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<SEC-DOCUMENT>0001169232-04-002236.txt : 20040414
<SEC-HEADER>0001169232-04-002236.hdr.sgml : 20040414
<ACCEPTANCE-DATETIME>20040414172819
ACCESSION NUMBER:		0001169232-04-002236
CONFORMED SUBMISSION TYPE:	10-K
PUBLIC DOCUMENT COUNT:		12
CONFORMED PERIOD OF REPORT:	20031231
FILED AS OF DATE:		20040414

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			CTI INDUSTRIES CORP
		CENTRAL INDEX KEY:			0001042187
		STANDARD INDUSTRIAL CLASSIFICATION:	FABRICATED RUBBER PRODUCTS, NEC [3060]
		IRS NUMBER:				362848943
		STATE OF INCORPORATION:			DE
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		10-K
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	000-23115
		FILM NUMBER:		04734113

	BUSINESS ADDRESS:	
		STREET 1:		22160 N PEPPER RD
		CITY:			BARRINGTON
		STATE:			IL
		ZIP:			60010

	MAIL ADDRESS:	
		STREET 1:		22160 N PEPPER RD
		CITY:			BARRINGTON
		STATE:			IL
		ZIP:			60010
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>d59202_10-k.txt
<DESCRIPTION>ANNUAL REPORT
<TEXT>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K
                            ANNUAL REPORT PURSUANT TO
                      SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                   For the Fiscal Year Ended December 31, 2003

                             Commission File Number
                                    000-23115

                           CTI INDUSTRIES CORPORATION
             (Exact name of Registrant as specified in its charter)

                  Illinois                                      36-2848943
       (State or other jurisdiction of                       (I.R.S. Employer
       incorporation or organization)                     Identification Number)

22160 North Pepper Road Barrington, Illinois                       60010
  (Address of principal executive offices)                      (Zip Code)

                                 (847) 382-1000
               Registrant's telephone number, including area code

     Securities registered pursuant to Sections 12(b) and 12(g) of the Act:

                                                          Name of each exchange
      Title of Class                                       on which registered:
- --------------------------                                ----------------------
Common Stock, no par value                                NASDAQ SmallCap Market

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

                               |X| Yes     |_| No

      Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated in Part III of the Form 10-K or any amendment to the Form 10-K.

      The Registrant's revenues for the fiscal year ended December 31, 2003,
were $36,259,638

      Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) Yes |_| No |X|

      Based upon the closing price of $3.00 per share of Registrant's Common
Stock as reported on NASDAQ SmallCap Market at March 23, 2004, the aggregate
market value of the voting stock held by non-affiliates of the Registrant was
then approximately $2,860,335 (Determination of stock ownership by
non-affiliates was made solely for the purpose of responding to the requirements
of the Form and the Registrant is not bound by this determination for any other
purpose).

      The number of shares of the Registrant's Common Stock outstanding as of
December 31, 2003 was 1,918,420 (excluding treasury shares).

      Transitional Small Business Disclosure Format (check one): Yes |_| No |X|

<PAGE>

PART I

Item No. 1 Description of Business

Business Overview

      CTI Industries Corporation is engaged in the development, manufacture,
sale and distribution of two principal lines of products within a single
segment:

o     Novelty products, principally balloons, including metalized balloons,
      latex balloons, punch balls and other inflatable toy items.

o     Specialty and printed films and flexible containers, for food packaging,
      specialized consumer uses and various commercial applications.

      The Company was organized in 1976 and initially was principally engaged in
the business of manufacturing bag-in-box plastic packaging systems. The Company
sold its assets related to bag-in-box packaging systems in 1985. In 1978, the
Company began manufacturing metalized balloons (sometimes referred to as "foil"
balloons), balloons made of a base material (usually nylon) having vacuum
deposited aluminum and polyethylene coatings. These balloons remain buoyant when
filled with helium for much longer periods than latex balloons and permit the
printing of graphic designs on the surface.

      In 1985, the Company began marketing latex balloons and, in 1988, began
manufacturing latex balloons. In 1994, the Company sold its latex balloon
manufacturing equipment to a company in Mexico and entered into an arrangement
for that company to manufacture latex balloons for the Company. The Company
since has acquired majority ownership of the Mexican latex manufacturing
company.

      The Company's metalized and latex balloons and toy products are sold
throughout the United States and in 30 foreign countries through a wide variety
of retail outlets including general merchandise and drugstore chains, grocery
chains, card and gift shops, and party goods stores, as well as through florists
and balloon decorators.

      Most metalized balloons contain printed characters, designs and social
expression messages. The Company maintains licenses on numerous characters and
designs, including, for example, Garfield(R), Precious Moments(R) and Hallmark.
During 2002, the Company entered into agreements with Hallmark Cards to produce
metalized balloons. The Party Express Division of Hallmark distributes these
balloons to its customers and the Company also distributes these balloons to its
distributors and customers.

      On an increasing basis over the past five years, the Company also has
engaged in the production, lamination, coating and printing of films and
provides custom film products for a variety of commercial applications. These
include (i) laminated and printed films for use in packaging applications and
(ii) completed products for customer storage applications and for packaging
applications. Revenues from this activity have grown rapidly and, during 2003,
represented approximately 48% of total Company revenue.


                                       1
<PAGE>

Background

      CTI Industries Corporation (the "Company") was incorporated as Container
Merger Company, Inc. under the laws of the State of Delaware on October 14,
1983, and changed its name to CTI Industries Corporation on August 2, 1985. A
predecessor company, Creative Technology, Inc., was organized as an Illinois
corporation on December 9, 1975 and was merged into the Company in February,
1984. On November 19, 2001, the Company was reincorporated in Illinois and is
now an Illinois corporation. CTI Balloons Ltd. ("CTI Balloons"), the Company's
wholly-owned subsidiary, was organized as a corporation under the laws of the
United Kingdom on October 2, 1996. On October 24, 1996, the Company entered into
an agreement with CTI Balloons pursuant to which all of the assets and
liabilities of the Company in its branch operation in the United Kingdom were
sold and transferred to CTI Balloons and all of the capital stock of CTI
Balloons was issued and delivered to the Company. Unless otherwise specified,
all references to the Company refer to the Company, its predecessor Creative
Technology, Inc., its wholly-owned subsidiaries, CTI Balloons, CTF
International, S.A. de C.V., and its majority-owned subsidiaries, CTI Mexico,
S.A. de C.V. and Flexo Universal, S.A. de C.V.

      In March and May of 1996, a group of investors made an equity investment
of $1,000,000 in the Company in return for 366,300 shares of Preferred Stock,
$.91 par value. Each share of Preferred Stock was entitled to an annual
cumulative dividend of 13% of the purchase price, and was convertible into one
share of Common Stock. The shares of Preferred Stock, voting separately as a
class, were entitled to elect four of the Company's directors. Members of such
investment group included Howard W. Schwan, John H. Schwan and Stephen M.
Merrick, current members of management.

      In July, 1997, the Company effected a recapitalization (the
"Recapitalization") without a formal reorganization. As part of the
Recapitalization, the Board of Directors approved the creation of Class B Common
Stock, approved a 1 for 2.6 reverse stock split on both the Common Stock and
Preferred Stock, and negotiated a conversion of all then outstanding shares of
the Company's Convertible Preferred Stock into an aggregate of 366,300 shares of
Class B Common Stock. The conversion was effective upon the closing of an
initial public offering of 575,000 shares of the Company's Common Stock on
November 5, 1997. The shares of Class B Common Stock contained rights identical
to shares of Common Stock, except that shares of Class B Common Stock, voting
separately as a class, had the right to elect four of the Company's seven
directors. Shares of Common Stock and Class B Common Stock, voting together as a
class, voted on all other matters, including the election of the remaining
directors. The recapitalization, initial public offering and related
transactions were approved by written consent of the shareholders. On July 1,
2002, all outstanding shares of Class B Common Stock, by their terms, were
converted to common stock.

      On October 15, 1999, the Company's Board of Directors approved a 1 for 3
reverse split of the Company's Common Stock and Class B Common Stock. The 1 for
3 reverse stock split became effective at the close of business on November 4,
1999, upon the approval and consent of a majority of Common and Class B Common
Stockholders voting together as a single class. As a result of the reverse stock
split, every three shares of the Company's Common Stock were reclassified and
changed into one share of the Company's Common Stock with a new par value


                                       2
<PAGE>

of $.195 per share, and every three shares of the Company's Class B Common Stock
were reclassified and changed into one share of the Company's Class B Common
Stock, with a new par value of $2.73 per share. After the reincorporation of the
Company in the State of Illinois, the Company's Common and Class B Common Stock
ceased to have any par value.

      On December 13, 2002, the Board of Directors of the Company declared a
stock dividend of one share of Common Stock for each 5.25 shares of Common Stock
outstanding. The record date for the dividend was December 27, 2002. Except for
the elimination of par values and as otherwise indicated, share figures in this
document have been restated to reflect the stock splits and stock dividends
described above.

      Mexico Operations. Through March, 2003, the Company's latex balloons were
manufactured by CTI Mexico S.A. de C.V. ("CTI Mexico"), formerly known as
Pulidos y Terminados Finos S.A. de C.V., a Guadalajara, Mexico company engaged
principally in the manufacture of latex balloons, and commencing in March, 2003
by Flexo Universal, S.A. de C.V. ("Flexo Universal"). Both CTI Mexico and Flexo
Universal are majority owned subsidiaries of the Company.

      In 1995, the Company entered into an agreement with CTI Mexico under which
(i) the Company sold to CTI Mexico all of its latex balloon manufacturing
equipment (for the manufacture of decorator balloons), (ii) CTI Mexico agreed
for a period of 10 years to supply balloons exclusively to the Company for sale
in the United States and Canada manufactured on such equipment and (iii) for
such 10 year period, CTI Mexico agreed to supply to the Company, exclusively in
the United States except as to two other companies, all balloons manufactured by
CTI Mexico. Commencing in 1996, CTI Mexico began manufacturing latex balloons
for the Company.

      In a series of transactions during the period 1998 through 2002, the
Company acquired capital stock of CTI Mexico and, by August 2002, had acquired
98% ownership of CTI Mexico.

      Through March, 2003, CTI Mexico conducted operations at four facilities in
Guadalajara, Mexico having, in total, approximately 95,000 square feet of
manufacturing, office and warehouse space. At these facilities, CTI Mexico
produced, printed and packaged latex balloons, warehoused latex and foil
balloons and conducted sales, marketing and administrative activities.

      On February 22, 2003, CTI Mexico effected a spin off under Mexico law
under which a portion of the assets, liabilities and capital of CTI Mexico were
transferred to a newly-organized entity which operates under the name Flexo
Universal S.A. de C.V. Flexo Universal is also 98% owned by the Company.

      In January, 2003, Flexo Universal entered into a lease for approximately
43,000 square feet of manufacturing, office and warehouse space in Guadalajara,
Mexico and all of the assets transferred to Flexo Universal in the spin-off were
moved to that facility. On March 1, 2003, Flexo Universal commenced operations
at this facility and now conducts balloon production, printing, packaging,
warehousing and sales activities there.


                                       3
<PAGE>

      In or about April, 2003, CTI Mexico ceased production of balloons at its
leased facilities. The leases of one facility, consisting of three buildings,
and another facility, consisting of one building, have been terminated and CTI
Mexico has vacated these locations.

Products

      Metalized Balloons. The metalized balloon is composed of a base material
(usually nylon) which is coated on one side with a vacuum deposited aluminum
coating and on the other with polyethylene. Typically, the balloon film is
printed with graphic designs and messages.

      The Company manufactures over 450 balloon designs, in different shapes and
sizes, including the following:

o     Superloons(R) - 18" balloons in round or heart shape, generally made to be
      filled with helium and remain buoyant for long periods. This is the
      predominant metalized balloon size.

o     Ultraloons(R) - 34" balloons made to be filled with helium and remain
      buoyant.

o     Miniloons(R)- 9" balloons made to be air-filled and sold on holder-sticks
      or for use in decorations.

o     Card-B-Loons(R)(4 1/2") - air-filled balloons, often sold on a stick, used
      in floral arrangements or with a container of candy.

o     Shape-A-Loons(R) - shaped balloons made to be filled with helium.

o     Minishapes - small shaped balloons designed to be air filled and sold on
      sticks as toys or inflated characters.

o     Walk-abouts(R) - helium filled shaped balloons with attached arms and
      legs.

      In addition to size and shape, a principal element of the Company's
metalized balloon products is the printed design or message contained on the
balloon. These designs include figures and licensed characters many of which are
well-known. The Company maintains many of its own licenses for several
characters, and, under an arrangement with Hallmark Cards Incorporated
("Hallmark"), manufactures and distributes balloons bearing a number of
additional licensed characters. Some of these characters include Garfield(R),
Precious Moments(R), Party Express(R), Kinka(R), Head First(R), Scooby Doo(R),
Barbie(R), Batman(R), Spirit(R), Nascar(R), Hotwheels(R), Major League
Baseball(R), Justice League(R), Star Wars(R), Butt Ugly Martians(R),
Madeline(R), Mucha Lucha(R), Boohbah(R), Shrek(R) and several others. See
"Patents, Trademarks and Copyrights" below.

      Latex Balloons. The Company sells a high end line of latex balloons under
the product line name Hi-Tex(R) and a standard line of latex balloons marketed
under the name Partyloons(R). The Company also manufactures toy balloon products
including punch balls and water bombs and "Animal Twisties."


                                       4
<PAGE>

      Packaging Films. The Company produces and sells films which are utilized
for the packaging of various products, principally food products. The Company
laminates, extrusion coats and prints films and sells them to customers who
utilize the films for packaging applications. The Company sells these products
to companies who, generally, convert the film to bags or pouches for the
packaging of food products.

      Custom Film Products. The Company fabricates custom film products for
various commercial and industrial purposes. These now include "dunnage" bags
(inflatable pouches used to cushion products in packages) and flexible
containers for the storage of clothing and personal items.

Markets

      Metalized Balloons

      The metalized balloon came into existence in the late 1970s. During the
1980s, the market for metalized balloons grew rapidly. Initially, the product
was sold principally to individual vendors, small retail outlets and at fairs,
amusement parks, shopping centers and other outdoor facilities and functions.
Metalized balloons remain buoyant when filled with helium for extended periods
of time and they permit the printing and display of graphics and messages. As a
result, the product has significant appeal as a novelty and message item.
Metalized balloons became part of the "social expression" industry, carrying
graphics designs, characters and messages like greeting cards. In the mid-1980s,
the Company and other participants in the market began licensing character and
cartoon images for printing on the balloons and directed marketing of the
balloons to retail outlets including grocery, general merchandise and drug store
chains, card and gift shops, party goods stores as well as florists and balloon
decorators. These outlets now represent the principal means for the sale of
metalized balloons throughout the United States and in a number of other
countries.

      Metalized balloons are sold in the United States and in Europe, several
countries in the Far East, Canada and to an increasing extent in Latin America.
The United States, however, is by far the largest market for these products.

      Metalized balloons are sold in the United States and foreign countries
directly by producers to retail outlets and through distributors and
wholesalers. Often the sale of metalized balloons by the
wholesalers/distributors is accompanied by related products including latex
balloons, floral supplies, candy containers, mugs, plush toys, baskets and a
variety of party goods. Although the latex balloon market overlaps the metalized
balloon market, the latex balloon market has been in existence for a longer
period than metalized balloons and extends to more customers and market
categories than metalized balloons.

      Latex Balloons

      There are several latex balloon product lines: (i) high quality decorator
balloons, (ii) standard novelty balloons; (iii) printed balloons and (iv) toy
categories. The high quality decorator balloons are generally sold to and
through balloon decorators and floral outlets and are generally of higher
quality and price than the standard line of balloons. The standard line of
balloons is sold widely in retail stores including many of the same outlets as
metalized balloons.


                                       5
<PAGE>

Printed latex balloons are sold both in retail outlets and for balloon
decoration purposes including floral designs. "Toy" balloons include novelty
balloons sold in toy departments or stores, punch balls, water bombs and other
specialty designs.

      Latex balloons are sold through many of the same outlets as metalized
balloons including grocery, general merchandise and drug store chains, card and
gift shops, party goods stores, florists and balloon decorators. Latex balloons
are sold in retail stores in packaged form as well as inflated. Also, certain
latex items are sold in retail stores, generally in packaged form, as toy items.

      Printed and Specialty Films

      The industry and market for printed and specialty films is fragmented and
includes many participants. There are hundreds of manufacturers of printed and
specialty film products in the United States and in other markets. In many
cases, companies who provide food and other products in film packages also
produce or process the films used for their packages. The market for the
Company's film products, and for its completed containers, consists principally
of companies who utilize the films for the packaging of their products,
including food products and other items. In addition to the packaging of food
products, the flexible containers are used for medical purposes (such as
colostomy bags, containers for saline solution and other items), "dunnage" (to
cushion products being packaged), storage of personal and household items and
other purposes.

      The total volume of products manufactured and sold in this industry is
estimated to be well in excess of $3 billion.

Marketing, Sales and Distribution

      The Company markets and sells its metalized balloon, latex balloon and
related novelty products throughout the United States and in a number of other
countries. The Company maintains a marketing, sales staff and support staff of 9
individuals and a customer service department of 6 individuals. European sales
are conducted by CTI Balloons, the Company's subsidiary located in Rugby,
England. CTI Mexico and Flexo Universal conduct sales and marketing activities
for the sale of balloon products in Mexico, Latin America, and certain other
markets. Sales in other foreign countries are made generally to distributors in
those countries and are managed at the Company's principal offices.

      The Company sells and distributes its products principally through a
network of approximately 600 distributors and wholesalers situated throughout
the United States and in several foreign countries. These distributors and
wholesalers are engaged principally in the sale of balloons and related products
(including such items as plush toys, mugs, containers, floral supplies and other
items). These distributors and wholesalers, in turn, sell balloons and related
products to retail outlets including grocery, general merchandise and drug store
chains, card and gift shops, party goods stores as well as florists and balloon
decorators. Most sales are on an individual order basis.

      The Company also sells balloons and related products to certain retail
outlets including some chain stores. The Company's largest chain store customer
is Eckerd Drug Stores.


                                       6
<PAGE>

      In March, 2002, the Company entered into an arrangement with Hallmark,
under which the Company agreed to produce metalized balloons for the Party
Express Division of Hallmark incorporating designs provided by Party Express as
well as licensed character designs under licenses held by Hallmark. Under the
arrangement, the Company is also entitled to market and sell balloons
incorporating these designs to its other customers. During 2003, sales to
Hallmark were $4,007,000 or 11% of the Company's total sales revenue.

      The Company engages in a variety of advertising and promotional activities
to promote the sale of its balloon products. Each year, the Company produces a
complete catalog of its balloon products, and also prepares various flyers and
brochures for special or seasonal products, which are disseminated to thousands
of customers, potential customers and others. The Company participates in
several trade shows for the gift, novelty, balloon and other industries and
advertises in several trade and other publications.

      The Company markets and sells its printed and laminated films and
converted film products directly and through independent sales representatives.
The Company sells laminated and printed films to companies that utilize these
films to produce packaging for a variety of products, including food products,
in both liquid and solid form, such as cola syrup, coffee, juices and other
items. The Company markets its custom film products, including its "dunnage"
bags (inflatable packaging pouches) and consumer storage bags directly to
customers who use the products in their packaging systems or re-sell the
products for commercial or consumer applications. During the 2003 fiscal year,
the Company sold such products to four principal, and a number of smaller
customers. The Company's largest customer in 2003 was ITW Spacebag whose
purchases from the Company of consumer storage products totaled $10,298,000 for
the year, about 28% of total Company sales. The Company has an agreement with
ITW Spacebag under which ITW Spacebag is obligated through July 15, 2005 to
purchase all of its requirements for film for use in consumer storage bags. ITW
Spacebag has no contractual commitment to the Company for the purchase of
finished storage bags. Rapak L.L.C., purchased approximately $5,360,000 in
laminated films from the Company in 2003; these sales represented 14.7% of total
Company revenues. The Company has an agreement with Rapak under which Rapak is
obligated for a term expiring on October 31, 2005, to purchase 65% of its
requirements for a certain type of film for packaging applications.

Manufacturing

      Production and Operations.

      The Barrington, Illinois headquarters incorporates the Company's principal
production facilities. The facilities include converting machines which
fabricate metalized balloons and packaging bags. These machines have the
capacity to manufacture in excess of 60 million 18" balloons annually.

      The Company owns and operates equipment for the development of films and
plates utilized in the printing of films for metalized balloons and packaging
films. The Company owns and operates one state of the art high-speed eight color
press and two six color presses at its facility in Barrington, Illinois. The
Company utilizes a water-based ink process for printing.


                                       7
<PAGE>

      The Company owns and operates one extrusion coating and lamination machine
and one solventless laminator to produce films for use in metalized balloons,
packaging films and specialty film products. The extrusion coating and
laminating machine was acquired in 1999 and the laminator was acquired in 2002.

      The Company maintains a graphic arts and development department which
designs its balloon products and graphics. The Creative Department operates a
networked, computerized graphic arts system for the production of these designs
and of printed materials including catalogues, advertisements and other
promotional materials.

      The Barrington facility also includes a computerized customer service
department which receives and fulfills over 86,000 orders annually.

      The Company maintains a finished goods inventory of all balloon products
at the Barrington facility and provides fulfillment for orders throughout the
United States and in a number of foreign countries.

      Flexo Universal. Flexo Universal operates a facility in Guadalajara,
Mexico which incorporates 43,000 square feet of production, printing, warehouse
and office space. At the facility, (i) Flexo Universal produces latex balloons
on three machines, (ii) prints latex balloons on two high-speed printing
machines and several manually operated machines, (iv) produces formers for latex
balloon production, (v) conducts mixing and pigment procedures and (vi) conducts
sorting, quality control and balloon packaging activities. At this facility,
Flexo Universal also warehouses raw materials and latex and metalized balloon
products. Administrative and sales functions are also performed at the facility.
A fourth balloon production machine is being assembled and a fifth machine has
been purchased.

      CTI Balloons Ltd. Through its wholly-owned subsidiary, CTI Balloons Ltd,
the Company conducts a warehouse, fulfillment and sales operation in Rugby,
United Kingdom for metalized and latex balloons. Sales and fulfillment for all
of the United Kingdom, Europe and the Middle East are conducted from this
facility.

Raw Materials

      The principal raw materials used in manufacturing our products are (i)
petroleum-based films, (ii) petroleum-based resin, (iii) latex and (iii)
printing inks. At least to some degree, we have historically been able to change
our product prices in response to changes in raw materials costs. While we
currently purchase our raw materials from a relatively limited number of
sources, films, resin and inks are available from numerous sources. Therefore,
we believe our current suppliers could be replaced without adversely affecting
our manufacturing operations in any material respect.

Competition

      The balloon and novelty industry is highly competitive, with numerous
competitors. There are presently six principal manufacturers of metalized
balloons whose products are sold in the United States including Anagram
International, Inc., Pioneer Balloon, Convertidora International, Barton
Enterprises and Betallic. Several companies market and sell metalized


                                       8
<PAGE>

balloons designed by them and manufactured by others for them. In 1998, Anagram
International, Inc. was acquired by Amscan Holdings and in 2000 M&D Balloons was
acquired by American Greetings. During 2002, Amscan acquired M&D Balloons from
American Greetings.

      There are at least seven manufacturers of latex balloons whose products
are sold in the United States.

      The market for film packaging and custom products is fragmented, and
competition in this area is difficult to gauge. However, there are numerous
participants in this market and the Company can expect to experience intense
quality and price competition.

      Many of these companies offer products and services which are the same or
similar to those offered by the Company and the Company's ability to compete
depends on many factors within and outside its control. There are a number of
well-established competitors in each of the Company's product lines, several of
which possess substantially greater financial, marketing and technical resources
and established, extensive, direct and indirect channels of distribution for
their products and services. As a result, such competitors may be able to
respond more quickly to new developments and changes in customer requirements,
or devote greater resources to the development, promotion and sale of their
products and services than the Company. Competitive pressures include, among
other things, price competition, new designs and product development and
copyright licensing.

Patents, Trademarks and Copyrights

      In connection principally with its metalized balloon business, the Company
has developed or acquired a number of intellectual property rights which are
significant to its business.

      Copyright Licenses. The most significant of these rights are licenses on a
number of popular characters. The Company presently maintains 8 licenses and
produces balloon designs utilizing the characters covered by the licenses.
Licenses are generally maintained for a one or two year term, although the
Company has maintained long term relationships with several of its licensors and
has been able to obtain renewal of its license agreements with them. Under its
agreements with Hallmark, the Company is authorized to produce for Hallmark, and
to sell as a distributor for Hallmark, a number of licensed characters.

      Trademarks. The Company is the owner of 12 registered trademarks in the
United States relating to its products. Many of these trademarks are registered
in foreign countries, principally in the European Community.

      Patent Rights. The Company is the owner of, or licensee under, several
patents which related to both its metalized balloon products and its flexible
container products. These include (i) ownership of two patents, and a license
under a third, relating to self-sealing valves for metalized balloons and
methods of making balloons with such valves, (ii) various metalized balloon
design patents and (iii) patents and applications related to the design and
structure of, and method of inserting and affixing, zipper-closure systems in a
bag.


                                       9
<PAGE>

Research and Development

      The Company maintains a product development and research department of 8
individuals for the development or identification of new balloons and related
products, product components and sources of supply. Research and development
includes (i) creative product development, (ii) creative marketing, and (iii)
engineering development. During the fiscal years ended December 31, 2002, and
December 31, 2003, the Company estimates that the total amount spent on research
and development activities was approximately $333,000 and $335,000,
respectively.

Employees

      As of December 31, 2003, the Company had 165 full-time employees in the
United States, of whom 14 are executive or supervisory, 8 are in sales, 112 are
in manufacturing and 31 are clerical. As of that same date, the Company had 10
full-time employees in England, of whom 2 are executive or supervisory, 1 is in
sales, 4 are in warehousing and 3 are clerical. In Mexico, as of December 31,
2003, the Company had 178 full-time employees, of whom 17 are executive or
supervisory, 3 are in sales, 143 are in manufacturing and 15 are clerical. The
Company is not a party to any collective bargaining agreement in the United
States, has not experienced any work stoppages and believes that its
relationship with its employees is satisfactory.

Regulatory Matters

      The Company's manufacturing operations are subject to the U.S.
Occupational Safety and Health Act ("OSHA"). The Company believes it is in
material compliance with OSHA. The Environmental Protection Agency regulates the
handling and disposal of hazardous materials. As the Company's printing
operations utilize only water-based ink, the waste generated by the Company's
production process is not deemed hazardous. The Company believes it is in
material compliance with applicable environmental rules and regulations. Several
states have enacted laws limiting or restricting the release of helium filled
metalized balloons. The Company does not believe such legislation will have any
material effect on its operations.

International Operations.

      The Company sells metalized balloons in a number of foreign countries
through distributors situated in those countries. We conduct production,
packaging, warehousing and sales operations in Mexico and warehousing and sales
operations in the United Kingdom. Our operations in Mexico conduct the sale of
metalized and latex balloons in Mexico and other markets in Latin America. Our
operations in the United Kingdom conduct warehousing and sale of metalized and
latex balloons in the United Kingdom and some countries in Europe. We rely and
are dependent on our operations in Mexico for the supply of latex balloons in
the United States, Mexico, Europe and other markets. Interruption of that supply
would have a material adverse effect on the business of the Company.

      Reference is made to Note 18 of the Consolidated Financial Statements
contained in Part IV hereof for financial information on revenues and assets in
our domestic and international operations.


                                       10
<PAGE>

Item No. 2 Properties

      The Company owns its principal plant and offices located in Barrington,
Illinois, approximately 45 miles northwest of Chicago, Illinois. The facility
includes approximately 75,000 square feet of office, manufacturing and warehouse
space. This facility is subject to a mortgage loan in the principal amount of
$2,912,000, having a term of 5 years, with payments amortized over 30 years and
bearing interest at the rate of 6.25% per year.

      In August, 1998, the Company purchased a building that is adjacent to its
principal plant and offices. This facility includes approximately 29,000 square
feet of combined office and warehouse space. In November, 1999, the Company sold
this building to a related party, and entered into a 10 year lease for the
building at a monthly rental cost of $17,404. In May, 2003, the monthly rental
cost of this building decreased to $15,500 per month.

      The Company also leases approximately 15,000 square feet of office and
warehouse space in Rugby, England at an annual lease cost of $51,700, expiring
2013. This facility is utilized for product packaging operations and to manage
and service the Company's operations in England and Europe.

      During 2003, CTI Mexico maintained under lease in Guadalajara, Mexico four
buildings having approximately 95,000 square feet, in total, of production,
warehouse and office space. One plant, consisting of three buildings, was
occupied at a monthly lease rate of $5,500, and the other plant, consisting of
one building was occupied under a three-year lease at a monthly lease rate of
$4,500. The leases on these buildings have been terminated and CTI Mexico has
vacated these locations. In January, 2003, Flexo Universal entered into a 5 year
lease agreement for the lease of approximately 43,000 square feet of
manufacturing, warehouse and office space in Guadalajara, Mexico at the cost of
$17,000 per month.

      We believe that our properties have been adequately maintained, are in
generally good condition and are suitable for our business as presently
conducted. We believe our existing facilities provide sufficient production
capacity for our present needs and for our presently anticipated needs in the
foreseeable future. We also believe that, with respect to leased properties,
upon the upon the expiration of our current leases, we will be able either to
secure renewal terms or to enter into leases for alternative locations at market
terms.


                                       11
<PAGE>

Item No. 3 Legal Proceedings

      On September 5, 2003, Airgas, Inc., Airgas-Southwest, Inc., Airgas-South,
Inc. and Airgas-East, Inc. filed a joint action against CTI Industries
Corporation for claimed breach of contract in the Circuit Court of Lake County,
Illinois claiming as damages the aggregate amount of $162,242. The Company has
filed an answer denying the material claims of the complaint, affirmative
defenses and a counterclaim. In the action, the plaintiffs claim that CTI
Industries Corporation owes them certain sums for (i) helium sold and delivered,
(ii) rental charges with respect to helium tanks and (iii) replacement charges
for tanks claimed to have been lost. The Company intends to vigorously defend
this action and to pursue its counterclaim.

      In addition, the Company is also party to certain lawsuits arising in the
normal course of business. The ultimate outcome of these matters is unknown, but
in the opinion of management, we do not believe any of these proceedings will
have, individually or in the aggregate, a material adverse effect upon our
financial condition or future results of operation.

Item No. 4 Submission of Matters to a Vote of Security Holders

      Not Applicable.

PART II

Item No. 5 Market for Registrant's Common Equity and Related Stockholder Matters

      Market Information. The Company's Common Stock was admitted to trading on
the NASDAQ SmallCap Market under the symbol CTIB on November 5, 1997. Prior to
that time, there was no established public trading market for the Company's
Common Stock.

      The high and low sales prices for the last eight fiscal quarters
(retroactively adjusted to reflect post-reverse split share and stock dividend
values), according to the NASDAQ Stock Market's Stock Price History Report,
were:

                                                             High     Low
                                                             ----     ----
      January 1, 2002 to March 31, 2002 ................     1.55     1.30
      April 1, 2002 to June 30, 2002 ...................     6.26     1.52
      July 1, 2002 to September 30, 2002 ...............     4.47     2.05
      October 1, 2002 to December 31, 2002 .............     6.90     2.23
      January 1, 2003 to March 31, 2003 ................     6.22     4.75
      April 1, 2003 to June 30, 2003 ...................     5.04     1.76
      July 1, 2003 to September 30, 2003 ...............     2.45     1.70
      October 1, 2003 to December 31, 2003 .............     2.49     1.79

      As of March 23, 2004, there were approximately 45 holders of record of the
Company's Common Stock. It is estimated that there are in excess of 300
beneficial owners of the Company's Common Stock.

      The Company has never paid any cash dividends on its Common Stock and does
not currently intend to pay cash dividends on its Common Stock in the
foreseeable future. The Company currently intends to retain all its earnings to
finance the development and expansion of


                                       12
<PAGE>

its business. Under the terms of its current loan agreement, the Company is
restricted from declaring any cash dividends or other distributions on its
shares.

      Recent Sales of Unregistered Securities

      In June, 1999, the Company issued a note to John C. Davis, a former
director and officer for $150,000 with a maturity of February 28, 2001,
replacing an existing note in that amount. Mr. Davis' June, 1997, warrant to
purchase up to 19,078 shares of the Company's common Stock at an exercise price
of $7.86 per share was cancelled in September, 1999, and a new warrant to
purchase up to 19,078 shares of the Company's Common Stock at an exercise price
of $1.418 per share, with an expiration date of June 30, 2003, was issued in its
place. Mr. Davis' June, 1999, Note was paid in full by the Company in February,
2001. Mr. Davis' September, 1999 warrant expired unexercised on June 30, 2003.

      In June, 1999, notes of the Company to Howard W. Schwan, John Schwan, and
Stephen Merrick in the amounts of respectively, $50,000, $350,000 and $315,000,
came due. On November 9, 1999, new notes in the same principal amounts were
issued to Messrs. H. Schwan, J. Schwan and Merrick, in payment and replacement
of the prior notes with maturity dates for each of November 9, 2001. In
November, 1999, the June, 1997 warrants of Messrs. H. Schwan, J. Schwan and
Merrick to purchase up to (respectively) 6,359, 44,515 and 40,063 shares of the
Company's Common Stock at an exercise price of $7.86 per share were cancelled.
At that time, new warrants to purchase up to 35,263, 246,840 and 222,157 shares
of the Company's Common Stock at an exercise price of $1.418 per share were
issued to Messrs. H. Schwan, J. Schwan and Merrick, respectively. Each of these
warrants were exercised on June 3, 2002. The respective $50,000, $350,000 and
$315,000 notes were cancelled and used as payment for the warrant shares.

      In July, 2001, the Company issued warrants to purchase up to 79,364 shares
of the Company's Common Stock to John H Schwan and 39,683 shares of the
Company's Common Stock to Stephen M. Merrick. The warrants were issued in
consideration of Mr. Schwan and Mr. Merrick each personally guaranteeing and
securing loans to the Company in the amount of approximately $1,600,000. The
warrants are exercisable for a period of five years at a price of $1.50 per
share.

      During February, 2003, John H. Schwan loaned $930,000 to the Company and
Stephen M. Merrick loaned $700,000 to the Company, each in exchange for (i) two
year promissory notes bearing interest at 9% per annum and (ii) five year
warrants to purchase up to 163,000 shares of Common Stock of the Company at
$4.87 per share, the market price of the Common Stock on the date of the
Warrants. The proceeds of these loans were to (i) re-finance the bank loan of
CTI Mexico in the amount of $880,000 and (ii) to provide financing for CTI
Mexico and Flexo Universal.


                                       13
<PAGE>

Item No. 6 Selected Financial Data

      The following selected financial data are derived from the consolidated
financial statements of the Company. The data should be read in conjunction with
the consolidated financial statements, related notes, and other financial
information included herein.

<TABLE>
<CAPTION>
                                                                                                                Year
(In thousands, except per share data)                                                                           Ended
                                                                  Year ended December 31,                    October 31,
                                                    --------------------------------------------------------------------
                                                      2003          2002          2001          2000           1999(1)
<S>                                                 <C>           <C>           <C>           <C>             <C>
Statement of Income Data:
Net Sales                                           $ 36,260      $ 41,236      $ 27,446      $ 22,978        $ 18,717
Costs of Sales                                      $ 29,627      $ 32,344      $ 19,835      $ 16,375        $ 13,781

                                                    ------------------------------------------------------------------
Gross Profit                                        $  6,633      $  8,892      $  7,611      $  6,603        $  4,936

SG &A                                               $  7,312      $  7,447      $  6,595      $  6,390        $  6,302

                                                    ------------------------------------------------------------------
Income from Operations                              $   (679)     $  1,445      $  1,016      $    213        $ (1,366)

Interest expense                                    $  1,103      $    832      $  1,030      $  1,281        $    942
Other (income) expense                              $   (433)     $    278                    $     29        $   (146)

                                                    ------------------------------------------------------------------
Income (loss) before taxes and minority interest    $ (1,349)     $    335      $    (14)     $ (1,039)       $ (2,162)
Income tax expense (benefit)                        $   (782)     $     39      $    276      $    107        $    380
Minority interest                                   $      0      $      6      $     58      $    (87)       $     --

                                                    ------------------------------------------------------------------
Net Income (loss)                                   $   (566)     $    302      $   (232)     $ (1,059)       $ (1,782)

Earnings (loss) per common share(1)
    Basic                                           $  (0.30)     $   0.18      $  (0.15)     $  (0.88)       $  (1.40)
    Diluted                                         $  (0.30)     $   0.16      $  (0.15)     $  (0.88)       $  (1.40)

Earnings(loss) from operations per
    Common Share (1)
    Basic                                           $  (0.35)     $   0.86      $   0.67      $   0.18        $  (1.08)
    Diluted                                         $  (0.35)     $   0.77      $   0.67      $   0.18        $  (1.08)
Other Financial Data:
Gross margin percentage                                18.29%        21.56%        27.73%        28.74%          26.37%
Capital Expenses                                    $  1,141      $  2,478      $  1,002      $    637        $  2,053
Depreciation & Amortization                         $  1,619      $  1,588      $  1,666      $  1,933        $  1,382
Balance Sheet Data:
Working capital                                     $   (706)     $ (2,907)     $   (278)     $ (3,862)       $ (1,217)
Total assets                                        $ 30,270      $ 30,272      $ 24,664      $ 22,219        $ 24,108

Short-term obligations(3)                           $  6,382      $  7,385      $  7,074      $  7,787        $  5,176
Long-term obligations                               $  9,220      $  5,726      $  5,737      $  2,701        $  5,374

                                                    ------------------------------------------------------------------
Total obligations                                   $ 14,807      $ 13,111      $ 12,811      $ 10,488        $ 10,550

Stockholders' Equity                                $  5,212      $  5,474      $  4,325      $  5,338        $  5,029
</TABLE>

- ----------
(1)   Two months ended December 31, 1999 have been omitted.

(3)   Short-term obligations consist primarily of borrowings under bank lines of
      credit and the current portion of long-term debt


                                       14
<PAGE>

Item No. 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations

Overview

The Company produces film products for novelty, packaging and container
applications. These products include metalized balloons, latex balloons and
related latex toy products, films for packaging applications, and flexible
containers for packaging and storage applications. We produce all of our film
products for packaging and container applications, and all of our metalized
balloons at our facility in Barrington, Illinois. We produce all of our latex
balloons and latex products at our facility in Guadalajara, Mexico.
Substantially all of our film products for packaging applications and flexible
containers for packaging and storage are sold to customers in the United States.
We market and sell our novelty items - principally metalized balloons and latex
balloons - in the United States, Mexico, the United Kingdom and a number of
additional countries.

      In 2003, our revenues as a percentage of total consolidated sales from
each of our principal product categories was as follows:

            Commercial Films
                And Containers                 48%
            Metalized Balloons                 34%
            Latex Balloons                     11%

      Over the past several years, revenues from commercial films and containers
have increased significantly as a percentage of sales. As a percentage of total
sales, revenues in this category have increased from a level of 17% of revenues
in 1998 to approximately 48% of total company revenues during the past two
years. The increase in sales in this product category have accounted for most of
the increase in consolidated sales over the past five years.

      Purchases by a limited number of customers represent a significant portion
of total Company revenues. In 2003, sales to our top 10 customers represented
68% of total revenues. Of those principal customers, one is a customer for
storage containers and represented 28% of total 2003 revenues, one is a customer
for packaging film and represented 14.7% of total 2003 revenues and one is a
customer for metalized balloons and represented 11% of total 2003 revenues. For
the most part, with our principal customers, we do not have long-term purchase
agreements or commitments and the risk exists that sales to one or more of these
customers will decline or terminate. With one customer for packaging film,
however, we do have a contract extending through October, 2005, under which the
customer is obligated to purchase at least 65% of that customer's requirements
for the packaging film and with our customer for storage containers, we do have
an agreement extending through July, 2005 under which that customer has agreed,
subject to certain conditions, to purchase its requirements for the film used in
the storage bags. Loss of one or more of these principal customers, or a
significant reduction in purchases by one or more of them, could have a material
adverse effect on the business of the Company.


                                       15
<PAGE>

      We have experienced declines in our gross margins over the past several
years. In general, gross margins have declined from almost 28% in 2001 to 18.3%
in 2003. Most of this decline in gross margins relates to metalized balloons.
Margins in that product category have declined from 27% in 2001 to 10.4% in
2003. The decline in margin is attributable both to price competition and to
increases in the costs principally of factory overhead and direct labor, and, to
a limited degree in 2003, of raw materials. We have experienced significant
increases in factory overhead costs over the past three years, including
insurance costs, health insurance costs, supervisory wages, quality control
wages and depreciation.

      Our business plan includes:

            o     Continued focus on our existing product categories, including
                  efforts to generate additional revenues in these categories.

            o     Efforts to control and reduce manufacturing costs,
                  particularly factory overhead and direct labor costs.

            o     Efforts to develop new products, product improvements and
                  technologies in our existing product categories.

            o     Development of new sales and marketing channels and
                  relationships.

      We have engaged in ongoing efforts during 2003 to achieve reduction in
factory overhead. In the fourth quarter of 2003, our factory overhead in the
U.S. was 17% less than in the first quarter. We intend to continue these efforts
and believe that we will achieve additional reductions in factory overhead and
direct labor costs during 2004.

Results of Operations

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

      Net Sales. For the fiscal year ended December 31, 2003, consolidated
revenues from the sale of all products were $36,260,000, compared to
consolidated revenues of $41,236,000 for the year ended December 31, 2002, a
decrease of 12%. This decrease in revenues is the result principally of (i) an
11% decrease in sales of printed and laminated films from $19,621,000 in 2002 to
$17,439,000 in 2003, (ii) a 24% decrease in sales of metalized balloons from
$16,392,000 in 2002 to $12,405,000 in 2003 and (iii) a 17% decrease in the sales
of latex balloons from $4,948,000 in 2002 to $4,125,000 in 2003. These revenue
decreases are attributable principally to decreases in sales to three principal
customers. Sales in 2002 to these three customers were as follows: (i)
$12,086,000 to a customer for consumer storage bags, (ii) $7,000,000 to a
customer for packaging films and (iii) $5,111,000, to a customer for metalized
balloons. During 2003, sales to each of those customers, respectively, were: (i)
$10,298,000, (ii) $5,360,000 and (iii) $4,006,000.

      For the fiscal year 2003, on a consolidated basis, metalized balloons
represented 34% of sales, laminated and printed films 48% of sales and latex
balloons 11% of sales. During fiscal 2002, metalized balloons represented 40% of
sales, laminated and printed films 48% of sales and latex balloons 12% of sales.


                                       16
<PAGE>

      Cost of Sales. For fiscal 2003, cost of sales increased to 81.7% of net
sales compared to 78.4% of net sales for fiscal 2002. In fiscal 2003, profit
margins on metalized balloons, latex balloons and laminated and printed film
were 10.4%, 9.1% and 34.9%, respectively, compared to margins on the same
product lines for 2002 of 24.3%, 17.5% and 27.5%. The reduction in margins with
respect to metalized balloons in 2003 is attributable principally to pricing
affected by price competition and to increases in production overhead.

      General and Administrative. For fiscal 2003, administrative expenses were
$4,055,000, or 11.2% of net sales, as compared to $4,225,000 or 10.2% of net
sales for fiscal 2002. The decrease in administrative expenses is attributable
to decreases in personnel and compensation expense, audit expenses, legal
expenses and consulting fees.

      Selling. For fiscal 2003, selling expenses were $1,442,000 or 4% of net
sales compared to $1,551,000, or 3.8% of net sales for fiscal 2002. There was no
significant change in selling expenses from 2002 to 2003.

      Marketing and Advertising. For fiscal 2003, advertising and marketing
expenses were $1,816,000 or 5% of net sales, compared to $1,671,000 or 4.1% of
sales for fiscal 2002. The increase is attributable principally to increases in
artwork and films and trade show expense.

      Other Expense. For fiscal 2003, interest expense and loan fees totaled
$1,103,000. For fiscal 2002, interest expense was $832,000. The increase in
interest expense is attributable principally to increased levels of borrowing
and an increased average rate of interest on outstanding indebtedness. The
Company had currency exchange losses during 2003 of $36,000 compared to currency
exchange losses during fiscal 2002 of $281,000. The Company had other income
during 2003 of $428,000 arising principally from the forgiveness of certain
indebtedness; the Company had no such income during 2002.

      Net Income or Loss. For the fiscal year ended December 31, 2003, the
Company had a loss before taxes and minority interest of $1,349,000 compared to
income before taxes and minority interest for fiscal 2002 of $335,000. The net
loss for fiscal 2003 was $566,000 compared to net income for fiscal 2002 of
$303,000.

      Income Taxes. For the fiscal year ended December 31, 2003, the Company had
an income tax benefit of $782,000 compared to an income tax expense of $39,000
for fiscal 2002. The amount of the income tax expense or benefit recognized by
the Company for both 2003 and 2002 reflects adjustments in deferred tax assets
and other items arising from the operating results of the Company for each year.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

      For the fiscal year ended December 31, 2002, consolidated revenues from
the sale of all products were $41,236,000, compared to consolidated revenues of
$27,446,000 for the year ended December 31, 2001, an increase of 50%. This
increase in revenues was the result principally of (i) a 72% increase in sales
of printed and laminated films from 11,438,000 in 2001 to 19,621,000 in 2002 and
(ii) a 61% increase in sales of metalized balloons from $10,155,000 in


                                       17
<PAGE>

2001 to $16,392,000 in 2002. These sales revenues increases are attributable
principally to increases in sales to three principal customers. Sales in 2002 to
these three customers were as follows: (i) $12,086,000, or 29% of total revenues
to a customer for consumer storage bags, (ii) $7,000,000 representing 17% of
total sales to a customer for packaging films and (iii) $5,111,000, representing
12.4% of total sales, to a customer for metalized balloons.

      For the fiscal year 2002, on a consolidated basis, metalized balloons
represented 40% of sales, laminated and printed films 48% of sales and latex
balloons 12% of sales. During fiscal 2001, metalized balloons represented 37% of
sales, laminated and printed films 44% of sales and latex balloons 19% of sales.

      Cost of Sales. For fiscal 2002, cost of sales increased to 78.4% of net
sales compared to 72.3% of net sales for fiscal 2001. In fiscal 2002, profit
margins on metalized balloons, latex balloons and laminated and printed film
were 24.3%, 17.5% and 27.5%, respectively, compared to margins on the same
product lines for 2001 of 27.1%, 14.1% and 33%. The reduction in margins with
respect to metalized balloons in 2002 is attributable principally to sales of
balloons to one significant customer at prices and margins lower than other
customers. Also, the Company experienced higher than normal production costs
during the second half of 2002 arising from the installation of new equipment
and the need to respond to large volume requirements. With respect to laminated
and printed films, the reduction in margins during 2002 is attributable
principally to (i) greater allocation of production overhead costs to this
product line, (ii) an increase in resin costs and (iii) increased costs
associated with the installation and operation of new equipment.

      General and Administrative. For fiscal 2002, administrative expenses were
$4,225,000, or 10.2% of net sales, as compared to $3,702,000 or 13.5% of net
sales for fiscal 2001. The increase in administrative expenses is attributable
to increases in personnel and compensation, insurance premiums, litigation
settlement costs, audit expenses, consulting fees and travel expenses.
Additionally, in June, 2002, the Company entered into a settlement agreement of
pending litigation, incurring an expense of $105,000.

      Selling. For fiscal 2002, selling expenses were $1,551,000 or 3.8% of net
sales compared to $1,760,000, or 6.4% of net sales for fiscal 2001. The decline
in selling expense resulted from reductions in several expense items including
royalty payments and commissions.

      Marketing and Adverstising. For fiscal 2002, advertising and marketing
expenses were $1,671,000 or 4.1% of net sales, compared to $1,133,000 or 4.1% of
sales for fiscal 2001. The increase is attributable principally to the expense
of additional personnel and compensation expenses.

      Other Expense. For fiscal 2002, interest expense and loan fees totaled
$832,000. For fiscal 2001, interest expense was $1,126,000. The reduction in
interest expense is attributable principally to lower applicable interest rates.
The Company had currency exchange losses during 2002 of $281,000 compared to
currency gains during fiscal 2001 of $89,000.


                                       18
<PAGE>

      Net Income or Loss. For the fiscal year ended December 31, 2002, the
Company had income before taxes and minority interest of $335,000 compared to a
loss before taxes and minority interest for fiscal 2001 of $14,000. The net
income for fiscal 2002 was $303,000 compared to a net loss for fiscal 2001 of
$232,000.

      Income Taxes. For the fiscal year ended December 31, 2002, the Company had
income tax expense of $39,000 compared to an income tax expense of $277,000 for
fiscal 2001. The amount of the income tax expense recognized by the Company for
both 2002 and 2001 reflects adjustments in deferred tax assets and other items
arising from the operating results of the Company for each year.

      Contracts with foreign suppliers are stated in U.S. dollars and the
Company is not subject to currency rate fluctuations on these transactions. The
effect of currency rate fluctuations on intercompany transactions with the
Company's England subsidiary and Mexico subsidiary has not been material. As a
result, the Company has not hedged against currency rate fluctuations.

Financial Condition

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

      Cash Flow From Operations. Cash flow provided by operations for the fiscal
year ended December 31, 2003 was $2,343,000. Cash flow from operations resulted
principally from increases in accounts payable of $264,000 and in depreciation
and amortization of $1,618,000, and a reduction in, or disposition of,
receivables, and inventory and other assets totaling $1,179,000 offset by an
increase in the deferred income tax benefit of $782,000. Cash flow generated by
operations for the fiscal year ended December 31, 2002, was $2,343,000.

      Cash Used in Investing Activities. During fiscal 2003, the Company
invested $1,141,000 in machinery and equipment. During fiscal 2002, the Company
invested $2,478,000 in machinery and equipment.

      Cash From Financing Activities. Cash used in financing activities during
fiscal 2003 was $804,000. The net cash use of funds in financing activities
during 2003 reflects (i) sources of cash including proceeds from a new term
loan, an amended mortgage loan, subordinated loan advances and officer loans and
(ii) uses of cash including payments on the term loans and mortgage loan and on
vendor notes. During fiscal 2002, cash flow used in financing activities was
$513,000.

      On December 31, 2003, the Company entered into a Loan and Security
Agreement with a bank under which the lender has provided the Company with a
credit facility in the amount of $11,000,000, collateralized by equipment,
inventory, receivables and other assets of the Company. The credit facility
includes a term loan of $3,500,000, at an interest rate of prime plus 1.5% per
annum, which is based upon the appraised value of the equipment of the Company,
and a revolving line of credit, up to a maximum amount of $7,500,000 at an
interest rate of prime plus 1.5% per annum. Advances under the revolving line of
credit include advances of up to 85% of eligible receivables and up to 50% of
the value of the Company's inventory. The term loan and revolving line of credit
are secured by substantially all assets of the Company. In


                                       19
<PAGE>

connection with the Loan Agreement, two principals of the Company have executed
agreements pursuant to which they have agreed, in the event appraisals of the
Company's machinery and equipment to be performed during 2004 indicates values
less than those specified in the Loan Agreement, to provide guarantees of a
portion of the term loan or subordinated loan funds to the Company. The term of
this credit facility is for a period of 2 years expiring on December 31, 2005,
and is automatically extended after that date from year to year unless (i) the
bank accelerates the payment of the obligations under the Loan Agreement or (ii)
either party elects to terminate by giving notice of termination 90 days before
the expiration of the original or any renewal term.

      Certain terms of the Loan Agreement include: (i) the requirement that the
Company maintain a specified level of tangible net worth and a ratio of EBITDA
to fixed charges, (ii) mandatory prepayment of the term loan (A) from the
proceeds of the sale or disposition of equipment and (B) 50% of excess cash flow
of the Company during 2004 and (iii) a prohibition of various acts including (A)
incurring new debt, (B) engaging in acquisitions, (C) paying dividends, (D)
purchasing stock, without the consent of the Bank.

      With respect to the financial covenants, the bank has issued a waver of
violations of the covenants as of December 31, 2003. For periods after December
31, 2003 the bank has agreed to modify the covenants, both the tangible net
worth and ratio of EDITDA of fixed charges, to reduce levels.

      Approximately $6,763,000 in proceeds from this new loan were used to pay
to a prior senior lender the entire balance due to that lender consisting of
$2,540,000 in term loans and $4,233,000 in revolving loans

      In January, 2001, the Company entered in to a Loan and Security Agreement
with an institutional lender under which the lender provided the Company with a
credit facility in the amount of $9,500,000, collateralized by equipment,
inventory, receivables and other assets of the Company. The credit facility
included a term loan of $1,426,000, at an interest rate of prime plus 0.75% per
annum, which was based upon the appraised value of the equipment of the Company
and a revolving line of credit at an interest rate of prime plus 0.5% per annum,
the amount of which was based on advances of up to 85% of eligible receivables
and up to 40% of the value of the Company's inventory. In 2002, the lender
advanced additional funds on the original term loan in the amount of $490,880
and advanced a second term loan in the amount of $1,740,000 and increased the
credit facility to $11,500,000. The term loans and revolving line of credit were
secured by substantially all assets of the Company. The term of this credit
facility was for a period of three years expiring on January 15, 2004. On
December 31, 2003, the entire balance due to the lender was paid and the credit
facility with that lender terminated.

      In January, 2001, another bank loaned to the Company the sum of $2,873,000
in a refinance of the Company's principal office building and property situated
in Barrington, Illinois. This loan is secured by this building and property, and
has been made in the form of two notes: one note is in the principal amount of
$2,700,000, bears interest of 9.75% per annum, and has a term of five years with
a 25 year amortization, and the second note is in the principal amount of


                                       20
<PAGE>

$173,000, bears interest at 10% per annum, and has a term of three years. In
May, 2003, this loan was amended to increase the principal amount of the first
note to $2,912,000 and to reduce the interest rate to 6.25% per annum. The
second note was paid in full as of January 5, 2004.

      Current assets. As of December 31, 2003, the total current assets of the
Company were $15,635,000 compared to total current assets of $16,138,000 as of
December 31, 2002. The change in current assets reflects, principally, a
decrease in inventory of $770,000 and decrease in receivables of $564,000.

      Inventory. The net inventory of the Company decreased from $10,034,000 as
of December 31, 2002 to 9,263,000 as of December 31, 2003. The decrease
reflected principally a reduction in latex balloon inventory.

      Property, Plant and Equipment. During fiscal 2003, the Company invested
$1,141,000 in capital items. Most of this investment was in production
equipment. During 2002, the Company invested $4,182,000 in capital items.

      Current liabilities. Total current liabilities decreased from $19,045,000
as of December 31, 2002 to $16,624,000 as of December 31, 2003. This decrease is
attributable principally to a decrease in accounts payable from $9,581,000 as of
December 31, 2002 to $6,799,000 as of December 31, 2003, which occurred
principally by reason of the conversion of $3,534,000 of vendor obligations to
term debt. Also, the amount outstanding on the line of credit was reduced from
$5,643,000 on December 31, 2002 to $3,694,000 on December 31, 2003.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

      Cash Flow From Operations. Cash flow provided by operations for the fiscal
year ended December 31, 2002 was $3,039,000. In addition to earnings, the funds
provided resulted principally from increases in accounts payable of $3,910,000
and in depreciation and amortization of $1,588,000, offset by increases in
accounts receivable of $1,075,000 and in inventory of $1,965,000. Cash flow
generated by operations for the fiscal year ended December 31, 2001, was
$624,000.

      Cash Used in Investing Activities. During fiscal 2002, the Company
invested $2,478,000 in machinery and equipment. During fiscal 2001, the Company
invested $1,002,000 in machinery and equipment.

      Cash From Financing Activities. Cash used in financing activities during
fiscal 2002 was $513,000. The cash used in financing activities was principally
to pay down the credit facility. During fiscal 2001, cash flow provided by
financing activities was $102,000.

      In January, 2001, the Company entered into a Loan and Security Agreement
with an institutional lender under which the lender provided the Company with a
credit facility in the amount of $9,500,000, collateralized by equipment,
inventory, receivables and other assets of the Company. The credit facility
included a term loan of $1,426,000, at an interest rate of prime plus 0.75% per
annum, which was based upon the appraised value of the equipment of the Company
and a revolving line of credit at an interest rate of prime plus 0.5% per annum,
the amount of


                                       21
<PAGE>

which was based on advances of up to 85% of eligible receivables and up to 40%
of the value of the Company's inventory. In 2002, the lender advanced additional
funds on the original term loan in the amount of $490,880 and advanced a second
term loan in the amount of $1,740,000 and increased the credit facility to
$11,500,000. The term loans and revolving line of credit were secured by
substantially all assets of the Company. The term of this credit facility was
for a period of three years expiring in January, 2004.

      Also in January, 2001, another bank loaned to the Company the sum of
$2,873,000 in a refinance of the Company's principal office building and
property situated in Barrington, Illinois. This loan is secured by this building
and property, and has been made in the form of two notes: one note is in the
principal amount of $2,700,000, bears interest of 9.75% per annum, and has a
term of five years with a 25 year amortization, and the second note was in the
principal amount of $173,000, bears interest at 10% per annum, and has a term of
three years.

      Current assets. As of December 31, 2002, the total current assets of the
Company were $16,138,000 compared to total current assets of $14,143,000 as of
December 31, 2001. The increase in current assets is attributable principally to
increases during 2002 in accounts receivable and inventory.

      Inventory. The net inventory of the Company increased from $8,458,000 as
of December 31, 2001 to $10,034,000 as of December 31, 2002. This increase was
the result principally of (i) higher levels of production arising from
increasing sales during 2001, (ii) a seasonal increase in balloon inventory for
anticipated levels of sales in the first quarter of 2002 and (iii) production of
balloons to order for a customer in the fourth quarter of 2002 for delivery in
the first quarter of 2003.

      Property, Plant and Equipment. During fiscal 2002, the Company invested
$4,709,000 in capital items, of which $2,016,000 was additional capital projects
in process substantially all of which will be recorded as capital investment in
plant and equipment during 2003. Most of this investment was in production
equipment. During 2001, the Company invested $1,002,000 in capital items.

      Current liabilities. Total current liabilities increased from $14,421,000
as of December 31, 2001 to $19,045,000 as of December 31, 2002. This increase is
attributable principally to an increase in accounts payable from $5,492,000 as
of December 31, 2001 to $9,585,000 as of December 31, 2002.

Liquidity and Financial Resources

      At December 31, 2003 the Company had negative working capital of $706,000
compared to negative working capital as of December 31, 2002 of $2,907,000. This
improvement in working capital occurred principally as the result of the
reduction in current liabilities on December 31, 2002 of $19,045,000 to
$16,624,000 on December 31, 2003. This reduction occurred because (i) during
2003, approximately $3,534,000 in payables to vendors was converted to term
obligations and (ii) in connection with the new senior loan completed on
December 30, 2003, the entire balance due to the prior senior lender, all of
which was designated


                                       22
<PAGE>

as short-term, was paid, consisting of $2,540,000 in term loans and $4,223,000
in revolving loan balances.

      The Company has maintained relatively small cash balances and reserves and
relies on its credit facility for liquidity. Under the credit facility, the
Company is able to borrow up to 85% of its eligible receivables and up to 50% of
its eligible inventory, and utilizes the proceeds of these borrowings for its
cash requirements. On December 31, 2003, the Company had available to it under
the revolving loan total availability of $1,648,000. If the Company's sales were
to decline significantly in any period, the Company's ability to borrow under
this line would be reduced and its ability to meet its current obligations would
be adversely affected.

      Based upon the current level of operations, we anticipate that our
operating cash flow, together with available borrowings under our revolving
loan, will be adequate to meet our anticipated future requirements for working
capital and operating expenses for at least the next 12 months. However, the
Company's ability to make scheduled payments of principal of, or to pay interest
on, its current indebtedness and to satisfy its other obligations will depend
upon its future performance, which, to a certain extent, will be subject to
general economic, financial, competitive, business and other factors beyond the
control of the Company.

      The contractual commitments of the Company over the next five years are as
follows:

                      Future Minimum     Operating
Year                Principal Payments     Leases       Licenses         Total
- ------------------- ------------------   ----------    ----------     ----------

2004                    $3,114,356       $  542,532    $   86,664     $3,743,552
2005                    $2,641,942       $  532,905    $   76,664     $3,251,511
2006                    $  930,504       $  504,771            --     $1,435,275
2007                    $  930,504       $  472,728            --     $1,403,232
2008 and thereafter     $3,362,530       $  620,400    $       --     $3,982,930

      The Company does not have any current material commitments for capital
expenditures.

Seasonality

      In the metalized product line, sales have historically been seasonal with
approximately 20% to 30% of annual sales of metalized balloons being generated
in December and January, and 11% to 13% of annual metalized balloon sales being
generated in June and July in recent years. The sale of latex balloons and
laminated film products have not historically been seasonal, and as sales in
these products lines increase as a percentage of total sales, the seasonality of
the Company's total net sales has decreased.

Critical Accounting Policies

      The financial statements of the Company are based on the selection and
application of significant accounting policies which require management to make
various estimates and assumptions. The following are some of the more critical
judgment areas in the application of our accounting policies that currently
affect our financial condition and results of operation.


                                       23
<PAGE>

      Revenue Recognition. Substantially all of the Company's revenues are
derived from the sale of products. With respect to the sale of products, revenue
from a transaction is recognized when (i) a definitive arrangement exists for
the sale of the product, (ii) delivery of the product has occurred, (iii) the
price to the buyer has been fixed or is determinable and (iv) collectibility is
reasonably assured. The Company generally recognizes revenue for the sale of
products when the products have been shipped and invoiced. In some cases,
product is provided on consignment to customers. In those cases, revenue is
recognized when the customer reports a sale of the product.

      Allowance for Doubtful Accounts. We estimate our allowance for doubtful
accounts based on an analysis of specific accounts, an analysis of historical
trends, payment and write-off histories. Our credit risks are continually
reviewed and management believes that adequate provisions have been made for
doubtful accounts. However, unexpected changes in the financial condition of
customers or changes in the state of the economy could result in write-offs
which exceed estimates and negatively impact our financial results.

      Inventory Valuation. Inventories are stated at the lower of cost or
market. Cost is determined using standard costs which approximate costing
determined on a first-in, first out basis. Standard costs are reviewed and
adjusted periodically based on actual direct and indirect production costs.
Labor, overhead and purchase price variances from standard costs are determined
on a monthly basis and inventory is adjusted monthly reflecting these variances.
On a periodic basis, the Company reviews its inventory levels for estimated
obsolescence or unmarketable items, in reference to future demand requirements
and shelf life of the products. As of December 31, 2003, the Company had
established a reserve for obsolescence, marketability or excess quantities with
respect to inventory in the aggregate amount of $492,000. As of December 31,
2002, the amount of the reserve was $354,000. In addition, on a periodic basis,
the Company disposes of inventory deemed to be obsolescent or unsaleable and, at
such time, records an expense for the value of such inventory.

      Valuation of Long-Lived Assets. We evaluate whether events or
circumstances have occurred which indicate that the carrying amounts of
long-lived assets (principally property and equipment and goodwill) may be
impaired or not recoverable. Significant factors which may trigger an impairment
review include: changes in business strategy, market conditions, the manner of
use of an asset, underperformance relative to historical or expected future
operating results, and negative industry or economic trends. In 2001, the FASB
issued Statement No. 142, "Goodwill and Other Intangible Assets," which among
other things, eliminates the amortization of goodwill and certain other
intangible assets and requires that goodwill be evaluated annually for
impairment by applying a fair-value based test. We retained valuation consulting
firms to conduct an evaluation of our goodwill in our Mexico subsidiary in June,
2002, December, 2002 and December, 2003. In the opinion of these firms our
goodwill valuation of our Mexico subsidiary on these dates, in the amount of
$1,113,000 was not impaired.

      Income Taxes and Deferred Tax Assets. Income taxes are accounted for as
prescribed in SFAS No. 109-Accounting for Income Taxes. Under the asset and
liability method of Statement 109, the Company recognizes the amount of income
taxes currently payable and deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences


                                       24
<PAGE>

between the financial statement carrying amounts of existing assets and
liabilities, and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years these temporary differences are expected to be recovered or settled.

      As of December 31, 2003, the Company had a net deferred tax asset of
$1,182,000, representing the amount the Company may recover in future years from
future taxable income. As of December 31, 2002, the amount of the deferred tax
asset was $689,000. Each year and period management must make a judgment to
determine the extent to which the deferred tax asset will be recovered from
future taxable income. As of December 31, 2003, management has determined that
an appropriate allowance against the deferred tax asset, for the possibility
that such amount will not be recovered, is $739,000. As of December 31, 2002,
the amount of this reserve was $739,000. These determinations involve the
exercise of significant management judgment and are made based upon historical,
current and projected levels of revenue and profit.

Safe Harbor Provision of the Private Securities Litigation Act of 1995 and
Forward Looking Statements

      The Company operates in a dynamic and rapidly changing environment that
involves numerous risks and uncertainties. The market for mylar and latex
balloon products is generally characterized by intense competition, frequent new
product introductions and changes in customer tastes which can render existing
products unmarketable. The statements contained in Item 1 (Description of
Business) and Item 7 (Management's Discussion and Analysis of Financial
Condition and Results of Operations) that are not historical facts may be
forward-looking statements (as such term is defined in the rules promulgated
pursuant to the Securities Exchange Act of 1934) that are subject to a variety
of risks and uncertainties more fully described in the Company's filings with
the Securities and Exchange Commission including, without limitation, those
described under "Risk Factors" in the Company's Form SB-2 Registration Statement
(File No. 333-31969) effective November 5, 1997. The forward-looking statements
are based on the beliefs of the Company's management, as well as assumptions
made by, and information currently available to the Company's management.
Accordingly, these statements are subject to significant risks, uncertainties
and contingencies which could cause the Company's actual growth, results,
performance and business prospects and opportunities in 2003 and beyond to
differ materially from those expressed in, or implied by, any such
forward-looking statements. Wherever possible, words such as "anticipate,"
"plan," "expect," "believe," "estimate," and similar expressions have been used
to identify these forward-looking statements, but are not the exclusive means of
identifying such statements. These risks, uncertainties and contingencies
include, but are not limited, to competition from, among others, national and
regional balloon, packaging and custom film product manufacturers and sellers
that have greater financial, technical and marketing resources and distribution
capabilities than the Company, the availability of sufficient capital, the
maturation and success of the Company's strategy to develop, market and sell its
products, risks inherent in conducting international business, risks associated
with securing licenses, changes in the Company's product mix and pricing, the
effectiveness of the Company's efforts to control operating expenses, general
economic and business conditions affecting the Company and its customers in the
United States and other countries in which the Company sells and anticipates
selling its products and services and the


                                       25
<PAGE>

Company's ability to (i) adjust to changes in technology, customer preferences,
enhanced competition and new competitors; (ii) protect its intellectual property
rights from infringement or misappropriation; (iii) maintain or enhance its
relationships with other businesses and vendors; and (iv) attract and retain key
employees. There can be no assurance that the Company will be able to identify,
develop, market, sell or support new products successfully, that any such new
products will gain market acceptance, or that the Company will be able to
respond effectively to changes in customer preferences. There can be no
assurance that the Company will not encounter technical or other difficulties
that could delay introduction of new or updated products in the future. If the
Company is unable to introduce new products and respond to industry changes or
customer preferences on a timely basis, its business could be materially
adversely affected. The Company is not obligated to update or revise these
forward-looking statements to reflect new events or circumstances.

Item No. 7A - Qualitative And Quantitative Disclosures Regarding Market Risk

      The Company is exposed to various market risks, primarily foreign currency
risks and interest rate risks.

      The Company's earnings are affected by changes in interest rates as a
result of variable rate indebtedness. If market interest rates for our variable
rate indebtedness averaged 1% more than the interest rate actually paid for the
years ending December 31, 2003, 2002 and 2001, our interest rate expense would
have increased, and income before income taxes would have decreased by $39,033,
$48,745 and $47,326, for these years, respectively. These amounts are determined
by considering the impact of the hypothetical interest rates on our borrowings.
This analysis does not consider the effects of the reduced level of overall
economic activity that could exist in such an environment. Further, in the event
of a change of such magnitude, management would likely take actions to reduce
our exposure to such change. However, due to the uncertainty of the specific
actions we would take and their possible effects, the sensitivity analysis
assumes no change in our financial structure.

      The Company's earnings and cash flows are subject to fluctuations due to
changes in foreign currency rates, particularly the Mexican peso and the British
pound, as the Company produces and sells products in Mexico for sale in the
United States and other countries and the Company's U.K. subsidiary purchases
balloon products from the Company in Dollars. Also, the Mexican subsidiary
purchases goods from external sources in U.S. Dollars and is affected by
currency fluctuations in those transactions. Substantially all of the Company's
purchases and sales of goods for its operations in the United States are done in
U.S. Dollars. However, the Company's level of sales in other countries may be
affected by currency fluctuations. As a result, exchange rate fluctuations may
have an effect on sales and gross margins. Accounting practices require that the
Company's results from operations be converted to U.S. dollars for reporting
purposes. Consequently, the reported earnings of the Company in future periods
may be affected by fluctuations in currency exchange rates, generally increasing
with a weaker U.S. dollar and decreasing with a strengthening U.S. dollar. To
date, we have not entered into any transactions to hedge against currency
fluctuation effects.


                                       26
<PAGE>

      We have performed a sensitivity analysis as of December 31, 2003 that
measures the change in the results of our foreign operations arising from a
hypothetical 10% adverse movement in the exchange rate of all of the currencies
the Company presently has operations in. Using the results of operations for
2003, 2002 and 2001 for the Company's foreign operations as a basis for
comparison, an adverse movement of 10% would create a potential reduction in the
Company's net income, or increase its net loss, before taxes, in the amount of,
for each of those years, $173,034, $175,973 and $176,509.

Item No. 8 Financial Statements and Supplementary Data

      Reference is made to the Consolidated Financial Statements attached
hereto.

Item No. 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

      Effective July 22, 2003, CTI Industries Corporation (the "Registrant")
engaged Eisner, LLP as the Registrant's principal accountants to audit the
Registrant's financial statements for the year ending December 31, 2003. Eisner,
LLP replaced McGladrey & Pullen, LLP, which had previously been engaged for the
same purpose, and whose dismissal was effective July 22, 2003. The decision to
change the Registrant's principal accountants was approved by the Registrant's
Board of Directors on July 22, 2003.

      The reports of McGladrey & Pullen, LLP, on the Registrant's financial
statements for the fiscal year ended December 31, 2002 did not contain an
adverse opinion or disclaimer of opinion, nor were they qualified or modified as
to uncertainty, audit scope, or accounting principles.

      Effective July 24, 2002, the Company engaged McGladrey & Pullen, LLP as
the Registrant's principal accountants to audit the Company's financial
statements for the year ending December 31, 2002. McGladrey & Pullen, LLP
replaced Grant Thornton, LLP, which had previously been engaged for the same
purpose, and whose dismissal was effective July 24, 2002. The decision to change
the Company's principal accountants was approved by the Company's Audit
Committee and Board of Directors on July 24, 2002.

      During the Company's fiscal year ended December 31, 2002 and in the
subsequent interim period through March 31, 2003, there were no disagreements
with McGladrey & Pullen, LLP on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of McGladrey & Pullen, LLP
would have caused it to make reference to the subject matter of the
disagreements in connection with its reports on the financial statements for
such periods.

      McGladrey & Pullen, LLP has not informed the Company of any reportable
events during the Company's fiscal year ended December 31, 2002 or in the
subsequent interim period ending March 31, 2003.

      The reports of Grant Thornton LLP, on the Company's financial statements
for the prior two fiscal years ended December 31, 2000, and December 31, 2001
did not contain an adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope, or accounting principles.

      During the Company's fiscal years ended December 31, 2000, and December
31, 2001, and in the subsequent interim periods through July 24, 2002, there
were no disagreements with Grant Thornton, LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of Grant
Thornton, LLP, would have caused it to make reference to the subject matter of
the disagreements in connection with its reports on the financial statements for
such periods.


                                       27
<PAGE>

      Grant Thornton, LLP has not informed the Company of any reportable events
during the Company's two fiscal years ended December 31, 2000 and 2001 and in
subsequent interim periods through July 24, 2002.

Item No. 9A - Controls and Procedures

      Disclosure Controls and Procedures

            (a) Evaluation of disclosure controls and procedures. Our principal
executive officer and principal financial officer, after evaluating the
effectiveness of our disclosure controls and procedures (as defined in Exchange
Act Rules 13a-15(e) and 15d-15(e)) as of a date within ninety days before the
filing date of this report, have concluded that, as of such date our disclosure
controls and procedures were adequate and effective to ensure that material
information relating to the Company would be made known to them by others within
the Company.

            (b) Changes in internal controls. There were no significant changes
in our internal controls or in other factors that could significantly affect the
Company's disclosure controls and procedures subsequent to the date of their
evaluation, nor were there any significant deficiencies or material weaknesses
in the Company's internal controls. As a result, no corrective actions were
required or undertaken.

PART III

Item No. 10 Directors and Executive Officers of the Registrant

Directors and Executive Officers

      The Company's current directors and executive officers and their ages, as
of March 15, 2004, are as follows:

       Name              Age               Position With The Company
- ------------------       ---    ------------------------------------------------
John H. Schwan           59     Chairman and Director
Howard W. Schwan         49     President and Director
Stephen M. Merrick       62     Executive Vice President, Secretary and Director
Mark Van Dyke            54     Senior Vice President
Brent Anderson           37     Vice President of Manufacturing
Samuel Komar             47     Vice President
Stanley M. Brown         57     Director
Bret Tayne               45     Director
Michael Avramovich       52     Director
Timothy Patterson        43     Vice President-Finance and Administration

      All directors hold office until the annual meeting next following their
election and/or until their successors are elected and qualified. Officers are
elected annually by the Board of


                                       28
<PAGE>

Directors and serve at the discretion of the Board. Information with respect to
the business expenses and affiliation of the directors and the executive
officers of the Company is set forth below:

      John H. Schwan, Chairman. Mr. Schwan has been an officer and director of
the Company since January, 1996. Mr. Schwan has been the President and principal
executive officer of Packaging Systems and affiliated companies for over the
last 15 years. Mr. Schwan has over 20 years of general management experience,
including manufacturing, marketing and sales. Mr. Schwan served in the U.S. Army
Infantry in Vietnam from 1966 to 1969, where he attained the rank of First
Lieutenant.

      Howard W. Schwan, President. Mr. Schwan has been associated with the
Company for 21 years, principally in the management of the production and
engineering operations of the Company. Mr. Schwan was appointed as Vice
President of Manufacturing in November, 1990, was appointed as a director in
January, 1996, and was appointed as President in June, 1997.

      Stephen M. Merrick, Executive Vice President and Secretary. Mr. Merrick
was President of the Company from January, 1996 to June, 1997 when he became
Chief Executive Officer of the Company. In October, 1999, Mr. Merrick became
Executive Vice President. Mr. Merrick is a principal of the law firm of Merrick
& Klimek, P.C. of Chicago, Illinois and has been engaged in the practice of law
for more than 35 years. Mr. Merrick is also Senior Vice President, Director and
a member of the Management Committee of Reliv International, Inc. (NASDAQ), a
manufacturer and direct marketer of nutritional supplements and food products.

      Mark Van Dyke, Senior Vice President. Mr. Van Dyke rejoined the Company in
August, 2001. Mr. Van Dyke has over 25 years experience in the balloon industry
and was previously employed by the Company for 12 years. Prior to rejoining the
Company, Mr. Van Dyke was employed by M&D Balloons, Inc. for eight years and
became Executive Director of that Company.

      Brent Anderson, Vice President of Manufacturing. Mr. Anderson has been
employed by the Company since January, 1989, and has held a number of
engineering positions with the Company including Plant Engineer and Plant
Manager. In such capacities Mr. Anderson was responsible for the design and
manufacture of much of the Company's manufacturing equipment. Mr. Anderson was
appointed Vice President of Manufacturing in June, 1997.

      Samuel Komar, Vice President of Sales. Mr. Komar has been employed by the
Company since March of 1998, and was named Vice-President of Sales in September
of 2001. Mr. Komar has worked in sales for 16 years, and prior to his employment
with the Company, Mr. Komar was with Bob Gable & Associates, a manufacturer of
sporting goods. Mr. Komar received a Bachelor of Science Degree in Sales and
Marketing from Indiana University.

      Timothy Patterson, Vice President of Finance and Administration. Mr.
Patterson has been employed by the Company as Vice President of Finance and
Administration since September, 2003. Prior to his employment with the Company,
Mr. Patterson was Manager of Controllers for the Thermoforming group at Solo Cup
Company for two years. Prior to that, Mr.


                                       29
<PAGE>

Patterson was Manager of Corporate Accounting for Transilwrap Company for three
years. Mr. Patterson received a Bachelor of Science degree in finance from
Northern Illinois University and an MBA from the University of Illinois at
Chicago.

      Stanley M. Brown, Director. Mr. Brown was appointed as a director of the
Company in January, 1996. Since March, 1996, Mr. Brown has been President of
Inn-Room Systems, Inc., a manufacturer and lessor of in-room vending systems for
hotels. From 1968 to 1989, Mr. Brown was with the United States Navy as a naval
aviator, achieving the rank of Captain.

      Bret Tayne, Director. Mr. Tayne was appointed as a director of the Company
in December, 1997. Mr. Tayne has been the President of Everede Tool Company, a
manufacturer of industrial cutting tools, since January, 1992. Prior to that,
Mr. Tayne was Executive Vice President of Unifin, a commercial finance company,
since 1986. Mr. Tayne received a Bachelor of Science degree from Tufts
University and an MBA from Northwestern University.

      Michael Avramovich, Director. Mr. Avramovich is a principal of the law
firm of Avramovich & Associates, P.C. of Chicago, Illinois, and has been engaged
in the practice of law for over 6 years. Prior to the practice of law, Mr.
Avramovich was an Associate Professor of Accounting and Finance at
National-Louis University in Chicago, Illinois. Mr. Avramovich has also worked
in various financial accounting positions at Molex International, Inc. of Lisle,
Illinois. Mr. Avramovich received a Bachelor of Arts degree in History and
International Relations from North Park University, a Master of Management,
Accounting and Information Systems, and Finance from Northwestern University, a
Juris Doctorate from the John Marshall Law School and an L.L.M. in International
and Corporate Law from Georgetown University Law Center.

      John H. Schwan and Howard W. Schwan are brothers.

Audit Committee

      Since 2000, the Company has had a standing Audit Committee, which is
presently composed of Mr. Tayne, Mr. Brown and Mr. Avramovich. Mr. Avramovich
has been designated and is the Company's "Audit Committee Financial Expert"
pursuant to paragraph (h)(1)(i)(A) of Item 401 of Regulation S-K of the Exchange
Act. The Audit Committee held five meetings during fiscal year 2003, including
quarterly meetings with management and independent auditors to discuss the
Company's financial statements. Mr. Avramovich and each appointed member of the
Audit Committee satisfies the definition of "independent" as that term is used
in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act. The Company's Board
of Directors has adopted a written charter for the Company's Audit Committee, a
true and correct copy of which has been included in the exhibits to this report.
The Audit Committee reviews and makes recommendations to the Company about its
financial reporting requirements. Information regarding the functions performed
by the Committee is set forth in the "Report of the Audit Committee," as
follows:

                         Report of the Audit Committee

      The Audit Committee oversees the Company's financial reporting process on
behalf of the Board of Directors. Management has the primary responsibility for
the financial statements


                                       30
<PAGE>

and the reporting process including the systems of internal controls. In
fulfilling its oversight responsibilities, the Committee reviewed the audited
financial statements in the Annual Report with management including a discussion
of the quality, not just the acceptability, of the accounting principles, the
reasonableness of significant judgments, and the clarity of disclosures in the
financial statements.

      The Committee reviewed with the independent auditors, who are responsible
for expressing an opinion on the conformity of those audited financial
statements with generally accepted accounting principles, their judgments as to
the quality, not just the acceptability, of the Company's accounting principles
and such other matters as are required to be discussed with the Committee under
generally accepted auditing standards, including but not limited to those
matters required to be discussed by SAS 61 (Codification of Statements on
Auditing Standards, AU ss.380). In addition, the Committee has discussed with
the independent auditors the auditor's independence from management and the
Company including the matters in the written disclosures required by the
Independence Standards Board.

      The Committee discussed with the Company's independent auditors the
overall scope and plans for their respective audits. The Committee meets with
the independent auditors, with and without management present, to discuss the
results of their examinations, their evaluations of the Company's internal
controls, and the overall quality of the Company's financial reporting.

      In reliance on the reviews and discussions referred to above, the
Committee recommended to the Board of Directors (and the Board has approved)
that the audited financial statements be included in the Annual Report on Form
10-K for the year ended December 31, 2003 for filing with the Securities and
Exchange Commission. The Committee and the Board have also recommended, subject
to future shareholder approval at the Company's 2004 annual meeting of
shareholders, the selection of Eisner, LLP as the Company's independent
auditors.

      Bret Tayne,, Audit Committee Chair

      Stanley M. Brown, III, Audit Committee Member

      Michael Avramovich, Audit Committee Member

Section 16(a) Beneficial Ownership Reporting Compliance

      Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and with the NASDAQ Stock Market. Officers, directors and greater than
ten-percent shareholders are required by SEC regulation to furnish the Company
with copies of all Section 16(a) forms they file.

      Based solely on a review of such forms furnished to the Company, or
written representations that no Form 5's were required, the Company believes
that during calendar year 2003, all Section 16(a) filing requirements applicable
to the officers, directors and ten-percent


                                       31
<PAGE>

beneficial shareholders were complied with, except that Brent Anderson was late
in filing one Form 4 for an aggregate of 8,750 shares.

Code of Ethics

      The Company has adopted a code of ethics that applies to its senior
executive and financial officers. The Company's Code of Ethics seeks to promote
(i) honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest between personal and professional relationships,
(2) full, fair, accurate, timely and understandable disclosure of information to
the Commission, (3) compliance with applicable governmental laws, rules and
regulations, (4) prompt internal reporting of violations of the Code to
predesignated persons, and (5) accountability for adherence to the Code. A copy
of the Company's Code of Ethics has been included in the Exhibits to this
report.

Item No. 11 Executive Compensation

      The following table sets forth certain information with respect to the
compensation paid or accrued by the Company to its President, Chief Executive
Officer and any other officer who received compensation in excess of $100,000
("Named Executive Officers").

                           Summary Compensation Table

<TABLE>
<CAPTION>
                                             Annual Compensation          Long Term Compensation
                                             -------------------          ----------------------
                                                                                        All Other
  Name and Principal                        Salary    Other Annual       Underlying   Compensation
       Position                   Year         $      Compensation         Options         ($)
- --------------------------------------------------------------------------------------------------
<S>                               <C>      <C>          <C>               <C>           <C>
Howard W. Schwan                  2003     $162,500     $  5,520              --            --
President                         2002     $162,500     $  8,100          14,285(1)     $1,925(5)
                                  2001     $150,000     $  5,000              --        $1,765(5)

Mark Van Dyke                     2003     $125,000           --              --            --
Senior Vice President             2002     $123,100           --              --            --
                                  2001     $ 45,900           --          23,809(2)         --

Brent Anderson                    2003     $ 95,000           --              --            --
Vice President of                 2002     $ 95,000           --           8,928(3)         --
Manufacturing                     2001     $ 86,700           --          17,857(3)         --

Samuel Komar                      2003     $104,200           --              --            --
Vice President of Sales           2002     $104,200           --              --            --
                                  2001     $ 94,450           --          11,904(4)         --
</TABLE>

- ----------

                       (footnotes continued on next page)


                                       32
<PAGE>

(1)   Stock options to purchase up to 14,285 shares of the Company's Common
      Stock at $2.31 per share, and stock options to purchase up to 23,809
      shares of the Company's Common Stock at $1.89 per share.

(2)   Stock options to purchase up to 23,809 shares of the Company's Common
      Stock at $1.47 per share.

(3)   Stock options to purchase up to 8,928 shares of the Company's Common Stock
      at $2.31 per share, and stock options to purchase up to 17,857 shares of
      the Company's Common Stock at $1.47 per share.

(4)   Stock options to purchase up to 11,904 shares of the Company's Common
      Stock at $1.47 per share.

(5)   Company contribution to the Company's 401(k) Plan as a pre-tax salary
      deferral.

      Certain Named Executive Officers have received warrants to purchase Common
Stock of the Company in connection with their guarantee of certain bank loans
secured by the Company and in connection with their participation in a private
offering of notes and warrants conducted by the Company. See "Board of Director
Affiliations and Related Transactions" below. The following stock option grants
were made to certain of the Company's executive officers in the fiscal year
ending December 31, 2003:

                        Option Grants in Last Fiscal Year

                                Individual Grants
- --------------------------------------------------------------------------------
                     Number of
                     Securities      % of Total
                     Underlying   Options Granted
                       Options    to Employees in    Exercise Price   Expiration
      Name             Granted      Fiscal Year         ($/share)        Date
- -----------------    ----------   ---------------    --------------   ----------
Timothy Patterson       5,000           71.4%             $2.26        2/3/2013

    Aggregated Option Exercises in Last Fiscal Year and FY-End Option Values

<TABLE>
<CAPTION>
                                                                                           Value of Unexercised In- the-
                          Shares         Value       Number of Securities Underlying       Money Options at Fiscal Year
                       Acquired on      Realized     Unexercised Options at Year End                   End ($)
        Name           Exercise (#)       ($)         (#) Exercisable/Unexercisable          Exercisable/Unexercisable
- ------------------     ------------     --------     -------------------------------       -----------------------------
<S>                         <C>            <C>                   <C>                                <C>
John H. Schwan              0              0                     29,762/0                           $4,286/0(1)
Howard W. Schwan            0              0                     53,968/0                           $8,810/0 (1)
Stephen M. Merrick          0              0                     29,762/0                           $4,286/0(1)
Mark Van Dyke               0              0                     23,809/0                           $18,809/0(1)
Brent Anderson              0              0                     31,546/0                           $14,107/0(1)
Samuel Komar                0              0                     24,641/0                           $12,355/0 (1)
</TABLE>

- ----------
(1)   The value of unexercised in-the-money options is based on the difference
      between the exercise price and the fair market value of the Company's
      Common Stock on December 31, 2003.


                                       33
<PAGE>

Compensation Committee

      During 2003, the Compensation Committee was composed of John H. Schwan,
Stanley M. Brown and Bret Tayne. The Compensation Committee reviews and makes
recommendations to the Board of Directors concerning the compensation of
officers and key employees of the Company. The Compensation Committee met one
time during 2003.

Compensation Committee Report on Executive Compensation

The Compensation Committee of the Board of Directors of the Company is composed
of three members of the Board of Directors. The Compensation Committee is
responsible for establishing the standards and philosophy of the Board of
Directors regarding executive compensation, for reviewing and evaluating
executive compensation and compensation programs, and for recommending levels of
salary and other forms of compensation for executives of the Company to the
Board of Directors. The full Board of Directors of the Company is responsible
for setting and administering salaries, bonus payments and other compensation
awards to executives of the Company.

Compensation Philosophy

      The philosophy of the Compensation Committee, and of the Board of
Directors of the Company, regarding executive compensation includes the
following principal components:

      To attract and retain quality executive talent, which is regarded as
critical to the long and short-term success of the Company, in substantial part
by offering compensation programs which provide attractive rewards for
successful effort.

      To provide a reasonable level of base compensation to senior executives.

      To create a mutuality of interest between executive officers of the
Company and shareholders through long-term compensation structures, particularly
stock option programs, so that executive officers share the risks and rewards of
strategic decision making and its effect on shareholder value.

      The Compensation Committee has recommended, and the Board of Directors has
determined, to take appropriate action to comply with the provisions of Section
162(m) of the Internal Revenue Code so that executive compensation will be
deductible as an expense to the fullest extent allowable.

      The Company's executive compensation program consists of two key elements:
(i) an annual component consisting of base salary and (ii) a long-term
component, principally stock options.


                                       34
<PAGE>

Annual Base Compensation

      The Compensation Committee recommends annual salary levels for each of the
Named Executives, and for other senior executives of the Company, to the Board
of Directors. The recommendations of the Compensation Committee for base salary
levels for senior executives of the Company are determined annually, in part, by
evaluating the responsibilities of the position and examining market
compensation levels and trends for similar positions in the marketplace.

      Additional factors which the Compensation Committee considers in
recommending annual adjustments to base salaries include: results of operation
of the Company, sales, shareholder returns, and the experience,
work-performance, leadership and team building skills of each executive. The
Company receives information from the Chief Executive Officer with regard to
these matters. While each of these factors is considered in relatively equal
weight, the Compensation Committee does not utilize performance matrices or
measured weightings in its review. Each year, the Compensation Committee
conducts a structured review of base compensation of senior executives with
input from the Chief Executive Officer.

Long-Term Component - Stock Options

      The long-term component of compensation provided to executives of the
Company has been in the form of stock options. The Compensation Committee has
recommended to the Board of Directors that a significant portion of the total
compensation to executives be in the form of incentive stock options. Stock
options are granted with an exercise price equal to or greater than the fair
market value of the Company's Common Stock on the date of the grant. Stock
options are exercisable between one and ten years from the date granted. Such
stock options provide incentive for the creation of shareholder value over the
long-term since the full benefit of the compensation package for an executive
cannot be realized unless an appreciation in the price of the Company's Common
Stock occurs over a specified number of years.

      The magnitude of the stock option awards are determined annually by the
Compensation Committee and the Board of Directors. Generally, the number of
options granted to an executive has been based on the relative salary level of
the executive.

      On October 12, 2002, incentive stock options to purchase up to 14,285,
8,928, 5,952 and 5, 952 shares of the Company's Common Stock were granted to
Messrs. Howard Schwan, Brent Anderson, Stephen M. Merrick and John Schwan,
respectively, under the 2002 Stock Option Plan (the "2002 Plan"). In addition,
on October 12, 2002, non-qualified stock options to purchase up to 2,926 shares
of the Company's Common Stock were granted to each of Messrs. Stan Brown and
Bret Tayne respectively, under the 2002 Plan, and incentive stock options to
purchase up to 5,000 shares of the Company's Common Stock were granted to
Timothy Patterson under the 2002 Stock Option Plan on December 31, 2003.

There were no other stock options granted to any of the Named Executives in
2001, 2002 or 2003.


                                       35
<PAGE>

CEO Compensation

      The Compensation Committee utilizes the same standards and methods for
recommending annual base compensation for the Chief Executive Officer of the
Company as it does for other senior executive officers of the Company.

      In 1997, the Company entered into an Employment Agreement with Howard W.
Schwan, President of the Company, providing that Mr. Schwan's base annual
compensation would not be less than $135,000. During 2001, 2002 and 2003, upon
the recommendation of the Compensation Committee, the base salary of Mr. Schwan
was $150,000, $162,500 and $162,500 respectively. In 2001, 2002 and 2003, annual
incentive compensation was paid to Mr. Schwan in the amounts of $5,000, $8,100
and $5,520, respectively.

      The Compensation Committee recommended that Mr. Schwan (and other senior
executives of the Company), receive incentive stock options, consistent with
observed market practices, so that a significant portion of his total
compensation will be based upon, and consistent with, returns to shareholders.
In 2002, Mr. Schwan was granted incentive stock options to purchase up to 14,285
shares of the Company's Common Stock.

                          Compensation Committee:
                          John H. Schwan, Bret Tayne, Stanley M. Brown, III

Compensation Committee Interlocks and Insider Participation

      John H. Schwan, a member of the Compensation Committee, is Chairman of the
Company. Mr. Schwan is President of Packaging Systems, L.L.C. and affiliated
companies. The Company made purchases of packaging materials from the entities
in the amount of $118,011 and $273,910 during each of the years ended December
31, 2002 and December 31, 2003, respectively. John Schwan and Howard W. Schwan
are brothers.

Comparative Stock Price Performance Graph

The following graph compares, for the period January 1, 1999 to December 31,
2003, the cumulative total return (assuming reinvestment of dividends) on the
Company's Common Stock with (i) NASDAQ Stock Market Index (U.S.) and (ii) a peer
group including the following companies: S&P 500 Specialty Stores. The graph
assumes an investment of $100 on January 1, 1999, in the Company's Common Stock
and each of the other investment categories.


                                       36
<PAGE>

Total Return To Shareholders
  (Includes reinvestment of dividends)

                            ANNUAL RETURN PERCENTAGE

<TABLE>
<CAPTION>
                                      Years Ending

Company / Index                       Oct99      Oct00      Dec00      Dec01      Dec02      Dec03
<S>                                  <C>         <C>       <C>        <C>        <C>        <C>
CTI INDUSTRIES CORP                  -74.39      -4.76     -46.67      75.00     325.85     -63.90
NASDAQ U.S. INDEX                     68.75      13.06     -27.05     -20.63     -30.86      49.51
S&P 500 SPECIALTY STORES             -16.29      -4.69     -13.37      61.41     -11.11      34.66
</TABLE>

                                 INDEXED RETURNS

<TABLE>
<CAPTION>
                            Base      Years Ending
                           Period
Company / Index             Oct98     Oct99      Oct00      Dec00      Dec01      Dec02      Dec03
<S>                          <C>     <C>        <C>        <C>        <C>         <C>       <C>
CTI INDUSTRIES CORP          100      25.61      24.39      13.01      22.76      96.94      35.00
NASDAQ U.S. INDEX            100     168.75     190.80     139.19     110.48      76.38     114.20
S&P 500 SPECIALTY STORES     100      83.71      79.78      69.12     111.56      99.16     133.53
</TABLE>

Employment Agreements

      In June, 1997, the Company entered into an Employment Agreement with
Howard W. Schwan as President, which provides for an annual salary of not less
than $135,000. The term of the Agreement was through June 30, 2002 and is
automatically renewed thereafter for successive one year terms. The Agreement
contains covenants of Mr. Schwan with respect to the use of the Company's
confidential information, establishes the Company's right to inventions created
by Mr. Schwan during the term of his employment, and includes a covenant of Mr.
Schwan not to compete with the Company for a period of three years after the
date of termination of the Agreement.

Director Compensation

      John Schwan was compensated in the amount of $76,500 in fiscal 2003 for
his services as Chairman of the Board of Directors. Directors other than members
of management received a fee of $1,000 for each Board meeting attended.

Item No. 12 Security Ownership of Certain Beneficial Owners and Management

Principal Stockholders

      The following table sets forth certain information with respect to the
beneficial ownership of the Company's capital stock, as of April 1, 2004, by (i)
each stockholder who is known by the Company to be the beneficial owner of more
than 5% of the Company's Common Stock, (ii) each director and executive officer
of the Company who owns any shares of Common Stock and (iii) all executive
officers and directors as a group. Except as otherwise indicated, the Company


                                       37
<PAGE>

believes that the beneficial owners of the shares listed below have sole
investment and voting power with respect to such shares.

<TABLE>
<CAPTION>
                                                                     Shares of Common
                                                                    Stock Beneficially      Percent of Common
                        Name and Address (1)                              Owned (2)               Stock
- ------------------------------------------------------------        ------------------      -----------------
<S>                                                                     <C>                      <C>
John H. Schwan                                                            642,237(3)             30.3%(4)
Stephen M. Merrick                                                        525,758(5)             25.6%(4)
Howard W. Schwan                                                          178,904(6)              9.1%(4)
Brent Anderson                                                             42,795(7)              2.2%(4)
Samuel Komar                                                               24,879(8)              1.3%(4)
Mark Van Dyke                                                              23,809(9)              1.2%(4)
Timothy Patterson                                                           5,000(10)               *(4)
Stanley M. Brown
   1140 Larkin
   Wheeling, IL 60090                                                      11,250(11)               *
Bret Tayne
   6834 N. Kostner Avenue
   Lincolnwood, IL 60712                                                    9,923(12)               *
Frances Ann Rohlen
   1140 Larkin
   Wheeling, IL 60090                                                     169,933                 8.9%
Michael Avramovich
  70 W. Madison Street, Suite 1400
   Chicago, IL 60602                                                            0                   *

All Directors and Executive Officers as a group (10 persons)            1,464,555                  62%(4)
</TABLE>

- ----------

*     Less than one percent

(1)   Except as otherwise indicated, the address of each stockholder listed
      above is c/o CTI Industries Corporation, 22160 North Pepper Road,
      Barrington, Illinois 60010.

(2)   A person is deemed to be the beneficial owner of securities that can be
      acquired within 60 days from the date set forth above through the exercise
      of any option, warrant or right. Shares of Common Stock subject to
      options, warrants or rights that are currently exercisable or exercisable
      within 60 days are deemed outstanding for purposes of computing the
      percentage ownership of the person holding such options, warrants or
      rights, but are not deemed outstanding for purposes of computing the
      percentage ownership of any other person.

(3)   Includes warrants to purchase up to 79,364 shares of Common Stock at $1.50
      per share, warrants to purchase up to 93,000 shares of Common Stock at
      $4.87 per share, options to purchase up to 23,810 shares of Common Stock
      at $2.08 per share granted under the Company's 1999 Stock Option Plan and
      options to purchase up to 5,952 shares of Common Stock at $2.55 per share
      granted under the Company's 2002 Stock Option Plan. Also includes indirect
      beneficial ownership of 130,821 shares of Common Stock through shares
      owned through CTI Investors, L.L.C. See "Board of Directors Affiliations
      and Related Transactions."

(4)   Assumes the exercise of all warrants and options owned by the named person
      into shares of Common Stock and all shares of Common Stock beneficially
      owned by the named person through CTI Investors, L.L.C.

                       (footnotes continued on next page)


                                       38
<PAGE>

(5)   Includes warrants to purchase up to 39,683 shares of Common Stock at $1.50
      per share, warrants to purchase up to 70,000 shares of Common Stock at
      $4.87 per share, options to purchase up to 23,810 shares of Common Stock
      at $2.08 per share granted under the Company's 1999 Stock Option Plan and
      options to purchase up to 5,952 shares of Common Stock at $2.55 per share
      granted under the Company's 2002 Stock Option Plan. Also includes indirect
      beneficial ownership of 87,214 shares of Common Stock through shares owned
      through CTI Investors, L.L.C. See "Board of Directors Affiliations and
      Related Transactions."

(6)   Includes options to purchase up to 15,873 shares of Common Stock at $6.30
      per share granted under the Company's 1997 Stock Option Plan, options to
      purchase up to 23,810 shares of Common Stock at $1.89 per share granted
      under the Company's 1999 Stock Option Plan and options to purchase up to
      14,285 shares of Common Stock at $2.31 per share granted under the
      Company's 2002 Stock Option Plan. Also includes indirect beneficial
      ownership of 65,410 shares of Common Stock through shares owned through
      CTI Investors, L.L.C. See "Board of Directors Affiliations and Related
      Transactions."

      With respect to the financial covenants, the bank has issued a waver of
      violations of the covenants as of December 31, 2003. For periods after
      December 31, 2003 the bank has agreed to modify the covenants, both the
      tangible net worth and ratio of EDITDA of fixed charges, to reduce levels.

(7)   Includes options to purchase up to 4,761 shares of Common Stock at $6.30
      per share granted under the Company's 1997 Stock Option Plan, options to
      purchase up to 17,857 shares of Common Stock at $1.47 per share, granted
      under the Company's 2001 Stock Option Plan and options to purchase up to
      8,928 shares of Common Stock at $2.31 per share granted under the
      Company's 2002 Stock Option Plan.

(8)   Includes options to purchase up to 4,761 shares of Common Stock at $6.30
      per share granted under the Company's 1997 Stock Option Plan, options to
      purchase up to 7,976 shares of Common Stock at $1.89 per share granted
      under the Company's 1999 Stock Option Plan, options to purchase up to
      11,904 shares of Common Stock at $1.47 per share granted under the
      Company's 2001 Stock Option Plan, and 238 shares of Common Stock held by
      immediate family members.

(9)   Includes options to purchase up to 23,809 shares of Common Stock at $1.47
      per share granted under the Company's 2001 Stock Option Plan.

(10)  Includes options to purchase up to 5,000 shares of Common Stock at $2.26
      per share granted under the Company's 2002 Stock Option Plan.

(11)  Includes options to purchase up to 1,984 shares of Common Stock at $6.30
      per share and options to purchase up to 1,984 shares of Common Stock at
      $10.08 per share, both granted under the Company's 1997 Stock Option Plan,
      options to purchase up to 3,571 shares of Common Stock at $1.89 per share
      granted under the Company's 1999 Stock Option Plan and options to purchase
      up to 2,976 shares of Common Stock at $2.31 per share granted under the
      Company's 2002 Stock Option Plan.

                       (footnotes continued on next page)


                                       39
<PAGE>

(12)  Includes options to purchase up to 1,984 shares of Common Stock at $6.30
      per share granted under the Company's 1997 Stock Option Plan, options to
      purchase up to 3,571 shares of Common Stock at $1.89 per share granted
      under the Company's 1999 Stock Option Plan and options to purchase up to
      2,976 shares of Common Stock at $2.31 per share granted under the
      Company's 2002 Stock Option Plan.

Item No. 13 Certain Relationships and Related Transactions

      Stephen M. Merrick, Executive Vice President and Secretary of the Company,
is a principal of the law firm of Merrick & Klimek, P.C., which serves as
general counsel of the Company. In addition, Mr. Merrick is a principal
stockholder of the Company. Other principals of the firm of Merrick & Klimek,
P.C. own less than 1% of the Company's outstanding Common Stock. Legal fees
incurred from the firm of Merrick & Klimek, P.C. for the fiscal years ended
December 31, 2003, 2002 and 2001 were $106,750, $102,245 and $121,305,
respectively. Mr. Merrick is also an officer and director of Reliv
International, Inc. (NASDAQ-RELV).

      John H. Schwan is President of Packaging Systems, L.L.C. and affiliated
companies. The Company made purchases of packaging materials from these entities
in the amount of $118,011 and $273,910 during each of the years ended December
31, 2002 and December 31, 2003, respectively.

      In June, 1999, notes of the Company to Howard W. Schwan, John Schwan, and
Stephen Merrick in the amount of, respectively, $50,000, $350,000 and $315,000,
came due. On November 9, 1999, new notes in the same principal amounts were
issued to Messrs. H. Schwan, J. Schwan and Merrick, in payment and replacement
of the prior notes with maturity dates for each of November 9, 2001. As of that
date, each payee under the Notes had executed a consent to extend the maturity
of the Notes to March 1, 2004. In November, 1999, the June, 1997 warrants of
Messrs. H. Schwan, J. Schwan and Merrick to purchase up to (respectively) 6,359,
44,515 and 40,063 shares of the Company's Common Stock at an exercise price of
$7.86 per share were cancelled. At that time, new warrants to purchase up to
35,263, 246,840 and 222,157 shares of the Company's Common Stock at an exercise
price of $1.418 per share were issued to Messrs. H. Schwan, J. Schwan and
Merrick, respectively. Each of these warrants were exercised on June 3, 2002.
The respective $50,000, $350,000 and $315,000 notes were cancelled and used as
payment for the warrant shares.

      In July, 2001, the Company issued Warrants to purchase up to 79,364 shares
of the Company's Common Stock to John H. Schwan and 39,683 shares of the
Company's Common Stock to Stephen M. Merrick. The warrants were issued in
consideration of Mr. Schwan and Mr. Merrick guaranteeing and securing loans to
the Company in the aggregate amount of approximately $1,600,000. The warrants
are exercisable for a period of five years at a price of $1.50 per share.


                                       40
<PAGE>

      On December 12, 2002, Messrs. John Schwan, Howard Schwan and Stephen
Merrick exercised warrants to purchase 24,572, 30,525 and 28,780 shares of the
Company's Common Stock, respectively. In each instance, the warrant holder
tendered shares of the Company's Common Stock on the date of exercise.

      During February, 2003, John H. Schwan loaned $930,000 to the Company and
Stephen M. Merrick loaned $700,000 to the Company, in exchange for (i) two year
promissory notes bearing interest at 9% per annum and (ii) five year warrants to
purchase up to an aggregate of 163,000 shares of Common Stock of the Company at
$4.87 per share, the market price of the Common Stock on the date of the
Warrants. The proceeds of these loans were to (i) re-finance the loan of bank
loan of CTI Mexico in the amount of $880,000 and (ii) to provide financing for
CTI Mexico and Flexo Universal.

      During 2003, John H. Schwan loaned to the Company an additional aggregate
amount of $795,024 . Such amount is due on demand and bears interest at the rate
of 8% per annum.

      During 2003, John H. Schwan loaned to Flexo Universal the aggregate amount
of $225,000 and Stephen M. Merrick loaned to Flexo Universal the sum of $25,000.
These advances are reflected in notes and bear interest at the rate of 8% per
annum. The notes are unsecured.

      On November 10, 1999, the Company entered into a Lease Agreement with
Pepper Road, Inc., an Illinois corporation, to lease certain warehouse and
office space located at 22222 North Pepper Road, Barrington, Illinois, the
building and property immediately adjacent to the Company's manufacturing
facilities at 22160 North Pepper Road, Barrington, Illinois. The lease has a 10
year term and provides for monthly rent payments of $15,500 ($186,000 annually),
plus all utility charges associated with the property. John Schwan, Howard
Schwan and Stephen M. Merrick are officers, directors, and the sole shareholders
of Pepper Road, Inc.

      The Company believes that each of the transactions set forth above were
entered into, and any future related party transactions will be entered into, on
terms as fair as those obtainable from independent third parties. All related
party transactions must be approved by a majority of disinterested directors and
subject to review in the context of the Company's Code of Ethics.

PART V

Item No. 14 Principal Accountant Fees and Services

Fees Billed By Independent Public Accountants

      The following table sets forth the aggregate amount of audit fees and all
other fees billed or expected to be billed by Eisner, LLP, the Company's
principal auditor, for the year ended December 31, 2003:


                                       41
<PAGE>

                                                     Amount
                                                    --------

            Audit fees (1)                          $ 98,500
            Other audit related fees (2)            $ 15,000
            All other fees(3)                       $ 15,000
                                                    --------

            Total fees                              $128,500
                                                    ========

- ----------

(1)   Includes the annual financial statement audit and limited quarterly
      reviews and expenses.

(2)   Includes fees and expenses for other audit related activity provided by
      Eisner, LLP.

(3)   Primarily represents tax services, which include preparation of tax
      returns and other tax consulting services.

      Eisner, LLP became the Company's principal auditor in July, 2003,
replacing the Company's principal auditor for the fiscal year ended December 31,
2002, McGladrey & Pullen, LLP, (See Item No. 9 - "Changes in and Disagreements
with Accountants on Accounting and Financial Disclosure"). Consequently, Eisner,
LLP billed no fees to the Company in 2002.

      The audit-related fees charged to the Company by McGladrey & Pullen, LLP
and RSM McGladrey, Inc. (an affiliate of McGladrey & Pullen, LLP) for the fiscal
year ended December 31, 2002 and in 2003 were as follows:

                                                 2002 Amount         2003 Amount
                                                 -----------         -----------

            Audit fees (1)                       $301,000            $ 84,200
            Other audit related fees (2)         $  8,900            $      0
            All other fees (3)                   $ 19,100            $      0
                                                 --------            --------

            Total fees                           $329,000            $ 84,200
                                                 ========            ========

- ----------

(1)   Includes the annual financial statement audit and limited quarterly
      reviews and expenses.

(2)   Includes fees and expenses for other audit related activity provided by
      McGladrey & Pullen, LLP.

(3)   Primarily represents tax services provided by RSM McGladrey, Inc. which
      include preparation of tax returns and other tax consulting services.


                                       42
<PAGE>

Item No. 15 Exhibits and Reports on Form 8-K

Exhibits

*        3.1      Third Restated Certificate of Incorporation of CTI
                  Industries Corporation

**       3.2      By-laws of CTI Industries Corporation

**       4.1      Form of Certificate for Common Stock of CTI Industries
                  Corporation

***      10.1     CTI Industries Corporation 1999 Stock Option Plan

****     10.2     CTI Industries Corporation 2001 Stock Option Plan

*****    10.3     CTI Industries Corporation 2002 Stock Option Plan

**       10.4     Employment Agreement dated June 30, 1997, between CTI
                  Industries Corporation and Howard W. Schwan

******   10.5     November, 1999 Lease Agreement between Pepper Road, Inc.
                  and CTI Industries Corporation

******   10.6     Warrant dated July 17, 2001 to purchase 79,364 shares of
                  Common Stock John H. Schwan

******   10.7     Warrant dated July 17, 2001 to purchase 39,683 shares of
                  Common Stock Stephen M. Merrick

******   10.8     Note dated January 28, 2003, CTI Industries Corporation
                  to Stephen M. Merrick in the sum of $500,000

******   10.9     Note dated February 28, 2003, CTI Industries Corporation
                  to Stephen M. Merrick in the sum of $200,000

******   10.10    Note dated February 10, 2003, CTI Industries Corporation
                  to John H. Schwan in the sum of $150,000

******   10.11    Note dated February 15, 2003, CTI Industries Corporation
                  to John Schwan in the sum of $680,000

******   10.12    Note dated March 3, 2003, CTI Industries Corporation to
                  John H. Schwan in the sum of $100,000

******   10.13    Warrant dated March 20, 2003, to purchase 70,000 shares
                  of Common Stock - Stephen M. Merrick

******   10.14    Warrant dated March 20, 2003, to purchase 93,000 shares
                  of Common Stock - John H. Schwan

         10.15    Loan and Security Agreement dated December 30, 2003,
                  between the Company and Cole Taylor Bank

         10.16    Term Note in the sum of $3,500,000 dated December 30,
                  2003 made by CTI Industries Corporation to Cole Taylor
                  Bank

         10.17    Revolving Note in the sum of $7,500,000 dated December
                  30, 2003, made by CTI Industries Corporation to Cole
                  Taylor Bank

*******  10.18    Mortgage dated January 12, 2001 for the benefit of Banco
                  Popular, N.A.

*******  10.19    Secured Promissory Note in the sum of $2,700,000 dated
                  December 15, 2000 made by CTI Industries Corporation to Banco
                  Popular, N.A.

*******  10.20    Secured Promissory Note in the sum of $173,000 dated
                  December 15, 2000 made by CTI Industries Corporation to Banco
                  Popular, N.A.

*******  10.21    Guaranties dated January 12, 2001 by John H. Schwan, Stephen
                  M. Merrick and Howard W. Schwan for the benefit of Banco
                  Popular, N.A.

         11.1     Computation of Earnings Per Share (Incorporated by reference
                  to Note 17 of the Consolidated Financial Statements contained
                  in Part IV)

         21       Subsidiaries (description incorporated in Form 10-K under Item
                  No. 1)


                                       43
<PAGE>

         23.1     Consent of Independent Auditors, Eisner, LLP

         23.2     Consent of Independent Auditors, McGladrey & Pullen, LLP

         23.3     Consent of Independent Auditors, Grant Thornton, LLP

         27       Financial Data Schedule

         31.1     Certification of Chief Executive Officer pursuant to Rule
                  13a-14(a) and rule 15d-14(a) of the Securities Exchange Act,
                  as amended

         31.2     Certification of Chief Financial Officer pursuant to Rule
                  13a-14(a) and rule 15d-14(a) of the Securities Exchange Act,
                  as amended

         32       Certification of Chief Executive Officer and Chief Financial
                  Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to
                  Section 906 of the Sarbanes-Oxley Act of 2002

         99.1     Code of Ethics

*                 Incorporated by reference to Exhibit A contained in
                  Registrant's Schedule 14A Definitive Proxy Statement for
                  solicitation of written consent of shareholders, as filed with
                  the Commission on October 25, 1999.

**                Incorporated by reference to Exhibits, contained in
                  Registrant's Form SB-2 Registration Statement (File No.
                  333-31969) effective November 5, 1997.

***               Incorporated by reference to Exhibit contained in Registrant's
                  Schedule 14A Definitive Proxy Statement, as filed with the
                  Commission on March 26, 1999.

****              Incorporated by reference to Exhibit contained in Registrant's
                  Schedule 14A Definitive Proxy Statement, as filed with the
                  Commission on May 21, 2001

*****             Incorporated by reference to Exhibit contained in Registrant's
                  Schedule 14A Definitive Proxy Statement, as filed with the
                  Commission on May 15, 2002

******            Incorporated by reference to Exhibits contained in the
                  Registrant's 2002 10-KSB, as filed with the Commission on
                  May 1, 2003

*******           Incorporated by reference to Exhibits contained in the
                  Registrant's Restated 2001 10-KSB, as filed with the
                  Commission on May 1, 2003

Reports on Form 8-K

      On May 28, 2003, the Company filed a report on Form 8-K to report its
First Quarter Earnings.

      On July 28, 2003, the Company filed a report on Form 8-K to report the
replacement of its then auditors, McGladrey & Pullen, LLP, with Eisner, LLP,
effective July 22, 2003.

      On August 20, 2003, the Company filed a report on Form 8-K to report its
Second Quarter Earnings.

      On November 20, 2003, the Company filed a report on Form 8-K to report its
Third Quarter Earnings.


                                       44
<PAGE>

                                   SIGNATURES

      In accordance with Section 13 or 15(d) of the Exchange Act the Registrant
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized on April 14, 2004.


                                        CTI INDUSTRIES CORPORATION
                                        By: /s/ Howard W. Schwan
                                            ------------------------------------
                                            Howard W. Schwan, President

      In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the Registrant in the capacities and on the
dates indicated.

      Signatures                        Title                         Date


/s/ Howard W. Schwan         President and Director              April 14, 2004
- ------------------------
Howard W. Schwan


/s/ John H. Schwan           Chairman and Director               April 14, 2004
- ------------------------
John H. Schwan


/s/ Stephen M. Merrick       Executive Vice President,           April 14, 2004
- ------------------------     Secretary, Chief Financial
Stephen M. Merrick           Officer and Director


/s/ Stanley M. Brown         Director                            April 14, 2004
- ------------------------
Stanley M. Brown


/s/ Bret Tayne               Director                            April 14, 2004
- ------------------------
Bret Tayne


/s/ Michael Avramovich       Director                            April 14, 2004
- ------------------------
Michael Avramovich


                                       45
<PAGE>



                          INDEPENDENT AUDITOR'S REPORT

To the Board of Directors
CTI Industries Corporation and Subsidiaries
Barrington, Illinois

We have audited the accompanying consolidated balance sheets of CTI Industries
Corporation and Subsidiaries as of December 31, 2002, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CTI Industries
Corporation and Subsidiaries as of December 31, 2002, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.

As discussed in Note 13 to the consolidated financial statements, on January 1,
2002, the Company changed its method of accounting for goodwill to adopt
Statement of Financial Accounting Standards No. 142.

/s/ McGladrey & Pullen, LLP
- ---------------------------
Schaumburg, Illinois
April 15, 2003


                                      F-1
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of CTI Industries Corporation

We have audited the accompanying consolidated balance sheet of CTI Industries
Corporation and Subsidiaries as of December 31, 2001, and the related
consolidated statement of operations, changes in stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.

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

In our opinion, the financial statements referred to above presently fairly, in
all material respects, the consolidated financial position of CTI Industries
Corporation and Subsidiaries as of December 31, 2001, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America.

As indicated in Note 3 to these accompanying consolidated financial statements,
the Company has restated its consolidated financial statements for the year
ended December 31, 2001.

/s/ Grant Thornton, LLP
- -----------------------
Chicago, Illinois
April 10, 2002, except as to Note 2,
which is as of April 15, 2003


                                      F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
CTI Industries Corporation

We have audited the accompanying consolidated balance sheet of CTI Industries
Corporation and subsidiaries (the "Company") as of December 31, 2003, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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 CTI
Industries Corporation and subsidiaries as of December 31, 2003, and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with accounting principles accepted in the United States of
America.

/s/ Eisner LLP

New York, New York
February 18, 2004

With respect to the first paragraph of Note 6
April 14, 2004


                                      F-1
<PAGE>

CTI Industries Corporation and Subsidiaries
Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                               December 31, 2003       December 31, 2002
                                                                               -----------------       -----------------
                                    ASSETS
<S>                                                                               <C>                    <C>
Current assets:
  Cash                                                                            $    329,742           $    160,493
  Accounts receivable, (less allowance for doubtful accounts of $186,215
  and $223,220 respectively)                                                         4,620,276              5,384,839
  Inventories                                                                        9,263,160             10,033,593
  Deferred tax assets                                                                  361,751                247,780
  Prepaid expenses and other current assets                                            859,185                310,995
                                                                                  ------------           ------------

      Total current assets                                                          15,434,564             16,137,700

Property and equipment:
  Machinery and equipment                                                           18,939,535             16,221,259
  Building                                                                           2,678,581              2,636,595
  Office furniture and equipment                                                     1,931,831              1,746,480
  Land                                                                                 250,000                250,000
  Leasehold improvements                                                               582,052                388,655
  Fixtures and equipment at customer locations                                       2,232,285              2,306,807
  Projects under construction                                                          408,961              2,331,981
                                                                                  ------------           ------------
                                                                                    27,023,245             25,881,777
    Less: accumulated depreciation                                                 (14,815,596)           (14,166,764)
                                                                                  ------------           ------------

      Total property and equipment, net                                             12,207,648             11,715,013

Other assets:
  Deferred financing costs, net                                                        222,696                 51,747
  Goodwill                                                                           1,113,108              1,113,108
  Deferred Income Tax Benefit                                                        1,012,365                441,592
  Other assets                                                                         279,800                812,698
                                                                                  ------------           ------------

      Total other assets                                                             2,627,969              2,419,145
                                                                                  ------------           ------------

TOTAL ASSETS                                                                        30,270,182             30,271,858
                                                                                  ============           ============
</TABLE>

See accompanying notes


                                      F-2
<PAGE>

CTI Industries Corporation and Subsidiaries
Consolidated Balance Sheets (cont'd.)

<TABLE>
                                                                           December 31, 2003  December 31, 2002
                                                                           -----------------  -----------------
<S>                                                                           <C>               <C>
                   LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
  Checks written in excess of bank balance                                         341,108           113,460
  Accounts payable                                                               6,799,490         9,580,823
  Line of credit                                                                 3,694,241         5,642,649
  Notes payable - current portion                                                2,998,496         1,742,658
  Accrued liabilities                                                            2,306,745         1,965,561
                                                                              ------------      ------------

      Total current liabilities                                                 16,140,080        19,045,151

Long-term liabilities:
  Other liabilities                                                              1,079,041           710,257
  Notes payable                                                                  5,766,091         5,016,109
  Notes payable - officers                                                       2,064,126                --
                                                                              ------------      ------------

      Total long-term liabilities                                                9,220,156         5,726,366

Minority interest                                                                    9,263            25,865

Commitments, Contingencies and Litigation (Note 12)
Stockholders' equity:
  Common stock - no par value, 5,000,000 shares authorized, 2,150,216 and
    2,141,882 shares issued, 1,918,420 and
    1,910,086 shares outstanding, respectively                                   3,764,020         3,748,270
  Class B Common stock - no par value, 500,000 shares authorized,
    0 shares issued and outstanding                                                      0                 0
  Preferred Stock - no par value
    2,000,000 shares authorized, 0 shares issued and outstanding                         0                 0
  Paid-in-capital                                                                5,554,332         5,554,332
  Warrants issued in connection with subordinated debt and bank debt               595,174           135,462
  Accumulated deficit                                                           (3,528,063)       (2,962,016)
  Accumulated other comprehensive earnings                                        (234,768)           (6,002)
  Less:
      Treasury stock - 231,796 shares                                             (939,114)         (939,114)
      Notes receivable from stockholders                                                 0           (56,456)
                                                                              ------------      ------------

      Total stockholders' equity                                                 5,211,581         5,474,476
                                                                              ------------      ------------

TOTAL LIABILITIES & STOCKHOLDERS' EQUITY                                      $ 30,270,182      $ 30,271,858
                                                                              ============      ============
</TABLE>

See accompanying notes


                                      F-3
<PAGE>

CTI Industries Corporation and Subsidiaries
Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                                                 2003              2002              2001
                                                                                                 (as restated)
                                                             ------------      ------------      -------------
<S>                                                          <C>               <C>               <C>
Net Sales                                                    $ 36,259,638      $ 41,236,476      $ 27,446,494

Cost of Sales                                                  29,626,450        32,344,115        19,835,066
                                                             ------------      ------------      ------------
      Gross profit on sales                                     6,633,188         8,892,361         7,611,428

Operating expenses:
  Administrative                                                4,054,607         4,224,777         3,701,591
  Selling                                                       1,441,501         1,551,538         1,760,138
  Advertising and marketing                                     1,816,301         1,671,106         1,132,977
                                                             ------------      ------------      ------------

      Total operating expenses                                  7,312,409         7,447,421         6,594,706
                                                             ------------      ------------      ------------

(Loss) income from operations                                    (679,221)        1,444,940         1,016,722

Other income (expense):
  Interest expense                                             (1,103,395)         (831,600)       (1,125,606)
  Interest income                                                  13,618             3,157             6,160
  Gain on sale of assets                                           28,007                 0                 0
  Foreign currency (loss) gain                                    (36,132)         (281,186)           89,028
  Other                                                           428,126                 0                 0
                                                             ------------      ------------      ------------
      Total other income (expense)                               (669,776)       (1,109,629)       (1,030,418)
                                                             ------------      ------------      ------------

(Loss) income  before income taxes (benefit)
  and minority interest                                        (1,348,998)          335,311           (13,696)

Income tax (benefit) expense                                     (782,468)           39,065           276,553
                                                             ------------      ------------      ------------

(Loss) income before minority interest                           (566,530)          296,246          (290,249)

Minority interest in income of subsidiary                            (483)           (6,266)          (57,957)
                                                             ------------      ------------      ------------

      Net (loss) income                                      $   (566,047)     $    302,512      $   (232,292)
                                                             ============      ============      ============

(Loss) income applicable to common shares                    $   (566,047)     $    302,512          (232,292)
                                                             ============      ============      ============

(Loss) income per common share - basic                       $      (0.30)     $       0.18      $      (0.15)
                                                             ============      ============      ============

(Loss) income per common share - diluted                     $      (0.30)     $       0.16      $      (0.15)
                                                             ============      ============      ============
Weighted average number of shares and equivalent shares
  of common stockoutstanding:
    Basic                                                       1,918,260         1,688,384         1,511,958
                                                             ============      ============      ============
    Diluted                                                     1,918,260         1,884,405         1,511,958
                                                             ============      ============      ============
</TABLE>

See accompanying notes


                                      F-4
<PAGE>

CTI Industries Corporation and Subsidiaries
Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                  For the Year Ended December 31,
                                                                         2003                  2002                  2001
                                                                                                                (as restated)
                                                                  -------------------------------------------------------------
<S>                                                                  <C>                   <C>                   <C>
Cash flows from operating activities:
  Net (loss) income                                                  $  (566,047)          $   302,512           $  (232,292)
  Adjustment to reconcile net (loss) income to cash
      provided by operating activities:
    Depreciation and amortization                                      1,618,563             1,588,187             1,665,758
    Deferred gain on sale/leaseback                                      (30,047)              (30,046)              (30,046)
    Amortization of Debt Discount                                        238,199                27,500               124,657
    Minority interest in loss of subsidiary                                 (483)               (6,266)              (57,957)
    Provision for losses on accounts receivable & inventory              355,000               300,000               240,000
    Deferred income taxes                                               (782,468)              (25,700)              225,908
    Change in assets and liabilities:
      Accounts receivable                                                619,113            (1,075,314)           (1,859,791)
      Inventory                                                          560,433            (1,964,697)           (1,832,182)
      Other assets                                                       (66,313)             (122,112)              132,809
      Accounts payable and accrued expenses                              263,960             4,056,872             2,246,986
                                                                     -------------------------------------------------------

          Net cash provided by operating activities                    2,342,536             3,050,936               623,850

Cash flows from investing activity:
  Purchases of property, plant and equipment                          (1,141,468)           (2,477,831)           (1,002,136)
                                                                     -------------------------------------------------------

          Net cash used in investing activities                       (1,141,468)           (2,477,831)           (1,002,136)

Cash flows from financing activities:
  Checks written in excess of bank balance                               227,648               113,460                     0
  Net change in revolving line of credit                              (2,037,993)              (55,068)            2,088,176
  Proceeds from issuance of long-term debt                             6,858,344                     0             4,299,000
  Repayment of long-term debt                                         (5,649,214)             (591,182)           (5,604,248)
  Repayment of short-term debt                                                 0                     0              (500,000)
  Repayment of subordinated debt                                               0                     0               (10,000)
  Collection of Stockholder note                                          56,456                     0                     0
  Proceeds from exercise of Stock options                                 15,750                     0                     0
  Proceeds from exercise of warrants                                                            19,750                     0
  Cash paid for deferred financing fees                                 (275,044)                    0                     0
  Purchase of Treasury Stock                                                   0                     0              (171,380)
                                                                     -------------------------------------------------------

          Net cash (used in) provided by financing activities           (803,853)             (513,040)              101,548
</TABLE>


                                      F-5
<PAGE>

CTI Industries Corporation and Subsidiaries
Consolidated Statements of Cash Flows (cont'd.)

<TABLE>
<CAPTION>
                                                                                  For the Year Ended December 31,
                                                                         2003                  2002                  2001
                                                                                                                (as restated)
                                                                  -------------------------------------------------------------
<S>                                                                  <C>                   <C>                   <C>
Effect of exchange rate changes on cash                                 (227,966)              (10,060)               (5,308)
                                                                     -------------------------------------------------------

Net increase (decrease) in cash                                          169,249                50,005              (282,046)

Cash and Equivalents at Beginning of Period                              160,493               110,488               392,534
                                                                     -------------------------------------------------------

Cash and Equivalents at End of Period                                $   329,742           $   160,493           $   160,493
                                                                     =================================           ===========

Supplemental disclosure of cash flow information:
    Cash payments for interest                                           865,196               776,802               876,326
    Cash payments for taxes                                               42,295               140,072                     0

Supplemental non-cash investing and financing activities:
    Issuance of stock for subordinated debt                                    0               715,000                     0
    Long-term debt incurred for the purchase of equipment                      0             2,230,719                     0
    Note payable incurred to purchase 21.8% of minority
        interest in CTI Mexico S. A. de C.V                                    0               148,290                     0
    Stock Dividend                                                             0             1,280,758                     0
    Conversion of accounts payable to notes payable                    3,534,326                     0                     0
    Common stock exchanged to exercise warrants                                0               192,350                     0
    Refinance mortgage                                                 2,671,243                     0                     0
</TABLE>

See accompanying notes


                                      F-6
<PAGE>

CTI Industries Corporation and Subsidiaries
Consolidated Statements of Stockholders'
Equity

<TABLE>
<CAPTION>
                                                                                                                        Warrants
                                             Common Stock              Class B Common Stock                            issued in
                                       ------------------------     -------------------------        Paid-in        connection with
                                         Shares       Amount          Shares        Amount           Capital       subordinated debt
                                       ---------------------------------------------------------------------------------------------
<S>                                    <C>         <C>               <C>         <C>               <C>               <C>
Balance, December 31, 2000               966,327   $    188,434       366,300    $  1,000,000      $  5,554,332      $    351,978
                                       =============================================================================================
Expiration of stock
  redemption period

Warrants issued in connection
  with subordinated debt                                                                                             $    135,462

Purchase of Treasury Stock

Net Loss

Other comprehensive income
  Foreign currency translation

Total comprehensive loss
                                       ---------------------------------------------------------------------------------------------
Balance, December 31, 2001               966,327   $    188,434       366,300    $  1,000,000      $  5,554,332      $    487,440
                                       =============================================================================================

Options Excersised                        11,000   $     19,750

Class B Conversion                       366,300   $  1,000,000     ($366,300)    ($1,000,000)

Stock Dividend                           304,218   $  1,280,758

Warrant exercise for
subordinated debt                        423,579   $  1,066,978                                                         ($351,978)

Cashless exercise of warrants             70,458   $    192,350

Net Income

<CAPTION>
                                                                                          Less
                                                           Accumulated       -----------------------------
                                                              Other                  Treasury Stock
                                         Accumulated      Comprehensive      -----------------------------
                                           Deficit           Earnings           Shares           Amount
                                       -------------------------------------------------------------------
<S>                                    <C>                <C>                <C>             <C>
Balance, December 31, 2000             $ (1,751,478)      $    (42,244)           124,683    $   (575,384)
                                       ===================================================================
Expiration of stock
  redemption period

Warrants issued in connection
  with subordinated debt

Purchase of Treasury Stock                                                         74,513    $   (171,380)

Net Loss                               $   (232,292)

Other comprehensive income
  Foreign currency translation                            $    (75,763)

Total comprehensive loss
                                       -------------------------------------------------------------------
Balance, December 31, 2001             $ (1,983,770)      $   (118,007)           199,196    $   (746,764)
                                       ===================================================================

Options Excersised

Class B Conversion

Stock Dividend                          ($1,280,758)

Warrant exercise for
subordinated debt

Cashless exercise of warrants                                                $     32,600    $   (192,350)

Net Income                             $    302,512

<CAPTION>
                                                                    Less
                                       ------------------------------------------------------------------
                                        Redeemable           Stock         Notes Recvble
                                       Common Stock       Sub Recvble      Shareholders         TOTAL
                                       -----------------------------------------------------------------
<S>                                    <C>               <C>               <C>               <C>
Balance, December 31, 2000             $         --      $      4,700      $    (56,456)     $ 4,664,482
                                       =================================================================
Expiration of stock
  redemption period                    $         --      $     (4,700)                       $     4,700

Warrants issued in connection
  with subordinated debt                                                                     $   135,462

Purchase of Treasury Stock                                                                   $  (171,380)

Net Loss                                                                                     $   232,292)

Other comprehensive income
  Foreign currency translation                                                               $   (75,763)
                                                                                             -----------

Total comprehensive loss                                                                     $  (308,055)
                                       -----------------------------------------------------------------
Balance, December 31, 2001             $         --      $         --      $    (56,456)     $ 4,325,209
                                       =================================================================

Options Excersised                                                                           $    19,750

Class B Conversion                                                                           $        --

Stock Dividend                                                                               $        --

Warrant exercise for
subordinated debt                                                                            $   715,000

Cashless exercise of warrants                                                                $        --

Net Income                                                                                   $   302,512

</TABLE>


                                      F-7
<PAGE>

<TABLE>
<S>                                    <C>         <C>                      <C>  <C>               <C>               <C>
Other comprehensive income
  Foreign currency translation

Total comprehensive loss

                                       ------------------------------------------------------------------------------------------
Balance, December 31, 2002             2,141,882   $  3,748,270             0    $         --      $  5,554,332      $    135,462
                                       ==========================================================================================

Options Excersised                         8,334   $     15,750

Warrant exercise for
subordinated debt                                                                                                    $    459,712

Collection of Notes
Receivable

Net Income

Other comprehensive income
  Foreign currency translation


Total comprehensive loss

                                       ------------------------------------------------------------------------------------------
Balance, December 31, 2003             2,150,216   $  3,764,020            --    $         --      $  5,554,332      $    595,174
                                       ==========================================================================================

<CAPTION>
<S>                                    <C>                <C>                     <C>        <C>
Other comprehensive income
  Foreign currency translation                            $    112,005

Total comprehensive loss

                                       -------------------------------------------------------------------
Balance, December 31, 2002             $ (2,962,816)      $     (6,002)           231,796    $   (939,114)
                                       ===================================================================

Options Excersised

Warrant exercise for
subordinated debt

Collection of Notes
Receivable

Net Income                                ($566,047)

Other comprehensive income
  Foreign currency translation                               ($228,776)


Total comprehensive loss

                                       -------------------------------------------------------------------
Balance, December 31, 2003             $ (3,528,063)      $   (234,768)           231,796    $   (939,114)
                                       ===================================================================

<CAPTION>
<S>                                    <C>               <C>               <C>               <C>
Other comprehensive income
  Foreign currency translation                                                               $   112,005
                                                                                             -----------
Total comprehensive loss                                                                     $   414,517

                                       -----------------------------------------------------------------
Balance, December 31, 2002             $         --      $         --      $    (56,456)     $ 5,473,676
                                       =================================================================

Options Excersised                                                                           $    15,750

Warrants issued in connection
with subordinated debt                                                                       $   459,712

Collection of Notes
Receivable                                                                 $     56,456      $    56,456

Net Income                                                                                   $  (566,047)

Other comprehensive income
  Foreign currency translation                                                               $  (227,966)

                                                                                             -----------
Total comprehensive loss                                                                     $  (794,813)

                                       -----------------------------------------------------------------
Balance, December 31, 2003             $         --      $         --      $         --      $ 5,211,581
                                       =================================================================
</TABLE>

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


                                      F-8
<PAGE>

CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements

      1. Nature of Operations

CTI Industries Corporation (the "Company"), its United Kingdom subsidiary (CTI
Balloons Limited), and Mexican subsidiaries (Flexo Universal, S.A. de C.V., CTI
Mexico Corporation, S.A. de C.V. and CTF International S.A. de C.V.) (i) design,
manufacture and distribute metallized and latex balloon products throughout the
world and (ii) operates systems for the production, lamination, coating and
printing of films used for food packaging and other commercial uses and for
conversion of films to flexible packaging containers and other products.

      2. Basis of Presentation

During the year ended December 31, 2003, the Company incurred a net operating
loss before taxes of $1,349,000. As of December 31, 2003 and 2002, the Company
had a working capital deficiency of $706,000 and $2,907,000, respectively. The
Company depends on its line of credit, including a term loan and revolving line
of credit with its principal lenders, and continued financial support from its
principal stockholders/officers for liquidity. This line of credit expires on
December 31, 2005.

For the year ending December 31, 2004, management anticipates improvement in its
operating results and in cash generated from operating activities resulting in,
among other things, from restructuring certain operations. However, there is no
assurance that such improvements in operating results will occur or that the
funds provided from the Company's line of credit and operations will be
sufficient to meet the Company's current obligations.

      3. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of CTI Industries
Corporation, its wholly owned subsidiaries CTI Balloons Ltd. ("CTI Balloons")
and CTF International S.A. de C.V., and its majority owned subsidiaries, Flexo
Universal S.A. de C.V. ("Flexo Universal") and CTI Mexico Corporation S.A. de
C.V. ("CTI Mexico"). All significant intercompany accounts and transactions have
been eliminated upon consolidation.

Foreign Currency Translation

The financial statements of foreign subsidiaries are translated into U.S.
dollars using the exchange rate at each balance sheet date for assets and
liabilities, the historical exchange rate for stockholders' equity, and a
weighted average exchange rate for each period for revenues and expenses.
Translation adjustments are recorded in accumulated other comprehensive income
(loss) as the local currencies of the subsidiaries are the functional
currencies.

Restatements

The Company's December 31, 2001 financial statements have been restated as
further discussed in Amendment No. 1 to the Company's 2001 Form 10-KSB.

Accounting Estimates

In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions that affect the amounts reported of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period in the financial statements and accompanying notes. Actual results may
differ from those estimates. The Company's significant estimates include
reserves for doubtful accounts, reserves for lower of cost to market of
inventory and recovery value of good will.

Cash and Cash Equivalents

Cash and cash equivalents includes cash on hand, demand deposits and short term
investments with original maturities of three months or less.

Trade Receivables

Trade receivables are carried at original invoice amount less an estimate for
doubtful receivables based on a review of all outstanding amounts on a monthly
basis. Management determines the allowance for doubtful accounts by identifying
troubled accounts, evaluating the individual customer receivables then
considering the customer's


                                      F-9
<PAGE>

CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements

3. Summary of significant accounting policies, continued

financial condition, credit history and current economic conditions and by using
historical experience applied to an aging of accounts. A trade receivable is
considered to be past due if any portion of the receivable balance is
outstanding for a period over the customers normal terms. Trade receivables are
written off when deemed uncollectible. Recoveries of trade receivables
previously written off are recorded when received.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined using
standard costs which approximates costing determined on a first-in, first-out
basis, and periodic adjustments to reflect the actual cost of production of
inventories.

Property and Equipment

Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to operations as incurred. Depreciation is computed using
the straight-line and declining-balance methods over estimated useful lives of
the related assets. Leasehold improvements are amortized on a straight-line
method over the lesser of the estimated useful life or the lease term. The
estimated useful lives range as follows:

            Building .......................................      25 - 30 years
            Machinery and equipment ........................      3 - 15 years
            Office furniture and equipment .................      5 - 8 years
            Leasehold improvements .........................      5 - 8 years
            Furniture & equipment at customer locations ....      2 - 3 years

Goodwill

Prior to January 1, 2002, goodwill was amortized over 15 years using the
straight-line method. Subsequent to that date, the Company has followed, and
does now follow, the provisions of Statement of Financial Accounting Standards
142. "Goodwill and Other Intangible Assets," under which goodwill is not
amortized but is tested at least annually for impairment. Goodwill on the
accompanying balance sheets relates to Flexo Universal/CTI Mexico. It is the
Company's policy to perform impairment testing for Flexo Universal/CTI Mexico
annually as of December 31.

Impairment of long lived assets

The Company evaluates whether events or circumstances have occurred which
indicate that the carrying amounts of long-lived assets (principally property
and equipment) may be impaired or not recoverable. The significant factors that
are considered that could trigger an impairment review include: changes in
business strategy, market conditions, or the manner of use of an asset;
underperformance relative to historical or expected future operating results;
and negative industry or economic trends. In evaluating an asset for possible
impairment, management estimates that asset's future undiscounted cash flows and
appraised values to measure whether the asset is recoverable, the Company
measures the impairment based on the projected discounted cash flows of the
asset over its remaining life. While the Company believes that our estimates of
future cash flows are reasonable, different assumptions regarding such cash
flows could materially affect these evaluations.


Deferred Financing Costs

Deferred financing costs relates to the refinancing of debt in December, 2003.
These costs are being amortized on a straight-line basis over the term of the
loans.


                                      F-10
<PAGE>

CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements

3. Summary of significant accounting policies, continued

Income Taxes

The Company accounts for income taxes using the asset and liability method. As
such, deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Deferred tax assets and
liabilities are measured using enacted tax rates expected to be in effect when
the anticipated reversal of these differences is scheduled to occur. The effect
of a change in tax rates on deferred tax assets or liabilities is recognized in
income in the period and includes the enactment date. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized.

Fair Value of Financial Instruments

The fair value of financial instruments are not materially different from their
carrying values.

Other Comprehensive Income

For years ended December 31, 2003, 2002 and 2001, other comprehensive income
consisted of foreign currency translation adjustments and a foreign deferred tax
benefit.

Revenue Recognition

The Company recognizes revenue when title transfers upon shipment. Revenue from
a transaction is not recognized until (i) a definitive arrangement exists, (ii)
delivery of the product has occurred or the services have been performed, (iii)
the price to the buyer has been fixed or is determinable and (iv) collectibility
is reasonably assured. In some cases, product is provided on consignment to
customers. For these cases, revenue is recognized when the customer reports a
sale of the product.

Stock-Based Compensation

At December 31, 2003, the Company has four stock-based compensation plans, which
are described more fully in Note 15. The Company accounts for those plans under
the recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees and related interpretations. The Company recognizes
compensation cost for stock-based compensation awards equal to the difference
between the quoted market price of the stock at the date of grant or award and
the price to be paid by the employee upon exercise in accordance with the
provisions of APB No. 25. Based upon the terms of Company's current stock option
plans, the stock price on the date of grant and price paid upon exercise are the
same. Accordingly, no stock-based employee compensation cost has been
recognized, as all options granted under those plans had an exercise price equal
to the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income (loss) and earnings (loss)
per share had compensation cost for all of the stock-based compensation plans
been determined based on the grant date fair values of awards (the method
described in FASB Statement No. 123, Accounting for Stock-Based Compensation):


                                      F-11
<PAGE>

CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements

3. Summary of significant accounting policies, continued

<TABLE>
<CAPTION>
                                                             Years Ended December 31,
                                                        2003           2002           2001
                                                      --------       --------       --------
<S>                                                   <C>            <C>            <C>
Net (Loss) Income:
As reported ....................................      (566,047)       302,512       (232,292)

Deduct total stock-based employee
   compensation expense determined under fair
   value based method for all awards, net of
   related tax effects .........................        (8,583)      (117,375)      (152,901)
                                                      --------       --------       --------

   Pro forma net income (loss) .................      (574,630)       185,137       (385,193)
                                                      ========       ========       ========

Net income (loss) per share:

   Basic - As reported .........................         (0.30)          0.18          (0.15)

   Basic - Proforma ............................         (0.30)          0.11          (0.25)

   Diluted - As reported .......................         (0.30)          0.16          (0.15)

   Diluted - Proforma ..........................         (0.30)          0.10          (0.25)
</TABLE>

The fair value of each option was estimated as of the date of the grant using
the Black-Scholes option pricing model based on the following assumptions:

<TABLE>
<CAPTION>
                                                        2003         2002         2001
                                                       -----        -----        -----
<S>                                                    <C>          <C>            <C>
      Expected life (years) ....................           5            5          7.5
      Volatility ...............................       136.6%       123.3%         117%
      Risk-free interest rate ..................         4.4%         2.9%         4.5%
      Dividend yield ...........................          --           --           --
</TABLE>

Research and Development

The Company conducts product development and research activities which includes
(i) creative product development, (ii) creative marketing, and (iii)
engineering. During the years ended December 31, 2003, 2002 and 2001, research
and development activities totaled $335,000 $333,000 and $325,000, respectively.

New Accounting Pronouncements

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosures Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN 45). FIN 45 requires that upon issuance of a
guarantee, the guarantor must recognize a liability for the fair value of the
obligation it assumes under that guarantee. FIN 45 is effective on a prospective
basis to guarantees issued or modified after December 31, 2002, but has certain
disclosure requirements effective for financial statements of interim or annual
periods ending after December 15, 2002. The Company does not currently have any
guarantees. The Company does not anticipate that the adoption of the disclosure
requirements will have a material effect on its financial position or results of
operations.

In January, 2003 the Financial Accounting Standards Board issued FASB
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51," which addresses consolidation by business
enterprises of variable interest entities ("VIE's") either: (1) that do not have
sufficient equity investment at risk to permit the entity to finance its
activities without additional subordinated financial support, or (2) in which
the equity investors lack an essential characteristic of a controlling financial
interest. In December, 2003, the FASB completed deliberations of proposed
modifications to FIN 46 resulting in multiple effective dates based on the
nature as well as the creation date of the VIE. Special purpose entities created
prior to February 1, 2003 may be accounted for under the original or revised
interpretation's provisions no later than the Company's first quarter of 2004.
Non-special purpose entities created prior to February 1, 2003 are to be
accounted for under the revised interpretation's provisions no later than the
Company's second quarter of 2004. Management has concluded that the provisions
of FIN 46 do not apply to the Company with respect to its transactions with
Pepper Road, Inc. (see Note 16).


                                      F-12
<PAGE>

CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements

      4. Major Customers

For the year ended December 31, 2003, the Company had three customers that
accounted for approximately 28.4%, 14.7% and 11%, respectively, of consolidated
net sales. Corresponding percentages of consolidated net sales generated by
these customers for the year ended December 31, 2002, were approximately 29%,
17% and 12% respectively, and in 2001, were approximately 23.0%, 14.0% and 2.7%,
respectively. At December 31, 2003, the outstanding accounts receivable balances
due from these three customers were $464,183, $566,557 and $862,407
respectively. At December 31, 2002 the outstanding accounts receivable balances
due from these three customers were $1,149,856, $932,707 and $1,697,852. At
December 31, 2001, the balance due from these three customers were $568,931,
$579,035, and $367,677.

      5. Inventory

Inventory is comprised of the following:

                                          December 31, 2003    December 31, 2002
                                          -----------------    -----------------
      Raw materials ..................      $    866,111         $  1,865,871
      Work in process ................         1,365,317            2,135,503
      Finished goods .................         7,523,889            6,386,719
      Allowance, Excess Quantities ...          (492,157)            (354,500)
                                            ------------         ------------
      Total inventory ................      $  9,263,160         $ 10,033,593
                                            ============         ============

      6. Notes Payable

Long-term debt consists of:

<TABLE>
<CAPTION>
                                                                                 Dec 31, 2003        Dec 31, 2002
                                                                                 ------------        ------------
<S>                                                                              <C>                    <C>
      Term Loan with bank, payable in monthly installments of $22,222
      plus interest at prime plus 0.75% due February 1, 2004 .............       $         --        $  1,355,057

      Term Loan with bank, payable in monthly installments of $58,333
      plus interest at prime (4% at December 31, 2003) plus 1.5%;
      balance due February 1, 2009 .......................................          3,500,000                  --

      Term Loan with bank, payable in monthly installments of $19,209
      including interest at 6.25% due May 5, 2008 (loan renegotiated
      May 2003) ..........................................................          2,879,886        $  2,647,586

      Term Loan with bank, payable in monthly installments of $5,582
      including interest at 10.00% due and paid in January 5, 2004 .......              1,399              68,657

      Term Loan with bank, payable in monthly installments of $26,139
      including interest at 5.75% due January, 2004 and paid
      December, 2003 .....................................................                 --           1,627,720

      Vendor notes, at various rates of interest, maturing through
      August, 2005 .......................................................          2,372,204                  --

      Subordinated Notes Due 2005, Interest at 9% Net of Debt
      Discount of $310,898 and $89,387 at December 31, 2003 and
      2002, respectively .................................................          1,269,102                  --

      Subordinated Notes due to an Officer, interest at 9% ...............            795,024                  --

      Loan payable to a Mexican finance institution denominated in
      Mexican Pesos bearing interest at 9.81% ............................             83,655              90,322

      Loan with bank, with interest payable monthly at prime (4.25%
      at December 31, 2002) ..............................................                 --             969,425

            Total ........................................................       $ 10,901,270        $  6,758,767
                                                                                 ------------        ------------

      Less current portion ...............................................         (2,998,496)         (1,742,658)
                                                                                 ------------        ------------

            Total long-term debt .........................................       $  7,902,774        $  5,016,109
                                                                                 ------------        ------------
</TABLE>


                                      F-13
<PAGE>

CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements

6. Notes Payable, continued

On December 31, 2003, the Company entered into a Loan and Security Agreement
with a Bank under which the Bank provided to the Company a credit facility in
the aggregate amount of $11,000,000, collateralized by substantially all assets
of the Company. The credit facility expires on December 31, 2005; it is
automatically renewed for successive one year terms unless terminated by either
of the parties. The credit facility includes a term loan of $3,500,000, at an
interest rate of prime plus 1.5% per annum (and is being amortized over a period
of 60 months), which is based primarily upon the appraised value of the
equipment of the Company and a revolving line of credit at an interest rate of
prime plus 1.5% per annum (5.5% at December 31, 2003), the amount of which is
based on advances of up to 85% of eligible receivables and up to 50% of the
value of the Company's domestic inventory. Upon the receipt of any proceeds of
sale or other disposition of equipment, or any proceeds from damage, destruction
or condemnation, such proceeds must be paid as a mandatory prepayment of the
term loan. In addition, 50 % of excess cash flow as of December 31, 2004, is
required to be paid as a prepayment of the term loan. The Loan Agreement
includes financial covenants requiring a minimal level of tangible net worth and
ratio of EBITDA to fixed charges. The Company was in violation of the EBITDA to
fixed charges at December 31, 2003 for which the bank has issued a waiver.

The loan agreement also prohibits new debt, loans by the Company, purchase of
stock and dividends, without the consent of the Bank.

As of December 31, 2003, the balance outstanding on the credit facility was
$3,694,241.

In January, 2001, the Company entered into a Loan and Security Agreement with an
institutional lender under which the lender provided the Company with a credit
facility in the amount of $9,500,000, collateralized by equipment, inventory,
receivables and other assets of the Company. The credit facility included a term
loan of $1,426,000, at an interest rate of prime plus 0.75% per annum, which was
based upon the appraised value of the equipment of the Company and a revolving
line of credit at an interest rate of prime plus 0.5% per annum, the amount of
which was based on advances of up to 85% of eligible receivables and up to 40%
of the value of the Company's inventory. In 2002, the lender advanced additional
funds on the original term loan in the amount of $490,880, advanced a second
term loan in the amount of $1,740,000 and increased the credit facility to
$11,500,000. The term loans and revolving line of credit were secured by
substantially all assets of the Company. The term of this credit facility was
for a period of three years expiring in January 31, 2004. This line of credit
was paid in full at December 31, 2003 and was terminated.

Also in January 2001, another lender loaned to the Company the sum of $2,873,000
in a refinance of the Company's principal office building and property situated
in Barrington, Illinois. The loan is collateralized by this building and
property, with a net carrying value of $2,886,595, and has been made in the form
of two notes. The first note is in the principal amount of $2,700,000, bears
interest at the rate of 9.75%, and has a term of five years with an amortization
period of 25 years. In May 2003, the terms of this note was renegotiated to a
note in the principal amount of $2,912,000 bearing 6.25% with a term of 5 years
amortized over 30 years.

The second note is in the principal amount of $173,000 with an interest rate of
10%, and has a term of three years. The balance on this Note of $1,399 as of
December 31, 2003, was paid on January 5, 2004.

Future Minimum principal payments, exclusive of debt discount, for amounts
outstanding under these long-term debt agreements at December 31, 2003 are as
follows:

                                                  2003
                                              -----------
                   2004 .................       3,016,404
                   2005 .................       2,948,195
                   2006 .................         756,065
                   2007 .................         759,723
                   2008 .................       3,362,530
                   Thereafter ...........          58,333
                                              -----------
                   Less Current Portion
                   Discount                    (2,998,496)
                                              ===========
                                              $ 7,902,774
                                              ===========


                                      F-14
<PAGE>

CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements

      7. Subordinated Debt

In November, 1999, warrants to purchase up to 35,263, 246,840 and 222,157 shares
of the Company's Common Stock at an exercise price of $1.418 per share were
issued to Messrs. H. Schwan, J. Schwan and Merrick, respectively in
consideration of subordinated loans by such individuals to the Company in the
amounts, respectively, of $50,000, $350,000 and $315,000. Each of these warrants
were exercised on June 3, 2002. The respective $50,000, $350,000 and $315,000
notes were cancelled and used as payment for the warrant shares.

In February, 2003, the Company received $1,630,000 from certain officers in
exchange for (a) two year 9% subordinated notes, and (b) five year warrants to
purchase 163,000 common shares at $4.87 per share. The proceeds were to (i)
re-finance the bank loan of CTI Mexico in the amount of $880,000 and (ii) to
provide financing for CTI Mexico and Flexo Universal. As a result of valuing the
warrants and allocating a portion of the proceeds to the warrants, the Company
recorded additional paid in capital attributable to the warrants of $459,712 and
a related discount in the subordinated debt of the same amount. The subordinated
debt is recorded at December 31, 2003, net of unamortized debt discount of
$310,898. The debt discount is amortized using the effective interest method
over the term of the debt.

At various times during 2003, a shareholder/officer loaned an aggregate of
$795,024 to the Company in exchange for notes bearing interest at 8%. These
notes are subordinated to the bank loan of the Company.

      8. Other Income

Other income of $428,126 set forth on the Comany's Consolidated Statements of
Operations for the year ended December 31, 2003 includes income derived from the
settlement of certain outstanding accounts with vendors for less than the amount
recorded on the books of the Company.

      9. Other Liabilities

Items identified as Other Liabilities in the Company's Consolidated Balance
Sheet as of Decmeber 31, 2003 include principally (i) obligations of Flexo
Universal and CTI Mexico to a financial institution, a vendor and individuals
for advances and (ii) the deferred amount of gain of the Company on the sale of
a building to Pepper Road, Inc.

      10. Income Taxes

The income tax provisions are comprised of the following:

                                                    Year ended December 31,
                                                 2003         2002        2001
                                              ---------     --------    --------
Current:
   Federal ................................   $      --     $     --    $     --
   State ..................................          --           --          --
   Foreign ................................          --           --      22,316
                                              ---------     --------    --------
                                                     --           --      22,316

Deferred:
   Federal ................................    (361,881)      25,859     199,340
   State ..................................     (51,281)       3,665          --
   Foreign ................................    (369,306)       9,541      54,897
                                              ---------     --------    --------
                                               (782,468)      39,065     254,237
                                              ---------     --------    --------

Total income tax (benefit) provision ......   $(782,468)    $ 39,065    $276,553
                                              =========     ========    ========

The components of the net deferred tax asset (liability) at December 31 are as
follows:

<TABLE>
<CAPTION>
                                                               2003            2002            2001
<S>                                                         <C>             <C>             <C>
      Deferred tax assets:
         Allowance for doubtful accounts ...............    $   139,845     $   135,667     $   141,915
         Inventory valuation ...........................        162,248         203,032         196,092
         Accrued liabilities ...........................        151,017         126,804         192,870
         Sale Leaseback ................................         68,037          79,701        (396,974)
         Unicap 263A Adjustment ........................         52,380              --              --
         Net operating loss carryforwards ..............      2,185,357       1,840,916       1,760,106
         Alternative minimum tax credit carryforward ...        338,612         338,612         338,600
         State Investment Tax Credit carryforward ......         18,041          26,225              --
         Other Foreign Tax Items .......................        137,993              --              --
         Foreign Asset Tax Credit carryforward .........        160,784         166,790              --
                                                            -----------     -----------     -----------

           Total deferred tax assets ...................      3,414,314       2,917,747       2,232,609

      Deferred tax liabilities:
         Book over tax basis of capital assets .........     (1,069,395)       (989,197)        841,626
         Cash basis of foreign inventory purchases .....       (264,933)       (500,578)             --
                                                            -----------     -----------     -----------

                                                             (1,334,328)     (1,489,775)        841,626
                                                            -------------------------------------------

      Net Deferred Assets before Valuation Allowance          2,079,986       1,427,972       1,390,983

      Less: Valuation allowance ........................       (738,600)       (738,600)       (738,600)
                                                            -----------     -----------     -----------

         Net deferred tax asset ........................    $ 1,341,386     $   689,372     $   652,383
                                                            ===========     ===========     ===========
</TABLE>


                                      F-15
<PAGE>

CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements

10. Income Taxes, continued

The Company maintains a valuation allowance with respect to deferred tax assets
as a result of the uncertainty of ultimate realization. At December 31, 2003 the
Company has net operating loss carryforwards of approximately $5,393,000
expiring in various years through 2023. The Company has approximately $338,600
of alternative minimum tax credits as of December 31, 2003, which have no
expiration date. Future use of net operating loss carryforwards and income tax
credits may be limited pursuant to Section 382 of the Internal Revenue Code. In
addition, as per Mexican tax regulations, Flexo Universal has net operating loss
carryforwards of approximately $2,822,000, expiring in 2013. Unremitted earnings
of foreign subsidiaries have been indefinitely reinvested.

Income tax provisions differed from the taxes calculated at the statutory
federal tax rate as follows:

<TABLE>
<CAPTION>
                                                               Year Ended December 31,
                                                     2003               2002               2001
                                                 ------------       ------------       ------------
<S>                                                <C>               <C>                <C>
Taxes at statutory rate .................         $(393,154)         $ 114,000          $  (4,600)
State income taxes ......................           (55,504)            16,000                  0
Nondeductible Expenses ..................            20,564             41,000                 --
Increase in deferred tax
   Valuation allowance ..................                 0                 --             27,300
State credit created in current year ....                 0            (22,000)                --
Foreign taxes and other .................          (354,374)          (109,935)           253,853
                                                  ---------          ---------          ---------

Income tax provision ....................         $(782,468)         $  39,065          $ 276,553
                                                  =========          =========          =========
</TABLE>

      11. Employee Benefit Plan

The company has a defined contribution plan for substantially all employees.
Prior to January 1, 2004, the plan provided for the Company matching
contributions on the first $300 of employee contributions with an additional
bonus match of 1% of compensation for all participants who were employees on the
last date of the plan year. Profit sharing contributions may also be made at the
discretion of the Board of Directors. Effective January 1, 2004 the Company
amended its defined contribution plan. Under the amended plan the maximum
contribution for the Company is 2% of gross wages. Employer contributions to the
plan totaled $54,836 for the year ended December 31, 2003, and $53,680 for the
year ended December 31, 2002, and $57,160 for the year ending December 31, 2001.

      12. Related Party Transactions

The Company obtains legal services from a law firm in which two shareholders of
the law firm are also shareholders of the Company, and in which one shareholder
of the law firm is both a director and a shareholder of the Company. Legal fees
incurred with this firm were $107,000 for the year ended December 31, 2003 and
$102,000 for the year ended December 31, 2002, and $121,000 for the year ended
December 31, 2001.

In 1998, the Company advanced funds totaling $81,352 to officers of the Company.
$56,456 of these funds were used to purchase common stock of the Company and
were reflected as a contra equity account at December 31, 2002 and 2001. During
2003, these obligations have been repaid in their entirety.

A shareholder/officer of the Company is President of Packaging Systems, L.L.C.
and affiliated companies. The Company made purchases of packaging materials from
these entities in the amount of $118,011 and $273,910 during each of the years
ended December 31, 2002 and 2003, respectively.

In November, 1999, the Company sold a building to a related party. See Note 15.


                                      F-16
<PAGE>

CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements

      13. Goodwill and Intangible Assets

On January 1, 2002, the Company implemented Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets. Under the provisions of
SFAS 142, goodwill is no longer subject to amortization over its estimated
useful life, but instead will be subject to at least annual assessments for
impairment by applying a fair- value based test. SFAS 142 also requires that an
acquired intangible asset should be separately recognized if the benefit of the
intangible asset is obtained through contractual or other legal rights, or if
the asset can be sold, licensed, rented or exchanged, regardless of the
acquirer's intent to do so. The Company has no acquired intangible assets other
than goodwill. The Company determined that no transitional impairment loss was
required at January 1, 2002.

The Company retained an independent consulting firm to conduct a study and make
a determination whether the goodwill reflected on the Company's financial
statements was impaired as of January 1, 2002, December 31, 2002 and December
31, 2003. For each of such times, the Company has received the report and
opinion of such consulting firms to the effect that there was no impairment of
goodwill reflected on the financial statements of the Company as of each of
January 1, 2002, December 31, 2002 and December 31, 2003.

The gross carrying amount of goodwill as of December 31, 2003 and 2002 is
$1,113,108.

The following information is provided with respect to amortization of good will
during 2001:

                                                Year Ended December 31
                                         2003            2002           2001
                                     ------------------------------------------
Reported net income (loss)           $  (566,047)    $   302,512    $  (232,292)
Add back: Goodwill amortization      $        --     $              $    86,664
                                     -----------     -----------    -----------
Adjusted net income (loss)           $  (566,047)    $   302,512    $  (145,628)
Basic earnings per share
Reported net income (loss)           $     (0.30)    $      0.18    $     (0.15)
Add back: Goodwill amortization      $        --     $        --    $      0.07
                                     -----------     -----------    -----------
Adjusted net income (loss)           $     (0.30)    $      0.18    $     (0.08)
                                     ===========     ===========    ===========
Fully diluted earnings per share:
Reported net income (loss)           $     (0.30)    $      0.16    $     (0.15)
Add back: Goodwill amortization      $        --     $        --    $      0.07
                                     -----------     -----------    -----------
Adjusted net income (loss)           $     (0.30)    $      0.16    $     (0.08)
                                     ===========     ===========    ===========

      14. Commitments, Contingencies and Litigation

Operating Leases

The Company entered into a 10-year lease agreement for office and warehouse
facilities in November 1999, requiring monthly payments of $17,404, to Pepper
Road, Inc., an entity which is owned by certain principal stockholders/officers
of the Company. In 2003 the rent was reduced to $15,500 per month. Approximately
50% of the facility was subleased through March 2002, and after that, the
Company assumed the remaining 50% of the facility. The Company's United Kingdom
subsidiary also maintains a lease for office and warehouse space which expires
in 2019.

The Company leases office equipment under operating leases which expire on
various dates between April 2004 and December 2006.

The net lease expense was $555,197, $348,631 and $269,643 for the years ended
December 31, 2003, 2002 and 2001, which includes $193,613 in 2003 and $208,844
in 2002 and 2001 to Pepper Road, Inc.

The future aggregate minimum net lease payments under existing agreements as of
December 31, as follows:

                                 Pepper Road,                     Total
                                     Inc.           Other     Lease Payments
                                 ------------    ----------   --------------
      2004 ..................     $  186,000     $  356,532     $  542,532
      2005 ..................        186,000        346,905        532,905
      2006 ..................        186,000        315,771        501,771
      2007 ..................        186,000        286,728        472,728
      2008 ..................        186,000         51,700        237,700
      Thereafter ............        155,000        568,700        723,700
                                  ----------     ----------     ----------
         Total ..............     $1,085,000     $1,926,336     $3,011,336
                                  ----------     ----------     ----------

Licenses

At December 31, 2003, Company had certain merchandising license agreements which
are of a one to two year duration that require royalty payments based upon the
Company's net sales of the respective products. The agreements call for
guaranteed minimum commitments that are determined on a calendar year basis.
Future guaranteed commitments due, as computed on a pro rata basis, as of
December 31, are as follows:


                                      F-17
<PAGE>

CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements

14. Commitments and Contingencies, continued

                  2004.....................       $86,664
                  2005.....................       $76,664

      15. Litigation

On September 5, 2003, Airgas Inc., Airgas-Southwest, Inc., Airgas-South, Inc.
and Airgas-East, Inc. filed a joint action against CTI Industries Corporation
for claimed breach of contract in the Circuit Court of Lake County, Illinois
claiming as damages the aggregate amount of $162,242. The Company has filed an
answer denying the material claims of the complaint, affirmative defenses and a
counterclaim. In the action, the plaintiffs claim that CTI Industries
Corporation owes them certain sums for (i) helium sold and delivered, (ii)
rental charges with respect to helium tanks and (iii) replacement charges for
tanks claimed to have been lost. The Company intends to vigorously defend this
action and to pursue its counterclaim.

In addition, the Company is also party to certain lawsuits arising in the normal
course of business. The ultimate outcome of these matters is unknown, but in the
opinion of management, the settlement of these matters is not expected to have a
significant effect on the future financial position or results of operations of
the Company.

      16. Sale/Leaseback of Building

In November, 1999, the Company sold its building located next to its
headquarters in Barrington, Illinois to Pepper Road, Inc. ("Pepper Road") for a
gain of $300,467, and entered into an agreement to lease back the facility.
Pepper Road is an entity in which officers/shareholders of the Company have a
controlling interest. The gain realized on the sale was deferred and is being
recognized into income over the 10 year lease term.

      17. Relationship with Pepper Road, Inc.

Pepper Road, Inc. ("Pepper Road") purchased from the Company certain real
estate, including a building and leases that property to the Company under a 10
year lease. The unaudited financial statements of Pepper Road for its fiscal
year ended December 31, 2003 include:

Gross Lease Income .............................................      $  193,615

Net Income .....................................................      $    3,483

Assets, primarily land and building ............................      $1,819,328

Liabilities, primarily notes payable to bank ...................      $1,818,272

Equity .........................................................      $    1,056

The Company paid a total of $193,615 in lease payments to Pepper Road during
2003, and $208,844 in lease payments during 2002 and 2001, respectively. The
lease commitments of the Company to Pepper Road are included in Note 14. Each of
the following persons owns a one-third equity interest in Pepper Road: Howard
Schwan, President, John Schwan, Chairman of the Board and Stephen Merrick,
Executive Vice President. Each of the foregoing persons is a director and a
significant shareholder of the Company. Management has concluded that the
provisions of FIN 46 do not apply to the Company with respect to its
transactions with Pepper Road, Inc.

      18. Authorized Preferred Stock

The Certificate of Incorporation of the Company authorizes the issuance, by the
Board of Directors fixing all rights, preferences and designations, of up to
2,000,000 shares of Preferred Stock of the Company, no par value. No shares of
this Preferred Stock have been issued and there are no shares of such stock
issued or outstanding.

      19. Stock Options and Warrants

Under the Company's 1997 Stock Option Plan, options to purchase 98,416 shares of
Common Stock have been granted as of October 31, 1998, and remain outstanding at
December 31, 2003. The options are exercisable immediately upon grant and have a
term of ten years. The Plan provides for the award of options, which may either
be incentive stock options ("ISOs") within the meaning of Section 422A of the
Internal Revenue Code of 1986, as amended (the "Code") or non-qualified options
("NQOs") which are not subject to special tax treatment under the Code. The Plan
is administered by the Board or a committee appointed by the Board (the
"Administrator"). Officers,


                                      F-18
<PAGE>

CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements

19. Stock Options and Warrants, continued

directors, and employees of, and consultants to, the Company or any parent or
subsidiary corporation selected by the Administrator are eligible to receive
options under the Plan. Subject to certain restrictions, the Administrator is
authorized to designate the number of shares to be covered by each award, the
terms of the award, the date on which and the rates at which options or other
awards may be exercised, the method of payment and other terms.

On March 19, 1999, the Board of Directors approved for adoption, effective May
6, 1999, the 1999 Stock Option Plan ("Plan"). The Plan authorizes the grant of
options to purchase up to an aggregate of 158,733 shares of the Company's Common
Stock. As of December 31, 2003, 147,027 options had been granted under the 1999
Stock Option Plan. The options are exercisable immediately upon grant, and have
a term of ten years.

On April 12, 2001 the Board of Directors approved for adoption, effective
December 27, 2001, the 2001 Stock Option Plan ("Plan"). The Plan authorizes the
grant of options to purchase up to an aggregate of 158,733 shares of the
Company's Common Stock. As of December 31, 2003, 106,550 options had been
granted under the 2001 Stock Option Plan. The options are exercisable
immediately upon grant and have a term of ten years.

On April 24, 2002 the Board of Directors approved for adoption, effective
October 12, 2002, the 2002 Stock Option Plan ("Plan"). The Plan authorizes the
grant of options to purchase up to an aggregate of 142,860 shares of the
Company's Common Stock. As of December 31, 2003, 58,930 options had been granted
under the 2002 Stock Option Plan. The options are exercisable immediately upon
grant and have a term of ten years.

The exercise price for ISOs cannot be less than the fair market value of the
stock subject to the option on the grant date (110% of such fair market value in
the case of ISOs granted to a stockholder who owns more than 10% of the
Company's Common Stock). The exercise price of a NQO shall be fixed by the
Administrator at whatever price the Administrator may determine in good faith.
Unless the Administrator determines otherwise, options generally have a 10-year
term (or five years in the case of ISOs granted to a participant owning more
than 10% of the total voting power of the Company's capital stock). Unless the
Administrator provides otherwise, options terminate upon the termination of a
participant's employment, except that the participant may exercise an option to
the extent it was exercisable on the date of termination for a period of time
after termination.

In December, 1996, certain members of company management were issued warrants to
purchase 76,923 shares of the Company's Common Stock at an exercise price of
$2.73 per share in consideration of their facilitating and guaranteeing a bank
loan to the Company in the amount of $6.3 million. The warrants had a term of
six years and were exercised in 2002.

In September, 1998 the Company issued an option to purchase 11,905 shares of the
Company's Common Stock at an exercise price of $2.10 per share to Thornhill
Capital LLC in consideration for services. The option has a term of 10 years. In
September, 1999, warrants to purchase 19,079 shares of the Company's Common
Stock at an exercise price of $9.36 per share were cancelled and reissued at an
exercise price of $1.42 per share. In April, 2002, the Company issued an option
to purchase 11,905 shares of the Company's Common Stock at an exercise price of
$2.10 per share to Thornhill Capital in consideration of services.

In November 1999, warrants issued in 1997 to purchase up to 76,389 shares of the
Company's Common Stock for $9.36 were cancelled. New warrants to purchase up to
423,579 shares of the Company's Common Stock at $1.688 were issued. The new
warrants had a term of 3 years and were exercised in 2002.

In July, 2001, certain members of management were issued warrants to purchase
119,050 shares of the Company's Common Stock at an exercise price of $1.50 per
share in consideration of their facilitating and guaranteeing and securing bank
loans to the Company in the amount of $1.4 million and for advancing additional
monies to the company that were repaid in 2001. The warrants have a term of five
years.

In March, 2003, certain members of management were issued warrants to purchase
an aggregate of 163,000 shares of common stock of the Company at an exercise
price of $4.87, per share, the then market price, in consideration of such
persons making subordinated loans to the Company in the aggregate of $1,730,000,
the warrants have a term of five years. See Note 7.


                                      F-19
<PAGE>

CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements

19. Stock Options and Warrants, continued

The following is a summary of the activity in the Company's stock option plans
and other options and warrants issued, as restated for the stock dividend, for
the years ended December 31, 2003, 2002 and 2001:

<TABLE>
<CAPTION>
                                                                   Weighted                    Weighted                    Weighted
                                                                      Avg.                        Avg.                        Avg.
                                                       Dec. 31,    Exercise                    Exercise       Dec. 31,     Exercise
                                                         2003        Price     Dec. 31, 2002     Price          2001         Price
                                                       --------    --------    -------------   --------      ---------     --------
<S>                                                    <C>           <C>         <C>             <C>         <C>             <C>
Outstanding and exercisable, beginning of period ...   572,862       $2.58       1,094,739       $2.04         884,814       $2.28
Granted ............................................   170,000        2.22          79,764        2.22         240,482        2.01
Exercised ..........................................    (8,334)       1.54        (601,245)       1.54              --          --
Cancelled ..........................................    (8,929)       6.51            (396)       6.51         (30,557)       5.37
                                                       -------       -----       ---------       -----       ---------       -----
Outstanding and exercisable at the end of period ...   725,599       $2.58         572,862       $2.58       1,094,739       $2.04
</TABLE>

At December 31, 2003, available options to grant were 76,930.

Significant option and warrant groups outstanding at December 31, 2003 and
related weighted average price and remaining life information are as follows:

                                                      Exercise       Remaining
     Grant Date           Outstanding   Exercisable     Price       Life (Years)
- ---------------------     -----------   -----------   --------      ------------
September 1997 ......         5,953         5,953       $6.28             3
September 1998 ......        92,463        92,463       $6.51             4
September 1998 ......        11,905        11,905       $2.10             4
September 1999 ......        19,079        19,079       $1.42             0
March 2000 ..........       138,693       138,693       $1.95             6
July 2001 ...........       119,050       119,050       $1.50             2
December 2001 .......       100,597       100,597       $1.46             7
April 2002 ..........        11,905        11,905       $2.10             8
December 2002 .......        55,954        55,954       $2.36             8
February 2003 .......       163,000       163,000       $4.87             4
December 2003 .......         7,000         7,000       $2.26            10
                            -------                     -----
Total Options and
Warrants Outstanding ..     725,599
Weighted Average
Exercise Price ........                                 $3.11

The weighted average fair value of options granted during the year ending
December 31, 2003, 2002 and 2001 were $2.00, $1.92 and $1.48 per share,
respectively.

      20. Stock Dividend and Class B Common Stock Conversion

On December 27, 2002, the Company distributed 304,218 shares of common stock in
connection with a 19.05% dividend. As a result of the stock dividend, common
stock was increased by $1,280,758 and accumulated deficit was increased by
$1,280,758. All references in the accompanying financial statements to the
number of common shares and pre-share amounts for 2001 have been restated to
reflect the stock dividend.

In July, 1997, the Company effected a recapitalization (the "Recapitalization")
without a formal reorganization. As part of the Recapitalization, the Board of
Directors approved the creation of Class B Common Stock, approved a 1 for 2.6
reverse stock split on both the Common Stock and Preferred Stock, and negotiated
a conversion of all then outstanding shares of the Company's Convertible
Preferred Stock into an aggregate of 366,300 shares of Class B Common Stock. The
conversion was effective upon the closing of an initial public offering of
575,000 shares of the Company's Common Stock on November 5, 1997. The shares of
Class B Common Stock contained rights identical to shares of Common Stock,
except that shares of Class B Common Stock, voting separately as a class, had
the right


                                      F-20
<PAGE>

CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements

20. Stock Dividend and Class B Common Stock Conversion, continued

to elect four of the Company's seven directors. Shares of Common Stock and Class
B Common Stock, voting together as a class, vote on all other matters, including
the election of the remaining directors. The recapitalization, initial public
offering and related transactions were approved by written consent of the
shareholders. On July 1, 2002, all outstanding shares of Class B Common Stock,
by their terms, were converted to common stock.

      21. Earnings Per Share

Basic earnings per share is computed by dividing the income available to common
shareholders, net earnings, by the weighted average number of shares of common
stock outstanding during each period.

Diluted earnings per share is computed by dividing the net earnings by the
weighted average number of shares of common stock and common stock equivalents
(redeemable common stock, stock options and warrants), unless anti-dilutive,
during each period.

Earnings per share for the years ended December 31, 2003, December 31, 2002 and
December 31, 2001 was computed as follows:

<TABLE>
<CAPTION>
                                                              Year Ended             Year Ended           Year Ended
                                                             December 31,           December 31,         December 31,
                                                                 2003                   2002                 2001
                                                             ------------           ------------         ------------
<S>                                                          <C>                    <C>                  <C>
                       BASIC
Average shares outstanding:
   Weighted average shares
     Outstanding during period ....................             1,918,260             1,688,384            1,511,958
                                                             ============           ===========          ===========

Earnings:
Net (loss) income .................................          $   (566,047)          $   302,512          $  (232,292)
                                                             ============           ===========          ===========

Amount for per share
   Computation ....................................          $   (566,047)          $   302,512          $  (232,292)
                                                             ============           ===========          ===========

Net (loss) earnings applicable to
     Common shares ................................          $      (0.30)          $      0.18          $     (0.15)
                                                             ============           ===========          ===========

                      DILUTED
Average shares outstanding:
   Weighted average shares
     Outstanding ..................................             1,918,260             1,688,384            1,511,958
   Common stock equivalents (options/warrants) ....                                     196,021                   --
                                                             ------------           -----------          -----------
Weighted average shares
   Outstanding during period ......................             1,918,260             1,884,405            1,511,958
                                                             ============           ===========          ===========

Earnings:
   Net (loss) income ..............................          $   (566,047)          $   302,512          $  (232,292)
                                                             ============           ===========          ===========

Amount for per share
   Computation ....................................          $   (566,047)          $   302,512          $  (232,292)
                                                             ============           ===========          ===========

Net (loss) earnings applicable to
     Common shares ................................          $      (0.30)          $      0.16          $     (0.15)
                                                             ============           ===========          ===========
</TABLE>


                                      F-21
<PAGE>

CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements

      22. Geographic Segment Data

The Company's operations consist of a business segment which designs,
manufactures, and distributes balloon products. Transfers between geographic
areas were primarily at cost. The Company's subsidiaries have assets consisting
primarily of trade accounts receivable, inventory and machinery and equipment.
Sales and selected financial information by geographic area for the periods
ended December 31, 2002, and December 31, 2003 are as follows:

<TABLE>
<CAPTION>
                              United States     United Kingdom        Mexico          Eliminations       Consolidated
                              ------------       ------------      ------------       ------------       ------------
<S>                           <C>                <C>               <C>                <C>                <C>
Year ended 12/31/03
Revenues ...............      $ 32,686,979       $  2,415,028      $  4,003,217       $ (2,845,586)      $ 36,259,638
Operating income .......          (246,299)           190,521          (527,767)           (95,676)          (679,221)
Net income (loss) ......          (883,369)           163,218           249,297            (95,193)          (566,047)
Total Assets ...........      $ 27,602,666       $  1,412,352      $  5,475,850       $ (4,220,686)      $ 30,270,182

Year ended 12/31/02
Revenues ...............      $ 37,418,425       $  1,965,736      $  5,235,119       $ (3,382,804)      $ 41,236,476
Operating income .......         1,259,905             68,535           212,174            (95,674)         1,444,940
Net income (loss) ......           451,582             40,065           (99,724)           (89,411)           302,512
Total Assets ...........      $ 26,311,194       $    979,959      $  4,982,751       $ (2,002,046)      $ 30,271,858

Year ended 12/31/01
Revenues ...............      $ 24,706,305       $  1,672,672      $  5,940,039       $ (4,872,522)      $ 27,446,494
Operating income .......         1,089,865             66,594           128,002           (267,739)         1,016,722
Net income (loss) ......          (104,384)            49,697            46,451           (224,056)          (232,292)
Total Assets ...........      $ 20,354,875       $    620,228      $  5,785,584       $ (2,096,462)      $ 24,664,225
</TABLE>

      23. Fourth Quarter Adjustments, 2002

During the fourth quarter of 2002, the Company determined that adjustments to
inventory, intercompany accounts, and other accounts were necessary. The net
effect of these fourth quarter adjustments did not materially effect the
operating results of the first three quarters of 2002.

During the fourth quarter of 2003, the Company determined that adjustments to
inventory and projects in process accounts were necessary. The net effect of
these fourth quarter adjustments did not materially affect the operating results
of the first three quarters of 2003.


                                      F-22

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.15
<SEQUENCE>3
<FILENAME>d59202_ex10-15.txt
<DESCRIPTION>LOAN AND SECURITY AGREEMENT
<TEXT>

                                  EXHIBIT 10.15

                           LOAN AND SECURITY AGREEMENT

                          DATED AS OF DECEMBER 31, 2003

                                      AMONG

                                COLE TAYLOR BANK,

                                   AS LENDER,

                                       AND

                           CTI INDUSTRIES CORPORATION,

                                       AND

                                CTI HELIUM, INC.,

                                  AS BORROWERS

<PAGE>

                                TABLE OF CONTENTS

                                                                            Page

1.  DEFINITIONS; RULES OF INTERPRETATION.......................................1

    (a)      Defined Terms.....................................................1
    (b)      Accounting Terms..................................................1
    (c)      Terms Defined in UCC..............................................2
    (d)      Other Definitional Provisions; Construction.......................2
    (e)      References to Agreements, Enactments, Etc.........................2

2.  LOANS......................................................................2

    (a)      Revolving Loans...................................................2
    (b)      Term Loan.........................................................4
    (c)      Repayments........................................................4
    (d)      Notes.............................................................5

3.  LETTERS OF CREDIT..........................................................6

    (a)      General Terms.....................................................6
    (b)      Requests for Letters of Credit....................................6
    (c)      Obligations Absolute..............................................6
    (d)      Expiration Dates of Letters of Credit.............................7

4.  INTEREST, FEES AND CHARGES.................................................7

    (a)      Interest Rate.....................................................7
    (b)      Fees and Charges..................................................7
    (c)      Maximum Interest..................................................8

5.  COLLATERAL.................................................................8

    (a)      Grant of Security Interest to Lender..............................8
    (b)      Other Security....................................................9
    (c)      Possessory Collateral.............................................9
    (d)      Electronic Chattel Paper..........................................9
    (e)      Letter-of-Credit Rights...........................................9
    (f)      Third-Party Collateral...........................................10
    (g)      Deposit Account..................................................10

6.  PRESERVATION OF COLLATERAL AND PERFECTION OF SECURITY INTERESTS THEREIN...10
7.  POSSESSION OF COLLATERAL AND RELATED MATTERS..............................10
8.  COLLECTIONS...............................................................11
9.  COLLATERAL, AVAILABILITY AND FINANCIAL REPORTS AND SCHEDULES..............12

    (a)      Weekly Reports...................................................12
    (b)      Monthly Reports..................................................12
    (c)      Financial Statements.............................................13
    (d)      Annual Projections...............................................13


                                       i
<PAGE>

                                TABLE OF CONTENTS
                                   (continued)

                                                                            Page

    (e)      Explanation of Budgets and Projections...........................13
    (f)      Public Reporting.................................................14
    (h)      Other Information................................................14

10. TERMINATION; AUTOMATIC RENEWAL............................................14
11. REPRESENTATIONS AND WARRANTIES............................................15

    (a)      Financial Statements and Other Information.......................15
    (b)      Locations; Certain Collateral....................................15
    (c)      Loans by Borrower................................................15
    (d)      Accounts and Inventory...........................................15
    (e)      Liens............................................................16
    (f)      Organization, Authority and No Conflict..........................16
    (g)      Litigation.......................................................16
    (h)      Compliance with Laws and Maintenance of Permits..................16
    (i)      Affiliate Transactions...........................................16
    (j)      Names and Trade Names............................................17
    (k)      Equipment........................................................17
    (l)      Enforceability...................................................17
    (m)      Solvency.........................................................17
    (n)      Indebtedness.....................................................17
    (o)      Margin Security and Use of Proceeds..............................17
    (p)      Parent, Subsidiaries and Affiliates..............................17
    (q)      No Defaults......................................................17
    (r)      Employee Matters.................................................18
    (s)      Intellectual Property............................................18
    (t)      Environmental Matters............................................18
    (u)      ERISA Matters....................................................18
    (v)      Collective Enterprise............................................18

12. AFFIRMATIVE COVENANTS.....................................................19

    (a)      Maintenance of Records...........................................19
    (b)      Notices..........................................................19
    (c)      Compliance with Laws and Maintenance of Permits..................20
    (d)      Inspection and Audits............................................21
    (e)      Insurance........................................................21
    (f)      Collateral.......................................................22
    (g)      Use of Proceeds..................................................23
    (h)      Taxes............................................................23
    (i)      Intellectual Property............................................23
    (j)      Financial Services Accounts......................................23
13. NEGATIVE COVENANTS........................................................24

    (a)      Indebtedness.....................................................24
    (b)      Liens............................................................24


                                       ii
<PAGE>

                                TABLE OF CONTENTS
                                   (continued)

                                                                            Page

    (c)      Mergers, Sales, Acquisitions, Subsidiaries and Other
             Transactions Outside the Ordinary Course of Business.............24
    (d)      Dividends and Distributions......................................25
    (e)      Investments; Loans...............................................25
    (f)      Fundamental Changes, Line of Business............................25
    (g)      Equipment........................................................25
    (h)      Affiliate Transactions...........................................25
    (i)      Settling of Accounts.............................................25
    (j)      Management Fees; Compensation....................................26

14. FINANCIAL COVENANTS.......................................................26

    (a)      Tangible Net Worth...............................................26
    (b)      Fixed Charge Coverage............................................27
    (c)      Capital Expenditure Limitations..................................27
    (d)      Operating Lease Obligations......................................27

15. DEFAULT...................................................................27

    (a)      Payment..........................................................27
    (b)      Breach of this Agreement and the Other Agreements................27
    (c)      Breaches of Other Obligations....................................27
    (d)      Breach of Representations and Warranties.........................28
    (e)      Loss of Collateral...............................................28
    (f)      Levy, Seizure or Attachment......................................28
    (g)      Bankruptcy or Similar Proceedings................................28
    (h)      Appointment of Receiver..........................................28
    (i)      Judgment.........................................................28
    (j)      Death or Dissolution of Obligor..................................28
    (k)      Default or Revocation of Guaranty; Subordination Agreement.......29
    (l)      Criminal Proceedings.............................................29
    (m)      Change of Control................................................29
    (n)      Change of Management.............................................29
    (o)      Material Adverse Change..........................................29

16. REMEDIES UPON AN EVENT OF DEFAULT.........................................29
17. CONDITIONS PRECEDENT......................................................30
18. JOINT AND SEVERAL LIABILITY...............................................31
19. INDEMNIFICATION...........................................................33
20. NOTICE....................................................................33
21. CHOICE OF GOVERNING LAW; CONSTRUCTION; FORUM SELECTION....................33
22. MODIFICATION AND BENEFIT OF AGREEMENT.....................................34
23. HEADINGS OF SUBDIVISIONS..................................................35
24. POWER OF ATTORNEY.........................................................35
25. CONFIDENTIALITY...........................................................35
26. COUNTERPARTS..............................................................35


                                      iii
<PAGE>

                                TABLE OF CONTENTS
                                   (continued)

                                                                            Page

27. ELECTRONIC SUBMISSIONS....................................................35
28. WAIVER OF JURY TRIAL; OTHER WAIVERS.......................................36


                                       iv
<PAGE>

ANNEX 1 - DEFINITIONS

EXHIBIT A - BORROWING BASE CERTIFICATE

EXHIBIT B - COMPLIANCE CERTIFICATE

SCHEDULE 1 - PERMITTED LIENS

SCHEDULE 11(b) - BUSINESS AND COLLATERAL LOCATIONS; CERTAIN
                 COLLATERAL

SCHEDULE 11(g) - LITIGATION

SCHEDULE 11(i) - AFFILIATE TRANSACTIONS

SCHEDULE 11(j) - NAMES & TRADE NAMES

SCHEDULE 11(n) - INDEBTEDNESS

SCHEDULE 11(p) - PARENT, SUBSIDIARIES AND AFFILIATES

SCHEDULE 11(s) - INTELLECTUAL PROPERTY

<PAGE>

                           LOAN AND SECURITY AGREEMENT

      THIS LOAN AND SECURITY AGREEMENT (as amended, modified or supplemented
from time to time, this "Agreement"), made this 31st day of December, 2003, by
and among COLE TAYLOR BANK, an Illinois corporation ("Lender"), 111 West
Washington Street, Suite 400, Chicago, Illinois 60602, and CTI INDUSTRIES
CORPORATION, an Illinois corporation, having its principal place of business at
22160 N. Pepper Road, Barrington, Illinois 60010 ("CTI Industries"), and CTI
HELIUM, INC., an Illinois corporation, having its principal place of business at
22160 N. Pepper Road, Barrington, Illinois 60010 ("CTI Helium") (CTI Industries
and CTI Helium are collectively referred to herein as "Borrowers").

                              W I T N E S S E T H:

      WHEREAS, Borrowers may, from time to time, request Loans from Lender, and
the parties wish to provide for the terms and conditions upon which such Loans
or other financial accommodations, if made by Lender, shall be made;

      NOW, THEREFORE, in consideration of any Loan (including any Loan by
renewal or extension) hereafter made to a Borrower by Lender, and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by Borrowers, the parties agree as follows:

      1. DEFINITIONS; RULES OF INTERPRETATION.

            (a) Defined Terms. For the purposes of this Agreement, the following
capitalized words and phrases shall have the meanings set forth in Annex I
attached hereto and made a part hereof.

            (b) Accounting Terms. Any accounting terms used in this Agreement
which are not specifically defined herein shall have the meanings customarily
given them in accordance with GAAP. Calculations and determinations of financial
and accounting terms used and not otherwise specifically defined hereunder and
the preparation of financial statements to be furnished to the Lender pursuant
hereto shall be made and prepared, both as to classification of items and as to
amount, in accordance with GAAP as used in the preparation of the financial
statements of the Borrowers on the date of this Agreement. If any changes in
accounting principles or practices from those used in the preparation of the
financial statements are hereafter occasioned by the promulgation of rules,
regulations, pronouncements and opinions by or required by the Financial
Accounting Standards Board or the American Institute of Certified Public
Accountants (or any successor thereto or agencies with similar functions), which
results in a material change in the method of accounting in the financial
statements required to be furnished to the Lender hereunder or in the
calculation of financial covenants, standards or terms contained in this
Agreement, the parties hereto agree to enter into good-faith negotiations to
amend such provisions so as equitably to reflect such changes to the end that
the criteria for evaluating the financial condition and performance of the
Borrowers will be the same after such changes as they were before such changes;
and, if the parties fail to agree on the amendment of such provisions, the
Borrowers will furnish financial statements in accordance with such changes but
shall provide calculations for all financial covenants, perform all financial
covenants and

<PAGE>

otherwise observe all financial standards and terms in accordance with
applicable accounting principles and practices in effect immediately prior to
such changes.

            (c) Terms Defined in UCC. The terms "Account," "Account Debtor,"
"Certificated Security," "Chattel Paper," "Commercial Tort Claim," "Deposit
Account," "Document," "Electronic Chattel Paper," "Equipment," "Financial
Asset," "Fixture," "General Intangible," "Goods," "Health-Care-Insurance
Receivables," "Instrument," "Inventory," "Investment Property,"
"Letter-of-Credit Right," "Payment Intangible," "Proceeds," "Security,"
"Securities Account," "Security Entitlement," "Software," "Supporting
Obligation," "Tangible Chattel Paper" and "Uncertificated Security" shall have
the respective meanings assigned to such terms in the UCC. All other capitalized
words and phrases used herein and not otherwise specifically defined shall have
the respective meanings assigned to such terms in the UCC, to the extent the
same are used or defined therein.

            (d) Other Definitional Provisions; Construction. Whenever the
context so requires, the neuter gender includes the masculine and feminine, the
single number includes the plural, and vice versa, and in particular the word
"Borrower" shall be so construed. The words "hereof", "herein" and "hereunder"
and words of similar import when used in this Agreement shall refer to this
Agreement as a whole and not to any particular provision of this Agreement, and
references to Article, Section, Subsection, Annex, Schedule, Exhibit and like
references are references to this Agreement unless otherwise specified. The word
"including" shall mean "including, without limitation". An Event of Default
shall "continue" or be "continuing" until such Event of Default has been waived
in accordance with Section 28(e) hereof. References in this Agreement to any
party shall include such party's successors and permitted assigns. References to
any "Section" shall be a reference to such Section of this Agreement unless
otherwise stated. To the extent any of the provisions of the Other Agreements
are inconsistent with the terms of this Loan Agreement, the provisions of this
Loan Agreement shall govern. This Agreement and the Other Agreements are the
result of negotiations among and have been reviewed by counsel to the Lender,
Borrowers and any other parties thereto, are the product of all parties and,
accordingly, shall not be construed against the Lender.

            (e) References to Agreements, Enactments, Etc. Unless otherwise
expressly provided herein, (i) references to agreements (including this
Agreement) and other contractual instruments shall be deemed to include all
subsequent amendments, restatements, supplements and other modifications
thereto, but only to the extent such amendments and other modifications are not
prohibited by the terms of this Agreement or any Other Agreement, and (ii)
references to any statute or regulation shall be construed as including all
statutory and regulatory provisions amending, replacing, supplementing or
interpreting such statute or regulation.

      2. LOANS.

            (a) Revolving Loans. Subject to the terms and conditions of this
Agreement and the Other Agreements, during the Original Term and any Renewal
Term, Lender shall, absent the occurrence of an Event of Default, make revolving
loans and advances to Borrowers (the "Revolving Loans") in an amount up to the
sum of the following sublimits (the "Revolving Borrowing Base Amount"):


                                       2
<PAGE>

                  (i) Up to eighty-five percent (85%), or such lesser percentage
      as determined by Lender in its sole discretion exercised in good faith, of
      the face amount (less maximum discounts, credits and allowances which may
      be taken by or granted to Account Debtors in connection therewith in the
      ordinary course of such Borrower's business) of Borrowers' Eligible
      Accounts; provided that such advance rate shall be reduced by one (1)
      percentage point for each whole or partial percentage point by which
      Dilution (as determined by Lender in good faith based on the results of
      the most recent twelve (12) month period for which Lender has conducted a
      field audit of Borrowers) exceeds five percent (5%); plus

                  (ii) Up to the lesser of (A) fifty percent (50%), or such
      lesser percentage as determined by Lender in its sole discretion exercised
      in good faith, of the lower of cost or market value of Borrowers' Eligible
      Inventory (which shall include work-in-process Inventory) or (B) an amount
      not to exceed ninety percent (90%) of the Net Orderly Liquidation Value of
      Borrowers' Inventory or (C) Three Million Seven Hundred Fifty Thousand and
      No/100 Dollars ($3,750,000), whichever is less; minus

                  (iii) such reserves as Lender elects, in its sole discretion,
      to establish from time to time;

provided, that (w) the Revolving Borrowing Base Amount shall in no event exceed
Seven Million Five Hundred Thousand and No/100 Dollars ($7,500,000) (the
"Maximum Revolving Loan Limit") except as such amount may be increased or
decreased by Lender, in its sole discretion, (x) the sum of the advances to all
Borrowers with respect to clause (ii) above relative to Inventory consisting of
packaging and related materials shall at no time exceed Four Hundred Thousand
Dollars ($400,000), (y) the sum of all advances with respect to Third-Party
Inventory (to the extent any such advances are otherwise permitted hereunder)
shall at no time exceed Two Hundred Thousand Dollars ($200,000), and (z) the
amount of Eligible Inventory advances with respect to clause "(ii)" above shall
include a "costing revaluation" of up to the lesser of $750,000 or the actual
amount of the "costing revaluation" line item on the most recent inventory
report delivered to Lender.

                  The aggregate unpaid principal balance of the Revolving Loans
      shall not at any time exceed the lesser of the (i) Revolving Borrowing
      Base Amount minus the Letter of Credit Obligations and (ii) the Maximum
      Revolving Loan Limit minus the Letter of Credit Obligations. If at any
      time the amount of outstanding Revolving Loans exceeds either the
      Revolving Borrowing Base Amount or the Maximum Revolving Loan Limit, in
      each case minus the Letter of Credit Obligations, or any portion of the
      Revolving Loans and Letter of Credit Obligations exceeds any applicable
      sublimit within the Revolving Borrowing Base Amount, Borrowers shall
      immediately, and without the necessity of demand by Lender, pay to Lender
      such amount as may be necessary to eliminate such excess and Lender shall
      apply such payment to the Revolving Loans in such order as Lender shall
      determine in its sole discretion.

                  Each Borrower hereby authorizes Lender, in its sole
      discretion, to charge any of such Borrower's accounts or advance Revolving
      Loans to make any payments of


                                       3
<PAGE>

      principal, interest, fees, costs or expenses required to be made under
      this Agreement or the Other Agreements.

                  A request for a Revolving Loan shall be made or shall be
      deemed to be made, each in the following manner: The Borrower requesting
      such Revolving Loan shall give Lender same-day notice, no later than 1:00
      p.m. (determined based on the local time of each Borrower at its principal
      place of business) on such day, of its request for a Revolving Loan. In
      the event that a Borrower maintains a controlled disbursement account with
      Lender, each check presented for payment against such controlled
      disbursement account and any other charge or request for payment against
      such controlled disbursement account shall constitute a request for a
      Revolving Loan as a Prime Rate Revolving Loan. As an accommodation to
      Borrowers, Lender may permit telephone requests for Revolving Loans and
      electronic transmittal of instructions, authorizations, agreements or
      reports to Lender by Borrowers. Unless a Borrower specifically directs
      Lender in writing not to accept or act upon telephonic or electronic
      communications from such Borrower, Lender shall have no liability to
      Borrowers for any loss or damage suffered by a Borrower as a result of
      Lender's honoring of any requests, execution of any instructions,
      authorizations or agreements or reliance on any reports communicated to it
      telephonically or electronically and purporting to have been sent to
      Lender by a Borrower, and Lender shall have no duty to verify the origin
      of any such communication or the authority of the Person sending it.

                  Each Borrower hereby irrevocably authorizes Lender to disburse
      the proceeds of each Revolving Loan requested by such Borrower, or deemed
      to be requested by such Borrower, as follows: the proceeds of each
      Revolving Loan requested under Section 2(a) shall be disbursed by Lender
      in lawful money of the United States of America in immediately available
      funds, in the case of the initial borrowing, in accordance with the terms
      of the written disbursement letter from such Borrower and, in the case of
      each subsequent borrowing, by wire transfer or Automated Clearing House
      (ACH) transfer to such bank account as may be agreed upon by such Borrower
      and Lender from time to time, or elsewhere if pursuant to a written
      direction from such Borrower.

            (b) Term Loan. Subject to the terms and conditions of this Agreement
and the Other Agreements, on the date that the conditions to the initial Loans
are satisfied, Lender shall make a term loan to Borrowers in an amount equal to
the lesser of (i) Three Million Five Hundred Thousand and No/100 Dollars
($3,500,000) and (ii) eighty-five percent (85%) of the net orderly liquidation
value of Borrowers' Equipment (as determined by an appraiser acceptable to
Lender) (the "Term Loan"). Such Equipment shall be subject to the first-priority
perfected security interest in favor of Lender and to no other Lien whatsoever,
other than Permitted Liens. Amounts repaid with respect to the Term Loan may not
be reborrowed.

            (c) Repayments. The Obligations shall be repaid as follows:

                  (i) Repayment of Revolving Loans. The Revolving Loans and all
      other Obligations (other than the Term Loan) shall be repaid on the last
      day of the


                                       4
<PAGE>

      Original Term or any Renewal Term if this Agreement is renewed pursuant to
      Section 10 hereof.

                  (ii) Repayment of Term Loan. The Term Loan shall be repaid in
      sixty (60) equal monthly installments of Fifty-Eight Thousand Three
      Hundred Thirty-Three Dollars ($58,333.00) each, payable beginning on
      February 1, 2004 and on the first day of each month thereafter; provided,
      that any remaining outstanding principal balance of the Term Loan shall be
      repaid at the end of the Original Term or any Renewal Term if this
      Agreement is renewed pursuant to Section 10 hereof or at any time this
      Agreement is terminated pursuant to the terms hereof. If any such payment
      due date is not a Business Day, then such payment may be made on the next
      succeeding Business Day and such extension of time shall be included in
      the computation of the amount of interest and fees due hereunder.

                  (iii) Mandatory Prepayments of the Term Loan.

                        (A) Sales of Assets. Upon receipt of the proceeds of the
            sale or other disposition of any Equipment or real property of a
            Borrower which is subject to any mortgage lien in favor of Lender,
            or if any of the Equipment or real property subject to such mortgage
            is damaged, destroyed or taken by condemnation in whole or in part,
            the proceeds thereof shall be paid by such Borrower to Lender as a
            mandatory prepayment of the Term Loan, such payment to be applied
            against the remaining installments of principal in the inverse order
            of their maturities until repaid in full, and then against the other
            Obligations, as determined by Lender, in its sole discretion.

                        (B) Excess Cash Flow. Ten (10) days after receipt of
            Borrowers' Fiscal Year end audited financial statements for each
            Fiscal Year of Borrowers commencing with Borrowers' Fiscal Year
            ended December 31, 2004, Borrowers shall make a mandatory prepayment
            of the Term Loan in an amount equal to fifty percent (50%) of
            Borrowers' "Excess Cash Flow" (as described below) for the Fiscal
            Year just ended, such prepayment to be applied against the remaining
            installments of principal in the inverse order of their maturities,
            such mandatory prepayments to continue for each Fiscal Year until
            the ratio of (i) all Term Loans hereunder to (ii) the net orderly
            liquidation value of the Equipment of Borrowers (based on appraisals
            in form and substance acceptable to Lender in its sole discretion)
            is greater than eighty percent (80%) for such Fiscal Year. For
            purposes hereof, "Excess Cash Flow" shall mean, for each of
            Borrowers' Fiscal Years, Borrowers' EBITDA for such period, minus
            Borrowers' taxes actually paid during such period and any
            distributions to their shareholders in respect of taxes actually
            paid for such period, minus cash interest actually paid during such
            period, minus actual principal payments made with respect to
            long-term debt during such period, minus all unfinanced Capital
            Expenditures by Borrowers during such period.

            (d) Notes. The Loans shall, in Lender's sole discretion, be
evidenced by one or more promissory notes in form and substance satisfactory to
Lender. However, if such Loans are not so evidenced, such Loans


                                       5
<PAGE>

may be evidenced solely by entries upon the books and records maintained by
Lender.

      3. LETTERS OF CREDIT.

            (a) General Terms. As of the Closing Date, no Letter of Credit
Obligations are outstanding. Subject to the terms and conditions of this
Agreement and the Other Agreements, during the Original Term or any Renewal
Term, Lender shall, in its sole discretion, absent an Event of Default, from
time to time cause to be issued and co-sign for or otherwise guarantee, upon a
Borrower's request, commercial and/or standby Letters of Credit; provided, that
the aggregate undrawn face amount of all such Letters of Credit shall at no time
exceed an amount determined by Lender in its sole discretion. Payments made by
Lender to any Person on account of any Letter of Credit shall constitute Loans
hereunder, and each Borrower agrees that each payment made by the issuer of a
Letter of Credit in respect of a Letter of Credit issued on behalf of such
Borrower shall constitute a request by such Borrower for a Loan to reimburse
such issuer. Borrowers shall remit to Lender a Letter of Credit fee in an amount
agreed between Lender and Borrowers per month on the aggregate undrawn face
amount of all Letters of Credit outstanding, which fee shall be payable monthly
in arrears on the last Business Day of each month. Borrowers shall also pay on
demand the normal and customary administrative charges of the issuer of the
Letter of Credit for issuance, amendment, negotiation, renewal or extension of
any Letter of Credit.

            (b) Requests for Letters of Credit. Each Borrower shall make
requests for Letters of Credit in writing at least two (2) Business Days prior
to the date such Letter of Credit is to be issued. Each such request shall
specify the date such Letter of Credit is to be issued, the amount thereof, the
name and address of the beneficiary thereof and a description of the transaction
to be supported thereby. Any such notice shall be accompanied by the form of
Letter of Credit requested and any application or reimbursement agreement
required by the issuer of such Letter of Credit. If any term of such application
or reimbursement agreement is inconsistent with this Agreement, then the
provisions of this Agreement shall control to the extent of such inconsistency.

            (c) Obligations Absolute. Each Borrower shall be obligated to
reimburse the issuer of any Letter of Credit, or Lender if Lender has reimbursed
such issuer on a Borrower's behalf, for any payments made in respect of any
Letter of Credit, which obligation shall be unconditional and irrevocable and
shall be paid regardless of: (i) any lack of validity or enforceability of any
Letter of Credit, (ii) any amendment or waiver of or consent or departure from
all or any provisions of any Letter of Credit, this Agreement or any Other
Agreement, (iii) the existence of any claim, setoff, defense or other right
which a Borrower or any other Person may have against any beneficiary of any
Letter of Credit, Lender or the issuer of the Letter of Credit, (iv) any draft
or other document presented under any Letter of Credit proving to be forged,
fraudulent, invalid or insufficient in any respect or any statement therein
being untrue or inaccurate in any respect, (v) any payment under any Letter of
Credit against presentation of a draft or other document that does not comply
with the terms of such Letter of Credit, and (vi) any other act or omission to
act or delay of any kind of the issuer of such Letter of Credit, the Lender or
any other Person or any other event or circumstance that might otherwise
constitute a legal or equitable discharge of a Borrower's obligations hereunder.
It is understood


                                       6
<PAGE>

and agreed by each Borrower that the issuer of any Letter of Credit may accept
documents that appear on their face to be in order without further investigation
or inquiry, regardless of any notice or information to the contrary.

            (d) Expiration Dates of Letters of Credit. The expiration date of
each Letter of Credit shall be no later than the earlier of (i) one (1) year
from the date of issuance and (ii) the thirtieth (30th) day prior to the end of
the Original Term or any Renewal Term. Notwithstanding the foregoing, a Letter
of Credit may provide for automatic extensions of its expiration date for one or
more one (1) year periods, so long as the issuer thereof has the right to
terminate the Letter of Credit at the end of each one (1) year period and no
extension period extends past the thirtieth (30th) day prior to the end of the
Original Term or any Renewal Term.

      4. INTEREST, FEES AND CHARGES.

            (a) Interest Rate. Each Revolving Loan and the Term Loan shall bear
interest at the rate of one and one-half percent (1 1/2%) per annum in excess of
the Prime Rate in effect from time to time, all such interest to be payable on
the first Business Day of each month in arrears. Said rate of interest shall
increase or decrease by an amount equal to each increase or decrease in the
Prime Rate effective on the effective date of each such change in the Prime
Rate. Upon the occurrence of an Event of Default and during the continuance
thereof, each Loan shall bear interest at the rate of two percent (2%) per annum
in excess of the interest rate otherwise payable thereon, which interest shall
be payable on demand. All interest shall be calculated on the basis of a 360-day
year.

            (b) Fees and Charges.

                  (i) Closing Fee: Borrowers shall jointly and severally pay to
      Lender a closing fee of One Hundred Ten Thousand Dollars ($110,000), which
      fee shall be fully earned and payable on the date of disbursement of the
      initial Loans hereunder.

                  (ii) Costs and Expenses: Borrowers shall reimburse Lender for
      all costs and expenses, including, without limitation, legal expenses and
      reasonable attorneys' fees (whether for internal or outside counsel),
      incurred by Lender in connection with the (i) documentation and
      consummation of this transaction and any other transactions between
      Borrowers and Lender, including, without limitation, Uniform Commercial
      Code and other public record searches and filings, overnight courier or
      other express or messenger delivery, appraisal costs, surveys, title
      insurance and environmental audit or review costs; (ii) collection,
      protection or enforcement of any rights in or to the Collateral; (iii)
      collection of any Obligations; and (iv) administration and enforcement of
      any of Lender's rights under this Agreement or any Other Agreement.
      Borrowers shall also pay all normal service charges with respect to all
      accounts maintained by each Borrower with Lender and any additional
      services requested by a Borrower from Lender. All such costs, expenses and
      charges shall, if owed to Lender, be reimbursed by Lender and in such
      event or in the event such costs and expenses are owed to Lender, shall
      constitute Obligations hereunder, shall be payable by Borrowers to Lender
      on demand and, until paid, shall bear interest at the highest rate then
      applicable to Loans hereunder.


                                       7
<PAGE>

                  (iii) Capital Adequacy Charge. If Lender shall have determined
      that the adoption of any law, rule or regulation regarding capital
      adequacy, or any change therein or in the interpretation or application
      thereof, or compliance by Lender with any request or directive regarding
      capital adequacy (whether or not having the force of law) from any central
      bank or governmental authority enacted after the date hereof, does or
      shall have the effect of reducing the rate of return on such party's
      capital as a consequence of its obligations hereunder to a level below
      that which Lender could have achieved but for such adoption, change or
      compliance (taking into consideration Lender's policies with respect to
      capital adequacy) by a material amount, then from time to time, after
      submission by Lender to Borrowers of a written demand therefor ("Capital
      Adequacy Demand") together with the certificate described below, Borrowers
      shall pay to Lender such additional amount or amounts ("Capital Adequacy
      Charge") as will compensate Lender for such reduction, such Capital
      Adequacy Demand to be made with reasonable promptness following such
      determination. A certificate of Lender claiming entitlement to payment as
      set forth above shall be conclusive in the absence of manifest error. Such
      certificate shall set forth the nature of the occurrence giving rise to
      such reduction, the amount of the Capital Adequacy Charge to be paid to
      Lender, and the method by which such amount was determined. In determining
      such amount, Lender may use any reasonable averaging and attribution
      method, applied on a nondiscriminatory basis.

            (c) Maximum Interest. It is the intent of the parties that the rate
of interest and other charges to each Borrower under this Agreement and the
Other Agreements shall be lawful; therefore, if for any reason the interest or
other charges payable under this Agreement are found by a court of competent
jurisdiction, in a final determination, to exceed the limit which Lender may
lawfully charge such Borrower, then the obligation to pay interest and other
charges shall automatically be reduced to such limit and, if any amount in
excess of such limit shall have been paid, then such amount shall be refunded to
such Borrower.

      5. COLLATERAL.

            (a) Grant of Security Interest to Lender. As security for the
payment of all Loans now or in the future made by Lender to Borrowers hereunder
and for the payment or other satisfaction of all other Obligations, each
Borrower hereby assigns to Lender and grants to Lender a continuing security
interest in the following property of such Borrower, whether now or hereafter
owned, existing, acquired or arising and wherever now or hereafter located: (a)
all Accounts (whether or not Eligible Accounts) and all Goods whose sale, lease
or other disposition by such Borrower has given rise to Accounts and have been
returned to, or repossessed or stopped in transit by, such Borrower; (b) all
Chattel Paper, Instruments, Documents and General Intangibles (including,
without limitation, all Intellectual Property, licenses, software, franchises,
tax refund claims, claims against carriers and shippers, guarantee claims,
contract rights, Payment Intangibles, security interests, security deposits and
rights to indemnification); (c) all Inventory (whether or not Eligible
Inventory); (d) all Goods (other than Inventory), including, without limitation,
Equipment, vehicles and Fixtures; (e) all Investment Property; (f) all Deposit
Accounts, bank accounts, deposits and cash; (g) all Letter-of-Credit Rights; (h)
Commercial Tort Claims listed on Schedule 11(b) hereto from time to time; (i)
any other property of such Borrower now or hereafter in the possession, custody
or control of Lender or any agent or any


                                       8
<PAGE>

parent, affiliate or subsidiary of Lender or any participant with Lender in the
Loans, for any purpose (whether for safekeeping, deposit, collection, custody,
pledge, transmission or otherwise) and (j) all additions and accessions to,
substitutions for, and replacements, products and Proceeds of the foregoing
property, including, without limitation, proceeds of all insurance policies
insuring the foregoing property, and all of such Borrower's books and records
relating to any of the foregoing and to such Borrower's business.

            (b) Other Security. Lender, in its sole discretion, without waiving
or releasing any obligation, liability or duty of a Borrower under this
Agreement or the Other Agreements or any Event of Default, may at any time or
times hereafter, but shall not be obligated to, pay, acquire or accept an
assignment of any Lien asserted by any Person in, upon or against the
Collateral, provided, that Lender may take such actions with respect to
Permitted Liens only after the occurrence and during the continuance of an Event
of Default. All sums paid by Lender in respect thereof and all costs, fees and
expenses, including, without limitation, reasonable attorney fees, all court
costs and all other charges relating thereto incurred by Lender shall constitute
Obligations payable by Borrowers to Lender on demand and, until paid, shall bear
interest at the highest rate then applicable to Loans hereunder.

            (c) Possessory Collateral. Immediately upon a Borrower's receipt of
any portion of the Collateral evidenced by an agreement, Instrument or Document,
including, without limitation, any Tangible Chattel Paper and any Investment
Property consisting of Certificated Securities, such Borrower shall deliver the
original thereof to Lender together with an appropriate endorsement or other
specific evidence of assignment thereof to Lender (in form and substance
acceptable to Lender). If an endorsement or assignment of any such items shall
not be made for any reason, Lender is hereby irrevocably authorized, as each
Borrower's attorney and agent-in-fact, to endorse or assign the same on such
Borrower's behalf.

            (d) Electronic Chattel Paper. To the extent that a Borrower obtains
or maintains any Electronic Chattel Paper, such Borrower shall create, store and
assign the record or records comprising the Electronic Chattel Paper in such a
manner that (i) a single authoritative copy of the record or records exists
which is unique, identifiable and, except as otherwise provided in clauses (iv),
(v) and (vi) below, unalterable, (ii) the authoritative copy identifies Lender
as the assignee of the record or records, (iii) the authoritative copy is
communicated to and maintained by the Lender or its designated custodian, (iv)
copies or revisions that add or change an identified assignee of the
authoritative copy can only be made with the participation of Lender, (v) each
copy of the authoritative copy and any copy of a copy is readily identifiable as
a copy that is not the authoritative copy and (vi) any revision of the
authoritative copy is readily identifiable as an authorized or unauthorized
revision.

            (e) Letter-of-Credit Rights. If Borrower at any time is a
beneficiary under a letter of credit now or hereafter issued in favor of
Borrower, at the request and option of Lender, Borrower shall, pursuant to an
agreement in form and substance satisfactory to Lender, either (i) arrange for
the issuer and any confirmer of such letter of credit to consent to an
assignment to Lender of the proceeds of any drawing under the letter of credit,
or (ii) arrange for Lender to become the transferee beneficiary of the letter of
credit, with Lender agreeing, in each case, that the proceeds of any drawing
under the letter to credit are to be applied as provided in this Agreement.


                                       9
<PAGE>

            (f) Third-Party Collateral. If Borrower shall at any time hold or
acquire an interest in Collateral in the possession of a third party (other than
Certificated Securities and Goods covered by a Document), Borrower shall
immediately obtain an acknowledgment from the third party that it is holding
such Collateral for the benefit of the Lender and a collateral access agreement
in favor of Lender in form and substance satisfactory to Lender.

            (g) Deposit Account. Borrower shall deliver to Lender with respect
to each Deposit Account maintained by Borrower now or hereafter (other than with
Lender) and that is permitted hereby, upon obtaining an interest in such Deposit
Account, a deposit account control agreement in form and substance satisfactory
to Lender, executed by the financial institution at which such account is
maintained, and shall take such other actions as Lender may request to ensure
that Lender's security interest in such account is perfected by control as such
term is used in UCC Section 9-104.

      6. PRESERVATION OF COLLATERAL AND PERFECTION OF SECURITY INTERESTS
THEREIN. Each Borrower shall, at Lender's request, at any time and from time to
time, authenticate, execute and deliver to Lender such financing statements,
documents and other agreements and instruments (and pay the costs of filing or
recording the same in all public offices deemed necessary or desirable by
Lender) and do such other acts and things or cause third parties to do such
other acts and things as Lender may deem necessary or desirable in its sole
discretion in order to establish and maintain a valid, attached and perfected
security interest in the Collateral in favor of Lender (free and clear of all
other Liens, except Permitted Liens) to secure payment of the Obligations, and
in order to facilitate the collection of the Collateral. Each Borrower
irrevocably hereby makes, constitutes and appoints Lender (and all Persons
designated by Lender for that purpose) as such Borrower's true and lawful
attorney and agent-in-fact to execute and file such financing statements,
documents and other agreements and instruments and do such other acts and things
as may be necessary to preserve and perfect Lender's security interest in the
Collateral. Each Borrower further agrees that a carbon, photographic,
photostatic or other reproduction of this Agreement or of a financing statement
shall be sufficient as a financing statement; each Borrower further ratifies and
confirms the prior filing by Lender of any and all financing statements which
identify such Borrower as debtor, Lender as secured party and any or all
Collateral as collateral.

      7. POSSESSION OF COLLATERAL AND RELATED MATTERS. Until otherwise notified
by Lender following the occurrence of an Event of Default, each Borrower shall
have the right, except as otherwise provided in this Agreement, in the ordinary
course of such Borrower's business, to (a) sell, lease or furnish under
contracts of service any of such Borrower's Inventory normally held by such
Borrower for any such purpose; and (b) use and consume any raw materials, work
in process or other materials normally held by such Borrower for such purpose;
and (c) dispose of obsolete or unuseful Equipment so long as all of the proceeds
thereof are paid to Lender for application to the Obligations (except for such
proceeds as are required to be delivered to the holder of a Permitted Lien which
is prior in right of payment); provided, however, that a sale in the ordinary
course of business shall not include any transfer or sale in satisfaction,
partial or complete, of a debt owed by such Borrower.


                                       10
<PAGE>

      8. COLLECTIONS.

            (a) Each Borrower shall direct all of its Account Debtors to make
all payments on the Accounts directly to a post office box (the "Lock Box")
designated by, and under the exclusive control of, Lender. Each Borrower shall
establish an account (the "Lock Box Account") in Lender's name with Lender, into
which all payments received in the Lock Box shall be deposited, and into which
such Borrower will immediately deposit all payments received by such Borrower on
Accounts in the identical form in which such payments were received, whether by
cash or check. If a Borrower, any Affiliate or Subsidiary, any shareholder,
officer, director, employee or agent of a Borrower or any Affiliate or
Subsidiary, or any other Person acting for or in concert with a Borrower shall
receive any monies, checks, notes, drafts or other payments relating to or as
Proceeds of Accounts or other Collateral, such Borrower and each such Person
shall receive all such items in trust for, and as the sole and exclusive
property of, Lender and, immediately upon receipt thereof, shall remit the same
(or cause the same to be remitted) in kind to the Lock Box Account. Each
Borrower agrees that all payments made to such Lock Box Account or otherwise
received by Lender, whether in respect of the Accounts or as Proceeds of other
Collateral or otherwise (except for proceeds of Collateral which are required to
be delivered to the holder of a Permitted Lien which is prior in right of
payment), will be applied on account of the Obligations in accordance with the
terms of this Agreement. Each Borrower agrees to pay all fees, costs and
expenses in connection with opening and maintaining the Lock Box and Lock Box
Account. All of such fees, costs and expenses shall constitute Obligations
hereunder, shall be payable to Lender by Borrowers upon demand and, until paid,
shall bear interest at the highest rate then applicable to Loans hereunder. All
checks, drafts, instruments and other items of payment or Proceeds of Collateral
shall be endorsed by the applicable Borrower to Lender, and, if that endorsement
of any such item shall not be made for any reason, Lender is hereby irrevocably
authorized to endorse the same on such Borrower's behalf. For the purpose of
this section, each Borrower irrevocably hereby makes, constitutes and appoints
Lender (and all Persons designated by Lender for that purpose) as such
Borrower's true and lawful attorney and agent-in-fact (i) to endorse such
Borrower's name upon said items of payment and/or Proceeds of Collateral and
upon any Chattel Paper, Document, Instrument, invoice or similar document or
agreement relating to any Account of such Borrower or Goods pertaining thereto;
(ii) to take control in any manner of any item of payment or Proceeds thereof
and (iii) to have access to any lock box or postal box into which any of such
Borrower's mail is deposited, and open and process all mail addressed to such
Borrower and deposited therein.

            (b) Lender may, at any time and from time to time after the
occurrence and during the continuance of an Event of Default, whether before or
after notification to any Account Debtor and whether before or after the
maturity of any of the Obligations, (i) enforce collection of any of Borrowers'
Accounts or other amounts owed to a Borrower by suit or otherwise; (ii) exercise
all of such Borrower's rights and remedies with respect to proceedings brought
to collect any Accounts or other amounts owed to such Borrower; (iii) surrender,
release or exchange all or any part of any Accounts or other amounts owed to
such Borrower, or compromise or extend or renew for any period (whether or not
longer than the original period) any indebtedness thereunder; (iv) sell or
assign any Account of such Borrower or other amount owed to such Borrower upon
such terms, for such amount and at such time or times as Lender deems advisable;
(v) prepare, file and sign such Borrower's name on any proof of claim in
bankruptcy or other similar document against any Account Debtor or other Person
obligated to


                                       11
<PAGE>

such Borrower; and (vi) do all other acts and things which are necessary, in
Lender's sole discretion, to fulfill such Borrower's obligations under this
Agreement and the Other Agreements and to allow Lender to collect the Accounts
or other amounts owed to such Borrower. In addition to any other provision
hereof, Lender may at any time, whether before or after the occurrence and
during the continuance of an Event of Default, at Borrowers' expense, notify any
parties obligated on any of the Accounts to make payment directly to Lender of
any amounts due or to become due thereunder.

            (c) For purposes of calculating interest and fees, Lender shall,
within two (2) Business Days after receipt by Lender at its office in Chicago,
Illinois of (i) checks and (ii) cash or other immediately available funds from
collections of items of payment and Proceeds of any Collateral, apply the whole
or any part of such collections or Proceeds against the Obligations in such
order as Lender shall determine in its sole discretion. For purposes of
determining the amount of Loans available for borrowing purposes, checks and
cash or other immediately available funds from collections of items of payment
and Proceeds of any Collateral shall be applied in whole or in part against the
Obligations, in such order as Lender shall determine in its sole discretion, on
the day of receipt, subject to actual collection.

            (d) On a monthly basis, Lender shall deliver to Borrowers an account
statement showing all Loans, charges and payments, which shall be deemed final,
binding and conclusive upon Borrowers unless a Borrower notifies Lender in
writing, specifying any error therein, within thirty (30) days of the date such
account statement is sent to Borrowers, and any such notice shall only
constitute an objection to the items specifically identified.

      9. COLLATERAL, AVAILABILITY AND FINANCIAL REPORTS AND SCHEDULES.

            (a) Weekly Reports. Each Borrower shall deliver to Lender an
executed borrowing base certificate in the form of Exhibit B on a weekly basis
(via facsimile with original to follow via U.S. Mail), and otherwise, from time
to time, to the extent requested by Lender in connection with any Revolving Loan
requested of Borrowers which shall be accompanied by copies of such Borrower's
sales journal, cash receipts journal and credit memo journal for the relevant
period. Such borrowing base certificate shall reflect the activity of such
Borrower with respect to Accounts for the immediately preceding period, and
shall be in a form and with such specificity as is satisfactory to Lender and
shall contain such additional information concerning Accounts and Inventory as
may be requested by Lender, including, without limitation, but only if
specifically requested by Lender, copies of all invoices prepared in connection
with such Accounts.

            (b) Monthly Reports. Borrowers shall deliver to Lender, in addition
to any other reports, as soon as practicable and in any event: (i) within ten
(10) days after the end of each month, (A) a detailed trial balance of each
Borrower's Accounts aged per invoice date, in form and substance reasonably
satisfactory to Lender, including, without limitation, the names and addresses
of all Account Debtors of each Borrower, and (B) a summary and detail of
accounts payable (such Accounts and accounts payable divided into such time
intervals as Lender may require in its sole discretion), including a listing of
any held checks; (ii) within ten (10) days after the end of each month, the
general ledger inventory account balance, a perpetual


                                       12
<PAGE>

inventory report and Lender's standard form of Inventory report then in effect
or the form most recently requested from Borrowers by Lender, for each Borrower
by each category of Inventory, together with a description of the monthly change
in each category of Inventory; and (iii) within ten (10) days after the end of
each month, a month-end Borrowing Base Certificate that reconciles to all
month-end reports, in form and substance acceptable to Lender.

            (c) Financial Statements. Borrowers shall deliver to Lender the
following financial information, all of which shall be prepared in accordance
with GAAP consistently applied, and shall be accompanied by a certificate in the
form of Exhibit B hereto, which compliance certificate ("Compliance
Certificate") signed by the Chief Financial Officer or President of Borrowers,
which shall (x) set forth in reasonable detail the calculations for the
financial covenants contained in Section 14 hereof and (y) state that, based
upon an examination sufficient to permit him to make an informed statement, no
Default or Event of Default exists, or if such is not the case, specifying such
Default or Event of Default, its nature, when it occurred, whether it is
continuing the steps begin taken by Borrowers with respect thereto: (i) no later
than thirty (30) days after each calendar month, copies of internally prepared
financial statements, including, without limitation, balance sheets and
statements of income, of such Borrowers from and after the month ending April
30, 2004 on a consolidated and consolidating (separately for each Borrower)
basis, certified by the chief financial officer of each Borrower; (ii) no later
than thirty (30) days after the end of each of the first three quarters of each
Borrower's Fiscal Year, copies of internally prepared financial statements,
including, without limitation, balance sheets, statements of income, retained
earnings, cash flows and reconciliation of surplus of Borrowers on a
consolidated and consolidating (separately for each Borrower) basis, certified
by the chief financial officer of Borrowers; and (iii) no later than ninety (90)
days after the end of each of Borrowers' Fiscal Years, audited annual
consolidated and consolidating (separately for each Borrower) financial
statements with an unqualified opinion by independent certified public
accountants selected by Borrowers and reasonably satisfactory to Lender, which
financial statements shall be accompanied by (A) a letter from such accountants
acknowledging that they are aware that a primary intent of Borrowers in
obtaining such financial statements is to influence Lender and that Lender is
relying upon such financial statements in connection with the exercise of its
rights hereunder, provided, that Borrower shall only be required to use its
reasonable efforts exercised in good faith to obtain such letter; and (B) copies
of any management letters sent to a Borrower by such accountants.

            (d) Annual Projections. As soon as practicable and in any event no
less than thirty (30) days prior to the beginning of each Fiscal Year, Borrowers
shall deliver to Lender projected balance sheets, statements of income and cash
flow for Borrowers on a consolidated and consolidating basis, for each of the
twelve (12) months during such Fiscal Year, which shall include the assumptions
used therein, together with appropriate supporting details as reasonably
requested by Lender.

            (e) Explanation of Budgets and Projections. In conjunction with the
delivery of the annual presentation of projections or budgets referred to in
Subsection 9(d) above, Borrowers shall deliver a letter, signed by the president
or a vice president of each Borrower and by the treasurer or chief financial
officer of each Borrower, describing, comparing and analyzing, in detail, all
changes and developments between the anticipated financial results included in
such projections or budgets and the historical financial statements of
Borrowers.


                                       13
<PAGE>

            (f) Public Reporting. Promptly upon the filing thereof, each
Borrower shall deliver to Lender copies of all registration statements and
annual, quarterly, monthly or other regular reports which such Borrower or any
of its Subsidiaries files with the Securities and Exchange Commission, as well
as promptly providing to Lender copies of any reports and proxy statements
delivered to its shareholders.

            (g) Appraisals. Borrowers shall deliver (i) an updated Equipment
appraisal in form and substance acceptable to Lender, no later than March 31,
2004 (the "Initial 2004 M & E Appraisal") and (ii) an Inventory appraisal, in
form and substance acceptable to Lender, on or before March 31, 2004 and
thereafter not less frequently than once every 180 days.

            (h) Other Information. Promptly following request therefor by
Lender, such other business or financial data, reports, appraisals and
projections as Lender may reasonably request.

      10. TERMINATION; AUTOMATIC RENEWAL. THIS AGREEMENT SHALL BE IN EFFECT FOR
A PERIOD OF TWO (2) YEARS FROM THE DATE HEREOF UNTIL DECEMBER 31, 2005 (THE
"ORIGINAL TERM") AND SHALL AUTOMATICALLY RENEW ITSELF FROM YEAR TO YEAR
THEREAFTER (EACH SUCH ONE-YEAR RENEWAL BEING REFERRED TO HEREIN AS A "RENEWAL
TERM") UNLESS (A) THE DUE DATE OF THE OBLIGATIONS IS ACCELERATED PURSUANT TO
SECTION 16 HEREOF; OR (B) A BORROWER OR LENDER ELECTS TO TERMINATE THIS
AGREEMENT AT THE END OF THE ORIGINAL TERM OR AT THE END OF ANY RENEWAL TERM BY
GIVING THE OTHER PARTY WRITTEN NOTICE OF SUCH ELECTION AT LEAST NINETY (90) DAYS
PRIOR TO THE END OF THE ORIGINAL TERM OR THE THEN-CURRENT RENEWAL TERM AND IN
WHICH CASE BORROWERS SHALL PAY ALL OF THE OBLIGATIONS IN FULL ON THE LAST DAY OF
SUCH TERM. If one or more of the events specified in clauses (A) or (B) occurs
or this Agreement otherwise expires, then (i) Lender shall not make any
additional Loans on or after the date identified as the date on which the
Obligations are to be repaid; and (ii) this Agreement shall terminate on the
date thereafter that the Obligations are paid in full. At such time as Borrowers
have repaid all of the Obligations and this Agreement has terminated, each
Borrower shall deliver to Lender a release, in form and substance satisfactory
to Lender, of all obligations and liabilities of Lender and its officers,
directors, employees, agents, parents, subsidiaries and affiliates to such
Borrower, and, if such Borrower is obtaining new financing from another lender,
such Borrower shall deliver such lender's indemnification of Lender, in form and
substance satisfactory to Lender, for checks which Lender has credited to such
Borrower's account but which subsequently are dishonored for any reason or for
automatic clearinghouse or wire transfers not yet posted to such Borrower's
account. If, during the term of this Agreement, Borrowers prepay all of the
Obligations from any source other than income from the ordinary-course
operations of Borrowers' business and this Agreement is terminated, Borrowers
jointly and severally agree to pay to Lender as a prepayment fee, in addition to
the payment of all other Obligations, an amount equal to (i) three percent (3%)
of the Maximum Loan Limit if such prepayment occurs at least one (1) year prior
to the end of the Original Term, or (ii) two percent (2%) of the Maximum Loan
Limit if such prepayment occurs less than one (1) year prior to the end of the
Original Term or any then-current Renewal Term; provided,


                                       14
<PAGE>

however, such prepayment fee shall be waived if repayment is made within ninety
(90) days prior to the end of the Original Term or any then current Renewal
Term.

      11. REPRESENTATIONS AND WARRANTIES. Each Borrower hereby represents and
warrants to Lender, which representations and warranties (whether appearing in
this Section 11 or elsewhere) shall be true at the time of Borrowers' execution
hereof and the closing of the transactions described herein or related hereto,
shall remain true until the repayment in full and satisfaction of all the
Obligations and termination of this Agreement, and shall be remade by each
Borrower at the time each Loan is made pursuant to this Agreement.

            (a) Financial Statements and Other Information. The financial
statements and other information delivered or to be delivered by Borrowers to
Lender at or prior to the date of this Agreement fairly present, in all material
respects, the financial condition of Borrowers, and there has been no adverse
change in the financial condition, the operations or any other status of a
Borrower since the date of the financial statements delivered to Lender most
recently prior to the date of this Agreement. All written information now or
heretofore furnished by each Borrower to Lender is true and correct as of the
date with respect to which such information was furnished.

            (b) Locations; Certain Collateral. The office where each Borrower
keeps its books, records and accounts (or copies thereof) concerning the
Collateral, each Borrower's principal place of business and all of each
Borrower's other places of business, locations of Collateral and post office
boxes and locations of bank accounts are as set forth in Schedule 11(b) and at
other locations within the continental United States of which Lender has been
advised by a Borrower in accordance with Subsection 12(b)(i). The Collateral,
including, without limitation, the Equipment (except any part thereof which a
Borrower shall have advised Lender in writing consists of Collateral normally
used in more than one state) is kept, or, in the case of vehicles, based, only
at the addresses set forth on Schedule 11(b), and at other locations within the
continental United States of which Lender has been advised by a Borrower in
writing in accordance with Subsection 12(b)(i) hereof. Schedule 11(b) hereto
contains a complete listing of all of Borrower's (a) Intellectual Property which
is subject to registration statutes and licenses of Intellectual Property to
which Borrower is a party (whether as licensor or licensee), (b) Instruments
(other than Instruments deposited for collection in the ordinary course of
business), (c) Deposit Accounts, (d) Investment Property, (e) Letter-of-Credit
Rights, (f) Chattel Paper, (g) Documents, (h) Commercial Tort Claims, (i)
Collateral which is subject to certificate of title statutes and (j) tangible
Collateral located with any bailee, warehousemen or other third parties.

            (c) Loans by Borrower. No Borrower has made any loans or advances to
any Affiliate or other Person except for advances authorized hereunder to
employees, officers and directors of such Borrower for travel and other expenses
arising in the ordinary course of such Borrower's business and loans permitted
pursuant to Subsection 13(e) hereof.

            (d) Accounts and Inventory. Each Account or item of Inventory which
a Borrower shall, expressly or by implication, request Lender to classify as an
Eligible Account or as Eligible Inventory, respectively, shall, as of the time
when such request is made, conform in all respects to the requirements of such
classification as set forth in the respective definitions of


                                       15
<PAGE>

"Eligible Account" and "Eligible Inventory" as set forth herein and as otherwise
established by Lender from time to time.

            (e) Liens. Each Borrower is the lawful owner of all Collateral now
purportedly owned or hereafter purportedly acquired by such Borrower, free from
all Liens, other than the Permitted Liens.

            (f) Organization, Authority and No Conflict. Each Borrower is a
corporation, duly organized, validly existing and in good standing in the State
of Illinois, and such Borrower is duly qualified and in good standing in all
states where the nature and extent of the business transacted by it or the
ownership of its assets makes such qualification necessary or, if such Borrower
is not so qualified, such Borrower may cure any such failure without losing any
of its rights, incurring any Liens or material penalties or otherwise affecting
Lender's rights. CTI Industries' State Organization Identification Number is
6178-634-1 and CTI Helium's State Organizational Identification Number is
6201-017-7. Each Borrower has the right and power and is duly authorized and
empowered to enter into, execute and deliver this Agreement and the Other
Agreements and perform its obligations hereunder and thereunder. Each Borrower's
execution, delivery and performance of this Agreement and the Other Agreements
do not conflict with the provisions of the organizational documents of such
Borrower, any statute, regulation, ordinance or rule of law, or any agreement,
contract or other document which may now or hereafter be binding on such
Borrower, except for conflicts with agreements, contracts or other documents
which would not have a Material Adverse Effect on such Borrower, and each
Borrower's execution, delivery and performance of this Agreement and the Other
Agreements shall not result in the imposition of any Lien upon any of such
Borrower's property (other than Permitted Liens) under any existing indenture,
mortgage, deed of trust, loan or credit agreement or other agreement or
instrument by which such Borrower or any of its property may be bound or
affected.

            (g) Litigation. Except as disclosed to Lender on Schedule 11(g)
hereto, there are no actions or proceedings which are pending or, to the best of
Borrower's knowledge, threatened against a Borrower which are, in the
determination of Lender, reasonably likely to have a Material Adverse Effect on
such Borrower, and each Borrower shall, promptly upon becoming aware of any such
pending or threatened action or proceeding, give written notice thereof to
Lender.

            (h) Compliance with Laws and Maintenance of Permits. Each Borrower
has obtained all governmental consents, franchises, certificates, licenses,
authorizations, approvals and permits, the lack of which would have a Material
Adverse Effect on such Borrower. Each Borrower is in compliance in all material
respects with all applicable federal, state, local and foreign statutes, orders,
regulations, rules and ordinances (including, without limitation, Environmental
Laws and statutes, orders, regulations, rules and ordinances relating to taxes,
employer and employee contributions and similar items, securities, ERISA or
employee health and safety) the failure to comply with which would have a
Material Adverse Effect on such Borrower.

            (i) Affiliate Transactions. Except as set forth on Schedule 11(i)
hereto or as permitted pursuant to Subsection 11(c) hereof, no Borrower is
conducting, permitting or


                                       16
<PAGE>

suffering to be conducted, transactions with any Affiliate other than
transactions with Affiliates for the purchase or sale of Inventory or services
in the ordinary course of business pursuant to terms that are no less favorable
to such Borrower than the terms upon which such transactions would have been
made had they been made to or with a Person that is not an Affiliate.

            (j) Names and Trade Names. Each Borrower's name has always been as
set forth on the first page of this Agreement and no Borrower uses trade names,
assumed names, fictitious names or division names in the operation of its
business, except as set forth on Schedule 11(j) hereto.

            (k) Equipment. Except for Permitted Liens, each Borrower has good
and indefeasible and merchantable title to and ownership of all Equipment. No
Equipment is a Fixture to real estate unless such real estate is owned by such
Borrower and is subject to a mortgage or mortgagee agreement in favor of Lender
or, if such real estate is leased, is subject to a landlord's agreement in favor
of Lender on terms acceptable to Lender, or an accession to other personal
property unless such personal property is subject to a first-priority Lien in
favor of Lender.

            (l) Enforceability. This Agreement and the Other Agreements to which
a Borrower is a party are the legal, valid and binding obligations of such
Borrower and are enforceable against such Borrower in accordance with their
respective terms.

            (m) Solvency. Each Borrower, after giving effect to the transactions
contemplated hereby, is solvent, is able to pay its debts as they become due,
has capital sufficient to carry on its business, now owns property having a
value both at fair valuation and at present fair saleable value greater than the
amount required to pay its debts, and will not be rendered insolvent by the
execution and delivery of this Agreement or any of the Other Agreements or by
completion of the transactions contemplated hereunder or thereunder.

            (n) Indebtedness. Except as set forth on Schedule 11(n) hereto, no
Borrower is obligated (directly or indirectly) for any Indebtedness other than
the Loans.

            (o) Margin Security and Use of Proceeds. No Borrower owns any margin
securities, and none of the proceeds of the Loans hereunder shall be used for
the purpose of purchasing or carrying any margin securities or for the purpose
of reducing or retiring any indebtedness which was originally incurred to
purchase any margin securities or for any other purpose not permitted by
Regulation U of the Board of Governors of the Federal Reserve System as in
effect from time to time.

            (p) Parent, Subsidiaries and Affiliates. Except as set forth on
Schedule 11(p) hereto, no Borrower has any Parents, Subsidiaries or other
Affiliates or divisions, nor is any Borrower engaged in any joint venture or
partnership with any other Person.

            (q) No Defaults. No Borrower is in default under any material
contract, lease or commitment to which it is a party or by which it is bound,
nor does any Borrower know of any dispute regarding any contract, lease or
commitment which would have a Material Adverse Effect on such Borrower.


                                       17
<PAGE>

            (r) Employee Matters. There are no controversies pending or
threatened between a Borrower and any of its employees, agents or independent
contractors, other than employee grievances arising in the ordinary course of
business which would not, in the aggregate, have a Material Adverse Effect on
such Borrower, and each Borrower is in compliance with all federal and state
laws respecting employment and employment terms, conditions and practices except
for such noncompliance as would not have a Material Adverse Effect on such
Borrower.

            (s) Intellectual Property. All patents, patent applications,
copyrights, service marks, trademarks, trademark applications, trade styles and
trade names of each Borrower are listed on Schedule 11(s) hereto, and each
Borrower possesses adequate licenses with respect thereto or necessary to
continue to conduct its business as heretofore conducted by it except to the
extent that the failure to possess such items would not have a Material Adverse
Effect on Borrower and each such license is described on Schedule 11(s) hereto.

            (t) Environmental Matters. No Borrower has generated, used, stored,
treated, transported, manufactured, handled, produced or disposed of any
Hazardous Materials, on or off its premises (whether or not owned by it) in any
manner which at any time violates any Environmental Law or any license, permit,
certificate, approval or similar authorization thereunder, and the operations of
each Borrower comply in all material respects with all Environmental Laws and
all licenses, permits, certificates, approvals and similar authorizations
thereunder. There has been no investigation, proceeding, complaint, order,
directive, claim, citation or notice by any governmental authority or any other
Person, nor is any pending or to the best of each Borrower's knowledge
threatened with respect to any noncompliance with or violation of the
requirements of any Environmental Law by a Borrower or the release, spill or
discharge, threatened or actual, of any Hazardous Materials or the generation,
use, storage, treatment, transportation, manufacture, handling, production or
disposal of any Hazardous Materials or any other environmental, health or safety
matter which affects a Borrower or its business, operations or assets or any
properties at which a Borrower has transported, stored or disposed of any
Hazardous Materials. No Borrower has any material liability (contingent or
otherwise) in connection with a release, spill or discharge, threatened or
actual, of any Hazardous Materials or the generation, use, storage, treatment,
transportation, manufacture, handling, production or disposal of any Hazardous
Materials.

            (u) ERISA Matters. Each Borrower has paid and discharged all
obligations and liabilities arising under ERISA of a character which, if unpaid
or unperformed, might result in the imposition of a Lien against any of its
properties or assets.

            (v) Collective Enterprise. Borrowers are engaged in the businesses
of purchasing, selling, distributing, developing and/or manufacturing helium gas
and/or balloons, punch balls and other inflatable toy products, films and
flexible containers as of the date hereof, as well as in certain other
businesses. These operations require financing on a basis such that the credit
supplied can be made available from time to time to Borrowers, as required for
the continued successful operation of Borrowers taken as a whole. Borrowers have
requested the Lender make credit available hereunder primarily for the purposes
of Subsection 12(g) and generally for the purposes of financing the operations
of Borrowers. Each Borrower expects to derive benefit (and the Board of
Directors of each Borrower has determined that such Borrower


                                       18
<PAGE>

may reasonably be expected to derive benefit), directly or indirectly, from a
portion of the credit extended by Lender hereunder, both in its separate
capacity and as a member of the group of companies, since the successful
operation and condition of each Borrower is dependent on the continued
successful performance of the functions of the group as a whole. Each Borrower
acknowledges that, but for the agreement of each of the other Borrowers to
execute and deliver this Agreement, Lender would not have made available the
credit facilities established hereby on the terms set forth herein.

      12. AFFIRMATIVE COVENANTS. Until payment and satisfaction in full of all
Obligations and termination of this Agreement, unless Borrowers obtain Lender's
prior written consent waiving or modifying any of Borrowers' covenants hereunder
in any specific instance, each Borrower covenants and agrees as follows:

            (a) Maintenance of Records. Each Borrower shall at all times keep
accurate and complete books, records and accounts with respect to all of such
Borrower's business activities, in accordance with sound accounting practices
and GAAP consistently applied, and shall keep such books, records and accounts,
and any copies thereof, only at the addresses indicated for such purpose on
Schedule 11(b).

            (b) Notices. Each Borrower shall:

                  (i) Locations. Promptly (but in no event less than ten (10)
      days prior to the occurrence thereof) notify Lender of the proposed
      opening of any new place of business or new location of Collateral, the
      closing of any existing place of business or location of Collateral, any
      change of in the location of such Borrower's books, records and accounts
      (or copies thereof), the opening or closing of any post office box, the
      opening or closing of any bank account or, if any of the Collateral
      consists of Goods of a type normally used in more than one state, the use
      of any such Goods in any state other than a state in which such Borrower
      has previously advised Lender that such Goods will be used.

                  (ii) Eligible Accounts and Inventory. Promptly upon becoming
      aware thereof, notify Lender if any Account or Inventory identified by
      such Borrower to Lender as an Eligible Account or Eligible Inventory
      becomes ineligible for any reason.

                  (iii) Litigation and Proceedings. Promptly upon becoming aware
      thereof, notify Lender of any actions or proceedings which are pending or
      threatened against such Borrower which might have a Material Adverse
      Effect on such Borrower and of any Commercial Tort Claims of such Borrower
      which may arise, which notice shall constitute such Borrower's
      authorization to amend Schedule 11(b) to add such Commercial Tort Claim.

                  (iv) Names and Trade Names. Notify Lender within ten (10) days
      of the change of its name or the use of any trade name, assumed name,
      fictitious name or division name not previously disclosed to Lender in
      writing.

                  (v) ERISA Matters. Promptly notify Lender of (x) the
      occurrence of any "reportable event" (as defined in ERISA) which might
      result in the termination by


                                       19
<PAGE>

      the Pension Benefit Guaranty Corporation (the "PBGC") of any employee
      benefit plan ("Plan") covering any officers or employees of such Borrower,
      any benefits of which are, or are required to be, guaranteed by the PBGC,
      (y) receipt of any notice from the PBGC of its intention to seek
      termination of any Plan or appointment of a trustee therefor or (z) its
      intention to terminate or withdraw from any Plan.

                  (vi) Environmental Matters. Immediately notify Lender upon
      becoming aware of any investigation, proceeding, complaint, order,
      directive, claim, citation or notice with respect to any noncompliance
      with or violation of the requirements of any Environmental Law by such
      Borrower or the generation, use, storage, treatment, transportation,
      manufacture handling, production or disposal of any Hazardous Materials or
      any other environmental, health or safety matter which affects such
      Borrower or its business operations or assets or any properties at which
      such Borrower has transported, stored or disposed of any Hazardous
      Materials unless the foregoing could not reasonably be expected to have a
      Material Adverse Effect on Borrower.

                  (vii) Default; Material Adverse Change. Promptly advise Lender
      of any material adverse change in the business, property, assets,
      prospects, operations or condition, financial or otherwise, of such
      Borrower, the occurrence of any Event of Default hereunder or the
      occurrence of any event which, if uncured, will become an Event of Default
      after notice or lapse of time, or both.

                  (viii) Subordinated Debt. Promptly advise Lender of any
      default or any event which, with the giving of notice or lapse of time, or
      both, would constitute a default, under any subordination agreement
      relative to Subordinated Debt, or any agreement, instrument or document
      evidencing or relating to any Subordinated Debt, and a certificate of a
      authorized officer of Borrower specifying the nature thereof and
      Borrower's proposed response thereto, in reasonable detail.

All of the foregoing notices shall be provided by Borrowers to Lender in
writing.

            (c) Compliance with Laws and Maintenance of Permits. Each Borrower
shall maintain all governmental consents, franchises, certificates, licenses,
authorizations, approvals and permits the lack of which would have a Material
Adverse Effect on such Borrower, and each Borrower shall remain in compliance
with all applicable federal, state, local and foreign statutes, orders,
regulations, rules and ordinances (including, without limitation, Environmental
Laws and statutes, orders, regulations, rules and ordinances relating to taxes,
employer and employee contributions and similar items, securities, ERISA or
employee health and safety) the failure to comply with which would have a
Material Adverse Effect on such Borrower. Following any determination by Lender
that there is noncompliance, or any condition which requires any action by or on
behalf of a Borrower in order to avoid noncompliance, with any Environmental
Law, such Borrower shall at such Borrower's expense cause an independent
environmental engineer acceptable to Lender to conduct such tests of the
relevant site(s) as are appropriate and prepare and deliver a report setting
forth the results of such tests, a proposed plan for remediation and an estimate
of the costs thereof.


                                       20
<PAGE>

            (d) Inspection and Audits. Each Borrower shall permit Lender, or any
Persons designated by it, to call at such Borrower's places of business at any
reasonable times and, without hindrance or delay, to inspect the Collateral and
to inspect, audit, check and make extracts from such Borrower's books, records,
journals, orders, receipts and any correspondence and other data relating to
such Borrower's business, the Collateral or any transactions between the parties
hereto, and Lender shall have the right to make such verification concerning
such Borrower's business as Lender may consider reasonable under the
circumstances. Each Borrower shall furnish to Lender such information relevant
to Lender's rights under this Agreement and the Other Agreements as Lender shall
at any time and from time to time request. Lender, through its officers,
employees or agents shall have the right, at any time and from time to time, in
Lender's name, to verify the validity, amount or any other matter relating to
any of such Borrower's Accounts, by mail, telephone, telecopy, electronic mail
or otherwise. Each Borrower authorizes Lender to discuss the affairs, finances
and business of such Borrower with any officers, employees or directors of such
Borrower, or with its Parent or any Affiliate or the officers, employees or
directors of its Parent or any Affiliate, and to discuss the financial condition
of such Borrower with such Borrower's independent public accountants. Any such
discussions shall be without liability to Lender or to Borrowers' independent
public accountants. Borrowers shall pay to Lender all customary fees (currently
$750 per person per day) and all costs and out-of-pocket expenses incurred by
Lender in the exercise of its rights hereunder, and all of such fees, costs and
expenses shall constitute Obligations hereunder, shall be payable on demand and,
until paid, shall bear interest at the highest rate then applicable to Loans
hereunder. So long as no Event of Default exists, Lender intends to conduct
audits based upon a 90 day audit schedule and so long as no Event of Default
exists, Lender shall use reasonable efforts to notify Borrowers of any change in
such audit schedule.

            (e) Insurance. Each Borrower shall:

                  (i) Keep the Collateral properly housed and insured for the
      full insurable value thereof against loss or damage by fire, theft,
      explosion, sprinklers, collision (in the case of motor vehicles) and such
      other risks as are customarily insured against by Persons engaged in
      businesses similar to that of such Borrower, with such companies, in such
      amounts, with such deductibles, and under policies in such form, as shall
      be satisfactory to Lender. Original (or certified) copies of such policies
      of insurance have been or shall be, within ninety (90) days of the date
      hereof, delivered to Lender, together with evidence of payment of all
      premiums therefor, and shall contain an endorsement, in form and substance
      acceptable to Lender, showing loss under such insurance policies payable
      to Lender. Such endorsement, or an independent instrument furnished to
      Lender, shall provide that the insurance company shall give Lender at
      least thirty (30) days' written notice before any such policy of insurance
      is altered or cancelled and that no act, whether willful or negligent, or
      default of such Borrower or any other Person shall affect the right of
      Lender to recover under such policy of insurance in case of loss or
      damage. In addition, each Borrower shall cause to be executed and
      delivered to Lender an assignment of proceeds of its business interruption
      insurance policies. Each Borrower hereby directs all insurers under all
      policies of insurance to pay all proceeds payable thereunder directly to
      Lender. Each Borrower irrevocably makes, constitutes and appoints Lender
      (and all officers, employees or agents designated by Lender) as such
      Borrower's true and lawful attorney (and agent-in-fact) for the purpose of
      making,


                                       21
<PAGE>

      settling and adjusting claims under such policies of insurance, endorsing
      the name of such Borrower on any check, draft, instrument or other item of
      payment for the proceeds of such policies of insurance and making all
      determinations and decisions with respect to such policies of insurance,
      provided however, that if no Event of Default shall have occurred and is
      continuing, Borrower may make, settle and adjust claims involving less
      than $25,000 in the aggregate without Lenders' consent.

                  (ii) Maintain, at its expense, such public liability and
      third-party property damage insurance as is customary for Persons engaged
      in businesses similar to that of such Borrower with such companies and in
      such amounts, with such deductibles and under policies in such form as
      shall be satisfactory to Lender and original (or certified) copies of such
      policies have been or shall be, within ninety (90) days after the date
      hereof, delivered to Lender, together with evidence of payment of all
      premiums therefor; each such policy shall contain an endorsement showing
      Lender as additional insured thereunder and providing that the insurance
      company shall give Lender at least thirty (30) days' written notice before
      any such policy shall be altered or cancelled.

If a Borrower at any time or times hereafter shall fail to obtain or maintain
any of the policies of insurance required above or to pay any premium relating
thereto, then Lender, without waiving or releasing any obligation or default by
Borrowers hereunder, may (but shall be under no obligation to) obtain and
maintain such policies of insurance and pay such premiums and take such other
actions with respect thereto as Lender deems advisable. Such insurance, if
obtained by Lender, may, but need not, protect such Borrower's interests or pay
any claim made by or against such Borrower with respect to the Collateral. Such
insurance may be more expensive than the cost of insurance such Borrower may be
able to obtain on its own and may be cancelled only upon such Borrower providing
evidence that it has obtained the insurance as required above. All sums
disbursed by Lender in connection with any such actions, including, without
limitation, court costs, expenses, other charges relating thereto and reasonable
attorneys' fees, shall constitute Loans hereunder, shall be payable on demand by
Borrowers to Lender and, until paid, shall bear interest at the highest rate
then applicable to Loans hereunder.

            (f) Collateral. Each Borrower shall keep the Collateral in good
condition, repair and order and shall make all necessary repairs to the
Equipment and replacements thereof so that the operating efficiency and the
value thereof shall at all times be preserved and maintained in all material
respects. Each Borrower shall permit Lender to examine any of the Collateral at
any time and wherever the Collateral may be located, and each Borrower shall,
immediately upon request therefor by Lender, deliver to Lender any and all
evidence of ownership of any of the Equipment, including, without limitation,
certificates of title and applications of title. Each Borrower shall, at the
request of Lender, indicate on its records concerning the Collateral a notation,
in form satisfactory to Lender, of the security interest of Lender hereunder.
If, prior to the termination of this Agreement, Borrower shall obtain rights to
any new Collateral of the type described in the last sentence of Subsection
11(b), Borrower shall notify Lender in writing (with reasonable detail) of such
changes at least once every thirty (30) days. Borrower hereby authorizes Lender
to unilaterally modify this Agreement by amending Schedule 11(b) to include any
such Collateral. Notwithstanding the foregoing, Borrower hereby agrees that
Lender's security interest shall extend to all such Collateral, regardless of
whether Lender actually amends Schedule 11(b).


                                       22
<PAGE>

            (g) Use of Proceeds. All monies and other property obtained by a
Borrower from Lender pursuant to this Agreement shall be used solely for the
refinancing of certain indebtedness of each Borrower and for business purposes
of such Borrower.

            (h) Taxes. Each Borrower shall file all required tax returns and pay
all of its taxes when due, subject to any extensions granted by the applicable
taxing authority, including, without limitation, taxes imposed by federal, state
or municipal agencies, and shall cause any Liens for taxes to be promptly
released; provided, that such Borrower shall have the right to contest the
payment of such taxes in good faith by appropriate proceedings so long as (i)
the amount so contested is shown on such Borrower's financial statements; (ii)
the contesting of any such payment does not give rise to a Lien for taxes; (iii)
such Borrower keeps on deposit with Lender (such deposit to be held without
interest) or a reserve is maintained against such Borrower's availability to
borrow money under Subsection 2(a), in either case in an amount of money which,
in the sole judgment of Lender, is sufficient to pay such taxes and any interest
or penalties that may accrue thereon; and (iv) if such Borrower fails to
prosecute such contest with reasonable diligence, Lender may apply the money so
deposited in payment of such taxes. If a Borrower fails to pay any such taxes
and in the absence of any such contest by such Borrower, Lender may (but shall
be under no obligation to) advance and pay any sums required to pay any such
taxes and/or to secure the release of any Lien therefor, and any sums so
advanced by Lender shall constitute Loans hereunder, shall be payable by such
Borrower to Lender on demand and, until paid, shall bear interest at the highest
rate then applicable to Loans hereunder.

            (i) Intellectual Property. Each Borrower shall maintain adequate
licenses, patents, patent applications, copyrights, service marks, trademarks,
trademark applications, tradestyles and trade names to continue its business as
heretofore conducted by it or as hereafter conducted by it unless the failure to
maintain any of the foregoing could not reasonably be expected to have a
Material Adverse Effect on such Borrower.

            (j) Financial Services Accounts. Each Borrower covenants and agrees,
at all times during the term of this Agreement, to utilize the Lender as its
primary bank of account and depository for all financial services, including all
receipts, disbursements, cash management and related services. In the event that
the average collected balances of each Borrower are not sufficient to cover the
costs of related activity, the account of such Borrower will be subject to the
standard charges of the Lender, which shall be debited against such account on a
monthly basis.

            (k) Key Man Insurance. The Borrowers shall at all times (i) maintain
key man life insurance on the life of Mr. Howard Schwan in a face amount equal
to at least Two Million and No/100 Dollars ($2,000,000), in form and substance,
and issued by an insurance company, acceptable to Lender in its sole discretion
(collectively, the "Key Man Insurance"), and (ii) cause the Key Man Insurance
and all proceeds thereof to be validly assigned to Lender, and subject to the
first priority perfected security interest of Lender, and subject to no other
Lien other than Permitted Liens. Borrowers shall obtain such policy and deliver
an assignment executed on behalf of the insurer and reasonably acceptable to
Lender on the Closing Date.

            (l) Keepwell Obligations. Borrowers shall deliver to Lender a
Keepwell Agreement in favor of Lender of certain principal shareholders of
Borrowers (which are


                                       23
<PAGE>

acceptable to Lender), pursuant to which such principals shall agree to, at the
option of Lender in its sole discretion, either (i) a Subordinated Debt
investment into CTI Industries, or (ii) execute and deliver to Lender an
individual guaranty of the Obligations of the Borrowers, in each case
(collectively, the "Principal Investment Amount") in an amount not less than the
following:

      (A) If the orderly liquidation value of the Equipment of the Borrowers set
forth in the Initial 2004 M & E Appraisal is less than $4,120,000, then such
Principal Investment Amount shall be an amount equal to the positive difference
between (x) $4,120,000 and (y) the amount set forth in the Initial 2002 M & E
Appraisal for the orderly liquidation value of the Equipment of Borrowers; and

      (B) If the forced liquidation value of the Equipment of Borrowers as set
forth in the Initial 2002 M & E Appraisal is less than the then outstanding
principal amount of the Term Loan, then the Principal Investment Amount shall be
an amount equal to the positive difference between (x) the amount of the forced
liquidation value of the Equipment of Borrowers as set forth in the Initial 2004
M & E Appraisal, and (y) the then outstanding principal amount of the Term Loan,
as of the date of such Initial 2004 M & E Appraisal.

      13. NEGATIVE COVENANTS. Until payment and satisfaction in full of all
Obligations and termination of this Agreement, unless Borrowers obtain Lender's
prior written consent waiving or modifying any of Borrowers' covenants hereunder
in any specific instance, each Borrower agrees as follows:

            (a) Indebtedness. No Borrower shall create, incur, assume or become
obligated (directly or indirectly), for any Indebtedness other than the Loans,
except that a Borrower may (i) incur Subordinated Debt; (ii) maintain its
present Indebtedness listed on Schedule 11(n) hereto; and (iii) incur purchase
money Indebtedness or Capital Lease Obligations in connection with Capital
Expenditures permitted pursuant to Subsection 14(c) hereof. Borrower shall not
make any payment of any part or all of any Subordinated Debt or take any other
action or omit to take any other action in respect of any Subordinated Debt,
except in accordance with the Subordination Agreement relative thereto or the
subordination provisions thereof; or amend or modify any agreement, instrument
or document evidencing or relating to any Subordinated Debt. Borrowers may make
regularly scheduled payments in respect of Subordinated Debt existing as of the
Closing Date (and not prepayments) of (i) interest only, not to exceed an
aggregate amount of $210,000 in any Fiscal Year of Borrowers, and (ii) principal
not to exceed an aggregate amount of $60,000 in any Fiscal Year of Borrowers, in
each case if and only to the extent that, after giving effect to such payment:
(x) no Default or Event of Default exists or would result from such payment, and
(y) Borrowers will have Excess Availability of not less than $150,000.

            (b) Liens. No Borrower shall grant or permit to exist (voluntarily
or involuntarily) any Lien on any of its assets, other than Permitted Liens.

            (c) Mergers, Sales, Acquisitions, Subsidiaries and Other
Transactions Outside the Ordinary Course of Business. No Borrower shall (i)
enter into any merger or consolidation; (ii) change its state of organization or
enter into any transaction which has the effect of changing its state of
organization; (iii) sell, lease or otherwise dispose of any of its


                                       24
<PAGE>

assets other than in the ordinary course of business; (iv) purchase the stock,
other equity interests or all or a material portion of the assets of any Person
or division of such Person; or (v) enter into any other transaction outside the
ordinary course of such Borrower's business, including, without limitation, any
purchase, redemption or retirement of any shares of any class of its stock or
any other equity interest, and any issuance of any shares of, or warrants or
other rights to receive or purchase any shares of, any class of its stock or any
other equity interest. No Borrower shall form any Subsidiaries or enter into any
joint ventures or partnerships with any other Person.

            (d) Dividends and Distributions. No Borrower shall declare or pay
any dividend or other distribution (whether in cash or in kind) on any class of
its stock (if such Borrower is a corporation) or on account of any equity
interest in such Borrower (if such Borrower is a partnership, limited liability
company or other type of entity).

            (e) Investments; Loans. No Borrower shall purchase or otherwise
acquire, or contract to purchase or otherwise acquire, the obligations or stock
of any Person, other than direct obligations of the United States, obligations
insured by the Federal Deposit Insurance Corporation and obligations
unconditionally guaranteed by the United States; nor shall a Borrower lend or
otherwise advance funds to any Person except for advances made to employees,
officers and directors for travel and other expenses arising in the ordinary
course of business.

            (f) Fundamental Changes, Line of Business. No Borrower shall amend
its organizational documents or change its Fiscal Year or enter into a new line
of business materially different from such Borrower's current business unless
(i) such actions would not have a Material Adverse Effect on any Borrower; (ii)
such actions would not affect the obligations of any Borrower to Lender; (iii)
such actions would not affect the interpretation of any of the terms of this
Agreement or the Other Agreements and (iv) Lender has received ten (10) days'
prior written notice of such amendment or change.

            (g) Equipment. No Borrower shall (i) permit any Equipment to become
a Fixture to real property unless such real property is owned by such Borrower
and is subject to a mortgage in favor of Lender or, if such real property is
leased, is subject to a landlord's agreement in favor of Lender on terms
acceptable to Lender or (ii) permit any Equipment to become an accession to any
other personal property unless such personal property is subject to a
first-priority Lien in favor of Lender.

            (h) Affiliate Transactions. Except as set forth on Schedule 11(i)
hereto or as permitted pursuant to Subsection 11(c) hereof, no Borrower shall
conduct, permit or suffer to be conducted, transactions with Affiliates other
than transactions for the purchase or sale of Inventory or services in the
ordinary course of business pursuant to terms that are no less favorable to such
Borrower than the terms upon which such transactions would have been made had
they been made to or with a Person that is not an Affiliate.

            (i) Settling of Accounts. Each Borrower shall not settle or adjust
any Account identified by such Borrower as an Eligible Account or with respect
to which the Account Debtor is an Affiliate without the consent of Lender,
provided, that following the


                                       25
<PAGE>

occurrence and during the continuance of an Event of Default, such Borrower
shall not settle or adjust any Account without the consent of Lender.

            (j) Management Fees; Compensation. No Borrower shall pay any
management or consulting fees to any shareholders of CTI Industries, or any
management employees of CTI Industries (except to the extent described on
Schedule 11(i) and existing as of the Closing Date), or pay annual aggregate
compensation, whether as salary, bonus or otherwise, to all directors or
officers of such Borrower in excess of one hundred ten percent (110%) of the
aggregate compensation, whether as salary, bonus or otherwise, to all directors,
and officers of such Borrower in effect on the date of this Agreement for the
first year and one hundred ten percent (110%) of the prior year's aggregate
compensation amount for each subsequent year. The aggregate annual compensation
amount(s) shall be adjusted each year for the net addition or loss of directors
or officers.

      14. FINANCIAL COVENANTS. Each Borrower shall maintain and keep (or cause
to be maintained and kept, as the case may be) in full force and effect each of
the financial covenants set forth below:

            (a) Tangible Net Worth. Borrowers' Tangible Net Worth shall not at
any time be less than the Minimum Tangible Net Worth; "Minimum Tangible Net
Worth" being defined for purposes of this Subsection as follows:

      (i) $2,200,000 for the period ending December 31, 2003;

      (ii) thereafter, from the first day of each Fiscal Year of Borrowers
through the last day of such Fiscal Year of Borrowers, and at the last day of
each fiscal quarter of Borrowers (on a year-to-date 12 month basis), the Minimum
Tangible Net Worth during the immediately preceding Fiscal Year or fiscal
quarter period, as applicable, plus eighty percent (80%) of Borrowers' net
income (but without reduction for any net loss) for such year-to-date period,
ending on the last day of the immediately preceding period as reflected on
Borrowers' most recent financial statements delivered to Lender pursuant to
Section 9 hereof; and

      (iii) For each Fiscal Year of Borrower following the Fiscal Year ended
December 31, 2003, the Minimum Tangible Net Worth amount calculated pursuant to
clause "(ii)" above shall be based upon the Tangible Net Worth of Borrowers as
of December 31 of the immediately preceding Fiscal Year;

      and "Tangible Net Worth" being defined for purposes of this Subsection as
Borrowers' shareholders' equity (including retained earnings) less the book
value of all intangible assets as determined solely by Lender on a consistent
basis plus the amount of any amount of any Subordinated Debt, all as determined
under GAAP applied on a consistent basis.


                                       26
<PAGE>

            (b) Fixed Charge Coverage. Borrowers shall not permit the ratio of
their EBITDA to Fixed Charges for each period set forth below to be less than
the ratio set forth below for the corresponding period set forth below.

                                  Period Ending                          Ratio
                                  -------------                          -----

            (i)      For the 3 months ending December 31, 2003        .95 to 1.0

            (ii)     For the 6 months ending March 31, 2004           1.0 to 1.0

            (iii)    For the 9 months ending June 30, 2004            .95 to 1.0

            (iv)     For the 12 months ending September 30, 2004      .90 to 1.0

            (v)      For the 12 months ending December 31, 2004       .90 to 1.0

            (vi)     As of the last day of the month ending each      1.0 to 1.0
                     fiscal quarter thereafter, for the four (4)
                     fiscal quarters then ending

            (c) Capital Expenditure Limitations. Borrowers shall not make any
Capital Expenditures if, after giving effect to such Capital Expenditure, the
aggregate cost of all such fixed assets purchased or otherwise acquired would
exceed Five Hundred Thousand and 00/100 Dollars ($500,000) during any Fiscal
Year.

            (d) Operating Lease Obligations. Borrower shall not incur operating
lease obligations requiring payments in excess of $100,000 in the aggregate
during any Fiscal Year of Borrower.

      15. DEFAULT. The occurrence of any one or more of the following events
shall constitute an "Event of Default" by Borrowers hereunder:

            (a) Payment. The failure of any Obligor to pay when due, declared
due or demanded by Lender any of the Obligations.

            (b) Breach of this Agreement and the Other Agreements. The failure
of any Obligor to perform, keep or observe any of the covenants, conditions,
promises, agreements or obligations of such Obligor under this Agreement or any
of the Other Agreements; provided that any such failure by any Borrower under
Subsections 12(b)(i), (iv), (v), (vi), 12(c) and 12(i) of this Agreement shall
not constitute an Event of Default hereunder until the fifteenth (15th) day
following the occurrence thereof.

            (c) Breaches of Other Obligations. The failure of any Obligor to
perform, keep or observe any of the covenants, conditions, promises, agreements
or obligations of such Obligor under any other agreement with any Person if such
failure might have a Material Adverse Effect on such Obligor, including under
any subordination agreement relative to Subordinated Debt of such Obligor, or
any agreement, instrument or document evidencing or relating to such
Subordinated Debt.


                                       27
<PAGE>

            (d) Breach of Representations and Warranties. The making or
furnishing by any Obligor to Lender of any representation, warranty,
certificate, schedule, report or other communication within or in connection
with this Agreement or the Other Agreements, or in connection with any other
agreement between such Obligor and Lender, which is untrue or misleading in any
respect.

            (e) Loss of Collateral. The loss, theft, damage or destruction of
any of the Collateral in an amount in excess of $25,000 in the aggregate for all
such events during any year of the Original Term or any Renewal Term as
determined by Lender in its sole discretion determined in good faith, or (except
as permitted hereby) the sale, lease or furnishing under a contract of service
of any of the Collateral.

            (f) Levy, Seizure or Attachment. The making or any attempt by any
Person to make any levy, seizure or attachment upon any of the Collateral.

            (g) Bankruptcy or Similar Proceedings. The commencement of any
proceedings in bankruptcy by or against any Obligor or for the liquidation or
reorganization of any Obligor, or alleging that such Obligor is insolvent or
unable to pay its debts as they mature, or for the readjustment or arrangement
of any Obligor's debts, whether under the United States Bankruptcy Code or under
any other law, whether state or federal, now or hereafter existing, for the
relief of debtors, or the commencement of any analogous statutory or
nonstatutory proceedings involving any Obligor; provided, however, that if such
commencement of proceedings against such Obligor is involuntary, such action
shall not constitute an Event of Default unless such proceedings are not
dismissed within forty-five (45) days after the commencement of such
proceedings, though Lender shall have no obligation to make Loans or issue
Letters of Credit to any Borrowers during such forty-five (45) day period or, if
earlier, until such proceedings are dismissed.

            (h) Appointment of Receiver. The appointment of a receiver or
trustee for any Obligor, for any of the Collateral or for any substantial part
of any Obligor's assets or the institution of any proceedings for the
dissolution, or the full or partial liquidation, or the merger or consolidation,
of any Obligor which is a corporation, limited liability company or a
partnership; provided, however, that if such appointment or commencement of
proceedings against such Obligor is involuntary, such action shall not
constitute an Event of Default unless such appointment is not revoked or such
proceedings are not dismissed within forty-five (45) days after the commencement
of such proceedings, though Lender shall have no obligation to make Loans or
issue Letters of Credit to Borrowers during such forty-five (45) day period or,
if earlier, until such appointment is revoked or such proceedings are dismissed.

            (i) Judgment. The entry of any judgments or orders aggregating in
excess of $25,000 against any Obligor which remain unsatisfied or undischarged
and in effect for thirty (30) days after such entry without a stay of
enforcement or execution.

            (j) Death or Dissolution of Obligor. The death of any Obligor who is
a natural Person, or of any general partner who is a natural Person of any
Obligor which is a partnership, or any member who is a natural Person of any
Obligor which is a limited liability


                                       28
<PAGE>

company or the dissolution of any Obligor which is a partnership, limited
liability company, corporation or other entity.

            (k) Default or Revocation of Guaranty; Subordination Agreement. The
occurrence of an event of default under, or the revocation or termination of,
any agreement, instrument or document executed and delivered by any Person to
Lender pursuant to which such Person has guaranteed to Lender the payment of all
or any of the Obligations or has granted Lender a Lien upon some or all of such
Person's real and/or personal property to secure the payment of all or any of
the Obligations or has subordinated indebtedness in whole or in part to the
Obligations.

            (l) Criminal Proceedings. The institution in any court of a criminal
proceeding against any Obligor which would have a Material Adverse Effect on
such Obligor, or the indictment of any Obligor for any crime other than traffic
and boating tickets and misdemeanors not punishable by jail terms.

            (m) Change of Control. The occurrence of any Change of Control.

            (n) Change of Management. Howard W. Schwan shall cease to be the
President of each Borrower at any time.

            (o) Material Adverse Change. Any material adverse change in the
Collateral, business, property, assets, prospects, operations or condition,
financial or otherwise of any Obligor, as determined by Lender in its sole
judgment or the occurrence of any event which, in Lender's sole judgment, could
have a Material Adverse Effect.

      16. REMEDIES UPON AN EVENT OF DEFAULT.

            (a) Upon the occurrence and during the continuance of an Event of
Default described in Subsection 15(g) hereof, all of the Obligations shall
immediately and automatically become due and payable, without notice of any
kind. Upon the occurrence of any other Event of Default, all Obligations may, at
the option of Lender, and without demand, notice or legal process of any kind,
be declared, and immediately shall become, due and payable.

            (b) Upon the occurrence and during the continuance of an Event of
Default, Lender may exercise from time to time any rights and remedies available
to it under the Uniform Commercial Code and any other applicable law in addition
to, and not in lieu of, any rights and remedies expressly granted in this
Agreement or in any of the Other Agreements and all of Lender's rights and
remedies shall be cumulative and non-exclusive to the extent permitted by law.
In particular, but not by way of limitation of the foregoing, Lender may,
without notice, demand or legal process of any kind, take possession of any or
all of the Collateral (in addition to Collateral of which it already has
possession), wherever it may be found and, for that purpose, may pursue the same
wherever it may be found, and may enter onto any of Borrowers' premises where
any of the Collateral may be, and search for, take possession of, remove, keep
and store any of the Collateral until the same shall be sold or otherwise
disposed of, and Lender shall have the right to store the same at any of
Borrowers' premises without cost to Lender. At Lender's request, each Borrower
shall, at Borrowers' expense, assemble the Collateral and make it available to
Lender at one or more places to be designated by Lender and reasonably
convenient


                                       29
<PAGE>

to Lender and such Borrower. Each Borrower recognizes that if a Borrower fails
to perform, observe or discharge any of its Obligations under this Agreement or
the Other Agreements, no remedy at law will provide adequate relief to Lender,
and agrees that Lender shall be entitled to temporary and permanent injunctive
relief in any such case without the necessity of proving actual damages. Any
notification of intended disposition of any of the Collateral required by law
will be deemed to be a reasonable authenticated notification of disposition if
given at least ten (10) days prior to such disposition and such notice shall (i)
describe Lender and the applicable Borrower(s), (ii) describe the Collateral
that is the subject to the intended disposition, (iii) state the method of the
intended disposition, (iv) state that the applicable Borrower(s) is entitled to
an accounting of the Obligations and state the charge, if any, for an accounting
and (v) state the time and place of any public disposition or the time after
which any private sale is to be made. Lender may disclaim any warranties that
might arise in connection with the sale, lease or other disposition of the
Collateral and has no obligation to provide any warranties at such time. Any
Proceeds of any disposition by Lender of any of the Collateral may be applied by
Lender to the payment of expenses in connection with the Collateral, including,
without limitation, legal expenses and reasonable attorneys' fees, and any
balance of such Proceeds may be applied by Lender toward the payment of such of
the Obligations, and in such order of application as Lender may from time to
time elect.

      17. CONDITIONS PRECEDENT. The obligation of Lender to fund the Term Loan,
to fund the initial Revolving Loan, and to issue or cause to be issued the
initial Letter of Credit is subject to the satisfaction or waiver, on or before
the date hereof, of the following conditions precedent:

            (a) Lender shall have received each of the agreements, opinions,
reports, approvals, consents, certificates and other documents set forth on the
closing document list pertaining to this Agreement (the "Closing Document List")
in each case in form and substance satisfactory to Lender;

            (b) Since December 31, 2002, no event shall have occurred which has
had or could reasonably be expected to have a Material Adverse Effect on any
Obligor, as determined by Lender in its sole discretion, determined in good
faith;

            (c) Lender shall have received payment in full of all fees and
expenses payable to it by Borrowers or any other Person in connection herewith,
on or before disbursement of the initial Loans hereunder;

            (d) Lender shall have determined that immediately after giving
effect to (A) the making of the initial Loans, including without limitation the
Term Loan and the Revolving Loans, if any, requested to be made on the date
hereof, (B) the issuance of the initial Letter of Credit, if any, requested to
be made on such date, (C) the payment of all fees due upon such date, and (D)
the payment or reimbursement by Borrowers of Lender for all closing costs and
expenses incurred in connection with the transactions contemplated hereby,
Borrowers have Excess Availability of not less than Seven Hundred Fifty Thousand
and no/100 Dollars ($750,000);


                                       30
<PAGE>

            (e) The Obligors shall have executed and delivered to Lender all
such other documents, instruments and agreements which Lender determines are
reasonably necessary to consummate the transactions contemplated hereby;

            (f) The indebtedness of Borrowers to Congress Financial shall have
been paid in full and Lender shall have been provided a payoff letter and all
applicable termination statements and other releases evidencing the payment in
full thereof, in form and substance acceptable to Lender;

            (g) Lender shall be satisfied with its review of each of the
following: (i) Borrowers' licensing agreements, (ii) Borrowers' buy/sell
agreements, (iii) Borrowers' vendor payout agreements and (iv) CTI Helium's
interim year-to-date financial statements;

            (h) Subordinated Agreements with respect to all Subordinated Debt
existing as of the Closing Date shall have been executed and delivered to
Lender;

            (i) Validity and Support Agreement executed by Mr. Howard Schwan and
Stephen M. Merrick, in form and substance acceptable to Lender, shall have been
delivered to Lender;

            (j) The Key Man Insurance shall be effective and Borrowers shall
have delivered an assignment in favor of Lender with respect to the Key Man
Insurance pursuant to Section 12(k); and

            (k) Keepwell Agreement of certain principal shareholders of CTI
Industries (which are acceptable to Lender) as provided in Section 12(l)
hereof.

      18. JOINT AND SEVERAL LIABILITY.

            (a) Notwithstanding anything to the contrary contained herein, all
Obligations of each Borrower hereunder shall be joint and several obligations of
Borrowers.

            (b) Notwithstanding any provisions of this Agreement to the
contrary, it is intended that the joint and several nature of the Obligations of
Borrowers, and the liens and security interests granted by Borrowers to secure
the Obligations, not constitute a "Fraudulent Conveyance" (as defined below).
Consequently, Lender and Borrowers agree that if the Obligations of a Borrower,
or any liens or security interests granted by such Borrower securing the
Obligations, would, but for the application of this sentence, constitute a
Fraudulent Conveyance, the Obligations of such Borrower and the liens and
security interests securing such Obligations shall be valid and enforceable only
to the maximum extent that would not cause such Obligations or such lien or
security interest to constitute a Fraudulent Conveyance, and the Obligations of
such Borrower and this Agreement shall automatically be deemed to have been
amended accordingly. For purposes hereof, "Fraudulent Conveyance" means a
fraudulent conveyance under Section 548 of Chapter 11 of Title II of the United
States Code (11 U.S.C. ss. 101, et seq.), as amended (the "Bankruptcy Code"), or
a fraudulent conveyance or fraudulent transfer under the applicable provisions
of any fraudulent conveyance or fraudulent transfer law or similar law of any
state, nation or other governmental unit, as in effect from time to time.


                                       31
<PAGE>

            (c) Each Borrower assumes responsibility for keeping itself informed
of the financial condition of the each other Borrower, and any and all endorsers
and/or guarantors of any instrument or document evidencing all or any part of
such other Borrower's Obligations, and of all other circumstances bearing upon
the risk of nonpayment by such other Borrowers of their Obligations and each
Borrower agrees that Lender shall not have any duty to advise such Borrower of
information known to Lender regarding such condition or any such circumstances
or to undertake any investigation not a part of its regular business routine. If
Lender, in its sole discretion, undertakes at any time or from time to time to
provide any such information to a Borrower, Lender shall not be under any
obligation to update any such information or to provide any such information to
such Borrower on any subsequent occasion.

            (d) Lender is hereby authorized, without notice or demand and
without affecting the liability of a Borrower hereunder, to, at any time and
from time to time, (i) renew, extend, accelerate or otherwise change the time
for payment of, or other terms relating to, a Borrower's Obligations or
otherwise modify, amend or change the terms of any promissory note or other
agreement, document or instrument now or hereafter executed by a Borrower and
delivered to Lender; (ii) accept partial payments on a Borrower's Obligations;
(iii) take and hold security or collateral for the payment of a Borrower's
Obligations hereunder or for the payment of any guaranties of a Borrower's
Obligations or other liabilities of a Borrower and exchange, enforce, waive and
release any such security or collateral; (iv) apply such security or collateral
and direct the order or manner of sale thereof as Lender, in its sole
discretion, may determine; and (v) settle, release, compromise, collect or
otherwise liquidate a Borrower's Obligations and any security or collateral
therefor in any manner, without affecting or impairing the obligations of the
other Borrowers. Lender shall have the exclusive right to determine the time and
manner of application of any payments or credits, whether received from a
Borrower or any other source, and such determination shall be binding on such
Borrower. All such payments and credits may be applied, reversed and reapplied,
in whole or in part, to any of a Borrower's Obligations as Lender shall
determine in its sole discretion without affecting the validity or
enforceability of the Obligations of the other Borrowers.

            (e) Each Borrower hereby agrees that, except as hereinafter
provided, its obligations hereunder shall be unconditional, irrespective of (i)
the absence of any attempt to collect a Borrower's Obligations from any Borrower
or any guarantor or other action to enforce the same; (ii) the waiver or consent
by Lender with respect to any provision of any instrument evidencing Borrowers'
Obligations, or any part thereof, or any other agreement heretofore, now or
hereafter executed by a Borrower and delivered to Lender; (iii) failure by
Lender to take any steps to perfect and maintain its security interest in, or to
preserve its rights to, any security or collateral for Borrowers' Obligations;
(iv) the institution of any proceeding under the Bankruptcy Code, or any similar
proceeding, by or against a Borrower or Lender's election in any such proceeding
of the application of Section 1111(b)(2) of the Bankruptcy Code; (v) any
borrowing or grant of a security interest by any Borrower as
debtor-in-possession under Section 364 of the Bankruptcy Code; (vi) the
disallowance, under Section 502 of the Bankruptcy Code, of all or any portion of
Lender's claim(s) for repayment of any of Borrowers' Obligations; or (vii) any
other circumstance which might otherwise constitute a legal or equitable
discharge or defense of a guarantor.


                                       32
<PAGE>

            (f) No payment made by or for the account of a Borrower, including,
without limitations, (i) a payment made by such Borrower on behalf of another
Borrower's Obligations or (ii) a payment made by any other person under any
guaranty, shall entitle such Borrower, by subrogation or otherwise, to any
payment from such other Borrower or from or out of such other Borrower's
property and such Borrower shall not exercise any right or remedy against such
other Borrower or any property of such other Borrower by reason of any
performance of such Borrower of its joint and several obligations hereunder.

      19. INDEMNIFICATION. Each Borrower agrees to defend (with counsel
satisfactory to Lender), protect, indemnify and hold harmless Lender, each
affiliate or subsidiary of Lender, and each of their respective officers,
directors, employees, attorneys and agents (each an "Indemnified Party") from
and against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, claims, costs, expenses and disbursements of any kind
or nature (including, without limitation, the disbursements and the reasonable
fees of counsel for each Indemnified Party in connection with any investigative,
administrative or judicial proceeding, whether or not the Indemnified Party
shall be designated a party thereto), which may be imposed on, incurred by, or
asserted against, any Indemnified Party (whether direct, indirect or
consequential and whether based on any federal, state or local laws or
regulations, including, without limitation, securities laws and regulations,
Environmental Laws and commercial laws and regulations, under common law or in
equity, or based on contract or otherwise) in any manner relating to or arising
out of this Agreement or any Other Agreement, or any act, event or transaction
related or attendant thereto, the making or issuance and the management of the
Loans or any Letters of Credit or the use or intended use of the proceeds of the
Loans or any Letters of Credit; provided, however, that no Borrower shall have
any obligation hereunder to any Indemnified Party with respect to matters caused
by or resulting from the willful misconduct or gross negligence of such
Indemnified Party. To the extent that the undertaking to indemnify set forth in
the preceding sentence may be unenforceable because it is violative of any law
or public policy, each Borrower shall satisfy such undertaking to the maximum
extent permitted by applicable law. Any liability, obligation, loss, damage,
penalty, cost or expense covered by this indemnity shall be paid to each
Indemnified Party on demand, and, failing prompt payment, shall, together with
interest thereon at the highest rate then applicable to Loans hereunder from the
date incurred by each Indemnified Party until paid by Borrowers, be added to the
Obligations of Borrowers and be secured by the Collateral. The provisions of
this Section 19 shall survive the satisfaction and payment of the other
Obligations and the termination of this Agreement.

      20. NOTICE. All written notices and other written communications with
respect to this Agreement shall be sent by ordinary, certified or overnight
mail, by telecopy or delivered in person, and in the case of Lender shall be
sent to it at 111 West Washington Street, Suite 400, Chicago, Illinois 60602,
attention: Mr. Jeffrey J. Podwika, facsimile number: (312) 442-5100,
jpodwika@coletaylor.com, and in the case of Borrowers shall be sent to them at
their respective principal places of business set forth on Schedule 11(b) or as
otherwise directed by Borrowers in writing. All notices shall be deemed received
upon actual receipt thereof or refusal of delivery.

      21. CHOICE OF GOVERNING LAW; CONSTRUCTION; FORUM SELECTION. This Agreement
and the Other Agreements are submitted by Borrowers to Lender for Lender's
acceptance or rejection at Lender's principal place of business as an offer by
Borrowers to borrow monies from Lender now and from time to time hereafter, and
shall not be


                                       33
<PAGE>

binding upon Lender or become effective until accepted by Lender, in writing, at
said place of business. If so accepted by Lender, this Agreement and the Other
Agreements shall be deemed to have been made at said place of business. THIS
AGREEMENT AND THE OTHER AGREEMENTS SHALL BE GOVERNED AND CONTROLLED BY THE
INTERNAL LAWS OF THE STATE OF ILLINOIS AS TO INTERPRETATION, ENFORCEMENT,
VALIDITY, CONSTRUCTION, EFFECT, AND IN ALL OTHER RESPECTS, INCLUDING, WITHOUT
LIMITATION, THE LEGALITY OF THE INTEREST RATE AND OTHER CHARGES, BUT EXCLUDING
PERFECTION OF THE SECURITY INTERESTS IN COLLATERAL LOCATED OUTSIDE OF THE STATE
OF ILLINOIS, WHICH SHALL BE GOVERNED AND CONTROLLED BY THE LAWS OF THE RELEVANT
JURISDICTION IN WHICH SUCH COLLATERAL IS LOCATED. If any provision of this
Agreement shall be held to be prohibited by or invalid under applicable law,
such provision shall be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of such provision or remaining
provisions of this Agreement.

      To induce Lender to accept this Agreement, each Borrower irrevocably
agrees that, subject to Lender's sole and absolute election, ALL ACTIONS OR
PROCEEDINGS IN ANY WAY, MANNER OR RESPECT, ARISING OUT OF OR FROM OR RELATED TO
THIS AGREEMENT, THE OTHER AGREEMENTS OR THE COLLATERAL SHALL BE LITIGATED IN
COURTS HAVING SITUS WITHIN THE CITY OF CHICAGO, STATE OF ILLINOIS. EACH BORROWER
HEREBY CONSENTS AND SUBMITS TO THE JURISDICTION OF ANY LOCAL, STATE OR FEDERAL
COURTS LOCATED WITHIN SAID CITY AND STATE. EACH BORROWER HEREBY WAIVES PERSONAL
SERVICE OF ANY AND ALL PROCESS AND AGREES THAT ALL SUCH SERVICE OF PROCESS MAY
BE MADE UPON SUCH BORROWER BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT
REQUESTED, ADDRESSED TO SUCH BORROWER AT THE ADDRESS SET FORTH FOR NOTICE IN
THIS AGREEMENT AND SERVICE SO MADE SHALL BE COMPLETE TEN (10) DAYS AFTER THE
SAME HAS BEEN POSTED. LENDER AGREES TO ENDEAVOR TO PROVIDE A COPY OF SUCH
PROCESS TO THE LAW FIRM OF MERRICK & KLIMEK, P.C. BY MAIL AT THE ADDRESS OF 33
N. LASALLE STREET, SUITE 2200, CHICAGO, ILLINOIS 60602 OR BY FACSIMILE
TRANSMISSION AT FACSIMILE NUMBER (312) 284-1521. FAILURE OF LENDER TO PROVIDE A
COPY OF SUCH PROCESS SHALL NOT IMPAIR LENDER'S RIGHTS HEREUNDER, CREATE A CAUSE
OF ACTION AGAINST LENDER OR CREATE ANY CLAIM OR RIGHT ON BEHALF OF ANY BORROWER
OR ANY THIRD PARTY. EACH BORROWER HEREBY WAIVES ANY RIGHT IT MAY HAVE TO
TRANSFER OR CHANGE THE VENUE OF ANY LITIGATION BROUGHT AGAINST SUCH BORROWER BY
LENDER IN ACCORDANCE WITH THIS SECTION.

      22. MODIFICATION AND BENEFIT OF AGREEMENT. This Agreement and the Other
Agreements may not be modified, altered or amended except by an agreement in
writing signed by each Borrower or such other Person who is a party to such
Other Agreement and Lender. No Borrower may sell, assign or transfer this
Agreement, or the Other Agreements or any portion thereof, including, without
limitation, such Borrower's rights, titles, interest, remedies, powers or duties
hereunder and thereunder. Each Borrower hereby consents to Lender's sale,
assignment, transfer or other disposition, at any time and from time to time


                                       34
<PAGE>

hereafter, of this Agreement, or the Other Agreements, or of any portion
thereof, or participations therein, including, without limitation, Lender's
rights, titles, interest, remedies, powers and/or duties and agrees that it
shall execute and deliver such documents as Lender may request in connection
with any such sale, assignment, transfer or other disposition.

      23. HEADINGS OF SUBDIVISIONS. The headings of subdivisions in this
Agreement are for convenience of reference only, and shall not govern the
interpretation of any of the provisions of this Agreement.

      24. POWER OF ATTORNEY. Each Borrower acknowledges and agrees that its
appointment of Lender as its attorney and agent-in-fact for the purposes
specified in this Agreement is an appointment coupled with an interest and shall
be irrevocable until all of the Obligations are satisfied and paid in full and
this Agreement is terminated.

      25. CONFIDENTIALITY. Lender hereby agrees to use commercially reasonable
efforts to assure that any and all information relating to such Borrower which
is (i) furnished by such Borrower to Lender (or to any affiliate of Lender); and
(ii) non-public, confidential or proprietary in nature shall be kept
confidential by Lender or such affiliate in accordance with applicable law;
provided, however, that such information and other credit information relating
to such Borrower may be distributed by Lender or such affiliate to Lender's or
such affiliate's directors, officers, employees, attorneys, affiliates,
assignees, participants, auditors, agents and regulators, and upon the order of
a court or other governmental agency having jurisdiction over Lender or such
affiliate, to any other party. Each Borrower and Lender further agree that this
provision shall survive the termination of this Agreement. Notwithstanding the
foregoing, each Borrower hereby consents to Lender publishing a tombstone or
similar advertising material relating to the financing transaction contemplated
by this Agreement.

      26. COUNTERPARTS. This Agreement, any of the Other Agreements and any
amendments, waivers, consents or supplements may be executed in any number of
counterparts and by different parties hereto in separate counterparts, each of
which, when so executed and delivered, shall be deemed an original, but all of
which counterparts together shall constitute but one agreement.

      27. ELECTRONIC SUBMISSIONS. Upon not less than thirty (30) days' prior
written notice (the "Approved Electronic Form Notice"), Lender may permit or
require that any of the documents, certificates, forms, deliveries or other
communications, authorized, required or contemplated by this Agreement or the
Other Agreements, be submitted to Lender in "Approved Electronic Form" (as
hereafter defined), subject to any reasonable terms, conditions and requirements
in the applicable Approved Electronic Forms Notice. For purposes hereof
"Electronic Form" means e-mail, e-mail attachments, data submitted on web-based
forms or any other communication method that delivers machine readable data or
information to Lender and "Approved Electronic Form" means an Electronic Form
that has been approved in writing by Lender (which approval has not been revoked
or modified by Lender) and sent to Borrowers in an Approved Electronic Form
Notice. Except as otherwise specifically provided in the applicable Approved
Electronic Form Notice, any submissions made in an applicable Approved
Electronic Form shall have the same force and effect that the same submissions
would have had


                                       35
<PAGE>

if they had been submitted in any other applicable form authorized, required or
contemplated by this Agreement or the Other Agreements.

      28. WAIVER OF JURY TRIAL; OTHER WAIVERS.

            (a) EACH BORROWER AND LENDER EACH HEREBY WAIVES ALL RIGHTS TO TRIAL
BY JURY IN ANY ACTION OR PROCEEDING WHICH PERTAINS DIRECTLY OR INDIRECTLY TO
THIS AGREEMENT, ANY OF THE OTHER AGREEMENTS, THE OBLIGATIONS, THE COLLATERAL,
ANY ALLEGED TORTUOUS CONDUCT BY A BORROWER OR LENDER OR WHICH, IN ANY WAY,
DIRECTLY OR INDIRECTLY, ARISES OUT OF OR RELATES TO THE RELATIONSHIP BETWEEN A
BORROWER AND LENDER. IN NO EVENT SHALL LENDER BE LIABLE FOR LOST PROFITS OR
OTHER SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES.

            (b) Each Borrower hereby waives demand, presentment, protest and
notice of nonpayment, and further waives the benefit of all valuation, appraisal
and exemption laws.

            (c) Each Borrower hereby waives the benefit of any law that would
otherwise restrict or limit Lender or any affiliate of Lender in the exercise of
its right, which is hereby acknowledged and agreed to, to set-off against the
Obligations, without notice at any time hereafter, any indebtedness, matured or
unmatured, owing by Lender or such affiliate of Lender to such Borrower,
including, without limitation any deposit account at Lender or such affiliate.

            (d) EACH BORROWER HEREBY WAIVES ALL RIGHTS TO NOTICE AND HEARING OF
ANY KIND PRIOR TO THE EXERCISE BY LENDER OF ITS RIGHTS TO REPOSSESS THE
COLLATERAL OF SUCH BORROWER WITHOUT JUDICIAL PROCESS OR TO REPLEVY, ATTACH OR
LEVY UPON SUCH COLLATERAL, PROVIDED THAT IN THE EVENT THAT LENDER SEEKS TO
ENFORCE ITS RIGHTS HEREUNDER BY JUDICIAL PROCESS OR SELF HELP, LENDER SHALL
PROVIDE BORROWER WITH SUCH NOTICES AS ARE REQUIRED BY LAW.

            (e) Lender's failure, at any time or times hereafter, to require
strict performance by a Borrower of any provision of this Agreement or any of
the Other Agreements shall not waive, affect or diminish any right of Lender
thereafter to demand strict compliance and performance therewith. Any suspension
or waiver by Lender of an Event of Default under this Agreement or any default
under any of the Other Agreements shall not suspend, waive or affect any other
Event of Default under this Agreement or any other default under any of the
Other Agreements, whether the same is prior or subsequent thereto and whether of
the same or of a different kind or character. No delay on the part of Lender in
the exercise of any right or remedy under this Agreement or any Other Agreement
shall preclude other or further exercise thereof or the exercise of any right or
remedy. None of the undertakings, agreements, warranties, covenants and
representations of Borrowers contained in this Agreement or any of the Other
Agreements and no Event of Default under this Agreement or default under any of
the Other Agreements shall be deemed to have been suspended or waived by Lender
unless such


                                       36
<PAGE>

suspension or waiver is in writing, signed by a duly authorized officer of
Lender and directed to Borrowers specifying such suspension or waiver.

                             SIGNATURE PAGES FOLLOW


                                       37
<PAGE>

                  Signature Page to Loan and Security Agreement

      IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the date first written above.


                                             CTI INDUSTRIES CORPORATION

                                             By /s/ Howard W. Schwan
                                                -----------------------
                                                Howard W. Schwan
                                                President


                                             CTI HELIUM, INC.

                                             By /s/ Howard W. Schwan
                                                -----------------------
                                                Howard W. Schwan
                                                President

<PAGE>

                  Signature Page to Loan and Security Agreement

                                        COLE TAYLOR BANK

                                        By /s/ Jeffrey J. Podwika
                                           -------------------------
                                           Vice President

<PAGE>

                            ANNEX I - DEFINED TERMS

      "Affiliate" shall mean any Person (i) which, directly or indirectly
through one or more intermediaries, controls, is controlled by, or is under
common control with, a Borrower, (ii) which beneficially owns or holds five
percent (5%) or more of the voting control or equity interests of a Borrower, or
(iii) five percent (5%) or more of the voting control or equity interests of
which is beneficially owned or held by a Borrower.

      "Business Day" shall mean any day other than a Saturday, a Sunday or any
day that banks in Chicago, Illinois are required or permitted to close.

      "Capital Expenditures" shall mean with respect to any period, the
aggregate of all expenditures (whether paid in cash or accrued as liabilities
and including expenditures for Capital Lease Obligations) by Borrowers during
such period that are required by GAAP, consistently applied, to be included in
or reflected by the property, plant and equipment or similar fixed asset
accounts (or intangible accounts subject to amortization) on the balance sheet
of Borrowers.

      "Capital Lease" shall mean, as to any Person, a lease of any interest in
any kind of property or asset, whether real, personal or mixed, or tangible or
intangible, by such Person as lessee that is, or should be, recorded as a
"capital lease" on the balance sheet of such Person prepared in accordance with
GAAP.

      "Capital Lease Obligations" shall mean, as to any Person, indebtedness
represented by obligations under a Capital Lease that is required to be
capitalized for financial reporting purposes in accordance with GAAP.

      "Change of Control" shall mean any merger or consolidation of or with any
Borrower or sale of all or substantially all of the property or assets of any
Borrower. For purposes of this definition, "control of Borrower" shall mean the
power, direct or indirect (x) to vote 50% or more of the securities having
ordinary voting power for the election of directors of any Borrower or (y) to
direct or cause the direction of the management and policies of any Borrower by
contract or otherwise.

      "Closing Date" shall mean December 31, 2003.

      "Collateral" shall mean all of the property of each Borrower described in
Section 5 hereof, together with all other real or personal property of any
Obligor or any other Person now or hereafter pledged to Lender to secure, either
directly or indirectly, repayment of any of the Obligations.

      "Compliance Certificate" shall have the meaning set forth in Section 9(c)
hereof.

      "Contingent Liability" shall mean any agreement, undertaking or
arrangement by which any Person guarantees, endorses or otherwise becomes or is
contingently liable upon (by direct or indirect agreement, contingent or
otherwise, to provide funds for payment, to supply funds to or otherwise to
invest in a debtor, or otherwise to assure a creditor against loss) any
indebtedness, obligation or other liability of any other Person (other than by
endorsements of


                                       1
<PAGE>

instruments in the course of collection), or guarantees the payment of dividends
or other distributions upon the shares of any other Person. The amount of any
Contingent Liability shall (subject to any limitation set forth herein) be
deemed to be the outstanding principal amount (or maximum permitted principal
amount, if larger) of the indebtedness, obligation or other liability guaranteed
or supported thereby.

      "Derivative Obligations" shall mean every obligation of a Person under any
forward contract, futures contract, exchange contract, swap, option or other
financing agreement or arrangement (including, without limitation, caps, floors,
collars and similar agreement), the value of which is dependent upon interest
rates, currency exchange rates, commodities or other indices.

      "Dilution" shall mean, with respect to any period, the percentage obtained
by dividing (i) the sum of non-cash credits against Accounts (including, but not
limited to returns, adjustments and rebates) of Borrowers for such period, plus
pending or probable, but not yet applied, non-cash credits against Accounts of
Borrowers for such period, as determined by Lender in its sole discretion, by
(ii) gross invoiced sales of Borrowers for such period.

      "EBITDA" shall mean, with respect to any period, Borrowers' net income
after taxes for such period (excluding any after-tax gains on the sale of assets
(other than the sale of Inventory in the ordinary course of business) and
excluding other after-tax extraordinary gains) plus interest expense, income tax
expense, depreciation and amortization for such period, plus or minus any other
non-cash charges or gains which have been subtracted or added in calculating net
income after taxes for such period.

      "Eligible Account" shall mean an Account owing to a Borrower which is
acceptable to Lender in its sole discretion for lending purposes. Without
limiting Lender's discretion, Lender shall, in general, consider an Account to
be an Eligible Account if it meets, and so long as it continues to meet, the
following requirements:

                  (i) it is genuine and in all respects what it purports to be;

                  (ii) it is owned by such Borrower, such Borrower has the right
      to subject it to a security interest in favor of Lender or assign it to
      Lender and it is subject to a first priority perfected security interest
      in favor of Lender and to no other Lien whatsoever, other than Permitted
      Liens;

                  (iii) it arises from (A) the performance of services by such
      Borrower in the ordinary course of such Borrower's business, and such
      services have been fully performed and acknowledged and accepted by the
      Account Debtor thereunder; or (B) the sale or lease of Goods by such
      Borrower in the ordinary course of such Borrower's business, and (x) such
      Goods have been completed in accordance with the Account Debtor's
      specifications (if any) and delivered to the Account Debtor, (y) such
      Account Debtor has not refused to accept, returned or offered to return
      any of the Goods which are the subject of such Account, and (z) such
      Borrower has possession of, or such Borrower has delivered to Lender (at
      Lender's request), shipping and delivery receipts evidencing delivery of
      such Goods;


                                       2
<PAGE>

                  (iv) it is evidenced by an invoice rendered to the Account
      Debtor thereunder, is due and payable within ninety (90) days after the
      date of the invoice and does not remain unpaid ninety (90) days past the
      invoice date thereof; provided, however, that if more than twenty-five
      percent (25%) of the aggregate dollar amount of invoices owing by a
      particular Account Debtor remain unpaid ninety (90) days after the
      respective invoice dates thereof, then all Accounts owing by that Account
      Debtor shall be deemed ineligible;

                  (v) it is a valid, legally enforceable and unconditional
      obligation of the Account Debtor thereunder, and is not subject to setoff,
      counterclaim, credit, allowance or adjustment by such Account Debtor, or
      to any claim by such Account Debtor denying liability thereunder in whole
      or in part;

                  (vi) it does not arise out of a contract or order which fails
      in any material respect to comply with the requirements of applicable law;

                  (vii) the Account Debtor thereunder is not a director,
      officer, employee or agent of a Borrower, or a Subsidiary, Parent or
      Affiliate;

                  (viii) it is not an Account with respect to which the Account
      Debtor is the United States of America or any state or local government,
      or any department, agency or instrumentality thereof, unless such Borrower
      assigns its right to payment of such Account to Lender pursuant to, and in
      full compliance with, the Assignment of Claims Act of 1940, as amended, or
      any comparable state or local law, as applicable;

                  (ix) it is not an Account with respect to which the Account
      Debtor is located in a state which requires such Borrower, as a
      precondition to commencing or maintaining an action in the courts of that
      state, either to (A) receive a certificate of authority to do business and
      be in good standing in such state; or (B) file a notice of business
      activities report or similar report with such state's taxing authority,
      unless (x) such Borrower has taken one of the actions described in clauses
      (A) or (B); (y) the failure to take one of the actions described in either
      clause (A) or (B) may be cured retroactively by such Borrower at its
      election; or (z) such Borrower has proven, to Lender's satisfaction, that
      it is exempt from any such requirements under any such state's laws;

                  (x) the Account Debtor is located within the United States of
      America;

                  (xi) it is not an Account with respect to which the Account
      Debtor's obligation to pay is subject to any repurchase obligation or
      return right, as with sales made on a bill-and-hold, guaranteed sale, sale
      on approval, sale or return or consignment basis;

                  (xii) it is not an Account (A) with respect to which any
      representation or warranty contained in this Agreement is untrue; or (B)
      which violates any of the covenants of such Borrower contained in this
      Agreement;


                                       3
<PAGE>

                  (xiii) it is not an Account which, when added to a particular
      Account Debtor's other indebtedness to such Borrower, exceeds twenty
      percent (20%) of all Accounts of such Borrower or a credit limit
      determined by Lender in its sole discretion determined in good faith for
      that Account Debtor (except that Accounts excluded from Eligible Accounts
      solely by reason of this clause (xiii) shall be Eligible Accounts to the
      extent of such credit limit), provided that Lender shall give such
      Borrower written notice of any such credit limit; and

                  (xiv) it is not an Account with respect to which the prospect
      of payment or performance by the Account Debtor is or will be impaired, as
      determined by Lender in its sole discretion determined in good faith.

      "Eligible Inventory" shall mean Inventory and work-in-process Inventory of
a Borrower, each to the extent acceptable to Lender in its sole discretion
determined in good faith for lending purposes. Without limiting Lender's
discretion, Lender shall, in general, consider Inventory to be Eligible
Inventory if it meets, and so long as it continues to meet, the following
requirements:

                  (i) it is owned by such Borrower, such Borrower has the right
      to subject it to a security interest in favor of Lender and it is subject
      to a first priority perfected security interest in favor of Lender and to
      no other Lien whatsoever, other than Permitted Liens;

                  (ii) it is located on one of the premises listed on Schedule
      11(b) (or other locations of which Lender has been advised in writing
      pursuant to Subsection 12(b)(i) hereof) and is not in transit;

                  (iii) if held for sale or lease or furnishing under contracts
      of service, it is (except as Lender may otherwise consent in writing) new
      and unused and free from defects which would, in Lender's sole
      determination, determined in good faith, affect its market value;

                  (iv) it is not stored with a bailee, consignee, warehouseman,
      processor or similar party unless Lender has given its prior written
      approval and such Borrower has caused any such bailee, consignee,
      warehouseman, processor or similar party to issue and deliver to Lender,
      in form and substance acceptable to Lender, such Uniform Commercial Code
      financing statements, warehouse receipts, waivers, collateral access
      agreements and other documents as Lender shall require (such Inventory
      being referred to herein as "Third-Party Inventory");

                  (v) Lender has determined, in good faith, in accordance with
      Lender's customary business practices, that it is not unacceptable due to
      age, type, category or quantity; and

                  (vi) it is not Inventory (A) with respect to which any of the
      representations and warranties contained in this Agreement are untrue; or
      (B) which violates any of the covenants of such Borrower contained in this
      Agreement.


                                       4
<PAGE>

      "Environmental Laws" shall mean all federal, state, district, local and
foreign laws, rules, regulations, ordinances, and consent decrees relating to
health, safety, hazardous substances, pollution and environmental matters, as
now or at any time hereafter in effect, applicable to a Borrower's business or
facilities owned or operated by a Borrower, including laws relating to
emissions, discharges, releases or threatened releases of pollutants,
contamination, chemicals, or hazardous, toxic or dangerous substances, materials
or wastes into the environment (including, without limitation, ambient air,
surface water, ground water, land surface or subsurface strata) or otherwise
relating to the generation, manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of Hazardous Materials.

      "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended, modified or restated from time to time.

      "Event of Default" shall have the meaning specified in Section 15 hereof.

      "Excess Availability" shall mean, as of any date of determination by
Lender, the excess, if any, of the lesser of (i) the Maximum Revolving Loan
Limit less the sum of the outstanding Revolving Loans and Letter of Credit
Obligations and (ii) the Revolving Borrowing Base Amount less the sum of the
outstanding Revolving Loans and Letter of Credit Obligations, in each case as of
the close of business on such date and assuming, for purposes of calculation,
that all accounts payable which remain unpaid more than sixty (60) days after
the due dates thereof as the close of business on such date are treated as
additional Revolving Loans outstanding on such date.

      "Excess Cash Flow" shall have the meaning set forth in Section
2(c)(iii)(B) hereof.

      "Fiscal Year" shall mean each twelve (12) month accounting period of
Borrowers, which ends on December 31 of each year.

      "Fixed Charges" shall mean for any period, without duplication, scheduled
payments of principal during the applicable period with respect to all
Indebtedness of Borrowers and their Subsidiaries, on a consolidated basis, for
borrowed money, plus scheduled payments of principal during the applicable
period with respect to all Capital Lease Obligations of Borrowers and their
Subsidiaries, on a consolidated basis, plus scheduled payments of interest
during the applicable period with respect to all Indebtedness of Borrowers and
their Subsidiaries, on a consolidated basis, for borrowed money including
Capital Lease Obligations, plus unfinanced Capital Expenditures of Borrowers and
their Subsidiaries, on a consolidated basis, during the applicable period, plus
payments during the applicable period in respect of income or franchise taxes of
Borrowers and their Subsidiaries, on a consolidated basis, plus any cash
dividends or payments of Subordinated Debt permitted by Lender paid by Borrowers
during such period.

      "GAAP" shall mean generally accepted accounting principles, using the
accrual basis of accounting and consistently applied with prior periods;
provided, however, that GAAP with respect to any interim financial statements or
reports shall be deemed subject to fiscal year-end adjustments and footnotes
made in accordance with GAAP.


                                       5
<PAGE>

      "Hazardous Materials" shall mean any hazardous, toxic or dangerous
substance, materials and wastes, including, without limitation, hydrocarbons
(including naturally occurring or man-made petroleum and hydrocarbons),
flammable explosives, asbestos, urea formaldehyde insulation, radioactive
materials, biological substances, polychlorinated biphenyls, pesticides,
herbicides and any other kind and/or type of pollutants or contaminants
(including, without limitation, materials which include hazardous constituents),
sewage, sludge, industrial slag, solvents and/or any other similar substances,
materials, or wastes and including any other substances, materials or wastes
that are, or become, regulated under any Environmental Law (including, without
limitation, any that are, or become, classified as hazardous or toxic under any
Environmental Law).

      "Indebtedness" of any Person shall mean, without duplication, (a) all
indebtedness of such Person for borrowed money, whether or not evidenced by
bonds, debentures, notes or similar instruments, (b) all Capital Lease
Obligations of such Person, (c) all obligations of such Person to pay the
deferred purchase price of property or services (excluding trade accounts
payable in the ordinary course of business), (d) all indebtedness secured by a
Lien on the property of such Person, whether or not such indebtedness shall have
been assumed by such Person, (e) all obligations, contingent or otherwise, with
respect to the face amount of all letters of credit (whether or not drawn) and
banker's acceptances issued for the account of such Person, (f) all Derivative
Obligations of such Person, (g) all Contingent Obligations, and (h) all
liabilities of any partnership or joint venture of which such Person is a
general partner or joint venturer.

      "Indemnified Party" shall have the meaning specified in Section 19 hereof.

      "Initial 2004 M & E Appraisal" shall have the meaning set forth in Section
9(g) hereof.

      "Intellectual Property" shall mean all past, present and future: trade
secrets (including, without limitation, customer lists), know-how and other
proprietary information; trademarks, Internet domain names, service marks, trade
dress, trade names, business names, designs, logos, slogans (and all
translations, adaptations, derivations and combinations of the foregoing),
indicia and other source and/or business identifiers, and the goodwill of the
business relating thereto and all registrations or applications for
registrations which have heretofore been or may hereafter be issued thereon
throughout the world; copyrights (including copyrights for computer programs)
and copyright registrations or applications for registrations which have
heretofore been or may hereafter be issued throughout the world and all tangible
property embodying the copyrights; unpatented inventions (whether or not
patentable); patent applications and patents; industrial designs, industrial
design applications and registered industrial designs; license agreements
related to any of the foregoing and income therefrom; books, records, writings,
computer tapes or disks, flow diagrams, specification sheets, computer software,
source codes, object codes, executable code, data, databases and other physical
manifestations, embodiments or incorporations of any of the foregoing; the right
to sue for all past, present and future infringements of any of the foregoing;
all other intellectual property; and all common law and other rights throughout
the world in and to all of the foregoing.

      "Key-Man Insurance" shall have the meaning set forth in Section 17(j)
hereto.


                                       6
<PAGE>

      "Letter of Credit" shall mean any Letter of Credit issued on behalf of a
Borrower in accordance with this Agreement.

      "Letter of Credit Obligations" shall mean, as of any date of
determination, the sum of (i) the aggregate undrawn face amount of all Letters
of Credit, and (ii) the aggregate unreimbursed amount of all drawn Letters of
Credit not already converted to Loans hereunder.

      "Lien" shall mean any mortgage, pledge, claim, hypothecation, judgment
lien or similar legal process, title retention lien, or other lien or security
interest, including, without limitation, the interest of a vendor under any
conditional sale or other title retention agreement and the interest of a lessor
under a lease of any interest in any kind of property or asset, whether real,
personal or mixed, or tangible or intangible, that is, or should be, accounted
for as a Capital Lease.

      "Loan Documents" shall mean this Agreement and the Other Agreements.

      "Loans" shall mean all loans and advances made by Lender to or on behalf
of Borrowers hereunder.

      "Lock Box" and "Lock Box Account" shall have the meanings specified in
Subsection 8(a) hereof.

      "Material Adverse Effect" shall mean a material adverse effect on the
business, property, assets, prospects, operations or condition, financial or
otherwise, of a Person.

      "Maximum Loan Limit" shall mean Eleven Million and No/100 Dollars
($11,000,000).

      "Maximum Revolving Loan Limit" shall have the meaning specified in
Subsection 2(a) hereof.

      "Net Orderly Liquidation Value" shall mean the aggregate net realizable
value of Borrowers' Inventory, by category, recoverable in an orderly
liquidation thereof (net of all liquidation expenses), as determined by a
certified appraiser satisfactory to Lender.

      "Obligations" shall mean any and all obligations, liabilities and
indebtedness of Borrowers to Lender, or to any parent, affiliate or subsidiary
of Lender, of any and every kind and nature, howsoever created, arising or
evidenced and howsoever owned, held or acquired, whether now or hereafter
existing, whether now due or to become due, whether primary, secondary, direct,
indirect, absolute, contingent or otherwise (including, without limitation,
obligations of performance), whether several, joint or joint and several, and
whether arising or existing under written or oral agreement or by operation of
law.

      "Obligor" shall mean Borrowers and each other Person who is or shall
become primarily or secondarily liable for any of the Obligations.

      "Original Term" shall have the meaning specified in Section 10 hereof.


                                       7
<PAGE>

      "Other Agreements" shall mean all agreements, instruments and documents,
other than this Agreement, including, without limitation, guaranties, mortgages,
trust deeds, pledges, powers of attorney, consents, assignments, contracts,
notices, security agreements, leases, financing statements, subordination
agreements, and all other writings heretofore, now or from time to time
hereafter executed by or on behalf of a Borrower or any other Person and
delivered to Lender or to any parent, affiliate or subsidiary of Lender in
connection with the Obligations or the transactions contemplated hereby, as each
of the same may be amended, modified or supplemented from time to time.

      "Parent" shall mean any Person now or at any time or times hereafter
owning or controlling (alone or with any other Person) at least a majority of
the issued and outstanding equity of a Borrower and, if a Borrower is a
partnership, the general partner of such Borrower.

      "PBGC" shall have the meaning specified in Subsection 12(b)(v) hereof.

      "Permitted Liens" shall mean (i) statutory Liens of landlords, carriers,
warehousemen, processors, mechanics, materialmen or suppliers incurred in the
ordinary course of business and securing amounts not yet due or declared to be
due by the claimant thereunder or amounts which are being contested in good
faith and by appropriate proceedings and for which Borrower has maintained
adequate reserves; (ii) Liens in favor of Lender; (iii) zoning restrictions and
easements, licenses, covenants and other restrictions affecting the use of real
property that do not individually or in the aggregate have a material adverse
effect on a Borrower's ability to use such real property for its intended
purpose in connection with such Borrower's business; (iv) Liens in connection
with purchase money indebtedness and Capital Leases otherwise permitted pursuant
to this Agreement, provided, that such liens attach only to the assets the
purchase of which was financed by such purchase money indebtedness or which is
the subject of such Capital Leases; (v) Liens set forth on Schedule 1; (vi)
Liens specifically permitted by Lender in writing; and (vii) involuntary Liens
securing amounts less than $100,000 and which are released or for which a bond
acceptable to Lender in its sole discretion, determined in good faith, has been
posted within ten (10) days of its creation.

      "Person" shall mean any individual, sole proprietorship, partnership,
joint venture, trust, unincorporated organization, association, corporation,
limited liability company, institution, entity, party or foreign or United
States government (whether federal, state, county, city, municipal or
otherwise), including, without limitation, any instrumentality, division,
agency, body or department thereof.

      "Plan" shall have the meaning specified in Subsection 12(b)(v) hereof.

      "Prime Rate" shall mean Lender's publicly announced prime rate (which is
not intended to be Lender's lowest or most favorable rate in effect at any time)
in effect from time to time.

      "Principal Investment Amount" shall have the meaning set forth in Section
12(l) hereof.

      "Renewal Term" shall have the meaning specified in Section 10 hereof.


                                       8
<PAGE>

      "Revolving Borrowing Base Amount" shall have the meaning specified in
Subsection 2(a) hereof.

      "Revolving Loans" shall have the meaning specified in Subsection 2(a)
hereof.

      "Subordination Agreements" shall mean, individually and collectively, all
subordination agreements, intercreditor agreements, consent and similar
agreements among either Borrower, Lender and any holder of Indebtedness, whether
entered into on or prior to the date hereof or from time to time hereafter,
together with all modifications, amendments and restatements of any of the
foregoing.

      "Subordinated Debt" shall mean Indebtedness of any Borrower or any
Subsidiary of any Borrower that is subordinated to the Obligations in a manner
satisfactory to Agent, and contains terms, including, without limitation,
payment terms, satisfactory to Agent.

      "Subsidiary" shall mean any corporation of which more than fifty percent
(50%) of the outstanding capital stock having ordinary voting power to elect a
majority of the board of directors of such corporation (irrespective of whether,
at the time, stock of any other class of such corporation shall have or might
have voting power by reason of the happening of any contingency) is at the time,
directly or indirectly, owned by a Borrower, or any partnership, joint venture
or limited liability company of which more than fifty percent (50%) of the
outstanding equity interests are at the time, directly or indirectly, owned by a
Borrower or any partnership of which a Borrower is a general partner.

      "Tangible Net Worth" shall have the meaning specified in Subsection 14(a)
hereof.

      "Term Loan" shall have the meaning specified in Subsection 2(b) hereof.

      "Third Party Inventory" shall have the meaning set forth in the definition
"Eligible Inventory".

      "UCC" shall mean the Uniform Commercial Code as in effect from time to
time in the State of Illinois.


                                       9

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.16
<SEQUENCE>4
<FILENAME>d59202_ex10-16.txt
<DESCRIPTION>TERM NOTE
<TEXT>

                                  EXHIBIT 10.16

                                    TERM NOTE

$3,500,000                                                     Chicago, Illinois
                                                               December 31, 2003

      FOR VALUE RECEIVED, the undersigned, CTI INDUSTRIES CORPORATION, an
Illinois corporation, and CTI HELIUM, INC., an Illinois corporation
(collectively, the "Borrowers" and, individually, each a "Borrower"), jointly
and severally, each promise to pay to the order of COLE TAYLOR BANK
(hereinafter, together with any holder hereof, called "Lender"), at the
principal office of the Lender, the principal sum of THREE MILLION FIVE HUNDRED
THOUSAND DOLLARS ($3,500,000). Each Borrower, jointly and severally, further
promise to pay interest on the outstanding principal amount hereof on the dates
and at the rates provided in the Loan Agreement (as hereinafter defined) from
the date hereof until payment in full hereof.

      This Note was delivered pursuant to that certain Loan and Security
Agreement dated as of the date hereof, as it may be amended from time to time,
together with all exhibits thereto, between Lender and the Borrowers (the "Loan
Agreement"). All terms which are capitalized and used herein (which are not
otherwise defined herein) shall have the meaning ascribed to such term in the
Loan Agreement. This Note is secured by the personal property described in and
pursuant to the Loan Agreement and various Loan Documents referred to therein,
and reference is made thereto for a statement of terms and provisions of such
Collateral security, a description of Collateral and the rights of Lender in
respect thereof.

      Principal hereunder shall be payable pursuant to the terms of the Loan
Agreement. Upon the occurrence of an Event of Default, the unpaid balance of the
principal amount of this Note, together with all accrued and unpaid interest
thereon, may become, or may be declared to be, due and payable in the manner,
upon the conditions and with the effect provided in the Loan Agreement.

      Each Borrower hereby authorizes the Lender to charge any account of such
Borrower for all sums due hereunder. If payment hereunder becomes due and
payable on a day that is not a Business Day, the due date thereof shall be
extended to the next succeeding Business Day, and interest shall be payable
thereon at the rate specified during such extension. Credit shall be given for
payments made in the manner and at the times provided in the Loan Agreement. It
is the intent of the parties that the rate of interest and other charges to the
Borrowers under this Note shall be lawful; therefore, if for any reason the
interest or other charges payable hereunder are found by a court of competent
jurisdiction, in a final determination, to exceed the limit which Lender may
lawfully charge the Borrowers, then the obligation to pay interest or other
charges shall automatically be reduced to such limit and, if any amount in
excess of such limit shall have been paid, then such amount shall be refunded to
the Borrowers.

<PAGE>

      The principal and all accrued interest hereunder may be prepaid by the
Borrowers, in whole, but not in part, at any time (subject to any applicable
prepayment fee).

      Each Borrower waives the benefit of any law that would otherwise restrict
or limit Lender in the exercise of its right, which is hereby acknowledged, to
set-off against the Obligations, without notice and at any time hereafter, any
indebtedness matured or unmatured owing from Lender to the Borrowers. Each
Borrower waives every defense, counterclaim or setoff which such Borrower may
now have or hereafter may have to any action by Lender in enforcing this Note
and/or any of the other Obligations, or in enforcing Lender's rights in the
Collateral and ratifies and confirms whatever Lender may do pursuant to the
terms hereof and of the Loan Agreement and with respect to the Collateral and
agrees that Lender shall not be liable for any error in judgment or mistakes of
fact or law.

      Each Borrower, any other party liable with respect to the Obligations and
any and all endorsers and accommodation parties, and each one of them, if more
than one, waive any and all presentment, demand, notice of dishonor, protest,
and all other notices and demands in connection with the enforcement of Lender's
rights hereunder.

      The loan evidenced hereby has been made and this Note has been delivered
at Chicago, Illinois. THIS NOTE SHALL BE GOVERNED AND CONTROLLED BY THE INTERNAL
LAWS OF THE STATE OF ILLINOIS AS TO INTERPRETATION, ENFORCEMENT, VALIDITY,
CONSTRUCTION, EFFECT, AND IN ALL OTHER RESPECTS, INCLUDING WITHOUT LIMITATION,
THE LEGALITY OF THE INTEREST RATE AND OTHER CHARGES, and shall be binding upon
the Borrowers and their respective successors and assigns. If this Note contains
any blanks when executed by the Borrowers, the Lender is hereby authorized,
without notice to the Borrowers to complete any such blanks according to the
terms upon which the loan or loans were granted. Wherever possible, each
provision of this Note shall be interpreted in such manner as to be effective
and valid under applicable law, but if any provision of this Note shall be
prohibited by or be invalid under such law, such provision shall be severable,
and be ineffective to the extent of such prohibition or invalidity, without
invalidating the remaining provisions of this Note.

      To induce the Lender to make the loan evidenced by this Note, each
Borrower (i) irrevocably agrees that, subject to Lender's sole and absolute
election, all actions arising directly or indirectly as a result or in
consequence of this Note or any other agreement with the Lender, or the
Collateral, shall be instituted and litigated only in courts having situs in the
City of Chicago, Illinois; (ii) hereby consents to the exclusive jurisdiction
and venue of any State or Federal Court located and having its situs in said
city; and (iii) waives any objection based on forum non-conveniens. IN ADDITION,
LENDER AND EACH BORROWER HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING
WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS NOTE, THE OBLIGATIONS, THE
COLLATERAL, ANY ALLEGED TORTIOUS CONDUCT BY BORROWER OR LENDER OR WHICH IN ANY
WAY, DIRECTLY OR INDIRECTLY, ARISES OUT OF OR RELATES TO THE RELATIONSHIP
BETWEEN BORROWER AND LENDER. In addition, each Borrower agrees that all service
of process shall be made as provided in the Loan Agreement.

                            [Signature Page Follows]


                                       2
<PAGE>

                           Signature Page to Term Note

      IN WITNESS WHEREOF, each Borrower has executed this Note on the date above
set forth.


                                    CTI INDUSTRIES CORPORATION, an
                                    Illinois corporation

                                    By: /s/ Howard W. Schwan
                                        ------------------------------
                                        Howard W. Schwan
                                        President


                                    CTI HELIUM, INC., an Illinois corporation

                                    By: /s Howard W. Schwan
                                        ------------------------------
                                        Howard W. Schwan
                                        President

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.17
<SEQUENCE>5
<FILENAME>d59202_ex10-17.txt
<DESCRIPTION>REVOLVING NOTE
<TEXT>

                                  EXHIBIT 10.17

                                 REVOLVING NOTE

$7,500,000                                                     Chicago, Illinois
                                                               December 31, 2003

      FOR VALUE RECEIVED, on or before the end of the Original Term or any
applicable Renewal Term (or, if such day is not a Business Day, on the next
following Business Day), the undersigned, CTI INDUSTRIES CORPORATION, an
Illinois corporation, and CTI HELIUM, INC., an Illinois corporation
(collectively, the "Borrowers" and, individually, each a "Borrower"), jointly
and severally, each promise to pay to the order of COLE TAYLOR BANK (herein,
together with its successors and assigns, called the "Lender"), the maximum
principal sum of SEVEN MILLION FIVE HUNDRED THOUSAND DOLLARS ($7,500,000) or, if
less, the aggregate unpaid principal amount of all Revolving Loans made by
Lender to any one or more of the Borrowers pursuant to that certain Loan and
Security Agreement of even date herewith among the Borrowers and Lender (herein,
as the same may be amended, modified, restated or supplemented from time to
time, called the "Loan Agreement").

      Each Borrower, jointly and severally, further promises to pay to the order
of Lender interest on the aggregate unpaid principal amount hereof from time to
time outstanding from the date hereof until paid in full at such rates and at
such times as shall be determined in accordance with the provisions of the Loan
Agreement. Accrued interest shall be payable on the dates specified in the Loan
Agreement.

      Payments of both principal and interest are to be made in the lawful money
of the United States of America in immediately available funds at Lender's
principal office at 111 West Washington Street, Suite 400, Chicago, Illinois
60602, or at such other place as may be designated by Lender to the Borrowers in
writing.

      This Note is the promissory note referred to in, evidences indebtedness
incurred under, and is subject to the terms and provisions of, the Loan
Agreement. The Loan Agreement, to which reference is hereby made, sets forth
said terms and provisions, including those under which this Note may or must be
paid prior to its due date or may have its due date accelerated. Terms used but
not otherwise defined herein are used herein as defined in the Loan Agreement.
This Note is secured by the personal property described in and pursuant to the
Loan Agreement and various Loan Documents referred to therein, and reference is
made thereto for a statement of terms and provisions of such Collateral
security, a description of Collateral and the rights of Lender in respect
thereof.

      In addition to, and not in limitation of, the foregoing and the provisions
of the Loan Agreement hereinabove referred to, each Borrower, jointly and
severally, further agrees, subject only to any limitation imposed by applicable
law, to pay all expenses, including reasonable attorneys' fees and expenses,
incurred by the holder of this Note in seeking to collect any amounts payable
hereunder which are not paid when due, whether by acceleration or otherwise.

<PAGE>

      All parties hereto, whether as makers, endorsers or otherwise, severally
waive presentment, demand, protest and notice of dishonor in connection with
this Note.

      This Note is binding upon the Borrowers and their successors and assigns,
and shall inure to the benefit of Lender and its successors and assigns. The
Borrowers and their successors and assigns shall be jointly and severally
obligated hereunder. This Note is made under and governed by the laws of the
State of Illinois without regard to conflict of laws principles.

                               [SIGNATURES FOLLOW]


                                       2
<PAGE>

                        Signature Page to Revolving Note

      IN WITNESS WHEREOF, each Borrower has executed this Revolving Note as of
the day and year first above written.


                                  CTI INDUSTRIES CORPORATION,
                                  an Illinois corporation

                                  By: /s/ Howard W. Schwan
                                      ---------------------------
                                      Howard W. Schwan
                                      President


                                  CTI HELIUM, INC.,
                                  an Illinois corporation

                                  By: /s/ Howard W. Schwan
                                      ---------------------------
                                      Howard W. Schwan
                                      President

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>6
<FILENAME>d59202_ex23-1.txt
<DESCRIPTION>CONSENT OF INDEPENDENT AUDITORS, EISNER, LLP
<TEXT>
                                                                    EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in the Registration Statements on
Form S-8 (Nos. 333-76006 and 333-76008) and the Registration Statement on Form
SB-2 (No. 333-31969), of our report dated February 18, 2004 (with respect to
Note 6, April 14, 2004), relating to our audit of the consolidated financial
statements of CTI Industries Corporation and subsidiaries included in the 2003
annual report on Form 10-K.


/s/ Eisner LLP

New York, New York
April 14, 2004

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.2
<SEQUENCE>7
<FILENAME>d59202_ex23-2.txt
<DESCRIPTION>CONSENT OF INDEPENDENT AUDITORS
<TEXT>

                                  EXHIBIT 23.2

                         CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-76006) pertaining to the CTI Industries Corporation 2001 Stock
Option Plan, in the Registration Statement (Form S-8 No. 333-76008) pertaining
to the CTI Industries Corporation 1999 Stock Option Plan and Registration
Statement (Form SB-2 No. 333-31969), of our report dated April 15, 2003, with
respect to the consolidated financial statements included in the Annual Report
of CTI Industries Corporation and Subsidiaries on Form 10-K for the year ended
December 31, 2003.

/s/ McGladrey & Pullen, LLP
- ---------------------------

Schaumburg, Illinois
April 14, 2004

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.3
<SEQUENCE>8
<FILENAME>d59202_ex23-3.txt
<DESCRIPTION>CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCTS
<TEXT>

                                  EXHIBIT 23.3

               CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

We have issued our report dated April 10, 2002, except for Note 3, which is
dated April 15, 2003, accompanying the consolidated financial statements
included in the Annual Report of CTI Industries Corporation and Subsidiaries on
Form 10-K for the year ended December 31, 2001. We hereby consent to the
incorporation by reference of said report in the Registration Statements of CTI
Industries Corporation and Subsidiaries on Form S-8 (Nos. 333-76006 and
333-76008) and SB-2 (No. 333-31969).

/s/ Grant Thornton LLP
- ----------------------

Chicago, Illinois
April 14, 2004

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.1
<SEQUENCE>9
<FILENAME>d59202_ex31-1.txt
<DESCRIPTION>CEO CERTIFICATION
<TEXT>

                                 CERTIFICATIONS

      I, Howard W. Schwan, Chief Executive Officer of CTI Industries
Corporation, certify that:

      1. I have reviewed this annual report on Form 10-K of CTI Industries
Corporation;

      2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

      3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

      4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

            a) Designed such disclosure controls and procedures to ensure that
      material information relating to the registrant, including its
      consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this annual report is
      being prepared;

            b) Evaluated the effectiveness of the registrant's disclosure
      controls and procedures as of a date within 90 days prior to the filing
      date of this annual report (the "Evaluation Date"); and

            c) Presented in this annual report our conclusions about the
      effectiveness of the disclosure controls and procedures based on our
      evaluation as the Evaluation Date;

      5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

            a) All significant deficiencies in the design or operation of
      internal controls which could adversely affect the registrant's ability to
      record, process, summarize and report financial data and have identified
      for the registrant's auditors any material weaknesses in internal
      controls; and

            b) Any fraud, whether or not material, that involves management or
      other employees who have a significant role in the registrant's internal
      controls; and

<PAGE>

      6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: April 14, 2004


                                        CTI INDUSTRIES CORPORATION
                                        By: /s/ Howard W. Schwan
                                            ------------------------------------
                                            Howard W. Schwan
                                            Chief Executive Officer


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.2
<SEQUENCE>10
<FILENAME>d59202_ex31-2.txt
<DESCRIPTION>CFO CERTIFICATION
<TEXT>

                                 CERTIFICATIONS

      I, Stephen M. Merrick, Chief Financial Officer of CTI Industries
Corporation, certify that:

      1. I have reviewed this annual report on Form 10-K of CTI Industries
Corporation;

      2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

      3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

      4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

            a) Designed such disclosure controls and procedures to ensure that
      material information relating to the registrant, including its
      consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this annual report is
      being prepared;

            b) Evaluated the effectiveness of the registrant's disclosure
      controls and procedures as of a date within 90 days prior to the filing
      date of this annual report (the "Evaluation Date"); and

            c) Presented in this annual report our conclusions about the
      effectiveness of the disclosure controls and procedures based on our
      evaluation as the Evaluation Date;

      5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

            a) All significant deficiencies in the design or operation of
      internal controls which could adversely affect the registrant's ability to
      record, process, summarize and report financial data and have identified
      for the registrant's auditors any material weaknesses in internal
      controls; and

            b) Any fraud, whether or not material, that involves management or
      other employees who have a significant role in the registrant's internal
      controls; and

<PAGE>

      6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: April 14, 2004


                                        CTI INDUSTRIES CORPORATION
                                        By: /s/ Stephen M. Merrick
                                            ------------------------------------
                                            Stephen M. Merrick,
                                            Chief Financial Officer



</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32
<SEQUENCE>11
<FILENAME>d59202_ex32.txt
<DESCRIPTION>CERTIFICATIONS
<TEXT>

                               SARBANES-OXLEY ACT
                       SECTION 906 CERTIFICATION [UPDATE]

      I certify that the periodic report on Form 10-K containing the financial
statements fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o (d)) and that information
contained in the periodic report on Form 10-K fairly presents, in all material
respects, the financial condition and results of operations of the issuer.


                                        CTI INDUSTRIES CORPORATION
                                        By: /s/ Howard W. Schwan
                                            ------------------------------------
                                            Howard W. Schwan
                                            Chief Executive Officer

<PAGE>

                               SARBANES-OXLEY ACT
                       SECTION 906 CERTIFICATION [UPDATE]

      I certify that the periodic report on Form 10-K containing the financial
statements fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o (d)) and that information
contained in the periodic report on Form 10-K fairly presents, in all material
respects, the financial condition and results of operations of the issuer.


                                            CTI INDUSTRIES CORPORATION
                                        By: /s/ Stephen M. Merrick
                                            ------------------------------------
                                            Stephen M. Merrick,
                                            Chief Financial Officer


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.1
<SEQUENCE>12
<FILENAME>d59202_ex99-1.txt
<DESCRIPTION>CODE OF ETHICS
<TEXT>

                                  EXHIBIT 99.1

                           CTI INDUSTRIES CORPORATION

                                 Code of Ethics
                   for Senior Executive and Financial Officers

I.    General

      The policy of CTI Industries Corporation (the "Company") is to comply
strictly with all laws governing its operations and to conduct its affairs in
keeping with the highest moral, legal and ethical standards. Senior executive
and financial officers hold an important and elevated role in maintaining a
commitment to (i) honest and ethical conduct, (ii) full, fair, accurate, timely
and understandable disclosure in the Company's public communications, and (iii)
compliance with applicable governmental rules and regulations. Accordingly, the
Company has adopted this Code of Ethics for its Chief Executive Officer, Chief
Financial Officer, Controller and any other senior executive or financial
officers performing similar functions and so designated from time to time by the
Chief Executive Officer (the "Senior Executive and Financial Officers"). This
Code of Ethics shall be approved annually by the Audit Committee of the Board of
Directors (the "Committee") and disbursed to the public by means of one of the
methods described in Item 406 of Regulation S-K promulgated by the Securities
and Exchange Commission (the "SEC").

II.   Honest and Ethical Conduct

      Senior Executive and Financial Officers are expected to exhibit and
promote the highest standards of honest and ethical conduct, by, among other
things, their adherence to the following policies and procedures:

            o     Senior Executive and Financial Officers shall engage in only
                  honest and ethical conduct, including the ethical handling of
                  actual or apparent conflicts of interest between personal and
                  professional relationships.

            o     Senior Executive and Financial Officers shall inform the
                  Company's Corporate Counsel or, in his absence, the Chairman
                  of the Committee of (a) deviations in practice from policies
                  and procedures governing honest and ethical behavior or (b)
                  any material transaction or relationship that could reasonably
                  be expected to create a conflict of interest.

            o     Senior Executive and Financial Officers shall demonstrate
                  personal support for the policies and procedures set forth in
                  this Code of Ethics through periodic communications
                  reinforcing these principles and standards throughout the
                  Company.

<PAGE>

            o     Senior Executive and Financial Officers shall respect the
                  confidentiality of information acquired in performance of
                  one's responsibilities and shall not use confidential
                  information for personal advantage.

III.  Financial Records and Periodic Reports

      The Company is committed to full, fair, accurate, timely and
understandable disclosures in reports and documents that it files with, or
submits to, the SEC and in other public communications made by the Company. In
support of this commitment, the Company has, among other measures, (a) designed
and implemented disclosure controls and procedures (within the meaning of
applicable SEC rules) and (b) required the maintenance of accurate and complete
records, the prohibition of false, misleading or artificial entries on its books
and records, and the full and complete documentation and recording of
transactions in the Company's accounting records. In addition to performing
their duties and responsibilities under these requirements, each of the Senior
Executive and Financial Officers will establish and manage the Company's
reporting systems and procedures with due care and diligence to ensure that:

            o     Reports filed with or submitted to the SEC and other public
                  communications contain information that is full, fair,
                  accurate, timely and understandable and do not misrepresent or
                  omit material facts.

            o     Business transactions are properly authorized and completely
                  and accurately recorded in all material respects on the
                  Company's books and records in accordance with generally
                  accepted accounting principles and the Company's established
                  financial policies.

            o     Retention or disposal of Company records is in accordance with
                  established Company policies and applicable legal and
                  regulatory requirements.

IV.   Compliance with Applicable Laws, Rules and Regulations

      The policy of the Company is to comply strictly with all laws governing
its operations and to conduct its affairs in keeping with the highest moral,
legal and ethical standards. Accordingly, the Senior Executive and Financial
Officers will comply with all applicable governmental laws, rules and
regulations, and will establish and maintain mechanisms to:

            o     Monitor compliance of the Company's finance organization and
                  other key employees with all applicable federal, state and
                  local statutes, rules, regulations and administrative
                  procedures.

            o     Identify, report and correct any detected deviations from
                  applicable federal, state and local statutes, rules,
                  regulations and administrative procedures.


                                       2
<PAGE>

V.    Compliance with Code of Ethics

      The Senior Executive and Financial Officers shall acknowledge and certify
their ongoing compliance with this Code of Ethics annually and provide a copy of
such certification to the Committee. This Code of Ethics will be published and
made available to all employees, and any employee should promptly report any
violation of this Code of Ethics to the General Counsel or, in his or her
absence, the Chairman of the Committee. The Board of Directors shall take
appropriate action with respect tot he failure of any Senior Executive or
Financial Officer to comply with this Code of Ethics, which may include
reprimand, demotion or dismissal, depending on the seriousness of the offense.

Adopted: April, 2004


                                       3

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99.2
<SEQUENCE>13
<FILENAME>d59202_ex99-2.txt
<DESCRIPTION>AUDIT COMMITTEE CHARTER
<TEXT>

                                  EXHIBIT 99.2

                             AUDIT COMMITTEE CHARTER
                          OF CTI INDUSTRIES CORPORATION

1.    Organization

      There shall be a committee of the Board of Directors of CTI Industries
Corporation (the "Corporation") to be known as the Audit Committee. This charter
(the "Charter") shall govern the operations of the Audit Committee. The
Committee shall review and reassess the adequacy of this Charter at least
annually, and shall submit any revisions to this Charter to the Board of
Directors for their approval. The Audit Committee shall be composed of at least
three directors who are independent of the management of the Corporation. A
director shall be deemed independent if he is free of any relationship that, in
the opinion of the Board of Directors, would interfere with exercise of
independent judgment as a Committee member. To ensure that an audit committee
member satisfies the definition of "independent" according to both Item 7(d) (3)
(iv) of Schedule 14A under the Securities Exchange Act and NASDAQ's SmallCap
Marketplace Rules, an Audit Committee member may not:

o     have been employed by the Corporation or its affiliates in the current or
      past three years;

o     have accepted any compensation from the Corporation or its affiliates in
      excess of $60,000 during the previous fiscal year (except for board
      service, retirement plan benefits, or non-discretionary compensation);

o     have an immediate family member who is, or has been in the past three
      years, employed by the Corporation or its affiliates as an executive
      officer;

o     have been a partner, controlling shareholder or an executive officer of
      any for-profit business to which the Corporation made, or from which it
      received, payments (other than those which arise solely from investments
      in the Corporation's securities) that exceed five percent of the
      organization's consolidated gross revenues for that year, or $200,000,
      whichever is more, in any of the past three years; or

o     have been employed as an executive of another entity where any of the
      Corporation's executives serve on that entity's compensation committee.

In addition, the Corporation shall have one member who is designated and meets
the requirements of an "audit committee financial expert" as that term is
defined in Item 401(h) of Regulation S-K of the Exchange Act. An "audit
committee financial expert" shall possess all of the following five attributes:

o     An understanding of generally accepted accounting principles ("GAAP") and
      financial statements;

o     The ability to assess the general application of such principles in
      connection with the accounting for estimates, accruals and reserves;

<PAGE>

o     Experience preparing, auditing, analyzing or evaluating financial
      statements that present a breadth and level of complexity of accounting
      issues that are generally comparable to the breadth and complexity of
      issues that can reasonably be expected to be raised by the Corporation's
      financial statements, or experience actively supervising one or more
      persons engaged in such activities;

o     An understanding of internal controls and procedures for financial
      reporting; and

o     An understanding of audit committee functions.

      The foregoing attributes must have been acquired by the audit committee
financial expert through one or more of the following means:

      (1)   Education and experience as a public accountant or a principal
            financial officer, controller or principal accounting office of a
            company, or experience in one or more positions involving the
            performance of similar functions;

      (2)   Experience actively supervising any of the persons referred to in
            (1) above;

      (3)   Experience in overseeing or assessing the performance of companies
            or public accountants with respect to the preparation, auditing or
            evaluation of financial statements; or

      (4)   other relevant experience.

All Audit Committee members shall be able to read and understand fundamental
financial statements, including but not limited to balance sheets, income
statements and cash flow statements.

2.    Statement of Policy

      The Audit Committee shall provide assistance to the Corporation's
directors in fulfilling their responsibility to the shareholders, potential
shareholders, and investment community relating to corporate accounting and
financial reporting practices of the Corporation, and the quality and integrity
of the financial reports of the Corporation. In so doing, it is the
responsibility of the Audit Committee to maintain free and open means of
communication between the directors, the independent auditors, the internal
auditors, and the financial management of the Corporation. In discharging its
oversight role, the Committee is empowered to investigate any matter brought to
its attention with full access to all books, records, facilities, and counsel or
other experts for this purpose.

3.    Responsibilities and Processes

      The primary responsibility of the Audit Committee is to oversee the
Corporation's financial reporting process on behalf of the Board and report the
results of their activities to the Board. Management is responsible for
preparing the Corporation's financial statements, and the independent auditors
are responsible for auditing those financial statements. In carrying out its
responsibilities, the Audit Committee believes its policies and procedures
should remain flexible,


                                        2
<PAGE>

in order to best react to changing conditions and to ensure to the directors and
shareholders that the corporate accounting and reporting practices of the
Corporation are in accordance with all applicable requirements and are of the
highest quality.

      In carrying out these responsibilities, the Audit Committee will:

      3.1 Provide an open avenue of communication between the independent
auditor, the internal auditor, management and the Board of Directors. The
Committee shall have a clear understanding with management and the independent
auditors that the independent auditors are ultimately accountable to the Board
and the Audit Committee.

      3.2 Meet at least one time per year or more frequently as circumstances
require. The Audit Committee may ask members of management or others to attend
meetings and provide pertinent information as necessary.

      3.3 Review and recommend to the Directors the independent auditors to be
selected to audit the financial statements of the corporation, and approve the
compensation of the independent auditors. The Committee shall have the ultimate
authority and responsibility to evaluate and, where appropriate, replace the
independent auditors (or to nominate the independent auditor to be proposed for
shareholder approval in any proxy statement).

      3.4 Review and concur in the appointment, replacement, reassignment or
dismissal of the internal auditor.

      3.5 Confirm and assure the independence of the independent auditors. The
Audit Committee has the responsibility for ensuring its receipt from the
independent auditors of a formal written statement delineating all relationships
between the auditors and the Corporation. The Audit Committee also has the
responsibility for actively engaging in a dialogue with the independent auditors
with respect to any disclosed relationships or services that may impact the
objectively and independence of the independent auditor and for taking, or
recommending that the full Board take appropriate action to oversee the
independence of the independent auditors.

      3.6 Meet with the independent auditors and internal auditors to review the
scope of the proposed audit for the current year and the audit procedures to be
utilized, and at the conclusion thereof review such audit, including any
comments or recommendations of the independent or internal auditors.

      3.7 Review with the independent auditors and the internal auditor(s) the
adequacy and effectiveness of the accounting and financial controls of the
Corporation, and elicit any recommendations for the improvement of such internal
control procedures or particular areas where new or more detailed controls or
procedures are desirable. The Audit Committee should also review with the
independent and internal auditors the coordination of audit efforts to assure


                                        3
<PAGE>

completeness of coverage, reduction of redundant efforts, and the effective use
of audit resources.

      3.8 Inquire of management, the internal auditor(s), and the independent
auditors about significant business risks or exposures and assess the steps
management has taken to minimize such risk to the Corporation.

      3.9 Review with management, the independent auditors and the internal
auditor(s) the interim financial report prior to the filing of the quarterly
report on Form 10-Q. The Audit Committee shall discuss the results of the
quarterly review and any other matters required to be communicated to the Audit
Committee by the independent auditors under generally accepted auditing
standards.

      3.10 The Audit Committee shall review with management, the independent
auditors and the internal auditor(s) the financial statements to be included in
the Annual Report on Form 10-K, including their judgment about the quality, not
just acceptability, of accounting principles, the reasonableness of significant
judgments, and the clarity of the disclosures in the financial statements. Also,
the Audit Committee shall discuss the results of the annual audit and any other
matters required to be communicated to the Audit Committee by the independent
auditors under generally accepted auditing standards.

      3.11 Review with the Board of Directors and the independent auditors at
the completion of the annual examination:

            (a) The Corporation's annual financial statements and related
      footnotes;

            (b) The independent auditor's audit of the financial statements and
      his report thereon;

            (c) Any significant changes required in the independent auditor's
      audit plan;

            (d) Any serious difficulties or disputes with management encountered
      during the course of the audit; and

            (e) Other matters relating to the conduct of the audit which are to
      be communicated to the Audit Committee under generally accepted auditor
      standards.

      3.12 Consider and review with management and the internal auditor(s):

            (a) Significant findings during the year and management's responses
      thereto;

            (b) Any difficulties encountered in the course of their audits,
      including any restrictions on the scope of their work or access to
      required information;


                                        4
<PAGE>

            (c) Any changes required in the planned scope of their audit plan;

            (d) The internal auditing department budget and staffing; and

            (e) Internal auditing's compliance with appropriate accounting
      standards.

      3.13 Provide sufficient opportunity for the internal and independent
auditors to meet with the members of the Audit Committee with and without
members of management present to discuss results of examinations. Among the
items to be discussed in these meetings are the independent auditors' evaluation
of the corporation's financial, accounting, and auditor personnel, and the
cooperation that the independent auditors received during the course of the
audit.

      3.14 Review legal and regulatory matters that may have a material impact
on the financial statements, related company compliance policies, and programs
and reports received from regulators.

      3.15 Submit the minutes of all meetings of the Audit Committee to, or
discuss the matters discussed at each committee meeting with, the Board of
Directors.

      3.16 Investigate any matter brought to its attention within the scope of
its duties.

      3.17 Report Committee actions to the Board of Directors with such
recommendations as the Audit Committee may deem appropriate.

      3.18 The duties and responsibilities of a member of the Audit Committee
are in addition to those duties set out for a member of the Board of Directors.

Effective this 8th day of April, 2004, by order of this Corporation's Board of
Directors.


                                        /s/ Stephen M. Merrick
                                        -----------------------------
                                        Stephen M. Merrick, Secretary


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</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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