UNITED STATES				SECURITIES AND EXCHANGECOMMISSION				Washington, DC 20549 

Form 10-K  

[X]      ANNUAL REPORT UNDER SECTION 13OR 15(d) OF THE SECURITIES				EXCHANGE ACT OF1934 

For the fiscalyear ended December 31, 2007 

Commission filenumber:  000-25958 
| INTEGRITY MUTUAL FUNDS,INC.                           |
|-------------------------------------------------------|
| (Exact name ofregistrant as specified in its charter) |
| North Dakota                                                  | 45-0404061                       |
|---------------------------------------------------------------|----------------------------------|
| (State or otherjurisdiction of incorporation or organization) | (IRS EmployerIdentification No.) |
| 1 Main Street North                     |
|-----------------------------------------|
| Minot, North Dakota58703                |
| (Address of principalexecutive offices) |
| Registrant'stelephone number, including area code:         | (701)852-5292                 |
|------------------------------------------------------------|-------------------------------|
|                                                       |                          |
| Securitiesregistered pursuant to Section 12(b) of the Act: | None                          |
|                                                       |                          |
| Securitiesregistered pursuant to Section 12(g) of the Act: | Common Stock;$.0001 par value |

Indicate by check mark if the registrant isa well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.    [  ] Yes   [X]No 

Indicate by check mark if the registrant isnot required to file reports pursuant to Section 13 or Section15(d) of the Act.   [  ] Yes   [X]No 

Indicate by check mark whether theregistrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90days.   [X] Yes   [  ] No 

Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best ofregistrant's knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form10-K or any amendment to this Form 10-K.  [X] 

Indicate by check mark whether theregistrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.  Seedefinition of "large accelerated filer," "accelerated filer," and"smaller reporting company" in Rule 12b-2 of the ExchangeAct.  (Check one): 

Large accelerated filer [ ]             Accelerated filer [ ]               Non-accelerated filer [ ]              Smaller Reporting Company [X] 

Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of theAct).   [  ] Yes   [X] No 

Aggregate market value of voting andnon-voting common equity held by non-affiliates of the registrantas of February 29, 2008: $5,990,124. 

On February 29, 2008, there were 14,455,943shares of the issuer's common equity outstanding. 

DOCUMENTS INCORPORATED BY REFERENCE: 

Portions of the Company's definitive ProxyStatement for the Annual Meeting of Shareholders to be held onMay 30, 2008, are incorporated by reference in certain sectionsof Part III.

10-K 

INTEGRITY MUTUAL FUNDS,INC. 

INDEX 
|        |                                                                                                       | Page # |
|-------------|------------------------------------------------------------------------------------------------------------|--------|
| PART I      |                                                                                                       |   |
|        |                                                                                                       |   |
| Item 1.     | Business                                                                                                   | 4      |
| Item 1A.    | Risk Factors                                                                                               | 9      |
| Item 1B.    | Unresolved Staff Comments                                                                                  | 9      |
| Item 2.     | Properties                                                                                                 | 9      |
| Item 3.     | Legal Proceedings                                                                                          | 9      |
| Item 4.     | Submission of Matters to a Vote of SecurityHolders                                                         | 9      |
|        |                                                                                                       |   |
| PART II     |                                                                                                       |   |
|        |                                                                                                       |   |
| Item 5.     | Market for Registrant's Common Equity,Related Stockholder Matters and Issuer Purchases of EquitySecurities | 9      |
| Item 6.     | Selected Financial Data                                                                                    | 10     |
| Item 7.     | Management's Discussion and Analysis ofFinancial Condition and Results of Operations                       | 10     |
| Item 7A.    | Quantitative and Qualitative DisclosuresAbout Market Risk                                                  | 17     |
| Item 8.     | Financial Statements and SupplementaryData                                                                 | 17     |
| Item 9.     | Changes In and Disagreements withAccountants on Accounting and Financial Disclosure                        | 17     |
| Item 9A(T). | Controls and Procedures                                                                                    | 17     |
| Item 9B.    | Other Information                                                                                          | 20     |
|        |                                                                                                       |   |
| PART III    |                                                                                                       |   |
|        |                                                                                                       |   |
| Item 10.    | Directors, Executive Officers and CorporateGovernance                                                      | 20     |
| Item 11.    | Executive Compensation                                                                                     | 20     |
| Item 12.    | Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters              | 20     |
| Item 13.    | Certain Relationships and RelatedTransactions, and Director Independence                                   | 20     |
| Item 14.    | Principal Accounting Fees and Services                                                                     | 20     |
|        |                                                                                                       |   |
| PART IV     |                                                                                                       |   |
|        |                                                                                                       |   |
| Item 15.    | Exhibits, Financial Statement Schedules                                                                    | 20     |
|        |                                                                                                       |   |
|        | SIGNATURES                                                                                                 | 26     |
|        |                                                                                                       |   |

Special NoteRegarding Forward Looking Statements 

Certain information included or incorporatedby reference in this Annual Report on Form 10-K and othermaterials filed or to be filed by Integrity Mutual Funds, Inc.("Integrity" or the "Company") with the Securities and ExchangeCommission ("SEC") contain statements that are not based onhistorical fact and may be considered forward-looking within themeaning of the Private Securities Litigation Reform Act of1995.  In some cases, you can identify these statements byforward-looking words such as "may," "might," "will," "should,""expect," "plan," "anticipate," "believe," "estimate," "predict,""potential," or "continue," and the negative of these terms andother comparable terminology.  These forward-lookingstatements, which are subject to known and unknown risks,uncertainties and assumptions about the Company, may includeprojections of the Company's future financial performance basedon the Company's growth strategies and anticipated trends in theCompany's business.  These statements are only predictionsbased on the Company's current expectations and projections aboutfuture events.  There are important factors that could causethe Company's actual results, level of activity, performance orachievements to differ materially from the results, level ofactivity, performance or achievements expressed or implied by theforward-looking statements. 

Sections of this Annual Report on Form 10-Kmay include additional factors that could adversely impact theCompany's business and financial performance.  Moreover, theCompany operates in a very competitive and rapidly changingenvironment.  New risks and uncertainties emerge from timeto time, and it is not possible for the Company's management topredict all risks and uncertainties, nor can the Company assessthe impact of all factors on the Company's business or the extentto which any factor, or combination of factors, may cause actualresults to differ materially from those contained in anyforward-looking statements. 

Although the Company believes theexpectations reflected in the forward-looking statements arereasonable, the Company cannot guarantee future results, level ofactivity, performance or achievements.  Moreover, neitherthe Company nor any other person assumes responsibility for theaccuracy or completeness of any of these forward-lookingstatements.  You should not unduly rely upon forward-lookingstatements as predictions of future events.  Except to theextent required by federal securities laws, the Company is underno duty to update any of these forward-looking statements afterthe date of this Annual Report on Forma 10-K, nor to conform tothe Company's prior statements to actual results or revisedexpectations, and the Company does not intend to do so. 

Forward-looking statements include, but arenot limited to, statements about the Company's: 

·         Business strategies and investment policies,

·         Possible or assumed future results of operations and operatingcash flows,

·         Financing plans and the availability of short-term borrowing,

·         Competitive position,

·         Potential growth opportunities,

·         Recruitment and retention of the Company's key employees,

·         Potential operating performance, achievements, productivityimprovements, efficiency and cost reduction efforts,

·         Likelihood of success and impact of litigation,

·         Expected tax rates,

·         Expectations with respect to the economy, securities markets, themarket for merger and acquisition activity, the market for assetmanagement activity, and other industry trends,

·         Competition, and

·         Effect from the impact of future legislation and regulation onthe Company. 

The following factors, among others, couldcause actual results to differ materially from forward-lookingstatements, and future results could differ materially fromhistorical performance: 

·         General political and economic conditions which may be lessfavorable than expected;

·         The effect of changes in interest rates, inflation rates, thestock markets, or other financial markets;

·         Unfavorable legislative, regulatory, or judicialdevelopments;

·         Incidence and severity of catastrophes, both natural andman-made;

·         Changes in accounting rules, policies, practices, and procedureswhich may adversely affect the business;

·         Terrorist activities or other hostilities which may adverselyaffect the general economy.

PART I 

Item 1. Business 

OVERVIEW 

Integrity Mutual Funds, Inc. ("theCompany"), is a holding company engaged, through varioussubsidiaries, in providing investment management, distribution,shareholder services, fund accounting, and other relatedadministrative services to the open-end investment companiesknown as "Integrity Mutual Funds," "Integrity ManagedPortfolios," and "The Integrity Funds," hereinafter collectivelyreferred to as "the Funds."  Integrity Mutual Fundscurrently consists of three open-end investment companiesincluding ND Tax-Free Fund, Inc. ("ND Tax-Free Fund"), MontanaTax-Free Fund, Inc. ("Montana Tax-Free Fund"), and Integrity Fundof Funds, Inc. ("Integrity Fund of Funds").  IntegrityManaged Portfolios consists of one open-end investment companycontaining six separate portfolios including the Kansas MunicipalFund, Kansas Insured Intermediate Fund, Nebraska Municipal Fund,Oklahoma Municipal Fund, Maine Municipal Fund, and New HampshireMunicipal Fund. The Integrity Funds currently consists of oneopen-end investment company containing six separate portfoliosincluding the Integrity Small Cap Growth Fund, Integrity HealthSciences Fund, Integrity Technology Fund, Integrity High IncomeFund, Integrity Growth & Income Fund, and Integrity TotalReturn Income Fund.  The Company also sells mutual funds,insurance products, and various other securities through anotherwholly owned subsidiary, Capital Financial Services, Inc.("CFS"). 

As of December 31, 2007, total assets undermanagement in the Funds were $395,664,082, compared to$442,008,564 as of December 31, 2006 and $381,914,392 as ofDecember 31, 2005. 

The Company has been engaged in thefinancial services business since 1987. The Company wasincorporated September 22, 1987, as a North Dakota corporation byRobert E. Walstad, founder and Chairman Emeritus of theCompany.  The Company's principal offices are located at 1Main Street North, Minot, North Dakota 58703.  As ofDecember 31, 2007, the Company had 54 full-time employees and 2part-time employees, consisting of officers, investmentmanagement, securities distribution, shareholder services, dataprocessing, compliance, accounting, and clerical supportstaff. 

BUSINESSDEVELOPMENT 

On April 22, 2005, the Company acquired themanagement rights to the IPS Millennium Fund and the IPS NewFrontier Fund from IPS Advisory, Inc. ("IPS Advisory"), andmerged them into a new Integrity Fund called the Integrity Growth& Income Fund.  The two funds had combined assets ofapproximately $57 million at the time of acquisition.  Thepurchase agreement called for total consideration ofapproximately 656,000 common shares of the Company.  TheCompany provided IPS Advisory with 250,000 common shares uponclosing.  The remaining consideration of approximately406,000 common shares, which is subject to adjustment based onretention of assets in the fund, is to be issued asfollows:  203,000 common shares at the one-year anniversaryof the closing date, and 203,000 common shares at the two-yearanniversary of the closing date.  The shares are subject toa put option, which will allow the holders of the shares to putthem back to the Company at a price equal to the market price ofthe Company's shares as of the closing date, which was $.36 pershare.  The put option is exercisable with respect toone-third of the shares per year starting on the thirdanniversary of the closing date.  The Company will alsoprovide IPS Advisory with a stock option incentive bonus based ongrowth in assets in the Fund based on the followingschedule:  150,000 options on the Company's common shareswhen assets of the Fund reach $100 million and 150,000 options onthe Company's common shares when the assets of the Fund reach$200 million.  The options will have a strike price of $.65per share and mature 10 years from the closing date.  Thesecurities issued in connection with this transaction will beissued on a private placement basis. In April of 2006, theone-year anniversary payment of 158,603 common shares was made,which reflected the assets of the acquired funds at the one-yearanniversary.  In April of 2007, the two-year anniversarypayment of 138,797 common shares was made, which reflected theassets of the acquired funds at the two-year anniversary. As of December of 2007, the liability relating to thisacquisition was valued at approximately $197,000. 

On March 7, 2007, the Company acquiredcertain assets of United Heritage Financial Services, Inc.(UHFS), a wholly-owned subsidiary of United Heritage FinancialGroup, Inc., of Meridian, Idaho.  UHFS had approximately 120independent registered representatives who became part of CapitalFinancial Services, Inc. (CFS), the retail brokerage division ofthe Company.  Pursuant to the agreement, in exchange forreceipt of the assets of UHFS set forth above, the Company agreedto issue 500,000 restricted IMFD shares and pay a deferred earnout cash payment totaling a maximum of $900,000, to be paid in 21quarterly installments.  On March 7, 2007, the Companyissued 500,000 restricted common shares to United HeritageFinancial Group, Inc.  As a result of this issuance ofshares, $175,000 was recorded by the Company as goodwill relatingto the purchase of the assets.  As of December 31, 2007, theCompany had made three quarterly installment payments totaling$60,548.  The liability relating to this acquisition isvalued at $786,813 as of December 31, 2007, and has also beenrecorded by the Company as goodwill.  As of December 31,2007, the total goodwill recorded relating to this acquisitionwas $1,121,189. 

THE COMPANY'SSUBSIDIARIES 

The Company derives most of its income fromtwo lines of business.  The first line of business providesinvestment management, distribution, shareholder services, fundaccounting, and other related administrative services to theFunds. The other provides order processing, regulatory oversight,concession processing, and other related services to registeredsecurities representatives transacting securities business fortheir clients. As a result, the Company is economically dependenton the Funds, the representatives, and others, for substantiallyall of its revenue and income. These businesses are conductedthrough the wholly owned subsidiary companies described below.Revenues generated by the subsidiaries' fund services are derivedprimarily from fees based on the level of assets undermanagement. Revenues generated by the broker-dealer's support ofsecurities sales are derived primarily through a sharing of salesconcessions paid by the products being sold to clients. 

Integrity MoneyManagement, Inc. 

Integrity Money Management, Inc. ("IntegrityMoney Management") is registered as an investment advisor withthe SEC under the Investment Advisers Act of 1940 (the "AdvisersAct").  Integrity Money Management provides investmentadvisory services under investment advisory agreements with theFunds.  As of December 31, 2007, Integrity Money Managementmanaged $395,664,082 of assets under management. 

Integrity FundsDistributor, Inc. 

Integrity Funds Distributor, Inc.("Integrity Funds Distributor") is registered with the SEC as abroker-dealer and is also a member of the Financial IndustryRegulatory Authority ("FINRA"). Integrity Funds Distributorserves as principal underwriter and distributor for theFunds.  Integrity Funds Distributor earns the underwriter'sportion of front-end sales loads ("FESLs") in connection withsales of shares of Funds subject to FESLs, Rule 12b-1 feespursuant to Rule 12b-1 plans adopted by certain of the Funds, andcontingent deferred sales charges ("CDSCs") in connection withredemptions of shares of Funds subject to CDSCs. 

Integrity Fund Services,Inc. 

Integrity Fund Services, Inc. ("IntegrityFund Services") is registered with the SEC as a transfer agentunder the Securities Exchange Act of 1934 (the "ExchangeAct").  Integrity Fund Services provides shareholderrecord-keeping services and acts as transfer agent anddividend-paying agent for the Funds.  Integrity FundServices also provides business management services, includingfund accounting, compliance, and other related administrativeactivities for the Funds.  Integrity Fund Services iscompensated for providing these services under agreements witheach Fund, and is reimbursed for certain out-of-pocketexpenses. 

Capital FinancialServices, Inc. 

Capital Financial Services, Inc. ("CFS") isa full-service brokerage firm.  CFS is registered with theSEC as an investment advisor and broker-dealer and also withFINRA as a broker-dealer.  CFS specializes in providinginvestment products and services to independent investmentrepresentatives, financial planners, and investment advisors andcurrently supports over 425 investment representatives andinvestment advisors.

 

DESCRIPTION OFBUSINESS 

Investment AdvisoryServices 

Integrity Money Management acts asinvestment advisor to the Funds pursuant to investment advisoryagreements with such Funds.  Integrity Money Managementsupervises and implements the Funds' investment activities,including determining which securities to buy and sell, and whichbroker-dealers to effect Fund securities transactionsthrough. 

Generally, each Fund pays Integrity MoneyManagement an investment advisory fee, payable monthly and basedon the Funds' net assets.  Investment advisory fees aregenerally either voluntarily or contractually waived or reduced,and the investment advisor may absorb other Fund expenses for aperiod of time to ensure that the Funds have competitive feestructures. 

The investment advisory agreements pursuantto which Integrity Money Management provides investment advisoryservices continue in effect for successive annual periods as longas such continuance is approved annually by (a) either (i) therelevant Fund's Board of Directors or Trustees, or (ii) a vote ofthe holders of a majority of the relevant Fund's outstandingvoting securities, and (b) a majority of the relevant Funds'directors or trustees who are not parties to the investmentadvisory agreement or interested persons of a party to suchagreement within the meaning of the Investment Company Act of1940. 

Either party may terminate the investmentadvisory agreement without penalty after specified writtennotice.  Each investment advisory agreement alsoautomatically terminates in the event of its "assignment," asdefined in the Investment Company Act of 1940.  To date, nosuch investment advisory agreements have been terminated. 

Transfer Agency, FundAccounting, and Administrative Services 

Transfer agency, fund accounting, and othershareholder administrative services are provided to the Funds byIntegrity Fund Services.  Integrity Fund Services receivesfees from the Funds for providing such services pursuant tocontracts with the Funds.  The contracts generally providefor Integrity Fund Services to be paid its servicing fees basedon the net assets of each Fund, subject to certain minimum feesper Fund.  The Funds' board of directors or trusteesapproves the contracts between the Funds and Integrity FundServices annually. 

Distribution of FundShares 

Pursuant to distribution agreements,Integrity Funds Distributor acts as the principal underwriter anddistributor of shares of the Funds.  The distributionagreements generally provide that Integrity Funds Distributorshall distribute Fund shares and pay the expenses thereof. Fund shares are sold primarily by broker-dealers with whomIntegrity Funds Distributor has entered into dealer salesagreements. 

Integrity Funds Distributor earns theunderwriter's portion of FESLs received in connection with salesof Fund shares subject to FESLs effected by other broker-dealers,and also earns CDSCs in connection with redemptions of Fundshares subject to CDSCs. 

Each of the Funds (other than Kansas InsuredIntermediate Fund and Integrity Fund of Funds) has adopted a Rule12b-1 plan pursuant to which Integrity Funds Distributor earnsRule 12b-1 fees in connection with its distribution of Fundshares.  Integrity Funds Distributor pays otherbroker-dealers a portion of these fees and retains thebalance. 

The 12b-1 Plans are established for aninitial term of one year.  Thereafter, the Board ofDirectors or Trustees, including a majority of the disinteresteddirectors or trustees of each Fund, must approve themannually.  Each Plan is subject to termination at any timeby a majority of the Funds' disinterested directors or trusteesor by the Funds' shareholders. 

Brokerage Commissions 

CFS's primary source of revenue iscommission revenue in connection with sales of shares of mutualfunds, insurance products, and various other securities. CFS receives commission and Rule 12b-1 servicing revenuegenerated from the sale of investment products originated by itsregistered representatives. CFS also receives investment advisoryrevenue in connection with its registered investment advisor. CFSpays a portion of the revenue generated to its registeredrepresentatives and retains the balance. 

REGULATION 

Virtually all aspects of the Company'sbusinesses are subject to various complex and extensive federaland state laws and regulations.  Regulated areas include,but are not limited to, the effecting of securities transactions,the financial condition of the Company's subsidiaries,record-keeping and reporting procedures, relationships withclients, and experience and training requirements for certainemployees.  Certain of the Company's subsidiaries areregistered with various federal and state government agencies,including the SEC, as well as FINRA, a self-regulatory industryorganization, as described below. 

Integrity Funds Distributor and CFS areregistered broker-dealers, subject to extensive regulation andperiodic examinations by the SEC, FINRA, and state agencies inthose states in which Integrity Funds Distributor and CFS conductbusiness.  As broker-dealers, Integrity Funds Distributorand CFS are subject to the Net Capital Rule promulgated by theSEC under the Exchange Act.  This rule requires that abroker-dealer must maintain certain minimum net capital and thatits aggregate indebtedness may not exceed specifiedlimitations.  Integrity Money Management is registered withthe SEC as an investment advisor under the Advisers Act and issubject to regulation thereunder, and is also subject toregulation under certain state laws.  The Funds are subjectto extensive regulation under the Investment Company Act of 1940(the "Investment Company Act") and, along with Integrity MoneyManagement, are subject to periodic examinations by the SEC. 

Federal and state laws and regulations, andthe rules of FINRA, grant broad powers to such regulatoryagencies and organizations.  These include the power tolimit, restrict, or prevent the Company from carrying on itsbusiness if it fails to comply with such laws, regulations andrules.  Other possible sanctions that may be imposed includethe suspension of individual employees, restrictions on theCompany expanding its business or paying cash dividends, therevocation of the investment advisor, broker dealer, or transferagent registrations, expulsions, censures, and/or fines. 

To the extent that existing or futureregulations affecting the sale of Fund shares or their investmentstrategies cause or contribute to reduced sales of Fund shares,or impair the investment performance of the Funds, the Company'saggregate assets under management and its revenues might beadversely affected. 

Since 1993, FINRA rules have limited theamount of aggregate sales charges which may be paid in connectionwith the purchase and holding of investment company shares soldthrough broker-dealers.  Congress and the SEC presently areconsidering amendments to Rule 12b-1 and other statutoryprovisions and rules that regulate the distribution of mutualfund shares.  The effect of the rule amendments and otherlegislative or regulatory actions might be to limit the amount offees that could be paid pursuant to a fund's 12b-1 Plan in asituation where a fund has no, or limited, new sales for aprolonged period of time, as well as the imposition of otherlimits on the use of fund assets to pay for distribution. 

The officers, directors, and employees ofthe Company may, from time to time, own securities that are alsoowned by one or more of the Funds.  The Company's internalpolicies with respect to individual investments by employees,including officers and directors who are employed by the Company,require prior clearance and reporting of some transactions andrestrict certain transactions so as to reduce the possibility ofconflicts of interest. 

COMPETITION 

The Company derives substantially all of itsrevenues from two sources; fees relating to the management of,and provision of services to, the Funds, and commission revenueearned in connection with sales of shares of mutual funds,insurance products, and various other securities.  The feesearned by the Company are generally calculated as a percentage ofassets under management/service.  If the Company's assetsunder management/service decline, or do not grow in accordancewith the Company's plans, fee revenues and earnings would bematerially adversely affected.  Assets undermanagement/service may decline because redemptions of Fund sharesexceed sales of Fund shares, or because of a decline in themarket value of securities held by the Funds, or a combination ofboth. 

In seeking to sell Fund shares and marketits other services, the Company operates in a highly competitivefinancial services industry.  Industry sources indicate thatthere are approximately 8,700 open-end investment companies ofvarying sizes, investment objectives and policies, which offertheir shares to the investing public in the United States. Since its inception, the Company has competed with numerouslarger, more established mutual fund managementorganizations.  The Company sells Fund shares principallythrough third party broker-dealers.  The Company competesfor the services of such third party broker-dealers with othersponsors of mutual funds who generally have substantially greaterresources than the Company.  Banks in particular haveincreased, and continue to increase, their sponsorship ofproprietary mutual funds distributed through third partydistributors.  Many broker-dealer firms also sponsor theirown proprietary mutual funds, which may limit the Company'sability to secure the distribution services of such broker-dealerfirms.  In seeking to sell Fund shares, the Company alsocompetes with increasing numbers of mutual funds that sell theirshares without the imposition of sales loads.  No-loadmutual funds are attractive to investors because they do not haveto pay sales charges on the purchase or redemption of such mutualfunds' shares.  This competition may place pressure on theCompany to reduce the FESLs and CDSCs charged upon the sale orredemption of Fund shares.  However, reduced sales loadswould make the sale of Fund shares less attractive to thebroker-dealers upon whom the Company depends for the distributionof Fund shares. In the alternative, the Company might itself berequired to pay additional fees, expenses, commissions, orcharges in connection with the distribution of Fund shares whichcould have a materially adverse effect on the Company'searnings. 

The fact that the investments of some Fundsare geographically concentrated within a single state makes themarket value of such investments particularly vulnerable toeconomic conditions within that state.  In addition, thestates in which the investments of such Funds, as a group, areconcentrated are themselves concentrated in certain regions ofthe United States.  The Company's fee revenues may,therefore, be adversely affected by economic conditions withinsuch regions. 

The Company also participates in two otherhighly competitive related sectors of the financial servicesindustry; retail brokerage and investment advisoryservices.  The Company competes directly with full-servicestock brokerage firms, insurance companies, banks, regionalbroker-dealers, other independent broker-dealers, and otherfinancial institutions, as well as investment advisoryfirms.  Each of these competitors offers to the public manyof the same investment products and services offered by theCompany.  Further, other broker-dealers providing the sameservices heavily recruit the representatives and advisorstransacting business through the Company. This competition forcesthe Company to maintain high levels of support services andcommission payouts for these representatives and advisors. Thesehigh levels of services and payouts could have a materiallyadverse effect on the Company's earnings. 

RECENTDEVELOPMENTS 

On February 29, 2008, Integrity MutualFunds, Inc., announced that Mark R. Anderson, Chief ExecutiveOfficer, President, and Director resigned from his positions withthe Company, effective February 29, 2008.  Concurrent withthe resignation, the Company announced that Bradley P. Wells,Senior Vice President of Retail Administration of the Company,would succeed Mr. Anderson as Interim Chief Executive Officer andPresident of the Company. 

In connection with Mr. Anderson'sresignation, the Company has entered into a Separation Agreementwith Mr. Anderson, dated February 29, 2008 (the "SeparationAgreement").  Under the terms of the Separation Agreement,subject to Mr. Anderson meeting his obligations thereunder in allmaterial respects, Mr. Anderson is entitled to receive a paymentin the amount of $59,000 (the "Separation Payment"), payable onMarch 14, 2008 (less required withholding deductions includingfederal and state taxes and FICA).  The Company will pay toMr. Anderson his vested balance in the Company's Employee StockOwnership Plan on March 14, 2008, or as soon thereafter aspracticable. 

AVAILABILITY OFSEC REPORTS 

All SEC reports may be viewed and copied atthe SEC's Public Reference Room at 100 F Street NE, Washington,DC 20549, on official business days during the hours of 10 a.m.to 3 p.m.  Information on the operation of the PublicReference Room may be obtained by calling the Commission at1-800-SEC-0330.  The Commission maintains an Internet site(http://www.sec.gov) that contains reports, proxy and informationstatements, and other information regarding issuers that fileelectronically with the Commission. 

All SEC reports are also made available onthe Company's website at http://corp.integrityfunds.com. These reports, including annual reports on Form 10-K and 10-KSB,quarterly reports of Form 10-Q and 10-QSB, and current reports onForm 8-K, are available on the same day they are filed with theSEC.  

Item 1A. Risk Factors 

Not Applicable as a Smaller ReportingCompany. 

Item 1B. Unresolved Staff Comments 

None 

Item 2. Properties 

The Company operates the majority of itsbusiness out of its location at 1 Main Street North, Minot, NorthDakota, which the Company owns.  As of December 31, 2007,the building has a $358,400 mortgage. 

Item 3. Legal Proceedings 

The Company has no pending legal proceedingsthat are material to the financial affairs of the Company. 

Item 4. Submission of Matters to a Vote of Security Holders 

No matters were submitted to a vote ofsecurity holders during the fourth quarter ended December 31,2007. 

PART II 

Item 5. Market for Registrant's Common Equity, Related StockholderMatters and Issuer Purchases of Equity Securities 

Information about theCompany's Common Stock 

The Company's Common Stock is traded on theOTC Bulletin Board under the symbol IMFD.  The Company'sstock began trading on the OTC Bulletin Board on November 7,1997.  On May 31, 2002, the shareholders of the Companyapproved a two for one (2:1) stock split of the issued andoutstanding common stock of the Company, which took effect onJuly 1, 2002.  On December 31, 2007, the closing price ofthe Company's Common Stock on the OTC Bulletin Board was $.69 pershare. At February 29, 2008, there were approximately 760shareholders of record. 

The following table sets forth the high andlow closing prices for the Company's common stock.  Thequotations reflect inter-dealer prices, without retail mark-up,mark-down, or commission, and may not represent actualtransactions. 
|           | 2007        | 2006        |
|----------------|-------------|-------------|
|           | Fiscal Year | Fiscal Year |
|           |        |        |   |   |
| Quarter        | High        | Low         | High | Low |
|           |        |        |   |   |
| First Quarter  | .850        | .600        | .400 | .310 |
| Second Quarter | 1.400       | .820        | .470 | .350 |
| Third Quarter  | 1.000       | .570        | .490 | .410 |
| Fourth Quarter | .870        | .590        | .600 | .460 |

The Company has not paid a dividend withrespect to its common stock, nor does the Company anticipatepaying dividends in the foreseeable future. 

The Company has issuedthe following securities in the past quarter without registeringthe securities under the Securities Act: 

None 

Smaller Reporting CompanyRepurchases of Equity Securities: 
| Period        | Total Number of SharesPurchased | Average Price PerShare | Total Number of SharesPurchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Valueof Shares that May Yet Be Purchased Under the Plans orPrograms |
|---------------|---------------------------------|------------------------|---------------------------------------------------------------------------------|----------------------------------------------------------------------------------------|
| October 2007  | -                               | -                      | -                                                                               | $597,754                                                                               |
| November 2007 | -                               | -                      | -                                                                               | $597,754                                                                               |
| December 2007 | -                               | -                      | -                                                                               | $597,754                                                                               |
| Total         | -                               | -                      | -                                                                               | $597,754                                                                               |

Item 6. Selected Financial Data 

Not Applicable as a Smaller ReportingCompany. 

Item 7. Management's Discussion and Analysis of Financial Condition andResults of Operations 

The following information is provided inconnection with, and should be read in conjunction with, theconsolidated financial statements and notes included in thisAnnual Report on Form 10-K. 

GENERAL 

Integrity Mutual Funds, Inc., is a holdingcompany which operates its current business units in tworeportable segments, 1) as an investment advisor, distributor,and provider of administrative services to sponsored mutualfunds, and 2) as a broker-dealer. 

Integrity Mutual Funds, Inc., derives aportion of its revenues and net income from providing investmentmanagement, distribution, shareholder services, fund accounting,and related services to the Funds.  CFS provides anothersubstantial portion of revenue through sales of mutual funds,insurance products, and various other securities.  Themajority of the Company's assets under management consist ofsingle-state municipal bond funds for the states of North Dakota,Montana, Kansas, Nebraska, Oklahoma, Maine, and NewHampshire. 

ASSETS UNDERMANAGEMENT

By Investment Objective 
| As of December31,                    | 2007                    | 2006                                | 2005                                |
|--------------------------------------|-------------------------|-------------------------------------|-------------------------------------|
|                                 |                    |                                |                                |
|                                 |                    |                                |                                |
| FIXED-INCOME                         |                    |                                |                                |
| Tax-Free Funds                       | $ 196,493,687           | $ 207,235,701                       | $ 213,405,941                       |
| Taxable Funds (Corporate/Government) | 138,559,709             | 143,385,144                         | 62,121,269                          |
| TOTAL FIXED-INCOME FUNDS             | $ 335,053,396           | $ 350,620,845                       |  $ 275,527,210                 |
|                                 |                    |                                |                                |
|                                 |                    |                                |                                |
| EQUITY                               |                    |                                |                                |
| Fund of Funds                        | $  13,483,262 | $     9,889,657 | $     6,029,000 |
| Equity Funds                         | 47,127,424              | 81,498,062                          | 100,358,182                         |
| TOTAL EQUITY FUNDS                   | $  60,610,686 | $  91,387,719             | $ 106,387,182                       |
|                                 |                    |                                |                                |
| TOTAL ASSETS UNDER MANAGEMENT        | $ 395,664,082           | $ 442,008,564                       | $ 381,914,392                       |

A substantial portion of the Company'srevenues depends upon the amount of assets under itsmanagement.  Assets under management can be affected by theaddition of new funds to the group, the acquisition of anotherinvestment management company, purchases and redemptions ofmutual fund shares, and investment performance, which may dependon general market conditions.  Assets under the Company'smanagement decreased by $46,344,482 (10.5%) in 2007 compared to2006 and increased by $60,094,172 (15.7%) in 2006 compared to2005.  Fixed income assets decreased by 4.4% in 2007compared to 2006, and increased by 27.3% in 2006 compared to2005.  Fixed income assets accounted for 84.7% of the totalassets under management in 2007 and 79.3% in 2006.  Equityassets decreased by 33.7% in 2007 compared to 2006, and decreased14.1% in 2006 compared to 2005. Equity assets accounted for 15.3%of total assets under management in 2007 and 20.7% in 2006. 

RESULTS OFOPERATIONS 

The following table sets forth, for theperiods indicated, amounts included in the Company's ConsolidatedStatements of Operations and the percentage change in thoseamounts from period to period. 
|                                              |                               |      |       |     |       |      | Variance 2007 to 2006 | Variance 2006 to 2005 |
|---------------------------------------------------|------------------------------------|-----------|------------|----------|------------|-----------|-----------------------|-----------------------|
|                                              |                               |      |       |     |       |      |
|                                              |                               | 2007      |       | 2006     |       | 2005      |
|                                              |                               |      |       |     |       |      |                  |                  |
| OPERATINGREVENUES                                 |                               |      |       |     |       |      |                  |                  |
|                                              | Fee income                         | $         | 8,171,653  | $        | 6,732,222  | $         | 4,788,853             | 21.4%                 | 40.6% |
|                                              | Commission income                  |      | 30,318,836 |     | 20,054,742 |      | 14,651,903            | 51.2%                 | 36.9% |
|                                              | Total revenue                      | $         | 38,490,489 | $        | 26,786,964 | $         | 19,440,756            | 43.7%                 | 37.8% |
|                                              |                               |      |       |     |       |      |                  |                  |
| OPERATINGEXPENSES                                 |                               |      |       |     |       |      |                  |                  |
|                                              | Compensation andbenefits           | $         | 4,233,481  | $        | 3,729,425  | $         | 3,330,165             | 13.5%                 | 12.0% |
|                                              | Commissionexpense                  |      | 29,027,276 |     | 19,370,607 |      | 13,283,057            | 49.9%                 | 45.8% |
|                                              | General andadministrative expenses |      | 2,602,750  |     | 2,242,721  |      | 2,139,042             | 16.1%                 | 4.8% |
|                                              | Sub-advisoryexpenses               |      | 961,837    |     | 887,896    |      | 432,534               | 8.3%                  | 105.3% |
|                                              | Sales commissionsamortized         |      | 443,661    |     | 334,254    |      | 316,928               | 32.7%                 | 5.5% |
|                                              | Depreciation andamortization       |      | 223,624    |     | 157,361    |      | 143,155               | 42.1%                 | 9.9% |
|                                              | Total operatingexpenses            | $         | 37,492,629 | $        | 26,722,264 | $         | 19,644,881            | 40.3%                 | 36.0% |
|                                              |                               |      |       |     |       |      |                  |                  |
| OPERATING INCOME (LOSS)                           | $                                  | 997,860   | $          | 64,700   | $          | (204,125) | 1,442.3%              | 131.7%                |
|                                              |                               |      |       |     |       |      |                  |                  |
| OTHER INCOME (EXPENSES)                           |                               |      |       |     |       |      |                  |                  |
|                                              | Interest and otherincome           | $         | 351,742    | $        | 233,610    | $         | 54,896                | 50.6%                 | 325.6% |
|                                              | Interestexpense                    |      | (331,687)  |     | (346,606)  |      | (301,934)             | (4.3)%                | 14.8% |
|                                              | Net other income(expenses)         | $         | 20,055     | $        | (112,996)  | $         | (247,038)             | 117.7%                | 54.3% |
|                                              |                               |      |       |     |       |      |                  |                  |
| INCOME (LOSS) BEFORE INCOME TAX BENEFIT (EXPENSE) | $                                  | 1,017,915 | $          | (48,296) | $          | (451,163) | 2,207.7%              | 89.3%                 |
|                                              |                               |      |       |     |       |      |                  |                  |
| INCOME TAX BENEFIT (EXPENSE)                      |                               | (434,702) |       | (11,091) |       | 118,750   | 3,819.4%              | 109.3%                |
|                                              |                               |      |       |     |       |      |                  |                  |
| NET INCOME (LOSS)                                 | $                                  | 583,213   | $          | (59,387) | $          | (332,413) | 1,082.1%              | 82.1%                 |
|                                              |                               |      |       |     |       |      |                  |                  |
| INCOME (LOSS) PER COMMON SHARE:                   |                               | .03       |       | (.01)    |       | (.03)     |                  |                  |
|                                                   |                                    |           |            |          |            |           |                       |                       |  |  |

Year EndedDecember 31, 2007, compared with Year Ended December 31,2006: 

**Operating Revenues***-* Totaloperating revenues for 2007 were $38,490,489, an increase of43.7% from $26,786,964 in 2006.  The increase results fromincreased fee income received from the Funds, as well asincreased commission and fee income relating to CFS. 

***Fee Income -*** Fee income for2007 was $8,171,653, a 21.4% increase from $6,732,222 in2006.  The increase was due to fees derived from assetgrowth resulting from new sales in certain of the Funds. The increase was also due to fees derived from additional assetsunder management in CFS' registered investment advisor, resultingfrom ongoing recruiting efforts.  

The Company receives fees for providinginvestment advisory services to the Funds.  In some cases,all or a portion of the investment advisory fees received by theCompany are paid to outside investment advisors for advisoryservices provided to the Funds.  These fees constituted 6%of the Company's consolidated revenues in 2007.  

The Company also earns investment advisoryfees in connection with CFS' registered investment advisor. The Company pays the registered representatives a portion of thisfee income as commission expense and retains the balance. These fees constituted 6% of the Company's consolidated revenuesin 2007. 

The Company receives fees from the Funds forproviding transfer agency, fund accounting, and otheradministrative services.  These fees constituted 6% of theCompany's consolidated revenues in 2007. 

The Company earns Rule 12b-1 fees inconnection with the distribution of Fund shares.  A portionof these fees are paid out to other broker-dealers, with theremaining amount retained by the Company to pay for expensesrelated to the distribution of the Funds.  These feesconstituted 4% of the Company's consolidated revenues in2007. 

***Commission Income -*** Commissionincome includes CFS commissions and 12b-1 fees associated withthe sale of mutual funds, insurance products, and various othersecurities.  The Company pays the registered representativesa percentage of this income as commission expense and retains thebalance.  Commission income also includes underwriting feesassociated with sales of Fund shares subject to front-end salesloads ("FESLs"), and the dealer commission associated with salesof Fund shares subject to FESLs, which is paid out to otherbroker-dealers as commission expense.  Commission income for2007 was $30,318,836, a 51.2% increase over $20,054,742 in2006.  The increase was due primarily to ongoing recruitingefforts for new registered representatives in CFS. Commission revenues constituted 78% of the Company's consolidatedrevenues in 2007. 

**Operating Expenses***-* Totaloperating expenses for 2007 were $37,492,629, a 40.3% increasefrom $26,722,264 in 2006.  The increase resulted primarilyfrom increased commission expense, which corresponds to increasesin fee and commission income. 

***Compensation and Benefits -***Compensation and benefits expense for 2007 was $4,233,481, a13.5% increase from $3,729,425 in 2006.  The increaseresults primarily from increased incentive overrides paid tocertain employees for the recruitment of new registeredrepresentatives in CFS, and a separation agreement entered intoby the Company. 

On January 24, 2007, the Company announcedthe retirement of Robert E. Walstad, the Company's founder, chiefexecutive officer and chairman of the board of directors,effective February 1, 2007.  In connection with Mr.Walstad's retirement, the Company entered into a separationagreement with Mr. Walstad.  Under the terms of theseparation agreement, subject to Mr. Walstad meeting hisobligations thereunder in all respects, Mr. Walstad is entitledto receive a cash payment in the amount of $274,500, options topurchase 60,000 common shares, and certain commissionpayments.  The $274,500 separation payment was expensed inFebruary of 2007. 

***Commission Expense -***Commission expense for 2007 was $29,027,276, a 49.9% increasefrom $19,370,607 in 2006. The increase corresponds with theincreases in fee and commission income. 

***General and Administrative Expenses-*** Total general and administrative expenses for 2007 were$2,602,750, an increase of 16.1% from $2,242,721 in 2006. The increase was due primarily to increased reimbursements madeto certain Funds due to low assets levels, increased 12b-1 feespaid to other broker-dealers for selling the Funds, and increasedlegal costs. 

***Sub-advisory Expenses* -**Sub-advisory expenses for 2007 were $961,837, an 8.3% increasefrom $887,896 in 2006.  The increase was due to higherlevels of sub-advisory fees paid due to asset growth resultingfrom new sales in certain of the Funds.  Sub-advisory feesare paid to outside investment advisors for advisory servicesprovided to some of the Funds.  The amount of sub-advisoryfees paid out will continue to increase if the net asset levelsin certain of the Funds continue to increase. 

***Sales Commissions Amortized -***Sales commissions paid to broker-dealers in connection with thesale of shares of the sponsored mutual funds sold without afront-end sales charge (B and C shares), are capitalized andamortized on a straight-line basis over a period not exceedingeight years, which approximates the period of time during whichdeferred sales commissions are expected to be recovered fromdistribution plan payments received from various sponsored mutualfunds and potential contingent deferred sales charges receivedfrom shareholders of the various sponsored mutual funds. Contingent deferred sales charges received by the Company arerecorded as a reduction of unamortized deferred salescommissions. In accordance with Statement of Position 98-5, thecommissions paid for the sale of Integrity Fund of Funds, Inc.'sshares have been expensed as incurred.  The contingentdeferred sales charges received from early redemptions fromIntegrity Fund of Funds, Inc. have been recorded asrevenue.  Amortization of deferred sales commissions for2007 was $443,661, a 32.7% increase from $334,254 in 2006. These expenses can be expected to increase if sales of shares ofFunds sold without a FESL increase. 

***Depreciation and Amortization-*** Depreciation and amortization for 2007 was $223,624, a42.1% increase from $157,361 in 2006.  The primary reasonfor the change was an increase in amortization of computersoftware costs.  

***Interest and Other Income -***Interest and other income for 2007 was $351,742, a 50.6% increasefrom $233,610 in 2006.  Other income is comprised, in part,from income derived from services billed back to registeredrepresentatives in CFS. 

***Interest Expense*** - Interestexpense was $331,687 for 2007, a 4.3% decrease from $346,606 in2006. 

Year EndedDecember 31, 2006, compared with Year Ended December 31,2005: 

**Operating Revenues***-* Totaloperating revenues for 2006 were $26,786,964, an increase of37.8% from $19,440,756 in 2005.  The increase results fromincreased fee income received from the Funds, as well asincreased commission and fee income relating to CFS. 

***Fee Income -*** Fee income for2006 was $6,732,222, a 40.6% increase from $4,788,853 in2005.  The increase was due to fees received in connectionwith new Funds that were acquired and/or opened during 2005, andfees derived from asset growth resulting from new sales incertain of the Funds.  The increase was also due to feesderived from additional assets under management in CFS'registered investment advisor, resulting from recruiting effortsduring 2005 and 2006.  

The Company receives fees for providinginvestment advisory services to the Funds.  In some cases,all or a portion of the investment advisory fees received by theCompany are paid to outside investment advisors for advisoryservices provided to the Funds.  These fees constituted 7%of the Company's consolidated revenues in 2006.  

The Company also earns investment advisoryfees in connection with CFS' registered investment advisor. The Company pays the registered representatives a portion of thisfee income as commission expense and retains the balance. These fees constituted 5% of the Company's consolidated revenuesin 2006. 

The Company receives fees from the Funds forproviding transfer agency, fund accounting, and otheradministrative services.  These fees constituted 8% of theCompany's consolidated revenues in 2006. 

The Company earns Rule 12b-1 fees inconnection with the distribution of Fund shares.  A portionof these fees are paid out to other broker-dealers, with theremaining amount retained by the Company to pay for expensesrelated to the distribution of the Funds.  These feesconstituted 5% of the Company's consolidated revenues in2006. 

***Commission Income -*** Commissionincome includes CFS commissions and 12b-1 fees associated withthe sale of mutual funds, insurance products, and various othersecurities.  The Company pays the registered representativesa percentage of this income as commission expense and retains thebalance.  Commission income also includes underwriting feesassociated with sales of Fund shares subject to front-end salesloads ("FESLs"), and the dealer commission associated with salesof Fund shares subject to FESLs, which is paid out to otherbroker-dealers as commission expense.  Commission income for2006 was $20,054,742, a 36.9% increase over $14,651,903 in2005.  The increase was due primarily to recruiting effortsfor new registered representatives in CFS during 2005 and2006.  Commission revenues constituted 75% of the Company'sconsolidated revenues in 2006. 

**Operating Expenses***-* Totaloperating expenses for 2006 were $26,722,264, a 36.0% increasefrom $19,644,881 in 2005.  The increase resulted primarilyfrom increased commission expense, which corresponds to increasesin fee and commission income. 

***Compensation and Benefits -***Compensation and benefits expense for 2006 was $3,729,425, a12.0% increase from $3,330,165 in 2005.  The increaseresults primarily from increased incentive overrides paid tocertain employees for the recruitment of new registeredrepresentatives in the Company's broker-dealer segment, and aseparation agreement entered into by the Company with a formeremployee. 

On July 13, 2006, Integrity Mutual Funds,Inc., entered into an agreement with Jerry J. Szilagyi, SeniorVice President of Business Development, the terms of whichprovide for the termination of Mr. Szilagyi's employmentagreement and his separation from the Company, effective as ofJuly 16, 2006.  Pursuant to the terms of the Agreement, theCompany agreed to pay Mr. Szilagyi $210,000 over a ten monthperiod and certain additional compensation, including amountswith respect to assets under management in certain of theCompany's mutual funds.  The $210,000 separation payment wasexpensed in July of 2006. 

***Commission Expense -***Commission expense for 2006 was $19,370,607, a 45.8% increasefrom $13,283,057 in 2005. The increase corresponds with theincreases in fee and commission income. 

***General and Administrative Expenses-*** Total general and administrative expenses for 2006 were$2,242,721, an increase of 4.8% from $2,139,042 in 2005. The increase was due primarily to increased incentive overridespaid to the Company's contracted wholesalers resulting fromincreased sales in the Funds, as well as increased recruitingcosts in the Company's broker-dealer segment. 

***Sub-advisory Expenses* -**Sub-advisory expenses for 2006 were $887,896, a 105.3% increasefrom $432,534 in 2005.  The increase was due to sub-advisoryfees paid in connection with new Funds that were acquired and/oropened during 2005, and higher levels of fees paid due to assetgrowth resulting from new sales in certain of the Funds. Sub-advisory fees are paid to outside investment advisors foradvisory services provided to some of the Funds.  The amountof sub-advisory fees paid out will continue to increase as thenet asset levels in certain of the Funds continue toincrease. 

***Sales Commissions Amortized -***Sales commissions paid to broker-dealers in connection with thesale of shares of the sponsored mutual funds sold without afront-end sales charge (B and C shares), are capitalized andamortized on a straight-line basis over a period not exceedingeight years, which approximates the period of time during whichdeferred sales commissions are expected to be recovered fromdistribution plan payments received from various sponsored mutualfunds and potential contingent deferred sales charges receivedfrom shareholders of the various sponsored mutual funds. Contingent deferred sales charges received by the Company arerecorded as a reduction of unamortized deferred salescommissions. In accordance with Statement of Position 98-5, thecommissions paid for the sale of Integrity Fund of Funds, Inc.'sshares have been expensed as incurred.  The contingentdeferred sales charges received from early redemptions fromIntegrity Fund of Funds, Inc. have been recorded asrevenue.  Amortization of deferred sales commissions for2006 was $334,254, a 5.5% increase from $316,928 in 2005. These expenses can be expected to increase if sales of shares ofFunds sold without a FESL increase. 

***Depreciation and Amortization-*** Depreciation and amortization for 2006 was $157,361, a9.9% increase from $143,155 in 2005.  The primary reason forthe change was an increase in amortization of computer softwarecosts.  

***Interest and Other Income -***Interest and other income for 2006 was $233,610, a 325.6%increase from $54,896 in 2005.  Other income is comprised,in part, from income derived from services billed back toregistered representatives in CFS. 

***Interest Expense*** - Interestexpense was $346,606 for 2006, a 14.8% increase from $301,934 in2005.  The increase was primarily the result of the issuanceof $2 million of 91⁄4% subordinated corporate notes during2005, which was used, in part, to retire $595,000 of 12%subordinated debentures that matured in June of 2005.

FINANCIALCONDITION 

On December 31, 2007, the Company's assetsaggregated $18,114,830, an increase of 17.1% from $15,466,130 in2006, due to increases in cash and cash equivalents, accountsreceivable, net property and equipment, and goodwill offset bydecreases in securities available-for-sale, income taxesreceivable, deferred tax assets, prepaids, deferred salescommissions, and other assets.  Stockholders equity was$10,213,625 on December 31, 2007, compared to $9,398,208 onDecember 31, 2006. 

On December 31, 2006, the Company's assetsaggregated $15,466,130, an increase of 1.8% from $15,192,914 in2005, due to increases in cash and cash equivalents, securitiesavailable-for-sale, and accounts receivable, offset by decreasesin income taxes receivable, deferred tax assets, prepaids, netproperty and equipment, deferred sales commissions, goodwill, andother assets.  Stockholders equity was $9,398,208 onDecember 31, 2006, compared to $9,403,721 on December 31,2005. 

Cash provided by operating activities was$1,568,087 for the year ended December 31, 2007, as compared tonet cash provided by operating activities of  $570,573 forthe year ended December 31, 2006 and net cash provided byoperating activities of $265,950 for the year ended December 31,2005. 

Net cash used by investing activities was$343,414 for the year ended December 31, 2007, as compared to netcash used by investing activities of $47,990 for the year endedDecember 31, 2006 and net cash used by investing activities of$308,119 for the year ended December 31, 2005.  The primaryuses of cash for investing activities in 2007 were the purchaseof additional computer equipment and the purchase of certainassets from United Heritage Financial Services, Inc.  

Net cash provided by financing activitieswas $67,328 for the year ended December 31, 2007, as compared tonet cash used by financing activities of $208,725 for the yearended December 31, 2006, and net cash provided by financingactivities of $712,032 for the year ended December 31,2005.  During the year ended December 31, 2007, the Companyreceived $60,000 in connection with the exercise of 100,000outstanding warrants, and received a $120,085 advance on a lineof credit with First Western Bank.  Also during the yearended December 31, 2007, the Company paid out $91,500 inpreferred stock dividends, and repaid $32,254 of bank debt. 

LIQUIDITY ANDCAPITAL RESOURCES 

On December 31, 2007, the Company held$3,143,250 in cash and cash equivalents, as compared to$1,851,249 on December 31, 2006, and $1,537,391 on December 31,2005.  Liquid assets, which consist of cash and cashequivalents and securities available-for-sale, totaled $3,143,250at December 31, 2007, as compared to $1,851,462 on December 31,2006, and $1,537,599 on December 31, 2005.  The Company isrequired to maintain certain levels of cash and liquid securitiesin its broker-dealer subsidiaries to meet regulatory net capitalrequirements. 

In January of 2006, the Company repaid$250,000 in convertible debentures that matured pursuant to itsacquisition of CFS, which was paid by using available cash. In May of 2006, an existing loan with First Western Bank wasmodified.  The modification called for a $301,866 cashinjection to the outstanding balance of the loan.  After themodification, the loan carried an interest rate of 8.25%, andbased on the monthly payments of $23,200, would be paid in fullon May 10, 2010.  In June of 2006, the Company paid off its$100,000 revolving bank line of credit, which was paid byutilizing a portion of the proceeds received from the $301,866cash injection.  In October of 2006, the Company issued a$950,000 convertible promissory note to PawnMart, Inc., in aprivate placement.  The unsecured note carries an interestrate of 6.5% per annum, payable semi-annually, and matures onOctober 15, 2016.  The holder of the note has the right, atany time after October 15, 2009, to convert the note in whole orin part, into $0.0001 par value common shares of theCompany.  The conversion price is equal to $0.50 pershare.  The entire principal amount of the note willautomatically convert into common shares at the conversion priceon October 15, 2016.  Approximately $845,000 of the $950,000in convertible promissory note proceeds was used to pay off theexisting loan with First Western Bank mentioned above. 

The Company has received an operating lineof credit from First Western Bank & Trust in the amount of $1million.  In March of 2007, the Company received a $120,085advance on the line of credit.  The Company currently hasapproximately $900,000 still available through the line ofcredit, which carries an interest rate of 8.00%.  TheCompany anticipates that proceeds received from the line ofcredit will be used primarily to pay for sales costs in theFunds. 

The Company has historically relied uponsales of its equity securities and debt instruments, as well asbank loans, for liquidity and growth.  Management believesthat the Company's existing liquid assets, along with cash flowfrom operations, will provide the Company with sufficientresources to meet its ordinary operating expenses during the nexttwelve months.  Significant, unforeseen or extraordinaryexpenses may require the Company to seek alternative financingsources, including common or preferred share issuance oradditional debt financing. 

In addition to the liabilities coming due inthe next twelve months, management expects that the principalneeds for cash may be to advance sales commissions on Fundssubject to CDSCs, acquire additional investment management orfinancial services firms, acquire the management rights toadditional outside mutual funds, repurchase shares of theCompany's common stock, and service debt.  Management alsoexpects to realize increases in expenses associated withregulatory compliance with Section 404 of the Sarbanes-Oxley Actof 2002, including increased legal, audit, staff, and consultantexpenses. 

Sales of fund shares with FESLs providecurrent distribution revenue to the Company in the form of theCompany's share of the FESLs, and distribution revenue, overtime, in the form of 12b-1 payments.  Sales of fund sharessubject to CDSCs provide distribution revenue, over time, in theform of 12b-1 fees and, if shares are redeemed within five years,CDSCs.  However, the Company pays commissions on sales ofFund shares subject to CDSCs, reflects such commissions asdeferred sales commissions on its balance sheet and amortizessuch commissions over a period of up to eight years, therebyrecognizing distribution expenses.  Therefore, to the extentthat sales of Fund shares subject to CDSCs increases over timerelative to sales of shares subject to FESLs, currentdistribution expenses may increase relative to currentdistribution revenues in certain periods, which would negativelyimpact the Company's cash flow in such periods.  Inaddition, the Company may need to find additional sources offunding if existing cash flow and debt facilities areinsufficient to fund commissions payable to sellingbroker-dealers on shares subject to CDSCs if sales of Fund sharessubject to CDSCs increase significantly. 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk 

Not Applicable as a Smaller ReportingCompany. 

Item 8. Financial Statements and Supplementary Data 

The financial statements required by thisitem, the accompanying notes thereto, and the reports ofindependent registered public accounting firm are included aspart of this Form 10-K immediately following the signatures page,beginning on page F-1. 

Item 9. Changes In and Disagreements with Accountants on Accounting andFinancial Disclosure 

None. 

Item 9A(T). Controls and Procedures 

The Company's management, including theCompany's Chief Executive Officer and Chief Financial Officer,evaluated the effectiveness of the design and operation of theCompany's disclosure controls and procedures (as defined in Rule13a-14(c) and Rule 15c-14(c) under the Exchange Act) as of theend of the period covered by this report, pursuant to Rule13a-15(b) of the Exchange Act.  Based upon that evaluation,the Chief Executive Officer and Chief Financial Officer haveconcluded that the Company's disclosure controls and proceduresare effective as of December 31, 2007, and that informationrequired to be disclosed by the Company in reports that it filesor submits under the Exchange Act is recorded, processed andsummarized, and reported within the time periods specified by theSEC's rules and forms. 

Disclosure controls and procedures are thecontrols and other procedures that are designed to ensure thatinformation required to be disclosed in the reports that theCompany files or submits under the Exchange Act is recorded,processed, summarized and reported within the time periodsspecified in the SEC's rules and forms.  Disclosure controlsand procedures include, without limitation, controls andprocedures designed to ensure that information required to bedisclosed in the reports that the Company files or submits underthe Exchange Act is accumulated and communicated to management,including the Chief Executive Officer and Chief FinancialOfficer, as appropriate, to allow timely decisions regardingrequired disclosure. 

There were no significant changes in theCompany's internal controls or in other factors that couldsignificantly affect these controls subsequent to the date oftheir evaluation, including any corrective actions with regard tosignificant deficiencies or material weaknesses. 

MANAGEMENT'S REPORT ONINTERNAL CONTROL OVER FINANCIAL REPORTING 

Management of Integrity Mutual Funds, Inc.(together with its consolidated subsidiaries, the "Company"), isresponsible for establishing and maintaining adequate internalcontrol over financial reporting.  The Company's internalcontrol over financial reporting is a process designed under thesupervision of the Company's principal executive and principalfinancial officers to provide reasonable assurance regarding thereliability of financial reporting and the preparation of theCompany's financial statements for external reporting purposes inaccordance with United States generally accepted accountingprinciples. 

As of December 31, 2007, managementconducted an assessment of the effectiveness of the Company'sinternal control over financial reporting, based on the frameworkestablished in *Internal Control - Integrated Framework*issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO).  Based on this assessment,management has determined that the Company's internal controlover financial reporting as of December 31, 2007, iseffective. 

The Company's internal control overfinancial reporting includes policies and procedures that pertainto the maintenance of records that, in reasonable detail,accurately and fairly reflect transactions and acquisitions anddispositions of assets; provide reasonable assurance thattransactions are recorded as necessary to permit preparation offinancial statements in accordance with United States generallyaccepted accounting principles, and that receipts andexpenditures are being made only in accordance withauthorizations of management and the directors of the Company;and provide reasonable assurance regarding prevention or timelydetection of unauthorized acquisition, use or disposition ofCompany assets that could have a material effect on the Company'sfinancial statements. 

This annual report does not include anattestation report of the Company's registered public accountingfirm regarding internal control over financial reporting. Management's report was not subject to attestation by theCompany's registered public accounting firm pursuant to temporaryrules of the Securities and Exchange Commission that permit theCompany to provide only management's report in this annualreport.

Item 9B. Other Information 

None. 

PART III 

Item 10. Directors, Executive Officers and Corporate Governance 

The information required by this Item willbe contained in our definitive Proxy Statement for our 2008Annual Meeting of Shareholders and such information isincorporated herein by reference. 

Item 11. Executive Compensation 

The information required by this Item willbe contained in our definitive Proxy Statement for our 2008Annual Meeting of Shareholders and such information isincorporated herein by reference. 

Item 12. Security Ownership of Certain Beneficial Owners and Managementand Related Stockholder Matters 

The information required by this Item willbe contained in our definitive Proxy Statement for our 2008Annual Meeting of Shareholders and such information isincorporated herein by reference. 

Item 13. Certain Relationships and Related Transactions, and DirectorIndependence 

The information required by this Item willbe contained in our definitive Proxy Statement for our 2008Annual Meeting of Shareholders and such information isincorporated herein by reference. 

Item14.   Principal Accounting Fees and Services 

The information required by this Item willbe contained in our definitive Proxy Statement for our 2008Annual Meeting of Shareholders and such information isincorporated herein by reference. 

 

PART IV 

Item 15. Exhibits 

The following exhibits arefiled herewith or incorporated herein by reference as set forthbelow: 

3.1          Restated Articles of Incorporation of the Company (incorporatedby reference to Exhibit 3.1 contained in the Company's QuarterlyReport on Form 10-QSB, (File No. 0-25958), filed with theCommission on November 10, 2004). 

3.2          Amended Bylaws of the Company (incorporated by reference toExhibit 3.2 contained in the Company's Quarterly Report on Form10-QSB, as amended (File No. 0-25958), filed with the Commissionon August 11, 2006). 

4.1          Specimen form of Common Stock Certificate (incorporated byreference to Exhibit 4.1 contained in the Company's RegistrationStatement on Form S-1, as amended (File No.33-96824), filed withthe Commission on September 12, 1995). 

4.2          Certificate of designation of Series A Convertible PreferredShares (incorporated by reference to Exhibit 4.1 contained in theCompany's Quarterly Report on Form 10-QSB, (File No. 0-25958),filed with the Commission on November 10, 2004). 

4.3          Instruments defining rights of holders of securities: (SeeExhibit 3.1 & 3.2) 

4.4          Subordinated Corporate Note Subscription Agreement (incorporatedby reference to Exhibit 4.4 contained in the Company's QuarterlyReport on Form 10-QSB, (File No. 0-25958), filed with theCommission on August 12, 2005). 

4.5          Form of Subordinated Corporate Note (incorporated by reference toExhibit 4.5 contained in the Company's Quarterly Report on Form10-QSB, (File No. 0-25958), filed with the Commission on August12, 2005). 

4.6          Form of Convertible Promissory Note (incorporated by reference toExhibit 4.1 contained in the Company's Current Report on Form8-K, (File No. 0-25958), filed with the Commission on October 13,2006.) 

10.1a       Investment AdvisoryContract - ND Tax-Free Fund, Inc. (incorporated by reference toExhibit 99.d contained in the Registration Statement on FormN-1A, as amended on Post-Effective Amendment 21 (File No.33-25138), filed with the Commission on April 27, 2004). 

10.1b       Investment AdvisoryContract - Montana Tax-Free Fund, Inc. (incorporated by referenceto Exhibit 99.d contained in the Registration Statement on FormN-1A, as amended on Post-Effective Amendment 16 (File No.33-63306), filed with the Commission on April 27, 2004). 

10.1c       Investment AdvisoryContract - Integrity Fund of Funds, Inc. (incorporated byreference to Exhibit 99.d contained in the Registration Statementon Form N-1A, as amended on Post-Effective Amendment 13 (File No.33-85332), filed with the Commission on April 27, 2004). 

10.1d       Management andInvestment Advisory Contract - Integrity Managed Portfolios onbehalf of the Kansas Municipal Fund (incorporated by reference toExhibit 99.d1a contained in the Registration Statement on FormN-1A, as amended on Post-Effective Amendment 51 (File No.33-36324), filed with the Commission on November 30, 2004). 

10.1e       Management andInvestment Advisory Contract - Integrity Managed Portfolios onbehalf of the Kansas Insured Intermediate Fund (incorporated byreference to Exhibit 99.d1b contained in the RegistrationStatement on Form N-1A, as amended on Post-Effective Amendment 51(File No. 33-36324), filed with the Commission on November 30,2004). 

10.1f        Management andInvestment Advisory Contract - Integrity Managed Portfolios onbehalf of the Maine Municipal Fund (incorporated by reference toExhibit 99.d1e contained in the Registration Statement on FormN-1A, as amended on Post-Effective Amendment 49 (File No.33-36324), filed with the Commission on September 29, 2003). 

10.1g       Management andInvestment Advisory Contract - Integrity Managed Portfolios onbehalf of the Nebraska Municipal Fund (incorporated by referenceto Exhibit 99.d1c contained in the Registration Statement on FormN-1A, as amended on Post-Effective Amendment 51 (File No.33-36324), filed with the Commission November 30, 2004). 

10.1h       Management andInvestment Advisory Contract - Integrity Managed Portfolios onbehalf of the New Hampshire Municipal Fund (incorporated byreference to Exhibit 99.d1f contained in the RegistrationStatement on Form N-1A, as amended on Post-Effective Amendment 49(File No. 33-36324), filed with the Commission on September 29,2003). 

10.1i        Management andInvestment Advisory Contract - Integrity Managed Portfolios onbehalf of the Oklahoma Municipal Fund (incorporated by referenceto Exhibit 99.d1d contained in the Registration Statement on FormN-1A, as amended on Post-Effective Amendment 51 (File No.33-36324), filed with the Commission November 30, 2004). 

10.1j        InvestmentAdvisory Contract - The Integrity Funds on behalf of theIntegrity Small Cap Growth Fund (incorporated by reference toExhibit 99.d1d contained in the Registration Statement on FormN-1A, as amended on Post-Effective Amendment 21 (File No.33-53698), filed with the Commission on September 5, 2003). 

10.1k       Investment AdvisoryContract - The Integrity Funds on behalf of the Integrity HealthSciences Fund (incorporated by reference to Exhibit 99.d1econtained in the Registration Statement on Form N-1A, as amendedon Post-Effective Amendment 21 (File No. 33-53698), filed withthe Commission on September 5, 2003). 

10.1l        InvestmentAdvisory Contract - The Integrity Funds on behalf of theIntegrity Technology Fund (incorporated by reference to Exhibit99.d1f contained in the Registration Statement on Form N-1A, asamended on Post-Effective Amendment 21 (File No. 33-53698), filedwith the Commission on September 5, 2003). 

10.1m      Investment Advisory Contract- The Integrity Funds on behalf of the Integrity High Income Fund(incorporated by reference to Exhibit 99.d1g contained in theRegistration Statement on Form N-1A, as amended on Post-EffectiveAmendment 23 (File No. 33-53698), filed with the Commission onApril 27, 2004). 

10.1n       Investment AdvisoryContract - The Integrity Funds on behalf of the Integrity Growth& Income Fund (incorporated by reference to Exhibit 99.d1icontained in the Registration Statement on Form N-1A, as amendedon Post-Effective Amendment 26 (File No. 33-53698), filed withthe Commission on April 25, 2005). 

10.1o       Investment AdvisoryContract - The Integrity Funds on behalf of the Integrity AllSeason Fund (incorporated by reference to Exhibit 99.d1vicontained in the Registration Statement on Form N-1A, as amendedon Post-Effective Amendment 32 (File No. 33-53698), filed withthe Commission on April 27, 2007). 

10.1p       Investment AdvisoryContract - The Integrity Funds on behalf of the Integrity TotalReturn Income Fund (incorporated by reference to Exhibit 99.d1viicontained in the Registration Statement on Form N-1A, as amendedon Post-Effective Amendment 34 (File No. 33-53698), filed withthe Commission on October 1, 2007). 

10.2a       Sub-Investment AdvisoryContract - The Integrity Funds on behalf of the Integrity HighIncome Fund (incorporated by reference to Exhibit 99.d2bcontained in the Registration Statement on Form N-1A, as amendedon Post-Effective Amendment 23 (File No. 33-53698), filed withthe Commission on April 27, 2004). 

10.2b       Sub-Investment AdvisoryContract - The Integrity Funds on behalf of the Integrity HighIncome Fund (incorporated by reference to Exhibit 99.d2econtained in the Registration Statement on Form N-1A, as amendedon Post-Effective Amendment 28 (File No. 33-53698), filed withthe Commission on July 29, 2005). 

10.2c       Sub-Investment AdvisoryContract - The Integrity Funds on behalf of the Integrity AllSeason Fund (incorporated by reference to Exhibit 99.2diicontained in the Registration Statement on Form N-1A, as amendedon Post-Effective Amendment 32 (File No. 33-53698), filed withthe Commission on April 27, 2007). 

10.2d       Sub-Investment AdvisoryContract - The Integrity Funds on behalf of the Integrity TotalReturn Income Fund (incorporated by reference to Exhibit 99.d2ivcontained in the Registration Statement on Form N-1A, as amendedon Post-Effective Amendment 34 (File No. 33-53698), filed withthe Commission on October 1, 2007). 

10.3a       Distribution Contract -ND Tax-Free Fund, Inc. (incorporated by reference to Exhibit99.e1 contained in the Registration Statement on Form N-1A, asamended on Post-Effective Amendment 21 (File No. 33-25138), filedwith the Commission on April 27, 2004). 

10.3b       Distribution Contract -Montana Tax-Free Fund, Inc. (incorporated by reference to Exhibit99.e1 contained in the Registration Statement on Form N-1A, asamended on Post-Effective Amendment 16 (File No. 33-63306), filedwith the Commission on April 27, 2004). 

10.3c       Distribution Contract -Integrity Fund of Funds, Inc. (incorporated by reference toExhibit 99.e1 contained in the Registration Statement on FormN-1A, as amended on Post-Effective Amendment 13 (File No.33-85332), filed with the Commission on April 27, 2004). 

10.3d       Distribution andService Contract - Integrity Managed Portfolios on behalf of theKansas Municipal Fund  (incorporated by reference to Exhibit99.e1a contained in the Registration Statement on Form N-1A, asamended on Post-Effective Amendment 50 (File No. 33-36324), filedwith the Commission on December 22, 2003). 

10.3e       Distribution andService Contract - Integrity Managed Portfolios on behalf of theKansas Insured Intermediate Fund (incorporated by reference toExhibit 99.e1b contained in the Registration Statement on FormN-1A, as amended on Post-Effective Amendment 50 (File No.33-36324), filed with the Commission on December 22, 2003). 

10.3f        Distribution andService Contract - Integrity Managed Portfolios on behalf of theMaine Municipal Fund  (incorporated by reference to Exhibit99.e1e contained in the Registration Statement on Form N-1A, asamended on Post-Effective Amendment 49 (File No. 33-36324), filedwith the Commission on September 29, 2003). 

10.3g       Distribution andService Contract - Integrity Managed Portfolios on behalf of theNebraska Municipal Fund  (incorporated by reference toExhibit 99.e1c contained in the Registration Statement on FormN-1A, as amended on Post-Effective Amendment 50 (File No.33-36324), filed with the Commission on December 22, 2003). 

10.3h       Distribution andService Contract - Integrity Managed Portfolios on behalf of theNew Hampshire Municipal Fund (incorporated by reference toExhibit 99.e1f contained in the Registration Statement on FormN-1A, as amended on Post-Effective Amendment 49 (File No.33-36324), filed with the Commission on September 29, 2003). 

10.3i        Distribution andService Contract - Integrity Managed Portfolios on behalf of theOklahoma Municipal Fund  (incorporated by reference toExhibit 99.e1d contained in the Registration Statement on FormN-1A, as amended on Post-Effective Amendment 50 (File No.33-36324), filed with the Commission on December 22, 2003). 

10.3j        Distribution andService Contract - The Integrity Funds on behalf of the IntegritySmall Cap Growth Fund (incorporated by reference to Exhibit99.e1d contained in the Registration Statement on Form N-1A, asamended on Post-Effective Amendment 21 (File No. 33-53698), filedwith the Commission on September 5, 2003). 

10.3k       Distribution andService Contract - The Integrity Funds on behalf of the IntegrityHealth Sciences Fund (incorporated by reference to Exhibit 99.e1econtained in the Registration Statement on Form N-1A, as amendedon Post-Effective Amendment 21 (File No. 33-53698), filed withthe Commission on September 5, 2003). 

10.3l        Distribution andService Contract - The Integrity Funds on behalf of the IntegrityTechnology Fund (incorporated by reference to Exhibit 99.e1fcontained in the Registration Statement on Form N-1A, as amendedon Post-Effective Amendment 21 (File No. 33-53698), filed withthe Commission on September 5, 2003). 

10.3m      Distribution and ServiceContract - The Integrity Funds on behalf of the Integrity HighIncome Fund (incorporated by reference to Exhibit 99.e1gcontained in the Registration Statement on Form N-1A, as amendedon Post-Effective Amendment 23 (File No. 33-53698), filed withthe Commission on April 27, 2004). 

10.3n       Distribution andService Contract - The Integrity Funds on behalf of the IntegrityGrowth & Income Fund (incorporated by reference to Exhibit99.e1i contained in the Registration Statement on Form N-1A, asamended on Post-Effective Amendment 26 (File No. 33-53698), filedwith the Commission on April 25, 2005). 

10.3o       Distribution andService Contract - The Integrity Funds on behalf of the IntegrityAll Season Fund (incorporated by reference to Exhibit 99.e1jcontained in the Registration Statement on Form N-1A, as amendedon Post-Effective Amendment 28 (File No. 33-53698), filed withthe Commission on July 29, 2005). 

10.3p       Distribution andService Contract - The Integrity Funds on behalf of the IntegrityTotal Return Income Fund (incorporated by reference to Exhibit99.e7 contained in the Registration Statement on Form N-1A, asamended on Post-Effective Amendment 34 (File No. 33-53698), filedwith the Commission on October 1, 2007). 

10.4a       Transfer AgencyContract - ND Tax-Free Fund, Inc. (incorporated by reference toExhibit 99.h1 contained in the Registration Statement on FormN-1A, as amended on Post-Effective Amendment 25 (File No.33-25138), filed with the Commission on April 27, 2007). 

10.4b       Transfer AgencyContract - Montana Tax-Free Fund, Inc. (incorporated by referenceto Exhibit 99.h1 contained in the Registration Statement on FormN-1A, as amended on Post-Effective Amendment 20 (File No.33-63306), filed with the Commission on April 27, 2007). 

10.4c       Transfer AgencyContract - Integrity Fund of Funds, Inc. (incorporated byreference to Exhibit 99.h1 contained in the RegistrationStatement on Form N-1A, as amended on Post-Effective Amendment 17(File No. 33-85332), filed with the Commission on April 27,2007). 

10.4d       Transfer AgencyContract - Integrity Managed Portfolios (incorporated byreference to Exhibit 99.h1 contained in the RegistrationStatement on Form N-1A, as amended on Post-Effective Amendment 54(File No. 33-36324), filed with the Commission on November 30,2006). 

10.4e       Transfer AgencyContract - The Integrity Funds (incorporated by reference toExhibit 99.h1 contained in the Registration Statement on FormN-1A, as amended on Post-Effective Amendment 34 (File No.33-53698), filed with the Commission on October 1, 2007). 

10.5a       Accounting ServiceContract - ND Tax-Free Fund, Inc. (incorporated by reference toExhibit 99.h2 contained in the Registration Statement on FormN-1A, as amended on Post-Effective Amendment 25 (File No.33-25138), filed with the Commission on April 27, 2007). 

10.5b       Accounting ServiceContract - Montana Tax-Free Fund, Inc. (incorporated by referenceto Exhibit 99.h2 contained in the Registration Statement on FormN-1A, as amended on Post-Effective Amendment 20 (File No.33-63306), filed with the Commission on April 27, 2007). 

10.5c       Accounting ServiceContract - Integrity Fund of Funds, Inc. (incorporated byreference to Exhibit 99.h2 contained in the RegistrationStatement on Form N-1A, as amended on Post-Effective Amendment 17(File No. 33-85332), filed with the Commission on April 27,2007). 

10.5d       Accounting ServiceContract - Integrity Managed Portfolios (incorporated byreference to Exhibit 99.h2 contained in the RegistrationStatement on Form N-1A, as amended on Post-Effective Amendment 49(File No. 33-36324), filed with the Commission on September 29,2003). 

10.6a       Administration andAccounting Service Contract - The Integrity Funds (incorporatedby reference to Exhibit 99.h2 contained in the RegistrationStatement on Form N-1A, as amended on Post-Effective Amendment 34(File No. 33-53698), filed with the Commission on October 1,2007). 

10.6b       Administration ServiceContract - Integrity Managed Portfolios (incorporated byreference to Exhibit 99.h3 contained in the RegistrationStatement on Form N-1A, as amended on Post-Effective Amendment 54(File No. 33-36324), filed with the Commission on November 30,2006). 

10.7a       Stock PurchaseAgreement - ND Holdings, Inc. and Shareholders of Ranson Company,Inc. (incorporated by reference to Exhibit 10.13 contained in theCompany's Registration Statement on Form S-1, as amended (FileNo. 33-96824), filed with the Commission on September 12,1995). 

10.7b       Stock PurchaseAgreement - CFS Stock Purchase Agreement (incorporated byreference to Exhibit 10.53 contained in the Company's QuarterlyReport on Form 10-QSB, (File No. 0-25958), filed with theCommission on November 10, 2004). 

10.8a       Employment Agreement -Bradley Wells (incorporated by reference to Exhibit 10.1contained in the Company's Quarterly Report on Form 10-QSB, (FileNo. 0-25958), filed with the Commission on August 13, 2007).* 

10.8b       Separation Agreement -Jerry J. Szilagyi (incorporated by reference to Exhibit 10.1contained in the Company's Quarterly Report on Form 10-QSB, (FileNo. 0-25958), filed with the Commission August 11, 2006).* 

10.8c       Separation Agreement -Robert E. Walstad (incorporated by reference to Exhibit 10.8contained in the Company's Annual Report on Form 10-KSB, (FileNo. 0-25958), filed with the Commission on March 16, 2007).* 

10.8d       Separation Agreement -Mark R. Anderson (incorporated by reference to Exhibit 10.1contained in the Company's Current Report on Form 8-K, (File No.0-25958), filed with the Commission on March 4, 2008).* 

14.1         Code ofEthics (incorporated by reference to Exhibit 14.1 contained inthe Company's Annual Report on Form 10-KSB, filed with theCommission on March 28, 2006). 

21.1         Subsidiariesof the Company (incorporated by reference to Exhibit 21.1contained in the Company's Annual Report on Form 10-KSB, filedwith the Commission on March 28, 2005). 

31.1         CEOCertification Pursuant to Section 302 of the Sarbanes-Oxley Actand Rules 13a-14(a) and 15d-14(a) of the Exchange Act. 

31.2         CFOCertification Pursuant to Section 302 of the Sarbanes-Oxley Actand Rules 13a-14(a) and 15d-14(a) of the Exchange Act. 

32.1         CEOCertification Pursuant to Section 906 of the Sarbanes-Oxley Actand 18 U.S.C. Section 1350. 

32.2         CFOCertification Pursuant to Section 906 of the Sarbanes-Oxley Actand 18 U.S.C. Section 1350. 

* Indicates ManagementContract or Compensatory Plan.

SIGNATURES

In accordance with Section 13 or 15(d) ofthe Exchange Act, the Registrant has caused this report to besigned on its behalf by the undersigned, thereunto dulyauthorized. 

INTEGRITY MUTUAL FUNDS,INC. 
| Date: March 17, 2008 | By /s/ Bradley P. Wells         |
|----------------------|---------------------------------|
|                 | Bradley P. Wells                |
|                 | Interim Chief Executive Officer |
|                 | and President                   |
|                 | (Principal Executive Officer)   |

In accordance with the Exchange Act, thisreport has been signed below by the following persons on behalfof the registrant and in the capacities and on the datesindicated. 
| Date: March 17, 2008 | By /s/ Bradley P. Wells         |
|----------------------|---------------------------------|
|                 | Bradley P. Wells                |
|                 | Interim Chief Executive Officer |
|                 | and President                   |
|                 | (Principal Executive Officer)   |
| Date: March 17, 2008 | By /s/ Heather Ackerman       |
|----------------------|-------------------------------|
|                 | Heather Ackerman              |
|                 | Chief Financial Officer       |
|                 | (Principal Financial Officer) |
| Date: March 17, 2008 | By /s/ Jeffrey A. Cummer    |
|----------------------|-----------------------------|
|                 | Jeffrey A. Cummer           |
|                 | Chairman                    |
|                 |                        |
| Date: March 17, 2008 | By /s/ Vance A. Castleman   |
|                 | Vance A. Castleman          |
|                 | Director                    |
|                 |                        |
| Date: March 17, 2008 | By /s/ Myron D. Thompson    |
|                 | Myron D. Thompson           |
|                 | Director                    |
|                 |                        |
| Date: March 17, 2008 | By /s/ Richard H. Walstad   |
|                 | Richard H. Walstad          |
|                 | Director                    |
|                 |                        |
| Date: March 17, 2008 | By /s/ Steven D. Lysne      |
|                 | Steven D. Lysne             |
|                 | Director                    |
|                 |                        |
| Date: March 17, 2008 | By /s/ Vaune M. Cripe       |
|                 | Vaune M. Cripe              |
|                 | Director                    |
|                 |                        |
| Date: March 17, 2008 | By /s/ Peter A. Quist       |
|                 | Peter A. Quist              |
|                 | Vice President and Director |

 

 

**INTEGRITY MUTUAL FUNDS, INC., AND SUBSIDIARIES **

MINOT, NORTH DAKOTA 

CONSOLIDATED FINANCIAL STATEMENTS 					AS OF 					DECEMBER 31, 2007, 2006 AND 2005					AND 					REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

INTEGRITY MUTUAL FUNDS, INC., AND SUBSIDIARIES

TABLE OF CONTENTS 
|                                                     | Pages      |
|----------------------------------------------------------|------------|
|                                                     |       |
| REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  | F-1        |
|                                                     |       |
|                                                     |       |
| CONSOLIDATED FINANCIAL STATEMENTS                        |       |
|                                                     |       |
| Consolidated Balance Sheets                              | F-2 - F-3  |
|                                                     |       |
| Consolidated Statements of Operations                    | F-4        |
|                                                     |       |
| Consolidated Statements of Stockholders' Equity          | F-5        |
|                                                     |       |
| Consolidated Statements of Cash Flows                    | F-6 - F-7  |
|                                                     |       |
| Notes to Consolidated Financial Statements               | F-8 - F-23 |
|                                                     |       |
| ADDITIONAL INFORMATION                                   |       |
|                                                     |       |
| Report of Independent Registered Public Accounting Firm  | F-24       |
|                                                     |       |
| Selected Financial Data                                  | F-25       |
|                                                     |       |
| Quarterly Results of Consolidated Operations (Unaudited) | F-26       |

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Directors of					Integrity Mutual Funds, Inc. and Subsidiaries					Minot, North Dakota 

We have audited the accompanying consolidated balance sheets of Integrity Mutual Funds, Inc. and Subsidiaries as of December 31, 2007 and 2006 and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 2007, 2006 and 2005.  These consolidated financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits. 

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Integrity Mutual Funds, Inc. and Subsidiaries as of December 31, 2007 and 2006, and the consolidated results of their operations and their consolidated cash flows for the years ended December 31, 2007, 2006 and 2005 in conformity with accounting principles generally accepted in the United States of America.

By /s/ Brady, Martz & Associates, P.C.

BRADY, MARTZ & ASSOCIATES, P.C.					Minot, North Dakota USA 

March 13, 2008

INTEGRITY MUTUAL FUNDS, INC., AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2007 AND 2006

ASSETS
|                   |  

              2007      |  

                  2006 |
|------------------------|--------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------|
|                   |                                                                                             |                                                                                                                |   |   |
| CURRENT ASSETS         |                                                                                             |                                                                                                                |   |   |
|                   | Cash and cash equivalents                                                                        | $                                                                                                                   | 3,143,250 | $ | 1,851,249 |
|                   | Securities available-for-sale                                                                    |                                                                                                                | - |   | 213 |
|                   | Accounts receivable (net of allowance for doubtful accounts of $24,000 for 2007 and $0 for 2006) |                                                                                                                | 2,191,626 |   | 1,793,645 |
|                   | Income taxes receivable                                                                          |                                                                                                                | - |   | 780 |
|                   | Deferred tax asset                                                                               |                                                                                                                | - |   | 5,833 |
|                   | Prepaids                                                                                         |                                                                                                                | 69,767 |   | 88,894 |
|                   |                                                                                             |                                                                                                                |   |   |   |
|                   | Total current assets                                                                             | $                                                                                                                   | 5,404,643 | $ | 3,740,614 |
|                   |                                                                                             |                                                                                                                |   |   |   |
| PROPERTY AND EQUIPMENT | $                                                                                                | 2,171,049                                                                                                           | $ | 1,989,312 |
|                   | Less accumulated depreciation                                                                    |                                                                                                                | (900,204) |   | (811,854) |
|                   |                                                                                             |                                                                                                                |   |   |   |
|                   | Net property and equipment                                                                       | $                                                                                                                   | 1,270,845 | $ | 1,177,458 |
|                   |                                                                                             |                                                                                                                |   |   |   |
| OTHER ASSETS           |                                                                                             |                                                                                                                |   |   |
|                   | Deferred sales commissions                                                                       | $                                                                                                                   | 165,126 | $ | 168,686 |
|                   | Goodwill                                                                                         |                                                                                                                | 10,912,548 |   | 9,792,801 |
|                   | Deferred tax asset                                                                               |                                                                                                                | 144,719 |   | 335,995 |
|                   | Other assets (net of accumulated amortization                                                    |                                                                                                                | 216,949 |   | 250,576 |
|                   |   of $387,534 for 2007 and $253,961 for 2006)                                               |
|                   |                                                                                             |                                                                                                                |   |   |   |
|                   | Total other assets                                                                               | $                                                                                                                   | 11,439,342 | $ | 10,548,058 |
|                   |                                                                                             |                                                                                                                |   |   |
| TOTAL ASSETS           | $                                                                                                | 18,114,830                                                                                                          | $ | 15,466,130 |
|                   |                                                                                             |                                                                                                                |   |   |
|                   |                                                                                             |                                                                                                                |   |   |
|                        |                                                                                                  |                                                                                                                     |  |  |  |

SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS (CONTINUED)

LIABILITIES AND STOCKHOLDERS' EQUITY
|   |  

2007 |  

2006 |
|--------|--------------|--------------|
| CURRENT LIABILITIES                        |                                                                               |       |        |       |
|--------------------------------------------|------------------------------------------------------------------------------------|------------|-------------|------------|
|                                       | Service fees payable                                                               | $          | 123,724     | $          | 115,225 |
|                                       | Accounts payable                                                                   |       | 587,521     |       | 261,767 |
|                                       | Income taxes payable                                                               |       | 20,512      |       | - |
|                                       | Other current liabilities                                                          |       | 2,316,171   |       | 1,600,772 |
|                                       | Current portion of long-term debt                                                  |       | 888,668     |       | 22,344 |
|                                       |                                                                               |       |        |       |   |
|                                       | Total current liabilities                                                          | $          | 3,936,596   | $          | 2,000,108 |
|                                       |                                                                               |       |        |       |
| LONG-TERM LIABILITIES                      |                                                                               |       |        |       |
|                                       | Note payable                                                                       | $          | 358,400     | $          | 380,651 |
|                                       | Subordinate commercial notes                                                       |       | 561,000     |       | 561,000 |
|                                       | Subordinate corporate notes                                                        |       | 2,000,000   |       | 2,000,000 |
|                                       | Convertible promissory note                                                        |       | 950,000     |       | 950,000 |
|                                       | Other long-term liabilities                                                        |       | 983,877     |       | 198,507 |
|                                       | Less current portion of long-term debt                                             |       | (888,668)   |       | (22,344) |
|                                       |                                                                               |       |        |       |   |
|                                       | Total long-term liabilities                                                        | $          | 3,964,609   | $          | 4,067,814 |
|                                       |                                                                               |       |        |       |
| TOTAL LIABILITIES                          | $                                                                                  | 7,901,205  | $           | 6,067,922  |
|                                       |                                                                               |       |        |       |
| STOCKHOLDERS' EQUITY                       |                                                                               |       |        |       |
|                                       | Series A Preferred stock - 5,000,000 shares authorized, $.0001 par value;          | $          | 305         | $          | 305 |
|                                       |    3,050,000 and 3,050,000 shares issued and outstanding, respectively   |
|                                       | Additional paid in capital - series A preferred stock                              |       | 1,524,695   |       | 1,524,695 |
|                                       | Common stock - 1,000,000,000 shares authorized, $.0001 par value;                  |       | 1,446       |       | 1,372 |
|                                       |    14,455,943 and 13,717,146 shares issued and outstanding, respectively |
|                                       | Additional paid in capital - common stock                                          |       | 10,284,900  |       | 9,967,973 |
|                                       | Receivable - unearned ESOP shares                                                  |       | (55,379)    |       | (62,072) |
|                                       | Accumulated deficit                                                                |       | (1,542,342) |       | (2,034,055) |
|                                       | Accumulated other comprehensive income (loss)                                      |       | -           |       | (10) |
|                                       |                                                                               |       |        |       |
| TOTAL STOCKHOLDERS' EQUITY                 | $                                                                                  | 10,213,625 | $           | 9,398,208  |
|                                       |                                                                               |       |        |       |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $                                                                                  | 18,114,830 | $           | 15,466,130 |
|                                       |                                                                               |       |        |       |
|                                       |                                                                               |       |        |       |
|                                            |                                                                                    |            |             |            |  |

SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

INTEGRITY MUTUAL FUNDS, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
|                                                      |  

                   2007 |  

                   2006 |  

                   2005 |
|-----------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------|
| OPERATING REVENUES                                        |                                                                                                                      |                                                                                                                      |                                                                                                                      |   |   |   |
|                                                      | Fee income                                                                                                                | $                                                                                                                         | 8,171,653                                                                                                                 | $ | 6,732,222 | $ | 4,788,853 |
|                                                      | Commission income                                                                                                         |                                                                                                                      | 30,318,836                                                                                                                |   | 20,054,742 |   | 14,651,903 |
|                                                      | Total revenue                                                                                                             | $                                                                                                                         | 38,490,489                                                                                                                | $ | 26,786,964 | $ | 19,440,756 |
|                                                      |                                                                                                                      |                                                                                                                      |                                                                                                                      |   |   |   |
| OPERATING EXPENSES                                        |                                                                                                                      |                                                                                                                      |                                                                                                                      |   |   |   |
|                                                      | Compensation and benefits                                                                                                 | $                                                                                                                         | 4,233,481                                                                                                                 | $ | 3,729,425 | $ | 3,330,165 |
|                                                      | Commission expense                                                                                                        |                                                                                                                      | 29,027,276                                                                                                                |   | 19,370,607 |   | 13,283,057 |
|                                                      | General and administrative expenses                                                                                       |                                                                                                                      | 2,602,750                                                                                                                 |   | 2,242,721 |   | 2,139,042 |
|                                                      | Sub-advisory expenses                                                                                                     |                                                                                                                      | 961,837                                                                                                                   |   | 887,896 |   | 432,534 |
|                                                      | Sales commissions amortized                                                                                               |                                                                                                                      | 443,661                                                                                                                   |   | 334,254 |   | 316,928 |
|                                                      | Depreciation and amortization                                                                                             |                                                                                                                      | 223,624                                                                                                                   |   | 157,361 |   | 143,155 |
|                                                      | Total operating expenses                                                                                                  | $                                                                                                                         | 37,492,629                                                                                                                | $ | 26,722,264 | $ | 19,644,881 |
|                                                      |                                                                                                                      |                                                                                                                      |                                                                                                                      |   |   |   |
| OPERATING INCOME (LOSS)                                   | $                                                                                                                         | 997,860                                                                                                                   | $                                                                                                                         | 64,700 | $ | (204,125) |
|                                                      |                                                                                                                      |                                                                                                                      |                                                                                                                      |   |   |   |
| OTHER INCOME (EXPENSES)                                   |                                                                                                                      |                                                                                                                      |                                                                                                                      |   |   |   |
|                                                      | Interest and other income                                                                                                 | $                                                                                                                         | 351,742                                                                                                                   | $ | 233,610 | $ | 54,896 |
|                                                      | Interest expense                                                                                                          |                                                                                                                      | (331,687)                                                                                                                 |   | (346,606) |   | (301,934) |
|                                                      | Net other income (expenses)                                                                                               | $                                                                                                                         | 20,055                                                                                                                    | $ | (112,996) | $ | (247,038) |
|                                                      |                                                                                                                      |                                                                                                                      |                                                                                                                      |   |   |   |
| INCOME (LOSS) BEFORE INCOME TAX

BENEFIT (EXPENSE)        | $                                                                                                                         | 1,017,915                                                                                                                 | $                                                                                                                         | (48,296) | $ | (451,163) |
|                                                      |                                                                                                                      |                                                                                                                      |                                                                                                                      |   |   |   |
| INCOME TAX BENEFIT (EXPENSE)                              |                                                                                                                 | (434,702)                                                                                                                 |                                                                                                                      | (11,091) |   | 118,750 |
|                                                      |                                                                                                                      |                                                                                                                      |                                                                                                                      |   |   |   |
| NET INCOME (LOSS)                                         | $                                                                                                                         | 583,213                                                                                                                   | $                                                                                                                         | (59,387) | $ | (332,413) |
|                                                      |                                                                                                                      |                                                                                                                      |                                                                                                                      |   |   |   |
| INCOME (LOSS) PER COMMON SHARE:                           |                                                                                                                      |                                                                                                                      |                                                                                                                      |   |   |   |
|                                                      |                                                                                                                      |                                                                                                                      |                                                                                                                      |   |   |   |   |
|                                                      |    Basic                                                                                                        | $                                                                                                                         | .03                                                                                                                       | $ | (.01) | $ | (.03) |
|                                                      |    Diluted                                                                                                      | $                                                                                                                         | .03                                                                                                                       | $ | (.01) | $ | (.03) |
|                                                      |                                                                                                                      |                                                                                                                      |                                                                                                                      |   |   |   |   |
| SHARES USED IN COMPUTING

INCOME (LOSS) PER COMMON SHARE: |                                                                                                                      |                                                                                                                      |                                                                                                                      |   |   |   |
|                                                      |                                                                                                                      |                                                                                                                      |                                                                                                                      |   |   |   |   |
|                                                      | Basic                                                                                                                     |                                                                                                                      | 14,359,162                                                                                                                |   | 13,696,486 |   | 13,430,040 |
|                                                      | Diluted                                                                                                                   |                                                                                                                      | 18,384,834                                                                                                                |   | 13,696,486 |   | 13,430,040 |
|                                                           |                                                                                                                           |                                                                                                                           |                                                                                                                           |  |  |  |  |

SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

INTEGRITY MUTUAL FUNDS, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005 
|                                                              |          Amounts |                          |       Shares |                          |
|-------------------------------------------------------------------|----------------------------------------------------------|-------------------------------|---------------------------------------|-------------------------------|
|                                                              |                                                     |      2007 |                                  |      2006 |   |      2005 |   |       2007 |       2006 |       2005 |   |
| Preferred stock and

additional paid-in capital                   |                                                     |                          |                                  |                          |   |   |   |   |   |   |   |
| Balance, beginning of year                                        | $                                                        | 1,525,000                     | $                                     | 1,525,000                     | $ | 1,525,000 |   | 3,050,000 | 3,050,000 | 3,050,000 |   |
| Preferred stock issued                                            |                                                     | -                             |                                  | -                             |   | - |   | - | - | - |   |
| Balance, end of year                                              | $                                                        | 1,525,000                     | $                                     | 1,525,000                     | $ | 1,525,000 |   | 3,050,000 | 3,050,000 | 3,050,000 |   |
|                                                              |                                                     |                          |                                  |                          |   |   |   |   |   |   |   |
| Common stock and

additional paid-in capital                      |                                                     |                          |                                  |                          |   |   |   |   |   |   |   |
|                                                              |                                                     |                          |                                  |                          |   |   |   |   |   |   |
| Balance, beginning of year                                        | $                                                        | 9,969,345                     | $                                     | 9,830,663                     | $ | 9,515,283 |   | 13,717,146 | 13,518,543 | 13,228,543 |   |
| Common stock issued                                               |                                                     | 239,301                       |                                  | 7,000                         |   | 6,600 |   | 738,797 | 198,603 | 290,000 |   |
| Stock option valuation                                            |                                                     | 77,700                        |                                  | 132,600                       |   | 310,500 |   | - | - | - |   |
| Purchase of common stock                                          |                                                     | -                             |                                  | (918)                         |   | (1,720) |   | - | - | - |   |
| Balance, end of year                                              | $                                                        | 10,286,346                    | $                                     | 9,969,345                     | $ | 9,830,663 |   | 14,455,943 | 13,717,146 | 13,518,543 |   |
|                                                              |                                                     |                          |                                  |                          |   |   |   |   |   |   |   |
| Accumulated deficit                                               |                                                     |                          |                                  |                          |   |   |   |   |   |   |   |
| Balance, beginning of year                                        | $                                                        | (2,034,055)                   | $                                     | (1,883,168)                   | $ | (1,459,255) |   |   |   |   |   |
| Net income (loss)                                                 |                                                     | 583,213                       |                                  | (59,387)                      |   | (332,413) |   |   |   |   |   |
| Preferred dividends                                               |                                                     | (91,500)                      |                                  | (91,500)                      |   | (91,500) |   |   |   |   |   |
| Balance, end of year                                              | $                                                        | (1,542,342)                   | $                                     | (2,034,055)                   | $ | (1,883,168) |   |   |   |   |   |
|                                                              |                                                     |                          |                                  |                          |   |   |   |   |   |   |   |
| ESOP activity                                                     |                                                     |                          |                                  |                          |   |   |   |   |   |   |   |
| Balance, beginning of year                                        | $                                                        | (62,072)                      | $                                     | (68,765)                      | $ | (75,455) |   |   |   |   |   |
| Repayments from ESOP                                              |                                                     | 6,693                         |                                  | 6,693                         |   | 6,690 |   |   |   |   |   |
| Balance, end of year                                              | $                                                        | (55,379)                      | $                                     | (62,072)                      | $ | (68,765) |   |   |   |   |   |
|                                                              |                                                     |                          |                                  |                          |   |   |   |   |   |   |   |
| Accumulated other

comprehensive income                           |                                                     |                          |                                  |                          |   |   |   |   |   |   |   |
|                                                              |                                                     |                          |                                  |                          |   |   |   |   |   |   |
| Balance, beginning of year                                        | $                                                        | (10)                          | $                                     | (9)                           | $ | 256 |   |   |   |   |   |
| Change in unrealized gain (loss) on available-for-sale securities |                                                     | 10                            |                                  | (1)                           |   | (265) |   |   |
| Balance, end of year                                              | $                                                        | -                             | $                                     | (10)                          | $ | (9) |   |   |   |   |
|                                                              |                                                     |                          |                                  |                          |   |   |   |   |   |   |
| Total stockholders' equity                                        | $                                                        | 10,213,625                    | $                                     | 9,398,208                     | $ | 9,403,721 |   |   |   |   |
|                                                                   |                                                          |                               |                                       |                               |  |  |  |  |  |  |  |  |  |  |

SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

INTEGRITY MUTUAL FUNDS, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
|                                                                                     |                 2007 |               2006 |                 2005 |
|------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------|
| CASH FLOWS FROM OPERATING ACTIVITIES                                                     |                                                                                            |                                                                                |                                                                                            |   |   |   |
|                                                                                     |                                                                                            |                                                                                |                                                                                            |   |   |   |
| Net income (loss)                                                                        | $                                                                                               | 583,213                                                                             | $                                                                                               | (59,387) | $ | (332,413) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: |                                                                                            |                                                                                |                                                                                            |   |   |   |
|                                                                                     |                                                                                            |                                                                                |                                                                                            |   |   |
|                                                                                     | Depreciation and amortization                                                                   |                                                                                | 223,624                                                                                         |   | 157,361 |   | 136,910 |
|                                                                                     | Sales commissions amortized                                                                     |                                                                                | 443,301                                                                                         |   | 334,254 |   | 316,928 |
|                                                                                     | Compensation expense - options                                                                  |                                                                                | 77,700                                                                                          |   | 132,600 |   | 310,500 |
|                                                                                     | Recruiting expense - stock                                                                      |                                                                                | -                                                                                               |   | 7,000 |   | 6,600 |
|                                                                                     | Loss on disposal of assets                                                                      |                                                                                | 813                                                                                             |   | - |   | 3,007 |
|                                                                                     | Gain (loss) on sale of available-for-sale securities                                            |                                                                                | 11                                                                                              |   | - |   | (270) |
| Effects on operating cash flows due to changes in:                                       |                                                                                            |                                                                                |                                                                                            |   |   |   |
|                                                                                     | Accounts receivable                                                                             |                                                                                | (397,981)                                                                                       |   | (333,245) |   | (275,116) |
|                                                                                     | Income taxes receivable                                                                         |                                                                                | 780                                                                                             |   | 154,186 |   | (154,966) |
|                                                                                     | Prepaids                                                                                        |                                                                                | 19,127                                                                                          |   | 6,222 |   | (1,606) |
|                                                                                     | Deferred sales commissions capitalized, net of CDSC collected                                   |                                                                                | (439,741)                                                                                       |   | (316,930) |   | (86,030) |
|                                                                                     | Deferred tax asset                                                                              |                                                                                | 197,109                                                                                         |   | 37,654 |   | (28,646) |
|                                                                                     | Other assets                                                                                    |                                                                                | (99,948)                                                                                        |   | 11,540 |   | (48,926) |
|                                                                                     | Service fees payable                                                                            |                                                                                | 8,499                                                                                           |   | 41,809 |   | (24,609) |
|                                                                                     | Accounts payable                                                                                |                                                                                | 325,754                                                                                         |   | 8,604 |   | 227,817 |
|                                                                                     | Income taxes payable                                                                            |                                                                                | 20,512                                                                                          |   | - |   | - |
|                                                                                     | Other liabilities                                                                               |                                                                                | 605,314                                                                                         |   | 388,905 |   | 216,770 |
|                                                                                     |                                                                                            |                                                                                |                                                                                            |   |   |   |   |
| Net cash provided by operating activities                                                | $                                                                                               | 1,568,087                                                                           | $                                                                                               | 570,573 | $ | 265,950 |
|                                                                                     |                                                                                            |                                                                                |                                                                                            |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                     |                                                                                            |                                                                                |                                                                                            |   |   |   |
|                                                                                     |                                                                                            |                                                                                |                                                                                            |   |   |   |
| Purchase of property and equipment                                                       | $                                                                                               | (184,255)                                                                           | $                                                                                               | (47,990) |   | (81,493) |
| Proceeds from sale of property and equipment                                             |                                                                                            | 5                                                                                   |                                                                                            | - |   | 500 |
| Purchase of available-for-sale securities                                                |                                                                                            | (2)                                                                                 |                                                                                            | - |   | - |
| Proceeds from sale of available-for-sale securities                                      |                                                                                            | 215                                                                                 |                                                                                            | - |   | 5,281 |
| Purchase of goodwill                                                                     |                                                                                            | (159,377)                                                                           |                                                                                            | - |   | (232,407) |
|                                                                                     |                                                                                            |                                                                                |                                                                                            |   |   |   |
| Net cash used by investing activities                                                    | $                                                                                               | (343,414)                                                                           | $                                                                                               | (47,990) | $ | (308,119) |
|                                                                                     |                                                                                            |                                                                                |                                                                                            |   |   |   |
|                                                                                          |                                                                                                 |                                                                                     |                                                                                                 |  |  |  |  |

SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
|                                                                        |                 2007 |                 2006 |                  2005 |
|-----------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------|
| CASH FLOWS FROM FINANCING ACTIVITIES                                        |                                                                                            |                                                                                            |                                                                                                  |   |   |   |
|                                                                        |                                                                                            |                                                                                            |                                                                                                  |   |   |   |
| Issuance of subordinated corporate notes                                    | $                                                                                               | -                                                                                               | $                                                                                                     | - | $ | 2,000,000 |
| Issuance of common stock                                                    |                                                                                            | 64,301                                                                                          |                                                                                                  | - |   | - |
| Issuance of convertible promissory note                                     |                                                                                            | -                                                                                               |                                                                                                  | 950,000 |   | - |
| Addition to notes payable                                                   |                                                                                            | -                                                                                               |                                                                                                  | 301,866 |   | - |
| Short-term borrowing                                                        |                                                                                            | 120,085                                                                                         |                                                                                                  | - |   | 650,025 |
| Repayments from ESOP                                                        |                                                                                            | 6,693                                                                                           |                                                                                                  | 6,693 |   | 6,690 |
| Redemption of common stock                                                  |                                                                                            | -                                                                                               |                                                                                                  | (918) |   | (1,720) |
| Reduction of short-term borrowing                                           |                                                                                            | (10,000)                                                                                        |                                                                                                  | (100,000) |   | (650,025) |
| Reduction of other debt obligations                                         |                                                                                            | -                                                                                               |                                                                                                  | - |   | (366,440) |
| Dividends paid                                                              |                                                                                            | (91,500)                                                                                        |                                                                                                  | (91,500) |   | (91,500) |
| Reduction of notes payable                                                  |                                                                                            | (22,251)                                                                                        |                                                                                                  | (1,024,866) |   | (239,998) |
| Redemption of subordinate debentures                                        |                                                                                            | -                                                                                               |                                                                                                  | - |   | (595,000) |
| Redemption of convertible debentures                                        |                                                                                            | -                                                                                               |                                                                                                  | (250,000) |   | - |
|                                                                        |                                                                                            |                                                                                            |                                                                                                  |   |   |   |
| Net cash provided (used) by financing activities                            | $                                                                                               | 67,328                                                                                          | $                                                                                                     | (208,725) | $ | 712,032 |
|                                                                        |                                                                                            |                                                                                            |                                                                                                  |   |   |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                   | $                                                                                               | 1,292,001                                                                                       | $                                                                                                     | 313,858 | $ | 669,863 |
| CASH AND CASH EQUIVALENTS

   AT BEGINNING OF YEAR                |                                                                                            | 1,851,249                                                                                       |                                                                                                  | 1,537,391 |   | 867,528 |
| CASH AND CASH EQUIVALENTS

   AT END OF YEAR                      | $                                                                                               | 3,143,250                                                                                       | $                                                                                                     | 1,851,249 | $ | 1,537,391 |
|                                                                        |                                                                                            |                                                                                            |                                                                                                  |   |   |   |
| SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION                           |                                                                                            |                                                                                            |                                                                                                  |   |   |   |
| Cash paid during the year for:                                              |                                                                                            |                                                                                            |                                                                                                  |   |   |   |
|                                                                        |   Interest                                                                                 | $                                                                                               | 332,035                                                                                               | $ | 260,844 | $ | 244,919 |
|                                                                        |   Income taxes                                                                             | $                                                                                               | 219,335                                                                                               | $ | 1,739 | $ | 100,177 |
|  

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES |                                                                                            |                                                                                            |                                                                                                  |   |   |   |
|                                                                        |                                                                                            |                                                                                            |                                                                                                  |   |   |   |   |
|                                                                        | Change in unrealized gain (loss) on available-for-sale securities                               | $                                                                                               | 10                                                                                                    | $ | (1) | $ | (265) |
|                                                                        | Increase (decrease) in goodwill                                                                 | $                                                                                               | 960,370                                                                                               | $ | (25,587) | $ | 168,497 |
|                                                                        | Increase (decrease) in other current liabilities                                                | $                                                                                               | -                                                                                                     | $ | - | $ | (55,597) |
|                                                                        | Increase (decrease) in other long-term liabilities                                              | $                                                                                               | 785,370                                                                                               | $ | (25,587) | $ | 224,094 |
|                                                                        | Increase (decrease) in common stock                                                             | $                                                                                               | 175,000                                                                                               | $ | - | $ | - |
|                                                                        | Recruiting expense - stock                                                                      | $                                                                                               | -                                                                                                     | $ | 7,000 | $ | 6,600 |
|                                                                        | Compensation expense - options                                                                  | $                                                                                               | 77,700                                                                                                | $ | 132,600 | $ | 310,500 |
|                                                                        | Preferred stock dividends declared                                                              | $                                                                                               | 22,875                                                                                                | $ | 22,875 | $ | 22,875 |
|                                                                        |                                                                                            |                                                                                            |                                                                                                  |   |   |   |   |
|                                                                             |                                                                                                 |                                                                                                 |                                                                                                       |  |  |  |  |

SEE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

INTEGRITY MUTUAL FUNDS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007, 2006 AND 2005

NOTE 1 - **NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES**  

The nature of operations and significant accounting policies of Integrity Mutual Funds, Inc., and Subsidiaries are presented to assist in understanding the Company's consolidated financial statements. 

**Nature of operations** - Integrity Mutual Funds, Inc., and Subsidiaries (the "Company") was established in September 1987 as a North Dakota corporation.  The Company derives its revenue primarily from providing investment management, distribution, shareholder services, fund accounting, and related services to sponsored mutual funds, as well as commissions earned from sales of mutual funds, insurance products, and various other securities.  Headquartered in Minot, North Dakota, the Company is marketing its services throughout the United States. 

**Principles of consolidation** - The consolidated financial statements include the accounts of Integrity Mutual Funds, Inc., and it's wholly owned subsidiaries, Integrity Money Management, Inc., Integrity Fund Services, Inc., Integrity Funds Distributor, Inc., and Capital Financial Services, Inc.  All significant inter-company transactions and balances have been eliminated in the accompanying consolidated financial statements. 

**Concentrations** - The Company derives its revenue primarily from investment advisory and administrative services provided to its sponsored mutual funds, as well as revenues derived from retail brokerage activities.  Company revenues are largely dependent on the total value and composition of assets under management, as well as the sales activity of registered representatives operating as independent contractors.  Accordingly, fluctuations in financial markets and the composition of assets under management impact revenues and results of operations. 

**Use of estimates** - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates. 

**Revenue recognition** - Investment advisory fees, transfer agent fees, accounting service fees, and administrative service fees are recorded as revenues as the related services are provided by the Company to sponsored mutual funds.  Commission income and the related clearing expenses are recorded on a trade-date basis as securities transactions occur. 

**Stock-based compensation -** In December of 2005, the Company adopted FASB Statement No. 123R, "Share-Based Payment," ("SFAS 123R") which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options, based on estimated fair values.  SFAS 123R supersedes the Company's previous accounting under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25"). 

**Cash and cash equivalents** - The Company's policy is to record all liquid investments with original maturities of three months or less as cash equivalents.  Liquid investments with maturities greater than three months are recorded as investments. 

**Accounts receivable -** The Company's receivables consist primarily of fees charged to the affiliated funds for services rendered and concessions related to registered representative activity.  Management evaluates the need for an allowance for doubtful accounts by identifying troubled accounts and using historical experience.  Accounts receivable are written off when management deems them uncollectible.  Recoveries of accounts receivable previously written off are recorded when received.  The Company does not charge interest on its receivables.

**Investments** - Investments in equity securities that have readily determinable fair values are classified and accounted for as available-for-sale.  Available-for-sale securities consist of investments in the Company's sponsored mutual funds and are recorded at fair value, with the change in fair value recorded as a component of other comprehensive income in the equity section of the balance sheet.  Cost of securities sold is recognized using the specific identification method.    

**Goodwill -** The Company accounts for goodwill under FASB Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"), which requires that goodwill and indefinite-lived other intangible assets deemed to have an indefinite useful life be assessed annually for impairment using fair value measurement techniques. 

**Property and equipment** - Property and equipment is stated at cost less accumulated depreciation computed on straight-line and accelerated methods over estimated useful lives as follows:  
| Equipment | 5-7 years      |
|-----------|----------------|
| Building  |  40 years |

**Deferred sales commissions** - Sales commissions paid to broker-dealers in connection with the sale of shares of the sponsored mutual funds sold without a front-end sales charge (B and C shares), are capitalized and amortized on a straight-line basis over a period of one to eight years, which approximates the period of time during which deferred sales commissions are expected to be recovered from distribution plan payments received from various sponsored mutual funds and potential contingent deferred sales charges received from shareholders of the various sponsored mutual funds.  Contingent deferred sales charges received by the Company are recorded as a reduction of unamortized deferred sales commissions. In accordance with Statement of Position 98-5, the commissions paid for the sale of Integrity Fund of Funds, Inc.'s shares have been expensed as incurred.  The contingent deferred sales charges received from early redemptions from Integrity Fund of Funds, Inc. have been recorded as revenue.  The Company is amortizing most of its sales commissions over one to five years for tax purposes. 

**Other assets** - Other assets include debt issue costs, computer software costs, and other miscellaneous assets.  Debt issue costs are amortized over the life of the corresponding debt and computer software costs are amortized over an estimated useful life. 

**Advertising** - Costs of advertising and promotion are expensed as incurred. Advertising and promotion costs aggregated $79,043 in 2007, $46,232 in 2006 and $66,409 in 2005. 

**Earnings per common share** - Basic earnings per common share was computed using the weighted average number of shares outstanding of 14,359,162 in 2007, 13,696,486 in 2006 and 13,430,040 in 2005.  Diluted earnings per common share is computed using the weighted average number of shares outstanding adjusted for share equivalents arising from unexercised stock warrants, stock options, and written put options.  The weighted average shares outstanding used in computing diluted earnings per common share were 18,384,834 in 2007, 13,696,486 in 2006 and 13,430,040 in 2005. 

**Income taxes** - The Company files a consolidated income tax return with its wholly owned subsidiaries.  The amount of deferred tax benefit or expense is recognized as of the date of the consolidated financial statements, utilizing currently enacted tax laws and rates.  Deferred tax benefits or expenses are recognized in the financial statements for the changes in deferred tax assets between years. 

**Reclassification** - Certain amounts from 2005 and 2006 have been reclassified to conform to the 2007 presentation.  These reclassifications had no effect on the Company's net income.  

**Impact of Newly Issued and Proposed Accounting Standards -** In December of 2007, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141R, "Business Combinations."  SFAS No. 141R will significantly change the accounting for business combinations.  Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions.  Statement No. 141R will change the accounting treatment for certain specific items, including: 

·          Acquisition costs will be generally expensed as incurred;

·          Non-controlling interests (formerly known as "minority interests") will be valued at fair value at the acquisition date;

·          Acquired contingent liabilities will be recorded at fair value at the acquisition date and subsequently measured at either the higher of such amount or the amount determined under existing guidance for non-acquired contingencies;

·          In-process research and development will be recorded at fair value as an indefinite-lived intangible assets at the acquisition date;

·          Restructuring costs associated with a business combination will be generally expensed subsequent to the acquisition date; and

·          Changed in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. 

SFAS No. 141R also includes as substantial number of new disclosure requirements.  SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  Earlier adoption is prohibited.  Accordingly, a calendar year-end company is required to record and disclose business combinations following existing GAAP until January 1, 2009.  The Company cannot predict what, if any, impact SFAS No. 141R will have on its consolidated financial statements when it becomes effective in 2008. 

In December of 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in Consolidated Financial Statements - An Amendment of ARB No. 51."  SFAS No. 160 establishes new accounting and reporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary.  Specifically, SFAF No. 160 requires the recognition of a non-controlling interest (minority interest) as equity in the consolidated financial statements and separate from the parent's equity.  The amount of net income attributable to the non-controlling interest will be included in consolidated net income on the face of the income statement.  SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  The Company does not believe the adoption of SFAS No. 160 will have a significant effect on the Company's consolidated financial statements. 

In February of 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115."  SFAS No. 159 permits an entity to choose to measure many financial instruments and certain other items at fair value.  SFAS No. 159 permits all entities to choose to measure eligible items at fair value at specified election dates.  SFAS No. 159 is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007.  The Company does not believe the adoption of SFAS No. 159 will have a significant effect on the Company's consolidated financial statements. 

In September of 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements."  SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosure about fair value measurements.  SFAS No. 157 is effective for fiscal years beginning after November 15, 2007.  SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements where fair value is the relevant measurement attribute.  Accordingly, SFAS No. 157 does not require any new fair value measurements.  The Company does not believe the adoption of SFAS No. 157 will have a significant effect on the Company's consolidated financial statements. 

NOTE 2 - **CASH AND CASH EQUIVALENTS** 

Cash and cash equivalents at December 31, 2007 and 2006 consist of the following:  
|             | Current Maturity | Current Interest Rate |   |      |   |
|------------------|------------------|-----------------------|--------|-----------|--------|
|             |             | Amount                |
|             |             | 2007                  | 2006   |
| Cash in checking | Demand           | -                     | $      | 2,932,403 | $      | 1,850,563 |
| Cash in savings  | Demand           | 0.20%                 |   | 210,847   |   | 686 |
|             |             |                  | $      | 3,143,250 | $      | 1,851,249 |
|                  |                  |                       |        |           |        |  |  |

NOTE 3 - **INVESTMENTS IN AND TRANSACTIONS WITH SPONSORED MUTUAL FUNDS** 

The Company's investments in sponsored mutual funds held as available-for-sale at December 31, 2007 and 2006:  
|                 | Aggregate Cost      | Gross Unrealized Holding Gains (Losses) |   |        |
|----------------------|---------------------|-----------------------------------------|--------|--------|
|                 |                     |
| Aggregate Fair Value |                |
|                 | 2007 - Mutual Funds |                                    | $      | -      | $ | - | $ | - |   |
|                 |                |                                    |   |   |   |   |   |   |   |
|                 | 2006 - Mutual Funds |                                    | $      | 223    | $ | (10) | $ | 213 |   |

Dividends earned on the Company's investments in sponsored mutual funds aggregated $1 in 2007, $7 in 2006 and $13 in 2005.   

The Company provides services to the Funds, which had aggregate net assets under management at December 31, 2007 of $395,664,082.  All services rendered by the Company are provided under contracts that definitively set forth the services to be provided and the fees to be charged.  The majority of these contracts are subject to periodic review and approval by each of the Fund's Board of Directors, Trustees and Shareholders.  Revenues derived from services rendered to the sponsored mutual funds were $6,044,265 in 2007, $5,461,110 in 2006 and $4,657,953 in 2005. 

Accounts receivable from the sponsored mutual funds aggregated $452,000 and $475,000 at December 31, 2007 and 2006, respectively.

NOTE 4 - **PROPERTY AND EQUIPMENT**  

Property and equipment at December 31, 2007 and 2006, consists of the following: 
|   |            2007 |           2006 |
|--------|-------------------------------------------------------------------|-------------------------------------------------------------|
|   | Office furniture and equipment                                    | $                                                           | 807,460 | $ | 709,208 |
|   | Building and land                                                 |                                                        | 1,363,589 |   | 1,280,104 |
|   |                                                              | $                                                           | 2,171,049 | $ | 1,989,312 |
|   | Accumulated depreciation and amortization                         |                                                        | (900,204) |   | (811,854) |
|   |                                                              | $                                                           | 1,270,845 | $ | 1,177,458 |

Depreciation expense totaled $90,050, $81,120 and $87,665 in 2007, 2006 and 2005, respectively. 

NOTE 5 - **BUSINESS ACQUISITIONS**  

**Purchase Combinations** - 

On April 22, 2005, the Company acquired the management rights to the IPS Millennium Fund and the IPS New Frontier Fund from IPS Advisory, Inc. ("IPS Advisory"), and merged them into a new Integrity Fund called the Integrity Growth & Income Fund.  The two funds had combined assets of approximately $57 million at the time of acquisition.  The purchase agreement called for total consideration of approximately 656,000 common shares of the Company.  The Company provided IPS Advisory with 250,000 common shares upon closing.  The remaining consideration of approximately 406,000 common shares, which is subject to adjustment based on retention of assets in the fund, is to be issued as follows:  203,000 common shares at the one-year anniversary of the closing date, and 203,000 common shares at the two-year anniversary of the closing date.  The shares will be subject to a put option, which will allow the holders of the shares to put them back to the Company at a price equal to the market price of the Company's shares as of the closing date, which was $.36 per share.  The put option will be exercisable with respect to one-third of the shares per year starting on the third anniversary of the closing date.  The Company will also provide IPS Advisory with a stock option incentive bonus based on growth in assets in the Fund based on the following schedule:  150,000 options on the Company's common shares when assets of the Fund reach $100 million and 150,000 options on the Company's common shares when the assets of the Fund reach $200 million.  The options will have a strike price of $.65 per share and mature 10 years from the closing date.  The securities issued in connection with this transaction will be issued on a private placement basis. In April of 2006, the one-year anniversary payment of 158,603 common shares was made, which reflected the assets of the acquired funds at the one-year anniversary.  In April of 2007, the two-year anniversary payment of 138,797 common shares was made, which reflected the assets of the acquired funds at the two-year anniversary. At December of 2007, the liability relating to this acquisition was valued at approximately $197,000. 

On March 7, 2007, the Company acquired certain assets of United Heritage Financial Services, Inc. (UHFS), a wholly-owned subsidiary of United Heritage Financial Group, Inc., of Meridian, Idaho.  UHFS had approximately 120 independent registered representatives who became part of Capital Financial Services, Inc. (CFS), the retail brokerage division of the Company.  Pursuant to the agreement, in exchange for receipt of the assets of UHFS set forth above, the Company agreed to issue 500,000 restricted IMFD shares and pay a deferred earn out cash payment totaling a maximum of $900,000, to be paid in 21 quarterly installments.  On March 7, 2007, the Company issued 500,000 restricted common shares to United Heritage Financial Group, Inc.  As a result of this issuance of shares, $175,000 was recorded by the Company as goodwill relating to the purchase of the assets.  As of December 31, 2007, the Company had made three quarterly installment payments totaling $60,548.  The liability relating to this acquisition is valued at $786,813 as of December 31, 2007, and has also been recorded by the Company as goodwill.  As of December 31, 2007, the total goodwill recorded relating to this acquisition was $1,121,189.  

NOTE 6 - **LONG-TERM DEBT** 

Long-term debt at December 31, 2007 and 2006 was as follows: 
|                            |   |   | Current Portion |   |      |   |
|---------------------------------|--------|--------|-----------------|--------|-----------|--------|
|                            |   | Rate   | 2007            | 2006   |
| Long-term debt:                 |   |   |            |   |      |   |   |   |
| First Western Bank              | 7.25%  |   | 23,855          |   | 358,400   |   | 380,651 |   |
| Subordinate commercial notes    | 9.00%  |   | 561,000         |   | 561,000   |   | 561,000 |   |
| Subordinate corporate notes     | 9.25%  |   | -               |   | 2,000,000 |   | 2,000,000 |   |
| Convertible promissory note     | 6.50%  |   | -               |   | 950,000   |   | 950,000 |   |
| Future payments on acquisitions |   |   | 303,813         |   | 983,877   |   | 198,507 |   |
|                            |   |   |            |   |      |   |   |   |
| Totals                          |   | $      | 888,668         | $      | 4,853,277 | $      | 4,090,158 |   |
|                                 |        |        |                 |        |           |        |  |  |  |  |  |  |  |  |

Summaries of the terms of the current long-term debt agreements follow:  

**First Western Bank** - In June of 1999, the Company converted its outstanding balance of $500,000 borrowed on its bank line-of-credit to long-term debt.  The debt was refinanced in October of 2005 and currently carries an interest rate of 7.25%, with monthly payments of $4,105.  On October 1, 2010, the remaining balance will be due in full. 

**Subordinate Commercial Notes** - The Company approved a $1 million intra-state subordinate commercial note offering limiting the sale in North Dakota, to North Dakota residents only.  The subordinate commercial notes do not represent ownership in the Company.  As of December 31, 2007, $561,000 in subordinate commercial notes was outstanding.  The subordinate commercial notes carry an interest rate of 9% per annum, payable semi-annually, and mature June 30, 2008.  The Company can call the subordinate commercial notes at par anytime after July 1, 2003. 

**Subordinate Corporate Notes**  - The Company approved a $2 million intra-state subordinate corporate note offering limiting the sale in North Dakota, to North Dakota residents only.  The subordinate corporate notes do not represent ownership in the Company.  As of December 31, 2007, $2,000,000 in subordinate corporate notes was outstanding.  The subordinate corporate notes carry an interest rate of 9.25% per annum, payable annually, and mature January 1, 2011.  The Company can call the subordinate corporate notes at par anytime after December 1, 2007. 

**Convertible Promissory Note  -** In October of 2006, the Company issued a $950,000 convertible promissory note to PawnMart, Inc., in a private placement.  The unsecured note carries an interest rate of 6.5% per annum, payable semi-annually, and matures on October 15, 2016.  The holder of the note has the right, at any time after October 15, 2009, to convert the note in whole or in part, into $0.0001 par value common shares of the Company.  The conversion price shall be equal to $0.50 per share.  The entire principal amount of this note shall be automatically converted into common shares at the conversion price on October 15, 2016.  ** **

**Future Payments on Acquisitions** - see Note 5 - Business Acquisitions 

The aggregate amount of required future payments on the above long-term debt at December 31, 2007, is as follows:
| Year ending December 31, |   |
|--------------------------|--------|
| 2008                     | $      | 888,668 |
| 2009                     |   | 262,816 |
| 2010                     |   | 538,793 |
| 2011                     |   | 2,180,000 |
| 2012                     |   | 33,000 |
| Thereafter               |   | 950,000 |
|                     |   |   |
| Total due                | $      | 4,853,277 |

NOTE 7 - **INCOME TAXES** 

The provision for income taxes is based on earnings before income taxes reported for financial statement purposes and consisted of the following: 
|                                  |           2007 |            2006 |            2005 |
|---------------------------------------|-------------------------------------------------------------|-------------------------------------------------------------------|-------------------------------------------------------------------|
| Current income tax benefit (expense): |                                                        |                                                              |                                                              |   |   |   |
|                                  | Federal                                                     | $                                                                 | (207,400)                                                         | $ | - | $ | - |
|                                  | State                                                       |                                                              | (26,352)                                                          |   | - |   | - |
|                                  | Total current tax benefit (expense)                         | $                                                                 | (233,752)                                                         | $ | - | $ | - |
| Deferred tax benefit (expense):       |                                                        |                                                              |                                                              |   |   |   |
|                                  | Federal                                                     | $                                                                 | (178,000)                                                         | $ | (9,700) | $ | 104,000 |
|                                  | State                                                       |                                                              | (22,950)                                                          |   | (1,391) |   | 14,750 |
|                                  | Total deferred tax benefit (expense)                        | $                                                                 | (200,950)                                                         | $ | (11,091) | $ | 118,750 |
|                                  |                                                        |                                                              |                                                              |   |   |   |
| Total provision for income tax        |                                                        |                                                              |                                                              |   |   |   |
|                                  | benefit (expense)                                           | $                                                                 | (434,702)                                                         | $ | (11,091) | $ | 118,750 |
|                                       |                                                             |                                                                   |                                                                   |  |  |  |  |

Deferred taxes arise because of different tax treatment between financial statement accounting and tax accounting, known as "temporary differences."  The Company records the tax effect of these temporary differences as "deferred tax assets" (generally items that can be used as a tax deduction or credit in future periods) and "deferred tax liabilities" (generally items for which the Company has received a tax deduction and has not yet been recorded in the consolidated statement of operations).  

Deferred tax assets (liabilities) were comprised of the following: 
|                      | 2007                                          | 2006    | 2005    |
|---------------------------|-----------------------------------------------|---------|---------|
| Deferred tax assets:      |                                          |    |    |   |   |   |
|                      | Net operating and capital loss carry forwards | $       | 37,892  | $ | 105,628 | $ | 133,648 |
|                      | Stock option compensation                     |    | 583,374 |   | 552,916 |   | 500,935 |
|                      | Other                                         |    | -       |   | - |   | - |
|                      | Total deferred tax assets                     | $       | 621,266 | $ | 658,544 | $ | 634,583 |
|                      |                                          |    |    |   |   |   |
| Deferred tax liabilities: |                                          |    |    |   |   |   |
|                      | Accumulated depreciation                      | $       | 62,624  | $ | 38,896 | $ | 51,406 |
|                      | Accumulated amortization                      |    | 413,923 |   | 277,820 |   | 203,695 |
|                      | Total deferred tax liabilities                | $       | 476,547 | $ | 316,716 | $ | 255,101 |
|                      |                                          |    |    |   |   |   |
| Net deferred tax asset    | $                                             | 144,719 | $       | 341,828 | $ | 379,482 |
|                           |                                               |         |         |  |  |  |  |
| Net deferred tax asset - current     | $ | -       | $ | 5,833   | $ | 52,609  |
|--------------------------------------|---|---------|---|---------|---|---------|
| Net deferred tax asset - non-current | $ | 144,719 | $ | 335,995 | $ | 326,873 |
| Net deferred tax asset               | $ | 144,719 | $ | 341,828 | $ | 379,482 |

As of December 31, 2007, the Company had federal and state net operating loss carry forwards of approximately $0 and $360,000, respectively, which will expire over the next six to twenty years if unused. 

As of December 31, 2007, the Company also has a capital loss carry forward of approximately $50,000 that will expire in 2008 if unused. 

A reconciliation of the difference between the expected income tax benefit (expense) computed at the U.S. statutory income tax rate of 35% and the Company's income tax expense is shown in the following table: 
|                                                   |     2007 |   2006 |     2005 |
|--------------------------------------------------------|-------------------------|-------------|-------------------------|
| Federal tax benefit (expense) at statutory rates       | $                       | (356,000)   | (35%)                   | $ | 17,000 | 35% | $ | 158,000 | 35% |
| State tax benefit (expense), net of federal tax effect |                    | (51,000)    | (5%)                    |   | 2,000 | 5% |   | 23,000 | 5% |
| Other                                                  |                    | (27,702)    | (3%)                    |   | (30,091) | (63%) |   | (62,250) | (14%) |
|                                                   |                    |        |                    |   |   |   |   |   |   |
| Actual tax benefit (expense)                           | $                       | (434,702)   | (43%)                   | $ | (11,091) | (23%) | $ | 118,750 | 26% |

Included in "other" are amounts separately allocated to stockholders' equity to recognize the related tax effect of the change in net unrealized gain or loss on securities available for sale, ESOP plan activity, and effects of stock-based employee compensation for the years ended December 31, 2007, 2006 and 2005. 

NOTE 8 - **STOCK WARRANTS, STOCK SPLITS, AND STOCK OPTIONS**  

The Company has authorized 2,100,000 perpetual warrants to certain organizers, directors, officers, employees and shareholders of the Company.  All of these warrants were issued between 1987 and 1990 and were accounted for in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees.  No compensation expense was recorded for these warrants as the exercise price exceeded the market price of the stock at the date of issue.  The Company plans to continue to apply APB Opinion No. 25 in accounting for these warrants.   These warrants, at the date of issue, allowed for the purchase of shares of stock at $2.00 per share.  The exercise prices of these warrants were adjusted to reflect stock splits of 2 for 1 in 2002, and 11 for 10 in 1990 and 1989.  2,000 warrants (adjusted for the 2 for 1 stock split in 2002) were exercised in 1997, leaving an outstanding balance of 2,098,000 warrants as of December 31, 2007. 

In addition to the warrants discussed above, the Company has also issued warrants to purchase 600,000 common shares in March of 2004 at an exercise price of $.60 per share.  These options are considered to be fully vested and have a contractual expiration date of September 1, 2010.  100,000 warrants were exercised in 2007, leaving an outstanding balance of 500,000 warrants as of December 31, 2007. 

The Company has entered into employment agreements with two key employees of the Company.  Upon execution of these employment agreements, a one-time granting of stock options took effect.  These options are fully vested and have a perpetual life.  Each employment contract stated the strike price for which options were granted.  In addition, the contracts granted options when the employee reach specified performance goals.  The employment contracts contain severance packages, buyout clauses, or other forms of commitments.  None of these commitments require payment of more than one year's salary. 

The Company has also issued options to directors as well as various other employees.  The options granted to employees were granted in connection with reaching certain performance goals.  These options are considered to be fully vested and have a contractual life of ten years. 

As part of the acquisition of Capital Financial Services, Inc., 500,000 options were granted in January of 2002 at a strike price of $.50.  These options are fully vested and expire ten years from the acquisition date.

The Company plans to issue additional common shares if any of its outstanding options are exercised.  There have been no options exercised to date.  

In December of 2005, the Company adopted the fair value recognition provisions of SFAS No. 123R for stock-based employee compensation.  Total compensation costs and deferred tax benefits recognized for stock-based compensation awards were as follows:  
|                             |   | 2007   |   | 2006    |   | 2005    |
|----------------------------------|--------|--------|--------|---------|--------|---------|
| Compensation costs               | $      | 77,700 | $      | 132,600 | $      | 310,500 |
| Less:  deferred tax benefit |   | 30,440 |   | 51,979  |   | 125,801 |
| Compensation costs, net of taxes | $      | 47,260 | $      | 80,621  | $      | 184,699 |

The fair value of each option was estimated on the date of the grant using the Black-Scholes option-pricing model.  The expected life of options granted range from 5 years to 10 years.  The following are the weighted average assumptions for each year: 
|                            | 2007    | 2006    | 2005    |
|---------------------------------|---------|---------|---------|
| Risk-free interest rate         | 4.59%   | 4.85%   | 4.08%   |
| Expected dividend yield         | 0%      | 0%      | 0%      |
| Expected stock price volatility | 80%     | 82%     | 83%     |
| Expected life of options        | 6 years | 5 years | 5 years |

Option activity for the last three years was as follows: 
|                             | Number of Options | Weighted Average Exercise Price per Share | Weighted Average Grant Date Fair Value | Aggregate Intrinsic Value |
|----------------------------------|-------------------|-------------------------------------------|----------------------------------------|---------------------------|
|                             |
|                             |
| Outstanding on January 1, 2005   | 3,835,613         | $                                         | .55                                    | $                         | .29 | $ | - |
|                             | Granted           | 1,412,500                                 |                                   | .49                       |   | .22 |   |   |
|                             | Exercised         | -                                         |                                   | -                         |   | - |   |   |
|                             | Canceled          | -                                         |                                   | -                         |   | - |   |   |
| Outstanding on December 31, 2005 | 5,248,113         | $                                         | .53                                    | $                         | .27 | $ | - |
|                             | Granted           | 510,000                                   |                                   | .49                       |   | .26 |   |   |
|                             | Exercised         | -                                         |                                   | -                         |   | - |   |   |
|                             | Canceled          | -                                         |                                   | -                         |   | - |   |   |
| Outstanding on December 31, 2006 | 5,758,113         | $                                         | .53                                    | $                         | .27 | $ | 608,000 |
|                             | Granted           | 130,000                                   |                                   | .86                       |   | .60 |   |   |
|                             | Exercised         | -                                         |                                   | -                         |   | - |   |   |
|                             | Canceled          | -                                         |                                   | -                         |   | - |   |   |
| Outstanding on December 31, 2007 | 5,888,113         | $                                         | .54                                    | $                         | .28 | $ | 1,081,950 |
|                                  |                   |                                           |                                        |                           |  |  |  |  |

Exercisable options at the end of 2007, 2006, and 2005 were 5,888,113, 5,758,113, and 5,248,113, respectively.  The following table summarizes information concerning options outstanding and exercisable as of December 31, 2007: 
| Range of Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life (Years) | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price |
|--------------------------|--------------------|-----------------------------------------------------|---------------------------------|--------------------|---------------------------------|
| $ .00 to $ .49           | 1,380,000          | Perpetual                                           | $                               | .42                | 1,380,000                       | $ | .42 |
| $ .50 to $ .99           | 3,935,000          | 7*                                                  | $                               | .52                | 3,935,000                       | $ | .52 |
| $1.00 to $1.50           | 573,113            | 7*                                                  | $                               | 1.01               | 573,113                         | $ | 1.01 |
| $ .00 to $ 1.50          | 5,888,113          | 7*                                                  | $                               | .54                | 5,888,113                       | $ | .54 |

* Excludes options with a perpetual life 

NOTE 9 - **EMPLOYEE BENEFIT PLANS** 

The Company sponsors a 401(K) plan for all its employees. Effective January 1, 2005, the Company implemented a match of up to 4% of employee deferrals.  Plan expenses paid for by the Company were $10,070, $7,796, and $4,790 for the years ended December 31, 2007, 2006, and 2005, respectively.  The matching contributions paid by the Company were $110,194 $92,825 and $91,991 for the years ended December 31, 2007, 2006 and 2005, respectively.  

The Company established an employee stock ownership plan ("ESOP") effective January 1, 1999.  Pursuant to the ESOP, each year the Company will determine the amount to contribute to the plan.  Contributions are made at the discretion of the Board of Directors.  To be eligible to participate in the plan, an employee must have completed one year of service and have attained age 21.  

During 2001, the ESOP purchased 208,000 shares of the Company's common stock, at a weighted average price of $.48 per share.  The purchase was funded with a loan of $100,000 from the Company, which is collateralized by the unallocated Company shares owned by the ESOP.  The loan will be repaid primarily from Company contributions.  The outstanding principal balance of the loan as of December 31, 2007, was $55,000 and the interest rate is 7% over a 15 year life.  All previous loans to the ESOP have been paid in full and shares purchased by those loans have been allocated to employees.   

The shares owned by the ESOP are held by a third party trustee and released for allocation to participants as repayments of the loan are made.  The number of shares released for allocation in any year is based upon the ratio of current year principal and interest payments to the total current year and projected future year's principal and interest payments.  Shares of common stock are allocated to each employee based on the relationship of their total compensation to the total compensation of all participants.  

At December 31, 2007 and 2006, cumulative allocated shares remaining in the trust were 595,016 and 581,072 respectively, and unallocated shares were 128,984 and 142,928 respectively, of which 13,944 and 13,944 respectively, were committed-to-be allocated.  Total ESOP contribution expense recognized was $11,800, $10,131 and $9,062 for the years ended December 31, 2007, 2006, and 2005, respectively.  The fair value of unallocated shares was $88,999 at December 31, 2007.  

NOTE 10 - **NET CAPITAL REQUIREMENTS**  

The Company's broker-dealer subsidiaries (Integrity Funds Distributor, Inc. and Capital Financial Services, Inc.) are member firms of the Financial Industry Regulatory Authority (FINRA) and are registered with the Securities and Exchange Commission (SEC) as broker-dealers.  Under the Uniform Net Capital Rule (Rule 15c3-1 under the Securities Exchange Act of 1934), the subsidiaries are required to maintain a minimum net capital and a ratio of aggregate indebtedness to net capital, as defined, of not more than 15 to 1.  At December 31, 2007, these subsidiaries had net capital of $465,968 and $1,504,627; minimum net capital requirements of $25,000 and $146,610; excess net capital of $440,968 and $1,358,017 and ratios of aggregate indebtedness to net capital of .33 to 1, and 1.46 to 1, respectively.  The subsidiaries are exempt from the reserve requirements of Rule 15c3-3.  

NOTE 11 - **OPERATING SEGMENTS**  

Integrity Mutual Funds, Inc., derives a portion of its revenues and net income from providing investment advisory, distribution, transfer agency, fund accounting, and other administrative services to the Funds.  Capital Financial Services, Inc. ("CFS") provides another substantial portion of revenues through sales of mutual funds, insurance products, and various other securities.  CFS also earns investment advisory fees in connection with its registered investment advisor.  

The Company organizes its current business units into two reportable segments: mutual fund services and broker-dealer services. The mutual fund services segment provides investment advisory, distribution, transfer agency, fund accounting, and other administrative services to the Funds.  The broker-dealer segment distributes securities and insurance products to retail investors through a network of registered representatives. 

The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. Most of the businesses were acquired as a unit, and the management at the time of the acquisition was retained.  The accounting policies are the same as those described in the summary of significant accounting policies. 

As of, and for the year ended, December 31, 2007: 
|   | Mutual Fund Services                              | Broker-Dealer Services |            Total |
|--------|---------------------------------------------------|------------------------|--------------------------------------------------------------------|
|   |
|   | Revenue from external customers                   | $                      | 6,857,033                                                          | $ | 31,633,456 | $ | 38,490,489 |
|   | Inter-segment revenues                            |                   | 15,193                                                             |   | 142,797 |   | 157,990 |
|   | Interest expense                                  |                   | 331,687                                                            |   | - |   | 331,687 |
|   | Stock-based employee compensation                 |                   | 77,700                                                             |   | - |   | 77,700 |
|   | Sales commissions amortized                       |                   | 443,661                                                            |   | - |   | 443,661 |
|   | Depreciation and amortization                     |                   | 212,929                                                            |   | 10,695 |   | 223,624 |
|   | Income (loss) before income tax benefit (expense) |                   | (627,144)                                                          |   | 1,645,059 |   | 1,017,915 |
|   | Income tax benefit (expense)                      |                   | 210,198                                                            |   | (644,900) |   | (434,702) |
|   | Net income (loss)                                 |                   | (416,946)                                                          |   | 1,000,159 |   | 583,213 |
|   | Segment assets                                    |                   | 14,001,290                                                         |   | 4,191,932 |   | 18,193,222 |
|   | Expenditure for segment assets                    |                   | 133,644                                                            |   | 50,611 |   | 184,255 |

As of, and for the year ended, December 31, 2006: 
|   | Mutual Fund Services                              | Broker-Dealer Services |             Total |
|--------|---------------------------------------------------|------------------------|--------------------------------------------------------------------------|
|   |
|   | Revenue from external customers                   | $                      | 6,526,128                                                                | $ | 20,260,836 | $ | 26,786,964 |
|   | Inter-segment revenues                            |                   | -                                                                        |   | 98,895 |   | 98,895 |
|   | Interest expense                                  |                   | 346,606                                                                  |   | - |   | 346,606 |
|   | Stock-based employee compensation                 |                   | 132,600                                                                  |   | - |   | 132,600 |
|   | Sales commissions amortized                       |                   | 334,254                                                                  |   | - |   | 334,254 |
|   | Depreciation and amortization                     |                   | 153,858                                                                  |   | 3,503 |   | 157,361 |
|   | Income (loss) before income tax benefit (expense) |                   | (1,034,533)                                                              |   | 986,237 |   | (48,296) |
|   | Income tax benefit (expense)                      |                   | 375,509                                                                  |   | (396,600) |   | (11,091) |
|   | Net income (loss)                                 |                   | (659,024)                                                                |   | 599,637 |   | (59,387) |
|   | Segment assets                                    |                   | 12,724,714                                                               |   | 2,819,808 |   | 15,544,522 |
|   | Expenditure for segment assets                    |                   | 33,791                                                                   |   | 14,199 |   | 47,990 |

As of, and for the year ended, December 31, 2005: 
|   | Mutual Fund Services                              | Broker-Dealer                  Services |             Total |
|--------|---------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------|
|   |
|   | Revenue from external customers                   | $                                                                                                                            | 5,319,221                                                                | $ | 14,121,535 | $ | 19,440,756 |
|   | Inter-segment revenues                            |                                                                                                                         | -                                                                        |   | 24,523 |   | 24,523 |
|   | Interest expense                                  |                                                                                                                         | 301,934                                                                  |   | - |   | 301,934 |
|   | Stock-based employee compensation                 |                                                                                                                         | 310,500                                                                  |   | - |   | 310,500 |
|   | Sales commissions amortized                       |                                                                                                                         | 316,928                                                                  |   | - |   | 316,928 |
|   | Depreciation and amortization                     |                                                                                                                         | 141,713                                                                  |   | 1,442 |   | 143,155 |
|   | Income (loss) before income tax benefit (expense) |                                                                                                                         | (1,113,101)                                                              |   | 661,938 |   | (451,163) |
|   | Income tax benefit (expense)                      |                                                                                                                         | 382,150                                                                  |   | (263,400) |   | 118,750 |
|   | Net income (loss)                                 |                                                                                                                         | (730,951)                                                                |   | 398,538 |   | (332,413) |
|   | Segment assets                                    |                                                                                                                         | 13,298,738                                                               |   | 1,972,568 |   | 15,271,306 |
|   | Expenditure for segment assets                    |                                                                                                                         | 71,683                                                                   |   | 9,810 |   |  81,493 |

Reconciliation of Segment Information 
|   |         2007 |       2006 |         2005 |
|--------|-------------------------------------------------|-------------------------------------|-------------------------------------------------|
|   | Revenues                                        |                                |                                            |   |   |   |   |
|   | Total revenues for reportable segments          |                                | 38,648,479                                      |   | 26,885,859 |   | 19,465,279 |
|   | Elimination of inter-company revenues           |                                | (157,990)                                       |   | (98,895) |   | (24,523) |
|   | Consolidated total revenue                      | $                                   | 38,490,489                                      | $ | 26,786,964 | $ | 19,440,756 |
|   |                                            |                                |                                            |   |   |   |   |
|   | Profit                                          |                                |                                            |   |   |   |   |
|   | Total reportable segment profit (loss)          | $                                   | 583,213                                         | $ | (59,387) | $ | (332,413) |
|   |                                            |                                |                                            |   |   |   |   |
|   | Assets                                          |                                |                                            |   |   |   |   |
|   | Total assets for reportable segments            | $                                   | 18,193,222                                      | $ | 15,544,522 | $ | 15,271,306 |
|   | Elimination of inter-company receivables        |                                | (78,392)                                        |   | (78,392) |   | (78,392) |
|   | Consolidated assets                             | $                                   | 18,114,830                                      | $ | 15,466,130 | $ | 15,192,914 |

NOTE 12 - **COMMITMENTS AND CONTINGENCIES** 

The Company entered into a three-year lease for office space in Huntington, New York on June 1, 2004.  The monthly lease payments were $1,500 for the first two years, and $1,545 for the third year.  The lease expired on May 31, 2007.  Total rent expense was $6,180, $18,315, and $18,000 for the years ended December 31, 2007, 2006, and 2005, respectively. 

The Company has various leases for office equipment that expire over the next several years through 2011.  The total rent expense for these leases was $34,000, $33,000, and $30,000 for December 31, 2007, 2006 and 2005 respectively.  

The following is a schedule by years of future minimum rental payments on operating leases as of December 31, 2007. 
|   | Years ending December 31,            |   |   |
|--------|--------------------------------------|--------|--------|
|   | 2008                                 | $      | 29,060 |
|   | 2009                                 |   | 25,145 |
|   | 2010                                 |   | 23,267 |
|   | 2011                                 |   | 3,615  |
|   | Total minimum future rental payments | $      | 81,087 |

NOTE 13 - **GOODWILL** 

The changes in the carrying amount of goodwill for the years ended December 31, 2007, 2006, and 2005, are as follows: 
|   | Mutual Fund Services                                                 | Broker-Dealer Services | Total     |
|--------|----------------------------------------------------------------------|------------------------|-----------|
|   |
|   | Balance as of January 1, 2005                                        | $                      | 6,950,733 | $ | 2,478,752 | $ | 9,429,485 |
|   | Goodwill acquired during the period                                  |                   | 468,656   |   | - |   | 468,656 |
|   | Goodwill disposed of during the period                               |                   | (67,752)  |   | - |   | (67,752) |
|   | Impairment losses                                                    |                   | -         |   | - |   | - |
|   | Balance as of December 31, 2005                                      | $                      | 7,351,637 | $ | 2,478,752 | $ | 9,830,389 |
|   | Goodwill acquired during the period                                  |                   | -         |   | - |   | - |
|   | Goodwill acquisition price adjustment during the period (see Note 5) |                   | (37,588)  |   | - |   | (37,588) |
|   | Impairment losses                                                    |                   | -         |   | - |   | - |
|   | Balance as of December 31, 2006                                      | $                      | 7,314,049 | $ | 2,478,752 | $ | 9,792,801 |
|   | Goodwill acquired during the period                                  |                   |      |   | 1,156,320 |   | 1,156,320 |
|   | Goodwill acquisition price adjustment during the period (see Note 5) |                   | (1,443)   |   | (35,130) |   | (36,573) |
|   | Impairment losses                                                    |                   | -         |   | - |   | - |
|   | Balance as of December 31, 2007                                      | $                      | 7,312,606 | $ | 3,599,942 | $ | 10,912,548 |

Goodwill impairment is determined using a multi-step process.  The first step of the goodwill impairment test is to determine the fair value of a reporting unit, including goodwill.  The estimates of fair value of a reporting unit, generally the Company's business segments, are determined using various valuation techniques. The two main techniques include the use of industry valuation benchmarks for comparable publicly traded companies and acquisition transaction multiples of comparable companies. For each method, valuation benchmarks are collected from third party sources such as independent investment banks or reporting services. Various industry average valuation multiples are calculated. Examples include value to revenue, value to assets under management and value to operating income. The average industry valuation multiples are then applied to the Company's operating characteristics to determine an estimate of the Company's business segment fair value. For example, the industry average multiple of value to assets under management is applied to the Company's assets under management. The business segments fair value is then calculated as a weighted average of the different industry valuation multiples. 

The next step is to calculate the implied fair value of goodwill by determining the fair value of equity for each business segment and substituting it for the book value of equity on the balance sheet. The implied fair value of goodwill is then calculated. 

The final step is to compare the implied fair value of goodwill as calculated to the book value of goodwill for each business segment. If the implied fair value of goodwill is equal to or greater than the book value of goodwill, there is no impairment. If the implied fair value of goodwill is less than the book value of goodwill, there is impairment and the goodwill is written down to the fair value number. 

The Company tests goodwill for impairment annually during the second quarter of each fiscal year.  Testing is done at the reporting unit level using a fair value approach, in accordance with the provisions of SFAS 142.  The annual testing resulted in no impairment charges to goodwill in 2005, 2006, or 2007.  If an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value, goodwill will be evaluated for impairment between annual tests. 

NOTE 14 - **EARNINGS PER SHARE** 

Basic earnings per share are computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding during the period.  Diluted earnings per share reflect per share amounts that would have resulted if dilutive potential common stock had been converted to common stock.  The following reconciles amounts reported in the financial statements: 
|                                                                         | For the Year Ended December 31, 2007 |
|------------------------------------------------------------------------------|--------------------------------------|
|                                                                         |                                 | Income (Numerator) | Shares (Denominator) |   | Per Share Amount |
| Income from continuing operations                                            | $                                    | 583,213 |   |   |   |
| Less: preferred stock dividends                                              |                                 | (91,500) |   |   |   |
| Income available to common stockholders -

  Basic earnings per share   |                                 | 491,713 | 14,359,162 | $ | .03 |
| Effect of dilutive securities:                                               |                                 |   |   |   |   |
| Options and warrants                                                         |                                 | - | 2,125,672 |   |   |
| Convertible promissory note                                                  |                                 | 37,050 | 1,900,000 |   |   |
| Income available to common stockholders -

  Diluted earnings per share | $                                    | 528,763 | 18,384,834 | $ | .03 |
|                                                                         | For the Year Ended December 31, 2006 |
|------------------------------------------------------------------------------|--------------------------------------|
|                                                                         |                                 | Income (Numerator) | Shares (Denominator) |   | Per Share Amount |
| Loss from continuing operations                                              | $                                    | (59,387) |   |   |   |
| Less: preferred stock dividends                                              |                                 | (91,500) |   |   |   |
| Loss available to common stockholders -

  Basic earnings per share     |                                 | (150,887) | 13,696,486 | $ | (.01) |
| Effect of dilutive securities:                                               |                                 |   |   |   |   |
| Options and warrants                                                         |                                 | - | - |   |   |
| Income available to common stockholders -

  Diluted earnings per share | $                                    | (150,887) | 13,696,486 | $ | (.01) |
|                                                                         | For the Year Ended December 31, 2005 |
|------------------------------------------------------------------------------|--------------------------------------|
|                                                                         |                                 | Income (Numerator) | Shares (Denominator) |   | Per Share Amount |
| Loss from continuing operations                                              | $                                    | (332,413) |   |   |   |
| Less: preferred stock dividends                                              |                                 | (91,500) |   |   |   |
| Loss available to common stockholders -

  Basic earnings per share     |                                 | (423,913) | 13,430,040 | $ | (.03) |
| Effect of dilutive securities:                                               |                                 |   |   |   |   |
| Options and warrants                                                         |                                 | - | - |   |   |
| Income available to common stockholders -

  Diluted earnings per share | $                                    | (423,913) | 13,430,040 | $ | (.03) |

Options and warrants to purchase 573,113 common shares at exercise prices between $1.00 and $1.43 were outstanding at December 31, 2007, but were not included in the computation of earnings per share for the year ended December 31, 2007.  The options and warrants were not included in the calculation because their exercise prices were greater than the average market price of the common shares during the period. 

In December of 2003, the Company issued 3,050,000 Series A preferred shares for total proceeds of $1,525,000.  The holders of the Series A preferred shares are entitled to receive cumulative dividends at a rate of 6% per year, payable quarterly.  These dividends are in preference and priority to any payment of any dividend on the Company's common shares.  The holders of the Series A preferred shares are also entitled to a liquidation preference of $.50 per share.  The Series A preferred shares are convertible to the Company's common shares at the rate of one share of common shares for one share of Series A preferred shares at any time after issuance.  At any time after five years from issuance, the Company has the right to redeem any or all of the Series A preferred shares after a sixty day notice upon payment of the liquidation preference of $.50 per share to the holders, for a total of $1,525,000. 

The Series A preferred shares were not included in the computation of diluted earnings per share for the year ended December 31, 2007, because their effect was anti-dilutive. 

NOTE 15 - **COMPREHENSIVE INCOME (LOSS)** 

Comprehensive income (loss) is reported on the accompanying consolidated statement of shareholders' equity as a component of retained earnings (accumulated deficit) and consists of net income (loss) and other gains and losses affecting shareholders' equity that, under accounting principles generally accepted in the United States of America, are excluded from net income (loss).  For the Company, such items consist primarily of unrealized gains and losses on available-for-sale equity investments. 

The following summary sets forth the components of other comprehensive income (loss), net of tax, accumulated in shareholders' equity:
|                                    | For the Year Ended December 31, 2007 |
|-----------------------------------------|--------------------------------------|
| Net Income                              | $                                    | 583,213 |
| Other Comprehensive Income, net of tax: |                                 |   |
|   Unrealized gain on securities    |                                 | 10 |
| Total Comprehensive Income              | $                                    | 583,223 |
|                                    | For the Year Ended December 31, 2006 |
|-----------------------------------------|--------------------------------------|
| Net Loss                                | $                                    | (59,387) |
| Other Comprehensive Income, net of tax: |                                 |   |
|   Unrealized loss on securities    |                                 | (1) |
| Total Comprehensive Loss                | $                                    | (59,388) |
|                                    | For the Year Ended December 31, 2005 |
|-----------------------------------------|--------------------------------------|
| Net Loss                                | $                                    | (332,413) |
| Other Comprehensive Income, net of tax: |                                 |   |
|   Unrealized loss on securities    |                                 | (265) |
| Total Comprehensive Loss                | $                                    | (332,678) |

NOTE 16 - **RISKS AND UNCERTAINTIES**  

**               ** The Company has a concentration of credit risk for cash deposits at various financial institutions.  These deposits may at times exceed amounts covered by insurance provided by the U.S. Federal Deposit Insurance Corporation (FDIC).  The maximum loss that could have resulted from the risk totaled approximately $2,856,608 as of December 31, 2007.  

NOTE 17 **- RELATED PARTY TRANSACTIONS**  

Mr. Jeffrey A. Cummer was elected a director of Integrity Mutual Funds, Inc. on June 1, 2006.  Mr. Cummer is president and senior portfolio manager of SMH Capital Advisors, Inc.  During 2007, Integrity Mutual Funds, Inc. paid monthly sub-advisory fees to SMH Capital Advisors, Inc. for advisory services provided to the Integrity High Income Fund and Integrity All Season Fund.  Sub-advisory payments made to SMH Capital Advisors, Inc. totaled $699,230 in 2007, $386,826 in 2006 and $144,636 in 2005.  

In May of 2006, Xponential, Inc. issued a tender offer to purchase up to 3,000,000 shares of Integrity Mutual Funds, Inc. common shares at a purchase price of $0.40 per share.  At the close of the tender offer, Xponential, Inc. had obtained 1,323,642 shares, representing approximately 9.76% of the outstanding Integrity Mutual Funds, Inc. common shares.  Mr. Cummer is Chairman of the Board and an executive officer of Xponential, Inc.  

In October of 2006, Integrity Mutual Funds, Inc. issued a $950,000 convertible promissory note to PawnMart, Inc., in a private placement.  The unsecured note carries an interest rate of 6.5% per annum, payable semi-annually, and matures on October 15, 2016.  The holder of the note has the right, at any time after October 15, 2009, to convert the note in whole or in part, into $0.0001 par value common shares of the Company.  The conversion price shall be equal to $0.50 per share.  The entire principal amount of this note shall be automatically converted into common shares at the conversion price on October 15, 2016.   PawnMart, Inc. is a wholly owned subsidiary of Xponential, Inc.   Mr. Cummer is Chairman of the Board and Executive Vice President of PawnMart, Inc.  Interest payments made to PawnMart, Inc. relating to this note totaled $62,436 in 2007. 

Mr. Steven D. Lysne was elected a director of Integrity Mutual Funds, Inc. on May 27, 2005.  Mr. Lysne is CEO and general manager of SRT Communications, Inc.  Integrity Mutual Funds, Inc. pays SRT Communications, Inc. for telephone and internet services.  Payments made to SRT Communications, Inc. totaled $65,817 in 2007, $60,333 in 2006, and $60,348 in 2005. 

NOTE 18 - **SUBSEQUENT EVENTS**  

On February 29, 2008, Integrity Mutual Funds, Inc., announced that Mark R. Anderson, Chief Executive Officer, President, and Director resigned from his positions with the Company, effective February 29, 2008.  Concurrent with the resignation, the Company announced that Bradley P. Wells, Senior Vice President of Retail Administration of the Company, would succeed Mr. Anderson as Interim Chief Executive Officer and President of the Company. 

In connection with Mr. Anderson's resignation, the Company has entered into a Separation Agreement with Mr. Anderson, dated February 29, 2008 (the "Separation Agreement").  Under the terms of the Separation Agreement, subject to Mr. Anderson meeting his obligations thereunder in all material respects, Mr. Anderson is entitled to receive a payment in the amount of $59,000 (the "Separation Payment"), payable on March 14, 2008 (less required withholding deductions including federal and state taxes and FICA).  The Company will pay to Mr. Anderson his vested balance in the Company's Employee Stock Ownership Plan on March 14, 2008, or as soon thereafter as practicable. 

 

ADDITIONAL INFORMATION

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM					ON ADDITIONAL INFORMATION

To the Stockholders and Directors					Integrity Mutual Funds, Inc. and Subsidiaries					Minot, North Dakota  

Our report on our audit of the basic consolidated financial statements of Integrity Mutual Funds, Inc. and Subsidiaries for the years ended December 31, 2007, 2006 and 2005, appears on page F-1.  Those audits were made for the purpose of forming an opinion on such consolidated financial statements taken as a whole.  The information on page F-25, related to the 2007, 2006 and 2005 consolidated financial statements, is presented for purposes of additional analysis and is not a required part of the basic consolidated financial statements.  Such information, has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements, and, in our opinion, the information is fairly stated in all material respects in relation to the basic consolidated financial statements for the years ended December 31, 2007, 2006 and 2005, taken as a whole. 

We also have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Integrity Mutual Funds, Inc. and Subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the two years in the periods ended December 31, 2004 and 2003, none of which is presented herein, and we expressed unqualified opinions on those consolidated financial statements.  In our opinion, the information on page F-25 relating to the 2004 and 2003 consolidated financial statements is fairly stated in all material respects in relation to the basic consolidated financial statements from which it has been derived.    

By /s/ Brady, Martz & Associates, P.C.

BRADY, MARTZ & ASSOCIATES, P.C.					Minot, North Dakota USA  

March 13, 2008

INTEGRITY MUTUAL FUNDS, INC., AND SUBSIDIARIES

SELECTED FINANCIAL DATA					FOR THE YEARS ENDED DECEMBER 31, AS INDICATED
|                              |   |       |        |          |     |
|-----------------------------------|--------|------------|--------------------------------------|--------------------------------------------------|--------------------|
|                              | 2007   | 2006       | 2005                                 | 2004                                             | 2003*              |
| Operating revenue                 | $      | 38,490,489 | $                                    | 26,786,964                                       | $                  | 19,440,756 | $ | 16,990,571 | $ | 13,956,173 |
|                              |   |       |                                 |                                             |               |   |   |   |   |   |
| Operating income (loss)           | $      | 997,860    | $                                    | 64,700                                           | $                  | (204,125) | $ | (165,018) | $ | 496,009 |
|                              |   |       |                                 |                                             |               |   |   |   |   |   |
| Income tax benefit (expense)      | $      | (434,702)  | $                                    | (11,091)                                         | $                  | 118,750 | $ | 124,110 | $ | (144,330) |
|                              |   |       |                                 |                                             |               |   |   |   |   |   |
| Basic earnings (loss) per share   | $      | .03        | $                                    | (.01)                                            | $                  | (.03) | $ | (.03) | $ | .01 |
|                              |   |       |                                 |                                             |               |   |   |   |   |   |
| Diluted earnings (loss) per share | $      | .03        | $                                    | (.01)                                            | $                  | (.03) | $ | (.03) | $ | .01 |
|                              |   |       |                                 |                                             |               |   |   |   |   |   |
| Total assets                      | $      | 18,114,830 | $                                    | 15,466,130                                       | $                  | 15,192,914 | $ | 13,907,987 | $ | 15,675,216 |
|                              |   |       |                                 |                                             |               |   |   |   |   |   |
| Long-term obligations             | $      | 4,853,277  | $                                    | 4,090,158                                        | $                  | 4,138,745 | $ | 2,749,649 | $ | 4,422,427 |
|                              |   |       |                                 |                                             |               |   |   |   |   |   |
| Shareholders' equity              | $      | 10,213,625 | $                                    | 9,398,208                                        | $                  | 9,403,721 | $ | 9,505,829 | $ | 9,201,106 |
|                              |   |       |                                 |                                             |               |   |   |   |   |   |
| Dividends paid                    | $      | 0          | $                                    | 0                                                | $                  | 0 | $ | 0 | $ | 0 |
|                                   |        |            |                                      |                                                  |                    |  |  |  |  |  |  |

*Excludes discontinued operations of Magic Internet Services, Inc.

INTEGRITY MUTUAL FUNDS, INC., AND SUBSIDIARIES

QUARTERLY RESULTS OF CONSOLIDATED OPERATIONS (UNAUDITED)  
|                         | **            Quarter Ended** |
|------------------------------|--------------------------------------------------------------------------------------|
|                         |        3-31-07                                         |             6-30-07 |            9-30-07 |      12-31-07 |
| Revenues                     | $                                                                                    | 8,271,397 | $ | 10,440,235 | $ | 10,197,203 | $ | 9,581,654 |
| Operating income (loss)      |                                                                                 | (307,941) |   | 480,817 |   | 401,719 |   | 423,265 |
| Other income (expense)       |                                                                                 | (46,104) |   | 24,068 |   | 75,727 |   | (33,636) |
| Income tax benefit (expense) |                                                                                 | 122,474 |   | (203,824) |   | (193,095) |   | (160,257) |
| Net income (loss)            |                                                                                 | (231,571) |   | 301,061 |   | 284,351 |   | 229,372 |
|                         |                                                                                 |   |   |   |   |   |   |   |
| Per Share, Basic             |                                                                                 |   |   |   |   |   |   |   |
|                         | Operating income (loss)                                                              |   | (.02) |   | .03 |   | .03 |   | .03 |
|                         | Other income (expense)                                                               |   | (.00) |   | .00 |   | .00 |   | (.00) |
|                         | Income tax benefit (expense)                                                         |   | .01 |   | (.02) |   | (.01) |   | (.01) |
| Per Share, Diluted           |                                                                                 |   |   |   |   |   |   |   |
|                         | Operating income (loss)                                                              |   | (.02) |   | .03 |   | .02 |   | .02 |
|                         | Other income (expense)                                                               |   | (.00) |   | .00 |   | .00 |   | (.00) |
|                         | Income tax benefit (expense)                                                         |   | .01 |   | (.01) |   | (.01) |   | (.01) |
|                              |                                                                                      |  |  |  |  |  |  |  |  |
|                         | **             Quarter Ended** |
|------------------------------|--------------------------------------------------------------------------------------------|
|                         | 3-31-06                                                                                    | 6-30-06 | 9-30-06 | 12-31-06 |
| Revenues                     | $                                                                                          | 6,347,664 | $ | 6,356,201 | $ | 7,015,276 | $ | 7,067,823 |
| Operating income (loss)      |                                                                                       | (78,763) |   | 93,472 |   | (168,118) |   | 218,109 |
| Other income (expense)       |                                                                                       | (69,398) |   | 16,534 |   | (7,090) |   | (53,042) |
| Income tax benefit (expense) |                                                                                       | 30,097 |   | (23,140) |   | 56,406 |   | (74,454) |
| Net income (loss)            |                                                                                       | (118,065) |   | 86,867 |   | (118,801) |   | 90,612 |
|                         |                                                                                       |   |   |   |   |   |   |   |
| Per Share (1)                |                                                                                       |   |   |   |   |   |   |   |
|                         | Operating income (loss)                                                                    |   | (0.01) |   | 0.01 |   | (0.01) |   | 0.01 |
|                         | Other income (expense)                                                                     |   | (0.01) |   | 0.00 |   | (0.00) |   | (0.00) |
|                         | Income tax benefit (expense)                                                               |   | 0.00 |   | (0.00) |   | 0.00 |   | (0.00) |
|                              |                                                                                            |  |  |  |  |  |  |  |  |  |  |
|                    | **               Quarter Ended** |
|-------------------------|--------------------------------------------------------------------------------------------------------|
|                    | 3-31-05                                                                                                | 6-30-05 | 9-30-05 | 12-31-05 |
| Revenues                | $                                                                                                      | 4,548,021 | $ | 4,631,193 | $ | 5,070,069 | $ | 5,191,473 |
| Operating income (loss) |                                                                                                   | 34,650 |   | (71,269) |   | (82,531) |   | (84,975) |
| Other expense           |                                                                                                   | (49,672) |   | (51,413) |   | (80,578) |   | (65,375) |
| Income tax benefit      |                                                                                                   | 9,457 |   | 45,759 |   | 12,198 |   | 51,336 |
| Net loss                |                                                                                                   | (5,565) |   | (76,923) |   | (150,911) |   | (99,014) |
|                    |                                                                                                   |   |   |   |   |   |   |   |
| Per Share (1)           |                                                                                                   |   |   |   |   |   |   |   |
|                    | Operating income (loss)                                                                                |   | 0.00 |   | (0.00) |   | (0.01) |   | (0.01) |
|                    | Other expense                                                                                          |   | (0.00) |   | (0.00) |   | (0.01) |   | (0.01) |
|                    | Income tax benefit                                                                                     |   | 0.00 |   | 0.00 |   | 0.00 |   | 0.01 |
|                         |                                                                                                        |  |  |  |  |  |  |  |  |  |  |

(1) For calculating per share amounts, basic and diluted common share are not materially different. 

The above financial information is unaudited.  In the opinion of management, all adjustments (which are of a normal recurring nature) have been included for a fair presentation.