<PAGE>   1


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

                              -----------------
                                   FORM 10-K      
                              -----------------
(MARK ONE)
               [X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
                                       OR
            [ ]  TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
            FOR THE TRANSITION PERIOD FROM            TO 
                                           ----------    ----------

                         COMMISSION FILE NUMBER 0-24134

                             INTEGRITY INCORPORATED
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

                                 1000 CODY ROAD
                             MOBILE, ALABAMA 36695
                    (Address of principal executive offices)
                                  334-633-9000
              (Registrant's telephone number, including area code)

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

                                      NONE

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

                      CLASS A COMMON STOCK, $.01 PAR VALUE
                                (Title of class)

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

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

         The aggregate market value of the Class A Common Stock held by
non-affiliates of the Registrant (assuming, for purposes of this calculation,
without conceding, that all executive officers and directors are "affiliates"),
was $3,375,843.75 at March 2, 1998, as reported by the Nasdaq National Market.

         The number of shares of Registrant's Class A Common Stock, $.01 par
value per share, outstanding at March 1, 1998 was 2,079,000.

         The number of shares of Registrant's Class B Common Stock, $.01 par
value per share, outstanding at March 1, 1998 was 3,435,000.

                      DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held May 6, 1998 are incorporated by reference into Part
III.

                    ========================================
<PAGE>   2

                                        PART I.
ITEM 1.  BUSINESS.

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

         Certain of the matters discussed in this document and in documents
incorporated by reference herein, including matters discussed under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," may constitute forward-looking statements for purposes of the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, and as such may involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
Integrity Incorporated (the "Company" or "Integrity") to be materially
different from future results, performance or achievements expressed or implied
by such forward-looking statements. The words "expect," "anticipate," "intend,"
"plan," "believe," "seek," "estimate," and similar expressions are intended to
identify such forward-looking statements. The Company's actual results may
differ materially from the results anticipated in these forward-looking
statements due to a variety of factors, including without limitation those
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Factor's Affecting Future Performance." All written or
oral forward-looking statements attributable to the Company are expressly
qualified in their entirety by these cautionary statements.

INTRODUCTION

         Integrity is a producer and publisher of Christian lifestyle products
developed to facilitate worship, entertainment and education.  Product formats
include cassettes, compact discs, videos and songbooks.  The Company produces
Christian music ranging from praise and worship music, its largest category, to
other styles of adult contemporary Christian music and children's music.
Integrity's products are sold primarily through retail stores and direct to
consumer throughout the United States and in over 130 other countries
worldwide.  Integrity was organized in Alabama as a corporation on May 1, 1987
and was reincorporated in Delaware on October 1, 1993.

         Integrity's recorded music products fall into two broad categories (i)
concept products which are centered on a specific theme, such as praise and
worship music and (ii) artist products, in which the artist is the focal point.
In addition to recorded music, Integrity produces Christian music video
products, including a children's music series and praise and worship music
recorded specifically for aerobic exercises.  Integrity's products also include
printed music, such as song books and sheet music, designed primarily for
distribution to churches and choral groups.  The Company distributes its
products domestically through two primary channels, direct to consumer programs
and retail markets.

PRODUCTS

         Concept Products

         Concept products are centered around a specific theme, such as praise
and worship music or inspirational instrumental music, rather than being
focused on a specific artist.  The Company's original concept product series
was Hosanna! Music(R), recorded praise and worship music, which is composed of
live recordings sung by an audience and worship leader rather than a performing
artist.  The Company's Hosanna! Music(R) series has proven to be a successful
product line having just produced its 82nd recording.

         The Company's concept product line now includes: Scripture Memory
Songs(R), in which actual Bible passages are used as lyrics in contemporary
music intended to facilitate Scripture memorization; Just-For-Kids(R), a series
of children's music tapes; Interludes(R), an instrumental series with varying
themes designed to transcend religious denominations; and Quest(R), a spoken
word series.  The Praise! Walk(R) series is a product designed to aid walkers
in their exercise programs.  In addition, the Company also offers the Lullaby
series of children's music and Praise! Aerobics(R).

         Artist Products

         In addition to concept products, the Company also produces artist
recordings which have recently included "Woman, Thou Art Loosed!" featuring
Bishop T.D. Jakes, "Holy Fire" with Paul Wilbur; "Let Your Glory Fall" by Don
Moen; "High Places" by Ron Kenoly and "Yes!" by Alvin Slaughter.   Previous
recordings by Ron Kenoly include "Welcome Home," recipient of the Dove
Foundation's "Family Approved" seal of excellence; "Sing Out," the first
Integrity title to enter Billboard's Top 200;  "God is Able," and "Lift Him
Up," which has recently received Gold certification by the Recording Industry
Association of America.   Previous recordings by Alvin Slaughter include
"Champion of Love," "Revive Us Again" and "God Can" .  Previous recordings by
Paul Wilbur include "Up To Zion" and "Shalom Jerusalem".





                                       1
<PAGE>   3


         Other Products

         The Company has also produced numerous musical video products,
including: recordings of live performances by the Company's artists, such as
Ron Kenoly's videos "High Places," "Welcome Home," "Sing Out," the first
Hosanna! title to appear on Billboard's Top 40 Music Video Chart, and the
Gold-certified videos "Lift Him Up" and "God is Able".  The popular children's
music series Just-For-Kids(R), featuring the Donut Man(R), includes nine
Gold-certified and one Platinum-certified videos.  Other videos include the
Gold-certified Praise! Aerobics(R), praise and worship music recorded
specifically for aerobic exercises; Bible Hits Video(R), Scripture songs
interpreted in hip-hop fashion, geared for children ages 7 to 14; and The
Adventures of the Royal Academy(R) , an animated video series featuring
Bible-based stories designed to teach in an entertaining fashion.    Other
products include Integrity Music Worship Software(R), designed to assist music
ministers in the selection of songs (over 5,000 featured), planning rehearsals
and services, and reviewing song usage tracking.

         Integrity's Christian music products also include printed product
lines such as songbooks and sheet music designed primarily for distribution to
churches and choral groups.  The Company produces "God With Us," winner of the
Gospel Music Association Dove Award in April 1994 for best musical and still at
the top of the non-seasonal musical charts for four years running; "Let Your
Glory Fall," ranked among the top 10 in the non-seasonal musical charts;  "We
Hold These Truths," a patriotic musical, has ranked among the top 10 during the
patriotic season;  "Mighty Cross," nominated for the 1995 best musical Dove
Award; "The Name of Our God," ranked among the top 10 in the youth non-seasonal
musical charts;  and "Emmanuel Has Come," ranked number 4 among the Adult
Christmas Collection chart.  These musicals were ranked by The Church Music
Report ("TCMR").   Other printed music products include "The Celebration
Hymnal," a joint venture with Word Entertainment, featuring over 700 songs and
hymns.

PRODUCT CREATION

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

         New product concepts are based on responses to surveys of the
Company's current customer base as well as other market and product research
conducted by the Company and by independent consultants.  Once a new product
concept has been identified, Integrity assembles a creative team which includes
one or more artists and producers, generally employed on a freelance or
contract basis, and representatives of Integrity's creative, marketing and
finance divisions.  The executive vice president/creative director is
responsible for the product creation process and the vice president of the
Creative Group provides strategic input in the creative process.  Both play a
key part with the creative team in the planning process, which includes
finalizing the concept for the recording or series and selecting the songs to
be used.  During this initial planning, the creative team also develops a cost
analysis for the project including projected sales and profitability.

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

DISTRIBUTION

         The Company distributes its products domestically through two primary
channels: direct to consumer and retail markets.  In addition, the Company has
an international distribution network which reaches markets in over 130
countries.

         Direct To Consumer

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


                                      2
<PAGE>   4
         The Company's potential direct to consumer database includes
subscribers to Christian magazines, purchasers of Christian mail order products
and donors to Christian ministries.  When available, the Company obtains such
mailing lists to conduct a one-time solicitation of an approved direct mailing.
Once a response is received by Integrity, the customer's name is added to the
Company's own mailing list.  Integrity also builds its direct to consumer
database through space advertisements in Christian magazines and through
telemarketing.

         The Company's first continuity club, Hosanna! Music(R) has just
produced its 82nd recording.  Currently the Company operates several continuity
clubs, including the Scripture Memory Songs(R), Praise Walk(R) and
Just-For-Kids(R) series.  The clubs are launched with a mailing of a new
product announcement and solicitation to as many as 500,000 people.  After the
initial mailing, the Company postpones further direct mail solicitation
campaigns for up to six months, utilizing the time to study the response and
evaluate the sustainability of the initial members.  If the initial membership
proves to be sustainable based on product shipments, the Company will roll out
the club in an extensive direct mail effort to an average of 900,000 people.

         In addition to continuity clubs, the Company's direct to consumer
program includes mail order catalog sales, telemarketing and one-time offers to
active customers.  The mail order catalog and telemarketing programs are
designed to increase sales to the Company's current customers by increasing
their awareness of Integrity's full line of products, as well as to develop new
customers for Integrity products.

         Retail Markets

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

         All CBA orders are fulfilled through Word, which is responsible for
warehousing Integrity's products which are shipped and invoiced based on orders
received directly from Word's sales force through a computerized order entry
system.  Word services the Company's customers from one warehouse located in
Texas.   As a result of the distribution agreement with Word, the Company also
has access to the Sony/Epic distribution system for sales in the general
market.  As of the end of 1997, SoundScan has ranked Word as the top
distribution company in the CBA market.  SoundScan also ranked Integrity as the
number three record label in CBA.

         Retail sales efforts are supported by market research,
point-of-purchase advertising, radio promotion, and product publicity developed
by Integrity's own in-house staff.

         International

         The Company's international sales are made through a subsidiary
located in the United Kingdom, responsible for Europe; a subsidiary located in
Australia, responsible for Australia, New Zealand and the Solomon Islands;  and
a subsidiary located in Singapore, responsible for Singapore and Burma .  In
addition, products are sold to more than 60 independent distributors who are
licensed to manufacture Integrity products from master recordings and
distribute them in a country or region and approximately 18 importers to whom
the Company provides products.  The Company's international distribution
network reaches markets in over 130 countries.  The Company continually
evaluates ways to expand into various markets through importers  or through
distributors licensed to produce Integrity products from a master recording.

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

         Church/Choral

         The church/choral division can be segmented into two separate
distribution channels, choral trade distribution and the Company's
direct-to-church business.  Choral music includes numerous recordings and
printed products designed primarily for sale to churches, organizations or
choral groups for their use in musical performances at worship services and
other events.  All of the direct-to-church marketing, sales and customer
service for choral music and concept products is provided by the Company.
PraiseGathering Music Group, Inc. provides product development, marketing and
production services for all of Integrity's choral print products.  The Word
sales force supplies all of these choral products to choral distributors as
well as the CBA stores.





                                       3
<PAGE>   5


         Hymnal

         During 1997, the Company introduced "The Celebration Hymnal," a joint
venture with Word Entertainment, featuring over 700 songs and hymns.  The
Hymnal and all related products are sold through the Word sales force in CBA
and directly to churches through Integrity's church resources division.

MUSIC PUBLISHING

         The Company's song catalog has accumulated ownership rights for over
2,400 songs and has generated a significant amount of royalty income from use
by third parties.  A majority of the songs appearing on Integrity recordings
are published out of the Company's song catalog.

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

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

WAREHOUSING AND FULFILLMENT

         Integrity currently contracts with Word for its retail market
warehousing, physical inventory and distribution functions.  Word is one of
several companies that provide this service in the CBA market.  The contract
with Word extends through March 30, 2000.  All retail market sales functions
are currently performed by Word's sales force.  Direct to consumer fulfillment
services, excluding warehousing and physical inventory functions, for
Integrity's direct to consumer programs are provided by LCS Industries, Inc.
("LCS"), located in Clifton, New Jersey.  In addition to managing the Company's
database of customer names, LCS also provides most of the fulfillment
activities of the direct to consumer operation, including order receipt and
processing, data entry, invoicing and payment processing.  Integrity's own
distribution center is responsible for its direct to consumer and international
warehousing, physical inventory and distribution functions.

COPYRIGHTS AND ROYALTY AGREEMENTS

         The Company's music products are protected under applicable domestic
and international copyright laws.  In addition, Integrity currently has
ownership rights to approximately 2,400 songs, which are also protected under
copyright law.  In general, works that are protected under copyright laws are
proprietary, which means that for a fixed period of time the copyright owner
has the exclusive right to control the publication (or other reproduction) of
the copyrighted work.  Subject to the compulsory licensing provisions of the
United States Copyright Act covering audio records, a copyright owner may
license others to publish, reproduce, or otherwise use its copyrighted work, on
an exclusive or nonexclusive basis, subject to limitations (such as duration
and territory) and upon such other terms and conditions, including royalty
payments, as the copyright owner may require.  However, the Company operates in
an industry in which revenues are adversely affected by the unauthorized
reproduction of recordings for commercial sale, commonly referred to as
"piracy" and by home taping for personal use.

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

COMPETITION

         The Company faces intense competition for discretionary consumer
spending from numerous other record companies and other forms of entertainment
offered by film companies, video companies and others.  Integrity competes
directly with other record companies and music publishers that distribute
Christian music to Christian bookstores, as well as a number of secular record
companies, many of whom have substantially greater financial resources than the
Company.  The Company competes with other record and music publishing
companies, both Christian and secular, on the basis of the Company's ability to





                                       4
<PAGE>   6

sign established and new artists and songwriters and gain access to
distribution channels.

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

EMPLOYEES

         As of December 31, 1997, the Company employed 139 individuals, 119 of
whom are  located at the Company's Mobile, Alabama, headquarters.

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

GOVERNMENT REGULATION

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

ITEM 2.  PROPERTIES.

         The Company owns the approximately 25,000 square foot headquarters and
studio facility it occupies in Mobile, Alabama, which houses the executive
offices of Integrity as well as the management and sales staff.  This facility
was constructed in 1983 and is pledged as security against the Company's senior
indebtedness.  See "Management's Discussion and Analysis  - Liquidity and
Capital Resources."   In early 1995, the Company began construction of a 44,000
square foot headquarters expansion.  As a result of general business
conditions, the Company decided to halt construction of its new facility at the
point when the building was secured from the elements.  In 1996, construction
costs totaled $365,000.  Total cost of construction of the new facility through
December 31, 1996 was $2.7 million.  Of this amount, approximately $1.2 million
relates to a write-down of the new facility in accordance with the provisions
of FASB 121 - "Accounting for the Impairment of Long-Lived Assets."  See Note 4
to the financial statements.

ITEM 3.  LEGAL PROCEEDINGS.

LEGAL PROCEEDINGS

         The Company is not a party to any material legal proceedings.

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

         No matters were submitted to a vote of the Company's stockholders
during the fourth quarter of the year ended December 31, 1997.





                                       5
<PAGE>   7

                                    PART II.

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

         Integrity's common stock is traded on The Nasdaq National Market under
the symbol ITGR.  The table below sets forth the quarterly high and low last
sales price per share as reported on the Nasdaq National Market for the Class A
Common Stock from January 1, 1996 through December 31, 1997.  The last sale
price of the Class A Common Stock on March 13, 1998 was $1.8125 per share.
<TABLE>
<CAPTION>
                                       High              Low
                                       ----              ---
        <S>                           <C>              <C>
        Fiscal Year 1996
        ----------------
        First Quarter                  3.75            1.875
        Second Quarter                 3.13            1.875
        Third Quarter                 2.375            1.387
        Fourth Quarter                 3.00            1.125

        Fiscal Year 1997
        ----------------
        First Quarter                 2.125             1.25
        Second Quarter                2.375             1.50
        Third Quarter                  2.25            1.625
        Fourth Quarter                 2.00            1.125
</TABLE>


         As of March 11, 1998, there were approximately 108 stockholders of
record of Integrity's Class A Common Stock and three stockholders of record of
Integrity's Class B Common Stock.

         The current policy of Integrity's Board of Directors is to retain any
future earnings to provide funds for the operation and expansion of Integrity's
business, and, therefore, the Board of Directors does not anticipate paying any
cash dividends in the foreseeable future.  In addition, Integrity's ability to
pay dividends is limited by its existing credit agreement and may be limited in
the future by the terms of then-existing credit facilities.  See Note 6 to the
financial statements.

         On February 23, 1998, new listing and maintenance rules for inclusion
on both the Nasdaq National Market and The SmallCap Market became effective.
Under these new rules, the Company failed to meet one of the listing
requirements for the Nasdaq National Market, specifically the market value of
its publicly-traded shares.  As a result, the Company has elected to transfer
its Class A Common Stock to The SmallCap Market.  At this time, the effective
date of the transition to The SmallCap Market is unknown.  There can be no
assurances that the Company's transition to and position in The SmallCap Market
will result in an active trading market for the Company's Class A Common Stock.





                                       6
<PAGE>   8

ITEM 6.  SELECTED FINANCIAL DATA

         The selected historical balance sheet and income statement data
presented below for each of the five years in the period ended December 31,
1997 have been derived from the consolidated financial statements for the
Company audited by Price Waterhouse LLP, independent accountants.

         The following selected financial data should be read in conjunction
with the Consolidated Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
appearing elsewhere herein.
<TABLE>
<CAPTION>
                                                                     Year Ended December 31
                                                               (in thousands, except share data)
   STATEMENT OF INCOME DATA:                           1997         1996         1995          1994         1993
   <S>                                             <C>          <C>          <C>           <C>          <C>
      Net sales                                    $ 32,428      $30,395      $36,277       $34,802      $29,127

      Cost of sales                                  15,236       14,981       15,547        12,636       10,291
                                                   --------      -------     --------      --------     --------
      Gross profit                                   17,192       15,414       20,730        22,166       18,836
      Marketing and fulfillment expenses              6,924        9,131       14,914        10,822        9,157

      General and administrative expenses             7,775        7,545        7,959         6,373        5,278
      Loss on impairment of long-lived assets            --        1,200           --            --           --
                                                   --------      -------     --------      --------     --------
      Income (loss) from continuing                   2,493      (2,462)      (2,143)         4,971        4,401
             operations
      Interest expense (net)                          1,790        1,804        1,027           244          561

      Interest expense on related party notes
        payable                                          --           --           --           281           --
      Other (income) expense                             61        (153)           65          (10)           --
                                                   --------     --------    ---------      --------     --------
      Income (loss) before extraordinary item           
         and taxes                                      642       (4,113)      (3,235)        4,456        3,840
      Taxes (expense) benefit, (pro forma                                                                        
         1993) (1)                                       --          654        1,183        (1,644)      (1,469) 
                                                   --------     --------    ---------     ---------    --------- 
      Income (loss) before extraordinary item           642      (3,459)      (2,052)         2,812        2,371
      Extraordinary item from early
      extinguishment of debt less
      applicable taxes of $47,000                        --        (248)           --            --           --
                                                   --------     --------     --------   -----------     --------
      Net income (loss) (pro forma 1993)(1)        $    642     $(3,707)     $(2,052)       $ 2,812      $ 2,371
      BASIC EPS

      Income (loss) before extraordinary item      $   0.12     $ (0.63)     $ (0.37)      $   0.59     $   0.52
      Extraordinary item                                 --       (0.04)           --            --           --
                                                   --------     --------     --------      --------     --------

      Net income (loss) (pro forma                                                                               
             1993)(1)(2)                           $   0.12     $ (0.67)     $ (0.37)       $  0.59     $   0.52 
                                                   ========     ========     ========       =======     ======== 
      DILUTED EPS

      Income before extraordinary item             $   0.12           --           --       $  0.59           --

      Extraordinary item                                 --           --           --            --           --
                                                   --------     --------    ---------       -------     --------

      Net income (proforma 1993)(1)(2)             $   0.12           --           --       $  0.59           --
                                                   ========     ========    =========       =======     ========
      Weighted average number of shares
      outstanding                                    5,514         5,514        5,514         4,744        4,533
                                                   ========     ========     ========       =======     ========
</TABLE>





                                       7
<PAGE>   9

<TABLE>
<CAPTION>
                                                                   Year Ended December 31
                                                                       (in thousands)
                                                   -----------------------------------------------------------
 BALANCE SHEET DATA:                                 1997         1996         1995          1994         1993
                                                   -----------------------------------------------------------
    <S>                                            <C>         <C>         <C>            <C>          <C>
    Net working capital                            $8,951      $10,467     $(6,052)       $ 9,079      $ 2,186

    Total assets                                   30,775       31,058       34,659        26,080       17,856
    Total bank debt and notes payable to
      former stockholder (3)                       15,117       18,304       18,018         5,093       13,313
    Stockholders' equity                           11,196       10,487       12,693        14,800          748
</TABLE>

__________________________________
(1)  The Company elected Subchapter S corporation status for federal and state
income tax purposes effective May 1, 1987.  The Company terminated its election
to be taxed as a Subchapter S corporation effective September 1, 1993 and has
been subjected to federal and state income taxes from that date forward.  The
pro forma provision for income taxes, pro forma net income and pro forma net
income per share reflect the pro forma effect of income taxes under FAS No. 109
as if the Company had been taxed as a C corporation for all periods presented.

(2)  As adjusted to give retroactive effect to the reclassification of each
share of the Company's Class A Common Stock as 3,597.12 shares of Class B
Common Stock and the sale of additional shares (454,526 in 1994 at the initial
public offering price of $9.00 per share) necessary to fund a distribution of
certain previously taxed earnings to the Company's existing stockholders and to
pay a former stockholder under a stock purchase agreement.  Distributions of
Subchapter S corporation dividends were $3.0 million in 1993.  There were no
dividends granted during 1994, 1995, 1996 or 1997.

(3) Includes discount of $1,064,000 at December 31, 1997 and $1,296,000 at
December 31, 1996.





                                       8
<PAGE>   10

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

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

OVERVIEW

         The Company is a producer and publisher of Christian lifestyle
products.  The Company's recorded music products fall into two broad
categories:  concept products and artist products.  Concept products are
centered on a specific theme, such as praise and worship, and artist products
feature a specific performer.  In addition to audio recordings, Integrity
produces Christian music print and video products.  The Company has an
international distribution network which reaches markets in over 130 countries.
In addition, the Company markets products directly to churches.

         The following historical analysis shows the percentage of product
sales by distribution channel:
<TABLE>
<CAPTION>
                            1997        1996        1995
                           ------------------------------
      <S>                  <C>          <C>         <C>
      Direct To             27.0%        37.2%      45.1%
      Consumer

      Retail Market         39.8         34.3       35.5
      International         19.8         20.7       12.9

      Church/choral         13.4          7.8        6.5
</TABLE>

         The Company also receives royalty income from the licensed use of
songs owned by Integrity, which was $3.5 million, $2.9 million and $2.4 million
in 1997, 1996 and 1995, respectively.

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

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                            Percentage of Net Sales          Percentage Change
                                             Year Ended December 31            Year Ended (1)
                                         -------------------------------------------------------
                                          1997        1996       1995        97-96        96-95
                                         -------------------------------------------------------
 <S>                                     <C>         <C>        <C>         <C>          <C>
 Net Sales                               100.0%      100.0%     100.0%        6.7%       (16.2)%
 Cost of Sales                            47.0        49.3       42.9         1.7         (3.6)
                                          ----        ----       ----         ---         -----
 Gross Profit                             53.0        50.7       57.1        11.5        (25.6)

 Marketing and Fulfillment Expense        21.4        30.0       41.1       (24.2)       (38.8)
 General and Administrative Expense
                                          23.9        24.8       21.9         3.0         (4.8)

 Loss on impairment of long-lived
 assets                                     --         3.9%        --      (100.0)       100.0
                                          ----       -----      -----      ------        -----
 Income (loss) From Operations             7.7%       (8.1%)     (5.9%)     201.3%       (14.9%)
                                          ====       =====      =====      ======        =====
</TABLE>

___________________________________
(1)  Calculated as a percentage change from the accompanying selected financial
     data.





                                       9
<PAGE>   11

1997 COMPARED TO 1996

         Net sales increased 6.7% to $32.4 million in 1997 from $30.4 million
in 1996, mainly attributable to increased sales in the retail, international,
church and special divisions.  Sales in the retail division increased 26.3% to
$12.0 million, compared to $9.5 million in 1996.  Revenues for the retail
division for 1997 are net of a fulfillment fee for Word, an arrangement that
did not exist until April 1996.  The copyright division posted an increase of
$544,000, or 20.7%, to $3.5 million in 1997, compared to $2.9 million in 1996
and the church/choral/hymnal division increased by $1.8 million or 85.7% to
$3.9 million from $2.1 million in 1996.  The direct to consumer division
decreased $2.4 million or 23.5% to $7.8 million, compared to $10.2 million in
1996, mainly as a result of the Company's focus on smaller, yet more profitable
direct to consumer advertising mailings.

         Unit sales increased by 50.0% to 5.1 million in 1997 from 3.4 million
in 1996 due to 48 major releases and strong catalog sales from prior releases
such as "Shout To The Lord" and "Revival At Brownsville".   In 1997, new
products accounted for 2.1 million units, or 41.2% of the total units sold.
The new products offered were from existing product lines as well as new
product lines featuring several of Integrity's best-selling artists, such as
Ron Kenoly.

         Gross profit increased 11.5% to $17.2 million in 1997 from $15.4
million in 1996.  Gross profit as a percentage of sales was 53.0% and 50.7% for
the years ended December 31, 1997 and 1996, respectively.  The increase in
gross profit, including gross profit as a percentage of sales, was primarily
the result of a charge of $1.7 million for record masters not expected to
recoup recording costs in 1996, which charge was not repeated in 1997.

         Marketing and fulfillment expenses decreased 24.2% to $6.9 million or
21.4% of net sales in 1997, as compared with $9.1 million or 30.0% of net sales
in 1996.  This decrease was primarily attributable to lower, but more
productive and targeted, marketing expenses in the direct to consumer division.

         General and administrative expenses increased 3.0% to $7.8 million or
23.9% of net sales in 1997, compared to $7.5 million or 24.8% of net sales in
1996.   The increase in expenditures was mainly attributable to the Company's
addition in late 1996 of a distribution center responsible for direct to
consumer, church and international warehousing, physical inventory and
distribution functions.

         As a result of the above, income from operations was $2.5 million or
7.7% of net sales in 1997, compared with loss of $2.5 million or 8.1% of net
sales in 1996.

         Interest expense decreased slightly to $1.79 million in 1997 compared
with $1.8 million in 1996.  The decrease was a result of lower average debt
balances in 1997.

1996 COMPARED TO 1995

         Net sales decreased 16.2% to $30.4 million in 1996 from $36.3 million
in 1995, reflecting decreased retail and direct to consumer sales, which were
partially offset by increased international sales and copyright revenues.  The
international and copyright divisions continued to grow with the international
division posting an increase of $1.4 million to $5.7 million in 1996, a 31.5%
increase primarily due to increased expansion overseas.  The copyright division
posted an increase of $511,000, a 21.0% increase, to $2.9 million in 1996 due
to the acquisition of song copyrights during late 1995.  The retail and direct
to consumer divisions posted decreases for 1996.  The retail division decreased
$2.5 million to $9.5 million a 20.9% decrease as the Company experienced higher
returns in retail upon the transition of the sales force and distribution
functions to Word.  The direct to consumer division decreased $4.9 million or
32.4% to $10.3 million primarily due to the significant reduction in mailings
sent to direct mail customers.  Management decreased its marketing efforts in
conjunction with its cost streamlining business plan.  Unit sales decreased by
24.4% to 3.4 million in 1996 from 4.5 million in 1995 due to fewer new album
releases and lower marketing expenditures.   In 1996, new products accounted
for 1.6 million units, or 47.1% of the total units sold.  The new products
offered were from existing product lines as well as new product lines featuring
new artists and several of Integrity's best-selling artists, such as Ron
Kenoly.

         Gross profit decreased 25.6% to $15.4 million in 1996 from $20.7
million in 1995.  Gross profit as a percentage of sales was 50.7% and 57.1% for
the years ended December 31, 1996 and 1995, respectively.  Gross margins
declined primarily as a result of a charge of $1.7 million  for record masters
not expected to recoup recording cost, including related inventory and
supplies.  The increase in copyright revenue which carries a lower gross margin
also contributed to the decrease.

         Marketing and fulfillment expenses decreased 38.8% to $9.1 million or
30.0% of net sales in 1996, as compared with $14.9 million or 41.1% of net
sales in 1995.  This decrease was primarily the result of lower marketing
expenses in both the retail and direct to consumer divisions.  The direct to
consumer





                                       10
<PAGE>   12

division did fewer marketing promotions to focus on those promotions with a
greater probability of profitability.  Both divisions also posted decreases in
fulfillment cost.    Retail marketing campaigns included concept marketing and
new- artist promotions.  Additionally, marketing expenses reflect the operation
of the Company's internal retail sales staff during the first half of 1996.
The internal sales force did not cover the additional fixed costs as
anticipated and in April 1996, Integrity transitioned retail sales operations
to Word's sales force.

         General and administrative expenses decreased $500,000 to $7.5 million
or 24.8% of net sales in 1996, compared with $8.0 million or 21.9% of net sales
in 1995.   The decrease in expenditures was due to personnel cuts and cost
saving measures implemented in 1995.

         Operating expenses increased by $1.2 million during 1996 as a result
of a write-down of the Company's corporate headquarters under the provisions of
SFAS 121 "Accounting for the Impairment of Long-Lived Assets."

         In addition to the building write-down charge, 1996 also included a
$1.7 million charge reflecting revised values for certain product masters, and
$300,000 in severance and other costs associated with the sales force
transition to Word.

         As a result of the above, loss from operations was $2.5 million or
8.1% of net sales in 1996, compared to loss of $2.1 million or 5.9% of net
sales in 1995.

         Interest expense increased to $1.8 million in 1996 compared with $1.0
million in 1995.  The increase was a result of higher debt levels  and higher
interest rates in 1996.

LIQUIDITY AND CAPITAL RESOURCES

         The Company historically has financed its operations through cash
generated from operations and by borrowings under a line of credit and term
notes as needed.  The Company's need for cash varies from quarter to quarter
based on product releases and scheduled marketing promotions.  The Company's
principal uses of cash historically have been operating expenses, capital
expenditures and debt service.  The most significant cash outlays for investing
purposes generally result from product development which primarily involves the
production and recording of the Company's product master library.  It is from
these masters that the Company's products are duplicated and then distributed
to customers.

         Cash generated from operations totaled $5.9 million, $3.5 million and
$433,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
The increase from 1996 to 1997 resulted primarily from increased earnings
before charges for depreciation and amortization, primarily due to lower
marketing and fulfillment costs in the direct to consumer and retail divisions.
The increase from 1995 to 1996 resulted from increased earnings before charges
for depreciation, amortization, a charge of $1.7 million reflecting revised
values for certain product masters and a $1.2 million write-down of the
Company's corporate office buildings.

         In accordance with industry practice, the Company's music products are
sold on a returnable basis.  The Company's allowance for returns and doubtful
accounts is based on the historical results of operations of the Company.  Due
to the nature of sales through direct to consumer continuity programs, the
Company has a somewhat higher product return and doubtful account exposure than
other music companies where the majority of sales are in traditional retail
markets.  For the year ended December 31, 1997, bad debts and returns were $6.0
million compared to $7.3 million for 1996.

         For the years ended December 31, 1997, 1996 and 1995, amounts charged
against income for returns and doubtful accounts were $5.5 million, $7.3
million and $9.8 million, respectively.

         The Company signed a $19 million financing agreement with a bank on
August 6, 1996.  The credit agreement includes a $6 million revolving credit
facility and $13 million term loan.  At the Company's option, the loan carries
an interest rate of the bank's base rate plus 1  1/2%, or LIBOR plus 3%.  This
facility replaced all of the Company's long- term and short-term borrowings.
The lender received warrants exercisable for up to 12.5% of the Company's Class
A Common Stock, with an exercise price of $1.875, and the warrants expire in 10
years.  Under the terms of the financing agreement, the lender cannot exercise
the warrants until August 1998 (unless the Company undergoes a change in
control.) The Company believes that funds generated from operations and funds
available under its credit facility will be sufficient to satisfy its current
operating requirements.

         Capital expenditures totaled $299,000 and $583,000 in the years ended
December 31, 1997 and 1996.  During 1997, capital expenditures were primarily
for computer equipment and general repairs on corporate headquarters.   During
1996, capital expenditures were primarily the result of safeguarding the





                                       11
<PAGE>   13

new building from the elements.  The capital expenditure budget for 1998 is
$360,000.

SEASONALITY

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

INFLATION

         The impact of inflation on the Company's operating results has been
moderate in recent years, reflecting generally lower rates of inflation in the
economy and relative stability in the Company's cost of sales.  In prior years,
the Company has been able to adjust its selling prices to substantially recover
increased costs.  While inflation has not had, and the Company does not expect
that it will have, a material impact upon operating results, there is no
assurance that the Company's business will not be affected by inflation in the
future.

YEAR 2000 COMPLIANCE

         It is possible that the Company's currently installed computer
systems, software products or other business systems, or those of others with
whom the Company interfaces with, will not always accept input of, store,
manipulate and output dates in the years 1999, 2000 or thereafter without error
or interruption.  The Company has conducted a review of its in-house computer
systems and is not aware of any material Year 2000 compliance problems.  In
addition, the Company is reviewing its third-party systems to ensure that such
systems are Year 2000 compliant.  While the Company is not aware of any
material expenses or losses of revenue that it will incur as a result of Year
2000 problems, it is impossible to anticipate all of the ways in which such
problems could arise and affect the Company's financial condition and results
of operations.  There can be no assurances that the expenses or liabilities to
which the Company may become subject as a result of such problems will not have
a material adverse effect on the Company's results of operations and financial
condition.

                      FACTORS AFFECTING FUTURE PERFORMANCE

COMPETITION

         The Company faces intense competition for discretionary consumer
spending from numerous other record companies and other forms of entertainment
offered by film companies, video companies and others.  Integrity competes
directly with other record companies and music publishers that distribute
Christian music to Christian bookstores, as well as a number of secular record
companies, many of whom have substantially greater financial resources than the
Company.  The Company also competes with other record and music publishing
companies, both Christian and secular, for signing established and new artists
and songwriters.  The Company's ability to continue to compete successfully
will be largely dependent upon its ability to build upon and maintain its
reputation for quality Christian music and other communication products.

RISKS INHERENT IN THE INDUSTRY

         The industries Integrity operates in, recorded music, video
productions and printed music, are creative industries, and involve a
substantial degree of risk.  Each musical or video recording or printed product
is an individual artistic work, and its commercial success is primarily
determined by consumer taste, which is unpredictable and constantly changing.
Accordingly, there can be no assurance as to the financial success of any
particular release, the timing of such success or the popularity of any
particular artist.  Furthermore, the Company must invest significant amounts
for product development prior to the release of any product, which costs may
not be recovered if the release is unsuccessful.  Changes in the timing of new
releases can also cause significant fluctuations in quarterly operating
results.  There can be no assurance that the Company's products will be
successful releases or that any product will generate revenues sufficient to
cover the cost of product development.  See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."

BUSINESS STRATEGY

         Integrity's business strategy is focused on developing new music,
video and printed products aimed





                                       12
<PAGE>   14

at the contemporary Christian market segments and broadening its distribution
channels to reach additional customers in the domestic and international
markets.  The Company's ability to achieve these objectives depends upon many
factors, including developing new concept products, signing and retaining
artists, and maintaining an effective sales effort capable of expanding the
Company's operations into new market segments.  In all of these endeavors, the
Company may compete with entities which have significantly greater resources
than the Company.  There can be no assurance that quality artists and songs
will continue to be available to Integrity, that the Company will be able to
produce and promote products which maintain the interest of the general market
or its record club members or that the Company will be able to penetrate
effectively new segments of the Christian products market or the general
market.

CHANGE TO THE SMALLCAP MARKET

         On February 23, 1998, new listing and maintenance rules for inclusion
on both the Nasdaq National Market and The SmallCap Market became effective.
Under these new rules, the Company failed to meet one of the listing
requirements for the Nasdaq National Market, specifically the market value of
its publicly-traded shares.  As a result, the Company has elected to transfer
its Class A Common Stock to The SmallCap Market.  At this time, the effective
date of the transition to The SmallCap Market is unknown.  There can be no
assurances that the Company's transition to and position in The SmallCap Market
will result in an active trading market for the Company's Class A Common Stock.

INCREASES IN COSTS OF MAILING, PAPER, PRINTING AND DELIVERY

         Increases in postal rates, as well as in paper, printing and delivery
costs affect the operating results of the Company's direct response programs.
The Company's orders are shipped primarily by third class mail with the United
States Postal Service.  The Company relies heavily on discounts from the basic
postal rate structure, such as discounts for bulk mailings and sorting by zip
code and carrier routes.  Any increase in postal rates, papers and printing
costs or delivery costs could have an adverse effect on earnings.

PIRACY AND HOME TAPING

         The Company operates in an industry in which revenues are adversely
affected by the unauthorized reproduction of recordings for commercial sale,
commonly referred to as "piracy," and by home taping for personal use.  There
can be no assurances that piracy and home taping for personal use will not have
an adverse affect on the financial condition and operations of the Company.

DEPENDENCE ON SENIOR MANAGEMENT

         The success of the Company has been largely dependent on the skills,
experience and efforts of its senior management and especially its Chairman,
President and Chief Executive Officer, P. Michael Coleman.  The loss of the
services of Mr. Coleman or other members of the Company's senior management
could have a material adverse affect on the Company's business prospects.

CONTROL OF COMPANY

         P. Michael Coleman, Chairman, President and Chief Executive Officer of
the Company, and his family beneficially own 65,100 share of Class A Common
Stock and all 3,435,000 shares of Class B Common Stock outstanding,
representing approximately 94.0% of the total voting power of all classes of
voting stock of the Company.  As a result, Mr. Coleman will be able to elect
all of the Company's directors, amend the Amended Certificate of Incorporation
(the "Amended Certificate"), effect or prevent a merger, sale of assets or
other business acquisition or disposition and otherwise control the outcome of
actions requiring stockholder approval.  See "Security Ownership of Certain
Beneficial Owners and Management" and "Certain Relationships and Related
Transactions."

LIMITED VOTING RIGHTS OF CLASS A COMMON STOCK

         The voting rights of the Class A Common Stock are limited by the
Amended Certificate.  On all matters with respect to which the Company's
stockholders have a right to vote, including the election of directors, each
share of Class A Common Stock is entitled to one vote, while each share of
Class B Common Stock is entitled to ten votes.  Except as otherwise required by
law or expressly provided in the Amended Certificate, the Class A Common Stock
and Class B Common Stock vote together as a single class.  Class B Common Stock
can be converted into shares of Class A Common Stock on a share-for-share basis
at the election of the holder and shall be converted to shares of Class A
Common Stock automatically on transfer, except for transfers to Mr. Coleman's
spouse and descendants or trusts or partnerships for their benefit.  The
Amended Certificate limits the Company's authority to issue additional Class B
Common Stock except as dividends or distributions on outstanding Class B Common
Stock proportional to dividends or distributions on Class A Common Stock.





                                       13
<PAGE>   15

         The disproportionate voting rights between the Class A Common Stock
and the Class B Common Stock could have an adverse effect on the market price
of the Class A Common Stock.  Such disproportionate voting rights may make the
Company a less attractive target for a takeover than it otherwise might be, or
render more difficult or discourage a merger proposal, a tender offer or a
proxy contest, even if such actions were favored by holders of the Company's
Class A Common Stock.  Such disproportionate voting rights may also deprive
holders of Class A Common Stock of an opportunity to sell their shares at a
premium over then prevailing market prices for the Class A Common Stock.

EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS

         The Amended Certificate authorizes the Board of Directors to issue
shares of preferred stock, $.01 per share (the "Preferred Stock") from time to
time in one or more designated series or classes.  The Board of Directors,
without approval of the stockholders, is authorized to establish voting,
dividend, redemption, conversion, liquidation and other provisions of a
particular series or class of Preferred Stock.  The issuance of Preferred Stock
could, among other things, adversely affect the voting power or other rights of
the holders of Common Stock and, under certain circumstances, make it more
difficult for a third party to acquire, or discourage a third party from
acquiring, control of the Company.  In addition, the Company is subject to the
Delaware Business Combination Statute, which may render more difficult a change
in control of the Company.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

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

         Not applicable.





                                       14
<PAGE>   16

                                   PART III.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         The information under the captions "Proposal I - Election of Directors
- Certain Information Concerning Nominees," "Proposal I - Election of Directors
- Executive Officers of the Company" and "Other Matters - Filings Under Section
16(a)" in the Company's 1998 Proxy Statement is incorporated herein by
reference.

ITEM 11.  EXECUTIVE COMPENSATION.

         The information under the caption "Proposal I - Election of Directors
- Executive Compensation" in the Company's 1998 Proxy Statement is incorporated
herein by reference.  In no event shall the information contained in the proxy
statement under the sections "Stockholder Return Comparison" or "Compensation
Committee Report on Executive Compensation" be incorporated herein by
reference.

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

         The information under the caption "Proposal I - Election of Directors
- Beneficial Owners of More Than Five Percent of the Company's Common Stock;
Shares Held by Directors and Executive Officers" in the Company's 1998 Proxy
Statement is incorporated herein by reference.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         The information under the caption "Proposal I - Election of Directors
- Certain Transactions" in the Company's 1998 Proxy Statement is incorporated
herein by reference.

                                    PART IV.

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

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

<TABLE>
<CAPTION>
FINANCIAL STATEMENTS:                                                                   PAGE NO.
------------------------------------------------------------------------------------------------
<S>                                                                                        <C>
Report of Independent Accountants                                                          16

Consolidated Balance Sheets at December 31, 1997 and 1996                                  17

Consolidated Statement of Operations for the three years ended December 31, 1997           18

Consolidated Statement of Changes in Stockholders' Equity for the three years ended
December 31, 1997                                                                          19

Consolidated Statement of Cash Flows for the three years ended December 31, 1997           20

Notes to Consolidated Financial Statements                                                 21


2.   CONSOLIDATED FINANCIAL STATEMENT SCHEDULES:
For the three years ended December 31, 1997
VIII--Valuation and Qualifying Accounts and Reserves                                       31
</TABLE>





                                       15
<PAGE>   17

                       REPORT OF INDEPENDENT ACCOUNTANTS

To The Board of Directors and Stockholders of Integrity Incorporated

         In our opinion, the accompanying consolidated financial statements
listed in the index appearing under item 14(a)(1) and (2) on page 15 present
fairly, in all material respects, the financial position of Integrity
Incorporated and its subsidiaries at December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.  These financial statements are the responsibility of
the Company's management;  our responsibility is to express an opinion on these
financial statements based on our audits.  We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement.  An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation.  We believe that our audits provide a
reasonable basis for the opinion expressed above.




PRICE WATERHOUSE LLP

Atlanta, GA


February 14, 1998





                                       16
<PAGE>   18

                             INTEGRITY INCORPORATED
                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
                                                                                                    December 31
                                                                                                    -----------
   ASSETS                                                                                        1997        1996 
                                                                                               ---------------------
   <S>                                                                                         <C>         <C>
   Current Assets
        Cash                                                                                   $    523     $  1,131

        Trade receivables, less allowance for returns and doubtful accounts of $812 and           
          $1,684                                                                                  4,258        4,195

        Other receivables                                                                         2,033          943

        Inventories                                                                               5,303        4,219

        Other current assets                                                                      2,927        3,562
                                                                                               --------     --------
             Total current assets                                                                15,044       14,050

    Property and equipment, net of accumulated depreciation of $3,085 and $2,576                  3,499        3,709

    Product masters, net of accumulated amortization of $7,537 and $3,813                         8,618        8,601

    Non-compete agreement, net of accumulated amortization of $1,130 and $895                       120          355

    Other assets                                                                                  3,494        4,343
                                                                                               --------     --------
             Total assets                                                                      $ 30,775     $ 31,058
                                                                                               ========     ========

   LIABILITIES AND STOCKHOLDERS' EQUITY
   Current Liabilities

        Current portion of long-term debt                                                      $  1,838     $  1,470

        Accounts payable and accrued expenses                                                     3,110        1,826

        Royalties payable                                                                           908          136

        Other current liabilities                                                                   237          151
                                                                                               --------     --------
             Total current liabilities                                                            6,093        3,583

    Long-term debt                                                                               13,279       16,834

    Other long-term liabilities                                                                     207          154
                                                                                               --------     --------
             Total liabilities                                                                   19,579       20,571
                                                                                               --------     --------
   Stockholders' Equity
        Preferred stock, $.01 par value; 500,000 shares authorized, none issued and outstanding

        Class A common stock, $.01 par value; 7,500,000 shares authorized;                           21           21
        2,079,000 shares issued and outstanding

        Class B common stock, $.01 par value, 10,500,000 shares authorized;                          34           34
        3,435,000 shares issued and outstanding
        Additional paid-in capital                                                               13,428       13,428

        Accumulated deficit                                                                       2,303        2,945
        Equity adjustments from foreign translation                                                                 
                                                                                                     16         (51)
                                                                                               --------     --------
             Total stockholders' equity                                                          11,196       10,487
                                                                                               --------     --------

                  Total liabilities and stockholders' equity                                   $ 30,775     $ 31,058
                                                                                               ========     ========
</TABLE>

See accompanying notes to consolidated financial statements.





                                       17
<PAGE>   19

                             INTEGRITY INCORPORATED
                      CONSOLIDATED STATEMENT OF OPERATIONS
                       (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
                                                                  Year Ended December 31
                                                           -----------------------------------
                                                            1997          1996          1995
                                                           -----------------------------------
 <S>                                                       <C>        <C>             <C>
 Net sales                                                 $32,428      $30,395        $36,277

 Cost of sales                                              15,236       14,981         15,547
                                                           -------      -------        -------
 Gross profit                                               17,192       15,414         20,730


 Marketing and fulfillment expenses                          6,924        9,131         14,914

 General and administrative expenses                         7,775        7,545          7,959

  Loss on impairment of long-lived assets                       --        1,200             --
                                                           -------      -------        -------
      Income (loss) from continuing operations               2,493      (2,462)        (2,143)
 Other (income) expense

      Interest expense (net)                                 1,790        1,804          1,027

      Other (income) expense                                    61        (153)             65
                                                           -------      -------        -------
 Income (loss) before extraordinary item and taxes             642      (4,113)        (3,235)

 Income tax benefit                                             --          654          1,183
                                                           -------      -------        -------
      Income (loss) before extraordinary item                  642      (3,459)        (2,052)

 Extraordinary item from early extinguishment of
 debt, less applicable taxes of $47,000                         --        (248)             --
                                                           -------      -------        -------

 Net income (loss)                                         $   642     $(3,707)       $(2,052)
                                                           =======     ========       ========
 BASIC EPS

 Income (loss) before extraordinary item                   $  0.12    $  (0.63)       $ (0.37)
 Extraordinary item                                              -       (0.04)             --
                                                           -------      -------        -------
 Net income (loss)                                         $  0.12    $  (0.67)       $ (0.37)
                                                           =======    =========       ========

 DILUTED EPS
 Income before extraordinary item                           $ 0.12           --             --

 Extraordinary item                                             --           --             --
                                                           -------      -------        -------
 Net income                                                $  0.12           --             --
                                                           =======      =======       ========

 Weighted average number of shares outstanding
 (note 1)                                                    5,514        5,514          5,514
                                                           =======      =======       ========
</TABLE>

          See accompanying notes to consolidated financial statements.





                                      18
<PAGE>   20

                             INTEGRITY INCORPORATED
           CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                       (IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
                                                         Class A                     Class B             
                                                      Common Stock                Common Stock                        
                                                  --------------------------------------------------     Partner's    
                                                  Shares        Amount        Shares        Amount        Capital     
                                                  -----------------------------------------------------------------
 <S>                                              <C>                <C>     <C>                 <C>           <C>    
 BALANCE, DECEMBER 31, 1993                             973                                                 $   200  
                                                                                                                      
      Cancellation of Class A stock                   (973)                                                           
      Issuance of Class B stock                                               3,500,000        $   35                 
                                                                                                                      
      Dissolution of partnership                                                                               (200)  
      Net proceeds from initial public            2,014,000      $     20                                             
                                                                                                                      
      Conversion of common stock                     65,000             1      (65,000)           (1)                 
      Net income                                                                                                      
                                                                                                                      
      Distributions                                                                                                   
      Translation adjustments                                                                                         
                                               ------------       -------  ------------        ------       --------  
 BALANCE, DECEMBER 31, 1994                       2,079,000            21     3,435,000            34              0  
      Net loss                                                                                                        
                                                                                                                      
      Translation adjustments                                                                                         
                                               ------------       -------  ------------        ------       --------  
 BALANCE, DECEMBER 31, 1995                       2,079,000            21     3,435,000            34              0  
                                                                                                                      
     Net loss                                                                                                         
     Issuance of stock warrants                                                                                       
                                                                                                                      
     Translation adjustments                                                                                          
                                               ------------      --------  ------------       -------       --------  
 BALANCE, DECEMBER 31, 1996                       2,079,000      $     21     3,435,000       $    34       $      0  
                                                                                                                      
     Net income                                                                                                       
     Translation adjustments                                                                                          
                                               ------------      --------  ------------       -------       --------  
 BALANCE, DECEMBER 31, 1997                       2,079,000      $     21     3,435,000       $    34       $      0  
                                               ============      ========  ============       =======       ========  


<CAPTION>
                                                 Additional    (Accumulated       Equity
                                                  Paid-In        Deficit)       Adjustments
                                                  Capital        Earnings      Translations       Total
                                                 ----------------------------------------------------------
 <S>                                               <C>           <C>                <C>           <C>
 BALANCE, DECEMBER 31, 1993                        $    655      $        2          $ (109)      $    748
                                               
      Cancellation of Class A stock            
      Issuance of Class B stock                         (35)
                                               
      Dissolution of partnership                                                                     (200)
      Net proceeds from initial public               14,414                                         14,434
                                               
      Conversion of common stock               
      Net income                                                      2,812                          2,812
                                               
      Distributions                                  (2,999)                                        (2,999)
      Translation adjustments                                                              5             5
                                                   --------      ----------          -------      --------
                                               
 BALANCE, DECEMBER 31, 1994                          12,035           2,814            (104)        14,800
      Net loss                                                       (2,052)                        (2,052)
                                               
      Translation adjustments                                                            (55)          (55)
                                                   --------      ----------          -------      --------
 BALANCE, DECEMBER 31, 1995                          12,035             762             (159)       12,693
                                               
     Net loss                                                        (3,707)                        (3,707)
     Issuance of stock warrants                       1,393                                          1,393
                                               
     Translation adjustments                                                             108          108 
                                                   --------      ----------          -------      --------
 BALANCE, DECEMBER 31, 1996                         $13,428      $   (2,945)         $   (51)     $ 10,487
                                               
     Net income                                                         642                            642
     Translation adjustments                                                              67            67
                                                   --------      ----------          -------      --------
 BALANCE, DECEMBER 31, 1997                        $ 13,428      $   (2,303)         $    16      $ 11,196
                                                   ========      ==========          =======      ========
</TABLE>

          See accompanying notes to consolidated financial statements.





                                       19
<PAGE>   21

                             INTEGRITY INCORPORATED
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                                             Year Ended December 31
                                                                                         --------------------------------
                                                                                          1997         1996        1995
                                                                                         --------    --------     -------
 <S>                                                                                      <C>        <C>          <C>
 Cash flows from operating activities

 Net income (loss)                                                                        $   642    $(3,707)     $(2,052)

 Adjustments to reconcile net income (loss) to net cash provided by operating activities

    Depreciation and amortization                                                           1,331         860          898

    Loss on impairment of building                                                             --       1,200           --

    Amortization of product masters                                                         3,250       4,714        3,234

    Extraordinary loss on debt extinguishment                                                  --         295           --

    (Decrease) increase in allowance for returns and doubtful accounts                      (872)          24          257

    Changes in operating assets and liabilities
       Decrease in trade receivables                                                          809         972          954

       (Increase) decrease in other receivables                                           (1,090)         984      (1,261)

       (Increase) decrease in inventories                                                 (1,084)       (151)           83

       Decrease (increase) in other current assets                                            635        (88)          614

       Increase (decrease) in accounts payable, royalties payable and accrued               2,056     (1,382)      (1,528)
         expenses

       Increase (decrease) in other current liabilities and deferred revenue                  139       (299)        (711)

       Equity adjustments from translation                                                     67         108         (55)
                                                                                          -------    --------     --------

       Net cash provided by operating activities                                            5,883       3,530          433
                                                                                          -------    --------     --------
 Cash flows from investing activities

    Purchases of property and equipment                                                     (299)       (583)      (2,633)

    Payments for product masters                                                          (3,267)     (3,329)      (7,068)

    Decrease (Increase) in noncurrent other assets                                            494       (475)      (2,377)
                                                                                          -------    --------     --------
       Net cash used in investing activities                                              (3,072)     (4,387)     (12,078)
                                                                                          -------    --------     --------
 Cash flows from financing activities

    Net (repayments) borrowings under line of credit                                      (2,040)    (12,018)       13,799

    Proceeds from issuance of long-term debt                                                  300      14,000        4,500

    Principal payments of long-term debt                                                  (1,679)       (400)      (2,545)

    Loan issuance cost                                                                         --       (639)        (464)

    Principal payments on related party debt                                                   --          --      (2,829)
                                                                                          -------    --------     --------
       Net cash (used) provided by financing activities                                   (3,419)         943       12,461
                                                                                          -------    --------     --------
 (Decrease) increase in cash                                                                (608)          86          816

 Cash, beginning of year                                                                    1,131       1,045          229
                                                                                          -------    --------     --------
 Cash, end of year                                                                        $   523      $1,131     $  1,045
                                                                                          =======      ======     ========
 Supplemental disclosures of cash flow information

    Interest paid                                                                         $ 1,790      $1,638     $    899

    Income taxes paid                                                                     $    37     $     0     $    693
                                                                                          =======     =======     ========
                                                                                                             
                                                                                                             

 Noncash financing activities
    Issuance of stock purchase warrants for debt                                          $    --     $ 1,393           --
                                                                                          =======     =======     ========
</TABLE>

          See accompanying notes to consolidated financial statements





                                       20
<PAGE>   22

                             INTEGRITY INCORPORATED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

         The Company's significant accounting policies are as follows:

PRINCIPLES OF CONSOLIDATION

         The accompanying financial statements include the accounts of the
Company and its subsidiaries.  All significant intercompany accounts and
transactions have been eliminated in consolidation.

REVENUE RECOGNITION

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

INVENTORIES

         Inventories, which consist principally of finished goods, are stated
at the lower of average cost or market using the first-in, first-out method.

MARKETING COSTS

         The Company incurs marketing costs utilizing various media to generate
direct sales to customers.  Marketing expenditures that benefit future periods
are capitalized and charged to operations using the straight-line method over a
period of six months, which approximates the period during which the related
sales are expected to be realized.  Other marketing costs are expensed the
first time advertising takes place.  Prepaid marketing costs, including
artwork, printing and direct mail packages, are included in assets in the
accompanying financial statements and approximated $1,119,000 and $861,000 at
December 31, 1997 and 1996, respectively.  Marketing costs expensed for the
three years ended December 31, 1997 approximated $4,626,000, $6,099,000 and
$6,479,000.

PROPERTY AND EQUIPMENT

         Property and equipment are stated at cost.  Depreciation is provided
over the estimated useful lives of the assets using the straight-line method.
The useful lives of the property and equipment range from three to thirty-seven
years.  Repairs and maintenance costs which do not increase the useful lives of
the assets are charged to expense as incurred.  Additions, improvements and
expenditures that significantly add to the productivity or extend the life of
an asset are capitalized.  When assets are replaced or otherwise disposed of,
the cost and related accumulated depreciation are removed from the accounts and
any gain or loss is reflected in income.

DEFERRED REVENUE

         Revenue recognition on prepayments of recorded product and print music
subscriptions are deferred until the product is shipped.





                                       21
<PAGE>   23

PRODUCT MASTERS

         Product masters, which include sound recordings and print masters, are
amortized over their future estimated useful lives, using a method that
reasonably relates to the amount of net revenue expected to be realized.  The
portion of the cost of product masters recoverable from artist royalties
recorded in the consolidated balance sheet at December 31, 1997 and 1996, were
$889,000 and $419,000, respectively.  The costs of producing a product master
include the cost of the musical talent, the cost of the technical talent for
engineering, directing and mixing, costs for the use of the equipment to record
and produce the master and studio facility charges.

ADVANCE ROYALTIES

         Royalties earned by publishers, producers, songwriters, or other
artists are charged to expense in the period in which the related product sale
occurs.  Advance royalties paid are capitalized if the past performance and
current popularity of the artist to whom the advance is made provide a sound
basis for estimating that such amounts will be recoverable from future
royalties to be earned by the artist.  Any portion of advances that
subsequently appear not to be fully recoverable from future royalties are
charged to expense during the period the loss becomes evident.

INCOME TAXES

         The Company adopted SFAS 109, "Accounting for Income Taxes," effective
September 1, 1993.  SFAS 109 requires the asset and liability approach of
accounting for income taxes.  The asset and liability approach requires the
recognition of deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
basis of assets and liabilities.

EARNINGS PER SHARE

         The company adopted SFAS 128, "Earnings per Share" effect December 31,
1997.  SFAS 128 requires that earnings per share be presented as basic earnings
per share which is computed by dividing income available to common stockholders
by the weighted average of common shares outstanding for the period and diluted
earnings per share which is calculated by dividing income available to common
stockholders by weighted average of common shares outstanding assuming issuance
of potential dilutive common shares related to options, warrants, convertible
debt, or other stock agreements.  All earnings per share amounts have been
presented in accordance with the provisions of this statement.  Additionally,
all prior years presented have been restated in accordance with the provisions
of this statement.

SIGNIFICANT ESTIMATES

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

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

RECLASSIFICATIONS

         Certain amounts in the consolidated balance sheet and statement of
income have been reclassified to conform to current year presentation.





                                       22
<PAGE>   24

2.  OTHER CURRENT ASSETS

Other current assets consist of the following:
<TABLE>
<CAPTION>
                                                  December 31
                                                (in thousands)
                                             --------------------
                                             1997         1996
                                             --------------------
 <S>                                         <C>          <C>
 Prepaid supplies                            $ 1,308      $ 1,626

 Prepaid marketing costs                       1,119          861

 Other                                           500        1,075
                                              ------      -------
                                              $2,927      $ 3,562
                                              ======      =======
</TABLE>
3. PROPERTY AND EQUIPMENT:

Property and equipment consists of:

<TABLE>
<CAPTION>
                                                   December 31
                                                 (in thousands)
                                              --------------------
                                              1997         1996
                                              --------------------
 <S>                                          <C>          <C>
 Land                                         $   625      $   625

 Buildings and leasehold improvements
                                                2,611        2,592

 Data processing and other equipment            1,105        1,178

 Studio equipment                                 950          609

 Furniture and fixtures                         1,293        1,281
                                              -------      -------
                                                6,584        6,285

 Less - accumulated depreciation               (3,085)      (2,576)
                                              -------      -------
                                              $ 3,499      $ 3,709
                                              =======      =======
</TABLE>

         Depreciation expense approximated $509,000, $600,000 and $648,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.

         Additionally, in 1996, the Company recorded a charge to earnings of
$1.2 million related to the write-down of its Corporate headquarters.

4.  IMPAIRMENT OF LONG-LIVED ASSETS

         In March 1995 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No.  121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,"
(SFAS 121).  SFAS 121 requires that long-lived assets to be held and used by an
entity, be reviewed for impairment, whenever events or changes in circumstances
indicate that the carrying amount of the asset(s) may not be recoverable.  The
discontinuance of construction of the Company's corporate headquarters facility
was due to losses from operations, and as a consequence of not finding a buyer
or a lessee for the building, a write-down to fair market value was required
under SFAS 121.  The undiscounted future cash flows further indicated that a
write-down to fair market value was required under SFAS 121.  This write-down
resulted in a charge to income before income taxes of $1.2 million which is
included in the Consolidated Statement of Operations as "Loss on Impairment of
Long-Lived Assets."





                                       23
<PAGE>   25

5.  OTHER ASSETS

Other assets consist of the following:
<TABLE>
<CAPTION>
                                     December 31
                                   (in thousands)
                                --------------------
                                1997         1996
                                --------------------
 <S>                            <C>          <C>
 Music copyrights               $ 2,191      $ 2,340

 Other                            1,303        2,003
                                -------      -------

                                $ 3,494      $ 4,343
                                =======      =======
</TABLE>

         The music copyrights are being amortized over their future estimated
useful lives, which approximates fifteen years.  Accumulated amortization at
December 31, 1997 approximates $443,000.

6.  DEBT

         In August 1996, the Company entered into a $19 million credit
agreement with a financial institution.  The credit agreement  includes a $6
million revolving credit facility (the Revolver) and $13 million term loan (the
Term Loan) maturing on August 6, 2002.  At the Company's option, the credit
agreement carries an interest rate of the bank's base rate plus 1  1/2%, or
LIBOR plus 3%.  At December 31, 1997, the interest rates on the Revolver were
$3.9 million at 8.9%; and on the Term Loan, $11.6 million at 8.8%.  This
facility replaced all of the Company's long-term and short-term financing.

         At December 31, 1997, the Company had approximately $2.1 million of
available funds under the Revolver.

         The Company, in conjunction with the 1996 financing, issued warrants
which are outstanding at December 31, 1997, to purchase 805,288 shares of Class
A Common Stock.  Each warrant entitles the record holder thereof to purchase
one fully paid share of Class A Common Stock (for an aggregate of 805,288
shares) or one-fourth fully paid share of convertible preferred stock (for an
aggregate of 201,322 shares) at the exercise price of $1.875.  The warrants
become exercisable on August 6, 1998.  On the date of issuance, the warrants
had an estimated fair value of $1.73 or $1,393,000, which is recorded as a
discount to the Revolver and Term Loan.   At December 31, 1997, the book value
of the discount is $1,064,000 net of accumulated amortization of $329,000.

         Prior to signing this agreement, the Company had a revolving/term loan
and a term loan under an agreement which provided for maximum borrowings of
$15.0 and $3.0 million, respectively.  Outstanding borrowings under the
revolving/term loan were $13.8 million at December 31, 1995.  The
revolving/term loan incurred interest equal to the prime rate plus 1%.  Amounts
outstanding under the term loan were $2.7 million at December 31, 1995.
Interest on the term loan accrued at 9.35% per annum.  During 1996, the Company
recorded an extraordinary loss of $248,000, net of applicable income taxes of
$47,000 related to the early retirement of this debt.

         The Revolver and Term Loan contain certain restrictive covenants with
respect to the Company, including, among other things, maintenance of working
capital, limitations on the payments of dividends, the occurrence of additional
indebtedness, certain liens and require the maintenance of certain financial
ratios.  Substantially all of the Company's assets are pledged as collateral
for these loans.

         The Company is in compliance with these debt covenants at December 31,
1997.  Primarily as a result of net losses experienced in 1996, the Company was
in non-compliance with certain of these debt covenants at December 31, 1996.
The Company obtained waivers for the conditions of default as of December 31,
1996,  and renegotiated covenants under the financing agreement for future
periods.





                                       24
<PAGE>   26




Aggregate principal maturities of long-term debt at December 31, 1997 are as
follows:

<TABLE>
<CAPTION>
                                  Total
     Fiscal Year             (in thousands)
                             --------------
 <S>                             <C>
        1998                     $ 1,838

        1999                       2,135

        2000                       2,349

        2001                       2,661

        2002                       6,134

 2003 and thereafter                   0 
                                 -------
                                 $15,117
                                 =======
</TABLE>


         The Company experienced an increase in working capital during 1997 as
compared to 1996 as a result of cash generated from operations.  The Company
believes that funds generated from operations will be sufficient to satisfy its
current operating requirements.

         At December 31, 1997, approximately $531,000, net of accumulated
amortization of $164,000, of loan issuance costs, included in other assets, are
being amortized over the term of the debt agreements.

7.  INCOME TAXES

         The components of the (benefit) provision for income taxes for the
three years ended December 31, 1997 are as follows:
<TABLE>
<CAPTION>
                                                Year Ended December 31
                                                  (in thousands)
                                      -------------------------------------------
                                         1997           1996            1995
                                      -------------------------------------------
   <S>                                 <C>                <C>              <C>
   Current benefit

      Federal                          $       --         $ 192            $  935

      State                                    --            --               101
                                       ----------         -----            ------
                                               --           192             1,036
                                       ----------         -----            ------

   Deferred benefit

      Federal                                  --           458               130

      State                                    --            51                17
                                       ----------         -----            ------

                                               --           509               147
                                       ----------         -----            ------
   Total benefit, including
   extraordinary item                  $       --         $ 701            $1,183
                                       ==========         =====            ======
</TABLE>

         The Company's benefit for income taxes differs from the amount
computed by applying the statutory federal income tax rate of 34% to income
before income taxes of $642,000 for the year ended December 31, 1997, the loss
before income taxes and extraordinary item of $4,113,000 for the year ended
December 31, 1996 and to the loss before income taxes of $3,235,000 for the
year ended December 31, 1995, as follows (in thousands):





                                       25
<PAGE>   27




<TABLE>
<CAPTION>
                                                                    December 31
                                                           1997        1996         1995
                                                         ---------------------------------                                 
  <S>                                                    <C>          <C>         <C>
  Income tax provision (benefit) at statutory rates         $  231    $ (1,398)   $ (1,099)

  State tax provision (benefit), net of federal taxes           27        (163)       (107)

  Release of foreign tax credits                                --        (159)         --

  Nondeductible expenses                                        (2)         69          25

  Other, net                                                   (58)                     (2)
                                                                           (70)

  Change in valuation allowance                               (198)      1,067          --
                                                             -----       -----    --------
                                                                                        
  Benefit for income taxes before extraordinary item        $   --    $   (654)    $(1,183)
                                                            ======    ========    ========
</TABLE>

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

         Significant components of the Company's deferred tax assets and
liabilities as of December 31, 1997 and 1996 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                          December 31
                                                       1997         1996
    <S>                                                <C>         <C>
    Deferred Assets

       Net operating loss carryforward                 $   677    $    677

       Reserves for returns and allowances                 299         631

       Impairment of long-lived assets                     456         456

       Foreign tax credits                                 426         276

       Other                                                61         372
                                                       -------    --------

                                                         1,919       2,412
    Deferred Liabilities

       Prepaid marketing expenses                         (293)       (327)

       Other                                              (148)       (207)
                                                       -------    --------

                                                          (441)       (534)
                                                       -------    --------

    Deferred asset before allowance                      1,478       1,878

    Valuation allowance for deferred tax assets           (869)     (1,067)
                                                       -------    --------

    Net deferred asset reported                        $   609    $    811
                                                       =======    ========
</TABLE>

         Even though the Company incurred tax losses during fiscal 1996 and
1995, management believes that it is more likely than not that it will generate
taxable income sufficient to realize a portion of the tax benefit associated
with future deductible temporary differences and NOL carryforwards prior to
their expiration.  Operating profits were lower in 1995 and 1996 primarily due
to write-downs including the impairment of corporate headquarters, a write-down
of certain product masters and certain reorganization charges related to the
Company's decision to lower staffing levels and out source its retail sales
force.  There can be no assurance, however that the Company will generate a
specific level of continuing earnings.  Due to the uncertainties of achieving
certain levels of future taxable income, management believes that a partial
valuation allowance of $869,000 as of December 31, 1997 is appropriate given
the uncertainty of estimates surrounding future taxable income.  For the year
ended December 31, 1997, the Company reduced its valuation allowance by
$198,000 which offsets the current year provision for income taxes.





                                       26
<PAGE>   28

8.  EMPLOYEE BENEFITS

         Effective January 1, 1988 the Company's Board of Directors established
a Profit Sharing Plan (the "Plan").  The Plan is a non-contributory defined
contribution plan covering substantially all employees of the Company.  An
employee is eligible to participate in the Plan after one year of service, as
defined.

         The Company contributed approximately $166,000 to the Plan during the
year ended December 31, 1994.  The Company did not make contributions to the
Plan during the years ended December 31, 1997, 1996 and 1995 as contributions
are at the discretion of the Board of Directors.

         Effective February 2, 1995, the Company's Board of Directors
established the Integrity 401k Plan ("401k Plan").  The 401k Plan is a
qualifying 401k Plan covering substantially all employees of the Company.  An
employee is eligible to participate in the 401k Plan after one year of service
and is allowed to make elective contributions of up to 12% of their annual
salary.  Company contributions to the 401k Plan are discretionary and are
determined annually by the Company's Board of Directors.  The Company
contributed approximately $75,000 and $57,000 during the years ended December
31, 1997 and 1996, respectively.

         The Board of Directors amended the 401(k) Plan in 1997 to include
qualified non-elective contributions to satisfy minimum contributions.

9.  RELATED PARTY TRANSACTIONS

         At December 31, 1994 the Company had outstanding notes payable to a
former stockholder of approximately $2.4 million.  These notes were repaid
during 1995.

         During 1992, the Company entered into non-compete agreements and a
consulting agreement with a former employee.  The non-compete agreement is in
effect through September 1998.  As consideration for the non-compete agreement,
the Company issued a $450,000 and $800,000 note payable to the former employee
which were both paid in 1995.  The consulting agreement with the former
employee was for a period of three years ended December 31, 1995 and required
the Company to make payments to the former employee of $110,000 in 1993 and
$142,000 in 1994 and 1995.

         Interest expense related to these notes approximated $75,000 and
$293,000 for the two years ended December 31, 1995 and 1994, respectively.

         Worship International ("Worship"), a not-for-profit charitable
organization, of which the principal stockholder of the Company is a member of
the board of directors, received from the Company contributions of $477,000 and
$445,000 for the years ended December 31, 1995 and 1994, respectively.  The
Company donated $12,642 and $6,500 of inventory to Worship during 1997 and
1996, respectively.  Additionally, the Company advanced Worship $180,000 during
1995 which was repaid prior to December 31, 1995.

         One of the Company's exclusive songwriters and artists, who is also an
officer of the Company, received royalties of approximately $197,831, $206,000
and $110,000 for the three years ended December 31, 1997.  Amounts due to the
officer at December 31, 1997 and 1996 approximate $8,800 and $31,000,
respectively.

10.  SEGMENT REPORTING

         The Company is a multinational corporation with wholly-owned
subsidiaries in the United States, Australia, the United Kingdom and Singapore.
Transfers between companies primarily represent inter-company export sales of
U.S.  produced goods and are accounted for based on established sales prices
between the related companies.  Intercompany sales and profits are eliminated
during consolidation.  In computing earnings from operations for foreign
subsidiaries, no allocations of general corporate expenses, interest or income
taxes have been made.





                                       27
<PAGE>   29



INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION

   The Company operates in one industry segment.  The Company sells its
products throughout the world and operates primarily in the U.S.  Export sales
are handled through the Company's international sales division and through
certain foreign subsidiaries.  Geographic financial information is as follows
(in thousands):
<TABLE>
<CAPTION>
 1997                             United States       Europe      Australia      Other        Consolidated
-----------------------------------------------------------------------------------------------------------
 <S>                              <C>                 <C>         <C>            <C>          <C>
 Net Sales                                27,348         1,638        1,267          2,175           32,428
 Net income (loss)                          (787)          105           10          1,314              642
 Identifiable assets                      28,557         1,104          565            549           30,775
-----------------------------------------------------------------------------------------------------------
 1996                             United States       Europe      Australia      Other        Consolidated
-----------------------------------------------------------------------------------------------------------
 Net Sales                                24,673         1,763        1,638          2,321           30,395
 Net income (loss)                        (4,731)           82           29            913           (3,707)
 Identifiable assets                      28,687         1,220          630            521           31,058
-----------------------------------------------------------------------------------------------------------
 1995                             United States       Europe      Australia      Other        Consolidated
-----------------------------------------------------------------------------------------------------------
 Net Sales                                31,845         1,575        1,504          1,353           36,277
 Net income (loss)                        (2,433)          (55)         (33)           469           (2,052)
 Identifiable assets                      32,880           940          613            226           34,659
-----------------------------------------------------------------------------------------------------------
 1994                             United States       Europe      Australia      Other        Consolidated
-----------------------------------------------------------------------------------------------------------
 Net Sales                                30,534         1,558        1,409          1,301           34,802
 Net income                                2,302            10            9            491            2,812
 Identifiable assets                      25,098           611          371              0           26,080
</TABLE>





                                       28
<PAGE>   30

11.  UNAUDITED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
                                           1997 Three Months Ended
                                    (in thousands, except per share data)
                               ---------------------------------------------------
                                  Mar 31       June 30       Sept 30       Dec 31
                               ---------------------------------------------------
<S>                              <C>          <C>           <C>           <C>
Net Sales                        $ 8,103      $ 7,819       $ 8,551       $ 7,955

Gross Profit                       4,393        4,319         4,363         4,117

Net income (loss)                    184         (163)          275           346

Net income (loss) per
share                                .03         (.03)          .06           .06
</TABLE>
<TABLE>
<CAPTION>
                                           1996 Three Months Ended
                                    (in thousands, except per share data)
                               ----------------------------------------------------
                                  Mar 31       June 30       Sept 30       Dec 31
                               ----------------------------------------------------
<S>                               <C>         <C>           <C>           <C>
Net sales                         $9,762      $ 6,432       $ 7,682        $6,519

Gross profit                       5,414        3,979         4,451         1,570

Net income (loss) before
extraordinary item
                                      50         (397)          287        (3,399)
Net income (loss)                     50         (397)           39        (3,399)

Net income (loss) per
share before
extraordinary item                   .01         (.07)          .05          (.62)

Net income (loss) per
share                                .01         (.07)          .01          (.62)
</TABLE>


         Any difference between the above quarterly results and the final
results as reported herein are attributed to a tax valuation allowance charged
against the deferred tax asset during the fourth quarter 1996.

12.  STOCKHOLDERS' EQUITY

         The Company completed an initial public offering of 2,014,000 newly
authorized shares of Class A Common Stock (Offering) in July 1994.  The Company
amended its certificate of incorporation (Amendment) to reclassify all of the
shares of its Class A common stock outstanding immediately prior to the
Offering as Class B common stock (Reclassification), increase the number of
authorized shares of all classes of its capital stock and provide for the
voting rights of its Class A and Class B common stock.  The Reclassification
provided that each of the 973 shares of its Class A common stock outstanding
immediately prior to the Offering be reclassified as 3,597.12 shares of Class B
common stock.  Such Reclassification resulted in 3,500,000 shares of Class B
common stock outstanding with such shares being the only shares of the
Company's common stock outstanding prior to the Offering.  The Amendment also
increased the number of authorized shares of the Company's Class A common stock
to 7,500,000, Class B common stock to 10,500,000 and Preferred Stock to
500,000.  In addition, the Amendment provided that each holder of the Company's
Class B common stock is entitled to 10 votes per share.  Holders of Class A
common stock are entitled to one vote per share.  The rights of each share of
Class A and Class B stock are identical in all respects except voting
privileges.  No dividends were declared or paid during the years ended December
31, 1997 and 1996.

13.  STOCK COMPENSATION PLANS

          In 1994 the Company adopted the Integrity Music, Inc. Long-term
Incentive Plan (the "Incentive Plan"), which permits grants of incentive stock
options, non-qualified stock options (options), stock appreciation rights
(SARs), performance shares, restricted stock and other stock-based awards.  The
Incentive Plan, which is administered by the Compensation Committee, authorizes
the issuance of up to 525,000 shares of Class A Common Stock in connection with
such awards.  Under the Incentive Plan,





                                       29
<PAGE>   31

incentive stock options may not be granted at less than market value on the
date of grant.  At December 31, 1997, there were 350,027 options outstanding
under the Plan, granted at fair market value at date of grant, including
138,027 granted and 148,000 canceled in 1997.  As of December 31, 1997, no
options had been exercised.  In 1996, 190,000 options were granted and 81,000
were canceled.  At December 31, 1997, 60,800 options are exercisable and
289,227 options are not exercisable as they have not yet vested.   The options
outstanding at December 31, 1997 are exercisable at prices ranging from $1.563
to $6.50 per share for a total exercise price of $855,187.

         During 1995 and 1994, the Compensation Committee granted rights under
the Executive Stock Purchase Plan permitting certain employees to purchase
shares of common stock.  Under this Plan, there were 50,000 shares of Class A
common stock and 0 shares of Class B common stock reserved at December 31,
1997.

         The Company has adopted the 1994 Stock Option Plan for Outside
Directors.  Under this plan each director (other than employees, former
employees or immediate family members of current or former employees)
automatically will receive on the day following each annual meeting of
stockholders options to purchase 1,000 shares of Class A common stock which
vest immediately.  Such options have an exercise price equal to 100% of the
fair market value of the Class A Common Stock at the date of grant.  Subsequent
to the Company's initial public offering, options for 2,000 shares of Class A
common stock were granted at $9 per share (fair market value at date of grant).
The day following the 1997, 1996 and 1995 annual meetings of stockholders,
3,000 additional shares of class A common stock each year were granted to
outside directors.  At December 31, 1997, 11,000 shares were exercisable under
this plan.

         Effective December 28, 1995, the Company's Board of Directors adopted
the 1995 Cash Incentive Plan.  Awards shall be granted by the Company's
Compensation Committee and any award shall be expressed in a number of units
payable only in cash.  Vesting is one-fifth of the units of an award on each
anniversary of the date of grant until vested in full.  Participants shall
become vested in full six months after the occurrence of a change in control
(as defined by the agreement) of the Company.  The value of all units shall be
measured as the difference between the fair market value of the Company's stock
on the grant date and the fair market value of the Company's stock on any given
date subsequent to the grant date.  To the extent the fair market value of the
stock exceeds the fair market value at the date of grant, compensation expense
will be charged to the Company's statement of operations.  As of December 31,
1997, 127,500 awards have been granted.  At December 31, 1997, no liability or
provision has been made as there was no increase in the fair market value of
the stock between the grant date and the end of the year.

         The Company accounts for its stock option plans under APB Opinion No.
25, "Accounting for Stock Issued to Employees" under which no compensation
expense is recognized.  In 1996, the Company adopted Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" (SFAS
123) for disclosure purposes; accordingly, no compensation expense has been
recognized in the results of operations for its stock option plans as required
by APB Opinion No. 25.

         For disclosure purposes, the fair value of each stock option grant is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for stock options granted
in 1997, 1996 and 1995, respectively; annual dividends of zero for each year,
expected volatility of 70% for each year, risk-free interest rate equal to the
yield of a five year government bond on the various option issuance dates, and
expected life of 5 years for all grants.  The weighted-average fair value of
the stock options granted in 1997, 1996 and 1995 was $1.01, $.83 and $1.99,
respectively.

         Under the above model, the total value of stock options granted in
1997, 1996 and 1995 was $142,000, $161,000 and $193,000, respectively, which
would be amortized ratably on a pro forma basis over the five year option
vesting period.  Had the Company determined compensation cost for these plans
in accordance with SFAS No. 123, the Company's pro forma net income (loss) and
income (loss) per share would have been $543,000 and $.10 in 1997, $(3,778,000)
and $(.69) in 1996 and $(2,091,000) and $(.38) in 1995.  The SFAS No. 123
method of accounting does not apply to options granted prior to January 1,
1995, and, accordingly, the resulting pro forma compensation cost may not be
representative of that to be expected in future years.





                                       30
<PAGE>   32

2.  CONSOLIDATED FINANCIAL STATEMENT SCHEDULES

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

                             INTEGRITY INCORPORATED
        SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                         (DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                            Additions
                                                                -------------------------------
                                  Balance at      Charged to                  
                                    Beg. of       costs and       Charged to                       Balance at end
             Description            Period         expenses     other Accounts    Deductions(1)       of Period
       ------------------------------------------------------------------------------------------------------------
       <S>                              <C>           <C>                               <C>                <C>
       1993
       Allowance for returns
       and doubtful accounts            $  925        $ 6,340                           $(5,901)           $ 1,363

       1994
       Allowance for returns
       and doubtful accounts             1,363          7,770                            (7,714)             1,419

       1995
       Allowance for returns
       and doubtful accounts             1,419         10,090                            (9,833)             1,676

       1996
       Allowance for returns
       and doubtful accounts
                                         1,676          7,311                            (7,303)             1,684

       1997
       Allowance for returns
       and doubtful accounts
                                         1,684          5,174                            (6,046)               812
</TABLE>

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



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





                                       31
<PAGE>   33

3.  EXHIBITS

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

                               INDEX TO EXHIBITS

<TABLE>
<CAPTION>
   EXHIBIT
   NUMBER                                       EXHIBIT DESCRIPTION
------------------------------------------------------------------------------------------------------
   <S>        <C>
    3(i)      Certificate of Incorporation of the Registrant, as amended (incorporated by reference
              from Exhibit 4(a) to the Registrant's Registration Statement on Form S-8 (File No.
              33-84584) filed on September 29, 1994).

   3(i).1     Certificate of Amendment to the Certificate of Incorporation of the Registrant, dated
              July 21, 1995 (incorporated by reference from Exhibit 3(I).1 to the Registrant's
              Quarterly Report on Form 10-Q for the quarter ended September 30, 1995).

    3(ii)     Bylaws of the Registrant, as amended (incorporated by reference from Exhibit 3(ii) to
              the Registrant's Registration Statement on Form S-1 (File No. 33-78582), and
              amendments thereto, originally filed on May 6, 1994).

     4.1      See Exhibits 3(i), 3(i).1 and 3(ii) for provisions of the Certificate of
              Incorporation, as amended, and Bylaws, as amended, of the Registrant defining rights
              of holders of Class A and Class B Common Stock of the Registrant.

     4.2      Form of Class A Common Stock certificate of the Registrant (incorporated by reference
              from Exhibit 4.2 to the Registrant's Registration Statement on Form S-1 (File No. 33-
              78582), and amendments thereto, originally filed on May 6, 1994).

    10.1      Agreement dated as of June 1, 1994, by and between Integrity Music, Inc. and LCS
              Industries, Inc. (Portions of the foregoing have been granted confidential
              treatment.) (incorporated by reference from Exhibit 10.13 to the Registrant's
              Registration Statement on Form S-1 (File No. 33-78582), and amendments thereto,
              originally filed on May 6, 1994).

    10.2      Form of Continuity Club Membership Agreement (incorporated by reference from Exhibit
              10.25 to the Registrant's Registration Statement on Form S-1 (File No. 33-78582), and
              amendments thereto, originally filed on May 6, 1994).

    10.3      Form of Tax Indemnification Agreement by and between Integrity Music, Inc. and P.
              Michael Coleman (incorporated by reference from Exhibit 10.41 to the Registrant's
              Registration Statement on Form S-1 (File No. 33-78582), and amendments thereto,
              originally filed on May 6, 1994).

    10.4      Loan and Security Agreement, dated as of August 2, 1996, by and among Integrity
              Incorporated and Creditanstalt Corporate Finance, Inc., (incorporated by reference
              from Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter
              ended June 30, 1996).

    10.5      Stock Pledge Agreement, dated as of August 2, 1996, by Integrity Incorporated in
              favor of Creditanstalt Corporate Finance, Inc., (incorporated by reference from
              Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
              June 30, 1996).

    10.6      Conditional Assignment and Trademark Security Agreement, dated August 2, 1996,
              between Integrity Incorporated and Creditanstalt Corporate Finance, Inc.
              (incorporated by reference from Exhibit 10.3 to the Registrant's Quarterly Report on
              Form 10-Q for the quarter ended June 30, 1996).

    10.7      Collateral Assignment and Agreement, dated as of August 2, 1996, by and between
              Integrity Incorporated and Creditanstalt Corporate Finance, Inc., (incorporated by
              reference from Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the
              quarter ended June 30, 1996).
</TABLE>





                                       32
<PAGE>   34

<TABLE>
    <S>       <C>
    10.8      Copyright Security Agreement, dated as of August 2, 1996, made by Integrity
              Incorporated in favor of Creditanstalt Corporate Finance, Inc., (incorporated by
              reference from Exhibit 10.5 to the Registrant's Quarterly Report on Form 10-Q for the
              quarter ended June 30, 1996).

    10.9      Warrant Agreement, dated August 2, 1996, made by Integrity Incorporated in favor of
              Creditanstalt Corporate Finance, Inc., (incorporated by reference from Exhibit 10.6
              to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
              1996).

    10.10     Product Distribution Agreement by and between Integrity Incorporated and Word, Inc.,
              dated as of April 1, 1996. (The foregoing is the subject of a request for
              confidential treatment.) (incorporated by reference from Exhibit 10.7 to the
              Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996).

    10.11     First Amendment to Loan and Security Agreement, dated as of February 14, 1997,  by
              and among Integrity Incorporated and Creditanstalt Corporate Finance, Inc.
              (incorporated by reference from Exhibit 10.14 to the Registrant's Annual Report on
              Form 10-K for the year ended December 31, 1996).

    10.12     Amended and Restated Stock Pledge Agreement, dated as of January 22, 1997, by
              Integrity Incorporated in favor of Creditanstalt Corporate Finance, Inc.
              (incorporated by reference from Exhibit 10.15 to the Registrant's Annual Report on
              Form 10-K for the year ended December 31, 1996).
              EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS

    10.13     Integrity Music, Inc. Profit Sharing Plan (incorporated by reference from Exhibit
              10.42 to the Registrant's Registration Statement on Form S-1 (File No. 33-78582), and
              amendments thereto, originally filed on May 6, 1994).

    10.14     1994 Management Incentive Plan (incorporated by reference from Exhibit 10.43 to the
              Registrant's Registration Statement on Form S-1 (File No. 33-78582), and amendments
              thereto, originally filed on May 6, 1994).

    10.15     Integrity Music, Inc. Long-Term Incentive Plan (incorporated by reference) from
              Exhibit 4(c) to the Registrant's Registration Statement on Form S-8 (File No. 33-
              86126) filed on November 7, 1994).

    10.16     Form of Stock Option Agreement under the Integrity Music, Inc. Long-Term Incentive
              Plan (incorporated by reference from Exhibit 10.45 to the Registrant's Registration
              Statement on Form S-1 (File No. 33-78582), and amendments thereto, originally filed
              on May 6, 1994).

    10.17     Integrity Music, Inc. 1994 Stock Option Plan for Outside Directors (incorporated by
              reference from Exhibit 4(c) to the Registrant's Registration Statement on Form S-8
              (File No. 33-86128) filed on November 7, 1994).

    10.18     Form of Indemnification Agreement (incorporated by reference from Exhibit 10.47 to
              the Registrant's Registration Statement on Form S-1 (File No. 33-78582), and
              amendments thereto, originally filed on May 6, 1994).

    10.19     Integrity Music, Inc. Employee Stock Purchase Plan (incorporated by reference from
              Exhibit 4(c) to the Registrant's Registration Statement on Form S-8 (File No. 33-
              84584) filed on September 29, 1994).

    10.20     Integrity Music, Inc. 401(k) Employee Savings Plan (incorporated by reference from
              Exhibit 10.50 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
              March 31, 1995).

    10.21     Amendment Number three to the Integrity Music, Inc. 401(k) Employee Savings Plan,
              dated as of April 2, 1997 (incorporated by reference from Exhibit 10.29 to the
              Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997).

    10.22     Defined Contribution Master Plan and Trust Agreement relating to Non-Standardized
              Profit Sharing Plan (incorporated by reference from Exhibit 10.51 to the Registrant's
              Quarterly Report on Form 10-Q for the quarter ended March 31, 1995).
</TABLE>





                                                            33
<PAGE>   35

<TABLE>
    <S>       <C>
    10.23     Form of Key Employee Change in Control Agreement (incorporated by reference from
              Exhibit 10.33 to the Registrant's Annual Report on Form 10-K for the year ended
              December 31, 1995).

    10.24     Integrity Incorporated 1995 Cash Incentive Plan  (incorporated by reference from
              Exhibit 10.34 to the Registrant's Annual Report on Form 10-K for the year ended
              December 31, 1995).

    10.25     Integrity Incorporated Severance Agreement  (incorporated by reference from Exhibit
              10.35 to the Registrant's Annual Report on Form 10-K for the year ended December 31,
              1995).

    10.26     Employment Agreement by and among Integrity Incorporated and Jerry Weimer dated as of
              March 28, 1996 (incorporated by reference from Exhibit 10.28 to the Registrant's
              Annual Report on Form 10-K for the year ended December 31, 1996).

     21       Subsidiaries of the Registrant

     23       Consent of Price Waterhouse LLP.

     27       Financial Data Schedule (for SEC only)
</TABLE>

(B)  REPORTS ON FORM 8-K

   The Registrant filed no reports on Form 8-K during the last quarter of the
fiscal year ended December 31, 1997.





                                      34
<PAGE>   36

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on March 13, 1998.


                                        INTEGRITY INCORPORATED




                                        BY:  /S/ P. MICHAEL COLEMAN
                                           --------------------------
                                        P. Michael Coleman
                                              Chairman, President and
                                              Chief Executive Officer

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant in the capacities indicated on March 13,
1998.

<TABLE>
<CAPTION>
                       Signature                                                 Title
                       ---------                                                 -----
                <S>                                      <C>
                 /s/ P. Michael Coleman
             -------------------------------             
                   P. Michael Coleman                     Chairman, President and Chief Executive Officer
                                                          (Principal Executive Officer)
                /s/ Alison S. Richardson
             -------------------------------
                  Alison S. Richardson                    Senior Vice President, Administration and Finance
                                                          (Principal Financial and Accounting Officer)
                  /s/ Jean C. Coleman                     
             -------------------------------
                    Jean C. Coleman                       Director

                   /s/ John B. Ellis
             -------------------------------
                     John B. Ellis                        Director

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

                 /s/ Heeth Varnedoe III
             -------------------------------
                   Heeth Varnedoe III                     Director
</TABLE>





                                       35