Edgar Filing: CTI INDUSTRIES CORP

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No. 1
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2003

Commission File Number
000-23115

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

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

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

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

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

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

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

|X| Yes |_| No

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

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

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

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

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

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

PART I

Item No. 1 Description of Business

Business Overview

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

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

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

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

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

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

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

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

Background

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

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

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

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

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

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

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

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

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

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

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

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

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

Products

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

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

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

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

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

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

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

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

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

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

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

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

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

Markets

Metalized Balloons

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

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

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

Latex Balloons

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

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

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

Printed and Specialty Films

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

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

Marketing, Sales and Distribution

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

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

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

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

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

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

Manufacturing

Production and Operations.

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

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

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

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

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

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

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

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

Raw Materials

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

Competition

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

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

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

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

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

Patents, Trademarks and Copyrights

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

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

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

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

Research and Development

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

Employees

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

Regulatory Matters

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

International Operations.

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

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

Item No. 2 Properties

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

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

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

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

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

Item No. 3 Legal Proceedings

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

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

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

Not Applicable.

PART II

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

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

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

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

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

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

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

Recent Sales of Unregistered Securities

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

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

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

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

Item No. 6 Selected Financial Data

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

Year
(In thousands, except per share data) Ended
Year ended December 31, October 31,
--------------------------------------------------------------------
2003 2002 2001 2000 1999(1)

Statement of Income Data:
Net Sales $ 36,260 $ 41,236 $ 27,446 $ 22,978 $ 18,717
Costs of Sales $ 29,627 $ 32,344 $ 19,835 $ 16,375 $ 13,781

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

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

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

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

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

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

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

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

Short-term obligations(3) $ 6,692 $ 7,385 $ 7,074 $ 7,787 $ 5,176
Long-term obligations $ 9,220 $ 5,726 $ 5,737 $ 2,701 $ 5,374

------------------------------------------------------------------
Total obligations $ 15,912 $ 13,111 $ 12,811 $ 10,488 $ 10,550

Stockholders' Equity $ 5,212 $ 5,474 $ 4,325 $ 5,338 $ 5,029

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

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

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

Overview

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

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

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

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

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

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

Our business plan includes:

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

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

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

o Development of new sales and marketing channels and
relationships.

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

Results of Operations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Financial Condition

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

Cash Flow From Operations. Cash flow provided by operations for the fiscal
year ended December 31, 2003 was $2,343,000. Cash flow from operations resulted
principally from increases in accounts payable of $264,000 and in depreciation
and amortization of $1,619,000, and a reduction in, or disposition of,
receivables, and inventory and other assets totaling $1,113,000 offset by an
increase in the deferred income tax benefit of $782,000. Cash flow generated by
operations for the fiscal year ended December 31, 2002, was $3,051,000.

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

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

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

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

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

With respect to the EBITDA to fixed charges and tangible net worth
covenants, the bank has issued a waiver of violations of the covenants as of
December 31, 2003. For periods after December 31, 2003 the bank has agreed to
modify the covenants, both the tangible net worth and ratio of EBITDA of fixed
charges, to reduced levels with a measurement date commencing January 1, 2004.

Approximately $6,763,000 in proceeds from this new loan were used to pay
to a prior senior lender the entire balance due to that lender consisting of
$2,540,000 in term loans and $4,223,000 in revolving loans

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

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

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

Current assets. As of December 31, 2003, the total current assets of the Company
were $15,435,000 compared to total current assets of $16,138,000 as of December
31, 2002. The change in current assets reflects, principally, a decrease in
inventory of $770,000 and decrease in receivables of $765,000, partially offset
by an increase in prepaid expenses and other current assets of $549,000.

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

Property, Plant and Equipment. During fiscal 2003, the Company invested
$1,141,000 in capital items. Most of this investment was in production
equipment. During 2002, the Company invested $2,478,000 in capital items.

Current liabilities. Total current liabilities decreased from $19,045,000
as of December 31, 2002 to $16,140,000 as of December 31, 2003. This decrease is
attributable principally to a decrease in accounts payable from $9,581,000 as of
December 31, 2002 to $6,799,000 as of December 31, 2003, which occurred
principally by reason of the conversion of $3,534,000 of vendor obligations to
term debt. Also, the amount outstanding on the line of credit was reduced from
$5,643,000 on December 31, 2002 to $3,694,000 on December 31, 2003.

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

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

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

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

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

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

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

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

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

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

Liquidity and Financial Resources

At December 31, 2003 the Company had negative working capital of $706,000
compared to negative working capital as of December 31, 2002 of $2,907,000. This
improvement in working capital occurred principally as the result of the
reduction in current liabilities on December 31, 2002 of $19,045,000 to
$16,140,000 on December 31, 2003. This reduction occurred because (i) during
2003, approximately $3,534,000 in payables to vendors was converted to term
obligations and (ii) in connection with the new senior loan completed on
December 30, 2003, the entire balance due to the prior senior lender, all of
which was designated

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

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

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

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

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

2004 $2,998,496 $ 542,532 $ 86,664 $3,627,692
2005 $2,948,195 $ 532,905 $ 76,664 $3,557,764
2006 $ 756,065 $ 504,771 -- $1,260,836
2007 $ 759,723 $ 472,728 -- $1,232,451
2008 and thereafter $3,366,234 $ 620,400 $ -- $3,986,634

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

Seasonality

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

Critical Accounting Policies

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

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

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

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

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

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

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

As of December 31, 2003, the Company had a net deferred tax asset of
$1,341,000, representing the amount the Company may recover in future years from
future taxable income. As of December 31, 2002, the amount of the deferred tax
asset was $689,000. Each year and period management must make a judgment to
determine the extent to which the deferred tax asset will be recovered from
future taxable income. As of December 31, 2003, management has determined that
an appropriate allowance against the deferred tax asset, for the possibility
that such amount will not be recovered, is $739,000. As of December 31, 2002,
the amount of this reserve was $739,000. These determinations involve the
exercise of significant management judgment and are made based upon historical,
current and projected levels of revenue and profit.

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

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

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

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

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

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

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

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

Item No. 8 Financial Statements and Supplementary Data

Reference is made to the Consolidated Financial Statements attached
hereto.

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

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

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

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

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

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

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

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

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

Item No. 9A - Controls and Procedures

Disclosure Controls and Procedures

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

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

PART III

Item No. 10 Directors and Executive Officers of the Registrant

Directors and Executive Officers

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Audit Committee

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

Report of the Audit Committee

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

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

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

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

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

Bret Tayne,, Audit Committee Chair

Stanley M. Brown, III, Audit Committee Member

Michael Avramovich, Audit Committee Member

Section 16(a) Beneficial Ownership Reporting Compliance

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

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

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

Code of Ethics

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

Item No. 11 Executive Compensation

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

Summary Compensation Table

Annual Compensation Long Term Compensation
------------------- ----------------------
All Other
Name and Principal Salary Other Annual Underlying Compensation
Position Year $ Compensation Options ($)
--------------------------------------------------------------------------------------------------

Howard W. Schwan 2003 $162,500 $ 5,520 -- --
President 2002 $162,500 $ 8,100 14,285(1) $1,925(5)
2001 $150,000 $ 5,000 -- $1,765(5)

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

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

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

----------

(footnotes continued on next page)

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

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

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

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

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

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

Option Grants in Last Fiscal Year

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

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

Value of Unexercised In- the-
Shares Value Number of Securities Underlying Money Options at Fiscal Year
Acquired on Realized Unexercised Options at Year End End ($)
Name Exercise (#) ($) (#) Exercisable/Unexercisable Exercisable/Unexercisable
------------------ ------------ -------- ------------------------------- -----------------------------

John H. Schwan 0 0 29,762/0 $4,286/0(1)
Howard W. Schwan 0 0 53,968/0 $8,810/0 (1)
Stephen M. Merrick 0 0 29,762/0 $4,286/0(1)
Mark Van Dyke 0 0 23,809/0 $18,809/0(1)
Brent Anderson 0 0 31,546/0 $14,107/0(1)
Samuel Komar 0 0 24,641/0 $12,355/0 (1)

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

Compensation Committee

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

Compensation Committee Report on Executive Compensation

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

Compensation Philosophy

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

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

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

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

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

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

Annual Base Compensation

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

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

Long-Term Component - Stock Options

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

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

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

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

CEO Compensation

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

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

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

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

Compensation Committee Interlocks and Insider Participation

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

Comparative Stock Price Performance Graph

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

Total Return To Shareholders
(Includes reinvestment of dividends)

ANNUAL RETURN PERCENTAGE

Years Ending

Company / Index Oct99 Oct00 Dec00 Dec01 Dec02 Dec03

CTI INDUSTRIES CORP -74.39 -4.76 -46.67 75.00 325.85 -63.90
NASDAQ U.S. INDEX 68.75 13.06 -27.05 -20.63 -30.86 49.51
S&P 500 SPECIALTY STORES -16.29 -4.69 -13.37 61.41 -11.11 34.66

INDEXED RETURNS

Base Years Ending
Period
Company / Index Oct98 Oct99 Oct00 Dec00 Dec01 Dec02 Dec03

CTI INDUSTRIES CORP 100 25.61 24.39 13.01 22.76 96.94 35.00
NASDAQ U.S. INDEX 100 168.75 190.80 139.19 110.48 76.38 114.20
S&P 500 SPECIALTY STORES 100 83.71 79.78 69.12 111.56 99.16 133.53

Employment Agreements

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

Director Compensation

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

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

Principal Stockholders

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

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

Shares of Common
Stock Beneficially Percent of Common
Name and Address (1) Owned (2) Stock
------------------------------------------------------------ ------------------ -----------------

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

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

----------

* Less than one percent

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

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

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

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

(footnotes continued on next page)

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

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

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

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

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

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

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

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

(footnotes continued on next page)

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

Item No. 13 Certain Relationships and Related Transactions

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

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

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

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

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

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

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

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

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

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

PART V

Item No. 14 Principal Accountant Fees and Services

Fees Billed By Independent Public Accountants

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

Amount
--------

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

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

----------

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

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

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

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

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

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

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

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

----------

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

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

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

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

Exhibits

* 3.1 Third Restated Certificate of Incorporation of CTI
Industries Corporation

** 3.2 By-laws of CTI Industries Corporation

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

*** 10.1 CTI Industries Corporation 1999 Stock Option Plan

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

23.1 Consent of Independent Auditors, Eisner, LLP

23.2 Consent of Independent Auditors, McGladrey & Pullen, LLP

23.3 Consent of Independent Auditors, Grant Thornton, LLP

27 Financial Data Schedule

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

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

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

99.1 Code of Ethics

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

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

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

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

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

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

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

Reports on Form 8-K

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

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

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

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

SIGNATURES

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

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

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

Signatures Title Date

/s/ Howard W. Schwan President and Director April 15, 2004
------------------------
Howard W. Schwan

/s/ John H. Schwan Chairman and Director April 15, 2004
------------------------
John H. Schwan

/s/ Stephen M. Merrick Executive Vice President, April 15, 2004
------------------------ Secretary, Chief Financial
Stephen M. Merrick Officer and Director

/s/ Stanley M. Brown Director April 15, 2004
------------------------
Stanley M. Brown

/s/ Bret Tayne Director April 15, 2004
------------------------
Bret Tayne

/s/ Michael Avramovich Director April 15, 2004
------------------------
Michael Avramovich

INDEPENDENT AUDITOR'S REPORT

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

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

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

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

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

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

F-1

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of CTI Industries Corporation

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

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

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

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

F-1

INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
CTI Industries Corporation

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of CTI
Industries Corporation and subsidiaries as of December 31, 2003, and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with accounting principles accepted in the United States of
America.

/s/ Eisner LLP

New York, New York
February 18, 2004

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

F-1

CTI Industries Corporation and Subsidiaries
Consolidated Balance Sheets

December 31, 2003 December 31, 2002
----------------- -----------------
ASSETS

Current assets:
Cash $ 329,742 $ 160,493
Accounts receivable, (less allowance for doubtful accounts of $186,215
and $223,220 respectively) 4,620,276 5,384,839
Inventories 9,263,160 10,033,593
Deferred tax assets 361,751 247,780
Prepaid expenses and other current assets 859,635 310,995
------------ ------------

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

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

Total property and equipment, net 12,207,649 11,715,013

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

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

TOTAL ASSETS 30,270,182 30,271,858
============ ============

See accompanying notes

F-2

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

December 31, 2003 December 31, 2002
----------------- -----------------

LIABILITIES AND STOCKHOLDERS' EQUITY

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

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

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

Total long-term liabilities 8,909,258 5,726,366

Minority interest 9,263 25,865

Commitments, Contingencies and Litigation (Notes 14 & 15)
Stockholders' equity:
Preferred Stock - no par value
2,000,000 shares authorized, 0 shares issued and outstanding 0 0
Common stock - no par value, 5,000,000 shares authorized, 2,150,216 and
2,141,882 shares issued, 1,918,420 and
1,910,086 shares outstanding, respectively 3,764,020 3,748,270
Class B Common stock - no par value, 500,000 shares authorized,
0 shares issued and outstanding 0 0
Paid-in-capital 5,554,332 5,554,332
Warrants issued in connection with subordinated debt and bank debt 595,174 135,462
Accumulated deficit (3,528,063) (2,962,016)
Accumulated other comprehensive earnings (234,768) (6,002)
Less:
Treasury stock - 231,796 shares (939,114) (939,114)
Notes receivable from stockholders 0 (56,456)
------------ ------------

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

TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 30,270,182 $ 30,271,858
============ ============

See accompanying notes

F-3

CTI Industries Corporation and Subsidiaries
Consolidated Statements of Operations

Year Ended December 31,
2003 2002 2001
(as restated)
------------ ------------ -------------

Net Sales $ 36,259,638 $ 41,236,476 $ 27,446,494

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

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

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

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

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

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

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

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

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

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

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

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

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

See accompanying notes

F-4

CTI Industries Corporation and Subsidiaries
Consolidated Statements of Cash Flows

For the Year Ended December 31,
2003 2002 2001
(as restated)
-------------------------------------------------------------

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

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

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

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

Cash flows from financing activities:
Checks written in excess of bank balance 227,648 113,460 0
Net change in revolving line of credit (1,948,408) (55,068) 2,088,176
Proceeds from issuance of long-term debt 6,768,759 0 4,299,000
Repayment of long-term debt (5,649,214) (591,182) (5,604,248)
Repayment of short-term debt 0 0 (500,000)
Repayment of subordinated debt 0 0 (10,000)
Collection of Stockholder note 56,456 0 0
Proceeds from exercise of Stock options 15,750 0 0
Proceeds from exercise of warrants 19,750 0
Cash paid for deferred financing fees (275,044) 0 0
Purchase of Treasury Stock 0 0 (171,380)
-------------------------------------------------------

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

F-5

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

For the Year Ended December 31,
2003 2002 2001
(as restated)
-------------------------------------------------------------

Effect of exchange rate changes on cash (227,966) (10,060) (5,308)
-------------------------------------------------------

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

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

Cash and Equivalents at End of Period $ 329,742 $ 160,493 $ 110,488
================================= ===========

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

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

See accompanying notes

F-6

CTI Industries Corporation and Subsidiaries
Consolidated Statements of Stockholders'
Equity

Warrants
Common Stock Class B Common Stock issued in
------------------------ ------------------------- Paid-in connection with
Shares Amount Shares Amount Capital subordinated debt
---------------------------------------------------------------------------------------------

Balance, December 31, 2000 966,327 $ 188,434 366,300 $ 1,000,000 $ 5,554,332 $ 351,978
=============================================================================================
Expiration of stock
redemption period

Warrants issued in connection
with subordinated debt $ 135,462

Purchase of Treasury Stock

Net Loss

Other comprehensive income
Foreign currency translation

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

Options Excersised 11,000 $ 19,750

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

Stock Dividend 304,218 $ 1,280,758

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

Cashless exercise of warrants 70,458 $ 192,350

Net Income

Less
Accumulated -----------------------------
Other Treasury Stock
Accumulated Comprehensive -----------------------------
Deficit Earnings Shares Amount
-------------------------------------------------------------------

Balance, December 31, 2000 $ (1,751,478) $ (42,244) 124,683 $ (575,384)
===================================================================
Expiration of stock
redemption period

Warrants issued in connection
with subordinated debt

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

Net Loss $ (232,292)

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

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

Options Excersised

Class B Conversion

Stock Dividend ($1,280,758)

Warrant exercise for
subordinated debt

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

Net Income $ 302,512

Less
------------------------------------------------------------------
Redeemable Stock Notes Recvble
Common Stock Sub Recvble Shareholders TOTAL
-----------------------------------------------------------------

Balance, December 31, 2000 $ -- $ 4,700 $ (56,456) $ 4,664,482
=================================================================
Expiration of stock
redemption period $ -- $ (4,700) $ 4,700

Warrants issued in connection
with subordinated debt $ 135,462

Purchase of Treasury Stock $ (171,380)

Net Loss $ (232,292)

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

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

Options Excersised $ 19,750

Class B Conversion $ --

Stock Dividend $ --

Warrant exercise for
subordinated debt $ 715,000

Cashless exercise of warrants $ --

Net Income $ 302,512

F-7

Other comprehensive income
Foreign currency translation

Total comprehensive loss

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

Options Excersised 8,334 $ 15,750

Warrant exercise for
subordinated debt $ 459,712

Collection of Notes
Receivable

Net Income

Other comprehensive income
Foreign currency translation

Total comprehensive loss

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

Other comprehensive income
Foreign currency translation $ 112,005

Total comprehensive loss

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

Options Excersised

Warrant exercise for
subordinated debt

Collection of Notes
Receivable

Net Loss ($566,047)

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

Total comprehensive loss

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

Other comprehensive income
Foreign currency translation $ 112,005
-----------
Total comprehensive loss $ 414,517

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

Options Excersised $ 15,750

Warrants issued in connection
with subordinated debt $ 459,712

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

Net Income $ (566,047)

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

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

-----------------------------------------------------------------
Balance, December 31, 2003 $ -- $ -- $ -- $ 5,211,581
=================================================================

See accompanying notes.

F-8

CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements

1. Nature of Operations

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

2. Basis of Presentation

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

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

3. Summary of Significant Accounting Policies

Principles of Consolidation

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

Foreign Currency Translation

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

Restatements

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

Accounting Estimates

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

Cash and Cash Equivalents

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

Trade Receivables

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

F-9

CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements

3. Summary of significant accounting policies, continued

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

Inventories

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

Property and Equipment

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

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

Goodwill

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

Impairment of long lived assets

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

Deferred Financing Costs

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

F-10

CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements

3. Summary of significant accounting policies, continued

Income Taxes

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

Fair Value of Financial Instruments

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

Other Comprehensive Income

For years ended December 31, 2003, 2002 and 2001, other comprehensive income
consisted of foreign currency translation adjustments, net of related taxes.

Revenue Recognition

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

Stock-Based Compensation

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

F-11

CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements

3. Summary of significant accounting policies, continued

Years Ended December 31,
2003 2002 2001
-------- -------- --------

Net (Loss) Income:
As reported .................................... (566,047) 302,512 (232,292)

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

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

Net income (loss) per share:

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

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

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

Diluted - Proforma .......................... (0.30) 0.10 (0.25)

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

2003 2002 2001
----- ----- -----

Expected life (years) .................... 5 5 7.5
Volatility ............................... 136.6% 123.3% 117%
Risk-free interest rate .................. 4.4% 2.9% 4.5%
Dividend yield ........................... -- -- --

Research and Development

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

New Accounting Pronouncements

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

In January, 2003 the Financial Accounting Standards Board issued FASB
Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51," which addresses consolidation by business
enterprises of variable interest entities ("VIE's") either: (1) that do not have
sufficient equity investment at risk to permit the entity to finance its
activities without additional subordinated financial support, or (2) in which
the equity investors lack an essential characteristic of a controlling financial
interest. In December, 2003, the FASB completed deliberations of proposed
modifications to FIN 46 resulting in multiple effective dates based on the
nature as well as the creation date of the VIE. Special purpose entities created
prior to February 1, 2003 may be accounted for under the original or revised
interpretation's provisions no later than the Company's first quarter of 2004.
Non-special purpose entities created prior to February 1, 2003 are to be
accounted for under the revised interpretation's provisions no later than the
Company's second quarter of 2004. Management has concluded that the provisions
of FIN 46 do not apply to the Company with respect to its transactions with
Pepper Road, Inc. (see Note 17).

F-12

CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements

4. Major Customers

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

5. Inventory

Inventory is comprised of the following:

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

6. Notes Payable

Long-term debt consists of:

Dec 31, 2003 Dec 31, 2002
------------ ------------

Term Loan with bank, payable in monthly installments of $22,222
plus interest at prime plus 0.75% ..................................... $ -- $ 1,355,057

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

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

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

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

Vendor notes, at various rates of interest, (weighted average of 6%),
maturing through August, 2005 ......................................... 2,299,647 --

Subordinated Notes due to officers in 2005, Interest at 9%
Net of Debt Discount of $310,898 ...................................... 1,269,102 --

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

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

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

Total ........................................................... $ 10,828,713 $ 6,758,767
------------ ------------

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

Total long-term debt ............................................ $ 7,830,217 $ 5,016,109
------------ ------------

F-13

CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements

6. Notes Payable, continued

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

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

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

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

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

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

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

2004 ................. 2,998,496
2005 ................. 2,948,195
2006 ................. 756,065
2007 ................. 759,723
2008 ................. 3,362,530
Thereafter ........... 3,704
-----------
Less Current Portion . (2,998,496)
===========
$ 7,830,217
===========

F-14

CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements

7. Subordinated Debt

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

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

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

8. Other Income

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

9. Other Liabilities

Items identified as Other Liabilities in the Company's Consolidated Balance
Sheet as of Decmeber 31, 2003 include (i) deferred gain of the Company in the
amount of $175,376 on the sale of a building to Pepper Road, Inc., (ii) loans by
officers/shareholders to Flexo Universal totaling $250,000 which is subordinated
to bank obligations and bearing interest at 8%, (iii) obligations of Flexo
Universal to a financial institution in the amount of $83,665 and (iv)
obligations of CTI Mexico, Flexo and CTF International totaling $570,000 to
vendors on deferred payment terms.

10. Income Taxes

The income tax provisions are comprised of the following:

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

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

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

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

2003 2002 2001

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

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

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

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

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

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

Net deferred tax asset ........................ $ 1,341,386 $ 689,372 $ 652,383
=========== =========== ===========

F-15

CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements

10. Income Taxes, continued

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

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

Year Ended December 31,
2003 2002 2001
------------ ------------ ------------

Taxes at statutory rate ................. $(393,154) $ 114,000 $ (4,600)
State income taxes ...................... (55,504) 16,000 0
Nondeductible Expenses .................. 20,564 41,000 --
Increase in deferred tax
Valuation allowance .................. 0 -- 27,300
State credit created in current year .... 0 (22,000) --
Foreign taxes and other ................. (354,374) (109,935) 253,853
--------- --------- ---------

Income tax provision .................... $(782,468) $ 39,065 $ 276,553
========= ========= =========

11. Employee Benefit Plan

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

12. Related Party Transactions

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

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

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

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

F-16

CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements

13. Goodwill and Intangible Assets

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

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

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

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

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

14. Commitments and Contingencies

Operating Leases

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

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

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

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

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

Licenses

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

F-17

CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements

14. Commitments and Contingencies, continued

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

15. Litigation

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

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

16. Sale/Leaseback of Building

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

17. Relationship with Pepper Road, Inc.

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

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

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

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

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

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

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

18. Authorized Preferred Stock

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

19. Stock Options and Warrants

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

F-18

CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements

19. Stock Options and Warrants, continued

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

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

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

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

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

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

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

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

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

In March, 2003, certain members of management were issued warrants to purchase
an aggregate of 163,000 shares of common stock of the Company at an exercise
price of $4.87, per share, the then market price, in consideration of such
persons making subordinated loans to the Company in the aggregate of $1,630,000,
the warrants have a term of five years. See Note 7.

F-19

CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements

19. Stock Options and Warrants, continued

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

Weighted Weighted Weighted
Avg. Avg. Avg.
Dec. 31, Exercise Exercise Dec. 31, Exercise
2003 Price Dec. 31, 2002 Price 2001 Price
-------- -------- ------------- -------- --------- --------

Outstanding and exercisable, beginning of period ... 572,862 $2.58 1,094,739 $2.04 884,814 $2.28
Granted ............................................ 170,000 2.22 79,764 2.22 240,482 2.01
Exercised .......................................... (8,334) 1.54 (601,245) 1.54 -- --
Cancelled .......................................... (8,929) 6.51 (396) 6.51 (30,557) 5.37
------- ----- --------- ----- --------- -----
Outstanding and exercisable at the end of period ... 725,599 $2.58 572,862 $2.58 1,094,739 $2.04

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

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

Exercise Remaining
Grant Date Outstanding Exercisable Price Life (Years)
--------------------- ----------- ----------- -------- ------------
September 1997 ...... 5,953 5,953 $6.28 3
September 1998 ...... 92,463 92,463 $6.51 4
September 1998 ...... 11,905 11,905 $2.10 4
September 1999 ...... 19,079 19,079 $1.42 0
March 2000 .......... 138,693 138,693 $1.95 6
July 2001 ........... 119,050 119,050 $1.50 2
December 2001 ....... 100,597 100,597 $1.46 7
April 2002 .......... 11,905 11,905 $2.10 8
December 2002 ....... 55,954 55,954 $2.36 8
February 2003 ....... 163,000 163,000 $4.87 4
December 2003 ....... 7,000 7,000 $2.26 10
------- ------- -----
Total Options and
Warrants Outstanding .. 725,599 725,799
======= =======

The weighted average fair value of options granted during the year ending
December 31, 2003, 2002 and 2001 were $2.26, $1.92 and $1.48 per share,
respectively.

20. Stock Dividend and Class B Common Stock Conversion

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

F-20

CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements

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

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

21. Earnings Per Share

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

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

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

Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2003 2002 2001
------------ ------------ ------------

BASIC
Average shares outstanding:
Weighted average shares
Outstanding during period .................... 1,918,260 1,688,384 1,511,958
============ =========== ===========

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

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

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

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

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

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

Net (loss) earnings applicable to
Common shares ................................ $ (0.30) $ 0.16 $ (0.15)
============ =========== ===========

F-21

CTI Industries Corporation and Subsidiaries
Notes to the Consolidated Financial Statements

22. Geographic Segment Data

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

United States United Kingdom Mexico Eliminations Consolidated
------------ ------------ ------------ ------------ ------------

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

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

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

23. Fourth Quarter Adjustments, 2002

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

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

F-22