egghead, Computer City,
Fry's Electronics, Office Depot, Best Buy and PriceCostco. In addition, the
Company engaged in a variety of merchandizing promotions, such as end-caps,
shelf-talkers, in-store posters and rebate coupons in order to increase sales.
The Company also has improved its product packaging to better attract attention
of retail consumers to the Company's products directly "on the shelf."
Management estimates the number of retail stores which carry the Company's
products increased from approximately 1,700 in 1993 to approximately 7,100 in
1995 as a result of these efforts.

The Company also uses media advertising, direct mail, attendance at industry
trade shows, press releases and direct contacts through its marketing and sales
force as other means of generating new sales. Additionally, the Company
participates in retail promotions to obtain sales and marketing advantages at
the retail level by providing allowances to certain distributors which are
passed through to the retailer. The Company also participates in cooperative
advertising programs directly with certain distributors and retailers whereby
the Company receives marketing advantages through advertisements, brochures and
catalogs initially paid for by the distributors. The Company provides for
expenses related to these programs in amounts established in the individual
distributor agreements.

Internationally, the Company markets its products through distributors
and/or co-publisher arrangements. Co-publisher arrangements usually provide the
Company with royalties based on sales of products by the co-publisher in a
specific geographical or foreign language market. The Company publishes
translated its WINCHECK-CHECKMARK-IT products in French by A.B. Soft, in German
by Markt Und Technik and in Russian by Connections East, and Trend will soon be
publishing translated versions of WINCHECK-CHECKMARK-IT for distribution in
China and Japan. The Company also has independent sales representatives in
Canada and Australia. The Company recently established a subsidiary in the
United Kingdom from which the Company's sales and marketing efforts will be
directed. The Company intends to implement its domestic marketing strategy
through its European subsidiary to expand its international distribution. The
Company is also evaluating further expansion into Asia, Latin America and
Australia.

The Company's sales force currently consists of seven people based in the
Company's office and one person based in the Company's subsidiary's United
Kingdom office, all of whom receive salaries, commissions and/or incentive bonus
compensation. In addition, the Company maintains an in-house

25
<PAGE>
marketing department that handles most of the design and development of the
Company's product packaging, advertisements and promotional items. The Company
intends to hire additional sales and marketing personnel and develop a corporate
sales team specializing in corporate customers.

DUPLICATION AND PACKAGING

The Company's product manuals are printed by United Business Systems, Inc.,
whose primary service is reproduction of manuals and brochures. Substantially
all of the Company's products are duplicated and packaged by Encryption
Technology Corporation, a software manufacturing operation. Promotion
Distribution Services provides the fulfillment services for all of the Company's
mail order and upgrade offers. The Company believes its relations with these
suppliers are good. Although the Company believes that alternative resources
exist or can be obtained, a disruption of the Company's relationship with any of
these third party contractors could adversely affect the Company's results of
operations until replacement sources were established. In addition, any material
changes in product and service quality and pricing by these outside resources
could adversely affect the Company's results of operations. The Company has
attempted to mitigate the risk of any such disruption by maintaining certain
levels of "safety stock" inventories and the limited use of "second source"
vendors.

COMPETITION

The utility software industry is intensely competitive. Consumer demand for
particular software products may be adversely affected by the increasing number
of competitive products. The Company competes primarily against other companies
offering utility software. Although many companies larger than the Company have
the resources and technical ability to develop, market and distribute products
similar to those offered by the Company, the Company's management believes that
competition in the "problem-solving" software utility market is somewhat
fragmented. The Company is aware of other companies which have developed or are
in the process of developing products which may compete in whole or in part with
the Company's products, including Microsoft, Symantec, DiagSoft, Inc., Landmark
Research, Quarterdeck and others.

The Company believes that competition in the computer software industry is
largely based on adaptation to a particular market segment, availability of an
integrated set of products, relationships with distributors and retailers and
selection of appropriate distribution channels. The Company believes its focus
on the utilities segment of the market, emphasis on product quality and
accuracy, the momentum of its current Windows products, the joint promotion of
its products with software retailers and sales to leading distributors make it
competitive in each of these areas.

PROPRIETARY RIGHTS

Under existing law, software products have been difficult to patent, and
copyright laws offer only limited protection. Where feasible and appropriate,
the Company seeks common law copyright protection through the use of copyright
notices. The Company has filed and received federal trademark registrations for
the Company's stylized logo and "CHECKIT." The Company regards its software
product line as proprietary and primarily relies upon trade secret laws and
third party nondisclosure agreements, as well as restrictions incorporated in
its software product license agreements, for protection. The Company believes
that trademark and copyright protection are less significant to the Company's
success than factors such as the knowledge, ability and experience of the
Company's personnel, research and development, brand name recognition and
product loyalty. Nevertheless, it may be possible for competitors of the Company
to copy aspects of its product line.

The Company is aware that unauthorized copying by end-users affects many
companies within the software industry and if a significantly greater amount of
unauthorized copying were to occur, the Company's operating results could be
adversely affected. However, policing unauthorized use of the Company's products
is difficult. While the Company is unable to determine the extent to which
software piracy of its products exists, software piracy can be expected to be a
persistent problem.

26
<PAGE>
The Company believes that its products, trademarks and other proprietary
rights do not infringe on the proprietary rights of third parties. As the number
of software products in the industry increases and the functionality of these
products further overlaps, software developers may become increasingly subject
to infringement claims. There can be no assurances that third parties will not
assert infringement claims against the Company in the future with respect to
current or future products or that any such assertion may not require the
Company to enter into royalty arrangements or result in costly litigation.

EMPLOYEES

On August 10, 1995, the Company had 49 employees, of which 12 were involved
in sales and marketing, 12 in product planning and development, 14 in customer
support, 3 in production, shipping and receiving, and 8 in general
administration. None of the Company's employees is covered by a collective
bargaining agreement. The Company considers its relationship with its employees
to be good.

PROPERTIES

The Company currently leases 10,000 square feet of office space in
Huntington Beach, California. The square footage under lease will increase to
15,000 square feet over the five year term of the lease. The annual rent payment
under this lease is currently $138,000.

27
<PAGE>
MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

The directors, executive officers and key employees of the Company are as
follows:

<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ------------------------------ --- --------------------------------------------------------------------------------
<S> <C> <C>
Larry W. Dingus 51 Chairman of the Board and Secretary
C. Shannon Jenkins 48 President, Chief Executive Officer and Director
Ronald R. Maas 49 Executive Vice President, Chief Financial Officer and General Manager, and
Director
Kenneth C. Welch III 38 Director
Richard W. Brail 54 Director
Sigmund A. Fidyke III 41 Vice President of Development
Donald C. Watters 38 Vice President of Sales
</TABLE>

Mr. Dingus has served as Chairman of the Company's Board of Directors since
the Company was founded in September 1982, and has served as Secretary of the
Company since 1989. He resigned as President of the Company on February 15,
1988, and as Chief Executive Officer of the Company on February 16, 1989, posts
he had held since September 1982.

Ms. Jenkins has served as President of the Company since March 1988. On
February 16, 1989, she also became Chief Executive Officer. She served as the
Company's Vice President of Marketing from September 1982 until January 1986,
when she became the Company's Executive Vice President, and since September 1982
she has also served as a Director of the Company.

Mr. Maas joined the Company in 1991 as Vice President of Finance and
Operations and Chief Financial Officer. In 1993, Mr. Maas was promoted to
Executive Vice President and General Manager of the Company, and was elected to
the Company's Board of Directors. Prior to joining the Company, Mr. Maas served
from March 1990 through January 1991 as the Controller of Bell & Howell Quintar
Company, a manufacturer of computer peripheral equipment.

Mr. Welch has been a director of the Company since August 1993. From
September 1985 to the present, he has worked as an independent software
consultant in the Washington, D.C. area. From September 1982 to May 1985, he
served as the Company's Vice President of Development, and was a Director of the
Company from September 1982 to August 1986.

Mr. Brail joined the Company's Board of Directors in April 1995. He has been
the President and Chief Executive Officer of Best Golf, Inc. since September
1994. From July 1991 to May 1994, Mr. Brail served as the President of Helio
Computers, Inc. of Irvine, California. From 1985 until 1991, he provided
services to the Company and other computer companies as the owner of a computer
sales and marketing company.

In addition to its executive officers, the following individuals are
considered to be key employees of the Company:

Sigmund A. Fidyke III joined the Company in December 1993 as Vice President
of Development. From 1985 until December 1993, he was the majority owner and had
served as the President of Custom Software, Inc., a software development firm
with which the Company contracted from time to time.

Donald C. Watters joined the Company in July 1992 as Director of Sales, and
was promoted to Vice President of Sales on January 1, 1994. From January 1992 to
July 1992, Mr. Watters was the Regional Territory Manager for Certus
International. From 1987 to 1992, he was employed as the Manager of Distributor
Sales for California Software Products, Inc.

28
<PAGE>
BOARD OF DIRECTORS

During the last fiscal year, the Company's Board of Directors held three
regular and two special meetings and otherwise took action by written consent.
The Board has established an Executive Committee comprised of Mr. Dingus, Ms.
Jenkins and Mr. Maas. Among other things, the Executive Committee determines the
persons entitled to participate in stock option, bonus and other similar plans.
The Board has also established an Audit Committee comprised of Messrs. Dingus,
Welch and Brail, which meets to consult with the Company's independent auditors
concerning their engagement and audit plan, and thereafter concerning the
auditor's report and management letter and with the assistance of the
independent auditors, also monitors the adequacy of the Company's internal
accounting controls. The Board has not established separate compensation or
nominating committees. Rather, the Board of Directors meets as a whole to
determine the compensation of corporate officers and nominate the individuals to
be proposed by the Board of Directors for election as directors of the Company.

Each non-employee director is paid an annual retainer of $1,200 plus $300
per each board meeting attended and each board committee meeting attended for
each committee of which they are a member. The Company has and will continue to
pay the expenses of its non-employee directors incurred in attending Board
meetings. In October 1994, the Company issued warrants to purchase 20,000 shares
of Common Stock, at the exercise price of $.50 per share, to each of Mr. Welch
and Ernest W. Baumgardner, formerly a director of the Company, for serving on
the Company's Board of Directors. No additional compensation is paid to any of
the employee directors.

EXECUTIVE COMPENSATION

The following table sets forth information regarding compensation for
services in all capacities paid or accrued for the fiscal years indicated by the
Company to each of the executive officers identified above.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
--------------------- UNDERLYING
SALARY BONUS OPTIONS
NAME AND PRINCIPAL POSITION YEAR $ $ #
- ------------------------------------------------------------ ---- ------- ------ ------------
<S> <C> <C> <C> <C>
C. Shannon Jenkins, 1994 112,400 89,657 104,000
President, Chief Executive 1993 100,000 17,641(1) 80,000
Officer and Director 1992 109,000 6,081 101,000
Larry W. Dingus, 1994 95,333 78,683 104,000
Chairman of the 1993 86,000 15,370(1) 80,000
Board of Directors 1992 90,000 6,753 109,334
Ronald R. Maas, 1994 83,800 47,449 64,000
Executive Vice President 1993 78,300 8,376(1) 78,000
and Director 1992 72,800 4,172 87,333
<FN>
- ------------------------
(1) Amounts reported for 1993 and 1994 exclude bonuses paid in 1994, including
$20,960 paid to Ms. Jenkins, $18,340 paid to Mr. Dingus, $11,480 paid to
Mr. Maas.
</TABLE>

EMPLOYMENT AGREEMENTS

The Company has entered into an employment agreement with each of its three
executive officers, Mr. Dingus, Ms. Jenkins and Mr. Maas, that automatically
renews on January 1 of each year and provides that, upon termination of
employment with the Company for any reason other than "cause," the executive
officer will continue to receive compensation at the level in effect on the date
of termination of employment for the remainder of the year or nine months,
whichever is longer. In the

29
<PAGE>
event that the termination of employment of any of the executive officers occurs
following a change in control of the Company, the exercisability of all stock
options and warrants held by the terminated officer will automatically be
accelerated and the purchase price of all shares of the Company's Common Stock
issuable upon exercise of such options and warrants can be paid by the
terminated executive pursuant to a promissory note due and payable in two years.

BONUS PLAN

For each of the years ended December 31, 1992, 1993 and 1994, the Company's
Board of Directors established a plan to provide additional incentive to
management. Under such plan, the Company's executive officers, including
directors who are also employees, and other key employees of the Company
received bonuses based upon the Company's profitability in addition to their
base cash compensation.

The Company has also established a bonus plan for the year ending December
31, 1995 (the "1995 Bonus Plan"). Under the 1995 Bonus Plan, participants
selected by the Board of Directors will be eligible to receive bonuses (which,
in the case of any individual participant, shall not exceed that participant's
base salary for the year) determined quarterly based upon the Company's net
income after taxes for the quarter, with 60% of the earned bonus payable
following the end of the quarter. The 40% balance of the earned bonus will be
deferred until the end of the year, and then will be payable only if the
Company's net income would still be in excess of $250,000, assuming all deferred
bonus payments were made. The maximum payable to all participants in the 1995
Bonus Plan, as a group, is that amount which equals 18.5% of the Company's
pre-tax income for any quarter or the full year, as appropriate. Each of the
executive officers of the Company identified above was selected as a participant
in the 1995 bonus plan for each of the first two quarters of 1995.

STOCK OPTION PLANS

On August 5, 1988, the Company adopted a non-qualified stock option plan
(the "1988 Plan"). Options to purchase a total of 166,667 shares of Common Stock
may be granted under the 1988 Plan to provide incentive for non-employee
directors, technical advisors, vendors and consultants of the Company, its
subsidiaries or affiliates. Options granted under the 1988 Plan are not intended
to qualify as incentive stock options. As of December 31, 1994, options to
purchase an aggregate of 12,500 shares of Common Stock, at an exercise price of
$.20 per share, were outstanding under the 1988 Plan. Since December 31, 1994
options to purchase 39,000 shares of Common Stock at an exercise price of $5.00
per share have been granted under the 1988 Plan to a public relations firm. As
of the date of this prospectus there are no shares available for grant under the
1988 Plan.

In 1991, the Company adopted stock option plans (collectively, the "1991
Plan") pursuant to which options can be granted to purchase up to an aggregate
of 1,175,000 shares of the Company's Common Stock. The 1991 Plan provides for
the grant of both incentive and non-qualified options. Incentive stock options
can be granted only to employees, including executive officers, of the Company,
while non-qualified stock options can be granted to employees, non-employee
directors, officers, consultants, vendors, customers and others expected to
provide significant services to the Company. At July 31, 1995, options to
purchase an aggregate of 48,833 shares of Common Stock were outstanding under
the 1991 Plan and 37,501 shares were available for issuance upon exercise of
options that may be granted under the 1991 Plan.

In 1994, the Company's Board of Directors adopted a 1994 Stock Option Plan
(the "1994 Plan") pursuant to which options to purchase up to 550,000 shares of
the Company's Common Stock may be granted. Unless and until the 1994 Plan is
approved by the Company's shareholders, only non-qualified options can be
granted under the 1994 Plan to employees, including executive officers, non-
employee directors, consultants, vendors, customers and others expected to
provide significant services to the Company. On October 31, 1994, the Company
granted options under the 1994 Plan to purchase an aggregate of 435,000 shares
of Common Stock, at $.50 per share, to a total of 15 key employees, including
executive officers. Since December 31, 1994, options to purchase an additional
110,000 shares of Common Stock, at prices ranging from $.85 to $1.85 per share,
have been granted under the 1994 Plan, including options to purchase 10,000
shares, at $1.00 per share, granted to

30
<PAGE>
Mr. Brail upon joining the Company's Board of Directors in April 1995. As of the
date of this Prospectus, 5,000 shares are available for issuance upon exercise
of options that may be granted under the 1994 Plan.

The following table sets forth certain information regarding options granted
by the Company during the fiscal year ended December 31, 1994 to the executive
officers of the Company identified above:

OPTIONS GRANTED IN FISCAL YEAR 1994

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES % OF TOTAL OPTIONS
UNDERLYING OPTIONS GRANTED TO EMPLOYEES EXERCISE EXPIRATION
NAME OF OPTIONEE GRANTED (#) (1)(2) IN FISCAL YEAR PRICE ($/SH) DATE
- --------------------------------------------- ------------------- ----------------------- ------------- ----------
<S> <C> <C> <C> <C>
C. Shannon Jenkins........................... 4,000 0.9% $ 0.31 05/09/96
50,000 11.2 0.50 10/31/97
50,000 11.2 0.50 10/31/97
Larry W. Dingus.............................. 4,000 0.9 0.31 05/09/96
50,000 11.2 0.50 10/31/97
50,000 11.2 0.50 10/31/97
Ronald R. Maas............................... 4,000 0.9 0.31 05/09/96
30,000 6.7 0.50 10/31/97
30,000 6.7 0.50 10/31/97
</TABLE>

The following table sets forth information regarding options exercised
during the year ended December 31, 1994 by the executive officers of the Company
identified above, as well as the aggregate value of unexercised options held by
such individuals at December 31, 1994:

AGGREGATED OPTION EXERCISES LAST FISCAL YEAR AND FISCAL YEAR END OPTION VALUES

<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END ($) (1)
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE (#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------- ------------ --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
C. Shannon Jenkins............... 286,000 $ 40,170 50,000 50,000 $ 26,500 $ 26,500
Larry W. Dingus.................. 297,668 40,503 50,000 50,000 26,500 26,500
Ronald R. Maas................... 169,333 21,070 30,000 30,000 15,900 15,900
<FN>
- ------------------------
(1) Calculated based on the closing bid quotation for a share of the Company's
Common Stock on December 31, 1994, which was $1.03 per share.
</TABLE>

EMPLOYEE STOCK PURCHASE PLAN

In August 1994, the Company's Board of Directors adopted an employee stock
purchase plan pursuant to which an aggregate of 260,900 shares of Common Stock
were sold to a total of 21 employees, including 20,000 shares purchased by each
of Mr. Dingus, Ms. Jenkins and Mr. Maas. Each participating employee was
entitled to purchase, for cash, promissory notes, or through semi-monthly
payroll deductions, up to 20,000 shares of Common Stock at $.22 per share, which
price was equal to 85% of the most recent bid price per share of the Common
Stock. In addition, each participant received a warrant to purchase, at any time
prior to August 14, 1997, one additional share of Common Stock, at the same
price per share, for every share purchased under the employee stock purchase
plan. In 1994, Mr. Dingus, Ms. Jenkins and Mr. Maas each purchased 20,000 shares
of the Company's Common Stock by providing non-interest bearing notes to the
Company in the principal amount of $4,400 each. These notes are payable in
monthly installments through August 1995, when the entire principal amount of
each is due and payable.

31
<PAGE>
CERTAIN TRANSACTIONS

In 1991, Mr. Dingus participated in the Company's $200,000 subordinated debt
financing, providing the Company with a personal loan of $10,000 for two years
at 15% interest and receiving options to purchase a total of 3,334 shares of the
Company's Common Stock at an average price of $.20 per share. In 1992, Mr.
Dingus, a member of his family and Mr. Maas participated in the Company's
$45,000 subordinated note financing, lending the Company $15,000, $20,000 and
$10,000, respectively. In consideration of these loans, Messrs. Dingus and Maas
were granted warrants to purchase 5,000 and 3,333 shares of Common Stock,
respectively, at $.30 per share. Additionally, in connection with the Company's
bank line of credit, Mr. Dingus and Mr. Maas were required to accept only
payments of interest from November 1993 until May 1, 1994 by virtue of the
subordination provisions of their subordinated notes. In consideration for the
Company's failure to make principal payments when due, Mr. Dingus was issued
11,120 shares of Common Stock and Mr. Maas was issued 4,810 shares of Common
Stock. At December 31, 1994, the principal amounts due Messrs. Dingus and Maas
under these subordinated notes were approximately $15,800 and $6,800,
respectively. All of these amounts were paid in March 1995.

During the years ended December 31, 1993 and 1994, Mr. Dingus, Ms. Jenkins
and Mr. Maas were each granted options to purchase a total of 34,000 of the
Company's Common Stock in consideration for their guarantees of borrowings under
the Company's bank line of credit. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Management -- Stock Option Plans."

In August 1994, three-year warrants to purchase an aggregate of 56,733
shares of Common Stock at $.26 per share were issued to holders of outstanding
stock options who agreed to exercise their options at an earlier date than
otherwise required, including warrants to purchase 14,883, 14,300, 8,467 and
2,000 shares issued to Mr. Dingus, Ms. Jenkins, Mr. Maas and Mr. Welch,
respectively.

During the year ended December 31, 1994, Mr. Dingus, Ms. Jenkins and Mr.
Maas gave the Company promissory notes in the respective principal amounts of
$46,357, $43,349 and $28,244 as payment of the purchase price for 297,668,
286,000 and 169,333 shares of the Company's Common Stock, respectively, acquired
upon exercise of stock options. Certain of these notes originally bore interest
at the rate of 8% per annum and were due and payable in August 1995, while other
bore interest at the annual rate of 3.5% and were not payable until August 1998.
Prior to the end of 1994, the interest rate on the 8% notes was reduced to 3.5%
per annum, and the maturity of those notes was extended to August 1998. Each of
these promissory notes will be paid in full upon consummation of this offering.

LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY AND INDEMNIFICATION

The Company's Bylaws provide that the Company must indemnify its officers
and directors, and may indemnify its employees and other agents, to the fullest
extent permitted by California law. California law provides that directors of a
California corporation will not be personally liable for monetary damages for
breach of the fiduciary duties as directors except for liability as a result of
their duty of loyalty to the company for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, unlawful
payments of dividends or stock transactions, unauthorized distributions of
assets, loans of corporate assets to an officer or director, unauthorized
purchase of shares, commencing business before obtaining minimum capital, or any
transaction from which a director derived an improper benefit. Such limitations
do not affect the availability of equitable remedies such as injunctive relief
or rescission. At present, there is no pending litigation or proceeding
involving any director, officer, employee, or agent of the Company where
indemnification will be required or permitted. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to officers,
directors or persons controlling the Company pursuant to the foregoing
provisions, the Company has been informed that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.

32
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of August 24, 1995 by each director
and executive officer of the Company, each person known to the Company to be the
beneficial owner of more than 5% of the outstanding Common Stock, each of the
Selling Shareholders, and all directors and executive officers of the Company as
a group. The table also sets forth the maximum number of shares to be offered
hereby for the account of each Selling Shareholder, and the number and
percentage of the outstanding shares of Common Stock to be beneficially owned by
each Selling Shareholder after completion of this offering, assuming all shares
offered hereby are in fact sold. Except as otherwise indicated below, the
Company believes that each person listed below has sole voting and investment
power with respect to the shares owned, subject to applicable community property
laws. The address of each person listed is 2124 Main Street, Huntington Beach,
California 92648.

<TABLE>
<CAPTION>
SHARES OWNED SHARES OWNED
PRIOR TO OFFERING (1) NUMBER OF AFTER THE OFFERING (1)
NAME OF BENEFICIAL OWNER ------------------------ SHARES THAT ------------------------
OR IDENTITY OF GROUP NUMBER PERCENT MAY BE SOLD NUMBER PERCENT
- ------------------------------------------------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Larry W. Dingus (2)................................... 879,957 14.7% 443,000 436,957 5.9%
C. Shannon Jenkins (2)................................ 879,518 14.6 243,000 636,518 8.6
Ronald R. Maas (2).................................... 426,610 7.1 121,000 305,610 4.2
Kenneth C. Welch III (2).............................. 310,574 5.2 82,000 228,574 3.1
Donald C. Watters (2)................................. 249,871 4.2 70,000 179,871 2.5
Sigmund A. Fidyke III (2)............................. 138,750 2.3 41,000 97,750 1.3
Richard W. Brail (2).................................. 10,000 * 0 10,000 *
All Selling Shareholders as a group
(6 persons).......................................... 2,884,913 46.0 1,000,000 1,884,913 24.7
All executive officers and directors as
a group (5 persons) (3).............................. 2,506,292 40.4 889,000 1,617,292 21.4
<FN>
- ------------------------
* Less than one percent.
(1) Percentages shown include shares which each named shareholder has the right
to acquire within 60 days from the date of this Prospectus. All shares of
Common Stock which a named shareholder has the right to so acquire upon
exercise of stock options are deemed to be outstanding for the purpose of
computing the percentage of Common Stock owned by such shareholder, but are
not deemed to be outstanding for the purpose of computing the percentage of
Common Stock owned by any other shareholder.
(2) Includes shares issuable upon exercise of outstanding options and stock
purchase warrants, including 84,883 shares in the case of Mr. Dingus,
84,300 shares in the case of Ms. Jenkins, 58,467 shares in the case of Mr.
Maas, 42,000 shares in the case of Mr. Welch, 43,500 shares in the case of
Mr. Watters, 43,750 shares in the case of Mr. Fidyke, and 10,000 shares in
the case of Mr. Brail. See "Management -- Stock Option Plans"; "Employee
Stock Purchase Plan" and "Certain Transactions."
(3) Includes an aggregate of 279,650 shares issuable upon exercise of
outstanding options.
</TABLE>

33
<PAGE>
DESCRIPTION OF SECURITIES

The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock, $.001 par value per share, of which 5,980,468 shares were issued
and outstanding as of August 24, 1995, and 3,000,000 shares of Preferred Stock,
$.001 par value per share, none of which have been issued or are outstanding.

COMMON STOCK

Holders of the Common Stock are entitled to one vote per share on all
matters to be voted upon by the shareholders and to cumulate votes in the
election of directors. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor. See "Dividend Policy." Upon the liquidation,
dissolution, or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets of the Company which are legally
available for distribution, after payment of all debts and other liabilities.
Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
being sold by the Company in this offering will be, when issued and delivered,
validly issued, fully paid and nonassessable.

PREFERRED STOCK

The Board of Directors is authorized, subject to any limitations prescribed
by the laws of the State of California, but without further action by the
Company's shareholders, to provide for the issuance of Preferred Stock in one or
more series, to establish from time to time the number of shares to be included
in each such series, to fix the designations, powers, preferences and rights of
the shares of each such series and any qualifications, limitations or
restrictions thereof, and to increase or decrease the number of shares of any
such series (but not below the number of shares of such series then outstanding)
without any further vote or action by the shareholders. The Board of Directors
may authorize and issue Preferred Stock with voting or conversion rights that
could adversely affect the voting power or other rights of the holders of Common
Stock. In addition, the issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company. The
Company has no current plan to issue any shares of Preferred Stock.

OUTSTANDING WARRANTS

As of August 24, 1995, there were outstanding warrants to purchase an
aggregate of 329,968 shares of Common Stock at exercise prices ranging from $.20
to $.50 per share. Included are warrants to purchase 34,883, 34,300 and 28,467
shares issued to Mr. Dingus, Ms. Jenkins and Mr. Maas, respectively, as
described under "Management -- Employee Stock Purchase Plan." Also included are
warrants to purchase 22,000 shares Common Stock issued to Mr. Welch and warrants
to purchase 10,000 shares retained by Mr. Baumgardner, a former member of the
Company's Board of Directors who exercised other warrants to purchase 36,833
shares in May 1995. See "Management -- Board of Directors" and "-- Certain
Transactions." Additional participants in the Company's stock purchase plan held
warrants to purchase an aggregate of 120,900 shares of Common Stock, and
warrants to purchase 82,168 shares of Common Stock are held by individuals who
loaned money to the Company and independent contractors for services provided
and to be provided to the Company.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Company's Common Stock is American
Securities Transfer, Incorporated, 938 Quail Street, Suite 101, Lakewood, CO
80215.

34
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of this offering, the Company will have 7,280,468 shares of
Common Stock outstanding. All of the 2,300,000 shares sold in this offering (and
any shares sold by the Selling Shareholders upon exercise of the Underwriters'
over-allotment option) will be freely transferable by persons other than
"affiliates" of the Company (as that term is defined under the Securities Act)
without restriction or further registration under the Securities Act.

The remaining outstanding shares of Common Stock will be "restricted
securities" within the meaning of Rule 144 under the Securities Act and may not
be sold in the absence of registration under the Securities Act unless an
exemption from registration is available, including the exemption contained in
Rule 144. In the absence of agreements with the Representative, approximately
3,700,000 of such shares have met the two year holding period requirement under
Rule 144 and could begin to be sold on the 91st day following the offering.
However, pursuant to the terms of the Underwriting Agreement, the
Representatives have required that the Common Stock owned by officers, directors
and other holders, as well as Common Stock obtained by them upon exercise of
stock options, may not be sold until nine months from the date of this
Prospectus without the prior written consent of the Representative.

In general, under Rule 144, as currently in effect, a person who has
beneficially owned shares for at least two years is entitled to sell, within any
three-month period, a number of "restricted" shares that does not exceed the
greater of 1% of the then outstanding shares of Common Stock or the average
weekly trading volume during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain manner of sale limitations, notice
requirements and the availability of current public information about the
Company. Rule 144(k) provides that a person who is not deemed an "affiliate" and
who has beneficially owned shares for at least three years is entitled to sell
such shares at any time under Rule 144 without regard to the limitations
described above.

In addition to the shares of Common Stock that are currently outstanding, a
total of 617,834 shares of Common Stock have been reserved for issuance upon
exercise of options granted under the Company's stock option plans, and options
to acquire 575,333 shares of Common Stock at a weighted average exercise price
of $.78 per share have been granted pursuant to such plans. In July 1995, the
Company registered an aggregate of 636,334 shares of Common Stock for issuance
upon exercise of outstanding options granted or to be granted under the
Company's stock option plans. Warrants to purchase an additional 329,968 shares
of Common Stock, at a weighted average exercise price of $.27 per share, have
also been issued to employees in connection with the Company's employee stock
purchase plan and to various consultants who provide services to the Company.
See "Management -- Stock Option Plan." Pursuant to the terms of the Underwriting
Agreement referenced above, shares underlying certain options granted may be
resold on the 91st day after the date of this Prospectus pursuant to Rule 701
promulgated under the Securities Act.

The Company is unable to estimate the number of shares that may be sold in
the future by its existing shareholders or the effect, if any, that sales of
shares by such shareholders will have on the market price of Common Stock
prevailing from time to time. Sales of substantial amounts of Common Stock by
existing shareholders could adversely affect prevailing market prices.

35
<PAGE>
UNDERWRITING

The Underwriters named below, represented by Cruttenden Roth Incorporated
and Punk, Ziegel & Knoell, L.P. (the "Representatives"), have severally agreed,
subject to the terms and conditions contained in the Underwriting Agreement, to
purchase from the Company and the Selling Shareholders the number of shares of
Common Stock indicated below opposite their respective names at the public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus. The Underwriting Agreement provides that the
obligations of the Underwriters are subject to certain conditions and that the
Underwriters are committed to purchase all of such shares (other than the Common
Stock covered by the over-allotment option as described below), if any are
purchased.

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ----------------------------------------------------------------------------------------------------- -----------
<S> <C>
Cruttenden Roth Incorporated..................................................................... 700,000
Punk, Ziegel & Knoell, L.P....................................................................... 700,000
Hambrecht & Quist Incorporated................................................................... 90,000
Morgan Stanley & Co. Incorporated................................................................ 90,000
Robertson, Stephens & Company, L.P............................................................... 90,000
S.G. Warburg & Co., Inc.......................................................................... 90,000
Adams, Harkness & Hill, Inc...................................................................... 45,000
William Blair & Company.......................................................................... 45,000
Commonwealth Associates.......................................................................... 45,000
Furman Selz Incorporated......................................................................... 45,000
Gerard Klauer Mattison & Co., Inc................................................................ 45,000
Janney Montgomery Scott Inc...................................................................... 45,000
Needham & Company, Inc........................................................................... 45,000
Pennsylvania Merchant Group Ltd.................................................................. 45,000
Piper Jaffray Inc................................................................................ 45,000
Soundview Financial Group........................................................................ 45,000
Wedbush Morgan Securities........................................................................ 45,000
Wessels, Arnold & Henderson, L.L.C............................................................... 45,000
-----------
Total........................................................................................ 2,300,000
-----------
-----------
</TABLE>

The Company has been advised by the Representatives that the Underwriters
propose to offer the shares to the public at the public offering price set forth
on the cover page of this Prospectus, and to certain securities dealers at such
price less a concession of not more than $0.55 per share, and that the
Underwriters and such dealers may reallow to other dealers, including the
Underwriters, a discount not in excess of $0.10 per share. After the public
offering, the public offering price and concessions and discounts may be changed
by the Representatives. No change in such terms shall change the amount of
proceeds to be received by the Company and the Selling Shareholders as set forth
on the cover page of this Prospectus.

Certain of the Selling Shareholders have granted an option to the
Representatives, exercisable for a period of 45 days after the date of this
Prospectus, to purchase up to an additional 345,000 shares of Common Stock at
the public offering price set forth on the cover page of this Prospectus less
the underwriting discounts and commissions. The Representatives may exercise
this option only to cover over-allotments, if any. To the extent such option is
exercised, each Underwriter will become obligated, subject to certain
conditions, to purchase a percentage of such additional shares approximately
equal to the percentage of shares it was obligated to purchase from the Company
pursuant to the Underwriting Agreement.

The Representatives have informed the Company and the Selling Shareholders
that they do not expect any sales of the shares of Common Stock offered hereby
to be made to discretionary accounts by the Underwriters.

36
<PAGE>
The Company has agreed to pay the Representatives a non-accountable expense
allowance of 2% of the offering proceeds of all shares sold by the Company and
the Selling Shareholders. However, to the extent the over-allotment option is
exercised, the 2% non-accountable expense allowance with respect to these shares
will be paid by the Selling Shareholders. To date, the Company has paid $30,000
of the non-accountable expense allowance to the Representatives. The
Representatives' expenses in excess of the non-accountable expense allowance,
including their legal expenses, will be borne by the Representatives. To the
extent that the expenses of the Representatives are less than the
non-accountable expense allowance, the excess shall be deemed to be compensation
to the Representatives.

The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities under the Securities Act or will
contribute to payments the Underwriters may be required to make in respect
thereof. The Company has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.

The Company has agreed to sell to the Representatives, for $230, warrants
(the "Representatives' Warrants") to purchase up to 230,000 shares of Common
Stock at an exercise price per share equal to 160% of the public offering price
per share. The Representatives' Warrants are exercisable for a period of four
years beginning one year from the date of this Prospectus, and are not
transferable for a period of one year except to officers of the Representatives
or any successor to the Representatives. In addition, the Company has granted
certain rights to the holders of the Representatives' Warrants to register the
Common Stock underlying the Representatives' Warrants under the Securities Act.

The foregoing sets forth the material terms and conditions of the
Underwriting Agreement, but does not purport to be a complete statement of the
terms and conditions thereof, copies of which are on file at the offices of the
Representatives, the Company and the United States Securities and Exchange
Commission, Los Angeles, California. See "Additional Information."

LEGAL MATTERS

Certain legal matters with respect to the legality of the issuance of the
Shares offered hereby under California law will be passed upon for the Company
by Phillips & Haddan, Newport Beach, California. Certain legal matters will be
passed upon for the Underwriters by Stradling, Yocca, Carlson & Rauth, Newport
Beach, California.

EXPERTS

The financial statements of the Company as of December 31, 1994 and 1993 and
for each of the three years in the period ended December 31, 1994, included in
this Prospectus and the Registration Statement have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports appearing herein
and elsewhere in the Registration Statement, and are included in reliance upon
such reports of such firm given upon their authority as experts in auditing and
accounting.

37
<PAGE>
ADDITIONAL INFORMATION

A Registration Statement on Form SB-2, including amendments thereto,
relating to the Common Stock offered hereby has been filed by the Company with
the Securities and Exchange Commission. This Prospectus does not contain all of
the information set forth in the Registration Statement and the exhibits and
schedules thereto. Statements contained in this Prospectus as to the contents of
any contract or other document referred to are not necessarily complete and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. For further information with
respect to the Company and the Common Stock offered hereby, reference is made to
such Registration Statement, exhibits and schedules. A copy of the Registration
Statement may be inspected by anyone without charge at the Commission's
principal office located at 450 Fifth Street, N.W., Washington, D.C. 20549, the
New York Regional Office located at 7 World Trade Center, 13th Floor, New York,
New York 10048, and the Chicago Regional Office located at Northwestern Atrium
Center, 500 West Madison Street, Chicago Illinois 60661-2511 and copies of all
or any part thereof may be obtained from the Public Reference Branch of the
Commission upon the payment of certain fees prescribed by the Commission.

38
<PAGE>
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report............................................................................... F-2

Balance Sheets
December 31, 1993 and 1994, and June 30, 1995 (unaudited)................................................ F-3

Statements of Income
Years ended December 31, 1992, 1993 and 1994, and six months ended June 30, 1994 and 1995 (unaudited).... F-4

Statements of Shareholders' Equity
Years ended December 31, 1992, 1993 and 1994, and six months ended June 30, 1995 (unaudited)............. F-5

Statements of Cash Flows
Years ended December 31, 1992, 1993 and 1994, and six months ended June 30, 1994 and 1995 (unaudited).... F-6

Notes to Financial Statements.............................................................................. F-7
</TABLE>

F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT

To the Board of Directors of
TouchStone Software Corporation:

We have audited the accompanying balance sheets of TouchStone Software
Corporation as of December 31, 1993 and 1994 and the related statements of
income, shareholders' equity and cash flows for each of three years in the
period ended December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of TouchStone Software Corporation as of
December 31, 1993 and 1994 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1994, in conformity
with generally accepted accounting principles.

Deloitte & Touche LLP
Costa Mesa, California
February 3, 1995

F-2
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION
BALANCE SHEETS
ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1993 1994
-------------- -------------- JUNE 30,
1995
--------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents...................................... $ 44,005 $ 1,298,201 $ 1,759,060
Accounts receivable, net....................................... 892,497 1,681,612 1,651,452
Inventories.................................................... 238,986 389,180 336,389
Deferred tax asset............................................. 298,800 298,833
Prepaid expenses and other current assets...................... 29,209 31,340 31,902
Employee and director advances................................. 14,981 18,458 47,026
-------------- -------------- --------------
Total current assets......................................... 1,219,678 3,717,591 4,124,662
Property, net.................................................... 49,568 54,607 133,844
Software development costs, net.................................. 433,948 235,868 296,781
Deferred tax asset............................................... 17,300
Other assets..................................................... 15,678 16,830 225,923
-------------- -------------- --------------
$ 1,736,172 $ 4,024,896 $ 4,781,210
-------------- -------------- --------------
-------------- -------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to bank.......................................... $ 89,821 $ 300,000 $
Accounts payable............................................... 311,410 703,524 525,749
Accrued payroll and related expenses........................... 172,523 524,157 480,046
Accrued cooperative advertising costs.......................... 96,075 228,157 447,529
Other accrued liabilities...................................... 125,826 447,601 450,561
Current portion of long-term debt.............................. 63,105 64,096 19,033
Obligations under capital leases............................... 10,468 4,124 1,006
-------------- -------------- --------------
Total current liabilities.................................... 869,228 2,271,659 1,923,924
Long-term debt................................................... 99,526 54,875 47,416
Deferred tax liability........................................... 80,400 80,374
Obligations under capital leases................................. 4,124
Deferred lease obligation........................................ 6,871
Due to affiliate................................................. 1,499 2,597
Other............................................................ 114,000
Commitments......................................................
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, 4,446,304 shares at December 31 1993,
5,833,469 shares at
December 31, 1994 and 5,920,468 at June 30, 1995.............. 2,071,150 5,833 5,920
Additional paid-in capital..................................... 2,324,111 2,430,041
Common stock subscribed........................................
Notes receivable from sale of common stock..................... (74,175) (272,603) (239,207)
Retained earnings (accumulated deficit)........................ (1,242,051) (441,976) 418,742
-------------- -------------- --------------
Total shareholders' equity................................... 754,924 1,615,365 2,615,496
-------------- -------------- --------------
$ 1,736,172 $ 4,024,896 $ 4,781,210
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>

See accompanying notes to financial statements.

F-3
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION
STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------- ----------------------------
1992 1993 1994 1994 1995
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Product sales....................... $ 3,348,511 $ 4,692,849 $ 6,893,447 $ 2,458,588 $ 6,022,127
Royalty income...................... 121,749 231,674 308,054 158,485 159,280
------------- ------------- ------------- ------------- -------------
Total revenues.................... 3,470,260 4,924,523 7,201,501 2,617,073 6,181,407
Cost of sales......................... 979,073 1,663,969 2,315,740 910,344 1,904,608
------------- ------------- ------------- ------------- -------------
Gross profit...................... 2,491,187 3,260,554 4,885,761 1,706,729 4,276,799
Operating expenses:
Sales and marketing................. 1,497,299 1,872,557 2,273,188 1,031,198 1,840,735
General and administrative.......... 642,154 813,458 1,244,516 412,575 805,474
Research and development............ 277,222 257,697 440,477 135,441 273,271
------------- ------------- ------------- ------------- -------------
Income from operations............ 74,512 316,842 927,580 127,515 1,357,319
Other income (expense), net........... (26,490) (29,119) (28,005) (11,118) 31,699
------------- ------------- ------------- ------------- -------------
Income before provision (benefit) for
income taxes......................... 48,022 287,723 899,575 116,397 1,389,018
Provision (benefit) for income
taxes................................ 7,000 (20,000) 99,500 13,100 528,300
------------- ------------- ------------- ------------- -------------
Net income............................ $ 41,022 $ 307,723 $ 800,075 $ 103,297 $ 860,718
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Net income per share.................. $ 0.01 $ 0.06 $ 0.14 $ 0.02 $ 0.13
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Weighted average shares............... 4,776,000 4,927,000 5,576,000 4,995,000 6,696,000
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
</TABLE>

See accompanying notes to financial statements.

F-4
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 (AUDITED),
AND FOR THE SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED)

<TABLE>
<CAPTION>
NOTES
RETAINED RECEIVABLE
COMMON STOCK EARNINGS FROM SALE TOTAL
-------------------------- PAID-IN (ACCUMULATED OF COMMON SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) STOCK EQUITY
------------ ------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance Jan. 1, 1992 4,425,470 $ 2,067,900 $ $ (1,590,796) $ (71,425) $ 405,679
Stock options exercised................. 8,334 1,250 (1,250)
Collection of notes receivable.......... 395 395
Interest accrued........................ (12,315) (12,315)
Net income.............................. 41,022 41,022
------------ ------------ ------------ ------------ ----------- ------------
Balance Dec. 31, 1992................... 4,433,804 2,069,150 (1,549,774) (84,595) 434,781
Collection of notes receivable.......... 15,436 15,436
Interest accrued........................ (5,016) (5,016)
Stock options exercised................. 12,500 2,000 2,000
Net income.............................. 307,723 307,723
------------ ------------ ------------ ------------ ----------- ------------
Balance Dec. 31, 1993................... 4,446,304 2,071,150 (1,242,051) (74,175) 754,924
Recapitalization........................ (2,066,704) 2,066,704
Collection of notes receivable.......... 36,309 36,309
Interest accrued........................ (2,361) (2,361)
Issuance of shares for services
received............................... 17,930 18 4,487 4,505
Stock options exercised................. 61,966 62 13,092 13,154
Notes received for options and warrants
exercised.............................. 1,307,269 1,307 239,828 (232,376) 8,759
Net income.............................. 800,075 800,075
------------ ------------ ------------ ------------ ----------- ------------
Balance Dec. 31, 1994................... 5,833,469 5,833 2,324,111 (441,976) (272,603) 1,615,365
UNAUDITED
Collection of notes receivable.......... 33,396 33,396
Stock options exercised................. 86,999 87 21,699 21,786
Tax benefit from stock option
exercises.............................. 84,231 84,231
Net income.............................. 860,718 860,718
------------ ------------ ------------ ------------ ----------- ------------
Balance June 30, 1995................... 5,920,468 $ 5,920 $ 2,430,041 $ 418,742 $ (239,207) $2,615,496
------------ ------------ ------------ ------------ ----------- ------------
------------ ------------ ------------ ------------ ----------- ------------
</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

F-5
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION
STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
YEAR ENDED DECEMBER 31,
-------------------------------------- -------------------------
1992 1993 1994 1994 1995
----------- ----------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................................. $ 41,022 $ 307,723 $ 800,075 $ 103,297 $ 860,718
Adjustments to reconcile net income to net cash flows
provided by operating activities:
Depreciation and amortization........................ 153,189 408,621 404,897 194,920 162,519
Change in deferred income taxes...................... 6,200 (20,000) (201,100)
Provision for doubtful accounts...................... 10,821 10,000 72,600 26,100 63,900
Amortization of deferred lease obligation............ (2,506) (11,779) (6,871) (5,890)
(Gain) loss on sale of assets........................ (6,417) 947
Issuance of stock for compensation and interest...... 3,320 4,505
Interest expense in connection with stock
issuances........................................... 8,759
Changes in operating assets and liabilities:
Accounts receivable.................................. 207,632 (635,555) (861,715) (175,487) (33,740)
Inventories.......................................... (37,000) (44,228) (150,194) (10,485) 52,792
Prepaid expenses and other current assets............ 22,885 (13,008) (2,131) (17,617) (562)
Employee and director receivables.................... 615 (7,775) (3,477) 4,556 (28,568)
Other assets......................................... 4,644 12,397 (540) (86) (19,320)
Accounts payable..................................... 117,662 18,079 392,114 95,063 (177,775)
Accrued and other liabilities........................ 72,284 53,197 810,588 38,105 263,205
----------- ----------- ------------ ----------- ------------
Net cash provided by operating activities.......... 597,448 74,575 1,267,510 252,476 1,144,116
Cash flows from investing activities:
Capitalized software development costs................. (408,990) (193,630) (168,730) (90,149) (198,848)
Purchases of property.................................. (15,929) (11,661) (14,380) (14,029) (65,023)
Payments received for the sale of a product line....... 15,060 17,468
Cash payments on behalf of affiliate................... (34,856) (138)
Cash received on sale of equipment..................... 1,500
----------- ----------- ------------ ----------- ------------
Net cash flow used in investing activities......... (444,715) (186,461) (183,110) (104,178) (263,871)
Cash flows from financing activities:
Net borrowings (repayments) under bank line of
credit................................................ 105,000 (95,179) 210,179 (89,821) (300,000)
Principal payments on notes payable.................... (2,348) (99,528) (66,783) (29,510) (89,622)
Principal payments under capital lease obligations..... (23,696) (27,038) (10,468) (6,870) (3,118)
Proceeds from exercise of stock warrants and options
and repayment on notes receivable..................... 395 6,894 45,463 2,712 51,805
Interest accrued on notes receivable................... (12,315) (5,016) (2,361) (2,361)
Proceeds from long-term borrowings..................... 45,000
Deferred ofering costs................................. (77,451)
Other prepaid financing costs.......................... (4,896) (5,498) (6,234) (5,034) (1,000)
----------- ----------- ------------ ----------- ------------
Net cash provided by (used in) financing
activities........................................ 107,140 (225,365) 169,796 (130,884) (419,386)
Net increase (decrease) in cash and cash equivalents..... 259,873 (337,251) 1,254,196 17,414 460,859
Cash and cash equivalents, beginning of period........... 121,383 381,256 44,005 44,005 1,298,201
----------- ----------- ------------ ----------- ------------
Cash and cash equivalents, end of period................. $ 381,256 $ 44,005 $ 1,298,201 $ 61,419 $ 1,759,060
----------- ----------- ------------ ----------- ------------
----------- ----------- ------------ ----------- ------------
Supplemental cash flow information:
Interest paid.......................................... $ 51,137 $ 51,396 $ 26,153 $ 15,861 $ 6,179
----------- ----------- ------------ ----------- ------------
----------- ----------- ------------ ----------- ------------
Income taxes paid...................................... $ 3,620 $ $ 22,555 $ 14,600 $ 712,701
----------- ----------- ------------ ----------- ------------
----------- ----------- ------------ ----------- ------------
</TABLE>

See accompanying notes to financial statements.

F-6
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND THE SIX MONTHS ENDED JUNE 30, 1994 AND 1995 (UNAUDITED)

1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS

TouchStone Software Corporation ("TouchStone" or the "Company") designs,
develops, sells on credit terms and supports a line of computer problem-solving
utility software and supporting products which simplify personal computer (PC)
installation, support and maintenance.

UNAUDITED INFORMATION

The information set forth in these financial statements as of June 30, 1995
and for the six-month periods ended June 30, 1994 and 1995, is unaudited. This
information reflects all adjustments, consisting only of normal recurring
adjustments, that, in the opinion of management, are necessary to present fairly
the financial position and results of operations of the Company for these
periods. Results of operations for the interim periods are not necessarily
indicative of the results of operations for the full fiscal year.

CASH EQUIVALENTS

Cash equivalents consist of highly liquid investments with original
maturities of three months or less.

INVENTORIES

Inventories are stated at the lower of cost, using the first-in, first-out
method, or market, and consist mainly of finished goods and packaging supplies.

PROPERTY

Property is stated at cost and depreciated using the straight-line method
based on the estimated useful lives of the related assets (three to five years).
Leasehold improvements are amortized over the useful life or the term of the
lease, which ever is shorter.

SOFTWARE DEVELOPMENT COSTS

Research and development expenses resulting from the design, development and
testing of new software and software maintenance and enhancement costs are
expensed as incurred, until technological feasibility has been established.
Thereafter, certain costs such as coding and testing are capitalized in
accordance with Statement of Financial Accounting Standards No. 86, Accounting
for Costs of Computer Software to be Sold, Leased or Otherwise Marketed, until
the product is available for sale. Capitalized expenses were approximately
$409,000, $194,000 and $169,000 for the years ended December 31, 1992, 1993 and
1994, respectively, and $90,000 and $199,000 for the six-month periods ended
June 30, 1994 and 1995, respectively.

Capitalized software development costs are amortized using the straight-line
method, commencing when the related products are available for sale, over the
estimated useful lives of the related products which range from 18 to 24 months.
Amortization of software development costs was approximately $81,500, $296,000
and $367,000 for the years ended December 31, 1992, 1993 and 1994, respectively,
and $176,400 and $138,000 for the six-month periods ended June 30, 1994 and
1995, respectively.

Software development costs are presented in the accompanying balance sheets
net of accumulated amortization of $484,411, $670,234 and $754,651 at December
31, 1993, December 31, 1994, and June 30, 1995, respectively.

F-7
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND THE SIX MONTHS ENDED JUNE 30, 1994 AND 1995 (UNAUDITED)

1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER ASSETS

Other assets include approximately $77,500 of deferred offering costs
incurred in connection with the Company's secondary common stock offering at
June 30, 1995. Such costs will be offset against the proceeds of such offering
if successful. If unsuccessful, such costs will be expensed.

REVENUE RECOGNITION

Product sales to distributors and retail customers are recorded upon
delivery of the related software in accordance with Statement of Position 91-1,
Software Revenue Recognition. The Company records an accrual for estimated
returns at the time of product shipment based on historical experience.
Royalties are recognized as income when minimum payments specified in the
royalty agreements become due, or as the related products are sold by the
licensee.

COOPERATIVE ADVERTISING

The Company offers cooperative advertising programs to its distributors
whereby the Company's products receive market visibility through ads, brochures,
and catalogs paid for by the distributors. Approved expenditures can be deducted
by the distributors from amounts due to the Company. Cooperative advertising
costs are accrued at the maximum rates allowed under the respective distribution
agreements and are charged to expense when product sales are recognized as
revenue.

INCOME TAXES

The Company accounts for income taxes in accordance with Statement of
Accounting Standards No. 109 (SFAS 109), Accounting for Income Taxes.

NET INCOME PER SHARE

Net income per share is computed using the weighted average common and
common equivalent shares outstanding. Common equivalent shares include warrants
and options to purchase common stock.

2. BALANCE SHEET DETAIL

ACCOUNTS RECEIVABLE

Accounts receivable included in the accompanying balance sheets is presented
net of the following allowances and reserves:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1993 1994
----------- ----------- JUNE 30,
1995
-------------
(UNAUDITED)
<S> <C> <C> <C>
Allowance for doubtful accounts................................ $ 55,000 $ 113,000 $ 125,500
Reseller rebate reserves....................................... 22,900 461,000 1,096,100
Product return reserves........................................ 78,500 257,000 569,400
----------- ----------- -------------
$ 156,400 $ 831,000 $ 1,791,000
----------- ----------- -------------
----------- ----------- -------------
</TABLE>

F-8
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND THE SIX MONTHS ENDED JUNE 30, 1994 AND 1995 (UNAUDITED)

2. BALANCE SHEET DETAIL (CONTINUED)
PROPERTY

Property consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1993 1994
----------- ----------- JUNE 30,
1995
-----------
(UNAUDITED)
<S> <C> <C> <C>
Office equipment and furniture............................................. $ 277,456 $ 314,959 $ 344,073
Automobiles................................................................ 47,487 47,487 95,962
Leasehold improvements..................................................... 11,456 11,456 24,533
----------- ----------- -----------
336,399 373,902 464,568
Less accumulated depreciation and amortization............................. (286,831) (319,295) (330,724)
----------- ----------- -----------
$ 49,568 $ 54,607 $ 133,844
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

3. FINANCING ARRANGEMENTS

BANK LINE OF CREDIT

Note payable to bank in the accompanying balance sheets represents
borrowings under a $300,000 bank line of credit, based upon eligible
receivables, as defined. Borrowings bear interest at rates of 10.5%, 11.25%, and
10.5% at December 31, 1993 and December 31, 1994, and June 30, 1995,
respectively, and are collateralized by substantially all Company assets. All
outstanding borrowings under the bank line of credit were repaid in April 1995.
Borrowings under the line of credit were guaranteed by three of the Company's
executive officers and one member of the Company's Board of Directors. The line
of credit agreement contains certain restrictive covenants, the most significant
of which relate to minimum tangible net worth, debt to tangible net worth and
current ratio requirements. The Company was in compliance with such covenants at
December 31, 1993 and 1994, and June 30, 1995.

On April 27, 1995, the line of credit was replaced with another borrowing
facility. The new line of credit allows for borrowings up to $300,000, bears
interest at the prime rate, as reported by the Wall Street Journal, plus 1.5%,
and matures May 5, 1996. The prime rate at June 30, 1995 was 9.0%. Borrowings
will be collateralized by substantially all Company assets and guaranteed by
three of the Company's executive officers. This borrowing facility requires the
Company to maintain a tangible net worth of not less than $1,300,000, a ratio of
total liabilities to tangible net worth of less than 2:1, and minimum net income
of $1 on an annual basis. This line of credit also prohibits payment of
dividends without prior approval of the bank, and limits annual capital
expenditures to $75,000.

F-9
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND THE SIX MONTHS ENDED JUNE 30, 1994 AND 1995 (UNAUDITED)

3. FINANCING ARRANGEMENTS (CONTINUED)
LONG TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1993 1994
----------- ----------- JUNE 30,
1995
-----------
(UNAUDITED)
<S> <C> <C> <C>
Subordinated notes payable to private investors, bearing interest at 15%,
repaid in 1995. .......................................................... $ 102,132 $ 54,608 $
Subordinated notes payable to private investors, bearing interest at 12%;
repaid in 1995. .......................................................... 38,690 27,323
Note payable to General Motors Acceptance Corp., collateralized by
automotive equipment, bearing interest at 10.25%, due in monthly
installments of $521 to April 1998. ...................................... 21,809 17,596 15,323
Notes payable to bank, collateralized by computer equipment, bearing
interest at 12.5%, due in monthly installments of $233 and $409 to May
1997 and July 1997 respectively. ......................................... 19,444 15,591
Note payable to bank, collateralized by automotive equipment, bearing
interest at 7.8%, due in monthly installments of $750 to March 2000. ..... 35,534
----------- ----------- -----------
Total...................................................................... 162,631 118,971 66,448
Less current portion....................................................... (63,105) (64,096) (19,032)
----------- ----------- -----------
$ 99,526 $ 54,875 $ 47,416
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

Maturities of long-term debt at December 31, 1994 are $64,096 in 1995,
$43,082 in 1996, $9,752 in 1997 and $2,041 in 1998.

Certain warrants and options to purchase shares of common stock were issued
in connection with the issuance in 1993 of subordinated notes payable to private
investors, including the Company's Chairman of the Board of Directors; a family
member of the Company's chairman; a Director and the Company's Chief Financial
Officer (Note 5). At December 31, 1993 and 1994, the principal amounts due the
Director, the Company's chairman, his family member and the Company's Chief
Financial Officer were approximately $33,880 and $12,300; $20,383 and $15,800;
$16,650 and $10,400; and $8,816 and $6,800, respectively. All of these amounts
were repaid by March 1995.

4. COMMITMENTS
At December 31, 1994, the Company was obligated under non-cancelable
operating leases for its office facility and office equipment as follows:

<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
-------------
<S> <C>
1995................................................................... $ 109,567
1996................................................................... 27,528
1997................................................................... 13,856
1998................................................................... 5,642
-----------
$ 156,593
-----------
-----------
</TABLE>

F-10
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND THE SIX MONTHS ENDED JUNE 30, 1994 AND 1995 (UNAUDITED)

4. COMMITMENTS (CONTINUED)
In 1992, 1993, 1994, and 1995, the Company sublet a portion of its office
space. This sublease required monthly payments of $700 and was canceled March
31, 1995. Rent expense for all operating leases totaled approximately $136,000,
$142,000 and $141,000 for the years ended December 31, 1992, 1993 and 1994,
respectively, and $74,000 and $59,000 for the six-month periods ended June 30,
1994 and 1995, respectively, all net of sublease income.

On April 1, 1995 the Company entered into a five year lease for
approximately 10,000 square feet in the first year increasing to approximately
15,000 square feet by the third year. The Company's commitment for this lease is
$103,500, $175,125, $187,500, and $187,500 for 1995, 1996, 1997, and 1998
respectively.

The Company has entered into various agreements with outside consulting
firms for the development of specialized applications utilized in the Company's
software products. Generally, the Company pays the software developers a
percentage royalty based on actual product sales. One royalty agreement executed
in 1994 provided that TouchStone pay minimum royalties of $50,000, which the
Company accrued at December 31, 1994. The Company recorded total royalty expense
of approximately $226,000, $139,000 and $166,000 for the years ended December
31, 1992, 1993 and 1994, respectively, and $47,700 and $274,200 for the
six-month periods ended June 30, 1994 and 1995, respectively.

5. SHAREHOLDERS' EQUITY

1983 INCENTIVE STOCK OPTION PLAN

During 1983, the Company adopted an incentive stock option plan (the 1983
ISOP "Plan") which provides that options to purchase up to 329,399 shares of the
Company's common stock may be granted to key officers, directors or other
employees at not less than fair market value at the date of grant. In addition,
stock appreciation rights may be granted under the Plan. Options granted under
the Plan vest immediately and are for periods not exceeding ten years from date
of grant. The 1983 ISOP Plan expired May 31, 1993.

1988 NON-QUALIFIED STOCK OPTION PLAN

On August 5, 1988, the Company's Board of Directors adopted a Non-Qualified
Stock Option Plan (the "1988 NQ-Plan"). The 1988 NQ-Plan authorizes a total of
166,667 shares of Common Stock designed as an incentive for non-employee
directors, technical advisors, vendors and consultants of the Company. The 1988
NQ-Plan is administered by the Non-Qualified Stock Option Committee of the Board
of Directors which determines the recipients of options, the exercise price of
the options, and the number of shares subject to each option. This plan expires
August 5, 1998. At June 30, 1995, 39,000 shares were available under the 1988
NQ-Plan for future grant.

THE 1991 INCENTIVE STOCK OPTION AND NON-QUALIFIED STOCK OPTION PLANS

In January 1992, the Company's stockholders approved additional incentive
stock option and non-qualified stock option plans (the "1991 ISOP-Plan" and the
"1991 NQ-Plan") which provide for additional grants of options to purchase up to
an aggregate of 1,175,000 shares of the Company's common stock. These plans
expire December 13, 2000. At June 30, 1995, an aggregate amount of 38,501 shares
were available for grant under the 1991 ISOP-Plan and the 1991 Non-Qualified
Plan.

THE 1994 STOCK OPTION PLAN

In 1994, the Company's Board of Directors adopted a 1994 Stock Option Plan
(the "1994 Plan") pursuant to which options to purchase up to 550,000 shares of
the Company's Common Stock may be

F-11
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND THE SIX MONTHS ENDED JUNE 30, 1994 AND 1995 (UNAUDITED)

5. SHAREHOLDERS' EQUITY (CONTINUED)
granted. Unless and until the 1994 Plan is approved by the Company's
shareholders, only non-qualified options can be granted under the 1994 Plan to
employees, including executive officers, non-employee directors, consultants,
vendors, customers and others expected to provide significant services to the
Company. On October 31, 1994, the Company granted options under the 1994 Plan to
purchase an aggregate of 435,000 shares of Common Stock, at $.50 per share, to a
total of 15 key employees, including executive officers. Since December 31,
1994, options to purchase an additional 110,000 shares of Common Stock, at
prices ranging from $.85 to $1.85 per share, have been granted under the 1994
Plan, including options to purchase 10,000 shares, at $1.00 per share, for each
of the outside directors, Mr. Welch and Mr. Brail. In February 1995, the Company
granted an option to purchase a total of 60,000 shares to a public relations
firm. These options are exercisable at $.85 per share, the fair market value at
date of grant, and expire September 30, 1995. At June 30, 1995, all of these
options were outstanding and exercisable.

In 1994, the Company approved an employee stock purchase plan. The plan
allowed individual employees to purchase, prior to October 31, 1994, up to
20,000 shares of the Company's common stock at 85% of the fair market value at
the date of purchase and receive a warrant to purchase an equal number of common
shares at the same price. Such warrants were exercisable immediately and expire
August 14, 1997. Employees purchased an aggregate of 260,900 shares under this
plan in 1994.

F-12
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND THE SIX MONTHS ENDED JUNE 30, 1994 AND 1995 (UNAUDITED)

5. SHAREHOLDERS' EQUITY (CONTINUED)
All options under the above plans were granted at fair market value at the
date of issuance. Stock option activity for these plans, along with common stock
warrant activity, for the years ended December 31, 1992, 1993, and 1994, and for
the six-month period ended June 30, 1995 was as follows:

<TABLE>
<CAPTION>
1983 1991 1994
ISOP 1988 ISOP 1991 OPTION
PLAN NQ-PLAN PLAN NQ-PLAN PLAN WARRANTS
--------- --------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, January 1, 1992...... 11,668 67,167 539,000 37,169
Granted................................... 12,334 190,166
Lapsed....................................
Exercised................................. (8,334)
Canceled..................................
--------- --------- ---------- ---------- ---------- ---------
Balance December 31, 1992................. 15,668 67,167 539,000 190,166 37,169
Granted................................... 413,000 66,000
Lapsed.................................... (23,000) (23,000)
Exercised................................. (12,500)
Canceled.................................. (51,000)
--------- --------- ---------- ---------- ---------- ---------
Balance December 31, 1993................. 15,668 44,167 901,000 243,666 14,169
Granted................................... 87,000 9,000 435,000 442,633
Lapsed.................................... (11,667) (41,667) (3,334)
Exercised................................. (15,668) (20,000) (883,000) (173,000) (16,667)
Canceled.................................. (75,000)
--------- --------- ---------- ---------- ---------- ---------
Balance December 31, 1994................. 0 12,500 30,000 37,999 435,000 436,801
UNAUDITED
Granted................................... 110,000
Exercised................................. (10,000) (2,500) (17,666) (56,833)
--------- --------- ---------- ---------- ---------- ---------
Balance June 30, 1995..................... 0 2,500 27,500 20,333 545,000 379,968
--------- --------- ---------- ---------- ---------- ---------
--------- --------- ---------- ---------- ---------- ---------
Options exercisable, June 30, 1995........ 0 2,500 22,500 20,333 327,500 347,468
--------- --------- ---------- ---------- ---------- ---------
--------- --------- ---------- ---------- ---------- ---------
Price range of outstanding options, June $.19 to $.19 to $ .50 to $.20 to
30, 1995................................. n/a $.20 $.22 $.30 $1.85 $.50
--------- --------- ---------- ---------- ---------- ---------
--------- --------- ---------- ---------- ---------- ---------
</TABLE>

1994 and 1993 grants under the 1991 ISOP-Plan and the 1991 NQ-Plan included
20,000 and 120,000 options, respectively, to various officers and directors in
connection with their guarantee of borrowings under the Company's bank line of
credit (Note 3).

All options exercised in 1993 were by Pelican Associates, Inc. ("Pelican"),
an entity that is owned by certain officers of the Company. The purchase price
of these shares was offset against amounts owed to Pelican by the Company (Note
9).

F-13
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND THE SIX MONTHS ENDED JUNE 30, 1994 AND 1995 (UNAUDITED)

5. SHAREHOLDERS' EQUITY (CONTINUED)
NOTES RECEIVABLE FROM SALE OF COMMON STOCK

Amounts due from sale of common stock or exercise of options consists of the
following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1993 1994 1995
--------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Notes receivable, bearing interest at 3.5% per annum,
principal and interest due in August 1998.............. $ 58,475 $ 220,068 $ 218,984
Notes receivable, non-interest bearing, due in monthly
installments through August 1995....................... 36,359 6,424
--------- ----------- -----------
58,475 256,427 225,408
Interest receivable..................................... 15,700 16,176 13,799
--------- ----------- -----------
$ 74,175 $ 272,603 $ 239,207
--------- ----------- -----------
--------- ----------- -----------
</TABLE>

During 1994, the due date of notes receivable aggregating $48,484 plus
accrued interest was extended from August 1995 to August 1998.

RECAPITALIZATION

During 1994, the Company amended its Articles of Incorporation to change its
common stock from no par to a $.001 par value.

In May 1990, the Company effected a 150 to 1 reverse stock split by approval
of the Company's Board of Directors. This reverse stock split was approved by a
majority vote of the Company's stockholders in 1994. All share and per share
amounts included herein reflect the reverse split.

6. SEGMENT INFORMATION AND CONCENTRATION OF CREDIT RISK
The Company operates primarily in the U.S. and European markets in a single
segment that is the design, development, manufacture and sale of
computer-related software products. Its customers generally consist of large
software distributors as well as PC end-users. Amounts receivable from customers
are generally not secured.

In 1994, one customer who is a distributor accounted for approximately 59%
of product sales (approximately 56.5% of total revenue). Two customers accounted
for approximately 46% and 12% of product sales during the six-month period ended
June 30, 1994 (approximately 44% and 11% of total revenue, respectively). In
addition, two customers accounted for approximately 64% and 10% of product sales
during the six month period ended June 30, 1995 (approximately 62% and 10% of
total revenue, respectively). International product sales were approximately
$777,600, $493,000, $670,000, $239,000 and $409,000 during the years ended
December 31, 1992, 1993, 1994 and the six-month periods ended June 30, 1994 and
1995, respectively, and accounted for approximately 23.2%, 10.5%, 9.7%, 9.7% and
6.8% of total product sales respectively.

In 1993, three major customers accounted for approximately 20.8%, 20.7% and
10.5% of total product sales (approximately 19.8%, 19.7% and 9.9% of total
revenues).

In 1992, four major customers accounted for approximately 20.7%, 15.4%,
11.6% and 10.7% of the Company's product sales (approximately 19.9%, 14.8%,
11.1% and 10.2% of total revenues).

F-14
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND THE SIX MONTHS ENDED JUNE 30, 1994 AND 1995 (UNAUDITED)

7. INCOME TAXES
Effective January 1, 1993, the Company adopted SFAS 109, Accounting for
Income Taxes. This statement requires the recognition of deferred tax assets and
liabilities for the future consequences of events that have been recognized in
the Company's financial statements or tax returns. The measurement of the
deferred items is based on enacted tax laws. In the event the future
consequences of differences between financial reporting bases and the tax bases
of the Company's assets and liabilities result in a deferred tax asset, SFAS 109
requires an evaluation of the probability of being able to realize the future
benefits indicated by such asset. A valuation allowance related to a deferred
tax asset is recorded when it is more likely than not that some portion or all
of the deferred tax asset will not be realized.

The provision (benefit) for income taxes consists of:

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
----------------------------------- ----------------------
1992 1993 1994 1994 1995
--------- ---------- ------------ --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current:
Federal........................................... $ $ 1,000 $ 129,000 $ 2,600 $ 403,300
State............................................. 800 11,000 171,600 10,500 125,000
--------- ---------- ------------ --------- -----------
800 12,000 300,600 13,100 528,300
Deferred:
Federal........................................... (49,000) (113,700)
State............................................. 6,200 17,000 (87,400)
--------- ---------- ------------ --------- -----------
6,200 (32,000) (201,100)
--------- ---------- ------------ --------- -----------
Total provision (benefit)........................... $ 7,000 $ (20,000) $ 99,500 $ 13,100 $ 528,300
--------- ---------- ------------ --------- -----------
--------- ---------- ------------ --------- -----------
</TABLE>

A reconciliation of the provision (benefit) for income taxes compared to the
U.S. statutory rate (35% in 1994 and 1995, 34% in 1992 and 1993) for the years
ended December 31, 1992, 1993 and 1994, and for the six months ended June 30,
1994 and 1995, is as follows:

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
------------------------------------- -----------------------
1992 1993 1994 1994 1995
--------- ------------ ------------ ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income taxes at statutory rates................. $ 16,300 $ 97,800 $ 314,900 $ 40,700 $ 486,200
State taxes, net of federal benefit............. 2,900 18,500 55,700 7,300 84,000
Deductible temporary differences for which no
benefit was previously recognized.............. 2,600 (68,600) (8,900)
Utilization of net operating loss carryovers.... (16,000)
Change in valuation allowance................... (131,800) (196,100)
Other........................................... 1,200 (4,500) (6,400) (26,000) (41,900)
--------- ------------ ------------ ---------- -----------
Provision (benefit) for income taxes............ $ 7,000 $ (20,000) $ 99,500 $ 13,100 $ 528,300
--------- ------------ ------------ ---------- -----------
--------- ------------ ------------ ---------- -----------
</TABLE>

F-15
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND THE SIX MONTHS ENDED JUNE 30, 1994 AND 1995 (UNAUDITED)

7. INCOME TAXES (CONTINUED)
Deferred tax assets (liabilities) consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1993 1994
------------ ------------
<S> <C> <C>
Research and development.......................................... $ (174,600) $ (102,100)
Credit carryforwards.............................................. 15,400
Depreciation...................................................... 6,300
------------ ------------
Net non-current deferred tax liabilities........................ (174,600) (80,400)
Accrued vacation.................................................. 7,800 21,200
Inventory and bad debt reserves................................... 79,700 409,600
State taxes....................................................... 3,800 33,900
Depreciation...................................................... 5,300
Loss carryforwards................................................ 395,300
Credit carryforwards.............................................. 62,000
------------ ------------
Deferred tax assets............................................. 553,900 464,700
Deferred tax valuation allowance................................ (362,000) (165,900)
------------ ------------
191,900 298,800
------------ ------------
Net deferred tax asset.......................................... $ 17,300 $ 218,400
------------ ------------
------------ ------------
</TABLE>

No material changes in the deferred tax balance occurred during the six
months ended June 30, 1994 and June 30, 1995.

The net change in the valuation allowance for the deferred tax asset was a
decrease of $131,800 and $196,100 for the years ended December 31, 1993 and
1994, respectively, related to benefits arising primarily from the utilization
of net operating loss carryforwards. At December 31, 1994, the Company had
general business tax credit carryforwards for federal purposes of approximately
$15,400, of which $11,400 expire in 2000 and $4,000 expire in 2004.

In the six months ended June 30, 1995 the Company decreased its tax
liability and increased additional paid-in capital by $84,231 as a result of tax
benefits resulting from certain non-qualified stock option and warrant
exercises.

8. STATEMENTS OF CASH FLOWS
Supplemental information concerning significant non-cash investing and
financing activities for the years ended December 31, 1992, 1993 and 1994, and
for the six months ended June 30, 1995, are presented below.

In June 1993, Pelican exercised options to purchase 12,500 shares of the
Company's common stock at $.16 per share. The purchase price of these shares was
offset against amounts owed to Pelican by the Company.

In 1993, the Company acquired property for approximately $24,000 in exchange
for a note payable and a used automobile.

During 1993, the Company forgave a note receivable from sale of common stock
and related interest receivable aggregating $3,320 due from an officer of the
Company in lieu of cash compensation.

F-16
<PAGE>
TOUCHSTONE SOFTWARE CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
AND THE SIX MONTHS ENDED JUNE 30, 1994 AND 1995 (UNAUDITED)

8. STATEMENTS OF CASH FLOWS (CONTINUED)
In 1994, 1993, and in the six months ended June 30, 1995, the Company
forgave notes receivable from sale of common stock and related interest
receivable aggregating $4,000, $5,222, and $3,377, respectively, due from a
consultant to the Company in lieu of fees.

In 1994, the Company issued 2,000 shares of the Company's common stock to an
officer of the Company in lieu of cash compensation of $1,000.

In 1994, two Company officers who held approximately $22,550 of the
Company's subordinated debt received a total of 15,930 shares of the Company's
common stock in lieu of interest payments aggregating approximately $3,500.

In March 1995, the Company purchased property for $48,475 by exchanging cash
of $11,415 and executing a note payable in the amount of $37,060.

9. TRANSACTIONS WITH RELATED PARTIES
The Company has agreements with Pelican for the development and marketing of
a PC certification software product. These agreements provide for royalty
payments by the Company to Pelican based on actual product sales. The net amount
due to Pelican under these agreements at December 31, 1993, December 31, 1994,
and June 30, 1995, after offsetting certain advances to Pelican by TouchStone,
was $1,499, $2,597 and none, respectively.

Beginning in 1993 the Company incurred royalties payable to a software
programming company whose majority shareholder is a TouchStone officer
aggregating $6,000 and $67,000 during the years ended December 31, 1993 and 1994
respectively, and approximately $8,000 and $27,000 during the six months ended
June 30, 1994 and 1995 respectively.

The Company incurred interest expense in connection with notes payable to
related parties of $17,850, $17,676 and $8,578 for the years ended December 31,
1992, 1993 and 1994, respectively, and $5,091 and $1,741 for the six months
ended June 30, 1994 and 1995, respectively.

The Company recorded interest income in connection with notes receivable
from related parties of $16,109, $4,087 and $1,890 for the years ended December
31, 1992, 1993 and 1994, respectively, and none for the six months ended June
30, 1994 and 1995.

In April 1995, the Company made a $23,000 loan to a member of the Board of
Directors. This loan bears interest at 8% per annum, and is repayable by
December 31, 1995.

10. SUBSEQUENT EVENTS (UNAUDITED)
In July 1995, the Company granted non-qualified options for 40,000 shares
under the 1988 Non-Qualified Stock Option Plan (39,000 shares) and the 1991
Incentive Stock Option and Non-Qualified Stock Option Plans (1,000 shares), to a
public relations firm with an exercise price of $5.00

In July 1995, TouchStone Europe Ltd., a wholly owned subsidiary of the
Company, commenced operations in the United Kingdom. TouchStone Europe Ltd. was
formed to market and sell the Company's products in Europe and to provide
additional customer support.

In July 1995, options to purchase 60,000 shares were exercised and warrants
to purchase 50,000 shares were canceled.

F-17
<PAGE>
[ COLOR PHOTOGRAPHS
OF A SAMPLE
ADVERTISEMENT FOR
WIN'95 ADVISOR ]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE SHARES OF THE COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES
OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.

----------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 5
Use of Proceeds................................ 10
Price Range of Common Stock.................... 11
Dividend Policy................................ 11
Capitalization................................. 12
Selected Financial Data........................ 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 14
Business....................................... 21
Management..................................... 28
Principal and Selling Shareholders............. 33
Description of Securities...................... 34
Shares Eligible for Future Sale................ 35
Underwriting................................... 36
Legal Matters.................................. 37
Experts........................................ 37
Additional Information......................... 38
Index to Financial Statements.................. F-1
</TABLE>

TOUCHSTONE
SOFTWARE CORPORATION

[LOGO]

2,300,000 SHARES
COMMON STOCK

-------------------
P R O S P E C T U S
-------------------

CRUTTENDEN ROTH
INCORPORATED

PUNK, ZIEGEL & KNOELL

AUGUST 25, 1995

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------