UNITED STATES				SECURITIES AND EXCHANGECOMMISSION**Washington****, DC 20549**

Form 10-KSB

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

 

For the fiscalyear ended December 31, 2005

 

[  ]      TRANSITION REPORT UNDER SECTION13 OR 15(d) OF THE SECURITIES				EXCHANGE ACT OF1934

 

For thetransition period from ________ to ________

 

Commission filenumber:  000-25958

 
| INTEGRITY MUTUAL FUNDS,INC.                         |
|-----------------------------------------------------|
| (Name of smallbusiness issuer  in its charter) |

 
| North Dakota                                                  | 45-0404061                       |
|---------------------------------------------------------------|----------------------------------|
| (State or otherjurisdiction of incorporation or organization) | (IRS EmployerIdentification No.) |

 
| 1 Main StreetNorth                      |
|-----------------------------------------|
| Minot, NorthDakota 58703                |
| (Address ofprincipal executive offices) |

 
| Issuer'stelephone number:                                     | (701)852-5292                 |
|---------------------------------------------------------------|-------------------------------|
|                                                          |                          |
| Securitiesregistered under Section 12(b) of the Exchange Act: | None                          |
|                                                          |                          |
| Securitiesregistered under Section 12(g) of the Exchange Act: | Common Stock;$.0001 par value |

Check whether the issuer is not required tofile reports pursuant to Section 13 or 15(d) of the ExchangeAct.  [   ] 

Check whether the issuer:  (1) filedall reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorterperiod that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past90 days.        YES[X]          NO [   ] 

Check if there is no disclosure ofdelinquent filers in response to Item 405 of Regulation S-Bcontained in this form, and no disclosure will be contained, tothe best of registrant's knowledge, in definitive proxy orinformation statements incorporated by reference in Part III ofthis Form 10-KSB or any amendment to this Form 10-KSB. [X] 

Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of theExchange Act).  YES [   ]  NO [X] 

The issuer's revenues for the year endedDecember 31, 2005, were $19,440,756. 

Aggregate market value of voting andnon-voting common equity held by non-affiliates of the registrantas of February 28, 2006: $4,068,380. 

On February 28, 2006, there were 13,558,543shares 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 25, 2006, are incorporated by reference in certain sectionsof Part III. 

Transitional Small Business DisclosureFormat:            YES [   ]  NO [X]

10-KSB 

INTEGRITY MUTUAL FUNDS,INC. 

INDEX 
|     |                                                                                                          | Page # |
|----------|---------------------------------------------------------------------------------------------------------------|--------|
| PART I   |                                                                                                          |   |
|     |                                                                                                          |   |
| Item 1.  | Description of Business                                                                                       | 1      |
|     |                                                                                                          |   |
| Item 2.  | Description of Property                                                                                       | 5      |
|     |                                                                                                          |   |
| Item 3.  | Legal Proceedings                                                                                             | 6      |
|     |                                                                                                          |   |
| Item 4.  | Submission of Matters to a Vote of SecurityHolders                                                            | 6      |
|     |                                                                                                          |   |
| PART II  |                                                                                                          |   |
|     |                                                                                                          |   |
| Item 5.  | Market for Common Equity and RelatedStockholder Matters                                                       | 6      |
|     |                                                                                                          |   |
| Item 6.  | Management's Discussion and Analysis ofFinancial Condition and Results of Operations                          | 7      |
|     |                                                                                                          |   |
| Item 7.  | Financial Statements                                                                                          | 14     |
|     |                                                                                                          |   |
| Item 8.  | Changes In and Disagreements withAccountants on Accounting and Financial Disclosure                           | 14     |
|     |                                                                                                          |   |
| Item 8A. | Controls and Procedures                                                                                       | 14     |
|     |                                                                                                          |   |
| Item 8B. | Other Information                                                                                             | 14     |
|     |                                                                                                          |   |
| PART III |                                                                                                          |   |
|     |                                                                                                          |   |
| Item 9.  | Directors, Executive Officers, Promoters andControl Persons; Compliance with Section 16(a) of the ExchangeAct | 15     |
|     |                                                                                                          |   |
| Item 10. | Executive Compensation                                                                                        | 15     |
|     |                                                                                                          |   |
| Item 11. | Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters                 | 15     |
|     |                                                                                                          |   |
| Item 12. | Certain Relationships and RelatedTransactions                                                                 | 15     |
|     |                                                                                                          |   |
| Item 13. | Exhibits                                                                                                      | 15     |
|     |                                                                                                          |   |
| Item 14. | Principal Accountant Fees and Services                                                                        | 19     |
|     |                                                                                                          |   |
|     | SIGNATURES                                                                                                    | 20     |

PART I 

Item 1. Description of Business 

BUSINESSDEVELOPMENT 

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 seven separate portfoliosincluding the Integrity Value Fund, Integrity Small Cap GrowthFund, Integrity Health Sciences Fund, Integrity Technology Fund,Integrity High Income Fund, Integrity Growth & Income Fund,and Integrity All Season Fund.  The Company also sellsmutual funds, insurance products, and various other securitiesthrough another wholly-owned subsidiary, Capital FinancialServices, Inc. ("CFS"). 

As of December 31, 2005, total assets undermanagement/service in the Funds were $381,914,392, compared to$360,055,850 as of December 31, 2004 and $394,289,570 as ofDecember 31, 2003. 

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, Chief Executive Officer of the Company. The Company's principal offices are located at 1 Main StreetNorth, Minot, North Dakota 58703.  The Company also has anoffice in Huntington, New York.  As of December 31, 2005,the Company had 48 full-time employees and 2 part-time employees,consisting of officers, investment management, securitiesdistribution, shareholder services, data processing, compliance,accounting and clerical support staff. 

On May 25, 2000, the Company acquired ARMSecurities Corporation for cash.  On January 15, 2002, theCompany acquired 100% of the equity stock of Capital FinancialServices, Inc. ("CFS"), a full-service brokerage firm based inMadison, Wisconsin for cash, common stock subject to a putoption, stock options, and convertible debentures.  Thesecurities issued in connection with this transaction were issuedon a private placement basis.  CFS specializes in providinginvestment products and services to independent investmentrepresentatives, financial planners, and investment advisors, andcurrently supports approximately 250 investment representativesand investment advisors. On June 3, 2003, the Company announcedthe consolidation of ARM Securities Corporation and CapitalFinancial Services, Inc., into one firm - Capital FinancialServices, Inc. 

On May 23, 2003, the Company acquired themanagement rights to the CNB Funds, which included the $13million Canandaigua Equity Fund, a large-cap growth fund, and the$1 million Canandaigua Bond Fund.  The purchase agreementcalled for total consideration of approximately $285,000. The majority of the purchase price, or approximately $160,000,was paid upon closing.  The remaining consideration ofapproximately $125,000, which was subject to adjustment based onretention of assets in the funds, was to be paid asfollows:  $62,500 at the one-year anniversary of the closingdate, and $62,500 at the two-year anniversary of the closingdate.  The total purchase price was paid by using availablecash on hand.  In June of 2004, the one-year anniversarypayment of approximately $44,000 was paid, which reflected theassets in the acquired funds at the one-year anniversary. In June of 2005, the final payment of approximately $26,000 wasmade, which reflected the assets in the acquired funds at thetwo-year anniversary. 

On May 30, 2003, the Company acquired 100%of the equity stock of Abbington Capital Management, Inc. The purchase consideration was comprised of 700,000 shares ofunregistered $.0001 par value common stock of the Companydetermined by both parties to have a total value of$210,000.  The common stock was issued in a privateplacement, exempt from registration, pursuant to the followingdelivery schedule:  200,000 shares at closing; 200,000shares on August 31, 2003; 200,000 shares on December 31, 2003;and 100,000 shares on April 30, 2004.  As a part of thetransaction, the Company received a license for the PortfolioManager's Stock Selection Matrix, a quantitative investment modelfor managing equity portfolios.  The shares were issued in aprivate placement exempt from registration under federalsecurities laws or any state registration requirements and aresubject to the resale restrictions on unregisteredsecurities. 

On September 19, 2003, the Company acquiredthe management rights to the four stock funds in the WillametteFamily of Funds.  The four funds had combined assets ofapproximately $63 million at the time of acquisition.  Thepurchase agreement called for total consideration ofapproximately $1,400,000.  The majority of the purchaseprice, or approximately $900,000, was paid upon closing. The remaining consideration of approximately $500,000, which wassubject to adjustment based on retention of assets in the funds,was to be paid as follows:  $350,000 within five businessdays of the one-year anniversary of the closing date, and$150,000 within five business days of the two-year anniversary ofthe closing date.  The total purchase price was paid byutilizing a commercial bank loan and lines of credit, as well asavailable cash on hand.  In September of 2004, the one-yearanniversary payment of approximately $323,000 was made, whichreflected the assets of the acquired funds at the one-yearanniversary.  In September of 2005, the final payment ofapproximately $90,000 was made, which reflected the assets in theacquired funds at the two-year anniversary. 

On December 19, 2003, the Company acquiredthe management rights to the Maine and New Hampshire Tax-SaverBond Funds from Forum Financial Group.  The two funds hadcombined assets of approximately $43 million at the time ofacquisition.  The purchase agreement called for totalconsideration of approximately $750,000.  The majority ofthe purchase price, or approximately $425,000, was paid uponclosing.  The remaining consideration of approximately$325,000, which was subject to adjustment based on retention ofassets in the funds, was placed in an escrow account that was tobe paid out on the first anniversary of the closing date. The total purchase price was paid with cash generated from aprivate placement of preferred stock.  In December of 2004,the final payment of approximately $285,000 was made, whichreflected the assets in the acquired funds at the one-yearanniversary. 

On February 12, 2004, the Company enteredinto a joint venture agreement with SMH Capital Advisors,Inc.  In accordance with the agreement, the Company set up aFund as a new series under the Integrity Funds called theIntegrity High Income Fund.  The Company's wholly-ownedsubsidiary, Integrity Money Management, Inc., serves as theFund's investment advisor.  SMH Capital Advisors, Inc.,serves as the Fund's investment sub-advisor.  The Company'swholly-owned subsidiary, Integrity Funds Distributor, Inc.,serves as distributor to the Fund, and the Company's wholly-ownedsubsidiary, Integrity Fund Services, Inc., serves asadministrator, transfer agent, and fund accountant to theFund.  The initial set-up of the Fund did not require amaterial cash outlay by the Company.  The assets of theIntegrity High Income Fund were approximately $62 million as ofDecember 31, 2005. 

On January 27, 2005, the Company enteredinto a joint venture agreement with All Season FinancialAdvisors, Inc.  In accordance with the agreement, theCompany set up a Fund as a new series under the Integrity Fundscalled the Integrity All Season Fund.  The Company'swholly-owned subsidiary, Integrity Money Management, Inc., servesas the Fund's investment advisor.  All Season FinancialAdvisors, Inc., serves as the Fund's investmentsub-advisor.  The Company's wholly-owned subsidiary,Integrity Funds Distributor, Inc., serves as distributor to theFund, and the Company's wholly-owned subsidiary, Integrity FundServices, Inc., serves as administrator, transfer agent, and fundaccountant to the Fund.  The initial set-up of the Fund didnot require a material cash outlay by the Company.  Theassets of the Integrity All Season Fund were approximately $11million as of December 31, 2005. 

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 will be subjectto a 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 will be 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 December of 2005, theliability relating to this acquisition was valued atapproximately $224,000 to reflect the assets in the acquiredfunds as of December 31, 2005. 

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 Securities and Exchange Commission ("SEC") under theInvestment Advisers Act of 1940 (the "Advisers Act"). Integrity Money Management provides investment advisory servicesunder investment advisory agreements with the Funds.  As ofDecember 31, 2005, Integrity Money Management managed$381,914,392 of assets under management/service. 

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 National Association ofSecurities Dealers, Inc. (the "NASD"). Integrity FundsDistributor serves as principal underwriter and distributor forthe Funds.  Integrity Funds Distributor earns theunderwriter's portion of front-end sales loads ("FESLs") inconnection with sales of shares of Funds subject to FESLs, Rule12b-1 fees pursuant to Rule 12b-1 plans adopted by certain of theFunds, and contingent deferred sales charges ("CDSCs") inconnection with redemptions of shares of Funds subject toCDSCs.  Effective October 1, 2004, Integrity FundsDistributor, Inc., acquired and assumed all of the assets,liabilities, and business of ND Capital, Inc.  Both of thesebroker-dealer firms are wholly-owned by the Company.  Thereorganization was designed to increase operating efficiency andpromote cost savings. 

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 out-of-pocket expenses. 

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 with theNASD as a broker-dealer.  CFS specializes in providinginvestment products and services to independent investmentrepresentatives, financial planners, and investment advisors andcurrently supports approximately 250 investment representativesand investment advisors. 

Magic Internet Services,Inc. 

Effective June 26, 2003, the Company soldits 51% ownership in Magic Internet Services, Inc. 

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 voluntarily waived or reduced, and the investmentadvisor may absorb other Fund expenses for a period of time toensure that the Funds have competitive fee structures. 

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) amajority vote cast in person at a meeting of the relevant Fund'sBoard of Directors or Trustees called for that purpose, or (ii) avote of the holders of a majority of the relevant Fund'soutstanding voting securities, and (b) a majority of the relevantFunds' directors or trustees who are not parties to theinvestment advisory agreement or interested persons of the Fundsor the Company within the meaning of the Advisers Act. 

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 Advisers Act.  To date, no such investmentadvisory 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 contracts between the Funds and IntegrityFund Services are approved annually by the Funds' board ofdirectors or trustees. 

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 effected by other broker-dealers and also earnsCDSCs in connection with redemptions of Fund shares subject toCDSCs. 

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, they must be approvedannually by the Board of Directors or Trustees, including amajority of the disinterested directors or trustees of eachFund.  Each Plan is subject to termination at any time by amajority of the Funds' disinterested directors or trustees or bythe Funds' shareholders. 

Brokerage Commissions 

CFS's primary source of revenue iscommission revenue in connection with sales of shares of mutualfunds,  insurance products, and various othersecurities.  CFS receives commission and Rule 12b-1servicing revenue generated from the sale of investment productsoriginated by its registered representatives.  CFS pays aportion 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.  The Company's subsidiaries are registered withvarious federal and state government agencies, including the SEC,as well as the NASD, a self-regulatory industry organization. 

Integrity Funds Distributor and CFS areregistered broker-dealers, subject to extensive regulation andperiodic examinations by the SEC, the NASD, 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 the NASD, 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, the NASD 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 financial services industry is highlycompetitive.  Industry sources indicate that there areapproximately 8,000 open-end investment companies of varyingsizes, investment objectives and policies which offer theirshares to the investing public in the United States.  Sinceits inception, the Company has competed with numerous larger,more established mutual fund management organizations.  TheCompany is also in competition with the financial services andinvestment alternatives offered by stock brokerage firms,insurance companies, banks, savings and loans associations, andother financial institutions, as well as investment advisoryfirms.  The Company sells Fund shares principally throughthird party broker-dealers.  The Company competes for theservices of such third party broker-dealers with other sponsorsof 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 which 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 the Companyto reduce the FESLs and CDSCs charged upon the sale or redemptionof Fund shares.  However, reduced sales loads would make thesale of Fund shares less attractive to the broker-dealers uponwhom the Company depends for the distribution of Fund shares. Inthe alternative, the Company might itself be required to payadditional fees, expenses, commissions, or charges in connectionwith the distribution of Fund shares which could have amaterially adverse effect on the Company's earnings. 

The Company also participates in two otherhighly competitive related sectors of the financial servicesindustry; retail brokerage and investment advisory services. TheCompany competes directly with full-service stock brokeragefirms, registered investment advisors, banks, regionalbroker-dealers, and other independent broker-dealers. Each ofthese competitors offers to the public many of the sameinvestment products and services offered by the Company. Further,other broker-dealers providing the same services heavily recruitthe representatives and advisors transacting business through theCompany. This competition forces the Company to maintain highlevels of support services and commission payouts for theserepresentatives and advisors. These high levels of services andpayouts could have a materially adverse effect on the Company'searnings. 

RECENTDEVELOPMENTS 

None 

AVAILABILITY OFSEC REPORTS 

All SEC reports are made available on theCompany's website at www.integrityfunds.com.  These reports,including annual reports on Form 10-KSB, quarterly reports ofForm 10-QSB, and current reports on Form 8-K, are available onthe same day they are filed with the SEC. 

Item2     Description of Property 

The Company operates the majority of itsbusiness out of its location at 1 Main Street North, Minot, NorthDakota in which it occupies approximately 15,000 square feet ofoffice space in a 28,000 square foot building, which itowns.  As of December 31, 2005, the building has a $401,483mortgage.  The Company also leases approximately 800 squarefeet of office space in Huntington, New York for part of itsinvestment advisory services.

Item3     Legal Proceedings 

The North Dakota Attorney General's Officeand the North Dakota Securities Department raised issuesconcerning the Company's status as a North Dakota venture capitalcorporation under Chapter 10-30.1 of the North Dakota CenturyCode, including the method and manner of the Company's compliancewith reporting requirements respecting the sales of certaininvestments made by the Company in non-qualified entities underthe venture capital corporation statute, the availability of theventure capital corporation exemption from registration for thesales of certain securities, and the subsequent use of offeringcirculars omitting references to information pertaining to theCompany's compliance with North Dakota's venture capitalcorporation requirements. 

On March 22, 2004, the Company entered intoa settlement agreement with the North Dakota Attorney General'sOffice, as a result of which the Company agreed (i) to change itscorporate structure from that of a venture capital corporation tothat of a regular business corporation, (ii) to fully andcompletely comply with all of the provisions of Chapter 10-30.1of the North Dakota Century Code until such time as the corporatestructure is changed, and (iii) to pay a civil penalty in theamount of $10,000 if the Company did not comply with theconditions in subparagraphs (i) and (ii) above.  Theshareholders of the Company approved the change in its corporatestructure at the Annual Meeting of Shareholders held May 28,2004, and the Company believes that it has otherwise compliedwith the requirements of the settlement agreement. 

On March 9, 2005, the Company and the NorthDakota Securities Department reached a settlement of alloutstanding issues raised by the North Dakota SecuritiesDepartment with respect to the Company's status as a North Dakotaventure capital corporation and exemptions from registrationclaimed thereunder.  As a result of such settlement, theCompany made a voluntary donation of $25,000 to the InvestorEducation and Technology Fund and no civil or criminal penaltieswere assessed against the Company, any of its subsidiaries, orany of its principals. 

The Company has no other pending legalproceedings which are material to the financial affairs of theCompany. 

Item4     Submission of Matters to a Vote ofSecurity Holders 

No matters were submitted to a vote ofsecurity holders during the fourth quarter ended December 31,2005. 

PART II 

Item5     Market for Common Equity and RelatedStockholder Matters 

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 on July1, 2002.  On December 30, 2005, the closing price of theCompany's Common Stock on the OTC Bulletin Board was $.34 pershare. At February 28, 2006, there were approximately 735shareholders 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. 
|           | 2005        | 2004        |
|----------------|-------------|-------------|
|           | Fiscal Year | Fiscal Year |
|           |        |        |   |   |
| Quarter        | High        | Low         | High | Low |
|           |        |        |   |   |
| First Quarter  | .460        | .360        | .510 | .350 |
| Second Quarter | .420        | .300        | .520 | .350 |
| Third Quarter  | .390        | .300        | .500 | .350 |
| Fourth Quarter | .390        | .300        | .450 | .300 |

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

Small Business IssuerRepurchases 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 2005  | -                               | -                      | -                                                                               | $597,754                                                                               |
| November 2005 | -                               | -                      | -                                                                               | $597,754                                                                               |
| December 2005 | -                               | -                      | -                                                                               | $597,754                                                                               |
| Total         | -                               | -                      | -                                                                               | $597,754                                                                               |

Item6     Management's Discussion and Analysis ofFinancial Condition and Results of Operations 

The following information is provided inconnection with, and should be read in conjunction with, theconsolidated financial statements and notes appearing elsewherein this Form 10-KSB. 

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/SERVICE

By Investment Objective 
| As of December31,                     | 2005                                | 2004                                | 2003                                |
|---------------------------------------|-------------------------------------|-------------------------------------|-------------------------------------|
|                                  |                                |                                |                                |
|                                  |                                |                                |                                |
| FIXED-INCOME                          |                                |                                |                                |
| Tax-Free Funds                        | $ 213,405,941                       |  $ 267,867,980                 | $ 309,275,765                       |
| Taxable Funds (Corporate/Government)  | 62,121,269                          | 20,983,945                          | 1,005,816                           |
| TOTAL FIXED-INCOME FUNDS              |  $ 275,527,210                 | $ 288,851,925                       | $ 310,281,581                       |
|                                  |                                |                                |                                |
|                                  |                                |                                |                                |
| EQUITY                                |                                |                                |                                |
| Fund of Funds                         | $     6,029,000 | $     6,517,292 | $     7,141,871 |
| Equity Funds                          | 100,358,182                         | 64,686,633                          | 76,866,118                          |
| TOTAL EQUITY FUNDS                    | $ 106,387,182                       | $  71,203,925             | $  84,007,989             |
|                                  |                                |                                |                                |
| TOTAL ASSETS UNDER MANAGEMENT/SERVICE | $ 381,914,392                       | $ 360,055,850                       | $ 394,289,570                       |

A substantial portion of the Company'srevenues depend upon the amount of assets under itsmanagement/service.  Assets under management/service can beaffected by the addition of new funds to the group, theacquisition of another investment management company, purchasesand redemptions of mutual fund shares, and investmentperformance, which may depend on general market conditions. Assets under the Company's management/service increased by$21,858,542 (6.1%) in 2005 compared to 2004 and decreased by$34,233,720 (8.7%) in 2004 compared to 2003.  Fixed incomeassets decreased by 4.6% in 2005 compared to 2004, and decreasedby 6.9% in 2004 compared to 2003.  Fixed income assetsaccounted for 72.1% of the total assets under management/servicein 2005 and 80.2% in 2004.  Equity assets increased by 49.4%in 2005 compared to 2004, and decreased 15.2% in 2004 compared to2003. Equity assets accounted for 27.9% of total assets undermanagement/service in 2005 and 19.8% in 2004.

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. 

In December of 2005, the Company adoptedFASB Statement No. 123R, "Share-Based Payment," ("SFAS 123R")which requires the measurement and recognition of compensationexpense for all share-based payment awards made to employees anddirectors, including employee stock options, based on estimatedfair values.  SFAS 123R supersedes the Company's previousaccounting under Accounting Principles Board Opinion No. 25,"Accounting for Stock Issued to Employees," ("APB 25").  TheCompany adopted SFAS 123R using the modified retroactiverestatement method, which requires the restatement of all periodspresented to reflect stock-based employee compensation cost underthe fair value-based accounting method for all employee awardsgranted, modified, or settled in fiscal years beginning afterDecember 15, 1994.  (See Note 9 - Stock Warrants, StockSplits, and Stock Options, located in the audited financialstatements.)
|                                                                        |                                                            |      |       |       |       |       | Variance 2005 to 2004 | Variance 2004 to 2003 |
|-----------------------------------------------------------------------------|-----------------------------------------------------------------|-----------|------------|------------|------------|------------|-----------------------|-----------------------|
|                                                                        |                                                            |      |       | (Restated) |       | (Restated) |
|                                                                        |                                                            | 2005      |       | 2004       |       | 2003       |
|                                                                        |                                                            |      |       |       |       |       |                  |                  |
| OPERATINGREVENUES                                                           |                                                            |      |       |       |       |       |                  |                  |
|                                                                        | Fee income                                                      | $         | 4,788,853  | $          | 4,382,788  | $          | 3,274,984             | 9.3%                  | 33.8% |
|                                                                        | Commissions                                                     |      | 14,651,903 |       | 12,607,783 |       | 10,681,189            | 16.2%                 | 18.0% |
|                                                                        | Total revenue                                                   | $         | 19,440,756 | $          | 16,990,571 | $          | 13,956,173            | 14.4%                 | 21.7% |
|                                                                        |                                                            |      |       |       |       |       |                  |                  |
| OPERATINGEXPENSES                                                           |                                                            |      |       |       |       |       |                  |                  |
|                                                                        | Compensation and benefits                                       | $         | 3,330,165  | $          | 3,120,309  | $          | 1,919,798             | 6.7%                  | 62.5% |
|                                                                        | General and administrative expenses                             |      | 2,571,576  |       | 2,208,038  |       | 1,713,187             | 16.5%                 | 28.9% |
|                                                                        | Commission expense                                              |      | 13,283,057 |       | 11,405,775 |       | 9,347,887             | 16.5%                 | 22.0% |
|                                                                        | Sales commissions amortized                                     |      | 316,928    |       | 321,942    |       | 376,386               | (1.6)%                | (14.5)% |
|                                                                        | Depreciation and amortization                                   |      | 143,155    |       | 99,525     |       | 102,906               | 43.8%                 | (3.3)% |
|                                                                        | Total operating expenses                                        | $         | 19,644,881 | $          | 17,155,589 | $          | 13,460,164            | 14.5%                 | 27.5% |
|                                                                        |                                                            |      |       |       |       |       |                  |                  |
| OPERATING INCOME(LOSS)                                                      | $                                                               | (204,125) | $          | (165,018)  | $          | 496,009    | (23.7)%               | (133.3)%              |
|                                                                        |                                                            |      |       |       |       |       |                  |                  |
| OTHER INCOME(EXPENSES)                                                      |                                                            |      |       |       |       |       |                  |                  |
|                                                                        | Interest and other income                                       | $         | 54,896     | $          | 66,155     | $          | 101,849               | (17.0)%               | (35.0)% |
|                                                                        | Interest expense                                                |      | (301,934)  |       | (275,247)  |       | (295,547)             | 9.7%                  | (6.9)% |
|                                                                        | Net other expenses                                              | $         | (247,038)  | $          | (209,092)  | $          | (193,698)             | 18.1%                 | 7.9% |
|                                                                        |                                                            |      |       |       |       |       |                  |                  |
| INCOME (LOSS) FROMCONTINUING OPERATIONS BEFORE INCOME TAX BENEFIT (EXPENSE) | $                                                               | (451,163) | $          | (374,110)  | $          | 302,311    | (20.6)%               | (223.8)%              |
|                                                                        |                                                            |      |       |       |       |       |                  |                  |
| INCOME TAX BENEFIT(EXPENSE)                                                 |                                                            | 118,750   |       | 124,110    |       | (144,330)  | (4.3)%                | 186.0%                |
|                                                                        |                                                            |      |       |       |       |       |                  |                  |
| INCOME (LOSS) FROMCONTINUING OPERATIONS                                     | $                                                               | (332,413) | $          | (250,000)  | $          | 157,981    | (33.0)%               | (258.2)%              |
|                                                                        |                                                            |      |       |       |       |       |                  |                  |
| DISCONTINUED OPERATIONS                                                     |                                                            |      |       |       |       |       |                  |                  |
|                                                                        | Loss from operation of discontinued internetsegment, net of tax |      |       |       |       |       |                  |                  |   |
|                                                                        |                                                            | -         |       | -          |       | (19,178)   | -                     | -                     |
|                                                                        | Gain from disposal of internet segment, netof tax               |      |       |       |       |       |                  |                  |   |
|                                                                        |                                                            | -         |       | -          |       | 11,197     | -                     | -                     |
|                                                                        | Loss from discontinued operations, net oftax                    |      |       |       |       |       |                  |                  |   |
|                                                                        |                                                            | -         |       | -          |       | (7,981)    | -                     | -                     |
|                                                                        |                                                            |      |       |       |       |       |                  |                  |
| NET INCOME(LOSS)                                                            | $                                                               | (332,413) | $          | (250,000)  | $          | 150,000    | (33.0)%               | (266.7)%              |
|                                                                        |                                                            |      |       |       |       |       |                  |                  |
| EARNINGS (LOSS)PER COMMON SHARE:                                            |                                                            | (.03)     |       | (.03)      |       | .01        |                  |                  |
|                                                                             |                                                                 |           |            |            |            |            |                       |                       |  |  |

Year EndedDecember 31, 2005, compared with Year Ended December 31,2004: 

***Operating Revenues****-*Total operating revenues for 2005 were $19,440,756, an increaseof 14.4% from $16,990,571 in 2004.  The increase resultsfrom increased fee income received from the funds, as well as anincrease in commission revenues relating to the broker-dealerservices segment. 

***Fee Income -*** Fee income for2005 was $4,788,853, a 9.3% increase from $4,382,788 in2004.  The increase was due primarily to fees received inconnection with new funds that were acquired and/or opened during2004 and 2005.  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 sub-advisoryservices provided to the Funds.  Investment advisory feesconstituted 8% of the Company's consolidated revenues in2005.  The Company also receives fees from the Funds forproviding transfer agency, fund accounting, and otheradministrative services.  These fees constituted 10% of theCompany's consolidated revenues in 2005. 

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 7% of the Company's consolidated revenues in2005. 

***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"), as well as contingent deferred sales changes("CDSCs") earned in connection with redemptions of Fund sharessubject to CDSCs, and the dealer commission associated with salesof Fund shares subject to FESLs, which is paid out to otherbroker-dealers as commission expense.  Commission income for2005 was $14,651,903, a 16.2% increase over $12,607,783 in2004.  The increase was due primarily to recruiting effortsfor new registered representatives in CFS during 2005. Commission revenues constituted 75% of the Company's consolidatedrevenues in 2005. 

***Operating Expenses****-*Total operating expenses for 2005 were $19,644,881, a 14.5%increase from $17,155,589 in 2004.  The increase was aresult of the net activity in the major expense categories, asdescribed in the paragraphs that follow. 

***Compensation and Benefits -***Compensation and benefits expenses for 2005 were $3,330,165, a6.7% increase from $3,120,309 in 2004.  The increase resultsprimarily from the addition of several new employees to theCompany over the past twelve months, annual compensation andbenefits increases, increased incentive overrides paid to certainemployees for sales, the recruitment of new registeredrepresentatives and new business acquisitions, and a 401(k) matchof up to 4% of employee deferrals that was implemented effectiveJanuary 1, 2005. 

In May of 2004, the Company implemented arestructuring of wholesaler compensation to a base salary plusincentive formula.  At the time of implementation, fivewholesalers were added to the Company payroll.  The primaryfunction of the wholesalers is to market the Company's Funds toregistered representatives.  Currently, the wholesaling teamconsists of 14 wholesalers, five of which are employees of theCompany.  The remaining members of the wholesaling team areindependent contractors working on a straight commissionbasis.  The wholesalers are allowed monthly general andadministrative expenses to support their sales efforts. Management expects to continue to expand the wholesaling team in2006.  The Company's compensation and benefits expense maycontinue to increase as a result of this effort. 

In December of 2005, the Company adoptedFASB Statement No. 123R, "Share-Based Payment," ("SFAS No. 123R")which requires the measurement and recognition of compensationexpense for all share-based payment awards made to employees anddirectors, including employee stock options, based on estimatedfair values.  SFAS No. 123R supersedes the Company'sprevious accounting under Accounting Principles Board Opinion No.25, "Accounting for Stock Issued to Employees," ("APB 25"). The Company adopted SFAS No. 123R using the modified retroactiverestatement method, which requires the restatement of all periodspresented to reflect stock-based employee compensation cost underthe fair value-based accounting method for all employee awardsgranted, modified, or settled in fiscal years beginning afterDecember 15, 1994.  (See Note 9 - Stock Warrants, StockSplits, and Stock Options, located in the audited financialstatements.) 

***Commission Expense -***Commission expense for 2005 was $13,283,057, a 16.5% increasefrom $11,405,775 in 2004. The increase corresponds to theincrease in commission income. 

***General and Administrative Expenses-*** Total general and administrative expense for 2005 were$2,571,576, an increase of 16.5% over $2,208,038 in 2004. The increase was due primarily to sub-advisory fees paid inconnection with new funds that were acquired and/or opened during2004 and 2005.

In May of 2004, the Company implemented arestructuring of wholesaler compensation to a base salary plusincentive formula.  At the time of implementation, fivewholesalers were added to the Company payroll.  The primaryfunction of the wholesalers is to market the Company's Funds toregistered representatives.  Currently, the wholesaling teamconsists of 14 wholesalers, five of which are employees of theCompany.  The remaining members of the wholesaling team areindependent contractors working on a straight commissionbasis.  The wholesalers are allowed monthly general andadministrative expenses to support their sales efforts. Management expects to continue to expand the wholesaling team in2006.  The Company's general and administrative expenses maycontinue to increase as a result of this effort. 

***Sales Commissions Amortized -***Sales commissions paid to brokers and dealers in connection withthe sale of shares of Funds sold without a FESL are capitalizedand amortized on a straight-line basis.  The Companyamortizes the sales commissions relating to some of the Company'ssponsored mutual funds over eight years, which best approximatesmanagement's estimate of the average life of investor's accountsin these funds and coincides with conversion of Class B shares toClass A shares. CDSCs received by the Company are recorded as areduction of unamortized deferred sales commissions. Amortization of deferred sales commissions for 2005 was $316,928,a 1.6% decrease from $321,942 in 2004. 

***Depreciation and Amortization-*** Depreciation and amortization for 2005 was $143,155, a43.8% increase from $99,525 in 2004.  The primary reason forthe change was an increase in amortization of computer softwarecosts.  Effective January 1, 2002, the Company adoptedStatement of Financial Accounting Standards (SFAS) No. 142 -Goodwill and Other Intangible Assets.  Under SFAS No. 142,the Company no longer amortizes its goodwill and certain otherintangibles over their estimated useful lives.  Rather,goodwill will be subject to at least an annual assessment forimpairment by applying a fair value-based test.  There wereno impairment adjustments made during 2005. 

***Interest and Other Income -***Interest and other income for 2005 was $54,896, a 17.0% decreasefrom $66,155 in 2004.  The decrease was primarily the resultof decreased dividend income earned on money market accounts. 

***Interest Expense*** - Interestexpense was $301,934 for 2005, a 9.7% increase from $275,247 in2004.  The increase was primarily the result of the issuanceof $2 million of 91⁄4% subordinated corporate notes duringthe year, which was used, in part, to retire $595,000 of 12%subordinated debentures that matured in June of 2005. 

Year EndedDecember 31, 2004, compared with Year Ended December 31,2003: 

***Operating Revenues****-*Total operating revenues for 2004 were $16,990,571, an 21.7%increase from $13,956,173 in 2003.  The increase resultsfrom increased fee income received from the funds, as well as anincrease in commission revenues relating to the broker-dealerservices segment. 

***Fee Income -*** Fee income for2004 was $4,382,788, a 33.8% increase from $3,274,984 in2003.  The increase in fee income was due primarily to feesreceived in connection with several new mutual funds acquiredduring 2003.  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 sub-advisoryservices provided to the Funds.  Investment advisory feesconstituted 8% of the Company's consolidated revenues in2004.  The Company also receives fees from the Funds forproviding transfer agency, fund accounting, and otheradministrative services.  These fees constituted 10% of theCompany's consolidated revenues in 2004. 

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 7% of the Company's consolidated revenues in2004. 

***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"), as well as contingent deferred sales changes("CDSCs") earned in connection with redemptions of Fund sharessubject to CDSCs, and the dealer commission associated with salesof Fund shares subject to FESLs, which is paid out to otherbroker-dealers as commission expense.  Commission income for2004 was $12,607,783, an 18.0% increase from $10,681,189 in2003.  The increase is due primarily to an increase intransaction activity and recruiting efforts for new registeredrepresentatives in CFS during 2004.  Commission revenuesconstituted 75% of the Company's consolidated revenues in2004. 

***Operating Expenses****-*Total operating expenses for 2004 were $17,155,589, a 27.5%increase from $13,460,164 in 2003.  The increase was aresult of the net activity in the major expense categories, asdescribed in the paragraphs that follow.

***Compensation and Benefits -***Compensation and benefits expense for 2004 was $3,120,309, a62.5% increase from $1,919,798 in 2003.  The increase isprimarily the result of the factors described in the followingtwo paragraphs. 

In May of 2004, the Company implemented arestructuring of wholesaler compensation to a base salary plusincentive formula.  At the time of implementation, fivewholesalers were added to the Company payroll.  The primaryfunction of the wholesalers is to market the Company's Funds toregistered representatives.  Currently, the wholesaling teamconsists of 14 wholesalers, five of which are employees of theCompany.  The remaining members of the wholesaling team areindependent contractors working on a straight commissionbasis.  The wholesalers are allowed monthly general andadministrative expenses to support their sales efforts. Management expects to continue to expand the wholesalingteam.  The Company's compensation and benefits expense maycontinue to increase as a result of this effort. 

In December of 2005, the Company adoptedFASB Statement No. 123R, "Share-Based Payment," ("SFAS No. 123R")which requires the measurement and recognition of compensationexpense for all share-based payment awards made to employees anddirectors, including employee stock options, based on estimatedfair values.  SFAS No. 123R supersedes the Company'sprevious accounting under Accounting Principles Board Opinion No.25, "Accounting for Stock Issued to Employees," ("APB 25"). The Company adopted SFAS No. 123R using the modified retroactiverestatement method, which requires the restatement of all periodspresented to reflect stock-based employee compensation cost underthe fair value-based accounting method for all employee awardsgranted, modified, or settled in fiscal years beginning afterDecember 15, 1994.  (See Note 9 - Stock Warrants, StockSplits, and Stock Options, located in the audited financialstatements.) 

***Commission Expense -***Commission expense for 2004 was $11,405,775, a 22.0% increasefrom $9,347,887 in 2003. The increase corresponds with theincrease in commission income. 

***General and Administrative Expenses-*** General and administrative expenses for 2004 were$2,208,038, a 28.9% increase over $1,713,187 in 2003.  Theincrease was due primarily to expenses incurred relating toseveral new Funds that were acquired in 2003, as well asincreased travel and entertainment expenses in connection withthe expanding wholesaling staff. 

In May of 2004, the Company implemented arestructuring of wholesaler compensation to a base salary plusincentive formula.  At the time of implementation, fivewholesalers were added to the Company payroll.  The primaryfunction of the wholesalers is to market the Company's Funds toregistered representatives.  Currently, the wholesaling teamconsists of 14 wholesalers, five of which are employees of theCompany.  The remaining members of the wholesaling team areindependent contractors working on a straight commissionbasis.  The wholesalers are allowed monthly general andadministrative expenses to support their sales efforts. Management expects to continue to expand the wholesalingteam.  The Company's general and administrative expenses maycontinue to increase as a result of this effort 

***Sales Commissions Amortized -***Sales commissions paid to brokers and dealers in connection withthe sale of shares of Funds sold without a FESL are capitalizedand amortized on a straight-line basis.  The Companyamortizes the sales commissions relating to some of the Company'ssponsored mutual funds over eight years, which best approximatesmanagement's estimate of the average life of investor's accountsin these funds and coincides with conversion of Class B shares toClass A shares. CDSCs received by the Company are recorded as areduction of unamortized deferred sales commissions. Amortization of deferred sales commissions was $321,942 in 2004,a 14.5% decrease from $376,386 in 2003 due to some of theCompany's deferred sales commissions becoming fullyamortized. 

***Depreciation and Amortization-*** Depreciation and amortization for 2004 was $99,525, a3.3% decrease from $102,906 in 2003.  Effective January 1,2002, the Company adopted Statement of Financial AccountingStandards (SFAS) No. 142 - Goodwill and Other IntangibleAssets.  Under SFAS 142, the Company no longer amortizes itsgoodwill and certain other intangibles over their estimateduseful lives.  Rather, goodwill will be subject to at leastan annual assessment for impairment by applying a fairvalue-based test. 

***Interest and Other Income -***Interest and other income for 2004 was $66,155, a 35.0% decreasefrom $101,849 in 2003.  The decrease was primarily theresult of a change in the way that the CFS annual sales andcompliance meeting was accounted for beginning in 2004. 

***Interest Expense*** - Interestexpense for 2004 was $275,247, a 6.9% decrease from $295,547 in2003. The decrease was primarily the result of the maturity ofdebentures in mid-2003 and corporate notes in mid-2004, whichwere partially replaced by subordinated commercial notes andshort-term bank loans carrying lower rates of interest.

**FINANCIAL CONDITION **

On December 31, 2005, the Company's assetsaggregated $15,192,914, an increase of 9.2% from $13,907,987 in2004, due to increases in cash and cash equivalents, accountsreceivable, income taxes receivable, deferred tax assets,prepaids, and goodwill, offset by decreases in securitiesavailable-for-sale, net property and equipment, deferred salescommissions, and other assets.  Stockholders equitydecreased was $9,403,721 on December 31, 2005, a decrease of 1.1%from $9,505,829 December 31, 2004, primarily the result of thenet loss of $332,413 and preferred dividends of $91,500, offsetby increased additional paid-in capital related to optioncompensation recorded in connection with the adoption of SFAS No.123R. 

On December 31, 2004, the Company's assetsaggregated $13,907,987, a decrease of 11.3% from $15,675,216 in2003, due to increases in accounts receivable, prepaids, anddeferred tax assets, offset by decreases in in cash and cashequivalents, securities available-for-sale, net property andequipment, deferred sales commissions, goodwill, and otherassets.  Stockholders' equity increased to $9,505,829million on December 31, 2004, an increase of 3.3% from $9,201,106on December 31, 2003, primarily the result of the net loss of$250,000 and preferred dividends of $94,550, offset by increasedadditional paid-in capital related to option compensationrecorded in connection with the adoption of SFAS No. 123R. 

Cash provided by operating activities was$243,075 in 2005, a 47.0% decrease from $458,825 in 2004. Duringthe year ended December 31, 2005, the Company used net cash of$308,119 for investing activities.  Cash provided frominvesting activities during the year included $5,281 in proceedsreceived from the sale of available-for-sale securities held bythe Company and $500 in proceeds received from the sale ofproperty and equipment.  Cash used for investing activitiesduring 2005 included $232,407 related to the acquisitions ofseveral new mutual funds, and $81,493, which was primarily usedto purchase computer equipment and remodel workspace on thesecond floor of the building. Net cash provided by financingactivities during the year was $734,907, primarily the net effectof $2,000,000 in proceeds received from the issuance ofsubordinated corporate notes and $650,025 in proceeds receivedfrom short-term bank borrowings, offset by $595,000 paid toredeem subordinated debentures that matured in June of 2005,$116,440 in final payments relating to the acquisitions ofseveral new mutual funds in 2003, $890,023 of debt repayment,$68,625 of preferred dividends paid, and $250,000 to purchase theCompany's common stock pursuant to a put option in the purchaseagreement by which CFS was acquired. 

Cash provided by operating activities was$458,825 in 2004, a 59.9% decrease from $1,144,388 in 2003.During the year ended December 31, 2004, the Company used netcash of $71,372 for investing activities.  Cash providedfrom investing activities during the year included $24,019 inproceeds received from the sale of available-for-sale securitiesheld by the Company.  Cash used for investing activitiesduring 2004 included $48,652 related to the acquisitions ofseveral new mutual funds, $5,030 for the purchase ofavailable-for-sale securities, and $41,709, which was primarilyused to purchase computer equipment. Net cash used by financingactivities during the year was $2,101,285, primarily the neteffect of $300,000 in proceeds received from a short-term bankborrowing, offset by $962,000 paid to redeem corporate notes thatmatured in June of 2004, $653,068 in one year anniversarypayments relating to the acquisitions of several new mutual fundsin 2003, $440,786 of debt repayment, $250,000 to purchase theCompany's common stock pursuant to a put option in the purchaseagreement by which CFS was acquired, $71,675 of preferreddividends paid, and $33,449 to purchase the Company's commonstock pursuant to a program, approved by its Board of Directorsin November 1997, to repurchase up to $2,000,000 of its commonstock from time to time in the open market. 

LIQUIDITY ANDCAPITAL RESOURCES 

On December 31, 2005, the Company's liquidassets totaled $1,537,599, including $1,537,391 of cash and cashequivalents, as compared to $873,017 of which $867,528represented cash and cash equivalents, on December 31, 2004, and$2,605,747 of which $2,581,360 represented cash and cashequivalents, on December 31, 2003.  The Company is requiredto maintain certain levels of cash and liquid securities in itsbroker-dealer subsidiaries to meet regulatory net capitalrequirements. 

The Company has historically relied uponsales of its equity securities and debt instruments, as well asbank loans, for liquidity and growth.  In January of 2004,the Company repurchased 500,000 common shares for $250,000 undera put option related to its acquisition of CFS.  In March of2004, the Company paid approximately $160,000 of 2003 taxobligations.  In June of 2004, the Company borrowed $200,000on a non-revolving bank line of credit, and $100,000 on arevolving bank line of credit that was used, along with existingcash, to repay $962,000 of corporate notes that matured on June30, 2004.  $200,000 of the bank debt was repaid in Decemberof 2004, and the remaining balance of $100,000 was repaid in Mayof 2005.  Also in 2004, the Company made additional paymentsof approximately $367,000 relating to the acquisitions of themanagement rights to the Canandaigua and Willamette Funds.

In January of 2005, the Company repurchased500,000 common shares for $250,000 pursuant to a put optionrelated to its acquisition of CFS, which was paid by utilizing ashort-term bank loan.  The six-month bank loan carried aninterest rate of 2.00% over the prime rate and was repaid in Julyof 2005.  The Company received an additional $300,025 inshort-term bank debt in February of 2005 to be used primarily forworking capital.  This debt carried an interest rate of6.75% and was also repaid in July of 2005.  In June of 2005,the Company borrowed $100,000 on its revolving bank line ofcredit and made a final payment of approximately $26,000 relatingto its acquisition of the management rights to the CanandaiguaFunds.  The Company had $595,000 of subordinated debenturesthat matured on June 30, 2005.  These subordinateddebentures were repaid by utilizing a portion of the proceedsreceived from the issuance of the Company's new 91⁄4%subordinated corporate notes, which mature on January 1,2011.  As of December 31, 2005, the Company has $2 millionof subordinated corporate notes outstanding.  In Septemberof 2005, the Company made a final payment of approximately$90,000 relating to its acquisition of the management rights tothe Willamette Funds. 

The Company has several cash requirementsfor liabilities coming due in 2006.  In January of 2006, theCompany repaid $250,000 in convertible debentures that maturedusing cash on hand.  These convertible debentures wereissued in relation to its acquisition of CFS. Also, in June of2006, $100,000 of short-term bank debt will mature. 

Management believes that the Company'sexisting liquid assets, along with expected cash flow fromoperations, will provide the Company with sufficient resources tomeet its cash requirements during the next twelve months. In addition to the liabilities coming due in 2006, managementexpects that the principal needs for cash may be to advance salescommissions on Funds subject to CDSCs, acquire additionalinvestment management or financial services firms, acquire themanagement rights to additional outside mutual funds, repurchaseshares of the Company's common stock, and service debt.  TheCompany may also 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 over timein the form of 12b-1 payments.  Sales of Fund shares withCDSCs provide distribution revenue over time in the form of 12b-1payments and, if shares are redeemed within 5 years, CDSCs. However, the Company pays commissions on sales of Fund sharessubject to CDSCs, reflects such commissions as deferred salescommissions on its balance sheet and amortizes such commissionsover a period of up to eight years, thereby recognizingdistribution expenses. Therefore, to the extent that sales ofFund shares with CDSCs increases over time relative to sales ofshares with FESLs, current distribution expenses may increaserelative to current distribution revenues in certain periods,which would negatively impact the Company's earnings in suchperiods.  In addition, the Company may need to findadditional sources of funding if existing cash flow and debtfacilities are insufficient to fund commissions payable toselling broker-dealers on shares subject to CDSCs if sales ofFund shares subject to CDSCs increase significantly. 

FORWARD-LOOKINGSTATEMENTS 

When used herein, in future filings by theCompany with the SEC, in the Company's press releases, and inother Company-authorized written or oral statements, the wordsand phrases "can be," "expects," "anticipates," "may affect,""may depend," "believes," "estimates," or similar expressions areintended to identify "forward-looking statements" within themeaning of the Private Securities Litigation Reform Act of 1995.The Company cautions readers not to place undue reliance on anysuch forward-looking statements, which speak only as of the datemade.  Such statements are subject to certain risks anduncertainties, including those set forth in this "Forward-LookingStatements" section, which could cause actual results for futureperiods to differ materially from those presently anticipated orprojected.  The Company does not undertake and specificallydisclaims any obligation to update any forward-looking statementto reflect events or circumstances after the date of suchstatements. 

The Company derives substantially all of itsrevenues from two sources; commission revenue earned inconnection with sales of shares of mutual funds, insuranceproducts, and various other securities, and fees relating to themanagement of, and provision of services to, the Funds.  Thefees earned by the Company are generally calculated as apercentage of assets under management/service.  If theCompany's assets under management/service decline, or do not growin accordance with the Company's plans, fee revenues and earningswould be materially 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 the highlycompetitive financial services industry.  The Companycompetes with approximately 8,000 open-end investment companiesthat offer shares to the investing public in the UnitedStates.  The Company also competes with the financialservices and other investment alternatives offered by stockbrokerage and investment banking firms, insurance companies,banks, savings and loan associations, and other financialinstitutions, as well as investment advisory firms.  Most ofthese competitors have substantially greater resources than theCompany.  The Company sells Fund shares principally throughthird-party broker-dealers.  The Company competes for theservices of such third party broker-dealers with other sponsorsof 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 mutualfund 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 mightitself be required to pay additional fees, expenses, commissions,or charges in connection with the distribution of Fund shares,which could 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 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 conditionswhich may be less favorable than expected;
    - The effect of changes in interest rates,inflation rates, the stock markets, or other financialmarkets;
    - Unfavorable legislative, regulatory, orjudicial developments;
    - Incidence and severity of catastrophes,both natural and man-made;
    - Changes in accounting rules, policies,practices, and procedures which may adversely affect thebusiness;
    - Terrorist activities or other hostilitieswhich may adversely affect the general economy 

Item7     Financial Statements 

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-KSB immediately following the signaturespage, beginning on page F-1. 

Item8    Changes In and Disagreements with Accountantson Accounting and Financial Disclosure 

None. 

Item8A   Controls & 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-15(e) and Rule 15d-15(e) under the Exchange Act as of the endof the period covered by this report.  Based upon thatevaluation, the Chief Executive Officer and Chief FinancialOfficer have concluded that the Company's disclosure controls andprocedures are effective as of December 31, 2005, and thatinformation required to be disclosed by the Company in reportsthat it files or submits under the Exchange Act is recorded,processed and summarized, and reported within the time periodsspecified by the SEC's rules and forms. 

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. 

Item8B   Other Information 

None. 

PART III 

Item 9   Directors, Executive Officers, Promoters and ControlPersons;

Compliance with Section16(a) of the Exchange Act 

Incorporated herein by reference is theinformation appearing under the headings "Election of Directors,""Executive Officers," and "Committees of the Board of Directorsand Meeting Attendance," in the Registrant's Proxy Statement,which the Registrant anticipates filing on or about April 11,2006. 

Item10    Executive Compensation 

Incorporated herein by reference is theinformation appearing under the heading "Executive Compensation",in the Registrant's Proxy Statement, which the Registrantanticipates filing on or about April 11, 2006. 

Item11    Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters 

Incorporated herein by reference is theinformation appearing under the heading "Security Ownership ofBeneficial Owners and Management", in the Registrant's ProxyStatement, which the Registrant anticipates filing on or aboutApril 11, 2006. 

Item12    Certain Relationships and RelatedTransactions 

Incorporated herein by reference is theinformation appearing under the heading "Certain Relationshipsand Related Transactions", in the Registrant's Proxy Statement,which the Registrant anticipates filing on or about April 11,2006. 

Item13    Exhibits 

               The following exhibits are filed herewith or incorporated hereinby reference as set forth below: 

               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          Bylaws of the Company (incorporated by reference to Exhibit 3.2contained in the Company's Quarterly Report on Form 10-QSB, asamended (File No. 0-25958), filed with the Commission on November10, 2004).

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

               4.2           Certificate of designation of Series A Convertible Preferred Shares (incorporated by reference to Exhibit 4.1 contained in the Company'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: (See Exhibit 3.1 & 3.2)

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

               4.5           Form of Subordinated Corporate Note (incorporated by reference to Exhibit 4.5 contained in the Company's Quarterly Report on Form 10-QSB, (File No. 0-25958), filed with the Commission on August 12, 2005). 

               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 Value Fund (incorporated by reference to Exhibit 99.d1ccontained 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). 

               10.1k       Investment AdvisoryContract - The Integrity Funds on behalf of the Integrity SmallCap Growth Fund (incorporated by reference to Exhibit 99.d1dcontained 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 Health Sciences Fund (incorporated by reference toExhibit 99.d1e 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).

               10.1m      Investment Advisory Contract- The Integrity Funds on behalf of the Integrity Technology Fund(incorporated by reference to Exhibit 99.d1f contained in theRegistration Statement on Form N-1A, as amended on Post-Effective Amendment 21 (File No. 33-53698), filed with theCommission on September 5, 2003).

               10.1n       Investment AdvisoryContract - The Integrity Funds on behalf of the Integrity HighIncome Fund (incorporated by reference to Exhibit 99.d1gcontained in the Registration Statement on Form N-1A, as amendedon Post- Effective Amendment 23 (File No. 33-53698), filed withthe Commission on April 24, 2004).

               10.1o       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).

               10.1p       Investment AdvisoryContract - The Integrity Funds on behalf of the Integrity AllSeason Fund (incorporated by reference to Exhibit 99.d1jcontained 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).

               10.2a       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).

               10.2b       Sub-Investment AdvisoryContract - The Integrity Funds on behalf of the Integrity Growth& Income Fund (incorporated by reference to Exhibit 99.d2ccontained 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.d2dcontained 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). 

               10.3a       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),filed with 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 IntegrityValue Fund (incorporated by reference to Exhibit 99.e1c containedin the Registration Statement on Form N-1A, as amended on Post-Effective Amendment 21 (File No. 33-53698), filed with theCommission on September 5, 2003). 

               10.3k       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),filed with the Commission on September 5, 2003). 

               10.3l        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).

               10.3m      Distribution and ServiceContract - 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).

               10.3n       Distribution andService Contract - The Integrity Funds on behalf of the IntegrityHigh Income 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 24, 2004).

               10.3o       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),filed with the Commission on April 25, 2005).

               10.3p       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). 

               10.4a       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 21 (File No.33-25138), filed with the Commission on April 27, 2004). 

               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 16 (File No.33-63306), filed with the Commission on April 27, 2004). 

               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 13(File No. 33-85332), filed with the Commission on April 27,2004). 

               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 49(File No. 33-36324), filed with the Commission on September 29,2003). 

               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 21 (File No.33-53698), filed with the Commission on September 5, 2003). 

               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 21 (File No.33-25138), filed with the Commission on April 27, 2004). 

               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 16 (File No.33-63306), filed with the Commission on April 27, 2004). 

               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 13(File No. 33-85332), filed with the Commission on April 27,2004). 

                10.5d       Accounting Service Contract - Integrity Managed Portfolios (incorporated by reference to Exhibit 99.h2 contained in the Registration Statement 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 and Accounting Service Contract - The Integrity Funds (incorporated by reference to Exhibit 99.h2 contained in the Registration Statement on Form N-1A, as amended on Post- Effective Amendment 21 (File No. 33-53698), filed with the Commission on September 5, 2003).

               10.6b       Administration Service Contract - Integrity Managed Portfolios (incorporated by reference to Exhibit 99.h3 contained in the Registration Statement on Form N-1A, as amended on Post-Effective Amendment 49 (File No. 33-36324), filed with the Commission on September 29, 2003).

               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 November 10, 2004).

               10.8a       Employment Agreement -Robert E. Walstad (incorporated by reference to Exhibit 10.48contained in the Company's Quarterly Report on Form 10-QSB, (FileNo. 0-25958), filed with the Commission May 13, 2004). 

               10.8b       Employment Agreement -Bradley Wells (incorporated by reference to Exhibit 10.49contained in the Company's Quarterly Report on Form 10-QSB, (FileNo. 0-25958), filed with the Commission May 13, 2004). 

               10.8c       Employment Agreement -Jerry J. Szilagyi (incorporated by reference to Exhibit 10.51contained in the Company's Quarterly Report on Form 10-QSB, (FileNo. 0-25958), filed with the Commission May 13, 2004). 

               10.8d       Amendment to EmploymentAgreement - Bradley Wells (incorporated by reference to Exhibit10.54 contained in the Company's Current Report on Form 8-K,(File No. 0-25958), filed with the Commission December 20,2004). 

               14.1         Code ofEthics. 

               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         CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act and 18 U.S.C. Section 1350. 

Item14    Principal Accountant Fees and Services 

Incorporated herein by reference is theinformation appearing under the heading "Fees Billed for ServicesRendered by Independent Accountant" in the Registrant's ProxyStatement, which the Registrant anticipates filing on or aboutApril 11, 2006.

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 27, 2006 | By /s/ Robert E. Walstad      |
|----------------------|-------------------------------|
|                 | Robert E. Walstad             |
|                 | Chief Executive Officer,      |
|                 | Chairman, and Director        |
|                 | (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 27, 2006 | By /s/ Robert E. Walstad      |
|----------------------|-------------------------------|
|                 | Robert E. Walstad             |
|                 | Chief Executive Officer,      |
|                 | Chairman, and Director        |
|                 | (Principal Executive Officer) |

 
| Date: March 27, 2006 | By /s/ Heather Ackerman       |
|----------------------|-------------------------------|
|                 | Heather Ackerman              |
|                 | Chief Financial Officer       |
|                 | (Principal Financial Officer) |

 
| Date: March 27, 2006 | By /s/ Peter A. Quist       |
|----------------------|-----------------------------|
|                 | Peter A. Quist              |
|                 | Vice President and Director |
|                 |                        |
| Date: March 27, 2006 | By /s/ Vance A. Castleman   |
|                 | Vance A. Castleman          |
|                 | Director                    |
|                 |                        |
| Date: March 27, 2006 | By /s/ Myron D. Thompson    |
|                 | Myron D. Thompson           |
|                 | Director                    |
|                 |                        |
| Date: March 27, 2006 | By /s/ Richard H. Walstad   |
|                 | Richard H. Walstad          |
|                 | Director                    |
|                 |                        |
| Date: March 27, 2006 | By /s/ Steven D. Lysne      |
|                 | Steven D. Lysne             |
|                 | Director                    |
|                 |                        |
| Date: March 27, 2006 | By /s/ Vaune M. Cripe       |
|                 | Vaune M. Cripe              |
|                 | Director                    |
|                 |                        |
| Date: March 27, 2006 | By /s/ Robert Mau           |
|                 | Robert Mau                  |
|                 | Director                    |

INTEGRITY MUTUAL FUNDS,INC., AND SUBSIDIARIES 

MINOT, NORTHDAKOTA

 

CONSOLIDATEDFINANCIAL STATEMENTS 				AS OF 				DECEMBER 31,2005, 2004 AND 2003 				AND 				REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

INTEGRITY MUTUAL FUNDS,INC., AND SUBSIDIARIES

TABLE OFCONTENTS 
|                                                   | Pages                                                   |
|--------------------------------------------------------|---------------------------------------------------------|
|                                                   |                                                    |
| REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING 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 FinancialStatements               | F-8 - F-23 |
|                                                   |                                                    |
| ADDITIONAL INFORMATION                                 |                                                    |
|                                                   |                                                    |
|                                                   | Report of Independent Registered PublicAccounting Firm  | F-24 |
|                                                   |                                                    |   |
|                                                   | Selected Financial Data                                 | F-25 |
|                                                   |                                                    |   |
|                                                   | Quarterly Results of Consolidated Operations(Unaudited) | F-26 |
|                                                        |                                                         |  |

 

REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Directors of				Integrity Mutual Funds, Inc. andSubsidiaries

Minot, North Dakota 

We have audited the accompanyingconsolidated balance sheets of Integrity Mutual Funds, Inc. andSubsidiaries as of December 31, 2005 and 2004 and the relatedconsolidated statements of operations, stockholders' equity andcash flows for the years ended December 31, 2005, 2004 and2003.  These consolidated financial statements are theresponsibility of the Company's management.  Ourresponsibility is to express an opinion on these consolidatedfinancial statements based on our audits. 

We conducted our audits in accordance withstandards of the Public Company Accounting Oversight Board(United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whetherthe consolidated financial statements are free of materialmisstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in theconsolidated financial statements.  An audit also includesassessing the accounting principles used and significantestimates made by management, as well as evaluating the overallconsolidated financial statement presentation.  We believethat our audits provide a reasonable basis for our opinion. 

In our opinion, the consolidated financialstatements referred to above present fairly, in all materialrespects, the financial position of Integrity Mutual Funds, Inc.and Subsidiaries as of December 31, 2005 and 2004, and theresults of their operations and their cash flows for the yearsended December 31, 2005, 2004 and 2003 in conformity withaccounting principles generally accepted in the United States ofAmerica.

 

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

March 3, 2006

INTEGRITY MUTUAL FUNDS,INC., AND SUBSIDIARIES				CONSOLIDATED BALANCESHEETS				DECEMBER 31, 2005 AND2004

ASSETS
|           |  

2005                                      | (Restated)

2004 |
|----------------|---------------------------------------------------|------------------|
|           |                                              |             |   |   |
| CURRENT ASSETS |                                              |             |   |   |
|           | Cash and cash equivalents                         | $                | 1,537,391 | $ | 867,528 |
|           | Securities available-for-sale                     |             | 208 |   |   5,489 |
|           | Accounts receivable                     |             | 1,460,400 |   |  1,185,284 |
|           | Income taxes receivable                           |             | 154,966 |   | - |
|           | Deferred tax asset                                |             | 52,609 |   | - |
|           | Prepaids                                          |             | 95,116 |   |   93,510 |
|           |                                              |             |   |   |   |
|           | Total current assets                              | $                | 3,300,690 | $ | 2,151,811 |
|           |                                              |             |   |   |   |
|           | PROPERTY ANDEQUIPMENT                             | $                | 1,941,613 | $ | 1,884,129 |
|           | Less accumulated depreciation                     |             | (731,016) |   | (670,101) |
|           |                                              |             |   |   |   |
|           | Net property and equipment                        | $                | 1,210,597 | $ | 1,214,028 |
|           |                                              |             |   |   |   |
|           | OTHER ASSETS                                      |             |   |   |   |
|           | Deferred sales commissions                        | $                | 186,010 | $ | 416,908 |
|           | Goodwill                                          |             | 9,830,389 |   |  9,429,485 |
|           | Deferred tax asset                                |             | 326,873 |   | 350,836 |
|           | Other assets (net of accumulatedamortization      |             | 338,355 |   |  344,919 |
|           |   of $177,720 for 2005 and $122,230 for2004) |
|           |                                              |             |   |   |   |
|           | Total other assets                                | $                | 10,681,627 | $ | 10,542,148 |
|           |                                              |             |   |   |
| TOTAL ASSETS   | $                                                 | 15,192,914       | $ | 13,907,987 |
|           |                                              |             |   |   |
|           |                                              |             |   |   |
|                |                                                   |                  |  |  |  |  |

SEE NOTES TO THECONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS (CONTINUED)

LIABILITIES ANDSTOCKHOLDERS' EQUITY
|   |  

2005 | (Restated)

2004 |
|--------|--------------|------------------|
| CURRENTLIABILITIES                        |                                                                              |       |        |       |
|-------------------------------------------|-----------------------------------------------------------------------------------|------------|-------------|------------|
|                                      | Service fees payable                                                              | $          | 73,416      | $          | 98,025 |
|                                      | Accounts payable                                                                  |       | 265,165     |       | 37,348 |
|                                      | Other current liabilities                                                    |       | 1,311,867   |       | 1,517,136 |
|                                      | Current portion of long-term debt                                                 |       | 514,085     |       | 848,206 |
|                                      |                                                                              |       |        |       |   |
|                                      | Total current liabilities                                                    | $          | 2,164,533   | $          | 2,500,715 |
|                                      |                                                                              |       |        |       |
| LONG-TERMLIABILITIES                      |                                                                              |       |        |       |
|                                      | Note payable                                                                      | $          | 1,103,651   | $          | 1,343,649 |
|                                      | Subordinate debentures                                                            |       | -           |       | 595,000 |
|                                      | Subordinate commercial notes                                                      |       | 561,000     |       | 561,000 |
|                                      | Subordinate corporate notes                                                       |       | 2,000,000   |       | - |
|                                      | Convertible debentures                                                            |       | 250,000     |       | 250,000 |
|                                      | Other long-term liabilities                                                       |       | 224,094     |       | - |
|                                      | Less current portion of long-term debt                                            |       | (514,085)   |       | (848,206) |
|                                      |                                                                              |       |        |       |   |
|                                      | Total long-term liabilities                                                       | $          | 3,624,660   | $          | 1,901,443 |
|                                      |                                                                              |       |        |       |
| TOTALLIABILITIES                          | $                                                                                 | 5,789,193  | $           | 4,402,158  |
|                                      |                                                                              |       |        |       |
| STOCKHOLDERS'EQUITY                       |                                                                              |       |        |       |
|                                      | Series A Preferred stock -  5,000,000shares authorized, $.0001 par value;    | $          | 305         | $          | 305 |
|                                      |    3,050,000 and 3,050,000 sharesissued and outstanding, respectively   |
|                                      | Additional paid in capital - series Apreferred stock                              |       | 1,524,695   |       | 1,524,695 |
|                                      | Common stock - 1,000,000,000 sharesauthorized, $.0001 par value                   |       | 1,352       |       | 1,323 |
|                                      |    13,518,543 and 13,228,543shares issued and outstanding, respectively |
|                                      | Additional paid in capital - commonstock                                          |       | 9,829,311   |       | 9,513,960 |
|                                      | Receivable - unearned ESOP shares                                                 |       | (68,765)    |       | (75,455) |
|                                      | Accumulated deficit                                                               |       | (1,883,168) |       | (1,459,255) |
|                                      | Accumulated other comprehensive income(loss)                                      |       | (9)         |       | 256 |
|                                      |                                                                              |       |        |       |
|                                      | Total stockholders' equity                                                        | $          | 9,403,721   | $          | 9,505,829 |
|                                      |                                                                              |       |        |       |
| TOTAL LIABILITIESAND STOCKHOLDERS' EQUITY | $                                                                                 | 15,192,914 | $           | 13,907,987 |
|                                      |                                                                              |       |        |       |
|                                      |                                                                              |       |        |       |
|                                      |                                                                              |       |        |       |
|                                      |                                                                              |       |        |       |
|                                      |                                                                              |       |        |       |
|                                           |                                                                                   |            |             |            |  |

SEE NOTES TO THECONSOLIDATED FINANCIAL STATEMENTS

INTEGRITY MUTUAL FUNDS,INC., AND SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF OPERATIONS				FOR THE YEARSENDED DECEMBER 31, 2005, 2004 AND 2003
|                                                                        |  

2005                                                    | (Restated)

2004 | (Restated)

2003 |
|-----------------------------------------------------------------------------|-----------------------------------------------------------------|------------------|------------------|
| REVENUES                                                                    |                                                            |             |             |   |   |   |
|                                                                        | Fee income                                                      | $                | 4,788,853        | $ | 4,382,788 | $ | 3,274,984 |
|                                                                        | Commissions                                                     |             | 14,651,903       |   | 12,607,783 |   | 10,681,189 |
|                                                                        | Total revenue                                                   | $                | 19,440,756       | $ | 16,990,571 | $ | 13,956,173 |
|                                                                        |                                                            |             |             |   |   |   |
| OPERATINGEXPENSES                                                           |                                                            |             |             |   |   |   |
|                                                                        | Compensation and benefits                                       | $                | 3,330,165        | $ | 3,120,309 | $ | 1,919,798 |
|                                                                        | General and administrative expenses                             |             | 2,571,576        |   | 2,208,038 |   | 1,713,187 |
|                                                                        | Commission expense                                              |             | 13,283,057       |   | 11,405,775 |   | 9,347,887 |
|                                                                        | Sales commissions amortized                                     |             | 316,928          |   | 321,942 |   | 376,386 |
|                                                                        | Depreciation and amortization                                   |             | 143,155          |   | 99,525 |   | 102,906 |
|                                                                        | Total operating expenses                                        | $                | 19,644,881       | $ | 17,155,589 | $ | 13,460,164 |
|                                                                        |                                                            |             |             |   |   |   |
| OPERATING INCOME(LOSS)                                                      | $                                                               | (204,125)        | $                | (165,018) | $ | 496,009 |
|                                                                        |                                                            |             |             |   |   |   |
| OTHER INCOME(EXPENSES)                                                      |                                                            |             |             |   |   |   |
|                                                                        | Interest and other income                                       | $                | 54,896           | $ | 66,155 | $ | 101,849 |
|                                                                        | Interest expense                                                |             | (301,934)        |   | (275,247) |   | (295,547) |
|                                                                        | Net other expenses                                              | $                | (247,038)        | $ | (209,092) | $ |  (193,698) |
|                                                                        |                                                            |             |             |   |   |   |
| INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXBENEFIT (EXPENSE) | $                                                               | (451,163)        | $                | (374,110) | $ | 302,311 |
|                                                                        |                                                            |             |             |   |   |   |
| INCOME TAX BENEFIT(EXPENSE)                                                 |                                                       | 118,750          |             | 124,110 |   | (144,330) |
|                                                                        |                                                            |             |             |   |   |   |
| INCOME (LOSS) FROMCONTINUING OPERATIONS                                     | $                                                               | (332,413)        | $                | (250,000) | $ | 157,981 |
|                                                                        |                                                            |             |             |   |   |   |
| DISCONTINUED OPERATIONS                                                     |                                                            |             |             |   |   |   |
|                                                                        | Loss from operation of discontinuedinternet segment, net of tax |             | -                |   | - |   | (19,178) |
|                                                                        | Gain from disposal of internet segment, netof tax               |             | -                |   | - |   | 11,197 |
|                                                                        | Loss from discontinued operations, net oftax                    |             | -                |   | - |   | (7,981) |
|                                                                        |                                                            |             |             |   |   |   |
| NET INCOME(LOSS)                                                            | $                                                               | (332,413)        | $                | (250,000) | $ | 150,000 |
|                                                                        |                                                            |             |             |   |   |   |
| EARNINGS (LOSS)PER COMMON SHARE:                                            |                                                            |             |             |   |   |   |
|                                                                        | Basic:                                                          |             |             |   |   |   |   |
|                                                                        |    Continuing operations                              | $                | (.03)            | $ | (.03) | $ | .01 |
|                                                                        |    Discontinued operations                            | $                | -                | $ | - | $ | (.00) |
|                                                                        | Diluted:                                                        |             |             |   |   |   |   |
|                                                                        |    Continuing operations                              | $                | (.03)            | $ | (.03) | $ | .01 |
|                                                                        |    Discontinued operations                            | $                | -                | $ | - | $ | (.00) |
|                                                                        |                                                            |             |             |   |   |   |   |
|                                                                        | SHARES USED IN COMPUTING EARNINGS (LOSS) PER COMMON SHARE:      |             |             |   |   |   |   |
|                                                                        | Basic                                                           |             | 13,430,040       |   | 13,064,779 |   | 13,674,425 |
|                                                                        | Diluted                                                         |             | 13,430,040       |   | 13,064,779 |   | 13,674,425 |
|                                                                             |                                                                 |                  |                  |  |  |  |  |

SEE NOTES TO THECONSOLIDATED FINANCIAL STATEMENTS

INTEGRITY MUTUAL FUNDS,INC., AND SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS' EQUITY				FOR THE YEARSENDED DECEMBER 31, 2005, 2004 AND 2003
|                                                             | Amounts |        | Shares |        |
|------------------------------------------------------------------|---------|-------------|--------|-------------|
|                                                             |    | 2005        |   | 2004        |   | 2003 |   | 2005 | 2004 | 2003 |   |
| Preferred stockand additional paid-in capital                    |    |        |   |        |   |   |   |   |   |   |   |
| Balance, beginning of year                                       | $       | 1,525,000   | $      | 1,525,000   | $ | - |   | 3,050,000 | 3,050,000 | - |   |
| Preferred stock issued                                           |    | -           |   | -           |   | 1,525,000 |   | - | - | 3,050,000 |   |
| 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

(as reported)                        |    |        |   |        | $ | 8,361,529 |   | 13,228,543 | 12,995,812 | 12,470,480 |   |
| Change in accounting principle                                   |    |        |   |        |   | 280,400 |   | - | - | - |   |
| Balance, beginning of year (restated)                            | $       | 9,515,283   | $      | 8,873,732   | $ | 8,641,929 |   | 13,228,543 | 12,995,812 | 12,470,480 |   |
| Common stock issued                                              |    | 6,600       |   | 38,000      |   | 210,000 |   | 290,000 | 300,000 | 600,000 |   |
| Stock option valuation                                           |    | 310,500     |   | 634,000     |   | 53,000 |   | - | - | - |   |
| Warrants issued                                                  |    | -           |   | 3,000       |   | - |   | - | - | - |   |
| Purchase of common stock                                         |    | (1,720)     |   | (33,449)    |   | (31,197) |   | - | (67,269) | (74,668) |   |
| Balance, end of year                                             | $       | 9,830,663   | $      | 9,515,283   | $ | 8,873,732 |   | 13,518,543 | 13,228,543 | 12,995,812 |   |
|                                                             |    |        |   |        |   |   |   |   |   |   |   |
| Accumulateddeficit                                               |    |        |   |        |   |   |   |   |   |   |   |
| Balance, beginning of year

(as reported)                        |    |        |   |        | $ | (1,198,551) |   |   |   |   |   |
| Change in accounting principle                                   |    |        |   |        |   | (175,600) |   |   |   |   |   |
| Balance, beginning of year (restated)                            | $       | (1,459,255) | $      | (1,114,705) | $ | (1,374,151) |   |   |   |   |   |
| Net income (loss)                                                |    | (332,413)   |   | (250,000)   |   | 150,000 |   |   |   |   |   |
| Preferred dividends                                              |    | (91,500)    |   | (94,550)    |   | - |   |   |   |   |   |
| Disposal of business segment                                     |    | -           |   | -           |   | 109,446 |   |   |   |   |   |
| Balance, end of year                                             | $       | (1,883,168) | $      | (1,459,255) | $ | (1,114,705) |   |   |   |   |   |
|                                                             |    |        |   |        |   |   |   |   |   |   |   |
| ESOP activity                                                    |    |        |   |        |   |   |   |   |   |   |   |
| Balance, beginning of year                                       | $       | (75,455)    | $      | (82,148)    | $ | (88,845) |   |   |   |   |   |
| Repayments from ESOP                                             |    | 6,690       |   | 6,693       |   | 6,697 |   |   |   |   |   |
| Balance, end of year                                             | $       | (68,765)    | $      | (75,455)    | $ | (82,148) |   |   |   |   |   |
|                                                             |    |        |   |        |   |   |   |   |   |   |   |
| Accumulated other comprehensive income                           |    |        |   |        |   |   |   |   |   |   |   |
|                                                             |    |        |   |        |   |   |   |   |   |   |
| Balance, beginning of year                                       | $       | 256         | $      | (773)       | $ | (26,160) |   |   |   |   |   |
| Change in unrealized gain (loss) onavailable-for-sale securities |    | (265)       |   | 1,029       |   | 25,387 |   |   |
| Balance, end of year                                             | $       | (9)         | $      | 256         | $ | (773) |   |   |   |   |
|                                                             |    |        |   |        |   |   |   |   |   |   |
| Totalstockholders' equity                                        | $       | 9,403,721   | $      | 9,505,829   | $ | 9,201,106 |   |   |   |   |
|                                                                  |         |             |        |             |  |  |  |  |  |  |  |  |  |  |  |

SEE NOTES TO THECONSOLIDATED FINANCIAL STATEMENTS

INTEGRITY MUTUAL FUNDS,INC., AND SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF CASH FLOWS				FOR THE YEARSENDED DECEMBER 31, 2005, 2004 AND 2003
|                                     | 2005                                                                             | 2004   | 2003      |
|-------------------------------------|----------------------------------------------------------------------------------|--------|-----------|
| CASH FLOWS FROMOPERATING ACTIVITIES |                                                                             |   |      |   |   |   |
|                                |                                                                             |   |      |   |   |   |   |
|                                | Net income (loss)                                                                | $      | (332,413) | $ | (250,000) | $ | 150,000 |
|                                | Adjustments to reconcilenet income to net cash provided by operating activities: |   |      |   |   |   |   |
|                                |                                                                             |   |      |   |   |   |
|                                | Depreciation and amortization                                                    |   | 136,910   |   | 98,754 |   | 145,131 |
|                                | Sales commissions amortized                                                      |   | 316,928   |   | 282,948 |   | 345,398 |
|                                | Minority interest                                                                |   | -         |   | - |   | 19,889 |
|                                | Compensation expense - stock                                                     |   | -         |   | 38,000 |   | - |
|                                | Compensation expense - options                                                   |   | 310,500   |   | 634,000 |   | 53,000 |
|                                | Recruiting expense - stock                                                       |   | 6,600     |   | - |   | - |
|                                | Loss on disposal of assets                                                       |   | 3,007     |   | - |   | - |
|                                | Gain (loss) on sale of available-for-salesecurities                              |   | (270)     |   | 937 |   | 13,243 |
|                                | Effects on operating cash flows due tochanges in:                                |   |      |   |   |   |   |
|                                | Cash segregated for customers                                                    |   | -         |   | - |   | 319,275 |
|                                | Accounts receivable                                                              |   | (275,116) |   | (137,793) |   | 61,894 |
|                                | Income taxes receivable                                                          |   | (154,966) |   | - |   | - |
|                                | Prepaids                                                                         |   | (1,606)   |   | (17,037) |   |  13,687 |
|                                | Deferred sales commissions capitalized, netof CDSC collected                     |   | (86,030)  |   | 28,030 |   | 85,881 |
|                                | Deferred tax asset                                                               |   | (28,646)  |   | (319,180) |   | - |
|                                | Other assets                                                                     |   | (48,926)  |   | 38,537 |   | 10,046 |
|                                | Service fees payable                                                             |   | (24,609)  |   | (5,473) |   | 25,775 |
|                                | Accounts payable                                                                 |   | 204,942   |   | (69,600) |   | 88,005 |
|                                | Deferred tax liability                                                           |   | -         |   | - |   | (201,894) |
|                                | Other liabilities                                                                |   | 216,770   |   | 136,702 |   | 15,058 |
|                                |                                                                             |   |      |   |   |   |   |
|                                | Net cash provided by operatingactivities                                         | $      | 243,075   | $ | 458,825 | $ | 1,144,388 |
|                                |                                                                             |   |      |   |   |   |   |
| CASH FLOWS FROMINVESTING ACTIVITIES |                                                                             |   |      |   |   |   |
|                                |                                                                             |   |      |   |   |   |   |
|                                | Purchase of property and equipment                                               | $      | (81,493)  | $ | (41,709) |   | (75,326) |
|                                | Proceeds from sale of property andequipment                                      |   | 500       |   | - |   | - |
|                                | Purchase of available-for-salesecurities                                         |   | -         |   | (5,030) | $ | (1,202) |
|                                | Proceeds from sale of available-for-salesecurities                               |   | 5,281     |   | 24,019 |   | 98,419 |
|                                | Proceeds from sale of subsidiary                                                 |   | -         |   | - |   | 337,875 |
|                                | Purchase of goodwill                                                             |   | (232,407) |   | (48,652) |   | (1,748,444) |
|                                |                                                                             |   |      |   |   |   |   |
|                                | Net cash used by investing activities                                            | $      | (308,119) | $ | (71,372) | $ | (1,388,678) |
|                                |                                                                             |   |      |   |   |   |   |
|                                     |                                                                                  |        |           |  |  |  |  |  |

SEE NOTES TO THECONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATEDSTATEMENTS OF CASH FLOWS (CONTINUED)
|                                                        | 2005                                                                             | 2004      | 2003      |
|-------------------------------------------------------------|----------------------------------------------------------------------------------|-----------|-----------|
|                                                        | CASH FLOWS FROMFINANCING ACTIVITIES                                              |      |      |   |   |   |   |
|                                                        |                                                                             |      |      |   |   |   |   |
|                                                        | Reduction of short-term borrowing                                                | $         | (650,025) | $ | (200,000) | $ | (555,592) |
|                                                        | Redemption of common stock                                                       |      | (1,720)   |   | (33,449) |   | (31,197) |
|                                                        | Sale of common stock warrants                                                    |      | -         |   | 3,000 |   | - |
|                                                        | Issuance of preferred stock                                                      |      | -         |   | - |   | 1,525,000 |
|                                                        | Issuance of subordinated corporate notes                                         |      | 2,000,000 |   | - |   | - |
|                                                        | Short-term borrowing                                                             |      | 650,025   |   | 300,000 |   | - |
|                                                        | Long-term borrowing                                                              |      | -         |   | - |   | 1,141,887 |
|                                                        | Reduction of other debt obligations                                              |      | (366,440) |   | (903,068) |   | (250,000) |
|                                                        | Dividends paid                                                                   |      | (68,625)  |   | (71,675) |   | - |
|                                                        | Reduction of notes payable                                                       |      | (239,998) |   | (240,786) |   | (18,764) |
|                                                        | Redemption of subordinate debentures                                             |      | (595,000) |   | - |   | - |
|                                                        | Redemption of corporate notes                                                    |      | -         |   | (962,000) |   | - |
|                                                        | Repayments from ESOP                                                             |      | 6,690     |   | 6,693 |   | 6,697 |
|                                                        |                                                                             |      |      |   |   |   |   |
|                                                        | Net cash provided (used) by financingactivities                                  | $         | 734,907   | $ | (2,101,285) | $ | 1,818,031 |
|                                                        |                                                                             |      |      |   |   |   |   |
|                                                        | NETINCREASE (DECREASE) IN CASH

   AND CASH EQUIVALENTS                | $         | 669,863   | $ | (1,713,832) | $ | 1,573,741 |
| CASHAND CASH EQUIVALENTS

   AT BEGINNING OF YEAR |                                                                             | 867,528   |      | 2,581,360 |   | 1,007,619 |
| CASH AND CASHEQUIVALENTS

   ATEND OF YEAR        | $                                                                                | 1,537,391 | $         | 867,528 | $ | 2,581,360 |
|                                                        |                                                                             |      |      |   |   |   |
| SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION           |                                                                             |      |      |   |   |   |
|                                                        | Cash paid during the year for:                                                   |      |      |   |   |   |   |
|                                                        |   Interest                                                                  | $         | 244,919   | $ | 323,347 | $ | 293,716 |
|                                                        |   Income taxes                                                              | $         | 100,177   | $ | 386,970 | $ | 175,340 |
|                                                        |  

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING  AND FINANCINGACTIVITIES |      |      |   |   |   |   |
|                                                        |                                                                             |      |      |   |   |   |   |
|                                                        | Change in unrealized gain (loss) onavailable-for-sale securities                 | $         | (265)     | $ | 1,029 | $ | 25,387 |
|                                                        | Purchase of other assets with commonstock                                        | $         | -         | $ | - | $ | 210,000 |
|                                                        | Disposal of minority interest                                                    | $         | -         | $ | - | $ | 335,482 |
|                                                        | Increase (decrease) in goodwill                                                  | $         | 168,497   | $ | (150,601) | $ | 975,707 |
|                                                        | Increase (decrease) in other currentliabilities                                  | $         | (55,597)  | $ | 69,392 | $ | 755,714 |
|                                                        | Increase (decrease) in other long-termliabilities                                | $         | 224,094   | $ | (219,993) | $ | 219,993 |
|                                                        | Recruiting expense - stock                                                       | $         | 6,600     | $ | - | $ | - |
|                                                        | Compensation expense - stock                                                     | $         | -         | $ | 38,000 | $ | - |
|                                                        | Compensation expense - options                                                   | $         | 310,500   | $ | 634,000 | $ | 53,000 |
|                                                        | Preferred stock dividends declared                                               | $         | 22,875    | $ | 22,875 | $ | - |
|                                                        |                                                                             |      |      |   |   |   |   |
|                                                             |                                                                                  |           |           |  |  |  |  |  |

SEE NOTES TO THECONSOLIDATED FINANCIAL STATEMENTS

INTEGRITY MUTUAL FUNDS,INC., AND SUBSIDIARIES

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS				DECEMBER 31,2005, 2004 AND 2003

 

NOTE 1 - **NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTINGPOLICIES** 

               The nature of operations and significant accounting policies ofIntegrity Mutual Funds, Inc., and Subsidiaries are presented toassist in understanding the Company's consolidated financialstatements. 

               **Nature of operations** - Integrity Mutual Funds, Inc., andSubsidiaries (the "Company") was established in September 1987 asa North Dakota corporation.  The Company derives its revenueprimarily from providing investment management, distribution,shareholder services, fund accounting, and related services tosponsored mutual funds, as well as commissions earned from salesof mutual funds, insurance products, and various othersecurities.  Headquartered in Minot, North Dakota, theCompany is marketing its services throughout the UnitedStates. 

               **Principles of consolidation** - The consolidated financialstatements include the accounts of Integrity Mutual Funds, Inc.,and its wholly-owned subsidiaries, Integrity Money Management,Inc., Integrity Fund Services, Inc., Integrity Funds Distributor,Inc., and Capital Financial Services, Inc.  All significantinter-company transactions and balances have been eliminated inthe accompanying consolidated financial statements. 

               **Concentrations** - The Company derives its revenue primarilyfrom investment advisory and administrative services provided tosponsored mutual funds, the majority of which are state-specificmunicipal bond funds, as well as revenues derived from retailbrokerage activities.  Company revenues are largelydependent on the total value and composition of assets undermanagement, which include state-specific municipal bonds, as wellas the sales activity of registered brokers operating asindependent contractors.  Accordingly, fluctuations infinancial markets and the composition of assets under managementimpact revenues and results of operations. 

               **Use of estimates** - The preparation of consolidatedfinancial statements in conformity with accounting principlesgenerally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the consolidatedfinancial statements and the reported amounts of revenues andexpenses during the reporting period.  Actual results coulddiffer from those estimates. 

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

               **Stock-based compensation -** In December of 2005, theCompany adopted FASB Statement No. 123R, "Share-Based Payment,"("SFAS 123R") which requires the measurement and recognition ofcompensation expense for all share-based payment awards made toemployees and directors, including employee stock options, basedon estimated fair values.  SFAS 123R supersedes theCompany's previous accounting under Accounting Principles BoardOpinion No. 25, "Accounting for Stock Issued to Employees," ("APB25"). 

               The Company adopted SFAS 123R using the modified retroactiverestatement method, which requires the restatement of all periodspresented to reflect stock-based employee compensation cost underthe fair value-based accounting method for all employee awardsgranted, modified, or settled in fiscal years beginning afterDecember 15, 1994. 

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

**               Accounts Receivable -** The Company's receivables consistprimarily of fees charged to the affiliated funds for servicesrendered and concessions related to registered representativeactivity.  Management evaluates the need for an allowancefor doubtful accounts by identifying troubled accounts and usinghistorical experience.  Based on this analysis, managementfeels that substantially all accounts are collectible and anallowance for doubtful accounts is not considerednecessary.  Accounts receivable are written off whenmanagement deems them uncollectible.  Recoveries of accountsreceivable previously written off are recorded whenreceived.  The Company does not charge interest on itsreceivables.

**Investments**- Investments in equity securities that have readily determinablefair values are classified and accounted for asavailable-for-sale.  Available-for-sale securities consistof investments in the Company's sponsored mutual funds and arerecorded at fair value, with the change in fair value recorded asa component of other comprehensive income in the equity sectionof the balance sheet.  Cost of securities sold is recognizedusing the specific identification method.    

**Goodwill -**In January 2002, the Company adopted FASB Statement of FinancialAccounting Standards No. 142, "Goodwill and Other IntangibleAssets" ("FAS 142"), which required that goodwill, includinggoodwill included in the carrying value of investments accountedfor using the equity method of accounting and indefinite-livedother intangible assets deemed to have an indefinite useful life,cease amortizing.  The new rules also required that goodwillof consolidated businesses and certain intangible assets beassessed for impairment using fair value measurementtechniques.  As a result, a substantial portion of theCompany's goodwill and intangible assets ceased amortizing. 

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

               **Deferred sales commissions** - Sales commissions paid tobrokers and dealers in connection with the sale of shares of thesponsored mutual funds sold without a front-end sales charge (Band C shares), are capitalized and amortized on a straight linebasis over a period not exceeding eight years, which approximatesthe period of time during which deferred sales commissions areexpected to be recovered from distribution plan payments receivedfrom various sponsored mutual funds and potential contingentdeferred sales charges received from shareholders of the varioussponsored mutual funds.  Contingent deferred sales chargesreceived by the Company are recorded as a reduction ofunamortized deferred sales commissions. In accordance withStatement of Position 98-5, the commissions paid for the sale ofIntegrity Fund of Funds, Inc.'s shares have been expensed asincurred.  The contingent deferred sales charges receivedfrom early redemptions from Integrity Fund of Funds, Inc. havebeen recorded as revenue.  Effective January 1, 2001, theCompany is amortizing most of its sales commissions over 5 yearsfor 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 correspondingdebt and computer software costs are amortized over an estimateduseful life. 

               **Advertising** - Costs of advertising and promotion areexpensed as incurred. Advertising and promotion costs aggregated$66,409 in 2005, $55,436 in 2004 and $86,105 in 2003. 

               **Earnings per common share** - Basic earnings per commonshare was computed using the weighted average number of sharesoutstanding of 13,430,040 in 2005, 13,064,779 in 2004 and13,674,425 in 2003.  Diluted earnings per common share iscomputed using the weighted average number of shares outstandingadjusted for share equivalents arising from unexercised stockwarrants, stock options, and written put options.  Theweighted average shares outstanding used in computing dilutedearnings per common share was 13,430,040 in 2005, 13,064,779 in2004 and 13,674,425 in 2003. 

**               Income taxes** - The Company files a consolidated income taxreturn with its wholly-owned subsidiaries.  The amount ofdeferred tax benefit or expense is recognized as of the date ofthe consolidated financial statements, utilizing currentlyenacted tax laws and rates.  Deferred tax benefits arerecognized in the financial statements for the changes indeferred tax assets between years. 

**               Reclassification** - Certain amounts from 2003 and 2004 havebeen reclassified to conform with the 2005 presentation. These reclassifications had no effect on the Company's netincome, except for the adoption of SFAS 123R as discussed in Note9 - Stock Warrants, Stock Splits, and Stock Options. 

               **Impact of Newly Issued and Proposed Accounting Standards -**In December of 2004, the Financial Accounting Standards Board("FASB") issued Statement of Financial Accounting Standards("SFAS") No. 153, "Exchanges of Nonmonetary Assets - Amendment ofAPB Opinion No. 29". The amendments made by SFAS No. 153 arebased on the principle that exchanges of nonmonetary assetsshould be measured based on the fair value of the assetsexchanged. Further, the amendments eliminate the narrow exceptionfor nonmonetary exchanges of similar productive assets andreplace it with a broader exception for exchanges of nonmonetaryassets that do not have "commercial substance." SFAS No. 153 iseffective for nonmonetary asset exchanges occurring in fiscalperiods beginning after June 15, 2005. The Company does notbelieve the adoption of SFAS No. 153 will have a significanteffect on the Company's consolidated financial statements.

In May of 2005, theFASB issued SFAS No. 154, "*Accounting Changes and ErrorCorrections-a replacement of APB Opinion No.* 20 and FASBStatement No. 3".  SFAS No. 154 applies to all voluntarychanges in accounting principle and also applies to changesrequired by an accounting pronouncement in the unusual instancethat the pronouncement does not include specific transitionprovisions.  When a pronouncement includes specifictransition provisions, those provisions should be followed. SFAS No. 154 requires retrospective application to prior periods'financial statements of changes in accounting principle, unlessit is impracticable to determine either the period-specificeffects or the cumulative effect of the change.  SFAS No.154 is effective for accounting changes and corrections of errorsmade in fiscal years beginning after December 15, 2005.  TheCompany does not believe the adoption of SFAS No. 154 will have asignificant effect on the Company's consolidated financialstatements. 

NOTE 2 - **CASH AND CASHEQUIVALENTS** 

               Cash and cash equivalents at December 31, 2005 and 2004 consistof the following: 
|                                 | CurrentMaturity | Current InterestRate |   |      |   |
|--------------------------------------|-----------------|----------------------|--------|-----------|--------|
|                                 |            | Amount               |
|                                 |            | 2005                 | 2004   |
| Cash in checking                     | Demand          | -                    | $      | 1,236,631 | $      | 860,129 |
| Cash in savings                      | Demand          | 0.20%                |   | 300,760   |   | 500 |
| Morgan Stanley money market accounts | Demand          | -                    |   | -         |   | 6,899 |
|                                 |            |                 | $      | 1,537,391 | $      | 867,528 |
|                                      |                 |                      |        |           |        |  |  |  |  |

NOTE 3 -**INVESTMENTS IN AND TRANSACTIONSWITH SPONSORED MUTUAL FUNDS** 

               The Company's investments in sponsored mutual funds held asavailable-for-sale at December 31, 2005 and 2004: 
|                | AggregateCost       | Gross UnrealizedHolding Gains (Losses) |   |        |
|---------------------|---------------------|----------------------------------------|--------|--------|
|                |                     |
| Aggregate FairValue |                |
|                | 2005 - Mutual Funds |                                   | $      | 217    | $ | (9) | $ | 208 |   |
|                |                |                                   |   |   |   |   |   |   |   |
|                | 2004 - Mutual Funds |                                   | $      | 5,233  | $ | 256 | $ | 5,489 |   |
|                     |                     |                                        |        |        |  |  |  |  |  |  |  |   |

               Dividends earned on the Company's investments in sponsored mutualfunds aggregated $13 in 2005, $326 in 2004 and $1,002 in2003.   

               The Company provides services to the Funds, which had aggregatenet assets under management at December 31, 2005 of$381,914,392.  All services rendered by the Company areprovided under contracts that definitively set forth the servicesto be provided and the fees to be charged.  The majority ofthese contracts are subject to periodic review and approval byeach of the Fund's Board of Directors, Trustees andShareholders.  Revenues derived from services rendered tothe sponsored mutual funds were $4,657,953 in 2005, $4,273,276 in2004 and $3,143,393 in 2003. 

               Accounts receivable from the sponsored mutual funds aggregated$409,000 and $347,000 at December 31, 2005 and 2004,respectively. 

NOTE 4 - **PROPERTY AND EQUIPMENT** 

               Property and equipment at December 31, 2005 and 2004, consists ofthe following: 
|   | 2005                                     | 2004   |
|--------|------------------------------------------|--------|
|   | Office furniture and equipment           | $      | 662,701 | $ | 630,774 |
|   | Building and land                        |   | 1,278,912 |   | 1,253,355 |
|   |                                     | $      | 1,941,613 | $ | 1,884,129 |
|   | Accumulated depreciation andamortization |   | (731,016) |   | (670,101) |
|   |                                     | $      | 1,210,597 | $ | 1,214,028 |

               Depreciation expense totaled $87,665, $85,964 and $83,986 in2005, 2004 and 2003, respectively.

NOTE 5 - **BUSINESS ACQUISITIONS** 

               **Purchase Combinations** - 

On April 22, 2005,the Company acquired the management rights to the IPS MillenniumFund and the IPS New Frontier Fund from IPS Advisory, Inc. ("IPSAdvisory"), and merged them into a new Integrity Fund called theIntegrity Growth & Income Fund.  The two funds hadcombined assets of approximately $57 million at the time ofacquisition.  The purchase agreement called for totalconsideration of approximately 656,000 common shares of theCompany.  The Company provided IPS Advisory with 250,000common shares upon closing.  The remaining consideration ofapproximately 406,000 common shares, which is subject toadjustment based on retention of assets in the fund, is to beissued as follows:  203,000 common shares at the one-yearanniversary of the closing date, and 203,000 common shares at thetwo-year anniversary of the closing date.  The shares willbe subject to a put option which will allow the holders of theshares to put them back to the Company at a price equal to themarket price of the Company's shares as of the closing date,which was $.36 per share.  The put option will beexercisable with respect to one-third of the shares per yearstarting on the third anniversary of the closing date.  TheCompany will also provide IPS Advisory with a stock optionincentive bonus based on growth in assets in the Fund based onthe following schedule:  150,000 options on the Company'scommon shares when assets of the fund reach $100 million and150,000 options on the Company's common shares when the assets ofthe Fund reach $200 million.  The options will have a strikeprice of $.65 per share and mature 10 years from the closingdate.  The securities issued in connection with thistransaction will be issued on a private placement basis. InDecember of 2005, the liability relating to this acquisition wasvalued at approximately $224,000 to reflect the assets in theacquired funds as of December 31, 2005. 

On December 19,2003, the Company acquired the management rights to the Maine andNew Hampshire Tax-Saver Bond Funds from Forum FinancialGroup.  The two funds had combined assets of approximately$43 million at the time of acquisition.  The purchaseagreement called for total consideration of approximately$750,000.  The majority of the purchase price, orapproximately $425,000, was paid upon closing.  Theremaining consideration of approximately $325,000, which wassubject to adjustment based on retention of assets in the funds,was placed in an escrow account that was to be paid out on thefirst anniversary of the closing date.  The total purchaseprice was paid with cash generated from a private placement ofpreferred stock.  In December of 2004, the final payment ofapproximately $285,000 was made, which reflected the assets inthe acquired funds at the one-year anniversary. 

               On September 19, 2003, the Company acquired the management rightsto the four stock funds in the Willamette Family of Funds. The four funds had combined assets of approximately $63 millionat the time of acquisition.  The purchase agreement calledfor total consideration of approximately $1,400,000.  Themajority of the purchase price, or approximately $900,000, waspaid upon closing.  The remaining consideration ofapproximately $500,000, which was subject to adjustment based onretention of assets in the funds, was to be paid asfollows:  $350,000 within five business days of the one-yearanniversary of the closing date, and $150,000 within fivebusiness days of the two-year anniversary of the closingdate.  The total purchase price was paid by utilizing acommercial bank loan and lines of credit, as well as availablecash on hand.  In September of 2004, the one-yearanniversary payment of approximately $323,000 was made, whichreflected the assets of the acquired funds at the one-yearanniversary.  In September of 2005, the final payment ofapproximately $90,000 was made, which reflected the assets in theacquired funds at the two-year anniversary. 

               On May 30, 2003, the Company acquired 100% of the equity stock ofAbbington Capital Management, Inc.  The purchaseconsideration was comprised of 700,000 shares of unregistered$.0001 par value common stock of the Company determined by bothparties to have a total value of $210,000.  The common stockwas issued in a private placement, exempt from registration,pursuant to the following delivery schedule:  200,000 sharesat closing; 200,000 shares on August 31, 2003; 200,000 shares onDecember 31, 2003; and 100,000 shares on April 30, 2004.  Asa part of the transaction, the Company received a license for thePortfolio Manager's Stock Selection Matrix, a quantitativeinvestment model for managing equity portfolios.  The shareswere issued in a private placement exempt from registration underfederal securities laws or any state registration requirementsand are subject to the resale restrictions on unregisteredsecurities. 

On May 23, 2003,the Company acquired the management rights to the CNB Funds,which included the $13 million Canandaigua Equity Fund, alarge-cap growth fund, and the $1 million Canandaigua BondFund.  The purchase agreement called for total considerationof approximately $285,000.  The majority of the purchaseprice, or approximately $160,000, was paid upon closing. The remaining consideration of approximately $125,000, which wassubject to adjustment based on retention of assets in the funds,was to be paid as follows:  $62,500 at the one-yearanniversary of the closing date, and $62,500 at the two-yearanniversary of the closing date.  The total purchase pricewas paid by using available cash on hand.  In June of 2004,the one-year anniversary payment of approximately $44,000 waspaid, which reflected the assets in the acquired funds at theone-year anniversary.  In June of 2005, the final payment ofapproximately $26,000 was made, which reflected the assets in theacquired funds at the two-year anniversary. 

On January 15,2002, the Company acquired 100% of the equity stock of CapitalFinancial Services, Inc. ("CFS"), a full-service brokerage firmbased in Madison, Wisconsin.  CFS is registered with the SECas an investment advisor and broker-dealer and also with the NASDas a broker-dealer.  CFS specializes in providing investmentproducts and services to independent investment representatives,financial planners, and investment advisors and currentlysupports approximately 175 investment representatives andinvestment advisors.  The purchase consideration, takinginto effect the 2 for 1 (2:1) forward stock split effective July1, 2002, was composed of $1,140,000 in cash, 1,500,000 shares ofthe Company common stock to be issued in three (3) annualinstallments beginning at the date of purchase, a $250,000convertible debenture to be issued one year from the purchasedate, and 500,000 options to purchase common stock of the Companyat an option strike price of $0.50 per share. 

Pursuant to theterms of the purchase agreement whereby CFS was acquired,1,500,000 shares of $.0001 par value common stock of the Companywere issued in three (3) annual installments beginning at thedate of purchase.  The shares have a put right, whereby theinstallment shares may be put back to the Company at the rate of$0.50 per share.  The put right may be exercised at any timewithin the ninety (90) day period following the first, second,and third anniversaries of the purchase.  The put rights arenon-accumulative and each installment will expire if notexercised during the scheduled redemption period.  InJanuary of 2003, 2004, and 2005, the put options on the threeinstallments of shares were exercised.  As a result, theCompany paid $250,000 to repurchase 500,000 shares in each of theyears 2003, 2004, and 2005. 

Also pursuant tothe terms of the purchase agreement whereby CFS was acquired, onJanuary 15, 2003, the Company issued convertible debenturesdivided among the prior shareholders of CFS in the total amountof $250,000, subject to certain provisions of the Stock PurchaseAgreement dated January 15, 2002, which may increase or decreasethe amount of the debenture to reflect undisclosed or unknownliabilities of CFS, loss of producing broker revenue base,recovery from third parties, and the costs of suchrecovery.  The debenture principal will be payable January15, 2006 and will pay interest on the principal sum from January15, 2003 at the rate of four percent (4%) per annum on asemi-annual basis beginning on July 15, 2003 and thereafter onJanuary 15th and July 15th of each yearuntil the principal balance is paid.  All payments will beapplied first to interest and any remainder to reduction ofprincipal.  The debenture will be convertible asfollows:  beginning on the date of issuance and until theprincipal is paid in accordance with the terms of this agreement,the holder of this convertible debenture shall have the option toconvert all or any portion of this convertible debenture to$.0001 par value common stock of the Company at the rate of twoshares for each one dollar of convertible debenture (2 shares per$1.00 converted) issued by the debenture holder.  In Januaryof 2006, the Company paid $250,000 to retire the convertibledebentures. 

The primary reasonsfor the acquisition were to acquire a full-service retailbrokerage distribution system as well as to acquire theinvestment advisory service operations of CFS.  The primaryfactors contributing to the purchase price were the presence ofan established group of approximately 90 investmentrepresentatives and investment advisors, the existingrelationship with a reputable clearing firm, the fact thatapproximately 95% of the business of CFS is processed as packagedproducts, i.e. mutual funds and insurance products, and tocapture the revenue stream of approximately $6.4 million. The estimated fair value of the equity of CFS was recorded at$78,392.  The excess of purchase price over the estimatedfair value of the equity of CFS was $2,117,711, which wasrecorded as goodwill. 

The operations andfinancial position of CFS were accounted for in the consolidatedfinancial statements of the Company beginning January 1,2002. 

NOTE 6 - **DISCONTINUED OPERATIONS** 

Effective June 26,2003, the Company sold its 51% ownership in Magic InternetServices, Inc.  The purchase consideration for the Company's51% ownership consisted of $337,875, which the Company receivedat closing, as well as an additional maximum payment of $36,975to be received 90 days after closing.  The additionalpayment was subject to adjustment based on terms of thecontract.  The Company received a final payment of $29,622in October of 2003, resulting in a final adjusted gain (net oftax) from the sale of stock of subsidiary of $11,197. 

The results ofMagic Internet Services, Inc., are reported in the Company'sConsolidated Statements of Operations separately as discontinuedoperations.  In accordance with GAAP, the ConsolidatedBalance Sheets have not been restated.

Summarizedfinancial information for discontinued operations is asfollows: 
|                                             | June 26, 2003 |
|--------------------------------------------------|---------------|
| Total revenues, net of interest expense          | $             | 233,845 |
|                                             |          |   |
| Loss from discontinued operations, net oftax     | $             | (19,178) |
| Gain from sale of stock of subsidiary, netof tax | $             | 11,197 |
| Loss from discontinued operations, net oftax     | $             | (7,981) |
|                                             |          |   |
| Total assets                                     | $             | 753,006 |
| Total liabilities                                | $             | 68,532 |
| Net assets of discontinued operations            | $             | 684,474 |

NOTE 7 - **LONG-TERM DEBT** 

               Long-term debt at December 31, 2005 and 2004 was as follows:               

|   |                            |   | CurrentPortion |    |   |      |
|--------|---------------------------------|--------|----------------|---------|--------|-----------|
|   | Rate                            | 2005   | 2004           |    |
|   | Long-term debt:            |   |           |    |   |      |   |   |
|   | First Western Bank              | 7.25%  |           | 20,875  |   | 401,483   |   | 422,637 |
|   | First Western Bank              | 8.25%  |           | 243,210 |   | 702,168   |   | 921,012 |
|   | Subordinate debentures          | 12.00% |           | -       |   | -         |   | 595,000 |
|   | Subordinate commercial notes    | 9.00%  |           | -       |   | 561,000   |   | 561,000 |
|   | Subordinate corporate notes     | 9.25%  |           | -       |   | 2,000,000 |   | - |
|   | Convertible debenture           | 4.00%  |           | 250,000 |   | 250,000   |   | 250,000 |
|   | Future payments on acquisitions |   |           | -       |   | 224,094   |   | - |
|   |                            |   |           |    |   |      |   |   |
|   | Totals                          |   | $              | 514,085 | $      | 4,138,745 | $ | 2,749,649 |
|        |                                 |        |                |         |        |           |  |  |  |  |  |  |  |  |

               A summary of the terms of the current long-term debt agreementsfollow: 

               **First Western Bank** - In June of 1999, the Companyconverted its outstanding balance of $500,000 borrowed on itsbank line-of-credit to long-term debt.  The debt wasrefinanced in October of 2005 and currently carries an interestrate of 7.25%, with monthly payments of $4,105.  On October1, 2010, the remaining balance will be due in full.  In Juneof 2003, the Company borrowed $900,000 on a $1,200,000 line ofcredit.  The debt carries an interest rate of 1.25% abovethe prime rate, with monthly payments of $23,200.  InDecember of 2003, the Company borrowed the remaining $300,000 onthe line of credit.  Based on the monthly payments, the debtwill be paid in full on September 25, 2008. 

               **Subordinate Debentures** - The Company approved a $1 millionintra-state subordinate debenture offering limiting the sale inNorth Dakota to North Dakota residents only.  Thesubordinate debentures do not represent ownership in the Company.The subordinate debentures carried an interest rate of 12% perannum, payable semi-annually.  On June 30, 2005, thesubordinate debentures matured and the liability was paid infull. 

**SubordinateCommercial Notes** - The Company approved a $1 millionintra-state subordinate commercial note offering limiting thesale in North Dakota to North Dakota residents only.  Thesubordinate commercial notes do not represent ownership in theCompany.  As of December 31, 2005, $561,000 in subordinatecommercial notes were outstanding.  The subordinatecommercial notes carry an interest rate of 9% per annum, payablesemi-annually, and mature June 30, 2008.  The Company cancall the subordinate commercial notes at par anytime after July1, 2003. 

**SubordinateCorporate Notes**  - The Company approved a $2 millionintra-state subordinate corporate note offering limiting the salein North Dakota to North Dakota residents only.  Thesubordinate corporate notes do not represent ownership in theCompany.  As of December 31, 2005, $2,000,000 in subordinatecorporate notes were outstanding.  The subordinate corporatenotes carry an interest rate of 91⁄4% per annum, payableannually, and mature January 1, 2011.  The Company can callthe subordinate corporate notes at par anytime after December 1,2007. 

**ConvertibleDebentures** - see Note 5 - Business Acquisitions 

**Future Paymentson Acquisitions** - see Note 5 - Business Acquisitions 

The aggregateamount of required future payments on the above long-term debt atDecember 31, 2005, is as follows: 
| Year endingDecember 31, |   |
|-------------------------|--------|
| 2006                    | $      | 516,772 |
| 2007                    |   |  282,206 |
| 2008                    |   | 871,526 |
| 2009                    |   | 92,938 |
| 2010                    |   | 375,303 |
| 2011                    |   | 2,000,000 |
|                    |   |   |
| Total due               | $      | 4,138,745 |

NOTE 8 - **INCOME TAXES** 

               The provision for income taxes is based on earnings before incometaxes reported for financial statement purposes and consisted ofthe following: 
|                            | 2005                                 | 2004   | 2003    |
|---------------------------------|--------------------------------------|--------|---------|
| Current income taxes:           |                                 |   |    |   |   |   |
|                            | Federal                              | $      | -       | $ | 158,000 | $ | 219,000 |
|                            | State                                |   | -       |   | 24,000 |   | 24,000 |
|                            | Total current payable                | $      | -       | $ | 182,000 | $ | 243,000 |
| Deferred tax benefit (expense): |                                 |   |    |   |   |   |
|                            | Federal                              | $      | 104,000 | $ | 268,000 | $ | 86,000 |
|                            | State                                |   | 14,750  |   | 38,110 |   | 12,670 |
|                            | Total deferred tax benefit (expense) | $      | 118,750 | $ | 306,110 | $ | 98,670 |
|                            |                                 |   |    |   |   |   |
| Total provision for income tax  |                                 |   |    |   |   |   |
|                            | benefit (expense)                    | $      | 118,750 | $ | 124,110 | $ | (144,330) |
|                                 |                                      |        |         |  |  |  |  |

               The information above has been revised to exclude the InternetServices segment related to Magic Internet Services, Inc. 

               Deferred taxes arise because of different tax treatment betweenfinancial statement accounting and tax accounting, known as"temporary differences."  The Company records the tax effectof these temporary differences as "deferred tax assets"(generally items that can be used as a tax deduction or credit infuture periods) and "deferred tax liabilities" (generally itemsfor which the Company has received a tax deduction and have notyet been recorded in the consolidated statement ofoperations).  

Deferred tax assets(liabilities) were comprised of the following: 
|                      | 2005                                        | 2004    | 2003    |
|---------------------------|---------------------------------------------|---------|---------|
| Deferred tax assets:      |                                        |    |    |   |   |   |
|                      | Net operating and capital losscarryforwards | $       | 133,648 | $ | 71,224 | $ | 75,109 |
|                      | Stock option compensation                   |    | 500,935 |   | 375,135 |   | 126,254 |
|                      | Other                                       |    | -       |   | - |   | - |
|                      | Total deferred tax assets                   | $       | 634,583 | $ | 446,359 | $ | 201,363 |
|                      |                                        |    |    |   |   |   |
| Deferred tax liabilities: |                                        |    |    |   |   |   |
|                      | Accumulated depreciation                    | $       | 51,406  | $ | 45,044 | $ | 36,990 |
|                      | Accumulated amortization                    |    | 203,695 |   | 50,479 |   | 132,717 |
|                      | Total deferred tax liabilities              | $       | 255,101 | $ | 95,523 | $ | 169,707 |
|                      |                                        |    |    |   |   |   |
| Net deferred tax asset    | $                                           | 379,482 | $       | 350,836 | $ | 31,656 |
|                           |                                             |         |         |  |  |  |  |
| Net deferred tax asset - current     | $ | 52,609  | $ | -       | $ | -      |
|--------------------------------------|---|---------|---|---------|---|--------|
| Net deferred tax asset - non-current | $ | 326,873 | $ | 350,836 | $ | 31,656 |
| Net deferred tax asset               | $ | 379,482 | $ | 350,836 | $ | 31,656 |

As of December 31,2005, the Company had federal and state net operating losscarryforwards of approximately $155,000 and $626,000,respectively, that will expire over the next six to twenty yearsif unused. 

As of December 31,2005, the Company also has a capital loss carryforward ofapproximately $125,000 that will expire in 2008 if unused. 

A reconciliation ofthe difference between the expected income tax expense (benefit)computed at the U.S. Statutory income tax rate of 35% and theCompany's income tax expense is shown in the following table: 
|                                            | 2005   | 2004     | 2003   |
|-------------------------------------------------|--------|----------|--------|
| Federal benefit (taxes) at statutoryrates       | $      | 158,000  | 35%    | $ | 131,000 | 35% | $ | (106,000) | (35%) |   |
| State benefit (taxes), net of federal taxeffect |   | 23,000   | 5%     |   | 19,000 | 5% |   | (15,000) | (5%) |   |
| Other                                           |   | (62,250) | (14%)  |   | (25,890) | (7%) |   | (23,330) | (8%) |   |
|                                            |   |     |   |   |   |   |   |   |   |   |
| Actual tax benefit (expense)                    | $      | 118,750  | 26%    | $ | 124,110 | 33% | $ | (144,330) | (48%) |   |
|                                                 |        |          |        |  |  |  |  |  |  |  |  |

                The information above has been revised to exclude the Internet Services segment related to Magic Internet Services, Inc. 

               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, 2005, 2004 and 2003. 

NOTE 9 - **STOCK WARRANTS, STOCK SPLITS,AND STOCK OPTIONS** 

               The Company has authorized 2,100,000 perpetual warrants tocertain organizers, directors, officers, employees andshareholders of the Company.  All warrants were issuedbetween 1987 and 1990 and were accounted for in accordance withthe provisions of Accounting Principles Board ("APB") Opinion No.25, Accounting for Stock Issued to Employees.  Nocompensation expense was recorded for these warrants as theexercise price exceeded the market price of the stock at the dateof issue.  The Company plans to continue to apply APBOpinion No. 25 in accounting for its warrants.  In the eventadditional warrants are issued, appropriate results will bedisclosed in accordance with the provisions of SFAS No.123R.  These warrants, at the date of issue, allowed for thepurchase of shares of stock at $2.00 per share.  Theexercise price of the warrants were adjusted to reflect stocksplits 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 of2,098,000 warrants as of December 31, 2005. 

               In addition, the Company has issued warrants to purchase 600,000common shares at an exercise price of $.60 per share.  Theseoptions are considered to be fully vested and have a contractualexpiration date of September 1, 2010. 

               The Company has entered into employment agreements with severalkey employees of the Company.  Upon execution of several ofthese employment agreements, a one time granting of stock optionstook effect.  These options are considered to be fullyvested.  Some of the options have a perpetual life and somehave a contractual life of ten years.  Each employmentcontract stated the strike price for which options weregranted.  In addition, several of the contracts will grantoptions should the employee reach specified performancegoals.  The number of shares authorized for granting ofoptions under these employment agreements is limited only bycontinued employment and the ability to reach these performancegoals.  Several employment contracts contain severancepackages, buyout clauses, or other forms of commitments. None of these commitments require payment of more than one year'ssalary. 

               The Company has also issued options to directors as well asvarious other employees.  The options granted to employeeswere granted in connection with reaching certain performancegoals.  These options are considered to be fully vested andhave a contractual life of ten years.               

               As part of the acquisition of Capital Financial Services, Inc.(see Note 5 - Business Acquisitions), 500,000 options weregranted at a strike price of $.50.  These options are fullyvested 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, using the modified retroactive restatement method.  In connection with the use of the modified retroactive restatement method, financial statement information was restated for all periods presented.  Total compensation costs and deferred tax benefits recognized for stock-based compensation awards were as follows: 
|                             |   | 2005    |   | 2004    |   | 2003   |
|----------------------------------|--------|---------|--------|---------|--------|--------|
| Compensation costs               | $      | 310,500 | $      | 634,000 | $      | 53,000 |
| Less:  deferred tax benefit |   | 125,801 |   | 248,881 |   | 21,455 |
| Compensation costs, net of taxes | $      | 184,699 | $      | 385,119 | $      | 31,545 |

As a result ofadopting SFAS No. 123R for stock-based compensations awards, thefollowing amounts have been restated: 
|                                             | 2004        | 2003   |
|--------------------------------------------------|-------------|--------|
| Income (loss) before income tax benefit(expense) |        |   |   |   |
|                                             | As reported | $      | 259,890 | $ | 355,311 |
|                                             | Restated    |   | (374,110) |   | 302,311 |
| Income (loss) from continuing operations         |        |   |   |   |
|                                             | As reported | $      | 135,119 | $ | 189,526 |
|                                             | Restated    |   | (250,000) |   | 157,981 |
| Net income (loss)                                |        |   |   |   |
|                                             | As reported | $      | 135,119 | $ | 181,545 |
|                                             | Restated    |   | (250,000) |   | 150,000 |
| Basic earnings (loss) per share                  |        |   |   |   |
|                                             | As reported | $      | .00 | $ | .01 |
|                                             | Restated    |   | (.03) |   | .01 |
| Diluted earnings (loss) per share                |        |   |   |   |
|                                             | As reported | $      | .00 | $ | .01 |
|                                             | Restated    |   | (.03) |   | .01 |
| Net cash provided by operatingactivities         |        |   |   |   |
|                                             | As reported | $      | 458,825 | $ | 1,144,388 |
|                                             | Restated    |   | 458,825 |   | 1,144,388 |
| Net cash provided (used) by financingactivities  |        |   |   |   |
|                                             | As reported | $      | (2,101,285) | $ | 1,818,031 |
|                                             | Restated    |   | (2,101,285) |   | 1,818,031 |
| Deferred tax asset (liability)                   |        |   |   |   |
|                                             | As reported | $      | (24,300) | $ | (94,599) |
|                                             | Restated    |   | 350,836 |   | 31,656 |
|                                                  |             |        |  |  |  |

Also as a result ofadopting SFAS No. 123R, certain portions of the Company's 2003and 2004 beginning of the year shareholders' equity has beenrestated as follows: 
|                                   |   | Additional paid-in capital- common stock |   | Accumulated deficit |
|----------------------------------------|--------|------------------------------------------|--------|---------------------|
| Balance, January 1, 2003 (as reported) | $      | 8,360,282                                | $      | (1,198,551)         |
| Restatement                            |   | 280,400                                  |   | (175,600)           |
| Balance, January 1, 2003 (restated)    | $      | 8,640,682                                | $      | (1,374,151)         |
|                                   |   |                                     |   |                |
| Balance, January 1, 2004 (as reported) | $      | 8,539,032                                | $      | (907,560)           |
| Restatement                            |   | 333,400                                  |   | (207,145)           |
| Balance, January 1, 2004 (restated)    | $      | 8,872,432                                | $      | (1,114,705)         |
|                                   |   |                                     |   |                |

The fair value ofeach option was estimated on the date of the grant using theBlack-Scholes option pricing model.  The expected life ofoptions granted range from 5 years to 10 years.  Thefollowing are the weighted average assumptions for each year:
|                            | 2005    | 2004    | 2003    |
|---------------------------------|---------|---------|---------|
| Risk-free interest rate         | 4.08%   | 3.78%   | 3.30%   |
| Expected dividend yield         | 0%      | 0%      | 0%      |
| Expected stock price volatility | 83%     | 79%     | 133%    |
| Expected life of options        | 5 years | 7 years | 7 years |

Option activity forthe last three years was as follows:
|                             | Number ofOptions | Weighted AverageExercise Price per Share | Weighted AverageGrant Date Fair Value |
|----------------------------------|------------------|------------------------------------------|---------------------------------------|
|                             |
|                             |
| Outstanding on January 1, 2003   | 1,440,000        | $                                        | .46                                   | $ | .30 |
|                             | Granted          | 200,000                                  |                                  | .41 |   | .27 |
|                             | Exercised        | -                                        |                                  | - |   | - |
|                             | Canceled         | -                                        |                                  | - |   | - |
| Outstanding on December 31, 2003 | 1,640,000        | $                                        | .45                                   | $ | .30 |
|                             | Granted          | 2,195,613                                |                                  | .63 |   | .29 |
|                             | Exercised        | -                                        |                                  | - |   | - |
|                             | Canceled         | -                                        |                                  | - |   | - |
| Outstanding on December 31, 2004 | 3,835,613        | $                                        | .55                                   | $ | .29 |
|                             | Granted          | 1,412,500                                |                                  | .49 |   | .22 |
|                             | Exercised        | -                                        |                                  | - |   | - |
|                             | Canceled         | -                                        |                                  | - |   | - |
| Outstanding on December 31, 2005 | 5,248,113        | $                                        | .53                                   | $ | .27 |
|                                  |                  |                                          |                                       |  |  |  |

Exercisable optionsat the end of 2005, 2004, and 2003 were 5,248,113, 3,835,613, and1,640,000, respectively.  The following table summarizesinformation concerning options outstanding and exercisable as ofDecember 31, 2005: 
| Range of ExercisePrices | NumberOutstanding | Weighted AverageRemaining Contractual Life (Years) | Weighted AverageExercise Price | NumberExercisable | Weighted AverageExercise Price |
|-------------------------|-------------------|----------------------------------------------------|--------------------------------|-------------------|--------------------------------|
| $ .00 to $ .49          | 1,320,000         | Perpetual                                          | $                              | .42               | 1,320,000                      | $ | .42 |
| $ .50 to $ .99          | 3,415,000         | 9*                                                 | $                              | .51               | 3,415,000                      | $ | .51 |
| $1.00 to $1.50          | 513,113           | 9*                                                 | $                              | 1.01              | 513,113                        | $ | 1.01 |
| $ .00 to $ 1.50         | 5,248,113         | 9*                                                 | $                              | .53               | 5,248,113                      | $ | .53 |

               * Excludes options with a perpetual life 

NOTE 10 - **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 $4,790, $4,004, and $3,099 for the years ended December 31, 2005, 2004, and 2003, respectively.  The matching contribution paid by the Company was $91,991 for the year ended December 31, 2005. 

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 contributions by the Company.  The outstanding principal balance of the loan as of December 31, 2005, was $69,000 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 31,2005 and 2004, cumulative allocated shares remaining in the trustwere 567,128 and 553,184 respectively, and unallocated shareswere 156,872 and 170,816 respectively, of which 13,944 and 13,944respectively, were committed-to-be allocated.  Total ESOPcontribution expense recognized was $9,062, $579 and $20,150 forthe years ended December 31, 2005, 2004, and 2003,respectively.  The fair value of unallocated shares was$53,336 at December 31, 2005.

 

NOTE 11 - **NET CAPITAL REQUIREMENTS** 

The Company's broker-dealer subsidiaries (Integrity Funds Distributor, Inc. and Capital Financial Services, Inc.) are member firms of the National Association of Securities Dealers, Inc. 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, 2005, these subsidiaries had net capital of $222,866 and $573,505; minimum net capital requirements of $25,000 and $77,690; excess net capital of $197,866 and $495,815 and ratios of aggregate indebtedness to net capital of .41 to 1, and 2.03 to 1, respectively.  The subsidiaries are exempt from the reserve requirements of Rule 15c3-3. 

NOTE 12 - **OPERATING SEGMENTS** 

Integrity MutualFunds, Inc., derives a portion of its revenues and net incomefrom providing investment advisory, distribution, transferagency, fund accounting, and other administrative services to theFunds.  Capital Financial Services, Inc. ("CFS"), acquiredeffective January 1, 2002, provides another substantial portionof revenues through sales of mutual funds, insurance products,and various other securities. 

The Companyorganizes its current business units into two reportablesegments: mutual fund services and broker-dealer services. Themutual fund services segment provides investment advisory,distribution, transfer agency, fund accounting, and otheradministrative services to the Funds.  The broker-dealersegment distributes securities and insurance products to retailinvestors through a network of registered representatives. 

As disclosed in Note 6 - Discontinued Operations, the Company has classified the results of operations of Magic Internet Services, Inc., (the Internet Services segment) as discontinued operations.  The information below has been revised to exclude the Internet Services segment related to Magic Internet Services, Inc.  

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 theyear ended, December 31, 2005 
|   | Mutual FundServices                                                        | Broker-DealerServices | Total       |
|--------|----------------------------------------------------------------------------|-----------------------|-------------|
|   |
|   | Revenue from external customers                                            | $                     | 5,294,698   | $ | 14,170,581 | $ | 19,465,279 |
|   | Intersegment 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) from continued operationsbefore income tax benefit (expense) |                  | (1,113,101) |   | 661,938 |   | (451,163) |
|   | Income tax benefit (expense)                                               |                  | 382,150     |   | (263,400) |   | 118,750 |
|   | Income (loss) from continued operations                                    |                  | (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 |

As of, and for theyear ended, December 31, 2004 
|   | Mutual FundServices                                                        | Broker-DealerServices | Total      |
|--------|----------------------------------------------------------------------------|-----------------------|------------|
|   |
|   | Revenue from external customers                                            | $                     | 4,942,676  | $ | 12,047,895 | $ | 16,990,571 |
|   | Interest expense                                                           |                  | 275,247    |   | - |   | 275,247 |
|   | Stock-based employee compensation                                          |                  | 634,000    |   | - |   | 634,000 |
|   | Sales commissions amortized                                                |                  | 321,942    |   | - |   | 321,942 |
|   | Depreciation and amortization                                              |                  | 98,799     |   | 726 |   | 99,525 |
|   | Income (loss) from continued operationsbefore income tax benefit (expense) |                  | (967,427)  |   | 593,317 |   | (374,110) |
|   | Income tax benefit (expense)                                               |                  | 356,690    |   | (232,580) |   | 124,110 |
|   | Income (loss) from continued operations                                    |                  | (610,737)  |   | 360,737 |   | (250,000) |
|   | Segment assets                                                             |                  | 12,527,689 |   | 1,458,690 |   | 13,986,379 |
|   | Expenditure for segment assets                                             |                  | 39,944     |   | 1,765 |   | 41,709 |

As of, and for theyear ended, December 31, 2003 
|   | Mutual FundServices                                              | Broker-DealerServices | Total      |
|--------|------------------------------------------------------------------|-----------------------|------------|
|   |
|   | Revenue from external customers                                  | $                     | 4,119,132  | $ | 9,837,041 | $ | 13,956,173 |
|   | Interest expense                                                 |                  | 294,787    |   | 760 |   | 295,547 |
|   | Stock-based employee compensation                                |                  | 53,000     |   | - |   | 53,000 |
|   | Sales commissions amortized                                      |                  | 376,386    |   | - |   | 376,386 |
|   | Depreciation and amortization                                    |                  | 98,116     |   | 4,790 |   | 102,906 |
|   | Income (loss) from continued operationsbefore income tax expense |                  | (290,379)  |   | 592,690 |   | 302,311 |
|   | Income tax expense                                               |                  | 144,330    |   | - |   | 144,330 |
|   | Income (loss) from continued operations                          |                  | (434,709)  |   | 592,690 |   | 157,981 |
|   | Segment assets                                                   |                  | 15,437,852 |   | 1,039,228 |   | 16,477,080 |
|   | Expenditure for segment assets                                   |                  | 72,968     |   | 2,358 |   | 75,326 |

Reconciliation of SegmentInformation 
|   | 2005                                    | 2004   | 2003       |
|--------|-----------------------------------------|--------|------------|
|   | Revenues                                |   |       |   |   |   |   |   |
|   | Total revenues for reportable segments  |   | 19,465,279 |   | 16,990,571 |   | 13,956,173 |   |
|   | Elimination of intercompany revenues    |   | (24,523)   |   | - |   | - |   |
|   | Consolidated total revenue              | $      | 19,440,756 | $ | 16,990,571 | $ | 13,956,173 |   |
|   |                                    |   |       |   |   |   |   |   |
|   | Profit                                  |   |       |   |   |   |   |   |
|   | Total reportable segment profit (loss)  | $      | (332,413)  | $ | (250,000) | $ | 150,000 |   |
|   |                                    |   |       |   |   |   |   |   |
|   | Assets                                  |   |       |   |   |   |   |   |
|   | Total assets for reportable segments    | $      | 15,271,306 | $ | 13,986,379 | $ | 16,477,080 |   |
|   | Elimination of intercompany receivables |   | (78,392)   |   | (78,392) |   | (801,864) |   |
|   | Consolidated assets                     | $      | 15,192,914 | $ | 13,907,987 | $ | 15,675,216 |   |
|        |                                         |        |            |  |  |  |  |  |  |

NOTE 13 - **COMMITMENTS ANDCONTINGENCIES** 

The Company entered into leases for office space in Minnesota and California as a result of purchasing ARM Securities Corporation.  The monthly lease payments were $900 and $7,409, respectively.  Both leases expired in 2003.  The Company also entered into a lease for office space located in Huntington, New York.  The monthly lease payments were $918.  The 6-month lease, with the option to renew, expired on February 17, 2004.  The lease was renewed for an additional 6-month period ending August 31, 2004.  The Company entered into a three-year lease for new office space in Huntington, New York on June 1, 2004.  The monthly lease payments are $1,500 for the first two years, and $1,545 for the third year.  Total rent expense was $18,000, $18,090, and $96,594 for the years ended December 31, 2005, 2004, and 2003, respectively.  

The Company has several leases for various office equipment that expire over the next several years through 2008.  The total rent expense for these leases was $30,000, $27,000, and $29,000 for December 31, 2005, 2004 and 2003 respectively.  

The following is aschedule by years of future minimum rental payments on operatingleases as of December 31, 2005. 
|   | Years ending December 31,            |   |    |
|--------|--------------------------------------|--------|---------|
|   | 2006                                 | $      | 50,014  |
|   | 2007                                 |   | 39,424  |
|   | 2008                                 |   | 11,177  |
|   | Total minimum future rental payments | $      | 100,615 |

NOTE 14 - **GOODWILL** 

The changes in thecarrying amount of goodwill for the years ended December 31,2005, 2004, and 2003, are as follows: 
|   | Mutual FundServices                                                 | Broker-DealerServices | Total     |
|--------|---------------------------------------------------------------------|-----------------------|-----------|
|   |
|   | Balance as of January 1, 2003                                       | $                     | 4,777,690 | $ | 2,456,627 | $ | 7,234,317 |
|   | Goodwill acquired during the period                                 |                  | 2,720,928 |   | 3,223 |   | 2,724,151 |
|   | Goodwill disposed of during the period                              |                  | (427,034) |   | - |   | (427,034) |
|   | Impairment losses                                                   |                  | -         |   | - |   | - |
|   | Balance as of December 31, 2003                                     | $                     | 7,071,584 | $ | 2,459,850 | $ | 9,531,434 |
|   | Goodwill acquired during the period                                 |                  | -         |   | 18,902 |   | 18,902 |
|   | Goodwill acquisition price adjustment duringthe period (see Note 5) |                  | (120,851) |   | - |   | (120,851) |
|   | Impairment losses                                                   |                  | -         |   | - |   | - |
|   | Balance as of December 31, 2004                                     | $                     | 6,950,733 | $ | 2,478,752 | $ | 9,429,485 |
|   | Goodwill acquired during the period                                 |                  | 468,656   |   | - |   | 468,656 |
|   | Goodwill acquisition price adjustment duringthe period (see Note 5) |                  | (67,752)  |   | - |   | (67,752) |
|   | Impairment losses                                                   |                  | -         |   | - |   | - |
|   | Balance as of December 31, 2005                                     | $                     | 7,351,637 | $ | 2,478,752 | $ | 9,830,389 |

Goodwillimpairment is determined using a multi-step process.  Thefirst step of the goodwill impairment test is to determine thefair value of a reporting unit, including goodwill.  Theestimates of fair value of a reporting unit, generally theCompany's business segments, are determined using variousvaluation techniques. The two main techniques include the use ofindustry valuation benchmarks for comparable publicly tradedcompanies and acquisition transaction multiples of comparablecompanies. For each method, valuation benchmarks are collectedfrom third party sources such as independent investment banks orreporting services. Various industry average valuation multiplesare calculated. Examples include value to revenue, value toassets under management and value to operating income. Theaverage industry valuation multiples are then applied to theCompany's operating characteristics to determine an estimate ofthe Company's business segment fair value. For example, theindustry average multiple of value to assets under management isapplied to the Company's assets under management. The businesssegments fair value is then calculated as a weighted average ofthe different industry valuation multiples. 

The next step isto calculate the implied fair value of goodwill by determiningthe fair value of equity for each business segment andsubstituting it for the book value of equity on the balancesheet. The implied fair value of goodwill is then calculated. 

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

The Company testsgoodwill for impairment annually during the second quarter ofeach fiscal year at the reporting unit level using a fair valueapproach, in accordance with the provisions of SFAS 142. The annual testing resulted in no impairment charges to goodwillin 2004 or 2005.  If an event occurs or circumstances changethat would more likely than not reduce the fair value of areporting unit below its carrying value, goodwill will beevaluated for impairment between annual tests. 

NOTE 15 - **EARNINGS PER SHARE** 

Basic earnings pershare are computed by dividing earnings available to commonstockholders by the weighted average number of common sharesoutstanding during the period.  Diluted earnings per sharereflect per share amounts that would have resulted if dilutivepotential common stock had been converted to common stock. The following reconciles amounts reported in the financialstatements:

 
|                                                                        | For the YearEnded December 31, 2005 |              |
|-----------------------------------------------------------------------------|-------------------------------------|-------------------|
|                                                                        |                                | Income(Numerator) | Shares(Denominator) |   | Per-shareAmount |
| 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:                                              |                                |              |   |   |   |
| Put options                                                                 |                                | -                 |   |   |   |
| Income available to common stockholders-

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

 
|                                                                        | For the YearEnded December 31, 2004 |              |
|-----------------------------------------------------------------------------|-------------------------------------|-------------------|
|                                                                        |                                | Income(Numerator) | Shares(Denominator) |   | Per-shareAmount |
| Loss from continuing operations                                             | $                                   | (250,000)         |   |   |   |
| Less: preferred stock dividends                                             |                                | (94,550)          |   |   |   |
| Loss available to common stockholders -

  Basic earnings per share    |                                | (344,550)         | 13,064,779 | $ | (.03) |
| Effect of dilutive securities:                                              |                                |              |   |   |   |
| Put options                                                                 |                                | -                 | - |   |   |
| Income available to common stockholders-

  Diluted earnings per share | $                                   | (344,550)         | 13,064,779 | $ | (.03) |
|                                                                             |                                     |                   |  |  |  |  |
|                                                                        | For the YearEnded December 31, 2003 |              |
|-----------------------------------------------------------------------------|-------------------------------------|-------------------|
|                                                                        |                                | Income(Numerator) | Shares(Denominator) |   | Per-shareAmount |
| Income from continuing operations                                           | $                                   | 150,000           |   |   |   |
| Less: preferred stock dividends                                             |                                | -                 |   |   |   |
| Income available to common stockholders-

  Basic earnings per share   |                                | 150,000           | 13,674,425 | $ | .01 |
| Effect of dilutive securities:                                              |                                |              |   |   |   |
| Put options                                                                 |                                | -                 | - |   |   |
| Income available to common stockholders-

  Diluted earnings per share | $                                   | 150,000           | 13,674,425 | $ | .01 |
|                                                                             |                                     |                   |  |  |  |  |

In December of2003, the Company issued 3,050,000 Series A preferred shares fortotal proceeds of $1,525,000.  The holders of the Series Apreferred shares are entitled to receive cumulative dividends ata rate of 6% per year, payable quarterly.  These dividendsare in preference and priority to any payment of any dividend onthe Company's common shares.  The holders of the Series Apreferred shares are also entitled to a liquidation preference of$.50 per share.  The Series A preferred shares areconvertible to the Company's common shares at the rate of oneshare of common shares for one share of Series A preferred sharesat any time after issuance.  At any time after five yearsfrom issuance, the Company has the right to redeem any or all ofthe Series A preferred shares after a sixty day notice uponpayment of the liquidation preference of $.50 per share to theholders, for a total of $1,525,000. 

Additionally, theCompany had outstanding warrants and options exercisable for atotal of 7,946,113 common shares as of December 31, 2005, aspresented in Note 9 - Stock Warrants, Stock Splits, and StockOptions, all of which were antidilutive. 

NOTE 16 - **COMPREHENSIVE INCOME** 

Comprehensiveincome (loss) is reported on the accompanying consolidatedstatement of shareholders' equity as a component of retainedearnings (accumulated deficit) and consists of net income (loss)and other gains and losses affecting shareholders' equity that,under accounting principles generally accepted in the UnitedStates of America, are excluded from net income (loss).  Forthe Company, such items consist primarily of unrealized gains andlosses on available-for-sale equity investments. 

The followingsummary sets forth the components of other comprehensive income(loss), net of tax, accumulated in shareholders' equity:
|                                    | For the Year EndedDecember 31, 2005 |
|-----------------------------------------|-------------------------------------|
| NET LOSS                                | $                                   | (332,413) |
| OTHER COMPREHENSIVE INCOME, NET OF TAX: |                                |   |
|   Unrealized loss on securities    |                                | (265) |
| TOTAL COMPREHENSIVE LOSS                | $                                   | (332,678) |
|                                    | For the Year EndedDecember 31, 2004 |
|-----------------------------------------|-------------------------------------|
| NET LOSS                                | $                                   | (250,000) |
| OTHER COMPREHENSIVE INCOME, NET OF TAX: |                                |   |
|   Unrealized gains on securities   |                                | 1,029 |
| TOTAL COMPREHENSIVE LOSS                | $                                   | (248,971) |
|                                    | For the Year EndedDecember 31, 2003 |
|-----------------------------------------|-------------------------------------|
| NET INCOME                              | $                                   | 150,000 |
| OTHER COMPREHENSIVE INCOME, NET OF TAX: |                                |   |
|   Unrealized gains on securities   |                                | 25,387 |
| TOTAL COMPREHENSIVE INCOME              | $                                   | 175,387 |

NOTE 17 - **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 $1,277,663 as of December 31, 2005. 

NOTE 18 - **SUBSEQUENT EVENTS** 

On January 15,2003, the Company issued convertible debentures in the totalamount of $250,000, pursuant to the terms of the purchaseagreement to acquire Capital Financial Services, Inc. (see Note 5- Business Acquisitions).  The convertible debenturesmatured on January 15, 2006, and as a result, the Company paid$250,000 to retire the convertible debentures.

  

ADDITIONALINFORMATION

 

REPORT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM				ON ADDITIONALINFORMATION

 

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

Our report on our audit of the basicconsolidated financial statements of Integrity Mutual Funds, Inc.and Subsidiaries for the years ended December 31, 2005, 2004 and2003, appears on page F-1.  Those audits were made for thepurpose of forming an opinion on such consolidated financialstatements taken as a whole.  The information on page F-25,related to the 2005, 2004 and 2003 consolidated financialstatements, is presented for purposes of additional analysis andis not a required part of the basic consolidated financialstatements.  Such information, has been subjected to theauditing procedures applied in the audits of the basicconsolidated financial statements, and, in our opinion, theinformation is fairly stated in all material respects in relationto the basic consolidated financial statements for the yearsended December 31, 2005, 2004 and 2003, taken as a whole. 

We also have previously audited, inaccordance with standards of the Public Company AccountingOversight Board (United States), the consolidated balance sheetsof Integrity Mutual Funds, Inc. and Subsidiaries as of December31, 2002 and 2001, and the related consolidated statements ofoperations, stockholders' equity, and cash flows for each of thetwo years in the periods ended December 31, 2002 and 2001, noneof which is presented herein, and we expressed unqualifiedopinions on those consolidated financial statements.  In ouropinion, the information on page F-25 relating to the 2002 and2001 consolidated financial statements is fairly stated in allmaterial respects in relation to the basic consolidated financialstatements from which it has been derived.

 

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

 

March 3, 2006

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

FOR THE YEARSENDED DECEMBER 31, AS INDICATED

 
|                              |   | (Restated) | (Restated) | (Restated) | (Restated) |
|-----------------------------------|--------|------------|------------|------------|------------|
|                              | 2005   | 2004       | 2003       | 2002       | 2001       |
| Operating revenue                 | $      | 19,440,756 | $          | 16,990,571 | $          | 13,956,173 | $ | 14,443,661 | $ | 7,525,140 |
|                              |   |       |       |       |       |   |   |   |   |   |
| Operating income (loss)           | $      | (204,125)  | $          | (165,018)  | $          | 496,009 | $ | 434,467 | $ | (337,109) |
|                              |   |       |       |       |       |   |   |   |   |   |
| Income tax benefit (expense)      | $      | 118,750    | $          | 124,110    | $          | (144,330) | $ | (73,298) | $ | 75,255 |
|                              |   |       |       |       |       |   |   |   |   |   |
| Basic earnings (loss) per share   | $      | (.03)      | $          | (.03)      | $          | .01 | $ | .03  | $ | (.04) |
|                              |   |       |       |       |       |   |   |   |   |   |
| Diluted earnings (loss) per share | $      | (.03)      | $          | (.03)      | $          | .01 | $ | .03 | $ | (.04) |
|                              |   |       |       |       |       |   |   |   |   |   |
| Total assets                      | $      | 15,192,914 | $          | 13,907,987 | $          | 15,675,216 | $ | 12,693,909 | $ | 11,214,792 |
|                              |   |       |       |       |       |   |   |   |   |   |
| Long-term obligations             | $      | 4,138,745  | $          | 2,749,649  | $          | 4,422,427 | $ | 2,894,511 | $ | 3,202,809 |
|                              |   |       |       |       |       |   |   |   |   |   |
| Shareholders' equity              | $      | 9,403,721  | $          | 9,505,829  | $          | 9,201,106 | $ | 7,152,773 | $ | 6,980,837 |
|                              |   |       |       |       |       |   |   |   |   |   |
| Dividends paid                    | $      | 0          | $          | 0          | $          | 0 | $ | 0 | $ | 0 |
|                                   |        |            |            |            |            |  |  |  |  |  |  |

*Excludes discontinued operations of MagicInternet Services, Inc.

INTEGRITY MUTUAL FUNDS,INC., AND SUBSIDIARIES

QUARTERLY RESULTSOF CONSOLIDATED OPERATIONS (UNAUDITED)*

  
|                    | 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 |
|                         |                         |  |  |  |  |  |  |  |  |  |  |

  
|                         | (Restated)                   |
|------------------------------|------------------------------|
|                         | Quarter Ended                |
|                         | 3-31-04                      | 6-30-04 | 9-30-04 | 12-31-04 |
| Revenues                     | $                            | 4,306,668 | $ | 4,251,239 | $ | 4,136,926 | $ | 4,295,738 |
| Operating income (loss)      |                         | 324,678 |   | (152,156) |   | 21,273 |   | (358,813) |
| Other expenses               |                         | (66,475) |   | (61,652) |   | (29,523) |   | (51,442) |
| Income tax benefit (expense) |                         | (110,580) |   | 78,461 |   | 2,397 |   | 153,832 |
| Net income (loss)            |                         | 147,623 |   | (135,347) |   | (5,853) |   | (256,423) |
|                         |                         |   |   |   |   |   |   |   |
| Per Share(1)                 |                         |   |   |   |   |   |   |   |
|                         | Operating income (loss)      |   |  0.03 |   |  (0.01) |   | 0.00 |   | (0.03) |
|                         | Other expense                |   | (0.01) |   | (0.01) |   | (0.00) |   | (0.00) |
|                         | Income tax benefit (expense) |   | (0.01) |   |  0.01 |   | 0.00 |   | 0.01 |
|                              |                              |  |  |  |  |  |  |  |  |  |  |

 
|               | (Restated)         |
|--------------------|--------------------|
|               | Quarter Ended      |
|               | 3-31-03            | 6-30-03 | 9-30-03 | 12-31-03 |
| Revenues           | $                  | 3,537,267 | $ | 2,936,933 | $ | 3,572,409 | $ | 3,909,564 |
| Operating income   |               | 153,515 |   | 110,892 |   | 122,314 |   | 109,288 |
| Other expenses     |               | (50,286) |   | (16,292) |   | (73,567) |   | (53,553) |
| Income tax expense |               | (33,500) |   | (82,671) |   | (3,729) |   | (24,430) |
| Net income (loss)  |               | 81,401 |   |  (3,409) |   |  40,703 |   | 31,305 |
|               |               |   |   |   |   |   |   |   |
| Per Share(1)       |               |   |   |   |   |   |   |   |
|               | Operating income   |   | 0.01 |   | 0.01 |   | 0.01 |   | 0.01 |
|               | Other expense      |   | (0.00) |   | (0.00) |   | (0.01) |   | (0.00) |
|               | Income tax expense |   | (0.00) |   |  (0.01) |   | (0.00) |   | (0.00) |
|                    |                    |  |  |  |  |  |  |  |  |  |  |  |

 

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

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

*Excludes discontinued operations of MagicInternet Services, Inc.