<PAGE>   1


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

                                   FORM 10-K

               [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                                       OR

             [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                      FOR THE TRANSITION PERIOD FROM TO .

                         COMMISSION FILE NUMBER 0-24134

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

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

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

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

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

                                      NONE

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

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

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

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

         The aggregate market value of the Class A Common Stock held by
non-affiliates of the Registrant (assuming, for purposes of this calculation,
without conceding, that all executive officers and directors are "affiliates"),
was $7,977,200 at March 12, 1999, as reported by the Nasdaq SmallCap Market.

         The number of shares of Registrant's Class A Common Stock, $.01 par
value per share, outstanding at March 12, 1999 was 2,079,000.

         The number of shares of Registrant's Class B Common Stock, $.01 par
value per share, outstanding at March 12, 1999 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 7, 1999 are incorporated by reference into Part
III.


<PAGE>   2


         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.

                                    PART 1.

ITEM 1.  BUSINESS

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
consumers throughout the United States and internationally in over 140 other
countries worldwide. The Company has determined that its business is operated
in segments based on these distribution channels. For specific information
regarding the financial performance of each segment, see Note 9 to Notes to
Consolidated Financial Statements.

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

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

PRODUCTS

         Concept Products

         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 88th recording.

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

         Artist Products

         In addition to concept products, the Company also produces artist
recordings which have recently included "Live From The Potter's House" with
T.D. Jakes, "God Is Good" with Don Moen, "Holy Fire" with Paul Wilbur and
"Majesty" with Ron Kenoly. Previous recordings by Ron Kenoly include Welcome
Home, recipient of the Dove Foundation "Family Approved" seal of excellence;



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"Sing Out," the first Integrity title to enter Billboard's Top 200; "God is
Able", "High Places" and "Lift Him Up," which has received Gold certification
by the Recording Industry Association of America. Previous recordings by Don
Moen include the Gold-certified "Give Thanks", "Worship With Don Moen", and
"God Will Make A Way". Previous recordings by Paul Wilbur include "Shalom
Jerusalem" and "Up to Zion". A previous recording by T. D. Jakes was "Woman,
Thou Art Loosed".

         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 "Majesty", "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 and "Woman Thou Art Loosed" with T. D.
Jakes. Other products include Integrity Music Worship Software(R), designed to
assist music ministers in the selection of songs (over 5,000 featured),
planning rehearsals and services, and reviewing song usage tracking.

         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 five 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; "Because We Believe", ranked among the top 10 in the youth non-seasonal
musical charts; and the recently released "God For Us", a sequel to "God With
Us". 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 significant 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, a member of the finance department
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 140
countries.



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         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.

         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 new
mailing lists to conduct a one-time solicitation of an approved direct mailing.
Once a response is received by Integrity, the customer's name is added to the
Company's own mailing list. Integrity also builds its direct to consumer
database through space advertisements in Christian magazines and through
telemarketing.

         The Company's first continuity club, Hosanna! Music(R) has just 
produced its 88th recording. Currently the Company operates several continuity
clubs, including the Integrity Notes(R), and Urban Praise(R) series. The clubs
are launched with a mailing of a new product announcement and solicitation to as
many as 500,000 people. After the initial mailing, the Company postpones further
direct mail solicitation campaigns for up to six months, utilizing the time to
study the response and evaluate the sustainability of the initial members. If
the initial membership proves to be sustainable based on product shipments, the
Company will roll out the club in an extensive direct mail effort to an average
of 900,000 people.

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

         Retail Markets

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

         All CBA orders are fulfilled through Word, which is responsible for
warehousing Integrity's products which are shipped and invoiced based on orders
received directly from Word's sales force through a computerized order entry
system. Word services the Company's customers from one warehouse located in
Tennessee. During 1998, SoundScan ranked Word as the number 2 distribution
company in the CBA market. SoundScan also ranked Integrity as the number two
record label in CBA, from the number three position in 1997. 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.

         Retail sales efforts are supported by Integrity's own in-house staff
for marketing, covering such things as point-of-purchase advertising, radio
promotion, and product publicity.

         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 Myanmar
(formerly known as 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 140 countries. The
Company continually evaluates ways to expand into various markets through
importers or through distributors licensed to produce Integrity products from a
master recording. For specific financial information regarding the geographic
areas that the Company's international distribution network reaches, see Note 9
to Notes to Consolidated Financial Statements.



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<PAGE>   5



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

MUSIC PUBLISHING

         The Company's song catalog has accumulated ownership rights for over
2,400 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 current
contract with Word extends through March 30, 2000. All retail market sales
functions are currently performed by Word's sales force. Most 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. Some of the data
fulfillment services for direct to consumer are handled by Integrity's own
staff in Mobile. In addition to managing most of the Company's database of
customer names, 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
located in Mobile is responsible for its direct to consumer and international
warehousing, physical inventory and distribution functions.

COPYRIGHTS AND ROYALTY AGREEMENTS

         The Company's music products are protected under applicable domestic
and international copyright laws. In addition, Integrity currently has
ownership rights to approximately 2,400 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. 



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The Company competes with other record and music publishing companies, both
Christian and secular, on the basis of the Company's ability to produce new
products that are attractive to consumers, sign established and new artists and
songwriters and gain access to distribution channels.

         Many of the Company's competitors have significantly longer operating
histories and 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, 1998, the Company employed 149 individuals, 123 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
indebtedness.

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, 1998.



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                                    PART II.

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

         Integrity's common stock is traded on The Nasdaq SmallCap Market under
the symbol ITGR. The table below sets forth the quarterly high and low last
sales price per share as reported on The Nasdaq National Market and The Nasdaq
SmallCap Market for the Class A Common Stock from January 1, 1997 through
March 12, 1999. The last sale price of the Class A Common Stock on March 12,
1999 was $4.00 per share.

<TABLE>
<CAPTION>
                                        High           Low
                                        ----           ----
              <S>                       <C>            <C>
              Fiscal Year 1997
              ----------------
              First Quarter                    2.125           1.25
              Second Quarter                   2.375           1.5
              Third Quarter                    2.25            1.625
              Fourth Quarter                   2.00            1.125

              Fiscal Year 1998
              ----------------
              First Quarter                    2.00            1.00
              Second Quarter                   3.75            1.63
              Third Quarter                    3.63            2.50
              Fourth Quarter                  12.25            1.50

              Fiscal Year 1999
              ----------------
              First Quarter (through
              March 12, 1999)                  7.25            3.50
</TABLE>

         As of March 12, 1999, there were approximately 101 stockholders of
record and 1,800 beneficial stockholders 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 5 to the
financial statements.

         The Company's Class A Common Stock moved to The Nasdaq SmallCap Market
effective October 2, 1998.



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ITEM 6.  SELECTED FINANCIAL DATA

         The selected historical balance sheet and statement of operations
presented below for each of the five years in the period ended December 31,
1998 have been derived from the consolidated financial statements for the
Company audited by PricewaterhouseCoopers 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.

                             Year Ended December 31
                     (in thousands, except per share data)

<TABLE>
<CAPTION>


STATEMENT OF OPERATIONS                           1998           1997           1996           1995           1994
                                              --------       --------       --------       --------       --------
<S>                                           <C>            <C>            <C>            <C>            <C>
Net sales                                     $ 38,847       $ 34,954       $ 31,975       $ 37,671       $ 35,972
Cost of sales                                   17,985         15,236         14,981         15,547         12,636
                                              --------       --------       --------       --------       --------
Gross profit                                    20,862         19,718         16,994         22,124         23,336
Marketing and fulfillment expenses               9,023          9,450         10,711         16,308         11,992
General and administrative expenses              8,557          7,796          7,545          7,959          6,373
Loss on impairment of long-lived assets              0              0          1,200              0              0
                                              --------       --------       --------       --------       --------
Income (loss) from operations                    3,282          2,472         (2,462)        (2,143)         4,971
Interest expense (net)                           1,529          1,790          1,804          1,027            525
Other (income) expense                               0              3           (153)            65            (10)
                                              --------       --------       --------       --------       --------
Income (loss) before extraordinary item,
 minority interest and taxes                     1,753            679         (4,113)        (3,235)         4,456
Income tax (expense) benefit                       369              0            654          1,183         (1,644)
Minority interest                                 (268)           (37)             0              0              0
                                              --------       --------       --------       --------       --------
Income (loss) before extraordinary item          1,854            642         (3,459)        (2,052)         2,812
Extraordinary item from early
 extinguishment of debt less applicable
 taxes of $47                                        0              0           (248)             0              0
                                              --------       --------       --------       --------       --------
Net income (loss)                             $  1,854       $    642       $ (3,707)      $ (2,052)      $  2,812
                                              ========       ========       ========       ========       ========
Basic EPS
Income (loss) before extraordinary item       $   0.34       $   0.12       $  (0.63)      $  (0.37)      $   0.59
Extraordinary item                                   0              0          (0.04)             0              0
                                              --------       --------       --------       --------       --------
Net income (loss)                             $   0.34       $   0.12       $  (0.67)      $  (0.37)      $   0.59
                                              ========       ========       ========       ========       ========
Diluted EPS
Income before extraordinary item              $   0.32       $   0.12       $  (0.63)      $  (0.37)      $   0.59
Extraordinary item                                   0              0          (0.04)             0              0
                                              --------       --------       --------       --------       --------
Net income                                    $   0.32       $   0.12       $  (0.67)      $  (0.37)      $   0.59
                                              ========       ========       ========       ========       ========
Weighted average number of shares
 outstanding
     Basic                                       5,514          5,514          5,514          5,514          4,744
     Diluted                                     5,805          5,514          5,514          5,514          4,744
</TABLE>



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                               As of December 31
                                 (in thousands)
<TABLE>
<CAPTION>

BALANCE SHEET DATA                                1998           1997           1996           1995           1994
                                              --------       --------       --------       --------       --------
<S>                                           <C>            <C>            <C>            <C>            <C>
Net working capital                           $  9,827       $  9,905       $ 10,467       $ (6,052)      $  9,079
Total assets                                    31,617         30,775       $ 31,058         34,659         26,080
Total bank debt(3)                              12,968         15,117         18,304         18,018          5,093
Stockholders' equity                            12,981         11,196         10,487         12,693         14,800
</TABLE>

(3)      Includes discount of $832 at December 31, 1998, $1,064 at December 31,
         1997 and $1,296 at December 31, 1996.



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

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

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. Some of the Company's concept products are Hosanna! Music
and Just-For-Kids. The Company has several artists under contract, including
leaders in Christian music such as Don Moen, Ron Kenoly and Paul Wilbur. In
addition to audio recordings, Integrity produces Christian music songsheets,
software and video products. The Company has determined that its reportable
segments are those that are based on the Company's distribution channels. These
distribution channels are Retail, Direct to consumers, International and Other
channels. The Retail channel primarily represents sales to Christian bookstores
either directly from the Company or through third party distributors. Direct to
consumers primarily represents sales from direct mail programs but also
includes Internet sales, special event sales, and sales of choral and print
products directly to churches, including sales of the Celebration Hymnal
through a joint venture controlled by the Company. The International channel
represents an international distribution network that reaches markets in over
140 countries. All transactions with foreign entities, whether they are shipped
from the U.S. or one of the Company's three subsidiaries in Singapore, the
United Kingdom and Australia are reported in the segment. Christian bookstores
are the primary distribution channel for this segment, but there are also
direct mail and other techniques used for these markets. Other channels include
copyright revenue, excess inventory and other small distribution sales.

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

<TABLE>
<CAPTION>

                                1998            1997           1996
                                ----            ----           ----
<S>                             <C>             <C>            <C>
Direct to Consumer              34.6%           33.2%          35.0%
Retail Markets                  37.8%           40.7%          34.2%
International                   16.5%           18.2%          20.3%
Other                           11.1%           7.9%           10.5%
</TABLE>

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

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.

                            Percentage of Net Sales
                             Year Ended December 31
<TABLE>
<CAPTION>
                                                 1998             1997        1996
                                                -----            -----       -----
<S>                                             <C>              <C>         <C>
Net Sales                                       100.0%           100.0%      100.0%
Cost of Sales                                    46.3%            43.6%       46.9%
                                                -----            -----       -----
Gross Profit                                     53.7%            56.4%       53.1%
Marketing and Fulfillment
Expenses                                         23.2%            27.0%       33.5%
General and Administrative
Expenses                                         22.0%            22.3%       23.6%
Loss on impairment of building
                                                  0                0           3.8%
                                                -----            -----       -----
Income (loss) from operations
before taxes and minority
interest                                          8.5%             7.1%       (7.8)%
                                                =====            =====       =====
</TABLE>




                                       9
<PAGE>   11



THE YEAR ENDED DECEMBER 31, 1998 ("1998") COMPARED TO THE YEAR ENDED DECEMBER
31, 1997 ("1997")

         Net sales increased 11.1% to $38.8 million in 1998 from $35.0 million
in 1997, mainly attributable to strong unit sales during 1998. Unit sales
increased by 31.4% to 6.7 million in 1998, from 5.1 million in 1997 due to 54
major releases and strong catalog sales from prior releases such as "Shout To
The Lord", "God Can" and "Let Your Glory Fall". In 1998, new products accounted
for 2.0 million units, or 30.0% of the total units sold. The new products
offered were from existing product lines as well as new product lines featuring
several of Integrity's best-selling artists, such as Don Moen, Ron Kenoly and
Paul Wilbur. Sales in the direct to consumer segment increased 15.8% to $13.4
million, compared to $11.6 million in 1997. The increase in the direct to
consumer segment was mainly due to increases in direct sales to churches of The
Celebration Hymnal. Copyright and royalty income increased $618,000 to $4.3
million or 16.9%, compared to $3.7 million in 1997. Revenues across the
Company's other segments were relatively flat from year to year. Bad debts and
returns were $5.0 million in 1998 as compared to $6.0 million in 1997.

         Gross profit increased 5.8% to $20.9 million in 1998 from $19.7
million in 1997 due primarily to the increase in sales discussed above. Gross
profit as a percentage of sales was 53.7% and 56.4% for the years ended
December 31, 1998 and 1997, respectively. The decrease in gross profit as a
percentage of sales was primarily the result of a $700,000 write-down of
certain older product masters that are no longer expected to recoup their costs
as well as several bulk sales of older products at reduced prices during 1998.

         Marketing and fulfillment expenses decreased 4.5% to $9.0 million or
23.2% of net sales in 1998, as compared with $9.5 million or 27.0% of net sales
in 1997. This decrease was primarily attributable to lower, but more productive
and targeted, marketing expenses in the direct to consumer segment.

         General and administrative expenses increased 9.8% to $8.6 million or
22.0% of net sales in 1998, compared to $7.8 million or 22.3% of net sales in
1997. The increase in expenditures was mainly attributable to increases in
personnel costs required to support the growth in the business.

         As a result of the above, income from operations was $3.3 million or
8.5% of net sales in 1998, compared with $2.5 million or 7.1% of net sales in
1997.

         Interest expense decreased to $1.5 million in 1998 compared with $1.8
million in 1997. The decrease was a result of lower average debt balances in
1998.

         The Company recorded a net benefit from income taxes during 1998 of
approximately $369,000 primarily as a result of a $750,000 reduction in the
valuation allowance against deferred tax assets. This non-cash benefit is the
result of two consecutive years of profitability coupled with management's
expectations to generate taxable income in future periods to utilize those
deferred tax assets, primarily net operating loss carry-forwards.

THE YEAR ENDED DECEMBER 31, 1997 ("1997") COMPARED TO THE YEAR ENDED DECEMBER
31, 1996 ("1996")

         Net sales increased 9.3% to $35.0 million in 1997 from $32.0 million
in 1996, mainly attributable to increased unit sales during 1997. 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. Sales in the retail
segment increased 30% to $14.2 million, compared to $11.0 million in 1996
primarily due to the success of the new products released in 1997. The Company
also experienced strong increases in copyright revenues, from $2.9 million in
1996 to $3.7 million in 1997. The direct to consumer segment increased $0.4
million, or 3.6% to $11.6 million, compared to $11.2 million in 1996, mainly as
a result of the Company's focus on smaller, yet more profitable direct to
consumer advertising mailings. Sales in the international segment were
relatively flat from year to year. Bad debts and returns were $6.0 million in
1997 as compared to $7.3 million in 1996.

         Gross profit increased 16.0% to $19.7 million in 1997 from $16.9
million in 1996 due primarily to the sales increases discussed above. Gross
profit as a percentage of sales was 56.4% and 53.1% for the years ended
December 31, 1997 and 1996, respectively. The increase in gross profit as a
percentage of sales was primarily the result of a $1.7 million write down of
certain product masters in 1996 with no comparable amount in 1997.



                                      10
<PAGE>   12



         Marketing and fulfillment expenses decreased 11.8% to $9.5 million or
27.0% of net sales in 1997, as compared with $10.7 million or 33.5% of net
sales in 1996. This decrease was primarily attributable to lower, but more
productive and targeted, marketing expenses in the direct to consumer segment.

         General and administrative expenses increased 3.3% to $7.8 million or
22.3% of net sales in 1997, compared to $7.5 million or 23.6% of net sales in
1996. The increase in expenses 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.

         Operating expenses were higher by $1.2 million 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".

         As a result of the above, income from operations was $2.5 million or
7.1% of net sales in 1997, compared with loss of $2.5 million or (7.8%) of net
sales in 1996.

         Interest expense was relatively flat from year to year.

         The Company did not record any provision for or benefit from income
taxes during 1997 as current period income was offset by net operating loss
carryforwards. After careful review by management, it was determined that the
remaining valuation allowance of $1.3 million at December 31, 1997 was still
required as it was not more likely than not, based on past operating
performance and current plans, that such amount would not be utilized in the
future.

LIQUIDITY AND CAPITAL RESOURCES

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

         Cash generated from operations totaled $7.3 million, $6.4 million and
$3.1 million for the years ended December 31, 1998, 1997 and 1996,
respectively. The increase from 1997 to 1998 resulted primarily from increased
earnings before depreciation and amortization. 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 segments.

         Capital expenditures totaled $0.5 million, $0.3 million and $0.6
million for the years ended December 31, 1998, 1997 and 1996, respectively.
During 1998 and 1997, capital expenditures were primarily for computer
equipment and general improvements on the Company's corporate headquarters. The
Company also invested $4.2 million, $3.3 million and $3.3 million in new
product masters during 1998, 1997 and 1996, respectively. The Company expects
its investments in capital expenditures and product masters during 1999 to
remain relatively consistent with 1998 levels.

         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 warrants became
exercisable in August 1998. During the years ended December 31, 1998 and 1997,
the Company made payments of $2.3 million and $1.7 million, respectively, under
such agreements. At December 31, 1998, the Company had available borrowings of
$1.9 million under such agreements.

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



                                      11
<PAGE>   13



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

         The Year 2000 Problem

         The Company is devoting resources throughout its business operations
to minimize the risk of potential disruption from the "Year 2000" problem. This
problem is a result of computer programs having been written using two digits
rather than four to define the applicable year. Information technology ("IT")
systems that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000, which could result in miscalculations
and system failures. The problem also extends to certain operating and control
systems that rely on embedded chip systems. In addition, like every other
business enterprise, the Company is at risk from Year 2000 failures on the part
of its major business counterparts, including suppliers, distributors,
contractors and service providers, as well as potential failures in public and
private infrastructure service, including electricity, water, gas,
transportation and communications.

         State of Readiness

         If the Company or its significant suppliers, distributors, contractors
and service providers do not successfully achieve Year 2000 compliance, the
Company's financial condition and results of operations could be materially and
adversely affected, resulting from, among other things, the Company's inability
in a timely manner: 
         -        to efficiently manufacture, sell and ship existing products 
                  to distributors, 
         -        to collect accounts receivable, and 
         -        to produce and effectively market new products.

         In December 1998, the Company formed a Year 2000 committee to identify
and address any potential Year 2000 problems with the Company's internal IT
systems, non-IT systems and products, as well as with its suppliers,
distributors, contractors and service providers. This phase involved a review
of all IT and significant non-IT systems and Company products, and testing of
the Company's IT systems and significant non-IT systems. The Company completed
this phase in February 1999 and determined that its internal IT systems are
Year 2000 compliant, including all in-house software. In addition, the Company
plans to perform a full scale Year 2000 simulation of its IT systems in May
1999.

         Except for the Company's telephone system which will be replaced with
a Year 2000 compliant telephone system in April 1999, the Company has
determined that all internal non-IT systems and products either are Year 2000
compliant or a Year 2000 problem with such non-IT system or product will not be
material to the Company's operation. In making this determination, the Company
relied upon representations from certain third parties, including the vendors
of its significant studio and recording equipment.

         As described in Item 1, the Company's business depends upon the
accurate and timely fulfillment of certain operations contracted to third-party
service providers and manufacturers, including Word in the retail market
segment, LCS in the direct to consumer segment, numerous international
distributors in the international segment, and Eva-Tone in the production of
musical recordings from the Company's master recordings. In February 1999, the
Company developed a Year 2000 compliance questionnaire and solicited its
principal suppliers, distributors, contractors and service providers to
determine such party's Year 2000 status. As of March 1999, Word and Eva-



                                      12
<PAGE>   14



Tone have provided assurances that their systems are Year 2000 compliant. In
addition, Eva-Tone indicated that all of its suppliers were Year 2000
compliant, and that in April 1999 it would perform a Year 2000 simulation
involving actual orders with its suppliers and vendors. LCS has indicated that
although the system it currently uses to fulfill its contract obligations with
the Company is not Year 2000 compliant, it will move these operations to its
existing Year 2000 compliant system in May 1999. Most significant distributors
in the international segment have not been able to provide any assurances their
systems are or will become Year 2000 compliant.

         Costs to Address Year 2000

         The total cost associated with the Company's Year 2000 remediation is
not expected to exceed $40,000 or be material to the Company's financial
condition or results of operations. The Company has not employed any outside
consultants regarding Year 2000 remediation, and has not made any significant
Year 2000 expenditures through the end of March 1999. The Company anticipates
spending approximately $25,000 in April 1999 to replace its non-Year 2000
compliant telephone system. All other Year 2000 remediation costs will be
incurred in the form of compensation and benefits of internal employees working
on the Company's Year 2000 project.

         The Company's Year 2000 Risks and Contingency Plan

         There can be no assurance that unanticipated or undiscovered Year 2000
compliance problems will not have a material adverse effect on the Company's
financial condition or results of operations. Such problems could result in a
diversion of resources away from the Company's core business, and the Company's
inability to efficiently sell and ship products to distributors, collect
accounts receivable in a timely manner, and produce and market new products.
These issues could in turn lead to significant additional operating costs and a
decrease in product sales, as well as damage the Company's reputation in the
industry. Upon a Year 2000 failure by one of the Company's domestic contractors
or service providers, including Word, LCS or Eva-Tone, the Company's
contingency plan includes utilizing alternate distributors, contractors and
service providers and moving certain fulfillment functions in-house, such as
order and payment processing. However, because of the volume of transactions
that could be required to be performed upon the failure of a contractor such as
LCS, the Company can not be certain it would be able to timely fulfill its
domestic orders in-house, and as a result, the Company could suffer a
significant decline in sales.

         However, the most reasonably likely worst case Year 2000 scenario is
that the Company's international distributors will encounter Year 2000 problems
and will not be able to utilize their systems to efficiently sell and
distribute the Company's products overseas. The Company is developing a
contingency plan to address this scenario pursuant to which the Company would
utilize alternate distributors and its foreign subsidiaries to fulfill
international orders. However, due to the number and diversity of environments
in which these distributors operate, the Company can not be certain that it
would be able to timely fulfill international orders under these circumstances
and that such a Year 2000 problem would not have a material adverse effect on
the Company's financial condition or results of operation.

         Year 2000 Forward-Looking Statements

         The foregoing Year 2000 discussion contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements, including without limitation, anticipated costs and
the dates by which the Company expects to complete actions, are based on
management's best current estimates, which were derived utilizing numerous
assumptions about future events, including the continued availability of
certain resources, representations received from third parties and other
factors. However, there can be no guarantee that these estimates will be
achieved, and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, results of
further Year 2000 testing, adequate resolution of Year 2000 problems by
suppliers, distributors, contractors or service providers of the Company, the
adequacy of and ability to further develop and implement contingency plans and
similar uncertainties. The "forward-looking statements" contained in the
foregoing Year 2000 discussion speak only as of the date on which such
statements are made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events.



                                      13
<PAGE>   15



                                  RISK FACTORS

OUR COMPETITION INCLUDES OTHER MUSIC COMPANIES AND GENERAL ENTERTAINMENT 
COMPANIES

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

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

OUR INDUSTRY IS SUBJECT TO CONSUMER TASTES AND DEMANDS

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

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

OUR BUSINESS IS DEPENDENT ON ACCESS TO DISTRIBUTION CHANNELS

         We distribute our products through three primary channels:
                  -        Direct to Consumer
                  -        Retail Sales; and
                  -        License Arrangements.
If our access to any of these channels is interrupted, our sales could be
significantly affected.

         The direct to consumer channel is based on a variety of methods, but
primarily is composed of our continuity clubs. The performance of these clubs
could be affected by a number of factors including:
         -        the maturity of our mailing lists such that consumers no 
         longer desire our products and cancel their participation; 
         -        our failure to expand and revise our mailing lists to include
         new potential customers, or the inability to secure new mailing lists
         from which to build ours; 
         -        our failure to offer new and appealing products to these
         customers; and 
         -        increases in the cost of mailing and shipping, or increased 
         regulation of mail order sales.

         Currently, we rely on Word's sales force to perform all retail market
sales functions for us, pursuant to a contract with them that extends through
March 30, 2000. Failure to successfully renegotiate this contract with Word or
failure of Word to fulfill the terms under this contract will immediately and
adversely affect our sales.

         In addition to our retail distribution channel, our international
distribution channel also relies heavily on third parties to sell and deliver
our products. We cannot quickly replace these third parties should they fail to
perform, nor can we assume their duties in a timely manner. As a result, 



                                      14
<PAGE>   16



the failure by any of these parties to fulfill their duties effectively and
efficiently will immediately and adversely affect our sales.

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

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

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

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

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

OUR CHANGE TO THE SMALLCAP MARKET MAY NOT RESULT IN AN ACTIVE TRADING MARKET

         On February 23, 1998, new listing and maintenance rules for inclusion
on both the Nasdaq National Market and The Nasdaq SmallCap Market became
effective. Under the new rules, the market value of our publicly-traded shares
failed to meet the listing requirements for the Nasdaq National Market. As a
result, our Class A Common Stock has been moved to The Nasdaq SmallCap Market.
The transition to The Nasdaq SmallCap Market became effective on October 2,
1998. We can not be certain that our transition to and position in The SmallCap
Market will result in an active trading market for our Class A Common Stock.

OUR COMPANY IS CONTROLLED BY THE COLEMAN FAMILY

         Our Chairman, President and Chief Executive Officer, P. Michael
Coleman, and his family beneficially own 65,100 shares of Class A Common Stock
and all 3,435,000 shares of Class B Common Stock outstanding. This represents
approximately 94.3% of the total voting power of all classes of our voting
stock. As a result, Mr. Coleman is able to elect all of our directors, amend
our Amended Certificate of Incorporation (the "Amended Certificate"), effect or
prevent a merger, sale of assets or other business acquisition or disposition,
and otherwise control the outcome of actions requiring stockholder approval.

         See "Security Ownership of Certain Beneficial Owners and Management"
and "Certain Relationships and Related Transactions."

THE CLASS A COMMON STOCK HAS LIMITED VOTING RIGHTS

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

         The disproportionate voting rights between our classes of stock could
adversely affect the market price of our Class A Common Stock. The
disproportionate voting rights may also make us a 



                                      15
<PAGE>   17



less attractive target for a takeover than we otherwise might be, and render
more difficult or discourage a merger proposal, a tender offer, or a proxy
contest even if such actions were favored by holders of our Class A Common
Stock.

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

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

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

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

THE MARKET PRICE OF OUR COMMON STOCK COULD BE VOLATILE

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

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

         The Company's market risk is limited to fluctuations in interest rates
as it pertains to the Company's borrowings under its credit facility. The
Company pays interest on borrowings at either the lender's offered rate plus 1
1/2%, or LIBOR plus 3%. If the interest rates on the Company's borrowings
average 100 basis points more in 1999 than they did in 1998, the Company's
interest expense would increase and income before income taxes would decrease
by $121,000. This amount is determined solely by considering the impact of the
hypothetical change in the interest rate on the Company's borrowing cost
without consideration for other factors such as actions management might take
to mitigate its exposure to interest rate changes.

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

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

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

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

         Not applicable.



                                      16
<PAGE>   18



                                   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 - Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's 1999 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 1999 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 1999 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 1999 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                                                                 18
Consolidated Balance Sheets at December 31, 1998 and 1997                                         19
Consolidated Statement of Operations for the three years ended December 31, 1998                  20
Consolidated Statement of Changes in Stockholders' Equity for the three years ended December
31, 1998                                                                                          21
Consolidated Statement of Cash Flows for the three years ended December 31, 1998                  22
Notes to Consolidated Financial Statements                                                        23
2.  Financial Statement Schedules:
For the three years ended December 31, 1998                                                       34
II - Valuation and Qualifying Accounts and Reserves
</TABLE>



                                      17
<PAGE>   19





                       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 17 present fairly, in
all material respects, the financial position of Integrity Incorporated and its
subsidiaries at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, 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.




PRICEWATERHOUSECOOPERS LLP

Atlanta, GA
February 19, 1999



                                      18
<PAGE>   20



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

<TABLE>
<CAPTION>

                                                                                              December 31
ASSETS                                                                                            1998           1997
                                                                                                --------       --------
<S>                                                                                           <C>              <C>
Current Assets
   Cash                                                                                         $    989       $    523
   Trade receivables, less allowance for returns and doubtful accounts of $696
   and $812                                                                                        4,913          4,258
   Other receivables                                                                               1,637          2,033
   Inventories                                                                                     4,528          5,524
   Other current assets                                                                            3,831          2,706
                                                                                                --------       --------
      Total current assets                                                                        15,898         15,044

Property and equipment, net of accumulated depreciation of $3,575 and $3,085                       3,473          3,499
Product masters, net of accumulated amortization of $11,325 and $7,537                             9,050          8,618
Other assets                                                                                       3,196          3,614
                                                                                                --------       --------
      Total assets                                                                              $ 31,617       $ 30,775
                                                                                                ========       ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
   Current portion of long-term debt                                                            $  1,847       $  1,838
   Accounts payable and accrued expenses                                                           2,732          2,156
   Royalties payable                                                                                 569            908
   Other current liabilities                                                                         923            237
                                                                                                --------       --------
      Total current liabilities                                                                    6,071          5,139

Long-term debt                                                                                    11,121         13,279
Other long-term liabilities                                                                           60            207
                                                                                                --------       --------
      Total liabilities                                                                           17,252         18,625
                                                                                                --------       --------

Commitments and contingencies                                                                         --             --

Minority interest                                                                                  1,384            954
                                                                                                --------       --------

Stockholders' Equity
   Preferred stock, $.01 par value; 500,000 shares authorized, none issued and 
outstanding                                                                                            0              0
   Class A common stock, $.01 par value; 7,500,000 shares authorized;
2,079,000 shares issued and outstanding                                                               21             21
   Class B common stock, $.01 par value, 10,500,000 shares authorized; 
3,435,000 shares issued and outstanding                                                               34             34
   Additional paid-in capital                                                                     13,428         13,428
   Accumulated deficit                                                                              (449)        (2,303)
   Equity adjustments from foreign translation                                                       (53)            16
                                                                                                --------       --------
      Total stockholders' equity                                                                  12,981         11,196
                                                                                                --------       --------
         Total liabilities and stockholders' equity                                             $ 31,617       $ 30,775
                                                                                                ========       ========
</TABLE>

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



                                      19
<PAGE>   21



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

<TABLE>
<CAPTION>

                                                                          Year Ended December 31
                                                                          1998               1997              1996
                                                                      --------           --------          --------
<S>                                                                   <C>                <C>               <C>
Net sales                                                             $ 38,847           $ 34,954          $ 31,975
Cost of sales                                                           17,985             15,236            14,981
                                                                      --------           --------          --------
Gross profit                                                            20,862             19,718            16,994

Marketing and fulfillment expenses                                       9,023              9,450            10,711
General and administrative expenses                                      8,557              7,796             7,545
Loss on impairment of long-lived assets                                      0                  0             1,200
                                                                      --------           --------          --------
   Income (loss) from operations                                         3,282              2,472            (2,462)

Other expenses (income)
   Interest expense, net                                                 1,529              1,790             1,804
   Other expenses (income)                                                   0                  3              (153)
                                                                      --------           --------          --------
   Income (loss) before extraordinary item,
   minority interest and taxes                                           1,753                679            (4,113)
Benefit from income taxes                                                  369                  0               654
Minority interest, less applicable taxes                                  (268)               (37)                0
                                                                      --------           --------          --------
Income (loss) before extraordinary item                                  1,854                642            (3,459)
Extraordinary item from early extinguishment of
debt, less applicable taxes of $47                                           0                  0              (248)
                                                                      --------           --------          --------
Net income (loss)                                                     $  1,854           $    642          $ (3,707)
                                                                      ========           ========          ========

Adjustments to determine comprehensive income
Foreign currency translation adjustments                                   (69)                67               108
                                                                      --------           --------          --------
Comprehensive income                                                  $  1,785           $    709          $ (3,599)
                                                                      ========           ========          ========
BASIC EPS
Income (loss) before extraordinary item                                   0.34               0.12             (0.63)
Extraordinary item                                                           0                  0             (0.04)
                                                                      --------           --------          --------
Net income (loss)                                                     $   0.34           $   0.12          $  (0.67)
                                                                      ========           ========          ========
DILUTED EPS
Income (loss) before extraordinary item                                   0.32               0.12             (0.63)
Extraordinary item                                                           0                  0             (0.04)
                                                                      --------           --------          --------
Net income (loss)                                                     $   0.32           $   0.12          $  (0.67)
                                                                      ========           ========          ========
Weighted average number of shares outstanding (note 1)
   Basic                                                                 5,514              5,514             5,514
   Diluted                                                               5,805              5,514             5,514
</TABLE>

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



                                      20
<PAGE>   22



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

<TABLE>
<CAPTION>

                                        Class A                     Class B                       (Accum.
                                      Common Stock               Common Stock       Additional    Deficit)   Equity Adj.
                                                                                      Paid-in     Retained      From        Total
                                 Shares          Amount        Shares      Amount     Capital     Earnings   Translations   -----
                                 ------          ------        ------      ------   ----------    --------   ------------
<S>                            <C>             <C>           <C>           <C>      <C>           <C>        <C>            <C>
Balance, December 31, 1995     2,079,000            21       3,435,000       34       12,035          762        (159)      12,693
  Net loss                                                                                         (3,707)                  (3,707)
  Issue of stock warrants                                                              1,393                                 1,393
  Translation adjustments                                                                                         108          108
                              ----------------------------------------------------------------------------------------------------
Balance, December 31, 1996     2,079,000            21       3,435,000       34       13,428       (2,945)        (51)      10,487
  Net income                                                                                          642                      642
  Translation adjustments                                                                                          67           67
                              ----------------------------------------------------------------------------------------------------
Balance, December 31, 1997     2,079,000            21       3,435,000       34       13,428       (2,303)         16       11,196
  Net income                                                                                        1,854                    1,854
  Translation adjustments                                                                                         (69)         (69)
                              ----------------------------------------------------------------------------------------------------
Balance, December 31, 1998     2,079,000       $    21       3,435,000     $ 34     $ 13,428      $  (449)      $ (53)      12,981
                              ====================================================================================================
</TABLE>

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



                                      21
<PAGE>   23



                             INTEGRITY INCORPORATED
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                            Year Ended December 31
                                                                          1998           1997           1996
                                                                      --------       --------      ---------
<S>                                                                   <C>            <C>           <C>
Cash flows from operating activities
Net income (loss)                                                     $  1,854       $    642      $  (3,707)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
   Depreciation and amortization                                         1,202          1,331            860
   Loss on impairment of long-lived assets                                   0              0          1,200
   Amortization of product masters                                       3,787          3,250          4,714
   Extraordinary loss on debt extinguishment                                 0              0            295
   Minority interest                                                       268             37              0
   Deferred income tax benefit                                            (527)             0           (509)
    Changes in operating assets and liabilities
       Trade receivables                                                  (655)           (63)           996
       Other receivables                                                   396         (1,090)           984
       Inventories                                                         996           (382)          (151)
       Other assets                                                       (691)         1,337            (54)
       Accounts payable, royalties payable and
       accrued expenses                                                    200          1,109         (1,382)
       Other current and non current liabilities                           468            206           (191)
                                                                      --------       --------      ---------
Net cash provided by operating activities                                7,298          6,377          3,055
                                                                      --------       --------      ---------
Cash flows from investing activities
   Purchases of property and equipment                                    (463)          (299)          (583)
   Payments for product masters                                         (4,220)        (3,267)        (3,329)
                                                                      --------       --------      ---------
Net cash used in investing activities                                   (4,683)        (3,566)        (3,912)
                                                                      --------       --------      ---------
Cash flows from financing activities
   Net (repayments) borrowings under line of credit                        169         (2,040)       (12,018)
   Proceeds from issuance of long-term debt                                  0            300         14,000
   Principal payments of long-term debt                                 (2,318)        (1,679)          (400)
   Loan issuance cost                                                        0              0           (639)
                                                                      --------       --------      ---------
      Net cash (used) provided by financing activities                  (2,149)        (3,419)           943
                                                                      --------       --------      ---------
Net (decrease) increase in cash                                            466           (608)            86
Cash, beginning of year                                                    523          1,131          1,045
                                                                      --------       --------      ---------
Cash, end of year                                                     $    989       $    523      $   1,131
                                                                      ========       ========      =========
Supplemental disclosures of cash flow information
   Interest paid                                                      $  1,355       $  1,790      $   1,638
   Income taxes paid                                                  $      0       $     37      $       0
Noncash financing activities
   Issuance of stock purchase warrants for debt                       $      0       $      0      $   1,393
</TABLE>

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



                                      22
<PAGE>   24



                             INTEGRITY INCORPORATED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

         The Company's significant accounting policies are as follows:

PRINCIPLES OF CONSOLIDATION

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

REVENUE RECOGNITION

         Revenue is recognized at the time 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.

CASH AND CASH EQUIVALENTS

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

INVENTORIES

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

MARKETING COSTS

         The Company incurs marketing costs utilizing various media to generate
direct sales to customers. Marketing expenditures that benefit future periods
are capitalized and charged to operations using the straight-line method over a
period of six months, which approximates the period during which the related
sales are expected to be realized. Other marketing costs are expensed the first
time advertising takes place. Prepaid marketing costs, including artwork,
printing and direct mail packages, are included in assets in the accompanying
financial statements and approximated $1,326,000 and $1,119,000 at December 31,
1998 and 1997, respectively. Marketing costs expensed for the three years ended
December 31, 1998, 1997 and 1996 approximated $4,455,000, $4,626,000 and
$6,099,000, respectively.

PROPERTY AND EQUIPMENT

         Property and equipment are stated at cost. Depreciation is provided
over the estimated useful lives of the assets using the straight-line method.
The useful lives of buildings are 14 to 25 years; leasehold improvements, 2
years; data processing equipment, 5 years; studio equipment, 5 years; and
furniture and fixtures, 5 to 7 years. Repairs and maintenance costs which do
not increase the useful lives of the assets are charged to expense as incurred.
Additions, 



                                      23
<PAGE>   25



improvements and expenditures that significantly add to the productivity or
extend the life of an asset are capitalized. When assets are replaced or
otherwise disposed of, the cost and related accumulated depreciation are
removed from the accounts and any gain or loss is reflected in income.

PRODUCT MASTERS

         Product masters, which include sound recordings and print masters, are
amortized over their future estimated useful lives, using a method that
reasonably relates to the amount of net revenue expected to be realized.
Management periodically reviews the product masters amortization rates and
adjusts the amortization rate based on management's estimates for future sales.
In conjunction with such analysis, any amounts that do not appear to be fully
recoverable are charged to expense during the period the loss becomes evident.
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 demonstrates such
amounts will be recoverable from future royalties to be earned by the artist.
Such capitalized amounts are included as a component of product masters in the
consolidated balance sheet. Any portion of advances that subsequently appear
not to be recoverable from future royalties are charged to expense during the
period the loss becomes evident. The amount of capitalized advance royalties
aggregated $1,256,000 and $889,000 at December 31, 1998 and December 31, 1997,
respectively.

INCOME TAXES

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

STOCK-BASED COMPENSATION PLANS

         The Company has elected to account for its stock-based compensation
plans under Accounting Principals Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25) with the associated disclosure requirements of
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-based Compensation" (SFAS No. 123) in Note 11. SFAS No. 123 requires that
companies which elect to not account for stock-based compensation as prescribed
by that statement shall disclose among other things, pro forma effects on net
income and net income per share as if SFAS No. 123 had been adopted. Under APB
No. 25, because the exercise price of the Company's employee stock options
equal the market price of the underlying stock on the date of the grant, no
compensation expense is recognized.

EARNINGS PER SHARE

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

COMPREHENSIVE INCOME

         Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130).
SFAS 130 establishes standards for the reporting and display of comprehensive
income.

FAIR VALUE OF FINANCIAL INSTRUMENTS

         The carrying amounts of financial instruments including cash, cash
equivalents, accounts receivable, accounts payable and accrued expenses
approximate fair value. The carrying amount 



                                      24
<PAGE>   26



of long-term debt approximates fair value based on current rates of interest
available to the Company for loans of similar maturities.

SIGNIFICANT ESTIMATES

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

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

RECLASSIFICATIONS

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

2.       OTHER CURRENT ASSETS

Other current assets consist of the following:

<TABLE>
<CAPTION>

                                                                     December 31
                                                                    (in thousands)
                                                                       1998               1997
                                                                    -------            -------
      <S>                                                           <C>                <C>
      Prepaid supplies                                              $ 1,780            $ 1,087
      Prepaid marketing costs                                         1,326              1,119
      Deferred tax assets                                               642                 81
      Other                                                              83                419
                                                                    -------            -------
                                                                    $ 3,831            $ 2,706
                                                                    =======            =======

3.       PROPERTY AND EQUIPMENT

Property and equipment consists of:

                                                                     December 31
                                                                    (in thousands)
                                                                       1998               1997
                                                                    -------            -------
                                      
      Land                                                          $   625            $   625
      Buildings and leasehold improvements                            2,633              2,611
      
      Data processing and other equipment                             1,354              1,105
      Studio equipment                                                1,062                950
      Furniture and fixtures                                          1,374              1,293
                                                                    -------            -------
                                                                      7,048              6,584
      Less - accumulated depreciation                                (3,575)            (3,085)
                                                                    -------            -------
                                                                    $ 3,473            $ 3,499
                                                                    =======            =======
</TABLE>

         Depreciation expense approximated $499,000, $509,000 and $600,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.

         During 1996, the Company recorded a charge to earnings of $1.2 million
related to the abandonment of its Corporate headquarters construction project
prior to completion.



                                      25
<PAGE>   27



4.       OTHER ASSETS

Other assets consist of the following:

<TABLE>
<CAPTION>

                                                                     December 31
                                                                    (in thousands)
                                                                       1998               1997
                                                                    -------            -------
<S>                                                                 <C>                <C>
Music copyrights, net of accumulated
amortization                                                        $ 2,014            $ 2,191
Deferred tax assets                                                     494                528
Other                                                                   688                895
                                                                    -------            -------
                                                                    $ 3,196            $ 3,614
                                                                    =======            =======
</TABLE>


         The music copyrights are being amortized over their future estimated
useful lives, which approximates fifteen years. Accumulated amortization at
December 31, 1998 and December 31, 1997 approximates $588,000 and $416,000,
respectively.

5.       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, 1998, the interest rates on the $4.1 million
outstanding Revolver were 9.25%; and on the $9.5 million outstanding Term Loan
were 8.22%. At December 31, 1997 the interest rates on the $3.9 million
outstanding revolver were 8.9% and on the $11.6 million outstanding term loan
were 8.8%.

         At December 31, 1998, the Company had approximately $1.9 million of
available funds under the Revolver.

         The Company, in conjunction with the 1996 financing, issued warrants
which are outstanding at December 31, 1998, 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 are subject to
adjustment upon the issuance of additional shares of common stock by the
Company. As a result of the issuance of shares of Class A Common Stock
associated with the exercise of stock options and certain restricted stock
grants, the Company expects that the warrants will be adjusted in the near
future. The warrants became 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. Such discount is
being accreted to interest expense on a straightline basis over the term of the
facility. At December 31, 1998, the book value of the discount is $832,000 net
of accumulated amortization of $561,000.

         Prior to the current credit 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. 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 incurrence 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, 1998.



                                      26
<PAGE>   28



Aggregate principal maturities of long-term debt at December 31, 1998 are as
follows:

<TABLE>
<CAPTION>

                                                                            Total
                                                                            -----
          Fiscal Year                                              (in thousands)
          -----------                                              --------------
          <S>                                                      <C>
             1999                                                        $  1,847
             2000                                                           2,563
             2001                                                           2,875
             2002                                                           6,515
                                                                         --------
                                                                         $ 13,800
           Discount                                                           832
                                                                         --------
                                                                         $ 12,968
                                                                         ========
</TABLE>

         At December 31, 1998, approximately $415,000, net of accumulated
amortization of $280,000, of loan issuance costs, included in other assets, are
being amortized over the term of the debt agreements.

6.       INCOME TAXES

         The components of the benefit (provision) for income taxes for the
three years ended December 31, 1998 are as follows, including an extraordinary
item benefit of $47,000 in 1996:

<TABLE>
<CAPTION>
                                            Year Ended December 31
                                             (in thousands)
                                           1998           1997             1996
                                          -----           ----            -----
<S>                                       <C>             <C>             <C>
Current (provision) benefit
   Federal                                $(138)           $ 0            $ 192
   State                                    (20)             0                0
                                          -----            ---            -----
                                           (158)             0              192
                                          -----            ---            -----
Deferred benefit
   Federal                                  464              0              458
   State                                     63              0               51
                                          -----            ---            -----
                                            527              0              509
                                          -----            ---            -----
Total benefit                             $ 369            $ 0            $ 701
                                          =====            ===            =====
</TABLE>

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

<TABLE>
<CAPTION>
                                                                             December 31
                                                                            (in thousands)
                                                                          1998            1997          1996
                                                                        ------           -----         ------
<S>                                                                     <C>              <C>           <C>
Income tax provision (benefit) at statutory rates                      $   596           $ 231         $(1,398)
State tax provision (benefit), net of federal taxes                         70              27            (163)
Utilization of foreign tax credits                                           0               0            (159)
Nondeductible expenses                                                      15              (2)             69
Other, net                                                                (265)            (58)            (70)
Change in valuation allowance                                             (785)           (198)          1,067
                                                                        ------           -----          ------
Benefit for income taxes before extraordinary item                      $ (369)          $   0          $ (654)
                                                                        ======           =====          ======
</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.



                                      27
<PAGE>   29



         Significant components of the Company's deferred tax assets and
liabilities as of December 31, 1998 and 1997 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                      December 31
                                                                         1998                1997
                                                                      -------             -------
         <S>                                                          <C>                 <C>
         Deferred Assets
            Net operating loss carryforward                           $   413             $   844
            Reserves for returns and allowances                           258                 299
            Impairment of building and depreciation                       494                 550
            Write down of product masters                                 295                  67
            Tax credits                                                   618                 510
            Non compete agreement                                         206                 193
            Other                                                         100                 211
                                                                      -------             -------
                                                                        2,384               2,674
                                                                      -------             -------

         Deferred tax liabilities
            Prepaid marketing expenses                                   (380)               (293)
            Other                                                        (368)               (487)
                                                                      -------             -------
                                                                         (748)               (780)
                                                                      -------             -------

         Deferred tax asset before valuation allowance                  1,636               1,894
         Valuation allowance for deferred tax assets                     (500)             (1,285)
                                                                      -------             -------
         Net deferred tax asset                                       $ 1,136             $   609
         Current portion                                                 (642)                (81)
                                                                      -------             -------
         Long term portion                                            $   494             $   528
                                                                      =======             =======
</TABLE>

         As of December 31, 1998, the Company's net operating loss
carryforwards available to reduce taxable income for federal and state income
tax purposes approximate $1,087,000. The Company's net operating loss
carryforwards expire in periods 2001 to 2011. During the year ended December
31, 1998, the Company utilized approximately $1,135,000 of its net operating
loss carryforward.

         Management believes that it is more likely than not that it will
generate taxable income sufficient to realize the net deferred tax asset
recorded at December 31, 1998. Management believes that a valuation allowance
of $500,000 as of December 31, 1998 is appropriate given the uncertainty of
estimates surrounding future taxable income. There can be no assurance, however
that the Company will generate a specific level of continuing earnings. For the
year ended December 31, 1998, the Company reduced its valuation allowance by
$785,000. Such reduction in the valuation allowance was the result of two
consecutive years of profitability coupled with management's current
projections that sufficient taxable income will realize the remaining deferred
tax assets.

7.       EMPLOYEE BENEFITS

         The Company maintains a non-contributory defined contribution Profit
Sharing Plan (the "Plan") covering substantially all employees of the Company.
An employee is eligible to participate in the Plan after one year of service,
as defined. The Company has not made contributions to the Plan during the years
ended December 31, 1998 and 1996 as contributions are at the discretion of the
Board of Directors. The Company did make a contribution to the Plan during the
year ended December 31, 1997.

         The Company also provides a qualifying 401k Plan ("401k Plan")
covering substantially all employees of the Company. An employee is eligible to
participate in the 401k Plan after one year of service and is allowed to make
elective contributions of up to 12% of their annual salary. Company
contributions to the 401k Plan are discretionary and are determined annually by
the Company's Board of Directors. The Company contributed approximately
$102,000; $175,000 and $57,000 during the years ended December 31, 1998, 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.

8.       RELATED PARTY TRANSACTIONS

         Integrity Worship Ministries, formerly known as Worship International
("Worship"), a not-for-profit charitable organization, of which the principal
stockholder of the Company is a member of the 



                                      28
<PAGE>   30



board of directors. The Company donated $7,895, $12,642 and $6,500 of inventory
to Worship during 1998, 1997 and 1996, respectively.

         One of the Company's exclusive songwriters and artists, who is also an
officer of the Company, received royalties of approximately $208,149, $197,831
and $206,000 for the three years ended December 31, 1998, 1997 and 1996.
Amounts due to the officer at December 31, 1998 and 1997 approximate $57,957
and $8,800, respectively. Due from this officer at December 31, 1998 is $49,817
advanced against future royalties.

9.       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 recorded.

         During 1998 the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information (FAS 131). FAS 131 amends the
way the companies report information about operating segments. The Company has
retroactively applied the provisions of FAS 131 to all periods presented.

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

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



                                      29
<PAGE>   31



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

<TABLE>
<CAPTION>

                                                              1998                1997           1996
                                                          --------            --------       --------
         <S>                                              <C>                 <C>            <C>
         NET SALES
         Direct to consumer                               $ 13,430            $ 11,602       $ 11,199
         Retail                                             14,702              14,214         10,951
         International                                       6,392               6,346          6,501
         Other                                               6,534               4,700          5,716
         Eliminations                                       (2,211)             (1,908)        (2,392)
                                                          --------            --------       --------
            Consolidated                                  $ 38,847            $ 34,954       $ 31,975
                                                          ========            ========       ========

         OPERATING PROFIT (BEFORE MINORITY INTEREST)
         Direct to consumer                                  2,954               3,158            295
         Retail                                              3,018               3,121          1,081
         International                                       1,436               1,452          1,197
         Other                                               1,798                 278          1,829
                                                          --------            --------       --------
            Consolidated                                     9,206               8,009          4,402

         General corporate expense                           5,924               5,540          6,711
         Interest expense, net                               1,529               1,790          1,804
                                                          --------            --------       --------

         Income (loss) before income taxes
         and minority interest                            $  1,753            $    679       $ (4,113)
                                                          ========            ========       ========

         IDENTIFIABLE ASSETS
         Direct to consumer                               $      0            $      0
         Retail                                                  0                   0
         International                                       2,596               2,218
         Other                                               1,993               2,191

         General corporate assets                           27,028              26,366
                                                          --------            --------
            Total assets                                  $ 31,617            $ 30,775
                                                          ========            ========
</TABLE>

         The Company does not allocate any separate assets to its retail or
direct to consumer segments as those segments are managed based on profit
centers. The primary assets used in these segments are product masters and
other intangibles which are shared among all segments. The Company does not
track property and equipment usage by segments.

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

<TABLE>
<CAPTION>
                                                              1998                1997           1996
                                                          --------            --------       --------
         <S>                                              <C>                 <C>            <C>
         NET SALES
         United States                                    $ 32,464            $ 29,875       $ 26,253
         Europe                                              1,956               1,638          1,763
         Australia                                           1,011               1,267          1,638
         Asia                                                  938                   0              0
         Other                                               2,478               2,174          2,321
                                                          --------            --------       --------
                                                          $ 38,847            $ 34,954       $ 31,975
                                                          ========            ========       ========

         IDENTIFIABLE ASSETS
         United States                                    $ 29,021            $ 28,557
         Europe                                              1,368               1,104
         Australia                                             494                 565
         Asia                                                  734                   0
         Other                                                   0                 549
                                                          --------            --------       
                                                          $ 31,617            $ 30,775
                                                          ========            ========
</TABLE>



                                      30
<PAGE>   32



10.      STOCKHOLDERS' EQUITY

         Each holder of the Company's Class B common stock is entitled to 10
votes per share. Holders of Class A common stock are entitled to one vote per
share. The rights of each share of Class A and Class B stock are identical in
all respects except as to voting privileges. No dividends were declared or paid
during the years ended December 31, 1998 and 1997.

11.      STOCK COMPENSATION PLANS

         The Company has two stock option plans, which provide for the granting
of stock options to officers, employees and non-employee directors. The
Long-term Incentive Plan (the "Incentive Plan") permits grants of not only
incentive stock options, but also non-qualified stock options, stock
appreciation rights, performance shares, restricted stock and other stock based
awards. The Incentive Plan is authorized to issue up to 525,000 shares of Class
A Common Stock in connection with such awards. Under the Incentive Plan, awards
may not be granted at less than the market value at the date of the grant, and
vesting terms are generally five years. The 1994 Stock Option Plan for Outside
Directors (the "Directors' Plan"), grants 1,000 options to purchase Class A
Common stock annually to Directors following the annual meeting. Such options
have an exercise price equal to the fair market value at grant date and are
exercisable six months from date of grant.

         The Executive Stock Purchase Plan permits certain employees to
purchase shares of common stock from the Company. Under this Plan, there are
50,000 shares of Class A common stock reserved at December 31, 1998.

         Effective December 28, 1995, the Company's Board of Directors adopted
the 1995 Cash Incentive Plan. Awards may be granted by the Company's
Compensation Committee and any award made is expressed in a number of units
payable only in cash. Vesting is one-fifth of the units of an award on each
anniversary of the date of grant until vested in full. Participants become
vested in full six months after the occurrence of a change in control (as
defined by the agreement) of the Company. The value of all units is measured as
the difference between the fair market value of the Company's stock on the
grant date and the fair market value of the Company's stock on any given date
subsequent to the grant date. To the extent the fair market value of the stock
exceeds the fair market value at the date of grant, compensation expense will
be charged to the Company's statement of operations. As of December 31, 1998,
127,500 awards have been granted. At December 31, 1998, a provision was
recorded in the amount of $123,930 for the difference in the fair market value
of the stock between the grant date and the end of the year.

         The Company accounts for stock-based compensation plans under APB 25,
"Accounting for Stock Issued to Employees". As a result, the Company has
recognized compensation expense only for the 1995 Cash Incentive Plan discussed
above. The Company is not required to recognize compensation expense for the
other option plans as the exercise price is equal to, or greater than, the fair
market value at the date of grant. The Company has adopted the disclosure
provisions of SFAS 123, "Accounting for Stock Based Compensation: (FAS 123)."
Had compensation cost for the Company's stock-based incentive compensation
plans been determined based on the fair value at the grant dates for awards
under these plans consistent with the methodology prescribed by FAS 123 and if
these values had been recorded in the statement of operations, the Company's
net income (loss) and per share results would have been reduced to the pro
forma amounts indicated below for the years ended December 31, 1998, 1997, and
1996, respectively.

<TABLE>
<CAPTION>

                                                     1998           1997                1996
                                                     ----           ----                ----
         <S>                 <C>              <C>              <C>               <C>
         Net income          As reported      $ 1,854,000      $ 642,000         $(3,707,000)
                             Pro forma          1,785,000        543,000          (3,778,000)

         Basic EPS           As reported             0.34           0.12               (0.67)
                             Pro forma               0.32           0.10               (0.69)

         Diluted EPS         As reported             0.32           0.12               (0.67)
                             Pro forma               0.31           0.10               (0.69)
</TABLE>


         These pro forma amounts represent the estimated fair value of stock
options issued during 1998, 1997 and 1995 and are being amortized to expense
over the applicable vesting period. Additional options may be granted in future
years.

         The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions
used for grants in 1998, 1997 and 



                                      31
<PAGE>   33



1996, respectively: Dividend yields of 0%, expected volatility of 70% each
year, risk-free interest rates that approximate the yield of a five year
government bond, and a specific vesting period for each option.

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

<TABLE>
<CAPTION>

                                                                                                          Total        Weighted
                                                                                                         shares        average
                                                                EXERCISE PRICE RANGES                    under       option price
                                                   $0.50 - $2.00    $2.01 - $5.00  $5.01 - $10.00        option        per share 
                                                   -------------    -------------  --------------        ------      ------------
<S>                                                <C>              <C>            <C>                   <C>         <C>
Outstanding at 12/31/95                                                    50,000         206,000        256,000          6.14
Granted                                                  120,000           73,000               0        193,000          2.20
Exercised                                                      0                0               0              0
Forfeited                                                      0                0         (81,000)       (81,000)         8.32
                                                         -------          -------         -------        -------          ----
Outstanding at 12/31/96                                  120,000          123,000         125,000        368,000          3.60
Granted                                                  141,027                0               0        141,027          1.74
Exercised                                                      0                0               0              0
Forfeited                                                (35,000)               0        (113,000)      (148,000)         7.21
                                                         -------          -------         -------        -------          ----
Outstanding at 12/31/97                                  226,027          123,000          12,000        361,027          1.39
Granted                                                   20,000           13,000               0         33,000          1.64
Exercised                                                      0                0               0              0
Forfeited                                                (60,000)               0               0        (60,000)         1.58
                                                         -------          -------         -------        -------          ----
Outstanding at 12/31/98                                  186,027          136,000          12,000        334,027          1.38
                                                         =======          =======         =======        =======          ====

Exercisable at 12/31/98                                                                                  128,805
                                                                                                         =======

Plan shares available for future
grants                                                                                                   215,973
                                                                                                         =======
</TABLE>

         The Company also has 805,288 warrants outstanding at December 31, 1998
at an exercise price of $1.875. These warrants were issued in 1996 with an
estimated fair value of $1,393,000 and have a life of ten years.

         The weighted-average fair value of options granted is $1.32, $1.01,
and $0.83 for the years ended December 31, 1998, 1997 and 1996, respectively.
The weighted average remaining contractual life for all options outstanding is
7.7 years.

12.      COMMITMENTS AND CONTINGENCIES

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

13.      SUBSEQUENT EVENT

         During February 1999, the Company granted 100,000 shares of restricted
stock to an officer which have a fair value of approximately $300,000. The
restricted stock vests after an additional seven years of employment by the
officer. The grant is subject to shareholder approval. As a result of this
grant, the Company's debt agreement requires the issuance of approximately
38,000 additional warrants to its primary lender at the fair value.



                                      32
<PAGE>   34



14.      QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
                                                           1998 Three Months Ended
                                                    (in thousands, except per share data)         
                                             Mar 31         Jun 30          Sep 30        Dec 31
                                            -------        -------        --------       -------
<S>                                         <C>            <C>            <C>            <C>
Net Sales                                   $ 9,453        $ 9,678        $ 10,196       $ 9,520
Gross Profit                                  5,456          5,650           4,939         4,817
Net Income                                      454            174             442           784
Basic earnings per share                    $   .09        $   .03        $    .08       $   .14
Diluted earnings per share                  $   .08        $   .03        $    .08       $   .13

                                                           1998 Three Months Ended
                                                    (in thousands, except per share data)         
                                             Mar 31         Jun 30          Sep 30        Dec 31
                                            -------        -------        --------       -------
Net Sales                                   $ 8,674        $ 8,451        $  9,157       $ 8,672
Gross Profit                                  4,964          4,951           4,969         4,834
Net Income (loss)                               184           (163)            275           346
Basic earnings (loss) per share
                                            $   .03        $  (.03)       $    .06       $   .06
Diluted earnings (loss) per share
                                            $   .03        $  (.03)       $    .06       $   .06
</TABLE>



                                      33
<PAGE>   35



2.       FINANCIAL STATEMENT SCHEDULE

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

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

<TABLE>
<CAPTION>

                                                            Additions
                                                           Charged to
                                       Balance at Beg.      costs and                               Balance at 
         Description                      Of Period         expenses          Deductions(1)       end of Period
         -----------                   ---------------     -----------        -------------       --------------
  <S>                                  <C>                 <C>                <C>                 <C>
  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

  1998
  Allowance for returns and
  doubtful accounts                           812             4,852              (4,968)                696
</TABLE>


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


<TABLE>
<CAPTION>
 
                                                           Charged to
                                       Balance at Beg.      costs and                              Balance at 
         Description                      Of Period         expenses           Adjustments        end of Period
         -----------                   ---------------     -----------         -----------        -------------
  <S>                                  <C>                 <C>                 <C>                <C>
  1996
  Valuation on deferred tax
  assets                                        0             1,067                                     1,067

  1997
  Valuation on deferred tax
  assets                                    1,067               218                                     1,285

  1998
  Valuation on deferred tax
  assets                                    1,285                                (785)                    500
</TABLE>

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.



                                      34
<PAGE>   36


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

                              Exhibit Description

<TABLE>
<CAPTION>
            Exhibit
            Number
            <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      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>



                                      35
<PAGE>   37


<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).
            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).
</TABLE>




                                      36
<PAGE>   38








<TABLE>

            <S>        <C>
            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).
            10.27      Employment Agreement by and among Integrity Incorporated
                       and Don Moen dated as of October 1, 1998.
            10.28      Employment Agreement by and among Integrity Incorporated
                       and Daniel McGuffey dated as of January 1, 1998.
            11         Statement of Computation of Per Share Earnings
            21         Subsidiaries of the Registrant
            23         Consent of Independent Accountant
            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, 1998.



                                      37
<PAGE>   39


                                   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 12, 1999.

                                          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 12,
1999.

<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, Finance and Administration
                                                               (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>




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