The original complaint was filed alleging the sales of WINCheckIt and WIN '95 Advisor were overstated, because the product sold to distributors was subject to an absolute right of return. In December 1995, Touchstone revealed that it would suffer a large loss for the fourth quarter of 1995 and for the entire year of 1995. Touchstone's stock price fell by as much as 75% after these disclosures. The complaint alleges that Touchstone's 10Q's for the prior three quarters were materially false and misleading because: (1) they were not prepared in accordance with generally accepted accounting principles; (2) they materially overstated the net income and earnings per share; (3) they failed to disclose material problems with sales, orders, and collection of ode sections 25400, 25401, 25402, 25502 and intentional and negligent breach of fiduciary duties.

On January 26, 1996, the complaint entitled DARRIN J. CARAMONTA v. LARRY W. DINGUS, ET AL. was filed in United States District Court for the Central District of California, in which Mr. Caramonta, on behalf of himself and all others who purchased the Company's Common Stock between May 2, 1995 and December 21, 1995. On March 13, 1996, and on March 21, 1996, substantially similar actions entitled JACK BODNER v. Larry W. Dingus, et al. and MARC JAFFE v. LARRY W. DINGUS, ET AL., respectively, were also filed in the same Court.

On April 17, 1997 the Court entered a "Final Judgment and Order of
Dismissal" approving the settlement and dismissing the class action in its
entirety. Under the principal terms of the agreement, Touchstone Software Corporation established a settlement fund consisting of $500,000 and 200,000 newly-issues shares of common stock. The Company also adopted a written policy on insider trading.