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<SEC-DOCUMENT>0001169232-04-004373.txt : 20040823
<SEC-HEADER>0001169232-04-004373.hdr.sgml : 20040823
<ACCEPTANCE-DATETIME>20040823172531
ACCESSION NUMBER:		0001169232-04-004373
CONFORMED SUBMISSION TYPE:	10-Q
PUBLIC DOCUMENT COUNT:		6
CONFORMED PERIOD OF REPORT:	20040630
FILED AS OF DATE:		20040823
DATE AS OF CHANGE:		20040823

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-Q
		SEC ACT:		1934 Act
		SEC FILE NUMBER:	000-23115
		FILM NUMBER:		04992597

	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-Q
<SEQUENCE>1
<FILENAME>d60519_10q.txt
<DESCRIPTION>QUARTERLY REPORT
<TEXT>
                                    FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                  For the quarterly period ended June 30, 2004

                          Commission File No. 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)

      Registrant 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 and
has been subject to such filing requirements for the past 90 days.

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

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

      COMMON STOCK, no par value, 1,918,420 outstanding Shares, as of June 30,
2004.

<PAGE>

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

The following consolidated financial statements of the Registrant are attached
to this Form 10-Q:

      1.    Interim Balance Sheet as at June 30, 2004 (unaudited) and December
            31, 2003;

      2.    Interim Statements of Operations (unaudited) for the three and six
            months ended June 30, 2004 and June 30, 2003;

      3.    Interim Statements of Cash Flows (unaudited) for the six months
            ended June 30, 2004 and June 30, 2003.

      4.    Notes to Consolidated Financial Statements

Item 2. Management's Discussion and Analysis of Financial Condition and Results
        of Operations

Results of Operations

      Net Income (Loss). For the three months ended June 30, 2004, the Company
had incurred a net loss of ($136,000), or ($0.07) per share (basic and diluted)
compared to net income for the same period of 2003 of $133,000, or $0.07 per
share (basic) and $0.06 per share (diluted). For the quarter, the Company
incurred a loss before taxes and minority interest of ($195,000), compared to
income before taxes and minority interest in the same period of 2003 of $6,000.

      For the six months ended June 30, 2004, the Company had net income of
$236,000, or $0.12 per share (basic) and $0.12 per share (diluted), compared to
a net loss of ($557,000) or ($0.29) per share (basic and diluted) for the six
months ended June 30, 2003. For the six months ended June 30, 2004 the Company
had income before taxes and minority interest of $413,000, compared to a loss of
($652,000) for the same period in 2003. Included in the first six months of
2004, are income items (described more fully below) totaling $490,000 which
occurred principally during the first quarter of 2004 and are not expected to
recur in the future.

      Net Sales, For the three months ended June 30, 2004, net sales were
$9,592,000 compared to net sales of $8,662,000 for the same period of 2003, an
increase of 10.7%. Net sales by product categories are as follows for each
period respectively:


                                       2
<PAGE>

                                                For the three month period ended
                                                June 30, 2004       June 30,2003
                                                -------------       ------------

Laminated and Printed Films                       $3,615,000         $4,315,000
Metalized Balloons                                 4,297,000          2,241,000
Latex Balloons                                     1,195,000          1,552,000
Other                                                485,000            554,000
                                                  ----------         ----------
                                                  $9,592,000         $8,662,000

      During the three months ended June 30, 2004, sales of laminated and
printed films represented 38% of sales, metalized balloons 45% of sales and
latex balloons 12% of sales. During the same period of 2003, sales of laminated
and printed films represented 50% of total sales, metalized balloons 26% and
latex balloons 18%. Other sales consists primarily of helium, for which the
company acts as a broker for select customers.

      For the six months ended June 30, 2004, net sales were $20,486,000
compared to net sales of $18,824,000 for the same period of 2003, an increase of
8.8%. For the six months ended June 30, 2003 and 2004, sales by product category
were as follows:

                                                For the six month period ended
                                               June 30, 2004       June 30, 2003
                                               -------------       -------------
Laminated and Printed Films                     $ 7,289,000         $ 8,502,000
Metalized Balloons                                9,228,000           6,953,000
Latex Balloons                                    2,880,000           2,544,000
Other                                             1,089,000             825,000
                                                -----------         -----------
                                                $20,486,000         $18,824,000

      During the six months ended June 30, 2004, sales of laminated and printed
films represented 36% of total sales, metalized balloons 45% of sales and latex
balloons 14% of sales. During the same period of 2003, sales of laminated and
printed films represented 45% of total sales, metalized balloons 37% of total
sales and latex balloons 14% of total sales.

      The decline in sales of laminated and printed films during the second
quarter and the six months ended June 30, 2004 is attributable principally to a
decline in sales to ITW Spacebag. Sales to ITW Spacebag during the first six
months of 2003 were $5,125,000 and during the first six months of 2004 were
$2,423,000. In part, the decline in sales to the customer during the first six
months of 2004 is attributable to (i) the customer engaging in pouch production
internally and (ii) the Company has not supplied a component of the pouches
which it supplied during 2003. We anticipate that sales to ITW Spacebag will
continue during the remainder of 2004 at substantially the same rate as during
the first six months.

      The increase in sales of metalized balloons during the second quarter and
the six months ended June 30, 2004, compared to the same periods in the prior
year, is the result, principally, of sales to a new customer. Sales to this
customer were $1,142,000 for the first quarter and


                                       3
<PAGE>

$2,175,000 for the first six months. We anticipate an increase in metalized
balloon sales during the final six months of 2004 and into the first six months
of 2005, compared to those same periods in 2003 and 2004, primarily as the
result of new customers.

      During the first six months of 2004, there were four customers whose
purchases represented more than 10% of the Company's sales for that period:
$3,946,000, $2,423,000, $2,256,000, and $2,175,000. During the first three
months of 2004, there were three customers whose purchases represent more than
10% of the Company's sales for that period: $1,979,000, $1,245,000, and
$1,142,000.

      Cost of Sales. During the three months ended June 30, 2004, cost of sales
increased to 79% of net sales compared to 78% of net sales for the same period
in 2003. For the six month period ended June 30, 2004, the cost of sales
remained 80%, the same as for the six month period in 2003.

      Administrative Expenses. For the three months ended June 30, 2004,
administrative expenses were $1,175,000, or 12.3% of net sales, compared to
$1,051,000, or 12.1% of net sales for the same period in 2003. For the six
months ended June 30, 2004, administrative expenses were $2,164,000, or 10.6% of
net sales, compared to $2,222,000, or 11.8% of net sales, for the same period in
2003. There were no material changes in administrative expenses during the first
six months of 2004 compared to the same period of the prior year. We do not
anticipate a significant change in administrative expenses for the remainder of
the year.

      Selling Expenses. For the three months ended June 30, 2004, selling
expenses were $357,000, or 3.7% of net sales for the quarter, compared to
$217,000 or 2.5% of net sales for the second quarter of 2003. For the six months
ended June 30, 2004, selling expenses were $747,000 or 3.6% of net sales for the
period, compared to $619,000 or 3.3% of net sales for the same period in 2003.
The increase in selling expense is attributable to a change in department
structure in which the supervision of customer service and an administrative
assistant salary are now charged to selling expense. The other item relating to
this increase is an increase in commission expenses. We do not anticipate a
significant change in selling expenses for the remainder of the year.

      Advertising and Marketing Expense. For the three months ended June 30,
2004, advertising and marketing expenses were $282,000, or 2.9% of net sales for
the period, compared to $661,000 or 7.6% of net sales for the same period of
2003. For the six months ended June 30, 2004, advertising and marketing expenses
were $675,000, or 3.3% of net sales for the period, compared to $1,250,000, or
6.6% of net sales for the same period in 2003. The decline in advertising and
marketing expense is attributable to reduction in personnel, decreases in
spending in tradeshows and catalog expense and a reduction in the cost of
artwork and films. We do not anticipate a significant change in advertising and
marketing expense for the remainder of the year.

      Other Income and Expense. During the three months ended June 30, 2004, the
Company incurred interest expense and loan fees of $338,000, compared to
interest and loan fees of $274,000 during the same period of 2003.


                                       4
<PAGE>

      During the six months ended June 30, 2004, the Company incurred interest
expense and loan fees of $670,000 compared to interest and loan fees of $475,000
during the same period for 2003. The increase in this expense is due to higher
levels of borrowing as a result of increased borrowing capacity to finance our
sales growth, higher interest rates due to cost of capital funding being higher
under our new credit facility and loan fees incurred during these periods. The
interest rate provided in our loan agreement with our bank is variable. However,
we do not believe that a change of one or two percent in interest rate would
have a material effect on our results of operations.

      Also, during the six months ended June 30, 2004, the Company had net other
income items totaling $490,000. Most of this gain is attributable to the first
quarter of 2004. These items included: (i) gains of $64,000 related to
transactions involving the valuation of the foreign currency, the amount of
which will vary from period to period; (ii) gains related to a review and
determination that various accrued items on the books of the Mexican
subsidiaries of the Company, CTI Mexico, S.A. de C.V. and Flexo Universal, S.A.
de C.V., are not due or payable; the items included (a) accrued amounts for
profit sharing or seniority benefits determined on the basis of a legal review
not to be due, totaling $97,950, (b) accrued amounts related to an asset tax
determined not to be due or beyond the statute of limitations, in the amount
approximately of $49,400, (c) accrued amounts with respect to various accounts
settled or determined not to be due or payable, in the aggregate amount of
approximately $190,000; (iii) gains related to the settlement of an account with
a tax authority in the amount of $38,750 based on payment of an amount less than
the amount accrued on the books of CTI Mexico and Flexo Universal and (iv) gains
totaling $70,000 based on the settlement of various accounts in consideration of
payment of an amount less than the amount accrued. Most of these gains related
to the restructuring of CTI Mexico which commenced in February, 2003 when CTI
Mexico effected a spin-off under Mexican law in which a portion of assets,
liabilities and capital were transferred to Flexo Universal and Flexo Universal
became the primary subsidiary of the Company in Mexico. These gains are not
recurring.

      Income Taxes

      During the second quarter of 2004, the Company recorded an income tax
benefit of $58,000, arising from the operating loss in the quarter, compared to
an income tax benefit recorded for the second quarter of 2003 in the amount of
$130,000.

      For the first six months of 2004, the Company recorded income tax expense
of $175,000 compared to an income tax benefit received for the same period of
2003 in the amount of $95,000.

Financial Condition

      During the six months ended June 30, 2004, the Company used cash in
operations of $994,000, compared to cash provided by operations during the
first six months of 2003 in the amount of $1,143,000. For the most part the use
of cash in operations arose from (i) the increase in receivables during the
period by $937,000, and (ii) a reduction in accounts payable and accrued
expenses by $1,29800. During the six month period cash from operations was
affected positively by depreciation of $910,000; depreciation is expected to
continue at approximately the same rate over the balance of 2004.


                                       5
<PAGE>

      During the six months ended June 30, 2004, investing cash flows consisted
of equipment in the amount of $172,000. The net purchase of equipment during
the first six months of 2003 was $1,319,000. The Company believes its capital
equipment is sufficient to meet planned operations for the next twelve months.
The Company anticipates a replacement of its computer systems and software, but
has no formal commitment as of this date.

      During the six months ended June 30, 2004, cash provided by financing
activities was $1,127,000, compared to net cash provided in the same period of
2003 of $313,000. The source of cash provided in the first six months of 2004
was, principally, net advances on the Company's revolving line of credit in the
amount of $2,301,000. Under the terms of the Company's revolving line of credit,
the bank advances up to 85% of eligible receivables and 50% of eligible
inventory. The amount of the net advances on the line of credit reflect (i)
increased sales during the first six months of 2004 and (ii) an increase in
inventory during the period in the amount of approximately $240,000. Financing
cash outflows consisted of repayments of $294,000 to the term loan and
$1,039,000 on vendor notes.

      Liquidity and Capital Resources. As of June 30, 2004, the Company's cash
balance was $421,000 and there was approximately $101,000 available under the
Company's line of credit with its bank. As of June 30, 2004, the Company had
working capital of $21,000 compared to a working capital deficit of $2,352,000
as of June 30, 2003 and a working capital deficit of $706,000 as of December 31,
2003.

      As of June 30, 2004, the Company was in compliance all loan covenants with
its bank. Based on our financial projections, the Company believes it will
comply with all financial and other covenants of the loan agreement with its
bank for the remainder of 2004 and beyond.

      The Company believes that existing capital resources, cash generated from
operations, and its newly established Standby Equity Distribution Agreement will
be sufficient to meet the Company's requirements for at least twelve months.
Under the SEDA, an investment firm has committed to provide up to $5 million of
funding to be drawn down at the Company's discretion by the purchase of the
Company's common stock. The Company may request up to $100,000 in any seven-day
period in exchange for issuing shares of its common stock to the investment
firm. The purchase price of any shares purchased under the SEDA with respect to
any advance will be equal to 100% of the volume weighted average price of the
Company's common stock on the NASDAQ SmallCap Stock Market for the five days
immediately following the notice date for the advance, subject to payment to the
investment firm of a commitment fee of 5% of the amount of each advance. The
facility may be used in whole or in part entirely at the Company's discretion,
subject to an effective registration of the related shares. As of June 30, 2004,
no shares have been issued or funds received by the Company under this
agreement.

      Seasonality. In the metalized balloon product line, sales have
historically been seasonal, with approximately 22% to 25% of annual sales of
metalized balloons being generated in December and January and 11% to 13% of
annual metalized sales being generated in September and July in recent years.
With the inclusion of a new major customer in metalized balloons with sales that
are from our recurring product line we expect this seasonality effect to be
reduced. In addition, the sale of latex balloons and laminated film products
have not historically been seasonal.


                                       6
<PAGE>

Critical Accounting Policies

      A summary of our critical accounting policies and estimates is presented
on pages 18 and 19 of our 2003 Annual Report on Form 10-K/A, Amendment No. 1, as
filed with the Securities and Exchange Commission.

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 metalized 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 2 (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 2004 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, the Company's
limited operating history on which expectations regarding its future performance
can be based, 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 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


                                       7
<PAGE>

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 obligate to update or
revise these forward-looking statements to reflect new events or circumstances.

Item 3. Quantitative and Qualitative Disclosures of Market Risk

      The Company has not identified any material changes in risk factors
identified in its Form 10-K/A Amendment No. 1 for the fiscal year ended December
31, 2003, which would create any material market risk for the Company.

      The Company and its subsidiaries are exposed to market risk in changes of
commodity prices in some of the raw materials they purchase for their
manufacturing needs, particularly nylon film, resin and latex, some of which may
be affected by changes in the prices of natural gas and crude oil. However, the
risk involved would not have a material effect on the Company's results of
operations or financial condition.

Item 4. 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-14(c) and 15d-14(c)) as of the end
            of the period covered by 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 II. OTHER INFORMATION

Item 1. 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. The matter is


                                       8
<PAGE>

currently in the course of discovery and is scheduled for a final pre-trial
conference on January 3, 2005.

      On June 4, 2004, Spar Group, Inc. initiated an arbitration proceeding in
New York City against the Company. In the proceeding, Spar Group claims that
there is due from the Company to Spar Group for services rendered in the amount
of $180,043, plus interest. Spar Group claims to have rendered services to the
Company in various Eckerd stores with respect to the display and ordering of
metalized and latex balloons for sale in those stores. The Company has filed an
answer denying liability with respect to the claim and asserting a counterclaim
for damages against Spar Group for breach of its agreement to provide such
services. The Company belives it has made adequate provision for any settlement
of this matter based on dicussions with counsel.

      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 2.     Changes in Securities, Use of Proceeds and Issuer Purchases of
            Equity Securities

            Not applicable.

Item 3.     Defaults Upon Senior Securities

            Not applicable.

Item 4.     Submission of Matters to a Vote of Security Holders

            Not applicable.

Item 5.     Other Information

      The Certifications of the Chief Executive Officer and the Chief Financial
Officer of Registrant Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
are attached as Exhibits to this Report on Form 10-Q.


                                       9
<PAGE>

Item 6. Exhibits and Reports on Form 8-K

      (a) Exhibits*

            Exhibit No.                            Description
            -----------                            -----------

                  3.1         Third Restated Certificate of Incorporation of CTI
                              Industries Corporation (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
                              Commission on October 25, 1999)

                  3.2         By-laws of CTI Industries Corporation
                              (incorporated by reference to Exhibits, contained
                              in Registrant's Form SB-2 Registration Statement
                              (File No. 333-31969) effective November 5, 1997)

                  10.1        Standby Equity Distribution Agreement dated July
                              1, 2004, between the Company and Cornell Capital
                              Partners, LP

                  11          Statement: Computation of Per Share Earnings

                  31.1        Sarbanes-Oxley Act Section 302 Certifications for
                              Howard W. Schwan

                  31.2        Sarbanes-Oxley Act Section 302 Certification for
                              Stephen M. Merrick

                  32.1        Sarbanes-Oxley Act Section 906 Certification for
                              Stephen M. Merrick, Chief Financial Officer

                  32.2        Sarbanes-Oxley Act Section 906 Certification for
                              Howard W. Schwan, Chief Executive Officer

      (b) The Company filed a Current Report on Form 8-K on May 18, 2004,
      reporting its financial results for the quarter ended March 31, 2004. The
      Company filed another Current Report on Form 8-K on July 7, 2004,
      reporting that it had entered into a Standby Equity Distribution Agreement
      with an investment firm. A copy of this agreement has been added to this
      report as Exhibit 10.1. The Company has not filed any other Current
      Reports on Form 8-K during the quarter covered by this report.

      *     Also incorporated by reference the Exhibits filed as part of the
            SB-2 Registration Statement of the Registrant, effective November 5,
            1997, and subsequent periodic filings.


                                       10
<PAGE>


                                   SIGNATURES

      Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

      Dated: August 23, 2004                 CTI INDUSTRIES CORPORATION


                                             By: /s/ Howard W. Schwan
                                                 ----------------------------
                                                 Howard W. Schwan, President


                                             By: /s/ Stephen M. Merrick
                                                 ----------------------------
                                                 Stephen M. Merrick
                                                 Executive Vice President and
                                                 Chief Financial Officer


                                       11
<PAGE>

CTI Industries Corporation and Subsidiaries
Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                              June 30, 2004    December 31, 2003
                                                                              -------------    -----------------
                     ASSETS                                                     (Unaudited)         (Audited)
<S>                                                                            <C>                <C>
Current assets:
  Cash                                                                         $    421,430       $    329,742
  Accounts receivable, (less allowance for doubtful accounts of $355,469          5,467,657          4,620,276
  and $186,215, respectively)
  Inventories                                                                     9,388,535          9,263,160
  Deferred tax assets                                                               361,751            361,751
  Prepaid expenses and other current assets                                       1,032,989            859,635
                                                                               ------------       ------------

      Total current assets                                                       16,672,362         15,434,564

Property and equipment:
  Machinery and equipment                                                        18,158,239         18,939,535
  Building                                                                        2,714,301          2,678,581
  Office furniture and equipment                                                  1,796,853          1,931,831
  Land                                                                              250,000            250,000
  Leasehold improvements                                                            677,550            582,052
  Fixtures and equipment at customer locations                                    2,286,814          2,232,285
  Projects under construction                                                       237,023            408,961
                                                                               ------------       ------------
                                                                                 26,120,780         27,023,245
    Less: accumulated depreciation                                              (14,847,855)       (14,815,596)
                                                                               ------------       ------------

      Total property and equipment, net                                          11,272,925         12,207,649

Other assets:
  Deferred financing costs, net                                                     175,817            222,696
  Goodwill                                                                        1,113,108          1,113,108
  Deferred tax assets                                                               851,284          1,012,365
  Other assets                                                                      262,692            279,800
                                                                               ------------       ------------

      Total other assets                                                          2,402,901          2,627,969
                                                                               ------------       ------------

TOTAL ASSETS                                                                     30,348,188         30,270,182
                                                                               ============       ============
</TABLE>

See accompanying notes to condensed consolidated unaudited statements

<PAGE>

CTI Industries Corporation and Subsidiaries
Consolidated Balance Sheets


<TABLE>
<CAPTION>
                                                                         June 30, 2004    December 31, 2003
                                                                         -------------    -----------------
                                                                          (unaudited)         (audited)
<S>                                                                       <C>                <C>
                   LIABILITIES AND STOCKHOLDERS' EQUITY

  Checks written in excess of bank balance                                     731,029            341,108
  Accounts payable                                                           5,659,098          6,799,490
  Line of credit                                                             5,810,369          3,694,241
  Notes payable - current portion                                            2,528,708          2,998,496
  Accrued liabilities                                                        1,921,724          2,306,745
                                                                          ------------       ------------

      Total current liabilities                                             16,650,928         16,140,080

Long-term liabilities:
  Other Liabilities                                                          1,038,898          1,079,041
  Notes payable                                                              4,726,709          5,766,091
  Notes payable - officers                                                   2,345,024          2,064,126
                                                                          ------------       ------------

      Total long-term liabilities                                            8,110,631          8,909,258

Minority interest                                                               10,230              9,263
Commitments and Contingencies
Stockholders' equity:
  Common stock - no par value, 5,000,000 shares authorized,
  2,150,216 shares issued, 1,918,420 shares outstanding                      3,764,020          3,764,020
  Class B Common stock - no par value, 500,000 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            595,174
  Accumulated deficit                                                       (3,291,843)        (3,528,063)
  Accumulated other comprehensive earnings                                    (106,170)          (234,768)
  Less:
      Treasury stock - 231,796 shares                                         (939,114)          (939,114)
                                                                          ------------       ------------

      Total stockholders' equity                                             5,576,399          5,211,581
                                                                          ------------       ------------

TOTAL LIABILITIES & STOCKHOLDERS' EQUITY                                  $ 30,348,188       $ 30,270,182
                                                                          ============       ============
</TABLE>

See accompanying notes to condensed consolidated unaudited statements

<PAGE>

CTI Industries Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)

<TABLE>
<CAPTION>
                                                                  Quarter Ended June 30,                  Year to Date June 30,
                                                                  2004                2003              2004               2003
                                                              ------------       ------------       ------------       ------------
<S>                                                           <C>                <C>                <C>                <C>
Net Sales                                                     $  9,591,785       $  8,661,939       $ 20,485,769       $ 18,824,434

Cost of Sales                                                    7,559,756          6,755,910         16,306,371         14,981,352
                                                              ------------       ------------       ------------       ------------

      Gross profit on sales                                      2,032,028          1,906,029          4,179,398          3,843,082

Operating expenses:
  Administrative                                                 1,175,277          1,051,114          2,163,790          2,221,500
  Selling                                                          356,731            217,008            747,287            619,371
  Advertising and marketing                                        282,005            660,637            675,489          1,249,531
                                                              ------------       ------------       ------------       ------------

      Total operating expenses                                   1,814,013          1,928,759          3,586,565          4,090,402
                                                              ------------       ------------       ------------       ------------

Income (loss) from operations                                      218,016            (22,730)           592,833           (247,320)

Other income (expense):
  Interest expense                                                (338,828)          (273,691)          (669,964)          (475,443)
  Interest income                                                       --              1,220                 --              1,608
  Gain (loss) on sale of assets                                     15,024              7,512             15,024             15,024
  Foreign currency (loss) gain                                     (12,914)            96,798             63,841            (11,708)
  Other                                                            (76,094)           196,495            410,802             65,482
                                                              ------------       ------------       ------------       ------------

      Total other (expense) income                                (412,812)            28,334           (180,297)          (405,037)
                                                              ------------       ------------       ------------       ------------

(Loss) income  before income taxes and minority interest          (194,797)             5,604            412,536           (652,357)

Income tax (benefit) expense                                       (58,327)          (129,671)           175,129            (95,425)
                                                              ------------       ------------       ------------       ------------

Income (loss) before minority interest                            (136,470)           135,275            237,408           (556,932)

Minority interest in  income (loss) of subsidiary                     (789)             2,097              1,187               (321)
                                                              ------------       ------------       ------------       ------------

      Net (loss) income                                       $   (135,681)      $    133,178       $    236,220       $   (556,611)
                                                              ============       ============       ============       ============

Income (loss) applicable to common shares                     $   (135,681)      $    133,178       $    236,220       $   (556,611)
                                                              ============       ============       ============       ============

Basic income (loss) per common share                          $      (0.07)      $       0.07       $       0.12       $      (0.29)
                                                              ============       ============       ============       ============

Diluted income (loss) per common share                        $      (0.07)      $       0.06       $       0.12       $      (0.29)
                                                              ============       ============       ============       ============

Weighted average number of shares and equivalent shares
  of common stock outstanding:
    Basic                                                        1,918,420          1,918,420          1,918,420          1,918,420
                                                              ============       ============       ============       ============

    Diluted                                                      1,918,420          2,139,754          2,032,665          1,918,098
                                                              ============       ============       ============       ============
</TABLE>

See accompanying notes to condensed consolidated unaudited statements

<PAGE>

CTI Industries Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)

<TABLE>
<CAPTION>
                                                                     For the Six Month Period Ended
                                                                   June 30, 2004        June 30, 2003
                                                                   ----------------------------------
<S>                                                                  <C>                  <C>
Cash flows from operating activities:
  Net income (loss)                                                  $   236,220          $  (556,611)
  Adjustment to reconcile net income (loss) to cash
      (used in) provided by operating activities:
    Depreciation and amortization                                        909,605              710,934
    Deferred gain on sale/leaseback                                      (15,024)              15,024
    Amortization of Debt Discount                                        125,746               55,051
    Minority interest in loss of subsidiary                                  967                 (321)
    Provision for losses on accounts receivable                           90,000               30,000
    Provision for loss on inventory                                      115,000               90,000
    Deferred income taxes                                                175,129             (189,289)
    Change in assets and liabilities:
      Accounts receivable                                               (937,381)             368,085
      Inventory                                                         (240,375)            (269,938)
      Other assets                                                      (156,246)              (2,475)
      Accounts payable, accrued expenses and other changes            (1,297,813)             892,374
                                                                     --------------------------------

          Net cash (used in) provided by operating activities           (994,172)           1,142,834

Cash flows from investing activities:
  Cash aquired in acquisition of CTI Mexico                                                    (5,000)
  Purchases of property, plant and equipment                            (171,875)          (1,318,971)
  Proceeds from sale of property and equipment                             2,225
                                                                     --------------------------------

          Net cash used in investing activities                         (169,650)          (1,323,971)

Cash flows from financing activities:
  Checks written in excess of bank balance                               389,921              366,193
  Net change in revolving line of credit                               2,301,280           (2,085,057)
  Proceeds from issuance of long-term debt                                71,270            4,675,665
  Proceeds from issuance of notes due to officer                                              820,000
  Proceeds from the  issuance of short-term debt                                              900,000
  Repayment of long-term debt                                         (1,635,559)          (3,247,329)
  Repayment of short-term debt                                                 0           (1,116,736)
  Proceeds from debt to equity swap                                                            15,750
  Purchase of treasury stock                                                                  (15,226)
                                                                     --------------------------------

          Net cash provided by financing activities                    1,126,912              313,260

Effect of exchange rate changes on cash                                  128,598             (105,368)
                                                                     --------------------------------

Net increase in cash                                                      91,688               26,755

Cash at Beginning of Period                                              329,742              160,493
                                                                     --------------------------------

Cash at End of Period                                                $   421,430          $   187,248
                                                                     ================================
Supplemental Disclosure of non-cash activity
  Settlement of liability with third
  party via ownership transfer of
  long-term asset                                                    $   241,268          $         0

</TABLE>

      See accompanying notes to condensed consolidated unaudited statements

<PAGE>

                                  June 30, 2004
                   CTI Industries Corporation and Subsidiaries
         Notes to Unaudited Condensed Consolidated Financial Statements

Note 1 - Basis of Presentation

The accompanying financial statements are unaudited but in the opinion of
management contain all the adjustments (consisting of those of a normal
recurring nature) considered necessary to present fairly the financial position
and the results of operations and cash flows for the periods presented in
conformity with generally accepted accounting principles for interim financial
information and the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all the information and footnotes required by
U.S. generally accepted accounting principles for complete financial statements.

Operating results for the six months ended June 30, 2004 are not necessarily
indicative of the results that may be expected for the full year ending December
31, 2004. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K/A for the fiscal year ended December 31, 2003.

Principles of consolidation and nature of operations:

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, CTI Balloons Limited and CTF International S.A.
de C.V., as well as its majority owned subsidiaries CTI Mexico S.A. de C.V., and
Flexo Universal, S.A. de C.V. All significant intercompany transactions and
accounts have been eliminated in consolidation. The Company (i) designs,
manufactures and distributes 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.

Use of estimates

The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and use
assumptions that affect certain reported amounts and disclosures. Actual results
may differ from those estimates.

Stock-Based Compensation

As of June 30, 2004, the Company had four stock-based compensation plans. 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

<PAGE>

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. No stock options were granted during the three or six months
ended June 30, 2004.

Historically, the Company's option awards have vested at date of grant.
Accordingly, had the Company applied the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock-based Compensation," there would be no pro
forma effect on net income to disclose in periods with no option awards.

Note 2 - Legal Proceedings

      On September 5, 2003, Airgas, Inc., Airgas-Southwest, Inc., Airgas-South,
Inc. and Airgas-East, Inc. filed a joint action against the Company 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, these plaintiffs claim that the Company owes to
them certain sums for (i) helium sold and delivered, (ii) rental with respect to
helium tanks and (iii) replacement charges for tanks claimed to have been lost.
The Company intends vigorously to defend this action and to pursue its
counterclaim. Currently, the parties are engaged in pre-trial discovery
proceedings. The case is set for a final pre-trial conference on January 3,
2005.

      On June 4, 2004, Spar Group, Inc. initiated an arbitration proceeding in
New York City against the Company. In the proceeding, Spar Group claims that
there is due from the Company to Spar Group for services rendered in the amount
of $180,043, plus interest. Spar Group claims to have rendered services to the
Company in various Eckerd stores with respect to the display and ordering of
metalized and latex balloons for sale in those stores. The Company has filed an
answer denying liability with respect to the claim and asserting a counterclaim
for damages against Spar Group for breach of its agreement to provide such
services. The Company belives it has made adequate provision for any settlement
of this matter based on dicussions with counsel.

      In addition, the Company and its subsidiaries are 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.

Note 3 - Comprehensive Income (Loss)

Comprehensive Income was $46,029 for the three months ended June 30, 2004 and of
$290,328 for the three months ended June 30, 2003. Comprehensive income was
$128,598 for the six months ended June 30, 2004 and there was a comprehensive
loss of ($375,874) for the six months ended June 30, 2003.

<PAGE>

Note 4 - Earnings (Loss) Per Share

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

Diluted earnings per share is computed by dividing the net income (loss) 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.

Potential dilutive securities include 417,470 options and 308,129 warrants.

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

<PAGE>

receivable, inventory and machinery and equipment. Sales and selected Note 4 -
Inventories, net

<TABLE>
<CAPTION>
                                                    June 30, 2004    December 31, 2003
                                                    -------------    -----------------
                                                     (unaudited)
<S>                                                  <C>                <C>
Raw material and work in process                     $ 2,240,179        $ 2,231,428
Finished goods                                         7,681,604          7,523,889
                                                     -----------        -----------
Inventory, Gross                                       9,921,780          9,755,317
Less:  Inventory Reserves                               (533,248)          (492,157)
                                                     -----------        -----------

Inventories, net                                       9,388,535          9,263,160
                                                     ===========        ===========
</TABLE>

Note 5 - Geographic Segment Data

The Company has determined that it operates primarily in one business segment
which designs, manufactures, and distributes film products for use in packaging
and novelty balloon products. The Company operates in foreign and domestic
regions. Information about the Company's operations by geographic areas is as
follows.

<TABLE>
<CAPTION>
                    Net Sales to External Customers      Net Sales to External Customers
                  For the Three Months Ended June 30,   For the Six Months Ended June 30,

                        2004               2003              2004               2003
                        ----               ----              ----               ----
<S>                 <C>                <C>               <C>                <C>
United States       $  8,403,000       $  7,920,000      $ 17,674,000       $ 17,003,000
Mexico                   539,000            543,000         1,411,000          1,070,000
United Kingdom           650,000            199,000         1,401,000            751,000
                    ------------       ------------      ------------       ------------

                    $ 9,592,000       $   8,662,000      $ 20,486,000       $ 18,824,000
                    ============       ============      ============       ============
</TABLE>

                           Total Assets at

                      June 30,        December 31,
                        2004               2003
                        ----               ----
United States       $ 27,388,000      $ 27,603,000
Mexico                 4,702,000         5,476,000
United Kingdom         1,853,000         1,412,000
Eliminations          (3,595,000)       (4,221,000)
                    ------------      ------------

                    $ 30,348,000      $ 30,270,000
                    ============      ============

Note 6 - Concentration of Credit Risk

Concentration of credit risk with respect to trade accounts receivable beyond
our significant customers noted below is generally limited due to the number of
entities comprising the Company's customer base. The Company performs ongoing
credit evaluations and provides an allowance for potential credit losses against
the portion of accounts receivable which is estimated to be uncollectible. Such
losses have historically been within management's expectations. For the six
months ended June 30, 2004, the Company had 4 customers that accounted for
approximately $3,946,000 or 19.3%, $2,423,000 or 11.8%, $2,256,000 or 11.0%, and
$2,175,000 or 10.6%, respectively, of consolidated net sales. For the three
months ended March 31, 2004, the Company had three customers that accounted for
approximately $1,979,000 or 18.2%, $1,245,000 or 11.4% and $1,142,000 or 10.5%,
respectively of consolidated net sales.

As of June 30, 2004 Accounts Receivable balances for the four customers were
$883,915 (16%), $204,927 (4%), $556,088 (10%) and $778,663 (14%)

<PAGE>

respectively. In 2003, the two customers had receivable balances of $548,694
(12%) and $458,162 (10%) respectively.

Note 7 - Subsequent Event - Standby Equity Distribution Agreement

On July 1, 2004, the Company entered into a Standby Equity Distribution
Agreement ("SEDA") with an investment firm. Under the SEDA, the investment firm
has committed to provide up to $5 million of funding to be drawn down at the
Company's discretion by the purchase of the Company's common stock. The Company
may request up to $100,000 in any seven-day period in exchange for issuing
shares of its common stock to the investment firm. The purchase price of any
shares purchased under the SEDA with respect to any advance will be equal to
100% of the volume weighted average price of the Company's common stock on the
NASDAQ SmallCap Stock Market for the five days immediately following the notice
date for the advance, subject to payment to the investment firm of a commitment
fee of 5% of the amount of each advance. The facility may be used in whole or in
part entirely at the Company's discretion, subject to an effective registration
of the related shares. As of June 30, 2004, no shares have been issued or funds
received by the Company under this agreement.

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>2
<FILENAME>d60519_ex10-1.txt
<DESCRIPTION>STANDBY EQUITY DISTRIBUTION AGREEMENT
<TEXT>

                                  EXHIBIT 10.1

                      STANDBY EQUITY DISTRIBUTION AGREEMENT

      AGREEMENT dated as of the 1st day of June 2004 (the "Agreement") between
CORNELL CAPITAL PARTNERS, LP, a Delaware limited partnership (the "Investor"),
and CTI INDUSTRIES CORPORATION a corporation organized and existing under the
laws of the State of Illinois (the "Company").

      WHEREAS, the parties desire that, upon the terms and subject to the
conditions contained herein, the Company shall issue and sell to the Investor,
from time to time as provided herein, and the Investor shall purchase from the
Company up to Five Million Dollars ($5,000,000) of the Company's common stock,
no par value per share (the "Common Stock"); and

      WHEREAS, such investments will be made in reliance upon the provisions of
Regulation D ("Regulation D") of the Securities Act of 1933, as amended, and the
regulations promulgated thereunder (the "Securities Act"), and or upon such
other exemption from the registration requirements of the Securities Act as may
be available with respect to any or all of the investments to be made hereunder.

      WHEREAS, the Company has engaged Newbridge Securities Corp., to act as the
Company's exclusive placement agent in connection with the sale of the Company's
Common Stock to the Investor hereunder pursuant to the Placement Agent Agreement
dated the date hereof by and among the Company, the Placement Agent and the
Investor (the "Placement Agent Agreement").

      NOW, THEREFORE, the parties hereto agree as follows:

                                   ARTICLE I.
                               Certain Definitions

      Section 1.1. "Advance" shall mean the portion of the Commitment Amount
requested by the Company in the Advance Notice.

      Section 1.2. "Advance Date" shall mean the date Butler Gonzalez LLP Escrow
Account is in receipt of the funds from the Investor and Butler Gonzalez LLP, as
the Investor's Counsel, is in possession of free trading shares from the Company
and therefore an Advance by the Investor to the Company can be made and Butler
Gonzalez LLP can release the free trading shares to the Investor. The Advance
Date shall be the first (1st) Trading Day after expiration of the applicable
Pricing Period for each Advance.

      Section 1.3. "Advance Notice" shall mean a written notice to the Investor
setting forth the Advance amount that the Company requests from the Investor and
the Advance Date.

<PAGE>

      Section 1.4. "Advance Notice Date" shall mean each date the Company
delivers to the Investor an Advance Notice requiring the Investor to advance
funds to the Company, subject to the terms of this Agreement. No Advance Notice
Date shall be less than seven (7) Trading Days after the prior Advance Notice
Date.

      Section 1.5. "Bid Price" shall mean, on any date, the closing bid price
(as reported by Bloomberg L.P.) of the Common Stock on the Principal Market or
if the Common Stock is not traded on a Principal Market, the highest reported
bid price for the Common Stock, as furnished by the National Association of
Securities Dealers, Inc.

      Section 1.6. "Closing" shall mean one of the closings of a purchase and
sale of Common Stock pursuant to Section 2.3.

      Section 1.7. "Commitment Amount" shall mean the aggregate amount of up to
Five Million Dollars ($5,000,000) which the Investor has agreed to provide to
the Company in order to purchase the Company's Common Stock pursuant to the
terms and conditions of this Agreement.

      Section 1.8. "Commitment Period" shall mean the period commencing on the
earlier to occur of (i) the Effective Date, or (ii) such earlier date as the
Company and the Investor may mutually agree in writing, and expiring on the
earliest to occur of (x) the date on which the Investor shall have made payment
of Advances pursuant to this Agreement in the aggregate amount of Five Million
Dollars ($5,000,000), (y) the date this Agreement is terminated pursuant to
Section 2.5, or (z) the date occurring twenty-four (24) months after the
Effective Date.

      Section 1.9. "Common Stock" shall mean the Company's common stock, no par
value per share.

      Section 1.10. "Condition Satisfaction Date" shall have the meaning set
forth in Section 7.2.

      Section 1.11. "Damages" shall mean any loss, claim, damage, liability,
costs and expenses (including, without limitation, reasonable attorney's fees
and disbursements and costs and expenses of expert witnesses and investigation).

      Section 1.12. "Effective Date" shall mean the date on which the SEC first
declares effective a Registration Statement registering the resale of the
Registrable Securities as set forth in Section 7.2(a).

      Section 1.13. "Escrow Agreement" shall mean the escrow agreement among the
Company, the Investor, and Butler Gonzalez LLP dated the date hereof.

      Section 1.14. "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder.

      Section 1.15. "Material Adverse Effect" shall mean any condition,
circumstance, or situation that would prohibit or otherwise materially interfere
with the ability of the Company to


                                       2
<PAGE>

enter into and perform any of its obligations under this Agreement or the
Registration Rights Agreement in any material respect.

      Section 1.16. "Market Price" shall mean the lowest daily VWAP of the
Common Stock during the Pricing Period.

      Section 1.17. "Maximum Advance Amount" shall be One Hundred Thousand
Dollars ($100,000) per Advance Notice up to a maximum of Four Hundred Thousand
Dollars ($400,000), in the aggregate, in any thirty-day (30) calendar period.

      Section 1.18 "NASD" shall mean the National Association of Securities
Dealers, Inc.

      Section 1.19 "Person" shall mean an individual, a corporation, a
partnership, an association, a trust or other entity or organization, including
a government or political subdivision or an agency or instrumentality thereof.

      Section 1.20 "Placement Agent" shall mean Newbridge Securities Corporation
a registered broker-dealer.

      Section 1.21 "Pricing Period" shall mean the five (5) consecutive Trading
Days after the Advance Notice Date.

      Section 1.22 "Principal Market" shall mean the Nasdaq National Market, the
Nasdaq SmallCap Market, the American Stock Exchange, the OTC Bulletin Board or
the New York Stock Exchange, whichever is at the time the principal trading
exchange or market for the Common Stock.

      Section 1.23 "Purchase Price" shall be set at one hundred percent (100%)
of the Market Price during the Pricing Period.

      Section 1.24 "Registrable Securities" shall mean the shares of Common
Stock to be issued hereunder (i) in respect of which the Registration Statement
has not been declared effective by the SEC, (ii) which have not been sold under
circumstances meeting all of the applicable conditions of Rule 144 (or any
similar provision then in force) under the Securities Act ("Rule 144") or (iii)
which have not been otherwise transferred to a holder who may trade such shares
without restriction under the Securities Act, and the Company has delivered a
new certificate or other evidence of ownership for such securities not bearing a
restrictive legend.

      Section 1.25 "Registration Rights Agreement" shall mean the Registration
Rights Agreement dated the date hereof, regarding the filing of the Registration
Statement for the resale of the Registrable Securities, entered into between the
Company and the Investor.

      Section 1.26 "Registration Statement" shall mean a registration statement
on Form S-1 or S-3 (if use of such form is then available to the Company
pursuant to the rules of the SEC and, if not, on such other form promulgated by
the SEC for which the Company then qualifies and which counsel for the Company
shall deem appropriate, and which form shall be available for the resale of the
Registrable Securities to be registered there under in accordance with the
provisions of this Agreement and the Registration Rights Agreement, and in
accordance with the


                                       3
<PAGE>

intended method of distribution of such securities), for the registration of the
resale by the Investor of the Registrable Securities under the Securities Act.

      Section 1.27 "Regulation D" shall have the meaning set forth in the
recitals of this Agreement.

      Section 1.28 "SEC" shall mean the Securities and Exchange Commission.

      Section 1.29 "Securities Act" shall have the meaning set forth in the
recitals of this Agreement.

      Section 1.30 "SEC Documents" shall mean Annual Reports on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and Proxy Statements
of the Company as supplemented to the date hereof, filed by the Company for a
period of at least twelve (12) months immediately preceding the date hereof or
the Advance Date, as the case may be, until such time as the Company no longer
has an obligation to maintain the effectiveness of a Registration Statement as
set forth in the Registration Rights Agreement.

      Section 1.31 "Trading Day" shall mean any day during which the New York
Stock Exchange shall be open for business.

      Section 1.32 "VWAP" shall mean the volume weighted average price of the
Company's Common Stock as quoted by Bloomberg, LP.

                                   ARTICLE II.
                                    Advances

      Section 2.1. Investments.

            (a) Advances. Upon the terms and conditions set forth herein
(including, without limitation, the provisions of Article VII hereof), on any
Advance Notice Date the Company may request an Advance by the Investor by the
delivery of an Advance Notice. The number of shares of Common Stock that the
Investor shall receive for each Advance shall be determined by dividing the
amount of the Advance by the Purchase Price. No fractional shares shall be
issued. Fractional shares shall be rounded to the next higher whole number of
shares. The aggregate maximum amount of all Advances that the Investor shall be
obligated to make under this Agreement shall not exceed the Commitment Amount.

      Section 2.2. Mechanics.

            (a) Advance Notice. At any time during the Commitment Period, the
Company may deliver an Advance Notice to the Investor, subject to the conditions
set forth in Section 7.2; provided, however, the amount for each Advance as
designated by the Company in the applicable Advance Notice, shall not be more
than the Maximum Advance Amount. The aggregate amount of the Advances pursuant
to this Agreement shall not exceed the Commitment Amount. The Company
acknowledges that the Investor may sell shares of the Company's Common Stock
corresponding with a particular Advance Notice on the day the Advance Notice


                                       4
<PAGE>

is received by the Investor. There will be a minimum of seven (7) Trading Days
between each Advance Notice Date.

            (b) Date of Delivery of Advance Notice. An Advance Notice shall be
deemed delivered on (i) the Trading Day it is received by facsimile or otherwise
by the Investor if such notice is received prior to 12:00 noon Eastern Time, or
(ii) the immediately succeeding Trading Day if it is received by facsimile or
otherwise after 12:00 noon Eastern Time on a Trading Day or at any time on a day
which is not a Trading Day. No Advance Notice may be deemed delivered, on a day
that is not a Trading Day.

            (c) Pre-Closing Share Credit. Within two (2) business days after the
Advance Notice Date, the Company shall credit shares of the Company's Common
Stock to the balance account of Butler Gonzalez LLP (the "Escrow Agent" and/or
"Investor's Counsel") with The Depository Trust Company through its Deposit
Withdrawal At Custodian system, in an amount equal to the amount of the
requested Advance divided by the closing Bid Price of the Company's Common Stock
as of the Advance Notice Date multiplied by one point one (1.1). Any adjustments
to the number of shares to be delivered to the Investor at the Closing as a
result of fluctuations in the closing Bid Price of the Company's Common Stock
shall be made as of the date of the Closing. Any excess shares shall be credited
to the next Advance. In no event shall the number of shares issuable to the
Investor pursuant to an Advance cause the Investor to own in excess of nine and
9/10 percent (9.9%) of the then outstanding Common Stock of the Company.

            (d) Hardship. In the event the Investor sells the Company's Common
Stock pursuant to subsection (c) above and the Company fails to perform its
obligations as mandated in Section 2.5 and 2.2 (c), and specifically fails to
provide the Investor with the shares of Common Stock for the applicable Advance,
the Company acknowledges that the Investor shall suffer financial hardship and
therefore shall be liable for any and all losses, commissions, fees, or
financial hardship caused to the Investor.

      Section 2.3. Closings. On each Advance Date, which shall be the first
(1st) Trading Day after expiration of the applicable Pricing Period for each
Advance, (i) the Company shall deliver to the Investor's Counsel, as defined
pursuant to the Escrow Agreement, shares of the Company's Common Stock,
representing the amount of the Advance by the Investor pursuant to Section 2.1
herein, registered in the name of the Investor which shall be delivered to the
Investor, or otherwise in accordance with the Escrow Agreement, subject to
adjustment for shares previously delivered with respect to such Advance pursuant
to Section 2.2(c) herein and (ii) the Investor shall deliver to the Investor's
Counsel the amount of the Advance specified in the Advance Notice by wire
transfer of immediately available funds which shall be delivered to the Company,
or otherwise in accordance with the Escrow Agreement. In addition, on or prior
to the Advance Date, each of the Company and the Investor shall deliver to the
other through the Investor's Counsel all documents, instruments and writings
required to be delivered by either of them pursuant to this Agreement in order
to implement and effect the transactions contemplated herein. Payment of funds
to the Company and delivery of the Company's Common Stock to the Investor shall
occur in accordance with the conditions set forth above and those contained in
the Escrow Agreement; provided, however, that to the extent the Company has not
paid the fees, expenses, and disbursements of the Investor and the Investor's
counsel in accordance with


                                       5
<PAGE>

Section 12.4, the amount of such fees, expenses, and disbursements may be
deducted by the Investor (and shall be paid to the relevant party) from the
amount of the Advance with no reduction in the amount of shares of the Company's
Common Stock to be delivered on such Advance Date.

      Section 2.4. Termination of Investment. The obligation of the Investor to
make an Advance to the Company pursuant to this Agreement shall terminate
permanently (including with respect to an Advance Date that has not yet
occurred) in the event that (i) there shall occur any stop order or suspension
of the effectiveness of the Registration Statement for an aggregate of fifty
(50) Trading Days, other than due to the acts of the Investor, during the
Commitment Period, and (ii) the Company shall at any time fail materially to
comply with the requirements of Article VI and such failure is not cured within
thirty (30) days after receipt of written notice from the Investor, provided,
however, that this termination provision shall not apply to any period
commencing upon the filing of a post-effective amendment to such Registration
Statement and ending upon the date on which such post effective amendment is
declared effective by the SEC..

      Section 2.5. Agreement to Advance Funds.

            (a) The Investor agrees to advance the amount specified in the
Advance Notice to the Company after the completion of each of the following
conditions and the other conditions set forth in this Agreement:

                  (i) the execution and delivery by the Company, and the
Investor, of this Agreement, and the Exhibits hereto;

                  (ii) Investor's Counsel shall have received the shares of
Common Stock applicable to the Advance in accordance with Section 2.2(c) hereof;

                  (iii) the Company's Registration Statement with respect to the
resale of the Registrable Securities in accordance with the terms of the
Registration Rights Agreement shall have been declared effective by the SEC;

                  (iv) the Company shall have obtained all material permits and
qualifications required by any applicable state for the offer and sale of the
Registrable Securities, or shall have the availability of exemptions therefrom.
The sale and issuance of the Registrable Securities shall be legally permitted
by all laws and regulations to which the Company is subject;

                  (v) the Company shall have filed with the Commission in a
timely manner all reports, notices and other documents required of a "reporting
company" under the Exchange Act and applicable Commission regulations;

                  (vi) the fees as set forth in Section 12.4 below shall have
been paid or can be withheld as provided in Section 2.3;

                  (vii) the conditions set forth in Section 7.2 shall have been
satisfied; and

                  (viii) The Company's transfer agent shall be DWAC eligible.


                                       6
<PAGE>

            (b) In the event that the Investor shall fail to advance and pay
funds to the Company as provided in this Agreement, the Company shall provide
the Investor written notice of such failure, of which receipt shall be confirmed
by the sending party by providing a confirmation of successful facsimile
transmission, in the event such failure to perform is not cured within ten (10)
business days from the receipt of such notice from the Company the Investor
shall be liable to the Company for (i) the amount of the Advance it is obligated
to make together with interest thereon at a rate of three percent (3%) in excess
of Prime Rate (as set forth in the Midwest Edition of the Wall Street Journal,
(ii) any and all reasonable losses or damage incurred by the Company as a result
of the Investor to timely advance funds to the Company as provided herein, and
(iii) all reasonable costs and expenses which the Company has incurred in their
effort to collect from the Investor the amount of such Advance and any damages,
including without limitation, a reasonable sum for its attorney's fees.

      Section 2.6. Lock Up Period.

                  During the Commitment Period, the Company shall not, without
thirty (30) calendar days advance written notice to the Investor, of which
receipt shall be confirmed by the sending party by providing a confirmation of
successful facsimile transmission, issue or sell (i) any Common Stock or
Preferred Stock without consideration or for a consideration per share less than
the Bid Price on the date of issuance, except for shares of the Company's Common
Stock which are purchased upon exercise of options or warrants or (ii) issue or
sell any warrant, option, right, contract, call, or other security or instrument
granting the holder thereof the right to acquire Common Stock without
consideration or for a consideration per share less than the Bid Price on the
date of issuance.

                                  ARTICLE III.
                   Representations and Warranties of Investor

      Investor hereby represents and warrants to, and agrees with, the Company
that the following are true and as of the date hereof and as of each Advance
Date:

      Section 3.1. Organization and Authorization. The Investor is duly
incorporated or organized and validly existing in the jurisdiction of its
incorporation or organization and has all requisite power and authority to
purchase and hold the securities issuable hereunder. The decision to invest and
the execution and delivery of this Agreement by such Investor, the performance
by such Investor of its obligations hereunder and the consummation by such
Investor of the transactions contemplated hereby have been duly authorized and
requires no other proceedings on the part of the Investor. The undersigned has
the right, power and authority to execute and deliver this Agreement and all
other instruments (including, without limitations, the Registration Rights
Agreement), on behalf of the Investor. This Agreement has been duly executed and
delivered by the Investor and, assuming the execution and delivery hereof and
acceptance thereof by the Company, will constitute the legal, valid and binding
obligations of the Investor, enforceable against the Investor in accordance with
its terms.

      Section 3.2. Evaluation of Risks. The Investor has such knowledge and
experience in financial tax and business matters as to be capable of evaluating
the merits and risks of, and bearing the economic risks entailed by, an
investment in the Company and of protecting its


                                       7
<PAGE>

interests in connection with this transaction. It recognizes that its investment
in the Company involves a high degree of risk.

      Section 3.3. No Legal Advice From the Company. The Investor acknowledges
that it had the opportunity to review this Agreement and the transactions
contemplated by this Agreement with his or its own legal counsel and investment
and tax advisors. The Investor is relying solely on such counsel and advisors
and not on any statements or representations of the Company or any of its
representatives or agents for legal, tax or investment advice with respect to
this investment, the transactions contemplated by this Agreement or the
securities laws of any jurisdiction.

      Section 3.4. Investment Purpose. The securities are being purchased by the
Investor for its own account, for investment and without any view to the
distribution, assignment or resale to others or fractionalization in whole or in
part. The Investor agrees not to assign or in any way transfer the Investor's
rights to the securities or any interest therein and acknowledges that the
Company will not recognize any purported assignment or transfer except in
accordance with applicable Federal and state securities laws. No other person
has or will have a direct or indirect beneficial interest in the securities. The
Investor agrees not to sell, hypothecate or otherwise transfer the Investor's
securities unless the securities are registered under Federal and applicable
state securities laws or unless, in the opinion of counsel satisfactory to the
Company, an exemption from such laws is available.

      Section 3.5. Accredited Investor. The Investor is an "Accredited Investor"
as that term is defined in Rule 501(a)(3) of Regulation D of the Securities Act.

      Section 3.6. Information. The Investor and its advisors (and its counsel),
if any, have been furnished with all materials relating to the business,
finances and operations of the Company and information it deemed material to
making an informed investment decision. The Investor and its advisors, if any,
have been afforded the opportunity to ask questions of the Company and its
management. Neither such inquiries nor any other due diligence investigations
conducted by such Investor or its advisors, if any, or its representatives shall
modify, amend or affect the Investor's right to rely on the Company's
representations and warranties contained in this Agreement. The Investor
understands that its investment involves a high degree of risk. The Investor is
in a position regarding the Company, which, based upon employment, family
relationship or economic bargaining power, enabled and enables such Investor to
obtain information from the Company in order to evaluate the merits and risks of
this investment. The Investor has sought such accounting, legal and tax advice,
as it has considered necessary to make an informed investment decision with
respect to this transaction.

      Section 3.7. Receipt of Documents. The Investor and its counsel has
received and read in their entirety: (i) this Agreement and the Exhibits annexed
hereto; (ii) all due diligence and other information necessary to verify the
accuracy and completeness of such representations, warranties and covenants;
(iii) the Company's Form 10-K for the year ended year ended December 31, 2003
and Form 10-Q for the periods ended March 31, 2004; and (iv) answers to all
questions the Investor submitted to the Company regarding an investment in the
Company; and the Investor has relied on the information contained therein and
has not been furnished any other documents, literature, memorandum or
prospectus.


                                       8
<PAGE>

      Section 3.8. Registration Rights Agreement and Escrow Agreement. The
parties have entered into the Registration Rights Agreement and the Escrow
Agreement, each dated the date hereof.

      Section 3.9. No General Solicitation. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D under the Securities Act) in connection with the offer or sale of
the shares of Common Stock offered hereby.

      Section 3.10. Not an Affiliate. The Investor is not an officer, director
or a person that directly, or indirectly through one or more intermediaries,
controls or is controlled by, or is under common control with the Company or any
"Affiliate" of the Company (as that term is defined in Rule 405 of the
Securities Act). Neither the Investor nor its Affiliates has an open short
position in the Common Stock of the Company, and the Investor agrees that it
will not, and that it will cause its Affiliates not to, engage in any short
sales of or hedging transactions with respect to the Common Stock, provided that
the Company acknowledges and agrees that upon receipt of an Advance Notice the
Investor may sell the Shares to be issued to the Investor pursuant to the
Advance Notice, even if the Shares have not been delivered to the Investor.

                                   ARTICLE IV.
                  Representations and Warranties of the Company

      Except as stated below, on the disclosure schedules attached hereto or in
the SEC Documents (as defined herein), the Company hereby represents and
warrants to, and covenants with, the Investor that the following are true and
correct as of the date hereof:

      Section 4.1. Organization and Qualification. The Company is duly
incorporated or organized and validly existing in the jurisdiction of its
incorporation or organization and has all requisite power and authority
corporate power to own its properties and to carry on its business as now being
conducted. Each of the Company and its subsidiaries is duly qualified as a
foreign corporation to do business and is in good standing in every jurisdiction
in which the nature of the business conducted by it makes such qualification
necessary, except to the extent that the failure to be so qualified or be in
good standing would not have a Material Adverse Effect on the Company and its
subsidiaries taken as a whole.

      Section 4.2. Authorization, Enforcement, Compliance with Other
Instruments. (i) The Company has the requisite corporate power and authority to
enter into and perform this Agreement, the Registration Rights Agreement, the
Escrow Agreement, the Placement Agent Agreement and any related agreements, in
accordance with the terms hereof and thereof, (ii) the execution and delivery of
this Agreement, the Registration Rights Agreement, the Escrow Agreement, the
Placement Agent Agreement and any related agreements by the Company and the
consummation by it of the transactions contemplated hereby and thereby, have
been duly authorized by the Company's Board of Directors and no further consent
or authorization is required by the Company, its Board of Directors or its
stockholders, (iii) this Agreement, the Registration Rights Agreement, the
Escrow Agreement, the Placement Agent Agreement and any related agreements have
been duly executed and delivered by the Company, (iv) this Agreement, the
Registration Rights Agreement, the Escrow Agreement, the Placement Agent


                                       9
<PAGE>

Agreement and assuming the execution and delivery thereof and acceptance by the
Investor and any related agreements constitute the valid and binding obligations
of the Company enforceable against the Company in accordance with their terms,
except as such enforceability may be limited by general principles of equity or
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally, the enforcement of creditors'
rights and remedies. The Company acknowledges that the Investor would not enter
into this Agreement without the participation of Stephen Merrick and his ability
to execute the Business Plan and the operational plans of the Company.

      Section 4.3. Capitalization. As of the date hereof, the authorized capital
stock of the Company consists of 5,000,000 shares of Common Stock, no par value
per share and 2,000,000 shares of Preferred Stock, no par value per share of
which 1,918,420 shares of Common Stock and no shares of Preferred Stock were
issued and outstanding. All of such outstanding shares have been validly issued
and are fully paid and nonassessable. Except as disclosed in the SEC Documents,
no shares of Common Stock are subject to preemptive rights or any other similar
rights or any liens or encumbrances suffered or permitted by the Company. Except
as disclosed in the SEC Documents, as of the date hereof, (i) there are no
outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, any shares of capital stock of the Company or any of its
subsidiaries, or contracts, commitments, understandings or arrangements by which
the Company or any of its subsidiaries is or may become bound to issue
additional shares of capital stock of the Company or any of its subsidiaries or
options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into, any
shares of capital stock of the Company or any of its subsidiaries, (ii) there
are no outstanding debt securities (iii) there are no outstanding registration
statements other than on Form S-8 and (iv) there are no agreements or
arrangements under which the Company or any of its subsidiaries is obligated to
register the sale of any of their securities under the Securities Act (except
pursuant to the Registration Rights Agreement). There are no securities or
instruments containing anti-dilution or similar provisions that will be
triggered by this Agreement or any related agreement or the consummation of the
transactions described herein or therein. The Company has furnished to the
Investor true and correct copies of the Company's Certificate of Incorporation,
as amended and as in effect on the date hereof (the "Certificate of
Incorporation"), and the Company's By-laws, as in effect on the date hereof (the
"By-laws"), and the terms of all securities convertible into or exercisable for
Common Stock and the material rights of the holders thereof in respect thereto.


                                       10
<PAGE>

      Section 4.4. No Conflict. The execution, delivery and performance of this
Agreement by the Company and the consummation by the Company of the transactions
contemplated hereby will not (i) result in a violation of the Certificate of
Incorporation, any certificate of designations of any outstanding series of
preferred stock of the Company or By-laws or (ii) conflict with or constitute a
default (or an event which with notice or lapse of time or both would become a
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any agreement, indenture or instrument to which
the Company or any of its subsidiaries is a party, or result in a violation of
any law, rule, regulation, order, judgment or decree (including federal and
state securities laws and regulations and the rules and regulations of the
Principal Market on which the Common Stock is quoted) applicable to the Company
or any of its subsidiaries or by which any material property or asset of the
Company or any of its subsidiaries is bound or affected and which would cause a
Material Adverse Effect. Except as disclosed in the SEC Documents, neither the
Company nor its subsidiaries is in violation of any term of or in default under
its Certificate of Incorporation or By-laws or their organizational charter or
by-laws, respectively, or any material contract, agreement, mortgage,
indebtedness, indenture, instrument, judgment, decree or order or any statute,
rule or regulation applicable to the Company or its subsidiaries. The business
of the Company and its subsidiaries is not being conducted in violation of any
material law, ordinance, regulation of any governmental entity. Except as
specifically contemplated by this Agreement and as required under the Securities
Act and any applicable state securities laws, the Company is not required to
obtain any consent, authorization or order of, or make any filing or
registration with, any court or governmental agency in order for it to execute,
deliver or perform any of its obligations under or contemplated by this
Agreement or the Registration Rights Agreement in accordance with the terms
hereof or thereof. All consents, authorizations, orders, filings and
registrations which the Company is required to obtain pursuant to the preceding
sentence have been obtained or effected on or prior to the date hereof. The
Company and its subsidiaries are unaware of any fact or circumstance which might
give rise to any of the foregoing.

Section 4.5. SEC Documents; Financial Statements. Since March 31, 2004, the
Company has filed all reports, schedules, forms, statements and other documents
required to be filed by it with the SEC under of the Exchange Act. The Company
has delivered to the Investor or its representatives, or made available through
the SEC's website at http://www.sec.gov, true and complete copies of the SEC
Documents. As of their respective dates, the financial statements of the Company
disclosed in the SEC Documents (the "Financial Statements") complied as to form
in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto. Such financial
statements have been prepared in accordance with generally accepted accounting
principles, consistently applied, during the periods involved (except (i) as may
be otherwise indicated in such financial statements or the notes thereto, or
(ii) in the case of unaudited interim statements, to the extent they may exclude
footnotes or may be condensed or summary statements) and, fairly present in all
material respects the financial position of the Company as of the dates thereof
and the results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited statements, to normal year-end audit
adjustments). No other information provided by or on behalf of the Company to
the Investor which is not included in the SEC Documents contains any untrue
statement of a material fact or omits to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.


                                       11
<PAGE>

      Section 4.6. 10b-5. The SEC Documents do not include any untrue statements
of material fact, nor do they omit to state any material fact required to be
stated therein necessary to make the statements made, in light of the
circumstances under which they were made, not misleading.

      Section 4.7. No Default. Except as disclosed in the SEC Documents, the
Company is not in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any indenture,
mortgage, deed of trust or other material instrument or agreement to which it is
a party or by which it is or its property is bound and neither the execution,
nor the delivery by the Company, nor the performance by the Company of its
obligations under this Agreement or any of the exhibits or attachments hereto
will conflict with or result in the breach or violation of any of the terms or
provisions of, or constitute a default or result in the creation or imposition
of any lien or charge on any assets or properties of the Company under its
Certificate of Incorporation, By-Laws, any material indenture, mortgage, deed of
trust or other material agreement applicable to the Company or instrument to
which the Company is a party or by which it is bound, or any statute, or any
decree, judgment, order, rules or regulation of any court or governmental agency
or body having jurisdiction over the Company or its properties, in each case
which default, lien or charge is likely to cause a Material Adverse Effect on
the Company's business or financial condition.

      Section 4.8. Absence of Events of Default. Except for matters described in
the SEC Documents and/or this Agreement, no Event of Default, as defined in the
respective agreement to which the Company is a party, and no event which, with
the giving of notice or the passage of time or both, would become an Event of
Default (as so defined), has occurred and is continuing, which would have a
Material Adverse Effect on the Company's business, properties, prospects,
financial condition or results of operations.

      Section 4.9. Intellectual Property Rights. The Company and its
subsidiaries own or possess adequate rights or licenses to use all material
trademarks, trade names, service marks, service mark registrations, service
names, patents, patent rights, copyrights, inventions, licenses, approvals,
governmental authorizations, trade secrets and rights necessary to conduct their
respective businesses as now conducted. The Company and its subsidiaries do not
have any knowledge of any infringement by the Company or its subsidiaries of
trademark, trade name rights, patents, patent rights, copyrights, inventions,
licenses, service names, service marks, service mark registrations, trade secret
or other similar rights of others, and, to the knowledge of the Company, there
is no claim, action or proceeding being made or brought against, or to the
Company's knowledge, being threatened against, the Company or its subsidiaries
regarding trademark, trade name, patents, patent rights, invention, copyright,
license, service names, service marks, service mark registrations, trade secret
or other infringement; and the Company and its subsidiaries are unaware of any
facts or circumstances which might give rise to any of the foregoing.

      Section 4.10. Employee Relations. Neither the Company nor any of its
subsidiaries is involved in any labor dispute nor, to the knowledge of the
Company or any of its subsidiaries, is any such dispute threatened. None of the
Company's or its subsidiaries' employees is a member of a union and the Company
and its subsidiaries believe that their relations with their employees are good.


                                       12
<PAGE>

      Section 4.11. Environmental Laws. The Company and its subsidiaries are (i)
in compliance with any and all applicable material foreign, federal, state and
local laws and regulations relating to the protection of human health and
safety, the environment or hazardous or toxic substances or wastes, pollutants
or contaminants ("Environmental Laws"), (ii) have received all permits, licenses
or other approvals required of them under applicable Environmental Laws to
conduct their respective businesses and (iii) are in compliance with all terms
and conditions of any such permit, license or approval.

      Section 4.12. Title. Except as set forth in the SEC Documents, the Company
has good and marketable title to its properties and material assets owned by it,
free and clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest other than such as are not material to the business of the
Company. Any real property and facilities held under lease by the Company and
its subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company and its
subsidiaries.

      Section 4.13. Insurance. The Company and each of its subsidiaries are
insured by insurers of recognized financial responsibility against such losses
and risks and in such amounts as management of the Company believes to be
prudent and customary in the businesses in which the Company and its
subsidiaries are engaged. Neither the Company nor any such subsidiary has been
refused any insurance coverage sought or applied for and neither the Company nor
any such subsidiary has any reason to believe that it will not be able to renew
its existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition,
financial or otherwise, or the earnings, business or operations of the Company
and its subsidiaries, taken as a whole.

      Section 4.14. Regulatory Permits. The Company and its subsidiaries possess
all material certificates, authorizations and permits issued by the appropriate
federal, state or foreign regulatory authorities necessary to conduct their
respective businesses, and neither the Company nor any such subsidiary has
received any notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit.

      Section 4.15. Internal Accounting Controls. The Company and each of its
subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
accountability, (iii) access to assets is permitted only in accordance with
management's general or specific authorization and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.


                                       13
<PAGE>

      Section 4.16. No Material Adverse Breaches, etc. Except as set forth in
the SEC Documents, neither the Company nor any of its subsidiaries is subject to
any charter, corporate or other legal restriction, or any judgment, decree,
order, rule or regulation which in the judgment of the Company's officers has or
is expected in the future to have a Material Adverse Effect on the business,
properties, operations, financial condition, results of operations or prospects
of the Company or its subsidiaries. Except as set forth in the SEC Documents,
neither the Company nor any of its subsidiaries is in breach of any contract or
agreement which breach, in the judgment of the Company's officers, has or is
expected to have a Material Adverse Effect on the business, properties,
operations, financial condition, results of operations or prospects of the
Company or its subsidiaries.

      Section 4.17. Absence of Litigation. Except as set forth in the SEC
Documents, there is no action, suit, proceeding, inquiry or investigation before
or by any court, public board, government agency, self-regulatory organization
or body pending against or affecting the Company, the Common Stock or any of the
Company's subsidiaries, wherein an unfavorable decision, ruling or finding would
(i) have a Material Adverse Effect on the transactions contemplated hereby (ii)
adversely affect the validity or enforceability of, or the authority or ability
of the Company to perform its obligations under, this Agreement or any of the
documents contemplated herein, or (iii) except as expressly disclosed in the SEC
Documents, have a Material Adverse Effect on the business, operations,
properties, financial condition or results of operation of the Company and its
subsidiaries taken as a whole.

      Section 4.18. Subsidiaries. Except as disclosed in the SEC Documents, the
Company does not presently own or control, directly or indirectly, any interest
in any other corporation, partnership, association or other business entity.

      Section 4.19. Tax Status. The Company and each of its subsidiaries has
made or filed all federal and state income and all other tax returns, reports
and declarations required by any jurisdiction to which it is subject and (unless
and only to the extent that the Company and each of its subsidiaries has set
aside on its books provisions reasonably adequate for the payment of all unpaid
and unreported taxes) has paid all taxes and other governmental assessments and
charges that are material in amount, shown or determined to be due on such
returns, reports and declarations, except those being contested in good faith
and has set aside on its books provision reasonably adequate for the payment of
all taxes for periods subsequent to the periods to which such returns, reports
or declarations apply. There are no unpaid taxes in any material amount claimed
to be due by the taxing authority of any jurisdiction, and the officers of the
Company know of no basis for any such claim.

      Section 4.20. Certain Transactions. Except as set forth in the SEC
Documents none of the officers, directors, or employees of the Company is
presently a party to any transaction with the Company (other than for services
as employees, officers and directors), including any contract, agreement or
other arrangement providing for the furnishing of services to or by, providing
for rental of real or personal property to or from, or otherwise requiring
payments to or from any officer, director or such employee or, to the knowledge
of the Company, any corporation, partnership, trust or other entity in which any
officer, director, or any such employee has a substantial interest or is an
officer, director, trustee or partner.


                                       14
<PAGE>

      Section 4.21. Fees and Rights of First Refusal. Except as set forth in the
SEC Documents, the Company is not obligated to offer the securities offered
hereunder on a right of first refusal basis or otherwise to any third parties
including, but not limited to, current or former shareholders of the Company,
underwriters, brokers, agents or other third parties.

      Section 4.22. Use of Proceeds. The Company represents that the net
proceeds from this offering will be used for general corporate purposes as
detailed in Schedule 4.22 attached hereto. However, in no event shall the net
proceeds from this offering be used by the Company for the payment (or loaned to
any such person for the payment) of any judgment, or other liability, incurred
by any executive officer, officer, director or employee of the Company, except
for any liability owed to such person for services rendered, or if any judgment
or other liability is incurred by such person originating from services rendered
to the Company, or the Company has indemnified such person from liability. All
uses of the net proceeds from this offering will shall be approved by Stephen
Merrick prior to disbursement. All capital expenditures shall not be made
without the prior written approval of Stephen Merrick.

      Section 4.23. Further Representation and Warranties of the Company. For so
long as any securities issuable hereunder held by the Investor remain
outstanding, the Company acknowledges, represents, warrants and agrees that it
will use commercially reasonable efforts to maintain the listing of its Common
Stock on the Principal Market

      Section 4.24. Opinion of Counsel. Investor shall receive an opinion letter
from Merrick & Klimek, counsel to the Company on the date hereof.

      Section 4.25. Opinion of Counsel. The Company will obtain for the
Investor, at the Company's expense, any and all opinions of counsel which may be
reasonably required in order to sell the securities issuable hereunder without
restriction.

      Section 4.26. Dilution. The Company is aware and acknowledges that
issuance of shares of the Company's Common Stock could cause dilution to
existing shareholders and could significantly increase the outstanding number of
shares of Common Stock.

                                   ARTICLE V.
                                 Indemnification

      The Investor and the Company represent to the other the following with
respect to itself:

      Section 5.1. Indemnification.

            (a) In consideration of the Investor's execution and delivery of
this Agreement, and in addition to all of the Company's other obligations under
this Agreement, the Company shall defend, protect, indemnify and hold harmless
the Investor, and all of its officers, directors, partners, employees and agents
(including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the "Investor
Indemnitees") from and against any and all actions, causes of action, suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in
connection therewith (irrespective of whether any such Investor Indemnitee is a
party to the action for which indemnification hereunder is sought), and
including reasonable attorneys' fees and disbursements (the


                                       15
<PAGE>

"Indemnified Liabilities"), incurred by the Investor Indemnitees or any of them
as a result of, or arising out of, or relating to (a) any misrepresentation or
breach of any representation or warranty made by the Company in this Agreement
or the Registration Rights Agreement or any other certificate, instrument or
document contemplated hereby or thereby, (b) any breach of any covenant,
agreement or obligation of the Company contained in this Agreement or the
Registration Rights Agreement or any other certificate, instrument or document
contemplated hereby or thereby, or (c) any cause of action, suit or claim
brought or made against such Investor Indemnitee not arising out of any action
or inaction of an Investor Indemnitee, and arising out of or resulting from the
execution, delivery, performance or enforcement of this Agreement or any other
instrument, document or agreement executed pursuant hereto by any of the
Investor Indemnitees. To the extent that the foregoing undertaking by the
Company may be unenforceable for any reason, the Company shall make the maximum
contribution to the payment and satisfaction of each of the Indemnified
Liabilities, which is permissible under applicable law.

            (b) In consideration of the Company's execution and delivery of this
Agreement, and in addition to all of the Investor's other obligations under this
Agreement, the Investor shall defend, protect, indemnify and hold harmless the
Company and all of its officers, directors, shareholders, employees and agents
(including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the "Company
Indemnitees") from and against any and all Indemnified Liabilities incurred by
the Company Indemnitees or any of them as a result of, or arising out of, or
relating to (a) any misrepresentation or breach of any representation or
warranty made by the Investor in this Agreement, the Registration Rights
Agreement, or any instrument or document contemplated hereby or thereby executed
by the Investor, (b) any breach of any covenant, agreement or obligation of the
Investor(s) contained in this Agreement, the Registration Rights Agreement or
any other certificate, instrument or document contemplated hereby or thereby
executed by the Investor, or (c) any cause of action, suit or claim brought or
made against such Company Indemnitee based on misrepresentations or due to a
breach by the Investor and arising out of or resulting from the execution,
delivery, performance or enforcement of this Agreement or any other instrument,
document or agreement executed pursuant hereto by any of the Company
Indemnitees. To the extent that the foregoing undertaking by the Investor may be
unenforceable for any reason, the Investor shall make the maximum contribution
to the payment and satisfaction of each of the Indemnified Liabilities, which is
permissible under applicable law.

                                   ARTICLE VI.
                            Covenants of the Company

      Section 6.1. Registration Rights. The Company shall cause the Registration
Rights Agreement to remain in full force and effect and the Company shall comply
in all material respects with the terms thereof.

      Section 6.2. Listing of Common Stock. The Company shall use commercially
reasonable efforts to maintain the Common Stock's authorization for quotation on
the National Association of Securities Dealers Inc's NASDAQ-Small Cap Market.


                                       16
<PAGE>

      Section 6.3. Exchange Act Registration. The Company will cause its Common
Stock to continue to be registered under Section 12(g) of the Exchange Act, will
file in a timely manner all reports and other documents required of it as a
reporting company under the Exchange Act and will not take any action or file
any document (whether or not permitted by Exchange Act or the rules thereunder
to terminate or suspend such registration or to terminate or suspend its
reporting and filing obligations under said Exchange Act.

      Section 6.4. Transfer Agent Instructions. Not later than two (2) business
days after each Advance Notice Date and prior to each Closing and the
effectiveness of the Registration Statement and resale of the Common Stock by
the Investor, the Company will deliver instructions to its transfer agent to
issue shares of Common Stock free of restrictive legends.

      Section 6.5. Corporate Existence. The Company will take all steps
necessary to preserve and continue the corporate existence of the Company.

      Section 6.6. Notice of Certain Events Affecting Registration; Suspension
of Right to Make an Advance. The Company will immediately notify the Investor
upon its becoming aware of the occurrence of any of the following events in
respect of a registration statement or related prospectus relating to an
offering of Registrable Securities: (i) receipt of any request for additional
information by the SEC or any other Federal or state governmental authority
during the period of effectiveness of the Registration Statement for amendments
or supplements to the registration statement or related prospectus; (ii) the
issuance by the SEC or any other Federal or state governmental authority of any
stop order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose; (iii) receipt of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purpose; (iv) the happening of any event that makes any statement made in the
Registration Statement or related prospectus of any document incorporated or
deemed to be incorporated therein by reference untrue in any material respect or
that requires the making of any changes in the Registration Statement, related
prospectus or documents so that, in the case of the Registration Statement, it
will not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading, and that in the case of the related prospectus, it will
not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; and (v) the Company's reasonable determination that a post-effective
amendment to the Registration Statement would be appropriate; and the Company
will promptly make available to the Investor any such supplement or amendment to
the related prospectus. The Company shall not deliver to the Investor any
Advance Notice during the continuation of any of the foregoing events.

      Section 6.7. Expectations Regarding Advance Notices. Within ten (10) days
after the commencement of each calendar quarter occurring subsequent to the
commencement of the Commitment Period, the Company must notify the Investor, in
writing, as to its reasonable expectations as to the dollar amount it intends to
raise during such calendar quarter, if any, through the issuance of Advance
Notices. Such notification shall constitute only the Company's good faith
estimate and shall in no way obligate the Company to raise such amount, or any


                                       17
<PAGE>

amount, or otherwise limit its ability to deliver Advance Notices. The failure
by the Company to comply with this provision can be cured by the Company's
notifying the Investor, in writing, at any time as to its reasonable
expectations with respect to the current calendar quarter.

      Section 6.8. Restriction on Sale of Capital Stock. During the Commitment
Period, the Company shall not, without thirty (30) calendar days advance written
notice to the Investor, of which receipt shall be confirmed by the sending party
by providing a confirmation of successful facsimile transmission, issue or sell
(i) any Common Stock or Preferred Stock without consideration or for a
consideration per share less than the bid price of the Common Stock determined
immediately prior to its issuance, except for shares of the Company's Common
Stock which are purchased upon exercise of options or warrants, or (ii) issue or
sell any Preferred Stock warrant, option, right, contract, call, or other
security or instrument granting the holder thereof the right to acquire Common
Stock without consideration or for a consideration per share less than such
Common Stock's Bid Price determined immediately prior to its issuance, or (iii)
file any registration statement on Form S-8.

      Section 6.9. Consolidation; Merger. The Company shall not, at any time
after the date hereof, effect any merger or consolidation of the Company with or
into, or a transfer of all or substantially all the assets of the Company to
another entity (a "Consolidation Event") unless the resulting successor or
acquiring entity (if not the Company) assumes by written instrument the
obligation to deliver to the Investor such shares of stock and/or securities as
the Investor is entitled to receive pursuant to this Agreement.

      Section 6.10. Issuance of the Company's Common Stock. The sale of the
shares of Common Stock to the Investor herein shall be made in accordance with
the provisions and requirements of Regulation D and any applicable state
securities law.

      Section 6.11 Business Plan and Operations. Within twenty (20) calendar
from the date hereof the Company shall deliver to the Investor a business plan
detailing the operations of the Company for a five (5) year period (the
"Business Plan"). The Business Plan shall include but not be limited to (i)
detailed projections including an income statement, cash flow, balance sheet,
and capital expenditures and (ii) a narrative description of (A) the businesses
and product lines in which the Company will engage, (B) a detailed description
of the initiatives to be undertaken by the Company to implement the business
plan and the steps to be taken and (C) a description of the financial controls
employed to manage funds as well as a a summary of all officers, directors, and
employees and a description of their roles and responsibilities including
Stephen Merrick.

                                 s ARTICLE VII.
                Conditions for Advance and Conditions to Closing

      Section 7.1. Conditions Precedent to the Obligations of the Company. The
obligation hereunder of the Company to issue and sell the shares of Common Stock
to the Investor incident to each Closing is subject to the satisfaction, or
waiver by the Company, at or before each such Closing, of each of the conditions
set forth below.


                                       18
<PAGE>

            (a) Accuracy of the Investor's Representations and Warranties. The
representations and warranties of the Investor shall be true and correct in all
material respects.

            (b) Performance by the Investor. The Investor shall have performed,
satisfied and complied in all respects with all covenants, agreements and
conditions required by this Agreement and the Registration Rights Agreement to
be performed, satisfied or complied with by the Investor at or prior to such
Closing.

      Section 7.2. Conditions Precedent to the Right of the Company to Deliver
an Advance Notice and the Obligation of the Investor to Purchase Shares of
Common Stock. The right of the Company to deliver an Advance Notice and the
obligation of the Investor hereunder to acquire and pay for shares of the
Company's Common Stock incident to a Closing is subject to the fulfillment by
the Company, on (i) the date of delivery of such Advance Notice and (ii) the
applicable Advance Date (each a "Condition Satisfaction Date"), of each of the
following conditions:

            (a) Registration of the Common Stock with the SEC. The Company shall
have filed with the SEC a Registration Statement with respect to the resale of
the Registrable Securities in accordance with the terms of the Registration
Rights Agreement. As set forth in the Registration Rights Agreement, the
Registration Statement shall have previously become effective and shall remain
effective on each Condition Satisfaction Date and (i) neither the Company nor
the Investor shall have received notice that the SEC has issued or intends to
issue a stop order with respect to the Registration Statement or that the SEC
otherwise has suspended or withdrawn the effectiveness of the Registration
Statement, either temporarily or permanently, or intends or has threatened to do
so (unless the SEC's concerns have been addressed and the Investor is reasonably
satisfied that the SEC no longer is considering or intends to take such action),
and (ii) no other suspension of the use or withdrawal of the effectiveness of
the Registration Statement or related prospectus shall exist. The Registration
Statement must have been declared effective by the SEC prior to the first
Advance Notice Date.

            (b) Authority. The Company shall have obtained all permits and
qualifications required by any applicable state in accordance with the
Registration Rights Agreement for the offer and sale of the shares of Common
Stock, or shall have the availability of exemptions therefrom. The sale and
issuance of the shares of Common Stock shall be legally permitted by all laws
and regulations to which the Company is subject.

            (c) Fundamental Changes. There shall not exist any fundamental
changes to the information set forth in the Registration Statement which would
require the Company to file a post-effective amendment to the Registration
Statement.

            (d) Performance by the Company. The Company shall have performed,
satisfied and complied in all material respects with all covenants, agreements
and conditions required by this Agreement (including, without limitation, the
conditions specified in Section 2.5 hereof) and the Registration Rights
Agreement to be performed, satisfied or complied with by the Company at or prior
to each Condition Satisfaction Date.


                                       19
<PAGE>

            (e) No Injunction. No statute, rule, regulation, executive order,
decree, ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent jurisdiction that
prohibits or directly and adversely affects any of the transactions contemplated
by this Agreement, and no proceeding shall have been commenced that may have the
effect of prohibiting or adversely affecting any of the transactions
contemplated by this Agreement.

            (f) No Suspension of Trading in or Delisting of Common Stock. The
trading of the Common Stock is not suspended by the SEC or the Principal Market
(if the Common Stock is traded on a Principal Market). The issuance of shares of
Common Stock with respect to the applicable Closing, if any, shall not violate
the shareholder approval requirements of the Principal Market (if the Common
Stock is traded on a Principal Market). The Company shall not have received any
notice threatening the continued listing of the Common Stock on the Principal
Market (if the Common Stock is traded on a Principal Market).

            (g) Maximum Advance Amount. The amount of the Advances requested by
the Company in any thirty (30) day period shall not exceed the Maximum Advance
Amount. In addition, in no event shall the number of shares issuable to the
Investor pursuant to an Advance cause the Investor to own in excess of nine and
9/10 percent (9.9%) of the then outstanding Common Stock of the Company.

            (h) No Knowledge. The Company has no knowledge of any event which
would be more likely than not to have the effect of causing such Registration
Statement to be suspended or otherwise ineffective.

            (i) Prior Approval. The Company shall have obtained all approvals
necessary under the rules and regulations under the Listing Qualifications of
the Market Place Rules established and maintained by the National Association of
Securities Dealers, Inc., for the issuance of the shares of Common Stock to the
Investor pursuant to Advances under this Agreement.

            (j) Other. On each Condition Satisfaction Date, the Investor shall
have received the certificate executed by an officer of the Company in the form
of Exhibit A attached hereto.

                                  ARTICLE VIII.
         Due Diligence Review; Non-Disclosure of Non-Public Information

      Section 8.1. Due Diligence Review. Prior to the filing of the Registration
Statement the Company shall make available for inspection and review by the
Investor, advisors to and representatives of the Investor, any underwriter
participating in any disposition of the Registrable Securities on behalf of the
Investor pursuant to the Registration Statement, any such registration statement
or amendment or supplement thereto or any blue sky, NASD or other filing, all
financial and other records, all SEC Documents and other filings with the SEC,
and all other corporate documents and properties of the Company as may be
reasonably necessary for the purpose of such review, and cause the Company's
officers, directors and employees to supply all such information reasonably
requested by the Investor or any such representative, advisor or


                                       20
<PAGE>

underwriter in connection with such Registration Statement (including, without
limitation, in response to all questions and other inquiries reasonably made or
submitted by any of them), prior to and from time to time after the filing and
effectiveness of the Registration Statement for the sole purpose of enabling the
Investor and such representatives, advisors and underwriters and their
respective accountants and attorneys to conduct initial and ongoing due
diligence with respect to the Company and the accuracy of the Registration
Statement.

      Section 8.2. Non-Disclosure of Non-Public Information.

            (a) The Company shall not disclose non-public information to the
Investor, advisors to or representatives of the Investor unless prior to
disclosure of such information the Company identifies such information as being
non-public information and provides the Investor, such advisors and
representatives with the opportunity to accept or refuse to accept such
non-public information for review. The Company may, as a condition to disclosing
any non-public information hereunder, require the Investor's advisors and
representatives to enter into a confidentiality agreement in form reasonably
satisfactory to the Company and the Investor.

            (b) Nothing herein shall require the Company to disclose non-public
information to the Investor or its advisors or representatives, and the Company
represents that it does not disseminate non-public information to any investors
who purchase stock in the Company in a public offering, to money managers or to
securities analysts, provided, however, that notwithstanding anything herein to
the contrary, the Company will, as hereinabove provided, immediately notify the
advisors and representatives of the Investor and, if any, underwriters, of any
event or the existence of any circumstance (without any obligation to disclose
the specific event or circumstance) of which it becomes aware, constituting
non-public information (whether or not requested of the Company specifically or
generally during the course of due diligence by such persons or entities),
which, if not disclosed in the prospectus included in the Registration Statement
would cause such prospectus to include a material misstatement or to omit a
material fact required to be stated therein in order to make the statements,
therein, in light of the circumstances in which they were made, not misleading.
Nothing contained in this Section 8.2 shall be construed to mean that such
persons or entities other than the Investor (without the written consent of the
Investor prior to disclosure of such information) may not obtain non-public
information in the course of conducting due diligence in accordance with the
terms of this Agreement and nothing herein shall prevent any such persons or
entities from notifying the Company of their opinion that based on such due
diligence by such persons or entities, that the Registration Statement contains
an untrue statement of material fact or omits a material fact required to be
stated in the Registration Statement or necessary to make the statements
contained therein, in light of the circumstances in which they were made, not
misleading.

                                   ARTICLE IX.
                           Choice of Law/Jurisdiction

      Section 9.1. Governing Law. This Agreement shall be governed by and
interpreted in accordance with the laws of the State of Illinois without regard
to the principles of conflict of laws. The parties further agree that any action
between them shall be heard in Hudson County, New Jersey, and expressly consent
to the jurisdiction and venue of the Superior Court of New Jersey, sitting in
Hudson County, New Jersey and the United States District Court of New Jersey,


                                       21
<PAGE>

sitting in Newark, New Jersey, for the adjudication of any civil action asserted
pursuant to this paragraph.

                                   ARTICLE X.
                             Assignment; Termination

      Section 10.1. Assignment. Neither this Agreement nor any rights of the
Company hereunder may be assigned to any other Person.

      Section 10.2. Termination. The obligations of the Investor to make
Advances under Article II hereof shall terminate twenty-four (24) months after
the Effective Date.

                                   ARTICLE XI.
                                     Notices

      Section 11.1. Notices. Any notices, consents, waivers, or other
communications required or permitted to be given under the terms of this
Agreement must be in writing and will be deemed to have been delivered (i) upon
receipt, when delivered personally; (ii) upon receipt, when sent by facsimile,
provided a copy is mailed by U.S. certified mail, return receipt requested;
(iii) three (3) days after being sent by U.S. certified mail, return receipt
requested, or (iv) one (1) day after deposit with a nationally recognized
overnight delivery service, in each case properly addressed to the party to
receive the same. The addresses and facsimile numbers for such communications
shall be:

If to the Company, to:      CTI Industries Corporation
                            22160 N. Pepper Road
                            Barrington, IL 60010
                            Attention:  Stephen M. Merrick
                            Telephone:  (847) 382-1000
                            Facsimile:  (847) 382-1219

With a copy to:             Merrick & Klimek
                            33 N. LaSalle Street
                            Chicago, IL 60602
                            Attention:  John M. Klimek, Esq.
                            Telephone:  (312) 284-1520
                            Facsimile:  (312) 284-1521

If to the Investor(s):      Cornell Capital Partners, LP
                            101 Hudson Street -Suite 3700
                            Jersey City, NJ 07302
                            Attention:  Mark Angelo
                                        Portfolio Manager
                            Telephone:  (201) 985-8300
                            Facsimile:  (201) 985-8266


                                       22
<PAGE>

With a Copy to:             Butler Gonzalez LLP
                            1416 Morris Avenue  - Suite 207
                            Union, NJ 07083
                            Attention:  David Gonzalez, Esq.
                            Telephone:  (908) 810-8588
                            Facsimile:  (908) 810-0973

Each party shall provide five (5) days' prior written notice to the other party
of any change in address or facsimile number.

                                  ARTICLE XII.
                                  Miscellaneous

      Section 12.1. Counterparts. This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party. In the event any signature page is
delivered by facsimile transmission, the party using such means of delivery
shall cause four (4) additional original executed signature pages to be
physically delivered to the other party within five (5) days of the execution
and delivery hereof, though failure to deliver such copies shall not affect the
validity of this Agreement.

      Section 12.2. Entire Agreement; Amendments. This Agreement supersedes all
other prior oral or written agreements between the Investor, the Company, their
affiliates and persons acting on their behalf with respect to the matters
discussed herein, and this Agreement and the instruments referenced herein
contain the entire understanding of the parties with respect to the matters
covered herein and therein and, except as specifically set forth herein or
therein, neither the Company nor the Investor makes any representation,
warranty, covenant or undertaking with respect to such matters. No provision of
this Agreement may be waived or amended other than by an instrument in writing
signed by the party to be charged with enforcement.

      Section 12.3. Reporting Entity for the Common Stock. The reporting entity
relied upon for the determination of the trading price or trading volume of the
Common Stock on any given Trading Day for the purposes of this Agreement shall
be Bloomberg, L.P. or any successor thereto. The written mutual consent of the
Investor and the Company shall be required to employ any other reporting entity.

      Section 12.4. Fees and Expenses. The Company hereby agrees to pay the
following fees:

            (a) Legal Fees. Each of the parties shall pay its own fees and
expenses (including the fees of any attorneys, accountants, appraisers or others
engaged by such party) in connection with this Agreement and the transactions
contemplated hereby, except that upon the execution of this Agreement the
Company will pay Fifteen Thousand Dollars ($15,000) to Butler Gonzalez LLP for
legal, administrative, and escrow fees. Subsequently on each advance date, the
Company will pay Butler Gonzalez LLP, the sum of Five Hundred Dollars ($500) for
legal, administrative and escrow fees directly out the proceeds of any Advances
hereunder.


                                       23
<PAGE>

            (b) Commitment Fees.

                  (i) On each Advance Date the Company shall pay to the
Investor, directly from the gross proceeds held in escrow, an amount equal to
five percent (5%) of the amount of each Advance. The Company hereby agrees that
if such payment, as is described above, is not made by the Company on the
Advance Date, such payment will be made at the direction of the Investor as
outlined and mandated by Section 2.3 of this Agreement.

                  (ii) Furthermore upon the execution of the Agreement the
Company shall issue to the Investor fourteen thousand six hundred eighty two
(14,162) shares of the Company's Common Stock (the "First Tranche of Investor's
Shares") and on the Effective Date of the Registration Statement filed pursuant
to the Registration Rights Agreement dated the date hereof the Company shall
issue to the Investor shares of the Company's common Stock in an amount equal to
Fifty Thousand Dollars ($50,000) divided by the closing Bid Price of the
Company's Common Stock on the NASDAQ Small-Cap Market as quoted by Bloomberg, LP
on the ninetieth (90th) Trading Day following the date hereof ("Second Tranche
of Investor's Shares" (collectively referred to as the "Investor's Shares").

                  (iii) Due Diligence Fee. Upon the submission of the due
diligence package the Company shall pay to the Investor Two Thousand Five
Hundred Dollars ($2,500) in order to defray the costs of due diligence (the "Due
Diligence Fee"). The Due Diligence Fee shall be earned as of the date the due
diligence package is submitted to the Investor.

                  (iv) Fully Earned. The First Tranche of Investor's Shares
shall be deemed fully earned as of the date hereof and the Second Tranche of
Investor's Shares shall be deemed fully earned on the date the registration
statement filed pursuant to the Registration Rights Agreement dated the date
hereof is declared effective by the SEC.

                  (iv) Registration Rights. The Investor's Shares will have
"piggy-back" registration rights.

      Section 12.5. Brokerage. Each of the parties hereto represents that it has
had no dealings in connection with this transaction with any finder or broker
who will demand payment of any fee or commission from the other party. The
Company on the one hand, and the Investor, on the other hand, agree to indemnify
the other against and hold the other harmless from any and all liabilities to
any person claiming brokerage commissions or finder's fees on account of
services purported to have been rendered on behalf of the indemnifying party in
connection with this Agreement or the transactions contemplated hereby.


                                       24
<PAGE>

      Section 12.6. Confidentiality. If for any reason the transactions
contemplated by this Agreement are not consummated, each of the parties hereto
shall keep confidential any information obtained from any other party (except
information publicly available or in such party's domain prior to the date
hereof, and except as required by court order) and shall promptly return to the
other parties all schedules, documents, instruments, work papers or other
written information without retaining copies thereof, previously furnished by it
as a result of this Agreement or in connection herein.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]


                                       25
<PAGE>

      IN WITNESS WHEREOF, the parties hereto have caused this Standby Equity
Distribution Agreement to be executed by the undersigned, thereunto duly
authorized, as of the date first set forth above.

                                          COMPANY:
                                          CTI INDUSTRIES CORPORTION


                                          By:    /s/ Stephen M. Merrick
                                             ----------------------------------
                                          Name:  Stephen M. Merrick
                                          Title: Executive Vice President

                                          INVESTOR:
                                          CORNELL CAPITAL PARTNERS, LP

                                          By:    Yorkville Advisors, LLC
                                          Its:   General Partner


                                          By:    /s/ Mark Angelo
                                             ----------------------------------
                                          Name:  Mark Angelo
                                          Title: Portfolio Manager


                                       26
<PAGE>

                                    EXHIBIT A

                      ADVANCE NOTICE/COMPLIANCE CERTIFICATE

                           CTI INDUSTRIES CORPORATION

      The undersigned, ____________________ hereby certifies, with respect to
the sale of shares of Common Stock of CTI Industries Corporation (the
"Company"), issuable in connection with this Advance Notice and Compliance
Certificate dated ___________________ (the "Notice"), delivered pursuant to the
Standby Equity Distribution Agreement (the "Agreement"), as follows:

      1. The undersigned is the duly elected President of the Company.

      2. There are no fundamental changes to the information set forth in the
Registration Statement which would require the Company to file a post effective
amendment to the Registration Statement.

      3. The Company has performed in all material respects all covenants and
agreements to be performed by the Company on or prior to the Advance Date
related to the Notice and has complied in all material respects with all
obligations and conditions contained in the Agreement.

      4. The Advance requested is _____________________.

      The undersigned has executed this Certificate this ____ day of
_________________.

                                           CTI INDUSTRIES CORPORATION


                                           By:
                                              --------------------------------
                                           Name:
                                           Title:

<PAGE>

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.1
<SEQUENCE>3
<FILENAME>d60519_ex31-1.txt
<DESCRIPTION>SECTION 302 CERTIFICATIONS FOR HOWARD W. SCHWAN
<TEXT>

                                  EXHIBIT 31.1
                                 CERTIFICATIONS

      I, Howard W. Schwan, President of CTI Industries Corporation, certify
that:

      1. I have reviewed this quarterly report on Form 10-Q of CTI Industries
Corporation.

      2. Based on my knowledge, this 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 report;

      3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;

      4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and we have:

      a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

      b) Paragraph omitted in accordance with SEC transition instructions
contained in SEC Release 34-47986;

      c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and

      d) Disclosed in this report any change in the registrant's internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) that occurred during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.

      5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):

<PAGE>

      a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and

      b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.

Date: August 19, 2004

                                             CTI INDUSTRIES CORPORATION


                                             By: /s/ Howard W. Schwan
                                                 -------------------------------
                                                 Howard W. Schwan, President

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.2
<SEQUENCE>4
<FILENAME>d60519_ex31-2.txt
<DESCRIPTION>SECTION 302 CERTIFICATION FOR STEPHEN M. MERRICK
<TEXT>

                                  EXHIBIT 31.2
                                 CERTIFICATIONS

      I, Stephen M. Merrick, Executive Vice-President and Chief Financial
Officer of CTI Industries Corporation certify that:

      1. I have reviewed this quarterly report on Form 10-Q of CTI Industries
Corporation.

      2. Based on my knowledge, this 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 report;

      3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;

      4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and we have:

      a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

      b) Paragraph omitted in accordance with SEC transition instructions
contained in SEC Release 34-47986;

      c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and

      d) Disclosed in this report any change in the registrant's internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) that occurred during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.

      5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):

<PAGE>

      a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and

      b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.

Date: August 19, 2004

                                       CTI INDUSTRIES CORPORATION


                                       By: /s/ Stephen M. Merrick
                                           -------------------------------------
                                           Stephen M. Merrick, Executive
                                           Vice-President and Chief Financial
                                           Officer

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.1
<SEQUENCE>5
<FILENAME>d60519_ex32-1.txt
<DESCRIPTION>SECTION 906 CERTIFICATION FOR CEO
<TEXT>

                                  EXHIBIT 32.1

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of CTI Industries Corporation (the
"Company") on Form 10-Q for the period ending June 30, 2004, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Howard
W. Schwan, President of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as
adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:

      (1)   The Report fully complies with the requirements of section 13(a) or
            15(d) of the Securities Exchange Act of 1934; and

      (2)   The information contained in the Report fairly presents, in all
            material respects, the financial condition and result of operations
            of the Company.


                                              By: /s/ Howard W. Schwan
                                                  -----------------------------
                                                  President

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.2
<SEQUENCE>6
<FILENAME>d60519_ex32-2.txt
<DESCRIPTION>SECTION 906 CERTIFICATION FOR CFO
<TEXT>

                                  EXHIBIT 32.2

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of CTI Industries Corporation (the
"Company") on Form 10-Q for the period ending June 30, 2004, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Stephen
M. Merrick, Executive Vice-President and Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:

      (1)   The Report fully complies with the requirements of section 13(a) or
            15(d) of the Securities Exchange Act of 1934; and

      (2)   The information contained in the Report fairly presents, in all
            material respects, the financial condition and result of operations
            of the Company.

                                    CTI INDUSTRIES CORPORATION


                                By: /s/ Stephen M. Merrick
                                    --------------------------------------------
                                    Stephen M. Merrick, Executive Vice-President
                                    and Chief Financial Officer


</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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