GlucoTrack (GCTK) 10-K/A 2011 FY Annual report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A  

(Amendment No.1)

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

o 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 333-176415

INTEGRITY APPLICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware	98-0668934
(State or other jurisdiction of incorporation or organization	(I.R.S. Employer Identification No.)

102 Ha’Avoda Street P.O. Box 432 Ashkelon, Israel	L3 78100
(Address of principal executive offices)	(Zip Code)
Registrant’s telephone number, including area code 972 (8) 675-7878
Securities registered pursuant to Section 12(b) of the Act:  None
Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes oNo x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes xNo o

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes oNo x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes xNo o

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 in Part III of this Form 10-K or any amendment to this Form 10-K.x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller Reporting Company x

The aggregate market value of the voting stock held by non-affiliates is not determinable because there is no public trading market for our common stock, par value $.001 per share.

As of August 9, 2012, 5,295,543 shares of our common stock, par value $.001 per share, were outstanding.

Explanatory Note

Integrity Applications, Inc. is filing this Amendment No. 1 on Form 10-K/A (this “Amendment”) to its Annual Report on Form 10-K for the fiscal year ended December 31, 2011 as filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2012 (the “Original Filing”) solely to amend the Report of Independent Registered Public Accounting Firm (the “Audit Report”) contained in Item 8 of the Form 10-K to correct  a typographical error in the date  of the Audit Report  from March 12, 2012 to March 14, 2012.

Pursuant to Rule 12b-15 promulgated under the Securities Exchange Act of 1934, as amended, we have repeated the entire text of Item 8 of the Original Filing in this Amendment.  However, there have been no changes to the text of such item other than the change stated in the immediately preceding paragraph.

This Amendment includes new certifications by our Principal Executive Officer and Principal Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 as exhibits 31.1, 31.2, 32.1 and 32.2 hereto.

Except as expressly set forth above, this Amendment does not, and does not purport to, amend, update or restate the information in any other item of the Original Filing or reflect any events that have occurred after the date of the Original Filing.  Please refer to our Quarterly Reports on Form 10-Q for the periods ended March 31, 2012 and June 30, 2012 for such subsequent events or transactions.

PART II

Item 8.  Financial Statements and Supplementary

INTEGRITY APPLICATIONS, INC.

(A Development Stage Company)

Consolidated Financial Statements

as of December 31, 2011

INTEGRITY APPLICATIONS, INC.

(A Development Stage Company)

Consolidated Financial Statements

as of December 31, 2011

Table of Contents

	Page
Report of Independent Registered Public Accounting Firm	F-3
Consolidated Financial Statements
Balance Sheets	F-4
Statements of Operations	F-5
Statements of Changes in Stockholders’ Equity	F-6 – F-10
Statements of Cash Flows	F - 11
Notes to Consolidated Financial Statements	F-12 – F-33

F- 2

Report of Independent Registered Public Accounting Firm To the Stockholders of   INTEGRITY APPLICATIONS, INC. (A Development Stage Company) Fahn Kanne & Co. Head Office Levinstein Tower 23 Menachem Begin Road Tel-Aviv 66184, ISRAEL P.O.B. 36172, 61361   T +972 3 7106666 F +972 3 7106660 www.gtfk.co.il

We have audited the accompanying consolidated balance sheets of Integrity Applications, Inc. (a development stage company) and subsidiary (hereinafter: the "Company") as of December 31, 2011 and 2010, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2011 and for the cumulative period from September 30, 2001 (date of inception) through December 31, 2011.  These consolidated financial statements are the responsibility of the Board of Directors and management of the Company.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also 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, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Integrity Applications, Inc. and subsidiary as of December 31, 2011 and 2010, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2011 and for the cumulative period from September 30, 2001 (date of inception) through December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.  As discussed in Note 1, the Company is in the development stage as defined in FASB Accounting Standards Codification (ASC) Topic 915, "Development Stage Entities".  It has not yet generated any revenues from its operations to fund its activities and is therefore dependent upon external sources for financing its operations.  As of December 31, 2011, the Company has incurred accumulated losses of US$ 12,517,519 and cumulative negative operating cash flow of US$ 9,276,835.  These factors among others, as discussed in Note 1 to the consolidated financial statements raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 1.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

FAHN KANNE & CO. GRANT THORNTON ISRAEL

Certified Public Accountants (Isr.)

Tel-Aviv, Israel

March 14, 2012

F- 3

INTEGRITY APPLICATIONS, INC.

(A Development Stage Company)

CONSOLIDATED BALANCE SHEETS

	US dollars (except share data)
	December 31,
	2011			2010
A S S E T S
Current Assets
Cash and cash equivalents		1,896,504			1,494,248
Other current assets (Note 3)		92,817			85,704
Total current assets		1,989,321			1,579,952
Property and Equipment, Net (Note 4)		82,868			57,350
Funds in Respect of Employee Rights Upon Retirement		110,310			133,335
Total assets		2,182,499			1,770,637
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Credit from banking institutions		-			18,843
Accounts payable (Note 5)		71,763			10,666
Other current liabilities (Note 6)		211,278			258,586
Total current liabilities		283,041			288,095
Long-Term Loans from Stockholders (Note 8)		606,144			625,881
Liability for Employee Rights Upon Retirement		241,176			258,522
Warrants with Down-Round Protection (Note 9C)		83,899			-
Total liabilities		1,214,260			1,172,498
Commitments and Contingent Liabilities (Note 9)
Stockholders’ Equity (Note 10)
Common Stock of US$ 0.001 par value ("Common Stock"):
40,000,000 shares authorized as of December 31, 2011 and 2010; issued and outstanding 5,295,543 shares and 4,844,575 shares as of December 31, 2011 and 2010, respectively		5,296			4,845
Additional paid in capital		13,457,838			10,762,892
Accumulated other comprehensive income (loss)		22,634			(16,418	)
Deficit accumulated during the development stage		(12,517,519	)		(10,153,180	)
Total stockholders' equity		968,239			598,139
Total liabilities and stockholders’ equity		2,182,499			1,770,637

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

F- 4

INTEGRITY APPLICATIONS, INC.

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS

	US dollars (except share data)
	Year ended December 31,					Cumulative period from September 30, 2001 (date of inception) through December 31,
	2011		2010(*)		2009(*)		2011(*)
Research and development expenses, net (Note 11)		1,789,301	934,056		1,005,108		8,555,714
General and administrative expenses (Note 12)		544,145	457,495		165,156		2,161,734
Other income		-	(912	)	-		(912	)
Operating loss		2,333,446	1,390,639		1,170,264		10,716,536
Financing expenses, net (Note 13)		30,893	1,397,807		32,032		1,800,983
Loss for the year		2,364,339	2,788,446		1,202,296		12,517,519
Loss per share (Basic and Diluted) (Note 15)		0.46	0.70		0.30
Weighted average number of shares outstanding (Basic and Diluted) (Note 15)		5,091,330	4,034,706		3,995,805

(*) As described in Note 1A, the financial statements were retroactively restated to reflect the historical financial statements of the subsidiary A.D. Integrity Applications Ltd., which merged with a subsidiary of the Company on July 15, 2010, as part of a structural reorganization of the Group.

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

F- 5

INTEGRITY APPLICATIONS, INC.

(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) (*)

	US Dollars (except share data)
	Common Stock						Accumulated			Deficit
	Number of shares		Amount		Additional paid in capital		other comprehensive loss			accumulated during development stage			Total stockholders equity (deficit)
September 30, 2001 (date of inception)
2,136,307 Common Stock of US$ 0.001 per share issued for cash		2,136,307		2,136		38,306		-			-			40,442
Loss for the period		-		-		-		-			(63,293	)		(63,293	)
Loss on translation of subsidiary's financial statements from its functional currency to the reporting currency		-		-		-		(5	)		-			(5	)
Comprehensive loss														(63,298	)
Balance as of December 31, 2002		2,136,307		2,136		38,306		(5	)		(63,293	)		(22,856	)
Loss for the year		-		-		-		-			(350,290	)		(350,290	)
Loss on translation of subsidiary's financial statements from its functional currency to the reporting currency		-		-		-		(15,035	)		-			(15,035	)
Comprehensive loss														(365,325	)
Balance as of December 31, 2003		2,136,307		2,136		38,306		(15,040	)		(413,583	)		(388,181	)
Loss for the year		-		-		-		-			(288,233	)		(288,233	)
Loss on translation of subsidiary's financial statements from its functional currency to the reporting currency		-		-		-		(15,069	)		-			(15,069	)
Comprehensive loss														(303,302	)
Issuance of 42,727 Common Stock for cash at US$ 1.76 per share on March 16, 2004		42,727		43		74,957		-			-			75,000
Issuance of 72,773 Common Stock for cash of US$ 1.72 per share on November 25, 2004		72,773		73		128,783		-			-			128,856
Balance as of December 31, 2004		2,251,807		2,252		242,046		(30,109	)		(701,816	)		(487,627	)

(*) As described in Note 1A, the financial statements were retroactively restated to reflect the historical financial statements of the subsidiary A.D. Integrity Applications Ltd., which merged with a subsidiary of the Company on July 15, 2010, as part of a structural reorganization of the Group.

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

F- 6

INTEGRITY APPLICATIONS, INC.

(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) (*) (cont.)

	US Dollars (except share data)
	Common Stock						Accumulated			Deficit
	Number of shares		Amount		Additional paid in capital		other comprehensive loss			accumulated during development stage			Total stockholders equity (deficit)
Balance as of January 1, 2005		2,251,807		2,252		242,046		(30,109	)		(701,816	)		(487,627	)
Loss for the year		-		-		-		-			(1,055,594	)		(1,055,594	)
Gain on translation of subsidiary's financial statements from its functional currency to the reporting currency		-		-		-		8,542			-			8,542
Comprehensive loss														(1,047,052	)
Issuance of 218,281 Common Stock for cash of US$ 1.72 per share on January 14, 2005		218,281		218		374,782		-			-			375,000
Issuance of 291,051 Common Stock for cash of US$ 1.72 per share on April 5, 2005		291,051		291		499,709		-			-			500,000
Issuance of 59,389 Common Stock for cash of US$ 3.37 per share on May 31, 2005		59,389		60		199,940		-			-			200,000
Stock-based compensation		52,147		52		189,564		-			-			189,616
Balance as of December 31, 2005		2,872,675		2,873		1,506,041		(21,567	)		(1,757,410	)		(270,063	)
Loss for the year		-		-		-		-			(1,282,842	)		(1,282,842	)
Loss on translation of subsidiary's financial statements from its functional currency to the reporting currency		-		-		-		(57,127	)		-			(57,127	)
Comprehensive loss														(1,339,969	)
Issuance of 87,315 Common Stock for cash of US$ 1.47 per share on January 26, 2006		87,315		87		128,118		-			-			128,205
Issuance of 1,899 Common Stock for cash of US$ 3.63 per share on March 31, 2006		1,899		2		6,888		-			-			6,890
Issuance of 13,786 Common Stock for cash of US$ 3.63 per share on June 16, 2006		13,786		14		49,986		-			-			50,000
Issuance of 14,113 Common Stock for cash of US$ 3.63 per share on June 30, 2006		14,113		14		51,166		-			-			51,180
Issuance of 51,207 Common Stock for cash of US$ 3.91 per share on August 15, 2006		51,207		51		199,949		-			-			200,000
Issuance of 301,948 Common Stock for cash of US$ 4.31 per share on October 5, 2006		301,948		302		1,299,698		-			-			1,300,000
Issuance of 348,402 Common Stock for cash of US$ 4.31 per share on December 14, 2006		348,402		349		1,372,146		-			-			1,372,495
Stock-based compensation		63,395		63		277,434		-			-			277,497
Balance as of December 31, 2006		3,754,740		3,755		4,891,426		(78,694	)		(3,040,252	)		1,776,235

(*) As described in Note 1A, the financial statements were retroactively restated to reflect the historical financial statements of the subsidiary A.D. Integrity Applications Ltd., which merged with a subsidiary of the Company on July 15, 2010, as part of a structural reorganization of the Group.

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

F- 7

INTEGRITY APPLICATIONS, INC.

(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) (*) (cont.)

	US Dollars (except share data)
	Common Stock						Accumulated						Deficit
	Number of shares		Amount		Additional paid in capital		other comprehensive income (loss)			Receivable in respect of stock issuance			accumulated during development stage			Total stockholders equity (deficit)
Balance as of January 1, 2007		3,754,740		3,755		4,891,426		(78,694	)		-			(3,040,252	)		1,776,235
Loss for the year		-		-		-		-			-			(1,593,205	)		(1,593,205	)
Gain on translation of subsidiary's financial statements from its functional currency to the reporting currency		-		-		-		84,528			-			-			84,528
Comprehensive loss																	(1,508,677	)
Stock-based compensation		28,707		29		274,630		-			-			-			274,659
Balance as of December 31, 2007		3,783,447		3,784		5,166,056		5,834			-			(4,633,457	)		542,217
Loss for the year		-		-		-		-			-			(1,528,981	)		(1,528,981	)
Gain on translation of subsidiary's financial statements from its functional currency to the reporting currency		-		-		-		110,134			-			-			110,134
Comprehensive loss																	(1,418,847	)
Issuance of 61,989 Common Stock for cash of US$ 5.52 per share on September 27, 2008		61,989		62		341,938		-			-			-			342,000
Issuance of 104,220 Common Stock for cash of US$ 5.52 per share on October 7, 2008		104,220		104		574,896		-			(75,000	)		-			500,000
Stock-based compensation		-		-		84,380		-			-			-			84,380
Balance as of December 31, 2008		3,949,656		3,950		6,167,270		115,968			(75,000	)		(6,162,438	)		49,750

(*) As described in Note 1A, the financial statements were retroactively restated to reflect the historical financial statements of the subsidiary A.D. Integrity Applications Ltd., which merged with a subsidiary of the Company on July 15, 2010, as part of a structural reorganization of the Group.

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

F- 8

INTEGRITY APPLICATIONS, INC.

(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) (*) (cont.)

	US Dollars (except share data)
	Common Stock						Accumulated						Deficit
	Number of shares		Amount		Additional paid in capital		other comprehensive income (loss)			Receivable in  respect of stock issuance			accumulated during development stage			Total stockholders equity (deficit)
Balance as of January 1, 2009		3,949,656		3,950		6,167,270		115,968			(75,000	)		(6,162,438	)		49,750
Loss for the year		-		-		-		-			-			(1,202,296	)		(1,202,296	)
Loss on translation of subsidiary's financial statements from its functional currency to the reporting currency		-		-		-		(13,367	)		-			-			(13,367	)
Comprehensive loss																	(1,215,663	)
Issuance of 50,342 Common Stock for cash of US$ 6.02 per share in January 2009		50,342		50		302,950		-			-			-			303,000
Repayment of receivable in respect of stock issuance		-		-		-		-			75,000			-			75,000
Stock-based compensation		-		-		12,171		-			-			-			12,171
Balance as of December 31, 2009		3,999,998		4,000		6,482,391		102,601			-			(7,364,734	)		(775,742	)
Loss for the year		-		-		-		-			-			(2,788,446	)		(2,788,446	)
Loss on translation of subsidiary's financial statements from its functional currency to the reporting currency		-		-		-		(119,019	)		-			-			(119,019	)
Comprehensive loss																	(2,907,465	)
Issuance of 530,600 Common Stock for cash of US$ 6.25 per share in December 2010, net of related expenses		530,600		531		2,356,501		-			-			-			2,357,032
Stock-based interest compensation to convertible notes holders		194,391		194		1,214,749		-			-			-			1,214,943
Conversion of convertible notes		119,586		120		694,676		-			-			-			694,796
Stock-based compensation		-		-		14,575		-			-			-			14,575
Balance as of December 31, 2010		4,844,575		4,845		10,762,892		(16,418	)		-			(10,153,180	)		598,139

(*) As described in Note 1A, the financial statements were retroactively restated to reflect the historical financial statements of the subsidiary A.D. Integrity Applications Ltd., which merged with a subsidiary of the Company on July 15, 2010, as part of a structural reorganization of the Group.

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

F- 9

INTEGRITY APPLICATIONS, INC.

(A Development Stage Company)

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (*) (cont.)

	US Dollars (except share data)
	Common Stock							Accumulated					Deficit
	Number of shares		Amount		Additional paid in capital			other comprehensive loss			Receivable in respect of stock issuance		accumulated during development stage			Total stockholders equity (deficit)
Balance as of January 1, 2011		4,844,575		4,845		10,762,892			(16,418	)		-		(10,153,180	)		598,139
Loss for the year		-		-		-			-			-		(2,364,339	)		(2,364,339	)
Gain on translation of subsidiary's financial statements from its functional currency to the reporting currency		-		-		-			39,052			-		-			39,052
Comprehensive loss																	(2,325,287	)
Issuance of 16,320 Common Stock for cash of US$ 6.25 per share in January 31, 2011, net of related expenses		16,320		16		83,164			-			-		-			83,180
Issuance of 90,768 Common Stock for cash of US$ 6.25 per share in March 31, 2011, net of related expenses		90,768		91		479,810			-			-		-			479,901
Issuance of 40,000 Common Stock for cash of US$ 6.25 per share in April 29, 2011, net of related expenses		40,000		40		191,682			-			-		-			191,722
Issuance of 34,200 Common Stock for cash of US$ 6.25 per share in May 31, 2011, net of related expenses		34,200		34		179,992			-			-		-			180,026
Issuance of 269,680 Common Stock for cash of US$ 6.25 per share on July 29, 2011, net of related expenses		269,680		270		1,466,115			-			-		-			1,466,385
Fair value of warrants with down-round protection issued in connection with Common Stock issuances		-		-		(83,899	)		-			-		-			(83,899	)
Stock-based compensation		-		-		378,072						-		-			378,072
Balance as of December 31, 2011		5,295,543		5,296		13,457,838			22,634			-		(12,517,519	)		968,239

(*) As described in Note 1A, the financial statements were retroactively restated to reflect the historical financial statements of the subsidiary A.D. Integrity Applications Ltd., which merged with a subsidiary of the Company on July 15, 2010, as part of a structural reorganization of the Group.

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

F- 10

INTEGRITY APPLICATIONS, INC.

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

	US dollars (except share data)
	Year ended December 31,							Cumulative period from September 30, 2001 (date of inception) through December 31,
	2011			2010(*)		2009(*)			2011(*)
Cash flows from operating activities:
Loss for the period		(2,364,339	)	(2,788,446	)	(1,202,296	)		(12,517,519	)
Adjustments to reconcile loss for the period to net cash used in operating activities:
Depreciation		23,045		19,153		20,837			132,486
Increase in liability for employee rights upon retirement		1,127		16,284		34,485			223,702
Stock-based compensation		378,072		14,575		12,171			1,230,903
Stock-based interest compensation to convertible notes holders		-		1,214,943		-			1,214,943
Linkage difference on principal of loans from stockholders (**)		24,934		15,909		10,617			177,049
Interest on convertible notes		-		78,192		-			78,192
Gain on sale of property and equipment		-		(912	)	-			(912	)
Gain from trading marketable securities		-		-		(756	)		(12,920	)
Changes in assets and liabilities:
Decrease (increase) in other current assets		(23,968	)	(46,562	)	577			(83,287	)
Increase (decrease) in accounts payable		64,697		(14,120	)	(8,530	)		73,142
Increase (decrease) in other current liabilities		(19,681	)	123,147		(29,835	)		207,386
Net cash used in operating activities		(1,916,113	)	(1,367,837	)	(1,162,730	)		(9,276,835	)
Cash flows from investment activities:
Decrease (increase) in funds in respect of employee rights upon retirement		14,436		(25,387	)	(28,819	)		(102,804	)
Purchase of property and equipment		(54,619	)	(8,725	)	(5,007	)		(208,773	)
Proceeds from sale of property and equipment		-		4,791		-			4,791
Investment in marketable securities		-		-		-			(388,732	)
Proceeds from sale of marketable securities		-		-		135,195			406,995
Short-term loan granted to related party, net of repayments		-		-		127,551			(14,252	)
Net cash provided by (used in) investment activities		(40,183	)	(29,321	)	228,920			(302,775	)
Cash flows from financing activities
Credit from banking institutions (repayment)		(18,669	)	(75,845	)	88,265			(6,218	)
Proceeds from issuance of convertible notes		-		1,144,000		-			1,144,000
Repayment of convertible notes		-		(527,396	)	-			(527,396	)
Proceeds from issuance of Common Stock, net of issuance expenses		2,401,214		2,357,032		378,000			10,406,380
Proceeds from stockholders loans		-		-		-			347,742
Net cash provided by financing activities		2,382,545		2,897,791		466,265			11,364,508
Effect of exchange rate changes on cash and cash equivalents		(23,993	)	(68,417	)	3,275			111,606
Increase (decrease) in cash and cash equivalents		402,256		1,432,216		(464,270	)		1,896,504
Cash and cash equivalents at beginning of the period		1,494,248		62,032		526,302			-
Cash and cash equivalents at end of the period		1,896,504		1,494,248		62,032			1,896,504

Supplementary information on financing activities not involving cash flows:
Conversion of convertible notes to Common Stock (see Note 10C)	-	694,796	-	-
Fair value of warrants with down-round protection issued in connection with Common Stock issuances (See Note 9C)	83,899	-	-	-

(*) As described in Note 1A, the financial statements were retroactively restated to reflect the historical financial statements of the subsidiary A.D. Integrity Applications Ltd., which merged with a subsidiary of the Company on July 15, 2010, as part of a structural reorganization of the Group.

(**) Represents charges taken to reflect changes in the Israeli Consumer Price index with respect to loans from stockholders that are denominated in New Israeli Shekels and linked to the Israeli Consumer Price Index.

F- 11

INTEGRITY APPLICATIONS, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – GENERAL

A. Integrity Applications, Inc. (the "Company") was incorporated on May 18, 2010, under the laws of the State of Delaware.  On July 15, 2010, Integrity Acquisition Corp. Ltd. (hereinafter: "Integrity Acquisition"), a wholly owned Israeli subsidiary of the Company which was established on May 23, 2010, completed a merger with A.D. Integrity Applications Ltd. (hereinafter: "Integrity Israel"), an Israeli corporation which was previously held by the stockholders of the Company.  Pursuant to the merger, all stockholders, option holders and warrant holders of Integrity Israel received an equal number of shares, options and warrants of the Company, as applicable, in exchange for their shares, options and/or warrants in Integrity Israel.  Following the merger, Integrity Israel remained a wholly-owned subsidiary of the Company.  As the merger transaction constituted a structural reorganization, the merger has been accounted for at historical cost in a manner similar to a pooling of interests.  On this basis, stockholders’ equity has been retroactively restated such that each ordinary share of Integrity Israel is reflected in stockholders' equity as a share of Common Stock of the Company as of the date of the issuance thereof by Integrity Israel.  In addition, the historical financial statements of the Company for all dates prior to May 18, 2010 have been retroactively restated to reflect the activities of Integrity Israel.

In November 2011, the Company completed the registration of 1,295,545 shares of its common stock pursuant to a Registration Statement on Form S-1 (Registration No. 333-176415), as amended, originally filed with the United States Securities and Exchange Commission on August 22, 2011.

Integrity Israel was incorporated in 2001 and commenced its operations in 2002.  Integrity Israel, a medical device company, focuses on the design, development and commercialization of non-invasive glucose monitoring devices for home use by persons suffering with diabetes.

Since its inception, Integrity Israel has devoted substantially all of its efforts to business planning, research and development and raising capital, and has not yet generated any revenues.  Accordingly, Integrity Israel (and therefore the Company) is considered to be in the development stage as defined in Financial Accounting Standards Board ("FASB") Accounting Standards Codification (ASC) Topic 915, "Development Stage Entities".

B. Going concern uncertainty

Since its incorporation (May 18, 2010), the Company has not had any operations other than those carried out by Integrity Israel.  The development and commercialization of Integrity Israel's product is expected to require substantial expenditures.  Integrity Israel has not yet generated any revenues from its operations to fund its activities, and therefore is dependent upon external sources for financing its operations. There can be no assurance that Integrity Israel will succeed in obtaining the necessary financing to continue its operations.  Since inception, Integrity Israel has incurred accumulated losses of US$ 12,517,519 and cumulative negative operating cash flow of US$ 9,276,835.  These factors raise substantial doubt about Integrity Israel's and the Company's ability to continue as a going concern.  The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.  During 2010, the Company raised funds via the issuance of Common Stock (including via the conversion of convertible notes), in a total amount of approximately US$ 4 million (before related expense).  During 2011, the Company raised funds via the issuance of Common Stock in a total amount of approximately US$ 2.4 million (net of related expenses).  The Company may need to secure additional capital in the future in order to meet its anticipated liquidity needs.  The Company would expect to secure additional capital primarily through the sale of additional Common Stock or other equity securities and/or debt financing.  Funds from these sources may not be available to the Company on acceptable terms, if at all, and there is no assurance that it will be successful in securing such additional capital.

F- 12

INTEGRITY APPLICATIONS, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 1 – GENERAL (cont.)

C. Stock split

The Board of Directors and stockholders of the Company approved in July 2010 a stock split of the outstanding shares of common stock and options to purchase shares of common stock of the Company, pursuant to which each share of common stock and each stock option was split into 2.1363 shares of common stock or options, as applicable (the "split").  The split became effective as of July 23, 2010. Unless otherwise noted, all share and option amounts for all periods presented have been retroactively restated to give effect to the split.

D. Risk factors

The Company and Integrity Israel (collectively, the "Group") have a limited operating history and face a number of risks, including uncertainties regarding finalization of the development process, demand and market acceptance of the Group's products, the effects of technological changes, competition and the development of products by competitors.  Additionally, other risk factors also exist, such as the ability to manage growth and the effect of planned expansion of operations on the Group's future results.

In addition, the Group expects to continue incurring significant operating costs and losses in connection with the development of its products and marketing efforts.

As mentioned above, the Group has not yet generated any revenues from its operations to fund its activities and therefore the Group is dependent on the receipt of additional funding from its stockholders and investors in order to continue as a going concern.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP).

A. Functional currency

The functional currency of the Company is the US dollar (“US$”), which is the currency of the primary economic environment in which the operations of the Company are conducted and is also the reporting currency of the Group.  The functional currency of Integrity Israel is the New Israeli Shekel ("NIS").

The financial statements of the subsidiary were translated into US dollars in accordance with the relevant standards of the FASB.  Accordingly, assets and liabilities were translated from NIS to US dollars using year-end exchange rates, and income and expense items were translated at average exchange rates during the year.

Gains or losses resulting from translation adjustments are reflected in stockholders' equity (deficit), under “accumulated other comprehensive income (loss)”.

Balances denominated in or linked to foreign currency are stated on the basis of the exchange rates prevailing at the balance sheet date.  For foreign currency transactions included in the statement of operations, the exchange rates applicable on the relevant transaction dates are used.  Gains or losses arising from changes in the exchange rates used in the translation of such balances are carried to financing income or expenses.

	Year ended December 31,
	2011		2010		2009
Official exchange rate of NIS 1 to US dollar		0.262		0.282		0.265

F- 13

INTEGRITY APPLICATIONS, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

B. Principles of consolidation

The consolidated financial statements include the accounts of the Company and its subsidiary. All significant intercompany balances and transactions have been eliminated on consolidation.

As described in Note 1A above, the merger of Integrity Israel has been accounted for in a manner similar to a pooling of interests at historical cost.

C. Use of estimates in the preparation of financial statements

The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

As applicable to these consolidated financial statements, the most significant estimates and assumptions relate to stock based compensation and to the going concern assumption.

D. Cash and cash equivalents

The Group considers all short-term investments, which are highly liquid investments with original maturities of three months or less at the date of purchase, to be cash equivalents.

E. Property and equipment, net

1. Property and equipment are stated at cost, net of accumulated depreciation.  Depreciation is calculated using the straight-line method over the estimated useful lives of the assets.  When an asset is retired or otherwise disposed of, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition is reflected in the statements of operations.

2. Rates of depreciation:

	%
Computers	33
Furniture and office equipment	7-15
Leasehold improvements	Shorter of lease term and 10 years

F. Impairment of long-lived assets

The Group's long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset.  If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value.  The Group has not recorded any impairment losses in the reported periods.

F- 14

INTEGRITY APPLICATIONS, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

G. Deferred income taxes

Deferred income taxes are determined utilizing the asset and liability method based on the estimated future tax effects of differences between the financial accounting and the tax bases of assets and liabilities under the applicable tax law.  Deferred tax balances are computed using the tax rates expected to be in effect when these differences reverse.  Valuation allowances in respect of deferred tax assets are provided for if, based upon the weight of available evidence, it is more likely than not that all or a portion of the deferred income tax assets will not be realized.

The Company accounts for uncertain tax positions in accordance with ASC Topic 740-10, which prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements. According to ASC Topic 740-10, tax positions must meet a more-likely-than-not recognition threshold. The Company’s accounting policy is to classify interest and penalties relating to uncertain tax positions under income taxes, however the Company did not recognize such items in its fiscal 2009, 2010 and 2011 financial statements and did not recognize any liability with respect to unrecognized tax position in its balance sheet.

H. Liability for employee rights upon retirement

Integrity Israel's liability for employee rights upon retirement with respect to its Israeli employees is calculated, pursuant to Israeli severance pay law, based on the most recent salary of each employee multiplied by the number of years of employment, as of the balance sheet date. Employees are entitled to one month's salary for each year of employment, or a portion thereof. Integrity Israel makes monthly deposits to insurance policies and severance pay funds.  The liability of the Company is fully provided for.

The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn upon the fulfillment of Integrity Israel's severance obligations pursuant to Israeli severance pay laws or labor agreements with its employees.  The value of the deposited funds is based on the cash surrender value of these policies, and includes immaterial profits/losses.

Commencing 2011, the Company's and its Israeli subsidiary's agreements with certain of their Israeli employees are in accordance with Section 14 of the Severance Pay Law -1963. Payments in accordance with Section 14 release the Company from any future severance payments in respect of those employees. Related obligations and liabilities under Section 14 are not recorded as an asset or as a liability in the Company's balance sheet.

Severance expenses for the year ended December 31, 2011, 2010 and 2009 amounted to US$ 1,127, US$ 16,284 and US$ 34,485, respectively.

I. Research and development expenses

Research and development expenses are charged to operations as incurred.  Grants received from the Government of Israel for development of approved projects were recognized as a reduction of expenses when the related costs were incurred (see also J. below).

J. Royalty-bearing grants

Royalty-bearing grants from the Office of the Chief Scientist of the Ministry of Industry, Trade and Labor (the "OCS") for funding approved research and development projects are recognized at the time Integrity Israel is entitled to such grants, on the basis of the costs incurred and reduce research and development costs.  The cumulative research and development grants received by Integrity Israel from inception through December 2004 amount to US$ 93,462.  Integrity Israel has not received any research and development grants since December 2004.

As of December 31, 2011, 2010 and 2009, the Company has not accrued any royalties, since no revenues were recognized in respect of the funded project.

F- 15

INTEGRITY APPLICATIONS, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

K. Loss per share

Basic loss per share is computed by dividing loss for the period by the weighted average number of shares outstanding during the period.

In computing diluted earnings per share, basic earnings per share are adjusted to reflect the potential dilution that could occur upon the exercise of options issued or granted using the “treasury stock method” and upon the conversion of convertible notes using the "if-converted method", if their effect is dilutive.

L. Stock-based compensation

Share-based payments including grants of stock options and shares are recognized in the statement of operations as an operating expense, based on the fair value of the award on the date of grant.  The fair value of options is estimated using the Black-Scholes option-pricing model and the fair value of share grants is estimated using recent transaction prices.  The Group has expensed compensation costs, net of estimated forfeitures, applying the accelerated vesting method, over the requisite service period or over the implicit service period when a performance condition affects the vesting, and it is considered probable that the performance condition will be achieved.

Share-based payments awarded to consultants (non-employees) are accounted for in accordance with ASC Topic 505-50, "Equity-Based Payments to Non-Employees".

M. Other comprehensive income (loss)

Other comprehensive income (loss), presented in stockholders' equity (deficit), includes, gains and losses from the translation of the subsidiary's financial statements from its functional currency to the reporting currency of the Group.

N. Fair value of financial instruments

ASC Topic 825-10, "Financial Instruments" defines financial instruments and requires disclosure of the fair value of financial instruments held by the Company. The Company considers the carrying amount of cash and cash equivalents, other current assets, credit from banking institutions, accounts payable and other current liabilities balances, to approximate their fair values because of the short period of time between the origination of such instruments and their expected realization.  The Company did not estimate the fair value of the long-term loans from stockholders which do not bear any interest, since the repayment schedule has not been determined.

O. Convertible notes

The Company has considered the provisions of ASC Topic 815, "Derivatives and Hedging", and determined that the conversion feature should not be separated from the host instrument because it did not meet the definition of a derivative due to the lack of a net settlement feature. Furthermore, the Company applied ASC Topic 470-20, "Debt - Debt with Conversion and Other Options" which clarifies the accounting for instruments with beneficial conversion features or contingency adjustable conversion ratios.  As described in Note 10C, the Company has determined that the convertible notes did not provide beneficial conversion feature.

The entire balance of the convertible notes (which were issued during fiscal year 2010) was either repaid in cash or converted into Common Stock during fiscal year 2010 (see also Note 10C).

F- 16

INTEGRITY APPLICATIONS, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.)

P. Concentrations of credit risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents.  Cash and cash equivalents are deposited with major banks in Israel and the United States of America. Management believes that such financial institutions are financially sound and, accordingly, minimal credit risk exists with respect to these financial instruments.

The Company has no significant off-balance-sheet concentration of credit risk, such as foreign exchange contracts, option contracts or other foreign hedging arrangements.

Q. Contingencies

The Company records accruals for loss contingencies arising from claims, litigation and other sources when it is probable that a liability has been incurred and the amount can be reasonably estimated. These accruals are adjusted periodically as assessments change or additional information becomes available. As of December 31, 2011, the Company has not recorded an expense related to the outstanding litigation because it has not yet been determined if a liability has been incurred and if so, if the liability can be reasonably estimated (see Note 9D).  Legal costs incurred in connection with loss contingencies are expensed as incurred.

R.  Warrants with down-round protection

Warrants that were issued to a certain non employee, which include down-round protection that would adjust the strike price of the warrants to a price per share at which the Company will subsequently issue stock, if such price per share is less than the original strike price of the warrants, were classified as liability and measured at fair value through earnings. To date, the changes in the fair value of the warrants, which were issued during fiscal 2011, were not material.

S. Recently issued accounting pronouncements

1. ASC Topic 220, "Comprehensive Income"

In June 2011, the FASB issued Accounting Standard Update No. 2011-05, “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income” (“ASU 2011-05”).  ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity and requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.

ASU 2011-05 will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 (fiscal year 2012 for the Company) and should be applied retrospectively.

2. ASC Topic 210, “Balance Sheet”

In December 2011, the FASB issued Accounting Standard Update (ASU) 2011-11, “Balance Sheet (Topic 210) - Disclosures about Offsetting Assets and Liabilities” (ASU 2011-11). ASU 2011-11, enhance disclosures about financial instruments and derivative instruments that are either offset in accordance with the Accounting Standards Codification or are subject to an enforceable master netting arrangement or similar agreement. 

The amended guidance will be effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods (fiscal year 2013 for the Company) and should be applied retrospectively to all comparative periods presented.

The Company is currently evaluating the impact that the adoption of ASU 2011-11 would have on its consolidated financial statements, if any.

F- 17

INTEGRITY APPLICATIONS, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 3 – OTHER CURRENT ASSETS

	US dollars
	December 31,
	2011		2010
Related parties		-		11,578
Prepaid expenses		21,282		14,391
Government Institution (*)		70,346		53,363
Other		1,189		6,372
		92,817		85,704

(*) Represents amounts prepaid by Integrity Israel to the Israeli tax authorities or amounts owed to Integrity Israel by the Israeli Value Added Tax authorities.

NOTE 4 – PROPERTY AND EQUIPMENT, NET

	US dollars
	December 31,
	2011			2010
Computers		75,982			68,704
Furniture and office equipment		108,485			74,879
Leasehold improvements		23,401			25,195
		207,868			168,778
Less – accumulated depreciation		(125,000	)		(111,428	)
		82,868			57,350

In years ended December 31, 2011, 2010 and 2009, depreciation was US$ 23,045, US$ 19,153 and US$ 20,837, respectively, and additional equipment was purchased in an amount of US$ 54,619, US$ 8,725 and US$ 5,007, respectively.

NOTE 5 – ACCOUNTS PAYABLE

	US dollars
	December 31,
	2011		2010
Open accounts		57,662		8,354
Checks payable		14,101		2,312
		71,763		10,666

NOTE 6 – OTHER CURRENT LIABILITIES

	US dollars
	December 31,
	2011		2010
Related parties		-		50,133
Employees and related institutions		130,918		110,436
Accrued expenses and other		80,360		98,017
		211,278		258,586

F- 18

INTEGRITY APPLICATIONS, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 7 – LINE OF CREDIT

As of December 31, 2011, the Company did not use any of its credit facilities with its Israeli banks.  As of December 31, 2011, the Company has an unutilized credit line of approximately US$ 78,513 (NIS 300,000).

NOTE 8 – LONG-TERM LOANS FROM STOCKHOLDERS

During the years 2003-2004, Integrity Israel received loans from stockholders (three separate lenders).  The loans are indexed to the Israeli Consumer Price Index from their origination date and bear no interest.

These loans are not required to be repaid until the first year in which the Company reports profits in its annual statements of operations (accounting profit).  The Company has not reported any profits since inception and does not expect to report profit in the near future.  Accordingly, the loans have been presented as long-term liabilities.  At such time as the Company reports profits, repayment of the stockholder loans is to be made from cash flows that will be received from sales, such that 10% of the total sales of the Company after deduction of VAT in every quarter, starting with the quarter following the first year in which the Company reports profits in its annual statement of operations, will be transferred to the lenders, until full repayment of the loans.  However, notwithstanding the abovementioned mechanism, the Company will not be required to repay the loans during any time when such repayment would cause a deficit in the Company's working capital.

As of December 31, 2011, no repayments of the stockholders loans have been made.

NOTE 9 – COMMITMENTS AND CONTINGENT LIABILITIES

A. On March 4, 2004, the Office of the Chief Scientist of the Ministry of Industry, Trade and Labor of the State of Israel (the “OCS”) agreed to provide Integrity Israel with a grant of NIS 420,000, or approximately US$ 93,462, for its plan to develop a non-invasive blood glucose monitor (the “development plan”). This grant constituted 60% of Integrity Israel’s research and development budget for the development plan. Due to Integrity Israel’s acceptance of this grant, it is subject to the provisions of the Israeli Law for the Encouragement of Industrial Research and Development of 1984 (the “R&D Law”). Integrity Israel is required to pay royalties to the OCS on the proceeds from the sale of the Company's systems resulting from research and development projects for which the OCS provided a grant. The maximum royalties payable by Integrity Israeli will be an amount equal to US$93,462, plus interest from the date of grant at LIBOR. In the first 3 years of sales, Integrity Israel will be required to pay a 3% royalty on the sale of any product developed under the research and development projects. In the fourth, fifth and sixth years of sales, Integrity Israel will be required to pay a 4% royalty on sales of such products and from the seventh year onward Integrity Israel will be required to pay a 5% royalty. Integrity Israel was entitled to the grant only upon incurring research and development expenditures. There were no future performance obligations related to the grant received from the OCS. As of December 31, 2011, the contingent liabilities with respect to the grants received from the OCS subject to repayment under this royalty agreement on future sales equal an amount of US$ 93,462, not including interest. There is no expiration date with respect to Integrity Israel’s obligations to pay royalties to the OCS in respect of the above.

B. Integrity Israel currently leases approximately 3,100 sq. ft. of office space in the city of Ashkelon, Israel for its principal offices and prototype laboratory.  The lease term began on February 1, 2006 and was extended until January 31, 2009.  Pursuant to a verbal agreement with the landlord, Integrity Israel currently leases these facilities on a monthly basis at a cost of NIS 11,500 plus VAT per month (US$ 3,010).

F- 19

INTEGRITY APPLICATIONS, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 9 – COMMITMENTS AND CONTINGENT LIABILITIES (cont.)

C. In 2010, the Company engaged Andrew Garrett, Inc. as its exclusive placement agent (the "Placement Agent") in connection with an offering on a “best efforts” basis of a minimum 560,000 shares (US$ 3,500,000) of the Company's Common Stock and a maximum of 2,000,000 shares of the Company’s Common Stock (US$ 12,500,000) (the "Offerings").  Pursuant to a placement agent agreement with the Placement Agent, the Placement Agent (or its sub-agents) was entitled to receive, as a commission, an amount equal to 7% of the funds raised in the Offerings, such amounts to be paid in cash, plus 3% of the funds as a management fee plus a 3% non-accountable expense allowance (13% in the aggregate).  In addition, the placement agent agreement required the Company to issue to the Placement Agent (or its sub-agents) warrants to purchase up to 10% of the shares of Common Stock issued to investors (or underlying convertible securities issued to investors) in connection with the Offerings at a price per share that will be equal to the offering price.  The warrants to be issued to the Placement Agent include a limited Period (until September 1, 2012) Down-Round Protection under which the strike price of the warrants would be adjusted to a price per share at which the Company will subsequently issue stock, if such price per share is less than the original strike price of the warrants.  See also Note 2R.

In connection with the Offerings described in Note 10, the Company paid to the Placement Agent US$ 366,412 and US$ 753,850, respectively, in cash during 2011 and 2010, respectively.  In addition, the Company issued to the Placement Agent warrants to purchase 45,097 and 83,281 shares, respectively, of the Company's Common Stock with an exercise price of US$ 6.25.  The warrants expire on the fifth anniversary of the date on which the shares of common stock underlying such warrants are fully registered with the SEC.  The warrants include customary adjustment provisions for stock splits, reorganizations and other similar transactions and provide for anti-dilution protection until September 1, 2012 for certain issuances of common stock by us for less than US$ 6.25 per share.

D. Y.H. Dimri Holdings, which was a shareholder of Integrity Israel prior to the reorganization and merger described in Note 1 ("Dimri"), has alleged (post the reorganization) that, in connection with such reorganization, certain of Dimri's rights in Integrity Israel were violated.  Under Dimri's investment agreement, certain rights in Integrity Israel were granted to Dimri, including an anti-dilution provision that provided that Dimri’s holdings in Integrity Israel would not be diluted below 18% of Integrity Israel’s issued capital shares as a result of any investment in Integrity Israel.  On the date of the reorganization, Dimri owned 18% of Integrity Israel’s ordinary shares and, therefore, upon the completion of the reorganization, Dimri was entitled to receive 18% of the shares of common stock of the Company outstanding on such date in exchange for his shares in Integrity Israel, subject to the fulfillment of certain requirements.  The Company's management, considering the legal advice of Israeli legal counsel, believe that, given Dimri no longer owns shares in Integrity Israel as a result of the reorganization, rights attached to the shares in Integrity Israel no longer exist in Integrity Israel and do not and have never existed in the Company.  However, Dimri has refused to acknowledge or agree to the termination of these rights and has challenged the Company's position.

On June 23, 2011, Mr. Dimri appealed to the District Court of HaMerkaz District in Petah Tikva, Israel, requesting the court to appoint an arbitrator to decide the dispute between Integrity Israel, the founders of Integrity Israel and Mr. Dimri (HPB 40754-06-11). On September 25, 2011, Integrity Israel's legal counsel filed an answer with the Court, disputing the facts and allegation raised in Dimri's motion and suggesting choosing an arbitrator with certain capacities, experience and skills. At a hearing held on October 11, 2011, the court appointed an arbitrator in this matter. On November 27, 2011, the proposed arbitrator informed the court that he would not be able to serve as an arbitrator in this matter.  On December 26, 2011, new arbitrator was appointed in this matter.  On February 14, 2012, a first procedural meeting took place with the appointed arbitrator.  As a result of which Dimri is required to submit a statement of claim to the arbitrator (with a copy to the defendants' attorneys) by March 15, 2012.  The defendants in the arbitration will be required to submit a statement of defense within 30 days of receiving Dimri's statement of claim and Dimri will have the right to reply within 10 days of receiving the statement of defense.

F- 20

INTEGRITY APPLICATIONS, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 9 – COMMITMENTS AND CONTINGENT LIABILITIES (cont.)

D. (cont.)

A preliminary session has been set for May 10, 2012.  It should be noted that, in accordance with Israeli law, Mr. Dimri was not required to, and he did not, specify in his request for the appointment of an arbitrator the relief to be sought by him in the arbitration. As a result, the Company does not yet know the relief to be sought by Mr. Dimri in the arbitration. The Company anticipates that Mr. Dimri will specify the relief sought by him in his statement of claim.

The Company does not know what other actions Mr. Dimri will ultimately bring, if any, and against whom they will be brought. Nevertheless, the Company, its legal counsel and Integrity Israel’s legal counsel believe that the Company and Integrity Israel have substantial defenses to any such claims and appropriate claims and counterclaims of their own and they intend to strongly defend against any such action by Mr. Dimri and to assert their own claims and counterclaims as they deem necessary.

Notwithstanding the aforesaid, the Company, considering the advice of its Israeli legal counsel, is unable to assess or make any estimate of the amount of the reasonably possible range of loss, if any. Accordingly, no provision has been made for this claim.

NOTE 10 – SHARE CAPITAL

A. Description of the rights attached to the Shares in the Company

Each share of Common Stock entitles the holder to one vote, either in person or by proxy, at meetings of stockholders.  The holders are not permitted to vote their shares cumulatively.  Accordingly, the stockholders of the Company's Common Stock who hold, in the aggregate, more than fifty percent of the total voting rights can elect all of the directors and, in such event, the holders of the remaining minority shares will not be able to elect any of such directors.  The vote of the holders of a majority of the issued and outstanding shares of Common Stock entitled to vote thereon is sufficient to authorize, affirm, ratify or consent to such act or action, except as otherwise provided by law.

B. Stock-based compensation

1. Grants to non-employees

a. During 2005, Integrity Israel granted to three consultants an aggregate sum of 144,250 of its ordinary shares of NIS 0.01 par value as consideration for consulting services.  The compensation expense was recorded as an expense over the consulting service period (varying from 2 months to 2 years).   The non-cash compensation recorded with respect to such grants was US$ 123,625, US$ 229,564 and US$ 175,516 for the years 2007, 2006 and 2005, respectively.  The fair value of the shares was based on the recent share price applicable.   Following the merger with Integrity Israel, the shares were replaced with shares of common stock of the Company.

b. In October 2006, the Company granted 45,531 options with an exercise price of US$ 4.305 per share in consideration of investor finders.  In November 2008, the Company granted 8,989 options with an exercise price of US$ 5.517 per share in consideration of investor finders.  The fair value of the grant was based on the most recent share price with respect to the relevant grant date.   Following the merger with Integrity Israel, the options were replaced with options of the Company.

c. See Note 9C.

F- 21

INTEGRITY APPLICATIONS, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 10 – SHARE CAPITAL (cont.)

B. Stock-based compensation (cont.)

2.  Grants to employees

a. During 2005-2006, Integrity Israel granted to two individuals (an officer and a director), options exercisable into 24,394 options of NIS 0.01 par value of Integrity Israel.  The exercise price of each option was US$ 3.49 (with respect to 4,486 options) and US$ 3.84 (with respect to 19,908 options).  The vesting period was three years with respect to the 4,486 options and two months with respect to the 19,908 options.   The total non-cash compensation recorded with respect to such grants was US$ 45,291, US$ 2,435 and US$ 203 for the years 2007, 2006 and 2005, respectively.  The fair value of the grants, which was estimated using Black-Scholes option pricing model, was based, among other factors, on the most recent share price with respect to the relevant grant date.   Following the merger with Integrity Israel, the options were replaced with options of the Company.

b. In August 2007, Integrity Israel’s Board of Directors ("Integrity Israel's Board") approved a stock option plan ("Integrity Israel's plan") for the grant, without consideration of options exercisable into ordinary shares of NIS 0.01 par value of Integrity Israel to employees, officers and directors of Integrity Israel.  The exercise price and vesting period for each grantee of options was determined by Integrity Israel's Board and specified in such grantee's option agreement.  The options were to vest over a period of 1-12 quarters based on each grantee's option agreements.  Any option not exercised within 10 years after the date of grant thereof will expire.   In July 2010, following the merger with Integrity Israel, the Company adopted the 2010 Share Incentive Plan (the "2010 Share Incentive Plan"), pursuant to which the Company's Board of Directors is authorized to grant options exercisable into Common Stock of the Company.  The Company has reserved 529,555 shares of Common Stock for issuance under the plan.  The purpose of the 2010 Share Incentive Plan is to offer an incentive to employees, directors, officers, consultants, advisors, suppliers and any other person or entity whose services are considered valuable to the Company, as well as to replace the Integrity Israel Plan and to replace all options granted in the past by Integrity Israel.   Upon the adoption of the 2010 Share Incentive Plan, all options granted under the Integrity Israel's Plan were replaced by options subject to the 2010 Share Incentive Plan on a 1 for 1 basis.   As of December 31, 2011, 91,829 options have been granted to employees and 21,641 options to non-employees (excluding the options granted to related parties – see Notes 16A and 16B).  All options granted in the Integrity Israel Plan were replaced with options of the Company and are subject to the 2010 Share Incentive Plan.  The non-cash compensation relating to options granted to employees and directors was US$ 320, US$ 14,575 and US$ 12,171 during the years ended December 31, 2011, 2010 and 2009, respectively.   As of December 31, 2011, there are 185,343 shares available for future grants under the 2010 Share Incentive Plan.   As of December 31, 2011, there were approximately $327,663 of total unrecognized compensation costs related to non-vested share-based compensation arrangements granted under the grants. This amount, which relate to the grants described in Note 16 A and B, is expected to be recognized in 2012.

F- 22

INTEGRITY APPLICATIONS, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 10 – SHARE CAPITAL (cont.)

B. Stock-based compensation (cont.)

2.  Grants to employees (cont.)

The following tables present a summary of the status of the grants to employees, officers and directors as of December 31, 2011, 2010 and 2009:

	Number			Weighted average exercise price (US$)
Year ended December 31, 2011
Balance outstanding at beginning of year		428,367			5.37
Granted (*)		29,315			6.25
Exercised		-			-
Forfeited		(3,328	)		3.84
Balance outstanding at end of the year		454,354			5.44
Balance exercisable at the end of the year		110,142			2.81

(*) Represents the minimum number of options, as of the date indicated that was required to be issued to Messrs. Gal and Malka following the completion of the Offering, the number of which was finalized in August 2011 upon the completion of the Offering. See Note 16 for a discussion regarding the total number of options to be issued in connection with the Offering.

	Number		Weighted average exercise price (US$)
Year ended December 31, 2010
Balance outstanding at beginning of year		109,197		2.81
Granted (*)		314,897		6.25
Granted		4,273		6.02
Exercised		-		-
Forfeited		-		-
Balance outstanding at end of the year		428,367		5.37
Balance exercisable at the end of the year		109,197		2.81

(*) Represents the minimum number of options, as of the date indicated, that was required to be issued to Messrs. Gal and Malka following the completion of the Offering, the number of which was finalized in August 2011 upon the completion of the Offering. See Note 16 for a discussion regarding the total number of options to be issued in connection with the Offering.

F- 23

INTEGRITY APPLICATIONS, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 10 – SHARE CAPITAL (cont.)

B. Stock-based compensation (cont.)

2.         Grants to employees (cont.)

	Number		Weighted average exercise price (US$)
Year ended December 31, 2009
Balance outstanding at beginning of year		106,213		2.73
Granted		2,984		5.52
Exercised		-		-
Forfeited		-		-
Balance outstanding at end of the year		109,197		2.81
Balance exercisable at the end of the year		106,213		2.73

The aggregate intrinsic value of the awards exercisable as of December 31, 2011 and 2010 is US$ 368,926 and US$ 375,638, respectively.  The aggregate intrinsic value of the awards outstanding as of December 31, 2011 and 2010 is US$ 368,926 and US$ 376,963, respectively.  This amount represents the total intrinsic value, based on management's estimate of the Company's stock price of US$ 6.25 as of December 31, 2011 and December 31, 2010, respectively, less the weighted exercise price.

The following tables summarize information about options outstanding at December 31, 2011 and 2010:

Exercise prices	Outstanding at December 31, 2011			Weighted average remaining contractual life years		Weighted average exercise price		Exercisable at December 31, 2011		Weighted average  exercise price
US$
1.72		46,004			5.6		1.72		46,004		1.72
3.27		30,966			3.9		3.27		30,966		3.27
3.48		4,486			3.9		3.48		4,486		3.48
3.63		4,849			5.6		3.63		4,849		3.63
3.84		16,580			5.0		3.84		16,580		3.84
5.52		2,984			7.6		5.52		2,984		5.52
6.02		4,273			5.1		6.02		4,273		6.02
6.25		344,212	(*)		9.0		-		-		-
		454,354							110,142

(*) Represents the minimum number of options, as of the date indicated, to be issued to Messrs. Gal and Malka following the completion of the Offering, the number of which was finalized in August 2011 upon the completion of the Offering. See Note 16 for a discussion regarding the total number of options to be issued in connection with the Offering.

F- 24

INTEGRITY APPLICATIONS, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 10 – SHARE CAPITAL (cont.)

B. Stock-based compensation (cont.)

2.         Grants to employees (cont.)

Exercise prices	Outstanding at December 31, 2010			Weighted average remaining contractual life years		Weighted average exercise price		Exercisable at December 31, 2010		Weighted average exercise price
US$
1.72		46,004			6.6		1.72		46,004		1.72
3.27		30,966			4.9		3.27		30,966		3.27
3.48		4,486			4.9		3.48		4,486		3.48
3.63		4,849			6.6		3.63		4,849		3.63
3.84		19,908			6.0		3.84		19,908		3.84
5.52		2,984			8.6		5.52		1,493		5.52
6.02		4,273			6.12		6.02		1,491		6.02
6.25		314,897	(*)		10.0		-		-		-
		428,367							109,197

(*) Represents the minimum number of options, as of the date indicated, to be issued to Messrs. Gal and Malka following the completion of the Offering, the number of which was finalized in August 2011 upon the completion of the Offering. See Note 16 for a discussion regarding the total number of options to be issued in connection with the Offering.

The fair value of options granted was estimated at the dates of grant using the Black-Scholes option pricing model.  The following are the data and assumptions used:

	2011		2010		2009
Dividend yield (%)		0		0		0
Expected volatility (%) (*)		50		50		50
Risk free interest rate (%)		2		2		2
Expected term of options (years) (**)		5-6		5-6		5-6
Exercise price (US dollars)		6.25		6.02/6.25		5.52
Share price (US dollars) (***)		6.25		6.02/6.25		5.52
Fair value (US dollars)		3.08		2.81/3.08		1.42

(*) Due to the fact that the Company is a nonpublic entity, the expected volatility is based on the historic volatility of public companies which operate in the same industry sector.

(**) Due to the fact that the Company does not have historical exercise data, the expected term was determined based on the "simplified method" in accordance with Staff Accounting Bulletin No. 110.

(***) The fair value of the share was based on the most recent share prices, as applicable to each grant.

F- 25

INTEGRITY APPLICATIONS, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 10 – SHARE CAPITAL (cont.)

C. Convertible notes

1. In April 2010, the Company issued Secured Notes (“Senior Notes”) in the aggregate initial principal amount of US$ 999,000 together with rights to acquire Common Stock following the reorganization and merger described in Note 1.  The principal amount of the notes, together with any interest accrued but unpaid thereon, and any fees and charges, are referred to collectively as the “Outstanding Amount” of such Senior Notes.

The Senior Notes provided for an interest rate of 9% per annum and were due and payable on the first to occur of (a) the date of the closing of the Company’s next Qualified Financing (as defined therein); or (b) August 9, 2010, provided that the holders of Senior Notes were permitted to extend the date in clause (b) by up to 60 days with respect to all of the Senior Notes (the “Maturity Date”).  Interest on the Senior Notes was to be paid on the Maturity Date if such interest was not exchanged for Common Stock in the manner described above.

Immediately after the initial closing of the Offering, each purchaser of a Senior Note (a “Senior Note Purchaser”) was entitled to receive Common Stock issued and sold at the closing of the Offering in accordance with the following:

(i) If the Senior Note Purchaser elected, to be repaid under its Senior Note in shares of Common Stock in lieu of any cash, such Senior Note Purchaser received the number of shares of Common Stock equal to the quotient obtained by dividing (i) 200% of the unpaid portion of the Outstanding Amount of such Senior Note Purchaser’s Senior Note by (ii) the offering price per share of the Common Stock, rounded to the nearest whole share; or

(ii) If the Senior Note Purchaser did not make the election in clause (i) above, such Senior Note Purchaser instead received the number of shares of Common Stock equal to the quotient obtained by dividing (i) 100% of the unpaid portion of the Outstanding Amount of such Senior Note Purchaser’s Senior Note by (ii) the offering price per share of the Common Stock, rounded to the nearest whole share, in addition to a cash payment equal to the Outstanding Amount of such Senior Note Purchaser’s Senior Note pursuant to the terms thereof.

The original amount of the Senior Notes (US$ 999,000), which entitled the holders of the Senior Notes to an either cash or stock settlement at a price per share equal to the fair value of the share that would be determined at the offering, represented stock-settled debt under the provisions of ASC Topic 47-20, "Debt-Debt with Conversion and Other Options".  Due to the conversion price, the Company has determined that this component did not provide an active beneficial conversion feature.  However, the entitlement of the Senior Note holders to receive a fixed value of Common Stock in an amount equal to 100% of the original amount of the Senior Notes (in addition to the stock settled debt described above), which represented an obligation to issue a variable number of shares under the provisions of ASC Topic 480, "Distinguishing Liabilities for Equity" (totaling US$ 999,000), was recognized as a stock-based interest compensation (which was included among financing expenses, net), over the term of the Senior Notes (April 2010 - August 2010).

On December 16, 2010, the Company completed an initial closing of the Offering, at which the Company issued 87,977 shares of Common Stock to certain holders of Senior Notes, who held an amount of US$ 549,797 (including unpaid interest) and which elected to be repaid in shares.  The remaining amount of the Senior Notes, US$ 527,396 (including unpaid interest), was settled in cash.

In addition, the Company issued 171,208 shares of Common Stock to the holders of Senior Notes as a repayment of the obligation to issue a variable number of shares.  The fair value of the shares (US$ 1,069,244) represents 100% of the original amount of the Senior Notes and interest accumulated up to the Offering date.

F- 26

INTEGRITY APPLICATIONS, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 10 – SHARE CAPITAL (cont.)

C. Convertible notes (cont.)

1. (cont.)

The Company issued to the Placement Agent warrants to purchase an aggregate of 25,919 shares of Common Stock with an exercise price of US$ 6.25 and in addition was required to pay US$ 129,870 in cash (see Note 9C).

2. In November 2010, Integrity Israel issued Unsecured Junior Promissory Notes ("Junior Notes") in the aggregate initial principal amount of US$ 170,000 (of which US$ 25,000 was received in 2011).  The Junior Promissory Notes were substantially similar to the Senior Notes, except that immediately after the initial closing of the Offering, each holder of Junior Promissory Notes was entitled to receive the number of shares of Common Stock equal to the quotient obtained by dividing (i) 200% of the Outstanding Amount of such holder’s Junior Promissory Note by (ii) the price per share of the Common Stock in the Offering, rounded to the nearest whole share.  The entitlement to receive a fixed value of Common Stock sold at the closing of the Offering in an amount equal to 200% of the original amount of the Junior Notes was recognized as an obligation to issue a variable number of shares under the provisions of ASC Topic 480, "Distinguishing Liabilities for Equity", accordingly an amount equal to 100% of the original amount of the Junior Notes was recognized as stock-based interest compensation (which was included among financing expenses, net) over the term of the Junior Notes (November 2010 – December 2010).   On December 16, 2010, the Company completed an initial closing of the Offering, at which, 54,792 shares of Common Stock were issued to the purchasers of the Junior Promissory Notes pursuant to the terms and in full repayment of such Junior Promissory Notes.  The fair value of the shares (US$ 345,100) represents 200% of the original amount of the Senior Notes and interest accumulated up to the Offering date.

The Company issued to the Placement Agent, warrants to purchase an aggregate of 5,480 shares of Common Stock with an exercise price of US$ 6.25 and in addition was required to pay US$ 77,292 in cash (see Note 9C).

D. On December 16, 2010, the Company completed an initial closing of the Offering at which the Company received an amount of US$ 3,016,250 for 482,600 shares of Common Stock issued to investors in the Offering representing a price per share of US$ 6.25.  The Company issued to the Placement Agent, warrants to purchase an aggregate of 48,260 shares of Common Stock at the third closing with an exercise price of US$ 6.25 and in addition was required to pay US$ 392,112 in cash (see Note 9C).

E. On December 30, 2010, the Company completed a second closing of the Offering at which the Company received an amount of US$ 300,000 for 48,000 shares of Common Stock issued to investors in the Offering representing a price per share of US$ 6.25.  The Company issued to the Placement Agent, warrants to purchase an aggregate of 4,800 shares of Common Stock at the third closing with an exercise price of US$ 6.25 and in addition was required to pay US$ 39,000 in cash (see Note 9C).

F. On January 31, 2011, the Company completed a third closing of the Offering at which the Company received an amount of US$ 102,000 for 16,320 shares of Common Stock issued to investors in the Offering representing a price per share of US$ 6.25.  The Company issued to the Placement Agent, warrants to purchase an aggregate of 1,632 shares of Common Stock at the third closing with an exercise price of US$ 6.25 and in addition was required to pay US$ 13,260 in cash (see Note 9C).

F- 27

INTEGRITY APPLICATIONS, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 10 – SHARE CAPITAL (cont.)

G. On March 31, 2011, the Company completed a fourth closing of the Offering at which the Company received an amount of US$ 567,300 for 90,768 shares of Common Stock issued to investors in the Offering representing a price per share of US$ 6.25.  The Company issued to the Placement Agent, warrants to purchase an aggregate of 9,077 shares of Common Stock at the fourth closing with an exercise price of US$ 6.25 and in addition was required to pay US$ 73,749 in cash (see Note 9C).

H. On April 29, 2011, the Company completed a fifth closing of the Offering at which the Company received an amount of US$ 250,000 for 40,000 shares of common stock issued to investors in the Offering representing a price per share of US$ 6.25.  The Company issued to the Placement Agent, warrants to purchase an aggregate of 4,000 shares of common-stock at the fifth closing with an exercise price of US$ 6.25 and in addition was required to pay US$ 32,500 in cash (see Note 9C).

I. On May 31, 2011, the Company completed a sixth closing of the Offering at which the Company received an amount of US$ 213,750 for 34,200 shares of common stock issued to investors in the Offering representing a price per share of US$ 6.25.  The Company issued to the Placement Agent, warrants to purchase an aggregate of 3,420 shares of common-stock at the sixth closing with an exercise price of US$ 6.25 and in addition was required to pay US$ 27,788 in cash (see Note 9C).

J. On July 29, 2011, the Company completed a seventh closing of the Offering at which the Company received an amount of US$ 1,685,500 for 269,680 shares of Common Stock.  The Company issued to the Placement Agent, warrants to purchase an aggregate of 26,968 shares of common-stock at the seventh closing with an exercise price of US$ 6.25 and in addition was required to pay US$ 219,115 in cash (see Note 9C).

K. Purchasers of the common stock in the Offering are entitled to anti-dilution protection until September 1, 2012 for certain issuances of common stock by the Company for less than US$ 6.25 per share.

NOTE 11 – RESEARCH AND DEVELOPMENT EXPENSES, NET

	US dollars
	Year ended December 31,						Cumulative period from September 30, 2001 (date of inception) through December 31,
	2011		2010		2009		2011
Salaries and related expenses		1,194,170		557,042		482,662		4,847,022
Professional fees		210,674		94,711		205,903		1,442,753
Materials		60,360		19,114		56,791		479,715
Depreciation		22,835		53,219		44,948		225,675
Travel expenses		119,498		58,215		25,195		344,067
Vehicle maintenance		33,856		33,697		30,411		241,420
Other		147,908		118,058		159,198		1,068,524
		1,789,301		934,056		1,005,108		8,649,176
Less:Grants from the OCS (*)		-		-		-		(93,462	)
		1,789,301		934,056		1,005,108		8,555,714

(*)  See Note 9A.

F- 28

INTEGRITY APPLICATIONS, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 12 – GENERAL AND ADMINISTRATIVE EXPENSES

	US dollars
	Year ended December 31,						Cumulative period from September 30, 2001 (date of inception) through December 31
	2011		2010		2009		2011
Salaries and related expenses		162,221		55,995		55,131		430,756
Professional fees		336,308		365,398		52,270		1,491,023
Other		45,616		36,102		57,755		239,955
		544,145		457,495		165,156		2,161,734

NOTE 13 – FINANCING EXPENSES, NET

	US dollars
	Year ended December 31,								Cumulative period from September 30, 2001 (date of inception) through December 31
	2011			2010			2009		2011
Linkage difference on principal of loans from stockholders		24,934			15,909			10,617		177,049
Exchange rate differences		(4,638	)		(51,844	)		18,210		233,897
Stock-based interest compensation to holders of convertible notes (see Note 10C)		-			1,214,943			-		1,214,943
Interest expenses on credit from banks and other		10,597			17,987			3,205		(25,718	)
Interest expenses and other, related to convertible notes		-			200,812			-		200,812
		30,893			1,397,807			32,032		1,800,983

NOTE 14 – INCOME TAX

A. Measurement of results for tax purposes under the Israeli Income Tax (Inflationary Adjustments) Law, 1985 (the “Inflationary Adjustment Law”)   Until December 31, 2007, Integrity Israel reported for tax purposes in accordance with the provisions of the Inflationary Adjustments Law, whereby taxable income was measured in NIS, adjusted for changes in the Israeli Consumer Price Index.

Results of operations for tax purposes were measured in terms of earnings in NIS after adjustments for changes in the Israeli Consumer Price Index ("CPI").  Commencing January 1, 2008, the Inflationary Adjustment Law became void and in its place there are transition provisions, whereby the results of operations for tax purposes are to be measured on a nominal basis.

F- 29

INTEGRITY APPLICATIONS, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 14 – INCOME TAX (cont.)

B. Reduction in Israeli corporate tax rates

On July 25, 2005, the Israeli Parliament passed an amendment to the Income Tax Ordinance (No. 147) – 2005, gradually reducing the tax rate applicable to the Company as follows: in 2006 – 31%, in 2007 – 29%, in 2008 – 27%, in 2009 – 26% and in 2010 and thereafter – 25%.

On July 23, 2009, as part of the Economic Efficiency Law (Legislative Amendments for the Implementation of the Economic Plan for the years 2009 and 2010) – 2009 (the “Arrangements Law”), article 126 of the Income Tax Ordinance (New Version) – 1961 was amended, whereby the Israeli corporate tax rate would be gradually reduced commencing in the 2011 tax year and thereafter, as follows: 2011 – 24%, 2012 – 23%, 2013 – 22%, 2014 – 21%, 2015 – 20% and 2016 and thereafter – 18%.

In accordance with the Law for the Change in the Tax Burden (Legislative Amendments) – 2011, commencing from December 5, 2011, the blueprint for the reduction in corporate tax set out in the Arrangements Law was cancelled so that following the amendment, the Israeli corporate tax rate will be as follows: 2011 – 24%, commencing in 2012 and thereafter – 25%.

C. Tax assessments

The Company and Integrity Israel have not received final tax assessments since their inception.

D. Carryforward tax losses

As of December 31, 2011, the Company and Integrity Israel has loss carry forward balances for income tax purposes of nearly US$ 0.5 million and US$ 9.7 million, respectively, that are available to offset future taxable income, if any.

E. The following is a reconciliation between the theoretical tax on pre-tax income, at the tax rate applicable to the Company (federal tax rate) and the tax expense reported in the financial statements:

	US dollars
	Year ended December 31,
	2011			2010			2009
Pretax loss		(2,364,339	)		(2,788,446	)		(1,202,296	)
Federal tax rate		35	%		35	%		35	%
Income tax benefit computed at the ordinary tax rate		(827,519	)		(975,956	)		(420,804	)
Non-deductible expenses		4,885			4,688			4,463
Stock-based compensation		132,325			5,101			4,260
Stock-based interest compensation to holders of convertible notes		-			425,229			-
Tax in respect of differences in corporate tax rates		236,434			278,844			252,483
Losses and timing differences in respect of which no deferred taxes were generated		453,875			262,094			159,598
		-			-			-

F- 30

INTEGRITY APPLICATIONS, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 14 – INCOME TAX (cont.)

F. Deferred taxes result principally from temporary differences in the recognition of certain revenue and expense items for financial and income tax reporting purposes.  Significant components of the Group's future tax assets are as follows:

	US dollars
	December 31,
	2011			2010			2009
Composition of deferred tax assets:
Provision for employee-related obligation		42,137			36,568			37,561
Non-capital loss carry forwards		2,890,426			2,393,919			1,768,416
Valuation allowance		(2,932,563	)		(2,430,487	)		(1,805,977	)
		-			-			-

NOTE 15 – LOSS PER SHARE

The loss and the weighted average number of shares used in computing basic and diluted loss per share for the years ended December 31, 2011, 2010 and 2009, are as follows:

	US dollars
	Year ended December 31,
	2011		2010		2009
Loss for the year		2,364,339		2,788,446		1,202,296

	Number of shares
	Year ended December 31,
	2011		2010		2009
Weighted average number of shares used in the computation of basic and diluted earnings per share		5,091,330		4,034,706		3,995,805
Total weighted average number of ordinary shares related to outstanding options and warrants excluded from the calculations of diluted loss per share (*)		582,732		511,648		109,197

(*) All stock issuable upon the exercise of all outstanding stock options and warrants and conversion of convertible notes (with respect to fiscal year 2010 calculation of EPS) have been excluded from the calculation of the diluted net loss per share for all the reported periods, since the effect of the shares issuable with respect of these instruments was anti-dilutive.

F- 31

INTEGRITY APPLICATIONS, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 16 – RELATED PARTIES

A. Avner Gal, the owner of approximately 7.75% of the Company's outstanding Common Stock entered into an employment agreement with Integrity Israel in July 2010 pursuant to which Mr. Gal agreed to continue to serve as the chief executive officer and managing director of Integrity Israel.  The agreement was approved by the board of directors and stockholders of Integrity Israel. Mr. Gal’s employment agreement provides for an annual salary of NIS 480,000 (US$ 125,622) and an annual bonus to be determined by the Board of Directors and an additional sum provided that Mr. Gal reaches certain milestones approved by the Board, as well as the payment of certain social and insurance benefits and the use of a group four car.  The agreement also provides for a renegotiation of Mr. Gal’s annual salary on the one-year anniversary thereof and the renegotiation of Mr. Gal’s bonus formula once Integrity Israel has begun commercialization of its products.  The agreement is terminable by either party on 180 days notice, immediately by Integrity Israel with the payment of an amount equal to 180 days of annual salary, or immediately by Integrity Israel for cause (as defined in the agreement) without the payment of severance.  Mr. Gal is subject to a non-compete and a confidentiality agreement during the term of the agreement and for one year thereafter.

In connection with the Offering, Mr. Gal was entitled to receive options to purchase 5% of all issued and outstanding Common Stock of the Company after the offering for sale of a minimum 560,000 shares ($3,500,000) of the Company's Common Stock and a maximum of 2,000,000 shares of the Company's Common Stock ($12,500,000).  The Offering (which commenced in December 2010) was completed in July 2011 and, as a result, Mr. Gal became entitled to receive a grant of 264,778 options.  The options shall be deemed vested, in 3 equal parts, in accordance with the achievement of the following milestones: (i) submission of clinical trials’ results to the Notified Body; (ii) CE mark approval; (iii) FDA approval. The options will be exercisable at $6.25 per share. In the event of a merger and/or acquisition in which one or more of the abovementioned milestones have not yet been met, the options shall be deemed vested on the date of the merger and/or acquisition.  All options granted as described above are subject to the terms of the 2010 share incentive plan.

The total non-cash compensation recorded with respect to such grants was US$ 290,824 for the year ended December 31, 2011.  The fair value of the shares was based on the recent share price applicable.

B. David Malka, the owner of 3.5% of the Company's outstanding Common Stock entered into an employment agreement with Integrity Israel in July 2010 pursuant to which Mr. Malka agreed to continue to serve as the vice president of operations of Integrity Israel.  The agreement was approved by the board of directors and stockholders of Integrity Israel. Mr. Malka’s employment agreement provides for an annual salary of NIS 240,000 (US$ 62,811) and an annual bonus to be determined by the Board of Directors in its sole discretion and an additional sum provided that Mr. Malka reaches certain milestones approved by the Board, as well as the payment of certain social and insurance benefits and the use of a group three car.  The agreement also provided for a renegotiation of Mr. Malka’s annual salary on the one-year anniversary thereof and the renegotiation of Mr. Malka’s bonus formula once Integrity Israel has begun commercialization of its products.  The agreement is terminable by either party on 90 days notice, immediately by Integrity Israel with the payment of an amount equal to 90 days of annual salary, or immediately by Integrity Israel for cause (as defined in the agreement) without the payment of severance.  Mr. Malka is subject to a non-compete and confidentiality agreement during the term of the agreement and for one year thereafter.

F- 32

INTEGRITY APPLICATIONS, INC.

(A Development Stage Company)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont.)

NOTE 16 – RELATED PARTIES (cont.)

B. (cont.)

In connection with the Offering, Mr. Malka was entitled to receive options to purchase 1.5% of all issued and outstanding Common Stock of the Company after the offering for sale of a minimum 560,000 shares ($3,500,000) of the Company's Common Stock and a maximum of 2,000,000 shares of the Company's common stock ($12,500,000).  The Offering (which commenced in December 2010) was completed in July 2011 and, as a result, Mr. Malka became entitled to receive a grant of 79,434 options.  The options shall be deemed vested, in equal parts, in accordance with the achievement of the following milestones: (i) Submission of clinical trials’ results to the Notified Body; (ii) CE mark approval; (iii) FDA approval. The options will be exercisable at $6.25 per share. In the event of a merger and/or acquisition in which one or more of the abovementioned milestones have not yet been met, the options shall be deemed vested on the date of the merger and/or acquisition.  All options granted as described above are subject to the terms of the 2010 share incentive plan.

The total non-cash compensation recorded with respect to such grants was US$ 87,248 for the year ended December 31, 2011.  The fair value of the shares was based on the recent share price applicable.

C. Zicon Ltd., a company of which Zvi Cohen, a director of the Company and an owner of 6.83% of the Company's outstanding Common Stock, was a principal stockholder, officer and director, has manufactured certain PC boards for Integrity Israel during the years 2006-2010.  In the years 2008-2010, total compensation paid by the Company to Zicon has been less than US$ 20,000, each year.

D. See Notes 3, 6 and 8.

NOTE 17 – SUBSEQUENT EVENTS

A. On March 12, 2012, the Company granted to Company’s employees options to purchase 17,500 shares of the Company’s common stock at an exercise price of US$6.25 per share. All options were granted in accordance with and subject to the terms of the Company’s 2010 Incentive Compensation Plan.

B. See Note 9D.

F- 33

PART IV

Item 15.  Exhibits, Financial Statement Schedules.

(a)           Document List

(1)           Financial Statements:

The financial statements of the Company filed herewith are set forth in Part II, Item 8 of this Report.

(2)           Financial Statement Schedules:

None.

(3)           Exhibits Required by Item 601 of Regulation S-K:

Exhibit Number	Description
2.1	Merger Agreement and Plan of Reorganization, dated as of May 25, 2010, by and among Integrity Applications, Inc., Integrity Acquisition Ltd. and A.D. Integrity Applications Ltd. (1)
3.1	Certificate of Incorporation of Integrity Applications, Inc. (1)
3.2	Certificate of Amendment to Certificate of Incorporation of Integrity Applications, Inc. (1)
3.3	Bylaws of Integrity Applications, Inc. (1)
4.1	Specimen Certificate Evidencing Shares of Common Stock (1)
4.2	Form of Common Stock Purchase Warrant (1)
10.1*	Integrity Applications, Inc. 2010 Incentive Compensation Plan (1)
10.2	Form of Subscription Agreement between Integrity Applications, Inc. and the investor signatory thereto (1)
10.3	Registration Rights Agreement, dated December 16, 2010, by and among Integrity Applications, Inc., Andrew Garrett, Inc. and each investor signatory thereto (1)
10.4*	Form of Director and Officer Indemnification Agreement (1)
10.5	Exclusive Placement Agent Agreement, dated as of September 1, 2009, by and between Andrew Garrett, Inc. and A.D. Integrity Applications Ltd. (1)
10.6	Amendment No. 1 to Exclusive Placement Agent Agreement, effective as of December 16th, 2010, by and between Andrew Garrett, Inc., Integrity Applications, Inc. and A.D. Integrity Applications Ltd. (1)
10.7*	Personal Employment Agreement, dated as of July 22, 2009, between A.D. Integrity Applications Ltd. and Avner Gal (1)
10.8*	Personal Employment Agreement, dated as of July 22, 2010, between A.D. Integrity Applications Ltd. and David Malka (1)
10.9*	Letter Agreement, dated November 10, 2010, by and among Integrity Applications Inc., Integrity Applications Ltd. and Xplanit Ltd. (1)
10.10	Irrevocable Undertaking of Indemnification, dated as of July 26, 2010, by and among Integrity Applications, Inc., Avner Gal, Zvi Cohen, Ilana Freger, David Malka and Alexander Raykhman (1)

10.11	Investment Agreement, dated February 18, 2003, between A.D. Integrity Applications Ltd., Avner Gal, Zvi Cohen, David Freger and David Malka and Yigal Dimri (1)
10.12	Agreement, dated as of November 1, 2005 by and between A.D. Integrity Applications Ltd. and Diabeasy Diabeasy cc. (3)
10.13	Agreement, dated as of October 2, 2005, by and between Technology Transfer Group and Integrity Applications Ltd. (1)
10.14*	Form of Stock Option Agreement (1)
10.15*	Form of Stock Option Agreement (ESOP) (1)
10.16	Letter of Approval, addressed to Integrity Applications Ltd. from the Ministry of Industry, Trade and Employment of the State of Israel (4)
10.17	Letter of Undertaking, addressed to the Ministry of Industry, Trade and Employment of the State of Israel - Office of the Chief Scientist from Integrity Applications Ltd. (2)
10.18	Investment Agreement, dated March 16, 2004, by and among A.D. Integrity Applications Ltd., Yitzhak Fisher, Asher Kugler and Nir Tarlovsky. (3)
10.19*	Personal Employment Agreement, dated as of December 6, 2011, between A.D. Integrity Applications Ltd. and Jacob Bar-Shalom. (6)
21.1	Subsidiaries of Integrity Applications, Inc. (1)
31.1	Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or 15(d)-14(a), as Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or 15(d)-14(a), as Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of 2002
32.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002
32.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes Oxley Act of 2002
101.INS	XBRL Instance Document (5)
101.SCH	XBRL Schema Document (5)
101.CAL	XBRL Calculation Linkbase Document (5)
101.LAB	XBRL Label Linkbase Document (5)
101.PRE	XBRL Presentation Linkbase Document (5)
101.DEF	XBRL Definition Linkbase Document (5)

_______________

(1) Previously filed as an exhibit to the Company’s Registration Statement on Form S-1, as filed with the SEC on August 22, 2011.

(2) Previously filed as an exhibit to Amendment No. 1 to the Company’s Registration Statement on Form S-1, as filed with the SEC on October 7, 2011.

(3) Previously filed as an exhibit to Amendment No. 2 to the Company’s Registration Statement on Form S-1, as filed with the SEC on October 27, 2011.

(4) Previously filed as an exhibit to Amendment No. 3 to the Company’s Registration Statement on Form S-1, as filed with the SEC on November 10, 2011.

(5) Filed as an exhibit to the Original Filing pursuant to Rule 405(a)(2)(ii) of Regulation S-T.  Pursuant to Rule 406T of Regulation S-T, the interactive files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

(6) Filed as Exhibit 10.19 to the Original Filing.

* Compensation Plan or Arrangement or Management Contract

IV-2

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 as of this 14th day of August, 2012.

INTEGRITY APPLICATIONS, INC.
By:	/s/ Avner Gal
Name:	Avner Gal
Title:	Chairman of the Board
	and Chief Executive Officer