TOUCHSTONE SOFTWARE CORP /CA/, 10KSB, 2000-04-13

TOUCHSTONE SOFTWARE CORP /CA/
10KSB, 2000-04-13
PREPACKAGED SOFTWARE

Previous: PENN AKRON CORP, S-8, 2000-04-13

Next: MEDIZONE INTERNATIONAL INC, DEF 14A, 2000-04-13

<PAGE>

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the Transition period from ____________ to ____________

Commission File Number 0-12969

TOUCHSTONE SOFTWARE CORPORATION
-------------------------------
(Exact name of Registrant as Specified in its Charter)

Delaware 95-3778226
-------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)

1538 Turnpike Street, North Andover, Massachusetts 01845
- -------------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)

(Registrant's Telephone Number including Area Code): (978) 686-6468
--------------

Securities Registered Pursuant to Section 12(b) of the Act: NONE
----

Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
-----------------------------
(Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]

The Registrant's revenues for the year ended December 31, 1999 were $6,739,355.

The approximate aggregate market value of common stock held by non-affiliates of
the Registrant was $15,982,848 as of March 29, 2000.
-----------

The number of shares outstanding of the registrant's classes of common stock as
of March 29, 2000 was 11,440,060.

DOCUMENTS INCORPORATED BY REFERENCE: NONE

Transitional Small Business Disclosure Format (Check One):
Yes No X
--- ---

1
<PAGE>

TOUCHSTONE SOFTWARE CORPORATION
FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PART I.
<S> <C> <C>
Item 1. Description of Business ........................................................................... 3-11
Item 2. Description of Properties.......................................................................... 12
Item 3. Legal Proceedings................................................................................. 12
Item 4. Submission of Matters to a Vote of Security Holders................................................ 12

PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.............................. 13
Item 6. Management's Discussion and Analysis or Plan of Operation.......................................... 14-20
Item 7. Financial Statements............................................................................... 21-43
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.............. 44

PART III.
Item 9. Directors, Executive Officers and Control Persons.................................................. 45
Item 10. Executive Compensation............................................................................. 46-48
Item 11. Security Ownership of Certain Beneficial Owners and Management..................................... 48
Item 12. Certain Relationships and Related Transactions..................................................... 48
Item 13. Exhibits and Reports on Form 8-K................................................................... 49
</TABLE>

2
<PAGE>

PART I

This Annual Report on Form 10-KSB contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended. For this
purpose, any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes," "anticipates," "plans," "expects" and similar
expressions are intended to identify forward-looking statements. Such forward-
looking statements represent management's current expectations and are
inherently uncertain. Investors are warned that actual results may differ from
management's expectations. Factors that could cause or contribute to such
differences include, but are not limited to, those factors discussed in Item 1,
"Description of Business", Item 6, "Management's Discussion and Analysis or Plan
of Operations" and elsewhere in this Annual Report on Form 10-KSB.

Item 1. Description of Business
--------------------------------

TouchStone Software Corporation (the "Company" or "TouchStone") is a
developer and publisher of utility software used to set up, maintain and manage
personal computers and networks. The Company's utility software can be
classified into three areas: diagnostic software, internet optimization
software and file transfer software. The CheckIt product line, a family of
system diagnostics, is designed to meet the needs of consumers and service
technicians. The CheckIt products, utilizing the Company's core technology,
have continued to evolve since they were first introduced in 1988. New versions
are released periodically to provide updated hardware tests for the latest
technology. The CheckIt products are sold worldwide through the retail channels
with some penetration into the enterprise and OEM market.

The newest additions to the Company's diagnostic product line are CheckIt
F/E7.0, WinCheckIt V6.5 and FastMove!2000. CheckIt 7.0 Factory Edition is a
full-featured, modular PC testing and diagnostics tool specifically designed for
computer OEMs, resellers and repair centers. WinCheckIt collects detailed system
information, tests system components, pinpoints problems, locates hidden
conflicts and restores critical system files for fast and easy PC
troubleshooting. FastMove 2000 is a file synchronization and transfer program
that keeps the files and directories on desktop PCs, laptops and networks
synchronized and up-to-date with the click of a button. The Company's file
transfer utility, marketed under the name of FastMove!, is primarily a retail
product.

TouchStone introduced CheckIt NetOptimizer in June of 1998 to address the
growing need for enhanced Internet performance of everyday modem users. The
product optimizes Internet settings in Windows and on the user's modem to
increase throughput and download speeds. CheckIt NetOptimizer has been
recognized by nationally known publications, such as PC Magazine and Windows
Magazine, as a product that is differentiated from web-caching programs.

On March 8, 1999, the Company acquired Unicore Software, Inc. ("Unicore"),
a Massachusetts corporation. The acquisition of Unicore was accomplished through
the merger of Unicore with and into a newly formed and wholly owned subsidiary
of the Company. Immediately prior to the acquisition, the Company contributed
all of the assets, products and operations of its personal computer diagnostic
software business to this newly formed corporation. As a consequence, since the
closing of the Unicore acquisition, the Company has served as a holding company,
with a single, wholly-owned subsidiary that currently conducts the business and
activities that previously were separately conducted by both the Company and
Unicore. For additional information regarding Unicore and the terms and
conditions upon which the Company acquired it, see "Acquisition of Unicore"
below.

Unicore is a provider of system management software, which includes basic
input/output ("BIOS") software upgrades, personal computer ("PC") diagnostics
and Year 2000 Solutions for personal computers and embedded systems. System
management software is one of the fundamental layers in any microprocessor-based
system (including PCs) architecture and provides an essential interface between
the system's operating software and hardware.

3
<PAGE>

Unicore was founded in 1989 and supplied primarily BIOS software upgrades.
The BIOS, which is the software initially executed after the system is turned
on, tests and initializes hardware components, initiates the operating system
and then provides advanced interface functions. BIOS software upgrades allow
end-users of desktop PCs to extend the life of their systems and reduce the
overall ownership cost of a PC.

During the past several years, Unicore has grown into a full-service
engineering company supplying not only BIOS software upgrades, but also PC
diagnostics software, Year 2000 solutions, PC Card software and custom
engineering services. As the evolution of software and hardware has become more
complex, the need for compatibility has increased in importance. Unicore
believes that its experience and customer focus allow it to quickly identify
solutions and market products compatible with the array of operating systems,
application programs, utilities and hardware products.

Unicore's customers include primarily end-users, enterprises such as a
majority of Fortune 500 corporations, government agencies, major educational and
financial institutions, designers and manufacturers of motherboards, PC systems
and other microprocessor-based or embedded devices. Unicore markets and
licenses its products and services worldwide.

In March 2000, the Company announced a plan to change its name to
TouchStone Capital Group. The Company also signed a non-binding letter of
intent to sell the assets of Unicore and its other wholly-owned subsidiary
e.Support.com, Inc., which was created in January 2000, to handle the day-to-day
activities of the company's operational business not already in Unicore. At the
end of 1999 the Company had also begun the process of implementing a new
business plan of investing as a minority shareholder, in a group of
internet-based companies, its portfolio companies. The Company's plan envisions
it assisting and acting and managing a diverse network of internet-based
companies.

As of December 31, 1999, the company had made investments in the following
companies:

A $663,000 investment for 260,000 shares of Series A convertible preferred
stock of PartsBase.com, a provider of Internet business-to-business e-commerce
services for the aviation industry. In March 2000, PartsBase.com filed an
initial public offering and is currently traded on the NASDAQ exchange.

A bridge financing agreement, in which the Company made a $250,000 loan,
the Company received 100,000 warrants to purchase the common stock of
Entertainment Boulevard Inc. Entertainment Boulevard, Inc. owns Vidnet, which
is a provider of streaming entertainment related media on the Internet, as well
as a comprehensive media encoding service provider. Entertainment Boulevard
currently trades on the OTC Bulletin Board.

TouchStone's operating model combines the talents of its management team
with those of its portfolio companies. Each of these companies holds niche
positions, with the promise of leadership, in proven Internet sectors.
TouchStone has a significant advantage, with a strong cash position and minimal
debt; the company is in a position to act on opportunities when they present
themselves.

Through minority interests, TouchStone's portfolio is comprised of well-
managed, late stage technology companies with market presence in e-commerce,
content, community and enabling technologies. TouchStone owns and invests
currently in business-to-business and business-to-consumer companies that fall
into one of four core areas of the Internet economy:

. Marketing companies offering technologies, products and services for
computer diagnostic tools and advanced software solutions.

. E-commerce companies offering products and services for consumers and
businesses, connecting consumers to products and products to consumers,
as well as businesses to products and products to businesses.

. Content and community companies with comprehensive sources of
information and systems to connect geographically dispersed individuals
and groups.

. Enabling technology companies that deliver strategy, services and
technologies to help dot.com and traditional corporations exploit the
full potential of the Internet

4
<PAGE>

Organized in 1982 as a California corporation, the Company reincorporated
in Delaware in January 1997. The Company's executive offices are located at
1538 Turnpike Street, North Andover, Massachusetts 01845, and its telephone
number is (978) 686-6468.

5
<PAGE>

Industry Overview

During the last decade, the personal computer industry has grown rapidly -
fueled most recently by the Internet. The Company believes that the market will
continue to expand in the future as technological advances and increased
functionality, combined with lower pricing, will increasingly make personal
computers common for use in both homes and businesses. Future changes in the
operating systems that run personal computers may contain some of the
functionality of certain utility software of the kind marketed by the Company.
The software industry, including the utility market, is increasingly being
dominated by a few very large competitors. However, the Company believes that
the complexities created by the Internet, multimedia and connectivity utilizing
enhanced video, storage, animation, and audio capabilities will continue to
drive the demand for new, sophisticated, separately installed utility software.

PRODUCTS

The following table sets forth the TouchStone products currently marketed by the
Company:
<TABLE>
<CAPTION>
INITIAL RELEASE
PRODUCT TITLE DESCRIPTION DATE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CheckIt F/E(R) CheckIt 7.0 Factory Edition is a modular PC testing and diagnostics tool January 2000
7.0 expressly designed for computer OEMs, resellers and repair centers.
Factory Designed to meet the requirements of demanding professional users, it
Edition brings the power of a professional testing laboratory to anyone who
installs, checks, develops, refurbishes, or repairs PC hardware. CheckIt
7.0 FE was developed for use by PC manufacturers and after-market
professionals - at varying levels and with varying technical requirements.

WinCheckIt(R) WinCheckIt collects system information, tests system components, pinpoints December 1999
V6.5 problems, locates hidden conflicts and restores system files for PC
troubleshooting. WinCheckIt automatically detects problems and guides the
user to the information and tests needed to fix the problem. Included
also are programs to test and fix Y2K hardware problems, find and remove
software viruses, and better manage data on your hard drives. Finally, a
newsletter is included that focuses on explaining new and emerging
technologies. Windows 95, 98 and NT4.0 are supported.

FastMove! FastMove! 2000 Is a file synchronization and transfer program that keeps December 1999
2000 the files and directories on desktop PCs, laptops and networks
with synchronized and up-to-date with the click of a button. Clean&Zip is a
Clean&Zip(R) file management utility designed to clean up and organize stored data. It
identifies duplicate and orphaned files spanned across multiple drives,
and provides tools to remove or archive them into a standard compressed
format.

CardWare(R) CardWare enables PCs and other electronic devices to recognize, install, November 1999
6.0 configure and operate peripheral devices that comply with PCMCIA
standards. CardWare provides a number of benefits over traditional PC
Card software, including the efficient use of system memory, greater
portability, ease of maintenance and a more modular design. CardWare can
be tailored to an OEM's needs to work with the OEM's power management and
plug and play specifications. CardWare is also available in a single user
version. A software development kit is available for designers who wish to
use our tools to help design their PC Card products. CardWare was designed
to operate with Windows NT4.0, DOS & OS/2 solutions.
</TABLE>

6
<PAGE>

<TABLE>
<CAPTION>
<S> <C> <C>
CheckIt 98 The CheckIt 98 Diagnostic Suite features the portable, self-booting August 1998
Diagnostic diagnostics of CheckIt for DOS, CheckIt 98 for Windows 95, FastMove! file
Suite(R) transfer utility and Bigelow's PC Technician's Troubleshooting Pocket
Reference. Professional technicians use this product to troubleshoot PC
problems, test hardware components, diagnose setup conflicts, optimize
modem configuration, calibrate video components, benchmark PC performance
and conduct burn-in and certification tests. The CheckIt Diagnostic Suite
also includes a Y2K hardware test and fix feature.

CheckIt CheckIt NetOptimizer gives Internet users a safe way to fine-tune their May 1998
NetOptimizer(R) Internet connections through an automatic or manual tune-up selection. In
addition, NetOptimizer performs a complete set of diagnostic tests and
corrects some common port and modem problems. It includes a detailed
troubleshooter's guide with suggestions on how to fix problems identified
by the test. In addition to the tests a complete list of details and
specifications about the consumer's modem and the current driver in use is
available at the touch of a button. NetOptmimizer's benchmark utility
provides the means for the Internet user to evaluate the current and past
performance of their ISP connections.

CheckIt DOS CheckIt for DOS provides diagnostics that run even when Windows is August 1998
Portable inoperable. Offering portability for technicians and advanced users, it
Diagnostics provides detailed information that shows how a system's hardware, software
and setup files are configured, and tests PC subsystems. Users can
generate custom batch tests and configure individual test applets for
burn-in and troubleshooting.

BIOS Upgrade The BIOS is the control center of any PC or compatible. Without a properly Current
Solutions functioning one, the operating system will not run correctly, devices will
not configure, and the system will fail. The Company's BIOS upgrades
solutions (known as firmware), allow end-users to keep their systems
current by enabling the latest technology, such as large drive support,
increased RAM size, processor upgrades, etc. Once the BIOS upgrade is
installed the operating system (Windows, Linux, etc) will then be able to
manage new technology add-ons.

POSTcard Postcard is a plug-in diagnostic card to aid MIS professionals and PC
end-users alike to determine the causes of their system failures. It
requires no operating system to run and works on any PC or compatible.

Millenium/Pro Millenium/Pro is a plug-in hardware card that offers a cost-effective
solution to bring older PCs into Year 2000 compliance. Plugged into any
available ISA slot, the Millenium/Pro is a safe, effective and fast
solution.
</TABLE>

7
<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 works closely with hardware and
software manufacturers to anticipate user problems with new products. These
efforts and the resulting "core" technology are critical in enabling the Company
to be competitive, improve quality and consistency, and quickly bring products
to market.

The product planning and development process begins with research and
analysis by both the marketing and development groups. The Company's products
require varying degrees of development time, which frequently depends on the
general complexity of the product. The typical length of research and
development time ranges from six to eighteen months. Prior to release, each
product undergoes careful quality assurance testing that involves usability
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 adapts its "core" technology to develop products,
or enhances existing ones, designed to assist the user in resolving problems or
adapting to new technological environments.

The utility software business is part of a fast changing industry. The
ability of the Company to grow or to achieve reliable sources of cash flow is
dependent to a large extent on the ability of the Company to develop new
products and new versions of existing products. Given the results of the last
three years, and the competitive factors affecting the software industry, as
discussed elsewhere in this report, management is unable to predict at this time
whether the Company can be successful at designing and developing products that
can compete profitably in this industry. Furthermore, several of the products,
currently under consideration, involve complicated diagnostic technologies which
are significantly more complex than those previously encountered in the
development of the Company's products. This may result in significant delays
and greater expense than normally encountered by the Company in the development
of its products.

The Company has worked with other 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 that the Company pays the developer royalties 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.

During 1999 and 1998, royalty expenses were approximately $517,000 and
$117,000, respectively. The increase in royalty expense from 1998 to 1999 is
attributable to one primary factor. The addition of royalties incurred from the
sales of BIOS upgrades, on which the Company incurred a royalty rate of 10%.
During 1999, the Company reached an agreement with Phoenix Technologies to
substantially reduce the rates of royalty payments by buying down the royalty
rate from 17% to 10%. Research and development expenses during 1999 and 1998
were approximately $1,572,000 and $1,722,000, respectively. The Company did not
capitalize any software development costs in 1999 or 1998.

Part of the Company's strategy is to develop products based on the Windows
98, Windows 95 and Windows 2000 operating systems. Release of these products
immediately prior to or at the time of the release by Microsoft Corporation
("Microsoft") of Windows products depends on the Company's ability to gain pre-
release access to, and to develop expertise in, current and future versions of
Windows operating systems. In order to provide products compatible with future
Windows releases, the Company depends on the cooperation of Microsoft.

8
<PAGE>

DISTRIBUTION, SALES, AND MARKETING

The Company markets its products domestically through software distributors
for resale to the retail sales channel and through a direct inbound and outbound
sales force. In 1999, Ingram Micro, Tech Data and Merisel were the main
distributors used by the company. The loss of or reduction in orders from either
of these distributors would 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. The Company's resellers generally offer
products of several different companies, including products that 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 Company's operations are subject to substantial
risk of product returns from distributors and retailers either through the
exercise by the Company's customers of contractual return rights or as a result
of the Company's policy of assisting customers in balancing and updating
inventories. Although the Company attempts to monitor and manage the volume of
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.

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, an increasing number
of companies compete 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. As the number of
software products available in the marketplace increases, competition for shelf
space also increases. Since utility software typically constitutes a relatively
small percentage of a retailer's sales volume, there can be no assurance that
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.

The Company's primary marketing and sales efforts in 1999 were directed at
increasing the demand for products at the retail sales level, and strengthening
its relationship with the major computer retailers. A key component of this
strategy includes using outside representatives to present the Company's
products to store employees in such retail stores as Best Buy, CompUSA and
Fry's. During 1999, the Company changed its outside representative firm in
order to re-invigorate this effort. In addition, the Company engaged in a
variety of merchandising promotions, such as end-caps, shelf-talkers, in-store
posters, contests, and rebate coupons in order to increase sales. The Company
has also improved its product packaging to better attract the attention of
retail consumers. Licensed end-users of the Company's products include
individual personal computer owners, government agencies, utilities, educational
institutions, software development companies, corporate users and computer
product manufacturers.

The Company also uses online advertising (Internet), print media
advertising, direct mail, attendance at industry trade shows such as Comdex,
Retail Vision, and Retail Exchange, press releases and direct contacts through
its marketing and sales force as other means of generating new sales. 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. These activities include end caps, in-
store advertising, promotions, brochures, catalog advertising, and software
detailing to increase the effectiveness of the sales activities.

Internationally, the Company markets its products through distributors. In
March 1999, the Company opened a sales office in Munich, Germany to handle
European sales operations. In January 2000 the former European sales manager
was appointed as an individual sales representative for TouchStone products
overseas.

9
<PAGE>

The Company's sales force at March 30, 2000 consisted of one person
handling the retail channel, who receives salary, commission, and incentive
bonus compensation and two direct sales teams, of about 12 individuals each who
also receive salary and commissions. The Company also utilizes outside
consultants in its marketing efforts, including design and development of
product packaging, advertisements, and promotional items.

DUPLICATION AND PACKAGING

Third-party suppliers provide the Company's packaging material, manuals,
and software duplication services. Management believes that relations with
these suppliers are good and that alternative supply sources exist and, if
necessary, can be engaged with minimal disruption of the Company's 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. The increasing
number of competitive products may adversely affect consumer demand for
particular software products. 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, IBM,
Symantec, Network Associates, and others. Each of these firms has substantially
greater financial, technical personnel and marketing resources than the Company.
Moreover, there are no proprietary barriers to entry into the utilities market
that could keep competitors from developing and selling products, which compete
with those marketed by the Company. Increased competition may result in loss of
shelf space and reduction in consumer demand or sell-through of the Company's
products; any of these events which could have a material adverse effect on the
Company's operating results.

The Company faces increasing pricing pressures from competitors and,
accordingly, competitive pressures may require the Company to reduce its prices.
In addition, to the extent that Microsoft or other companies incorporate
applications comparable or superior (either in perception or reality) to those
offered by the Company into Windows 95, Windows 98, Windows 2000, or other
products (or separately offer such products), sales of the Company's products
could be materially adversely affected. As a result, the Company's Windows 95,
Windows 98 or Windows 2000 based products could be rendered noncompetitive or
obsolete.

The Company is in the process of developing products while possessing
considerably less financial and human resources than other companies who are
already leaders in the software industry.

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.

Under existing law, software products have been difficult to patent, and
copyright laws offer limited protection. The Company routinely applies for
federal trademark registrations for its products. 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 will
provide meaningful protection to the Company. Furthermore, the Company may not
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. The laws of some
countries do not protect the Company's proprietary rights to the same extent as
the laws of the United States.

10
<PAGE>

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.

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 March 31, 2000, the Company had 43 full-time employees and two part-time
employees. None of the Company's employees is covered by a collective
bargaining agreement. The Company considers its relationship with its employees
to be good.

ACQUISITION OF UNICORE

The Company acquired Unicore for an aggregate purchase price of
approximately $4,410,000, with $1,205,000 of this sum paid in cash and
$1,128,000 assumed in liabilities at the closing. As provided in the Agreement
and Plan of Acquisition dated as of March 5, 1999 (the "Acquisition Agreement"),
the $2,077,000 balance of the purchase price was paid immediately following the
1999 Annual Meeting of the Company's stockholders (the "1999 Annual Meeting") as
described in more detail below. At the time of the acquisition, the Company
pledged to and deposited the sum of $620,000 in cash in an interest-bearing
account with Lawrence Savings Bank of Massachusetts, in order to obtain the
release of Messrs. Narath and Raza from their personal guarantees of
approximately $620,000 of indebtedness owed by Unicore to Lawrence Savings Bank
that was incurred in connection with the purchase of Unicore from Phoenix/Award.
The agreement regarding the purchase of Unicore from Phoenix/Award is attached
hereto as Exhibit 10.8 hereto. The documents to secure the $620,000 loan and
Lawrence Savings Bank's consent to TouchStone's acquisition of Unicore are
attached hereto as Exhibits 10.9 and 10.10, respectively.

In connection with the acquisition, each of Messrs. Narath and Raza entered
into a three-year employment agreement with the Company. The terms of these
employment agreements are described in the Proxy Statement and are incorporated
herein by reference.

On July 30, 1999, at the Annual meeting of the Company's stockholders (the
"Annual meeting"), held in Ipswich, Massachusetts, the stockholders approved the
issuance of an aggregate of 3,350,000 shares of the Company's Common Stock to
the former shareholders of Unicore as the balance of the purchase price for
Unicore. On August 3, 1999 the shares were issued to both Messrs. Narath and
Raza in the amounts of 2,680,000 and 670,000, respectively.

11
<PAGE>

ITEM 2. DESCRIPTION OF PROPERTIES
- ----------------------------------

The Company had a five-year lease for approximately 15,700 square feet of
office space in Huntington Beach, California that expired on March 31, 2000. As
part of the relocation of all of the company's assets this facility was closed
on March 31, 1999. The Company leases its Massachusetts office facilities under
a five-year operating lease agreement expiring December 2000. The Company
leases the office from a related party real estate trust, owned 100% by Pierre
Narath, TouchStone's Chief Executive Officer. The lease contains a provision
for a separate five-year renewal option at an annual rent expense of no greater
than 50% of the rent, as defined in the agreement. Rental payments to the
related real estate trust in 1999 were approximately $87,000. The Company leases
its German office facilities under a five-year operating lease agreement
expiring April 2004. The annual rent payments under this lease are currently
$30,000. The company also leases approximately 1800 square feet at its Rancho
Cucamonga, California location. This location operates as a direct sales and
marketing facility. The annual rent payments under this lease are currently
$19,000.

ITEM 3. LEGAL PROCEEDINGS
- --------------------------

On October 9, 1996, an entity known as Intervention, Incorporated
("Intervention") filed an action against the Company in the Superior Court of
the State of California, Contra Costa County (C 96-04476). Intervention claims
that it is a non-profit corporation bringing an action for the interests of the
general public. In essence, Intervention claims that the Company is engaged in
unfair competition and is violating California's Fair Packaging and Labeling Act
by filling the Software packages to "substantially less than their capacities."
Intervention seeks injunctive relief, unspecified attorneys' fees and damages of
$1,000,000. Eight other software companies have been named as defendants in
identical lawsuits in three different counties; all of the actions have been
coordinated in the San Francisco Superior Court (No. 4006) (the "Court"). The
Court sustained the Company's demurrer to the complaint without leave to amend
on January 23, 1998 and Intervention appealed the decision. On April 5, 1999,
the California Court of Appeals affirmed the Court's decision and dismissed the
case with prejudice.

In March 1999, the Company was served with a Complaint and Summons
("Complaint") filed against the Company by Otto Legerer and GSV Immobilien
Ges.m.b.H. ("GSV"). Mr. Legerer had formerly served as the Company's Managing
Director of European Operations. The Complaint alleged, among other items,
breach of contract in regards to his termination and sought compensatory and
certain other damages. This matter was settled in December 1999, in part
through a settlement payment to Mr. Legerer and GSV Immobilien Ges m.b.H. in the
amount of $300,000.

In April 2000, the Company learned the existence of a Complaint
("Complaint") filed against the Company by former CEO and President, Lawrence
Jordan. The Company, as of April 12, 2000, has yet to be served with an official
complaint.

The Company is also subject to other legal proceedings and claims, which
arise in the ordinary course of its business. Although occasional adverse
decisions (or settlements) may occur, the Company believes that the final
disposition of such matters will not have a material adverse effect on the
financial position or results of operations of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------

During the quarter ended December 31, 1999 the Company did not submit any
matter to a vote of security holders.

12
<PAGE>

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------

The Company's Common Stock was traded on The Nasdaq National Market from
May 19, 1995, until July 1999 under the symbol "TSSW." In July 1999, the NASDAQ
Listing Qualification Panel (the "Panel") determined to delist the Company's
shares from the NASDAQ National Market and noted the Company did not comply with
the requirements for continued listing on the NASDAQ Small Cap Market. The
Panel based its decision primarily on its lack of confidence in the Company's
ability to achieve and maintain compliance with the minimum bid price
requirement of Rule 4450(a)(5). The Panel also cited its concern that the
Company would not maintain the level of net tangible assets required by
Marketplace Rule 4450(a)(3). The Company's shares now trade on the OTC Bulletin
Board. The high and low closing sale prices for a share of the Company's Common
Stock set forth below for the periods indicated are as reported on the OTC
Bulletin Board:

2000 - Quarter ended Low High
- ---------------------- ---- ----
March 31, 2000 0.72 3.25

1999 - Quarter ended
- ----------------------
December 31, 1999 0.38 1.16
September 30, 1999 0.41 1.06
June 30, 1999 0.94 1.75
March 31, 1999 0.69 1.56

1998 - Quarter ended
- ----------------------
December 31, 1998 0.56 1.25
September 30, 1998 0.88 2.06
June 30, 1998 1.50 4.19
March 31, 1998 1.69 4.00

The stock markets have experienced extreme price and volume fluctuations
during certain periods. This broad market volatility, and other factors, have
affected the Company's stock price and may do so again in the future. Any
shortfall in revenue or earnings from levels expected by securities analysts,
along with the sale of the operating assets and change in core business could
have an immediate and significant adverse effect on the trading price of the
Company's common stock in any given period. Finally, because the Company
participates in a highly dynamic industry, there is often significant volatility
of the Company's common stock price.

As of December 31, 1999, there were approximately 3,059 holders of record
of TouchStone's common stock, including stock held by affiliates and excluding
an undetermined number of shareholders whose shares are held in "street" or
"nominee" names.

The Company has never declared or paid cash dividends on its common stock.
The Company currently intends to retain earnings, if any, to support its growth
strategy and does not anticipate paying cash dividends in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of the
Company's Board of Directors after taking into account various factors,
including the Company's financial condition, operating results, current and
anticipated cash needs and plans for expansion.

13
<PAGE>

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
- ------------------------------------------------------------------

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

GENERAL

During 1999, the Company experienced an increase in revenues and a decrease
in operating losses. In part this was attributable to the Company acquiring
Unicore. With this acquisition, the Company was able to increase its product
line and its channels of distribution. Integral to this strategy was the
combination of Unicore's direct sales experience with the Company's retail-
oriented products and the combination of the Company's retail sales experience
with Unicore's BIOS and Y2K products.

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

Product revenues are recorded at the time products are shipped, but the
Company records a reserve for product returns at each period-end which covers
100% of inventory in the sales channel. The reserves for such inventory are
classified as deferred revenue on the Company's balance sheet. The Company's
operations are subject to substantial and unpredictable risk of product returns
from distributors and retailers either through the exercise by the Company's
customers of contractual return rights or as a result of the Company's policy of
assisting customers in balancing and updating inventories. Although the Company
attempts to monitor and manage the volume of its sales to its customers, large
shipments in anticipation of demand, which is subsequently unrealized, can lead
to overstocking by the distributors and substantial product returns. Certain of
the Company's customer agreements also provide for rebates to customers should
the price of the Company's products decline subsequent to shipment.

Cost of sales includes the cost of blank diskettes, compact disks, software
duplication, packaging materials and user manuals, in addition to royalties paid
to other software development companies under various agreements, and inventory
obsolescence reserves. Sales and marketing expense consists primarily of
salaries and commissions paid to the Company's sales, customer service and
technical support personnel and expenditures for retail product merchandising
and promotions. The Company's products can be expected to have short product
life cycles, characterized by decreases in retail prices as a given product's
life cycle advances.

In order for the Company to achieve 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 and hardware products.

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. Many of these
expenses are committed in advance. Consequently, the Company has difficulty in
adjusting spending in a timely manner to compensate for any unexpected shortfall
in sales.

14
<PAGE>

The unaudited quarterly financial information of the Company has been
restated for all prior periods in 1999 to reflect the effect of year-end audit
adjustments. These adjustments relate primarily to the recording of intangible
assets, goodwill, and deferred tax liability recorded in connection with the
acquisition of Unicore. The selected information, as filed by the Company on
Form 10-Q, is presented below. The selected information, as restated, reflects
all adjustments which, in the opinion of management, are necessary to present
fairly the results of operations for the periods presented.
<TABLE>
<CAPTION>

AS FILED ON FORM 10-Q: Q1 Q2 Q3 Q4
<S> <C> <C> <C> <C>
Net revenues $ 1,335,198 $1,849,033 $1,569,204
Provision for (benefit) from income taxes 1,267 - -
Net loss (1,444,231) (912,951) (1,404,691)
Net loss per share (0.18) (0.11) (0.12)

PRO FORMA, AS ADJUSTED:
Net revenues 1,295,598 1,849,033 1,569,204 2,025,520
Provision for (benefit from) income taxes (51,500) (206,000) (360,500) (308,200)
Net loss (1,504,733) (276,745) (869,737) 325,108
Net loss per share (0.19) (0.03) (0.09) 0.03

</TABLE>

From 1996 through 1998, the Company spent considerable resources on the
development, marketing, and sales of PC-cillin, a retail anti-virus product. In
addition, sales of PC-cillin required a large commitment to customer technical
support in relation to that required by the Company's other products. In the
early part of 1998, sales of anti-virus products were negatively impacted by a
strategy implemented by the Company's competitors to gain market share. The
strategy involved giving customers a mail-in rebate equivalent to 100% of their
purchase price. Because of this severe price erosion, the Company found it
increasingly difficult to compete and revenues from PC-cillin dropped
dramatically.

In order to avoid spending more resources on PC-cillin, the Company decided
to discontinue all activities related to the product and to terminate its
associated licensing agreement with Trend Micro, from whom the Company licensed
PC-cillin. In so doing, the Company has decided to forego revenue opportunities
associated with the sales of anti-virus products. There can be no assurances
that the Company will be able to develop products that will sufficiently make up
for the shortfall in anti-virus sales.

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

15
<PAGE>

RESULTS OF OPERATIONS

The following table sets forth certain statement of operations data as a
percentage of total revenues for the years ended December 31:

1999 1998
------- -------
Revenues:
Product sales 98.3% 97.8%
Royalty income 1.7 2.2
------ ------
Total revenues 100.0 100.0
Cost of revenue 16.6 28.3
------ ------
Gross profit 83.4 71.7
Sales and marketing 34.5 49.2
General and administrative 29.2 40.5
Research and development 23.3 35.6
Amortization of goodwill and acquired intangibles 31.3 -
Merger, acquisiton and restructuring 17.4 22.2
------ ------
Loss from operations (52.3) (75.8)
Other income, net 4.2 11.8
------ ------
Loss before taxes (48.1) (64.0)
Benefit from income taxes 13.7 -
------ ------
Net loss (34.4)% (64.0)%
====== ======

COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998

Revenues. Total product sales increased almost 40% from $4,729,000 in 1998
to $6,628,000 in 1999 due primarily to the added sales from the product line
acquired through the acquisition of Unicore, the addition of a direct sales
operation and new European sales.

Gross Profit. Gross profit as a percentage of total revenues improved from
71.7% in 1998 to 83.4% in 1999 because of lower retail sales, which have a
lower-gross margin, an increase in the sales of the Company's high-gross margin
products, mainly the Unicore product line. Royalty expense increased from
$117,000 in 1998 to $517,000 in 1999 due mainly on the royalties from the sales
of BIOS and Millennium products and due to buying down the royalty rate from 17%
to 10% in March of 1999.

Sales and Marketing Expenses. Sales and marketing expense decreased
approximately 2% from $2,381,000 in 1998 to $2,328,000 in 1999, primarily due to
reduced marketing staff as part of the Company's restructuring efforts, lower
advertising costs, and lower promotional costs. Because of these reductions,
sales and marketing expenses also decreased as a percentage of total revenues
from 49.2% in 1998 to 34.5% in 1999.

General and Administrative Expenses. General and administrative expenses
increased from $1,957,000, or 40.5% of revenues, in 1998 to $1,970,000 or 29.2%
of revenues, in 1999. The increase in general and administrative expense for
1999 was attributable to several factors. First, the Company spent more for
executive and administrative management than in 1999. Second, the Company was
forced to increase spending for legal and accounting matters, particularly with
regard to the Unicore acquisition. Third, the Company wrote off bad debt of
approximately $110,000 and increased the reserve against bad debts by $225,000.

Research and Development Expenses. The decrease in research and
development expense from $1,722,000 in 1998 to $1,572,000 in 1999 is
attributable to decreased staff, outside consultants and overhead as part of the
Company's restructuring efforts. Research and development expense decreased as
a percentage of total revenues from 35.6% in 1998 to 23.3% in 1999.

16
<PAGE>

Amortization of Goodwill and Acquired Intangible Assets. Goodwill
associated from the acquisition of Unicore is being amortized over three years.
Purchased software related from the purchase price allocation of the Unicore
products along with the purchase of Cardware are being amortized over their
estimated useful lives of twelve to thirty months. During 1999, the company
recorded $2,112,439 in amortization charges.

Merger, Acquisition, and Restructuring Charges. Charges incurred during
1999 in connection with the Unicore acquisition and included in merger,
acquisition and restructuring charges included $52,000 in asset write-offs,
$229,000 in facilities abandonment costs, and $114,000 in employee relocation
costs and severance benefits. Included in 1999 merger, acquisition and
restructuring charges are costs associated with the winding down of the
TouchStone Europe, Ltd. operations including the termination of its managing
director. In December 1999, the Company entered into a settlement agreement and
mutual general release with the managing director providing for a dismissal of
certain lawsuits and the Company's payment to the managing director for
$300,000. In addition, certain trade and employee receivables of approximately
$86,000 were written off and legal expenses and related costs associated with
the lawsuits and settlement agreement totaled approximately $394,000

Other Income. Other income decreased from approximately $570,000 in 1998 to
approximately $281,000 in 1999, as interest-bearing investments decreased.

COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997

Revenues. Total product sales decreased almost 40% from $7,637,000 in 1997
to $4,729,000 in 1998 due to a number of factors. First, the overall utility
market experienced a slowdown in sales in the first half of 1998, as consumers
postponed purchases while waiting for the release of Windows 98. Second, the
Company, as part of an overall restructuring of its operations, decided to
discontinue selling the PC-cillin anti-virus product, which represented
approximately 60% of sales in 1997. PC-cillin sales decreased from $4,787,000
in 1997 to $1,202,000 in 1998. Royalty income decreased from $279,000 in 1997 to
$107,000 in 1998 as the product mix changed from royalty-based sales to direct
sales

The Company determined that certain reserves, primarily related to rebates
and price protection, for recent sales activities and inventory in the channel,
were no longer required to be at their previous levels. Consequently during the
fourth quarter, the Company reduced reserves by approximately $750,000.

Gross Profit. Gross profit as a percentage of total revenues improved from
64.0% in 1997 to 71.7% in 1998 because of lower royalty expense associated with
PC-cillin, and an increase in the sales of the Company's higher-priced, high-
gross margin products. Royalty expense decreased from $1,082,000 in 1997 to
$117,000 in 1998 due to lower sales of PC-cillin products and due to the
reductions in the royalty rates ranging from 15% to 20% in 1997 to a fixed
amount in 1998.

Sales and Marketing Expenses. Sales and marketing expense decreased
approximately 45% from $4,368,000 in 1997 to $2,381,000 in 1998, primarily due
to reduced sales and marketing staff as part of the Company's restructuring
efforts, lower commissions because of reduced sales and sales staff, and lower
promotional costs. Because of these reductions, sales and marketing expenses
also decreased as a percentage of total revenues from 55.2% in 1997 to 49.2% in
1998.

General and Administrative Expenses. The increase in general and
administrative expense for 1998 was attributable to several factors. First, the
Company spent more for executive and administrative management than in 1997.
Second, the Company was forced to increase spending for legal matters,
particularly trademark issues. Third, the Company wrote off bad debt of
$159,000 related to its European subsidiary. General and administrative expenses
increased from $1,290,000, or 16.3% of revenues, in 1997 to $1,957,000, or 40.5%
of revenues, in 1998.

17
<PAGE>

Research and Development Expenses. The decrease in research and
development expense from $2,146,000 in 1997 to $1,722,000 in 1998 is
attributable to decreased staff, outside consultants and overhead as part of the
Company's restructuring efforts. Research and development expense increased as
a percentage of total revenues from 27.1% in 1997 to 35.6% in 1998 due to the
Company's decline in sales from year to year.

Restructuring Costs. During 1998 the Company experienced a significant
decline in its retail products business. This decline in revenues caused the
Company to experience significant operating losses during its fiscal second and
third quarters. As part of its strategy to curtail these losses, the Company
restructured its operations. The restructuring consisted primarily of a
reduction in the Company's workforce from approximately 50 to 12. The reduction
in headcount resulted in a charge for severance payments. In addition, the
Company took a charge for the write-off of certain fixed assets and leasehold
improvements. The restructuring also included the resignation of Larry Jordan
as Chief Executive Officer. Ken Forbes succeeded Mr. Jordan in August 1998. Mr.
Forbes embarked on a business strategy involving the Internet, which was a
drastic change from the Company's recent business strategy. At the end of 1998,
the Company's Board of Directors elected to discontinue the Internet strategy
and Mr. Forbes resigned from the Company. Much of the Company's restructuring
costs related to severance packages for Messrs. Jordan and Forbes. Total
restructuring costs of $1,075,000 included approximately $837,000 related to
severance expense for termination of approximately 35 employees, $182,000
related to the write-down of property and equipment, and $56,000 related to the
accrual of lease expenses on vacated facilities. Severance expenses include
salaries and benefits related to all employees terminated as a result of the
acquisition and cost reduction efforts. The Company wrote down its inventories
to their salvage value of the assets. In addition, the Company wrote down its
facilities expense to the net realizable value. These write-downs are
attributable to the Company's intention to dispose of the assets based on its
decision to relocate its facilities and its decision to reduce headcount.

Other Income. Other income decreased from approximately $685,000 in 1997
to approximately $570,000 in 1998, as interest-bearing investments decreased.

LIQUIDITY AND CAPITAL RESOURCES

During the year ended December 31, 1999, the Company used cash resources of
$1,969,000 for operating activities. The Company received proceeds from the
exercise of stock options aggregating $20,000. The Company also had net
investment sales of $5,468,000.

The Company's cash and cash equivalents, restricted cash, and investments
totaled $4,543,000 at December 31, 1999. Working capital decreased from
$5,644,000 at December 31, 1998 to $3,743,000 at December 31, 1999. Cash and
cash equivalents increased from $825,000 at December 31, 1998 to $2,158,000 at
December 31, 1999. The decrease in working capital and increase in cash and
cash equivalents was due primarily to decreased holdings of short-term
investments.

In September 1997, the Company negotiated a bank line of credit, which
allows for borrowings up to $500,000. The Company renewed the line of credit in
September 1998, which expired in September 1999. The company elected not to
renew this line of credit in September 1999. In November 1998 Unicore
negotiated a bank line of credit, which provides for borrowings up to $100,000
and bears interest at 2% over the cash collateral certificate of deposit rate
(6.51% at December 31, 1999). The line of credit, which expires in November
2000, is secured by a $100,000 certificate of deposit, held at the bank, which
has been classified as restricted cash at December 31, 1999. There were no
borrowings outstanding under this line of credit at December 31, 1999.

Management believes that the Company's existing cash and periodic
borrowings under the line of credit will be sufficient to fund the Company's
operations at currently anticipated levels through December 31, 2000. The
Company plans to use its cash resources to finance new product development and
existing product enhancements, expand internationally, and expand the direct
sales force for corporate customers. The execution of such plans may include
strategic acquisitions of, or investments in, businesses, products or
technologies.

18
<PAGE>

SUBSEQUENT EVENTS

In January 2000, the Company formed a new wholly owned subsidiary
eSupport.com, Inc., a New Hampshire corporation ("e.Support.com"), which
currently conducts the day to day operations formerly conducted by the Company.
Pursuant to its' articles of incorporation, eSupport.com is authorized to issue
20,000,000 shares of common stock, par value $.01 per share, and 10,000,000
shares of preferred stock, par value $.01 per share. eSupport.com was
capitalized through the issuance of 5,000,000 shares of its common stock to the
Company.

In January 2000, TSC Investments, LLC, a New Hampshire limited liability
company, ("TSC") was formed to engage in the business of making investments.
Under its Operating Agreement, TSC's sole member was TouchStone Investments,
Inc., which was issued 100 membership units and appointed manager of the LLC.
In a subsequent amendment to the operating agreement, Pierre Narath was
designated as the manager of TSC Investment, LLC. The operating agreement was
amended in its entirety on March 29, 2000. Under the amended operating
agreement, TouchStone Investments, Inc. holds 80 membership units, Pierre A.
Narath, the Chief Executive Officer of TouchStone Software Corporation holds
17.5 units and Jason Raza, a Vice President of TouchStone Software Corporation
holds 2.5 units.

TouchStone Investments, Inc. a New Hampshire corporation was formed during
January 2000 for the principal purpose of engaging in the business of making
investments and serving as a member of TSC. Under its articles of
incorporation, TouchStone Investments, Inc., is authorized to issue 100,000
shares of common stock, par value $.01 per share, no other classes of stock have
been authorized. TouchStone Investments, Inc. was capitalized through the
issuance of 10,000 shares of its common stock to TouchStone Software
Corporation.

On March 3, 2000 the Company entered into an amended license agreement with
Compaq Computer ("Compaq") that grants an unlimited paid up license for CardWare
5.x and 6.x for as long as Compaq supports CardWare for NT 4.0.

Effective March 6, 2000, the Company entered into a non-binding letter of
intent to sell its wholly-owned subsidiary eSupport.com, Inc., along with
certain other assets of the Company and its wholly-owned subsidiary, Unicore
Software, Inc. to Phoenix Technologies, Ltd. (Phoenix). Phoenix proposes to
acquire all of TouchStone's and the Subsidiaries' respective assets related to
the development and licensing of personal computer ("PC") software utility
packages, system level software packages (including BIOS Software), hardware
diagnostic software, internet access optimization software, internet diagnostic
and online software and PC to PC file transfer software (the "Business").
Additionally, Phoenix will receive approximately (subject to adjustment) the
equivalent of approximately $3,300,000 of TouchStone Software Corporation's
convertible preferred securities. In addition to assuming the liabilities
associated with business, Phoenix offered to pay TouchStone $4,500,000 in cash
and the equivalent of $4,500,000 in Phoenix common shares. The Company and
Phoenix are continuing to negotiate the terms and conditions of a binding
agreement.

In March 2000, TouchStone Software Corporation announced a board resolution
to change its name to TouchStone Capital Group.

BUSINESS RISKS

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

19
<PAGE>

These risk factors include the risk that products under development prove
more difficult to develop than currently anticipated resulting in delays in
reaching the market, significantly greater development costs, or even in planned
products having to be abandoned. Moreover, with or without delays in bringing
new products to market, it is possible that the Company's competitors will bring
to market successful competing products which reduce the size of, or eliminate
altogether, the market for the Company's planned products. In addition, rapid
change and technological advancement characterize the software industry,
including a trend by hardware manufacturers to feature pre-loaded software
packages in computers. This could reduce demand for the Company's products, if
such pre-loaded software performs many of the same functions as the Company's
currently marketed product or technology currently under development.

Industry Risks
- --------------

The utility software business is part of a fast-changing industry and the
ability of the Company to grow or to predict future revenue is dependent to a
large extent on the ability of the Company to develop new products and new
versions of existing products. Given the results of the last two years, and the
competitive factors affecting this industry, as discussed elsewhere in this
report, management is unable to predict at this time whether the Company can be
successful at designing and developing products that can compete profitably in
this industry. Furthermore, some of the products currently under consideration
involve complicated diagnostic technologies, which are more complex than those
previously encountered in the development of the Company's products. This may
result in significant delays and greater expense than normally encountered by
the Company in the development of its products.

20
<PAGE>

ITEM 7. FINANCIAL STATEMENTS
- -----------------------------

INDEPENDENT AUDITORS' REPORT

To the Board of Directors of
TouchStone Software Corporation:

We have audited the accompanying consolidated balance sheet of TouchStone
Software Corporation and subsidiaries (the Company) as of December 31, 1999, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit. The consolidated financial statements of TouchStone Software Corporation
and subsidiary (the Company) as of December 31, 1998, were audited by other
auditors whose report dated March 9, 1999, express an unqualified opinion on
those statements.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the 1999 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
TouchStone Software Corporation and subsidiaries as of December 31, 1999, and
the results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.

/s/ Vitale, Caturano and Company, P.C.

Boston, Massachusetts
March 15, 2000, Except for Note 14,
as to which the date is March 30, 2000

21
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors
TouchStone Software Corporation

We have audited the consolidated balance sheet of TouchStone Software
Corporation and subsidiary (the Company) as of December 31, 1998, and the
related consolidated statement of operations, shareholders' equity, and cash
flows for the year then ended. 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 audit.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of TouchStone Software
Corporation and subsidiary as of December 31, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.

/s/ DELOITTE & TOUCHE LLP

Costa Mesa, California
March 9, 1999

22
<PAGE>

TouchStone Software Corporation
Consolidated Balance Sheets
December 31, 1999 and 1998

<TABLE>
<CAPTION>
1999 1998
----------------- -------------------
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash and cash equivalents $ 2,157,904 $ 825,255
Restricted cash 720,000 500,000
Investments, marketable securities 857,906 5,897,469
Accounts receivable, net 963,636 1,193,528
Inventories, net 199,201 185,287
Note receivable 250,000 -
Deferred tax asset 412,000 -
Prepaid expenses and other current assets 221,606 166,987
------------------ --------------------
Total current assets 5,782,253 8,768,526

Investments, marketable securities 69,363 1,364,797
Investments, other 738,000 -
Property and equipment, net 132,233 134,888
Goodwill and other intangible assets, net 3,067,342 -
Other assets 64,274 58,458
------------------ --------------------
$ 9,853,465 $ 10,326,669
================== ====================

LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current maturities of long-term debt $ 89,286 $ -
Accounts payable 383,649 631,646
Accrued payroll and related expenses 411,969 152,336
Deferred revenues 325,757 1,243,034
Other accrued liabilities 828,447 1,097,541
------------------ --------------------
Total current liabilities 2,039,108 3,124,557

Long-term debt, net of current maturities 438,905 -
Deferred tax liability 535,600 -
Other liabilities - 189,893
------------------ --------------------
Total liabilities 3,013,613 3,314,450
------------------ --------------------

Commitments and contingencies

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,
11,346,060 (1999)
7,963,060 (1998) 11,346 7,963
Additional paid-in capital 20,952,873 18,754,516
Deferred compensation (48,000) -
Accumulated deficit (14,076,367) (11,750,260)
------------------ --------------------
Total shareholders' equity 6,839,852 7,012,219
------------------ --------------------
$ 9,853,465 $ 10,326,669
================== ====================
</TABLE>

See accompanying notes to consolidated financial statements.

23
<PAGE>

TouchStone Software Corporation
Consolidated Statements of Operations
Years ended December 31, 1999 and 1998

<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Revenues:
Product sales $ 6,627,911 $ 4,729,240
Royalty income 111,444 106,583
----------------- -----------------
Total revenues 6,739,355 4,835,823
Cost of revenues 1,116,767 1,367,196
----------------- -----------------
Gross profit 5,622,588 3,468,627
----------------- -----------------

Operating expenses:
Sales and marketing 2,327,518 2,380,787
General and administrative 1,969,555 1,956,603
Research and development 1,571,520 1,721,716
Amortization of goodwill and
acquired intangible assets 2,112,439 -
Merger, acquisition and
restructuring charges 1,174,730 1,075,253
----------------- -----------------
Total operating expenses 9,155,762 7,134,359
----------------- -----------------
Loss from operations (3,533,174) (3,665,732)

Other income, net 280,867 569,616
----------------- -----------------
Loss before provision for (benefit from)
income taxes (3,252,307) (3,096,116)
Provision for (benefit from) income taxes (926,200) 800
----------------- -----------------
Net loss $(2,326,107) $(3,096,916)
================= =================

Loss per share, basic and diluted $(0.25) $(0.39)
================= =================

Weighted average shares outstanding, basic and diluted
9,239,852 7,930,000
================= =================
</TABLE>

See accompanying notes to consolidated financial statements.

24
<PAGE>

TouchStone Software Corporation
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1999 and 1998
<TABLE>
<CAPTION>

Total
Common stock Additional share-
------------ Paid-in Deferred Accumulated holders'
Shares Amount capital Compensation deficit equity
------------ ---------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>

Balances at
January 1, 1998 7,883,085 $ 7,883 $18,673,682 $ - $ (8,653,344) $10,028,221

Stock options exercised 79,975 80 70,663 - - 70,743

Stock options issued for
consulting services - - 10,171 - - 10,171

Net loss - - - - (3,096,916) (3,096,916)
------------ ---------- ----------- ------------ ------------ -----------

Balances at
December 31, 1998 7,963,060 7,963 18,754,516 - (11,750,260) 7,012,219

Stock options exercised 33,000 33 19,707 - - 19,740

Stock issued for business
acquisition 3,350,000 3,350 2,073,650 - - 2,077,000

Stock options issued for
consulting services - - 105,000 (48,000) - 57,000

Net loss - - - - (2,326,107) (2,326,107)
------------ ---------- ----------- ------------ ------------ -----------

Balances at
December 31, 1999 11,346,060 $11,346 $20,952,873 $(48,000) $(14,076,367) $ 6,839,852
============ ========== =========== ============ ============ ===========

</TABLE>

See accompanying notes to consolidated financial statements.

25
<PAGE>

TouchStone Software Corporation
Consolidated Statements of Cash Flows
Years ended December 31, 1999 and 1998

<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,326,107) $ (3,096,916)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation 79,460 180,876
Amortization of intangibles 2,112,439 -
Stock options issued for consulting services 57,000 10,171
Deferred taxes (927,000) -
Provision for doubtful accounts 293,085 350,409
Provision for obsolete inventories - 79,794
Write-off of property and equipment 52,160 183,881
Realized gains on investments (91,261) -
Change in deferred lease obligation (115,393) 59,101
Changes in assets and liabilities, net of effect of acquisition:
Accounts receivable 502,496 1,143,341
Inventories 77,989 18,060
Prepaid expenses and other current assets (54,619) 96,215
Other assets (5,816) (27,287)
Accounts payable (416,635) (1,902)
Deferred revenue (917,277) (1,160,763)
Accrued liabilities (289,922) (889,444)
----------------- -----------------
Net cash used in operating activities (1,969,401) (3,054,464)
----------------- -----------------

Cash flows from investing activities:
Purchases of investments (3,541,998) (41,036,995)
Proceeds from sales and maturities of investments 9,010,256 43,491,722
Advances on notes receivable (250,000) -
Purchase of property and equipment (51,312) (83,668)
Proceeds from sale of property and equipment - 4,056
Purchase of software for resale (950,000) -
Net cash used in business acquisition (860,236) -
----------------- -----------------
Net cash provided by investing activities 3,356,710 2,375,115
----------------- -----------------

Cash flows from financing activities:
Payments on long-term debt (74,400) -
Proceeds from exercise of stock options 19,740 70,743
----------------- -----------------
Net cash provided by (used in) financing activities (54,660) 70,743
----------------- -----------------

Net increase (decrease) in cash and cash equivalents 1,332,649 (608,606)
Cash and cash equivalents, beginning of year 825,255 1,433,861
----------------- -----------------
Cash and cash equivalents, end of year $ 2,157,904 $ 825,255
================= =================
</TABLE>

See accompanying notes to consolidated financial statements.

26
<PAGE>

TouchStone Software Corporation
Consolidated Statements of Cash Flows (continued)
Years ended December 31, 1999 and 1998

<TABLE>
<S> <C> <C>
Supplemental cash flow information:
Interest paid $ 32,377 $923
================= =====================
Income taxes paid $ 800 $800
================= =====================
Noncash financing and investing activities:
Common stock issued in business acquisition $2,077,000 $ -
----------------- ---------------------
Assets and liabilities recognized upon business acquisition:
Accounts receivables 565,689 -
Inventories 91,903 -
Property and equipment 77,653 -
Goodwill and other intangible assets 4,229,781 -
Accounts payable and accrued liabilities 374,599 -
Deferred tax liability 1,050,600 -
Long-term debt 602,591 -
</TABLE>

See accompanying notes to consolidated financial statements.

27
<PAGE>

TouchStone Software Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 1999 and 1998

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations. TouchStone Software Corporation ("TouchStone" or the
"Company") designs, develops, markets, and supports a line of computer problem-
solving utility software and supporting products which simplify personal
computer installation, support, and maintenance. TouchStone operates from two
locations in the United States and from a branch in Germany. The Company
markets its products, domestically and internationally through software
distributors, for resale through the retail channel, as well as, directly to
original equipment manufacturers and end users, primarily located in the United
States. Ongoing customer evaluations are performed with respect to the
Company's receivables, and collateral is generally not required.

Basis of Presentation. The 1999 consolidated financial statements of the
Company include the financial statements of the Company's two wholly owned
subsidiaries, Unicore Software, Inc. and TouchStone Europe, Ltd. The 1998
consolidated financial statements of the Company include the financial
statements of the Company's wholly owned subsidiary, TouchStone Europe Ltd. All
intercompany transactions and balances have been eliminated.

Cash and Cash Equivalents. The Company considers temporary liquid
investments with an original maturity of three months or less to be cash
equivalents.

Investments. The Company accounts for marketable securities under
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" (SFAS 115). SFAS 115 establishes the
accounting and reporting requirements for all debt securities and for
investments in equity securities that have readily determinable fair values.
All marketable securities must be classified as one of the following: held-to-
maturity, available-for-sale, or trading. Under SFAS 115, marketable security
investments classified as available for sale are carried at fair value, with
unrealized holding gains and losses, reported as a separate component of
shareholders' equity. The Company's marketable investment securities consists
of a portfolio of certificates of deposits, commercial paper, corporate bonds
and government notes. The Company accounts for nonmarketable investments using
the cost method. Realized gains and losses from the sale of investments are
determined on a specific identification basis.

Accounts Receivable. An allowance for doubtful accounts is provided for
those accounts receivable considered to be uncollectible, based upon historical
experience and management's evaluation of outstanding accounts receivable at the
end of the year. At December 31, 1999 and 1998, the allowance for doubtful
accounts was $225,000 and $0, respectively.

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

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

Goodwill. Goodwill, which represents the excess of purchase price over
fair value of net assets acquired, is amortized on a straight-line basis over
the expected periods to be benefited of three years. The Company evaluates
whether changes have occurred that would require revision of the remaining
estimated useful life or impact the recoverability of the goodwill. If such
changes occur, the Company would use an estimate of the undiscounted future
operating cash flows to determine the recoverability of the goodwill. At
December 31, 1999, the balance of goodwill, net of accumulated amortization was
$1,213,175.

28
<PAGE>

TouchStone Software Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 1999 and 1998

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Intangible Assets. Intangible assets consist of developed technology
purchased by the Company in its business acquisition and software acquired from
third parties. At the date of acquisition, the Company evaluates the components
of the purchase price of each acquisition and assesses the net realizable value
of the acquired technology. In assessing net realizable value, the Company
relies on several factors including historical results, projections, product
cycles, customer relationships, consumer buying patterns, and other financial
and nonfinancial data. Intangible assets are reported at cost, net of
accumulated amortization, and are being amortized on a straight-line basis over
their estimated useful life of twelve to thirty months. At December 31, 1999,
the balance of intangible assets, net of accumulated amortization was
$1,854,167.

Long-Lived Assets. The Company evaluates long-lived assets under Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of" (SFAS 121). This
statement requires that long-lived assets and certain identifiable intangibles
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell. During 1999 and 1998, the
Company evaluated its property and equipment and recorded $52,000 and $182,000,
respectively, of write-down in property and equipment to be disposed and
$229,000 and $56,000, respectively, of accrual of lease expense on vacated
facilities as part of merger, acquisition and restructuring charges.

Revenue Recognition. Product sales are recorded at the time products are
shipped, but the Company records a reserve for product returns at each period-
end which covers 100% of inventory in the retail channel. The reserves for such
inventory are classified as deferred revenue on the Company's balance sheet.
The Company's operations are subject to substantial and unpredictable risk of
product returns from distributors and retailers either through the exercise by
the Company's customers of contractual return rights or as a result of the
Company's policy of assisting customers in balancing and updating inventories.
Although the Company attempts to monitor and manage the volume of its sales to
its customers, large shipments in anticipation of demand which is subsequently
unrealized, can lead to overstocking by the distributors and substantial product
returns. Certain of the Company's customer agreements also provide for rebates
to customers should the price of the Company's products decline subsequent to
shipment. The Company accrues for such rebates when such price declines are
known or become anticipated.

Translation of Foreign Currencies. In accordance with Statement of
Financial Accounting Standards No. 52, "Foreign Currency Translation" (SFAS 52),
the assets and liabilities of the Company's foreign operations are translated at
exchange rates as of the balance sheet date. Revenues and expenses are
translated at average rates of exchange in effect during the year. Under SFAS
52, resulting translation adjustments are reflected as a separate component of
shareholders' equity. The functional currency of the Company's German branch is
the German Deutsche Mark, while the functional currency of the Company's
European subsidiary is the U.S. dollar. Transaction gains and losses were not
significant in 1999 and 1998 and have been included in results of operations.

29
<PAGE>

TouchStone Software Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 1999 and 1998

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Research and Development. 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 and costs are considered recoverable. 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" (SFAS 86), until the product
is available for sale. During 1999 and 1998, software has been substantially
completed concurrently with the establishment of technological feasibility; and,
accordingly, no costs have been capitalized.

Merger, Acquisition, and Restructuring Charges. The primary components of
the Company's merger, acquisition and restructuring charges include severance
for terminated employees, the write-down of property and equipment, the write-
down of facilities expense, legal expenses and costs associated with a lawsuit
settlement. Severance expenses include salaries and benefits related to all
employees terminated as a result of the acquisition and cost reduction efforts.
The Company wrote down its property and equipment to the salvage value of the
assets. In addition, the Company accrued lease expenses related to facilities
it vacated. These expenses are attributable to the Company's intention to
dispose of the assets based on its decision to relocate its facilities and its
decision to reduce its workforce.

Advertising Costs. The Company expenses advertising costs as incurred.
Advertising expense was approximately $247,000 and $735,000 for the years ended
December 31, 1999 and 1998, respectively.

Income Taxes. The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109), which requires the recognition of deferred tax assets and liabilities at
tax rates expected to be in effect when these balances reverse. Future tax
benefits attributable to temporary differences are recognized to the extent that
realization of such benefits is more likely than not.

Stock-Based Compensation. The Company accounts for stock-based employee
compensation arrangements using the intrinsic value method of accounting
prescribed in accordance with Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees". The Company provides proforma
disclosures of net income (loss) and income (loss) per share as required under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 encourages, but does not require companies
to recognize compensation expense for grants of stock, stock options, and other
equity instruments based on the fair value method of accounting. For options or
other stock-based compensation issued to nonemployees, the Company recognizes
compensation expense under the fair value method.

Earnings per Share. Pursuant to Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (SFAS 128), the Company provides dual
presentation of "Basic" and "Diluted" EPS, replacing "Primary" and "Fully
diluted" EPS formerly under Accounting Principals Board ("APB") Opinion No. 15.
Basic EPS excludes dilution from common stock equivalents and is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution from common stock equivalents, similar to fully diluted EPS, but uses
only the average stock price during the period as part of the computation.
Common stock equivalents consisted of outstanding stock options and warrants for
the years ended December 31, 1999 and 1998, but have not been included in the
calculation of diluted EPS as their effect would have been antidilutive on both
periods. At December 31, 1999 and 1998, the number of outstanding stock options
and warrants were 1,525,383 and 1,834,808, respectively.

30
<PAGE>

TouchStone Software Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 1999 and 1998

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Fair Value of Financial Instruments. The recorded amounts of financial
instruments, including cash equivalents, investments, accounts and notes
receivable, accounts payable, accrued liabilities and deferred revenues,
approximate their fair value because of the short maturity of these instruments.
The fair value of the Company's long-term debt approximates its carry value.

Use of Estimates. The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions. Such estimates and assumptions
affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the periods then ended. Actual results
could differ from management's estimates.

Segment Reporting. In 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and
Related Information", (SFAS 131). SFAS 131 supersedes SFAS No. 14, Financial
Reporting for Segments of a Business Enterprise. Under the new standard, the
Company is required to use the management approach to reporting its segments.
The management approach designates that the internal organization that is used
by management for making operating decisions and assessing performance as the
source of the Company's segments. The adoption of SFAS 131 had no impact on the
Company's net loss, balance sheet, or shareholders' equity. The accounting
policies of the segments are the same as those described elsewhere in Note 1.

Comprehensive Income. In 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). This
statement establishes standards for the reporting and display of comprehensive
income and its components in the financial statements. Comprehensive income, as
defined, includes all changes in equity during a period from non-owner sources.
Examples of items to be included in comprehensive income, which are excluded
from net income, include foreign currency translation adjustment and unrealized
gains and losses on available-for-sale securities. For the years ended December
31, 1999 and 1998, there was no differences between the Company's comprehensive
loss and the net loss reported on the statement of operations.

Recently Issued Accounting Standards. In June 1998, the Financial
Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). The new standard requires
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives will be reported in the statement of operations or as a
deferred item, depending on the use of the derivatives and whether they qualify
for hedge accounting. The key criterion for hedge accounting is that the
derivative must be highly effective in achieving offsetting changes in fair
value or cash flows of the hedged items during the term of the hedge. The
Company currently expects to adopt SFAS 133, as amended by SFAS 137, for the
year ending December 31, 2001. Management has determined there will be no
impact on its results of operations or financial position resulting from the
adoption of SFAS 133 because the Company currently does not hold derivative
instruments.

Reclassifications. Certain items previously reported in specific financial
captions have been reclassified to conform with the 1999 presentation.

31
<PAGE>

TouchStone Software Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 1999 and 1998

2. INVESTMENTS

Investments, Marketable Securities. Current investments consist of the
following marketable securities, which are classified as available-for-sale at
December 31, 1999 and as held to maturity at December 31, 1998:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Cost of Investments:
Certificates of deposit $ 97,000 $1,639,002
Commercial paper - 1,678,557
Corporate bonds 260,906 1,084,917
Government notes 500,000 1,494,993
--------------- ---------------
$857,906 $5,897,469
=============== ===============
Fair Market Value of Investments:
Certificates of deposit $ 97,000 $1,638,590
Commercial paper - 1,691,653
Corporate bonds 260,906 1,086,086
Government notes 500,000 1,509,158
--------------- ---------------
$857,906 $5,925,487
=============== ===============
</TABLE>

At December 31, 1999, the cost of the current investments classified as
available-for-sale approximates fair market value. Accordingly, no unrealized
gains or losses have been reported as a separate component of shareholders'
equity.

Non-current investments consist of the following marketable securities,
which are classified as held-to-maturity at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------------- -------------
<S> <C> <C>
Cost of Investments:
Certificates of deposit $ - $ 291,000
Government notes - 999,297
Other 69,363 74,500
------------------ ---------------
$ 69,363 $1,364,797
================== ===============

Fair Market Value of Investments:
Certificates of deposit $ - $ 290,243
Government notes - 1,015,119
Other 111,825 111,847
------------------ ---------------
$111,825 $1,417,209
================== ===============
</TABLE>

Investments, other. Investments at December 31, 1999, include equity
instruments of privately held internet companies. These investments are
accounted for under the cost method as the Company's ownership represents less
than 20% of each investee. The Company's carrying value of these investments
approximates fair value at December 31, 1999. For non-marketable investments,
the Company regularly reviews the assumptions underlying the operating
performance and cash flow forecasts in assessing carrying value.

Included in investments, other at December 31, 1999 is a $663,000
investment in 260,000 shares of Series A convertible preferred stock of
PartsBase.com, a provider of Internet business-to-business e-commerce services
for the aviation industry. In March 2000, PartsBase.com filed an initial public
offering and is currently traded on the NASDAQ exchange.

32
<PAGE>

TouchStone Software Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 1999 and 1998

2. INVESTMENTS (CONTINUED)

As part of a bridge financing agreement, in which the Company made a
$250,000 loan, the Company received 100,000 warrants to purchase the common
stock of Entertainment Boulevard, Inc. The Company has placed a $75,000 value
on the warrants, which is included in investments, other at December 31, 1999.
Entertainment Boulevard, Inc. owns Vidnet, which is a provider of streaming
entertainment related media on the Internet, as well as a comprehensive media
encoding service provider. Entertainment Boulevard currently trades on the OTC
Bulletin Board.

3. PROPERTY AND EQUIPMENT

Property and equipment consist of the following at December 31:

<TABLE>
<CAPTION>
1999 1998
-------------- --------------

<S> <C> <C>
Office equipment and furniture $ 250,412 $ 389,209
Leasehold improvements 21,704 17,519
--------------- ---------------
272,116 406,728
Less - accumulated depreciation (139,883) (271,840)
--------------- ---------------
$ 132,233 $ 134,888
=============== ===============
</TABLE>

Depreciation expense for the years ended December 31, 1999 and 1998 was
$79,460 and $180,875, respectively.

4. LINE OF CREDIT

The Company has a bank line of credit, which provides for borrowings up to
$100,000 and bears interest at 2% over the cash collateral certificate of
deposit rate (6.51% at December 31, 1999). The line of credit, which expires in
November 2000, is secured by a $100,000 certificate of deposit, held at the
bank, which has been classified as restricted cash at December 31, 1999. There
were no borrowings outstanding under this line of credit at December 31, 1999.

5. LONG-TERM DEBT

Long-term debt consists of the following at December 31, 1999:
<TABLE>

<S> <C>
Installment note payable - bank, due in 84 monthly principal installments of $7,440, plus interest at 2% over the
bank's cash collateral certificate of deposit rate, (6.51% at December 31, 1999), final installment due December
2005, secured by a $620,000 certificate of deposit, held at the bank, which has been classified as restricted cash
at December 31, 1999. $528,191

Less - current maturities 89,286
--------

Long-term debt, net of current maturities $438,905
========
</TABLE>

33
<PAGE>

TouchStone Software Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 1999 and 1998

5. LONG-TERM DEBT (CONTINUED)

Principal maturities of long-term debt as of December 31, 1999, are as
follows:

Years Ended
December 31,
- --------------------------

2000 $89,286
2001 89,286
2002 89,286
2003 89,286
2004 89,286
2005 81,761
-------
$528,191
========

Interest expense incurred in 1999 and 1998 was approximately $32,000 and
$1,000, respectively.

6. SHAREHOLDERS' EQUITY

Stock Option Plans. The Company has various stock option plans for
directors, officers, employees and certain consultants, which provide for non-
qualified and incentive stock options. The Board of Directors determines the
option price (not to be less than fair market value for incentive options) at
the date of grant. Options granted prior to 1996 generally vest over periods
ranging from one to two years and expire ten years from the date of grant.
Options granted after 1995 vest over four years and expire ten years from date
of grant. At December 31, 1999, options for 558,825 shares were available for
future grants under the plans.

All options granted under these plans were granted at fair market value at
date of issuance. A summary of the status of the Company's stock option plans
and stock warrants as of December 31, 1999 and 1998, and changes during the
years ended on those dates is presented below:

<TABLE>
<CAPTION>
1999 1998
----------------------------- ------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
-------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>

Options and warrants outstanding,
beginning of year 1,834,808 $3.57 1,907,518 $3.68

Granted 453,000 $0.58 684,700 $0.97
Exercised (33,000) $0.60 (79,975) $0.88
Canceled (729,425) $0.99 (677,435) $1.55
--------- ---------
Options and warrants outstanding,
end of year 1,525,383 $3.98 1,834,808 $3.57
========= =========
Options and warrants exercisable at
year-end 1,094,796 $5.24 978,802 $5.72
========= =========
</TABLE>

34
<PAGE>

TouchStone Software Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 1999 and 1998

6. SHAREHOLDERS' EQUITY (CONTINUED)

The following table summarizes other information about stock options
outstanding at December 31, 1999:

<TABLE>
<CAPTION>
Number Weighted Average Weighted Average Number Weighted Average
Range of Exercise Price Outstanding Remaining Exercise Exercisable Exercise
12/31/99 Contractual Life Price 12/31/99 Price
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.22-$1.00 867,183 6.3 $ 0.52 511,683 $ 0.46

$1.44-$3.56 428,200 3.1 $ 1.53 353,113 $ 1.52

$21.60 230,000 0.7 $21.60 230,000 $21.60
--------- ---------
1,525,383 4.5 $ 3.98 1,094,796 $ 5.24
========= =========
</TABLE>

As discussed in Note 1, the Company accounts for its stock-based employee
compensation arrangements using the intrinsic value method in accordance with
APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related
interpretations.

SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net income and earnings per share had the Company
adopted the fair value method. Under SFAS No. 123, the fair value of stock-
based compensation to employees is calculated through the use of option-pricing
models, even though such models were developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option compensation arrangements.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. If the fair values of the awards had been amortized to expense over
the vesting period of the awards, results would have been as follows:

1999 1998
------------ ------------
Net loss: As reported $(2,326,107) $(3,096,916)
Pro forma $(2,427,024) $(3,316,334)

Basic and diluted loss per share: As reported $ (0.25) (0.39)
Pro forma $ (0.26) (0.42)

The fair value of options granted under the Company's stock option plans
during 1999 and 1998 was estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used: no
dividend yield, expected volatility of 127% in 1999 and 88% in 1998, risk-free
interest rate of 6.00% in 1999 and 5.00% in 1998, and expected lives of 3 years
in 1999 and 4 years in 1998. The Company's calculations are based on a single-
option valuation approach and forfeitures are recognized as they occur. The
computed weighted average fair values for options awards in 1999 and 1998 were
$0.46 and $0.66 per share, respectively.

Shareholder Rights Plan. In September 1996, the Board of Directors
approved the adoption of a Shareholder Rights Plan. The Rights Plan provides for
the distribution to TouchStone Software Corporation's shareholders of one
preferred stock purchase "Right" for each outstanding share of TouchStone common
stock. The Rights have an exercise price of $15 per Right, subject to subsequent
adjustment. Initially, the Rights will trade with the Company's common stock,
and will not be exercisable until the occurrence of certain takeover-related
events.

35
<PAGE>

TouchStone Software Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 1999 and 1998

6. SHAREHOLDERS' EQUITY (CONTINUED)

The Rights Plan provides that if a person or group acquires 15 percent or
more of the Company's common stock without the approval of the Board of
Directors, the holders of the Rights, other than the acquiring person or group,
would, under certain circumstances, have the right to purchase additional shares
of the Company's common stock having a market value equal to two times the
exercise price of the Right. In addition, if the Company is thereafter merged
into another entity, or if 50% or more of the Company's consolidated assets or
earning power are sold, then the Right will entitle its holder, other than the
acquiring person or group, to buy common shares of the acquiring entity having a
market value equal to two times the exercise price of the Right.

The Rights were distributed to holders of the Company's common stock of
record on October 4, 1996, as a dividend, and will expire, unless earlier
redeemed, on September 26, 2006.

The NASDAQ Listing Qualification Panel delisted the Company's shares from
the NASDAQ National Market on July 9, 1999. The decision was based on the
Company's inability to achieve and maintain compliance with the $1.00 minimum
bid price requirement and to maintain the level of net tangible assets required
by Marketplace Rule 4450(a)(5) and Marketplace Rule 4450(a)(3), respectively.
The Company's shares now trade on the OTC Bulletin Board.

7. MERGER, ACQUISITION AND RESTRUCTURING

1999. Effective as of the close of business on March 8, 1999, TouchStone
Software Corporation (the "Company") acquired all of the issued and outstanding
capital stock of Unicore Software, Inc., a Massachusetts corporation
("Unicore"). At the time of the acquisition, Unicore was privately owned by
Pierre A. Narath, the Company's President and Chief Executive Officer and a
member of the Company's Board of Directors, and Jason K. Raza, who became a Vice
President of the Company in connection with the acquisition.

Pursuant to the terms and conditions of a definitive Agreement and Plan of
Acquisition ("Acquisition Agreement"), the acquisition of Unicore was
accomplished through the merger of Unicore with and into a newly formed and
wholly owned subsidiary of the Company. Immediately prior to the acquisition,
the Company contributed all of the assets, products and operations of its
personal computer diagnostic software business to this newly formed corporation.
As a consequence, since the closing of the Unicore acquisition, the Company has
served as a holding company with a single, wholly-owned subsidiary that
currently conducts the business and activities that previously were separately
conducted by both the Company and Unicore.

At the closing of the acquisition of Unicore by the Company, the former
shareholders of Unicore, Messrs. Narath and Raza, received an aggregate of
$1,205,000 in cash. The balance of the purchase price was paid through the
issuance of an aggregate of 3,350,000 shares of the Company's common stock
immediately following shareholder approval of the issuance of these shares at
the 1999 Annual Meeting of the Company's shareholders, held on July 30, 1999 in
Andover, Massachusetts.

The acquisition was accounted for as a purchase, and accordingly, the
purchase price was allocated to the assets acquired and liabilities assumed
based on their estimated fair values on the date of the acquisition. Results of
operations for Unicore have been included with those of the Company for periods
subsequent to the date of acquisition.

36
<PAGE>

TouchStone Software Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 1999 and 1998

7. MERGER, ACQUISITION AND RESTRUCTURING (CONTINUED)

The purchase price, including costs incurred in connection with the
acquisition of Unicore, was allocated as follows:

Current assets, including cash acquired $ 1,153,261
Property and equipment 77,653
Developed technology 2,550,000
Goodwill 1,679,781
Liabilities assumed (2,027,790)
-----------
$ 3,432,905
===========

Charges incurred during 1999 in connection with the Unicore acquisition and
included in merger, acquisition and restructuring charges included $52,000 in
asset write-offs, $229,000 in facilities abandonment costs, and $114,000 in
employee relocation costs and severance benefits.

Included in 1999 merger, acquisition and restructuring charges are costs
associated with the winding down of the TouchStone Europe, Ltd. operations
including the termination of its managing director. In December 1999, the
Company entered into a settlement agreement and mutual general release with the
managing director providing for a dismissal of certain lawsuits and the
Company's payment to the managing director of $300,000. In addition, certain
trade and employee receivables of approximately $86,000 were written off and
legal expenses and related costs associated with the lawsuits and settlement
agreement totaled approximately $394,000.

1998. During 1998 the Company experienced a significant decline in its
retail products business. This decline in revenues caused the Company to
experience significant operating losses during its fiscal 1998 second and third
quarters. As part of its strategy to curtail these losses, the Company
restructured its operations. The restructuring consisted primarily of a
reduction in the Company's workforce from approximately 50 to 12. The reduction
in workforce resulted in a charge for severance payments. In addition, the
Company took a charge for the write-off of certain property and equipment and
leasehold improvements. The restructuring also included the resignation of
Larry Jordan as Chief Executive Officer. Ken Forbes succeeded Mr. Jordan in
August 1998. Mr. Forbes embarked on a business strategy involving the Internet,
which was a drastic change from the Company's recent business strategy. At the
end of 1998, the Company's Board of Directors elected to discontinue the
Internet strategy and Mr. Forbes resigned from the Company. Much of the
Company's restructuring costs related to severance packages for Messrs. Jordan
and Forbes. Total restructuring costs of $1,075,000 included approximately
$837,000 related to severance expense for termination of approximately 35
employees, $182,000 related to the write-down of property and equipment, and
$56,000 related to the accrual of lease expenses on vacated facilities.
Severance expenses include salaries and benefits related to all employees
terminated as a result of the cost reduction efforts. The Company wrote down
its inventories to their salvage value of the assets. In addition, the Company
wrote down its facilities expense to the net realizable value. These write-
downs are attributable to the Company's intention to dispose of the assets based
on its decision to relocate its facilities and its decision to reduce headcount.

37
<PAGE>

TouchStone Software Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 1999 and 1998

8. INCOME TAXES

The provision for (benefit from) income taxes consists of the following for
the years ended December 31:

<TABLE>
<CAPTION>
1999 1998
------------------- --------------------
<S> <C> <C>
Current:
Federal $ - $ -
State 800 800
------------------ -------------------
800 800
Deferred:
Federal (844,660) (892,100)
State (149,040) (152,800)
-------------------- ---------------------
(993,700) (1,044,900)
Valuation allowance 66,700 1,044,900

Provision for (benefit from) income taxes $(926,200) $ 800
==================== =====================
</TABLE>
A reconciliation of federal statutory rate to the provision for (benefit
from) income taxes follows:

<TABLE>
<CAPTION>
1999 1998
----------- -----------

<S> <C> <C>
Federal taxes at statutory rates (35.0)% (35.0)%

State benefits, net of federal tax effect (6.2) (5.7)

Change in valuation allowance 2.9 33.7

Other 9.8 7.0
------------ ------------

Provision for (benefit from) income taxes (28.5)% 0.0%
============ ============
</TABLE>

The components of the deferred tax assets (liabilities), as reflected on
the balance sheet, consist of the following:
<TABLE>
<CAPTION>
1999 1998
--------------- ------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss and credit carry-forwards $ 5,128,000 $ 4,899,000
Reserves and accruals 416,000 470,700
Other 54,000 -
---------------- -------------------
5,598,000 5,369,700

Deferred tax liabilities:
Intangibles (535,600) -
Other - (250,400)
---------------- -------------------
(535,600) (250,400)
---------------- -------------------

Valuation allowance (5,186,000) (5,119,300)
---------------- -------------------

Net deferred tax asset (liability) $ (123,600) $ -
================ ===================
</TABLE>

38
<PAGE>

TouchStone Software Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 1999 and 1998

8. INCOME TAXES (CONTINUED)

Presented on the balance sheet as:

Current deferred tax asset $ 412,000 $ -
Noncurrent deferred tax liability (535,600) -
--------- ---

$(123,600) $ -
========= ===

In assessing the realizability of deferred tax assets, the Company
considers whether it is more likely than not that some or all of the deferred
tax asset will not be realized. The Company believes that sufficient
uncertainty exists regarding the realizability of the deferred tax assets such
that valuation allowances of $5,186,000 and $5,199,300 for December 31, 1999 and
1998, respectively, have been established for deferred tax assets.

In connection with the merger of Unicore Software, Inc., the Company
recognized approximately $1,050,000 as deferred tax liability for the
differences between the assigned values and the tax bases of the acquired
software. As of December 31, 1999, the deferred tax liability remaining was
$535,600.

At December 31, 1999, the Company had federal and state net operating loss
carry-forwards of approximately $13,300,000 and $7,100,000, respectively, which
will begin expiring in the years 2011 and 2001, respectively. At December 31,
1999, the Company had general business credit carry-forwards for federal and
state purposes of approximately $131,000 and $87,000, respectively, which will
begin expiring in the years 2001 and 2009, respectively.

9. COMMITMENTS AND CONTINGENCIES

At December 31, 1999, the Company is obligated under non-cancelable
operating leases for its office facilities, office equipment, and automobiles.
As part of its restructuring, the Company has subleased a portion of its
California office facility. Future minimum rents, net of sublease income, are
as follows:

Years Ending
December 31,
- -----------------------------

2000 $208,800
2001 42,100
2002 32,000
2003 30,700
2004 7,700
--------
$321,300
========

Rent expense totaled approximately $318,000 and $217,000 for the years
ended December 31, 1999 and 1998, respectively. Sublease income totaled
approximately $60,000 and $14,000 for the years ended December 31, 1999 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 agrees to pay the software developers
a percentage royalty based on actual product sales. The Company recorded total
royalty expense of approximately $517,000 and $117,000 for the years ended
December 31, 1999 and 1998, respectively.

39
<PAGE>

TouchStone Software Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 1999 and 1998

9. COMMITMENTS AND CONTINGENCIES (CONTINUED)

Under a subscription agreement with SupplyAccess, Inc., entered into on
December 31, 1999, TouchStone subscribed to purchase 340,000 shares of the
series A preferred stock of SupplyAccess, Inc. at $1.50 per share. SupplyAccess
over subscribed the number of shares of its series A preferred stock and in
March 2000, TouchStone received a joinder and acknowledgement agreement from
SupplyAccess, Inc. which permits the Company to purchase approximately 117,000
shares of Supply Access, Inc. series A preferred stock. SupplyAccess, Inc., a
wholly owned subsidiary of EnPointe Technologies, Inc., provides is an internet
procurement system comprised of databases of over 600,000 products, which are
refreshed for content, price and availability every 24 hours.

10. RELATED PARTY TRANSACTIONS

The Company leases its Massachusetts office facilities under a five-year
operating lease agreement expiring December 2000. The Company leases the office
from a related party real estate trust, owned 100% by Pierre Narath,
TouchStone's Chief Executive Officer. The lease contains a provision for a
separate five-year renewal option at an annual rent expense of no greater than
50% of the rent, as defined in the agreement. Rental payments to the related
real estate trust in 1999 were approximately $87,000.

The Company has utilized the travel services of PANJet, a jet charter
service provider, which is wholly owned by, Pierre Narath, TouchStone's Chief
Executive Officer. Total payments during 1999 related to these jet charter
services were approximately $132,000. On January 1, 2000, the Company entered
into a service agreement with PANJet, expiring in December 2003, which
formalizes the services agreement between the Company and PANJet. In
consideration for PANJet making itself available to provide travel services on
an up to full time basis, the Company will compensate PanJet $10,000 per month.

The Company has utilized the services of A.M. Razo & Company Securities,
Inc. an investment banking service company. Ron Maas, a former executive vice
president of the Company and current shareholder and director, serves as the
senior vice president of Corporate Finance of A.M. Razo & Company. Payments to
A.M. Razo & Company in 1999 totaled approximately $53,000 and 187,000 options
granted at an excise price of $0.48 per share.

11. SEGMENT INFORMATION

The Company engages in business activity in only one operating segment,
which entails the development, manufacture and sale of utility and diagnostic
software for personal computers. While the Company offers multiple products for
sale, they are manufactured at one production facility. In addition, the
Company's products are marketed through a common sales organization and are sold
primarily to individual end-users through common distributors and retail
channels.

40
<PAGE>

TouchStone Software Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 1999 and 1998

11. SEGMENT INFORMATION (CONTINUED)

The Company sells its products primarily through distributors and inbound
telephone sales. During 1999, no one distributor or customer accounted for more
than 10% of the Company's net product sales. During 1998, two distributors
accounted for 35% and 17% of net product sales. A decision by a significant
customer to substantially decrease or delay purchases from the Company or the
Company's inability to collect receivables from these customers should not have
a material adverse effect on the Company's financial condition and results of
operations.

<TABLE>
<CAPTION>
Geographical Information 1999 % 1998 %
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
North America $6,025,877 89% $4,114,988 85%
- ------------------------------------------------------------------------------------------------------------------
Europe 713,478 11% 538,870 11%
- ------------------------------------------------------------------------------------------------------------------
Other - 0% 181,965 4%
- ------------------------------------------------------------------------------------------------------------------
Total Revenues $6,739,355 100% $4,835,823 100%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

Product information is presented in categories. All versions of CheckIt,
including professional and diagnostic versions are included. Similarly, all
versions of PC-cillin and FastMove are included in the respective categories.

<TABLE>
<CAPTION>
Product Information 1999 % 1998 %
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CheckIt $2,182,150 32% $2,501,537 52%
- ------------------------------------------------------------------------------------------------------------------
Bios Upgrades 1,864,420 28% - 0%
- ------------------------------------------------------------------------------------------------------------------
Millennium ProCards 862,115 13% - 0%
- ------------------------------------------------------------------------------------------------------------------
Cardware 526,160 8% - 0%
- ------------------------------------------------------------------------------------------------------------------
Other 416,563 6% 284,471 6%
- ------------------------------------------------------------------------------------------------------------------
Diagnostics 350,603 5% - 0%
- ------------------------------------------------------------------------------------------------------------------
CheckIt NetOptimizer 284,117 4% 542,217 11%
- ------------------------------------------------------------------------------------------------------------------
FastMove 253,227 4% 305,573 6%
- ------------------------------------------------------------------------------------------------------------------
PC-cillin - 0% 1,202,025 25%
- ------------------------------------------------------------------------------------------------------------------
Total Revenues $6,739,355 100% $4,835,823 100%
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

12. PRO FORMA INFORMATION (UNAUDITED)

The following pro forma financial statements are unaudited and give effect
to the acquisition of all of the issued and outstanding common stock of Unicore
Software, Inc. ("Unicore") by TouchStone Software Corporation (the "Company")
on a purchase accounting basis. Both the Company's and Unicore's fiscal years
end on December 31.

The following summarized unaudited pro forma financial information assumes
the acquisition had occurred on January 1 of each year. As the Company's 1999
financial statements include only ten months of operations of the recently
acquired Unicore, the following selected unaudited pro forma information is
being provided to present a summary of the combined results of the Company as if
the acquisition had occurred on January 1, 1999 and January 1, 1998, giving
effect to purchase accounting adjustments including the effect of amortization
expense on developed technology acquired, goodwill amortization and deferred tax
benefits.

<TABLE>
<CAPTION>
Pro forma information
(in millions, except per share data) 1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales 7,431 8,130
- ------------------------------------------------------------------------------------------
Net loss 2,613 4,251
- ------------------------------------------------------------------------------------------
Loss per share .23 .38
- ------------------------------------------------------------------------------------------
</TABLE>

41
<PAGE>

TouchStone Software Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 1999 and 1998

12. PRO FORMA INFORMATION (UNAUDITED) (CONTINUED)

Such unaudited pro forma combined financial information is presented for
illustrative purposes only and is not necessarily indicative of the financial
position or results of operations that would have actually been reported had the
acquisition occurred at the beginning of the period presented nor is it
necessarily indicative of future financial position or results of operations.

13. QUARTERLY DATA (UNAUDITED)

The unaudited quarterly financial information of the Company has been
restated for all prior periods in 1999 to reflect the effect of year-end audit
adjustments. These adjustments related primarily to the recording of intangible
assets, goodwill, and deferred tax liability recorded in connection with the
acquisition of Unicore. The selected information as filed by the Company on
Form 10-Q is presented below. The selected information, as restated, reflects
all adjustments which, in the opinion of management, are necessary to present
fairly the results of operations for the periods presented.
<TABLE>
<CAPTION>

14. SUBSEQUENT EVENTS

In January 2000, the Company formed eSupport.com, Inc. (a New Hampshire
Corporation), a wholly-owned subsidiary, which currently conducts the day to day
operations formerly conducted by TouchStone Software Corporation. Pursuant to
its' articles of incorporation, eSupport.com is authorized to issue 20,000,000
shares of common stock, par value $.01 per share, and 10,000,000 shares of
preferred stock, par value $.01 per share. eSupport.com was capitalized through
the issuance of 5,000,000 shares of its common stock to TouchStone Software
Corporation.

In January 2000, TSC Investments, LLC (a New Hampshire Limited Liability
Company) was formed to engage in the business of making investments. Under its
operating agreement, TSC's sole member was TouchStone Investments, Inc., which
was issued 100 membership units and appointed manager of the LLC. In a
subsequent amendment to the operating agreement, Pierre Narath was designated as
the manager of TSC Investment, LLC. The operating agreement was amended in its
entirety on March 29, 2000. Under the amended operating agreement, TouchStone
Investments, Inc. holds 80 membership units, Pierre A. Narath, the Chief
Executive Officer of TouchStone Software Corporation holds 17.5 units and Jason
Raza, a Vice President of TouchStone Software Corporation holds 2.5 units.

42
<PAGE>

TouchStone Software Corporation
Notes to Consolidated Financial Statements
Years Ended December 31, 1999 and 1998

14. SUBSEQUENT EVENTS (CONTINUED)

TouchStone Investments, Inc. (a New Hampshire corporation) was formed
during January 2000 for the principal purpose of engaging in the business of
making investments and serving as a member of TSC Investments, LLC. Under its
articles of incorporation, TouchStone Investments, Inc., is authorized to issue
100,000 shares of common stock, par value $.01 per share, no other classes of
stock have been authorized. TouchStone Investments, Inc. was capitalized
through the issuance of 10,000 shares of its common stock to TouchStone Software
Corporation. Since its formation, TouchStone Investments, Inc. is a wholly-
owned subsidiary of TouchStone Software Corporation and has subsequently
invested in several private offerings.

Effective March 6, 2000, TouchStone Software Corporation entered into a
letter of intent to sell its wholly-owned subsidiary eSupport.com, Inc., along
with certain other assets of TouchStone Software Corporation and its wholly-
owned subsidiary, Unicore Software, Inc. to Phoenix Technologies, Ltd.
(Phoenix). Under plans of the agreement, Phoenix proposes to acquire all of
TouchStone's and the Subsidiaries' respective assets related to the development
and licensing of personal computer ("PC") software utility packages, system
level software packages (including BIOS Software), hardware diagnostic software,
internet access optimization software, internet diagnostic and online software
and PC to PC file transfer software (the "Business"). Additionally, Phoenix
will receive approximately (subject to adjustment) the equivalent of
approximately $3,300,000 of TouchStone Software Corporation's convertible
preferred securities. In addition to assuming the liabilities associated with
business, Phoenix will pay TouchStone $4,500,000 in cash and the equivalent of
$4,500,000 in Phoenix common shares.

In March 2000, TouchStone Software Corporation announced a board resolution
to change its name to TouchStone Capital Group.

43
<PAGE>

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------

(a)(1) (i) By letter dated November 15, 1999 the Company notified Deloitte &
Touche LLP ("Deloitte & Touche") of its dismissal as the Company's principal
independent accountant.

(ii) Neither of Deloitte & Touche's reports on the financial statements of the
Company for the fiscal years ended December 31, 1998 or December 31, 1997
contained an adverse opinion or a disclaimer of opinion nor was modified as to
uncertainty, audit scope or accounting principles.

(iii) The decision to change accountants was approved by the Company's Board of
Directors on November 5, 1999.

(iv) It is the Company's opinion that during the fiscal years ended December 31,
1998 and December 31, 1997 and the interim period January 1, 1999 through
November 15, 1999 there were no disagreements with Deloitte & Touche on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure or any reportable event.

(a)(2) On November 15, 1999, the Company engaged Vitale Caturano & Company as
its new principal independent accountant.

(a)(3) Item 5 of the Company's Form 10QSB for the quarter ending September 30,
1999 disclosed this event and contained a letter from Deloitte & Touche LLP
to the commission commenting thereon.

44
<PAGE>

PART III
--------

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS
- ----------------------------------------------------------

The directors and executive officers of the Company at March 31, 2000 are
as follows:

<TABLE>
<CAPTION>
Director
Name Age Title Since
- ----------------------------------------------- -------- --------------------------------------- ------------

<S> <C> <C> <C>
Pierre A. Narath .............................. 36 Chairman of the Board, Chief Executive 1998
Officer and President
Jason K. Raza.................................. 38 Vice President 1999
Ronald R. Maas................................. 54 Director 1993
Christopher J. Gaudette........................ 29 Controller, Principal Accounting
Officer and Assistant Secretary
</TABLE>
BUSINESS EXPERIENCE OF DIRECTORS

Pierre A. Narath has served as President and Chief Executive Officer since
January 1999 and as a Director since July 1998. Mr. Narath served as Vice
President of Award Software International, Inc. and President of Unicore
Software, Inc. ("Unicore") since May 1997. From 1989 to May 1991, he founded
and was the sole proprietor of Unicore. From May 1991 to May 1997, Mr. Narath
was President of Unicore.

Jason K. Raza has served as a director of the Company since 1999. Mr. Raza
serves as Vice President for TouchStone Software, having served as International
Sales Manager for Unicore Software, a wholly owned subsidiary of Phoenix
Technologies, (NASDAQ: PTEC) prior to its acquisition by TouchStone. In
addition, Mr. Raza is the second-largest shareholder in the company

Ronald R. Maas served as Chief Financial Officer and Executive Vice President
of the Company from 1991- 1999, and has served as a director of the Company
since 1993. Mr. Maas has also served as the Corporate Secretary from 1995-1999.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Pierre A. Narath, Jason K. Raza, Ronald R. Maas and Chris J. Gaudette
inadvertently failed to file on a timely basis a Form 5 due February 14, 2000.
The Form 5's, disclosing the beneficial ownership were all filed between
February 15, 2000 and April 1, 2000.

45
<PAGE>

ITEM 10. 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 officers identified above.

<TABLE>
<CAPTION>
Other Restricted
Name & Annual Stock All Other
Principal Compen- Awards Options/ LTIP Compen-
Position Year Salary ($) Bonus ($) sation ($) ($) SAR (#) Payouts sation
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>

P. A. Narath 1999 $170,833 $161,000 $ 30,000 0 0 0 0
CEO, President, and
Chairman(2)

J. K. Raza V.P.(2) 1999 $ 91,666 $ 25,500 0 0 0 0 0

R. R. Maas 1999 $109,499 0 $44,270(1) 0 0 0 0
Exec. V. P. and 1998 $101,149 0 0 0 0 0 0
Director 1997 $ 93,570 0 0 0 $45,400 0 0

C.J. Gaudette 1999 $ 59,000 $ 5,000 0 0 0 0 0
Controller, PAO(2)
</TABLE>

(1) Amount represents the payment from a deferred compensation plan upon
termination.

(2) Mr. Narath, Mr. Raza and Mr. Gaudette all joined the Company on
March 1st 1999.

The foregoing table does not include $148,808 in 1999 and $242,502 paid in
1998 to Kenneth S. Forbes, who became the Company's President and Chief
Executive Officer in August 1998 and held those offices until his resignation in
December 1998. $66,254 paid to Greg Wookey who was acting as Chief Financial
Officer until March 31, 1999. $52,129 paid to Calvin Leong, who held the
position of Chief Financial Officer from March 1999 until his resignation in
July 1999; and $257,765 paid to Larry S. Jordan in 1998, who served as the
President and Chief Executive Officer of the Company until he resigned in
June 1998.

OPTION GRANTS IN LAST FISCAL YEAR

The Company did not grant stock appreciation rights in 1999 to any of the
executive officers named above. Grants of stock options to the named executive
officers in 1999 are summarized in the following table.
<TABLE>
<CAPTION>
Number of Securities % of Total Options Avg.
Underlying Options Granted to Employees Exercise Expiration
Name Granted in 1999 Price Date
- ---------------- -------------------- --------------------- -------- ----------
<S> <C> <C> <C> <C>

P. A. Narath 10,000 2.21% $0.69 2009
R. R. Maas 10,000 2.21% $0.69 2009
C. J. Gaudette 15,000 3.31% $0.69 2009

</TABLE>

46
<PAGE>

AGGREGATED OPTION EXERCISES IN 1999 AND OPTION VALUES AS OF DECEMBER 31, 1999

No options were exercised in 1999 by any of the named executive officers.
The value of unexercised options at December 31, 1999, for each of the executive
officers named above are as follows:

<TABLE>
<CAPTION>
Number of Value of
Unexercised Unexercised
Options/SARs at In-the-Money
12/31/99 (#) Options/SARs at
Shares 12/31/99 ($)
Acquired on Value Exercisable (1) Exercisable (1)
Name Exercise (#) Realized ($) Unexercisable (2) Unexercisable (2)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5,000(1)
P. A. Narath 0 0 25,000(2) 0
107,283(1)
R. R. Maas 0 0 28,117(2) $20,640(1)

C. J. Gaudette 0 0 15,000(2) 0
</TABLE>

The value of unexercised in-the-money options is determined by using the
difference between the exercise price and the average bid price for shares of
the Company's Common Stock on December 31, 1999, which was $.69.

BOARD OF DIRECTOR MEETINGS AND COMMITTEES

During 1999, the Company's Board of Directors held seven regular meetings
and otherwise took action by written consent.

The Board has established an Audit Committee, comprised of one director,
Mr. Maas. The Audit Committee meets to consult with the Company's independent
auditors concerning their engagement and audit plan. Thereafter the committee
provides consultation regarding the auditors' 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 of Directors meets as a committee of the whole to nominate the
individuals to be proposed by the Board of Directors for election as directors
of the Company, and has no separate nominating committee.

COMPENSATION OF DIRECTORS

The Company pays the expenses incurred by its non-employee directors in
attending Board meetings.

EMPLOYMENT AGREEMENTS

In connection with the acquisition of Unicore, the Company entered into
three-year employment agreements with each of Pierre A. Narath and Jason K.
Raza.

47
<PAGE>

The company elected not to renew Mr. Maas's employment agreement in November
1999 and gave Mr. Maas written notification of this termination in accordance
with the agreement. Mr. Maas will continue to serve on the Company's Board of
Directors.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------

The following table sets forth the beneficial ownership of common stock of
the Company as of March 30, 2000, by (a) each person known by the Company to own
beneficially more than 5% of the outstanding Common Stock; (b) each of the named
executive officers of the Company referred to above under "EXECUTIVE
COMPENSATION AND OTHER INFORMATION"; (c) each director of the Company; and (d)
all directors and executive officers as a group. Except as otherwise indicated,
the address of each holder identified below is in care of the Company, 1538
Turnpike Street, North Andover, Massachusetts 01845.
<TABLE>
<CAPTION>

NUMBER OF SHARES APPROXIMATE
Name BENEFICIALLY OWNED /(1)/ PERCENT OWNED
- -------------------------------------- ------------------------- --------------
<S> <C> <C>

Pierre A. Narath 3,647,138 (2) 31.9%
Jason K. Raza 710,000 (3) 6.2%
Ronald R. Maas 317,310 (4) 2.8%
Chris J. Gaudette 3,750 (5) -
All Directors and Executive Officers
As a Group (4 individuals) 4,678,198 (6) 40.9%
</TABLE>

(1) Except as indicated in the footnotes to this table, the stockholders named
in the table are known to the Company to have sole voting and investment
power with respect to all shares of common stock shown as beneficially
owned by them, subject to community property laws where applicable.
Excludes options that do not vest within 60 days of the date of this
report. As of March 30, 2000, an aggregate of 11,440,060 shares of common
stock was outstanding.
(2) Includes options to purchase 393,550 shares that currently are exercisable.
(3) Includes options to purchase 40,000 shares that currently are exercisable.
(4) Includes options to purchase 107,283 shares that currently are exercisable.
(5) Includes options to purchase 3,750 shares that currently are exercisable.
(6) Includes officers' and directors' shares listed above.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------

48
<PAGE>

ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-k
- -------------------------------------------------

(a) Exhibits
--------

1. Exhibits.

The Exhibits listed on the accompanying Index to Exhibits are filed as
part of this report.

(b) Reports on Form 8-K
-------------------

No reports on form 8-K were filed during the quarter ended December
31, 1999.

49
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange the registrant has caused this report to be signed on its behalf by the
under-signed, thereunto duly authorized.

TouchStone Software Corporation

By /s/ Christopher J. Gaudette
----------------------------
Christopher J. Gaudette
Controller, Principal Accounting Officer
And assistant secretary

Dated: April 11, 2000

In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.

/s/ Pierre A. Narath Chairman of the Board,
- ------------------------------------- Chief Executive Officer and President
Pierre A. Narath Date: 04/11/00

/s/ Jason K. Raza Executive Vice President, and Director
- -------------------------------------
Jason K. Raza Date: 04/11/00

/s/ Ronald R. Maas Director
- -------------------------------------
Ronald R. Maas Date: 04/11/00

50
<PAGE>

****** Certain information on this page has been omitted and filed separately
with the Securities and Exchange Commission. Confidential treatment has been
requested with respect to the omitted portions.

TouchStone Software Corporation

INDEX TO EXHIBITS
<TABLE>

<S> <C>
3.1 Certificate of Incorporation of Registrant in Delaware. (9)
3.2 By-Laws of Registrant. (9)
*10.1 1988 Incentive Stock Option Plan. (1)
*10.1A 1988 Amended Incentive Stock Option Plan. (2)
*10.1B 1988 Non-Qualified Stock Option Plan. (2)
*10.1C 1991 Stock Option Plan. (3)
*10.1D Employee Stock Purchase Agreement. (5)
*10.1E 1994 Non-Qualified Stock Option Plan (6)
*10.1F 1995 Non-Qualified Stock Option Plan (9)
*10.1G Preferred Share Purchase Rights (7)
*10.1H 1997 Incentive Stock Plan (8)
10.3 Office Lease dated February 7,1995 (6)
*10.4 Employment contract for Larry S. Jordan (10)
*10.5 Employment contract Ronald R. Maas (10)
*10.6 Employment contract for C. S. (Jenkins) Dingus (10)
*10.7 Employment contract amendment for C. S. (Jenkins) Dingus (10)
10.8 Asset Purchase Agreement for purchase of Unicore from Phoenix/Award (11)
10.9 Collateral Pledge Agreement for Lawrence Savings Bank (11)
10.10 Lawrence Savings Bank Consent to TouchStone/Unicore merger (11)
10.11 Unicore License agreement for Award/Phoenix CardWare with appendices
and addenda (11)
10.12 Software Purchase agreement
21 Subsidiaries of Registrant (6)
23.1 Consent of Independent Auditors
23.2 Consent of Independent Auditors
27 Financial Data Schedule
</TABLE>
* MANAGEMENT CONTRACTS AND COMPENSATORY PLANS OR ARRANGEMENTS

(1) Incorporated by reference to the Exhibits to the Registration
Statements on Form S-18, as amended, Registration Number 2-92450-LA as
filed with the Securities and Exchange Commission.

(2) Incorporated by reference to the Company's filing on Form S-8 with the
Securities and Exchange Commission, Registration Number 33-25989.

(3) Incorporated by reference to the Exhibits to the Company's Form 10-KSB
for the year ended December 31, 1992 as filed with the Securities and
Exchange Commission.

(4) Incorporated by reference to the Exhibits to the Company's 10-KSB for
the year ended December 31, 1993 as filed with the Securities and
Exchange Commission.

(5) Incorporated by reference to the Exhibits to the Company's 10-KSB for
the year ended December 31, 1994 as filed with the Securities and
Exchange Commission.

(6) Incorporated by reference to the Exhibits to the Registration Statement
on Form SB-2, as amended; Registration number 33-94352 as filed with
the Securities and Exchange Commission.

(7) Incorporated by reference to the Exhibits to the Registration Statement
on Form 8-A, Registration number 00112237 as filed with the Securities
and Exchange Commission.

51
<PAGE>

(8) Incorporated by reference to the Exhibits to the Registration Statement
on Form S-8, Registration number 333-21395 as filed with the Securities
and Exchange Commission.

(9) Incorporated by reference to the Exhibits to the Company's 10-KSB for
the year ended December 31, 1995 as filed with the Securities and
Exchange Commission.

(10) Incorporated by reference to the Exhibits to the Company's 10-KSB for
the year ended December 31, 1996 as filed with the Securities and
Exchange Commission.

(11) Incorporated by reference to the Exhibits to the Company's 10-KSB for
the year ended December 31, 1998 as filed with the Securities and
Exchange Commission.

<PAGE>

EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration Statements
No. 333-21395 on Form S-8 of TouchStone Software Corporation of our
report dated March 15, 2000, appearing in the Annual Report on Form 10-KSB of
TouchStone Software Corporation for the year ended December 31, 1999.

/s/ Vitale, Caturano and Company, P.C.

Boston, Massachusetts
April 11, 2000

<PAGE>

EXHIBIT 23.2

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration Statements
No. 33-25989 and 333-21395 on Form S-8 of TouchStone Software Corporation of our
report dated March 9, 2000, appearing in the Annual Report on Form 10-KSB of
TouchStone Software Corporation for the year ended December 31, 1999.

/s/ DELOITTE & TOUCHE LLP

Costa Mesa, California
April 11, 2000

<PAGE>
<ARTICLE> 5

<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 2,877,904 1,325,255
<SECURITIES> 857,906 5,897,469
<RECEIVABLES> 1,188,636 1,193,528
<ALLOWANCES> 225,000 0
<INVENTORY> 199,201 185,287
<CURRENT-ASSETS> 5,782,253 8,768,526
<PP&E> 132,233 134,888
<DEPRECIATION> 79,460 180,876
<TOTAL-ASSETS> 9,853,465 10,326,669
<CURRENT-LIABILITIES> 2,039,108 3,124,557
<BONDS> 0 0
0 0
0 0
<COMMON> 11,346 7,963
<OTHER-SE> 6,828,506 7,004,256
<TOTAL-LIABILITY-AND-EQUITY> 9,853,465 10,326,669
<SALES> 6,627,911 4,729,240
<TOTAL-REVENUES> 6,739,355 4,835,823
<CGS> 1,116,767 1,367,196
<TOTAL-COSTS> 1,116,767 1,367,196
<OTHER-EXPENSES> 9,155,762 7,134,359
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 32,377 923
<INCOME-PRETAX> (3,252,307) (3,096,116)
<INCOME-TAX> (926,200) 800
<INCOME-CONTINUING> (2,326,107) (3,096,916)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,326,107) (3,096,916)
<EPS-BASIC> (0.25) (0.39)
<EPS-DILUTED> (0.25) (0.39)

</TABLE>