Integrity Media Inc · 10-K405 · For 12/31/00

Filed On 3/29/01 9:37am ET   ·   SEC File 0-24134   ·   Accession Number 950144-1-4196

Annual Report -- [X] Reg. S-K Item 405   ·   Form 10-K
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-K405     Integrity Incorporated                                40    265K 
 2: EX-10.16    Waiver to Loan and Security Agreement                  7     28K 
 3: EX-10.17    Product Development and Co-Branding Agreement         11     41K 
 4: EX-10.36    Employment Agreement                                  15     46K 
 5: EX-11       Statement of Computation of Per Share Earnings         1      5K 
 6: EX-21       Subsidiaries of the Registrant                         1      4K 
 7: EX-23       Consent of Independent Accountant                      1      5K 

10-K405   ·   Integrity Incorporated
Document Table of Contents

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 =============================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 FORM 10-K

 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000

OR

 [ ] 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 0-24134

INTEGRITY INCORPORATED
(Exact name of registrant as specified in its charter)

INCORPORATED IN DELAWARE        I.R.S. EMPLOYER IDENTIFICATION NUMBER 63-0952549

1000 CODY ROAD
 MOBILE, ALABAMA 36695
(Address of principal executive offices)

334-633-9000
(Registrant's telephone number, including area code)

 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

NONE

 SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

CLASS A COMMON STOCK, $.01 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.                                       

[X] Yes  [ ] 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 into Part III of this Form 10-K or any     
amendment to this form 10-K. [X]                                                

The aggregate market value of the Class A Common Stock held by
non-affiliates of the Registrant (assuming, for purposes of this calculation,   
without conceding, that only Integrity's executive officers and directors are   
"affiliates"), was $6,473,744 at March 23, 2001, as reported by the Nasdaq      
SmallCap Market.                                                                

     The number of shares of Registrant's Class A Common Stock, $.01 par
value per share, outstanding at March 23, 2001 was 2,184,000.                   

     The number of shares of Registrant's Class B Common Stock, $.01 par
value per share, outstanding at March 23, 2001 was 3,435,000.                   

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 DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held May 17, 2001 are incorporated by reference into Part    
III.                                                                            

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

    Certain of the matters discussed in this document and in documents
incorporated by reference herein, including matters discussed under the caption 
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations," may constitute forward-looking statements for purposes of the   
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as 
amended, and as such may involve known and unknown risks, uncertainties and     
other factors that may cause the actual results, performance or achievements of 
Integrity Incorporated (the "Company" or "Integrity") to be materially different
from future results, performance or achievements expressed or implied by such   
forward-looking statements. The words "expect," "anticipate," "intend," "plan," 
"believe," "seek," "estimate," and similar expressions are intended to identify 
such forward-looking statements. The Company's actual results may differ        
materially from the results anticipated in these forward-looking statements due 
to a variety of factors, including without limitation those discussed in        
"Management's Discussion and Analysis of Financial Condition and Results of     
Operations - Risk Factors." All written or oral forward-looking statements      
attributable to the Company are expressly qualified in their entirety by these  
cautionary statements. Any forward-looking statements represent management's    
estimates only as of the date of this report and should not be relied upon as   
representing estimates as of any subsequent date. While Integrity may elect to  
update forward-looking statements at some point in the future, Integrity        
specifically disclaims any obligation to do so, even if its estimates change.   

 PART I.

ITEM 1. BUSINESS                                                                

INTRODUCTION                                                                    

    Integrity is a media-communications company that chiefly produces,
publishes and distributes Christian music. It is a producer and publisher of    
Christian lifestyle products developed to facilitate worship, entertainment and 
education. Integrity's music product formats include cassettes, compact discs,  
videos, DVD's and printed music. The Company produces praise and worship music  
in different musical styles for specific audiences such as children's music,    
urban music, youth music and live worship for adult audiences. According to     
Soundscan tracking, the Company is the leading praise and worship music company,
with 56% of the Christian Bookseller's Association ("CBA") market at end of year
2000. The Company was also the No. 2 Christian music label in the CBA market for
3 years running according to Soundscan. Integrity's products are sold primarily 
through retail stores and direct to consumers throughout the United States and  
internationally in 161 other countries worldwide. The Company has determined    
that its business is operated in segments based on these distribution channels. 
For specific information regarding the financial performance of each segment,   
see Note 10 to Notes to Consolidated Financial Statements.                      

        Integrity's recorded music products fall into two broad categories (i)
concept products which are centered on a specific theme, such as praise and     
worship music and (ii) artist products, in which the artist is the focal point. 
In addition to recorded music, Integrity produces Christian music video products
for certain praise and worship artists. Integrity's products also include       
software and printed music, such as songbooks and sheet music, designed         
primarily for distribution to churches and choral groups.                       

        Integrity was organized in Alabama as a corporation on May 1, 1987 and
was reincorporated in Delaware on October 1, 1993.                              

PRODUCTS                                                                        

Concept Products                                                      

    Praise and worship concept products are centered around a specific
theme or event rather than being focused on a specific artist. The Company's    
original concept product series, Hosanna! Music(R), consists of recorded praise 
and worship music composed of live recordings sung by an audience and worship   
leader rather than a performing artist. The Company's Hosanna! Music(R) series  
has proven to be a successful product line having just produced its 105th       
recording.                                                                      

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     The Company's concept product line now includes: Hosanna! Music(R),
Urban Praise(R), FairHope Records(R), classic praise and worship music grouped  
according to themes, designed for budget-conscious customers; World's Best      
Praise and Worship(R) series; and Integrity Notes(R), a series of greeting cards
for general occasions and specialty cards related to seasonal events, featuring 
verses from our praise and worship songs.                                       

Artist Products                                                     

   In addition to concept products, the Company also produces artist
recordings in which the artist is the main focal point. These products have     
recently included "Get Ready - The Best of T.D. Jakes" with T.D. Jakes, "I Will 
Sing" with Don Moen, "Lion of Judah" with Paul Wilbur, "We Offer Praises" with  
Ron Kenoly, "Never Gonna Stop" with Tommy Walker, "More Than Enough" with Gary  
Oliver, "Freedom" with Darrell Evans and "Open The Eyes of My Heart" with Paul  
Baloche.                                                                        

Other Products                                                        

The Company has also produced numerous musical video products,
including: recordings of live performances by the Company's artists, such as Ron
Kenoly's videos "We Offer Praises", "Majesty", "High Places" and "Welcome Home";
and the Gold-certified videos "Lift Him Up", "God is Able" and "Sing Out", the  
first Hosanna! Title to appear on Billboard's Top 40 Music Video Chart. The     
popular children's music series Just-For-Kids(R), featuring the Donut Man(R),   
includes ten Gold-certified and three Platinum-certified videos. Other videos   
include the Gold-certified Praise! Aerobics(R), praise and worship music        
recorded specifically for aerobic exercises and "Woman Thou Art Loosed" with T. 
D. Jakes. Other products include Integrity Music Worship Software(R), designed  
to assist music ministers in the selection of songs (over 5,000 featured),      
planning rehearsals and services, and reviewing song usage tracking. The        
Company, in partnership with two other praise and worship music companies, has  
also produced the Platinum certified "WoW Worship (Blue)" and the Gold certified
"WoW Worship (Orange)", as well as the Songs 4 Worship series produced in       
conjunction with Time Life Music, which includes the Gold certified "Songs 4    
Worship - Shout To The Lord", the first release in the series.                  

         Integrity's Christian music products also include printed music such as
songbooks and sheet music designed primarily for distribution to churches and   
choral groups. The Company produces "God With Us", winner of the Gospel Music   
Association Dove Award in April 1994 for best musical and still on the best     
sellers list on the non-seasonal musical charts for seven years running. "God   
For Us", "Let Your Glory Fall" and "Hillsongs Choral Collection" ranked among   
the top 10 in the non-seasonal musical and adult collection charts. "We Believe"
and "Redeemer, Savior, Friend" ranked among the top 10 in the youth musical     
non-seasonal charts. The musicals were ranked by The Church Music Report        
("TCMR"). Other printed music products include orchestrations and "The          
Celebration Hymnal", a joint venture with Word Entertainment, featuring over 700
songs and hymns. Sales of this hymn book have exceeded one million units in less
than four years.                                                                

PRODUCT CREATION                                                                

         The Company's product development process is based upon the creation of
new concept or artist products that are designed, scripted and marketed to      
respond to a specific demand. Integrity conducts a planning process for each new
product in order to determine whether the final product is likely to be         
successful in the market for which it is designed.                              

         New product concepts are based on responses to surveys of the Company's
current customer base as well as other market and product research conducted by 
the Company and by independent consultants. Once a new product concept has been 
identified, the concept is reviewed and discussed by representatives of         
Integrity's creative, marketing and finance divisions. If the product concept is
approved by that group, then Integrity assembles a creative team which includes 
one or more artists and producers, generally employed on a freelance or contract
basis, along with members of Integrity's creative division.                     

  Following the development of the product concept, the product is
recorded in live settings at churches or civic auditoriums, in independent      
studios in cities such as Los Angeles, California or Nashville, Tennessee, or at
Integrity's studio in Mobile, Alabama. A significant amount of recording is done
in independent studios. The studios in Mobile, Alabama are mainly used as a     
post-production facility where the recordings are edited and mixed. The         
manufacturers receive the master recordings from Integrity in digital format and
then produce a master to be used in the manufacturing process. The Company      
reviews the final manufacturing master prior to production to ensure that the   
quality of the recording has been maintained.                                   

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DISTRIBUTION                                                                    

       The Company distributes its products domestically through two primary
channels: direct to consumer and retail markets. In addition, the Company has an
international distribution network that reaches markets in 161 countries.       

Direct To Consumer                                                    

       The Company's direct to consumer activities are based on a variety of
methods designed to reach the consumer directly. Among the methods are          
continuity clubs, through which the member receives a selection every six to    
eight weeks and is billed for each selection. Shipments continue until the      
Company is instructed to cancel the membership. This differs from certain other 
music clubs in which members have a "negative option" allowing them to decline  
monthly selections before they are mailed and in which their only obligation is 
to purchase a certain number of products over a stated period of time.          

 The Company rents mailing lists of potential direct-to-consumer
customers that includes subscribers to Christian magazines, purchasers of       
Christian mail order products and donors to Christian ministries. When          
available, the Company obtains new mailing lists to conduct a one-time          
solicitation of an approved direct mailing. Once a response is received by      
Integrity, the customer's name is added to the Company's own mailing list.      
Integrity also builds its direct-to-consumer database through space             
advertisements in Christian magazines, television advertising and Internet      
marketing.                                                                      

 The Company's first continuity club, Hosanna! Music(R) has just
produced its 105th recording. Currently the Company operates several continuity 
clubs, including the Integrity Notes(R) series. The clubs are launched with a   
mailing of a new product announcement and solicitation to as many as 500,000    
people. After the initial mailing, the Company postpones further direct mail    
solicitation campaigns for up to six months, utilizing the time to study the    
response and evaluate the sustainability of the initial members. If the initial 
membership proves to be sustainable based on product shipments, the Company will
roll out the club in an extensive direct mail effort to an average of 900,000   
people.                                                                         

   In addition to continuity clubs, the Company's direct-to-consumer
program includes mail order catalog sales, telemarketing, one-time offers to    
active customers, television offers and sales through the Internet. The mail    
order catalog and telemarketing programs are designed to increase sales to the  
Company's current customers by increasing their awareness of Integrity's full   
line of products, as well as to develop new customers for Integrity products.   
The direct-to-consumer segment also includes direct sales to churches of printed
products, including "The Celebration Hymnal", which features over 700 songs and 
hymns, introduced in 1997 in a joint venture with Word Entertainment.           

Retail Markets                                                        

      Integrity's retail sales activities are targeted at two markets, the
Christian bookstore ("CBA") market which includes sales of choral music         
products, and the general retail market. The Company currently utilizes Word    
Entertainment ("Word") to serve these markets.                                  

     All CBA orders are fulfilled through Word, which is responsible for
warehousing Integrity's products, which are shipped and invoiced based on orders
received directly from Word's sales force through a computerized order entry    
system. Word services the Company's customers from one warehouse located in     
Tennessee. During 2000, SoundScan ranked Word as the number two distribution    
company in the CBA market. SoundScan also ranked Integrity as the number two    
record label in CBA for three consecutive years. The distribution agreement with
Word also offers the Company access to the Sony/Epic distribution system for    
sales in the general market.                                                    

      Retail sales efforts are supported by Integrity's own in-house staff
for marketing, covering such things as point-of-purchase advertising, radio     
promotion, and product publicity. The Company also utilizes the marketing       
expertise of several outside marketing firms.                                   

International                                                         

         The Company's international sales are made through a subsidiary located
in the United Kingdom, responsible for Europe; a subsidiary located in          
Australia, responsible for Australia, New Zealand and the Solomon Islands; a    
subsidiary located in Singapore, responsible for Singapore and Myanmar; and an  
office located at the Company's headquarters in Mobile, Alabama, responsible for
Latin America. In addition, products are sold to more than 60 independent       
distributors who are licensed to manufacture Integrity products from master     
recordings and                                                                  

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distribute them in a country or region and approximately 18 importers to whom   
the Company provides products. The Company's international distribution network 
reaches markets in 161 countries. The Company continually evaluates ways to     
expand into various markets through importers or through distributors licensed  
to produce Integrity products from a master recording. For specific financial   
information regarding the geographic areas that the Company's international     
distribution network reaches, see Note 10 to Notes to Consolidated Financial    
Statements.                                                                     

      The Company also develops products specifically for certain markets.
This effort includes recording songs in indigenous languages as well as         
utilizing local artists and local songs to produce the recordings. Integrity    
currently produces products in the Russian, Spanish, Mandarin Chinese, French,  
German, Portuguese and Indonesian languages. Integrity artists are also involved
in live performance tours to various countries.                                 

MUSIC PUBLISHING                                                                

      The Company's song catalog has accumulated ownership rights for over
2,700 songs and has generated a significant amount of royalty income from use by
third parties. A majority of the songs appearing on Integrity recordings are    
published out of the Company's song catalog.                                    

  Integrity emphasizes the development and maintenance of its song
catalog. Songs are selectively added to the song catalog based on the concept or
theme of a specific product design or because the Company believes that the     
songs have the potential to be a part of a future Integrity product. The Company
believes that its efforts have produced a distinctive Christian song catalog    
whose titles are used not only on recorded media and radio and television       
programming, but also in church services.                                       

        The Company licenses the use of its songs to churches and other choral
groups through Christian Copyright Licensing, Inc. ("CCLI"). Through CCLI,      
churches and choral groups in the United States are able to pay one licensing   
fee for the use of numerous Christian music copyrights. The Company is paid a   
percentage of the licensing fees collected by CCLI based on CCLI's estimates of 
the percentage of Integrity songs utilized by the churches and choral groups.   

WAREHOUSING AND FULFILLMENT                                                     

Integrity currently contracts with Word for its retail market 
warehousing, physical inventory and distribution functions. Word is one of      
several companies that provide this service in the CBA market. All retail market
sales functions are currently performed by Word's sales force. Many             
direct-to-consumer fulfillment services, excluding warehousing and physical     
inventory functions, for Integrity's direct to consumer programs are provided by
Client Logic located in Clifton, New Jersey. Some of the order entry and data   
fulfillment services for direct to consumer are handled by Integrity's own staff
in Mobile. In addition to managing most of the Company's database of customer   
names, Client Logic also provides most of the fulfillment activities of the     
direct-to-consumer operation, including order receipt and processing, data      
entry, invoicing and payment processing. Integrity's own distribution center    
located in Mobile is responsible for its direct-to-consumer and international   
warehousing, physical inventory and distribution functions.                     

COPYRIGHTS AND ROYALTY AGREEMENTS                                               

      The Company's music products are protected under applicable domestic
and international copyright laws. In addition, Integrity currently has ownership
rights to approximately 2,700 songs, which are also protected under copyright   
law.                                                                            

In general, works that are protected under copyright laws are 
proprietary, which means that for a fixed period of time the copyright owner has
the exclusive right to control the publication (or other reproduction) of the   
copyrighted work. Subject to the compulsory licensing provisions of the United  
States Copyright Act covering audio records, a copyright owner may license      
others to publish, reproduce, or otherwise use its copyrighted work, on an      
exclusive or nonexclusive basis, subject to limitations (such as duration and   
territory) and upon such other terms and conditions, including royalty payments,
as the copyright owner may require. Despite these protections, the Company's    
revenues may be adversely affected by the unauthorized reproduction of          
recordings for commercial sale, commonly referred to as "piracy" and by home    
taping for personal use.                                                        

     Integrity pays royalties in two different categories. The Integrity
songwriters are paid by Integrity's publishing division when their songs are    
used on an Integrity product or by other companies when used on third party     
products. Artists, producers and other song publishers are paid based on        
Integrity's sales of products containing their works. Integrity owns the        
majority of the songs it produces, and does not have to pay publisher royalties 
to third parties for those songs.                                               

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SEASONALITY                                                                     

    Retail sales are typically higher in the third and fourth quarters
because of holiday promotions. Direct to consumer sales are typically higher in 
the first quarter as a result of significant marketing promotions in late       
December. Direct to consumer promotions require a build up in inventory in the  
fourth quarter and as a result, sales and accounts receivable increase in the   
first quarter. It is important to note that sales from quarter to quarter depend
heavily on marketing promotions and new product releases. Accordingly, results  
of operations in any one quarter may not be indicative of results of operations 
for the entire year.                                                            

COMPETITION                                                                     

  The Company faces intense competition for discretionary consumer
spending from numerous other record companies and other forms of entertainment  
offered by film companies, video companies and others. Integrity competes       
directly with other record companies and music publishers that distribute       
Christian music to Christian bookstores, as well as a number of secular record  
companies. Many of the Company's competitors have substantially greater         
financial resources than the Company. The Company competes on the basis of the  
Company's ability to produce new products that are attractive to consumers, sign
established and new artists and songwriters and gain access to distribution     
channels.                                                                       

       Many of the Company's competitors have significantly longer operating
histories and greater revenues from their music product lines. The Company's    
ability to continue to compete successfully will be largely dependent upon its  
ability to build and maintain its reputation for quality Christian music and    
other communication products.                                                   

EMPLOYEES                                                                       

       As of December 31, 2000, the Company employed 168 individuals, 134 of
whom are located at the Company's Mobile, Alabama, headquarters.                

         The Company has no collective bargaining agreements covering any of its
employees, has never experienced any material labor disruption and is unaware of
any efforts or plans to organize its employees. The Company considers relations 
with its employees to be good.                                                  

GOVERNMENT REGULATION                                                           

The Company's direct to consumer program is subject to federal
regulations governing unfair methods of competition and unfair or deceptive acts
and practices in or affecting commerce. These regulations generally prohibit the
solicitation of any order for sale of merchandise through the mail unless at the
time of solicitation the seller has a reasonable basis to expect that he will be
able to ship the merchandise within the time period indicated or within thirty  
days if no time period is indicated. If there is any delay in the applicable    
time period, the regulations require the seller to give the buyer the option to 
cancel the order and receive a prompt refund or consent to a delay in shipment. 
Management believes that the Company is in full compliance with the applicable  
federal regulations governing its direct to consumer programs.                  

ITEM 2. PROPERTIES.                                                             

        The Company owns a 25,000 square foot headquarters and studio facility
in Mobile, Alabama, which houses its executive offices, management and sales    
staff. This facility was constructed in 1983 and is pledged as security for the 
Company's indebtedness. The Company leases a 30,000 square foot building located
in Mobile, Alabama, which houses its distribution and warehousing center.       

ITEM 3. LEGAL PROCEEDINGS.                                                      

   The Company is not a party to any material legal proceedings that
management believes will have a material effect on Integrity's business,        
financial condition or results of operations.                                   

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

   No matters were submitted to a vote of the Company's stockholders
during the fourth quarter of the year ended December 31, 2000.                  

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PART II.

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

        Integrity's common stock is traded on The Nasdaq SmallCap Market under
the symbol ITGR. The table below sets forth the quarterly high and low sales    
price as reported on The Nasdaq National Market and The Nasdaq SmallCap Market  
for the Class A Common Stock from January 1, 1999 through March 23, 2001. The   
last sale price of the Class A Common Stock on March 23, 2001 was $3.50.        

                                                                [Download Table]

                                           High             Low 
                                          ------          ------
                                                                
Fiscal Year 1999                                                
First Quarter                             $7.250          $3.375
Second Quarter                             4.500           2.096
Third Quarter                              4.125           2.750
Fourth Quarter                             3.688           2.781

Fiscal Year 2000                                                
First Quarter                              4.000           2.813
Second Quarter                             3.750           3.000
Third Quarter                              3.750           3.313
Fourth Quarter                             3.688           2.375

Fiscal Year 2001                                                
First Quarter (through                                          
March 23, 2001)                            4.063           2.938

    As of March 23, 2001, there were approximately 104 stockholders of
record and approximately 1,500 beneficial stockholders of Integrity's Class A   
Common Stock and three stockholders of record of Integrity's Class B Common     
Stock.                                                                          

       Integrity has never declared or paid any cash dividends on its shares
of Class A or Class B Common Stock or any other of its securities. The current  
policy of Integrity's Board of Directors is to retain any future earnings to    
provide funds for the operation and expansion of Integrity's business, and,     
therefore, the Board of Directors does not anticipate paying any cash dividends 
in the foreseeable future. In addition, Integrity's ability to pay dividends is 
limited by its existing credit agreement and may be limited in the future by the
terms of then-existing credit facilities. See Note 6 to the financial           
statements.                                                                     

      The Company's Class A Common Stock was listed on The Nasdaq SmallCap
Market effective October 2, 1998. Prior to that time, the Company's Class A     
Common Stock was listed on The Nasdaq National Market.                          

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ITEM 6. SELECTED FINANCIAL DATA                                                 

   The selected historical balance sheet and statement of operations
presented below for each of the five years in the period ended December 31, 2000
have been derived from the Company's audited consolidated financial statements. 

     The following selected financial data should be read in conjunction
with the Consolidated Financial Statements and Notes thereto and Item 7.        
"Management's Discussion and Analysis of Financial Condition and Results of     
Operations" appearing elsewhere herein.                                         

                                                        [Enlarge/Download Table]

                                                                Year Ended December 31                      
                                                        (in thousands, except per share data)               
STATEMENT OF OPERATIONS                    2000       1999              1998              1997       1996   
                                         --------   --------          --------          --------   -------- 
                                                                                                            
Net sales                                $ 51,819   $ 45,326          $ 38,847          $ 34,954   $ 31,975 
Cost of sales                              27,072     22,268            18,254            15,427     14,981 
                                         --------   --------          --------          --------   -------- 
Gross profit                               24,747     23,058            20,593            19,527     16,994 
Marketing and fulfillment expenses         10,496     10,404             9,023             9,450     10,711 
General and administrative                                                                                  
   Expenses                                10,698      9,751             8,557             7,796      7,545 
Loss on impairment of long-lived assets                                                                     
                                                0          0                 0                 0      1,200 
                                         --------   --------          --------          --------   -------- 
Income (loss) from operations               3,553      2,903             3,013             2,281     (2,462)
Interest expense (net)                        932      1,292             1,529             1,790      1,804 
Other (income) expense                        137       (352)                0                 3       (153)
                                         --------   --------          --------          --------   -------- 
Income (loss) before extraordinary                                                                          
   item, minority interest and taxes        2,484      1,963             1,484               488     (4,113)
Income tax (expense) benefit                 (600)      (481)              467                70        654 
Minority interest, net of tax                (188)       (55)             (200)              (37)         0 
                                         --------   --------          --------          --------   -------- 
Income (loss) before extraordinary                                                                          
   Item                                     1,696      1,427             1,751               521     (3,459)
Extraordinary item from early                                                                               
   extinguishment of debt less                                                                              
   applicable taxes of $47                      0          0                 0                 0       (248)
                                         --------   --------          --------          --------   -------- 
Net income (loss)                        $  1,696   $  1,427          $  1,751          $    521   $ (3,707)
                                         ========   ========          ========          ========   ======== 
Basic EPS                                                                                                   

Income (loss) before extraordinary                                                                          
   Item                                  $   0.30   $   0.26          $   0.32          $   0.09   $  (0.63)
Extraordinary item                              0          0                 0                 0      (0.04)
                                         --------   --------          --------          --------   -------- 
Net income (loss)                        $   0.30   $   0.26          $   0.32          $   0.09   $  (0.67)
                                         ========   ========          ========          ========   ======== 
Diluted EPS                                                                                                 

Income (loss) before extraordinary                                                                          
   Item                                  $   0.28   $   0.24          $   0.30          $   0.09   $  (0.63)
Extraordinary item                              0          0                 0                 0      (0.04)
                                         --------   --------          --------          --------   -------- 
Net income                               $   0.28   $   0.24          $   0.30          $   0.09   $  (0.67)
                                         ========   ========          ========          ========   ======== 
Weighted average number of                                                                                  
   shares outstanding                                                                                       
       Basic                                5,615      5,579             5,514             5,514      5,514 
       Diluted                              6,058      6,032             5,805             5,514      5,514 

                                                                [Download Table]

                                          As of December 31                    
                                            (in thousands)                     
BALANCE SHEET DATA      2000      1999           1998          1997      1996  
                      --------  --------       --------      --------  --------
                                                                               
Net working capital   $  5,787  $  8,179       $  9,536      $  8,831  $ 10,467
Total assets            27,232    29,341         31,377        30,775    31,058
Total bank debt(1)       4,034     8,705         12,968        15,117    18,304
Stockholders' equity    15,956    14,289         12,758        11,076    10,487

(1) Includes discount of $403 at December 31, 2000, $649 at December 31, 1999,  
$832 at December 31, 1998, $1,064 at December 31, 1997 and $1,296 at December   
31, 1996.                                                                       

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS 
OF OPERATIONS.                                                                  

 The following discussion should be read in conjunction with the
Selected Financial Data and the Consolidated Financial Statements and Notes     
thereto included elsewhere herein.                                              

      During February 2001, management determined that certain adjustments
were necessary to the prior year's financial statements. See Footnote 2 of the  
Notes to the Consolidated Financial Statements for a detailed explanation and   
discussion of the impact of these adjustments. As a result of these adjustments,
the Company has revised the financial statements for the years ended December   
31, 1997, 1998, 1999, and interim periods of 2000 and 1999.                     

OVERVIEW                                                                        

      The Company is a media-communications company that chiefly produces,
publishes and distributes Christian music. It is a producer and publisher of    
Christian lifestyle products developed to facilitate worship, entertainment and 
education. The Company's recorded music products fall into two broad categories:
concept products and artist products. Concept products are centered on a        
specific theme, such as praise and worship, and artist products are those in    
which the artist is the focal point. Some of the Company's concept product lines
are Hosanna! Music(R), Urban Praise(R), FairHope Records(R) and                 
Just-For-Kids(R). The Company has several artists under contract, including     
leaders in Christian music such as Don Moen, Ron Kenoly, Paul Wilbur, Tommy     
Walker, Gary Oliver, Darrell Evans and Paul Baloche. In addition to audio       
recordings, Integrity produces Christian music video and DVD products, printed  
music such as songbooks and sheet music and software. The Company has determined
that its reportable segments are those that are based on the Company's          
distribution channels. These distribution channels are Retail, Direct to        
Consumers, International and Other channels. The Retail channel primarily       
represents sales to Christian bookstores through Word Distribution, special     
event sales, sales of choral products and to the general market through Sony.   
Direct to Consumers primarily represents sales from direct mail programs but    
also includes Internet sales, television sales and sales of print products      
directly to churches, including sales of the Celebration Hymnal through a joint 
venture controlled by the Company. The International channel represents an      
international distribution network that reaches markets in 161 countries. All   
transactions with foreign entities, whether they are shipped from the United    
States or one of the Company's three subsidiaries in Singapore, the United      
Kingdom and Australia are reported in the segment. Christian bookstores are the 
primary distribution channel for this segment, but there are also direct mail   
and other techniques used for these markets. The Other segment includes         
copyright revenue and other distribution sales.                                 

    The following historical analysis shows the percentage of sales by
segment:                                                                        

                                                                [Download Table]

                             2000            1999            1998 
                            ------          ------          ------
                                                                  
Direct to Consumer           30.9%           27.8%           30.6%
Retail Markets               50.1%           49.2%           41.8%
International                14.5%           16.0%           16.5%
Other                         4.5%            7.0%           11.1%

        The Direct to Consumer segment, as a percent of total sales, increased
largely due to the sales to Time Life for the Songs 4 Worship continuity        
program. As a result, the International and Other segments decreased as a       
percent of total sales, although International net sales increased slightly for 
the year as compared to 1999.                                                   

        The Company's operating results may fluctuate significantly due to new
product introductions, the timing of selling and marketing expenses, seasonality
and changes in sales and product mixes.                                         

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RESULTS OF OPERATIONS                                                           

         The following table sets forth consolidated operating results expressed
as a percentage of net sales for the periods indicated and the percentage change
in such operating results between periods.                                      

                                                                [Download Table]

                                               Percentage of Net Sales         
                                               Year Ended December 31          
                                        2000             1999             1998 
                                       ------           ------           ------
                                                                               
Net Sales                              100.0%           100.0%           100.0%
Cost of Sales                           52.2%            49.1%            47.0%
Gross Profit                            47.8%            50.9%            53.0%
Marketing and Fulfillment                                                      
Expenses                                20.3%            23.0%            23.2%
General and Administrative                                                     
Expenses                                20.6%            21.5%            22.0%
Income from operations before                                                  
taxes and minority interest              4.8%             4.3%             3.8%

THE YEAR ENDED DECEMBER 31, 2000 ("2000") COMPARED TO THE YEAR ENDED DECEMBER   
31, 1999 ("1999")                                                               

       Net sales increased 14.3% to $51.8 million in 2000 from $45.3 million
in 1999. The increases were mainly attributable to increases in the Direct to   
Consumer and Retail Market segments. Major new releases in 2000 included WoW    
Worship Orange and Songs 4 Worship "Shout To the Lord". In 2000, new products   
accounted for 2.7 million units, or 42.3% of the total units sold. The new      
products released in 2000 featured several of Integrity's best-selling artists  
such as Don Moen, Paul Wilbur, Lincoln Brewster and Gary Oliver, as well as new 
Integrity artist Tommy Walker. Three of the best selling albums of the year were
WoW Worship Blue, WoW Worship Orange and Songs 4 Worship "Shout To The Lord".   
All three of the albums are compilations of the "best" praise and worship songs.
The WoW albums were created in partnership with two other Christian praise and  
worship song providers. WoW Orange (released in 2000) and WoW Blue (released in 
1999) continue to have a very strong market presence. Songs 4 Worship is a      
continuity series of praise and worship compilations developed in partnership   
with Time Life Music. The Songs 4 Worship continuity series, released in the    
fourth quarter of 2000, according to Time Life "generated the strongest initial 
response for a music product launch in Time Life Music's history." In the first 
90 days of release, over 500,000 consumers joined Time Life's continuity series.
Due to the success of the Songs 4 Worship series and the WoW albums, substantial
progress was made in 2000 in broadening the overall market for Praise and       
Worship Music. As the leader in this genre, Integrity should benefit from this  
increased exposure. Due primarily to the success of Time Life's Songs 4 Worship 
continuity program, sales in the Direct to Consumer segment increased 27.2% to  
$16.0 million in 2000 from $12.6 million in 1999. Due to the success of the WoW 
Worship albums, sales in the Retail segment increased 16.5% to $26.0 million in 
2000 from $22.3 million in 1999. Total WoW sales were $7.5 million in 2000 as   
compared to $3.8 million in 1999. Revenues in the International segment         
increased 3.8% to $7.5 million in 2000 from $7.2 million in 1999 due primarily  
to increases in the Latin America division. Other international divisions and   
subsidiaries were impacted negatively by changes in foreign exchange rates and  
increased local competitive pressures. Management expects these competitive     
pressures to continue in many of its foreign markets in 2001. Revenues in the   
Other segment increased 8.9% to $7.3 million in 2000 from $6.7 million in 1999  
due primarily to additional copyright royalties generated from the increase in  
product sales and third party use. Bad debts and returns were $4.8 million in   
2000 and $5.1 million in 1999.                                                  

         Gross profit increased 7.3% to $24.7 million in 2000 from $23.1 million
in 1999 due primarily to the increases in revenue discussed previously. Gross   
profit as a percentage of sales was 47.8% and 50.9% for the years ended December
31, 2000 and 1999, respectively. The decrease in gross profit as a percentage of
sales was primarily due to increased sales of the WoW albums and the Songs 4    
Worship continuity which have lower margins. The gross profit percentage in the 
Direct to Consumer segment declined to 47.5% in 2000 from 53.3% in 1999. The    
decline is attributable to Songs 4 Worship sales whose gross margins are lower  
as the Company sells the product to Time Life at a wholesale price. The gross   
profit percentage in the Retail segment declined to 45.2% in 2000 from 48.6% in 
1999 due primarily to the increased sales of the WoW albums. Because the WoW    
albums were created in partnership with two other record                        

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companies, the Company's margin is lower due to higher royalties. The gross     
profit percentage in the International segment declined slightly to 58.0% in    
2000 from 58.6% in 1999. Additionally, reductions in the carrying value of      
product masters as a result of management's periodic estimates of the eventual  
recoupment of production costs increased to $894,000 for the year ended December
31, 2000 as compared to $640,000 for the year ended December 31, 1999. These    
amounts are included in cost of sales, but are not specifically allocated to the
segments.                                                                       

   The Company's gross margins are generally higher in the Direct to
Consumer segment where sales are generally at retail value. However, the Songs 4
Worship release is sold to Time Life at a wholesale value and significantly     
lowers the gross margin for this segment. The retail segment's gross margin is  
impacted by the sales mix of distributed and artists products, which generally  
have lower gross margins than concept products. Sales of concept products made  
up 62% and 78% of the retail segment's sales in 2000 and 1999, respectively.    
Management expects the trend towards more artists products to continue in 2001. 
Management expects consolidated gross margins in 2001 to be consistent with 2000
results.                                                                        

  The following table shows the gross margin by operating segment:

                                                                [Download Table]

                                Year Ended December 31
                                2000             1999 
                                                      
Gross margin                                          
Retail                          45.2%            48.6%
Direct to Consumer              47.5%            53.3%
International                   58.0%            58.6%
Other                           18.4%            20.5%
Consolidated                    47.8%            50.9%

      Operating profit in the Direct to Consumer segment increased 106% to
$3.0 million in 2000 from $1.5 million in 1999, due to Songs 4 Worship sales    
mentioned earlier and due to lower marketing and fulfillment costs in 2000      
versus 1999 in this segment. Though the Songs 4 Worship sales to Time Life had a
negative impact to Direct to Consumer's gross margin as a percentage of sales,  
the Company bears no marketing and fulfillment expenses related to this revenue.
Operating profit in the Retail segment increased 2.2% to $4.4 million in 2000   
from $4.3 million in 1999. Though retail gross margins rose $0.9 million in 2000
compared to 1999, most of this benefit was offset by increases in retail        
marketing and fulfillment expenses resulting from the higher level of sales. As 
a percentage of sales, marketing and fulfillment expenses in the retail segment 
declined to 24.5% in 2000 from 25.5% in 1999. Operating profit in the           
International segment decreased 9.8% to $1.7 million in 2000 from $1.8 million  
in 1999. The net decrease is a result of a slight increase in International's   
gross margin offset by larger increases in applicable general and administrative
expenses in 2000 compared to 1999. The increase in the International segment's  
general and administrative expenses for 2000 is due to additional expenditures  
for market development and personnel additions. The Operating profit in the     
Other segment decreased $638,000, or 59.6%, due to increases in marketing and   
fulfillment expenses not charged to specific segments and due to amount charged 
to expense for record masters that do not appear to be fully recoverable.       

       Marketing and fulfillment expenses increased 0.9% to $10.5 million in
2000 from $10.4 million in 1999. As a percentage of sales, however, marketing   
and fulfillment expenses decreased to 20.3% in 2000 from 23.0% in 1999. The     
Company negotiated a reduction in its fulfillment rate that was effective for   
2000. The aggregate dollar amount of marketing and fulfillment expenses         
increased as a result of higher fulfillment expenses due to higher volumes in   
the Retail segment. These higher volumes were offset partially by the benefit of
a reduction in the fulfillment services rate being charged. Also offsetting the 
increase were lower marketing costs due to fewer direct mail campaigns in the   
Direct to Consumer segment. The primary reason for the decline as a percent of  
sales is that Songs 4 Worship sales in the Direct to Consumer segment bear no   
marketing or fulfillment expenses when the Company sells directly to Time Life. 

        General and administrative expenses increased 9.7% to $10.7 million in
2000 from $9.8 million in 1999. The increase was due to several new positions,  
company wide cost of living increases and certain professional fees. Also       
included in these amounts is approximately $0.3 million from the International  
segment. The additional personnel were needed to support the anticipated growth 
of the Company.                                                                 

     As a result of the above, income from operations increased 22.4% to
$3.6 million in 2000 from $2.9 million in 1999. As a percentage of sales,       
operating income increased to 6.9% in 2000 from 6.4% in 1999.                   

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         Interest expense decreased to $0.9 million in 2000 from $1.3 million in
1999. The decrease was a result of lower average indebtedness in 2000. Other    
income in 1999 included a favorable insurance settlement of $300,000.           

    The Company recorded a net expense for income taxes during 2000 of
approximately $600,000 compared to $481,000 in 1999. During 2000, the Company's 
effective tax rate was 24.1%, which reflected the benefit of certain foreign and
AMT (alternative minimum tax) tax credits. The effective rate in 1999 was 24.5%,
which reflected the benefit of a $180,000 reduction in the valuation allowance  
against deferred taxes.                                                         

THE YEAR ENDED DECEMBER 31, 1999 ("1999") COMPARED TO THE YEAR ENDED DECEMBER   
31, 1998 ("1998")                                                               

       Net sales increased 16.7% to $45.3 million in 1999 from $38.8 million
in 1998, mainly attributable to a 37.2% increase in the retail segment to $22.3 
million in 1999 from $16.2 million in 1998. Unit sales increased by 6% to 7.1   
million in 1999 from 6.7 million in 1998 due to 63 major releases, including WoW
Worship and Shout To The Lord 2000, and strong product catalog sales from prior 
releases such as Shout To The Lord and Jerusalem Arise. In 1999, new products   
accounted for 2.4 million units, or 33.8% of the total units sold. The new      
products offered were from existing product lines as well as new product lines  
featuring several of Integrity's best-selling artists, such as Don Moen, Ron    
Kenoly and Paul Wilbur. One of our best selling albums for the year was WoW     
Worship, a collection of the best selling praise and worship songs, created in  
partnership with Maranatha! and Vineyard. Total WoW sales were $3.8 million in  
1999 as compared to $0 million in 1998. Sales in the direct to consumer segment 
increased 5.8% to $12.6 million, compared to $11.9 million in 1998 due to       
increased sales of Integrity Notes, a greeting card continuity club. Direct to  
consumer sales were negatively impacted by approximately $0.2 million during the
year due to adjustments to correct an inadvertent overstatement of shipping and 
handling revenue related to system modifications carried out in 1998. This      
situation, which affected only one portion of the Company's direct to consumer  
segment, had no impact on customers, has been rectified, and had an immaterial  
impact on all prior periods. Revenues from the international segment increased  
13.2% to $7.2 million from $6.4 million in 1998, mainly due to strong increases 
in Australia and the U.K. However, because of the 37.2% increase in the retail  
segment, international sales as a percent of total sales decreased to 16.0% from
16.5% in 1998. Sales from the Other segment increased from $6.5 million to $6.7 
million due largely to increases in copyright revenues, which increased from    
$6.0 million in 1998 to $6.6 million in 1999. Bad debts and returns were $5.1   
million in 1999 as compared to $4.9 million in 1998.                            

  Gross profit increased 12.0% to $23.1 million in 1999 from $20.6
million in 1998 due primarily to revenue increases discussed above. Gross profit
as a percentage of sales was 50.9% and 53.0% for the years ended December 31,   
1999 and 1998, respectively. The decrease in gross profit as a percentage of    
sales was primarily the result of the sales mix including a higher portion of   
distributed and artist products, which have lower gross margin percentages, than
the comparable period in 1998. The gross margin percentages in the retail       
segment were negatively impacted with the sales of WoW Worship. Although the    
album has generated significant revenues, it was created in partnership with two
other record companies, and, as a result, the Company's margin percentage is    
significantly lower due to higher royalties. Gross profit in the direct to      
consumer segment was negatively impacted by approximately $200,000 as a result  
of the billing adjustments discussed above. Management expects that the sales   
mix is likely to continue to focus in the retail segment, which may keep gross  
margin percentages lower than in previous years. Reductions in the carrying     
value of product masters as a result of management's periodic estimates of the  
eventual recoupment of production costs aggregated $640,000 and $700,000 for the
years ended December 31, 1999 and 1998, respectively. Such amounts are included 
in cost of sales, but are not specifically allocated to the segments.           

   Operating profit in the retail segment grew 27.0% to $4.3 million
during 1999 from $3.4 million due to the revenue increases discussed above,     
resulting from several major product releases during the year, including the WoW
Worship and Shout To The Lord 2000. Operating costs related to the retail       
segment, principally fulfillment expenses, were consistent with the increase in 
sales. The lower gross margin in the retail segment discussed above also        
contributed to the results for the segment. Operating profit from the direct to 
consumer segment decreased 44.3% to $1.5 million during 1999 from $2.6 million  
as a result of the $200,000 billing adjustment discussed above and increased    
direct marketing costs associated with new continuity products. Operating profit
in the international segment grew 27.9% to $1.8 million during 1999 from $1.4   
million due to continued steady growth in sales (13%). Operating profit in the  
Other segment decreased $459,000 due to higher royalties and additional masters 
amortization.                                                                   

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        Marketing and fulfillment expenses increased 15.3% to $10.4 million or
23.0% of net sales in 1999 as compared with $9.0 million or 23.2% of net sales  
in 1998. This increase was primarily associated with higher sales levels.       

        General and administrative expenses increased 14.0% to $9.8 million or
21.5% of net sales in 1999, compared to $8.6 million or 22.0% of net sales in   
1998. The increase in expenses was mainly attributable to increases in personnel
costs required to support the growth in the business including the addition of  
new positions arising from the Company's expansion both internationally and in  
new distribution channels.                                                      

      As a result of the above, income from operations was $2.9 million or
6.4% of net sales in 1999, compared with $3.0 million or 7.8% of net sales in   
1998.                                                                           

       Interest expense decreased to $1.3 million in 1999 compared with $1.5
million in 1998. The decrease was a result of lower average indebtedness in     
1999. Other income in 1999 also includes a favorable insurance settlement of    
$300,000.                                                                       

    The Company recorded a net expense for income taxes during 1999 of
approximately $481,000 which included a $180,000 benefit for a reduction in the 
valuation allowance against deferred tax assets. During 1998, the Company       
recorded a net benefit from income taxes of approximately $467,000 primarily as 
a result of a $785,000 reduction in the valuation allowance against deferred tax
assets. The reductions in the valuation allowance were the result of            
management's revised expectations relative to the ability to generate future    
taxable income. In fact, during 1999, the Company utilized substantially all of 
the deferred tax assets associated with net operating loss carry-forwards, tax  
credits and other carry-forward attributes. There was no valuation allowance    
remaining at December 31, 1999.                                                 

LIQUIDITY AND CAPITAL RESOURCES                                                 

   The Company historically has financed its operations through cash
generated from operations and from borrowings under a line of credit and term   
notes as needed. The Company's need for cash varies from quarter to quarter     
based on product releases and scheduled marketing promotions. The Company's     
principal uses of cash historically have been the production and recording of   
product masters to build the Company's product master library and debt service. 
It is from these product masters that the Company's products are duplicated and 
distributed to customers. The Company believes that its working capital and     
funds available under its credit facility will be sufficient to fund its        
operating and capital requirements for the fiscal year ended December 31, 2001  
and beyond.                                                                     

       Cash generated from operations totaled $8.9 million, $8.2 million and
$7.3 million for the years ended December 31, 2000, 1999 and 1998, respectively.
The increases from 1999 to 2000 and 1998 to 1999 resulted primarily from        
improved operating results.                                                     

       Investing activities used $3.9 million, $3.1 million and $4.7 million
of cash in 2000, 1999 and 1998, respectively. Capital expenditures totaled $0.8 
million, $0.7 million and $0.5 million for the years ended December 31, 2000,   
1999 and 1998, respectively. During 2000, 1999 and 1998, capital expenditures   
were primarily for computer equipment and general improvements on the Company's 
corporate headquarters. The Company also invested $4.1 million, $3.4 million and
$4.2 million in new product masters during 2000, 1999 and 1998, respectively.   
The Company expects its investments in capital expenditures and product masters 
during 2001 to remain relatively consistent with 2000 levels.                   

         During the fourth quarter of 1999, the Company sold its Animation Video
masters at book value for $2 million. The Company received payment of $1 million
during fourth quarter 1999, with the remaining $1 million received during 2000  
in four equal installments of $250,000. The proceeds have been used to reduce   
the Company's debt position.                                                    

     The Company's $19 million financing agreement includes a $6 million
revolving credit facility and $13 million term loan. At the Company's option,   
and as of September 1, 2000, the loan carries an interest rate of the bank's    
base rate plus 0.75%, or LIBOR plus 2%. Prior to September 2000, the interest   
rate was the bank's base rate plus 1 1/2% or LIBOR plus 3%. The lender holds    
818,897 warrants with an exercise price of $1.875 that are exercisable into the 
Company's Class A common stock and expire in 2006. During the years ended       
December 31, 2000, 1999 and 1998, the Company made net payments of $4.9 million,
$4.4 million and $2.1 million, respectively, under such agreements. At December 
31, 2000, the Company had available borrowings of $4.1 million under such       
agreements. The Company's minimum payments due in 2001 related to its borrowings
are $2.2 million, however, the Company may elect to make additional payments.   
Also during 2000, the Company paid $400,000 as a distribution to the Hymnal     
joint venture partner. As discussed in                                          

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Note 2, during the fourth quarter of 2000, adjustments were made to prior       
periods and prior year financial statements. In light of these adjustments, all 
loan covenants for prior periods were reviewed and the Company found that       
certain covenants were violated. The Company has received waivers for those     
violations and is currently in compliance with all debt covenants at December   
31, 2000. Management has been in discussions with several banking institutions  
interested in refinancing its credit facilities and providing expanded credit   
facilities during 2001.                                                         

RECENT ACCOUNTING PRONOUNCEMENTS                                                

       In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial          
Statements." This SAB summarizes certain of the staff's views in applying       
generally accepted accounting principles to selected revenue recognition issues.
Accordingly, guidance is provided with respect to the recognition, presentation,
and disclosure of revenue in the financial statements. Adoption of SAB No. 101, 
as amended by SAB No. 101A, "Amendment: Revenue Recognition in Financial        
Statements" and SAB No. 101B, "Second Amendment: Revenue Recognition in         
Financial Statements," was effective for the fourth quarter of 2000. The        
Company's adoption of this SAB did not materially affect the Company's financial
position or results of operations.                                              

         In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133). This accounting standard, which is       
effective for all fiscal quarters of fiscal years beginning after June 15,      
2000,requires that all derivatives be recognized as either assets or liabilities
at estimated fair value. In June 2000, the Financial Accounting Standards Board 
issued Statement of Financial Accounting Standards No. 138, Accounting for      
Certain Derivative Instruments and Certain Hedging Activities, an amendment of  
SFAS No. 133. This accounting standard amended the accounting and reporting     
standards of SFAS No. 133 for certain derivative instruments and hedging        
activities. The January 1, 2001 adoption of SFAS No. 133, as amended, is not    
expected to have a material effect on the Company's financial position or       
results of operations. The Company does not enter into any derivative or related
instruments, and the Company does not engage in any hedging activities related  
to foreign currency transactions.                                               

    In September 2000, the EITF reached a final consensus on Issue No.
00-10, "Accounting for Shipping and Handling Revenues and Costs," which requires
amounts charged to customers for shipping and handling to be classified as      
revenue. In addition, the Issue established that the classification of shipping 
and handling costs is an accounting policy decision that should be disclosed    
pursuant to APB Opinion No. 22, "Disclosure of Accounting Policies." If shipping
and handling costs are significant and are not included in cost of sales, a     
company should disclose both the amount of such costs and which line item on the
income statement includes that amount. This Issue is applicable no later than   
the fourth quarter of fiscal years beginning after December 15,1999. The        
Company's current accounting policies conform with this new guidance.           

     In November 2000, the Emerging Issues Task Force ("EITF") reached a
final consensus on Issue No. 00-14, "Accounting for Coupons, Rebates and        
Discounts" that addresses the recognition, measurement, and income statement    
classification for sales incentives offered voluntarily by a vendor without     
charge to customers that can be used in, or that are exercisable by a customer  
as a result of, a single exchange transaction. This Issue is applicable no later
than in annual financial statements for fiscal years beginning after December   
15, 1999, or financial statements for the first quarter beginning after March   
15, 2001,whichever is later. The Company believes that adoption of this Issue   
will not have a material impact on the Company's results of operations,         
financial position, or cash flows.                                              

         In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock     
Compensation," an Interpretation of Accounting Principles Board ("APB") Opinion 
No. 25. This interpretation was intended to clarify certain problems that have  
arisen in practice since the issuance of APB Opinion No. 25 in October 1972. It 
specifically answers certain questions and provides guidance on the             
implementation of APB Opinion No. 25. The adoption of this interpretation did   
not have any impact on the Company's financial position or results of           
operations.                                                                     

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INFLATION                                                                       

     The impact of inflation on the Company's operating results has been
moderate in recent years, reflecting generally lower rates of inflation in the  
economy and relative stability in the Company's cost of sales. While inflation  
has not had, and the Company does not expect that it will have, a material      
impact upon operating results, inflation may affect the Company's business in   
the future.                                                                     

YEAR 2000 COMPLIANCE                                                            

     Due to its remediation efforts, the Company has not experienced any
disruptions in its business because of Year 2000 related computer issues,       
including leap year related failures. Further, the Company has not experienced  
any disruptions in its business because of disruptions related to these issues  
experienced by its suppliers, distributors, contractors or other service        
providers.                                                                      

       The total cost of the Company's Year 2000 remediation effort was less
than $40,000 and was not material to the Company's financial condition or       
results of operations. These costs were primarily in the form of compensation   
and benefits of internal employees working on the Company's Year 2000           
remediation effort and were expensed as incurred. The actual cost of the        
remediation was materially consistent with its projected costs.                 

RISK FACTORS

OUR COMPETITION INCLUDES OTHER MUSIC COMPANIES AND GENERAL ENTERTAINMENT        
COMPANIES                                                                       

      We face intense competition for discretionary consumer spending from
numerous other music companies and entertainment companies that utilize various 
formats, including audio recordings, film, video, and other media.              

 Our products compete directly with the products of other record
companies and music publishers that distribute Christian music to Christian     
bookstores, as well as a number of secular music companies. Many of these       
competitors have substantially greater financial resources than we have. This   
provides them with the ability to launch more new products, spend more on       
marketing those products, and pay more to artists and songwriters for new music 
and songs. Our ability to continue to compete successfully will be largely      
dependent upon our ability to successfully develop and launch new products that 
build upon and maintain our reputation for quality Christian music and other    
communication products.                                                         

OUR INDUSTRY IS SUBJECT TO CONSUMER TASTES AND DEMANDS                          

       We operate in the recorded music, video productions and printed music
industries. These industries involve a substantial degree of risk. Each music or
video recording or printed product is an individual artistic work. Consumer     
taste, which is unpredictable and constantly changing, primarily determines the 
commercial success of any such work. Accordingly, there can be no assurance as  
to the financial success of any particular release, the timing of such success, 
or the popularity of any particular artist.                                     

         Furthermore, we must invest significant amounts for product development
prior to the release of any product. These costs may not be recovered if the    
release is unsuccessful. Changes in the timing of new releases can also cause   
significant fluctuations in our quarterly operating results because of the      
marketing costs involved in launching a new product and the delay in receiving  
any sales revenue from the new product. There can be no assurance that our      
products will be successful releases or that any product will generate revenues 
sufficient to cover the cost of product development. See "Management's          
Discussion and Analysis of Financial Condition and Results of Operations."      

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COMPETITION FROM INTERNET RETAILERS AND "NAPSTER-STYLE COMPANIES" MAY IMPAIR OUR
ABILITY TO SELL OUR PRODUCTS                                                    

         The emergence of Internet, peer-to-peer, and MP3 technology, as well as
file-sharing services like Napster, has facilitated the free distribution of    
music over the Internet and may hinder our ability to sell our products through 
traditional retail outlets. File-sharing technology permits the sharing of high 
quality music without payment to performers, songwriters and music producers.   
The impact this technology will have on the music industry in general and on    
Integrity in particular is not certain.                                         

OUR BUSINESS IS DEPENDENT ON ACCESS TO DISTRIBUTION CHANNELS                    

We distribute our products through three primary channels:    

- Direct to Consumer                        
- Retail Sales; and                         
- License Arrangements.                     

If our access to any of these channels is interrupted, our sales could be       
significantly affected.                                                         

      The direct to consumer channel is based on a variety of methods, but
primarily is composed of our continuity clubs. The performance of these clubs   
could be affected by a number of factors including:                             

   - the maturity of our mailing lists such that consumers no longer
desire our products and cancel their participation;           

     - our failure to expand and revise our mailing lists to include new
        potential customers, or the inability to secure new mailing lists from
which to build ours;                                          

       - our failure to offer new and appealing products to these customers;
and                                                           

- increases in the cost of mailing and shipping, or increased 
regulation of mail order sales.                               

       Currently, we rely on Word's sales force to perform all retail market
sales functions for us, pursuant to a contract with them that extends through   
January 2004.                                                                   

   In addition to our retail distribution channel, our international
distribution channel also relies heavily on third parties to sell and deliver   
our products. We cannot quickly replace these third parties should they fail to 
perform, nor can we assume their duties in a timely manner. As a result, the    
failure by any of these parties to fulfill their duties effectively and         
efficiently will immediately and adversely affect our sales.                    

INCREASES IN COSTS OF MAILING, PAPER, PRINTING AND DELIVERY WILL SIGNIFICANTLY  
INCREASE OUR COSTS OF GOODS SOLD                                                

       Increases in postal rates, as well as in paper, printing and delivery
costs would affect our direct response programs. We generally ship orders by    
third class mail with the United States Postal Service. We rely heavily on      
discounts from the basic postal rate structure, such as discounts for bulk      
mailings, sorting by zip code, and carrier routes.                              

     Any increase in postal rates, papers and printing or delivery costs
could adversely affect our earnings.                                            

WE DEPEND ON OUR SENIOR EXECUTIVES WHO HAVE EXPERIENCE UNIQUE TO OUR INDUSTRY   

      Our success has been largely dependent on the skills, experience and
efforts of our senior management. Although we have employment agreements with   
some of our senior executives, they could still choose to leave the Company at  
any time. If they did we would have significant difficulty replacing them with  
individuals who had an equal level of experience in the Christian products      
market. This could affect our daily operations, creative development and        
ultimately our financial performance.                                           

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OUR COMPANY IS CONTROLLED BY THE COLEMAN FAMILY                                 

 Our Chairman, President and Chief Executive Officer, P. Michael
Coleman, and his family beneficially own 35,100 shares of Class A Common Stock  
and all 3,435,000 shares of Class B Common Stock outstanding. This represents   
approximately 94.1% of the total voting power of all classes of our voting      
stock. As a result, Mr. Coleman is able to elect all of our directors, further  
amend our Amended Certificate of Incorporation (the "Amended Certificate"),     
effect or prevent a merger, sale of assets or other business acquisition or     
disposition, and otherwise control the outcome of actions requiring stockholder 
approval.                                                                       

THE CLASS A COMMON STOCK HAS LIMITED VOTING RIGHTS                              

        Our Amended Certificate limits the voting rights of our Class A Common
Stock. Each share of our Class A Common Stock is entitled to one vote, while    
each share of our Class B Common Stock is entitled to ten votes on all matters  
with respect to which our stockholders have a right to vote. Both classes of our
stock generally vote together as a single class. The shares of Class B Common   
Stock are convertible into shares of Class A Common Stock on a share-for-share  
basis at the election of the holder. Also, our Class B Common Stock must be     
converted to shares of Class A Common Stock automatically if it is transferred, 
except for transfers to or for the benefit of certain of Mr. Coleman's          
relatives. We do not have the authority to issue additional Class B Common Stock
except as dividends or distributions on outstanding Class B Common Stock        
proportional to dividends or distributions on Class A Common Stock.             

       The disproportionate voting rights between our classes of stock could
adversely affect the market price of our Class A Common Stock. The              
disproportionate voting rights may also make us a less attractive target for a  
takeover than we otherwise might be, and render more difficult or discourage a  
merger proposal, a tender offer, or a proxy contest even if such actions were   
favored by holders of our Class A Common Stock.                                 

      Holders of Class A Common Stock may be deprived of an opportunity to
sell their shares at a premium over the then prevailing market price due to the 
disproportionate voting rights between the two classes of stock.                

CERTAIN PROVISIONS OF OUR AMENDED CERTIFICATE COULD DISCOURAGE A TAKE-OVER OF   
INTEGRITY                                                                       

   Our Board of Directors is authorized to issue shares of preferred
stock. Our Board of Directors, without approval of the stockholders, is also    
authorized to establish the following provisions of any preferred stock: voting,
dividend, redemption, conversion, liquidation, and other provisions.            

         The issuance of preferred stock could adversely affect the voting power
or other rights of the holders of our common stock. Further, the issuance of    
preferred stock could make more difficult, or discourage, a third party's       
attempt to acquire control of us. Finally, we are also subject to the Delaware  
Business Combination Statute, which may render more difficult a change in our   
control.                                                                        

THE MARKET PRICE OF OUR COMMON STOCK COULD BE VOLATILE                          

     From time to time there may be significant volatility in the market
price of the Class A Common Stock. Our quarterly operating results or those of  
other similar companies, changes in the conditions in the economy or the        
financial markets, projections and statements by industry analysts or other     
third parties could cause the price of the Class A Common Stock to fluctuate    
substantially.                                                                  

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.            

        The Company's market risk is limited to fluctuations in interest rates
as it pertains to the Company's borrowings under its credit facility. As of     
September 1, 2000, the Company pays interest on borrowings at either the        
lender's base rate plus 0.75%, or LIBOR plus 2%. Prior to September 2000, the   
interest rate was the bank's base rate plus 1 1/2% or LIBOR plus 3%. If the     
interest rates on the Company's borrowings average 100 basis points more in 2001
than they did in 2000, the Company's interest expense would increase and income 
before income taxes would decrease by $68,000. This amount is determined solely 
by considering the impact of the hypothetical change in the interest rate on the
Company's borrowing cost without consideration for other factors such as actions
management might take to mitigate its exposure to interest rate changes.        

    The Company is also exposed to market risk from changes in foreign
exchange rates and commodity prices. The Company does not use any hedging       
transactions in order to modify the risk from these foreign currency exchange   
rate and commodity price fluctuations. The Company also does not use financial  
instruments for trading purposes and is not a party to any leveraged            
derivatives.                                                                    

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.                            

    The response to this item is submitted in Part IV, Item 14 of this
report.                                                                         

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND         
FINANCIAL DISCLOSURE.                                                           

Not applicable.                                               

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PART III. 

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.                   

        The information under the captions "Proposal I - Election of Directors
- Certain Information Concerning Nominees", "Proposal I - Election of Directors 
- Executive Officers of Integrity" and "Other Matters - Section 16(a)           
Beneficial Ownership Reporting Compliance" in Integrity's 2001 Proxy Statement  
is incorporated herein by reference.                                            

ITEM 11.  EXECUTIVE COMPENSATION.                                               

       The information under the caption "Proposal I - Election of Directors
- Executive Compensation" in Integrity's 2001 Proxy Statement is incorporated   
herein by reference. In no event shall the information contained in the proxy   
statement under the sections "Stockholder Return Comparison" or "Compensation   
Committee Report on Executive Compensation" be incorporated herein by           
reference.                                                                      

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.       

       The information under the caption "Proposal I - Election of Directors
- Beneficial Owners of More Than Five Percent of the Company's Common Stock;    
Shares Held by Directors and Executive Officers" in the Company's 2001 Proxy    
Statement is incorporated herein by reference.                                  

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.                       

       The information under the caption "Proposal I - Election of Directors
- Certain Transactions" in the Company's 2001 Proxy Statement is incorporated   
herein by reference.                                                            

PART IV.

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.     

(A)      1.CONSOLIDATED FINANCIAL STATEMENTS                                    
INDEX TO FINANCIAL STATEMENTS                                                   

                                                        [Enlarge/Download Table]

FINANCIAL STATEMENTS                                                                          PAGE NO.
                                                                                                      
Report of Independent Accountants                                                               19    
Consolidated Balance Sheets at December 31, 2000 and 1999                                       20    
Consolidated Statement of Operations for the three years ended December 31, 2000                21    
Consolidated Statement of Changes in Stockholders' Equity for the three years ended December          
31, 2000                                                                                        22    
Consolidated Statement of Cash Flows for the three years ended December 31, 2000                23    
Notes to Consolidated Financial Statements                                                      24    

2.  FINANCIAL STATEMENT SCHEDULES:                          

II - Valuation and Qualifying Accounts for the three years ended December 31,   
2000                                                                            

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REPORT OF INDEPENDENT ACCOUNTANTS 

To The Board of Directors and Stockholders of Integrity Incorporated            

In our opinion, the consolidated financial statements listed in the index       
appearing under item 14(a)(1) on page 18, after the restatement described in    
Note 2, present fairly, in all material respects, the financial position of     
Integrity Incorporated and its subsidiaries at December 31, 2000 and 1999, and  
the results of their operations and their cash flows for each of the three      
years in the period ended December 31, 2000, in conformity with accounting      
principles generally accepted in the United States of America. In addition, in  
our opinion, the financial statement schedule listed in the index appearing     
under item 14(a)(2) on page 18 presents fairly, in all material respects, the   
information set forth therein when read in conjunction with the related         
consolidated financial statements. These financial statements and financial     
statement schedule are the responsibility of the Company's management; our      
responsibility is to express an opinion on these financial statements and       
financial statement schedule based on our audits. We conducted our audits of    
these statements in accordance with auditing standards generally accepted in    
the United States of America, which 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,    
assessing the accounting principles used and significant estimates made by      
management, and evaluating the overall financial statement presentation. We     
believe that our audits provide a reasonable basis for our opinion.             

PricewaterhouseCoopers LLP                                                      

Atlanta, GA                                                                     
February 28, 2001                                                               

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INTEGRITY INCORPORATED                                                          
CONSOLIDATED BALANCE SHEETS 
(IN THOUSANDS, EXCEPT SHARE DATA) 

                                                        [Enlarge/Download Table]

                                                                                                    December 31,         
                                                                                               2000               1999   
                                                                                             --------           -------- 
                                                                                                                         
ASSETS                                                                                                                   
Current Assets                                                                                                           
   Cash                                                                                      $    801           $  1,067 
   Trade receivables, less allowance for returns and doubtful accounts of $1,241 and $1,108     5,929              6,246 
   Other receivables                                                                              561              1,681 
   Inventories                                                                                  3,961              4,104 
   Other current assets                                                                         3,212              2,456 
                                                                                             --------           -------- 
      Total current assets                                                                     14,464             15,554 

Property and equipment, net of accumulated depreciation of $4,519 and $3,956                    3,950              3,664 
Product masters, net of accumulated amortization of $16,604 and $11,649                         5,626              6,967 
Other assets                                                                                    3,192              3,156 
                                                                                             --------           -------- 
      Total assets                                                                           $ 27,232           $ 29,341 
                                                                                             ========           ======== 

LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                     
Current Liabilities                                                                                                      
   Current portion of long-term debt                                                         $  2,188           $  1,937 
   Accounts payable and accrued expenses                                                        3,090              3,108 
   Royalties payable                                                                            2,920              1,104 
   Other current liabilities                                                                      479              1,226 
                                                                                             --------           -------- 
      Total current liabilities                                                                 8,677              7,375 

Long-term debt                                                                                  1,846              6,768 
Other long-term liabilities                                                                         7                 52 
                                                                                             --------           -------- 
      Total liabilities                                                                        10,530             14,195 
                                                                                             --------           -------- 

Commitments and contingencies                                                                       0                  0 

Minority interest                                                                                 746                857 
                                                                                             --------           -------- 

Stockholders' Equity                                                                                                     
   Preferred stock, $.01 par value; 500,000 shares authorized, none issued and outstanding          0                  0 
   Class A common stock, $.01 par value; 7,500,000 shares authorized;                                                    
2,184,000 and 2,179,000 shares issued and outstanding                                              22                 22 
   Class B common stock, $.01 par value, 10,500,000 shares authorized; 3,435,000 shares                                  
issued and outstanding                                                                             34                 34 
   Additional paid-in capital                                                                  13,857             13,847 
   Unearned compensation                                                                         (272)              (327)
   Retained earnings                                                                            2,450                754 
   Equity adjustments from foreign translation                                                   (135)               (41)
                                                                                             --------           -------- 
      Total stockholders' equity                                                               15,956             14,289 
                                                                                             --------           -------- 
         Total liabilities and stockholders' equity                                          $ 27,232           $ 29,341 
                                                                                             ========           ======== 

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

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INTEGRITY INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA) 

                                                        [Enlarge/Download Table]

                                                                   Year Ended December 31,           
                                                          2000              1999              1998   
                                                        --------          --------          -------- 

                                                                                                     
Net sales                                               $ 51,819          $ 45,326          $ 38,847 
Cost of sales                                             27,072            22,268            18,254 
                                                        --------          --------          -------- 
Gross profit                                              24,747            23,058            20,593 

Marketing and fulfillment expenses                        10,496            10,404             9,023 
General and administrative expenses                       10,698             9,751             8,557 
                                                        --------          --------          -------- 
   Income from operations                                  3,553             2,903             3,013 

Other expenses (income)                                                                              
   Interest expense, net                                     932             1,292             1,529 
   Other expenses (income)                                   137              (352)                0 
                                                        --------          --------          -------- 
   Income before minority interest and taxes               2,484             1,963             1,484 
(Provision for) benefit from income taxes                   (600)             (481)              467 
Minority interest, net of applicable taxes                  (188)              (55)             (200)
                                                        --------          --------          -------- 
Net income                                              $  1,696          $  1,427          $  1,751 
                                                        ========          ========          ======== 

Adjustments to determine comprehensive income                                                        
Foreign currency translation adjustments                     (94)               12               (69)
                                                        --------          --------          -------- 
Comprehensive income                                    $  1,602          $  1,439          $  1,682 
                                                        ========          ========          ======== 

Net income per share - Basic                            $   0.30          $   0.26          $   0.32 
                                                        ========          ========          ======== 

Net income per share - Diluted                          $   0.28          $   0.24          $   0.30 
                                                        ========          ========          ======== 
Weighted average number of shares outstanding (note 1)                                               
   Basic                                                   5,615             5,579             5,514 
   Diluted                                                 6,058             6,032             5,805 

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

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INTEGRITY INCORPORATED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY 
(IN THOUSANDS, EXCEPT PER SHARE DATA) 

                                                        [Enlarge/Download Table]


                                                                                                  (Accum.   Equity Adj.        
                                         Class A              Class B       Unearned  Additional  Deficit)     From            
                                       Common Stock         Common Stock     Compen-    Paid-in   Retained    Trans-           
                                      Shares   Amount     Shares    Amount   sation    Capital    Earnings   lations    Total  
                                    ---------  -------  ---------  ------   --------  ----------  --------  ---------- ------- 

                                                                                                                               
Balance, December 31, 1997          2,079,000  $    21  3,435,000    $34               $13,428    $(2,424)  $  16      $11,075 
  Net income                                                                                        1,751                1,751 
  Translation adjustments                                                                                     (69)         (69)
                                    ---------  -------  ---------    ---    -----      -------    -------   -----      ------- 
Balance, December 31, 1998          2,079,000       21  3,435,000     34                13,428       (673)    (53)      12,757 
  Net income                                                                                        1,427                1,427 
  Issuance of restricted stock        100,000        1                       (375)         374                               0 
  Issuance of warrants                                                                      45                              45 
  Amortization of restricted stock                                             48                                           48 
award                                                                                                                          
  Translation adjustments                                                                                      12           12 
                                    ---------  -------  ---------    ---    -----      -------    -------   -----      ------- 
Balance, December 31, 1999          2,179,000       22  3,435,000     34     (327)      13,847        754     (41)      14,289 
  Net income                                                                                        1,696                1,696 
  Issuance of common stock                                                                                                     
  upon exercise of options              5,000        0                                      10                              10 
  Amortization of restricted                                                                                                   
  stock award                                                                  55                                           55 
  Translation adjustments                                                                                     (94)         (94)
                                    ---------  -------  ---------    ---    -----      -------    -------   -----      ------- 
Balance, December 31, 2000          2,184,000  $    22  3,435,000    $34    $(272)     $13,857    $ 2,450   $(135)     $15,956 
                                    =========  =======  =========    ===    =====      =======    =======   =====      ======= 

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

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INTEGRITY INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                                       Year Ended December 31,          
                                                               2000               1999           1998   
                                                             -------             -------        ------- 

                                                                                                        
Cash flows from operating activities                                                                    
Net income                                                   $ 1,696             $ 1,427        $ 1,751 
Adjustments to reconcile net income to net cash provided by                                             
operating activities                                                                                    
   Depreciation and amortization                               1,034               1,019          1,202 
   Amortization of product masters                             5,397               3,500          3,787 
   Minority interest                                             188                  55            200 
   Stock compensation                                             55                  48              0 
   Deferred income tax (benefit) provision                      (390)                420           (527)
   Changes in operating assets and liabilities                                                          
       Trade receivables                                         317              (1,170)          (817)
       Other receivables                                         120                 956            396 
       Inventories                                               143                  22          1,177 
       Other assets                                             (528)                838           (510)
       Accounts payable, royalties payable and                                                          
       accrued expenses                                        1,799                 690            265 
       Other current and non current liabilities                (886)                352            377 
       Other                                                       0                  12              0 
                                                             -------             -------        ------- 
Net cash provided by operating activities                      8,945               8,169          7,298 
                                                             -------             -------        ------- 
Cash flows from investing activities                                                                    
   Purchases of property and equipment                          (849)               (716)          (463)
   Payments for product masters                               (4,056)             (3,417)        (4,220)
   Proceeds from sale of product masters                       1,000               1,000              0 
                                                             -------             -------        ------- 
Net cash used in investing activities                         (3,905)             (3,133)        (4,683)
                                                             -------             -------        ------- 
Cash flows from financing activities                                                                    
   Net (repayments) borrowings under line of credit           (2,290)               (975)           169 
   Distributions to joint venture partner                       (400)               (510)             0 
   Proceeds from exercise of common stock options                 10                   0              0 
   Principal payments of long-term debt                       (2,626)             (3,473)        (2,318)
                                                             -------             -------        ------- 
      Net cash used in financing activities                   (5,306)             (4,958)        (2,149)
                                                             -------             -------        ------- 
Net (decrease) increase in cash                                 (266)                 78            466 
Cash, beginning of year                                      $ 1,067                 989            523 
                                                             -------             -------        ------- 
Cash, end of year                                            $   801             $ 1,067        $   989 
                                                             =======             =======        ======= 
Supplemental disclosures of cash flow information                                                       
   Interest paid                                             $   913             $ 1,173        $ 1,355 
   Income taxes paid                                         $ 1,188             $    15        $     0 
Noncash investing activities                                                                            
   Sale of product masters for note receivable               $     0             $ 1,000        $     0 
   Issuance of warrants in connection with debt                                  $    45                

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

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INTEGRITY INCORPORATED  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  

1.       NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES      

      Integrity Incorporated (the "Company") is engaged in the production,
distribution and publishing of music cassette tapes and compact discs, print    
music and related products, primarily by direct to consumer marketing and       
wholesale trade methods. A principal direct to consumer marketing method of     
distribution is continuity programs whereby subscribers receive products at     
regular intervals.                                                              

        Integrity Music Europe Limited was formed in 1988, Integrity Music PTY
Limited was formed in 1991 and Integrity Media Asia Pte Ltd was formed in 1995. 
These subsidiaries serve to expand the Company's presence in Western Europe;    
Australia and New Zealand; and Singapore, respectively, and all are             
wholly-owned by the Company. Celebration Hymnal LLC was formed in 1997 as a     
50/50 joint venture with Word Entertainment, for the purpose of producing and   
promoting The Celebration Hymnal. Due to the Company's ability to control the   
venture, Word Entertainment's interest in the joint venture is presented as     
minority interest in these financial statements.                                

The Company's significant accounting policies are as follows: 

PRINCIPLES OF CONSOLIDATION                                                     

   The accompanying financial statements include the accounts of the
Company and its controlled subsidiaries. All significant intercompany accounts  
and transactions have been eliminated in consolidation. The Company controls    
the operations of the joint venture through its majority position on the Board  
of Directors of The Celebration Hymnal LLC.                                     

REVENUE RECOGNITION                                                             

 Revenue is recognized at the time title passes to the customer.
Provision for sales returns and allowances are made in the period in which the  
related products are shipped based on estimates derived from historical data.   
The allowance represents the gross sales price and is recorded in the period in 
which the related products are shipped. The returns allowance is presented,     
along with the allowance for doubtful accounts, as a reduction of accounts      
receivable in the accompanying financial statements. Generally, revenue earned  
from licensing the use of songs in the Company's song catalogs is recognized as 
payments are received from licensees.                                           

CASH AND CASH EQUIVALENTS                                                       

        Cash and cash equivalents consist of deposits with banks and financial
institutions which are unrestricted as to withdrawal or use and which have      
original maturities of three months or less.                                    

INVENTORIES                                                                     

  Inventories, which consist principally of finished goods such as
compact discs, cassette tapes, videos and print products, are stated at the     
lower of average cost or market using the first-in, first-out method.           

MARKETING COSTS                                                                 

        The Company incurs marketing costs utilizing various media to generate
direct sales to customers. Marketing expenditures that benefit future periods   
are capitalized and charged to operations using the straight-line method over a 
period of six months, which approximates the period during which the related    
sales are expected to be realized. Other marketing costs are expensed the first 
time advertising takes place. Prepaid marketing costs, including artwork,       
printing and direct mail packages, are included in assets in the accompanying   
financial statements and approximated $814,000 and $525,000 at December 31,     
2000 and 1999, respectively. Marketing costs expensed for the three years ended 
December 31, 2000, 1999 and 1998 approximated $4,628,000, $4,609,000 and        
$4,455,000, respectively.                                                       

FULFILLMENT COSTS                                                               

        Fulfillment expenses are primarily comprised of distribution fees paid
to third party distributors based on a percentage of sales. The services        
provided by the third party distributor include sales, fulfillment and storage  
of the Company's product for the retail segment. Distribution fees represented  
approximately 58.3% of total fulfillment expense for the year ended December    
31,                                                                             

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2000. Also included in fulfillment expenses are fees paid to a third party      
service provider on a transaction basis for data entry, generation of invoices  
and cash processing.                                                            

        Additionally, in the Direct to Consumer segment, the Company completes
the distribution and shipping function internally and includes a separate       
surcharge to customers related to this service. These costs, which approximated 
$1.3 million for the year ended December 31, 2000, are recorded as a component  
of Cost of Sales and the related customer fee is recorded as a component of Net 
Sales.                                                                          

PROPERTY AND EQUIPMENT                                                          

     Property and equipment are stated at cost. Depreciation is provided
over the estimated useful lives of the assets using the straight-line method.   
The useful lives of buildings are 14 to 25 years; leasehold improvements, 2     
years, which is the life of the related lease; data processing equipment, 5     
years; studio equipment, 5 years; and furniture and fixtures, 5 to 7 years.     
Repairs and maintenance costs that do not increase the useful lives of the      
assets are charged to expense as incurred. Additions, improvements and          
expenditures that significantly add to the productivity or extend the life of   
an asset are capitalized. When assets are replaced or otherwise disposed of,    
the cost and related accumulated depreciation are removed from the accounts and 
any gain or loss is reflected in income.                                        

PRODUCT MASTERS                                                                 

     Product masters, which include sound and video recordings and print
masters, are amortized over their future estimated useful lives, using a method 
that reasonably relates to the amount of net revenue expected to be realized.   
Management periodically reviews the product masters amortization rates and      
adjusts the amortization rate based on management's estimates for future sales. 
In conjunction with such analysis, any amounts that do not appear to be fully   
recoverable are charged to expense during the period the loss becomes           
estimable. The costs of producing a product master include the cost of the      
musical talent, the cost of the technical talent for engineering, directing and 
mixing, costs for the use of the equipment to record and produce the master and 
studio facility charges.                                                        

IMPAIRMENT OF LONG-LIVED ASSETS                                                 

       The Company evaluates impairment of long-lived assets whenever events
or changes in circumstances indicate that the carrying amount of such assets    
may not be recoverable. If the sum of the expected future undiscounted cash     
flows is less than the carrying amount of the asset, an impairment loss would   
be recognized. Measurement of an impairment loss for long-lived assets would be 
based on the fair value of the asset.                                           

ADVANCE ROYALTIES AND ROYALTIES PAYABLE                                         

  Royalties earned by publishers, producers, songwriters, or other
artists are charged to expense in the period in which the related product sale  
occurs. Advance royalties paid are capitalized if the past performance and      
current popularity of the artist to whom the advance is made demonstrates such  
amounts will be recoverable from future royalties to be earned by the artist.   
Such capitalized amounts are included as a component of product masters in the  
consolidated balance sheet. Any portion of advances that subsequently appear    
not to be recoverable from future royalties are charged to expense during the   
period the loss becomes evident. The amount of capitalized advance royalties    
aggregated $370,000 and $562,000 at December 31, 2000 and 1999, respectively.   
Royalties payable are reduced for the estimated royalties that will not be paid 
due to product returns and bad debts.                                           

INCOME TAXES                                                                    

    The Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the carrying  
amounts and the tax basis of assets and liabilities. Management includes the    
consideration of future events to assess the likelihood that the tax benefits   
will be realized in the future.                                                 

STOCK-BASED COMPENSATION PLANS                                                  

     The Company has elected to account for its stock-based compensation
plans under Accounting Principals Board Opinion No. 25, "Accounting for Stock   
Issued to Employees" (APB 25) with the associated disclosure requirements of    
Statement of Financial Accounting Standards No. 123, "Accounting for            
Stock-based Compensation" (SFAS No. 123) in Note 11. SFAS No. 123               

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requires that companies that elect to not account for stock-based compensation  
as prescribed by that statement shall disclose among other things, pro forma    
effects on net income and net income per share as if SFAS No. 123 had been      
adopted. Under APB No. 25, because the exercise price of the Company's employee 
stock options equal the market price of the underlying stock on the date of the 
grant, no compensation expense is recognized.                                   

EARNINGS PER COMMON SHARE                                                       

      Basic earnings per share is computed by dividing income available to
common stockholders by the weighted average of common shares outstanding for    
the period. Diluted earnings per share is calculated by dividing income         
available to common stockholders by weighted average of common shares           
outstanding assuming issuance of potential dilutive common shares related to    
options, warrants, convertible debt, or other stock agreements.                 

FOREIGN CURRENCIES                                                              

      Assets and liabilities at foreign subsidiaries are recorded based on
their functional currencies. Amounts in foreign currencies are translated at    
the applicable exchange rate at the balance sheet date using the rate in effect 
as of the period end. Revenues and expenses of foreign subsidiaries are         
translated using the average rates applicable during the reporting period. The  
effects of foreign currency translation adjustments are included as a component 
of stockholders' equity and Comprehensive income.                               

FAIR VALUE OF FINANCIAL INSTRUMENTS                                             

    The carrying amounts of financial instruments including cash, cash
equivalents, accounts receivable, accounts payable and accrued expenses         
approximate fair value. The carrying amount of long-term debt approximates fair 
value based on current rates of interest available to the Company for loans of  
similar maturities.                                                             

SIGNIFICANT ESTIMATES                                                           

      The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and        
assumptions that affect the reported amounts of assets and liabilities and      
disclosure of contingent assets and liabilities at the date of the financial    
statements and the reported amounts of revenues and expenses during the         
reporting period. Actual results could differ from those estimates.             

       Significant estimates inherent in the preparation of the accompanying
consolidated financial statements include management's forecast of anticipated  
revenues from the sale of future and existing music, video and                  
publishing-related products in order to evaluate the ultimate recoverability of 
product masters and artist advances. Management periodically reviews such       
estimates and it is possible that management's assessment of recoverability of  
product masters and artist advances may change based on actual results and      
other factors.                                                                  

COMPREHENSIVE INCOME                                                            

 Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," requires entities to report comprehensive income which   
represents the change in equity during a period from non-owner sources and      
requires financial statement presentation with the same prominence as net       
income. The Company's components of comprehensive income relate solely to       
foreign currency translation adjustments and are presented in the accompanying  
consolidated statement of operations.                                           

RECLASSIFICATIONS                                                               

     Certain prior year amounts have been reclassified to conform to the
current year presentation.                                                      

2.       REVISIONS TO THE CONSOLIDATED FINANCIAL STATEMENTS                     

      During February 2001, management determined that certain adjustments
were necessary to the prior year financial statements. At Celebration Hymnal,   
the Company's joint venture in which the Company holds a controlling interest,  
management determined that an inventory adjustment was required due to the      
incorrect costing of certain inventory items during 1998 and 1999. As a result  
of this matter, cost of sales had been understated while the ending inventory   
balances had been overstated during 1998 and 1999. An accounts receivable and   
sales adjustment was also                                                       

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necessary at this joint venture to correct a clerical oversight that was        
originally recorded in the fourth quarter of 1999, which had increased sales and
accounts receivable.                                                            

In accordance with its contracts, and consistent with industry
practice, the Company withholds a percentage of royalties due to artists,       
producers, and songwriters in anticipation of future product returns.           
Management has also determined that its previous reporting did not              
appropriately reflect a liability for the future payment of these royalty       
"hold-backs". Accordingly, the revisions to the previously reported amounts     
include adjustments to correct the timing of the recognition of these           
liabilities.                                                                    

     None of these adjustments have impacted the Company's reported cash
flows from operations. The Company has also amended all its Form 10-Q's in 2000 
to reflect the matters discussed above.                                         

       The impact of the revisions to the annual periods is presented below:

                                                        [Enlarge/Download Table]

                                  As of and for the year ended      As of and for the year ended  
                                            December 31                     December 31           
                                    1999                1999         1998                 1998    
                                  -------              -------      -------              -------  
                               As previously         As revised  As previously          As revised
                                 reported                          reported                       
                                                                                                  
Statement of Operations Data:                                                                     
Net Sales                         $45,571              $45,326      $38,847              $38,847  
Gross Profit                      $23,635              $23,058      $20,862              $20,593  
Income From Operations            $ 3,480              $ 2,903      $ 3,282              $ 3,013  
Net Income                        $ 1,664              $ 1,427      $ 1,854              $ 1,751  
Net Income Per Share                                                                              
Basic                             $  0.30              $  0.26      $  0.34              $  0.32  
Fully Diluted                     $  0.28              $  0.24      $  0.32              $  0.30  

Balance Sheet Data:                                                                               
Accounts Receivable               $ 6,329              $ 6,246      $ 4,913              $ 5,075  
Inventory                         $ 4,754              $ 4,104      $ 4,528              $ 4,126  
Current Assets                    $16,287              $15,554      $15,898              $15,658  
Royalties Payable                 $   774              $ 1,104      $   569              $   789  
Current Liabilities               $ 7,312              $ 7,375      $ 6,071              $ 6,122  
Minority Interest                 $ 1,166              $   857      $ 1,384              $ 1,316  
Total Stockholders' Equity        $14,750              $14,289      $12,981              $12,758  

   In connection with the items outlined above, the Company has also
recorded a reduction of $121,000 to its retained earnings balance at January 1, 
1998. This adjustment gives effect to the cumulative impact of the above noted  
matters on the 1997 financial statements.                                       

3.       OTHER CURRENT ASSETS                                                   

Other current assets consist of the following:                                  

                                                                [Download Table]

                                              December 31     
                                             (in thousands)   
                                          2000            1999
                                          ----            ----
                                                              
Prepaid supplies                        $1,241          $1,571
Prepaid marketing costs                    814             525
Income tax receivable                      512               0
Deferred tax assets                        102             124
Other                                      543             236
                                        ------          ------
                                        $3,212          $2,456
                                        ======          ======

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4.       PROPERTY AND EQUIPMENT                                                 

Property and equipment consists of:                                             

                                                                [Download Table]

                                                  December 31          
                                                (in thousands)         
                                        2000                     1999  
                                        ----                     ----  
                                                                       
Land                                  $   625                  $   625 
Buildings and leasehold improvements    2,837                    2,684 

Data processing and other equipment     2,284                    1,846 

Studio equipment                        1,083                    1,037 
Furniture and fixtures                  1,640                    1,428 
                                      -------                  ------- 
                                        8,469                    7,620 
Less - accumulated depreciation        (4,519)                  (3,956)
                                      -------                  ------- 
                                      $ 3,950                  $ 3,664 
                                      =======                  ======= 

       Depreciation expense approximated $563,000, $525,000 and $499,000 for
the years ended December 31, 2000, 1999 and 1998, respectively.                 

5.       OTHER ASSETS                                                           

Other assets consist of the following:                                          

                                                                [Download Table]

                                               December 31          
                                              (in thousands)        
                                        2000                   1999 
                                        ----                   ---- 
                                                                    
Music copyrights, net of accumulated                                
amortization                          $1,665                  $1,840
Deferred tax assets                    1,004                     592
Other                                    523                     724
                                      ------                  ------
                                      $3,192                  $3,156
                                      ======                  ======

      The music copyrights are being amortized over their future estimated
useful lives, which is approximately fifteen years. Accumulated amortization at 
December 31, 2000 and December 31, 1999 was approximately $969,000 and          
$794,000, respectively.                                                         

6.       DEBT                                                                   

  The Company's $19 million credit agreement includes a $6 million
revolving credit facility (the Revolver) and $13 million term loan (the Term    
Loan) maturing on August 6, 2002. At the Company's option, and as of September  
1, 2000, the credit agreement carries an interest rate of the bank's base rate  
plus 0.75% or LIBOR plus 2%. Prior to September 2000, the interest rate was the 
bank's base rate plus 1 1/2% or LIBOR plus 3%. At December 31, 2000, the        
interest rate on the $874,000 outstanding under the Revolver was 8.78% and on   
the $3.6 million outstanding under the Term Loan was 8.62%. At December 31,     
1999, the interest rate on the $3.1 million outstanding under the Revolver was  
9.12% and on the $6.25 million outstanding under the Term Loan was 8.76%.       

     At December 31, 2000, the Company had approximately $4.1 million of
available funds under the Revolver.                                             

      The Company, in conjunction with the 1996 financing, issued warrants
to purchase 805,288 shares of Class A Common Stock. Each warrant entitles the   
record holder thereof to purchase one fully paid share of Class A Common Stock  
(for an aggregate of 805,288 shares) or one-fourth fully paid share of          
convertible preferred stock (for an aggregate of 201,322 shares) at the         
exercise price of $1.875. These warrants became exercisable on August 6, 1998.  
The warrants are subject to adjustment upon the issuance of additional shares   
of common stock by the Company. On the date of issuance, the warrants had an    
estimated fair value of $1.73 per share or $1,393,000, which is recorded as a   
discount to the Revolver and Term Loan. As a result of the issuance of shares   
of Class A Common Stock associated with certain restricted stock grants, the    
Company issued 13,609 additional warrants in 1999, which are immediately        
exercisable. The fair value of these warrants, approximately $45,000, was       
recorded as additional debt discount. The fair value of the warrants was        
determined using the Black-Scholes option-pricing model with the following      
assumptions:                                                                    

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Dividend yield of 0%, expected volatility of 95%, risk-free interest rate of    
5.5%, and an expected term of 6.5 years. The discount is being amortized to     
interest expense over the term of the facility. At December 31, 2000, the book  
value of the discount is $403,000 net of accumulated amortization of $1.0       
million.                                                                        

       The Revolver and Term Loan contain certain restrictive covenants with
respect to the Company, including, among other things, maintenance of working   
capital, limitations on the payments of dividends, the incurrance of additional 
indebtedness, certain liens and require the maintenance of certain financial    
ratios. Substantially all of the Company's assets are pledged as collateral for 
these loans. Due to the restatement described in Note 2, all loan covenants for 
prior periods were reviewed and the Company found that certain covenants were   
violated. The Company has received waivers for these violations and is          
currently in compliance with these debt covenants at December 31, 2000.         

Aggregate principal maturities of long-term debt at December 31, 2000 are as    
follows:                                                                        

                                                                [Download Table]

                                                      Total 
Fiscal Year                                   (in thousands)
-----------                                   --------------
                                                            
   2001                                               $2,188
   2002                                                2,249
                                                      ------
                                                      $4,437
 Discount                                                403
                                                      ------
                                                      $4,034
                                                      ======

  At December 31, 2000, approximately $403,000, net of accumulated
amortization of $1,033,000, of loan issuance costs are being amortized over the 
term of the debt agreements.                                                    

7.       INCOME TAXES                                                           

      The components of the provision for income taxes for the three years
ended December 31, 2000 are as follows:                                         

                                                                [Download Table]

                                      Year Ended December 31        
                                          (in thousands)            
                               2000             1999           1998 
                              -----            -----          ----- 
                                                                    
Current provision                                                   
   Federal                    $ 861            $  55          $  54 
   State                        129                6              6 
                              -----            -----          ----- 
                                990               61             60 
                              -----            -----          ----- 
Deferred provision (benefit)                                        
   Federal                     (345)             344           (464)
   State                        (45)              76            (63)
                              -----            -----          ----- 
                               (390)             420           (527)
                              -----            -----          ----- 
Total provision (benefit)     $ 600            $ 481          $(467)
                              =====            =====          ===== 

  The provision (benefit) for income taxes differs from the amount
computed by applying the U. S. federal income tax rate (34%) because of the     
effect of the following items:                                                  

                                                                [Download Table]

                                                    December 31          
                                                   (in thousands)        
                                            2000          1999      1998 
                                           -----         -----     ----- 

                                                                         
Income tax provision at statutory rates    $ 845         $ 667     $ 504 
State tax provision, net of federal taxes     59            34        26 
Nondeductible expenses                        56            15        15 
Foreign tax impacts                         (260)            0       (40)
Other, net                                  (100)          (55)     (187)
Change in valuation allowance                  0          (180)     (785)
                                           -----         -----     ----- 
Provision of (benefit) for income taxes                                  
before extraordinary item                  $ 600         $ 481     $(467)
                                           =====         =====     ===== 

      Deferred income taxes are recorded to reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities    
for financial reporting purposes and the amounts used for income tax purposes.  

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 Significant components of the Company's deferred tax assets and
liabilities as of December 31, 2000 and 1999 are as follows (in thousands):     

                                                                [Download Table]

                                                     December 31         
                                               2000               1999   
                                             --------           -------- 
                                                                         
Deferred Assets                                                          
   Net operating loss carryforwards          $     16           $      0 
   Reserves for returns and allowances, net       194                 30 
   Impairment of building and depreciation        349                460 
   Write down of product masters                  265                137 
   Hymnal income                                  373                246 
   Non compete agreement                          171                246 
   Other                                           86                  0 
                                             --------           -------- 
                                                1,454              1,119 
                                             --------           -------- 

Deferred tax liabilities                                                 
   Prepaid marketing expenses                    (263)              (217)
   Other                                          (85)              (186)
                                             --------           -------- 
                                                 (348)              (403)
                                             --------           -------- 

Net deferred tax asset                       $  1,106           $    716 
Current portion                                  (102)              (124)
                                             --------           -------- 
Long term portion                            $  1,004           $    592 
                                             ========           ======== 


  Management believes that it is more likely than not that it will
generate taxable income sufficient to realize the net deferred tax asset        
recorded at December 31, 2000. For the year ended December 31, 1999, the        
Company reduced its valuation allowance by $320,000 related to the utilization  
of previously established foreign tax credits as deductions rather than tax     
credits. As a result this portion of the prior year tax credits has been        
written off against the valuation allowance, which did not result in any impact 
to the results of operations. The Company reduced the remaining $180,000        
valuation allowance to zero. Such reduction in the valuation allowance was the  
result of three consecutive years of profitability coupled with management's    
current projections that sufficient taxable income will realize the remaining   
deferred tax assets.                                                            

8.       EMPLOYEE BENEFITS                                                      

      The Company maintains a non-contributory defined contribution Profit
Sharing Plan (the "Plan") covering substantially all employees of the Company.  
An employee is eligible to participate in the Plan after one year of service,   
as defined. The Company did not make contributions to the Plan during the year  
ended December 31, 2000 or 1998 as contributions are at the discretion of the   
Board of Directors. The Company contributed $91,000 to the Plan during the year 
ended December 31, 1999.                                                        

The Company also provides a qualifying 401k Plan ("401k Plan")
covering substantially all employees of the Company. An employee is eligible to 
participate in the 401k Plan after one year of service and is allowed to make   
elective contributions of up to 12% of their annual salary. Company             
contributions to the 401k Plan are discretionary and are determined annually by 
the Company's Board of Directors. The Company contributed approximately         
$124,000, $110,000 and $102,000 during the years ended December 31, 2000, 1999  
and 1998, respectively. The Board of Directors amended the 401(k) Plan in 1997  
to include qualified non-elective contributions to satisfy minimum              
contributions.                                                                  

9.       RELATED PARTY TRANSACTIONS                                             

       Integrity Worship Ministries, formerly known as Worship International
("Worship"), is a not-for-profit charitable organization, of which the          
principal stockholder of the Company is a member of the board of directors. The 
Company donated $6,470, $9,280 and $7,895 of inventory to Integrity Worship     
Ministries during 2000, 1999 and 1998, respectively.                            

        One of the Company's exclusive songwriters and artists, who is also an
officer of the Company, received royalties of approximately $385,000, $276,000  
and $208,149 for the three years ended December 31, 2000, 1999 and 1998.        
Amounts due to the officer at December 31, 2000 and 1999 approximate $45,000    
and $83,000, respectively. Due from this officer at December 31, 2000 and 1999  
is $10,500 advanced against future royalties.                                   

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10.      SEGMENT REPORTING                                                      

The Company is a multinational corporation with wholly-owned  
subsidiaries in the United States, Australia, the United Kingdom and Singapore. 
Transfers between companies primarily represent inter-company export sales of   
U.S. produced goods and are accounted for based on established sales prices     
between the related companies. Intercompany sales and profits are eliminated    
during consolidation. In computing operating profits, certain corporate         
expenses, to the extent related to a segment, are charged to that segment.      
Marketing and fulfillment costs are also attributed to the specific segment     
benefited. Other expenses (income) are also included in the general corporate   
expenses total.                                                                 

        The Company has determined that its reportable segments are those that
are based on the Company's distribution channels. These distribution channels   
are Retail, Direct to consumers, International and Other channels. The Retail   
channel primarily represents sales to Christian bookstores, special event sales 
and sales of choral products through third party distributors, and sales to the 
general retail market. Direct to consumers primarily represents sales from      
direct mail programs but also includes Internet sales and sales direct to       
churches, including through the Company's hymnal joint venture. The             
International channel represents all transactions with foreign entities,        
whether they are shipped from the US or one of the Company's three foreign      
subsidiaries. Christian bookstores are the primary distribution channel for     
this segment, but there are also direct mail and other techniques used for      
these markets. The other channels segment includes copyright revenue from the   
song catalog and other small distribution sales.                                

    The accounting policies of the reportable segments are the same as
those described in Note 1 of Notes to Consolidated Financial Statements. The    
Company evaluates the performance of its operating segments based on net        
revenues and operating income before taxes. Intersegment sales are not          
significant.                                                                    

      Summarized financial information concerning the Company's reportable
segments is shown in the following table, in thousands:                         

                                                                [Download Table]

                                               2000      1999      1998  
                                             -------   -------   ------- 
                                                                         
NET SALES                                                                
Direct to consumer                           $16,012   $12,587   $11,898 
Retail                                        25,960    22,280    16,234 
International                                  7,510     7,234     6,392 
Other                                          7,334     6,735     6,534 
Eliminations                                  (4,997)   (3,510)   (2,211)
                                             -------   -------   ------- 
   Consolidated                              $51,819   $45,326   $38,847 
                                             =======   =======   ======= 

OPERATING PROFIT (BEFORE MINORITY INTEREST)                              
Direct to consumer                            $2,990    $1,454    $2,609 
Retail                                         4,362     4,270     3,363 
International                                  1,656     1,836     1,436 
Other                                            432     1,070     1,529 
                                             -------   -------   ------- 
   Consolidated                                9,440     8,630     8,937 

General corporate expense                                                
                                               6,024     5,375     5,924 
Interest expense, net                            932     1,292     1,529 
                                             -------   -------   ------- 

Income before income taxes and                                           
minority interest                             $2,484    $1,963    $1,484 
                                              ======    ======    ====== 

IDENTIFIABLE ASSETS                                                      
Direct to consumer                            $1,712    $1,980    $2,630 
Retail                                             0         0         0 
International                                  3,126     3,230     2,596 
Other                                          1,665     1,840     2,014 

General corporate assets                      20,729    22,291    24,137 
                                             -------   -------   ------- 
   Total assets                              $27,232   $29,341   $31,377 
                                             =======   =======   ======= 

    The Company does not allocate any separate assets to its retail or
direct to consumer segments as those segments are managed based on profit       
centers. The primary assets used in                                             

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these segments are product masters and other intangibles that are shared among  
all segments. The Company does not track property and equipment usage by        
segments.                                                                       

  The Company sells its products throughout the world and operates
primarily in the U.S. Export sales are handled through the Company's            
international sales division and through certain foreign subsidiaries.          
Geographic financial information is as follows (in thousands):                  

                                                                [Download Table]

                       2000     1999     1998 
                     -------  -------  -------
                                              
NET SALES                                     
United States        $44,309  $38,092  $32,464
Europe                 2,136    2,401    1,956
Australia                737    1,174    1,011
Asia                   1,179    1,142      938
Latin America          1,478      652       12
Other                  1,980    1,865    2,466
                     -------  -------  -------
                     $51,819  $45,326  $38,847
                     =======  =======  =======

IDENTIFIABLE ASSETS                           
United States        $24,106  $26,111  $28,781
Europe                 1,617    1,688    1,368
Australia                499      629      494
Asia                   1,010      913      734
Other                      0        0        0
                     -------  -------  -------
                     $27,232  $29,341  $31,377
                     =======  =======  =======

11.      STOCKHOLDERS' EQUITY                                                   

     Each holder of the Company's Class B common stock is entitled to 10
votes per share. Holders of Class A common stock are entitled to one vote per   
share. The rights of each share of Class A and Class B stock are identical in   
all respects except as to voting privileges. No dividends were declared or paid 
during the years ended December 31, 2000 and 1999.                              

12.      STOCK COMPENSATION PLANS                                               

        The Company has two stock option plans, which provide for the granting
of stock options to officers, employees and non-employee directors. The 1999    
Long-term Incentive Plan (the "Incentive Plan") permits grants of not only      
incentive stock options, but also non-qualified stock options, stock            
appreciation rights, performance shares, restricted stock and other stock based 
awards. The Incentive Plan is authorized to issue up to 400,000 shares of Class 
A Common Stock in connection with such awards. Under the Incentive Plan, awards 
may not be granted at less than the market value at the date of the grant, and  
vesting terms are generally five years. The 1994 Stock Option Plan for Outside  
Directors (the "Directors' Plan"), grants 1,000 options to purchase Class A     
Common stock annually to Directors following the annual meeting. Such options   
have an exercise price equal to the fair market value at grant date and are     
exercisable six months from date of grant. Prior to approval of the 1999        
Long-term Incentive Plan, the Company had the 1994 Stock Option Plan for        
employees and officers. Under that plan, 315,207 options had been granted and   
are outstanding at December 31, 2000. No further options will be granted under  
the 1994 plan.                                                                  

The Executive Stock Purchase Plan permits certain employees to
purchase shares of common stock from the Company. Under this Plan, there are    
50,000 shares of Class A common stock reserved at December 31, 2000.            

       Effective December 28, 1995, the Company's Board of Directors adopted
the 1995 Cash Incentive Plan. Awards may be granted by the Company's            
Compensation Committee and any award made is expressed in a number of units     
payable only in cash. Vesting is one-fifth of the units of an award on each     
anniversary of the date of grant until vested in full. Participants become      
vested in full six months after the occurrence of a change in control (as       
defined by the agreement) of the Company. The value of all units is measured as 
the difference between the fair market value of the Company's stock on the      
grant date and the fair market value of the Company's stock on any given date   
subsequent to the grant date. To the extent the fair market value of the stock  
exceeds the fair market value at the date of grant, compensation expense will   
be charged to the Company's statement of operations. As of December 31, 2000,   
127,500 awards have been granted. The Company paid $11,000 and $62,000 related  
to this plan in 2000 and 1999, respectively. An accrual of $30,000 is recorded  
as of December 31, 2000 for the difference in the fair market value of the      
stock between the grant date and the end of the year.                           

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       The Company accounts for stock-based compensation plans under APB 25,
"Accounting for Stock Issued to Employees". As a result, the Company has        
recognized compensation expense only for the 1995 Cash Incentive Plan discussed 
above. The Company is not required to recognize compensation expense for the    
other option plans as the exercise price is equal to, or greater than, the fair 
market value at the date of grant. The Company has adopted the disclosure       
provisions of SFAS 123, "Accounting for Stock Based Compensation: (FAS 123)".   
Had compensation cost for the Company's stock-based incentive compensation plans
been determined based on the fair value at the grant dates for awards under     
these plans consistent with the methodology prescribed by FAS 123 and if these  
values had been recorded in the statement of operations, the Company's net      
income and per share results would have been reduced to the pro forma amounts   
indicated below for the years ended December 31, 2000, 1999 and 1998,           
respectively.                                                                   

                                                                [Download Table]

                             2000        1999        1998   
                          ----------  ----------  ----------
                                                            
Net income   As reported  $1,696,000  $1,427,000  $1,751,000
             Pro forma    $1,536,645  $1,237,000  $1,682,000

Basic EPS    As reported        0.30        0.26        0.32
             Pro forma          0.27        0.22        0.31

Diluted EPS  As reported        0.28        0.24        0.30
             Pro forma          0.25        0.21        0.29

     These pro forma amounts represent the estimated fair value of stock
options issued during 2000, 1999 and 1998 and are being amortized to expense    
over the applicable vesting period. Additional options may be granted in future 
years.                                                                          

       The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions used
for grants in 2000, 1999 and 1998, respectively: Dividend yields of 0%, expected
volatility of 50% each year, risk-free interest rates that approximate the yield
of a five year government bond, and a specific vesting period for each option.  
The weighted-average fair value of options granted is $1.96, $1.82 and $1.32 for
the years ended December 31, 2000, 1999 and 1998, respectively. The             
weighted-average remaining contractual life for all options outstanding is 5.6  
years.                                                                          

    The following table summarizes the changes in the number of shares
under option:                                                                   

                                                        [Enlarge/Download Table]

                                                                               Total      Weighted  
                                                                               shares     average   
                                          EXERCISE PRICE RANGES                under    option price
                           $0.50 - $2.00     $2.01 - $5.00     $5.01- $10.00   option     per share 
                           -------------     -------------     -------------  -------   ------------
                                                                                                    
Outstanding at 12/31/97        226,027           123,000            12,000    361,027        1.39   
Granted                         20,000            13,000                 0     33,000        1.64   
Exercised                            0                 0                 0          0           0   
Forfeited                      (60,000)                0                 0    (60,000)       1.58   
                               -------           -------           -------    -------               
Outstanding at 12/31/98        186,027           136,000            12,000    334,027        1.38   
Granted                              0           272,000                 0    272,000        3.60   
Exercised                            0                 0                 0          0           0   
Forfeited                       (1,000)           (2,000)           (3,000)    (6,000)       5.35   
                               -------           -------           -------    -------               
Outstanding at 12/31/99        185,027           406,000             9,000    600,027        2.99   
Granted                              0           131,722                 0    131,722        2.87   
Exercised                       (5,000)                0                 0     (5,000)       1.75   
Forfeited                            0                 0            (2,000)    (2,000)       6.50   
                               -------           -------           -------    -------               
Outstanding at 12/31/00        180,027           537,722             7,000    724,749        2.95   
                               =======           =======           =======    =======               
Exercisable at 12/31/00        122,815           150,800             7,000    280,615               
                               =======           =======           =======    =======               

Plan shares available for                                                                           
future grants                                                                  15,278               
                                                                              =======               

        The Company also has 818,897 warrants outstanding at December 31, 2000
at an exercise price of $1.875. These warrants were issued in 1996 and 1999 with
an estimated fair value at time of issuance of $1,438,000 and expire in 2006.   

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     During 1999, the Company issued 100,000 shares of restricted common
stock to an officer of the Company. These shares had a fair value at the time of
issuance of $375,000 and vest on the seventh anniversary of the date of grant.  

13.      COMMITMENTS AND CONTINGENCIES                                          

       The Company is subject to legal proceedings and other claims that may
arise in the ordinary course of business. However, the company is not party to  
any material legal proceedings. The Company's commitments under lease agreements
for equipment are not significant.                                              

14.      QUARTERLY FINANCIAL INFORMATION (UNAUDITED)                            

                                                                [Download Table]

                                                      2000                         
                                              Three Months Ended                   
                                     (in thousands, except per share data)         
                             Mar 31         Jun 30             Sep 30        Dec 31
                            -------        -------            -------       -------
                                                                                   
Net Sales                   $13,897        $12,204            $12,224       $13,494
Gross Profit                  6,548          5,506              6,263         6,430
Net Income                      167            156                705           668
Basic earnings per share    $   .03        $   .03            $   .13       $   .12
Diluted earnings per share  $   .03        $   .03            $   .12       $   .11

                                                                [Download Table]

                                                     1999                          
                                              Three Months Ended                   
                                     (in thousands, except per share data)         
                             Mar 31         Jun 30             Sep 30        Dec 31
                            -------        -------            -------       -------
                                                                                   
Net Sales                   $11,045        $10,513            $11,547       $12,221
Gross Profit                  5,683          5,776              5,613         5,986
Net Income                      147            119                570           591
Basic earnings per share    $   .03        $   .02            $   .10       $   .11
Diluted earnings per share  $   .02        $   .02            $   .09       $   .10

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2.       FINANCIAL STATEMENT SCHEDULE                                           

The following consolidated financial statement schedules of the Company are set 
forth herewith:                                                                 

INTEGRITY INCORPORATED
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
 (DOLLAR AMOUNTS IN THOUSANDS)

                                                                [Download Table]

                                            Additions                              
                                           Charged to                              
                             Balance at     costs and                   Balance at 
        Description        Beg. Of Period   expenses   Deductions(1)  end of Period
        -----------        --------------  ----------  -------------  -------------
                                                                                   
1998                                                                               
Allowance for returns and                                                          
doubtful accounts                  812        4,852      (4,968)            696    

1999                                                                               
Allowance for returns and                                                          
doubtful accounts                  696        5,108      (4,696)          1,108    

2000                                                                               
Allowance for returns and                                                          
doubtful accounts                1,108        4,826      (4,693)          1,241    

(1)      Represents write-offs during the respective period for product returns 
and uncollectible accounts.                                   

                                                        [Enlarge/Download Table]

                                           Charged to                                
                             Balance at     costs and                    Balance at  
        Description        Beg. Of Period   expenses   Adjustments(2)   end of Period
        -----------        --------------  ----------  --------------  ------------- 
                                                                                     
1998                                                                                 
Valuation on deferred tax                                                            
assets                           1,285        (785)            0             500     

1999                                                                                 
Valuation of deferred tax                                                            
assets                             500        (180)         (320)              0     

2000                                                                                 
Valuation on deferred tax                                                            
assets                               0           0             0               0     

(2)      During 1999, the Company reduced its valuation allowance by $320,000   
related to the utilization of previously established foreign tax credits as     
deductions rather than tax credits. As a result, this portion of the prior year 
tax credits has been written off against the valuation allowance.               

       All other schedules have been omitted, as they are not required under
the related instructions, are inapplicable, or because the information required 
is included in the consolidated financial statements or notes thereto.          

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3.       EXHIBITS                                                               

   The exhibits indicated below are either incorporated by reference
herein or are bound separately and accompany the copies of this report filed    
with the Securities and Exchange Commission and the National Association of     
Securities Dealers, Inc. Copies of such exhibits will be furnished to any       
requesting stockholder of the Company upon payment of the costs of copying and  
transmitting the same.                                                          

 INDEX TO EXHIBITS

                                                                [Download Table]

Exhibit                      Exhibit Description                        
Number                                                                  
                                                                        
 3(i)     Certificate of Incorporation of the Registrant, as amended    
          (incorporated by reference from Exhibit 4(a) to the           
          Registrant's Registration Statement on Form S-8 (File No.     
          33-84584) filed on September 29, 1994).                       
 3(i).1   Certificate of Amendment to the Certificate of Incorporation  
          of the Registrant, dated July 21, 1995 (incorporated by       
          reference from Exhibit 3(I).1 to the Registrant's Quarterly   
          Report on Form 10-Q for the quarter ended September 30, 1995).
 3(ii)    Bylaws of the Registrant, as amended (incorporated by         
          reference from Exhibit 3(ii) to the Registrant's Registration 
          Statement on Form S-1 (File No. 33-78582), and amendments     
          thereto, originally filed on May 6, 1994).                    
 4.1      See Exhibits 3(i), 3(i).1 and 3(ii) for provisions of the     
          Certificate of Incorporation, as amended, and Bylaws, as      
          amended, of the Registrant defining rights of holders of Class
          A and Class B Common Stock of the Registrant.                 
 4.2      Form of Class A Common Stock certificate of the Registrant    
          (incorporated by reference from Exhibit 4.2 to the            
          Registrant's Registration Statement on Form S-1 (File No.     
          33-78582), and amendments thereto, originally filed on May 6, 
          1994).                                                        
 10.1     Agreement dated as of June 1, 1994, by and between Integrity  
          Music, Inc. and LCS Industries, Inc. (Portions of the         
          foregoing have been granted confidential treatment.)          
          (incorporated by reference from Exhibit 10.13 to the          
          Registrant's Registration Statement on Form S-2 (File No.     
          33-78582), and amendments thereto, originally filed on May 6, 
          1994).                                                        
 10.2     Form of Continuity Club Membership Agreement (incorporated by 
          reference from Exhibit 10.25 to the Registrant's Registration 
          Statement on Form S-1 (File No. 33-78582), and amendments     
          thereto, originally filed on May 6, 1994).                    
 10.3     Loan and Security Agreement, dated as of August 2, 1996, by   
          and among Integrity Incorporated and Creditanstalt Corporate  
          Finance, Inc., (incorporated by reference from Exhibit 10.1 to
          the Registrant's Quarterly Report on Form 10-Q for the quarter
          ended June 30, 1996).                                         
 10.4     Stock Pledge Agreement, dated as of August 2, 1996, by        
          Integrity Incorporated in favor of Creditanstalt Corporate    
          Finance, Inc., (incorporated by reference from Exhibit 10.2 to
          the Registrant's Quarterly Report on Form 10-Q for the quarter
          ended June 30, 1996).                                         
 10.5     Conditional Assignment and Trademark Security Agreement, dated
          August 2, 1996, between Integrity Incorporated and            
          Creditanstalt Corporate Finance, Inc. (incorporated by        
          reference from Exhibit 10.3 to the Registrant's Quarterly     
          Report on Form 10-Q for the quarter ended June 30, 1996).     
 10.6     Collateral Assignment and Agreement, dated as of August 2,    
          1996, by and between Integrity Incorporated and Creditanstalt 
          Corporate Finance, Inc., (incorporated by reference from      
          Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q
          for the quarter ended June 30, 1996).                         
 10.7     Copyright Security Agreement, dated as of August 2, 1996, made
          by Integrity Incorporated in favor of Creditanstalt Corporate 
          Finance, Inc., (incorporated by reference from Exhibit 10.5 to
          the Registrant's Quarterly Report on Form 10-Q for the quarter
          ended June 30, 1996).                                         

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                                                                [Download Table]
                                                                       
10.8     Warrant Agreement, dated August 2, 1996, made by Integrity    
         Incorporated in favor of Creditanstalt Corporate Finance,     
         Inc., (incorporated by reference from Exhibit 10.6 to the     
         Registrant's Quarterly Report on Form 10-Q for the quarter    
         ended June 30, 1996).                                         
10.9     Product Distribution Agreement by and between Integrity       
         Incorporated and Word, Inc., dated as of April 1, 1996. (The  
         foregoing is the subject of a request for confidential        
         treatment.) (incorporated by reference from Exhibit 10.7 to   
         the Registrant's Quarterly Report on Form 10-Q for the quarter
         ended June 30, 1996).                                         
10.10    First Amendment to Loan and Security Agreement, dated as of   
         February 14, 1997, by and among Integrity Incorporated and    
         Creditanstalt Corporate Finance, Inc. (incorporated by        
         reference from Exhibit 10.14 to the Registrant's Annual Report
         on Form 10-K for the year ended December 31, 1996).           
10.11    Second Amendment to Loan and Security Agreement, dated as of  
         March 31, 1999, by and among Integrity Incorporated and Bank  
         Austria Creditanstalt Corporate Finance, Inc. (incorporated by
         reference from Exhibit 10.1 to the Registrant's Quarterly     
         Report on Form 10-Q for the quarter ended March 31, 1999).    
10.12    Warrant Certificate, dated January 26, 2000, issued by        
         Integrity Incorporated to Creditanstalt Corporate Finance,    
         Inc. (incorporated by reference from Exhibit 10.12 to the     
         Registrant's Annual Report on Form 10-K for the year ended    
         December 31, 1999).                                           
10.13    Product Distribution Agreement by and between Integrity       
         Incorporated and Word, Inc., dated as of January 1, 2000 (The 
         foregoing is the subject of a request for confidential        
         treatment) (incorporated by reference from Exhibit 10.13 to   
         the Registrant's Annual Report on Form 10-K for the year ended
         December 31, 1999).                                           
10.14    Asset Purchase Agreement by and between Integrity Incorporated
         and Idea Entertainment, Inc. dated as of November 19, 1999.   
         (incorporated by reference from Exhibit 10.14 to the          
         Registrant's Annual Report on Form 10-K for the year ended    
         December 31, 1999).                                           
10.15    Amended and Restated Stock Pledge Agreement, dated as of      
         January 22, 1997, by Integrity Incorporated in favor of       
         Creditanstalt Corporate Finance, Inc. (incorporated by        
         reference from Exhibit 10.15 to the Registrant's Annual Report
         on Form 10-K for the year ended December 31, 1996).           
10.16    Waiver to Loan and Security Agreement dated February 28, 2001 
         by and between Integrity Incorporated and Bank Austria        
         Creditanstalt Corporate Finance.                              
10.17    Product Development and Co-Branding Agreement dated January   
         10, 2000 by and between Integrity Incorporated and Time Life, 
         Inc. (the foregoing is the subject of a request for           
         confidential treatment).                                      
         EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS                 
10.18    Integrity Music, Inc. Profit Sharing Plan (incorporated by    
         reference from Exhibit 10.42 to the Registrant's Registration 
         Statement on Form S-1 (File No. 33-78582), and amendments     
         thereto, originally filed on May 6, 1994).                    
10.19    1994 Management Incentive Plan (incorporated by reference from
         Exhibit 10.43 to the Registrant's Registration Statement on   
         Form S-1 (File No. 33-78582), and amendments thereto,         
         originally filed on May 6, 1994).                             
10.20    Integrity Music, Inc. Long-Term Incentive Plan (incorporated  
         by reference) from Exhibit 4(c) to the Registrant's           
         Registration Statement on Form S-8 (File No. 33-86126) filed  
         on November 7, 1994).                                         
10.21    Form of Stock Option Agreement under the Integrity Music, Inc.
         Long-Term Incentive Plan (incorporated by reference from      
         Exhibit 10.45 to the Registrant's Registration Statement on   
         Form S-1 (File No. 33-78582), and amendments thereto,         
         originally filed on May 6, 1994).                             

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                                                                [Download Table]
                                                                       
10.22    Integrity Music, Inc. 1994 Stock Option Plan for Outside      
         Directors (incorporated by reference from Exhibit 4(c) to the 
         Registrant's Registration Statement on Form S-8 (File No.     
         33-86128) filed on November 7, 1994).                         
10.23    Form of Indemnification Agreement (incorporated by reference  
         from Exhibit 10.47 to the Registrant's Registration Statement 
         on Form S-1 (File No. 33-78582), and amendments thereto,      
         originally filed on May 6, 1994).                             
10.24    Integrity Music, Inc. Employee Stock Purchase Plan            
         (incorporated by reference from Exhibit 4(c) to the           
         Registrant's Registration Statement on Form S-8 (File No.     
         33-84584) filed on September 29, 1994).                       
10.25    Integrity Music, Inc. 401(k) Employee Savings Plan            
         (incorporated by reference from Exhibit 10.50 to the          
         Registrant's Quarterly Report on Form 10-Q for the quarter    
         ended March 31, 1995).                                        
10.26    Amendment Number three to the Integrity Music, Inc. 401(k)    
         Employee Savings Plan, dated as of April 2, 1997 (incorporated
         by reference from Exhibit 10.29 to the Registrant's Quarterly 
         Report on Form 10-Q for the quarter ended March 31, 1997).    
10.27    Defined Contribution Master Plan and Trust Agreement relating 
         to Non-Standardized Profit Sharing Plan (incorporated by      
         reference from Exhibit 10.51 to the Registrant's Quarterly    
         Report on Form 10-Q for the quarter ended March 31, 1995).    
10.28    Form of Key Employee Change in Control Agreement (incorporated
         by reference from Exhibit 10.33 to the Registrant's Annual    
         Report on Form 10-K for the year ended December 31, 1995).    
10.29    Integrity Incorporated 1995 Cash Incentive Plan (incorporated 
         by reference from Exhibit 10.34 to the Registrant's Annual    
         Report on Form 10-K for the year ended December 31, 1995).    
10.30    Integrity Incorporated Severance Agreement (incorporated by   
         reference from Exhibit 10.35 to the Registrant's Annual Report
         on Form 10-K for the year ended December 31, 1995).           
10.31    Employment Agreement by and among Integrity Incorporated and  
         Jerry Weimer dated as of March 28, 1996 (incorporated by      
         reference from Exhibit 10.28 to the Registrant's Annual Report
         on Form 10-K for the year ended December 31, 1996).           
10.32    Employment Agreement by and among Integrity Incorporated and  
         Don Moen dated as of October 1, 1998 (incorporated by         
         reference from Exhibit 10.27 to the Registrant's Annual Report
         on Form 10-K for the year ended December 31, 1998).           
10.33    Employment Agreement by and among Integrity Incorporated and  
         Daniel McGuffey dated as of January 1, 1998 (incorporated by  
         reference from Exhibit 10.28 to the Registrant's Annual Report
         on Form 10-K for the year ended December 31, 1998).           
10.34    Amendment to the Integrity Music, Inc. 1994 Employee Stock    
         Purchase Plan as approved on August 6, 1999 (incorporated by  
         reference from Exhibit 10.0 to the Registrant's Quarterly     
         Report on Form 10-Q for the quarter ended September 30, 1999).
10.35    Integrity Incorporated 1999 Long-Term Incentive Plan, as      
         approved by the Stockholders of the Corporation on May 7, 1999
         (incorporated by reference from Exhibit 10.1 to the           
         Registrant's Quarterly Report on Form 10-Q for the quarter    
         ended June 30, 1999).                                         
10.36    Employment Agreement by and among Integrity Incorporated and  
         Donald Moen effective as of October 1, 2001.                  
11       Statement of Computation of Per Share Earnings                
21       Subsidiaries of the Registrant                                
23       Consent of Independent Accountant                             

(b)      Reports on Form 8-K                                                    

The Registrant filed no reports on Form 8-K during the last quarter of the      
fiscal year ended December 31, 2000.                                            

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SIGNATURES

       Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 23, 2001.     

                    INTEGRITY INCORPORATED

                                 By:          /s/ P. Michael Coleman
                                    --------------------------------
                P. Michael Coleman
                     Chairman, President and
                     Chief Executive Officer

       Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant in the capacities indicated on March 23, 2001.      

                                                        [Enlarge/Download Table]

                       Signature                                              Title                           
                                                                                                              
                 /s/ P. Michael Coleman                                                                       
---------------------------------------------------------                                                     
                   P. Michael Coleman                      Chairman, President and Chief Executive Officer    
                                                           (Principal Executive Officer)                      

                /s/ Donald S. Ellington                                                                       
---------------------------------------------------------                                                     
                  Donald S. Ellington                      Senior Vice President of Finance and Administration
                                                           (Principal Financial and Accounting Officer)       

                  /s/ Jean C. Coleman                                                                         
---------------------------------------------------------                                                     
                    Jean C. Coleman                        Director                                           

                 /s/ Jimmy M. Woodward                                                                        
---------------------------------------------------------                                                     
                   Jimmy M. Woodward                       Director                                           

                 /s/ Charles V. Simpson                                                                       
---------------------------------------------------------                                                     
                   Charles V. Simpson                      Director                                           

                 /s/ Heeth Varnedoe III                                                                       
---------------------------------------------------------                                                     
                   Heeth Varnedoe III                      Director                                           

39

Dates Referenced Herein   and   Documents Incorporated By Reference

				Referenced-On Page
This 10-K405 Filing		Date		First		Last			Other Filings
		10/1/93		2
		5/6/94		37		39
		6/1/94		37
		9/29/94		37		39
		11/7/94		38		39
		3/31/95		39
		7/21/95		37
		9/30/95		37
		12/28/95		33
		12/31/95		39
		3/28/96		39
		4/1/96		38
		6/30/96		37		38			10-Q
		8/2/96		37		38
		12/31/96		8		39			10-K
		1/22/97		38
		2/14/97		38					SC 13G/A
		3/31/97		39					10-Q
		4/2/97		39
		12/31/97		8		9			10-K
		1/1/98		28		39
		8/6/98		29
		10/1/98		39
		10/2/98		7
		12/31/98		8		39			10-K405
		1/1/99		7
		3/31/99		38					10-Q
		5/7/99		39					DEF 14A
		6/30/99		39					10-Q
		8/6/99		39
		9/30/99		39					10-Q
		11/19/99		38
		12/15/99		14
		12/31/99		8		38			10-K405
		1/1/00		38
		1/10/00		38
		1/26/00		38
		6/15/00		14
		9/1/00		13		29
For The Period Ended		12/31/00		1		39
		1/1/01		14
		2/28/01		20		38
		3/15/01		14
		3/23/01		1		40
Filed On / Filed As Of		3/29/01
		5/17/01		2					DEF 14A
		10/1/01		39					8-K
		12/31/01		13					10-K
		8/6/02		29
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